<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended JUNE 30, 1997 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: 33-26398
--------------------------
ALARIS MEDICAL, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3492624
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10221 Wateridge Circle, San Diego, CA 92121
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(619) 566-0426
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
On August 5, 1997, 59,030,103 shares of Registrant's Common Stock were
outstanding.
Page 1 of 23
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
INDEX
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements:
Page
----
Condensed consolidated balance sheet at
December 31, 1996 and June 30, 1997.............................. 3
Condensed consolidated statement of operations for the
three and six months ended June 30, 1996 and 1997................ 4
Condensed consolidated statement of cash flows for the
six months ended June 30, 1996 and 1997.......................... 5
Condensed consolidated statement of changes in
stockholders' equity for the period from
December 31, 1996 to June 30, 1997............................... 6
Notes to the condensed consolidated financial statements......... 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 11
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings............................................ 20
Item 6 - Exhibits and Reports on Form 8-K............................. 21
- 2 -
<PAGE>
FORM 10 - Q
PART 1 - ITEM 1
FINANCIAL INFORMATION
ALARIS MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
ASSETS
DECEMBER 31, JUNE 30,
1996 1997
----------- --------
(Unaudited)
Current assets:
Cash.................................................. $ 12,084 $ 4,012
Restricted cash and investment securities............. 2,332 -
Receivables, net...................................... 87,880 77,193
Inventories........................................... 58,976 65,323
Prepaid expenses and other current assets............. 21,582 19,832
--------- ---------
Total current assets............................... 182,854 166,360
Net investment in sales-type leases, less
current portion....................................... 27,276 31,334
Property, plant and equipment, net...................... 56,628 55,683
Other non-current assets................................ 18,107 18,228
Intangible assets, net.................................. 308,517 295,865
--------- ---------
$ 593,382 $ 567,470
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt..................... $ 3,963 $ 9,265
Accounts payable...................................... 25,812 24,347
Accrued expenses and other current liabilities........ 50,196 55,178
Accrued restructuring................................. 15,098 7,373
--------- ---------
Total current liabilities.......................... 95,069 96,163
--------- ---------
Long-term debt.......................................... 436,130 434,595
Other non-current liabilities........................... 16,130 5,642
--------- ---------
Total non-current liabilities...................... 452,260 440,237
--------- ---------
Contingent liabilities and commitments (Notes 4 and 5)
Common stock and other stockholders' equity:
Common stock, authorized 75,000 shares at
$.01 par value; issued and outstanding -
58,977 shares and 59,062 shares at December 31,
1996 and June 30, 1997, respectively................ 589 591
Capital in excess of par value........................ 147,840 147,999
Accumulated deficit................................... (101,704) (113,021)
Treasury stock........................................ (734) (2,027)
Other equity.......................................... 62 (2,472)
--------- ---------
Total common stock and other stockholders' equity.. 46,053 31,070
--------- ---------
$ 593,382 $ 567,470
--------- ---------
--------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1996 1997 1996 1997
------- -------- ------- --------
<S> <C> <C> <C> <C>
Sales................................................................. $28,216 $ 88,072 $54,091 $170,067
Cost of sales......................................................... 15,756 47,361 29,651 94,331
------- -------- ------- --------
Gross margin........................................................ 12,460 40,711 24,440 75,736
------- -------- ------- --------
Selling and marketing expense......................................... 4,655 16,414 8,862 31,909
General and administrative expense.................................... 2,579 9,681 5,545 18,935
Research and development expense...................................... 1,977 4,123 3,789 8,191
Integration and other non-recurring expense........................... - 12,247 - 15,899
------- -------- ------- --------
Total operating expense............................................. 9,211 42,465 18,196 74,934
------- -------- ------- --------
Lease interest income................................................. 600 1,029 1,200 2,191
------- -------- ------- --------
Income (loss) from operations....................................... 3,849 (725) 7,444 2,993
------- -------- ------- --------
Other income (expense):
Interest income..................................................... 357 227 714 385
Interest expense.................................................... (2,184) (11,002) (4,399) (21,695)
Other, net.......................................................... 304 (302) 306 (400)
------- -------- ------- --------
Total other expense................................................. (1,523) (11,077) (3,379) (21,710)
------- -------- ------- --------
Income (loss) before income taxes..................................... 2,326 (11,802) 4,065 (18,717)
Provision for (benefit from) income taxes............................. 1,176 (4,800) 2,056 (7,400)
------- -------- ------- --------
Net income (loss)..................................................... 1,150 (7,002) 2,009 (11,317)
Dividends on mandatorily redeemable preferred stock .................. 163 - 325 -
------- -------- ------- --------
Net income (loss) attributable to common stock...................... $ 987 $ (7,002) $ 1,684 $(11,317)
------- -------- ------- --------
------- -------- ------- --------
Net income (loss) per common share assuming no dilution............. $ .06 $ (.12) $ .10 $ (.19)
------- -------- ------- --------
------- -------- ------- --------
Net income (loss) per common share assuming full dilution........... $ .03 $ (.12) $ .06 $ (.19)
------- -------- ------- --------
------- -------- ------- --------
Weighted average common shares outstanding assuming no dilution....... 16,402 58,635 16,432 58,788
------- -------- ------- --------
------- -------- ------- --------
Weighted average common shares outstanding assuming full dilution..... 42,593 58,635 42,589 58,788
------- -------- ------- --------
------- -------- ------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
---------------------
1996 1997
-------- -------
Net cash provided by (used in) operating activities..... $ 6,656 $(2,776)
-------- -------
Cash flows from investing activities:
Net decrease in restricted cash and investments....... 12,444 2,332
Net capital expenditures.............................. (2,756) (9,717)
Payments for product distribution rights.............. (1,503) -
Proceeds from sale of investments..................... 154 -
Return of capital by investee......................... - 148
-------- -------
Net cash provided by (used in) investing activities..... 8,339 (7,237)
-------- -------
Cash flows from financing activities:
Net repayments under former credit facilities......... (1,973) -
Principal payments on long-term debt.................. (322) (3,622)
Purchase of IMED common stock warrants................ (12,500) -
Purchase of treasury stock............................ - (1,293)
Proceeds under revolving credit facility.............. - 10,300
Repayments under revolving credit facility............ - (3,000)
Debt issue costs...................................... - (429)
Proceeds from exercise of stock options............... 15 161
-------- -------
Net cash (used in) provided by financing activities..... (14,780) 2,117
-------- -------
Effect of exchange rate changes on cash................. 31 (176)
-------- -------
Net increase (decrease) in cash......................... 246 (8,072)
Cash at beginning of period............................. 1,862 12,084
-------- -------
Cash at end of period................................... $ 2,108 $ 4,012
-------- -------
-------- -------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 5 -
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY (UNAUDITED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN TREASURY STOCK
--------------- EXCESS OF ACCUMULATED ------------------ OTHER
SHARES AMOUNT PAR VALUE DEFICIT SHARES AMOUNT EQUITY TOTAL
------ ------ --------- ----------- ------ ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 58,977 $589 $147,840 $(101,704) 83 $ (734) $ 62 $ 46,053
Exercise of stock options 85 2 159 161
Purchase of treasury stock 370 (1,293) (1,293)
Translation adjustment (2,534) (2,534)
Net loss for the period (11,317) (11,317)
------ ---- -------- --------- --- ------- ------- --------
Balance at June 30, 1997 59,062 $591 $147,999 $(113,021) 453 $(2,027) $(2,472) $ 31,070
------ ---- -------- --------- --- ------- ------- --------
------ ---- -------- --------- --- ------- ------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 6 -
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------
NOTE 1--BUSINESS AND STATEMENT OF ACCOUNTING POLICY
THE COMPANY:
ALARIS-TM- Medical, Inc., formerly Advanced Medical, Inc. ("ALARIS Medical"),
operating through its consolidated subsidiaries, designs, manufactures,
distributes and services intravenous infusion therapy and vital signs
measurement instruments and related disposables and accessories. On November
26, 1996, IMED Corporation ("IMED"), then a wholly-owned subsidiary of
Advanced Medical, Inc. ("Advanced Medical") acquired all of the outstanding
stock of IVAC Holdings, Inc. ("IVAC Holdings") and its subsidiaries including
IVAC Medical Systems, Inc. (Note 2). In connection with the acquisition,
IMED and IVAC Medical Systems, Inc. were merged into IVAC Holdings (the
"Merger"), which then changed its name to ALARIS Medical Systems, Inc.
