<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 SEPTEMBER 30, 2000 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.
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(Exact name of registrant as specified in its charter)
Delaware 13-3800335
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10221 Wateridge Circle, San Diego, CA 92121
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(Address of principal executive offices) (Zip Code)
(858) 458-7000
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(Registrant's telephone number, including area code)
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(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 November 9, 2000, 1,000 shares of Registrant's Common Stock were outstanding.
Page 1 of 26
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ALARIS MEDICAL SYSTEMS, INC.
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INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C>
Item 1 - Financial Information:
Condensed consolidated balance sheet at
September 30, 2000 and December 31, 1999.............................................................. 3
Condensed consolidated statement of operations for
the three and nine months ended September 30, 2000 and 1999........................................... 4
Condensed consolidated statement of cash flows for
the nine months ended September 30, 2000 and 1999..................................................... 5
Condensed consolidated statement of changes
in stockholder's equity for the period from
December 31, 1999 to September 30, 2000 .............................................................. 6
Notes to the condensed consolidated financial statements.............................................. 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................................... 13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk...................................... 23
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings............................................................................... 24
Item 6 - Exhibits and Reports on Form 8-K................................................................ 25
</TABLE>
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<PAGE>
FORM 10 - Q
PART 1 - ITEM 1
FINANCIAL INFORMATION
ALARIS MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash................................................................................ $ 29,791 $ 23,539
Receivables, net.................................................................... 77,431 84,885
Inventories......................................................................... 68,346 76,769
Prepaid expenses and other current assets........................................... 29,049 24,992
---------- -----------
Total current assets............................................................ 204,617 210,185
---------- -----------
Net investment in sales-type leases, less current portion............................... 24,693 24,407
Property, plant and equipment, net...................................................... 61,392 68,480
Other non-current assets................................................................ 25,224 23,745
Intangible assets, net.................................................................. 251,220 273,909
---------- -----------
$ 567,146 $ 600,726
========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt................................................... $ 18,098 $ 13,769
Accounts payable.................................................................... 18,408 25,147
Accrued expenses and other current liabilities...................................... 59,228 43,326
---------- -----------
Total current liabilities....................................................... 95,734 82,242
---------- -----------
Long-term debt.......................................................................... 349,841 382,678
Other non-current liabilities........................................................... 30,327 34,685
---------- -----------
Total non-current liabilities......................................................... 380,168 417,363
---------- -----------
Contingent liabilities and commitments (Note 6)
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 September 30, 2000 and December 31, 1999...................................... 203,684 203,684
Accumulated deficit................................................................. (104,124) (98,250)
Accumulated other comprehensive loss................................................ (8,316) (4,313)
---------- -----------
Total stockholder's equity...................................................... 91,244 101,121
---------- -----------
$ 567,146 $ 600,726
========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2000 1999 2000 1999
----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Sales ............................................... $ 92,687 $ 91,211 $ 275,088 $ 276,491
Cost of sales.......................................... 51,089 43,882 149,123 139,804
----------- ----------- ----------- -----------
Gross margin........................................... 41,598 47,329 125,965 136,687
----------- ----------- ----------- -----------
Selling and marketing expenses......................... 16,727 18,002 52,327 54,736
General and administrative expenses.................... 9,040 10,375 28,334 30,408
Research and development expenses...................... 4,911 4,511 15,899 16,138
Restructuring and other non-recurring charges.......... 6,067 2,838 6,602 2,887
----------- ----------- ----------- -----------
Total operating expenses........................... 36,745 35,726 103,162 104,169
----------- ----------- ----------- -----------
Lease interest income.................................. 1,300 1,187 3,753 3,267
----------- ----------- ----------- -----------
Income from operations............................. 6,153 12,790 26,556 35,785
----------- ----------- ----------- -----------
Other income (expenses):
Interest income.................................... 342 360 831 1,121
Interest expense................................... (10,922) (9,956) (31,559) (29,831)
Other, net......................................... (1,503) 97 (361) (793)
----------- ----------- ----------- -----------
Total other expense.................................... (12,083) (9,499) (31,089) (29,503)
----------- ----------- ----------- -----------
(Loss) income before income taxes...................... (5,930) 3,291 (4,533) 6,282
(Benefit from) provision for income taxes.............. (530) 1,447 50 2,198
----------- ----------- ----------- -----------
(Loss) income from continuing operations............... (5,400) 1,844 (4,583) 4,084
----------- ----------- ----------- -----------
Discontinued operations:
Loss from operations of discontinued Instromedix
[net of applicable income tax benefits of ($351),
($747), ($872) and ($2,998), respectively]...... (526) (1,121) (1,308) (4,497)
Gain on disposal of Instromedix
[net of applicable income tax expense of ($1,226)] 1,839 - 1,839 -
----------- ----------- ----------- -----------
Total income (loss) from discontinued operations....... 1,313 (1,121) 531 (4,497)
----------- ----------- ----------- -----------
Net (loss) income...................................... $ (4,087) $ 723 $ (4,052) $ (413)
=========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
----------- ------------
<S> <C> <C>
Net cash provided by operating activities.............................................. $ 27,526 $ 38,616
---------- ------------
