<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 28, 1997
REGISTRATION NO. 333-18687
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
ALARIS MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3841 13-3800335
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
IVAC OVERSEAS HOLDINGS, INC.
(Exact name of additional registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3841 13-3800332
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
IMED INTERNATIONAL TRADING CORP.
(Exact name of additional registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3841 33-0712032
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
10221 WATERIDGE CIRCLE
SAN DIEGO, CALIFORNIA 92121
(619) 458-7000
(Address, including ZIP Code, and telephone number, including area code,
of each registrant's principal executive offices)
------------------------------
DANIEL A. ETNA, ESQ.
GORDON ALTMAN BUTOWSKY
WEITZEN SHALOV & WEIN
114 WEST 47TH STREET
NEW YORK, NEW YORK 10036
(212) 626-0872
(Name, address, including ZIP Code and telephone number, including area code, of
agent for service)
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: Upon the effectiveness of this registration statement, ALARIS Medical
Systems, Inc. (f/k/a IVAC Holdings, Inc.) will offer to exchange its 9 3/4%
Senior Subordinated Notes due 2006, which will have been registered under the
Securities Act of 1933, as amended, for any and all of its outstanding 9 3/4%
Senior Subordinated Notes due 2006.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 28, 1997
ALARIS MEDICAL SYSTEMS, INC.
OFFER TO EXCHANGE ITS
9 3/4% SENIOR SUBORDINATED NOTES DUE 2006,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT 1933, AS AMENDED,
FOR ANY AND ALL OF ITS OUTSTANDING
9 3/4% SENIOR SUBORDINATED NOTES DUE 2006
------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1997, UNLESS EXTENDED.
--------------------------
ALARIS Medical Systems, Inc. (f/k/a IVAC Holdings, Inc.), a Delaware
corporation (the "Company"), hereby offers (the "Exchange Offer"), upon the
terms and subject to the conditions set forth in this Prospectus and the
accompanying letter of transmittal (the "Letter of Transmittal"), to exchange
$1,000 principal amount of its 9 3/4% Senior Subordinated Notes due 2006 ("New
Notes"), registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to the Registration Statement (as defined) of which
this Prospectus is a part, for each $1,000 principal amount of its outstanding
9 3/4% Senior Subordinated Notes due 2006 ("Old Notes," and, together with New
Notes, "Notes"), of which $200.0 million aggregate principal amount is
outstanding. The form and terms of the New Notes are identical in all material
respects to the form and terms of the Old Notes (which they replace), except
that the New Notes (i) have been registered under the Securities Act and,
therefore, do not bear legends restricting their transfer and (ii) do not
contain certain provisions providing for the payment of Liquidated Damages (as
defined) under certain circumstances relating to the Registration Rights
Agreement (as defined). The New Notes will evidence the same debt as the Old
Notes (which they replace) and, except as set forth in the immediately preceding
sentence, will be entitled to the benefits of the Indenture (as defined), under
which both the Old Notes were, and the New Notes will be, issued. See "The
Exchange Offer" and "Description of Notes."
As a result of the Company's failure to have the Registration Statement (as
defined), of which this Prospectus is a part, declared effective by the
Securities and Exchange Commission (the "Commission") by March 26, 1997, the
Company commenced paying Liquidated Damages on March 27, 1997 to each holder of
Old Notes in an amount equal to $.05 per week per $1,000 principal amount of Old
Notes held by such holder. The Company's obligation to pay the aforesaid
Liquidated Damages terminated as of the date of this Prospectus. See "The
Exchange Offer-- Purpose and Effect of the Exchange Offer."
Interest on the New Notes will accrue from November 26, 1996, the date of
the original issuance of the Old Notes, and will be payable in cash
semi-annually in arrears on June 1 and December 1 of each year, commencing June
1, 1997. No interest will be payable on the Old Notes accepted for exchange. The
Company will not be required to make any mandatory redemption or sinking fund
payment with respect to the New Notes prior to maturity. The New Notes will be
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 herein, plus accrued
and unpaid interest, if any, to the date of redemption. In addition, at any time
prior to December 1, 1999, the Company may, on one or more occasions, redeem up
to $70.0 million in aggregate principal amount of the Notes with any of the net
proceeds of one or more public or private offerings of common stock of (i)
ALARIS Medical, Inc. (f/k/a Advanced Medical, Inc.), a Delaware corporation
("ALARIS Medical"), or any other corporate parent of the Company to the extent
the net proceeds thereof are contributed to the Company as a capital
contribution to common equity or (ii) the Company, in each case, at a redemption
price of 109.75% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the applicable date of redemption; PROVIDED that at least
$130.0 million in aggregate principal amount of the Notes remain outstanding
immediately after the occurrence of each such redemption; PROVIDED, FURTHER,
that, with respect to a private offering of the common stock of the Company,
such common stock shall be issued at a price no lower than the fair market value
thereof, as evidenced by an independent investment banking firm of national
standing delivered to the Trustee (as defined). In the event of a Change of
Control (as defined), the holders of the New Notes will have the right to
require the Company to purchase their New Notes, in whole or in part, at a price
equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid
interest, if any, to the date of purchase. See "Description of Notes--Optional
Redemption" and "--Repurchase at the Option of Holders."
The New Notes will be general unsecured obligations of the Company,
subordinated in right of payment to all existing and future Senior Debt (as
defined) of the Company, including indebtedness pursuant to the New Credit
Facility (as defined). The New Notes will be guaranteed (the "Subsidiary
Guarantees"), jointly and severally, on a full and unconditional senior
subordinated basis by certain of the Company's domestic subsidiaries (which are
the only subsidiaries that guarantee the Company's obligations under the New
Credit Facility) (the "Guaranteeing Subsidiaries"). The Indenture provides that
the obligations of the Guaranteeing Subsidiaries under the Subsidiary Guarantees
are limited to amounts which will not result in the Subsidiary Guarantees being
fraudulent conveyances under applicable law. See "Description of
Notes--Subsidiary Guarantees." As of the date of this Prospectus, the
Guaranteeing Subsidiaries are IMED International Trading Corp., a Delaware
corporation, and IVAC Overseas Holdings, Inc., a Delaware corporation. Each
Guaranteeing Subsidiary is a non-operating company with no significant tangible
assets.
The Subsidiary Guarantees will be subordinated in right of payment to all
existing and future Senior Debt of the Guaranteeing Subsidiaries, including the
guarantees of the Guaranteeing Subsidiaries of the Company's obligations under
the New Credit Facility. At March 31, 1997, the Company had approximately $224.9
million of Senior Debt outstanding and the Guaranteeing Subsidiaries had no
Senior Debt outstanding (excluding guarantees by the Guaranteeing Subsidiaries
of the Company's obligations under the New Credit Facility).
<PAGE>
The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on the
date the Exchange Offer expires (the "Expiration Date"), which will be
, 1997, unless the Exchange Offer is extended. Tenders of Old Notes
may be withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of Old Notes being tendered for exchange. The Exchange Offer,
however, is subject to certain customary conditions which may be waived by the
Company. Old Notes may be tendered only in integral multiples of $1,000. See
"The Exchange Offer."
The Old Notes were sold by IMED Corporation on November 26, 1996 to the
Initial Purchasers (as defined) in a transaction not registered under the
Securities Act in reliance upon an exemption under the Securities Act (the
"Offering"). The Initial Purchasers subsequently placed the Old Notes with
qualified institutional buyers in reliance upon Rule 144A under the Securities
Act ("Rule 144A") and with a limited number of institutional accredited
investors that agreed to comply with certain transfer restrictions and other
conditions. Accordingly, the Old Notes may not be reoffered, resold or otherwise
transferred in the United States unless registered under the Securities Act or
unless an applicable exemption from the registration requirements of the
Securities Act is available. The New Notes are being offered hereunder in order
to satisfy the obligations of the Company and the Guaranteeing Subsidiaries
under the Registration Rights Agreement. See "The Exchange Offer--Purpose and
Effect of the Exchange Offer."
Based on no-action letters issued by the staff of the Commission to third
parties, the Company believes the New Notes issued pursuant to the Exchange
Offer may be offered for resale, resold and otherwise transferred by any holder
thereof (other than any such holder that is an "affiliate" of the Company or
either of the Guaranteeing Subsidiaries within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, PROVIDED that such New Notes are acquired in
the ordinary course of such holder's business and such holder has no arrangement
or understanding with any person to, and does not intend to, participate in the
distribution of such New Notes. See "The Exchange Offer--Purpose and Effect of
the Exchange Offer" and "The Exchange Offer--Resale of the New Notes." Each
broker-dealer (a "Participating Broker-Dealer") that receives New Notes for its
own account pursuant to the Exchange Offer must acknowledge that it will deliver
a prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by such Participating Broker-Dealer
as a result of market-making activities or other trading activities. The Company
and the Guaranteeing Subsidiaries have agreed that, for a period of 180 days
after the Expiration Date, they will make this Prospectus, as it may be amended
or supplemented from time to time, available to any Participating Broker-Dealer
for use in connection with any such resale. See "Plan of Distribution."
Holders of Old Notes not tendered and accepted in the Exchange Offer will
continue to hold such Old Notes and will be entitled to all the rights and
benefits and will be subject to the limitations applicable thereto under the
Indenture and with respect to transfer under the Securities Act. The Old Notes
are designated for trading in the Private Offerings, Resales and Trading through
Automated Linkages ("PORTAL") market. There is no established trading market for
the New Notes. The Company does not currently intend to list the New Notes on
any securities exchange or to seek approval for quotation through any automated
quotation system. Accordingly, there can be no assurance as to the development
or liquidity of any market for the New Notes. Moreover, to the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Old Notes could be adversely affected.
The New Notes will be available initially only in book-entry form and the
Company expects that the New Notes issued pursuant to the Exchange Offer will be
issued in the form of a Global Note (as defined), which will be deposited with,
or on behalf of, The Depository Trust Company (the "Depositary") and registered
in its name or in the name of Cede & Co., its nominee. Beneficial interests in
the Global Note representing the New Notes will be shown on, and transfers
thereof will be effected through, records maintained by the Depositary and its
participants. After the initial issuance of the Global Note, New Notes in
certificated form will be issued in exchange for beneficial interests in the
Global Note only under the limited circumstances set forth in the Indenture. See
"Description of Notes--Book-Entry; Delivery and Form."
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all of the expenses incident to the Exchange Offer. No
dealer-manager is being used in connection with this Exchange Offer. See "Use of
Proceeds" and "Plan of Distribution."
SEE "RISK FACTORS" BEGINNING ON PAGE 20 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING OLD NOTES IN THE
EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1997.
2
<PAGE>
AVAILABLE INFORMATION
The Company and the Guaranteeing Subsidiaries have filed with the Commission
a registration statement on Form S-4 (together with all amendments, exhibits,
schedules and supplements thereto, the "Registration Statement") under the
Securities Act covering the New Notes being offered hereby. This Prospectus does
not contain all the information set forth in the Registration Statement. For
further information with respect to the Company, the Guaranteeing Subsidiaries
and the Exchange Offer, reference is made to the Registration Statement.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document referred to are not necessarily complete. With respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the document or matter involved, and each such statement shall be
deemed qualified in its entirety by such reference.
The Registration Statement, including the exhibits thereto, can be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at the Regional
Offices of the Commission at 75 Park Place, New York, New York 10007 and at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of such
site is http://www.sec.gov.
As a result of the filing of the Registration Statement with the Commission,
the Company and the Guaranteeing Subsidiaries will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith will be required to file
periodic reports and other information with the Commission. The obligation of
the Company and the Guaranteeing Subsidiaries to file periodic reports and other
information with the Commission will be suspended if the Notes are held of
record by fewer than 300 holders as of the beginning of any fiscal year of the
Company and the Guaranteeing Subsidiaries other than the fiscal year in which
the Registration Statement is declared effective. The Company and the
Guaranteeing Subsidiaries will nevertheless be required to continue to file
reports with the Commission if the New Notes are listed on a national securites
exchange. The Company has agreed pursuant to the Indenture that, whether or not
required by the rules and regulations of the Commission, for so long as any
Notes are outstanding, the Company shall furnish to the holders of the Notes (i)
all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" that describes the
financial condition and results of operations of the Company and its Restricted
Subsidiaries (as defined) and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K if the Company was required to file such reports. In addition, whether or
not required by the rules and regulations of the Commission, the Company shall
file a copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. Moreover, the Company and the Guaranteeing Subsidiaries have agreed
that, for so long as any Notes remain outstanding, they will furnish to holders
of the Notes and to securities analysts and prospective investors, upon their
request, the information required to be delivered by Rule 144A(d)(4) under the
Securities Act.
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL
DATA APPEARING ELSEWHERE IN THIS PROSPECTUS AND THE DOCUMENTS REFERRED TO
HEREIN. IMMEDIATELY FOLLOWING THE CLOSING OF THE OFFERING, A SERIES OF MERGERS
(COLLECTIVELY, THE "MERGER") WERE EFFECTED PURSUANT TO WHICH THE OPERATIONS OF
IMED AND IVAC MEDICAL SYSTEMS, INC. ("IVAC MEDICAL SYSTEMS"), FORMERLY KNOWN AS
IVAC CORPORATION AND A SUBSIDIARY OF IVAC HOLDINGS, INC. ("IVAC HOLDINGS"), WERE
TRANSFERRED TO IVAC HOLDINGS AND IVAC HOLDINGS BECAME A WHOLLY OWNED SUBSIDIARY
OF ALARIS MEDICAL. AS A RESULT OF THE MERGER, THE COMPANY BECAME THE SUCCESSOR
OBLIGOR WITH RESPECT TO THE OLD NOTES. REFERENCES HEREIN TO THE "COMPANY" REFER
TO ALARIS MEDICAL SYSTEMS, INC. (F/K/A IVAC HOLDINGS) AFTER THE MERGER.
REFERENCES HEREIN TO "IMED" REFER TO IMED CORPORATION OR IMED CORPORATION AND
ITS SUBSIDIARIES, AS THE CONTEXT MAY REQUIRE, IN EACH CASE PRIOR TO THE MERGER.
REFERENCES HEREIN TO "IVAC" REFER TO IVAC HOLDINGS AND ITS SUBSIDIARIES (OTHER
THAN RIVER MEDICAL, INC. ("RIVER"), THE OPERATIONS OF WHICH WERE DISCONTINUED BY
IVAC IN JUNE 1996 (THE "RIVER DIVESTITURE")) PRIOR TO THE MERGER.
THE COMPANY
The Company is a leading provider of infusion systems and related
technologies to the United States hospital market, with the largest installed
base of pump delivery lines ("channels"). In addition, the Company is a leader
in the international infusion systems market. The Company, based on installed
base of infusion pumps, has a number one or two market position in eleven
Western European countries, the number three market position in Germany and
Italy, the largest installed base of infusion pumps in Australia and Canada, and
a developing position in Latin America and Asia. The Company's infusion systems,
which are used to deliver fluids, generally pharmaceuticals or nutritionals,
accurately and safely to patients, consist of single and multi-channel infusion
pumps and controllers, and proprietary and non-proprietary disposable
administration sets (plastic tubing and pump interfaces). In addition, the
Company is a leading provider of vital signs measurement products that measure
and monitor temperature, pulse and blood pressure, with the largest installed
base of hospital thermometry systems in the United States.
The Company sells a full range of products through a direct sales force
consisting of over 230 salespersons and through more than 150 distributors to
over 5,000 hospitals worldwide. On a pro forma basis, the Company's United
States sales and sales to customers located outside of the United States would
have accounted for approximately 65% and 35%, respectively, of the Company's pro
forma sales for 1996. For the three months ended March 31, 1997, the Company had
sales of approximately $82.0 million and Adjusted EBITDA of approximately $17.8
million. For the year ended December 31, 1996, on a pro forma basis, the Company
would have had sales of approximately $346.3 million and Adjusted EBITDA of
approximately $77.7 million. Adjusted EBITDA represents income from operations
before restructuring charges, non-cash purchase accounting charges and
depreciation and amortization. Adjusted EBITDA does not represent net income or
cash flows, 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 operating performance or as a measure of
liquidity. The Company has included information concerning Adjusted EBITDA
herein because it uses such information as a method of assessing its cash flow
and ability to service debt and believes that such information is also used by
investors as a measure of an issuer's ability to service its debt obligations.
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 similarly titled measures of other companies.
------------------------
The Company has registered or applied to register the following trademarks:
IMED-Registered Trademark-, Accuset-Registered Trademark-,
Graviset-Registered Trademark-, Microset-Registered Trademark-,
Flo-Stop-Registered Trademark-, Gemini-Registered Trademark-, Gemini
PC-1-Registered Trademark-, Gemini PC-2-Registered Trademark-, Gemini
PC-4-Registered Trademark-, Gemini PC-2TX-Registered Trademark-,
PC-1-Registered Trademark-, PC-2-Registered Trademark-,
PC-4-Registered Trademark-, Autotaper-Registered Trademark-,
Versataper-Registered Trademark-, microSTAR-Registered Trademark-,
ReadyMED-Registered Trademark-, VersaSafe-Registered Trademark-,
IVAC-Registered Trademark-, IVAC MEDICAL SYSTEMS-TM-,
CORE-CHECK-Registered Trademark-, DYNAMIC MONITORING-TM-, MEDSYSTEM III-TM-,
PCAM-TM-, SIGNATURE EDITION-TM-, TEMP-PLUS-Registered Trademark-,
VITAL-CHECK-Registered Trademark-, ACCUSLIDE-TM- and SmartSite-TM-.
SAFSITE-Registered Trademark- is a registered trademark of B. Braun, Inc.
4
<PAGE>
Infusion Systems. At December 31, 1996, the Company had approximately
214,000 single and multi-channel large volume infusion pumps installed in the
United States, with a market share of approximately 40% of the installed base of
infusion pump channels in the United States. The Company offers a wide variety
of infusion pumps designed to meet the varying price and technological
requirements of its broad array of customers. These infusion pumps include the
Gemini series, consisting of single, dual and four channel infusion pumps
designed for use in all hospital settings by customers with sophisticated
technological requirements; the Signature Edition system, a versatile,
user-friendly single and dual channel infusion pump for use in general medical
and surgical settings; the MedSystem III instrument ("MS III"), a compact,
lightweight, programmable three channel infusion pump targeted for the hospital
critical care setting; and the 560/570 Series, consisting of single channel
infusion pumps designed for the price-conscious customer. In addition, the
Company offers the ReadyMED ambulatory infusion pump ("ReadyMED"), which is
compact, lightweight and disposable, for use in the alternate site market and a
variety of syringe infusion pumps for use primarily outside the United States.
The Company manufactures higher margin proprietary disposable administration
sets which can only be used with the Company's large volume infusion pumps.
Since the useful life of the Company's infusion pumps is typically seven to ten
years, the Company's industry-leading installed base allows it to generate
stable, predictable and recurring revenues from sales of disposable
administration sets. In 1996, the Company sold, on a pro forma basis,
approximately 49.0 million proprietary and 11.0 million non-proprietary
disposable administration sets. The Company's disposable administration sets
offer protection features designed to prevent the unregulated flow of fluids
into a patient's blood stream ("free flow"). In addition, the Company has
recently introduced several enhancements to its disposable administration sets,
including needleless access systems that are designed to reduce the risk to
health care providers of diseases, such as AIDS and hepatitis, that may be
transmitted through accidental needlesticks and, in the case of the SmartSite
System, to eliminate patient exposure to latex which can cause severe allergic
or anaphylactic shock reactions. These features continue to provide the
Company's customers with the latest cost-effective technology for the Company's
installed base of infusion pumps. For the three months ended March 31, 1997, the
Company's infusion systems sales were approximately $68.9 million or 84.0% of
total sales. For the year ended December 31, 1996, on a pro forma basis, the
Company's infusion systems sales would have been approximately $292.1 million,
representing approximately 84% of the Company's pro forma sales.
Vital Signs Measurement Products. The vital signs measurement products
market consists of discrete market niches, each of which has different
competitive dynamics. The Company primarily operates in the United States,
Canada and Western Europe in two market niches of the vital signs measurement
products market: (i) hospital thermometry systems and (ii) stand-alone,
non-invasive, multi-parameter instruments used to measure and monitor a
combination of temperature, pulse and blood pressure. The Company's large base
of installed hospital thermometry instruments allows it to generate stable,
predictable and recurring revenues from sales of related disposable probe
covers. In 1996, the Company manufactured and sold over 595 million proprietary
disposable probe covers. For the three months ended March 31, 1997, the
Company's vital signs measurement product sales were approximately $7.5 million
or 9.1% of total sales. For the year ended December 31, 1996, on a pro forma
basis, the Company's vital signs measurement products sales would have been
approximately $33.2 million, representing approximately 10% of the Company's pro
forma sales.
At December 31, 1996, the Company's installed base of thermometry
instruments constituted approximately 42% of the United States hospital
electronic and infrared thermometry market, making the Company the largest
provider of hospital thermometry systems in the United States. The Company's
principal thermometry instruments are the TEMP-PLUS II electronic thermometer
and the CORE-CHECK infrared thermometer, both of which are widely used in
hospitals and alternate site settings. The Company is also the second largest
participant in the United States infrared thermometry market, the fastest
growing segment of the hospital thermometry market, and, at December 31, 1996,
had approximately 31% of the United States hospital installed base. In addition,
the Company's hospital installed base of stand-alone, non-invasive,
multi-parameter instruments, which measure and monitor temperature, pulse and
blood pressure, is the second largest in this market niche in the United States.
5
<PAGE>
The Company's principal executive offices are located at 10221 Wateridge
Circle, San Diego, California 92121 and its telephone number is (619) 458-7000.
OPERATING STRATEGY
The Company believes that the Merger will enable it to: (i) significantly
expand the breadth of its product lines; (ii) capitalize on its established
global distribution network; (iii) enhance existing products and introduce new
products through the use of complementary patents and other proprietary
technologies; (iv) benefit from the combined experience of IMED and IVAC
management teams; and (v) identify and realize cost savings through synergies
and economies of scale. The Company believes that these benefits will enable it
to achieve increased sales, profitability and Adjusted EBITDA in future periods.
The Company's goals are to: (i) enhance its worldwide position as a leading
provider of cost-effective, high-quality infusion systems in the hospital
setting; (ii) expand its presence in the alternate site market; (iii) expand its
product lines through strategic acquisitions and alliances; and (iv) increase
sales, profitability and Adjusted EBITDA. In order to achieve these goals,
management will focus on implementing the following strategies:
Expanding Internal Growth. The Company will seek to expand internal growth
by continuing to develop, manufacture and market new products while also making
innovations to its existing product lines in order to respond to evolving
customer preferences, changing market dynamics and technological advancements.
Moreover, the Company will introduce certain of its products to geographic and
user markets that have traditionally not used such products as part of their
therapeutic programs. The Company will strive to introduce and market products
with innovative features that are not presently available while manufacturing
these products at a reasonable cost. The Company is currently developing several
new infusion system products and product line extensions, including: (i) a
modular infusion pump that incorporates innovations in microprocessor and
electromechanical technology and will offer advanced programming features,
compact size and a one to four channel capability; (ii) an electromechanical
ambulatory infusion pump, targeted for both the hospital and alternate site
markets, that is lightweight, compact and capable of performing multiple
therapeutic applications and other advanced functions; and (iii) a single
channel infusion pump designed for the price-conscious customer. The Company
believes that, in addition to increasing revenues from infusion pump sales, to
the extent the introduction of these new infusion pumps increases its installed
base of infusion pumps, the Company will benefit from increased cash flows
attributable to sales of higher margin proprietary disposable administration
sets used in connection with these new infusion pumps. Anticipated additions to
the Company's vital signs measurement product line in the next twelve months
include: (i) a seven-to-ten second electronic thermometer and (ii) a
multi-parameter patient monitoring system, manufactured by Criticare Systems,
Inc., which will provide non-invasive temperature, pulse oximetry and blood
pressure monitoring.
Increasing International Operations. The Company believes that sales of
products outside of the United States represents a significant potential source
of growth. For the three months ended March 31, 1997 sales to customers located
outside the United States represented approximately 37% of the Company's total
sales. For the year ended December 31, 1996, sales to customers of IMED and IVAC
located outside of the United States represented 22% and 41% of their respective
sales. The Company intends to expand its global presence and increase its
penetration in markets where it does not currently enjoy significant market
shares by: (i) cross-selling the full range of IMED and IVAC products to the
Company's expanded customer base; (ii) establishing distribution channels
through strategic partnerships and direct sales forces in countries where the
Company has little or no existing distribution network; (iii) establishing
direct distribution systems in markets where the Company utilizes local
distributors; and (iv) developing products or modifying existing products to
satisfy local market preferences or requirements.
In furtherance of this strategy, the Company, with respect to capitalizing
on cross-selling opportunities, has initiated efforts to register its
consolidated product line in all served countries in Southeast Asia.
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Additionally, the Company is evaluating opportunities for increasing its
international sales focus on vital signs measurement products.
With respect to establishing distribution channels, the Company currently is
assessing candidates to assume the role of its primary sales/distribution
partner for Japan and evaluating the potential for establishing original
equipment manufacturer supply relationships for certain of its products both
domestically and internationally. The Company also has begun to implement its
strategic plan to consolidate its international distributor network by
terminating redundant distributors in a number of countries. Terminated
distributors are being replaced by new or existing distributors or, as in the
case of the Australian market, by an existing direct sales force.
With respect to developing products or modifying existing products to
satisfy local market preferences, the Company has entered into discussions to
distribute a complementary product line manufactured by another company through
its international sales network. In addition, the Company's international
Research and Development/Engineering group (located in the United Kingdom) is
developing several product modifications in response to customer preferences in
the European market, including the P6000 syringe pump, which is based on the
Company's P7000 syringe pump technology platform.
Reducing Production and Operating Costs. The Company will seek to
significantly reduce production and operating costs by eliminating redundant
expenses and by monitoring and controlling fixed and variable operating
expenses. In this regard, the Company has: (i) reduced overall head count
through termination and attrition; (ii) consolidated all of its instrument
manufacturing operations in the United States at the former IVAC facility in San
Diego; (iii) combined its United States and United Kingdom administrative
offices; (iv) consolidated the Company's Canadian sales and distribution
operations; and (v) transferred all disposable-related manufacturing operations
in San Diego to maquiladoras in Mexico. To achieve additional cost reductions,
the Company will focus on: (i) consolidating supply sources and (ii) further
rationalizing underutilized assets.
The Company, as part of its program to consolidate supply sources, has
identified potential savings of over $3.0 million annually from the
consolidation of supply sources and is negotiating to complete the outsourcing
of certain instrument subassembly operations, such as assembly of printed
circuit boards and wiring harnesses. Discussions are also underway to transfer
the manufacture of all disposable products consumed in Europe to European
suppliers. In addition, the Company has notified the operator of its two
existing maquiladora operations in Mexico that it will terminate these
arrangements by the end of 1997. Thereafter, the Company plans to directly
operate a consolidated disposables manufacturing facility in Mexico. Moreover,
conversion to a new, company-wide information management system has been
initiated to provide more flexibility in meeting the Company's changing
information needs, while eliminating costly mainframe outsourcing contracts.
With respect to the further rationalization of underutilized assets, the
Company has initiated steps to close its domestic service depots (other than San
Diego) by the end of the third quarter of 1997 and utilize an outside service
contractor to provide instrument warranty and repair services to its customers
in the United States.
Historically, IVAC's and IMED's executives have demonstrated an ability to
enhance productivity and reduce costs. The Company believes that a low-cost
manufacturer should be well positioned to succeed in the current cost-conscious
health care environment through aggressive pricing while maintaining
profitability.
Capitalizing on Strategic Acquisitions. The Company intends to supplement
internal growth by engaging in strategic product, technology and business
acquisitions focused primarily on complementing the Company's existing product
lines. Acquisition candidates will be assessed primarily based on: (i)
opportunities for improving the Company's established United States and
international sales presence; (ii) market leadership potential; (iii) ability to
increase the Company's revenue per account; (iv) ability to
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access niche markets; and (v) synergy with the Company's existing technological
base and manufacturing capabilities. The acquisition of products used in the
alternate site market will also be a priority.
The Company has retained Bear, Stearns & Co. Inc. to assist it in
identifying potential acquisition targets which will provide additional synergy
with existing operations and product lines. The Company has not yet identified
any specific acquisition target. The Company intends to support its acquisition
strategy by utilizing funding available under the New Credit Facility. If such
funding is insufficient, the Company may consider various conventional means for
raising capital including, without limitation, a public or private offering of
the common stock of ALARIS Medical or additional Senior Debt. See "Risk
Factors-- Significant Leverage."
FUNDING OF THE MERGER AND RELATED TRANSACTIONS
IMED, a wholly owned subsidiary of ALARIS Medical prior to the Merger, used
the net proceeds of the Offering, borrowings of $204.2 million under the New
Credit Facility, the proceeds of a capital contribution (the "Capital
Contribution") of approximately $19.6 million from ALARIS Medical and existing
cash balances to: (i) pay the cash portion of the Merger Consideration (as
defined); (ii) refinance (the "Refinancing") IMED's and IVAC's existing bank
indebtedness; (iii) repurchase the Existing Senior Notes (as defined) pursuant
to the Debt Tender Offer and Consent Solicitation (as defined); (iv) repay the
13.2% Junior Subordinated Notes due 2006 of IVAC Holdings (the "Junior Notes
Repayment"); and (v) pay transaction fees and expenses.
The Capital Contribution was funded in part through the sale to Decisions
Incorporated ("Decisions") by ALARIS Medical of 13,333,333 shares of its common
stock for aggregate proceeds of $40.0 million (the "Decisions Contribution").
Decisions is wholly owned by Jeffry M. Picower, a Director and Chairman of the
Board of ALARIS Medical and the Company. For further information regarding
Decisions and Mr. Picower, see "Risk Factors--Control of the Company,"
"Management--Directors and Key Executive Officers" and "Principal Stockholders."
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 approximately $22.0 million principal amount of its 15% Subordinated
Debentures due 1999 and fund the redemption of ALARIS Medical's outstanding
preferred stock. Mr. Picower, Decisions and JA Special Partnership Limited ("JA
Special"), the sole general partner of which is Mr. Picower, owned a portion of
the 15% Subordinated Debentures due 1999 and the preferred stock so redeemed. In
connection with the Decisions Contribution, Decisions exchanged an aggregate of
$37.5 million in principal amount of convertible promissory notes issued by
ALARIS Medical for 29,416,086 shares of ALARIS Medical common stock.
The Merger, the Offering, the Capital Contribution, the Refinancing, the
Debt Tender Offer and Consent Solicitation and the Junior Notes Repayment are
collectively referred to herein as the "Transactions."
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THE OFFERING
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NOTES........................................ The Old Notes were sold by IMED on November
26, 1996 to Donaldson, Lufkin & Jenrette
Securities Corporation, BT Securities
Corporation, Bear, Stearns & Co. Inc. and
Paribas Corporation (collectively, the
"Initial Purchasers") pursuant to a purchase
agreement dated November 19, 1996 (the
"Purchase Agreement") by and among IMED, IMED
International Trading Corp. and the Initial
Purchasers. The Initial Purchasers
subsequently resold the Old Notes to
qualified institutional buyers pursuant to
Rule 144A and to a limited number of
institutional accredited investors that
agreed to comply with certain transfer
restrictions and other conditions. See "The
Exchange Offer-- Purpose and Effect of the
Exchange Offer."
RANKING...................................... The Old Notes are general unsecured
obligations of the Company, subordinated in
right of payment to all existing and future
Senior Debt of the Company, including
indebtedness pursuant to the New Credit
Facility. At March 31, 1997, the Company had
approximately $424.9 million of indebtedness
outstanding, of which $224.9 million
constituted Senior Debt. See "Description of
Notes-- Subordination."
REGISTRATION RIGHTS AGREEMENT................ Pursuant to the Purchase Agreement, IMED,
IMED International Trading Corp. and the
Initial Purchasers entered into a
registration rights agreement dated as of
November 26, 1996 (the "Registration Rights
Agreement"), which grants the holders of the
Old Notes certain exchange and registration
rights. The Exchange Offer is intended to
satisfy such exchange rights which terminate
upon the consummation of the Exchange Offer.
See "The Exchange Offer--Purpose and Effect
of the Exchange Offer."
THE EXCHANGE OFFER
SECURITIES OFFERED........................... $200.0 million in aggregate principal amount
of 9 3/4% Senior Subordinated Notes due 2006,
which have been registered under the
Securities Act. The form and terms of the New
Notes will be identical in all material
respects to the form and terms of the Old
Notes, except that the New Notes (i) have
been registered under the Securities Act and,
therefore, will not bear legends restricting
their transfer and
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(ii) do not contain certain provisions
providing for the payment of Liquidated
Damages under certain circumstances relating
to the Registration Rights Agreement. The New
Notes will evidence the same debt as the Old
Notes and, except as set forth in the
immediately preceding sentence, will be
entitled to the benefits of the Indenture,
under which both the Old Notes were, and the
New Notes will be, issued. See "Description
of Notes--General."
THE EXCHANGE OFFER........................... $1,000 principal amount of New Notes in
exchange for each $1,000 principal amount of
Old Notes that are validly tendered and not
withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. As of the date
hereof, $200.0 million aggregate principal
amount of the Old Notes are outstanding. The
Company will issue the New Notes to holders
as promptly as practicable following the
Expiration Date.
RESALE....................................... Based on no-action letters issued by the
staff of the Commission to third parties, the
Company believes the New Notes issued
pursuant to the Exchange Offer may be offered
for resale, resold and otherwise transferred
by any holder thereof (other than any such
holder that is an "affiliate" of the Company
or either of the Guaranteeing Subsidiaries
within the meaning of Rule 405 under the
Securities Act) without compliance with the
registration and prospectus delivery
provisions of the Securities Act, PROVIDED
that such New Notes are acquired in the
ordinary course of such holder's business and
such holder has no arrangement or
understanding with any person to, and does
not intend to, participate in the
distribution of such New Notes.
Any Participating Broker-Dealer that acquired
Old Notes for its own account as a result of
market-making activities or other trading
activities may be a statutory underwriter.
Each Participating Broker-Dealer that
receives New Notes for its own account
pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus
in connection with any resale of such New
Notes. The Letter of Transmittal states that
by so acknowledging and by delivering a
prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an
"underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time,
may be used by a Participating Broker-Dealer
in connection with
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resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired
by such Participating Broker-Dealer as a
result of market-making activities or other
trading activities.
The Company and the Guaranteeing Subsidiaries
have agreed that, for a period of 180 days
after the Expiration Date, they will make
this Prospectus, as it may be amended or
supplemented from time to time, available to
any Participating Broker-Dealer for use in
connection with any such resale. See "Plan of
Distribution."
Any holder who tenders Old Notes in the
Exchange Offer with the intention to
participate, or for the purpose of
participating, in a distribution of the New
Notes may not rely on the position of the
staff of the Commission enunciated in the
aforesaid no-action letters and, in the
absence of an exemption therefrom, must
comply with the registration and prospectus
delivery requirements of the Securities Act
in connection with any secondary resale
transaction. Failure to comply with such
requirements in such instance may result in
such holder incurring liability under the
Securities Act for which the holder is not
indemnified by the Company and the
Guaranteeing Subsidiaries.
EXPIRATION DATE.............................. The Exchange Offer will expire at 5:00 p.m.,
New York City time, on , 1997,
unless extended, in which case the term
"Expiration Date" shall mean the latest date
and time to which the Exchange Offer is
extended.
ACCRUED INTEREST ON THE NEW NOTES AND
THE OLD NOTES.............................. Each New Note will bear interest from
November 26, 1996, the date of the original
issuance of the Old Notes. No interest will
be paid on the Old Notes accepted for
exchange.
CONDITIONS TO THE EXCHANGE OFFER............. The Exchange Offer is subject to certain
customary conditions, which may be waived by
the Company. See "The Exchange
Offer--Conditions." The Exchange Offer is not
conditioned upon any minimum principal amount
of Old Notes being tendered.
PROCEDURES FOR TENDERING OLD NOTES........... Each holder of Old Notes wishing to accept
the Exchange Offer must transmit a properly
completed Letter of Transmittal, (or a
facsimile thereof) or an Agent's Message (as
defined), in accordance with the instructions
contained herein and therein, together with
such Old Notes and any other required
documentation to the Exchange
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Agent (as defined), at one of the addresses
set forth herein and therein. By executing
the Letter of Transmittal (or a facsimile
thereof) or delivering an Agent's Message,
each holder of Old Notes will represent to
the Company and the Guaranteeing Subsidiaries
that, among other things (i) the New Notes
being acquired pursuant to the Exchange Offer
are being obtained in the ordinary course of
business of the person receiving such New
Notes, whether or not such person is the
holder; and (ii) neither the holder nor any
such other person (A) has any arrangement or
understanding with any person to participate
in the distribution of such New Notes or is
engaging or intends to engage in the
distribution of such New Notes; or (B) is an
"affiliate" of the Company or either of the
Guaranteeing Subsidiaries within the meaning
of Rule 405 under the Securities Act. Each
Participating Broker-Dealer that receives New
Notes for its own account in exchange for Old
Notes must acknowledge that it (i) acquired
the Old Notes for its own account as a result
of market-making activities or other trading
activities; (ii) has not entered into any
arrangement or understanding with the Company
or any "affiliate" of the Company or either
of the Guaranteeing Subsidiaries within the
meaning of Rule 405 under the Securities Act
to distribute the New Notes to be received in
the Exchange Offer; and (iii) will deliver a
prospectus meeting the requirements of the
Securities Act in connection with any resale
of such New Notes. See "Plan of
Distribution," "The Exchange Offer--Purpose
and Effect of the Exchange Offer" and
"--Procedures for Tendering."
SHELF REGISTRATION STATEMENT................. If (i) any holder of Old Notes (A) is
prohibited by law or Commission policy from
participating in the Exchange Offer; (B) may
not resell the New Notes acquired by it in
the Exchange Offer to the public without
delivering a prospectus and this Prospectus,
as it may be amended or supplemented from
time to time, is not appropriate or available
for such resales; or (C) is a Participating
Broker-Dealer and owns Old Notes acquired
directly from the Company or an affiliate of
the Company or either of the Guaranteeing
Subsidiaries and (ii) such holder has
satisfied certain conditions relating to the
provision of information to the Company for
use therein, the Company and the Guaranteeing
Subsidiaries have agreed to register such Old
Notes
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<S> <C>
on a shelf registration statement (the "Shelf
Registration Statement") and use their
respective best efforts to cause it to be
declared effective by the Commission on or
prior to 120 days after the date on which the
Company and the Guaranteeing Subsidiaries
became obligated to file the Shelf
Registration Statement. The Company and the
Guaranteeing Subsidiaries have agreed to
maintain the effectiveness of the Shelf
Registration Statement for, under certain
circumstances, a maximum of three years, to
cover resales of Old Notes held by any such
holders. See "The Exchange Offer--Purpose and
Effect of the Exchange Offer."
SPECIAL PROCEDURES FOR BENEFICIAL OWNERS..... Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other
nominee and who wishes to tender such Old
Notes in the Exchange Offer should contact
such registered holder promptly and instruct
such registered holder to tender on such
beneficial owner's behalf. If such beneficial
owner wishes to tender on his own behalf,
such beneficial owner must, prior to
transmitting a properly completed Letter of
Transmittal (or facsimile thereof) or an
Agent's Message and delivering his Old Notes
to the Exchange Agent, either make
appropriate arrangements to register
ownership of the Old Notes in such beneficial
owner's name or obtain a properly completed
bond power from the registered holder.
The transfer of registered ownership may take
considerable time and may not be able to be
completed prior to the Expiration Date. See
"The Exchange Offer--Procedures for
Tendering."
GUARANTEED DELIVERY PROCEDURES............... Holders of Old Notes who wish to tender their
Old Notes and whose Old Notes are not
immediately available or who cannot deliver
their Old Notes, the Letter of Transmittal
(or a facsimile thereof) or an Agent's
Message, or any other documents required by
the Letter of Transmittal to the Exchange
Agent (or comply with the procedures for
book-entry transfer) prior to the Expiration
Date, must tender their Old Notes according
to the guaranteed delivery procedures set
forth in "The Exchange Offer--Guaranteed
Delivery Procedures."
ACCEPTANCE OF OLD NOTES AND DELIVERY
OF NEW NOTES............................... Subject to certain conditions (as described
more fully in "The Exchange
Offer--Conditions"), the Company will accept
for exchange any and all Old Notes which are
properly tendered in the Exchange
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Offer and not withdrawn, prior to 5:00 p.m.,
New York City time, on the Expiration Date.
The New Notes issued pursuant to the Exchange
Offer will be delivered as promptly as
practicable following the Expiration Date.
WITHDRAWAL RIGHTS............................ Except as otherwise provided herein, tenders
of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on
the Expiration Date. See "The Exchange
Offer--Withdrawal of Tenders."
ABSENCE OF APPRAISAL OR DISSENTERS' RIGHTS... Holders of Old Notes do not have any
appraisal or dissenters' rights under the
Delaware General Corporation Law or the
Indenture in connection with the Exchange
Offer. See "The Exchange Offer--Terms of the
Exchange Offer--General."
EXCHANGE AGENT............................... United States Trust Company of New York.
UNTENDERED OLD NOTES......................... Holders of Old Notes eligible to participate
in the Exchange Offer but who do not tender
their Old Notes will not have any further
exchange rights and such Old Notes will
continue to be subject to certain
restrictions on transfer. Accordingly, the
liquidity of the market for such Old Notes
could be adversely affected.
FEDERAL INCOME TAX CONSEQUENCES.............. The exchange of Old Notes for New Notes will
not be a taxable exchange for United States
federal income tax purposes. See "Certain
Federal Income Tax Consequences."
CONSEQUENCES OF FAILURE TO EXCHANGE
OLD NOTES.................................. Holders of Old Notes who do not exchange
their Old Notes for New Notes pursuant to the
Exchange Offer will continue to be subject to
the restrictions on transfer of such Old
Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes
pursuant to exemptions from, or in
transactions not subject to, the registration
requirements of the Securities Act and
applicable state securities laws. In general,
the Old Notes may not be offered or sold,
unless registered under the Securities Act,
except pursuant to an exemption from, or in a
transaction not subject to, the Securities
Act and applicable state securities laws. The
Company does not currently anticipate that it
will register Old Notes under the Securities
Act. See "The Exchange Offer--Consequences of
Failure to Exchange."
USE OF PROCEEDS.............................. There will be no cash proceeds to the Company
from the exchange pursuant to the Exchange
Offer.
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The net proceeds from the Offering were used,
together with borrowings under the New Credit
Facility, the proceeds from the Capital
Contribution and existing cash balances, to
pay the cash portion of the Merger
Consideration, consummate the Refinancing,
the Debt Tender Offer and Consent
Solicitation and the Junior Notes Repayment,
and pay transaction fees and expenses. See
"Use of Proceeds."
THE NEW NOTES
GENERAL...................................... The Exchange Offer applies to $200.0 million
aggregate principal amount of Old Notes. The
form and terms of the New Notes will be
identical in all material respects to the
form and terms of the Old Notes, except that
the New Notes (i) have been registered under
the Securities Act and, therefore, will not
bear legends restricting their transfer and
(ii) do not contain certain provisions
providing for the payment of Liquidated
Damages under certain circumstances relating
to the Registration Rights Agreement. The New
Notes will evidence the same debt as the Old
Notes and, except as set forth in the
immediately preceding sentence, will be
entitled to the benefits of the Indenture,
under which both the Old Notes were, and the
New Notes will be, issued. See "Description
of Notes--General."
SECURITIES OFFERED........................... $200.0 million in aggregate principal amount
of 9 3/4% Senior Subordinated Notes due 2006,
which have been registered under the
Securities Act.
MATURITY DATE................................ December 1, 2006.
INTEREST PAYMENT DATES....................... June 1 and December 1, commencing June 1,
1997.
MANDATORY REDEMPTION......................... The Company will not be required to make
mandatory redemption or sinking fund payments
with respect to the New Notes.
OPTIONAL REDEMPTION.......................... The New Notes will be 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 herein, plus
accrued and unpaid interest, if any, to the
date of redemption. In addition, at any time
prior to December 1, 1999, the Company may,
on one or more occasions, redeem up to $70.0
million in aggregate principal amount of the
Notes with any of the net proceeds of one or
more public or private offerings of common
stock of (i) ALARIS Medical or any other
corporate parent
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of the Company to the extent the net proceeds
thereof are contributed to the Company as a
capital contribution to common equity or (ii)
the Company, in each case, at a redemption
price of 109.75% of the principal amount
thereof, plus accrued and unpaid interest, if
any, to the date of redemption; PROVIDED that
at least $130.0 million in aggregate
principal amount of the Notes remain
outstanding immediately after the occurrence
of each such redemption; PROVIDED, FURTHER,
that, with respect to a private offering of
the common stock of the Company, such common
stock shall be issued at a price no lower
than the fair market value thereof, as
evidenced by an appraisal from an independent
investment banking firm of national standing
delivered to the Trustee. See "Description of
Notes--Optional Redemption."
CHANGE OF CONTROL............................ In the event of a Change of Control, each
holder of the New Notes will have the right
to require the Company to purchase such
holder's New Notes at 101% of the principal
amount thereof, plus accrued and unpaid
interest, if any, to the date of repurchase.
The source of funds for any such purchase
will be dependent upon the Company's
available cash or cash generated from
operating or other sources, including
borrowing, sales of assets, sales of equity
or funds provided by a new controlling
person. There can be no assurance, however,
that sufficient funds will be available at
the time of any Change of Control to make the
required repurchases of Notes tendered, or
that, if applicable, restrictions in the New
Credit Facility will allow the Company to
make such required repurchases. See "Risk
Factors--Possible Inability to Repurchase
Notes upon a Change of Control" and
"Description of Notes--Repurchase at the
Option of Holders--Change of Control."
RANKING...................................... The New Notes will be general unsecured
obligations of the Company, subordinated in
right of payment to all existing and future
Senior Debt of the Company, including
indebtedness pursuant to the New Credit
Facility. At March 31, 1997, the Company had
approximately $224.9 million of Senior Debt
outstanding. See "Description of
Notes--Subordination."
SUBSIDIARY GUARANTEES........................ The New Notes will be guaranteed, jointly and
severally, on a full and unconditional senior
subordinated basis by each of the
Guaranteeing Subsidiaries. Each Guaranteeing
Subsidiary is a
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non-operating company with no significant
tangible assets. The Subsidiary Guarantees
will be subordinated in right of payment to
all existing and future Senior Debt of the
Guaranteeing Subsidiaries, including the
guarantees of the Guaranteeing Subsidiaries
of the Company's obligations under the New
Credit Facility. At March 31, 1997, the
Guaranteeing Subsidiaries had no Senior Debt
outstanding (excluding guarantees by the
Guaranteeing Subsidiaries of the Company's
obligations under the New Credit Facility).
The Indenture provides that the obligations
of the Guaranteeing Subsidiaries under the
Subsidiary Guarantees are limited to amounts
which will not result in the Subsidiary
Guarantees being fraudulent conveyances under
applicable law. See "Description of
Notes--Subsidiary Guarantees."
CERTAIN COVENANTS............................ The Indenture pursuant to which the Old Notes
were, and the New Notes will, be issued
contains covenants that, among other things:
(i) limit the incurrence by the Company and
its Restricted Subsidiaries of additional
indebtedness; (ii) limit the issuance by the
Company and the Guaranteeing Subsidiaries of
Disqualified Stock (as defined) and the
issuance by Restricted Subsidiaries that are
not Guaranteeing Subsidiaries of preferred
stock; (iii) restrict the ability of the
Company and its Restricted Subsidiaries to
make dividends and other restricted payments
or investments; (iv) limit the ability of the
Company and its Restricted Subsidiaries to
enter into sale-leaseback transactions; (v)
limit transactions by the Company and its
Restricted Subsidiaries with affiliates; (vi)
limit the ability of the Company and its
Restricted Subsidiaries to make asset sales;
(vii) limit the ability of the Company and
its Restricted Subsidiaries to incur certain
liens; and (viii) limit the ability of the
Company to consolidate or merge with or into,
or to transfer all or substantially all of
its assets to, another person. See "Risk
Factors--Certain Covenants."
</TABLE>
RISK FACTORS
Holders of Old Notes should carefully consider the matters set forth under
the caption "Risk Factors" and all other information set forth in this
Prospectus before making a decision to tender their Old Notes in the Exchange
Offer.
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SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The summary statement of operations and other data for the year ended
December 31, 1996 and the three months ended March 31, 1997, and the summary pro
forma unaudited Statement of Operations and other data for the year ended
December 31, 1996 and the balance sheet data at March 31, 1997 set forth below
(the "Summary Financial Data") is qualified in its entirety by reference to, and
should be read in conjunction with, the Consolidated Financial Statements and
the Pro Forma Condensed Consolidated Financial Statements included elsewhere in
this Prospectus. The pro forma Summary Financial Data does not purport to
represent what the Company's results of operations would have been if any of the
Transactions had actually occurred at such dates nor does such data purport to
represent the Company's results of operations for any future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
-------------------------- ENDED MARCH 31,
PRO FORMA ---------------
(UNAUDITED) (UNAUDITED)
1996 1996 1997
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales............................................................. $ 136,371 $ 346,348 $ 81,995
Gross margin...................................................... 57,729 161,580 35,025
Restructuring and special item(1)................................. 59,277 -- 2,517
Lease interest income(2).......................................... 2,501 4,601 1,162
Income (loss) from operations..................................... (43,608) 44,439 5,179
Interest expense.................................................. 6,303 40,384 10,370
Net income (loss)................................................. (50,674) 298 (3,301)
Ratio of earnings to fixed charges(3)............................. -- 1.1x --
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: AT MARCH 31, 1997
---------------------
(UNAUDITED)
<S> <C>
Cash...................................................................................... $ 14,635
Working capital.......................................................................... 74,750
Total assets............................................................................. 582,145
Long-term debt (including current portion)............................................... 424,925
Stockholder's equity..................................................................... 44,631
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
-------------------------- ENDED MARCH 31,
PRO FORMA ---------------
(UNAUDITED) (UNAUDITED)
1996 1996 1997
<S> <C> <C> <C>
OTHER DATA:
Adjusted EBITDA(4)................................................ $ 29,023 $ 77,675 $ 17,573
Cash interest expense(5).......................................... 5,190 37,990 9,781
Depreciation and amortization..................................... 10,453 32,686 8,844
Capital expenditures(6)........................................... 9,502 20,251 4,882
Net cash provided by operating activities(7)...................... 16,676 -- 10,605
Net cash used in investing activities(7).......................... 241,411 -- 4,868
Net cash provided by financing activities(7)...................... 233,742 -- 125
Ratio of Adjusted EBITDA to cash interest expense................. 5.6x 2.0x 1.8x
</TABLE>
- ------------------------
(1) Restructuring and special items include one-time restructuring and
integration charges and a non-cash purchased in-process research and
development charge.
(2) Lease/contract interest income consists of interest income associated with
contracts or agreements pursuant to which a third party acquires infusion
pumps either (i) under sales-type leases or (ii) at no or reduced initial
cost, by paying a premium (a
18
<PAGE>
portion of which is recorded by the Company in accordance with generally
accepted accounting principles as interest income) for subsequent purchases
of disposable administration sets.
(3) For purposes of determining the ratio of earnings to fixed charges, earnings
includes pre-tax income adjusted for fixed charges. Fixed charges consist of
interest on all indebtedness, estimated interest component of rental expense
and amortization of deferred financing costs. As a result of losses,
earnings would have been inadequate to cover fixed charges by $49,404 for
the year ended December 31, 1996 and by $5,201 for the three months ended
March 31, 1997.
(4) Adjusted EBITDA represents income (loss) from operations before
restructuring charges, non-recurring, non-cash purchase accounting charges,
depreciation and amortization. Adjusted EBITDA does not represent net income
or cash flows, as these terms are defined under generally accepted
accounting principles, and should not be considered as an alternative to net
income as an indicator of the Company's operating performance or to cash
flows as a measure of liquidity. The Company has included information
concerning Adjusted EBITDA herein because it uses such information as a
method of assessing its cash flow and ability to service debt and
understands that such information is also used by certain investors as one
measure of an issuer's historical ability to service debt.
(5) Cash interest expense excludes $1,113, actual, and $2,394, pro forma, of
debt issuance cost amortization for the year ended December 31, 1996 and
$589, actual, for the three months ended March 31, 1997.
(6) The pro forma capital expenditures represent the combined capital
expenditures of IMED and IVAC for 1996.
(7) Pro forma cash flow information related to operating, investing and
financing activities has not been included as it is not required and
computation of such pro formas measures is not practicable.
19
<PAGE>
RISK FACTORS
HOLDERS OF OLD NOTES SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN
ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS BEFORE TENDERING
THEIR OLD NOTES IN THE EXCHANGE OFFER. THE RISK FACTORS SET FORTH BELOW (OTHER
THAN "FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES COULD ADVERSELY AFFECT
HOLDERS" AND "CONSEQUENCES OF FAILURE TO EXCHANGE AND REQUIREMENTS FOR TRANSFER
OF NEW NOTES") ARE GENERALLY APPLICABLE TO THE OLD NOTES, AS WELL AS THE NEW
NOTES.
SIGNIFICANT LEVERAGE
As a result of the Transactions, the Company has substantial indebtedness
and significant debt service obligations. At March 31, 1997, the Company had
approximately $424.9 million of indebtedness outstanding, approximately $582.1
million of total assets, approximately $279.3 million of total tangible assets
and approximately $44.6 million of stockholder's equity. See "Pro Forma
Condensed Consolidated Financial Statements." The Company believes that it will
generate sufficient cash flow from operations to fund its operations, make
planned capital expenditures and make required payments of principal and
interest under the New Credit Facility and interest on the Notes; however, the
Company may not generate sufficient cash flow from operations to repay the Notes
at maturity. Accordingly, the Company may have to refinance the Notes at or
prior to maturity or sell assets or raise equity capital to repay the principal
amount of the Notes. No assurance can be given that any such debt or equity
financing will be available to the Company on acceptable terms, if at all. 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 prevailing economic conditions, availability of other sources of
liquidity, and financial, business, regulatory and other factors affecting the
Company's business and operations. Futhermore, ALARIS Medical has guaranteed the
New Credit Facility and, accordingly, any failure by ALARIS Medical to pay
interest on its outstanding indebtedness or to repay such indebtedness at or
prior to maturity would cause a default under the New Credit Facility which, in
turn, could cause a default under the Notes. ALARIS Medical currently has
outstanding $16.2 million of indebtedness pursuant to its 7 1/4% Convertible
Subordinated Debentures due 2002 (the "Convertible Debentures") and has no
significant operations other than operations conducted through the Company. As a
result, ALARIS Medical will be dependent on dividends or advances from the
Company or proceeds from additional equity offerings to fund its debt service
obligations. The Indenture and the New Credit Facility do not restrict
distributions to ALARIS Medical to pay interest on the Convertible Debentures;
provided that, with respect to the New Credit Facility, there exists no default
or event of default under the New Credit Facility. The Indenture and the New
Credit Facility do, however, limit the ability of the Company to pay dividends
and make other distributions to ALARIS Medical to repay the Convertible
Debentures at maturity. If the Company is prohibited from funding the repayment
of the Convertible Debentures at maturity, ALARIS Medical could seek to
refinance the Convertible Debentures or to repay the Convertible Debentures with
proceeds from the sale of additional equity; no assurance can be given, however,
that any such refinancing or equity offering could be consummated on acceptable
terms, if at all.
The Company's high degree of leverage may have important consequences to the
holders of the Notes including, without limitation, the following: (i) a
substantial portion of the Company's net cash provided by operations is
committed to the payment of the Company's interest expense and principal
repayment obligations and is not available to the Company for its operations,
capital expenditures, acquisitions or other purposes; (ii) the Company's ability
to obtain additional financing in the future for working capital, capital
expenditures or acquisitions may be limited; (iii) the Company is more highly
leveraged than certain of its competitors, which may place it at a disadvantage
and limit the Company's flexibility in reacting to changes in its business. In
addition the Company's borrowings under the New Credit Facility bear interest at
variable rates, which could result in higher interest expense if interest rates
rise. A one percent increase in the rate of interest charged on indebtedness
outstanding under the New Credit Facility
20
<PAGE>
at December 31, 1996 would result in additional annual interest expense of
approximately $2.3 million. As required by the New Credit Facility, the Company
has entered into an interest rate protection agreement covering 50% of its term
loan borrowings. See "Description of Notes" and "Description of New Credit
Facility."
LIMITATIONS IMPOSED BY CERTAIN INDEBTEDNESS
The documents governing the outstanding indebtedness of the Company
(including the Indenture and the New Credit Facility) contain significant
covenants that limit the Company's and its subsidiaries' ability to engage in
various transactions and, in the case of the New Credit Facility, require
satisfaction of specified financial performance criteria. In addition, under
each of the foregoing documents, the occurrence of certain events (including,
without limitation, failure to comply with the foregoing covenants, material
inaccuracies of representations and warranties, certain defaults under or
acceleration of other indebtedness and events of bankruptcy or insolvency)
would, in certain cases after notice and grace periods, constitute an event of
default permitting acceleration of the indebtedness covered by such documents.
The limitations imposed by the documents governing the outstanding indebtedness
of the Company and its subsidiaries are substantial, and failure to comply with
them could have a material adverse effect on the Company and its subsidiaries.
See "Description of Notes--Certain Covenants" and "--Events of Default and
Remedies" and "Description of New Credit Facility--Certain Covenants" and
"--Events of Default."
SUBORDINATION
The payment of principal, premium, if any, and interest on the Notes is
subordinated to the prior payment in full of all existing and future Senior Debt
of the Company, including indebtedness under the New Credit Facility, and,
therefore, in the event of the bankruptcy, liquidation or reorganization of the
Company, the assets of the Company will not be available to pay obligations
under the Notes until all such Senior Debt has been paid in full. Furthermore,
any payment with respect to a Subsidiary Guarantee also is subordinated to the
payment of Senior Debt of that Guaranteeing Subsidiary, including the
Guaranteeing Subsidiary's guarantee of the Company's obligations under the New
Credit Facility. As a result, there may not be sufficient assets remaining after
such bankruptcy, liquidation or reorganization to pay amounts due on the Notes.
At March 31, 1997, the Company had approximately $224.9 million of Senior Debt
outstanding and the Guaranteeing Subsidiaries had no Senior Debt outstanding
(excluding guarantees by the Guaranteeing Subsidiaries of the Company's
obligations under the New Credit Facility).
The subordination provisions of the Indenture provide that no payment may be
made by the Company with respect to the Notes upon the occurrence of a default
in the payment of principal, premium, if any, or interest on certain Designated
Senior Debt (as defined) beyond any applicable grace period. In addition, upon
the occurrence of any other event entitling the holders of such Designated
Senior Debt to accelerate the maturity thereof and receipt by the Trustee of
written notice of such occurrence, the holders of such Designated Senior Debt
will be able to block payment on the Notes for specified periods of time. If the
Company fails to make any payment on the Notes when due or within any applicable
grace period, whether or not on account of the payment blockage provisions
referred to above, such failure would constitute an event of default under the
Indenture and would entitle the holders of the Notes to accelerate the maturity
thereof. See "Description of Notes--Subordination."
The Notes are also effectively subordinated to all existing and future
liabilities of the Company's subsidiaries that are not Guaranteeing
Subsidiaries. The Notes, on the date of the Indenture, were and continue to be,
guaranteed by certain of the Company's domestic subsidiaries and were not, and
continue not to be, guaranteed by any of the Company's foreign subsidiaries. See
"Description of Notes--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock."
21
<PAGE>
POSSIBLE INABILITY TO REPURCHASE NOTES UPON A CHANGE OF CONTROL
The New Credit Facility prohibits the Company from purchasing any of the
Notes and also provides that certain change of control events with respect to
the Company and ALARIS Medical constitute a default thereunder. Any future
credit agreements or other agreements relating to Senior Debt to which the
Company becomes a party may contain similar restrictions and provisions. In the
event a Change of Control occurs at a time when the Company is prohibited from
purchasing the Notes, the Company could seek the consent of its lenders to the
purchase of the Notes or could attempt to refinance the borrowings that contain
such prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing the Notes by the
relevant Senior Debt. In such case, the Company's failure to purchase the
tendered Notes would constitute an event of default under the Indenture which
would, in turn, constitute a default under the New Credit Facility and/or other
Senior Debt. In such circumstances, the subordination provisions in the
Indenture would likely restrict payments to the holders of the Notes.
Furthermore, the source of funds for any such purchase will be dependent upon
the Company's available cash or cash generated from operating or other sources,
including borrowing, sales of assets, sales of equity or funds provided by a new
controlling person. There can be no assurance that the Company will have
sufficient resources to satisfy its purchase obligation with respect to the
Notes following a Change of Control. See "Description of Notes--Repurchase at
the Option of Holders--Change of Control."
ABILITY TO SUCCESSFULLY INTEGRATE IMED AND IVAC
The integration and consolidation of IMED and IVAC following the Merger
requires substantial management, financial and other resources and may pose
risks with respect to production, other operations, customer service and market
share. While the Company believes it has sufficient financial and management
resources to accomplish this integration, there can be no assurance in this
regard or that the Company will not experience difficulties with customers,
personnel or others. In addition, although the Company believes that the Merger
will enhance its competitive position and business prospects, there can be no
assurance that such benefits will be realized or that the combination of IMED
and IVAC will be successful.
As the Company adapts to the current health care environment and integrates
IMED and IVAC subsequent to the Merger, it has made and will make further
operational changes, including consolidating certain operations, in order to
improve the future profitability of the Company. However, there can be no
assurance that the Company will recognize improved profitability as a result of
such operational changes. In addition, these actions may result in significant
disruption to the Company's operations, which could have a material adverse
effect on the Company's business.
DEPENDENCE ON NEW PRODUCTS AND MARKETS; UNCERTAIN PACE OF TECHNOLOGICAL CHANGE
The primary markets for the Company's products are relatively mature and
highly competitive. The Company's success is therefore dependent on the
development of new infusion technologies and the development of other markets
for its products. The Company's older infusion therapy and thermometry product
lines have experienced declining sales and market share recently, primarily due
to competitors who 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. See "--Substantial Competition" and
"Business--Competition." 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
"Business--Products and Services." Moreover, there can be no assurance that the
Company's efforts to take advantage of opportunities it perceives in the
alternate site and international markets will be successful. In addition,
although the pace of technological
22
<PAGE>
change in the Company's industry historically has been relatively slow, the
Company is unable to predict the pace of such change in the future. There can be
no assurance that technological change will not place one or more of the
Company's existing or proposed products at a significant competitive
disadvantage. Additionally, to the extent the Company does not successfully
reposition existing products for sale to different markets, the introduction of
new products by the Company will reduce sales of such existing products.
SUBSTANTIAL 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
broader range of their medical equipment and supplies than the Company,
including infusion systems and intravenous solutions used with such systems; a
strategy that the Company is currently unable to and may continue to be unable
to pursue. There can be no assurance that such competition will not adversely
affect the Company's results of operations or ability to maintain or increase
sales and market share. See
"--Dependence on New Products and Markets; Uncertain Pace of Technological
Change," "--Concentration of Buying Power" and "Business--Competition."
CONCENTRATION OF BUYING POWER
Many existing and potential customers for the Company's products have
combined into group purchasing organizations ("GPOs") which are quite large and
which effectively police compliance with exclusive purchase commitments. GPOs
often enter into exclusive purchase commitments with as few as one or two
providers of infusion systems and/or vital signs measurement products for a
period of several years. If the Company is not one of the selected providers, it
may be precluded from making sales to members of a GPO for several years and, in
certain situations, the GPO may require removal of the Company's existing
installed infusion pumps, which would result in a loss of the related disposable
administration set sales. Even if the Company is one of the selected providers,
the Company may be at a disadvantage relative to other selected providers which
are able to offer volume discounts based on "bundled" purchases or a broader
range of medical equipment and supplies. Further, the Company may be required to
commit to pricing which has a material adverse effect on net sales and profit
margins. In addition, many of the Company's competitors may have advantages over
the Company in competing for GPOs' business. See "--Substantial Competition" and
"Business--Competition."
RELIANCE ON PATENTS AND PROPRIETARY RIGHTS; EXPIRATION AND PROTECTION OF
SIGNIFICANT PATENTS
The Company relies heavily on patented and other proprietary technology.
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. Legal standards relating to the scope of claims are
still evolving in the courts and no assurance can be given as to the degree of
protection that will be accorded the Company's patents in the future.
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 cost of prosecuting or defending patent
validity or infringement issues. See "Business--Patents, Trademarks and
Proprietary Rights" and "Business--Legal Proceedings."
23
<PAGE>
The United States patent code was recently amended. As a result, certain
statutory remedies for patent infringement are no longer available for a medical
practitioner's otherwise infringing performance of a medical activity. As
defined in the United States patent code, medical activity does not include "the
use of a patented machine, manufacture or composition of matter in violation of
such patent." The aforesaid amendment does not apply to patents issued before
September 30, 1996. Legislation which would have prohibited the issuance of
patents directed to surgical and medical procedures did not pass in the 104th
Congress and no such legislation presently is pending.
GOVERNMENT REGULATION
Government regulation is a significant factor in the research, development,
testing, production and marketing of the Company's products. 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, refusal of the government to
allow new products to be marketed, civil penalties or fines and criminal
prosecution. There can be no assurance that the Company's existing products will
be found to comply with such regulations or that new products will be approved
in a timely manner or at all. See "Business--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, as well as manufacturing procedures, labelling, 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. Current regulations depend heavily on administrative
interpretation and there can be no assurance that interpretations made by the
FDA or other regulatory bodies will not adversely affect the Company. The FDA
and state agencies routinely inspect the Company to determine whether the
Company is in compliance with various regulations relating to manufacturing
practices, testing, quality control and product labelling. Such
audits/inspections can result in the agencies requiring the Company to take
certain corrective actions for non-complying conditions observed during the
audits/inspections. A determination that the Company is in violation of such
regulations could lead to the imposition of civil sanctions, including fines,
recall orders or product seizures and criminal sanctions. Since 1992, the
Company has on thirteen occasions removed products from the market that were
found not to meet acceptable standards. None of such recalls materially
interfered with the Company's operations and all such product lines were
subsequently returned to the market. Two such product recalls, both of which are
voluntary, related to the Company's Signature Edition and Gemini PC-1 infusion
pumps, have not been closed with the FDA. In addition, the Company has initiated
a voluntary safety alert of its (i) P1000, P2000, P3000 and P4000 syringe pumps,
which are marketed internationally, and (ii) Model 599 Series infusion pumps
(which the Company discontinued selling in March 1997). The Company continues to
sell administration sets and replacement parts for the Model 599 Series infusion
pump. Moreover, the Company will initiate a voluntary field correction 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. There can be no assurance that the Company will not
remove additional products from the market in the future. See
"Business--Government Regulation."
The Company has received ISO 9000 certification for certain of its
facilities regarding the quality of its manufacturing systems, a requirement for
doing business in European Community ("EC") countries, and is in the process of
applying for ISO 9000 certification for the balance of its manufacturing
facilities. The Company has been granted approval to affix the CE mark, pursuant
to the EC Medical Device Directives on certain of its products. This does not
necessarily preclude, however, additional restrictions on marketing in any
individual country in the EC.
24
<PAGE>
Certain countries will require the Company to obtain clearances for its
products prior to marketing the products in those countries. In addition,
certain countries impose product specifications, standards or other requirements
which differ from or are in addition to those mandated in the United States. The
EC and certain other countries are in the process of developing new modes of
regulating medical products which may result in lengthening the time required to
obtain permission to market new products. These changes could have a material
adverse effect on the Company's ability to market its devices in such countries
and could hinder or delay the successful implementation of the Company's planned
international expansion. In addition, since MS III does not meet European
standards for resistance to electromagnetic and radio frequency interference, it
is currently not marketed in Europe. See "Business--Government Regulation."
HEALTH CARE REFORM
Because the cost of health care delivery has been steadily rising and
because the cost of a significant portion of medical care in the United States
and other countries is typically funded by governmental insurance programs,
there have been a number of government initiatives to reduce health care costs.
Congress and various state legislatures currently are proposing changes in law
and regulation that could effect major restructuring of the health care
industry. Although many of these proposals may seek to maintain or expand access
to health care services, the common objective of the proposed legislation is to
achieve cost containment in the health care sector. Changes in governmental
support of health care services, the methods by which such services are
delivered, the prices for such services, or the regulations governing such
services or mandated benefits, as well as the growth of managed care
organizations, may all have a material adverse effect on the Company's net sales
and expenses. Even if the ultimate impact of any such changes on net sales is
positive, no assurance can be given that the costs of complying with possible
new requirements would not have a negative impact on the Company's future
earnings. No assurance can be given that any such legislation will not have a
material adverse effect on the Company's business and results of operations. In
addition, the Company believes that the trend toward cost containment in the
health care industry resulted in a change of protocol at certain hospitals
whereby the maximum time between changes of disposable administration sets
increased from every 24 hours to as much as every 72 hours. Unless sales of
disposable administration sets increase because of an increased installed base
of infusion pumps, this change in protocol, which the Company expects other
hospitals will adopt, will have an adverse effect on the Company's business and
results of operations. Moreover, this change in protocol and other changes in
the United States health care market which may occur in the future could force
the Company to alter its approach in selling, marketing, distributing and
servicing its customer base. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company," "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
IVAC" and "Business--Government Regulation."
PRODUCT LIABILITY
The Company faces an inherent business risk of exposure to product liability
claims in the event that the use of its products is alleged to have resulted in
injury or other adverse effects. The Company currently maintains product
liability insurance coverage but there can be no assurance that the Company will
be able to obtain such insurance on acceptable terms in the future, if at all,
or that any such insurance will provide adequate coverage against potential
claims. Current product liability insurance for products which constituted the
IMED product line provides for a deductible of $100,000 per occurrence, a
deductible cap of $500,000 per year, and a coverage limitation of $25.0 million
per occurrence and in the aggregate. Current product liability insurance for
products which constituted the IVAC product line provides for a deductible of
$100,000 per occurrence, a deductible cap of $500,000 per year, and a coverage
limitation of $5.0 million per occurrence and, together with other policies
taken out by IVAC, maximum aggregate coverage of $30.0 million per year. Each of
IMED's and IVAC's insurance excludes coverage for punitive damages.
25
<PAGE>
The Company's financial condition and its ability to market and sell its
products could be adversely affected by a successful product liability claim.
CONTROL OF THE COMPANY
The Company is a wholly owned subsidiary of ALARIS Medical which is
indirectly controlled through Decisions, JD Partnership, L.P ("JD Partnership")
and JA Special by Jeffry M. Picower. Mr. Picower is (i) the sole stockholder and
sole Director of Decisions, which is the sole general partner of JD Partnership,
(ii) the sole general partner of JA Special and (iii) a Director and executive
officer of each of ALARIS Medical and the Company. Mr. Picower beneficially
owns, indirectly through Decisions, JD Partnership and JA Special, approximately
79% of ALARIS Medical's common stock. Accordingly, Mr. Picower has the power to
elect all of the Company's Directors, appoint new management, determine the
outcome of any action requiring the approval of the holders of the Company's
common stock, including adopting amendments to the Company's certificate of
incorporation, and approve mergers or sales of all of the Company's assets. See
"Management--Directors and Key Executive Officers" and "Principal Stockholders."