("ALARIS Medical Systems"). ALARIS Medical and its subsidiaries are
collectively referred to as the "Company." The acquisition was accounted for
as a purchase. Accordingly, the interim 1996 operating results and cash
flows exclude those of the acquired company and are not comparable to the
interim 1997 operating results and cash flows.
STATEMENT OF ACCOUNTING POLICY:
The accompanying financial statements have been prepared by the Company
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
those rules and regulations, although the Company believes that the
disclosures herein are adequate to make the information not misleading.
In the opinion of the Company, the accompanying financial statements contain
all adjustments, consisting of normal recurring adjustments, necessary for a
fair statement of the Company's financial position as of June 30, 1997, and
the results of its operations and its cash flows for the six months ended
June 30, 1996 and 1997.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities 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.
NET INCOME (LOSS) PER COMMON SHARE:
The Company's net income (loss) per common share assuming no dilution is
computed using the weighted average number of common shares outstanding and
dilutive common stock equivalents using the treasury stock method. The
Company's net income (loss) per common share assuming full dilution is
computed using the weighted average number of common shares outstanding plus
dilutive common stock equivalents using the treasury stock method at the
higher of the average or ending market price during the reporting period and
non-common stock equivalents. The Company's non-common stock equivalents for
the three months ended June 30, 1996 consisted of convertible promissory
notes issued to Decisions Incorporated ("Decisions"), a corporation wholly
owned by the Company's principal stockholder. Since conversion was assumed
from the beginning of the period or date of issuance, if later, net income
attributable to common stock for the three months and six months ended June
30, 1996 has been increased by $412 and $824, respectively, for the interest
expense (net of tax) on the convertible promissory notes. The convertible
promissory notes issued to Decisions were all converted to common stock in
-7-
<PAGE>
connection with the Merger (Note 2). Net loss per common share assuming no
dilution and full dilution is the same for June 30, 1997, as the Company
experienced a net loss for the three months and six months ended June 30,
1997.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings per Share." SFAS No.
128 will be adopted by the Company as required in the fourth quarter of
fiscal 1997. Upon adoption of SFAS No. 128, the Company will present basic
earnings per share and diluted earnings per share. Basic earnings per share
will be computed based on the weighted average number of shares outstanding
during the period. Diluted earnings per share will be computed based on the
weighted average number of shares outstanding during the period increased by
the effect of all dilutive potential common shares, computed using the
treasury stock method, that were outstanding during the period. Using this
standard, basic and diluted earnings per share would be the same as primary
and fully diluted earnings per share for the three months and six months
ended June 30, 1996 and 1997.
NOTE 2--THE MERGER
On November 26, 1996, IMED acquired all of the outstanding stock of IVAC
Holdings and its subsidiaries including IVAC Medical Systems, Inc., in
exchange for $390,000 plus acquired cash of $7,225 less total debt assumed
aggregating $173,314 plus related expenses. The Merger was financed with
$204,200 in bank debt and $200,000 in senior subordinated notes. Subsequent
to the acquisition, IVAC Medical Systems, Inc. and IMED were merged into IVAC
Holdings.
In connection with the Merger, ALARIS Medical contributed $19,588 to IMED
(the "Capital Contribution"). The Capital Contribution was funded in part
through the sale to Decisions by ALARIS Medical of 13,333 shares of its
common stock for aggregate proceeds of $40,000 (the "Decisions
Contribution"). The balance of the Capital Contribution was funded with
existing cash balances of ALARIS Medical. The portion of the net proceeds of
the Decisions Contribution not applied to make the Capital Contribution was
used by ALARIS Medical to redeem $21,924 principal amount of its 15%
subordinated debentures due 1999 and fund the redemption of ALARIS Medical's
outstanding preferred stock. In connection with the Decisions Contribution,
Decisions exchanged an aggregate of $37,500 in principal amount of
convertible promissory notes previously issued by ALARIS Medical for 29,416
shares of ALARIS Medical common stock, including 3,333 shares issued as an
inducement to convert.
The acquisition was accounted for as a purchase, whereby the purchase price,
including related expenses, was allocated to identified assets, including
intangible assets, purchased research and development and liabilities based
upon their respective fair values. The excess of the purchase price over the
value of identified assets and liabilities, in the amount of $132,482, was
recorded as goodwill and is being amortized over its estimated life of thirty
years.
NOTE 3--INVENTORIES
Inventories comprise the following:
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
Raw materials . . . . . . . $ 24,711 $ 31,321
Work-in-process . . . . . . 9,622 8,711
Finished goods. . . . . . . 24,643 25,291
------------ --------
$ 58,976 $ 65,323
------------ --------
------------ --------
-8-
<PAGE>
NOTE 4--CONTRACT SETTLEMENT
MAQUILADORA CONTRACT DISPUTE. On June 26, 1997, the Company entered into a
settlement agreement which resolved its contract dispute with Cal Pacifico of
California and affiliated entities (collectively, "Cal Pacifico"), the
operator of the Company's two maquiladora assembly plants in Tijuana, Mexico.
