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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, 1998 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 due 2002 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
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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 12, 1999, was $46,586,016. Solely for purposes of this
calculation, the following persons, who beneficially owned in the
aggregate 47,922,110 shares of Common Stock at March 12, 1999, 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 12, 1999, the registrant had 59,234,392 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.
On July 17, 1998, pursuant to an agreement with ALARIS Medical, ALARIS
Medical Systems, Instromedix ("Instromedix"), and the shareholders of
Instromedix as of June 24, 1998, ALARIS Medical Systems acquired all of the
outstanding common stock of Instromedix, a cardiovascular monitoring and
pacemaker follow-up company, and subsequently merged Instromedix with and into
itself.
OVERVIEW
The Company is a leading provider of infusion systems and related
technologies to the United States hospital market, with the largest installed
base of pump delivery lines ("channels"). The Company is also a leader in the
International infusion systems market. Based on installed base of infusion
pumps, the Company has a number one or two market position in eight Western
European countries, the number three market position in Germany, the largest
installed base of infusion pumps in Australia and Canada and a developing
position in Latin America and Asia. The Company's infusion systems, which are
used to deliver one or more fluids, primarily pharmaceuticals or nutritionals to
patients, consist of single and multi-channel infusion pumps and controllers,
and proprietary and non-proprietary disposable administration sets (i.e. plastic
tubing and pump interfaces). In addition, the Company is a leading provider of
patient monitoring products that measure and monitor temperature, pulse, pulse
oximetry and blood pressure, with the largest installed base of hospital
thermometry systems in the United States. Through the acquisition of
Instromedix, the Company now produces and sells arrhythmia-event recorders and
pacemaker monitors targeted for the alternate site market.
ALARIS has defined three strategic business units: North America, which
includes the United States and Canada; Instromedix, and International, which
includes all other international operations, including Europe, Asia, Australia
and Latin America.
--------------------------
The 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-,
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-Registered Trademark-, TEMP-PLUS-Registered
Trademark-, VITAL-CHECK-Registered Trademark-, ACCUSLIDE-TM-, and
SmartSite-Registered Trademark- SAFSITE-Registered Trademark- is a registered
trademark of B. Braun, Inc., ADVANTIS-TM-, ALARIS-TM-, ALARIS Medical
Systems-TM-, ORION-Registered Trademark-, Palisade-TM-, Rhythmic-TM- is a
registered trademark of Micrel Microelectronics E.P.E., Turbo-Temp-TM-,
CarryAll-Registered Trademark-, HeartCard-Registered Trademark-,
Instromedix-Registered Trademark-, King of Hearts Express-Registered
Trademark-, LifeSigns-TM-, LifeSigns Commander-TM-, and LifeSigns Shuttle-TM-.
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The North American and International operating units, manufacture and
market intravenous infusion therapy devices and patient monitoring products,
primarily using a direct sales force for product distribution. The International
unit also utilizes product distributors in areas where the Company does not have
a direct sales force. Distributor sales accounted for 12.1% of International
sales in 1998. The Instromedix business segment designs, manufactures and sells
cardiology products such as arrhythmia-event recorders and pacemaker monitors.
Instromedix products are targeted to the alternate-site market and are primarily
distributed through a direct sales force. Instromedix sales represented
approximately 2% of the Company's sales in 1998.
The Company sells a full range of products through the worldwide direct
sales force consisting of over 230 salespersons and through more than 150
distributors to over 5,000 hospitals worldwide. Sales to customers located in
and outside of North America accounted for approximately 67.1% and 32.9%,
respectively, of the Company's sales for the year ended 1998. For the year ended
December 31, 1998, the Company had sales of approximately $380.1 million.
INFUSION SYSTEMS. The Company offers a wide variety of infusion pumps
designed to meet the varying price and technological requirements of its diverse
customer base. These infusion pumps include the Gemini series, consisting of
single, dual and four channel infusion pumps designed for use in all hospital
settings by customers with sophisticated technological requirements; the
Signature Edition Family, a versatile, user-friendly single and dual channel
infusion pump for use in critical and general medical and surgical settings; the
MedSystem III instrument (the "MS III"), a compact, lightweight, programmable
three channel infusion pump targeted for the hospital critical care setting and
transport applications. A single channel pump has only one fluid delivery line
to the patient, while a multi-channel pump has two or more fluid delivery lines.
Multi-channel pumps are used to service only a single patient. Generally, where
more than one fluid delivery line is required for a patient, purchasing a
multi-channel pump is less costly than purchasing an equivalent number of single
channel pumps. In addition, the Company offers the ReadyMED ambulatory infusion
pump ("ReadyMED"), which is compact, lightweight and disposable for use in the
alternate-site market, as well as a broad range of syringe infusion pumps for
use primarily outside the United States.
The Company also manufactures and sells proprietary disposable
administration sets which are required to be used with the Company's large
volume infusion pumps. Since the useful lives of the Company's infusion pumps
typically range between seven to ten years, the Company's industry-leading
installed base allows it to generate predictable and recurring revenues from
sales of disposable administration sets. For the year ended December 31, 1998,
the Company sold approximately 66.7 million disposable administration sets
(proprietary and non-proprietary) representing sales of $228.8 million or 60.2%
of sales. Disposable administration sets sales for 1998 for the North America
and International business units were $157.0 million and $71.8 million,
respectively. Many of the Company's disposable administration sets offer
protection features designed to prevent the unregulated flow of fluids into a
patient's blood stream ("free flow"). In addition, the Company also has several
enhancements to its disposable administration sets, including needle-free access
systems that are designed to reduce the risk to health care providers of
diseases, such as AIDS and hepatitis, that may be transmitted through accidental
needlesticks and, in the case of the SmartSite needle-free system, to eliminate
patient exposure to latex which can cause severe allergic or anaphylactic shock
reactions. These features continue to provide the Company's customers with the
latest cost-effective technology for the Company's installed base of infusion
pumps. For the year ended December 31, 1998, the Company's infusion systems
sales (pumps and disposables) were $315.2 million, representing approximately
82.9% of sales.
PATIENT MONITORING PRODUCTS. The Company's patient monitoring products
compete in discrete market niches, each with different competitive dynamics. The
Company primarily operates in the United States, Canada and Western Europe in
two patient monitoring products market: (i) hospital thermometry systems and
(ii) stand-alone, non-invasive, multi-parameter instruments used to measure and
monitor a combination of vital signs. For the year ended December 31, 1998, the
Company's patient monitoring product sales were approximately $34.9 million,
representing approximately 9.2% of the Company's total
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sales. Patient monitoring sales for North America and International for
1998 were $30.3 million and $4.6 million, respectively.
The Company's principal thermometry instruments, the electronic
thermometer and the infrared tympanic thermometer, are both widely used in
hospitals and alternate site settings. The Company believes it is the second
largest participant in the United States infrared thermometry market. The
Company's large base of installed hospital thermometry instruments allows it to
generate predictable and recurring revenues from sales of related proprietary
disposable probe covers. In 1998, the Company manufactured and sold over 635
million proprietary disposable probe covers into its worldwide installed base.
In addition, the Company participates in the hospital market of stand-alone,
non-invasive, multi-parameter instruments through its Vital-Check product line,
which measures and monitors a combination of temperature, pulse, blood pressure
and pulse oximetry.
INDUSTRY
GENERAL. In the United States, the Company sells its products primarily
in two markets: the hospital market and the alternate-site market. The United
States hospital market consists of approximately 5,300 hospitals with a total of
approximately 900,000 licensed beds. Within this market, cost containment
measures both imposed and proposed by federal and state regulators and private
payors, combined with increased utilization review and case management, have led
to greater financial pressure on hospitals. In response to these
cost-containment pressures, hospitals and other potential customers for the
Company's products are increasingly combining into group purchasing
organizations ("GPOs") which may be large and which monitor compliance with
exclusive purchase commitments. GPOs may enter into exclusive purchase
commitments with as few as one or two providers of infusion systems and/or
patient monitoring products, for a period of several years. These trends have,
in turn, led to downward pricing pressure on manufacturers of medical products,
including the Company, and greater use of care settings outside the hospital
(i.e., the alternate-site setting) for treatment. See "--Marketing and Sales."
The alternate-site market encompasses all health care provided outside
the hospital and comprises primarily home health care, freestanding clinics,
skilled nursing facilities and long-term care facilities. The market for
infusion systems used in the alternate site has recently experienced a
substantially greater growth rate than that of the hospital market. This growth
is primarily attributable to advances in technology that have facilitated the
provision of care outside of the hospital, an increased number of illnesses and
diseases considered to be treatable with home infusion therapy and increased
acceptance by the medical community of, and patient preference for, non-hospital
treatment.
The Company also sells its products internationally. The Western
European infusion therapy market, which includes infusion pumps, controllers and
disposable intravenous sets, had sales of approximately $397.0 million in 1997.
Unlike the U.S. market, syringe pumps represent a significant share of total
infusion pump placements in the international market. The Company expects the
trend toward utilization of syringe pumps to continue as hospitals favor the
lower cost associated with syringe pumps and focus on administering
pharmaceuticals and nutritionals to patients in higher concentrations. The
majority of revenues in the international market are derived from hospitals
since the alternate-site market is in a developmental stage.
The Company believes that as the worldwide infusion systems and patient
monitoring markets continue to mature, providers of goods and services in these
markets will need to increase the scale of their operations and broaden the
scope of their product lines in order to leverage worldwide sales, service and
research and development infrastructures. These trends are driving industry
consolidation both in the United States and internationally which, in turn,
provides opportunities for leading suppliers to increase market share and
participate in strategic alliances, joint ventures and acquisitions.
INFUSION SYSTEMS. Intravenous infusion therapy generally involves the
delivery of one or more fluids, primarily pharmaceuticals or nutritionals, to a
patient through an infusion line inserted into the
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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 pumps are volumetric devices that regulate flow by
electronically measuring a specific volume of a fluid. Infusion pumps administer
precise, volumetrically measured quantities of fluids over a wide range of
infusion rates by using positive pressure to overcome the resistance of the
infusion tubing and the back pressure generated by the patient's circulatory
system. Syringe pumps operate by gradually depressing the plunger on a standard
disposable syringe, thereby delivering a more concentrated dose of medication at
a very precise rate of accuracy. Disposable pumps are single use products
designed for use primarily in alternate-site settings.
By contrast, controllers typically are nonvolumetric devices that
regulate flow by electronically counting drops rather that by measuring a
specific volume of fluid. Because infusion pumps can measure volume and can more
accurately administer fluids, they are used more frequently than controllers to
administer expensive, critical or potent therapeutics. The Company does not
currently market controllers, but some of its infusion pumps can be used in a
controller mode.
The infusion systems sold in the markets in which the Company competes
consist of single and multi-channel infusion pumps and disposable administration
sets. As treatment regimens have become more complex and as the critically ill
constitute an increasing percentage of hospital patients, the average hospital
patient now requires a greater number of intravenous lines and more potent
therapeutics, thereby creating a greater need for technologically-advanced
infusion systems.
All infusion pumps 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.
Almost all of these sets, including those manufactured by the Company, are
compatible only with their particular manufacturer's line of infusion systems.
The introduction, however, of the SmartSite needle-free system has provided the
Company with an opportunity to aggressively compete in the gravity extension set
segment of the market with innovative, cost-effective needle-free gravity sets.
PATIENT MONITORING PRODUCTS. The Company's patient monitoring products
compete in discrete market niches, each with different competitive dynamics. The
Company primarily operates in the United States, Canada and Western Europe in
two patient monitoring product markets: (i) hospital thermometry systems and
(ii) stand-alone, non-invasive, multi-parameter instruments used to measure and
monitor a combination of vital signs.
The two major instrument types in the hospital thermometry market are
electronic and infrared devices. The Company offers electronic and infrared
instruments but does not compete in the smaller glass thermometry market. As
with the infusion therapy market, the hospital thermometry market has disposable
products that are used in conjunction with instruments and, consequently, the
existence of an installed base is important for generating ongoing disposable
product sales.
CARDIOVASCULAR AND PACEMAKER MONITORING PRODUCTS. The Company's
cardiovascular and pacemaker monitoring products are utilized in the
alternate-site care setting, primarily at the patient's home, workplace or a
physician's office. As the trend to treat patients in locations outside of the
traditional hospital setting accelerates due to cost pressures and availability
of new technology, the ability
5
to provide remote diagnostic and telemedicine capabilities are becoming
increasingly important to both the caregiver and patient. Instromedix's products
and services include: (i) arrhythmia event recorders which are portable or
wearable devices used to monitor, record and subsequently transmit
electrocardiograms (ECGs) cardiac events via a standard or wireless telephone
link to a remote location; (ii) pacemaker monitors which are portable devices
used to help physicians and patients monitor the performance and medical
compliance longevity of implantable pacemakers; (iii) the LifeSigns system which
is a proprietary, computer-based software and hardware system that allows remote
and real time monitoring, diagnosis and data capture of selected vital signs
and; (iv) a telemonitoring laboratory service, which offers 24 hour cardiac
arrhythmia monitoring to physicians, devices and hospitals. Instromedix'
products are distributed through both direct and OEM sales channels, which
include major cardiac pacing companies in the United States.
PRODUCTS AND SERVICES
The Company manufactures and markets both single and multi-channel
infusion pumps and disposable administration sets. The Company's infusion pumps
include large volume infusion pumps such as its Gemini series, Signature Edition
Family, MS III and Model 560/570 Series pumps, syringe infusion pumps such as
P1000, P3000, PCAM, P6000 and P7000, which are sold primarily in Western Europe,
and disposable pumps such as the ReadyMED for use in the alternate-site setting.
The Company's large volume infusion pumps require the use of higher margin
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. The Company also manufactures and
markets hospital thermometry instruments and related disposable probe covers,
and stand-alone, non-invasive, multi-parameter instruments which measure and
monitor a combination of temperature, pulse and blood pressure and other vital
signs. Additionally, the Company manufactures and markets arrhythmia-event
recorders and pacemaker monitors through the Instromedix division. The table
below summarizes the key features and actual or estimated market introduction
dates with respect to the Company's products.
PRODUCT DESCRIPTION STATUS
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INFUSION SYSTEMS
LARGE VOLUME INFUSION PUMPS
SIGNATURE EDITION GOLD Single and dual channel pumps; Introduced in first quarter of
incorporates intuitive user 1999.
interface and advanced software
capabilities.
SIGNATURE EDITION Single and dual channel pumps; Marketed since 1995.
incorporates intuitive user
interface; for critical and general
care and alternate site use.
GEMINI Single, dual and four channel Marketed since 1987.
instruments with pump and
controller capability; programmable
drug delivery/dose calculations and
pressure history; for use in all
hospital and general medical
surgical settings.
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PRODUCT DESCRIPTION STATUS
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560/570 SERIES Single channel pump; for general care Marketed since 1983 and 1990,
use in the United States, and respectively.
general and critical care use in
Europe.
597/598/599 SERIES Single channel, multi-pump Marketed internationally
configuration of reduced size and since 1993.
weight; used frequently for
delivery of nutritional products;
sold in Europe; for general care
and alternate site use.
MEDSYSTEM III Three channel pump; smallest and Originally introduced in late
lightest multi-channel pump 1980s by Siemens Infusion
available; for critical care and Systems, Ltd as MiniMed;
emergency transport use. acquired by the Company in
1993. Introduced in Europe in
1998.
ADVANTIS DL Large volume infusion pump for Technology licensed from
price-conscious consumers, Caesarea Medical Electronics
primarily in emerging international Ltd. Introduced in November 1998
markets. in French, German and English
versions.
ORION Modular infusion pump which can be Under development; market
configured as a one-to-four channel introduction planned for late
device, expected to result in lower 1999.
operating cost and better asset
utilization; for use in all
hospital and critical care settings.
SYRINGE INFUSION PUMPS
P1000, P2000, P3000, P4000 Syringe pump for critical and Various models introduced
non-critical care use outside the between late 1980s and early
United States. 1990s.
P7000 Syringe pump with advanced features Marketed in Europe since 1996.
for critical, non-critical and
neonatal care use in markets
outside the United States.
P6000 Syringe pump using the P7000 Marketed in Europe since 1997.
technology platform designed for
the price-conscious consumer in
markets outside the United States;
for critical and non-critical care
use.
7
PRODUCT DESCRIPTION STATUS
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TRISTAR Compact, lighter syringe pump with Market introduction planned for
modular mounting design which will 1999.
connect to a docking station
capable of displaying all infusion
information centrally. Designed
for the international market.
PCAM PUMP Syringe pump used in markets Marketed internationally since
(PATIENT CONTROLLED ANALGESIA) outside the United States that 1995.
allows patients to control the
delivery of pain medication.
AMBULATORY PUMPS
READYMED Compact, lightweight and disposable 100 mL marketed in U.S. since
ambulatory infusion pump designed July 1992 and 50 mL and 250 mL
for alternate site use. marketed in U.S. since 1993.
RHYTHMIC Family of lightweight, self- Agreement with Micrel Electronic
contained portable pumps for Applications Centre E.P.E signed
PCA, intermittent and continuous in second half of 1997. Marketed
use at home in markets outside the since September 1998.
United States.
PALISADE Ambulatory, electromechanical Acquired from Invacare in May
infusion pump for use in the 1998; U.S. market introduction
alternate-site market. planned for late 1999.
DISPOSABLE ADMINISTRATION SETS Proprietary and non-proprietary Marketed worldwide.
administration sets for use with
each of the Company's existing and
proposed infusion pumps.
NEEDLE-FREE ACCESS PRODUCTS
SMARTSITE Needle-free, capless, latex-free Marketed since 1996.
infusion system intended to
increase safety of patients and
health care workers.
VERSASAFE Needle-free infusion system component Marketed since 1994 through a
utilizing a blunt, plastic cannula license agreement.
combined with a split-septum "Y"
site.
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PRODUCT DESCRIPTION STATUS
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PATIENT MONITORING
THERMOMETRY SYSTEMS
TURBO TEMP Fast electronic thermometer; for Market introduction planned for
general hospital and alternate-site mid 1999.
use.
TEMP-PLUS II Electronic thermometer for general Marketed since mid-1980s.
hospital and alternate site use.
CORE-CHECK Infrared tympanic thermometer; for Marketed since 1991.
general hospital use.
DISPOSABLE PROBE COVERS Proprietary covers for use with each Marketed since late 1980s.
of the Company's existing and
proposed thermometers.
OTHER PATIENT MONITORING PRODUCTS
VITAL-CHECK (MODEL 4200) Continuous monitoring model that Marketed in the United States
rapidly measures pulse, blood since late 1980s.
pressure and temperature; for
general hospital use.
VITAL-CHECK (MODEL 4400) Multi-parameter non-invasive patient Marketed in the United States
monitor providing blood pressure, since 1997 through a license
pulse oximetry and temperature agreement.
monitoring.
CARDIOVASCULAR MONITORING PRODUCTS
KING OF HEARTS EXPRESS II Pager-sized, patient-activated Introduced in the first
looping memory cardiac event and quarter of 1999.
electrocardiograph recorder, using
1-3 leads of ECG. Capable of
recording up to 60 cardiac events,
which can be subsequently
transmitted over a telephone line.
Automatically records rhythms above
or below user programmable heart
rates.
KING OF HEARTS EXPRESS Pager-sized, patient-activated Marketed since 1992.
looping memory cardiac event and
electrocardiograph recorder;
capable of recording up to 60
cardiac events, which can be
subsequently transmitted over a
telephone line.
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PRODUCT DESCRIPTION STATUS
- -------------------------------------- ---------------------------------------- ------------------------------
HEARTCARD Credit card-sized, patient-activated Marketed since 1995.
cardiac event recorder; capable of
recording up to three cardiac
events which can be subsequently
transmitted over a telephone line.
PACEMAKER MONITORS
CARRYALL TRANSMITTER Portable transmitter for recommended Marketed since 1995.
pacemaker follow-up; used in a
patient's home to avoid unnecessary
visits to physician's office.
LIFESIGNS HOME HEALTH CARE TELEMEDICINE SYSTEM
LIFESIGNS SHUTTLE One-pound, portable, patient-worn Marketed since the fourth
vital signs monitor; programmable quarter of 1997.
to record up to 20 vital sign
recordings, including blood-oxygen
saturation and up to 12 leads of
electrocardiograph data.
LIFESIGNS COMMANDER Docking station used by patients to Marketed since the fourth
allow simultaneous data quarter of 1997.
transmission from the LifeSigns
Shuttle to the LifeSigns Central
Station and voice interaction with
the home health care provider; also
provides non-invasive blood
pressure measurements.
LIFESIGNS CENTRAL STATION Computerized patient management Marketed since the fourth
system operating in conjunction quarter of 1997.
with the LifeSigns Shuttle and the
LifeSigns Commander to allow remote
monitoring of patient vital signs;
contains a patient database and
displays medical profiles on-screen
for expedient review and analysis
by the home health care provider.
ALARIS INFUSION SYSTEMS
LARGE VOLUME INFUSION PUMPS. The Company's large volume infusion pumps
are either single or multi-channel and are used in both the general care and
critical care settings. The Signature Edition family of infusion pumps includes
a single channel and dual channel pump and is designed for use primarily in
hospitals. The Signature Edition line of infusion pumps features
cost-effectiveness, ease of use, reliability and innovative features, such as
new safety features designed to minimize the chance of
10
free flow. The Company has initiated a voluntary recall of its Signature
Edition infusion pumps to correct a malfunction of an electronic line filter
component. Further, in November 1998, the Company issued a voluntary safety
alert regarding the Signature Edition infusion pumps advising users to check for
the proper installation of a spring in the pumping mechanism assembly. See
"-Government Regulation - Product Regulation."
The Gemini infusion pump series, which consists of single, dual and
four channel pumps, is based on a flexible hardware and software technology
platform. This technology platform has enabled the Company over time to offer
incremental feature enhancements based on evolving customer needs. The Gemini
series currently offers the following features: free flow protection (which the
Company pioneered); independent channel operation; ability to switch from pump
to controller mode without changing the disposable administration set;
programmable to automatically taper-up and taper-down infusion rates to
facilitate delivery of complex drug-dosing regimens; capability to operate in
either micro mode (0.1 to 99.9 mL/hr) for use with neonatal patients, among
others, or macro mode (1 to 999 mL/hr) for use with adult patients; drug dose
calculation; pressure monitoring; pressure history and volume/time dosing; and
nuisance alarm (alarms with no clinical significance) reduction. The Gemini PC-1
and PC-2 infusion pumps are currently subject to a voluntary recall initiated by
the Company, and the PC-2T CE (220V) will be the subject of a mandatory field
upgrade outside the U.S. The Company has also discovered certain
electro-mechanical problems with its Gemini PC-4 infusion pumps and is
evaluating ways to correct these problems. In each reported instance of this
problem, the user has been alerted to the problem by audio and visual alarms.
See "-Government Regulation - Product Regulation."
The MS III instrument is a compact, lightweight, programmable, three
channel, infusion pump used primarily in the critical care market and transport
applications. The MS III predecessor product line was acquired from Siemens
Infusion Systems, Ltd. in September 1993. Since that time, significant resources
have been invested in the MS III pump. The Company believes that as a result of
such investment, the MS III is one of the smallest, most versatile and most
technologically advanced multi-channel pumps currently on the market.
The Model 560/570 Series and the Model 597/598 Series are single
channel peristaltic infusion pumps that offer cost-effective solutions for drug
delivery in all settings.
In May 1998 the Company acquired a license to manufacture, market and
sell the Advantis DL large volume infusion pump, which is marketed primarily for
price-conscious consumers in emerging international markets. The Company will
market and sell the pump through existing distribution channels.
The Company is also in the process of developing the Orion product, a
modular infusion system, which can be configured as a one-to-four channel
device, and is the basis for its next generation of infusion pumps. In addition
to all of the features available on the Gemini series, the Orion product will
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 and is expected to result in lower cost operation and better asset
utilization.
SYRINGE PUMPS. The Company offers syringe pumps, which are small-volume
fluid delivery systems used in neonatal care, oncology, anesthesia, critical
care and labor and delivery. While these infusion pumps represent a relatively
small portion of the industry installed base in the United States, such pumps
are widely used in Europe, where they constitute approximately 60% of the
infusion pump market. Syringe pumps are more widely used in Europe because of
the general practice of European doctors to administer medications in smaller
volumes of fluid. The Company believes that it is one of the two largest
suppliers of syringe pumps in Western Europe, with a number one or number two
installed base market share in eight countries and the number three installed
base market position in Germany.
11
The Company's PCAM patient controlled analgesia infusion pump allows
patients to control the delivery of pain medication. Designed for general care
settings, the PCAM syringe infusion pump is one of the most advanced patient
controlled analgesia infusion pumps on the European market today, with
pre-programmed and user programmable drug delivery protocols, comprehensive
patient history logging and an ergonomically designed handset with status
indicator. The Company has initiated a mandatory field upgrade of its P-1000,
P-2000, P-3000 and P-4000 syringe pumps because under certain circumstances a
rate change can occur. See "-Government Regulation - Product Regulation."
The Company's syringe pump product line also includes the P7000 syringe
pump which has been available internationally since 1996 and the P6000 syringe
pump which was introduced to the European Market during the second quarter of
1997. The Company recently received a 510(k) premarket notification clearance
("510(k)") of the P7000 syringe pump with the United States Food and Drug
Administration (the "FDA"). Designed for critical, non-critical and neonatal
care settings, the P7000 offers several advanced features, including an
automatic dose rate calculator; a pre-programmable drug menu; a range of
pre-programmed infusion administration protocols; and an automatic pressure
reduction capability in response to 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.
