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ALARIS MEDICAL, INC.
OFFER TO EXCHANGE ITS
11 1/8% SENIOR DISCOUNT NOTES DUE 2008,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT 1933,
AS AMENDED, FOR ANY AND ALL OF ITS OUTSTANDING
11 1/8% SENIOR DISCOUNT NOTES DUE 2008
------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
FEBRUARY 17, 1999, UNLESS EXTENDED.
ALARIS Medical, Inc., a Delaware corporation ("ALARIS Medical"), hereby
offers (the "Exchange Offer"), upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying letter of transmittal (the "Letter
of Transmittal"), to exchange $1,000 principal amount of its 11 1/8% Senior
Discount Notes due 2008 ("New Notes"), registered under the Securities Act of
1933, as amended (the "Securities Act"), pursuant to the Registration Statement
(as defined) of which this Prospectus is a part, for each $1,000 principal
amount of its outstanding 11 1/8% Senior Discount Notes due 2008 ("Old Notes,"
and, together with New Notes, "Notes"), of which $189.0 million aggregate
principal amount at maturity is outstanding. The form and terms of the New Notes
are identical in all material respects to the form and terms of the Old Notes
(which they replace), except that the New Notes (i) have been registered under
the Securities Act and, therefore, do not bear legends restricting their
transfer and (ii) do not contain certain provisions providing for the payment of
Liquidated Damages (as defined) under certain circumstances relating to the
Registration Rights Agreement (as defined). The New Notes will evidence the same
debt as the Old Notes (which they replace) and, except as set forth in the
immediately preceding sentence, will be entitled to the benefits of the
Indenture (as defined), under which both the Old Notes were, and the New Notes
will be, issued. See "The Exchange Offer" and "Description of Notes."
The Notes will mature on August 1, 2008. Until August 1, 2003, the Accreted
Value (as defined) of the Notes will increase (representing amortization of
original issue discount) at a rate of 11 1/8% compounded semi-annually to their
aggregate principal amount of maturity between the date of original issuance and
August 1, 2003, the Notes will be redeemable at any time at the option of ALARIS
Medical, in whole or in part, at the redemption prices set forth herein, plus
accrued and unpaid interest, if any, thereon to the redemption date. In
addition, on or prior to August 1, 2001, ALARIS Medical may redeem up to 35% of
the aggregate principal amount at maturity of Notes issued under the Indenture
(as defined) at a redemption price equal to 111.125% of the Accreted Value
thereof to the redemption date, with the net cash proceeds of one or more public
or private offerings of Common Stock (as defined); provided that at least 65% of
the aggregate principal amount at maturity of Notes remain outstanding
immediately after the occurrence of each such redemption.
As a result of ALARIS Medical's failure to have the Registration Statement,
of which this Prospectus is a part, declared effective by the Securities and
Exchange Commission (the "Commission") by November 25, 1998, ALARIS Medical's
obligation to pay Liquidated Damages to each holder of Old Notes commenced on
November 26, 1998. ALARIS Medical's obligation to pay the aforesaid Liquidated
Damages terminated on January 14, 1999. See "The Exchange Offer--Purpose and
Effect of the Exchange Offer."
In reviewing this Prospectus it should be noted that all references herein
to (i) "ALARIS Medical" refer to ALARIS Medical, Inc. without any of its
subsidiaries and that ALARIS Medical is the issuer of the Notes; and (ii) the
"Company" refer to ALARIS Medical, Inc. and its subsidiaries, and all such
subsidiaries are not guarantors of the Notes nor do such subsidiaries have any
obligations with regard to the Notes.
It should also be noted that ALARIS Medical is a holding company that
conducts all of its operations through its subsidiaries, and therefore is
dependent upon receipt of sufficient funds from its subsidiaries in order to pay
interest and principal when due to Holders of the Notes. Moreover, due to
restrictions in the instruments governing certain indebtedness of ALARIS
Medical, it will need to seek the consent of various of the holders of such
indebtedness in order to allow the subsidiaries of ALARIS Medical to pay
dividends and make distributions to ALARIS Medical, in order for ALARIS Medical
to meet its debt obligations under the Notes. See "Risk Factors--Holding Company
Structure, Dependence Upon Operations of Subsidiaries."
The Notes will rank senior in right of payment to all subordinated
indebtedness of ALARIS Medical, which as of September 30, 1998 was $16.2
million, and will rank PARI PASSU in right of payment with all future senior
indebtedness of ALARIS Medical and with all other general liabilities and
commitments of ALARIS Medical, which as of September 30, 1998 was $1.5 million.
Additionally, the Notes will be effectively subordinated to the Credit Facility
Guarantee (as defined), to the extent such Credit Facility Guarantee is secured,
which secured indebtedness as of September 30, 1998 was $211.4 million, and will
be effectively subordinated to all indebtedness and other liabilities and
commitments of ALARIS Medical's subsidiaries, which, as of September 30, 1998,
was $525.0 million. See "Risk Factors--Holding Company Structure; Dependence
Upon Operations of Subsidiaries."
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ALARIS Medical will accept for exchange any and all Old Notes that are
validly tendered and not withdrawn on or prior to 5:00 p.m., New York City time,
on the date the Exchange Offer expires (the "Expiration Date"), which will be
February 17, 1999, unless the Exchange Offer is extended. Tenders of Old Notes
may be withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of Old Notes being tendered for exchange. The Exchange Offer,
however, is subject to certain customary conditions which may be waived by
ALARIS Medical. Old Notes may be tendered only in integral multiples of $1,000.
See "The Exchange Offer."
The Old Notes were sold by ALARIS Medical on July 28, 1998 to the Initial
Purchasers (as defined) in a transaction not registered under the Securities Act
in reliance upon an exemption under the Securities Act (the "Offering"). The
Initial Purchasers subsequently placed the Old Notes with qualified
institutional buyers in reliance upon Rule 144A under the Securities Act ("Rule
144A"). Accordingly, the Old Notes may not be reoffered, resold or otherwise
transferred in the United States unless registered under the Securities Act or
unless an applicable exemption from the registration requirements of the
Securities Act is available. The New Notes are being offered hereunder in order
to satisfy the obligations of ALARIS Medical under the Registration Rights
Agreement. See "The Exchange Offer--Purpose and Effect of the Exchange Offer."
Based on no-action letters issued by the staff of the Commission to third
parties, ALARIS Medical believes the New Notes issued pursuant to the Exchange
Offer may be offered for resale, resold and otherwise transferred by any holder
thereof (other than any such holder that is an "affiliate" of ALARIS Medical
within the meaning of Rule 405 under the Securities Act) without compliance with
the registration and prospectus delivery provisions of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
holder's business and such holder has no arrangement or understanding with any
person to, and does not intend to, participate in the distribution of such New
Notes. See "The Exchange Offer--Purpose and Effect of the Exchange Offer" and
"--Resale of the New Notes." Each broker-dealer (a "Participating
Broker-Dealer") that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a Participating Broker-Dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a Participating Broker-Dealer in connection with resales
of New Notes received in exchange for Old Notes where such Old Notes were
acquired by such Participating Broker-dealer as a result of market-making
activities or other trading activities. ALARIS Medical has agreed that, for a
period of 180 days after the Expiration Date, they will make this Prospectus, as
it may be amended or supplemented from time to time, available to any
Participating Broker-Dealer for use in connection with any such resale. See
"Plan of Distribution."
Holders of Old Notes not tendered and accepted in the Exchange Offer will
continue to hold such Old Notes and will be entitled to all the rights and
benefits and will be subject to the limitations applicable thereto under the
Indenture and with respect to transfer under the Securities Act. The Old Notes
are designated for trading in the Private Offerings, Resales and Trading through
Automated Linkages ("PORTAL") market. There is no established trading market for
the New Notes. ALARIS Medical does not currently intend to list the New Notes on
any securities exchange or to seek approval for quotation through any automated
quotation system. Accordingly, there can be no assurance as to the development
or liquidity of any market for the New Notes. Moreover, to the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Old Notes could be adversely affected.
The New Notes will be available initially only in book-entry form and the
Registrant expects that the New Notes issued pursuant to the Exchange Offer will
be issued in the form of a Global Note (as defined), which will be deposited
with, or on behalf of, The Depository Trust Company (the "Depositary") and
registered in its name or in the name of Cede & Co., its nominee. Beneficial
interests in the Global Note representing the New Notes will be shown on, and
transfers thereof will be effected through, records maintained by the Depositary
and its participants. After the initial issuance of the Global Note, New Notes
in certificated form will be issued in exchange for beneficial interests in the
Global Note only under the limited circumstances set forth in the Indenture. See
"Description of Notes--Book-Entry; Delivery and Form."
ALARIS Medical will not receive any proceeds from the Exchange Offer. ALARIS
Medical will pay all of the expenses incident to the Exchange Offer. No
dealer-manager is being used in connection with this Exchange Offer. See "Use of
Proceeds" and "Plan of Distribution."
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING OLD NOTES IN THE
EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JANUARY 15, 1999.
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL
DATA APPEARING ELSEWHERE IN THIS PROSPECTUS AND THE DOCUMENTS REFERRED TO
HEREIN. UNLESS THE CONTEXT OTHERWISE REQUIRES, (I) REFERENCES HEREIN TO THE
"COMPANY" REFER TO ALARIS MEDICAL, INC. (F/K/A ADVANCED MEDICAL, INC.) AND ITS
SUBSIDIARIES; (II) REFERENCES TO "ALARIS MEDICAL" REFER TO ALARIS MEDICAL, INC.
WITHOUT ITS SUBSIDIARIES, WHICH IS THE ISSUER OF THE NOTES; AND (III) REFERENCES
TO "ALARIS MEDICAL SYSTEMS" REFER TO ALARIS MEDICAL SYSTEMS, INC., A WHOLLY
OWNED SUBSIDIARY OF ALARIS MEDICAL, AND ITS SUBSIDIARIES; WHICH WAS FORMED ON
NOVEMBER 26, 1996 AS A RESULT OF A SERIES OF MERGERS (COLLECTIVELY, THE
"MERGER") PURSUANT TO WHICH THE OPERATIONS OF IMED CORPORATION ("IMED") AND IVAC
MEDICAL SYSTEMS, INC. ("IVAC MEDICAL SYSTEMS"), A SUBSIDIARY OF IVAC HOLDINGS,
INC. ("IVAC HOLDINGS"), WERE TRANSFERRED TO IVAC HOLDINGS, AND IVAC HOLDINGS
BECAME A WHOLLY OWNED SUBSIDIARY OF ALARIS MEDICAL AND SUBSEQUENTLY CHANGED ITS
NAME TO ALARIS MEDICAL SYSTEMS, INC. PORTIONS OF THIS PROSPECTUS MAY CONSTITUTE
FORWARD-LOOKING STATEMENTS FOR PURPOSES OF THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND THE EXCHANGE ACT OF 1934, AS AMENDED (THE
"EXCHANGE ACT"). SEE "RISK FACTORS."
THE COMPANY
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 has a number one or two market position in eight 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.
The Company sells a full range of products through a direct sales force
consisting of over 230 sales persons and through more than 150 distributors to
over 5,000 hospitals worldwide. Sales to customers located in and outside of the
United States accounted for 63.2% and 36.8%, respectively, of the Company's
sales for the year ended December 31, 1997. For the year ended December 31,
1997, the Company had sales of $359.1 million. ALARIS Medical is a holding
company that conducts all of its operations through its subsidiaries. All
material cash flow is generated by and all material tangible assets of ALARIS
Medical are held by the subsidiaries of ALARIS Medical. The subsidiaries of
ALARIS Medical are not guarantors of the Notes. As ALARIS Medical and not ALARIS
Medical and its subsidiaries is the issuer of the Notes, Holders of the Notes
are effectively subordinated to all indebtedness and other liabilities of ALARIS
Medical's subsidiaries. Thus, in the event of a bankruptcy or other liquidation,
all such indebtedness and other liabilities of the subsidiaries will be paid
prior to the payment of any principal or interest which may be due to Holders of
the Notes.
------------------------
The Company has registered or applied to register the following trademarks:
ALARIS-TM-, ALARIS Medical Systems-TM-, IMED-Registered Trademark-,
Gemini-Registered Trademark-, Gemini PC-2TX-Registered Trademark-, Gemini
PC-1-Registered Trademark-, Gemini PC-2-Registered Trademark-, Gemini
PC-4-Registered Trademark-, ReadyMED-Registered Trademark-,
VersaSafe-Registered Trademark-, IVAC-Registered Trademark-, IVAC Medical
Systems-TM-, Core-Check-Registered Trademark-, MedSystem
III-Registered Trademark-, PCAM-Registered Trademark-, Signature
Edition-Registered Trademark-, Temp-Plus-Registered Trademark-,
Vital-Check-Registered Trademark- and SmartSite-Registered Trademark-;
Advantis-TM-, Orion-Registered Trademark-, King of Hearts
Express-Registered Trademark-, HeartCard-Registered Trademark-,
HeartWatch-Registered Trademark-, CarryAll-Registered Trademark-,
Pacer-Tracer-Registered Trademark-, Rythm Stripper-Registered Trademark-,
LifeSigns-TM-, LifeSigns Commander-TM-, LifeSigns Shuttle-TM-, LifeSigns Central
Station-TM- and Instromedix-Registered Trademark-; Rythmic-TM- is a trademark of
Micrel Microelectronics EP.E.
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INFUSION SYSTEMS. At December 31, 1997, the Company had approximately
190,000 single and multi-channel large volume infusion pumps and 273,000
channels installed in the United States, with a market share of approximately
32% and 37% of the installed base of large volume infusion pumps and channels,
respectively. The Company offers a wide variety of infusion pumps designed to
meet the varying price and technological requirements of its diverse customer
base. These infusion pumps include the Gemini series, consisting of single, dual
and four channel infusion pumps designed for use in all hospital settings by
customers with sophisticated technological requirements; the Signature Edition
system, a versatile, user-friendly single and dual channel infusion pump for use
in critical and general medical and surgical settings; the MedSystem III
instrument (the "MS III"), a compact, lightweight, programmable three channel
infusion pump targeted for the hospital critical care setting; and the Model
560/570 Series, consisting of single channel infusion pumps designed for use in
all hospital settings and marketed primarily to the price-conscious customer. In
addition, the Company offers the ReadyMED ambulatory infusion pump, which is
compact, lightweight and disposable for use in the alternate-site market, as
well as a broad range of syringe infusion pumps for use primarily outside the
United States.
The Company also manufactures and sells higher-margin proprietary disposable
administration sets which are required to be used with the Company's large
volume infusion pumps. Since the useful lives of the Company's infusion pumps
typically range between seven to ten years, the Company's industry-leading
installed base allows it to generate predictable and recurring revenues from
sales of disposable administration sets. For the year ended December 31, 1997,
the Company sold approximately 62.0 million disposable administration sets
(proprietary and non-proprietary) representing sales of $220.7 million or 61.5%
of sales. Many of the Company's disposable administration sets offer protection
features designed to prevent the unregulated flow of fluids into a patient's
blood stream ("free flow"). In addition, the Company has recently introduced
several enhancements to its disposable administration sets, including
needle-free access systems that are designed to reduce the risk to health care
providers of diseases, such as AIDS and hepatitis, that may be transmitted
through accidental needlesticks, and, in the case of the SmartSite Needle Free
System, to eliminate patient exposure to latex which can cause severe allergic
or anaphylactic shock reactions. These features continue to provide the
Company's customers with the latest cost-effective technology for the Company's
installed base of infusion pumps. For the year ended December 31, 1997, the
Company's infusion system sales (pumps and disposables) were $306.3 million or
85.3% of sales.
PATIENT MONITORING PRODUCTS. The Company's patient monitoring products
compete in discrete market niches, each with different competitive dynamics. The
Company primarily operates in the United States, Canada and Western Europe in
two patient monitoring product markets: (i) hospital thermometry systems and
(ii) stand-alone, non-invasive, multi-parameter instruments used to measure and
monitor a combination of vital signs. For the year ended December 31, 1997, the
Company's patient monitoring product sales were approximately $33.4 million,
representing approximately 9.3% of sales.
At December 31, 1996, the Company's installed base of thermometry
instruments constituted approximately 42% of the United States hospital
electronic and infrared thermometry market, making the Company the largest
provider of hospital thermometry systems in the United States. The Company's
principal thermometry instruments, the Temp-Plus II electronic thermometer and
the Core-Check infrared tympanic thermometer, are both widely used in hospitals
and alternate-site settings. The Company is also the second largest participant
in the United States infrared thermometry market, and, at December 31, 1996, had
approximately 31% of the United States hospital installed base. The Company's
large base of installed hospital thermometry instruments allows it to generate
predictable and recurring revenues from sales of related proprietary disposable
probe covers. In 1997, the Company manufactured and sold over 595 million
proprietary disposable probe covers into its worldwide installed base.
In addition, the Company participates in the hospital market of stand-alone,
non-invasive, multi-parameter instruments through its Vital-Check product line,
which measures and monitors a combination of temperature, pulse, blood pressure
and pulse oximetry.
2
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OPERATING STRATEGY
The Company's goal is to increase sales and cash flow by leveraging its
competitive strengths in infusion systems and patient monitoring, and fulfilling
its corporate vision of building a world-class medical technology franchise
around the patient bedside and throughout the continuum of care. The essence of
this vision involves the integration of infusion technology, patient monitoring,
advanced data management and specialty medical devices. The Company believes it
is well-positioned to lead this technology convergence and to provide
cost-effective, quality health care. In order to achieve these goals, management
intends to further focus on implementing the following strategies:
EXPANDING INTERNAL GROWTH. The Company believes that it has one of the
largest installed bases of infusion systems and channels worldwide and the
largest installed base of hospital thermometry products in the United States.
The Company seeks to protect and expand its installed base by (i) aggressively
marketing its existing products to hospital users and group purchasing
organizations ("GPOs") and (ii) introducing new technologies that build on or
enhance its existing product portfolio. The Company believes that, to the extent
it can increase its installed base, the Company will benefit from increasing
revenues from infusion pump sales, and increased cash flows attributable to the
recurring sales of related higher-margin proprietary disposable administration
sets.
CAPITALIZING ON STRATEGIC ACQUISITIONS AND ALLIANCES. The Company actively
seeks to supplement internal growth through strategic acquisitions focused
primarily on complementing the Company's existing product lines. The Company
believes that there is the potential to strengthen and diversify its portfolio
of products at the patient bedside through the acquisition of technologies that
extend into products and markets where the Company currently has little or no
presence. The Company assesses acquisition candidates primarily based on such
candidate's ability to: (i) improve the Company's United States and
international market leadership; (ii) increase the Company's revenue per account
and margins; (iii) access new and expanding markets, including the
alternate-site market; (iv) fit strategically within the Company's existing
technological base and manufacturing and distribution capabilities; and (v)
improve the Company's results from operations. The Company is also seeking to
establish strategic alliances with major participants in the pharmaceutical
industry, both domestically and internationally. The Company does not currently
have any acquisitions planned or contemplated.
INCREASING PRESENCE IN ALTERNATE-SITE SETTINGS. The Company will seek to
increase its presence in the alternate-site market. Industry sources estimate
that the alternate-site market for infusion therapy and patient monitoring has
experienced rapid and substantial growth. The Company currently has in place a
distributor network and a dedicated sales force trained to sell into the
alternate-site market. The Company has also recently acquired, and continues to
develop, the PSI Pump for use in the alternate site. Moreover, the Company
intends to integrate the product lines of Instromedix, including the LifeSigns
System, which is a technologically-advanced, telephonic monitoring system that
allows a caregiver to remotely monitor multiple patient parameters via a
standard telephone line. The Company believes that through these recent
acquisitions, combined with the ongoing development of its existing
alternate-site products (i.e., the ReadyMED product line), it is well-positioned
to leverage its reputation for quality products and service in the hospital
setting to increase its presence in the growing alternate-site market.
STRENGTHENING PRESENCE IN INTERNATIONAL MARKETS. For the year ended
December 31, 1997, 36.8% of the Company's sales were derived from sales to
customers outside the United States and the Company believes that the sales of
products outside the United States represent a significant source of growth. As
part of its business strategy, the Company intends to increase its position in
targeted geographical markets, including emerging international markets by (i)
establishing distribution channels and direct sales forces in countries where
the Company has little or no existing distribution network and (ii) developing
products or modifying existing products to satisfy local market preferences or
requirements.
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EMPHASIZING CUSTOMER SERVICE. The Company seeks to develop and maintain
strong customer relationships by working closely with its customers to fully
understand their needs and by furnishing value-added services such as (i)
expertise in engineering and manufacturing high-quality, reliable and innovative
products; (ii) prompt order fulfillment and delivery; and (iii) after-sale
technical and clinical support and emergency service. The Company believes that
its ability to retain existing customers and attract new customers is
attributable to its ongoing commitment to customer service.
REDUCING PRODUCTION AND OPERATING COSTS. The Company will seek to further
reduce production and operating costs by eliminating redundant expenses and by
monitoring and controlling fixed and variable operating expenses. In this
regard, the Company has recently: (i) reduced overall head count through
termination and attrition; (ii) consolidated all of its United States instrument
manufacturing operations into one location near the Company's headquarters;
(iii) transferred substantially all disposable-related assembly operations in
San Diego, California to its lower cost operations in Tijuana, Mexico; and (iv)
consolidated certain of the Company's international sales and distribution
operations. See Note 9 to the 1997 Consolidated Financial Statements.
RECENT DEVELOPMENTS
INSTROMEDIX ACQUISITION
On July 17, 1998, pursuant to an Agreement and Plan of Merger (the
"Instromedix Agreement") among ALARIS Medical, ALARIS Medical Systems,
Instromedix, Inc., an Oregon corporation, and its shareholders, dated June 24,
1998, ALARIS Medical Systems acquired (the "Acquisition") all of the outstanding
common stock of Instromedix and subsequently merged Instromedix with and into
itself. The total consideration for the Acquisition included (i) $51.0 million
in cash, subject to certain adjustments, (ii) the assumption of indebtedness of
Instromedix of approximately $5.5 million and (iii) the payment of certain
transaction expenses incurred by Instromedix relating to the Acquisition in the
amount of $1.0 million. The Acquisition was funded through a cash payment (the
"Acquisition Payment") of $24.7 million by ALARIS Medical Systems and the
issuance of $25.6 million of promissory notes (the "Acquisition Notes") by
ALARIS Medical. The Acquisition Payment was funded with proceeds borrowed under
the Credit Facility (as defined). A portion of the net proceeds of the Offering
were used to repay the Acquisition Notes and certain borrowings under the Credit
Facility. See "The Acquisition."
Instromedix, founded in 1969, produces technologically-advanced products
that primarily address cardiac disease diagnosis, monitoring and management.
Instromedix has developed, among other products, the LifeSigns System, a
telemedicine product which allows clinical professionals to monitor a patient's
cardiac events from a remote location and transmit the recorded event, via a
standard telephone line, to a central location. Virtually all of Instromedix's
revenues are derived from the sale of products that are utilized in the
alternate-site care setting, primarily at the patient's home or at the
physician's office. For the year ended December 31, 1997, Instromedix had $22.0
million in revenues.
PUMP ACQUISITIONS
In May 1998, the Company (i) acquired from Invacare Corporation
("Invacare"), an ambulatory, electromechanical infusion pump (the "PSI Pump")
for use in the alternate-site market and (ii) licensed technology from Caesarea
Medical Electronics Ltd. for a large volume infusion pump (the "International
Pump") marketed primarily to price-conscious consumers in emerging international
markets. The aggregate consideration to be paid in connection with such
acquisition and such license is dependent upon certain developmental milestones,
and could be up to a maximum of $10.3 million (excluding royalties), of which
$6.3 million has been paid to date through borrowings under the Credit Facility.
The Company believes the addition of the Instromedix product line, the PSI
Pump and the International Pump will expand the scope of the Company's infusion
and patient monitoring systems, thereby enhancing the Company's competitive
position. For example, the Company believes that it can leverage its
4
<PAGE>
distribution capabilities and brand identity to market and sell the LifeSigns
System and other Instromedix products, as well as the PSI Pump to capture market
share in the rapidly growing alternate-site markets.
CREDIT FACILITY AMENDMENT
The Company amended the Credit Facility (the "Credit Facility Amendment") in
order to, among other things, obtain the consent of the lenders under the Credit
Facility to enter into the Acquisition and the Offering and to finance the
Acquisition Payment and other fees and expenses in connection with the
Acquisition. The Credit Facility Amendment, among other things, (i) increases
the revolving portion of the Credit Facility from $50.0 million to $60.0 million
and (ii) increases the Tranche D Term Loan by $30.0 million to $70.0 million.
Pursuant to the Credit Facility Amendment, the Company (i) must use the
proceeds of the additional Tranche D Term Loan toward financing the Acquisition
Payment and paying certain fees and expenses in connection with the Acquisition
or to pay amounts owed under the revolving portion of the Credit Facility and
(ii) may also use the revolving portion of the Credit Facility toward financing
the Acquisition Payment and paying certain fees and expenses in connection with
the Acquisition (any such borrowings under the Tranche D Term Loans or revolving
portion of the Credit Facility referred to herein as the "Credit Facility
Borrowings").
The Company's principal executive offices are located at 10221 Wateridge
Circle, San Diego, California 92121 and its telephone number is (619) 458-7000.
5
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THE OFFERING
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<S> <C>
NOTES........................................ The Old Notes were sold by ALARIS Medical on
July 28, 1998 to Bear Stearns & Co. Inc., BT
Alex. Brown Incorporated and Donaldson,
Lufkin & Jenrette Securities Corporation
(collectively, the "Initial Purchasers")
pursuant to a purchase agreement dated July
28, 1998 (the "Purchase Agreement") by and
among ALARIS Medical, ALARIS Medical Systems,
ALARIS Release Corporation ("ALARIS
Release"), IVAC Overseas Holdings, Inc.
("IVAC Overseas") and the Initial Purchasers.
ALARIS Medical Systems, ALARIS Release and
IVAC Overseas, as well as all other
subsidiaries of ALARIS Medical are not
guarantors of the Notes. The Initial
Purchasers subsequently resold the Old Notes
to qualified institutional buyers pursuant to
Rule 144A. See "The Exchange Offer--Purpose
and Effect of the Exchange Offer."
REGISTRATION RIGHTS AGREEMENT................ Pursuant to the Purchase Agreement, ALARIS
Medical, ALARIS Medical Systems, ALARIS
Release, IVAC Overseas and the Initial
Purchasers entered into a registration rights
agreement dated as of July 28, 1998 (the
"Registration Rights Agreement"), which
grants the holders of the Old Notes certain
exchange and registration rights. The
Exchange Offer is intended to satisfy such
exchange rights which terminate upon the
consummation of the Exchange Offer. See "The
Exchange Offer-- Purpose and Effect of the
Exchange Offer."
THE EXCHANGE OFFER
SECURITIES OFFERED........................... $189.0 million in aggregate principal amount
at maturity of 11 1/8% senior discount notes
due 2008, which have been registered under
the Securities Act.
THE EXCHANGE OFFER........................... $1,000 principal amount of New Notes in
exchange for each $1,000 principal amount of
Old Notes that are validly tendered and not
withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. As of the date
hereof, $189.0 million aggregate principal
amount at maturity of the Old Notes are
outstanding. ALARIS Medical will issue the
New Notes to holders as promptly as
practicable following the Expiration Date.
RESALE....................................... Based on no-action letters issued by the
staff of the Commission to third parties,
ALARIS Medical believes the New Notes issued
pursuant to the Exchange Offer may be offered
for resale, resold and otherwise transferred
by any holder thereof
</TABLE>
6
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<TABLE>
<S> <C>
(other than any such holder that is an
"affiliate" of the ALARIS Medical within the
meaning of Rule 405 under the Securities Act)
without compliance with the registration and
prospectus delivery provisions of the
Securities Act, provided that such New Notes
are acquired in the ordinary course of such
holder's business and such holder has no
arrangement or understanding with any person
to, and does not intend to, participate in
the distribution of such New Notes.
Any Participating Broker-Dealer that acquired
Old Notes for its own account as a result of
market-making activities or other trading
activities may be a statutory underwriter.
Each Participating Broker-Dealer that
receives New Notes for its own account
pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus
in connection with any resale of such New
Notes. The Letter of Transmittal states that
by so acknowledging and by delivering a
prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an
"underwriter" within the meaning of the
Securities Act. This Prospectus, as if may be
amended or supplemented from time to time,
may be used by a Participating Broker-Dealer
in connection with resales of New Notes
received in exchange for Old Notes where such
Old Notes were acquired by such Participating
Broker-Dealer as a result of Market-making
activities or other trading activities.
ALARIS Medical has agreed that, for a period
of 180 days after the Expiration Date, they
will make this Prospectus, as it may be
amended or supplemented from time to time,
available to any Participating Broker-Dealer
for use in connection with any such resale.
See "Plan of Distribution."
Any holder who tenders Old Notes in the
Exchange Offer with the intention to
participate, or for the purpose of
participating, in a distribution of the New
Notes may not rely on the position of the
staff of the Commission enunciated in the
aforesaid no-action letters and, in the
absence of an exemption therefrom, must
comply with the registration and prospectus
delivery requirements of the Securities Act
in connection with any secondary resale
transaction. Failure to comply with such
requirements in such instance may result in
such holder incurring liability under the
Securities Act for which the holder is not
indemnified by ALARIS Medical.
</TABLE>
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EXPIRATION DATE.............................. The Exchange Offer will expire at 5:00 p.m.,
New York City time, on February 17, 1999,
unless extended, in which case the term
"Expiration Date" shall mean the latest date
and time to which the Exchange Offer is
extended.
CONDITIONS TO THE EXCHANGE OFFER............. The Exchange Offer is subject to certain
customary conditions, which may be waived by
ALARIS Medical. See "The Exchange
Offer--Conditions." The Exchange Offer is not
conditioned upon any minimum principal amount
of Old Notes being tendered.
PROCEDURES FOR TENDERING OLD NOTES........... Each holder of Old Notes wishing to accept
the Exchange Offer must transmit a properly
completed Letter of Transmittal, (or a
facsimile thereof) or an Agent's Message (as
defined), in accordance with the instructions
contained herein and therein, together with
such Old Notes and any other required
documentation to the Exchange Agent (as
defined), at one of the addresses set forth
herein and therein. By executing the Letter
of Transmittal (or a facsimile thereof) or
delivering an Agent's Message, each holder of
Old Notes will represent to ALARIS Medical
that, among other things (i) the New Notes
being acquired pursuant to the Exchange Offer
are being obtained in the ordinary course of
business of the person receiving such New
Notes, whether or not such person is the
holder; and (ii) neither the holder nor any
such other person (A) has any arrangement or
understanding with any person to participate
in the distribution of such New Notes or is
engaging or intends to engage in the
distribution of such New Notes; or (B) is an
"affiliate" of ALARIS Medical within the
meaning of Rule 405 under the Securities Act.
Each Participating Broker-Dealer that
receives New Notes for its own account in
exchange for Old Notes must acknowledge that
it (i) acquired the Old Notes for its own
account as a result of market-making
activities or other trading activities; (ii)
has not entered into any arrangement or
understanding with ALARIS Medical or any
"affiliate" of ALARIS Medical within the
meaning of Rule 405 under the Securities Act
to distribute the New Notes to be received in
the Exchange Offer; and (iii) will deliver a
prospectus meeting the requirements of the
Securities Act in connection with any resale
of such New Notes. See "Plan of
Distribution," "The Exchange Offer--Purpose
and Effect of the Exchange Offer" and
"--Procedures for Tendering."
</TABLE>
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<S> <C>
SHELF REGISTRATION STATEMENT................. If (i) any holder of Old Notes (A) is
prohibited by law or Commission policy from
participating in the Exchange Offer; (B) may
not resell the New Notes acquired by it in
the Exchange Offer to the public without
delivering a prospectus and this Prospectus,
as it may be amended on supplemented form
time to time, is not appropriate or available
for such resales; or (C) is a Participating
Broker-Dealer and owns Old Notes acquired
directly from ALARIS Medical or an affiliate
of ALARIS Medical and (ii) such holder has
satisfied certain conditions relating to the
provision of information to ALARIS Medical
for use therein, ALARIS Medical has agreed to
register such Old Notes on a shelf
registration statement (the "Shelf
Registration Statement") and use their
respective best efforts to cause it to be
declared effective by the Commission on or
prior to 120 days after the date on which
ALARIS Medical became obligated to file the
Shelf Registration Statement. ALARIS Medical
has agreed to maintain the effectiveness of
the Shelf Registration Statement for, under
certain circumstances, a maximum of three
years, to cover resales of Old Notes held by
any such holders. See "The Exchange
Offer--Purpose and Effect of the Exchange
Offer."
SPECIAL PROCEDURES FOR BENEFICIAL OWNERS..... Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other
nominee and who wishes to tender such Old
Notes in the Exchange Offer should contact
such registered holder promptly and instruct
such registered holder to tender on such
beneficial owner's behalf. If such beneficial
owner wishes to tender on his own behalf,
such beneficial owner must, prior to
transmitting a properly completed Letter of
Transmittal (or facsimile thereof) or an
Agent's Message and delivering his Old Notes
to the Exchange Agent, either make
appropriate arrangements to register
ownership of the Old Notes in such beneficial
owner's name or obtain a properly completed
bond power from the registered holder.
The transfer of registered ownership may take
considerable time and may not be able to be
completed prior to the Expiration Date. See
"The Exchange Offer--Procedures for
Tendering."
GUARANTEED DELIVERY PROCEDURES............... Holders of Old Notes who wish to tender their
Old Notes and whose Old Notes are not
immediately available or who cannot deliver
their Old Notes, the Letter of Transmittal
(or a facsimile thereof) or an
</TABLE>
9
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<TABLE>
<S> <C>
Agent's Message, or any other documents
required by the Letter of Transmittal to the
Exchange Agent (or comply with the procedures
for book-entry transfer) prior to the
Expiration Date, must tender their Old Notes
according to the guaranteed delivery
procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures."
WITHDRAWAL RIGHTS............................ Except as otherwise provided herein, tenders
of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on
the Expiration Date. See "The Exchange
Offer--Withdrawal of Tenders."
ABSENCE OF APPRAISAL OR DISSENTERS' RIGHTS... Holders of Old Notes do not have any
appraisal or dissenters' rights under the
Delaware General Corporation Law or the
Indenture in connection with the Exchange
Offer. See "The Exchange Offer--Terms of the
Exchange Offer--General."
EXCHANGE AGENT............................... United States Trust Company of New York.
UNTENDERED OLD NOTES......................... Holders of Old Notes eligible to participate
in the Exchange Offer but who do not tender
their Old Notes will not have any further
exchange rights and such Old Notes will
continue to be subject to certain
restrictions on transfer. Accordingly, the
liquidity of the market for such Old Notes
could be adversely affected.
FEDERAL INCOME TAX CONSEQUENCES.............. ALARIS Medical believes that the exchange of
Old Notes for New Notes will not be a taxable
exchange for United States Federal income tax
purposes. See "Federal Income Tax
Consequences."
CONSEQUENCES OF FAILURE TO EXCHANGE OLD
NOTES...................................... Holders of Old Notes who do not exchange
their Old Notes for New Notes pursuant to the
Exchange Offer will continue to be subject to
the restrictions on transfer of such Old
Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes
pursuant to exemptions from, or in
transactions not subject to, the registration
requirements of the Securities Act and
applicable state securities laws. In general,
the Old Notes may not be offered or sold,
unless registered under the Securities Act,
except pursuant to an exemption from, or in a
transaction to subject to, the Securities Act
and applicable state securities laws. ALARIS
Medical does not currently anticipate that it
will register Old Notes under the Securities
Act. See "The Exchange Offer--Consequences of
Failure to Exchange."
USE OF PROCEEDS.............................. There will be no cash proceeds to ALARIS
Medical from the exchange pursuant to the
Exchange Offer. The net proceeds from the
Offering were used to
</TABLE>
10
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<S> <C>
fund the Acquisition and related transaction
expenses, to repay certain indebtedness and
will be used for general corporate purposes.
See "The Acquisition" and "Use of Proceeds."
THE NEW NOTES
GENERAL...................................... The Exchange Offer applies to $189.0 million
aggregate principal amount at maturity of Old
Notes. The form and terms of the New Notes
will be identical in all material respects to
the form and terms of the Old Notes, except
that the New Notes (i) have been registered
under the Securities Act and, therefore, will
not bear legends restricting their transfer
and (ii) do not contain certain provisions
providing for the payment of Liquidated
Damages under certain circumstances relating
to the Registration Rights Agreement. The New
Notes will evidence the same debt as the Old
Notes and, except as set forth in the
immediately preceding sentence, will be
entitled to the benefits of the Indenture,
under which both the Old Notes were, and the
New Notes will be, issued. See "Description
of Notes--General."
SECURITIES OFFERED........................... $189.0 million in aggregate principal amount
at maturity of 11 1/8% senior discount notes
due 2008 which have been registered under the
Securities Act.
MATURITY DATE................................ August 1, 2008
INTEREST PAYMENT DATES....................... February 1 and August 1, commencing February
1, 2004.
MANDATORY REDEMPTION......................... ALARIS Medical will not be required to make
mandatory redemption or sinking fund payments
with respect to the New Notes.
OPTIONAL REDEMPTION.......................... On and after August 1, 2003, the New Notes
will be redeemable at any time at the option
of ALARIS Medical, in whole or in part, at
the redemption prices set forth herein, plus
accrued and unpaid interest, if any, thereon
to the redemption date. In addition, on or
prior to August 1, 2001, ALARIS Medical may
redeem up to 35% of the aggregate principal
amount at maturity of New Notes issued under
the Indenture at a redemption price equal to
111.125% of the Accreted Value thereof to the
redemption date, with the net cash proceeds
of one or more public or private offering of
Common Stock; PROVIDED that at least 65% of
the aggregate principal amount at maturity of
New Notes remain outstanding immediately
after the occurrence of
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<S> <C>
each such redemption. See "Description of
Notes-- Optional Redemption."
CHANGE OF CONTROL............................ In the event of a Change of Control, ALARIS
Medical will be required to make an offer to
each Holder of New Notes at a repurchase
price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if
any, thereon to the repurchase date (or, in
the case of repurchases of New Notes prior to
August 1, 2003, at a repurchase price equal
to 101% of the Accreted Value thereof, to the
repurchase date). There can be no assurance
that ALARIS Medical will have the financial
resources to repurchase the New Notes upon a
Change of Control. See "Risk
Factors--Repurchase of Notes Upon Change of
Control."
RANKING...................................... The New Notes will rank senior in right of
payment to all subordinated indebtedness of
ALARIS Medical and will rank PARI PASSU in
right of payment with all existing and future
senior indebtedness of ALARIS Medical. The
New Notes will be effectively subordinated to
the Credit Facility Guarantee, to the extent
such Credit Facility Guarantee is secured,
and will be effectively subordinated to all
indebtedness and other liabilities and
commitments of ALARIS Medical's subsidiaries,
which, as of September 30, 1998 was $525.0
million.
CERTAIN COVENANTS............................ The Indenture pursuant to which the Old Notes
were, and the New Notes will, be issued
contains covenants that, among other things,
limit the ability of ALARIS Medical and its
Restricted Subsidiaries (as defined) to incur
additional Indebtedness (as defined), pay
dividends, repurchase Equity Interests (as
defined) or make other Restricted Payments
(as defined), create Liens (as defined),
enter into transactions with Affiliates (as
defined), sell assets or enter into certain
mergers and consolidations. See "Description
of Notes--Certain Covenants."
</TABLE>
RISK FACTORS
Holders of Old Notes should carefully consider the matters set forth under
the caption "Risk Factors" and all other information set forth in the Prospectus
before making a decision to tender their Old Notes in the Exchange Offer.
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<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA OF THE COMPANY
(DOLLARS IN THOUSANDS)
The following summary consolidated financial data of the Company for the
years ended December 31, 1993, 1994, 1995, 1996 and 1997 have been derived from
the Company's audited consolidated financial statements. The summary
consolidated financial data of the Company for the nine months ended September
30, 1997 and as of and for the nine months ended September 30, 1998 have been
derived from the unaudited consolidated financial statements of the Company
which, in the opinion of management, contain all adjustments (consisting only of
normal and recurring adjustments) necessary to present fairly the Company's
financial position and results of operations at such dates and for such periods.
Operating results for the nine months ended September 30, 1998 are not
necessarily indicative of results to be expected for the full year. The
information contained in the following table should also be read in conjunction
with "Selected Consolidated Financial Data of the Company" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements, including the notes thereto, in each case
contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 (1) 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.............................................. $ 119,858 $ 112,122 $ 112,551 $ 136,371 $ 359,077 $ 256,897 $ 271,881
Gross margin....................................... 47,649 46,532 49,332 57,755 170,737 120,166 133,856
Purchased in-process research and development
(2).............................................. -- -- -- 44,000 -- -- 28,334
Restructuring, integration and other non-recurring
charges (3)...................................... 9,352 -- -- 15,277 20,902 17,592 1,112
Lease interest income (4).......................... 2,627 2,449 2,333 2,501 4,559 3,417 3,407
Income (loss) from operations...................... (781) 15,040 17,051 (45,358) 32,490 17,253 11,526
Interest expense................................... (10,880) (8,690) (8,153) (13,393) (44,413) (32,972) (34,809)
Net income (loss).................................. 1,297 5,677 27,454 (67,236) (9,626) (10,223) (24,742)
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Adjusted EBITDA (5)................................. $ 18,420 $ 22,851 $ 24,626 $ 27,775 $ 89,287 $ 62,402 $ 67,181
Cash interest expense (6)........................... 10,148 8,009 7,632 12,061 41,288 31,307 30,342
Depreciation and amortization (7)................... 9,849 7,811 7,575 9,842 34,288 25,950 26,037
Capital expenditures................................ 1,616 4,549 4,803 9,502 19,843 15,132 16,963
Net cash provided by (used in) operating
activities........................................ 531 11,790 18,473 7,715 9,753 776 30,169
Net cash provided by (used in) investing
activities........................................ 16,009 3,368 (32,815) (214,151) (17,274) (12,627) (76,637)
Net cash (used in) provided by financing
activities........................................ (17,418) (15,892) 15,520 216,953 3,781 5,578 84,507
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
------------------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
PRO FORMA DATA (8):
Adjusted EBITDA (5)....................................................... $ 89,287 $ 67,181
Total interest expense.................................................... 58,477 42,404
Cash interest expense (6)................................................. 42,260 30,588
Ratio of net debt to Adjusted EBITDA (9).................................. 5.7x --
Ratio of Adjusted EBITDA to total interest expense........................ 1.5 1.6
Ratio of Adjusted EBITDA to cash interest expense......................... 2.1 2.2
</TABLE>
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<TABLE>
<CAPTION>
AT SEPTEMBER
30, 1998
-------------
ACTUAL
-------------
<S> <C>
BALANCE SHEET DATA:
Cash............................................................................................... $ 45,098
Working capital.................................................................................... 136,472
Total assets....................................................................................... 653,047
Long-term debt (including current portion)......................................................... 543,394
Stockholders' equity............................................................................... 8,129
</TABLE>
- ------------------------------
(1) Includes the effects of the merger pursuant to which the operations of IMED
and IVAC Medical Systems, a subsidiary of IVAC Holdings, were transferred to
IVAC Holdings, and IVAC Holdings became a wholly owned subsidiary of ALARIS
Medical and subsequently changed its name to ALARIS Medical Systems, Inc. As
a result, the 1996 operating results include those of the combined companies
beginning November 26, 1996.
(2) Purchased in-process research and development represents that portion of
purchase accounting adjustments related to the value assigned to the
acquired in-process research and development of projects acquired for which
technological feasibility had not been established and for which there was
no alternative future use.
(3) In 1993 and 1996, the Company restructured its operations. During 1997, the
Company incurred significant non-recurring integration and other
non-recurring charges resulting from the Merger. During the third quarter of
1998, the Company incurred integration costs in connection with the
Acquisition. Restructuring, integration and other non-recurring charges are
included in operating expenses for the years ended December 31, 1993, 1996
and 1997, and the nine months ended September 30, 1997 and 1998.
(4) Lease interest income consists of interest income associated with contracts
or agreements pursuant to which a third party acquires infusion pumps under
sales-type leases.
(5) 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. The
Company has included information concerning Adjusted EBITDA herein because
it understands that such information is used by certain investors as one
measure of an issuer's historical ability to service debt. The Company's
computation of Adjusted EBITDA may not be comparable to similarly titled
measures of other companies.
(6) Cash interest expense excludes $732, $681, $521, $1,332, $3,125, $1,935 and
$2,323 of debt discount and issuance cost amortization for the years ended
December 31, 1993, 1994, 1995, 1996 and 1997 and the nine months ended
September 30, 1997, and 1998, respectively. On a pro forma basis, cash
interest expense excludes $3,652 and $2,647 of debt discount and issuance
cost amortization for the year ended December 31, 1997 and for the nine
months ended September 30, 1998, respectively, and does not reflect the
accretion on the Notes.
(7) Depreciation and amortization excludes amortization of debt discount and
issuance costs included in interest expense of $732, $681, $521, $1,332,
$3,125, $1,935 and $2,323 for the years ended December 31, 1993, 1994, 1995,
1996 and 1997 and the nine months ended September 30, 1997 and 1998,
respectively.
(8) To give effect to the Offering and the use of proceeds therefrom and the
Credit Facility Borrowings.
(9) Net debt represents total indebtedness less cash. This ratio is not
meaningful for interim periods and therefore is not presented for the nine
months ended September 30, 1998.
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RISK FACTORS
HOLDERS OF OLD NOTES SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN
ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS BEFORE TENDERING
THEIR OLD NOTES IN THE EXCHANGE OFFER. THE RISK FACTORS SET FORTH BELOW (OTHER
THAN "FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES COULD ADVERSELY AFFECT
HOLDERS" AND "CONSEQUENCES OF FAILURE TO EXCHANGE AND REQUIREMENTS FOR TRANSFER
OF NEW NOTES") ARE GENERALLY APPLICABLE TO THE OLD NOTES, AS WELL AS THE NEW
NOTES.
THIS PROSPECTUS MAY INCLUDE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS INVOLVE
KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT COULD CAUSE THE
ACTUAL RESULTS OF THE COMPANY TO DIFFER MATERIALLY FROM THE RESULTS EXPRESSED OR
IMPLIED BY SUCH STATEMENTS, INCLUDING GENERAL ECONOMIC AND BUSINESS CONDITIONS,
CONDITIONS AFFECTING THE INDUSTRIES SERVED BY THE COMPANY, CONDITIONS AFFECTING
THE COMPANY'S CUSTOMERS AND SUPPLIERS, COMPETITOR RESPONSES TO THE COMPANY'S
PRODUCTS AND SERVICES, AND OVERALL MARKET ACCEPTANCE OF SUCH PRODUCTS AND
SERVICES AND OTHER FACTORS DISCLOSED IN THE COMPANY'S PERIODIC REPORTS FILED
WITH THE COMMISSION.
SIGNIFICANT LEVERAGE
The Company is highly leveraged. As of September 30, 1998, the Company had
consolidated indebtedness of $543.4 million and stockholders' equity of $8.1
million. In addition, the Company had $59.5 million available for additional
borrowings under the revolving credit portion of the Credit Facility. Moreover,
the Company's indebtedness will increase as a result of the accretion of
original issue discount on the Notes. See "Capitalization." For the year ended
December 31, 1997 and the nine months ended September 30, 1998, on a pro forma
basis, after giving effect to the Offering and the use of proceeds therefrom and
the Credit Facility borrowings, as a result of losses, earnings were
insufficient to cover fixed charges by $26.5 million and $33.9 million,
respectively. Additionally, based on the Company's outstanding debt as of
September 30, 1998 and current interest rates, the Company's debt service
requirement for the remaining three months of 1998, and for the years ending
December 31, 1999 and 2000 includes principal payments of $3.0 million, $16.2
million and $14.0 million and estimated interest payments of $9.7 million, $38.3
million and $37.3 million, respectively. See "Description of Certain
Indebtedness--Credit Facility." At December 31, 1997, the Company had total
assets of $565.3 million including intangible assets of $287.9 million.
The Company believes that, based on current levels of performance, it will
generate cash flow from operations, together with borrowings under the Credit
Facility, sufficient at least through the next twelve months, to fund its
operations, make planned capital expenditures and make required payments of
principal and interest under its Credit Facility and interest on the 9 3/4%
Notes; however, there can be no assurance the Company will generate sufficient
cash flow from operations to repay the 9 3/4% Notes at maturity, to make
scheduled payments on the Notes or to repay the Notes at maturity. Borrowings
under the Credit Facility made as: (i) Revolving Credit Loans and Tranche A Term
Loans bear interest at a rate equal to the Eurodollar Rate (as adjusted) (as
defined in the Credit Facility) plus 2.25% or the Base Rate (as defined in the
Credit Facility) plus 1.00% (in each case, less 0.25% if the Leverage Ratio (as
defined in the Credit Facility) on the Test Date (as defined in the Credit
Facility) is less than 3.0:1.0 and less 0.50% if the Leverage Ratio on such Test
Date is less than 2.5:1.0); (ii) Tranche B, C and D Term Loans bear interest at
a rate equal to the Eurodollar Rate (as adjusted) plus 2.5% or the Base Rate
plus 1.25%. See "Description of Certain Indebtedness--Credit Facility." The
ability of the Company to repay its existing indebtedness, including the Notes,
will depend upon future operating performance, which is subject to the success
of the Company's business strategy, prevailing economic conditions, regulatory
matters, levels of interest rates and financial, business and other factors,
many of which are beyond the Company's control. There can be no assurance that
the Company's operating strategy will be successful in generating the
substantial increases in cash flow from operations that will be necessary for
the Company to meet its obligations under the Notes. The current and future
leverage of the Company could have important consequences, including the
following: (i) the ability of the Company to obtain additional financing for
15
<PAGE>
future working capital needs or financing for possible future acquisitions or
other purposes may be limited; (ii) a substantial portion of the Company's cash
flow from operations will be dedicated to payment of the principal and interest
on its indebtedness, including the Notes, thereby reducing funds available for
other purposes; and (iii) the Company may be more vulnerable to adverse economic
conditions than some of its competitors and, thus, may be limited in its ability
to withstand competitive pressures.
HOLDING COMPANY STRUCTURE; DEPENDENCE UPON OPERATIONS OF SUBSIDIARIES
ALARIS Medical is a holding company that conducts all of its operations
through its subsidiaries, and therefore will not have any material cash flow
independent of its subsidiaries. Substantially all of the tangible assets of
ALARIS Medical are held by its subsidiaries. Therefore, ALARIS Medical's ability
to pay interest and principal when due to Holders of the Notes is dependent upon
the receipt of sufficient funds from its direct and indirect subsidiaries.
The instruments governing the indebtedness of ALARIS Medical's subsidiaries
contain numerous restrictive covenants which restrict their ability to pay
dividends or make other distributions to ALARIS Medical. As of September 30,
1998, ALARIS Medical's subsidiaries had the ability to pay dividends or make
other restricted payments under the 9 3/4% Notes Indenture (as defined) of
approximately $55.7 million. The Credit Facility allows the payment of dividends
or the making of other distributions by ALARIS Medical Systems to ALARIS
Medical, including interest payment requirements beginning in 2003 on the Notes,
if there has been no Event of Default and the Company has met its ratio tests
thereunder. As of September 30, 1998, ALARIS Medical Systems has met all
required covenants under the Credit Facility. See "Description of Certain
Indebtedness--Credit Facility."
The 9 3/4% Senior Subordinated Notes due 2006 of ALARIS Medical Systems (the
"9 3/4% Notes") and the Credit Facility permit ALARIS Medical Systems to fund
interest payments on ALARIS Medical's 7 1/4% Convertible Subordinated Debentures
due 2002 (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. However, the 9 3/4% Notes contain no
provisions that specifically provide that ALARIS Medical's subsidiaries may pay
dividends or make other distributions to ALARIS Medical to pay interest on,
redeem or repurchase, the Notes and ALARIS Medical is dependent on dividends or
distributions from its subsidiaries in order to do so. In addition, the payment
of dividends and other distributions by ALARIS Medical's subsidiaries is
restricted by applicable law. Therefore in order to meet its debt obligations,
including the principal amount at maturity on the Notes, cash interest when due
and redeeming or repurchasing the Notes upon the occurrence of a Change of
Control or otherwise, ALARIS Medical will be required to seek the consent of,
among others, the lenders under the Credit Facility and the holders of the
9 3/4% Notes, to the payment of dividends or the making of other distributions
by ALARIS Medical's subsidiaries to ALARIS Medical and/or in the event ALARIS
Medical decides to refinance the Notes or the instruments governing such
indebtedness. There can be no assurance that ALARIS Medical will be able to do
so or that the assets of the Company would be sufficient to enable ALARIS
Medical to make any payments in respect of the Notes when required. The
Indenture will permit ALARIS Medical's subsidiaries to incur additional
indebtedness which may restrict or prohibit the ability of such subsidiaries to
pay dividends or make other distributions to ALARIS Medical. See "Description of
Certain Indebtedness" and "Description of Notes."
POTENTIAL LIMITATION ON HOLDER'S ABILITY TO RECOVER ON THE NOTES; EFFECTIVE
SUBORDINATION
Any right of ALARIS Medical and its creditors, including the Holders of the
Notes, to participate in the assets of ALARIS Medical's subsidiaries upon any
liquidation or reorganization of any such subsidiary will be subject to prior
claims of that subsidiary's creditors, including trade creditors. Accordingly,
the Notes will be effectively subordinated to all liabilities, including trade
payables of the subsidiaries of
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ALARIS Medical. The Notes will be effectively subordinated to all indebtedness
and other liabilities or commitments of ALARIS Medical's subsidiaries, which, as
of September 30, 1998, was $525.0 million. ALARIS Medical has unconditionally
guaranteed on a senior secured basis the obligations of ALARIS Medical Systems
under the Credit Facility (the "Credit Facility Guarantee"). Therefore, the
Notes will also be effectively subordinated to all secured indebtedness of
ALARIS Medical Systems, which as of September 30, 1998, was $211.4 million.
Thus, since the Holders of the Notes are so subordinated, the amount such
Holders are able to recover in any liquidation or reorganization could be
insufficient to pay all of the principal and interest due on the Notes. See
"--Holding Company Structure; Dependence on Operations of Subsidiaries."
INDENTURE AND CREDIT FACILITY RESTRICTIONS
The Credit Facility and the indenture (the "9 3/4% Notes Indenture")
governing the 9 3/4% Notes contain and the Indenture will contain, numerous
restrictive covenants including, among other things, limitations on the ability
of ALARIS Medical and its subsidiaries, as the case may be, to incur additional
indebtedness, to create liens and other encumbrances, to make certain payments
and investments, to sell or otherwise dispose of assets or to merge or
consolidate with another entity. The Credit Facility requires ALARIS Medical and
its subsidiaries, in certain instances, to meet financial tests. See
"Description of Certain Indebtedness--Credit Facility." The failure by ALARIS
Medical or its subsidiaries to comply with their respective obligations under
the Credit Facility, the indenture governing the Convertible Debentures, the
9 3/4% Notes Indenture, the Indenture or under agreements relating to
indebtedness incurred in the future, could result in an event of default under
such agreements, which would permit acceleration of the related indebtedness and
acceleration of indebtedness under other financing arrangements that may contain
cross-acceleration or cross-default provisions including the Notes. In addition,
because such documents limit or will limit, as the case may be, the ability of
ALARIS Medical and its subsidiaries to engage in certain transactions, ALARIS
Medical and its subsidiaries may be prohibited from entering into transactions
that could be beneficial. See "Description of Certain Indebtedness" and
"Description of Notes."
REPURCHASE OF NOTES UPON CHANGE OF CONTROL
Upon a Change of Control, ALARIS Medical will be required to offer to
purchase all of the Notes then outstanding at 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest, if any, thereon (or, in the
case of repurchases of Notes prior to August 1, 2003, at a purchase price equal
to 101% of the Accreted Value thereof as of the date of repurchase). The
repurchase price is required to be paid in cash. There can be no assurance that,
were a Change of Control to occur, ALARIS Medical would have sufficient funds to
pay the purchase price for all the Notes which ALARIS Medical might be required
to purchase. In addition, there can be no assurance that the subsidiaries of
ALARIS Medical would be permitted by the terms of their outstanding
indebtedness, including under the terms of the 9 3/4% Notes Indenture and the
Credit Facility, to pay dividends or make other distributions to ALARIS Medical
to permit ALARIS Medical to purchase the Notes. See "Description of Certain
Indebtedness." In addition, any such Change of Control transaction may be a
change of control under the Credit Facility, the indenture governing the
Convertible Debentures and the 9 3/4% Notes Indenture, which would require the
Company to prepay all amounts owing under the Credit Facility and to reduce the
commitments thereunder to zero, to offer to purchase all outstanding Convertible
Debentures at a price of 100% of the aggregate principal amount thereof, plus
accrued and unpaid interest thereon to the date of purchase and to offer to
purchase all outstanding 9 3/4% Notes at a price of 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon to the date
of purchase. In the event ALARIS Medical does not have sufficient funds to pay
the purchase price of the Notes upon a Change of Control, ALARIS Medical could
be required to seek third-party financing to the extent it did not have
sufficient funds available to meet its purchase obligations, and there can be no
assurance that ALARIS Medical would be able to obtain such financing on
favorable terms, if at all. See "--Holding Company Structure; Dependence Upon
Operations
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of Subsidiaries," "Description of Certain Indebtedness" and "Description of
Notes--Repurchase at the Option of Holders--Change of Control."
RISKS ATTENDANT TO ACQUISITION STRATEGY
The Company regularly considers the acquisition of other companies and
product lines. Although the Company may be in various stages of discussions in
connection with potential acquisitions, the Company has not entered into any
letters of intent or definitive agreements with respect to any such acquisitions
at this time, except in connection with the Acquisition. There can be no
assurance that the anticipated benefits of the Acquisition or of any future
acquisitions will be realized. The process of integrating acquired operations
into the Company's operations may result in unforeseen operating difficulties,
could absorb significant management attention and may require significant
financial resources that would otherwise be available for the ongoing
development or expansion of the Company's existing operations. This acquisition
strategy may be unsuccessful since the Company may be unable to identify
acquisitions in the future or, if identified, to arrive at satisfactory prices
and terms, especially in light of the competition the Company faces from other
well-financed organizations. This competition has resulted and is expected to
further result in increased acquisition prices for such acquisitions. The
successful completion of any future acquisition may depend on consents from
third parties, including federal, state and local regulatory authorities or
private parties and, in certain circumstances, lenders under the Credit
Facility, all of whose consents are beyond the Company's control. Possible
future acquisitions by the Company could result in dilutive issuances of equity
securities, the incurrence of additional debt and contingent liabilities, and
additional amortization expenses related to goodwill and other intangible
assets, which could have a material adverse effect on the business, financial
condition, results of operations or prospects of the Company or the Company's
ability to make payments with respect to the Notes when due.
To date the Company has not encountered any material difficulties in
connection with the Acquisition or prior acquisitions. However, the full
benefits of any acquisition, including the Acquisition, will require the
implementation of appropriate operational, financial and management systems and
controls in order to operate effectively and efficiently, and the integration of
any acquired business into the Company's administrative, finance and marketing
organizations. This implementation will require substantial attention from the
Company's management team. The diversion of management attention, as well as any
other difficulties which may be encountered in the transition and integration
process, could have a material adverse effect on the business, financial
condition, results of operations or prospects of the Company or the Company's
ability to make payments with respect to the Notes when due. In addition, there
can be no assurance that the Company will be successful in integrating the
operations of any such acquisition or that the Company's distribution system can
successfully sell any acquired product lines or that any planned benefits will
be realized. For example, although Instromedix operates in a similar patient
monitoring market segment as the Company, Instromedix's product lines focus on
the diagnosis and monitoring of patients with cardiac disease, a segment to
which the Company has not focused its products and services. There can be no
assurance that any new Instromedix products will be accepted by the market or
that the Company will be successful in expanding its focus into new product
segments.
DEPENDENCE ON NEW PRODUCTS AND MARKETS; UNCERTAIN PACE OF TECHNOLOGICAL CHANGE
The primary markets for the Company's products are relatively mature and
highly competitive. The Company's success is therefore dependent on the
development of new technologies, the development of new products, the
implementation of its acquisition strategy and the development of other markets
for its products. See "--Risks Attendant to Acquisition Strategy." The Company's
infusion therapy products have experienced declining market share recently,
primarily due to larger competitors who offer volume discounts based on bundled
purchases of a broader range of medical equipment and supplies, as well as to
the aging of the Company's core products. The installed base market share of the
Company's large volume infusion pumps has declined from 36% in 1996 to 32% in
1997. Moreover, certain of Instromedix's product
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lines have experienced a decline in sales in recent years. See "--Substantial
Competition" and "Business-- Competition." The Company's introduction of new
products may offset future declines in market share. There can be no assurance,
however, that new products will be successfully completed or marketed for sale,
will not necessitate upgrades or technical adjustments after market
introduction, can be manufactured in sufficient volumes to satisfy demand, or
will offset declines in market share experienced with respect to existing
products. See "Business--Products and Services." Moreover, there can be no
assurance that the Company's efforts to take advantage of opportunities it
perceives in the alternate-site and international markets will be successful. In
addition, although the pace of technological change in the Company's industry
historically has been relatively slow, the Company is unable to predict the pace
of such change in the future. There can be no assurance that technological
change will not place one or more of the Company's existing or proposed products
at a significant competitive disadvantage. Additionally, to the extent the
Company does not successfully reposition existing products for sale to different
markets, the introduction of new products by the Company will reduce sales of
such existing products.
SUBSTANTIAL COMPETITION
The Company faces substantial competition in all of its markets. Many of the
Company's competitors have greater financial, research and development, and
marketing resources than the Company. Some of the Company's principal
competitors are able to offer volume discounts based on bundled purchases of a
broader range of medical equipment and supplies than the Company, including
infusion systems and intravenous solutions used with such systems; a strategy
that the Company is currently unable to and may continue to be unable to pursue.
There can be no assurance that such competition will not have a material adverse
effect on the business, financial condition, results of operations or prospects
of the Company or the Company's ability to make payments with respect to the
Notes when due. See "--Dependence on New Products and Markets; Uncertain Pace of
Technological Change," "--Concentration of Buying Power" and
"Business--Competition."
CONCENTRATION OF BUYING POWER
Many existing and potential customers for the Company's products have
combined into GPOs which are quite large and which effectively monitor
compliance with exclusive purchase commitments. GPOs often enter into exclusive
purchase commitments with as few as one or two providers of infusion systems
and/or patient monitoring products for a period of several years. If the Company
is not one of the selected providers, it may be precluded from making sales to
members of a GPO for several years and, in certain situations, the GPO may
require removal of the Company's existing installed infusion pumps, which would
result in a loss of the related disposable administration set sales. Even if the
Company is one of the selected providers, the Company may be at a disadvantage
relative to other selected providers which are able to offer volume discounts
based on bundled purchases of a broader range of medical equipment and supplies
than the Company. Further, the Company may be required to commit to pricing
which has a material adverse effect on sales and profit margins, the business,
financial condition, results of operations or prospects of the Company or the
Company's ability to make payments with respect to the Notes when due. See
"--Substantial Competition" and "Business--Competition."
RELIANCE ON PATENTS AND PROPRIETARY RIGHTS; EXPIRATION AND PROTECTION OF
SIGNIFICANT PATENTS
The Company relies heavily on patented and other proprietary technology.
There can be no assurance that patent applications submitted by the Company or
its licensors will result in patents being issued or that, if issued, such
patents and patents already issued will afford protection against competitors
with similar technology. Legal standards relating to the scope of claims are
still evolving in the courts and no assurance can be given as to the degree of
protection that will be accorded the Company's patents in the future. Even
issued patents may later be modified or revoked by the United States Patent and
Trademark Office or in legal proceedings. In addition, foreign patents may be
more difficult to protect and/or the
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remedies available may be less extensive than in the U.S. Patent applications in
the U.S. are maintained in secrecy until patents issue and, since publication of
discoveries in the scientific or patent literature tends to lag behind actual
discoveries, the Company cannot be certain that it was the first creator of the
inventions covered by pending patent applications or the first to file patent
applications on such inventions. No assurance can be given that any of the
Company's pending patent applications will be allowed, or if allowed, whether
the scope of the claims allowed will be sufficient to protect the Company's
products.
In addition, there can be no assurance that any patents issued to or
licensed by the Company will not be infringed or designed around by others, that
others will not obtain patents that the Company will need to license or design
around, that the Company's products will not inadvertently infringe the patents
of others, or that others will not manufacture and distribute similar products
upon expiration of such patents. There can also be no assurance that key patents
of the Company will not be invalidated or that the Company or its licensors will
have adequate funds to finance the high cost of prosecuting or defending patent
validity or infringement issues. See "Business--Patents, Trademarks and
Proprietary Rights" and "Business--Legal Proceedings."
The United States patent code was recently amended. As a result, certain
statutory remedies for patent infringement are no longer available for a medical
practitioner's otherwise infringing performance of a medical activity. As
provided in the United States patent code, a patent may not be enforced against
a medical practitioner's performance, or the performance of a related health
care entity of a "medical activity" which is defined as the performance of a
medical or surgical procedure on a body. However, a "medical activity" does not
include "the use of a patented machine, manufacture or composition of matter in
violation of such patent." Hence, remedies are still available against
manufacturers and distributors. The aforesaid amendment does not apply to
patents issued before September 30, 1996. Legislation which would have
prohibited the issuance of patents directed to surgical and medical procedures
did not pass Congress and no such legislation presently is pending. However,
there can be no assurance that such legislation will not be reintroduced and
passed. If so passed, such legislation could have a material adverse effect on
the business, financial condition, results of operations or prospects of the
Company or the Company's ability to make payments with respect to the Notes when
due.
