<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended MARCH 31, 1999 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission File Number: 33-26398
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ALARIS MEDICAL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3492624
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10221 Wateridge Circle, San Diego, CA 92121
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(Address of principal executive offices) (Zip Code)
(619) 458-7000
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
On May 5, 1999, 59,247,881 shares of Registrant's Common Stock were
outstanding.
<PAGE>
ALARIS MEDICAL, INC.
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INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements:
PAGE
----
<S> <C>
Condensed consolidated balance sheet at
March 31, 1999 and December 31, 1998..................................... 3
Condensed consolidated statement of operations for
the three months ended March 31, 1999 and 1998........................... 4
Condensed consolidated statement of cash flows for
the three months ended March 31, 1999 and 1998........................... 5
Condensed consolidated statement of changes
in stockholders' equity for the period from
December 31, 1998 to March 31, 1999 ..................................... 6
Notes to the condensed consolidated financial statements................. 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 13
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings.................................................. 23
Item 6 - Exhibits and Reports on Form 8-K................................... 24
</TABLE>
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<PAGE>
FORM 10 - Q
PART 1 - ITEM 1
FINANCIAL INFORMATION
ALARIS MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
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(UNAUDITED)
<S> <C> <C>
Current assets:
Cash................................................................... $ 39,512 $ 29,500
Receivables, net....................................................... 86,550 102,295
Inventories............................................................ 81,500 79,485
Prepaid expenses and other current assets.............................. 26,230 25,246
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Total current assets............................................... 233,792 236,526
Net investment in sales-type leases, less current portion.................. 16,758 19,111
Property, plant and equipment, net......................................... 65,947 61,990
Other non-current assets................................................... 21,840 22,388
Intangible assets, net..................................................... 306,775 311,018
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$ 645,112 $ 651,033
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt...................................... $ 12,979 $ 15,423
Accounts payable....................................................... 19,116 22,103
Accrued expenses and other current liabilities......................... 58,109 52,340
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Total current liabilities.......................................... 90,204 89,866
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Long-term debt............................................................. 530,525 530,867
Other non-current liabilities.............................................. 17,626 21,931
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Total non-current liabilities...................................... 548,151 552,798
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Contingent liabilities and commitments (Note 5)
Stockholders' equity:
Common stock, authorized 75,000 shares at $.01 par value; issued and
outstanding - 59,233 shares and 59,221 shares at March 31, 1999
and December 31, 1998, respectively................................. 592 592
Capital in excess of par value......................................... 148,793 148,762
Accumulated deficit.................................................... (136,494) (135,769)
Treasury stock......................................................... (2,027) (2,027)
Accumulated other comprehensive loss................................... (4,107) (3,189)
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Total stockholders' equity......................................... 6,757 8,369
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$ 645,112 $ 651,033
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE>
ALARIS MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Sales................................................................... $ 93,436 $ 86,971
Cost of sales........................................................... 45,634 44,854
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Gross margin............................................................ 47,802 42,117
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Selling and marketing expenses.......................................... 19,917 17,129
General and administrative expenses..................................... 11,235 9,902
Research and development expenses....................................... 6,047 4,340
Integration and other non-recurring charges............................. 2,099 -
----------- -----------
Total operating expenses............................................ 39,298 31,371
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Lease interest income................................................... 1,061 1,162
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Income from operations.............................................. 9,565 11,908
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Other income (expenses):
Interest income..................................................... 322 62
Interest expense.................................................... (13,653) (11,156)
Other, net.......................................................... (459) (357)
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Total other expense..................................................... (13,790) (11,451)
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(Loss) income before income taxes....................................... (4,225) 457
(Benefit from) provision for income taxes............................... (3,500) 250
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Net (loss) income....................................................... $ (725) $ 207
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Net (loss) income per common share assuming no dilution............. $ (.01) $ -
------------ -----------
------------ -----------
Net (loss) income per common share assuming dilution ............... $ (.01) $ -
------------ -----------
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Weighted average common shares outstanding assuming no dilution......... 58,777 58,658
------------ -----------
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Weighted average common shares outstanding assuming dilution............ 58,777 60,196
------------ -----------
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE>
ALARIS MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---------- -----------
<S> <C> <C>
Net cash provided by operating activities............................ $ 26,025 $ 14,238
---------- -----------
Cash flows from investing activities:
Net capital expenditures......................................... (8,886) (5,002)
Patents, trademarks and other.................................... (297) (125)
Payment for product distribution rights.......................... (800) -
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Net cash used in investing activities................................ (9,983) (5,127)
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Cash flows from financing activities:
Principal payments on long-term debt............................. (5,993) (6,072)
Proceeds under revolving credit facility......................... - 10,300
Repayments under revolving credit facility....................... - (16,500)
Proceeds from exercise of stock options.......................... 26 41
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Net cash used in financing activities................................ (5,967) (12,231)
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Effect of exchange rate changes on cash.............................. (63) (25)
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Net increase (decrease) in cash...................................... 10,012 (3,145)
Cash at beginning of period.......................................... 29,500 6,984
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Cash at end of period................................................ $ 39,512 $ 3,839
---------- -----------
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE>
ALARIS MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY (UNAUDITED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS)
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<TABLE>
<CAPTION>
ACCUMULATED
OTHER OTHER
CAPITAL IN COMPRE- COMPRE-
COMMON STOCK EXCESS OF ACCUMULATED TREASURY STOCK HENSIVE HENSIVE
SHARES AMOUNT PAR VALUE DEFICIT SHARES AMOUNT LOSS TOTAL LOSS
------ ------ ---------- ------- ------- ------ ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998....... 59,221 $ 592 $ 148,762 $ (135,769) 453 $(2,027) $(3,189) $ 8,369
Comprehensive loss
Net loss for the period......... (725) (725) $ (725)
Equity adjustment from foreign
currency translation........... (918) (918) (918)
-------
Comprehensive loss................. $(1,643)
-------
-------
Exercise of stock options.......... 12 - 26 26
Tax benefit from exercise of
stock options................... 5 5
------ ------ --------- ---------- ----- ------- -------- -------
Balance at March 31, 1999.......... 59,233 $ 592 $ 148,793 $ (136,494) 453 $(2,027) $(4,107) $ 6,757
------ ------ --------- ---------- ----- ------- -------- -------
------ ------ --------- ---------- ----- ------- -------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE>
ALARIS MEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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NOTE 1 -- BUSINESS AND STATEMENT OF ACCOUNTING POLICY
THE COMPANY:
ALARIS Medical, Inc. ("ALARIS Medical"), formerly Advanced Medical, Inc.,
operating through its consolidated subsidiaries, designs, manufactures,
distributes and services intravenous infusion therapy and patient monitoring
instruments and related disposables and accessories, as well as
cardiovascular and pacemaker monitoring products. ALARIS Medical and its
subsidiaries are collectively referred to as the "Company."