DEPENDENCE ON KEY PERSONNEL
The Company's business is managed by a small number of key executive
officers, the loss of certain of whom could have a material adverse effect on
the Company. The Company believes that its future success will depend in large
part on its continued ability to attract and retain highly skilled and qualified
personnel. Upon consummation of the Merger, the Company's Chief Executive
Officer entered into an employment contract with ALARIS Medical and the Company
for an initial term of five years. In March 1997, the Company's Chief Financial
Officer resigned. The Company has initiated a nationwide recruitment search to
find a qualified replacement. The Company does not presently maintain "key man"
life insurance with respect to any executive officer or other employee of the
Company. See "Management--Employment Agreements."
FOREIGN OPERATIONS
A substantial portion of the Company's sales and earnings are attributable
to operations conducted abroad. See "Business--International Operations." In
addition, the Company's current operating strategy contemplates expansion of the
Company's international operations. See "Business--Operating Strategy--
Increasing International Operations." Foreign operations are subject to special
risks that can materially affect the sales, profits and cash flows of the
Company, including currency exchange rate devaluations and fluctuations, the
impact of inflation, exchange controls, labor unrest, political instability,
export duties and quotas, domestic and international customs and tariffs,
unexpected changes in regulatory environments, potentially adverse tax
consequences and other risks. Changes in certain exchange rates could have an
adverse effect on the Company's ability to meet interest and principal
obligations with respect to its United States dollar-denominated debt and could
also have a material adverse effect on the Company.
MATERIAL LEGAL PROCEEDING
The Company is a defendant in a lawsuit filed in June 1996 by Sherwood (as
defined) against IVAC. The lawsuit, which is pending in the United States
District Court for the Southern District of California, alleges infringement of
two Sherwood patents by reason of certain activities including the sale by IVAC
of disposable probe covers for use with infrared tympanic thermometers. The
lawsuit seeks injunctive relief, treble damages and the recovery of costs and
attorney fees. The discovery phase of the lawsuit has recently commenced. The
Company is currently unable to quantify its exposure in the lawsuit. The Company
believes it has sufficient defenses to all claims by Sherwood, including the
defenses of noninfringement and invalidity. However, there can be no assurance
that the Company will successfully defend all claims made by Sherwood and the
failure of the Company to successfully prevail in this lawsuit could have a
material
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adverse effect on the Company's operations, business and financial condition.
See "Business--Legal Proceedings."
FRAUDULENT TRANSFER CONSIDERATIONS
The incurrence by the Company of indebtedness such as the Old Notes to
finance the Merger may be subject to review under relevant state and federal
fraudulent conveyance laws if a bankruptcy case or lawsuit is commenced by or on
behalf of unpaid creditors of the Company. The Company believes that the
indebtedness represented by the Old Notes was incurred for proper purposes and
in good faith. Notwithstanding the Company's belief, however, if a court of
competent jurisdiction in a suit by an unpaid creditor or representative of
creditors (such as a trustee in bankruptcy or debtor-in-possession) were to find
that, at the time of the issuance of the Old Notes, the Company was insolvent,
was rendered insolvent by reason of such incurrence, was engaged in a business
or transaction for which its remaining assets constituted unreasonably small
capital, intended to incur, or believed that it would incur debts beyond its
ability to pay such debts as they matured, or intended to hinder, delay or
defraud its creditors, and that the indebtedness was incurred for less than
reasonably equivalent value, then such court could, among other things: (i) void
all or a portion of the Company's obligations to the holders of the Notes, the
effect of which would be that the holders of the Notes may not be repaid in full
or at all and/or (ii) subordinate the Company's obligations to the holders of
the Notes to other existing and future indebtedness of the Company, the effect
of which would be to entitle such other creditors to be paid in full before any
payment could be made on the Notes.
ENFORCEABILITY OF SUBSIDIARY GUARANTEES
The Company's obligations under the Notes will be guaranteed, jointly and
severally, on a full and unconditional senior subordinated basis by each of the
Guaranteeing Subsidiaries. Each Guaranteeing Subsidiary is a non-operating
company with no significant tangible assets. The Company believes that the
Subsidiary Guarantees were incurred for proper purposes and in good faith.
Notwithstanding the Company's belief however, if a court of competent
jurisdiction in a suit by an unpaid creditor or representative of creditors
(such as a trustee in bankruptcy or debtor-in-possession) were to find that, at
the time of the incurrence of a Subsidiary Guarantee, a Guaranteeing Subsidiary
was insolvent, was rendered insolvent by reason of such issuance, was engaged in
a business or transaction for which its remaining assets constituted
unreasonably small capital, intended to incur, or believed that it would incur,
debts beyond its ability to pay such debts as they matured, or intended to
hinder, delay or defraud its creditors, and that the indebtedness was incurred
for less than reasonably equivalent value, then such court could, among other
things: (i) void all or a portion of such Guaranteeing Subsidiary's obligations
to the holders of the Notes, the effect of which would be that the holders of
the Notes may not be repaid in full or at all and/or (ii) subordinate such
Guaranteeing Subsidiary's obligations to the holders of the Notes to other
existing and future indebtedness of such Guaranteeing Subsidiary, the effect of
which would be to entitle such other creditors to be paid in full before any
payment could be made on the Notes. Among other things, a legal challenge of a
Subsidiary Guarantee on fraudulent conveyance grounds may focus on the benefits,
if any, realized by the Guaranteeing Subsidiary as a result of the issuance by
the Company of the Old Notes. The Indenture provides that the obligations of the
Guaranteeing Subsidiaries under the Subsidiary Guarantees are limited to amounts
which will not result in the Subsidiary Guarantees being fraudulent conveyances
under applicable law. See "Description of Notes--Subsidiary Guarantees."
FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES COULD ADVERSELY AFFECT HOLDERS
To participate in the Exchange Offer, holders of Old Notes must transmit a
properly completed Letter of Transmittal (or a facsimile thereof) or an Agent's
Message and all other documents required by such Letter of Transmittal to the
Exchange Agent at one of the addresses set forth below under "The Exchange
Offer--Exchange Agent" prior to 5:00 p.m., New York City time, on the Expiration
Date. In addition
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(i) certificates for Old Notes tendered must be received by the Exchange Agent
prior to 5:00 p.m., New York City time, on the Expiration Date; (ii) a
Book-Entry Confirmation (as defined) of such Old Notes, if such procedure is
available, into the Exchange Agent's account at the Book-Entry Transfer Facility
(as defined) must be received by the Exchange Agent prior to 5:00 p.m., New York
City time, on the Expiration Date; or (iii) the holder of such Old Notes must
comply with the guaranteed delivery procedures described herein. See "The
Exchange Offer--Procedures for Tendering."
CONSEQUENCES OF FAILURE TO EXCHANGE AND REQUIREMENT FOR TRANSFERS OF NEW NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register Old Notes under the Securities Act. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Old Notes could be adversely affected.
See "The Exchange Offer--Consequences of Failure to Exchange."
Based on no-action letters issued by the staff of the Commission to third
parties, the Company believes the New Notes issued pursuant to the Exchange
Offer may be offered for resale, resold and otherwise transferred by any holder
thereof (other than any such holder that is an "affiliate" of the Company or
either of the Guaranteeing Subsidiaries within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, PROVIDED that such New Notes are acquired in
the ordinary course of such holder's business and such holder has no arrangement
or understanding with any person to, and does not intend to, participate in the
distribution of such New Notes.
Any Participating Broker-Dealer that acquired Old Notes for its own account
as a result of market-making activities or other trading activities may be a
statutory underwriter. Each Participating Broker-Dealer that receives New Notes
for its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by such Participating Broker-Dealer
as a result of market-making activities or other trading activities.
The Company and the Guaranteeing Subsidiaries have agreed that, for a period
of 180 days after the Expiration Date, they will make this Prospectus, as it may
be amended or supplemented from time to time, available to any Participating
Broker-Dealer for use in connection with any such resale. See "Plan of
Distribution."
If (i) any holder of Old Notes (A) is prohibited by law or Commission policy
from participating in the Exchange Offer; (B) may not resell the New Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus and this Prospectus, as it may be amended or supplemented from time
to time, is not appropriate or available for such resales; or (C) is a
Participating Broker-Dealer and owns Old Notes acquired directly from the
Company or an affiliate of the Company or either of the Guaranteeing
Subsidiaries and (ii) such holder has satisfied certain conditions relating to
the provision of information to the Company for use therein, the Company and the
Guaranteeing Subsidiaries have agreed to register such Old Notes pursuant to the
Shelf Registration Statement and to use their respective best efforts to cause
it
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to be declared effective by the Commission on or prior to 120 days after the
date on which the Company and the Guaranteeing Subsidiaries became obligated to
file the Shelf Registration Statement. The Company and the Guaranteeing
Subsidiaries have agreed to maintain the effectiveness of the Shelf Registration
Statement for, under certain circumstances, a maximum of three years, to cover
resales of Old Notes held by such holders. See "The Exchange Offer--Purpose and
Effect of the Exchange Offer."
LACK OF PUBLIC MARKET FOR NEW NOTES
The New Notes are being offered to the holders of the Old Notes. The Old
Notes were issued in November 1996 to a small number of qualified institutional
buyers and institutional accredited investors, and are eligible for trading in
the PORTAL market. There is no existing market for the New Notes, and the
Company does not intend to apply for listing of the New Notes on any securities
exchange or the Nasdaq National Market. There can be no assurance regarding the
future development of a market for the New Notes, the liquidity of any market
that may develop for the New Notes, the ability of holders of the New Notes to
sell their New Notes, or the price at which holders would be able to sell their
New Notes. In the event that a market for the New Notes develops, future trading
prices of the New Notes will depend on many factors, including, among other
things, prevailing interest rates, the Company's operating results and the
market for similar securities. As a result, the New Notes could trade at prices
above or below either their purchase price or face value.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward-looking
statements." Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or industry results to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions, both domestic and foreign;
industry capacity; demographic changes; existing government regulations and
changes in, or the failure to comply with, government regulations; legislative
proposals for health care reform; liability and other claims asserted against
the Company; competition; the loss of any significant customers; changes in
operating strategy or development plans; the ability to attract and retain
qualified personnel; the significant indebtedness of the Company after the
Merger; the successful integration of IMED's and IVAC's operations following the
Merger; the availability and terms of capital to fund the expansion of the
Company's business; and other factors referenced in this Prospectus. Certain of
these factors are discussed in more detail elsewhere in this Prospectus,
including, without limitation, under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company," "Management's Discussion and Analysis of
Financial Condition and Results of Operations of IVAC" and "Business." GIVEN
THESE UNCERTAINTIES, PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by IMED on November 26, 1996 to the Initial
Purchasers pursuant to the Purchase Agreement. The Initial Purchasers
subsequently resold the Old Notes only to "qualified institutional buyers" (as
defined in Rule 144A) in compliance with Rule 144A and to a limited number of
other institutional "accredited investors" (as defined in Rule 501(a)(1), (2),
(3) or (7) under the Securities Act) that, prior to their purchase of Old Notes,
delivered to the Initial Purchasers a letter containing certain representations
and agreements. As a condition to the Purchase Agreement, IMED, IMED
International Trading Corp. and the Initial Purchaser entered into the
Registration Rights Agreement.
Immediately subsequent to the Merger, the Company entered into a series of
assumption agreements under which it assumed all of the obligations of IMED (i)
under the Registration Rights Agreement; (ii) under the Old Notes and the
Indenture; and (iii) under the Purchase Agreement. In addition, immediately
subsequent to the Merger, IVAC Overseas Holdings, Inc. executed and delivered
(i) a supplemental indenture under which it agreed to guarantee the Notes on a
senior subordinated basis; (ii) a registration rights assumption agreement under
which IVAC Overseas Holdings, Inc. became a party to the Registration Rights
Agreement; and (iii) a purchase agreement assumption under which IVAC Overseas
Holdings, Inc. became a party to the Purchase Agreement.
Under existing interpretations of the staff of the Commission contained in
several no-action letters issued to third parties, the New Notes would in
general be freely tradeable after the Exchange Offer without further
registration under the Securities Act. However, any holder of Old Notes who is
an "affiliate" of the Company or either of the Guaranteeing Subsidiaries within
the meaning of Rule 405 under the Securities Act, or who intends to participate
in the Exchange Offer for the purpose of distributing New Notes (i) will not be
able to rely on the aforesaid interpretations of the staff of the Commission;
(ii) will not be able to tender its Old Notes in the Exchange Offer; and (iii)
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or transfer of the its Old Notes,
unless such sale or transfer is made pursuant to an exemption from such
requirements.
As contemplated by the aforesaid no-action letters and the Registration
Rights Agreement, each holder accepting the Exchange Offer is required to
represent to the Company and the Guaranteeing Subsidiaries pursuant to the
Letter of Transmittal that, among other things (i) the New Notes being acquired
pursuant to the Exchange Offer are being obtained in the ordinary course of
business of the person receiving such New Notes, whether or not such person is
the holder; and (ii) neither the holder nor any such other person (A) has any
arrangement or understanding with any person to participate in the distribution
of such New Notes or is engaging or intends to engage in the distribution of
such New Notes; or (B) is an "affiliate" of the Company or either of the
Guaranteeing Subsidiaries within the meaning of Rule 405 under the Securities
Act. Each Participating Broker-Dealer that receives New Notes for its own
account in exchange for Old Notes must acknowledge that it (i) acquired the Old
Notes for its own account as a result of market-making activities or other
trading activities; (ii) has not entered into any arrangement or understanding
with the Company or any "affiliate" of the Company or either of the Guaranteeing
Subsidiaries within the meaning of Rule 405 under the Securities Act to
distribute the New Notes to be received in the Exchange Offer; and (iii) will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes. For a description of the
procedures for such resales by Participating Broker-Dealers, see "Plan of
Distribution."
Pursuant to the Registration Rights Agreement, the Company and the
Guaranteeing Subsidiaries agreed to file with the Commission the Registration
Statement, of which this Prospectus is a part, covering the Exchange Offer. If
(i) the Company is not permitted to consummate the Exchange Offer because the
Exchange Offer is not permitted by applicable law or Commission policy or (ii)
any holder of Transfer Restricted Securities (as defined) notifies the Company,
within the 20 business day time period specified in
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the Registration Rights Agreement, that (A) it is prohibited by law or
Commission policy from participating in the Exchange Offer; (B) that it may not
resell the New Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus and this Prospectus, as it may be amended or
supplemented from time to time, is not appropriate or available for such
resales; or (C) that it is a Participating Broker-Dealer and owns Old Notes
acquired directly from the Company or an affiliate of the Company or either of
the Guaranteeing Subsidiaries, the Company and the Guaranteeing Subsidiaries
will file with the Commission a Shelf Registration Statement to cover resales of
the Old Notes by the holders thereof who satisfy certain conditions relating to
the provision of information in connection with the Shelf Registration
Statement. The Company will, in the event of the filing of the Shelf
Registration Statement, provide to each applicable holder of Old Notes copies of
the prospectus which is a part of the Shelf Registration Statement; notify each
such holder when the Shelf Registration Statement has become effective and take
certain other actions as are required to permit unrestricted resales of the Old
Notes covered thereby. A holder of Old Notes that sells such Old Notes pursuant
to the Shelf Registration Statement generally will be required to be named as a
selling securityholder in the related prospectus and to deliver a prospectus to
purchasers; will be subject to certain civil liability provisions under the
Securities Act in connection with such sales and will be bound by the provisions
of the Registration Rights Agreement which are applicable to such a holder
(including certain indemnification obligations). In addition, each holder of Old
Notes will be required to deliver information to be used in connection with the
Shelf Registration Statement and to provide comments on the Shelf Registration
Statement within the time periods set forth in the Registration Rights Agreement
in order to have its Old Notes included in the Shelf Registration Statement and
to benefit from the provisions contained in the Registration Rights Agreement
regarding Liquidated Damages.
For purposes of the foregoing, "Transfer Restricted Securities" means each
Old Note until the earlier of (i) the date on which such Old Note has been
exchanged by a person other than a Participating Broker-Dealer for a New Note in
the Exchange Offer; (ii) following the exchange by a Participating Broker-Dealer
in the Exchange Offer of an Old Note for a New Note, the date on which such New
Note is sold to a purchaser who receives from such Participating Broker-Dealer
on or prior to the date of such sale a copy of this Prospectus, as it may be
amended or supplemented from time to time; (iii) the date on which such Old Note
has been effectively registered under the Securities Act and disposed of in
accordance with the Shelf Registration Statement; or (iv) the date on which such
Old Note is distributed to the public pursuant to Rule 144 under the Act.
The Registration Rights Agreement requires, among other things, that (i) the
Company and the Guaranteeing Subsidiaries use their respective best efforts to
have the Registration Statement, of which this Prospectus is a part, declared
effective by the Commission no later than March 26, 1997; (ii) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Company will commence the Exchange Offer and use its best efforts to issue
on or prior to 30 days after the date on which the Registration Statement was
declared effective by the Commission, New Notes in exchange for all Old Notes
tendered prior thereto in the Exchange Offer; (iii) if obligated to file the
Shelf Registration Statement, the Company and the Guaranteeing Subsidiaries will
file the Shelf Registration Statement with the Commission on or prior to 45 days
after such filing obligation arises and use their respective best efforts to
cause the Shelf Registration to be declared effective by the Commission on or
prior to 120 days after such obligation arises; and (iv)(A) in certain
circumstances, cause the Registration Statement to remain effective and usable
for a period of 180 days following the initial effectiveness thereof and (B)
cause the Shelf Registration Statement to remain effective and usable for a
period of three years following the initial effectiveness thereof or such
shorter period ending when all the Old Notes available for sale thereunder have
been sold. If (a) the Company and the Guaranteeing Subsidiaries fail to file any
of the registration statements required by the Registration Rights Agreement on
or before the date specified for such filing; (b) any of such registration
statements is not declared effective by the Commission on or prior to the date
specified for such effectiveness; or (c) the Company fails to consummate the
Exchange Offer within 30 business days after the date on which the Registration
Statement is declared effective; or (d) the Shelf Registration Statement or the
Registration Statement is declared effective but
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thereafter ceases to be effective or usable in connection with resales of
Transfer Restricted Securities during the periods specified in the Registration
Rights Agreement (each such event referred to in clauses (a) through (d) above a
"Registration Default"), then the Company will pay liquidated damages
("Liquidated Damages") to each holder of Old Notes, with respect to the first
90-day period immediately following the occurrence of such Registration Default
in an amount equal to $.05 per week per $1,000 principal amount of Old Notes
held by such holder. The amount of the Liquidated Damages will increase by an
additional $.05 per week per $1,000 principal amount of Old Notes with respect
to each subsequent 90-day period until all Registration Defaults have been
cured, up to a maximum amount of Liquidated Damages of $.50 per week per $1,000
principal amount of Old Notes. All accrued Liquidated Damages will be paid by
the Company on each interest payment date to the Global Note Holder (as defined)
by wire transfer of immediately available funds or by federal funds check and to
holders of Certificated Securities (as defined) by wire transfer to the accounts
specified by them or by mailing checks to their registered addresses if no such
accounts have been specified. Following the cure of all Registration Defaults,
the accrual of Liquidated Damages will cease.
As a result of the Company's failure to have the Registration Statement, of
which this Prospectus is a part, declared effective by the Commission by March
26, 1997, the Company commenced paying Liquidated Damages on March 27, 1997 to
each holder of Old Notes in an amount equal to $.05 per week per $1,000
principal amount of Old Notes held by such holder. The Company's obligation to
pay the aforesaid Liquidated Damages terminated as of the date of this
Prospectus.
The Exchange Offer is not being made to, nor will the Company accept
surrenders for exchange from, holders of Old Notes in any jurisdiction in which
this Exchange Offer or the acceptance thereof would not be in compliance with
the securities or blue sky laws of such jurisdiction.
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to participate. Holders of the Old Notes are urged to
consult their financial and tax advisors in making their own decisions on
whether to participate in the Exchange Offer.
The Old Notes are designated for trading in the PORTAL market. To the extent
Old Notes are tendered and accepted in the Exchange Offer, the principal amount
of outstanding Old Notes will decrease with a resulting decrease in the
liquidity in the market therefor. Following the consummation of the Exchange
Offer, holders of Old Notes who were eligible to participate in the Exchange
Offer but did not tender their Old Notes will not be entitled to certain rights
under the Registration Rights Agreement and such Old Notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for Old Notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
GENERAL. Upon the terms and subject to the conditions set forth in this
Prospectus and in the Letter of Transmittal, the Company hereby offers to
exchange any and all Old Notes validly tendered and not withdrawn prior to 5:00
p.m., New York City time, on the Expiration Date. The Company will issue $1,000
principal amount of New Notes in exchange for each $1,000 principal amount of
outstanding Old Notes accepted in the Exchange Offer. Holders may tender some or
all of their Old Notes pursuant to the Exchange Offer. However, Old Notes may be
tendered only in amounts that are integral multiples of $1,000 principal amount.
The date of the exchange of New Notes for Old Notes will be the next business
day following the Expiration Date.
The form and terms of the New Notes are identical in all material respects
to the form and terms of the Old Notes except that the New Notes (i) have been
registered under the Securities Act and, therefore, do not bear legends
restricting their transfer and (ii) do not contain certain provisions providing
for the payment of Liquidated Damages under certain circumstances relating to
the Registration Rights Agreement. The New Notes will evidence the same debt as
the Old Notes and will be entitled to the benefits of the Indenture. The
Exchange Offer is not conditioned upon any minimum aggregate principal amount of
Old Notes being tendered for exchange.
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As of the date of this Prospectus, $200.0 million aggregate principal amount
of the Old Notes is outstanding. The Company has fixed the close of business on
, 1997 as the record date for the Exchange Offer for the purpose of
determining the persons to whom this Prospectus, together with the Letter of
Transmittal, will initially be sent.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the Delaware General Corporation Law or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the provisions of the Registration Rights Agreement and the applicable
requirements of the Exchange Act, and the rules and regulations of the
Commission thereunder. Old Notes which are not tendered for exchange in the
Exchange Offer will remain outstanding and interest thereon will continue to
accrue.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral notice (confirmed in writing) or
written notice thereof to the Exchange Agent. The Exchange Agent will act as
agent for the tendering holders for the purposes of receiving the New Notes from
the Company. If any tendered Old Notes are not accepted for exchange because of
an invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes described below, in connection with the
Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS. The term "Expiration Date" shall
mean 5:00 p.m., New York City time, on , 1997, unless the Company, in
its sole discretion, extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date and time to which the Exchange
Offer is extended. Although the Company has no current intention to extend the
Exchange Offer, the Company reserves the right to extend the Exchange Offer at
any time and from time to time. During any extension of the Exchange Offer, all
Old Notes previously tendered pursuant to the Exchange Offer and not withdrawn
will remain subject to the Exchange Offer. In order to extend the Exchange
Offer, the Company will notify the Exchange Agent of any extension by oral
notice (confirmed in writing) or written notice and will make a public
announcement thereof prior to 9:00 a.m., New York City time, on the next
business day after each previously scheduled expiration date.
The Company reserves the right, in its sole discretion (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "--Conditions"
shall not have been satisfied, by giving oral notice (confirmed in writing) or
written notice of such delay, extension or termination to the Exchange Agent or
(ii) to amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by public announcement thereof. If the Exchange Offer is amended in
any manner determined by the Company to constitute a material change, the
Company will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the holders of Old Notes, and the Company
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the amendment and the manner of disclosure to
such holders, if the Exchange Offer otherwise would expire during such period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, termination or amendment of the Exchange
Offer, the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
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INTEREST ON THE NEW NOTES. The New Notes will bear interest from November
26, 1996, the date of original issuance of the Old Notes. No interest will be
paid on the Old Notes accepted for exchange.
PROCEDURES FOR TENDERING
Only a holder (I.E., any person in whose name Old Notes are registered on
the books of the Company or any other person who has obtained a properly
completed bond power from the registered holder) of Old Notes may tender such
Old Notes in the Exchange Offer. To tender in the Exchange Offer, a holder must
transmit a properly completed Letter of Transmittal (or a facsimile thereof) or
an Agent's Message, have the signature(s) thereon guaranteed if required by the
Letter of Transmittal, and mail or otherwise deliver such Letter of Transmittal
(or facsimile) or Agent's Message, together with any other required documents,
to the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date. In addition (i) certificates for Old Notes tendered must be received by
the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date; (ii) a confirmation of a book-entry transfer (a "Book-Entry Confirmation")
of such Old Notes, if such procedure is available, into the Exchange Agent's
account at the Book-Entry Transfer Facility (as defined) pursuant to the
procedure for book-entry transfer described below must be received by the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date;
or (iii) the holder of such Old Notes must comply with the guaranteed delivery
procedures described below. To be tendered effectively, the Old Notes and all
documents required by the Letter of Transmittal must be completed and received
by the Exchange Agent at one of the addresses set forth below under "-- Exchange
Agent" prior to 5:00 p.m., New York City time, on the Expiration Date.
The term "Agent's Message" means a message transmitted by the Book-Entry
Transfer Facility to, and received by, the Exchange Agent and forming a part of
a Book-Entry Confirmation, which states that such Book-Entry Transfer Facility
has received an express acknowledgment from the participant in such Book-Entry
Transfer Facility tendering Old Notes which are subject to Book-Entry
Confirmation that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal and that the Company may enforce such
agreement against the participant.
By executing the Letter of Transmittal (or a facsimile thereof) or
transmitting an Agent's Message, each holder will make to the Company and the
Guaranteeing Subsidiaries the representations set forth above in the fourth
paragraph under the heading "--Purpose and Effect of the Exchange Offer."
The tender of Old Notes by a holder and the acceptance thereof by the
Company will constitute agreement between such holder and the Company in
accordance with the terms and subject to the conditions set forth herein and in
the Letter of Transmittal. This Prospectus, together with the Letter of
Transmittal, will first be sent on or about , 1997 to all holders of
Old Notes known to the Company and the Exchange Agent.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK
OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should contact the registered holder promptly and instruct such registered
holder to tender on such beneficial owner's behalf. See "Instructions to
Registered Holder and/or Book-Entry Transfer Facility Participant from
Beneficial Owner" included with the Letter of Transmittal. If such beneficial
owner wishes to tender on his own behalf, such beneficial owner must, prior to
transmitting a properly completed Letter of Transmittal (or a facsimile thereof)
or an
34
<PAGE>
Agent's Message and delivering his Old Notes to the Exchange Agent, either make
appropriate arrangements to register ownership of the Old Notes in such
beneficial owner's name or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership may take considerable
time.
The signature(s) on a Letter of Transmittal (or facsimile thereof) or a
notice of withdrawal, as the case may be, must be guaranteed by an Eligible
Institution (as defined below) unless the Old Notes tendered pursuant thereto
are tendered (i) by a registered holder who has not completed the box entitled
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that the signature(s) on a
Letter of Transmittal (or facsimile thereof) or a notice of withdrawal, as the
case may be, must be guaranteed, such guarantee must be by a member firm of the
Medallion System (an "Eligible Institution").
If the Letter of Transmittal (or facsimile thereof) is signed by a person
other than the registered holder of any Old Notes listed therein, such Old Notes
must be endorsed or accompanied by a properly completed bond power, signed by
such registered holder as such registered holder's name appears on such Old
Notes with the signature(s) thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal (or facsimile thereof) or any Old Notes or bond
powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish an account with respect to the
Old Notes at the Depositary (the "Book-Entry Transfer Facility") for the purpose
of facilitating the Exchange Offer, and subject to the establishment thereof,
any financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of Old Notes by causing such
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account with respect to the Old Notes in accordance with the Book-Entry
Transfer Facility's procedures for such transfer. Although delivery of the Old
Notes may be effected through book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility, a Letter of Transmittal (or
facsimile thereof) properly completed and duly executed with any required
signature guarantee or an Agent's Message and all other required documents must,
in each case, be transmitted to and received or confirmed by the Exchange Agent
at its address set forth below on or prior to the Expiration Date, or, if the
guaranteed delivery procedures described below are complied with, within the
time period provided under such procedures. Delivery of documents to the
Book-Entry Transfer Facility does not constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject any
and all Old Notes not properly tendered or any Old Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right in its sole discretion to waive
any defects, irregularities or conditions of tender as to particular Old Notes.
The Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Old Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
35
<PAGE>
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal (or facsimile thereof) or an Agent's Message, or any other required
documents to the Exchange Agent prior to the Expiration Date or (iii) who cannot
complete the procedures for book-entry transfer, prior to the Expiration Date,
may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within five New
York Stock Exchange trading days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof) or an Agent's Message, together with the
certificate(s) representing the Old Notes or a Book-Entry Confirmation, as
the case may be, and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof) or an Agent's Message, as well as the certificate(s)
representing all tendered Old Notes in proper form for transfer or a
Book-Entry Confirmation, as the case may be, and all other documents
required by the Letter of Transmittal are received by the Exchange Agent
within five New York Stock Exchange trading days after the Expiration Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Old Notes to be withdrawn (the
"Depositor"); (ii) identify the Old Notes to be withdrawn (including the
certificate number(s) and principal amount of such Old Notes, or, in the case of
Old Notes transferred by book-entry transfer, the name and number of the account
at the Book-Entry Transfer Facility to be credited); (iii) be signed by the
holder in the same manner as the original signature on the Letter of Transmittal
by which such Old Notes were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee with respect to the Old Notes register the transfer of such Old Notes
into the name of the person withdrawing the tender; and (iv) specify the name in
which any such Old Notes are to be registered, if different from that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no New Notes will be issued with respect thereto unless the
Old Notes so withdrawn are validly retendered. Any Old Notes which have been
tendered but which are not accepted for exchange will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Notes may be retendered by following one of the procedures described above under
"--Procedures for Tendering" at any time prior to the Expiration Date.
36
<PAGE>
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange New Notes for, any Old Notes,
and may terminate or amend the Exchange Offer as provided herein before the
acceptance of such Old Notes, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Company, might materially impair
the ability of the Company to proceed with the Exchange Offer or any
material adverse development has occurred in any existing action or
proceeding with respect to the Company or any of its subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff of
the Commission is proposed, adopted or enacted, which, in the reasonable
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval the
Company shall, in its reasonable discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its reasonable discretion that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Old Notes
and return all tendered Old Notes to the tendering holders; (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of the
Exchange Offer, SUBJECT, HOWEVER, to the rights of holders to withdraw such Old
Notes (see "--Withdrawal of Tenders"); or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn.
37
<PAGE>
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus, the Letter of Transmittal or the Notice of
Guaranteed Delivery should be directed to the Exchange Agent as follows:
<TABLE>
<S> <C>
BY OVERNIGHT COURIER AND BY HAND
AFTER 4:30 P.M., NEW YORK CITY TIME,
BY MAIL: ON THE EXPIRATION DATE:
United States Trust Company of New York United States Trust Company of New York
P.O. Box 843 770 Broadway
Peter Cooper Station 13th Floor
New York, New York 10276 New York, New York 10003
Attention: Corporate Trust Attention: Corporate Trust
BY HAND UNTIL 4:30 P.M., NEW YORK BY FACSIMILE TRANSMISSION:
CITY TIME, ON THE EXPIRATION DATE: (212) 420-6152
United States Trust Company of New York CONFIRM BY TELEPHONE:
111 Broadway (800) 548-6565
Lower Level
New York, New York 10006
Attention: Corporate Trust
</TABLE>
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT
CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders of Old Notes will be borne by the
Company. The principal solicitation is being made by mail; however, additional
solicitation may be made by telegraph, telecopy, telephone or in person by
officers and regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include, among others, fees and expenses
of the Exchange Agent and Trustee, accounting and legal fees, and printing
costs.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value, as reflected in the Company's accounting records on the
date of exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company. The expenses of the Exchange Offer will be expensed
over the term of the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will remain restricted securities. Accordingly, such Old Notes may be
resold only (i) to the Company (upon redemption thereof or otherwise); (ii) so
long as the Old Notes are eligible for resale pursuant to Rule 144A, to a person
inside the United States whom the seller reasonably believes is a qualified
institutional buyer within the meaning of Rule 144A in a transaction meeting the
requirements of Rule 144A; (iii) in accordance with
38
<PAGE>
Rule 144 under the Securities Act, or pursuant to another exemption from the
registration requirements of the Securities Act (and based upon an opinion of
counsel reasonably acceptable to the Company); (iv) outside the United States to
a foreign person in a transaction meeting the requirements of Rule 904 under the
Securities Act; or (v) pursuant to an effective registration statement under the
Securities Act, in each case in accordance with any applicable securities laws
of any state of the United States.
RESALE OF THE NEW NOTES
Based on no-action letters issued by the staff of the Commission to third
parties, the Company believes the New Notes issued pursuant to the Exchange
Offer may be offered for resale, resold and otherwise transferred by any holder
thereof (other than any such holder that is an "affiliate" of the Company or
either of the Guaranteeing Subsidiaries within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act, PROVIDED that such New Notes are acquired in
the ordinary course of such holder's business and such holder has no arrangement
or understanding with any person to, and does not intend to, participate in the
distribution of such New Notes. Any holder who tenders Old Notes in the Exchange
Offer with the intention to participate, or for the purpose of participating, in
a distribution of the New Notes may not rely upon the position of the staff of
the Commission enunciated in such no-action letters and, in the absence of an
exemption therefrom, must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction. Holders of Old Notes wishing to accept the Exchange Offer must
represent to the Company and the Guaranteeing Subsidiaries pursuant to the
Letter of Transmittal that such conditions have been met. See "The Exchange
Offer--Purpose and Effect of the Exchange Offer" and "Plan of Distribution."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended, applicable Treasury regulations, judicial
authority and administrative rulings and practice. There can be no assurance
that the Internal Revenue Service will not take a contrary view, and no ruling
from the Internal Revenue Service has been or will be sought. Legislative,
judicial or administrative changes or interpretations may be forthcoming that
could alter or modify the statements and conditions set forth herein. Any such
changes or interpretations may or may not be retroactive and could affect the
tax consequences to holders. Certain holders (including insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United States)
may be subject to special rules not discussed below. The Company recommends that
each holder consult such holder's own tax advisor as to the particular tax
consequences of exchanging such holder's Old Notes for New Notes, including the
applicability and effect of any state, local or foreign tax laws.
EXCHANGE OFFER
The Company believes that the exchange of Old Notes for New Notes pursuant
to the Exchange Offer should not be a taxable event to a holder for United
States federal income tax purposes. Rather, the New Notes received by a holder
should be treated as a continuation of the Old Notes in the hands of such
holder. As a result, there will be no United States federal income tax
consequences to holders exchanging Old Notes for New Notes pursuant to the
Exchange Offer. Accordingly, the holding period of the New Notes will include
the holding period of the Old Notes and the basis of the New Notes will be the
same as the basis of the Old Notes immediately before the exchange.
LIQUIDATED DAMAGES
The Company intends to treat the payment of Liquidated Damages as additional
interest paid on the Notes for United States federal income tax purposes.
39
<PAGE>
THE MERGER
MERGER OVERVIEW
On November 26, 1996 immediately following the closing of the Offering (the
"Merger Closing") of the Old Notes sold by IMED, a direct wholly owned
subsidiary of ALARIS Medical prior to the Merger, IMED Merger Sub, Inc., a
Delaware corporation and direct wholly owned subsidiary of IMED ("IMED Merger
Sub"), merged with and into IVAC Holdings (the "Initial Merger"). In connection
therewith: (i) each share of the common stock of IVAC Holdings was converted
into the right to receive the per share Merger Consideration (as defined); (ii)
each outstanding option to acquire common stock of IVAC Holdings was cancelled;
and (iii) each share of the common stock of IMED Merger Sub was converted into
one share of the corporation (the "Surviving Corporation") surviving the Initial
Merger. The aggregate cash consideration paid, including related acquisition
costs, in connection with the Initial Merger was approximately $220.0 million.
The Initial Merger was completed pursuant to an agreement and plan of merger
entered into on August 23, 1996 by and among IMED, IMED Merger Sub, IVAC
Holdings, IVAC Medical Systems and approximately twenty participating
stockholders (certain of which are affiliates of one of the Initial Purchasers)
constituting the holders of in excess of 95% of the voting power of IVAC
Holdings.
As a result of the Initial Merger, the Surviving Corporation became a direct
wholly owned subsidiary of IMED and IVAC Medical Systems became an indirect
wholly owned subsidiary of IMED. Immediately following the Initial Merger: (i)
IVAC Medical Systems was merged with and into the Surviving Corporation and (ii)
IMED, which then held all of the outstanding stock of the Surviving Corporation,
was merged with and into the Surviving Corporation thereby creating the Company,
a direct wholly owned subsidiary of ALARIS Medical.
The following charts depict the organizational structure of (i) ALARIS
Medical and its subsidiaries prior to the Initial Merger, (ii) IVAC Holdings and
its subsidiaries prior to the Initial Merger and (iii) ALARIS Medical and its
subsidiaries upon completion of the Merger:
[CHART]
40
<PAGE>
[CHART]
[CHART]
- ------------------------------
(G) Guaranteeing Subsidiary
(N) Non-operating company
(O) Operating company
MERGER CONSIDERATION
The unadjusted aggregate consideration (the "Merger Consideration") paid to
the holders of IVAC Holdings common stock on the Merger Closing in connection
with the Initial Merger (including in connection with the cancellation of
outstanding options to acquire common stock of IVAC Holdings) was determined by
subtracting the following from the sum of $390.0 million plus the cash of IVAC
Medical Systems immediately prior to the Initial Merger: (i) the aggregate
amount of all indebtedness of IVAC for borrowed money and certain other
outstanding obligations; (ii) the aggregate amount of the cost needed to
complete the Debt Tender Offer and Consent Solicitation (including any premium,
prepayment penalty
41
<PAGE>
and cost of defeasance paid in connection therewith, to the extent such items
are, in the aggregate, exceeded $1.0 million); and (iii) the aggregate amount of
certain miscellaneous items and adjustments. On the first business day following
the Initial Merger, all of the then outstanding options to acquire common stock
of IVAC Holdings were cancelled and the holders thereof received a cash payment
equal to the difference between: (i) the per share Merger Consideration paid to
holders of IVAC Holdings common stock in connection with the Initial Merger and
(ii) the exercise price of such options (as adjusted). Purchase price
adjustments based on the amount of cash held by IVAC as of the date of the
Initial Merger will be determined through customary post-closing mechanisms.
Only limited representations and warranties made by the parties to the Merger
survive the Merger Closing. In connection with the Merger, certain former
stockholders of IVAC Holdings have agreed to indemnify IMED and others for
certain liabilities and obligations relating to River.
THE DEBT TENDER OFFER AND CONSENT SOLICITATION
In connection with the Merger, IVAC Medical Systems commenced and completed
a tender offer to purchase for cash all of its outstanding 9 1/4% Senior Notes
due 2002 (the "Existing Senior Notes") and a related consent solicitation to
modify certain terms of the indenture governing the Existing Senior Notes
(collectively, the "Debt Tender Offer and Consent Solicitation") for an
aggregate purchase price of 105.25% of their principal amount plus accrued
interest up to, but not including, the date of purchase. On November 13, 1996,
IVAC Medical Systems executed a supplemental indenture relating to the Existing
Senior Notes and, as of such date, all Existing Senior Notes had been tendered
for purchase. The amendments to the Existing Senior Notes set forth in the
supplemental indenture became effective and all Existing Senior Notes were
accepted for purchase immediately following the Initial Merger. Approximately
$109.75 million of the net proceeds from the Offering, the borrowings under the
New Credit Facility, the Capital Contribution and existing cash balances were
paid to holders of the Existing Senior Notes in connection with the Debt Tender
Offer and Consent Solicitation.
42
<PAGE>
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Purchase Agreement and the Registration Rights Agreement.
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. In consideration for issuing the New Notes contemplated in
this Prospectus, the Company will receive Old Notes in like principal amount,
the form and terms of which are the same as the form and terms of the New Notes
which replace the Old Notes, except as otherwise described herein. The Old Notes
surrendered in exchange for New Notes will be retired and cancelled and cannot
be reissued. Accordingly, issuance of the New Notes will not result in any
increase or decrease in the indebtedness of the Company. As such, no effect has
been given to the Exchange Offer in the Pro Forma Condensed Consolidated
Financial Statements.
The proceeds of the Offering of $194.0 million, net of selling commissions,
actual borrowings of $204.2 million under the New Credit Facility, the proceeds
from the Capital Contribution ($19.6 million) and existing cash balances were
used to pay the Merger Consideration, consummate the Refinancing, the Debt
Tender Offer and Consent Solicitation and the Junior Notes Repayment, and pay
fees and expenses.
The following table illustrates the sources and uses of funds for the
Transactions.
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
SOURCES OF FUNDS:
Notes.................................................................................... $ 200,000
New Credit Facility(1):
Revolving credit facility............................................................ 4,200
Term loan facilities................................................................. 200,000
Capital Contribution(2).................................................................. 19,588
Combined cash(3)......................................................................... 7,500
--------
Total sources........................................................................ $ 431,288
--------
--------
USES OF FUNDS(4):
Merger Consideration..................................................................... $ 218,529
Refinancing including accrued interest................................................... 38,841
Debt Tender Offer and Consent Solicitation (including accrued interest
and tender and consent fees)(5)........................................................ 109,758
Junior Notes Repayment................................................................... 38,020
Buyer's fees and expenses(6)............................................................. 21,000
Seller's fees and expenses paid at close................................................. 5,140
--------
Total uses........................................................................... $ 431,288
--------
--------
</TABLE>
- ------------------------
(1) The New Credit Facility consists of $200.0 million of term loan facilities
and a $50.0 million revolving credit facility. See "Description of New
Credit Facility."
(2) The Capital Contribution was funded from a portion of 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 approximately $22.0 million principal
amount of its 15% Subordinated Debentures due 1999 and fund the redemption
of ALARIS Medical's outstanding preferred stock. In connection with the
Decisions Contribution, Decisions exchanged an aggregate of $37.5 million in
principal amount of convertible promissory notes issued by ALARIS Medical
for 29,416,086 shares of ALARIS Medical common stock.
(3) Represents transactions fees paid prior and subsequent to the Merger Close
from available cash balances.
(4) As described under "The Merger -- Merger Consideration," the aggregate
Merger Consideration paid to holders of IVAC Holdings common stock is
calculated by subtracting certain amounts, including indebtedness of IVAC
(including accrued interest) at the Merger Closing and, subject to certain
limitations, costs of IVAC in connection with the Transactions, from $390.0
million plus IVAC's cash on the date of the Merger Closing. Accordingly, any
increase in interest accrued on indebtedness of IVAC prior to the Merger
Closing and any increase in estimated transaction costs at the Merger
Closing will reduce the Merger Consideration and increase one or more of the
amounts applied to the Refinancing, the Debt Tender Offer and Consent
Solicitation and/or the Junior Notes Repayment. Any such increase will not,
however, increase the aggregate uses of funds in the Transactions.
(5) Debt Tender Offer and Consent Solicitation including $5.25 million of
redemption premium and consent fees and $4.5 million of accrued interest.
(6) The fees and expenses consist of debt issuance costs, financial advisory
fees and legal, accounting and other professional fees.
43
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On November 26, 1996 IMED acquired all of the outstanding common stock of
IVAC Holdings. The acquisition was accounted for as a purchase whereby the
purchase price, including related expenses, was allocated to identified assets
including intangible assets and liabilities based upon their respective
estimated fair values.
The following Pro Forma Condensed Consolidated Statement of Operations and
Other Data for the year ended December 31, 1996 is based on the historical
results of operations of IMED and the historical unaudited results of operations
of IVAC Holdings, adjusted to give effect to the Transactions and the River
Divestiture, as if such transactions had occurred on January 1, 1996.
The column included in the Pro Forma Condensed Consolidated Statement of
Operations entitled "IMED" represents the operating results of IMED from January
1, 1996 through the Merger date of November 26, 1996 and the combined operating
results of IMED and IVAC Holdings from November 27, 1996 through December 31,
1996, excluding nonrecurring charges related to the Merger.
The column included in the Pro Forma Condensed Consolidated Statement of
Operations entitled "IVAC Holdings" represents the operating results of IVAC
Holdings from January 1, 1996 through November 26, 1996, excluding nonrecurring
charges of approximately $6.0 million related to the Transaction incurred by the
selling company.
The unaudited pro forma condensed consolidated financial statements are
based on assumptions the Company believes are reasonable, are factually
supportable and directly attributable to the Merger. The Merger represents a
series of mergers, including the Initial Merger, which resulted in the
operations of IMED and IVAC Medical Systems being combined into one entity
(I.E., the Company). The Initial Merger was the transaction pursuant to which
ALARIS Medical indirectly acquired IVAC Holdings and its subsidiaries
(including, without limitation, IVAC Medical Systems). Such unaudited pro forma
financial data should be read in conjunction with the Consolidated Financial
Statements of IMED and IVAC Holdings and the respective accompanying notes
thereto included elsewhere in this Prospectus.
The Pro Forma Condensed Consolidated Statement of Operations does not
include certain cost savings that management has identified related to the
Merger. In connection with the Merger, management identified duplicative costs
for certain functional areas and facilities. As a result, approximately 225
employees from all functional areas were given notice of termination in December
1996. Approximately 125 of such terminations were effective December 31, 1996
while the additional 100 employees are being phased-out during the first half of
1997. The costs of the terminations are reflected in the financial statements of
the Company for the year ended December 31, 1996.
Due to excess capacity at the manufacturing facilities of both companies,
the Company has consolidated IMED's instrument manufacturing operations into the
existing IVAC facility. This was completed in December 1996. In addition, as a
result of the employee terminations described above, management decided to
consolidate the headquarters of IMED into IVAC's existing headquarters. This
consolidation was substantially completed during the first quarter of 1997.
Management has also identified additional cost savings related to volume
discounts expected to be received as a result of vendor consolidation.
Management believes that all of the items described above will lead to reduced
manufacturing and operating costs of the Company as compared to the combined
historical costs of the two companies. The extent of the savings is dependent
upon the timing of when such consolidation and integration is completed. As a
result, no estimated cost savings have been included in the Pro Forma Condensed
Consolidated Statement of Operations.
The following pro forma financial data are 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.
44
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND OTHER DATA
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------------------------
RIVER
IVAC DIVESTITURE TRANSACTIONS COMPANY
IMED HOLDINGS COMBINED ADJUSTMENTS(A) ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C> <C> <C>
Net sales.......................... $ 136,371 $ 210,350 $ 346,721 $ (373) $ 346,348
Cost of sales(H)................... 74,628 112,519 187,147 (2,787) $ 1,419(B) 184,768
(1,011) (C)
--------- --------- --------- ------------
Gross margin....................... 61,743 97,831 159,574 161,580
--------- --------- --------- ------------
Selling and marketing.............. 22,273 44,310 66,583 (819) (379)(C) 65,385
General and administrative......... 13,434 20,223 33,657 (719) 5,900(B) 38,215
(623)(C)
Research and development(I)........ 8,854 9,487 18,341 (199) 18,142
Restructuring(J)................... -- 17,396 17,396 (17,396) --
--------- --------- --------- ------------
Total operating expenses....... 44,561 91,416 135,977 121,742
--------- --------- --------- ------------
Lease interest income.............. 2,501 2,100 4,601 4,601
--------- --------- --------- ------------
Income from operations......... 19,683 8,515 28,198 44,439
--------- --------- --------- ------------
Other income (expense):
Interest income.................. 184 428 612 (379)(D) 233
Interest expense................. (6,303) (16,629) (22,932) 121 (34,938)(E) (40,384)
17,365(F)
Other, net....................... 323 (213) 110 110
--------- --------- --------- ------------
(5,796) (16,414) (22,210) (40,041)
--------- --------- --------- ------------
Income (loss) before income
taxes............................ 13,887 (7,899) 5,988 4,398
Provision for (benefit from) income
taxes(K)......................... 8,986 2,105 11,091 2,782 (9,773)(G) 4,100
--------- --------- --------- ------------- ------------ ------------
Net income (loss).................. $ 4,901 $ (10,004) $ (5,103) $ 18,886 $ (13,485) $ 298
--------- --------- --------- ------------- ------------ ------------
--------- --------- --------- ------------- ------------ ------------
</TABLE>
See accompanying notes to Pro Forma Condensed Consolidated Statements of
Operations and Other Data.
45
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER DATA
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(A) In June 1996, IVAC decided to discontinue River's operations and to divest
River's assets. River's primary assets include patents, technologies, trade
secrets, inventories and manufacturing equipment. As a result of the River
Divestiture, pro forma adjustments have been made to eliminate the
historical operating results of River and the related income tax impact to
IVAC Holdings.
(B) Reflects amortization of new intangible assets (primarily goodwill) using
estimated useful lives of 3 to 30 years, netted with the elimination of
amortization incurred on IVAC intangible assets revalued in connection with
the Merger.
The Merger Consideration, including related costs, was allocated to the
acquired assets and liabilities based on their estimated fair values.
Based on an independent appraisal the following intangible assets were
recorded:
<TABLE>
<CAPTION>
ESTIMATED
AMOUNT USEFUL LIFE
RECORDED (IN YEARS)
<S> <C> <C>
Workforce....................................................... $ 7,100 16
Supply Agreements............................................... $ 10,758 3
Patents......................................................... $ 20,100 13
Trademarks...................................................... $ 90,000 30
Goodwill........................................................ $ 132,482 30
</TABLE>
(C) Reflects elimination of depreciation expense on fixed assets disposed of in
connection with the Merger.
(D) Reflects elimination of interest income on actual cash balances used to fund
the Merger.
(E) Reflects interest expense related to the borrowings under the New Credit
Facility and the Notes:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
<S> <C>
New Credit Facility in the principal amount of $204,200 (at actual weighted average
interest rate of 8.7%)(1)............................................................... $ 15,230
Amortization of issuance costs............................................................ 1,469
Notes (at an interest rate of 9.75%)...................................................... 17,550
Amortization of issuance costs............................................................ 689
-------
$ 34,938
-------
-------
</TABLE>
----------------------------
(1) The average interest rate for the Company's various borrowings under
the New Credit Facility was determined on a weighted average basis using
the actual rates of interest in effect under the New Credit Facility and
actual borrowings at the time of the Merger financing. Amount excludes
eight months of interest expense related to $11,000 of borrowings under
the New Credit Facility used to repay borrowings under the Existing
Credit Facility (as defined) incurred in connection with the repurchase
of certain European distribution rights on August 30, 1996.
46
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER DATA (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(F) Reflects elimination of interest expense, including amortization of debt
issuance costs in connection with the Refinancing, the Debt Tender Offer and
Consent Solicitation, and the Junior Notes Repayment:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
<S> <C>
IMED Existing Credit Facility............................................................. $ 2,121
IVAC existing credit facility(1).......................................................... 2,101
Existing Senior Notes..................................................................... 9,084
Junior subordinated notes of IVAC Holdings................................................ 4,059
-------
$ 17,365
-------
-------
</TABLE>
----------------------------
(1) In addition to interest on the $18,000 of indebtedness under IVAC's
existing credit facility that was repaid on November 26, 1996 in the
Refinancing, the elimination of interest expense related to IVAC includes
interest on $14,000 of bank debt which was repaid with the proceeds
received from the issuance of the Existing Senior Notes by IVAC Medical
Systems during November 1995.
(G) Reflects adjustment to income tax expense related to the Transactions. The
pro forma income tax expense represents the estimated income tax provision
on the pro forma pretax income.
(H) Does not include the inventory purchase price allocation adjustment in the
amount of $4,014 charged to cost of sales in December 1996. Amount
represents a non-recurring charge incurred in connection with the Merger.
(I) Does not include $44,000 charged to purchased in-process research and
development in connection with the Merger.
(J) Does not include $15,277 recorded as restructuring, integration and other
non-recurring charges in connection with the Merger.
(K) Does not reflect tax benefit associated with certain one time non-recurring
charges incurred in connection with the Merger.
(L) The following table is a reconciliation of pro forma income from operations
to pro forma adjusted EBITDA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------------------------------
RIVER
IVAC DIVESTITURE TRANSACTIONS COMPANY
IMED HOLDINGS COMBINED ADJUSTMENTS(A) ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C> <C> <C>
Income from operations................ $ 19,683 $ 8,515 $ 28,198 $ 21,547 $ (5,306) $ 44,439
Depreciation and amortization......... 9,340 18,788 28,128 (748) 5,306 32,686
Technology license fee to
ALARIS Medical(1)................... -- -- -- 550 550
Restructuring......................... -- 17,396 17,396 (17,396) --
--------- --------- ----------- -------------- ------------ -----------
Adjusted EBITDA(2).................... $ 29,023 $ 44,699 $ 73,722 $ 3,403 $ 550 $ 77,675
--------- --------- ----------- -------------- ------------ -----------
--------- --------- ----------- -------------- ------------ -----------
</TABLE>
----------------------------
(1) Prior to June 30, 1996, ALARIS Medical licensed to IMED certain
technology rights for $1,100 per year. Because this license fee could not
be paid to ALARIS Medical as a result of restrictions in the revolving
credit facility between IMED and General Electric Capital Corporation
(the "Existing Credit Facility"), IMED accrued a liability in respect of
such license fee. Effective June 30, 1996, ALARIS Medical contributed the
underlying technology to IMED. This non-cash charge, which will not
recur, has been added to income from operations in computing Adjusted
EBITDA.
(2) Adjusted EBITDA does not represent net income or cash flows, 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 operating performance or to cash flows as a measure of liquidity.
See consolidated statement of cash flows for measures of cash flows in
accordance with generally accepted accounting principles.
47
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY
THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS OF ALARIS MEDICAL SYSTEMS, INC. AND THE RELATED NOTES THERETO
INCLUDED ELSEWHERE IN THIS PROSPECTUS.
GENERAL
As described in Note 1 to the 1996 consolidated financial statements of
ALARIS Medical Systems, IMED was the predecessor to ALARIS Medical Systems, for
financial reporting purposes. As a result of the Merger on November 26, 1996,
the operating results and cash flows reported as that of ALARIS Medical Systems
for the three months ended March 31, 1997 are not comparable to the three months
ended March 31, 1996 and those for the year ended December 31, 1996 are not
comparable to 1995. The 1996 operating results represent those of "IMED" for the
entire year plus the results of "IVAC" for the period from November 27, 1996
through December 31, 1996. Additionally, "IMED" as used herein represents the
Company exclusive of the impact of the Merger. For a detailed description
related to IVAC's historical operations and product lines see "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
IVAC."
The Company sells and services infusion systems primarily in the United
States, Western Europe, Canada, Australia, Latin America and the Middle East.
The Company generates revenues from the sale and/or lease of infusion pumps and
sales of associated proprietary disposable administration sets. Additionally, as
a result of the Merger, the Company now generates revenue from the sale of vital
signs measurement products.
In recent years, the Company's results of operations have been affected by
the cost containment pressures applicable to health care providers. In
particular, in order to reduce costs, certain hospitals have adopted a new
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 IMED's disposable administration sets
have increased in every year since 1993, primarily as a result of its growing
installed base of infusion pumps. The Company's profitability is also affected
by the increasing use of GPOs which are better able to negotiate favorable
pricing from providers of infusion systems, such as the Company, and which
police compliance with exclusive buying arrangements for their members. These
buying arrangements, in certain situations, also may result in the GPO requiring
removal of the Company's existing infusion pumps. The Company expects that such
GPOs will become increasingly more common and may have an adverse effect on the
Company's profitability in the future. Finally, the enactment of national health
care reform or other legislation affecting payment mechanisms and health care
delivery would affect the Company's future results of operations. Although the
final form of any such legislation is not known, it is likely that any such
legislation may impose limits on the number and type of medical procedures which
may be performed and may restrict a provider's ability to select specific
devices or products for use in administering care which, in turn, could
adversely impact demand and/or pricing for the Company's infusion systems. It is
impossible to predict the extent to which the Company may be affected by any
such change in legislation.
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, selected
financial information expressed as a percentage of net sales, as well as, pro
forma first quarter 1996 operating results in thousands of dollars. The pro
forma data is based on the historical operating results of IMED and IVAC
Holdings, Inc. adjusted to give effect to the Merger, as if it occurred on
January 1, 1996. The data excludes nonrecurring charges related to the Merger,
as well as the operating results of River which was divested prior to the
consummation of the Merger.
51
<PAGE>
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------
PRO FORMA AS REPORTED
PRO FORMA 1996 1997
1996
($ IN
AS REPORTED THOUSANDS)
1996
(% OF SALES) (% OF SALES)
<S> <C> <C> <C> <C>
Sales..................................................... 100.0% $ 79,677 100.0% 100.0%
Cost of sales............................................. 53.8 41,335 51.9 57.3
----- --------------- ----- -----
Gross margin.............................................. 46.2% 38,342 48.1% 42.7%
Selling and marketing expense............................. 16.2 15,404 19.3 18.9
General and administrative expense........................ 9.0 8,946 11.2 10.9
Research and development expense.......................... 7.0 3,858 4.8 4.9
Restructuring, integration and other
non-recurring charges................................... -- -- -- 3.1
Lease interest income..................................... 2.3 1,243 1.5 1.4
----- --------------- ----- -----
Income from operations.................................... 16.3 11,377 14.3 6.3
Interest expense.......................................... (1.4) (10,066) (12.6) (12.6)
Other, net................................................ (0.4) 27 -- --
OTHER DATA:
Adjusted EBITDA......................................... 22.7% $ 19,117 24.0% 21.4%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1994 1995 1996 1996(A)
----------- ----------- -------------- --------------
(AS REPORTED) (IMED ONLY)
<S> <C> <C> <C> <C>
Sales........................................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales................................................... 58.5 56.2 57.7 55.2
----- ----- ----- -----
Gross margin.................................................... 41.5% 43.8% 42.3% 44.8%
Selling and marketing expense................................... 15.0 14.7 16.3 15.9
General and administrative expense.............................. 7.8 7.9 9.8 9.5
Research and development expense................................ 5.7 6.6 6.5 6.9
Purchased in-process research and development................... -- -- 32.3 --
Restructuring, integration and other non-recurring charges...... -- -- 11.2 --
Lease interest income........................................... 2.2 2.1 1.8 2.1
----- ----- ----- -----
Income (loss) from operations................................... 15.2 16.7 (32.0) 14.6
Interest expense................................................ (2.5) (1.8) (4.6) (5.5)
Other, net...................................................... (0.2) (0.3) 0.2 0.3
OTHER DATA:
Adjusted EBITDA............................................... 21.2% 22.5% 21.3% 21.4%
</TABLE>
- ------------------------------
(A) Amounts represent those of IMED only before impact of the Merger, purchase
accounting and restructuring.
52
<PAGE>
The following table sets forth sales by major product groups for the periods
presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Pumps............................................................... $ 23.2 $ 25.8 $ 28.8 $ 3.8 $ 15.7
Drug infusion disposables........................................... 82.0 79.6 96.0 20.2 53.2
Vital Signs instruments and disposables............................. -- -- 3.0 -- 7.5
Other(1)............................................................ 6.9 7.2 8.6 1.8 5.6
--------- --------- --------- --------- ---------
Total............................................................... $ 112.1 $ 112.6 $ 136.4 $ 25.8 $ 82.0
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) Consists primarily of operating lease income relating to pumps, service
fees, license fee revenue and accessory sales.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
For purposes of this discussion and analysis, the three months ended March
31, 1996 and 1997 are referred to as 1996 and 1997, respectively.
SALES. Sales increased $56.1 million during 1997 as compared to 1996 due to
the Merger. On a pro forma basis, sales increased $2.3 million, or 2.9%, during
1997 as compared to 1996. United States sales decreased $0.5 million, or 1.0%,
on a pro forma basis while international sales increased $2.8 million, or 10.3%,
on a pro forma basis. The increase in international sales is primarily due to
higher 1997 sales of infusion therapy disposable products offset in part by
foreign currency exchange rate fluctuations. The increase in 1997 disposable
sales is partially due to the August 1996 repurchase of IMED's European product
distribution rights from Pharmacia and Upjohn, Inc. which has resulted in higher
average selling prices for these products in 1997.
GROSS MARGIN. The gross margin percentage decreased from 1996 to 1997
primarily due to increased amortization expense resulting from the IVAC purchase
price allocated to certain intangible assets, as well as $1.6 million of
nonrecurring purchase accounting inventory adjustments charged to cost of sales
during 1997. Also adversely impacting the gross margin percentage during 1997
was $2.5 million related to a voluntary field correction of certain Gemini PC-1
and PC-2 infusion pumps. (See Note 4 to the March 31, 1997 Condensed
Consolidated Financial Statements.) Pro forma 1996 gross margin percentage was
48.1% compared to 47.7% for 1997, exclusive of the purchase accounting inventory
adjustment and product field correction charges.
SELLING AND MARKETING EXPENSE. Selling and marketing expense increased
$11.3 million during 1997 primarily due to the Merger. On a pro forma basis,
selling and marketing expense increased approximately $0.1 million, or 0.6%. As
a percentage of sales, on a pro forma basis, selling and marketing expense
decreased from 19.3% in 1996 to 18.9% in 1997 due primarily to a $2.3 million
increase in sales. Domestic expense decreased by $1.0 million, or 9.0%, from
1996 due to merger related synergies which are anticipated to be offset in
future periods as further investment is made to add personnel in this area. The
decrease in domestic selling and marketing expense was more than offset by
increased international expenses of $1.1 million, or 26.0%, due largely to
IMED's repurchase of the European distribution rights for IMED products from
Pharmacia & Upjohn, Inc. in August 1996 and an associated increase in European
direct operations.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased $6.6 million during 1997 primarily due to the Merger. On a pro forma
basis, general and administrative expense decreased by $0.1 million, or 0.2%,
during 1997. As a percentage of sales, on a pro forma basis, general and
administrative expense decreased from 11.2% for 1996 to 10.9% for 1997 due to an
increase in sales, as
53
<PAGE>
well as merger-related synergies at the Company. International expenses
increased by $0.2 million, or 13.2%, primarily as a result of IMED's repurchase
of the European distribution rights for IMED products from Pharmacia & Upjohn,
Inc. in August 1996 and an associated increase in European direct operations.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased approximately $2.3 million during 1997 primarily due to the Merger. On
a pro forma basis, research and development expense increased from $3.9 million
or 4.8% of sales during 1996 to $4.1 million or 4.9% of sales during 1997. This
increase is due to continued investment in development of new infusion and vital
signs products.
INTEGRATION EXPENSE. Integration expense of $2.5 million was incurred in
the first quarter of 1997. This Merger related expense is in addition to
restructuring and integration charges of $15.3 million recorded in the fourth
quarter of 1996. The 1997 expense consists primarily of management consulting
fees of $1.0 million, sales force integration expense of $0.9 million and
information system conversion costs of $0.5 million.
INCOME (LOSS) FROM OPERATIONS. Income from operations increased $1.0
million during 1997 primarily due to the Merger. On a pro forma basis, operating
income decreased $6.2 million, or 54.5%, from $11.4 million in 1996 to $5.2
million in 1997 due to the reasons discussed above.
INTEREST EXPENSE. Interest expense increased $10.0 million during 1997
primarily due to the Merger. In addition to 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. On a pro forma
basis, interest expense increased $0.3 million due to additional borrowings
under the Company's New Credit Facility. See "Liquidity and Capital Resources."
The additional borrowings were used to pay for restructuring and integration
costs associated with the Merger.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
SALES. Sales increased approximately $23.8 million or 21.2% due to the
inclusion of IVAC's sales for December 1996. Excluding IVAC sales, total IMED
only sales increased approximately $.4 million during 1996 as compared to 1995.
United States sales decreased approximately $4.5 million or 4.9% during 1996 as
compared to 1995. Within the United States infusion therapy business, sales
decreased for 1996, as compared to 1995, primarily due to (i) a decrease of $2.4
million related to the volume of infusion pump shipments primarily attributable
to several large transactions during 1995 and (ii) a decline of $1.9 million
related to a reduced average selling price of IMED's infusion pumps and
disposable administration sets, offset in part by an increase of $0.2 million
related to volume of disposable administration set sales. Sales to customers
located outside of the United States increased $5.0 million, or 24.5%, from
$20.4 million for 1995 to $25.4 million for 1996 primarily as a result of
increased instrument and disposable administration set pricing of approximately
$3.5 million primarily resulting from the repurchase of the IMED product
European distribution rights from Pharmacia & Upjohn, Inc. in August 1996. This
resulted in the Company realizing higher sales prices than when the products
were sold directly to Pharmacia & Upjohn, Inc. Related to the Pharmacia &
Upjohn, Inc. repurchase, IMED established IMED Ltd., a wholly-owned subsidiary,
to distribute its products throughout Europe. As a result, the consolidated 1996
operating results include approximately $2.3 million of start-up and operating
expenses which were not present in prior years. Additionally, sales to customers
outside the United States increased approximately $1.6 million related to higher
volume of disposable administration sets resulting from IMED's growing installed
base in Canada, Australia, Latin America and the Far East.
GROSS MARGIN. Gross margin increased $8.4 million or 17.1% from 1995 to
1996 primarily due to the Merger. Additionally, 1996 gross margin was reduced by
$4.0 million due to that portion of the purchase accounting adjustments made to
adjust the acquired IVAC inventory to its estimated fair value on the Merger
date which was charged to cost of sales during December 1996. Excluding the
Merger, IMED only
54
<PAGE>
gross margin increased $1.4 million from $49.3 million for 1995 to $50.7 million
for 1996 due primarily to the decrease in cost of sales discussed below. Despite
the decline in average selling prices of infusion pumps and disposable
administration sets discussed above, IMED only gross margin, as a percentage of
IMED only sales, increased from 43.8% for 1995 to 44.8% for 1996 primarily as a
result of reductions in the manufacturing cost of disposable administration sets
caused by (i) increased outsourcing of molded parts and components; (ii)
negotiated price reductions from suppliers; and (iii) the favorable effects of
increased manufacturing volume. Gross margin also increased for 1996, compared
to 1995, as a result of lower unit cost for inventory at December 31, 1995 that
were sold during 1996 compared to the unit cost for inventory at December 31,
1994 that were sold during 1995.
SELLING AND MARKETING. Selling and marketing expenses increased $5.7
million or 34.4% during 1996 as compared to 1995 primarily due to the Merger.
Exclusive of the Merger, as a percentage of IMED only sales, selling and
marketing expense increased from 14.7% for 1995 to 15.9% for 1996. IMED only
selling and marketing expense increased from $16.6 million for 1995 to $18.0
million for 1996 primarily due to the recognition of selling and marketing
expense by IMED Ltd. in 1996 as a result of IMED's repurchase of the European
distribution rights for IMED products from Pharmacia & Upjohn, Inc. Also
contributing to this increase were compensation and relocation expenses for
selling and marketing management personnel hired during 1996.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased
$4.5 million or 51.1% during 1996 as compared to 1995 primarily due to the
Merger. IMED only general and administrative expense increased from $8.9 million
for 1995 to $10.7 million for 1996 as a result of recruitment and relocation
expenses of development personnel and increased management compensation. General
and administrative expense also increased for 1996, compared to 1995, due to the
recognition of general and administrative expenses by IMED Ltd. in 1996. As a
percentage of IMED only sales, IMED only general and administrative expense
increased from 7.9% for 1995 to 9.5% for 1996 primarily as a result of the
increase in general and administrative expenses discussed above.
RESEARCH AND DEVELOPMENT. Research and development expense increased $1.5
million or 19.9% during 1996 as compared to 1995 primarily due to the Merger.
IMED only research and development expense increased from $7.4 million for 1995
to $7.8 million for 1996 primarily as a result of the timing of certain expenses
associated with the development of a new modular infusion system. Due to the
increase in IMED only research and development costs, research and development
expense, as a percentage of sales, increased from 6.6% for 1995 to 6.9% for
1996.
PURCHASED RESEARCH AND DEVELOPMENT. In connection with the Merger, the
assets and liabilities of IVAC were adjusted to their estimated fair values. As
a result of this process the Company incurred a one time $44.0 million write-off
related to the value assigned to the acquired in-process research and
development of IVAC projects for which technological feasibility had not been
established and for which there was no alternative future use. Such amount was
determined with the assistance of a third party appraiser based upon the present
value of estimated future cash flow contributions from the identified projects.
The Company has continued to invest in the development necessary to obtain
technological feasibility of these projects. The project, which represents the
most significant portion of the acquired in-process research and development
charge, is an improved cost effective and technologically advanced electronic
thermometer designed to provide a temperature reading in seven-to-ten seconds.
Market introduction of this product is planned for the second half of 1997.
RESTRUCTURING, INTEGRATION AND OTHER NON-RECURRING COSTS. In connection
with the Merger, management performed an extensive review of the operating
activities of both IMED and IVAC in order to reduce costs and maximize
synergies. Management identified duplicative costs to eliminate and developed
and implemented plans to consolidate and integrate the companies' operations
including product strategies, manufacturing, service centers, research and
development, marketing and other administrative functions. As a result, the
Company has recorded a non-recurring charge related to the implementation of
these plans in
55
<PAGE>
the amount of $15.3 million in 1996. The charge includes $10.6 million of
restructuring expense with the following significant components: severance and
benefits - $4.4 million, cost to vacate facilities - $3.4 million, write-off
unused furniture, fixtures and equipment - $1.5 million, distributor termination
costs - $0.8 million and $0.5 million of miscellaneous other restructuring
charges. Integration costs of $4.7 million were also included in the 1996 charge
and relate primarily to consulting services and employee sign-on bonuses
incurred in connection with forming the new combined company.
Estimated dealer termination costs as well as severance and benefits costs
related to the acquired company's personnel in the amount of $2.8 million were
also accrued at the acquisition date. The remaining unpaid portion of
approximately $2.7 million is included in accrued restructuring costs at
December 31, 1996 and is expected to be paid during 1997. In accordance with
generally accepted accounting principles, such items effectively increased the
amount of goodwill recorded in connection with the Merger and were not included
in the $15.3 million restructuring and integration expense included in the
Consolidated Statement of Operations for the year ended December 31, 1996. At
December 31, 1996, the Company has approximately $15.1 million accrued related
to restructuring costs, primarily all of which the Company believes will be paid
during 1997. Additionally, the Company expects to incur additional integration
expenses during 1997 to fully implement its plans.
As a result of these plans, approximately 225 employees from all functional
areas were given notice of termination in December 1996. Approximately 125 of
such terminations were effective December 31, 1996 while the additional 100
employees are being phased-out during the first half of 1997.
Due to excess capacity at the manufacturing facilities of both companies,
the Company has consolidated IMED's instrument manufacturing operations into the
existing IVAC facility. This was completed in December 1996. In addition, as a
result of the employee terminations described above, management decided to
consolidate the headquarters of IMED into IVAC's existing headquarters. This
consolidation was substantially completed during the first quarter of 1997.
Management has also identified additional cost savings related to volume
discounts expected to be received as a result of vendor consolidation.
Management believes that all of the items described above will lead to
reduced manufacturing and operating costs of the Company in future periods as
compared to the combined historical costs of the two companies. The extent of
the savings is dependent upon the timing of when such consolidation and
integration is completed.
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 million or 7.2% for 1996 as compared to 1995 primarily due
to the Merger.
