<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934. (NO FEE REQUIRED)
For the quarterly period ended September 30, 1996
or
Transition Report Pursuant to Section 13 or 15(d) of the
/ / Securities Exchange Act of 1934. (NO FEE REQUIRED)
For the transition period from to
----------- -----------
Commission file number 34-
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IVAC MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3177311
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10221 WATERIDGE CIRCLE 92121-2733
SAN DIEGO, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (619) 458-7000
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:
----- -----
As of October 30, 1996, registrant had 100 shares of its Common Stock
($0.01 par value) outstanding.
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IVAC MEDICAL SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheet at September 30, 1996 and
December 31, 1995 3
Condensed Consolidated Statement of Operations for the three
and nine months ended September 30, 1996 and 1995 4
Condensed Consolidated Statement of Cash Flows for the nine months
ended September 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 13
Item 2. Changes in Securities. 13
Item 3. Defaults Upon Senior Securities. 13
Item 4. Submission of Matters to a Vote of Security Holders. 13
Item 5. Other Information. 13
Item 6. Exhibits and Reports on Form 8-K. 14
Signatures 15
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
IVAC MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ ------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 10,447 $ 18,308
Accounts receivable, net . . . . . . . . . . . . . . . . . . . 46,435 54,133
Current portion of contract receivables, net . . . . . . . . . 6,034 5,414
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . 39,646 34,625
Prepaid expenses and other assets . . . . . . . . . . . . . . 2,506 3,143
--------- ---------
Total current assets . . . . . . . . . . . . . . . . . . 105,068 115,623
Long-term contract receivables, net. . . . . . . . . . . . . . . 18,232 19,957
Property, plant and equipment, net . . . . . . . . . . . . . . . 44,966 48,277
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . 21,105 30,893
Other long-term assets . . . . . . . . . . . . . . . . . . . . . 1,626 1,245
--------- ---------
$ 190,997 $ 215,995
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued warranty. . . . . . . . . . . . . $ 20,565 $ 21,355
Accrued employee liabilities . . . . . . . . . . . . . . . . . 8,182 9,528
Current portion of long-term debt. . . . . . . . . . . . . . . 17,534 8,091
Other current liabilities. . . . . . . . . . . . . . . . . . . 34,708 34,869
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . 80,989 73,843
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 105,631 123,733
Other non-current liabilities. . . . . . . . . . . . . . . . . . 2,737 5,043
Shareholder's equity:
Common stock, $.01 par value; 1,000 shares
authorized; 100 shares issued and outstanding. . . . . . . . - -
Additional paid-in capital . . . . . . . . . . . . . . . . . . 63,333 63,333
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . (62,483) (51,804)
Foreign currency translation adjustment. . . . . . . . . . . . 790 1,847
--------- ---------
Total shareholder's equity . . . . . . . . . . . . . . . . . 1,640 13,376
--------- ---------
$ 190,997 $215,995
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
IVAC MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1996 1995 1996 1995
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . $ 57,393 $ 55,872 $ 170,155 $ 174,663
Cost of sales . . . . . . . . . . . . . . . 33,203 33,506 98,836 118,255
----------- ----------- ----------- ------------
Gross profit . . . . . . . . . . . . . . 24,190 22,366 71,319 56,408
Sales and marketing . . . . . . . . . . . . 9,204 9,610 28,872 32,470
General and administrative . . . . . . . . . 5,411 6,361 17,412 18,529
Research and development . . . . . . . . . . 2,750 2,861 7,663 10,111
Restructuring and special items. . . . . . . - 4,460 17,396 4,460
Purchased research and development . . . . . - - - 19,883
----------- ----------- ----------- ------------
Income (loss) from operations . . . . . 6,825 (926) (24) (29,045)
Interest income (expense):
Interest income . . . . . . . . . . . . 681 567 2,146 2,165
Interest expense . . . . . . . . . . . . (3,330) (5,544) (10,367) (16,750)
----------- ----------- ----------- ------------
Income (loss) before income taxes . . . 4,176 (5,903) (8,245) (43,630)
Provision for (benefit from) income taxes . 1,708 (449) 2,434 (3,270)
----------- ----------- ----------- ------------
Net income (loss) . . . . . . . . . . . $ 2,468 $ (5,454) $ (10,679) $ (40,360)
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
IVAC MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