Cash flows from investing activities:
Net capital expenditures........................................................... (11,753) (22,080)
Net proceeds from sale of discontinued business.................................... 24,202 -
Payments for licenses and distribution rights...................................... (1,940) (3,031)
Patents, trademarks and other...................................................... (718) (942)
---------- -----------
Net cash provided in (used in) investing activities.................................... 9,791 (26,053)
---------- -----------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations................. (28,489) (17,543)
Dividends to ALARIS Medical........................................................ (1,822) (2,185)
Deferred financing costs........................................................... (650)
---------- -----------
Net cash used in financing activities.................................................. (30,961) (19,728)
---------- -----------
Effect of exchange rate changes on cash................................................ (104) (42)
----------- -----------
Net increase (decrease) in cash........................................................ 6,252 (7,207)
Cash at beginning of period............................................................ 23,539 29,468
---------- -----------
Cash at end of period.................................................................. $ 29,791 $ 22,261
========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY (UNAUDITED)
(DOLLAR AMOUNTS 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, 1999................... 1,000 $203,684 $ (98,250) $ (4,313) $ 101,121
Comprehensive loss
Net loss for the period..................... (4,052) (4,052) $ (4,052)
Equity adjustment from foreign currency
translation............................... (4,003) (4,003) (4,003)
--------
Comprehensive loss............................. $ (8,055)
Dividends to ALARIS Medical.................... (1,822) (1,822) ==========
------ -------- ---------- -------- ---------
Balance at September 30, 2000.................. 1,000 $203,684 $ (104,124) $ (8,316) $ 91,244
====== ======== ========== ======== =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE>
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1 -- BUSINESS AND STATEMENT OF ACCOUNTING POLICY
THE COMPANY:
ALARIS Medical Systems, Inc. ("ALARIS Medical Systems") operating through its
consolidated subsidiaries, designs, manufactures, distributes and services
intravenous infusion therapy and patient monitoring instruments and related
disposables and accessories. ALARIS Medical Systems was formed by the merger of
IMED Corporation ("IMED") and IVAC Medical Systems, Inc. ("IVAC"), on November
26, 1996 (the "Merger"). ALARIS Medical Systems, a wholly-owned subsidiary of
ALARIS Medical, Inc. ("ALARIS Medical"), formerly Advanced Medical, Inc., was
incorporated on October 14, 1988 under the laws of the state of Delaware. 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 September 30, 2000, the
results of its operations for the three and nine months ended September 30, 2000
and 1999, and its cash flows for the nine months ended September 30, 2000 and
1999.
RECLASSIFICATIONS:
Certain prior year period amounts have been reclassified to conform to the
current period presentation. Due to the sale of the Instromedix division in the
third quarter of 2000 (Note 2), the operating results of the Instromedix
division have been reclassified to discontinued operations in the consolidated
statements of operations. This reclassification affects the International
business segment, since sales and expenses related to international sales of
Instromedix products were historically included in the International business
unit. All prior period segment information has been restated to exclude
Instromedix results.
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.
DERIVATIVES:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133") which
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the Company is required to adopt January 1, 2001. This statement will require
the Company to record all derivatives on the balance sheet at fair value, and
to record most changes to the value of derivatives in income as the change
occurs. Upon adoption of FAS 133 all existing derivatives must be recognized
on the balance sheet at fair value. Under FAS 133 reporting, the Company's
interest rate swap will be presented at fair value on the balance sheet. At
September 30, 2000 the fair value of the swap was negative $0.9 million,
which would be presented as a non-current liability under FAS 133 with the
initial offsetting charge included in other comprehensive income. As it
relates to the swap, the adoption of FAS 133 will not have an impact on the
results of operations of the Company. FAS 133 also has extensive disclosure
requirements. (See Liquidity and Capital Resources.)
SHIPPING AND HANDLING FEES AND COSTS:
In July 2000, The Financial Accounting Standards Board Emerging Issues Task
Force ("EITF") reached a consensus that amounts billed to customers for shipping
and handling costs should be included in sales. The classification of shipping
and handling costs is considered an accounting policy decision that should be
disclosed. If shipping and handling costs are significant and not included in
cost of sales, companies should disclose both the amount of such costs and which
line item on the income statement includes that amount. The Company is required
to apply the consensus beginning fourth quarter 2000. The Company has
historically included most amounts billed to customers for shipping and handling
as a reduction of selling and marketing expense where such expenses are
included. The Company will not conform prior period financials due to lack of
sufficient available data for earlier periods. However, in future periods, the
Company will disclose both the current period shipping and handling revenues and
the shipping and handling costs included in operating expense to facilitate
comparability to prior periods. The Company estimates that shipping and handling
charges currently being recorded as reduction of selling and marketing expense
are approximately $500 per quarter. While this change will not have any net
income effect, future periods sales and selling and marketing expense will both
increase by equivalent amounts.
NOTE 2 - SALE OF INSTROMEDIX
On August 31, 2000, pursuant to an Asset Purchase Agreement dated as of August
17, 2000, the Company sold the assets and certain liabilities of its Instromedix
division ("Instromedix") to Card Guard Technologies, Inc.
("Buyer") for $30,000 in cash ("the Sale").
The Asset Purchase Agreement and the other agreements executed in connection
with the sale provide that the Company will assist Buyer in setting up a fully
independent headquarters and manufacturing facility in San Diego, California.
Pursuant to these agreements, $5,000 of the $30,000 purchase price was placed in
escrow. The Company will receive such escrowed amounts upon completion of its
obligations under the agreements. The agreement also entitles the Buyer to
indemnification of up to $7,500 if the Company fails to meet its obligation
under this agreement. The Company will recognize the gain associated with this
contingent amount upon completion of its obligation under the agreement. During
this transition period, the Company will continue to manufacture Instromedix
products for Buyer. It is anticipated that the Company will complete these
transition activities in the first quarter of 2001.
