<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, 1998 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
incorporation or organization) Identification No.)
10221 Wateridge Circle, San Diego, CA 92121
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(619) 458-7000
- -------------------------------------------------------------------------------
(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 May 7, 1998, 59,127,783 shares of Registrant's Common Stock were
outstanding.
Page 1 of 22
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements:
Page
Condensed consolidated balance sheet at
December 31, 1997 and March 31, 1998. . . . . . . . . . . . 3
Condensed consolidated statement of operations
for the three months ended March 31, 1997 and 1998 .. . . . 4
Condensed consolidated statement of cash flows for the
three months ended March 31, 1997 and 1998 . . . . .. . . . 5
Condensed consolidated statement of changes in
stockholders' equity for the period from
December 31, 1997 to March 31, 1998 . . . . . . . .. . . . 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. . . . . . . . . . .. . . . . . . . . 19
Item 6 - Exhibits and Reports on Form 8-K . . .. . . . . . . . . 20
- 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, MARCH 31,
1997 1998
------------ ----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,984 $ 3,839
Receivables, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,406 80,724
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,666 58,872
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . 23,260 23,065
--------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . 175,316 166,500
Net investment in sales-type leases, less current portion. . . . . . . . . . . . 30,404 27,792
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . 55,365 55,888
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,279 17,439
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287,933 284,102
--------- -----------
$ 565,297 $ 551,721
--------- -----------
--------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . $ 14,559 $ 14,619
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,042 20,646
Accrued expenses and other current liabilities. . . . . . . . . . . . . . . 52,668 55,462
--------- -----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . 91,269 90,727
--------- -----------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431,571 419,340
Other non-current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 10,508 9,516
--------- -----------
Total non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . 442,079 428,856
--------- -----------
Contingent liabilities and commitments (Note 6)
Stockholders' equity:
Common stock, authorized 75,000 shares at $.01 par value; issued and
outstanding - 59,102 shares and 59,122 shares at December 31, 1997
and March 31, 1998, respectively . . . . . . . . . . . . . . . . . . . . 591 591
Capital in excess of par value. . . . . . . . . . . . . . . . . . . . . . . 148,341 148,382
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (111,330) (111,123)
Treasury stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,027) (2,027)
Equity adjustment for foreign currency translation. . . . . . . . . . . . . (3,626) (3,685)
--------- -----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . 31,949 32,138
--------- -----------
$ 565,297 $ 551,721
--------- -----------
--------- -----------
</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,
----------------------------
1997 1998
---- ----
<S> <C> <C>
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 81,995 $ 86,971
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,970 44,854
--------- ---------
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,025 42,117
--------- ---------
Selling and marketing expenses . . . . . . . . . . . . . . . . . . . . . . . . . 15,495 17,129
General and administrative expenses. . . . . . . . . . . . . . . . . . . . . . . 9,254 9,902
Research and development expenses. . . . . . . . . . . . . . . . . . . . . . . . 4,068 4,340
Integration and other non-recurring charges. . . . . . . . . . . . . . . . . . . 3,652 -
--------- ---------
Total operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 32,469 31,371
--------- ---------
Lease interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,162 1,162
--------- ---------
Income from operations. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,718 11,908
--------- ---------
Other income (expenses):
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 62
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,693) (11,156)
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (98) (357)
--------- ---------
Total other expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,633) (11,451)
--------- ---------
(Loss) income before income taxes. . . . . . . . . . . . . . . . . . . . . . . . (6,915) 457
(Benefit from) provision for income taxes. . . . . . . . . . . . . . . . . . . . (2,600) 250