STATEMENT OF ACCOUNTING POLICY:
The accompanying financial statements have been prepared by the Company
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
those rules and regulations, although the Company believes that the
disclosures herein are adequate to make the information not misleading.
In the opinion of the Company, the accompanying financial statements contain
all adjustments, consisting of normal recurring adjustments, necessary for a
fair statement of the Company's financial position as of March 31, 1999, and
the results of its operations and its cash flows for the three months ended
March 31, 1999 and 1998.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the period. Actual results could differ from those estimates.
NET INCOME (LOSS) PER COMMON SHARE:
The Company's net income (loss) per common share assuming no dilution is
computed using the weighted average number of common shares outstanding. The
Company's net income (loss) per common share assuming dilution is computed
using the weighted average number of common shares outstanding plus dilutive
potential common shares using the treasury stock method at the average market
price during the reporting period (Note 3).
NOTE 2 -- INVENTORIES
Inventories comprise the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
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<S> <C> <C>
Raw materials............................. $ 37,834 $ 35,024
Work-in-process........................... 7,263 5,719
Finished goods............................ 36,403 38,742
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$ 81,500 $ 79,485
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</TABLE>
-7-
<PAGE>
NOTE 3 -- EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------
1999 1998
------------------------ ------------------------
BASIC DILUTED BASIC DILUTED
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Net (loss) income as reported.......................... $ (725) $ (725) $ 207 $ 207
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
Weighted average common shares outstanding............. 58,777 58,777 58,658 58,658
Weighted average common stock options as
determined by application of the treasury
stock method........................................ - - - 1,538
--------- ---------- ---------- ---------
Weighted average common and common
equivalent shares outstanding....................... 58,777 58,777 58,658 60,196
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
Net (loss) income per common share..................... $ (.01) $ (.01) $ - $ -
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
</TABLE>
Net loss per common share assuming no dilution and dilution are the same for
the three months ended March 31, 1999, as the Company experienced a net loss.
Options outstanding at March 31, 1999 were excluded due to their antidilutive
nature. Had such options been included, the weighted average shares would
have increased by 1,153.
The Company's 7.25% Convertible Debentures (the "Convertible Debentures")
were not included in the calculation of diluted earnings per share in the
quarters ended March 31, 1999 and 1998 as they are antidilutive. The $16,152
of Convertible Debentures, if converted at an exercise price of $18.14 per
share, would result in an increase of 890 common shares and an increase of
$176, net of taxes, to net income, due to the reduction in interest expense.
NOTE 4 -- SEGMENT INFORMATION
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." The prior year's segment information has been conformed to
present the Company's three reportable segments in accordance with the new
standard -(1) North America, (2) International and (3) Instromedix.
The accounting policies of the segments are the same as those described in
the "Statement of Accounting Policy" (Note 1). Segment data does not include
intersegment revenues, or charges allocating corporate-headquarters costs to
each of its operating segments. The Company evaluates the performance of its
segments and allocates resources to them based on operating income and
adjusted earnings before interest, taxes, depreciation, and amortization
(EBITDA).
The Company is organized primarily based on geographic location with the
United States and Canada drug infusion and patient monitoring business
representing the North American Segment. All other international operations
including Europe, Asia, Australia and Latin America represent the
International segment. The acquisition of Instromedix in 1998 resulted in a
third separate operating segment.
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<PAGE>
The table below presents information about reported segments for the three
months ended March 31:
<TABLE>
<CAPTION>
NORTH SHARED
AMERICA INTERNATIONAL INSTROMEDIX SERVICES TOTAL
------------ -------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
1999
Sales ......................... $ 57,336 $ 32,062 $ 4,038 $ - $ 93,436
Operating Income............... 9,332 7,520 (2,853) (4,434) 9,565
Adjusted EBITDA................ 12,648 8,970 343 (1,103) 20,858
1998
Sales ......................... $ 56,070 $ 30,901 $ - $ - $ 86,971
Operating Income............... 9,690 6,850 - (4,632) 11,908
Adjusted EBITDA................ 13,474 8,133 - (1,415) 20,192
</TABLE>
Reconciliation of total segment adjusted EBITDA to consolidated (loss) income
before taxes:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ADJUSTED EBITDA
Total adjusted EBITDA............................................ $ 20,858 $ 20,192
Depreciation and amortization.................................... (9,194) (8,284)
Interest (net)................................................... (13,331) (11,094)
Integration and other non-recurring charges...................... (2,099) -
Other reconciling items.......................................... (459) (357)
----------- -----------
Consolidated (loss) income before income taxes................ $ (4,225) $ 457
----------- -----------
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</TABLE>
NOTE 5 -- CONTINGENCIES AND LITIGATION
GOVERNMENT REGULATION
The United States Food and Drug Administration (the "FDA"), pursuant to the
Federal Food, Drug, and Cosmetic Act (the "FDC Act"), regulates the
introduction of medical devices into commerce, as well as testing
manufacturing procedures, labeling, adverse event reporting and
record-keeping with respect to such products. The process of obtaining market
clearances from the FDA for new products can be time-consuming and expensive
and there can be no assurance that such clearances will be granted or that
FDA review will not involve delays adversely affecting the marketing and sale
of products. Enforcement of the FDC Act depends heavily on administrative
interpretation and there can be no assurance that interpretations made by the
FDA or other regulatory bodies will not have a material adverse effect on the
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
seventeen occasions temporarily removed products from the market or issued
safety alerts regarding products that were found not to meet performance
standards. None of such recalls materially interfered with the Company's
operations and all such product lines, except the Model 599 Series infusion
pump, were subsequently returned to the market. The Company continues,
however, to sell administration sets and replacement parts for the Model 599
Series infusion pump. In addition, the
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<PAGE>
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
recall 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 three months ended March 31, 1997
on account of this voluntary recall. The Company initiated a voluntary recall
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 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 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. The Company has also initiated a mandatory field upgrade of the
Gemini PC-2T CE (220V) product, distributed only in certain countries outside
the U.S., for failure to audibly alarm when a certain type of failure occurs.
