<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended SEPTEMBER 30, 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 November 4, 1997, 59,063,034 shares of Registrant's Common Stock were
outstanding.
Page 1 of 25
<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 September 30, 1997.................... 3
Condensed consolidated statement of operations for the
three and nine months ended September 30, 1996 and 1997..... 4
Condensed consolidated statement of cash flows for the
nine months ended September 30, 1996 and 1997............... 5
Condensed consolidated statement of changes in
stockholders' equity for the period from
December 31, 1996 to September 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......................... 12
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings....................................... 21
Item 6 - Exhibits and Reports on Form 8-K........................ 22
- 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)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash.................................................................... $ 12,084 $ 5,028
Restricted cash and investment securities............................... 2,332 --
Receivables, net........................................................ 87,880 79,312
Inventories............................................................. 58,976 73,201
Prepaid expenses and other current assets............................... 21,582 20,617
-------- --------
Total current assets................................................. 182,854 178,158
Net investment in sales-type leases, less current portion................... 27,276 28,970
Property, plant and equipment, net.......................................... 56,628 55,879
Other non-current assets.................................................... 18,107 17,256
Intangible assets, net...................................................... 308,517 292,108
-------- --------
$593,382 $572,371
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt....................................... $ 3,963 $ 11,912
Accounts payable........................................................ 25,812 24,743
Accrued expenses and other current liabilities.......................... 50,196 56,825
Accrued restructuring................................................... 15,098 5,938
-------- --------
Total current liabilities............................................ 95,069 99,418
-------- --------
Long-term debt.............................................................. 436,130 435,733
Other non-current liabilities............................................... 16,130 5,648
-------- --------
Total non-current liabilities........................................ 452,260 441,381
-------- --------
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 59,065 shares at December 31, 1996
and September 30, 1997, respectively................................ 589 592
Capital in excess of par value......................................... 147,840 148,005
Accumulated deficit.................................................... (101,704) (111,927)
Treasury stock......................................................... (734) (2,027)
Other equity........................................................... 62 (3,071)
-------- --------
Total common stock and other stockholders' equity................... 46,053 31,572
-------- --------
$593,382 $572,371
-------- --------
-------- --------
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1996 1997 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales........................................................................ $27,679 $ 86,830 $81,770 $256,897
Cost of sales................................................................ 15,080 42,400 44,731 136,731
------- -------- -------- --------
Gross margin............................................................. 12,599 44,430 37,039 120,166
------- -------- -------- --------
Selling and marketing expense................................................ 4,305 15,896 13,167 47,805
General and administrative expense........................................... 2,908 9,273 8,453 28,208
Research and development expense............................................. 1,984 4,534 5,773 12,725
Integration and other non-recurring expense.................................. -- 1,693 -- 17,592
------- -------- -------- --------
Total operating expense.................................................. 9,197 31,396 27,393 106,330
------- -------- -------- --------
Lease interest income........................................................ 600 1,226 1,800 3,417
------- -------- -------- --------
Income from operations................................................... 4,002 14,260 11,446 17,253
------- -------- -------- --------
Other income (expense):
Interest income.......................................................... 298 57 1,012 442
Interest expense......................................................... (2,308) (11,277) (6,707) (32,972)
Other, net............................................................... (51) (46) 255 (446)
------- -------- -------- --------
Total other expense...................................................... (2,061) (11,266) (5,440) (32,976)
------- -------- -------- --------
Income (loss) before income taxes............................................ 1,941 2,994 6,006 (15,723)
Provision for (benefit from) income taxes.................................... 1,162 1,900 3,218 (5,500)
------- -------- -------- --------
Net income (loss)............................................................ 779 1,094 2,788 (10,223)
Dividends on mandatorily redeemable preferred stock.......................... 162 -- 487 --
------- -------- -------- --------
Net income (loss) attributable to common stock........................... $ 617 $ 1,094 $ 2,301 $(10,223)
------- -------- -------- --------
------- -------- -------- --------
Net income (loss) per common share assuming no dilution.................. $ .04 $ .02 $ .14 $ (.17)
------- -------- -------- --------
------- -------- -------- --------
Net income (loss) per common share assuming full dilution................ $ .02 $ .02 $ .08 $ (.17)
------- -------- -------- --------
------- -------- -------- --------
Weighted average common shares outstanding assuming no dilution.............. 16,494 59,246 16,453 58,645
------- -------- -------- --------
------- -------- -------- --------
Weighted average common shares outstanding assuming full dilution............ 42,602 59,760 42,600 58,645
