<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, 1999 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
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(Address of principal executive offices) (Zip Code)
(619) 458-7000
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(Registrant's telephone number, including area code)
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(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 5, 1999, 59,296,609 shares of Registrant's Common Stock were
outstanding.
<PAGE>
ALARIS MEDICAL, INC.
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INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 - Financial Information:
PAGE
Condensed consolidated balance sheet at
September 30, 1999 and December 31, 1998.............................................................. 3
Condensed consolidated statement of operations for
the three and nine months ended September 30, 1999 and 1998........................................... 4
Condensed consolidated statement of cash flows for
the nine months ended September 30, 1999 and 1998..................................................... 5
Condensed consolidated statement of changes
in stockholders' equity for the period from
December 31, 1998 to September 30, 1999 .............................................................. 6
Notes to the condensed consolidated financial statements.............................................. 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................................... 13
</TABLE>
<TABLE>
<CAPTION>
PART II. OTHER INFORMATION
<S> <C>
Item 1 - Legal Proceedings............................................................................... 26
Item 6 - Exhibits and Reports on Form 8-K................................................................ 27
</TABLE>
- 2 -
<PAGE>
FORM 10 - Q
PART 1 - ITEM 1
FINANCIAL INFORMATION
ALARIS MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---------------------------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash................................................................................ $ 22,281 $ 29,500
Receivables, net.................................................................... 74,634 102,295
Inventories......................................................................... 84,812 79,485
Prepaid expenses and other current assets........................................... 27,619 25,246
---------- -----------
Total current assets............................................................ 209,346 236,526
Net investment in sales-type leases, less current portion............................... 22,050 19,111
Property, plant and equipment, net...................................................... 69,158 61,990
Other non-current assets................................................................ 22,926 22,388
Intangible assets, net.................................................................. 298,013 311,018
---------- -----------
$ 621,493 $ 651,033
========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Current portion of long-term debt................................................... $ 11,545 $ 15,423
Accounts payable.................................................................... 15,462 22,103
Accrued expenses and other current liabilities...................................... 51,544 52,340
---------- -----------
Total current liabilities....................................................... 78,551 89,866
---------- -----------
Long-term debt.......................................................................... 526,988 530,867
Other non-current liabilities........................................................... 18,818 21,931
---------- -----------
Total non-current liabilities......................................................... 545,806 552,798
---------- -----------
Contingent liabilities and commitments (Note 6)
Stockholders' equity:
Common stock, authorized 75,000 shares at $.01 par value; issued and
outstanding - 59,296 shares and 59,221 shares at September 30, 1999
and December 31, 1998, respectively.............................................. 593 592
Capital in excess of par value...................................................... 148,989 148,762
Accumulated deficit................................................................. (146,322) (135,769)
Treasury stock...................................................................... (2,027) (2,027)
Accumulated other comprehensive loss................................................ (4,097) (3,189)
---------- -----------
Total stockholders' equity...................................................... (2,864) 8,369
---------- -----------
$ 621,493 $ 651,033
========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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<PAGE>
ALARIS MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS(UNAUDITED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
1999 1998 1999 1998
-------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales ............................................... $ 93,991 $ 94,227 $ 287,042 $ 271,881
Cost of sales.......................................... 45,654 46,672 146,251 138,025
----------- ----------- ----------- -----------
Gross margin........................................... 48,337 47,555 140,791 133,856
----------- ----------- ----------- -----------
Selling and marketing expenses......................... 18,847 17,876 57,932 52,106
General and administrative expenses.................... 11,877 10,518 34,779 30,059
Research and development expenses...................... 4,813 5,126 17,411 14,126
Purchased in-process research and development.......... - 22,800 - 28,334
Integration and other non-recurring charges............ 3,500 1,112 6,938 1,112
----------- ----------- ----------- -----------
Total operating expenses........................... 39,037 57,432 117,060 125,737
----------- ----------- ----------- -----------
Lease interest income.................................. 1,187 1,185 3,267 3,407
----------- ----------- ----------- -----------
Income (loss) from operations...................... 10,487 (8,692) 26,998 11,526
----------- ----------- ----------- -----------
Other income (expenses):
Interest income.................................... 361 511 1,124 658
Interest expense................................... (13,751) (13,014) (40,999) (34,809)
Other, net......................................... 97 14 (776) (667)
----------- ----------- ----------- -----------
Total other expense.................................... (13,293) (12,489) (40,651) (34,818)
----------- ----------- ----------- -----------
Loss before income taxes............................... (2,806) (21,181) (13,653) (23,292)
(Benefit from) provision for income taxes.............. (400) 1,800 (3,100) 1,450
----------- ----------- ----------- -----------
Net loss............................................... $ (2,406) $ (22,981) $ (10,553) $ (24,742)
=========== =========== =========== ===========
Net loss per common share
assuming no dilution............................. $ (.04) $ (.39) $ (.18) $ (.42)
========== =========== =========== ===========
Net loss per common share
assuming dilution ............................... $ (.04) $ (.39) $ (.18) $ (.42)
========== =========== =========== ===========
Weighted average common shares outstanding
assuming no dilution................................. 58,838 58,737 58,805 58,692
=========== =========== =========== ===========
Weighted average common shares outstanding
assuming dilution.................................... 58,838 58,737 58,805 58,692
=========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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<PAGE>
ALARIS MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
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<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
1999 1998
------ -----
<S> <C> <C>
Net cash provided by operating activities.............................................. $ 36,221 $ 30,619
---------- -----------
Cash flows from investing activities:
Net capital expenditures........................................................... (22,080) (16,795)
Acquisitions of business........................................................... - (59,842)
Payments for licenses and distribution rights...................................... (3,031) -
Patents, trademarks and other...................................................... (942) (450)
---------- -----------
Net cash used in investing activities.................................................. (26,053) (77,087)
---------- -----------
Cash flows from financing activities:
Principal payments on long-term debt............................................... (17,543) (20,228)
Proceeds from term loan borrowing.................................................. - 30,000
Proceeds under revolving credit facility........................................... - 34,800
Repayments under revolving credit facility......................................... - (60,000)
Principal payments on acquired debt................................................ - (4,822)
Proceeds from issuance of notes payable............................................ - 109,892
Debt issue costs................................................................... - (5,390)
Proceeds from exercise of stock options............................................ 198 255
---------- -----------
Net cash (used in) provided by financing activities.................................... (17,345) 84,507
---------- -----------
Effect of exchange rate changes on cash................................................ (42) 75
---------- -----------
Net (decrease) increase in cash........................................................ (7,219) 38,114
Cash at beginning of period............................................................ 29,500 6,984
---------- -----------
Cash at end of period.................................................................. $ 22,281 $ 45,098
========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
-5-
<PAGE>
ALARIS MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY (UNAUDITED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
OTHER OTHER
CAPITAL IN COMPRE- COMPRE-
COMMON STOCK EXCESS OF ACCUMULATED TREASURY STOCK HENSIVE HENSIVE
SHARES AMOUNT PAR VALUE DEFICIT SHARES AMOUNT LOSS TOTAL LOSS
------ ------ --------- ------- ------ ------ ---- ----- ------
<S> <C> <C> <C> <C> <C> C> <C> <C> <C>
Balance at December 31, 1998....... 59,221 $ 592 $ 148,762 $ (135,769) 453 $(2,027) $(3,189) $ 8,369
Comprehensive loss
Net loss for the period......... (10,553) (10,553) $ (10,553)
Equity adjustment from foreign
currency translation........... (908) (908) (908)
---------
Comprehensive loss................. $ (11,461)
Exercise of stock options.......... 75 1 197 198
Tax benefit from exercise of
stock options................... 30 30
------ ------ --------- ---------- ----- ------ ------ -------
Balance at September 30, 1999...... 59,296 $ 593 $ 148,989 $ (146,322) 453 $(2,027) $(4,097) $(2,864)
====== ====== ========= ========== ===== ======= ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
-6-
<PAGE>
ALARIS MEDICAL, INC.
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") operating through its consolidated
subsidiaries, designs, manufactures, distributes and services intravenous
infusion therapy and patient monitoring instruments and related disposables and
accessories, as well as cardiovascular and pacemaker monitoring products. ALARIS
Medical and its subsidiaries are collectively referred to as the "Company."
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, 1999, the
results of its operations for the three and nine months ended September 30, 1999
and 1998, and its cash flows for the nine months ended September 30, 1999 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.
RECLASSIFICATIONS:
Certain prior year period amounts have been reclassified to conform to the
current period presentation.
NET LOSS PER COMMON SHARE:
The Company's net loss per common share assuming no dilution is computed using
the weighted average number of common shares outstanding, excluding treasury
shares. The Company's net 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 3).
NOTE 2 -- INVENTORIES
<TABLE>
<CAPTION>
Inventories comprise the following: SEPTEMBER 30, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Raw materials............................................ $ 39,752 $ 35,024
Work-in-process.......................................... 7,331 5,719
Finished goods........................................... 37,729 38,742
----------- -----------
$ 84,812 $ 79,485
=========== ===========
</TABLE>
-7-
<PAGE>
NOTE 3 -- LOSS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------
1999 1998
------------------------ ------------------------
BASIC DILUTED BASIC DILUTED
----- ------- ----- -------
<S> <C> <C> <C> <C>
Net loss as reported................................... $ (2,406) $ (2,406) $ (22,981) $ (22,981)
========= ========== ========== =========
Weighted average common shares outstanding............. 58,838 58,838 58,737 58,737
========= ========== ========== =========
Net loss per common share.............................. $ (.04) $ (.04) $ (.39) $ (.39)
========= ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------
1999 1998
------------------------ -------------------------
BASIC DILUTED BASIC DILUTED
----- -------- ------ -------
<S> <C> <C> <C> <C>
Net loss as reported................................... $ (10,553) $ (10,553) $ (24,742) $ (24,742)
========= ========== ========== =========
Weighted average common shares outstanding............. 58,805 58,805 58,692 58,692
========= ========== ========== =========
Net loss per common share.............................. $ (.18) $ (.18) $ (.42) $ (.42)
========= ========= ========== =========
</TABLE>
Net loss per common share assuming no dilution and dilution are the same for the
three and nine months ended September 30, 1999 and September 30, 1998, as the
Company experienced a net loss. Options outstanding at September 30, 1999 and
September 30, 1998 were excluded due to their antidilutive nature. Had such
options been included, the weighted average shares would have increased by 596
and 931 for the three and nine months ended September 30, 1999 and increased by
1,488 and 1,619 for the three and nine months ended September 30, 1998.
