<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 MARCH 31, 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
- -------------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S.
incorporation or organization) Employer 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 May 3, 2000 1,000 shares of Registrant's Common Stock were outstanding.
Page 1 of 21
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ALARIS MEDICAL SYSTEMS, INC.
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INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1 - Financial Information:
PAGE
<S> <C>
Condensed consolidated balance sheet at
March 31, 2000 and December 31, 1999.................................... 3
Condensed consolidated statement of operations for
the three months ended March 31, 2000 and 1999.......................... 4
Condensed consolidated statement of cash flows for
the three months ended March 31, 2000 and 1999.......................... 5
Condensed consolidated statement of changes
in stockholder's equity for the period from
December 31, 1999 to March 31, 2000 .................................... 6
Notes to the condensed consolidated financial statements................ 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 11
Item 3 - Quantitative and Qualitative Disclosures About Market Risk........ 18
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings.................................................. 19
Item 6 - Exhibits and Reports on Form 8-K................................... 20
</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)
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<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
2000 1999
----------- -------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash................................................................................ $ 22,163 $ 23,539
Receivables, net.................................................................... 76,837 84,885
Inventories......................................................................... 79,736 76,769
Prepaid expenses and other current assets........................................... 26,601 24,992
---------- -----------
Total current assets............................................................ 205,337 210,185
Net investment in sales-type leases, less current portion............................... 24,773 24,407
Property, plant and equipment, net...................................................... 66,610 68,480
Other non-current assets................................................................ 25,457 23,745
Intangible assets, net.................................................................. 270,596 273,909
---------- -----------
$ 592,773 $ 600,726
========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt................................................... $ 16,169 $ 13,769
Accounts payable.................................................................... 22,234 25,147
Accrued expenses and other current liabilities...................................... 44,889 43,326
---------- -----------
Total current liabilities....................................................... 83,292 82,242
---------- -----------
Long-term debt.......................................................................... 376,982 382,678
Other non-current liabilities........................................................... 35,427 34,685
---------- -----------
Total non-current liabilities................................................... 412,409 417,363
---------- -----------
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 March 31, 2000 and December 31, 1999............................................. 203,684 203,684
Accumulated deficit................................................................... (100,908) (98,250)
Accumulated other comprehensive loss.................................................. (5,704) (4,313)
---------- -----------
Total stockholder's equity...................................................... 97,072 101,121
---------- -----------
$ 592,773 $ 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)
(DOLLAR AMOUNTS IN THOUSANDS)
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<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------------------------
2000 1999
-------------------- --------------
<S> <C> <C>
Sales .......................................... $ 91,277 $ 93,436
Cost of sales..................................... 48,714 45,634
----------- -----------
Gross margin...................................... 42,563 47,802
----------- -----------
Selling and marketing expenses.................... 19,474 19,917
General and administrative expenses............... 10,103 10,874
Research and development expenses................. 6,331 6,047
Integration and other non-recurring charges....... - 2,099
----------- -----------
Total operating expenses...................... 35,908 38,937
----------- -----------
Lease interest income............................. 1,130 1,061
----------- -----------
Income from operations........................ 7,785 9,926
----------- -----------
Other income (expenses):
Interest income............................... 223 322
Interest expense.............................. (10,331) (10,000)
Other, net.................................... (1,330) (459)
----------- -----------
Total other expense............................... (11,438) (10,137)
----------- -----------
Loss before income taxes.......................... (3,653) (211)
(Benefit from) provision for income taxes......... (1,800) 400
----------- -----------
Net loss.......................................... $ (1,853) $ (611)
=========== ===========
</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)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
2000 1999
--------------- -------------
<S> <C> <C>
Net cash provided by operating activities....................................... $ 8,587 $ 27,117
---------- -----------
Cash flows from investing activities:
Net capital expenditures.................................................... (3,930) (8,886)
Patents, trademarks and other............................................... (193) (297)
Payments for product licenses and distribution rights....................... (1,065) (800)
---------- -----------
Net cash used in investing activities........................................... (5,188) (9,983)
---------- -----------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations.......... (3,287) (5,993)
Deferred financing costs.................................................... (650) -
Dividends to ALARIS Medical................................................. (805) (1,046)
---------- -----------
Net cash used in financing activities........................................... (4,742) (7,039)
---------- -----------
Effect of exchange rate changes on cash......................................... (33) (63)
---------- -----------
Net (decrease) increase in cash................................................. (1,376) 10,032
Cash at beginning of period..................................................... 23,539 29,468
---------- -----------
Cash at end of period........................................................... $ 22,163 $ 39,500
========== ===========
</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
STOCKHOLDER'S EQUITY (UNAUDITED)
(DOLLARS IN THOUSANDS)
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<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..................... (1,853) (1,853) $ (1,853)
Equity adjustment from foreign currency
translation............................... (1,391) (1,391) (1,391)
---------
Comprehensive loss............................. $ (3,244)
=========
Dividends to ALARIS Medical.................... (805) (805)
------ -------- ---------- -------- ---------
Balance at March 31, 2000...................... 1,000 $203,684 $ (100,908) $ (5,704) $ 97,072
====== ======== ========== ======== =========
</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)
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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, as well as telemedicine, cardiovascular and
pacemaker monitoring equipment. ALARIS Medical Systems was formed by the merger
of two pioneers in infusion systems, IMED Corporation ("IMED") and IVAC Medical
Systems, Inc. ("IVAC"), on November 26, 1996. 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 March 31, 2000, the results
of its operations for the three months ended March 31, 2000 and 1999, and its
cash flows for the three months ended March 31, 2000 and 1999.
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: MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
<S> <C> <C>
Raw materials............................. $ 37,089 $ 34,960
Work-in-process........................... 5,626 6,156
Finished goods............................ 37,021 35,653
----------- -----------
$ 79,736 $ 76,769
=========== ===========
</TABLE>
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<PAGE>
NOTE 3 -- 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
acquisition of Instromedix in 1998 resulted in a third separate operating
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 the three
months ended March 31:
<TABLE>
<CAPTION>
NORTH SHARED
AMERICA INTERNATIONAL INSTROMEDIX SERVICES (A) TOTAL
------- ------------- ----------- ------------ -----
<S> <C> <C> <C> <C> <C>
2000
Sales ......................... $ 58,170 $ 29,919 $ 3,188 $ - $ 91,277
Operating income (loss)........ 7,270 4,689 (622) (3,552) 7,785
Adjusted EBITDA................ 11,083 6,367 (149) (1,156) 16,145
1999
Sales ......................... $ 57,336 $ 32,062 $ 4,038 $ - $ 93,436
Operating income (loss)........ 9,332 7,520 (2,853) (4,073) 9,926
Adjusted EBITDA................ 12,648 8,970 343 (757) 21,204
</TABLE>
(A) Shared services includes amortization of intangibles and certain legal,
business development and executive costs.