----------- -----------
<S> <C> <C>
Net cash provided by operating activities. . . . . . . . . . . . . . . $ 15,524 $ 28,544
Cash flows from investing activities:
Acquisitions, net of cash and cash equivalents acquired. . . . . . . - (185,955)
Capital expenditures, net . . . . . . . . . . . . . . . . . . . . . (12,957) (7,738)
----------- -----------
Net cash used by investing activities. . . . . . . . . . . (12,957) (193,693)
Cash flows from financing activities:
Capital contributions . . . . . . . . . . . . . . . . . . . . . . . - 50,000
Borrowings under term loan and revolving credit arrangements . . . . 3,000 68,500
Proceeds from bridge notes . . . . . . . . . . . . . . . . . . . . . - 80,000
Repayment of term loan and revolving debt. . . . . . . . . . . . . . (7,500) (10,000)
Payment of other debt obligations. . . . . . . . . . . . . . . . . . (4,533) -
Debt issue costs . . . . . . . . . . . . . . . . . . . . . . . . . . (39) (6,566)
Capital lease payments . . . . . . . . . . . . . . . . . . . . . . . (299) (260)
----------- -----------
Net cash (used) provided by financing activities . . . . . (9,371) 181,674
Effect of exchange rate changes on cash. . . . . . . . . . . . . . . . (1,057) 1,401
----------- -----------
Net (decrease) increase in cash and cash equivalents . . . . . . . (7,861) 17,926
Cash and cash equivalents at the beginning of the period . . . . . . . 18,308 0
----------- -----------
Cash and cash equivalents at the end of the period . . . . . . . . . . $ 10,447 $ 17,926
----------- -----------
----------- -----------
Supplemental disclosure of non-cash financing activities:
Contribution of River capital stock. . . . . . . . . . . . . . . . . - $ 13,333
-----------
-----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
IVAC MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(unaudited)
NOTE 1-BUSINESS
IVAC Medical Systems, Inc. ("IVAC" or the "Company"), formerly known as
IVAC Corporation, designs, manufactures, distributes and services intravenous
infusion therapy and vital signs measurement instruments and related disposables
and accessories. The Company sells a full range of products to hospitals and
alternate site facilities in the United States, Canada and Europe. IVAC is a
wholly owned subsidiary of IVAC Holdings, Inc. ("Holdings").
In management's opinion, the accompanying unaudited condensed consolidated
financial statements of the Company for the three and nine months ended
September 30, 1996 and 1995 have been prepared in accordance with generally
accepted accounting principles for interim financial statements and include all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of the financial position, results of operations and cash flows for
all periods presented. All such financial statements are unaudited except for
the December 31, 1995 balance sheet. The unaudited condensed consolidated
financial statements include the accounts and results of operations of the
Company and its subsidiaries, all of which are wholly owned. All significant
intercompany balances and transactions have been eliminated. Interim operating
results are not necessarily indicative of operating results for the full year.
These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K filed for the year ended December 31, 1995.
NOTE 2-EARNINGS PER SHARE
Due to the fact that IVAC is a wholly owned subsidiary of Holdings,
earnings per share data is not considered meaningful and, therefore, is not
presented.
NOTE 3-INVENTORIES
Inventories at September 30, 1996 and December 31, 1995 consisted of:
SEPTEMBER 30, DECEMBER 31,
1996 1995
----------- -----------
Finished products. . . . $ 16,464 $ 14,998
Work-in-process. . . . . 7,237 3,472
Raw materials. . . . . . 19,254 17,867
----------- -----------
42,955 36,337
Less reserves. . . . . . (3,309) (1,712)
----------- -----------
$ 39,646 $ 34,625
----------- -----------
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6
<PAGE>
IVAC MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(unaudited)
NOTE 4-LONG-TERM DEBT
On March 29, 1996, the Company amended and restated its Bank Credit
Facility. The amended and restated senior credit facility (the "Facility") is
available through March 29, 1999, provides for borrowings of up to $40,000 and
is secured by substantially all of the Company's domestic assets. Borrowings
under the Facility bear interest at a rate equal to the Alternate Base Rate (as
defined in the Facility) plus 0.25% or Adjusted LIBOR plus 1.50%, at the option
of the Company. The interest rate is also subject to change quarterly based
upon certain debt and interest coverage ratios.
NOTE 5-LITIGATION
The Company is a party to various legal actions which have occurred in the
normal course of business. Management believes the Company has meritorious
defenses and intends to defend vigorously against these allegations and claims.