GOVERNMENT REGULATION
Government regulation is a significant factor in the research, development,
testing, production and marketing of the Company's products. Non-compliance with
applicable requirements may result in recall or seizure of products, total or
partial suspension of production, refusal of the government to allow clinical
testing or commercial distribution of products, refusal of the government to
allow new products to be marketed, civil penalties or fines and criminal
prosecution, and orders for repair and for refund. There can be no assurance
that the Company's existing products will be found to comply with such
regulations or that new products will be approved in a timely manner or at all.
See "Business--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 business, financial condition, results
of operations or prospects of the Company or the Company's ability to make
payments with respect to the Notes when due. 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-
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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 sixteen
occasions temporarily removed products from the market 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. In addition, the Company has initiated a voluntary safety
alert of its Model 597/598 and Model 599 Series infusion pumps. Moreover, the
Company has initiated a voluntary field correction of approximately 50,000 of
its Gemini PC-1 and PC-2 infusion pumps because failure of specific electrical
components on the power regulator printed circuit board may result in improper
regulation of the battery charge voltage, which may cause the battery to
overheat. The Company recorded a charge of $2.5 million to cost of sales for the
quarter ended March 31, 1997 on account of this voluntary field correction. The
Company has initiated a voluntary field correction of its Signature Edition
infusion pumps to correct a malfunction of an electronic line filter component
(which malfunction may occur when a user fails to follow the Company's written
cleaning instructions and can result in an electrical short). Further, in
November, 1998, the Company initiated a voluntary safety alert regarding the
Signature Edition infusion pumps advising to check for the proper installation
of a spring in the pumping mechanism assembly. In the third quarter of 1998, the
Company initiated a recall of its Gemini PC-4 infusion pumps to correct certain
electro-mechanical problems which may cause one or more channels of the device
to audibly and visibly alarm and temporarily cease operation. The Company is not
aware of the occurrence of any injury incidents relating to a malfunction of
this type. Although there can be no assurance, the Company believes that this
voluntary field correction, 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 operation or prospects of the Company
or the Company's ability to make payments with respect to the Notes when due.
There can be no assurance that the Company will not remove additional products
from the market in the future or that any such removal would not have a material
adverse effect on the business, financial condition, results of operations or
prospects of the Company or the Company's ability to make payments with respect
to the Notes when due. See "Business--Government Regulation."
The Company has received either ISO 9001 or ISO 9002 certification for all
of its manufacturing facilities regarding the quality of its manufacturing
systems, a requirement for doing business in European Community ("EC")
countries. The Company has been granted approval to affix the CE mark, pursuant
to the EC Medical Device Directives on substantially all of its products.
Instromedix has been granted approval to affix the CE mark on certain of its
products. Products not CE marked cannot be distributed in the EC. CE marking
does not necessarily preclude, however, additional restrictions on marketing in
any individual country in the EC.
Certain countries will require the Company to obtain clearances for its
products prior to marketing the products in those countries. In addition,
certain countries impose product specifications, standards or other requirements
which differ from or are in addition to those mandated in the United States. The
EC and certain other countries are in the process of developing new modes of
regulating medical products which may result in lengthening the time required to
obtain permission to market new products. These changes could have a material
adverse effect on the Company's ability to market its devices in such countries
and could hinder or delay the successful implementation of the Company's planned
international expansion. See "Business--Government Regulation."
HEALTH CARE REFORM
Because the cost of health care delivery has been steadily rising and
because the cost of a significant portion of medical care in the United States
and other countries is typically funded by governmental
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insurance programs, there have been a number of government initiatives to reduce
health care costs. Congress and various state legislatures currently are
proposing changes in law and regulation that could effect a major restructuring
of the health care industry. Although many of these proposals may seek to
maintain or expand access to health care services, the common objective of the
proposed legislation is to achieve cost containment in the health care sector.
Changes in governmental support of health care services, the methods by which
such services are delivered, the prices for such services, or the regulations
governing such services or mandated benefits, as well as the growth of managed
care organizations may all have a material adverse effect on the business,
financial condition, results of operations or prospects of the Company or the
Company's ability to make payments with respect to the Notes when due. Even if
the ultimate impact of any such changes on sales is positive, no assurance can
be given that the costs of complying with possible new requirements would not
have a negative impact on the Company's future earnings. No assurance can be
given that any such legislation will not have a material adverse effect on the
business, financial condition, results of operations or prospects of the Company
or the Company's ability to make payments with respect to the Notes when due. In
addition, the Company believes that the trend toward cost containment in the
health care industry resulted in a change of protocol at certain hospitals
whereby the maximum time between changes of disposable administration sets
increased. Unless sales of disposable administration sets increase because of an
increased installed base of infusion pumps, such changes in protocol may have a
material adverse effect on the business, financial condition, results of
operations or prospects of the Company or the Company's ability to make payments
with respect to the Notes when due. Moreover, any changes in protocol and other
changes in the United States health care market which may occur in the future
could force the Company to alter its approach in selling, marketing,
distributing and servicing its customer base. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business--Government Regulation."
PRODUCT LIABILITY
The Company faces an inherent business risk of exposure to product liability
claims in the event that the use of its products is alleged to have resulted in
injury or other adverse effects. The Company currently maintains product
liability insurance coverage but there can be no assurance that the Company will
be able to obtain such insurance on acceptable terms in the future, if at all,
or that any such insurance will provide adequate coverage against potential
claims. Current product liability insurance for the Company's products provides
for a deductible of $100,000 per occurrence, a deductible cap of $500,000 per
year and a coverage limitation of $5.0 million per occurrence, and, together
with other policies taken out by the Company, coverage of $55.0 million per year
per occurrence and in the aggregate. The Company's insurance excludes coverage
for punitive damages. A successful product liability claim could have a material
adverse effect on the business, financial condition, results of operations or
prospects of the Company or the Company's ability to make payments with respect
to the Notes when due.
CONTROL OF THE COMPANY
The Company is indirectly controlled through Decisions Incorporated
("Decisions"), JD Partnership, L.P. ("JD Partnership") and JA Special Limited
Partnership ("JA Special") by Jeffry M. Picower. Mr. Picower is (i) the sole
stockholder and sole Director of Decisions, which is the sole general partner of
JD Partnership, (ii) the sole general partner of JA Special and (iii) a Director
and executive officer of each of ALARIS Medical and ALARIS Medical Systems. Mr.
Picower beneficially owns, indirectly through Decisions, JD Partnership and JA
Special, approximately 78% of the Common Stock. Accordingly, Mr. Picower has the
power to elect all of ALARIS Medical's Directors, appoint new management,
determine the outcome of any action requiring the approval of the holders of the
Common Stock, including adopting amendments to ALARIS Medical's certificate of
incorporation, and approve mergers or sales of all of ALARIS Medical's assets.
See "Management--Directors and Key Executive Officers" and "Principal
Stockholders."
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DEPENDENCE ON KEY PERSONNEL
The Company's business is managed by a small number of key executive
officers, the loss of certain of whom could have a material adverse effect on
the business, financial condition, results of operations or prospects of the
Company or the Company's ability to make payments with respect to the Notes when
due. The Company believes that its future success will depend in large part on
its continued ability to attract and retain highly skilled and qualified
personnel. The Company does not presently maintain "key man" life insurance with
respect to any executive officer or other employee of the Company. See
"Management-- Employment Agreements." Instromedix is managed by a small number
of key executive officers, the loss of certain of whom could have a material
adverse effect on the business, financial condition, results of operations or
prospects of Instromedix. The Company has not entered into employment agreements
with any such officers.
FOREIGN OPERATIONS
A substantial portion of the Company's sales and earnings are attributable
to international sales and manufacturing operations. See
"Business--International Operations." In addition, the Company's current
operating strategy contemplates expansion of the Company's international
operations. See "Business-- Operating Strategy--Strengthening Presence in
International Markets." During the year ended December 31, 1997, and the nine
months ended September 30, 1998, $132.1 million and $100.3 million,
respectively, of the Company's sales were generated outside the United States,
representing approximately 36.8% and 36.9%, respectively, of the Company's total
sales during such periods. The value of the Company's foreign sales and earnings
varies with currency exchange rate fluctuations. Changes in currency exchange
rates could have a material adverse effect on the business, financial condition,
results of operations or prospects of the Company or the Company's ability to
make payments with respect to the Notes when due. Furthermore, international
manufacturing and sales are subject to other inherent risks. Foreign operations
are subject to special risks that can materially affect the sales, profits and
cash flows of the Company, including currency exchange rate devaluations and
fluctuations, the impact of inflation, exchange controls, labor unrest,
restrictions on transfer of funds, contract disputes with critical suppliers,
political instability, export duties and quotas, domestic and international
customs and tariffs, unexpected changes in regulatory environments, potentially
adverse tax consequences and other risks. Additionally, the Company will be
affected by the conversion to euro currency, a new monetary unit which certain
European countries can begin using in 1999. See "--Euro Conversion."
EURO CONVERSION
On January 1, 1999, certain member countries of the European Economic and
Monetary Union ("EMU") will adopt a common currency, the euro. The conversion
rates between the euro and the participating nations' currencies will be fixed
irrevocably as of January 1, 1999 with the participating nations' currencies
being removed from circulation between January 1, and June 30, 2002 and replaced
with euro notes and coinage. During the transition period from January 1, 1999
through December 31, 2001, public and private entities, as well as individuals
may pay for goods and services using either checks, drafts, or wire transfers
denominated in euro or the participating country's national currency. However,
use of euro currency is not mandatory until 2002 when the euro will be the sole
legal tender for the participating EMU countries. As of September 30, 1998, of
the eleven participating countries of the EMU, the Company has subsidiary
operations in seven of those countries.
The Company's existing information system for its European operations can
properly process transactions denominated in euro currency. The Company is
currently assessing euro related issues and its impact on currency exchange rate
risk, taxation, contracts, competition and pricing. Until the Company completes
its assessment of the euro conversion impact, there can be no assurance that the
euro impact will not have a material impact on the overall business operations
of the Company. The Company anticipates full conversion of all the Company's
affected subsidiaries to euro to be completed by December 31, 2001.
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Moreover, the Company does not expect compliance costs associated with the euro
conversion to be material to its results of operations, financial condition or
cash flows.
MATERIAL LEGAL PROCEEDINGS
The Company was a defendant in a lawsuit filed in June 1996 by Sherwood (as
defined) against IVAC Medical Systems. The lawsuit was filed in the United
States District Court for the Southern District of California, alleging
infringement of two Sherwood patents by reason of certain activities including
the sale by IVAC Medical Systems of disposable probe covers for use with
infrared tympanic thermometers. 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 tentatively scheduled for June, 1999.
The Company believes it has sufficient defenses to all claims by Sherwood,
including the defenses of noninfringement and invalidity. 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 any such
lawsuit could have a material adverse effect on the business, financial
condition, results of operations or prospects of the Company or the Company's
ability to make payments with respect to the Notes when due.
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") 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 (US 5,699,821). 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 Company's operations, financial condition and
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 Atrium needle free valve. The lawsuit
seeks injunctive relief, damages and the recovery of costs and attorney fees.
ENVIRONMENTAL MATTERS
The Company's operations involve the handling and use of substances that are
subject to federal, state and local environmental laws and regulations that
impose limitations on the discharge of pollutants into the soil, air and water
and establish standards for their discharge and disposal. Although the Company
believes it is in material compliance with these laws, the violation of these
laws could have a material adverse effect on the business, financial condition,
results of operations or prospects of the Company or the Company's ability to
make payments with respect to the Notes when due. There can be no assurance that
additional environmental or remediation obligations will not be incurred in the
future, that existing or future environmental liabilities could not have a
material adverse effect on the business, financial condition, results of
operation or prospects of the Company or the Company's ability to make payments
with respect to the Notes when due, or that currently unknown matters, new laws
and regulations or stricter interpretations of existing laws or regulations will
not have a material adverse effect on the business, financial condition, results
of operation or prospects of the Company or the Company's ability to make
payments with respect to the Notes when due. See "Business--Government
Regulation--Environmental Matters."
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YEAR 2000 RISK; NEW INFORMATION SYSTEM
Certain of the Company's infusion pumps contain software in which the
product's record keeping capabilities will be affected beyond the year 2000. The
Company believes that these issues will not interfere with the fluid delivery
functions of the products involved, nor will they affect the safety of patients;
however, there can be no assurance in this regard. Such record keeping
capabilities serve as a log of the products use and are primarily used by the
Company if needed in determining causes of product failures. Management believes
the Company has completed development of the corrective software for all but one
of its products and is offering such software for sale to its customers.
Corrective software for the one remaining product is under development and will
be available to customers in the first quarter of 1999. Costs of such
development has not been and is not anticipated to be material to the Company.
In addition to routine capital expenditures, and in connection with the
Merger, the Company has made significant expenditures for the acquisition of
enterprise-wide information system software and hardware and the related design,
testing and implementation. The 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, the Company will be converting the international information systems
to a system common with the domestic operations. The international project is
scheduled for completion in 1999. The international system is also designed to
properly process transactions denominated in euro currency. Euro currency is a
new monetary unit which certain European countries can begin using in 1999. See
"--Euro Conversion."
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. 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 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 supplies and seek supplies from other vendors. The Company estimates that
such contingency plan will be completed by December 31, 1998. 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.
The Company has formed a committee to identify, evaluate and address year
2000 issues to which the Company might be exposed on a worldwide basis including
and in addition to the items previously described. The committee is currently
assessing the year 2000 readiness of certain key areas including, but not
limited to, Company operations (including non-information technology systems)
and third party suppliers. The committee has not yet completed this assessment
but it is not currently aware of any material year 2000 issues related to other
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 end of the calendar year 1998 and 1999. In addition to its
customers, the Company conducts business with and utilizes the services of
numerous parties including but not limited to suppliers, distributors,
telecommunication companies, financial institutions, governmental agencies, and
utility companies. The ability of these third parties to adequately address
their Year 2000 issues is outside the Company's control. Failure by some or all
these parties to adequately address their year 2000 issues could
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have a material adverse effect on the Company. Given the number of parties with
whom the Company transacts business, it is reasonably likely some of these
parties will not be able to adequately solve their Year 2000 issues in a timely
manner. The Company does not believe it has significant dependence on any one of
these third parties and accordingly does not believe that it is reasonably
likely that the Company will experience any material adverse impacts related to
Year 2000 issues. However, 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 or the Company's ability to
make payments with respect to the Notes when due.
During the fiscal years 1996 and 1997, the Company made combined capital and
operating expenditures of approximately $7.5 million related to the new
enterprise-wide information system, and expenditures of $4.5 million during the
nine months ended September 30, 1998. To complete the identified phases of the
project, the Company anticipates additional expenditures for the remainder of
1998 and for 1999 of approximately $3.4 million and $3.5 million, respectively.
FRAUDULENT TRANSFER CONSIDERATIONS
The issuance by ALARIS Medical of the Old Notes may be subject to review
under relevant federal and state fraudulent conveyance laws if a bankruptcy case
or lawsuit is commenced by or on behalf of unpaid creditors of the Company.
ALARIS Medical believes that the indebtedness represented by the Old Notes was
incurred for proper purposes and in good faith. Notwithstanding ALARIS Medical's
belief, however, if a court of competent jurisdiction in a suit by an unpaid
creditor or representative of creditors (such as a trustee in bankruptcy or
debtor-in-possession) were to find that, at the time of the issuance of the Old
Notes, the Company was insolvent, was rendered insolvent by reason of such
incurrence, was engaged in a business or transaction for which its remaining
assets constituted unreasonably small capital, intended to incur, or believed
that it would incur debts beyond its ability to pay such debts as they matured,
or intended to hinder, delay or defraud its creditors, and that the indebtedness
was incurred for less than reasonably equivalent value, then such court could,
among other things: (i) void all or a portion of ALARIS Medical's obligations to
the Holders of the Notes, the effect of which would be that the Holders of the
Notes may not be repaid in full or at all and/or (ii) subordinate ALARIS
Medical's obligations to the Holders of the Notes to other existing and future
indebtedness of the Company, the effect of which would be to entitle such other
creditors to be paid in full before any payment could be made on the Notes.
For purposes of the foregoing, the measure of insolvency varies depending
upon the law of the jurisdiction which is being applied. Generally, however, the
Company would be considered to have been insolvent at the time the Old Notes
were issued if the sum of its debts was, at that time, greater than the sum of
the value of all of its property at a fair valuation, or if the then fair
saleable value of its assets was less than the amount that was then required to
pay its probable liability on its existing debts as they become absolute and
matured. There can be no assurance as to what standard a court would apply in
order to determine whether the Company was insolvent as of the date the Old
Notes were issued, or that, regardless of the method of valuation, a court would
not determine that the Company was insolvent on that date, or that regardless of
whether the Company was insolvent on the date the Old Notes were issued, that
the issuances constituted fraudulent transfers on another of the grounds
summarized above.
FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES COULD ADVERSELY AFFECT HOLDERS
To participate in the Exchange Offer, holders of Old Notes must transmit a
properly completed Letter of Transmittal (or a facsimile thereof) or an Agent's
Message and all other documents required by such Letter of Transmittal to the
Exchange Agent at one of the addresses set forth below under "The Exchange
Offer--Exchange Agent" prior to 5:00 p.m., New York City time, on the Expiration
Date. In addition (i) certificates for Old Notes tendered must be received by
the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date; (ii) a Book-Entry Confirmation (as defined) of such Old Notes, if such
procedure is available, into the Exchange Agent's account at the Book-Entry
Transfer Facility (as
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defined) must be received by the Exchange Agent prior to 5:00 p.m., New York
City time, on the Expiration Date; or (iii) the holder of such Old Notes must
comply with the guaranteed delivery procedures described herein. See "The
Exchange Offer--Procedures for Tendering."
CONSEQUENCES OF FAILURE TO EXCHANGE AND REQUIREMENT FOR TRANSFERS OF NEW NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. ALARIS Medical does not currently anticipate
that it will register Old Notes under the Securities Act. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Old Notes could be adversely affected.
See "The Exchange Offer--Consequences of Failure to Exchange."
Based on no-action letters issued by the staff of the Commission to third
parties, ALARIS Medical believes the New Notes issued pursuant to the Exchange
Offer may be offered for resale, resold and otherwise transferred by any holder
thereof (other than any such holder that is an "affiliate" of ALARIS Medical
within the meaning of Rule 405 under the Securities Act) without compliance with
the registration and prospectus delivery provisions of the Securities Act,
PROVIDED that such New Notes are acquired in the ordinary course of such
holder's business and such holder has no arrangement or understanding with any
person to, and does not intend to, participate in the distribution of such New
Notes.
Any Participating Broker-Dealer that acquired Old Notes for its own account
as a result of market-making activities or other trading activities may be a
statutory underwriter. Each Participating Broker-Dealer that receives New Notes
for its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by such Participating Broker-Dealer
as a result of market-making activities or other trading activities.
ALARIS Medical has agreed that, for a period of 180 days after the
Expiration Date, they will make this Prospectus, as it may be amended or
supplemented from time to time, available to any Participating Broker-Dealer for
use in connection with any such resale. See "Plan of Distribution."
If (i) any holder of Old Notes (A) is prohibited by law or Commission policy
from participating in the Exchange Offer; (B) may not resell the New Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus and this Prospectus, as it may be amended or supplemented from time
to time, is not appropriate or available for such resales; or (C) is a
Participating Broker-Dealer and owns Old Notes acquired directly from ALARIS
Medical or an affiliate of ALARIS Medical and (ii) such holder has satisfied
certain conditions relating to the provision of information to ALARIS Medical
for use therein, ALARIS Medical has agreed to register such Old Notes pursuant
to the Shelf Registration Statement and to use their respective best efforts to
cause it to be declared effective by the Commission on or prior to 120 days
after the date on which ALARIS Medical became obligated to file the Shelf
Registration Statement. ALARIS Medical has agreed to maintain the effectiveness
of the Shelf Registration Statement for, under certain circumstances, a maximum
of three years, to cover resales of Old Notes held by such holders. See "The
Exchange Offer--Purpose and Effect of the Exchange Offer."
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LACK OF PUBLIC MARKET FOR NEW NOTES
The New Notes are being offered to the holders of the Old Notes. The Old
Notes were issued in July 1998 to a small number of qualified institutional
buyers, and are eligible for trading in the PORTAL market. There is no existing
market for the New Notes, and ALARIS Medical does not intend to apply for
listing of the New Notes on any securities exchange or the Nasdaq National
Market. There can be no assurance regarding the future development of a market
for the New Notes, the liquidity of any market that may develop for the New
Notes, the ability of holders of the New Notes to sell their New Notes, or the
price at which holders would be able to sell their New Notes. In the event that
a market for the New Notes develops, future trading prices of the New Notes will
depend on many factors, including, among other things, prevailing interest
rates, ALARIS Medical's operating results and the market for similar securities.
As a result, the New Notes could trade at prices above or below either their
purchase price or face value.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by ALARIS Medical on July 28, 1998 to the Initial
Purchasers pursuant to the Purchase Agreement. The Initial Purchasers
subsequently resold the Old Notes only to "qualified institutional buyers" (as
defined in Rule 144A) in compliance with Rule 144A that, prior to their purchase
of Old Notes, delivered to the Initial Purchasers a letter containing certain
representations and agreements. As a condition to the Purchase Agreement, ALARIS
Medical, ALARIS Medical Systems, ALARIS Release, IVAC Overseas and the Initial
Purchaser entered into the Registration Rights Agreement.
Under existing interpretations of the staff of the Commission contained in
several no-action letters issued to third parties, the New Notes would in
general be freely tradeable after the Exchange Offer without further
registration under the Securities Act. However, any holder of Old Notes who is
an "affiliate" of ALARIS Medical within the meaning of Rule 405 under the
Securities Act, or who intends to participate in the Exchange Offer for the
purpose of distributing New Notes (i) will not be able to rely on the aforesaid
interpretations of the staff of the Commission; (ii) will not be able to tender
its Old Notes in the Exchange Offer; and (iii) must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any sale or transfer of the its Old Notes, unless such sale or transfer is made
pursuant to an exemption from such requirements.
As contemplated by the aforesaid no-action letters and the Registration
Rights Agreement, each holder accepting the Exchange Offer is required to
represent to ALARIS Medical pursuant to the Letter of Transmittal that, among
other things (i) the New Notes being acquired pursuant to the Exchange Offer are
being acquired in the ordinary course of business of the person receiving such
New Notes, whether or not such person is the holder, and (ii) neither the holder
nor any such other person (A) has any arrangement or understanding with any
person to participate in the distribution of such New Notes or is engaging or
intends to engage in the distribution of such New Notes or (B) is an "affiliate"
of ALARIS Medical within the meaning of Rule 405 under the Securities Act. Each
Participating Broker-Dealer that receives New Notes for its own account in
exchange for Old Notes must acknowledge that it (i) acquired the Old Notes for
its own account as a result of market-making activities or other trading
activities; (ii) has not entered into any arrangement or understanding with
ALARIS Medical or any "affiliate" of ALARIS Medical within the meaning of Rule
405 under the Securities Act to distribute the New Notes to be received in the
Exchange Offer; and (iii) will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of such New Notes. For a
description of the procedures for such resales by Participating Broker-Dealers,
see "Plan of Distribution."
Pursuant to the Registration Rights Agreement, ALARIS Medical agreed to file
with the Commission the Registration Statement, of which this Prospectus is a
part, covering the Exchange Offer. If (i) ALARIS Medical is not permitted to
consummate the Exchange Offer because the Exchange Offer is not permitted by
applicable law or Commission policy or (ii) any holder of Transfer Restricted
Securities (as defined) notifies ALARIS Medical, within the 20 business day time
period specified in the Registration Rights Agreement, that (A) it is prohibited
by law or Commission policy from participating in the Exchange Offer; (B) that
it may not resell the New Notes acquired by it in the Exchange Offer to the
public without delivering a prospectus and this Prospectus, as it may be amended
or supplemented from time to time, is not appropriate or available for such
resales; or (C) that it is a Participating Broker-Dealer and owns Old Notes
acquired directly from ALARIS Medical or an affiliate of ALARIS Medical, ALARIS
Medical will file with the Commission a Shelf Registration Statement to cover
resales of the Old Notes by the holders thereof who satisfy certain conditions
relating to the provision of information in connection with the Shelf
Registration Statement. ALARIS Medical will, in the event of the filing of the
Shelf Registration Statement, provide to each applicable holder of Old Notes
copies of the prospectus which is a part of the Shelf Registration Statement;
notify each such holder when the Shelf Registration Statement has become
effective and take certain other actions as are required to permit unrestricted
resales of the Old Notes
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covered thereby. A holder of Old Notes that sells such Old Notes pursuant to the
Shelf Registration Statement generally will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers; will be subject to certain civil liability provisions under the
Securities Act in connection with such sales and will be bound by the provisions
of the Registration Rights Agreement which are applicable to such a holder
(including certain indemnification obligations). In addition, each holder of Old
Notes will be required to deliver information to be used in connection with the
Shelf Registration Statement and to provide comments on the Shelf Registration
Statement within the time periods set forth in the Registration Rights Agreement
in order to have its Old Notes included in the Shelf Registration Statement and
to benefit from the provisions contained in the Registration Rights Agreement
regarding Liquidated Damages.
For purposes of the foregoing, "Transfer Restricted Securities" means each
Old Note until the earlier of (i) the date on which such Old Note has been
exchanged by a person other than a Participating Broker-Dealer for a New Note in
the Exchange Offer; (ii) following the exchange by a Participating Broker-Dealer
in the Exchange Offer of an Old Note for a New Note, the date on which such New
Note is sold to a purchaser who receives from such Participating Broker-Dealer
on or prior to the date of such sale a copy of this Prospectus, as it may be
amended or supplemented from time to time; (iii) the date on which such Old Note
has been effectively registered under the Securities Act and disposed of in
accordance with the Shelf Registration Statement; or (iv) the date on which such
Old Note is distributed to the public pursuant to Rule 144 under the Act.
The Registration Rights Agreement requires, among other things, that (i)
ALARIS Medical use its respective best efforts to have the Registration
Statement, of which this Prospectus is a part, declared effective by the
Commission no later than November 25, 1998; (ii) unless the Exchange Offer would
not be permitted by applicable law or Commission policy, ALARIS Medical will
commence the Exchange Offer and use its best efforts to issue on or prior to 30
business days after the date on which the Registration Statement was declared
effective by the Commission, New Notes in exchange for all Old Notes tendered
prior thereto in the Exchange Offer; (iii) if obligated to file the Shelf
Registration Statement, ALARIS Medical will file the Shelf Registration
Statement with the Commission on or prior to 45 days after such filing
obligation arises and use their respective best efforts to cause the Shelf
Registration to be declared effective by the Commission on or prior to 120 days
after such obligation arises; and (iv)(A) in certain circumstances, cause the
Registration Statement to remain effective and usable for a period of 180 days
following the initial effectiveness thereof and (B) cause the Shelf Registration
Statement to remain effective and usable for a period of three years following
the initial effectiveness thereof or such shorter period ending when all the Old
Notes available for sale thereunder have been sold. If (a) ALARIS Medical fails
to file any of the registration statements required by the Registration Rights
Agreement on or before the date specified for such filing; (b) any of such
registration statements is not declared effective by the Commission on or prior
to the date specified for such effectiveness; or (c) ALARIS Medical fails to
consummate the Exchange Offer within 30 business days after the date on which
the Registration Statement is declared effective; or (d) the Shelf Registration
Statement or the Registration Statement is declared effective but thereafter
ceases to be effective or usable in connection with resales of Transfer
Restricted Securities during the periods specified in the Registration Rights
Agreement (each such event referred to in clauses (a) through (d) above a
"Registration Default"), then ALARIS Medical will pay liquidated damages
("Liquidated Damages") to each holder of Old Notes, with respect to the first
90-day period immediately following the occurrence of such Registration Default
in an amount equal to $.05 per week per $1,000 principal amount of Old Notes
held by such holder. The amount of the Liquidated Damages will increase by an
additional $.05 per week per $1,000 principal amount of Old Notes with respect
to each subsequent 90-day period until all Registration Defaults have been
cured, up to a maximum amount of Liquidated Damages of $.50 per week per $1,000
principal amount of Old Notes. All accrued Liquidated Damages will be paid by
ALARIS Medical on each interest payment date to the Global Note Holder (as
defined) by wire transfer of immediately available funds or by federal funds
check and to holders of Certificated Securities (as defined) by wire transfer to
the accounts specified by them or
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by mailing checks to their registered addresses if no such accounts have been
specified. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
As a result of ALARIS Medical's failure to have the Registration Statement,
of which this Prospectus is a part, declared effective by the Commission by
November 25, 1998, ALARIS Medical's obligation to pay Liquidated Damages to each
holder of Old Notes commenced on November 26, 1998. ALARIS Medical's obligation
to pay the aforesaid Liquidated Damages terminated on January 14, 1999, the date
on which the Registration Statement was declared effective by the Commission.
The Exchange Offer is not being made to, nor will ALARIS Medical accept
tenders of Old Notes for exchange from, holders of Old Notes in any jurisdiction
in which this Exchange Offer or the acceptance thereof would not be in
compliance with the securities or blue sky laws of such jurisdiction.
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to participate. Holders of the Old Notes are urged to
consult their financial and tax advisors in making their own decisions on
whether to participate in the Exchange Offer.
The Old Notes are designated for trading in the PORTAL market. To the extent
Old Notes are tendered and accepted in the Exchange Offer, the principal amount
of outstanding Old Notes will decrease with a resulting decrease in the
liquidity in the market therefor. Following the consummation of the Exchange
Offer, holders of Old Notes who were eligible to participate in the Exchange
Offer but did not tender their Old Notes will not be entitled to certain rights
under the Registration Rights Agreement and such Old Notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for Old Notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
GENERAL. Upon the terms and subject to the conditions set forth in this
Prospectus and in the Letter of Transmittal, ALARIS Medical hereby offers to
exchange any and all Old Notes validly tendered and not withdrawn prior to 5:00
p.m., New York City time, on the Expiration Date. ALARIS Medical will issue
$1,000 principal amount of New Notes in exchange for each $1,000 principal
amount of outstanding Old Notes accepted in the Exchange Offer. Holders may
tender some or all of their Old Notes pursuant to the Exchange Offer. However,
Old Notes may be tendered only in amounts that are integral multiples of $1,000
principal amount. The date of the exchange of New Notes for Old Notes will be
the next business day following the Expiration Date.
The form and terms of the New Notes are identical in all material respects
to the form and terms of the Old Notes except that the New Notes (i) have been
registered under the Securities Act and, therefore, do not bear legends
restricting their transfer and (ii) do not contain certain provisions providing
for the payment of Liquidated Damages under certain circumstances relating to
the Registration Rights Agreement. The New Notes will evidence the same debt as
the Old Notes and will be entitled to the benefits of the Indenture. The
Exchange Offer is not conditioned upon any minimum aggregate principal amount of
Old Notes being tendered for exchange.
As of the date of this Prospectus, $189.0 million aggregate principal amount
at maturity of the Old Notes is outstanding. ALARIS Medical fixed the close of
business on January 14, 1999 as the record date for the Exchange Offer for the
purpose of determining the persons to whom this Prospectus, together with the
Letter of Transmittal, will initially be sent.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the Delaware General Corporation Law or the Indenture in connection with the
Exchange Offer. ALARIS Medical intends to conduct the Exchange Offer in
accordance with the provisions of the Registration Rights Agreement and the
applicable requirements of the Exchange Act, and the rules and regulations of
the Commission thereunder. Old Notes which are not tendered for exchange in the
Exchange Offer will remain outstanding and interest thereon will continue to
accrue.
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ALARIS Medical shall be deemed to have accepted validly tendered Old Notes
when, as and if ALARIS Medical has given oral notice (confirmed in writing) or
written notice thereof to the Exchange Agent. The Exchange Agent will act as
agent for the tendering holders for the purposes of receiving the New Notes from
ALARIS Medical. If any tendered Old Notes are not accepted for exchange because
of an invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. ALARIS Medical will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS. The term "Expiration Date" shall
mean 5:00 p.m., New York City time, on February 17, 1999, unless ALARIS Medical,
in its sole discretion, extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date and time to which the Exchange
Offer is extended. Although ALARIS Medical has no current intention to extend
the Exchange Offer, ALARIS Medical reserves the right to extend the Exchange
Offer at any time and from time to time. During any extension of the Exchange
Offer, all Old Notes previously tendered pursuant to the Exchange Offer and not
withdrawn will remain subject to the Exchange Offer. In order to extend the
Exchange Offer, ALARIS Medical will notify the Exchange Agent of any extension
by oral notice (confirmed in writing) or written notice and will make a public
announcement thereof prior to 9:00 a.m., New York City time, on the next
business day after each previously scheduled expiration date.
ALARIS Medical reserves the right, in its sole discretion (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "--Conditions"
shall not have been satisfied, by giving oral notice (confirmed in writing) or
written notice of such delay, extension or termination to the Exchange Agent or
(ii) to amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by public announcement thereof. If the Exchange Offer is amended in
any manner determined by ALARIS Medical to constitute a material change, ALARIS
Medical will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the holders of Old Notes, and ALARIS
Medical will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the amendment and the manner of
disclosure to such holders, if the Exchange Offer otherwise would expire during
such period.
Without limiting the manner in which ALARIS Medical may choose to make
public announcement of any delay, extension, termination or amendment of the
Exchange Offer, ALARIS Medical shall have no obligation to publish, advertise or
otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service.
PROCEDURES FOR TENDERING
Only a holder (I.E., any person in whose name Old Notes are registered on
the books of ALARIS Medical or any other person who has obtained a properly
completed bond power from the registered holder) of Old Notes may tender such
Old Notes in the Exchange Offer. To tender in the Exchange Offer, a holder must
transmit a properly completed Letter of Transmittal (or a facsimile thereof) or
an Agent's Message, have the signature(s) thereon guaranteed if required by the
Letter of Transmittal, and mail or otherwise deliver such Letter of Transmittal
(or facsimile) or Agent's Message, together with any other required documents,
to the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date. In addition (i) certificates for Old Notes tendered must be received by
the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date; (ii) a confirmation of a book-entry transfer (a
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"Book-Entry Confirmation") of such Old Notes, if such procedure is available,
into the Exchange Agent's account at the Book-Entry Transfer Facility (as
defined) pursuant to the procedure for book-entry transfer described below must
be received by the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date; or (iii) the holder of such Old Notes must comply with the
guaranteed delivery procedures described below. To be tendered effectively, the
Old Notes and all documents required by the Letter of Transmittal must be
completed and received by the Exchange Agent at one of the addresses set forth
below under "--Exchange Agent" prior to 5:00 p.m., New York City time, on the
Expiration Date.
The term "Agent's Message" means a message transmitted by the Book-Entry
Transfer Facility to, and received by, the Exchange Agent and forming a part of
a Book-Entry Confirmation, which states that such Book-Entry Transfer Facility
has received an express acknowledgment from the participant in such Book-Entry
Transfer Facility tendering Old Notes which are subject to Book-Entry
Confirmation that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal and that ALARIS Medical may enforce such
agreement against the participant.
By executing the Letter of Transmittal (or a facsimile thereof) or
transmitting an Agent's Message, each holder will make to ALARIS Medical the
representations set forth above in the fourth paragraph under the heading
"--Purpose and Effect of the Exchange Offer."
The tender of Old Notes by a holder and the acceptance thereof by ALARIS
Medical will constitute agreement between such holder and ALARIS Medical in
accordance with the terms and subject to the conditions set forth herein and in
the Letter of Transmittal. This Prospectus, together with the Letter of
Transmittal, will first be sent on or about January 15, 1999 to all holders of
Old Notes known to ALARIS Medical and the Exchange Agent.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK
OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO ALARIS MEDICAL.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should contact the registered holder promptly and instruct such registered
holder to tender on such beneficial owner's behalf. See "Instructions to
Registered Holder and/or Book-Entry Transfer Facility Participant from
Beneficial Owner" included with the Letter of Transmittal. If such beneficial
owner wishes to tender on his own behalf, such beneficial owner must, prior to
transmitting a properly completed Letter of Transmittal (or a facsimile thereof)
or an Agent's Message and delivering his Old Notes to the Exchange Agent, either
make appropriate arrangements to register ownership of the Old Notes in such
beneficial owner's name or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership may take considerable
time.
The signature(s) on a Letter of Transmittal (or facsimile thereof) or a
notice of withdrawal, as the case may be, must be guaranteed by an Eligible
Institution (as defined below) unless the Old Notes tendered pursuant thereto
are tendered (i) by a registered holder who has not completed the box entitled
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that the signature(s) on a
Letter of Transmittal (or facsimile thereof) or a notice of withdrawal, as the
case may be, must be guaranteed, such guarantee must be by a member firm of the
Medallion System (an "Eligible Institution").
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<PAGE>
If the Letter of Transmittal (or facsimile thereof) is signed by a person
other than the registered holder of any Old Notes listed therein, such Old Notes
must be endorsed or accompanied by a properly completed bond power, signed by
such registered holder as such registered holder's name appears on such Old
Notes with the signature(s) thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal (or facsimile thereof) or any Old Notes or bond
powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and
evidence satisfactory to ALARIS Medical of their authority to so act must be
submitted with the Letter of Transmittal.
ALARIS Medical understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish an account with respect
to the Old Notes at the Depositary (the "Book-Entry Transfer Facility") for the
purpose of facilitating the Exchange Offer, and subject to the establishment
thereof, any financial institution that is a participant in the Book-Entry
Transfer Facility's system may make book-entry delivery of Old Notes by causing
such Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account with respect to the Old Notes in accordance with the Book-Entry
Transfer Facility's procedures for such transfer. Although delivery of the Old
Notes may be effected through book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility, a Letter of Transmittal (or
facsimile thereof) properly completed and duly executed with any required
signature guarantee or an Agent's Message and all other required documents must,
in each case, be transmitted to and received or confirmed by the Exchange Agent
at its address set forth below on or prior to the Expiration Date, or, if the
guaranteed delivery procedures described below are complied with, within the
time period provided under such procedures. Delivery of documents to the
Book-Entry Transfer Facility does not constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by ALARIS Medical in its sole discretion, which determination
will be final and binding. ALARIS Medical reserves the absolute right to reject
any and all Old Notes not properly tendered or any Old Notes ALARIS Medical's
acceptance of which would, in the opinion of counsel for ALARIS Medical, be
unlawful. ALARIS Medical also reserves the right in its sole discretion to waive
any defects, irregularities or conditions of tender as to particular Old Notes.
ALARIS Medical's interpretation of the terms and conditions of the Exchange
Offer (including the instructions in the Letter of Transmittal) will be final
and binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as ALARIS
Medical shall determine. Although ALARIS Medical intends to notify holders of
defects or irregularities with respect to tenders of Old Notes, neither ALARIS
Medical, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available; (ii) who cannot deliver their Old Notes, the Letter of
Transmittal (or facsimile thereof) or an Agent's Message, or any other required
documents to the Exchange Agent prior to the Expiration Date; or (iii) who
cannot complete the procedures for book-entry transfer prior to the Expiration
Date, in each case, may effect a tender if:
(a) the tender is made through an Eligible Institution;
34
<PAGE>
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within three
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof) or an Agent's Message, together with
the certificate(s) representing the Old Notes or a Book-Entry Confirmation,
as the case may be, and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof) or an Agent's Message, as well as the certificate(s)
representing all tendered Old Notes in proper form for transfer or a
Book-Entry Confirmation, as the case may be, and all other documents
required by the Letter of Transmittal are received by the Exchange Agent
within three New York Stock Exchange trading days after the Expiration Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Old Notes to be withdrawn (the
"Depositor"); (ii) identify the Old Notes to be withdrawn (including the
certificate number(s) and principal amount of such Old Notes, or, in the case of
Old Notes transferred by book-entry transfer, the name and number of the account
at the Book-Entry Transfer Facility to be credited); (iii) be signed by the
holder in the same manner as the original signature on the Letter of Transmittal
by which such Old Notes were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee with respect to the Old Notes register the transfer of such Old Notes
into the name of the person withdrawing the tender; and (iv) specify the name in
which any such Old Notes are to be registered, if different from that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by ALARIS Medical, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no New Notes will be issued with respect thereto unless the
Old Notes so withdrawn are validly retendered. Any Old Notes which have been
tendered but which are not accepted for exchange will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Notes may be retendered by following one of the procedures described above under
"--Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, ALARIS Medical shall
not be required to accept for exchange, or exchange New Notes for, any Old
Notes, and may terminate or amend the Exchange Offer as provided herein before
the acceptance of such Old Notes, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of ALARIS Medical, might materially impair
the ability of ALARIS Medical to proceed with the Exchange Offer or any
material adverse development has occurred in any existing action or
proceeding with respect to ALARIS Medical or any of its subsidiaries; or
35
<PAGE>
(b) any law, statute, rule, regulation or interpretation by the staff of
the Commission is proposed, adopted or enacted, which, in the reasonable
judgment of ALARIS Medical, might materially impair the ability of ALARIS
Medical to proceed with the Exchange Offer or materially impair the
contemplated benefits of the Exchange Offer to ALARIS Medical; or
(c) any governmental approval has not been obtained, which approval
ALARIS Medical shall, in its reasonable discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If ALARIS Medical determines in its reasonable discretion that any of the
conditions are not satisfied, ALARIS Medical may (i) refuse to accept any Old
Notes and return all tendered Old Notes to the tendering holders; (ii) extend
the Exchange Offer and retain all Old Notes tendered prior to the expiration of
the Exchange Offer, SUBJECT, HOWEVER, to the rights of holders to withdraw such
Old Notes (see "--Withdrawal of Tenders"); or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus, the Letter of Transmittal or the Notice of
Guaranteed Delivery should be directed to the Exchange Agent as follows:
<TABLE>
<S> <C>
BY OVERNIGHT COURIER AND BY HAND
AFTER 4:30 P.M., NEW YORK CITY TIME,
BY MAIL: ON THE EXPIRATION DATE:
United States Trust Company of New York United States Trust Company of New York
P.O. Box 843 770 Broadway
Peter Cooper Station 13th Floor
New York, New York 10276 New York, New York 10003
Attention: Corporate Trust Attention: Corporate Trust
BY HAND UNTIL 4:30 P.M., NEW YORK BY FACSIMILE TRANSMISSION:
CITY TIME, ON THE EXPIRATION DATE: (212) 780-0592
United States Trust Company of New York CONFIRM BY TELEPHONE:
111 Broadway (800) 548-6565
Lower Level
New York, New York 10006
Attention: Corporate Trust
</TABLE>
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders of Old Notes will be borne by ALARIS
Medical. The principal solicitation is being made by mail; however, additional
solicitation may be made by telegraph, telecopy, telephone or in person by
officers and regular employees of ALARIS Medical and its affiliates.
ALARIS Medical has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. ALARIS Medical, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
36
<PAGE>
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by ALARIS Medical. Such expenses include, among others, fees and
expenses of the Exchange Agent and Trustee, accounting and legal fees, and
printing costs.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value, as reflected in ALARIS Medical's accounting records on the
date of exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by ALARIS Medical. The expenses of the Exchange Offer will be
expensed over the term of the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will remain restricted securities. Accordingly, such Old Notes may be
resold only (i) to ALARIS Medical (upon redemption thereof or otherwise); (ii)
so long as the Old Notes are eligible for resale pursuant to Rule 144A, to a
person inside the United States whom the seller reasonably believes is a
qualified institutional buyer within the meaning of Rule 144A in a transaction
meeting the requirements of Rule 144A; (iii) in accordance with Rule 144 under
the Securities Act, or pursuant to another exemption from the registration
requirements of the Securities Act (and based upon an opinion of counsel
reasonably acceptable to ALARIS Medical); (iv) outside the United States to a
foreign person in a transaction meeting the requirements of Rule 904 under the
Securities Act; or (v) pursuant to an effective registration statement under the
Securities Act, in each case in accordance with any applicable securities laws
of any state of the United States.
RESALE OF THE NEW NOTES
Based on no-action letters issued by the staff of the Commission to third
parties, ALARIS Medical believes the New Notes issued pursuant to the Exchange
Offer may be offered for resale, resold and otherwise transferred by any holder
thereof (other than any such holder that is an "affiliate" of ALARIS Medical
within the meaning of Rule 405 under the Securities Act) without compliance with
the registration and prospectus delivery requirements of the Securities Act,
PROVIDED THAT such New Notes are acquired in the ordinary course of such
holder's business and such holder has no arrangement or understanding with any
person to, and does not intend to, participate in the distribution of such New
Notes. Any holder who tenders Old Notes in the Exchange Offer with the intention
to participate, or for the purpose of participating, in a distribution of the
New Notes may not rely upon the position of the staff of the Commission
enunciated in such no-action letters and, in the absence of an exemption
therefrom, must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction. Holders of Old Notes wishing to accept the Exchange Offer must
represent to ALARIS Medical pursuant to the Letter of Transmittal that such
conditions have been met. See "The Exchange Offer-Purpose and Effect of the
Exchange Offer" and "Plan of Distribution."
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended, applicable Treasury regulations, judicial
authority and administrative rulings and practice. There can be no assurance
that the Internal Revenue Service will not take a contrary view, and no ruling
from the Internal Revenue Service has been or will be sought. Legislative,
judicial or administrative changes or interpretations may be forthcoming that
could alter or modify the statements and conditions set forth herein. Any such
changes or interpretations may or may not be retroactive and could affect the
tax consequences to holders. Certain holders (including insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United States)
may be subject to special rules not discussed below. ALARIS Medical recommends
that
37
<PAGE>
each holder consult such holder's own tax advisor as to the particular tax
consequences of exchanging such holder's Old Notes for New Notes, including the
applicability and effect of any state, local or foreign tax laws.
EXCHANGE OFFER
ALARIS Medical believes that the exchange of Old Notes for New Notes
pursuant to the Exchange Offer will not be a taxable event to a holder for
United States federal income tax purposes. Rather, the New Notes received by a
holder should be treated as a continuation of the Old Notes in the hands of such
holder. As a result, ALARIS Medical believes there will be no United States
federal income tax consequences to holders exchanging Old Notes for New Notes
pursuant to the Exchange Offer. Accordingly, the holding period of the New Notes
will include the holding period of the Old Notes and the basis of the New Notes
will be the same as the basis of the Old Notes immediately before the exchange.
The Company intends to treat the payment of Liquidated Damages as additional
interest paid on the Notes for United States income tax purposes.
THE ACQUISITION
On July 17, 1998, pursuant to the Instromedix Agreement ALARIS Medical
Systems engaged in the Acquisition. The total consideration for the Acquisition
included (i) $51.0 million in cash, subject to certain adjustments, (ii) the
assumption of indebtedness of Instromedix of approximately $5.5 million and
(iii) the payment of certain transaction expenses incurred by Instromedix
relating to the Acquisition in the amount of $1.0 million. The Acquisition was
funded through the Acquisition Payment of $24.7 million by ALARIS Medical
Systems and the issuance of the $25.6 million Acquisition Notes by ALARIS
Medical. The Acquisition Notes contained offset provisions for, among other
things, indebtedness owed by certain Instromedix shareholders to Instromedix,
which offset was approximately $2.3 million. The Acquisition Payment was funded
with the Credit Facility Borrowings. A portion of the net proceeds of the
Offering were used to repay the Acquisition Notes and certain borrowings under
the Credit Facility.
Pursuant to the Instromedix Agreement, certain shareholders of Instromedix
(the "Optionees") exercised their option to acquire, prior to the closing of the
Acquisition, a non-core division (the "CompressAR Division") of Instromedix for
approximately $450,000. The CompressAR Division is engaged in the business of
manufacturing, marketing and distributing adjustable compression instruments and
clamps, and selling sterile disposable compression disks, in each case, in
connection with a system for femoral compression procedures. The consideration
paid in connection with the Acquisition was increased by an amount equal to that
paid by the Optionees for the CompressAR Division and was offset by a payment
from the Optionees in an equal amount.
Instromedix was founded in 1969 and its products primarily address cardiac
disease diagnosis, monitoring and management and focus on the delivery of
patient care in the alternate-site setting (i.e., outside the hospital).
Instromedix arrhythmia-event recorders, pacemaker monitors and the recently
developed LifeSigns System, an interactive, multi-parameter patient monitor and
software system, are designed to provide both health care professionals and
patients with an easy-to-use, cost-effective means of cardiac monitoring in a
convenient care setting, primarily at the patient's home or the physician's
office. Instromedix has developed telemedicine products which allow clinical
professionals to monitor a patient's cardiac events from a remote location and
transmit the recorded event, via a standard telephone line, to a central
location.
Instromedix's products fall into three major categories: (i) Arrhythmia
Event Recorders which
are portable devices used to monitor, record and subsequently transmit cardiac
events (including arrhythmia - the irregular beating of the heart) via a
standard telephone line to a remote location; (ii) Pacemaker Monitors which are
portable devices used to help physicians and patients monitor the performance
and medical compliance of implantable pacemakers as recommended by
manufacturers; and (iii) the LifeSigns
38
<PAGE>
System which is a proprietary, computer-based software and hardware system that
allows remote and real-time monitoring, diagnosis and data capture of selected
vital signs.
Sources estimate that the U.S. market for home care telemedicine patient
systems will approach $400.0 million by the year 2002, as health care payors and
providers seek to reduce the cost of patient care associated with extended
hospital stays. Growth in the alternate-site health care market is also expected
to be facilitated by an increased acceptance of such care by physicians and
patients. The Company believes that the LifeSigns System is positioned to
capitalize on this rapid growth by permitting care providers to remotely monitor
and diagnose patient cardiac conditions without the incremental expense
associated with sending a trained specialist to the point of care.
The table below summarizes the key features and market introduction dates
with respect to the Instromedix product lines.
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION STATUS
- ----------------------------------- ------------------------------------------------- -------------------------
<S> <C> <C>
ARRHYTHMIA EVENT RECORDERS
KING OF HEARTS EXPRESS Pager-sized, patient-activated looping memory Marketed since 1992.
cardiac event and electrocardiograph recorder;
capable of recording up to 60 cardiac events,
which can be subsequently transmitted over a
telephone line.
HEARTCARD Credit card-sized, patient-activated cardiac Marketed since 1995.
event recorder; capable of recording up to three
cardiac events which can be subsequently
transmitted over a telephone line.
HEARTWATCH Wrist-worn, patient-activated cardiac event Marketed since 1993.
recorder; capable of recording up to three
cardiac events which can be subsequently
transmitted over a telephone line.
PACEMAKER MONITORS
CARRYALL TRANSMITTER Portable transmitter for recommended pacemaker Marketed since 1995.
follow-up; used in a patient's home to avoid
unnecessary visits to physician's office.
PACER-TRACER Pager-sized device which records and transmits Marketed since the early
electrocardiograph and pacemaker data over a 1980s.
telephone line.
LIFESIGNS HOME HEALTH CARE SYSTEM
LIFESIGNS SHUTTLE One-pound, portable, patient-worn vital signs Marketed since the fourth
monitor; programmable to record up to 20 vital quarter of 1997.
sign recordings, including blood-oxygen
saturation and up to 12 leads of
electrocardiograph data.
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION STATUS
- ----------------------------------- ------------------------------------------------- -------------------------
<S> <C> <C>
LIFESIGNS COMMANDER Docking station used by patients to allow Marketed since the fourth
simultaneous data transmission from the quarter of 1997.
LifeSigns Shuttle to the LifeSigns Central
Station and voice interaction with the home
health care provider; also provides non-invasive
blood pressure measurements.
LIFESIGNS CENTRAL STATION Computerized patient management system operating Marketed since the fourth
in conjunction with the LifeSigns Shuttle and quarter of 1997.
the LifeSigns Commander to allow remote
monitoring of patient vital signs; contains a
patient database and displays medical profiles
on-screen for expedient review and analysis by
the home health care provider.
</TABLE>
In addition, Instromedix has agreements with certain manufacturers of medical
devices whereby Instromedix provides research and development and original
equipment manufacturing ("OEM") services on an ongoing basis.
The Company believes that the Acquisition is consistent with its acquisition
strategy and that it will benefit from the following acquisition
characteristics: (i) certain of Instromedix's product lines have a leading
market position and established reputation for quality in cardiac patient
monitoring; (ii) the Instromedix product line's telemedicine capabilities will
better equip the Company to develop telemedicine-based patient monitoring
instruments capable of interfacing with the Company's existing patient
monitoring and infusion instruments; and (iii) the Company believes it can
leverage its distribution capabilities and brand identity to market and sell the
LifeSigns System and other Instromedix products to capture market share in the
rapidly growing, alternate-site patient monitoring market.
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Purchase Agreement and the Registration Rights Agreement.
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. In consideration for issuing the New Notes contemplated in
this Prospectus, the Company will receive Old Notes in like principal amount,
the form and terms of which are the same as the form and terms of the New Notes
which replace the Old Notes, except as otherwise described herein. The Old Notes
surrendered in exchange for New Notes will be retired and cancelled and cannot
be reissued. Accordingly, issuance of the New Notes will not result in any
increase or decrease in the indebtedness of the Company. The Company received
net proceeds of approximately $106.3 million from the issuance of Old Notes with
an aggregate principal amount of maturity of $189.0 million less $79.1 million
in original issue discount and $3.6 million in offering costs. A portion of the
proceeds were used to pay the Acquisition Notes of approximately $25.6 million
and pay-off the then outstanding balance of $27.5 million on the revolving
portion of the Credit Facility. The remaining net proceeds will be used to pay
the remaining consideration for the International Pump which could be up to a
maximum of $4.0 million (excluding royalties) depending upon the attainment of
certain milestones, to pay integration and transaction costs in the estimated
amount of $12.3 million related to the acquisition and for general corporate
purposes.
40
<PAGE>
CAPITALIZATION
The following table sets forth the cash and capitalization of the Company as
reported at September 30, 1998.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
1998
--------------------
ACTUAL
--------------------
(UNAUDITED)
<S> <C>
Cash........................................................................................ $ 45,098
--------
--------
Long-term debt:
Credit Facility (1)
Term loan facilities.................................................................... $ 211,437
Revolving credit facilities............................................................. --
9 3/4% Senior Subordinated Notes due 2006................................................. 200,000
11 1/8% senior discount notes due 2008 (3)................................................ 112,035
7 1/4% Convertible Subordinated Debentures due 2002....................................... 16,152
Other (2)................................................................................. 3,770
--------
Total long-term debt (including current portion)........................................ 543,394
--------
Total stockholders' equity.................................................................. 8,129
--------
Total capitalization........................................................................ $ 551,523
--------
--------
</TABLE>
- ------------------------
(1) The Credit Facility Amendment, among other things, (i) increased the
revolving portion of the Credit Facility from $50.0 million to $60.0
million, and (ii) increased the Tranche D Term Loan by $30.0 million to
$70.0 million.
(2) Primarily reflects the present value of the Company's minimum royalty
payment to Siemens Infusion Systems, Ltd. in conjunction with the September
1993 purchase of the MiniMed product line (the predecessor product line to
MS III).
(3) The Notes were issued at a substantial discount from their aggregate
principal amount at maturity of $189.0 million. Until August 1, 2003, the
Notes will increase (representing amortization of the original issue
discount) at a rate of 11 1/8% compounded semi-annually to their aggregate
principal amount at maturity.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
(DOLLARS AND SHARES IN THOUSANDS)
The following selected consolidated financial data of the Company at
December 31, 1993, 1994, 1995, 1996 and 1997, and for the years then ended, have
been derived from the Company's audited consolidated financial statements. The
selected consolidated financial data of the Company at September 30, 1998 and
for the nine months ended September 30, 1997 and 1998 have been derived from the
unaudited consolidated financial statements of the Company which, in the opinion
of management, contain all adjustments (consisting only of normal and recurring
adjustments) necessary to present fairly the Company's financial position and
results of operation at such dates and for such periods. Operating results for
the nine months ended September 30, 1998 are not necessarily indicative of
results to be expected for the full year. The information contained in the
following table should also be read in conjunction with "Prospectus
Summary--Summary Consolidated Financial Data of the Company" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements, including the notes thereto, in each case
contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 (1) 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.................................. $ 119,858 $ 112,122 $ 112,551 $ 136,371 $ 359,077 $ 256,897 $ 271,881
Cost of sales.......................... 72,209 65,590 63,219 78,616 188,340 136,731 138,025
--------- --------- --------- --------- --------- --------- ---------
Gross margin........................... 47,649 46,532 49,332 57,755 170,737 120,166 133,856
Total operating expenses (2)........... (51,057) (33,941) (34,614) (105,614) (142,806) (106,330) (125,737)
Lease interest income (3).............. 2,627 2,449 2,333 2,501 4,559 3,417 3,407
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations.......... (781) 15,040 17,051 (45,358) 32,490 17,253 11,526
Interest income........................ 140 77 192 1,193 532 442 658
Interest expense....................... (10,880) (8,690) (8,153) (13,393) (44,413) (32,972) (34,809)
Debt conversion expense (4)............ -- -- -- (10,000) -- -- --
Other (expense) income, net............ 6,004 1,136 313 1,222 (1,535) (446) (667)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes,
minority interests, extraordinary
item and cumulative effect of change
in accounting principle.............. (5,517) 7,563 9,403 (66,336) (12,926) (15,723) (23,292)
Provision (benefit) for income taxes... 926 1,886 (9,374) (730) (3,300) (5,500) 1,450
Minority interests in consolidated
subsidiaries......................... 3,755 -- (6,500) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle................. (2,688) 5,677 12,277 (65,606) (9,626) (10,223) (24,742)
Net income (loss)...................... 1,297 5,677 27,454 (67,236) (9,626) (10,223) (24,742)
(Loss) income per common share before
extraordinary item and cumulative
effect of change in accounting
principle assuming no dilution (6)... $ (.29) $ .34 $ .75 $ (3.27) $ (.16) $ (.17) $ (.42)
(Loss) income per common share before
extraordinary item and cumulative
effect of change in accounting
principle assuming dilution (6)...... $ (.29) $ .23 $ .38 $ (3.27) $ (.16) $ (.17) $ (.42)
Ratio of earnings to fixed charges
(5).................................. -- 1.8x 2.0x -- -- -- --
OTHER DATA:
Adjusted EBITDA (7).................... $ 18,420 $ 22,851 $ 24,626 $ 27,775 $ 89,287 $ 62,402 $ 67,181
Cash interest expense (8).............. 10,148 8,009 7,632 12,061 41,288 31,307 30,342
Depreciation and amortization (9)...... 9,849 7,811 7,575 9,842 34,288 25,950 26,037
Capital expenditures................... 1,616 4,549 4,803 9,502 19,843 15,132 16,963
Net cash provided by (used in)
operating activities 531 11,790 18,473 7,715 9,753 776 30,169
Net cash provided by (used in)
investing activities 16,009 3,368 (32,815) (214,151) (17,274) (12,627) (76,637)
Net cash (used in) provided by
financing activities (17,418) (15,892) 15,520 216,953 3,781 5,578 84,507
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------- AT SEPTEMBER 30,
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................................ $ 1,762 $ 1,340 $ 1,862 $ 12,084 $ 6,984 $ 45,098
Working capital (deficit)........................... (2,833) 29,576 31,938 87,785 84,047 136,472
Total assets........................................ 142,891 132,124 169,630 593,382 565,297 653,047
Long-term debt (including current portion) (4)...... 106,814 93,017 87,111 440,093 446,130 543,394
Stockholders' (deficit) equity (4).................. (8,274) (2,238) 31,532 46,053 31,949 8,129
</TABLE>
- ------------------------
(1) Includes the effects of the merger pursuant to which the operations of IMED
and IVAC Medical Systems, a subsidiary of IVAC Holdings, were transferred to
IVAC Holdings, and IVAC Holdings became a wholly owned subsidiary of ALARIS
Medical and subsequently changed its name to ALARIS Medical Systems, Inc.
(2) In 1993 and 1996, the Company restructured its operations. During 1997, the
Company incurred significant non-recurring integration and other
non-recurring charges resulting from the Merger. During the third quarter of
1998, the Company incurred integration costs in connection with the
Acquisition. Operating expenses for the years ended December 31, 1993, 1996
and 1997 and for the nine months ended September 30, 1997 and 1998 include
restructuring, integration and other non-recurring charges of $9,352,
$15,277, $20,902, $17,592 and $1,112, respectively. Additionally, in 1996,
the Company recorded $44,000 of purchased in-process research and
development in connection with the Merger. In 1998, the Company recorded
$28,334 of purchased in-process research and development charges.
(3) Lease interest income consists of interest income associated with contracts
or agreements pursuant to which a third party acquires infusion pumps under
sales-type leases.
(4) In connection with the Merger, the Company entered into a $250,000 Credit
Facility and also issued $200,000 of 9 3/4% Notes. Additionally, convertible
promissory notes in the aggregate principal amount of $37,500 were exchanged
for 29,416 shares of Common Stock, including 3,333 shares issued as an
inducement to convert, which resulted in $10,000 of debt conversion expense.
ALARIS Medical also redeemed the remaining $21,924 principal amount of its
15% Subordinated Debentures due 1999 and recorded an extraordinary loss on
extinguishment of debt of $1,630 as a result of this transaction.
(5) For purposes of determining the ratio of earnings to fixed charges, earnings
include pre-tax income adjusted for fixed charges. Fixed charges consist of
interest on all indebtedness, estimated interest component of rental expense
and amortization of deferred financing costs. As a result of the losses
incurred during the years ended December 31, 1993, 1996, 1997 and the nine
months ended September 30, 1997 and 1998, earnings were inadequate to cover
fixed charges by $5,517, $66,336, $12,926, $15,723 and $23,292,
respectively.
(6) In February, 1997 the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128") which specifies the computation, presentation,and disclosure
requirements for earnings per share. The statement is effective for all
periods ending after December 15, 1997 and requires all prior-period
earnings per share data to be restated to conform with the provisions of the
Statement. As a result of the application of this statement, prior period
numbers presented may not agree with the earnings per share data previously
reported.
(7) 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. The
Company has included information concerning Adjusted EBITDA herein because
it understands that such information is used by certain investors as one
measure of an issuer's historical ability to service debt. The Company's
computation of Adjusted EBITDA may not be comparable to similarly titled
measures of other companies. The following table reconciles Adjusted EBITDA
to the Company's net income (loss):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Adjusted EBITDA................................ $ 18,420 $ 22,851 $ 24,626 $ 27,775 $ 89,287 $ 62,402 $ 67,181
Inventory purchase price allocation adjustment
(a).......................................... -- -- -- (4,014) (1,607) (1,607) (172)
Restructuring, integration and other
non-recurring charges........................ (9,352) -- -- (15,277) (20,902) (17,592) (1,112)
Purchased in-process research and
development.................................. -- -- -- (44,000) -- -- (28,334)
Depreciation and amortization.................. (9,849) (7,811) (7,575) (9,842) (34,288) (25,950) (26,037)
Interest income................................ 140 77 192 1,193 532 442 658
Interest expense............................... (10,880) (8,690) (8,153) (13,393) (44,413) (32,972) (34,809)
Debt conversion expense........................ -- -- -- (10,000) -- -- --
Other, net..................................... 6,004 1,136 313 1,222 (1,535) (446) (667)
(Provision) benefit for income taxes........... (926) (1,886) 9,374 730 3,300 5,500 (1,450)
Minority interests in consolidated
subsidiaries................................. 3,755 -- (6,500) -- -- -- --
Extraordinary gain (loss)...................... -- -- 15,177 (1,630) -- -- --
Cumulative effect of change in accounting
principle.................................... 3,985 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss).............................. $ 1,297 $ 5,677 $ 27,454 $ (67,236) $ (9,626) $ (10,223) $ (24,742)
</TABLE>
- ------------------------------
(a) Amount represents that portion of the purchase accounting
adjustments made to adjust the acquired IVAC inventory to its
estimated fair value on the Merger date which was charged to cost of
sales during the respective period.
(8) Cash interest expense excludes $732, $681, $521, $1,332, $3,125, $1,935 and
$2,323 of debt discount and issuance cost amortization for the years ended
December 31, 1993, 1994, 1995, 1996 and 1997 and the nine months ended
September 30, 1997 and 1998, respectively.
(9) Depreciation and amortization excludes amortization of debt discount and
issuance costs included in interest expense of $732, $681, $521, $1,332,
$3,125, $1,935 and $2,323 for the years ended December 31, 1993, 1994, 1995,
1996 and 1997 and the nine months ended September 30, 1997 and 1998,
respectively.
43
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ALARIS Medical is a holding company for ALARIS Medical Systems. ALARIS
Medical also identifies and evaluates potential acquisitions and investments,
and performs various corporate functions. As a holding company, ALARIS Medical
currently has no revenues to fund its operating and interest expense and relies
on its existing cash, cash generated from the operations of ALARIS Medical
Systems and external borrowings to meet its obligations.
OVERVIEW
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 has a number one or two market position in eight 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.
The Company sells a full range of products through a direct sales force
consisting of over 230 sales persons and through more than 150 distributors to
over 5,000 hospitals worldwide. Sales to customers located in and outside of the
United States accounted for 63.2% and 36.8%, respectively, of the Company's
sales for the year ended December 31, 1997. For the year ended December 31,
1997, the Company had sales of $359.1 million and Adjusted EBITDA of $89.3
million. Adjusted EBITDA represents income from operations before restructuring
charges, non-cash purchase accounting charges and depreciation and amortization.
Adjusted EBITDA does not represent net income or cash flows, as these terms are
defined under generally accepted accounting principles, and should not be
considered as an alternative to net income or to cash flows as an indicator of
operating performance or as a measure of liquidity. The Company has included
information concerning Adjusted EBITDA herein because it uses such information
as a method of assessing its cash flow and ability to service debt and believes
that such information is also used by investors as a measure of an issuer's
ability to service its debt obligations. Restructuring and other one-time
non-recurring charges are excluded from Adjusted EBITDA as the Company believes
that the inclusion of these items would not be helpful to an investor's
understanding of the Company's ability to service debt. The Company's
computation of Adjusted EBITDA may not be comparable to similarly titled
measures of other companies. For the years ended December 31, 1996 and 1997 and
for the nine months ended September 30, 1998, the Company had net losses of
$67.2 million, $9.6 million and $24.7 million, respectively.