Reconciliation of total segment adjusted EBITDA to consolidated loss before
taxes:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
ADJUSTED EBITDA
Total adjusted EBITDA.................................. $ 16,145 $ 21,204
Depreciation and amortization.......................... (8,360) (9,179)
Interest (net)......................................... (10,108) (9,678)
Integration and other non-recurring charges............ - (2,099)
Other reconciling items................................ (1,330) (459)
----------- -----------
Consolidated loss before income taxes............... $ (3,653) $ (211)
=========== ===========
</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
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<PAGE>
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 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. These FDA inspections noted several areas of non-compliance
with FDA regulatory requirements. The letter stated that to resolve this matter,
the Company is required until October 2001 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 for this
purpose. In addition, product approvals, clearances and certificates for device
exports, including renewals, will not be provided until the FDA is satisfied
with the Company's corrective action. The FDA has informed the Company that the
corrective action plan it submitted in response to the warning letter is
adequate. The Company estimates that during the first quarter of 2000, Company
personnel devoted over 150,000 hours toward resolving these regulatory
compliance issues. In April 2000, as requested by the FDA, independent
regulatory experts audited the Company's progress to date. Based on the audit,
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. ALARIS Medical Systems is now awaiting the
FDA's review of its progress. The Company is not able to determine if or when
the FDA will be satisfied with the Company's actions, and the Company will
continue to work with the FDA to ensure resolution of this matter as quickly as
possible.
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, three 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 four of the recalls but has not received notice
back from the FDA. The remaining seven are still active. Additionally, the
Company has three active recalls related to its products manufactured and sold
outside the United States. None of the recalls materially interfered with the
Company's operations and all such affected product lines continued to be
marketed by the Company, with the exception of 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
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<PAGE>
complete are often quite difficult to determine due to uncertainty surrounding
how many effected 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.
- 10 -
<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
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.
Through its Instromedix division, the Company also designs, manufactures and
sells cardiology products such as arrhythmia-event recorders and pacemaker
monitors.
The Company sells a full range of products through a worldwide direct sales
force consisting of over 250 sales persons and through more than 150
distributors to over 5,000 hospitals worldwide. Sales by the Company's
International business unit represented 32.8% of the Company's total sales for
the three months ended March 31, 2000. For the three months ended March 31,
2000, the Company had sales of $91.3 million and Adjusted EBITDA of $16.1
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, primarily as a result of the growth in its
worldwide installed base of infusion pumps. However, uncertainty remains with
regard to future changes within the healthcare industry. The trend towards
managed care and economically motivated buyers in the U.S. may result in
continued pressure on selling prices of products and compression on gross
margins. The U.S. marketplace is increasingly characterized by consolidation
among healthcare providers and purchasers of medical products. The Company's
profitability is affected by the increasing use of Group Purchasing
Organizations ("GPOs") which are better able to negotiate favorable pricing from
providers of infusion systems, such as the Company, and which insure compliance
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.
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<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 MARCH 31,
--------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Sales.............................................. 100.0% 100.0%
Cost of sales...................................... 53.4 48.8
----------- -----------
Gross margin....................................... 46.6% 51.2%
Selling and marketing expenses..................... 21.3 21.3
General and administrative expenses................ 11.1 11.6
Research and development expenses.................. 6.9 6.5
Integration and other non-recurring charges........ - 2.2
Lease interest income.............................. 1.2 1.1
----------- -----------
Income from operations............................. 8.5 10.7
Interest expense................................... (11.3) (10.7)
Other, net......................................... (1.2) (.2)
----------- -----------
Loss before income taxes........................... (4.0) (.2)
(Benefit from) provision for income taxes.......... (2.0) .4
----------- -----------
Net loss........................................... (2.0)% (.6)%
=========== ===========
OTHER DATA:
Adjusted EBITDA............................... 17.7% 22.7%
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
2000 1999
--------------- -------------
<S> <C> <C>
ADJUSTED EBITDA (1)................................ $ 16,145 $ 21,204
Integration and other non-recurring charges........ - (2,099)
Depreciation and amortization (2).................. (8,360) (9,179)
Interest income.................................... 223 322
Interest expense................................... (10,331) (10,000)
Other, net......................................... (1,330) (459)
Benefit from (provision for) income taxes.......... 1,800 (400)
----------- -----------
Net loss........................................... $ (1,853) $ (611)
=========== ===========
</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 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.
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<PAGE>
(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 three
strategic business units: North America, International, and Instromedix. The
following table summarizes sales to customers by each business unit.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
----------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
North America sales............................................................. $ 58.2 $ 57.3
International sales............................................................. 29.9 32.1
Instromedix sales............................................................... 3.2 4.0
--------- --------
Total sales................................................................ $ 91.3 $ 93.4
========= ========
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1999
SALES
Sales decreased $2.2 million, or 2%, for the three months ended March 31, 2000
compared with the three months ended March 31, 1999. North America sales
increased $0.8 million, or 2%, compared with the first quarter of 1999. North
America drug infusion instrument revenue increased by approximately $2.9 million
as instrument placements increased 46% over the unusually low first quarter of
1999. The increase in North America instrument sales was significantly offset by
a decrease in sales of drug infusion disposable administration sets. Disposable
set revenue was lower than a year ago in major markets worldwide. The Company
estimates that about $3 million of its dedicated disposable sets were purchased
in 1999 as safety stock in anticipation of possible Y2K problems at year-end.
The Company believes that most of this inventory was worked off in the first
quarter of 2000.
The increase in total North America sales in the first quarter was more than
offset by a decrease in International sales of $2.1 million, or 7%, compared
with the first quarter of 1999. Sales decreased approximately $3.3 million in
the United Kingdom, the Company's largest international market. The Company
believes the UK decrease was due in part to the Y2K disposables issue described
above and in part to a limitation in governmental funds available for healthcare
expenditures in this quarter, which was the final quarter of the UK's fiscal
year. Additionally, foreign currency rate changes had an adverse effect on
International sales in the first quarter of 2000. 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 $1.6 million, or 5%. Using constant exchange rates, International
sales decreased 2%.
Instromedix sales decreased $0.9 million during the quarter to $3.2 million
compared with a strong first quarter a year ago of $4.1 million.