The Company's 7.25% Convertible Debentures (the "Convertible Debentures") were
not included in the calculation of diluted earnings per share in the three and
nine months ended September 30, 1999 and 1998 as they are antidilutive. For both
the three and nine months ended September 30, 1999 and 1998, 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 and
$528, net of taxes, to net income due to the reduction in interest expense.
NOTE 4 -- SEGMENT INFORMATION
In 1998, the Company adopted Statement of Financial Accounting Standards No. 131
("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." The prior year's segment information has been conformed to present
the Company's three reportable segments in accordance with the new standard -
(1) North America, (2) International and (3) Instromedix.
The accounting policies of the segments are the same as those described in the
"Statement of Accounting Policy" (Note 1). Segment data does not include
intersegment revenues, or charges allocating corporate-headquarters costs to
each of its operating segments. The Company evaluates the performance of its
segments and allocates resources to them based on operating income and adjusted
earnings before interest, taxes, depreciation, and amortization (EBITDA).
-8-
<PAGE>
The Company is organized primarily based on geographic location with the United
States and Canada drug infusion and patient monitoring business representing the
North American Segment. All other international operations including Europe,
Asia, Australia and Latin America represent the International segment. The
acquisition of Instromedix in 1998 resulted in a third separate operating
segment.
The table below presents information about reported segments for the:
<TABLE>
<CAPTION>
Three months ended September 30,
NORTH SHARED
AMERICA INTERNATIONAL INSTROMEDIX SERVICES TOTAL
------- ------------- ------------ -------- ------
<S> <C> <C> <C> <C> <C>
1999
Sales ......................... $ 62,804 $ 28,449 $ 2,738 $ - $ 93,991
Operating income (loss)........ 16,118 5,379 (1,820) (9,190) 10,487
Adjusted EBITDA................ 19,534 7,049 (23) (3,003) 23,557
1998
Sales ......................... $ 61,107 $ 29,466 $ 3,654 $ - $ 94,227
Operating income (loss)........ 13,151 7,996 (828) (29,011) (8,692)
Adjusted EBITDA................ 17,090 9,379 135 (1,647) 24,957
</TABLE>
Reconciliation of total segment adjusted EBITDA to consolidated loss before
taxes:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ADJUSTED EBITDA
Total adjusted EBITDA for reportable segments................................... $ 23,557 $ 24,957
Depreciation and amortization................................................... (9,570) (9,565)
Inventory purchase price allocation adjustment.................................. - (172)
Interest, net................................................................... (13,390) (12,503)
Purchased in-process research and development................................... - (22,800)
Integration and other non-recurring charges..................................... (3,500) (1,112)
Other reconciling items......................................................... 97 14
----------- -----------
Consolidated loss before income taxes........................................ $ (2,806) $ (21,181)
=========== ===========
</TABLE>
Nine months ended September 30,
<TABLE>
<CAPTION>
NORTH SHARED
AMERICA INTERNATIONAL INSTROMEDIX SERVICES TOTAL
------- ------------- ----------- --------- -----
<S> <C> <C> <C> <C> <C>
1999
Sales ......................... $ 187,393 $ 89,498 $ 10,151 $ - $ 287,042
Operating income (loss)........ 34,738 18,875 (7,438) (19,177) 26,998
Adjusted EBITDA................ 44,919 23,387 3 (6,311) 61,998
1998
Sales ......................... $ 177,077 $ 91,150 $ 3,654 $ - $ 271,881
Operating income (loss)........ 34,228 21,086 (828) (42,960) 11,526
Adjusted EBITDA................ 45,652 25,024 135 (3,630) 67,181
</TABLE>
-9-
<PAGE>
Reconciliation of total segment adjusted EBITDA to consolidated loss before
taxes:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ADJUSTED EBITDA
Total adjusted EBITDA for reportable segments................................... $ 61,998 $ 67,181
Depreciation and amortization................................................... (28,062) (26,037)
Inventory purchase price allocation adjustment.................................. - (172)
Interest, net................................................................... (39,875) (34,151)
Purchased in-process research and development................................... - (28,334)
Integration and other non-recurring charges..................................... (6,938) (1,112)
Other reconciling items......................................................... (776) (667)
----------- -----------
Consolidated loss before income taxes........................................ $ (13,653) $ (23,292)
=========== ===========
</TABLE>
NOTE 5 -- PATENT LICENSE AGREEMENTS
On August 31, 1999 the Company entered into an agreement under which Tyco
Healthcare Group LP granted ALARIS Medical a paid-up license to certain patents.
This agreement also settles a patent infringement lawsuit relating to disposable
probe covers for use with the Company's infrared tympanic thermometers. The
lawsuit was filed in 1996 by Sherwood Medical Company ("Sherwood"), a unit of
Tyco Healthcare Group. In connection with this agreement, the Company made a
one-time payment of $3,950 during the third quarter of 1999. ALARIS will not be
required to pay any future royalties on patents covered by the agreement.
On October 13, 1999 the Company entered into an agreement with Becton, Dickinson
and Company ("Becton") which grants between the two companies paid-up licenses
to certain patents. The agreement also settles patent infringement lawsuits
relating to certain needle-free valve products. The lawsuits were filed in 1998
by the two companies. In connection with this agreement, the Company paid a
total of $6,700 during the fourth quarter of 1999. The Company will not be
required to pay any future royalties on patents covered by the agreement.
The two agreements resulted in a charge in the quarter of $2,838 included in
integration and other non-recurring costs with the remainder of the license
payments capitalized as acquired technology. The license resulting from the
Sherwood agreement was recorded in the third quarter. The expense portion of the
Becton agreement was recorded in the third quarter and the capitalized portion
will be recorded in the fourth quarter of 1999.
NOTE 6 -- CONTINGENCIES AND LITIGATION
GOVERNMENT REGULATION
The United States Food and Drug Administration (the "FDA"), pursuant to the
Federal Food, Drug, and Cosmetic Act (the "FDC Act"), regulates the introduction
of medical devices into commerce, as well as testing manufacturing procedures,
labeling, adverse event reporting and record-keeping with respect to such
products. The process of obtaining market clearances from the FDA for new
products can be time-consuming and expensive and there can be no assurance that
such clearances will be granted or that FDA review will not involve delays
adversely affecting the marketing and sale of products. Enforcement of the FDC
Act depends heavily on administrative interpretation and there can be no
assurance that interpretations made by the FDA or other regulatory bodies will
not have a material adverse effect on the Company's business, financial
condition, results of operations or cash flows. The FDA and state agencies
-10-
<PAGE>
routinely inspect the Company to determine whether the Company is in compliance
with various requirements relating to manufacturing practices, testing, quality
control, complaint handling, medical device reporting and product labeling. Such
inspections can result in such agencies requiring the Company to take certain
corrective actions for non-complying conditions observed during the inspections.
A determination that the Company is in violation of the FDC Act could lead to
the imposition of civil sanctions, including fines, recall orders, orders for
repair or refund or product seizures and criminal sanctions. Since 1994, the
Company has on nineteen occasions temporarily removed products from the market
or issued safety alerts regarding products that were found not to meet
performance standards. None of such recalls materially interfered with the
Company's operations and all such product lines, except the Model 599 Series
infusion pump, were subsequently returned to the market. The Company continues,
however, to sell administration sets and replacement parts for the Model 599
Series infusion pump. Although there can be no assurance, the Company believes
that these voluntary recalls, along with adjustments and corrections that may be
made to various Company products from time to time as an ordinary part of the
business of the Company, will not have a material adverse effect on the
business, financial condition, results of operations or cash flows.
In October 1999, the Company received a warning letter from the FDA regarding
findings from earlier inspections. The inspections noted several deficiencies
in regards to compliance with specific areas of the Quality System
Regulations ("QSR"). In order to resolve this matter, the Company is required
to submit to the FDA one or more certifications that audits of the Company's
quality systems have been performed by qualified outside regulatory
consultants and that any additional corrective actions noted have been or
will be implemented. The Company is in the process of preparing for the first
such audit. The Company has identified qualified outside regulatory
consultants and has implemented many of the required improvements and
believes that it has the resources necessary to complete the remaining
improvements, but is not able to determine when the FDA will approve such
corrective actions. Although there can be no assurances, the Company believes
this matter will not have a material adverse effect on the business,
financial condition, results of operations or 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 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 to 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.
-11-
<PAGE>
Cal Pacifico is contesting Customs' assessment of the Disputed Amounts. Given
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. Cal Pacifico or Customs has not informed the
Company 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 the business, financial
condition, results of operations or cash flows of the Company.
