<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended JUNE 30, 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.
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(Exact name of registrant as specified in its charter)
Delaware 13-3492624
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 August 4, 1999, 59,293,156 shares of Registrant's Common Stock were
outstanding.
Page 1 of 28
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ALARIS MEDICAL, INC.
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INDEX
PART I. FINANCIAL INFORMATION
Item 1 - Financial Information:
Page
----
Condensed consolidated balance sheet at
June 30, 1999 and December 31, 1998....................... 3
Condensed consolidated statement of operations for
the three and six months ended June 30, 1999 and 1998..... 4
Condensed consolidated statement of cash flows for
the six months ended June 30, 1999 and 1998............... 5
Condensed consolidated statement of changes
in stockholders' equity for the period from
December 31, 1998 to June 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
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings.................................... 25
Item 4 - Submission of Matters to a Vote of Security Holders.. 25
Item 6 - Exhibits and Reports on Form 8-K..................... 26
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<TABLE>
<CAPTION>
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
JUNE 30, DECEMBER 31,
1999 1998
---------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash................................................................................ $ 39,708 $ 29,500
Receivables, net.................................................................... 76,770 102,295
Inventories......................................................................... 78,736 79,485
Prepaid expenses and other current assets........................................... 27,879 25,246
---------- -----------
Total current assets............................................................ 223,093 236,526
Net investment in sales-type leases, less current portion............................... 21,503 19,111
Property, plant and equipment, net...................................................... 68,121 61,990
Other non-current assets................................................................ 21,488 22,388
Intangible assets, net.................................................................. 302,710 311,018
---------- -----------
$ 636,915 $ 651,033
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................... $ 13,390 $ 15,423
Accounts payable.................................................................... 19,526 22,103
Accrued expenses and other current liabilities...................................... 54,529 52,340
---------- -----------
Total current liabilities....................................................... 87,445 89,866
---------- -----------
Long-term debt.......................................................................... 529,986 530,867
Other non-current liabilities........................................................... 20,720 21,931
---------- -----------
Total non-current liabilities......................................................... 550,706 552,798
---------- -----------
Contingent liabilities and commitments (Note 5)
Stockholders' equity:
Common stock, authorized 75,000 shares at $.01 par value; issued and
outstanding -- 59,267 shares and 59,221 shares at June 30, 1999
and December 31, 1998, respectively.............................................. 592 592
Capital in excess of par value...................................................... 148,892 148,762
Accumulated deficit................................................................. (143,916) (135,769)
Treasury stock...................................................................... (2,027) (2,027)
Accumulated other comprehensive loss................................................ (4,777) (3,189)
---------- -----------
Total stockholders' equity...................................................... (1,236) 8,369
---------- -----------
$ 636,915 $ 651,033
---------- -----------
---------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
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ALARIS MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales ............................................... $ 99,615 $ 90,683 $ 193,051 $ 177,654
Cost of sales.......................................... 54,963 46,499 100,597 91,353
----------- ----------- ----------- -----------
Gross margin........................................... 44,652 44,184 92,454 86,301
----------- ----------- ----------- -----------
Selling and marketing expenses......................... 19,168 17,101 39,085 34,230
General and administrative expenses.................... 11,667 9,639 22,902 19,541
Research and development expenses...................... 6,551 4,660 12,598 9,000
Purchased in-process research and development.......... - 5,534 - 5,534
Integration and other non-recurring charges............ 1,339 - 3,438 -
----------- ----------- ----------- -----------
Total operating expenses........................... 38,725 36,934 78,023 68,305
----------- ----------- ----------- -----------
Lease interest income.................................. 1,019 1,060 2,080 2,222
----------- ----------- ----------- -----------
Income from operations............................. 6,946 8,310 16,511 20,218
----------- ----------- ----------- -----------
Other income (expenses):
Interest income.................................... 441 85 763 147
Interest expense................................... (13,595) (10,639) (27,248) (21,795)
Other, net......................................... (414) (324) (873) (681)
----------- ----------- ----------- -----------
Total other expense.................................... (13,568) (10,878) (27,358) (22,329)
----------- ----------- ------------ -----------
Loss before income taxes............................... (6,622) (2,568) (10,847) (2,111)
Provision for (benefit from) income taxes.............. 800 (600) (2,700) (350)
----------- ----------- ----------- -----------
Net loss............................................... $ (7,422) $ (1,968) $ (8,147) $ (1,761)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per common share assuming