--------- ---------
Net (loss) income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,315) $ 207
--------- ---------
--------- ---------
Net loss per common share assuming no dilution. . . . . . . . . . . . . . . $ (.07) $ -
--------- ---------
--------- ---------
Net loss per common share assuming dilution . . . . . . . . . . . . . . . . $ (.07) $ -
--------- ---------
--------- ---------
Weighted average common shares outstanding assuming no dilution. . . . . . . . . 59,026 58,658
--------- ---------
--------- ---------
Weighted average common shares outstanding assuming dilution . . . . . . . . . . 59,026 60,196
--------- ---------
--------- ---------
</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,
----------------------------
1997 1998
---- ----
<S> <C> <C>
Net cash provided by operating activities. . . . . . . . . . . . . . . . . . . . $ 9,065 $ 14,113
-------- ---------
Cash flows from investing activities:
Net decrease in restricted cash and investments . . . . . . . . . . . . . . 2,332 -
Net capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . (4,868) (5,002)
-------- ---------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . . . (2,536) (5,002)
-------- ---------
Cash flows from financing activities:
Principal payments on long-term debt. . . . . . . . . . . . . . . . . . . . (3,309) (6,072)
Proceeds under revolving credit facility. . . . . . . . . . . . . . . . . . 4,300 10,300
Repayments under revolving credit facility. . . . . . . . . . . . . . . . . - (16,500)
Debt issue costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (109) -
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . 147 41
-------- ---------
Net cash provided by (used in) financing activities. . . . . . . . . . . . . . . 1,029 (12,231)
-------- ---------
Effect of exchange rate changes on cash. . . . . . . . . . . . . . . . . . . . . (375) (25)
-------- ---------
Net increase (decrease) in cash. . . . . . . . . . . . . . . . . . . . . . . . . 7,183 (3,145)
Cash at beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . 12,084 6,984
-------- ---------
Cash at end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,267 $ 3,839
-------- ---------
-------- ---------
</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>
EQUITY
ADJUSTMENT
COMMON STOCK CAPITAL IN TREASURY STOCK FOR FOREIGN
----------------- EXCESS OF ACCUMULATED ------------------- CURRENCY
SHARES AMOUNT PAR VALUE DEFICIT SHARES AMOUNT TRANSLATION TOTAL
------ ------ ---------- ----------- ------ ------ ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 59,102 $591 $148,341 $(111,330) 453 $(2,027) $(3,626) $31,949
Exercise of stock options 20 41 41
Equity adjustment for foreign
currency translation (59) (59)
Net income for the period 207 207
------ ---- -------- --------- --- ------- ------- -------
Balance at March 31, 1998 59,122 $591 $148,382 $(111,123) 453 $(2,027) $(3,685) $32,138
------ ---- -------- --------- --- ------- ------- -------
------ ---- -------- --------- --- ------- ------- -------
</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. ("ALARIS Medical"), formerly Advanced Medical, Inc.,
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.
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, 1998, and
the results of its operations and its cash flows for the three months ended
March 31, 1997 and 1998.
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. The
Company's net income (loss) per common share assuming dilution is computed using
the weighted average number of common shares outstanding plus dilutive potential
common shares using the treasury stock method at the average market price during
the reporting period (Note 5).
-7-
<PAGE>
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, which subsequently changed its name to ALARIS Medical Systems, Inc.
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 Incorporated ("Decisions"), a corporation
wholly owned by ALARIS Medical's principal stockholder, 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:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ----------
<S> <C> <C>
Raw materials . . . . . . . . . . . $ 24,144 $ 25,266
Work-in-process . . . . . . . . . . 8,363 7,610
Finished goods. . . . . . . . . . . 29,159 25,996
-------- --------
$ 61,666 $ 58,872
-------- --------
-------- --------
</TABLE>
NOTE 4 -- COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
Statement requires that all items recognized under accounting standards as
components of comprehensive earnings be reported in an annual financial
statement that is displayed with the same prominence as other annual
financial statements. This Statement also requires that an entity classify
items of other comprehensive earnings by their nature in an annual financial
statement. For example, other comprehensive earnings may include foreign
currency translation adjustments, minimum pension liability adjustments, and
