<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended MARCH 31, 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)
Advanced Medical, Inc.
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
On May 13, 1997, 59,020,273 shares of Registrant's Common Stock were
outstanding.
Page 1 of 16
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
INDEX
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements:
<TABLE>
<CAPTION>
Page
----
<C> <C>
Condensed consolidated balance sheet at
December 31, 1996 and March 31, 1997. . . . . . . . . . . . . 3
Condensed consolidated statement of operations for the
three months ended March 31, 1996 and 1997. . . . . . . . . . 4
Condensed consolidated statement of cash flows for the
three months ended March 31, 1996 and 1997. . . . . . . . . . 5
Condensed consolidated statement of changes in
stockholders' equity for the period from
December 31, 1996 to March 31, 1997 . . . . . . . . . . . . . 6
Notes to the condensed consolidated financial statements. . . 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings . . . . . . . . . . . . . . . . . . . 13
Item 6 - Exhibits and Reports on Form 8-K. . . . . . . . . . . . 14
</TABLE>
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<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)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, MARCH 31,
1996 1997
------------ ---------
(Unaudited)
<S> <C> <C>
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,084 $ 19,267
Restricted cash and investment securities. . . . . . . . . . . . . . 2,332 -
Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . 87,880 73,718
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,976 61,926
Prepaid expenses and other current assets. . . . . . . . . . . . . . 21,582 22,707
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 182,854 177,618
Net investment in sales-type leases, less current portion. . . . . . . . 27,276 31,678
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . 56,628 56,637
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . 18,107 18,966
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . 308,517 304,505
---------- ----------
$ 593,382 $ 589,404
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt. . . . . . . . . . . . . . . . . . $ 3,963 $ 6,619
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 25,812 25,012
Accrued expenses and other current liabilities . . . . . . . . . . . 50,196 58,132
Accrued restructuring and integration costs. . . . . . . . . . . . . 15,098 9,922
---------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . . 95,069 99,685
---------- ----------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 436,130 434,458
Other non-current liabilities. . . . . . . . . . . . . . . . . . . . . . 16,130 14,708
---------- ----------
Total non-current liabilities. . . . . . . . . . . . . . . . . . . . . 452,260 449,166
---------- ----------
Contingent liabilities and commitments (Note 4)
Common stock and other stockholders' equity:
Common stock, authorized 75,000 shares at $.01 par value; issued and
outstanding - 58,977 shares and 59,054 shares at December 31, 1996
and March 31, 1997, respectively. . . . . . . . . . . . . . . . . 589 591
Capital in excess of par value . . . . . . . . . . . . . . . . . . . 147,840 147,985
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . (101,704) (106,019)
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . (734) (734)
Other equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 (1,270)
---------- ----------
Total common stock and other stockholders' equity . . . . . . . 46,053 40,553
---------- ----------
$ 593,382 $ 589,404
---------- ----------
---------- ----------
</TABLE>
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 MARCH 31,
----------------------------
1996 1997
--------- ---------
<S> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,875 $ 81,995
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,895 46,970
-------- --------
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,980 35,025
-------- --------
Selling and marketing expense. . . . . . . . . . . . . . . . . . . . . . 4,207 15,495
General and administrative expense . . . . . . . . . . . . . . . . . . . 2,966 9,254
Research and development expense . . . . . . . . . . . . . . . . . . . . 1,812 4,068
Integration expense. . . . . . . . . . . . . . . . . . . . . . . . . . . - 3,652
-------- --------
Total operating expense. . . . . . . . . . . . . . . . . . . . . . . 8,985 32,469
-------- --------
Lease interest income. . . . . . . . . . . . . . . . . . . . . . . . . . 600 1,162
-------- --------
Income from operations . . . . . . . . . . . . . . . . . . . . . . . 3,595 3,718
-------- --------
Other income (expense):
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . 357 158
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . (2,215) (10,693)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (98)