------- -------- -------- --------
------- -------- -------- --------
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Net cash provided by operating activities.................... $ 7,979 $ 776
--------- ---------
Cash flows from investing activities:
Net decrease in restricted cash and investments.......... 12,429 2,332
Net capital expenditures................................. (3,912) (15,107)
Payments for product distribution rights................. (1,503) --
Proceeds from sale of investments........................ 1,145 --
Purchase of European distribution rights................. (11,053) --
Return of capital by investee............................ -- 148
--------- ---------
Net cash used in investing activities........................ (2,894) (12,627)
--------- ---------
Cash flows from financing activities:
Net borrowings under former credit facilities .......... 8,801 --
Principal payments on long-term debt..................... (322) (3,935)
Purchase of IMED common stock warrants................... (12,500) --
Purchase of treasury stock............................... -- (1,293)
Proceeds under revolving credit facility................. -- 18,800
Repayments under revolving credit facility............... -- (7,500)
Debt issue costs......................................... -- (662)
Proceeds from exercise of stock options.................. 17 168
--------- ---------
Net cash (used in) provided by financing activities.......... (4,004) 5,578
--------- ---------
Effect of exchange rate changes on cash...................... 28 (783)
--------- ---------
Net increase (decrease) in cash.............................. 1,109 (7,056)
Cash at beginning of period.................................. 1,862 12,084
--------- ---------
Cash at end of period........................................ $ 2,971 $ 5,028
--------- ---------
--------- ---------
</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 88 3 165 168
Purchase of treasury stock 370 (1,293) (1,293)
Translation adjustment (3,133) (3,133)
Net loss for the period (10,223) (10,223)
------ ------- -------- --------- ---- -------- ------- --------
Balance at September 30, 1997 59,065 $ 592 $148,005 $(111,927) 453 $(2,027) $ (3,071) $ 31,572
------ ------- -------- --------- ---- -------- ------- --------
------ ------- -------- --------- ---- -------- ------- --------
</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 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 September 30, 1997,
and the results of its operations and its cash flows for the nine months
ended September 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 September 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 nine months ended
September 30, 1996 has been increased by $417 and $1,241, respectively, for
the interest expense (net of tax) on
- 7 -
<PAGE>
the convertible promissory notes. The convertible 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 the nine months ended September 30, 1997, as the Company
experienced a net loss during this period.
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 nine months
ended September 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, SEPTEMBER 30,
1996 1997
------------ -------------
Raw materials...................... $24,711 $35,068
Work-in-process.................... 9,622 12,477
Finished goods..................... 24,643 25,656
------- -------
$58,976 $73,201
------- -------
------- -------
- 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 utilized 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 assembly plants
resumed full operations on June 27, 1997 and Cal Pacifico provided the
Company with assistance as it transitioned into the direct operation of such
plants. The Company began operating these plants directly during 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. The individual costs included within
such non-recurring charge consist of approximately $2.7 million of settlement
and legal fees and approximately $1.4 million of idle labor costs and
start-up costs incurred in connection with the implementation of the interim
assembly plans discussed below.
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 Creedmoor, North Carolina and San Diego, California. The
Company utilized these facilities through the third quarter of 1997 in order
to replenish its inventory. While production costs of disposable
administration sets at these facilities were greater than in Mexico, the
incremental volume of disposable administration sets produced outside of
Mexico has not had 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"). The Company has
been advised by its special Customs counsel that, under applicable law, no
person, by fraud, gross negligence or negligence, may (i) import merchandise
into the commerce of the United States by means of any material and false
document, statement or act, or any material omission, or (ii) aid or abet any
other person to import merchandise in such manner. No proceeding has been
initiated by Customs against the Company in respect of the matters which are
the subject of the proceeding against Cal Pacifico. Since Cal Pacifico was
the Company's United States customs broker and importer of record during each
of the
- 9 -
<PAGE>
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's challenge to the assessment of the Disputed Amounts is in its
preliminary stages. Given the present posture of Cal Pacifico's challenge,
and the inherent uncertainty of contested matters such as this, it is not
possible for the Company to express an opinion as to the likelihood that Cal
Pacifico will prevail on its challenge. The Company has not been informed by
Cal Pacifico or Customs as to the specific amount 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. The actual amount so
determined by the arbitrator may be less or greater than $550. 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. Inasmuch as Cal Pacifico's challenge before Customs is still
pending and any claim against the Company for indemnification would be based
on Cal Pacifico's ultimate lack of success in that challenge, and inasmuch as
any arbitration proceeding by which Cal Pacifico might seek indemnification
has not been filed nor has Cal Pacifico committed itself to the theories
under which it might seek indemnification or the recovery of damages from the
Company, it is not possible for the Company to express an opinion at this
time as to the likelihood of an unfavorable outcome in such a proceeding.