-12-
<PAGE>
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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OPERATIONS
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GENERAL
ALARIS Medical is a holding company for ALARIS Medical Systems, Inc. ("ALARIS
Medical Systems"). As a holding company, ALARIS Medical currently has no
revenues to fund its operating and interest expense and relies on cash generated
from the operations of ALARIS Medical Systems, as well as the existing cash and
external borrowings of ALARIS Medical Systems 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 is a leading provider of infusion systems and related technologies
to the United States hospital market, with the largest installed base of pump
delivery lines ("channels"). The Company is also a leader in the international
infusion systems market. Based on installed base of infusion pumps, the Company
believes it has a number one or number two market position in many Western
European countries, the number three market position in Germany, the largest
installed base of infusion pumps in Australia and Canada and a developing
position in Latin America and Asia. The Company's infusion systems, which are
used to deliver one or more fluids, primarily pharmaceuticals or nutritionals,
to patients, consist of single and multi-channel infusion pumps and controllers,
and proprietary and non-proprietary disposable administration sets (i.e.,
plastic tubing and pump interfaces). In addition, the Company is a leading
provider of patient monitoring products that measure and monitor temperature,
pulse, pulse oximetry and blood pressure, with the largest installed base of
hospital thermometry systems in the United States. Through its July 17, 1998
acquisition of Instromedix, Inc. ("Instromedix"), the Company also designs,
manufactures and sells cardiology products such as arrhythmia-event recorders
and pacemaker monitors.
The Company sells a full range of products through a worldwide direct sales
force consisting of approximately 300 sales persons and through more than 150
distributors to over 5,000 hospitals worldwide. Sales by the Company's
International business unit represented 30.3% and 31.2% of the Company's total
sales for the three and nine months ended September 30, 1999. For the nine
months ended September 30, 1999, the Company had sales of $287.0 million and
Adjusted EBITDA of $62.0 million.
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 world-wide
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
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could affect the Company's future results of operations. 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:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- --------------------
1999 1998 1999 1998
---- ---- ---- -----
<S> <C> <C> <C> <C>
Sales.................................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................................... 48.6 49.5 51.0 50.8
---------- ----------- ----------- ---------
Gross margin........................................... 51.4 50.5 49.0 49.2
Selling and marketing expenses......................... 20.0 19.0 20.3 19.2
General and administrative expenses.................... 12.7 11.2 12.1 11.1
Research and development expenses...................... 5.1 5.4 6.1 5.2
Purchased in-process research and development.......... - 24.2 - 10.4
Integration and other non-recurring charges............ 3.7 1.2 2.3 0.4
Lease interest income.................................. 1.3 1.3 1.2 1.3
---------- ----------- ----------- ----------
Income (loss) from operations.......................... 11.2 (9.2) 9.4 4.2
Interest expense....................................... (14.6) (13.8) (14.3) (12.8)
Other, net............................................. .4 .5 .1 -
---------- ----------- ----------- -----------
Loss before income taxes............................... (3.0) (22.5) (4.8) (8.6)
(Benefit from) provision for income taxes.............. (.4) 1.9 (1.1) .5
----------- ----------- ------------ ----------
Net loss............................................... (2.6%) (24.4%) (3.7%) (9.1%)
========== =========== =========== ==========
OTHER DATA:
Adjusted EBITDA................................... 25.1% 26.5% 21.6% 24.7%
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Adjusted EBITDA (1).................................... $ 23,557 $ 24,957 $ 61,998 $ 67,181
Inventory purchase price allocation adjustment (2)..... - (172) - (172)
Integration and other non-recurring expense............ (3,500) (1,112) (6,938) (1,112)
Depreciation and amortization (3)...................... (9,570) (9,565) (28,062) (26,037)
Purchased in-process research and development (4)...... - (22,800) - (28,334)
Interest income........................................ 361 511 1,124 658
Interest expense....................................... (13,751) (13,014) (40,999) (34,809)
Other, net............................................. 97 14 (776) (667)
Benefit from (provision for) income taxes.............. 400 (1,800) 3,100 (1,450)
----------- ----------- ----------- -----------
Net loss............................................... $ (2,406) $ (22,981) $ (10,553) $ (24,742)
=========== =========== =========== ===========
</TABLE>
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(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. Integration 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 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 Instromedix inventory in 1998 to its
estimated fair value on the acquisition date. Such amount was charged to
cost of sales during third quarter of 1998.
(3) Depreciation and amortization excludes amortization of debt discount and
issuance costs included in interest expense.
(4) For the three months ended September 30, 1998, the amount represents that
portion of the purchase accounting adjustments related to the value
assigned to the acquired in-process research and development of projects
acquired from Instromedix for which technological feasibility had not
been established and for which there was no alternative future use. In
addition to the Instromedix charge, the nine months ended September 30,
1998 includes acquired in-process research and development purchase
accounting adjustments from Patient Solutions, Inc. ("PSI") and Caesarea
Medical Electronics Limited ("Caesarea") for which technological
feasibility had not been established and for which there was no
alternative future use.
The following table summarizes sales to customers by each business unit (A).
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
---- ---- ---- ----
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
North America sales....................................... $ 62.8 $ 61.1 $ 187.4 $ 177.1
International sales....................................... 28.5 29.4 89.5 91.1
Instromedix sales......................................... 2.7 3.7 10.1 3.7
-------- --------- --------- --------
Total sales.......................................... $ 94.0 $ 94.2 $ 287.0 $ 271.9
======== ========= ========= ========
</TABLE>
(A) The Company's sales results are reported consistent with the Company's
three strategic business units: North America, International, and
Instromedix. As a result, Canadian sales of drug infusion and patient
monitoring products are now included in "North America" results.
Previously, Canadian sales were reported as "international" sales. Prior
year amounts have been reclassified for comparability with 1999.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
SALES
Sales decreased $0.2 million, less than 1%, during the three months ended
September 30, 1999 as compared with the three months ended September 30, 1998.
An increase in North America sales for the quarter was offset by lower
International and Instromedix sales. North America sales increased $1.7 million,
or 3%, compared with the same period in the prior year. The increase in North
America sales in the three months ended September 30, 1999 as compared with the
same period in 1998 is primarily due
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to increases in drug infusion instrument revenue of $1.4 million and in drug
infusion disposable administration set revenue of $0.8 million. These increases
were partially offset by lower patient monitoring instrument and disposables
sales in the period. International sales decreased $1.0 million or 4% during the
three months ended September 30, 1999 compared with the three months ended
September 30, 1998. Of the decrease, approximately half was due to the
strengthening of the U.S. dollar, the Company's functional currency, against
many European currencies during the quarter as compared with the same quarter in
the prior year. The remaining International decrease was primarily due to lower
drug infusion instrument sales due to the pending release of the Company's new
ASENA modular syringe pump that was launched in October 1999. Instromedix sales
decreased from $3.7 million for the third quarter of 1998 to $2.7 million for
the quarter ended September 30, 1999, reflecting the temporary disruption in the
sales support functions caused by the transition of the Instromedix Division
from Oregon to San Diego, California in early July 1999.
GROSS MARGIN
Gross margin increased $0.8 million, or 2%, during the three months ended
September 30, 1999 as compared with the three months ended September 30, 1998.
The gross margin percentage increased from 50.5% in the three months ended
September 30, 1998 to 51.4% in the three months ended September 30, 1999. The
increase in gross margin percentage was primarily due to continued material cost
reductions and increased North America sales volume resulting in lower per unit
manufacturing costs.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses increased $1.0 million, or 5%, during the three
months ended September 30, 1999 as compared with the three months ended
September 30, 1998. As a percentage of sales, selling and marketing expenses
increased from 19.0% in 1998 to 20.0% in 1999. This increase is primarily due to
management consulting fees associated with developing product strategies and
planning upcoming product introductions.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $1.4 million, or 13%, during the
three months ended September 30, 1999 as compared with the three months ended
September 30, 1998. As a percentage of sales, general and administrative
expenses increased from 11.2% in 1998 to 12.7% in 1999. The third quarter of
1998 included a reduction of bad debt reserves of approximately $0.7 million
while the third quarter of 1999 did not contain such a benefit. Additionally,
the third quarter of 1999 includes costs related to two international direct
sales locations established in 1999. Also contributing to the increase in
general and administrative expense are information technology costs for the
Company's new domestic operating system implemented in late 1998.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased approximately $0.3 million, or 6%,
during the three months ended September 30, 1999 as compared with the three
months ended September 30, 1998 primarily due to fixed assets used in research
and development which became fully depreciated resulting in lower depreciation
as well as lower bonus expense in the third quarter of 1999 as compared with the
same quarter last year.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the Instromedix acquisition in July 1998, the assets and
liabilities of Instromedix were adjusted to their estimated fair values. As a
result of this process, during the third quarter of 1998, the Company incurred a
one-time $22.8 million write-off related to the value assigned to the acquired
in-process research and development of Instromedix projects for which
technological feasibility had not
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been established and for which there was no alternative future use. Such amount
was determined with the assistance of a third party appraiser based upon the
present value of estimated future cash flow contributions from the identified
projects. The Company has continued to invest in the development necessary to
obtain technological feasibility of these projects.
INTEGRATION AND OTHER NON-RECURRING CHARGES
Integration and other non-recurring charges were $3.5 million during the
quarter. Included in this amount is a non-recurring charge of $2.8 million
related to two previously announced patent license agreements related to patent
infringement lawsuits (see Note 5 to the accompanying Condensed Consolidated
Financial Statements).
The quarter also included Instromedix integration charges of $0.7 million. In
connection with the Instromedix acquisition in July 1998, management, with the
assistance of consultants performed a review of the operating activities of the
acquired company in order to assess how best to integrate and leverage the
Instromedix operations with ALARIS Medical Systems. As a result of this
assessment, in February 1999, the Company announced its plans to consolidate the
operations of Instromedix into its San Diego, California facilities. Such
consolidation will allow the Company to leverage its existing infrastructure and
manufacturing capacity in San Diego. In connection with these relocation and
integration activities, during the three months ended September 30, 1999 the
Company incurred $0.7 million in costs, including personnel relocation costs of
$0.1 million, retention bonuses of $0.4 million, $0.1 million in moving expenses
and $0.1 million in other related costs. Total integration costs for 1999 are
anticipated to be slightly under $5.0 million. In the third quarter of 1998, the
Instromedix integration charges were $1.1 million.