-------- --------
Total other expense. . . . . . . . . . . . . . . . . . . . . . . . . . (1,856) (10,633)
-------- --------
Income (loss) before income taxes. . . . . . . . . . . . . . . . . . . . 1,739 (6,915)
Provision for (benefit from) income taxes. . . . . . . . . . . . . . . . 880 (2,600)
-------- --------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . 859 (4,315)
Dividends on mandatorily redeemable preferred stock. . . . . . . . . . . 162 -
-------- --------
Net income (loss) attributable to common stock . . . . . . . . . . . $ 697 $ (4,315)
-------- --------
-------- --------
Net income (loss) per common share assuming no dilution. . . . . . . $ .04 $ (.07)
-------- --------
-------- --------
Net income (loss) per common share assuming full dilution. . . . . . $ .03 $ (.07)
-------- --------
-------- --------
Weighted average common shares outstanding assuming no dilution. . . . . 16,461 59,026
-------- --------
-------- --------
Weighted average common shares outstanding assuming full dilution. . . . 42,550 59,026
-------- --------
-------- --------
</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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1997
--------- --------
<S> <C> <C>
Net cash provided by operating activities. . . . . . . . . . . . . . . . $ 3,162 $ 9,065
-------- --------
Cash flows from investing activities:
Net (increase) decrease in restricted cash and investments . . . . . (19) 2,332
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . (1,205) (4,882)
Payments for product distribution rights . . . . . . . . . . . . . . (1,503) -
Proceeds from disposal of property, plant and equipment. . . . . . . 11 14
-------- --------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . (2,716) (2,536)
-------- --------
Cash flows from financing activities:
Net repayments under former credit facilities. . . . . . . . . . . . (232) -
Principal payments on long-term debt . . . . . . . . . . . . . . . . (322) (3,309)
Proceeds from borrowings under revolving credit facility . . . . . . - 4,300
Debt issue costs . . . . . . . . . . . . . . . . . . . . . . . . . . - (109)
Proceeds from exercise of stock options. . . . . . . . . . . . . . . 8 147
-------- --------
Net cash (used in) provided by financing activities. . . . . . . . . . . (546) 1,029
-------- --------
Effect of exchange rate changes on cash. . . . . . . . . . . . . . . . . 1 (375)
-------- --------
Net (decrease) increase in cash. . . . . . . . . . . . . . . . . . . . . (99) 7,183
Cash at beginning of period. . . . . . . . . . . . . . . . . . . . . . . 1,862 12,084
-------- --------
Cash at end of period. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,763 $ 19,267
-------- --------
-------- --------
</TABLE>
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 77 2 145 147
Translation adjustment (1,332) (1,332)
Net loss for the period (4,315) (4,315)
------- ------- --------- --------- ------ ------ ------- --------
Balance at March 31, 1997 59,054 $ 591 $ 147,985 $(106,019) 83 $ (734) $(1,270) $ 40,553
------- ------- --------- --------- ------ ------ ------- --------
------- ------- --------- --------- ------ ------ ------- --------
</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, manufacturers,
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
1996 operating results and cash flows exclude those of the acquired company and
are not comparable to the 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 March 31, 1997, and the
results of its operations and its cash flows for the three months ended March
31, 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 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 March 31, 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 ended March 31, 1996 has
been increased by $412 for the interest expense (net of tax) on the
convertible promissory notes. The convertible
-7-
<PAGE>
promissory notes issued to Decisions were all converted to common stock in
connection with the Merger (Note 2). Net loss per common share assuming no
dilution and full dilution is the same for March 31, 1997, as the Company
experienced a net loss for the three months ended March 31, 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 ended March 31, 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, MARCH 31,
1996 1997
------------ ----------
Raw materials. . . . . . . . . . $24,711 $25,889
Work-in-process. . . . . . . . . 9,622 13,327
Finished goods . . . . . . . . . 24,643 22,710
------- -------
$58,976 $61,926
------- -------
------- -------
-8-
<PAGE>
NOTE 4 -- 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 for the quarter ended March 31, 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.
-9-
<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, Inc. 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, Inc. ("ALARIS Medical Systems"), external borrowings and other external
sources of funds to meet its obligations.