As a result of the Merger on November 26, 1996, the operating results
reported for the year ended December 31, 1997 are not comparable to 1995 or
1996. The 1995 operating results and cash flows represent those of Advanced
Medical, Inc. and IMED. The 1996 operating results and cash flows include those
of IVAC Holdings from November 27, 1996 through December 31, 1996.
The Company has historically taken write-offs in connection with in-process
research and development acquired by the Company, including write-offs in
connection with completed acquisitions during the nine months ended September
30, 1998 in the amount of $28.3 million and may take such write-offs in
connection with future acquisitions. Additionally, with respect to the
Acquisition, the Company expects to incur certain integration costs, primarily
related to consulting. Furthermore, the issuance of the Notes to finance the
Acquisition will result in additional interest expense to the Company. Such
interest expense is added to the outstanding principal balance through July 31,
2003. Interest incurred on the Notes
44
<PAGE>
subsequent to July 31, 2003 is payable in cash semi-annually at the rate of
11 1/8%. See "--Liquidity and Capital and Resources." The other acquisitions
completed during the nine months ended September 30, 1998 involved the
acquisition of certain assets from Invacare related to the PSI Pump and licensed
technology from Caesarea Medical Electronics Ltd. for the International Pump.
These acquisitions were financed through borrowings under the Credit Facility,
which was subsequently paid off with proceeds from the Notes. With respect to
the PSI Pump, the Company expects to incur additional research and development
costs in order to complete the technology for a functioning pump. With respect
to the International Pump, additional payments up to an aggregate amount of $4.0
million (excluding royalties) are dependent upon the attainment of certain
developmental milestones.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
financial information expressed as a percentage of sales, as well as
Merger-Adjusted (as defined) year 1996 operating results in thousands of
dollars. The data is based on the historical operating results of ALARIS Medical
and IVAC Holdings, adjusted to give effect to the Merger as if it occurred on
January 1, 1996 ("Merger-Adjusted"). The data excludes non-recurring charges
related to the Merger, as well as the operating results of River Medical, Inc.,
a subsidiary of IVAC Medical Systems which was divested prior to the
consummation of the Merger.
The Merger-Adjusted financial data is not necessarily indicative of the
Company's results of operations that might have occurred had such transactions
been completed at the beginning of the period specified, and do not purport to
represent what the Company's consolidated results of operations might be for any
future period.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------------------------------------------- SEPTEMBER 30,
MERGER --------------
MERGER ADJUSTED ADJUSTED AS REPORTED AS REPORTED
AS REPORTED 1996 1996 1997 1997
1996 --------------- ------------ -------------- --------------
--------------
($ IN
AS REPORTED (% OF SALES) THOUSANDS)
1995
-----------
(% OF
SALES) (% OF SALES) (% OF SALES)
<S> <C> <C> <C> <C> <C> <C>
Sales........................... 100.0% 100.0% $ 346,348 100.0% 100.0% 100.0%
Cost of sales................... 56.2 57.6 184,742 53.3 52.5 53.2
----------- ----- --------------- ----- ----- -----
Gross margin.................... 43.8 42.4 161,606 46.7 47.5 46.8
Selling and marketing
expenses...................... 14.7 16.3 65,385 18.9 18.3 18.6
General and administrative
expenses...................... 9.5 11.2 39,985 11.5 10.9 11.0
Research and development
expenses...................... 6.6 6.5 18,142 5.2 4.7 5.0
Purchased in-process research
and development............... -- 32.3 -- -- -- --
Restructuring, integration and
other non-recurring charges... -- 11.2 -- -- 5.8 6.8
Lease interest income........... 2.1 1.8 4,601 1.2 1.2 1.3
----------- ----- --------------- ----- ----- -----
Income (loss) from operations... 15.1 (33.3) 42,695 12.3 9.0 6.7
Interest income................. 0.2 0.9 363 0.1 0.1 0.2
Interest expense................ (7.2) (9.8) (41,692) (12.0) (12.4) (12.8)
Debt conversion expense......... -- (7.3) -- -- -- --
Other income (expense), net..... 0.3 0.9 1,009 0.3 (0.3) (0.2)
----------- ----- --------------- ----- ----- -----
Income (loss) before income
taxes, minority interests and
extraordinary item............ 8.4 (48.6) 2,375 0.7 (3.6) (6.1)
Provision for (benefit from)
income taxes.................. (8.3) (0.5) 3,250 0.9 (0.9) (2.1)
Income (loss) before minority
interest and extraordinary
item.......................... 16.7 (48.1) (875) (0.2) (2.7) (4.0)
OTHER DATA:
Adjusted EBITDA............... 21.9% 20.4% $ 75,883 21.9% 24.9% 24.3%
<CAPTION>
AS REPORTED
1998
--------------
<S> <C>
Sales........................... 100.0%
Cost of sales................... 50.8
-----
Gross margin.................... 49.2
Selling and marketing
expenses...................... 19.2
General and administrative
expenses...................... 11.1
Research and development
expenses...................... 5.2
Purchased in-process research
and development............... 10.4
Restructuring, integration and
other non-recurring charges... 0.4
Lease interest income........... 1.3
-----
Income (loss) from operations... 4.2
Interest income................. 0.2
Interest expense................ (12.8)
Debt conversion expense......... --
Other income (expense), net..... (0.2)
-----
Income (loss) before income
taxes, minority interests and
extraordinary item............ (8.6)
Provision for (benefit from)
income taxes.................. 0.5
Income (loss) before minority
interest and extraordinary
item.......................... (9.1)
OTHER DATA:
Adjusted EBITDA............... 24.7%
</TABLE>
45
<PAGE>
SALES BY PRODUCT LINE
The following table sets forth, for the periods indicated, the Company's
sales by product line.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------------------------------- SEPTEMBER 30,
MERGER ------------------------
AS REPORTED AS REPORTED ADJUSTED AS REPORTED AS REPORTED AS REPORTED
1995 1996 1996 1997 1997 1998
----------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Drug Infusion Instruments..................... $ 27,887 $ 30,574 $ 81,378 $ 85,576 $ 55,315 $ 56,767
Drug Infusion Disposables..................... 77,064 93,806 210,802 220,634 162,651 169,777
Patient Monitoring Instruments................ -- 1,234 14,452 14,819 9,742 11,940
Patient Monitoring Disposables................ -- 1,758 18,710 18,591 13,497 13,100
Service and other............................. 7,600 8,999 21,006 19,457 15,692 20,297
----------- ----------- ---------- ----------- ----------- -----------
$ 112,551 $ 136,371 $ 346,348 $ 359,077 $ 256,897 $ 271,881
----------- ----------- ---------- ----------- ----------- -----------
----------- ----------- ---------- ----------- ----------- -----------
</TABLE>
The Company achieved increased sales of drug infusion instruments during
1997 as compared to 1996 (on a Merger-adjusted basis), as well as for the nine
months ended September 30, 1998 as compared to the same period in 1997. This
growth is primarily due to continued international expansion and the
introduction of new products for the international market. Drug infusion
disposable sales increased during 1997 and the first nine months of 1998 due to
the growth of the worldwide installed base of drug infusion instruments, as well
as continued growth of specialty disposable administration sets. Patient
monitoring instruments sales increased during 1997 and for the first nine months
of 1998 due the Company obtaining key contracts with significant group
purchasing organizations for patient monitoring products. Despite increased
volume of patient monitoring disposable sales, patient monitoring disposable
revenue decreased approximately $.4 million during the nine months ended
September 30, 1998 as compared to the same period in the prior year due to lower
average selling prices of such products.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
SALES. Sales increased $14.9 million during the nine months ended September
30, 1998 as compared to the nine months ended September 30, 1997. International
sales increased $6.0 million, or 6.4% while United States sales increased $8.9
million, or 5.5%. The increase in international sales is primarily due to
increases in drug infusion revenues of $5.4 million. The majority of the
Company's international sales are denominated in foreign currency. Due to a
stronger U.S. dollar in 1998 as compared to the actual foreign currency exchange
rates in effect during 1997, translation of international sales for the nine
months ended September 30, 1998 were adversely impacted by $2.9 million. See
"--Foreign Operations." The increase in U.S. sales for the nine months ended
September 30, 1998 as compared to the nine months ended September 30, 1997 is
primarily due to increases in drug infusion disposable administration set
revenue of $5.6 million, patient-monitoring revenue of $1.9 million, and revenue
of $3.7 million generated by Instromedix products. These increases were
partially offset by a decrease in drug infusion instrument revenue of $2.4
million.
GROSS MARGIN. The gross margin percentage increased from 46.8% for the nine
months ended September 30, 1997 to 49.2% for the nine months ended September 30,
1998 primarily due to $4.1 million of non-recurring costs included in cost of
sales during the first quarter of 1997. Exclusive of $1.6 million of
non-recurring purchase accounting inventory adjustments and $2.5 million related
to a voluntary field correction of certain Gemini PC-1 and PC-2 infusion pumps
charged to cost of sales during 1997, the gross margin percentage was 48.4%. The
improvement is due to overall higher margins on domestic and international
disposable administration sets and instruments as well as the benefits realized
from ongoing cost reduction efforts and purchasing synergies.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
$4.3 million, or 9.0%, during the nine months ended September 30, 1998 as
compared to the nine months ended September 30,
46
<PAGE>
1997. As a percentage of sales, selling and marketing expenses increased from
18.6% in 1997 to 19.2% in 1998. Domestic expenses increased by $1.8 million, or
6.5%, from 1997 due to the addition of Instromedix and Patient Solutions in 1998
as well as increases in personnel and freight costs in 1998. International
expenses increased $2.5 million from 1997 due to increased sales, the investment
in international direct operations in Italy and Norway during the second half of
1997 and related increases in personnel costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $1.9 million, or 6.6%, during the nine months ended September 30, 1998
as compared to the nine months ended September 30, 1997. As a percentage of
sales, general and administrative expenses increased from 11.0% in 1997 to 11.1%
in 1998. Domestic expenses increased by $0.4 million due to additional domestic
amortization resulting from the Instromedix and Patient Solutions acquisitions.
International expenses increased by $1.5 million, primarily as a result of the
conversion of certain European dealer operations into direct operations,
expansion of the European headquarters and quality initiatives to obtain
required CE markings on products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased approximately $1.4 million, or 11.0%, during the nine months ended
September 30, 1998 as compared to the nine months ended September 30, 1997
primarily due to additional research and development related to projects
associated with the recently acquired Instromedix and Patient Solutions, as well
as increased activities associated with the later development stages of various
domestic and international engineering projects for infusion systems and
disposable administration sets.
INTEGRATION AND OTHER NON-RECURRING CHARGES. In connection with the
Instromedix acquisition, management, with the assistance of consultants, is
performing a review of the operating activities of the acquired company and is
assessing how best to integrate and leverage the Instromedix operations with
ALARIS. During the first nine months of 1998, the Company incurred $1.1 million
in costs associated with this integration, primarily in consulting fees of $0.8
million, retention bonuses of $0.2 million and $0.1 million in other related
costs.
The Company incurred $17.6 million in costs to integrate the IMED and IVAC
operations during the first nine months of 1997. These costs are in addition to
restructuring and integration charges of $15.3 million recorded in the fourth
quarter of 1996. The 1997 expense consists primarily of the write-off of a
product distribution and license agreement with a third party developer of an
ambulatory and alternate site infusion pump of $4.5 million, maquiladora
settlement and related costs of $4.1 million, information systems conversion
costs of $3.1 million, management consulting fees of $1.4 million, severance of
$1.3 million and other integration costs of $3.2 million. The Company reviewed
its products and related research and development activities and market
opportunities in order to focus on projects that will provide greater
competitive advantage and shareholder return. That review resulted in the
termination of the aforesaid product distribution and license agreement. The
$4.5 million charge related to such termination includes a $4.3 million non-cash
charge representing the write-off of the intangible asset associated with such
agreement.
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.
The Company is using the Instromedix purchased in-process research and
development to create new cardiac disease diagnosis, monitoring and management
products which will become part of the Arrhythmia Event Recorders and LifeSigns
System product suites over the next several years. The nature of the efforts
47
<PAGE>
required to develop the purchased in-process technology into commercially viable
products principally relate to designing, prototyping, verification and testing
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features and technical
performance requirements. The Company expects to incur a total of approximately
$4.0 million to complete the projects, of which $0.5 million is expected to be
incurred in the fourth quarter of 1998, while $3.0 million and $0.5 million are
expected to be incurred during 1999 and 2000, respectively. The Company
anticipates that products in the Arrhythmia Event Recorders product suite using
the purchased in-process technology will be released during 1999, while products
under the LifeSigns System product suite will be released during 2000. 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 products will be achieved.
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.
In connection with the PSI acquisition, the Company is using the acquired
in-process research and development to develop an ambulatory infusion pump for
use in the alternate-site market. The nature of the efforts required to develop
the purchased in-process technology into a commercially viable product
principally relate to designing, prototyping, verification and testing
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features and technical
performance requirements. The Company expects to incur a total of $0.7 million
to complete the project, of which $0.2 million is projected to be incurred in
1998 and $0.5 million in 1999. It is anticipated that the pump will be released
during 1999. 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 pump will be achieved.
Pursuant to the technology license agreement, the Company acquired certain
volumetric infusion pump technology from Caesarea. Caesarea is conducting
research and development on this in-process technology in order to create a
large volume infusion pump marketed primarily to consumers in emerging
international markets. The Company is required to make certain milestone
payments up to an aggregate of $4.0 million to Caesarea upon the attainment of
certain developmental milestones, which primarily relate to different product
releases. The Company anticipates that certain products using the purchased in-
process technology will be released during the fourth quarter of 1998, with
additional product releases in subsequent periods through the first half of
1999. 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 pump will be achieved.
INCOME FROM OPERATIONS. Income from operations decreased $5.7 million
during the nine months ended September 30, 1998 as compared to the nine months
ended September 30, 1997 primarily due to non-recurring charges related to the
write-off of $28.3 million in purchased in-process research and development
charges in connection with acquisitions and $1.1 million in integration charges
related to the Instromedix acquisition. The 1997 income from operations includes
integration and other non-recurring charges of charges of $21.7 million in 1997
related to the IVAC/IMED merger. After excluding non-recurring charges from 1997
and 1998, the adjusted income from operations is $39.0 in 1997 as compared to
$40.9 in 1998. The increase in 1998 over 1997 is due primarily to improved sales
and gross margins.
ADJUSTED EBITDA. Adjusted EBITDA increased $4.8 million during the nine
months ended September 30, 1998 as compared to the nine months ended September
30, 1997. As a percentage of sales, Adjusted EBITDA increased from 24.3%, or
$62.4 million, for 1997 to 24.7%, or $67.2 million, for 1998 due to the reasons
discussed above. Adjusted EBITDA represents income from operations before non-
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recurring non-cash purchase accounting charges, integration charges and
depreciation and amortization. Adjusted EBITDA does not represent net income or
cash flows from operations, as these terms are defined under generally accepted
accounting principles, and should not be considered as an alternative to net
income or to cash flows as an indicator of the Company's operating performance
or to cash flows as a measure of liquidity. The Company has included information
concerning Adjusted EBITDA herein because it understands that such information
is used by investors as a measure of an issuer's historical ability to service
debt. Integration and other one-time non-recurring charges are excluded from
Adjusted EBITDA as the Company believes that the inclusion of these items would
not be helpful to an investor's understanding of the Company's ability to
service debt. The Company's computation of Adjusted EBITDA may not be comparable
to similar titled measures of other companies.
INTEREST EXPENSE. Interest expense increased $1.8 million, or 5.6%, during
the nine months ended September 30, 1998 as compared to the nine months ended
September 30, 1997 due to additional financing obtained to fund the Instromedix
acquisition. In connection with the Instromedix acquisition, in July the Company
increased the outstanding bank term debt $30.0 million and completed the sale of
$109.9 million 11 1/8% senior discount notes, due 2008, resulting in increased
interest expense for 1998. (see Liquidity and Capital Resources).
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
SALES. Sales increased $222.7 million during 1997 as compared to 1996 due
to the Merger. On a Merger-Adjusted basis, sales increased $12.7 million, or
3.7%, during 1997 as compared to 1996. United States sales increased $2.4
million, or 1.1%, on a Merger-Adjusted basis to $227.0 million during 1997 from
$224.6 million in 1996. International sales increased $10.4 million, or 8.5%, on
a Merger-Adjusted basis to $132.1 million during 1997 from $121.7 million during
1996. The increase in international sales is primarily due to an increase in
volume of drug infusion instruments and disposable administration sets as well
as the August 1996 repurchase of European distribution rights from Pharmacia &
Upjohn, Inc. for IMED products which has resulted in higher average selling
prices for these products in 1997. The majority of the Company's international
sales are denominated in foreign currency. Due to a stronger U.S. dollar in 1997
as compared to the actual foreign currency exchange rates in effect during 1996,
translation of 1997 international sales were adversely impacted by $7.1 million.
See "--Foreign Operations." The increase in U.S. sales in 1997 as compared to
1996, on a Merger-Adjusted basis, is primarily due to an increase in drug
infusion disposable administration set revenue. Such increase is due to an
increase in volume of the Company's SmartSite Needle Free System administration
sets.
GROSS MARGIN. The gross margin percentage increased to 47.5% in 1997 from
42.4% in 1996 primarily due to supplier price concessions resulting from the
Merger and favorable international margins due in part to the repurchase of
European distribution rights from Pharmacia & Upjohn, Inc. These were partially
offset by increased amortization expense resulting from the IVAC Holdings
purchase price allocated to certain intangible assets, $1.6 million of
non-recurring purchase accounting inventory adjustments, as well as $2.5 million
related to a voluntary field correction of certain Gemini PC-1 and PC-2 infusion
pumps charged to cost of sales during 1997. The Merger-Adjusted gross margin
percentage for 1996 was 46.7% compared to 48.7% for 1997, exclusive of the
purchase accounting inventory adjustment and product field correction charges.
SELLING AND MARKETING EXPENSE. Selling and marketing expense increased
$43.5 million during 1997 primarily due to the Merger. On a Merger-Adjusted
basis, selling and marketing expense increased approximately $0.4 million, or
0.6%, during 1997. As a percentage of sales, on a Merger-Adjusted basis, selling
and marketing expense decreased to 18.3% in 1997 from 18.9% in 1996. Domestic
expense decreased by $2.3 million, or 5.6%, from 1996 due to Merger-related
synergies. The decrease in domestic selling and marketing expense was more than
offset by increased international expenses of $2.7 million, or 10.9%, due to
increased international sales and associated increase in European direct
operations.
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GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased $24.0 million during 1997 primarily due to the Merger. On a
Merger-Adjusted basis, general and administrative expense decreased by $0.8
million, or 1.9%, during 1997. As a percentage of sales, on a Merger-Adjusted
basis, general and administrative expense decreased to 10.9% for 1997 from 11.5%
for 1996 due to an increase in sales, as well as Merger-related synergies,
including lower labor and facilities expenses. International expenses increased
by $0.6 million, or 9.1% as a result of an increase in the investment in direct
operations in Europe.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased approximately $8.0 million during 1997 primarily due to the Merger. On
a Merger-Adjusted basis, research and development expense decreased to $16.9
million, or 4.7% of sales, for 1997 from $18.1 million, or 5.2% of sales, for
1996, primarily due to synergies realized in the Merger and realignment and
prioritization of research and development projects.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with the
Merger, the assets and liabilities of IVAC Holdings were adjusted to their
estimated fair values. As a result of this process, the Company incurred a
one-time $44.0 million write-off during 1996 related to the value assigned to
the acquired in-process research and development of IVAC Holdings 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. The Company has continued to invest
in the development necessary to obtain technological feasibility of these
projects. The project, which represents the most significant portion of the
acquired in-process research and development charge, is an improved
cost-effective and technologically advanced electronic thermometer.
RESTRUCTURING, INTEGRATION AND OTHER NON-RECURRING CHARGES. The Company
incurred $20.9 million in integration costs and other non-recurring charges
during 1997. These costs are in addition to restructuring and integration
charges of $15.3 million recorded in the fourth quarter of 1996. The 1997
charges consist primarily of information systems conversion costs of $4.8
million, the write-off of a product distribution and license agreement with a
third party developer of an ambulatory and alternate-site infusion pump of $4.5
million, contract dispute settlement and related costs of $4.1 million, the
write-off of drug infusion instrument tooling associated with the redesign
effort on a product in development of $1.7 million, facilities moving expenses
and Company name change costs of $1.6 million, management consulting fees of
$1.4 million, severance of $1.3 million and other integration costs of $1.5
million. The Company has reviewed its products and related research and
development activities and market opportunities in order to focus on projects
that will provide greater competitive advantage and stockholder return. That
review resulted in the termination of the aforesaid product distribution and
license agreement. The $4.5 million charge related to such termination includes
a $4.3 million non-cash charge representing the intangible asset that had been
recorded associated with such agreement.
LEASE INTEREST INCOME. Lease interest income during both periods consists
of interest income associated with contracts or agreements pursuant to which a
third party acquired infusion pumps under sales-type leases. Lease interest
income increased $2.1 million or 82.3% for 1997 as compared to 1996 primarily
due to the Merger. On a Merger-Adjusted basis, lease interest income decreased
approximately 0.9% from 1996 to 1997.
INCOME (LOSS) FROM OPERATIONS. Income from operations increased $77.8
million during 1997 primarily due to the 1996 operating results including
significant non-recurring purchase accounting charges in the amount of $63.3
million. Additionally, due to the Merger being completed on November 26, 1996,
the 1996 operating results include only one month of operating profit from the
acquired business, in the amount of $1.8 million, while 1997 includes a full
year of profit contribution. This increase was partially offset by expenses
related to the field correction on the Gemini pumps in the first quarter and the
maquiladora business interruption in the second quarter. On a Merger-Adjusted
basis, operating income decreased
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$10.2 million to $32.5 million in 1997 from $42.7 million in 1996 primarily due
to the $20.9 million of integration costs discussed above, offset by a $9.1
million improvement in gross profit.
ADJUSTED EBITDA. Adjusted EBITDA increased $61.5 million during 1997
primarily due to the Merger. On a Merger-Adjusted basis, as a percentage of
sales, Adjusted EBITDA increased to 24.9%, or $89.3 million, for 1997 from
21.9%, or $75.9 million, for 1996, due to the reasons discussed above. Excluding
the $2.5 million charge to cost of sales during the first quarter of 1997,
Adjusted EBITDA would have increased to $91.8 million, an increase of $15.9
million or approximately 21.0%, as compared to Merger-Adjusted 1996.
INTEREST INCOME. Interest income decreased approximately $0.7 million
during 1997 as compared to 1996 due to the liquidation of interest earning
restricted cash balances during 1996.
INTEREST EXPENSE. Interest expense increased $31.0 million during 1997
primarily due to the Merger. In addition to interest on approximately $404.0
million of borrowings to finance the Merger and related debt refinancings,
higher interest expense was incurred in 1997 due to IMED's $11.0 million
purchase of the European distribution rights for IMED products in August 1996.
This increase in interest expense was offset by reductions in interest on $37.5
million of convertible debt which was converted to Common Stock in connection
with the Merger, as well as the redemption of $21.9 million of 15% Subordinated
Debentures in December 1996. On a Merger-Adjusted basis, interest expense
increased $2.7 million due to additional borrowings under the Credit Facility.
The additional borrowings were used to pay for restructuring and integration
costs associated with the Merger.
DEBT CONVERSION EXPENSE. In connection with the Merger, $37.5 million of
convertible notes payable to Decisions, which is wholly-owned by Mr. Picower and
a shareholder of ALARIS Medical, were converted to common stock of ALARIS
Medical, par value $.01 per share ("Common Stock"). In order to induce
conversion, approximately 3.3 million shares of Common Stock were issued to
Decisions. As a result, during 1996, ALARIS Medical recorded a non-cash charge
of $10.0 million based upon the fair value of the shares issued.
OTHER (EXPENSE) INCOME. Other income decreased $2.8 million during 1997 as
compared to 1996, partially due to a foreign exchange loss of approximately $1.0
million during 1997 as compared to foreign exchange gain of approximately $0.5
million during 1996. Also, during 1996, ALARIS Medical sold its investment in
the common stock of Alteon, Inc. for approximately $2.4 million and realized a
gain of approximately $0.7 million.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
SALES. Sales increased approximately $23.8 million or 21.2% due to the
inclusion of IVAC Holdings sales for December 1996. Excluding IVAC Holdings
sales, total IMED only sales increased approximately $0.4 million during 1996 as
compared to 1995. United States sales decreased approximately $4.5 million or
4.9% during 1996 as compared to 1995. Within the United States infusion therapy
business, sales decreased for 1996, as compared to 1995, primarily due to a (i)
decrease in the volume of infusion pump shipments primarily attributable to
several large transactions during 1995 and (ii) decline in the average selling
price of IMED's infusion pumps and disposable administration sets, offset in
part by an increase in unit volume of disposable administration set sales. Sales
to customers located outside of the United States increased $5.0 million, or
24.5%, to $25.4 million for 1996 from $20.4 million for 1995 primarily as a
result of increased unit volume of disposable administration sets resulting from
IMED's growing installed base in Canada, Australia, Latin America and the Far
East. Also contributing to the growth in international sales was the repurchase
of the European distribution rights by IMED for its products in August 1996.
This repurchase resulted in higher end-user sales prices being recognized than
charged to the European distributor in 1995.
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GROSS MARGIN. Gross margin increased $8.4 million or 17.1% from 1995 to
1996 primarily due to the Merger. Additionally, 1996 gross margin was reduced by
$4.0 million due to that portion of the purchase accounting adjustments made to
adjust the acquired IVAC Holdings inventory to its estimated fair value on the
Merger date which was charged to cost of sales during December 1996. Excluding
the Merger, IMED only gross margin increased $1.4 million to $50.7 million for
1996 from $49.3 million for 1995 due primarily to the decrease in cost of sales
discussed below. Despite the decline in average selling prices of infusion pumps
and disposable administration sets discussed above, IMED only gross margin, as a
percentage of IMED only sales, increased to 44.8% for 1996 from 43.8% for 1995
primarily as a result of reductions in the manufacturing cost of disposable
administration sets caused by (i) increased outsourcing of molded parts and
components; (ii) negotiated price reductions from suppliers; and (iii) the
favorable effects of increased manufacturing volume. Gross margin also increased
for 1996, compared to 1995, as a result of lower unit cost for inventory at
December 31, 1995 that were sold during 1996 compared to the unit cost for
inventory at December 31, 1994 that were sold during 1995.
SELLING AND MARKETING. Selling and marketing expense increased $5.7 million
or 34.4% during 1996 as compared to 1995 primarily due to the Merger. Exclusive
of the Merger, as a percentage of IMED only sales, selling and marketing expense
increased to 15.9% for 1996 from 14.7% for 1995. IMED only selling and marketing
expense increased from $16.6 million for 1995 to $18.0 million for 1996
primarily due to the recognition of selling and marketing expense by IMED Ltd.
in 1996 as a result of the repurchase by IMED of the European distribution
rights for its products. Also contributing to this increase were compensation
and relocation expenses for selling and marketing management personnel hired
during 1996.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased
$4.5 million or 42.7% during 1996 as compared to 1995 primarily due to the
Merger. Exclusive of the Merger, general and administrative expense increased to
$12.5 million for 1996 from $10.7 million for 1995 as a result of recruitment
and relocation expenses of development personnel and increased management
compensation. General and administrative expense also increased for 1996,
compared to 1995, due to the recognition of general and administrative expenses
by IMED Ltd. in 1996. As a percentage of IMED only sales, IMED only general and
administrative expense increased to 9.5% for 1996 from 7.9% for 1995 primarily
as a result of the increase in general and administrative expenses discussed
above.
RESEARCH AND DEVELOPMENT. Research and development expense increased $1.5
million or 19.9% during 1996 as compared to 1995 primarily due to the Merger.
IMED only research and development expense increased to $7.8 million for 1996
from $7.4 million for 1995 primarily as a result of the timing of certain
expenses associated with the development of a new modular infusion system. Due
to the increase in IMED only research and development costs, research and
development expense, as a percentage of sales, increased to 6.9% for 1996 from
6.6% for 1995.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with the
Merger, the assets and liabilities of IVAC Holdings were adjusted to their
estimated fair values. As a result of this process, the Company incurred a
one-time $44.0 million write-off during 1996 related to the value assigned to
the acquired in-process research and development of IVAC Holdings 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. The Company has continued to invest
in the development necessary to obtain technological feasibility of these
projects. The project, which represents the most significant portion of the
acquired in-process research and development charge, is an improved cost
effective and technologically advanced electronic thermometer.
RESTRUCTURING, INTEGRATION AND OTHER NON-RECURRING CHARGES. In connection
with the Merger, management performed an extensive review of the operating
activities of both IMED and IVAC Holdings in order to reduce costs and maximize
synergies. Management identified duplicative costs to eliminate and developed
and implemented plans to consolidate and integrate the companies' operations
including
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product strategies, manufacturing, service centers, research and development,
marketing and other administrative functions. As a result, the Company recorded
a non-recurring charge related to the implementation of these plans in the
amount of $15.3 million in 1996. Estimated dealer termination costs, as well as
severance and benefits costs related to the acquired company's personnel in the
amount of $2.8 million were also accrued at the acquisition date. In accordance
with generally accepted accounting principles, such items effectively increased
the amount of goodwill recorded in connection with the Merger and were not
included in the $15.3 million restructuring and integration expense included in
the Consolidated Statement of Operations for the year ended December 31, 1996.
At December 31, 1996, the Company had approximately $15.1 million accrued
related to restructuring costs, primarily all of which was paid during 1997.
As a result of the Merger, approximately 225 employees from all functional
areas were given notice of termination in December 1996. Approximately 125 of
such terminations were effective December 31, 1996 while the additional 100
employees were phased-out during the first half of 1997.
Due to excess capacity at the manufacturing facilities of both companies,
the Company consolidated IMED's instrument manufacturing operations into the
existing IVAC Holdings facility. This consolidation was completed in December
1996. In addition, as a result of the employee terminations described above,
management decided to consolidate the headquarters of IMED into IVAC Holdings'
existing headquarters. This consolidation was substantially completed during the
first quarter of 1997.
LEASE INTEREST INCOME. Lease interest income during both periods consists
of interest income associated with contracts or agreements pursuant to which a
third party acquired infusion pumps under sales-type leases. Lease interest
income increased $0.2 million or 7.2% for 1996 as compared to 1995 primarily due
to the Merger.
INCOME (LOSS) FROM OPERATIONS. Income from operations decreased from $17.1
million for 1995 to a loss of $45.3 million for 1996 primarily due to the Merger
and resulting purchase accounting adjustments which more than offset the IVAC
Holdings only operating income generated in December 1996. Excluding the impact
of the Merger on the 1996 operating results, consolidated operating income
decreased $2.3 million or 13.5% to $14.8 million in 1996 from $17.1 million in
1995 due to the reasons discussed above.
ADJUSTED EBITDA. For the reasons discussed above excluding the impact of
the Merger, as a percentage of sales, Adjusted EBITDA decreased to 20.3%, or
$22.9 million, for 1996 from 21.9%, or $24.6 million, for 1995.
INTEREST INCOME. Interest income increased approximately $1.0 million
during 1996 as compared to 1995 due to the interest earned on the proceeds of
the $25.0 million borrowed from Decisions in December 1995. Approximately $12.5
million of such proceeds were utilized in June 1996 to fund the purchase of a
warrant which entitled the holder to purchase up to 10% of IMED's common stock.
The remaining proceeds were utilized in November 1996 in connection with the
Merger.
INTEREST EXPENSE. Interest expense increased $5.2 million to $13.4 million
during 1996 from $8.2 million during 1995. The increase in interest expense was
due to the increase in debt obtained to finance the Merger. Also contributing to
the increase was the interest on approximately $11.0 million of borrowings made
by IMED in August 1996 related to the repurchase of the European distribution
rights for IMED products, as well as interest on $25.0 million of convertible
notes payable to Decisions which was borrowed in December 1995 and converted to
Common Stock in November 1996 in connection with the Merger.
DEBT CONVERSION EXPENSE. In connection with the Merger, $37.5 million of
convertible notes payable to Decisions were converted to Common Stock. In order
to induce conversion, approximately 3.3 million shares of Common Stock were
issued to Decisions. As a result, during 1996 ALARIS Medical recorded a non-cash
charge of $10.0 million based upon the fair value of the shares issued.
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OTHER INCOME. During 1996, ALARIS Medical sold its investment in the common
stock of Alteon, Inc. for approximately $2.4 million and realized a gain of
approximately $0.7 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have been cash flow from
operations and borrowings under the Credit Facility. See "Description of Certain
Indebtedness--Credit Facility." The Company expects to continue to meet its
short-term (I.E., less than twelve months) and long-term liquidity needs,
including capital expenditure requirements with cash flow from the operations of
ALARIS Medical Systems and the remaining cash proceeds from the Notes. In
addition to operating expenses, the Company's primary historical use of funds
has been and its future use of funds, on a short-term (I.E., less than twelve
months) and long-term basis, will continue to be to fund capital expenditures
and strategic acquisitions and to pay debt service on outstanding indebtedness.
Net cash provided by operating activities for the nine months ended
September 30, 1998 was $30.2 million compared to $0.8 million provided by
operating activities in the same period in 1997. Net cash used in investing
activities for the nine months ended September 30, 1997 and 1998 was $12.6
million and $76.6 million, respectively. Net cash used in investing activities
included $15.1 million and $16.8 million in net capital expenditures for the
nine months ended September 30, 1997 and 1998, respectively. The net capital
expenditures for the nine months ended September 30, 1997 were partially offset
by a net decrease in restricted cash and investments of $2.3 million. Net cash
provided by financing activities for the nine months ended September 30, 1997
was $5.6 million which was primarily comprised of proceeds under the revolving
credit facility of $18.8 million offset by $7.5 million in repayments under the
revolving credit facility and $3.9 million of principal payments on long-term
debt. Net cash provided by financing activities for the nine months ended
September 30, 1998 was $84.5 million which was primarily comprised of proceeds
from the issuance of notes payable of $109.9 million and proceeds from the term
loan borrowing of $30.0 million offset by net repayments under the revolving
credit facility of $25.2 million and principal payments on long-term debt of
$20.2 million.
At September 30, 1998, the Company's outstanding indebtedness was $543.4
million, which includes $211.4 million of bank term debt under the credit
facility, $200.0 million of Senior Subordinated Notes due 2006 (the "Notes"),
which were issued in connection with the Merger and $112.0 million 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
50% of its term loan borrowings. Such agreement fixed the interest rate charged
on such borrowings resulting in a weighted average fixed rate of 9.6% on the
principal balance covered. As a result, a one percent increase in the rate of
interest charged on indebtedness outstanding under the credit facility at
September 30, 1998 would result in additional annual interest expense of
approximately $1.1 million. During March 1998, the bank credit facility was
amended and the interest rates on the bank debt reduced. As a result, the
weighted average interest rate, including the effect of the interest rate
protection agreement, was reduced to 8.5% based on the amounts outstanding at
the time of the amendment. The Company incurred fees of approximately $0.4
million related to such interest rate reductions. Included in total consolidated
debt, at September 30, 1998, ALARIS Medical had outstanding $16.2 million of
7 1/4% Convertible Debentures.
In connection with obtaining the Merger financing, the Company also obtained
a $50.0 million revolving credit line as part of the credit facility. In July
1998, in connection with the Instromedix acquisition, the Company amended its
bank credit facility. The amendment provided for the banks' consent to the
Instromedix acquisition and increased the revolving credit facility to $60.0
million. At September 30, 1998, a $0.5 million letter of credit was committed
under this line of credit and $59.5 million was available.
The amended bank 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
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$3.0 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
11 1/8% senior discount notes, due 2008, 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.
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 $82.6
million to ALARIS Medical Systems, as required under the amended bank credit
agreement. ALARIS Medical Systems then repaid the amount outstanding under its
revolving credit line.
As a result of ALARIS Medical's failure to have the Registration Statement,
of which this Prospectus is a part, declared effective by November 25, 1998, the
Company's obligation to pay Liquidated Damages to each Holder of Old Notes
commenced November 26, 1998. ALARIS Medical's obligation to pay the aforesaid
Liquidated Damages terminated on January 14, 1999. During the period that the
Company was obligated to pay Liquidated Damages, additional interest at the rate
of $0.05 per week per one thousand dollars of principal amount of Old Notes
accrued. See "The Exchange Offer--Purpose and Effect of the Exchange Offer."
In connection with the Merger, the Company assumed IVAC's obligations to
Siemens Infusion Systems Ltd. ("SIS"). These obligations relate to the payment
of additional purchase consideration related to the acquisition of the MiniMed
product line (the predecessor product line to MS III). The Company's remaining
obligation to SIS is the greater of $3.0 million or 8% of the prior year's MS
III sales in 1999. The Company made the minimum 1998 payment of $3.0 million
during the first quarter of 1998.
As a result of the Company's significant indebtedness, the Company expects
to incur significant interest expense in future periods. The Company believes
that cash provided by operations will be sufficient to meet its interest expense
obligations.
Annual principal amortization of the Company's indebtedness is $0.1 million
for the fourth quarter of 1998 and $15.5 million and $13.9 million for 1999 and
2000, respectively.
The Convertible Debentures provide for semi-annual interest payments of
approximately $0.6 million and mature on January 15, 2002. The Notes and the
credit facility permit ALARIS Medical Systems to fund interest payments on the
Convertible Debentures and to make limited distributions to ALARIS Medical to
fund operating expenses and to pay income taxes; provided that, with respect to
the credit facility, there exists no default or event of default under the
credit facility. The Notes and the credit facility, however, restrict
distributions to ALARIS Medical to fund the repayment of the Convertible
Debentures at maturity.
During the first nine months of 1998, the Company made cash payments of
approximately $1.7 million related to merger and integration costs accrued at
December 31, 1997. Also during the third quarter of 1998, the Company accrued
approximately $1.1 million for integration costs related to Instromedix, of
which approximately $0.1 million was paid in cash. During 1997 the Company made
cash payments of approximately $13.7 million related to merger and integration
costs accrued at December 31, 1996, as well as payments of approximately $16.7
million for integration costs expensed during 1997. The Company made capital
expenditures of approximately $19.8 million during the year ended December 31,
1997, of which approximately $5.7 million was related to the consolidation of
IMED and IVAC Holdings facilities.
During the first nine months of 1998, the Company made capital expenditures
of approximately $17.0 million and anticipates it will make capital expenditures
of approximately $25.0 million for the full year.
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
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additional acquisitions, depending on the value of potential acquisitions, the
Company might fund such transactions through a variety of sources, including
existing cash, new or existing debt facilities or through the sale of equity
securities.
The Company believes that, on both a short-term (I.E., less than twelve
months) 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 its 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
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, 1998, over the next twelve months, the
Company is required to make principal and interest payments under its bank
credit facility in the amount of $30.8 million and interest payments on the
9 3/4% Notes and the 7 1/4% 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. Furthermore, for the year ended
December 31, 1997 and the nine months ended September 30, 1998, on a pro forma
basis, after giving effect to the Offering and the use of proceeds therefrom and
the Credit Facility Borrowings, as a result of losses, earnings were
insufficient to cover fixed charges by $26.5 million and $33.9 million,
respectively. However, the fixed charges coverage ratio as provided in the
Indenture is defined significantly different to fixed charges as presented here.
Pursuant to the Indenture, the fixed charges coverage ratio is based on
consolidated EBITDA divided by fixed charges, whereby EBITDA is substantially
equivalent to Adjusted EBITDA (as defined). See "Risk Factors."
YEAR 2000 RISK; NEW INFORMATION SYSTEMS
Certain of the Company's infusion pumps contain software in which the
product's record keeping capabilities will be affected beyond the year 2000. The
Company believes that these issues will not interfere with the fluid delivery
functions of the products involved, nor will they affect the safety of patients;
however, there can be no assurance in this regard. Such record keeping
capabilities serve as a log of the products use and are primarily used by the
Company if needed in determining causes of product failures. Management believes
the Company has completed development of the corrective software for all but one
of its products and is offering such software for sale to its customers.
Corrective software for the one remaining product is under development and will
be available to customers in the first quarter of 1999. Costs of such
development has not been and is not anticipated to be material to the Company.
In addition to routine capital expenditures, and in connection with the
Merger, the Company has made significant expenditures for the acquisition of
enterprise-wide information system software and hardware and the related design,
testing and implementation. The 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, the Company will be converting the international information systems
to a system common with the domestic operations. The international project is
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scheduled for completion in 1999. The international system is also designed to
properly process transactions denominated in euro currency. Euro currency is a
new monetary unit which certain European countries can begin using in 1999. See
"Risk Factors--Euro Conversion".
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. 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 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 supplies and seek supplies from other vendors. The Company estimates that
such contingency plan will be completed by December 31, 1998. 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.
The Company has formed a committee to identify, evaluate and address year
2000 issues to which the Company might be exposed on a worldwide basis including
and in addition to the items previously described. The committee is currently
assessing the year 2000 readiness of certain key areas including, but not
limited to, Company operations (including non-information technology systems)
and third party suppliers. The committee has not yet completed this assessment
but it is not currently aware of any material year 2000 issues related to other
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 end of the calendar year 1998 and 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 ability of these third parties to adequately address
their year 2000 issues is outside the Company's control. Failure by some or all
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 some of these parties will not be
able to adequately solve their year 2000 issues in a timely manner. The Company
does not believe it has significant dependence on any one of these third parties
and accordingly does not believe that it is reasonably likely that the Company
will experience any material adverse impacts related to year 2000 issues.
However, 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 or the Company's ability to make payments with
respect to the notes when due.
During the fiscal years 1996 and 1997 the Company made combined capital and
operating expenditures of approximately $7.5 million related to the new
enterprise, and expenditures of $4.5 million in the nine months ended September
30, 1998. To complete the identified phases of the project, the Company
anticipates additional expenditures for the remainder of 1998 and for 1999 of
approximately $3.4 million and $3.5 million, respectively.
SEASONALITY
Infusion instrument sales are typically higher in the fourth quarter due to
sales compensation plans which reward the achievement of annual quotas and the
seasonal characteristics of the industry, including hospital purchasing
patterns. First quarter sales are traditionally not as strong as the fourth
quarter. The
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Company anticipates that this trend will continue but is unable to predict the
effect, if any, from health care reform and increased competitive pressures.
BACKLOG
The backlog of orders, believed to be firm, at September 30, 1997 and 1998
was $7.9 million and $5.2 million, respectively.
FOREIGN OPERATIONS
As a result of the Merger, the Company has significant foreign operations.
Accordingly, the Company is subject to various risks, including without
limitation, foreign currency risks. Historically, the Company has not entered
into foreign currency contracts to hedge such exposure and such risk. Due to
changes in foreign currency exchange rates during 1997, primarily a
strengthening of the U.S. dollar against many European currencies, the Company
recognized a foreign currency transaction loss of approximately $1.0 million
during 1997. Due to changes in foreign currency exchange rates during 1998,
primarily a strengthening of the U.S. dollar against many European currencies,
the Company recognized a foreign currency transaction loss of approximately $0.5
million during the nine months of 1998. For the year ended December 31, 1997 and
the nine months ended September 30, 1998, approximately 30% and 32% of the
Company's sales and 23% 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 will
evaluate hedging programs during 1998 to limit the exposure to the Company
resulting from changes in foreign currency exchange rates.
HEALTH CARE REFORM
Heightened public awareness and concerns regarding the growth in overall
health care expenditures in the United States may result in the enactment of
legislation affecting payment mechanisms and health care delivery. Legislation
which imposes limits on the number and type of medical procedures which may be
performed or which has the effect of restricting a provider's ability to select
specific devices or products for use in administrating medical care may
adversely impact the demand for the Company's products. In addition, legislation
which imposes restrictions on the price which may be charged for medical
products may adversely affect the Company's results of operations. It is not
possible to predict the extent to which the Company or the health care industry
in general may be adversely affected by the aforementioned in the future.
LITIGATION
The Company was a defendant in a lawsuit filed in June 1996 by Sherwood
Medical, Inc. against IVAC which alleges infringement of two patents by reason
of certain activities including the sale by IVAC of disposable probe covers for
use with the Company's infrared tympanic thermometer. The lawsuit 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 tentatively
scheduled for June, 1999. The Company believes it has sufficient defenses to all
claims, including the defenses of noninfringement and invalidity and intends to
vigorously defend this action. However, there can be no assurance that the
Company will successfully defend all claims made by Sherwood and the failure of
the Company to successfully prevail in any such lawsuit could have a material
adverse effect on the Company's operations, financial condition and cash flows.
The Company is a defendant in a lawsuit filed on April 20, 1998 and served
on October 28, 1998, by Becton which alleges infringement of a patent licensed
to Becton by reason of certain activities, including the
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sale of the Company's SmartSite Needle Free System. Becton has requested a
permanent injuction enjoining the Company from infringing the patent in suit (US
5,699,821). 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 Company's operations, financial condition and 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 Atrium needle free valve. The lawsuit seeks
injunctive relief, damages and the recovery of costs and attorney fees.
FIELD CORRECTIONS
In the first quarter of 1997, the Company identified and subsequently
initiated a voluntary field correction of approximately 50,000 of its Gemini
model PC-1 and PC-2 infusion pumps because failure of specific electrical
components on the power regulator printed circuit board may result in improper
regulation of the battery charge voltage, which can cause the battery to
overheat. Such overheating could result in product failure and discharge of
hydrogen gas which may accumulate within the instrument's case. As an interim
measure, the Company has advised its customers of simple precautions that can be
taken to minimize the potential for an adverse incident pending completion of
the field correction. The Company is not aware of any injuries sustained in
battery overcharging incidents. The Company recorded a charge of $2.5 million to
cost of sales during the first quarter of 1997 for this field correction and
believes it has adequately accrued for this matter. However, there can be no
assurance that this field correction can be implemented for an amount consistent
with management's estimate.
The Company has initiated a voluntary safety alert of its Model 597/598 and
Model 599 Series infusion pumps. The Company discontinued selling the Model 599
Series infusion pumps in March 1997. The safety alert advises customers to
inspect and, if necessary, make an adjustment to the infusion pump in order to
prevent misloading of disposable administration sets.
The Company has initiated a voluntary field correction of its Signature
Edition infusion pumps to correct a malfunction of an electronic line filter
component (which malfunction may occur when a user fails to follow the Company's
written cleaning instructions and can result in an electrical short). The
Company is not aware of the occurrence of any injury incidents relating to a
malfunction of this type. During November 1998, the Company initiated a product
Safety Alert regarding its Signature Edition infusion pump instructing users to
confirm the proper placement of a mechanism spring which, if not properly
positioned, could cause a free flow condition. In the third quarter of 1998, the
Company initiated a recall of its Gemini PC-4 infusion pumps to correct certain
electro-mechanical problems which may cause one or more channels of the device
to audibly and visibly alarm and temporarily cease operation. The Company has
also initiated a mandatory field upgrade of its P-1000, P-2000, P-3000 and
P-4000 syringe pumps because under certain circumstances a rate change can
occur. Although there can be no assurance, the Company believes that the
voluntary field correction, Safety Alert, recall and field upgrade, 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
operation or cash flows of the Company.
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BUSINESS
OVERVIEW
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 has a number one or two market position in eight 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.
The Company sells a full range of products through a direct sales force
consisting of over 230 sales persons and through more than 150 distributors to
over 5,000 hospitals worldwide. Sales to customers located in and outside of the
United States accounted for 63.2% and 36.8%, respectively, of the Company's
sales for the year ended December 31, 1997. For the year ended December 31,
1997, the Company had sales of $359.1 million and Adjusted EBITDA of $89.3
million. Adjusted EBITDA represents income from operations before restructuring
charges, non-cash purchase accounting charges and depreciation and amortization.
Adjusted EBITDA does not represent net income or cash flows, as these terms are
defined under generally accepted accounting principles, and should not be
considered as an alternative to net income or to cash flows as an indicator of
operating performance or as a measure of liquidity. The Company has included
information concerning Adjusted EBITDA herein because it uses such information
as a method of assessing its cash flow and ability to service debt and believes
that such information is also used by investors as a measure of an issuer's
ability to service its debt obligations. Restructuring and other one-time
non-recurring charges are excluded from Adjusted EBITDA as the Company believes
that the inclusion of these items would not be helpful to an investor's
understanding of the Company's ability to service debt. The Company's
computation of Adjusted EBITDA may not be comparable to similarly titled
measures of other companies. For the years ended December 31, 1996 and 1997 and
for the nine months ended September 30, 1998, the Company had net losses of
$67.2 million, $9.6 million and $24.7 million, respectively.
INFUSION SYSTEMS. At December 31, 1997, the Company had approximately
190,000 single and multi-channel large volume infusion pumps and 273,000
channels installed in the United States, with a market share of approximately
32% and 37% of the installed base of large volume infusion pumps and channels,
respectively. The Company offers a wide variety of infusion pumps designed to
meet the varying price and technological requirements of its diverse customer
base. These infusion pumps include the Gemini series, consisting of single, dual
and four channel infusion pumps designed for use in all hospital settings by
customers with sophisticated technological requirements; the Signature Edition
system, a versatile, user-friendly single and dual channel infusion pump for use
in critical and general medical and surgical settings; the MS III, a compact,
lightweight, programmable three channel infusion pump targeted for the hospital
critical care setting; and the Model 560/570 Series, consisting of single
channel infusion pumps designed for use in all hospital settings and marketed
primarily to the price-conscious customer. A single channel pump has only one
fluid delivery line to the patient, while a multi-channel pump has two or more
fluid delivery lines. Multi-channel pumps are used to service only a single
patient. Generally, where more than one fluid delivery line is required for a
patient, purchasing a multi-channel pump is less costly than purchasing an
equivalent number of single channel pumps. In addition, the Company offers the
ReadyMED ambulatory infusion pump, which is compact, lightweight and disposable
for use in the alternate-site market, as well as a broad range of syringe
infusion pumps for use primarily outside the United States.
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The Company also manufactures and sells higher-margin proprietary disposable
administration sets which are required to be used with the Company's large
volume infusion pumps. Since the useful lives of the Company's infusion pumps
typically range between seven to ten years, the Company's industry-leading
installed base allows it to generate predictable and recurring revenues from
sales of disposable administration sets. For the year ended December 31, 1997,
the Company sold approximately 62.0 million disposable administration sets
(proprietary and non-proprietary) representing sales of $220.7 million or 61.5%
of sales. Many of the Company's disposable administration sets offer protection
features designed to prevent the unregulated flow of fluids into a patient's
blood stream ("free flow"). In addition, the Company has recently introduced
several enhancements to its disposable administration sets, including
needle-free access systems that are designed to reduce the risk to health care
providers of diseases, such as AIDS and hepatitis, that may be transmitted
through accidental needlesticks, and, in the case of the SmartSite Needle Free
System, to eliminate patient exposure to latex which can cause severe allergic
or anaphylactic shock reactions. These features continue to provide the
Company's customers with the latest cost-effective technology for the Company's
installed base of infusion pumps. For the year ended December 31, 1997, the
Company's infusion system (pumps and disposables) sales were $306.3 million or
85.3% of sales.
PATIENT MONITORING PRODUCTS. The Company's patient monitoring products
compete in discrete market niches, each with different competitive dynamics. The
Company primarily operates in the United States, Canada and Western Europe in
two patient monitoring product markets: (i) hospital thermometry systems and
(ii) stand-alone, non-invasive, multi-parameter instruments used to measure and
monitor a combination of vital signs. For the year ended December 31, 1997, the
Company's patient monitoring product sales were approximately $33.4 million,
representing approximately 9.3% of sales.
At December 31, 1996, the Company's installed base of thermometry
instruments constituted approximately 42% of the United States hospital
electronic and infrared thermometry market, making the Company the largest
provider of hospital thermometry systems in the United States. The Company's
principal thermometry instruments, the Temp-Plus II electronic thermometer and
the Core-Check infrared tympanic thermometer, are both widely used in hospitals
and alternate-site settings. The Company is also the second largest participant
in the United States infrared thermometry market, and, at December 31, 1996, had
approximately 31% of the United States hospital installed base. The Company's
large base of installed hospital thermometry instruments allows it to generate
predictable and recurring revenues from sales of related proprietary disposable
probe covers. In 1997, the Company manufactured and sold over 595 million
proprietary disposable probe covers into its worldwide installed base. The
market share figures as presented herein are based on the most recent data
available.
In addition, the Company participates in the hospital market of stand-alone,
non-invasive, multi-parameter instruments through its Vital-Check product line,
which measures and monitors a combination of temperature, pulse, blood pressure
and pulse oximetry.
OPERATING STRATEGY
The Company's goal is to increase sales and cash flow by leveraging its
competitive strengths in infusion systems and patient monitoring, and fulfilling
its corporate vision of building a world-class medical technology franchise
around the patient bedside and throughout the continuum of care. The essence of
this vision involves the integration of infusion technology, patient monitoring,
advanced data management and specialty medical devices. The Company believes it
is well-positioned to lead this technology convergence and to provide
cost-effective, quality health care. In order to achieve these goals, management
intends to further focus on implementing the following strategies:
EXPANDING INTERNAL GROWTH. The Company believes that it has one of the
largest installed bases of infusion systems and channels worldwide and the
largest installed base of hospital thermometry products in the United States.
The Company seeks to protect and expand its installed base by (i) aggressively
marketing its existing products to hospital users and GPOs and (ii) introducing
new technologies that build
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on or enhance its existing product portfolio. The Company believes that, to the
extent it can increase its installed base, the Company will benefit from
increasing revenues from infusion pump sales, and increased cash flows
attributable to the recurring sales of related higher-margin proprietary
disposable administration sets.
The Company has recently entered into sole-source or dual-source supplier
agreements with certain of the country's largest GPOs and intends to continue to
pursue additional GPO agreements through its dedicated national accounts sales
force. Moreover, the Company intends to expand customer demand for its existing
products by introducing certain of its products to geographic and user markets
that have traditionally not used such products as part of their therapeutic
programs.
The Company also expects to achieve internal growth through continued market
acceptance of its latest needle-free technology, the SmartSite Needle Free
System. During the first six months of 1998, SmartSite Needle Free System
disposable sales were approximately 26.5% of the Company's total United States
infusion system disposable sales as compared to 8.5% during the first six months
of 1997. This rapid adoption of SmartSite Needle Free System technology
emphasizes the Company's successful focus on increasing sales through higher
margin disposable products. See "Risk Factors--Material Legal Proceedings."
In addition, the Company is currently developing several new infusion system
products and product line extensions, including a modular infusion pump that
incorporates innovations in microprocessor and electromechanical technology and
will offer advanced programming features, compact size and a one-to-four channel
capability. The Company also anticipates further advancements to its patient
monitoring product lines in the next twelve months including the development of
a faster electronic thermometer.
CAPITALIZING ON STRATEGIC ACQUISITIONS AND ALLIANCES. The Company actively
seeks to supplement internal growth through strategic acquisitions focused
primarily on complementing the Company's existing product lines. The Company
believes that there is the potential to strengthen and diversify its portfolio
of products at the patient bedside through the acquisition of technologies that
extend into products and markets where the Company currently has little or no
presence. The Company assesses acquisition candidates primarily based on such
candidate's ability to: (i) improve the Company's United States and
international market leadership; (ii) increase the Company's revenue per account
and margins; (iii) access new and expanding markets, including the
alternate-site market; (iv) fit strategically within the Company's existing
technological base and manufacturing and distribution capabilities; and (v)
improve the Company's results from operations.
Consistent with the approach outlined above, the Company recently acquired
from Invacare the PSI Pump, an ambulatory, electromechanical infusion pump for
use in the alternate-site market. In addition, the Company recently licensed
technology from Caesarea Medical Electronics Ltd. for the International Pump, a
large volume infusion pump marketed primarily to price-conscious consumers in
emerging international markets. The Company also expects to expand its presence
in patient monitoring into the alternate-site setting through the Acquisition.
The Company is also seeking to establish strategic alliances with major
participants in the pharmaceutical industry, both domestically and
internationally. In accordance with this objective, the Company has entered into
a supply agreement with Zeneca Limited to incorporate Zeneca Limited's
Diprifusor-TM- Target Controlled Infusion module in the Company's P6000 syringe
pump.
INCREASING PRESENCE IN ALTERNATE-SITE SETTINGS. The Company will seek to
increase its presence in the alternate-site market. Industry sources estimate
that the alternate-site market for infusion therapy and patient monitoring has
experienced rapid and substantial growth. The Company currently has in place a
distributor network and a dedicated sales force trained to sell into the
alternate-site market. The Company has also recently acquired, and continues to
develop, the PSI Pump for use in the alternate site. Moreover, the Company
intends to integrate the product lines of Instromedix, including the LifeSigns
System, which
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is a technologically-advanced, telephonic monitoring system that allows a
caregiver to remotely monitor multiple patient parameters via a standard
telephone line. The Company believes that through these recent acquisitions,
combined with the ongoing development of its existing alternate-site products
(i.e., the ReadyMED product line), it is well-positioned to leverage its
reputation for quality products and service in the hospital setting to increase
its presence in the growing alternate-site market.
STRENGTHENING PRESENCE IN INTERNATIONAL MARKETS. For the year ended
December 31, 1997, 36.8% of the Company's sales were derived from sales to
customers outside the United States and the Company believes that the sales of
products outside the United States represent a significant source of growth. As
part of its business strategy, the Company intends to increase its position in
targeted geographical markets, including emerging international markets by (i)
establishing distribution channels and direct sales forces in countries where
the Company has little or no existing distribution network and (ii) developing
products or modifying existing products to satisfy local market preferences or
requirements.
With respect to establishing distribution channels, the Company currently is
assessing candidates to assume the role of its primary sales/distribution
partner for Japan and has established original equipment manufacturer supply
relationships for certain of its products internationally. The Company also has
implemented its strategic plan to consolidate its international distributor
network by terminating redundant distributors in a number of countries. In the
case of the Italian and Norwegian markets, terminated distributors have been
replaced by a newly-established direct sales force.
With respect to developing products or modifying existing products to
satisfy local market preferences, the Company is developing several product
modifications in response to customer preferences in the international market,
including the development of enhancements to its syringe pumps, which have
demonstrated growth in markets where this technology is used (primarily outside
the United States). In addition, the Company recently acquired a license to
manufacture, market and sell the International Pump, a cost-effective large
volume pump, in an effort to increase its penetration in emerging international
markets where consumers are more price-conscious but still demand quality
products and service.
EMPHASIZING CUSTOMER SERVICE. The Company seeks to develop and maintain
strong customer relationships by working closely with its customers to fully
understand their needs and by furnishing value-added services such as (i)
expertise in engineering and manufacturing high-quality, reliable and innovative
products; (ii) prompt order fulfillment and delivery; and (iii) after-sale
technical and clinical support and emergency service. The Company believes that
its ability to retain existing customers and attract new customers is
attributable to its ongoing commitment to customer service. For example, the
Company has recently renewed and expanded its agreement with Physio-Control
International, Inc. ("Physio") whereby Physio has agreed to provide on-site
technical support for the Company's domestic installed base of infusion systems
in selected geographic regions. Through this arrangement, the Company is able to
provide its customers reliable, on-site repair without the need for shipment of
the infusion system to a remote location.
REDUCING PRODUCTION AND OPERATING COSTS. The Company will seek to further
reduce production and operating costs by eliminating redundant expenses and by
monitoring and controlling fixed and variable operating expenses. In this
regard, the Company has recently: (i) reduced overall head count through
termination and attrition; (ii) consolidated all of its United States instrument
manufacturing operations into one location near the Company's headquarters;
(iii) transferred substantially all disposable-related assembly operations in
San Diego, California to its lower cost operations in Tijuana, Mexico; and (iv)
consolidated certain of the Company's international sales and distribution
operations.
INDUSTRY
GENERAL. In the United States, the Company sells its products primarily in
two markets: the hospital market and the alternate-site market. The United
States hospital market consists of approximately 5,300
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hospitals with a total of approximately 900,000 licensed beds. Within this
market, cost containment measures both imposed and proposed by federal and state
regulators and private payors, combined with increased utilization review and
case management, have led to greater financial pressure on hospitals. In
response to these cost-containment pressures, hospitals and other potential
customers for the Company's products are increasingly combining into group
purchasing organizations which may be large and which monitor compliance with
exclusive purchase commitments. GPOs may enter into exclusive purchase
commitments with as few as one or two providers of infusion systems and/or
patient monitoring products, for a period of several years. These trends have,
in turn, led to downward pricing pressure on manufacturers of medical products,
including the Company, and greater use of care settings outside the hospital
(i.e., the alternate-site setting) for treatment. See "--Marketing and Sales."
The alternate-site market encompasses all health care provided outside the
hospital and is comprised primarily of home health care, freestanding clinics,
skilled nursing facilities and long-term care facilities. The market for
infusion systems used in the alternate site has recently experienced a
substantially greater growth rate than that of the hospital market. This growth
is primarily attributable to advances in technology that have facilitated the
provision of care outside of the hospital, an increased number of illnesses and
diseases considered to be treatable with home infusion therapy and increased
acceptance by the medical community of, and patient preference for, non-hospital
treatment. In the patient monitoring markets, similar trends of cost reduction
of health care delivery and technological innovation have resulted in the
creation of a number of new products and product areas, such as infrared
thermometry products, pulse oximetry and multi-parameter patient monitoring
products.
The Company also sells its products to the international market. The Western
European infusion therapy market, which includes infusion pumps, controllers and
disposable intravenous sets, had sales of approximately $397.0 million in 1997.
Unlike the U.S. market, syringe pumps represent a significant share of total
infusion pump placements in the international market. The Company expects the
trend toward utilization of syringe pumps to continue as hospitals favor the
lower cost associated with syringe pumps and focus on administering
pharmaceuticals and nutritionals to patients in higher concentrations. The
majority of revenues in the international market are derived from hospitals
since the alternate-site market is in its infancy.
The Company believes that as the worldwide infusion system and patient
monitoring markets continue to mature, providers of goods and services in these
markets will need to increase the scale of their operations and broaden the
scope of their product lines in order to leverage worldwide sales, service and
research and development infrastructures. These trends are driving industry
consolidation both in the United States and internationally which, in turn,
provides opportunities for leading suppliers to increase market share and
participate in strategic alliances, joint ventures and acquisitions.
INFUSION SYSTEMS. Intravenous infusion therapy generally involves the
delivery of one or more fluids, primarily pharmaceuticals or nutritionals, to a
patient through an infusion line inserted into the circulatory system. Over the
past 20 years, as both the reliance on intravenous drug therapy and the potency
of the drugs administered have increased, the need for extremely precise
administration and monitoring of intravenous fluids has risen significantly.
Infusion systems are differentiated on a number of characteristics including
size, weight, number of channels, programmability, mechanism of infusion, cost
and service. One of the key differences among infusion systems is the level of
control that such systems afford to both medical staffs and patients. Infusion
systems are generally designed for either critical care or general care use,
with the latter group being used both in hospitals and at alternate-site
facilities.
The United States infusion therapy market is estimated to have had sales of
approximately $3.0 billion in 1997 and is estimated to grow at a compound annual
growth rate of approximately 5.2% from 1997 to 2000. The hospital market and the
alternate-site market for infusion systems is estimated to have had sales in the
United States of approximately $2.1 billion and $850.0 million, respectively, in
1997, and estimated
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annual compound growth rates of approximately 3.2% and 10.0%, respectively, from
1997 to 2000. Infusion systems include three major delivery technologies:
pumps/controllers, disposable ambulatory pumps and gravity delivery products.
While the Company competes in the pumps/controllers and disposable ambulatory
pumps segments, it has never competed in gravity delivery products because of
the commodity nature of this market. The introduction, however, of the SmartSite
Needle Free System has provided the Company with an opportunity to aggressively
compete in this market with innovative, cost-effective needleless gravity sets.
See "Risk Factors--Material Legal Proceedings."
Infusion pumps are volumetric devices that regulate flow by electronically
measuring a specific volume of a fluid. Infusion pumps administer precise,
volumetrically measured quantities of fluids over a wide range of infusion rates
by using positive pressure to overcome the resistance of the infusion tubing and
the back pressure generated by the patient's circulatory system. Syringe pumps
operate by gradually depressing the plunger on a standard disposable syringe,
thereby delivering a more concentrated dose of medication at a very precise rate
of accuracy. Disposable pumps are single use products designed for use primarily
in alternate-site settings.
By contrast, controllers typically are nonvolumetric devices that regulate
flow by electronically counting drops rather than by measuring a specific volume
of fluid. Because infusion pumps can measure volume and can more accurately
administer fluids, they are used more frequently than controllers to administer
expensive, critical or potent therapeutics. The Company does not currently
market controllers, but some of its infusion pumps can be used in a controller
mode.
Historically, controllers have held a major share of the installed base of
infusion instruments, principally because they were significantly less expensive
than infusion pumps. As infusion pump prices declined and their technological
capabilities increased, the purchasing trend has been toward infusion pumps. As
of the end of 1996, infusion pumps represented approximately 98%, and
controllers represented approximately 2%, of the installed base of infusion
instruments in the United States hospital market.
The infusion systems sold in the markets in which the Company competes
consist of single and multi-channel infusion pumps and disposable administration
sets. As treatment regimens have become more complex and as the critically ill
constitute an increasing percentage of hospital patients, the average hospital
patient now requires a greater number of intravenous lines and more potent
therapeutics, thereby creating a greater need for technologically-advanced
infusion systems. As a result, United States sales of channels relating to
multi-channel infusion pumps have increased from approximately 28% of total
United States channels sold in 1991 to approximately 39% of total United States
channels sold in 1996.
All infusion pumps and controllers require the use of disposable
administration sets. A set consists of a plastic interface and tubing and may
have a variety of features such as volume control, pumping segments or cassette
pumping systems for more accurate delivery, clamps for flow regulation and
multiple ports for injecting medication and the delivery of more than one
solution. Almost all of these sets, including those manufactured by the Company,
are compatible only with their particular manufacturer's line of infusion
systems. Since these disposable administration sets tend to have significantly
higher margins than infusion pumps, the establishment of an extensive installed
base, such as the Company's, is important for generating ongoing disposable
administration set sales and enhancing overall margins.