no dilution...................................... $ (.13) $ (.03) $ (.14) $ (.03)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per common share assuming
dilution ........................................ $ (.13) $ (.03) $ (.14) $ (.03)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average common shares outstanding
assuming no dilution................................. 58,880 58,680 58,789 58,669
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average common shares outstanding
assuming dilution.................................... 58,880 58,680 58,789 58,669
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
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ALARIS MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
1999 1998
---------- -----------
<S> <C> <C>
Net cash provided by operating activities.............................................. $ 37,842 $ 25,965
---------- -----------
Cash flows from investing activities:
Net capital expenditures........................................................... (16,417) (10,405)
Acquisition and license of technology.............................................. (1,250) (6,547)
Patents, trademarks and other...................................................... (603) (250)
---------- -----------
Net cash used in investing activities.................................................. (18,270) (17,202)
---------- -----------
Cash flows from financing activities:
Principal payments on long-term debt............................................... (9,349) (8,579)
Proceeds under revolving credit facility........................................... - 27,300
Repayments under revolving credit facility......................................... - (32,250)
Proceeds from exercise of stock options............................................ 109 107
---------- -----------
Net cash used in financing activities.................................................. (9,240) (13,422)
---------- -----------
Effect of exchange rate changes on cash................................................ (124) (40)
---------- -----------
Net increase (decrease) in cash........................................................ 10,208 (4,699)
Cash at beginning of period............................................................ 29,500 6,984
---------- -----------
Cash at end of period.................................................................. $ 39,708 $ 2,285
---------- -----------
---------- -----------
</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 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......... (8,147) (8,147) $(8,147)
Equity adjustment from foreign
currency translation........... (1,588) (1,588) (1,588)
-------
Comprehensive loss................. $(9,735)
-------
-------
Exercise of stock options.......... 46 109 109
Tax benefit from exercise of
stock options................... 21 21
------ ------ --------- ---------- ----- ------ ------ -------
Balance at June 30, 1999........... 59,267 $ 592 $ 148,892 $ (143,916) 453 $(2,027) $(4,777) $(1,236)
------ ------ --------- ---------- ----- ------ ------ -------
------ ------ --------- ---------- ----- ------ ------ -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
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<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"), formerly Advanced Medical, Inc.,
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 June 30, 1999, and
the results of its operations and its cash flows for the six months ended
June 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.
NET INCOME (LOSS) PER COMMON SHARE:
The Company's net income (loss) per common share assuming no dilution is
computed using the weighted average number of common shares outstanding,
excluding treasury shares. The Company's net income (loss) per common share
assuming dilution is computed using the weighted average number of common
shares outstanding plus dilutive potential common shares using the treasury
stock method at the average market price during the reporting period (Note 3).
NOTE 2 -- INVENTORIES
Inventories comprise the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Raw materials................................................................. $ 33,942 $ 35,024
Work-in-process............................................................... 8,411 5,719
Finished goods................................................................ 36,383 38,742
----------- -----------
$ 78,736 $ 79,485
----------- -----------
----------- -----------
</TABLE>
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<PAGE>
NOTE 3 -- EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------
1999 1998
------------------------ -------------------------
BASIC DILUTED BASIC DILUTED
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Net loss as reported................................... $ (7,422) $ (7,422) $ (1,968) $ (1,968)
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
Weighted average common shares outstanding............. (58,800) (58,800) 58,680 58,680
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
Net loss per common share.............................. $ (.13) $ (.13) $ (.03) $ (.03)
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------
1999 1998
------------------------ -------------------------
BASIC DILUTED BASIC DILUTED
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Net loss as reported................................... $ (8,147) $ (8,147) $ (1,761) $ (1,761)
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
Weighted average common shares outstanding............. 58,789 58,789 58,669 58,669
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
Net loss per common share.............................. $ (.14) $ (.14) $ (.03) $ (.03)
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
</TABLE>
Net loss per common share assuming no dilution and dilution are the same for
the three and six months ended June 30, 1999 and June 30, 1998, as the
Company experienced a net loss. Options outstanding at June 30, 1999 and June
30, 1998 were excluded due to their antidilutive nature. Had such options
been included, the weighted average shares would have increased by 804 and
1,036 for the three and six months ended June 30, 1999 and increased by 1,807
and 1,687 for the three and six months ended June 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 six months ended June 30, 1999 and 1998 as they are antidilutive.