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
- 10 -
<PAGE>
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.
- 11 -
<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 nine months ended September 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
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 increased in every year since 1993, primarily as a result
of the growth in its installed base of infusion pumps. However, uncertainty
remains with regard to future changes within the healthcare industry. The
trend towards managed care and economically motivated buyers in the U.S. may
result in continued pressure on selling prices of products and compression on
gross margins. The U.S. marketplace is increasingly characterized by
consolidation among healthcare providers and purchasers of medical products.
The Company's profitability is affected by the increasing use of Group
Purchasing Organizations ("GPOs") which are better able to negotiate
favorable pricing from providers of infusion systems, such as the Company,
and which 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 future profitability. 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 third
quarter 1996 and pro forma nine months ended September 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
- 12 -
<PAGE>
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.
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 SEPTEMBER 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% $ 85,072 100.0% 100.0%
Cost of sales................................ 54.5 45,446 53.4 48.8
------- --------- ------ ------
Gross margin................................. 45.5% 39,626 46.6% 51.2%
Selling and marketing expense................ 15.6 16,354 19.2 18.3
General and administrative expense........... 10.5 9,473 11.1 10.7
Research and development expense............. 7.2 4,734 5.6 5.2
Integration and other non-recurring expense.. -- -- -- 1.9
Lease interest income........................ 2.2 1,188 1.4 1.3
------- --------- ------ ------
Income from operations....................... 14.4 10,253 12.1 16.4
Interest expense............................. (8.3) (10,341) (12.2) (13.0)
Other, net................................... .9 171 .2 --
------- --------- ------ ------
Income before income taxes................... 7.0 83 .1 3.4
Provision for income taxes................... 4.2 600 .7 2.2
------- --------- ------ ------
Net income (loss)............................ 2.8% $ (517) (.6%) 1.2%
------- --------- ------ ------
------- --------- ------ ------
OTHER DATA:
Adjusted EBITDA........................... 22.1% $ 18,942 22.3% 28.3%
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 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% $251,552 100.0% 100.0%
Cost of sales................................ 54.7 134,542 53.5 53.2
------- --------- ------ ------
Gross margin................................. 45.3% 117,010 46.5% 46.8%
Selling and marketing expense................ 16.1 47,482 18.9 18.6
General and administrative expense........... 10.3 29,000 11.5 11.0
Research and development expense............. 7.1 13,237 5.3 5.0
Integration and other non-recurring expense.. -- -- -- 6.8
Lease interest income........................ 2.2 3,612 1.5 1.3
------- --------- ------ ------
Income from operations....................... 14.0 30,903 12.3 6.7
Interest expense............................. (8.2) (30,892) (12.3) (12.8)
Other, net................................... 1.5 804 .3 --
------- --------- ------ ------
Income (loss) before income taxes............ 7.3 815 .3 (6.1)
Provision for (benefit from) income taxes.... 3.9 2,035 .8 (2.1)
------- --------- ------ ------
Net income (loss)............................ 3.4% $ (1,220) (.5%) (4.0%)
------- --------- ------ ------
------- --------- ------ ------
OTHER DATA:
Adjusted EBITDA........................... 21.4% $ 55,790 22.2% 24.3%
</TABLE>
- 13 -
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 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) $ 6,104 $ 18,942 $ 24,580 $ 17,461 $ 55,790 $ 62,402
Inventory purchase price
allocation adjustment (2) -- -- -- -- -- (1,607)
Integration and other non-
recurring expense -- -- (1,693) -- -- (17,592)
Depreciation and
amortization (3) (2,102) (8,689) (8,627) (6,015) (24,887) (25,950)
Interest income 298 222 57 1,012 549 442
Interest expense (2,308) (10,341) (11,277) (6,707) (30,892) (32,972)
Other, net (51) (51) (46) 255 255 (446)
(Provision for) benefit
from income taxes (1,162) (600) (1,900) (3,218) (2,035) 5,500
-------- -------- -------- -------- -------- --------