INCOME FROM OPERATIONS
Income from operations increased $19.2 million during the three months ended
September 30, 1999 as compared with the three months ended September 30, 1998
primarily due to the $22.8 million Instromedix purchased in-process research and
development charge in 1998 offset by the 1999 patent infringement lawsuit
settlement, Instromedix integration and other activities discussed above.
ADJUSTED EBITDA
Adjusted EBITDA decreased $1.4 million, or 6%, during the three months ended
September 30, 1999 as compared with the three months ended September 30, 1998.
As a percentage of sales, Adjusted EBITDA decreased from 26.5%, or $25.0
million, during the three months ended September 30, 1998 to 25.1%, or $23.6
million, during the three months ended September 30, 1999 due to the reasons
discussed above. Adjusted EBITDA represents income from operations before
restructuring, integration and other non-recurring charges, non-cash purchase
accounting charges, depreciation and amortization. Adjusted EBITDA does not
represent net income or cash flows from operations, as these terms are defined
under generally accepted accounting principles, and should not be considered as
an alternative to net income as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity. The Company has included
information concerning Adjusted EBITDA herein because it understands that such
information is used by 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.
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INTEREST EXPENSE
Interest expense increased $0.7 million, or 6%, during the three months ended
September 30, 1999 as compared with the three months ended September 30, 1998
primarily due to additional financing obtained to fund the Instromedix
acquisition. In connection with the Instromedix acquisition, in late July 1998
the Company completed the sale of $109.9 million 11 1/8% Senior Discount Notes
("Senior Discount Notes"), due 2008. The increase from the Senior Discount Notes
was partially offset by a decrease in interest expense on other long-term debt
due to a decrease in the amount outstanding as compared with 1998 (see Liquidity
and Capital Resources).
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998
SALES
Sales increased $15.2 million, or 6% during the nine months ended September 30,
1999 as compared with the nine months ended September 30, 1998. International
sales decreased $1.7 million, or 2% while North America sales increased $10.3
million, or 6%. For the nine months ended September 30, 1999 sales generated by
Instromedix, acquired in July 1998, were $10.2 million as compared with $3.7
million in 1998. The decrease in International sales is primarily due to a
strengthening of the U.S. dollar, the Company's functional currency, against
many European currencies, and to decreases in volume of drug infusion
instruments due, in part, to the pending release of the Company's new modular
syringe pump. The increase in North America sales in the nine months ended
September 30, 1999 as compared with the same period in 1998 is primarily due to
increases in drug infusion disposable administration set revenue of $5.8
million, and an increase in drug infusion instrument revenue of $4.8 million.
GROSS MARGIN
Gross margin increased $6.9 million, or 5%, during the nine months ended
September 30, 1999 as compared with the nine months ended September 30, 1998.
The gross margin percentage decreased from 49.2% in the nine months ended
September 30, 1998 to 49.0% for the nine months ended September 30, 1999 due to
a one-time charge of $2.5 million during the second quarter of 1999 associated
with disposable manufacturing issues significantly offset by manufacturing
efficiencies and material cost reductions. Excluding the $2.5 million charge,
the gross margin percentage was 49.9% during the nine months ended September 30,
1999.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses increased $5.8 million, or 11%, during the
nine months ended September 30, 1999 as compared with the nine months ended
September 30, 1998. As a percentage of sales, selling and marketing expenses
increased from 19.2% for the nine months ended September 30, 1998 to 20.3%
for the nine months ended September 30, 1999. This increase is primarily due
to management consulting fees associated with developing product strategies
and planning upcoming product introductions, higher distribution and clinical
consultants costs, and nine months of Instromedix selling and marketing
expenses in 1999 as compared with two and one-half months of Instromedix
expense in the prior year period.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $4.7 million, or 16%, during
the nine months ended September 30, 1999 as compared with the nine months
ended September 30, 1998. As a percentage of sales, general and
administrative expenses increased from 11.1% for the nine months ended
September 30, 1998 to 12.1% for the nine months ended September 30, 1999.
This increase is primarily due to the nine months of Instromedix spending in
1999 versus two and one-half months in the same period of the prior year,
increased activity associated with now concluded patent litigation and an
increase in information
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technology costs for the Company's new domestic operating system implemented in
late 1998. Instromedix added approximately $2.2 million of general and
administrative cost in 1999 over 1998, including $1.2 million of intangible
asset amortization.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased approximately $3.3 million, or 23%,
during the nine months ended September 30, 1999 as compared with the nine months
ended September 30, 1998 primarily due to the addition of Instromedix and
increased activities associated with the later development stages of various
domestic and international engineering projects for infusion systems and patient
monitoring products.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
During 1998, the Company recorded $28.3 million in purchased in-process research
and development write-offs as a result of certain business acquisitions. In
conjunction with the Instromedix acquisition, the assets and liabilities of
Instromedix were adjusted to their estimated fair values. As a result of this
process, the Company incurred a one-time $22.8 million write-off related to the
value assigned to the acquired in-process research and development of
Instromedix projects for which technological feasibility had not been
established and for which there was no alternative future use. Such amount was
determined with the assistance of a third party appraiser based upon the present
value of estimated future cash flow contributions from the identified projects.
In connection with the PSI acquisition and the technology license agreement with
Caesarea during the second quarter of 1998, the Company incurred a one-time $5.5
million write-off related to the value assigned to the acquired in-process
research and development of the projects for which technological feasibility had
not been established and for which there was no alternative future use. The
Company has continued to invest in the development necessary to obtain
technological feasibility of these projects.
The Company expects that the purchased in-process research and development will
be successfully developed, but there can be no assurance that commercial
viability of the projects will be achieved.
INTEGRATION AND OTHER NON-RECURRING CHARGES
Integration and other non-recurring charges includes a third quarter charge of
$2.8 million related to two previously announced patent license agreements
related to patent infringement lawsuits (see Note 5 to the accompanying
Condensed Consolidated Financial Statements).
Also included are integration charges related to the July 1998 Instromedix
acquisition. In connection with the Instromedix acquisition, management, with
the assistance of consultants performed a review of the operating activities of
the acquired company in order to assess how best to integrate and leverage the
Instromedix operations with ALARIS Medical Systems. As a result of this
assessment, in February 1999, the Company announced its plans to consolidate the
operations of Instromedix into its San Diego, California facilities. Such
consolidation will allow the Company to leverage its existing infrastructure and
manufacturing capacity in San Diego. In connection with these relocation and
integration activities, for the nine months ended September 30, 1999, the
Company incurred $4.1 million in costs, including severance and related
termination benefits of $1.1 million, retention bonuses of $0.7 million,
personnel relocation costs of $0.8 million, asset dispositions of $0.5 million,
lease termination costs of $0.3 million and $0.7 million in other related costs.
Total integration costs for 1999 are anticipated to be slightly under $5.0
million. Charges related to the Instromedix acquisition for the nine months
ended September 30, 1998 were $1.1 million.
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INCOME FROM OPERATIONS
Income from operations increased $15.5 million during the nine months ended
September 30, 1999 as compared with the nine months ended September 30, 1998
primarily due to the $28.3 million in purchased in-process research and
development costs recorded in 1998, not incurred in 1999, which was partially
offset by the $2.5 million charge to cost of sales resulting from the
manufacturing issues related to infusion disposable products, in the second
quarter of 1999 and the 1999 Instromedix integration and other activities
discussed above.
ADJUSTED EBITDA
Adjusted EBITDA decreased $5.2 million during the nine months ended September
30, 1999 as compared with the nine months ended September 30, 1998. As a
percentage of sales, Adjusted EBITDA decreased from 24.7% or $67.2 million,
during the nine months ended September 30, 1998 to 21.6% or $62.0 million,
during the nine months ended September 30, 1999 due to the reasons discussed
above. Adjusted EBITDA represents income from operations before restructuring,
integration and other non-recurring charges, non-cash purchase accounting
charges, depreciation and amortization. Adjusted EBITDA does not represent net
income or cash flows from operations, as these terms are defined under generally
accepted accounting principles, and should not be considered as an alternative
to net income as an indicator of the Company's operating performance or to cash
flows as a measure of liquidity. The Company has included information concerning
Adjusted EBITDA herein because it understands that such information is used by
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 $6.2 million during the nine months ended September
30, 1999 as compared with the nine months ended September 30, 1998 primarily due
to additional financing obtained to fund the Instromedix acquisition. In
connection with the Instromedix acquisition, in July 1998 the Company completed
the sale of $109.9 million 11 1/8% Senior Discount Notes due 2008. The increase
from the Senior Discount Notes was partially offset by a decrease in interest
expense on other long-term debt due to a decrease in the amount outstanding as
compared with the nine months ended September 30, 1998 (see Liquidity and
Capital Resources).
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
November 1996, ALARIS Medical Systems entered into a bank credit facility
consisting of term loans and a revolving credit facility (the "Credit
Facility"). The 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 payment
requirements.
The Company expects to continue to meet its short-term and long-term liquidity
needs, including capital expenditure requirements with cash flow from
operations, borrowings under the Credit Facility, and the remaining cash
proceeds from the Senior Discount Notes which were issued, among other things,
to fund the Instromedix acquisition in July 1998. In addition to operating
expenses, the Company's primary future use of funds, on a short-term and
long-term basis, will continue to be to fund capital expenditures and strategic
acquisitions and to pay debt service on outstanding indebtedness.
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At September 30, 1999, the Company's outstanding indebtedness was $538.5
million, which includes $197.3 million of bank term debt under the Credit
Facility, $200.0 million of 9 3/4% Senior Subordinated Notes due 2006 (the "9
3/4% Notes") and $124.8 million (including accretion) of Senior Discount Notes
due 2008 which were issued to fund the Instromedix acquisition in July 1998. 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 approximately 50% of
its Credit Facility term loan borrowings. Such agreement fixed the interest rate
charged on such borrowings through January 2000, resulting in a weighted average
interest rate of 9.1% on the Credit Facility borrowings at September 30, 1999.