In management's opinion, liabilities arising from the above matters, if any,
will not have a material adverse effect on the Company's consolidated financial
position or results of operations.
NOTE 6-RIVER MEDICAL, INC. DIVESTITURE
The Company has closed River Medical, Inc. ("River") and is divesting
the subsidiary's assets. River's primary assets include patents,
technologies, trade secrets, inventories and manufacturing equipment. The
Company recorded a restructuring charge of $17,396 during the three months
ended June 30, 1996, including an accrual of $7,808. At September 30, 1996,
the related accrual balance was $6,159.
NOTE 7-MERGER AGREEMENT
On August 23, 1996, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") among IVAC Holdings, Inc.; the Company; IMED
Corporation ("IMED"), a subsidiary of Advanced Medical, Inc.; a wholly owned
subsidiary of IMED and the holders of Common Stock of Holdings named therein,
pursuant to which IMED will acquire, directly or indirectly through a wholly
owned subsidiary, 100% of the capital stock of Holdings for approximately
$400,000 less certain indebtedness. The proposed transaction received
regulatory approval in October 1996 and is subject to certain other closing
conditions including the completion of the financing necessary to consummate
the merger.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Excluding the effect of pre-tax 1995 acquisition purchase accounting
adjustments of $34.7 million and pre-tax 1995 restructuring charge of $4.5
million and 1996 pre-tax restructuring charge of $17.4 million, income before
income taxes increased $13.7 million, from a loss before taxes of $4.5
million for the nine months ended September 30, 1995 to income before taxes
of $9.2 million for the nine months ended September 30, 1996, due to (i)
reduction of overall spending as a result of workforce restructuring and cost
savings in connection with the cessation of River operations in June 1996,
and (ii) the benefits of lower interest expense as a result of the Company's
actions to restructure and repay debt through the sale of $100 million of 9
1/4% Senior Notes and the sale of the San Diego headquarters facility in the
fourth quarter of 1995.
Adjusted EBITDA (as defined below) increased $7.4 million, or 29.4%, from
$25.2 million for the nine months ended September 30, 1995 to $32.6 million for
the nine months ended September 30, 1996. Adjusted EBITDA margin increased from
14.4% for the nine months ended September 30, 1995 to 19.1% for the nine months
ended September 30, 1996. Adjusted EBITDA represents operating profit (loss)
before net interest expense, income taxes, certain purchase accounting
adjustments, restructurings and depreciation and amortization. Adjusted EBITDA
does not represent net income or cash flows from operations, as these terms are
defined under generally accepted accounting principles, and should not be
considered as an alternative to net income as an indicator of the Company's
operating performance or to cash flows as a measure of liquidity. The Company
has included information concerning Adjusted EBITDA herein because it
understands that such information is used by certain investors as one measure of
the Company's historical ability to service debt.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1995
NET SALES. Net sales increased $1.5 million, or 2.7%, from $55.9 million for
the three months ended September 30, 1995 to $57.4 million for the three months
ended September 30, 1996. U.S. net sales, which were 68.3% of net sales for the
three months ended September 30, 1996, increased $0.9 million, or 2.3%, from
$38.3 million for the three months ended September 30, 1995 to $39.2 million for
the three months ended September 30, 1996 as a result of growth in infusion
therapy products offset in part by a decrease in vital signs product sales.
Within the U.S. infusion therapy business, net sales increased for the three
months ended September 30, 1996 as compared to the three months ended September
30, 1995 as a result of higher instrument placements and the favorable impact of
higher average selling prices related to the disposable administration sets.
U.S. vital signs sales declined as a result of lower instrument placements and
decreased sales of thermometer disposable probe covers. International net sales
increased $0.6 million, or 3.4%, from $17.6 million for the three months ended
September 30, 1995 to $18.2 million for the three months ended September 30,
1996, primarily as a result of the increased volume of drug infusion disposable
administration sets offset in part by the unfavorable impact of exchange rate
fluctuations which reduced net sales by $0.4 million. Excluding River, net
sales were $57.4 million for the three months ended September 30, 1996 and $55.6
million for the three months ended September 30, 1995.