The total after tax gain to be recorded related to the Sale is estimated at
approximately $5,100, with $1,839, or $.03 per share, recorded during the
quarter ended September 30, 2000. The remainder of the gain will be recorded
when the Company has completed its obligations under the Asset Purchase
Agreement. The amount of gain to be recorded at such time is dependent upon the
actual costs incurred by the Company to complete the transition activities and
the amount actually received from the escrow.
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<PAGE>
Approximately $18,000 of the net cash proceeds from the Sale (after taxes and
other estimated costs) was used to repay indebtedness under the ALARIS Medical
Systems credit facility.
As a result of the Sale, the Company has restated its historically reported
consolidated statements of operations to exclude the Instromedix results from
continuing operations and report such operating results as discontinued
operations. The gain on the sale and the Instromedix third quarter 2000
operating results through the sale date have also been reported as discontinued
operations in the quarter ended September 30, 2000. For the quarters ended
September 30, 2000 and 1999 Instromedix sales included in discontinued
operations were $2,055 and $2,780, respectively. For the nine months ended
September 30, 2000 and 1999 Instromedix sales included in discontinued
operations were $8,672 and $10,551, respectively.
NOTE 3 -- RESTRUCTURING
On July 7, 2000, the Company announced plans for restructuring activities which
are anticipated to total approximately $7.0 million this year. These actions are
intended to save approximately $6 million per year when fully implemented and
involve facilities in Creedmoor, N.C., Basingstoke, England and San Diego. The
primary focus of this activity is in the Creedmoor manufacturing operation. This
plant is being restructured to include disposables engineering, automated
manufacturing of selected products and distribution operations. Manual assembly
operations will be relocated to the Company's facilities in Tijuana, Mexico, and
certain operations will be outsourced. Additionally, the Basingstoke and San
Diego operations are being matched to the mix of requirements resulting from
current and future product line rationalization efforts.
During the nine months ended September 30, 2000 the Company recorded a charge
of $6,602 included in restructuring and other non-recurring charges. Of this
charge, approximately $4,800 related to employee termination benefits, $800
related to termination of a product distribution agreement (including $200 in
legal expenses) and $1,000 to non-cash charges for fixed asset write-offs.
The restructuring plans call for 154 manufacturing employees and 13 sales and
administrative employees to be terminated. As of September 30, 2000,
approximately $1,400 of employee termination costs have been paid to 74
employees. Additionally, approximately $300 has been paid for termination of
a product distribution agreement and related legal costs year-to-date. The
remaining restructuring accrual of $3,900 is comprised of approximately
$3,400 for severance and related employee costs and $500 for termination of a
product distribution agreement. The majority of the restructuring charges are
expected to be paid throughout the remainder of 2000, with final activities
and payments completed during the first quarter of 2001.
NOTE 4 -- INVENTORIES
<TABLE>
<CAPTION>
Inventories comprise the following: September 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
Raw materials................................................................. $ 28,863 $ 34,960
Work-in-process............................................................... 7,695 6,156
Finished goods................................................................ 31,788 35,653
----------- -----------
$ 68,346 $ 76,769
=========== ===========
</TABLE>
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NOTE 5 -- SEGMENT INFORMATION
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 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-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 table below presents information about reported segments for continuing
operations for the:
Three months ended September 30,
<TABLE>
<CAPTION>
North Shared
America International Services Total
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
2000
Sales ......................................... $ 64,221 $ 28,466 $ - $ 92,687
Operating income (loss) from
continuing operations........................ 7,807 1,549 (3,203) 6,153
Adjusted EBITDA................................ 15,751 5,512 (700) 20,563
1999
Sales ......................................... $ 62,804 $ 28,407 $ - $ 91,211
Operating income (loss) from
continuing operations........................ 16,118 5,421 (8,749) 12,790
Adjusted EBITDA................................ 19,534 7,091 (2,577) 24,048
</TABLE>
Reconciliation of total segment adjusted EBITDA to consolidated loss from
continuing operations before taxes:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
ADJUSTED EBITDA
Total adjusted EBITDA for reportable segments................................... $ 20,563 $ 24,048
Depreciation and amortization................................................... (8,343) (8,420)
Interest, net................................................................... (10,580) (9,596)
Restructuring and other non-recurring charges................................... (6,067) (2,838)
Other reconciling items......................................................... (1,503) 97
----------- -----------
Consolidated loss from continuing operations
before income taxes........................................................ $ (5,930) $ (3,291)
=========== ===========
</TABLE>
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Nine months ended September 30,
<TABLE>
<CAPTION>
North Shared
America International Services Total
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
2000
Sales ......................................... $ 188,003 $ 87,085 $ - $ 275,088
Operating income (loss) from
continuing operations....................... 26,292 10,429 (10,165) 26,556
Adjusted EBITDA................................ 41,969 18,382 (2,852) 57,499
1999
Sales ......................................... $ 187,395 $ 89,096 $ - $ 276,491
Operating income (loss) from
continuing operations....................... 34,738 18,908 (17,861) 35,785
Adjusted EBITDA................................ 44,919 23,420 (5,040) 63,299
</TABLE>
Reconciliation of total segment adjusted EBITDA to consolidated (loss) income
from continuing operations before taxes:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
ADJUSTED EBITDA
Total adjusted EBITDA for reportable segments................................... $ 57,499 $ 63,299
Depreciation and amortization................................................... (24,341) (24,627)
Interest, net................................................................... (30,728) (28,710)
Restructuring and other non-recurring charges................................... (6,602) (2,887)
Other reconciling items......................................................... (361) (793)
----------- -----------
Consolidated (loss) income from continuing operations
before income taxes........................................................ $ (4,533) $ 6,282
=========== ===========
</TABLE>
NOTE 6 -- CONTINGENCIES AND LITIGATION
GOVERNMENT REGULATION
The United States Food and Drug Administration (the "FDA"), pursuant to the
Federal Food, Drug, and Cosmetic Act (the "FDC Act"), regulates the introduction
of medical devices into commerce, as well as testing manufacturing procedures,
labeling, adverse event reporting and record-keeping with respect to such
products. The process of obtaining market clearances from the FDA for new
products can be time-consuming and expensive and there can be no assurance that
such clearances will be granted or that FDA review will not involve delays
adversely affecting the marketing and sale of products. Enforcement of the FDC
Act depends heavily on administrative interpretation and there can be no
assurance that interpretations made by the FDA or other regulatory bodies will
not have a material adverse effect on the business, financial condition, results
of operations or cash flows. The FDA and state agencies routinely inspect the
Company to determine whether the Company is in compliance with various
requirements relating to manufacturing practices, testing, quality control,
complaint handling, medical device reporting 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 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
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such products and could result in the Company losing its ability to contract
with government agencies. 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 refuse to issue or renew certificates to export the Company's products
to foreign countries. Such actions could also result in an inability of the
Company to obtain additional clearances or approvals to market its devices.