For both the three and six months ended June 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 $352, 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:
Three months ended June 30,
<TABLE>
<CAPTION>
NORTH SHARED
AMERICA INTERNATIONAL INSTROMEDIX SERVICES TOTAL
----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1999
Sales ......................... $ 67,255 $ 28,985 $ 3,375 $ - $ 99,615
Operating Income............... 5,901 5,976 623 (5,554) 6,946
Adjusted EBITDA................ 12,740 7,368 (320) (2,205) 17,583
1998
Sales ......................... $ 59,899 $ 30,784 $ - $ - $ 90,683
Operating Income............... 11,386 6,242 - (9,318) 8,310
Adjusted EBITDA................ 15,086 7,513 - (567) 22,032
</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................................... $ 17,583 $ 22,032
Depreciation and amortization................................................... (9,298) (8,188)
Interest, net................................................................... (13,154) (10,554)
Purchased in-process research and development................................... - (5,534)
Integration and other non-recurring charges..................................... (1,339) -
Other reconciling items......................................................... (414) (324)
----------- -----------
Consolidated loss before income taxes........................................ $ (6,622) $ (2,568)
----------- -----------
----------- -----------
</TABLE>
Six months ended June 30,
<TABLE>
<CAPTION>
NORTH SHARED
AMERICA INTERNATIONAL INSTROMEDIX SERVICES TOTAL
----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1999
Sales ......................... $ 124,590 $ 61,048 $ 7,413 $ - $ 193,051
Operating Income............... 18,621 13,497 (5,619) (9,988) 16,511
Adjusted EBITDA................ 25,387 16,339 24 (3,309) 38,441
1998
Sales ......................... $ 115,970 $ 61,684 $ - $ - $ 177,654
Operating Income............... 21,076 13,091 - (13,949) 20,218
Adjusted EBITDA................ 28,560 15,645 - (1,981) 42,224
</TABLE>
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<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................................... $ 38,441 $ 42,224
Depreciation and amortization................................................... (18,492) (16,472)
Interest, net................................................................... (26,485) (21,648)
Purchased in-process research and development................................... - (5,534)
Integration and other non-recurring charges..................................... (3,438) -
Other reconciling items......................................................... (873) (681)
----------- -----------
Consolidated loss before income taxes........................................ $ (10,847) $ (2,111)
----------- -----------
----------- -----------
</TABLE>
NOTE 5 -- 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 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 eighteen 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.
LITIGATION
The Company is a defendant in a lawsuit filed in June 1996 by Sherwood
Medical, Inc. ("Sherwood") against IVAC Medical Systems, Inc. ("IVAC") which
alleges infringement of two patents by reason of certain activities including
the sale by IVAC of disposable probe covers for use with the Company's
infrared tympanic thermometer. The lawsuit sought injunctive relief, treble
damages and the recovery of costs and attorney fees. The jury failed to reach
a verdict in this litigation and the Court has declared a mistrial. Sherwood
has asked the Court for a retrial, which is scheduled for August 1999. The
Company
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<PAGE>
believes it has sufficient defenses to all claims, including the defenses of
noninfringement and invalidity and intends to vigorously defend this action.
However, there can be no assurance that the Company will successfully defend
all claims made by Sherwood and the failure of the Company to successfully
prevail in this lawsuit could have a material adverse effect on the business,
financial condition, results of operations or cash flows.
The Company is a defendant in a lawsuit filed on April 20, 1998 and served on
October 28, 1998, by Becton Dickinson and Company ("Becton") against ALARIS
Medical Systems, Inc., which alleges infringement of a patent licensed to
Becton by reason of certain activities, including the sale of the Company's
SmartSite needle-free system. Becton has requested a permanent injunction
enjoining the Company from infringing the patent in suit. No amount of
monetary damages has been specified by Becton, however, the complaint
requests damages as appropriate and all gains, profits and advantages derived
by or from the Company's infringement of the patent, as well as prejudgment
interest, costs, expenses and reasonable attorney's fees. The Company
believes it has sufficient defenses to all claims, and intends to vigorously
defend this action. However, there can be no assurance that the Company will
successfully defend all claims made by Becton and the failure of the Company
to successfully prevail in this lawsuit could have a material adverse effect
on the business, financial condition, results of operations or cash flows. In
addition, the Company filed a lawsuit on December 4, 1998 against Becton. The
lawsuit, which is pending in the United States District Court for the
Southern District of California, alleges infringement of two patents, one
owned by the Company and one licensed to the Company, by reason of certain
activities, including the sale of Becton's Posi-Flow needle free valve. The
lawsuit seeks injunctive relief, damages and the recovery of costs and
attorney fees.