GROSS PROFIT. Gross profit increased $1.8 million, or 8.0%, from $22.4
million for the three months ended September 30, 1995 to $24.2 million for the
three months ended September 30, 1996 due primarily to (i) cost savings in
connection with the cessation of River operations in June 1996, and (ii)
increased sales. Excluding River, gross profit was $24.2 million for the three
months ended September 30, 1996 and $23.4 million for the three months ended
September 30, 1995.
SELLING AND MARKETING. As a percent of net sales, selling and marketing
expenses decreased from 17.2%, or $9.6 million, for the three months ended
September 30, 1995 to 16.0%, or $9.2 million, for the three months ended
September 30, 1996. This decrease is primarily a result of cost savings in
connection with the cessation of River operations in June 1996, offset in part
by increased expenses related to advertising and trade show costs. Excluding
River, selling and marketing expense was $9.2 million for the three months ended
September 30, 1996 and $8.8 million for the three months ended September 30,
1995.
GENERAL AND ADMINISTRATIVE. As a percent of net sales, general and
administrative expenses decreased from 11.4%, or $6.4 million, for the three
months ended September 30, 1995 to 9.4%, or $5.4 million for the three months
ended September 30,
8
<PAGE>
1996. This decrease is primarily a result of cost savings in connection with
the cessation of River operations in June 1996. Excluding River, general and
administrative expense was $5.4 million for the three months ended September 30,
1996 and $5.6 million for the three months ended September 30, 1995.
RESEARCH AND DEVELOPMENT. As a percent of net sales, research and
development expenses decreased from 5.1%, or $2.9 million, for the three months
ended September 30, 1995 to 4.8%, or $2.8million, for the three months ended
September 30, 1996, primarily as a result of cost savings in connection with
the cessation of River operations in June 1996, offset in part by an increase
in spending related to the international syringe pump instruments. Excluding
River, research and development expense was $2.8 million for the three months
ended September 30, 1996 and $2.6 million for the three months ended
September 30, 1995.
RESTRUCTURING AND SPECIAL ITEMS. The restructuring and special items during
1995 totaling $4.5 million were solely related to a non-recurring charge for
severance costs incurred in connection with headcount reductions undertaken as
part of a restructuring in September 1995. Excluding River, restructuring and
special items totaled $4.4 million for the three months ended September 30,
1995.
INCOME (LOSS) FROM OPERATIONS. Income from operations increased $7.7 million
from a loss of $0.9 million for the three months ended September 30, 1995 to
income from operations of $6.8 million for the three months ended September 30,
1996, as a result of the non-recurring charge for severance costs incurred in
connection with the headcount reductions undertaken as part of a restructuring
in September 1995, as well as, the cost savings in connection with the cessation
of River operations in June 1996. Excluding River, income from operations was
$6.8 million for the three months ended September 30, 1996 and $2.1 million for
the three months ended September 30, 1995.
INTEREST INCOME(EXPENSE). Net interest expense for the three months ended
September 30, 1995 was $4.9 million, consisting of interest income of $0.6
million and interest expense of $5.5 million, compared to net interest expense
for the three months ended September 30, 1996 of $2.6 million, consisting of
interest income of $0.7 million and interest expense of $3.3 million. Interest
income during both periods included interest income related to NCA contracts,
which allow hospitals to acquire instruments at no initial cost by paying a
premium (a portion of which is recorded by the Company as interest income) for
subsequent purchases of disposables. The term of these contracts is generally
three to five years, with interest at rates of 9% to 15%. Interest expense was
lower for the three months ended September 30, 1996 as a result of refinancing
and repayment of debt during the fourth quarter of 1995. Excluding River, net
interest expense was $2.6 million for the three months ended September 30, 1996
and $4.9 million for the three months ended September 30, 1995.