In October 1999, the Company received a warning letter from the FDA related to
earlier inspections of the San Diego based manufacturing facility. The letter
stated that, the Company would be required to submit to the FDA periodic
certifications as to its state of compliance based on the outcome of inspections
conducted by outside regulatory consultants employed by the Company. On April
29, 2000 the Company's president and chief executive officer, David L.
Schlotterbeck, certified to the FDA that, to the best of his knowledge, the
Company has initiated or completed all corrections called for in the report
issued by the independent consultant. On July 10, 2000, the Company received
correspondence from the FDA indicating that the certification adequately
addresses the FDA's concerns. In this connection, in August 2000 the FDA
completed an inspection of the Company's San Diego based manufacturing facility.
The Company will submit one additional certification to the FDA in April 2001.
Since 1995, the Company has on fourteen occasions initiated product recalls or
issued safety alerts regarding its products regulated by the FDA. In each case
this was done because the products were found not to meet the Company's
specifications. Of the fourteen recalls, four are closed and notice to that
effect has been received from the FDA. The Company has submitted to the FDA a
request for closure related to nine of the recalls but has not received notice
of closure from the FDA. There is one remaining active recall. Additionally, the
Company has two active field corrections related to its products manufactured
and sold outside the United States. None of the recalls or field corrections
materially interfered with the Company's operations and all such affected
product lines continued to be marketed by the Company, with the exception of one
of the two international field corrections and the Model 599 Series infusion
pump, for which the Company continues to sell administration sets and
replacement parts only.
The costs incurred related to the Company's recall activities have historically
been significant. These costs include labor and materials, as well as travel and
lodging for repair technicians. Estimates to complete are often quite difficult
to determine due to uncertainty surrounding how many affected units are still in
service and how many units customers will fix without Company assistance. Due to
these difficulties in estimating costs, it is possible that the actual costs to
complete each individual recall could differ significantly from management's
current estimates to complete. Although there can be no assurances, the Company
believes it has adequate reserves to cover the remaining estimated aggregate
costs related to these active recalls.
OTHER
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 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.
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<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 historical pump placements, the Company
believes it has a number one or two market position in seven Western European
countries, the number three market position in three countries, 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 dedicated
and non-dedicated 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.
The Company sells a full range of products through a worldwide direct sales
force consisting of over 250 sales persons and through more than 150
distributors to over 5,000 hospitals worldwide. Sales by the Company's
International business unit represented 30.7% and 31.7% of the Company's total
sales for the three and nine months ended September 30, 2000. For the nine
months ended September 30, 2000, the Company had sales of $275.1 million and
Adjusted EBITDA of $57.5 million.
In recent years, the Company's results of operations have been affected by the
cost containment pressures applicable to health care providers. Notwithstanding
this, unit sales volume of the Company's disposable administration sets
increased in every year since 1993. 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.