Although there can be no assurance, the Company believes that these voluntary
recalls, along with adjustments and corrections that may be made to various
Company products from time to time as an ordinary part of the business of the
Company, will not have a material adverse effect on the business, financial
condition, results of operations or cash flows.
LITIGATION
The Company is a defendant in a lawsuit filed in June 1996 by Sherwood
Medical, Inc. against IVAC Medical Systems, Inc. ("IVAC") which alleges
infringement of two patents by reason of certain activities including the
sale by IVAC of disposable probe covers for use with the Company's infrared
tympanic thermometer. The lawsuit sought injunctive relief, treble damages
and the recovery of costs and attorney fees. The jury failed to reach a
verdict in this litigation and the Court has declared a mistrial. Sherwood
has asked the Court for a retrial, which is tentatively scheduled for August
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 this lawsuit could have a material
adverse effect on the business, financial condition, results of operations or
cash flows.
The Company is a defendant in a lawsuit filed on April 20, 1998 and served on
October 28, 1998, by Becton Dickinson and Company ("Becton") against ALARIS
Medical Systems, Inc., which alleges infringement of a patent licensed to
Becton by reason of certain activities, including the sale of the Company's
SmartSite needle-free system. Becton has requested a permanent injunction
enjoining the Company from infringing the patent in suit. No amount of
monetary damages has been specified by Becton, however, the complaint
requests damages as appropriate and all gains, profits and advantages derived
by or from the Company's infringement of the patent, as well as prejudgment
interest, costs, expenses and reasonable attorney's fees. The Company
believes it has sufficient defenses to all claims, and intends to vigorously
defend this action. However, there can be no assurance that the Company will
successfully defend all claims made by Becton and the failure of the Company
to successfully prevail in this lawsuit could have a material adverse effect
on the business, financial condition, results of operations or cash flows. In
addition, the Company filed a lawsuit on December 4, 1998 against Becton. The
lawsuit, which is pending in the United States District Court for the
Southern District of California, alleges infringement of two patents, one
owned by the Company and one licensed to the Company, by reason of
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<PAGE>
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 ("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 to these years as well
(collectively with the amounts referred to in the immediately preceding
sentence, the "Disputed Amounts"). The Company has been advised by its
special Customs counsel that, under applicable law, no person, by fraud,
gross negligence or negligence, may (i) import merchandise into the commerce
of the United States by means of any material and false document, statement
or act, or any material omission or (ii) aid or abet any other person to
import merchandise in such manner. No proceeding has been initiated by
Customs against the Company in respect of the matters which are the subject
of the proceeding against Cal Pacifico. Since Cal Pacifico was the Company's
United States customs broker and importer of record during each of the
foregoing years, the Company believes that it is unlikely that Customs will
assess against the Company any portion of the Disputed Amounts.
Cal Pacifico is contesting Customs' assessment of the Disputed Amounts. 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. Cal Pacifico or Customs has not
informed the Company as to the specific amount of the Disputed Amounts.
Cal Pacifico has advised the Company that, should Cal Pacifico's challenge to
the assessment of the Disputed Amounts prove to be unsuccessful, it will seek
recovery from the Company, through arbitration, for any portion of the
Disputed Amounts which it is required to pay to Customs. As part of the
settlement agreement which resolved the Company's contract dispute with Cal
Pacifico during the second quarter of 1997, the Company paid Cal Pacifico
$550, which is to be applied toward Cal Pacifico's payment of Disputed
Amounts. The $550 payment by the Company is to be credited toward any portion
of the Disputed Amounts which the arbitrator determines the Company owes to
Cal Pacifico. The actual amount so determined by the arbitrator may be less
or greater than $550. Although the ultimate outcome of such an arbitration
proceeding cannot be guaranteed, the Company believes that it has meritorious
defenses to claims with respect to Disputed Amounts which Cal Pacifico might
raise against the Company. These defenses would be based, among other
factors, on the contractual relationship between the Company and Cal Pacifico
(including a defense with respect to the availability of indemnification
under the agreements between Cal Pacifico and the Company), the conduct of
Cal Pacifico with respect to both the Company and Customs, and the compliance
obligations of Cal Pacifico under applicable customs laws. Inasmuch as Cal
Pacifico's challenge before Customs is still pending and any claim against
the Company for indemnification would be based on Cal Pacifico's ultimate
lack of success in that challenge, and inasmuch as any arbitration proceeding
by which Cal Pacifico might seek indemnification has not been filed nor has
Cal Pacifico committed itself to the theories under which it might seek
indemnification or
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<PAGE>
the recovery of damages from the Company, it is not possible for the Company
to express an opinion at this time as to the likelihood of an unfavorable
outcome in such a proceeding.
OTHER
The Company is also a defendant in various actions, claims, and legal
proceedings arising from its normal business operations. Management believes
they have meritorious defenses and intends to vigorously defend against all
allegations and claims. As the ultimate outcome of these matters is
uncertain, no contingent liabilities or provisions have been recorded in the
accompanying financial statements for such matters. However, in management's
opinion, based on discussions with legal counsel, liabilities arising from
such matters, if any, will not have a material adverse effect on the
business, financial condition, results of operations or cash flows.