For over eight years, the Company has assembled disposable administration
sets at these two plants, which utilize more than 1,200 workers employed by
Cal Pacifico, under a contract with Cal Pacifico. The dispute originated in
April 1997 when the Company, in accordance with the terms of such contract,
informed Cal Pacifico that it would be terminating its contractual
arrangements effective August 1, 1997. Cal Pacifico objected to such
notification and proposed the systematic termination of the work force. In
response to such objection, the Company on June 6, 1997 hired substantially
all of the workers at the plants directly. On June 11, 1997, Cal Pacifico
locked the Company's administrative personnel and production employees out of
the plants and would not allow the Company access to its production equipment
or inventory. As a result of the settlement agreement, the plants resumed
full operations on June 27, 1997. The Company expects to directly operate
these plants before the end of the third quarter of 1997.
The Company recorded a non-recurring charge of $4.1 million during the
quarter ended June 30, 1997 relating to this settlement and the legal fees
and other costs associated therewith. As a result of the manufacturing
shutdown, sales of the Company's disposable administration sets during June
1997 were approximately $1.5 million below that of previous months and new
orders for infusion pumps were not filled, resulting in a North American
infusion pump sales backlog of approximately $5.5 million at June 30, 1997.
During the contract dispute, the Company implemented interim assembly plans
for disposable administration sets at its facilities in Creedmore, North
Carolina and San Diego, California. The Company will continue to use these
facilities during the third quarter of 1997 in order to replenish its
inventory. While production costs of disposable administration sets at these
facilities are greater than in Mexico, the incremental volume of the
disposable administration sets to be produced outside of Mexico is not
anticipated to have a significant impact on the Company's gross margins.
UNITED STATES CUSTOMS SERVICE LIABILITY. During the years 1988 through 1995,
Cal Pacifico acted as the Company's United States customs broker and importer
of record with respect to the importation into the United States of finished
products ("Finished Products") assembled at the Company's two maquiladora
assembly plants in Tijuana, Mexico. In May 1995, Cal Pacifico received a
pre-penalty notice from the United States Customs Service ("Customs") to the
effect that Customs intended to assess additional duties and substantial
penalties against Cal Pacifico for its alleged failure, during the years 1988
through 1992, to comply with certain documentary requirements regarding the
importation of goods on behalf of its clients, including the Company. Customs
recently assessed additional duties with respect to Cal Pacifico's
importation of goods on behalf of its clients, including the importation of
the Company's Finished Products, for the years 1993 and 1994, and it is
anticipated that Customs will issue a pre-penalty notice to Cal Pacifico in
respect of these years as well (collectively with the amounts referred to in
the immediately preceding sentence, the "Disputed Amounts"). Since Cal
Pacifico was the importer of record during each of the foregoing years, the
Company believes that it is unlikely that Customs will assess against the
Company any portion of the Disputed Amounts.
Cal Pacifico is contesting Customs' assessment of the Disputed Amounts. Cal
Pacifico has advised the Company that, should Cal Pacifico's challenge to the
assessment of the Disputed Amounts prove to be unsuccessful, it will seek
recovery from the Company, through arbitration, for any portion of the
Disputed Amounts which it is required to pay to Customs. As part of the
settlement agreement which resolved the Company's contract dispute with Cal
Pacifico, the Company paid Cal Pacifico $550, which is to be applied
toward Cal Pacifico's payment of Disputed Amounts. The $550 payment by
the Company is to be credited toward any portion of the Disputed Amounts
which the arbitrator determines the Company owes to Cal Pacifico. Although
the ultimate outcome of such an arbitration proceeding cannot be guaranteed,
the Company believes that it has meritorious defenses to claims with respect
to Disputed Amounts which Cal Pacifico might raise against the Company. These
defenses would be based, among other factors, on the contractual relationship
between the Company and Cal Pacifico (including a defense with respect to the
availability of indemnification under the agreements between Cal Pacifico and
the Company), the conduct of Cal Pacifico with respect to both the Company
and Customs, and the compliance obligations of Cal Pacifico under applicable
customs laws.
-9-
<PAGE>
NOTE 5--CONTINGENCIES AND LITIGATION
FIELD CORRECTION
The Company will initiate a voluntary field correction of approximately
50,000 of its Gemini model PC-1 and PC-2 infusion pumps because failure of
specific electrical components on the power regulator printed circuit board
may result in improper regulation of the battery charge voltage, which can
cause the battery to overheat. Such overheating could result in product
failure and discharge of hydrogen gas which may accumulate within the
instrument's case. As an interim measure, the Company has advised its
customers of simple precautions that can be taken to minimize the potential
for an adverse incident pending completion of the field correction. The
Company is not aware of any injuries sustained in known battery overcharging
incidents.
As a result of this decision, the Company recorded a charge of $2.5 million
to cost of sales during the first quarter of 1997. Based on management's
current understanding of these incidents, the Company believes it has
adequately accrued for this matter. However, since the Company's analysis of
this matter is preliminary, there can be no assurances that it can be
resolved for an amount consistent with management's estimated cost.
LITIGATION
The Company is a defendant in a lawsuit which alleges infringement of two
patents by reason of certain activities including the sale of disposable
probe covers for use with tympanic thermometers. The lawsuit seeks injunctive
relief, treble damages and the recovery of costs and attorney fees. The
discovery phase of the lawsuit has recently commenced. The Company is
currently unable to quantify its exposure to the lawsuit; however, the
Company believes it has sufficient defenses to all claims, including the
defenses of noninfringement and invalidity. However, there can be no
assurance that the Company will successfully defend all claims and the
failure of the Company to successfully prevail in this lawsuit could have a
material adverse effect on the Company's operations, financial condition and
cash flows.
The Company is also a defendant in various actions, claims, and legal
proceedings arising from its normal business operations. Management believes
the Company has meritorious defenses and intends to vigorously defend against
all allegations and claims. As the ultimate outcome of these matters is
uncertain, no contingent liabilities or provisions have been recorded in the
accompanying financial statements for such matters. However, in management's
opinion, based on discussions with legal counsel, liabilities arising from
such matters, if any, will not have a material adverse effect on consolidated
financial position, results of operations or cash flows.