INCOME (LOSS) FROM OPERATIONS. Income from operations decreased from $18.8
million for 1995 to a loss of $43.6 million for 1996 primarily due to the Merger
and resulting purchase accounting adjustments which more than offset the IVAC
only operating income generated in December 1996. Excluding the impact of the
Merger on the 1996 operating results, IMED only operating income decreased $2.3
million or 12.1% from $18.8 million in 1995 to $16.5 million in 1996 due to the
reasons discussed above.
INTEREST EXPENSE. Interest expense increased $4.3 million from $2.1 million
during 1995 to $6.3 million during 1996. The increase in interest expense was
due to the increase in debt obtained to finance the Merger. Also contributing to
the increase was the interest on approximately $11.0 million of borrowings made
by IMED in August 1996 related to the repurchase of the European distribution
rights for IMED products.
56
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
SALES. Sales increased $0.4 million, or 0.4%, from $112.1 million for 1994
to $112.6 million for 1995. United States sales, which were 81.8% of sales for
1995, increased $0.9 million or 1.0%, from $91.2 million for 1994 to $92.1
million for 1995. Within the United States infusion therapy business, sales
increased for 1995 as compared to 1994 primarily due to an increase of $3.7
million related to the volume of infusion pump and disposable administration set
shipments, offset in part by a decrease of $1.5 million due to a decline in
average selling price of infusion pumps and disposable administration sets and a
reduction of $1.0 million in ReadyMED sales volume due to lower demand for the
product. Sales to customers outside of the United States increased $2.1 million,
or 11.5%, from $18.3 million for 1994 to $20.4 million for 1995 primarily as a
result of (i) an increase of $0.2 million related to unit volume (ii)
approximately $0.3 million increase in average sales price of disposable
administration sets (iii) an increase of $1.2 million related to sales of
infusion pumps and (iv) an increase of $0.5 million due to higher distributor
fees realized in 1995 than in 1994. The increased volume of infusion pumps and
disposable administration sets in the Middle East and the Far East reflect the
additional investment in direct sales personnel in these territories, which were
previously covered exclusively by dealer networks.
GROSS MARGIN. Gross margin increased $2.8 million from $46.5 million for
1994 to $49.3 million for 1995 primarily due to reductions in cost of sales.
Gross margin as a percentage of sales increased from 41.5% for 1994 to 43.8% for
1995, primarily due to (i) increased outsourcing of molded parts and components;
(ii) the discontinuance of lower margin sales generated from the production by
IMED of a customer's products; and (iii) the favorable effects of the peso
devaluation on the labor cost on the assembly of disposable administration sets
at IMED's Mexico facility in 1995, partially offset by the decline in the
average selling price of IMED's instruments and disposable administration sets
in the United States.
SELLING AND MARKETING. As a percentage of sales, selling and marketing
expense decreased from 15.0%, or $16.9 million, for 1994 to 14.7%, or $16.6
million, for 1995, primarily due to cost containment programs which continue to
reduce expenses, partially offset by expenses associated with certain 1995 sales
meetings not held in 1994 and increases in personnel costs associated with
additional head count in international territories previously covered
exclusively by dealer networks.
GENERAL AND ADMINISTRATIVE. As a percentage of sales, general and
administrative expense increased from 7.8%, or $8.7 million, for 1994 to 7.9%,
or $8.9 million, for 1995.
RESEARCH AND DEVELOPMENT. Research and development expense increased from
$6.3 million, or 5.7% of sales, for 1994 to $7.4 million, or 6.6% of sales, for
1995 primarily as a result of increases in personnel and related costs
associated with the development of a new modular infusion system.
LEASE INTEREST INCOME. Lease interest income during both periods consisted
of interest income associated with contracts or agreements pursuant to which a
third party acquired infusion pumps under sales-type leases.
INCOME FROM OPERATIONS. For the reasons discussed above, as a percentage of
sales, income from operations increased from 15.2%, or $17.0 million, for 1994
to 16.7%, or $18.8 million, for 1995.
INTEREST EXPENSE. Interest expense decreased from $2.8 million for 1994 to
$2.1 million for 1995 primarily as a result of lower average borrowings.
PROVISION FOR INCOME TAXES. Provision for income taxes was $8.3 million for
1994 compared to $8.1 million for 1995. Provision for income taxes in 1994
includes taxes on foreign earnings relating to the sale of IMED's Irish
manufacturing facility in August 1994.
NET INCOME. For the reasons discussed above, net income increased $2.6
million from $5.6 million for 1994 to $8.3 million for 1995.
57
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In recent years, IMED has met its liquidity needs and capital expenditures
requirements with internally generated funds and external borrowings. IMED's
primary use of funds had been to fund capital expenditures, pay interest on
outstanding indebtedness, repay outstanding indebtedness and pay dividends to
and redeem preferred stock held by ALARIS Medical.
The Company expects to continue to meet its liquidity needs, including, in
the short-term, funding of restructuring and integration costs, as well as
long-term capital expenditures requirements with cash flow from operations and
borrowings under its revolving credit facility. The Company's primary future use
of funds will be to fund capital expenditures and strategic acquisitions, and to
pay debt service on outstanding indebtedness. During the quarter ended March 31,
1997 the Company made cash payments of approximately $5.2 million related to
merger and integration costs accrued at December 31, 1996, as well as payments
of approximately $2.0 million for integration costs expensed during the first
quarter of 1997.
At March 31, 1997, the Company's outstanding indebtedness was $424.9
million, including $200.0 million of bank term debt under the New Credit
Facility and $200.0 million of Old Notes, all of which was borrowed in
connection with the Merger. The bank debt bears interest at floating rates
based, at the Company's option, on Eurodollar or prime rates. As a result, a one
percent increase in the rate of interest charged on indebtedness outstanding
under the New Credit Facility at March 31, 1997 would result in additional
annual interest expense of approximately $2.2 million. As required by the New
Credit Facility, the Company has entered into an interest rate protection
agreement covering 50% of its term loan borrowings. Such agreement fixed the
interest rate charged on such borrowings resulting in a weighted average fixed
rate of 9.6% on the principal balance covered.
Additionally, in connection with obtaining the Merger financing, the Company
obtained a $50.0 million revolving credit facility as part of the New Credit
Facility. At March 31, 1997, $19.5 million in borrowings and $0.5 million under
letters of credit were outstanding under this facility and $30.0 million was
available. The Company borrowed $4.3 million under the New Credit Facility
during the three months ended March 31, 1997.
Also, in connection with the Merger, the Company assumed IVAC's obligations
to Siemens Infusion Systems Ltd. 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) and provide for the
payment of the greater of $3.0 million per year or 8% of the prior year's MS III
sales in 1997 through 1999. The Company made the minimum 1997 payment of $3.0
million during the quarter ended March 31, 1997.
As a result of the Company's significant indebtedness, the Company expects
to incur significant interest expense in future periods. The Company believes
that cash provided by operations will be sufficient to meet its interest expense
obligations.
Annual principal amortizations of the Company's indebtedness are $4.0
million, $14.6 million and $15.6 million for 1997, 1998 and 1999, respectively.
Adjusted EBITDA increased $11.7 million during 1997 primarily due to the
Merger. On a pro forma basis, as a percentage of sales, Adjusted EBITDA
decreased from 24.0% or $19.1 million, for 1996 to 21.4%, or $17.6 million, for
1997 due to the reasons previously described in the operating results components
under "--Three Months Ended March 31, 1997 Compared to Three Months Ended March
31, 1996." Excluding the $2.5 million charge to cost of sales during 1997,
Adjusted EBITDA would have increased $1.0 million as compared to pro forma first
quarter 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 as these terms are defined under generally
accepted accounting principles, and should not be considered as an alternative
to net income as an indicator of the Company's operating performance or to cash
flows as a measure of liquidity. The Company has included information concerning
58
<PAGE>
Adjusted EBITDA herein because it uses such information as a method of assessing
its cash flow and ability to sevice debt and understands that such information
is also used by investors as a measure of an issuer's historical ability to
service debt. Restructuring and other one-time nonrecurring 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 similarly titled measures of other companies.
Although the Company is not a guarantor of ALARIS Medical's debt, ALARIS
Medical has no significant operations other than the operations of the Company
and is dependent upon the Company to fund its debt service requirements and
other operating expenses. At March 31, 1997, ALARIS Medical had $16.2 million of
outstanding Convertible Debentures. The Convertible Debentures provide for semi-
annual interest payments of approximately $0.6 million and mature on January 15,
2002. The Notes and the New Credit Facility permit the Company to fund interest
payments on the Convertible Debentures and to make limited distributions to
ALARIS Medical to fund operating expenses and to pay income taxes; PROVIDED
THAT, with respect to the New Credit Facility, there exists no default or event
of default under the New Credit Facility. The Notes and the New Credit Facility,
however, restricts distributions to ALARIS Medical to fund the repayment of the
Convertible Notes at maturity.
In addition to routine capital expenditures that are expected to be
consistent with the combined historical capital expenditures of IMED and IVAC,
the Company expects to make a total of approximately $12.0 million of capital
and operating expenditures during 1997 and 1998 for the acquisition and
implementation of a new enterprise-wide information system. In addition, during
1997 the Company plans to make approximately $5.5 million of capital
expenditures with respect to leasehold improvements in connection with the
consolidation of the domestic operations of IMED and IVAC. The Company made
capital expenditures of approximately $4.9 million during the first quarter of
1997, approximately $3.0 million of which was related to the consolidation of
the IMED and IVAC facilities.
The Company believes that it will generate sufficient cash flow from
operations to fund its operations, make planned capital expenditures and make
required payments of principal and interest under the New Credit Facility and
interest on the Notes; however, the Company may not generate sufficient cash
flow from operations to repay the Notes at maturity. Accordingly, the Company
may have to refinance the Notes at or prior to maturity or sell assets or raise
equity capital to repay the principal amount of the Notes. In addition, the
Company's ability to fund its operations, to make planned capital expenditures
and to make scheduled principal and interest payments will be dependent on the
Company's future operating performance, which is itself dependent on a number of
factors, many of which the Company cannot control, including conditions
affecting the Company's foreign operations, prevailing economic conditions,
availability of other sources of liquidity, and financial, business, regulatory
and other factors affecting the Company's business and operations. See "Risk
Factors--Significant Leverage," "--Dependence on New Products and Markets;
Uncertain Pace of Technological Change," "--Substantial Competition,"
"--Concentration of Buying Power," "--Government Regulation," "--Health Care
Reform," "--Foreign Operations" and "--Material Legal Proceeding."
SEASONALITY
Infusion pump sales are typically higher in the fourth quarter due to sales
compensation plans which reward the achievement of annual quotas and the
seasonal nature of the health care industry, including hospital purchasing
patterns. First quarter sales are traditionally not as strong as the fourth
quarter.
BACKLOG
The backlog of orders, believed to be firm, at March 31, 1997 was $6.7
million.
59
<PAGE>
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 translation risks. Historically, neither IMED nor
IVAC has entered into foreign currency contracts to hedge such exposure and such
risk has not had a material impact on either such company's operating results,
financial condition or cash flows.
60
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF IVAC
(DOLLARS IN THOUSANDS)
The following selected historical consolidated financial data as of and for
the years ended December 31, 1992 and 1993 have been derived from the
Consolidated Financial Statements of the Predecessor Company and subsidiaries
and certain related entities. The following selected historical consolidated
financial data as of and for the years ended December 31, 1994 and 1995 have
been derived from the Consolidated Financial Statements of the Predecessor
Company and IVAC Holdings, respectively. The selected historical consolidated
financial data as of September 30, 1996 and for the nine months ended September
30, 1995 and 1996 have been derived from unaudited financial statements of IVAC
Holdings. The summary historical consolidated financial data for all periods
prior to and including December 31, 1994 are derived from the Consolidated
Financial Statements of the Predecessor Company prior to the consummation of the
December 1994 acquisition (the "Prior Acquisition") of IVAC Medical Systems by
DLJ Merchant Banking, L.P. and related entities ("DLJMB") and River and related
entities (the "River Group") (the "Predecessor Company"). For accounting
purposes, the Prior Acquisition was treated as a purchase transaction and
accordingly, the summary historical consolidated financial data of the
Predecessor Company are not comparable in all respects to the summary historical
consolidated financial data of IVAC Holdings for periods subsequent to the Prior
Acquisition. The unaudited financial statements include all adjustments which
IVAC Holdings considers necessary for a fair presentation of its financial
position and results of operations for these periods. Operating results for the
nine months ended September 30, 1996 are not indicative of results for future
periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- --------------------
PREDECESSOR COMPANY IVAC HOLDINGS
---------------------------- --------------------------------
1992 1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................... $213,430 $214,244 $223,227 $240,971 $174,663 $170,155
Cost of sales................................ 123,497 125,542 146,659 157,869(1) 118,255(1) 98,836
-------- -------- -------- -------- -------- --------
Gross profit................................. 89,933 88,702 76,568 83,102 56,408 71,319
Sales and marketing.......................... 41,395 40,190 45,055 43,994 32,470 28,872
General and administrative................... 16,348 16,032 21,586 28,381 18,529 17,479
Research and development..................... 15,938 18,742 18,504 12,083 10,111 7,663
Purchased research and development........... -- -- -- 22,883 19,883 --
Restructuring and special items(2)........... 1,307 3,967 13,143 5,944 4,460 17,396
Expense allocation from Lilly(3)............. 7,411 6,416 7,480 -- -- --
Other expense, net........................... 2,013 269 3,560 1,497 -- --
-------- -------- -------- -------- -------- --------
Total operating expenses..................... 84,412 85,616 109,328 114,782 85,453 71,410
-------- -------- -------- -------- -------- --------
Contract interest income(4).................. 2,766 2,724 2,927 3,013 2,130 1,812
-------- -------- -------- -------- -------- --------
Income (loss) from operations................ 8,287 5,810 (29,833) (28,667) (26,915) 1,721
Interest income (expense), net(5)............ 1,963 1,316 (2,227) (27,476) (19,686) (13,396)
Provision for (benefit from) income taxes.... 4,755 1,710 3,793 (378) (3,270) 2,434
-------- -------- -------- -------- -------- --------
Net income (loss)............................ $ 5,495 $ 5,416 $(35,853) $(55,765) $(43,331) $(14,109)
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Ratio of earnings to fixed charges(6)........ 15.9x 7.2x -- -- -- 1.1x
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------
PREDECESSOR COMPANY AT SEPTEMBER 30,
----------------
IVAC HOLDINGS
-------------------------------- ------------------------------
1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 5,400 $ 4,683 $ 3,226 $ 18,308 $ 10,447
Working capital............................ 52,734 119,457 74,124 41,850 24,172
Total assets............................... 230,012 248,909 174,144 215,995 190,981
Long-term debt (including current portion
and related party debt).................. -- 12,000(10) 11,621(10) 165,785 160,489
Shareholders' equity (deficit)............. 185,173 192,511 129,981 (20,515) (35,591)
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- --------------------
PREDECESSOR COMPANY IVAC HOLDINGS
---------------------------- --------------------------------
1992 1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Adjusted EBITDA(7)........................... $ 27,267 $ 26,442 $ 7,601 $ 35,884 $ 27,296 $ 34,396
Depreciation and amortization................ 10,262 10,249 15,119 20,950(8) 15,094(8) 15,279
Capital expenditures, net.................... 8,324 9,920 9,000 13,752(9) 7,738 12,957
Net cash provided by operating activities.... 18,618 8,115 6,502 38,143 28,544 15,485
Net cash used in investing activities........ (8,482) (36,721) (9,000) (179,287) (193,693) (12,957)
Net cash provided by (used in) financing
activities................................. (1,551) 30,217 -- 157,605 181,674 (9,332)
</TABLE>
RECONCILIATION OF ADJUSTED EBITDA TO NET INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- --------------------
PREDECESSOR COMPANY IVAC HOLDINGS
---------------------------- --------------------------------
1992 1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C> <C>
Adjusted EBITDA.............................. $ 27,267 $ 26,442 $ 7,601 $ 35,884 $ 27,296 $ 34,396
Restructuring and special items.............. (8,718) (10,383) (22,315) (5,944) (4,460) (17,396)
Purchased research and development........... -- -- -- (22,883) (19,883) --
Purchase accounting adjustments.............. -- -- -- (14,774) (14,774) --
Depreciation and amortization................ (10,262) (10,249) (15,119) (20,950) (15,094) (15,279)
Interest income (expense).................... 1,963 1,316 (2,227) (27,476) (19,686) (13,396)
(Provision for) benefit from income taxes.... (4,755) (1,710) (3,793) 378 3,270 (2,434)
-------- -------- -------- -------- -------- --------
Net income................................... $ 5,495 $ 5,416 $(35,853) $(55,765) $(43,331) $(14,109)
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
- --------------------------
(1) Includes $14,774 one-time purchase price allocation to inventories in
excess of historical costs.
(2) See Notes 4 and 5 to Notes to Consolidated Financial Statements of the
Predecessor Company, Note 12 to Notes to Consolidated Financial Statements
of IVAC Holdings and Note 5 to Condensed Consolidated Financial Statements
of IVAC Holdings included elsewhere in this Prospectus.
(3) Prior to December 31, 1994, IVAC was a wholly owned subsidiary of Lilly.
Parent company allocations represent the Predecessor Company's non-cash pro
rata share of Lilly's corporate overhead.
(4) Contract interest income consists of interest income associated with
contracts or agreements pursuant to which a third party acquires instruments
at no or reduced initial cost by paying a premium (a portion of which is
recorded by IVAC in accordance with generally accepted accounting principles
as contract interest income) for subsequent purchases of disposable
administration sets. See Note 2 to Consolidated Financial Statements of the
Predecessor Company and IVAC Holdings included elsewhere in this Prospectus.
(5) Prior to the Prior Acquisition, interest income (expense), net, consists of
interest expense net of intercompany interest income, if any, and,
subsequent to the Prior Acquisition, interest income (expense), net,
consists of interest expense net of interest earned on cash balances. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of IVAC." Includes interest income of $2,060, $1,674, $716 and
$493 for the years ended December 31, 1992, 1993, 1994 and 1995,
respectively, and $361 and $334 for the nine months ended September 30, 1995
and 1996, respectively.
(6) For purposes of determining the ratio of earnings to fixed charges,
earnings includes pre-tax income adjusted for fixed charges. Fixed charges
consist of interest on all indebtedness, estimated interest component of
rental expense and amortization of deferred financing costs. As a result of
losses, earnings were inadequate to cover
62
<PAGE>
fixed charges by $32,060, $56,143, $46,601 and $11,675 for the years ended
December 31, 1994 and 1995, and the nine months ended September 30, 1995 and
1996, respectively.
(7) Adjusted EBITDA represents income (loss) from operations before parent
company allocations, restructuring and special items, certain non-recurring,
non-cash purchase accounting charges and depreciation and amortization.
Adjusted EBITDA does not represent net income or cash flows, 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 IVAC's
operating performance or to cash flows as a measure of liquidity. The
Company has included information concerning Adjusted EBITDA herein because
it uses such information as a method of assessing its cash flow and ability
to service debt and understands that such information is also 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 the Company believes that the inclusion of
these items would not be helpful to an investor's understanding of IVAC's
ability to service debt. IVAC's computation of Adjusted EBITDA may not be
comparable to similarly titled measures of other companies.
(8) Excludes service support agreement amortization for the year ended December
31, 1995 and nine months ended September 30, 1995 of $2,786. The amount
capitalized as service support agreement in 1995 consisted of certain
administrative services provided by Lilly on behalf of IVAC for a period of
six months.
(9) Excludes proceeds from the sale of IVAC's 380,000 square foot San Diego
facility.
(10) Includes IVAC's minimum royalty payment to Siemens Infusion Systems, Ltd.
in conjunction with the sale of the MiniMed product line (the predecessor of
MS III) to the Predecessor Company in September 1993. See Note 3 to
Consolidated Financial Statements of the Predecessor Company included
elsewhere in this Prospectus.
63
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF IVAC
THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS OF IVAC HOLDINGS AND THE PREDECESSOR COMPANY AND THE RESPECTIVE
RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
GENERAL
IVAC sells and services products primarily in the United States, Canada and
Europe to both hospital and alternate site markets. IVAC's two principal lines
of business are infusion therapy and vital signs measurement products. In 1995,
net sales from infusion therapy and vital signs measurement products (including,
in each category, associated disposable sets) accounted for approximately 80%
and 14%, respectively, of IVAC's net sales.
In order to provide continued support for its products, IVAC offers repair
and other services in connection with its installed base of instruments. Net
sales from such services were less than 10% of total net sales in all of the
periods discussed below.
Pursuant to the Prior Acquisition, IVAC Holdings was formed and, after the
close of business on December 31, 1994, IVAC Medical Systems was acquired from
Lilly by DLJMB and the River Group. Prior to the Prior Acquisition, IVAC Medical
Systems was a wholly owned subsidiary of Lilly. In connection with the Prior
Acquisition, all of the outstanding capital stock of River was contributed to
IVAC Holdings (which, in turn, contributed such stock to IVAC Medical Systems)
and, as a result, River became a wholly owned subsidiary of IVAC Medical
Systems. River's primary product was SmartDose, a pre-filled, disposable
infusion pump used primarily in the alternate site market. As a result of the
Prior Acquisition, financial data for IVAC for periods subsequent to December
31, 1994, which give effect to purchase accounting adjustments related to the
Prior Acquisition and include financial results for River, are not necessarily
comparable to financial data for the Predecessor Company for periods prior to
December 31, 1994. In addition, results of operations for periods prior to the
Prior Acquisition include parent company allocations of corporate expenses which
are not included in subsequent periods.
In June 1996, IVAC decided to discontinue operations at River and to seek to
divest the subsidiary's assets. River's primary assets include patents,
technologies, trade secrets, inventories and manufacturing equipment. IVAC
recorded a restructuring charge of $17.4 million during the second quarter of
1996 and anticipates that it will make cash payments related to the River
Divestiture of approximately $7.8 million.
Subsequent to the Prior Acquisition, IVAC significantly reduced production
and operating costs and eliminated excess expenses incurred by Lilly, its former
parent, in connection with Lilly's operation of IVAC Medical Systems as a
division. IVAC's efforts focused on improving the overall quality of its product
offerings and providing better customer service while achieving a lower-cost
manufacturing platform for existing and future products. During 1995, IVAC
implemented the following programs: (i) reduced overall head count by
approximately 403, or 28% of total employees as of December 31, 1994, through
termination and attrition; (ii) consolidated supply sources; (iii) eliminated
research and development projects which were judged to be high risk/low market
potential; (iv) rationalized underutilized assets, including consolidating
certain warehouse operations and reconfiguring materials handling and product
lines; and (v) integrated the vital signs manufacturing, engineering and
marketing functions with those of the infusion therapy business. In addition, as
part of its overall cost reduction strategy, IVAC sold its 380,000 square foot
San Diego facility in November 1995 and IVAC relocated its primary instrument
manufacturing and corporate headquarters operations to smaller leased facilities
in San Diego. IVAC intends to continue implementing cost reduction initiatives
in the future, including the possible expansion of its Mexican maquiladora
manufacturing facility to realize labor savings. In connection with the Prior
Acquisition, IVAC was obligated to pay a defined severance package to employees
transferred from the Predecessor Company if such employees were terminated prior
to July 1, 1996.
64
<PAGE>
In recent years, IVAC'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 adopted a new 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 IVAC's disposable administration sets have increased in every
period since January 1, 1994, primarily as a result of IVAC's growing installed
base of infusion pumps. IVAC's profitability is also affected by the increasing
use of GPOs which are better able to negotiate favorable pricing from providers
of infusion systems, such as IVAC, and which police compliance with exclusive
buying arrangements for their members. These buying arrangements, in certain
situations, also may result in the GPO requiring removal of IVAC's existing
infusion pumps. IVAC expects that such GPOs will become increasingly common and
may have an adverse effect on IVAC's profitability in the future. Finally, the
enactment of national health care reform or other legislation affecting payment
mechanisms and health care delivery would affect IVAC's future results of
operations. Although the final form of any such legislation is not known, it is
likely that any such legislation may impose limits on the number and type of
medical procedures which may be performed and may restrict a provider's ability
to select specific devices or products for use in administering care which, in
turn, in each case could adversely impact demand and/or pricing for IVAC's
products. It is impossible to predict the extent to which IVAC may be affected
by any such change in legislation.
RESULTS OF OPERATIONS OF IVAC
The following table sets forth, for the periods indicated, selected
financial information of IVAC, expressed as a percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------
NINE MONTHS ENDED
PREDECESSOR
COMPANY SEPTEMBER 30,
--------------------
IVAC HOLDINGS
------------- -------------------------------
1994 1995 1995 1996
<S> <C> <C> <C> <C>
Net sales............................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales........................................ 65.7 65.5 67.7 58.1
----- --------- --------- ---------
Gross profit......................................... 34.3 34.5 32.3 41.9
Selling and marketing................................ 20.2 18.3 18.6 17.0
General and administrative........................... 9.7 11.8 10.6 10.3
Research and development............................. 8.3 5.0 5.8 4.5
Purchased research and development................... -- 9.5 11.4 --
Restructuring and special items...................... 5.9 2.5 2.5 10.2
Parent company allocations........................... 3.3 -- -- --
Other expense........................................ 1.6 0.6 -- --
----- --------- --------- ---------
Total operating expenses............................. 49.0 47.7 48.9 42.0
Contract interest income............................. 1.3 1.3 1.2 1.1
----- --------- --------- ---------
Income (loss) from operations........................ (13.4) (11.9) (15.4) 1.0
Interest income (expense), net....................... (1.0) (11.4) (11.3) (7.9)
Provision for (benefit from) income taxes............ 1.7 (0.2) (1.9) 1.4
----- --------- --------- ---------
Net income (loss).................................... (16.1)% (23.1)% (24.8)% (8.3)%
----- --------- --------- ---------
----- --------- --------- ---------
OTHER DATA:
Adjusted EBITDA.................................... 3.4% 14.9% 15.6% 20.2%
</TABLE>
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The following table sets forth for the periods indicated selected financial
information of IVAC Holdings expressed as a percentage of net sales, on a pro
forma basis, as if the River Divestiture had occurred at the beginning of each
of the periods indicated:
<TABLE>
<CAPTION>
IVAC HOLDINGS, EXCLUDING RIVER
-----------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
YEAR ENDED ----------------------------------
DECEMBER 31, 1995 1995 1996
<S> <C> <C> <C>
Net sales....................................... 100.0% 100.0% 100.0%
Cost of sales................................... 63.5 66.0 56.6
------- ------- -------
Gross profit.................................... 36.5 34.0 43.4
Selling and marketing........................... 17.1 17.4 16.5
General and administrative...................... 10.4 9.3 9.9
Research and development........................ 4.7 5.4 4.4
Purchased research and development.............. 4.2 5.8 --
Restructuring and special items................. 2.4 2.5 --
Other expense................................... 0.6 -- --
------- ------- -------
Total operating expenses........................ 39.4 40.4 30.8
Contract interest income........................ 1.3 1.2 1.1
------- ------- -------
Income (loss) from operations................... (1.6) (5.2) 13.7
Interest income (expense), net.................. (11.4) (11.3) (7.8)
Provision for (benefit from) income taxes....... 1.4 0.3 3.1
------- ------- -------
Net income (loss)............................... (14.4)% (16.8)% 2.8%
------- ------- -------
------- ------- -------
OTHER DATA:
Adjusted EBITDA............................... 19.4% 19.8% 22.3%
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
NET SALES. Net sales decreased $4.5 million, or 2.6%, from $174.7 million
for the nine months ended September 30, 1995 to $170.2 million for the nine
months ended September 30, 1996. U.S. net sales, which were 66.8% of net sales
for the nine months ended September 30, 1996, decreased $4.7 million, or 4.0%,
from $118.4 million for the nine months ended September 30, 1995 to $113.7
million for the nine months ended September 30, 1996. Within the United States
infusion therapy business, sales decreased for the nine months ended September
30, 1996 as compared to the nine months ended September 30, 1995 as a result of
(i) shipment in 1995 of the MS III product backlog which had resulted from the
discontinuation of production due to product design and manufacturing process
problems during the fourth quarter 1994 and (ii) attrition in the installed base
of older technology products. In addition, IVAC has been impacted by the market
trend of increasing concentration of buying power among healthcare providers.
The sales decrease was partially offset by an increase in the number of
Signature Edition instruments shipped in 1996 as compared to 1995. Separately,
in June 1996, IVAC temporarily ceased manufacturing and distribution of its
Signature Edition infusion pumps in order to evaluate field complaints. IVAC
subsequently implemented a voluntary recall of the Signature Edition pumps.
Production and distribution of the Signature Edition product line, incorporating
product improvements, resumed during the third quarter of 1996. U.S. vital signs
product sales declined as a result of lower instrument placements and decreased
sales of thermometer disposable probe covers. International sales increased $0.2
million, or 0.4%, from $56.3 million for the nine months ended September 30,
1995 to $56.5 million for the nine months ended September 30, 1996, primarily as
a result of the increased volume of drug infusion disposable administration sets
offset in part by the unfavorable impact of exchange rate fluctuations which
reduced net sales by $1.3 million. On a pro forma basis for the River
Divestiture, net sales would have been $169.8 million for the nine months ended
September 30, 1996 and $174.1 million for the nine months ended September 30,
1995.
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GROSS PROFIT. Gross profit increased $14.9 million, or 26.4%, from $56.4
million for the nine months ended September 30, 1995 to $71.3 million for the
nine months ended September 30, 1996 due to (i) a one time $14.8 million charge
in 1995 for the acquisition purchase price allocation to inventories in excess
of historical costs recorded in connection with the Prior Acquisition, (ii)
lower repair costs associated with the MS III product line, (iii) the ongoing
benefit of lower manufacturing costs associated with restructuring of
manufacturing workforce in 1995, and (iv) cost savings realized in connection
with the discontinuation of the operations of River in June 1996. These factors
were offset in part by decreased net sales, without a reduction in fixed
overhead costs, and costs associated with IVAC's voluntary recall of the
Signature Edition pumps. Excluding the 1995 effect of the one time purchase
accounting adjustment, gross profit as a percentage of net sales improved from
40.8% for the nine months ended September 30, 1995 to 41.9% for the nine months
ended September 30, 1996. On a pro forma basis for the River Divestiture, gross
profit would have been $73.7 million for the nine months ended September 30,
1996 and $59.3 million for the nine months ended September 30, 1995.
SELLING AND MARKETING. As a percentage of net sales, selling and marketing
expenses decreased from 18.6%, or $32.5 million, for the nine months ended
September 30, 1995 to 17.0%, or $28.9 million, for the nine months ended
September 30, 1996, primarily as a result of cost savings derived from
restructuring the Company's hospital field sales force during 1995, cost savings
realized in connection with the discontinuation of the operations of River in
June 1996 and lower international spending due to the termination of the
services agreement with Lilly (IVAC's former parent). IVAC is currently
performing these services. On a pro forma basis for the River Divestiture,
selling and marketing expense would have been $28.1 million for the nine months
ended September 30, 1996 and $30.2 million for the nine months ended September
30, 1995.
GENERAL AND ADMINISTRATIVE. As a percentage of net sales, general and
administrative expenses decreased from 10.6%, or $18.5 million for the nine
months ended September 30, 1995 to 10.3%, or $17.5 million for the nine months
ended September 30, 1996, primarily as a result of cost savings realized in
connection with the discontinuation of the operations of River in June 1996,
including lower legal costs associated with the SmartDose product line, offset
in part by legal costs and accounting fees associated with the Merger. On a pro
forma basis for the River Divestiture, general and administrative expense would
have been $16.8 million for the nine months ended September 30, 1996 and $16.3
million for the nine months ended September 30, 1995.
RESEARCH AND DEVELOPMENT. As a percentage of net sales, research and
development expenses decreased from 5.8%, or $10.1 million, for the nine months
ended September 30, 1995 to 4.5%, or $7.7 million, for the nine months ended
September 30, 1996, primarily as a result of reduced spending on the new
Signature Edition product as it reached the final phase of the development cycle
during the fourth quarter of 1995 and 1995 head count reductions. On a pro forma
basis for the River Divestiture, research and development expense would have
been $7.5 million for the nine months ended September 30, 1996 and $9.5 million
for the nine months ended September 30, 1995.
RESTRUCTURING AND SPECIAL ITEMS. The restructuring and special items for
1995, totaling $4.5 million, consisted of a non-recurring charge for severance
costs incurred in connection with head count reductions undertaken as part of a
restructuring in September 1995. The restructuring and special items for the
nine months ended September 30, 1996, totaling $17.4 million, consisted of a
non-recurring charge for the River Divestiture. The restructuring charge
included the writedown of the book value of River's assets including intangible
assets of $5.3 million, manufacturing equipment of $5.2 million and inventories
of $1.4 million. The restructuring charge also included approximately $5.5
million in exit and severance costs calculated at the present value of the
estimated amount to be paid. River has ceased operations and IVAC is continuing
to seek the most advantageous sale of River's assets. River developed and
manufactured the SmartDose product line. The SmartDose product line was
specifically designed for the alternate site market and comprised a pre-filled,
non-mechanical, disposable infusion pump. Management decided to discontinue
River's operations to allow IVAC to focus on its core products in the infusion
therapy and vital signs
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monitoring markets. For the nine months ended September 30, 1995 and 1996, River
experienced negative margins of $2,849 and $2,414, respectively, due to high
production costs caused by low production volume coupled with reduced sales
prices resulting from poor market acceptance of its products. The River
Divestiture is anticipated to have a favorable effect on the Company's future
operations and liquidity as the Company was investing in and River was spending
at the rate of approximately $1.5 million per quarter.
PURCHASED RESEARCH AND DEVELOPMENT. During the nine months ended September
30, 1995, IVAC recorded a one time purchase accounting adjustment of $19.9
million for purchased research and development relating to the revaluation of
assets in conjunction with the acquisition of IVAC Medical Systems and River in
the Prior Acquisition. On a pro forma basis for the River Divestiture, the
purchased research and development expense would have been $10.1 million for the
nine months ended September 30, 1995.
CONTRACT INTEREST INCOME. Contract interest income consists of interest
income associated with contracts or agreements pursuant to which a third party
acquires instruments at no or reduced initial cost by paying a premium (a
portion of which is reported by IVAC in accordance with generally accepted
accounting principles as contract interest income) for subsequent purchase of
disposable administration sets.
INCOME (LOSS) FROM OPERATIONS. Loss from operations decreased $28.6 million
from a loss of $26.9 million for the nine months ended September 30, 1995 to an
income from operations of $1.7 million for the nine months ended September 30,
1996. Excluding the one time acquisition purchase accounting charges of $34.7
million during the nine months ended September 30, 1995, of which $14.8 million
was included in cost of sales and $19.9 million in purchased research and
development, the 1995 restructuring charge of $4.5 million and the 1996 one time
restructuring charge of $17.4 million for the River Divestiture, income from
operations increased $7.2 million, or 70.6%, from $10.2 million for the nine
months ended September 30, 1995 to $17.4 million for the nine months ended
September 30, 1996. The $7.2 million increase reflects the reduction in
production and operating costs attributed to IVAC's restructuring and cost
savings actions initiated in 1995 and continuing in 1996, including the
discontinuance of the operations of River in June 1996. On a pro forma basis for
the River Divestiture, income from operations would have been $21.5 million for
the nine months ended September 30, 1996 and loss from operations would have
been $11.2 million for the nine months ended September 30, 1995.
INTEREST INCOME (EXPENSE), NET. Net interest expense for the nine months
ended September 30, 1995 was $19.7 million, compared to net interest expense for
the nine months ended September 30, 1996 of $13.4 million. Interest income
during both periods consisted of interest earned on actual cash balances.
Interest expense was lower for the nine months ended September 30, 1996 as a
result of refinancing and repayment of debt during the fourth quarter of 1995.
On a pro forma basis for the River Divestiture, net interest expense would have
been $13.3 million for the nine months ended September 30, 1996 and $19.6
million for the nine months ended September 30, 1995. See "--Liquidity and
Capital Resources."
INCOME (LOSS) BEFORE INCOME TAXES. Excluding the effect of (i) pre-tax 1995
acquisition purchase accounting adjustments of $34.7 million, (ii) 1995 pre-tax
restructuring charges of $4.5 million and (iii) 1996 pre-tax restructuring
charge of $17.4 million, income before income taxes increased $13.1 million,
from a loss before taxes of $7.4 million for the nine months ended September 30,
1995 to income before taxes of $5.7 million for the nine months ended September
30, 1996, reflecting the cost savings discussed above. On a pro forma basis for
the River Divestiture, income before income taxes would have been $10.0 million
for the nine months ended September 30, 1996 and loss before income taxes would
have been $28.7 million for the nine months ended September 30, 1995.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. The benefit from income taxes
was $3.3 million for the nine months ended September 30, 1995 compared to income
tax expense of $2.4 million for the nine months ended September 30, 1996. The
1995 benefit reflects the write-off of purchased research and development
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<PAGE>
partially offset by foreign taxes. IVAC has recorded a valuation allowance
against its deferred tax assets based on an assessment that it is more likely
than not that the deferred tax assets will not be realized. On a pro forma basis
for the River Divestiture, provision for income taxes would have been $5.2
million for the nine months ended September 30, 1996 and $0.6 million for the
nine months ended September 30, 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
NET SALES. Net sales increased $17.8 million, or 8.0%, from $223.2 million
for 1994 to $241.0 million for 1995. United States sales, which comprised 67.8%
of net sales for 1995, increased 6.5%, or $9.9 million, from $153.4 million for
1994 to $163.3 million for 1995 as a result of increases in drug infusion
product sales. Within the United States infusion therapy business, sales of
IVAC's more mature product lines, such as the 560/570 Series and 590/599 Series,
increased modestly and sales of MS III increased as compared to 1994 net sales
as a result of (i) a backlog resulting from discontinuance of production due to
product design and manufacturing process problems during 1994 and (ii) the
transfer of selling efforts from a small number of MS III specialists to IVAC's
larger sales force beginning in the second quarter of 1994. International sales
increased 11.2%, or $7.8 million, from $69.8 million for 1994 to $77.6 million
for 1995 primarily as a result of the increased volume of sales of infusion
therapy products, particularly the P-Series syringe pumps, the favorable impact
of exchange rate fluctuations and the increased volume of vital signs
measurement products sales. On a pro forma basis for the River Divestiture, net
sales would have been $240.2 million for the year ended December 31, 1995.
GROSS PROFIT. Excluding the effect of purchase accounting of $14.8 million,
gross profit increased $21.3 million, or 27.8%, from $76.6 million for 1994 to
$97.9 million for 1995. This increase resulted from increased sales, decreased
manufacturing costs achieved through cost savings and improved manufacturing
efficiencies, and improvements in product quality, offset in part by increased
spending associated with manufacturing of the SmartDose product line. On a pro
forma basis for the River Divestiture, gross profit would have been $87.7
million for the year ended December 31, 1995.
SELLING AND MARKETING. As a percentage of net sales, selling and marketing
expense decreased from 20.2%, or $45.1 million, for 1994 to 18.3%, or $44.0
million, for 1995 primarily as a result of cost savings derived from
restructuring the Company's hospital field sales force during the first quarter
of 1995 and on-going expense management of items such as travel and
entertainment, offset in part by increased expenses attributable to the
establishment of an alternate site sales force. On a pro forma basis for the
River Divestiture, selling and marketing expense would have been $41.0 million
for the year ended December 31, 1995.
GENERAL AND ADMINISTRATIVE. As a percentage of net sales, general and
administrative expense increased from 9.7%, or $21.6 million, for 1994 to 11.8%,
or $28.4 million, for 1995 primarily reflecting (i) increased expenses incurred
by River (without corresponding River sales volume increases); (ii) amortization
of excess purchase price over net assets acquired associated with the Prior
Acquisition; and (iii) expenses for studies conducted to identify improvement
opportunities for domestic and international operations. On a pro forma basis
for the River Divestiture, general and administrative expense would have been
$24.9 million for the year ended December 31, 1995.
RESEARCH AND DEVELOPMENT. As a percentage of net sales, research and
development expense decreased from 8.3%, or $18.5 million, for 1994 to 5.0%, or
$12.1 million, for 1995 primarily as a result of the elimination of certain
research projects and reduced spending on the new Signature Edition line as it
neared the final phase of the development cycle. Such reductions were offset in
part, however, by development expenses related to the SmartDose system. This
increase is partially offset by reduced costs resulting from 1995 head count
reductions. On a pro forma basis for the River Divestiture, research and
development expense would have been $11.3 million for the year ended December
31, 1995.
RESTRUCTURING AND SPECIAL ITEMS. The restructuring and special items for
1995, totaling $5.9 million, consisted of a non-recurring charge of $5.3 million
for severance costs incurred in connection with head
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<PAGE>
count reductions undertaken as part of the restructuring and $0.6 million in
costs for relocating the corporate headquarters and primary instrument
manufacturing facilities. The restructuring and special items for 1994, totaling
$13.1 million, were solely related to a write-down of excess purchase price over
net assets acquired as a result of the acquisition of the MS III product line.
The write-down recognized design and other defects of the acquired product line,
together with a change in market conditions which caused the sales and earnings
of MS III products to be significantly below those that had been projected at
the time of the acquisition of the product line. Based on significantly higher
than anticipated returns of MS III units during fiscal 1994, management
determined that there existed a fundamental flaw in the MedSystem design and
manufacturing process. As a result, the Company ceased production and shipments
of MS III in October, 1994 and began to redesign the unit configuration to
correct the aforementioned flaws. Based on the lost sales resulting from
shut-down and the lost value of the MedSystem name in the marketplace, and
considering the costs associated with correcting the design problems, it was
determined than an impairment had occurred.
The methodology used to assess the recoverability of the Company's goodwill
recorded in connection with the MedSystem acquisition was to discount future
projected cash flows over the remaining estimated useful life of the MedSystem
technology. The projected cash flows represented management's best estimate of
the Company's future results of operations related to this product line. The
Company discounted the resulting projected cash flows using a discount rate of
12% which was considered a reasonable approximation of the Company's cost of
capital at the time of impairment. Based on the estimated discounted cash flows,
the Company determined that approximately $1.1 million of the remaining
unamortized goodwill would be recoverable. The same method and discount rate
were used to measure potential impairment as of December 31, 1993 for the
MedSystem goodwill. Management determined that no other assets were impaired by
the circumstances that led to the discontinuance of the MiniMed product line. On
a pro forma basis for the River Divestiture, restructuring and special items
would have been $5.8 million for the year ended December 31, 1995.
CONTRACT INTEREST INCOME. Contract interest income consists of interest
income associated with contracts or agreements pursuant to which a third party
acquires instruments at no or reduced initial cost by paying a premium (a
portion of which is reported by IVAC in accordance with generally accepted
accounting principles as contract interest income) for subsequent purchase of
disposable administration sets.
INCOME (LOSS) FROM OPERATIONS. For the reasons discussed above, IVAC
recorded a loss from operations of $29.8 million for 1994 as compared to a loss
from operations of $28.7 million for 1995. Loss from operations in 1995 included
$37.7 million of one-time-purchase accounting adjustments of which $14.8 million
is included in cost of sales and $22.9 million in purchased research and
development, as well as a $5.9 million charge for restructuring and special
items. Loss from operations in 1994 included a $13.1 million write-down of
excess purchase price over net assets associated with the MS III product line,
as well as $7.5 million of corporate expense allocations from IVAC Medical
System's former parent company, Lilly. On a pro forma basis for the River
Divestiture, loss from operations would have been $7.0 million for the year
ended December 31, 1995.
INTEREST INCOME (EXPENSE), NET. Net interest expense for 1995 was $27.5
million compared to net interest expense for 1994 of $2.2 million. Interest
expense in 1995 was comprised primarily of interest expense attributable to
indebtedness incurred to fund the Prior Acquisition. On a pro forma basis for
the River Divestiture, net interest expense would have been $27.3 million for
the year ended December 31, 1995.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. Benefit from income taxes was
$0.4 million in 1995 compared to income tax expense of $3.8 million for 1994.
The 1995 benefit reflects the write-off of purchased research and development
partially offset by foreign taxes. As of December 31, 1995, IVAC recorded a
valuation allowance against its deferred tax assets based on an assessment that
it is more likely than not that the deferred tax assets will not be realized.
This determination was based on historical losses,
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uncertainties surrounding new product introduction, lack of evidence that
sufficient future income would be generated to utilize the net deferred assets,
and no carryback period existed in which to utilize such losses. Had management
fully recognized these deferred tax assets, the effect would have been a
one-time benefit to net income of $21.2 million. On a pro forma basis for the
River Divestiture, provision for income taxes would have been $3.5 million for
the year ended December 31, 1995.
NET LOSS. For the reasons discussed above, net loss increased $19.9 million
from a net loss of $35.9 million for 1994 to a net loss of $55.8 million for
1995. The net loss in 1995 included $37.7 million of pre-tax one-time-purchase
accounting adjustments and $5.9 million of pre-tax non-recurring charges for
severance costs and facility relocation expenses. On a pro forma basis for the
River Divestiture, net loss would have been $34.7 million for the year ended
December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1996, cash and cash equivalents
decreased to $10.4 million from $18.3 million at December 31, 1995 due primarily
to (i) $13.0 million of capital expenditures inclusive of leasehold improvements
associated with IVAC's relocation of its corporate and primary instrument
manufacturing facilities in San Diego; (ii) the March 1996 prepayment of $5.5
million of bank term loans (concurrent with the amendment and restatement of
IVAC's old bank credit facility (the "Old Facility")); and (iii) the payment of
$4.5 million related to the 1993 acquisition of the MS III product line; all of
the above being offset in part by $15.5 million of cash provided by operating
activities (resulting from operating profitability and reductions in certain
working capital components).
For the reasons discussed in the operating results components under "--Nine
Months Ended September 30, 1996 Compared to Nine Months Ended September 30,
1995," Adjusted EBITDA increased $7.1 million, or 26.0%, from $27.3 million for
the nine months ended September 30, 1995 to $34.4 million for the nine months
ended September 30, 1996. Adjusted EBITDA margin increased from 15.6% for the
nine months ended September 30, 1995 to 20.2% for the nine months ended
September 30, 1996. On a pro forma basis for the River Divestiture, Adjusted
EBITDA would have been $37.8 million for the nine months ended September 30,
1996 and $34.4 million for the nine months ended September 30, 1995. Adjusted
EBITDA represents income from operations before restructuring charges, non-cash
purchase accounting charges and depreciation and amortization. Adjusted EBITDA
does not represent net income or cash flows, 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 operating performance or to cash
flows as a measure of liquidity. IVAC has included information concerning
Adjusted EBITDA herein because it uses such information as a method of assessing
cash flow and ability to service debt and believes that such information is also
used by investors as a measure of an issuer's ability to service its debt
obligations. Restructuring and other one time non-recurring charges are excluded
from Adjusted EBITDA as IVAC believes that the inclusion of these items would
not be helpful to an investor's understanding of IVAC's ability to service debt.
IVAC's computation of Adjusted EBITDA may not be comparable to similarly titled
measures of other companies.
At September 30, 1996, IVAC had working capital of $24.2 million, a decrease
of $17.7 million, or 42.2%, from the level at December 31, 1995 of $41.9
million. The decrease in working capital was due primarily to the (i) impact of
the prepayment of $5.5 million of term loans under the Old Facility concurrent
with the conversion of the Old Facility to a new revolving credit facility (the
"New Facility"), which resulted in a reclassification of $9.7 million from
long-term debt to current debt; (ii) $7.4 million working capital impact of the
write-down for the River Divestiture; (iii) decreased accounts receivable due to
increased collection efforts and reduced net sales; and (iv) inventory build-up
in anticipation of fourth quarter sales of Signature Edition instruments.
The New Facility matures on March 29, 1999 and provides for borrowings of up
to $40.0 million, secured by substantially all of the Company's domestic assets.
Borrowings under the New Facility bear interest at a rate equal to the Alternate
Base Rate (as defined in the New Facility) plus 0.25% or Adjusted
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LIBOR (as defined in the New Facility) plus 1.5%, at the option of IVAC. The
interest rate is also subject to change quarterly based upon certain debt and
interest coverage ratios. In connection with the Prior Acquisition, IVAC entered
into and became the borrower under the Old Facility with a syndicate of
financial institutions providing for facilities of $80.0 million, consisting of
$60.0 million of term loans and a $20.0 million revolving credit facility.
Initial borrowings under the Old Facility were used to finance the Prior
Acquisition. See Notes 5 and 13 to Notes to Consolidated Financial Statements of
IVAC Holdings included elsewhere herein. At September 30, 1996, IVAC had $24.5
million of available revolving borrowings under the New Facility and cash and
cash equivalents of $10.4 million.
In the fourth quarter of 1995, IVAC Medical Systems issued $100.0 million of
the Existing Senior Notes through a public debt offering, the net proceeds of
which were used to prepay $80.0 million of bridge financing incurred to fund the
Prior Acquisition (plus accrued interest) and $14.0 million of term loans under
the Old Facility. This refinancing reduced interest expense as the result of the
lower interest rate applicable to the Existing Senior Notes.
Also, in the fourth quarter of 1995, IVAC sold its San Diego facility for
$26.0 million and relocated its corporate headquarters and the operations
previously conducted at the San Diego facility to smaller leased premises. The
net proceeds from the sale were used to prepay $25.0 million of term loans under
the Old Facility.
IVAC is obligated to pay additional purchase consideration related to two
previous acquisitions. In connection with the acquisition of MS III, IVAC paid
additional consideration to Siemens Infusion Systems, Ltd. of $4.5 million
during the three months ended March 31, 1996, based on 1994 and 1995 product
sales, and is obligated to pay the greater of $3.0 million per year or 8% of the
prior year's product sales in 1997 through 1999. IVAC is also contingently
liable for up to approximately $1.9 million for additional purchase
considerations through 1996 based upon the P-Series syringe pump product line
achieving certain sales and pre-tax performance in each year.
BACKLOG
The backlog of orders, believed to be firm, at December 31, 1996 was $8.5
million. The comparable backlog at September 30, 1995 was $3.4 million.
INFLATION
In 1994, 1995 and the first nine months of 1996, IVAC has experienced
moderate upward pressure on the cost of supplies and services. Greater upward
pressure has historically been exerted upon labor costs, a trend that IVAC
expects will continue. IVAC has generally been able to offset the impact of
inflation through increased economies related to higher sales and manufacturing
efficiencies.
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BUSINESS
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 channels. In addition, the Company is a leader in the international
infusion systems market. The Company, based on installed base of infusion pumps,
has a number one or two market position in eleven Western European countries,
the number three market position in Germany and Italy, the largest installed
base of infusion pumps in Australia and Canada, and a developing position in
Latin America and Asia. The Company's infusion systems, which are used to
deliver fluids, generally pharmaceuticals or nutritionals, accurately and safely
to patients, consist of single and multi-channel infusion pumps and controllers,
and proprietary and non-proprietary disposable administration sets (plastic
tubing and pump interfaces). In addition, the Company is a leading provider of
vital signs measurement products that measure and monitor temperature, pulse and
blood pressure, with the largest installed base of hospital thermometry systems
in the United States.
The Company sells a full range of products through a direct sales force
consisting of over 230 salespersons and through more than 150 distributors to
over 5,000 hospitals worldwide. On a pro forma basis, the Company's United
States sales and sales to customers located outside the United States would have
accounted for approximately 65% and 35%, respectively, of the Company's pro
forma sales for 1996. For the three months ended March 31, 1997, the Company had
sales of approximately $82.0 million, with 37% of such sales being to customers
outside of the United States. Adjusted EBITDA for the three months ended March
31, 1997 was $17.8 million. For the year ended December 31, 1996, on a pro forma
basis, the Company would have had sales of approximately $346.3 million and
Adjusted EBITDA of approximately $77.7 million.
INFUSION SYSTEMS. At December 31, 1996, the Company had approximately
214,000 single and multi-channel large volume infusion pumps installed in the
United States, with a market share of approximately 40% of the installed base of
infusion pump channels in the United States. The Company offers a wide variety
of infusion pumps designed to meet the varying price and technological
requirements of its broad array of customers. These infusion pumps include the
Gemini series, consisting of single, dual and four channel infusion pumps
designed for use in all hospital settings by customers with sophisticated
technological requirements; the Signature Edition system, a versatile,
user-friendly single and dual channel infusion pump for use in general medical
and surgical settings; MS III, a compact, lightweight, programmable three
channel infusion pump targeted for the hospital critical care setting; and the
560/570 Series, consisting of single channel infusion pumps designed for the
price-conscious customer. In addition, the Company offers ReadyMED, an
ambulatory infusion pump which is compact, lightweight and disposable, for use
in the alternate site market and a variety of syringe infusion pumps for use
primarily outside the United States.
The Company manufactures higher margin proprietary disposable administration
sets which can only be used with the Company's large volume infusion pumps.
Since the useful life of the Company's infusion pumps is typically seven to ten
years, the Company's industry-leading installed base allows it to generate
stable, predictable and recurring revenues from sales of disposable
administration sets. In 1996, the Company sold, on a pro forma basis,
approximately 49.0 million proprietary and 11.0 million non-proprietary
disposable administration sets. The Company's disposable administration sets
offer protection features designed to prevent free flow. In addition, the
Company has recently introduced several enhancements to its disposable
administration sets, including needleless access systems that are designed to
reduce the risk to health care providers of diseases, such as AIDS and
hepatitis, that may be transmitted through accidental needlesticks and, in the
case of the SmartSite System, to eliminate patient exposure to latex which can
cause severe allergic or anaphylactic shock reactions. These features continue
to provide the Company's customers with the latest cost-effective technology for
the Company's installed base of infusion pumps. For the three months ended March
31, 1997, the Company's infusion system sales were approximately $68.9 million
or 84% of total sales. For the year ended December 31, 1996, on a pro forma
basis,
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the Company's infusion systems sales would have been approximately $292.1
million, representing approximately 84% of the Company's pro forma sales.
VITAL SIGNS MEASUREMENT PRODUCTS. The vital signs measurement products
market consists of discrete market niches, each of which has different
competitive dynamics. The Company primarily operates in the United States,
Canada and Western Europe in two market niches of the vital signs measurement
products market: (i) hospital thermometry systems and (ii) stand-alone,
non-invasive, multi-parameter instruments used to measure and monitor a
combination of temperature, pulse and blood pressure. The Company's large base
of installed hospital thermometry instruments allows it to generate stable,
predictable and recurring revenues from sales of related disposable probe
covers. In 1996, the Company manufactured and sold over 595 million proprietary
disposable probe covers. For the three months ended March 31, 1997, the
Company's vital signs measurement product sales were approximately $7.5 million
or 9.1% of sales. For the year ended December 31, 1996, on a pro forma basis,
the Company's vital signs measurement products net sales would have been
approximately $33.2 million, representing approximately 10% of the Company's pro
forma net sales.
At December 31, 1996, the Company's installed base of thermometry
instruments constituted approximately 42% of the United States hospital
electronic and infrared thermometry market, making the Company the largest
provider of hospital thermometry systems in the United States. The Company's
principal thermometry instruments are the TEMP-PLUS II electronic thermometer
and the CORE-CHECK infrared thermometer, both of which are widely used in
hospitals and alternate site settings. The Company is also the second largest
participant in the United States infrared thermometry market, the fastest
growing segment of the hospital thermometry market, and, at December 31, 1996,
had approximately 31% of the United States hospital installed base. In addition,
the Company's hospital installed base of stand-alone, non-invasive,
multi-parameter instruments, which measure and monitor temperature, pulse and
blood pressure, is the second largest in this market niche in the United States.
OPERATING STRATEGY
The Company believes that the Merger will enable it to: (i) significantly
expand the breadth of its product lines; (ii) capitalize on its established
global distribution network; (iii) enhance existing products and introduce new
products through the use of complementary patents and other proprietary
technologies; (iv) benefit from the combined experience of IMED and IVAC
management teams; and (v) identify and realize cost savings through synergies
and economies of scale. The Company believes that these benefits will enable it
to achieve increased sales, profitability and Adjusted EBITDA in future periods.
The Company's goals are to: (i) enhance its worldwide position as a leading
provider of cost-effective, high-quality infusion systems in the hospital
setting; (ii) expand its presence in the alternate site market; (iii) expand its
product lines through strategic acquisitions and alliances; and (iv) increase
sales, profitability and Adjusted EBITDA. In order to achieve these goals,
management will focus on implementing the following strategies:
EXPANDING INTERNAL GROWTH. The Company will seek to expand internal growth
by continuing to develop, manufacture and market new products while also making
innovations to its existing product lines in order to respond to evolving
customer preferences, changing market dynamics and technological advancements.
Moreover, the Company will introduce certain of its products to geographic and
user markets that have traditionally not used such products as part of their
therapeutic programs. The Company will strive to introduce and market products
with innovative features that are not presently available while manufacturing
these products at a reasonable cost. The Company is currently developing several
new infusion system products and product line extensions, including: (i) a
modular infusion pump that incorporates innovations in microprocessor and
electromechanical technology and will offer advanced programming features,
compact size and a one to four channel capability; (ii) an electromechanical
ambulatory infusion pump, targeted for both the hospital and alternate site
markets, that is lightweight,
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compact and capable of performing multiple therapeutic applications and other
advanced functions; and (iii) a single channel infusion pump designed for the
price-conscious customer. The Company believes that, in addition to increasing
revenues from infusion pump sales, to the extent the introduction of these new
infusion pumps increases its installed base of infusion pumps, the Company will
benefit from increased cash flows attributable to sales of higher margin
proprietary disposable administration sets used in connection with these new
infusion pumps. Anticipated additions to the Company's vital signs measurement
product line in the next twelve months include: (i) a seven-to-ten second
electronic thermometer and (ii) a multi-parameter patient monitoring system,
manufactured by Criticare Systems, Inc., which will provide non-invasive
temperature, pulse oximetry and blood pressure monitoring.
INCREASING INTERNATIONAL OPERATIONS. The Company believes that sales of
products outside of the United States represents a significant potential source
of growth. For the year ended December 31, 1996, sales to customers of IMED and
IVAC located outside of the United States represented approximately 22% and 41%
of their respective sales. The Company intends to expand its global presence and
increase its penetration in markets where it does not currently enjoy
significant market shares by: (i) cross-selling the full range of IMED and IVAC
products to the Company's expanded customer base; (ii) establishing distribution
channels through strategic partnerships and direct sales forces in countries
where the Company has little or no existing distribution network; (iii)
establishing direct distribution systems in markets where the Company utilizes
local distributors; and (iv) developing products or modifying existing products
to satisfy local market preferences or requirements.
In furtherance of this strategy, the Company, with respect to capitalizing
on cross-selling opportunities, has initiated efforts to register its
consolidated product line in all served countries in Southeast Asia.
Additionally, the Company is evaluating opportunities for increasing its
international sales focus on vital signs measurement products.
With respect to establishing distribution channels, the Company currently is
assessing candidates to assume the role of its primary sales/distribution
partner for Japan and evaluating the potential for establishing original
equipment manufacturer supply relationships for certain of its products both
domestically and internationally. The Company also has begun to implement its
strategic plan to consolidate its international distributor network by
terminating redundant distributors in a number of countries. Terminated
distributors are being replaced by new or existing distributors or, as in the
case of the Australian market, by an existing direct sales force.
With respect to developing products or modifying existing products to
satisfy local market preferences, the Company has entered into discussions to
distribute a complementary product line manufactured by another company through
its international sales network. In addition, the Company's international
Research and Development/Engineering group (located in the United Kingdom) is
developing several product modifications in response to customer preferences in
the European market, including the P6000 syringe pump, which is based on the
Company's P7000 syringe pump technology platform.
REDUCING PRODUCTION AND OPERATING COSTS. The Company will seek to
significantly reduce production and operating costs by eliminating redundant
expenses and by monitoring and controlling fixed and variable operating
expenses. In this regard, the Company has: (i) reduced overall head count
through termination and attrition; (ii) consolidated all of its instrument
manufacturing operations in the United States at the former IVAC facility in San
Diego; (iii) combined its United States and United Kingdom administrative
offices; (iv) consolidated the Company's Canadian sales and distribution
operations; and (v) transferred all disposable-related manufacturing operations
in San Diego to macquiladoras in Mexico. To achieve additional cost reductions,
the Company will focus on: (i) consolidating supply sources and (ii) further
rationalizing underutilized assets.
The Company, as part of its program to consolidate supply sources, has
identified potential savings of over $3.0 million annually from the
consolidation of supply sources and is negotiating to complete the outsourcing
of certain instrument subassembly operations, such as assembly of printed
circuit boards and
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<PAGE>
wiring harnesses. Discussions are also underway to transfer the manufacture of
all disposable products consumed in Europe to European suppliers. In addition,
the Company has notified the operator its its two existing maquiladora
operations in Mexico that it will terminate these arrangements by the end of
1997. Thereafter, the Company plans to directly operate a consolidated
disposables manufacturing facility in Mexico. Moreover, conversion to a new,
company-wide information management system has been initiated to provide more
flexibility in meeting the Company's changing information needs, while
eliminating costly mainframe outsourcing contracts.
With respect to the further rationalization of underutilized assets, the
Company has initiated steps to close its domestic service depots (other than San
Diego) by the end of the third quarter of 1997 and utilize an outside service
contractor to provide instrument warranty and repair services to its customers
in the United States.
Historically, IVAC's and IMED's executives have demonstrated an ability to
enhance productivity and reduce costs. The Company believes that a low-cost
manufacturer should be well positioned to succeed in the current cost-conscious
health care environment through aggressive pricing while maintaining
profitability.
CAPITALIZING ON STRATEGIC ACQUISITIONS. The Company intends to supplement
internal growth by engaging in strategic product, technology and business
acquisitions focused primarily on complementing the Company's existing product
lines. Acquisition candidates will be assessed primarily based on: (i)
opportunities for improving the Company's established United States and
international sales presence; (ii) market leadership potential; (iii) ability to
increase the Company's revenue per account; (iv) ability to access niche
markets; and (v) synergy with the Company's existing technological base and
manufacturing capabilities. The acquisition of products used in the alternate
site market will also be a priority.
The Company has retained Bear, Stearns & Co. Inc. to assist it in
identifying potential acquisition targets which will provide additional synergy
with existing operations and product lines. The Company has not yet identified
any specific acquisition target. The Company intends to support its acquisition
strategy by utilizing funding available under the New Credit Facility. If such
funding is insufficient, the Company may consider various conventional means for
raising capital including, without limitation, a public or private offering of
the common stock of ALARIS Medical or additional Senior Debt. See "Risk
Factors-- Significant Leverage."
INDUSTRY
GENERAL. Cost containment measures both imposed and proposed by federal and
state regulators and private payors, combined with increased utilization review
and case management, have led to greater financial pressure on hospitals. In
response to these cost-containment pressures, hospitals and other potential
customers for the Company's products are increasingly combining into GPOs which
may be large and which effectively police compliance with exclusive purchase
commitments. GPOs may enter into exclusive purchase commitments with as few as
one or two providers of infusion systems and/or vital signs measurement
products, for a period of several years. See "Risk Factors--Concentration of
Buying Power." These trends have, in turn, led to downward pricing pressure on
manufacturers of medical products, including the Company, and greater use of
alternate sites for treatment. Growth in the alternate site market is also
attributable to advances in technology that have facilitated the provision of
care outside of the hospital, an increased number of illnesses and diseases
considered to be treatable with home infusion therapy and increased acceptance
by the medical community of, and patient preference for, non-hospital treatment.
As both the complexity of infusion therapy treatments and the potency of drugs
administered have increased, the demand for technologically-advanced infusion
systems has risen significantly. In the vital signs measurement products
markets, similar trends of cost reduction of health care delivery and
technological innovation have resulted in the creation of a number of new
products and product areas, such as infrared thermometry products, pulse
oximetry and multi-parameter patient monitoring products.
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The Company believes that as the infusion system and vital signs measurement
products markets continue to mature, providers of goods and services in these
markets will need to increase the scale of their operations and broaden the
scope of their product lines in order to leverage worldwide sales, service and
research and development infrastructures. These trends are driving industry
consolidation which, in turn, provides opportunities for leading suppliers to
increase market share and participate in strategic alliances, joint ventures and
acquisitions. See "--Operating Strategy."
The United States hospital market consists of approximately 5,300 hospitals
with a total of approximately 900,000 licensed beds and can be divided into
three major areas: critical care (E.G., adult, pediatric and neonatal intensive
care units), specialty units (E.G., oncology, ob/gyn, coronary care and
emergency room/trauma) and general medical/surgical. The alternate site market
encompasses all health care provided outside a hospital and is comprised
primarily of home health care, freestanding clinics, skilled nursing facilities
and long-term care facilities.
INFUSION SYSTEMS. Intravenous infusion therapy generally involves the
delivery of one or more fluids, primarily pharmaceuticals or nutritionals, to a
patient through an infusion line inserted into the circulatory system. Over the
past 20 years, as both the reliance on intravenous drug therapy and the potency
of the drugs administered have increased, the need for extremely precise
administration and monitoring of intravenous fluids has risen significantly.
Infusion systems are differentiated on a number of characteristics including
size, weight, number of delivery channels, programmability, mechanism of
infusion, cost and service. One of the key differences among infusion systems is
the level of control that such systems afford to both medical staffs and
patients. Infusion systems are generally designed for either critical care or
general care use, with the latter group being used both in hospitals and at
alternate site facilities.
The United States infusion therapy market had sales of approximately $1.5
billion in 1996 and has grown at an estimated compound annual growth rate of
approximately 3.8% from 1992 to 1996. There are two principal markets for
infusion systems: the hospital market and the alternate site market. These
markets had sales in the United States of approximately $1.1 billion and $360
million, respectively, in 1996, and estimated annual compound growth rates of
approximately 1.6% and 12%, respectively, from 1992 to 1996.
Infusion systems include three major delivery technologies:
pumps/controllers, disposable pumps and gravity delivery products. In 1996,
these three segments had sales in the United States of approximately $800
million, $80 million and $350 million, respectively. While the Company competes
in the pumps/ controllers and disposable pumps segments, it has never competed
in gravity delivery products because of the commodity nature of this market.
Controllers typically are nonvolumetric devices that regulate flow by
electronically counting drops rather than by measuring a specific volume of
fluid. The Company does not currently market a traditional controller, but some
of its infusion pumps can be used in a controller mode. Infusion pumps use
positive pressure to overcome the resistance in the infusion tubing and the back
pressure generated by the patient's circulatory system. Infusion pumps
administer precise, volumetrically measured quantities of fluids more accurately
and over a wider range of infusion rates than controllers. For this reason,
infusion pumps are used more frequently than controllers to administer
expensive, critical or potent therapeutics. Syringe pumps operate by gradually
depressing the plunger on a standard disposable syringe, thereby delivering a
more concentrated dose of medication at a very precise rate of accuracy.
Disposable pumps are single-use products designed for use primarily in general
care settings.
Historically, controllers have held a major share of the installed base of
infusion instruments, principally because they were significantly less expensive
than infusion pumps. As infusion pump prices declined and their technological
capabilities increased, the purchasing trend has been toward infusion
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pumps. As of the end of 1996, infusion pumps represented approximately 98%, and
controllers represented approximately 2%, of the installed base of infusion
instruments in the United States hospital market and less than 1% of the
infusion instruments sold in 1996 were controllers.
The infusion systems sold in the markets in which the Company competes
consist of single and multi-channel infusion pumps and disposable administration
sets. As treatment regimens have become more complex and as the critically ill
constitute an increasing percentage of hospital patients, the average hospital
patient now requires a greater number of intravenous lines and more potent
therapeutics, thereby creating a greater need for technologically-advanced
infusion systems. As a result, United States sales of channels relating to
multi-channel infusion pumps have increased from approximately 28% of total
United States channels sold in 1991 to approximately 39% of total United States
channels sold in 1996.
All infusion pumps and controllers require the use of disposable
administration sets. A set consists of a plastic interface and tubing and may
have a variety of features such as volume control, pumping segments or cassette
pumping systems for more accurate delivery, clamps for flow regulation and
multiple ports for injecting medication and delivery of more than one solution.
Components such as burettes and filters may also be added for critical drugs or
special infusion. Almost all of these sets, including those manufactured by the
Company, are compatible only with their particular manufacturer's line of
infusion systems. Since these disposable administration sets tend to have
significantly higher margins than infusion pumps, the establishment of an
extensive installed base, such as the Company's, is important for generating
ongoing disposable administration set sales and enhancing overall margins.
VITAL SIGNS MEASUREMENT PRODUCTS. Vital signs measurement products are used
to measure and monitor temperature, pulse, blood pressure and respiration rate.
Products sold in this market have varying levels of technological sophistication
and are used in a variety of diagnostic and health care settings. The vital
signs measurement products market consists of discrete market niches each of
which has different competitive dynamics. The Company competes in two
niches--hospital thermometry systems, and stand-alone, non-invasive,
multi-parameter instruments which measure and monitor a combination of
temperature, pulse and blood pressure. In the United States, these two market
niches had sales of approximately $55.0 million and $25.0 million, respectively,
in 1996.
The three major instrument types in the hospital thermometry market are
glass, electronic and infrared devices, which in 1996 accounted for
approximately 5%, 65% and 30%, respectively, of the United States hospital
market installed base. The Company offers electronic and infrared instruments
but does not compete in the glass thermometry market. Over the last several
years, there has been a shift toward increased use of infrared instruments due
primarily to their ease of use. While infrared thermometers constituted only
approximately 30% of the installed base in the United States in 1996, sales of
these products accounted for approximately 58% of total market sales in 1996.
As with the infusion therapy market, the hospital thermometry market has
higher margin disposable products that are used in concert with instruments and,
consequently, the existence of an installed base is important for generating
ongoing disposable product sales and enhancing overall margins.
PRODUCTS AND SERVICES
The Company manufactures and markets both single and multi-channel infusion
pumps and disposable administration sets. At December 31, 1996, the Company had
approximately 214,000 single and multi-channel large volume infusion pumps
installed in the United States, with a market share of approximately 40% of all
installed channels in the United States. The Company's infusion pumps include
large volume infusion pumps such as its Gemini series, the Signature Edition
system, MS III and 560/570 Series pumps, syringe infusion pumps such as P1000,
P3000, PCAM and P7000, which are sold primarily in Western Europe, and ReadyMED.
The Company's large volume infusion pumps require the use of higher margin
proprietary disposable administration sets. The Company also sells
non-proprietary disposable administration sets for use with syringe infusion
pumps manufactured by the Company and others. Furthermore, the
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Company manufactures and markets hospital thermometry instruments and related
disposable probe covers, and stand-alone, non-invasive, multi-parameter
instruments which measure and monitor temperature, pulse and blood pressure. In
the United States hospital electronic and infrared thermometry market, the
Company had an installed base market share of approximately 42% in 1996 and was
the second largest supplier of hospital thermometry products in the infrared
market. In its niche of stand-alone, non-invasive, multi-parameter instruments,
the Company had an installed base market share of approximately 14% in the
United States in 1996.
The table set forth below summarizes the key features, actual or estimated
market introduction dates and predecessor product line information with respect
to the Company's product line and products in development.