-12-
<PAGE>
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
GENERAL
ALARIS Medical is a holding company for ALARIS Medical Systems, Inc. ("ALARIS
Medical Systems"). 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 cash generated from the
operations of ALARIS Medical Systems, as well as the existing cash and
external borrowings of ALARIS Medical Systems to meet its obligations.
Capitalized terms used but not defined herein have the meaning ascribed to
them in the Notes to the Condensed Consolidated Financial Statements.
The Company is a leading provider of infusion systems and related
technologies to the United States hospital market, with the largest installed
base of pump delivery lines ("channels"). The Company is also a leader in the
international infusion systems market. Based on installed base of infusion
pumps, the Company 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.
Through its July 17, 1998 acquisition of Instromedix, Inc. ("Instromedix"),
the Company also designs, manufactures and sells cardiology products such as
arrhythmia-event recorders and pacemaker monitors.
The Company sells a full range of products through a worldwide direct sales
force consisting of approximately 300 sales persons and through more than 150
distributors to over 5,000 hospitals worldwide. Sales by the Company's
International business unit represented 34.3% of the Company's total sales
for the period ended March 31, 1999. For the three months ended March 31,
1999, the Company had sales of $93.4 million and Adjusted EBITDA of $20.9
million.
In recent years, the Company's results of operations have been affected by
the cost containment pressures applicable to health care providers. In
particular, in order to reduce costs, certain hospitals have adopted a
protocol increasing the maximum time between disposable administration set
changes from every 24 hours to as much as every 72 hours. Notwithstanding
this change in protocol, unit sales volume of the Company's disposable
administration sets increased in every year since 1993, primarily as a result
of the growth in its world-wide installed base of infusion pumps. However,
uncertainty remains with regard to future changes within the healthcare
industry. The trend towards managed care and economically motivated buyers in
the U.S. may result in continued pressure on selling prices of products and
compression on gross margins. The U.S. marketplace is increasingly
characterized by consolidation among healthcare providers and purchasers of
medical products. The Company's profitability is affected by the increasing
use of Group Purchasing Organizations ("GPOs") which are better able to
negotiate favorable pricing from providers of infusion systems, such as the
Company, and which police compliance with exclusive buying arrangements for
their members. These buying arrangements, in certain situations, also may
result in the GPO requiring removal of the Company's existing infusion pumps.
The Company expects that such GPOs will become increasingly more common and
may have an adverse effect on the Company's future profitability. Finally,
the enactment
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<PAGE>
of national health care reform or other legislation affecting payment
mechanisms and health care delivery could affect the Company's future results
of operations. It is impossible to predict the extent to which the Company
may be affected by any such change in legislation.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected financial
information expressed as a percentage of sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Sales............................................... 100.0% 100.0%
Cost of sales....................................... 48.8 51.6
----------- -----------
Gross margin........................................ 51.2% 48.4%
Selling and marketing expenses...................... 21.3 19.7
General and administrative expenses................. 12.0 11.4
Research and development expenses................... 6.5 5.0
Integration and other non-recurring charges......... 2.2 -
Lease interest income............................... 1.1 1.3
----------- -----------
Income from operations.............................. 10.3 13.6
Interest expense.................................... (14.6) (12.8)
Other, net.......................................... (.2) (.3)
----------- -----------
(Loss) income before income taxes................... (4.5) .5
(Benefit from) provision for income taxes........... (3.7) .3
----------- -----------
Net (loss) income................................... (.8)% .2%
----------- -----------
----------- -----------
OTHER DATA:
Adjusted EBITDA................................ 22.3% 23.2%
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
ADJUSTED EBITDA (1)................................. $ 20,858 $ 20,192
Integration and other non-recurring charges......... (2,099) -
Depreciation and amortization (2)................... (9,194) (8,284)
Interest income..................................... 322 62
Interest expense.................................... (13,653) (11,156)
Other, net.......................................... (459) (357)
Benefit from (provision for) income taxes........... 3,500 (250)
----------- -----------
Net (loss) income.............................. $ (725) $ 207
----------- -----------
----------- -----------
</TABLE>
- -------------------------
(1) Adjusted EBITDA represents income from operations before restructuring,
integration and other non-recurring charges, non-cash purchase accounting
charges and depreciation and amortization. Adjusted EBITDA does not
represent net income or cash flows from operations, as these terms are
defined under generally accepted accounting principles, and should not be
considered as an alternative to net income as an indicator of the
Company's operating performance or to cash flows as a measure of
liquidity. ALARIS Medical has included information concerning Adjusted
EBITDA herein because it understands that such information is used by
investors as one measure of an issuer's historical ability to service
debt. Restructuring and other one-time non-recurring charges are excluded
from Adjusted EBITDA as ALARIS
-14-
<PAGE>
Medical believes that the inclusion of these items would not be helpful
to an investor's understanding of ALARIS Medical's ability to service
debt. ALARIS Medical's computation of Adjusted EBITDA may not be
comparable to similar titled measures of other companies.
(2) Depreciation and amortization excludes amortization of debt discount and
issuance costs included in interest expense.
The following table summarizes sales to customers by each business unit.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,(A)
--------------------------
1999 1998
--------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
North America sales................................ $ 57.3 $ 56.1
International sales................................ 32.1 30.9
Instromedix sales.................................. 4.0 -
--------- --------
Total sales................................... $ 93.4 $ 87.0
--------- --------
--------- --------
</TABLE>
(A) The Company's sales results are reported consistent with the Company's
three strategic business units: North America, International, and
Instromedix. As a result, Canadian sales of drug infusion and patient
monitoring products are now included in "North America" results.
Previously, Canadian sales were reported as "international" sales. Prior
year amounts have been reclassified for comparability with 1999.
For purposes of this discussion and analysis, the three months ended March
31, 1999 and 1998 are referred to as 1999 and 1998, respectively.
SALES
Sales increased $6.4 million, or 7%, during 1999 as compared with 1998.
International sales increased $1.2 million, or 4% while North America sales
increased $1.2 million, or 2%. Sales generated by Instromedix for 1999 were
$4.0 million. Excluding Instromedix, sales increased approximately 3%. The
increase in International sales is primarily due to increases in volume of
drug infusion disposable administration sets. The increase in North America
sales in 1999 as compared with 1998 is primarily due to increases in drug
infusion disposable administration set revenue of $3.1 million, partially
offset by a decrease in drug infusion instrument and patient monitoring
product revenue of $1.8 million.