GROSS MARGIN
Gross margin decreased $5.2 million, or 11%, during the three months ended March
31, 2000, compared with the three months ended March 31, 1999. The gross margin
percentage decreased to 46.6% in the first quarter of 2000, from 51.2% in the
first quarter of 1999. The margin percentage for the first quarter of 1999 was
unusually high due to low instrument placement during that period. Contributing
to the
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<PAGE>
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, as well as less favorable production costs
in the first quarter of 2000 compared with the same quarter last year.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses decreased $0.4 million, or 2%, during the three
months ended March 31, 2000 compared with the three months ended March 31, 1999
due to lower sales volume and the effect of spending controls initiated in the
second quarter of last year. As a percentage of sales, selling and marketing
expenses remained constant at 21.3% for the first quarter of 2000 and 1999.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased $0.8 million, or 7%, during the
three months ended March 31, 2000 compared with the three months ended March 31,
1999. This decrease is primarily due to lower amortization expense in the
current period as a result of the write-off of certain Instromedix intangible
assets during the fourth quarter of 1999 and from other intangibles becoming
fully amortized during the prior year. These decreases were partially offset by
increased information technology costs for the Company's new International
operating system implemented in late 1999.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased approximately $0.3 million, or 5%,
during the three months ended March 31, 2000 compared with the three months
ended March 31, 1999 primarily due to increased activities associated with the
later development stages of various International engineering 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 June
1999, the Company consolidated the operations of Instromedix into its San Diego,
California facilities, allowing the Company to leverage its existing
infrastructure and manufacturing capacity in San Diego. In connection with these
relocation and integration activities, the Company incurred $2.1 million in
costs in the first quarter of 1999, including severance and related termination
benefits of $1.1 million, retention bonuses of $0.2 million, asset dispositions
of $0.4 million, lease termination costs of $0.3 million and $0.1 million in
other related costs.
INCOME FROM OPERATIONS
Income from operations decreased $2.1 million during the three months ended
March 31, 2000 compared with the three months ended March 31, 1999 primarily
due to lower sales and gross margins in the current year and other activities
discussed above.
ADJUSTED EBITDA
Adjusted EBITDA decreased $5.1 million during the three months ended March 31,
2000 compared with the three months ended March 31, 1999. As a percentage of
sales, Adjusted EBITDA decreased from 22.7%, or $21.2 million, during the three
months ended March 31, 1999 to 17.7% or $16.1 million, during the three months
ended March 31, 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
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<PAGE>
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 $0.3 million, or 3%, during the three months ended
March 31, 2000 compared with the three months ended March 31, 1999 primarily due
to higher interest rates in 2000 on the Company's outstanding debt. (See
Liquidity and Capital Resources.)
OTHER EXPENSE
Other expense increased approximately $0.9 million during the three months ended
March 31, 2000 compared with the three months ended March 31, 1999 primarily due
to an increase in foreign currency transaction losses resulting from the
strengthening of the U.S. dollar in the first quarter of 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 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. 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 to pay debt service on outstanding indebtedness.
At March 31, 2000, the Company's outstanding indebtedness was $393.2 million,
which includes $192.8 million of bank term debt under the Credit Facility,
$200.0 million of Senior Subordinated Notes due 2006 (the "Notes"), which were
issued in connection with the Merger. 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 through January 2000, covering approximately 50% of the Credit
Facility term loan borrowings. Under the interest rate protection agreement,
such borrowings' interest rate was effectively fixed. During the reporting
period and prior to expiration of the interest rate protection agreement, such
agreement resulted in a weighted average interest rate for all Credit Facility
borrowings of 9.6%. During the remainder of the reporting period subsequent to
expiration of the interest rate protection agreement and unless otherwise
modified, all Credit Facility borrowings are subject to interest rate risk. A
10% increase (approximately one percentage point) in the applicable interest
rate, would result in a $1.9 million annual increase in interest expense.
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
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<PAGE>
revolving credit facility to $60.0 million. The amended Credit Facility also
provided the Company an additional $30.0 million under the Tranche D term
debt. The Company used $30.0 million term debt borrowing, along with
approximately $2.0 million from the revolving credit line, to fund the
initial payments required upon closing the Instromedix acquisition.
Subsequent to closing the Instromedix acquisition, ALARIS Medical completed
the sale of $109.9 million of 11 1/8% senior discount notes ("Senior Discount
Notes"), due 2008, 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 $10.5 million for
the remaining nine months of 2000 and $22.1 million and $28.9 million for 2001
and 2002, respectively.
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, 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. Although there can be no assurances, the Company anticipates that its bank
group will consent to, and its operating performance will meet the performance
measures required for ALARIS Medical Systems to fund the repayment of the
Convertible Debentures at maturity.
During the three months ended March 31, 2000, the Company made cash payments of
approximately $0.4 million related to Instromedix integration costs which were
accrued at December 31, 1999. In June 1999, the Company consolidated the
operations of Instromedix into its San Diego, California facilities. In
connection with these relocation and integration activities, the Company
incurred nonrecurring charges of approximately $4.6 million before related
income tax benefits in 1999. Of this charge, approximately $0.2 million is
accrued at March 31, 2000.
The Company made capital expenditures of approximately $4 million during the
three months ended March 31, 2000 and anticipates additional capital
expenditures of approximately $26 million during the remainder of 2000.
In addition to routine capital expenditures, and in connection with prior
acquisitions, the Company made significant expenditures for the acquisition of
enterprise-wide information system software and hardware and the related design,
testing and implementation. During the fiscal years 1996 through 1999 the
Company made combined capital and operating expenditures of approximately $19.0
million related to the new enterprise-wide information system, and expenditures
of $0.4 million for the three months ended
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<PAGE>
March 31, 2000. The remaining significant phases of the project will be
completed in 2000 with anticipated additional expenditures of approximately $0.9
million.
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 to repay such debt.
Based on current interest rates and debt outstanding as of March 31, 2000, over
the next twelve months, the Company is required to make principal and interest
payments under its Credit Facility in the amount of $34.1 million and interest
payments on the 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.
BACKLOG
The backlog of orders, believed to be firm, at March 31, 2000 and 1999 was $9.7
million and $6.9 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. 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
$1.3 million and $0.4 million during the three months ended March 31, 2000
and 1999, respectively. For the three months ended March 31, 2000 and 1999,
approximately 35% and 37% of the Company's sales and 31% and 30% 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.
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.
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<PAGE>
FORWARD-LOOKING STATEMENTS
Forward-Looking Statements in this report are made pursuant to the Safe Harbor
Provisions of the Private Securities Litigation Reform Act of 1995. Persons
reading this report are cautioned that such forward-looking statements involve
risks and uncertainties, including, without limitation, the effect of
legislative and regulatory changes effecting the health care industry; the
potential of increased levels of competition; technological changes; the
dependence of the Company upon the success of new products and ongoing research
and development efforts; restrictions contained in the instruments governing the
Company's indebtedness; the significant leverage to which the Company is
subject; and other matters referred to in this report.
ITEM 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 4 to the Condensed Consolidated Financial Statements.
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.17 -- Change in Control Agreement, dated April 20, 2000 between ALARIS
Medical, Inc. and William C. Bopp. The Company has entered into
identical agreements with each of the following: David L.
Schlotterbeck, Sally M. Grigoriev, Joergen Lyngsgaard, Richard M.
Mirando, L. James Runchey, Anthony B. Semedo and Jake St. Philip.
27 -- Financial Data Schedule
-----------------------------------------
(b) Reports on Form 8-K
None.
- 20 -
<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: May 4, 2000 By: /s/ WILLIAM C. BOPP
-------------------------------
William C. Bopp
Senior Vice President and Chief Financial Officer
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<PAGE>
EXHIBIT 10.17
CHANGE IN CONTROL AGREEMENT
- --------------------------------------------------------------------------------
ALARIS MEDICAL, INC.