-10-
<PAGE>
PART I--ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- ------------------------------------------------------------------------
GENERAL
ALARIS Medical is a holding company for ALARIS Medical Systems. ALARIS
Medical also identifies and evaluates potential acquisitions and investments,
and performs various corporate functions. As a holding company, ALARIS
Medical currently has no revenues to fund its operating and interest expense
and relies on its existing cash and cash generated from operations of ALARIS
Medical Systems, external borrowings and other external sources of funds to
meet its obligations. Capitalized terms used but not defined herein have the
meaning ascribed to them in the Notes to the Condensed Consolidated
Financial Statements.
As a result of the Merger on November 26, 1996, the operating results
reported for the three and six months ended June 30, 1997 are not comparable
to 1996. The 1996 operating results and cash flows represent those of
Advanced Medical and IMED.
The Company sells and services infusion systems primarily in the United
States, Western Europe, Canada, Australia, Latin America and the Middle East.
The Company generates revenues from the sale and/or lease of infusion pumps
and sales of associated proprietary disposable administration sets.
Additionally, as a result of the Merger, the Company now generates revenue
from the sale of vital signs measurement products.
In recent years, the Company's results of operations have been affected by
the cost containment pressures applicable to health care providers. In
particular, in order to reduce costs, certain hospitals have adopted a new
protocol increasing the maximum time between disposable administration set
changes from every 24 hours to as much as every 72 hours. Notwithstanding
this change in protocol, unit sales volume of the Company's disposable
administration sets has increased in every year since 1993, primarily as a
result of its growing installed base of infusion pumps. The Company's
profitability is also affected by the increasing use of Group Purchasing
Organizations ("GPOs") which are better able to negotiate favorable pricing
from providers of infusion systems, such as the Company, and which police
compliance with exclusive buying arrangements for their members. These buying
arrangements, in certain situations, also may result in the GPO requiring
removal of the Company's existing infusion pumps. The Company expects that
such GPOs will become increasingly more common and may have an adverse effect
on the Company's profitability in the future. Finally, the enactment of
national health care reform or other legislation affecting payment mechanisms
and health care delivery would affect the Company's future results of
operations. Although the final form of any such legislation is not known, it
is likely that any such legislation may impose limits on the number and type
of medical procedures which may be performed and may restrict a provider's
ability to select specific devices or products for use in administering care
which, in turn, could adversely impact demand and/or pricing for the
Company's infusion systems. It is impossible to predict the extent to which
the Company may be affected by any such change in legislation.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected financial
information expressed as a percentage of sales, as well as, pro forma second
quarter 1996 and pro forma six months ended June 30, 1996 operating results
in thousands of dollars. The pro forma data is based on the historical
operating results of Advanced Medical and IVAC Holdings, Inc., adjusted to
give effect to the Merger as if it occurred on January 1, 1996. The data
excludes non-recurring charges related to the Merger, as well as, the
operating results of River Medical, Inc., a subsidiary of IVAC which was
divested prior to the consummation of the Merger.
-11-
<PAGE>
The pro forma financial data is not necessarily indicative of the Company's
results of operations that might have occurred had such transactions been
completed at the beginning of the period specified, and do not purport to
represent what the Company's consolidated results of operations might be for
any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------------------------------------
AS REPORTED PRO FORMA PRO FORMA AS REPORTED
1996 1996 1996 1997
----------- ---------------- ---------- -----------
(% OF SALES) ($ IN THOUSANDS) (% OF SALES)
<S> <C> <C> <C> <C>
Sales . . . . . . . . . . . . . 100.0% $ 86,803 100.0% 100.0%
Cost of sales . . . . . . . . . 55.8 47,774 55.0 53.8
--------- --------- --------- ---------
Gross margin. . . . . . . . . . 44.2% 39,029 45.0% 46.2%
Selling and marketing expense . 16.5 15,724 18.1 18.6
General and administrative
expense . . . . . . . . . . . 9.1 9,948 11.5 11.0
Research and development
expense . . . . . . . . . . . 7.0 4,645 5.4 4.7
Integration and other
non-recurring expense . . . . - - - 13.9
Lease interest income . . . . . 2.0 1,181 1.4 1.2
--------- --------- --------- ---------
Income (loss) from operations . 13.6 9,893 11.4 (.8)
Interest expense. . . . . . . . (7.7) (10,159) (11.7) (12.5)
Other, net. . . . . . . . . . . 2.3 522 .6 (.1)
--------- --------- --------- ---------
Income (loss) before income
taxes . . . . . . . . . . . . 8.2 256 .3 (13.4)
Provision for (benefit from)
income taxes . . . . . . . . 4.1 675 .8 (5.4)
--------- --------- --------- ---------
Net income (loss) . . . . . . . 4.1% $ (419) (.5%) (8.0%)
--------- --------- --------- ---------
--------- --------- --------- ---------
OTHER DATA:
Adjusted EBITDA . . . . . . . 20.7% $18,369 21.2% 23.3%
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------
AS REPORTED PRO FORMA PRO FORMA AS REPORTED
1996 1996 1996 1997
----------- ---------------- ---------- -----------
(% OF SALES) ($ IN THOUSANDS) (% OF SALES)
<S> <C> <C> <C> <C>
Sales . . . . . . . . . . . . 100.0% $ 166,480 100.0% 100.0%
Cost of sales . . . . . . . . 54.8 89,096 53.5 55.5
--------- --------- --------- ---------
Gross margin. . . . . . . . . 45.2% 77,384 46.5% 44.5%
Selling and marketing
expense . . . . . . . . . . 16.4 31,128 18.7 18.8
General and administrative
expense . . . . . . . . . . 10.3 19,527 11.7 11.1
Research and development
expense . . . . . . . . . . 7.0 8,503 5.1 4.8
Integration and other
non-recurring expense . . . - - - 9.3
Lease interest income . . . . 2.2 2,424 1.4 1.3
--------- --------- --------- ---------
Income from operations. . . . 13.7 20,650 12.4 1.8
Interest expense. . . . . . . (8.1) (20,551) (12.3) (12.8)
Other, net. . . . . . . . . . 1.9 633 .3 -
--------- --------- --------- ---------
Income (loss) before
income taxes . . . . . . . 7.5 732 .4 (11.0)
Provision for (benefit from)
income taxes . . . . . . . 3.8 1,435 .8 (4.3)
--------- --------- --------- ---------
Net income (loss) . . . . . . 3.7% $ (703) (.4%) (6.7%)
--------- --------- --------- ---------
--------- --------- --------- ---------
OTHER DATA:
Adjusted EBITDA . . . . . . 21.0% $ 36,848 22.1% 22.2%
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------- ---------------------------------------
AS REPORTED PRO FORMA AS REPORTED AS REPORTED PRO FORMA AS REPORTED
1996 1996 1997 1996 1996 1997
----------- ---------- ----------- ----------- ---------- -----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ADJUSTED EBITDA (1) $ 5,836 $ 18,369 $ 20,560 $ 11,357 $ 36,848 $ 37,822
Inventory purchase price
allocation adjustment (2) - - - - - (1,607)
Integration and other non-
recurring expense - - (12,247) - - (15,899)
Depreciation and
amortization (3) (1,987) (8,476) (9,038) (3,913) (16,198) (17,323)
Interest income 357 218 227 714 327 385
Interest expense (2,184) (10,159) (11,002) (4,399) (20,551) (21,695)
Other, net 304 304 (302) 306 306 (400)
(Provision for) benefit
from income taxes (1,176) (675) 4,800 (2,056) (1,435) 7,400
---------- ---------- ---------- ----------- ---------- -----------
Net income (loss) $ 1,150 $ (419) $ (7,002) $ 2,009 $ (703) $ (11,317)
---------- ---------- ---------- ----------- ---------- -----------
---------- ---------- ---------- ----------- ---------- -----------
- ----------
</TABLE>
(1) Adjusted EBITDA represents income from operations before
non-recurring non-cash purchase accounting charges, restructuring
charges, integration charges and depreciation and amortization.