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.
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.
- 11 -
<PAGE>
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 OPERATIONS
- ------------------------------------------------------------------------------
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 29.1% and 31.6% of the Company's
total sales for the three and six months ended June 30, 1999. For the six
months ended June 30, 1999, the Company had sales of $193.1 million and
Adjusted EBITDA of $38.4 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
- 13 -
<PAGE>
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 ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Sales.................................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................................... 55.2 51.3 52.1 51.4
---------- ----------- ----------- ---------
Gross margin........................................... 44.8 48.7 47.9 48.6
Selling and marketing expenses......................... 19.2 18.9 20.2 19.3
General and administrative expenses.................... 11.7 10.6 11.9 11.0
Research and development expenses...................... 6.6 5.1 6.5 5.1
Purchased in-process research and development.......... - 6.1 - 3.1
Integration and other non-recurring charges............ 1.3 - 1.8 -
Lease interest income.................................. 1.0 1.2 1.1 1.3
---------- ----------- ----------- ----------
Income from operations................................. 7.0 9.2 8.6 11.4
Interest expense....................................... (13.6) (11.7) (14.1) (12.3)
Other, net............................................. - (.3) (.1) (.3)
----------- ----------- ----------- ----------
Loss before income taxes............................... (6.6) (2.8) (5.6) (1.2)
Provision for (benefit from) income taxes.............. .8 (.6) (1.4) (.2)
---------- ----------- ----------- ----------
Net loss............................................... (7.4%) (2.2%) (4.2%) (1.0%)
---------- ----------- ----------- ---------
---------- ----------- ----------- ---------
OTHER DATA:
Adjusted EBITDA................................... 17.7% 24.3% 19.9% 23.8%
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Adjusted EBITDA (1).................................... $ 17,583 $ 22,032 $ 38,441 $ 42,224
Integration and other non-recurring expense............ (1,339) - (3,438) -
Depreciation and amortization (2)...................... (9,298) (8,188) (18,492) (16,472)
Purchased in-process research and development (3)...... - (5,534) - (5,534)
Interest income........................................ 441 85 763 147
Interest expense....................................... (13,595) (10,639) (27,248) (21,795)
Other, net............................................. (414) (324) (873) (681)
(Provision for) benefit from income taxes.............. (800) 600 2,700 350
----------- ----------- ----------- -----------
Net loss............................................... $ (7,422) $ (1,968) $ (8,147) $ (1,761)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- -------------------------
(1) Adjusted EBITDA represents income from operations before
restructuring, integration and other non-recurring charges, non-cash
purchase accounting charges and depreciation and amortization.
Adjusted EBITDA does not represent net income or cash flows from
operations, as these terms are defined under generally accepted
accounting principles, and should not be considered as an alternative
to net income as an
- 14 -
<PAGE>
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) Depreciation and amortization excludes amortization of debt discount and
issuance costs included in interest expense.
(3) 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 in Second Quarter, 1998 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------ -------------------------
1999 1998 1999 1998
-------- --------- --------- ---------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
North America sales....................................... $ 67.3 $ 59.9 $ 124.6 $ 116.0
International sales....................................... 29.0 30.8 61.0 61.6
Instromedix sales......................................... 3.4 - 7.4 -
-------- --------- --------- ---------
Total sales.......................................... $ 99.7 $ 90.7 $ 193.0 $ 177.6
-------- --------- --------- ---------
-------- --------- --------- ---------
</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.
For purposes of this discussion and analysis, the three months ended June 30,
1999 and 1998 are referred to as Second Quarter 1999 and Second Quarter 1998,
respectively, and the six months ended June 30, 1999 and 1998 are referred to
as 1999 and 1998, respectively.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
SALES
Sales increased $8.9 million, or 10%, during Second Quarter 1999 as compared
with Second Quarter 1998. Sales generated by Instromedix for Second Quarter
1999 were $3.4 million. Excluding Instromedix, which was acquired in July
1998, sales increased approximately 6%. North America sales increased $7.4
million, or 12%, compared with the same period in the prior year. The
increase in North America sales in Second Quarter 1999 as compared with
Second Quarter 1998 is primarily due to increases in instrument product
revenue of $5.0 million and in drug infusion disposable administration set
revenue of $1.9 million. This growth was primarily due to increasing demand
by clinicians for ALARIS Medical's advanced lines of infusion therapy and
monitoring instruments in the United States and Canada. International sales
decreased $1.8 million or 6% during Second Quarter 1999 compared with Second
Quarter 1998. Of the decrease, 4% was due to the stronger U.S. dollar, with
the balance due to local economic factors resulting in a decrease in
instrument sales.