AMBULATORY PUMPS. The ReadyMED pump is a compact, lightweight
disposable pump for the intravenous administration of antibiotics in the
alternate-site market. The ReadyMED is designed to offer a number of advantages
over drug delivery systems currently in use for this purpose. Traditional
systems require the patient to attach a small bag and tubing set, through which
the antibiotics are administered, to a catheter placed in the patient's
circulatory system. Since traditional systems are gravity driven, the bag must
remain on an intravenous solution pole during infusion, thereby restricting the
patient's movement. The ReadyMED pump is available in 50 mL, 100 mL and 250 mL
sizes, 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. The
Company sells the ReadyMED pump through its alternate-site sales force and
distribution network.
In May 1998, the Company acquired from Invacare the Palisade pump, a
multi-therapy, ambulatory infusion pump along with a broad range of accessories
and intravenous disposables for use in the ambulatory infusion market. These
products have been developed specifically for home care applications and will be
distributed by the Company's alternate-site sales force.
DISPOSABLE ADMINISTRATION SETS. Disposable administration sets consist
of a plastic pump interface and tubing and have a variety of features, such as
volume control, pumping segments or cassette pumping systems for more accurate
delivery, clamps for flow regulation and multiple entry ports for injecting
medication and delivery of more than one 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 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, plastic cannula combined with a split-septum "Y" site. The
Company has a non-exclusive license, which expires in May 2003, to the VersaSafe
system which was a cooperative development effort of IMED, Elcam
12
Plastic of Israel and Medical Associates Network. The Company's latest
needle-free access product, the SmartSite needle-free system, offers a fully
integrated, cost effective design and eliminates the need for separate caps and
additional cannula components. The SmartSite needle-free system is latex-free
and therefore reduces the risk of exposure of patients and health care workers
to latex which can cause severe allergic or anaphylactic shock reactions. The
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.
ALARIS PATIENT MONITORING PRODUCTS. Patient monitoring instruments are
used to measure temperature, pulse, blood pressure, and other vital signs.
Instruments sold in this market have varying levels of technological
sophistication and are used in a variety of diagnostic and health care settings.
The Company competes in two key niches: hospital thermometry systems and
stand-alone, non-invasive, multi-parameter patient monitoring products.
THERMOMETRY. The Company is a leader in hospital thermometry systems,
which consist of thermometers and disposable probe covers, and maintains a
strong position in both the United States and Western Europe. The Company's
primary product is an electronic thermometer which is widely used in hospitals
and alternate-site settings. The Company is currently launching Turbo Temp
thermometer, an improved cost-effective and technologically advanced electronic
thermometer designed to provide a faster temperature reading. The Company also
manufactures and markets the CoreoCheck system, a thermometer that measures
temperature by detecting the emission of infrared energy in the ear. In the
infrared market, the Company believes it is the second largest participant. The
only disposable probe covers which can be used with the Company's thermometry
instruments are those manufactured by the Company.
OTHER PATIENT MONITORING PRODUCTS. The Company also produces
stand-alone, non-invasive, multi-parameter patient monitoring products which
measure a combination of pulse, pulse-oximetry, temperature and blood pressure.
In January 1997, the Company entered into two agreements with Criticare
Systems, Inc., ("Criticare") a manufacturer of patient monitoring systems and
non-invasive sensors for use in the hospital and alternate-site markets. Under
these agreements, Criticare obtained the right to use the Company's electronic
thermometry technology in certain monitoring systems to be manufactured and
distributed by both Criticare 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 VitaloCheck 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
13
on-site primary decision makers, which include physicians, pharmacists,
nurses, materials managers, biomedical staff and administrators. The Company has
over 5,000 hospital customers worldwide and sells its products through a
combined direct sales force consisting of over 230 salespersons and through more
than 150 distributors.
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 proprietary 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 five-year dual source supply agreement with Premier for the purchase of
large volume infusion pumps and associated disposable administration sets.
In December 1997, the Company and Tenet Healthcare Corporation
("Tenet") entered into a ten-year, sole-source agreement for intravenous
infusion pumps and associated IV disposables. In addition, the Company is named
as one of two approved sources by Tenet for needle-free IV sets and components.
The Company also has supply agreements with other leading GPOs, including
Novation, Inc., Amerinet, Inc. and Medecon Services, Inc.
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.
No single account is material to the business or operations of the
Company.
INTERNATIONAL OPERATIONS
The Company markets products in approximately 120 countries through its
direct sales force and distributors. The primary markets for the Company's
products outside the United States are Western Europe, Canada and Australia. The
Company also has a developing position in Asia and Latin America. The principal
products sold by the Company outside the United States are large volume and
syringe infusion pumps and related disposable administration sets. The Company
has manufacturing operations in England and Mexico. The Company has also
contracted with a number of foreign manufacturers to provide certain of its
sourcing needs. The following table sets forth, for each period presented, the
approximate amount of sales made to customers by each business unit over the
last three fiscal years:
1996(1) 1997 1998
--------- -------- ---------
(DOLLARS IN MILLIONS)
North America........................................ $ 236.0 $ 240.5 $ 246.7
International........................................ 110.3 118.6 125.0
Instromedix.......................................... - - 8.4
--------- -------- ---------
Total Sales..................................... $ 346.3 $ 359.1 $ 380.1
--------- -------- ---------
--------- -------- ---------
- -------------------------
(1) Presented on a pro forma basis. Exclusive of the Merger, sales to
customers in North America and internationally were $105.6 million and
$30.8 million during the year ended December 31, 1996.
The Company believes that sales of products to customers outside of the
United States represent a significant potential source of growth. Foreign
operations are subject to special risks that can materially affect the sales,
profits and cash flows of the Company, including currency exchange rate
devaluations and fluctuations, the impact of inflation, exchange controls, labor
unrest, political instability, export duties and quotas, domestic and
international customs and tariffs, unexpected changes in regulatory
environments, potentially adverse tax consequences and other risks. Changes in
certain exchange rates
14
could have an adverse effect on the Company's ability to meet interest and
principal obligations with respect to its United States dollar-denominated
debt and could also have a material adverse effect on the business, financial
condition, results of operations or prospects of the Company.
MANUFACTURING
The Company is focusing on low-cost manufacturing and manufactures its
products at plants in San Diego, California; Creedmoor, North Carolina; Tijuana,
Mexico; and Hampshire, England. In February 1999 the Company announced its plans
to relocate the Instromedix operations, including manufacturing of Instromedix
products, from Hillsboro, Oregon to San Diego. The San Diego facility is the
primary manufacturing facility for infusion pumps and patient monitoring
instruments and also houses a service operation for installed infusion pumps and
patient monitoring instruments. The Creedmoor facility houses a portion of the
current disposables operations and is a distribution center for North American
disposable finished products. Product release from sterilization is done in San
Diego and Creedmoor. The Tijuana facilities primarily focus on the manual
assembly of disposables, and the Hampshire facility focuses on the manufacturing
of syringe pumps and Advantis which are sold primarily to the international
market. Disposable products for international markets are currently supported
through a number of foreign manufacturers.
The Company has designed and implemented an integrated network of
quality systems, including control procedures that are planned and executed by
technically-trained professionals. Through these systems, the Company has
established written specifications for raw materials, packaging, labels,
sterilization and overall manufacturing process control. A substantial number of
raw materials require certificates of analysis to help ensure that finished
products conform to specifications. In addition, the Company regularly tests
components and products at various stages of the manufacturing process to ensure
compliance with applicable specifications.
The Company purchases raw materials worldwide in the ordinary course of
business from numerous suppliers. The vast majority of these materials are
generally available and the Company has not experienced any serious shortages or
material delays in obtaining these materials. In some situations, the Company
has long-term supply contracts, although the Company purchases a significant
amount of its requirements of certain raw materials by purchase order. Although
the Company is generally not dependent upon any single source of supply, it
relies upon a limited number of suppliers for circuit boards and other parts
which are used in certain of its infusion systems. The loss of any such supplier
would result in a temporary interruption in the manufacturing of the Company's
products. The Company believes, however, that these materials are available as
needed from alternative sources.
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, 1998, the Company expended approximately $20.1
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.
15
PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS
The Company relies heavily on patented and other proprietary
technology. The Company believes its issued and pending patents are important to
its competitive position. There can be no assurance that patent applications
submitted by the Company or its licensors will result in patents being issued or
that, if issued, such patents and patents already issued will afford protection
against competitors with similar technology. In addition, there can be no
assurance that any patents issued to or licensed by the Company will not be
infringed or designed around by others, that others will not obtain patents that
the Company will need to license or design around, that the Company's products
will not inadvertently infringe the patents of others, or that others will not
manufacture and distribute similar products upon expiration of such patents.
There can also be no assurance that key patents of the Company will not be
invalidated or that the Company or its licensors will have adequate funds to
finance the high costs of prosecuting or defending patent validity or
infringement issues.
The Company's policy is to secure patent protection for significant
inventions. The Company holds approximately 239 unexpired patents in the United
States and approximately 400 unexpired patents in foreign countries, principally
in Europe, Canada, Japan and Australia. The Company has 18 additional
applications pending or in preparation in the United States and 395 foreign
applications pending. Within the next ten years, approximately 142 of the
Company's United States patents and approximately 218 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 business, financial condition, results of operations, or prospects
of the Company.
The patent positions of medical device firms, including the Company,
are uncertain and involve complex legal and factual questions for which certain
legal principles are unresolved. The coverage claimed in a patent application
can be significantly reduced before a patent is issued. In addition, patent law
has recently been revised to give effect to international accords to which the
United States has become a party. Pursuant to such accords, the patent term has
been changed from 17 years from date of grant to 20 years from date of filing
and certain provisions favoring United States inventors over foreign inventors
have been eliminated.
The United States patent code was recently amended. As a result,
certain statutory remedies for patent infringement are no longer available for a
medical practitioner's otherwise infringing performance of a medical activity.
As defined in the United States patent code, a patent may not be enforced
against a medical practitioner's performance, or the performance of a related
health care entity of a "medical activity" which is defined as the performance
of a medical or surgical procedure on a body. However, a "medical activity" does
not include "the use of a patented machine, manufacture or composition of matter
in violation of such patent." Hence, remedies are still available against
manufacturers and distributors. The aforesaid amendment does not apply to
patents issued before September 30, 1996.
The Company sells its products under a variety of trademarks, some of
which are considered by the Company to be of 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.
16
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 internal developments and
seeking acquisitions or alliances 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. Major competitors in this market include Baxter
International, Inc., Abbott Laboratories, Inc. and McGaw. The Company's success
is therefore dependent on the development of new infusion technologies and
products and the development of other markets for its products. The Company's
older infusion therapy product lines have experienced declining sales and market
share recently, primarily due to competitors who offer volume discounts based on
bundled purchases of a broader range of medical equipment and supplies, as well
as to the aging of the Company's core products. The Company's introduction of
new products may offset future declines in sales and market share. There can be
no assurance, however, that new products will be successfully completed or
marketed for sale, will not necessitate upgrades or technical adjustments after
market introduction, can be manufactured in sufficient volumes to satisfy
demand, or will offset declines in sales and market share experienced with
respect to existing products. See "--Products and Services."
The European infusion systems market is much more regionalized and
fragmented, with a few strong competitors in each regional market. Major
competitors encountered in several markets include Graseby, Fresenius and B.
Braun Melsungen AG. The Company is among the leaders in a number of Western
European markets, with a number one or number two installed base market share in
eight countries and the number three installed base market share in Germany. The
Western European countries in which the Company has a number one or number two
installed base market share are France, Norway, Sweden, the United Kingdom,
Belgium, the Netherlands, Spain and Italy.
The patient monitoring products market is fragmented by product type.
The Company's key competitor in the United States electronic thermometer
market is Welch Allyn, Inc. (f/k/a Diatek, Inc.) and its key competitor in the
infrared thermometer market is Sherwood.
GOVERNMENT REGULATION
PRODUCT REGULATION. The research, development, testing, production and
marketing of the Company's products are subject to extensive governmental
regulation in the United States at the federal, state and local levels, and in
certain other countries. Non-compliance with applicable requirements may result
in recall or seizure of products, total or partial suspension of production,
refusal of the government to allow clinical testing or commercial distribution
of products, civil penalties or fines and criminal prosecution and/or dues for
repair and/or refund.
The United States FDA regulates the development, production,
distribution and promotion of medical devices in the United States. Virtually
all of the products being developed, manufactured and sold by the Company in the
United States (and products likely to be developed, manufactured or sold in the
foreseeable future) are subject to regulation as medical devices by the FDA.
Pursuant to the Federal Food, Drug, and Cosmetic Act (the "FDC Act"), a medical
device is classified as a Class I, Class II or Class III device. Class I devices
are subject to general controls, including registration, device listing,
17
recordkeeping requirements, labeling requirements, "Quality Systems Regulation"
("QSR" as defined in FDA Quality System regulations) 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 include notification and could include performance standards,
postmarket surveillance, patient registries, guidelines, recommendations and
other actions as the FDA deems necessary to provide reasonable assurance of
safety and effectiveness. New Class III devices must meet the most stringent
regulatory requirements and must be approved by the FDA before they can be
marketed. Such premarket approval can involve extensive preclinical and clinical
testing to prove safety and effectiveness of the devices.
Virtually all of the Company's products are Class II devices. The
Company is currently developing and manufacturing a Class III device for a third
party. This device is pending Premarket Approval Application ("PMA"). Unless
otherwise exempt, all Class II and Class III medical devices introduced to the
market since 1976 are required by the FDA, as a condition of marketing, to
secure a 510(k) or a PMA. A product will be cleared by the FDA under a 510(k) if
it is found to be substantially equivalent because it has the same intended use
and the same technological characteristics as 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 ("predicate device"),
or if it has different technological characteristics if it is demonstrated that
the device is as safe and effective as the predicate device and raises no new
safety or efficacy questions. In general, if a product is not substantially
equivalent to a predicate device, and not otherwise exempt, the FDA must first
reclassify the device or approve a PMA before it can be marketed. An approved
PMA indicates that the FDA has determined the product has been demonstrated,
through the submission of clinical data and manufacturing and other information,
to be safe and effective for its labeled indications. The PMA process typically
takes more than a year from submission and requires the submission of
significant quantities of clinical data and supporting information. The process
of obtaining a 510(k) 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 for cause 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,
18
unless the device is found to be a non-significant risk device by the
sponsor and each institutional review board ("IRB") that reviews the study. The
FDA, however, has the authority to determine that a study designated as
involving a non-significant risk device by the sponsor and IRBs involves a
significant risk device and an IDE application must be submitted and approved
before the study can resume. In addition, a study of a non-significant risk
device must still comply with certain provisions of the IDE regulations, and
meet other regulatory requirements. The violation of the IDE regulations can
result in a variety of sanctions, such as warning letters, prohibition against
additional clinical research, the refusal to accept data and criminal
prosecution.
Devices manufactured by the Company in the United States are exported
by the Company to other countries. Such devices, if not approved 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 9001 or ISO 9002 certification for all of
its manufacturing facilities regarding the quality of its manufacturing systems,
a requirement for doing business in EC countries. The Company has been granted
approval to affix the CE mark, pursuant to the EC Medical Device Directives, on
substantially all of its products. Products not CE marked cannot be distributed
in the EC after June 16, 1998. CE marking does not necessarily preclude,
however, additional restrictions on marketing in any individual country in the
EC.
The Company's products are subject to varying degrees of government
regulation in the countries in which the Company has operations, and the general
trend is toward regulation of increasing stringency. The degree of government
regulation affecting the Company varies considerably among countries, ranging
from stringent design, testing, manufacturing, approval requirements, and
post-approval requirements to more simple registration. In general the Company
has not encountered material delays or unusual regulatory impediments in
marketing its products internationally. Establishment of new uniform regulations
for the European Economic Area, the transition rule for which ended on June 16,
1998, subjects the Company to a single extensive regulatory scheme for all of
the participating countries. The EU Medical Device Directive requires that
medical devices marketed in participating countries have a "CE" mark affixed to
the device certifying compliance with the applicable medical device
requirements. The Company is required to classify its medical devices into one
of four classes; meet certain essential requirements generally relating to
device design, construction, labeling, manufacture and other standards; certify,
for Class I devices, or in the case of a medium or high risk device, obtain
certification from a recognized non-governmental body (notified body) that its
device conforms to the applicable requirements. In addition, other regulatory
requirements apply, including but not limited to registration, vigilance or
adverse event reporting, recordkeeping, and labeling and promotional
restrictions. Companies and medical devices in the EU are also subject to
enforcement actions, including administrative, civil and criminal penalties.
Certain countries require the Company to obtain clearances for its
products prior to marketing the products in those countries. In addition,
certain countries impose product specifications, standards or other requirements
which differ from or are in addition to those mandated in the United States. The
EC and certain countries are in the process of developing new modes of
regulating medical products which may result in lengthening the time required to
obtain permission to market new products. These changes could have a material
adverse effect on the Company's ability to market its products in such countries
and would hinder or delay the successful implementation of the Company's planned
international expansion.
The Company is registered as a medical device manufacturer with the FDA
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 QSRs governing design, manufacturing, testing, quality
control, product packaging and storage practices. An inspection may result in a
determination that the
19
Company is not in compliance with certain FDA or state requirements, may
require the Company to undertake corrective action, and could result in legal
action against the Company and its products, including actions such as those
described herein. The FDA has recently revised the QSR 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 1994, the Company has on
seventeen occasions temporarily removed products from the market or issued
safety alerts regarding products 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 Model 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, was recently closed by the FDA, however, 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. Without charge to its customers, the Company has completed
the upgrade and replacement of 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 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. The Company has completed required modifications and was recently
notified that this recall has been closed with the FDA.
In the first quarter of 1997 the Company identified and in March 1998
initiated a voluntary recall of approximately 50,000 of its Gemini model PC-1
and PC-2 infusion pumps because failure of specific electrical components 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 recall. The
Company is not aware of any injuries sustained in known battery overcharging
incidents. The Company recorded a charge of $2.5 million to cost of sales during
the first quarter of 1997 for this recall and believes it has adequately accrued
for this matter. However, there can be no assurance that this recall can be
implemented for an amount consistent with management's estimate.
The Company has initiated a voluntary safety alert of its Model 597/598
and Model 599 Series infusion pumps. The Company discontinued selling the Model
599 Series infusion pumps in March 1997. The 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.
20
The Company initiated a voluntary recall of certain MS III disposable
administration sets affecting 44,000 units. This recall advised 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 has initiated a voluntary recall of its Signature Edition
infusion pumps to correct a malfunction of an electronic line filter component
(which malfunction may occur when a user fails to follow the Company's written
cleaning instructions and can result in an electrical short). Further, in
November, 1998, the Company initiated a voluntary safety alert regarding the
Signature Edition infusion pumps advising to check for the proper installation
of a spring in the pumping mechanism assembly. In the third quarter of 1998, the
Company initiated a recall of its Gemini PC-4 pumps to correct certain
electro-mechanical problems which may cause one or more channels of the device
to audibly and visibly alarm and temporarily cease operation. The Company is not
aware of the occurrence of any injury incidents relating to a malfunction of
this type. The Company has also initiated a mandatory field upgrade of its
P-1000, P-2000, P-3000 and P-4000 syringe pumps because under certain
circumstances a rate change can occur. In April 1999, the Company will initiate
a mandatory field upgrade of the Gemini PC-2T CE 220V product, distributed only
in certain countries outside the U.S., for failure to audibly alarm when a
certain type of failure occurs.
Although there can be no assurance, the Company believes that the
voluntary recalls, Safety Alerts, recalls and field upgrades, along with
adjustments and corrections that may be made to various Company products from
time to time as an ordinary part of the business of the Company, will not have a
material adverse effect on the business, financial condition, results of
operation or cash flows of the Company.
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 other federally funded
health care programs. Violations of the statute are punishable by civil and
criminal penalties and the exclusion of the provider from future participation
in other federally funded health care programs. The Social Security Act contains
exceptions to these prohibitions for, among other things, properly reported
discounts, rebates and payments of certain administrative fees to GPOs. Because
of the breadth of the statutory prohibitions, the lack of court decisions or
other authority addressing the types of arrangements that are permissible under
the law and the narrowness of statutory exceptions, the Secretary of Health and
Human Services published regulations creating "safe harbors" identifying certain
practices that will not be treated as violating the "anti-kickback" provisions
of the Social Security Act. While failure to satisfy all of the criteria for a
safe harbor does not necessarily mean that an arrangement is unlawful, engaging
in a business practice for which there is a safe harbor may be regarded as
suspect if the practice fails to meet each of the prescribed criteria of the
appropriate safe harbor. The enumerated safe harbors include safe harbors which
implement, and further refine, the statutory exceptions for discounts and
payments to GPOs. Because the Company sells some of its products to customers at
prices below list price and in various combinations, the Company is engaged in
giving discounts within the meaning of the Social Security Act. The regulations
require sellers to fully and accurately report all discounts and inform buyers
of their obligations to report such discounts. The Company also pays
administrative fees to certain purchasing agents within the meaning of the
Social Security Act. In order to qualify for the GPO safe harbor, certain
requirements must be met including disclosure of the existence of the GPO fee
arrangement to GPO
21
members and that members are neither wholly owned by the GPO nor
subsidiaries of a parent corporation that wholly owns the GPO. Certain of the
Company's discounts and arrangements with purchasing agents may not meet all the
requirements of the appropriate safe harbors.
Several states also have statutes or regulations prohibiting financial
relationships with referral sources that are not limited to services for which
Medicare, Medicaid or other state or federal health care program payment may be
made. A finding of non-compliance with these anti-remuneration laws by federal
or state regulatory officials, including non-compliance with appropriate safe
harbors, could have a material adverse effect on the Company.
COVERAGE AND REIMBURSEMENT. The Company's products are purchased or
leased by health care providers or suppliers which submit claims for
reimbursement for such products to third-party payors such as Medicare, Medicaid
and private health insurers. Although the Company has no knowledge that
third-party payors will adopt measures that would limit coverage of, or
reimbursement for, its products, any such measures that were applied to the
Company's products could have a material adverse effect on the Company.
ENVIRONMENTAL MATTERS. The Company is subject to regulation by OSHA,
the Environmental Protection Agency ("EPA") and their respective state and local
counterparts, and under extensive and changing foreign, federal, state and local
environmental standards, including those governing the handling and disposal of
solid and hazardous wastes, discharges to the air and water, and the remediation
of contamination associated with releases of hazardous substances. Such
standards are imposed by, among other statutes, the Toxic Substances Control
Act, the Clean Air Act, the Federal Water Pollution Control Act, the Resource
Conservation and Recovery Act and the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"). Although there can be no assurances,
the Company believes that it is currently in material compliance with current
environmental standards. Nevertheless, the Company uses hazardous substances in
its day-to-day operations and, as is the case with manufacturers in general, if
a release of hazardous substances occurs on or from the Company's properties,
the Company may be held liable and may be required to pay the cost of remedying
the condition. The amount of any such liability could be material.
The Company has made, and will continue to make, expenditures to comply
with current and future environmental standards. Although no material capital or
operating expenditures relating to environmental controls are anticipated, there
can be no assurance that changes in, additions to, or differing interpretations
of statutory and regulatory requirements will not require material expenditures
in the future.
The Company is subject to liability under CERCLA and analogous state
laws for the investigation and remediation of environmental contamination at
properties owned and/or operated by it and at off-site locations where it has
arranged for the disposal of hazardous substances. Courts have determined that
liability under CERCLA is, in most cases, joint and several, meaning that any
responsible party could be held liable for all costs necessary for investigating
and remediating a release or threatened release of hazardous substances. As a
practical matter, liability at most CERCLA (and similar) sites is shared among
all the solvent "potentially responsible parties" ("PRPs"). The most relevant
factors in determining the probable liability of a party at a CERCLA site
usually are the cost of the investigation and remediation, the relative amount
of hazardous substances contributed by the party to the site and the number of
solvent PRPs.
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
22
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 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 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, 1999, the Company employed 2,716 people including
1,167 in the United States. The Company has not experienced any work stoppages
related to employment matters other than in connection with a contract dispute
with Cal Pacifico.
Cal Pacifico was the operator of the Company's two maquiladora assembly
plants in Tijuana, Mexico. For over eight years, the Company assembled
disposable administration sets at these two plants, which utilized more than
1,200 workers employed by Cal Pacifico, under a contract with Cal Pacifico. A
dispute originated in April 1997 when the Company, in accordance with the terms
of such contract, informed Cal Pacifico that it would be terminating its
contractual arrangements effective August 1, 1997. Cal Pacifico objected to such
notification and proposed the systematic termination of the workforce. In
response to such objection, the Company on June 6, 1997 hired substantially all
of the workers at the plants directly. On June 11, 1997, Cal Pacifico locked the
Company's administrative personnel and production employees out of the plants
and would not allow the Company access to its production equipment or inventory.
On June 26, 1997, the Company entered into a settlement agreement with Cal
Pacifico. As a result of the settlement agreement, the assembly plants resumed
full operations on June 27, 1997. The Company now directly operates these plants
with no assistance from or interaction with Cal Pacifico.
ALARIS Medical's operations are supported by persons employed by ALARIS
Medical Systems and its subsidiaries. The Company's principal executive offices
are located at 10221 Wateridge Circle, San Diego, California 92121.