<TABLE>
<CAPTION>
PREDECESSOR
PRODUCT DESCRIPTION STATUS PRODUCT LINE
- --------------------------- --------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
LARGE VOLUME INFUSION PUMPS
PISTON CASSETTE PUMPS Full line of single channel Various models introduced IMED
pumps between 1974 and 1981
PERISTALTIC PUMPS
GEMINI PC-1 Single channel instrument Marketed since 1988 IMED
with pump and controller
capability; for use in
all hospital settings
GEMINI PC-2 Dual channel instrument Marketed since 1987 IMED
with pump and controller
capability; for use in
all hospital settings
GEMINI PC-2TX Dual channel instrument Marketed since May 1994 IMED
with pump and controller
capability; programmable
drug delivery/dose
calculations and pressure
history; for use in all
hospital settings
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR
PRODUCT DESCRIPTION STATUS PRODUCT LINE
- --------------------------- --------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
GEMINI PC-4 Four channel instrument Marketed since December IMED
with pump and controller 1992
capability; programmable
drug delivery/dose
calculations and pressure
history; for use in all
hospital settings
MODULAR INFUSION PUMP Compact, flexible, Market introduction planned IMED
lightweight modular for 1998
infusion pump with an
adjustable hardware and
software platform with
advanced programming
capabilities; for use in
all hospital and certain
alternate site settings
560/570 SERIES Single channel pump with On market since 1983 and IVAC Medical Systems
largest installed base 1990, respectively
worldwide; for general
care use in the United
States, and general and
critical care use in
Europe
597/598 SERIES Single channel, multi-pump On market in Europe since IVAC Medical Systems
configuration of reduced 1993
size and weight; used
frequently for delivery
of nutritional products;
sold in Europe; for
general care and
alternate site use
MS III Three channel pump; Originally introduced in IVAC Medical Systems
smallest and lightest late 1980s by Siemens
multi-channel pump Infusion Systems, Ltd. as
available on the United MiniMed; reengineered
States market; for since its acquisition in
critical care use 1993
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR
PRODUCT DESCRIPTION STATUS PRODUCT LINE
- --------------------------- --------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
SIGNATURE EDITION Single and dual channel Selectively marketed since IVAC Medical Systems
(MODEL 7100/7200) pump; incorporates September 1995; full
intuitive user interface; commercial availability
for critical and general in the United States
care use achieved in the first
quarter of 1996;
introduction in Europe
planned for the second
half of 1997
SIGNATURE EDITION GP Single channel pump using Introduced to market during IVAC Medical Systems
the Signature Edition second quarter of 1997
technology platform
designed for the
price-conscious consumer;
intended to be marketed
in the United States for
general care use
SYRINGE INFUSION PUMPS
P1000, P2000, P3000, Preferred method of Various models introduced IVAC Medical Systems
P4000 delivery in many markets between late 1980s and
outside the United early 1990s
States; for critical and
non-critical care use
P7000 Syringe pump with advanced Introduced to European IVAC Medical Systems
features for critical, market during second
non-critical and neonatal quarter of 1996
care use in markets
outside the United States
P6000 Syringe pump using the Introduction to European IVAC Medical Systems
P7000 technology platform market planned for the
designed for the second half of 1997
price-conscious consumer
in markets outside the
United States; for
critical and non-critical
care use
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR
PRODUCT DESCRIPTION STATUS PRODUCT LINE
- --------------------------- --------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
PCAM (PATIENT CONTROLLED Syringe pump used in Introduced internationally IVAC Medical Systems
ANALGESIA PUMP) markets outside the in first quarter of 1995
United States that allows
patients to control the
delivery of pain
medication
AMBULATORY PUMPS
READYMED Compact, disposable, 100 mL marketed since July IMED
lightweight ambulatory 1992 and 50 mL and 250 mL
infusion pump designed introduced in 1993
for alternate site use
MICROSTAR Compact, mobile, United States market IMED
lightweight multiple introduction planned for
therapy infusion pump late 1997
designed for hospital,
ambulatory and alternate
site infusions requiring
device-based flow control
DISPOSABLE ADMINISTRATION Proprietary and non- On market and in IMED and IVAC Medical
SETS proprietary development Systems
administration sets for
use with each of the
Company's existing and
proposed infusion pumps
NEEDLELESS ACCESS PRODUCTS
IVAC NEEDLELESS SYSTEM Infusion system component On market since fourth IVAC Medical Systems
designed to eliminate use quarter of 1994
of hypodermic needle to
access administration
set; may reduce risk of
caregiver needlestick
injuries
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR
PRODUCT DESCRIPTION STATUS PRODUCT LINE
- --------------------------- --------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
VERSASAFE Infusion system component Marketed since 1994 through IMED
utilizing a blunt cannula a non- exclusive license
device combined with a
split-septum "Y" site
SAFSITE Valve which provides Introduced in 1995 IMED
needle-free access to the
administration set
through the use of a
standard male luer
SMARTSITE SYSTEM Needleless, capless, Introduced in 1996 IVAC Medical Systems
latex-free infusion
system component intended
to increase safety of
patients and health care
workers
THERMOMETRY SYSTEMS
TEMP-PLUS II (MODEL 2080) Electronic thermometer; for On market since mid-1980s IVAC Medical Systems
general hospital and
alternate site use
TEMP-PLUS III Electronic thermometer; a Market introduction planned IVAC Medical Systems
7-to-10-second version of for the second half of
the Model 2080; intended 1997
for general hospital use
CORE-CHECK (MODEL 2090) Infrared tympanic On market since 1991 IVAC Medical Systems
thermometer that saves
time, reduces patient
interruption and lowers
risk of infection; for
general hospital use
DISPOSABLE PROBE COVERS Proprietary covers for use On market since mid-1980s IVAC Medical Systems
with each of the
Company's existing and
proposed thermometers
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR
PRODUCT DESCRIPTION STATUS PRODUCT LINE
- --------------------------- --------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
OTHER VITAL SIGNS
MEASUREMENT PRODUCTS
VITAL-CHECK Continuous monitoring model On market in the United IVAC Medical Systems
(MODEL 4200) that rapidly measures States since late 1980s
pulse, blood pressure and
temperature; for general
hospital use
VITAL-CHECK Multiparameter non- invasive Market introduction planned IVAC Medical Systems
(MODEL 4400) patient monitor providing for second half of 1997
blood pressure, pulse
oximetry and temperature
monitoring
</TABLE>
LARGE VOLUME INFUSION PUMPS. The Company's large volume infusion pumps
consist of volumetric piston cassette pumps, which regulate the flow of fluid
through a syringe-like mechanism, and peristaltic pumps, which regulate fluid
flow by means of a multi-finger-like mechanism that alternately compresses
sections of the tubing contained in the pumping chamber. Peristaltic pumps
represent the largest portion of the Company's installed base of infusion pumps.
The Company discontinued manufacturing piston cassette pumps in the first
quarter of 1995 and all subsequently recognized revenue relating to piston
cassette pumps results primarily from the shipment of reconditioned pumps.
The Gemini peristaltic infusion pump series, which consists of single, dual
and four channel pumps, is based on a flexible hardware and software technology
platform. This technology platform has enabled the Company over time to offer
incremental feature enhancements based on evolving customer needs. The Gemini
series currently offers the following features: free flow protection (which the
Company pioneered); independent channel operation; ability to switch from pump
to controller mode without changing the disposable administration set;
programmable to automatically taper-up and taper-down infusion rates to
facilitate delivery of complex drug-dosing regimens; capability to operate in
either micro mode (0.1 to 99.9 mL/hr) for use with neonatal patients, among
others, or macro mode (1 to 999 mL/hr) for use with adult patients; drug dose
calculation; pressure monitoring; pressure history and volume/time dosing; and
nuisance alarm (alarms with no clinical significance) reduction. The Gemini PC-1
infusion pump is currently subject to a voluntary recall initiated by the
Company. The Company also intends to initiate a voluntary field correction of
approximately 50,000 of its Gemini PC-1 and PC-2 infusion pumps. See
"--Government Regulation--Product Regulation."
The 560/570 Series and the 597/598 Series are single channel peristaltic
infusion pumps that offer cost-effective solutions for drug delivery in the
general care setting. The Company believes that the 560/570 Series has the
largest installed base of any individual infusion pump worldwide.
MS III is a compact, lightweight, programmable, three channel, peristaltic
infusion pump used primarily in the critical care market. The MS III predecessor
product line was acquired from Siemens Infusion Systems, Ltd. in September 1993.
Since such time, significant resources have been invested to reengineer MS III.
The Company believes that as a result of this reengineering, MS III is one of
the smallest, most versatile and most technologically advanced multi-channel
pumps currently on the market.
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The Signature Edition line of peristaltic infusion pumps includes a single
channel and dual channel pump. The Signature Edition line of infusion pumps is
designed for use primarily in hospitals. The Signature Edition line of infusion
pumps features reduced size and weight, improved ease of use and other advanced
features, including new safety features designed to minimize the chance of free
flow. The Signature Edition line of infusion pumps is currently subject to a
voluntary recall initiated by the Company. See "--Government Regulation--Product
Regulation."
During the fourth quarter of 1993, the Company commenced designing a modular
infusion pump, which can operate in a one to four channel mode, as the basis for
its next generation of infusion pumps. In addition to all of the features
available on the Gemini series, the modular infusion pump is being designed to
incorporate advanced programming capabilities in a smaller infusion pump that is
simpler to operate. A modular, building-block design is intended to allow the
user to configure the various features of the modular infusion pump to specific
situations resulting in lower cost operation and greater asset utilization.
SYRINGE PUMPS. The Company offers syringe pumps, which are small-volume
fluid delivery systems used in neonatal care, oncology, anesthesia, critical
care and labor and delivery. While these infusion pumps represent a relatively
small portion of the industry installed base in the United States, such pumps
are widely used in Europe, where they constitute approximately 60% of the
infusion pump market. Syringe pumps are more widely used in Europe because of
the general practice of European doctors to administer medications in smaller
volumes of fluid. The Company believes that it is one of the two largest
suppliers of syringe pumps in Western Europe, with a number one or number two
installed base market share in eleven countries and the number three installed
base market share in Germany and Italy. The Company is currently evaluating
customer interest and regulatory requirements in the United States for syringe
pumps.
In 1995, the Company introduced the PCAM patient controlled analgesia
infusion pump that allows patients to control the delivery of pain medication.
Designed for general care settings, the PCAM infusion pump is one of the most
advanced patient controlled analgesia infusion pumps on the European market
today, with pre-programmed and user programmable drug delivery protocols,
comprehensive patient history logging and an ergonomically designed handset with
status indicator.
The Company continued to expand its syringe pump product line by introducing
the P7000 syringe pump to the international market during the second quarter of
1996. 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 Company has initiated a voluntary safety alert of its P1000, P2000,
P3000 and P4000 syringe pumps. These syringe pumps are marketed internationally.
See "--Government Regulation--Product Regulation."
AMBULATORY PUMPS. ReadyMED is a disposable, compact, ambulatory pump for
the intravenous administration of antibiotics. ReadyMED is designed to offer a
number of advantages over systems currently in use for this purpose. Traditional
systems require the patient to attach a small bag and tubing set, through which
the antibiotics are administered, to a catheter placed in the patient's
circulatory system. The patient must eliminate all air from the system and set a
manual rate adjustment clamp, a process that generally must be repeated every
four to six hours. Since traditional systems are gravity driven, the bag must
remain on an intravenous solution pole during infusion, thereby restricting the
patient's movement. ReadyMED is pre-filled (in 50 mL, 100 mL and 250 mL sizes)
and pre-primed, allowing infusion to be initiated when the patient simply opens
a clamp. In addition, since ReadyMED is small and uses positive pressure, the
patient is able to carry the device in a pocket or wear it on a belt. In March
1992, the Company entered into a five-year agreement with McGaw, Inc. ("McGaw")
pursuant to which McGaw obtained the exclusive right to distribute the 50 mL,
100 mL and 250 mL sizes of ReadyMED in the United States and Puerto Rican
alternate site markets. The Company and McGaw are currently in the process of
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amending their distribution agreement to: (i) extend its term; (ii) adjust the
price paid by McGaw for ReadyMEDs; and (iii) convert McGaw's exclusive
distribution right into a non-exclusive distribution right.
In May 1995, the Company entered into a fifteen-year agreement with
Debiotech SA, a privately-held company located in Lausanne Switzerland, which
grants the Company exclusive rights to distribute the microSTAR ambulatory pump
in certain North and Central American countries, including the United States.
The microSTAR ambulatory pump is electromechanical, lightweight, compact and
capable of multiple therapeutic applications including continuous delivery,
total parenteral nutrition administration with adjustable tapering regimes and
intermittent dose delivery (for example, intravenous antibiotics). Design
criteria for the development of this pump have included patient safety, as well
as ease of use for medical and nonmedical personnel.
The microSTAR ambulatory pump includes many advanced features such as user
adjustable air-in-line sensitivity, automatic secondary delivery, and delayed
start. In addition to its alternate site use, the microSTAR ambulatory pump is
well suited for patient transport and transition from hospital to home infusion
therapies.
DISPOSABLE ADMINISTRATION SETS. The Company estimates that it has
approximately 214,000 single and multi-channel large volume infusion pumps
installed in the United States, each of which uses proprietary disposable
administration sets designed and manufactured only by the Company. Disposable
administration sets consist of a plastic pump interface and tubing and have a
variety of features, such as volume control, pumping segments or cassette
pumping systems for more accurate delivery, clamps for flow regulation and
multiple entry ports for injecting medication and delivery of more than one
solution. Components such as burettes and filters may also be added for critical
drugs or special infusion. In addition, many of the Company's disposable
administration sets offer protection features designed to prevent free flow.
Each of the Company's current and proposed large volume infusion pumps uses only
disposable administration sets designed by the Company for that particular pump.
NEEDLELESS 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 needleless systems or protected needle
systems to replace hypodermic needles for accessing intravenous lines. The
Company's needleless access products are designed to permit access to the
Company's disposable administration sets without the use of needles, thus
reducing the potential for accidental needlesticks. The Company's Needleless
System introduced in the fourth quarter of 1994, is a component which is
compatible with standard luer or luer-locking syringes and disposable
administration sets, thereby allowing users to integrate the Needleless System
into existing care practices. The VersaSafe system utilizes a blunt cannula
device combined with a split-septum "Y" site. The Company has a non-exclusive
license, which expires in April 2000, to the VersaSafe system which was a
cooperative development effort of IMED, Elcam Plastic of Israel and Medical
Associates Network. Additionally, the Company has entered into an agreement with
B. Braun, Inc. for the purchase of their SAFSITE valve. The SAFSITE valve
provides needle-free access through the use of a standard male luer, eliminating
the need for needleless blunt cannulae to access the administration set. The
Company's latest needleless access product, the SmartSite System, which is based
upon the Company's Needleless System, offers a fully integrated design and
eliminates the need for separate caps to maintain an infection control barrier.
The SmartSite System is latex-free and therefore reduces the risk of exposure of
patients and health care workers to latex which can cause severe allergic or
anaphylactic shock reactions. The Company's needleless 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.
THERMOMETRY. The Company is a leader in hospital thermometry systems, which
consist of thermometers and disposable probe covers, and maintains a strong
position in both the United States and Western Europe. The Company believes that
in 1996 its installed base comprised approximately 42% of the United
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States hospital electronic and infrared thermometry market, thereby making the
Company the largest provider of hospital thermometry systems in the United
States. The Company's primary product is an electronic thermometer which is
widely used in hospitals and alternate site settings. The Company is currently
developing the TEMP-PLUS III (formerly known as the "Fast" 2080), an improved
cost-effective and technologically-advanced electronic thermometer designed to
provide a temperature reading in seven-to-ten seconds. The Company also
manufactures and markets the CORE-CHECK system, a thermometer that measures
temperature by detecting the emission of infrared energy in the ear. In the
infrared market, the fastest growing segment of the industry's market, the
Company is currently the second largest domestic participant, with a United
States hospital installed base market share of approximately 31% at December 31,
1996. The only disposable probe covers which can be used with the Company's
thermometry instruments are those manufactured by the Company.
OTHER VITAL SIGNS MEASUREMENT PRODUCTS. The Company also produces
stand-alone, non-invasive, multi-parameter instruments which measure and monitor
temperature, pulse and blood pressure. In 1996, the Company's hospital installed
base of these instruments was approximately 14%, making it the second largest
participant in this market niche in the United States.
In January 1997, the Company entered into two agreements with Criticare
Systems, Inc., a manufacturer of patient monitoring systems and non-invasive
sensors for use in the hospital and alternate site markets. Under these
agreements, Criticare Systems, Inc. obtained the right to use the Company's
electronic thermometry technology in certain monitoring systems to be
manufactured and distributed by both Criticare Systems, Inc. and the Company.
The Company also obtained exclusive distribution rights to certain of these
monitoring systems in the United States hospital market and in all Canadian
markets. The first of these exclusive systems, which will be marketed as the
Vital-Check 4400, will provide non-invasive blood pressure, pulse oximetry and
temperature monitoring.
CUSTOMER SERVICE. The Company provides repair service for its products in
San Diego and at its customers' facilities through third-party contractors.
Customers may elect to enter into service agreements or to receive service on a
time and materials basis. The Company also trains customers as to the use of its
products and maintains a technical support help-line to answer customers'
questions. In addition, the Company maintains its parts inventory at levels
which enable it to deliver critical supplies immediately and minimize
back-ordered products. The Company believes that the availability of such
services is important for maintaining strong customer relations.
MARKETING AND SALES
The Company has historically focused its sales efforts on the hospital
market. In response to the industry shift toward health care delivery outside of
the hospital, the Company has recently begun to expand its selling efforts and
products to the alternate site market. The Company's sales strategy emphasizes
increasing instrument placements and the number of units installed in order to
increase sales of its proprietary disposable administration sets and probe
covers. Sales representatives work closely with on-site primary decision makers,
which include physicians, pharmacists, nurses, materials managers, biomedical
staff and administrators. The Company has over 5,000 hospital customers
worldwide.
The Company has contracts with a number of GPOs that are emerging in
response to cost containment pressures and health care reform. In January 1997,
the Company entered into a five-year sole-source supply contract with Premier
Purchasing Partners, L.P. ("Premier"), an affiliate of Premier, Inc., the
nation's largest healthcare alliance GPO, for tympanic and electronic
thermometry instruments and related disposable probe covers. Under this
agreement, Premier agreed to purchase 80% of its needs for such products from
the Company. In addition, in March 1997, the Company entered into a dual source
supply agreement with Premier for the purchase of large volume infusion pumps
and associated disposable administration sets. The dual source agreement is for
a five year period with a two-year renewal option. Premier had previously signed
a seven-year supply contract with Baxter International Inc. covering a
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number of hospital supplies, including a dual source award for large volume
infusion pumps and disposable administration sets. See "Risk
Factors--Concentration of Buying Power" and "--Substantial Competition."
No single account is material to the business or operations of the Company.
The Company sells its products through a combined direct sales force
consisting of over 230 salespersons and through more than 150 distributors. The
Company's domestic marketing efforts are supported by a staff of nurses and
pharmacists who consult with customers providing ongoing clinical support in the
evaluation, installation and use of the Company's products. The Company believes
its sales force in the United States and internationally plays a key role in the
effective introduction of new products.
INTERNATIONAL OPERATIONS
The Company markets products in approximately 120 countries through its
direct sales force, affiliates and distributors. The primary markets for the
Company's products outside the United States are Western Europe, Canada and
Australia. The Company also has a developing position in Asia and Latin America.
The principal products sold by the Company outside the United States are large
volume and syringe infusion pumps and related disposable administration sets.
The Company has manufacturing operations in England and Mexico. The Company has
also contracted with a number of foreign manufacturers to provide certain of its
sourcing needs. The following table sets forth, on a pro forma basis as if the
Merger had occurred at the beginning of each period presented, the approximate
amount of sales made to customers in each of the geographic locations set forth
below over the last three fiscal years:
<TABLE>
<CAPTION>
1994 1995 1996
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
United States....................................... $ 231.6 $ 238.3 $ 224.6
International....................................... 103.7 114.4 121.7
--------- --------- ---------
Total sales..................................... $ 335.3 $ 352.7 $ 346.3
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company believes that sales of products to customers outside of the
United States represents a significant potential source of growth. As part of
its operating strategy, the Company intends to selectively pursue international
expansion opportunities, particularly in Europe, Japan, Southeast Asia and Latin
America. See "Business--Operating Strategy--Increasing International Operations"
and "Risk Factors-- Foreign Operations."
MANUFACTURING
The Company manufactures its products at plants in San Diego, California;
Creedmoor, North Carolina; Tijuana, Mexico; and Hampshire, England. The San
Diego facilities are the primary manufacturing facilities for infusion pumps and
vital signs measurement instruments and also house a service operation for
installed infusion pumps and vital signs measurement instruments. The Creedmoor,
North Carolina facility houses a portion of the current disposables operations
and is a distribution center for North American disposable finished products.
Product sterilization and release are also executed in Creedmoor, North
Carolina. The Tijuana facilities primarily focus on the manual assembly of
disposables, and the England facility focuses on the manufacturing of syringe
pumps. Disposable products for international markets are currently supported
through a number of foreign manufacturers.
Two contractors provide the Company with assembly services for disposable
administration sets in Tijuana, Mexico. The agreements between the Company and
the contractors require that the Company pay the contractor an hourly rate per
employee hour worked on assembly of products.
The Company has designed and implemented an integrated network of quality
systems, including control procedures that are planned and executed by
technically-trained professionals. These systems result in establishing written
specifications for raw materials, packaging, labels, sterilization and overall
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manufacturing process control. A substantial number of raw materials require
certificates of analysis to help ensure that finished products conform to
specifications. In addition, the Company regularly tests components and products
at various stages of the manufacturing process to ensure compliance with
applicable specifications.
The Company purchases raw materials worldwide in the ordinary course of
business from numerous suppliers. The vast majority of these materials are
generally available and the Company has not experienced any serious shortages or
material delays in obtaining these materials. In some situations, the Company
has long-term supply contracts, although the Company purchases a significant
amount of its requirements of certain raw materials by purchase order. Although
the Company is generally not dependent upon any single source of supply, it
relies upon a limited number of suppliers for PC boards and other parts which
are used in certain of its infusion systems. The loss of any such supplier would
result in a temporary interruption in the manufacturing of the Company's
products. The Company believes, however, that these materials are available as
needed from alternative sources.
The Company has identified the reduction of production and operating costs
as a key component of its operating strategy. As part of this strategy, the
Company has reduced overall head count through termination and attrition. The
Company will now focus on implementing the following programs: (i) consolidating
supply sources and (ii) rationalizing underutilized assets, including
consolidating executive offices, warehouse operations and manufacturing
operations. See "--Operating Strategy."
FACILITIES
The Company owns or leases the following properties:
<TABLE>
<CAPTION>
LEASE
APPROXIMATE LEASED EXPIRATION
SQUARE OR DATE
LOCATION FOOTAGE PURPOSE OWNED (IF LEASED)
- --------------------------------- ------------ ------------------------------------------ --------- -------------
<S> <C> <C> <C> <C>
San Diego, CA(1) 49,284 Executive Offices Leased 1997
San Diego, CA 45,000 Warehouse Leased 1997(4)
San Diego, CA(1) 57,590 Manufacturing and Service Leased 1997(4)
San Diego, CA(1) 35,500 Manufacturing, Research and Development Leased 1997
Buckingham, England(1) 8,000 Sales Office and Warehouse Leased 2001
Tijuana, Mexico(2) 41,190 Contract Manufacturing of Disposable Leased 1997
Products
San Diego, CA 135,516 Executive Offices Leased 2006
San Diego, CA(3) 83,520 Manufacturing of Instruments Leased 2005
Creedmoor, NC 120,000 Manufacturing of Disposable Sets Owned
Hampshire, England 10,000 Manufacturing of Syringe Pumps Leased 2012(6)
Hampshire, England 7,500 International Headquarters Leased 2000(7)
Tijuana, Mexico(2) 37,946 Contract Manufacturing of Disposable Leased (5)
Products
Geissen, Germany 6,200 Sales Office Leased 2005
Alcobendas, Spain 8,396 Sales Office Leased 1999
Taby, Sweden 3,337 Sales Office Leased 1997
Grimberger, Belgium 2,530 Sales Office Leased 2004
Amersfoort, The Netherlands 2,562 Sales Office Leased 1998
Rueil Maimaison, France 1,939 Sales Office Leased 1998(4)
Rafa, Dubai, U.A.E. 1,700 Sales Office Leased 1997
</TABLE>
- ------------------------
(1) It is currently anticipated that these leases will not be renewed and that
the operations at such facilities will be consolidated and conducted at the
Company's other San Diego facilities.
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(2) Lessee of facility is a contractor that provides the Company with certain
assembly services.
(3) Primary instrument manufacturing facility.
(4) Cancellable upon six months written notice.
(5) Cancellable upon 180 days notice. The Company is a surety with respect to
the lease.
(6) Lease contains a "break clause" that gives the Company the option to
terminate the lease in 1999.
(7) Lease contains a "break clause" that gives the Company the option to
terminate the lease in 1998.
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. IMED historically devoted a significant portion of
its research and development budget to the development of new projects. IMED
expended approximately $6.3 million, $7.4 million and $7.8 million on in-house
research and development for the years ended December 31, 1994, 1995 and 1996,
respectively, and $1.8 million for the three months ended March 31, 1996. The
Company expended approximately $4.1 million for the three months ended March 31,
1997. Substantially all of each such amount was dedicated to the development of
new products.
IVAC's research and development efforts focused primarily on completing the
development and commercial introduction of existing product concepts, including
the Signature Edition line and TEMP-PLUS III electronic thermometer, as well as
enhancing commercially available products such as MS III and disposable
administration sets. IVAC expended approximately $18.5 million, $12.1 million
and $7.7 million on in-house research and development for the years ended
December 31, 1994 and 1995 and the nine months ended September 30, 1996,
respectively. Substantially all of each 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 believes
that the combination of IMED's and IVAC's research and development functions
will result in the elimination of redundant costs while increasing the
productivity of its research and development activities. The Company is
currently developing several new products and product line extensions.
PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS
The Company relies heavily on patented and other proprietary technology. The
Company believes its issued and pending patents are important to its competitive
position. The Company's policy is to secure patent protection for significant
inventions. The Company holds approximately 210 unexpired patents in the United
States and approximately 390 unexpired patents in foreign countries, principally
in Europe, Canada, Japan and Australia. Additional applications are pending or
in preparation. Within the next ten years, approximately 116 of the Company's
United States patents and approximately 146 of the Company's foreign patents
will expire. The Company does not believe that the expiration of any such
patents will, individually or in the aggregate, have a material adverse effect
on the Company's results of operations, business or financial condition.
The patent positions of medical device firms, including the Company, are
uncertain and involve complex legal and factual questions for which certain
legal principles are unresolved. The coverage claimed in a patent application
can be significantly reduced before a patent is issued. In addition, patent law
has recently been revised to give effect to international accords to which the
United States has become a party. Pursuant to such accords, the patent term has
been changed from 17 years from date of grant to 20 years from date of filing
and certain provisions favoring United States inventors over foreign inventors
have been eliminated. See "Risk Factors--Reliance on Patents and Proprietary
Rights; Expiration and Protection of Significant Patents."
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The Company sells its products under a variety of trademarks, some of which
are considered by the Company to be of importance to warrant registration in the
United States and various foreign countries in which the Company does business.
The Company also relies on trade secrets, unpatented know-how and continuing
technological advancement to maintain its competitive position. It is the
Company's practice to enter into confidentiality agreements with key technical
employees and consultants. There can be no assurance that these measures will
prevent the unauthorized disclosure or use of the Company's trade secrets and
know-how or that others may not independently develop similar trade secrets or
know-how or obtain access to the Company's trade secrets, know-how or
proprietary technology. In addition, the Company from time to time seeks
copyright protection for the software used in certain of its products.
COMPETITION
The Company faces substantial competition in all of its markets. Many of the
Company's competitors have greater financial, research and development and
marketing resources than the Company. Some of the Company's principal
competitors are able to offer volume discounts based on "bundled" purchases of a
broad range of their medical equipment and supplies; a strategy that the Company
is currently unable to pursue. 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.
At December 31, 1996, on a pro forma basis, the Company had a market share
of approximately 40% of the installed base of infusion pump channels in the
United States. Major competitors in this market include Baxter International
Inc., Abbott Laboratories, Inc. and McGaw, which in the aggregate had a market
share of approximately 55% of the installed base of infusion pump channels in
the United States at December 31, 1996.
The European infusion systems market is much more regionalized and
fragmented, with a few strong competitors in each regional market. Major
competitors encountered in several markets include Graseby, Fresenius and B.
Braun Melsungen AG. The Company is among the leaders in a number of Western
European markets, with a number one or number two installed base market share in
eleven countries and the number three installed base market share in Germany and
Italy. The Western European countries in which the Company has a number one or
number two installed base market share are France, Denmark, Finland, Norway,
Sweden, the United Kingdom, Belgium, the Netherlands, Luxembourg, Spain and
Portugal.
The vital signs measurement products market is fragmented by product type.
The Company's key competitor in the United States electronic thermometer market
is Diatek and its key competitor in the infrared thermometer market is Sherwood
Medical Company ("Sherwood").
LEGAL PROCEEDINGS
The Company is a defendant in a lawsuit filed in June 1996 by Sherwood
against IVAC. The lawsuit, which is pending in the United States District Court
for the Southern District of California, alleges infringement of two Sherwood
patents by reason of certain activities including the sale by IVAC of disposable
probe covers for use with infrared tympanic thermometers. The lawsuit seeks
injunctive relief, treble damages and the recovery of costs and attorney fees.
The discovery phase of the lawsuit has recently commenced. The Company is
currently unable to quantify its exposure in the lawsuit. The Company believes
it has sufficient defenses to all claims by Sherwood, including the defenses of
noninfringement and invalidity. However, there can be no assurance that the
Company will successfully defend all claims made by Sherwood and the failure of
the Company to successfully prevail in this lawsuit could have a material
adverse effect on the Company's operations, business and financial condition.
The Company is a defendant in a QUI TAM lawsuit filed by a former IMED
employee in the United States District Court for the Northern District of
Illinois. On November 15, 1996, an amended complaint
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was filed which alleges fraud in the inducement, breach of employment contract,
common law fraud and violations of the Federal False Claims Act and Medicare
Fraud and Abuse Act. To date, the United States has declined to intervene in
this action. The Company believes it has sufficient defenses to all claims by
the plaintiff.
The Company is also involved in a number of legal proceedings arising in the
ordinary course of its business, none of which is expected to have a material
adverse effect on the Company's operations, business or financial condition. The
Company maintains insurance coverage against claims in an amount which it
believes to be adequate.
GOVERNMENT REGULATION
PRODUCT REGULATION. The research, development, testing, production and
marketing of the Company's products are subject to extensive governmental
regulation in the United States at the federal, state and local levels, and in
certain other countries. Non-compliance with applicable requirements may result
in recall or seizure of products, total or partial suspension of production,
refusal of the government to allow clinical testing or commercial distribution
of products, civil penalties or fines and criminal prosecution.
The FDA regulates the development, production, distribution and promotion of
medical devices in the United States. Virtually all of the products being
developed, manufactured and sold by the Company (and products likely to be
developed, manufactured or sold in the foreseeable future) are subject to
regulation as medical devices by the FDA. Pursuant to the FDC Act, a medical
device is classified as a Class I, Class II or Class III device. Class I devices
are subject to general controls, including registration, device listing,
recordkeeping requirements, labeling requirements, "Good Manufacturing
Practices" (as defined in FDA regulations) ("GMP"), prohibitions on adulteration
and misbranding, and reporting of certain adverse events ("MDR"). In addition to
general controls, Class II devices may be subject to special controls that could
include performance standards, postmarket surveillance, patient registries,
guidelines, recommendations and other actions as the FDA deems necessary to
provide reasonable assurance of safety and effectiveness. Class III devices must
meet the most stringent regulatory requirements and must be approved by the FDA
before they can be marketed. Such premarket approval can involve extensive
preclinical and clinical testing to prove safety and effectiveness of the
devices.
Virtually all of the Company's products are Class II devices. The Company is
not currently developing, manufacturing or distributing any Class III devices,
although it may do so in the future. Unless otherwise exempt, all medical
devices introduced to the market since 1976 are required by the FDA, as a
condition of marketing, to secure a 510(k) premarket notification clearance
("510(k)") or a Premarket Approval Application ("PMA"). A product will be
cleared by the FDA under a 510(k) if it is found to be substantially equivalent
in terms of safety, effectiveness and intended use to another legally marketed
medical device that was on the market prior to May 28, 1976 or to a product that
has previously received a 510(k) and is lawfully on the market. If a product is
not substantially equivalent to such a medical device, and not otherwise exempt,
the FDA must first approve a PMA before it can be marketed. An approved PMA
indicates that the FDA has determined the product has been proven, through the
submission of clinical data and manufacturing and other information, to be safe
and effective for its labeled indications. The PMA process typically takes more
than a year 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 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.
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As part of its normal course of business, the FDA regularly conducts
inquiries regarding the safety or efficacy of medical products, including those
manufactured by the Company, which may result in the Company's inability to
market a particular device or cause the Company to need to generate additional
data to support submissions for market clearance. Future products developed by
the Company may require FDA clearance through either the 510(k), PMA, new drug
approval application procedures or abbreviated new drug approval application
procedures. There can be no assurance that marketing clearances or approvals
will be obtained on a timely basis or at all. Delays in receiving such
clearances or approvals could have a material adverse effect on the Company.
The FDA also regulates the commencement and conduct of clinical
investigations to determine the safety and effectiveness of devices, including
investigations of devices not cleared or approved for marketing, and
investigations involving new intended uses of previously cleared or approved
devices. Clinical investigations are regulated by the FDA under the
investigational device exemption ("IDE") regulations. The IDE regulations
include significant requirements that must be met, including informed patient
consent, criteria for selection of study investigators and monitors, review and
approval of research protocols, reporting obligations to the FDA, recordkeeping
and prohibitions against commercialization of investigational devices. A sponsor
must obtain FDA approval of an IDE before starting the investigation, unless the
device is found to be a non-significant risk device by the sponsor and each
institutional review board ("IRB") that reviews the study. The FDA, however, has
the authority to determine that a study designated as involving a
non-significant risk device by the sponsor and IRBs involves a significant risk
device and an IDE application must be submitted and approved before the study
can resume. In addition, a study of a non-significant risk device must still
comply with certain provisions of the IDE regulations, and meet other regulatory
requirements. The violation of the IDE regulations can result in a variety of
sanctions, such as warning letters, prohibition against additional clinical
research, the refusal to accept data and criminal prosecution.
The Company is also providing devices for use in a clinical trial as a
contract manufacturer. There can be no assurance that this clinical study will
comply with all elements of the FDA's regulations, that the study will provide
evidence of the safety or effectiveness of the device, or that the study will
ultimately result in the approval of the device.
Devices manufactured by the Company in the United States are exported by the
Company to other countries. Such devices, if not approved for sale in the United
States, are subject to the FDA export requirements, including restriction on
distribution in the United States.
The Company has received ISO 9000 certification for certain of its
facilities regarding the quality of its manufacturing systems, a requirement for
doing business in EC countries, and is in the process of applying for ISO 9000
certification for the balance of its manufacturing facilities. The Company has
been granted approval to affix the CE mark, pursuant to the EC Medical Device
Directives, on certain of its products. Approval to affix the CE mark to a
product does not necessarily preclude, however, additional restrictions on
marketing in any individual country in the EC.
Certain countries require the Company to obtain clearances for its products
prior to marketing the products in those countries. In addition, certain
countries impose product specifications, standards or other requirements which
differ from or are in addition to those mandated in the United States. The EC
and certain other countries are in the process of developing new modes of
regulating medical products which may result in lengthening the time required to
obtain permission to market new products. These changes could have a material
adverse effect on the Company's ability to market its products in such countries
and would hinder or delay the successful implementation of the Company's planned
international expansion. In addition, since MS III does not meet the current EC
Electromagnetic Capability Directive (Directive 89/336/EEC) for resistance to
electromagnetic and radio frequency interference, it is currently not marketed
in Europe.
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
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the FDC Act and regulations, including regulations relating to MDR reporting,
product labeling and promotion, and medical device GMPs governing design,
manufacturing, testing, quality control, product packaging and storage
practices. The FDA has recently proposed revising certain GMP regulations which,
if adopted, would increase the cost of regulatory compliance for the Company.
The MDR regulations promulgated by the FDA require the Company to provide
information to the FDA on certain malfunctions, as well as serious injuries or
deaths which may have been associated with the use of a product. The EC Medical
Device Directives also require reporting of serious injuries or deaths which may
be associated with the use of a medical device to the competent authority in the
country where the incident occurred.
A determination that the Company is in material violation of the FDC Act or
such FDA regulations could lead to the issuance of warning letters, imposition
of civil or criminal sanctions against the Company, its officers and employees,
including fines, recalls, repair, replacement or refund to the user of the cost
of such products. In addition, if the FDA believes any of the Company's products
violate the law and present a potential health hazard, the FDA could seek to
detain and seize products, to require the Company to cease distribution and to
notify users to stop using the product. The FDA could also seek criminal
sanctions or seek to close some or all of the Company's manufacturing
facilities. Such actions could also result in an inability of the Company to
obtain additional market clearances. Since 1992, the Company has on thirteen
occasions removed products from the market that were found not to meet
performance standards. None of such recalls materially interfered with the
Company's operations and all such affected product lines were subsequently
returned to the market. One such product recall, a recent voluntary recall
related to the Company's Signature Edition infusion pumps, has not yet been
terminated or otherwise closed by the FDA and the FDA could take further
regulatory action against the Company, including actions such as those described
above. The Signature Edition infusion pumps were recalled because of an
unacceptable level of malfunction alarms due to less than expected reliability
of their pressure monitoring systems. The user of these pumps is notified of
such malfunction alarms by both a continuous audible signal and a visual
message. The Company is in the process of upgrading and replacing, at no charge
to its customers, the current pressure monitoring system contained in certain of
the infusion pumps included within the Signature Edition product line. This
recall, which is believed to affect approximately 4,000 infusion pumps, is
expected to be completed by the end of the second quarter of 1997. In connection
with this recall, estimated expenses of approximately $1.0 million were accrued
by the Company at December 31, 1996. In addition, a voluntary recall of
approximately 645 Gemini PC-1 infusion pumps (limited to distribution outside
the United States) was initiated by the Company in June 1996. At this time, the
Company has completed required modifications to all but two of the infusion
pumps subject to such voluntary recall.
The Company has initiated a voluntary safety alert of its P1000, P2000,
P3000 and P4000 syringe pumps, which are marketed internationally. This safety
alert is based on certain operational anomalies that have been observed in the
course of electronic laboratory bench testing of these syringe pumps. In
particular, under certain unusual conditions which are unlikely to be duplicated
in a clinical setting, the syringe pumps may be programmed such that they
continue to run at the initial infusion rate set by the operator for longer than
the specified length of time. Upon such occurrence, the syringe pumps emit a
continuous audible alarm. While the syringe pumps covered by the aforesaid
safety alert have been on the market for over three years, the Company is aware
of no reported instances of these anomalies occurring in connection with patient
use. Although not required to do so by the United Kingdom Department of Health,
the Company has offered to provide customers, at their request, with modified
software for the approximately 16,000 affected syringe pumps at no charge. The
Company has not incurred material costs in providing the upgraded software. In
addition, the Company has initiated a voluntary safety alert of its 599 Series
infusion pumps, which it discontinued selling in March 1997. This safety alert
advises customers to inspect and, if necessary, make an adjustment to the
infusion pump in order to prevent misloading of disposable administration sets.
The Company will initiate a voluntary field correction 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
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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
infusion pump's case. As a interim measure, the Company has advised its
customers of simple precautions that can be taken to minimize the potential for
an adverse incident pending completion of the field correction. The Company is
not aware of any injuries sustained in known battery overcharging incidents. As
a result of this decision, the Company recorded a charge of $2.5 million to cost
of sales for the quarter ended March 31, 1997.
The Company's manufacturing facilities in San Diego have been licensed by
the State of California Department of Health Services, Food and Drug Branch,
under the applicable GMP and other regulations.
ANTI-REMUNERATION LAWS. The sale of the Company's products is subject to
the illegal remuneration/ "anti-kickback" provisions of the Social Security Act
of 1935, as amended (the "Social Security Act"), which prohibits knowingly and
willfully the offering, receiving or paying of any remuneration, whether
directly or indirectly, in return for inducing the purchase of items or
services, or patient referrals to providers of services, for which payment may
be made in whole or in part by Medicare, Medicaid or similar state programs.
Violations of the statute are punishable by civil and criminal penalties and
exclusion of the provider from future participation in the Medicare and Medicaid
programs. The Social Security Act contains exceptions to these prohibitions for,
among other things, properly reported discounts and payment of certain
administrative fees to GPOs. Because of the breadth of the statutory
prohibitions, the lack of court decisions or other authority addressing the
types of arrangements that are permissible under the law and the narrowness of
statutory exceptions, the Secretary of Health and Human Services published
regulations creating "safe harbors" identifying certain practices that will not
be treated as violating the "anti-kickback" provisions of the Social Security
Act. While failure to satisfy all of the criteria for a safe harbor does not
necessarily mean that an arrangement is unlawful, engaging in a business
practice for which there is a safe harbor may be regarded as suspect if the
practice fails to meet each of the prescribed criteria of the appropriate safe
harbor. The enumerated safe harbors include safe harbors which implement, and
further refine, the statutory exceptions for discounts and payments to GPOs.
Because the Company sells some of its products to customers at prices below list
price and in various combinations, the Company is engaged in giving discounts
within the meaning of the Social Security Act. The regulations require sellers
to fully and accurately report all discounts and inform buyers of their
obligations to report such discounts. The Company also pays administrative fees
to certain purchasing agents within the meaning of the Social Security Act. In
order to qualify for the GPO safe harbor, certain requirements must be met
including disclosure of the existence of the GPO fee arrangement to GPO members
and that members are neither wholly owned by the GPO nor subsidiaries of a
parent corporation that wholly owns the GPO. Certain of the Company's discounts
and arrangements with purchasing agents may not meet all the requirements of the
appropriate safe harbors.
Several states also have statutes or regulations prohibiting financial
relationships with referral sources that are not limited to services for which
Medicare, Medicaid or other state health care program payment may be made. A
finding of non-compliance with these anti-remuneration laws by federal or state
regulatory officials, including non-compliance with appropriate safe harbors,
could have a material adverse effect on the Company.
COVERAGE AND REIMBURSEMENT. The Company's products are purchased or leased
by health care providers or suppliers which submit claims for reimbursement for
such products to third-party payors such as Medicare, Medicaid and private
health insurers. Although the Company has no knowledge that third-party payors
will adopt measures that would limit coverage of, or reimbursement for, its
products, any such measures that were applied to the Company's products could
have a material adverse effect on the Company.
HEALTH CARE REFORM. Because the cost of health care delivery has been
steadily rising and because the cost of a significant portion of medical care in
the United States and other countries is typically funded by governmental
insurance programs, there have been a number of government initiatives to reduce
health
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care costs. Congress and various state legislatures currently are proposing
changes in law and regulation that could effect major restructuring of the
health care industry. Although many of these proposals may seek to maintain or
expand access to health care services, the common objective of proposed
legislation is to achieve cost containment in the health care sector. Changes in
governmental support of health care services, the methods by which such services
are delivered, the prices for such services or the regulations governing such
services or mandated benefits may all have a material adverse effect on the
Company. Even if the ultimate impact of any such changes on net sales is
positive, no assurance can be given that the costs of complying with possible
new requirements would not have a negative impact on the Company's future
earnings. No assurance can be given that any such legislation will not have a
material adverse effect on the Company.
ENVIRONMENTAL MATTERS. The Company is subject to regulation by OSHA, the
Environmental Protection Agency and their state and local counterparts, and
under extensive and changing foreign, federal, state and local environmental
standards, including those governing the handling and disposal of solid and
hazardous wastes, discharges to the air and water, and the remediation of
contamination associated with releases of hazardous substances. Such standards
are imposed by, among other statutes, the Toxic Substances Control Act, the
Clean Air Act, the Federal Water Pollution Control Act, the Resource
Conservation and Recovery Act and the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"). Although there can be no assurances,
the Company believes that it is currently in material compliance with current
environmental standards. Nevertheless, the Company uses hazardous substances in
its day-to-day operations and, as is the case with manufacturers in general, if
a release of hazardous substances occurs on or from the Company's properties,
the Company may be held liable and may be required to pay the cost of remedying
the condition. The amount of any such liability could be material.
The Company has made, and will continue to make, expenditures to comply with
current and future environmental standards. Although no material capital or
operating expenditures relating to environmental controls are anticipated, there
can be no assurance that changes in, additions to or differing interpretations
of, statutory and regulatory requirements will not require material expenditures
in the future.
The Company is subject to liability under CERCLA and analogous state laws
for the investigation and remediation of environmental contamination at
properties owned and/or operated by it and at off-site locations where it has
arranged for the disposal of hazardous substances. Courts have determined that
liability under CERCLA is, in most cases, joint and several, meaning that any
responsible party could be 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 currently is involved in one such matter at the Seaboard
Chemical site in Jamestown, North Carolina. There are over 675 PRPs at this
site. The Company has entered into a DE MICROMIS consent order with the North
Carolina Department of Environment, Health and Natural Resources and a group of
PRPs (which represent 77% of the known waste disposed of at the site), 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.
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The Company is aware that at one other location at which the Company has
disposed of 1,205 gallons of waste alcohol a governmental agency completed a
remedial investigation and feasability study in 1991 and an integrated
assessment in 1995. As a result, the Company believes that it could be
identified as a PRP at some time in the future; however, the Company has not
received notice of the commencement of any proceeding against it with respect to
such site. If the Company were identified as a PRP with respect to such site,
there can be no assurance that such designation, and any resulting liability
associated therewith, would not have a material adverse effect on the Company.
In addition, the Company has recently received notice from a group claiming
that the Company has violated California Proposition 65 ("Proposition 65").
Proposition 65 requires, among other things, that warnings be given in
connection with the exposure of consumers to products containing certain listed
substances. Certain of the Company's disposable administration sets contain one
such substance, DEHP. The Company believes that it has meritorious defenses to
such claim and intends to defend the action vigorously. No assurance can be
given that the Company will be successful in defending such claim or that an
adverse determination of such claim would not have a material adverse effect on
the Company. A significant portion of the Company's competitors have also
recently received similar notices claiming violations of Proposition 65.
EMPLOYEES
As of January 31, 1997, the Company had a total of 1,356 full-time
employees, of which 629 employees were employed in manufacturing, 440 employees
in sales and marketing, 183 employees in research and development and 104
employees in executive and administrative functions. None of the employees of
the Company is subject to a collective bargaining agreement, nor has the Company
experienced any work stoppages.
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MANAGEMENT
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 May , 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- -------------------------------------------------
<S> <C> <C>
Jeffry M. Picower................... 54 Director, Chairman of the Board
William J. Mercer................... 49 Director, President, Chief Executive Officer and
Chief Financial Officer
Norman M. Dean(1)(2)................ 76 Director
Henry Green......................... 54 Director
Richard B. Kelsky(2)................ 41 Director
Frederic Greenberg(1)............... 56 Director
John A. deGroot..................... 41 Vice President, Secretary and General Counsel
Jake St. Philip..................... 44 Vice President of Sales--North America
Anthony B. Semedo................... 45 Vice President of Research, Development and
Engineering
Richard M. Mirando.................. 54 Vice President of Operations
Henk van Rossem..................... 54 Vice President and General Manager for Europe,
Africa and the Middle East
</TABLE>
- ------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
JEFFRY M. PICOWER--Mr. Picower became a Director and the Chairman of the
Board of the Company upon consummation of the Merger. Prior thereto, Mr. Picower
served as a Director of IMED since March 1993 and the Chairman of the Board of
IMED since May 1993. Mr. Picower served at ALARIS Medical as Chief Executive
Officer from September 1993 until the consummation of the Merger and Co-Chairman
of the Board from March 1993 to May 1993. Mr. Picower has served at ALARIS
Medical as Chairman of the Board since May 1993 and a Director since March 1993.
He was also a Director, Vice President and Assistant Treasurer of ALARIS Medical
from September 1988 to March 1989 and Vice Chairman from December 1988 to June
1989. Since 1984, Mr. Picower has been Chairman of the Board and Chief Executive
Officer of Monroe Systems for Business, Inc. ("Monroe"), a worldwide office
equipment, distribution and service organization. Mr. Picower has been a
Director of Physician Computer Network, Inc. ("PCN") since January 1994 and
Chairman of the Board since June 1994. PCN, a corporation whose principal
shareholder is Mr. Picower, operates a computer network linking its office-based
physician members to health care organizations.
WILLIAM J. MERCER--Mr. Mercer became a Director, the President and the Chief
Executive Officer of each of the Company and ALARIS Medical upon consummation of
the Merger. Mr. Mercer became the Chief Financial Officer of the Company in
March 1997. Prior to the Merger, Mr. Mercer served as President, Chief Executive
Officer and a Director of IVAC Medical Systems and President and a Director of
IVAC Holdings since May 1995 and Chief Executive Officer of IVAC Holdings since
January 1996. Prior to joining IVAC Medical Systems, Mr. Mercer held various
positions at Mallinckrodt Group Inc. for 17 years, most recently as Senior Vice
President. Mallinckrodt Group, Inc. is an international company serving
specialty markets in human healthcare, chemicals and animal health.
NORMAN M. DEAN--Mr. Dean became a Director of the Company upon consummation
of the Merger. Prior thereto, Mr. Dean served as a Director of IMED since April
1990. He has been a Director of ALARIS Medical since March 1989. Mr. Dean has
been a Director and President of Foothills Financial
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Corporation, a venture capital company, since January 1985 and Chairman of the
Board of Miller Diversified Corp., a commercial cattle feeder, since May 1990.
HENRY GREEN--Mr. Green became a Director of the Company upon consummation of
the Merger. Prior thereto, Mr. Green served as a Director of IMED since
September 1991. Mr. Green was President and Chief Operating Officer of ALARIS
Medical from September 1990 to March 1993 and has been a Director of ALARIS
Medical since 1991. Mr. Green was employed by PCN in March 1993, elected as
President of PCN in May 1993, Chief Executive Officer of PCN in June 1994 and a
Director of PCN in July 1993.
RICHARD B. KELSKY--Mr. Kelsky became a Director of the Company upon
consummation of the Merger. Prior thereto, Mr. Kelsky served as a Director of
IMED since April 1990. He has served as a Director of ALARIS Medical since June
1989. Mr. Kelsky is a Director of Monroe and from 1984 to 1996 served as Vice
President and General Counsel of Monroe and has served as Vice Chairman of
Monroe since 1996. Mr. Kelsky has served as a Director of PCN since January
1992.
FREDERIC GREENBERG--Mr. Greenberg became a Director of the Company upon
consummation of the Merger. Prior thereto, Mr. Greenberg served as a Director of
IMED since October 1996. He has been a Director of ALARIS Medical since June 7,
1995. Mr. Greenberg is a partner with EGS Partners LLC, an asset management and
merchant banking firm which Mr. Greenberg founded in 1989. From 1974 to 1989,
Mr. Greenberg served as a pharmaceutical analyst with Goldman Sachs & Company,
an investment banking firm. Mr. Greenberg serves as an advisor to various health
care companies and has been a Director of PCN since July 1993.
JOHN A. DE GROOT--Mr. de Groot became a Vice President and General Counsel
of the Company upon consummation of the Merger. Mr. de Groot became the
Secretary of ALARIS Medical and the Company in March 1997. Prior to the Merger,
Mr. de Groot served as a Vice President and General Counsel of IVAC Holdings and
IVAC Medical Systems since April 1995. From January 1991 to December 1996, Mr.
de Groot was a partner in the law firm of Brobeck, Phleger & Harrison LLP, a
firm he had been associated with since March 1987.
JAKE ST. PHILIP--Mr. St. Philip became Vice President of Sales--North
America of the Company upon consummation of the Merger. Prior thereto, Mr. St.
Philip served as Vice President of Sales--North America of IVAC Medical Systems
since June 1994. From 1981 to June 1994, Mr. St. Philip held various sales and
marketing positions with IVAC Medical Systems.
ANTHONY B. SEMEDO--Mr. Semedo became Vice President of Research, Development
and Engineering of the Company upon consummation of the Merger. 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 is
engaged in the discovery, development, manufacture and sale of products, and the
provision of services in the life sciences industry.
RICHARD M. MIRANDO--Mr. Mirando became Vice President of Operations of the
Company upon consummation of the Merger. Prior thereto, Mr. Mirando served as
Vice President and General Manager of International Business of IVAC Medical
Systems since January 1995. From 1978 to January 1995, Mr. Mirando held various
positions, including Marketing Manager, Director of Market Planning and
Research, Director of Sales, Executive Director of International Operations,
Vice President Sales and Marketing--Fluid 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 the Company's Vice President and
General Manager for Europe, Africa and the Middle East in January 1997. Prior
thereto, Mr. van Rossem held various
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international marketing and sales positions with Mallinckrodt Group, Inc. since
1984. Mr. van Rossem's last position with Mallinckrodt Group, Inc. was Vice
President and General Manager of the European nuclear medicine division.
There are no family relationships among the above Directors and executive
officers.
BOARD OF DIRECTORS
The Board of Directors of the Company consists of six 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 the Company also serve as
and constitute all of the members of the Board of Directors of ALARIS Medical.
COMPENSATION OF DIRECTORS
Members of the Board of Directors who are not employees of the Company are
paid $10,000 per annum. In addition, every three years such Directors receive
options to purchase 12,000 shares of ALARIS Medical common stock pursuant to the
Directors Plan, which options vest at a rate of 4,000 shares per annum. See
"--Stock-Based Benefit Plans--Directors Plan." Travel and accommodation expenses
of Directors incurred in connection with meetings are reimbursed by the Company.
All of the Directors are covered by ALARIS Medical's director's liability
insurance policy.
In 1996, two Directors were each granted an option on 10,000 shares of
ALARIS Medical common stock in consideration for service on a special committee
of the Board of Directors of ALARIS Medical. See "Principal Stockholders."
EXECUTIVE COMPENSATION
The following table summarizes certain information regarding compensation
paid or accrued by the Company, ALARIS Medical, IMED or IVAC Medical Systems to
or on behalf of the Company's Chief Executive Officer, each of the four most
highly compensated executive officers of the Company, other than the Chief
Executive Officer, whose total annual salary and bonus for the year ended
December 31, 1996 exceeded $100,000 (collectively, the "Named Executive
Officers") and Joseph W. Kuhn:
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1996 1996
ANNUAL COMPENSATION LONG-TERM
----------------------------------- COMPENSATION
OTHER ------------- 1996 ALL
ANNUAL SECURITIES OTHER
SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
($)(1) ($) ($)(2) OPTIONS ($)
--------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
William J. Mercer .................................. 319,334 312,965 -- 600,000 2,998,298(3)
Chief Executive Officer and Chief Financial
Officer
Joseph W. Kuhn(4)................................... 226,348 139,236 12,519(5) 175,000 3,413(6)
Anthony B. Semedo .................................. 146,808 100,804 -- 180,000 671,210(7)
Vice President of Research, Development and
Engineering
Jake St. Philip .................................... 144,894 111,425 -- 180,000 607,734(8)
Vice President of Sales--North America
Richard M. Mirando ................................. 181,319 92,401 13,216(9) 180,000 622,680(10)
Vice President of Operations
John A. deGroot .................................... 131,254 125,232 -- 180,000 384,108(11)
Vice President, Secretary and General Counsel
</TABLE>
- ------------------------------
(1) "Salary" with respect to (i) Messrs. Mercer, Semedo, St. Philip, Mirando
and deGroot consists of eleven months of salary paid by IVAC Medical Systems
and one month of salary paid by the Company and (ii) Mr. Kuhn consists of
eleven months of salary paid by IMED and one month of salary paid by the
Company.
(2) "Other Annual Compensation" includes annual compensation, other than salary
or bonus, including perquisites and other personal benefits where such items
exceed the lesser of $50,000 or 10% of the Named Executive Officers' annual
salary and bonus.
(3) Consists of (i) $271,980 in relocation and temporary housing expenses paid
by IVAC Medical Systems and the Company; (ii) an aggregate contribution of
$4,120 made by IVAC Medical Systems and the Company to match pre-tax
elective deferred contributions (included under "Salary") made by Mr. Mercer
to the IVAC Medical Systems and ALARIS Medical 401(k) plans (collectively,
the "401(k) Plans"); and (iii) $2,722,198 stock option cancelation payment
paid by the Company in connection with the Merger for unexercised options
previously granted under the IVAC Holdings 1995 stock option plan.
(4) Mr. Kuhn resigned from his position as the Company's Chief Financial
Officer in March 1997. Prior to the Merger, Mr. Kuhn served as President,
Treasurer and Secretary of IMED and as President, Chief Financial Officer,
Treasurer and Secretary of ALARIS Medical.
(5) Consists of a car allowance paid by IMED and the Company.
(6) Consists of contributions made by IMED to ALARIS Medical's 401(k) plan on
behalf of Mr. Kuhn to match pre-tax elective deferral contributions
(included under "Salary") made by Mr. Kuhn to such plan.
(7) Consists of (i) $8,568 of in relocation expenses paid by IVAC Medical
Systems; (ii) an aggregate contribution of $4,404 made by IVAC Medical
Systems and the Company to match pre-tax elective deferred contributions
(included under "Salary") made by Mr. Semedo to the 401(k) Plans; and (iii)
$658,238 stock option cancelation payment paid by the Company in connection
with the Merger for unexercised options previously granted under the IVAC
Holdings 1995 stock option plan.
(8) Consists of (i) $4,504 of in relocation expenses paid by IVAC Medical
Systems; (ii) an aggregate contribution of $4,346 made by IVAC Medical
Systems and the Company to match pre-tax elective deferral contributions
(included under "Salary") made by Mr. St. Philip to the 401(k) Plans; and
(iii) $598,884 stock option cancelation payment paid by the Company in
connection with the Merger for unexercised options previously granted under
the IVAC Holdings 1995 stock option plan.
(9) Consists of a car allowance paid by IVAC Medical Systems and the Company.
(10) Consists of (i) an aggregate contribution of $5,440 made by IVAC Medical
Systems and the Company to match pre-tax elective deferral contributions
(included under "Salary") made by Mr. Mirando to the 401(k) Plans; (ii)
$6,727 in housing expenses paid by IVAC Medical Systems and the Company; and
(iii) $597,297 stock option cancelation payment paid by the Company in
connection with the Merger for unexercised options previously granted under
the IVAC Holdings 1995 stock option plan.
(11) Consists of an aggregate contribution of $3,000 made by IVAC Medical
Systems and the Company to match pre-tax elective deferral contributions
(included under "Salary") made by Mr. deGroot to the 401(k) Plans and (ii)
$381,108 stock option cancelation payment paid by the Company in connection
with the Merger for unexercised options previously granted under the IVAC
Holdings 1995 stock option plan.
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EMPLOYMENT AGREEMENTS
In August 1996, Mr. Mercer entered into an employment agreement whereby he
became employed full time by the Company and ALARIS Medical upon consummation of
the Merger. The agreement is for a term of five years, subject to automatic
renewal for successive one-year periods and to earlier termination as provided
therein. The agreement provides for, among other things, a base salary of
$400,000, certain annual and additional bonuses beginning in the Company's 1997
fiscal year in an aggregate amount up to 100% of Mr. Mercer's base annual salary
in each such year, options to purchase an aggregate of 600,000 shares of common
stock of ALARIS Medical, and, in the event Mr. Mercer's employment is terminated
by the Company or ALARIS Medical without cause or disability (as defined in the
agreement), or by Mr. Mercer for good reason (as defined in the agreement),
severance payments in an amount equal to Mr. Mercer's base salary annually until
the end of the employment term. The agreement also contains certain
confidentiality, non-solicitation and non-competition provisions.
STOCK-BASED BENEFIT PLANS
1988 STOCK OPTION PLAN. The Third Amended and Restated 1988 Stock Option
Plan of ALARIS Medical (the "1988 Option Plan") was approved by the Board of
Directors of ALARIS Medical and became effective on June 28, 1994. Under the
1988 Option Plan, incentive stock options with respect to shares of common stock
of ALARIS Medical ("ISOs"), as provided in Section 422 of the Internal Revenue
Code, may be granted to key employees of ALARIS Medical and its subsidiaries
(including the Company), and non-qualified stock options with respect to shares
of common stock of ALARIS Medical ("NQSOs") may be granted to key employees,
Directors (except Directors eligible to participate in the Directors Plan), and
officers of ALARIS Medical, its subsidiaries (including the Company) and
affiliates, as well as independent contractors and consultants performing
services for such entities. The maximum aggregate number of shares of ALARIS
Medical's 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 1,625,755, of which 1,150,179 are subject
to currently outstanding options. If the 1996 Option Plan (as defined) is
approved by the stockholders of ALARIS Medical, no further option grants will be
made under the 1988 Option Plan. The number of shares of common stock available
under the 1988 Option Plan is reduced on a share-for-share basis in respect of
each share issued other than under the 1988 Option Plan to persons eligible to
participate in the 1988 Option Plan. In the event of a change in the
capitalization of ALARIS Medical which affects the common stock, the 1988
Committee (as defined) may make proportionate adjustments to the number of
shares of common stock for which options may be granted and the number and
exercise price of shares of common stock subject to outstanding options. Options
may not be granted under the 1988 Option Plan on or after December 27, 1998.
The 1988 Option Plan provides for administration by a committee appointed by
the Board of Directors of ALARIS Medical (the "1988 Committee"). No member of
the 1988 Committee is eligible to receive options under the 1988 Option Plan.
The 1988 Committee has authority, subject to the terms of the 1988 Option Plan,
to determine the individuals to whom options may be granted, the exercise price
and number of shares of common stock subject to each option, whether the options
granted to employees are to be ISOs, the time or times during which all or a
portion of each option may be exercised and certain other provisions of each
option.
Pursuant to the 1988 Option Plan, the purchase price of shares of common
stock subject to ISOs must be not less than the fair market value of the common
stock at the date of the grant; provided that the purchase price of shares
subject to ISOs granted to any optionee who owns shares possessing more than 10%
of the combined voting power of ALARIS Medical or any parent or subsidiary of
ALARIS Medical ("Ten Percent Shareholder") must be not less than 110% of the
fair market value of the common stock at the date of the grant. With respect to
NQSOs, the purchase price of shares will be determined by the 1988 Committee at
the time of the grant, but will not be less than the par value of a share of
common stock. The maximum term of an option may not exceed 10 years from the
date of grant, except with respect to ISOs
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<PAGE>
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. Under the 1988 Option Plan, no more than 250,000 shares of
common stock (subject to certain adjustments) may be made subject to options
granted to any one employee in any calendar year. During the lifetime of an
optionee, his or her options may be exercised only by such optionee. Options are
not transferable other than by will or by the laws of descent and distribution.
Payment of the purchase price for the shares of common stock to be received
upon exercise of an option may be made in cash, in shares of common stock or in
any combination thereof. In addition, the 1988 Committee may, pursuant to the
terms of the stock option agreement between the optionee and ALARIS Medical,
provide for payment of the purchase price by promissory note or by any other
form of consideration permitted by law.
Options granted to participants under the 1988 Option Plan are subject to
forfeiture under certain circumstances in the event an optionee is no longer
employed by or performing services for ALARIS Medical or the Company. In the
event an optionee is terminated for cause, all unexercised options held by such
optionee (whether or not vested) expire upon such termination. If an optionee is
no longer an officer, Director or employee other than as the result of having
been terminated for cause, all unvested options expire at such time and all
vested options expire twelve months thereafter, unless by their terms such
options expire sooner.
In the event of a change of control, as defined in the 1988 Option Plan,
unless otherwise determined by the 1988 Committee at the time of grant or by
amendment (with the holder's consent) of such grant, all options not vested on
or prior to the effective time of any such change of control will immediately
vest as of such effective time.
1996 STOCK OPTION PLAN. The 1996 Stock Option Plan of ALARIS Medical (the
"1996 Option Plan") was approved by the Board of Directors of ALARIS Medical and
became effective on November 26, 1996, subject to approval by the stockholders
of ALARIS Medical at a meeting held within twelve months following such date.
Under the 1996 Option Plan, ISOs with respect to the common stock of ALARIS
Medical may be granted to key employees of ALARIS Medical and its subsidiaries
(including the Company), and NQSOs with respect to the common stock of ALARIS
Medical may be granted to key employees, Directors (except Directors eligible to
participate in the Directors Plan), and officers of ALARIS Medical, its
subsidiaries (including the Company) and affiliates, as well as independent
contractors and consultants performing services for such entities. The maximum
aggregate number of shares of ALARIS Medical's common stock that may be issued
under the 1996 Option Plan is 4,000,000. The number of shares of common stock
which remain available for issuance under the 1996 Option Plan is 4,000,000, of
which 2,373,667 are subject to currently outstanding options. In the event of a
change in the capitalization of ALARIS Medical which affects the common stock,
the 1996 Committee (as defined) will make proportionate adjustments to the
number of shares of common stock for which options may be granted and the number
and exercise price of shares of common stock subject to outstanding options.
Options may not be granted under the 1996 Option Plan on or after November 26,
2006.
The 1996 Option Plan provides for administration by a committee appointed by
the Board of Directors of ALARIS Medical (the "1996 Committee"), consisting of
not less than a sufficient number of non-employee directors (as such term is
defined in Rule 16b-3 under the Exchange Act) who are also "outside directors"
(within the meaning of Section 162(m) of the Code) so as to qualify the 1996
Committe to administer the 1996 Option Plan as contemplated by Rule 16b-3 and
Section 162(m), respectively. No member of the 1996 Committee is eligible to
receive options under the 1996 Option Plan. The 1996 Committee has authority,
subject to the terms of the 1996 Option Plan, to determine the individuals to
whom options may be granted, the exercise price and number of shares of common
stock subject to each option, whether the options granted to employees are to be
ISOs, the time or times during which all or a portion of each option may be
exercised and certain other provisions of each option.
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<PAGE>
Pursuant to the 1996 Option Plan, the purchase price of shares of common
stock subject to ISOs must be not less than the fair market value of the common
stock at the date of the grant; provided that the purchase price of shares
subject to ISOs granted to any optionee who owns shares possessing more than 10%
of the combined voting power of ALARIS Medical or any parent or subsidiary of
ALARIS Medical ("Ten Percent Shareholder") must be not less than 110% of the
fair market value of the common stock at the date of the grant. With respect to
NQSOs, the purchase price of shares will be determined by the 1996 Committee at
the time of the grant, but will not be less than the par value of a share of
common stock. The maximum term of an option may not exceed 10 years from the
date of grant, except with respect to ISOs granted to Ten Percent Shareholders
which must expire within five years of the date of grant. Options granted vest
and become exercisable as determined by the 1996 Committee. Under the 1996
Option Plan, no more than 600,000 shares of common stock (subject to certain
adjustments) may be made subject to options granted 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.
Payment of the purchase price for the shares of common stock to be received
upon exercise of an option may be made in cash, in shares of common stock or in
any combination thereof. In addition, the 1996 Committee may, pursuant to the
terms of the stock option agreement between the optionee and ALARIS Medical,
provide for payment of the purchase price by promissory note or by any other
form of consideration permitted by law.
Options granted to participants under the 1996 Option Plan are subject to
forfeiture under certain circumstances in the event an optionee is no longer
employed by or performing services for ALARIS Medical or the Company. Unless
otherwise provided by the 1996 Committee in the optionee's stock option
agreement, in the event the employment of an optionee who is an officer or
employee is terminated for cause, or in the event the services of an optionee
who is a consultant or independent contractor are terminated for cause, all
unexercised options held by such optionee on the date of such termination
(whether or not vested) will expire immediately. If an optionee who is a
Director (but not an officer or employee) is removed from the Board of Directors
for cause, all unexercised options held by such optionee on the date of such
removal (whether or not vested) will expire immediately.
Unless otherwise provided by the 1996 Committee in the optionee's stock
option agreement, in the event an optionee is no longer a Director, officer,
employee, consultant or independent contractor, other than as a result of having
been terminated for cause, all options which remain unvested on the date the
optionee ceases to be a Director, officer, employee, consultant or independent
contractor, as the case may be, will expire immediately, and all options which
have vested prior to such date will expire twelve months thereafter unless by
their terms they expire sooner.
In the event of a change of control, as defined in the 1996 Option Plan,
unless otherwise determined by the 1996 Committee at the time of grant or by
amendment (with the holder's consent) of such grant, all options not vested on
or prior to the effective time of any such change of control will 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 will terminate and cease to be outstanding immediately following
the change of control.
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The following table sets forth certain information with respect to stock
options granted during 1996 to the Named Executive Officers and Mr. Kuhn
pursuant to the 1988 Option Plan and the 1996 Option Plan.
OPTION GRANTS IN FISCAL YEAR 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------
POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATE OF
SECURITIES OPTIONS EXERCISE STOCK APPRECIATION FOR THE
UNDERLYING GRANTED TO OF BASE OPTIONS TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
- -------------------- ----------- --------------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
William J. Mercer... 600,000 21.1% 3.00 11-26-06 1,132,010 2,868,736
Joseph W. Kuhn...... 100,000 3.5% 2.437 3-12-06 141,501 358,592
75,000 2.6% 3.00 11-26-06 153,262 388,395
Anthony B. Semedo... 180,000 6.3% 3.00 11-26-06 339,603 860,621
Jake St. Philip..... 180,000 6.3% 3.00 11-26-06 339,603 860,621
Richard M. Mirando.. 180,000 6.3% 3.00 11-26-06 339,603 860,621
John A. deGroot..... 180,000 6.3% 3.00 11-26-06 339,603 860,621
</TABLE>
- ------------------------------
(1) The option on 100,000 shares granted to Mr. Kuhn was made under the 1988
Option Plan. The balance of the option grants set forth in the table were
made under the 1996 Option Plan.
The following table sets forth certain information with respect to
unexercised stock options during 1996:
AGGREGATED OPTION EXERCISE IN FISCAL YEAR 1996
AND OPTION VALUES AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES VALUE OPTIONS AT 12/31/96 AT 12/31/96 ($)(1)
ACQUIRED REALIZED ----------------------------- -----------------------------
NAME ON EXERCISE $ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
William J. Mercer............. -- -- 100,000 500,000 75,000 375,000
Joseph W. Kuhn................ -- -- 40,000 260,000 59,688 370,050
Anthony B. Semedo............. -- -- 36,000 144,000 27,000 108,000
Jake St. Philip............... -- -- 36,000 144,000 27,000 108,000
Richard M. Mirando............ -- -- 36,000 144,000 27,000 108,000
John A. deGroot............... -- -- 36,000 144,000 27,000 108,000
</TABLE>
- ------------------------
(1) Calculated based on the excess of the closing price of ALARIS Medical's
common stock on December 31, 1996 ($3.75) as reported in the American Stock
Exchange Composite Transactions published in THE WALL STREET JOURNAL over
the option exercise price.
DIRECTORS PLAN. Certain Directors of the Company are eligible to
participate in the Second Amended and Restated 1990 Non-Qualified Stock Option
Plan for Non-Employee Directors of ALARIS Medical (the "Directors Plan"). The
Directors Plan was approved by the Board of Directors of ALARIS Medical and
became effective on June 28, 1994. Directors who are eligible participants in
the Directors Plan are not eligible to receive awards under the 1988 Option Plan
and the 1996 Option Plan. An aggregate of 250,000 shares of ALARIS Medical's
common stock may be issued under the Directors Plan. The number of shares of
common stock which remains available for issuance under the Directors Plan is
218,800, of which 84,000 are subject to currently outstanding options. The
number of shares of common stock available under the Directors Plan is reduced
on a share-for-share basis in respect of each share issued other than under the
Directors Plan to persons eligible to participate in the Directors Plan. In the
event of a change in the capitalization of ALARIS Medical which affects the
common stock, the committee of the Board of Directors of ALARIS Medical which
administers the Directors Plan (the "Plan Committee") will make proportionate
adjustments to the number of shares of common stock for which NQSOs may be
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<PAGE>
granted and to the number and exercise price of shares of common stock subject
to outstanding NQSOs. NQSOs may not be granted under the Directors Plan on or
after September 7, 2000.