INCOME (LOSS) BEFORE INCOME TAXES. Income before income taxes increased
$10.1 million, or 171.2%, from a loss before income taxes of $5.9 million
for the three months ended September 30, 1995 to income before income taxes
of $4.2 million for the three months ended September 30, 1996, as a result of
the non-recurring charge for severance costs incurred in connection with the
headcount reductions undertaken as part of a restructuring in September
1995, as well as the River cost savings discussed above. Excluding River,
income before income taxes was $4.2 million for the three months ended
September 30, 1996 and loss before income taxes was $2.9 million for the
three months ended September 30, 1995.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. The benefit from income taxes was
$0.4 million for the three months ended September 30, 1995 compared to the
provision for income taxes of $1.7 million for the three months ended September
30, 1996. The Company has recorded a valuation allowance against its deferred
tax assets based on an assessment that it is more likely than not that the
deferred tax assets will not be realized. Excluding River, provision for income
taxes was $1.7 million for the three months ended September 30, 1996 and benefit
from income taxes was $0.4 million for the three months ended September 30,
1995.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
NET SALES. Net sales decreased $4.5 million, or 2.6%, from $174.7 million
for the nine months ended September 30, 1995 to $170.2 million for the nine
months ended September 30, 1996. U.S. net sales, which were 66.8% of net sales
for the nine months ended September 30, 1996, decreased $4.7 million, or 4.0%,
from $118.4 million for the nine months ended September 30, 1995 to $113.7
million for the nine months ended September 30, 1996. Within the U.S. infusion
therapy business, sales decreased for the nine months ended September 30, 1996
as compared to the nine months ended September 30, 1995 as a result of (i)
shipment in 1995 of the MedSystem III product backlog which had resulted from
the
9
<PAGE>
discontinuation of production due to product design and manufacturing process
problems during the fourth quarter 1994, and (ii) attrition in the installed
base of older technology products. In addition, the Company has been impacted by
the market trend of increasing concentration of buying power among healthcare
providers. The sales decrease was partially offset by an increase in the number
of Signature Edition instruments shipped in 1996 as compared to 1995.
Separately, in June 1996, the Company temporarily ceased manufacturing and
distribution of its Signature Edition infusion pumps in order to evaluate field
complaints. The Company subsequently implemented a voluntary recall of the
Signature Edition pumps. Production and distribution of the Signature Edition
product line, incorporating product improvements, resumed during the third
quarter of 1996. U.S. vital signs product sales declined as a result of lower
instrument placements and decreased sales of thermometer disposable probe
covers. International sales increased $0.2 million, or 0.4%, from $56.3 million
for the nine months ended September 30, 1995 to $56.5 million for the nine
months ended September 30, 1996, primarily as a result of the increased volume
of drug infusion disposable administration sets offset in part by the
unfavorable impact of exchange rate fluctuations which reduced net sales by $1.3
million. Excluding River, net sales were $169.8 million for the nine months
ended September 30, 1996 and $174.1 million for the nine months ended September
30, 1995.
GROSS PROFIT. Gross profit increased $14.9 million, or 26.4%, from $56.4
million for the nine months ended September 30, 1995 to $71.3 million for the
nine months ended September 30, 1996 due to (i) a one time $14.8 million charge
in 1995 for the acquisition purchase price allocation to inventories in excess
of historical costs, (ii) lower repair costs associated with the MedSystem III
product line, (iii) the ongoing benefit of lower manufacturing costs associated
with restructuring of the manufacturing workforce in 1995, and (iv) cost savings
in connection with the cessation of River operations in June 1996. These
factors were offset in part by decreased net sales, which reduced the Company's
economies of scale, and the costs associated with the Signature Edition pumps
voluntary recall. Excluding the 1995 effect of the one time purchase accounting
adjustment, gross profit as a percent of net sales improved from 40.8% for the
nine months ended September 30, 1995 to 41.9% for the nine months ended
September 30, 1996. Excluding River, gross profit was $73.7 million for the
nine months ended September 30, 1996 and $59.3 million for the nine months ended
September 30, 1995.
SELLING AND MARKETING. As a percent of net sales, selling and marketing
expenses decreased from 18.6%, or $32.5 million, for the nine months ended
September 30, 1995 to 17.0%, or $28.9 million, for the nine months ended
September 30, 1996, primarily as a result of cost savings derived from
restructuring the Company's hospital field sales force during 1995, cost savings
in connection with the cessation of River operations in June 1996 and lower
international spending due to the termination of the services agreement with Eli
Lilly and Company (IVAC's former parent). The Company is currently performing
these services. Excluding River, selling and marketing expense was $28.1
million for the nine months ended September 30, 1996 and $30.2 million for the
nine months ended September 30, 1995.
GENERAL AND ADMINISTRATIVE. As a percent of net sales, general and
administrative expenses decreased from 10.6%, or $18.5 million for the nine
months ended September 30, 1995 to 10.2%, or $17.4 million for the nine months
ended September 30, 1996, primarily a result of cost savings in connection with
the cessation of River operations in June 1996, including lower legal costs
associated with the SmartDose product line, offset in part by legal costs and
accounting fees associated with the Merger Agreement. Excluding River, general
and administrative expense was $16.7 million for the nine months ended September
30, 1996 and $16.3 million for the nine months ended September 30, 1995.