23
ITEM 2. PROPERTIES
The Company has long-term leases on substantially all of its major
facilities. The Company maintains an instrument manufacturing facility in San
Diego, California where infusion pumps and patient monitoring instruments for
both the North America and International business units are manufactured. The
Company also maintains a facility in Hampshire, England where syringe pumps and
the Advantis pump, products marketed for countries outside of the United States,
are manufactured. The manufacturing facility for the Instromedix operating unit
is located in Hillsboro, Oregon. In February, 1999 the Company announced its
plans to relocate the Instromedix operations, including manufacturing of
Instromedix products, to San Diego. Disposable administration set manufacturing
facilities for the North America and International business units are located in
Creedmoor, North Carolina and Tijuana, Mexico. The disposable manufacturing
facility in Creedmoor, North Carolina is owned by the Company. The disposable
manufacturing facilities in Tijuana, Mexico are maintained under 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, Norway and Australia. The North American sales office for
Canada is also maintained under a long-term lease.
The Company's principal offices are located in San Diego, California
and its International headquarters are located in Hampshire, England. These
facilities are maintained under long-term lease arrangements.
ITEM 3. LEGAL PROCEEDINGS
The Company was a defendant in a lawsuit filed in June 1996 by Sherwood
Medical Company (d/b/a Sherwood, Davis & Geck) ("Sherwood") against IVAC Medical
Systems. The lawsuit was filed in the United States District Court for the
Southern District of California, alleging infringement of two Sherwood patents
by reason of certain activities including the sale by IVAC Medical Systems of
disposable probe covers for use with the Company's infrared tympanic
thermometers. The lawsuit sought injunctive relief, treble damages and the
recovery of costs and attorney fees. The jury failed to reach a verdict in this
litigation and the Court has declared a mistrial. Sherwood has asked the Court
for a retrial, which is tentatively scheduled for August, 1999. The Company
believes it has sufficient defenses to all claims by Sherwood, 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 lawsuit filed on April 20, 1998 and
served on October 28, 1998, by Becton Dickinson and Company ("Becton") against
ALARIS Medical Systems, Inc., which alleges infringement of a patent licensed to
Becton by reason of certain activities, including the sale of the Company's
SmartSite needle-free system. Becton has requested a permanent injunction
enjoining the Company from infringing the patent in suit. No amount of monetary
damages has been specified by Becton, however the complaint requests damages as
appropriate and all gains, profits and advantages derived by or from the
Company's infringement of the patent, as well as prejudgment interest, costs,
expenses and reasonable attorney's fees. The Company believes it has sufficient
defenses to all claims, and intends to vigorously defend this action. However,
there can be no assurance that the Company will successfully defend all claims
made by Becton 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. In addition, the Company filed a lawsuit on
December 4, 1998 against Becton. The lawsuit, which is pending in the United
States District Court for the Southern District of California, alleges
infringement of two patents, one owned by the Company and one licensed to the
Company, by reason of
24
certain activities, including the sale of Becton's Atrium needle-free
valve. The lawsuit seeks injunctive relief, damages and the recovery of costs
and attorney fees.
The Company is also involved in a number of legal proceedings arising
in the ordinary course of its business, none of which is expected to have a
material adverse effect on the Company's business, financial condition, results
of operations or prospects of the Company. The Company maintains insurance
coverage against claims in an amount which it believes to be adequate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCK-HOLDER MATTERS
The Common Stock was listed and traded on the 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, based on daily closing prices.
HIGH LOW
------ ------
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
1998:
First Quarter....................................................................... 5-9/16 4-1/8
Second Quarter...................................................................... 7-11/32 4-1/2
Third Quarter....................................................................... 6-15/16 3-1/4
Fourth Quarter...................................................................... 7-1/2 3
At March 11, 1999, there were 482 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."
25
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data of ALARIS
Medical at December 31, 1994, 1995, 1996, 1997 and 1998, and for the years then
ended, have been derived from ALARIS Medical's annual financial statements
including the consolidated balance sheet at December 31, 1997 and 1998 and the
related consolidated statement of operations for the three-year period ended
December 31, 1998 and notes thereto which appear elsewhere herein.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1994 1995 1996 1997 1998
--------- ---------- ---------- ---------- ----------
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Sales.................................... $ 112,122 $ 112,551 $ 136,371 $ 359,077 $ 380,068
Cost of sales............................ 65,590 63,219 78,616 188,340 191,232
--------- ---------- ---------- ---------- ----------
Gross margin............................. 46,532 49,332 57,755 170,737 188,836
Total operating expenses (1)............. (33,941) (34,614) (105,614) (142,806) (165,150)
Lease interest income (2)................ 2,449 2,333 2,501 4,559 4,599
--------- ---------- ---------- ---------- ----------
Income (loss) from operations............ 15,040 17,051 (45,358) 32,490 28,285
Interest income.......................... 77 192 1,193 532 1,134
Interest expense......................... (8,690) (8,153) (13,393) (44,413) (48,658)
Debt conversion expense (4).............. - - (10,000) - -
Other income (expense), net.............. 1,136 313 1,222 (1,535) (1,100)
--------- ---------- ---------- ---------- ----------
Income (loss) before income taxes,
minority interests and extraordinary
item ................................. 7,563 9,403 (66,336) (12,926) (20,339)
(Provision) benefit for income taxes .... (1,886) 9,374 730 3,300 (4,100)
Minority interests in consolidated
subsidiaries.......................... - (6,500) - - -
--------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary
item.................................. 5,677 12,277 (65,606) (9,626) (24,439)
Dividends and accretion on mandatorily
redeemable preferred stock............ 874 650 962 - -
--------- ---------- ---------- ---------- ----------
Income (loss) applicable to common
stock before extraordinary item....... $ 4,803 $ 11,627 $ (66,568) $ (9,626) $ (24,439)
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
Income (loss) per common share before
extraordinary item assuming
no dilution (3)....................... $ .34 $ .75 $ (3.27) $ (.16) $ (.42)
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
Income (loss) per common share before
extraordinary item assuming
dilution (3).......................... $ .23 $ .38 $ (3.27) $ (.16) $ (.42)
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
Weighted average common shares
outstanding assuming no dilution (3).. 14,069 15,506 20,343 58,644 58,710
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
Weighted average common shares
outstanding assuming dilution (3)..... 24,304 33,236 20,343 58,644 58,710
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
26
DECEMBER 31,
-------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents ............... $ 1,340 $ 1,862 $ 12,084 $ 6,984 $ 29,500
Working capital ......................... 29,576 31,938 87,785 84,047 146,660
Total assets ............................ 132,124 169,630 593,382 565,297 651,033
Short-term debt (4) ..................... 1,214 322 3,963 14,559 15,423
Long-term debt (4) ...................... 91,803 86,789 436,130 431,571 530,867
Mandatorily redeemable equity securities 6,567 7,217 - - -
Stockholders' (deficit) equity (4) ...... (2,238) 31,532 46,053 31,949 8,369
ADJUSTED EBITDA (5) ........................ $ 22,851 $ 24,626 $ 27,775 $ 89,287 $ 94,942
Inventory purchase price allocation
adjustment (6) .......................... - - (4,014) (1,607) (274)
Restructuring, integration and other
non-recurring charges ................... - - (15,277) (20,902) (1,901)
Purchased in-process research and
development ............................. - - (44,000) - (28,334)
Depreciation and amortization (7) .......... (7,811) (7,575) (9,842) (34,288) (36,148)
Interest income ............................ 77 192 1,193 532 1,134
Interest expense ........................... (8,690) (8,153) (13,393) (44,413) (48,658)
Debt conversion expense (4) ................ - - (10,000) - -
Other, net ................................. 1,136 313 1,222 (1,535) (1,100)
(Provision) benefit for income taxes ....... (1,886) 9,374 730 3,300 (4,100)
Minority interests in consolidated
subsidiaries ............................ - (6,500) - - -
Extraordinary gain (loss) .................. - 15,177 (1,630) - -
--------- --------- --------- --------- ---------
Net income (loss) ....................... $ 5,677 $ 27,454 $ (67,236) $ (9,626) $ (24,439)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
- ---------------------------------
(1) In 1996 ALARIS Medical restructured its operations. During 1997, the
Company incurred significant non-recurring integration and other
non-recurring expense resulting from the Merger. During 1998, the Company
incurred integration costs and other non-recurring expenses resulting from
the acquisitions of Instromedix and Patient Solutions. Operating expenses
for the years ended December 31, 1996, 1997 and 1998 include restructuring,
integration and other non-recurring charges of $15,277, $20,902 and $1,901,
respectively. Additionally, in 1996, the Company recorded $44,000 of
purchased in-process research and development in connection with the
Merger. In 1998, in connection with the acquisitions and licensing, the
Company recorded $28,334 of purchased in-process research and development.
(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 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.
(4) In 1996, in connection with the Merger, the Company entered into a
$250,000 credit facility and also issued $200,000 of 9 3/4% senior
subordinated notes due 2006. Additionally, convertible promissory notes in
the aggregate principal amount of $37,500 were exchanged for 29,416 shares
of common stock, including 3,333 shares issued as an inducement to
convert, which resulted in $10,000 of debt conversion expense. ALARIS
Medical also redeemed the remaining $21,924 principal amount of its 15%
subordinated debentures due 1999 and recorded an extraordinary loss on
extinguishment of debt of $1,630 as a result of this transaction. On July
27
28, 1998, ALARIS Medical completed the sale of $109.9 million of 11-1/8%
Senior Discount Notes (the "Senior Discount Notes"), due 2008, receiving
net proceeds of $106.3 million. A portion of the net proceeds of the sale
of the notes was also used to repay certain borrowings under a bank credit
facility. For further discussion, see Note 5 to the Consolidated Financial
Statements.
(5) Adjusted EBITDA represents income from operations before restructuring,
integration and other non-recurring charges, non-cash purchase accounting
charges and depreciation and amortization. Adjusted EBITDA does not
represent net income or cash flows from operations, as these terms are
defined under generally accepted accounting principles, and should not be
considered as an alternative to net income as an indicator of the
Company's operating performance or to cash flows as a measure of
liquidity. ALARIS Medical 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.
(6) Amounts in 1996 and 1997 represent 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. The 1998 amount represents
that portion of the purchase accounting adjustments made to adjust the
acquired inventories to the estimated fair value on the acquisition dates
which was charged to cost of sales.
(7) Depreciation and amortization excludes amortization of debt discount and
issuance costs included in interest expense of $681, $521, $1,332, $3,125
and $3,199 for the years ended December 31, 1994, 1995, 1996, 1997 and
1998, respectively.
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF ALARIS MEDICAL AND THE RELATED NOTES THERETO INCLUDED
ELSEWHERE IN THIS ANNUAL REPORT.
OVERVIEW
ALARIS Medical is a holding company for ALARIS Medical Systems. ALARIS
Medical also identifies and evaluates potential acquisitions and investments,
and performs various corporate functions. As a holding company, ALARIS Medical
currently has no revenues to fund its operating and interest expense and relies
on its existing cash, cash generated from operations of ALARIS Medical Systems
and external borrowings to meet its obligations. Capitalized terms used but not
defined herein have the meaning ascribed to them in the Notes to the
Consolidated Financial Statements.
The Company is a leading provider of infusion systems and related
technologies to the United States hospital market, with the largest installed
base of pump delivery lines ("channels"). The Company is also a leader in the
international infusion systems market. Based on installed base of infusion
pumps, the Company has a number one or two market position in eight Western
European countries, the number three market position in Germany, the largest
installed base of infusion pumps in Australia and Canada and a developing
position in Latin America and Asia. The Company's infusion systems, which are
used to deliver one or more fluids, primarily pharmaceuticals or nutritionals,
to patients, consist of single and multi-channel infusion pumps and controllers,
and proprietary and non-proprietary disposable administration sets (i.e.,
plastic tubing and pump interfaces). In addition, the Company is a leading
provider of patient monitoring products that measure and monitor temperature,
pulse, pulse oximetry and blood pressure, with the largest installed base of
hospital thermometry systems in the United States. Through its July 17, 1998
acquisition of Instromedix, the Company also designs, manufactures and sells
cardiology products such as arrhythmia-event recorders and pacemaker monitors.
The Company sells a full range of products through a worldwide
direct sales force consisting of over 230 sales persons and through more than
150 distributors to over 5,000 hospitals worldwide. Sales by the Company's
International business unit represented 32.9% of the Company's total sales
for the year ended December 31, 1998. For the year ended December 31, 1998,
the Company had sales of $380.1 million and Adjusted EBITDA of $94.9 million.
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 1996. The
1996 operating results and cash flows represent those of Advanced Medical
(ALARIS Medical's predecessor) and IMED and include those of IVAC from November
27, 1996 through December 31, 1996.
In recent years, the Company's results of operations have been affected
by the cost containment pressures applicable to health care providers. In
particular, in order to reduce costs, certain hospitals have adopted a protocol
increasing the maximum time between disposable administration set changes from
every 24 hours to as much as every 72 hours. Notwithstanding this change in
protocol, unit sales volume of the Company's disposable administration sets
increased in every year since 1993, primarily as a result of the growth in its
worldwide installed base of infusion pumps. However, uncertainty remains with
regard to future changes within the healthcare industry. The trend towards
managed care and economically motivated buyers in the U.S. may result in
continued pressure on selling prices of products and compression on gross
margins. The U.S. marketplace is increasingly characterized by consolidation
among healthcare providers and purchasers of medical products. The Company's
profitability is affected by the increasing use of Group Purchasing
Organizations ("GPOs") which are better able to negotiate favorable pricing from
providers of infusion systems, such as the Company, and which insure compliance
29
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 could
affect the Company's future results of operations. It is impossible to predict
the extent to which the Company may be affected by any such change in
legislation.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
financial information expressed as a percentage of sales, 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 PRO FORMA PRO FORMA AS REPORTED AS REPORTED
1996 1996 1996 1997 1998
--------- ---------- ------- -------- -------
(% OF SALES) ($ IN THOUSANDS) (% OF SALES) (% OF SALES) (% OF SALES)
Sales .......................................... 100.0% $ 346,348 100.0% 100.0% 100.0%
Cost of sales..................................... 57.6 184,742 53.3 52.5 50.3
--------- ---------- ------- -------- -------
Gross margin...................................... 42.4 161,606 46.7 47.5 49.7
Selling and marketing expenses.................... 16.3 65,385 18.9 18.3 19.0
General and administrative expenses............... 11.2 39,985 11.5 10.9 11.2
Research and development expenses................. 6.5 18,142 5.2 4.7 5.3
Purchased in-process research and
development.................................... 32.3 - - - 7.5
Restructuring, integration and other
non-recurring charges.......................... 11.2 - - 5.8 .5
Lease interest income............................. 1.8 4,601 1.2 1.2 1.2
--------- ---------- ------- -------- -------
(Loss) income from operations..................... (33.3) 42,695 12.3 9.0 7.4
Interest income................................... .9 363 .1 .1 .3
Interest expense.................................. (9.8) (41,692) (12.0) (12.4) (12.8)
Debt conversion expense........................... (7.3) - - - -
Other, net........................................ .9 1,009 .3 (.3) (.2)
--------- ---------- ------- -------- -------
(Loss) income before income taxes
and extraordinary item......................... (48.6) 2,375 .7 (3.6) (5.3)
(Benefit from) provision for income taxes......... (.5) 3,250 .9 (.9) 1.1
--------- ---------- ------- -------- -------
(Loss) income before extraordinary item........... (48.1%) $ (875) (.2%) (2.7%) 6.4%
--------- ---------- ------- -------- -------
--------- ---------- ------- -------- -------
Other Data:
Adjusted EBITDA............................... 20.4% $ 75,883 21.9% 24.9% 25.0%
--------- ---------- ------- -------- -------
--------- ---------- ------- -------- -------
30
The following table summarizes sales to customers by each business
unit:
YEAR ENDED DECEMBER 31, (A)
---------------------------------------------------
AS REPORTED PRO FORMA AS REPORTED AS REPORTED
1996 1996 1997 1998
---------- --------- --------- ---------
(IN MILLIONS)
North America sales......................................... $ 105.6 $ 236.0 $ 240.5 $ 246.7
International sales......................................... 30.8 110.3 118.6 125.0
Instromedix sales........................................... - - - 8.4
---------- --------- --------- ---------
Total sales............................................. $ 136.4 $ 346.3 $ 359.1 $ 380.1
---------- --------- --------- ---------
---------- --------- --------- ---------
(A) The Company's sales results are reported consistent with the Company's
three strategic business units: North America, International, and
Instromedix. As a result, Canadian sales of drug infusion and patient
monitoring products are now included in "North America" results.
Previously, Canadian sales were reported as "international" sales. Prior
year amounts have been reclassified for comparability with 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
SALES. Sales increased $21.0 million, or 5.9%, during 1998 as
compared with 1997. During 1998 as compared with 1997, North America sales
increased $6.2 million, or 2.5%, while International sales increased $6.4
million, or 5.4%. Sales generated by Instromedix for 1998 were $8.4 million.
The increase in International sales is primarily due to an increase in volume
of drug infusion instruments and disposable administration sets. The majority
of the Company's international sales are denominated in foreign currency. Due
to a stronger U.S. dollar in 1998 as compared with the actual foreign
currency exchange rates in effect during 1997, translation of 1998
international sales were adversely impacted by $2.8 million. The increase in
North America sales in 1998 as compared with 1997 is primarily due to an
increase in drug infusion disposable administration set revenue and patient
monitoring instrument revenues. The increase in drug infusion disposable
administration set revenue is due primarily to an increase in volume of the
Company's SmartSite needle-free system administration sets.
GROSS MARGIN. The gross margin percentage increased from 47.5% in 1997
to 49.7% in 1998 due in part to $4.1 million of non-recurring costs included in
1997 cost of sales. Exclusive of $1.6 million of non-recurring purchase
accounting inventory adjustments and $2.5 million related to a voluntary recall
of certain infusion pumps charged to cost of sales during 1997, the gross margin
percentage for 1997 was 48.7%. The improvement over 1997 is due to overall lower
warranty costs as well as higher margins on North America and International
disposable administration sets and instruments due to the benefits realized from
ongoing cost reduction programs and purchasing synergies.
SELLING AND MARKETING EXPENSE. Selling and marketing expenses increased
$6.4 million, or 9.7%, during 1998 as compared with 1997. As a percentage of
sales, selling and marketing expenses increased from 18.3% in 1997 to 19.0% in
1998. North America expenses increased by $1.1 million, or 2.7% in 1998 which is
consistent with the growth in North American sales. International expenses
increased $3.1 million, or 12.4%, from 1997 due to compensation and distribution
costs related to the increase in sales. This increase was also due to investment
in direct operations in Italy and Norway during late 1997 and early 1998,
respectively. In addition, selling and marketing expenses increased $2.2 million
from 1997 to 1998 due to the addition of Instromedix in 1998.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased $3.4 million, or 8.7%, during 1998 as compared with 1997. As a
percentage of sales, general and administrative expense increased from 10.9% for
1997 to 11.2% for 1998. North America general and administrative expenses
increased $0.5 million, or 1.5%, during 1998 as compared to 1997 due to higher
compensation expense and related employee costs, and increased spending for
business development activities in 1998. During 1998 as compared with 1997,
International expenses increased by $1.1 million, or 14.4%, as a result of an
increase in the investment in direct operations in Europe. Instromedix added
31
approximately $1.8 million of general and administrative cost in 1998, including
$1.0 million of intangible asset amortization.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased approximately $3.2 million, or 18.9%, during 1998 primarily due to
additional research and development related to projects associated with the
recently acquired Instromedix and Patient Solutions, as well as increased
activities associated with the later development stages of various engineering
projects for infusion systems and disposable administration sets.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. During 1998, the Company
recorded $28.3 million in purchased in-process research and development
write-offs as a result of certain business acquisitions. In conjunction with the
Instromedix acquisition, the assets and liabilities of Instromedix were adjusted
to their estimated fair values. As a result of this process, the Company
incurred a one-time $22.8 million write-off related to the value assigned to the
acquired in-process research and development of Instromedix projects for which
technological feasibility had not been established and for which there was no
alternative future use. Such amount was determined with the assistance of a
third party appraiser based upon the present value of estimated future cash flow
contributions from the identified projects.
The Company is using the Instromedix purchased in-process research and
development to create new cardiac disease diagnosis, monitoring and management
products which will become part of the arrhythmia event recorder and LifeSigns
systems product suites over the next several years. The nature of the efforts
required to develop the purchased in-process technology into commercially viable
products principally relate to designing, prototyping, verification and testing
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features and technical
performance requirements. The Company expects to incur a total of approximately
$4.0 million to complete the projects, of which $0.5 million was incurred in
1998 and approximately $2.0 million and $1.5 million are expected to be incurred
during 1999 and 2000, respectively. The Company completed the development and
released the new arrhythmia event recorder during the first quarter of 1999
using the purchased in-process technology. The LifeSigns systems product suite
development is expected to be complete and the product released during 2000. The
Company expects that the purchased in-process research and development for this
product will be successfully developed, but there can be no assurance that
commercial viability of the products will be achieved.
During the second quarter of 1998, the Company acquired the net assets
of Patient Solutions, Inc. ("PSI"). PSI was a wholly owned subsidiary of
Invacare Corporation and was focused on the development of an ambulatory pump
for use in the alternate-site market. In connection with the PSI acquisition and
the technology license agreement with Caesarea during the second quarter of
1998, the Company incurred a one-time $5.5 million write-off related to the
value assigned to the acquired in-process research and development of the
projects for which technological feasibility had not been established and for
which there was no alternative future use. The Company has continued to invest
in the development necessary to obtain technological feasibility of these
projects.
In connection with the PSI acquisition, the Company is using the
acquired in-process research and development to develop an ambulatory pump for
use in the alternate-site market. The nature of the efforts required to develop
the purchased in-process technology into a commercially viable product
principally relate to designing, prototyping, verification and testing
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features and technical
performance requirements. The Company expects to incur a total of approximately
$1.0 million to complete the project, of which approximately $0.4 million was
incurred in 1998 and $0.6 million is projected to be incurred in 1999. It is
anticipated that the pump will be released during 1999. The Company expects that
the purchased in-process research and development will be successfully
developed, but there can be no assurance that commercial viability of the pump
will be achieved.
32
Pursuant to the technology license agreement, the Company acquired
certain volumetric infusion pump technology from Caesarea. Caesarea is
conducting research and development on this in-process technology in order to
create a large volume infusion pump marketed primarily to consumers in emerging
international markets. The Company is required to make certain milestone
payments up to an aggregate of $4.0 million to Caesarea upon the attainment of
certain developmental milestones, which primarily relate to different product
releases. The Company anticipates that certain products using the purchased
in-process technology will be released during the first half of 1999. The
Company expects that the purchased in-process research and development will be
successfully developed, but there can be no assurance that commercial viability
of the pump will be achieved.
RESTRUCTURING, INTEGRATION AND OTHER NON-RECURRING CHARGES. In
connection with the Instromedix acquisition, management, with the assistance of
consultants, is performing a review of the operating activities of the acquired
company and is assessing how best to integrate and leverage the Instromedix
operations with ALARIS. During 1998, the Company incurred $1.9 million in costs
associated with this integration, primarily in consulting fees of $1.0 million,
retention bonuses of $0.5 million, legal fees of $0.1 million and $0.3 million
in other related costs.
The Company incurred $20.9 million in costs to integrate the IMED and
IVAC operations during 1997. These costs are in addition to restructuring and
integration charges of $15.3 million recorded in the fourth quarter of 1996. The
1997 expense consists primarily of information systems conversion costs of $4.8
million, the write-off of a product distribution and license agreement with a
third party developer of an ambulatory and alternate-site infusion pump of $4.5
million, maquiladora contract dispute settlement and related costs of $4.1
million (see Note 10 to the Consolidated Financial Statements), the write-off of
drug infusion instrument tooling associated with the redesign effort on a
product in development of $1.7 million, facilities moving expenses and Company
name change costs of $1.6 million, management consulting fees of $1.4 million,
severance of $1.3 million and other integration costs of $1.5 million. The
Company reviewed its products and related research and development activities
and market opportunities in order to focus on projects that will provide greater
competitive advantage and stockholder return. That review resulted in the
termination of the aforesaid product distribution and license agreement. The
$4.5 million charge related to such termination includes a $4.3 million non-cash
charge representing the write-off of the intangible asset associated with such
agreement.
LEASE INTEREST INCOME. Lease interest income during both periods
consists of interest income associated with contracts or agreements pursuant to
which a third party acquired infusion pumps under sales-type leases. Lease
interest income remained constant from 1997 to 1998.
INCOME FROM OPERATIONS. Income from operations decreased $4.2 million
during 1998 as compared with 1997 primarily due to non-recurring charges related
to the write-off of $28.3 million in purchased in-process research and
development charges in connection with acquisitions and $1.9 million in
integration and other non-recurring charges related to the Instromedix
acquisition. The 1997 income from operations includes acquisition and
integration charges of charges of $20.9 million in 1997 related to the IVAC/IMED
merger. After excluding such charges from 1997 and 1998, the adjusted income
from operations is $53.4 million in 1997 as compared with $58.5 million in 1998.
The increase in 1998 over 1997 is due primarily to improved sales and gross
margins.
ADJUSTED EBITDA. Adjusted EBITDA increased $5.7 million, or 6.3%,
during 1998. As a percentage of sales, Adjusted EBITDA increased from 24.9%, or
$89.3 million, for 1997 to 25.0%, or $94.9 million, for 1998 due to the reasons
discussed above. Adjusted EBITDA represents income from operations before
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
33
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.