As a result of the Merger on November 26, 1996, the operating results
reported for the three months ended March 31, 1997 are not comparable to
1996. The first quarter 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 have
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 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.
-10-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected financial
information expressed as a percentage of net sales, as well as, pro forma first
quarter 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 nonrecurring 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.
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 MARCH 31,
------------------------------------------------------------
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% $ 79,677 100.0% 100.0%
Cost of sales. . . . . . . . . . . . . . . 53.7 41,322 51.9 57.3
----- -------- ----- -----
Gross margin . . . . . . . . . . . . . . . 46.3% 38,355 48.1% 42.7%
Selling and marketing expense. . . . . . . 16.2 15,404 19.3 18.9
General and administrative expense . . . . 11.5 9,579 12.0 11.3
Research and development expense . . . . . 7.0 3,858 4.8 5.0
Integration expense. . . . . . . . . . . . - - - 4.4
Lease interest income. . . . . . . . . . . 2.3 1,243 1.5 1.4
----- -------- ----- -----
Income from operations . . . . . . . . . . 13.9 10,757 13.5 4.5
Interest expense . . . . . . . . . . . . . (8.6) (10,392) (13.0) (13.0)
Other, net . . . . . . . . . . . . . . . . 1.4 111 .1 .1
----- -------- ----- -----
Income (loss) before income taxes. . . . . 6.7 476 .6 (8.4)
Provision for (benefit from) income taxes. 3.4 760 1.0 (3.2)
----- -------- ----- -----
Net income (loss). . . . . . . . . . . . . 3.3% $ (284) (.4)% (5.2)%
----- -------- ----- -----
----- -------- ----- -----
OTHER DATA:
Adjusted EBITDA. . . . . . . . . . . . . . 21.3% $ 18,479 23.2% 21.1%
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------
AS REPORTED PRO FORMA AS REPORTED
1996 1996 1997
----------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ADJUSTED EBITDA (1) . . . . . . . . . . . . . . . . . $ 5,521 $ 18,479 $ 17,262
Inventory purchase price allocation adjustment (2). . - - (1,607)
Integration expense . . . . . . . . . . . . . . . . . - - (3,652)
Depreciation and amortization (3) . . . . . . . . . . (1,926) (7,722) (8,285)
Interest income . . . . . . . . . . . . . . . . . . . 357 109 158
Interest expense. . . . . . . . . . . . . . . . . . . (2,215) (10,392) (10,693)
Other, net. . . . . . . . . . . . . . . . . . . . . . 2 2 (98)
(Provision for) benefit from income taxes . . . . . . (880) (760) 2,600
------- -------- --------
Net income (loss) . . . . . . . . . . . . . . . . . . $ 859 $ (284) $ (4,315)
------- -------- --------
------- -------- --------
</TABLE>
- --------------------
-11-
<PAGE>
(1) Adjusted EBITDA represents income from operations before nonrecurring
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 nonrecurring 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:
THREE MONTHS ENDED MARCH 31,
---------------------------------------
AS REPORTED PRO FORMA AS REPORTED
1996 1996 1997
----------- --------- -----------
(IN MILLIONS)
U.S. sales. . . . . . . . . . . . . . . $ 20.2 $ 51.9 $ 51.4
International sales . . . . . . . . . . 5.7 27.8 30.6
------- ------ -------
Total sales. . . . . . . . . . . . . $ 25.9 $ 79.7 $ 82.0
------- ------ -------
------- ------ -------
For purposes of this discussion and analysis, the three months ended March 31,
1996 and 1997 are referred to as 1996 and 1997, respectively.
SALES
Sales increased $56.1 million during 1997 as compared to 1996 due to the
Merger. On a pro forma basis, sales increased $2.3 million, or 2.9%, during
1997 as compared to 1996. United States sales decreased $0.5 million, or
1.0%, on a pro forma basis while international sales increased $2.8 million,
or 10.3%, on a pro forma basis. The increase in international sales is
primarily due to higher 1997 sales of infusion therapy disposable products
offset in part by foreign currency exchange rate fluctuations. The increase
in 1997 disposable sales is partially due to the August 1996 repurchase of
IMED product European distribution rights from Pharmacia and Upjohn, Inc.
which has resulted in higher average selling prices for these products in
1997.