-13-
<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 Nine Months
Ended September 30, Ended September 30,
-------------------------- ---------------------------
2000 1999 2000 1999
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales.................................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................................... 55.1 48.1 54.2 50.6
---------- ----------- ----------- ----------
Gross margin........................................... 44.9 51.9 45.8 49.4
Selling and marketing expenses......................... 18.1 19.7 19.0 19.8
General and administrative expenses.................... 9.8 11.4 10.3 11.0
Research and development expenses...................... 5.3 4.9 5.8 5.8
Restructuring and other non-recurring charges.......... 6.5 3.1 2.4 1.0
Lease interest income.................................. 1.4 1.3 1.4 1.2
---------- ----------- ----------- ----------
Income from operations................................. 6.6 14.1 9.7 13.0
Interest expense....................................... (11.4) (10.5) (11.2) (10.4)
Other, net............................................. (1.6) 0.1 (0.1) (0.3)
---------- ----------- ----------- ----------
(Loss) income from continuing operations
before income taxes................................. (6.4) 3.7 (1.6) 2.3
(Benefit from) provision for income taxes
from continuing operations.......................... (0.6) 1.6 0.0 0.8
---------- ----------- ----------- ----------
(Loss) income from continuing operations............... (5.8) 2.1 (1.6) 1.5
Loss from discontinued operations
(net of tax)......................................... (0.6) (1.2) (0.5) (1.6)
Gain on disposal of discontinued operations
(net of tax)......................................... 2.0 - 0.6 -
---------- ----------- ----------- ----------
Net (loss) income...................................... (4.4)% 0.9% (1.5)% (0.1)%
OTHER DATA:
Adjusted EBITDA................................... 22.2% 26.4% 20.9% 22.9%
========== =========== =========== ==========
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- ---------------------------
2000 1999 2000 1999
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Adjusted EBITDA (1).................................... $ 20,563 $ 24,048 $ 57,499 $ 63,299
Restructuring and other non-recurring charges.......... (6,067) (2,838) (6,602) (2,887)
Depreciation and amortization (2)...................... (8,343) (8,420) (24,341) (24,627)
Interest income........................................ 342 360 831 1,121
Interest expense....................................... (10,922) (9,956) (31,559) (29,831)
Other, net............................................. (1,503) 97 (361) (793)
Benefit from (provision for) income taxes
from continuing operations........................... 530 (1,447) (50) (2,198)
Loss from discontinued operations
(net of tax)......................................... (526) (1,121) (1,308) (4,497)
Gain on disposal of discontinued operations
(net of tax)......................................... 1,839 - 1,839 -
----------- ----------- ----------- -----------
Net (loss) income...................................... $ (4,087) $ 723 $ (4,052) $ (413)
=========== =========== =========== ===========
</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
understanding of ALARIS Medical Systems' ability to service debt. ALARIS
Medical Systems' computation of Adjusted EBITDA may not be comparable to
similar titled measures of other companies.
(2) Depreciation and amortization excludes amortization of debt discount and
issuance costs included in interest expense.
The Company's sales results are reported consistent with the Company's two
strategic business units: North America and International. The following table
summarizes sales to customers by each business unit.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- ---------------------------
2000 1999 2000 1999
---------- ----------- ----------- -----------
(in millions) (in millions)
<S> <C> <C> <C> <C>
North America sales....................................... $ 64.2 $ 62.8 $ 188.0 $ 187.4
International sales....................................... 28.5 28.4 87.1 89.1
-------- --------- --------- --------
Total sales.......................................... $ 92.7 $ 91.2 $ 275.1 $ 276.5
======== ========= ========= ========
</TABLE>
-15-
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
PRIOR PERIOD INFORMATION HAS BEEN RESTATED TO CONFORM TO THE CURRENT YEAR
PRESENTATION WHICH REFLECTS INSTROMEDIX AS A DISCONTINUED OPERATION.
SALES
Sales increased $1.5 million, or 2%, for the quarter ended September 30, 2000
compared with the same quarter last year. North America sales increased $1.4
million, or 2%, compared with the third quarter of 1999 due to an increase in
drug infusion instrument revenue. International sales increased approximately
$0.1 million over the same period in the prior year. An increase of $1.8 million
in International instrument revenue was partially offset by lower disposables
and service revenue. The majority of the Company's international sales are
denominated in foreign currency. Due to a stronger U.S. dollar in 2000 compared
with the actual foreign currency exchange rates in effect during 1999,
translation of 2000 International sales were adversely impacted by $2.8 million.
Using constant exchange rates, International sales increased approximately 10%
compared with the third quarter of 1999, driven primarily by unit growth in both
syringe pumps and large volume pumps, especially in the U.K. market.
GROSS MARGIN
Gross margin decreased $5.7 million, or 12%, during the quarter ended September
30, 2000 compared with the same quarter last year. The gross margin percentage
decreased to 44.9% in the third quarter of 2000, from 51.9% in the third quarter
of 1999. Third quarter 2000 costs of sales were negatively impacted by product
mix, higher production and service costs, and lower average selling prices on
International products, particularly in France and Germany. These higher costs,
as well as the effect of a stronger U.S. dollar, reduced gross margins.
SELLING AND MARKETING EXPENSES Selling and marketing expense decreased $1.3
million, or 7%, during the quarter ended September 30, 2000 compared with the
same period in 1999 due to the favorable effect on international expenses of
a strong U.S. dollar as well as $1.2 million in management consulting fees
incurred in the third quarter of 1999 associated with developing and
validating product strategies. As a percentage of sales, selling and
marketing expenses decreased to 18.1% for the third quarter of 2000 from
19.7% in the third quarter of 1999.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased $1.3 million, or 13%, during the
three months ended September 30, 2000 compared with the three months ended
September 30, 1999. This decrease is primarily due to lower amortization expense
in the current period resulting from intangible assets becoming fully amortized
and lower legal fees compared with prior period. As a percent of sales, general
and administrative expenses decreased to 9.8% in the third quarter of 2000 from
11.4% in the third quarter of 1999.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased approximately $0.4 million, or 9%,
during the three months ended September 30, 2000 compared with the three months
ended September 30, 1999 due to increased personnel costs and higher consulting
and project spending associated with an increased focus on new product
development.
-16-
<PAGE>
RESTRUCTURING AND OTHER NON-RECURRING CHARGES
Restructuring and other non-recurring charges increased $3.2 million during
the quarter ended September 30, 2000 compared with the same period in the
prior year. The 2000 costs represent the previously announced restructuring
activities the Company has initiated. These costs are anticipated to total
approximately $7.0 million this year. These actions are intended to save
approximately $6 million per year when fully implemented and involve
facilities in Creedmoor, N.C., Basingstoke, England and San Diego. The
primary focus of this activity is in the Creedmoor manufacturing operation.
This plant is being restructured to include disposables engineering,
automated manufacturing of selected products and distribution operations.