RESEARCH AND DEVELOPMENT. As a percent of net sales, research and
development expenses decreased from 5.8%, or $10.1 million, for the nine
months ended September 30, 1995 to 4.5%, or $7.7million, for the nine months
ended September 30, 1996, primarily as a result of reduced spending on the
new Signature Edition product as it reached the final phase of the
development cycle during the fourth quarter of 1995 and 1995 headcount
reductions. Excluding River, research and development expense was $7.5
million for the nine months ended September 30, 1996 and $9.5 million for the
nine months ended September 30, 1995.
RESTRUCTURING AND SPECIAL ITEMS. The restructuring and special items for
1995, totaling $4.5 million, were solely related to a non-recurring charge for
severance costs incurred in connection with headcount reductions undertaken as
part of a restructuring in September 1995. The restructuring and special items
for 1996, totaling $17.4 million, consisted of a non-recurring charge for the
divestiture of the River assets. River's primary assets include
patents, technologies, trade secrets, inventories and manufacturing equipment.
River has ceased operations and the Company is continuing to seek the most
advantageous sale of River's assets. Management believes the divestiture of
River will allow the Company to focus on its core products in infusion therapy
and vital signs monitoring markets.
10
<PAGE>
PURCHASED RESEARCH AND DEVELOPMENT. In 1995, the Company recorded a one time
purchase accounting adjustment of $19.9 million for purchased research and
development relating to the revaluation of assets in conjunction with the
acquisition of IVAC and River by IVAC Holdings, Inc. in December 1994.
Excluding River, the purchased research and development expense was $10.1
million for the nine months ended September 30, 1995.
INCOME (LOSS) FROM OPERATIONS. Loss from operations decreased $29.0 million
from a loss of $29.0 million for the nine months ended September 30, 1995 to a
loss from operations of less than $0.1 million for the nine months ended
September 30, 1996. Excluding 1995's one time acquisition purchase accounting
charges of $34.7 million, of which $14.8 million was included in cost of sales
and $19.9 million in purchased research and development, as well as the 1995
restructuring charge of $4.5 million and the 1996 one time restructuring charge
of $17.4 million for the divestiture of the River assets, income from operations
increased $7.2 million, or 70.6%, from $10.2 million for the nine months ended
September 30, 1995 to $17.4 million for the nine months ended September 30,
1996. The $7.2 million increase reflects the reduction in production and
operating costs attributed to the Company's restructuring and cost savings
actions initiated in 1995 and continuing in 1996, including the cessation of
River operations in June 1996. Excluding River, income from operations was
$21.5 million for the nine months ended September 30, 1996 and loss from
operations was $11.2 million for the nine months ended September 30, 1995.
INTEREST INCOME(EXPENSE). Net interest expense for the nine months ended
September 30, 1995 was $14.6 million, consisting of interest income of $2.2
million and interest expense of $16.8 million, compared to net interest expense
for the nine months ended September 30, 1996 of $8.2 million, consisting of
interest income of $2.2 million and interest expense of $10.4 million. Interest
income during both periods included interest income related to NCA contracts,
which allow hospitals to acquire instruments at no initial cost by paying a
premium (a portion of which is recorded by the Company as interest income) for
subsequent purchases of disposables. The term of these contracts is generally
three to five years, with interest at rates of 9% to 15%. Interest expense was
lower for the nine months ended September 30, 1996 as a result of the Company's
actions to restructure and repay debt through the sale of $100 million of 9 1/4%
Senior Notes and the sale of the San Diego headquarters facility in the fourth
quarter of 1995. Excluding River, net interest expense was $8.1 million for the
nine months ended September 30, 1996 and $14.5 million for the nine months ended
September 30, 1995.