Integration and other one-time non-recurring charges are excluded from Adjusted
EBITDA as the Company believes that the inclusion of these items would not be
helpful to an investor's understanding of the Company's ability to service debt.
The Company's computation of Adjusted EBITDA may not be comparable to similar
titled measures of other companies.
INTEREST EXPENSE. Interest expense increased $4.2 million, or 9.6%,
during 1998 primarily due to additional financing obtained to fund the
Instromedix acquisition. In connection with the Instromedix acquisition, in July
the Company increased its outstanding bank term debt $30.0 million and completed
the sale of $109.9 million 11 1/8 % Senior Discount Notes, due 2008. In
connection with the Merger in 1996, the Company entered into a bank credit
facility consisting of term loans and a revolving credit facility (the "Credit
Facility") which was amended in the first quarter of 1998. As a result of this
amendment, interest expense on the Credit Facility decreased, partially
offsetting the increase in interest expense related to the Senior Discount
Notes. (See Liquidity and Capital Resources.)
INTEREST INCOME. Interest income increased approximately $0.6 million
during 1998 as compared with 1997 due to earnings from the remaining cash
proceeds from the Senior Discount Notes which were issued in July 1998 to fund
the Instromedix acquisition.
OTHER INCOME (EXPENSE). Other income decreased $0.4 million during 1998
as compared with 1997, partially due to a decrease in foreign exchange loss of
approximately $0.7 million during 1998 as compared with 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
SALES. Sales increased $222.7 million during 1997 as compared with
1996 due to the Merger. On a pro forma basis, sales increased $12.7 million, or
3.7%, during 1997 as compared with 1996. North America sales increased $4.5
million, or 1.9%, on a pro forma basis to $240.5 million during 1997 from $236.0
million in 1996. International sales increased $8.2 million, or 7.4%, on a pro
forma basis to $118.6 million during 1997 from $110.3 million during 1996. 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 European distribution rights from Pharmacia & Upjohn,
Inc. for IMED products which resulted in higher average selling prices for these
product 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 with the actual foreign currency exchange rates in effect during 1996,
translation of 1997 international sales were adversely impacted by $7.1 million.
See "--Foreign Operations." The increase in North America sales in 1997 as
compared with 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 to 47.5% in 1997
from 42.4% in 1996 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 Holdings
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 recall of certain infusion pumps charged to cost of sales
during 1997. The pro forma gross margin percentage for 1996 was 46.7% compared
with 48.7% for 1997, exclusive of the purchase accounting inventory adjustment
and product recall charges.
34
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. North America
expense decreased by $2.1 million, or 4.9%, from 1996 due to Merger-related
synergies. The decrease in North America selling and marketing expense was more
than offset by increased International expenses of $2.5 million, or 11.4%, 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 to 10.9% for 1997 from 11.5% for 1996 due to an
increase in sales, as well as Merger-related synergies, including lower labor
and facilities expenses. International expenses increased by $0.6 million, or
8.9%, as a result of an increase in the investment in direct operations in
Europe.
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, to $16.9 million, or 4.7% of sales, for 1997, for
1996, 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 Holdings 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 Holdings projects for
which technological feasibility had not been established and for which there are
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 continue 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 planned for
market introduction in mid-1999.
RESTRUCTURING, INTEGRATION AND OTHER NON-RECURRING CHARGES. The Company
incurred $20.9 million in integration costs and other non-recurring charges
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
charges consist primarily of information systems conversion costs of $4.8
million, the write-off of a product distribution and license agreement with a
third party developer of an ambulatory and alternate-site infusion pump of $4.5
million, maquiladora contract dispute settlement and related costs of $4.1
million (see Note 10 to the Consolidated Financial Statements), the write-off of
drug infusion instrument tooling associated with the redesign effort on a
product in development of $1.7 million, facilities moving expenses and Company
name change costs of $1.6 million, management consulting fees of $1.4 million,
severance of $1.3 million and other integration costs of $1.5 million. The
Company reviewed its products and related research and development activities
and market opportunities in order to focus on projects that will provide greater
competitive advantage and stockholder return. That review resulted in the
termination of the aforesaid product distribution and license agreement. The
$4.5 million charge related to such termination includes a $4.3 million non-cash
charge representing the write-off of the intangible asset associated with such
agreement.
35
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 with 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 in the amount of $63.3
million. 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, in the amount of $1.8 million, while 1997 includes a full
year of profit contribution. This increase was partially offset by expenses
related to the recall on infusion 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 to $32.5 million in 1997 from $42.7 million in
1996 primarily due to the $20.9 million of integration costs discussed above,
offset by a $9.1 million improvement in gross profit.
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 to 24.9%, or $89.3 million, for 1997 from 21.9%, or
$75.9 million, for 1996, 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 with 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 INCOME. Interest income decreased approximately $0.7 million
during 1997 as compared with 1996 due to the liquidation of interest earning
restricted cash balances during 1996.
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 Credit Facility. The
additional borrowings were used to pay for restructuring and integration costs
associated with the Merger.
DEBT CONVERSION EXPENSE. In connection with the Merger, $37.5 million
of convertible notes payable to Decisions, Inc., which is wholly-owned by the
Company's controlling shareholder, were converted to common stock of ALARIS
Medical, par value $.01 per share. In order to induce conversion, approximately
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.
36
OTHER (EXPENSE) INCOME. Other income decreased $2.8 million during 1997
as compared with 1996, partially due to a foreign exchange loss of approximately
$1.0 million during 1997 as compared with foreign exchange gain of approximately
$0.5 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.
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 short-term and long-term
liquidity needs, including capital expenditure requirements with cash flow from
operations of ALARIS Medical Systems, borrowings under the credit facility, and
the remaining cash proceeds from the Senior Discount Notes which were issued,
among other things, to fund the Instromedix acquisition in July 1998. In
addition to operating expenses, the Company's primary future use of funds, on a
short-term and long-term basis, will continue to be fund capital expenditures
and strategic acquisitions and to pay debt service on outstanding indebtedness.
Net cash provided by operating activities for the year ended December
31, 1998 was $24.9 million compared with $10.3 million provided by operating
activities in 1997. Net cash used in investing activities for the year ended
December 31, 1998 and 1997 was $86.4 million and $17.8 million, respectively.
Net cash used in investing activities included $59.8 million for business
acquisitions in 1998 and $24.6 million and $19.8 million in net capital
expenditures for the year ended December 31, 1998 and 1997, respectively. The
net capital expenditures for the year ended December 31, 1997 were partially
offset by a net decrease in restricted cash and investments of $2.3 million. Net
cash provided by financing activities for the year ended December 31, 1997 was
$3.8 million which primarily comprised net proceeds under the revolving credit
facility of $10.0 million partially offset by $4.2 million in principal payments
on long-term debt. Net cash provided by financing activities for the year ended
December 31, 1998 was $84.0 million which primarily comprised proceeds from the
issuance of notes payable of $109.9 million and proceeds from the term loan
borrowing of $30.0 million offset by net repayments under the revolving credit
facility of $25.2 million and principal payments on long-term debt of $25.3
million.
At December 31, 1998, the Company's outstanding indebtedness was $546.3
million, which includes $211.3 million of bank term debt under the Credit
Facility, $200.0 million of Senior Subordinated Notes due 2006 (the "Notes"),
which were issued in connection with the Merger and $115.1 million (including
accretion) of Senior Discount Notes due 2008 which were issued to fund the
Instromedix acquisition in July 1998. The bank debt bears interest at floating
rates based, at the Company's option, on Eurodollar or prime rates. During the
second quarter of 1997, the Company entered into an interest rate protection
agreement covering approximately 50% of its term loan borrowings. Such agreement
fixed the interest rate charged on such borrowings resulting in a weighted
average interest rate of 8.9% on the Credit Facility borrowings at December 31,
1998. As a result, a one-percent increase in the rate of interest charged on
indebtedness outstanding under the Credit Facility at December 31, 1998 would
result in additional annual interest expense of approximately $1.2 million.
Included in total consolidated debt, at December 31, 1998, ALARIS Medical had
outstanding $16.2 million of 7 1/4% Convertible Debentures (the "Convertible
Debentures").
37
In connection with obtaining the Merger financing, the Company also
obtained a $50.0 million revolving credit line as part of the Credit Facility.
In July 1998, in connection with the Instromedix acquisition, the Company
amended the Credit Facility. The amendment provided for the banks' consent to
the Instromedix acquisition and increased the revolving credit facility to $60.0
million. The amended Credit Facility also provided the Company an additional
$30.0 million under the Tranche D term debt. The Company used $30.0 million term
debt borrowing, along with approximately $2.0 million from the revolving credit
line, to fund the initial payments required upon closing the Instromedix
acquisition. Subsequent to closing the Instromedix acquisition, ALARIS Medical
completed the sale of $109.9 million of 11-1/8% Senior Discount Notes, due 2008,
receiving net proceeds of approximately $106.3 million. Interest accruing on
these notes is added to the outstanding principal balance through July 31, 2003.
Interest accruing subsequent to July 31, 2003 is payable in cash semi-annually
in arrears on February 1 and August 1, commencing February 1, 2004. Upon receipt
of the net proceeds from the Senior Discount Notes, ALARIS Medical paid its
remaining obligations of approximately $22.7 million to the Instromedix
shareholders and contributed the remaining net proceeds of approximately $81.7
million to ALARIS Medical Systems, as required under the amended Credit
Facility. ALARIS Medical Systems then repaid the amount outstanding under its
revolving credit line.
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 1998
payment of $3.0 million during the first quarter of 1998, and made the final
payment in March, 1999.
As a result of the Company's significant indebtedness, the Company
expects to incur significant interest expense in future periods. The Company
believes that its existing cash and cash provided by operations will be
sufficient to meet its interest expense obligations.
Annual principal amortization of the Company's indebtedness is $15.4
million, $14.0 million and $22.1 million for 1999, 2000 and 2001, 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.
During 1998, the Company made cash payments of approximately $1.7
million related to merger and integration costs accrued at December 31, 1997.
Also during 1998, the Company accrued approximately $1.9 million for integration
costs related to Instromedix, of which approximately $1.0 million was paid
during 1998. These integration activities primarily related to the assessment
and review of Instromedix operating activities and strategy. In February 1999,
as a result of this assessment, the Company announced it plans to consolidate
the operations of Instromedix into its San Diego, California facilities. Such
consolidation will allow the Company to leverage its existing infrastructure and
manufacturing capacity in San Diego. In connection with these relocation and
integration activities, the Company expects to incur nonrecurring charges of
approximately $5.0 million before related income tax benefits, primarily during
the first half of 1999. 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. The Company made capital expenditures of
approximately $19.8 million during the year ended December 31,
38
1997 of which approximately $5.7 million was related to the consolidation of
IMED and IVAC Holdings facilities.
The Company made capital expenditures of approximately $25.1 million
and $19.8 million during the year ended December 31, 1998 and 1997,
respectively.
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 additional acquisitions, depending on the value of potential
acquisitions, the Company might fund such transactions through a variety of
sources, including existing cash, new or existing debt facilities or through the
sale of equity securities.
The Company believes that, on both a short-term and long-term basis,
based on current levels of performance, it will generate cash flow from
operations, together with its existing cash, sufficient to fund its operations,
make planned capital expenditures and make principal amortization and interest
payments under the Credit Facility and interest payments on the 9-3/4% Notes.
However, on a long-term basis, the Company may not generate sufficient cash flow
from operations to repay the 9-3/4% Notes at maturity in the amount of $200.0
million, to make scheduled payments on the Senior Discount Notes or to repay the
Senior Discount Notes in the amount of $189.0 million at maturity. Accordingly,
the Company may have to refinance the 9-3/4% Notes and the Senior Discount Notes
at or prior to maturity or sell assets or raise equity capital to repay such
debt. Based on current interest rates and debt outstanding as of December 31,
1998, over the next twelve months, the Company is required to make principal and
interest payments under its Credit Facility in the amount of $29.4 million and
interest payments on the 9-3/4% Notes and the Convertible Debentures in the
amount of $19.5 million and $1.2 million, respectively. In addition, the
Company's ability to fund its operations, to make planned capital expenditures
and to make scheduled principal and interest payments will be dependent on the
Company's future operating performance, which is itself dependent on a number of
factors, many of which the Company cannot control, including conditions
affecting the Company's foreign operations, prevailing economic conditions,
availability of other sources of liquidity, and financial, business, regulatory
and other factors affecting the Company's business and operations.
YEAR 2000 RISK
The Year 2000 problem arises from the use of a two-digit field to
identify years in computer programs, e.g., 85=1985, and the assumption of a
single century, the 1900s. Any program so created may read, or attempt to read,
"00" as the year 1900.
The Company has developed, and is implementing, a comprehensive program
to address Year 2000 issues pertaining to both information technology (IT) and
non-IT systems. The program is monitored by a steering committee comprised of
representatives from key functional areas, which periodically reports to senior
management and will be reporting to the board of directors throughout 1999 as to
the program's status. The program consists of identification, prioritization,
remediation and post-implementation phases and considers the worldwide effect of
the Year 2000 on the Company's operations and internal systems (including
non-information technology systems), customers, products and services, and
manufacturing systems, as well as on its third party suppliers and other
critical business partners. The committee has completed its initial assessment
and it is not currently aware of any material Year 2000 issues related to third
parties with whom the Company conducts business or in its non-information
technology systems. The committee's assessment will likely be a continuous
process through the remainder of 1999. In addition to its customers, the Company
conducts business with and utilizes the services of numerous third parties
including but not limited to suppliers, distributors, telecommunication
companies, financial institutions, governmental agencies, and utility companies.
The
39
Company is working to identify and analyze the most reasonably likely
worst-case scenarios for third-party relationships affected by the Year 2000.
The ability of these third parties to adequately address their Year 2000 issues
is outside the Company's control. Failure by some or all of these parties to
adequately address their Year 2000 issues could have a material adverse effect
on the Company. Given the number of parties with whom the Company transacts
business, it is reasonably likely that some of these parties will not be able to
adequately solve their Year 2000 issues in a timely manner. Due to the Company's
inability to control third party compliance with Year 2000 issues, there can be
no assurances that such Year 2000 issues will not have a material adverse effect
on the financial condition, results of operations or cash flows of the Company.
In order to successfully provide product to its customers, the Company is
dependent upon the timely fulfillment of its supply orders from its chosen
vendors. The Company has identified potentially critical suppliers and attempted
to determine if such suppliers have identified and/or addressed their own Year
2000 issues by means of questionnaires. The Company is dependent on such
suppliers to provide timely responses to its questionnaires and is not in a
position to verify the truth or accuracy of the responses it receives to such
questionnaires. At this time, the Company has not identified or been informed of
any significant suppliers that will not be able to fulfill the Company's orders.
However, many of the Company's key suppliers have acknowledged that they must
make improvements to their systems to properly deal with the Year 2000 orders
and issues. As a result, there can be no assurances that key suppliers will be
able to timely fill the Company's future orders. The Company is in the process
of evaluating what alternatives are available if key suppliers could not provide
required materials and supplies to the Company when ordered. While a formal
contingency plan related to this risk has not yet been completed by the Company,
alternatives would be to increase inventory levels of key suppliers and seek
supplies from other vendors. The Company estimates that such contingency plans
will be completed by December 31, 1999. However, there can be no assurance that
all significant primary and back-up suppliers will be able to fill the Company's
orders due to their own Year 2000 issues. Such supplier failures could have a
material adverse impact on the Company's financial condition, results of
operations and cash flows.
In addition to routine capital expenditures, and in connection with the
Merger, the Company has made significant expenditures for the acquisition of
enterprise-wide information system software and hardware and the related design,
testing and implementation. The manufacturer has represented that the new system
is Year 2000 compliant. The Company successfully implemented certain financial
applications of the new system and began utilizing such applications at the
beginning of 1998. The Company successfully converted the remainder of its
domestic business processes to the new system in September 1998. The Company
believes the primary information system for its International operations is not
directly affected by the Year 2000. However, due to the increased significance
of its International operations and the desire to integrate its reporting
systems, the Company will be converting the International information systems to
a system common with the domestic operations. The International project is
scheduled for completion in 1999. The International system is also designed to
properly process transactions denominated in the euro-currency. Euro currency is
a new monetary unit which certain European countries can begin using in 1999.
The Company has launched Year 2000 internet websites for its customers
that include a complete list of the Company's electronic medical products,
detailed and updated information regarding the status of the products and other
information regarding the Company's Year 2000 program. Certain of the Company's
products contain software in which the record keeping capabilities will be
affected beyond the Year 2000. Products affected by the Year 2000 issue have
been identified and information regarding user interventions and software
upgrades has been provided. The Company believes that these issues will not
interfere with the primary functions of the products involved, nor will they
affect the safety of patients; however, there can be no assurance in regard to
the foregoing nor can there be any assurance
40
that the Company will not be subject to legal claims for damages arising from
products that are not Year 2000 compliant.
During the fiscal years 1996 and 1997 the Company made combined capital
and operating expenditures of approximately $7.5 million related to the new
enterprise-wide information system, and expenditures of $6.4 million in the year
ended December 31, 1998. To complete the identified phases of the project, the
Company anticipates additional expenditures for 1999 of approximately $4.0
million.
Infusion instrument sales are typically higher in the fourth quarter due
to sales compensation plans which reward the achievement of annual quotas and
the seasonal characteristics of the industry, including hospital purchasing
patterns. First quarter sales are traditionally not as strong as the fourth
quarter. The Company anticipates that this trend will continue but is unable to
predict the effect, if any, from health care reform, increased competitive
pressures and Year 2000 issues. Approximately 34% and 33% of the Company's sales
of drug infusion instruments occurred during the fourth quarters of 1997 and
1998, respectively. Sales of the Company's medical instrument products represent
capital expenditures to many of the Company's customers. The Company believes it
is possible that due to Year 2000 capital requirements by its customers during
1999, fourth quarter drug infusion instrument purchasing decisions could be
deferred until 2000. Additionally, the Company believes that customers' Year
2000 concerns and planning strategies may result in certain customers increasing
historical stock levels of the Company's disposable products resulting in
increased sales of such products during 1999.
Although the Company is dedicating substantial resources towards
attaining Year 2000 readiness, there is no assurance it will be successful in
its efforts to identify and address all Year 2000 issues. Even if the Company
acts in a timely manner to complete all of its assessments; identifies, develops
and implements remediation plans believed to be adequate; and develops
contingency plans believed to be adequate some problems may not be identified or
corrected in time to prevent material adverse consequences to the Company. The
discussion above regarding estimated completion dates, costs, risks and other
forward-looking statements regarding Year 2000 is based on the Company's best
estimates given information that is currently available and is subject to
change. As the Company continues to progress with its Year 2000 initiatives, it
may discover that actual results will differ materially from these estimates.
The information provided above constitutes a "Year 2000 Readiness Disclosure"
for purposes of the Year 2000 Information and Readiness Disclosure Act.
BACKLOG
The backlog of orders, believed to be firm, at December 31, 1997 and
1998 was $2.7 million and $5.8 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 and 1998,
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 and $0.3 million during 1997 and 1998, respectively. For the year ended
December 31, 1997 and the year ended December 31, 1998, approximately 30% and
32% of the Company's sales and 23% and 24% of the Company's operating expenses
were denominated in currencies other than the Company's functional currency,
respectively. These foreign currencies are primarily those of Western Europe,
Canada and Australia. Additionally, substantially all of the receivables and
payables of the Company's foreign subsidiaries are denominated in currencies
other than the Company's functional currency, and no formal hedging program
exists to manage fluctuations in
41
these foreign currencies. The Company will evaluate hedging programs during 1999
to limit the exposure to the Company resulting from changes in foreign currency
exchange rates.
On December 31, 1998, Mexico enacted certain changes to its tax code
which broaden the definition of when a U.S. company using manufacturing services
in Mexico will be considered to have a "permanent establishment." These changes,
which would apply to the Company effective as of January 1, 2000, would result
in effective taxation of that portion of the Company's income attributable to
the Mexican subsidiary at a rate of 75% or higher. It is uncertain if any such
new tax imposed by Mexico will be granted a corresponding foreign tax credit
under the U.S. Internal Revenue Code. The Company is currently evaluating the
anticipated effect of such changes, which could have a material adverse effect
on its financial condition, results of operations and cash flows.
HEALTH CARE REFORM
Heightened public awareness and concerns regarding the growth in
overall health care expenditures in the United States may result in the
enactment of legislation affecting payment mechanisms and health care delivery.
Legislation which imposes limits on the number and type of medical procedures
which may be performed or which has the effect of restricting a provider's
ability to select specific devices or products for use in administrating medical
care may adversely impact the demand for the Company's products. In addition,
legislation which imposes restrictions on the price which may be charged for
medical products may adversely affect the Company's results of operations. It is
not possible to predict the extent to which the Company or the health care
industry in general may be adversely affected by the aforementioned in the
future.
FORWARD-LOOKING STATEMENTS
Forward-Looking Statements in this report are made pursuant to the Safe
Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
Persons reading this report are cautioned that such forward-looking statements
involve risks and uncertainties, including, without limitation, the effect of
legislative and regulatory changes effecting the health care industry; the
potential of increased levels of competition; technological changes; the
dependence of the Company upon the success of new products and ongoing research
and development efforts; the effect of the Year 2000 risk; restrictions
contained in the instruments governing the Company's indebtedness; the
significant leverage to which the Company is subject; and other matters referred
to in this report.