unrealized gains and losses on marketable securities classified as
available-for-sale. Annual financial statements for prior periods will be
reclassified, as required. ALARIS Medical's total comprehensive earnings
were as follows:
-8-
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net (loss) income. . . . . . . . . . . . . . . . $ (4,315) $ 207
Other comprehensive loss:
Foreign currency translation adjustments. . . (1,332) (59)
--------- --------
Other comprehensive (loss) income. . . . . . . . $ (5,647) $ 148
--------- --------
--------- --------
</TABLE>
NOTE 5 -- EARNINGS PER SHARE
In February, 1997 the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128") which specifies the computation, presentation, and disclosure
requirements for earnings per share. The earnings per share information
contained in these financial statements, including those presented for prior
periods, conform with SFAS 128.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
1997 1998
------------------- ------------------
BASIC DILUTED BASIC DILUTED
-------- ---------- ------- ---------
<S> <C> <C> <C> <C>
Net (loss) income as reported. . . . . . . . . $ (4,315) $ (4,315) $ 207 $ 207
-------- ---------- ------- ---------
-------- ---------- ------- ---------
Weighted average common shares outstanding . . 59,026 59,026 58,658 58,658
Weighted average common stock options as
determined by application of the treasury
stock method. . . . . . . . . . . . . . . . . - - - 1,538
-------- ---------- ------- ---------
Weighted average common and common
equivalent shares outstanding . . . . . . . . 59,026 59,026 58,658 60,196
-------- ---------- ------- ---------
-------- ---------- ------- ---------
Net loss per common share. . . . . . . . . . . $ (.07) $ (.07) $ - $ -
-------- ---------- ------- ---------
-------- ---------- ------- ---------
</TABLE>
Net loss per common share assuming no dilution and dilution are the same for the
three months ended March 31, 1997, as the Company experienced a net loss. The
7.25% convertible debentures and options outstanding at March 31, 1997 were
excluded due to their antidilutive nature. Had such options been included, the
weighted average shares would have increased by 1,453.
The Company's 7.25% Debentures were not included in the calculation of
diluted earnings per share in 1998 as they are antidilutive. The $16,152 of
convertible debentures, if converted at an exercise price of $18.14 per
share, would result in an increase of 890 common shares and an increase of
$176, net of taxes, to net income, due to the reduction in interest expense.
-9-
<PAGE>
NOTE 6 -- CONTINGENCIES AND LITIGATION
FIELD CORRECTION
The Company has initiated 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 $2,500 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 ongoing, 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 filed in June 1996 by Sherwood
Medical, Inc. against IVAC which alleges infringement of two patents by
reason of certain activities including the sale by IVAC of disposable probe
covers for use with the Company's infrared tympanic thermometer. The lawsuit
seeks injunctive relief, treble damages and the recovery of costs and
attorney fees. The Company believes it has sufficient defenses to all claims,
including the defenses of noninfringement and invalidity and intends to
vigorously defend this action. However, there can be no assurance that the
Company will successfully defend all claims made by Sherwood 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 a defendant in a QUI TAM lawsuit filed by a former IMED
employee in the United States District Court for the Northern District of
Illinois. On November 15, 1996, an amended complaint was filed which alleges
fraud in the inducement, breach of employment contract, common law fraud and
violations of the Federal False Claims Act and Medicare Fraud and Abuse Act.
To date, the United States has declined to intervene in this action. The
Company believes it has sufficient defenses to all claims by the plaintiff.
However, there can be no assurance that the Company will successfully defend
all claims made in this lawsuit and the failure of the Company to prevail in
this lawsuit could have a material adverse effect on the Company's
operations, financial condition and cash flows.
UNITED STATES CUSTOMS SERVICE MATTER
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
-10-
<PAGE>
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
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 during the second quarter of 1997, 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.
OTHER
The Company is also a defendant in various actions, claims, and legal
proceedings arising from its normal business operations. Management believes
they have 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.
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, the Company generates revenue from the sale of patient
monitoring 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.