LOSS BEFORE INCOME TAXES. Excluding the effect of pre-tax 1995
acquisition purchase accounting adjustments of $34.7 million and pre-tax 1995
restructuring charge of $4.5 million and 1996 pre-tax River restructuring
charge of $17.4 million, income before income taxes increased $13.7 million,
from a loss before taxes of $4.5 million for the nine months ended September
30, 1995 to income before taxes of $9.2 million for the nine months ended
September 30, 1996, reflecting the cost savings discussed above. Excluding
River, income before income taxes was $13.4 million for the nine months ended
September 30, 1996 and loss before income taxes was $25.7 million for the
nine months ended September 30, 1995.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. The benefit from income taxes
was $3.3 million for the nine months ended September 30, 1995 compared to
income tax expense of $2.4 million for the nine months ended September 30,
1996. The 1995 benefit reflects the write-off of purchased research and
development partially offset by foreign taxes. The Company has recorded a
valuation allowance against its deferred tax assets based on an assessment
that it is more likely than not that the deferred tax assets will not be
realized. Excluding River, provision for income taxes was $5.2 million for
the nine months ended September 30, 1996 and $0.6 million for the nine months
ended September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1996, cash and cash equivalents
decreased to $10.4 million from $18.3 million at December 31, 1995, due
primarily to (i) $13.0 million of capital expenditures inclusive of leasehold
improvements associated with the Company's relocation of its corporate and
primary instrument manufacturing facilities in San Diego, (ii) the March 1996
prepayment of $5.5 million of bank term loans (concurrent with the amendment and
restatement of the Bank Credit Facility), and (iii) the payment of $4.5 million
related to the 1993 acquisition of the MiniMed product line; all of the above
being offset in part by $15.5 million of cash provided by operating activities
(resulting from operating profitability and reductions in certain working
capital components).
At September 30, 1996, the Company had working capital of $24.1 million, a
decrease of $17.7 million, or 42.3%, from the level at December 31, 1995 of
$41.8 million. The decrease in working capital was due primarily to (i) the
impact of the prepayment of $5.5 million on the bank term loan concurrent with
the conversion of the loan to a revolving Bank Credit Facility which resulted
in a reclassification of $9.7 million from long-term debt to current debt,
(ii) the $7.4 million working capital impact of the writedown for the
divestiture of the River assets,
11
<PAGE>
(iii) decreased accounts receivable due to increased collection efforts and
reduced sales, and (iv) inventory build-up in anticipation of fourth quarter
sales of Signature Edition instruments.
The Company amended and restated its Bank Credit Facility on March 29,
1996. The amended and restated Facility is available through March 29, 1999,
provides for borrowings of up to $40.0 million and is secured by
substantially all of the Company's domestic assets. Borrowings under the
Facility bear interest at a rate equal to the Alternate Base Rate (as defined
in the Facility) plus 0.25% or Adjusted LIBOR plus 1.50%, at the option of
the Company. The interest rate is also subject to change quarterly based
upon certain debt and interest coverage ratios. At September 30, 1996 the
Company had $24.5 million of available revolving borrowings under the amended
and restated Facility.
The Company believes that, based on current levels of operations, its cash
flow from operations, together with borrowings under the amended and restated
Bank Credit Facility, will be adequate, at least through the next 12 months,
to finance contemplated operations and make required payments of interest and
principal on its debt and planned capital expenditures. However, the
Company's ability to finance its operations, to make interest payments on
such indebtedness, to repay such indebtedness at maturity and to make capital
expenditures will be dependent on the Company's future operating performance.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In June 1996, Sherwood Medical Company ("Sherwood") filed a lawsuit against
the Company in the United States District Court for the District of Delaware.
The complaint alleges infringement of two Sherwood patents by reason of certain
activities including the sale by the Company of disposable probe covers for use
with infrared tympanic thermometers. The Company plans to vigorously contest
the suit.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
By written consent dated July 1, 1996, the Company's sole shareholder, IVAC
Holdings, Inc., approved an amendment to the Management Bonus Plan and
Performance Incentive Plan (each a "Bonus Plan") to provide that, in the event
of a Corporate Transaction (as defined in the IVAC Holdings, Inc. 1996 Key
Contributor Stock Option Plan) on or before December 31, 1996, each participant
in the Bonus Plan who is employed by the Company at the time of the Corporate
Transaction shall, if the Company has achieved 80% or more of the Bonus Plan's
year-to-date EBITDA financial goal as of the time of the Corporate Transaction
(after Corporate-Transaction-related expenses are backed out), receive 100% of
his or her target award, without regard to any other requirement of the Bonus
Plan.
ITEM 5. OTHER INFORMATION.