42
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 93 present fairly, in all
material respects, the financial position of ALARIS Medical, Inc. and its
subsidiaries at December 31, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, 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.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
March 1, 1999
43
ALARIS MEDICAL, INC
CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
DECEMBER 31,
--------------------------
1997 1998
---------- ----------
Current assets:
Cash.................................................................................. $ 6,984 $ 29,500
Receivables, net...................................................................... 83,406 102,295
Inventories........................................................................... 61,666 79,485
Prepaid expenses and other current assets............................................. 23,260 25,246
---------- ----------
Total current assets.............................................................. 175,316 236,526
Net investment in sales-type leases, less current portion................................. 30,404 19,111
Property, plant and equipment, net........................................................ 55,365 61,990
Other non-current assets.................................................................. 16,279 22,388
Intangible assets, net.................................................................... 287,933 311,018
---------- ----------
$ 565,297 $ 651,033
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt..................................................... $ 14,559 $ 15,423
Accounts payable...................................................................... 24,042 22,103
Accrued expenses and other current liabilities........................................ 52,668 52,340
---------- ----------
Total current liabilities......................................................... 91,269 89,866
---------- ----------
Long-term debt............................................................................ 431,571 530,867
Other non-current liabilities............................................................. 10,508 21,931
---------- ----------
Total non-current liabilities..................................................... 442,079 552,798
---------- ----------
Contingent liabilities and commitments (Notes 9 and 16)
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 - 59,102 and 59,221 shares at
December 31, 1997 and 1998, respectively........................................... 591 592
Capital in excess of par value........................................................ 148,341 148,762
Accumulated deficit................................................................... (111,330) (135,769)
Treasury stock........................................................................ (2,027) (2,027)
Accumulated other comprehensive loss.................................................. (3,626) (3,189)
---------- ----------
Total stockholders' equity........................................................ 31,949 8,369
---------- ----------
$ 565,297 $ 651,033
---------- ----------
---------- ----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
44
ALARIS MEDICAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
----------- ---------- ----------
Sales ..................................................................... $ 136,371 $ 359,077 $ 380,068
Cost of sales................................................................ 78,616 188,340 191,232
----------- ---------- ----------
Gross margin............................................................. 57,755 170,737 188,836
----------- ---------- ----------
Selling and marketing expenses............................................... 22,273 65,797 72,202
General and administrative expenses.......................................... 15,210 39,231 42,654
Research and development expenses............................................ 8,854 16,876 20,059
Purchased in-process research and development................................ 44,000 - 28,334
Restructuring, integration and other non-recurring charges................... 15,277 20,902 1,901
----------- ---------- ----------
Total operating expenses 105,614 142,806 165,150
----------- ---------- ----------
Lease interest income........................................................ 2,501 4,559 4,599
----------- ---------- ----------
(Loss) income from operations............................................ (45,358) 32,490 28,285
Other income (expenses):
Interest income............................................................ 1,193 532 1,134
Interest expense........................................................... (13,393) (44,413) (48,658)
Debt conversion expense.................................................... (10,000) - -
Other, net................................................................. 1,222 (1,535) (1,100)
----------- ---------- ----------
Total other expense...................................................... (20,978) (45,416) (48,624)
----------- ---------- ----------
Loss before income taxes and extraordinary item.............................. (66,336) (12,926) (20,339)
(Benefit from) provision for income taxes.................................... (730) (3,300) 4,100
----------- ---------- ----------
Loss before extraordinary item............................................... (65,606) (9,626) (24,439)
Extraordinary item - loss on early retirement of debt, net of taxes.......... (1,630) - -
----------- ---------- ----------
Net loss .................................................................... (67,236) (9,626) (24,439)
Dividends on mandatorily redeemable preferred stock.......................... 962 - -
----------- ---------- ----------
Net loss attributable to common stock........................................ $ (68,198) $ (9,626) $ (24,439)
----------- ---------- ----------
----------- ---------- ----------
Loss per common share assuming no dilution:
Loss before extraordinary item........................................... $ (3.27) $ (.16) $ (.42)
Extraordinary item....................................................... (.08) - -
----------- ----------- ----------
Net loss per common share assuming no dilution....................... $ (3.35) $ (.16) $ (.42)
----------- ---------- ----------
----------- ---------- ----------
Loss per common share assuming dilution:
Loss before extraordinary item........................................... $ (3.27) $ (.16) $ (.42)
Extraordinary item....................................................... (.08) - -
----------- ----------- ----------
Net loss per common share assuming dilution.......................... $ (3.35) $ (.16) $ (.42)
----------- ---------- ----------
----------- ---------- ----------
Weighted average common shares outstanding assuming no dilution.............. 20,343 58,644 58,710
----------- ---------- ----------
----------- ---------- ----------
Weighted average common shares outstanding assuming dilution................. 20,343 58,644 58,710
----------- ---------- ----------
----------- ---------- ----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
45
ALARIS MEDICAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
---------- ---------- ---------
Cash flows from operating activities:
Net loss ...................................................................... $(67,236) $ (9,626) $ (24,439)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization................................................ 10,499 34,288 36,148
Net (gain) loss on disposal/write-off of property, plant and equipment
and intangible assets....................................................... (452) 6,735 824
Extraordinary loss - early retirement of debt, net of taxes.................. 1,630 - -
Debt conversion expense...................................................... 10,000 - -
Debt discount and issue costs amortization................................... 1,332 3,125 3,199
Accretion of bond interest................................................... - - 5,201
Purchased in-process research and development................................ 44,000 - 28,334
Inventory purchase price allocation adjustment............................... 4,014 1,607 274
(Increase) decrease in assets, net of effects of the Merger:
Receivables................................................................. (2,932) 1,509 (14,959)
Inventories................................................................. (1,223) (4,681) (13,763)
Prepaid expenses and other current assets................................... 578 (1,773) (1,141)
Net investment in sales-type leases, non-current portion.................... 1,830 (3,128) 11,293
Other non-current assets.................................................... 7,872 698 (3,023)
Increase (decrease) in liabilities, net of effects of the Merger:
Accounts payable............................................................ 2,975 (1,548) (3,294)
Accrued expenses, restructuring and integration costs and other current
liabilities 3,152 (11,305) (1,944)
Other non-current liabilities............................................... (8,324) (5,622) 2,161
---------- ---------- ---------
Net cash provided by operating activities........................................ 7,715 10,279 24,871
---------- ---------- ---------
Cash flows from investing activities:
Net decrease in restricted cash and investments................................ 24,886 2,332 -
Capital expenditures........................................................... (9,502) (19,843) (25,055)
Patents, trademarks and other.................................................. - (526) (1,221)
Payments for product distribution rights....................................... (12,556) - (750)
Proceeds from disposal of property, plant and equipment........................ 106 89 451
Proceeds from sale of investments.............................................. 2,374 - -
Acquisition of business, net of cash acquired (Notes 2 and 3).................. (219,459) - (59,842)
Return of capital investment................................................... - 148 -
---------- ---------- ---------
Net cash used in investing activities............................................ (214,151) (17,800) (86,417)
---------- ---------- ---------
Cash flows from financing activities:
Principal payments on long-term debt........................................... (322) (4,248) (20,437)
Proceeds from issuance of notes payable and long-term debt..................... 400,000 - 109,892
Principal payments on acquired debt............................................ - - (4,822)
Net proceeds under former revolving credit facilities.......................... 10,006 - -
Proceeds from revolving credit facility........................................ 15,200 34,300 34,800
Repayments of revolving credit facility........................................ - (24,300) (60,000)
Proceeds from term loan borrowing.............................................. - - 30,000
Proceeds from issuance of common stock......................................... 40,024 - -
Proceeds from exercise of stock options........................................ - 241 275
Debt issuance costs............................................................ (16,888) (919) (5,682)
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........................................ 216,953 3,781 84,026
---------- ---------- ---------
Effect of exchange rate changes on cash.......................................... (295) (1,360) 36
---------- ---------- ---------
Net increase (decrease) in cash ................................................. 10,222 (5,100) 22,516
Cash at beginning of year........................................................ 1,862 12,084 6,984
---------- ---------- ---------
Cash at end of year.............................................................. $ 12,084 $ 6,984 $ 29,500
---------- ---------- ---------
---------- ---------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
46
ALARIS MEDICAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS)
CAPITAL IN
COMMON STOCK EXCESS OF ACCUMULATED
SHARES AMOUNT PAR VALUE DEFICIT
----------- ----------- ----------- -----------
Balance at December 31, 1995 . . . . . . . . . . 16,214 $ 162 $ 62,965 $ (34,468)
Comprehensive loss
Net loss for the year. . . . . . . . . . . . . (67,236)
Decrease in unrealized gains from
securities available for sale,
net of tax of $1,711. . . . . . . . . . . .
Equity adjustment from foreign
currency translation. . . . . . . . . . . . (260)
Comprehensive loss . . . . . . . . . . . . . . .
Issuance of common stock upon conversion of
notes payable. . . . . . . . . . . . . . . . . 29,416 294 47,206
Issuance of common stock . . . . . . . . . . . . 13,333 133 39,867
Exercise of stock options. . . . . . . . . . . . 14 24
Purchase of common stock warrant . . . . . . . . (1,000)
Dividends on mandatorily
redeemable preferred stock . . . . . . . . . . (962)
--------- ----------- ---------- ----------
Balance at December 31, 1996 . . . . . . . . . . 58,977 589 147,840 (101,704)
Comprehensive loss
Net loss for the year. . . . . . . . . . . . . (9,626)
Equity adjustment from foreign
currency translation. . . . . . . . . . . .
Comprehensive loss . . . . . . . . . . . . . . .
Exercise of stock options. . . . . . . . . . . . 125 2 239
Tax benefit from exercise of
stock options. . . . . . . . . . . . . . . . . 262
Purchase of treasury stock . . . . . . . . . . .
--------- ----------- ---------- ----------
Balance at December 31, 1997 . . . . . . . . . . 59,102 591 148,341 (111,330)
Comprehensive loss
Net loss for the year. . . . . . . . . . . . . (24,439)
Equity adjustment from foreign
currency translation. . . . . . . . . . . .
Comprehensive loss . . . . . . . . . . . . . . .
Exercise of stock options. . . . . . . . . . . . 119 1 274
Tax benefit from exercise of
stock options. . . . . . . . . . . . . . . . . 147
--------- ----------- ---------- ----------
Balance at December 31, 1998 . . . . . . . . . . 59,221 $ 592 $ 148,762 $ (135,769)
--------- ----------- ---------- ----------
--------- ----------- ---------- ----------
ACCUMULATED
OTHER OTHER
COMPRE- COMPRE-
HENSIVE HENSIVE
TREASURY STOCK INCOME INCOME
SHARES AMOUNT (LOSS) TOTAL (LOSS)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1995 . . . . . . . . . . 83 $ (734) $ 3,607 $ 31,532
Comprehensive loss
Net loss for the year. . . . . . . . . . . . . (67,236) $ (67,236)
Decrease in unrealized gains from
securities available for sale,
net of tax of $1,711. . . . . . . . . . . . (3,577) (3,577) (3,577)
Equity adjustment from foreign
currency translation. . . . . . . . . . . . 32 (228) 32
----------
Comprehensive loss . . . . . . . . . . . . . . . $ (70,781)
----------
----------
Issuance of common stock upon
conversion of notes payable. . . . . . . . . . 47,500
Issuance of common stock . . . . . . . . . . . . 40,000
Exercise of stock options. . . . . . . . . . . . 24
Purchase of common stock warrant . . . . . . . . (1,000)
Dividends on mandatorily
redeemable preferred stock . . . . . . . . . . (962)
--------- ---------- ---------- -----------
Balance at December 31, 1996 . . . . . . . . . . 83 (734) 62 46,053
Comprehensive loss
Net loss for the year. . . . . . . . . . . . . (9,626) $ (9,626)
Equity adjustment from foreign
currency translation. . . . . . . . . . . . (3,688) (3,688) (3,688)
----------
Comprehensive loss . . . . . . . . . . . . . . . $ (13,314)
----------
----------
Exercise of stock options. . . . . . . . . . . . 241
Tax benefit from exercise of
stock options. . . . . . . . . . . . . . . . . 262
Purchase of treasury stock . . . . . . . . . . . 370 (1,293) (1,293)
--------- ----------- ---------- -----------
Balance at December 31, 1997 . . . . . . . . . . 453 (2,027) (3,626) 31,949
Comprehensive loss
Net loss for the year. . . . . . . . . . . . . (24,439) $ (24,439)
Equity adjustment from foreign
currency translation. . . . . . . . . . . . 437 437 437
-----------
Comprehensive loss . . . . . . . . . . . . . . . $ (24,002)
-----------
-----------
Exercise of stock options. . . . . . . . . . . . 275
Tax benefit from exercise of
stock options. . . . . . . . . . . . . . . . . 147
--------- ---------- ---------- -----------
Balance at December 31, 1998 . . . . . . . . . . 453 $ (2,027) $ (3,189) $ 8,369
--------- ---------- ---------- -----------
--------- ---------- ---------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
47
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - BUSINESS AND ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY:
ALARIS Medical, 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 as well as cardiovascular
and pacemaker monitoring. 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 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
48
NOTE 1 - BUSINESS AND ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
balance method which approximates the interest method. Contract provisions
include liquidated damage clauses which are sufficient to recover the sales
price of the instruments in the event of customer cancellation.
CONCENTRATIONS OF CREDIT RISK:
The Company provides a variety of financing arrangements for its
customers. The majority of the Company's accounts receivable are from hospitals
throughout the United States and Europe with credit terms of generally 30 days.
The Company maintains adequate reserves for potential credit losses and such
losses have been within management's estimates.
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, capital leases and instrument operating leases:
Building and leasehold improvements.................................................. 3 to 10 years
Machinery and equipment.............................................................. 3 to 10 years
Information technology............................................................... 3 to 10 years
Furniture and fixtures............................................................... 4 to 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
and acquisitions, a portion of the purchase price was allocated to various
identifiable intangible assets, including patents, trademarks, customer base,
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, completed technology
and product distribution rights.
49
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 8 years (weighted average)
Workforce........................................... Straight-line 10-14 years
Product licensing and distribution fee.............. Straight-line 15-18 years
Trademarks.......................................... Straight-line 10-30 years
Goodwill............................................ Straight-line 10-35 years
Customer base....................................... Straight-line 10 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 $15,734 and $18,468 at December 31, 1997
and 1998, respectively, are amortized using the interest method, or
straight-line when the results are not materially different from the interest
method, over the respective terms of the debt agreements and are included in
other non-current assets.
FOREIGN CURRENCY TRANSLATION:
The accounts of foreign subsidiaries which use local currencies as
functional currencies are translated into U.S. dollars using year-end exchange
rates for assets and liabilities, historical exchange rates for equity and
weighted average exchange rates during the period for revenues and expenses. The
gains or losses resulting from translations are excluded from results of
operations and accumulated as a separate component of other comprehensive income
(loss).
RESEARCH AND DEVELOPMENT COSTS:
Research and development costs are expensed as incurred.
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
50
NOTE 1 - BUSINESS AND ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
based on comparison with similar issues or current rates offered to the Company
for debt of the same remaining maturities and the quoted market price for the
debentures. The estimated fair values of both the Company's long-term lease
receivables and long-term debt, with the exception of the debentures,
approximate their carrying values. The carrying value of the debentures was
$16,152 at December 31, 1997 and 1998 and the fair value was approximately
$14,900 and $14,000 at December 31, 1997 and 1998, 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:
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net loss per share as if the fair value-based method had been
applied in measuring compensation expense.
PENSION PLAN DISCLOSURE:
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132 ("FAS 132"), "Employer's
Disclosure about Pensions and Other Postretirement Benefits - an amendment of
FASB Statements No. 87, 88 and 106," which the Company was required to adopt for
1998. This statement revises employers' disclosure about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans. Upon adoption of FAS 132, the Company was required to restate
disclosures for earlier periods provided for comparative purposes (Note 8).
51
NOTE 1 - BUSINESS AND ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 11).
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform to the
current year presentation.
SEGMENT INFORMATION:
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise
and Related Information." FAS 131 supersedes FAS 14, "Financial Reporting for
Segments of a Business Enterprise," replacing the "industry segment" approach
with the "management" approach. The management approach designates the
internal organization that is used by management for making operating
decisions and assessing performance as the source of the Company's reportable
segments. FAS 131 also requires disclosures about products and services,
geographic areas, and major customers. The adoption of FAS 131 does not
affect results of operations or financial position but did affect the
disclosure of segment information (Note 14).
COMPREHENSIVE INCOME:
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting Comprehensive
Income." This statement requires the Company to report in the financial
statements, in addition to net income, comprehensive income and its components
including foreign currency translation items and unrealized gains from
securities available for sale currently recorded to stockholders' equity. Upon
adoption of FAS 130, the Company was also required to reclassify financial
statements for earlier periods provided for comparative purposes. The adoption
of FAS 130 does not have an impact on the Company's consolidated financial
statements but requires display of comprehensive income including items not
currently included in net income.
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.
52
NOTE 2 - THE MERGER (CONTINUED)
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 5) 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 5).
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,
1996, excluding certain one time non-recurring charges related to the Merger.
YEAR ENDED
DECEMBER 31,
1996
------------
Sales:
As reported................................................................... $ 136,371
Pro forma..................................................................... $ 346,348
Loss before extraordinary item:
As reported................................................................... $ (65,606)
Pro forma..................................................................... $ (1,364)
NOTE 3 -- ACQUISITIONS AND LICENSES
On July 17, 1998, pursuant to an agreement with ALARIS Medical, ALARIS
Medical Systems, Instromedix ("Instromedix") and its shareholders dated June 24,
1998, ALARIS Medical Systems acquired all of the outstanding common stock of
Instromedix and subsequently merged Instromedix with and into itself. The total
consideration for the Instromedix acquisition included approximately (i) $51,000
in cash, subject to certain adjustments, (ii) the assumption of indebtedness of
Instromedix of approximately $5,500 and (iii) the payment of certain seller
transaction expenses in the amount of $1,000. The acquisition payment was funded
with $30,000 of ALARIS Medical Systems' bank term debt and proceeds from an
ALARIS Medical debt offering. On July 28, 1998, ALARIS Medical completed the
sale of $109,892 of 11-1/8% Senior Discount Notes (the "Senior Discount Notes"),
due 2008, receiving net proceeds of $106,321. A portion of the net proceeds of
the sale of the notes was also used to repay certain borrowings under a bank
credit facility.
53
NOTE 3 -- ACQUISITIONS AND LICENSES (CONTINUED)
The acquisition was accounted for as a purchase, whereby the purchase
price, including related expenses, was allocated to identified assets and
liabilities, based upon their respective fair values. The allocation included
acquired in-process research and development of $22,800, which was immediately
written-off, and other identifiable intangible assets of $21,130, which are
being amortized over their estimated weighted-average useful lives of ten years.
The other identifiable intangible assets of $21,130 include: completed
technology of $16,700, representing current product technology as opposed to
product under development; customer base of $3,390, representing the value of
existing customer accounts; assembled workforce of $770, representing core
engineers, sales and technical service forces and executives; and trademarks of
$270. The excess of the purchase price over the value of identified assets and
liabilities, in the amount of $18,012, was recorded as goodwill and is being
amortized over its estimated life of ten years. Pro forma data has not been
presented as such results would not differ materially from the historical
results presented.
The Company is using the Instromedix purchased in-process research and
development to create new cardiac disease diagnosis, monitoring and management
products which will become part of the arrhythmia event recorders and LifeSigns
system product suites over the next several years. The nature of the efforts
required to develop the purchased in-process technology into commercially viable
products principally relate to designing, prototyping, verification and testing
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features and technical
performance requirements. The Company expects to incur a total of approximately
$4,000 to complete the projects, of which approximately $500 was incurred in
1998 and approximately $2,000 and $1,500 are expected to be incurred during 1999
and 2000, respectively. The Company completed the development and released the
arrhythmia event recorder during the first quarter of 1999, using the purchased
in-process technology. The LifeSigns system product suite development is
expected to be complete and the product released during 2000. The Company
expects that the purchased in-process research and development will be
successfully developed, but there can be no assurance that commercial viability
of the products will be achieved.
In 1998, the Securities and Exchange Commission (the "SEC") issued a
letter to the American Institute of Certified Public Accountants SEC Regulations
Committee encouraging them to develop additional guidelines in determining
in-process research and development ("IPR&D") charges related to acquisitions
accounted for under the purchase method of accounting. The SEC also indicated
its suggested practices in determining such charges. Prior to this letter, the
Company had completed its accounting for the Instromedix acquisition on a basis
consistent with that used for acquisitions in prior years and included the
aforementioned $22,800 IPR&D charge in its third quarter operating results. The
Company utilized the services of a third-party valuation firm in order to
determine the appropriate allocation of the Instromedix purchase price to the
acquired identifiable intangible assets. The Company's third quarter operating
results were included in the Company's Amended Form S-4 Registration Statement
filed with the SEC during the fourth quarter of 1998. Such registration
statement was reviewed by the SEC and declared effective in January 1999. The
Company believes that a significant portion of the Instromedix value was related
to technology under development at the time the transaction was consummated and
is consistent with the economic substance from the buyer's perspective. As a
result, the Company has elected not to retroactively apply different valuation
methods to its determination of the Instromedix acquired IPR&D.
54
NOTE 3 -- ACQUISITIONS AND LICENSES (CONTINUED)
However, the SEC previously reviewed the Company's third quarter operating
results, made inquiries into the accounting for the Instromedix acquisition and
requested and was provided the underlying appraisal, there can be no assurance
that the SEC will not require the Company to utilize different valuation methods
and retroactively apply such results.
During the second quarter of 1998, the Company acquired the net assets
of Patient Solutions, Inc. ("PSI") for $5,250. PSI was a wholly owned subsidiary
of Invacare Corporation and was focused on the development of an ambulatory pump
for use in the alternate-site market. The transaction was accounted for as a
purchase with the net assets acquired recorded at their estimated fair values.
The rights to the pump under development were valued at $4,421 and were recorded
as a non-recurring charge included in purchased in-process research and
development. The nature of the efforts required to develop the purchased
in-process technology into a commercially viable product principally relate to
designing, prototyping, verification and testing activities that are necessary
to establish that the product can be produced to meet its design specifications,
including functions, features and technical performance requirements. The
Company expects to incur a total of $1,000 to complete the project, of which
approximately $400 was incurred in 1998 and $600 is projected to be incurred
1999. It is anticipated that the pump will be released during 1999. The Company
expects that the purchased in-process research and development will be
successfully developed, but there can be no assurance that commercial viability
of the pump will be achieved.
Also during the second quarter of 1998, the Company licensed technology
from Caesarea Medical Electronics Limited ("Caesarea") for a pole mounted
volumetric infusion pump being designed for developing international markets. At
the time of license, the development of the applications and functionality
required by the Company had not reached technological feasibility and no
alternative uses were identified. As a result, the initial license payment and
related expenses of approximately $1,200 were recorded as purchased in-process
research and development during the second quarter. Under the terms of the
license agreement, the Company is obligated to pay additional consideration up
to an aggregate of $4,000 to Caesarea upon timely completion of certain
development milestones, which primarily relate to different product releases. In
December 1998, upon completion of the first milestone, the Company paid $750 to
Caesarea. Due to the completed technology obtained, the Company capitalized such
payment and plans to capitalize future license fees and amortize such costs over
the eighteen year license period. The Company expects that additional products
using the purchased in-process technology will be released during 1999.
55
NOTE 4 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
DECEMBER 31,
-------------------------
1997 1998
---------- ----------
RECEIVABLES:
Trade receivables................................................................... $ 73,282 $ 88,493
Allowance for doubtful accounts..................................................... (3,259) (2,946)
---------- ----------
70,023 85,547
Current portion of net investment in sales-type leases (Note 9)..................... 13,383 16,748
---------- ----------
$ 83,406 $ 102,295
---------- ----------
---------- ----------
INVENTORIES:
Raw materials....................................................................... $ 24,144 $ 35,024
Work-in-process..................................................................... 8,363 5,719
Finished goods...................................................................... 29,159 38,742
---------- ----------
$ 61,666 $ 79,485
---------- ----------
---------- ----------
PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Deferred income tax asset........................................................... $ 19,135 $ 20,757
Other............................................................................... 4,125 4,489
---------- ----------
$ 23,260 $ 25,246
---------- ----------
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Land................................................................................ $ 640 $ 640
Building and leasehold improvements................................................. 14,000 14,799
Machinery and equipment............................................................. 30,970 39,464
Information technology.............................................................. 9,017 18,537
Furniture and fixtures.............................................................. 5,401 5,786
Instruments under operating lease contracts......................................... 20,338 22,683
Construction-in-process............................................................. 9,138 10,511
---------- ----------
89,504 112,420
Accumulated depreciation and amortization........................................... (34,139) (50,430)
---------- ----------
$ 55,365 $ 61,990
---------- ----------
---------- ----------
Depreciation expense was $5,827, $17,417 and $18,906 for 1996, 1997 and 1998,
respectively.
DECEMBER 31,
-------------------------
1997 1998
---------- ----------
OTHER NON-CURRENT ASSETS:
Debt issue costs.................................................................... $ 15,734 $ 18,468
Other............................................................................... 545 3,920
---------- ----------
$ 16,279 $ 22,388
---------- ----------
---------- ----------
56
NOTE 4 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS (CONTINUED)
INTANGIBLE ASSETS:
Goodwill............................................................................ $ 180,381 $ 198,543
Patents............................................................................. 28,661 45,646
Product licensing and distribution fees............................................. 3,837 4,587
Supply agreements................................................................... 10,758 10,758
Trademarks.......................................................................... 90,000 90,270
Workforce........................................................................... 7,100 7,870
Customer base....................................................................... - 3,390
---------- ----------
320,737 361,064
Accumulated amortization............................................................ (32,804) (50,046)
---------- ----------
$ 287,933 $ 311,018
---------- ----------
---------- ----------
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 fifteen-year term of the original distribution agreement. The net
distribution fee is being amortized over approximately ten years, which
represents the remaining term of the original distribution agreement.
Amortization expense was $4,672, $16,871 and $17,242 during 1996, 1997
and 1998, respectively.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Income taxes payable................................................................ $ 2,721 $ 2,285
Compensation........................................................................ 13,556 12,912
Warranty............................................................................ 12,855 13,848
Interest............................................................................ 4,000 5,452
Other............................................................................... 19,536 17,843
---------- ----------
$ 52,668 $ 52,340
---------- ----------
---------- ----------
OTHER NON-CURRENT LIABILITIES:
Deferred income tax liability....................................................... $ 4,283 $ 14,321
Deferred revenue.................................................................... - 3,568
Warranty............................................................................ 6,225 3,560
Other............................................................................... - 482
---------- ----------
$ 10,508 $ 21,931
---------- ----------
---------- ----------
57
NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
------------------------------
1997 1998
------------ ------------
Bank credit facility
Term loan facilities ........................................................... $ 198,750 $ 211,262
Revolving credit facilities ................................................... 25,200 -
9.75% senior subordinated notes due 2006............................................ 200,000 200,000
11.125% Senior Discount Notes due 2008.............................................. - 115,092
7.25% convertible subordinated debentures due 2002.................................. 16,152 16,152
Other............................................................................... 6,028 3,784
------------ ------------
446,130 546,290
Current portion................................................................. (14,559) (15,423)
------------ ------------
Long-term debt...................................................................... $ 431,571 $ 530,867
------------ ------------
------------ ------------
BANK CREDIT FACILITY:
In connection with the Merger, the Company entered into a $250,000 bank
credit facility (the "Credit Facility") with a syndicate of financial
institutions which consisted of $200,000 of term loans ($75,000 Tranche A Term
Loans maturing in 2002, $42,500 Tranche B Term Loans maturing in 2003, $42,500
Tranche C Term Loans maturing in 2004 and $40,000 Tranche D Term Loans maturing
in 2005) and a $50,000 revolving credit facility maturing in 2002. In July 1998,
in connection with the Instromedix acquisition, the Company amended the Credit
Facility ("The Credit Facility Amendment"). The Credit Facility Amendment, among
other things, increased the revolving credit facility to $60,000 and provided
the Company an additional $30,000 under the Tranche D term debt. The Company
used the $30,000 term debt borrowing, along with approximately $2,000 from the
revolving credit line, to fund the initial payments required upon closing the
Instromedix acquisition. No principal balance was outstanding under the
revolving credit facility at December 31, 1998.
During January and February 1998, 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.
Borrowings under the revolving credit facility bear interest at the same rate as
Tranche A. Effective March 1998, the Credit 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. Such total rates were 7.6% and 7.8%, respectively, at December 31, 1998.
During the second quarter of 1997, the Company entered into an interest rate
protection agreement covering approximately 50% of its term loan borrowings to
reduce the impact of changes in interest rates on its floating rate long-term
debt. At December 31, 1998, the Company had outstanding an interest rate
protection agreement with commercial banks, having a total notional principal
amount of $92,150. That agreement effectively changed the Company's interest
rate exposure on its floating rate debt and resulted in a weighted average
interest rate of 8.9% on the Credit Facility borrowings at December 31, 1998.
The Credit Facility contains various operating and financial covenants, as well
as certain covenants relating to reporting requirements. As of December 31,
1998, the Company was in compliance with all such covenants.