Adjusted EBITDA does not represent net income or cash flows from
operations, as these terms are defined under generally accepted
accounting principles, and should not be considered as an
alternative to net income or to cash flows as an indicator of
the Company's operating performance or to cash flows as a measure
of liquidity. The Company has included information concerning
Adjusted EBITDA herein because it understands that such information
is used by investors as a measure of an issuer's historical ability
to service debt. Restructuring and other one-time non-recurring
charges are excluded from Adjusted EBITDA as the Company believes
that the inclusion of these items would not be helpful to an
investor's understanding of the Company's ability to service debt.
The Company's computation of Adjusted EBITDA may not be comparable
to similar titled measures of other companies.
(2) Amount represents that portion of the purchase accounting adjustments
made to adjust the acquired IVAC inventory to its estimated fair value
on the Merger date which was charged to cost of sales during 1997.
(3) Depreciation and amortization excludes amortization of debt
issuance costs included in interest expense.
The following table summarizes sales to customers located in the
United States and international locations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------- ---------------------------------------
AS REPORTED PRO FORMA AS REPORTED AS REPORTED PRO FORMA AS REPORTED
1996 1996 1997 1996 1996 1997
----------- ---------- ----------- ----------- ---------- -----------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
U.S. sales $ 22.5 $ 57.1 $ 55.4 $ 42.7 $ 109.0 $ 106.8
International sales 5.7 29.7 32.7 11.4 57.5 63.3
----------- ---------- ----------- ----------- ---------- ------------
Total sales $ 28.2 $ 86.8 $ 88.1 $ 54.1 $ 166.5 $ 170.1
----------- ---------- ----------- ----------- ---------- ------------
----------- ---------- ----------- ----------- ---------- ------------
</TABLE>
-13-
<PAGE>
For purposes of this discussion and analysis, the three months ended June 30,
1996 and 1997 are referred to as Second Quarter 1996 and Second Quarter 1997,
respectively, and the six months ended June 30, 1996 and 1997 are referred to
as 1996 and 1997, respectively.
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
SALES
Sales increased $59.9 million during Second Quarter 1997 as compared to
Second Quarter 1996 due to the Merger. On a pro forma basis, sales increased
$1.3 million, or 1.5%, during Second Quarter 1997 as compared to Second
Quarter 1996. United States sales decreased $1.6 million, or 2.9%, on a pro
forma basis while international sales increased $2.9 million, or 9.8%, on a
pro forma basis. The increase in international sales is partially due to the
August 1996 repurchase of IMED product European distribution rights from
Pharmacia & Upjohn, Inc. which has resulted in higher average selling prices
for these products in 1997. The decrease in U.S. sales during Second Quarter
1997 as compared to Second Quarter 1996, on a pro forma basis, is primarily
due to a decrease in the disposable administration set volume from 1996 as a
result of the business interruption in Mexico during the second quarter of
1997 (see Note 4 to the Condensed Consolidated Financial Statements).
GROSS MARGIN
The gross margin percentage increased 2 percentage points, from 44.2% for
Second Quarter 1996 to 46.2% for Second Quarter 1997, primarily due to
favorable international margins due in part to the repurchase of European
distribution rights from Pharmacia & Upjohn, Inc. This was partially offset
by increased amortization expenses resulting from the IVAC purchase price
allocated to certain intangible assets. Pro forma gross margin percentage
for Second Quarter 1996 was 45.0% compared to 46.2% for Second Quarter 1997.
SELLING AND MARKETING EXPENSE
Selling and marketing expense increased $11.8 million during Second Quarter
1997 primarily due to the Merger. On a pro forma basis, selling and
marketing expense increased approximately $0.7 million, or 4.4%, during
Second Quarter 1997. As a percentage of sales, on a pro forma basis, selling
and marketing expense increased from 18.1% in Second Quarter 1996 to 18.6% in
Second Quarter 1997 due partly to the addition of sales and marketing
management personnel. Domestic expense increased by $1.0 million, or 7.9%,
from Second Quarter 1996. The increase in domestic selling and marketing
expense was partially offset by decreased international expenses of $0.2
million, or 4.9%.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense increased $7.1 million during Second
Quarter 1997 primarily due to the Merger. On a pro forma basis, general and
administrative expense decreased by $0.3 million, or 2.7%, during Second
Quarter 1997. As a percentage of sales, on a pro forma basis, general and
administrative expense decreased from 11.5% for Second Quarter 1996 to 11.0%
for Second Quarter 1997 due to an increase in sales as well as Merger-related
synergies at ALARIS Medical Systems including lower data processing and
general insurance expense.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense increased approximately $2.1 million during
1997 primarily due to the Merger. On a pro forma basis, research and
development expense decreased from $4.6 million, or 5.4% of sales, during
Second Quarter 1996 to $4.1 million, or 4.7% of sales, for Second Quarter
1997, primarily due to synergies realized in the Merger and realignment and
prioritization of research and development projects.