PATIENT MONITORING PRODUCTS. The Company's patient monitoring products
compete in discrete market niches, each with different competitive dynamics. The
Company primarily operates in the United States, Canada and Western Europe in
two patient monitoring product markets: (i) hospital thermometry systems and
(ii) stand-alone, non-invasive, multi-parameter instruments used to measure and
monitor a combination of vital signs.
The three major instrument types in the hospital thermometry market are
glass, electronic and infrared devices, which in 1996 accounted for
approximately 5%, 65% and 30%, respectively, of the United
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States hospital market installed base. The Company offers electronic and
infrared instruments but does not compete in the glass thermometry market. As
with the infusion therapy market, the hospital thermometry market has higher
margin disposable products that are used in concert with instruments and,
consequently, the existence of an installed base is important for generating
ongoing disposable product sales and enhancing overall margins.
PRODUCTS AND SERVICES
The Company manufactures and markets both single and multi-channel infusion
pumps and disposable administration sets. The Company's infusion pumps include
large volume infusion pumps such as its Gemini series, the Signature Edition
system, MS III and Model 560/570 Series pumps, syringe infusion pumps such as
P1000, P3000, PCAM, P6000 and P7000, which are sold primarily in Western Europe,
and disposable pumps such as ReadyMED for use in the alternate-site setting. The
Company's large volume infusion pumps require the use of higher margin
proprietary disposable administration sets. The Company also sells
non-proprietary disposable administration sets for use with syringe infusion
pumps manufactured by the Company and others. In addition to infusion systems,
the Company manufactures and markets hospital thermometry instruments and
related disposable probe covers, and stand-alone, non-invasive, multi-parameter
instruments which measure and monitor a combination of temperature, pulse and
blood pressure and other vital signs. The table below summarizes the key
features and actual or estimated market introduction dates with respect to the
Company's product lines.
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION STATUS
- ------------------------------------- ------------------------------------------------ ------------------------
<S> <C> <C>
INFUSION SYSTEMS
LARGE VOLUME INFUSION PUMPS
SIGNATURE EDITION Single and dual channel pumps; incorporates Marketed since 1995.
intuitive user interface; for critical and
general care and alternate-site use.
GEMINI Single, dual and four channel instruments with Marketed since 1987.
pump and controller capability; programmable
drug delivery/dose calculations and pressure
history; for use in all hospital and general
medical surgical settings.
560/570 SERIES Single channel pump with largest installed base Marketed since 1983 and
worldwide; for general care use in the United 1990, respectively.
States, and general and critical care use in
Europe.
597/598 SERIES Single channel, multi-pump configuration of Marketed in Europe since
reduced size and weight; used frequently for 1993.
delivery of nutritional products; sold in
Europe; for general care and alternate-site
use.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION STATUS
- ------------------------------------- ------------------------------------------------ ------------------------
<S> <C> <C>
MS III Three channel pump; smallest and lightest Originally introduced in
multi-channel pump available; for critical care late 1980s by Siemens
and emergency transport use. Infusion Systems, Ltd as
MiniMed; acquired by the
Company in 1993.
Introduced in Europe in
1998.
INTERNATIONAL PUMP Large volume infusion pump for price-conscious Recently licensed from
consumers primarily in emerging international Caesarea Medical
markets. Electronics Ltd.
Introduced in November
1998.
ORION Modular infusion pump which can operate in a Under development;
one-to-four channel mode resulting in lower market introduction
operating cost and better asset utilization; planned for late 1999.
for use in all hospital and critical care
settings.
SYRINGE INFUSION PUMPS
P1000, P2000, P3000, P4000 Syringe pump for critical and non-critical care Various models
use outside the United States. introduced between late
1980s and early 1990s.
P7000 Syringe pump with advanced features for Marketed in Europe since
critical, non-critical and neonatal care use in 1996.
markets outside the United States.
P6000 Syringe pump using the P7000 technology platform Marketed in Europe since
designed for the price-conscious consumer in 1997.
markets outside the United States; for critical
and non-critical care use.
PCAM PUMP Syringe pump used in markets outside the United Marketed internationally
(PATIENT CONTROLLED ANALGESIA) States that allows patients to control the since 1995.
delivery of pain medication.
AMBULATORY PUMPS
READYMED Compact, lightweight and disposable ambulatory 100 mL marketed in U.S.
infusion pump designed for alternate-site use. since July 1992 and 50
mL and 250 mL marketed
in U.S. since 1993.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION STATUS
- ------------------------------------- ------------------------------------------------ ------------------------
<S> <C> <C>
RYTHMIC Family of lightweight, self-contained portable Agreement with Micrel
pumps for PCA, intermittent and continuous use Electronic Applications
at home in markets outside the United States. Centre EP.E signed in
second half of 1997.
Marketed since September
1998.
PSI PUMP Ambulatory, electromechanical infusion pump for Acquired from Invacare
use in the alternate-site market. in May 1998; U.S. market
introduction planned for
1999.
DISPOSABLE ADMINISTRATION SETS Proprietary and non-proprietary administration Marketed worldwide and
sets for use with each of the Company's under development.
existing and proposed infusion pumps.
NEEDLE-FREE ACCESS PRODUCTS
SMARTSITE Needle-free, capless, latex-free infusion system Marketed since 1996.
component intended to increase safety of
patients and health care workers.
VERSASAFE Needle-free infusion system component utilizing Marketed since 1994
a blunt, plastic cannula combined with a through a non- exclusive
split-septum "Y" site. license.
PATIENT MONITORING
THERMOMETRY SYSTEMS
TEMP-PLUS II Electronic thermometer; for general hospital and Marketed since
alternate-site use. mid-1980s.
CORE-CHECK Infrared tympanic thermometer; for general Marketed since 1991.
hospital use.
DISPOSABLE PROBE COVERS Proprietary covers for use with each of the Marketed since late
Company's existing and proposed thermometers. 1980s.
OTHER PATIENT MONITORING PRODUCTS
VITAL-CHECK (MODEL 4200) Continuous monitoring model that rapidly Marketed since late
measures pulse, blood pressure and temperature; 1980s.
for general hospital use.
VITAL-CHECK (MODEL 4400) Multi-parameter non-invasive patient monitor Marketed in the United
providing blood pressure, pulse oximetry and States since 1997
temperature monitoring. through an exclusive
license.
</TABLE>
ALARIS INFUSION SYSTEMS
LARGE VOLUME INFUSION PUMPS. The Company's large volume infusion pumps are
either single or multi-channel and are used in both the general care and
critical care settings. The large volume infusion pumps consist of volumetric
piston cassette pumps, which regulate the flow of fluid through a syringe-like
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mechanism, and peristaltic pumps, which regulate fluid flow by means of a
multi-finger-like mechanism that alternately compresses sections of the tubing
contained in the pumping chamber. Peristaltic pumps represent the largest
portion of the Company's installed base of infusion pumps. The Company
discontinued manufacturing piston cassette pumps in the first quarter of 1995.
The Signature Edition line of peristaltic infusion pumps includes a single
channel and dual channel pump and is designed for use primarily in hospitals.
The Signature Edition line of infusion pumps feature cost-effectiveness, ease of
use, reliability and innovative features, such as new safety features designed
to minimize the chance of free flow.
The Gemini peristaltic infusion pump series, which consists of single, dual
and four channel pumps, is based on a flexible hardware and software technology
platform. This technology platform has enabled the Company over time to offer
incremental feature enhancements based on evolving customer needs. The Gemini
series currently offers the following features: free flow protection (which the
Company pioneered); independent channel operation; ability to switch from pump
to controller mode without changing the disposable administration set;
programmable to automatically taper-up and taper-down infusion rates to
facilitate delivery of complex drug-dosing regimens; capability to operate in
either micro mode (0.1 to 99.9 mL/hr) for use with neonatal patients, among
others, or macro mode (1 to 999 mL/hr) for use with adult patients; drug dose
calculation; pressure monitoring; pressure history and volume/time dosing; and
nuisance alarm (alarms with no clinical significance) reduction. The Gemini PC-1
and PC-2 infusion pumps are currently subject to a voluntary recall initiated by
the Company. See "--Government Regulation--Product Regulation." The Company has
discovered certain electro-mechanical problems with its Gemini PC-4 infusion
pumps and is evaluating ways to correct these problems. In each reported
instance of this problem, the user has been alerted to the problem by audio and
visual alarms.
The MS III instrument is a compact, lightweight, programmable, three
channel, peristaltic infusion pump used primarily in the critical care market.
The MS III predecessor product line was acquired from Siemens Infusion Systems,
Ltd. in September 1993. Since that time, significant resources have been
invested in the MS III pump. The Company believes that as a result of such
investment, the MS III is one of the smallest, most versatile and most
technologically advanced multi-channel pumps currently on the market.
The Model 560/570 Series and the Model 597/598 Series are single channel
peristaltic infusion pumps that offer cost effective solutions for drug delivery
in all settings. The Company believes that the Model 560/570 Series has the
largest installed base of any individual infusion pump worldwide.
In addition, in May 1998 the Company acquired a license to manufacture,
market and sell the International Pump, a large volume infusion pump marketed
primarily for price-conscious consumers in emerging international markets. The
Company will market and sell the International Pump through existing
distribution channels.
The Company is also in the process of designing the Orion product, a modular
infusion pump which can operate in a one-to-four channel mode, and is the basis
for its next generation of infusion pumps. In addition to all of the features
available on the Gemini series, the Orion product is being designed to
incorporate advanced programming capabilities in a smaller infusion pump that is
simpler to operate. A modular, building-block design is intended to allow the
user to configure the various features of the modular infusion pump to specific
situations resulting in lower cost operation and better asset utilization.
SYRINGE PUMPS. The Company offers syringe pumps, which are small-volume
fluid delivery systems used in neonatal care, oncology, anesthesia, critical
care and labor and delivery. While these infusion pumps represent a relatively
small portion of the industry installed base in the United States, such pumps
are widely used in Europe, where they constitute approximately 60% of the
infusion pump market. Syringe pumps are more widely used in Europe because of
the general practice of European doctors to administer medications in smaller
volumes of fluid. The Company believes that it is one of the two largest
suppliers of syringe pumps in Western Europe, with a number one or number two
installed base market share in eight countries and the number three market
position in Germany.
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The Company's PCAM patient controlled analgesia syringe infusion pump allows
patients to control the delivery of pain medication. Designed for general care
settings, the PCAM syringe infusion pump is one of the most advanced patient
controlled analgesia infusion pumps on the European market today, with
pre-programmed and user programmable drug delivery protocols, comprehensive
patient history logging and an ergonomically designed handset with status
indicator.
The Company's syringe pump product line also includes the P7000 syringe pump
which has been available internationally since 1996 and the P6000 syringe pump
which was introduced to the European market during the second quarter of 1997.
The Company recently filed for 510(k) clearance of the P7000 syringe pump with
the FDA. Designed for critical, non-critical and neonatal care settings, the
P7000 offers several advanced features, including an automatic dose rate
calculator; a pre-programmable drug menu; a range of pre-programmed infusion
administration protocols; and an automatic pressure reduction capability in
response to administration set occlusions. The P6000 syringe pump, which is
based on the P7000 syringe pump technology platform, is designed for use in
critical and non-critical care settings by the price-conscious consumer.
AMBULATORY PUMPS. The ReadyMED pump is a compact, lightweight and
disposable ambulatory pump for the intravenous administration of antibiotics in
the alternate-site market. The ReadyMED pump is designed to offer a number of
advantages over systems currently in use for this purpose. Traditional systems
require the patient to attach a small bag and tubing set, through which
antibiotics are administered, to a catheter placed in the patient's circulatory
system. The patient must eliminate all air from the system and set a manual rate
adjustment clamp, a process that generally must be repeated every four to six
hours. Since traditional systems are gravity driven, the bag must remain on an
intravenous solution pole during infusion, thereby restricting the patient's
movement. The ReadyMED pump is available in 50 mL, 100 mL and 250 mL sizes,
allowing infusion to be initiated when the patient simply opens a clamp. In
addition, since the ReadyMED pump is small and uses positive pressure, the
patient is able to carry the device in a pocket or wear it on a belt. The
Company sells the ReadyMED pump through its alternate-site sales force and
distribution network.
In May 1998, the Company acquired from Invacare the PSI Pump, a
multi-therapy, electromechanical infusion pump along with a broad range of
accessories and intravenous disposables for use in the ambulatory infusion
market. These products have been developed specifically for home care
applications and will be distributed by the Company's alternate-site sales
force.
DISPOSABLE ADMINISTRATION SETS. The Company estimates that it has
approximately 190,000 single and multi-channel large volume infusion pumps
installed in the United States, each of which uses proprietary disposable
administration sets designed and manufactured only by the Company. Disposable
administration sets consist of a plastic pump interface and tubing and have a
variety of features, such as volume control, pumping segments or cassette
pumping systems for more accurate delivery, clamps for flow regulation and
multiple entry ports for injecting medication and the delivery of more than one
solution. Components such as burettes and filters may also be added for critical
drugs or specific infusion. In addition, many of the Company's disposable
administration sets offer protection features designed to prevent free flow.
Each of the Company's current and proposed large volume infusion pumps uses only
disposable administration sets designed by the Company for that particular pump.
NEEDLE-FREE ACCESS PRODUCTS. There is increasing pressure by regulatory
agencies, such as the Occupational Safety and Health Administration ("OSHA") and
the FDA, for more stringent control of needles in hospitals. OSHA requires that
hospitals must put in place systems to reduce the potential for accidental
needlesticks. The FDA recommends using needle-free systems or protected needle
systems to replace hypodermic needles for accessing intravenous lines. The
Company's needle-free access products are designed to permit access to the
Company's disposable administration sets without the use of needles, thus
reducing the potential for accidental needlesticks. The VersaSafe system
utilizes a blunt, plastic cannula combined with a split-septum "Y" site. The
Company has a non-exclusive license, which expires in April 2000, to the
VersaSafe system which was a cooperative development effort of IMED, Elcam
Plastic
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of Israel and Medical Associates Network. The Company's latest needle-free
access product, the SmartSite Needle Free System, offers a fully integrated
design and eliminates the need for separate caps to maintain an infection
control barrier. The SmartSite Needle Free System is latex-free and therefore
reduces the risk of exposure of patients and health care workers to latex which
can cause severe allergic or anaphylactic shock reactions. The Company's
needle-free access products have received strong interest from customers and
provide the Company with an opportunity to increase revenues in what has
previously been a commodity market. See "Risk Factors--Material Legal
Proceedings."
ALARIS PATIENT MONITORING PRODUCTS
Patient monitoring products are used to measure temperature, pulse, blood
pressure and other vital signs. Instruments sold in this market have varying
levels of technological sophistication and are used in a variety of diagnostic
and health care settings. The Company competes in two key market niches:
hospital thermometry systems and stand-alone, non-invasive, multi-parameter
patient monitoring products. In the United States hospital electronic and
infrared thermometry market, the Company had an installed base market share of
approximately 42% in 1996 and was the second largest supplier of hospital
thermometry products in the infrared market. In its niche of stand-alone,
non-invasive, multi-parameter instruments, the Company had an installed base
market share of approximately 14% in the United States in 1996.
THERMOMETRY. The Company is a leader in hospital thermometry systems, which
consist of thermometers and proprietary disposable probe covers, and maintains a
strong position in both the United States and Western Europe. The Company's
primary product is an electronic thermometer which is widely used in hospitals
and alternate-site settings. The Company is currently developing the Temp-Plus
III instrument, an improved cost-effective and technologically-advanced
electronic thermometer designed to provide a faster temperature reading. The
Company also manufactures and markets the Core-Check system, a thermometer that
measures temperature by detecting the emission of infrared energy in the ear. In
the infrared market, the Company is currently the second largest participant,
with a United States hospital installed base market share of approximately 31%
at December 31, 1996. The only disposable probe covers which can be used with
the Company's thermometry instruments are those manufactured by the Company.
OTHER PATIENT MONITORING PRODUCTS. The Company also produces stand-alone,
non-invasive, multi-parameter patient monitoring products which measure a
combination of pulse, pulse oximetry, temperature and blood pressure.
In January 1997, the Company entered into two agreements with Criticare
Systems, Inc. ("Criticare"), a manufacturer of patient monitoring systems and
non-invasive sensors for use in the hospital and alternate-site markets. Under
these agreements, Criticare obtained the right to use the Company's electronic
thermometry technology in certain monitoring systems to be manufactured and
distributed by both Criticare and the Company. The Company also obtained
exclusive distribution rights to certain of these monitoring systems in the
United States hospital market and in all Canadian markets. The first of these
exclusive systems is the Vital-Check 4400, which provides non-invasive blood
pressure, pulse oximetry and temperature monitoring.
CUSTOMER SERVICE
The Company provides repair service for its products at its facilities in
San Diego or on-site at the customer's facilities through third-party
contractors. Customers may elect to enter into service agreements to receive
service on a time and materials basis. The Company also trains customers as to
the use of its products and maintains a technical support help-line to answer
customers' questions. In addition, the Company maintains its parts inventory at
levels which enable it to deliver critical supplies immediately and minimize
back-ordered products. The Company believes that the availability of such
services is important for maintaining strong customer relations.
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MARKETING AND SALES
The Company has historically focused its sales efforts on the hospital
market. In response to the industry shift toward health care delivery outside of
the hospital, the Company has recently begun to expand its selling efforts and
products to the alternate-site market. The Company's sales strategy emphasizes
increasing instrument placements and the number of units installed in order to
increase sales
of its proprietary disposable administration sets and probe covers. Sales
representatives work closely with on-site primary decision makers, which include
physicians, pharmacists, nurses, materials managers, biomedical staff and
administrators. The Company has over 5,000 hospital customers worldwide and
sells its products through a combined direct sales force consisting of over 230
salespersons and through more than 150 distributors.
In January 1997, the Company entered into a five-year sole-source supply
contract with Premier Purchasing Partners, L.P. ("Premier"), an affiliate of
Premier, Inc., the nation's largest health care alliance GPO, for tympanic and
electronic thermometry instruments and related proprietary disposable probe
covers. Under this agreement, Premier agreed to purchase 80% of its needs for
such products from the Company. In addition, in March 1997, the Company entered
into a five-year dual source supply agreement with Premier for the purchase of
large volume infusion pumps and associated disposable administration sets.
In December 1997, the Company and Tenet HealthCare Corporation ("Tenet")
entered into a ten-year, sole-source agreement for intravenous infusion pumps
and associated IV disposables. In addition, the Company is named as one of two
approved sources by Tenet for needle-free IV tubing sets and components. The
Company also has supply agreements with other leading GPOs, including Novation,
Inc., AmeriNet Inc. and Medecon Services, Inc.
The Company's domestic marketing efforts are supported by a staff of nurses
and pharmacists who consult with customers providing ongoing clinical support in
the evaluation, installation and use of the Company's products. The Company
believes its sales force in the United States and internationally plays a key
role in the effective introduction of new products.
No single account is material to the business or operations of the Company.
INTERNATIONAL OPERATIONS
The Company markets products in approximately 120 countries through its
direct sales force, affiliates and distributors. The primary markets for the
Company's products outside the United States are Western Europe, Canada and
Australia. The Company also has a developing position in Asia and Latin America.
The principal products sold by the Company outside the United States are large
volume and syringe infusion pumps and related disposable administration sets.
The Company has manufacturing operations in England and Mexico. The Company has
also contracted with a number of foreign manufacturers to provide certain of its
sourcing needs. The following table sets forth for each period presented, the
sales made to customers in each of the geographic locations described below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31,
SEPTEMBER 30,
----------------------------------- --------------------
1995 (1) 1996 (1) 1997 1997 1998
----------- ----------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
United States................................................... $ 238.3 $ 224.6 $ 227.0 $ 162.6 $ 171.6
International................................................... 114.4 121.7 132.1 94.3 100.3
----------- ----------- --------- --------- ---------
Total Sales................................................... $ 352.7 $ 346.3 $ 359.1 $ 256.9 $ 271.9
</TABLE>
- ------------------------
(1) Presented on a Merger-Adjusted basis. Exclusive of the Merger, sales to
customers in the United States and internationally were $91.7 million and
$20.8 million and $100.2 million and $36.2 million during the years ended
December 31, 1995 and 1996, respectively.
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The Company believes that sales of products to customers outside of the
United States represents a significant potential source of growth.
Foreign operations are subject to special risks that can materially affect
the sales, profits and cash flows of the Company, including currency exchange
rate devaluations and fluctuations, the impact of inflation, exchange controls,
labor unrest, political instability, export duties and quotas, domestic and
international customs and tariffs, unexpected changes in regulatory
environments, potentially adverse tax consequences and other risks. Changes in
certain rates could have an adverse effect on the Company's ability to meet
interest and principal obligations with respect to its United States
dollar-denominated debt and could also have a material adverse effect on the
business, financial condition, results of operations or prospects of the Company
or the Company's ability to make payments with respect to the Notes when due.
See "Financial Statements--Note 13 to the 1997 Consolidated Financial
Statements."
MANUFACTURING
The Company is focusing on low-cost manufacturing and manufactures its
products at plants in San Diego, California; Creedmoor, North Carolina; Tijuana,
Mexico; and Hampshire, England. The San Diego facility is the primary
manufacturing facility for infusion pumps and patient monitoring instruments and
also houses a service operation for installed infusion pumps and patient
monitoring instruments. The Creedmoor facility houses a portion of the current
disposables operations and is a distribution center for North American
disposable finished products. Product release from sterilization is done in San
Diego and Creedmoor. The Tijuana facilities primarily focus on the manual
assembly of disposables, and the Hampshire facility focuses on the manufacturing
of syringe pumps which are sold primarily to the international markets.
Disposable products for international markets are currently supported through a
number of foreign manufacturers.
The Company has designed and implemented an integrated network of quality
systems, including control procedures that are planned and executed by
technically-trained professionals. Through these systems, the Company has
established written specifications for raw materials, packaging, labels,
sterilization and overall manufacturing process control. A substantial number of
raw materials require certificates of analysis to help ensure that finished
products conform to specifications. In addition, the Company regularly tests
components and products at various stages of the manufacturing process to ensure
compliance with applicable specifications.
The Company purchases raw materials worldwide in the ordinary course of
business from numerous suppliers. The vast majority of these materials are
generally available and the Company has not experienced any serious shortages or
material delays in obtaining these materials. In some situations, the Company
has long-term supply contracts, although the Company purchases a significant
amount of its requirements of certain raw materials by purchase order. Although
the Company is generally not dependent upon any single source of supply, it
relies upon a limited number of suppliers for circuit boards and other parts
which are used in certain of its infusion systems. The loss of any such supplier
would result in a temporary interruption in the manufacturing of the Company's
products. The Company believes, however, that these materials are available as
needed from alternative sources.
RESEARCH AND DEVELOPMENT
The Company believes that a well-targeted research and development program
constitutes an essential part of the Company's activities and is an integral
part of its future success. The Company is actively engaged in research and
development programs to develop and improve products. These activities are
performed in the United States and, to a lesser extent, in the United Kingdom.
For the year ended December 31, 1997, the Company expended approximately $16.9
million on in-house research and development. Substantially all of this amount
was dedicated to the development of new products.
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The Company intends to focus a significant portions of its research and
development efforts on the development of new products. The Company is currently
developing several new products and product line extensions.
PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS
The Company relies heavily on patented and other proprietary technology. The
Company believes its issued and pending patents are important to its competitive
position. There can be no assurance that patent applications submitted by the
Company or its licensors will result in patents being issued or that, if issued,
such patents and patents already issued will afford protection against
competitors with similar technology. In addition, there can be no assurance that
any patents issued to or licensed by the Company will not be infringed or
designed around by others, that others will not obtain patents that the Company
will need to license or design around, that the Company's products will not
inadvertently infringe the patents of others, or that others will not
manufacture and distribute similar products upon expiration of such patents.
There can also be no assurance that key patents of the Company will not be
invalidated or that the Company or its licensors will have adequate funds to
finance the high costs of prosecuting or defending patent validity or
infringement issues.
The Company's policy is to secure patent protection for significant
inventions. The Company holds approximately 220 unexpired patents in the United
States and approximately 400 unexpired patents in foreign countries, principally
in Europe, Canada, Japan and Australia. Additional applications are pending or
in preparation. Within the next ten years, approximately 130 of the Company's
United States patents and approximately 165 of the Company's foreign patents
will expire. The Company does not believe that the expiration of any such
patents will, individually or in the aggregate, have a material adverse effect
on the business, financial condition, results of operations or prospects of the
Company or the Company's ability to make payments with respect to the Notes when
due.
The patent positions of medical device firms, including the Company, are
uncertain and involve complex legal and factual questions for which certain
legal principals are unresolved. The coverage claimed in a patent application
can be significantly reduced before a patent is issued. In addition, patent law
has recently been revised to give effect to international accords to which the
United States has become a party. Pursuant to such accords, the patent term has
been changed from 17 years from date of grant to 20 years from date of filing
and certain provisions favoring United States inventors over foreign inventors
have been eliminated.
The United States patent code was recently amended. As a result, certain
statutory remedies for patent infringement are no longer available for a medical
practitioner's otherwise infringing performance of a medical activity. As
provided in the United States patent code, a patent may not be enforced against
a medical practitioner's performance, or the performance of a related health
care entity of a "medical activity" which is defined as the performance of a
medical or surgical procedure on a body. However, a "medical activity" does not
include "the use of a patented machine, manufacture or composition of matter in
violation of such patent." Hence, remedies are still available against
manufacturers and distributors. The aforesaid amendment does not apply to
patents issued before September 30, 1996.
The Company sells its products under a variety of trademarks, some of which
are considered by the Company to be of importance to warrant registration in the
United States and various foreign countries in which the Company does business.
The Company also relies on trade secrets, unpatented know-how and continuing
technological advancement to maintain its competitive position. It is the
Company's practice to enter into confidentiality agreements with key technical
employees and consultants. There can be no assurance that these measures will
prevent the unauthorized disclosure or use of the Company's trade secrets and
know-how or that others may not independently develop similar trade secrets or
know-how or obtain access to the Company's trade secrets, know-how or
proprietary technology. In addition, the Company from time to time seeks
copyright protection for the software used in certain of its products.
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LEGAL PROCEEDINGS
The Company was a defendant in a lawsuit filed in June 1996 by Sherwood
Medical Company (d/b/a Sherwood, Davis & Geck) ("Sherwood") against IVAC Medical
Systems. The lawsuit was filed in the United States District Court for the
Southern District of California, alleging infringement of two Sherwood patents
by reason of certain activities including the sale by IVAC Medical Systems of
disposable probe covers for use with infrared tympanic thermometers. The lawsuit
sought injunctive relief, treble damages and the recovery of costs and attorneys
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
tentatively scheduled for June, 1999. The Company believes it has sufficient
defenses to all claims by Sherwood, including the defenses of noninfringement
and invalidity. 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 any such lawsuit could have a material adverse effect
on the business, financial condition, results of operations or prospects of the
Company or the Company's ability to make payments with respect to the Notes when
due.
During the years 1988 through 1995, Cal Pacifico of California and
affiliated entities ("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 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 of these years as well
(collectively with the amounts referred to in the immediately preceding
sentence, the "Disputed Amounts"). The Company has been advised by its special
customs counsel that, under applicable law, no person, by fraud, gross
negligence or negligence, may (i) import merchandise into the commerce of the
United States by means of any material and false document, statement or act, or
any material omission, or (ii) aid or abet any other person to import
merchandise in such manner. No proceeding has been initiated by Customs against
the Company in respect of the matters which are the subject of the proceeding
against Cal Pacifico. Since Cal Pacifico was the Company's United States customs
broker and importer of record during each of the foregoing years, the Company
believes that it is unlikely that Customs will assess against the Company any
portion of the Disputed Amounts.
Cal Pacifico is contesting Customs' assessment of the Disputed Amounts. Cal
Pacifico's challenge to the assessment of the Disputed Amounts is in its
preliminary stages. Given the present posture of Cal Pacifico's challenge, and
the inherent uncertainty of contested matters such as this, it is not possible
for the Company to express an opinion as to the likelihood that Cal Pacifico
will prevail on its challenge. The Company has not been informed by Cal Pacifico
or Customs as to the specific amount of the Disputed Amounts.
Cal Pacifico has advised the Company that, should Cal Pacifico's challenge
to the assessment of the Disputed Amounts prove to be unsuccessful, it will seek
recovery from the Company, through arbitration, for any portion of the Disputed
Amounts which it is required to pay to Customs. As part of the settlement
agreement which resolved the Company's contract dispute with Cal Pacifico, the
Company made a non-refundable payment of $550,000 to Cal Pacifico. The $550,000
payment is to be credited toward any portion of the Disputed Amounts which the
arbitrator determines the Company owes to Cal Pacifico, which may be less or
greater than $550,000. 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
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(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 (i) any arbitration proceeding by
which Cal Pacifico might seek indemnification has not been filed and (ii) Cal
Pacifico has not 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.
The Company is a defendant in a lawsuit filed on April 20, 1998 and served
on October 28, 1998, by Becton 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 (US 5,699,821). 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 Company's
operations, financial condition and 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 Atrium
needle free valve. The lawsuit seeks injunctive relief, damages and the recovery
of costs and attorney fees.
The Company is also involved in a number of legal proceedings arising in the
ordinary course of its business, none of which is expected to have a material
adverse effect on the business, financial condition, results of operations or
prospects of the Company or the Company's ability to make payments with respect
to the Notes when due. The Company maintains insurance coverage against claims
in an amount which it believes to be adequate.
COMPETITION
The Company faces substantial competition in all of its markets. Many of the
Company's competitors have greater financial, research and development and
marketing resources than the Company. Some of the Company's principal
competitors are able to offer volume discounts based on bundled purchases of a
broad range of their medical equipment and supplies. The Company intends to
improve its competitive position in this area by seeking acquisitions that will
allow or enhance its own bundles of devices and instruments. The Company expects
the trends toward volume discounts to continue in the future. The Company
believes that the competitive factors most important in its markets are quality
of products and services, technological innovation and price.
The primary markets for the Company's products are relatively mature and
highly competitive. The Company's success is therefore dependent on the
development and acquisition of infusion technologies and products, the
implementation of its acquisition strategy and the development of other markets
for its products. The Company's older infusion therapy product lines have
experienced declining sales and market share recently, primarily due to
competitors who offer volume discounts based on bundled purchases of a broader
range of medical equipment and supplies, as well as the aging of the Company's
core products. The Company's introduction of new products may offset future
declines in sales and market share. There can be no assurance, however, that new
products will be successfully completed or marketed for sale, will not
necessitate upgrades or technical adjustments after market introduction, can be
manufactured in
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sufficient volumes to satisfy demand, or will offset declines in sales and
market share experienced with respect to existing products. See "--Products and
Services."
At December 31, 1997, the Company had a market share of approximately 37% of
the installed base of infusion pump channels in the United States. Major
competitors in this market include Baxter International, Inc., Abbott
Laboratories, Inc. and McGaw, Inc., which in the aggregate had a market share of
approximately 59% of the installed base of infusion pump channels in the United
States at December 31, 1997.
The European infusion systems market is much more regionalized and
fragmented, with a few strong competitors in each regional market. Major
competitors encountered in several markets include Graseby, Fresenius and B.
Braun Melsungen AG. The Company is among the leaders in a number of Western
European markets, with a number one or number two installed base market share in
eight countries and the number three installed base market share in Germany. The
Western European countries in which the Company has a number one or number two
installed base market share are France, Norway, Sweden, the United Kingdom,
Belgium, the Netherlands, Spain and Italy.
The patient monitoring products market is fragmented by product type. The
Company's key competitor in the United States electronic thermometer market is
Welch Allyn, Inc. (f/k/a Diatek, Inc.) and its key competitor in the infrared
thermometer market is Sherwood.
GOVERNMENT REGULATION
PRODUCT REGULATION. The research, development, testing, production and
marketing of the Company's products are subject to extensive governmental
regulation in the United States at the federal, state and local levels, and in
certain other countries. Non-compliance with applicable requirements may result
in recall or seizure of products, total or partial suspension of production,
refusal of the government to allow clinical testing or commercial distribution
of products, civil penalties or fines and criminal prosecution and orders for
repair and/or refund.
The FDA regulates the development, production, distribution and promotion of
medical devices in the United States. Virtually all of the products being
developed, manufactured and sold by the Company in the United States (and
products likely to be developed, manufactured or sold in the foreseeable future)
are subject to regulation as medical devices by the FDA. Pursuant to the FDC
Act, a medical device is classified as a Class I, Class II or Class III device.
Class I devices are subject to general controls, including registration, device
listing, record keeping requirements, labeling requirements, "Quality Systems
Regulation" ("QSR" as defined in FDA Quality System regulations), prohibitions
on adulteration and misbranding, and reporting of certain adverse events
("MDR"). In addition to general controls, Class II devices may be subject to
special controls that include notification and could include performance
standards, postmarket surveillance, patient registries, guidelines,
recommendations and other actions as the FDA deems necessary to provide
reasonable assurance of safety and effectiveness. New Class III devices must
meet the most stringent regulatory requirements and must be approved by the FDA
before they can be marketed. Such premarket approval can involve extensive
preclinical and clinical testing to prove safety and effectiveness of the
devices.
Virtually all of the Company's products are Class II devices. The Company is
not currently developing, manufacturing or distributing any Class III devices,
although it may do so in the future. Unless otherwise exempt, all Class II and
Class III medical devices introduced to the market since 1976 are required by
the FDA, as a condition of marketing, to secure a 510(k) premarket notification
clearance ("510(k)") or a Premarket Approval Application ("PMA"). A product will
be cleared by the FDA under a 510(k) if it is found to be substantially
equivalent because it has the same intended use and the same technological
characteristics as another legally marketed medical device that was on the
market prior to May 28, 1976 or to a product that has previously received a
510(k) and is lawfully on the market ("predicate device"), or if it has
different technological characteristics if it is demonstrated that the device is
as safe and effective as
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the predicate device and raises no new safety or efficacy questions. In general,
if a product is not substantially equivalent to a predicate device, and not
otherwise exempt, the FDA must first reclassify the device or approve a PMA
before it can be marketed. An approved PMA indicates that the FDA has determined
the product has been demonstrated, through the submission of clinical data and
manufacturing and other information, to be safe and effective for its labeled
indications. The PMA process typically takes more than a year from submission
and requires the submission of significant quantities of clinical data and
supporting information. The process of obtaining a 510(k) currently takes, on
average, approximately six months from the date of submission. However, the
review process for a particular product may be shorter or substantially longer
depending upon the circumstances. Moreover, there can be no assurance that a
510(k) will be cleared. The 510(k) must include submission of supporting
information, including design details and labeling, and may be required to
contain safety and efficacy data. Product modifications intended to be made to a
cleared device or new product claims also may require submission and clearance
of a new 510(k) application or submission and approval of a PMA, during which
time the modified product cannot be distributed in interstate commerce. Although
there can be no assurance, the Company believes that its proposed products under
development will qualify for the 510(k) procedure.
As part of its normal course of business, the FDA conducts investigations
for cause regarding the safety or efficacy of medical products, including those
manufactured by the Company, which may result in the Company's inability to
market a particular device or cause the Company to need to generate additional
data to support submissions for market clearance. Future products developed by
the Company may require FDA clearance through either the 510(k), PMA, new drug
approval application procedures or abbreviated new drug approval application
procedures. There can be no assurance that marketing clearances or approvals
will be obtained on a timely basis or at all. Delays in receiving such
clearances or approvals could have a material adverse effect on the Company.
The FDA also regulates the commencement and conduct of clinical
investigations to determine the safety and effectiveness of devices, including
investigations of devices not cleared or approved for marketing, and
investigations involving new intended uses of previously cleared or approved
devices. Clinical investigations are regulated by the FDA under the
investigational device exemption ("IDE") regulations. The IDE regulations
include significant requirements that must be met, including informed patient
consent, criteria for selection of study investigators and monitors, review and
approval of research protocols, reporting obligations to the FDA, record keeping
and prohibitions against commercialization of investigational devices. A sponsor
must obtain FDA approval of an IDE before starting the investigation, unless the
device is found to be a non-significant risk device by the sponsor and each
institutional review board ("IRB") that reviews the study. The FDA, however, has
the authority to determine that a study designated as involving a
non-significant risk device by the sponsor and IRBs involves a significant risk
device and an IDE application must be submitted and approved before the study
can resume. In addition, a study of a non-significant risk device must still
comply with certain provisions of the IDE regulations, and meet other regulatory
requirements. The violation of the IDE regulations can result in a variety of
sanctions, such as warning letters, prohibition against additional clinical
research, the refusal to accept data and criminal prosecution.
Devices manufactured by the Company in the United States are exported by the
Company to other countries. Such devices, if not approved for sale in the United
States, are subject to the FDA export requirements, including restriction on
distribution in the United States.
The Company has received either ISO 9001 or ISO 9002 certification for all
of its manufacturing facilities regarding the quality of its manufacturing
systems, a requirement for doing business in EC countries. The Company has been
granted approval to affix the CE mark, pursuant to the EC Medical Device
Directives, on substantially all of its products. Instromedix has been granted
approval to affix the CE mark on certain of its products. Products not CE marked
cannot be distributed in the EC after June 16, 1998. CE marking does not
necessarily preclude, however, additional restrictions on marketing in any
individual country in the EC.
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The Company's products are subject to varying degrees of government
regulation in the countries in which the Company has operations, and the general
trend is toward regulation of increasing stringency. The degree of government
regulation affecting the Company varies considerably among countries, ranging
from stringent design, testing, manufacturing, approval requirements, and
post-approval requirements to more simple registration. In general the Company
has not encountered material delays or unusual regulatory impediments in
marketing its products internationally. Establishment of new uniform regulations
for the European Economic Area, the transition rule for which ended on June 13,
1998, subjects the Company to a single extensive regulatory scheme for all of
the participating countries. The EU Medical Device Directive requires that
medical devices marketed in participating countries have a "CE" mark affixed to
the device certifying compliance with the applicable medical device
requirements. The Company is required to classify its medical devices into one
of four classes; meet certain essential requirements generally relating to
device design, construction, labeling, manufacture and other standards; certify,
for class I devices, or in the case of a medium or high risk device, obtain
certification from a recognized non-governmental body (notifying body) that its
device conforms to the applicable requirements. In addition, other regulatory
requirements apply, including but not limited to registration, vigilance or
adverse event reporting, recordkeeping, and labeling and promotional
restrictions. Companies and medical devices in the EU are also subject to
enforcement actions, including administrative, civil and criminal penalties.
Certain countries require the Company to obtain clearances for its products
prior to marketing the products in those countries. In addition, certain
countries impose product specifications, standards or other requirements which
differ from or are in addition to those mandated in the United States. The EC
and certain countries are in the process of developing new modes of regulating
medical products which may result in lengthening the time required to obtain
permission to market new products. These changes could have a material adverse
effect on the Company's ability to market its products in such countries and
would hinder or delay the successful implementation of the Company's planned
international expansion.
The Company is registered as a medical device manufacturer with the FDA and
certain state agencies. These agencies inspect the Company periodically to
determine whether the Company is in compliance with the FDC Act and regulations,
including regulations relating to MDR reporting, product labeling and promotion,
and medical device QSRs governing design, manufacturing, testing, quality
control, product packaging and storage practices. An inspection may result in a
determination that the Company is not in compliance with certain FDA or state
requirements, may require the Company to undertake corrective action, and could
result in legal action against the Company and its products, including actions
such as those described herein. The FDA has recently revised the QSR
regulations. These revised regulations include new requirements such as design
control, which may increase the cost of regulatory compliance for the Company.
The MDR regulations promulgated by the FDA require the Company to provide
information to FDA on certain malfunctions, as well as serious injuries or
deaths which may have been associated with the use of a product. The EC Medical
Device Directives also require reporting of serious injuries or deaths which may
be associated with the use of a medical device to the competent authority in the
country where the incident occurred.
A determination that the Company is in violation of the FDC Act or such FDA
regulations could lead to the issuance of warning letters, imposition of civil
or criminal sanctions against the Company, its officers and employees, including
fines, recalls, repair, replacement or refund to the user of the cost of such
products. In addition, if the FDA believes any of the Company's products violate
the law and present a potential health hazard, the FDA could seek to detain and
seize such products, to require the Company to cease distribution and to notify
users to stop using the product. The FDA could also seek criminal sanctions or
seek to close some or all of the Company's manufacturing facilities. Such
actions could also result in an inability of the Company to obtain additional
market clearances. Since 1994, the Company has on sixteen occasions temporarily
removed products from the market that were found not to meet performance
standards. None of such recalls materially interfered with the Company's
operations and all
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such affected product lines, except the Model 599 Series infusion pump (as noted
below), were subsequently returned to the market. One such product recall, a
voluntary recall related to the Company's Signature Edition infusion pumps, was
recently closed by the FDA, however, the FDA could take further regulatory
action against the Company, including actions such as those described above. The
Signature Edition infusion pumps were recalled because of an unacceptable level
of malfunction alarms due to less than expected reliability of their pressure
monitoring systems. The user of these pumps is notified of such malfunction
alarms by both a continuous audible signal and a visual message. Without charge
to its customers, the Company has completed the upgrade and replacement of the
current pressure monitoring system contained in certain of the infusion pumps
included within the Signature Edition product line. The recall was completed at
the end of the second quarter of 1997. In addition, a voluntary recall of
approximately 645 Gemini PC-1 infusion pumps (limited to distribution outside
The United States) was initiated by the Company in June 1996. The Company has
completed required modifications and was recently notified that this recall has
been closed with the FDA.
In the first quarter of 1997, the Company identified and subsequently
initiated a voluntary field correction of approximately 50,000 of its Gemini
model PC-1 and PC-2 infusion pumps because failure of specific electrical
components on the power regulator printed circuit board may result in improper
regulation of the battery charge voltage, which can cause the battery to
overheat. Such overheating could result in product failure and discharge of
hydrogen gas which may accumulate within the instrument's case. As an interim
measure, the Company has advised its customers of simple precautions that can be
taken to minimize the potential for an adverse incident pending completion of
the field correction. The Company is not aware of any injuries sustained in
battery overcharging incidents. The Company recorded a charge of $2.5 million to
cost of sales during the first quarter of 1997 for this field correction and
believes it has adequately accrued for this matter. However, there can be no
assurance that this field correction can be implemented for an amount consistent
with management's estimate.
The Company has initiated a voluntary safety alert of its Model 597/598 and
Model 599 Series infusion pumps. The Company discontinued selling the Model 599
Series infusion pumps in March 1997. The safety alert advises customers to
inspect and, if necessary, make an adjustment to the infusion pump in order to
prevent misloading of disposable administration sets.
The Company initiated a product recall of certain MS III disposable
administration sets affecting 44,000 units. This recall advised the user to
return the affected product for replacement. The sets were recalled due to a low
level assembly defect which could result in reverse flow. The Company was
recently notified that this recall has been closed.
The Company has initiated a voluntary field correction of its Signature
Edition infusion pumps to correct a malfunction of an electronic line filter
component (which malfunction may occur when a user fails to follow the Company's
written cleaning instructions and can result in an electrical short). Further,
in November, 1998, the Company initiated a voluntary safety alert regarding the
Signature Edition infusion pumps advising to check for the proper installation
of a spring in the pumping mechanism assembly. In the third quarter of 1998, the
Company initiated a recall of its Gemini PC-4 infusion pumps to correct certain
electro-mechanical problems which may cause one or more channels of the device
to audibly and visibly alarm and temporarily cease operation. The Company is not
aware of the occurrence of any injury incidents relating to a malfunction of
this type. During the third quarter of 1998, the Company will also initiate a
product Safety Alert regarding its Signature Edition infusion pump instructing
users to confirm the proper placement of a mechanism spring which, if not
properly positioned, could cause a free flow condition. In the third quarter of
1998, the Company will initiate a recall of its Gemini PC-4 infusion pumps to
correct certain electro-mechanical problems which may cause one or more channels
of the device to audibly and visibly alarm and temporarily cease operation. The
Company has also initiated a mandatory field upgrade of its P-1000, P-2000,
P-3000 and P-4000 syringe pumps because under certain circumstances a rate
change can occur. Although there can be no assurance, the Company believes that
the voluntary field correction, Safety Alert, recall and field upgrade, along
with adjustments and corrections that may be
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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 operation or prospects of the Company
or the Company's ability to make payments with respect to the Notes when due.
The Company's manufacturing facilities in San Diego have been licensed by
the State of California Department of Health Services, Food and Drug Branch,
under the applicable GMP and other regulations.
ANTI-REMUNERATION LAWS. The sale of the Company's products is subject to the
illegal remuneration/ "anti-kickback" provisions of the Social Security Act of
1935, as amended (the "Social Security Act"), which prohibits knowingly and
willfully offering, receiving or paying of any remuneration, whether directly or
indirectly, in return for inducing the purchase of items or services, or patient
referrals to providers of services, for which payment may be made in whole or in
part by Medicare, Medicaid or other federally funded health care programs.
Violations of the statute are punishable by civil and criminal penalties and the
exclusion of the provider from future participation in other federally funded
health care programs. The Social Security Act contains exceptions to these
prohibitions for, among other things, properly reported discounts, rebates and
payments of certain administrative fees to GPOs. Because of the breadth of the
statutory prohibitions, the lack of court decisions or other authority
addressing the types of arrangements that are permissible under the law and the
narrowness of statutory exceptions, the Secretary of Health and Human Services
published regulations creating "safe harbors" identifying certain practices that
will not be treated as violating the "anti-kickback" provisions of the Social
Security Act. While failure to satisfy all of the criteria for a safe harbor
does not necessarily mean that an arrangement is unlawful, engaging in a
business practice for which there is a safe harbor may be regarded as suspect if
the practice fails to meet each of the prescribed criteria of the appropriate
safe harbor. The enumerated safe harbors include safe harbors which implement,
and further refine, the statutory exceptions for discounts and payments to GPOs.
Because the Company sells some of its products to customers at prices below list
price and in various combinations, the Company is engaged in giving discounts
within the meaning of the Social Security Act. The regulations require sellers
to fully and accurately report all discounts and inform buyers of their
obligations to report such discount. The Company also pays administrative fees
to certain purchasing agents within the meaning of the Social Security Act. In
order to qualify for the GPO safe harbor, certain requirements must be met
including disclosure of the existence of the GPO fee arrangement to GPO members
and that members are neither wholly owned by the GPO nor subsidiaries of a
parent corporation that wholly owns the GPO. Certain of the Company's discounts
and arrangements with purchasing agents may not meet all the requirements of the
appropriate safe harbors.
Several states also have statutes or regulations prohibiting financial
relationships with referral sources that are not limited to services for which
Medicare, Medicaid or other state or federal health care program payment may be
made. A finding of non-compliance with these anti-remuneration laws by federal
or state regulatory officials, including non-compliance with appropriate safe
harbors, could have a material adverse effect on the Company.
COVERAGE AND REIMBURSEMENT. The Company's products are purchased or leased
by health care providers or suppliers which submit claims for reimbursement for
such products to third-party payors such as Medicare, Medicaid and private
health insurers. Although the Company has no knowledge that third-party payors
will adopt measures that would limit coverage of, or reimbursement for, its
products, any such measures that were applied to the Company's products could
have a material adverse effect on the Company.
ENVIRONMENTAL MATTERS. The Company is subject to regulation by OSHA, the
Environmental Protection Agency ("EPA") and their respective state and local
counterparts, and under extensive and changing foreign, federal, state and local
environmental standards, including those governing the handling and disposal of
solid and hazardous wastes, discharges to the air and water, and the remediation
of contamination associated with releases of hazardous substances. Such
standards are imposed by, among other statutes, the Toxic Substances Control
Act, the Clean Air Act, the Federal Water Pollution Control Act, the
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Resource Conservation and Recovery Act and the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"). Although there can be no
assurances, the Company believes that it is currently in material compliance
with current environmental standards. Nevertheless, the Company uses hazardous
substances in its day-to-day operations and, as is the case with manufacturers
in general, if a release of hazardous substances occurs on or from the Company's
properties, the Company may be held liable and may be required to pay the cost
of remedying the condition. The amount of any such liability could be material.
The Company has made, and will continue to make, expenditures to comply with
current and future environmental standards. Although no material capital or
operating expenditures relating to environmental controls are anticipated, there
can be no assurance that changes in, additions to or differing interpretations
of, statutory and regulatory requirements will not require material expenditures
in the future.
The Company is subject to liability under CERCLA and analogous state laws
for the investigation and remediation of environmental contamination at
properties owned and/or operated by it and at off-site locations where it has
arranged for the disposal of hazardous substances. Courts have determined that
liability under CERCLA is, in most cases, joint and several, meaning that any
responsible party could be held liable for all costs necessary for investigating
and remediating a release or threatened release of hazardous substances. As a
practical matter, liability at most CERCLA (and similar) sites is shared among
all the solvent "potentially responsible parties" ("PRPs"). The most relevant
factors in determining the probable liability of a party at a CERCLA site
usually are the cost of the investigation and remediation, the relative amount
of hazardous substances contributed by the party to the site and the number of
solvent PRPs.
The Company is currently involved in two such matters: one, at the Seaboard
Chemical site in Jamestown, North Carolina, and another at the Caldwell Systems,
Inc., site in Lenoir, North Carolina. In relation to Seaboard Chemical site, the
Company has entered into a DE MICROMIS administrative order on consent with the
North Carolina Department of Environment, Health and Natural Resources and a
group of PRPs, settling its liability for past and future response costs
associated with the site. Under the consent order, the Company receives a
release from further liability associated with the site, a covenant not to sue
by the other PRPs entering into the consent order, and protection under CERCLA
against contribution actions for matters addressed by the consent order.
Protection from further liability is conditioned on the absence of information
indicating that the Company disposed of a greater quantity of hazardous
substances at the site than currently known. Although there can be no assurance
that such further information does not exist, the Company believes that the
amount of its liability at this site will be de minimis.
In relation to the Caldwell Systems, Inc. site, the Company has agreed to
enter into a DE MICROMIS administrative order on consent with the EPA and a
group of PRPs, settling its potential liability for past and future response
costs associated with the site. Under the consent order, the Company will
receive a covenant not to sue by the EPA and by other PRPs entering into the
consent order, and protection under CERCLA against contribution actions for
matters addressed by the consent order.
In 1997, the Company received a Notice of Intent to Sue from a citizen's
group which claimed that the Company had violated California's Safe Drinking
Water and Toxic Enforcement Act of 1986 ("Proposition 65") in the warning it
provided with respect to DEHP, a plasticizer used in certain of the Company's IV
sets. Proposition 65 requires, among other things, that warnings be given in
connection with the exposure of consumers to products containing certain listed
substances. The Company entered into a settlement agreement, pursuant to which
the Company received a release and covenant not to sue from the group.
82
<PAGE>
FACILITIES
The Company owns or leases the following material properties which are
currently adequate in order for the Company to operate its business:
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE LEASED OR LEASE EXPIRATION
LOCATION FOOTAGE PURPOSE OWNED DATE
- ---------------------------------- ------------ ---------------------------------- ----------- -----------------
<S> <C> <C> <C> <C>
San Diego, CA..................... 133,000 Executive Offices Leased 2006
San Diego, CA..................... 25,000 Executive Offices Subleased 2002
San Diego, CA..................... 34,000 Warehouse Leased 2005
San Diego, CA (1)................. 83,000 Manufacturing of Instruments Leased 2005
Creedmoor, NC..................... 120,000 Manufacturing of Disposable Sets Owned N/A
Tijuana, Mexico................... 41,000 Contract Manufacturing of
Disposable Products Leased 1999(3)
Tijuana, Mexico................... 38,000 Contract Manufacturing of
Disposable Products Leased Indefinite(4)
Hampshire, England (2)............ 43,000 International and United Kingdom
Manufacturing Leased 2012
Hillsboro, OR..................... 30,000 Executive Offices and
Manufacturing of Instromedix
Products Leased 2002
</TABLE>
- ------------------------
(1) Primary instrument manufacturing facility.
(2) Lease contains a break clause that gives the Company the option to terminate
the lease in 2007.
(3) Cancellable upon 180 days notice.
(4) Cancellable by Company upon 180 days notice; cancellable by landlord
(pursuant to statute) upon 60 days notice.
EMPLOYEES
At September 30, 1998, the Company had a total of 2,803 full-time employees.
The Company has not experienced any work stoppages related to employment matters
other than in connection with a contract dispute with Cal Pacifico.
Cal Pacifico was the operator of the Company's two maquiladora assembly
plants in Tijuana, Mexico. For over eight years, the Company has assembled
disposable administration sets at these two plants, which utilize more than
1,200 workers employed by Cal Pacifico, under a contract with Cal Pacifico. The
dispute originated in April 1997 when the Company, in accordance with the terms
of such contract, informed Cal Pacifico that it would be terminating its
contractual arrangements effective August 1, 1997. Cal Pacifico objected to such
notification and proposed the systematic termination of the workforce. In
response to such objection, the Company on June 6, 1997 hired substantially all
of the workers at the plants directly. On June 11, 1997, Cal Pacifico locked the
Company's administrative personnel and production employees out of the plants
and would not allow the Company access to its production equipment or inventory.
On June 26, 1997, the Company entered into a settlement agreement with Cal
Pacifico. As a result of the settlement agreement, the assembly plants resumed
full operations on June 27, 1997. The Company now directly operates these plants
with no assistance from or interaction with Cal Pacifico.
83
<PAGE>
MANAGEMENT
DIRECTORS AND KEY EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
Directors and certain key executive officers of ALARIS Medical and/or ALARIS
Medical Systems.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
ALARIS MEDICAL AND ALARIS MEDICAL SYSTEMS
Jeffry M. Picower............................ 56 Director, Chairman of the Board
William J. Mercer............................ 50 Director, President, Chief Executive Officer and Chief
Financial Officer
Norman M. Dean (1)........................... 78 Director
Henry Green.................................. 56 Director
Richard B. Kelsky (1)........................ 43 Director
ALARIS MEDICAL SYSTEMS
John A. de Groot............................. 43 Vice President, Secretary and General Counsel
Jake St. Philip.............................. 45 Vice President and General Manager, North America
Anthony B. Semedo............................ 46 Vice President of Corporate Development
Richard M. Mirando........................... 55 Vice President of Operations
Henk van Rossem.............................. 56 Vice President and General Manager, International
</TABLE>
- ------------------------
(1) Member of Audit, Compensation and Stock Option Committees.
JEFFRY M. PICOWER. Mr. Picower was a Director, Vice President and the
Assistant Treasurer of ALARIS Medical from September 1988 to March 1989 and Vice
Chairman from December 1988 to June 1989. Mr. Picower was re-elected as a
Director and Co-Chairman of the Board of ALARIS Medical in March 1993 and became
Chairman of the Board in May 1993. Mr. Picower served as Chief Executive Officer
of ALARIS Medical from September 1993 to November 1996. Mr. Picower has served
as Chairman of the Board of ALARIS Medical Systems since the effective date of
the Merger. He has, since 1984, been Chairman of the Board and Chief Executive
Officer of Monroe Systems for Business, Inc. ("Monroe"), a worldwide office
equipment, distribution and service organization of which Mr. Picower is the
sole shareholder. Mr. Picower has been a Director of Physician Computer Network,
Inc. ("PCN") since January 1994 and Chairman of the Board of PCN since June
1994. PCN, a corporation whose principal shareholder is Mr. Picower, operates a
computer network linking its office-based physician members to health care
organizations. See "--Board of Directors."
WILLIAM J. MERCER. Mr. Mercer became a Director, the President and the
Chief Executive Officer of each of ALARIS Medical and ALARIS Medical Systems on
the effective date of the Merger. Mr. Mercer served as the Chief Financial
Officer of each of ALARIS Medical and ALARIS Medical Systems from March 1997
until August 1997. Prior to the effective date of the Merger, Mr. Mercer served
as President, Chief Executive Officer and a Director of IVAC Medical Systems and
President and a Director of IVAC Holdings since May 1995, and as Chief Executive
Officer of IVAC Holdings since January 1996. Prior to joining IVAC Medical
Systems, Mr. Mercer held various positions at Mallinckrodt Group, Inc. for 17
years, most recently as Senior Vice President. Mallinckrodt Group, Inc. is an
international company serving specialty markets in human health care and
pharmaceutical chemicals.
NORMAN M. DEAN. Mr. Dean has been a Director of ALARIS Medical since March
1989. Mr. Dean has been a Director and President of Foothills Financial
Corporation, a venture capital company, since January 1985 and Chairman of the
Board of Miller Diversified Corp., a commercial cattle feeder, since May 1990.
84
<PAGE>
HENRY GREEN. Mr. Green was President and Chief Operating Officer of ALARIS
Medical from September 1990 to March 1993 and has been a Director of ALARIS
Medical since 1991. Mr. Green was employed by PCN in March 1993 and elected as
President of PCN in May 1993, Chief Executive Officer of PCN in June 1994 and a
Director of PCN in July 1993. Mr. Green served as President and Chief Executive
Officer of PCN until his retirement in December 1997. See "--Board of
Directors."
RICHARD B. KELSKY. Mr. Kelsky has served as a Director of ALARIS Medical
since June 1989. Mr. Kelsky is a Director of Monroe and served as Vice President
and General Counsel of Monroe from 1984 to 1996. Mr. Kelsky has served as Vice
Chairman of Monroe since 1996. Mr. Kelsky has served as a Director of PCN since
January 1992. See "--Board of Directors."
JOHN A. DE GROOT. Mr. de Groot became the Secretary of each of ALARIS
Medical and ALARIS Medical Systems in March 1997. Mr. de Groot became a Vice
President and General Counsel of ALARIS Medical Systems as of November 1996.
Prior thereto, Mr. de Groot served as a Vice President and General Counsel of
IVAC Holdings, Inc. and IVAC Medical Systems since April 1995. From January 1991
to December 1996, Mr. de Groot was a partner in the law firm of Brobeck, Phleger
& Harrison LLP, a firm he had been associated with since March 1987.
JAKE ST. PHILIP. Mr. St. Philip became Vice President of Sales, North
America of ALARIS Medical Systems as of November 1996. Prior thereto, Mr. St.
Philip served as Vice President of Sales, North America of IVAC Medical Systems
since June 1994. From 1981 to June 1994, Mr. St. Philip held various sales and
marketing positions with IVAC Medical Systems.
ANTHONY B. SEMEDO. Mr. Semedo became Vice President of Corporate
Development in January 1998. From November 1996 until February 1998, Mr. Semedo
served as Vice President of Research, Development and Engineering of ALARIS
Medical Systems. Prior thereto, Mr. Semedo served as Vice President of Research
and Development of IVAC Medical Systems since February 1995. From September 1994
to February 1995, Mr. Semedo served as Vice President of Quality of IVAC Medical
Systems. From August 1992 to September 1994, Mr. Semedo served as the Business
Development Manager of the cardiovascular business and the Quality Assurance
Manager of the medical devices and diagnostics division of Eli Lilly and
Company. Eli Lilly and Company is engaged in the discovery, development,
manufacture and sale of products, and the provision of services in the life
sciences industry.
RICHARD M. MIRANDO. Mr. Mirando became Vice President of Operations of
ALARIS Medical Systems as of November 1996. Prior thereto, Mr. Mirando served as
Vice President and General Manager of International Business of IVAC Medical
Systems since January 1995. From 1978 to January 1995, Mr. Mirando held various
positions, including Marketing Manager, Director of Market Planning and
Research, Director of Sales, Executive Director of International Operations,
Vice President Sales and Marketing--Fluid Delivery Division, Vice
President--Corporate Accounts and Pricing, and Vice President--Corporate
Quality/Service Business Unit, with IVAC Medical Systems.
HENK VAN ROSSEM. Mr. van Rossem became Vice President and General Manager,
International of ALARIS Medical Systems in January 1997. Prior thereto, Mr. van
Rossem held various international marketing and sales positions with
Mallinckrodt Group, Inc. since 1984. Mr. van Rossem's last position with
Mallinckrodt Group, Inc. was Vice President and General Manager of the European
nuclear medicine division.
BOARD OF DIRECTORS
The Board of Directors of ALARIS Medical consists of five members. Directors
serve for terms of one year and until their successors are duly elected and have
qualified. The members of the Board of Directors of ALARIS Medical also serve as
and constitute all of the members of the Board of Directors of ALARIS Medical
Systems.
85
<PAGE>
Mr. Picower is the principal shareholder, and Messrs. Picower, Green and
Kelsky are directors of PCN. In early March 1998 PCN announced the discovery of
instances of improper income and expense recognition in the first three quarters
of its fiscal year ended December 31, 1997, as well as delay in the completion
of its financial statements for that year. In addition, in May 1998, PCN
announced that its auditors had informed it that they were reviewing certain
matters with respect to PCN's financial statements for the year ended December
31, 1996 and that they had determined to withdraw their previously issued report
on those financial statements. In connection with the foregoing, numerous class
action lawsuits have been filed against PCN, as well as certain of its officers
and directors, including Mr. Green and, in certain instances, Mr. Picower. The
lawsuits allege, among other things, that PCN issued false and misleading
financial statements.
COMPENSATION OF DIRECTORS
Members of the Board of Directors who are not employees of the Company are
paid $25,000 per annum and in addition receive $1,000 per board and/or committee
meeting attended. In addition, such Directors are entitled to receive options to
purchase shares of Common Stock pursuant to the Directors Plan. See
"--Stock-Based Benefit Plans--Directors Plan." Travel and accommodation expenses
of Directors incurred in connection with meetings are reimbursed by ALARIS
Medical. All of the Directors are covered by ALARIS Medical's directors'
liability insurance policy.
EXECUTIVE COMPENSATION
The following table summarizes certain information regarding compensation
paid or accrued by ALARIS Medical, its subsidiaries or IVAC Medical Systems to
or on behalf of ALARIS Medical's Chief Executive Officer, each of the four most
highly compensated executive officers of ALARIS Medical Systems, other than the
Chief Executive Officer, whose total annual salary and bonus for the year ended
December 31, 1997 exceeded $100,000 (collectively, the "Named Executive
Officers") and Joseph W. Kuhn:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------------- --------------------------
OTHER ANNUAL SECURITIES
YEAR SALARY BONUS COMPENSATION UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION (1) (2) (3) (4) OPTIONS COMPENSATION
- ------------------------------------------- --------- --------- --------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
WILLIAM J. MERCER ......................... 1997 $ 400,008 $ 360,000 $ -- -- $ 6,366
President and Chief Executive Officer 1996 319,334 312,965 -- 600,000 2,998,298
JOHN A. DE GROOT .......................... 1997 200,004 87,395 -- -- 3,559
Vice President, Secretary and General 1996 131,254 125,232 -- 180,000 384,108
Counsel
RICHARD M. MIRANDO ........................ 1997 197,316 71,047 -- -- 4,750
Vice President of Operations 1996 181,319 92,401 13,216 180,000 625,939
HENK VAN ROSSEM ........................... 1997 200,823 75,594 17,923 180,000 44,078
Vice President and General Manager, 1996 -- -- -- -- --
International
JAKE ST. PHILLIP .......................... 1997 167,127 71,358 -- -- 20,484
Vice President of Sales, North America 1996 144,894 111,425 -- 180,000 607,734
JOSEPH W. KUHN (5) ........................ 1997 41,668 -- 2,227 -- 1,118,878
1996 226,348 139,236 12,519 175,000 3,413
1995 175,000 60,000 9,250 125,000 2,053
</TABLE>
- ------------------------------
(1) Compensation data is not presented for the Named Executive Officers for 1995
as none were employed by ALARIS Medical and/or ALARIS Medical Systems prior
to November 26, 1996.
86
<PAGE>
(2) 1996 "Salary" amounts for the Named Executive Officers consist of salaries
paid by IVAC Medical Systems through November 1996 and salaries paid by
ALARIS Medical Systems for December 1996. 1997 salaries were paid by ALARIS
Medical Systems or its subsidiaries.
(3) 1996 "Bonus" amounts for the Named Executive Officers represent amounts
earned in their respective positions with IVAC Medical Systems prior to the
Merger but paid by ALARIS Medical Systems.
(4) Amounts represent automobile allowances paid by ALARIS Medical Systems. With
respect to Mr. Mirando, automobile allowances through November 1996 were
paid by IVAC Medical Systems.
(5) Mr. Kuhn resigned from his positions as the Executive Vice President and
Chief Financial Officer of each of ALARIS Medical and ALARIS Medical Systems
in March of 1997. Prior to the Merger, Mr. Kuhn served as President,
Treasurer and Secretary of IMED and President, Chief Financial Officer,
Treasurer and Secretary of ALARIS Medical.
<TABLE>
<CAPTION>
COMPANY STOCK OPTION
RETIREMENT RELOCATION CANCELLATION TOTAL OTHER
NAME YEAR CONTRIBUTIONS (1) PAYMENTS (2) PAYMENT (3) OTHER COMPENSATION
- ------------------------------ ---- ----------------- ------------ ------------ ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
William J. Mercer............. 1997 $ 4,750 $ -- $ -- $ (1,6164) $ 6,366
1996 4,120 271,980 2,722,198 -- 2,998,298
John A. de Groot.............. 1997 3,559 -- -- -- 3,559
1996 3,000 -- 381,108 -- 384,108
Richard M. Mirando............ 1997 4,750 -- -- -- 4,750
1996 5,440 23,202 597,297 -- 625,939
Henk van Rossem............... 1997 17,568 26,510 -- -- 44,078
1996 -- -- -- -- --
Jake St. Phillip.............. 1997 4,750 -- -- 15,733(5) 20,483
1996 4,346 4,504 598,884 -- 607,734
Joseph W. Kuhn................ 1997 878 -- -- 1,118,000(6) 1,118,878
1996 3,413 -- -- -- 3,413
1995 2,053 -- -- -- 2,053
</TABLE>
- ------------------------------
(1) Represents contributions made by ALARIS Medical Systems (and by IMED and
IVAC Medical Systems prior to the Merger) to match pre-tax elective deferral
contributions made by the Named Executive Officers and Mr. Kuhn to
retirement plans.