GROSS MARGIN
The gross margin increased $5.7 million, or 14%, during 1999 as compared with
1998. The gross margin percentage increased from 48.4% in 1998 to 51.2% in
1999 primarily due to increased sales with lower product costs resulting from
1998 cost reduction efforts and the mix of higher margin disposable
administration set sales in relation to total sales.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses increased $2.8 million, or 16%, during 1999 as
compared with 1998. As a percentage of sales, selling and marketing expenses
increased from 19.7% in 1998 to 21.3% in 1999. This increase is primarily due
to the addition of Instromedix as well as the addition of International
personnel and increased distribution cost. Instromedix selling and marketing
expenses for 1999 were $1.2 million.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $1.3 million, or 14%, during
1999 as compared with 1998. As a percentage of sales, general and
administrative expenses increased from 11.4% in 1998 to
-15-
<PAGE>
12.0% in 1999. This increase is primarily due to the addition of Instromedix
and an increase in information technology costs for the Company's new
domestic operating system implemented in late 1998. Instromedix added
approximately $1.0 million of general and administrative cost in 1999,
including $0.6 million of intangible asset amortization.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased approximately $1.7 million, or
39%, during 1999 as compared with 1998 primarily due to the addition of
Instromedix and increased activities associated with the later development
stages of various domestic and international engineering projects.
INTEGRATION AND OTHER NON-RECURRING CHARGES
In connection with the Instromedix acquisition, management, with the
assistance of consultants performed a review of the operating activities of
the acquired company in order to assess how best to integrate and leverage
the Instromedix operations with ALARIS Medical Systems. As a result of this
assessment, in February 1999, the Company announced its plans to consolidate
the operations of Instromedix into its San Diego, California facilities. Such
consolidation will allow the Company to leverage its existing infrastructure
and manufacturing capacity in San Diego. In connection with these relocation
and integration activities, the Company incurred $2.1 million in costs,
including severance and related termination benefits of $1.1 million,
retention bonuses of $0.2 million, asset dispositions of $0.4 million, lease
termination costs of $0.3 million and $0.1 million in other related costs.
Total integration costs for 1999 are anticipated to be approximately $5.0
million.
INCOME FROM OPERATIONS
Income from operations decreased $2.3 million during 1999 as compared with
1998 primarily due to the 1999 Instromedix integration activities discussed
above.
ADJUSTED EBITDA
Adjusted EBITDA increased $0.7 million during 1999 as compared with 1998. As
a percentage of sales, Adjusted EBITDA decreased from 23.2%, or $20.2
million, during 1998 to 22.3%, or $20.9 million, during 1999 due to the
reasons discussed above. Adjusted EBITDA represents income from operations
before non-recurring non-cash purchase accounting charges, integration
charges and depreciation and amortization. Adjusted EBITDA does not represent
net income or cash flows from operations, as these terms are defined under
generally accepted accounting principles, and should not be considered as an
alternative to net income or to cash flows as an indicator of the Company's
operating performance or to cash flows as a measure of liquidity. The Company
has included information concerning Adjusted EBITDA herein because it
understands that such information is used by investors as a measure of an
issuer's historical ability to service debt. Integration and other one-time
non-recurring charges are excluded from Adjusted EBITDA as the Company
believes that the inclusion of these items would not be helpful to an
investor's understanding of the Company's ability to service debt. The
Company's computation of Adjusted EBITDA may not be comparable to similar
titled measures of other companies.
INTEREST EXPENSE
Interest expense increased $2.5 million during 1999 primarily due to
additional financing obtained to fund the Instromedix acquisition. In
connection with the Instromedix acquisition, in July 1998 the Company
completed the sale of $109.9 million 11 1/8% Senior Discount Notes ("Senior
Discount Notes"), due 2008. The increase from the Senior Discount Notes was
partially offset by a decrease in interest expense on other long-term debt
due to a decrease in the amount outstanding as compared with 1998 (see
Liquidity and Capital Resources).
-16-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Management currently believes that sufficient cash will be available through
ALARIS Medical Systems, based upon current operations, to satisfy debt
service and other corporate expenses of ALARIS Medical in the foreseeable
future. In November 1996, ALARIS Medical Systems entered into a bank credit
facility consisting of term loans and a revolving credit facility (the
"Credit Facility"). The Credit Facility permits ALARIS Medical Systems to
transfer to ALARIS Medical up to $1.5 million annually to fund ALARIS
Medical's operating expenses and additional amounts sufficient to meet
interest payment requirements.
The Company expects to continue to meet its short-term and long-term
liquidity needs, including capital expenditure requirements with cash flow
from operations, borrowings under the Credit Facility, and the remaining cash
proceeds from the Senior Discount Notes which were issued, among other
things, to fund the Instromedix acquisition in July 1998. In addition to
operating expenses, the Company's primary future use of funds, on a
short-term and long-term basis, will continue to be fund capital expenditures
and strategic acquisitions and to pay debt service on outstanding
indebtedness.
At March 31, 1999, the Company's outstanding indebtedness was $543.5 million,
which includes $208.5 million of bank term debt under the Credit Facility,
$200.0 million of 9 3/4% Senior Subordinated Notes due 2006 (the "9 3/4%
Notes") and $118.3 million (including accretion) of Senior Discount Notes due
2008 which were issued to fund the Instromedix acquisition in July 1998. The
bank debt bears interest at floating rates based, at the Company's option, on
Eurodollar or prime rates. During the second quarter of 1997, the Company
entered into an interest rate protection agreement covering approximately 50%
of its term loan borrowings. Such agreement fixed the interest rate charged
on such borrowings resulting in a weighted average interest rate of 8.9% on
the Credit Facility borrowings at March 31, 1999. As a result, a one percent
increase in the rate of interest charged on indebtedness outstanding under
the Credit Facility at March 31, 1999 would result in additional annual
interest expense of approximately $1.2 million. Included in total
consolidated debt, at March 31, 1999, ALARIS Medical had outstanding $16.2
million of 7 1/4% Convertible Debentures.