-12-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected financial
information expressed as a percentage of sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1998
----------- -----------
<S> <C> <C>
Sales. . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0%
Cost of sales. . . . . . . . . . . . . . . . . . . 57.3 51.6
-------- --------
Gross margin . . . . . . . . . . . . . . . . . . . 42.7% 48.4%
Selling and marketing expenses . . . . . . . . . . 18.9 19.7
General and administrative expenses. . . . . . . . 11.3 11.4
Research and development expenses. . . . . . . . . 5.0 5.0
Integration and other non-recurring charges. . . . 4.4 -
Lease interest income. . . . . . . . . . . . . . . 1.4 1.3
-------- --------
Income from operations . . . . . . . . . . . . . . 4.5 13.6
Interest expense . . . . . . . . . . . . . . . . . (13.0) (12.8)
Other, net . . . . . . . . . . . . . . . . . . . . .1 (.3)
-------- --------
(Loss) income before income taxes. . . . . . . . . (8.4) .5
(Benefit from) provision for income taxes. . . . . (3.2) .3
-------- --------
Net (loss) income. . . . . . . . . . . . . . . . . (5.2%) .2%
-------- --------
-------- --------
OTHER DATA:
Adjusted EBITDA. . . . . . . . . . . . . . . . . 21.1% 23.2%
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1998
----------- -----------
<S> <C> <C>
ADJUSTED EBITDA (1). . . . . . . . . . . . . . . . $ 17,262 $ 20,192
Inventory purchase price allocation adjustment(2) (1,607) -
Integration and other non-recurring charges. . . . (3,652) -
Depreciation and amortization (3). . . . . . . . . (8,285) (8,284)
Interest income. . . . . . . . . . . . . . . . . . 158 62
Interest expense . . . . . . . . . . . . . . . . . (10,693) (11,156)
Other, net . . . . . . . . . . . . . . . . . . . . (98) (357)
Benefit from (provision for) income taxes. . . . . 2,600 (250)
--------- ----------
Net (loss) income . . . . . . . . . . . . . . $ (4,315) $ 207
--------- ----------
--------- ----------
</TABLE>
- -------------------------
(1) Adjusted EBITDA represents income from operations before
restructuring, integration and other non-recurring charges, non-cash
purchase accounting charges and depreciation and amortization.
Adjusted EBITDA does not represent net income or cash flows from
operations, as these terms are defined under generally accepted
accounting principles, and should not be considered as an alternative
to net income as an indicator of the Company's operating performance
or to cash flows as a measure of liquidity. ALARIS Medical has
included information concerning Adjusted EBITDA herein because it
understands that such information is used by investors as one measure
of an issuer's historical ability to service debt. Restructuring and
other one-time non-recurring charges are excluded from Adjusted EBITDA
as ALARIS Medical believes that the inclusion of these items would not
be helpful to an investor's understanding of
-13-
<PAGE>
ALARIS Medical's ability to service debt. ALARIS Medical'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 the first
quarter of 1997.
(3) Depreciation and amortization excludes amortization of debt discount
and 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 MARCH 31,
----------------------------
1997 1998
------------ ------------
<S> <C> <C>
U.S. sales . . . . . . . . . . . . . . . . . . . . $ 51.4 $ 52.6
International sales. . . . . . . . . . . . . . . . 30.6 34.4
------------ ------------
Total sales . . . . . . . . . . . . . . . . . $ 82.0 $ 87.0
------------ ------------
------------ ------------
</TABLE>
For purposes of this discussion and analysis, the three months ended March
31, 1997 and 1998 are referred to as 1997 and 1998, respectively.
SALES Sales increased $5.0 million during 1998 as compared to 1997.
International sales increased $3.8 million, or 12.4% while United States
sales increased $1.2 million, or 2.3%. The increase in international sales is
primarily due to increases in drug infusion instrument revenue of $2.1
million and drug infusion disposable administration set revenue of $1.1
million. The majority of the Company's international sales are denominated in
foreign currency. Due to a stronger U.S. dollar in 1998 as compared to the
actual foreign currency exchange rates in effect during 1997, translation of
1998 international sales were adversely impacted by $1.5 million. The
increase in U.S. sales in 1998 as compared to 1997 is primarily due to
increases in drug infusion disposable administration set revenue of $1.3
million and patient monitoring revenue of $0.7 million. These increases were
offset by a decrease in drug infusion instrument revenue of $0.7 million.
GROSS MARGIN The gross margin percentage increased from 42.7% in 1997 to
48.4% in 1998 primarily due to $4.1 million of non-recurring costs included
in 1997 cost of sales. Exclusive of $1.6 million of non-recurring purchase
accounting inventory adjustments and $2.5 million related to a voluntary
field correction of certain Gemini PC-1 and PC-2 infusion pumps charged to
cost of sales during 1997, the gross margin percentage for 1997 was 47.7%.
This improvement is due to the benefits realized from ongoing cost reduction
efforts and purchasing synergies.