Manual assembly operations will be relocated to the Company's facilities in
Tijuana, Mexico, and certain operations will be outsourced. Additionally, the
Basingstoke and San Diego operations are being matched to the mix of
requirements resulting from current and future product line rationalization
efforts. The $6.1 million in restructuring and other non-recurring charges
taken during the current period were comprised of severance ($4.5 million),
fixed asset write-offs ($1.0 million), termination of a product distribution
agreement ($0.5 million) and legal ($0.1 million).
Third quarter 1999 charges of $2.8 million related to two patent license
agreements for patent infringement lawsuits.
INCOME FROM CONTINUING OPERATIONS
Income from operations decreased $6.6 million during the three months ended
September 30, 2000 compared with the three months ended September 30, 1999
primarily due to lower gross margins, current year restructuring charges and
other activities discussed above.
DISCONTINUED OPERATIONS
During the third quarter of 2000, the Company sold its Instromedix division to
Card Guard Technologies, Inc., resulting in a gain of $1.8 million, net of
applicable taxes. Third quarter 2000 operating losses of $0.5 (net of tax) for
the Instromedix division are included in discontinued operations. (Note 2)
ADJUSTED EBITDA
Adjusted EBITDA decreased $3.5 million during the three months ended September
30, 2000 compared with the three months ended September 30, 1999. As a
percentage of sales, Adjusted EBITDA decreased from 26.4%, or $24.0 million,
during the three months ended September 30, 1999 to 22.2%, or $20.6 million,
during the three months ended September 30, 2000 due to the reasons discussed
above. Adjusted EBITDA represents income from operations before restructuring,
integration and other non-recurring, 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. The Company 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 the Company believes that the inclusion of these items would not be
helpful to an investor's understanding of the Company's ability to service debt.
The Company's computation of Adjusted EBITDA may not be comparable to similar
titled measures of other companies.
INTEREST EXPENSE
Interest expense increased $1.0 million, or 10%, during the three months ended
September 30, 2000 compared with the three months ended September 30, 1999 due
to higher interest rates in 2000 on the
-17-
<PAGE>
Company's other outstanding debt. Additionally, in conjunction with an $18.1
million debt repayment following the sale of Instromedix, the Company
recorded a corresponding reduction of debt issuance costs, resulting in a
$0.4 million interest expense charge in the third quarter of 2000. (See Note
2 and Liquidity and Capital Resources.)
OTHER EXPENSE
Other expense increased $1.6 million during the quarter ended September 30, 2000
compared with the same period in the prior year due to the unfavorable foreign
currency transaction losses resulting from the strengthening of the U.S. dollar
in 2000 compared with the actual foreign currency exchange rates in effect
during 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
PRIOR PERIOD INFORMATION HAS BEEN RESTATED TO CONFORM TO THE CURRENT YEAR
PRESENTATION WHICH REFLECTS INSTROMEDIX AS A DISCONTINUED OPERATION.
SALES
Sales decreased $1.4 million, or 1%, for the nine months ended September 30,
2000 compared with the nine months ended September 30, 1999. North America sales
increased $0.6 million compared with the nine months ended September 30, 1999
primarily in drug infusion instrument revenue. A $4.0 million increase in North
America instrument sales was partially offset by a decrease in sales of drug
infusion disposable administration sets, patient monitoring equipment and
services revenue. Disposable set revenue was lower than a year ago in major
markets worldwide.
International sales decreased $2.0 million, or 2%, compared with 1999. Increased
instrument sales of $0.2 million were more than offset by decreases in
disposables, patient monitoring and service revenues, due largely to lower
translation of these foreign currency denominated sales. Foreign currency rate
changes had an adverse effect on International sales in the first nine months of
2000. The majority of the Company's international sales are denominated in
foreign currencies. Due to a stronger U.S. dollar in 2000 compared with the
actual foreign currency exchange rates in effect during 1999, translation of
2000 International sales were adversely impacted by $6.3 million, or 7%. Using
constant exchange rates, International sales increased 5%, driven primarily by
unit growth in syringe pumps and large volume pumps.
GROSS MARGIN
Gross margin decreased $10.7 million, or 8%, during the nine months ended
September 30, 2000 compared with the nine months ended September 30, 1999 due to
lower sales, changes in product mix and unfavorable manufacturing variances. The
gross margin percentage decreased to 45.8% in the nine months ended September
30, 2000, from 49.4% in the nine months ended September 30, 1999. Contributing
to the margin decrease in 2000 was the overall worldwide mix of increased
instrument sales and lower disposables sales, lower international sales which
typically carry higher margins than U.S. sales, a stronger U.S. dollar, as well
as less favorable production costs in the nine months ended September 30, 2000
compared with the nine months ended September 30, 1999.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses decreased $2.4 million, or 4%, during the nine
months ended September 30, 2000 compared with the nine months ended September
30, 1999 due to lower International sales volume, the favorable effect on
international expenses of a strong U.S. dollar. Additionally, the 1999 results
included costs of approximately $1.7 million that were not repeated in 2000 for
management
-18-
<PAGE>
consulting fees associated with developing and validating product strategies.
As a percentage of sales, selling and marketing expenses decreased to 19.0%
for 2000 from 19.8% for 1999.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased $2.1 million, or 7%, during the
nine months ended September 30, 2000 compared with the nine months ended
September 30, 1999. This decrease is primarily due to lower amortization expense
in 2000 resulting from intangible assets becoming fully amortized. These
decreases were partially offset by increased information technology costs for
the Company's new International operating system implemented in late 1999. As a
percentage of sales, general and administrative expenses decreased to 10.3% from
11.0% in the prior year period.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased approximately $0.2 million, or 2%,
during the nine months ended September 30, 2000 compared with the nine months
ended September 30, 1999 which contained consulting and material costs for the
development of prototype instruments that were not as significant in 2000.