On August 23, 1996, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") among IVAC Holdings, Inc.; the Company; IMED
Corporation ("IMED"), a subsidiary of Advanced Medical, Inc.; a wholly owned
subsidiary of IMED and the holders of Common Stock of Holdings named therein,
pursuant to which IMED will acquire, directly or indirectly through a wholly
owned subsidiary, 100% of the capital stock of Holdings for approximately
$400,000 less certain indebtedness. The proposed transaction received
regulatory approval in October 1996 and is subject to certain other closing
conditions including the completion of the financing necessary to consummate
the merger.
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
2.1* Agreement and Plan of Merger dated August 23, 1996 by and among
IMED Corporation; IMED Merger Sub, Inc.; IVAC Holdings, Inc.; IVAC
Medical Systems, Inc. and the Participating Stockholders.
3.1** Amendment to the Restated Certificate of Incorporation of IVAC
Holdings, Inc.
10.1*** Letter Agreement dated May 8, 1996 between IVAC Medical Systems,
Inc. and Donaldson, Lufkin & Jenrette Securities Corporation
("DLJSC").
10.2 Amendment to the Bonus Plan.
27.1 Financial Data Schedule
* Incorporated herein by reference to Exhibit 99.1 to the Company's Post
Effective Amendment No. 1 to Form S-1 filed on September 20, 1996.
** Incorporated herein by reference to Exhibit 3.4 to the Company's Post
Effective Amendment No. 1 to Form S-1 filed on September 20, 1996.
*** Incorporated herein by reference to the Company's Report on Form 8-K filed
on August 30, 1996.
(b) Reports on Form 8-K
Report on Form 8-K filed on August 30, 1996 with respect to an event dated
May 8, 1996 (letter agreement between IVAC Medical Systems, Inc. and DLJSC).
14
<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.
IVAC MEDICAL SYSTEMS, INC.
Date: October 30, 1996 By: /s/ William J. Mercer
----------------------------
William J. Mercer
Chief Executive Officer and
President
Date: October 30, 1996 By: /s/ Debra P. Crawford
----------------------------
Debra P. Crawford
Chief Financial Officer and
Vice President of Finance
and Administration
15
<PAGE>
WRITTEN CONSENT OF
THE SOLE STOCKHOLDER OF
IVAC MEDICAL SYSTEMS, INC.
July 1, 1996
The following action is taken by Written Consent of the sole stockholder of
IVAC Medical Systems, Inc. a Delaware corporation ("the Corporation") as of July
1, 1996, pursuant to Section 228 of the Delaware General Corporation Law.
The following resolution is adopted:
RESOLVED, that the following proposed actions are hereby approved and,
pursuant to Internal Revenue Code Section 280G(b)(5) and Proposed Treasury
Regulations Section 1.280G-1, A-7, shall not constitute parachute payments:
1. The payments by this Corporation under the 1996 Management
Incentive Plan (MBO) and 1996 Performance Incentive Plan (4%)
(each a "Bonus Plan") which has been amended by the addition of
the following provision:
In the event of a Corporate Transaction (as defined in the
IVAC Holdings, Inc. 1996 Key Contributor Stock Option Plan)
with respect to either IVAC Holdings, Inc. or the
Corporation on or before December 31, 1996, each participant
in the Bonus Plan who is employed by the Corporation at the
time of such Corporate Transaction shall, if the Corporation
has achieved 80% or more of the Bonus Plan's year-to-date
EBITDA financial goal as of the time of the Corporate
Transaction (after Corporate-Transaction-related expenses
are backed out), be entitled to and shall immediately before
the Corporate Transaction receive 100% of his or her target
award, without regard to any other requirement of the Bonus
Plan. Year-to-date EBITDA financial goals shall be
determined by the monthly projections which established the
annual EBITDA financial goal; if the Corporate Transaction
occurs mid-month, the year-to-date EBITDA financial goal
shall be specified by interpolation (by number of days)
between the previous-month-end EBITDA projection and the
then-current-month-end EBITDA projection.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
Failure of all stockholders to give Written Consent hereto shall be
immaterial if holders of more than 75% of the total voting power do consent.
This Written Consent action may be executed in counterparts. This Written
Consent of a Supermajority of the Stockholders of IVAC Medical Systems, Inc. has
been executed effective as the date first written above.
IVAC HOLDINGS, INC.
By: /s/ William J. Mercer
-------------------------
William J. Mercer
Chief Executive Officer
[SIGNATURE PAGE TO WRITTEN CONSENT
OF THE SOLE STOCKHOLDER
OF IVAC MEDICAL SYSTEMS, INC.]
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