- 15 -
<PAGE>
GROSS MARGIN
Gross margin increased $0.5 million, or 1%, during Second Quarter 1999 as
compared with Second Quarter 1998 due to increased sales. The gross margin
percentage decreased from 48.7% in Second Quarter 1998 to 44.8% in Second
Quarter 1999 primarily due to a $2.5 million charge to write-down inventory
in Second Quarter 1999, resulting from manufacturing issues related to
infusion therapy disposable products. Also contributing to the lower gross
margin percentage was the effect of increased North America instrument sales.
Instrument margins are significantly lower than margins typically earned on
disposables.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses increased $2.1 million, or 12%, during Second
Quarter 1999 as compared with Second Quarter 1998. As a percentage of sales,
selling and marketing expenses increased from 18.9% in 1998 to 19.2% in 1999.
This increase is primarily due to the addition of Instromedix as well as
increased marketing costs associated with upcoming product introduction and
increased costs for clinical consultants. Instromedix selling and marketing
expenses for Second Quarter 1999 were $1.0 million.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $2.0 million, or 21%, during
Second Quarter 1999 as compared with Second Quarter 1998. As a percentage of
sales, general and administrative expenses increased from 10.6% in 1998 to
11.7% in 1999. This increase is primarily due to the addition of Instromedix,
increased activity associated with ongoing patent litigation and an increase
in information technology costs for the Company's new domestic operating
system implemented in late 1998. Instromedix added approximately $1.0 million
of general and administrative cost in 1999, including $0.6 million of
intangible asset amortization.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased approximately $1.9 million, or
41%, during Second Quarter 1999 as compared with Second Quarter 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
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.
INTEGRATION AND OTHER NON-RECURRING CHARGES
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 Second Quarter of 1999 the Company incurred
$1.3 million in costs, including personnel relocation costs of $0.7 million,
retention bonuses of $0.1 million and $0.5 million in other related costs. Total
integration costs for 1999 are anticipated to be approximately $5.0 million.
- 16 -
<PAGE>
INCOME FROM OPERATIONS
Income from operations decreased $1.4 million during Second Quarter 1999 as
compared with Second Quarter 1998 primarily due to the $2.5 million charge to
cost of sales resulting from the manufacturing issues related to infusion
disposable products and the 1999 Instromedix integration and other activities
discussed above.
ADJUSTED EBITDA
Adjusted EBITDA decreased $4.4 million during Second Quarter 1999 as compared
with Second Quarter 1998. As a percentage of sales, Adjusted EBITDA decreased
from 24.3%, or $22.0 million, during Second Quarter 1998 to 17.7%, or $17.6
million, during Second Quarter 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 $3.0 million during Second Quarter 1999 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 ("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).
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
SALES
Sales increased $15.4 million, or 9% during 1999 as compared with 1998.
International sales decreased $0.6 million, or 1% while North America sales
increased $8.6 million, or 7%. Sales generated by Instromedix for 1999 were
$7.4 million. Excluding Instromedix, sales increased approximately 4%. The
decrease in International sales is primarily due to decreases in volume of
drug infusion instruments. The increase in North America sales in 1999 as
compared with 1998 is primarily due to increases in drug infusion disposable
administration set revenue of $5.0 million, and an increase in drug infusion
instrument revenue of $3.4 million.
GROSS MARGIN
Gross margin increased $6.2 million, or 7%, during 1999 as compared with
1998. The gross margin percentage decreased from 48.6% in 1998 to 47.9% in
1999 due to a one-time charge associated with disposable manufacturing issues
of $2.5 million. Excluding such charge, the gross margin percentage was 49.2%
during 1999.