In July 1998, in connection with the Instromedix acquisition, the Company
amended the Credit Facility. The amendment provided for the banks' consent to
the Instromedix acquisition and increased the revolving credit facility from
$50.0 million to $60.0 million. The amended Credit Facility also provided the
Company an additional $30.0 million under the Tranche D term debt. The
Company used the $30.0 million term debt borrowing, along with approximately
$2.0 million from the revolving credit line, to fund the initial payments
required upon closing the Instromedix acquisition. Subsequent to closing the
Instromedix acquisition, ALARIS Medical completed the sale of $109.9 million
of Senior Discount Notes, receiving net proceeds of approximately $106.3
million. Interest accruing on these notes is added to the outstanding
principal balance through July 31, 2003. Interest accruing subsequent to July
31, 2003 is payable in cash semi-annually in arrears on February 1 and August
1, commencing February 1, 2004. Upon receipt of the net proceeds from the
Senior Discount Notes, ALARIS Medical paid its remaining obligations of
approximately $22.7 million to the Instromedix shareholders and contributed
the remaining net proceeds of approximately $81.7 million to ALARIS Medical
Systems, as required under the amended Credit Facility. ALARIS Medical
Systems then repaid the amount outstanding under its revolving credit line.
As a result of the Company's significant indebtedness, the Company expects to
incur significant interest expense in future periods. The Company believes
that its existing cash and cash provided by operations will be sufficient to
meet its interest expense obligations.
-17-
<PAGE>
Annual principal amortization of the Company's indebtedness is $9.5 million
for the remaining nine months of 1999 and $14.1 million and $22.1 million for
2000 and 2001, respectively.
The Convertible Debentures provide for semi-annual interest payments of
approximately $0.6 million and mature on January 15, 2002. The 9 3/4% Notes
and the Credit Facility permit ALARIS Medical Systems to fund interest
payments on the Convertible Debentures and to make limited distributions to
ALARIS Medical to fund operating expenses and to pay income taxes; provided
that, with respect to the Credit Facility, there exists no default or event
of default under the Credit Facility. The 9 3/4% Notes and the Credit
Facility, however, restrict distributions to ALARIS Medical to fund the
repayment of the Convertible Debentures at maturity.
During 1999, the Company made cash payments of approximately $0.1 million
related to merger and integration costs accrued at December 31, 1998. These
payments are in addition to approximately $1.0 million of Instromedix
integration paid in 1998. These integration activities primarily related to
the assessment and review of Instromedix operating activities and strategy.
In February 1999, as a result of this assessment, the Company announced it
plans to consolidate the operations of Instromedix into its San Diego,
California facilities. Such consolidation will allow the Company to leverage
its existing infrastructure and manufacturing capacity in San Diego. In
connection with these relocation and integration activities, the Company
recorded a charge of $2.1 million during the quarter ended March 31, 1999.
The Company expects to incur nonrecurring integration and relocation charges
of approximately $5.0 million before related income tax benefits for full
year 1999.
The Company made capital expenditures of approximately $9.0 million during
1999 and anticipates additional capital expenditures of approximately $20.0
million during the remainder of 1999. First quarter 1999 capital spending was
higher than historical quarterly levels due to approximately $1.8 million for
a significant U.S. hospital order of drug infusion instruments accounted for
as an operating lease, as well as approximately $1.0 million to upgrade sales
force demonstration and evaluation units for new product introductions.
During the first quarter of 1998, the Company created a corporate development
function to assess product and company acquisitions, distribution alliances
and joint ventures which would expand Company technologies into unserved
markets. While there can be no assurances that the Company will complete any
acquisitions, depending on the value of potential acquisitions, the Company
might fund such transactions through a variety of sources, including existing
or new debt facilities or through the sale of equity securities.
The Company believes that, on both a short-term and long-term basis, based on
current levels of performance, it will generate cash flow from operations,
together with its existing cash, sufficient to fund its operations, make
planned capital expenditures and make principal amortization and interest
payments under the Credit Facility and interest payments on the 9 3/4% Notes.
However, on a long-term basis, the Company may not generate sufficient cash
flow from operations to repay the 9 3/4% Notes at maturity in the amount of
$200.0 million, to make scheduled payments on the Senior Discount Notes or to
repay the Senior Discount Notes in the amount of $189.0 million at maturity.
Accordingly, the Company may have to refinance the 9 3/4% Notes and the
Senior Discount Notes at or prior to maturity or sell assets or raise equity
capital to repay such debt. Based on current interest rates and debt
outstanding as of March 31, 1999, over the next twelve months, the Company is
required to make principal and interest payments under its Credit Facility in
the amount of $28.9 million and interest payments on the 9 3/4% Notes and the
Convertible Debentures in the amount of $19.5 million and $1.2 million,
respectively. In addition, the Company's ability to fund its operations, to
make planned capital expenditures and to make scheduled principal and
interest payments will be dependent on the
-18-
<PAGE>
Company's future operating performance, which is itself dependent on a number
of factors, many of which the Company cannot control, including conditions
affecting the Company's foreign operations, prevailing economic conditions,
availability of other sources of liquidity, and financial, business,
regulatory and other factors affecting the Company's business and operations.
YEAR 2000 RISK
The Year 2000 problem arises from the use of a two-digit field to identify
years in computer programs, e.g., 85=1985, and the assumption of a single
century, the 1900s. Any program so created may read, or attempt to read, "00"
as the year 1900.