Included in total consolidated debt, at September 30, 1999 ALARIS Medical had
outstanding $16.2 million of 7 1/4% Convertible Debentures.
In July 1998, in connection with the Instromedix acquisition, the Company
amended the Credit Facility. The amendment provided for the banks' consent to
the Instromedix acquisition and increased the revolving credit facility from
$50.0 million to $60.0 million. The amended Credit Facility also provided the
Company an additional $30.0 million under the Tranche D term debt. The Company
used the $30.0 million term debt borrowing, along with approximately $2.0
million from the revolving credit line, to fund the initial payments required
upon closing the Instromedix acquisition. Subsequent to closing the Instromedix
acquisition, ALARIS Medical completed the sale of $109.9 million of Senior
Discount Notes, receiving net proceeds of approximately $106.3 million. Interest
accruing on these notes is added to the outstanding principal balance through
July 31, 2003. Interest accruing subsequent to July 31, 2003 is payable in cash
semi-annually in arrears on February 1 and August 1, commencing February 1,
2004. Upon receipt of the net proceeds from the Senior Discount Notes, ALARIS
Medical paid its remaining obligations of approximately $22.7 million to the
Instromedix shareholders and contributed the remaining net proceeds of
approximately $81.7 million to ALARIS Medical Systems, as required under the
amended Credit Facility. ALARIS Medical Systems then repaid the amount
outstanding under its revolving credit line.
As a result of the Company's significant indebtedness, the Company expects to
incur significant interest expense in future periods. The Company believes that
its existing cash and cash provided by operations will be sufficient to meet its
interest expense obligations.
Annual principal amortization of the Company's indebtedness is $1.4 million for
the remaining three months of 1999 and $13.6 million and $22.0 million for 2000
and 2001, respectively.
The Convertible Debentures provide for semi-annual interest payments of
approximately $0.6 million and mature on January 15, 2002. The 9 3/4% 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 Credit Facility requires the Company, under most
circumstances, to obtain consent from its bank group to allow ALARIS Medical to
repay the Convertible Debentures at maturity. The 9 3/4% Notes allow
distributions to ALARIS Medical to fund the repayment of the Convertible
Debentures at maturity if certain performance measures are met. Although there
can be no assurances, the Company anticipates that its bank group will consent
to, and its operating performance will meet the performance measures required
to, repay the Convertible Debentures at maturity.
During the three months ended September 30, 1999, the Company made cash payments
of approximately $1.4 million related to Instromedix merger and integration
costs of which approximately $0.7 million was related to Instromedix integration
costs accrued at December 31, 1998. These integration activities primarily
relate to the assessment and review of Instromedix operating activities and
strategy. In February 1999, as a result of this assessment, the Company
announced it plans to consolidate the operations of
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Instromedix into its San Diego, California facilities. Such consolidation will
allow the Company to leverage its existing infrastructure and manufacturing
capacity in San Diego. In connection with these relocation and integration
activities, the Company has recorded charges of $4.1 million during the nine
months ended September 30, 1999. The Company expects to incur nonrecurring
integration and relocation charges slightly under $5.0 million before related
income tax benefits for 1999.
As described in Note 5 to the Condensed Consolidated Financial Statements, the
Company has entered into two patent license agreements. In connection with these
agreements, the Company made a payment of $4.0 million during the third quarter
of 1999 and a payment of $6.7 million in the fourth quarter of 1999. No future
payments are required under these agreements.
The Company has made capital expenditures of approximately $22.2 million during
the first nine months of 1999 and anticipates total capital expenditures of
approximately $30.0 million for full year 1999.
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, on both a short-term and long-term basis, based on
current levels of performance, it will generate cash flow from operations,
together with its existing cash, sufficient to fund its operations, make planned
capital expenditures and make principal amortization and interest payments under
the Credit Facility and interest payments on the 9 3/4% Notes. However, on a
long-term basis, the Company may not generatE sufficient cash flow from
operations to repay the 9 3/4% Notes at maturity in the amount of $200.0
million, to makE scheduled payments on the Senior Discount Notes or to repay the
Senior Discount Notes in the amount of $189.0 million at maturity. Accordingly,
the Company may have to refinance the 9 3/4% Notes and the Senior Discount NoteS
at or prior to maturity or sell assets or raise equity capital to repay such
debt. Based on current interest rates and debt outstanding as of September 30,
1999, over the next twelve months, the Company is required to make principal and
interest payments under its Credit Facility in the amount of $24.9 million and
interest payments on the 9 3/4% Notes and the Convertible Debentures in the
amount of $19.5 million and $1.2 million, respectively. 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.
YEAR 2000 RISK
The Year 2000 problem arises from the use of a two-digit field to identify years
in computer programs, e.g., 85=1985, and the assumption of a single century, the
1900s. Any program so created may read, or attempt to read, "00" as the year
1900.
The Company has developed, and is implementing, a comprehensive program to
address Year 2000 issues pertaining to both information technology (IT) and
non-IT systems. The program is monitored by a steering committee comprised of
representatives from key functional areas, which periodically reports to senior
management and will be reporting to the board of directors throughout 1999 as to
the program's status. The
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<PAGE>
program consists of identification, prioritization, remediation and
post-implementation phases and considers the worldwide effect of the Year 2000
on the Company's operations and internal systems (including non-IT systems),
customers, products and services, and manufacturing systems, as well as on its
third party suppliers and other critical business partners. The committee has
completed its assessment and it is not currently aware of any material Year 2000
issues related to third parties with whom the Company conducts business or in
its non-IT systems. The committee's assessment will likely be a continuous
process through the remainder of 1999. In addition to its customers, the Company
conducts business with and utilizes the services of numerous third parties
including, but not limited to, suppliers, distributors, telecommunication
companies, financial institutions, governmental agencies, and utility companies.
The Company has identified and analyzed the most reasonably likely worst-case
scenarios for third-party relationships affected by the Year 2000. The ability
of these third parties to adequately address their Year 2000 issues is outside
the Company's control. Failure by some or all of these parties to adequately
address their Year 2000 issues could have a material adverse effect on the
Company. Given the number of parties with whom the Company transacts business,
it is reasonably likely that some of these parties will not be able to
adequately solve their Year 2000 issues in a timely manner. Due to the Company's
inability to control third party compliance with Year 2000 issues, there can be
no assurances that such Year 2000 issues will not have a material adverse effect
on the financial condition, results of operations or cash flows of the Company.
In order to successfully provide product to its customers, the Company is
dependent upon the timely fulfillment of its supply orders from its chosen
vendors. The Company has identified potentially critical suppliers and attempted
to determine if such suppliers have identified and/or addressed their own Year
2000 issues by means of questionnaires. The Company is dependent on such
suppliers to provide timely responses to its questionnaires and is not in a
position to verify the truth or accuracy of the responses it receives to such
questionnaires. At this time, the Company has not identified or been informed of
any significant suppliers that will not be able to fulfill the Company's orders.
However, many of the Company's key suppliers have acknowledged that they must
make improvements to their systems to properly deal with the Year 2000 orders
and issues. As a result, there can be no assurances that key suppliers will be
able to timely fill the Company's future orders. The Company has evaluated what
alternatives are available if key suppliers could not provide required materials
and supplies to the Company when ordered. While a formal contingency plan
related to this risk has not yet been completed by the Company, alternatives
would be to increase inventory levels of key suppliers and seek supplies from
other vendors. In this regard, the Company surveyed its customers and based on
the results of such surveys, increased production plans for the months of
August, September and October in anticipation of customer stocking orders. The
Company also sent letters to certain customers and distributors offering such
customers and distributors the opportunity to place additional stocking orders
of disposable products. The Company estimates that such contingency plans will
be completed by December 31, 1999. However, there can be no assurance that all
significant primary and back-up suppliers will be able to fill the Company's
orders due to their own Year 2000 issues. Such supplier failures could have a
material adverse impact on the Company's financial condition, results of
operations and cash flows.
In addition to routine capital expenditures, and in connection with prior
acquisitions, 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 manufacturer has represented that the
new system is Year 2000 compliant. The Company successfully implemented certain
financial applications of the new system and began utilizing such applications
at the beginning of 1998. The Company successfully converted the remainder of
its domestic business processes to the new system in September 1998. The Company
converted its international business unit headquarters as well as its
international manufacturing and central distribution center to the new system in
October of 1999. The balance of the Company's sales offices will be converted to
the new system early in 2000. The International system is also designed to
properly process
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<PAGE>
transactions denominated in the euro currency. Euro currency is a new monetary
unit which certain European countries can begin using in 1999.
The Company has launched Year 2000 internet websites for its customers that
include a complete list of the Company's electronic medical products, detailed
and updated information regarding the status of the products and other
information regarding the Company's Year 2000 program. Certain of the Company's
products contain software in which the record keeping capabilities will be
affected beyond the Year 2000. Products affected by the Year 2000 issue have
been identified and information regarding user interventions and software
upgrades has been provided. The Company believes that these issues will not
interfere with the primary functions of the products involved, nor will they
affect the safety of patients; however, there can be no assurance in regard to
the foregoing nor can there be any assurance that the Company will not be
subject to legal claims for damages arising from products that are not Year 2000
compliant.
During the fiscal years 1996, 1997 and 1998 the Company made combined capital
and operating expenditures of approximately $13.9 million related to the new
enterprise-wide information system, and expenditures of $4.1 million in the nine
months ended September 30, 1999. The significant phases of the project will be
completed in 1999 with additional expenditures of approximately $0.7 million
anticipated for the remainder of the year.
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, increased competitive
pressures and Year 2000 issues. Approximately 34% and 33% of the Company's sales
of drug infusion instruments occurred during the fourth quarters of 1997 and
1998, respectively. Sales of the Company's medical instrument products represent
capital expenditures to many of the Company's customers. The Company believes it
is possible that due to Year 2000 capital requirements by its customers during
1999, fourth quarter drug infusion instrument purchasing decisions could be
deferred until 2000. Additionally, the Company believes that customers' Year
2000 concerns and planning strategies may result in certain customers increasing
historical stock levels of the Company's disposable products resulting in
increased sales of such products during 1999.