(2) Represents relocation and temporary living expenses paid by IVAC Medical
Systems prior to the Merger and by the Company after the Merger.
(3) Represents stock option cancellation payments paid by ALARIS Medical Systems
in connection with the Merger for unexercised stock options previously
granted under the IVAC Holdings 1995 stock option plan.
(4) Represents life insurance premium paid by ALARIS Medical Systems.
(5) Represents the fair value of noncash awards grossed-up to cover applicable
state and federal income taxes.
(6) Represents separation amount paid to Mr. Kuhn in connection with his
resignation in March 1997 for various matters, including amount paid for
cancellation of then outstanding stock options.
EMPLOYMENT AGREEMENTS
In August 1996, Mr. Mercer entered into an employment agreement whereby he
became employed full time by the Company upon consummation of the Merger. The
agreement is for a term of five years, subject to automatic renewal for
successive one-year periods and to earlier termination as provided therein. The
agreement provides for, among other things, a base salary of $400,000, certain
annual and additional bonuses in an aggregate amount up to 100% of Mr. Mercer's
base annual salary in each such year, options to purchase an aggregate of
600,000 shares of Common Stock, and, in the event Mr. Mercer's employment is
terminated by the Company without cause or due to a disability (as defined
therein), or by Mr. Mercer for good reason (as defined therein), severance
payments in an amount equal to Mr. Mercer's base salary annually until the end
of the employment term. The agreement also contains certain confidentiality,
non-solicitation and non-competition provisions.
87
<PAGE>
In January 1998, Mr. Mercer's employment agreement was amended whereby the
base salary was increased to $432,000, effective as of January 1, 1998.
SEVERANCE PLAN
Effective through December 31, 1999, the Company has in place a severance
plan, which provides employees severance pay and benefits in the event of an
involuntary termination without cause. The amount of severance and benefits is
based upon position and length of service with the Company and ranges from a
minimum of seven weeks' compensation up to one year's base salary for senior
executives. In the event of an involuntary termination related to a change in
control of the Company, the severance plan provides severance of up to two
years' base salary and bonus for senior executives.
STOCK-BASED BENEFIT PLANS
1988 STOCK OPTION PLAN. Under the Third Amended and Restated 1988 Stock
Option Plan of ALARIS Medical (the "1988 Option Plan"), incentive stock options
with respect to shares of Common Stock ("ISOs"), as provided in Section 422 of
the Internal Revenue Code, may be granted to key employees of the Company, and
non-qualified stock options with respect to shares of Common Stock ("NQSOs") may
be granted to key employees, Directors (except Directors eligible to participate
in the Directors Plan (as defined)), and officers of the Company and affiliates,
as well as independent contractors and consultants performing services for such
entities. The maximum aggregate number of shares of Common Stock that may be
issued under the 1988 Option Plan is 1,700,200. The number of shares of Common
Stock which remain available for issuance under the 1988 Option Plan is
1,462,007, of which 587,993 are subject to currently outstanding options.
The 1988 Option Plan is administered by a committee appointed by the Board
of Directors of ALARIS Medical (the "1988 Committee"). No member of the 1988
Committee is eligible to receive options under the 1988 Option Plan.
Pursuant to the 1988 Option Plan, the purchase price of shares of Common
Stock subject to ISOs must be not less than the fair market value of the Common
Stock at the date of the grant; provided that the purchase price of shares
subject to ISOs granted to any optionee who owns shares possessing more than 10%
of the combined voting power of ALARIS Medical or any parent or subsidiary of
ALARIS Medical ("Ten Percent Shareholder") must be not less than 110% of the
fair market value of the Common Stock at the date of the grant. With respect to
NQSOs, the purchase price of shares will be determined by the 1988 Committee at
the time of the grant, but will not be less than the par value of a share of
Common Stock. The maximum term of an option may not exceed 10 years from the
date of grant, except with respect to ISOs granted to Ten Percent Shareholders
which must expire within five years of the date of grant. Options granted vest
and become exercisable as determined by the 1988 Committee. The 1988 Committee
will limit the grant so that no more than 250,000 shares of Common Stock
(subject to certain adjustments) may be awarded to any one employee in any
calendar year. During the lifetime of an optionee, his or her options may be
exercised only by such optionee. Options are not transferable other than by will
or by the laws of descent and distribution.
Options granted to participants under the 1988 Option Plan are subject to
forfeiture under certain circumstances in the event an optionee is no longer
employed by or performing services for the Company.
In the event of a Change of Control, as defined in the 1988 Option Plan,
unless otherwise determined by the 1988 Committee at the time of grant or by
amendment (with the holder's consent) of such grant, all options not vested on
or prior to the effective time of any such Change of Control shall immediately
vest as of such effective time.
1996 STOCK OPTION PLAN. Under the 1996 Stock Option Plan of ALARIS Medical
(the "1996 Option Plan"), ISOs with respect to shares of Common Stock may be
granted to key employees of the Company
88
<PAGE>
and NQSOs with respect to shares of Common Stock may be granted to key
employees, Directors (except Directors eligible to participate in the Directors
Plan), and officers of the Company and its affiliates, as well as independent
contractors and consultants performing services for such entities. The maximum
aggregate number of shares of Common Stock that may be issued under the 1996
Option Plan is 5,500,000. The number of shares of Common Stock which remain
available for issuance under the 1996 Option Plan is 5,485,125, of which
3,196,330 are subject to currently outstanding options.
The 1996 Option Plan is administered by the Board of Directors of ALARIS
Medical or a committee appointed by the Board of Directors of ALARIS Medical
(the "1996 Committee"). No member of the 1996 Committee is eligible to receive
options under the 1996 Option Plan.
Pursuant to the 1996 Option Plan, the purchase price of shares of Common
Stock subject to ISOs must be not less than the fair market value of the Common
Stock at the date of the grant; provided that the purchase price of shares
subject to ISOs granted to any Ten Percent Shareholder must be not less than
110% of the fair market value of the Common Stock at the date of the grant. With
respect to NQSOs, the purchase price of shares will be determined by the 1996
Committee at the time of the grant, but will not be less than the par value of a
share of Common Stock. The maximum term of an option may not exceed 10 years
from the date of grant, except with respect to ISOs granted to Ten Percent
Shareholders which must expire within five years of the date of grant. Options
granted vest and become exercisable as determined by the 1996 Committee. Under
the 1996 Option Plan, no more than 600,000 shares of Common Stock (subject to
certain adjustments) may be awarded to any officer or employee in any calendar
year. During the lifetime of an optionee, his or her options may be exercised
only by such optionee or by his or her guardian or legal representative, except
that the 1996 Committee may permit a NQSO to be transferred to and exercised by
one or more transferees of an optionee. Options are not transferable other than
(i) as provided in the immediately preceding sentence; (ii) by will; (iii) by
the laws of descent and distribution; or (iv) to a beneficiary upon the death of
the optionee.
Options granted to participants under the 1996 Option Plan are subject to
forfeiture under certain circumstances in the event an optionee is no longer
employed by or performing services for the Company.
In the event of a Change of Control, as defined in the 1996 Option Plan,
unless otherwise determined by the 1996 Committee at the time of grant or by
amendment (with the holder's consent) of such grant, all options not vested on
or prior to the effective time of any such Change of Control shall immediately
vest prior to such effective time. Unless otherwise determined by the 1996
Committee in an optionee's stock option agreement or at the time of the Change
of Control, in the event of a Change of Control, all unexercised options held by
such optionee shall terminate and cease to be outstanding immediately following
such Change of Control.
The following table sets forth certain information with respect to stock
options granted during 1997 to the Named Executive Officers pursuant to the 1988
Option Plan and the 1996 Option Plan.
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATE OF STOCK
SECURITIES TOTAL OPTIONS APPRECIATION FOR THE
UNDERLYING GRANTED TO EXERCISE OF OPTION TERM
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
GRANTED 1997 (PER SHARE) DATE 5% 10%
----------- ------------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Henk van Rossem........................ 36,001 3.8% $ 3.19 7-24-06 $ 54,832 $ 131,333
Henk van Rossem........................ 143,999 15.4 3.19 7-24-10 365,582 982,302
</TABLE>
89
<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997
AND OPTION VALUES AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS AT 12/31/97
SHARES OPTIONS AT 12/31/98 (1)
ACQUIRED ON VALUE -------------------------- --------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William J. Mercer.................... -- $ -- 200,000 400,000 $ 375,000 $ 750,000
John A. de Groot..................... -- -- 63,667 116,333 119,376 218,124
Richard M. Mirando................... -- -- 63,667 116,333 119,376 218,124
Henk van Rossem...................... -- -- 45,001 134,999 75,962 227,878
Jake St. Philip...................... -- -- 63,667 116,333 119,376 218,124
</TABLE>
- ------------------------
(1) Calculated based on the excess of the closing price of ALARIS Medical's
common stock on December 31, 1997 ($4.875) as reported in the NASDAQ
National Market Issues published in THE WALL STREET JOURNAL over the option
exercise price.
DIRECTORS PLAN. The Third Amended and Restated 1990 Non-Qualified Stock
Option Plan for Non-Employee Directors of ALARIS Medical (the "Directors Plan")
was most recently amended (the "Amendment") by the Board of Directors of ALARIS
Medical in May 1998. The Amendment was approved by ALARIS Medical's stockholders
in June 1998. Under the Directors Plan, each Director of ALARIS Medical
("Eligible Director") who (i) is neither an employee nor officer (other than an
officer who does not receive a salary as an officer of ALARIS Medical) of ALARIS
Medical or any of its subsidiaries and (ii) has not elected to decline to
participate in the Directors Plan pursuant to an irrevocable one-time election
made within 30 days after first becoming a Director of ALARIS Medical is
eligible to participate in the Directors Plan. An aggregate of 250,000 shares of
Common Stock may be issued under the Directors Plan. The number of shares of
Common Stock which remain available for issuance under the Directors Plan is
238,800, of which 103,000 are subject to currently outstanding options.
The Directors Plan is administered by a committee (the "Plan Committee")
appointed by the Board of Directors of ALARIS Medical consisting of at least two
individuals who are not eligible to participate in the Directors Plan. The Plan
Committee has the authority to administer all aspects of the Directors Plan
other than (i) the grant of NQSOs; (ii) the number of shares of Common Stock
subject to NQSOs; and (iii) the price at which each share of Common Stock
covered by a NQSO may be purchased, all of which are determined automatically
under the Directors Plan.
As a result of the Amendment, NQSOs to purchase 10,000 shares of Common
Stock will be granted automatically to any Eligible Director who first becomes
an Eligible Director after May 28, 1998 on the next succeeding business day
following his or her becoming an Eligible Director. In addition, NQSOs to
purchase 10,000 shares of Common Stock are granted automatically to each
Eligible Director on the anniversary date of his or her preceding NQSO grant
under the Directors Plan and every year thereafter during the term of the
Directors Plan, PROVIDED that such Eligible Director continues to be an Eligible
Director on the date of each such additional NQSO grant. Moreover, the Chairman
of the Board of ALARIS Medical was granted a NQSO to purchase 16,000 shares of
Common Stock on May 28, 1998, which NQSO is fully vested and presently
exercisable. Other than the aforesaid NQSO grant to the Chairman of the Board of
ALARIS Medical, NQSOs granted under the Directors Plan vest and become
exercisable in one-third increments for each year of an Eligible Director's
service on the Board of Directors of ALARIS Medical from the date of the grant
of the NQSO. Immediately prior to the Amendment, NQSOs to purchase 15,000 shares
of Common Stock, which vest at the rate of 5,000 shares of Common Stock per
year, were granted to Eligible Directors every three years.
90
<PAGE>
Pursuant to the Directors Plan, the purchase price of shares of Common Stock
subject to NQSOs must be equal to the fair market value of a share of Common
Stock on the date of the grant of the NQSO. The maximum term of each NQSO may
not exceed five years from the date of grant. During the lifetime of an Eligible
Director, his or her NQSOs may be exercised only by such Eligible Director or by
his or her legal guardian or legal representative, except that the Plan
Committee may permit a NQSO to be transferred to and exercised by one or more
transferees of such Eligible Director. NQSOs are not transferable other than (i)
as provided in the immediately preceding sentence; (ii) by will; (iii) by the
laws of descent and distribution; or (iv) to a beneficiary upon the death of the
Eligible Director.
NQSOs granted under the Directors Plan are subject to termination under
certain circumstances in the event the Eligible Director ceases to be an
Eligible Director or becomes an employee of the Company.
In the event of a Change of Control, as defined in the Directors Plan, all
NQSOs not vested on or prior to the effective time of any such Change of Control
shall vest immediately prior to such effective time. Unless otherwise determined
by the Plan Committee at the time of a Change of Control, in the event of a
Change of Control all outstanding NQSOs shall terminate and cease to be
outstanding immediately following the Change of Control.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There are no reportable compensation committee interlocks or insider
participation transactions.
In connection with the Merger, Mr. Mercer entered into an employment
agreement with ALARIS Medical and ALARIS Medical Systems. See "--Employment
Agreements."
For further information regarding certain relationships and related
transactions, see "Certain Relationships and Related Transactions."
91
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, at June 30, 1998, information regarding the
beneficial ownership of Common Stock by (i) all persons known by ALARIS Medical
who own beneficially more than 5% of the outstanding Common Stock; (ii) each
Director of ALARIS Medical; (iii) each of the Named Executive Officers; and (iv)
all Directors and the Named Executive Officers as a group. Unless otherwise
stated, ALARIS Medical believes that the beneficial owners of the shares listed
below have sole investment and voting power with respect to such shares. In
addition, unless otherwise indicated, each such person's business address is
10221 Wateridge Circle, San Diego, California 92121.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENTAGE OF
OWNED TOTAL (1)
-------------- -------------
<S> <C> <C>
Jeffry M. Picower .......................................... 46,664,209(2) 78.1%
South Ocean Blvd.
Palm Beach, FL 33480
William J. Mercer........................................... 356,200(3) *
Norman M. Dean.............................................. 26,000(4) *
Henry Green................................................. 13,000(5) *
Richard B. Kelsky........................................... 98,100(6) *
Jake St. Philip............................................. 82,334(7) *
Richard M. Mirando.......................................... 92,334(8) *
John A. de Groot............................................ 87,334(9) *
Henk van Rossem............................................. 72,001(10) *
All Directors and Named Executive Officers
as a group (9 individuals)................................ 47,491,512(11) 79.5%
</TABLE>
- ------------------------
* Less than 1%
(1) Calculated in accordance with Rule 13d-3(d)(1) under the Securities
Exchange Act of 1934, as amended. At June 30, 1998, ALARIS Medical had
59,159,839 shares of Common Stock outstanding.
(2) Includes: (i) 20,079,477 shares of Common Stock owned by Decisions; (ii)
2,489,463 shares of Common Stock owned by JA Special; (iii) 24,074,269
shares of Common Stock owned by JD Partnership and (iv) currently
exercisable option on 21,000 shares of Common Stock granted under the
Directors Plan. Does not include an option to purchase 10,000 shares of
Common Stock granted under the Directors Plan that vests over time. Mr.
Picower is the sole stockholder and sole Director of Decisions, which is
the sole general partner of JD Partnership, and the sole general partner of
JA Special. As a result, Mr. Picower shares or has the sole power to vote
or direct the vote of and to dispose or direct the disposition of such
shares of Common Stock and may be deemed to be the beneficial owner of such
shares.
(3) Includes: (i) 156,200 shares of Common Stock owned by the William J. Mercer
Trust, of which Mr. Mercer is the trustee and a beneficiary; and (ii)
currently exercisable option on 200,000 shares of Common Stock granted upon
consummation of the Merger under the 1996 Option Plan. In addition,
pursuant to an employment agreement with the Company, Mr. Mercer has been
granted under the 1996 Option Plan an additional option on 400,000 shares
of Common Stock that vests over time. See "Management--Employment
Agreements."
(4) Includes: (i) 4,000 shares of Common Stock owned by Norman Dean; (ii)
currently exercisable option on 16,000 shares of Common Stock under the
Directors Plan, and currently exercisable option on 5,500 shares of Common
Stock granted in consideration for service on a special committee of the
Board of Directors and (iii) an option on 500 shares of Common Stock which
will become exercisable within 60 days. Does not include: (i) option on an
additional 8,000 shares of Common Stock granted under the Directors Plan
that vests over time; and (ii) option on 4,000 shares of Common Stock
granted in consideration for service on a special committee of the Board of
Directors of ALARIS Medical that vests over time.
(5) Does not include an option to purchase 4,000 of Common Stock granted under
the Directors Plan that vests over time.
(6) Includes currently exercisable option on 16,000 shares of Common Stock
granted under the Directors Plan. Does not include option on an additional
8,000 shares of Common Stock granted under the Directors Plan that vests
over time.
(7) Represents currently exercisable option on 81,667 shares of Common Stock
granted under the 1996 Option Plan and an option on 667 shares of Common
Stock which will become exercisable within 60 days. Does not include option
of 97,666 shares of Common Stock granted under the 1996 Option Plan that
vests over time.
(8) Includes: (i) 10,000 shares of Common Stock owned by Richard M. Mirando;
(ii) a currently exercisable option on 81,667 shares of Common Stock
granted under the 1996 Option Plan; and (iii) an option on 667 shares of
Common Stock which will become exercisable within 60 days. Does not include
option of 97,666 shares of Common Stock granted under the 1996 Option Plan
that vests over time.
(9) Includes: (i) 5,000 shares of Common Stock owned by John A. de Groot; (ii)
a currently exercisable option on 81,667 shares of Common Stock granted
under the 1996 Option Plan; and (iii) and an option on 667 shares of Common
Stock which will become exercisable within 60 days. Does not include option
of 97,666 shares of Common Stock granted under the 1996 Option Plan that
vests over time.
(10) Includes currently exercisable option on 63,001 shares of Common Stock
granted under the 1996 Option Plan and an option on 9,000 shares of Common
Stock which will become exercisable within 60 days. Does not include
option on an additional 107,999 shares of Common Stock granted under the
1996 Option Plan that vests over time.
(11) Includes currently exercisable options on 530,003 shares of Common Stock
granted under the 1996 Option Plan and 56,000 shares of Common Stock
granted under the Directors Plan.
92
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DECISIONS CONTRIBUTION
In connection with the Merger, ALARIS Medical made a capital contribution
(the "Capital Contribution") of approximately $20.0 million to IMED. The Capital
Contribution was funded in part through the sale to Decisions, a corporation
wholly owned by ALARIS Medical's principal stockholder, by ALARIS Medical of
approximately 13.3 million shares of Common Stock for aggregate proceeds of
$40.0 million (the "Decisions Contribution"). The balance of the Capital
Contribution was funded with existing cash balances of ALARIS Medical. The
portion of the net proceeds of the Decisions Contribution not applied to make
the Capital Contribution was used by ALARIS Medical to redeem approximately
$22.0 million principal amount of its 15% Subordinated Debentures due 1999 and
fund the redemption of ALARIS Medical's outstanding preferred stock. In
connection with the Decisions Contribution, Decisions exchanged an aggregate of
$37.5 million in principal amount of convertible promissory notes issued by
ALARIS Medical for approximately 29.4 million shares of Common Stock. See "Risk
Factors--Control of the Company," "Management--Directors and Key Executive
Officers" and "Principal Stockholders."
NON-CASH CONTRIBUTIONS
Effective June 30, 1996, ALARIS Medical made non-cash contributions totaling
$41.2 million to IMED. Included in this capital contribution was $2.9 million
representing ALARIS Medical's net carrying value of certain patents which up to
June 30, 1996 had been licensed to IMED for $1.1 million per year. Amounts
accrued to ALARIS Medical under this license, as well as other intercompany
charges due to ALARIS Medical totaling $9.4 million were contributed to IMED.
Additionally, ALARIS Medical contributed $8.8 million representing the
outstanding par value and accrued dividends on all outstanding shares of IMED
12% preferred stock. These preferred shares were then cancelled.
Pursuant to IMED's tax sharing agreement with ALARIS Medical, for Federal
and California income tax purposes, IMED was required to calculate its income
tax liability on a stand-alone basis as if it were not included in the ALARIS
Medical consolidated income tax return. The resulting tax liability was payable
to ALARIS Medical. Due to restrictions on payments from IMED to ALARIS Medical
contained in IMED's credit facility (the "IMED Credit Facility"), income tax
payments to ALARIS Medical were limited to actual tax liabilities of ALARIS
Medical. Due to losses incurred at the ALARIS Medical level which reduced the
consolidated taxable income, the income tax liabilities recorded by IMED on a
stand-alone basis were significantly greater than the amounts actually paid to
ALARIS Medical. As of June 30, 1996 ALARIS Medical agreed to contribute to IMED
stockholder's equity income tax payments due from IMED but which could not be
paid pursuant to the IMED Credit Facility. As a result of this agreement by
ALARIS Medical, approximately $20.1 million was credited to IMED's capital in
excess of par and the corresponding income tax liabilities were eliminated from
IMED's consolidated balance sheet. Such liabilities amounted to approximately
$18.9 million at December 31, 1995.
TRANSACTIONS WITH MANAGEMENT
In connection with the Merger, Mr. Mercer entered into an employment
agreement with ALARIS Medical and ALARIS Medical Systems. See
"Management--Employment Agreements."
93
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
The existing indebtedness of the Company summarized below will remain
outstanding subsequent to the Acquisition. The summaries of such indebtedness
contained herein do not purport to be complete and are qualified in their
entirety by reference to the provisions of the various agreements and indenture
related thereto, copies of which are available from ALARIS Medical upon request.
THE 9 3/4% NOTES
On November 26, 1996, ALARIS Medical Systems issued and sold $200 million
principal amount of 9 3/4% Notes pursuant to an indenture (the "9 3/4% Notes
Indenture"). The 9 3/4% Notes were sold pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In September 1997, ALARIS Medical Systems
and certain of its subsidiaries completed an exchange offer whereby the 9 3/4%
Notes were exchanged into new 9 3/4% Notes, which are registered under
Securities Act with terms substantially identical to the 9 3/4% Notes.
The 9 3/4% Notes will mature on December 1, 2006. Interest accrues at the
rate of 9 3/4% per annum and is payable semi-annually in arrears on each June 1
and December 1. Payments of principal, premium and interest on the 9 3/4% Notes
are subordinated, as set forth in the 9 3/4% Notes Indenture, to the prior
payment in full of the Senior Debt (as defined in the 9 3/4% Notes Indenture).
At any time prior to December 1, 1999, ALARIS Medical Systems may, on one or
more occasions, redeem up to $70.0 million in aggregate principal amount of the
9 3/4% Notes with any of the net proceeds of one or more public or private
offerings of common stock of (i) ALARIS Medical or any other corporate parent of
ALARIS Medical Systems to the extent the net proceeds thereof are contributed to
ALARIS Medical Systems as a capital contribution to common equity or (ii) ALARIS
Medical Systems in each case, at a redemption price of 109.75% of the principal
amount thereof, plus accrued and unpaid interest thereon, if any. At any time on
or after December 1, 2001, the 9 3/4% Notes may be redeemed at the option of
ALARIS Medical Systems, in whole or in part, at a premium that declines each
year until December 1, 2004 when the 9 3/4% Notes may be redeemed at 100% of
their principal amount. In the event of a Change of Control (as defined in
9 3/4% Notes Indenture), the holders of the 9 3/4% Notes have the right to
require ALARIS Medical Systems to purchase the 9 3/4% Notes, in whole or in
part, at a price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of purchase.
The 9 3/4% Notes Indenture contains various restrictive covenants that limit
the ability of ALARIS Medical Systems and its subsidiaries to, among other
things, incur additional indebtedness, consummate certain asset sales, enter
into certain transactions with affiliates, pay dividends or make certain other
restricted payments, issue preferred stock, incur liens, enter in sale and
leaseback transactions, incur indebtedness that is subordinate in right of
payment of any Senior Debt pursuant to the 9 3/4% Notes Indenture and senior in
right of payment to the 9 3/4% Notes, impose restrictions on the ability of a
subsidiary to pay dividends or make certain payments to ALARIS Medical Systems
and its subsidiaries, merge or consolidate or sell, assign, transfer, lease
convey or otherwise dispose of all or substantially all of the assets of ALARIS
Medical Systems, engage in sales of their respective accounts receivable and
engage in any line of business other than (i) the same or a similar line of
business as ALARIS Medical Systems and its subsidiaries were engaged in on
November 26, 1996 and (ii) such business activities as are complementary to or
are incidents, ancillary or related to the foregoing.
CREDIT FACILITY
GENERAL. In connection with the Merger, ALARIS Medical Systems entered into
a credit facility (as amended to date, the "Credit Facility") which is comprised
of a Term Loan Facility and a Revolving Credit Facility. Capitalized terms that
are used but not otherwise defined herein shall have the meanings assigned to
them in the Credit Facility and those definitions are incorporated herein by
reference.
94
<PAGE>
The Credit Facility consists of a $230.0 million Term Loan Facility and a
$60.0 million 68-month Revolving Credit Facility. The Term Loan Facility is
comprised of $75.0 million of Tranche A Term Loans amortizing over 68 months,
$42.5 million of Tranche B Term Loans amortizing over 83 months, $42.5 million
of Tranche C Term Loans amortizing over 95 months and $70.0 million of Tranche D
Term Loans amortizing over 101 months.
The proceeds of the Term Loan Facility were used by the Company to fund
certain amounts payable in connection with the Merger. The Revolving Credit
Facility, is available for general corporate purposes.
CREDIT FACILITY AMENDMENT. The Company entered into the Credit Facility
Amendment to, among other things, obtain the consent of the lenders under the
Credit Facility to enter into the Acquisition and the Offering and to finance
the Acquisition Payment and other fees and expenses in connection with the
Acquisition.
The Credit Facility Amendment, among other things, (i) increases the
revolving portion of the Credit Facility from $50.0 million to $60.0 million and
(ii) increases the Tranche D Term Loan by $30.0 million to $70.0 million.
Pursuant to the Credit Facility Amendment, the Company (i) must use the
proceeds of the additional Tranche D Term Loan toward financing the Acquisition
Payment and paying certain fees and expenses in connection with the Acquisition
or to pay amounts owed under the revolving portion of the Credit Facility and
(ii) may also use the revolving portion of the Credit Facility toward financing
the Acquisition Payment and paying certain fees and expenses in connection with
the Acquisition.
INTEREST RATE; FEES. Borrowings made as: (i) Revolving Credit Loans and
Tranche A Term Loans bear interest at a rate equal to the Eurodollar Rate (as
adjusted) plus 2.25% or the Base Rate plus 1.00% (in each case, less 0.25% if
the Leverage Ratio on the Test Date is less than 3.0:1.0 and less 0.50% if the
Leverage Ratio on such Test Date is less than 2.5:1.0); (ii) Tranche B, C and D
Term Loans bear interest at a rate equal to the Eurodollar Rate (as adjusted)
plus 2.5% or the Base Rate plus 1.25%. The "Base Rate" is a rate equal to the
higher of 0.50% in excess of the Federal Reserve reported certificate of deposit
rate and (ii) the prime rate, as in effect from time to time, of Bankers Trust
Company. Overdue principal and interest will bear interest at a rate per annum
equal to the greater of (i) the rate which is 2.0% in excess of the rate
otherwise applicable to Base Rate Loans from time to time and (ii) the rate
which is 2.0% in excess of the rate then borne by such borrowings.
The commitment fee payable by ALARIS Medical Systems is calculated at a rate
equal to 0.50% of 1.0% per annum of the Aggregate Unutilized Commitment (less
0.125% if the Leverage Ratio on the Test Date is less than 2.5:1.0). Such a fee
was paid on the closing of the Merger ("Merger Closing"), and is payable
quarterly in arrears after such date and upon the termination of the Credit
Facility.
The letter of credit fee payable by ALARIS Medical Systems is calculated at
a rate equal to the applicable margin for Eurodollar Loans under the Revolving
Credit Facility plus an additional 0.25% per annum of the face amount of each
letter of credit.
AMORTIZATION; PREPAYMENTS. The final scheduled maturity of the: (i) Tranche
A Term Loans is the date that is approximately five years and eight months after
the Merger Closing, (ii) Tranche B Term Loans is the date that is approximately
seven years after the Merger Closing, (iii) Tranche C Term Loans is the date
that is approximately eight years after the Merger Closing, and (iv) Tranche D
Term Loans is the date that is approximately eight years and six months after
the Merger Closing. All such loans are subject to interim scheduled
amortization.
In certain instances, ALARIS Medical Systems is required to make certain
mandatory prepayments under the Credit Facility.
95
<PAGE>
GUARANTEES; SECURITY. All obligations of ALARIS Medical Systems under the
Credit Facility are guaranteed by the Credit Facility Guarantee and each
existing and subsequently formed or acquired domestic subsidiary of ALARIS
Medical (other than ALARIS Medical Systems, ALARIS Release Corporation, ALARIS
Consent Corporation, IVAC Overseas Holdings Inc., Fidata and River).
The Credit Facility and the related guarantees (a) are secured by (i) a
perfected first priority pledge of the security interest in all of the common
stock owned by ALARIS Medical in each existing and subsequently formed or
acquired direct or indirect domestic subsidiary of ALARIS Medical (other than
Fidata, River and IVAC Overseas Holdings, Inc. but including ALARIS Medical
Systems) and (ii) all assets of ALARIS Medical and each of its direct and
indirect domestic subsidiaries (other than Fidata and River but including ALARIS
Medical Systems) and (b) are secured by a perfected first priority pledge of and
security interest in 65% of the common stock owned by ALARIS Medical in each
existing and subsequently formed or acquired direct or indirect first-tier
foreign subsidiary of ALARIS Medical.
CERTAIN COVENANTS. The Credit Facility contains numerous operating and
financial covenants, all of which the Company is currently in compliance with
including, without limitation, the following:
(I) MINIMUM CONSOLIDATED EBITDA. Consolidated EBITDA for any Test Period
ending on a date set forth below may not be less than the amount set forth
opposite such date:
<TABLE>
<CAPTION>
MINIMUM CONSOLIDATED
DATE EBITDA
- ----------------------------------------------------------------------- ---------------------
<S> <C>
September 30, 1998..................................................... $ 86,200,000
December 31, 1998...................................................... $ 88,400,000
March 31, 1999......................................................... $ 89,200,000
June 30, 1999.......................................................... $ 90,300,000
September 30, 1999..................................................... $ 91,300,000
December 31, 1999...................................................... $ 92,600,000
March 31, 2000......................................................... $ 93,600,000
June 30, 2000.......................................................... $ 94,800,000
September 30, 2000..................................................... $ 96,100,000
December 31, 2000...................................................... $ 97,600,000
March 31, 2001......................................................... $ 99,600,000
June 30, 2001.......................................................... $ 102,100,000
September 30, 2001..................................................... $ 104,500,000
December 31, 2001...................................................... $ 107,500,000
March 31, 2002......................................................... $ 109,500,000
June 30, 2002.......................................................... $ 111,900,000
September 30, 2002..................................................... $ 114,300,000
December 31, 2002...................................................... $ 117,200,000
March 31, 2003......................................................... $ 118,600,000
June 30, 2003.......................................................... $ 120,300,000
September 30, 2003..................................................... $ 122,100,000
December 31, 2003...................................................... $ 124,200,000
March 31, 2004......................................................... $ 125,700,000
June 30, 2004.......................................................... $ 127,500,000
September 30, 2004..................................................... $ 129,400,000
December 31, 2004...................................................... $ 131,600,000
March 31, 2005......................................................... $ 132,600,000
June 30, 2005.......................................................... $ 133,900,000
</TABLE>
96
<PAGE>
(II) INTEREST COVERAGE RATIO. The Interest Coverage Ratio for any Test
Period ending on a date set forth below may not be less than the ratio set forth
opposite such date:
<TABLE>
<CAPTION>
DATE RATIO
- ---------------------------------------------------------------------------------- ----------
<S> <C>
September 30, 1998................................................................ 2.05:1.00
December 31, 1998................................................................. 2.10:1.00
March 31, 1999.................................................................... 2.15:1.00
June 30, 1999..................................................................... 2.20:1.00
September 30, 1999................................................................ 2.25:1.00
December 31, 1999................................................................. 2.30:1.00
March 31, 2000.................................................................... 2.35:1.00
June 30, 2000..................................................................... 2.40:1.00
September 30, 2000................................................................ 2.45:1.00
December 31, 2000................................................................. 2.50:1.00
March 31, 2001.................................................................... 2.60:1.00
June 30, 2001..................................................................... 2.70:1.00
September 30, 2001................................................................ 2.75:1.00
December 31, 2001................................................................. 2.75:1.00
March 31, 2002.................................................................... 3.00:1.00
June 30, 2002..................................................................... 3.10:1.00
September 30, 2002................................................................ 3.25:1.00
December 31, 2002................................................................. 3.35:1.00
March 31, 2003.................................................................... 3.50:1.00
June 30, 2003..................................................................... 3.65:1.00
September 30, 2003................................................................ 3.70:1.00
December 31, 2003................................................................. 3.75:1.00
March 31, 2004.................................................................... 4.05:1.00
June 30, 2004..................................................................... 4.15:1.00
September 30, 2004................................................................ 4.20:1.00
December 31, 2004................................................................. 4.25:1.00
March 31, 2005.................................................................... 4.50:1.00
June 30, 2005..................................................................... 4.75:1.00
</TABLE>
97
<PAGE>
(III) LEVERAGE RATIO. The Leverage Ratio at any time during a fiscal
quarter set forth below may not be more than the ratio set forth opposite such
fiscal quarter:
<TABLE>
<CAPTION>
FISCAL QUARTER ENDING RATIO
- ---------------------------------------------------------------------------------- ----------
<S> <C>
September 30, 1998................................................................ 4.75:1.00
December 31, 1998................................................................. 4.60:1.00
March 31, 1999.................................................................... 4.55:1.00
June 30, 1999..................................................................... 4.45:1.00
September 30, 1999................................................................ 4.35:1.00
December 31, 1999................................................................. 4.25:1.00
March 31, 2000.................................................................... 4.20:1.00
June 30, 2000..................................................................... 4.10:1.00
September 30, 2000................................................................ 4.05:1.00
December 31, 2000................................................................. 4.00:1.00
March 31, 2001.................................................................... 3.80:1.00
June 30, 2001..................................................................... 3.65:1.00
September 30, 2001................................................................ 3.50:1.00
December 31, 2001................................................................. 3.35:1.00
March 31, 2002.................................................................... 3.20:1.00
June 30, 2002..................................................................... 3.10:1.00
September 30, 2002................................................................ 2.95:1.00
December 31, 2002................................................................. 2.85:1.00
March 31, 2003.................................................................... 2.75:1.00
June 30, 2003..................................................................... 2.65:1.00
September 30, 2003................................................................ 2.55:1.00
December 31, 2003................................................................. 2.50:1.00
March 31, 2004.................................................................... 2.40:1.00
June 30, 2004..................................................................... 2.35:1.00
September 30, 2004................................................................ 2.30:1.00
December 31, 2004................................................................. 2.25:1.00
March 31, 2005.................................................................... 2.05:1.00
June 30, 2005..................................................................... 1.75:1.00
</TABLE>
(IV) FIXED CHARGE COVERAGE RATIO. Neither ALARIS Medical nor ALARIS
Medical Systems will permit the ratio of (i) (x) Consolidated EBITDA less (y)
Capital Expenditures of ALARIS Medical Systems and its Subsidiaries on a
consolidated basis to (ii) Consolidated Fixed Charges for any Test Period
(commencing with the Test Period ending on September 30, 1997) to be less than
1.00:1.00.
(V) MINIMUM CONSOLIDATED NET WORTH. Neither ALARIS Medical nor ALARIS
Medical Systems will permit Consolidated Net Worth at any time to be less than
the sum of (1) $85,000,000 plus (2) if such amount is positive, an amount equal
to 75% of Consolidated Net Income for the period commencing January 1, 1997
through the last day of the then most recently ended fiscal quarter.
The Credit Facility also includes customary covenants relating to the
delivery of financial statements, reports, notices, and other information,
access to information and properties, maintenance of insurance, payment of
taxes, maintenance of assets, nature of business, corporate existence and
rights, compliance with applicable laws, transactions with affiliates, use of
proceeds, limitations on indebtedness, limitations on liens, limitations on
certain mergers and sales of assets, limitations on investments, limitations on
dividends and other distributions and limitations on debt payments, including
prepayment or redemption
98
<PAGE>
of the 9 3/4% Notes and dividends and distributions from ALARIS Medical's
subsidiaries to ALARIS Medical.
EVENTS OF DEFAULT. The Credit Facility contains certain events of default,
including failure to make payments under the Credit Facility; breach of
representations and warranties; breach of covenants; default under other
agreements or conditions relating to indebtedness; certain events of insolvency
or bankruptcy with respect to ALARIS Medical Systems or certain subsidiaries;
certain ERISA violations; invalidity or disaffirmance of any guarantee or pledge
agreement; certain judgments and certain events relating to changes in control
of ALARIS Medical Systems or ALARIS Medical.
CONVERTIBLE DEBENTURES
In January 1992, ALARIS Medical issued and sold the Convertible Debentures,
of which approximately $16.2 million in aggregate principal amount are
outstanding. The Convertible Debentures will mature on January 15, 2002.
Interest accrues at the rate of 7 1/4% per annum and is payable semi-annually in
arrears on each January 15 and July 15. Payments of principal, premium and
interest on the Convertible Debentures are subordinated, as set forth in the
indenture governing the Convertible Debentures, to the prior payment in full of
the Senior Indebtedness (as defined in the indenture governing the Convertible
Debentures).
The Convertible Debentures may be redeemed at the option of ALARIS Medical,
in whole or in part, at a premium that declines on January 15 of each year until
the maturity date of the Convertible Debentures. The Convertible Debentures are
convertible at the option of the holders thereof into shares of Common Stock.
The original conversion price for the Convertible Debentures was $18.14 per
share of Common Stock subject to the customary adjustments for anti-dilution
which are set forth in the indenture governing the Convertible Debentures. In
the event of a Change in Control (as defined in the indenture governing the
Convertible Debentures), the holders of the Convertible Debentures have the
right to require ALARIS Medical to purchase the Convertible Debentures, in whole
or in part, at a price equal to 100% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of purchase.
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DESCRIPTION OF NOTES
GENERAL
The Old Notes were, and the New Notes will be, issued pursuant to the
Indenture (the "Indenture") between ALARIS Medical and U.S. Trust Company of
Texas, N.A., as trustee (the "Trustee"), dated as of July 28, 1998. The form and
terms of the New Notes are identical in all material respects to the form and
terms of the Old Notes, except that the New Notes (i) have been registered under
the Securities Act and therefore, will not bear legends restricting their
transfer and (ii) do not contain certain provisions providing for the payment of
Liquidated Damages under certain circumstances relating to the Registration
Rights Agreement.
The terms of the Notes include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The Notes are subject to all such terms,
and the Holders of the Notes are referred to the Indenture and the Trust
Indenture Act for a statement thereof. A copy of the form of Indenture and
Registration Rights Agreement are available as set forth below under
"--Available Information." The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions."
The Notes will be general obligations of ALARIS Medical and will rank senior
in right of payment to all existing and future subordinated indebtedness of
ALARIS Medical, and will rank PARI PASSU in right of payment to all existing and
future senior indebtedness of ALARIS Medical and with all other general
liabilities and commitments of ALARIS Medical. Additionally, as ALARIS Medical
has unconditionally guaranteed on a senior secured basis the obligations of
ALARIS Medical Systems under the Credit Facility, the Notes will also be
effectively subordinated to all secured indebtedness of ALARIS Medical Systems,
which as of September 30, 1998 was $211.4 million.
All of the operations of ALARIS Medical are conducted through its
Subsidiaries and, therefore, ALARIS Medical is dependent upon the cash flow of
its Subsidiaries to meet its obligations, including its obligations under the
Credit Facility, the Notes and the Convertible Debentures. ALARIS Medical's
Subsidiaries will not be guarantors of the Notes. Under the Credit Facility,
Subsidiaries of ALARIS Medical are permitted to pay dividends or make other
distributions to ALARIS Medical, including interest payment requirements
beginning in 2003 on the Notes, if there has been no Event of Default and ALARIS
Medical Systems has met its ratio tests thereunder. Also under the Credit
Facility, any new domestic Subsidiary of ALARIS Medical will be required to
become a guarantor thereunder. As a result, the Notes will be effectively
subordinated to all indebtedness and other liabilities and commitments
(including trade payables and lease obligations) of ALARIS Medical's
Subsidiaries which as of September 30, 1998 was $525.0 million which includes
$211.4 million of secured Credit Facility indebtedness. Any right of ALARIS
Medical to receive assets of any of its Subsidiaries upon the latter's
liquidation or reorganization (and the consequent right of the Holders of the
Notes to participate in those assets) will be effectively subordinated to the
claims of such Subsidiary's creditors, except to the extent that ALARIS Medical
is itself recognized as a creditor of such Subsidiary, in which case the claims
of ALARIS Medical would still be subordinate to any security in the assets of
such Subsidiary and any indebtedness of such Subsidiary senior to that held by
ALARIS Medical. See "Risk Factors--Holding Company Structure; Dependence Upon
Operations of Subsidiaries."
Restrictions in the Indenture on the ability of ALARIS Medical and its
Restricted Subsidiaries to incur additional Indebtedness, to make Asset Sales,
to enter into transactions with Affiliates and to enter into mergers,
consolidations or sales of all or substantially all of its assets, may make more
difficult or discourage a takeover of ALARIS Medical, whether favored or opposed
by the management of ALARIS Medical. While such restrictions cover a wide
variety of arrangements which have traditionally been used to effect highly
leveraged transactions, the Indenture may not afford the Holders of the Notes
protection in all circumstances from the adverse aspects of a highly leveraged
transaction, reorganization, restructuring, merger or similar transaction.
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As of the date of the Indenture, all of ALARIS Medical's Subsidiaries will
be Restricted Subsidiaries. However, under certain circumstances, ALARIS Medical
will be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries; PROVIDED that in no event shall ALARIS Medical Systems be
designated by ALARIS Medical as an Unrestricted Subsidiary. Unrestricted
Subsidiaries will not be subject to many of the restrictive covenants set forth
in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount at maturity to
$275.0 million, of which $189.0 million was issued in the Offering, and will
mature on August 1, 2008. The Notes were issued at a substantial discount from
their principal amount at maturity to generate gross proceeds to ALARIS Medical
of approximately $109.9 million. Until August 1, 2003, the Accreted Value will
increase (representing amortization of original issue discount) between the date
of original issuance and August 1, 2003, at a rate of 11 1/8% on a semi-annual
bond equivalent basis using a 360-day year comprised of twelve 30-day months,
such that the Accreted Value on August 1, 2003 will be equal to the full
principal amount at maturity of the Notes. Beginning on August 1, 2003, interest
on the Notes will accrue at the rate of 11 1/8% per annum and will be payable in
cash semi-annually in arrears on February 1 and August 1 of each year,
commencing on February 1, 2004 to the Holders of the Notes of record on the
immediately preceding January 15 and July 15. Additional Notes may be issued
from time to time after the Offering, subject to the provisions of the covenant
described under the caption "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock." The Notes offered hereby and any additional Notes
subsequently issued under the Indenture would be treated as a single class for
all purposes under the Indenture, including, without limitation, waivers,
amendments, redemptions and offers to purchase. Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from August 1, 2003. Interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months. Principal, premium,
if any, and interest, if any, on the Notes will be payable at the office or
agency of ALARIS Medical maintained for such purpose within the City and State
of New York or, at the option of ALARIS Medical, payment of interest may be made
by check mailed to the Holders of the Notes at their respective addresses set
forth in the register of Holders of Notes; PROVIDED that all payments of
principal, premium, interest, if any, with respect to Notes the Holders of which
have given wire transfer instructions to ALARIS Medical or the Paying Agent will
be required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof. Until otherwise designated by ALARIS
Medical, ALARIS Medical's office or agency in New York will be the office of the
Trustee maintained for such purpose. The Notes will be issued in denominations
of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION
Except as provided in the next paragraph, the Notes will not be redeemable
at ALARIS Medical's option prior to August 1, 2003. Thereafter, the Notes will
be subject to redemption at the option of ALARIS Medical, in whole or in part,
upon not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below, together with
accrued and unpaid interest, if any, thereon to the applicable redemption date,
if redeemed during the twelve-month period beginning on August 1 of the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2003.............................................................................. 105.563%
2004.............................................................................. 103.708%
2005.............................................................................. 101.854%
2006 and thereafter............................................................... 100.000%
</TABLE>
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Notwithstanding the foregoing, on or prior to August 1, 2001, ALARIS Medical
on one or more occasions may redeem up to 35% in aggregate principal amount at
maturity of Notes issued under the Indenture at a redemption price equal to
111.125% of the Accreted Value thereof to the redemption date, with the net cash
proceeds of one or more public or private offerings of common stock of ALARIS
Medical; PROVIDED that at least 65% in aggregate principal amount at maturity of
Notes remain outstanding immediately after the occurrence of each such
redemption; and PROVIDED, FURTHER; that any such redemption must occur within 90
days of the date of the closing of any such public or private offering.
MANDATORY REDEMPTION
Except as set forth below under "Repurchase at the Option of Holders,"
ALARIS Medical is not required to make any mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require ALARIS Medical to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the
offer described below (the "Change of Control Offer") at an offer price in cash
equal to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest, if any, thereon to the date of purchase (or, in the case of
repurchases of Notes prior to August 1, 2003, at a purchase price equal to 101%
of the Accreted Value thereof, as of the date of repurchase) (in either case,
the "Change of Control Payment"). Within 30 days following any Change of
Control, ALARIS Medical will mail a notice to each Holder of Notes describing
the transaction or transactions that constitute the Change of Control and
offering to repurchase Notes pursuant to the procedures required by the
Indenture and described in such notice. However, prior to any such repurchase,
ALARIS Medical will need to obtain consent to do such under its Credit Facility.
On the Change of Control Payment Date, ALARIS Medical will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount at maturity of Notes or portions thereof being
purchased by ALARIS Medical. The Paying Agent will promptly mail to each Holder
of Notes so tendered the Change of Control Payment for such Notes, and the
Trustee will promptly authenticate and mail (or cause to be transferred by book
entry) to each Holder of Notes a new Note equal in principal amount at maturity
to any unpurchased portion of the Notes surrendered, if any; PROVIDED that each
such new Note will be in a principal amount at maturity of $1,000 or an integral
multiple thereof. ALARIS Medical will publicly announce the results of the
Change of Control Offer on or as soon as practicable after the Change of Control
Payment Date.
The Indenture will provide that ALARIS Medical will fix the Change of
Control Payment Date no earlier than 30 days and no later than 60 days after the
Change of Control Offer is mailed as set forth above. Prior to complying with
the provisions of the preceding sentence, but in any event within 90 days
following a Change of Control, ALARIS Medical will either repay or cause its
Subsidiaries to repay all outstanding Indebtedness of its Subsidiaries or obtain
the requisite consents, if any, under all agreements governing all such
outstanding Indebtedness of its Subsidiaries to permit the repurchase of the
Notes required by this covenant. Under the terms of the indenture governing the
9 3/4% Notes and the Credit Facility, the payment of dividends by ALARIS Medical
Systems is subject to certain specified tests or restrictions which will
significantly restrict its ability to pay dividends or make other distributions.
In addition, the terms of the Notes and the Indenture will permit ALARIS
Medical's Subsidiaries to incur additional Indebtedness, the terms of which
could limit or prohibit the payment of dividends or the making
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of other distributions by such Subsidiaries. If ALARIS Medical does not obtain
the consent of the lenders or holders of Indebtedness under agreements governing
outstanding Indebtedness of its Subsidiaries, including under the Credit
Facility and the indenture governing the 9 3/4% Notes, to permit the repurchase
of the Notes or does not refinance any such Indebtedness, ALARIS Medical will
likely not have the financial resources to repurchase the Notes and ALARIS
Medical's Subsidiaries will be restricted by the terms of such Indebtedness from
paying dividends to ALARIS Medical or otherwise lending funds to ALARIS Medical
for the purpose of such repurchase. In any event, there can be no assurance that
ALARIS Medical's Subsidiaries will have the ability to access the financial
resources to pay any such dividend or make any such distribution. ALARIS
Medical's failure to make a Change of Control Offer when required or to
repurchase tendered Notes when tendered would constitute an Event of Default
under the Indenture. See "Risk Factors--Holding Company Structure; Dependence
Upon Operations of Subsidiaries" and "--Repurchase of Notes Upon Change of
Control."
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that ALARIS Medical
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar restructuring.
ALARIS Medical will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by ALARIS Medical
and purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of ALARIS Medical and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precisely established definition of the phrase under
applicable law. Accordingly, the ability of a Holder of Notes to require ALARIS
Medical to repurchase such Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of ALARIS Medical
and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
ALARIS Medical will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of a Change of Control. To the extent that
the provisions of any securities laws or regulations conflict with provisions of
this covenant, ALARIS Medical will comply with the applicable securities laws
and regulations and will not be deemed to have breached its obligations under
this paragraph by virtue thereof.
ASSET SALES
The Indenture will provide that ALARIS Medical will not, and will not permit
any of its Restricted Subsidiaries to, engage in an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 75% of the
consideration therefor received by ALARIS Medical or such Restricted Subsidiary
is in the form of cash and/or Marketable Securities; PROVIDED that the amount of
(x) any liabilities (as shown on ALARIS Medical's or such Restricted
Subsidiary's most recent balance sheet or in the notes thereto), of ALARIS
Medical or any Restricted Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the Notes or any guarantee
thereof) that are assumed by the transferee of any such assets pursuant to a
customary novation agreement that releases ALARIS Medical or such Restricted
Subsidiary
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from further liability and (y) any securities, notes or other obligations
received by ALARIS Medical or any such Restricted Subsidiary from such
transferee that are contemporaneously (subject to ordinary settlement periods)
converted by ALARIS Medical or such Restricted Subsidiary into cash (to the
extent of the cash received), will be deemed to be cash for purposes of this
provision; PROVIDED FURTHER, that the 75% limitation referred to above shall not
apply to any sale, transfer or other disposition of assets in which the cash
portion of the consideration received therefor is equal to or greater than the
after-tax net cash proceeds that would have been received by ALARIS Medical had
a transaction involving the same assets complied with the aforementioned 75%
limitation but was not structured with the same tax benefits as the actual
transaction.
Within 367 days after the receipt of any Net Proceeds from an Asset Sale,
ALARIS Medical or any Restricted Subsidiary may apply such Net Proceeds (a) to
permanently reduce long-term Indebtedness of a Restricted Subsidiary, (b) to
permanently reduce Indebtedness (and, in the case of revolving Indebtedness, to
permanently reduce commitments thereunder) of ALARIS Medical, (c) to cash
collateralize letters of credit under the Credit Facility and concurrently
therewith permanently reduce commitments under the Credit Facility by an amount
equal to the Net Proceeds applied to such cash collateralization (PROVIDED that
any such cash collateral released to ALARIS Medical and/or its Restricted
Subsidiaries upon the expiration of such letters of credit is applied in
accordance with clause (a), (b) or (d) of this sentence not later than the
latter to occur of (i) 367 days after the original receipt of such Net Proceeds
and (ii) 90 days after such release), or (d) to an investment in another
business, the making of a capital expenditure or the acquisition of other
tangible assets, product distribution rights or intellectual property or rights
thereto, in each case, in a line of business permitted by the covenant described
under the caption "--Certain Covenants--Line of Business." Any Net Proceeds from
Asset Sales that are not applied or invested as provided in the preceding
sentence of this paragraph will be deemed to constitute "Excess Proceeds." When
the aggregate amount of Excess Proceeds exceeds $15.0 million, ALARIS Medical
will be required to make an offer to all Holders of Notes (an "Asset Sale
Offer") to purchase the maximum principal amount at maturity of Notes that may
be purchased out of the Excess Proceeds, at an offer price in cash in an amount
equal to 100% of the principal amount at maturity thereof plus accrued and
unpaid interest, if any, thereon to the date of purchase (or, in the case of
purchases of Notes prior to August 1, 2003, at a purchase price equal to 100% of
the Accreted Value thereof, as of the date of repurchase), in accordance with
the procedures set forth in the Indenture. To the extent that the aggregate
principal amount at maturity or Accreted Value (as applicable) of Notes
(including any Additional Notes) tendered pursuant to an Asset Sale Offer is
less than the Excess Proceeds, ALARIS Medical or any Restricted Subsidiary may
use any remaining Excess Proceeds for any purpose not prohibited under the
Indenture. If the aggregate principal amount at maturity or Accreted Value (as
applicable) of Notes surrendered by Holders thereof exceeds the amount of Excess
Proceeds, the Trustee shall select the Notes to be purchased on a PRO RATA
basis. Upon completion of such Asset Sale Offer, the amount of Excess Proceeds
shall be reset at zero.
Notwithstanding the two immediately preceding paragraphs, ALARIS Medical and
the Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (i) at least 75% of the
consideration received in connection with such Asset Sale constitutes
Replacement Assets or a combination of Replacement Assets and cash and (ii) such
Asset Sale is for fair market value (which, in the case of any Replacement
Assets the fair market value of which exceeds $5.0 million, will be evidenced by
the opinion of an accounting, appraisal or investment banking firm of national
standing delivered to the Trustee); PROVIDED that any Net Proceeds in the form
of cash received by ALARIS Medical or any of its Restricted Subsidiaries in
connection with any Asset Sale permitted to be consummated pursuant to this
paragraph shall be subject to the provisions of the immediately preceding
paragraph.
The Credit Facility prohibits ALARIS Medical from purchasing any Notes and
also provides that certain asset sales will constitute a default thereunder. Any
future credit agreements or other agreements
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relating to Indebtedness to which ALARIS Medical becomes a party may contain
similar restrictions and provisions.
ALARIS Medical will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes pursuant to an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with provisions of
this covenant, ALARIS Medical will comply with the applicable securities laws
and regulations and will not be deemed to have breached its obligations under
this paragraph by virtue thereof.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed or, if the Notes are not so listed, on a pro rata basis, by lot
or by such other method as the Trustee deems fair and appropriate, PROVIDED that
no Notes with a principal amount at maturity of $1,000 or less shall be redeemed
in part. Notice of redemption shall be mailed by first class mail at least 30
but not more than 60 days before the redemption date to each Holder of Notes to
be redeemed at its registered address. If any Note is to be redeemed in part
only, the notice of redemption that relates to such Note shall state the portion
of the principal amount at maturity thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note. On and after
the redemption date, interest will cease to accrue on Notes or portions thereof
called for redemption.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture will provide that ALARIS Medical will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or
pay any dividend or make any distribution (including in connection with any
merger or consolidation) on account of any Equity Interests of ALARIS Medical or
any of its Restricted Subsidiaries (other than dividends or distributions
payable in Equity Interests (other than Disqualified Stock) of ALARIS Medical or
dividends or distributions payable to ALARIS Medical or any Wholly Owned
Restricted Subsidiary of ALARIS Medical); (ii) purchase, redeem or otherwise
acquire or retire for value any Equity Interests of ALARIS Medical, any of its
Restricted Subsidiaries or any other Affiliate of ALARIS Medical (other than any
such Equity Interests owned by ALARIS Medical or any Wholly Owned Restricted
Subsidiary of ALARIS Medical; (iii) make any principal payment on, or purchase,
redeem, defease or otherwise acquire or retire for value any Indebtedness that
is subordinated in right of payment to the Notes, except at the original final
maturity thereof or in accordance with the scheduled mandatory redemption or
repayment provisions set forth in the original documentation governing such
Indebtedness (but not pursuant to any mandatory offer to repurchase upon the
occurrence of any event); or (iv) make any Restricted Investment (all such
payments and other actions set forth in clauses (i) through (iv) above being
collectively referred to as "Restricted Payments"), unless, at the time of such
Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof, and
(b) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by ALARIS Medical and its Restricted Subsidiaries
after the date of the Indenture (excluding Restricted Payments permitted by
clauses (ii), (iii), (v) and (vi) of the next succeeding paragraph), is less
than the sum of (1) 50% of the Consolidated Net Income of ALARIS Medical for
the period (taken as one accounting period) from the beginning of the first
fiscal quarter commencing after the date of the Indenture to the end of
ALARIS Medical's most recently ended fiscal quarter for which
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internal financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a deficit,
minus 100% of such deficit), PLUS (2) 100% of the aggregate net cash
proceeds received by ALARIS Medical after the date of the Indenture from the
issuance and sale of its Qualified Capital Stock to the extent such net cash
proceeds have been, and continue to be, designated as Designated Equity
Proceeds to be added to the cumulative amount calculated pursuant to this
clause (b) as provided in the definition thereof, PLUS (3) 100% of the
aggregate net cash proceeds received by ALARIS Medical from contributions of
capital or the issue or sale since the date of the Indenture of debt
securities of ALARIS Medical that have been converted into Equity Interests
of ALARIS Medical (other than Equity Interests (or convertible debt
securities) sold to a Subsidiary of ALARIS Medical and other than
Disqualified Stock or debt securities that have been converted into
Disqualified Stock), PLUS (4) to the extent that any Restricted Investment
that was made after the date of the Indenture is sold for cash or otherwise
liquidated or repaid for cash, the cash return of capital with respect to
such Restricted Investment (less the cost of disposition, if any); PROVIDED
that no cash proceeds received by ALARIS Medical from the issue or sale of
any Equity Interests issued by ALARIS Medical will be counted in determining
the amount available for Restricted Payments under this clause (b) to the
extent such proceeds were used to redeem, repurchase, retire or acquire any
Equity Interests of ALARIS Medical pursuant to clause (ii) of the next
succeeding paragraph, to defease, redeem or repurchase any subordinated
Indebtedness pursuant to clause (iii) of the next succeeding paragraph or to
repurchase, redeem or acquire any Equity Interests of ALARIS Medical
pursuant to clause (iv) of the next succeeding paragraph, and
(c) ALARIS Medical would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had been
made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock."
The foregoing provisions will not prohibit any or all of the following (each
and all of which: (1) constitutes an independent exception to the foregoing
provisions and (2) may occur in addition to any action permitted to occur under
any other exception):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment would have
complied with the provisions of the Indenture;
(ii) the redemption, repurchase, retirement or other acquisition of any
Equity Interests of ALARIS Medical in exchange for, or out of the net
proceeds of, the substantially concurrent sale (other than to a Subsidiary
of ALARIS Medical) of other Equity Interests of ALARIS Medical (other than
Disqualified Stock); PROVIDED that the amount of any such net cash proceeds
that are utilized for any such redemption, repurchase, retirement or other
acquisition shall be excluded from clause (b)(2) of the preceding paragraph;
(iii) the defeasance, redemption or repurchase of subordinated
Indebtedness with the net proceeds from an incurrence of Permitted
Refinancing Indebtedness or the substantially concurrent sale (other than to
a Subsidiary of ALARIS Medical) of Equity Interests of ALARIS Medical (other
than Disqualified Stock); PROVIDED that the amount of any such net cash
proceeds that are utilized for any such redemption, repurchase, retirement
or other acquisition shall be excluded from clause (b)(2) of the preceding
paragraph;
(iv) a Restricted Payment to fund the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of ALARIS
Medical held by any member of ALARIS Medical's or any of its Restricted
Subsidiaries' management pursuant to any management equity subscription
agreement or stock option agreement; PROVIDED that (A) the aggregate price
paid for all such repurchased, redeemed, acquired or retired Equity
Interests shall not exceed $2.0 million in any twelve-month period (or $5.0
million in any single twelve-month period during the term of the Notes)
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PLUS the aggregate cash proceeds received by ALARIS Medical during such
twelve-month period from any reissuance of Equity Interests by ALARIS
Medical to members of management of ALARIS Medical and its Restricted
Subsidiaries and (B) no Default or Event of Default shall have occurred and
be continuing immediately after such transaction; PROVIDED that the amount
in excess of $2.0 million (or $5.0 million, as the case may be) expended for
all such repurchases, redemptions and other acquisitions and retirements of
Equity Interests pursuant to this clause (iv) in any twelve-month period
shall be excluded from clause (b)(2) of the preceding paragraph;
(v) the payment of dividends by a Restricted Subsidiary on any class of
common stock of such Restricted Subsidiary if such dividend is paid PRO RATA
to all holders of such class of common stock;
(vi) the repurchase of any class of common stock of a Restricted
Subsidiary if such repurchase is made PRO RATA with respect to such class of
common stock;
(vii) any other Restricted Payment (other than (A) a dividend or other
distribution on account of any Equity Interests of ALARIS Medical or any of
its Restricted Subsidiaries and (B) a purchase, redemption or other
acquisition of any Equity Interests of ALARIS Medical, any of its Restricted
Subsidiaries or any Affiliate of ALARIS Medical) if the amount thereof,
together with all other Restricted Payments made pursuant to this clause
(vii) since the date of the Indenture does not exceed $15.0 million; and
(viii) the issuance of cash in lieu of fractional shares of common stock
upon the conversion of the Convertible Debentures into common stock of
ALARIS Medical.
The Board of Directors may designate any Restricted Subsidiary (other than
ALARIS Medical Systems) to be an Unrestricted Subsidiary if such designation
would not cause a Default. For purposes of making such designation, all
outstanding Investments by ALARIS Medical and its Restricted Subsidiaries
(except to the extent repaid in cash) in the Subsidiary so designated will be
deemed to be Restricted Payments at the time of such designation and will reduce
the amount available for Restricted Payments under the first paragraph of this
covenant. All such outstanding Investments will be deemed to constitute
Restricted Investments in an amount equal to the greater of (i) the net book
value of such Investments at the time of such designation and (ii) the fair
market value of such Investments at the time of such designation. Such
designation will only be permitted if such Restricted Investment would be
permitted at such time and if such Restricted Subsidiary otherwise meets the
definition of an Unrestricted Subsidiary.
Not later than the date of making any Restricted Payment, ALARIS Medical
shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant described under the caption "--Restricted
Payments" were computed, which calculations shall be based upon ALARIS Medical's
latest available financial statements.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture will provide that ALARIS Medical will not, and will not permit
any of its Subsidiaries to, directly or indirectly, incur any Indebtedness
(including Acquired Debt) and ALARIS Medical will not issue any Disqualified
Stock and will not permit any of its Subsidiaries to issue any shares of
preferred stock; PROVIDED, HOWEVER; that ALARIS Medical may incur Indebtedness
or issue shares of Disqualified Stock and ALARIS Medical's Restricted
Subsidiaries may incur Indebtedness or issue shares of preferred stock if the
Fixed Charge Coverage Ratio for ALARIS Medical's most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred
or such Disqualified Stock or such preferred stock is issued would have been at
least 2.0 to 1, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional Indebtedness
had been incurred, or the Disqualified Stock or the preferred stock had been
issued, as the case may be, at the beginning of such four-quarter period.
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The Indenture will also provide that ALARIS Medical will not incur
Indebtedness that is contractually subordinated in right of payment to any other
Indebtedness of ALARIS Medical unless such Indebtedness is also contractually
subordinated in right of payment to the Notes on substantially identical terms;
PROVIDED, HOWEVER, that no Indebtedness of ALARIS Medical shall be deemed to be
contractually subordinated in right of payment to any other Indebtedness of the
Company solely by virtue of being unsecured.