SELLING AND MARKETING EXPENSES Selling and marketing expenses increased $1.6
million, or 10.5%, during 1998 as compared to 1997. As a percentage of sales,
selling and marketing expenses increased from 18.9% in 1997 to 19.7% in 1998.
Domestic expenses increased by $0.5 million, or 5.7%, from 1997.
International expenses increased $1.1 million, or 16.4%, from 1997. These
increases were due to additional corporate investment in international direct
operations and personnel in this area.
-14-
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses
increased $0.6 million, or 7.0%, during 1998 as compared to 1997. As a
percentage of sales, general and administrative expenses increased from 11.3%
in 1997 to 11.4% in 1998. Domestic expenses increased $0.2 million due to (i)
the creation of a corporate development function to assess product and
company acquisitions, distribution alliances and joint ventures which will
expand Company technologies into unserved markets and (ii) increased costs
related to performing general holding company functions, including the
communication and meeting costs of shareholder and investor relations.
International expenses increased by $0.4 million, or 22.2%, primarily as a
result of the conversion of certain European dealer operations into direct
operations.
RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses increased
approximately $0.3 million, or 6.7%, during 1998 as compared to 1997
primarily due to increased activities associated with the later development
stages of various domestic and international engineering projects for
infusion systems and disposable administration sets.
INTEGRATION AND OTHER NON-RECURRING CHARGES The Company incurred $3.7 million
in costs to integrate the IMED and IVAC operations during 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 severance of $1.1 million, management consulting fees of $1.0 million,
sales force integration expense of $0.9 million and information systems
conversion costs of $0.5 million.
INCOME FROM OPERATIONS Income from operations increased $8.2 million during
1998 as compared to 1997 primarily due to the 1997 operating results
including significant integration charges, non-recurring purchase accounting
charges and expenses related to the field correction on the Gemini pumps as
discussed above which were not incurred in 1998.
ADJUSTED EBITDA Adjusted EBITDA increased $2.9 million during 1998 as
compared to 1997. As a percentage of sales, Adjusted EBITDA increased from
21.1%, or $17.3 million, for 1997 to 23.2%, or $20.2 million, for 1998 due to
the reasons discussed above. Excluding the $2.5 million charge to cost of
sales during the first quarter of 1997, Adjusted EBITDA for 1997 would have
increased to $19.8 million. Adjusted EBITDA represents income from operations
before non-recurring non-cash purchase accounting 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. Integration and other one-time
non-recurring charges are excluded from Adjusted EBITDA as the Company
believes that the inclusion of these items would not be helpful to an
investor's understanding of the Company's ability to service debt. The
Company's computation of Adjusted EBITDA may not be comparable to similar
titled measures of other companies.
INTEREST EXPENSE Interest expense increased $0.5 million during 1998
primarily due to a higher average balance on the Company's revolving credit
facility in 1998 and higher interest rates on the Company's bank term debt in
1998 due to the interest rate protection agreement entered into during the
second quarter of 1997 (see Liquidity and Capital Resources).
-15-
<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
capital expenditure requirements with cash flow from operations and
borrowings under the credit facility. In addition to operating expenses, 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 1998, the Company made cash payments of approximately $0.8 million
related to merger and integration costs accrued at December 31, 1997.
At March 31, 1998, the Company's outstanding indebtedness was $434.0 million,
which includes $195.8 million of bank term debt under the credit facility and
$200.0 million of Senior Subordinated Notes due 2006 (the "Notes"), which
were issued in connection with the Merger. The bank debt bears interest at
floating rates based, at the Company's option, on Eurodollar or prime rates.
During the second quarter of 1997, the Company entered into an interest rate
protection agreement 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. As a result, a
one percent increase in the rate of interest charged on indebtedness
outstanding under the credit facility at March 31, 1998 would result in
additional annual interest expense of approximately $1.0 million. During
March 1998, the credit facility was amended and the interest rates on the
bank debt reduced. As a result, the weighted average interest rate, including
the effect of the interest rate protection agreement, was reduced to 8.5%
based on the amounts outstanding at the time of the amendment. The Company
incurred fees of approximately $0.4 million related to such interest rate
reductions. Included in total consolidated debt, at March 31, 1998, ALARIS
Medical had outstanding $16.2 million of 71/4% 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, 1998, $19.0 million in borrowings and $0.5 million under letters of
credit were outstanding under this line of credit and $30.5 million was
available.