The Company has developed, and is implementing, a comprehensive program to
address Year 2000 issues pertaining to both information technology (IT) and
non-IT systems. The program is monitored by a steering committee comprised of
representatives from key functional areas, which periodically reports to
senior management and will be reporting to the board of directors throughout
1999 as to the program's status. The program consists of identification,
prioritization, remediation and post-implementation phases and considers the
worldwide effect of the Year 2000 on the Company's operations and internal
systems (including non-information technology systems), customers, products
and services, and manufacturing systems, as well as on its third party
suppliers and other critical business partners. The committee has completed
its initial assessment and it is not currently aware of any material Year
2000 issues related to third parties with whom the Company conducts business
or in its non-information technology systems. The committee's assessment will
likely be a continuous process through the remainder of 1999. In addition to
its customers, the Company conducts business with and utilizes the services
of numerous third parties including, but not limited to, suppliers,
distributors, telecommunication companies, financial institutions,
governmental agencies, and utility companies. The Company is working to
identify and analyze the most reasonably likely worst-case scenarios for
third-party relationships affected by the Year 2000. The ability of these
third parties to adequately address their Year 2000 issues is outside the
Company's control. Failure by some or all of these parties to adequately
address their Year 2000 issues could have a material adverse effect on the
Company. Given the number of parties with whom the Company transacts
business, it is reasonably likely that some of these parties will not be able
to adequately solve their Year 2000 issues in a timely manner. Due to the
Company's inability to control third party compliance with Year 2000 issues,
there can be no assurances that such Year 2000 issues will not have a
material adverse effect on the financial condition, results of operations or
cash flows of the Company.
In order to successfully provide product to its customers, the Company is
dependent upon the timely fulfillment of its supply orders from its chosen
vendors. The Company has identified potentially critical suppliers and
attempted to determine if such suppliers have identified and/or addressed
their own Year 2000 issues by means of questionnaires. The Company is
dependent on such suppliers to provide timely responses to its questionnaires
and is not in a position to verify the truth or accuracy of the responses it
receives to such questionnaires. At this time, the Company has not identified
or been informed of any significant suppliers that will not be able to
fulfill the Company's orders. However, many of the Company's key suppliers
have acknowledged that they must make improvements to their systems to
properly deal with the Year 2000 orders and issues. As a result, there can be
no assurances that key suppliers will be able to timely fill the Company's
future orders. The Company is in the process of evaluating what alternatives
are available if key suppliers could not provide required materials and
supplies to the Company when ordered. While a formal contingency plan related
to this risk has not yet been completed by the Company, alternatives would be
to increase inventory levels of key suppliers and seek supplies from other
vendors. The Company estimates that such contingency plans will be completed
by December 31, 1999. However, there can be no assurance that all significant
primary and back-up suppliers will be able to fill the Company's orders due
to their own
-19-
<PAGE>
Year 2000 issues. Such supplier failures could have a material adverse impact
on the Company's financial condition, results of operations and cash flows.
In addition to routine capital expenditures, and in connection with prior
acquisitions, the Company has made significant expenditures for the
acquisition of enterprise-wide information system software and hardware and
the related design, testing and implementation. The manufacturer has
represented that the new system is Year 2000 compliant. The Company
successfully implemented certain financial applications of the new system and
began utilizing such applications at the beginning of 1998. The Company
successfully converted the remainder of its domestic business processes to
the new system in September 1998. The Company believes the primary
information system for its International operations is not directly affected
by the Year 2000. However, due to the increased significance of its
International operations and the desire to integrate its reporting systems,
the Company will be converting the International information systems to a
system common with the domestic operations. The International project is
scheduled for completion in 1999. The International system is also designed
to properly process transactions denominated in the euro currency. Euro
currency is a new monetary unit which certain European countries can begin
using in 1999.
The Company has launched Year 2000 internet websites for its customers that
include a complete list of the Company's electronic medical products,
detailed and updated information regarding the status of the products and
other information regarding the Company's Year 2000 program. Certain of the
Company's products contain software in which the record keeping capabilities
will be affected beyond the Year 2000. Products affected by the Year 2000
issue have been identified and information regarding user interventions and
software upgrades has been provided. The Company believes that these issues
will not interfere with the primary functions of the products involved, nor
will they affect the safety of patients; however, there can be no assurance
in regard to the foregoing nor can there be any assurance that the Company
will not be subject to legal claims for damages arising from products that
are not Year 2000 compliant.
During the fiscal years 1996, 1997 and 1998 the Company made combined capital
and operating expenditures of approximately $13.9 million related to the new
enterprise-wide information system, and expenditures of $0.6 million in the
period ended March 31, 1999. To complete the identified phases of the
project, the Company anticipates additional expenditures for 1999 of
approximately $3.4 million.
Infusion instrument sales are typically higher in the fourth quarter due to
sales compensation plans which reward the achievement of annual quotas and
the seasonal characteristics of the industry, including hospital purchasing
patterns. First quarter sales are traditionally not as strong as the fourth
quarter. The Company anticipates that this trend will continue but is unable
to predict the effect, if any, from health care reform, increased competitive
pressures and Year 2000 issues. Approximately 34% and 33% of the Company's
sales of drug infusion instruments occurred during the fourth quarters of
1997 and 1998, respectively. Sales of the Company's medical instrument
products represent capital expenditures to many of the Company's customers.
The Company believes it is possible that due to Year 2000 capital
requirements by its customers during 1999, fourth quarter drug infusion
instrument purchasing decisions could be deferred until 2000. Additionally,
the Company believes that customers' Year 2000 concerns and planning
strategies may result in certain customers increasing historical stock levels
of the Company's disposable products resulting in increased sales of such
products during 1999.
Although the Company is dedicating substantial resources towards attaining
Year 2000 readiness, there is no assurance it will be successful in its
efforts to identify and address all Year 2000 issues. Even if the Company
acts in a timely manner to complete all of its assessments; identifies,
develops and implements remediation plans believed to be adequate; and
develops contingency plans believed to be adequate some problems may not be
identified or corrected in time to prevent material adverse consequences to
the
-20-
<PAGE>
Company. The discussion above regarding estimated completion dates, costs,
risks and other forward-looking statements regarding Year 2000 is based on
the Company's best estimates given information that is currently available
and is subject to change. As the Company continues to progress with its Year
2000 initiatives, it may discover that actual results will differ materially
from these estimates. The information provided above constitutes a "Year 2000
Readiness Disclosure" for purposes of the Year 2000 Information and Readiness
Disclosure Act.