Although the Company is dedicating substantial resources towards attaining Year
2000 readiness, there is no assurance it will be successful in its efforts to
identify and address all Year 2000 issues. Even if the Company acts in a timely
manner to complete all of its assessments; identifies, develops and implements
remediation plans believed to be adequate; and develops contingency plans
believed to be adequate some problems may not be identified or corrected in time
to prevent material adverse consequences to the Company. The discussion above
regarding estimated completion dates, costs, risks and other forward-looking
statements regarding Year 2000 is based on the Company's best estimates given
information that is currently available and is subject to change. As the Company
continues to progress with its Year 2000 initiatives, it may discover that
actual results will differ materially from these estimates. The information
provided above constitutes a "Year 2000 Readiness Disclosure" for purposes of
the Year 2000 Information and Readiness Disclosure Act.
BACKLOG
The backlog of orders, believed to be firm, at September 30, 1999 and 1998 was
$6.9 million and $5.2 million, respectively.
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<PAGE>
FOREIGN OPERATIONS
The Company has significant foreign operations and, as a result, 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 1999 and 1998, primarily a strengthening of the U.S.
dollar, the Company's functional currency, against many European currencies,
the Company recognized a foreign currency transaction loss of approximately
$0.4 million and $0.3 million during the period ended September 30, 1999 and
1998, respectively. For the nine months ended September 30, 1999 and the nine
months ended September 30, 1998, approximately 35% and 32% of the Company's
sales and 28% and 22% of the Company's operating expenses were denominated in
currencies other than the Company's functional currency, respectively. These
foreign currencies are primarily those of Western Europe, Canada and
Australia. Additionally, substantially all of the receivables and payables of
the Company's foreign subsidiaries are denominated in currencies other than
the Company's functional currency, and no formal hedging program exists to
manage fluctuations in these foreign currencies. The Company continues to
evaluate hedging programs 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.
AMERICAN STOCK EXCHANGE
Effective September 15, 1999 shares of the Company's common stock began trading
on the American Stock Exchange (AMEX). ALARIS shares were previously traded on
the NASDAQ National Market.
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; the effect of the Year 2000 risk; 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.
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PART II
OTHER INFORMATION
- -------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
See Note 6 to the Condensed Consolidated Financial Statements.
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10 -- Resignation and Consulting Agreement dated as of October 29, 1999
among William J. Mercer, ALARIS Medical Systems, Inc. and ALARIS
Medical, Inc.
27 -- Financial Data Schedule
-----------------------------------------
(b) Reports on Form 8-K
During the quarter ended September 30, 1999, the Company filed a report on Form
8-K dated August 31, 1999. This report contained a press release related to an
agreement entered into with Tyco Healthcare Group LP ("Tyco") which grants
ALARIS a paid-up license to certain patents and the settlement of a lawsuit by
Sherwood Medical Company, a unit of Tyco.
The Company filed a report on Form 8-K dated October 13, 1999. This report
contained a press release related to an agreement entered into between ALARIS
Medical Systems and Becton, Dickinson and Company which grants paid-up licenses
to certain patents and the settlement of a lawsuit by Becton Dickinson and
Company.
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<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 12, 1999 By: /S/ WILLIAM C. BOPP
---------------------------
William C. Bopp
Senior Vice President and Chief Financial Officer
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<PAGE>
EXHIBIT INDEX
Exhibit
NO.
- -------
10 -- Resignation and Consulting Agreement dated as of October 29, 1999
among William J. Mercer, ALARIS Medical Systems, Inc. and ALARIS
Medical, Inc.
27 -- Financial Data Schedule
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<PAGE>
<PAGE>
EXHIBIT 10
RESIGNATION AND CONSULTING AGREEMENT
- --------------------------------------------------------------------------------
This Resignation and Consulting Agreement ("Agreement") is entered into
as of October 29, 1999 by and between ALARIS Medical Systems, Inc., a Delaware
corporation ("ALARIS"), and ALARIS Medical, Inc., a Delaware corporation
("AMI"), on the one hand, and William J. Mercer (the "Executive"), on the other.
RECITALS
WHEREAS, Executive has been employed by ALARIS and AMI as Chief
Executive Officer since November 26, 1996 pursuant to a written Employment
Agreement dated as of August 23, 1996, as amended (the "Employment Agreement");
and
WHEREAS, Executive currently serves on the Boards of Directors of
ALARIS and AMI; and
WHEREAS, Executive wishes voluntarily to terminate his employment and
resign his positions as an officer and Board member with ALARIS and AMI to
pursue other interests, but to continue to perform services for ALARIS on a
consultant basis; and
WHEREAS, ALARIS and AMI wish to provide for an orderly and amicable
transition; and
WHEREAS, ALARIS, AMI, and Executive (collectively, "the Parties")
mutually desire fully and finally to settle any and all disputes arising from
the termination of Executive's employment without litigation;
AGREEMENT
NOW, THEREFORE, the Parties hereby agree as follows:
1. RESIGNATION.
a. Executive's employment by, and, except as provided
for in this Agreement, entitlement to compensation from, any one or more of
ALARIS and AMI and their respective predecessors, parents, subsidiaries, or
corporate affiliates (collectively, "the Company") will end effective October
31, 1999 (the "Separation Date"). ALARIS will continue to pay Executive's
current base salary, on its normal payroll schedule, and (subject to all
applicable withholding), through the Separation Date. Within five (5) days after
the Separation Date, ALARIS shall issue Executive his final paycheck,
representing all wages, compensation, accrued, unused vacation and
reimbursements to which he is entitled. Executive acknowledges and agrees that
except for amounts due to him in his final paycheck, he has received all monies,
bonuses, commissions, other compensation or perquisites and reimbursements he
earned or was due through the Separation Date.
b. Executive resigns his offices with the Company,
including, without limitation, his positions as Chief Executive Officer of
ALARIS and AMI, effective as of the Separation Date. Executive agrees to execute
any documentation necessary to effectuate such resignation. Following the
execution of this Agreement, AMI shall issue a press release in the form set
forth in Schedule A hereto regarding Executive's resignation.
c. Executive resigns from the Boards of Directors of
each of ALARIS and AMI effective as of the Separation Date. Executive agrees to
execute any documentation necessary to effectuate such resignation.
<PAGE>
d. Except as expressly provided for in this Agreement,
Executive's entitlement to benefits from the Company, and eligibility to
participate in the Company's benefit plans, shall cease on the Separation Date,
except to the extent Executive elects to and is eligible to continue his medical
and dental benefits at his sole expense pursuant to COBRA.
e. As soon as reasonably practicable after the
Separation Date, Executive shall transfer his rights in the corporate membership
with the Rancho Santa Fe Farms Country Club to ALARIS or its designee.
f. Executive acknowledges and agrees that his execution
of this Agreement, and the expiration of the revocation period set forth in
paragraph 6 below are conditions to the effectiveness of this Agreement.
2. CONSULTING PAYMENTS.
a. During the Consulting Period (as hereinafter defined)
ALARIS shall pay Executive consulting payments at the rate of $37,834 per month
(Executive's current base salary), paid on ALARIS' normal payroll schedule
(subject to all applicable withholding). These payments shall be made in
consideration for Executive's services as a consultant during the aforesaid
Consulting Period.
b. Executive acknowledges and agrees that the consulting
payments described above and the additional benefits described in paragraph 3
are in lieu of any severance compensation or benefits to which he may be
entitled pursuant to Company policy, his Employment Agreement, the ALARIS
Severance Plan for Officers and Key Contributors or otherwise.
c. Notwithstanding anything to the contrary contained in
this Agreement, Executive shall retain any vested benefits to which Executive
may be entitled under the Company's 401k Retirement Savings Plan as of the
Separation Date.
3. STOCK OPTIONS.
Executive currently holds 300,000 vested options granted under the
ALARIS Medical, Inc. 1996 Stock Option Plan (the "Plan") pursuant to that
certain option agreement between Executive and ALARIS, dated as of November 26,
1996 (the "Stock Option Agreement"). In accordance with a resolution adopted by
the Stock Option Committee under the Plan, those of Executive's options which
would have vested on November 26, 1999 (100,000 options) had his employment not
terminated, shall instead vest and become exercisable on the Separation Date.
Except as provided in the immediately preceding sentence, Executive shall
relinquish any and all rights to his remaining unvested options, and all such
options shall expire immediately. Executive must exercise his vested,
exercisable stock options on the later to occur of: (a) ninety (90) days after
the Separation Date and (b) the earlier to occur of the following dates: (i)
thirty (30) days after termination of the Consulting Period (as defined in
paragraph 8) or (ii) October 31, 2000, and to the extent not exercised by such
date, such stock options shall expire. The Parties shall execute any
documentation (including an amendment of the Stock Option Agreement) necessary
to effectuate the foregoing.
4. GENERAL RELEASE OF CLAIMS.
a. By Executive.