- 17 -
<PAGE>
SELLING AND MARKETING EXPENSES
Selling and marketing expenses increased $4.9 million, or 14%, during 1999 as
compared with 1998. As a percentage of sales, selling and marketing expenses
increased from 19.3% in 1998 to 20.2% in 1999. This increase is primarily due
to the addition of Instromedix as well as cost increases for distribution and
clinical consultants. Instromedix selling and marketing expenses for 1999
were $2.2 million.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $3.4 million, or 17%, during
1999 as compared with 1998. As a percentage of sales, general and
administrative expenses increased from 11.0% in 1998 to 11.9% in 1999. This
increase is primarily due to the addition of Instromedix, increased activity
associated with ongoing patent litigation and an increase in information
technology costs for the Company's new domestic operating system implemented
in late 1998. Instromedix added approximately $2.0 million of general and
administrative cost in 1999, including $1.1 million of intangible asset
amortization.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased approximately $3.6 million, or
40%, during 1999 as compared with 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
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.
INTEGRATION AND OTHER NON-RECURRING CHARGES
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 six months ended June 30, 1999, the
Company incurred $3.4 million in costs, including severance and related
termination benefits of $1.1 million, retention bonuses of $0.3 million,
personnel relocation costs of $0.7 million, asset dispositions of $0.5
million, lease termination costs of $0.3 million and $0.5 million in other
related costs. Total integration costs for 1999 are anticipated to be
approximately $5.0 million.
INCOME FROM OPERATIONS
Income from operations decreased $3.7 million during 1999 as compared with
1998 primarily due to the $2.5 million charge to cost of sales resulting from
the manufacturing issues related to infusion disposable products and the 1999
Instromedix integration and other activities discussed above.
ADJUSTED EBITDA
Adjusted EBITDA decreased $3.8 million during 1999 as compared with 1998. As a
percentage of sales, Adjusted EBITDA decreased from 23.8% or $42.2 million,
during 1998 to 19.9% or $38.4 million,
- 18 -
<PAGE>
during 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 $5.5 million during 1999 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 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.
At June 30, 1999, the Company's outstanding indebtedness was $543.4 million,
which includes $205.5 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 $121.5 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 resulting in a weighted average interest rate of 8.9% on the
Credit Facility borrowings at June 30, 1999. As a result, a one percent increase
in the rate of interest charged on indebtedness outstanding under the Credit
Facility at June 30, 1999 would result in additional annual interest expense of
approximately $2.1 million. Included in total consolidated debt, at June 30,
1999, ALARIS Medical had outstanding $16.2 million of 7 1/4% Convertible
Debentures.
- 19 -
<PAGE>
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 $6.4 million for
the remaining six months of 1999 and $14.0 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 9 3/4% Notes and the Credit Facility, however, restrict
distributions TO ALARIS Medical to fund the repayment of the Convertible
Debentures at maturity.
During Second Quarter 1999, the Company made cash payments of approximately $2.1
million related to Instromedix merger and integration costs of which
approximately $0.1 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 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 $3.4
million during the six months ended June 30, 1999. The Company expects to incur
nonrecurring integration and relocation charges of approximately $5.0 million
before related income tax benefits for 1999.
The Company has made capital expenditures of approximately $16.6 million during
the first half of 1999 and anticipates total capital expenditures of
approximately $30.0 million during 1999. First half 1999 capital spending was
higher than historical levels due to approximately $1.8 million for a
significant U.S. hospital order of drug infusion instruments accounted for as an
operating lease, as well as approximately $1.0 million to upgrade sales force
demonstration and evaluation units for new product introductions.
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
- 20 -
<PAGE>
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 June 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 $29.5 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 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-information technology 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 initial 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-information
technology 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 is working to identify and analyze 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
- 21 -
<PAGE>
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 is in the process
of evaluating 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 recently surveyed its
customers and based on the results of such surveys, has increased production
plans for the months of August, September and October in anticipation of
customer stocking orders. The Company is also in the process of sending 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
believes the primary information system for its International operations is not
directly affected by the Year 2000. However, due to the increased significance
of its International operations and the desire to integrate its reporting
systems, the Company will be converting the International information systems to
a system common with the domestic operations. The most significant portions of
the International project, including the business unit headquarters,
manufacturing and central distribution center, are scheduled for completion in
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 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.
- 22 -
<PAGE>
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 $2.8 million in the
six months ended June 30, 1999. The significant phases of the project will be
completed in 1999 with additional expenditures of approximately $1.9 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 June 30, 1999 and 1998 was
$6.3 million and $5.5 million, respectively.