Net income (loss) $ 779 $ (517) $ 1,094 $ 2,788 $ (1,220) $(10,223)
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 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 $21.9 $55.8 $55.9 $64.6 $164.8 $162.6
International sales 5.8 29.3 31.0 17.2 86.8 94.3
----- ----- ----- ----- ------ ------
Total sales $27.7 $85.1 $86.9 $81.8 $251.6 $256.9
----- ----- ----- ----- ------ ------
----- ----- ----- ----- ------ ------
</TABLE>
- 14 -
<PAGE>
For purposes of this discussion and analysis, the three months ended
September 30, 1996 and 1997 are referred to as Third Quarter 1996 and Third
Quarter 1997, respectively, and the nine months ended September 30, 1996 and
1997 are referred to as 1996 and 1997, respectively.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
SALES
Sales increased $59.2 million during Third Quarter 1997 as compared to Third
Quarter 1996 due to the Merger. On a pro forma basis, sales increased $1.8
million, or 2.1%, during Third Quarter 1997 as compared to Third Quarter
1996. United States sales increased $0.1 million, or 0.2%, on a pro forma
basis while international sales increased $1.7 million, or 5.8%, on a pro
forma basis. The majority of the Company's international sales are
denominated in foreign currency. Due to a stronger U.S. dollar as compared
to the actual foreign currency exchange rates in effect during Third Quarter
1996, translation of Third Quarter 1997 international sales were adversely
impacted by approximately $2.3 million. The increase in international sales
is primarily due to an increase in volume of drug infusion disposable
administration sets as well as 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.
GROSS MARGIN
The gross margin percentage increased 5.7 percentage points, from 45.5% for
Third Quarter 1996 to 51.2% for Third Quarter 1997, primarily due to vendor
price concessions resulting from the Merger and 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 Third Quarter 1996
was 46.6% compared to 51.2% for Third Quarter 1997.
SELLING AND MARKETING EXPENSE
Selling and marketing expense increased $11.6 million during Third Quarter
1997 primarily due to the Merger. On a pro forma basis, selling and
marketing expense decreased approximately $0.5 million, or 2.8%, during Third
Quarter 1997. As a percentage of sales, on a pro forma basis, selling and
marketing expense decreased from 19.2% in Third Quarter 1996 to 18.3% in
Third Quarter 1997 primarily due to Merger-related synergies resulting in a
decrease in domestic labor and advertising costs offset by increased
international expenses of $.5 million, or 2.8%.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense increased $6.4 million during Third
Quarter 1997 primarily due to the Merger. On a pro forma basis, general and
administrative expense decreased by $0.2 million, or 2.1%, during Third
Quarter 1997. As a percentage of sales, on a pro forma basis, general and
administrative expense decreased from 11.1% for Third Quarter 1996 to 10.7%
for Third 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. International expenses increased by $0.4 million,
or 28%, 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 $2.6 million during
Third Quarter 1997 due to the Merger. On a pro forma basis, research and
development expense decreased from $4.7 million, or 5.6% of sales, during
Third Quarter 1996 to $4.5 million, or 5.2% of sales, for Third Quarter 1997,
primarily due to synergies realized in the Merger and realignment and
prioritization of research and development projects.
- 15 -
<PAGE>
INTEGRATION AND OTHER NON-RECURRING EXPENSE
The Company incurred $1.7 million in integration costs during Third Quarter
1997. These costs are in addition to restructuring and integration charges
of $15.3 million recorded in the fourth quarter of 1996, $3.7 million and
$12.2 million recorded in the first and second quarters of 1997,
respectively. The Third Quarter 1997 expense consists primarily of
information systems conversion costs of $1.4 million and other integration
costs of $0.3 million.
INCOME FROM OPERATIONS
Income from operations increased $10.3 million during Third Quarter 1997
primarily due to the Merger. On a pro forma basis, operating income
increased $4.0 million, from $10.3 million in Third Quarter 1996 to $14.3
million in Third Quarter 1997, due primarily to improved gross margin of $4.8
million and reduced selling and marketing, general and administrative and
research and development expenses. This increase was partially offset by
integration expenses incurred in Third Quarter 1997.