GROSS MARGIN
The gross margin percentage decreased from 1996 to 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
nonrecurring 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 4 to the Condensed
Consolidated Financial Statements). Pro forma 1996 gross margin percentage
was 48.1% compared to 47.7% for 1997, exclusive of the purchase accounting
inventory adjustment and product field correction charges.
SELLING AND MARKETING EXPENSE
Selling and marketing expense increased $11.3 million during 1997 primarily
due to the Merger. On a pro forma basis, selling and marketing expense
increased approximately $0.1 million, or 0.6%. As a percentage of sales, on a
pro forma basis, selling and marketing expense decreased from 19.3% in 1996
to 18.9% in 1997 due primarily to a $2.3 million increase in sales. Domestic
expense decreased by $1.0 million, or 9.0%, 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 $1.1 million, or 26.0%, 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.
-12-
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense increased $6.3 million during 1997
primarily due to the Merger. On a pro forma basis, general and
administrative expense decreased by $0.3 million, or 3.4%, during 1997. As a
percentage of sales, on a pro forma basis, general and administrative expense
decreased from 12.0% for 1996 to 11.3% for 1997 due to an increase in sales
as well as merger related synergies at ALARIS Medical Systems and lower
outside legal expense at ALARIS Medical. International expenses increased by
$0.2 million, or 13.2%, 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 $2.3 million during
1997 primarily due to the Merger. On a pro forma basis, research and
development expense increased from $3.9 million or 4.8% of sales during 1996
to $4.1 million or 5.0% of sales during 1997. This increase is due to
continued investment in development of new infusion and vital signs products.
INTEGRATION EXPENSE
Integration expense of $3.7 million was incurred in the first quarter of
1997. This Merger related expense is in addition to restructuring and
integration charges of $15.3 million recorded in the fourth quarter of 1996.
The 1997 expense consists primarily of severance of $1.1 million, management
consulting fees of $1.0 million, sales force integration expense of $0.9
million and information system conversion costs of $0.5 million.
INCOME (LOSS) FROM OPERATIONS
Income from operations increased $0.1 million during 1997 primarily due to
the Merger. On a pro forma basis, operating income decreased $7.0 million,
or 65.0%, from $10.8 million in 1996 to $3.7 million in 1997 due to the
reasons discussed above.
ADJUSTED EBITDA
Adjusted EBITDA increased $11.7 million during 1997 primarily due to the Merger.
On a pro forma basis, as a percentage of sales, Adjusted EBITDA decreased from
23.2% or $18.5 million, for 1996 to 21.1%, or $17.3 million, for 1997 due to the
reasons discussed above. Excluding the $2.5 million charge to cost of sales
during 1997, Adjusted EBITDA would have increased $1.3 million as compared to
pro forma first quarter 1996. Adjusted EBITDA represents income from operations
before nonrecurring 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
nonrecurring 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 $8.5 million during 1997 primarily due to the Merger.
In addition to 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 $0.3 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.
-13-
<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 expenditures 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 March 31, 1997 the Company made cash payments of
approximately $5.2 million related to merger and integration costs accrued at
December 31, 1996, as well as payments of approximately $3.0 million for
integration costs expensed during the first quarter of 1997.
At March 31, 1997, the Company's outstanding indebtedness was $441.1 million,
which includes $199.7 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 March 31, 1997 would
result in additional annual interest expense of approximately $2.2 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 March 31, 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
March 31, 1997, $19.5 million in borrowings, of which $4.3 million was
borrowed during the first quarter, and $0.5 million under letters of credit
were outstanding under this line of credit and $30.0 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 quarter ended March 31, 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 $4.0 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, restricts distributions to ALARIS Medical to fund the repayment of
the Convertible Debentures at maturity.