In consideration for ALARIS' agreement to make the consulting
payments set forth in paragraph 2 and provide the additional benefits set forth
in paragraph 3, the adequacy of which is hereby acknowledged, Executive, on
behalf of himself and his heirs, executors, administrators, successors, agents,
and assigns, agrees to release fully and without limitation and forever
discharge ALARIS Medical Systems,
<PAGE>
Inc., ALARIS Medical, Inc., IVAC Corporation, IMED Corporation, IVAC Medical
Systems, Inc., Advanced Medical, Inc., IVAC Holdings, Inc., and each of their
respective parents, subsidiaries, divisions, officers, agents, employees,
consultants, insurers, representatives, lawyers, corporate affiliates,
predecessors, successors and assigns, employee welfare benefit plans and
pension, profit sharing or deferred compensation plans, and their trustees,
administrators and other fiduciaries, and all persons acting by, through,
under or in concert with them, or any of them ("Releasees"), both
individually and collectively, from any and all rights, claims, demands,
liabilities, actions, causes of action, damages, losses, costs, expenses and
compensation, of whatever nature whatsoever, known or unknown, fixed or
contingent, in law or in equity ("Claims"), which Executive may have, or now
claim to have against, or in the future claim from the Releasees by reason of
any matter, cause, or thing whatsoever, from the beginning of time to the
date hereof, including, without limiting the generality of the foregoing, any
Claims arising out of, based upon, or relating to Executive's recruitment,
hire, employment, benefits, remuneration (including salary; bonus; incentive
or other compensation; vacation, sick leave or medical insurance benefits;
and/or benefits from any employee stock ownership, stock option, pension,
profit-sharing and/or any deferred compensation plan) or separation by the
Company, or any contract, agreement, or compensation arrangement between
Executive and the Releasees, or any of them, including without limitation,
the Employment Agreement. Without limiting the generality of the foregoing,
Employee acknowledges and agrees that he is not entitled to any compensation
or benefits pursuant to the ALARIS Severance Plan for Officers and Key
Contributors, and that he is entitled to no bonus or incentive compensation
for 1999.
As part of this Agreement, Executive expressly waives any
Claims arising out of any federal, state or other governmental statute,
regulation or ordinance, including, without limitations: (1) Title VII of the
Civil Rights Act of 1964, as amended; (2) the Equal Pay Act, as amended; (3) the
Age Discrimination in Employment Act, as amended; (4) the Family and Medical
Leave Act of 1993; (5) the California Fair Employment and Housing Act of 1993,
as amended; (6) the California Labor Code (including but not limited to Section
970); (7) the Fair Labor Standards Act, as amended; (8) the federal and state
wage and hour laws; (9) the Americans With Disabilities Act, as amended; (10)
the Employee Retirement Income Security Act of 1974, as amended; (11) the
California Family Rights Act; (12) the Worker Adjustment and Retraining
Notification Act; (13) the California common law of fraud, misrepresentation,
negligence, defamation, infliction of emotional distress, breach of contract, or
wrongful termination; (14) Executive Order 11246; (15) Executive Order 11141;
(16) the Rehabilitation Act of 1973, including sections 503 and 504; and/or (17)
any other local, state or federal law, rule, or regulation governing employment,
discrimination in employment or the payment of wages and benefits. This
Agreement does not include waiver of (1) any rights or Claims which may arise
after the date hereof, (2) any rights or Claims arising from breach of this
Agreement, and (3) Executive's right to indemnification as an officer or
director of the Company, as determined by applicable law.
b. By the Company.
The Company, on behalf of itself, and its successors, agents
and assigns, agrees to release fully and forever discharge Executive and his
heirs, executors, administrators, successors, agents and assigns (collectively,
the "Executive Releasees"), both individually and collectively, from any and all
Employer Claims (as hereinafter defined) which constitute Known Claims (as
hereinafter defined), excluding any claim or right arising under this Agreement.
"Employer Claims" means rights, claims, demands, liabilities, actions, causes of
action, damages, losses, costs, expenses and compensation, of whatever nature
whatsoever, known or unknown, fixed or contingent, which the Company may have,
or now claim to have against, or in the future claim from the Executive
Releasees by reason of any matter, cause, or thing whatsoever, from the
beginning of time to the date hereof, including, without limiting the generality
of the foregoing, any claims arising out of, based upon, or relating to
Executive's employment with the Company, Executive's recruitment, hire,
employment, benefits, remuneration (including without limitation, salary, bonus,
incentive or other compensation, vacation, sick leave or medical insurance
benefits from any employee stock ownership plan, stock option plan,
profit-sharing plan) or separation by the Company, or any contract, agreement,
or compensation arrangement between Executive and the Company, including,
without
<PAGE>
limitation, the Employment Agreement). "Known Claims" means any Employer
Claims of which any one or more of the executive officers (other than Executive)
of AMI, ALARIS or both have actual knowledge (whether or not such executive
officer has made due inquiry) of facts giving rise to such Employer Claims as of
the date hereof.
5. KNOWING AND VOLUNTARY WAIVER OF UNKNOWN CLAIMS.
Executive understands that California law includes Civil Code Section
1542 which says that releases usually do not apply to certain unknown claims.
Specifically, Section 1542 of the California Civil Code states as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE
TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
With full awareness and understanding of the above provisions, Executive hereby
waives any rights he may have under Section 1542, as well as under any other
statutes or common law principles of similar effect. Executive intends to, and
hereby does, release Releasees from claims which he does not presently know or
suspect to exist at this time.
6. OLDER WORKERS BENEFIT PROTECTION ACT.
In accordance with the Older Workers Benefit Protection Act of 1990,
Executive acknowledges that:
a. This Agreement includes a waiver and release of
Executive's claims under the Age Discrimination in Employment Act, 29 U.S.C. ss.
621 et seq.
b. Executive has the right to consult with an attorney
before signing this Agreement.
c. Executive has twenty-one (21) days from October 27,
1999 to consider this Agreement but he may waive that period by signing it
earlier.
d. Executive has seven (7) days after signing this
Agreement to revoke this Agreement and this Agreement will not be effective
until that revocation period has expired. Written notice of revocation must be
delivered in person to L. James Runchey, Vice President for Human Resources,
10221 Wateridge Circle, San Diego, California 92121-1579. If Executive revokes
this Agreement it shall not be effective or enforceable and Executive will not
receive the benefits described in paragraph 2 or any additional benefits under
paragraph 3.
7. COOPERATION.
Executive agrees to cooperate fully with the Company (including,
without limitation, the Boards of Directors of ALARIS and AMI and any special
committees thereof) and its counsel and accountants in any financial audits or
internal investigation involving securities, financial or accounting matters,
and in its defense, assertion, prosecution, or other participation in, any
administrative, judicial, or other proceeding, claim, or dispute relating to the
period during which Executive was engaged in employment with the Company. Time
spent by Executive cooperating with the Company pursuant to the sentence next
preceding shall be credited to the time otherwise required to be spent by
Executive consulting with the Company pursuant to paragraph 8, below. To the
extent that the time spent by Executive in cooperating with the Company pursuant
to this paragraph 7 shall exceed ten (10) hours in any month during the
Consulting Period (as defined in paragraph 8), or to the extent that Executive's
cooperation pursuant to this paragraph 7 shall
<PAGE>
occur after the Consulting Period, Executive shall be compensated at the rate
of $300 per hour by ALARIS for the time spent by Executive in such
cooperation. Executive further agrees that, except as otherwise required by
applicable law or regulation, he will present a positive public image
regarding Entities (as hereinafter defined) and will not , in any way,
willfully disparage or otherwise publish or communicate negative statements
or opinions about Entities or any one or more officers, directors, and
non-corporate affiliates or shareholders of Entities. For purposes hereof the
term "Entities" means any one or more entities included in the definition of
the "Company". Conversely, the Company agrees that, except as otherwise
required by applicable law or regulation, or in connection with frank,
non-gratuitous Company operating discussions, or in connection with
objectively accurate discussions of the Company's operating results, it will
present a positive public image regarding Executive and it will not, in any
way, willfully disparage or otherwise publish or communicate negative
statements about Executive.
8. CONSULTING SERVICES.
For a period of twelve (12) months from the Separation Date, unless
earlier terminated in accordance with this paragraph (the "Consulting Period"),
Executive shall provide consulting services to the Company, if and as reasonably
requested. During the Consulting Period, Executive shall make himself available,
during regular business hours, for such telephonic consultation and assistance,
and for the performance of such other tasks, duties, and assignments, as the
Chairman or Chief Executive Officer of ALARIS or AMI may from time to time
direct, not to exceed ten(10) hours per month. Unless otherwise directed by
ALARIS, Executive will perform the consulting services from his residence; no
office or office support will be provided by the Company. Executive shall have
no authority to bind the Company. The Company shall reasonably accommodate
Executive's schedule and job search efforts when requesting Executive's
assistance pursuant to this paragraph. The Company shall not assign tasks to
Executive of such a nature or magnitude so as to effectively preclude Executive
from undertaking separate employment during such period with third parties, or
seeking such employment. Executive's sole right to compensation from the Company
for his consulting services shall be the consulting payments payable by ALARIS
as set forth in paragraph 2; provided, however, that ALARIS shall reimburse
Executive for reasonable out-of-pocket expenses, approved in advance, actually
incurred by Executive in furtherance of the consulting services herein referred
to or in furtherance of the cooperation referred to in paragraph 7, above, in
each case as supported by adequate documentation. Executive may terminate the
Consulting Period at any time upon fifteen (15) days' written notice to the
Company. The Company may terminate the Consulting Period upon fifteen (15) days'
written notice to the Executive upon the occurrence of Cause (as hereinafter
defined). For purposes hereof the term "Cause" shall mean any willful breach by
Executive of any of his obligations under: (a) the provisions of the third
sentence of paragraph 7, above, whether or not such breach constitutes a breach
which is materially adverse; and (b) any of the other provisions of this
Agreement, but only if such breach constitutes a breach which is materially
adverse to any intended beneficiary of any such provision. ALARIS right to
terminate the Consulting Period, upon the occurrence of Cause shall be in
addition to any other rights and remedies Entities may have upon the happening
of any such occurrence. The Consulting Period shall terminate automatically at
such time, if any, as the Executive dies or suffers a Disability (as that term
defined in the Employment Agreement). Upon termination of the Consulting Period,
ALARIS' obligation to make consulting payments to Executive pursuant to
paragraph 2, above shall immediately terminate.