RESTRUCTURING AND OTHER NON-RECURRING CHARGES
Restructuring and other non-recurring charges increased $3.7 million during
the nine months ended September 30, 2000 compared with the same period in the
prior year. The 2000 costs represent the previously announced restructuring
activities the Company has initiated which are anticipated to total
approximately $7.0 million this year. These actions are intended to save
approximately $6 million per year when fully implemented and involve
facilities in Creedmoor, N.C., Basingstoke, England and San Diego. The
primary focus of this activity is in the Creedmoor manufacturing operation.
This plant is being restructured to include disposables engineering,
automated manufacturing of selected products and distribution operations.
Manual assembly operations will be relocated to the Company's facilities in
Tijuana, Mexico, and certain operations will be outsourced. Additionally, the
Basingstoke and San Diego operations are being matched to the mix of
requirements resulting from current and future product line rationalization
efforts. The restructuring and other non-recurring charges of $6.6 million
taken during the current period were comprised of severance ($4.8 million),
fixed asset write-offs ($1.0 million), termination of a product distribution
agreement ($0.6 million) and legal ($0.2 million).
The 1999 charges of $2.9 million related primarily to two patent license
agreements for patent infringement lawsuits.
INCOME FROM CONTINUING OPERATIONS
Income from operations decreased $9.2 million, or 26%, during the nine months
ended September 30, 2000 compared with the nine months ended September 30, 1999
primarily due to lower sales and gross margins and restructuring charges, which
were partially offset by lower operating spending.
DISCONTINUED OPERATIONS
During the third quarter of 2000, the Company sold its Instromedix division to
Card Guard Technologies, Inc., resulting in a gain of $1.8 million, net of
applicable taxes. For the nine months ended September 30, 2000, operating losses
of $1.3 million (net of tax) for the Instromedix division are included in
discontinued operations. (Note 2)
ADJUSTED EBITDA
Adjusted EBITDA decreased $5.8 million during the nine months ended September
30, 2000 compared with the nine months ended September 30, 1999. As a percentage
of sales, Adjusted EBITDA decreased
-19-
<PAGE>
from 22.9%, or $63.3 million, during the nine months ended September 30, 1999
to 20.9%, or $57.5 million, during the nine months ended September 30, 2000
due to the reasons discussed above. Adjusted EBITDA represents income from
operations before restructuring, integration and other non-recurring,
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. The Company 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
the Company believes that the inclusion of these items would not be helpful
to an investor's understanding of the Company's ability to service debt. The
Company's computation of Adjusted EBITDA may not be comparable to similar
titled measures of other companies.
INTEREST EXPENSE
Interest expense increased $1.7 million, or 6%, during the nine months ended
September 30, 2000 compared with the nine months ended September 30, 1999
primarily due to higher interest rates in 2000 on the Company's other
outstanding debt. Additionally, in conjunction with an $18.1 million debt
repayment following the sale of Instromedix, the Company recorded a
corresponding reduction of debt issuance costs, resulting in a $0.4 million
interest expense charge in the current period. (See Note 2 and Liquidity and
Capital Resources.)
OTHER EXPENSE
Other expense decreased $0.4 million during the nine months ended September 30,
2000 compared with the same period in the prior year. In the second quarter of
2000, the favorable resolution of two tradename disputes resulted in payments to
ALARIS of approximately $2.8 million. This income in 2000 was partially offset
by increases of $2.3 million in foreign currency transaction losses resulting
from the strengthening of the U.S. dollar in 2000 compared with the actual
foreign currency exchange rates in effect during 1999.
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 during the next twelve months. 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 liquidity needs during the next
twelve months, including capital expenditure requirements, with cash flow from
operations of ALARIS Medical Systems. The Company's primary future use of funds
will continue to be to fund operating expenses, including planned expenditures
for new research and development programs, capital expenditures and to pay debt
service on outstanding indebtedness.
At September 30, 2000, the Company's outstanding indebtedness was $367.9
million, which includes $167.8 million of bank term debt under the Credit
Facility and $200.0 million of Senior Subordinated Notes due 2006 (the "Notes"),
which were issued in connection with the Merger. The bank debt bears
-20-
<PAGE>
interest at floating rates based, at the Company's option, on Eurodollar or
prime rates. From February 2000 until August of 2000, all borrowings under
the Credit Facility were subject to interest rate risk. Effective August
2000, the Company entered into an interest rate protection agreement on a
$100 million notional amount at a three month eurodollar benchmark interest
rate of 7.245%, covering the period of August 2000 through January 2002. The
agreement effectively fixes the interest rate on approximately 60% of the
outstanding Credit Facility term loan borrowings. As of September 2000, this
resulted in a weighted average rate of 10.05% on all Credit Facility
borrowings. At September 30, 2000, a one percentage point increase in the
applicable interest rate would result in a $0.7 million annual increase in
interest expense.
ALARIS Medical's 7 1/4% 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 Credit Facility permit ALARIS
Medical Systems to fund interest payments on the Convertible Debentures and
to make limited distributions to ALARIS Medical to fund operating expenses
and to pay income taxes; provided that, with respect to the Credit Facility,
there exists no default or event of default under the Credit Facility. The
Credit Facility requires the Company to meet certain performance measures
and, under most circumstances, to obtain consent from its bank group to allow
ALARIS Medical to repay the Convertible Debentures at maturity. The Notes
allow distributions to ALARIS Medical to fund the repayment of the
Convertible Debentures at maturity if certain performance measures are met.