-14-
<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. In addition, during 1997 the Company
plans to make approximately $5.5 million of capital expenditures with respect to
leasehold improvements in connection with the consolidation of the domestic
operations of IMED and IVAC.
The Company made capital expenditures of approximately $4.9 million during the
first quarter of 1997, approximately $3.0 million of which was related to the
consolidation of the IMED and IVAC facilities.
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.
-15-
<PAGE>
PART II
OTHER INFORMATION
- -------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
See Item 3. of the Company's December 31, 1996 Form 10-K.
-16-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 -- Computation of Net Income per share for the three months ended
March 31, 1996 and 1997.
_________________________________________
(b) Reports on Form 8-K
During the quarter ended March 31, 1997 the Company filed a report on Form 8-K
dated February 7, 1997. This report contained pro forma financial statements
related to the Company's acquisition of IVAC Holdings, Inc.
-17-
<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: May ___, 1997 By: /s/ WILLIAM J. MERCER
----------------------------
William J. Mercer
PRESIDENT
(PRINCIPAL FINANCIAL OFFICER)
-18-
<PAGE>
EXHIBIT INDEX
- -------------------------------------------------------------------------------
Exhibit Page
No. No.
- ------- ----
11.1 Computation of Net Income per share for the three months
ended March 31, 1996 and 1997 . . . . . . . . . . . . . . . . . . 25
Exhibits 10.27 and 11.1 have been omitted from this copy of Advanced Medical's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
-19-
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES EXHIBIT 11.1
COMPUTATION OF NET INCOME (LOSS) PER SHARE
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1997
---------- ---------
<S> <C> <C>
INCOME (LOSS) PER COMMON SHARE ASSUMING NO DILUTION
Income (loss) before dividends on mandatorily
redeemable preferred stock . . . . . . . . . . . . . . . . $ 859 $(4,315)
Dividends on mandatorily redeemable preferred stock . . . . (162) -
------- -------
Net income (loss) applicable to common stock. . . . . . . . $ 697 $(4,315)
------- -------
------- -------
Weighted average common shares outstanding (1). . . . . . . 16,461 59,026
------- -------
------- -------
Net income (loss) per common share assuming no dilution . . $ .04 $(.07)
------- -------
------- -------
INCOME PER COMMON SHARE ASSUMING FULL DILUTION (2)
Income before dividends on mandatorily redeemable
preferred stock . . . . . . . . . . . . . . . . . . . . . $ 859
Dividends on mandatorily redeemable preferred stock . . . . (162)
Add back interest expense, net of taxes, on convertible
promissory notes . . . . . . . . . . . . . . . . . . . . 412
-------
Net income applicable to common stock . . . . . . . . . . . $ 1,109
-------
-------
Weighted average common shares outstanding prior
to conversion of convertible promissory notes (1) . . . . 16,461
Add weighted average shares issued upon conversion
of convertible promissory notes . . . . . . . . . . . . . 26,089
-------
Weighted average common shares outstanding. . . . . . . . . 42,550
-------
-------
Net income per common share assuming full dilution. . . . . $ .03
-------
-------
</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 MONTHS
ENDED MARCH 31, 1997 AS IT IS ANTI-DILUTIVE.
-25-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted from the
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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 19,267
<SECURITIES> 0
<RECEIVABLES> 67,299
<ALLOWANCES> (3,732)
<INVENTORY> 61,926
<CURRENT-ASSETS> 177,618
<PP&E> 81,665
<DEPRECIATION> (25,028)
<TOTAL-ASSETS> 589,404
<CURRENT-LIABILITIES> 99,685
<BONDS> 434,458
0
0
<COMMON> 591
<OTHER-SE> 39,962
<TOTAL-LIABILITY-AND-EQUITY> 589,404
<SALES> 81,995
<TOTAL-REVENUES> 81,995
<CGS> 46,970
<TOTAL-COSTS> 46,970
<OTHER-EXPENSES> 32,369
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> 10,693
<INCOME-PRETAX> (6,915)
<INCOME-TAX> (2,600)
<INCOME-CONTINUING> (4,315)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,315)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