The foregoing provisions will not apply to any of the following (each and
all of which may be issued or incurred):
(i) the incurrence by ALARIS Medical and/or its Restricted Subsidiaries
of Indebtedness and letters of credit pursuant to Credit Agreements (with
letters of credit being deemed to have a principal amount equal to the
maximum potential liability of ALARIS Medical) in an aggregate principal
amount outstanding at any one time not to exceed $325.0 million (A) LESS the
aggregate amount of all mandatory repayments (a "Mandatory Repayment") of
the principal of any term Indebtedness under any such Credit Agreement that
have been made since the date of the Indenture pursuant to the amortization
schedule of such Credit Agreement (other than any Mandatory Repayment made
concurrently with refinancing or refunding of any such Credit Agreement) (B)
PLUS the Excess Amount and (C) LESS the aggregate amount of all Net Proceeds
of Asset Sales applied pursuant to clause (b) or (c) of the first sentence
of the second paragraph of the covenant described under the caption
"--Repurchase at the Option of Holders--Asset Sales" to permanently reduce
Indebtedness (and, in the case of revolving Indebtedness, commitments
thereunder) under any Credit Agreement or to cash collateralize letters of
credit and permanently reduce commitments with respect to revolving
Indebtedness under any Credit Agreement; PROVIDED that the amount of
Indebtedness permitted to be incurred pursuant to Credit Agreements in
accordance with this clause (i) shall be in addition to any Indebtedness
permitted to be incurred pursuant to Credit Agreements or otherwise in
reliance on, and in accordance with, clause (x) below;
(ii) the incurrence by ALARIS Medical of Indebtedness represented by the
Notes originally issued and the Exchange Notes issued in exchange thereof;
(iii) the incurrence by ALARIS Medical or a Restricted Subsidiary of
ALARIS Medical of Indebtedness in connection with the acquisition of a
Person (if as a result of such acquisition, such Person becomes a Wholly
Owned Restricted Subsidiary of ALARIS Medical that is engaged in a Permitted
Business or is merged into ALARIS Medical or a Wholly Owned Restricted
Subsidiary), in an amount not to exceed two times the net cash proceeds
received by ALARIS Medical from the issuance and sale, substantially
concurrently with the incurrence of such Indebtedness, of its Qualified
Capital Stock to the extent that such net cash proceeds have been and
continue to be Designated Equity Proceeds to be used for the purpose of
incurring additional Indebtedness pursuant to this clause (iii) as provided
in the definition thereof; PROVIDED that, to the extent that any such
Qualified Capital Stock ceases to be outstanding for any reason, any
Indebtedness that was incurred as a result of the receipt of net cash
proceeds from the issuance of such Qualified Capital Stock shall cease (as
of the date on which such Qualified Capital Stock ceases to be outstanding)
to be permitted by virtue of this clause (iii); and PROVIDED FURTHER that
the principal amount (or accreted value, as applicable) of such
Indebtedness, including all Permitted Refinancing Indebtedness incurred to
refund, refinance or replace any other Indebtedness incurred pursuant to
this clause (iii) does not exceed $50.0 million at any time outstanding;
(iv) the incurrence by ALARIS Medical or any of its Restricted
Subsidiaries of Indebtedness (A) represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case, incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement of property used in the business of ALARIS
Medical or such Restricted Subsidiary, or (B) in connection with sale and
leaseback transactions, in an aggregate principal
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amount with respect to clause (iv) not to exceed $20.0 million at any time
outstanding; PROVIDED THAT in no event shall the aggregate principal amount
of Indebtedness incurred pursuant to clause (iv)(B) exceed $5.0 million at
any time outstanding;
(v) Existing Indebtedness;
(vi) the incurrence by ALARIS Medical or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to extend, refinance, renew, replace, defease
or refund, Indebtedness that was permitted by the Indenture;
(vii) the incurrence ALARIS Medical or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among ALARIS Medical and any of its
Restricted Subsidiaries; PROVIDED, HOWEVER; that (a) any subsequent issuance
or transfer (other than for security purposes) of Equity Interests and (b)
any subsequent sale or other transfer (including for security purposes other
than to secure Indebtedness permitted to be incurred pursuant to clause (i)
of this paragraph) of such Indebtedness, in each case, that results in any
such Indebtedness being held by a Person other than ALARIS Medical or any of
its Restricted Subsidiaries shall be deemed to constitute an incurrence of
such Indebtedness by ALARIS Medical or such Restricted Subsidiary, as the
case may be, not permitted pursuant to this clause (vii);
(viii) the incurrence by ALARIS Medical or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging (a) interest rate risk with respect to any floating rate
Indebtedness of such Person so long as such floating rate Indebtedness is
permitted by the terms of the Indenture to be outstanding or (b) exchange
rate risk with respect to agreements or Indebtedness of such Person payable
or denominated in a currency other than U.S. dollars;
(ix) the incurrence by ALARIS Medical's Unrestricted Subsidiaries of
Non-Recourse Debt; PROVIDED, HOWEVER; that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of ALARIS Medical;
(x) the incurrence or issuance by ALARIS Medical or any of its
Restricted Subsidiaries of Indebtedness or preferred stock (in addition to
Indebtedness and preferred stock that may be incurred or issued pursuant to
any other clause of this paragraph) in an aggregate principal amount at any
one time outstanding not to exceed $30.0 million;
(xi) the incurrence by any Foreign Subsidiary of Indebtedness and
letters of credit to fund working capital and capital expenditure
requirements (with letters of credit being deemed to have a principal amount
equal to the maximum potential liability of such Foreign Subsidiary
thereunder) in an aggregate maximum principal amount at any one time
outstanding not to exceed $15.0 million;
(xii) Obligations in respect of performance and surety bonds provided by
ALARIS Medical in the ordinary course of business; and
(xiii) the guarantee by ALARIS Medical or any Restricted Subsidiary of
Indebtedness of ALARIS Medical or any Restricted Subsidiary that was
permitted to be incurred by another provision of this covenant.
For purposes of determining compliance with this covenant, in the event that
an item of proposed Indebtedness meets the criteria of more than one of the
categories described in clauses (i) through (xiii) above as of the date of
incurrence thereof, or is entitled to be incurred pursuant to the first
paragraph of this covenant as of the date of incurrence thereof, ALARIS Medical
shall, in its sole discretion, classify such item of Indebtedness on the date of
its incurrence in any manner that complies with this covenant. Accrual of
interest, accretion or amortization of original issue discount, the payment of
interest on any Indebtedness in the form of additional Indebtedness with the
same terms and the payment of dividends on Disqualified Stock in the form of
additional shares of the same class of Disqualified Stock will not be
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deemed to be an incurrence of Indebtedness or an issuance of Disqualified Stock
for purposes of this covenant; PROVIDED, in each such case, that the amount
thereof is included in Fixed Charges of ALARIS Medical as accrued.
SALE AND LEASEBACK TRANSACTIONS
The Indenture will provide that ALARIS Medical will not, and will not permit
any of its Restricted Subsidiaries to, enter into any sale and leaseback
transaction; PROVIDED that ALARIS Medical may enter into a sale and leaseback
transaction if (i) ALARIS Medical could have incurred Indebtedness in an amount
equal to the Attributable Debt relating to such sale and leaseback transaction
pursuant to (A) the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock" and/or (B) clause (iv)(B) of the
covenant described under the caption "--Incurrence of Indebtedness and Issuance
of Preferred Stock" (as limited by the proviso to such clause), (ii) the Lien to
secure such Indebtedness does not extend to or cover any assets of ALARIS
Medical other than the assets which are the subject of the sale leaseback
transaction, (iii) the gross cash proceeds of such sale and leaseback
transaction are at least equal to the fair market value (as determined in good
faith by the Board of Directors of ALARIS Medical and set forth in an Officers'
Certificate delivered to the Trustee) of the property that is the subject of
such sale and leaseback transaction and (iv) the transfer of assets in such sale
and leaseback transaction is permitted by, and the proceeds of such transaction
are applied in compliance with, the covenant described under the caption
"--Repurchase at the Option of Holders--Asset Sales."
LIENS
The Indenture will provide that ALARIS Medical will not, and will not permit
any of its Restricted Subsidiaries to, create, incur, assume or otherwise cause
or suffer to exist or become effective any Lien of any kind (other than
Permitted Liens) upon any of their property or assets, now owned or hereafter
acquired, unless all payments due under the Indenture and the Notes are secured
on an equal and ratable basis with the obligations so secured until such time as
such obligations are no longer secured by a Lien.
LIMITATION ON ISSUANCES AND SALES OF EQUITY INTERESTS IN WHOLLY OWNED
RESTRICTED SUBSIDIARIES
The Indenture will provide that ALARIS Medical (i) will not, and will not
permit any Restricted Subsidiary of ALARIS Medical to, transfer, convey, sell,
lease or otherwise dispose of any Equity Interests in any Wholly Owned
Restricted Subsidiary of ALARIS Medical to any Person (other than ALARIS Medical
or a Wholly Owned Restricted Subsidiary of ALARIS Medical), unless (a) such
transfer, conveyance, sale, lease or other disposition is of all the Equity
Interests in such Wholly Owned Restricted Subsidiary and (b) the cash Net
Proceeds from such transfer, conveyance, sale, lease or other disposition are
applied in accordance with the covenant described under the caption
"--Repurchase at the Option of Holders--Asset Sales," and (ii) will not permit
any Wholly Owned Restricted Subsidiary of ALARIS Medical to issue any of its
Equity Interests (other than, if necessary, shares of its Capital Stock
constituting directors' qualifying shares) to any Person other than to ALARIS
Medical or a Wholly Owned Restricted Subsidiary of ALARIS Medical.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The Indenture will provide that ALARIS Medical will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
consensual restriction on the ability of any Restricted Subsidiary to: (i)(a)
pay dividends or make any other distributions to ALARIS Medical or any of its
Restricted Subsidiaries on its Capital Stock or (b) pay any Indebtedness owed to
ALARIS Medical or any of its Restricted Subsidiaries; (ii) make loans or
advances to ALARIS Medical or any of its Restricted Subsidiaries; or (iii)
transfer any of its properties or assets to ALARIS Medical or any of its
Restricted Subsidiaries, except for such
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encumbrances or restrictions existing under or by reasons of (a) Existing
Indebtedness, as in effect on the date of the Indenture; (b) the Credit Facility
as in effect on the date of the Indenture and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof; PROVIDED that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacement or
refinancings are no more restrictive in the aggregate than those contained in
the Credit Facility as in effect on the date of the Indenture; (c) any
Indebtedness permitted by the terms of the Indenture to be incurred by a
Restricted Subsidiary of ALARIS Medical; (d) the Indenture, the Notes and the
Exchange Notes; (e) applicable law; (f) any instrument governing Indebtedness or
Capital Stock of a Person acquired by ALARIS Medical or any of its Restricted
Subsidiaries, as in effect at the time of acquisition (except to the extent such
Indebtedness was incurred in connection with, or in contemplation of, such
acquisition), which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired; PROVIDED that in the case of
Indebtedness, such Indebtedness was permitted by the terms of the Indenture to
be incurred; (g) customary non-assignment provisions in leases and other
agreements entered into in the ordinary course of business and consistent with
past practices; (h) purchase money obligations for property acquired in the
ordinary course of business that impose restrictions of the nature described in
clause (iii) above on the property so acquired; (i) an agreement that has been
entered into for the sale or disposition of all or substantially all of the
Equity Interests or property or assets of a Restricted Subsidiary; PROVIDED that
such restrictions are limited to the Restricted Subsidiary that is the subject
of such agreement; (j) any agreement for the sale or other disposition of a
Restricted Subsidiary that restricts distributions by that Restricted Subsidiary
pending its sale or other disposition; (k) Liens securing Indebtedness otherwise
permitted to be incurred pursuant to the covenant described above under the
caption "--Liens" that limit the right of ALARIS Medical or any of its
Subsidiaries to dispose of the assets subject to such Lien; (l) provisions with
respect to the disposition or distribution of assets or property in joint
venture agreements and other similar agreements entered into in the ordinary
course of business; or (m) restrictions on cash or other deposits or net worth
imposed by customers under contracts entered into in the ordinary course of
business.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Indenture will provide that ALARIS Medical may not consolidate or merge
with or into (whether or not ALARIS Medical is the surviving entity), or sell,
assign, transfer, convey or otherwise dispose of all or substantially all of its
properties or assets, in one or more related transactions to, another Person
unless (i) ALARIS Medical is the surviving corporation or the Person formed by
or surviving any such consolidation or merger (if other than ALARIS Medical) or
to which such sale, assignment, transfer, conveyance or other disposition shall
have been made is a corporation organized or existing under the laws of the
United States, any state thereof or the District of Columbia; (ii) the Person
formed by or surviving any such consolidation or merger (if other than ALARIS
Medical) or the Person to which such sale, assignment, transfer, conveyance or
other disposition will have been made assumes all the obligations of ALARIS
Medical under the Notes and the Indenture pursuant to a supplemental indenture
in form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction, no Default or Event of Default exists; and (iv) ALARIS Medical or
the Person formed by or surviving any such consolidation or merger, or to which
such sale, assignment, transfer, conveyance or other disposition will have been
made will, at the time of such transaction after giving pro forma effect thereto
as if such transaction had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
first paragraph of the covenant described under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock." The Indenture will also provide
that ALARIS Medical may not, directly or indirectly, lease all or substantially
all of its properties or assets in one or more related transactions to any
Person. The foregoing will not prohibit a consolidation or merger between ALARIS
Medical and a Wholly Owned Restricted Subsidiary, the transfer of all or
substantially all of the properties or assets of ALARIS Medical to a
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Wholly Owned Restricted Subsidiary or the transfer of all or substantially all
of the properties or assets of a Wholly Owned Restricted Subsidiary to ALARIS
Medical; PROVIDED that if ALARIS Medical is not the surviving entity of such
transaction or the Person to which such transfer is made, the surviving entity
or the Person to which such transfer is made shall comply with clause (ii) of
this paragraph.
TRANSACTIONS WITH AFFILIATES
The Indenture will provide that ALARIS Medical will not, and will not permit
any of its Restricted Subsidiaries to, sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into any contract, agreement, understanding, loan, advance
or guarantee with, or for the benefit of, any Affiliate (each of the foregoing,
an "Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms
that are no less favorable to ALARIS Medical or such Restricted Subsidiary than
those that would have been obtained in a comparable transaction by ALARIS
Medical or such Restricted Subsidiary with an unrelated Person and (ii) ALARIS
Medical delivers to the Trustee with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate consideration in
excess of $5.0 million, a resolution of the Board of Directors of ALARIS Medical
set forth in an Officers' Certificate certifying that such Affiliate Transaction
complies with clause (i) above and (iii) such Affiliate Transaction is approved
by a majority of the disinterested members of the Board of Directors of ALARIS
Medical; PROVIDED that (a) any employment agreement entered into by ALARIS
Medical or any of its Restricted Subsidiaries in the ordinary course of business
of ALARIS Medical or such Restricted Subsidiary, (b) transactions between or
among ALARIS Medical and/or its Restricted Subsidiaries, (c) payment of employee
benefits, including bonuses, retirement plans and stock options, and director
fees in the ordinary course of business, (d) Restricted Payments permitted by
clauses (i), (iv), (v) and (vi) of the second paragraph of the covenant
described under the caption "--Restricted Payments," and (e) transactions
permitted by the provisions of the covenant described under the caption "--Sales
of Accounts Receivable," in each case, shall not be deemed Affiliate
Transactions.
LINE OF BUSINESS
ALARIS Medical will not, and will not permit any of its Restricted
Subsidiaries to, engage in any business other than Permitted Businesses, except
to such extent as would not be material to ALARIS Medical and its Restricted
Subsidiaries taken as a whole.
SALES OF ACCOUNTS RECEIVABLE
ALARIS Medical may, and any of its Restricted Subsidiaries may, sell, at any
time and from time to time, all of their respective accounts receivable to an
Accounts Receivable Subsidiary; PROVIDED that (i) the cash received in each such
sale is not less than 90% of the aggregate face value of the receivables sold
and the remainder of the consideration received in each such sale is a
promissory note (a "Promissory Note") which is subordinated to no Indebtedness
or obligation other than the financial institution or other entity providing the
financing to the Accounts Receivable Subsidiary with respect to such accounts
receivable (a "Financier"); PROVIDED FURTHER that the Initial Sale will include
all eligible accounts receivable of ALARIS Medical and/or its Restricted
Subsidiaries that will be party to such arrangements in existence on the date of
the Initial Sale, (ii) the cash proceeds received from the Initial Sale less
reasonable and customary transaction costs will be deemed to be Net Proceeds and
will be applied in accordance with the second paragraph of the covenant
described under the caption "--Repurchase at the Option of Holders--Asset
Sales," and (iii) ALARIS Medical and its Restricted Subsidiaries will sell their
accounts receivable to the Accounts Receivable Subsidiary no less frequently
than on a weekly basis.
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ALARIS Medical (i) will not permit any Accounts Receivable Subsidiary to
sell any accounts receivable purchased from ALARIS Medical or any of its
Restricted Subsidiaries to any other Person except on an arms-length basis and
solely for consideration in the form of cash or Marketable Securities, (ii) will
not permit the Accounts Receivable Subsidiary to engage in any business or
transaction other than the purchase, financing and sale of accounts receivable
of ALARIS Medical and its Restricted Subsidiaries and activities incidental
thereto, (iii) will not permit any Accounts Receivable Subsidiary to incur
Indebtedness in an amount in excess of the book value of such Accounts
Receivable Subsidiary's total assets, as determined in accordance with GAAP,
(iv) will, at least as frequently as monthly, cause the Accounts Receivable
Subsidiary to remit to ALARIS Medical as payment on the Promissory Notes, all
available cash or Marketable Securities not held in a collection account pledged
to a Financier, to the extent not applied to pay or maintain reserves for
reasonable operating expenses of the Account Receivable Subsidiary or to satisfy
reasonable minimum operating capital requirements and (v) will not, and will not
permit any of its Subsidiaries to, sell accounts receivable to any Accounts
Receivable Subsidiary upon (1) the occurrence of a Default with respect to
ALARIS Medical and its Restricted Subsidiaries and (2) the occurrence of certain
events of bankruptcy or insolvency with respect to such Accounts Receivable
Subsidiary.
REPORTS
The Indenture will provide that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding, ALARIS Medical will furnish to the Holders of
the Notes (i) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and 10-K
if ALARIS Medical were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" that
describes the financial condition and results of operations of ALARIS Medical
and its Restricted Subsidiaries and, with respect to the annual information
only, a report thereon by ALARIS Medical's certified independent accountants and
(ii) all current reports that would be required to be filed with the Commission
on Form 8-K if ALARIS Medical were required to file such reports, in each case,
within the time periods specified in the Commission's rules and regulations. In
addition following the consummation of the Exchange Offer contemplated by the
Registration Rights Agreement, whether or not required by the rules and
regulations of the Commission, ALARIS Medical will file a copy of all such
information and reports with the Commission for public availability within the
time periods specified in the Commission's rules and regulations (unless the
Commission will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request. In addition, ALARIS
Medical has agreed that, for so long as any Notes remain outstanding, it will
furnish to the Holders of the Notes and to securities analysts and prospective
investors, upon their request, the information required to be delivered pursuant
to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default:
(i) default in payment when due of principal or premium, if any, on the
Notes at maturity, upon redemption or otherwise;
(ii) failure by ALARIS Medical for 30 days after receipt of notice from
the Trustee or the Holders of at least 25% in principal amount of the Notes
then outstanding to comply with the provisions described under the covenants
described under the captions "--Repurchase at the Option of Holders--Change
of Control," "--Repurchase at the Option of Holders--Asset Sales,"
"--Certain Covenants--Restricted Payments," "--Certain Covenants--Incurrence
of Indebtedness and Issuance of Preferred Stock," "--Certain Covenants--Sale
and Leaseback Transactions," "--Certain Covenants--Merger, Consolidation, or
Sale of Assets" or "--Certain Covenants--Sales of Accounts Receivable;"
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(iii) failure by ALARIS Medical for 60 days after notice from the Trustee
or the Holders of at least 25% in principal amount of the Notes then
outstanding to comply with its other agreements in the Indenture and the
Notes;
(iv) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by ALARIS Medical or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by ALARIS Medical or any
of its Restricted Subsidiaries) whether such Indebtedness or guarantee now
exists, or is created after the date of the Indenture, which default (a) is
caused by a failure to pay when due at final stated maturity (giving effect
to any grace period related thereto) principal of (a "Payment Default") or
(b) results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any such Indebtedness under which
there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $15.0 million or more;
(v) failure by ALARIS Medical or any of its Restricted Subsidiaries to
pay final judgments (to the extent not covered by insurance and as to which
the insurer has not acknowledged coverage in writing) aggregating in excess
of $15.0 million, which judgments are not paid, fully bonded, discharged or
stayed within 60 days after their entry; and
(vi) certain events of bankruptcy or insolvency with respect to ALARIS
Medical or any Restricted Subsidiary of ALARIS Medical that is a Significant
Subsidiary or group of Restricted Subsidiaries of ALARIS Medical that,
together, would constitute a Significant Subsidiary.
To the extent that the last day of the period referred to in clauses (i),
(iii), (iv) or (vi) of the immediately preceding paragraph is not a Business
Day, then the first Business Day following such day shall be deemed to be the
last day of the period referred to in such clauses. Any "day" will be deemed to
end as of 11:59 p.m., New York City time.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable by notice in writing to ALARIS Medical and
the Trustee specifying the respective Event of Default and that it is a "notice
of acceleration" (the "Acceleration Notice"), and the same shall become
immediately due and payable. Notwithstanding the foregoing, in the case of an
Event of Default arising from certain events of bankruptcy or insolvency with
respect to ALARIS Medical, all outstanding Notes will become due and payable
without further action or notice. Upon any acceleration of maturity of the
Notes, all principal of and accrued interest on, if any (if on or after August
1, 2003) or Accreted Value (if prior to August 1, 2003), of the Notes shall be
due and payable immediately. The Holders of the Notes may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, the Holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or power.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of ALARIS Medical with
the intention of avoiding payment of the premium that ALARIS Medical would have
had to pay if ALARIS Medical then had elected to redeem the Notes pursuant to
the optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
August 1, 2003 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of ALARIS Medical with the intention of avoiding the
prohibition on redemption of the Notes prior to August 1, 2003, then the premium
specified in the Indenture shall also become immediately due and payable to the
extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding, by notice to the Trustee, may on behalf of the Holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture, except a continuing Default or Event of Default in the
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payment of interest or premium on, or principal of, the Notes. The Trustee may
withhold from the Holders of the Notes notice of any continuing Default or Event
of Default (except a Default or Event of Default relating to the payment of
principal, interest, if any) if it determines that withholding notice is in such
Holders' interest.
ALARIS Medical is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and ALARIS Medical is required upon
becoming aware of any Default or Event of Default to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of ALARIS
Medical, ALARIS Medical Systems, ALARIS Release and IVAC Overseas, as such,
shall have any liability for any obligations of ALARIS Medical, ALARIS Medical
Systems, ALARIS Release and IVAC Overseas under the Notes, the Indenture and the
Registration Rights Agreement or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of Notes by accepting
a Note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the Notes. Such waiver may not be effective
to waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
ALARIS Medical may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of the Holders of the outstanding Notes
to receive payments in respect of the principal amount at maturity or Accreted
Value (as applicable) of, premium, if any, interest, if any, on such Notes when
such payments are due from the trust referred to below, (ii) ALARIS Medical's
obligations with respect to the Notes concerning issuing temporary Notes,
registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and ALARIS Medical's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, ALARIS Medical may,
at its option and at any time, elect to have the obligations of ALARIS Medical
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under the caption "--Events of Default and Remedies" will no
longer constitute Events of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
ALARIS Medical must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders of the Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal amount at maturity or Accreted Value (as
applicable) of, premium, if any, interest, if any, on the outstanding Notes on
the stated maturity or on the applicable redemption date, as the case may be,
and ALARIS Medical must specify whether the Notes are being defeased to maturity
or to a particular redemption date; (ii) in the case of Legal Defeasance, ALARIS
Medical shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that (A) ALARIS Medical
has received from, or there has been published by, the Internal Revenue Service
a ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in the
case of Covenant Defeasance, ALARIS Medical shall have delivered to the Trustee
an
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opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which ALARIS Medical or any of its
Subsidiaries is a party or by which ALARIS Medical or any of its Subsidiaries is
bound; (vi) ALARIS Medical must have delivered to the Trustee an opinion of
counsel to the effect that after the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) ALARIS Medical must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by ALARIS Medical with the
intent of preferring the Holders of Notes over the other creditors of ALARIS
Medical with the intent of defeating, hindering, delaying or defrauding
creditors of ALARIS Medical or others; and (viii) ALARIS Medical must deliver to
the Trustee an Officers' Certificate and an opinion of counsel, each stating
that all conditions precedent provided for relating to the Legal Defeasance or
the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder of Notes may transfer or exchange Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder of Notes, among
other things, to furnish appropriate endorsements and transfer documents and
ALARIS Medical may require a Holder of Notes to pay any taxes and fees required
by law or permitted by the Indenture. ALARIS Medical is not required to transfer
or exchange any Note selected for redemption. Also, ALARIS Medical is not
required to transfer or exchange any Note for a period of 15 days before a
selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the then outstanding Notes (including
Additional Notes, if any) voting as a single class (including, without
limitation, consents obtained in connection with a purchase of, tender offer or
exchange offer for Notes), and any existing default or compliance with any
provision of the Indenture or the Notes may be waived with the consent of the
Holders of a majority in principal amount of the then outstanding Notes
(including Additional Notes, if any) voting as a single class (including,
without limitation, consents obtained in connection with a purchase of, tender
offer or exchange offer for Notes).
Without the consent of each Holder of Notes affected, however, an amendment
or waiver may not (with respect to any Note held by a non-consenting Holder of
Notes): (i) reduce the principal amount of Notes whose Holders must consent to
an amendment, supplement or waiver; (ii) reduce the principal amount at maturity
of or change the fixed maturity of any Note, alter the provisions with respect
to the redemption of the Notes (other than the provisions described under the
caption "--Repurchase at the Option of Holders") or amend or modify the
calculation of Accreted Value so as to reduce the amount of the Accreted Value
of the Notes; (iii) reduce the rate of or change the time for payment of
interest on any Notes; (iv) waive a Default or Event of Default in the payment
of principal of or premium, if any, or interest or, if any, on the Notes (except
a rescission of acceleration of the Notes by the Holders of at least a majority
in aggregate principal amount of the Notes and a waiver of the payment default
that resulted from such acceleration); (v) make any Note payable in money other
than that stated in the Notes; (vi) waive a redemption or repurchase payment
with respect to any Note or (vii) make any change to the provisions of
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the Indenture relating to waiver of past Defaults or the rights of Holders of
the Notes to receive payments of principal of or interest on the Notes or in the
foregoing amendment and waiver provisions. Notwithstanding the foregoing,
without the consent of the Holders of at least two-thirds in principal amount of
the Notes then outstanding (including, without limitation, consents obtained in
connection with a purchase of, tender offer or exchange offer for the Notes), no
waiver or amendment to the Indenture may make any change in the provisions of
the covenants described under the captions "--Repurchase at the Option of
Holders--Change of Control" and "--Repurchase at the Option of Holders--Asset
Sales" that adversely affect the rights of any Holder of Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
ALARIS Medical and the Trustee may amend or supplement the Indenture or the
Notes to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Notes in addition to or in place of Certificated Notes, to
provide for the assumption of ALARIS Medical's obligations to the Holders of the
Notes in the case of a merger or consolidation or sale of all or substantially
all of ALARIS Medical's assets, to make any change that would provide any
additional rights or benefits to the Holders of the Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder or to
comply with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act or to provide for
the issuance of additional Notes in accordance with the provisions set forth in
the Indenture as in effect on the date of the issuance of the Notes.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should the Trustee become a creditor of ALARIS Medical, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise. The Trustee will be permitted to
engage in other transactions with ALARIS Medical; however, if the Trustee
acquires any conflicting interest, it must eliminate such conflict within 90
days, apply to the Commission for permission to continue as Trustee or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture
without charge by writing to ALARIS Medical, Inc., 10221 Wateridge Circle, San
Diego, California 92121, Attention: Corporate Secretary.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the Notes to be resold as set
forth herein will initially be issued in the form of one or more Global Notes
(the "Global Notes"). The Global Notes will be deposited on the date of the
closing of the sale of the Notes offered hereby (the "Closing Date") with, or on
behalf of the Depositary and registered in the name of Cede & Co., as nominee of
the Depositary (such nominee being referred to herein as the "Global Note
Holder").
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Notes that are issued as described below under "--Certificated Notes" will
be issued in the form of registered definitive certificates (the "Certificated
Notes"). Upon the transfer of Certificated Notes, such Certificated Notes may,
unless all Global Notes have previously been exchanged for Certificated Notes,
be exchanged for an interest in the Global Note representing the principal
amount of Notes being transferred, subject to the transfer restrictions set
forth in the Indenture.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the Initial
Purchasers), banks and trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants" or the "Depositary's Indirect Participants") that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Notes, the Depositary will credit the
accounts of Participants designated by the Initial Purchasers with portions of
the principal amount of the Global Notes and (ii) ownership of the Notes
evidenced by the Global Notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by the Depositary
(with respect to the interests of the Depositary's Participants), the
Depositary's Participants and the Depositary's Indirect Participants.
Prospective purchasers are advised that the laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own. Consequently, the ability to transfer Notes evidenced by the Global
Note will be limited to such extent. For certain other restrictions on the
transferability of the Notes, see "Notice to Investors."
So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole Holder under the Indenture of any
Notes evidenced by the Global Notes. Beneficial owners of Notes evidenced by the
Global Notes will not be considered the owners or Holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any aspect
of the records of the Depositary or for maintaining, supervising or reviewing
any records of the Depositary relating to the Notes.
Payments in respect of the principal of, premium, if any, interest, if any,
on any Notes registered in the name of the Global Note Holder on the applicable
record date will be payable by the Trustee to or at the direction of the Global
Note Holder in its capacity as the registered Holder under the Indenture. Under
the terms of the Indenture, the Company and the Trustee may treat the persons in
whose names Notes, including the Global Notes, are registered as the owners
thereof for the purpose of receiving such payments. Consequently, neither the
Company nor the Trustee has or will have any responsibility or liability for the
payment of such amounts to beneficial owners of Notes. The Company believes,
however, that it is currently the policy of the Depositary to immediately credit
the accounts of the relevant Participants with such payments, in amounts
proportionate to their respective holdings of beneficial interests in the
relevant security as shown on the records of the Depositary. Payments by the
Depositary's Participants and the Depositary's Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practice and will be the responsibility of the Depositary's
Participants or the Depositary's Indirect Participants.
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CERTIFICATED NOTES
Subject to certain conditions, any person having a beneficial interest in a
Global Note may, upon request to the Trustee, exchange such beneficial interest
for Notes in the form of Certificated Notes. Upon any such issuance, the Trustee
is required to register such Certificated Notes in the name of, and cause the
same to be delivered to, such person or persons (or the nominee of any thereof).
All such Certificated Notes would be subject to the legend requirements
described herein under "Notice to Investors." In addition, if (i) the Company
notifies the Trustee in writing that the Depositary is no longer willing or able
to act as a depositary and the Company is unable to locate a qualified successor
within 90 days or (ii) the Company, at its option, notifies the Trustee in
writing that it elects to cause the issuance of Notes in the form of
Certificated Notes under the Indenture, then, upon surrender by the Global Note
Holder of its Global Note, Notes in such form will be issued to each person that
the Global Note Holder and the Depositary identify as being the beneficial owner
of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Notes represented
by the Global Note (including principal, premium, if any, interest, if any) be
made by wire transfer of immediately available next day funds to the accounts
specified by the Global Note Holder. With respect to Certificated Notes, the
Company will make all payments of principal, premium, if any, interest, if any,
by wire transfer of immediately available funds to the accounts specified by the
Holders thereof or, if no such account is specified, by mailing a check to each
such Holder's registered address. The Company expects that secondary trading in
the Certificated Notes will also be settled in immediately available funds.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as,
any other capitalized terms used herein for which no definition is provided. For
purposes of making any determination of any amount under any single definition
set forth below, such determination shall be made without double counting of any
item; PROVIDED that with respect to the definition of "Fixed Charge Coverage
Ratio" it shall not be deemed to be double counting if an item is included in
the calculation of each of "Consolidated EBITDA" and "Fixed Charges."
"9 3/4% NOTES" means the 9 3/4% Senior Subordinated Notes due 2006 of ALARIS
Medical Systems issued pursuant to an indenture dated November 26, 1996 among
ALARIS Medical Systems, IMED International Trading Corp., IVAC Overseas Holdings
Inc. and United States Trust Company of New York, as trustee.
"ACCOUNTS RECEIVABLE SUBSIDIARY" means a newly created, Wholly Owned
Subsidiary of ALARIS Medical (i) which is formed solely for the purpose of, and
which engages in no activities other than activities in connection with,
financing accounts receivable of ALARIS Medical and/or its Restricted
Subsidiaries, (ii) which is designated by the Board of Directors of ALARIS
Medical as an Accounts Receivables Subsidiary pursuant to a Board of Directors'
resolution set forth in an Officers' Certificate and delivered to the Trustee,
(iii) that has total assets at the time of such creation and designation with a
book value of $10,000 or less, (iv) no portion of the Indebtedness or any other
obligation (contingent or otherwise) of which (a) is at any time guaranteed by
ALARIS Medical or any Restricted Subsidiary of ALARIS Medical, (b) is at any
time recourse to or obligates ALARIS Medical or any other Restricted Subsidiary
of ALARIS Medical in any way, other than pursuant to representations and
covenants entered into in the ordinary course of business in connection with the
sale of accounts receivable to such Accounts Receivable Subsidiary or (c)
subjects any property or asset of ALARIS Medical or any other Restricted
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Subsidiary of ALARIS Medical, directly or indirectly, contingently or otherwise,
to the satisfaction thereof, other than pursuant to representations and
covenants entered into in the ordinary course of business in connection with
sales of accounts receivable, (v) with which neither ALARIS Medical nor any
Restricted Subsidiary of ALARIS Medical has any contract, agreement, arrangement
or understanding other than contracts, agreements, arrangements and
understandings entered into in the ordinary course of business in connection
with sales of accounts receivable in accordance with the covenant described
under the caption "--Certain Covenants--Sale of Accounts Receivables" and fees
payable in the ordinary course of business in connection with servicing accounts
receivable and (vi) with respect to which neither ALARIS Medical nor any
Restricted Subsidiary of ALARIS Medical has any obligation (a) to subscribe for
additional shares of Capital Stock or other Equity Interests therein or make any
additional capital contribution or similar payment or transfer thereto or (b) to
maintain or preserve the solvency or any balance sheet term, financial
condition, level of income or results of operations thereof.
"ACCRETED VALUE" means, as of any date of determination prior to August 1,
2003, with respect to any Note, the sum of (a) the initial offering price to
investors of such Note and (b) the portion of the excess of the principal amount
of such Note over such initial offering price (which shall be calculated by
discounting the aggregate principal amount at maturity of such Note at a rate of
11 1/8% per annum, compounded semi-annually on each February 1 and August 1 from
August 1, 2003 to the date of issuance) which shall have been accreted thereon
through such date, such amount to be so accreted on a daily basis at a rate of
11 1/8% per annum of the initial offering price of such Note, compounded
semi-annually on each February 1 and August 1 from the date of issuance of the
Notes through the date of determination, computed on the basis of a 360-day year
of twelve 30-day months.
"ACQUIRED DEBT" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person merges
with or into or becomes a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person
and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or, indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
"ALARIS MEDICAL SYSTEMS" means ALARIS Medical Systems, Inc., a Wholly Owned
Subsidiary of ALARIS Medical.
"ASSET SALE" means (i) the sale, lease, conveyance, or other disposition of
any assets (including, without limitation, by way of a sale and leaseback) other
than (A) sales of inventory in the ordinary course of business consistent with
past practice or (B) sales of accounts receivables to the Accounts Receivable
Subsidiary in accordance with the covenant described under the caption
"--Certain Covenants--Sales of Accounts Receivable" (PROVIDED that the sale,
conveyance or other disposition of all or substantially all of the assets of
ALARIS Medical and its Subsidiaries taken as a whole will be governed by the
provisions of the Indenture described above under the caption "Repurchase at the
Option of Holders--Change of Control" and/or the provisions described above
under the covenant described under the caption "--Certain Covenants--Merger,
Consolidation, or Sale of Assets" and not by the provisions of the Asset Sale
covenant), and (ii) the issue or sale by ALARIS Medical or any of its Restricted
Subsidiaries of Equity Interests of any of ALARIS Medical's Restricted
Subsidiaries, in the case of clauses (i) and (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $5.0 million or (b) for net proceeds in excess of $5.0
million. Notwithstanding the foregoing: (i) a transfer of assets by ALARIS
Medical to a Restricted Subsidiary or by a Restricted Subsidiary to ALARIS
Medical or to another Restricted Subsidiary, (ii) an issuance of Equity
Interests by a Restricted Subsidiary to
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ALARIS Medical or to another Restricted Subsidiary, (iii) a Restricted Payment
that is permitted by the covenant described above under the covenant described
under the caption "--Certain Covenants-- Restricted Payments" and (iv) the sale
and leaseback of any assets within 90 days of the acquisition of such assets
will not be deemed to be Asset Sales.
"ATTRIBUTABLE DEBT" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the rate of interest
implicit in such transaction, determined in accordance with GAAP) of the
obligation of the lessee for net rental payments during the remaining term of
the lease included in such sale and leaseback transaction (including any period
for which such lease has been extended or may, at the option of the lessor, be
extended).
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be so required to be capitalized on the balance sheet in accordance
with GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"CHANGE OF CONTROL" means the occurrence of any of the following: (i) any
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation) in one or a series of related transactions, of all or
substantially all of the assets of ALARIS Medical and its Subsidiaries taken as
a whole to any "person" (as defined in Section 13 (d) of the Exchange Act) or
"group" (as defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) other
than the Principal and his Related Parties; (ii) the adoption of a plan for the
liquidation or dissolution of ALARIS Medical; (iii) ALARIS Medical consolidates
with, or merges with or into, another "person" (as defined above) or "group" (as
defined above) in a transaction or series of related transactions in which the
Voting Stock of ALARIS Medical is converted into or exchanged for cash,
securities or other property, other than any transaction where (A) the
outstanding Voting Stock of ALARIS Medical is converted into or exchanged for
Voting Stock (other than Disqualified Stock) of the surviving or transferee
corporation and (B) either (1) the "beneficial owners" (as defined in Rule 13d-3
under the Exchange Act) of the outstanding Voting Stock of ALARIS Medical
immediately prior to such transaction own beneficially, directly or indirectly
through one or more Subsidiaries, not less than a majority of the total
outstanding Voting Stock of the surviving or transferee corporation immediately
after such transaction or (2) if, immediately prior to such transaction ALARIS
Medical is a direct or indirect Subsidiary of any other Person (each such other
Person, the "Holding Company"), the "beneficial owners" (as defined above) of
the outstanding Voting Stock of such Holding Company immediately prior to such
transaction own beneficially, directly or indirectly through one or more
Subsidiaries, not less than a majority of the outstanding Voting Stock of the
surviving or transferee corporation immediately after such transaction; (iv) the
consummation of any transaction or series of related transactions (including,
without limitation, by way of merger or consolidation) the result of which is
that any "person" (as defined above) or "group" (as defined above) other than
the Principal and his Related Parties becomes the "beneficial owner" (as defined
above) of more than 40% of the voting power of the Voting Stock of ALARIS
Medical, or (v) during any consecutive two-year period, the first day on which a
majority of the members of the Board of Directors of Parent who were members of
the Board of Directors at the beginning of such period are not Continuing
Directors.
"CONSOLIDATED EBITDA" means, with respect to any Person for any period, the
Consolidated Net Income of such Person and its Restricted Subsidiaries for such
period, PLUS, to the extent deducted in computing Consolidated Net Income, (i)
provision for taxes based on income or profits of such Person and its Restricted
Subsidiaries for such period, (ii) Consolidated Interest Expense of such Person
for such period, (iii) depreciation and amortization (including amortization of
goodwill and other intangibles) and
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all other non-cash charges (excluding any such non-cash charge to the extent
that it represents an accrual of or reserve for cash charges in any future
period or amortization of a prepaid cash expense that was paid in a prior
period) of such Person and its Restricted Subsidiaries for such period and (iv)
any extraordinary or non-recurring loss and any net loss realized in connection
with either an Asset Sale or the extinguishment of Indebtedness, in each case,
on a consolidated basis determined in accordance with GAAP. Notwithstanding the
foregoing, the provision for taxes based on the income or profits of, and the
depreciation and amortization and other non-cash charges of, a Restricted
Subsidiary of a Person shall be added to Consolidated Net Income to compute
Consolidated EBITDA only to the extent (and in the same proportion) that the Net
Income of such Restricted Subsidiary was included in calculating the
Consolidated Net Income of such Person.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, the interest expense of such Person and its Restricted Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP
(including amortization of original issue discount and deferred financing costs,
except as set forth in the proviso to this definition, non-cash interest
payments, the interest component of all payments associated with Capital Lease
Obligations, net payments, if any, pursuant to Hedging Obligations and imputed
interest with respect to Attributable Debt; PROVIDED, HOWEVER; that in no event
shall any amortization of deferred financing cost incurred on or prior to the
date of the Indenture in connection with the Credit Facility or any amortization
of deferred financing costs incurred in connection with the issuance of the
Notes be included in Consolidated Interest Expense).
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
PROVIDED, HOWEVER; that (i) the Net Income (but not loss) of any Person that is
not a Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid to the referent Person or a Restricted Subsidiary thereof in
cash, (ii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded, (iii) the cumulative effect of a change in accounting principles shall
be excluded and (iv) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not, at the
date of determination, permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Restricted Subsidiary or its
stockholders.
"CONTINUING DIRECTORS" means, as of any date of determination, any member of
the Board of Directors of the relevant Person who (i) was a member of such Board
of Directors on the date of the Indenture, (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election or (iii) became a member of the Board of Directors as a
result of the actions of the Principal; PROVIDED that at the time the Principal
took any such action, the Principal was the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act) in excess of 50% of the Voting Stock of
ALARIS Medical.
"CONVERTIBLE DEBENTURES" means the 7 1/4% Convertible Subordinated
Debentures due 2002 of ALARIS Medical issued pursuant to the Indenture, dated as
of January 15, 1992, between ALARIS Medical and U.S. Trust Company of
California, N.A. as in effect on the date of the Indenture.
"CREDIT AGREEMENTS" means, with respect to ALARIS Medical and its Restricted
Subsidiaries, one or more debt facilities (including, without limitation, the
Credit Facility) or commercial paper facilities, in each case with banks or
other institutional lenders providing for revolving credit loans, term loans,
receivables financing (including through the sale of receivables to such lenders
or to special purpose entities formed to borrow from such lenders against such
receivables) or letters of credit, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to time.
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"CREDIT FACILITY" means that certain credit agreement, dated as of November
26, 1996, by and among ALARIS Medical, ALARIS Medical Systems, Bankers Trust
Company, as administration agent and syndication agent, Banque Paribas, as
documentation agent and syndication agent, Donaldson, Lufkin & Jenrette
Securities Corporation, as syndication agent, and the lenders party thereto,
including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended,
modified, renewed, refunded, replaced or refinanced from time to time (together
with any amendment, modification, renewal, refunding, replacement or refinancing
to or of any of the foregoing (collectively, a "Modification") or to any
Modification, ad infinitum), including, without limitation, any agreement
modifying the maturity or amortization schedule of or refinancing or refunding
all or any portion of the Indebtedness thereunder or increasing the amount that
may be borrowed under such agreement or any successor agreement, whether or not
among the same parties.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DESIGNATED EQUITY PROCEEDS" means any net cash proceeds received by ALARIS
Medical after the date of this Indenture from the issuance and sale of its
Qualified Capital Stock (other than Qualified Capital Stock sold to a Subsidiary
of ALARIS Medical) providing the basis for (i) a redemption of Notes in a
transaction consummated in compliance with the second paragraph of the section
captioned "--Optional Redemption," (ii) an addition to the cumulative amount
calculated pursuant to clause (b) of the first paragraph of the covenant
described under the caption "--Certain Covenants--Restricted Payments," or (iii)
the incurrence of additional Indebtedness pursuant to clause (iii) of the
covenant described under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock," in each case, as designated by a
written resolution of the Board of Directors of ALARIS Medical filed with the
Trustee on or prior to the earlier to occur of (i) the use of such net cash
proceeds and (ii) 180 days from the date such net cash proceeds are received by
ALARIS Medical. In no event shall the same net cash proceeds be treated as
Designated Equity Proceeds for more than one purpose under the Indenture. Once
designated for a particular purpose, such net cash proceeds may not be
redesignated for an alternative purpose. In addition, to the extent that any
such Qualified Capital Stock ceases to be outstanding for any reason, any
Restricted Payment or Indebtedness that was made or incurred as a result of the
receipt of net cash proceeds from the issuance of such Qualified Capital Stock
shall cease (as of the date on which such Qualified Capital Stock ceases to be
outstanding) to be permitted by virtue of the issuance of such Qualified Capital
Stock.
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, except to the extent such capital stock is exchangeable into
Indebtedness at the option of the issuer thereof and only subject to the terms
of any debt instrument to which such issuer is a party), or upon the happening
of any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof, in
whole or in part, or convertible or exchangeable into Indebtedness on or prior
to date on which the Notes mature; PROVIDED, HOWEVER, that any Capital Stock
that would constitute Disqualified Stock solely because the holders thereof have
the right to require ALARIS Medical to repurchase such Capital Stock upon the
occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that ALARIS
Medical may not repurchase or redeem any such Capital Stock pursuant to such
provisions unless such repurchase or redemption complies with the covenant
described under the caption "--Certain Covenants--Restricted Payments."
"ELIGIBLE INSTITUTION" means a commercial banking institution that has
combined capital and surplus of not less than $100.0 million or its equivalent
in foreign currency, whose short-term debt is rated "A-3" (or higher) according
to Standard & Poor's Ratings Group ("S&P") or "P-2" or higher according to
Moody's
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Investor Services, Inc. ("Moody's") or carrying an equivalent rating by a
nationally recognized rating agency if both of the two named rating agencies
cease publishing ratings of investments.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EXCESS AMOUNT" means, with respect to any Credit Agreement, the amount by
which aggregate payments of principal thereunder exceed the aggregate payments
of principal required to be made through the date of determination, in respect
of any term Indebtedness, under the amortization schedule of such Credit
Agreement.
"EXISTING INDEBTEDNESS" means Indebtedness of ALARIS Medical and its
Restricted Subsidiaries (other than Indebtedness under the Credit Facility) in
existence on the date of the Indenture until such amounts are repaid, including,
without limitation, the 9 3/4% Notes.
"FIXED CHARGES" means, with respect to any Person for any period, the sum of
(i) the Consolidated Interest Expense of such Person for such period and (ii)
any interest expense on Indebtedness of another Person that is (A) guaranteed by
the referent Person or one of its Restricted Subsidiaries (whether or not such
guarantee is called upon) or (B) secured by a Lien on assets of such Person or
one of its Restricted Subsidiaries (whether or not such Lien is called upon);
PROVIDED THAT with respect to clause (ii)(B), the amount of Indebtedness (and
attributable interest expense) shall be equal to the lesser of (I) the principal
amount of the Indebtedness secured by the assets of such Person or one of its
Restricted Subsidiaries and (II) the fair market value (as determined by the
Board of Directors of such Person and set forth in an Officers' Certificate
delivered to the Trustee) of the assets securing such Indebtedness and (iii) the
product of (a) all cash dividend payments (and non-cash dividend payments in the
case of a Person that is a Subsidiary) on any series of preferred stock of such
Person, TIMES (b) a fraction, the numerator of which is one and the denominator
of which is one minus the then current combined federal, state and local
statutory tax rate of such Person, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP.
"FIXED CHARGE COVERAGE RATIO" means with respect to any Person for any
period, the ratio of the Consolidated EBITDA of such Person and its Restricted
Subsidiaries for such period to the Fixed Charges of such Person and its
Restricted Subsidiaries for such period. In the event that ALARIS Medical or any
of its Restricted Subsidiaries incurs, assumes, guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues or redeems
preferred stock subsequent to the commencement of the period for which the Fixed
Charge Coverage Ratio is being calculated but on or prior to the date on which
the event for which the calculation of the Fixed Charge Coverage Ratio is made
(the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, guarantee or
redemption of Indebtedness, or such issuance or redemption of preferred stock,
as if the same had occurred at the beginning of the applicable four-quarter
reference period. For purposes of making the computation referred to above, (i)
acquisitions that have been made by ALARIS Medical or any of its Restricted
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have occurred on the first day of the four-quarter reference
period and shall give pro forma effect to the Indebtedness and the Consolidated
EBITDA of the Person which is the subject of any such acquisition, (ii) the
Consolidated EBITDA attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, and (iii) the Fixed Charges attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed Charges will
not be obligations of the referent Person or any of its Restricted Subsidiaries
following the Calculation Date.
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"FOREIGN SUBSIDIARY" means any Restricted Subsidiary of ALARIS Medical
organized and existing under the laws of any jurisdiction outside of the United
States.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board, the Securities and Exchange Commission
or in such other statements by such other entity as may be approved by a
significant segment of the accounting profession of the United States, which are
in effect from time to time; PROVIDED, HOWEVER, that all reports and other
financial information provided by ALARIS Medical to the Holders of the Notes,
the Trustee and/or the Commission shall be prepared in accordance with GAAP, as
in effect on the date of such report or other financial information.
"GOVERNMENT SECURITIES" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements, (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or foreign exchange rates and (iii) indemnity agreements and arrangements
entered into in connection with the agreements and arrangements described in
clauses (i) and (ii).
"INCUR" means, with respect to any Indebtedness (including Acquired Debt),
to create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable for or with respect to, or become responsible for, the payment
of such Indebtedness (including Acquired Debt); PROVIDED that (i) neither the
accrual of interest nor the accretion of original issue discount shall be
considered an incurrence of Indebtedness and (ii) the assumption of Indebtedness
by the surviving entity of a transaction permitted by the last sentence of the
covenant described under the caption "--Certain Covenants--Merger,
Consolidation, or Sale of Assets" in existence at the time of such transaction
shall not be deemed to be an incurrence of Indebtedness. The term "incurrence"
has corresponding meaning.
"INDEBTEDNESS" means, with respect to any Person without duplication, any
indebtedness of such Person, whether or not contingent, in respect of borrowed
money or evidenced by bonds, notes, debentures or similar instruments or letters
of credit (or reimbursement agreements in respect thereof) or representing
Capital Lease Obligations or the balance deferred and unpaid of the purchase
price of any property, except any such balance that constitutes an accrued
expense or trade payable, or representing any Hedging Obligations if and to the
extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person), the maximum fixed repurchase price of Disqualified
Stock issued by such Person and the liquidation preference of preferred stock
issued by such Person, in each case if held by any Person other than ALARIS
Medical or a Wholly Owned Restricted Subsidiary of ALARIS Medical, and, to the
extent not otherwise included, the Guarantee by such Person of any such
indebtedness of any other Person. The amount of any Indebtedness outstanding as
of any date shall be (i) the accreted value thereof, in the case of any
Indebtedness issued with original issue discount and (ii) the principal amount
thereof, together with any interest thereon that is more than 30 days past due,
in the case of any other Indebtedness.
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"INITIAL SALE" means the first transaction in which accounts receivable are
sold by ALARIS Medical and/or its Restricted Subsidiaries to an Accounts
Receivable Subsidiary.
"INSTRUMENT CONTRACT" means any contract or agreement to which ALARIS
Medical or any of its Restricted Subsidiaries is a party pursuant to which the
other party to any such contract or agreement acquires on behalf of itself or
another party instruments from ALARIS Medical or such Restricted Subsidiary at
no or reduced initial cost by paying a premium (a portion of which is recorded
by ALARIS Medical in accordance with GAAP as interest income) for subsequent
purchases of disposable administration sets.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all other items that are or would
be classified as investments on a balance sheet prepared in accordance with
GAAP; PROVIDED that an acquisition of assets, Equity Interests or other
securities by ALARIS Medical for consideration consisting of common equity
securities of ALARIS Medical shall not be deemed to be an Investment. If ALARIS
Medical or any Restricted Subsidiary of ALARIS Medical sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted Subsidiary
of ALARIS Medical, or any Restricted Subsidiary of ALARIS Medical issues Equity
Interests, such that, after giving effect to any such sale or disposition, such
Person is no longer a Restricted Subsidiary of ALARIS Medical, ALARIS Medical
shall be deemed to have made an Investment on the date of any such sale,
disposition or issuance equal to the fair market value of the Equity Interests
of such Person held by ALARIS Medical or such Restricted Subsidiary immediately
following any such sale, disposition or issuance.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"MARKETABLE SECURITIES" means (i) Government Securities, (ii) any
certificate of deposit maturing not more than 270 days after the date of
acquisition issued by, or time deposit of, an Eligible Institution or any lender
under the Credit Facility, (iii) commercial paper maturing not more than 270
days after the date of acquisition of an issuer (other than an Affiliate of
ALARIS Medical) with a rating, at the time as of which any investment therein is
made, of "A-3" (or higher) according to S&P or "P-2" (or higher) according to
Moody's or carrying an equivalent rating by a nationally recognized rating
agency if both of the two named rating agencies cease publishing ratings of
investments, (iv) any bankers acceptances or money market deposit accounts
issued by an Eligible Institution and (v) any fund investing exclusively in
investments of the types described in clauses (i) through (iv) above.
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP, excluding, however, (i) any
gain (but not loss), together with any related provision for taxes on such gain
(but not loss), realized in connection with (a) any Asset Sale (including,
without limitation, dispositions pursuant to sale and leaseback transactions) or
(b) the extinguishment of any Indebtedness of such Person or any of its
Restricted Subsidiaries, and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
"NET PROCEEDS" means the aggregate cash proceeds received by ALARIS Medical
or any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon
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the sale or other disposition of any non-cash consideration received in any
Asset Sale), net of the direct costs relating to such Asset Sale (including,
without limitation, legal, accounting and investment banking fees, and sales
commissions) and any relocation expenses incurred as a result thereof, taxes
paid or payable as a result thereof, amounts required to be applied to the
repayment of Indebtedness (other than long-term Indebtedness of a Restricted
Subsidiary of such Person and Indebtedness under any Credit Agreement) secured
by a Lien on the asset or assets that are the subject of such Asset Sale and any
reserve for adjustment in respect of the sale price of such asset or assets
established in accordance with GAAP.
"NON-RECOURSE DEBT" means Indebtedness (i) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness of ALARIS Medical or any of
its Restricted Subsidiaries to declare a default on such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its stated
maturity; and (ii) as to which the lenders have been notified in writing that
they will not have any recourse to the stock or assets of ALARIS Medical or any
of its Restricted Subsidiaries; PROVIDED, HOWEVER, that in no event shall
Indebtedness of any Unrestricted Subsidiary fail to be Non-Recourse Debt solely
as a result of any default provisions contained in a guarantee thereof by ALARIS
Medical or any of its Restricted Subsidiaries if ALARIS Medical or such
Restricted Subsidiary was otherwise permitted to incur such guarantee pursuant
to the Indenture.
"OBLIGATIONS" means any principal, interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy at the rate provided in the
documentation with respect thereto, whether or not such interest is an allowed
claim under applicable law), penalties, fees, indemnifications, reimbursements,
damages and other liabilities payable under the documentation governing any
Indebtedness.
"PERMITTED BUSINESS" means (i) the same or a similar line of business as
ALARIS Medical and its Restricted Subsidiaries are engaged in on the date of the
Indenture and (ii) such business activities as are complementary to or are
incidental, ancillary or related to the foregoing.
"PERMITTED INVESTMENTS" means (i) Investments in ALARIS Medical or in a
Restricted Subsidiary of ALARIS Medical (including, without limitation,
guarantees of the Indebtedness and/or other Obligations of ALARIS Medical and/or
any Restricted Subsidiary of ALARIS Medical, so long as such Indebtedness and/or
other Obligations are permitted under the Indenture), (ii) Investments in
Marketable Securities, (iii) Investments by ALARIS Medical or any Restricted
Subsidiary of ALARIS Medical in, or the purchase of the securities of, a Person
if, as a result of such Investment, (a) such person becomes a Restricted
Subsidiary of ALARIS Medical or (b) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, ALARIS Medical or a Restricted Subsidiary of
ALARIS Medical, (iv) Investments in accounts and notes receivable acquired in
the ordinary course of business, (v) Investments in connection with the sale of
medical instruments pursuant to Instrument Contracts or any leasing of medical
instruments in the ordinary course of business, (vi) any non-cash consideration
received in connection with an Asset Sale that complies with the covenant
described under the caption "--Repurchase at the Option of Holders--Asset
Sales," (vi) Investments in connection with Hedging Obligations permitted to be
incurred under the covenant described under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," (vii)
loans to employees not to exceed $1,000,000 at any time outstanding and (viii)
Investments in an Accounts Receivable Subsidiary received in consideration of
sales of accounts receivable in accordance with the covenant described under the
caption "--Certain Covenants--Sales of Accounts Receivable."
"PERMITTED LIENS" means (i) Liens on property of ALARIS Medical and its
Subsidiaries securing (a) any Credit Agreement, (b) Indebtedness of any
Restricted Subsidiary permitted to be incurred pursuant to the covenant
described under the caption "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock," or (c) Hedging Obligations permitted to be
incurred under the Indenture; (ii) Liens in favor of ALARIS Medical or any of
its Restricted Subsidiaries; (iii) Liens on property of a Person existing at the
time such Person is merged with or into or consolidated with ALARIS Medical or
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any Restricted Subsidiary of ALARIS Medical; PROVIDED, that such Liens were not
incurred in connection with, or in contemplation of, such merger or
consolidation and do not extend to any assets of ALARIS Medical or any
Restricted Subsidiary of ALARIS Medical other than the assets acquired in such
merger or consolidation; (iv) Liens on property of a Person existing at the time
such Person becomes a Restricted Subsidiary of ALARIS Medical; PROVIDED that
such Liens were not incurred in connection with, or in contemplation of, such
Person becoming a Restricted Subsidiary and do not extend to any assets of
ALARIS Medical or any other Restricted Subsidiary of ALARIS Medical; (v) Liens
on property existing at the time of acquisition thereof by ALARIS Medical or any
Restricted Subsidiary of ALARIS Medical; PROVIDED that such Liens were not
incurred in connection with, or in contemplation of, such acquisition and do not
extend to any assets of ALARIS Medical or any of its Restricted Subsidiaries
other than the property so acquired; (vi) Liens to secure the performance of
statutory obligations, surety or appeal bonds or performance bonds, or
landlords', carriers', warehousemen's, mechanics', suppliers', materialmen's or
other like Liens, in any case incurred in the ordinary course of business and
with respect to amounts not yet delinquent or being contested in good faith by
appropriate process of law, if a reserve or other appropriate provision, if any,
as is required by GAAP shall have been made therefor; (vii) Liens existing on
the date of the Indenture; (viii) Liens for taxes, assessments or governmental
charges or claims that are not yet delinquent or that are being contested in
good faith by appropriate proceedings promptly instituted and diligently
concluded; PROVIDED that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor; (ix) Liens to
secure Indebtedness (including Capital Lease Obligations) permitted by clause
(iii) of the second paragraph of the covenant described under the caption
"--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock" covering only the assets acquired with such Indebtedness or the assets
which are the subject of the sale leaseback transaction, as the case may be; (x)
Liens incurred in the ordinary course of business of ALARIS Medical or any
Restricted Subsidiary of ALARIS Medical with respect to obligations not
constituting Indebtedness for borrowed money that do not exceed $15.0 million in
the aggregate at any one time outstanding; (xi) Liens securing Indebtedness
incurred to refinance Indebtedness that has been secured by a Lien permitted
under the Indenture; PROVIDED that (a) any such Lien shall not extend to or
cover any assets or property not securing the Indebtedness so refinanced and (b)
the refinancing Indebtedness secured by such Lien shall have been permitted to
be incurred under the covenant described under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock;" (xii)
Liens in favor of the lessee on instruments which are the subject of leases
entered into in the ordinary course of business; PROVIDED that any such Lien
shall not extend to or cover any assets or property of ALARIS Medical and its
Restricted Subsidiaries that is not the subject of any such lease; (xiii) Liens
in favor of the contracting party in instruments which are the subject of
Instrument Contracts entered into in the ordinary course of business; PROVIDED
that any such Lien shall not extend to or cover any assets or property of ALARIS
Medical and its Restricted Subsidiaries that is not the subject of any such
Instrument Contract; (xiv) Liens to secure Attributable Debt that is permitted
to be incurred pursuant to the covenant described under the caption "--Certain
Covenants--Sale and Leaseback Transactions;" PROVIDED that any such Lien shall
not extend to or cover any assets of ALARIS Medical other than the assets which
are the subject of the sale leaseback transaction in which the Attributable Debt
is incurred; and (xv) Liens to secure the performance of ALARIS Medical under
the Indenture and the Notes.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of ALARIS
Medical or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of ALARIS Medical or any of its Restricted
Subsidiaries; PROVIDED that: (i) the principal amount (or Accreted Value, if
applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount (or Accreted Value, if applicable) of the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded (plus the amount
of reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date at least as late as the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
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extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded
is subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Notes on terms at least as
favorable to the Holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and (iv) such Indebtedness is incurred by ALARIS Medical
or by the Restricted Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"PRINCIPAL" means Jeffry M. Picower.
"QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified
Stock.
"RELATED PARTY" means, with respect to the Principal, (i) any spouse or
immediate family member of the Principal or (ii) any trust, corporation,
partnership or other entity, the beneficiaries, stockholders, partners, owners
or Persons beneficially holding (directly or through one or more Subsidiaries)
an 80% or more controlling interest of which consist of the Principal and/or
such other Persons referred to in the immediately preceding clause (i).
"REPLACEMENT ASSETS" means (i) a business permitted by the covenant
described under the caption "--Certain Covenants--Line of Business," (ii) a
controlling equity interest in any Person engaged in a line of business
permitted by the covenant described under the caption "--Certain Covenants--Line
of Business" or (iii) tangible assets, product distribution rights or
intellectual property or rights thereto used in a line of business permitted by
the covenant described under the caption "--Certain Covenants--Line of
Business."
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date hereof.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of Voting Stock is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole general
partner or the managing general partner of which is such Person or a Subsidiary
of such Person or (b) the only general partners of which are such Person or one
or more Subsidiaries of such Person (or any combination thereof); PROVIDED,
HOWEVER; that the Accounts Receivable Subsidiary and its Subsidiaries shall not
be deemed Subsidiaries of ALARIS Medical or any of its other Subsidiaries.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary that is designated by the
Board of Directors of ALARIS Medical as an Unrestricted Subsidiary pursuant to a
Board Resolution, but only to the extent that such Subsidiary: (i) has no
Indebtedness other than Non-Recourse Debt; (ii) is not party to any agreement,
contract, arrangement or understanding with ALARIS Medical or any Restricted
Subsidiary of ALARIS Medical unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to ALARIS Medical or such
Restricted Subsidiary than those that might be obtained at the time from Persons
who are not Affiliates of ALARIS Medical; (iii) is a Person with respect to
which neither ALARIS Medical nor any of its Restricted Subsidiaries has any
direct or indirect obligation (a) to subscribe for additional Equity Interests
or (b) to maintain or preserve such Person's financial condition or to cause
such Person to achieve any specified levels of operating results; and (iv) has
not guaranteed or
129
<PAGE>
otherwise directly or indirectly provided credit support for any Indebtedness of
ALARIS Medical or any of its Restricted Subsidiaries. Any such designation by
the Board of Directors shall be evidenced to the Trustee by filing with the
Trustee a certified copy of the Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted by the covenant
described above under the covenant described under the caption "--Certain
Covenants--Restricted Payments." If, at any time, any Unrestricted Subsidiary
would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it
shall thereafter cease to be an Unrestricted Subsidiary for purposes of the
Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred
by a Restricted Subsidiary of ALARIS Medical as of such date (and, if such
Indebtedness is not permitted to be incurred as of such date under the covenant
described under the caption "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock," ALARIS Medical shall be in default of such
covenant from the date of such incurrence). The Board of Directors of ALARIS
Medical may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; PROVIDED that such designation shall be deemed to be an incurrence
of Indebtedness by a Restricted Subsidiary of ALARIS Medical of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if (i) such Indebtedness is permitted under the covenant described
under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock" and (ii) no Default or Event of Default would be in
existence following such designation.
"VOTING STOCK" means any class or classes of Capital Stock pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees of
any Person (irrespective of whether or not, at the time, stock of any other
class or classes shall have, or might have, voting power by reason of the
happening of any contingency).
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the then outstanding
principal amount of such Indebtedness into (ii) the total of the product
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other required payments of principal, including
payment at final maturity, in respect thereof, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between such date and
the making of such payment.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or by such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person or by such
Person and one or more Wholly Owned Subsidiaries of such Person.
130
<PAGE>
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of such New Notes
received in exchange for Old Notes where such Old Notes were acquired as a
result of market-making activities or other trading activities. ALARIS Medical
has agreed that for a period of 180 days after the Expiration Date, it will make
this Prospectus, as it may be amended or supplemented from time to time,
available to any Participating Broker-Dealer for use in connection with any such
resale.
ALARIS Medical will not receive any proceeds from any sale of New Notes by
Participating Broker-Dealers. New Notes received by Participating Broker-Dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Notes or a combination
of such methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such Participating Broker-Dealer and/or the purchasers of any such New Notes.
Any Participating Broker-Dealer that resells New Notes that were received by it
for its own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of the New Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a Participating Broker-Dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, ALARIS Medical promptly
will send additional copies of this Prospectus, as it may be amended or
supplemented from time to time, to any Participating Broker-Dealer upon request.
ALARIS Medical has agreed to pay all expenses incident to the Exchange Offer
(including the expenses of one counsel for all of the holders of Old Notes)
other than commissions or concessions of any brokers or dealers and transfer
taxes and will indemnify the holders of the Old Notes against certain
liabilities, including liabilities under the Securities Act.
AVAILABLE INFORMATION
ALARIS Medical has filed with the Commission a registration statement on
Form S-4 (together with all amendments, exhibits, schedules and supplements
thereto, the "Registration Statement") under the Securities Act covering the New
Notes being offered hereby. This Prospectus does not contain all the information
set forth in the Registration Statement. For further information with respect to
ALARIS Medical and the Exchange Offer, reference is made to the Registration
Statement. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the document or matter involved, and each such
statement shall be deemed qualified in its entirety by such reference.
The Registration Statement, including the exhibits thereto, can be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at the Regional
Offices of the Commission at Seven World Trade Center, New York, New York 10048
and at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials can be obtained from the Public
Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
131
<PAGE>
regarding registrants, such as ALARIS Medical, that file electronically with the
Commission. The address of such site is http://www.sec.gov.
ALARIS Medical is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports and other information with the Commission.
ALARIS Medical has agreed pursuant to the Indenture that, whether or not
required by the rules and regulations of the Commission, for so long as any
Notes are outstanding, ALARIS Medical shall furnish to the holders of the Notes
(i) all quarterly and annual financial information that would be required to be
contained in a filing with the commission on Form 10-Q and 10-K if ALARIS
Medical were required to file such form, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" that describes
the financial condition and results of operations of ALARIS Medical and its
Restricted Subsidiaries (as defined) and, with respect to the annual information
only, a report thereon by the ALARIS Medical's certified independent accountants
and (ii) all current reports that would be required to be filed with the
Commission on Form 8-K if ALARIS Medical was required to file such reports. In
addition, whether or not required by the rules and regulations of the
Commission, ALARIS Medical shall file a copy of all such information and reports
with the Commission for public availability (unless the Commission will not
accept such a filing) and make such information available to securities analysts
and prospective investors upon request. Moreover, ALARIS Medical has agreed
that, for so long as any Notes remain outstanding, they will furnish to holders
of the Notes and to securities analysts and prospective investors, upon their
request, the information required to be delivered by Rule 144A(d)(4) under the
Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the validity of the New Notes will be
passed upon for the Company by Gordon Altman Butowsky Weitzen Shalov & Wein, New
York, New York.