10221 Wateridge Circle
San Diego, CA 92121
Dated: April 20, 2000
Mr. William C. Bopp
4295 Hermosa Way
San Diego, CA 92103
Dear William C. Bopp:
ALARIS Medical, Inc. (the "Corporation") considers it essential to the best
interests of its shareholders to foster the continuous employment by the
Corporation of its key management personnel as well as the key management
personnel of the Corporation's direct and indirect subsidiaries, including,
without limitation, ALARIS Medical Systems, Inc. ("AMS"). The Corporation's
Board of Directors (the "Board") recognizes that, as is the case with many
publicly held corporations, the existence of the possibility of a change in
control of the Corporation may promote management uncertainty and could result
in serious management distraction.
Accordingly, the Board has decided to reinforce and encourage the continued
attention and dedication of members of the management of the Corporation and its
direct and indirect subsidiaries to their assigned duties without the
distraction arising from the possibility of a change in control. Accordingly,
the Corporation hereby agrees that after this letter agreement (this
"Agreement") has been fully executed, you shall receive the severance benefits
set forth in this Agreement in the event your employment with the Corporation
and its direct and indirect subsidiaries (as applicable), is terminated under
the circumstances described below subsequent to a Change of Control (as defined
in Section 2). Unless the context indicates otherwise, references herein to the
"Corporation" and its rights and obligations hereunder (including, without
limitation, its payment obligations) shall refer to the Corporation and its
direct and indirect subsidiaries individually, or collectively, as the context
may require.
1. Change of Control. No benefits shall be payable hereunder unless a Change of
Control (as hereinafter defined) shall have occurred on or before the End Date
(as hereinafter defined), regardless of whether or not the End Date shall have
been designated. For purposes of this Agreement the term "End Date" shall mean
that date designated by the Corporation as the End Date in a written notice to
that effect provided to you at least six (6) months prior to the date so
designated. For purposes of this Agreement, a "Change of Control" will be deemed
to have occurred on the date any of the following events shall have occurred:
(a) any person or persons acting together which would constitute a "group" for
purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), (other than the Corporation, any Subsidiary (as defined
below) and Jeffry M. Picower (including, any of his Affiliates (as defined
below) and any lineal descendant of Mr. Picower, any widow or then current
spouse of Mr. Picower or of any such lineal descendant, a trust established
principally for the benefit of any of the foregoing, any entity which is at
least 90% beneficially owned by any of the foregoing, and the executor,
administrator or personal representative of the estate of any of the foregoing
(any one or more of the foregoing being sometimes hereinafter referred to as the
"Picower Group") beneficially own (as defined in Rule 13d-3 under the
<PAGE>
Exchange Act), directly or indirectly, securities of the Corporation, AMS or any
Significant Subsidiary (as defined below) representing greater than 10% of the
total combined voting power of the Corporation, AMS or the Significant
Subsidiary entitled to vote in the election of the board of directors of the
Corporation, AMS or the Significant Subsidiary; provided, however, that such
event shall not constitute a Change of Control unless and until the combined
voting power of such securities owned beneficially, directly or indirectly, by
such person or persons is greater than the combined voting power of all such
securities owned beneficially, directly or indirectly, by Mr. Picower and the
Picower Group. For purposes of this Agreement, (i) the term "Subsidiary" shall
mean any corporation of which the Corporation, directly or indirectly, is the
beneficial owner of fifty percent (50%) or more of the total combined voting
power of all classes of its stock having voting power and which qualifies as a
subsidiary corporation pursuant to Section 424(f) of the Internal Revenue Code
of 1986, as amended (the "Code"), and (ii) the term "Affiliate" shall mean any
partnership, corporation, firm, joint venture, association, trust,
unincorporated organization or other entity that, directly or indirectly through
one or more intermediaries, is controlled by Mr. Picower or the Picower Group,
where the term "controlled by" means the possession, direct or indirect, of the
power to cause the direction of the management and policies of such entity,
whether through the ownership of voting interests or voting securities, as the
case may be, by contract or otherwise.
(b) persons other than the Current Directors (as defined below) constitute a
majority of the members of the Board (for these purposes, a "Current Director"
means any member of the Board as of November 27, 1996, and any successor of any
such member whose election, or nomination for election by the Corporation's
shareholders, was approved by at least a majority of the Current Directors then
on the Board or by Mr. Picower or the Picower Group);
(c) the consummation of (i) a plan of liquidation of all or substantially all of
the assets of the Corporation, AMS or any Subsidiary owning directly or
indirectly all or substantially all of the consolidated assets of the
Corporation (a "Significant Subsidiary"), or (ii) an agreement providing for the
merger or consolidation of the Corporation, AMS or a Significant Subsidiary (A)
in which the Corporation, AMS or the Significant Subsidiary is not the
continuing or surviving corporation (other than a consolidation or merger with a
wholly-owned subsidiary of the Corporation in which all shares of common stock
of the Corporation or common stock in AMS or the Significant Subsidiary
outstanding immediately prior to the effectiveness thereof are changed into or
exchanged for all or substantially all of the common stock of the surviving
corporation and (if the Corporation ceases to exist) the surviving corporation
assumes all outstanding options to purchase common stock of the Corporation) or
(B) pursuant to which, even though the Corporation is the continuing or
surviving corporation, the shares of common stock of the Corporation or common
stock in AMS or the Significant Subsidiary are converted into cash, securities
or other property; provided, however, that no "Change of Control" shall be
deemed to occur as the result of a consolidation or merger of the Corporation,
AMS or a Significant Subsidiary in which the holders of the shares of common
stock of the Corporation immediately prior to the consolidation or merger have,
as a result thereof, directly or indirectly, at least a majority of the combined
voting power of all classes of voting stock of the continuing or surviving
corporation or its parent immediately after such consolidation or merger or in
which the Board immediately prior to the merger or consolidation would,
immediately after the merger or consolidation, constitute a majority of the
board of directors of the continuing or surviving corporation or its parent; or
(d) the consummation of an agreement (or agreements) providing for the sale or
other disposition (in one transaction or a series of transactions) of all or
substantially all of the assets of the Corporation, AMS or a Significant
Subsidiary other than such a sale or disposition immediately after which such
assets will be owned directly or indirectly by the stockholders of the
Corporation in substantially the same proportions as their ownership of the
shares of common stock of the Corporation immediately prior to such sale or
disposition.