BACKLOG
The backlog of orders, believed to be firm, at March 31, 1999 and 1998 was
$6.9 million and $5.9 million, respectively.
FOREIGN OPERATIONS
The Company has significant foreign operations and, as a result, is subject
to various risks, including without limitation, foreign currency risks.
Historically, the Company has not entered into foreign currency contracts to
hedge such exposure and such risk. Due to changes in foreign currency
exchange rates during 1999 and 1998, primarily a strengthening of the U.S.
dollar, the Company's functional currency, against many European currencies,
the Company recognized a foreign currency transaction loss of approximately
$0.4 million and $0.2 million during 1999 and 1998, respectively. For the
three months ended March 31, 1999 and the three months ended March 31, 1998,
approximately 37% and 40% of the Company's sales and 29% and 33% of the
Company's operating expenses were denominated in currencies other than the
Company's functional currency, respectively. These foreign currencies are
primarily those of Western Europe, Canada and Australia. Additionally,
substantially all of the receivables and payables of the Company's foreign
subsidiaries are denominated in currencies other than the Company's
functional currency, and no formal hedging program exists to manage
fluctuations in these foreign currencies. The Company continues to evaluate
hedging programs to limit the exposure to the Company resulting from changes
in foreign currency exchange rates.
On December 31, 1998, Mexico enacted certain changes to its tax code which
broaden the definition of when a U.S. company using manufacturing services in
Mexico will be considered to have a "permanent establishment." These changes,
which would apply to the Company effective as of January 1, 2000, would
result in effective taxation of that portion of the Company's income
attributable to the Mexican subsidiary at a rate of 75% or higher. It is
uncertain if any such new tax imposed by Mexico will be granted a
corresponding foreign tax credit under the U.S. Internal Revenue Code. The
Company is currently evaluating the anticipated effect of such changes, which
could have a material adverse effect on its financial condition, results of
operations and cash flows.
HEALTH CARE REFORM
Heightened public awareness and concerns regarding the growth in overall
health care expenditures in the United States may result in the enactment of
legislation affecting payment mechanisms and health care delivery.
Legislation which imposes limits on the number and type of medical procedures
which may be performed or which has the effect of restricting a provider's
ability to select specific devices or products for use in administrating
medical care may adversely impact the demand for the Company's products. In
addition, legislation which imposes restrictions on the price which may be
charged for medical products may adversely affect the Company's results of
operations. It is not possible to predict the extent to which the Company or
the health care industry in general may be adversely affected by the
aforementioned in the future.
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<PAGE>
NASDAQ NATIONAL MARKET LISTING
During the first quarter of 1999, The Nasdaq Stock Market, Inc. ("NASDAQ")
notified the Company that it would delist the Company's common stock ("Common
Stock") from the NASDAQ National Market System on June 22, 1999 for failure
to maintain a closing per share bid price of at least $5.00 in accordance
with NASDAQ Marketplace Rule 4450(b)(4) (the "Pricing Requirement").
Notwithstanding the foregoing, if on or before June 18, 1999, the closing per
share bid price of the Common Stock equals at least $5.00 for a minimum of
ten consecutive trading days, the Company will be deemed to have satisfied
the Pricing Requirement. If the Company is unable to achieve compliance with
the Pricing Requirement, the Company may, prior to June 18, 1999, request a
hearing for the purpose of seeking a waiver of the Pricing Requirement from
NASDAQ. If the Company timely requests a hearing, the Common Stock will
continue to trade on the NASDAQ National Market System until a decision on
the Company's request for such waiver is rendered by NASDAQ. Although the
Company expects that, if it is unable to achieve compliance with the Pricing
Requirement by June 18, 1999, it will request a hearing, there can be no
assurance that it will be granted a waiver with respect to such requirement.
In the event that the Company cannot achieve compliance with the Pricing
Requirement and is not granted a waiver with respect to the Pricing
Requirement, the Company will seek to have the Common Stock approved for
trading on either the NASDAQ Small Capitalization Market or the American
Stock Exchange.
FORWARD-LOOKING STATEMENTS
Forward-Looking Statements in this report are made pursuant to the Safe
Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
Persons reading this report are cautioned that such forward-looking
statements involve risks and uncertainties, including, without limitation,
the effect of legislative and regulatory changes effecting the health care
industry; the potential of increased levels of competition; technological
changes; the dependence of the Company upon the success of new products and
ongoing research and development efforts; the effect of the Year 2000 risk;
restrictions contained in the instruments governing the Company's
indebtedness; the significant leverage to which the Company is subject; and
other matters referred to in this report.
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<PAGE>
PART II
OTHER INFORMATION
- -------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
See Note 5 to the Condensed Consolidated Financial Statements.
-23-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 -- Financial Data Schedule
-----------------------------------------
(b) Reports on Form 8-K
None.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ALARIS MEDICAL, INC.
--------------------
(REGISTRANT)
Date: May 14, 1999 By: /s/ WILLIAM C. BOPP
---------------------------
William C. Bopp
Vice President and Chief Financial Officer
-25-
<PAGE>
EXHIBIT INDEX
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Exhibit Page
No. No.
- ------- ----
<S> <C> <C>
27 -- Financial Data Schedule................................... 27
</TABLE>
-26-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 39,512
<SECURITIES> 0
<RECEIVABLES> 89,366
<ALLOWANCES> (2,816)
<INVENTORY> 81,500
<CURRENT-ASSETS> 233,792
<PP&E> 119,241
<DEPRECIATION> (53,294)
<TOTAL-ASSETS> 645,112
<CURRENT-LIABILITIES> 90,204
<BONDS> 530,525
0
0
<COMMON> 592
<OTHER-SE> 6,165
<TOTAL-LIABILITY-AND-EQUITY> 645,112
<SALES> 93,436
<TOTAL-REVENUES> 93,436
<CGS> 45,634
<TOTAL-COSTS> 45,634
<OTHER-EXPENSES> 39,282
<LOSS-PROVISION> 16
<INTEREST-EXPENSE> 13,653
<INCOME-PRETAX> (4,225)
<INCOME-TAX> (3,500)
<INCOME-CONTINUING> (725)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (725)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