EXPERTS
The financial statements of ALARIS Medical, Inc. and its subsidiaries as of
December 31, 1996 and 1997 and for each of the three years in the period ended
December 31, 1997 and the financial statements of IVAC Holdings, Inc. and its
subsidiaries as of December 31, 1995 and for the year then ended included in
this Prospectus have been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
132
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ALARIS Medical, Inc. (unaudited)
Condensed Consolidated Balance Sheet at December 31, 1997 and September
30, 1998................................................................ F-2
Condensed Consolidated Statement of Operations for the nine months ended
September 30, 1997 and 1998............................................. F-3
Condensed Consolidated Statement of Cash Flows for the nine months ended
September 30, 1997 and 1998............................................. F-4
Condensed Consolidated Statement of Changes in Stockholders' Equity for
the nine months ended September 30, 1998................................ F-5
Notes to the Condensed Consolidated Financial Statements.................. F-6
ALARIS Medical, Inc. (audited)
Report of Independent Accountants......................................... F-15
Consolidated Balance Sheet at December 31, 1996 and 1997.................. F-16
Consolidated Statement of Operations for the years ended December 31,
1995, 1996 and 1997..................................................... F-17
Consolidated Statement of Cash Flows for the years ended December 31,
1995, 1996 and 1997..................................................... F-18
Consolidated Statement of Stockholder's Equity for the years ended
December 31, 1995, 1996 and 1997........................................ F-19
Notes to the Consolidated Financial Statements............................ F-20
IVAC Holdings, Inc. (audited)
Report of Independent Accountants......................................... F-49
Consolidated Balance Sheet at December 31, 1995........................... F-50
Consolidated Statement of Operations for the year ended December 31,
1995.................................................................... F-51
Consolidated Statement of Cash Flows for the year ended December 31,
1995.................................................................... F-52
Consolidated Statement of Shareholders' Equity (Deficit) for the year
ended December 31, 1995................................................. F-53
Notes to the Consolidated Financial Statements............................ F-54
</TABLE>
F-1
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER
DECEMBER 31, 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash.................................................................................... $ 6,984 $ 45,098
Receivables, net........................................................................ 83,406 89,548
Inventories............................................................................. 61,666 78,297
Prepaid expenses and other current assets............................................... 23,260 21,829
------------ -----------
Total current assets.................................................................. 175,316 234,772
Net investment in sales-type leases, less current portion................................. 30,404 21,100
Property, plant and equipment, net........................................................ 55,365 60,032
Other non-current assets.................................................................. 16,279 22,310
Intangible assets, net.................................................................... 287,933 314,833
------------ -----------
$ 565,297 $ 653,047
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt....................................................... $ 14,559 $ 12,517
Accounts payable........................................................................ 24,042 21,722
Accrued expenses and other current liabilities.......................................... 52,668 64,061
------------ -----------
Total current liabilities............................................................. 91,269 98,300
------------ -----------
Long-term debt............................................................................ 431,571 530,877
Other non-current liabilities............................................................. 10,508 15,741
------------ -----------
Total non-current liabilities......................................................... 442,079 546,618
------------ -----------
Contingent liabilities and commitments (Note 7)
Stockholders' equity:
Common stock, authorized 75,000 shares at $.01 par value; issued and outstanding--59,102
shares and 59,214 shares at December 31, 1997 and September 30, 1998, respectively.... 591 592
Capital in excess of par value.......................................................... 148,341 148,731
Accumulated deficit..................................................................... (111,330) (136,072)
Treasury stock.......................................................................... (2,027) (2,027)
Equity adjustment for foreign currency translation...................................... (3,626) (3,095)
------------ -----------
Total stockholders' equity............................................................ 31,949 8,129
------------ -----------
$ 565,297 $ 653,047
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-2
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Sales..................................................................................... $ 256,897 $ 271,881
Cost of sales............................................................................. 136,731 138,025
---------- ----------
Gross margin.............................................................................. 120,166 133,856
---------- ----------
Selling and marketing expenses............................................................ 47,805 52,106
General and administrative expenses....................................................... 28,208 30,059
Research and development expenses......................................................... 12,725 14,126
Purchased in-process research and development............................................. -- 28,334
Integration and other non-recurring charges............................................... 17,592 1,112
---------- ----------
Total operating expenses................................................................ 106,330 125,737
---------- ----------
Lease interest income..................................................................... 3,417 3,407
---------- ----------
Income from operations.................................................................. 17,253 11,526
---------- ----------
Other income (expenses):
Interest income......................................................................... 442 658
Interest expense........................................................................ (32,972) (34,809)
Other, net.............................................................................. (446) (667)
---------- ----------
Total other expense....................................................................... (32,976) (34,818)
---------- ----------
Loss before income taxes.................................................................. (15,723) (23,292)
Provision for (benefit from) income taxes................................................. (5,500) 1,450
---------- ----------
Net loss.................................................................................. $ (10,223) $ (24,742)
---------- ----------
---------- ----------
Net loss per common share assuming no dilution.......................................... $ (.17) $ (.42)
---------- ----------
---------- ----------
Net loss per common share assuming dilution............................................. $ (.17) $ (.42)
---------- ----------
---------- ----------
Weighted average common shares outstanding assuming no dilution........................... 58,645 58,692
---------- ----------
---------- ----------
Weighted average common shares outstanding assuming dilution.............................. 58,645 58,692
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-3
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Net cash (used) provided by operating activities.......................................... $ 776 $ 30,169
---------- ----------
Cash flows from investing activities:
Net decrease in restricted cash and investments......................................... 2,332 --
Return of capital by investee........................................................... 148 --
Net capital expenditures................................................................ (15,107) (16,795)
Acquisition and license of technology................................................... -- (59,842)
---------- ----------
Net cash used in investing activities..................................................... (12,627) (76,637)
---------- ----------
Cash flows from financing activities:
Principal payments on long-term debt.................................................... (3,935) (20,228)
Proceeds from term loan borrowing....................................................... -- 30,000
Proceeds under revolving credit facility................................................ 18,800 34,800
Repayments under revolving credit facility.............................................. (7,500) (60,000)
Principal payments on acquired debt..................................................... -- (4,822)
Proceeds from issuance of notes payable................................................. -- 109,892
Debt issue costs........................................................................ (662) (5,390)
Purchase of treasury stock.............................................................. (1,293) --
Proceeds from exercise of stock options................................................. 168 255
---------- ----------
Net cash provided by (used in) financing activities....................................... 5,578 84,507
---------- ----------
Effect of exchange rate changes on cash................................................... (783) 75
---------- ----------
Net decrease in cash...................................................................... (7,056) 38,114
Cash at beginning of period............................................................... 12,084 6,984
---------- ----------
Cash at end of period..................................................................... $ 5,028 $ 45,098
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-4
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY (UNAUDITED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
EQUITY
ADJUSTMENT
COMMON STOCK CAPITAL IN TREASURY STOCK FOR FOREIGN
------------------------ EXCESS OF ACCUMULATED ------------------------ CURRENCY
SHARES AMOUNT PAR VALUE DEFICIT SHARES AMOUNT TRANSLATION
----------- ----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997............ 59,102 $ 591 $ 148,341 $ (111,330) 453 $ (2,027) $ (3,626)
Exercise of stock options............... 112 1 255
Tax benefit from stock options.......... 135
Equity adjustment for foreign currency
translation........................... 531
Net income for the period............... (24,742)
----------- ----- ----------- ------------ --- ----------- -----------
Balance at September 30, 1998........... 59,214 $ 592 $ 148,731 $ (136,072) 453 $ (2,027) $ 3,095
----------- ----- ----------- ------------ --- ----------- -----------
----------- ----- ----------- ------------ --- ----------- -----------
<CAPTION>
TOTAL
---------
<S> <C>
Balance at December 31, 1997............ $ 31,949
Exercise of stock options............... 256
Tax benefit from stock options.......... 135
Equity adjustment for foreign currency
translation........................... 531
Net income for the period............... (24,742)
---------
Balance at September 30, 1998........... $ 8,129
---------
---------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-5
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--BUSINESS AND STATEMENT OF ACCOUNTING POLICY
THE COMPANY:
ALARIS Medical, Inc. ("ALARIS Medical"), formerly Advanced Medical, Inc.,
operating through its consolidated subsidiaries, designs, manufactures,
distributes and services intravenous infusion therapy and vital signs
measurement instruments and related disposables and accessories. On November 26,
1996, IMED Corporation ("IMED"), then a wholly-owned subsidiary of Advanced
Medical, Inc., ("Advanced Medical") acquired all of the outstanding stock of
IVAC Holdings, Inc. ("IVAC Holdings") and its subsidiaries including IVAC
Medical Systems, Inc. (Note 2). In connection with the acquisition, IMED and
IVAC Medical Systems, Inc. were merged into IVAC Holdings (the "Merger"), which
then changed its name to ALARIS Medical Systems, Inc. ("ALARIS Medical
Systems"). ALARIS Medical and its subsidiaries are collectively referred to as
the "Company." The acquisition was accounted for as a purchase.
STATEMENT OF ACCOUNTING POLICY:
The accompanying financial statements have been prepared by the Company
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures herein are
adequate to make the information not misleading.
In the opinion of the Company, the accompanying financial statements contain
all adjustments, consisting of normal recurring adjustments, necessary for a
fair statement of the Company's financial position as of September 30, 1998, and
the results of its operations and its cash flows for the nine months ended
September 30, 1997 and 1998.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the period. Actual results could differ from those estimates.
NET INCOME (LOSS) PER COMMON SHARE:
The Company's net income (loss) per common share assuming no dilution is
computed using the weighted average number of common shares outstanding. The
Company's net income (loss) per common share assuming dilution is computed using
the weighted average number of common shares outstanding plus dilutive potential
common shares using the treasury stock method at the average market price during
the reporting period (Note 7).
NOTE 2--THE MERGER
On November 26, 1996, IMED acquired all of the outstanding stock of IVAC
Holdings and its subsidiaries including IVAC Medical Systems, Inc., in exchange
for $390,000 plus acquired cash of $7,225 less total debt assumed aggregating
$173,314 plus related expenses. The Merger was financed with $204,200 in bank
debt and $200,000 in senior subordinated notes. Subsequent to the acquisition,
IVAC
F-6
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2--THE MERGER (CONTINUED)
Medical Systems, Inc. and IMED were merged into IVAC Holdings, which
subsequently changed its name to ALARIS Medical Systems, Inc.
In connection with the Merger, ALARIS Medical contributed $19,588 to IMED
(the "Capital Contribution"). The Capital Contribution was funded in part
through the sale to Decisions Incorporated ("Decisions"), a corporation wholly
owned by ALARIS Medical's principal stockholder, of 13,333 shares of its common
stock for aggregate proceeds of $40,000 (the "Decisions Contribution"). The
balance of the Capital Contribution was funded with existing cash balances of
ALARIS Medical. The portion of the net proceeds of the Decisions Contribution
not applied to make the Capital Contribution was used by ALARIS Medical to
redeem $21,924 principal amount of its 15% subordinated debentures due 1999 and
fund the redemption of ALARIS Medical's outstanding preferred stock. In
connection with the Decisions Contribution, Decisions exchanged an aggregate of
$37,500 in principal amount of convertible promissory notes previously issued by
ALARIS Medical for 29,416 shares of ALARIS Medical common stock, including 3,333
shares issued as an inducement to convert.
The acquisition was accounted for as a purchase, whereby the purchase price,
including related expenses, was allocated to identified assets, including
intangible assets, purchased research and development and liabilities based upon
their respective fair values. The excess of the purchase price over the value of
identified assets and liabilities, in the amount of $132,482, was recorded as
goodwill and is being amortized over its estimated life of thirty years.
NOTE 3--ACQUISITIONS AND LICENSES
On July 17, 1998, pursuant to an agreement with ALARIS Medical, ALARIS
Medical Systems, Instromedix and its shareholders dated June 24, 1998, ALARIS
Medical Systems acquired all of the outstanding common stock of Instromedix
("Instromedix") and subsequently merged Instromedix with and into itself. The
total consideration for the Instromedix acquisition included (i) $51.0 million
in cash, subject to certain adjustments, (ii) the assumption of indebtedness of
Instromedix of approximately $5.5 million and (iii) the payment of certain
seller transaction expenses in the amount of $1.0 million. The acquisition
payment was funded with $30.0 million of ALARIS Medical Systems' bank term debt
and proceeds from an ALARIS Medical debt offering. On July 28, 1998, ALARIS
Medical completed the sale of $109.9 million of 11 1/8% Senior Discount Notes
(the "Senior Discount Notes"), due 2008, receiving net proceeds of $106.3
million. A portion of the net proceeds of the sale of the notes was also used to
repay certain borrowings under the bank credit facility.
The acquisition was accounted for as a purchase, whereby the purchase price,
including related expenses, was allocated to identified assets and liabilities,
based upon their respective fair values. The allocation included acquired
in-process research and development of $22.8 million, which was immediately
written-off, and other identifiable intangible assets of $21.1 million, which
are being amortized over their estimated weighted-average useful lives of 10
years. The other identifiable intangible assets of $21.1 million include:
completed technology of $16.7 million, representing current product technology
as opposed to product under development; customer base of $3.4 million,
representing the value of existing customer accounts; assembled workforce of
$0.8 million, representing core engineers, sales and technical service forces
and executives; trademarks of $0.2 million. The excess of the purchase price
over the value of identified assets and liabilities, in the amount of $18.0
million, was recorded as goodwill and is being
F-7
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3--ACQUISITIONS AND LICENSES (CONTINUED)
amortized over its estimated life of ten years. Pro forma data has not been
presented as such results would not differ materially from the historical
results presented.
The Company is using the Instromedix purchased in-process research and
development to create new cardiac disease diagnosis, monitoring and management
products which will become part of the Arrhythmia Event Recorders and LifeSigns
System product suites over the next several years. The nature of the efforts
required to develop the purchased in-process technology into commercially viable
products principally relate to designing, prototyping, verification and testing
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features and technical
performance requirements. The Company expects to incur a total of approximately
$4.0 million to complete the projects, of which $0.5 million is expected to be
incurred in the fourth quarter of 1998, while $3.0 million and $0.5 million are
expected to be incurred during 1999 and 2000, respectively. The Company
anticipates that products in the Arrhythmia Event Recorders product suite using
the purchased in-process technology will be released during 1999, while products
under the LifeSigns System product suite will be released during 2000. 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 products will be achieved.
During the second quarter of 1998, the Company acquired the net assets of
Patient Solutions, Inc. ("PSI") for $5,250. PSI was a wholly-owned subsidiary of
Invacare Corporation and was focused on the development of an ambulatory pump
for use in the alternate site market. The transaction was accounted for as a
purchase with the net assets acquired recorded at their estimated fair values.
The rights to the pump under development were valued at $4,421 and were recorded
as a non-recurring charge included in purchased in-process research and
development. The nature of the efforts required to develop the purchased
in-process technology into a commercially viable product principally relate to
designing, prototyping, verification and testing activities that are necessary
to establish that the product can be produced to meet its design specifications,
including functions, features and technical performance requirements. The
Company expects to incur a total of $0.7 million to complete the project, of
which $0.2 million is projected to be incurred in 1998 and $0.5 million in 1999.
It is anticipated that the pump will be released during 1999. 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 pump will be achieved.
Also during the second quarter, the Company licensed technology from
Caesarea Medical Electronics Limited ("Caesarea") for a pole mounted volumetric
infusion pump being designed for developing international markets. At the time
of license, the development of the applications and functionality required by
the Company had not reached technological feasibility and no alternative uses
were identified. As a result, the initial license payment and related expenses
of approximately $1,200 were recorded as purchased in-process research and
development during the second quarter. Under the terms of the license agreement,
the Company is obligated to pay additional consideration to Caesarea upon timely
completion of certain development milestones and delivery of specified numbers
of assembly kits. The milestones, which primarily relate to different product
releases, require completion by various dates through the first half of 1999
with the first significant milestones expected to be met during the fourth
quarter of 1998. If all such milestones are reached, the additional
consideration will be up to a maximum of $4,000, excluding
F-8
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3--ACQUISITIONS AND LICENSES (CONTINUED)
royalties. The Company expects that the purchased in-process research and
development will be successfully developed, but there can be no assurance that
the commercial viability of the pump will be achieved.
NOTE 4--INVENTORIES
Inventories comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Raw materials................................................... $ 24,144 $ 36,524
Work-in-process................................................. 8,363 5,116
Finished goods.................................................. 29,159 36,657
------------ -------------
$ 61,666 $ 78,297
------------ -------------
------------ -------------
</TABLE>
NOTE 5--DEBT
In July 1998, in connection with the Instromedix acquisition, the Company
amended its bank credit facility ("The Credit Facility Amendment"). The Credit
Facility Amendment, among other things, approved the Instromedix acquisition and
the senior discount note offering, increased the revolving credit facility to
$60.0 million and 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 $3.0 million from the revolving credit line, to fund
the initial payments required upon closing the Instromedix acquisition.
On July 28, 1998, subsequent to closing the Instromedix acquisition, the
Company issued $189.0 million of senior discount notes, issued at a discount
from their principal amount at maturity to generate gross proceeds to the
Company of $109.9 million. Upon receipt of net proceeds of $106.3 million, the
Company paid its remaining obligations of approximately $22.7 million to the
Instromedix shareholders and contributed the remaining net proceeds of
approximately $82.6 million, after issuance costs, to ALARIS Medical Systems, as
required under the Credit Facility Amendment. ALARIS Medical Systems then repaid
the amount outstanding under its revolving credit line.
The Senior Discount Notes bear interest at a rate of 11 1/8% per annum.
Interest accruing on these notes is added to the outstanding principal balance
through July 31, 2003. Interest accruing beginning August 1, 2003 is payable in
cash semi-annually in arrears on February 1 and August 1, commencing February 1,
2004. The notes will mature on August 1, 2008. The Company may redeem the notes
at any time prior to the redemption date. In addition, on or prior to August 2,
2001, under certain conditions ALARIS Medical has the option to redeem a portion
of the notes. The notes are senior in right of payment to all subordinated
indebtedness of ALARIS Medical and rank PARI PASSU in right of payment with all
existing and future senior indebtedness of the Company, including indebtedness
incurred under the bank credit facility.
Additionally, the Company is required to register and is in the process of
registering, the Senior Discount Notes with the Securities and Exchange
Commission. Such registration was required to be completed on November 25, 1998.
As a result of ALARIS Medical's failure to have the registration declared
effective by November 25, 1998, the Company is obligated to pay Liquidated
Damages to each
F-9
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5--DEBT (CONTINUED)
holder of the Senior Discount Notes commencing November 26, 1998. For the first
90 day period that the registration is not declared effective, additional
interest of $0.05 per week per one thousand dollars of principal amount of the
Senior Discount Notes will accrue. This would amount to approximately $.1
million for the period November 26, 1998 through February 25, 1999. The Company
believes the registration will be declared effective before the expiration of
the first 90-day period.
NOTE 6--COMPREHENSIVE INCOME (LOSS)
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
requires that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
Statement also requires that an entity classify items of other comprehensive
earnings by their nature in an annual financial statement. For example, other
comprehensive earnings may include foreign currency translation adjustments,
minimum pension liability adjustments, and unrealized gains and losses on
marketable securities classified as available-for-sale. Annual financial
statements for prior periods will be reclassified, as required. ALARIS Medical's
total comprehensive earnings were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Net loss............................................................ $ (10,223) $ (24,742)
Other comprehensive loss:
Foreign currency translation adjustments.......................... (3,133) 531
---------- ----------
Comprehensive loss.................................................. $ (13,356) $ (24,211)
---------- ----------
---------- ----------
</TABLE>
NOTE 7--EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128") which specifies the computation, presentation, and disclosure requirements
for earnings per share. The earnings per share information contained in these
financial statements, including those presented for prior periods, conform with
SFAS 128.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
1997 1998
---------------------- ----------------------
BASIC DILUTED BASIC DILUTED
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss as reported.......................... $ (10,223) $ (10,223) $ (24,742) $ (24,742)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares outstanding.... 58,645 58,645 58,692 58,692
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net loss per common share..................... $ (.17) $ (.17) $ (.42) $ (.42)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
F-10
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7--EARNINGS PER SHARE (CONTINUED)
Potential common shares are not included in the diluted computation when the
Company reports a net loss, as they are antidilutive. As a result, net loss per
common share assuming no dilution and dilution are the same when the Company
experiences a net loss.
The Company's 7.25% Debentures were not included in the calculation of
diluted earnings per share in the nine months ended September 30, 1998 as they
are antidilutive. For the nine month periods ended September 30, 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 $528 net of
taxes, to net income, due to the reduction in interest expense. Options
outstanding at September 30, 1997 and 1998 were excluded due to their
antidilutive nature. Had such options been included, the weighted average shares
would have increased by 1,123 and 1,619 for the nine month periods ended
September 30, 1997, and 1998, respectively.
NOTE 8--CONTINGENCIES AND LITIGATION
GOVERNMENT REGULATION AND FIELD CORRECTION
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 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 sixteen occasions temporarily removed products from the market
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. In addition, the
Company has initiated a voluntary safety alert of its Model 597/598 and Model
599 Series infusion pumps. Moreover, the Company has initiated a voluntary field
correction of approximately 50,000 of its Gemini PC-1 and PC-2 infusion pumps
because failure of specific electrical components on the power regulator printed
circuit board may result in improper regulation of the battery charge voltage,
which may cause the battery to overheat. The Company recorded a charge of $2,500
to cost of sales for the quarter ended March 31, 1997 on account of this
voluntary field correction. The Company initiated a voluntary field correction
of its Signature Edition infusion pumps to correct a malfunction of an
electronic line filter component (which malfunction may occur when a user fails
to follow the Company's written cleaning instructions and can result in an
electrical short). The Company is not aware of the occurrence of any injury
incidents relating to a malfunction of this type. Further, in November 1998, the
F-11
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8--CONTINGENCIES AND LITIGATION (CONTINUED)
Company initiated a voluntary safety alert regarding the Signature Edition
infusion pumps advising to check for the proper installation of a spring in the
pumping mechanism assembly. In the third quarter of 1998, the Company initiated
a recall of its Gemini PC-4 infusion pumps to correct certain electro-mechanical
problems which may cause one or more channels of the device to audibly and
visibly alarm and temporarily cease operation. The Company has also initiated a
mandatory field upgrade of its P-1000, P-2000, P-3000 and P-4000 syringe pumps
because under certain circumstances a rate change can occur. Although there can
be no assurance, the Company believes that these voluntary field corrections,
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 was a defendant in a lawsuit filed in June 1996 by Sherwood
Medical, Inc. against IVAC which alleges infringement of two patents by reason
of certain activities including the sale by IVAC of disposable probe covers for
use with the Company's infrared tympanic thermometer. The lawsuit 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 tentatively
scheduled for June, 1999. The Company believes it has sufficient defenses to all
claims, including the defenses of noninfringement and invalidity and intends to
vigorously defend this action. However, there can be no assurance that the
Company will successfully defend all claims made by Sherwood and the failure of
the Company to successfully prevail in any such lawsuit could have a material
adverse effect on the Company's operations, financial condition and 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 (US 5,699,821). 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 infringment 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 Company's operations,
financial condition and 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 Atrium
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
F-12
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8--CONTINGENCIES AND LITIGATION (CONTINUED)
("Finished Products") assembled at the Company's two maquiladora assembly plants
in Tijuana, Mexico. In May 1995, Cal Pacifico received a pre-penalty notice from
the United States Customs Service ("Customs") to the effect that Customs
intended to assess additional duties and substantial penalties against Cal
Pacifico for its alleged failure, during the years 1988 through 1992, to comply
with certain documentary requirements regarding the importation of goods on
behalf of its clients, including the Company. Customs recently assessed
additional duties with respect to Cal Pacifico's importation of goods on behalf
of its clients, including the importation of the Company's Finished Products,
for the years 1993 and 1994, and it is anticipated that Customs will issue a
pre-penalty notice to Cal Pacifico in respect of these years as well
(collectively with the amounts referred to in the immediately preceding
sentence, the "Disputed Amounts"). The Company has been advised by its special
Customs counsel that, under applicable law, no person, by fraud, gross
negligence or negligence, may (i) import merchandise into the commerce of the
United States by means of any material and false document, statement or act, or
any material omission, or (ii) aid or abet any other person to import
merchandise in such manner. No proceeding has been initiated by Customs against
the Company in respect of the matters which are the subject of the proceeding
against Cal Pacifico. Since Cal Pacifico was the Company's United States customs
broker and importer of record during each of the foregoing years, the Company
believes that it is unlikely that Customs will assess against the Company any
portion of the Disputed Amounts.
Cal Pacifico is contesting Customs' assessment of the Disputed Amounts. Cal
Pacifico's challenge to the assessment of the Disputed Amounts is in its
preliminary stages. Given the present posture of Cal Pacifico's challenge, and
the inherent uncertainty of contested matters such as this, it is not possible
for the Company to express an opinion as to the likelihood that Cal Pacifico
will prevail on its challenge. The Company has not been informed by Cal Pacifico
or Customs as to the specific amount of the Disputed Amounts.
Cal Pacifico has advised the Company that, should Cal Pacifico's challenge
to the assessment of the Disputed Amounts prove to be unsuccessful, it will seek
recovery from the Company, through arbitration, for any portion of the Disputed
Amounts which it is required to pay to Customs. As part of the settlement
agreement which resolved the Company's contract dispute with Cal Pacifico during
the second quarter of 1997, the Company paid Cal Pacifico $550, which is to be
applied toward Cal Pacifico's payment of Disputed Amounts. The $550 payment by
the Company is to be credited toward any portion of the Disputed Amounts which
the arbitrator determines the Company owes to Cal Pacifico. The actual amount so
determined by the arbitrator may be less or greater than $550. Although the
ultimate outcome of such an arbitration proceeding cannot be guaranteed, the
Company believes that it has meritorious defenses to claims with respect to
Disputed Amounts which Cal Pacifico might raise against the Company. These
defenses would be based, among other factors, on the contractual relationship
between the Company and Cal Pacifico (including a defense with respect to the
availability of indemnification under the agreements between Cal Pacifico and
the Company), the conduct of Cal Pacifico with respect to both the Company and
Customs, and the compliance obligations of Cal Pacifico under applicable customs
laws. Inasmuch as Cal Pacifico's challenge before Customs is still pending and
any claim against the Company for indemnification would be based on Cal
Pacifico's ultimate lack of success in that challenge, and inasmuch as any
arbitration proceeding by which Cal Pacifico might seek indemnification has not
been filed nor has Cal Pacifico committed itself to the theories under which it
might seek indemnification or the recovery of damages from the Company, it is
not possible for the Company to express an opinion at this time as to the
likelihood of an unfavorable outcome in such a proceeding.
F-13
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8--CONTINGENCIES AND LITIGATION (CONTINUED)
OTHER
The Company is also a defendant in various actions, claims, and legal
proceedings arising from its normal business operations. Management believes
they have meritorious defenses and intends to vigorously defend against all
allegations and claims. As the ultimate outcome of these matters is uncertain,
no contingent liabilities or provisions have been recorded in the accompanying
financial statements for such matters. However, in management's opinion, based
on discussions with legal counsel, liabilities arising from such matters, if
any, will not have a material adverse effect on consolidated financial position,
results of operations or cash flows.
F-14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
ALARIS Medical, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of stockholders' equity
(deficit) present fairly, in all material respects, the financial position of
ALARIS Medical, Inc. and its subsidiaries at December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Diego, California
March 2, 1998
F-15
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash.................................................................................. $ 12,084 $ 6,984
Restricted cash and investment securities............................................. 2,332 --
Receivables, net...................................................................... 87,880 83,406
Inventories........................................................................... 58,976 61,666
Prepaid expenses and other current assets............................................. 21,582 23,260
----------- -----------
Total current assets.............................................................. 182,854 175,316
----------- -----------
Net investment in sales-type leases, less current portion............................... 27,276 30,404
Property, plant and equipment, net...................................................... 56,628 55,365
Other non-current assets................................................................ 18,107 16,279
Intangible assets, net.................................................................. 308,517 287,933
----------- -----------
$ 593,382 $ 565,297
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Crrent liabilities:
Current portion of long-term debt..................................................... $ 3,963 $ 14,559
Accounts payable...................................................................... 25,812 24,042
Accrued expenses and other current liabilities........................................ 50,196 50,988
Accrued restructuring and integration costs........................................... 15,098 1,680
----------- -----------
Total current liabilities......................................................... 95,069 91,269
----------- -----------
Long-term debt.......................................................................... 436,130 431,571
Other non-current liabilities........................................................... 16,130 10,508
----------- -----------
Total non-current liabilities..................................................... 452,260 442,079
----------- -----------
Contingent liabilities and commitments (Notes 8 and 15) Stockholders' equity:
Preferred stock, authorized 6,000 shares at $.001 par value, issued and
outstanding--none...................................................................
Common stock, authorized 75,000 shares at $.01 par value; issued and
outstanding--58,977 and 59,102 shares at December 31, 1996 and 1997, respectively... 589 591
Capital in excess of par value........................................................ 147,840 148,341
Accumulated deficit................................................................... (101,704) (111,330)
Treasury stock........................................................................ (734) (2,027)
Equity adjustment for foreign currency translation.................................... 62 (3,626)
----------- -----------
Total stockholders' equity........................................................ 46,053 31,949
----------- -----------
$ 593,382 $ 565,297
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Sales............................................................................. $ 112,551 $ 136,371 $ 359,077
Cost of sales..................................................................... 63,219 78,616 188,340
--------- --------- ---------
Gross margin.................................................................. 49,332 57,755 170,737
--------- --------- ---------
Selling and marketing expenses.................................................... 16,567 22,273 65,797
General and administrative expenses............................................... 10,661 15,210 39,231
Research and development expenses................................................. 7,386 8,854 16,876
Purchased in-process research and development..................................... -- 44,000 --
Restructuring, integration and other non-recurring charges........................ -- 15,277 20,902
--------- --------- ---------
Total operating expenses...................................................... 34,614 105,614 142,806
--------- --------- ---------
Lease interest income............................................................. 2,333 2,501 4,559
--------- --------- ---------
Income (loss) from operations................................................. 17,051 (45,358) 32,490
Other income (expenses):
Interest income................................................................. 192 1,193 532
Interest expense................................................................ (8,153) (13,393) (44,413)
Debt conversion expense......................................................... -- (10,000) --
Other, net...................................................................... 313 1,222 (1,535)
--------- --------- ---------
Total other expense........................................................... (7,648) (20,978) (45,416)
--------- --------- ---------
Income (loss) before income taxes, minority interests and extraordinary item...... 9,403 (66,336) (12,926)
Benefit from income taxes......................................................... (9,374) (730) (3,300)
--------- --------- ---------
Income (loss) before minority interests and extraordinary item.................... 18,777 (65,606) (9,626)
Minority interests in consolidated subsidiaries................................... (6,500) -- --
--------- --------- ---------
Income (loss) before extraordinary item........................................... 12,277 (65,606) (9,626)
Extraordinary item--gain (loss) on early retirement of debt, net of taxes......... 15,177 (1,630) --
--------- --------- ---------
Net income (loss)................................................................. 27,454 (67,236) (9,626)
Dividends on mandatorily redeemable preferred stock............................... 650 962 --
--------- --------- ---------
Net income (loss) attributable to common stock.................................... $ 26,804 $ (68,198) $ (9,626)
--------- --------- ---------
--------- --------- ---------
Income (loss) per common share assuming no dilution:
Income (loss) before extraordinary item......................................... $ .75 $ (3.27) $ (.16)
Extraordinary item.............................................................. .98 (.08) --
--------- --------- ---------
Net income (loss) per common share assuming no dilution....................... $ 1.73 $ (3.35) $ (.16)
--------- --------- ---------
--------- --------- ---------
Income (loss) per common share assuming dilution:
Income (loss) before extraordinary item......................................... $ .38 $ (3.27) $ (.16)
Extraordinary item.............................................................. .46 (.08) --
--------- --------- ---------
Net income (loss) per common share assuming dilution.......................... $ .84 $ (3.35) $ (.16)
--------- --------- ---------
--------- --------- ---------
Weighted average common shares outstanding assuming no dilution................... 15,506 20,343 58,644
--------- --------- ---------
--------- --------- ---------
Weighted average common shares outstanding assuming dilution...................... 33,236 20,343 58,644
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................................ $ 27,454 $ (67,236) $ (9,626)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................. 7,575 10,499 34,288
Net (gain) loss on disposal/write-off of property, plant and equipment and
intangible assets............................................................. (176) (452) 6,735
Minority interests in consolidated subsidiaries................................ 6,500 -- --
Extraordinary (gain) loss - early retirement of debt, net of taxes............. (15,177) 1,630 --
Debt conversion expense........................................................ -- 10,000 --
Debt discount and issue costs amortization..................................... 521 1,332 3,125
Purchased in-process research and development.................................. -- 44,000 --
Inventory purchase price allocation adjustment................................. -- 4,014 1,607
Non-cash restructuring charges................................................. -- 1,616 --
(Increase) decrease in assets, net of effects of the Merger:
Receivables.................................................................. (2,096) (2,932) 1,509
Inventories.................................................................. 4,518 (1,223) (4,681)
Prepaid expenses and other current assets.................................... (1,511) 578 (1,773)
Net investment in sales-type leases.......................................... (458) 1,830 (3,128)
Other non-current assets..................................................... (10,718) 7,872 172
Increase (decrease) in liabilities, net of effects of the Merger:
Accounts payable............................................................. (546) 2,975 (1,548)
Accrued expenses, restructuring and integration costs and other current
liabilities................................................................. 2,900 1,536 (11,305)
Other non-current liabilities................................................ (313) (8,324) (5,622)
--------- --------- ---------
Net cash provided by operating activities.......................................... 18,473 7,715 9,753
--------- --------- ---------
Cash flows from investing activities:
Net (increase) decrease in restricted cash and investments....................... (25,486) 24,886 2,332
Capital expenditures............................................................. (4,803) (9,502) (19,843)
Payments for product distribution rights......................................... (3,402) (12,556) --
Proceeds from disposal of property, plant and equipment.......................... 17 106 89
Proceeds from sale of investments................................................ 859 2,374 --
Acquisition of business, net of cash acquired (Note 2)........................... -- (219,459) --
Return of capital investment..................................................... -- -- 148
--------- --------- ---------
Net cash used in investing activities.............................................. (32,815) (214,151) (17,274)
--------- --------- ---------
Cash flows from financing activities:
Principal payments on long-term debt............................................. (1,218) (322) (4,248)
Proceeds from issuance of notes payable and long-term debt....................... 25,000 400,000 --
Net (repayments) proceeds under former revolving credit facilities............... (7,764) 10,006 --
Proceeds from revolving credit facility.......................................... -- 15,200 34,300
Repayments of revolving credit facility.......................................... -- -- (24,300)
Proceeds from issuance of common stock........................................... -- 40,024 --
Proceeds from exercise of stock options.......................................... -- -- 241
Debt issuance costs.............................................................. (498) (16,888) (919)
Debt repaid in Merger............................................................ -- (210,723) --
Redemption of preferred stock including related dividends........................ -- (7,844) --
Purchase of common stock warrant................................................. -- (12,500) --
Repurchase of common stock....................................................... -- -- (1,293)
--------- --------- ---------
Net cash provided by financing activities.......................................... 15,520 216,953 3,781
--------- --------- ---------
Effect of exchange rate changes on cash............................................ (656) (295) (1,360)
--------- --------- ---------
Net increase (decrease) in cash.................................................... 522 10,222 (5,100)
Cash at beginning of year.......................................................... 1,340 1,862 12,084
--------- --------- ---------
Cash at end of year................................................................ $ 1,862 $ 12,084 $ 6,984
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
HOLDING
GAINS FROM
COMMON STOCK CAPITAL IN TREASURY STOCK SECURITIES
------------------------ EXCESS OF ACCUMULATED ------------------------ AVAILABLE
SHARES AMOUNT PAR VALUE DEFICIT SHARES AMOUNT FOR SALE
----------- ----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994... 14,152 $ 142 $ 58,703 $ (61,922) 83 $ (734) $ 883
Issuance of common stock....... 2,062 20 4,912
Dividends on mandatorily
redeemable preferred stock... (650)
Increase in unrealized gains
from securities available for
sale, net of tax............. 2,694
Equity adjustment from foreign
currency translation.........
Net income for the year........ 27,454
----------- ----- ----------- ------------ --- ----------- -----------
Balance at December 31, 1995... 16,214 162 62,965 (34,468) 83 (734) 3,577
Issuance of common stock upon
conversion of notes
payable...................... 29,416 294 47,206
Issuance of common stock....... 13,333 133 39,867
Dividends on mandatorily
redeemable preferred stock... (962)
Decrease in unrealized gain on
securities available for
sale, net of tax............. (3,577)
Purchase of common stock
warrant...................... (1,000)
Exercise of stock options...... 14 24
Equity adjustment from foreign
currency translation......... (260)
Net loss for the year.......... (67,236)
----------- ----- ----------- ------------ --- ----------- -----------
Balance at December 31, 1996... 58,977 589 147,840 (101,704) 83 (734) --
Exercise of stock options...... 125 2 239
Tax benefit from exercise of
options...................... 262
Purchase of treasury stock..... 370 (1,293)
Equity adjustment from foreign
currency translation.........
Net loss for the year.......... (9,626)
----------- ----- ----------- ------------ --- ----------- -----------
Balance at December 31, 1997... 59,102 $ 591 $ 148,341 $ (111,330) 453 $ (2,027) $ --
----------- ----- ----------- ------------ --- ----------- -----------
----------- ----- ----------- ------------ --- ----------- -----------
<CAPTION>
EQUITY
ADJUSTMENT
FROM
FOREIGN
CURRENCY
TRANSLATION TOTAL
----------- ---------
<S> <C> <C>
Balance at December 31, 1994... $ 690 $ (2,238)
Issuance of common stock....... 4,932
Dividends on mandatorily
redeemable preferred stock... (650)
Increase in unrealized gains
from securities available for
sale, net of tax............. 2,694
Equity adjustment from foreign
currency translation......... (660) (660)
Net income for the year........ 27,454
----------- ---------
Balance at December 31, 1995... 30 31,532
Issuance of common stock upon
conversion of notes
payable...................... 47,500
Issuance of common stock....... 40,000
Dividends on mandatorily
redeemable preferred stock... (962)
Decrease in unrealized gain on
securities available for
sale, net of tax............. (3,577)
Purchase of common stock
warrant...................... (1,000)
Exercise of stock options...... 24
Equity adjustment from foreign
currency translation......... 32 (228)
Net loss for the year.......... (67,236)
----------- ---------
Balance at December 31, 1996... 62 46,053
Exercise of stock options...... 241
Tax benefit from exercise of
options...................... 262
Purchase of treasury stock..... (1,293)
Equity adjustment from foreign
currency translation......... (3,688) (3,688)
Net loss for the year.......... (9,626)
----------- ---------
Balance at December 31, 1997... $ (3,626) $ 31,949
----------- ---------
----------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--BUSINESS AND ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
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. On November 26, 1996, IMED
Corporation ("IMED"), then a wholly-owned subsidiary of Advanced Medical, Inc.,
("Advanced Medical") acquired all of the outstanding stock of IVAC Holdings,
Inc. ("IVAC Holdings") and its subsidiaries including IVAC Medical Systems, Inc.
(Note 2). In connection with the acquisition, IMED and IVAC Medical Systems,
Inc. were merged into IVAC Holdings (the "Merger"), which then changed its name
to ALARIS Medical Systems, Inc. ("ALARIS Medical Systems"). The acquisition was
accounted for as a purchase. The accompanying balance sheet as of December 31,
1996 reflects the assets, liabilities and stockholders' equity of ALARIS Medical
and its subsidiaries, including the merged entity. The accompanying statements
of operations, of cash flows and of stockholders' equity for the year ended
December 31, 1996 include the operations and cash flows of IVAC Holdings
subsequent to the acquisition date. ALARIS Medical and its subsidiaries are
collectively referred to as the "Company."
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION:
The financial statements include the accounts of ALARIS Medical and its
greater than 50 percent-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION:
Revenue is recorded upon product shipment, net of an allowance for estimated
returns, or service delivery. Additionally, the Company leases instruments to
customers under non-cancelable sales-type capital leases and operating lease
contracts with terms ranging generally from 1 to 6 years. The Company sells
instruments via long-term financing arrangements to a number of customers under
agreements which allow customers to acquire instruments with no initial payment.
The sales price for the instruments is recovered via surcharges applied to
minimum purchase commitments of related disposables. The term of the financing
is generally three to five years, with interest at rates of 9% to 15%. Unearned
finance revenue is calculated using the inherent rate of interest on each
agreement, the expected disposable shipment period and the principal balance
financed and is recognized as disposables are shipped using a reducing principal
balance method which approximates the interest method. Contract provisions
include liquidated damage clauses which are sufficient to recover the sales
price of the instruments in the event of customer cancelation.
F-20
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--BUSINESS AND ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CONCENTRATIONS OF CREDIT RISK:
The Company provides a variety of financing arrangements for its customers.
The majority of the Company's accounts receivable are from hospitals throughout
the United States and Europe with credit terms of generally 30 days. The Company
maintains adequate reserves for potential credit losses and such losses have
been within management's estimates.
INVENTORIES:
Inventories are stated at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market. Cost of inventory acquired in the Merger was
determined based on an allocation of the purchase price to all assets and
liabilities including inventory, as determined by an independent appraisal, at
the date of acquisition (Note 2).
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is stated at cost. Depreciation and
amortization is provided using the straight-line method based upon the following
estimated useful lives of the assets or lease terms, if shorter, for leasehold
improvements and instrument operating leases:
<TABLE>
<S> <C>
Building and leasehold improvements.................... 3 to 10 years
Machinery and equipment................................ 3 to 10 years
Furniture and fixtures................................. 4 to 8 years
Instruments on operating lease contracts............... 1 to 6 years
</TABLE>
INTANGIBLE ASSETS:
The Company has recorded goodwill for the excess purchase price over the
estimated fair values of tangible and intangible assets acquired and liabilities
assumed resulting from acquisitions. In connection with the Merger, a portion of
the purchase price was allocated to various identifiable intangible assets,
including patents, trademarks, workforce and supply agreements, based on their
fair values at the date of acquisition. The excess purchase price over the
estimated fair value of the net assets acquired has been assigned to goodwill.
Additionally, the Company has recorded intangible assets related to purchases of
patents and product distribution rights.
Intangible assets are amortized as follows:
<TABLE>
<S> <C> <C>
Supply agreements................................. Straight-line 3 years
Patents........................................... Straight-line 13 years (weighted average)
Workforce......................................... Straight-line 14 years
Product distribution license fee.................. Straight-line 15 years
Trademarks........................................ Straight-line 30 years
Goodwill.......................................... Straight-line 30 to 35 years
</TABLE>
F-21
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--BUSINESS AND ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company investigates potential impairments of long-lived assets and
certain identifiable intangibles including goodwill, on an exception basis, when
there is evidence that events or changes in circumstances may have made recovery
of an asset's carrying value unlikely. An impairment loss is recognized when the
sum of the expected, undiscounted future net cash flows is less than the
carrying amount of the asset. The Company has not identified any such losses.
DEBT ISSUE COSTS:
Debt issue costs aggregating $17,504 and $15,734 at December 31, 1996 and
1997, respectively, are amortized using the interest method over the respective
terms of the debt agreements and are included in other non-current assets.
FOREIGN CURRENCY TRANSLATION:
The accounts of foreign subsidiaries which use local currencies as
functional currencies are translated into U.S. dollars using year-end exchange
rates for assets and liabilities, historical exchange rates for equity and
weighted average exchange rates during the period for revenues and expenses. The
gains or losses resulting from translations are excluded from results of
operations and accumulated as a separate component of stockholders' equity.
RESEARCH AND DEVELOPMENT COSTS:
Research and development costs are expensed as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount of the Company's financial instruments, including cash,
trade receivables and payables, approximates their fair value due to their
short-term maturities. The fair values of the Company's long-term lease
receivables are estimated by discounting future cash flows using discount rates
that reflect the risk associated with similar types of loans. The fair value of
the Company's long-term debt is estimated based on comparison with similar
issues or current rates offered to the Company for debt of the same remaining
maturities and the quoted market price for the debentures. The estimated fair
values of both the Company's long-term lease receivables and long-term debt,
with the exception of the debentures, approximate their carrying values. The
carrying value of the debentures was $16,152 at December 31, 1996 and 1997 and
the fair value was approximately $12,800 and $14,900 at December 31, 1996 and
1997, respectively.
INCOME TAXES:
The Company and its domestic subsidiaries file a consolidated Federal income
tax return. Domestic subsidiaries file income tax returns in multiple states on
either a stand-alone or combined basis. Foreign subsidiaries file income tax
returns in their respective local jurisdictions.
F-22
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--BUSINESS AND ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The Company recognizes deferred tax assets and liabilities based on the
expected future tax consequences of events that have been included in the
financial statements and tax returns in different periods. Under this method,
deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. The Company provides a reserve against its net deferred assets when,
in the opinion of management, it is more likely than not that such assets will
not be realized.
STOCK-BASED COMPENSATION:
During the year ended December 31, 1996, the Company adopted Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). The Company has continued to measure compensation expense for its
stock-based employee compensation plans using the intrinsic value method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and has included disclosure of the pro forma effects of SFAS 123 in Note 7 to
these Consolidated Financial Statements.
NET INCOME (LOSS) PER COMMON SHARE:
The Company's net income (loss) per common share assuming no dilution is
computed using the weighted average number of common shares outstanding. The
Company's net income (loss) per common share assuming dilution is computed using
the weighted average number of common shares outstanding plus dilutive potential
common shares using the treasury stock method at the average market price during
the reporting period (Note 10).
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform to the
classifications used in 1997.
COMPREHENSIVE INCOME:
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting
Comprehensive Income," which the Company is required to adopt for 1998. This
statement will require the Company to report in the financial statements, in
addition to net income, comprehensive income and its components including
foreign currency translation items currently recorded to stockholders' equity.
Upon adoption of FAS 130, the Company is also required to reclassify financial
statements for earlier periods provided for comparative purposes. The adoption
of FAS 130 will not have an impact on the Company's consolidated financial
statements but will require display of comprehensive income including items not
currently included.
NOTE 2--THE MERGER
On November 26, 1996, IMED acquired all of the outstanding stock of IVAC
Holdings and its subsidiaries including IVAC Medical Systems, Inc., in exchange
for $390,000 plus acquired cash of $7,225 less total debt assumed aggregating
$173,314 plus related expenses. The Merger was financed with $204,200 in bank
debt and $200,000 in senior subordinated notes. Subsequent to the acquisition,
IVAC
F-23
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2--THE MERGER (CONTINUED)
Medical Systems, Inc. and IMED were merged into IVAC Holdings, which
subsequently changed its name to ALARIS Medical Systems, Inc.
In connection with the Merger, ALARIS Medical contributed $19,588 to IMED
(the "Capital Contribution"). The Capital Contribution was funded in part
through the sale to Decisions Incorporated ("Decisions"), a corporation wholly
owned by ALARIS Medical's principal stockholder, of 13,333 shares of its common
stock for aggregate proceeds of $40,000 (the "Decisions Contribution"). The
balance of the Capital Contribution was funded with existing cash balances of
ALARIS Medical. The portion of the net proceeds of the Decisions Contribution
not applied to make the Capital Contribution was used by ALARIS Medical to
redeem $21,924 principal amount of its 15% subordinated debentures due 1999
(Note 4) and fund the redemption of ALARIS Medical's outstanding preferred
stock. In connection with the Decisions Contribution, Decisions exchanged an
aggregate of $37,500 in principal amount of convertible promissory notes
previously issued by ALARIS Medical for 29,416 shares of ALARIS Medical common
stock, including 3,333 shares of ALARIS Medical common stock issued as an
inducement to convert (Note 4).
The acquisition was accounted for as a purchase, whereby the purchase price,
including related expenses, was allocated to identified assets, including
intangible assets, purchased research and development and liabilities based upon
their respective fair values. The excess of the purchase price over the value of
identified assets and liabilities, in the amount of $132,482, was recorded as
goodwill and is being amortized over its estimated life of thirty years.
The following unaudited pro forma financial information presents the
operations of the Company, as if the Merger had been consummated on January 1,
of the respective year, excluding certain one time non-recurring charges related
to the Merger.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Sales:
As reported......................................................... $ 112,551 $ 136,371
Pro forma........................................................... $ 352,728 $ 346,348
Income (loss) before extraordinary item:
As reported......................................................... $ 12,277 $ (65,606)
Pro forma........................................................... $ (38,372) $ (1,364)
</TABLE>
F-24
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3--COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
RECEIVABLES:
Trade receivables................................................... $ 75,170 $ 73,282
Allowance for doubtful accounts..................................... (4,085) (3,259)
---------- ----------
71,085 70,023
Current portion of net investment in sales-type leases (Note 8)..... 16,795 13,383
---------- ----------
$ 87,880 $ 83,406
---------- ----------
---------- ----------
INVENTORIES:
Raw materials....................................................... $ 24,711 $ 24,144
Work-in-process..................................................... 9,622 8,363
Finished goods...................................................... 24,643 29,159
---------- ----------
$ 58,976 $ 61,666
---------- ----------
---------- ----------
PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Deferred income tax asset........................................... $ 16,201 $ 19,135
Other............................................................... 5,381 4,125
---------- ----------
$ 21,582 $ 23,260
---------- ----------
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Land................................................................ $ 640 $ 640
Building and leasehold improvements................................. 10,073 14,000
Machinery and equipment............................................. 32,230 39,987
Furniture and fixtures.............................................. 5,215 5,401
Instruments under operating lease contracts......................... 17,245 20,338
Construction-in-process............................................. 8,102 9,138
---------- ----------
73,505 89,504
Accumulated depreciation and amortization........................... (16,877) (34,139)
---------- ----------
$ 56,628 $ 55,365
---------- ----------
---------- ----------
</TABLE>
F-25
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3--COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS (CONTINUED)
Depreciation expense was $4,211, $5,827 and $17,417 for 1995, 1996 and 1997,
respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
OTHER NON-CURRENT ASSETS:
Debt issue costs.................................................... $ 17,504 $ 15,734
Other............................................................... 603 545
---------- ----------
$ 18,107 $ 16,279
---------- ----------
---------- ----------
INTANGIBLE ASSETS:
Goodwill............................................................ $ 179,879 $ 180,381
Patents............................................................. 28,661 28,661
Product distribution license fee.................................... 8,742 3,837
Supply agreements................................................... 10,758 10,758
Trademarks.......................................................... 90,000 90,000
Workforce........................................................... 7,100 7,100
---------- ----------
325,140 320,737
Accumulated amortization............................................ (16,623) (32,804)
---------- ----------
$ 308,517 $ 287,933
---------- ----------
---------- ----------
</TABLE>
Supply agreements represent non-cancelable customer commitments to purchase
specified quantities of disposable administration sets and probe covers at
contracted prices.
Amortization expense was $3,364, $4,672 and $16,871 during 1995, 1996 and
1997, respectively.
<TABLE>
<S> <C> <C>
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Income taxes payable.................................... $ 2,647 $ 2,721
Compensation............................................ 8,096 13,556
Warranty................................................ 16,676 12,855
Interest................................................ 3,907 4,000
Other................................................... 18,870 17,856
--------- ---------
$ 50,196 $ 50,988
--------- ---------
--------- ---------
OTHER NON-CURRENT LIABILITIES:
Deferred income tax liability........................... $ 8,943 $ 4,283
Warranty................................................ 3,039 6,225
Other................................................... 4,148 --
--------- ---------
$ 16,130 $ 10,508
--------- ---------
--------- ---------
</TABLE>
F-26
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4--NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Bank credit facility
Term loan facilities................................................ $ 200,000 $ 198,750
Revolving credit facilities......................................... 15,200 25,200
9.75% Senior Subordinated Notes due 2006.............................. 200,000 200,000
7.25% Convertible Subordinated Debentures due 2002.................... 16,152 16,152
Other................................................................. 8,741 6,028
---------- ----------
440,093 446,130
Current portion..................................................... (3,963) (14,559)
---------- ----------
Long-term debt........................................................ $ 436,130 $ 431,571
---------- ----------
---------- ----------
</TABLE>
BANK CREDIT FACILITY:
In connection with the Merger, the Company entered into a $250,000 bank
credit facility (the "Facility") with a syndicate of financial institutions
which consists of $200,000 of term loans ($75,000 Tranche A Term Loans maturing
in 2002, $42,500 Tranche B Term Loans maturing in 2003, $42,500 Tranche C Term
Loans maturing in 2004 and $40,000 Tranche D Term Loans maturing in 2005) and a
$50,000 revolving credit facility maturing in 2002 of which $25,200 in principal
was outstanding at December 31, 1997. Available funds under the revolving credit
facility ($24,300 at December 31, 1997) are based on the difference between
$50,000 and the amounts of outstanding letters of credit ($500 at December 31,
1997) and borrowings issued under the revolving credit facility. All obligations
of ALARIS Medical Systems under the Facility are guaranteed by ALARIS Medical.
Additionally, the Facility agreement permits ALARIS Medical Systems to transfer
to ALARIS Medical up to $1,500 annually to fund ALARIS Medical's operating
expenses and additional amounts sufficient to meet interest payments on the
7.25% convertible subordinated debentures.
During 1997, Tranche A, B, C and D term loans bore interest at a Eurodollar
rate plus 2.5%, 3.0%, 3.5% and 3.75%, respectively. Such total rates were 8.4%,
8.9%, 9.4% and 9.7%, respectively, at December 31, 1997. Borrowings under the
revolving credit facility bear interest at the same rate as Tranche A. The
Company has an interest rate protection agreement to reduce the impact of
changes in interest rates on its floating rate long-term debt. At December 31,
1997, the Company had outstanding an interest rate protection agreement with
commercial banks, having a total notional principal amount of $98,075. That
agreement effectively changed the Company's interest rate exposure on its
floating rate debt and resulted in a weighted average interest rate of 9.6% on
the principal balance covered.
Effective March 1998, the Facility was amended and interest rates decreased
to a Eurodollar rate plus 2.25% for the revolving credit facility and Tranche A
loans and a Eurodollar rate plus 2.5% for Tranches B, C and D.
F-27
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4--NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
The Facility contains various operating and financial covenants, as well as
certain covenants relating to reporting requirements. As of December 31, 1996
and December 31, 1997 the Company was in compliance with all such covenants.
SENIOR SUBORDINATED NOTES:
In connection with the Merger, on November 19, 1996, the Company issued
$200,000 of senior subordinated notes due 2006 (the "Notes"). The Notes bear
interest at a rate of 9.75% per annum, which is payable semi-annually on June 1
and December 1 of each year, commencing June 1, 1997. The Company is not
required to make mandatory redemption or sinking fund payments with respect to
the Notes prior to maturity. The Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after December 1, 2001 at the
redemption prices set forth in the indenture plus accrued and unpaid interest to
the date of redemption. In the event of a change of control, as defined in the
indenture, holders of the Notes will have the right to require the Company to
purchase their Notes in cash in an amount equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of repurchase.
DEBENTURES:
At December 31, 1994, the Company had outstanding 7.25% convertible
subordinated debentures due 2002 ("7.25% Debentures") in the principal amount of
$60,000. The 7.25% Debentures are convertible at the option of the holder into
common stock of the Company at any time prior to maturity, unless previously
redeemed or repurchased, at a conversion price of $18.14 per share, subject to
adjustment in certain events. The 7.25% Debentures mature on January 15, 2002,
with interest payable semi-annually on each January 15 and July 15. The 7.25%
Debentures are redeemable in whole or in part at the option of the Company at
any time on or after January 15, 1993, at the redemption prices set forth in the
indenture, together with accrued and unpaid interest. Holders may require the
Company to repurchase the 7.25% Debentures, in whole or in part, in certain
circumstances involving a change in control of the Company. The 7.25% Debentures
are subordinate to all existing or future senior indebtedness of the Company,
and are also effectively subordinated to liabilities of the Company's
subsidiaries. The indenture does not restrict the incurrence of senior
indebtedness or other indebtedness by the Company or any subsidiary.
Additionally, the 7.25% Debentures are not guaranteed by the Company's
subsidiaries.
On March 31, 1995, the Company completed an exchange (the "Exchange")
wherein $28,245, or approximately 47%, in principal amount of the 7.25%
Debentures ("Old Debentures") were exchanged for an aggregate of $14,123 in
principal amount of newly created subordinated debentures ("First Debentures")
and 1,340 shares of the Company's common stock ("Common Stock"). As a result of
this transaction, the Company recognized an extraordinary gain on the
extinguishment of debt of $8,807 (net of the write-off of unamortized debt issue
costs of $1,343 related to the Old Debentures and net of $705, the taxes
applicable to the Exchange).
On May 19, 1995, the Company completed a second exchange ("Second Exchange")
wherein $15,603 of Old Debentures were exchanged for an aggregate of $7,801 of
newly created 15% Subordinated Debentures due 1999 ("New Debentures") and 733
shares of Common Stock. In addition, the Company accepted for exchange all of
the First Debentures and Common Stock from the Exchange for an aggregate of
$14,123 of New Debentures and 1,328 shares of Common Stock. As a result of these
transactions, the
F-28
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4--NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
Company recognized an extraordinary gain on the extinguishment of debt of $6,370
(net of the write-off of unamortized debt issue costs of $727 related to the Old
Debentures and net of $362, the taxes applicable to the Second Exchange).
In connection with the Merger, the Company redeemed the remaining $21,924
principal amount of New Debentures plus a 10% premium. As a result of this
transaction, the Company recognized an extraordinary loss for the year ended
December 31, 1996, on the extinguishment of debt of $1,630, net of income tax
benefit of $878.
REFINANCINGS:
During 1994 and 1995, the Company borrowed an aggregate of $37,500 from
Decisions (the "Decisions Notes"). The Decisions Notes bore interest at 7% to
9%, were due January 4, 2001 and were used for various corporate purposes
including the repayment of other debt and acquisition of the remaining minority
interest in IMED. The Decisions Notes were convertible, at the option of the
holder, into an aggregate of up to 26,083 shares of Common Stock, at prices
ranging from $0.62 to $2.625 per share, subject to certain anti-dilution
protection. Proceeds from $25,000 of the Decisions Notes were restricted in
their use.
In connection with the Merger, the Decisions Notes in the aggregate
principal amount of $37,500 were exchanged for 29,416 shares of ALARIS Medical
common stock, including 3,333 shares issued as an inducement to convert. The
Company recognized $10,000 of debt conversion expense during the year ended
December 31, 1996 in connection with the shares issued as an inducement to
convert.
OTHER DEBT:
Other debt primarily consists of consideration owed to Siemens Infusion
Systems, Ltd. ("SIS") resulting from IVAC Medical Systems, Inc.'s acquisition of
the MiniMed product line from SIS in 1993. In accordance with the acquisition
agreement, the Company's remaining obligation to SIS is $3,000 per year or 8% of
the prior year's product sales in 1998 and 1999. The original liability was
discounted at an imputed interest rate of 7% and recorded as debt. The
unamortized discount, which is amortized using the interest method over the term
of the payments, is $303 at December 31, 1997.
Maturities of long-term debt during the years subsequent to December 31,
1997 are as follows:
<TABLE>
<S> <C>
1998.............................................................. $ 14,559
1999.............................................................. 15,569
2000.............................................................. 13,650
2001.............................................................. 21,650
2002.............................................................. 70,377
Thereafter........................................................ 310,325
---------
$ 446,130
---------
---------
</TABLE>
F-29
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5--INCOME TAXES
The provision for income taxes comprises the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
---------- --------- ---------
<S> <C> <C> <C>
Current:
Federal.................................................... $ 221 $ -- $ --
State...................................................... 1,524 609 94
Foreign.................................................... 157 1,000 4,511
---------- --------- ---------
Total Current............................................ 1,902 1,609 4,605
---------- --------- ---------
Deferred:
Federal.................................................... (9,132) (1,964) (6,984)
State...................................................... (2,613) (307) (745)
Foreign.................................................... 469 (68) (176)
---------- --------- ---------
Total Deferred........................................... (11,276) (2,339) (7,905)
---------- --------- ---------
Provision (benefit) for income taxes..................... $ (9,374) $ (730) $ (3,300)
---------- --------- ---------
---------- --------- ---------
</TABLE>
The principal items accounting for the differences in income taxes computed
at the U.S. statutory rate (34%) and the effective income tax rate comprise the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
---------- ---------- ---------
<S> <C> <C> <C>
Taxes computed at statutory rate.......................... $ 3,197 $ (22,554) $ (4,395)
State income taxes, net of federal benefit................ 1,018 199 (492)
Effect of foreign operations.............................. 105 3,516 649
Amortization of non-deductible intangible assets.......... 442 574 1,944
Federal tax credits....................................... -- (2,343) (513)
Debt conversion expense................................... -- 3,400 --
Acquired in-process research and development.............. -- 14,960 --
Items affected by valuation allowance..................... (14,136) 1,243 --
Other, net................................................ -- 275 (493)
---------- ---------- ---------
Provision for income taxes before extraordinary item...... (9,374) (730) (3,300)
---------- ---------- ---------
Extraordinary item:
Taxes computed at statutory rate.......................... 5,523 (853) --
State income taxes, net of federal benefit................ 488 (25) --
Items affected by valuation allowance..................... (4,944) -- --
---------- ---------- ---------
1,067 (878) --
---------- ---------- ---------
Total....................................................... $ (8,307) $ (1,608) $ (3,300)
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
F-30
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5--INCOME TAXES (CONTINUED)
The components of the net deferred tax assets included in other assets as of
December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................................... $ 17,431 $ 20,074
Accrued liabilities and reserves...................................... 20,783 19,019
Unearned income....................................................... 1,979 2,126
Credit carryforwards.................................................. 4,699 5,156
Inventory............................................................. 1,713 2,771
Property, plant and equipment......................................... -- 926
Miscellaneous......................................................... 850 1,157
--------- ---------
47,455 51,229
Valuation allowance................................................... (1,673) (1,427)
--------- ---------
Total deferred tax assets........................................... 45,782 49,802
Deferred tax liabilities:
Property, plant and equipment......................................... 86 --
Intangible assets..................................................... 36,979 33,973
Miscellaneous......................................................... 1,459 977
--------- ---------
Net deferred tax assets................................................. $ 7,258 $ 14,852
--------- ---------
--------- ---------
</TABLE>
As of December 31, 1997, the Company had federal and state net operating
loss carryforwards of approximately $56,284 and $20,291, respectively.
Additionally, as of December 31, 1997, the Company had a foreign tax credit
carryforward and an alternative minimum tax credit carryforward of approximately
$2,595 and $552, respectively, for federal tax purposes and research and
development tax credits of approximately $1,814 and $294 for federal and state
purposes, respectively. The federal and state net operating loss carryforwards
expire from 1998 to 2012. The foreign tax credit expires from 2001 to 2002 and
the research and development tax credits expire from 2005 to 2011.
As a result of certain changes in the Company's stock ownership which
occurred during 1996, portions of the above described carryforwards are subject
to annual income offset limitations on a prospective basis. Accordingly,
approximately $28,689 and $4,985 of the respective federal and state net
operating loss carryforwards, approximately $552 of the federal alternative
minimum tax credit carryforward and approximately $1,659 and $294 of the
respective federal and state research and development credits are subject to a
general annual income offset limitation of approximately $4,000. Additionally,
certain built-in gains recognized by the Company will increase the annual
utilization rate of the net operating losses. The Company also possesses certain
unrealized built-in losses which will be subject to the annual utilization
limitation when recognized.
F-31
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6--STOCK OPTION PLANS
The Company maintains several stock option plans under which incentive stock
options may be granted to key employees of the Company and nonqualified stock
options may be granted to key employees, directors, officers, independent
contractors and consultants.
The exercise price for incentive stock options generally may not be less
than the underlying stock's fair market value at the grant date. The exercise
price for non-qualified stock options granted to non-directors will not be less
than the par value of a share of common stock, as determined by a committee
appointed by the Board of Directors ("the Committee"). The exercise price for
non-qualified stock options granted to directors may not be less than the
underlying stock's fair market value at the grant date.
Options granted to non-directors generally vest and become exercisable as
determined by the Committee. Options granted to directors generally vest and
become exercisable over a three-year period. Options granted to non-directors
generally expire upon the earlier of the termination of the optionee's
employment, with vested options expiring one year after termination of
employment, or ten years from the grant date. Options granted to directors
generally expire upon the earlier of the date the optionee is no longer a
director or five years from the grant date.
STOCK OPTION ACTIVITY:
Activity for 1995, 1996 and 1997 with respect to these plans is as follows:
<TABLE>
<CAPTION>
SHARES OPTION
UNDERLYING PRICE PER
OPTIONS SHARE
---------- --------------
<S> <C> <C>
Outstanding at December 31, 1994.......................................................... 328 $4.47 - $16.94
Granted................................................................................. 1,270 $1.81 - $ 3.03
Canceled................................................................................ (505) $1.81 - $16.94
-----
Outstanding at December 31, 1995.......................................................... 1,093 $1.81 - $ 6.93
Granted................................................................................. 2,861 $2.28 - $ 3.78
Exercised............................................................................... (14) $1.81 - $ 1.81
Canceled................................................................................ (312) $1.81 - $ 3.47
-----
Outstanding at December 31, 1996.......................................................... 3,628 $1.81 - $ 6.93
Granted................................................................................. 936 $3.19 - $ 6.22
Exercised............................................................................... (125) $1.81 - $ 3.69
Canceled................................................................................ (479) $1.81 - $ 4.16
-----
Outstanding at December 31, 1997.......................................................... 3,960
-----
-----
</TABLE>
At December 31, 1997, options for 1,244 shares were exercisable at
$1.81-$6.93 under the plans and 731 shares were available for future grant.
Additionally, as of December 31, 1997, 4,691 shares of common stock were
reserved for issuance pursuant to the Company's stock option plans.
The Company adopted Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123) during the year ended December 31, 1996. In
accordance with the provisions of SFAS 123, the Company applied APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plans and does not recognize compensation expense for its
F-32
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6--STOCK OPTION PLANS (CONTINUED)
stock-based compensation plans other than for options granted to non-employees.