2. Termination Following Change of Control.
(i) General. Nothing contained in this Agreement shall (a) confer upon you any
right to continue in the employ of the Corporation, (b) constitute any contract
or agreement of employment, or (c) interfere in any way with the at-will nature
of your employment with the Corporation (it being understood and agreed that
<PAGE>
(so long as it is done in accordance with applicable law) the Corporation may
terminate your employment at any time for any reason or for no reason and that
you may terminate your employment with the Corporation at anytime for any reason
or for no reason [except, of course, to the extent otherwise provided for in a
formal written employment agreement between you and the Corporation]). However,
if a Change of Control shall have occurred on or prior to the End Date, you
shall be entitled to the benefits provided in Section 3(ii) upon a subsequent
termination of your employment if that termination occurs within the two (2)
year period immediately following the date of such Change of Control, but only
if that termination was effected (a) by the Corporation other than for Cause or
Disability (each as defined below), or (b) by you for Good Reason (as defined
below) (a termination of your employment under the circumstances set forth in
subparagraph (a) or (b) of this sentence is sometimes hereinafter referred to as
a "Payment Termination"). You shall not be entitled to such benefits: (a) if
your employment is terminated for any reason after a Change of Control which
occurs after the End Date, (b) if your employment is terminated for any reason
prior to a Change of Control, even if that Change of Control occurs on or prior
to the End Date or (c) your employment is terminated after a Change of Control
occurring on or prior to the End Date, if such termination is occasioned: (i) by
your death; (ii) by the Corporation for Cause or Disability; or (iii) by you for
other than Good Reason (a termination of your employment under the circumstances
set forth in subparagraph (a), (b), or (c) of this sentence is sometimes
hereafter referred to as a "Non-Payment Termination"). Notwithstanding any of
the foregoing to the contrary, if your employment is terminated by the
Corporation prior to a Change of Control (under circumstances in which had your
employment terminated after such Change in Control, such termination would have
constituted a Payment Termination), but otherwise in contemplation of a known
specific Change of Control which occurs on or before the End Date, then for all
purposes of this Agreement your employment shall be deemed to have been
terminated immediately after that contemplated Change of Control actually occurs
if it does.
(ii) Death or Disability. Your employment with the Corporation shall terminate,
automatically, upon your death. The Corporation may terminate your employment
for any reason or for no reason, including, without limitation, for Disability,
but only if that Disability continues through the Date of Termination (as
hereinafter defined). For purposes hereof the term "Disability" shall mean your
absence from the full-time performance of your duties with the Corporation for
six (6) consecutive months by reason of physical or mental illness.
(iii) Cause. The Corporation may terminate your employment for any reason or for
no reason, including, without limitation, for Cause. For purposes of this
Agreement, "Cause" shall mean (a) any breach by you of any of your obligations
under this Agreement of a type and kind which is materially adverse to the
Corporation and which remains uncured by you for five (5) calendar days
following your receipt of Notice of Termination (as hereinafter defined), (b)
any gross misconduct by you of a type and kind which is materially adverse to
the Corporation and which remains uncured by you for five (5) calendar days
following your receipt of Notice of Termination, (c) any violation by you of a
governmental law, rule or regulation applicable to the business of the
Corporation of a type and kind which is materially adverse to the Corporation
and which remains uncured for five (5) calendar days following your receipt of
Notice of Termination, or (d) your conviction of, or entry by you of a guilty,
or no contest, plea to, the commission of a felony involving moral turpitude.
(iv) Good Reason. You may terminate your employment for any reason or for no
reason, including, without limitation for Good Reason. For purposes of this
Agreement, "Good Reason" shall mean the occurrence after a Change of Control
occurring on or before the End Date of any one or more of the following events
without, in each case, your prior written consent:
(a) the assignment to you of any duties (other than duties constituting
reasonable transition services in connection with a Change of Control
transaction) which are inconsistent with the position in the Corporation that
you held immediately prior to the Change of Control, an alteration in the nature
or status of your responsibilities or the conditions of your employment from
those in effect immediately prior to such Change of Control, or any other action
by the Corporation that results in a diminution in the position and authority
with the Corporation held by you prior to such Change of Control, in each case,
under circumstances in which such assignment, alteration or action is materially
adverse to you;
<PAGE>
(b) the Corporation's reduction of your annual base salary or bonus opportunity,
each as in effect on the date hereof or as the same may be increased from time
to time;
(c) the relocation of the Corporation's offices at which you are principally
employed immediately prior to the date of the Change of Control (your "Principal
Location") to a location more than twenty-five (25) miles from such location, or
the Corporation's requiring you to be based at a location more than twenty-five
(25) miles from your Principal Location, except for required travel on the
Corporation's business to an extent substantially consistent with your present
business travel obligations;
(d) the Corporation's failure to pay to you any portion of your current
compensation or any portion of an installment of deferred compensation under any
deferred compensation program of the Corporation within seven (7) days following
the later of the date such compensation is due or the date of demand by you for
the payment of such compensation;
(e) the Corporation's failure to continue in effect compensation and benefit
plans which provide you with benefits which are substantially similar, on an
aggregate basis, to the benefits provided to you under the Corporation's regular
compensation and benefit plans and practices immediately prior to the Change of
Control, unless an equitable arrangement (embodied in ongoing substitute or
alternative plans) has been made with respect to such plans, or the
Corporation's failure to continue your participation therein (or in such
substitute or alternative plans) on a basis not materially less favorable in the
aggregate, both in terms of the amount of benefits provided and the level of
your participation relative to other participants, as existed at the time of the
Change of Control;
(f) the Corporation's failure to obtain an agreement from any successor to
assume and agree to perform this Agreement, as contemplated in Section 6 hereof;
(g) any purported termination of your employment by the Corporation which does
not satisfy the requirements of Section 2(v) hereof (such a purported
termination shall not be effective for purposes of this Agreement);
(h) the continuation or repetition, after written notice of objection from you,
of harassing or denigrating treatment of you inconsistent with your position
with the Corporation, which treatment is materially adverse to you; or
(i) any breach by the Corporation of its obligations under this Agreement which
is materially adverse to you.
Your right to terminate your employment pursuant to this Section 3(iv) shall not
be affected by your short-term incapacity due to physical or mental illness.
Your continued employment shall not constitute consent to, or a waiver of right
with respect to, any circumstance constituting Good Reason hereunder.
(v) Notice of Termination. Any purported termination of your employment by the
Corporation or by you (other than termination due to your death, since your
death terminates your employment automatically) occurring within two (2) years
following a Change of Control, which itself occurs on or before the End Date,
shall be communicated by written Notice of Termination to the other party hereto
in accordance with Section 6. For purposes of this Agreement, "Notice of
Termination" shall mean a notice that shall indicate the specific termination
provision in this Agreement relied upon, shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of your
employment under the provision so indicated and shall set forth a date (the
"Date of Termination") which follows the date of that notice (it being
understood and agreed that if your employment is being terminated by you for
Good Reason, the Date of Termination may not be more than thirty (30) days from
the date of that notice or more than three (3) months from the date of the
events giving rise to that Good Reason, whichever first occurs).