9. NO LAWSUITS.
a. Executive represents that he knows of no lawsuits
pending by Executive against any one or more Releasees. Executive agrees if
there are any such lawsuits to dismiss any and all lawsuits that Executive might
have filed against Releasees. Executive promises never to file or prosecute a
lawsuit asserting any Claims (as defined in paragraph 4a) against any of the
Releasees or, except as otherwise required by applicable law or legal process,
directly or indirectly assist any other person in so doing.
b. The Company represents that it knows of no lawsuits
pending by it against any one or more Executive Releasees. The Company agrees if
there are any such lawsuits to dismiss any and
<PAGE>
all lawsuits that the Company might have filed against Executive Releasees.
The Company promises never to file or prosecute a lawsuit asserting any Known
Claims against any of the Executive Releasees or, except as otherwise
required by applicable law or legal process, directly or indirectly assist
any other person in so doing.
10. NON-ADMISSION OF LIABILITY.
Executive and the Company agree that neither the payment of any sum of
money nor the execution of this Agreement shall constitute or be construed as an
admission of any liability by either Executive or the Company.
11. ENCOURAGEMENT TO CONSULT WITH ATTORNEY; TAX CONSEQUENCES.
Executive has the right to consult with an attorney and is encouraged
to do so before signing this Agreement. Executive understands that whether or
not to do so is Executive's decision and if it is done, it is done at
Executive's expense. Executive further acknowledges that the benefits provided
in this Agreement may have tax consequences, including those relating to the tax
treatment of any stock options granted as incentive stock options, that the
Company has not provided any tax advice, and that Executive is free to consult
with an accountant, legal counsel, or other tax advisor regarding the tax
consequences.
12. CONFIDENTIAL ARBITRATION.
The Parties agree that any and all disputes, controversies or claims
based on, arising out of, or relating to this Agreement, or the alleged breach
thereof, shall be submitted to final and binding arbitration. Such arbitration
proceeding shall be conducted confidentially and under seal. The arbitration
shall take place in the county of San Diego, and may be compelled and enforced
according to the California Arbitration Act (Code of Civil Procedure ss.ss. 1280
et seq.). Unless the Parties mutually agree otherwise, the arbitration shall be
conducted before the American Arbitration Association, according to its
Employment Dispute Resolution Rules. Judgment on the award the arbitrator
renders may be entered in any court having jurisdiction over the Parties.
Arbitration shall be initiated in accordance with the Employment Dispute
Resolution Rules of the American Arbitration Association.
13. PROPRIETARY INFORMATION AND RETURN OF DOCUMENTS.
Executive shall, on or before the Separation Date, return to the
Company the original and all copies of all accounts, notes, data, sketches,
drawings, reports, studies and other documents and records, materials and
physical items of any kind, which are the property of the Company or which
relate in any way to the business, products, practices or techniques of the
Company. Executive acknowledges that he has certain continuing obligations under
the Employment Agreement with IVAC Corporation dated May 30, 1995 and the
Confidentiality and Invention Assignment Agreement previously executed by him on
December 15, 1997. Executive further agrees that he will not disclose to any
person or use for his own account any such information, observations or data, or
the Company's trade secrets, including without limitation information relating
to intellectual property, patents, trademarks, trade secrets, supplier lists,
customer lists, pricing or cost data, bidding procedures, marketing studies,
business plans, sales projections, product research and development, strategic
plans, consultant reports, customer surveys, financing techniques and sources,
and non-public financial information, without the prior written consent of the
Board of Directors, Chairman, or Chief Executive Officer of ALARIS or AMI.
Executive shall hold all such information in trust and confidence for the
Company and shall not use or disclose any such information, and shall be liable
for damages incurred by the Company as a result of any disclosure of such
information by Executive.
14. NON-SOLICITATION.
Executive agrees that during the twelve (12) month period following the
Separation Date, he will not directly or indirectly (whether as an employee,
director, owner, stockholder, consultant, limited or general
<PAGE>
partner, or otherwise), for himself or for any other person or entity: (I)
solicit, induce or entice, or attempt to solicit, induce, or entice, any
person who is (or was within the prior ninety (90) days) an employee of the
Company to terminate such employment relationship or to become employed by
any other person , firm or entity; or (ii) solicit, induce or entice, or
attempt to solicit, induce, or entice, any customer of the Company to
purchase from another person or entity products or services of the type then
marketed by the Company.
15. CONSULTING RESTRICTIONS.
Executive agrees with ALARIS and AMI that during the Consulting Period
neither Executive nor any Controlled Affiliate (as hereinafter defined) shall,
whether on his or its own behalf or on behalf of any other person, firm,
partnership, corporation or other business venture (hereinafter, a "person"),
own, manage, control, participate in, consult with, be employed by, render
services for or otherwise assist in any manner any person that is engaged in,
any Business Activity (as hereinafter defined) competitive with the Business (as
hereinafter defined). Nothing herein shall prohibit Executive or any Controlled
Affiliate from being an owner of not more than 2% of the equity or debt
securities of any such person, so long as Executive has no active participation
(other than exercising voting or consensual rights with respect to such interest
of up to 2%) in the business of such person. As used herein: (I) "Controlled
Affiliate" of Executive means any member of Executive's immediate family
(including, without limitation, his spouse, children, parents and siblings) and
any other person or entity which, directly or indirectly, is at any time
controlled by Executive; (ii) "control" of a person or entity means the power,
direct or indirect, to direct or cause the direction of the management and
policies of such person, whether by contract or otherwise; (iii) "Business
Activity," with respect to any person, means any direct or indirect primary
business activity of such person; and (iv) "Business" means, as of the date of
determination, any Business Activity of any one or more of ALARIS, AMI or any
affiliate of either one or both of them.
16. NO ADEQUATE REMEDY AT LAW.
a. EQUITABLE RELIEF. In the event that Executive shall
breach any of the provisions of paragraphs 13, 14 or 15 hereof, or in the event
that any such breach is threatened by Executive, in addition to and without
limiting or waiving any other remedies available to either or both of ALARIS and
AMI in law or in equity, either or both of ALARIS and AMI, as the case may be,
shall be entitled to immediate injunctive relief in any court, domestic or
foreign, having the capacity to grant such relief, to restrain such breach or
threatened breach and to enforce the provisions of such paragraphs. Executive
acknowledges that it is impossible to measure in money the damages that either
or both of ALARIS and AMI will sustain in the event that Executive breaches or
threatens to breach any of the provisions of such paragraphs and, in the event
that either or both of ALARIS and AMI shall institute any action or proceeding
to enforce those provisions seeking injunctive relief, Executive hereby waives
and agrees not to assert and shall not use as a defense thereto the claim or
defense that either or both of ALARIS and AMI has an adequate remedy at law. The
foregoing shall not prejudice the right of each of ALARIS and AMI to require
Executive to account for and pay over to it the amount of any actual damages
incurred by ALARIS or AMI, as the case may be, as a result of any such breach.
b. ENFORCEMENT. The parties acknowledge that (i) the
provisions of paragraphs 13, 14 and 15 are essential to protect the business,
goodwill, and trade secrets of the Company, and (ii) the foregoing restrictions
are under all of the circumstances reasonable and necessary for the protection
of the Company and its business. If, however, at the time of enforcement of any
or such paragraphs or any other provision of this Agreement, a court or
arbitrator shall hold that the duration, scope or area restriction or any other
provision hereof is unreasonable under circumstances now or then existing, the
Parties hereto agree that the maximum duration, scope or area reasonable under
the circumstances shall be substituted for the stated duration, scope or area.
17. MISCELLANEOUS PROVISIONS.
<PAGE>
a. This Agreement shall be interpreted as a whole in
accordance with its fair meaning and in accordance with the laws of the State of
California. The language in the Agreement shall not be construed for or against
any particular party.
b. If any party to this Agreement brings an action or
proceeding to enforce his or its rights hereunder, the prevailing party shall be
entitled to recover his or its costs and expenses, including court costs and
attorneys' fees, if any, incurred in connection with such suit or proceeding.
c. Each of ALARIS and AMI shall require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise)
to all or substantially all of its business and/or assets to expressly assume
and agree to perform this Agreement in the same manner and to the same extent
that ALARIS or AMI, as the case may be, would be required to perform if no
such succession had taken place.
18. SEVERABILITY.
The provisions of this Agreement are severable. If any part of this
Agreement is found to be invalid or unenforceable, the other provisions shall
remain fully valid and enforceable.
19. ENTIRE AGREEMENT.
a. This Agreement and the Stock Option Agreement, as may
be amended as contemplated herein, set forth the entire agreement between
Executive and the Company, and except as set forth herein supersede the
Employment Agreement and any and all prior oral or written arrangements or
understandings between Executive and the Company concerning the subject matter
of this Agreement. This Agreement may not be altered, amended, or modified,
except by a further writing signed by Executive on the one hand and the Chairman
of the Board of each of ALARIS and AMI on the other.
20. EXECUTIVE ACKNOWLEDGMENTS.
a. Executive acknowledges and agrees that he has read
this Agreement carefully, understands all of its terms, and agrees to those
terms voluntarily.
b. EXECUTIVE ACKNOWLEDGES AND UNDERSTANDS THAT THIS
AGREEMENT INCLUDES A GENERAL RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS.
IN WITNESS WHEREOF, the Parties have executed this Agreement on the
dates indicated below.
EXECUTIVE ALARIS MEDICAL SYSTEMS, INC.
/s/ William J. Mercer By: /s/ David Schlotterbeck
- -------------------------------- -----------------------------------
William J. Mercer David Schlotterbeck
Dated: October 29, 1999 Title: President
Dated: October 29, 1999
ALARIS MEDICAL, INC.
By: /s/ David Schlotterbeck
----------------------------------
David Schlotterbeck
Title: President
Dated: October 29, 1999
<TABLE> <S> <C>
<PAGE>
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<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED STATEMENT
OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000817161
<NAME> ALARIS MEDICAL, INC.
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