58
NOTE 5 - 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.
The Notes are subject to certain financial and reporting covenants.
SENIOR DISCOUNT NOTES:
On July 28, 1998, subsequent to closing the Instromedix acquisition,
the Company issued $189,000 of Senior Discount Notes at a discount from their
principal amount at maturity to generate gross proceeds to the Company of
$109,892. Upon receipt of net proceeds of $106,321, the Company paid its
remaining obligations of approximately $22,700 to the Instromedix shareholders
and contributed the remaining net proceeds of approximately $81,700, after
issuance costs, to ALARIS Medical Systems, as required under the Credit Facility
Amendment. ALARIS Medical Systems then repaid $27,500 outstanding under its
revolving credit facility.
The Senior Discount Notes bear interest at a rate of 11-1/8% per annum.
Interest accruing on these notes is added to the outstanding principal balance
through July 31, 2003. Interest accruing beginning August 1, 2003 is payable in
cash semi-annually in arrears on February 1 and August 1, commencing February 1,
2004. The notes will mature on August 1, 2008. The notes are senior in right of
payment to all subordinated indebtedness of ALARIS Medical and rank PARI PASSU
in right of payment with all existing and future senior indebtedness of the
Company, including indebtedness incurred under the bank credit facility. On or
prior to August 1, 2001, under certain conditions ALARIS Medical has the option
to redeem a portion of the notes at 111.125% of the then accreted value. On or
subsequent to August 1, 2001, the Company may redeem the notes at 105.6% of the
then accreted value with the redemption price declining each year thereafter.
Effective August 1, 2006, the redemption price is 100.0% of the then outstanding
accreted value. In the event of a change of control, as defined in the
indenture, holders of the Senior Discount Notes will have the right to require
the Company to purchase their notes in cash in an amount equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of repurchase. The Senior Discount Notes are subject to certain financial and
reporting covenants.
59
NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
DEBENTURES:
At December 31, 1998, the Company had outstanding $16,152 of 7.25%
convertible subordinated debentures due 2002 (the "Convertible Debentures"). The
Convertible Debentures are convertible at the option of the holder into common
stock of the Company at any time prior to maturity at a conversion price of
$18.14 per share, subject to adjustment in certain events. The Convertible
Debentures mature on January 15, 2002, with interest payable semi-annually on
each January 15 and July 15. The Convertible Debentures are redeemable 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
Convertible Debentures, in whole or in part, in certain circumstances involving
a change in control of the Company. The Convertible Debentures are subordinate
to all existing or future senior indebtedness of the Company, and are also
effectively subordinated to liabilities of the Company's subsidiaries. The
indenture does not restrict the incurrence of senior indebtedness or other
indebtedness by the Company or any subsidiary.
In connection with the Merger, the Company redeemed the remaining
$21,924 principal amount of its 15% subordinated 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 the greater of $3,000,
or 8% of the prior year's product sales in 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 $52 at December 31, 1998.
60
NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt during the years subsequent to December 31, 1998
are as follows:
1999.............................................................. $ 15,423
2000.............................................................. 14,051
2001.............................................................. 22,060
2002.............................................................. 45,311
2003.............................................................. 32,825
Thereafter........................................................ 416,620
-----------
$ 546,290
-----------
-----------
NOTE 6 - INCOME TAXES
The (benefit from) provision for income taxes comprises the following:
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
---------- ---------- ----------
Current:
Federal............................................... $ - $ - $ 472
State................................................. 609 94 361
Foreign............................................... 1,000 4,511 3,008
---------- ---------- ----------
Total Current...................................... 1,609 4,605 3,841
---------- ---------- ----------
Deferred:
Federal............................................... (1,964) (6,984) 126
State................................................. (307) (745) 34
Foreign............................................... (68) (176) 99
---------- ---------- ----------
Total Deferred..................................... (2,339) (7,905) 259
---------- ---------- ----------
(Benefit from) provision for income taxes.......... $ (730) $ (3,300) $ 4,100
---------- ---------- ----------
---------- ---------- ----------
61
NOTE 6 - INCOME TAXES (CONTINUED)
The principal items accounting for the differences in income taxes
computed at the U.S. statutory rate (35%) and the effective income tax rate
comprise the following:
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1997 1998
---------- ---------- ----------
Taxes computed at statutory rate........................................ $ (22,554) $ (4,395) $ (7,119)
State income taxes, net of federal benefit.............................. 199 (492) 257
Effect of foreign operations............................................ 3,516 649 1,391
Amortization of non-deductible intangible assets........................ 574 1,944 2,299
Federal tax credits..................................................... (2,343) (513) (473)
Debt conversion expense................................................. 3,400 - -
Acquired in-process research and development............................ 14,960 - 7,980
Items affected by valuation allowance................................... 1,243 - -
Other, net.............................................................. 275 (493) (235)
---------- ---------- ----------
Benefit from income taxes before extraordinary item..................... (730) (3,300) 4,100
---------- ---------- ----------
Extraordinary item:
Taxes computed at statutory rate........................................ (853) - -
State income taxes, net of federal benefit.............................. (25) - -
Items affected by valuation allowance................................... - - -
---------- ---------- ----------
(878) - -
---------- ---------- ----------
Total ................................................................... $ (1,608) $ (3,300) $ 4,100
---------- ---------- ----------
---------- ---------- ----------
The components of the net deferred tax assets included in other assets
as of December 31, 1997 and 1998 are as follows:
1997 1998
---------- ----------
Deferred tax assets:
Net operating loss carryforwards.................................................. $ 20,074 $ 13,013
Accrued liabilities and reserves.................................................. 19,019 21,526
Unearned income................................................................... 2,126 3,311
Credit carryforwards.............................................................. 5,156 6,097
Inventory......................................................................... 2,771 3,246
Property, plant and equipment..................................................... 926 -
Miscellaneous..................................................................... 1,157 1,010
---------- ----------
51,229 48,203
Valuation allowance............................................................... (1,427) (2,029)
---------- ----------
Total deferred tax assets......................................................... 49,802 46,174
Deferred tax liabilities:
Intangible assets................................................................. 33,973 38,455
Property, plant and equipment..................................................... - 302
Miscellaneous..................................................................... 977 981
---------- ----------
Net deferred tax assets............................................................... $ 14,852 $ 6,436
---------- ----------
---------- ----------
62
NOTE 6 - INCOME TAXES (CONTINUED)
As of December 31, 1998, the Company had federal and state net
operating loss carryforwards of approximately $36,750 and $3,319, respectively.
Additionally, as of December 31, 1998, the Company had a foreign tax credit
carryforward and an alternative minimum tax credit carryforward of approximately
$3,068 and $1,024, 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 1999 to 2012. The foreign tax credit expires from 2001 to 2003 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 $10,801 of the federal net operating loss carryforward,
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.
NOTE 7 - STOCK OPTION PLANS
The Company maintains several stock option plans under which incentive
stock options may be granted to key employees of the Company and non-qualified
stock options may be granted to key employees, directors, officers, independent
contractors and consultants.
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.
63
NOTE 7 - STOCK OPTION PLANS (CONTINUED)
STOCK OPTION ACTIVITY:
Activity for 1996, 1997 and 1998 with respect to these plans is as
follows:
SHARES OPTION
UNDERLYING PRICE PER
OPTIONS SHARE
---------- -----------------
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 $ 1.81 - $ 6.93
Granted.................................................................... 468 $ 3.66 - $ 6.75
Exercised.................................................................. (119) $ 1.81 - $ 3.81
Canceled................................................................... (307) $ 1.81 - $ 6.93
------
Outstanding at December 31, 1998.............................................. 4,002 $1.81 - $ 6.93
------
------
At December 31, 1998, options for 2,047 shares were exercisable at
$1.81-$6.75 under the plans and 3,120 shares were available for future grant.
Additionally, as of December 31, 1998, 7,122 shares of common stock were
reserved for issuance pursuant to the Company's stock option plans.
If the Company had elected to recognize compensation expense based upon
the fair value at the grant date for awards under these plans, the Company's
reported net loss would be increased to the pro forma amounts indicated below:
DECEMBER 31,
------------------------------------------
1996 1997 1998
---------- ----------- -----------
Net loss:
As reported....................................... $ (67,236) $ (9,626) $ (24,439)
Pro forma......................................... $ (68,235) $ (11,836) $ (26,053)
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, 1996, 1997 and 1998, respectively;
dividend yields of 0%, expected volatility of 180%, 164% and 186%, risk free
interest rates of 6.2%, 5.8% and 4.6%, and expected lives ranging from 2 to 7
years.
64
NOTE 7 - STOCK OPTION PLANS (CONTINUED)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because ALARIS Medical's employee stock options have characteristics
significantly different from those of traded options, and because changes in
subjective input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock based compensation plans.
The following table summarizes information about employee stock-based
compensation plans outstanding at December 31, 1998:
OPTIONS OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 1998
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE-YEARS PRICE EXERCISABLE PRICE
------------- ----------- ---------- -------- ----------- --------
$1.81 - $2.81 481 6.35 $2.07 247 $2.02
$2.81 - $3.00 1,929 9.39 $2.99 1,097 $2.99
$3.09 - $3.19 559 10.14 $3.12 337 $3.12
$3.22 - $3.69 488 2.21 $3.64 278 $3.64
$3.75 - $6.22 511 3.58 $5.10 86 $4.83
$6.47 - $6.75 34 3.53 $6.73 2 $6.72
------------- ----------- -------- ------ ----------- -------
$1.81 - $6.75 4,002 7.46 $3.28 2,047 $3.07
------------- ----------- -------- ------ ----------- -------
------------- ----------- -------- ------ ----------- -------
NOTE 8 - BENEFIT PLANS
PENSION PLANS:
The Company had a defined benefit pension plan (the "Plan") which
covered substantially all of its U.S. employees as of December 31, 1993. On
December 1, 1993, the Company's Board of Directors approved amendments to the
Plan provisions which include, among other matters, cessation of benefit
accruals after December 1, 1993. All earned benefits as of that date were
preserved and the Company will continue to contribute to the Plan as necessary
to fund earned benefits. No contributions to the Plan were required during 1996,
1997 or 1998 due to the prepaid position of the Plan during those years.
65
NOTE 8 - BENEFIT PLANS (CONTINUED)
The following table sets forth the change in the benefit obligation and
the change in the Plan assets during the years ended December 31, 1997 and 1998
and the Plan's estimated funded status and amounts recognized in the Company's
balance sheet as of December 31, 1997 and 1998:
DECEMBER 31,
-------------------------
1997 1998
---------- ----------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year............................................. $ 9,822 $ 11,442
Service cost........................................................................ 210 253
Interest cost....................................................................... 725 754
Benefits paid....................................................................... (186) (201)
Actuarial loss...................................................................... 871 -
---------- ----------
Benefit obligation at end of year................................................... $ 11,442 $ 12,248
---------- ----------
---------- ----------
CHANGE IN PLAN ASSETS:
Fair value of Plan assets at beginning of year...................................... $ 13,053 $ 15,838
Actual return on Plan assets........................................................ 2,971 2,753
Benefits paid....................................................................... (186) (201)
---------- ----------
Fair value of Plan assets at end of year............................................ $ 15,838 $ 18,390
---------- ----------
---------- ----------
Funded status....................................................................... $ 4,396 $ 6,142
Unrecognized actuarial gain......................................................... (3,761) (4,941)
---------- ----------
Prepaid benefit cost................................................................ $ 635 $ 1,201
---------- ----------
---------- ----------
The components of net periodic benefit cost (gain) for the years
ended December 31, 1996, 1997 and 1998 are as follows:
DECEMBER 31,
---------------------------------------
1996 1997 1998
---------- ---------- ----------
Service cost ............................................................ $ 181 $ 210 $ 253
Interest cost ............................................................ 706 725 754
Expected return on Plan assets............................................ (1,010) (1,166) (1,417)
Recognized actuarial gain................................................. - (113) (156)
---------- ---------- ----------
Net periodic benefit gain................................................. $ (123) $ (344) $ (566)
---------- ---------- ----------
---------- ---------- ----------
Assumptions used in the accounting are as follows:
Discount rates........................................................ 7.45% 6.64% 6.64%
Rates of increase in compensation levels.............................. NA NA NA
Expected long-term rates of return on assets.......................... 9.00% 9.00% 9.00%
66
NOTE 9 - LEASES
LEASE RECEIVABLES:
The Company leases instruments to customers under capital and operating
lease contracts with terms ranging generally from 1 to 6 years. Certain capital
lease agreements obligate the lessee to purchase a specified annual minimum of
disposable sets and payment of liquidating damages if the agreement is
terminated by the lessee. Anticipated future minimum amounts due under operating
leases and capital lease receivables as of December 31, 1998 are as follows:
OPERATING CAPITAL
YEAR ENDING DECEMBER 31: LEASES LEASES
------------------------ ---------- ----------
1999................................................................................ $ 1,313 $ 19,675
2000................................................................................ 413 12,797
2001................................................................................ 44 8,341
2002................................................................................ 35 5,822
2003................................................................................ - 3,202
Thereafter.......................................................................... - 1,606
---------- ----------
Total minimum lease receivables..................................................... $ 1,805 $ 51,443
---------- ----------
---------- ----------
The net investment in sales-type leases consists of the following:
DECEMBER 31,
-------------------------
1997 1998
---------- ----------
Minimum lease payments.............................................................. $ 59,051 $ 51,443
Unguaranteed residual value of leased equipment..................................... 753 411
Unearned interest income............................................................ (14,136) (13,552)
Allowance for uncollectible lease receivables....................................... (1,881) (2,443)
---------- ----------
Net investment in sales-type leases................................................. 43,787 35,859
Current portion..................................................................... (13,383) (16,748)
---------- ----------
Net investment in sales-type leases, less current portion........................... $ 30,404 $ 19,111
---------- ----------
---------- ----------
67
NOTE 9 - LEASES (CONTINUED)
LEASE COMMITMENTS:
The Company leases buildings and equipment under non-cancelable
operating and capital leases with terms ranging from approximately 2 to 10
years. Scheduled future minimum lease commitments as of December 31, 1998 are as
follows:
OPERATING CAPITAL
YEAR ENDING DECEMBER 31: LEASES LEASES
------------------------ ---------- ---------
1999................................................................................ $ 5,552 $ 210
2000................................................................................ 5,597 210
2001................................................................................ 5,429 183
2002................................................................................ 5,307 130
2003................................................................................ 4,608 71
Thereafter.......................................................................... 11,552 -
------------------------ ---------- ---------
$ 38,045 804
----------
----------
Lease amounts representing interest................................................. (140)
------------------------ ---------
Capital lease obligation............................................................ 664
Less current portion................................................................ (152)
------------------------ ---------
$ 512
------------------------ ---------
------------------------ ---------
Rental expense was $3,474, $4,722 and $5,451 during 1996, 1997 and
1998, respectively.
NOTE 10 - RESTRUCTURING, INTEGRATION AND OTHER NON-RECURRING CHARGES
In connection with the Merger (Note 2), management performed a
review of the operating activities of both IMED and IVAC Medical Systems,
Inc. in order to reduce costs and maximize synergies. Management identified
duplicative costs to eliminate and developed and implemented plans to
consolidate and integrate the companies' operations including product
strategies, manufacturing, service centers, research and development,
marketing and other administrative functions. As a result, the Company
recorded non-recurring charges related to the implementation of these plans
of $15,277 and $20,902 in 1996 and 1997, respectively.
In connection with the Instromedix acquisition (Note 3), management,
with the assistance of consultants, is performing a review of the operating
activities of the acquired company and is assessing how to best integrate and
leverage the Instromedix operations with ALARIS Medical. During 1998, the
Company incurred $1,901 in costs associated with this integration. In February
1999, the Company announced its plans to relocate the Instromedix operations,
including manufacturing of Instromedix products, to San Diego.
68
NOTE 10 - RESTRUCTURING, INTEGRATION AND OTHER NON-RECURRING CHARGES (CONTINUED)
The following summarizes the significant components of the Company's
1996, 1997 and 1998 restructuring, integration and other non-recurring charges
included in the Consolidated Statement of Operations:
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
------ ------ -------
(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 1.6
Other........................................................................ - 1.5 .3
------ ------ -------
Total restructuring, integration and other non-recurring charges.......... $ 15.3 $ 20.9 $ 1.9
------ ------ -------
------ ------ -------
In 1997, the Company reviewed its products and related research and
development activities and market opportunities in order to focus on projects
that will provide greater competitive advantage and stockholder return. That
review resulted in the termination and write-off of a product distribution and
license agreement with a third party developer of an ambulatory and alternate
site infusion pump. The $4,500 charge related to such termination is included in
the 1997 integration cost and includes a $4,300 non-cash charge representing the
intangible asset that had been recorded associated with such agreement.
On June 26, 1997, the Company entered into a settlement agreement which
resolved its contract dispute with Cal Pacifico of California and affiliated
entities (collectively, "Cal Pacifico"), the operator of the Company's two
maquiladora assembly plants in Tijuana, Mexico. For over eight years, the
Company has assembled disposable administration sets at these two plants, which
utilized more than 1,200 workers employed by Cal Pacifico, under a contract with
Cal Pacifico. The dispute originated in April 1997 when the Company, in
accordance with the terms of such contract, informed Cal Pacifico that it would
be terminating its contractual arrangements effective August 1, 1997. Cal
Pacifico objected to such 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
69
NOTE 10 - RESTRUCTURING, INTEGRATION AND OTHER NON-RECURRING CHARGES (CONTINUED)
provided the Company with assistance as it transitioned into the direct
operation of such plants. The Company began operating these plants directly
during the third quarter of 1997.
The Company recorded a non-recurring charge of $4,100 during the
quarter ended June 30, 1997 relating to the settlement with Cal Pacifico and the
legal fees and other costs associated therewith. The individual costs included
within such non-recurring charge consist of approximately $2,700 of settlement
and legal fees and approximately $1,400 of idle labor costs and start-up costs
incurred in connection with the implementation of interim assembly plans during
the contract dispute.
In addition to restructuring and integration costs included in the
Consolidated Statement of Operations in 1996, 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. 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 $15,277 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 $260, $27,000 and $2,700 during 1996, 1997, and 1998,
respectively, for restructuring and integration activities. The Company has
approximately $1,700, and $800 accrued related to restructuring and integration
costs at December 31, 1997 and 1998, respectively. The Company anticipates that
the remaining accrued integration costs will be paid during 1999.
70
NOTE 11 - EARNINGS PER SHARE
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998
---------- ---------- ---------
BASIC EARNINGS PER SHARE
Loss before extraordinary item..................................... $ (65,606) $ (9,626) $ (24,439)
Less: dividends and accretion on mandatorily
redeemable preferred stock...................................... (962) - -
---------- ---------- ---------
Loss available to common stockholders before
extraordinary item.............................................. (66,568) (9,626) (24,439)
Extraordinary item................................................. (1,630) - -
---------- ---------- ---------
Net loss available to common stockholder........................... $ (68,198) $ (9,626) $ (24,439)
---------- ---------- ---------
---------- ---------- ---------
Weighted average common shares outstanding
during the period............................................... 20,343 58,644 58,710
Basic earnings per share before extraordinary item................. $ (3.27) $ (0.16) $ (0.42)
Extraordinary item................................................. (0.08) - -
--------- ---------- ---------
Basic earnings per share........................................... $ (3.35) $ (0.16) $ (0.42)
---------- ---------- ---------
---------- ---------- ---------
Net loss per common share assuming no dilution and dilution are the
same for 1996, 1997 and 1998 as the Company experienced a net loss for the years
ended December 31, 1996, 1997 and 1998. The Company's 7.25% Debentures were not
included in the calculation of diluted earnings per share in 1996, 1997 and 1998
as they are antidilutive. For each of the years presented, the $16,152 of
Convertible Debentures, if converted at an exercise price of $18.14 per share,
would result in an increase of 890 common shares and an increase of $703, net of
taxes, to net income, due to the reduction in interest expense. Options
outstanding at December 31, 1996, 1997 and 1998 were not included in the
computation of diluted earnings per share because the Company reported losses
for these years and the effect would be antidilutive. Had such options been
included, the weighted average shares would have increased by 370, 1,361 and
1,507 for 1996, 1997 and 1998, respectively.
NOTE 12 - RELATED PARTY ARRANGEMENTS
In June 1996, ALARIS Medical purchased General Electric Capital
Corporation'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.
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.
71
NOTE 12 - RELATED PARTY ARRANGEMENTS (CONTINUED)
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.
On July 28, 1998, subsequent to closing the Instromedix acquisition,
the Company issued $189,000 of Senior Discount Notes at a discount from their
principal amount at maturity to generate gross proceeds to the Company of
$109,892. Upon receipt of net proceeds of $106,321, the Company paid its
remaining obligations of approximately $22,700 to the Instromedix shareholders
and contributed the remaining net proceeds of approximately $81,700, after
issuance costs, to ALARIS Medical Systems, as required under the Credit Facility
Amendment. ALARIS Medical Systems then repaid $27,500 outstanding under its
Credit Facility.
72
NOTE 13- PARENT GUARANTOR OF SUBSIDIARY DEBT
All obligations of ALARIS Medical Systems under the Credit Facility
(Note 5) are guaranteed by ALARIS Medical and each existing and subsequently
formed or acquired domestic subsidiary of ALARIS Medical. Summarized financial
information of ALARIS Medical Systems, the issuer of the Credit Facility, at
December 31, 1997 and 1998 and for the years ended December 31, 1996, 1997 and
1998 is as follows:
DECEMBER 31,
---------------------------
1997 1998
----------- -----------
CONDENSED BALANCE SHEET
Current assets.................................................................... $ 175,309 $ 236,470
Non-current assets................................................................ 387,797 407,907
----------- -----------
$ 563,106 $ 644,377
----------- -----------
----------- -----------
Current liabilities............................................................... $ 90,225 $ 88,326
Long-term debt and other non-current liabilities.................................. 433,934 432,933
----------- -----------
524,159 521,259
----------- -----------
Total common stock and other stockholder's equity................................. 38,947 123,118
----------- -----------
$ 563,106 $ 644,377
----------- -----------
----------- -----------
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1997 1998
----------- ----------- -----------
CONDENSED STATEMENT OF OPERATIONS
Sales...... ....................................................... $ 136,371 $ 359,077 $ 380,068
Cost of sales...................................................... 78,642 188,340 191,232
----------- ----------- -----------
Gross margin....................................................... 57,729 170,737 188,836
Total operating expense............................................ (103,838) (139,950) (163,448)
Lease interest income.............................................. 2,501 4,559 4,599
----------- ----------- -----------
(Loss) income from operations...................................... (43,608) 35,346 29,987
Total other expense................................................ 5,796 44,274 41,786
Provision for (benefit from) income taxes.......................... 1,270 (1,900) 7,400
----------- ----------- -----------
Net loss ......................................................... $ (50,674) $ (7,028) $ (19,199)
----------- ----------- -----------
----------- ----------- -----------
73
NOTE 14 - SEGMENT INFORMATION
In 1998, the Company adopted FAS 131. The prior year's segment
information has been conformed to present the Company's three reportable
segments in accordance with the new standard - (1) North America, (2)
International and (3) Instromedix.
The accounting policies of the segments are the same as those described
in the "Summary of Significant Accounting Policies" (Note 1). Segment data does
not include intersegment revenues, or charges allocating corporate-headquarters
costs to each of its operating segments. The Company evaluates the performance
of its segments and allocates resources to them based on operating income and
adjusted earnings before interest, taxes, depreciation, and amortization
(EBITDA).
The Company is organized primarily based on geographic location with
the United States and Canada drug infusion and patient monitoring business
representing the North American Segment. All other international operations
including Europe, Asia, Australia and Latin America represent the International
segment. The acquisition of Instromedix in 1998 resulted in a third separate
operating segment.
The table below presents information about reported segments for the
years ended December 31:
NORTH SHARED
AMERICA INTERNATIONAL INSTROMEDIX SERVICES (A) TOTAL
------- ------------- ----------- ------------ -----
1998
Sales ......................... $ 246,631 $ 125,007 $ 8,430 $ - $ 380,068
Operating Income (Loss) ....... 44,844 29,272 (26,149) (19,682) 28,285
Adjusted EBITDA................ 65,194 35,732 710 (6,694) 94,942
1997
Sales ......................... $ 240,514 $ 118,563 $ - $ - $ 359,077
Operating Income (Loss)........ 45,445 29,008 - (41,963) 32,490
Adjusted EBITDA................ 62,588 33,207 - (6,508) 89,287
1996
Sales ......................... $ 105,577 $ 30,794 $ - $ - $ 136,371
Operating Income (Loss)........ 8,830 6,839 - (61,027) (45,358)
Adjusted EBITDA................ 17,947 8,221 - 1,607 27,775
Reconciliation of total segment adjusted EBITDA to consolidated income
before taxes:
1996 1997 1998
----------- ------------ ------------
ADJUSTED EBITDA
Total adjusted EBITDA for reportable segments.................. $ 27,775 $ 89,287 $ 94,942
Depreciation and amortization.................................. (9,842) (34,288) (36,148)
Net interest................................................... (12,200) (43,881) (47,524)
Purchased in-process research and development.................. (44,000) - (28,334)
Restructuring, integration and other non-recurring charges..... (29,291) (22,509) (2,175)
Other reconciling items........................................ 1,222 (1,535) (1,100)
----------- ------------ ------------
Consolidated loss before income taxes....................... $ (66,336) $ (12,926) $ (20,339)
----------- ------------ ------------
----------- ------------ ------------
(A) Shared services includes amortization of intangibles and certain legal,
business development and executive costs.