(vi) Date of Termination. If the Corporation seeks to terminate your employment
for Disability, the date of termination of your employment shall be the Date of
Termination, unless prior to that date you have fully
<PAGE>
recovered from your illness and have returned to the full-time performance of
your duties, in which case your employment shall not terminate. If the
Corporation seeks to terminate your employment for Cause, the date of
termination of your employment shall be the Date of Termination, except that if
the consequences of the act or omission to act set forth in the pertinent Notice
of Termination is curable (and cure is allowed under such circumstances) then
the date of termination of your employment shall be the date which is the sixth
(6th) day following the Date of Termination, unless you shall have cured such
consequences prior to that date, in which case your employment shall not
terminate. If you seek to terminate your employment with the Corporation for
Good Reason then the date of termination of your employment shall be the Date of
Termination. The date that your employment actually terminates is sometimes
hereafter referred to as the "Final Date".
3. Compensation Upon Termination.
(i) If you suffer a Non-Payment Termination, the Corporation shall pay you your
full base salary, when due, through the Final Date at the rate in effect
immediately prior to the delivery of the pertinent Notice of Termination, if a
Notice of Termination was required to have been given, or if it was not, then
immediately prior to the Final Date, plus all other amounts to which you are
entitled under any compensation plan or practice of the Corporation at the time
such payments are due, and the Corporation shall have no further obligations to
you under this Agreement.
(ii) If you suffer a Payment Termination, then, subject to paragraph (v) of this
Section 3 and in lieu of any severance benefits to which you may otherwise be
entitled under any severance plan or program of the Corporation or any
Subsidiary, you shall be entitled to the benefits provided below:
(a) the Corporation shall pay you your full base salary, when due, through the
Final Date at the rate in effect immediately prior to the delivery of the
pertinent Notice of Termination (or if your termination is for Good Reason by
reason of a reduction in your annual base salary, the rate in effect immediately
prior to such reduction), at the time specified in Section 3(iii), plus all
other amounts (other than severance benefits not provided for in this Agreement)
to which you are entitled under any compensation plan or practice of the
Corporation at the time such payments are due;
(b) in lieu of any further salary payments to you for periods subsequent to the
Final Date, the Corporation shall pay as severance pay to you, at the time
specified in Section 3(iii), a lump-sum severance payment equal to the sum of
the following:
(A) two hundred percent (200%) of your annual base salary as in effect
immediately prior to the delivery of the pertinent Notice of Termination (or if
your termination is for Good Reason by reason of a reduction in your annual base
salary, the rate in effect immediately prior to such reduction); and
(B) two hundred percent (200%) of your targeted annual aggregate bonus amounts
for the year in which this Agreement is executed;
(c) the Corporation shall, at its sole expense as incurred, provide you with
outplacement services for a period not to exceed nine (9) months at an aggregate
cost to the Corporation not to exceed $12,000, the scope of which shall be
selected by you in your sole discretion and the provider of which shall be
selected by you from among the providers offered to you by the Corporation;
(d) for the period beginning on the Final Date and ending on the earlier of (i)
the date which is twenty-four (24) full months following the Final Date or (ii)
the first day of your eligibility to participate in another group health plan,
the Corporation shall pay for and provide you and your dependents with the same
medical benefits coverage to which you would have been entitled had you remained
continuously employed by the Corporation during such period. In the event that
you are ineligible under the terms of the Corporation's benefit plans to
continue to be so covered, the Corporation shall provide you with substantially
equivalent coverage through other sources or will provide you with a lump sum
payment (determined on a present value basis using the interest rate provided in
Section 1274(b)(2)(B) of the Code on the Date of Termination) in
<PAGE>
such amount that, after all income and employment taxes on that amount, shall be
equal to the cost to you of providing yourself such benefit coverage. At the
termination of the benefits coverage under the first sentence of this Section
3(ii)(d), you and your dependents shall be entitled to continuation coverage
("COBRA Coverage") pursuant to Section 4980B of the Code, Sections 601-608 of
the Employee Retirement Income Security Act of 1974, as amended, and under any
other applicable law, to the extent required by such laws, as if you had
terminated employment with the Corporation on the date such benefits coverage
terminates; provided, however, that the period of your benefits coverage under
the first sentence of this Section 3(ii)(d) shall be offset against the period
during which you would be entitled to such COBRA Coverage; and
(e) you shall be fully vested in your accrued benefits under any qualified or
nonqualified pension, profit sharing, deferred compensation or supplemental
plans maintained by the Corporation for your benefit; provided, however, that to
the extent that the acceleration of vesting of such benefits would violate any
applicable law or require the Corporation to accelerate the vesting of the
accrued benefits of all participants in such plan or plans, then, assuming that
you obtain the appropriate consents, the Corporation shall pay you a lump-sum
payment at the time specified in Section 3(iii) in an amount equal to the value
of such unvested benefits.
(iii) The payments provided for in Sections 3(ii)(a), (b) and (e) (if
applicable) shall be made not later than the fifth business day following the
Final Date; provided, however, that if the amounts of such payments cannot be
finally determined on or before such date, the Corporation shall pay to you on
such day an estimate, as determined in good faith by the Corporation, of the
minimum amount of such payments and shall pay the remainder of such payments
(together with interest at the rate provided in Section 1274(b)(2)(B) of the
Code) as soon as the amount thereof can be determined but in no event later than
the thirtieth (30th) day after the Date of Termination. In the event that the
amount of the estimated payments exceeds the amount subsequently determined to
have been due, such excess shall constitute a loan by the Corporation to you,
payable on the fifth (5th) business day after demand by the Corporation
(together with interest at the rate provided in Section 1274(b)(2)(B) of the
Code).
(iv) You shall not be required to mitigate the amount of any payment provided
for in this Section 3 by seeking other employment or otherwise nor, except as
provided in Section 3(ii)(d), shall the amount of any payment or benefit
provided for in this Section 3 be reduced by any compensation earned by you as
the result of employment by another employer or self-employment, by retirement
benefits, by offset against any amounts (other than loans or advances to you by
the Corporation) claimed to be owed by you to the Corporation, or otherwise.
(v) (a) Notwithstanding anything contained herein, if any payment or
distribution to you or for your benefit (whether paid or payable or distributed
or distributable) pursuant to the terms of this Agreement or otherwise (a
"Payment") would constitute a "parachute payment" within the meaning of Section
28OG of the Code, the Payments shall be reduced to the extent necessary so that
no portion of the Payments shall be subject to the excise tax imposed by Section
4999 of the Code (the "Excise Tax"), but only if, by reason of such reduction,
the net after-tax benefit to you shall exceed the net after-tax benefit to you
if no such reduction was made. For purposes of this Section 3(v), "net after-tax
benefit" shall mean (i) the Payments which you receive or are then entitled to
receive that would constitute "parachute payments" within the meaning of Section
280G of the Code, less (ii) the amount of all federal, state, local and foreign
income and employment taxes payable with respect to the foregoing calculated at
the maximum marginal income tax rate (factoring in the loss of itemized
deductions) for each year in which the foregoing shall be paid to you (based on
the rate in effect for such year as set forth in the Code as in effect at the
time of the first payment of the foregoing), less (iii) the amount of the Excise
Tax imposed with respect to the Payments. The foregoing determination will be
made by the Accountants (as defined below) in consultation with you and the
Corporation and in accordance with the analysis, valuations and calculations
prepared by the Accountants in connection with this Agreement. If the
Accountants determine that such reduction is required by this Section 3(v)(a),
you, in your sole and absolute discretion, may determine which Payments shall be
reduced to the extent necessary so that no portion thereof shall be subject to
the Excise Tax, and the Corporation shall pay such reduced amount to you. You
and the Corporation will each provide the
<PAGE>
Accountants access to and copies of any books, records, and documents in the
possession of you or the Corporation, as the case may be, reasonably requested
by the Accountants, and otherwise cooperate with the Accountants in connection
with the preparation and issuance of the determinations and calculations
contemplated by this Section 3(v)(a).