ADJUSTED EBITDA
Adjusted EBITDA increased $18.5 million during Third Quarter 1997 compared to
Third Quarter 1996 primarily due to the Merger. On a pro forma basis, as a
percentage of sales, Adjusted EBITDA increased from 22.3%, or $18.9 million,
for Third Quarter 1996 to 28.3%, or $24.6 million, for Third 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 $9.0 million during Third Quarter 1997 compared to
Third 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 Third 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 $0.9 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 and to
ramp up inventory for fourth quarter sales.
- 16 -
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
SALES
Sales increased $175.1 million during 1997 as compared to 1996 due to the
Merger. On a pro forma basis, sales increased $5.3 million, or 2.1%, during
1997 as compared to 1996. United States sales decreased $2.2 million, or
1.3%, on a pro forma basis while international sales increased $7.5 million,
or 8.6%, on a pro forma basis. The increase in international sales is
primarily due to an increase in volume of drug infusion instruments and
disposable administration sets as well as 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
majority of the Company's international sales are denominated in foreign
currency. Due to a stronger U.S. dollar in 1997 as compared to the actual
foreign currency exchange rates in effect during 1996, translation of 1997
international sales were adversely impacted by $4.2 million. The decrease in
U.S. sales in the nine months ended September 30, 1997 as compared to the
nine months ended September 30, 1996, on a pro forma basis, is primarily due
to a decrease in the drug infusion instrument and disposable administration
set volume from the 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 increased from 45.3% for the nine months ended
September 30, 1996 to 46.8% for the nine months ended September 30, 1997
primarily due to vendor price concessions resulting from the Merger and
favorable international margins due in part to the repurchase of European
distribution rights from Pharmacia & Upjohn, Inc. These were partially
offset by increased amortization expense resulting from the IVAC purchase
price allocated to certain intangible assets, $1.6 million of non-recurring
purchase accounting inventory adjustments, as well as $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) charged to
cost of sales during 1997. Pro forma gross margin percentage for 1996 was
46.5% compared to 48.4% for 1997, exclusive of the purchase accounting
inventory adjustment and product field correction charges.
SELLING AND MARKETING EXPENSE
Selling and marketing expense increased $34.6 million during 1997 primarily
due to the Merger. On a pro forma basis, selling and marketing expense
increased approximately $0.3 million, or 0.7%, during 1997. As a percentage
of sales, on a pro forma basis, selling and marketing expense decreased from
18.9% in 1996 to 18.6% in 1997. Domestic expense decreased by $2.4 million,
or 7.9%, from 1996 due to Merger-related synergies. The decrease in domestic
selling and marketing expense was more than offset by increased international
expenses of $2.7 million, or 16.2%, due largely to increased distribution
costs and 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 $19.8 million during 1997
primarily due to the Merger. On a pro forma basis, general and
administrative expense decreased by $0.8 million, or 2.7%, during 1997. As a
percentage of sales, on a pro forma basis, general and administrative expense
decreased from 11.5% for 1996 to 11.0% 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 $0.2 million, or 4.8%, 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 $7.0 million during
1997 primarily due to the Merger. On a pro forma basis, research and
development expense decreased from $13.2 million, or 5.3% of sales, for the
nine
- 17 -
<PAGE>
months ended September 30, 1996 to $12.7 million, or 5.0% of sales, for the
nine months ended September 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 $17.6 million in integration costs and other
non-recurring expense during the first nine 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 $3.1 million, management consulting
fees of $1.4 million, severance of $1.3 million and other integration costs
of $3.2 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 increased $5.8 million during 1997 primarily due to
the Merger. This increase was partially offset by expenses related 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 $13.6 million from $30.9 million in 1996 to $17.3 million in
1997 due to the reasons discussed above.
ADJUSTED EBITDA
Adjusted EBITDA increased $44.9 million during 1997 primarily due to the
Merger. On a pro forma basis, as a percentage of sales, Adjusted EBITDA
increased from 22.2%, or $55.8 million, for 1996 to 24.3%, or $62.4 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 $64.9 million, an increase of $9.1 million or
approximately 16.3%, 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 $26.3 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 $2.1 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.
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
- 18 -
<PAGE>
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 September 30, 1997 the Company made cash payments of
approximately $1.5 million related to merger and integration costs accrued at
December 31, 1996, as well as payments of approximately $1.7 million for
integration costs expensed during the third quarter of 1997.