74
NOTE 14 - SEGMENT INFORMATION (CONTINUED)
SALES
--------------------------------------------
1996 1997 1998
----------- ----------- -----------
PRODUCT LINE INFORMATION
Drug Infusion.................................................. $ 126,410 $ 306,212 $ 315,617
Patient Monitoring............................................. 2,992 33,410 34,865
Service........................................................ 6,969 19,455 21,156
Instromedix.................................................... - - 8,430
----------- ----------- -----------
$ 136,371 $ 359,077 $ 380,068
----------- ----------- -----------
----------- ----------- -----------
SALES LONG-LIVED ASSETS
------------------------------------------ ----------------------------
1996 1997 1998 1997 1998
----------- ----------- ----------- ----------- -----------
GEOGRAPHICAL INFORMATION
United States..................... $ 100,200 $ 227,002 $ 242,603 $ 374,854 $ 399,591
International (A)................. 36,171 132,075 137,465 15,127 14,916
----------- ----------- ----------- ----------- -----------
$ 136,371 $ 359,077 $ 380,068 $ 389,981 $ 414,507
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
(A) Includes Canadian sales which are included in the North America unit
for segment reporting purposes.
NOTE 15 - CASH FLOW INFORMATION
Federal, state and foreign income taxes paid during 1996, 1997 and 1998
totaled $3,592, $3,884 and $4,550, respectively. Interest paid during 1996, 1997
and 1998 totaled $8,960, $40,576 and $38,044, respectively.
The Company sold 433 shares for $2,374 of its Alteon common stock
during 1996. The sale resulted in a realized gain of $686 for the year ended
December 31, 1996.
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 16- CONTINGENCIES AND LITIGATION
GOVERNMENT REGULATION
The United States Food and Drug Administration (the "FDA"), pursuant to
the Federal Food, Drug, and Cosmetic Act (the "FDC Act"), regulates the
introduction of medical devices into commerce, as well as testing manufacturing
procedures, labeling, adverse event reporting and record-keeping with respect to
such products. The process of obtaining market clearances from the FDA for new
products can be time-consuming and expensive and there can be no assurance that
such clearances will be granted or that FDA review will not involve delays
adversely affecting the marketing and sale of products. Enforcement of the FDC
Act depends heavily on administrative interpretation and there can be no
assurance that interpretations made by the FDA or other regulatory bodies will
not have a material adverse effect on the business, financial condition, results
of operations or cash flows. The FDA and state agencies routinely inspect the
Company to determine whether the Company is in compliance with various
requirements relating to manufacturing practices, testing, quality control,
complaint handling, medical device reporting
75
NOTE 16 - CONTINGENCIES AND LITIGATION (CONTINUED)
and product labeling. Such inspections can result in such agencies requiring the
Company to take certain corrective actions for non-complying conditions observed
during the inspections. A determination that the Company is in violation of the
FDC Act could lead to the imposition of civil sanctions, including fines, recall
orders, orders for repair or refund or product seizures and criminal sanctions.
Since 1994, the Company has on seventeen occasions temporarily removed products
from the market or issued safety alerts regarding products that were found not
to meet performance standards. None of such recalls materially interfered with
the Company's operations and all such product lines, except the Model 599 Series
infusion pump, were subsequently returned to the market. The Company continues,
however, to sell administration sets and replacement parts for the Model 599
Series infusion pump. In addition, the Company has initiated a voluntary safety
alert of its Model 597/598 and Model 599 Series infusion pumps. Moreover, the
Company has initiated a voluntary recall of approximately 50,000 of its Gemini
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 may cause the battery to overheat. The
Company recorded a charge of $2,500 to cost of sales for the quarter ended March
31, 1997 on account of this voluntary recall. The Company initiated a voluntary
recall of its Signature Edition infusion pumps to correct a malfunction of an
electronic line filter component (which malfunction may occur when a user fails
to follow the Company's written cleaning instructions and can result in an
electrical short). The Company is not aware of the occurrence of any injury
incidents relating to a malfunction of this type. Further, in November 1998, the
Company initiated a voluntary safety alert regarding the Signature Edition
infusion pumps advising to check for the proper installation of a spring in the
pumping mechanism assembly. In the third quarter of 1998, the Company initiated
a recall of its Gemini PC-4 infusion pumps to correct certain electro-mechanical
problems which may cause one or more channels of the device to audibly and
visibly alarm and temporarily cease operation. The Company has also initiated a
mandatory field upgrade of its P-1000, P-2000, P-3000 and P-4000 syringe pumps
because under certain circumstances a rate change can occur. In April 1999, the
Company will initiate a mandatory field upgrade of the Gemini PC-2T CE (220V)
product, distributed only in certain countries outside the U.S., for failure to
audibly alarm when a certain type of failure occurs. Although there can be no
assurance, the Company believes that these voluntary recalls, along with
adjustments and corrections that may be made to various Company products from
time to time as an ordinary part of the business of the Company, will not have a
material adverse effect on the business, financial condition, results of
operations or cash flows.
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 sought
injunctive relief, treble damages and the recovery of costs and attorney fees.
The jury failed to reach a verdict in this litigation and the Court has declared
a mistrial. Sherwood has asked the Court for a retrial, which is tentatively
scheduled for August 1999. 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.
76
NOTE 16 - CONTINGENCIES AND LITIGATION (CONTINUED)
The Company is a defendant in a lawsuit filed on April 20, 1998 and
served on October 28, 1998, by Becton Dickinson and Company ("Becton") against
ALARIS Medical Systems, Inc., which alleges infringement of a patent licensed to
Becton by reason of certain activities, including the sale of the Company's
SmartSite needle-free system. Becton has requested a permanent injunction
enjoining the Company from infringing the patent in suit. No amount of monetary
damages has been specified by Becton, however, the complaint requests damages as
appropriate and all gains, profits and advantages derived by or from the
Company's infringement of the patent, as well as prejudgment interest, costs,
expenses and reasonable attorney's fees. The Company believes it has sufficient
defenses to all claims, and intends to vigorously defend this action. However,
there can be no assurance that the Company will successfully defend all claims
made by Becton 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. In addition, the Company filed a lawsuit on
December 4, 1998 against Becton. The lawsuit, which is pending in the United
States District Court for the Southern District of California, alleges
infringement of two patents, one owned by the Company and one licensed to the
Company, by reason of certain activities, including the sale of Becton's Atrium
needle free valve. The lawsuit seeks injunctive relief, damages and the recovery
of costs and attorney fees.
UNITED STATES CUSTOMS SERVICE MATTER
During the years 1988 through 1995, Cal Pacifico acted as the Company's
United States customs broker and importer of record with respect to the
importation into the United States of finished products ("Finished Products")
assembled at the Company's two maquiladora assembly plants in Tijuana, Mexico.
In May 1995, Cal Pacifico received a pre-penalty notice from the United States
Customs Service ("Customs") to the effect that Customs intended to assess
additional duties and substantial penalties against Cal Pacifico for its alleged
failure, during the years 1988 through 1992, to comply with certain documentary
requirements regarding the importation of goods on behalf of its clients,
including the Company. Customs recently assessed additional duties with respect
to Cal Pacifico's importation of goods on behalf of its clients, including the
importation of the Company's Finished Products, for the years 1993 and 1994, and
it is anticipated that Customs will issue a pre-penalty notice to Cal Pacifico
in respect to these years as well (collectively with the amounts referred to in
the immediately preceding sentence, the "Disputed Amounts"). The Company has
been advised by its special Customs counsel that, under applicable law, no
person, by fraud, gross negligence or negligence, may (i) import merchandise
into the commerce of the United States by means of any material and false
document, statement or act, or any material omission, or (ii) aid or abet any
other person to import merchandise in such manner. No proceeding has been
initiated by Customs against the Company in respect of the matters which are the
subject of the proceeding against Cal Pacifico. Since Cal Pacifico was the
Company's United States customs broker and importer of record during each of the
foregoing years, the Company believes that it is unlikely that Customs will
assess against the Company any portion of the Disputed Amounts.
Cal Pacifico is contesting Customs' assessment of the Disputed Amounts.
Cal Pacifico's challenge to the assessment of the Disputed Amounts is in its
preliminary stages. Given the present posture of Cal 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
77
NOTE 16 - CONTINGENCIES AND LITIGATION (CONTINUED)
challenge. Cal Pacifico or Customs has not informed the Company as to the
specific amount of the Disputed Amounts.
Cal Pacifico has advised the Company that, should Cal Pacifico's
challenge to the assessment of the Disputed Amounts prove to be unsuccessful, it
will seek recovery from the Company, through arbitration, for any portion of the
Disputed Amounts which it is required to pay to Customs. As part of the
settlement agreement which resolved the Company's contract dispute with Cal
Pacifico during the second quarter of 1997, the Company paid Cal Pacifico $550,
which is to be applied toward Cal Pacifico's payment of Disputed Amounts. The
$550 payment by the Company is to be credited toward any portion of the Disputed
Amounts which the arbitrator determines the Company owes to Cal Pacifico. The
actual amount so determined by the arbitrator may be less or greater than $550.
Although the ultimate outcome of such an arbitration proceeding cannot be
guaranteed, the Company believes that it has meritorious defenses to claims with
respect to Disputed Amounts which Cal Pacifico might raise against the Company.
These defenses would be based, among other factors, on the contractual
relationship between the Company and Cal Pacifico (including a defense with
respect to the availability of indemnification under the agreements between Cal
Pacifico and the Company), the conduct of Cal Pacifico with respect to both the
Company and Customs, and the compliance obligations of Cal Pacifico under
applicable customs laws. Inasmuch as Cal Pacifico's challenge before Customs is
still pending and any claim against the Company for indemnification would be
based on Cal Pacifico's ultimate lack of success in that challenge, and inasmuch
as any arbitration proceeding by which Cal Pacifico might seek indemnification
has not been filed nor has Cal Pacifico committed itself to the theories under
which it might seek indemnification or the recovery of damages from the Company,
it is not possible for the Company to express an opinion at this time as to the
likelihood of an unfavorable outcome in such a proceeding.
OTHER
The Company is also a defendant in various actions, claims, and legal
proceedings arising from its normal business operations. Management believes
they have meritorious defenses and intends to vigorously defend against all
allegations and claims. As the ultimate outcome of these matters is uncertain,
no contingent liabilities or provisions have been recorded in the accompanying
financial statements for such matters. However, in management's opinion, based
on discussions with legal counsel, liabilities arising from such matters, if
any, will not have a material adverse effect on consolidated financial position,
results of operations or cash flows.
78
NOTE 17 - 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 1998 and 1997 is as follows:
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
1998
Sales ............................................ $ 86,971 $ 90,683 $ 94,227 $ 108,187
Gross margin ..................................... 42,117 44,184 47,555 54,980
Income (loss) from operations..................... 11,908 8,310 (8,692) 16,759
Net income (loss)................................. 207 (1,968) (22,981) 303
(Loss) income per common share
assuming no dilution (1)....................... $ - $ (.03) $ (.39) $ .01
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
(Loss) income per common share
assuming dilution (1).......................... $ - $ (.03) $ (.39) $ .01
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
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
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
- --------------------------------
(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.
79
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 22, 1999:
NAME AGE POSITION
---- --- ---------------------------------------
ALARIS MEDICAL AND ALARIS MEDICAL SYSTEMS:
Jeffry M. Picower................................... 56 Director, Chairman of the Board
William J. Mercer................................... 50 Director, President and Chief
Executive Officer
Norman M. Dean(1)................................... 78 Director
Henry Green......................................... 56 Director
Richard B. Kelsky(1)................................ 43 Director
William C. Bopp..................................... 55 Vice President and Chief Financial
Officer
ALARIS MEDICAL SYSTEMS:
John A. de Groot(2)................................. 43 Vice President, Secretary and General
Counsel
Anthony B. Semedo................................... 47 Vice President of Corporate
Development
Richard M. Mirando.................................. 55 Vice President of Operations
Henk van Rossem..................................... 56 Vice President and General Manager,
International
Jake St. Philip..................................... 46 Vice President and General Manager,
North America
James E. May........................................ 47 Vice President and General Manager,
Instromedix
- --------------------------
(1) Member of Audit, Compensation and Stock Option Committee
(2) Mr. de Groot is also Secretary of ALARIS Medical, Inc.
JEFFRY M. PICOWER--Mr. Picower was a Director, Vice President and the
Assistant Treasurer of ALARIS Medical from September 1988 to March 1989 and Vice
Chairman from December 1988 to June 1989. Mr. Picower was re-elected as a
Director and Co-Chairman of the Board of ALARIS Medical in March 1993 and became
Chairman of the Board in May 1993. Mr. Picower served as Chief Executive Officer
of ALARIS Medical from September 1993 to November 1996. Mr. Picower has served
as Chairman of the Board of ALARIS Medical Systems since the effective date of
the Merger. He has, since 1984, been Chairman of the Board and Chief Executive
Officer of Monroe Systems for Business, Inc. ("Monroe"), a worldwide office
equipment, distribution and service organization of which Mr. Picower is the
sole shareholder. Mr. Picower has been a Director of Physician Computer Network,
Inc. ("PCN") since January 1994 and Chairman of the Board of PCN 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.
80
WILLIAM J. MERCER--Mr. Mercer became a Director, the President and the
Chief Executive Officer of each of ALARIS Medical Systems and ALARIS Medical on
the effective date of the Merger. Mr. Mercer served as the Chief Financial
Officer of each of ALARIS Medical Systems and ALARIS Medical from March 1997
until August 1997. Prior to the effective date of 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, primarily in medical imaging at
Mallinckrodt, Inc. for 17 years, most recently as Senior Vice President. Prior
to that, Mr. Mercer worked at Becton Dickinson Inc. and Abbot Laboratories, Inc.
NORMAN M. DEAN--Mr. Dean has been a Director of ALARIS Medical since
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 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
elected as President of PCN in May 1993, Chief Executive Officer of PCN in June
1994 and a Director of PCN in July 1993. Mr. Green served as President and Chief
Executive Officer of PCN until his retirement in December 1997.
RICHARD B. KELSKY--Mr. Kelsky has served as a Director of ALARIS
Medical since June 1989. Mr. Kelsky is a Director of Monroe and served as Vice
President and General Counsel of Monroe from 1984 to 1996. Mr. Kelsky has served
as Vice Chairman of Monroe since 1996. Mr. Kelsky has served as a Director of
PCN since January 1992.
WILLIAM C. BOPP--Mr. Bopp became Vice President and Chief Financial
Officer of each ALARIS Medical, Inc. and ALARIS Medical Systems, Inc., on March
22, 1999. Prior to joining ALARIS, he was executive vice president and chief
financial officer of C.R. Bard, Inc. since 1995. Since 1980, Mr. Bopp has held
positions of increasing responsibility with Bard, a $1.2 billion developer,
manufacturer and marketer of health care products, including vascular,
urological and oncological and interventional products. Bard's products are sold
worldwide to hospitals, health care professionals, and extended care and
alternate-site facilities. In addition to his most recent position, from 1995
until 1999, Mr. Bopp also served as a member of the board of directors of Bard.
He is a graduate of Harvard College, Cambridge, MA, and completed his MBA,
Finance, from the Harvard Business School.
JOHN A. DE GROOT--Mr. de Groot became the Secretary of each of ALARIS
Medical and ALARIS Medical Systems in March 1997. Mr. de Groot became a Vice
President and General Counsel of ALARIS Medical Systems as of November 1996.
Prior thereto, Mr. de Groot served as a Vice President and General Counsel of
IVAC Holdings, Inc. and IVAC Medical Systems since April 1995. From January 1991
to December 1996, Mr. de Groot was a partner in the law firm of Brobeck, Phleger
& Harrison LLP, a firm he had been associated with since March 1987.
ANTHONY B. SEMEDO--Mr. Semedo became Vice President of Corporate
Development in January 1998. From November 1996 until February 1998, Mr. Semedo
served as Vice President of Research, Development and Engineering of ALARIS
Medical Systems. Prior thereto, Mr. Semedo served as Vice President of Research
and Development of IVAC Medical Systems since February 1995. From September 1994
to February 1995, Mr. Semedo served as Vice President of Quality of IVAC Medical
Systems. From August 1992 to September 1994, Mr. Semedo served as the Business
Development Manager of the cardiovascular business and the Quality Assurance
Manager of the medical devices and diagnostics division of Eli Lilly and
Company. Eli Lilly and Company are engaged in the discovery, development,
manufacture and sale of products, and the provision of services in the life
sciences industry.
81
RICHARD M. MIRANDO--Mr. Mirando became Vice President of Operations of
ALARIS Medical Systems as of November 1996. Prior thereto, Mr. Mirando served as
Vice President and General Manager of International Business of IVAC Medical
Systems since January 1995. From 1978 to January 1995, Mr. Mirando held various
positions, including Marketing Manager, Director of Market Planning and
Research, Director of Sales, Executive Director of International Operations,
Vice President Sales and Marketing-Fluid Delivery Division, Vice
President-Corporate Accounts and Pricing, and Vice President-Corporate Quality/
Service Business Unit, with IVAC Medical Systems.
HENK VAN ROSSEM--Mr. van Rossem became Vice President and General
Manager, International of ALARIS Medical Systems in January 1997. Prior thereto,
Mr. van Rossem held various international marketing and sales positions with
Mallinckrodt Group, Inc. since 1984. Mr. van Rossem's last position with
Mallinckrodt Group, Inc. was Vice President and General Manager of the European
nuclear medicine division.
JAKE ST. PHILIP--Mr. St. Philip became Vice President and General
Manager, North America, as of July 1998. He previously served as Vice President
of Sales, North America of ALARIS Medical Systems as of November 1996. Prior
thereto, Mr. St. Philip served as Vice President of Sales, North America of IVAC
Medical Systems since June 1994. From 1981 to June 1994, Mr. St. Philip held
various sales and marketing positions with IVAC Medical Systems. Additional
prior experience includes sales positions with Johnson & Johnson and M&M/Mars.
Mr. St. Philip holds a BS degree in Marketing from the University of New
Orleans.
JAMES E. MAY--Mr. May is Vice President and General Manager for the
Instromedix Division of ALARIS Medical Systems. Prior to the July 1998
acquisition, Mr. May served as President and CEO of Instromedix. Mr. May served
as President and CEO of Legacy Portland Hospitals from 1992 to 1996 prior to
joining Instromedix. Mr. May holds an MBA from the University of Chicago in
Finance and Health Administration and a BS degree in Psychology and Chemistry
from Ohio State University.
SALLY M. GRIGORIEV--Ms. Grigoriev is the Vice President of Quality and
Regulatory Affairs for ALARIS Medical Systems. Prior to joining IVAC Medical
Systems in January 1995, she served as the Vice President of Quality and
Regulatory Affairs at U.S. Medical Instruments, Inc. and Block Medical, Inc.
respectively. While at Block Medical, she established and implemented all
quality and regulatory systems. Ms. Grigoriev held various management positions
at IMED Corporation from 1982 to 1990, including Principal Manufacturing
Engineer, Quality Engineering Manager, Manufacturing Engineering Manager, and
Quality Assurance Manager. Ms. Grigoriev holds a B.S. degree, Chemical
Engineering, from the University of California, Santa Barbara.
RICHARD H.SALZAR--Mr. Salzar is Vice President, Far East and Latin
America, for ALARIS Medical Systems. Mr. Salzar previously served as the Vice
President of International Operations for IMED Corporation for two years. From
April 1982 to June 1994, Mr. Salzar held positions of increasing responsibility
with IMED's international business, including European Business Manager in
Abingdon, England. Mr. Salzar holds an M.B.A. and B.S. degree, Business
Administration - Finance, from San Diego State University.
KEVIN WHITELEY--Mr. Whiteley became Vice President, Marketing, of
ALARIS Medical Systems as of November 1996. Previously, Mr. Whiteley served as
IMED Corporation's Vice President of Marketing and Business Development. Prior
to joining IMED in 1996, he held various positions of responsibility from 1981
to 1995 at McGaw, Inc. Mr. Whiteley's last position with McGaw was Director of
Business Development. Mr. Whiteley holds an MBA, with a focus on Marketing and
Finance, and a Bachelor's degree in Business Administration, emphasizing
Marketing, from the University of Arizona.
L. JAMES RUNCHEY--Mr. Runchey is the Vice President of Human Resources
for ALARIS Medical Systems. He joined IVAC Medical Systems in May 1995. Prior to
IVAC, Mr. Runchey served as Vice
82
President of Human Resources and Administration for Magma Power Company
from 1988 to 1995, where he was responsible for all aspects of Human Resources
management, facilities, safety and training. Mr. Runchey holds a B.S. degree in
Management from San Diego State University.
There are no family relationships among the above Directors and
executive officers.
BOARD OF DIRECTORS
The Board of Directors of ALARIS Medical 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 1998, all of its executive officers, Directors and
greater-than-10% beneficial owners complied with the Section 16(a) filing
requirements applicable to them with the exception of the following late
filings: (i) Mr. Picower filed one Form 4 approximately 10 months late
disclosing two transactions involving stock options granted; (ii) Mr.
Greenberg, a former member of the board of directors filed one Form 4
approximately 7 months late disclosing 4 transactions involving the purchase
of shares of Common Stock; (iii) Mr. May, who became subject to Section 16(a)
requirements in February, 1999, filed one Form 3 approximately 1 month late;
(iv) Mr. St. Philip filed one Form 4 approximately 8 months late disclosing
one transaction involving the grant of stock options.
83
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes certain information regarding
compensation paid or accrued by ALARIS Medical, its subsidiaries or IVAC Medical
Systems to or on behalf of ALARIS Medical's Chief Executive Officer, each of the
four most highly compensated executive officers of ALARIS Medical Systems, other
than the Chief Executive Officer, whose total annual salary and bonus for the
years ended December 31, 1998, 1997 and 1996 exceeded $100,000 (collectively,
the "Named Executive officers").
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------------- --------------------------------
OTHER ALL
ANNUAL SECURITIES OTHER
SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($)(2) ($)(3) OPTIONS ($)
- --------------------------- -------- ----------- ---------------------------- --------------------------------
WILLIAM J. MERCER 1998 434,154 388,800 - - 15,761
President and Chief Executive 1997 400,008 360,000 - - 6,366
Officer (4) 1996 319,334 312,965 - 600,000 2,998,298
JOHN A. DE GROOT 1998 207,308 172,200 - - 5,000
Vice President, Secretary and 1997 200,004 87,395 - - 3,559
General Counsel 1996 131,254 125,232 - 180,000 384,108
RICHARD M. MIRANDO 1998 210,385 92,880 - - 5,000
Vice President of Operations 1997 197,316 71,047 - - 4,750
1996 181,319 92,401 13,216 180,000 625,939
HENK VAN ROSSEM 1998 217,925 114,317 13,556 - 22,953
Vice President and General 1997 200,823 75,594 17,923 180,000 44,078
Manager, International 1996 - - - - -
ANTHONY B. SEMEDO 1998 180,383 156,722 - - 5,000
Vice President of Corporate 1997 160,008 70,318 - - 4,750
Development 1996 146,808 100,804 - 180,000 671,210
- --------------------------
(1) 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 and 1998 salaries were paid by
ALARIS Medical Systems or its subsidiaries.
(2) 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.
(3) Amounts represent automobile allowances paid by the Company.
(4) Mr. Mercer also served as Chief Financial Officer from September 19, 1998
to March 22, 1999.
84
STOCK
COMPANY OPTION TOTAL
RETIREMENT RELOCATION CANCELLATION OTHER
NAME YEAR CONTRIBUTIONS(1) PAYMENTS(2) PAYMENT(3) OTHER COMPENSATION
- ---- ---- ---------------- ------------ ---------- ----- -------------
WILLIAM J. MERCER 1998 5,000 - - 10,761(5) 15,761
1997 4,750 - - 1,616(4) 6,366
1996 4,120 271,980 2,722,198 - 2,998,298
JOHN DE GROOT 1998 5,000 - - - 5,000
1997 3,559 - - - 3,559
1996 3,000 - 381,108 - 384,108
RICHARD M. MIRANDO 1998 5,000 - - - 5,000
1997 4,750 - - - 4,750
1996 5,440 23,202 597,297 - 625,939
HENK VAN ROSSEM 1998 22,953 - - - 22,953
1997 17,568 26,510 - - 44,078
1996 - - - - -
ANTHONY B. SEMEDO 1998 5,000 - - - 5,000
1997 4,750 - - - 4,750
1996 4,404 8,568 658,238 - 671,210
- --------------------------
(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 to retirement plans.
(2) Represents relocation and temporary living expenses paid by IVAC Medical
Systems and the Company.
(3) Represents stock option cancellation 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.
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 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 therein), or
by Mr. Mercer for good reason (as defined therein), 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.
In January 1998, Mr. Mercer's employment agreement was amended whereby
the base salary was increased to $432,000 effective January 1, 1998.
SEVERANCE PLAN
Effective through December 31, 1999, the Company has in place a
severance plan, which provides employee severance pay and benefits in the event
of an involuntary termination without cause. The amount of severance and
benefits is based upon position and length of service with the Company and
ranges from a
85
minimum of seven weeks' compensation up to one year's base salary for senior
executives. In the event of an involuntary termination related to a change in
control of the Company, the severance plan provides severance of up to two
years' base salary and bonus for senior executives.