(b) All determinations required to be made under this Section 3(v), including
the assumptions to be utilized in arriving at such determinations, shall be made
by the Accountants which shall provide you and the Corporation with its
determinations and detailed supporting calculations with respect thereto at
least fifteen (15) business days prior to the date on which you would be
entitled to receive a Payment (or as soon as practicable in the event that the
Accountants have less than fifteen (15) business days advance notice that you
may receive a Payment) in order that you may determine whether it is in your
best interest to waive the receipt of any or all amounts which may constitute
"excess parachute payments." For the purposes of this Section 3(v), the
"Accountants" shall mean the Corporation's independent certified public
accountants serving immediately prior to the Change of Control. In the event
that the Accountants are also serving as accountant or auditor for the
individual, entity or group effecting the Change of Control, you shall appoint
another nationally recognized public accounting firm to make the determinations
required hereunder (which accounting firm shall then be referred to as the
Accountants hereunder). All fees and expenses of the Accountants shall be borne
solely by the Corporation. For the purposes of determining whether any of the
Payments will be subject to the Excise Tax and the amount of such Excise Tax,
such Payments will be treated as "parachute payments" within the meaning of
Section 280G of the Code, and all "parachute payments" in excess of the "base
amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as
subject to the Excise Tax, unless and except to the extent that in the opinion
of the Accountants such Payments (in whole or in part) either do not constitute
"parachute payments" or represent reasonable compensation for services actually
rendered (within the meaning of Section 280G(b)(4) of the Code) in excess of the
"base amount," or such "parachute payments" are otherwise not subject to such
Excise Tax. Any determination by the Accountants shall be binding upon the
Corporation and you. As a result of uncertainty in the application of Section
4999 of the Code at the time of the initial determination by the Accountants
hereunder, it is possible that the amount of the Payments that the Accountants
determine would constitute a "parachute payment" within the meaning of Section
280G of the Code will have been less than the amount of the Payments that the
Internal Revenue Service (the "IRS") determines constitutes a "parachute
payment" within the meaning of Section 280G of the Code. In such event, you
shall notify the Corporation in writing of any such claim by the IRS. Such
notification shall be given as soon as practicable after you are informed in
writing of such claim and shall apprize the Corporation of the nature of such
claim and the date on which such claim is requested to be paid. In connection
with any contest or potential contest of such claim, you and the Corporation
will provide each other access to and copies of any books, records, and
documents in the possession of you or the Corporation, as the case may be,
reasonably requested by the other party, and will otherwise cooperate with each
other in connection with any such contest or potential contest. In the event
that you or the Corporation contest such claim, the Corporation shall bear and
pay directly all costs and expenses (including additional interest and
penalties) incurred in connection with such contest. If it is finally determined
that the amount of the Payments that the Accountants determined constituted a
"parachute payment" within the meaning of Section 280G of the Code is less than
the amount of the Payments that the IRS determined constituted a "parachute
payment" within the meaning of Section 280G of the Code, you shall repay to the
Corporation (together with interest at the rate provided in Section
1274(b)(2)(B) of the Code) that amount of the Payments necessary to reduce the
Payments such that no portion thereof shall be subject to the Excise Tax, but
only if, by reason of such repayment, the net after-tax benefit to you shall
exceed the net after-tax benefit to you if no such repayment was made. Nothing
contained in this Section 3(v)(b) shall limit your ability or entitlement to
settle or contest, as the case may be, any claim or issue asserted or raised by
the IRS or any other taxing authority.
4. Stock Options. Notwithstanding anything contained herein, all outstanding
options ("Options"), if any, granted to you under any of the Corporation's stock
option plans, incentive plans or other similar plans (or options substituted
therefor covering the stock of a successor corporation) shall continue to be
subject to the terms of the applicable stock option plan and option agreement.
5. Successors; Binding Agreement.
<PAGE>
(i) The Corporation shall require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Corporation to expressly assume and agree to pay
and perform, when due, all of the obligations of the Corporation to you under
this Agreement incurred in connection with the Change of Control to that
successor.
(ii) This Agreement shall inure to the benefit of and be enforceable by you and
your personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If you should die while any amount
would still be payable to you hereunder had you continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to your devisee, legatee or other designee or, if there
is no such designee, to your estate.
6. Notice. For the purpose of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
certified or, registered mail, return receipt requested, postage prepaid,
addressed to the respective addresses set forth on the first page of this
Agreement, provided that all notices to the Corporation shall be directed to the
attention of the Board with a copy to the Secretary of the Corporation, or to
such other address as either party may have furnished to the other in writing in
accordance herewith, except that notice of change of address shall be effective
only upon receipt.
7. Confidentiality and Non-Solicitation Covenants.
(i) Confidentiality. You hereby agree to be bound by the terms and conditions of
the Confidentiality and Invention Assignment Agreement attached hereto as
Exhibit A.
(ii) Non-Solicitation. You hereby agree that, for the period commencing on the
Final Date and terminating on the twelve (12) month anniversary thereof, you
shall not, either on your own account or jointly with or as a manager, agent,
officer, employee, consultant, partner, joint venturer, owner or shareholder or
otherwise on behalf of any other person, firm or corporation, directly or
indirectly solicit or attempt to solicit away from the Corporation any of its
officers or employees or offer employment to any person who, on or during the
six (6) months immediately preceding the date of such solicitation or offer, is
or was an officer or employee of the Corporation; provided, however, that a
general advertisement to which an employee of the Corporation responds shall in
no event be deemed to result in a breach of this Section 7(ii). Such agreement
by you shall not be deemed to limit in any way any other non-solicitation or
similar agreement between you and the Corporation.
(iii) The provisions of this Section 7 shall survive the termination or
expiration of this Agreement and your employment with the Corporation and shall
be fully enforceable thereafter. If it is determined by a court of competent
jurisdiction in any state or jurisdiction that any restriction in this Section 7
is excessive in duration or scope or is unreasonable or unenforceable under the
laws of that state or jurisdiction, it is the intention of the parties that such
restriction may be modified or amended by the court to render it enforceable to
the maximum extent permitted by the law of that state or jurisdiction.