-14-
<PAGE>
INTEGRATION AND OTHER NON-RECURRING EXPENSE The Company incurred $12.2
million in integration costs and other non-recurring expense during Second
Quarter 1997. These costs are in addition to restructuring and integration
charges of $15.3 million recorded in the fourth quarter of 1996 and $3.7
million recorded in the first quarter of 1997. The Second Quarter 1997
expense consists primarily of the write-off of a product distribution and
license agreement with a third party developer of an ambulatory and alternate
site infusion pump of $4.5 million, maquiladora settlement and related costs
of $4.1 million, information systems conversion costs of $1.1 million and
other integration costs of $2.5 million. The Company has reviewed its
products and related research and development activities and market
opportunities in order to focus on projects that will provide greater
competitive advantage and shareholder return. That review resulted in the
termination of the aforesaid product distribution and license agreement. The
$4.5 million charge related to such termination includes a $4.3 million
non-cash charge representing the write-off of the intangible asset associated
with such agreement.
INCOME (LOSS) FROM OPERATIONS
Income from operations decreased $4.6 million during Second Quarter 1997
primarily due to the Merger. On a pro forma basis, operating income
decreased $10.6 million, from $9.9 million in Second Quarter 1996 to a loss
of $.7 million in Second Quarter 1997, due primarily to the 1997 integration
and other non-recurring expense.
ADJUSTED EBITDA
Adjusted EBITDA increased $14.7 million during Second Quarter 1997 compared
to Second Quarter 1996 primarily due to the Merger. On a pro forma basis, as
a percentage of sales, Adjusted EBITDA increased from 21.2%, or $18.4
million, for Second Quarter 1996 to 23.3%, or $20.6 million, for Second
Quarter 1997 due to the reasons discussed above. Adjusted EBITDA represents
income from operations before non-recurring purchase accounting charges,
restructuring charges, integration 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 or to cash flows
as an indicator of the Company's operating performance or to cash flows as a
measure of liquidity. The Company has included information concerning
Adjusted EBITDA herein because it understands that such information is used
by investors as a measure of an issuer's historical ability to service debt.
Restructuring and other one-time non-recurring charges are excluded from
Adjusted EBITDA as the Company believes that the inclusion of these items
would not be helpful to an investor's understanding of the Company's ability
to service debt. The Company's computation of Adjusted EBITDA may not be
comparable to similar titled measures of other companies.
INTEREST EXPENSE
Interest expense increased $8.8 million during Second Quarter 1997 compared
to Second Quarter 1996 primarily due to the Merger. In addition to interest
on approximately $404.0 million of borrowings to finance the Merger and
related debt refinancings, higher interest expense was incurred in Second
Quarter 1997 due to IMED's $11.0 million purchase of the European
distribution rights for IMED products in August 1996. This increase in
interest expense was offset by reductions in interest on $37.5 million of
convertible debt which was converted to common stock in connection with the
Merger as well as the redemption of $21.9 million of 15% subordinated
debentures in December 1996. On a pro forma basis, interest expense
increased $0.8 million due to additional borrowings under the Company's
revolving credit facility (see Liquidity and Capital Resources). The
additional borrowings were used to pay for restructuring and integration
costs associated with the Merger.
-15-
<PAGE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
SALES
Sales increased $116.0 million during 1997 as compared to 1996 due to the
Merger. On a pro forma basis, sales increased $3.6 million, or 2.2%, during
1997 as compared to 1996. United States sales decreased $2.2 million, or
2.0%, on a pro forma basis while international sales increased $5.8 million,
or 10.1%, on a pro forma basis. The increase in international sales is
partially due to the August 1996 repurchase of IMED product European
distribution rights from Pharmacia & Upjohn, Inc. which has resulted in
higher average selling prices for these products in 1997. The decrease in
U.S. sales in the six months ended June 30, 1997 as compared to June 30,
1996, on a pro forma basis, is primarily due to a decrease in the disposable
administration set volume from prior year as a result of the business
interruption in Mexico during the second quarter of 1997 (see Note 4 to the
Condensed Consolidated Financial Statements).
GROSS MARGIN
The gross margin percentage decreased from 45.2% for the six months ended
June 30, 1996 to 44.5% for the six months ended June 30, 1997 primarily due
to increased amortization expense resulting from the IVAC purchase price
allocated to certain intangible assets as well as $1.6 million of
non-recurring purchase accounting inventory adjustments charged to cost of
sales during 1997. Also adversely impacting the gross margin percentage
during 1997 was $2.5 million related to a voluntary field correction of
certain Gemini PC-1 and PC-2 infusion pumps. (See Note 5 to the Condensed
Consolidated Financial Statements.) These were partially offset by favorable
international margins due in part to the repurchase of European distribution
rights from Pharmacia & Upjohn, Inc. Pro forma gross margin percentage for
the six months ended June 30, 1996 was 46.5% compared to 47.0% for the six
months ended June 30, 1997, exclusive of the purchase accounting inventory
adjustment and product field correction charges.
SELLING AND MARKETING EXPENSE
Selling and marketing expense increased $23.0 million during 1997 primarily
due to the Merger. On a pro forma basis, selling and marketing expense
increased approximately $0.8 million, or 2.5%, during 1997. As a percentage
of sales, on a pro forma basis, selling and marketing expense increased from
18.7% in 1996 to 18.8% in 1997. Domestic expense decreased by $0.1 million,
or 0.5%, from 1996 due to Merger-related synergies which are anticipated to
be offset in future periods as further investment is made to add personnel in
this area. The decrease in domestic selling and marketing expense was more
than offset by increased international expenses of $0.9 million, or 8.7%, due
largely to IMED's repurchase of the European distribution rights for IMED
products from Pharmacia & Upjohn, Inc. in August 1996 and an associated
increase in European direct operations.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense increased $13.4 million during 1997
primarily due to the Merger. On a pro forma basis, general and
administrative expense decreased by $0.6 million, or 3.0%, during 1997. As a
percentage of sales, on a pro forma basis, general and administrative expense
decreased from 11.7% for 1996 to 11.1% for 1997 due to an increase in sales,
as well as Merger-related synergies at ALARIS Medical Systems, including
lower data processing and general insurance expense. International expenses
increased by $0.3 million, or 8.5%, primarily as a result of IMED's
repurchase of the European distribution rights for IMED products from
Pharmacia & Upjohn, Inc. in August 1996 and an associated increase in
European direct operations.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense increased approximately $4.4 million during
1997 primarily due to the Merger. On a pro forma basis, research and
development expense decreased from $8.5 million, or 5.1% of sales, for the
six months ended June 30, 1996 to $8.2 million, or 4.8% of sales, for the six
months ended
-16-
<PAGE>
June 30, 1997, primarily due to synergies realized in the Merger and
realignment and prioritization of research and development projects.
INTEGRATION AND OTHER NON-RECURRING EXPENSE The Company incurred $15.9
million in integration costs and other non-recurring expense during the first
six months of 1997. These costs are in addition to restructuring and
integration charges of $15.3 million recorded in the fourth quarter of 1996.