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 $0.5 million and
$0.4 million during 1999 and 1998, respectively. For the six months ended June
30, 1999 and the six months ended June 30, 1998, approximately 35% and 38% of
the Company's sales and 27% and 30% 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.
- 23 -
<PAGE>
On December 31, 1998, Mexico enacted certain changes to its tax code which
broaden the definition of when a U.S. company using manufacturing services in
Mexico will be considered to have a "permanent establishment." These changes
which apply to the Company would result in effective taxation on that portion
of the Company's income attributable to the Mexican subsidiary at a rate of
75% or higher. It is uncertain if any such new tax imposed by Mexico will be
granted a corresponding foreign tax credit under the U.S. Internal Revenue
Code. The changes have an effective date of January 1, 2000, however, it is
presently anticipated that implementation will be deferred one year. The
Company has evaluated the effect of such changes and determined that they
should not have a material adverse effect on its financial condition, results
of operations and cash flows.
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.
NASDAQ NATIONAL MARKET LISTING
During the first quarter of 1999, The Nasdaq Stock Market, Inc. ("NASDAQ")
notified the Company that it would delist the Company's common stock ("Common
Stock") from the NASDAQ National Market System on June 22, 1999 for failure
to maintain a closing per share bid price of at least $5.00 in accordance
with NASDAQ Marketplace Rule 4450(b)(4) (the "Pricing Requirement"). The
Company requested and on August 5, 1999 attended a hearing for the purpose of
seeking a waiver of the Pricing Requirement from NASDAQ. The Common Stock
will continue to trade on the NASDAQ National Market System until a decision
on the Company's request for such waiver is rendered by NASDAQ. There can be
no assurance that the Company will be granted the requested waiver with
respect to the Pricing Requirement. In the event that the Company cannot
achieve compliance with the Pricing Requirement and is not granted a waiver
with respect to the Pricing Requirement, the Company will seek to have the
Common Stock approved for trading on the American Stock Exchange.
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.
- 24 -
<PAGE>
PART II
OTHER INFORMATION
- -------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
See Note 5 to the Condensed Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of ALARIS Medical, Inc. was held
on June 23, 1999.
(c) The following resolutions were voted upon and the results of the
voting are as follows:
1. Election of directors
<TABLE>
<CAPTION>
VOTES VOTES
FOR WITHHELD
--------- --------
<S> <C> <C>
Jeffry M. Picower 57,668,630 537,959
William J. Mercer 58,036,367 170,222
Norman N. Dean 57,878,129 328,460
Henry Green 57,666,430 540,159
Richard B. Kelsky 57,891,767 314,822
</TABLE>
2. Ratification of appointment of PricewaterhouseCoopers LLP as
independent accountants
<TABLE>
<CAPTION>
VOTES VOTES
FOR WITHHELD ABSTAIN
---------- -------- -------
<S> <C> <C> <C>
58,046,650 38,256 121,683
</TABLE>
- 25 -
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 -- Financial Data Schedule
-----------------------------------------
(b) Reports on Form 8-K
None.
- 26 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ALARIS MEDICAL, INC.
--------------------
(REGISTRANT)
Date: August 13, 1999 By: /s/ WILLIAM C. BOPP
---------------------------
William C. Bopp
Vice President and Chief Financial Officer
- 27 -
<PAGE>
EXHIBIT INDEX
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Exhibit Page
No. No.
- ------- ----
<S> <C>
27 -- Financial Data Schedule................................. 29
</TABLE>
- 28 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED STATEMENT OF OPERATIONS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000817161
<NAME> ALARIS MEDICAL, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 39,708
<SECURITIES> 0
<RECEIVABLES> 79,510
<ALLOWANCES> (2,740)
<INVENTORY> 78,736
<CURRENT-ASSETS> 223,093
<PP&E> 123,468
<DEPRECIATION> (55,347)
<TOTAL-ASSETS> 636,915
<CURRENT-LIABILITIES> 87,445
<BONDS> 529,986
592
0
<COMMON> 0
<OTHER-SE> (1,828)
<TOTAL-LIABILITY-AND-EQUITY> 636,915
<SALES> 193,051
<TOTAL-REVENUES> 193,051
<CGS> 100,597
<TOTAL-COSTS> 100,597
<OTHER-EXPENSES> 77,923
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> 27,248
<INCOME-PRETAX> (10,847)
<INCOME-TAX> (2,700)
<INCOME-CONTINUING> (8,147)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,147)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