The Company may not receive its bank group's consent to, and anticipates that
its operating performance will not meet the performance measures required to,
repay the Convertible Debentures at maturity. In order to avoid causing
default on the Company's other indebtedness which could have a material
adverse effect on the Company, the Company is exploring alternatives to
satisfy or revise its obligations under the Convertible Debentures. However,
there can be no assurances that the Company will be successful in
implementing any alternatives that will satisfy or revise these obligations
at or prior to maturity.
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 and principal payment obligations for the next twelve months. Based on
current interest rates and debt outstanding as of September 30, 2000, over the
next twelve months, the Company is required to make principal and interest
payments under its Credit Facility and its related interest rate protection
agreement in the amount of $34.0 million and interest payments on the 9 3/4%
Notes in the amount of $19.5 million.
Annual principal amortization of the Company's indebtedness is $3.1 million for
the remaining three months of 2000 and $19.9 million and $26.1 million for 2001
and 2002, respectively.
In July 1998, ALARIS Medical issued $189.0 million (face value) of 11 1/8%
senior discount notes ("Senior Discount Notes"). Approximately $81.7 million
of net proceeds were contributed to the capital of ALARIS Medical Systems.
Interest accruing on the original issue amount of $109.9 million of Senior
Discount Notes is added to the outstanding principal balance through July 31,
2003. Interest accruing subsequent to July 31, 2003 is payable in cash
semi-annually in arrears on February 1 and August 1, commencing February 1,
2004. While ALARIS Medical Systems is not a party to the Senior Discount
Notes, ALARIS Medical is dependent upon cash flow from ALARIS Medical Systems
to meet all of its obligations. 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 or make payments to ALARIS Medical.
Accordingly, the Company may have to refinance the 9 3/4% Notes, and ALARIS
Medical may have to refinance the Senior Discount Notes at or prior to
maturity or sell assets or raise equity capital to repay such debt. The
Company is exploring alternatives to better position it to satisfy the
obligations under the
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<PAGE>
debt agreement. However, there can be no assurances that the Company will be
successful in these efforts.
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.
On July 7, 2000, the Company announced plans for restructuring activities which
are anticipated to total approximately $7.0 million this year. These actions are
intended to save approximately $6 million per year when fully implemented and
involve facilities in Creedmoor, N.C., Basingstoke, England and San Diego. The
primary focus of this activity is in the Creedmoor manufacturing operation. This
plant is being restructured to include disposables engineering, automated
manufacturing of selected products and distribution operations. Manual assembly
operations will be relocated to the Company's facilities in Tijuana, Mexico, and
certain operations will be outsourced. Additionally, the Basingstoke and San
Diego operations are being matched to the mix of requirements resulting from
current and future product line rationalization efforts. Approximately $1.0
million of the total estimated restructuring charge will be non-cash. During the
first nine months of 2000, the Company made cash payments of $1.7 million for
the first portion of the restructuring charges. The majority of the
restructuring charges are expected to be paid throughout the remainder of 2000.
At September 30, 2000, $3.9 million is accrued for restructuring costs.
In August 2000, in connection with the sale of Instromedix, the Company made a
payment of $18.1 million under the Credit Facility, reducing the outstanding
balance to $167.8 million from $185.9 million. The Company made capital
expenditures of approximately $11.8 million during the nine months ended
September 30, 2000 and anticipates additional capital expenditures of
approximately $5 million during the remainder of 2000.
BACKLOG
The backlog of orders was estimated to be $7.7 million at September 30, 2000 and
was $6.9 million at September 30, 1999, respectively.
FOREIGN OPERATIONS
The Company has significant foreign operations and, as a result, is subject to
various risks, including without limitation, foreign currency risks. The Company
has not entered into foreign currency contracts for purposes of hedging or
speculation. Due to changes in foreign currency exchange rates during 2000 and
1999, 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 $3.0 million and $0.4 million during
the nine months ended September 30, 2000 and 1999, respectively. In addition,
during the nine months ended September 30, 2000 the Company recorded $4.0
million of foreign currency translation adjustments in equity as a component of
other comprehensive loss. For the nine months ended September 30, 2000 and 1999,
approximately 34% and 34% of the Company's sales and 30% and 29% 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. As part of a comprehensive approach to risk management, the Company is
presently evaluating alternatives to address this risk.
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<PAGE>
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
This report contains forward-looking statements as defined in 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 restrictions contained in the
instruments governing the Company's indebtedness, the significant leverage to
which the Company is subject, the effect of change in foreign currency
exchange rates, the effect of legislative and regulatory changes affecting
the health care industry, the potential of increased levels of competition
and technological changes, the dependence of the Company upon the success of
new products and ongoing research and development efforts including obtaining
regulatory approvals, and other matters referred to in this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information is set forth under the subcaption "Liquidity and Capital
Resources" contained under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Item 2.
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<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 6 to the Condensed Consolidated Financial Statements.
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 -- Financial Data Schedule
-----------------------------------------
(b) Reports on Form 8-K
During the quarter ended September 30, 2000 the Company filed a report on Form
8-K dated September 15, 2000. This report contained information and pro forma
financial statements related to the sale of the Instromedix division to Card
Guard Technologies, Inc.
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<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: November 9, 2000 By: /s/ WILLIAM C. BOPP
---------------------------
William C. Bopp
Senior Vice President and
Chief Financial Officer
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