At September 30, 1997, the Company's outstanding indebtedness was $447.6
million, which includes $199.1 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
September 30, 1997 would result in additional annual interest expense of
approximately $1.0 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 September
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
September 30, 1997, $26.5 million in borrowings and $0.5 million under
letters of credit were outstanding under this line of credit and $23.0
million was available. A net $4.0 million was borrowed during the quarter.
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 amortization of the Company's indebtedness are $.3 million for the
fourth quarter of 1997 and $14.6 million and $15.6 million for 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.
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
$12.4 million of capital
- 19 -
<PAGE>
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 $5.4 million and $15.1
million during the three and nine months ended September 30, 1997,
respectively, of which approximately $0.7 million and $5.3 million,
respectively, were related to the consolidation of the IMED and IVAC
facilities. The Company anticipates capital spending for the fourth quarter
of 1997 to be approximately $5.0 million 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
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 or orders, believed to be firm, at September 30, 1997 was $7.9
million.
- 20 -
<PAGE>
PART II
OTHER INFORMATION
- -------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
See Note 5 to the Condensed Consolidated Financial Statements.
- 21 -
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 - Computation of Net Income per share for the
three and nine months ended September 30, 1996
and 1997.
_________________________________________
(b) Reports on Form 8-K
None.
- 22 -
<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: November 11, 1997 By: /S/ DOUGLAS C. JEFFRIES
------------------------
Douglas C. Jeffries
Vice President and Chief Financial
Officer
- 23 -
<PAGE>
EXHIBIT INDEX
Exhibit Page
No. No.
- ------ ----
11.1 Computation of Net Income per share for the three and
nine months ended September 30, 1996 and 1997........... 25
- 24 -
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES EXHIBIT 11.1
COMPUTATION OF NET INCOME PER SHARE
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 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................................ $ 779 $ 1,094 $ 2,788 $(10,223)
Dividends on mandatorily redeemable preferred stock......... (162) (487)
------- ------- ------- --------
Net income (loss) applicable to common stock................ $ 617 $ 1,094 $ 2,301 $(10,223)
------- ------- ------- --------
------- ------- ------- --------
Weighted average common shares outstanding (1).............. 16,494 59,246 16,453 58,645
------- ------- ------- --------
------- ------- ------- --------
Net income (loss) per common share assuming no dilution..... $ .04 $ .02 $ .14 $ (.17)
------- ------- ------- --------
------- ------- ------- --------
INCOME PER COMMON SHARE ASSUMING FULL DILUTION (2)
Income before dividends on mandatorily redeemable
preferred stock........................................... $ 779 $ 1,094 $ 2,788
Dividends on mandatorily redeemable preferred stock......... (162) (487)
Add back interest expense, net of taxes, on convertible
promissory notes.......................................... 417 1,241
------- ------- -------
Net income applicable to common stock....................... $ 1,034 $ 1,094 $ 3,542
------- ------- -------
------- ------- -------
Weighted average common shares outstanding prior
to conversion of convertible promissory notes (1)......... 16,519 59,760 16,517
Add weighted average shares issued upon conversion
of convertible promissory notes........................... 26,083 26,083
------- ------- -------
Weighted average common shares outstanding.................. 42,602 59,760 42,600
------- ------- -------
------- ------- -------
Net income per common share assuming full dilution.......... $ .02 $ .02 $ .08
------- ------- -------
------- ------- -------
</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 NINE MONTHS
ENDED SEPTEMBER 30, 1997 AS IT IS ANTI-DILUTIVE.
- 25 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 5028
<SECURITIES> 0
<RECEIVABLES> 68931
<ALLOWANCES> (4101)
<INVENTORY> 73201
<CURRENT-ASSETS> 178158
<PP&E> 87707
<DEPRECIATION> (31828)
<TOTAL-ASSETS> 572371
<CURRENT-LIABILITIES> 99418
<BONDS> 435733
0
0
<COMMON> 592
<OTHER-SE> 30980
<TOTAL-LIABILITY-AND-EQUITY> 572371
<SALES> 256897
<TOTAL-REVENUES> 256897
<CGS> 136731
<TOTAL-COSTS> 136731
<OTHER-EXPENSES> 106030
<LOSS-PROVISION> 300
<INTEREST-EXPENSE> 32972
<INCOME-PRETAX> (15723)
<INCOME-TAX> (5500)
<INCOME-CONTINUING> (10223)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10223)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> 0
</TABLE>