The Plan Committee consists of at least two individuals who are not eligible
to participate in the Directors Plan. The Plan Committee has the authority to
administer all aspects of the Directors Plan other than (i) the grant of NQSOs;
(ii) the number of shares of common stock subject to NQSOs; (iii) the rate at
which options granted thereunder vest and become first exercisable; and (iv) the
price at which each share covered by a NQSO may be purchased, all of which are
determined automatically under the Directors Plan.
On September 10, 1990, initial grants of NQSOs covering 12,000 shares of
common stock were made automatically under the Directors Plan to each of ALARIS
Medical's non-employee Directors. An initial grant of NQSOs covering 12,000
shares of common stock was made automatically to any person who became an
eligible participant after September 10, 1990, on the business day following
such person's election to the Board of Directors of ALARIS Medical. During the
term of the Directors Plan, additional grants of NQSOs covering 12,000 shares of
common stock have been and will continue to be made to each participant in the
Directors Plan every three years on the anniversary of such person's initial
NQSO grant. NQSOs granted under the Directors Plan vest and become exercisable
at the rate of 4,000 shares for every twelve-month period of continuous service
on the Board of Directors of ALARIS Medical, provided that the optionee is still
a member of the Board of Directors on that date. The term of each NQSO is five
years from the date of grant. During the lifetime of an optionee, his or her
NQSOs may be exercised only by the optionee and the NQSOs are not transferable
other than by will or by the laws of descent and distribution. NQSOs granted
under the Directors Plan which have not yet vested are subject to termination if
the optionee ceases to be a Director of ALARIS Medical or becomes an employee of
ALARIS Medical or the Company and all NQSOs which have vested expire twelve
months after such change in status, unless by their terms such NQSOs expire
sooner. In the event that an optionee is removed from the Board of Directors of
ALARIS Medical for cause, all unexercised NQSOs, whether or not vested, expire
upon such removal.
The purchase price of shares of common stock subject to NQSOs is the fair
market value of the common stock on the date of the grant. Payment for the
shares of common stock to be received by a optionee upon exercise of a NQSO may
be in cash or in shares of common stock. In addition, the Plan Committee may
provide in such optionee's stock option agreement for payment of the purchase
price by promissory note or any other form of consideration permitted by law.
In the event of a change of control, as defined in the Directors Plan, all
NQSOs not vested on or prior to the effective time of any such change in control
will immediately vest as of such effective time.
In May 1997, the Board of Directors of ALARIS Medical approved, subject to
approval by the stockholders of ALARIS Medical, the amendment and restatement of
the Directors Plan. The amendment and restatement of the Directors Plan is being
proposed in order to (i) maintain ALARIS Medical's ability to attract and reward
its Directors by increasing the number of shares of common stock subject to each
automatic award under the Directors Plan formula from 12,000 to 15,000; (ii)
make automatic awards under the Directors Plan available to any Director who
does not receive a salary as an officer of ALARIS Medical or the Company; and
(iii) conform the Directors Plan to corresponding provisions in the newly
adopted 1996 Option Plan and changes in applicable law.
COMPENSATION 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 and ALARIS Medical. See "--Employment Agreements."
For further information regarding certain relationships and related
transactions, see "Certain Relationships and Related Transactions."
106
<PAGE>
PRINCIPAL STOCKHOLDERS
All of the outstanding capital stock of the Company is owned by ALARIS
Medical. The following table sets forth, at April 23, 1997, information
regarding the beneficial ownership of ALARIS Medical's common stock by (i) all
persons known by the Company who own beneficially more than 5% of ALARIS
Medical's outstanding common stock; (ii) each Director of the Company; (iii)
each of the Named Executive Officers; and (iv) all Directors and Named Executive
Officers as a group. Unless otherwise stated, the Company 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.
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS OF OF CLASS
BENEFICIAL OWNERS NUMBER (1)
- ------------------------------------------------------------ ------------- ----------
<S> <C> <C>
Jeffry M. Picower........................................... 46,643,209(2) 79.6%
South Ocean Blvd.
Palm Beach, FL 33480
William J. Mercer........................................... 200,000(3) *
Norman M. Dean.............................................. 16,000(4) *
Henry Green................................................. 5,000(5) *
Frederic Greenberg.......................................... 14,000(6) *
Richard B. Kelsky........................................... 94,100(7) *
Anthony B. Semedo........................................... 36,000(8) *
Jake St. Philip............................................. 36,000(8) *
Richard M. Mirando.......................................... 36,000(8) *
John A. deGroot............................................. 36,000(8) *
All Directors and Named Executive Officers as a group (10 47,116,309(9) 80.5%
individuals)..............................................
</TABLE>
- ------------------------
* Less than 1%
(1) Calculated in accordance with Rule 13d-3(d)(1) under the Exchange Act. At
April 23, 1997, ALARIS Medical had 58,567,377 shares of its 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; and (iii) 24,074,269
shares of common stock owned by JD Partnership. 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) 100,000 shares of common stock owned by the William J. Mercer
Trust, of which Mr. Mercer is the trustee and a beneficiary, and (ii)
currently exercisable option on 100,000 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 and ALARIS Medical, Mr. Mercer
has been granted under the 1996 Option Plan additional options on 500,000
shares of common stock. Such additional options consist of an option on (i)
400,000 shares of common stock that vests over time and (ii) 100,000 shares
of common stock that vests upon the attainment by the Company of certain
operational and financial performance targets. See "Management--Employment
Agreements."
(4) Includes currently exercisable option on 12,000 shares of common stock under
the Directors Plan. Does not include (i) option on an additional 12,000
shares of common stock granted under the Directors Plan that vests over time
and (ii) option on 10,000 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) Does not include an option to purchase 12,000 of common stock granted under
the Directors Plan that vests over time.
107
<PAGE>
(6) Includes currently exercisable option on 4,000 shares of common stock
granted under the Directors Plan. Does not include (i) option on an
additional 8,000 shares of common stock granted under the Directors Plan
that vests over time and (ii) option on 10,000 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.
(7) Includes currently exercisable option on 12,000 shares of common stock
granted under the Directors Plan. Does not include option on an additional
12,000 shares of common stock granted under the Directors Plan that vests
over time.
(8) Represents currently exercisable option on 36,000 shares of common stock
granted under the 1996 Option Plan. Does not include option of 144,000
shares of common stock granted under the 1996 Option Plan that vests over
time.
(9) Includes currently exercisable options on 244,000 shares of common stock
granted under the 1996 Option Plan and 20,000 shares of common stock granted
under the Directors Plan.
POSSIBLE CHANGES IN CONTROL
The Company is a wholly owned subsidiary of ALARIS Medical. All of the
Company's outstanding equity securities has been pledged by ALARIS Medical to
secure the Company's obligations under the New Credit Facility. In the event of
a default under the New Credit Facility, the lenders thereunder have certain
rights as secured creditors under the terms of the New Credit Facility to vote
and to sell or otherwise dispose of such pledged shares. See "Description of New
Credit Facility--Events of Default."
108
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DECISIONS CONTRIBUTION
In connection with the financing of the Merger, ALARIS Medical made the
Capital Contribution to IMED. The Capital Contribution was funded in part
through the sale to Decisions by ALARIS Medical of shares of its common stock.
The balance of the Capital Contribution was funded with existing cash balances
of ALARIS Medical. See "Prospectus Summary--Funding of the Merger and Related
Transactions." Mr. Picower is the sole stockholder and sole director of
Decisions. See "Risk Factors--Control of the Company" and "Management--Key
Executive Officers and Directors."
NON-CASH CONTRIBUTIONS
Effective June 30, 1996, ALARIS Medical made non-cash contributions totaling
$41.2 million to IMED. Included in this capital contribution was $2.9 million
representing ALARIS Medical's net carrying value of certain patents which up to
June 30, 1996 had been licensed to IMED for $1.1 million per year. Amounts
accrued to ALARIS Medical under this license, as well as other intercompany
charges due to ALARIS Medical totaling $9.4 million were contributed to IMED.
Additionally, ALARIS Medical contributed $8.8 million representing the
outstanding par value and accrued dividends on all outstanding shares of IMED's
12% preferred stock. These preferred shares were then cancelled. Payments to
ALARIS Medical relating to each of the contributed items were restricted
pursuant to the Existing Credit Facility.
Pursuant to IMED's tax sharing agreement with ALARIS Medical, for Federal
and California income tax purposes, IMED was required to calculate its current
income tax liability on a stand-alone basis as if it were not included in the
ALARIS Medical consolidated income tax return. The resulting tax liability was
payable to ALARIS Medical. Due to restrictions on payments from IMED to ALARIS
Medical contained in the Existing Credit Facility, income tax payments to ALARIS
Medical were limited to actual tax liabilities of ALARIS Medical. Due to losses
incurred at the ALARIS Medical level which served to reduce the consolidated
taxable income, the income tax liabilities recorded by IMED on a stand-alone
basis were significantly greater than the amounts actually paid to ALARIS
Medical. As of June 30, 1996, ALARIS Medical agreed to contribute to IMED's
stockholder's equity, income tax payments due from IMED but which could not be
paid pursuant to the Existing Credit Facility. As a result of this agreement by
ALARIS Medical, approximately $20.1 million was credited to IMED's capital in
excess of par and the corresponding income tax liabilities were eliminated from
the IMED consolidated balance sheet. Such liabilities amounted to approximately
$18.9 million at December 31, 1995.
TRANSACTIONS WITH MANAGEMENT
In connection with the Merger, Mr. Mercer entered into a new employment
agreement with the Company and ALARIS Medical. See "Management--Employment
Agreements."
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<PAGE>
DESCRIPTION OF NOTES
GENERAL
The Old Notes were, and the New Notes will be, issued pursuant to the
Indenture dated as of November 26, 1996 (the "Indenture") between the Company,
the Guaranteeing Subsidiaries and United States Trust Company of New York, as
trustee (the "Trustee"). The form and terms of the New Notes are identical in
all material respects to the form and terms of the Old Notes, except that the
New Notes (i) have been registered under the Securities Act and therefore, will
not bear legends restricting their transfer and (ii) do not contain certain
provisions providing for the payment of Liquidated Damages under certain
circumstances relating to the Registration Rights Agreement.
The terms of the Notes include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The Notes are subject to all such terms,
and Holders of Notes are referred to the Indenture and the Trust Indenture Act
for a statement thereof. A copy of the Indenture is available as set forth below
under "--Additional Information." The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions."
The Notes are general unsecured obligations of the Company, subordinated in
right of payment to all existing and future Senior Debt of the Company,
including Indebtedness pursuant to the New Credit Facility. See
"--Subordination." The Notes are guaranteed, jointly and severally, on a full
and unconditional senior subordinated basis by the Guaranteeing Subsidiaries.
Each Guaranteeing Subsidiary is a non-operating company with no significant
tangible assets. The Subsidiary Guarantees are subordinated in right of payment
to all existing and future Senior Debt of the Guaranteeing Subsidiaries,
including the guarantees of the Guaranteeing Subsidiaries of the Company's
obligations under the New Credit Facility. See "--Subsidiary Guarantees." At
March 31, 1997, the Company had approximately $224.9 million of Senior Debt
outstanding and the Guaranteeing Subsidiaries had no Senior Debt outstanding
(excluding guarantees by the Guaranteeing Subsidiaries of the Company's
obligations under the New Credit Facility). The Indenture provides that the
obligations of the Guaranteeing Subsidiaries are limited to amounts which will
not result in the Subsidiary Guarantees being fraudulent conveyances under
applicable law.
Restrictions in the Indenture on the ability of the Company and its
Restricted Subsidiaries to incur additional Indebtedness, to make Asset Sales,
to enter into transactions with Affiliates and to enter into mergers,
consolidations or sales of all or substantially all of its assets, may make more
difficult or discourage a takeover of the Company, whether favored or opposed by
the management of the Company. While such restrictions cover a wide variety of
arrangements which have traditionally been used to effect highly leveraged
transactions, the Indenture may not afford holders of Notes protection in all
circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
As of the date of this Prospectus, all of the Company's Subsidiaries are
Restricted Subsidiaries. However, under certain circumstances, the Company will
be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries are not subject to many of the
restrictive covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $200.0 million and
mature on December 1, 2006. Interest on the Notes accrues at the rate of 9.75%
per annum and is payable semi-annually in arrears on June 1 and December 1,
commencing on June 1, 1997, to Holders of record on the immediately preceding
May 15 and November 15. Interest on the Notes accrues from the most recent date
to which interest has been paid or, if no interest has been paid, from the date
of original issuance. Interest is computed on the basis of a 360-day year
comprised of twelve 30-day months. Principal, premium, if any,
110
<PAGE>
and interest on the Notes is payable at the office or agency of the Company
maintained for such purpose within the City and State of New York or, at the
option of the Company, payment of interest may be made by check mailed to the
Holders of the Notes at their respective addresses set forth in the register of
Holders of Notes. Until otherwise designated by the Company, the Company's
office or agency in New York is the office of the Trustee maintained for such
purpose. The Notes are issued in denominations of $1,000 and integral multiples
thereof.
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes are jointly and severally
guaranteed (the "Subsidiary Guarantees") on a full and unconditional senior
subordinated basis by the Guaranteeing Subsidiaries. Each Guaranteeing
Subsidiary is a non-operating company with no significant tangible assets. The
Subsidiary Guarantee of each Guaranteeing Subsidiary is subordinated to the
prior payment in full of all existing and future Senior Debt of such
Guaranteeing Subsidiary on substantially the same terms as the Notes are
subordinated to the Senior Debt of the Company. The obligations of each
Guaranteeing Subsidiary under its Subsidiary Guarantee are limited so as not to
constitute a fraudulent conveyance under applicable law. See "Risk
Factors--Enforceability of Subsidiary Guarantees."
The Indenture provides that no Guaranteeing Subsidiary may consolidate with
or merge with or into (whether or not such Guaranteeing Subsidiary is the
surviving Person), another corporation, Person or entity whether or not
affiliated with such Guaranteeing Subsidiary unless: (i) subject to the
provisions of the following paragraph, the Person formed by or surviving any
such consolidation or merger (if other than such Guaranteeing Subsidiary)
assumes all the obligations of such Guaranteeing Subsidiary pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Notes and the Indenture; (ii) immediately after giving effect
to such transaction, no Default or Event of Default exists; and (iii) the
Company would be permitted by virtue of the Company's pro forma Fixed Charge
Coverage Ratio, immediately after giving effect to such transaction, to incur at
least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio set forth in the covenant entitled "Incurrence of Indebtedness and
Issuance of Preferred Stock." The foregoing does not prohibit a merger between a
Guaranteeing Subsidiary and another Guaranteeing Subsidiary or a merger between
a Guaranteeing Subsidiary and the Company.
The Indenture provides that in the event of a sale or other disposition of
all or substantially all of the assets of any Guaranteeing Subsidiary, by way of
merger, consolidation or otherwise, or a sale or other disposition of all of the
capital stock of any Guaranteeing Subsidiary, then such Guaranteeing Subsidiary
(in the event of a sale or other disposition, by way of such a merger,
consolidation or otherwise, of all of the capital stock of such Guaranteeing
Subsidiary) or the corporation acquiring the property (in the event of a sale or
other disposition of all of the assets of such Guaranteeing Subsidiary) will be
released and relieved of any obligations under its Subsidiary Guarantee;
PROVIDED that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. See "--Asset Sales."
SUBORDINATION
The payment of all Obligations on the Notes is subordinated in right of
payment, as set forth in the Indenture, to the prior payment in full in cash or
Marketable Securities of all Senior Debt, whether outstanding on the date of the
Indenture or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshalling of the Company's
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full in cash or Marketable
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Securities of all Obligations due in respect of such Senior Debt (including
interest after the commencement of any such proceeding at the rate specified in
the applicable Senior Debt, whether or not such interest is in an allowed claim
under applicable law) before the Holders of Notes will be entitled to receive
any payment with respect to the Notes, and until all Obligations with respect to
Senior Debt are paid in full in cash or Marketable Securities, any distribution
to which the Holders of Notes would be entitled shall be made to the holders of
Senior Debt (except that Holders of Notes may receive Permitted Junior
Securities and any other Permitted Junior Securities issued in exchange for any
Permitted Junior Securities and payments made from the trust described below
under "--Legal Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the Notes
(except in such Permitted Junior Securities, Permitted Junior Securities issued
in exchange for such Permitted Junior Securities or from the trust described
below under "--Legal Defeasance and Covenant Defeasance") if (i) a default in
the payment of the principal of, premium, if any, or interest on Designated
Senior Debt occurs and is continuing or (ii) any other default occurs and is
continuing with respect to Designated Senior Debt that permits holders of the
Designated Senior Debt as to which such default relates to accelerate its
maturity and the Trustee receives a notice of such default (a "Payment Blockage
Notice") from the holders of any Designated Senior Debt. Payments on the Notes
may and shall be resumed (a) in the case of a payment default, upon the date on
which such default is cured or waived and (b) in case of a nonpayment default,
the earlier of the date on which such nonpayment default is cured or waived or
179 days after the date on which the applicable Payment Blockage Notice is
received, unless the maturity of any Designated Senior Debt has been
accelerated. No new period of payment blockage may be commenced unless and until
(i) 360 days have elapsed since the effectiveness of the immediately prior
Payment Blockage Notice and (ii) all scheduled payments of principal, premium,
if any, and interest on the Notes that have come due have been paid in full in
cash. No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the
basis for a subsequent Payment Blockage Notice.
The Indenture further requires that the Company promptly notify holders of
Senior Debt if payment of the Notes is accelerated because of an Event of
Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of the Notes may recover less ratably than
creditors of the Company who are holders of Senior Debt. See "Risk
Factors--Subordination."
OPTIONAL REDEMPTION
Except as provided in the next paragraph, the Notes are not redeemable at
the Company's option prior to December 1, 2001. Thereafter, the Notes are
subject to redemption at the option of the Company, in whole or in part, upon
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below, together with
accrued and unpaid interest, if any, thereon to the applicable redemption date,
if redeemed during the twelve-month period beginning on December 1 of the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2001.............................................................................. 104.875%
2002.............................................................................. 103.250%
2003.............................................................................. 101.625%
2004 and thereafter............................................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to December 1, 1999, the
Company on one or more occasions may redeem up to $70.0 million in aggregate
principal amount of Notes with any of the net proceeds of one or more public or
private offerings of common stock of: (i) ALARIS Medical or any other corporate
parent of the Company to the extent the net proceeds thereof are contributed to
the Company
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as a capital contribution to common equity or (ii) the Company, in each case, at
a redemption price of 109.75% of the principal amount thereof plus accrued and
unpaid interest, if any, thereon to the applicable date of redemption; PROVIDED
that at least $130.0 million in aggregate principal amount of the Notes remain
outstanding immediately after the occurrence of each such redemption; PROVIDED,
FURTHER, that with respect to any private offering of the common stock (other
than of ALARIS Medical), such common stock shall be issued at a price no lower
than the fair market value thereof, as evidenced by an independent investment
banking firm of national standing delivered to the Trustee; and PROVIDED,
FURTHER, that any such redemption must occur within 90 days of the date of the
closing of such public or private offering.
MANDATORY REDEMPTION
Except as set forth below under "--Repurchase at the Option of Holders," the
Company is not required to make any mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to purchase all or any part (equal to $1,000 or
an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest, if any, thereon to the date of purchase (the "Change of Control
Payment"). The source of funds for any such purchase will be dependent upon the
Company's available cash or cash generated from operating or other sources,
including borrowing, sales of assets, sales of equity or funds provided by a new
controlling person. There can be no assurance, however, that sufficient funds
will be available at the time of any Change of Control to make the required
repurchases of Notes tendered, or that, if applicable, restrictions in the New
Credit Facility will allow the Company to make such required repurchases. See
"Risk Factors--Possible Inability to Repurchase Notes upon a Change of Control."
Within 30 days following any Change of Control, the Company will mail a
notice to each Holder describing the transaction or transactions that constitute
the Change of Control and offering to repurchase Notes pursuant to the
procedures required by the Indenture and described in such notice. The Company
will comply with the requirements of Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes as a
result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; PROVIDED that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Indenture provides that,
prior to being required to comply with the provisions of this covenant, but in
any event within 90 days following a Change of Control, the Company will either
repay all outstanding Senior Debt or obtain the requisite consents, if any,
under all agreements governing outstanding Senior Debt to permit the repurchase
of Notes required by this covenant. The Company will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
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The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar restructuring.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precisely established definition of the phrase under
applicable law. Accordingly, the ability of a Holder of Notes to require the
Company to repurchase such Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
ASSET SALES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, engage in an Asset Sale unless (i) the Company
(or the Restricted Subsidiary, as the case may be) receives consideration at the
time of such Asset Sale at least equal to the fair market value (evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) of the assets or Equity Interests issued or sold or
otherwise disposed of and (ii) at least 75% of the consideration therefor
received by the Company or such Restricted Subsidiary is in the form of cash
and/or Marketable Securities; PROVIDED that the amount of (x) any liabilities
(as shown on the Company's or such Restricted Subsidiary's most recent balance
sheet or in the notes thereto) of the Company or any Restricted Subsidiary
(other than liabilities that are by their terms subordinated to the Notes or any
guarantee thereof) that are assumed by the transferee of any such assets and (y)
any notes or other obligations received by the Company or any such Restricted
Subsidiary from such transferee that are immediately converted by the Company or
such Restricted Subsidiary into cash (to the extent of the cash received), will
be deemed to be cash for purposes of this provision; PROVIDED FURTHER, that the
75% limitation referred to above shall not apply to any sale, transfer or other
disposition of assets in which the cash portion of the consideration received
therefor is equal to or greater than the after-tax net cash proceeds that would
have been received by the Company had a transaction involving the same assets
complied with the aforementioned 75% limitation but was not structured with the
same tax benefits as the actual transaction.
Within 367 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or any Restricted Subsidiary may apply such Net Proceeds (a) to
permanently reduce long-term Indebtedness of a Restricted Subsidiary that is not
a Guaranteeing Subsidiary, (b) to permanently reduce Senior Debt (and, in the
case of revolving Indebtedness, to permanently reduce the commitments) of the
Company or any Guaranteeing Subsidiary, (c) to cash collateralize letters of
credit under the New Credit Facility and concurrently therewith permanently
reduce commitments under the New Credit Facility by an amount equal to the Net
Proceeds applied to such cash collateralization (PROVIDED that any such cash
collateral released to the Company and/or its Restricted Subsidiaries upon the
expiration of such letters of credit is applied in accordance with clause (a),
(b) or (d) of this sentence not later than the last to occur of (i) 367 days
after the original receipt of such Net Proceeds and (ii) 90 days after such
release), or (d) to an investment in another business, the making of a capital
expenditure or the acquisition of other tangible assets, product distribution
rights or intellectual property or rights thereto, in each case, in a line of
business permitted by the covenant entitled "Line of Business." Any Net Proceeds
from Asset Sales that are not applied or invested as provided in the preceding
sentence of this paragraph will be deemed to constitute, "Excess Proceeds." When
the aggregate amount of Excess Proceeds exceeds $15.0 million, the Company will
be required to make an offer to all Holders of Notes (an "Asset Sale Offer") to
purchase the maximum principal amount of Notes that may be purchased out of the
Excess Proceeds, at an offer price in cash in an amount equal to 100% of the
principal amount thereof plus accrued and unpaid interest, if any,
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thereon to the date of purchase, in accordance with the procedures set forth in
the Indenture. To the extent that the aggregate amount of Notes tendered
pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company or
any Restricted Subsidiary may use any remaining Excess Proceeds for any purpose
not prohibited under the Indenture. If the aggregate principal amount of Notes
surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the Notes to be purchased on a PRO RATA basis. Upon
completion of such Asset Sale Offer, the amount of Excess Proceeds shall be
reset at zero.
Notwithstanding the two immediately preceding paragraphs, the Company and
the Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (i) at least 75% of the
consideration received in connection with such Asset Sale constitutes
Replacement Assets or a combination of Replacement Assets and cash and (ii) such
Asset Sale is for fair market value (which, in the case of any Replacement
Assets the fair market value of which exceeds $3.0 million, will be evidenced by
the opinion of an accounting, appraisal or investment banking firm of national
standing delivered to the Trustee); PROVIDED that any Net Proceeds in the form
of cash received by the Company or any of its Restricted Subsidiaries in
connection with any Asset Sale permitted to be consummated pursuant to this
paragraph shall be subject to the provisions of the immediately preceding
paragraph.
The New Credit Facility prohibits the Company from purchasing any Notes and
also provides that certain change of control events with respect to ALARIS
Medical and/or the Company and certain asset sales will constitute a default
thereunder. Any future credit agreements or other agreements relating to Senior
Debt to which the Company becomes a party may contain similar restrictions and
provisions. In the event a Change of Control occurs or the Company is required
to make an Asset Sale Offer at a time when the Company is prohibited from
purchasing Notes, the Company could seek the consent of its lenders to the
purchase of Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an Event
of Default under the Indenture which would, in turn, constitute a default under
the New Credit Facility. In such circumstances, the subordination provisions in
the Indenture would likely restrict payments to the Holders of the Notes. See
"Risk Factors--Subordination."
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed or, if the Notes are not so listed, on a pro rata basis, by lot
or by such other method as the Trustee deems fair and appropriate, PROVIDED that
no Notes with a principal amount of $1,000 or less shall be redeemed in part.
Notice of redemption shall be mailed by first class mail at least 30 but not
more than 60 days before the redemption date to each Holder of Notes to be
redeemed at its registered address. If any Note is to be redeemed in part only,
the notice of redemption that relates to such Note shall state the portion of
the principal amount thereof to be redeemed. A new Note in principal amount
equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note. On and after the redemption
date, interest will cease to accrue on Notes or portions thereof called for
redemption.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any distribution (including in connection with any merger or
consolidation) on account of any Equity Interests of the Company or any of its
Restricted Subsidiaries (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Company or dividends or
distributions payable to the Company or any Wholly
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Owned Restricted Subsidiary of the Company); (ii) purchase, redeem or otherwise
acquire or retire for value any Equity Interests of the Company, any of its
Restricted Subsidiaries or any other Affiliate of the Company (other than any
such Equity Interests owned by the Company or any Wholly Owned Restricted
Subsidiary of the Company); (iii) make any principal payment on, or purchase,
redeem, defease or otherwise acquire or retire for value any Indebtedness that
is subordinated in right of payment to the Notes or a Subsidiary Guarantee,
except at the original final maturity thereof or in accordance with the
scheduled mandatory redemption or repayment provisions set forth in the original
documentation governing such Indebtedness (but not pursuant to any mandatory
offer to repurchase upon the occurrence of any event); or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as "Restricted Payments"),
unless, at the time of such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof, and
(b) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the date of the Indenture (excluding Restricted Payments permitted by
clauses (ii), (iii), (v), (vi), (x) and (xii) of the next succeeding
paragraph), is less than the sum of (1) 50% of the Consolidated Net Income
of the Company for the period (taken as one accounting period) from the
beginning of the first fiscal quarter commencing after the date of the
Indenture to the end of the Company's most recently ended fiscal quarter for
which internal financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Net Income for such period is a
deficit, minus 100% of such deficit), plus (2) 100% of the aggregate net
cash proceeds received by the Company from contributions of capital or the
issue or sale since the date of the Indenture of Equity Interests of the
Company or of debt securities of the Company that have been converted into
such Equity Interests (other than Equity Interests (or convertible debt
securities) sold to a Subsidiary of the Company and other than Disqualified
Stock or debt securities that have been converted into Disqualified Stock),
PLUS (3) to the extent that any Restricted Investment that was made after
the date of the Indenture is sold for cash or otherwise liquidated or repaid
for cash, the cash return of capital with respect to such Restricted
Investment (less the cost of disposition, if any); PROVIDED that no cash
proceeds received by the Company from the issue or sale of any Equity
Interests issued by the Company will be counted in determining the amount
available for Restricted Payments under this clause (b) to the extent such
proceeds were used to redeem, repurchase, retire or acquire any Equity
Interests of the Company pursuant to clause (ii) of the next succeeding
paragraph, to defease, redeem or repurchase any subordinated Indebtedness
pursuant to clause (iii) of the next succeeding paragraph or to repurchase,
redeem or acquire any Equity Interests of the Company pursuant to clause
(iv) of the next succeeding paragraph, and
(c) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
under "--Incurrence of Indebtedness and Issuance of Preferred Stock."
The foregoing provisions do not prohibit any or all of the following (each
and all of which: (1) constitutes an independent exception to the foregoing
provisions and (2) may occur in addition to any action permitted to occur under
any other exception): (i) the payment of any dividend within 60 days after the
date of declaration thereof, if at such date of declaration such payment would
have complied with the provisions of the Indenture; (ii) the redemption,
repurchase, retirement or other acquisition of any Equity Interests of the
Company in exchange for, or out of the net proceeds of, the substantially
concurrent sale (other than to a Subsidiary of the Company) of other Equity
Interests of the Company (other than Disqualified Stock); PROVIDED that the
amount of any such net cash proceeds that are utilized for any such redemption,
repurchase, retirement or other acquisition shall be excluded from clause (b)(2)
of the
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preceding paragraph; (iii) the defeasance, redemption or repurchase of
subordinated Indebtedness with the net proceeds from an incurrence of Permitted
Refinancing Indebtedness or the substantially concurrent sale (other than to a
Subsidiary of the Company) of Equity Interests of the Company (other than
Disqualified Stock); PROVIDED that the amount of any such net cash proceeds that
are utilized for any such redemption, repurchase, retirement or other
acquisition shall be excluded from clause (b)(2) of the preceding paragraph;
(iv) a Restricted Payment to fund the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of ALARIS Medical or
the Company held by any member of ALARIS Medical's, the Company's or any of its
Restricted Subsidiaries' management pursuant to any management equity
subscription agreement or stock option agreement; PROVIDED that (A) the
aggregate price paid for all such repurchased, redeemed, acquired or retired
Equity Interests shall not exceed $1.0 million in any twelve-month period (or
$3.0 million in any single twelve month period during the term of the Notes)
PLUS the aggregate cash proceeds received by the Company during such
twelve-month period from any reissuance of Equity Interests by ALARIS Medical or
the Company to members of management of ALARIS Medical, the Company and its
Restricted Subsidiaries and (B) no Default or Event of Default shall have
occurred and be continuing immediately after such transaction; PROVIDED that the
amount in excess of $1.0 million (or $3.0 million, as the case may be) expended
for all such repurchases, redemptions and other acquisitions and retirements of
Equity Interests pursuant to this clause (iv) in any twelve month period shall
be excluded from clause (b)(2) of the preceding paragraph; (v) the payment of
dividends (A) by a Restricted Subsidiary on any class of common stock of such
Restricted Subsidiary if such dividend is paid PRO RATA to all holders of such
class of common stock and (B) by a Guaranteeing Subsidiary on any class of
preferred stock issued in compliance with the covenant entitled "Incurrence of
Indebtedness and Issuance of Preferred Stock;" (vi) the repurchase of any class
of common stock of a Restricted Subsidiary if such repurchase is made PRO RATA
with respect to such class of common stock; (vii) the payment of dividends or
the making of loans or advances by the Company to ALARIS Medical in order to
permit the payment by ALARIS Medical of interest in respect of the Convertible
Debentures in accordance with their terms; (viii) the payment of dividends or
the making of loans or advances by the Company to ALARIS Medical in order to
permit the payment by ALARIS Medical of principal in respect of the Convertible
Debentures at January 15, 2002 in accordance with their terms if, at the time of
such Restricted Payment, the Company would be permitted to incur at least $1.00
of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant entitled "Incurrence of
Indebtedness and Issuance of Preferred Stock;" (ix) the payment of dividends or
the making of loans or advances by the Company to ALARIS Medical not to exceed
$1.5 million in any fiscal year for, among other things, costs, expenses and
capital expenditures incurred by ALARIS Medical in its capacity as a holding
company; (x) payments to ALARIS Medical pursuant to the Tax Sharing Agreement;
(xi) any other Restricted Payment (other than (A) a dividend or other
distribution on account of any Equity Interests of the Company or any of its
Restricted Subsidiaries and (B) a purchase, redemption or other acquisition of
any Equity Interests of the Company, any of its Restricted Subsidiaries or any
Affiliate of the Company) if the amount thereof, together with all other
Restricted Payments made pursuant to this clause (xi) since the date of the
Indenture does not exceed $15.0 million; and (xii) the redemption, repurchase or
other acquisition of Notes.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such designation, all outstanding Investments by the Company
and its Restricted Subsidiaries (except to the extent repaid in cash) in the
Subsidiary so designated will be deemed to be Restricted Payments at the time of
such designation and will reduce the amount available for Restricted Payments
under the first paragraph of this covenant. All such outstanding Investments
will be deemed to constitute Restricted Investments in an amount equal to the
greater of (i) the net book value of such Investments at the time of such
designation and (ii) the fair market value of such Investments at the time of
such designation. Such designation will only be permitted if such Restricted
Investment would be permitted at such time and if such Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary.
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Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "Restricted Payments" were computed, which calculations
shall be based upon the Company's latest available financial statements.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, Incur any Indebtedness (including
Acquired Debt) and the Company and any Guaranteeing Subsidiary will not issue
any Disqualified Stock and will not permit any of their respective Restricted
Subsidiaries that are not Guaranteeing Subsidiaries to issue any shares of
preferred stock; PROVIDED, HOWEVER, that the Company and any Guaranteeing
Subsidiary may Incur Indebtedness or issue shares of Disqualified Stock, if the
Fixed Charge Coverage Ratio for the Company's most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred
or such Disqualified Stock is issued would have been at least (x) 2.25 to 1 if
such incurrence or issuance occurs on or before December 1, 1999, or (y) 2.5 to
1 if such incurrence or issuance occurs at any time thereafter, in each case,
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock had been issued, as the case may be, at the beginning of such
four-quarter period.
The foregoing provisions will not apply to any of the following (each and
all of which (1) may be issued or incurred, (2) constitutes an independent
exception to the foregoing provisions and (3) may be incurred in addition to any
other Indebtedness permitted to be incurred under any other exception): (i) the
incurrence by the Company or any Guaranteeing Subsidiary of Indebtedness and
letters of credit pursuant to any New Credit Facility (with letters of credit
being deemed to have a principal amount equal to the maximum potential liability
of the Company or the relevant Guaranteeing Subsidiary thereunder) in an
aggregate principal amount outstanding at any one time not to exceed $265.0
million (A) LESS the aggregate amount of all mandatory repayments (a "Mandatory
Repayment") of the principal of any term Indebtedness under the New Credit
Facility that have been made since the date of the Indenture pursuant to the
amortization schedule of any New Credit Facility (other than any Mandatory
Repayment made concurrently with refinancing or refunding of the New Credit
Facility) (B) PLUS the Excess Amount and (C) LESS the aggregate amount of all
Net Proceeds of Asset Sales applied pursuant to clause (b) or (c) of the first
sentence of the second paragraph under the covenant entitled "Asset Sales" to
permanently reduce Indebtedness (and, in the case of revolving Indebtedness, the
commitments) under the New Credit Facility or to cash collateralize letters of
credit and permanently reduce commitments with respect to revolving Indebtedness
under the New Credit Facility; PROVIDED that the amount of Indebtedness
permitted to be incurred pursuant to the New Credit Facility in accordance with
this clause (i) shall be in addition to any Indebtedness permitted to be
incurred pursuant to the New Credit Facility or otherwise in reliance on, and in
accordance with, clause (ix) below; (ii) the incurrence by the Company and any
Guaranteeing Subsidiary of Indebtedness represented by the Notes and any
Subsidiary Guarantee; (iii) the incurrence by the Company or any of its
Restricted Subsidiaries of Indebtedness (A) represented by Capital Lease
Obligations, mortgage financings or purchase money obligations, in each case,
incurred for the purpose of financing all or any part of the purchase price or
cost of construction or improvement of property used in the business of the
Company or such Restricted Subsidiary, or (B) in connection with sale and
leaseback transactions, in an aggregate principal amount with respect to clause
(iii) not to exceed $20.0 million at any time outstanding; PROVIDED THAT in no
event shall the aggregate principal amount of Indebtedness incurred pursuant to
clause (iii)(B) exceed $5.0 million at any time outstanding; (iv) Existing
Indebtedness; (v) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund, Indebtedness that was permitted by the Indenture; (vi) the incurrence by
Company or any of its Restricted Subsidiaries of intercompany Indebtedness
between or among the Company and any of its Restricted
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Subsidiaries; PROVIDED, HOWEVER, that (a) any subsequent issuance or transfer
(other than for security purposes) of Equity Interests and (b) any subsequent
sale or other transfer (including for security purposes other than to secure
Indebtedness permitted to be incurred pursuant to clause (i) of this paragraph)
of such Indebtedness, in each case, that results in any such Indebtedness being
held by a Person other than the Company or any of its Restricted Subsidiaries
shall be deemed to constitute an incurrence of such Indebtedness by the Company
or such Restricted Subsidiary, as the case may be, not permitted pursuant to
this clause (vi); (vii) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of fixing
or hedging (a) interest rate risk with respect to any floating rate Indebtedness
of such Person so long as such floating rate Indebtedness is permitted by the
terms of the Indenture to be outstanding or (b) exchange rate risk with respect
to agreements or indebtedness of such Person payable or denominated in a
currency other than U.S. dollars; (viii) the incurrence by the Company's
Unrestricted Subsidiaries of Non-Recourse Debt; PROVIDED, HOWEVER, that if any
such Indebtedness ceases to be Non-Recourse Debt of an Unrestricted Subsidiary,
such event shall be deemed to constitute an incurrence of Indebtedness by a
Restricted Subsidiary of the Company; (ix) the incurrence by the Company and any
Guaranteeing Subsidiary of Indebtedness in an aggregate principal amount at any
time outstanding not to exceed $25.0 million; (x) the incurrence by any Foreign
Subsidiary of Indebtedness and letters of credit to fund working capital and
capital expenditure requirements (with letters of credit being deemed to have a
principal amount equal to the maximum potential liability of such Foreign
Subsidiary thereunder) in an aggregate maximum principal amount outstanding at
any one time not to exceed $15.0 million; (xi) Obligations in respect of
performance and surety bonds provided by the Company or any Guaranteeing
Subsidiary in the ordinary course of business; and (xii) the incurrence or
issuance by any Restricted Subsidiary of the Company of Indebtedness or
preferred stock (in addition to Indebtedness and preferred stock that may be
incurred or issued pursuant to any other clause of this paragraph) in an
aggregate principal amount not to exceed $1.0 million.
SALE AND LEASEBACK TRANSACTIONS
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, enter into any sale and leaseback transaction;
PROVIDED that the Company and any Guaranteeing Subsidiary may enter into a sale
and leaseback transaction if (i) the Company or such Guaranteeing Subsidiary
could have incurred Indebtedness in an amount equal to the Attributable Debt
relating to such sale and leaseback transaction pursuant to (A) the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant entitled
"Incurrence of Indebtedness and Issuance of Preferred Stock" and/or (B) clause
(iii)(B) of the covenant entitled "Incurrence of Indebtedness and Issuance of
Preferred Stock" (as limited by the proviso to such clause), (ii) the Lien to
secure such Indebtedness does not extend to or cover any assets of the Company
or such Guaranteeing Subsidiary other than the assets which are the subject of
the sale leaseback transaction, (iii) the gross cash proceeds of such sale and
leaseback transaction are at least equal to the fair market value (as determined
in good faith by the Board of Directors of the Company and set forth in an
Officers' Certificate delivered to the Trustee) of the property that is the
subject of such sale and leaseback transaction and (iv) the transfer of assets
in such sale and leaseback transaction is permitted by, and the proceeds of such
transaction are applied in compliance with, the covenant "Asset Sales."
LIENS
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or
suffer to exist any Lien (other than Permitted Liens) securing any Obligations
on any property or asset now owned or hereafter acquired, or on any income or
profits therefrom or assign or convey any right to receive income therefrom,
unless the Notes and the Subsidiary Guarantees, as applicable, are either (i)
secured by a Lien on such property, assets, income or profits, if such other
Obligations are subordinated in right of payment to the Notes and/or the
Subsidiary Guarantees, that is senior in priority to the Lien securing such
other Obligations or (ii) equally
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and ratably secured by a Lien on such property, assets, income or profits with
the Lien securing such other Obligations, if such other Obligations are PARI
PASSU in right of payment to the Notes and/or the Subsidiary Guarantees.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or consensual
restriction on the ability of any Restricted Subsidiary to: (i)(a) pay dividends
or make any other distributions to the Company or any of its Restricted
Subsidiaries on its Capital Stock or (b) pay any Indebtedness owed to the
Company or any of its Restricted Subsidiaries; (ii) make loans or advances to
the Company or any of its Restricted Subsidiaries; or (iii) transfer any of its
properties or assets to the Company or any of its Restricted Subsidiaries,
except for such encumbrances or restrictions existing under or by reasons of (a)
Existing Indebtedness, as in effect on the date of the Indenture; (b) the New
Credit Facility as in effect on the date of the Indenture and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof; PROVIDED that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacement or refinancings are no more restrictive in the aggregate than those
contained in the New Credit Facility as in effect on the date of the Indenture;
(c) the Indenture and the Notes; (d) applicable law; (e) any instrument
governing Indebtedness or Capital Stock of a Person acquired by the Company or
any of its Restricted Subsidiaries, as in effect at the time of acquisition
(except to the extent such Indebtedness was incurred in connection with, or in
contemplation of, such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so acquired; PROVIDED that
in the case of Indebtedness, such Indebtedness was permitted by the terms of the
Indenture to be incurred; (f) customary non-assignment provisions in leases and
other agreements entered into in the ordinary course of business and consistent
with past practices; (g) purchase money obligations for property acquired in the
ordinary course of business that impose restrictions of the nature described in
clause (iii) above on the property so acquired; (h) Permitted Refinancing
Indebtedness; PROVIDED that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive in the
aggregate than those contained in the agreements governing the Indebtedness
being refinanced; (i) an agreement that has been entered into for the sale or
disposition of all or substantially all of the Equity Interests or property or
assets of a Restricted Subsidiary; PROVIDED that such restrictions are limited
to the Restricted Subsidiary that is the subject of such agreement; or (j)
restrictions applicable to any Foreign Subsidiary pursuant to Indebtedness
permitted to be incurred pursuant to clause (x) of the second paragraph of the
covenant entitled "Incurrence of Indebtedness and Issuance of Preferred Stock";
PROVIDED that such restrictions shall be limited to customary net worth,
leverage, cash flow and other financial ratios applicable to such Foreign
Subsidiary, customary restrictions on mergers and consolidations involving such
Foreign Subsidiary, customary restrictions on transactions with affiliates of
such Foreign Subsidiary and customary provisions subordinating the payment of
intercompany Indebtedness owed by such Foreign Subsidiary to the Company or any
of its Restricted Subsidiaries upon the occurrence of a default in respect of
Indebtedness of such Foreign Subsidiary or its Subsidiaries and/or events of
insolvency with respect to such Foreign Subsidiary or its Subsidiaries; and
PROVIDED FURTHER that in no event shall any Indebtedness incurred by a Foreign
Subsidiary prohibit such Foreign Subsidiary from making any dividend or other
distribution to the Company or its Restricted Subsidiaries or from otherwise
making any loan to the Company or its Restricted Subsidiaries in the absence of
a breach by such Foreign Subsidiary of the covenants contained in such
Indebtedness.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Indenture provides that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving entity), or sell, assign,
transfer, lease, convey or otherwise dispose of all or
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substantially all of its properties or assets in one or more related
transactions to, another Person unless (i) the Company is the surviving
corporation or the Person formed by or surviving any such consolidation or
merger (if other than the Company) or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made is a corporation
organized or existing under the laws of the United States, any state thereof or
the District of Columbia; (ii) the Person formed by or surviving any such
consolidation or merger (if other than the Company) or the Person to which such
sale, assignment, transfer, lease, conveyance or other disposition will have
been made assumes all the obligations of the Company under the Notes and the
Indenture pursuant to a supplemental indenture in form reasonably satisfactory
to the Trustee; (iii) immediately after such transaction, no Default or Event of
Default exists; and (iv) the Company or the Person formed by or surviving any
such consolidation or merger, or to which such sale, assignment, transfer,
lease, conveyance or other disposition will have been made will, at the time of
such transaction after giving pro forma effect thereto as if such transaction
had occurred at the beginning of the applicable four-quarter period, be
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant entitled "Incurrence of Indebtedness and Issuance of Preferred Stock."
The foregoing does not prohibit a consolidation or merger between the Company
and a Wholly Owned Restricted Subsidiary, the transfer of all or substantially
all of the properties or assets of the Company to a Wholly Owned Restricted
Subsidiary or the transfer of all or substantially all of the properties or
assets of a Wholly Owned Restricted Subsidiary to the Company; PROVIDED that if
the Company is not the surviving entity of such transaction or the Person to
which such transfer is made, the surviving entity or the Person to which such
transfer is made shall comply with clause (ii) of this paragraph.
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, sell, lease, transfer or otherwise dispose of
any of its properties or assets to, or purchase any property or assets from, or
enter into any contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or such Restricted Subsidiary than those that
would have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person and (ii) if such Affiliate
Transaction involves aggregate payments in excess of $5.0 million, the Company
delivers to the Trustee a resolution of the Board of Directors of the Company
set forth in an Officers' Certificate certifying that such Affiliate Transaction
complies with clause (i) above and such Affiliate Transaction is approved by a
majority of the disinterested members of the Board of Directors of the Company;
PROVIDED, HOWEVER, that (a) any employment agreement entered into by the Company
or any of its Restricted Subsidiaries in the ordinary course of business of the
Company or such Restricted Subsidiary, (b) transactions between or among the
Company and/or its Restricted Subsidiaries, (c) payment of employee benefits,
including bonuses, retirement plans and stock options, and director fees in the
ordinary course of business, (d) Restricted Payments permitted by the provisions
of the Indenture described above under clauses (i), (iv), (v), (vi), (vii),
(viii), (ix) and (x) of the second paragraph of the covenant entitled
"Restricted Payments," and (e) transactions permitted by the provisions of the
Indenture described below under the covenant entitled "Sales of Accounts
Receivable," in each case, shall not be deemed Affiliate Transactions.
ANTI-LAYERING
The Indenture provides that (i) the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is both
(a) subordinate or junior in right of payment to any Senior Debt and (b) senior
in any respect in right of payment to the Notes; and (ii) no Guaranteeing
Subsidiary will incur, create, issue, assume, guarantee or otherwise become
liable for any Indebtedness that is both (a) subordinate or junior in right of
payment to its Senior Debt and (b) senior in any respect in right of payment to
its Subsidiary Guarantee.
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LINE OF BUSINESS
The Company will not, and will not permit any of its Restricted Subsidiaries
to, engage in any line of business other than (i) the same or a similar line of
business as the Company and its Restricted Subsidiaries are engaged in on the
date of the Indenture and (ii) such business activities as are complementary to
or are incidental, ancillary or related to the foregoing.
SALES OF ACCOUNTS RECEIVABLE
The Company and any of its Restricted Subsidiaries may sell, at any time and
from time to time, all of their respective accounts receivable to an Accounts
Receivable Subsidiary; PROVIDED that (i) the cash received in each such sale is
not less than 90% of the aggregate face value of the receivables sold and the
remainder of the consideration received in each such sale is a promissory note
(a "Promissory Note") which is subordinated to no Indebtedness or obligation
other than the financial institution or other entity providing the financing to
the Accounts Receivable Subsidiary with respect to such accounts receivable (a
"Financier"); PROVIDED FURTHER that the Initial Sale will include all eligible
accounts receivable of the Company and/or its Restricted Subsidiaries that will
be party to such arrangements in existence on the date of the Initial Sale, (ii)
the cash proceeds received from the Initial Sale less reasonable and customary
transaction costs will be deemed to be Net Proceeds and will be applied in
accordance with the second paragraph of the covenant entitled "Asset Sales;" and
(iii) the Company and its Restricted Subsidiaries will sell their accounts
receivable to the Accounts Receivable Subsidiary no less frequently than on a
weekly basis.
The Company (i) will not permit any Accounts Receivable Subsidiary to sell
any accounts receivable purchased from the Company or any of its Restricted
Subsidiaries to any other person except on an arms-length basis and solely for
consideration in the form of cash or Marketable Securities, (ii) will not permit
the Accounts Receivable Subsidiary to engage in any business or transaction
other than the purchase, financing and sale of accounts receivable of the
Company and its Restricted Subsidiaries and activities incidental thereto, (iii)
will not permit any Accounts Receivable Subsidiary to incur Indebtedness in an
amount in excess of the book value of such Accounts Receivable Subsidiary's
total assets, as determined in accordance with GAAP, (iv) will, at least as
frequently as monthly, cause the Accounts Receivable Subsidiary to remit to the
Company as payment on the Promissory Notes, all available cash or Marketable
Securities not held in a collection account pledged to a Financier, to the
extent not applied to pay or maintain reserves for reasonable operating expenses
of the Account Receivable Subsidiary or to satisfy reasonable minimum operating
capital requirements and (v) will not, and will not permit any of its
Subsidiaries to, sell accounts receivable to any Accounts Receivable Subsidiary
upon (1) the occurrence of a Default with respect to the Company and its
Restricted Subsidiaries and (2) the occurrence of certain events of bankruptcy
or insolvency with respect to such Accounts Receivable Subsidiary.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Holders of Notes (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" that describes the financial condition and results of
operations of the Company and its Restricted Subsidiaries and, with respect to
the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all current reports that would be required to
be filed with the Commission on Form 8-K if the Company were required to file
such reports. In addition, whether or not required by the rules and regulations
of the Commission, from and after the consummation of the Exchange Offer or the
effectiveness of the Shelf Registration Statement, the Company will file a copy
of all such information and reports with the Commission for public availability
(unless the Commission will not accept such a filing) and make such
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information available to securities analysts and prospective investors upon
request. In addition, the Company and the Guaranteeing Subsidiaries have agreed
that, for so long as any Notes remain outstanding, they will furnish to Holders
and to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default:
(i) default for 30 days in the payment when due of interest with respect
to the Notes (whether or not prohibited by the subordination provisions of
the Indenture);
(ii) default in payment when due of principal or premium, if any, on the
Notes at maturity, upon redemption or otherwise (whether or not prohibited
by the subordination provisions of the Indenture);
(iii) failure by the Company or any Guaranteeing Subsidiary for 30 days
after receipt of notice from the Trustee or Holders of at least 25% in
principal amount of the Notes then outstanding to comply with the provisions
described under the covenants entitled "Change of Control," "Asset Sales,"
"Sale and Leaseback Transactions," "Restricted Payments," "Incurrence of
Indebtedness and Issuance of Preferred Stock," "Sales of Accounts
Receivable" or "Merger, Consolidation or Sale of Assets;"
(iv) failure by the Company or any Guaranteeing Subsidiary for 60 days
after notice from the Trustee or the Holders of at least 25% in principal
amount of the Notes then outstanding to comply with its other agreements in
the Indenture or the Notes;
(v) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of their respective
Restricted Subsidiaries (or the payment of which is guaranteed by the
Company or any of their respective Restricted Subsidiaries) whether such
Indebtedness or Guarantee now exists, or is created after the date of the
Indenture, which default (A) (i) is caused by a failure to pay when due at
final stated maturity (giving effect to any grace period related thereto)
principal of (a "Payment Default") or (ii) results in the acceleration of
such Indebtedness prior to its express maturity and (B) in each case, the
principal amount of any such Indebtedness due to be paid, together with the
principal amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been accelerated as a result of
any matter contemplated in clause (v)(A)(i) or (v)(A)(ii), aggregates $15.0
million or more;
(vi) failure by the Company or any of its Restricted Subsidiaries to pay
final judgments (to the extent not covered by insurance and as to which the
insurer has not acknowledged coverage in writing) aggregating in excess of
$15.0 million, which judgments are not paid, fully bonded, discharged or
stayed within 60 days after their entry;
(vii) certain events of bankruptcy or insolvency with respect to the
Company or any Restricted Subsidiary of the Company that is a Significant
Subsidiary or group of Restricted Subsidiaries of the Company that,
together, would constitute a Significant Subsidiary; and
(viii) the termination of the Subsidiary Guarantee(s) of either a
Guaranteeing Subsidiary that is a Significant Subsidiary or group of
Guaranteeing Subsidiaries that together constitute a Significant Subsidiary
for any reason not permitted by the Indenture, or the denial of any Person
acting on behalf of any such Guaranteeing Subsidiary or group of
Guaranteeing Subsidiaries of its Obligations under any such Subsidiary
Guarantee(s).
To the extent that the last day of the period referred to in clauses (i),
(iii), (iv) or (vi) of the immediately preceding paragraph is not a Business
Day, then the first Business Day following such day
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shall be deemed to be the last day of the period referred to in such clauses.
Any "day" will be deemed to end as of 11:59 p.m., New York City time.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable by notice in writing to the Company and the
Trustee specifying the respective Event of Default and that it is a "notice of
acceleration" (the "Acceleration Notice"), and the same (i) shall become
immediately due and payable or (ii) if there are any amounts outstanding under
the New Credit Facility, shall become immediately due and payable upon the first
to occur of an acceleration under the New Credit Facility or 5 Business Days
after receipt by the Company and the Representative under the New Credit
Facility of such Acceleration Notice but only if such Event of Default is then
continuing. Notwithstanding the foregoing, in the case of an Event of Default
arising from certain events of bankruptcy or insolvency with respect to the
Company, all outstanding Notes will become due and payable without further
action or notice. Holders of the Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Notes may
direct the Trustee in its exercise of any trust or power.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding, by notice to the Trustee, may on behalf of the Holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture, except a continuing Default or Event of Default in the
payment of interest or premium on, or principal of, the Notes. The Trustee may
withhold from Holders of the Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in such
Holders' interest.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any Guaranteeing Subsidiary, as such, shall have any liability for any
obligations of the Company under the Notes, any Subsidiary Guarantee or the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of Notes by accepting a Note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes and the Subsidiary Guarantees. Such
waiver may not be effective to waive liabilities under the federal securities
laws and it is the view of the Commission that such a waiver is against public
policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all
obligations of the Company and the Guaranteeing Subsidiaries discharged with
respect to the outstanding Notes and the Subsidiary Guarantees ("legal
defeasance"). Such legal defeasance means that the Company will be deemed to
have paid and discharged the entire indebtedness represented by the outstanding
Notes, except for (a) the rights of Holders of outstanding Notes to receive
payments in respect of the principal of, premium, if any, and interest on the
Notes when such payments are due, or on the redemption date, as the case may be,
(b) the Company's obligations with respect to the Notes concerning issuing
temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen
Notes and the maintenance of an office or agency for payment and money for
security payments held in trust, (c) the rights, powers, trust, duties and
immunities of the Trustee, and the Company's obligations in connection therewith
and (d) the legal defeasance provisions of the Indenture. In addition, the
Company may, at its option and at any time, elect to have the obligations of the
Company and the Guaranteeing Subsidiaries released with respect to certain
covenants that are
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described in the Indenture ("covenant defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event covenant defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "--Events of Default and
Remedies" will no longer constitute an Event of Default with respect to the
Notes.
In order to exercise either legal defeasance or covenant defeasance, the
Company must, among other things, irrevocably deposit with the Trustee, in
trust, for the benefit of the Holders of the Notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such amounts as
will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants selected by the Trustee, to pay the principal of,
premium, if any, and interest on the outstanding Notes on the stated maturity or
on the applicable optional redemption date, as the case may be.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture, the
Notes or the Subsidiary Guarantees may be amended or supplemented with the
consent of the Holders of at least a majority in principal amount of the Notes
then outstanding (including consents obtained in connection with a tender offer
or exchange offer for Notes), and any existing default or compliance with any
provision of the Indenture, the Notes or the Subsidiary Guarantees may be waived
with the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for Notes).
Without the consent of each Holder affected, however, an amendment or waiver
may not (with respect to any Note held by a non-consenting Holder): (i) reduce
the principal amount of Notes whose Holders must consent to an amendment,
supplement or waiver; (ii) reduce the principal of or change the fixed maturity
of any Note or alter the provisions with respect to the redemption of the Notes
or any change of control offer; (iii) reduce the rate of or change the time for
payment of interest on any Notes; (iv) waive a Default or Event of Default in
the payment of principal of or premium, if any, or interest on the Notes (except
a rescission of acceleration of the Notes by the Holders of at least a majority
in aggregate principal amount of the Notes and a waiver of the payment default
that resulted from such acceleration); (v) make any Note payable in money other
than that stated in the Notes; (vi) waive a redemption or repurchase payment
with respect to any Note; (vii) make any change in the foregoing amendment and
waiver provisions; or (viii) except as provided under "--Legal Defeasance and
Covenant Defeasance" or the third paragraph under "--Subsidiary Guarantees,"
release any of the Guaranteeing Subsidiaries from their obligations under the
Subsidiary Guarantees or make any change in the Subsidiary Guarantees that would
adversely affect the Holders. Notwithstanding the foregoing, the provisions with
respect to Asset Sales may be amended or supplemented with the consent of the
Holders of at least two-thirds in principal amount of the Notes then outstanding
(including consents obtained in connection with a tender offer or exchange offer
for the Notes). In addition, any amendment to the provisions of Article 10 of
the Indenture (which relate to subordination) will require the consent of the
Holders of at least 75% in aggregate amount of Notes then outstanding if such
amendment would adversely affect the rights of Holders of Notes.
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Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company, the Guaranteeing Subsidiaries and the Trustee may amend or
supplement the Indenture, the Subsidiary Guarantees or the Notes to cure any
ambiguity, defect or inconsistency, to provide for uncertificated Notes in
addition to or in place of certificated Notes, to provide for the assumption of
the Company's or a Guaranteeing Subsidiary's obligations to Holders of the Notes
in the case of a merger or consolidation, to make any change that would provide
any additional rights or benefits to the Holders of the Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, to
comply with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act or to allow any
Guaranteeing Subsidiary to guarantee the Notes.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should the Trustee become a creditor of the Company, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions with the Company; however, if the Trustee acquires any
conflicting interest, it must eliminate such conflict within 90 days, apply to
the Commission for permission to continue as Trustee or resign.
The Holders of a majority in principal amount of the then outstanding Notes
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that in case an Event of Default shall occur
(which shall not be cured), the Trustee will be required, in the exercise of its
power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request of any
Holder of Notes, unless such Holder shall have offered to the Trustee security
and indemnity satisfactory to it against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture
without charge by writing to the Company, 10221 Wateridge Circle, San Diego,
California 92121, Attention: Corporate Secretary.
BOOK-ENTRY, DELIVERY AND FORM
The Old Notes were, and the New Notes will be initially issued in the form
of one Global Note (the "Global Note"). The Global Note for the Old Notes was,
and the Global Note for the New Notes will be, deposited with, or on behalf of,
the Depositary and registered in the name of Cede & Co., as nominee of the
Depositary (such nominee being referred to herein as the "Global Note Holder").
Notes that are issued as described below under "--Certificated Securities,"
will be issued in the form of registered definitive certificates (the
"Certificated Securities"). Upon the transfer of Certificated Securities, such
Certificated Securities may, unless the Global Note has previously been
exchanged for Certificated Securities, be exchanged for an interest in the
Global Note representing the principal amount of Notes being transferred.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the Initial
Purchasers), banks and trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants" or the "Depositary's Indirect Participants") that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly. Persons who are not Participants may beneficially own securities
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held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
Pursuant to procedures established by the Depositary, ownership of the Notes
evidenced by the Global Note will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by the Depositary
(with respect to the interests of the Depositary's Participants), the
Depositary's Participants and the Depositary's Indirect Participants.
Prospective purchasers are advised that the laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own. Consequently, the ability to transfer Notes evidenced by the Global
Note will be limited to such extent.
So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole Holder under the Indenture of any
Notes evidenced by the Global Note. Beneficial owners of Notes evidenced by the
Global Note will not be considered the owners or Holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any aspect
of the records of the Depositary or for maintaining, supervising or reviewing
any records of the Depositary relating to the Notes.
Payments in respect of the principal of, premium, if any, and interest on
any Notes registered in the name of the Global Note Holder on the applicable
record date will be payable by the Trustee to or at the direction of the Global
Note Holder in its capacity as the registered Holder under the Indenture. Under
the terms of the Indenture, the Company and the Trustee may treat the persons in
whose names Notes, including the Global Note, are registered as the owners
thereof for the purpose of receiving such payments. Consequently, neither the
Company nor the Trustee has or will have any responsibility or liability for the
payment of such amounts to beneficial owners of Notes. The Company believes,
however, that it is currently the policy of the Depositary to immediately credit
the accounts of the relevant Participants with such payments, in amounts
proportionate to their respective holdings of beneficial interests in the
relevant security as shown on the records of the Depositary. Payments by the
Depositary's Participants and the Depositary's Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practice and will be the responsibility of the Depositary's
Participants or the Depositary's Indirect Participants.
CERTIFICATED SECURITIES
Subject to certain conditions, any person having a beneficial interest in
the Global Note may, upon request to the Trustee, exchange such beneficial
interest for Notes in the form of Certificated Securities. Upon any such
issuance, the Trustee is required to register such Certificated Securities in
the name of, and cause the same to be delivered to, such person or persons (or
the nominee of any thereof). In addition, if (i) the Company notifies the
Trustee in writing that the Depositary is no longer willing or able to act as a
depositary and the Company is unable to locate a qualified successor within 90
days or (ii) the Company, at its option, notifies the Trustee in writing that it
elects to cause the issuance of Notes in the form of Certificated Securities
under the Indenture, then, upon surrender by the Global Note Holder of its
Global Note, Notes in such form will be issued to each person that the Global
Note Holder and the Depositary identify as being the beneficial owner of the
related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Note (including principal, premium, if any, and interest) be made by
wire transfer of immediately available funds
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to the accounts specified by the Global Note Holder. With respect to
Certificated Securities, the Company will make all payments of principal,
premium, if any, and interest by wire transfer of immediately available funds to
the accounts specified by the Holders thereof or, if no such account is
specified, by mailing a check to each such Holder's registered address.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearing-house or next-day funds. In contrast, Notes
represented by the Global Note are eligible to trade in the Depositary's
Same-Day Funds Settlement System, and any permitted secondary market trading
activity in such Notes will, therefore, be required by the Depositary to be
settled in immediately available funds. The Company expects that secondary
trading in the Certificated Securities will also be settled in immediately
available funds.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as,
any other capitalized terms used herein for which no definition is provided. All
calculations made pursuant hereto for any four-quarter period the last day of
which is on or prior to December 31, 1997 shall be made on a pro forma basis (i)
to exclude the operating results of River for all periods prior to the date of
the Indenture and (ii) to exclude any restructuring charges associated with the
River Divestiture made prior to the date of the Indenture and in each case, as
if such transactions had occurred on September 30, 1995. For purposes of making
any determination of any amount under any single definition set forth below,
such determination shall be made without double counting of any item; PROVIDED
that with respect to the definition of "Fixed Charge Coverage Ratio" it shall
not be deemed to be double counting if an item is included in the calculation of
each of "Consolidated EBITDA" and "Fixed Charges."
"ACCOUNTS RECEIVABLE SUBSIDIARY" means a newly created, Wholly Owned
Subsidiary of the Company which is formed solely for the purpose of, and which
engages in no activities other than activities in connection with, financing
accounts receivable of the Company and/or its Restricted Subsidiaries, (ii)
which is designated by the Board of Directors of the Company as an Accounts
Receivables Subsidiary pursuant to a Board of Directors' resolution set forth in
an Officers' Certificate and delivered to the Trustee, (iii) that has total
assets at the time of such creation and designation with a book value of $10,000
or less, (iv) no portion of the Indebtedness or any other obligation (contingent
or otherwise) of which (a) is at any time guaranteed by the Company or any
Restricted Subsidiary of the Company, (b) is at any time recourse to or
obligates the Company or any other Restricted Subsidiary of the Company in any
way, other than pursuant to representations and covenants entered into in the
ordinary course of business in connection with the sale of accounts receivable
to such Accounts Receivable Subsidiary or (c) subjects any property or asset of
the Company or any other Restricted Subsidiary of the Company, directly or
indirectly, contingently or otherwise, to the satisfaction thereof, other than
pursuant to representations and covenants entered into in the ordinary course of
business in connection with sales of accounts receivable, (v) with which neither
the Company nor any Restricted Subsidiary of the Company has any contract,
agreement, arrangement or understanding other than contracts, agreements,
arrangements and understandings entered into in the ordinary course of business
in connection with sales of accounts receivable in accordance with the covenant
entitled "Sale of Accounts Receivables" and fees payable in the ordinary course
of business in connection with servicing accounts receivable and (vi) with
respect to which neither the Company nor any Restricted Subsidiary of the
Company has any obligation (a) to subscribe for additional shares of Capital
Stock or other Equity Interests therein or make any additional capital
contribution or similar payment or transfer thereto or (b) to maintain or
preserve the solvency or any balance sheet term, financial condition, level of
income or results of operations thereof.
"ACQUIRED DEBT" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person merges
with or into or becomes a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person,
and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
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"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or, indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
"ASSET SALE" means (i) the sale, lease, conveyance, or other disposition of
any assets (including, without limitation, by way of a sale and leaseback) other
than (A) in the ordinary course of business or (B) sales of accounts receivables
to the Accounts Receivable Subsidiary in accordance with the covenant entitled
"Sales of Accounts Receivable" (PROVIDED that the sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company and
its Subsidiaries taken as a whole will be governed by the provisions of the
Indenture described above under the covenant entitled "Change of Control" and/
or the provisions described above under the covenant entitled "Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset Sale
covenant), and (ii) the issue or sale by the Company or any of their respective
Restricted Subsidiaries of Equity Interests of any of the Company's Restricted
Subsidiaries, in the case of clauses (i) and (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $3.0 million or (b) for net proceeds in excess of $3.0
million. Notwithstanding the foregoing: (i) a transfer of assets by the Company
to a Restricted Subsidiary or by a Restricted Subsidiary to the Company or to
another Restricted Subsidiary, (ii) an issuance of Equity Interests by a
Restricted Subsidiary to the Company or to another Restricted Subsidiary, (iii)
a Restricted Payment that is permitted by the covenant described above under the
covenant entitled "Restricted Payments," and (iv) the sale and leaseback of any
assets within 90 days of the acquisition of such assets will not be deemed to be
Asset Sales.
"ATTRIBUTABLE DEBT" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the rate of interest
implicit in such transaction, determined in accordance with GAAP) of the
obligation of the lessee for net rental payments during the remaining term of
the lease included in such sale and leaseback transaction (including any period
for which such lease has been extended or may, at the option of the lessor, be
extended).
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be so required to be capitalized on the balance sheet in accordance
with GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participation, rights or other equivalents (however designated) of
corporate stock and (iii) in the case of a partnership, partnership interests
(whether general or limited).
"CHANGE OF CONTROL" means the occurrence of any of the following: (i) any
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation) in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as defined in Section 13(d) of the Exchange Act) or
"group" (as defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) other
than the Principal and his Related Parties; (ii) the adoption of a plan for the
liquidation or dissolution of the Company other than a liquidation or
dissolution that results in substantially all of the assets of the Company being
held by the corporate parent of the Company; (iii) the Company consolidates
with, or merges with or into, another "person" (as defined above) or "group" (as
defined above) in a transaction or series of related transactions in which the
Voting Stock of the Company is converted into or exchanged for cash, securities
or other property, other than any transaction where (A) the outstanding Voting
Stock of the Company is converted into or exchanged for Voting Stock (other than
Disqualified Stock) of the surviving or transferee corporation and (B) either
(1) the "beneficial owners" (as defined in Rule 13d-3 under the Exchange Act) of
the outstanding Voting Stock of the Company immediately prior to such
transaction own beneficially, directly or indirectly through
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one or more Subsidiaries, not less than a majority of the total outstanding
Voting Stock of the surviving or transferee corporation immediately after such
transaction or (2) if, immediately prior to such transaction the Company is a
direct or indirect Subsidiary of any other Person (each such other Person, the
"Holding Company"), the "beneficial owners" (as defined above) of the
outstanding Voting Stock of such Holding Company immediately prior to such
transaction own beneficially, directly or indirectly through one or more
Subsidiaries, not less than a majority of the outstanding Voting Stock of the
surviving or transferee corporation immediately after such transaction; (iv) the
consummation of any transaction or series of related transactions (including,
without limitation, by way of merger or consolidation) the result of which is
that any "person" (as defined above) or "group" (as defined above) other than
the Principal and his Related Parties becomes the "beneficial owner" (as defined
above) of more than 40% of the voting power of the Voting Stock of the Company,
or (v) during any consecutive two-year period, the first day on which a majority
of the members of the Board of Directors of Parent who were members of the Board
of Directors at the beginning of such period are not Continuing Directors.
"CONSOLIDATED EBITDA" means, with respect to any Person for any period, the
Consolidated Net Income of such Person and its Restricted Subsidiaries for such
period, PLUS, to the extent deducted in computing Consolidated Net Income, (i)
provision for taxes based on income or profits of such Person and its Restricted
Subsidiaries for such period, (ii) Consolidated Interest Expense of such Person
for such period, (iii) depreciation and amortization (including amortization of
goodwill and other intangibles) and all other non-cash charges (excluding any
such non-cash charge to the extent that it represents an accrual of or reserve
for cash charges in any future period or amortization of a prepaid cash expense
that was paid in a prior period) of such Person and its Restricted Subsidiaries
for such period, (iv) any extraordinary or non-recurring loss and any net loss
realized in connection with either an Asset Sale or the extinguishment of
Indebtedness, in each case, on a consolidated basis determined in accordance
with GAAP and (v) cash severance, restructuring and transaction costs incurred
within one year of the date of the Indenture in connection with the Merger in an
amount not to exceed $17.0 million to the extent included in computing
Consolidated Net Income. Notwithstanding the foregoing, the provision for taxes
based on the income or profits of, and the depreciation and amortization and
other non-cash charges of, a Restricted Subsidiary of a Person shall be added to
Consolidated Net Income to compute Consolidated EBITDA only to the extent (and
in the same proportion) that the Net Income of such Restricted Subsidiary was
included in calculating the Consolidated Net Income of such Person.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, the interest expense of such Person and its Restricted Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP
(including amortization of original issue discount and deferred financing costs,
except as set forth in the proviso to this definition, non-cash interest
payments, the interest component of all payments associated with Capital Lease
Obligations, net payments, if any, pursuant to Hedging Obligations and imputed
interest with respect to Attributable Debt; PROVIDED, HOWEVER, that in no event
shall any amortization of deferred financing cost incurred on or prior to the
date of the Indenture in connection with the New Credit Facility or any
amortization of deferred financing costs incurred in connection with the
issuance of the Notes be included in Consolidated Interest Expense).
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
PROVIDED, HOWEVER, that (i) the Net Income (but not loss) of any Person that is
not a Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid to the referent Person or a Restricted Subsidiary thereof in
cash, (ii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded, (iii) the cumulative effect of a change in accounting principles shall
be excluded, and (iv) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of Net Income is not, at the date of
determination, permitted without any prior governmental approval (which has not
been obtained) or, directly or indirectly, by operation of the terms
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of its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Restricted Subsidiary.
"CONVERTIBLE DEBENTURES" means the 7 1/4% Convertible Subordinated
Debentures due 2002 of ALARIS Medical issued pursuant to the Indenture, dated as
of January 15, 1992, between Advanced Medical and U.S. Trust Company of
California, N.A. as in effect on the date of the Indenture.
"CONTINUING DIRECTORS" means, as of any date of determination, any member of
the Board of Directors of the relevant Person who (i) was a member of such Board
of Directors on the date of the Indenture, (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election, or (iii) became a member of the Board of Directors as a
result of the actions of the Principal; PROVIDED that at the time the Principal
took any such action, the Principal was the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act) in excess of 50% of the Voting Stock of the
Company.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DESIGNATED SENIOR DEBT" means (i) so long as any Indebtedness is
outstanding under the New Credit Facility, such Indebtedness, and (ii)
thereafter, any other Senior Debt permitted under the Indenture the principal
amount of which is $50.0 million or more and that has been designated by the
Company as "Designated Senior Debt."
"DISQUALIFIED STOCK" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable, except to the extent such capital stock is exchangeable into
indebtedness at the option of the issuer thereof and only subject to the terms
of any debt instrument to which such issuer is a party), or upon the happening
of any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof, in
whole or in part, or convertible or exchangeable into Indebtedness on or prior
to date on which the Notes mature.
"ELIGIBLE INSTITUTION" means a commercial banking institution that has
combined capital and surplus of not less than $100.0 million or its equivalent
in foreign currency, whose short-term debt is rated "A-3" (or higher) according
to Standard & Poor's Ratings Group ("S&P") or "P-2" or higher according to
Moody's Investor Services, Inc. ("Moody's") or carrying an equivalent rating by
a nationally recognized rating agency if both of the two named rating agencies
cease publishing ratings of investments.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EXCESS AMOUNT" means, with respect to any New Credit Facility, the amount
by which aggregate payments of principal thereunder exceed the aggregate
payments of principal required to by made through the date of determination, in
respect of any term Indebtedness, under the amortization schedule of such New
Credit Facility.
"EXISTING INDEBTEDNESS" means Indebtedness of the Company and its Restricted
Subsidiaries (other than Indebtedness under the New Credit Facility) in
existence on the date of the Indenture until such amounts are repaid, including,
without limitation, the Existing Senior Notes as amended on the date of the
Indenture.
"FIXED CHARGES" means, with respect to any Person for any period, the sum of
(i) the Consolidated Interest Expense of such Person for such period and (ii)
any interest expense on Indebtedness of another Person that is (A) Guaranteed by
the referent Person or one of its Restricted Subsidiaries (whether or not such
Guarantee is called upon) or (B) secured by a Lien on assets of such Person or
one of its Restricted Subsidiaries (whether or not such Lien is called upon);
PROVIDED THAT with respect to clause (ii)(B), the amount of Indebtedness (and
attributable interest expense) shall be equal to the lesser of (I) the principal
amount of the Indebtedness secured by the assets of such Person or one of its
Restricted Subsidiaries and
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(II) the fair market value (as determined by the Board of Directors of such
Person and set forth in an Officers' Certificate delivered to the Trustee) of
the assets securing such Indebtedness and (iii) the product of (a) all cash
dividend payments (and non-cash dividend payments in the case of a Person that
is a Subsidiary) on any series of preferred stock of such Person, TIMES (b) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current combined federal, state and local statutory tax rate of
such Person, expressed as a decimal, in each case, on a consolidated basis and
in accordance with GAAP.
"FIXED CHARGE COVERAGE RATIO" means with respect to any Person for any
period, the ratio of the Consolidated EBITDA of such Person and its Restricted
Subsidiaries for such period to the Fixed Charges of such Person and its
Restricted Subsidiaries for such period. In the event that the Company or any of
its Restricted Subsidiaries incurs, assumes, Guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues or redeems
preferred stock subsequent to the commencement of the period for which the Fixed
Charge Coverage Ratio is being calculated but on or prior to the date on which
the event for which the calculation of the Fixed Charge Coverage Ratio is made
(the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, Guarantee or
redemption of Indebtedness, or such issuance or redemption of preferred stock,
as if the same had occurred at the beginning of the applicable four-quarter
reference period. For purposes of making the computation referred to above, (i)
acquisitions that have been made the Company or any of its Restricted
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have occurred on the first day of the four-quarter reference
period and shall give pro forma effect to the Indebtedness and the Consolidated
EBITDA of the Person which is the subject of any such acquisition, (ii) the
Consolidated EBITDA attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, and (iii) the Fixed Charges attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed Charges will
not be obligations of the referent Person or any of its Restricted Subsidiaries
following the Calculation Date.
"FOREIGN SUBSIDIARY" means any Restricted Subsidiary of the Company
organized and existing under the laws of any jurisdiction outside of the United
States.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board, the Securities and Exchange Commission
or in such other statements by such other entity as may be approved by a
significant segment of the accounting profession of the United States, which are
in effect from time to time; PROVIDED, HOWEVER, that all reports and other
financial information provided by the Company to the Holders, the Trustee and/or
the Commission shall be prepared in accordance with GAAP, as in effect on the
date of such report or other financial information.
"GOVERNMENT SECURITIES" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"GUARANTEEING SUBSIDIARY" means (i) prior to the Merger, IMED International
Trading Corp., (ii) immediately subsequent to the Merger, each of IMED
International Trading Corp. and IVAC Overseas Holdings, Inc., (iii) any other
Restricted Subsidiary of the Company that executes a Subsidiary Guarantee
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in accordance with the terms of the Indenture and (iv) each of their respective
successors and assigns unless and until any successor replaces any such
Guaranteeing Subsidiary in accordance with the Indenture and thereafter includes
each such successor.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements, (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or foreign exchange rates and (iii) indemnity agreements and arrangements
entered into in connection with the agreements and arrangements described in
clauses (i) and (ii).
"INCUR OR INCUR" means, with respect to any Indebtedness (including Acquired
Debt), to create, incur, issue, assume, guaranty or otherwise become directly or
indirectly liable for or with respect to, or become responsible for, the payment
of such Indebtedness (including Acquired Debt); PROVIDED that (i) neither the
accrual of interest nor the accretion of original issue discount shall be
considered an incurrence of Indebtedness, (ii) the issuance of any New Notes in
exchange for a like principal amount of Notes shall not be deemed to be an
Incurrence of Indebtedness and (iii) the assumption of Indebtedness by the
surviving entity of a transaction permitted by the last sentence of the second
paragraph under "Subsidiary Guarantees" or the last sentence of the covenant
entitled "Merger, Consolidation, or Sale of Assets" in existence at the time of
such transaction shall not be deemed to be an incurrence of Indebtedness. The
term "incurrence" has corresponding meaning.
"INDEBTEDNESS" means, with respect to any Person without duplication, any
indebtedness of such Person, whether or not contingent, in respect of borrowed
money or evidenced by bonds, notes, debentures or similar instruments or letters
of credit (or reimbursement agreements in respect thereof) or representing
Capital Lease Obligations or the balance deferred and unpaid of the purchase
price of any property, except any such balance that constitutes an accrued
expense or trade payable, or representing any Hedging Obligations if and to the
extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person), the maximum fixed repurchase price of Disqualified
Stock issued by such Person and the liquidation preference of preferred stock
issued by such Person, in each case if held by any Person other than the Company
or a Wholly Owned Restricted Subsidiary of the Company, and, to the extent not
otherwise included, the Guarantee by such Person of any such indebtedness of any
other Person.
"INITIAL SALE" means the first transaction in which accounts receivable are
sold by the Company and/or its Restricted Subsidiaries to an Accounts Receivable
Subsidiary.
"INSTRUMENT CONTRACT" means any contract or agreement to which the Company
or any of its Restricted Subsidiaries is a party pursuant to which the other
party to any such contract or agreement acquires on behalf of itself or another
party instruments from the Company or such Restricted Subsidiary at no or
reduced initial cost by paying a premium (a portion of which is recorded by the
Company in accordance with GAAP as interest income) for subsequent purchases of
disposable administration sets.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of loans (including
Guarantees), advances or capital contributions (excluding commission, travel and
similar advances to officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities, and all other items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
PROVIDED that an acquisition of assets, Equity Interests or other securities by
the Company for consideration consisting of common equity securities of the
Company shall not be deemed to be an Investment. If the Company or any
Restricted Subsidiary of the Company sells or otherwise disposes of any Equity
Interests of any direct or indirect Restricted Subsidiary of the Company, or any
Restricted Subsidiary of the Company issues Equity Interests, such that, after
giving effect to any such sale or disposition, such Person is no longer a
Restricted Subsidiary of the Company, the Company shall be
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deemed to have made an Investment on the date of any such sale, disposition or
issuance equal to the fair market value of the Equity Interests of such Person
held by the Company or such Restricted Subsidiary immediately following any such
sale, disposition or issuance.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest).
"MARKETABLE SECURITIES" means (i) Government Securities, (ii) any
certificate of deposit maturing not more than 270 days after the date of
acquisition issued by, or time deposit of, an Eligible Institution or any lender
under the New Credit Facility, (iii) commercial paper maturing not more than 270
days after the date of acquisition of an issuer (other than an Affiliate of the
Company) with a rating, at the time as of which any investment therein is made,
of "A-3" (or higher) according to S&P or "P-2" (or higher) according to Moody's
or carrying an equivalent rating by a nationally recognized rating agency if
both of the two named rating agencies cease publishing ratings of investments,
(iv) any bankers acceptances or money market deposit accounts issued by an
Eligible Institution and (v) any fund investing exclusively in investments of
the types described in clauses (i) through (iv) above.
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP, excluding, however, (i) any
gain (but not loss), together with any related provision for taxes on such gain
(but not loss), realized in connection with (a) any Asset Sale (including,
without limitation, dispositions pursuant to sale and leaseback transactions or
(b) the extinguishment of any Indebtedness of such Person or any of its
Restricted Subsidiaries, and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
"NET PROCEEDS" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof, amounts
required to be applied to the repayment of Indebtedness (other than long-term
Indebtedness of a Restricted Subsidiary of such Person and Indebtedness under
the New Credit Facility) secured by a Lien on the asset or assets that are the
subject of such Asset Sale and any reserve for adjustment in respect of the sale
price of such asset or assets established in accordance with GAAP.
"NEW CREDIT FACILITY" means that certain credit agreement, dated as of
November 26, 1996, by and among the Company, Advanced Medical, Bankers Trust
Company, as administration agent and syndication agent, Banque Paribas, as
documentation agent and syndication agent, Donaldson, Lufkin & Jenrette
Securities Corporation, as syndication agent, and the lenders party thereto,
including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended,
modified, renewed, refunded, replaced or refinanced from time to time (together
with any amendment, modification, renewal, refunding, replacement or refinancing
to or of any of the foregoing (collectively, a "Modification") or to any
Modification, ad infinitum), including, without limitation, any agreement
modifying the maturity or amortization schedule of or refinancing or refunding
all or any portion of the Indebtedness thereunder or increasing the amount that
may be borrowed under such agreement or any successor agreement, whether or not
among the same parties.
"NON-RECOURSE DEBT" means Indebtedness (i) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness of the Company or any of its
Restricted Subsidiaries to declare a default on such other Indebtedness or cause
the payment thereof to be accelerated or payable prior to its stated maturity;
and (ii) as to which the lenders have been notified in
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writing that they will not have any recourse to the stock or assets of the
Company or any of its Restricted Subsidiaries; PROVIDED, HOWEVER, that in no
event shall Indebtedness of any Unrestricted Subsidiary fail to be Non-Recourse
Debt solely as a result of an default provisions contained in a Guarantee
thereof by the Company or any of its Restricted Subsidiaries if the Company or
such Restricted Subsidiary was otherwise permitted to incur such Guarantee
pursuant to the Indenture.
"OBLIGATIONS" means any principal, interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy at the rate provided in the
documentation with respect thereto, whether or not such interest is an allowed
claim under applicable law), penalties, fees, indemnifications, reimbursements,
damages and other liabilities payable under the documentation governing any
Indebtedness.
"PARENT" means (i) ALARIS Medical or (ii) if ALARIS Medical ceases to either
(a) exist or (b) beneficially own, directly or indirectly, in excess of 50% of
the Capital Stock of the Company, the ultimate corporate parent of the Company
that owns all of the outstanding Capital Stock of the Company either directly or
through one or more Wholly Owned Subsidiaries or (iii) if there exists no
corporate parent of the Company, the Company.
"PERMITTED INVESTMENTS" means (i) Investments in the Company or in a
Restricted Subsidiary of the Company (including, without limitation, Guarantees
of the Indebtedness and/or other Obligations of the Company and/or any
Restricted Subsidiary of the Company, so long as such Indebtedness and/or other
Obligations are permitted under the Indenture), (ii) Investments in Marketable
Securities, (iii) Investments by the Company or any Restricted Subsidiary of the
Company in, or the purchase of the securities of, a Person if, as a result of
such Investment, (a) such person becomes a Restricted Subsidiary of the Company
or (b) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated into,
the Company or a Restricted Subsidiary of the Company, (iv) Investments in
accounts and notes receivable acquired in the ordinary course of business, (v)
Investments in connection with the sale of medical instruments pursuant to
Instrument Contracts or any leasing of medical instruments in the ordinary
course of business, (vi) any non-cash consideration received in connection with
an Asset Sale that complies with the covenant entitled "Asset Sales," (vi)
Investments in connection with Hedging Obligations permitted to be incurred
under the covenant entitled "Incurrence of Indebtedness and Issuance of
Preferred Stock," (vii) loans to employees not to exceed $1,000,000 at any time
outstanding, and (viii) Investments in an Accounts Receivable Subsidiary
received in consideration of sales of accounts receivable in accordance with the
covenant entitled "Sales of Accounts Receivable."
"PERMITTED JUNIOR SECURITIES" means (i) equity securities of Parent and (ii)
debt securities of the Company that are unsecured and subordinated at least to
the same extent as the Notes to Senior Debt of the Company and guarantees of any
such debt by any Guaranteeing Subsidiary that are unsecured and subordinated at
least to the same extent as the Subsidiary Guarantee of such Guaranteeing
Subsidiary to the Senior Debt of such Guaranteeing Subsidiary, as the case may
be, and has a final maturity date at least as late as the final maturity date
of, and has a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of, the Notes.
"PERMITTED LIENS" means (i) Liens on property of the Company and any
Guaranteeing Subsidiary securing (a) Senior Debt and/or (b) Hedging Obligations
permitted to be incurred under the Indenture; (ii) Liens in favor of the Company
or any of its Restricted Subsidiaries, (iii) Liens on property of a Person
existing at the time such Person is merged with or into or consolidated with the
Company or any Restricted Subsidiary of the Company; PROVIDED, that such Liens
were not incurred in connection with, or in contemplation of, such merger or
consolidation and do not extend to any assets of the Company or any Restricted
Subsidiary of the Company other than the assets acquired in such merger or
consolidation; (iv) Liens on property of a Person existing at the time such
Person becomes a Restricted Subsidiary of the Company; PROVIDED that such Liens
were not incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary and do not extend to any assets of the Company
or any other Restricted Subsidiary of the Company; (v) Liens on property
existing at the time of acquisition thereof by
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the Company or any Restricted Subsidiary of the Company; PROVIDED that such
Liens were not incurred in connection with, or in contemplation of, such
acquisition and do not extend to any assets of the Company or any of its
Restricted Subsidiaries other than the property so acquired; (vi) Liens to
secure the performance of statutory obligations, surety or appeal bonds or
performance bonds, or landlords', carriers', warehousemen's, mechanics',
suppliers', materialmen's or other like Liens, in any case incurred in the
ordinary course of business and with respect to amounts not yet delinquent or
being contested in good faith by appropriate process of law, if a reserve or
other appropriate provision, if any, as is required by GAAP shall have been made
therefor; (vii) Liens existing on the date of the Indenture; (viii) Liens for
taxes, assessments or governmental charges or claims that are not yet delinquent
or that are being contested in good faith by appropriate proceedings promptly
instituted and diligently concluded; PROVIDED that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (ix) Liens to secure (A) Indebtedness (including Capital
Lease Obligations) permitted by clause (iii) of the second paragraph of the
covenant entitled "Incurrence of Indebtedness and Issuance of Preferred Stock"
covering only the assets acquired with such Indebtedness or the assets which are
the subject of the sale leaseback transaction, as the case may be, and (B)
Indebtedness of any Restricted Subsidiary (other than a Guaranteeing Subsidiary)
permitted to be incurred by such Restricted Subsidiary pursuant to the covenant
entitled "Incurrence of Indebtedness and Issuance of Preferred Stock;" (x) Liens
incurred in the ordinary course of business of the Company or any Restricted
Subsidiary of the Company with respect to obligations not constituting
Indebtedness for borrowed money that do not exceed $15.0 million in the
aggregate at any one time outstanding; (xi) Liens securing Indebtedness incurred
to refinance Indebtedness that has been secured by a Lien permitted under the
Indenture; PROVIDED that (a) any such Lien shall not extend to or cover any
assets or property not securing the Indebtedness so refinanced and (b) the
refinancing Indebtedness secured by such Lien shall have been permitted to be
incurred under the covenant entitled "Incurrence of Indebtedness and Issuance of
Preferred Stock;" (xii) Liens in favor of the lessee on instruments which are
the subject of leases entered into in the ordinary course of business; PROVIDED
that any such Lien shall not extend to or cover any assets or property of the
Company and its Restricted Subsidiaries that is not the subject of any such
lease; (xiii) Liens in favor of the contracting party in instruments which are
the subject of Instrument Contracts entered into in the ordinary course of
business; PROVIDED that any such Lien shall not extend to or cover any assets or
property of the Company and its Restricted Subsidiaries that is not the subject
of any such Instrument Contract; and (xiv) Liens to secure Attributable Debt
that is permitted to be incurred pursuant to the covenant entitled "Sale and
Leaseback Transactions;" PROVIDED that any such Lien shall not extend to or
cover any assets of the Company or any Guaranteeing Subsidiary other than the
assets which are the subject of the sale leaseback transaction in which the
Attributable Debt is incurred.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
PROVIDED that: (i) the principal amount of such Permitted Refinancing
Indebtedness does not exceed the principal amount of the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded (plus the amount
of reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date at least as late as the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded
is subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Notes on terms at least as
favorable to the Holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and (iv) such Indebtedness is incurred by the Company or
by the Restricted Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
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"PRINCIPAL" means Jeffry M. Picower.
"RELATED PARTY" means, with respect to the Principal, (i) any spouse or
immediate family member of the Principal or (ii) any trust, corporation,
partnership or other entity, the beneficiaries, stockholders, partners, owners
or Persons beneficially holding (directly or through one or more Subsidiaries) a
80% or more controlling interest of which consist of the Principal and/or such
other Persons referred to in the immediately preceding clause (i).
"REPLACEMENT ASSETS" means (i) a business permitted by the covenant entitled
"Line of Business," (ii) a controlling equity interest in any Person engaged in
a line of business permitted by the covenant entitled "Line of Business," or
(iii) tangible assets, product distribution rights or intellectual property or
rights thereto used in a line of business permitted by the covenant entitled
"Line of Business."
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"RIVER DIVESTITURE" means the discontinuance of the operations of River
Medical, Inc. in June 1996.
"SENIOR DEBT" means (a) with respect to the Company, (i) all Obligations
permitted to be incurred pursuant to the Indenture under or in respect of the
New Credit Facility and (ii) any other Indebtedness permitted to be incurred by
the Company under the terms of the Indenture and any Hedging Obligation
permitted to be incurred under the terms of the Indenture, unless the instrument
under which the foregoing is incurred expressly provides that it is on a parity
with or subordinated in right of payment to the Notes and (b) with respect to
any Guaranteeing Subsidiary, (i) all Obligations permitted to be incurred
pursuant to the Indenture under or in respect of the New Credit Facility and
(ii) any other Indebtedness permitted to be incurred by such Guaranteeing
Subsidiary under the terms of the Indenture and any Hedging Obligation permitted
to be incurred under the terms of the Indenture, unless the instrument under
which the foregoing is incurred expressly provides that such Indebtedness is on
parity with or subordinated in right of payment to the Subsidiary Guarantee of
such Guaranteeing Subsidiary. Notwithstanding anything to the contrary in the
foregoing, Senior Debt will not include (w) any liability for federal, state,
local or other taxes; (x) any Indebtedness of the Company or any Guaranteeing
Subsidiary to the Company or any Subsidiary of the Company or any of their
respective Affiliates, (y) any trade payables or (z) any Indebtedness that is
incurred in violation of the Indenture.
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date hereof.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of Voting Stock is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole general
partner or the managing general partner of which is such Person or a Subsidiary
of such Person or (b) the only general partners of which are such Person or one
or more Subsidiaries of such Person (or any combination thereof); PROVIDED,
HOWEVER, that the Accounts Receivable Subsidiary and its Subsidiaries shall not
be deemed Subsidiaries of the Company or any of its other Subsidiaries.
"TAX SHARING AGREEMENT" means the tax sharing agreement, dated as of
November 26, 1996, between the Company and Advanced Medical as in effect on the
date of the Indenture.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary that is designated by the
Board of Directors of the Company as an Unrestricted Subsidiary pursuant to a
Board Resolution, but only to the extent that such Subsidiary: (i) has no
Indebtedness other than Non-Recourse Debt; (ii) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to
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the Company or such Restricted Subsidiary than those that might be obtained at
the time from Persons who are not Affiliates of the Company; (iii) is a Person
with respect to which neither the Company nor any of its Restricted Subsidiaries
has any direct or indirect obligation (a) to subscribe for additional Equity
Interests or (b) to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels of operating results; and (iv)
has not guaranteed or otherwise directly or indirectly provided credit support
for any Indebtedness of the Company or any of its Restricted Subsidiaries. Any
such designation by the Board of Directors shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
covenant described above under the covenant entitled "Restricted Payments." If,
at any time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of
such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the
Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant entitled "Incurrence of Indebtedness
and Issuance of Preferred Stock," the Company shall be in default of such
covenant from the date of such incurrence). The Board of Directors of the
Company may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; PROVIDED that such designation shall be deemed to be an incurrence
of Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if (i) such Indebtedness is permitted under the covenant entitled
"Incurrence of Indebtedness and Issuance of Preferred Stock" and (ii) no Default
or Event of Default would be in existence following such designation.
"VOTING STOCK" means any class or classes of Capital Stock pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees of
any Person (irrespective of whether or not, at the time, stock of any other
class or classes shall have, or might have, voting power by reason of the
happening of any contingency).
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the then outstanding
principal amount of such Indebtedness into (ii) the total of the product
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other required payments of principal, including
payment at final maturity, in respect thereof, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between such date and
the making of such payment.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or by such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person or by such
Person and one or more Wholly Owned Subsidiaries of such Person.
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DESCRIPTION OF NEW CREDIT FACILITY
GENERAL
In connection with the Merger, the Company entered into a credit facility
(as amended to date, the "New Credit Facility") which is comprised of a Term
Loan Facility and a Revolving Credit Facility. The following summary of certain
provisions of the New Credit Facility is generalized, does not purport to be
complete, and is subject to and is qualified in its entirety by reference to the
provisions of the New Credit Facility, a copy of which is filed as an exhibit to
the Registration Statement of which this Prospectus is a part and to which
exhibit reference is hereby made. Capitalized terms that are used but not
otherwise defined herein shall have the meanings assigned to them in the New
Credit Facility and those definitions are incorporated herein by reference.
The New Credit Facility consists of a $200.0 million Term Loan Facility and
a $50.0 million 68-month Revolving Credit Facility. The Term Loan Facility is
comprised of $75.0 million of Tranche A Term Loans amortizing over 68 months,
$42.5 million of Tranche B Term Loans amortizing over 83 months, $42.5 million
of Tranche C Term Loans amortizing over 95 months and $40.0 million of Tranche D
Term Loans amortizing over 101 months.
The proceeds of the Term Loan Facility were used by the Company to fund
certain amounts payable in connection with the Merger. The Revolving Credit
Facility, in addition to being partially drawn upon to pay certain amounts in
connection with the Merger, is also available for general corporate purposes.
INTEREST RATE; FEES
Borrowings made as: (i) Revolving Credit Loans and Tranche A Term Loans bear
interest at a rate equal to the Eurodollar Rate (as adjusted) plus 2.5% or the
Base Rate plus 1.25% (in each case, less 0.25% if the leverage ratio on the test
date is less than 3.0:1.0 and less 0.50% if the leverage ratio on such test date
is less than 2.5:1.0); (ii) Tranche B Term Loans bear interest at a rate equal
to the Eurodollar Rate (as adjusted) plus 3.0% or the Base Rate plus 1.75%;
(iii) Tranche C Term Loans bear interest at a rate equal to the Eurodollar Rate
(as adjusted) plus 3.5% or the Base Rate plus 2.25%; and (iv) Tranche D Term
Loans bear interest at a rate equal to the Eurodollar Rate (as adjusted) plus
3.75% or the Base Rate plus 2.50%. The "Base Rate" equal to the higher of 0.50%
in excess of the Federal Reserve reported certificate of deposit rate and (ii)
the prime rate, as in effect from time to time, of Bankers Trust Company.
Overdue principal and interest will bear interest at a rate per annum equal to
the greater of (i) the rate which is 2.0% in excess of the rate otherwise
applicable to Base Rate Loans from time to time and (ii) the rate which is 2.0%
in excess of the rate then borne by such borrowings.
The commitment fee payable by the Company is calculated at a rate equal to
0.50% of 1.0% per annum of the Aggregate Unutilized Commitment (less 0.125% if
the leverage ratio on the test date is less than 2.5:1.0). Such a fee was paid
on the Merger Closing, and will be payable quarterly in arrears after the Merger
Closing and upon the termination of the New Credit Facility.
The letter of credit fee payable by the Company is calculated at a rate
equal to the applicable margin for Eurodollar Loans under the Revolving Credit
Facility plus an additional 0.25% per annum of the face amount of each letter of
credit.
AMORTIZATION; PREPAYMENTS
The final scheduled maturity of the Tranche A Term Loans is the date that is
approximately five years and nine months after the Merger Closing, and such
loans are subject to interim scheduled amortization (i) in equal quarterly
installments totalling $10.4 million in the second year after the Merger
Closing; (ii) in equal quarterly installments totalling $11.2 million in the
third year after the Merger Closing; (iii) in equal quarterly installments
totalling $12.4 million in the fourth year after the Merger Closing; (iv) in
equal quarterly installments totalling $20.4 million in the fifth year after the
Merger Closing; and (v) in equal quarterly installments totalling $20.6 million
in the final nine months prior to the final maturity of the Tranche A Term
Loans. The final scheduled maturity of the Tranche B Term Loans is the date that
is approximately seven years after the Merger Closing, and such loans are
subject to interim scheduled amortization (i) in equal quarterly installments
totalling $425,000 in each of the first five years after the
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Merger Closing; (ii) in equal quarterly installments totalling $7.6 million in
the sixth year after the Merger Closing; and (iii) in equal quarterly
installments totalling $32.8 million in the final year prior to final maturity
of the Tranche B Term Loans. The final scheduled maturity of the Tranche C Term
Loans is the date that is approximately eight years after the Merger Closing,
and such loans are subject to interim scheduled amortization (i) in equal
quarterly installments totalling $425,000 in each of the first seven years after
the Merger Closing and (ii) in equal quarterly installments totalling $39.5
million during the final year prior to final maturity of the Tranche C Term
Loans. The final scheduled maturity of the Tranche D Term Loans is the date that
is approximately eight years and six months after the Merger Closing, and such
loans will be subject to interim scheduled amortization (i) in equal quarterly
installments totalling $400,000 in each of the first eight years after the
Merger Closing; and (ii) in equal quarterly installments totalling $36.8 million
in the final six months prior to final maturity of the Tranche D Term Loans. The
commitments under the Revolving Credit Facility terminate automatically five
years and nine months after the Merger Closing.
The Company is required to make certain mandatory prepayments with (i) 100%
of the Net Cash Proceeds from sales or other dispositions of property not in the
ordinary course of business, equity issuances or capital contributions,
insurance or condemnation proceeds, pension plan refunds or the incurrence of
indebtedness, PROVIDED that the first $20.0 million of certain proceeds is not
required to reduce indebtedness under the New Credit Facility, and (ii) 75% of
the Excess Cash Flow for each fiscal year, PROVIDED that such percentage shall
be reduced to 50% when the leverage ratio is less than 3.0:1.0. Such mandatory
prepayments will be allocated among the tranches of the Term Loan Facility on a
pro rata basis. Optional prepayments are permitted without premium or penalty.
GUARANTEES; SECURITY
All obligations of the Company under the New Credit Facility are guaranteed
by ALARIS Medical and each existing and subsequently formed or acquired domestic
subsidiary of ALARIS Medical (other than the Company, Fidata and River).
The New Credit Facility and the related guarantees (a) are secured by (i) a
perfected first priority pledge of the security interest in all of the common
stock owned by ALARIS Medical in each existing and subsequently formed or
acquired direct or indirect domestic subsidiary of ALARIS Medical (other than
Fidata and River but including the Company) and (ii) all assets of ALARIS
Medical and each of its direct and indirect domestic subsidiaries (other than
Fidata and River but including the Company) and (b) are secured by a perfected
first priority pledge of and security interest in 65% of the common stock owned
by ALARIS Medical in each existing and subsequently formed or acquired direct or
indirect first-tier foreign subsidiary of ALARIS Medical.
CERTAIN COVENANTS
The New Credit Facility contains numerous operating and financial covenants,
including, without limitation, requirements relating to (i) maintenance of
minimum Consolidated EBITDA, Consolidated Net Worth, and interest coverage and
fixed charge coverage ratios and (ii) maximum Leverage Ratio and amounts of
Capital Expenditures. Under the covenant regarding maintenance of minimum
Consolidated EBITDA, neither ALARIS Medical nor the Company may permit
Consolidated EBITDA for any Test Period ending on June 30, 1997, September 30,
1997 and December 31, 1997 to be less than $33.55 million, $54.3 million and
$78.6 million, respectively. Thereafter, ALARIS Medical and the Company are
required to satisfy a minimum Consolidated EBITDA test on a quarterly basis
through June 30, 2005. Under the minimum Consolidated Net Worth covenant,
neither ALARIS Medical nor the Company may permit Consolidated Net Worth at any
time to be less than the sum of (i) $85.0 million less after tax adjustments for
purchase accounting and after tax effect of non cash restructuring charges
recorded in connection with the Merger and (ii) if such amount is positive, an
amount equal to 75% of Consolidated Net Income for the period commencing January
1, 1997 through the last day of the then most recently completed fiscal quarter.
Under the Interest Coverage Ratio covenant, neither ALARIS Medical nor the
Company may permit the Interest Coverage Ratio for any Test Period ending on
June 30, 1997, September 30, 1997 and December 31, 1997 to be less than 1.55:1,
1.7:1 and 1.85:1, respectively. Thereafter, ALARIS Medical and
140
<PAGE>
the Company are required to satisfy a minimum Interest Coverage Ratio test on a
quarterly basis through June 30, 2005. Under the Fixed Charge Coverage Ratio
covenant, neither ALARIS Medical nor the Company may permit the ratio of (i) (A)
Consolidated EBITDA less (B) Capital Expenditures of the Company and its
Subsidiaries on a consolidated basis to (ii) Consolidated Fixed Charges for any
Test Period (commencing with the Test Period ending on September 30, 1997) to be
less than 1:1. Under the Leverage Ratio covenant, neither ALARIS Medical nor the
Company may permit the Leverage Ratio at any time during the fiscal quarters
ending June 30, 1997, September 30, 1997 and December 31, 1997 to be more than
6.4:1, 5.95:1 and 5.35:1, respectively. Thereafter, ALARIS Medical and the
Company are required to satisfy a maximum Leverage Ratio test on a quarterly
basis through June 30, 2005. Under the Capital Expenditures covenant, except as
otherwise provided therein, ALARIS Medical and its Subsidiaries are prohibited
from making Capital Expenditures (on a consolidated basis) for the years ending
December 31, 1997, 1998, and 1999 and thereafter in excess of $24.0 million,
$22.0 million and $18.0 million, respectively.
The New Credit Facility also includes customary covenants relating to the
delivery of financial statements, reports, notices, and other information,
access to information and properties, maintenance of insurance, payment of
taxes, maintenance of assets, nature of business, corporate existence and
rights, compliance with applicable laws, transactions with affiliates, use of
proceeds, limitations on indebtedness, limitations on liens, limitations on
certain mergers and sales of assets, limitations on investments, limitations on
dividends and other distributions and limitations on debt payments, including
prepayment or redemption of the Notes.
EVENTS OF DEFAULT
The New Credit Facility contains certain events of default after expiration
of applicable grace periods, including failure to make payments under the New
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 the Company and ALARIS Medical.
141
<PAGE>
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of such New Notes
received in exchange for Old Notes where such Old Notes were acquired as a
result of market-making activities or other trading activities. The Company and
the Guaranteeing Subsidiaries have agreed that for a period of 180 days after
the Expiration Date, they will make this Prospectus, as it may be amended or
supplemented from time to time, available to any Participating Broker-Dealer for
use in connection with any such resale. In addition, until , 1997, all
dealers effecting transactions in the Exchange Notes may be required to deliver
a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
Participating Broker-Dealers. New Notes received by Participating Broker-Dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Notes or a combination
of such methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such Participating Broker-Dealer and/or the purchasers of any such New Notes.
Any Participating Broker-Dealer that resells New Notes that were received by it
for its own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of the New Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a Participating Broker-Dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company and the
Guaranteeing Subsidiaries promptly will send additional copies of this
Prospectus, as it may be amended or supplemented from time to time, to any
Participating Broker-Dealer upon request. The Company and the Guaranteeing
Subsidiaries have agreed to pay all expenses incident to the Exchange Offer
(including the expenses of one counsel for all of the holders of Old Notes)
other than commissions or concessions of any brokers or dealers and transfer
taxes and will indemnify the holders of the Old Notes against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the validity of the New Notes will be
passed upon for the Company by Gordon Altman Butowsky Weitzen Shalov & Wein, New
York, New York.
EXPERTS
The financial statements of ALARIS Medical Systems, Inc. (formerly IMED) as
of December 31, 1995 and 1996 and for each of the three years in the period
ended December 31, 1996, the financial statements of IVAC Holdings, Inc. as of
December 31, 1995 and for the year then ended, and the financial statements of
IVAC Corporation as of December 31, 1994 and for the year then ended included in
this Prospectus have been so included in reliance on the reports of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
142
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ALARIS Medical Systems, Inc. (unaudited)
Condensed Consolidated Balance Sheet at December 31, 1996 and March 31,
1997.................................................................... F-2
Condensed Consolidated Statement of Operations for the three months ended
March 31, 1996 and 1997................................................. F-3
Condensed Consolidated Statement of Cash Flows for the three months ended
March 31, 1996 and 1997................................................. F-4
Condensed Consolidated Statement of Changes in Stockholders' Equity for
the three months ended March 31, 1997................................... F-5
Notes to the Condensed Consolidated Financial Statements.................. F-6
ALARIS Medical Systems, Inc. (formerly IMED) (audited)
Report of Independent Accountants......................................... F-11
Consolidated Balance Sheet at December 31, 1995 and 1996.................. F-12
Consolidated Statement of Operations for the years ended December 31,
1994, 1995 and 1996..................................................... F-13
Consolidated Statement of Cash Flows for the years ended December 31,
1994, 1995 and 1996..................................................... F-14
Consolidated Statement of Stockholder's Equity for the years ended
December 31, 1994, 1995 and 1996........................................ F-15
Notes to the Consolidated Financial Statements............................ F-16
IVAC Holdings, Inc. (unaudited)
Condensed Consolidated Balance Sheet at December 31, 1995 and September
30, 1996................................................................ F-37
Condensed Consolidated Statement of Operations for the nine months ended
September 30, 1995 and 1996............................................. F-38
Condensed Consolidated Statement of Cash Flows for the nine months ended
September 30, 1995 and 1996............................................. F-39
Notes to the Condensed Consolidated Financial Statements.................. F-40
IVAC Holdings, Inc. (audited)
Report of Independent Accountants......................................... F-44
Consolidated Balance Sheet at December 31, 1995........................... F-45
Consolidated Statement of Operations for the year ended December 31,
1995.................................................................... F-46
Consolidated Statement of Cash Flows for the year ended December 31,
1995.................................................................... F-47
Consolidated Statement of Shareholders' Equity (Deficit) for the year
ended December 31, 1995................................................. F-48
Notes to the Consolidated Financial Statements............................ F-49
IVAC Corporation (Predecessor Company) (audited)
Report of Independent Accountants......................................... F-66
Consolidated Balance Sheet at December 31, 1994........................... F-67
Consolidated Statement of Operations for the year ended December 31,
1994.................................................................... F-68
Consolidated Statement of Cash Flows for the year ended December 31,
1994.................................................................... F-69
Consolidated Statement of Shareholder's Equity for the year ended December
31, 1994................................................................ F-70
Notes to the Consolidated Financial Statements............................ F-71
</TABLE>
F-1
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................................................. $ 9,148 $ 14,635
Receivables.......................................................................... 87,874 73,711
Inventories.......................................................................... 58,976 61,926
Prepaid expenses and other current assets............................................ 22,126 23,255
------------ ----------
Total current assets............................................................... 178,124 173,527
Net investment in sales-type leases, less current portion.............................. 27,276 31,678
Property, plant and equipment, net..................................................... 56,628 56,637
Other non-current assets............................................................... 17,310 17,497
Intangible assets, net................................................................. 306,803 302,806
------------ ----------
$ 586,141 $ 582,145
------------ ----------
------------ ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt.................................................... $ 3,963 $ 6,619
Accounts payable..................................................................... 25,808 25,012
Accrued expenses and other current liabilities....................................... 48,786 57,224
Accrued restructuring and integration costs.......................................... 15,098 9,922
------------ ----------
Total current liabilities.......................................................... 93,655 98,777
------------ ----------
Long-term debt......................................................................... 419,978 418,306
Other non-current liabilities.......................................................... 22,487 20,431
------------ ----------
Total non-current liabilities........................................................ 442,465 438,737
------------ ----------
Contingent liabilities (Note 4)
Stockholder's equity:
Common stock and capital in excess of par, authorized 3,000 common shares at $.01 par
value; issued and outstanding -- 1,000 shares at December 31, 1996 and March 31,
1997............................................................................... 96,646 96,646
Accumulated deficit.................................................................. (46,687) (50,745)
Other equity......................................................................... 62 (1,270)
------------ ----------
Total stockholder's equity......................................................... 50,021 44,631
------------ ----------
$ 586,141 $ 582,145
------------ ----------
------------ ----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-2
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1996 1997
--------- ----------
<S> <C> <C>
Sales...................................................................................... $ 25,875 $ 81,995
Cost of sales.............................................................................. 13,908 46,970
--------- ----------
Gross margin............................................................................. 11,967 35,025
--------- ----------
Selling and marketing expense.............................................................. 4,207 15,495
General and administrative expense......................................................... 2,333 8,928
Research and development expense........................................................... 1,812 4,068
Integration expense........................................................................ -- 2,517
--------- ----------
Total operating expense.................................................................. 8,352 31,008
--------- ----------
Lease interest income...................................................................... 600 1,162
--------- ----------
Income from operations................................................................... 4,215 5,179
--------- ----------
Other income (expense):
Interest income.......................................................................... 3 137
Interest expense......................................................................... (351) (10,370)
Other, net............................................................................... (100) (147)
--------- ----------
Total other expense...................................................................... (448) (10,380)
--------- ----------
Income (loss) before income taxes.......................................................... 3,767 (5,201)
Provision for (benefit from) income taxes.................................................. 1,630 (1,900)
--------- ----------
Net income (loss).......................................................................... 2,137 (3,301)
Dividends on mandatorily redeemable preferred stock........................................ (305) --
--------- ----------
Net income (loss) attributable to common stock............................................. $ 1,832 $ (3,301)
--------- ----------
--------- ----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-3
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1996 1997
--------- ----------
<S> <C> <C>
Net cash provided by operating activities................................................... $ 5,769 $ 10,605
--------- ----------
Cash flows from investing activities:
Capital expenditures...................................................................... (1,205) (4,882)
Payments for product distribution rights.................................................. (1,503) --
Proceeds from disposal of property, plant and equipment................................... 11 14
--------- ----------
Net cash used in investing activities....................................................... (2,697) (4,868)
--------- ----------
Cash flows from financing activities:
Net repayments under former credit facilities............................................. (232) --
Principal payments on long-term debt...................................................... (140) (3,309)
Proceeds from borrowings under revolving credit facility.................................. -- 4,300
Debt issue costs.......................................................................... -- (109)
Dividends................................................................................. (2,755) (757)
--------- ----------
Net cash (used in) provided by financing activities......................................... (3,127) 125
--------- ----------
Effect of exchange rate changes on cash..................................................... 1 (375)
--------- ----------
Net (decrease) increase in cash............................................................. (54) 5,487
Cash at beginning of period................................................................. 436 9,148
--------- ----------
Cash at end of period....................................................................... $ 382 $ 14,635
--------- ----------
--------- ----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-4
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY (UNAUDITED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK AND
CAPITAL IN EXCESS OF
PAR VALUE
-------------------- ACCUMULATED OTHER
SHARES AMOUNT DEFICIT EQUITY TOTAL
--------- --------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996.............................. 1,000 $ 96,646 $ (46,687) $ 62 $ 50,021
Dividends to ALARIS Medical, Inc.......................... (757) (757)
Translation adjustment.................................... (1,332) (1,332)
Net loss for the period................................... (3,301) (3,301)
--------- --------- ------------ --------- ---------
Balance at March 31, 1997................................. 1,000 $ 96,646 $ (50,745) $ (1,270) $ 44,631
--------- --------- ------------ --------- ---------
--------- --------- ------------ --------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-5
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--BUSINESS AND STATEMENT OF ACCOUNTING POLICY
THE COMPANY:
ALARIS Medical Systems, Inc., formerly IMED Corporation ("ALARIS Medical
Systems" or the "Company"), designs, manufactures, distributes and services
intravenous infusion therapy and vital signs measurement instruments and related
disposables and accessories. On November 26, 1996, IMED Corporation ("IMED"),
then a wholly-owned subsidiary of ALARIS Medical, Inc., formerly Advanced
Medical, Inc. ("ALARIS Medical") acquired all of the outstanding stock of IVAC
Holdings, Inc. ("IVAC Holdings") and its subsidiaries including IVAC Medical
Systems, Inc. (Note 2). In connection with the acquisition, IMED and IVAC
Medical Systems, Inc. were merged into IVAC Holdings (the "Merger"), which then
changed its name to ALARIS Medical Systems, Inc. The acquisition was accounted
for as a purchase. Accordingly, the 1996 operating results and cash flows
exclude those of the acquired company and are not comparable to the 1997
operating results and cash flows.
STATEMENT OF ACCOUNTING POLICY:
The accompanying financial statements have been prepared by the Company
without audit 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, although the Company believes that the disclosures herein are
adequate to make the information not misleading.
In the opinion of the Company, the accompanying financial statements contain
all adjustments, consisting of normal recurring adjustments, necessary for a
fair statement of the Company's financial position as of March 31, 1997, and the
results of its operations and its cash flows for the three months ended March
31, 1996 and 1997.
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 period.
Actual results could differ from those estimates.
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.
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, by ALARIS Medical 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
F-6
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
NOTE 2--THE MERGER (CONTINUED)
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 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 issued as an inducement to convert.
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.
NOTE 3--INVENTORIES
Inventories comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
<S> <C> <C>
Raw materials................................................................. $ 24,711 $ 25,889
Work-in-process............................................................... 9,622 13,327
Finished goods................................................................ 24,643 22,710
------------ -----------
$ 58,976 $ 61,926
------------ -----------
------------ -----------
</TABLE>
NOTE 4--CONTINGENCIES AND LITIGATION
FIELD CORRECTION
The Company will initiate a voluntary field correction of approximately
50,000 of its Gemini model PC-1 and PC-2 infusion pumps because failure of
specific electrical components on the power regulator printed circuit board may
result in improper regulation of the battery charge voltage, which can cause the
battery to overheat. Such overheating could result in product failure and
discharge of hydrogen gas which may accumulate within the instrument's case. As
an interim measure, the Company has advised its customers of simple precautions
that can be taken to minimize the potential for an adverse incident pending
completion of the field correction. The Company is not aware of any injuries
sustained in known battery overcharging incidents.
As a result of this decision, the Company recorded a charge of $2.5 million
to cost of sales for the quarter ended March 31, 1997. Based on management's
current understanding of these incidents, the Company believes it has adequately
accrued for this matter. However, since the Company's analysis of this matter is
preliminary, there can be no assurances that it can be resolved for an amount
consistent with management's estimated cost.
F-7
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
NOTE 4--CONTINGENCIES AND LITIGATION (CONTINUED)
LITIGATION
The Company is a defendant in a lawsuit which alleges infringement of two
patents by reason of certain activities including the sale of disposable probe
covers for use with tympanic thermometers. The lawsuit seeks injunctive relief,
treble damages and the recovery of costs and attorney fees. The discovery phase
of the lawsuit has recently commenced. The Company is currently unable to
quantify its exposure to the lawsuit; however, the Company believes it has
sufficient defenses to all claims, including the defenses of noninfringement and
invalidity. However, there can be no assurance that the Company will
successfully defend all claims 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 also a defendant in various actions, claims, and legal
proceedings arising from its normal business operations. Management believes the
Company has meritorious defenses and intends to vigorously defend against all
allegations and claims. As the ultimate outcome of these matters is uncertain,
no 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.
NOTE 5--GUARANTOR SUBSIDIARY
Two wholly-owned subsidiaries of the Company have provided full and
unconditional guarantees of the Notes. The guarantors are IMED Intentional
Trading Corporation (ITC), a former IMED subsidiary, and IVAC Overseas Holdings,
Inc. (OSH), a former IVAC Holdings subsidiary. Separate financial statements of
the guarantors are not presented as management has determined that they would
not be material to investors. ITC's net assets are comprised of an intangible
asset (IMED production distribution rights) and an intercompany liability. OSH's
net assets are comprised of its ownership interest in three wholly-owned foreign
subsidiaries which distribute the Company's products.
The condensed consolidating financial statements of the parent, the
guarantors and non guarantors follows. Investments in subsidiaries are accounted
for using the equity method. Since ITC was not formed until August 1990 and OSH
was not a subsidiary of the Company until completion of the merger in November
1996, condensed consolidating financial statements have not been presented for
periods prior to 1996.
F-8
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
NOTE 5--GUARANTOR SUBSIDIARY (CONTINUED)
CONDENSED BALANCE SHEET
MARCH 31, 1997
<TABLE>
<CAPTION>
COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------------ ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Current assets.............................. $ 136,386 $ 1 $ 37,140 $ -- 173,527
Non-current assets.......................... 411,137 37,246 67,224 (106,989) 408,618
------------ ----------- -------------- ----------- ------------
$ 547,523 $ 37,247 $ 104,364 $ (106,989) $ 582,145
------------ ----------- -------------- ----------- ------------
------------ ----------- -------------- ----------- ------------
Current liabilities......................... $ 80,899 $ -- $ 17,878 $ -- $ 98,777
Amounts due related parties, net............ (16,825) 8,196 8,629 -- --
Long-term debt and other liabilities........ 438,737 -- -- -- 438,737
------------ ----------- -------------- ----------- ------------
502,811 8,196 26,507 -- 537,514
Common stock and other stockholder's
equity..................................... 44,712 29,051 77,857 (106,989) 44,631
------------ ----------- -------------- ----------- ------------
$ 547,523 $ 37,247 $ 104,364 $ (106,989) $ 582,145
------------ ----------- -------------- ----------- ------------
------------ ----------- -------------- ----------- ------------
</TABLE>
CONDENSED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------------ ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Sales....................................... $ 61,202 $ -- $ 27,926 $ (7,133) $ 81,995
Cost of sales............................... 35,471 205 18,427 (7,133) 46,970
------------ ----------- -------------- ----------- ------------
25,731 (205) 9,499 -- 35,025
Operating expenses.......................... 24,702 -- 6,306 -- 31,008
Lease interest income....................... 1,162 -- -- -- 1,162
Income (loss) from operations............... 2,191 (205) 3,193 -- 5,179
Other income (expense)...................... (10,427) -- 47 -- (10,380)
Equity interest in subsidiary income........ 1,612 77 -- (1,689) --
Provision for (benefit from) income taxes... (3,400) -- 1,500 -- (1,900)
------------ ----------- -------------- ----------- ------------
Net income (loss)......................... $ (3,224) $ (128) $ 1,740 $ (1,689) $ (3,301)
------------ ----------- -------------- ----------- ------------
------------ ----------- -------------- ----------- ------------
</TABLE>
F-9
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
NOTE 5--GUARANTOR SUBSIDIARY (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
COMBINED
GUARANTOR NON-GUARANTOR
PARENT COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
--------------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities.............................. $ 9,923 $ -- $ 682 $ -- $ 10,605
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................... (4,080) -- (802) -- (4,882)
Proceeds from disposal of property,
plant and equipment.................. 7 -- 7 -- 14
--------------- ----------- -------------- ----------- ------------
Net cash used in investing activities.... $ (4,073) -- (795) -- (4,868)
--------------- ----------- -------------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt... (3,309) -- -- -- (3,309)
Debt issuance costs.................... (109) -- -- -- (109)
Dividends on preferred stock........... (757) -- -- -- (757)
Proceeds from revolving credit
facility............................. 4,300 -- -- -- 4,300
(Decrease) increase in due to
Guarantor............................ -- 35 (35) -- --
(Decrease) increase in due to Parent... (2,127) (35) 2,162 -- --
--------------- ----------- -------------- ----------- ------------
Net cash (used in) provided by financing
activities.............................. (2,002) -- 2,127 -- 125
--------------- ----------- -------------- ----------- ------------
Effect of exchange rate changes on
cash.................................... -- -- (375) -- (375)
--------------- ----------- -------------- ----------- ------------
Net increase in cash..................... 3,848 -- 1,639 -- 5,487
Cash at beginning of period.............. 1,813 1 7,334 -- 9,148
--------------- ----------- -------------- ----------- ------------
Cash at end of period.................... $ 5,661 $ 1 $ 8,973 $ -- $ 14,635
--------------- ----------- -------------- ----------- ------------
--------------- ----------- -------------- ----------- ------------
</TABLE>
F-10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholder of ALARIS Medical Systems, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of stockholder's equity
present fairly, in all material respects, the financial position of ALARIS
Medical Systems, Inc. (formerly IMED Corporation) (a wholly owned subsidiary of
ALARIS Medical, Inc., formerly Advanced Medical, Inc.) and its subsidiaries at
December 31, 1995 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Diego, California
March 27, 1997
F-11
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash.................................................................................... $ 436 $ 9,148
Receivables............................................................................. 27,014 87,874
Inventories............................................................................. 15,829 58,976
Prepaid expenses and other current assets............................................... 3,696 22,126
---------- ----------
Total current assets.................................................................. 46,975 178,124
---------- ----------
Net investment in sales-type leases, less current portion................................. 15,179 27,276
Property, plant and equipment, net........................................................ 12,652 56,628
Other non-current assets.................................................................. 5,485 17,310
Intangible assets, net.................................................................... 42,306 306,803
---------- ----------
$ 122,597 $ 586,141
---------- ----------
---------- ----------
<CAPTION>
LIABILITIES, MANDATORILY REDEEMABLE EQUITY
SECURITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
Current liabilities:
Current portion of long-term debt....................................................... $ 140 $ 3,963
Accounts payable........................................................................ 7,871 25,808
Accrued expenses and other current liabilities.......................................... 13,211 48,786
Accrued restructuring and integration costs............................................. -- 15,098
---------- ----------
Total current liabilities............................................................. 21,222 93,655
---------- ----------
Amounts due related parties............................................................... 28,004 --
Long-term debt............................................................................ 11,213 419,978
Other non-current liabilities............................................................. 6,050 22,487
---------- ----------
Total non-current liabilities......................................................... 45,267 442,465
---------- ----------
Contingent liabilities and commitments (Notes 9, 11 and 14)
Mandatorily redeemable equity securities.................................................. 23,631 --
---------- ----------
Common stock and other stockholder's equity:
Common stock and capital in excess of par value, authorized 3,000 common shares at $.01
par value; 900 and 1,000 issued and outstanding at December 31, 1995 and 1996,
respectively.......................................................................... 24,398 96,646
Retained earnings (accumulated deficit)................................................. 8,049 (46,687)
Equity adjustment from foreign currency translation..................................... 30 62
---------- ----------
Total common stock and other stockholder's equity..................................... 32,477 50,021
---------- ----------
$ 122,597 $ 586,141
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-12
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Sales........................................................................ $ 112,122 $ 112,551 $ 136,371
Cost of sales................................................................ 65,641 63,270 78,642
---------- ---------- ----------
Gross margin............................................................... 46,481 49,281 57,729
---------- ---------- ----------
Selling and marketing expense................................................ 16,850 16,567 22,273
General and administrative expense........................................... 8,726 8,893 13,434
Research and development expense............................................. 6,345 7,386 8,854
Purchased in-process research and development................................ -- -- 44,000
Restructuring, integration, and other non-recurring charges.................. -- -- 15,277
---------- ---------- ----------
Total operating expense.................................................. 31,921 32,846 103,838
---------- ---------- ----------
Lease interest income........................................................ 2,449 2,333 2,501
---------- ---------- ----------
Income (loss) from operations.............................................. 17,009 18,768 (43,608)
Other income (expense):
Interest expense........................................................... (2,805) (2,052) (6,303)
Interest income............................................................ 12 28 184
Other, net................................................................. (261) (379) 323
---------- ---------- ----------
Total other expense...................................................... (3,054) (2,403) (5,796)
---------- ---------- ----------
Income (loss) before income taxes............................................ 13,955 16,365 (49,404)
Provision for income taxes................................................... 8,310 8,099 1,270
---------- ---------- ----------
Net income (loss)............................................................ 5,645 8,266 (50,674)
Dividends on mandatorily redeemable preferred stock and adjustment of common
stock warrant to redemption amount......................................... (1,560) (8,058) (589)
---------- ---------- ----------
Net income (loss) attributable to common stock............................... $ 4,085 $ 208 $ (51,263)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-13
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................ $ 5,645 $ 8,266 $ (50,674)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................. 6,969 6,790 10,453
Loss on disposal/write-off of property, plant and equipment.................... 525 220 234
Write-off of debt issue costs.................................................. -- -- 657
Purchased in-process research and development.................................. -- -- 44,000
Inventory purchase price allocation adjustment................................. -- -- 4,014
Non-cash restructuring charges................................................. -- -- 1,616
Loss on write-off of patent.................................................... -- 150 --
(Increase) decrease in assets, net of effects of the Merger:
Receivables.................................................................... 1,210 (2,101) (2,935)
Inventories.................................................................... (976) 4,518 (1,223)
Prepaid expenses and other current assets...................................... 1,326 (625) 79
Net investment in sales-type leases............................................ 458 (458) 1,830
Other non-current assets....................................................... 326 105 66
Increase (decrease) in liabilities, net of effects of the Merger:
Accounts payable............................................................... 2,368 (537) 2,981
Accrued expenses and other current liabilities................................. (9,038) 2,262 5,533
Amounts due related parties.................................................... 14,680 6,210 840
Other non-current liabilities.................................................. (3,560) (776) (795)
--------- --------- ---------
Net cash provided by operating activities........................................ 19,933 24,024 16,676
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................................... (4,549) (4,803) (9,502)
Proceeds from disposal of property, plant and equipment........................ 253 17 106
Proceeds from sale of Irish operations......................................... 3,766 -- --
Payments for product distribution rights....................................... -- (3,402) (12,556)
Acquisition of business, net of cash acquired (Note 2)......................... -- -- (219,459)
--------- --------- ---------
Net cash used in investing activities............................................ (530) (8,188) (241,411)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) proceeds under former revolving credit facilities............. (5,296) (7,764) 10,006
Principal payments on long-term debt........................................... (34,690) (530) (140)
Proceeds from issuance of long-term credit facilities.......................... 23,793 -- --
Dividends on preferred stock................................................... (2,273) (6,684) (4,067)
Redemption of preferred stock.................................................. -- (880) (3,350)
Debt issuance costs............................................................ (1,205) (10) (16,888)
Debt repaid in merger.......................................................... -- -- (186,607)
Capital contributions.......................................................... -- -- 19,588
Proceeds from issuances of long-term debt...................................... -- -- 400,000
Proceeds from revolving credit facility........................................ -- -- 15,200
Other.......................................................................... 99 -- --
--------- --------- ---------
Net cash (used in) provided by financing activities.............................. (19,572) (15,868) 233,742
--------- --------- ---------
Effect of exchange rate changes on cash.......................................... 312 (656) (295)
--------- --------- ---------
Net (decrease) increase in cash.................................................. 143 (688) 8,712
Cash at beginning of period...................................................... 981 1,124 436
--------- --------- ---------
Cash at end of period............................................................ $ 1,124 $ 436 $ 9,148
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-14
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
AND CAPITAL IN EQUITY
EXCESS OF PAR VALUE RETAINED ADJUSTMENT
EARNINGS FROM FOREIGN TOTAL
---------------------- (ACCUMULATED CURRENCY STOCKHOLDER'S
SHARES AMOUNT DEFICIT) TRANSLATION EQUITY
----------- --------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994................................ 900 $ 24,398 $ 3,657 $ 459 $ 28,514
Accrual of dividends on mandatorily redeemable preferred
stock................................................... -- (1,560) -- (1,560)
Other..................................................... -- -- 99 -- 99
Equity adjustment from foreign currency translation....... -- -- -- 231 231
Net income for the year................................... -- -- 5,645 -- 5,645
----- --------- ------------ ----- ------------
Balance at December 31, 1994.............................. 900 24,398 7,841 690 32,929
----- --------- ------------ ----- ------------
Accrual of dividends on mandatorily redeemable preferred
stock................................................... -- -- (1,558) -- (1,558)
Adjustment of common stock warrant to redemption amount... -- -- (6,500) -- (6,500)
Equity adjustment from foreign currency translation....... -- -- -- (660) (660)
Net income for the year................................... -- -- 8,266 -- 8,266
----- --------- ------------ ----- ------------
Balance at December 31, 1995.............................. 900 24,398 8,049 30 32,477
----- --------- ------------ ----- ------------
Dividends on mandatorily redeemable preferred stock....... -- -- (589) -- (589)
Cancellation of stock warrants............................ 11,500 -- -- 11,500
Non-cash capital contribution from ALARIS Medical......... -- 41,160 -- -- 41,160
Dividends to ALARIS Medical............................... -- -- (3,473) -- (3,473)
Capital contribution from ALARIS Medical.................. -- 19,588 -- -- 19,588
Shares issued due to merger............................... 100 -- -- -- --
Equity adjustment from foreign currency translation....... -- -- -- 32 32
Net loss for the year..................................... -- -- (50,674) -- (50,674)
----- --------- ------------ ----- ------------
Balance at December 31, 1996.............................. 1,000 $ 96,646 $ (46,687) $ 62 $ 50,021
----- --------- ------------ ----- ------------
----- --------- ------------ ----- ------------
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-15
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1-- BUSINESS AND ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY:
The consolidated financial statements include ALARIS Medical Systems, Inc.
(formerly IMED Corporation ("IMED")) and its subsidiaries (the "Company" or
"ALARIS Medical Systems"). On November 26, 1996, IMED, a then wholly-owned
subsidiary of ALARIS Medical, Inc., formerly Advanced Medical, Inc. ("AM"),
acquired all of the outstanding stock of IVAC Holdings, Inc. (predecessor
company) and its subsidiaries including IVAC Medical Systems, Inc. In connection
with the acquisition, IMED and IVAC Medical Systems, Inc. were merged into IVAC
Holdings, Inc. (the "Merger"). The accompanying balance sheet as of December 31,
1996 reflects the assets, liabilities and stockholder's equity of the merged
entity. The accompanying statements of operations, of cash flows and of
stockholder's equity for the year ended December 31, 1996, reflect the
operations and cash flows of IMED up to the date of the acquisition and the
operations and cash flows of the merged entity subsequent to the acquisition
date. The comparative historical information as of December 31, 1995 and for the
years ended December 31, 1994 and 1995 represents the financial position,
results of operations and cash flows of IMED.
BUSINESS:
The Company designs, manufactures, distributes and services intravenous
infusion therapy and vital signs measurement instruments and related disposables
and accessories. The Company sells a full range of products to hospitals and
alternate site facilities in the United States, Canada, Australia and Europe.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION:
The financial statements include the accounts of the Company 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, which result in
immediate profit recognition, 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
F-16
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1-- BUSINESS AND ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
as disposables are shipped using a reducing principal balance method which
approximates the interest method. Contract provisions include liquidated damage
clauses which are sufficient to recover the sales price of the instruments in
the event of customer cancellation.
CONCENTRATIONS OF CREDIT RISK:
The Company provides a variety of financing arrangements for its customers.
The majority of the Company's accounts receivable are from hospitals throughout
the United States and Europe with credit terms of generally 30 days. The Company
maintains adequate reserves for potential credit losses and such losses, which
have been minimal, have been within management's estimates.
INVENTORIES:
Inventories are stated at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market. Cost of inventory acquired in the Merger was
determined based on an allocation of the purchase price to all assets and
liabilities including inventory, as determined by an independent appraisal, at
the date of acquisition (Note 2).
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is stated at cost. Depreciation and
amortization is provided using the straight-line method based upon the following
estimated useful lives of the assets or lease terms, if shorter, for leasehold
improvements and instrument operating leases:
<TABLE>
<S> <C>
Building and leasehold improvements........................... 3 to 10 years
Machinery and equipment....................................... 3 to 10 years
Furniture and fixtures........................................ 4 to 8 years
Instruments on operating lease contracts...................... 1 to 6 years
</TABLE>
INTANGIBLE ASSETS:
The Company has recorded goodwill for the excess purchase price over the
estimated fair values of tangible and intangible assets acquired and liabilities
assumed resulting from acquisitions. In connection with the Merger, a portion of
the purchase price was allocated to various identifiable intangible assets,
including patents, trademarks, workforce and supply agreements, based on their
fair values at the date of acquisition. The excess purchase price over the
estimated fair value of the net assets acquired has been assigned to goodwill.
Additionally, the Company has recorded intangible assets related to purchases of
patents and product distribution rights.
Intangible assets are amortized as follows:
<TABLE>
<S> <C>
Supply agreements............. Straight-line 3 years
Patents....................... Straight-line 13 years (weighted average)
Workforce..................... Straight-line 16 years
Product distribution license fee............
Straight-line 15 years
Trademarks.................... Straight-line 30 years
Goodwill...................... Straight-line 30 to 35 years
</TABLE>
F-17
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1-- BUSINESS AND ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 $877 and $16,936 at December 31, 1995 and 1996,
respectively, are amortized using the interest method over the respective terms
of the debt agreements and are included in other non-current assets.
FOREIGN CURRENCY TRANSLATION:
The accounts of foreign subsidiaries which use local currencies as
functional currencies are translated into U.S. dollars using year-end exchange
rates for assets and liabilities, historical exchange rates for equity and
weighted average exchange rates during the period for revenues and expenses. The
gains or losses resulting from translations are excluded from results of
operations and accumulated as a separate component of stockholder's equity.
RESEARCH AND DEVELOPMENT COSTS:
Research and development costs are expensed as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount of the Company's financial instruments, including cash,
trade receivables and payables, approximates their fair value due to their short
term maturities. The fair values of the Company's long-term lease receivables
are estimated by discounting future cash flows using discount rates that reflect
the risk associated with similar types of loans. The fair value of the Company's
long-term debt is estimated based on comparison with similar issues or current
rates offered to the Company for debt of the same remaining maturities. The
estimated fair values of both the Company's long-term lease receivables and
long-term debt approximate their carrying values.
INCOME TAXES:
The Company is included in AM's consolidated Federal income tax return. The
Company files income tax returns in multiple states on either a stand-alone or
combined basis. Foreign subsidiaries file income tax returns in their respective
jurisdictions based on their separate taxable income. The Company provides for
deferred income taxes on undistributed earnings of its foreign subsidiaries.
Deferred tax liabilities and assets are recognized for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. 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
F-18
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1-- BUSINESS AND ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
reverse. The Company provides a reserve against its net deferred assets when, in
the opinion of management, it is more likely than not that such assets will not
be realized.
STOCK-BASED COMPENSATION:
During the year ended December 31, 1996, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). The Company has continued to measure compensation
expense for its stock-based employee compensation plans using the intrinsic
value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, the Company has provided pro forma disclosures of
results of operations as if the fair value-based method prescribed by SFAS 123
had been applied in measuring compensation expense.
NOTE 2--THE MERGER
On November 26, 1996, IMED acquired all of the outstanding stock of IVAC
Holdings, Inc. 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 and the Merger was effected. The
Merger was financed with $204,200 in bank debt and $200,000 of Notes (as
defined).
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 consolidated balance sheets and statements of stockholder's equity of
the Company at December 31, 1996 includes the assets, liabilities and
stockholder's equity of the combined companies. The consolidated statements of
operations and of cash flows presents the revenues and related expenses and cash
flows of IMED up to the date of merger and the revenues and related expenses and
cash flows of the combined companies subsequent to the date of merger.
The following unaudited pro forma financial information presents the
operations of ALARIS Medical Systems, as if the Merger had been consummated on
January 1, of the respective year, excluding certain one time non-recurring
charges related to the Merger.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Sales:
As reported......................................................... $ 112,551 $ 136,371
Pro forma........................................................... $ 352,728 $ 346,348
Net income (loss):
As reported......................................................... $ 8,266 $ (50,674)
Pro forma........................................................... $ (40,334) $ (150)
</TABLE>
F-19
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 3--COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
RECEIVABLES:
Trade receivables............................................................. $ 20,473 $ 75,164
Allowance for doubtful accounts............................................... (875) (4,085)
---------- ----------
19,598 71,079
Current portion of net investment in sales-type leases (Note 9)............... 7,034 16,795
Other......................................................................... 382 --
---------- ----------
$ 27,014 $ 87,874
---------- ----------
---------- ----------
INVENTORIES:
Raw materials................................................................. $ 6,946 $ 24,711
Work-in-process............................................................... 1,686 9,622
Finished goods................................................................ 7,197 24,643
---------- ----------
$ 15,829 $ 58,976
---------- ----------
---------- ----------
PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Deferred income tax asset..................................................... $ 2,637 $ 16,174
Other......................................................................... 1,059 5,952
---------- ----------
$ 3,696 $ 22,126
---------- ----------
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Land.......................................................................... $ -- $ 640
Building and leasehold improvements........................................... 2,681 10,073
Machinery and equipment....................................................... 9,835 32,194
Furniture and fixtures........................................................ 3,371 5,215
Instruments under operating lease contracts................................... 12,762 17,245
Construction-in-process....................................................... 1,991 8,102
---------- ----------
30,640 73,469
Accumulated depreciation and amortization..................................... (17,988) (16,841)
---------- ----------
$ 12,652 $ 56,628
---------- ----------
---------- ----------
</TABLE>
Depreciation expense was $3,886, $4,204 and $5,826 for 1994, 1995 and 1996,
respectively.
F-20
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 3--COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
INTANGIBLE ASSETS:
Goodwill.................................................. $ 45,683 $ 178,165
Patents................................................... 5,676 28,661
Product distribution license fee.......................... 3,402 8,742
Supply agreements......................................... -- 10,758
Trademarks................................................ -- 90,000
Workforce................................................. -- 7,100
---------- ----------
54,761 323,426
Accumulated amortization.................................. (12,455) (16,623)
---------- ----------
$ 42,306 $ 306,803
---------- ----------
---------- ----------
</TABLE>
Supply agreements represent non-cancelable customer commitments to purchase
specified quantities of disposable administration sets and probe covers at
contractual prices.
Amortization expense was $2,210, $2,338 and $4,168 during 1994, 1995 and
1996, respectively.
<TABLE>
<S> <C> <C>
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Income taxes payable...................................... $ 2,555 $ 2,647
Compensation.............................................. 3,819 8,096
Warranty.................................................. 2,210 16,676
Interest.................................................. 144 3,357
Other..................................................... 4,483 18,010
--------- ---------
$ 13,211 $ 48,786
--------- ---------
--------- ---------
OTHER NON-CURRENT LIABILITIES:
Deferred income tax liability............................. $ -- $ 15,550
Deferred revenue.......................................... 4,618 137
Other..................................................... 1,432 6,800
--------- ---------
$ 6,050 $ 22,487
--------- ---------
--------- ---------
</TABLE>
F-21
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 4--NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
--------- ----------
<S> <C> <C>
Bank credit facility
Term loan facilities........................................................... $ -- $ 200,000
Revolving credit facilities.................................................... -- 15,200
9.75% Senior subordinated notes due 2006......................................... -- 200,000
GECC revolving credit facility................................................... 10,733 --
Other............................................................................ 620 8,741
--------- ----------
11,353 423,941
Current portion................................................................ (140) (3,963)
--------- ----------
Long-term debt................................................................... $ 11,213 $ 419,978
--------- ----------
--------- ----------
</TABLE>
In connection with the Merger, the Company entered into a $250,000 bank
credit facility (the "Facility") with a syndicate of financial institutions
which consists of $200,000 of term loans ($75,000 Tranche A Term Loans maturing
in 2002, $42,500 Tranche B Term Loans maturing in 2003, $42,500 Tranche C Term
Loans maturing in 2004 and $40,000 Tranche D Term Loans maturing in 2005) and a
$50,000 revolving credit facility maturing in 2002 of which $15,200 in principal
was outstanding at December 31, 1996. Available funds under the revolving credit
facility ($34,300 at December 31, 1996) are limited to the difference between
$50,000 and the amounts of outstanding letters of credit and borrowings issued
under the revolving credit facility.
Tranche A, B, C and D term loans bear interest at a Eurodollar rate plus
2.5%, 3.0%, 3.5% and 3.75%, respectively. Such total rates were 8.0%, 8.5%, 9.0%
and 9.25%, respectively, at December 31, 1996. Borrowings under the revolving
credit facility bear interest at the same rate as Tranche A term loans.
All obligations of the Company under the Facility are guaranteed by AM and
each existing and subsequently formed or acquired domestic subsidiary of AM.
The Facility contains various operating and financial covenants, as well as
certain covenants relating to reporting requirements.
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 the 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 general unsecured obligations of the Company, subordinated in
right of payment to all existing and future senior debt of the Company,
including indebtedness pursuant to the Facility. The Notes are guaranteed by two
wholly-owned nonoperating subsidiaries of the Company. Such subsidiaries have no
material assets or liabilities and do not generate cash flow.
F-22
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 4--NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
The Company had a revolving credit agreement with GECC, which included a
$38,500 revolving credit facility with an interest rate at the index rate as
defined in the agreement plus 2% (10.75% at December 31, 1995). In connection
with the Merger, the Company repaid the outstanding balance on the GECC
revolving credit facility in the amount of $20,739.
Other debt primarily consists of consideration owed to Siemens Infusion
Systems, Ltd. ("SIS") resulting from IVAC Medical Systems, Inc.'s acquisition of
the MiniMed product line from SIS in 1993. In accordance with the acquisition
agreement, the Company's remaining obligation to SIS is $3,000 per year or 8% of
the prior year's product sales in 1997 through 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 $739 at December 31, 1996.
Maturities of long-term debt during the years subsequent to December 31,
1996 are as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 3,963
1998.............................................................. 14,559
1999.............................................................. 15,569
2000.............................................................. 13,650
2001.............................................................. 21,650
Thereafter........................................................ 354,550
---------
$ 423,941
---------
---------
</TABLE>
NOTE 5--INCOME TAXES
The provision for income taxes comprises the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal.................................................................. $ 5,182 6,239 $ --
State.................................................................... 1,068 1,741 529
Foreign.................................................................. 1,049 157 1,000
--------- --------- ---------
7,299 8,137 1,529
--------- --------- ---------
Deferred:
Federal.................................................................. 827 (519) 421
State.................................................................... 268 474 (612)
Foreign.................................................................. (84) 7 (68)
--------- --------- ---------
1,011 (38) (259)
--------- --------- ---------
Provision for income taxes............................................... $ 8,310 $ 8,099 $ 1,270
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-23
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 5--INCOME TAXES (CONTINUED)
The principal items accounting for the differences in income taxes computed
at the U.S. statutory rate (34%) and the effective income tax rate comprise the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
Taxes computed at statutory rate......................................... $ 4,745 $ 5,564 $ (16,797)
State income taxes (net of federal benefit).............................. 882 1,462 (55)
Taxes above the U.S. rate on earnings deemed repatriated................. 1,722 105 2,630
Foreign taxes............................................................ -- -- 886
Amortization of non-deductible intangibles............................... 442 442 574
Purchased in-process research and development............................ -- -- 14,960
Items affected by valuation allowance.................................... -- -- 1,029
Federal tax credits...................................................... -- -- (2,196)
Miscellaneous............................................................ 519 526 239
--------- --------- ----------
Provision for income taxes............................................... $ 8,310 $ 8,099 $ 1,270
--------- --------- ----------
--------- --------- ----------
</TABLE>
The components of the net deferred tax assets included in other assets as of
December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................................................. $ -- $ 13,056
Accrued liabilities and reserves................................................. 3,003 19,943
Unearned income.................................................................. 2,085 1,979
Inventory........................................................................ 966 2,450
Intangible assets................................................................ 778 --
Property, plant and equipment.................................................... 71 18
Credit carryforwards............................................................. -- 2,432
Miscellaneous.................................................................... 369 213
--------- ---------
7,272 40,091
Valuation allowance.............................................................. -- (1,029)
--------- ---------
Total deferred tax assets........................................................ 7,272 39,062
Deferred tax liabilities:
Intangible assets................................................................ -- 36,979
Miscellaneous.................................................................... 154 1,459
--------- ---------
Net deferred tax assets............................................................ $ 7,118 $ 624
--------- ---------
--------- ---------
</TABLE>
As of December 31, 1996, the Company had federal and state net operating
loss carryforwards of approximately $35,530 and $21,129, respectively.
Additionally, as of December 31, 1996, the Company had a foreign tax credit
carryforward of approximately $2,058 for federal tax purposes and research and
development tax credits of approximately $138 and $358 for federal and state
purposes, respectively. The federal and state net operating loss carryforwards
expire from 1999 to 2011. The foreign tax credit expires in 2001 and the
research and development tax credits expire from 2009 to 2011.
F-24
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 5--INCOME TAXES (CONTINUED)
As a result of certain changes in the Company's stock ownership which
occurred during the year, portions of the above described carryforwards are
subject to annual income offset limitations on a prospective basis. Accordingly,
approximately $25,874 and $4,629 of the federal and state net operating loss
carryforwards and approximately $115 and $342 of the federal and state research
and development credits are, in general, subject to annual limitations of
approximately $3,700. Additionally, certain built-in gains recognized by the
Company will increase the annual utilization rate of the net operating losses.
Finally, the Company possesses certain unrealized built-in losses which will be
subject to the annual utilization limitation when recognized.
NOTE 6--MANDATORILY REDEEMABLE EQUITY SECURITIES
Mandatorily redeemable equity securities comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Preferred stock (includes accrued dividends of $5,137 and $11 at December 31,
1994 and 1995)................................................................. $ 18,137 $ 12,131 $ --
Common stock warrant (includes cumulative accretion to estimated redemption price
of $2,491 and $8,991 at December 31, 1994 and 1995)............................ 5,000 11,500 --
--------- --------- ---------
$ 23,137 $ 23,631 $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
MANDATORILY REDEEMABLE PREFERRED STOCK:
At December 31, 1995, the Company had 1,212 shares of $0.01 par value
mandatorily redeemable preferred stock ("12% Preferred Stock") outstanding, all
of which were owned by AM. The 12% Preferred Stock had a stated value of $10,000
per share. During 1995 and 1996, the Company redeemed 88 and 335 shares,
respectively, of its 12% Preferred Stock from AM for $880 and $3,350,
respectively. In June 1996, AM contributed to the Company $8,776 representing
the outstanding par value and accrued dividends on all the remaining outstanding
shares of the Company's 12% Preferred Stock. The preferred shares were then
canceled. The Company made dividend payments to AM of $2,273, $6,684 and $4,067
during 1994, 1995 and 1996, respectively, related to the 12% Preferred Stock.
COMMON STOCK WARRANT:
In connection with the GECC revolving credit facility (Note 4), IMED issued
a warrant allowing GECC to purchase up to 10% of IMED's common stock on a
fully-diluted basis for nominal consideration, subject to adjustment as provided
in the loan agreement, and exercisable at any time until August 12, 2004. On an
annual basis, IMED adjusted the carrying value of the warrant based on its
estimated fair value. In June 1996, AM purchased the GECC warrant for $12,500.
The warrant acquired by AM was then canceled.
NOTE 7--STOCK OPTION PLANS
AM maintains several stock option plans under which incentive stock options
may be granted to key employees of the Company and nonqualified stock options
may be granted to key employees, directors, officers, independent contractors
and consultants.
F-25
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 7--STOCK OPTION PLANS (CONTINUED)
The exercise price for incentive stock options generally may not be less
than the underlying stock's fair market value at the grant date. The exercise
price for non-qualified stock options granted to non-directors will not be less
than the par value of a share of common stock, as determined by a committee
appointed by AM's Board of Directors ("the Committee"). The exercise price for
non-qualified stock options granted to directors may not be less than the
underlying stock's fair market value at the grant date.
Options granted to non-directors generally vest and become exercisable as
determined by the Committee. Options granted to directors generally vest and
become exercisable over a three-year period. Options granted to non-directors
generally expire upon the earlier of the termination of the optionee's
employment or ten years from the grant date. Options granted to directors
generally expire upon the earlier of the date the optionee is no longer a
director or five years from the grant date.
STOCK OPTION ACTIVITY:
Activity for 1994, 1995 and 1996 with respect to these plans is as follows:
<TABLE>
<CAPTION>
SHARES
UNDERLYING OPTION PRICE
OPTIONS PER SHARE
---------- --------------
<S> <C> <C>
Outstanding at December 31, 1993........................................... 470,656 $ 4.47-$16.94
Canceled................................................................. (143,150) $ 6.93-$16.94
----------
Outstanding at December 31, 1994........................................... 327,506 $ 4.47-$16.94
Granted.................................................................. 1,270,107 $ 1.81-$ 3.03
Canceled................................................................. (504,796) $ 1.81-$16.94
----------
Outstanding at December 31, 1995........................................... 1,092,817 $ 1.81-$ 6.93
Granted.................................................................. 2,860,620 $ 2.28-$ 3.78
Exercised................................................................ (14,125) $ 1.81-$ 1.81
Canceled................................................................. (311,466) $ 1.81-$ 3.47
----------
Outstanding at December 31, 1996........................................... 3,627,846 $ 1.81-$ 6.93
----------
----------
</TABLE>
At December 31, 1996 options for 691,196 shares were exercisable at $1.81 --
$6.93 under the plans and 1,984,847 shares were available for future grant.
Additionally, as of December 31, 1996, 5,612,693 shares of common stock were
reserved for issuance pursuant to AM's stock option plans.
The Company adopted Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123) during the year ended December 31, 1996. In
accordance with the provisions of SFAS 123, the Company applied APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plans and does not recognize compensation expense for its
stock-based compensation plans other than for options granted to non-employees.
If the Company had elected to recognize compensation expense based upon the fair
value at the grant date for awards under
F-26
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 7--STOCK OPTION PLANS (CONTINUED)
these plans consistent with the methodology prescribed by SFAS 123, the
Company's net income would be reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
--------- ----------
<S> <C> <C>
Net income (loss):
As reported............................................................ $ 8,266 $ (50,674)
Pro forma.............................................................. $ 7,787 $ (51,909)
</TABLE>
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 assumptions for the years ended
December 31, 1996 and 1995, respectively; dividend yields of 0%, expected
volatility of 180% and 183%, risk free interest rates of 6.2% and 6.5%, and
expected lives ranging from 2 to 7 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because AM'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, 1996:
OPTIONS OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE-YEARS PRICE EXERCISABLE PRICE
- ------------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$1.81-$2.94 1,220,962 8.04 $ 2.08 216,062 $ 1.94
$3.00-$3.78 2,410,484 9.85 $ 3.07 466,734 $ 3.08
$6.93-$6.93 400 3.81 $ 6.93 400 $ 6.93
----------- -----------
3,631,846 683,196
----------- -----------
----------- -----------
</TABLE>
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 31, 1993. All earned benefits as of that date were preserved and
the Company will
F-27
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 8--BENEFIT PLANS (CONTINUED)
continue to contribute to the Plan as necessary to fund earned benefits. No
contributions to the Plan were required during 1994, 1995 or 1996 due to the
prepaid position of the Plan during those years.
The following table sets forth the Plan's estimated funded status and
amounts recognized in the Company's balance sheet:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation....................................................... $ 10,343 $ 9,733
--------- ---------
--------- ---------
Accumulated benefit obligation.................................................. $ 10,440 $ 9,822
--------- ---------
--------- ---------
Projected benefit obligation for service rendered to date......................... $ 10,440 $ 9,822
Plan assets at fair value, consisting of equity and fixed income mutual funds..... 11,305 13,053
--------- ---------
Plan assets greater than projected benefit obligation............................. 865 3,231
Unrecognized net gain............................................................. (697) (2,940)
--------- ---------
Prepaid pension cost.............................................................. $ 168 $ 291
--------- ---------
--------- ---------
</TABLE>
The components of net periodic pension cost (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Service cost during the period.......................................... $ 143 $ 146 $ 181
Interest cost on projected benefit obligation........................... 631 608 706
Actual return on Plan assets............................................ 263 (2,494) (1,896)
Amortization and deferred amounts....................................... (1,075) 1,666 886
--------- --------- ---------
Net periodic pension cost (benefit)..................................... $ (38) $ (74) $ (123)
--------- --------- ---------
--------- --------- ---------
Assumptions used in the accounting are as follows:
Discount rates........................................................ 8.56% 6.82% 7.45%
Rates of increase in compensation levels.............................. N/A N/A N/A
Expected long-term rates of return on assets.......................... 9.00% 9.00% 9.00%
</TABLE>
F-28
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 9--LEASES
LEASE RECEIVABLES:
The Company leases instruments to customers under capital and operating
lease contracts with terms ranging generally from 1 to 6 years. Certain capital
lease agreements obligate the lessee to purchase a specified annual minimum of
disposable sets and payment of liquidating damages if the agreement is
terminated by the lessee. Anticipated future minimum lease receivables as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31: LEASES LEASES
- ------------------------------------------------------------------------ --------- -----------
<S> <C> <C>
1997.................................................................... $ 20,530 $ 2,023
1998.................................................................... 15,029 1,688
1999.................................................................... 10,640 1,417
2000.................................................................... 5,896 688
2001.................................................................... 2,235 53
Thereafter.............................................................. 2,204 30
--------- -----------
Total minimum lease receivables......................................... $ 56,534 $ 5,899
--------- -----------
--------- -----------
</TABLE>
The net investment in sales-type leases consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
--------- ----------
<S> <C> <C>
Minimum lease payments................................................. $ 25,978 $ 56,534
Unguaranteed residual value of leased equipment........................ 727 789
Unearned interest income............................................... (4,096) (10,750)
Allowance for uncollectible receivables................................ (396) (2,502)
--------- ----------
Net investment in sales-type leases.................................... 22,213 44,071
Current portion........................................................ (7,034) (16,795)
--------- ----------
Net investment in long-term portion of sales-type leases............... $ 15,179 $ 27,276
--------- ----------
--------- ----------
</TABLE>
Operating lease revenue totaled $2,033, $1,476 and $1,521 during 1994, 1995
and 1996, respectively.
F-29
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 9--LEASES (CONTINUED)
LEASE COMMITMENTS:
The Company leases buildings and equipment under non-cancelable operating
leases with terms ranging from 2 to 10 years. Scheduled future minimum lease
commitments as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
- -----------------------------------------------------------------------------------
<S> <C>
1997............................................................................... $ 4,838
1998............................................................................... 3,738
1999............................................................................... 3,355
2000............................................................................... 3,125
2001............................................................................... 3,144
Thereafter......................................................................... 14,301
---------
$ 32,501
---------
---------
</TABLE>
Rental expense was $3,679, $3,138 and $3,468 during 1994, 1995 and 1996,
respectively.
NOTE 10--RESTRUCTURING CHARGES
In connection with the Merger, management performed an extensive review of
the operating activities of both IMED and IVAC Medical Systems 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 plans and other administrative
functions. As a result, the Company has recorded a non-recurring charge related
to the implementation of these plans in the amount of approximately $15,300 in
1996.
The following summarizes the significant components of the Company's 1996
restructuring and integration charge included in the Consolidated Statement of
Operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31, 1996
-------------------
(IN MILLIONS)
<S> <C>
RESTRUCTURING
Severance and related benefits............................................................... $ 4.4
Cost to vacate facilities.................................................................... 3.4
Write-off of unused furniture, fixtures and equipment........................................ 1.5
Distributor terminations..................................................................... .8
Other........................................................................................ .5
-----
Total restructuring........................................................................ 10.6
INTEGRATION
Consulting and bonuses....................................................................... 4.7
-----
Total restructuring and integration........................................................ $ 15.3
-----
-----
</TABLE>
F-30
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 10--RESTRUCTURING CHARGES (CONTINUED)
Additionally, estimated dealer termination costs as well as severance and
benefits costs related to the acquired company's personnel in the amount of
approximately $2,800 were also accrued at the acquisition date. The remaining
unpaid portion of approximately $2,700 is included in accrued restructuring
costs at December 31, 1996 and is expected to be paid during 1997. In accordance
with generally accepted accounting principles, such items effectively increased
the amount of goodwill recorded in connection with the Merger and were not
included in the approximately $15,300 restructuring and integration expense
included in the consolidated statement of operations for the year ended December
31, 1996. At December 31, 1996, the Company has approximately $15,100 accrued
related to restructuring and integration costs.
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.
Approximately $260 of termination costs were paid during 1996.
NOTE 11--RELATED PARTY ARRANGEMENTS AND COMMITMENTS
In October 1991, IMED sold certain European assets to Pharmacia & Upjohn
("Pharmacia") and entered into a marketing, distribution and development
arrangement with AM and 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. In August 1994,
AM, IMED and Pharmacia amended their distribution agreement. Under the terms of
the Amended and Restated Distribution Agreement ("Amended Distribution
Agreement"), Pharmacia retained the exclusive right (subject to certain
exceptions) to distribute IMED's infusion products in the territory that
included most of Europe. Under the Amended Distribution Agreement, Pharmacia had
the right not to distribute certain products currently under development by
IMED. In the event of such an election, IMED had the right to sell such products
directly or through others, and under certain circumstances, has the right to
repurchase from Pharmacia the distribution rights to IMED products currently
distributed by Pharmacia in the territory. During 1996, AM and IMED entered into
an agreement with Pharmacia to reacquire for approximately $11,000 the European
distribution rights to IMED's intravenous infusion pumps and related disposable
administration sets and certain related assets. The purchase price was allocated
between the tangible assets and the distribution fee based upon their estimated
fair values. The amount allocated to the distribution fee has been capitalized
net of the unamortized deferred revenue resulting from the 1991 sale of the
aforesaid European distribution rights to Pharmacia which was being amortized
over the 15-year term of the original distribution agreement. The net
distribution fee is being amortized over approximately 10 years, which
represents the remaining term of the original distribution agreement.
In June 1996, AM purchased GECC's warrant to acquire common shares equal to
10% of IMED's common stock, on a fully diluted basis, for $12,500. The warrant
acquired by AM was then canceled (Note 6).
Effective June 30, 1996, AM made non-cash contributions totaling $41,160 to
IMED. Included in this capital contribution was $2,885, representing AM's net
carrying value of certain patents which up to June 30, 1996 had been licensed to
IMED for $1,100 per year. Amounts accrued to AM under this license,
F-31
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 11--RELATED PARTY ARRANGEMENTS AND COMMITMENTS (CONTINUED)
as well as other intercompany charges due to AM totaling $9,399 were contributed
to IMED. Additionally, AM contributed $8,776 representing the outstanding par
value and accrued dividends on all outstanding shares of the Company's 12%
preferred stock. The preferred shares were then canceled (Note 6).
Included in the $41,160 non cash contribution were tax payments due from
IMED to AM. Pursuant to IMED's tax sharing agreement with AM, for Federal and
California income tax purposes, IMED was required to calculate its current
income tax liability on a stand-alone basis as if it were not included in the AM
consolidated income tax return. The resulting tax liability was payable to AM.
Due to restrictions on payments from IMED to AM contained in the GECC revolving
credit facility agreement, income tax payments to AM were limited to actual tax
liabilities of the AM consolidated group. Due to losses incurred at the AM level
which have served to reduce the consolidated taxable income, the income tax
liabilities recorded by IMED on a stand-alone basis have been significantly
greater than the amounts actually paid to AM. As of June 30, 1996 AM agreed to
contribute to IMED's stockholder's equity, income tax payments due from IMED but
which could not be paid pursuant to the GECC revolving credit facility. As a
result of this agreement, approximately $20,100 was credited to IMED's capital
in excess of par and the corresponding income tax liabilities were eliminated
from the IMED consolidated balance sheet. Such liabilities amounted to
approximately $18,900 at December 31, 1995 and were included in non-current
liabilities as amounts due to related parties at December 31, 1995.
During November 1996, in connection with the Merger, AM contributed $19,588
to IMED.
F-32
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 12--GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
SALES TO UNAFFILIATED CUSTOMERS:
United States.................................................... $ 99,228 $ 102,830 $ 111,877
Australia........................................................ 5,020 5,841 7,723
United Kingdom................................................... -- -- 6,100
Canada........................................................... 3,489 3,880 5,377
Other............................................................ 4,385 -- 5,294
---------- ---------- ----------
Sales as reported in the accompanying statement of
operations................................................... $ 112,122 $ 112,551 $ 136,371
---------- ---------- ----------
---------- ---------- ----------
INTERGEOGRAPHIC SALES:
United States.................................................... $ 7,668 $ 6,973 $ 17,133
United Kingdom................................................... -- -- 2,891
Other............................................................ 6,565 -- --
---------- ---------- ----------
Total intergeographic sales.................................... $ 14,233 $ 6,973 $ 20,024
---------- ---------- ----------
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES:
United States.................................................... $ 14,276 $ 16,650 $ (45,023)
Australia........................................................ 753 1,123 1,253
United Kingdom................................................... -- -- (2,050)
Canada........................................................... (289) (194) (248)
Other............................................................ 1,633 -- 468
Lease interest income............................................ 2,449 2,333 2,501
Eliminations and adjustments..................................... (1,813) (1,144) (509)
---------- ---------- ----------
Income (loss) from operations.................................... 17,009 18,768 (43,608)
---------- ---------- ----------
Interest expense................................................. (2,805) (2,052) (6,303)
Interest income.................................................. 12 28 184
Other, net....................................................... (261) (379) 323
---------- ---------- ----------
Income (loss) before income taxes.............................. $ 13,955 $ 16,365 $ (49,404)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
IDENTIFIABLE ASSETS:
United States................................................................. $ 124,756 $ 546,088
Australia..................................................................... 3,794 6,405
United Kingdom................................................................ -- 28,243
Canada........................................................................ 3,258 5,855
Other......................................................................... 51 24,583
Eliminations and adjustments.................................................. (9,262) (25,033)
---------- ----------
Total assets as reported in the accompanying balance sheet.................. $ 122,597 $ 586,141
---------- ----------
---------- ----------
</TABLE>
F-33
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 12--GEOGRAPHIC INFORMATION (CONTINUED)
Other sales to unaffiliated customers, intergeographic sales and income
(loss) before income taxes include results of operations in Germany, Spain,
France, Sweden, Holland, and Belgium that are individually less than 10% of the
absolute amount of sales to unaffiliated customers, intergeographic sales and
income (loss) before income taxes.
NOTE 13--SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS
Federal, state and foreign income taxes paid during 1994, 1995 and 1996
totaled $1,325, $1,487 and $3,592, respectively. Interest paid during 1994, 1995
and 1996 totaled $2,365, $1,765 and $1,865, respectively.
NOTE 14--LITIGATION AND CONTINGENCIES
The Company is a defendant in a lawsuit which alleges infringement of two
patents by reason of certain activities including the sale of disposable probe
covers for use with tympanic thermometers. The lawsuit seeks injunctive relief,
treble damages and the recovery of costs and attorney fees. The discovery phase
of the lawsuit has recently commenced. The Company is currently unable to
quantify its exposure to this lawsuit; however, the Company believes it has
sufficient defenses to all claims, including the defenses of noninfringement and
invalidity. However, there can be no assurance that the Company will
successfully defend all claims 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 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.
NOTE 15--GUARANTOR SUBSIDIARY
Two wholly-owned subsidiaries of the Company have provided full and
unconditional guarantees of the Notes. The guarantors are IMED International
Trading Corporation (ITC), a former IMED Subsidiary, and IVAC Overseas Holdings,
Inc. (OSH), a former IVAC Holdings Subsidiary. Separate financial statements of
the guarantors are not presented as management has determined that they would
not be material to investors. ITC's net assets are comprised as intangible asset
(IMED production distribution rights) and an intercompany liability. OSH's net
assets are comprised of its ownership interest in three wholly-owned foreign
subsidiaries which distribute the Company's products.
The Condensed Consolidating Financial Statements of the parent, the
guarantors and non guarantors follows. Investments in subsidiaries are accounted
for using the equity method. Since ITC was not formed until August 1990 and OSH
was not a subsidiary of the Company until completion of the Merger in November
1996, Condensed Consolidating Financial Statements have not been presented for
periods prior to 1996.
F-34
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 15--GUARANTOR SUBSIDIARY (CONTINUED)
CONDENSED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
---------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Current assets................................. $ 138,117 $ 1 $ 40,006 $ 178,124
Non-current assets............................. 407,844 37,372 68,101 $ (105,300) 408,017
---------- ----------- -------------- ----------- ------------
$ 545,961 $ 37,373 $ 108,107 $ (105,300) $ 586,141
---------- ----------- -------------- ----------- ------------
---------- ----------- -------------- ----------- ------------
Current liabilities............................ $ 74,776 -- $ 18,879 $ 93,655
Amounts due to related parties, net............ (21,305) $ 8,194 13,111 --
Long-term debt and other liabilities........... 442,465 -- -- 442,465
---------- ----------- -------------- ----------- ------------
$ 495,936 $ 8,194 $ 31,990 $ -- $ 536,120
---------- ----------- -------------- ----------- ------------
Common stock and other stockholder's equity.... 50,025 29,179 76,117 (105,300) 50,021
---------- ----------- -------------- ----------- ------------
$ 545,961 $ 37,373 $ 108,107 $ (105,300) $ 586,141
---------- ----------- -------------- ----------- ------------
---------- ----------- -------------- ----------- ------------
</TABLE>
CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
---------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Sales.......................................... $ 128,956 $ 904 $ 26,535 $ (20,024) $ 136,371
Cost of sales.................................. 79,646 1,116 17,904 (20,024) 78,642
---------- ----------- -------------- ----------- ------------
49,310 (212) 8,631 -- 57,729
Operating expenses............................. 94,747 -- 9,091 -- 103,838
Lease interest income.......................... 2,501 -- -- 2,501
Loss from operations........................... (42,936) (212) (460) -- (43,608)
Other income (expense)......................... (6,209) -- 413 (5,796)
Equity interest in subsidiary income........... (1,066) 4 -- 1,062 --
Provision for income taxes..................... 459 -- 811 1,270
---------- ----------- -------------- ----------- ------------
Net income (loss)............................ $ (50,670) $ (208) $ (858) $ 1,062 $ (50,674)
---------- ----------- -------------- ----------- ------------
---------- ----------- -------------- ----------- ------------
</TABLE>
F-35
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 15--GUARANTOR SUBSIDIARY (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
---------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating activities...... $ 16,065 $ -- $ 611 $ 16,676
Cash flows from investing activities:
Capital expenditures......................... (5,894) -- (3,608) (9,502)
Proceeds from disposal of property, plant and
equipment.................................. 106 -- -- 106
Payments for product distribution rights..... (1,722) (8,251) (2,583) (12,556)
Acquisition, net of cash acquired............ (224,602) -- 5,143 (219,459)
---------- ----------- -------------- ----------- ------------
Net cash used in investing activities.......... (232,112) (8,251) (1,048) -- (241,411)
---------- ----------- -------------- ----------- ------------
Cash flows from financing activities:
Net proceeds under former revolving credit
facilities................................. 10,006 -- -- 10,006
Principal payments on long-term debt......... (140) -- -- (140)
Dividends on preferred stock................. (4,067) -- -- (4,067)
Redemption of preferred stock................ (3,350) -- -- (3,350)
Debt issuance costs.......................... (16,888) -- -- (16,888)
Debt repaid in merger........................ (186,607) -- -- (186,607)
Capital contributions........................ 19,588 -- -- 19,588
Proceeds from issuance of long-term debt..... 400,000 -- -- 400,000
Proceeds from revolving credit facility...... 15,200 -- -- 15,200
(Decrease) increase in due to Guarantor...... -- (3,543) 3,543 --
(Decrease) increase in due to Parent......... (16,091) 11,795 4,296 --
---------- ----------- -------------- ----------- ------------
Net cash provided by financing activities...... 217,651 8,252 7,839 -- 233,742
---------- ----------- -------------- ----------- ------------
Effect of exchange rate changes on cash........ -- -- (295) (295)
---------- ----------- -------------- ----------- ------------
Net increase in cash........................... 1,604 1 7,107 -- 8,712
Cash at beginning of period.................... 209 -- 227 436
---------- ----------- -------------- ----------- ------------
Cash at end of period.......................... $ 1,813 $ 1 $ 7,334 $ -- $ 9,148
---------- ----------- -------------- ----------- ------------
---------- ----------- -------------- ----------- ------------
</TABLE>
F-36
<PAGE>
IVAC HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER SEPTEMBER
31, 30,
1995 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 18,308 $ 10,447
Accounts receivable, net........................................ 54,133 46,435
Current portion of contract receivables, net.................... 5,414 6,034
Inventories, net................................................ 34,625 39,646
Prepaid expenses and other assets............................... 3,143 2,490
----------- ------------
Total current assets...................................... 115,623 105,052
Long-term contract receivables, net............................... 19,957 18,232
Property, plant and equipment, net................................ 48,277 44,966
Intangible assets, net............................................ 30,893 21,105
Other long-term assets............................................ 1,245 1,626
----------- ------------
$ 215,995 $ 190,981
----------- ------------
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued warranty........................... $ 21,355 $ 20,565
Accrued employee liabilities.................................... 9,528 8,182
Current portion of long-term debt............................... 8,091 17,534
Other current liabilities....................................... 34,799 34,599
----------- ------------
Total current liabilities................................. 73,773 80,880
Long-term debt.................................................... 157,694 142,955
Other non-current liabilities..................................... 5,043 2,737
Shareholders' equity (deficit):
Common stock:
Class A, $.01 par value; 60,000,000 shares authorized;
20,000,938 and 20,017,627 issued and outstanding at December
31, 1995 and September 30, 1996, respectively................. 200 200
Class B, $.01 par value; 20,000,000 shares authorized;
19,532,630 and 19,654,744 issued and outstanding at December
31, 1995 and September 30, 1996, respectively................. 195 197
Additional paid-in capital...................................... 33,308 33,458
Note receivable from stockholder................................ (8 ) (6 )
Deferred compensation........................................... -- (64 )
Accumulated deficit............................................. (56,057 ) (70,166 )
Foreign currency translation adjustment......................... 1,847 790
----------- ------------
Total shareholders' equity (deficit)...................... (20,515 ) (35,591 )
----------- ------------
$ 215,995 $ 190,981
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
F-37
<PAGE>
IVAC HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Net sales.............................................................................. $ 174,663 $ 170,155
Cost of sales.......................................................................... 118,255 98,836
---------- ----------
Gross profit................................................................... 56,408 71,319
Sales and marketing.................................................................... 32,470 28,872
General and administrative............................................................. 18,529 17,479
Research and development............................................................... 10,111 7,663
Restructuring and special items........................................................ 4,460 17,396
Purchased research and development..................................................... 19,883 --
---------- ----------
Total operating expense........................................................ 85,453 71,410
Contract interest income............................................................... 2,130 1,812
---------- ----------
(Loss) income from operations.................................................. (26,915) 1,721
Interest expense, net.................................................................. (19,686) (13,396)
---------- ----------
Loss before income taxes............................................................... (46,601) (11,675)
Provision for (benefit from) income taxes.............................................. (3,270) 2,434
---------- ----------
Net loss............................................................................... $ (43,331) $ (14,109)
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
F-38
<PAGE>
IVAC HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1995 1996
----------- ----------
<S> <C> <C>
Net cash provided by operating activities............................................. $ 28,544 $ 15,485
Cash flows from investing activities:
Acquisitions, net of cash and cash equivalents acquired............................. (185,955) --
Capital expenditures, net........................................................... (7,738) (12,957)
----------- ----------
Net cash used by investing activities................................................. (193,693) (12,957)
----------- ----------
Cash flows from financing activities:
Capital contributions............................................................... 20,000 --
Borrowings under term loan and revolving credit arrangements........................ 68,500 3,000
Exercise of stock options........................................................... -- 37
Payment on note receivable from stockholder......................................... -- 2
Proceeds from bridge notes.......................................................... 80,000 --
Proceeds from junior notes.......................................................... 30,000 --
Repayment of term loan and revolving debt........................................... (10,000) (7,500)
Payment of other debt obligations................................................... -- (4,533)
Debt issue costs.................................................................... (6,566) (39)
Capital lease payments.............................................................. (260) (299)
----------- ----------
Net cash (used) provided by financing activities...................................... 181,674 (9,332)
----------- ----------
Effect of exchange rate changes on cash............................................... 1,401 (1,057)
----------- ----------
Net (decrease) increase in cash and cash equivalents.................................. 17,926 (7,861)
Cash and cash equivalents at the beginning of the period.............................. 0 18,308
----------- ----------
Cash and cash equivalents at the end of the period.................................... $ 17,926 $ 10,447
Supplemental disclosure of non-cash financing activities:
Contribution of River capital stock................................................. $ 13,333 --
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
F-39
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 1--BUSINESS
IVAC Holdings, Inc. ("Holdings" or the "Company"), through its wholly owned
subsidiaries, designs, manufactures, distributes and services intravenous
infusion therapy and vital signs measurement instruments and related disposables
and accessories. The Company sells a full range of products to hospitals and
alternate site facilities in the United States, Canada and Europe.
In management's opinion, the accompanying unaudited condensed consolidated
financial statements of the Company for the nine months ended September 30, 1996
and 1995 have been prepared in accordance with generally accepted accounting
principles for interim financial statements and include all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of the financial position, results of operations and cash flows for all periods
presented. All such financial statements are unaudited except for the December
31, 1995 balance sheet. The unaudited condensed consolidated financial
statements include the accounts and results of operations of the Company and its
subsidiaries, all of which are wholly owned. All significant intercompany
balances and transactions have been eliminated. Interim operating results are
not necessarily indicative of operating results for the full year. These
financial statements should be read in conjunction with the financial statements
and notes thereto for the year ended December 31, 1995.
NOTE 2--INVENTORIES
Inventories at December 31, 1995 and September 30, 1996 consisted of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Finished products............................................... $ 14,998 $ 16,464
Work-in-process................................................. 3,472 7,237
Raw materials................................................... 17,867 19,254
------------ -------------
36,337 42,955
Less reserves................................................... (1,712) (3,309)
------------ -------------
$ 34,625 $ 39,646
------------ -------------
------------ -------------
</TABLE>
NOTE 3--LONG-TERM DEBT
On March 29, 1996, the Company amended and restated its Bank Credit
Facility. Outstanding indebtedness under the amended and restated senior credit
facility (the "Facility") matures on March 29, 1999. The facility provides for
borrowings of up to $40,000 and is secured by substantially all of the Company's
domestic assets. Borrowings under the Facility bear interest at a rate equal to
the Alternate Base Rate (as defined in the Facility) plus 0.25% or Adjusted
LIBOR plus 1.50%, at the option of the Company. The interest rate is also
subject to change quarterly based upon certain debt and interest coverage
ratios. The Company has in place an interest rate swap agreement to fix the rate
of interest payable on a portion of the term loan principal borrowed under the
Bank Credit Facility. The interest rate swap agreement was not amended or
terminated in connection with the amendment and restatement of the Bank Credit
Facility.
F-40
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 4--LITIGATION
The Company is a party to various other legal actions which have occurred in
the normal course of business. Management believes the Company has meritorious
defenses and intends to defend vigorously against these allegations and claims.
In management's opinion, liabilities arising from the above matters, if any,
will not have a material adverse effect on the Company's consolidated financial
position or results of operations.
NOTE 5--RIVER MEDICAL, INC. DIVESTITURE
The Company closed River on June 30, 1996 and is divesting the subsidiary's
assets. River's primary assets include patents, technologies, trade secrets,
inventories and manufacturing equipment which were unique to River. During the
three months ended June 30, 1996, the Company recorded a restructuring charge of
$17,396, including the write down of $5,280 in intangibles, $5,137 in property
and equipment and $1,395 of inventory, based upon estimated salvage and resale
values of the assets. The restructuring charge also included approximately
$5,584 in exit and severance costs calculated at the present value of the
estimated amount to be paid. At September 30, 1996, the related accrual balance
of $6,159 was comprised primarily of severance, legal and building lease costs.
Revenues directly attributable to River for the nine-month periods ended
September 30, 1995 and 1996 were $555 and $373, respectively. Related costs and
expenses were $14,660 and $19,259, respectively.
NOTE 6--MERGER AGREEMENT
On August 23, 1996, the Company entered into an Agreement and Plan of Merger
among the Company, IVAC Medical Systems, Inc., IMED Corporation ("IMED"), a
subsidiary of ALARIS Medical, Inc. (f/k/a Advanced Medical, Inc.), a wholly
owned subsidiary of IMED and the holders of Common Stock of Holdings named
therein, pursuant to which IMED will acquire, directly or indirectly through a
wholly owned subsidiary, 100% of the capital stock of Holdings for approximately
$400,000 less certain indebtedness.The proposed transaction received regulatory
approval in October 1996 and is subject to certain other closing conditions,
including the completion of the financing necessary to consummate the merger
(the "Merger").
NOTE 7--GUARANTOR SUBSIDIARY
Following the consummation of the Merger, the operations of IMED and IVAC
Medical Systems, Inc. will be transferred to Holdings and Holdings will become
the successor obligor under the Senior Subordinated Notes due 2006 of IMED (the
"IMED Notes") that will be issued in connection with the Merger. In addition,
IVAC Overseas Holding, Inc. (OSH), a wholly-owned subsidiary of Holdings, along
with an IMED subsidiary will provide a full and unconditional guarantee of the
IMED Notes. OSH's net assets are comprised of intercompany liabilities and its
ownership interest in three wholly-owned foreign subsidiaries which distribute
IVAC products. Separate financial statements of OSH are not presented as
management has determined that they would not be material to investors.
Accordingly, condensed
F-41
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 7--GUARANTOR SUBSIDIARY (CONTINUED)
combining financial information for Holdings and its guarantor and non-guarantor
subsidiaries at September 30, 1996 and for the nine months ended September 30,
1996, with investments in subsidiaries accounted for using the equity method, is
as follows:
<TABLE>
<CAPTION>
NON
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
- ----------------------------------------------------
Current assets...................................... $ 64,367 $ 41,178 -- $ (493) $ 105,052
Non-current assets.................................. 101,102 9,146 $ 13,741 (38,060) 85,929
---------- ----------- ----------- ------------ ------------
$ 165,469 $ 50,324 $ 13,741 $ (38,553) $ 190,981
---------- ----------- ----------- ------------ ------------
---------- ----------- ----------- ------------ ------------
Current liabilities................................. $ 60,431 $ 29,486 $ 5,465 $ (14,502) $ 80,880
Long-term debt and other liabilities................ 145,692 -- -- -- 145,692
---------- ----------- ----------- ------------ ------------
206,123 29,486 5,465 (14,502) 226,572
Common stock and other shareholders' equity......... (40,654) 20,838 8,276 (24,051) (35,591)
---------- ----------- ----------- ------------ ------------
$ 165,469 $ 50,324 $ 13,741 $ (38,553) $ 190,981
---------- ----------- ----------- ------------ ------------
---------- ----------- ----------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
NON
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
- ----------------------------------------------------
Net sales........................................... $ 141,066 $ 63,703 -- $ (34,614) $ 170,155
Cost of sales....................................... 88,494 45,561 -- (35,219) 98,836
---------- ----------- ----------- ------------ ------------
52,572 18,142 -- 605 71,319
Operating expenses.................................. 38,275 33,894 -- (759) 71,410
Interest (income) expense, net...................... 10,097 1,487 -- 11,584
---------- ----------- ----------- ------------ ------------
Income (loss) before income taxes and equity
interest in subsidiary income...................... 4,200 (17,239) -- 1,364 (11,675)
Equity interest in subsidiary income................ -- -- $ 166 (166) --
Provision for (benefit from) income taxes........... 3,230 (796) 58 (58) 2,434
---------- ----------- ----------- ------------ ------------
Net income (loss)................................... $ 970 $ (16,443) $ 108 $ 1,256 $ (14,109)
---------- ----------- ----------- ------------ ------------
---------- ----------- ----------- ------------ ------------
</TABLE>
F-42
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 7--GUARANTOR SUBSIDIARY (CONTINUED)
<TABLE>
<CAPTION>
NON
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CONDENSED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
- ----------------------------------------------------
Net cash (used) provided by operating activities.... $ 30,818 $ (14,896) -- $ (437) $ 15,485
Cash flows from investing activities:
Intercompany advances to River Medical............ (9,165) -- 9,165 --
Intercompany advances from Parent................. 9,165 (9,165) --
Capital expenditures, net......................... (9,493) (4,480) 1,016 (12,957)
---------- ----------- ----------- ------------ ------------
Net cash (used) provided by investing activities.... (18,658) 4,685 -- 1,016 (12,957)
---------- ----------- ----------- ------------ ------------
Cash flows from financing activities:
Borrowings under term loan and revolving credit
arrangements.................................... 3,000 -- 3,000
Exercise of stock options......................... 37 -- 37
Payment on note receivable from stockholder....... 2 -- 2
Repayment of term loan and revolving debt......... (7,500) -- (7,500)
Payment of other debt obligations................. (4,533) -- (4,533)
Debt issue costs.................................. (39) -- (39)
Capital lease payments............................ -- (299) (299)
---------- ----------- ----------- ------------ ------------
Net cash (used) provided by financing activities.... (9,033) (299) -- -- (9,332)
---------- ----------- ----------- ------------ ------------
Effect of exchange rate changes on cash............. (478) (579) (1,057)
---------- ----------- ----------- ------------ ------------
Net (decrease) increase in cash and cash
equivalents........................................ 3,127 (10,988) -- -- (7,861)
Cash and cash equivalents at the beginning of the
period............................................. 2,203 16,105 -- -- 18,308
---------- ----------- ----------- ------------ ------------
Cash and cash equivalents at the end of the
period............................................. $ 5,330 $ 5,117 -- -- $ 10,447
---------- ----------- ----------- ------------ ------------
---------- ----------- ----------- ------------ ------------
</TABLE>
F-43
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
IVAC Holdings, Inc.
In our opinion, the, accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of shareholders' equity
(deficit) present fairly, in all material respects, the financial position of
IVAC Holdings, Inc. and its subsidiaries at December 31, 1995, and the results
of their operations and their cash flows for the year 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 audit. We conducted our audit
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 audit provides a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Diego, California
March 29, 1996
F-44
<PAGE>
IVAC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................................... $ 18,308
Accounts receivable, net.......................................................................... 54,133
Current portion of contract receivables, net...................................................... 5,414
Inventories....................................................................................... 34,625
Prepaid expenses and other assets................................................................. 3,143
-------------
Total current assets.......................................................................... 115,623
Long-term contract receivables, net................................................................. 19,957
Property, plant and equipment, net.................................................................. 48,277
Intangible assets, net.............................................................................. 30,893
Other long-term assets.............................................................................. 1,245
-------------
$ 215,995
-------------
-------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................................................................. $ 14,407
Accrued warranty.................................................................................. 6,948
Accrued employee liabilities...................................................................... 9,528
Current portion of long-term debt................................................................. 8,091
Other current liabilities......................................................................... 34,799
-------------
Total current liabilities..................................................................... 73,773
Long-term debt...................................................................................... 157,694
Other non-current liabilities....................................................................... 5,043
Commitments and contingencies (Note 11)
Shareholders' equity (deficit):
Common stock:
Class A, $.01 par value; 60,000,000 shares authorized;
20,000,938 issued and outstanding............................................................... 200
Class B, $.01 par value; 20,000,000 shares authorized;
19,532,630 issued and outstanding............................................................... 195
Additional paid-in capital.......................................................................... 33,308
Note receivable from shareholder.................................................................... (8)
Accumulated deficit................................................................................. (56,057)
Foreign currency translation adjustment............................................................. 1,847
-------------
Total shareholders' equity (deficit).......................................................... (20,515)
-------------
$ 215,995
-------------
-------------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-45
<PAGE>
IVAC HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Net sales........................................................................................... $ 240,971
Cost of sales............................................................................... 157,869
------------
Gross profit........................................................................................ 83,102
Sales and marketing................................................................................. 43,994
General and administrative.......................................................................... 28,381
Research and development............................................................................ 12,083
Purchased research and development.................................................................. 22,883
Restructuring and special items..................................................................... 5,944
Other expense, net.................................................................................. 1,497
------------
Total operating expense..................................................................... 114,782
Contract interest income............................................................................ 3,013
------------
Loss from operations........................................................................ (28,667)
Interest expense, net............................................................................... (27,476)
------------
Loss before income taxes............................................................................ (56,143)
Benefit from income taxes........................................................................... 378
------------
Net loss............................................................................................ $ (55,765)
------------
------------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-46
<PAGE>
IVAC HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
Cash flows from operating activities:
Net loss....................................................................................... $ (55,765)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization................................................................ 23,736
Debt issuance cost amortization.............................................................. 5,902
Purchased research and development........................................................... 22,883
Deferred income taxes........................................................................ (1,898)
Gain on disposal of property, plant and equipment............................................ (55)
Accretion of discount on Junior Subordinated Notes and Siemens Infusion System Debt.......... 4,664
Changes in assets and liabilities:
Receivables................................................................................ (11,837)
Inventories................................................................................ 23,176
Prepaid expenses and other assets.......................................................... 223
Accounts payable........................................................................... 4,975
Accrued warranty........................................................................... (557)
Accrued employee liabilities............................................................... (900)
Other current liabilities.................................................................. 9,265
Other non-current liabilities.............................................................. (829)
Payables to and receivables from Lilly, net................................................ 15,160
--------
Net cash provided by operating activities.............................................. 38,143
--------
Cash flows from investing activities:
Acquisitions, net of cash and cash equivalents acquired...................................... (190,793)
Capital expenditures, net.................................................................... (13,752)
Proceeds from sale of facility, net.......................................................... 25,258
--------
Net cash used by investing activities.................................................. (179,287)
--------
Cash flows from financing activities:
Capital contributions........................................................................ 20,000
Exercise of stock options.................................................................... 70
Borrowings under term loan and revolving credit arrangements................................. 68,500
Proceeds from bridge notes................................................................... 80,000
Proceeds from senior notes................................................................... 100,000
Proceeds from junior subordinated notes...................................................... 30,000
Repayment of term loan and revolving debt.................................................... (49,000)
Repayment of bridge notes.................................................................... (80,000)
Debt issue costs............................................................................. (11,486)
Capital lease payments....................................................................... (479)
--------
Net cash provided by financing activities.............................................. 157,605
--------
Effect of exchange rate changes on cash........................................................ 1,847
--------
Net increase in cash and cash equivalents...................................................... 18,308
Cash and cash equivalents at the beginning of the year......................................... 0
--------
Cash and cash equivalents at the end of the year............................................... $ 18,308
--------
--------
Supplemental disclosure of cash flow information:
Cash paid for interest....................................................................... $ 15,380
Cash paid for income taxes................................................................... $ 12
Supplemental disclosure of non-cash financing activities:
Contribution of River capital stock.......................................................... $ 13,333
Stock dividend (3 for 1)..................................................................... $ 292
Capital lease financing...................................................................... $ 1,200
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-47
<PAGE>
IVAC HOLDINGS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------------------------------------------------------
CLASS A CLASS B FOREIGN TOTAL
COMMON STOCK COMMON STOCK ADDITIONAL SHAREHOLDER CURRENCY SHAREHOLDERS'
------------------ ------------------ PAID-IN NOTE ACCUMULATED TRANSLATION EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT ADJUSTMENT (DEFICIT)
---------- ------ ---------- ------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Contribution of capital:
Cash.................... $ 20,000 $ 20,000
River capital stock..... 5,000,000 $ 50 4,740,388 $ 47 13,236 13,333
Foreign currency
translation
adjustment.............. $ 1,847 1,847
Stock dividend (3 for
1)...................... 15,000,000 150 14,221,164 142 $ (292)
Exercise of stock
options................. 938 571,078 6 72 $ (8) 70
Net loss.................. (55,765) (55,765)
--
---------- ------ ---------- ------ ----------- ----------- ----------- -----------
Balance at December 31,
1995.................... 20,000,938 $ 200 19,532,630 $ 195 $ 33,308 $ (8) $ (56,057) $ 1,847 $ (20,515)
--
--
---------- ------ ---------- ------ ----------- ----------- ----------- -----------
---------- ------ ---------- ------ ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-48
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1--DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
IVAC Holdings, Inc. ("Holdings" or the "Company"), through its wholly owned
subsidiaries, designs, manufactures, distributes and services intravenous
infusion therapy and vital signs measurement instruments and related disposables
and accessories. The Company sells a full range of products to hospitals and
alternate site facilities in the United States, Canada and Europe.
All outstanding common stock of IVAC Medical Systems, Inc. ("IVAC") is owned
by Holdings. On December 30, 1994, DLJ Merchant Banking Partners, L.P. and the
related investors (collectively, "DLJMB") and River Medical, Inc. ("River") and
related investors ("the River Group") formed Holdings to acquire all of the
outstanding stock of IVAC Corporation ("IVAC") from Eli Lilly and Company
("Lilly"). Holdings was formed through the contribution of $20,000 cash from an
DLJMB in exchange for 5,000,000 shares (20,000,000 shares after giving effect to
3 for 1 stock split effected in the form of a dividend) of Class A Common Stock
and the issuance of 4,740,388 shares (18,961,552 shares after giving effect to 3
for 1 stock split offered in the form of a dividend) of Class B Common Stock in
exchange for 100% of the outstanding capital stock of River.
In connection with the formation of Holdings, after the close of business on
December 31, 1994, the Company acquired the outstanding capital stock of IVAC
from Lilly for approximately $195,000 in cash, including transaction costs ("the
Acquisition"). Concurrently with the closing of the Acquisition, Holdings
contributed all of the outstanding capital stock of River to IVAC and, as a
result, River became a wholly owned subsidiary of IVAC, renamed as IVAC Medical
Systems, Inc. The proceeds received from the investor group were contributed as
capital to IVAC Medical Systems, Inc. and recorded as Additional Paid-in Capital
in IVAC's financial statements.
In connection with the Acquisition, Holdings issued Junior Subordinated
Notes due 2006 (the "Subordinated Notes") to DLJMB, the River Group and others
for an aggregate of $30,000. Interest accrues to principal annually at an
effective fixed rate of 13.2%. IVAC does not guarantee repayment of the notes on
behalf of Holdings nor are these notes secured by IVAC's assets. The proceeds
from the Subordinated Notes were contributed as capital to IVAC Medical Systems,
Inc.
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. All significant
intercompany balances and transactions have been eliminated.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with maturities of 90
days or less at date purchased.
REVENUE RECOGNITION
Revenue is recorded upon product shipment, net of an allowance for estimated
returns, or service delivery. The Company also sells instruments via long-term
financing arrangements to a number of hospitals under No Capital Agreements
("NCAs"). These agreements allow hospitals 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 transactions
are akin to sales-type leases as provided for in SFAS 13, with the Company
recording revenue and profit upon shipment of the
F-49
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
instruments. The Company records a receivable equal to the present value of the
sales price of the instrument based upon the ratio of the overall gross margin
on the commitment compared to margins on direct sales of instruments and
disposables. Title to the instrument passes to the customer upon shipment. The
term of the financing is generally three to five years, with interest at rates
of 9% to 15%. The related contract receivables at December 31, 1995 are
presented net of unearned finance revenue of $6,813 which reflects the remaining
interest to be earned on unshipped disposables. Unearned finance revenue is
calculated using the inherent rate of interest on each NCA, the expected
disposable shipment period and the principal balance financed. Finance revenue
is recognized as disposables are shipped using a reducing principal balance
method which approximates the interest method. Contract provisions include
liquidated damage clauses which are sufficient to recover the sales price of the
instruments in the event of customer cancellation.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. Credit
risk associated with this concentration is limited due to the large number and
geographic dispersion of the accounts and the overall stability of the hospital
industry. Management believes that adequate provision has been made for such
credit risk.
INVENTORIES
Inventories are stated at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market. Cost of inventories at the beginning of the
year 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.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated on the basis of cost. Cost of
acquired assets (see Note 3) was determined based on an allocation of the
purchase price to all assets and liabilities, as determined by an independent
appraisal, at the date of acquisition. Additions to property, plant and
equipment, including significant betterments and renewals, are capitalized.
Maintenance and repair costs are charged to expense as incurred. Depreciation is
computed using the straight-line method over estimated useful lives of 3 to 20
years. Depreciation expense amounted to $15,076 for the year ended December 31,
1995.
INCOME TAXES
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred tax asset or liability is computed for
the expected future impact of differences between the financial reporting and
tax basis of assets and liabilities as well as the expected future tax benefit
to be derived from tax loss and tax credit carryforwards. Deferred income tax
expense (benefit) is determined as the net change during the year in the
deferred income tax asset or liability. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount "more likely than
not" to be realized in future tax returns. Tax rate changes are reflected in
income during the period such changes are enacted.
F-50
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries are
translated into U.S. dollars using period-end exchange rates for assets and
liabilities and weighted average exchange rates during the period for revenues
and expenses. Gains and losses from translation are excluded from results of
operations and accumulated as a separate component of shareholders' equity.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, including cash
and cash equivalents, trade receivables and payables, approximates their fair
value due to their short term maturities. The fair values of the Company's
long-term contract receivables are estimated by discounting future cash flows
using discount rates that reflect the risk associated with similar types of
loans. The fair value of the Company's long-term debt is estimated based on
comparison with similar issues or current rates offered to the Company for debt
of the same remaining maturities. The estimated fair values of both the
Company's long-term contract receivables and long-term debt approximate their
carrying values.
STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation," which establishes a fair value based method of
accounting for compensation costs related to stock option plans and other forms
of stock based compensation plans as an alternative to the intrinsic value based
method of accounting defined under Accounting Principles Board Opinion No. 25.
Companies that do not elect the new method of accounting beginning in 1996 will
be required to provide pro forma disclosures as if the fair value based method
had been applied. The Company anticipates that it will not elect the fair value
based method of accounting and will provide pro forma disclosure as required.
INTANGIBLE ASSETS
Intangible assets are amortized as follows:
<TABLE>
<S> <C> <C>
Supply agreements............................. Straight-line 3 years
Trademarks.................................... Straight-line 10 years
Patents....................................... Straight-line 10 years
Debt acquisition costs........................ Interest method Terms of related debt
Excess purchase price......................... Straight-line 10 years
</TABLE>
F-51
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangibles are presented net of accumulated amortization of $11,776. In
connection with the acquisition of IVAC, Lilly agreed to continue providing
certain administrative services on behalf of IVAC for a period of six months.
The amount capitalized as service support agreement ($2,786) has been fully
amortized as of December 31, 1995.
IMPAIRMENT OF LONG-LIVED ASSETS
During 1995, the FASB issued Statement of Financial Accounting Standards No.
121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," which establishes accounting standards for
measuring the impairment of long-lived assets, certain identifiable intangibles
and excess purchase price related to those assets to be held and used and for
long-lived assets and certain intangible assets to be disposed of. In the fourth
quarter of 1995, the Company elected to early adopt the new accounting
pronouncement. Based upon an analysis performed in accordance with SFAS 121, the
Company believes that no material impairments exist at December 31, 1995. Prior
to the adoption of SFAS 121, management reviewed long-lived assets for
impairment on an annual basis based on undiscounted future cash flows.
PRODUCT WARRANTY
The Company provides warranties for up to one year on all products and for
up to two years on certain products. A provision for the estimated future costs
of warranty repair or replacement is provided at the time of sale based upon the
Company's historical warranty experience.
REBATES
The Company provides rebates to customers under certain programs. The
estimated costs of these rebates are accrued at the time revenue is recognized.
NOTE 3--THE ACQUISITION AND THE RIVER TRANSACTION
The Acquisition and the River Transaction have been accounted for under the
purchase method as the voting common stock issued was not identical;
accordingly, the purchased assets and liabilities have been recorded at their
estimated fair value, as determined by independent appraisal, at the date of
acquisition. The purchase price of River of $13,333 was determined based on the
fair value of the River assets contributed to Holdings relative to the purchase
price paid by the DLJMB led investor group for their initial equity in Holdings.
The application of the purchase method to the Acquisition and the River
Transaction resulted in an excess of cost over net assets acquired of
approximately $90,804. The excess purchase price has been allocated to property,
plant and equipment ($20,315), inventory ($14,774), intangibles ($23,356) and
in-process research and development ($22,883) with a remaining excess purchase
price over net assets acquired of $9,476. The allocation of the purchase price
to inventory, and subsequent sales of such inventory, resulted in a reduction of
$14,744 in 1995 gross profit. The in-process research and development of River
and IVAC were charged to earnings in 1995 as the associated products had not
reached technological feasibility and had no alternative use. The purchase price
allocations reflect the resolution of certain purchase contingencies including
the arbitration settlement of a dispute with Lilly over the final IVAC purchase
price subsequent to December 31, 1995, the resolution of certain contingent
liabilities, and the ultimate realization of certain acquired receivables and
property, plant and equipment.
F-52
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--THE ACQUISITION AND THE RIVER TRANSACTION (CONTINUED)
Additionally, the Company and Lilly jointly elected to make an Internal Revenue
Code Section 338(h)(10) election for Federal and state tax purposes in the third
quarter of 1995. This election resulted in treatment of the acquisition as if
Lilly sold assets in a taxable transaction and resulted in adjustments to
reflect the fair value of the acquired tax assets and liabilities as of the date
of purchase.
In conjunction with purchase accounting, the Company recorded a severance
liability in the amount of $5,659 pursuant to a plan in place as of the purchase
date to subsequently terminate employees. The liability was determined based on
the expected employee resources to be terminated at an estimated cost of
severance benefits as provided for in the purchase agreement at the time of the
Acquisition to include separation payments based on years of service, continued
medical benefits and outplacement assistance for a specified time. These costs
were paid to employees terminated during the six month period following the
Acquisition and did not materially differ from the amount initially accrued.
In connection with the Acquisition and the River Transaction, certain
stockholders of Holdings received approximately $3,650 in connection with the
exchange of their capital stock or services rendered. These amounts have been
capitalized as a component of the purchase price.
F-53
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--COMPOSITION OF CERTAIN CONSOLIDATED FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Accounts receivable:
Trade......................................................................... $ 58,677
Less allowance for doubtful accounts.......................................... (4,544)
------------
$ 54,133
------------
------------
Inventories:
Finished products............................................................. $ 14,998
Work-in-process............................................................... 3,472
Raw materials................................................................. 17,867
------------
36,337
Less reserves................................................................. (1,712)
------------
$ 34,625
------------
------------
Property, plant and equipment:
Land.......................................................................... $ 640
Buildings..................................................................... 4,554
Equipment..................................................................... 50,179
Construction in process....................................................... 6,341
------------
61,714
Less accumulated depreciation................................................. (13,437)
------------
$ 48,277
------------
------------
Intangibles:
Excess purchase price......................................................... $ 9,476
Supply agreements............................................................. 10,296
Trademarks.................................................................... 5,140
Patents....................................................................... 5,186
Debt acquisition costs........................................................ 11,486
Other......................................................................... 1,085
------------
42,669
Less accumulated amortization................................................. (11,776)
------------
$ 30,893
------------
------------
Supply agreements represent noncancellable customer commitments to purchase specified
quantities of disposable administration sets and probe covers at contractual prices.
Other current liabilities:
Accrued expense reimbursement to former parent................................ $ 12,212
Other......................................................................... 22,587
------------
$ 34,799
------------
------------
</TABLE>
F-54
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 5--LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Senior notes.................................................................... $ 100,000
Term loan borrowings under the Bank Credit Facility............................. 19,500
Junior subordinated notes....................................................... 33,961
Other........................................................................... 12,324
------------
165,785
Less current portion............................................................ (8,091)
------------
Long-term debt.................................................................. $ 157,694
------------
------------
</TABLE>
In connection with the acquisition of IVAC, the Company entered into an
$80,000 credit facility (the "Bank Credit Facility") with a syndicate of
financial institutions which consists of $60,000 of term loans and a $20,000
revolving credit facility, each of which matures on December 30, 1999. Available
funds under the revolving credit facility are limited to the difference between
$20,000 and the amount of letters of credit issued under the Bank Credit
Facility, which cannot exceed $15,000. Borrowings under the Bank Credit Facility
bear interest at a rate equal to the Alternate Base Rate plus 1.75% or Adjusted
LIBOR plus 3.00%, at the option of the Company, payable quarterly (10.25% and
8.69%, respectively, at December 31, 1995). The Bank Credit Facility is secured
by the stock of IVAC and all of its subsidiaries and substantially all of the
assets of Holdings, IVAC and IVAC's domestic subsidiaries. The Bank Credit
Facility is guaranteed by Holdings and substantially all of the Company's
subsidiaries. As more fully discussed in Note 13, subsequent to December 31,
1995, the Company amended and restated certain terms of the Bank Credit
Facility.
Immediately following the Acquisition, the Company entered into an interest
rate swap agreement to fix the rate of interest payable on a portion of the term
loan principal borrowed under the Bank Credit Facility. The swap has a three
year term and an initial notional amount of $30,000, which amortizes at a rate
equal to 50% of the original term loan principal paydown schedule, with
quarterly payments at a fixed rate of 11.05% of the outstanding notional amount
and quarterly receipts at a LIBOR-based floating rate plus 3.00%. Interest
expense related to the swap was $565 for the year ended December 31, 1995.
The Bank Credit Facility contains covenants which, among other matters,
restrict or limit the ability of the Company to pay dividends, incur
indebtedness, and make capital expenditures. The Company must also maintain
certain ratios regarding interest coverage and leverage, among other
restrictions.
On November 8, 1995, the Company issued $100,000 of senior unsecured public
notes (the "Notes") due December 1, 2002. The Notes bear interest at the rate of
9.25% annually, which is payable semi-annually in arrears on June 1 and December
1 of each year, commencing June 1, 1996. The Company is not required to make any
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, 1998 at the redemption prices set
forth in the indenture plus accrued and unpaid interest to the date of
redemption. In addition, at any time prior to December 1, 1998, the Company may
redeem the Notes with the proceeds of one or more public offerings of common
stock at a redemption price equal to 108.25% of the principal amount plus
accrued and unpaid interest; provided that at least
F-55
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 5--LONG-TERM DEBT (CONTINUED)
$65,000 in aggregate principal amount of the Notes remain outstanding
immediately after the occurrence of each such 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 whole or in part,
at a price equal to 101% of the aggregate principal amount thereof, plus accrued
and unpaid interest to the date of purchase. The Notes are senior unsecured
obligations of the Company and rank senior in right of payment to all
subordinated indebtedness of the Company.
The indenture contains covenants which, among other matters, restrict or
limit the ability of the Company to pay dividends, incur indebtedness, make
asset sales, create liens and restrict the ability of the Company to enter into
mergers, consolidations or sales of all or substantially all of its assets.
The Company also issued $30,000 of Junior Subordinated Notes due 2006. The
notes accrue interest at 13.2% per annum, compounded annually.
The net proceeds from the bridge notes, Junior Subordinated Notes, and term
loan were used to pay the cash purchase price in connection with the Acquisition
and to pay fees and expenses related to the Acquisition. The proceeds of the
revolving loan will be used for general corporate purposes in the ordinary
course of the business.
Other debt consists of consideration owed to Siemens Infusion Systems, Ltd.
("SIS") resulting from IVAC's acquisition of the MiniMed product line from SIS
in 1993. In accordance with the acquisition agreement, IVAC is obligated to pay
SIS $1,571 in 1996 based on 1994 product sales and the greater of $3,000 per
year or 8% of the prior year's product sales in 1996 through 1999. The minimum
$12,000 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 $1,247 at December 31, 1995.
The aggregate minimum annual maturities on long-term debt are as follows:
<TABLE>
<S> <C>
1996.............................................................. $ 8,091
1997.............................................................. 7,375
1998.............................................................. 7,901
1999.............................................................. 8,457
2000.............................................................. --
Thereafter........................................................ 133,961
---------
$ 165,785
---------
---------
</TABLE>
NOTE 6--LEASES
Leases are generally for buildings, computers and office equipment. The
leases for the Company's San Diego corporate headquarters and manufacturing
facilities provide for scheduled rent increases. Total rent expense amounted to
approximately $2,035 for the year ended December 31, 1995.
The Company maintains a lease line of credit with a leasing company for
acquisitions of equipment under capital lease arrangements.
F-56
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 6--LEASES (CONTINUED)
Future minimum payments are as follows:
<TABLE>
<CAPTION>
NONCANCELLABLE
CAPITAL OPERATING
LEASES LEASES
--------- --------------
<S> <C> <C>
1996........................................................................ $ 770 $ 3,413
1997........................................................................ 722 2,931
1998........................................................................ 425 2,990
1999........................................................................ 241 2,916
2000........................................................................ -- 2,803
Thereafter.................................................................. -- 11,298
--------- -------
2,158 $ 26,351
-------
-------
Less amounts representing interest.......................................... (304)
---------
Capital lease obligations................................................... 1,854
Less current portion........................................................ (595)
---------
$ 1,259
---------
---------
</TABLE>
NOTE 7--INCOME TAXES
The benefit from income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Current:
Federal....................................................................... $ --
Foreign....................................................................... 3,307
State......................................................................... 5
------------
3,312
------------
Deferred:
Federal....................................................................... (3,192)
Foreign....................................................................... 142
State......................................................................... (640)
------------
(3,690)
------------
Total........................................................................... $ (378)
------------
------------
</TABLE>
F-57
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 7--INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Deferred tax assets:
Net operating loss and research and development credit carryforwards.......... $ 5,742
Intangibles................................................................... 3,666
State income taxes............................................................ 2,987
Product return/warranty reserves.............................................. 1,895
Rebate reserve................................................................ 1,479
Other......................................................................... 5,430
------------
Total deferred tax assets....................................................... 21,199
Valuation allowance........................................................... (21,199)
------------
Net deferred tax assets......................................................... 0
------------
Deferred tax liabilities:
Foreign taxes................................................................. (142)
------------
Total deferred tax liabilities.................................................. (142)
------------
Net deferred taxes.............................................................. $ (142)
------------
------------
</TABLE>
The Company has recorded a valuation allowance against deferred tax assets
since it is more likely than not that the deferred tax assets will not be
realized.
As of December 31, 1994, River net operating loss carryforwards for Federal
and state tax purposes totaled approximately $4,156 and $1,513, respectively. As
specified in the Internal Revenue Code, a more than 50% ownership change by a
combination of significant shareholders during any three year period would
result in certain limitations on the Company's ability to utilize net operating
loss carryforwards and research and development credit carryforwards. Such a
change is likely to have occurred in connection with the acquisition transaction
discussed in Note 3. These net operating loss and research and development
credit carryforwards expire from 2008 to 2009 for Federal tax purposes and from
1998 and 1999 for state tax purposes.
During 1995, net operating loss carryforwards for Federal and state tax
purposes totaling approximately $4,245 and $236, respectively, were generated by
the consolidated group. These net operating loss carryforwards expire in 2010
for Federal tax purposes and in 2000 for state tax purposes.
F-58
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 7--INCOME TAXES (CONTINUED)
Following is a reconciliation of the effective income tax rate:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
---------------
<S> <C>
Tax benefit at statutory rate................................................... (35.0)%
Add (deduct):
Foreign taxes................................................................. 6.2
State taxes................................................................... (5.8)
Other......................................................................... (.2)
-----
(34.8)
Valuation allowance........................................................... 34.1
-----
(.7)%
-----
-----
</TABLE>
NOTE 8--BENEFITS
Effective December 30, 1994, in connection with the purchase of IVAC
discussed in Note 1, the Company's U.S. noncontributory defined benefit plan was
terminated and the assets and liabilities of the IVAC Retirement Plan were
merged into The Lilly Retirement Plan. All eligible participants in the IVAC
Retirement Plan became participants in The Lilly Retirement Plan, and all
benefits previously earned will be paid by The Lilly Retirement Plan.
In connection with the River Transaction, all outstanding stock options
issued under the River Medical Stock Option Plan were assumed by Holdings
subject to the same terms, vesting, duration and cancellation existing prior to
the acquisition. On a converted basis, there were 467,370 options exercisable
into Holdings Class B common stock outstanding at December 31, 1995 at exercise
prices ranging from $.13 to $.52. The options expire not more than ten years
from the date of grant and were fully vested at December 31, 1995.
A summary of Class B stock option transactions follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
OPTIONS OUTSTANDING
---------------------------------
NUMBER OF NUMBER OF
SHARES SHARES
AT $.52 AT $.13
PER SHARE PER SHARE TOTAL
----------- --------- ---------
<S> <C> <C> <C>
Converted from River Plan.................................... 24,611 1,013,837 1,038,448
Options exercised............................................ (8,204) (562,874) (571,078)
----------- --------- ---------
Balance at December 31, 1995................................. 16,407 450,963 467,370
----------- --------- ---------
----------- --------- ---------
</TABLE>
The 1995 Stock Option/Stock Issuance Plan (the "Plan") of Holdings
authorizes up to 4,000,000 shares of Holdings Class A common stock to be granted
no later than February 2005. Under the Plan, the Board of Directors of Holdings
may grant options to selected key employees, directors and consultants to the
Company to purchase shares of Holdings common stock, at a price not less than
85% of the fair market
F-59
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 8--BENEFITS (CONTINUED)
value of the stock at the date of grant, as determined by the Board of Directors
of Holdings. The Plan provides for the grant of both incentive stock options and
non-qualified stock options. Generally, options outstanding vest over a four to
eight year period and are exercisable for up to ten years from the grant date.
At December 31, 1995, 633,343 options were exercisable at $1.00 for an aggregate
exercise price of $633.
A summary of Class A stock option transactions follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
OPTIONS OUTSTANDING
OPTIONS -----------------------
AVAILABLE NUMBER OF PRICE PER
FOR GRANT SHARES SHARE
----------- ---------- -----------
<S> <C> <C> <C>
Options authorized.......................................................... 4,000,000 -- --
Options granted............................................................. (3,668,656) 3,668,656 $ 1.00
Options exercised........................................................... -- (938) --
Options forfeited on termination of employment.............................. 360,516 (360,516) --
----------- ---------- -----
Balance at December 31, 1995................................................ 691,860 3,307,202 $ 1.00
----------- ---------- -----
----------- ---------- -----
</TABLE>
During 1995, the Company consummated a 3 for 1 stock split effected in the
form of a dividend to all holders of record of Class A and Class B common stock
held at the close of business on February 1, 1995. All share amounts presented
herein reflect the 3 for 1 split.
The Company maintains a defined contribution savings plan which covers
substantially all of its U.S. employees. Contributions under the plan amounted
to $757 for the year ended December 31, 1995.
The Company was self-insured for medical benefits through June 30, 1995.
Effective July 1, 1995, the Company transitioned its medical and dental
insurance to coverage under a health maintenance organization.
F-60
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 9--GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Net sales to unaffiliated customers:
United States................................................................. $ 163,323
United Kingdom................................................................ 18,217
Germany....................................................................... 18,516
Spain......................................................................... 10,248
Other......................................................................... 30,667
------------
$ 240,971
------------
------------
Income (loss) before income taxes:
United States................................................................. $ (61,462)
United Kingdom................................................................ 3,869
Germany....................................................................... 127
Spain......................................................................... 587
Other......................................................................... 1,398
Eliminations and adjustments.................................................. (662)
------------
$ (56,143)
------------
------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Total assets:
United States................................................................. $ 190,640
United Kingdom................................................................ 17,384
Germany....................................................................... 7,230
Spain......................................................................... 11,860
Other......................................................................... 17,216
Eliminations and adjustments.................................................. (28,335)
------------
$ 215,995
------------
------------
</TABLE>
Transfers between geographic areas are made at prices calculated to reflect
a profit attributable to manufacturing operations.
Remittances to the United States are subject to various regulations of the
respective governments as well as to fluctuations in exchange rates.
NOTE 10--LITIGATION
River is a defendant in an action alleging misappropriation of trade secrets
and other proprietary information of the plaintiff. The Company believes the
allegations to be without merit and has filed a countersuit with respect to this
matter. In addition, the Company is a party to various other legal actions which
have occurred in the normal course of business. Management believes the Company
has meritorious
F-61
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 10--LITIGATION (CONTINUED)
defenses and intends to defend vigorously against these allegations and claims.
In management's opinion, liabilities arising from the above matters, if any,
will not have a material adverse effect on the Company's consolidated financial
position or results of operations.
NOTE 11--COMMITMENTS AND CONTINGENCIES
In connection with the Acquisition, Lilly agreed to perform certain
administrative functions for the Company's foreign subsidiaries including the
collection of receivables and the payment of certain direct expenses incurred by
Lilly on behalf of the Company. The Company agreed to reimburse Lilly for such
direct expenses and anticipates that a payment of less than $8,000 will be made
to Lilly in 1996. The Company is currently waiting for notification from Lilly
of the amount owed under this arrangement. Management does not believe that this
amount will be materially different from the amount accrued at December 31,
1995.
The Company is obligated to pay additional purchase consideration related to
previous acquisitions. As discussed in Note 5, the Company is obligated to pay
additional consideration to SIS. In connection with another acquisition, the
Company is contingently liable to certain prior shareholders of the acquiree for
up to approximately $1,850 for additional purchase consideration through 1996,
based upon the acquired entity achieving certain sales and pre-tax performance
in each year subsequent to such acquisition. Any additional consideration paid
will be treated as additional cost of the acquired entity.
NOTE 12--RESTRUCTURING
In 1995, management approved and committed the Company to a non-voluntary
termination plan in compliance with the terms of the Acquisition purchase
agreement in an effort to reduce operating expenses. The terminations were not
concentrated in one particular area of the Company's operations and the plan
does not contemplate any significant changes to the operations or product lines
that the Company offers. In connection with these terminations the Company
charged severance and related costs of $5,319 to earnings. As of December 31,
1995, the remaining accrual related to these terminations totaled $1,510.
NOTE 13--SUBSEQUENT EVENT
On March 29, 1996, the Company amended and restated its Bank Credit
Facility. The amended and restated senior credit facility (the "Facility")
matures on March 29, 1999 and provides for borrowings of up to $40,000, secured
by substantially all U.S. domestic assets. Borrowings under the Facility bear
interest at a rate equal to the Alternate Base Rate ("ABR") plus 0.25% or
Adjusted LIBOR plus 1.50%, at the option of the Company. The ABR is equal to the
greatest of the (i) prime rate in effect on such day; (ii) base certificate of
deposit rate in effect on such day plus 1%; and (iii) federal funds effective
rate in effect on such day plus 1/2 of 1%. The pricing is subject to change
quarterly based upon certain debt and interest coverage ratios.
NOTE 14--GUARANTOR SUBSIDIARY
On August 23, 1996, the Company entered into an Agreement and Plan of Merger
among the Company, IVAC Medical Systems, Inc., IMED Corporation ("IMED"), a
subsidiary of ALARIS Medical, Inc. (f/k/a Advanced Medical, Inc.), a
wholly-owned subsidary of IMED and the holders of Common Stock
F-62
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 14--GUARANTOR SUBSIDIARY (CONTINUED)
of Holdings named therein, pursuant to which IMED will acquire, directly or
indirectly through a wholly owned subsidiary, 100% of the capital stock of
Holdings for approximately $400,000 less certain indebtedness. The proposed
transaction received regulatory approval in October 1996 and is subject to
certain other closing conditions, including the completion of the financing
necessary to consummate the merger (the "Merger"). Following the consummation of
the Merger, the operations of IMED and IVAC Medical Systems, Inc. will be
transferred to Holdings and Holdings will become the successor obligor under the
Senior Subordinated Notes due 2006 of IMED (the "IMED Notes") that will be
issued in connection with the Merger. In addition, IVAC Overseas Holding, Inc.
(OSH), a wholly-owned subsidiary of Holdings, along with an IMED subsidiary will
provide full and unconditional guarantees of the IMED Notes. OSH's net assets
are comprised of intercompany liabilities and its ownership interest in three
wholly-owned foreign subsidiaries which distribute IVAC products. Separate
financial statements of OSH are not presented as management has determined that
they would not be material to investors. Accordingly, condensed combining
financial information for Holdings and its guarantor and non-guarantor
subsidiaries
F-63
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 14--GUARANTOR SUBSIDIARY (CONTINUED)
at December 31, 1995 and for the year ended December 31, 1995, with investments
in subsidiaries accounted for using the equity method, is as follows:
<TABLE>
<CAPTION>
NON
CONDENSED BALANCE SHEET PARENT GUARANTOR GUARANTOR
DECEMBER 31, 1995 COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
- ----------------------------------------------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets................................. $ 71,181 $ 45,683 -- $ (1,241) $ 115,623
Non-current assets............................. 120,431 20,368 $ 16,027 (56,454) 100,372
----------- ----------- ----------- ------------ ------------
$ 191,612 $ 66,051 $ 16,027 $ (57,695) $ 215,995
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
Current liabilities............................ $ 44,327 $ 38,872 $ 7,859 $ (17,285) $ 73,773
Long-term debt and other liabilities........... 161,052 1,685 -- -- 162,737
----------- ----------- ----------- ------------ ------------
205,379 40,557 7,859 (17,285) 236,510
Common stock and other shareholders' equity.... (13,767) 25,494 8,168 (40,410) (20,515)
----------- ----------- ----------- ------------ ------------
$ 191,612 $ 66,051 $ 16,027 $ (57,695) $ 215,995
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
NON
CONDENSED STATEMENT OF OPERATIONS PARENT GUARANTOR GUARANTOR
FOR THE YEAR ENDED DECEMBER 31, 1995 COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
- ------------------------------------------------ ---------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales....................................... $ 203,767 $ 78,442 -- $ (41,238) $ 240,971
Cost of sales................................... 144,089 55,350 -- (41,570) 157,869
---------- ----------- ----------- ------------ ------------
59,678 23,092 -- 332 83,102
Operating expenses.............................. 73,114 40,674 -- 994 114,782
Interest (income) expense, net.................. 23,168 1,295 -- -- 24,463
---------- ----------- ----------- ------------ ------------
Income (loss) before income taxes and equity
interest in subsidiary income................. (36,604) (18,877) -- (662) (56,143)
Equity interest in subsidiary income............ -- -- $ 730 (730) --
Provision for (benefit from) income taxes....... 4 (382) 256 (256) (378)
---------- ----------- ----------- ------------ ------------
Net income (loss)............................... $ (36,608) $ (18,495) $ 474 $ (1,136) $ (55,765)
---------- ----------- ----------- ------------ ------------
---------- ----------- ----------- ------------ ------------
</TABLE>
F-64
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 14--GUARANTOR SUBSIDIARY (CONTINUED)
<TABLE>
<CAPTION>
NON
CONDENSED STATEMENT OF CASH FLOWS PARENT GUARANTOR GUARANTOR
FOR THE YEAR ENDED DECEMBER 31, 1995 COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
- ------------------------------------------------ ---------- ----------- ----------- ------------ ------------
Net cash (used) provided by operating
activities.................................... $ 31,580 $ 7,625 -- $ (1,062) $ 38,143
<S> <C> <C> <C> <C> <C>
Cash flows from investing activities:
Acquisitons, net of cash and cash equivalents
acquired.................................... (192,652) 1,859 $ (15,297) 15,297 (190,793)
Intercompany advances to River Medical........ (12,389) -- -- 12,389 --
Intercompany advances from Parent............. 12,389 15,297 (27,686) --
Capital expenditures, net..................... (7,678) (6,342) -- 268 (13,752)
Proceeds from sale of facility, net........... 25,258 -- -- -- 25,258
---------- ----------- ----------- ------------ ------------
Net cash (used) provided by investing
activities.................................... (187,461) 7,906 -- 268 (179,287)
---------- ----------- ----------- ------------ ------------
Cash flows from financing activities:
Capital contributions......................... 20,000 -- -- -- 20,000
Exercise of stock options..................... 70 -- -- -- 70
Borrowings under term loan and revolving
credit arrangements......................... 68,500 -- -- -- 68,500
Proceeds from bridge notes.................... 80,000 -- -- -- 80,000
Proceeds from senior notes.................... 100,000 -- -- -- 100,000
Proceeds from junior subordinated notes....... 30,000 -- -- -- 30,000
Repayment of term loan and revolving debt..... (49,000) -- -- -- (49,000)
Repayment of bridge notes..................... (80,000) -- -- -- (80,000)
Debt issue costs.............................. (11,486) -- -- -- (11,486)
Capital lease payments........................ -- (479) -- -- (479)
---------- ----------- ----------- ------------ ------------
Net cash (used) provided by financing
activities.................................... 158,084 (479) -- -- 157,605
---------- ----------- ----------- ------------ ------------
Effect of exchange rate changes on cash......... -- 1,053 -- 794 1,847
---------- ----------- ----------- ------------ ------------
Net increase in cash and cash equivalents....... 2,203 16,105 -- -- 18,308
Cash and cash equivalents at the beginning of
the period.................................... -- -- -- -- --
---------- ----------- ----------- ------------ ------------
Cash and cash equivalents at the end of the
period........................................ $ 2,203 $ 16,105 -- -- $ 18,308
---------- ----------- ----------- ------------ ------------
---------- ----------- ----------- ------------ ------------
</TABLE>
F-65
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
IVAC Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of shareholder's equity
present fairly, in all material respects, the financial position of IVAC
Corporation and its subsidiaries at December 31, 1994, and the results of their
operations and their cash flows for the year 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 audit. We conducted our audit
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 audit provides a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Diego, California
June 29, 1995
F-66
<PAGE>
IVAC CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31,
1994
---------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................................... $ 3,226
Accounts receivable, net....................................................................... 43,324
Receivable from Lilly.......................................................................... 1,581
Current portion of contract receivables, net................................................... 7,014
Inventories.................................................................................... 43,828
Prepaid expenses and other current assets...................................................... 3,333
---------------
Total current assets....................................................................... 102,306
Long-term contract receivables, net.............................................................. 18,164
Property, plant and equipment, net............................................................... 50,095
Intangible assets, net........................................................................... 3,579
---------------
$ 174,144
---------------
---------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable............................................................................... $ 7,950
Accrued warranty............................................................................... 7,339
Accrued employee liabilities................................................................... 4,715
Current portion of long-term debt.............................................................. 1,571
Other current liabilities...................................................................... 6,607
---------------
Total current liabilities.................................................................. 28,182
Long-term debt................................................................................... 10,050
Other non-current liabilities.................................................................... 5,931
Commitments and contingencies (Note 14)
Shareholder's equity:
Common stock, no par value; 100 shares authorized, issued and outstanding...................... --
Additional paid-in capital..................................................................... 58,343
Retained earnings.............................................................................. 73,574
Foreign currency translation adjustment........................................................ (1,936)
---------------
Total shareholder's equity................................................................. 129,981
---------------
$ 174,144
---------------
---------------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-67
<PAGE>
IVAC CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
Net Sales........................................................................................... $ 223,227
Cost of sales....................................................................................... 146,659
------------
Gross profit................................................................................ 76,568
Sales and marketing................................................................................. 45,055
General and administrative.......................................................................... 21,586
Research and development............................................................................ 18,504
Excess purchase price write-down.................................................................... 13,143
Expense allocation from Lilly....................................................................... 7,480
Other expense, net.................................................................................. 3,560
------------
Total operating expense..................................................................... 109,328
Contract interest income............................................................................ 2,927
------------
Loss from operations................................................................................ (29,833)
Interest expense, net............................................................................... (2,227)
------------
Income (loss) before income taxes................................................................... (32,060)
Provision for income taxes.......................................................................... 3,793
------------
Net income (loss)................................................................................... $ (35,853)
------------
------------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-68
<PAGE>
IVAC CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
-----------------
<S> <C>
Cash flows from operating activities:
Net income (loss)............................................................................ $ (35,853)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization.............................................................. 15,119
Excess purchase price write-down........................................................... 13,143
Lilly allocated expenses contributed as paid-in-capital.................................... 7,480
Loss on disposal of fixed assets........................................................... 1,363
Changes in assets and liabilities:
Receivables.............................................................................. 766
Inventories.............................................................................. 5,481
Prepaid expenses and other assets........................................................ 3,864
Accounts payable......................................................................... (1,744)
Accrued warranty......................................................................... 1,584
Accrued employee liabilities............................................................. (2,514)
Other liabilities........................................................................ 2,523
Payables to and receivables from Lilly, net.............................................. (4,710)
--------
Net cash provided by operating activities.............................................. 6,502
--------
Cash flows from investing activities:
Capital expenditures, net.................................................................... (9,000)
--------
Net cash used by investing activities.................................................. (9,000)
--------
Effect of exchange rate changes on cash........................................................ 1,041
--------
Net decrease in cash and cash equivalents...................................................... (1,457)
Cash and cash equivalents at the beginning of the year......................................... 4,683
--------
Cash and cash equivalents at the end of the year............................................... $ 3,226
--------
--------
Supplemental disclosure of cash flow information:
Cash paid for income taxes................................................................... $ 1,854
Supplemental non-cash financing activities:
Dividends paid through forgiveness of intercompany receivable from Lilly..................... $ 48,699
Net liabilities assumed by Lilly credited to paid-in-capital................................. $ 13,663
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-69
<PAGE>
IVAC CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN TOTAL
COMMON STOCK ADDITIONAL CURRENCY SHARE-
------------------------ PAID-IN ACCUMULATED TRANSLATION HOLDERS'
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT EQUITY
----------- ----------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993......................... 100 $ 162 $ 37,200 $ 158,126 $ (2,977) $ 192,511
Transactions with Lilly:
Lilly corporate expense allocation............... -- -- 7,480 -- -- 7,480
Assumption of net liabilities.................... -- -- 13,663 -- -- 13,663
Non-cash dividend................................ -- -- -- (48,699) -- (48,699)
Other............................................ -- (162) -- -- -- (162)
Foreign currency translation adjustment............ -- -- -- -- 1,041 1,041
Net income......................................... -- -- -- (35,853) -- (35,853)
--- ----- ----------- ------------ ----------- ----------
Balance at December 31, 1994......................... 100 $ -- $ 58,343 $ 73,574 $ (1,936) $ 129,981
--- ----- ----------- ------------ ----------- ----------
--- ----- ----------- ------------ ----------- ----------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-70
<PAGE>
IVAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1--DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
IVAC Corporation ("IVAC" or the "Company") designs, manufactures,
distributes and services intravenous infusion therapy and vital signs
measurement instruments and related disposables and accessories. Prior to and
during fiscal 1994, the Company operated as a wholly owned subsidiary of Eli
Lilly and Company ("Lilly"). As more fully discussed in Note 15, after the close
of business on December 31, 1994, the outstanding capital stock of IVAC was
acquired by IVAC Holdings, Inc. ("Holdings"). The accompanying consolidated
financial statements do not reflect adjustments resulting from this subsequent
purchase transaction.
The consolidated financial statements include the accounts and results of
operations of the Company, its wholly owned subsidiary MIS Scandinavia A.B., and
affiliate activities conducted through subsidiaries or divisions of Lilly. Where
activities were conducted through a subsidiary or division of Lilly or related
to the joint venture in Spain, productive assets such as accounts receivable,
inventory and equipment specifically related to IVAC operations are included in
the accompanying consolidated balance sheets. With respect to the operations of
Germany, there are certain assets and liabilities included in the accompanying
consolidated balance sheets prior to 1994 which related to affiliated companies.
Management believes the value of these net assets is not material. All
significant intercompany accounts and transactions have been eliminated in
consolidation. These statements reflect the financial position, results of
operations, and cash flows of the Company as a component of Lilly and may not be
indicative of the actual results of operations and financial position of the
Company under new ownership.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with maturities of 90
days or less at date purchased.
REVENUE RECOGNITION
Revenue is recorded upon product shipment, net of an allowance for estimated
returns, or service delivery. The Company also sells instruments via long-term
financing arrangements to a number of hospitals under No Capital Agreements
("NCAs"). These agreements allow hospitals 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 transactions
are akin to sales-type leases as provided for in SFAS 13, with the Company
recording revenue and profit upon shipment of the instruments. The Company
records a receivable equal to the present value of the sales price of the
instrument based upon the ratio of the overall gross margin on the commitment
compared to margins on direct sales of instruments and disposables. Title to the
instrument passes to the customer upon shipment. The term of the financing is
generally three to five years, with interest at rates of 9% to 15%. The related
contract receivables at December 31, 1994 are presented net of unearned finance
revenue of $6,468 which reflects the remaining interest to be earned on
unshipped disposables. Unearned finance revenue is calculated using the inherent
rate of interest on each NCA, the expected disposable shipment period and the
principal balance financed. Finance revenue is recognized as disposables are
shipped using a reducing principal balance method which approximates the
interest method. Contract provisions include liquidated damage clauses which are
sufficient to recover the sales price of the instruments in the event of
customer cancellation.
F-71
<PAGE>
IVAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. Credit
risk associated with this concentration is limited due to the large number and
geographic dispersion of the accounts and the overall stability of the hospital
industry. Management believes that adequate provision has been made for such
credit risk.
INVENTORIES
Inventories are stated at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market.
EXCESS PURCHASE PRICE
Excess purchase price arising from acquisitions is amortized over estimated
useful lives, ranging from 5 to 7 years, using the straight-line method. At
December 31, 1994, excess purchase price is presented net of accumulated
amortization of $1,186.
At each balance sheet date, the Company evaluates the realizability of
excess purchase price based upon management's best estimations of future
discounted cash flows. If future discounted cash flows are less than the
carrying amount of the excess purchase price, an adjustment is recorded to
reduce the excess purchase price to its fair value. Based on its most recent
analysis, the Company believes that no material impairment existed at December
31, 1994 (Notes 3 and 4).
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated on the basis of cost. Additions to
property, plant and equipment, including significant betterments and renewals
are capitalized. Maintenance and repair costs are charged to expense as
incurred. Depreciation is computed using the straight-line method over estimated
useful lives of 3 to 50 years. Depreciation expense amounted to $12,274 during
fiscal 1994. Management reviewed long-lived assets for impairment on an annual
basis based on undiscounted future cash flows.
INCOME TAXES
The Company's operations have historically been included in consolidated
income tax returns filed by Lilly. Income tax expense in the accompanying
consolidated financial statements has been determined on a separate return
basis, in accordance with the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
Differences between income tax expense computed on a separate return basis
and the amount actually charged to IVAC by Lilly has been reflected on the
consolidated balance sheet as an adjustment to paid-in capital.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiary and affiliates
are translated into U.S. dollars using period-end exchange rates for assets and
liabilities and weighted average exchange rates
F-72
<PAGE>
IVAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
during the period for revenues and expenses. Gains and losses from translation
are excluded from results of operations and accumulated as a separate component
of shareholder's equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1994, the carrying amount of the Company's financial
instruments including cash and cash equivalents, trade receivables and payables,
approximated their fair value due to their short term maturities. The fair value
of the Company's long-term contract receivables are estimated by discounting
future cash flows using discount rates that reflect the risk associated with
similar types of loans. At December 31, 1994, the estimated fair values of both
the Company's long-term contract receivables and long-term debt approximate
their carrying values.
EARNINGS PER SHARE
The ownership change of IVAC that occurred after the close of business on
December 31, 1994 (Note 14) has resulted in the historical earnings per share
calculations becoming irrelevant for purposes of comparability with future
periods. As such, historical earnings per share calculations have not been
presented.
PRODUCT WARRANTY
The Company provides warranties for up to one year on all products and for
up to two years on certain products. A provision for the estimated future costs
of warranty repair or replacement is provided at the time of sale based upon the
Company's historical warranty experience.
REBATES
The Company provides rebates to customers under certain programs. The
estimated costs of these rebates are accrued at the time revenue is recognized.
NOTE 3--ACQUISITIONS
In September 1993, IVAC completed the acquisitions of certain of the assets
of the MiniMed product line, a three-channel infusion pump system, from Siemens
Infusion Systems, Ltd. ("SIS"). The acquisition was accounted for as a purchase.
Under provisions of the acquisition agreement, the Company is required to pay
royalties to SIS in 1995 based on 1994 product sales and will pay in 1996
through 1999 based on the greater of 8% of the prior year product sales or a
guaranteed minimum of $3,000 per year. Excess purchase price and other
intangibles associated with this acquisition are being amortized on a
straight-line basis over 7 years (Note 4).
NOTE 4--EXCESS PURCHASE PRICE ADJUSTMENT
Since the Company's acquisition of the MiniMed product line from SIS in
September 1993, the Company discovered design and other defects of the product
line and evaluated market conditions. Upon the discontinuance of production in
the fourth quarter of 1994, the Company determined that sales and earnings of
the product line acquired from SIS were significantly below that projected at
the time of
F-73
<PAGE>
IVAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--EXCESS PURCHASE PRICE ADJUSTMENT (CONTINUED)
acquisition. Accordingly, the Company recorded a write-down of excess purchase
price of $13,143 to reduce the carrying value of the excess purchase price to
its estimated fair value.
The methodology used to assess the recoverability of the excess purchase
price recorded in connection with the acquisition was to discount future
projected cash flows over the remaining estimated useful life of the product
line. The projected cash flows represent management's best estimate of the
Company's future results of operations related to this product line. The Company
discounted the resulting projected cash flows using a discount rate of 12% which
is considered a reasonable approximation of the Company's cost of capital at the
time of impairment. Based on the estimated discounted cash flows, the Company
determined that approximately $1,100 of the remaining unamortized excess
purchase price would be recoverable.
F-74
<PAGE>
IVAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 5--COMPOSITION OF CERTAIN CONSOLIDATED FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
AT DECEMBER 31,
1994
---------------
<S> <C>
Accounts Receivable:
Trade...................................................................... $ 47,064
Less allowance for doubtful accounts....................................... (3,740)
---------------
$ 43,324
---------------
---------------
Inventories:
Finished products.......................................................... $ 18,974
Work-in-process............................................................ 5,985
Raw materials.............................................................. 22,129
---------------
47,088
Less reserve............................................................... (3,260)
---------------
$ 43,828
---------------
---------------
Property, plant and equipment:
Land....................................................................... $ 1,788
Buildings.................................................................. 42,421
Equipment.................................................................. 68,031
Construction in process.................................................... 5,112
---------------
117,352
Less accumulated depreciation.............................................. (67,257)
---------------
$ 50,095
---------------
---------------
Other current liabilities:
Accrued contract termination costs......................................... $ 1,500
Deferred revenue........................................................... 1,057
Other miscellaneous accruals............................................... 4,050
---------------
$ 6,607
---------------
---------------
Other non-current liabilities:
Minority interest.......................................................... $ 3,625
Other...................................................................... 2,306
---------------
$ 5,931
---------------
---------------
</TABLE>
NOTE 6--DEBT
In connection with the acquisition of the MiniMed product line, the Company
is obligated to pay additional consideration to SIS of $1,571 based on 1994
product sales and the greater of $3,000 per year or 8% of the prior year's
product sales in 1996 through 1999. In 1994, the minimum $12,000 liability was
discounted at an imputed interest rate of 7% with a corresponding reduction in
excess purchase price. The unamortized discount, which is amortized using the
interest method over the term of the payments, is $1,950 at December 31, 1994.
F-75
<PAGE>
IVAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 7--TRANSACTIONS WITH LILLY
Operating expenses include certain services performed by Lilly or its
affiliates and billed directly to IVAC and certain corporate expenses which have
been allocated to the Company. Such allocation method is based on IVAC's
contribution to the total Lilly business unit revenue in which IVAC was
included. In the opinion of management such allocation reflects IVAC's
proportionate share of the related expenses. Other transactions include
intercompany purchases and sales, service fees and interest.
A summary of significant actual expenditures charged by or (billed to) Lilly
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Personnel and benefits...................................... $ 8,321
Insurance................................................... 1,265
Information systems......................................... (2,589)
Interest.................................................... 1,088
Miscellaneous............................................... (3,099)
------------
$ 4,986
------------
------------
</TABLE>
A summary of corporate expense allocations follows:
<TABLE>
<S> <C>
Business planning........................................... $ 1,902
Corporate expenses.......................................... 3,676
International expenses...................................... 1,103
Other....................................................... 799
-----------
$ 7,480
-----------
-----------
</TABLE>
Lilly did not require the intercompany payable resulting from corporate
expense allocations to be paid. Accordingly, these amounts have been reflected
as an increase to additional paid-in capital.
In addition, other intercompany balances due to and from Lilly during 1994
were settled in contemplation of and pursuant to the sale of IVAC. In May 1994,
IVAC forgave a net receivable due from Lilly in the amount of $48,699. This
transaction has been reflected as a dividend to Lilly in the accompanying
financial statements. In December 1994, Lilly forgave a net intercompany
receivable from IVAC amounting to $19,689. This transaction has been reflected
as an increase to additional paid-in capital in the accompanying financial
statements.
In accordance with the terms of the sale of IVAC, Lilly also assumed
responsibility for employee-related and certain other liabilities existing prior
to December 31, 1994 and IVAC forgave certain additional intercompany balances
due from Lilly. The net effect of this transaction was a reduction in additional
paid-in capital of $6,026.
NOTE 8--LEASES
Total rental expense amounted to approximately $2,368 for the year ended
December 31, 1994. Leases are generally for computer and office equipment.
Future minimum rental commitments as of December 31, 1994 for noncancellable
leases are not material.
F-76
<PAGE>
IVAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 9--INCOME TAXES
The Company accounts for income taxes on the liability method under SFAS
109. The following is the composition of income taxes:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Current:
Federal....................................................................... $ (1,208)
Foreign....................................................................... 748
State......................................................................... 495
------------
35
Deferred:
Federal....................................................................... (8,369)
State......................................................................... (1,937)
------------
Total before valuation allowance................................................ (10,271)
Valuation allowance............................................................. 14,064
------------
Total........................................................................... $ 3,793
------------
------------
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1994
---------------
<S> <C>
Deferred tax assets:
Excess purchase price write-down........................................... $ 5,187
Inventory.................................................................. 2,484
Product return/warranty reserves........................................... 2,937
State income tax........................................................... 2,017
Rebate reserve............................................................. 1,649
Allowance for doubtful accounts............................................ 1,311
Other...................................................................... 1,794
---------------
Total deferred tax assets.................................................... 17,379
---------------
Deferred tax liabilities:
Property and equipment..................................................... (3,315)
---------------
Total deferred tax liabilities............................................... (3,315)
---------------
Net deferred tax assets...................................................... 14,064
---------------
Valuation allowance.......................................................... (14,064)
---------------
Net deferred taxes........................................................... $ 0
---------------
---------------
</TABLE>
SFAS 109 specifies that deferred tax assets are to be reduced by a valuation
allowance if it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Based on uncertainty as to whether IVAC will
generate adequate future income to recover its deferred tax assets at December
31, 1994, management recorded a valuation allowance against such net deferred
tax assets.
F-77
<PAGE>
IVAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 9--INCOME TAXES (CONTINUED)
Following is a reconciliation of the effective income tax rate:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
--------------
<S> <C>
Tax benefit at statutory rate............................................... (34.0)%
Add (deduct):
State taxes, net of federal tax benefit................................... (1.7)
Benefit from foreign sales corporation.................................... (.5)
Research tax credit....................................................... (1.1)
Effect of international operations........................................ 3.6
Revisions of prior year estimates......................................... (2.2)
Lilly's assumption of net liabilities..................................... 3.9
-----
(32.0)
Valuation allowance....................................................... 43.9
-----
11.9%
-----
-----
</TABLE>
NOTE 10--BENEFITS
Effective December 30, 1994, in connection with the subsequent sale of IVAC
discussed in Note 14, the Company's U.S. noncontributory defined benefit
retirement plan was terminated and the assets and liabilities of the IVAC
Retirement Plan were merged into The Lilly Retirement Plan. All eligible
participants in the IVAC Retirement Plan became participants in The Lilly
Retirement Plan, and all benefits previously earned will be paid by The Lilly
Retirement Plan.
The Company's U.S. noncontributory defined benefit retirement plan covered
substantially all United States employees. Benefits under the domestic plan were
calculated by using one of several formulas. These formulas were based on a
combination of the following: (1) years of service; (2) final average earnings;
(3) primary social security benefit; and (4) age.
The Company's funding policy was consistent with local governmental and tax
funding regulations. Generally, pension costs accrued were funded. Plan assets,
which were maintained in a trust with Lilly and other Lilly affiliate plan
assets, consisted primarily of equity and fixed income instruments.
Net pension expense for the Company's U.S. noncontributory defined benefit
retirement plan included the following components:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Service cost--benefits earned during the year................................ $ 1,743
Interest cost on projected benefit obligations............................... 1,394
Actual return on assets (gain)............................................... (1,492)
Net amortization and deferral................................................ 466
------------
$ 2,111
------------
------------
</TABLE>
F-78
<PAGE>
IVAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 10--BENEFITS (CONTINUED)
The assumptions used to develop net periodic pension expense and the
actuarial present value of projected benefit obligations are shown below:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
-------------
<S> <C>
Discount rate................................................................ 7.5%
Rate of increase in future compensation levels............................... 4.5-8.0%
Expected long-term return on assets.......................................... 11.0%
</TABLE>
In addition to employees covered by the above U.S. noncontributory defined
benefit retirement plan, the Company also had employees outside the U.S. who
were covered by retirement plans maintained by Lilly or its affiliates. No
allocation of expenses for the Company's employees participating in these plans
has been included in the above information. However, expenses attributable to
the Company's employees at these locations are included in the consolidated
statements of operations.
The Company was self-insured for medical and dental benefits. Medical and
dental expense recorded in 1994 was $6,884.
Lilly has assumed responsibility for all employee benefit related
liabilities as of December 31, 1994.
The Company's employees are eligible to contribute to the Company's defined
contribution savings plan, which may be matched by the Company. The Company's
expense under the plan totaled $1,215 for the year ended December 31, 1994.
NOTE 11--GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
Net sales to unaffiliated customers:
United States................................................................. $ 153,383
United Kingdom................................................................ 17,332
Germany....................................................................... 14,960
Spain......................................................................... 9,146
Other......................................................................... 28,406
------------
$ 223,227
------------
------------
Income (loss) before income taxes:
United States................................................................. $ (35,218)
United Kingdom................................................................ 3,576
Germany....................................................................... 423
Spain......................................................................... 983
Other......................................................................... (500)
Eliminations and adjustments.................................................. (1,324)
------------
$ (32,060)
------------
------------
</TABLE>
F-79
<PAGE>
IVAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 11--GEOGRAPHIC INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
AT DECEMBER 31,
1994
---------------
<S> <C>
Total assets:
United States.............................................................. $ 140,706
United Kingdom............................................................. 9,345
Germany.................................................................... 3,827
Spain...................................................................... 7,766
Other...................................................................... 14,949
Eliminations and adjustments............................................... (2,449)
---------------
$ 174,144
---------------
---------------
</TABLE>
Transfers between geographic areas are made at prices calculated to reflect
a profit attributable to manufacturing operations.
Remittances to the United States are subject to various regulations of the
respective governments as well as to fluctuations in exchange rates.
NOTE 12--LITIGATION
Prior to and in connection with the sale of IVAC, Lilly assumed
responsibility for the anticipated cost of resolution of certain legal claims
existing at December 31, 1994. Consequently, the related accrual is not
reflected within the accompanying financial statements. In addition, the Company
is a party to various other legal actions which have occurred in the normal
course of business. Management believes the Company has meritorious defenses and
intends to defend vigorously against these allegations and claims. As the
ultimate outcome of the matters is uncertain, no loss provisions have been
recorded in the accompanying financial statements. In management's opinion,
liabilities arising from these matters, if any, will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
NOTE 13--COMMITMENTS AND CONTINGENCIES
The Company is obligated to pay additional purchase consideration related to
two previous acquisitions. As discussed in Note 7, the Company is obligated to
pay additional consideration to SIS. In connection with another acquisition, the
Company is contingently liable for up to approximately $3,050 for additional
purchase consideration through 1996 based upon the acquired entity achieving
certain sales and pre-tax performance in each year.
NOTE 14--SUBSEQUENT EVENTS
After the close of business on December 31, 1994, Lilly sold the outstanding
stock of IVAC to Holdings, which was formed through the contribution of the
outstanding capital stock of River Medical, Inc. and cash from an investor group
including DLJ Merchant Banking Partners, L.P. and related investors, and other
investors. Through a series of subsequent transactions, River Medical, Inc.
became a wholly owned subsidiary of IVAC.
F-80
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL IN CONNECTION WITH THE
OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE
GUARANTEEING SUBSIDIARIES OR ANY OTHER PERSON. THIS PROSPECTUS AND THE
ACCOMPANYING LETTER OF TRANSMITTAL DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE
ACCOMPANYING LETTER OF TRANSMITTAL, NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 3
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 20
The Exchange Offer........................................................ 30
Certain Federal Income Tax Consequences................................... 39
The Merger................................................................ 40
Use of Proceeds........................................................... 43
Pro Forma Condensed Consolidated Financial Statements..................... 44
Selected Historical Consolidated Financial Data of the Company............ 48
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company................................................ 51
Selected Historical Consolidated Financial Data of IVAC................... 61
Management's Discussion and Analysis of Financial Condition and Results of
Operations of IVAC....................................................... 64
Business.................................................................. 73
Management................................................................ 98
Principal Stockholders.................................................... 107
Certain Relationships and Related Transactions............................ 109
Description of Notes...................................................... 110
Description of New Credit Facility........................................ 139
Plan of Distribution...................................................... 142
Legal Matters............................................................. 142
Experts................................................................... 142
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL , 1997 ( DAYS AFTER THE COMMENCEMENT OF THE EXCHANGE
OFFER), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THE UNSOLD ALLOTMENTS AND SUBSCRIPTIONS.
$200,000,000
ALARIS MEDICAL
SYSTEMS, INC.
OFFER TO EXCHANGE ITS
9 3/4% SENIOR SUBORDINATED NOTES
DUE 2006, WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, FOR ANY AND
ALL OF ITS OUTSTANDING
9 3/4% SENIOR SUBORDINATED NOTES
DUE 2006
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Each of ALARIS Medical Systems, Inc. (f/k/a IVAC Holdings, Inc.) (the
"Company"), IVAC Overseas Holdings, Inc. ("IVAC Overseas") and IMED
International Trading Corp. ("IMED Trading") is incorporated under the laws of
the State of Delaware. Each of (i) Section 145 of the Delaware General Corporate
Law, as amended, (ii) Articles SIXTH and SEVENTH of the Company's Amended and
Restated Certificate of Incorporation, (iii) Article NINTH of IVAC Overseas'
Certificate of Incorporation, (iv) Articles SEVENTH and EIGHTH of IMED Trading's
Certificate of Incorporation and (v) ARTICLE IX of each of the Company's, IVAC
Overseas' and IMED Trading's Amended and Restated By-Laws contain
indemnification provisions.
Set forth below is the text of Articles SIXTH and SEVENTH of the Company's
Amended and Restated Certificate of Incorporation:
SIXTH: No director shall be personally liable to the Corporation or its
stockholders for monetary damages for any breach of fiduciary duty by such
director as a director except: (i) for breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of the law, (iii) pursuant to Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derived
an improper personal benefit. No amendment to or repeal of this Article
Sixth shall apply to or have any effect on the liability or alleged
liability of any director of the Corporation for or with respect to any acts
or omissions of such director occurring prior to such amendment.
SEVENTH: The corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware, as the
same may be amended and supplemented, indemnify any and all persons whom it
shall have power to indemnify under said Section from and against any and
all of the expenses, liabilities or other matters referred to or covered by
said Section, and the indemnification provided for herein shall not be
deemed exclusive of any other rights to which those indemnified may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors, or otherwise, both as to action in his official capacity and as
to action in another capacity while holding office, and shall continue as to
a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the heirs, executors and administrators of
such a person.
Set forth below is the text of Article NINTH of IVAC Overseas' Certificate
of Incorporation:
NINTH: 1. A director of the Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director to the fullest extent permitted by Delaware Law.
2. (a) Each person (and the heirs, executors or administrators of such
person) who was or is a party or is threatened to be made a party to, or is
involved in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the
fact that such person is or was a director or officer of the Corporation or
is or was serving at the request of the Corporation as a director or officer
of another corporation, partnership, joint venture, trust or other
enterprise, shall be indemnified and held harmless by the Corporation to the
fullest extent permitted by Delaware Law. The right to indemnification
conferred in this ARTICLE NINTH shall also include the right to be paid by
the Corporation the expenses incurred in connection with any such proceeding
in advance of its final disposition to the fullest extent authorized by
Delaware Law. The right to indemnification conferred in this ARTICLE NINTH
shall be a contract right.
II-1
<PAGE>
(b) The Corporation may, by action of its Board of Directors, provide
indemnification to such of the officers, employees and agents of the
Corporation to such extent and to such effect as the Board of Directors
shall determine to be appropriate and authorized by Delaware Law.
3. The Corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent
of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss incurred by such person in any such capacity or arising
out of his status as such, whether or not the Corporation would have the
power to indemnify him against such liability under Delaware Law.
4. The rights and authority conferred in this ARTICLE NINTH shall not be
exclusive of any other right which any person may otherwise have or
hereafter acquire.
5. Neither the amendment nor repeal of this ARTICLE NINTH, nor the
adoption of any provision of this Certificate of Incorporation or the bylaws
of the Corporation, nor, to the fullest extent permitted by Delaware Law,
any modification of law, shall eliminate or reduce the effect of this
ARTICLE NINTH in respect of any acts or omissions occurring prior to such
amendment, repeal, adoption or modification.
Set forth below is the text of Articles SEVENTH and EIGHTH of IMED Trading's
Certificate of Incorporation:
SEVENTH: No director shall be personally liable to the Corporation or
its stockholders for monetary damages for any breach of fiduciary duty by
such director as a director except: (i) for breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of the law, (iii) pursuant to Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derived
an improper personal benefit. No amendment to or repeal of this Article
Sixth shall apply to or have any effect on the liability or alleged
liability of any director of the Corporation for or with respect to any acts
or omissions of such director occurring prior to such amendment.
EIGHTH: The corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware, as the
same may be amended and supplemented, indemnify any and all persons whom it
shall have power to indemnify under said Section from and against any and
all of the expenses, liabilities or other matters referred to or covered by
said Section, and the indemnification provided for herein shall not be
deemed exclusive of any other rights to which those indemnified may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors, or otherwise, both as to action in his official capacity and as
to action in another capacity while holding office, and shall continue as to
a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the heirs, executors and administrators of
such a person.
Set forth below is the text of ARTICLE IX of each of the Company's, IVAC
Overseas' and IMED Trading's Amended and Restated By-Laws:
ARTICLE IX
INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 1. RIGHT TO INDEMNIFICATION. Each person who was or is made a
party or is threatened to be made a party to or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or
she is or was a director or an officer of the Corporation or is or was
serving at the request of the
II-2
<PAGE>
Corporation as a director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including
service with respect to an employee benefit plan (hereinafter an
"indemnitee"), whether the basis of such proceeding is alleged action in an
official capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to
the extent that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide
prior to such amendment), against all expense, liability and loss (including
attorney's fees, judgments, fines, ERISA excise taxes or penalties and
amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith; provided, however, that, except as
provided in Section 3 of this ARTICLE IX with respect to proceedings to
enforce rights to indemnification, the Corporation shall indemnify any such
indemnitee in connection with a proceeding (or part thereof) initiated by
such indemnitee only if such proceeding (or part thereof) was authorized by
the Board of Directors of the Corporation.
SECTION 2. RIGHT TO ADVANCEMENT OF EXPENSES. The right to
indemnification conferred in Section 1 of this ARTICLE IX shall include the
right to be paid by the Corporation the expenses (including attorney's fees)
incurred in defending any such proceeding in advance of its final
disposition (hereinafter an "advancement of expenses"); provided, however,
that, if the Delaware General Corporation Law requires, an advancement of
expenses incurred by an indemnitee in his or her capacity as a director or
officer (and not in any other capacity in which service was or is rendered
by such indemnitee, including, without limitation, service to an employee
benefit plan) shall be made only upon delivery to the Corporation of an
undertaking (hereinafter an "undertaking"), by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right
to appeal (hereinafter a "final adjudication") that such indemnitee is not
entitled to be indemnified for such expenses under this Section 2 or
otherwise. The rights to indemnification and to the advancement of expenses
conferred in Sections 1 and 2 of this ARTICLE IX shall be contract rights
and such rights shall continue as to an indemnitee who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators.
SECTION 3. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under Section 1
or 2 of this ARTICLE IX is not paid in full by the Corporation within sixty
(60) days after a written claim has been received by the Corporation, except
in the case of a claim for an advancement of expenses, in which case the
applicable period shall be twenty (20) days, the indemnitee may at any time
thereafter bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a
suit brought by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the indemnitee shall be entitled to
be paid also the expense of prosecuting or defending such suit. In (i) any
suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to
an advancement of expenses) it shall be a defense that, and (ii) in any suit
brought by the Corporation to recover an advancement of expenses pursuant to
the terms of an undertaking, the Corporation shall be entitled to recover
such expenses upon a final adjudication that, the indemnitee has not met any
applicable standard for indemnification set forth in the Delaware General
Corporation Law. Neither the failure of the Corporation (including its Board
of Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification of
the indemnitee is proper in the circumstances because the indemnitee has met
the applicable standard of conduct set forth in the Delaware General
Corporation Law, nor an actual determination by the Corporation (including
its Board of Directors, independent legal counsel, or its stockholders) that
the indemnitee has not met such applicable standard of conduct, shall create
a presumption that the indemnitee has not meet the applicable standard of
conduct or, in the case of such a suit brought
II-3
<PAGE>
by the indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or brought by the Corporation to recover an advancement
of expenses pursuant to the terms of an undertaking, the burden of proving
that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this ARTICLE IX or otherwise shall be on the
Corporation.
SECTION 4. NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification and
to the advancement of expenses conferred in this ARTICLE IX shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, the Corporation's Certificate of Incorporation, By-Laws,
agreement, vote of stockholders or disinterested directors or otherwise.
SECTION 5. INSURANCE. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of
the Corporation or another corporation, partnership, joint venture, trust or
other enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such
expense, liability or loss under the Delaware General Corporation Law.
SECTION 6. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION.
The Corporation may, to the extent authorized from time to time by the Board
of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent
of the provisions of this ARTICLE IX with respect to the indemnification and
advancement of expenses of directors and officers of the Corporation.
The Company has entered into indemnification agreements with certain of its
directors, officers and employees providing each such person with
indemnification (and advancement of expenses) to the fullest extent permitted by
Delaware law.
The Company maintains officers' and directors' liability insurance which
insures against liabilities that officers and directors of the Company may incur
in such capacities.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Purchase Agreement dated November 19, 1996 among IMED Corporation, IMED Trading, Donaldson, Lufkin &
Jenrette Securities Corporation, BT Securities Corporation, Bear, Stearns & Co., Inc. and Paribas
Corporation.*
1.2 Purchase Agreement Assumption Agreement dated as of November 26, 1996 between the Company and IVAC
Overseas.*
2.1 Agreement and Plan of Merger dated August 23, 1996 among the Participating Stockholders, IMED
Corporation, IMED Merger Sub, Inc., the Company and IVAC Medical Systems, Inc. (Incorporated by
reference to Exhibit 2 to Advanced Medical, Inc.'s report on Form 8-K dated August 23, 1996 (the "AM
August 8-K")).
2.2 Agreement of Stock Purchase and Plan of Recapitalization dated November 26, 1996 among Advanced
Medical, Inc., Decisions Incorporated and Jeffry M. Picower (Incorporated by reference to Exhibit
10.3 to Advanced Medical, Inc.'s report on Form 8-K dated December 11, 1996 (the "AM December 8-K")).
3.1 Amended and Restated Certificate of Incorporation of the Company.*
3.2 Amended and Restated By-Laws of the Company.*
3.3 Certificate of Incorporation of IVAC Overseas.*
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
3.4 Amended and Restated By-Laws of IVAC Overseas.*
3.5 Certificate of Incorporation of IMED Trading.*
3.6 Amended and Restated By-Laws of IMED Trading.*
3.7 Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company.
4.1 Indenture dated as of November 26, 1996 among IMED Corporation, IMED Trading 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 the Company and United States
Trust Company of New York, as trustee.*
4.3 Supplemental Indenture dated as of November 26, 1996 between IVAC Overseas 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 Trading,
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 the Company and IVAC
Overseas.*
5 Opinion of Gordon Altman Butowsky Weitzen Shalov & Wein.**
10.1 Credit Agreement dated as of November 26, 1996 ("Credit Agreement") 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 the Company 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")).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.8 Activity Road Lease Agreement dated as of October 25, 1995 between Rancho Bernardo Corporate Center
Ltd. and IVAC Corporation (Incorporated by reference to Exhibit 10.13 to the IVAC 1995 Form 10-K).
10.9 Kenamar Court Lease Agreement dated as of January 24, 1996 between Brentcrest Properties, Inc. and
IVAC Corporation (Incorporated by reference to Exhibit 10.14 of the IVAC 1995 Form 10-K).
10.10 Development and Exclusive Distribution Agreement dated May 8, 1995 between Debiotech SA and IMED
Corporation (Incorporated by reference to Exhibit 10.7 of Amendment No. 2 dated January 31, 1996 to
Advanced Medical, Inc.'s Report on Form 10-Q for the quarter ended September 30, 1995).
10.11 Asset Transfer Agreement dated June 26, 1996 among IMED Ltd., IMED Corporation, Pharmacia AB and
Pharmacia & Upjohn Limited with respect to the acquisition of certain European assets (Incorporated
by reference to Exhibit 10.28 to Advanced Medical, Inc.'s Report on Form 10-Q for the quarter ended
June 30, 1996 (the "AM June 1996 Form 10-Q")).
10.12 Assignment Agreement dated June 26, 1996 among IMED Corporation, IMED Trading, 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.
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).
12 Computation of Ratio of Earnings to Fixed Charges.
21 List of Subsidiaries of the Company.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Gordon Altman Butowsky Weitzen Shalov & Wein (included in Exhibit 5.1).**
24 Power of Attorney (included on the Company's signature page of the Registration Statement on Form S-4
(333-18687) of the Company, IVAC Overseas and IMED Trading dated December 24, 1996).
25 Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939 of United
States Trust Company of New York, as trustee.*
27 Financial Data Schedule, 3 months.
</TABLE>
- ------------------------
* Filed as an exhibit to the Registration Statement on Form S-4 (333-18687) of
the Company, IVAC Overseas and IMED Trading dated December 24, 1996.
** To be filed by amendment.
(b) Financial Statement Schedule
Report of Independent Accountants on Financial Statement Schedule.
Schedule II--Valuation and Qualifying Accounts and Reserves.
II-6
<PAGE>
All other schedules are omitted because they are not applicable or not
required, or because the information required therein is included in the
financial statements or the notes thereto.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Diego, State of
California, on May 28, 1997.
ALARIS MEDICAL SYSTEMS, INC.
By: /s/ WILLIAM J. MERCER
-----------------------------------------
Name: William J. Mercer
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE(S) DATE
- ---------------------------------------- ------------------------------ --------------------
<C> <S> <C>
*
- ---------------------------------------- Director and Chairman of the May 28, 1997
Jeffry M. Picower Board
Director, President, Chief
/s/ WILLIAM J. MERCER Executive Officer, Chief
- ---------------------------------------- Financial Officer and Chief May 28, 1997
William J. Mercer Accounting Officer
*
- ---------------------------------------- Director May 28, 1997
Norman M. Dean
*
- ---------------------------------------- Director May 28, 1997
Henry Green
*
- ---------------------------------------- Director May 28, 1997
Frederic Greenberg
*
- ---------------------------------------- Director May 28, 1997
Richard B. Kelsky
*By: /s/ WILLIAM J. MERCER
- ---------------------------------------
Attorney-in-Fact
</TABLE>
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Diego, State of
California, on May 28, 1997.
IVAC OVERSEAS HOLDINGS, INC.
By: /s/ WILLIAM J. MERCER
-----------------------------------------
Name: William J. Mercer
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE(S) DATE
- ---------------------------------------- ------------------------------ --------------------
<C> <S> <C>
/s/ JOHN A. DE GROOT
- ---------------------------------------- Director May 28, 1997
John A. de Groot
Director, President, Chief
/s/ WILLIAM J. MERCER Executive Officer, Chief
- ---------------------------------------- Financial Officer and Chief May 28, 1997
William J. Mercer Accounting Officer
</TABLE>
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Diego, State of
California, on May 28, 1997.
<TABLE>
<S> <C> <C>
IMED INTERNATIONAL TRADING CORP.
By: /s/ WILLIAM J. MERCER
-----------------------------------------
Name: William J. Mercer
Title: President
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE(S) DATE
- ---------------------------------------- ------------------------------ --------------------
<C> <S> <C>
/s/ GRANTLAND E. BRYCE
- ---------------------------------------- Director, Vice President and May 28, 1997
Grantland E. Bryce Secretary
Director, President, Chief
/s/ WILLIAM J. MERCER Executive Officer, Chief
- ---------------------------------------- Financial Officer, Chief May 28, 1997
William J. Mercer Accounting Officer and
Treasurer
</TABLE>
II-10
<PAGE>
ALARIS MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END OF
OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS(2) PERIOD
------------- ------------- ------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Deducted from receivables
Allowance for doubtful accounts:
Year ended December 31, 1994................... $ 804 $ 100 -- $ (49) $ 855
Year ended December 31, 1995................... 855 100 -- (80) 875
Year ended December 31, 1996................... 875 100 $ 3,320 (210) 4,085
</TABLE>
- ------------------------
(1) Represents amount of allowance for doubtful accounts assigned to accounts
receivable acquired in the Merger.
(2) Represents accounts written-off as uncollectible, net of collections on
accounts previously written-off.
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE
- ------------- ---------------------------------------------------------------------------------------- -------------
<C> <S> <C>
1.1 Purchase Agreement dated November 19, 1996 among IMED Corporation, IMED International
Trading Corp., Donaldson, Lufkin & Jenrette Securities Corporation, BT Securities
Corporation, Bear, Stearns & Co., Inc. and Paribas Corporation.*
1.2 Purchase Agreement Assumption Agreement dated as of November 26, 1996 between IVAC
Holdings, Inc. and IVAC Overseas Holdings, Inc.*
2.1 Agreement and Plan of Merger dated August 23, 1996 among the Participating Stockholders,
IMED Corporation, IMED Merger Sub, Inc., IVAC Holdings, Inc. and IVAC Medical Systems,
Inc. (Incorporated by reference to Exhibit 2 to Advanced Medical, Inc.'s report on Form
8-K dated August 23, 1996 (the "AM August 8-K")).
2.2 Agreement of Stock Purchase and Plan of Recapitalization dated November 26, 1996 among
Advanced Medical, Inc., Decisions Incorporated and Jeffry M. Picower (Incorporated by
reference to Exhibit 10.3 to Advanced Medical, Inc.'s report on Form 8-K dated December
11, 1996 (the "AM December 8-K")).
3.1 Amended and Restated Certificate of Incorporation of IVAC Holdings, Inc.*
3.2 Amended and Restated By-Laws of IVAC Holdings, Inc.*
3.3 Certificate of Incorporation of IVAC Overseas Holdings, Inc.*
3.4 Amended and Restated By-Laws of IVAC Overseas Holdings, Inc.*
3.5 Certificate of Incorporation of IMED International Trading Corp.*
3.6 Amended and Restated By-Laws of IMED International Trading Corp.*
3.7 Certificate of Amendment to the Amended and Restated Certificate of Incorporation of
IVAC Holdings, Inc.
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.*
5 Opinion of Gordon Altman Butowsky Weitzen Shalov & Wein.**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE
- ------------- ---------------------------------------------------------------------------------------- -------------
<C> <S> <C>
10.1 Credit Agreement dated as of November 26, 1996 ("Credit Agreement") among Advanced
Medical, Inc., IMED Corporation, Various Lending Institutions, Bankers Trust Company,
Banque Paribas and Donaldson, Lufkin & Jenrette Securities Corporation (Incorporated by
reference to Exhibit 10.1 to the AM December 8-K).
10.2 Employment Agreement dated as of August 23, 1996 among William J. Mercer, IMED
Corporation and Advanced Medical, Inc. (Incorporated by reference to Exhibit 10.4 to the
AM December 8-K).
10.3 Employment Agreement dated as of August 23, 1996 among Joseph W. Kuhn, IMED Corporation
and Advanced Medical, Inc. (Incorporated by reference to Exhibit 10.5 to the AM December
8-K).
10.4 Advanced Medical, Inc.'s Third Amended and Restated 1988 Stock Option Plan (Incorporated
by reference to Annex IV to Advanced Medical, Inc.'s Proxy Statement dated July 25, 1994
for its Special Meeting of Stockholders held on August 11, 1994 (the "AM August 1994
Proxy Statement")).
10.5 Advanced Medical, Inc.'s Second Amended and Restated 1990 Non-Qualified Stock Option
Plan for Non-Employee Directors (Incorporated by reference to Annex V to the AM August
1994 Proxy Statement).
10.6 Form of Indemnification Agreements between IVAC Holdings, Inc. and certain of its
directors and officers (Incorporated by reference to Exhibit 10.2 to IVAC Medical
System, Inc.'s Report on Form 10-Q for the quarter ended June 30, 1996).
10.7 Wateridge Plaza Office Building Lease Agreement dated as of December 1, 1995 between
California Public Employees' Retirement System and IVAC Corporation (Incorporated by
reference to Exhibit 10.12 to IVAC Medical Systems, Inc.'s Report on Form 10-K for the
year ended December 31, 1995 (the "IVAC 1995 Form 10-K")).
10.8 Activity Road Lease Agreement dated as of October 25, 1995 between Rancho Bernardo
Corporate Center Ltd. and IVAC Corporation (Incorporated by reference to Exhibit 10.13
to the IVAC 1995 Form 10-K).
10.9 Kenamar Court Lease Agreement dated as of January 24, 1996 between Brentcrest
Properties, Inc. and IVAC Corporation (Incorporated by reference to Exhibit 10.14 of the
IVAC 1995 Form 10-K).
10.10 Development and Exclusive Distribution Agreement dated May 8, 1995 between Debiotech SA
and IMED Corporation (Incorporated by reference to Exhibit 10.7 of Amendment No. 2 dated
January 31, 1996 to Advanced Medical, Inc.'s Report on Form 10-Q for the quarter ended
September 30, 1995).
10.11 Asset Transfer Agreement dated June 26, 1996 among IMED Ltd., IMED Corporation,
Pharmacia AB and Pharmacia & Upjohn Limited with respect to the acquisition of certain
European assets (Incorporated by reference to Exhibit 10.28 to Advanced Medical, Inc.'s
Report on Form 10-Q for the quarter ended June 30, 1996 (the "AM June 1996 Form 10-Q")).
10.12 Assignment Agreement dated June 26, 1996 among IMED Corporation, IMED International
Trading Corp., Advanced Medical, Inc. and Pharmacia, AB with respect to the acquisition
of European distribution rights (Incorporated by reference to Exhibit 10.29 to the AM
June 1996 Form 10-Q).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE
- ------------- ---------------------------------------------------------------------------------------- -------------
<C> <S> <C>
10.13 Amendment and Waiver No. 1 to Credit Agreement dated as of March 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).
12 Computation of Ratio of Earnings to Fixed Charges.
21 List of Subsidiaries of the Company.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Gordon Altman Butowsky Weitzen Shalov & Wein (included in Exhibit 5.1).**
24 Power of Attorney (included on the IVAC Holdings, Inc. signature page of the
Registration Statement on Form S-4 (33-18687) of the Company, IVAC Overseas Holdings,
Inc. and IMED International Trading Corp. dated December 24, 1996).
25 Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of
1939 of United States Trust Company of New York, as trustee.
27 Financial Data Schedule, 3 months.
</TABLE>
- ------------------------
* Filed as an exhibit to the Registration Statement on Form S-4 (333-18687) of
IVAC Holdings, Inc., IVAC Overseas Holdings, Inc. and IMED International
Trading Corp. dated December 24, 1996.
** To be filed by amendment.
<PAGE>
Exhibit 3.7
CERTIFICATE OF AMENDMENT TO THE
CERTIFICATE OF INCORPORATION
OF
IVAC HOLDINGS, INC.
PURSUANT TO SECTION 242 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
IVAC Holdings, Inc. (the "Corporation"), a corporation organized and
existing under the laws of Delaware, does hereby certify that:
FIRST: The name of the Corporation is IVAC Holdings, Inc.
SECOND: The Certificate of Incorporation was originally filed with the
Secretary of State of Delaware under the name River Acquisition Corp. on
October 14, 1994.
THIRD: The Board of Directors of the Corporation, at a meeting held in
accordance with Section 141 of the General Corporation Law of the State of
Delaware ("DGCL"), adopted a resolution proposing and declaring it advisable
to amend the Certificate of Incorporation of the Corporation to change the
name of the Corporation to ALARIS Medical Systems, Inc.
FOURTH: The amendment has been duly adopted by sole stockholder in
accordance with the provisions of Sections 228 and 242 of DGCL.
FIFTH: That in connection with the foregoing, Article FIRST of the
Certificate of Incorporation of the Corporation is hereby deleted in its
entirety and substituted therefor is the following new Article FIRST.
"FIRST" The name of the corporation is ALARIS Medical Systems, Inc.
SIXTH: That this Amendment to the Certificate on Incorporated was made
pursuant to Sections 228 and 242 of the Delaware Corporation Law.
IN WITNESS WHEREOF, said Corporation has caused this Certificate to be
signed by William J. Mercer, its President and Chief Executive Officer this
25th day of April, 1997.
/s/ William J. Mercer
____________________________
William J. Mercer, President
and Chief Executive Officer
<PAGE>
EXHIBIT 10.13
AMENDMENT AND WAIVER NO. 1 TO CREDIT AGREEMENT
AMENDMENT AND WAIVER NO. 1 (this "Amendment"), dated as of March 28,
1997, among ADVANCED MEDICAL, INC., a Delaware corporation ("Advanced Medical"),
IVAC HOLDINGS, INC., a Delaware corporation (the "Borrower"), the financial
institutions party to the Credit Agreement referred to below (the "Banks"),
BANKERS TRUST COMPANY, as Administrative Agent and as a Syndication Agent and
BANQUE PARIBAS, as Documentation Agent (together with Bankers Trust Company in
its capacity as Administrative Agent, the "Agents") and as a Syndication Agent.
All capitalized terms used herein and not otherwise defined shall have the
respective meanings provided such terms in the Credit Agreement referred to
below.
W I T N E S S E T H :
WHEREAS, Advanced Medical, the Borrower, the Banks and the Agents are
parties to the Credit Agreement, dated as of November 26, 1996 (as modified,
supplemented and amended to the date hereof, the "Credit Agreement");
WHEREAS, Advanced Medical and the Borrower have requested, and the
Banks party hereto are willing (subject to the terms and conditions hereof) to
grant, a waiver in connection with certain covenants contained in the Credit
Agreement, and further the parties hereto wish to amend the Credit Documents as
set forth below;
NOW THEREFORE, it is agreed:
1. On the Amendment Effective Date (as defined below), the Banks
hereby waive compliance by the Borrower with the provision set forth in Section
7.01(a) of the Credit Agreement solely with respect to the fiscal months ending
on December 31, 1996, January 31, 1997 and February 28, 1997.
<PAGE>
2. On the Amendment Effective Date, Section 7.01(a) of the Credit
Agreement is hereby amended by inserting at the end of such Section, immediately
following the word "footnotes" the following proviso:
, PROVIDED that (i) for the fiscal month ended on December
31, 1996 and for the two month period ended on February 28,
1997, such reports shall be furnished to each Bank within
120 days after the fiscal year ended on December 31, 1996,
(ii) thereafter, for each fiscal month ending in March, June
and September, such reports shall be furnished to each Bank
within 55 days after the end of such fiscal month and (iii)
for each fiscal month ending in December (other than
December 31, 1996), such reports shall be furnished to each
Bank within 100 days after the end of such fiscal month.
3. On the Amendment Effective Date, Section 7.01(b) of the Credit
Agreement is hereby amended by inserting at the end of such Section, immediately
following the word "footnotes" the following proviso:
, PROVIDED that (i) for the quarterly accounting period
ending on December 31, 1996, such statements shall be
furnished to each Bank within 120 days after the close of
such quarterly accounting period and (ii) thereafter, for
each quarterly accounting period ending in December, such
statements shall be furnished to each Bank within 100 days
after the close of such quarterly accounting period.
4. On the Amendment Effective Date, Section 7.01(c) of the Credit
Agreement is hereby amended by inserting at the end of such Section, immediately
following the word "thereof" the following proviso:
, PROVIDED that for the fiscal year ended on December 31,
1996, such annual statements shall be furnished to each Bank
within 120 days after the end of such fiscal year.
5. On the Amendment Effective Date, Section 7.01(d) of the Credit
Agreement is hereby amended by replacing the phrase "90 days" therein with the
phrase "120 days".
-2-
<PAGE>
6. On and after the Amendment Effective Date, Section 7.03 of the
Credit Agreement is hereby amended by deleting in its entirety therein, the
phrase "on each date on which financial statements are delivered pursuant to
Section 7.01(c)" and inserting in lieu thereof the phrase, "within 120 days
after the close of each fiscal year".
7. On the Amendment Effective Date, the definition of "Net Worth" in
Section 10 of the Credit Agreement is hereby amended by inserting at the end of
such definition immediately following the words "treasury stock" therein the
following phrase:
, after tax adjustments for purchase accounting and the
after tax effect of non-cash restructuring charges in
connection with the IVAC Merger and the IMED Merger.
8. In order to induce the Agents and the Banks to enter into this
Amendment, Advanced Medical and the Borrower hereby represent and warrant that
(x) no Default or Event of Default exists on the Amendment Effective Date (as
defined below) after giving effect to this Amendment and (y) all of the
representations and warranties contained in the Credit Agreement and the other
Credit Documents shall be true and correct in all material respects on the date
hereof and on the Amendment Effective Date (as defined below) with the same
effect as though such representations and warranties had been made on and as of
such date (it being understood that any representation or warranty made as of a
specific date shall be true and correct in all material respects as of such
specific date).
9. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
10. This Amendment may be executed in any number of counterparts and
by the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be lodged with Advanced Medical, the Borrower and the Agents.
11. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE
STATE OF NEW YORK.
-3-
<PAGE>
12. This Amendment shall become effective as of the date hereof on
the date (the "Amendment Effective Date") when each of Advanced Medical, the
Borrower, the Agents and the Required Banks shall have signed a copy hereof
(whether the same or different copies) and shall have delivered (including by
way of telecopier) the same to the Administrative Agent at its Notice Office.
-4-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of the date
first above written.
ADVANCE MEDICAL, INC.
By /s/ WILLIAM J. MERCER
--------------------------------
Name: William J. Mercer
Title: President and Chief Executive Officer
IVAC HOLDINGS, INC.
By /s/ WILLIAM J. MERCER
--------------------------------
Name: William J. Mercer
Title: President and Chief Executive Officer
BANKERS TRUST COMPANY,
Individually and as Administrative Agent
By /s/ MARY KAY COYLE
--------------------------------
Name: Mary Kay Coyle
Title: Managing Director
<PAGE>
BANQUE PARIBAS,
Individually and as Documentation Agent
By /s/ (Illegible)
--------------------------------
Name: (Illegible)
Title: VPI Group Head
By /s/ NANCI MEYER
--------------------------------
Name: Nanci Meyer
Title: AVP
<PAGE>
PARIBAS CAPITAL FUNDING
By /s/ ERIC GREER
--------------------------------
Name: Eric Greer
Title: Director
<PAGE>
GENERAL ELECTRIC CAPITAL
CORPORATION
By /s/ (Illegible)
--------------------------------
Name: (Illegible)
Title: Vice President
<PAGE>
THE NIPPON CREDIT BANK, LTD.
By /s/ CLIFFORD ABRAMSKY
--------------------------------
Name: Clifford Abramsky
Title: Senior Manager
<PAGE>
BANK OF MONTREAL
By /s/ REBECCA D. KUNTZ
--------------------------------
Name: Rebecca D. Kuntz
Title: Director
<PAGE>
UNION BANK OF CALIFORNIA, N.A.
By /s/ LYNN E. VINE
--------------------------------
Name: Lynn E. Vine
Title: Vice President
<PAGE>
UNITED STATES NATIONAL BANK OF
OREGON
By /s/ DALE PARSHALL
--------------------------------
Name: Dale Parshall
Title: Assistant Vice President
<PAGE>
PILGRIM AMERICA PRIME RATE TRUST
By /s/ MICHAEL J. BACEVICH
--------------------------------
Name: Michael J. Bacevich
Title: Vice President
<PAGE>
IBJ SCHRODER BANK & TRUST COMPANY
By
--------------------------------
Name:
Title:
<PAGE>
MERRILL LYNCH SENIOR FLOATING RATE
FUND, INC.
By /s/ ANTHONY R. CLEMENTE
--------------------------------
Name: Anthony R. Clemente
Title: Authorized Signatory
<PAGE>
ML CBO IV (CAYMAN) Ltd.
By: Protective Asset Management, L.L.C., as
Collateral Manager
By /s/ JAMES DONDERO CPA, CFA
--------------------------------
Name: James Dondero CPA, CFA
Title: President
Protective Asset Management, L.L.C.
<PAGE>
VAN KAMPEN AMERICAN CAPITAL PRIME
RATE INCOME TRUST
By /s/ BRIAN W. GOOD
--------------------------------
Name: Brian W. Good
Title: Vice President
<PAGE>
JACKSON NATIONAL LIFE INSURANCE
COMPANY
By: PPM America, Inc., as attorney in fact, on
behalf of Jackson National Life Insurance
Company
By /s/ MICHAEL DI RE
--------------------------------
Name: Michael DiRe
Title: Managing Director/
Head, High Yield Bank Loans
<PAGE>
CRESCENT/MACH I PARTNERS, L.P.
By: TCW Asset Management Company, its
Investment Manager
By /s/ (Illegible)
--------------------------------
Name:
Title:
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY
By /s/ (Illegible)
--------------------------------
Name:
Title:
By /s/ (Illegible)
--------------------------------
Name:
Title:
<PAGE>
ING CAPITAL ADVISORS, INC., as Agent for
Bank Syndication Account
By /s/ KATHLEEN A. LENARCIC
--------------------------------
Name: Kathleen A. Lenarcic
Title: Vice President & Portfolio Manager
<PAGE>
OCTAGON CREDIT INVESTORS LOAN
PORTFOLIO (a unit of The Chase
Manhattan Bank)
By /s/ ANDREW D. GORDON
--------------------------------
Name: Andrew D. Gordon
Title: Managing Director
<PAGE>
INDOSUEZ CAPITAL FUNDING III, LIMITED
By: Indosuez Capital, as Portfolio Advisor
By /s/ FRANCOISE BERTHELOT
--------------------------------
Name: Francoise Berthelot
Title: Vice President
<PAGE>
SENIOR DEBT PORTFOLIO
By: Boston Management and Research, as
Investment Advisor
By /s/ PAYSON F. SWAFFIELD
--------------------------------
Name: Payson F. Swaffield
Title: Vice President
<PAGE>
PRIME INCOME TRUST
By /s/ RAFAEL SCOLARI
--------------------------------
Name: Rafael Scolari
Title: V.P. Portfolio Manager
<PAGE>
OCTAGON CREDIT INVESTORS LOAN
PORTFOLIO (a unit of The Chase
Manhattan Bank)
By
--------------------------------
Name:
Title:
INDOSUEZ CAPITAL FUNDING III, LIMITED
By: Indosuez Capital, as Portfolio Advisor
By
--------------------------------
Name:
Title:
AMARA-1 FINANCE LTD.
By ANDREW IAN WIGNALL
--------------------------------
Name: Andrew Ian Wignall
Title: Director
AMARA-2 FINANCE LTD.
By ANDREW IAN WIGNALL
--------------------------------
Name: Andrew Ian Wignall
Title: Director
<PAGE>
EXHIBIT 12
ALARIS MEDICAL SYSTEMS
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(AMOUNTS IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------------- -----------------
1996
1992 1993 1994 1995 1996 PRO FORMA 1996 1997
------- ------ ------- ------- ----------- ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pre-tax income (loss) from
continuing operations $13,939 $ (377) $13,955 $16,365 $(49,404) $ 3,583 $3,767 $(5,201)
Fixed charges:
Interest expense and amortization
of debt discount and premium on
all indebtedness 5,046 4,159 2,805 2,052 6,303 40,384 351 10,370
Interest portion of rentals
(33% of rent expense) 1,232 1,252 1,226 1,046 1,156 2,065 173 377
------- ------ ------- ------- -------- ------- ------ -------
Total fixed charges 6,278 5,411 4,031 3,098 7,459 42,449 524 10,747
------- ------ ------- ------- -------- ------- ------ -------
------- ------ ------- ------- -------- ------- ------ -------
Earnings before income taxes and
fixed charges $20,217 $5,034 $17,986 $19,463 $(41,945) $46,032 $4,291 $ 5,546
------- ------ ------- ------- -------- ------- ------ -------
------- ------ ------- ------- -------- ------- ------ -------
Ratio of earnings to fixed charges 3.2 n/a 4.5 6.3 n/a 1.1 8.2 n/a
------- ------ ------- ------- -------- ------- ------ -------
------- ------ ------- ------- -------- ------- ------ -------
Earnings insufficient to cover
fixed charges by n/a $ 377 n/a n/a $ 49,404 n/a n/a $ 5,201
------- ------ ------- ------- -------- ------- ------ -------
------- ------ ------- ------- -------- ------- ------ -------
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF ALARIS MEDICAL SYSTEMS, INC.
<TABLE>
<CAPTION>
JURISDICTION OF
NAME INCORPORATION
- -------------------------------------------------------------------------------------- --------------------------
<S> <C>
IVAC Overseas Holdings, Inc. Delaware
River Medical, Inc. Delaware
IVAC Foreign Sales Corp. Barbados
IVAC Canada, Inc. Canada
IVAC-Medical, B.V. Belgium
IVAC Scandinavia AB Sweden
IVAC Industries Limited United Kingdom
IVAC UK Limited United Kingdom
IVAC France S.A. France
IVAC Medizintechnik GmbH Germany
Electromedicina IVAC, S.L. Spain
IMED International Trading Corp. Delaware
IMED Ltd. United Kingdom
IMED Pty. Ltd. Australia
IMED Canada Ltd. Canada
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of our reports dated March 27, 1997 relating
to the financial statements of ALARIS Medical Systems, Inc. (formerly IMED
Corporation), March 29, 1996 relating to the financial statements of IVAC
Holdings, Inc. and June 29, 1995 relating to the financial statements of IVAC
Corporation, which appear in such Prospectus. We also consent to the application
of our report dated March 27, 1997 to the Financial Statement Schedule of ALARIS
Medical Systems, Inc. for the three years ended December 31, 1996 appearing on
page S-1 of this Registration Statement when such schedule is read in
conjunction with the financial statements referred to in our report. The audits
referred to in such report also included this schedule. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
San Diego, California
May 28, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted from the
Consolidated Balance Sheet and Condensed Consolidated Statement of Operations
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 14,635
<SECURITIES> 0
<RECEIVABLES> 67,299
<ALLOWANCES> (3,732)
<INVENTORY> 61,926
<CURRENT-ASSETS> 173,527
<PP&E> 81,629
<DEPRECIATION> (24,992)
<TOTAL-ASSETS> 582,145
<CURRENT-LIABILITIES> 98,777
<BONDS> 418,306
0
0
<COMMON> 0
<OTHER-SE> 44,631
<TOTAL-LIABILITY-AND-EQUITY> 582,145
<SALES> 81,995
<TOTAL-REVENUES> 81,995
<CGS> 46,970
<TOTAL-COSTS> 46,970
<OTHER-EXPENSES> 30,908
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> 10,370
<INCOME-PRETAX> (5,201)
<INCOME-TAX> (1,900)
<INCOME-CONTINUING> (3,301)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,301)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