If the Company had elected to recognize compensation expense based upon the fair
value at the grant date for awards under these plans consistent with the
methodology prescribed by SFAS 123, the Company's net income or loss would be
reduced/increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
Net income (loss):
As reported.............................................. $ 27,454 $ (67,236) $ (9,626)
Pro forma................................................ $ 26,975 $ (68,235) $ (11,836)
</TABLE>
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over the
vesting period and additional options may be granted in future years. The fair
value for these options was estimated at the date of grant using the Black-
Scholes option pricing model with the following weighted average assumptions for
the years ended December 31, 1995, 1996 and 1997, respectively; dividend yields
of 0%, expected volatility of 183%, 180% and 164%, risk free interest rates of
6.5%, 6.2% and 5.8%, and expected lives ranging from 2 to 7 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because ALARIS Medical's employee stock options have characteristics
significantly different from those of traded options, and because changes in
subjective input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock based compensation plans.
The following table summarizes information about employee stock-based
compensation plans outstanding at December 31, 1997:
OPTIONS OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE-YEARS PRICE EXERCISABLE PRICE
- -------------- ------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
$1.81 - $2.94.. 752 7.16 $ 2.12 293 $ 2.05
$3.00 - $3.09.. 2,288 10.63 $ 3.02 845 $ 3.02
$3.19 - $3.69.. 812 9.64 $ 3.52 216 $ 3.56
$3.75 - $6.09.. 102 3.76 $ 4.03 10 $ 3.87
$6.13 - $6.93.. 6 3.78 $ 6.26 -- $ 6.93
- -------------- ----- ----- ----- ----- -----
$1.81 - $6.93.. 3,960 9.58 $ 2.98 1,364 $ 2.90
- -------------- ----- ----- ----- ----- -----
- -------------- ----- ----- ----- ----- -----
</TABLE>
F-33
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7--BENEFIT PLANS
PENSION PLANS:
The Company had a defined benefit pension plan (the "Plan") which covered
substantially all of its U.S. employees as of December 31, 1993. On December 1,
1993, the Company's Board of Directors approved amendments to the Plan
provisions which include, among other matters, cessation of benefit accruals
after December 1, 1993. All earned benefits as of that date were preserved and
the Company will continue to contribute to the Plan as necessary to fund earned
benefits. No contributions to the Plan were required during 1995, 1996 or 1997
due to the prepaid position of the Plan during those years.
The following table sets forth the Plan's estimated funded status and
amounts recognized in the Company's balance sheet:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation............................................. $ 9,733 $ 11,425
--------- ---------
--------- ---------
Accumulated benefit obligation........................................ $ 9,822 $ 11,442
--------- ---------
--------- ---------
Projected benefit obligation for service rendered to date............... $ 9,822 $ 11,442
Plan assets at fair value, consisting of equity and fixed income mutual
funds................................................................. 13,053 15,838
--------- ---------
Plan assets greater than projected benefit obligation................... 3,231 4,396
Unrecognized net gain................................................... (2,940) (3,761)
--------- ---------
Prepaid pension cost.................................................... $ 291 $ 635
--------- ---------
--------- ---------
</TABLE>
The components of net periodic pension cost (benefit) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Service cost during the period................................ $ 146 $ 181 $ 210
Interest cost on projected benefit obligation................. 608 706 725
Actual return on Plan assets.................................. (2,494) (1,896) (2,970)
Amortization and deferred amounts............................. 1,666 886 1,691
--------- --------- ---------
Net periodic pension cost (benefit)........................... $ (74) $ (123) $ (344)
--------- --------- ---------
--------- --------- ---------
Assumptions used in the accounting are as follows:
Discount rates.............................................. 6.82% 7.45% 6.64%
Rates of increase in compensation levels.................... N/A N/A N/A
Expected long-term rates of return on assets................ 9.00% 9.00% 9.00%
</TABLE>
F-34
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8--LEASES
LEASE RECEIVABLES:
The Company leases instruments to customers under capital and operating
lease contracts with terms ranging generally from 1 to 6 years. Certain capital
lease agreements obligate the lessee to purchase a specified annual minimum of
disposable sets and payment of liquidating damages if the agreement is
terminated by the lessee. Anticipated future minimum amounts due under operating
leases and capital lease receivables as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING DECEMBER 31,: LEASES LEASES
- ------------------------------------------------------------------------ ----------- ---------
<S> <C> <C>
1998.................................................................... $ 1,785 $ 22,549
1999.................................................................... 837 14,829
2000.................................................................... 369 9,553
2001.................................................................... 37 5,946
2002.................................................................... 28 3,776
Thereafter.............................................................. -- 2,398
----------- ---------
Total minimum lease receivables..................................... $ 3,056 $ 59,051
----------- ---------
----------- ---------
</TABLE>
The net investment in sales-type leases consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Minimum lease payments................................................ $ 56,534 $ 59,051
Unguaranteed residual value of leased equipment....................... 789 753
Unearned interest income.............................................. (10,750) (14,136)
Allowance for uncollectible lease receivables......................... (2,502) (1,881)
---------- ----------
Net investment in sales-type leases................................... 44,071 43,787
Current portion....................................................... (16,795) (13,383)
---------- ----------
Net investment in sales-type leases, less current portion............. $ 27,276 $ 30,404
---------- ----------
---------- ----------
</TABLE>
F-35
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8--LEASES (CONTINUED)
LEASE COMMITMENTS:
The Company leases buildings and equipment under non-cancelable operating
leases with terms ranging from 2 to 10 years. Scheduled future minimum lease
commitments as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,:
- -----------------------------------------------------------------------------------
<S> <C>
1998............................................................................... $ 3,769
1999............................................................................... 4,230
2000............................................................................... 4,250
2001............................................................................... 4,300
2002............................................................................... 4,263
Thereafter......................................................................... 15,343
---------
$ 36,155
---------
---------
</TABLE>
Rental expense was $3,149, $3,474 and $4,722 during 1995, 1996 and 1997,
respectively.
NOTE 9--RESTRUCTURING, INTEGRATION AND OTHER NON-RECURRING CHARGES
In connection with the Merger, management performed a review of the
operating activities of both IMED and IVAC Medical Systems, Inc. in order to
reduce costs and maximize synergies. Management identified duplicative costs to
eliminate and developed and implemented plans to consolidate and integrate the
companies' operations including product strategies, manufacturing, service
centers, research and development, marketing and other administrative functions.
As a result, the Company has recorded non-recurring charges related to the
implementation of these plans in the amount of approximately $15,300 and $20,900
in 1996 and 1997, respectively.
F-36
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9--RESTRUCTURING, INTEGRATION AND OTHER NON-RECURRING CHARGES (CONTINUED)
The following summarizes the significant components of the Company's 1996
and 1997 restructuring, integration and other non-recurring charges included in
the Consolidated Statement of Operations:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1996 1997
--------- ---------
(IN MILLIONS)
<S> <C> <C>
RESTRUCTURING
Severance and related benefits........................................... $ 4.4 $ 1.3
Cost to vacate facilities................................................ 3.4 --
Write-off unused furniture, fixtures and equipment....................... 1.5 --
Distributor terminations................................................. .8 --
Other.................................................................... .5 --
--------- ---------
Total restructuring.................................................... 10.6 1.3
INTEGRATION AND OTHER NON-RECURRING CHARGES
Information systems conversion costs..................................... -- 4.8
Write-off of product distribution license................................ -- 4.5
Maquiladora settlement and related costs................................. -- 4.1
Write-off of instrument tooling.......................................... -- 1.7
Facilities moving expenses and Company name change....................... -- 1.6
Consulting and bonuses................................................... 4.7 1.4
Other.................................................................... -- 1.5
--------- ---------
Total restructuring, integration and other non-recurring
charges.............................................................. $ 15.3 $ 20.9
--------- ---------
--------- ---------
</TABLE>
The Company has reviewed its products and related research and development
activities and market opportunities in order to focus on projects that will
provide greater competitive advantage and stockholder return. That review
resulted in the termination and write-off of a product distribution and license
agreement with a third party developer of an ambulatory and alternate site
infusion pump. The $4,500 charge related to such termination is included in the
1997 integration cost and includes a $4,300 non-cash charge representing the
intangible asset that had been recorded associated with such agreement.
On June 26, 1997, the Company entered into a settlement agreement which
resolved its contract dispute with Cal Pacifico of California and affiliated
entities (collectively, "Cal Pacifico"), the operator of the Company's two
maquiladora assembly plants in Tijuana, Mexico. For over eight years, the
Company has assembled disposable administration sets at these two plants, which
utilized more than 1,200 workers employed by Cal Pacifico, under a contract with
Cal Pacifico. The dispute originated in April 1997 when the Company, in
accordance with the terms of such contract, informed Cal Pacifico that it would
be terminating its contractual arrangements effective August 1, 1997. Cal
Pacifico objected to such notification and proposed the systematic termination
of the work force. In response to such objection, the Company on June 6, 1997
hired substantially all of the workers at the plants directly. On June 11, 1997,
Cal Pacifico locked the Company's administrative personnel and production
employees out of the plants and
F-37
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9--RESTRUCTURING, INTEGRATION AND OTHER NON-RECURRING CHARGES (CONTINUED)
would not allow the Company access to its production equipment or inventory. As
a result of the settlement agreement, the assembly plants resumed full
operations on June 27, 1997 and Cal Pacifico provided the Company with
assistance as it transitioned into the direct operation of such plants. The
Company began operating these plants directly during the third quarter of 1997.
The Company recorded a non-recurring charge of $4,100 during the quarter
ended June 30, 1997 relating to this settlement and the legal fees and other
costs associated therewith. The individual costs included within such
non-recurring charge consist of approximately $2,700 of settlement and legal
fees and approximately $1,400 of idle labor costs and start-up costs incurred in
connection with the implementation of the interim assembly plans discussed
below.
In addition to restructuring and integration costs included in the
Consolidated Statement of Operations, estimated dealer termination costs as well
as severance and benefits costs related to the acquired company's personnel in
the amount of approximately $2,800 were also accrued at the acquisition date. In
accordance with generally accepted accounting principles, such items effectively
increased the amount of goodwill recorded in connection with the Merger and were
not included in the approximately $15,300 restructuring and integration expense
included in the consolidated statement of operations for the year ended December
31, 1996.
In connection with the Company's restructuring plans, in December 1996
management provided termination notifications to 225 employees from all
functional areas of the Company. Accrued restructuring costs at December 31,
1996 includes approximately $4,400 of employee termination costs which were
charged to the 1996 consolidated operating results and approximately $1,800 of
employee termination costs which were recorded in purchase accounting.
The Company paid approximately $260 and $27,000 during 1996 and 1997,
respectively, for restructuring and integration activites. The Company has
approximately $15,100 and $1,700 accrued related to restructuring and
integration costs at December 31, 1996 and 1997, respectively. The Company
anticipates that the remaining accrued restructuring and integration costs will
be paid during 1998.
F-38
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10--EARNINGS PER SHARE
In February, 1997 the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128") which specifies the computation, presentation, and disclosure requirements
for earnings per share. The earnings per share information contained in these
financial statements, including those presented for prior periods, conform with
SFAS 128.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
--------- ---------- ---------
<S> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE
Income (loss) before extraordinary item................... $ 12,277 $ (65,606) $ (9,626)
Less: dividends and accretion on mandatorily redeemable
preferred stock......................................... (650) (962) --
--------- ---------- ---------
Income available to common stockholders before
extraordinary item...................................... 11,627 (66,568) (9,626)
Extraordinary item........................................ 15,177 (1,630) --
--------- ---------- ---------
Net income (loss) available to common stockholder......... $ 26,804 $ (68,198) $ (9,626)
--------- ---------- ---------
--------- ---------- ---------
Weighted average common shares outstanding during the
period.................................................. 15,506 20,343 58,644
Basic earnings per share before extraordinary item........ $ 0.75 $ (3.27) $ (0.16)
Extraordinary item........................................ 0.98 (0.08) --
--------- ---------- ---------
Basic earnings per share.................................. $ 1.73 $ (3.35) $ (0.16)
--------- ---------- ---------
--------- ---------- ---------
DILUTED EARNINGS PER SHARE
Income available to common stockholders before
extraordinary item...................................... $ 11,627
Plus convertible preferred dividends...................... 320
Plus the after-tax interest associated with convertible
debt.................................................... 684
---------
Income available to common stockholders plus assumed
conversions before extraordinary item................... 12,631
Extraordinary item........................................ 15,177
---------
Net income available to common stockholder assuming
dilution................................................ $ 27,808
---------
---------
</TABLE>
F-39
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10--EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
--------- ---------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding during the
period.................................................. 15,506
Common stock options...................................... 249
Convertible preferred stock............................... 205
Convertible securities.................................... 17,276
---------
Weighted average common shares outstanding during the
period, including dilutive potential common shares...... 33,236
---------
---------
Earnings per share before extraordinary items, assuming
dilution................................................ $ 0.38
Extraordinary item........................................ 0.46
---------
Earnings per share assuming dilution...................... $ 0.84
---------
---------
</TABLE>
1995
The Company's convertible securities in 1995 consist of convertible
promissory notes issued to Decisions. Since conversion was assumed from the
beginning of the period or date of issuance, if later, net income attributable
to common stock for the year ended December 31, 1995 has been increased by $684
for the interest expense (net of tax) on the convertible promissory notes.
Convertible preferred stock in 1995 consists of 333 shares of mandatorily
redeemable convertible preferred stock issued to a stockholder or entities
controlled by the stockholder. The conversion was assumed as of the beginning of
the period at a conversion rate of 0.617, resulting in an increase of 205 common
shares.
The Company's 7.25% Debentures were not included in the calculation of
diluted earnings per share in 1995 as they are antidilutive. The $16,152 of
convertible debentures, if converted at an exercise price of $18.14 per share,
would result in an increase of 890 common shares and an increase of $703, net of
taxes, to net income, due to the reduction in interest expense.
1996
Net loss per common share assuming no dilution and dilution are the same for
1996, as the Company experienced a net loss for the year ended December 31,
1996. Potential common shares for 1996, if converted, would include the
convertible preferred stock and convertible debentures described in 1995 EPS.
Options outstanding at December 31, 1996 were not included in the computation of
diluted EPS because income before extraordinary item was a loss and the effect
would be antidilutive. Had such options been included, the weighted average
shares would have increased by 370.
F-40
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10--EARNINGS PER SHARE (CONTINUED)
1997
Net loss per common share assuming no dilution and dilution are the same for
1997, as the Company experienced a net loss for the year ended December 31,
1997. The 7.25% convertible debentures were excluded due to their antidilutive
nature. Options outstanding at December 31, 1997 were not included in the
computation of diluted EPS because income before extraordinary item was a loss
and the effect would be antidilutive. Had such options been included, the
weighted average shares would have increased by 1,361.
NOTE 11--RELATED PARTY ARRANGEMENTS
In October 1991, the Company entered into a marketing, distribution and
development arrangement with Pharmacia and Upjohn, Inc. ("Pharmacia") (the
"Pharmacia Transaction"), pursuant to which Pharmacia obtained the exclusive
right to market and distribute IMED's infusion products in a territory that
included most of Europe. During 1996, the Company entered into an agreement with
Pharmacia to reacquire for approximately $11,000 the European distribution
rights to IMED's intravenous infusion pumps and related disposable
administration sets and certain related assets. The purchase price was allocated
between the tangible assets and the distribution fee based upon their estimated
fair values. The amount allocated to the distribution fee has been capitalized
net of the unamortized deferred revenue resulting from the 1991 sale of the
aforesaid European distribution rights to Pharmacia which was being amortized
over the 15-year term of the original distribution agreement. The net
distribution fee is being amortized over approximately 10 years, which
represents the remaining term of the original distribution agreement.
In June 1996, ALARIS Medical purchased GECC's warrant to acquire common
shares equal to 10% of IMED's common stock, on a fully diluted basis, for
$12,500. The warrant acquired by ALARIS Medical was then canceled.
Effective June 30, 1996, ALARIS Medical made non-cash contributions totaling
$41,160 to IMED. Included in this capital contribution was $2,885, representing
ALARIS Medical's net carrying value of certain patents which up to June 30, 1996
had been licensed to IMED for $1,100 per year. Amounts accrued to ALARIS Medical
under this license, as well as other intercompany charges due to ALARIS Medical
totaling $9,399 were contributed to IMED. Additionally, ALARIS Medical
contributed $8,776 representing the outstanding par value and accrued dividends
on all outstanding shares of IMED's 12% preferred stock, all of which were owned
by ALARIS Medical. The preferred shares were then canceled.
Included in the $41,160 non-cash contribution are tax payments due from IMED
to ALARIS Medical. Pursuant to IMED's tax sharing agreement with ALARIS Medical,
for Federal and California income tax purposes, IMED was required to calculate
its current income tax liability on a stand-alone basis as if it were not
included in the ALARIS Medical consolidated income tax return. The resulting tax
liability was payable to ALARIS Medical. Due to restrictions on payments from
IMED to ALARIS Medical contained in the GECC revolving credit facility
agreement, income tax payments to ALARIS Medical were limited to actual tax
liabilities of the ALARIS Medical consolidated group. Due to losses incurred at
the ALARIS Medical level which have served to reduce the consolidated taxable
income, the income tax liabilities recorded by IMED on a stand-alone basis have
been significantly greater than the amounts actually paid to ALARIS Medical. As
of June 30, 1996 ALARIS Medical agreed to contribute to IMED's stockholder's
F-41
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 11--RELATED PARTY ARRANGEMENTS (CONTINUED)
equity, income tax payments due from IMED but which could not be paid pursuant
to the GECC revolving credit facility. As a result of this agreement,
approximately $20,100 was credited to IMED's capital in excess of par and the
corresponding income tax liabilities were eliminated from the IMED consolidated
balance sheet. Such liabilities amounted to approximately $18,900 at December
31, 1995 and were included in non-current liabilities as amounts due to related
parties at December 31, 1995.
During November 1996, in connection with the Merger, ALARIS Medical
contributed $19,588 to IMED.
During 1994 and 1995, the Company issued the Decisions Notes. During
November 1996, in connection with the Merger, the Decisions Notes in the
aggregate principal amount of $37,500 were exchanged for 29,416 shares of ALARIS
Medical common stock, including 3,333 shares issued as an inducement to convert.
Additionally, Decisions was issued 13,333 shares of ALARIS Medical common stock
for aggregate proceeds of $40,000.
During June 1997, ALARIS Medical made a cash contribution of $3,052 to
ALARIS Medical Systems, of which $1,457 paid off intercompany charges due to
ALARIS Medical Systems and $1,595 was contributed to capital.
NOTE 12--PARENT GUARANTOR OF SUBSIDIARY DEBT
All obligations of ALARIS Medical Systems under the Facility (Note 4) are
guaranteed by ALARIS Medical and each existing and subsequently formed or
acquired domestic subsidiary of ALARIS Medical. Summarized financial information
of ALARIS Medical Systems, the issuer of the Facility, at December 31, 1996 and
1997 and for the years ended December 31, 1995, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
CONDENSED BALANCE SHEET
Current assets...................................................... $ 178,124 $ 175,309
Non-current assets.................................................. 408,017 387,797
---------- ----------
$ 586,141 $ 563,106
---------- ----------
---------- ----------
Current liabilities................................................. $ 93,655 $ 90,225
Long-term debt and other non-current liabilities.................... 442,465 433,934
---------- ----------
536,120 524,159
---------- ----------
Total common stock and other stockholder's equity................... 50,021 38,947
---------- ----------
$ 586,141 $ 563,106
---------- ----------
---------- ----------
</TABLE>
F-42
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12--PARENT GUARANTOR OF SUBSIDIARY DEBT (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
CONDENSED STATEMENT OF OPERATIONS
Sales................................................ $ 112,551 $ 136,371 $ 359,077
Cost of sales........................................ 63,270 78,642 188,340
---------- ----------- -----------
Gross margin......................................... 49,281 57,729 170,737
Total operating expense.............................. (32,846) (103,838) (139,950)
Lease interest income................................ 2,333 2,501 4,559
---------- ----------- -----------
Income (loss) from operations........................ 18,768 (43,608) 35,346
Total other expense.................................. 2,403 5,796 44,274
Provision for (benefit from) income taxes............ 8,099 1,270 (1,900)
---------- ----------- -----------
Net income (loss).................................... $ 8,266 $ (50,674) $ (7,028)
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
NOTE 13--GEOGRAPHIC INFORMATION
The Company operates primarily in four geographic locations: United States,
Europe, Canada and Australia. United States sales to unaffiliated customers
include export sales to customers located outside of the United States of
$10,643, $11,677 and $25,197 for the years ended December 31, 1995, 1996 and
1997, respectively.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
SALES TO UNAFFILIATED CUSTOMERS:
United States.......................................... $ 102,830 $ 111,877 $ 252,199
Europe................................................. -- 11,394 82,259
Canada................................................. 3,880 5,377 13,512
Australia.............................................. 5,841 7,723 11,107
---------- ---------- ----------
Sales as reported in the accompanying statement of
operations......................................... $ 112,551 $ 136,371 $ 359,077
---------- ---------- ----------
---------- ---------- ----------
INTERGEOGRAPHIC SALES:
United States.......................................... $ 6,973 $ 17,133 $ 64,404
Europe................................................. -- 2,891 12,924
---------- ---------- ----------
Total intergeographic sales.......................... $ 6,973 $ 20,024 $ 77,328
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-43
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 13--GEOGRAPHIC INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
INCOME (LOSS) BEFORE INCOME TAXES:
United States.......................................... $ 16,143 $ (44,740) $ 6,611
Europe................................................. -- (1,686) 19,994
Canada................................................. (194) (248) 841
Australia.............................................. 1,123 1,253 5,006
Eliminations and adjustments........................... (21) 63 38
---------- ---------- ----------
Income (loss) from operations.......................... 17,051 (45,358) 32,490
Interest expense....................................... (8,153) (13,393) (44,413)
Interest income........................................ 192 1,193 532
Debt conversion expense................................ -- (10,000) --
Other, net............................................. 313 1,222 (1,535)
---------- ---------- ----------
Income (loss) before income taxes.................... $ 9,403 $ (66,336) $ (12,926)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
IDENTIFIABLE ASSETS:
United States....................................................... $ 552,168 $ 619,903
Europe.............................................................. 52,826 34,539
Canada.............................................................. 5,855 1,644
Australia........................................................... 6,405 6,475
Eliminations and adjustments........................................ (23,872) (97,264)
---------- ----------
Total assets as reported in the accompanying balance sheet........ $ 593,382 $ 565,297
---------- ----------
---------- ----------
</TABLE>
NOTE 14--CASH FLOW INFORMATION
Federal, state and foreign income taxes paid during 1995, 1996 and 1997
totaled $1,726, $3,592 and $3,884, respectively. Interest paid during 1995, 1996
and 1997 totaled $6,097, $8,960 and $40,576, respectively.
The Company sold 80,000 shares for $859 and 433 shares for $2,374 of its
Alteon common stock during 1995 and 1996, respectively. These sales resulted in
realized gains of $546 and $686 for the years ended December 31, 1995 and 1996,
respectively.
In connection with the Merger, the Company redeemed all outstanding shares
of its 10% Preferred Stock and Convertible Preferred Stock, plus accrued and
unpaid dividends for $7,844.
F-44
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 15--CONTINGENCIES AND LITIGATION
FIELD CORRECTION
The Company has initiated a voluntary field correction of approximately
50,000 of its Gemini model PC-1 and PC-2 infusion pumps because failure of
specific electrical components on the power regulator printed circuit board may
result in improper regulation of the battery charge voltage, which can cause the
battery to overheat. Such overheating could result in product failure and
discharge of hydrogen gas which may accumulate within the instrument's case. As
an interim measure, the Company has advised its customers of simple precautions
that can be taken to minimize the potential for an adverse incident pending
completion of the field correction. The Company is not aware of any injuries
sustained in known battery overcharging incidents.
As a result of this decision, the Company recorded a charge of $2,500 to
cost of sales during the first quarter of 1997. Based on management's current
understanding of these incidents, the Company believes it has adequately accrued
for this matter. However, since the Company's analysis of this matter is
preliminary, there can be no assurances that it can be resolved for an amount
consistent with management's estimated cost.
LITIGATION
The Company is a defendant in a lawsuit filed in June 1996 by Sherwood
Medical, Inc. against IVAC which alleges infringement of two patents by reason
of certain activities including the sale by IVAC of disposable probe covers for
use with the Company's infrared tympanic thermometer. The lawsuit seeks
injunctive relief, treble damages and the recovery of costs and attorney fees.
The Company believes it has sufficient defenses to all claims, including the
defenses of noninfringement and invalidity and intends to vigorously defend this
action. However, there can be no assurance that the Company will successfully
defend all claims made by Sherwood and the failure of the Company to
successfully prevail in this lawsuit could have a material adverse effect on the
Company's operations, financial condition and cash flows.
The Company is a defendant in a QUI TAM lawsuit filed by a former IMED
employee in the United States District Court for the Northern District of
Illinois. On November 15, 1996, an amended complaint was filed which alleges
fraud in the inducement, breach of employment contract, common law fraud and
violations of the Federal False Claims Act and Medicare Fraud and Abuse Act. To
date, the United States has declined to intervene in this action. The Company
believes it has sufficient defenses to all claims by the plaintiff. However,
there can be no assurance that the Company will successfully defend all claims
made in this lawsuit and the failure of the Company to prevail in this lawsuit
could have a material adverse effect on the Company's operations, financial
condition and cash flows.
UNITED STATES CUSTOMS SERVICE MATTER
During the years 1988 through 1995, Cal Pacifico acted as the Company's
United States customs broker and importer of record with respect to the
importation into the United States of finished products ("Finished Products")
assembled at the Company's two maquiladora assembly plants in Tijuana, Mexico.
In May 1995, Cal Pacifico received a pre-penalty notice from the United States
Customs Service ("Customs") to the effect that Customs intended to assess
additional duties and substantial penalties against Cal Pacifico for its alleged
failure, during the years 1988 through 1992, to comply with certain documentary
requirements regarding the importation of goods on behalf of its clients,
including the
F-45
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 15--CONTINGENCIES AND LITIGATION (CONTINUED)
Company. Customs recently assessed additional duties with respect to Cal
Pacifico's importation of goods on behalf of its clients, including the
importation of the Company's Finished Products, for the years 1993 and 1994, and
it is anticipated that Customs will issue a pre-penalty notice to Cal Pacifico
in respect of these years as well (collectively with the amounts referred to in
the immediately preceding sentence, the "Disputed Amounts"). The Company has
been advised by its special Customs counsel that, under applicable law, no
person, by fraud, gross negligence or negligence, may (i) import merchandise
into the commerce of the United States by means of any material and false
document, statement or act, or any material omission, or (ii) aid or abet any
other person to import merchandise in such manner. No proceeding has been
initiated by Customs against the Company in respect of the matters which are the
subject of the proceeding against Cal Pacifico. Since Cal Pacifico was the
Company's United States customs broker and importer of record during each of the
foregoing years, the Company believes that it is unlikely that Customs will
assess against the Company any portion of the Disputed Amounts.
Cal Pacifico is contesting Customs' assessment of the Disputed Amounts. Cal
Pacifico's challenge to the assessment of the Disputed Amounts is in its
preliminary stages. Given the present posture of Cal Pacifico's challenge, and
the inherent uncertainty of contested matters such as this, it is not possible
for the Company to express an opinion as to the likelihood that Cal Pacifico
will prevail on its challenge. The Company has not been informed by Cal Pacifico
or Customs as to the specific amount of the Disputed Amounts.
Cal Pacifico has advised the Company that, should Cal Pacifico's challenge
to the assessment of the Disputed Amounts prove to be unsuccessful, it will seek
recovery from the Company, through arbitration, for any portion of the Disputed
Amounts which it is required to pay to Customs. As part of the settlement
agreement which resolved the Company's contract dispute with Cal Pacifico, the
Company paid Cal Pacifico $550, which is to be applied toward Cal Pacifico's
payment of Disputed Amounts. The $550 payment by the Company is to be credited
toward any portion of the Disputed Amounts which the arbitrator determines the
Company owes to Cal Pacifico. The actual amount so determined by the arbitrator
may be less or greater than $550. Although the ultimate outcome of such an
arbitration proceeding cannot be guaranteed, the Company believes that it has
meritorious defenses to claims with respect to Disputed Amounts which Cal
Pacifico might raise against the Company. These defenses would be based, among
other factors, on the contractual relationship between the Company and Cal
Pacifico (including a defense with respect to the availability of
indemnification under the agreements between Cal Pacifico and the Company), the
conduct of Cal Pacifico with respect to both the Company and Customs, and the
compliance obligations of Cal Pacifico under applicable customs laws. Inasmuch
as Cal Pacifico's challenge before Customs is still pending and any claim
against the Company for indemnification would be based on Cal Pacifico's
ultimate lack of success in that challenge, and inasmuch as any arbitration
proceeding by which Cal Pacifico might seek indemnification has not been filed
nor has Cal Pacifico committed itself to the theories under which it might seek
indemnification or the recovery of damages from the Company, it is not possible
for the Company to express an opinion at this time as to the likelihood of an
unfavorable outcome in such a proceeding.
F-46
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 15--CONTINGENCIES AND LITIGATION (CONTINUED)
OTHER
The Company is also a defendant in various actions, claims, and legal
proceedings arising from its normal business operations. Management believes
they have meritorious defenses and intends to vigorously defend against all
allegations and claims. As the ultimate outcome of these matters is uncertain,
no contingent liabilities or provisions have been recorded in the accompanying
financial statements for such matters. However, in management's opinion, based
on discussions with legal counsel, liabilities arising from such matters, if
any, will not have a material adverse effect on consolidated financial position,
results of operations or cash flows.
F-47
<PAGE>
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 16--SUMMARIZED QUARTERLY DATA (UNAUDITED)
The following financial information reflects all normal recurring
adjustments which are, in the opinion of management, necessary for a fair
statement of the results of the interim periods. Summarized quarterly data for
fiscal 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
IN THOUSANDS, EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C>
1997
Sales..................................................... $ 81,995 $ 88,072 $ 86,830 $ 102,180
Gross margin.............................................. 35,025 40,711 44,430 50,571
Income (loss) from operations............................. 3,718 (725) 14,260 15,237
Net (loss) income......................................... (4,315) (7,002) 1,094 597
(Loss) income per common share assuming no dilution (1)... $ (.07) $ (.12) $ .02 $ .01
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
(Loss) income per common share assuming dilution (1)...... $ (.07) $ (.12) $ .02 $ .01
----------- ----------- ----------- -----------
1996
Sales..................................................... $ 25,875 $ 28,216 $ 27,679 $ 54,601
Gross margin.............................................. 11,980 12,460 12,599 20,716
Income (loss) from operations............................. 3,595 3,849 4,002 (56,804)
Income (loss) before extraordinary item................... 859 1,150 779 (68,394)
Extraordinary item--loss on early retirement of debt, net
of taxes................................................ -- -- -- (1,630)
----------- ----------- ----------- -----------
Net income (loss)......................................... 859 1,150 779 (70,024)
Income (loss) per common share assuming no dilution (1):
Income (loss) before extraordinary item................. $ .04 $ .06 $ .04 $ (2.09)
Extraordinary item...................................... -- -- -- (.05)
----------- ----------- ----------- -----------
Net income (loss)................................... $ .04 $ .06 $ .04 $ (2.14)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income (loss) per common share assuming dilution (1):
Income (loss) before extraordinary item................. $ .03 $ .03 $ .03 $ (2.09)
Extraordinary item...................................... -- -- -- (.05)
----------- ----------- ----------- -----------
Net income (loss)................................... $ .03 $ .03 $ .03 $ (2.14)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- ------------------------
(1) Income (loss) per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly net income (loss) per share
will not necessarily equal the total for the year.
F-48
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
IVAC Holdings, Inc.
In our opinion, the, accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of shareholders' equity
(deficit) present fairly, in all material respects, the financial position of
IVAC Holdings, Inc. and its subsidiaries at December 31, 1995, and the results
of their operations and their cash flows for the year in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Diego, California
March 29, 1996
F-49
<PAGE>
IVAC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................................... $ 18,308
Accounts receivable, net.......................................................................... 54,133
Current portion of contract receivables, net...................................................... 5,414
Inventories....................................................................................... 34,625
Prepaid expenses and other assets................................................................. 3,143
-------------
Total current assets.......................................................................... 115,623
Long-term contract receivables, net................................................................. 19,957
Property, plant and equipment, net.................................................................. 48,277
Intangible assets, net.............................................................................. 30,893
Other long-term assets.............................................................................. 1,245
-------------
$ 215,995
-------------
-------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................................................................. $ 14,407
Accrued warranty.................................................................................. 6,948
Accrued employee liabilities...................................................................... 9,528
Current portion of long-term debt................................................................. 8,091
Other current liabilities......................................................................... 34,799
-------------
Total current liabilities..................................................................... 73,773
Long-term debt...................................................................................... 157,694
Other non-current liabilities....................................................................... 5,043
Commitments and contingencies (Note 11)
Shareholders' equity (deficit):
Common stock:
Class A, $.01 par value; 60,000,000 shares authorized;
20,000,938 issued and outstanding............................................................... 200
Class B, $.01 par value; 20,000,000 shares authorized;
19,532,630 issued and outstanding............................................................... 195
Additional paid-in capital.......................................................................... 33,308
Note receivable from shareholder.................................................................... (8)
Accumulated deficit................................................................................. (56,057)
Foreign currency translation adjustment............................................................. 1,847
-------------
Total shareholders' equity (deficit).......................................................... (20,515)
-------------
$ 215,995
-------------
-------------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-50
<PAGE>
IVAC HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Net sales........................................................................................... $ 240,971
Cost of sales............................................................................... 157,869
------------
Gross profit........................................................................................ 83,102
Sales and marketing................................................................................. 43,994
General and administrative.......................................................................... 28,381
Research and development............................................................................ 12,083
Purchased research and development.................................................................. 22,883
Restructuring and special items..................................................................... 5,944
Other expense, net.................................................................................. 1,497
------------
Total operating expense..................................................................... 114,782
Contract interest income............................................................................ 3,013
------------
Loss from operations........................................................................ (28,667)
Interest expense, net............................................................................... (27,476)
------------
Loss before income taxes............................................................................ (56,143)
Benefit from income taxes........................................................................... 378
------------
Net loss............................................................................................ $ (55,765)
------------
------------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-51
<PAGE>
IVAC HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
Cash flows from operating activities:
Net loss....................................................................................... $ (55,765)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization................................................................ 23,736
Debt issuance cost amortization.............................................................. 5,902
Purchased research and development........................................................... 22,883
Deferred income taxes........................................................................ (1,898)
Gain on disposal of property, plant and equipment............................................ (55)
Accretion of discount on Junior Subordinated Notes and Siemens Infusion System Debt.......... 4,664
Changes in assets and liabilities:
Receivables................................................................................ (11,837)
Inventories................................................................................ 23,176
Prepaid expenses and other assets.......................................................... 223
Accounts payable........................................................................... 4,975
Accrued warranty........................................................................... (557)
Accrued employee liabilities............................................................... (900)
Other current liabilities.................................................................. 9,265
Other non-current liabilities.............................................................. (829)
Payables to and receivables from Lilly, net................................................ 15,160
-----------------
Net cash provided by operating activities.............................................. 38,143
-----------------
Cash flows from investing activities:
Acquisitions, net of cash and cash equivalents acquired...................................... (190,793)
Capital expenditures, net.................................................................... (13,752)
Proceeds from sale of facility, net.......................................................... 25,258
-----------------
Net cash used by investing activities.................................................. (179,287)
-----------------
Cash flows from financing activities:
Capital contributions........................................................................ 20,000
Exercise of stock options.................................................................... 70
Borrowings under term loan and revolving credit arrangements................................. 68,500
Proceeds from bridge notes................................................................... 80,000
Proceeds from senior notes................................................................... 100,000
Proceeds from junior subordinated notes...................................................... 30,000
Repayment of term loan and revolving debt.................................................... (49,000)
Repayment of bridge notes.................................................................... (80,000)
Debt issue costs............................................................................. (11,486)
Capital lease payments....................................................................... (479)
-----------------
Net cash provided by financing activities.............................................. 157,605
-----------------
Effect of exchange rate changes on cash........................................................ 1,847
-----------------
Net increase in cash and cash equivalents...................................................... 18,308
Cash and cash equivalents at the beginning of the year......................................... 0
-----------------
Cash and cash equivalents at the end of the year............................................... $ 18,308
-----------------
-----------------
Supplemental disclosure of cash flow information:
Cash paid for interest....................................................................... $ 15,380
Cash paid for income taxes................................................................... $ 12
Supplemental disclosure of non-cash financing activities:
Contribution of River capital stock.......................................................... $ 13,333
Stock dividend (3 for 1)..................................................................... $ 292
Capital lease financing...................................................................... $ 1,200
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-52
<PAGE>
IVAC HOLDINGS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------------------------------------------------------
CLASS A CLASS B FOREIGN TOTAL
COMMON STOCK COMMON STOCK ADDITIONAL SHAREHOLDER CURRENCY SHAREHOLDERS'
------------------ ------------------ PAID-IN NOTE ACCUMULATED TRANSLATION EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT ADJUSTMENT (DEFICIT)
---------- ------ ---------- ------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Contribution of capital:
Cash.................... $ 20,000 $ 20,000
River capital stock..... 5,000,000 $ 50 4,740,388 $ 47 13,236 13,333
Foreign currency
translation
adjustment.............. $ 1,847 1,847
Stock dividend (3 for
1)...................... 15,000,000 150 14,221,164 142 $ (292)
Exercise of stock
options................. 938 571,078 6 72 $ (8) 70
Net loss.................. (55,765) (55,765)
--
---------- ------ ---------- ------ ----------- ----------- ----------- -----------
Balance at December 31,
1995.................... 20,000,938 $ 200 19,532,630 $ 195 $ 33,308 $ (8) $ (56,057) $ 1,847 $ (20,515)
--
--
---------- ------ ---------- ------ ----------- ----------- ----------- -----------
---------- ------ ---------- ------ ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-53
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1--DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
IVAC Holdings, Inc. ("Holdings" or the "Company"), through its wholly owned
subsidiaries, designs, manufactures, distributes and services intravenous
infusion therapy and vital signs measurement instruments and related disposables
and accessories. The Company sells a full range of products to hospitals and
alternate site facilities in the United States, Canada and Europe.
All outstanding common stock of IVAC Medical Systems, Inc. is owned by
Holdings. On December 30, 1994, DLJ Merchant Banking Partners, L.P. and the
related investors (collectively, "DLJMB") and River Medical, Inc. ("River") and
related investors ("the River Group") formed Holdings to acquire all of the
outstanding stock of IVAC Corporation ("IVAC") from Eli Lilly and Company
("Lilly"). Holdings was formed through the contribution of $20,000 cash from an
DLJMB in exchange for 5,000,000 shares (20,000,000 shares after giving effect to
3 for 1 stock split effected in the form of a dividend) of Class A Common Stock
and the issuance of 4,740,388 shares (18,961,552 shares after giving effect to 3
for 1 stock split offered in the form of a dividend) of Class B Common Stock in
exchange for 100% of the outstanding capital stock of River.
In connection with the formation of Holdings, after the close of business on
December 31, 1994, the Company acquired the outstanding capital stock of IVAC
from Lilly for approximately $195,000 in cash, including transaction costs ("the
Acquisition"). Concurrently with the closing of the Acquisition, Holdings
contributed all of the outstanding capital stock of River to IVAC and, as a
result, River became a wholly owned subsidiary of IVAC, renamed as IVAC Medical
Systems, Inc. The proceeds received from the investor group were contributed as
capital to IVAC Medical Systems, Inc. and recorded as Additional Paid-in Capital
in IVAC's financial statements.
In connection with the Acquisition, Holdings issued Junior Subordinated
Notes due 2006 (the "Subordinated Notes") to DLJMB, the River Group and others
for an aggregate of $30,000. Interest accrues to principal annually at an
effective fixed rate of 13.2%. IVAC does not guarantee repayment of the notes on
behalf of Holdings nor are these notes secured by IVAC's assets. The proceeds
from the Subordinated Notes were contributed as capital to IVAC Medical Systems,
Inc.
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. All significant
intercompany balances and transactions have been eliminated.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with maturities of 90
days or less at date purchased.
REVENUE RECOGNITION
Revenue is recorded upon product shipment, net of an allowance for estimated
returns, or service delivery. The Company also sells instruments via long-term
financing arrangements to a number of hospitals under No Capital Agreements
("NCAs"). These agreements allow hospitals to acquire instruments with no
initial payment. The sales price for the instruments is recovered via surcharges
applied to minimum purchase commitments of related disposables. The transactions
are akin to sales-type leases as provided for in SFAS 13, with the Company
recording revenue and profit upon shipment of the
F-54
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
instruments. The Company records a receivable equal to the present value of the
sales price of the instrument based upon the ratio of the overall gross margin
on the commitment compared to margins on direct sales of instruments and
disposables. Title to the instrument passes to the customer upon shipment. The
term of the financing is generally three to five years, with interest at rates
of 9% to 15%. The related contract receivables at December 31, 1995 are
presented net of unearned finance revenue of $6,813 which reflects the remaining
interest to be earned on unshipped disposables. Unearned finance revenue is
calculated using the inherent rate of interest on each NCA, the expected
disposable shipment period and the principal balance financed. Finance revenue
is recognized as disposables are shipped using a reducing principal balance
method which approximates the interest method. Contract provisions include
liquidated damage clauses which are sufficient to recover the sales price of the
instruments in the event of customer cancellation.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. Credit
risk associated with this concentration is limited due to the large number and
geographic dispersion of the accounts and the overall stability of the hospital
industry. Management believes that adequate provision has been made for such
credit risk.
INVENTORIES
Inventories are stated at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market. Cost of inventories at the beginning of the
year was determined based on an allocation of the purchase price to all assets
and liabilities including inventory, as determined by an independent appraisal,
at the date of acquisition.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated on the basis of cost. Cost of
acquired assets (see Note 3) was determined based on an allocation of the
purchase price to all assets and liabilities, as determined by an independent
appraisal, at the date of acquisition. Additions to property, plant and
equipment, including significant betterments and renewals, are capitalized.
Maintenance and repair costs are charged to expense as incurred. Depreciation is
computed using the straight-line method over estimated useful lives of 3 to 20
years. Depreciation expense amounted to $15,076 for the year ended December 31,
1995.
INCOME TAXES
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred tax asset or liability is computed for
the expected future impact of differences between the financial reporting and
tax basis of assets and liabilities as well as the expected future tax benefit
to be derived from tax loss and tax credit carryforwards. Deferred income tax
expense (benefit) is determined as the net change during the year in the
deferred income tax asset or liability. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount "more likely than
not" to be realized in future tax returns. Tax rate changes are reflected in
income during the period such changes are enacted.
F-55
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries are
translated into U.S. dollars using period-end exchange rates for assets and
liabilities and weighted average exchange rates during the period for revenues
and expenses. Gains and losses from translation are excluded from results of
operations and accumulated as a separate component of shareholders' equity.
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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, including cash
and cash equivalents, trade receivables and payables, approximates their fair
value due to their short term maturities. The fair values of the Company's
long-term contract receivables are estimated by discounting future cash flows
using discount rates that reflect the risk associated with similar types of
loans. The fair value of the Company's long-term debt is estimated based on
comparison with similar issues or current rates offered to the Company for debt
of the same remaining maturities. The estimated fair values of both the
Company's long-term contract receivables and long-term debt approximate their
carrying values.
STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation," which establishes a fair value based method of
accounting for compensation costs related to stock option plans and other forms
of stock based compensation plans as an alternative to the intrinsic value based
method of accounting defined under Accounting Principles Board Opinion No. 25.
Companies that do not elect the new method of accounting beginning in 1996 will
be required to provide pro forma disclosures as if the fair value based method
had been applied. The Company anticipates that it will not elect the fair value
based method of accounting and will provide pro forma disclosure as required.
INTANGIBLE ASSETS
Intangible assets are amortized as follows:
<TABLE>
<S> <C> <C>
Supply agreements............................. Straight-line 3 years
Trademarks.................................... Straight-line 10 years
Patents....................................... Straight-line 10 years
Debt acquisition costs........................ Interest method Terms of related debt
Excess purchase price......................... Straight-line 10 years
</TABLE>
F-56
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangibles are presented net of accumulated amortization of $11,776. In
connection with the acquisition of IVAC, Lilly agreed to continue providing
certain administrative services on behalf of IVAC for a period of six months.
The amount capitalized as service support agreement ($2,786) has been fully
amortized as of December 31, 1995.
IMPAIRMENT OF LONG-LIVED ASSETS
During 1995, the FASB issued Statement of Financial Accounting Standards No.
121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," which establishes accounting standards for
measuring the impairment of long-lived assets, certain identifiable intangibles
and excess purchase price related to those assets to be held and used and for
long-lived assets and certain intangible assets to be disposed of. In the fourth
quarter of 1995, the Company elected to early adopt the new accounting
pronouncement. Based upon an analysis performed in accordance with SFAS 121, the
Company believes that no material impairments exist at December 31, 1995. Prior
to the adoption of SFAS 121, management reviewed long-lived assets for
impairment on an annual basis based on undiscounted future cash flows.
PRODUCT WARRANTY
The Company provides warranties for up to one year on all products and for
up to two years on certain products. A provision for the estimated future costs
of warranty repair or replacement is provided at the time of sale based upon the
Company's historical warranty experience.
REBATES
The Company provides rebates to customers under certain programs. The
estimated costs of these rebates are accrued at the time revenue is recognized.
NOTE 3--THE ACQUISITION AND THE RIVER TRANSACTION
The Acquisition and the River Transaction have been accounted for under the
purchase method as the voting common stock issued was not identical;
accordingly, the purchased assets and liabilities have been recorded at their
estimated fair value, as determined by independent appraisal, at the date of
acquisition. The purchase price of River of $13,333 was determined based on the
fair value of the River assets contributed to Holdings relative to the purchase
price paid by the DLJMB led investor group for their initial equity in Holdings.
The application of the purchase method to the Acquisition and the River
Transaction resulted in an excess of cost over net assets acquired of
approximately $90,804. The excess purchase price has been allocated to property,
plant and equipment ($20,315), inventory ($14,774), intangibles ($23,356) and
in-process research and development ($22,883) with a remaining excess purchase
price over net assets acquired of $9,476. The allocation of the purchase price
to inventory, and subsequent sales of such inventory, resulted in a reduction of
$14,744 in 1995 gross profit. The in-process research and development of River
and IVAC were charged to earnings in 1995 as the associated products had not
reached technological feasibility and had no alternative use. The purchase price
allocations reflect the resolution of certain purchase contingencies including
the arbitration settlement of a dispute with Lilly over the final IVAC purchase
price subsequent to December 31, 1995, the resolution of certain contingent
liabilities, and the ultimate realization of certain acquired receivables and
property, plant and equipment.
F-57
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--THE ACQUISITION AND THE RIVER TRANSACTION (CONTINUED)
Additionally, the Company and Lilly jointly elected to make an Internal Revenue
Code Section 338(h)(10) election for Federal and state tax purposes in the third
quarter of 1995. This election resulted in treatment of the acquisition as if
Lilly sold assets in a taxable transaction and resulted in adjustments to
reflect the fair value of the acquired tax assets and liabilities as of the date
of purchase.
In conjunction with purchase accounting, the Company recorded a severance
liability in the amount of $5,659 pursuant to a plan in place as of the purchase
date to subsequently terminate employees. The liability was determined based on
the expected employee resources to be terminated at an estimated cost of
severance benefits as provided for in the purchase agreement at the time of the
Acquisition to include separation payments based on years of service, continued
medical benefits and outplacement assistance for a specified time. These costs
were paid to employees terminated during the six month period following the
Acquisition and did not materially differ from the amount initially accrued.
In connection with the Acquisition and the River Transaction, certain
stockholders of Holdings received approximately $3,650 in connection with the
exchange of their capital stock or services rendered. These amounts have been
capitalized as a component of the purchase price.
F-58
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--COMPOSITION OF CERTAIN CONSOLIDATED FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Accounts receivable:
Trade......................................................................... $ 58,677
Less allowance for doubtful accounts.......................................... (4,544)
------------
$ 54,133
------------
------------
Inventories:
Finished products............................................................. $ 14,998
Work-in-process............................................................... 3,472
Raw materials................................................................. 17,867
------------
36,337
Less reserves................................................................. (1,712)
------------
$ 34,625
------------
------------
Property, plant and equipment:
Land.......................................................................... $ 640
Buildings..................................................................... 4,554
Equipment..................................................................... 50,179
Construction in process....................................................... 6,341
------------
61,714
Less accumulated depreciation................................................. (13,437)
------------
$ 48,277
------------
------------
Intangibles:
Excess purchase price......................................................... $ 9,476
Supply agreements............................................................. 10,296
Trademarks.................................................................... 5,140
Patents....................................................................... 5,186
Debt acquisition costs........................................................ 11,486
Other......................................................................... 1,085
------------
42,669
Less accumulated amortization................................................. (11,776)
------------
$ 30,893
------------
------------
Supply agreements represent noncancellable customer commitments to purchase specified
quantities of disposable administration sets and probe covers at contractual prices.
Other current liabilities:
Accrued expense reimbursement to former parent................................ $ 12,212
Other......................................................................... 22,587
------------
$ 34,799
------------
------------
</TABLE>
F-59
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 5--LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Senior notes.................................................................... $ 100,000
Term loan borrowings under the Bank Credit Facility............................. 19,500
Junior subordinated notes....................................................... 33,961
Other........................................................................... 12,324
------------
165,785
Less current portion............................................................ (8,091)
------------
Long-term debt.................................................................. $ 157,694
------------
------------
</TABLE>
In connection with the acquisition of IVAC, the Company entered into an
$80,000 credit facility (the "Bank Credit Facility") with a syndicate of
financial institutions which consists of $60,000 of term loans and a $20,000
revolving credit facility, each of which matures on December 30, 1999. Available
funds under the revolving credit facility are limited to the difference between
$20,000 and the amount of letters of credit issued under the Bank Credit
Facility, which cannot exceed $15,000. Borrowings under the Bank Credit Facility
bear interest at a rate equal to the Alternate Base Rate plus 1.75% or Adjusted
LIBOR plus 3.00%, at the option of the Company, payable quarterly (10.25% and
8.69%, respectively, at December 31, 1995). The Bank Credit Facility is secured
by the stock of IVAC and all of its subsidiaries and substantially all of the
assets of Holdings, IVAC and IVAC's domestic subsidiaries. The Bank Credit
Facility is guaranteed by Holdings and substantially all of the Company's
subsidiaries. As more fully discussed in Note 13, subsequent to December 31,
1995, the Company amended and restated certain terms of the Bank Credit
Facility.
Immediately following the Acquisition, the Company entered into an interest
rate swap agreement to fix the rate of interest payable on a portion of the term
loan principal borrowed under the Bank Credit Facility. The swap has a three
year term and an initial notional amount of $30,000, which amortizes at a rate
equal to 50% of the original term loan principal paydown schedule, with
quarterly payments at a fixed rate of 11.05% of the outstanding notional amount
and quarterly receipts at a LIBOR-based floating rate plus 3.00%. Interest
expense related to the swap was $565 for the year ended December 31, 1995.
The Bank Credit Facility contains covenants which, among other matters,
restrict or limit the ability of the Company to pay dividends, incur
indebtedness, and make capital expenditures. The Company must also maintain
certain ratios regarding interest coverage and leverage, among other
restrictions.
On November 8, 1995, the Company issued $100,000 of senior unsecured public
notes (the "Notes") due December 1, 2002. The Notes bear interest at the rate of
9.25% annually, which is payable semi-annually in arrears on June 1 and December
1 of each year, commencing June 1, 1996. The Company is not required to make any
mandatory redemption or sinking fund payments with respect to the Notes prior to
maturity. The Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after December 1, 1998 at the redemption prices set
forth in the indenture plus accrued and unpaid interest to the date of
redemption. In addition, at any time prior to December 1, 1998, the Company may
redeem the Notes with the proceeds of one or more public offerings of common
stock at a redemption price equal to 108.25% of the principal amount plus
accrued and unpaid interest; provided that at least
F-60
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 5--LONG-TERM DEBT (CONTINUED)
$65,000 in aggregate principal amount of the Notes remain outstanding
immediately after the occurrence of each such redemption. In the event of a
Change of Control (as defined in the indenture), holders of the Notes will have
the right to require the Company to purchase their Notes, in whole or in part,
at a price equal to 101% of the aggregate principal amount thereof, plus accrued
and unpaid interest to the date of purchase. The Notes are senior unsecured
obligations of the Company and rank senior in right of payment to all
subordinated indebtedness of the Company.
The indenture contains covenants which, among other matters, restrict or
limit the ability of the Company to pay dividends, incur indebtedness, make
asset sales, create liens and restrict the ability of the Company to enter into
mergers, consolidations or sales of all or substantially all of its assets.
The Company also issued $30,000 of Junior Subordinated Notes due 2006. The
notes accrue interest at 13.2% per annum, compounded annually.
The net proceeds from the bridge notes, Junior Subordinated Notes, and term
loan were used to pay the cash purchase price in connection with the Acquisition
and to pay fees and expenses related to the Acquisition. The proceeds of the
revolving loan will be used for general corporate purposes in the ordinary
course of the business.
Other debt consists of consideration owed to Siemens Infusion Systems, Ltd.
("SIS") resulting from IVAC's acquisition of the MiniMed product line from SIS
in 1993. In accordance with the acquisition agreement, IVAC is obligated to pay
SIS $1,571 in 1996 based on 1994 product sales and the greater of $3,000 per
year or 8% of the prior year's product sales in 1996 through 1999. The minimum
$12,000 liability was discounted at an imputed interest rate of 7% and recorded
as debt. The unamortized discount, which is amortized using the interest method
over the term of the payments, is $1,247 at December 31, 1995.
The aggregate minimum annual maturities on long-term debt are as follows:
<TABLE>
<S> <C>
1996.............................................................. $ 8,091
1997.............................................................. 7,375
1998.............................................................. 7,901
1999.............................................................. 8,457
2000.............................................................. --
Thereafter........................................................ 133,961
---------
$ 165,785
---------
---------
</TABLE>
NOTE 6--LEASES
Leases are generally for buildings, computers and office equipment. The
leases for the Company's San Diego corporate headquarters and manufacturing
facilities provide for scheduled rent increases. Total rent expense amounted to
approximately $2,035 for the year ended December 31, 1995.
The Company maintains a lease line of credit with a leasing company for
acquisitions of equipment under capital lease arrangements.
F-61
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 6--LEASES (CONTINUED)
Future minimum payments are as follows:
<TABLE>
<CAPTION>
NONCANCELLABLE
CAPITAL OPERATING
LEASES LEASES
--------- --------------
<S> <C> <C>
1996........................................................................ $ 770 $ 3,413
1997........................................................................ 722 2,931
1998........................................................................ 425 2,990
1999........................................................................ 241 2,916
2000........................................................................ -- 2,803
Thereafter.................................................................. -- 11,298
--------- -------
2,158 $ 26,351
-------
-------
Less amounts representing interest.......................................... (304)
---------
Capital lease obligations................................................... 1,854
Less current portion........................................................ (595)
---------
$ 1,259
---------
---------
</TABLE>
NOTE 7--INCOME TAXES
The benefit from income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Current:
Federal....................................................................... $ --
Foreign....................................................................... 3,307
State......................................................................... 5
------------
3,312
------------
Deferred:
Federal....................................................................... (3,192)
Foreign....................................................................... 142
State......................................................................... (640)
------------
(3,690)
------------
Total........................................................................... $ (378)
------------
------------
</TABLE>
F-62
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 7--INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Deferred tax assets:
Net operating loss and research and development credit carryforwards.......... $ 5,742
Intangibles................................................................... 3,666
State income taxes............................................................ 2,987
Product return/warranty reserves.............................................. 1,895
Rebate reserve................................................................ 1,479
Other......................................................................... 5,430
------------
Total deferred tax assets....................................................... 21,199
Valuation allowance........................................................... (21,199)
------------
Net deferred tax assets......................................................... 0
------------
Deferred tax liabilities:
Foreign taxes................................................................. (142)
------------
Total deferred tax liabilities.................................................. (142)
------------
Net deferred taxes.............................................................. $ (142)
------------
------------
</TABLE>
The Company has recorded a valuation allowance against deferred tax assets
since it is more likely than not that the deferred tax assets will not be
realized.
As of December 31, 1994, River net operating loss carryforwards for Federal
and state tax purposes totaled approximately $4,156 and $1,513, respectively. As
specified in the Internal Revenue Code, a more than 50% ownership change by a
combination of significant shareholders during any three year period would
result in certain limitations on the Company's ability to utilize net operating
loss carryforwards and research and development credit carryforwards. Such a
change is likely to have occurred in connection with the acquisition transaction
discussed in Note 3. These net operating loss and research and development
credit carryforwards expire from 2008 to 2009 for Federal tax purposes and from
1998 and 1999 for state tax purposes.
During 1995, net operating loss carryforwards for Federal and state tax
purposes totaling approximately $4,245 and $236, respectively, were generated by
the consolidated group. These net operating loss carryforwards expire in 2010
for Federal tax purposes and in 2000 for state tax purposes.
F-63
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 7--INCOME TAXES (CONTINUED)
Following is a reconciliation of the effective income tax rate:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
---------------
<S> <C>
Tax benefit at statutory rate................................................... (35.0)%
Add (deduct):
Foreign taxes................................................................. 6.2
State taxes................................................................... (5.8)
Other......................................................................... (.2)
-----
(34.8)
Valuation allowance........................................................... 34.1
-----
(.7)%
-----
-----
</TABLE>
NOTE 8--BENEFITS
Effective December 30, 1994, in connection with the purchase of IVAC
discussed in Note 1, the Company's U.S. noncontributory defined benefit plan was
terminated and the assets and liabilities of the IVAC Retirement Plan were
merged into The Lilly Retirement Plan. All eligible participants in the IVAC
Retirement Plan became participants in The Lilly Retirement Plan, and all
benefits previously earned will be paid by The Lilly Retirement Plan.
In connection with the River Transaction, all outstanding stock options
issued under the River Medical Stock Option Plan were assumed by Holdings
subject to the same terms, vesting, duration and cancellation existing prior to
the acquisition. On a converted basis, there were 467,370 options exercisable
into Holdings Class B common stock outstanding at December 31, 1995 at exercise
prices ranging from $.13 to $.52. The options expire not more than ten years
from the date of grant and were fully vested at December 31, 1995.
A summary of Class B stock option transactions follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
OPTIONS OUTSTANDING
---------------------------------
NUMBER OF NUMBER OF
SHARES SHARES
AT $.52 AT $.13
PER SHARE PER SHARE TOTAL
----------- --------- ---------
<S> <C> <C> <C>
Converted from River Plan.................................... 24,611 1,013,837 1,038,448
Options exercised............................................ (8,204) (562,874) (571,078)
----------- --------- ---------
Balance at December 31, 1995................................. 16,407 450,963 467,370
----------- --------- ---------
----------- --------- ---------
</TABLE>
The 1995 Stock Option/Stock Issuance Plan (the "Plan") of Holdings
authorizes up to 4,000,000 shares of Holdings Class A common stock to be granted
no later than February 2005. Under the Plan, the Board of Directors of Holdings
may grant options to selected key employees, directors and consultants to the
Company to purchase shares of Holdings common stock, at a price not less than
85% of the fair market
F-64
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 8--BENEFITS (CONTINUED)
value of the stock at the date of grant, as determined by the Board of Directors
of Holdings. The Plan provides for the grant of both incentive stock options and
non-qualified stock options. Generally, options outstanding vest over a four to
eight year period and are exercisable for up to ten years from the grant date.
At December 31, 1995, 633,343 options were exercisable at $1.00 for an aggregate
exercise price of $633.
A summary of Class A stock option transactions follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
OPTIONS OUTSTANDING
OPTIONS -----------------------
AVAILABLE NUMBER OF PRICE PER
FOR GRANT SHARES SHARE
----------- ---------- -----------
<S> <C> <C> <C>
Options authorized.......................................................... 4,000,000 -- --
Options granted............................................................. (3,668,656) 3,668,656 $ 1.00
Options exercised........................................................... -- (938) --
Options forfeited on termination of employment.............................. 360,516 (360,516) --
----------- ---------- -----
Balance at December 31, 1995................................................ 691,860 3,307,202 $ 1.00
----------- ---------- -----
----------- ---------- -----
</TABLE>
During 1995, the Company consummated a 3 for 1 stock split effected in the
form of a dividend to all holders of record of Class A and Class B common stock
held at the close of business on February 1, 1995. All share amounts presented
herein reflect the 3 for 1 split.
The Company maintains a defined contribution savings plan which covers
substantially all of its U.S. employees. Contributions under the plan amounted
to $757 for the year ended December 31, 1995.
The Company was self-insured for medical benefits through June 30, 1995.
Effective July 1, 1995, the Company transitioned its medical and dental
insurance to coverage under a health maintenance organization.
F-65
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 9--GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Net sales to unaffiliated customers:
United States................................................................. $ 163,323
United Kingdom................................................................ 18,217
Germany....................................................................... 18,516
Spain......................................................................... 10,248
Other......................................................................... 30,667
------------
$ 240,971
------------
------------
Income (loss) before income taxes:
United States................................................................. $ (61,462)
United Kingdom................................................................ 3,869
Germany....................................................................... 127
Spain......................................................................... 587
Other......................................................................... 1,398
Eliminations and adjustments.................................................. (662)
------------
$ (56,143)
------------
------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Total assets:
United States................................................................. $ 190,640
United Kingdom................................................................ 17,384
Germany....................................................................... 7,230
Spain......................................................................... 11,860
Other......................................................................... 17,216
Eliminations and adjustments.................................................. (28,335)
------------
$ 215,995
------------
------------
</TABLE>
Transfers between geographic areas are made at prices calculated to reflect
a profit attributable to manufacturing operations.
Remittances to the United States are subject to various regulations of the
respective governments as well as to fluctuations in exchange rates.
NOTE 10--LITIGATION
River is a defendant in an action alleging misappropriation of trade secrets
and other proprietary information of the plaintiff. The Company believes the
allegations to be without merit and has filed a countersuit with respect to this
matter. In addition, the Company is a party to various other legal actions which
have occurred in the normal course of business. Management believes the Company
has meritorious
F-66
<PAGE>
IVAC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 10--LITIGATION (CONTINUED)
defenses and intends to defend vigorously against these allegations and claims.
In management's opinion, liabilities arising from the above matters, if any,
will not have a material adverse effect on the Company's consolidated financial
position or results of operations.
NOTE 11--COMMITMENTS AND CONTINGENCIES
In connection with the Acquisition, Lilly agreed to perform certain
administrative functions for the Company's foreign subsidiaries including the
collection of receivables and the payment of certain direct expenses incurred by
Lilly on behalf of the Company. The Company agreed to reimburse Lilly for such
direct expenses and anticipates that a payment of less than $8,000 will be made
to Lilly in 1996. The Company is currently waiting for notification from Lilly
of the amount owed under this arrangement. Management does not believe that this
amount will be materially different from the amount accrued at December 31,
1995.
The Company is obligated to pay additional purchase consideration related to
previous acquisitions. As discussed in Note 5, the Company is obligated to pay
additional consideration to SIS. In connection with another acquisition, the
Company is contingently liable to certain prior shareholders of the acquiree for
up to approximately $1,850 for additional purchase consideration through 1996,
based upon the acquired entity achieving certain sales and pre-tax performance
in each year subsequent to such acquisition. Any additional consideration paid
will be treated as additional cost of the acquired entity.
NOTE 12--RESTRUCTURING
In 1995, management approved and committed the Company to a non-voluntary
termination plan in compliance with the terms of the Acquisition purchase
agreement in an effort to reduce operating expenses. The terminations were not
concentrated in one particular area of the Company's operations and the plan
does not contemplate any significant changes to the operations or product lines
that the Company offers. In connection with these terminations the Company
charged severance and related costs of $5,319 to earnings. As of December 31,
1995, the remaining accrual related to these terminations totaled $1,510.
NOTE 13--SUBSEQUENT EVENT
On March 29, 1996, the Company amended and restated its Bank Credit
Facility. The amended and restated senior credit facility (the "Facility")
matures on March 29, 1999 and provides for borrowings of up to $40,000, secured
by substantially all U.S. domestic assets. Borrowings under the Facility bear
interest at a rate equal to the Alternate Base Rate ("ABR") plus 0.25% or
Adjusted LIBOR plus 1.50%, at the option of the Company. The ABR is equal to the
greatest of the (i) prime rate in effect on such day; (ii) base certificate of
deposit rate in effect on such day plus 1%; and (iii) federal funds effective
rate in effect on such day plus 1/2 of 1%. The pricing is subject to change
quarterly based upon certain debt and interest coverage ratios.
F-67
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT IN THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL
AND, IF GIVEN OR MADE, MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE INITIAL PURCHASERS. THIS PROSPECTUS AND THE ACCOMPANYING LETTER
OF TRANSMITTAL DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION BY ANYONE
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING THE OFFER OF SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL NOR
ANY SALES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS NOT BEEN A CHANGE IN THE INFORMATION CONTAINED HEREIN OR IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................................................... 1
Risk Factors............................................................ 15
The Exchange Offer...................................................... 29
Federal Income Tax Consequences......................................... 37
The Acquisition......................................................... 38
Use of Proceeds......................................................... 40
Capitalization.......................................................... 41
Selected Consolidated Financial Data of the Company..................... 42
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 44
Business................................................................ 60
Management.............................................................. 84
Principal Stockholders.................................................. 92
Certain Relationships and Related Transactions.......................... 93
Description of Certain Indebtedness..................................... 94
Description of Notes.................................................... 100
Plan of Distribution.................................................... 131
Available Information................................................... 131
Legal Matters........................................................... 132
Independent Accountants................................................. 132
Index to Financial Statements........................................... F-1
</TABLE>
$189,000,000
[LOGO]
OFFER TO EXCHANGE ITS
11 1/8% SENIOR DISCOUNT NOTES
DUE 2008, WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, FOR ANY AND
ALL OF ITS OUTSTANDING
11 1/8% SENIOR DISCOUNT NOTES
DUE 2008
JANUARY 15, 1999
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