In connection with the Merger, the Company assumed IVAC's obligations to
Siemens Infusion Systems Ltd. ("SIS"). 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). The
Company's remaining obligation to SIS is the greater of $3.0 million or 8% of
the prior year's MS III sales in 1999. The Company made the minimum 1998
payment of $3.0 million during the first quarter of 1998.
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 is $8.7 million for the
remaining nine months of 1998 and $15.6 million and $13.7 million for 1999
and 2000, respectively.
-16-
<PAGE>
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.
The Company made capital expenditures of approximately $5.1 million during
1998 and anticipates additional capital expenditures of approximately $20.0
million during the remainder of 1998.
In addition to routine capital expenditures, and in connection with the
Merger, the Company has made significant expenditures for the acquisition of
enterprise-wide information system software and hardware and the related
design, testing and implementation. The worldwide project is scheduled for
completion in 1999. The system is year 2000 compliant and also designed to
properly process transactions denominated in euro currency. Euro currency is
a new monetary unit which certain European countries can begin using in 1999.
During fiscal year 1997 and the three months ended March 31, 1998, the
Company made combined capital and operating expenditures of approximately
$6.0 million and $1.4 million, respectively, related to this project. To
complete the identified phases of the project, the Company anticipates
additional expenditures for the remainder of 1998 and for 1999 of
approximately $3.7 million and $1.5 million, respectively.
During the first quarter of 1998, the Company created a corporate development
function to assess product and company acquisitions, distribution alliances
and joint ventures which would expand Company technologies into unserved
markets. While there can be no assurances that the Company will complete any
acquisitions, depending on the value of potential acquisitions, the Company
might fund such transactions through a variety of sources, including existing
or new debt facilities or through the sale of equity securities.
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.
BACKLOG The backlog of orders, believed to be firm, at March 31, 1998 was
$5.9 million.
-17-
<PAGE>
FOREIGN OPERATIONS As a result of the Merger, the Company has significant
foreign operations. Accordingly, the Company is subject to various risks,
including without limitation, foreign currency risks. Historically, the
Company has not entered into foreign currency contracts to hedge such
exposure and such risk. Due to changes in foreign currency exchange rates
during 1998, primarily a strengthening of the U.S. dollar against many
European currencies, the Company recognized a foreign currency transaction
loss of approximately $0.2 million during 1998. The Company will evaluate
hedging programs during 1998 to limit the exposure to the Company resulting
from changes in foreign currency exchange rates.
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.
-18-
<PAGE>
PART II
OTHER INFORMATION
- -------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
See Note 6 to the Condensed Consolidated Financial Statements.
-19-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 -- Amendment No. 3 to the Bank Credit Agreement dated as of March 4, 1998.
27 -- Financial Data Schedule
-----------------------------------------
(b) Reports on Form 8-K
None.
-20-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ALARIS MEDICAL, INC.
--------------------
(REGISTRANT)
Date: May 12, 1998 By: /s/ DOUGLAS C. JEFFRIES
-----------------------------
Douglas C. Jeffries
Vice President and Chief Financial Officer
- 21 -
<PAGE>
EXHIBIT INDEX
- -------------------------------------------------------------------------------
Exhibit
No.
- -------
10.1 -- Amendment No. 3 to the Bank Credit Agreement dated as of March 4, 1998.