STOCK-BASED BENEFIT PLANS
1988 STOCK OPTION PLAN. Under the Third Amended and Restated 1988 Stock
Option Plan of ALARIS Medical (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 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 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 1,441,447, of which
535,901 are subject to currently outstanding options.
The 1988 Option Plan is administered 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.
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.
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 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. Under the 1996 Stock Option Plan of ALARIS
Medical (the "1996 Option Plan"), ISOs with respect to shares of Common Stock
may be granted to key employees of the Company, 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 the Company and
its 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 5,500,000. The number of
shares of Common Stock which remain available for issuance under the 1996 Option
Plan is 5,474,125, of which 3,369,056 are subject to currently outstanding
options.
86
The 1996 Option Plan is administered by the Board of Directors of
ALARIS Medical or a committee appointed by the Board of Directors of ALARIS
Medical (the "1996 Committee"). No member of the 1996 Committee is eligible to
receive options under the 1996 Option plan.
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 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 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.
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.
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.
87
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998
AND OPTION VALUES AS OF DECEMBER 31, 1998
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
SHARES UNDERLYING UNEXERCISED OPTIONS AT 12/31/98
ACQUIRED VALUE OPTIONS AT 12/31/98 ($) (1)
ON REALIZED ---------------------------- ---------------------------
EXERCISE $ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------- -------- ----------- ------------- ----------- -------------
William J. Mercer - - 300,000 300,000 862,500 862,500
John A. de Groot - - 108,000 72,000 310,500 207,000
Richard M. Mirando - - 108,000 72,000 310,500 207,000
Henk van Rossem - - 99,001 80,999 266,115 217,725
Anthony B. Semedo - - 108,000 72,000 310,500 207,000
- --------------------------
(1) Calculated based on the excess of the closing price of ALARIS Medical's
common stock on December 31, 1998 ($5.875) as reported in the NASDAQ
National Market Issues published in THE WALL STREET JOURNAL over the
option exercise price.
DIRECTORS PLAN. The Third Amended and Restated 1990 Non-Qualified Stock
Option Plan for Non-Employee Directors of ALARIS Medical (the "Directors Plan")
was most recently amended (the "Amendment") by the Board of Directors of ALARIS
Medical in May 1998. The Amendment was approved by ALARIS Medical's stockholders
in June 1998. Under the Directors Plan, each Director of ALARIS Medical
("Eligible Director") who (i) is neither an employee nor officer (other than an
officer who does not receive a salary as an officer of ALARIS Medical) of ALARIS
Medical or any of its subsidiaries and (ii) has not elected to decline to
participate in the Directors Plan pursuant to an irrevocable one-time election
made within 30 days after first becoming a Director of ALARIS Medical is
eligible to participate in the Directors 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
206,800, of which 97,000 are subject to currently outstanding options.
The Director Plan is administered by a committee (the "Plan Committee")
appointed by the Board of Directors of ALARIS Medical consisting 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 (i) the grant of NQSOs; (ii) the number of shares of Common Stock
subject to NQSOs; (iii) the price at which each share of Common Stock covered by
a NQSO may be purchased, all of which are determined automatically under the
Directors Plan.
As a result of the Amendment, NQSOs to purchase 10,000 shares of Common
Stock will be granted automatically to any Eligible Director who first becomes
an Eligible Director after May 28, 1998 on the next succeeding business day
following his or her becoming an Eligible Director. In addition, NQSOs to
purchase 10,000 shares of Common Stock are granted automatically to each
Eligible Director on the anniversary date of his or her preceding NQSO grant
under the Directors Plan and every year thereafter during the term of the
Directors Plan, PROVIDED that such Eligible Director continues to be an Eligible
Director on the date of each such addition NQSO grant. Moreover, the Chairman of
the Board of ALARIS Medical was granted a NQSO to purchase 16,000 shares of
Common Stock on May 28, 1998, which NQSO is fully vested and presently
exercisable. Other than the aforesaid NQSO grant to the Chairman of the Board of
ALARIS Medical, NQSOs granted under the Directors Plan vest and become
exercisable in one-third increments for each year of an Eligible Director's
service on the Board of Directors of ALARIS Medical from the date of grant of
the NQSO. Immediately prior to the Amendment, NQSOs to purchase 15,000 shares of
Common Stock, which vest at the rate of 5,000 shares of Common Stock per year,
were granted to Eligible Directors every three years.
88
Pursuant to the Directors Plan, the purchase price of shares of Common
Stock subject to NQSOs must be equal to the fair market value of a share of
Common Stock on the date of the grant of the NQSO. The maximum term of each NQSO
may not exceed five years from the date of grant. During the lifetime of an
Eligible Director, his or her NQSOs may be exercised only by such Eligible
Director or by his or her legal guardian or legal representative, except that
the Plan Committee may permit a NQSO to be transferred to and exercised by one
or more transferees of such Eligible Director. NQSOs are not transferable 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 Eligible Director.
NQSOs granted under the Director Plan are subject to termination under
certain circumstances in the event the Eligible Director ceases to be an
Eligible Director or becomes an employee of the Company.
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 vest immediately prior to such effective time. Unless otherwise
determined by the Plan Committee at the time of a Change of Control, in the
event of a Change of Control all outstanding NQSOs shall terminate and cease to
be outstanding immediately following the Change of Control.
COMPENSATION OF DIRECTORS
Members of the Board of Directors who are not employees of the Company
are paid $25,000 per annum and in addition receive $1,000 per board and/or
committee meeting attended. In addition, such Directors are entitled to receive
options to purchase shares of Common Stock pursuant to the Directors Plan. See
"--Stock-Based Benefit Plans--Directors Plan." Travel and accommodation expenses
of Directors incurred in connection with meetings are reimbursed by ALARIS
Medical. 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."
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.
On May 28, 1998, ALARIS Medical granted a NQSO to purchase 16,000
shares of Common Stock to Mr. Picower. The NQSO is fully vested and presently
exercisable. On June 11, 1998, Mr. Picower was granted options to purchase
10,000 shares of common Stock pursuant to the Directors Plan. The options vest
over three years in one-third increments.
On September 9, 1998 Mr. Dean and Mr. Kelsky were each granted options
to purchase 10,000 shares of Common Stock pursuant to the Directors Plan. The
options vest over three years in one-third increments.
89
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."
90
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, at March 12, 1999, 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............................................... 46,664,209 (2) 77.6%
South Ocean Blvd.
Palm Beach, FL 33480
William J. Mercer............................................... 536,200 (3) *
Norman M. Dean.................................................. 31,000 (4) *
Henry Green..................................................... 13,000 (5) *
Richard B. Kelsky............................................... 102,100 (6) *
Anthony B. Semedo............................................... 108,600 (7) *
Richard M. Mirando.............................................. 118,000 (8) *
John A. de Groot................................................ 113,000 (9) *
Henk van Rossem................................................. 108,001 (10) *
Jake St. Philip................................................. 110,500 (11) *
James E. May.................................................... 17,500 (12) *
All Directors and Named Executive Officers as a group........... 47,922,110 (13) 79.7%
(11 individuals)
- -------------------------
* Less than 1%
(1) Calculated in accordance with Rule 13d-3(d)(1) under the Securities
Exchange Act of 1934, as amended. At March 12, 1999, ALARIS Medical had
59,234,392 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"); (iii) 24,074,269 shares of Common Stock owned by JD
Partnership, L.P. ("JD Partnership") and; (iv) currently exercisable
option on 21,000 shares of Common Stock granted under the Directors Plan.
Does not include an option to purchase 20,000 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) 196,200 shares of Common Stock owned by the William J. Mercer
Trust, of which Mr. Mercer is the trustee and a beneficiary; (ii) 22,500
shares of Common Stock owned by the William J. Mercer IRA Rollover of
which Mr. Mercer has a pecuniary interest; (iii) 7,500 shares of Common
Stock held by the Nikki Mercer IRA Rollover, that Mr. Mercer disclaims any
beneficial interest in and; (iv) currently exercisable option on 300,000
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 300,000 shares of Common Stock that vests over time.
See "Management--Employment Agreements."
(4) Includes 16,000 shares of Common Stock owned by Norman Dean, currently
exercisable option on 8,000 shares of Common Stock under the Directors
Plan, and currently exercisable option on 7,000 shares of Common Stock
91
granted in consideration for service on a special committee of the Board
of Directors. Does not include (i) option on an additional 14,000 shares
of Common Stock granted under the Directors Plan that vests over time and
(ii) option on 3,000 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) Includes: 5,000 shares of Common Stock owned by Mr. Green and currently
exercisable option on 8,000 shares. Does not include an option to purchase
4,000 of Common Stock granted under the Directors Plan that vests over
time.
(6) Includes (i) 94,100 shares of Common Stock owned by Mr. Kelsky and (ii)
currently exercisable option on 8,000 shares of Common Stock granted under
the Directors Plan. Does not include option on an additional 14,000 shares
of Common Stock granted under the Directors Plan that vests over time.
(7) Includes (i) 600 shares of Common Stock owned by Mr. Semedo and (ii)
currently exercisable option on 108,000 shares of Common Stock granted
under the 1996 Option Plan. Does not include option of 72,000 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 exercisable option on 108,000 shares of Common Stock
granted under the 1996 Option Plan. Does not include option of 72,000
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 exercisable option on 108,000 shares of Common Stock
granted under the 1996 Option Plan. Does not include option of 72,000
shares of Common Stock granted under the 1996 Option Plan that vests over
time.
(10) Includes currently exercisable option on 108,001 shares of Common Stock
granted under the 1996 Option Plan. Does not include option on an
additional 71,999 shares of Common Stock granted under the 1996 Option
Plan that vests over time.
(11) Includes currently exercisable option on 110,500 shares of Common Stock
granted under the 1996 Option Plan. Does not include option on an
additional 89,500 shares of Common Stock granted under the 1996 Option
Plan that vests over time.
(12) Includes: (i) 5,000 shares of Common Stock owned by James E. May, and (ii)
a currently exercisable option on 12,500 shares of Common Stock granted
under the 1996 Option Plan. Does not include option on 87,500 shares of
Common Stock granted under the 1996 Option Plan that vests over time.
(13) Includes currently exercisable options on 862,001 shares of Common Stock
granted under the 1996 Option Plan and 45,000 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.
92
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.......................................................... 43
Consolidated Balance Sheet at December 31, 1997 and 1998................................... 44
Consolidated Statement of Operations for the years ended December 31, 1996,
1997 and 1998........................................................................... 45
Consolidated Statement of Cash Flows for the years ended December 31, 1996,
1997 and 1998........................................................................... 46
Consolidated Statement of Stockholders' Equity for the period from
December 31, 1995 to December 31, 1998.................................................. 47
Notes to Consolidated Financial Statements................................................. 48
2. FINANCIAL STATEMENT SCHEDULES:
Schedule II--Valuation and Qualifying Accounts and Reserves for
the three years ended December 31, 1998
Schedule III--Condensed Financial Information of ALARIS Medical,
Inc. as of December 31, 1997 and 1998 and for the three years
ended December 31, 1998.
All other schedules have been omitted because they are
inapplicable, not required or the required information is included
in the financial statements or notes thereto.
3. EXHIBITS:
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- -----------------------
1.0 -- Purchase Agreement July 28, 1998 among ALARIS Medical, Inc.,
ALARIS Medical Systems, Inc., IVAC Overseas Holdings, Inc.,
ALARIS Release Corporation, Bear, Stearns & Co., Inc., BT
Alex. Brown Incorporated and Donaldson, Lufkin & Jenrette
Securities Corporation. (Incorporated by reference to the
Registration Statement on Form S-4 of ALARIS Medical, Inc.
dated December 24, 1998.)
2.1 -- Agreement and Plan of Merger dated June 24, 1998 by and among
ALARIS Medical, Inc., ALARIS Medical Systems, Inc., Herbert J.
and Shirley L. Semler, Instromedix, Inc. and the shareholders
of Instromedix, Inc. (Incorporated by reference to Exhibit 2
(a) to The Company's report on Form 8-K dated July 30, 1998.)
93
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- -----------------------
2.2 -- Agreement to Purchase Selected Assets dated May 18, 1998 among
ALARIS Medical Systems, Inc., Invacare Corporation and Patient
Solutions, Inc. (Incorporated by reference to Exhibit 2.1 (a)
to ALARIS Medical's Form 10-Q for the quarterly period ended
June 30, 1998).
3.1 -- Certificate of Incorporation of Advanced Medical, Inc. and
form of Certificate of Incorporation of Advanced Medical,
Inc., as amended. (Incorporated by reference to Exhibit 3.1(a)
to the Prospectus/Joint Proxy Statement, dated March 3, 1989,
of Fidata Corporation, Advanced Medical, Inc. and Controlled
Therapeutics Corporation included and forming part of the
Registration Statement on Form S-4 of Advanced Medical, Inc.
(the "Prospectus/Joint Proxy Statement")).
3.2 -- By-Laws of Advanced Medical, Inc., as amended. (Incorporated
by reference to Exhibit 3.1(b) to the Prospectus/Joint Proxy
Statement.)
3.3 -- Amendments to Articles First and Fourth of the Restated
Certificate of Incorporation of Advanced Medical, Inc.
(Incorporated by reference to Exhibits A and B to Advanced
Medical Inc.'s Proxy Statement, dated August 15, 1990, for its
Special Meeting of Stockholders held on September 7, 1990).
3.4 -- Amendment to Article Fourth of the Restated Certificate of
Incorporation of Advanced Medical, Inc. (Incorporated by
reference to Annex III to Advanced Medical Inc.'s Proxy
Statement, dated July 25, 1994, for its Special Meeting of
Stockholders held on August 11, 1994).
4.1 -- Indenture dated as of November 26, 1996 among IMED
Corporation, IMED International Trading Corp. and United
States Trust Company of New York, as trustee (including form
of Notes) (Incorporated by reference to Exhibit 10.2 to the AM
December 8-K).
4.2 -- Indenture Assumption Agreement dated as of November 26, 1996
between IVAC Holdings, Inc. and United States Trust Company of
New York, as trustee.*
4.3 -- Supplemental Indenture dated as of November 26, 1996 between
IVAC Overseas Holdings, Inc. and United States Trust Company
of New York, as trustee.*
4.4 -- 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).
94
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- -----------------------
4.9 -- Indenture dated as of July 28, 1998 among ALARIS Medical, Inc.
ALARIS Medical Systems, Inc. and United States Trust Company
of Texas, N.A., as trustee (including form of Notes).
(Incorporated by reference to the Registration Statement on
Form S-4 of ALARIS Medical, Inc. dated December 24, 1998)
4.10 -- Registration Rights Agreement dated as of July 28, 1998 among
ALARIS Medical, Inc., ALARIS Medical Systems, Inc., IVAC
Overseas Holdings, Inc. ALARIS Release Corporation, Bear,
Stearns & Co., Inc., BT Alex. Brown Incorporated and
Donaldson, Lufkin and Jenrette Securities Corporation.
(Incorporated by reference to the Registration Statement on
Form S-4 of ALARIS Medical, Inc. dated December 24, 1998)
10.1 -- Credit Agreement dated as of November 26, 1996 among Advanced
Medical, Inc., IMED Corporation, Various Lending Institutions,
Bankers Trust Company, Banque Paribas and Donaldson, Lufkin &
Jenrette Securities Corporation (Incorporated by reference to
Exhibit 10.1 to the AM December 8-K).
10.2 -- Employment Agreement dated as of August 23, 1996 among William
J. Mercer, IMED Corporation and Advanced Medical, Inc.
(Incorporated by reference to Exhibit 10.4 to the AM December
8-K).
10.3 -- Employment Agreement dated as of August 23, 1996 among Joseph
W. Kuhn, IMED Corporation and Advanced Medical, Inc.
(Incorporated by reference to Exhibit 10.5 to the AM December
8-K).
10.4 -- Advanced Medical, Inc.'s Third Amended and Restated 1988 Stock
Option Plan (Incorporated by reference to Annex IV to Advanced
Medical, Inc.'s Proxy Statement dated July 25, 1994 for its
Special Meeting of Stockholders held on August 11, 1994 (the
"AM August 1994 Proxy Statement")).
10.5 -- Advanced Medical, Inc.'s Second Amended and Restated 1990
Non-Qualified Stock Option Plan for Non-Employee Directors
(Incorporated by reference to Annex V to the AM August 1994
Proxy Statement).
10.6 -- Form of Indemnification Agreements between IVAC Holdings, Inc.
and certain of its directors and officers (Incorporated by
reference to Exhibit 10.2 to IVAC Medical System, Inc.'s
Report on Form 10-Q for the quarter ended June 30, 1996).
10.7 -- Wateridge Plaza Office Building Lease Agreement dated as of
December 1, 1995 between California Public Employees'
Retirement System and IVAC Corporation (Incorporated by
reference to Exhibit 10.12 to IVAC Medical Systems, Inc.'s
Report on Form 10-K for the year ended December 31, 1995 (the
"IVAC 1995 Form 10-K")).
10.8 -- Activity Road Lease Agreement dated as of October 25, 1995
between Rancho Bernardo Corporate Center Ltd. and IVAC
Corporation (Incorporated by reference to Exhibit 10.13 to the
IVAC 1995 Form 10-K).
10.9 -- Kenamar Court Lease Agreement dated as of January 24, 1996
between Brentcrest Properties, Inc. and IVAC Corporation
(Incorporated by reference to Exhibit 10.14 of the IVAC 1995
Form 10-K).
10.10 -- Development and Exclusive Distribution Agreement dated May 8,
1995 between Debiotech SA and IMED Corporation (Incorporated
by reference to Exhibit 10.7 of Amendment No. 2 dated January
31, 1996 to Advanced Medical, Inc.'s Report on Form 10-Q for
the quarter ended September 30, 1995).
95
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- -----------------------
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).
10.19 -- Amendment No. 3 and Consent to the Bank Credit Agreement dated
as of March 4, 1998. (Incorporated by reference to Exhibit
10.1 to the Company's Report on Form 10-Q for the quarter
ended March 31, 1998).
10.20 -- Agreement dated May 7, 1998 among ALARIS Medical Systems, Inc.
and Caesarea Medical Electronics Limited. (Incorporated by
reference to Exhibit 10.1(a) to the Company's Report on Form
10-Q for the quarter ended June 30, 1998).
10.21 -- Agreement to furnish to the Securities and Exchange
Commission, upon request, omitted exhibits and schedules from
the Agreement dated May 7, 1998. (Incorporated by reference to
Exhibit 10.1(b) to the Company's Report on Form 10-Q for the
quarter ended June 30, 1998).
10.22 -- Amendment No. 4 and Consent to the Bank Credit Agreement dated
as of July 7, 1998. (Incorporated by reference to Exhibit 10.1
to the Company's Report on Form 10-Q for the quarter ended
March 31, 1998).
96
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- -----------------------
21 -- List of Subsidiaries of ALARIS Medical, Inc.
23 -- Consent of PricewaterhouseCoopers LLP.
27 -- Financial Data Schedule.
- --------------------------
* Filed as an exhibit to the Registration Statement on Form S-4 (333-18687)
of the Company, IVAC Overseas Holdings, Inc. and IMED International Trading
Corp. dated December 24, 1996.
(b) Report on Form 8-K.
None.
97
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 31, 1999.
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/ WILLIAM C. BOPP Vice President and Chief Financial Officer
- ------------------------------------------------------- (Principal Financial and Accounting Officer)
William C. Bopp
/s/ NORMAN M. DEAN Director
- -------------------------------------------------------
Norman M. Dean
/s/ HENRY GREEN Director
- -------------------------------------------------------
Henry Green
/s/ RICHARD B. KELSKY Director
- -------------------------------------------------------
Richard B. Kelsky
98
ALARIS MEDICAL, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
- -------------------------------------------------------------------------------
(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, 1996............. $ 875 $ 100 $ 3,320 $ (210) $ 4,085
Year ended December 31, 1997............. 4,085 810 - (1,636) 3,259
Year ended December 31, 1998............. 3,259 (75) 245 (483) 2,946
- -------------------------
(1) Represents amount of allowance for doubtful accounts assigned to accounts
receivables acquired in the Merger and the Instromedix acquisition during
the years ended December 31, 1996 and 1998, respectively.
(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,
--------------------------
1997 1998
---------- ----------
Current assets:
Cash................................................................................. $ 66 $ 32
Receivables, prepaid expenses and other current assets............................... 962 1,045
---------- ----------
Total current assets................................................................. 1,028 1,077
Investments in and net advances from subsidiaries........................................ 42,862 125,633
Other investments, at cost............................................................... 26 26
Intangible assets, net................................................................... 1,654 1,594
Other non-current assets................................................................. 3,731 12,979
---------- ----------
$ 49,301 $ 141,309
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................................... $ 115 $ 99
Accrued expenses and other current liabilities....................................... 1,085 1,597
---------- ----------
Total current liabilities............................................................ 1,200 1,696
---------- ----------
Long-term debt........................................................................... 16,152 131,244
---------- ----------
Contingent liabilities and commitments (Note 5)
Stockholders' equity:
Common stock......................................................................... 591 592
Capital in excess of par value....................................................... 148,341 148,762
Accumulated deficit.................................................................. (111,330) (135,769)
Treasury stock....................................................................... (2,027) (2,027)
Other equity......................................................................... (3,626) (3,189)
---------- ----------
31,949 8,369
---------- ----------
$ 49,301 $ 141,309
---------- ----------
---------- ----------
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,
-------------------------------------------
1996 1997 1998
----------- ----------- -----------
General and administrative expense.................................... $ 2,278 $ 1,716 $ 1,702
Restructuring, integration and other non-recurring charges............ - 1,135 -
Interest income....................................................... 950 89 6
Interest expense...................................................... (7,087) (1,290) (6,844)
Debt conversion expense............................................... (10,000) - -
Equity in earnings (loss) of unconsolidated subsidiaries.............. (49,933) (6,974) (19,199)
Other, net............................................................ 716 - -
----------- ----------- -----------
Loss before income taxes and extraordinary item....................... (67,632) (11,026) (27,739)
Income tax benefit.................................................... 2,026 1,400 3,300
----------- ----------- -----------
Loss before extraordinary item........................................ (65,606) (9,626) (24,439)
Extraordinary item:
Loss on early retirement of debt, net of taxes.................... (1,630) - -
----------- ----------- -----------
Net loss.............................................................. (67,236) (9,626) (24,439)
Accumulated deficit at beginning of year.............................. (34,468) (101,704) (111,330)
----------- ----------- -----------
Accumulated deficit at end of year.................................... $ (101,704) $ (111,330) $ (135,769)
----------- ----------- -----------
----------- ----------- -----------
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,
---------------------------------------
1996 1997 1998
---------- ---------- -----------
Net cash used in operating activities..................................... $ (9,222) $ (4,918) $ (25,958)
---------- ---------- -----------
Cash flows from investing activities:
Dividends on IMED redeemable preferred stock.......................... 4,067 - -
Dividends from ALARIS Medical Systems................................. - 2,215 2,216
Proceeds from sale of IMED redeemable preferred stock................. 3,350 - -
Net decrease in restricted cash....................................... 25,000 2,332 -
Proceeds from sale of investments..................................... 2,374 - -
Return of capital investment.......................................... - 148 -
Capital contribution to ALARIS Medical Systems........................ (19,588) (1,595) (81,671)
---------- ---------- -----------
Net cash provided by (used in) investing activities....................... 15,203 3,100 (79,455)
---------- ---------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.............................. - - 109,892
Proceeds from issuance of common stock................................ 40,024 - -
Proceeds from exercise of stock options............................... - 241 275
Debt repaid in merger................................................. (24,116) - -
Debt issuance costs................................................... - - (4,788)
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 (used in) provided by financing activities....................... (4,436) (1,052) 105,379
---------- ---------- -----------
Net increase (decrease) in cash........................................... 1,545 (2,870) (34)
Cash at beginning of year................................................. 1,391 2,936 66
---------- ---------- -----------
Cash at end of year....................................................... $ 2,936 $ 66 $ 32
---------- ---------- -----------
---------- ---------- -----------
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.
NOTE 2--INVESTMENTS IN AND NET ADVANCES FROM SUBSIDIARIES:
ALARIS Medical accounts for its investments in subsidiaries using the
equity method. Under the equity method, investments are carried at cost,
adjusted for ALARIS Medical's proportionate share of their undistributed
earnings or losses. At December 31, 1997 and 1998, investments in and net
advances from subsidiaries is comprised of ALARIS Medical Systems common
ownership interest and advances of $42,862 and $125,633, respectively.
NOTE 3--LONG-TERM DEBT:
The terms and maturities of ALARIS Medical's long-term debt are
described in Note 5 to the Consolidated Financial Statements.
NOTE 4--CASH FLOW INFORMATION:
During 1996, IMED redeemed 335 shares of its 12% Preferred Stock (all
of which was owned by Advanced Medical) from Advanced Medical for $3,350. In
June 1996, Advanced 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 $4,067 during 1996 related to
the 12% Preferred Stock.
The Company sold 433 shares for $2,374 of its Alteon common stock
during 1996. The sale resulted in a realized gain of $686 for the year ended
December 31, 1996.
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.
During 1997 and 1998, ALARIS Medical Systems made dividend payments of
$2,215 and $2,216, respectively, to ALARIS Medical.
NOTE 5--CONTINGENCIES AND LITIGATION:
Contingencies and litigation are described in Note 16 to the
Consolidated Financial Statements.
S-III-4
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
21 List of Subsidiaries of ALARIS Medical, Inc.
23 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule