<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended JUNE 30, 1999 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ___________ to ___________
Commission File Number: 333-18687
--------------------------------------------------------
ALARIS MEDICAL SYSTEMS, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3800335
- -------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10221 Wateridge Circle, San Diego, CA 92121
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(619) 458-7000
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
On August 4, 1999 the registrant had 1,000 shares of common stock outstanding.
Page 1 of 26
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ALARIS MEDICAL SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 - Financial Information:
Condensed consolidated balance sheet at
June 30, 1999 and December 31, 1998............................... 3
Condensed consolidated statement of operations for
the three and six months ended June 30, 1999 and 1998............. 4
Condensed consolidated statement of cash flows for the
six months ended June 30, 1999 and 1998........................... 5
Condensed consolidated statement of changes in
Stockholder's equity for the period from
December 31, 1998 to June 30, 1999................................ 6
Notes to the condensed consolidated financial statements.......... 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 12
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings............................................ 23
Item 6 - Exhibits and Reports on Form 8-K............................. 24
</TABLE>
2
<PAGE>
FORM 10 - Q
PART 1 - ITEM 1
FINANCIAL INFORMATION
ALARIS MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash..................................................... $ 39,661 $ 29,468
Receivables, net......................................... 76,767 102,294
Inventories.............................................. 78,736 79,485
Prepaid expenses and other current assets................ 27,853 25,223
---------- -----------
Total current assets................................... 223,017 236,470
Net investment in sales-type leases, less current portion.. 21,503 19,111
Property, plant and equipment, net......................... 68,121 61,990
Other non-current assets................................... 16,785 17,382
Intangible assets, net..................................... 301,146 309,424
---------- -----------
$ 630,572 $ 644,377
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt........................ $ 13,390 $ 15,423
Accounts payable......................................... 19,375 22,004
Accrued expenses and other current liabilities........... 53,234 50,899
---------- -----------
Total current liabilities.............................. 85,999 88,326
---------- -----------
Long-term debt............................................. 392,340 399,623
Other non-current liabilities.............................. 33,299 33,310
---------- -----------
Total non-current liabilities.......................... 425,639 432,933
---------- -----------
Contingent liabilities and commitments (Note 4)
Common stock and other stockholder's equity:
Common stock and capital in excess of par value,
authorized 3,000 common shares at $.01 par value;
1,000 issued and outstanding at June 30, 1999 and
December 31, 1998...................................... 203,673 203,652
Accumulated deficit...................................... (79,962) (77,345)
Accumulated other comprehensive loss..................... (4,777) (3,189)
---------- -----------
Total stockholder's equity............................. 118,934 123,118
---------- -----------
$ 630,572 $ 644,377
---------- -----------
---------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales ............................................... $ 99,615 $ 90,683 $ 193,051 $ 177,654
Cost of sales.......................................... 54,963 46,499 100,597 91,353
----------- ----------- ----------- -----------
Gross margin........................................... 44,652 44,184 92,454 86,301
----------- ----------- ----------- -----------
Selling and marketing expenses......................... 19,168 17,100 39,085 34,229
General and administrative expenses.................... 11,153 9,284 22,027 18,817
Research and development expenses...................... 6,551 4,660 12,598 9,000
Purchased in-process research and development.......... - 5,534 - 5,534
Integration and other non-recurring charges............ 1,339 - 3,438 -
----------- ----------- ----------- -----------
Total operating expenses........................... 38,211 36,578 77,148 67,580
----------- ----------- ----------- -----------
Lease interest income.................................. 1,019 1,059 2,080 2,221
----------- ----------- ----------- -----------
Income from operations............................. 7,460 8,665 17,386 20,942
----------- ----------- ----------- -----------
Other income (expenses):
Interest income.................................... 439 84 761 145
Interest expense................................... (9,910) (10,316) (19,910) (21,149)
Other, net......................................... (414) (324) (873) (681)
----------- ----------- ----------- -----------
Total other expense.................................... (9,885) (10,556) (20,022) (21,685)
----------- ----------- ----------- -----------
Loss before income taxes............................... (2,425) (1,891) (2,636) (743)
(Benefit from) provision for income taxes.............. (1,900) (230) (1,500) 400
----------- ----------- ----------- -----------
Net loss............................................... $ (525) $ (1,661) $ (1,136) $ (1,143)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
---------- ----------
<S> <C> <C>
Net cash provided by operating activities............. $ 39,417 $ 27,148
---------- ----------
Cash flows from investing activities:
Net capital expenditures............................ (16,417) (10,405)
Patents, trademarks and other....................... (603) (250)
Acquisition and license of technology............... (1,250) (6,547)
---------- ----------
Net cash used in investing activities................. (18,270) (17,202)
---------- ----------
Cash flows from financing activities:
Principal payments on long-term debt................ (9,349) (8,579)
Proceeds under revolving credit facility............ - 27,300
Repayments under revolving credit facility.......... - (32,250)
Dividends to ALARIS Medical......................... (1,481) (1,133)
---------- ----------
Net cash used in financing activities................. (10,830) (14,662)
---------- ----------
Effect of exchange rate changes on cash............... (124) (40)
---------- ----------
Net increase/(decrease) in cash....................... 10,193 (4,756)
Cash at beginning of period........................... 29,468 6,918
---------- ----------
Cash at end of period................................. $ 39,661 $ 2,162
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDER'S EQUITY (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER OTHER
AND CAPITAL COMPRE- TOTAL COMPRE-
IN EXCESS OF PAR VALUE ACCUMULATED HENSIVE STOCKHOLDER'S HENSIVE
SHARES AMOUNT DEFICIT LOSS EQUITY LOSS
-------- -------- ----------- ----------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998................ 1,000 $203,652 $(77,345) $ (3,189) $123,118
Comprehensive loss
Net loss for the period................... (1,136) (1,136) $(1,136)
Equity adjustment from foreign
currency translation.................... (1,588) (1,588) (1,588)
-------
Comprehensive loss.......................... $(2,724)
-------
-------
Tax benefit from exercise of ALARIS
Medical stock options..................... 21 21
Dividends to ALARIS Medical................. (1,481) (1,481)
------- -------- -------- -------- --------
Balance at June 30, 1999.................... 1,000 $203,673 $(79,962) $ (4,777) $118,934
------- -------- -------- -------- --------
------- -------- -------- -------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
6
<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. ("ALARIS Medical Systems"), formerly IMED
Corporation ("IMED"), designs, manufactures, distributes and services
intravenous infusion therapy and patient monitoring instruments and related
disposables and accessories, as well as cardiovascular and pacemaker monitoring
products. ALARIS Medical Systems is a wholly-owned subsidiary of ALARIS Medical,
Inc. ("ALARIS Medical"). ALARIS Medical Systems and its subsidiaries are
collectively referred to as the "Company."
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 June 30, 1999, and the
results of its operations and its cash flows for the six months ended June 30,
1999 and 1998.
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 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 -- INVENTORIES
<TABLE>
<CAPTION>
Inventories comprise the following: JUNE 30, DECEMBER 31,
1999 1998
----------- ----------
<S> <C> <C>
Raw materials............................................................... $ 33,942 $ 35,024
Work-in-process............................................................. 8,411 5,719
Finished goods.............................................................. 36,383 38,742
----------- ----------
$ 78,736 $ 79,485
----------- ----------
----------- ----------
</TABLE>
NOTE 3 -- SEGMENT INFORMATION
In 1998, the Company adopted Statement of Financial Accounting Standards No. 131
("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." The prior year's segment information has been conformed to present
the Company's three reportable segments in accordance with the new standard -
(1) North America, (2) International and (3) Instromedix.
The accounting policies of the segments are the same as those described in the
"Statement of Accounting Policy" (Note 1). Segment data does not include
intersegment revenues, or charges allocating corporate-
7
<PAGE>
headquarters costs to each of its operating segments. The Company evaluates
the performance of its segments and allocates resources to them based on
operating income and adjusted earnings before interest, taxes, depreciation,
and amortization (EBITDA).
The Company is organized primarily based on geographic location with the United
States and Canada drug infusion and patient monitoring business representing the
North American Segment. All other international operations including Europe,
Asia, Australia and Latin America represent the International segment. The
acquisition of Instromedix in 1998 resulted in a third separate operating
segment.
The table below presents information about reported segments for the:
Three months ended June 30,
<TABLE>
<CAPTION>
NORTH SHARED
AMERICA INTERNATIONAL INSTROMEDIX SERVICES TOTAL
----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
1999
Sales ......................... $ 67,255 $ 28,985 $ 3,375 $ - $ 99,615
Operating Income............... 5,901 5,976 623 (5,040) 7,460
Adjusted EBITDA................ 12,740 7,368 (320) (1,706) 18,082
1998
Sales ......................... $ 59,899 $ 30,784 $ - $ - $ 90,683
Operating Income............... 11,386 6,242 - (8,963) 8,665
Adjusted EBITDA................ 15,086 7,513 - (227) 22,372
</TABLE>
Reconciliation of total segment adjusted EBITDA to consolidated loss before
taxes:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ADJUSTED EBITDA
Total adjusted EBITDA for reportable segments................................... $ 18,082 $ 22,372
Depreciation and amortization................................................... (9,283) (8,173)
Interest, net................................................................... (9,471) (10,232)
Purchased in-process research and development................................... - (5,534)
Integration and other non-recurring charges..................................... (1,339) -
Other reconciling items......................................................... (414) (324)
----------- -----------
Consolidated loss before income taxes........................................ $ (2,425) $ (1,891)
----------- -----------
----------- -----------
</TABLE>
Six months ended June 30,
<TABLE>
<CAPTION>
NORTH SHARED
AMERICA INTERNATIONAL INSTROMEDIX SERVICES TOTAL
----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
1999
Sales ......................... $ 124,590 $ 61,048 $ 7,413 $ - $ 193,051
Operating Income............... 18,621 13,497 (5,619) (9,113) 17,386
Adjusted EBITDA................ 25,387 16,339 24 (2,464) 39,286
1998
Sales ......................... $ 115,970 $ 61,684 $ - $ - $ 177,654
Operating Income............... 21,076 13,091 - (13,225) 20,942
Adjusted EBITDA................ 28,560 15,645 - (1,287) 42,918
</TABLE>
8
<PAGE>
Reconciliation of total segment adjusted EBITDA to consolidated loss before
taxes:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ADJUSTED EBITDA
Total adjusted EBITDA for reportable segments................................... $ 39,286 $ 42,918
Depreciation and amortization................................................... (18,462) (16,442)
Interest, net................................................................... (19,149) (21,004)
Purchased in-process research and development................................... - (5,534)
Integration and other non-recurring charges..................................... (3,438) -
Other reconciling items......................................................... (873) (681)
----------- -----------
Consolidated loss before income taxes........................................ $ (2,636) $ (743)
----------- -----------
----------- -----------
</TABLE>
NOTE 4 -- CONTINGENCIES AND LITIGATION
GOVERNMENT REGULATION
The United States Food and Drug Administration (the "FDA"), pursuant to the
Federal Food, Drug, and Cosmetic Act (the "FDC Act"), regulates the
introduction of medical devices into commerce, as well as testing
manufacturing procedures, labeling, adverse event reporting and
record-keeping with respect to such products. The process of obtaining market
clearances from the FDA for new products can be time-consuming and expensive
and there can be no assurance that such clearances will be granted or that
FDA review will not involve delays adversely affecting the marketing and sale
of products. Enforcement of the FDC Act depends heavily on administrative
interpretation and there can be no assurance that interpretations made by the
FDA or other regulatory bodies will not have a material adverse effect on the
Company's business, financial condition, results of operations or cash flows.
The FDA and state agencies routinely inspect the Company to determine whether
the Company is in compliance with various requirements relating to
manufacturing practices, testing, quality control, complaint handling,
medical device reporting and product labeling. Such inspections can result in
such agencies requiring the Company to take certain corrective actions for
non-complying conditions observed during the inspections. A determination
that the Company is in violation of the FDC Act could lead to the imposition
of civil sanctions, including fines, recall orders, orders for repair or
refund or product seizures and criminal sanctions. Since 1994, the Company
has on eighteen occasions temporarily removed products from the market or
issued safety alerts regarding products that were found not to meet
performance standards. None of such recalls materially interfered with the
Company's operations and all such product lines, except the Model 599 Series
infusion pump, were subsequently returned to the market. The Company
continues, however, to sell administration sets and replacement parts for the
Model 599 Series infusion pump. Although there can be no assurance, the
Company believes that these voluntary recalls, along with adjustments and
corrections that may be made to various Company products from time to time as
an ordinary part of the business of the Company, will not have a material
adverse effect on the business, financial condition, results of operations or
cash flows.
LITIGATION
The Company is a defendant in a lawsuit filed in June 1996 by Sherwood
Medical, Inc. ("Sherwood") against IVAC Medical Systems, Inc. ("IVAC") which
alleges infringement of two patents by reason of certain activities including
the sale by IVAC of disposable probe covers for use with the Company's
infrared tympanic thermometer. The lawsuit sought injunctive relief, treble
damages and the recovery of costs and attorney fees. The jury failed to reach
a verdict in this litigation and the Court has declared a mistrial. Sherwood
has asked the Court for a retrial, which is scheduled for August 1999. The
Company believes it has sufficient defenses to all claims, including the
defenses of noninfringement and invalidity and intends to vigorously defend
this action. However, there can be no assurance that the Company will
9
<PAGE>
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 business, financial condition, results of operations or cash
flows.
The Company is a defendant in a lawsuit filed on April 20, 1998 and served on
October 28, 1998, by Becton Dickinson and Company ("Becton") against ALARIS
Medical Systems, Inc., which alleges infringement of a patent licensed to
Becton by reason of certain activities, including the sale of the Company's
SmartSite needle-free system. Becton has requested a permanent injunction
enjoining the Company from infringing the patent in suit. No amount of
monetary damages has been specified by Becton, however, the complaint
requests damages as appropriate and all gains, profits and advantages derived
by or from the Company's infringement of the patent, as well as prejudgment
interest, costs, expenses and reasonable attorney's fees. The Company
believes it has sufficient defenses to all claims, and intends to vigorously
defend this action. However, there can be no assurance that the Company will
successfully defend all claims made by Becton and the failure of the Company
to successfully prevail in this lawsuit could have a material adverse effect
on the business, financial condition, results of operations or cash flows. In
addition, the Company filed a lawsuit on December 4, 1998 against Becton. The
lawsuit, which is pending in the United States District Court for the
Southern District of California, alleges infringement of two patents, one
owned by the Company and one licensed to the Company, by reason of certain
activities, including the sale of Becton's Posi-Flow needle free valve. The
lawsuit seeks injunctive relief, damages and the recovery of costs and
attorney fees.
UNITED STATES CUSTOMS SERVICE MATTER
During the years 1988 through 1995, Cal Pacifico acted as the Company's
United States customs broker and importer of record with respect to the
importation into the United States of finished products ("Finished Products")
assembled at the Company's two maquiladora assembly plants in Tijuana,
Mexico. In May 1995, Cal Pacifico received a pre-penalty notice from the
United States Customs Service ("Customs") to the effect that Customs intended
to assess additional duties and substantial penalties against Cal Pacifico
for its alleged failure, during the years 1988 through 1992, to comply with
certain documentary requirements regarding the importation of goods on behalf
of its clients, including the Company. Customs assessed additional duties
with respect to Cal Pacifico's importation of goods on behalf of its clients,
including the importation of the Company's Finished Products, for the years
1993 and 1994, and it is anticipated that Customs will issue a pre-penalty
notice to Cal Pacifico in respect to these years as well (collectively with
the amounts referred to in the immediately preceding sentence, the "Disputed
Amounts"). The Company has been advised by its special Customs counsel that,
under applicable law, no person, by fraud, gross negligence or negligence,
may (i) import merchandise into the commerce of the United States by means of
any material and false document, statement or act, or any material omission
or (ii) aid or abet any other person to import merchandise in such manner. No
proceeding has been initiated by Customs against the Company in respect of
the matters which are the subject of the proceeding against Cal Pacifico.
Since Cal Pacifico was the Company's United States customs broker and
importer of record during each of the foregoing years, the Company believes
that it is unlikely that Customs will assess against the Company any portion
of the Disputed Amounts.
Cal Pacifico is contesting Customs' assessment of the Disputed Amounts. Given
the inherent uncertainty of contested matters such as this, it is not
possible for the Company to express an opinion as to the likelihood that Cal
Pacifico will prevail on its challenge. Cal Pacifico or Customs has not
informed the Company as to the specific amount of the Disputed Amounts.
Cal Pacifico has advised the Company that, should Cal Pacifico's challenge to
the assessment of the Disputed Amounts prove to be unsuccessful, it will seek
recovery from the Company, through arbitration, for any portion of the
Disputed Amounts which it is required to pay to Customs. As part of the
settlement
10
<PAGE>
agreement which resolved the Company's contract dispute with Cal Pacifico
during the second quarter of 1997, the Company paid Cal Pacifico $550, which
is to be applied toward Cal Pacifico's payment of Disputed Amounts. The $550
payment by the Company is to be credited toward any portion of the Disputed
Amounts which the arbitrator determines the Company owes to Cal Pacifico. The
actual amount so determined by the arbitrator may be less or greater than
$550. Although the ultimate outcome of such an arbitration proceeding cannot
be guaranteed, the Company believes that it has meritorious defenses to
claims with respect to Disputed Amounts which Cal Pacifico might raise
against the Company. These defenses would be based, among other factors, on
the contractual relationship between the Company and Cal Pacifico (including
a defense with respect to the availability of indemnification under the
agreements between Cal Pacifico and the Company), the conduct of Cal Pacifico
with respect to both the Company and Customs, and the compliance obligations
of Cal Pacifico under applicable customs laws. Inasmuch as Cal Pacifico's
challenge before Customs is still pending and any claim against the Company
for indemnification would be based on Cal Pacifico's ultimate lack of success
in that challenge, and inasmuch as any arbitration proceeding by which Cal
Pacifico might seek indemnification has not been filed nor has Cal Pacifico
committed itself to the theories under which it might seek indemnification or
the recovery of damages from the Company, it is not possible for the Company
to express an opinion at this time as to the likelihood of an unfavorable
outcome in such a proceeding.
OTHER
The Company is also a defendant in various actions, claims, and legal
proceedings arising from its normal business operations. Management believes
they have meritorious defenses and intends to vigorously defend against all
allegations and claims. As the ultimate outcome of these matters is
uncertain, no contingent liabilities or provisions have been recorded in the
accompanying financial statements for such matters. However, in management's
opinion, based on discussions with legal counsel, liabilities arising from
such matters, if any, will not have a material adverse effect on the
business, financial condition, results of operations or cash flows of the
Company.
11
<PAGE>
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The Company is a leading provider of infusion systems and related
technologies to the United States hospital market, with the largest installed
base of pump delivery lines ("channels"). The Company is also a leader in the
international infusion systems market. Based on installed base of infusion
pumps, the Company believes it has a number one or number two market position
in many Western European countries, the number three market position in
Germany, the largest installed base of infusion pumps in Australia and Canada
and a developing position in Latin America and Asia. The Company's infusion
systems, which are used to deliver one or more fluids, primarily
pharmaceuticals or nutritionals, to patients, consist of single and
multi-channel infusion pumps and controllers, and proprietary and
non-proprietary disposable administration sets (i.e., plastic tubing and pump
interfaces). In addition, the Company is a leading provider of patient
monitoring products that measure and monitor temperature, pulse, pulse
oximetry and blood pressure, with the largest installed base of hospital
thermometry systems in the United States. Through its July 17, 1998
acquisition of Instromedix, Inc. ("Instromedix"), the Company also designs,
manufactures and sells cardiology products such as arrhythmia-event recorders
and pacemaker monitors.
The Company sells a full range of products through a worldwide direct sales
force consisting of approximately 300 sales persons and through more than 150
distributors to over 5,000 hospitals worldwide. Sales by the Company's
International business unit represented 29.1% and 31.6% of the Company's
total sales for the three and six months ended June 30, 1999. For the six
months ended June 30, 1999, the Company had sales of $193.1 million and
Adjusted EBITDA of $39.3 million.
In recent years, the Company's results of operations have been affected by
the cost containment pressures applicable to health care providers. In
particular, in order to reduce costs, certain hospitals have adopted a
protocol increasing the maximum time between disposable administration set
changes from every 24 hours to as much as every 72 hours. Notwithstanding
this change in protocol, unit sales volume of the Company's disposable
administration sets increased in every year since 1993, primarily as a result
of the growth in its world-wide installed base of infusion pumps. However,
uncertainty remains with regard to future changes within the healthcare
industry. The trend towards managed care and economically motivated buyers in
the U.S. may result in continued pressure on selling prices of products and
compression on gross margins. The U.S. marketplace is increasingly
characterized by consolidation among healthcare providers and purchasers of
medical products. The Company's profitability is affected by the increasing
use of Group Purchasing Organizations ("GPOs") which are better able to
negotiate favorable pricing from providers of infusion systems, such as the
Company, and which insure compliance with exclusive buying arrangements for
their members. These buying arrangements, in certain situations, also may
result in the GPO requiring removal of the Company's existing infusion pumps.
The Company expects that such GPOs will become increasingly more common and
may have an adverse effect on the Company's future profitability. Finally,
the enactment of national health care reform or other legislation affecting
payment mechanisms and health care delivery could affect the Company's future
results of operations. It is impossible to predict the extent to which the
Company may be affected by any such change in legislation.
12
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected financial
information expressed as a percentage of sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales.................................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................................... 55.2 51.3 52.1 51.4
------- ------- ------- -------
Gross margin........................................... 44.8 48.7 47.9 48.6
Selling and marketing expenses......................... 19.2 18.9 20.2 19.3
General and administrative expenses.................... 11.1 10.2 11.4 10.6
Research and development expenses...................... 6.6 5.1 6.5 5.1
Purchased in-process research and development.......... - 6.1 - 3.1
Integration and other non-recurring charges............ 1.3 - 1.8 -
Lease interest income.................................. 1.0 1.2 1.1 1.3
------- ------- ------- -------
Income from operations................................. 7.6 9.6 9.1 11.8
Interest expense....................................... (9.9) (11.4) (10.3) (11.9)
Other, net............................................. - (0.3) (0.1) (0.3)
------- ------- ------- -------
Loss before income taxes............................... (2.3) (2.1) (1.3) (0.4)
(Benefit from) provision for income taxes.............. (1.9) (0.3) (0.8) 0.2
------- ------- ------- -------
Net loss............................................... (0.4%) (1.8%) (0.5%) (0.6%)
------- ------- ------- -------
------- ------- ------- -------
OTHER DATA:
Adjusted EBITDA................................... 18.2% 24.7% 20.4% 24.2%
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Adjusted EBITDA (1).................................... $ 18,082 $ 22,372 $ 39,286 $ 42,918
Integration and other non-recurring expense............ (1,339) - (3,438) -
Depreciation and amortization (2)...................... (9,283) (8,173) (18,462) (16,442)
Purchased in-process research and development (3)...... - (5,534) - (5,534)
Interest income........................................ 439 84 761 145
Interest expense....................................... (9,910) (10,316) (19,910) (21,149)
Other, net............................................. (414) (324) (873) (681)
Benefit from (provision for) income taxes.............. 1,900 230 1,500 (400)
---------- --------- --------- ---------
Net loss............................................... $ (525) $ (1,661) $ (1,136) $ (1,143)
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
- -------------------
(1) Adjusted EBITDA represents income from operations before restructuring,
integration and other non-recurring charges, non-cash purchase
accounting charges and depreciation and amortization. Adjusted EBITDA
does not represent net income or cash flows from operations, as these
terms are defined under generally accepted accounting principles, and
should not be considered as an alternative to net income as an indicator
of the Company's operating performance or to cash flows as a measure of
liquidity. ALARIS Medical Systems has included information concerning
Adjusted EBITDA herein because it understands that such information is
used by investors as one measure of an issuer's historical ability to
service debt. Integration and other one-time non-recurring charges are
excluded from Adjusted EBITDA as ALARIS Medical Systems believes that
the inclusion of these items would not be helpful to an investor's
13
<PAGE>
understanding of ALARIS Medical System's ability to service debt. ALARIS
Medical System's computation of Adjusted EBITDA may not be comparable to
similar titled measures of other companies.
(2) Depreciation and amortization excludes amortization of debt discount and
issuance costs included in interest expense.
(3) Amount represents that portion of the purchase accounting adjustments
related to the value assigned to the acquired in-process research and
development of projects acquired in Second Quarter, 1998 from Patient
Solutions, Inc. ("PSI") and Caesarea Medical Electronics Limited
("Caesarea") for which technological feasibility had not been established
and for which there was no alternative future use.
The following table summarizes sales to customers by each business unit.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(IN MILLIONS) (IN MILLIONS)
North America sales....................................... $ 67.3 $ 59.9 $ 124.6 $ 116.0
International sales....................................... 29.0 30.8 61.0 61.6
Instromedix sales......................................... 3.4 - 7.4 -
---------- --------- --------- ---------
Total sales.......................................... $ 99.7 $ 90.7 $ 193.0 $ 177.6
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
(A) The Company's sales results are reported consistent with the Company's
three strategic business units: North America, International, and
Instromedix. As a result, Canadian sales of drug infusion and patient
monitoring products are now included in "North America" results.
Previously, Canadian sales were reported as "international" sales. Prior
year amounts have been reclassified for comparability with 1999.
For purposes of this discussion and analysis, the three months ended June 30,
1999 and 1998 are referred to as Second Quarter 1999 and Second Quarter 1998,
respectively, and the six months ended June 30, 1999 and 1998 are referred to
as 1999 and 1998, respectively.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
SALES
Sales increased $8.9 million, or 10%, during Second Quarter 1999 as compared
with Second Quarter 1998. Sales generated by Instromedix for Second Quarter
1999 were $3.4 million. Excluding Instromedix, which was acquired in July
1998, sales increased approximately 6%. North America sales increased $7.4
million, or 12%, compared with the same period in the prior year. The
increase in North America sales in Second Quarter 1999 as compared with
Second Quarter 1998 is primarily due to increases in instrument product
revenue of $5.0 million and in drug infusion disposable administration set
revenue of $1.9 million. This growth was primarily due to increasing demand
by clinicians for ALARIS Medical System's advanced lines of infusion therapy
and monitoring instruments in the United States and Canada. International
sales decreased $1.8 million or 6% during Second Quarter 1999 compared with
Second Quarter 1998. Of the decrease, 4% was due to the stronger U.S. dollar,
with the balance due to local economic factors resulting in a decrease in
instrument sales.
GROSS MARGIN
Gross margin increased $0.5 million, or 1%, during Second Quarter 1999 as
compared with Second Quarter 1998 due to increased sales. The gross margin
percentage decreased from 48.7% in Second Quarter 1998 to 44.8% in Second
Quarter 1999 primarily due to a $2.5 million charge to write-down inventory
in Second Quarter 1999, resulting from manufacturing issues related to
infusion therapy disposable products. Also contributing to the lower gross
margin percentage was the effect of increased North America sales. Instrument
margins are significantly lower than margins typically earned on disposables.
14
<PAGE>
SELLING AND MARKETING EXPENSES
Selling and marketing expenses increased $2.1 million, or 12%, during Second
Quarter 1999 as compared with Second Quarter 1998. As a percentage of sales,
selling and marketing expenses increased from 18.9% in 1998 to 19.2% in 1999.
This increase is primarily due to the addition of Instromedix as well as
increased marketing costs associated with upcoming product introduction and
increased costs for clinical consultants. Instromedix selling and marketing
expenses for Second Quarter 1999 were $1.0 million.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $1.9 million, or 20%, during
Second Quarter 1999 as compared with Second Quarter 1998. As a percentage of
sales, general and administrative expenses increased from 10.2% in 1998 to
11.1% in 1999. This increase is primarily due to the addition of Instromedix,
increased activity associated with ongoing patent litigation and an increase
in information technology costs for the Company's new domestic operating
system implemented in late 1998. Instromedix added approximately $1.0 million
of general and administrative cost in 1999, including $0.6 million of
intangible asset amortization.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased approximately $1.9 million, or
41%, during Second Quarter 1999 as compared with Second Quarter 1998
primarily due to the addition of Instromedix and increased activities
associated with the later development stages of various domestic and
international engineering projects for infusion systems and patient
monitoring products.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the PSI acquisition and the technology license agreement
with Caesarea, during the Second Quarter of 1998 the Company incurred a
one-time $5.5 million write-off related to the value assigned to the acquired
in-process research and development of the projects for which technological
feasibility had not been established and for which there was no alternative
future use. The Company has continued to invest in the development necessary
to obtain technological feasibility of these projects.
INTEGRATION AND OTHER NON-RECURRING CHARGES
In connection with the Instromedix acquisition in July 1998, management, with
the assistance of consultants performed a review of the operating activities
of the acquired company in order to assess how best to integrate and leverage
the Instromedix operations with ALARIS Medical Systems. As a result of this
assessment, in February 1999, the Company announced its plans to consolidate
the operations of Instromedix into its San Diego, California facilities. Such
consolidation will allow the Company to leverage its existing infrastructure
and manufacturing capacity in San Diego. In connection with these relocation
and integration activities, during the Second Quarter of 1999 the Company
incurred $1.3 million in costs, including personnel relocation costs of $0.7
million, retention bonuses of $0.1 million and $0.5 million in other related
costs. Total integration costs for 1999 are anticipated to be approximately
$5.0 million.
INCOME FROM OPERATIONS
Income from operations decreased $1.2 million during Second Quarter 1999 as
compared with Second Quarter 1998 primarily due to the $2.5 million charge to
cost of sales resulting from the manufacturing issues related to infusion
disposable products and the 1999 Instromedix integration and other activities
discussed above.
ADJUSTED EBITDA
Adjusted EBITDA decreased $4.3 million during Second Quarter 1999 as compared
with Second Quarter 1998. As a percentage of sales, Adjusted EBITDA decreased
from 24.7%, or $22.4 million,
15
<PAGE>
during Second Quarter 1998 to 18.2%, or $18.1 million, during Second Quarter
1999 due to the reasons discussed above. Adjusted EBITDA represents income
from operations before restructuring, integration and other non-recurring
charges, non-cash purchase accounting charges, depreciation and amortization.
Adjusted EBITDA does not represent net income or cash flows from operations,
as these terms are defined under generally accepted accounting principles,
and should not be considered as an alternative to net income as an indicator
of the Company's operating performance or to cash flows as a measure of
liquidity. The Company has included information concerning Adjusted EBITDA
herein because it understands that such information is used by investors as a
measure of an issuer's historical ability to service debt. Integration and
other one-time non-recurring charges are excluded from Adjusted EBITDA as the
Company believes that the inclusion of these items would not be helpful to an
investor's understanding of the Company's ability to service debt. The
Company's computation of Adjusted EBITDA may not be comparable to similar
titled measures of other companies.
INTEREST EXPENSE
Interest expense decreased $0.4 million during Second Quarter 1999 as
compared with Second Quarter 1998 primarily due to a decrease in the amount
of long-term debt outstanding as compared with 1998 (see Liquidity and
Capital Resources).
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
SALES
Sales increased $15.4 million, or 9% during 1999 as compared with 1998.
International sales decreased $0.6 million, or 1% while North America sales
increased $8.6 million, or 7%. Sales generated by Instromedix for 1999 were
$7.4 million. Excluding Instromedix, sales increased approximately 4%. The
decrease in International sales is primarily due to decreases in volume of
drug infusion instruments. The increase in North America sales in 1999 as
compared with 1998 is primarily due to increases in drug infusion disposable
administration set revenue of $5.0 million, and an increase in drug infusion
instrument revenue of $3.4 million.
GROSS MARGIN
Gross margin increased $6.2 million, or 7%, during 1999 as compared with
1998. The gross margin percentage decreased from 48.6% in 1998 to 47.9% in
1999 due to a one-time charge associated with disposable manufacturing issues
of $2.5 million. Excluding such charge, the gross margin percentage was 49.2%
during 1999.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses increased $4.9 million, or 14%, during 1999 as
compared with 1998. As a percentage of sales, selling and marketing expenses
increased from 19.3% in 1998 to 20.2% in 1999. This increase is primarily due
to the addition of Instromedix as well as cost increases for distribution and
clinical consultants. Instromedix selling and marketing expenses for 1999
were $2.2 million.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $3.2 million, or 17%, during
1999 as compared with 1998. As a percentage of sales, general and
administrative expenses increased from 10.6% in 1998 to 11.4% in 1999. This
increase is primarily due to the addition of Instromedix, increased activity
associated with ongoing patent litigation and an increase in information
technology costs for the Company's new domestic operating system implemented
in late 1998. Instromedix added approximately $2.0 million of general and
administrative cost in 1999, including $1.1 million of intangible asset
amortization.
16
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased approximately $3.6 million, or
40%, during 1999 as compared with 1998 primarily due to the addition of
Instromedix and increased activities associated with the later development
stages of various domestic and international engineering projects for
infusion systems and patient monitoring products.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the PSI acquisition and the technology license agreement
with Caesarea, during the Second Quarter of 1998 the Company incurred a
one-time $5.5 million write-off related to the value assigned to the acquired
in-process research and development of the projects for which technological
feasibility had not been established and for which there was no alternative
future use. The Company has continued to invest in the development necessary
to obtain technological feasibility of these projects.
INTEGRATION AND OTHER NON-RECURRING CHARGES
In connection with the Instromedix acquisition, management, with the
assistance of consultants performed a review of the operating activities of
the acquired company in order to assess how best to integrate and leverage
the Instromedix operations with ALARIS Medical Systems. As a result of this
assessment, in February 1999, the Company announced its plans to consolidate
the operations of Instromedix into its San Diego, California facilities. Such
consolidation will allow the Company to leverage its existing infrastructure
and manufacturing capacity in San Diego. In connection with these relocation
and integration activities, for the six months ended June 30, 1999, the
Company incurred $3.4 million in costs, including severance and related
termination benefits of $1.1 million, retention bonuses of $0.3 million,
personnel relocation costs of $0.7 million, asset dispositions of $0.5
million, lease termination costs of $0.3 million and $0.5 million in other
related costs. Total integration costs for 1999 are anticipated to be
approximately $5.0 million.
INCOME FROM OPERATIONS
Income from operations decreased $3.6 million during 1999 as compared with
1998 primarily due to the $2.5 million charge to cost of sales resulting from
the manufacturing issues related to infusion disposable products and the 1999
Instromedix integration and other activities discussed above.
ADJUSTED EBITDA
Adjusted EBITDA decreased $3.6 million during 1999 as compared with 1998. As
a percentage of sales, Adjusted EBITDA decreased from 24.2% or $42.9 million,
during 1998 to 20.4% or $39.3 million, during 1999 due to the reasons
discussed above. Adjusted EBITDA represents income from operations before
restructuring, integration and other non-recurring charges, non-cash purchase
accounting charges, depreciation and amortization. Adjusted EBITDA does not
represent net income or cash flows from operations, as these terms are
defined under generally accepted accounting principles, and should not be
considered as an alternative to net income as an indicator of the Company's
operating performance or to cash flows as a measure of liquidity. The Company
has included information concerning Adjusted EBITDA herein because it
understands that such information is used by investors as a measure of an
issuer's historical ability to service debt. Integration and other one-time
non-recurring charges are excluded from Adjusted EBITDA as the Company
believes that the inclusion of these items would not be helpful to an
investor's understanding of the Company's ability to service debt. The
Company's computation of Adjusted EBITDA may not be comparable to similar
titled measures of other companies.
INTEREST EXPENSE
Interest expense decreased $1.2 million during 1999 due to a decrease in
long-term debt outstanding as compared with 1998 (see Liquidity and Capital
Resources).
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Management currently believes that sufficient cash will be available through
ALARIS Medical Systems, based upon current operations, to satisfy debt
service and other corporate expenses of ALARIS Medical, the holding company
for ALARIS Medical Systems, in the foreseeable future. In November 1996,
ALARIS Medical Systems entered into a bank credit facility consisting of term
loans and a revolving credit facility (the "Credit Facility"). The Credit
Facility permits ALARIS Medical Systems to transfer to ALARIS Medical up to
$1.5 million annually to fund ALARIS Medical's operating expenses and
additional amounts sufficient to meet interest payment requirements.
The Company expects to continue to meet its short-term and long-term
liquidity needs, including capital expenditure requirements with cash flow
from operations, borrowings under the Credit Facility, and the remaining cash
proceeds from the Senior Discount Notes which were issued, among other
things, to fund the Instromedix acquisition in July 1998. In addition to
operating expenses, the Company's primary future use of funds, on a
short-term and long-term basis, will continue to be to fund capital
expenditures and strategic acquisitions and to pay debt service on
outstanding indebtedness.
At June 30, 1999, the Company's outstanding indebtedness was $405.7 million,
which includes $205.5 million of bank term debt under the Credit Facility and
$200.0 million of 9 3/4% Senior Subordinated Notes due 2006 (the "9 3/4%
Notes). The bank debt bears interest at floating rates based, at the
Company's option, on Eurodollar or prime rates. During the second quarter of
1997, the Company entered into an interest rate protection agreement covering
approximately 50% of its Credit Facility term loan borrowings. Such agreement
fixed the interest rate charged on such borrowings resulting in a weighted
average interest rate of 8.9% on the Credit Facility borrowings at June 30,
1999. As a result, a one percent increase in the rate of interest charged on
indebtedness outstanding under the Credit Facility at June 30, 1999 would
result in additional annual interest expense of approximately $2.1 million.
In July 1998, in connection with the Instromedix acquisition, the Company
amended the Credit Facility. The amendment provided for the banks' consent to
the Instromedix acquisition and increased the revolving credit facility from
$50.0 million to $60.0 million. The amended Credit Facility also provided the
Company an additional $30.0 million under the Tranche D term debt. The
Company used the $30.0 million term debt borrowing, along with approximately
$2.0 million from the revolving credit line, to fund the initial payments
required upon closing the Instromedix acquisition. Subsequent to closing the
Instromedix acquisition, ALARIS Medical completed the sale of $109.9 million
of Senior Discount Notes, receiving net proceeds of approximately $106.3
million. Upon receipt of the net proceeds from the Senior Discount Notes,
ALARIS Medical paid its remaining obligations of approximately $22.7 million
to the Instromedix shareholders and contributed the remaining net proceeds of
approximately $81.7 million to ALARIS Medical Systems, as required under the
amended Credit Facility. ALARIS Medical Systems then repaid the amount
outstanding under its revolving credit line.
As a result of the Company's significant indebtedness, the Company expects to
incur significant interest expense in future periods. The Company believes
that its existing cash and cash provided by operations will be sufficient to
meet its interest expense obligations.
Annual principal amortization of the Company's indebtedness is $6.4 million
for the remaining six months of 1999 and $14.0 million and $22.0 million for
2000 and 2001, respectively.
The ALARIS Medical's Convertible Debentures (the "Convertible Debentures")
provide for semi-annual interest payments of approximately $0.6 million and
mature on January 15, 2002. The 9 3/4% Notes and the Credit FaciliTY permit
ALARIS Medical Systems to fund interest payments on the Convertible
Debentures
18
<PAGE>
and to make limited distributions to ALARIS Medical to fund operating
expenses and to pay income taxes; provided that, with respect to the Credit
Facility, there exists no default or event of default under the Credit
Facility. The 9 3/4% Notes and the Credit Facility, however, restrict
distributions to ALARIS Medical to fund the repayment of the Convertible
Debentures at maturity.
During Second Quarter 1999, the Company made cash payments of approximately
$2.1 million related to Instromedix merger and integration costs of which
approximately $0.1 million was related to Instromedix integration costs
accrued at December 31, 1998. These integration activities primarily relate
to the assessment and review of Instromedix operating activities and
strategy. In February 1999, as a result of this assessment, the Company
announced it plans to consolidate the operations of Instromedix into its San
Diego, California facilities. Such consolidation will allow the Company to
leverage its existing infrastructure and manufacturing capacity in San Diego.
In connection with these relocation and integration activities, the Company
has recorded charges of $3.4 million during the six months ended June 30,
1999. The Company expects to incur nonrecurring integration and relocation
charges of approximately $5.0 million before related income tax benefits for
1999.
The Company has made capital expenditures of approximately $16.6 million
during the first half of 1999 and anticipates total capital expenditures of
approximately $30.0 million during 1999. First half 1999 capital spending was
higher than historical levels due to approximately $1.8 million for a
significant U.S. hospital order of drug infusion instruments accounted for as
an operating lease, as well as approximately $1.0 million to upgrade sales
force demonstration and evaluation units for new product introductions.
During the first quarter of 1998, the Company created a corporate development
function to assess product and company acquisitions, distribution alliances
and joint ventures which would expand Company technologies into unserved
markets. While there can be no assurances that the Company will complete any
acquisitions, depending on the value of potential acquisitions, the Company
might fund such transactions through a variety of sources, including existing
or new debt facilities or through the sale of equity securities.
The Company believes that, on both a short-term and long-term basis, based on
current levels of performance, it will generate cash flow from operations,
together with its existing cash, sufficient to fund its operations, make
planned capital expenditures and make principal amortization and interest
payments under the Credit Facility and interest payments on the 9 3/4% Notes.
However, on a long-term basis, the Company may not generate sufficient cash
flow from operations to repay the 9 3/4% Notes at maturity in the amount of
$200.0 million. Accordingly, the Company may have to refinance the 9 3/4%
Notes at or prior to maturity or sell assets or raise equity capital through
ALARIS Medical to repay such debt. Based on current interest rates and debt
outstanding as of June 30, 1999, over the next twelve months, the Company is
required to make principal and interest payments under its Credit Facility in
the amount of $29.5 million and interest payments on the 9 3/4% Notes in the
amount of $19.5 million. In additioN, the Company's ability to fund its
operations, to make planned capital expenditures and to make scheduled
principal and interest payments will be dependent on the Company's future
operating performance, which is itself dependent on a number of factors, many
of which the Company cannot control, including conditions affecting the
Company's foreign operations, prevailing economic conditions, availability of
other sources of liquidity, and financial, business, regulatory and other
factors affecting the Company's business and operations.
YEAR 2000 RISK
The Year 2000 problem arises from the use of a two-digit field to identify
years in computer programs, e.g., 85=1985, and the assumption of a single
century, the 1900s. Any program so created may read, or attempt to read, "00"
as the year 1900.
19
<PAGE>
The Company has developed, and is implementing, a comprehensive program to
address Year 2000 issues pertaining to both information technology (IT) and
non-IT systems. The program is monitored by a steering committee comprised of
representatives from key functional areas, which periodically reports to
senior management and will be reporting to the board of directors throughout
1999 as to the program's status. The program consists of identification,
prioritization, remediation and post-implementation phases and considers the
worldwide effect of the Year 2000 on the Company's operations and internal
systems (including non-information technology systems), customers, products
and services, and manufacturing systems, as well as on its third party
suppliers and other critical business partners. The committee has completed
its initial assessment and it is not currently aware of any material Year
2000 issues related to third parties with whom the Company conducts business
or in its non-information technology systems. The committee's assessment will
likely be a continuous process through the remainder of 1999. In addition to
its customers, the Company conducts business with and utilizes the services
of numerous third parties including, but not limited to, suppliers,
distributors, telecommunication companies, financial institutions,
governmental agencies, and utility companies. The Company is working to
identify and analyze the most reasonably likely worst-case scenarios for
third-party relationships affected by the Year 2000. The ability of these
third parties to adequately address their Year 2000 issues is outside the
Company's control. Failure by some or all of these parties to adequately
address their Year 2000 issues could have a material adverse effect on the
Company. Given the number of parties with whom the Company transacts
business, it is reasonably likely that some of these parties will not be able
to adequately solve their Year 2000 issues in a timely manner. Due to the
Company's inability to control third party compliance with Year 2000 issues,
there can be no assurances that such Year 2000 issues will not have a
material adverse effect on the financial condition, results of operations or
cash flows of the Company.
In order to successfully provide product to its customers, the Company is
dependent upon the timely fulfillment of its supply orders from its chosen
vendors. The Company has identified potentially critical suppliers and
attempted to determine if such suppliers have identified and/or addressed
their own Year 2000 issues by means of questionnaires. The Company is
dependent on such suppliers to provide timely responses to its questionnaires
and is not in a position to verify the truth or accuracy of the responses it
receives to such questionnaires. At this time, the Company has not identified
or been informed of any significant suppliers that will not be able to
fulfill the Company's orders. However, many of the Company's key suppliers
have acknowledged that they must make improvements to their systems to
properly deal with the Year 2000 orders and issues. As a result, there can be
no assurances that key suppliers will be able to timely fill the Company's
future orders. The Company is in the process of evaluating what alternatives
are available if key suppliers could not provide required materials and
supplies to the Company when ordered. While a formal contingency plan related
to this risk has not yet been completed by the Company, alternatives would be
to increase inventory levels of key suppliers and seek supplies from other
vendors. In this regard, the Company recently surveyed its customers and
based on the results of such surveys, has increased production plans for the
months of August, September and October in anticipation of customer stocking
orders. The Company is also in the process of sending letters to certain
customers and distributors offering such customers and distributors the
opportunity to place additional stocking orders of disposable products. The
Company estimates that such contingency plans will be completed by December
31, 1999. However, there can be no assurance that all significant primary and
back-up suppliers will be able to fill the Company's orders due to their own
Year 2000 issues. Such supplier failures could have a material adverse impact
on the Company's financial condition, results of operations and cash flows.
In addition to routine capital expenditures, and in connection with prior
acquisitions, the Company has made significant expenditures for the
acquisition of enterprise-wide information system software and hardware and
the related design, testing and implementation. The manufacturer has
represented that the new system is Year 2000 compliant. The Company
successfully implemented certain financial applications of the new system and
began utilizing such applications at the beginning of 1998. The Company
successfully converted the remainder of its domestic business processes to
the new system in September 1998. The Company
20
<PAGE>
believes the primary information system for its International operations is
not directly affected by the Year 2000. However, due to the increased
significance of its International operations and the desire to integrate its
reporting systems, the Company will be converting the International
information systems to a system common with the domestic operations. The most
significant portions of the International project, including the business
unit headquarters, manufacturing and central distribution center, are
scheduled for completion in 1999. The balance of the Company's sales offices
will be converted to the new system early in 2000. The International system
is also designed to properly process transactions denominated in the euro
currency. Euro currency is a new monetary unit which certain European
countries can begin using in 1999.
The Company has launched Year 2000 internet websites for its customers that
include a complete list of the Company's electronic medical products,
detailed and updated information regarding the status of the products and
other information regarding the Company's Year 2000 program. Certain of the
Company's products contain software in which the record keeping capabilities
will be affected beyond the Year 2000. Products affected by the Year 2000
issue have been identified and information regarding user interventions and
software upgrades has been provided. The Company believes that these issues
will not interfere with the primary functions of the products involved, nor
will they affect the safety of patients; however, there can be no assurance
in regard to the foregoing nor can there be any assurance that the Company
will not be subject to legal claims for damages arising from products that
are not Year 2000 compliant.
During the fiscal years 1996, 1997 and 1998 the Company made combined capital
and operating expenditures of approximately $13.9 million related to the new
enterprise-wide information system, and expenditures of $2.8 million in the
six months ended June 30, 1999. The significant phases of the project will be
completed in 1999 with additional expenditures of approximately $1.9 million
anticipated for the remainder of the year.
Infusion instrument sales are typically higher in the fourth quarter due to
sales compensation plans which reward the achievement of annual quotas and
the seasonal characteristics of the industry, including hospital purchasing
patterns. First quarter sales are traditionally not as strong as the fourth
quarter. The Company anticipates that this trend will continue but is unable
to predict the effect, if any, from health care reform, increased competitive
pressures and Year 2000 issues. Approximately 34% and 33% of the Company's
sales of drug infusion instruments occurred during the fourth quarters of
1997 and 1998, respectively. Sales of the Company's medical instrument
products represent capital expenditures to many of the Company's customers.
The Company believes it is possible that due to Year 2000 capital
requirements by its customers during 1999, fourth quarter drug infusion
instrument purchasing decisions could be deferred until 2000. Additionally,
the Company believes that customers' Year 2000 concerns and planning
strategies may result in certain customers increasing historical stock levels
of the Company's disposable products resulting in increased sales of such
products during 1999.
Although the Company is dedicating substantial resources towards attaining
Year 2000 readiness, there is no assurance it will be successful in its
efforts to identify and address all Year 2000 issues. Even if the Company
acts in a timely manner to complete all of its assessments; identifies,
develops and implements remediation plans believed to be adequate; and
develops contingency plans believed to be adequate some problems may not be
identified or corrected in time to prevent material adverse consequences to
the Company. The discussion above regarding estimated completion dates,
costs, risks and other forward-looking statements regarding Year 2000 is
based on the Company's best estimates given information that is currently
available and is subject to change. As the Company continues to progress with
its Year 2000 initiatives, it may discover that actual results will differ
materially from these estimates. The information provided above constitutes a
"Year 2000 Readiness Disclosure" for purposes of the Year 2000 Information
and Readiness Disclosure Act.
21
<PAGE>
BACKLOG
The backlog of orders, believed to be firm, at June 30, 1999 and 1998 was
$6.3 million and $5.5 million, respectively.
FOREIGN OPERATIONS
The Company has significant foreign operations and, as a result, is subject
to various risks, including without limitation, foreign currency risks.
Historically, the Company has not entered into foreign currency contracts to
hedge such exposure and such risk. Due to changes in foreign currency
exchange rates during 1999 and 1998, primarily a strengthening of the U.S.
dollar, the Company's functional currency, against many European currencies,
the Company recognized a foreign currency transaction loss of approximately
$0.5 million and $0.4 million during 1999 and 1998, respectively. For the six
months ended June 30, 1999 and the six months ended June 30, 1998,
approximately 35% and 38% of the Company's sales and 28% and 31% of the
Company's operating expenses were denominated in currencies other than the
Company's functional currency, respectively. These foreign currencies are
primarily those of Western Europe, Canada and Australia. Additionally,
substantially all of the receivables and payables of the Company's foreign
subsidiaries are denominated in currencies other than the Company's
functional currency, and no formal hedging program exists to manage
fluctuations in these foreign currencies. The Company continues to evaluate
hedging programs to limit the exposure to the Company resulting from changes
in foreign currency exchange rates.
On December 31, 1998, Mexico enacted certain changes to its tax code which
broaden the definition of when a U.S. company using manufacturing services in
Mexico will be considered to have a "permanent establishment." These changes
which apply to the Company would result in effective taxation on that portion
of the Company's income attributable to the Mexican subsidiary at a rate of
75% or higher. It is uncertain if any such new tax imposed by Mexico will be
granted a corresponding foreign tax credit under the U.S. Internal Revenue
Code. The changes have an effective date of January 1, 2000, however, it is
presently anticipated that implementation will be deferred one year. The
Company has evaluated the effect of such changes and determined that they
should not have a material adverse effect on its financial condition, results
of operations and cash flows.
HEALTH CARE REFORM
Heightened public awareness and concerns regarding the growth in overall
health care expenditures in the United States may result in the enactment of
legislation affecting payment mechanisms and health care delivery.
Legislation which imposes limits on the number and type of medical procedures
which may be performed or which has the effect of restricting a provider's
ability to select specific devices or products for use in administrating
medical care may adversely impact the demand for the Company's products. In
addition, legislation which imposes restrictions on the price which may be
charged for medical products may adversely affect the Company's results of
operations. It is not possible to predict the extent to which the Company or
the health care industry in general may be adversely affected by the
aforementioned in the future.
FORWARD-LOOKING STATEMENTS
Forward-Looking Statements in this report are made pursuant to the Safe
Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
Persons reading this report are cautioned that such forward-looking
statements involve risks and uncertainties, including, without limitation,
the effect of legislative and regulatory changes effecting the health care
industry; the potential of increased levels of competition; technological
changes; the dependence of the Company upon the success of new products and
ongoing research and development efforts; the effect of the Year 2000 risk;
restrictions contained in the instruments governing the Company's
indebtedness; the significant leverage to which the Company is subject; and
other matters referred to in this report.
22
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 4 to the Condensed Consolidated Financial Statements.
23
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 -- Financial Data Schedule
-----------------------------------------
(b) Reports on Form 8-K
None.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ALARIS MEDICAL SYSTEMS, INC.
----------------------------
(REGISTRANT)
Date: August 13, 1999 By: /S/ WILLIAM C. BOPP
---------------------
William C. Bopp
Vice President and Chief Financial Officer
25
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
No. No.
- ------- -----
<S> <C> <C>
27 -- Financial Data Schedule.................................. 27
</TABLE>
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001029069
<NAME> ALARIS MEDICAL SYSTEMS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 39,661
<SECURITIES> 0
<RECEIVABLES> 79,507
<ALLOWANCES> (2,740)
<INVENTORY> 78,736
<CURRENT-ASSETS> 233,017
<PP&E> 123,432
<DEPRECIATION> (55,311)
<TOTAL-ASSETS> 630,572
<CURRENT-LIABILITIES> 85,999
<BONDS> 392,340
0
0
<COMMON> 0
<OTHER-SE> 118,934
<TOTAL-LIABILITY-AND-EQUITY> 630,572
<SALES> 193,051
<TOTAL-REVENUES> 193,051
<CGS> 100,597
<TOTAL-COSTS> 100,597
<OTHER-EXPENSES> 77,048
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> 19,910
<INCOME-PRETAX> (2,636)
<INCOME-TAX> (1,500)
<INCOME-CONTINUING> (1,136)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,136)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