27 -- Financial Data Schedule
- 22 -
<PAGE>
Exhibit 10.1
AMENDMENT NO. 3 AND CONSENT TO CREDIT AGREEMENT
AMENDMENT NO. 3 AND CONSENT (this "Amendment"), dated as of March 4,
1998, among ALARIS MEDICAL, INC. (formerly named Advanced Medical, Inc.), a
Delaware corporation ("ALARIS Medical"), ALARIS MEDICAL SYSTEMS, INC. (formerly
named IVAC Holdings, Inc.), a Delaware corporation (the "Borrower"), the
financial institutions party to the Credit Agreement referred to below (the
"Banks"), BANKERS TRUST COMPANY, as Administrative Agent and as a Syndication
Agent and BANQUE PARIBAS, as Documentation Agent (together with Bankers Trust
Company in its capacity as Administrative Agent, the "Agents") and as a
Syndication Agent. All capitalized terms used herein and not otherwise defined
shall have the respective meanings provided such terms in the Credit Agreement
referred to below.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, ALARIS Medical, the Borrower, the Banks and the Agents are
parties to a Credit Agreement, dated as of November 26, 1996 (as modified,
supplemented and amended to, but not including, the date hereof, the "Credit
Agreement");
WHEREAS, ALARIS Medical and the Borrower have requested certain
amendments, modifications and consents to the Credit Documents; and
WHEREAS, subject to the terms and conditions of this Amendment, the
Banks are willing to grant such amendments, modifications and consents.
NOW THEREFORE, it is agreed:
1. The Banks hereby agree to release IVAC Overseas Holdings, Inc.
("IVAC Overseas") as a Guarantor under the Subsidiary Guaranty, a Pledgor under
the Pledge Agreement and an Assignor under the Security Agreement.
2. The Banks hereby agree to release all of the capital stock of
IVAC Overseas previously pledged by the Borrower pursuant to the Pledge
Agreement and currently held by the Collateral Agent.
3. Notwithstanding anything to the contrary contained in Section
8.17 of the Credit Agreement, the Banks hereby agree that the Borrower may
create a new, direct Wholly-Owned Subsidiary (the "New Subsidiary") and the New
Subsidiary shall not be required to execute the Subsidiary Guaranty, the Pledge
Agreement and the Security Agreement, provided that the New Subsidiary shall at
no time own any significant assets other than its ownership of the capital stock
of IVAC Overseas.
23
<PAGE>
4. Section 8.02(t) of the Credit Agreement is amended by (i)
replacing the first and second references to "$6,500,000" appearing therein with
the amount "$15,000,000" and (ii) replacing the last two provisos appearing
therein with the following proviso:
"PROVIDED that in no event shall the aggregate amount of Permitted
Acquisitions made after the First Effective Date exceed $25,000,000;".
5. Section 8.02 of the Credit Agreement is hereby further amended by
(i) deleting the word "and" appearing at the end of clause 8.02(y), (ii)
replacing the period appearing at the end of clause 8.02(z) with the text ";
and" and (iii) inserting the following clause immediately following clause
8.02(z) therein:
"(aa) sales of Receivables Payments made in connection with the
Equipment Sales Program, provided that such sales shall not exceed $20,000,000
in the aggregate in any fiscal year of the Borrower.".
6. Section 8.03 of the Credit Agreement is hereby amended by (i)
deleting the word "and" appearing at the end of clause 8.03(p), (ii) replacing
the period appearing at the end of clause 8.03(q) with the text "; and" and
(iii) inserting the following clause immediately following clause 8.03(q)
therein:
"(r) Liens arising from the sale or assignment of Receivables
Payments made pursuant to the Equipment Sales Program.".
7. Section 10 of the Credit Agreement is hereby amended by deleting
the definitions of "Applicable Base Rate Margin" and "Applicable Eurodollar
Margin" appearing therein in their entirety and inserting the following new
definitions of "Applicable Base Rate Margin" and "Applicable Eurodollar Margin"
in lieu thereof:
"Applicable Base Rate Margin" shall mean (i) in the case of A
Term Loans and Revolving Loans, 1.00%, less the Applicable Performance
Discount, if any, and (ii) in the case of B Term Loans, C Term Loans
and D Term Loans, 1.25%.
"Applicable Eurodollar Margin" shall mean (i) in the case of A
Term Loans and Revolving Loans, 2.25%, less the Applicable Performance
Discount, if any, and (ii) in the case of B Term Loans, C Term Loans
and D Term Loans, 2.50%.