(iv) In the event that you shall breach or threaten to breach any of the
provisions of this Section 7, in addition to and without limiting or waiving any
other remedies available to the Corporation in law or in equity, the Corporation
shall be entitled to immediate injunctive relief in any court, domestic or
foreign, having the capacity to grant such relief, to restrain such breach or
threatened breach and to enforce the provisions of this Section 7. You
acknowledge that it is impossible to measure in money the damages that the
Corporation will sustain in the event that you breach or threaten to breach the
provisions of this Section 7 and, in the event that the Corporation shall
institute any action or proceeding to enforce such provisions seeking injunctive
relief, you hereby waive and agree not to assert and shall not use as a defense
thereto the claim or defense that the Corporation has an adequate remedy at law.
The foregoing shall not prejudice the right of the Corporation to require you to
account for and pay over to the Corporation the amount of any actual damages
incurred by the Corporation as a result of such breach.
<PAGE>
8. Miscellaneous. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by you and such officer as may be specifically designated by the
Board. No waiver by either party hereto at any time of any breach by the other
party hereto of or compliance with, any condition or provision of this Agreement
to be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time. No agreements or representations, oral or otherwise, express or implied,
with respect to the subject matter hereof have been made by either party which
are not expressly set forth in this Agreement. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of California without regard to its conflicts of law principles. All
references to sections of the Exchange Act or the Code shall be deemed also to
refer to any successor provisions to such sections. Any payments provided for
hereunder shall be paid net of any applicable withholding required under
federal, state, local or foreign law. The section headings contained in this
Agreement are for convenience only, and shall not affect the interpretation of
this Agreement.
9. Severability. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
10. Counterparts. This Agreement may be executed in several counterparts, each
of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
11. Arbitration; Dispute Resolution, Etc.
(i) Arbitration Procedure. Any disagreement, dispute, controversy or claim
arising out of or relating to this Agreement or the interpretation of this
Agreement or any arrangements relating to this Agreement or contemplated in this
Agreement or the breach, termination or invalidity thereof shall be settled by
final and binding arbitration administered by JAMS/Endispute in San Diego,
California in accordance with the then existing JAMS/Endispute Arbitration Rules
and Procedures for Employment Disputes. In the event of such an arbitration
proceeding, you and the Corporation shall select a mutually acceptable neutral
arbitrator from among the JAMS/Endispute panel of arbitrators. In the event you
and the Corporation cannot agree on an arbitrator, the Administrator of
JAMS/Endispute will appoint an arbitrator. Neither you nor the Corporation nor
the arbitrator shall disclose the existence, content, or results of any
arbitration hereunder without the prior written consent of all parties. Except
as provided herein, the Federal Arbitration Act shall govern the interpretation,
enforcement and all proceedings. The arbitrator shall apply the substantive law
(and the law of remedies, if applicable) of the state of California, or federal
law, or both, as applicable, and the arbitrator is without jurisdiction to apply
any different substantive law. The arbitrator shall have the authority to
entertain a motion to dismiss and/or a motion for summary judgment by any party
and shall apply the standards governing such motions under the Federal Rules of
Civil Procedure. The arbitrator shall render an award and a written, reasoned
opinion in support thereof. Judgment upon the award may be entered in any court
having jurisdiction thereof.
(ii) Compensation During Dispute, Etc. Your compensation during any action or
proceeding brought by you pursuant to Section 11(i) involving a termination of
your employment following a Change of Control occurring on or prior to the End
Date (a "Dispute") shall be as follows: If there is a termination of your
employment with the Corporation followed by a Dispute, then, during the period
of that Dispute the Corporation shall pay you fifty percent (50%) of the amount
specified in Section 3(ii)(b) hereof, and the Corporation shall provide you with
the other benefits provided in Section 3(ii) of this Agreement, if, but only if,
you agree in writing that if the Dispute is resolved against you, you shall
promptly refund to the Corporation all payments you receive under Section
3(ii)(b) of this Agreement, as well as an amount equal to the value of all other
benefits provided to you under Section 3(ii) of this Agreement, in each case
plus interest at the rate provided in Section 1274(d) of the Code, compounded
quarterly. If the Dispute is resolved in your favor, promptly after resolution
of the Dispute the Corporation shall pay you the sum that was withheld during
the period of the Dispute plus interest at the rate provided in Section 1274(d)
of the Code, compounded quarterly.
<PAGE>
(iii) Expenses, Legal Fees. The Corporation shall pay to you all expenses and
reasonable attorneys' fees incurred by you in connection with any Dispute
(including, without limitation, all such fees and expenses, if any, incurred in
contesting or disputing any termination of your employment or in seeking to
obtain or enforce any right or benefit provided by this Agreement, or in
connection with any tax audit or proceeding to the extent attributable to the
application of Section 4999 of the Code to any payment or benefit provided
hereunder) if you prevail on the principal material issues which are in dispute
with respect to such Dispute.
12. Indemnification; Directors' and Officers' Insurance.
(i) The Corporation shall indemnify you in the manner and to the extent (if any)
that it is obligated to do so under the bylaws of the Corporation or AMS as of
the date hereof. Such agreement by the Corporation shall not be deemed to impair
any other obligation of the Corporation respecting your indemnification
otherwise arising out of this or any other agreement or promise of the
Corporation or under any statute.
(ii) The Corporation shall furnish you with directors' and officers' liability
insurance to the same extent, if any (in terms of policy limits, terms,
conditions and exceptions) as is provided to members of the Board of Directors,
employees, and officers, as the case may be, of comparable rank to your position
(at the time of determination) within the Corporation.
13. Entire Agreement. This Agreement sets forth the entire agreement of the
parties hereto in respect of the subject matter contained herein and, except as
otherwise expressly provided herein, supersedes all prior agreements, promises,
covenants, arrangements, communications, representations or warranties, whether
oral or written, by any officer, employee or representative of any party hereto;
and any prior agreement of the parties hereto in respect of the subject matter
contained herein, including, without limitation, any prior change of control
agreements or severance agreements, is hereby terminated and canceled. Except as
otherwise expressly provided for herein, any of your rights hereunder shall be
in addition to any rights you may otherwise have under benefit plans or
agreements of the Corporation to which you are a party or in which you are a
participant and any Corporation sponsored employee benefit plans and stock
options plans and no provisions of this Agreement shall in any way abrogate your
rights under such other plans and agreements.
If this letter sets forth our agreement on the subject matter hereof, kindly
sign and return to the Corporation the enclosed copy of this letter, which shall
then constitute our agreement on this subject.
<PAGE>
Sincerely,
ALARIS MEDICAL, INC.
By: /s/ DAVID L. SCHLOTTERBECK
-------------------------------------
President and Chief Executive Officer
Agreed and Accepted,
this 3rd day of May, 2000
--------- --------------
/s/ WILLIAM C. BOPP
- ------------------------------------
William C. Bopp
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<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> ALARIS MEDICAL SYSTEMS, INC.
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