The 1997 expense consists primarily of the write-off of a product
distribution and license agreement with a third party developer of an
ambulatory and alternate site infusion pump of $4.5 million, maquiladora
settlement and related costs of $4.1 million, information systems conversion
costs of $1.6 million, management consulting fees of $1.4 million, severance
of $1.3 million and other integration costs of $3.0 million. The Company has
reviewed its products and related research and development activities and
market opportunities in order to focus on projects that will provide greater
competitive advantage and stockholder return. That review resulted in the
termination of the aforesaid product distribution and license agreement.
The $4.5 million charge related to such termination includes a $4.3 million
non-cash charge representing the intangible asset associated with such
agreement.
INCOME FROM OPERATIONS
Income from operations decreased $4.5 million during 1997 primarily due to
the field correction on the Gemini pumps in the first quarter and the
maquiladora business interruption in the second quarter. On a pro forma
basis, operating income decreased $17.7 million from $20.7 million in 1996 to
$3.0 million in 1997 due to the reasons discussed above.
ADJUSTED EBITDA
Adjusted EBITDA increased $26.5 million during 1997 primarily due to the
Merger. On a pro forma basis, as a percentage of sales, Adjusted EBITDA
increased from 22.1%, or $36.8 million, for 1996 to 22.2%, or $37.8 million,
for 1997 due to the reasons discussed above. Excluding the $2.5 million
charge to cost of sales during the first quarter of 1997, Adjusted EBITDA
would have increased to $40.3 million, an increase of $3.5 million or
approximately 9.5%, as compared to pro forma 1996. Adjusted
EBITDA represents income from operations before non-recurring non-cash
purchase accounting charges, restructuring charges, integration charges and
depreciation and amortization. Adjusted EBITDA does not represent net income
or cash flows from operations, as these terms are defined under generally
accepted accounting principles, and should not be considered as an
alternative to net income or to cash flows as an indicator of the Company's
operating performance or to cash flows as a measure of liquidity. The Company
has included information concerning Adjusted EBITDA herein because it
understands that such information is used by investors as a measure of an
issuer's historical ability to service debt. Restructuring and other one-time
non-recurring charges are excluded from Adjusted EBITDA as the Company
believes that the inclusion of these items would not be helpful to an
investor's understanding of the Company's ability to service debt. The
Company's computation of Adjusted EBITDA may not be comparable to similar
titled measures of other companies.
INTEREST EXPENSE
Interest expense increased $17.3 million during 1997 primarily due to the
Merger. In addition to interest on approximately $404.0 million of
borrowings to finance the Merger and related debt refinancings, higher
interest expense was incurred in 1997 due to IMED's $11.0 million purchase of
the European distribution rights for IMED products in August 1996. This
increase in interest expense was offset by reductions in interest on $37.5
million of convertible debt which was converted to common stock in connection
with the Merger, as well as the redemption of $21.9 million of 15%
subordinated debentures in December 1996. On a pro forma basis, interest
expense increased $1.1 million due to additional borrowings under the
Company's revolving credit facility (see Liquidity and Capital Resources).
The additional borrowings were used to pay for restructuring and integration
costs associated with the Merger.
-17-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Management currently believes that sufficient cash will be available through
ALARIS Medical Systems, based upon current operations, to satisfy debt
service and other corporate expenses of ALARIS Medical in the foreseeable
future. In particular, ALARIS Medical Systems' 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 expense requirements.
The Company expects to continue to meet its liquidity needs, including, in
the short-term, funding of restructuring and integration costs, as well as
long-term capital expenditure requirements with cash flow from operations and
borrowings under the credit facility. The Company's primary future use of
funds will be to fund capital expenditures and strategic acquisitions and to
pay debt service on outstanding indebtedness.
During the quarter ended June 30, 1997 the Company made cash payments of
approximately $2.5 million related to merger and integration costs accrued at
December 31, 1996, as well as payments of approximately $5.8 million for
integration costs expensed during the second quarter of 1997.
At June 30, 1997, the Company's outstanding indebtedness was $443.9 million,
which includes $199.4 million of bank term debt under the credit facility and
$200.0 million of Senior Subordinated Notes due 2006 (the "Notes"), which
were borrowed in connection with the Merger. The bank debt bears interest at
floating rates based, at the Company's option, on Eurodollar or prime rates.
As a result, a one percent increase in the rate of interest charged on
indebtedness outstanding under the credit facility at June 30, 1997 would
result in additional annual interest expense of approximately $2.0 million.
During the second quarter of 1997 the Company entered into an interest rate
protection agreement covering 50% of its term loan borrowings. Such agreement
fixed the interest rate charged on such borrowings resulting in a weighted
average fixed rate of 9.6% on the principal balance covered. Included in
total consolidated debt, at June 30, 1997, ALARIS Medical had $16.2 million
of outstanding Convertible Debentures.
In connection with obtaining the Merger financing, the Company also obtained
a $50.0 million revolving credit line as part of the credit facility. At
June 30, 1997, $22.5 million in borrowings, of which $3.0 million was
borrowed during the second quarter, and $0.5 million under letters of credit
were outstanding under this line of credit and $27.0 million was available.
In connection with the Merger, the Company assumed IVAC's obligations to
Siemens Infusion Systems Ltd. These obligations relate to the payment of
additional purchase consideration related to the acquisition of the MiniMed
product line (the predecessor product line to MS III) and provide for the
payment of the greater of $3.0 million per year or 8% of the prior year's MS
III sales in 1997 through 1999. The Company made the minimum 1997 payment of
$3.0 million during the first quarter of 1997.
As a result of the Company's significant indebtedness, the Company expects to
incur significant interest expense in future periods. The Company believes
that cash provided by operations will be sufficient to meet its interest
expense obligations.
Annual amortizations of the Company's indebtedness are $4.2 million, $14.6
million and $15.6 million for 1997, 1998 and 1999, respectively.
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 Notes and the credit facility,
however, restrict distributions to ALARIS Medical to fund the repayment of
the Convertible Debentures at maturity.
-18-
<PAGE>
In addition to routine capital expenditures that are expected to be
consistent with the combined historical capital expenditures of IMED and
IVAC, the Company expects to make a total of approximately $12.3 million of
capital and operating expenditures during 1997 and 1998 for the acquisition
and implementation of a new enterprise-wide information system.
The Company made capital expenditures of approximately $4.8 million and $9.7
million during the three and six months ended June 30, 1997, respectively, of
which approximately $1.6 million and $4.6 million, respectively, were related
to the consolidation of the IMED and IVAC facilities. The Company
anticipates capital spending for the second half of 1997 to be near or
greater than first half spending as the Company plans to purchase hardware to
support new information systems, move and consolidate its U.K. operations
into a new leased facility and purchase tooling and other equipment for new
products.