8. Section 10 of the Credit Agreement is hereby further amended by
inserting the following new sentence at the end of the definition of
"Consolidated Net Income" appearing therein:
"Notwithstanding anything to the contrary contained in the definition
of Consolidated Net Income, for purposes of determining compliance
with Section 8.11, there shall be included (to the extent not already
included) in determining
24
<PAGE>
Consolidated Net Income for any period the net income (or loss) of any
Persons, business, property or asset acquired during such period pursuant
to Section 8.02(t) and not subsequently sold or otherwise disposed of by
the Borrower or one of its Subsidiaries during such period (each such
Person, business, property or asset acquired and not subsequently disposed
of during such period, an "Acquired Entity or Business"), in each case
based on the actual net income (or loss) of such Acquired Entity or
Business for the entire period (including the portion thereof occurring
prior to such acquisition).".
9. Section 10 of the Credit Agreement is hereby further amended by
inserting the following new definitions in appropriate alphabetical order:
"Equipment Sales Program" shall mean any transaction or series of
transactions whereby the Borrower or any of its Subsidiaries (i)
provides medical equipment ("Medical Equipment") and disposable
consumable medical devices ("Consumables") used with such Medical
Equipment to third party customers ("Customers") who in exchange make
payments ("Receivables Payments") to the Borrower or its Subsidiaries,
as the case may be, in connection therewith over a period of time,
(ii) sells or otherwise transfers its title in such Medical
Instruments to third party financing parties ("Third Party Lessors")
which shall simultaneously lease the Medical Equipment to such
Customers and (iii) sells or assigns to such Third Party Lessors the
Receivables Payments attributable to such Medical Equipment with no
recourse against the Borrower or its Subsidiaries; it being understood
and agreed that any such transaction or series of transactions are
sales of inventory in the ordinary course of business of the Borrower
or such Subsidiary.
"Receivables Payments" shall have the meaning provided in the
definition of "Equipment Sales Program" herein.
10. In order to induce the Agents and the Banks to enter into this
Amendment, ALARIS Medical and the Borrower hereby represent and warrant that (x)
no Default or Event of Default exists (i) on the First Effective Date (as
defined below) both before and after giving effect to Sections 1, 2, 3, 4, 5, 6,
8 and 9 of this Amendment or (ii) on the Second Effective Date (as defined
below) both before and after giving effect to Section 7 of this Amendment and
(y) all of the representations and warranties contained in the Credit Agreement
or the other Credit Documents shall be true and correct in all material respects
on the date hereof, on the First Effective Date and on the Second Effective Date
with the same effect as though such representations and warranties had been made
on and as of such date (it being understood that any representation or warranty
made as of a specific date shall be true and correct in all material respects as
of such specific date).
25
<PAGE>
11. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
12. This Amendment may be executed in any number of counterparts and
by the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be lodged with ALARIS Medical, the Borrower and the Agents.
13. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE
STATE OF NEW YORK.
14. This Amendment shall become effective (x) in the case of Sections
1, 2, 3, 4, 5, 6, 8 and 9 of this Amendment, on the date (the "First Effective
Date") when each of ALARIS Medical, the Borrower, the Agents and the Required
Banks shall have signed a copy hereof (whether the same or different copies) and
(y) in the case of Section 7 of this Amendment, on the date (the "Second
Effective Date") when each of ALARIS Medical, the Borrower, the Agents and each
Bank shall have signed a copy hereof (whether the same or different copies) and,
in each case, shall have delivered (including by way of telecopier) the same to
the Administrative Agent at the Notice Office.
* * *
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,839
<SECURITIES> 0
<RECEIVABLES> 70,956
<ALLOWANCES> (3,347)
<INVENTORY> 58,872
<CURRENT-ASSETS> 166,500
<PP&E> 93,940
<DEPRECIATION> (38,052)
<TOTAL-ASSETS> 551,721
<CURRENT-LIABILITIES> 90,727
<BONDS> 419,340
0
0
<COMMON> 591
<OTHER-SE> 31,547
<TOTAL-LIABILITY-AND-EQUITY> 551,721
<SALES> 86,971
<TOTAL-REVENUES> 86,971
<CGS> 44,854
<TOTAL-COSTS> 44,854
<OTHER-EXPENSES> 31,296
<LOSS-PROVISION> 75
<INTEREST-EXPENSE> 11,156
<INCOME-PRETAX> 457
<INCOME-TAX> 250
<INCOME-CONTINUING> 207
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 207
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