The Company believes that it will generate sufficient cash flow from
operations to fund its operations, make planned capital expenditures and make
required payments of principal and interest under its credit facility and
interest on the Notes; however, the Company may not generate sufficient cash
flow from operations to repay the Notes at maturity. Accordingly, the Company
may have to refinance the Notes at or prior to maturity or sell assets or
raise equity capital to repay the principal amount of the Notes. In addition,
the Company's ability to fund its operations, to make planned capital
expenditures and to make scheduled principal and interest payments will be
dependent on the Company's future operating performance, which is itself
dependent on a number of factors, many of which the Company cannot control,
including conditions affecting the Company's foreign operations, prevailing
economic conditions, availability of other sources of liquidity, and
financial, business, regulatory and other factors affecting the Company's
business and operations.
SEASONALITY
Infusion instrument sales are typically higher in the fourth quarter due to
sales compensation plans which reward the achievement of annual quotas and
the seasonal characteristics of the industry, including hospital purchasing
patterns. First quarter sales are traditionally not as strong as the fourth
quarter. The Company anticipates that this trend will continue but is unable
to predict the effect, if any, from health care reform and increased
competitive pressures.
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
national health care reform or other legislation affecting payment mechanisms
and health care delivery. Legislation which imposes limits on the number and
type of medical procedures which may be performed or which has the effect of
restricting a provider's ability to select specific devices or products for
use in administrating medical care may adversely impact the demand for the
Company's products. In addition, legislation which imposes restrictions on
the price which may be charged for medical products may adversely affect the
Company's results of operations. It is not possible to predict the extent to
which the Company or the health care industry in general may be adversely
affected by the aforementioned in the future.
FORWARD-LOOKING STATEMENTS
Forward-Looking Statements in this report are made pursuant to the Safe
Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
Persons reading this report are cautioned that such forward-looking
statements involve risks and uncertainties, including, without limitation,
the effect of legislative and regulatory changes effecting the health care
industry; the potential of increased levels of competition; technological
changes; the dependence of the Company upon the success of new products and
ongoing research and development efforts; 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
and ALARIS Medical's Report on Form 10-K for the year ended December 31, 1996.
BACKLOG
The backlog of orders, believed to be firm, at June 30, 1997 was $7.8 million.
-19-
<PAGE>
PART II
OTHER INFORMATION
- -------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
See Item 3. of the Company's December 31, 1996 Form 10-K.
-20-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 -- Computation of Net Income per share for the three and six months
ended June 30, 1996 and 1997.
______________________________________
(b) Reports on Form 8-K
None.
-21-
<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, INC.
----------------------------------------
(REGISTRANT)
Date: August 13, 1997 By: /s/ WILLIAM J. MERCER
----------------------------------------
William J. Mercer
President, Chief Executive Officer
and Chief Financial Officer
-22-
<PAGE>
EXHIBIT INDEX
- -------------------------------------------------------------------------------
Exhibit Page
No. No.
- ------- ----
11.1 Computation of Net Income per share for the three and six
months ended June 30, 1996 and 1997 .......................... 20
-23-
<PAGE>
EXHIBIT 11.1
ALARIS MEDICAL, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1996 1997 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INCOME (LOSS) PER COMMON SHARE ASSUMING NO DILUTION
Income (loss) before dividends on mandatorily
redeemable preferred stock. . . . . . . . . . . . . . . . . . $ 1,150 $(7,002) $ 2,009 $(11,317)
Dividends on mandatorily redeemable preferred stock . . . . . . (163) (325)
-------- -------- -------- --------
Net income (loss) applicable to common stock. . . . . . . . . . $ 987 $(7,002) $ 1,684 $(11,317)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common shares outstanding (1). . . . . . . . . 16,402 58,635 16,432 58,788
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per common share assuming no dilution . . . . $ .06 $ (.12) $ .10 $ (.19)
-------- -------- -------- --------
-------- -------- -------- --------
INCOME (LOSS) PER COMMON SHARE ASSUMING FULL DILUTION (2)
Income (loss) before dividends on mandatorily
redeemable preferred stock . . . . . . . . . . . . . . . . . . $ 1,150 $ 2,009
Dividends on mandatorily redeemable preferred stock. . . . . . . (163) (325)
Add back interest expense, net of taxes, on convertible
promissory notes . . . . . . . . . . . . . . . . . . . . . . . 412 824
-------- --------
Net income (loss) applicable to common stock . . . . . . . . . . $ 1,399 $ 2,508
-------- --------
-------- --------
Weighted average common shares outstanding prior
to conversion of convertible promissory notes (1). . . . . . . 16,504 16,500
Add weighted average shares issued upon conversion
of convertible promissory notes. . . . . . . . . . . . . . . . 26,089 26,089
-------- --------
Weighted average common shares outstanding . . . . . . . . . . . 42,593 42,589
-------- --------
-------- --------
Net income (loss) per common share assuming full dilution. . . . $ .03 $ .06
-------- --------
-------- --------
</TABLE>
(1) INCLUDES THE COMMON STOCK EQUIVALENT OF DILUTIVE OPTIONS OUTSTANDING AT THE
END OF EACH PERIOD.
(2) FULLY DILUTED LOSS PER COMMON SHARE IS NOT INCLUDED FOR THE THREE AND SIX
MONTHS ENDED JUNE 30, 1997 AS IT IS ANTI-DILUTIVE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted from the Condensed
Consolidated Balance Sheet and Condensed Consolidated Statement of Operations
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,012
<SECURITIES> 0
<RECEIVABLES> 67,468
<ALLOWANCES> (3,997)
<INVENTORY> 65,323
<CURRENT-ASSETS> 166,360
<PP&E> 85,041
<DEPRECIATION> (29,358)
<TOTAL-ASSETS> 567,470
<CURRENT-LIABILITIES> 96,163
<BONDS> 434,595
0
0
<COMMON> 591
<OTHER-SE> 30,479
<TOTAL-LIABILITY-AND-EQUITY> 567,470
<SALES> 170,067
<TOTAL-REVENUES> 170,067
<CGS> 94,331
<TOTAL-COSTS> 94,331
<OTHER-EXPENSES> 74,734
<LOSS-PROVISION> 200
<INTEREST-EXPENSE> 21,695
<INCOME-PRETAX> (18,717)
<INCOME-TAX> (7,400)
<INCOME-CONTINUING> (11,317)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,317)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> 0
</TABLE>
