<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended JUNE 30, 2000 or
[ ] Transition Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the transition period from ___________ to ___________
Commission File Number: 33-26398
----------------
ALARIS MEDICAL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3492624
-------- ----------
(State or other jurisdiction (I.R.S. Employer incorporation
of Identification No.) or organization)
10221 Wateridge Circle, San Diego, CA 92121
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(858) 458-7000
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes: X No:
--- ---
On August 3, 2000, 58,844,834 shares of Registrant's Common Stock were
outstanding, excluding shares held in Treasury.
Page 1 of 25
<PAGE>
ALARIS MEDICAL, INC.
--------------------------------------------------------------------------------
INDEX
PART I. FINANCIAL INFORMATION
Item 1 - Financial Information:
<TABLE>
<CAPTION>
PAGE
<S> <C>
Condensed consolidated balance sheet at
June 30, 2000 and December 31, 1999............................................................ 3
Condensed consolidated statement of operations for
the three and six months ended June 30, 2000 and 1999.......................................... 4
Condensed consolidated statement of cash flows for
the six months ended June 30, 2000 and 1999.................................................... 5
Condensed consolidated statement of changes
in stockholders' equity for the period from
December 31, 1999 to June 30, 2000 ............................................................ 6
Notes to the condensed consolidated financial statements....................................... 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................ 12
Item 3 - Quantitative and Qualitative Disclosures About Market Risk................................ 22
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings........................................................................ 23
Item 4 - Submission of Matters to a Vote of Security Holders...................................... 23
Item 6 - Exhibits and Reports on Form 8-K......................................................... 24
</TABLE>
- 2 -
<PAGE>
FORM 10 - Q
PART 1 - ITEM 1
FINANCIAL INFORMATION
ALARIS MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
Current assets:
<S> <C> <C>
Cash................................................................................ $ 22,509 $ 23,559
Receivables, net.................................................................... 78,421 84,889
Inventories......................................................................... 74,247 76,769
Prepaid expenses and other current assets........................................... 24,888 25,086
---------- -----------
Total current assets............................................................ 200,065 210,303
---------- -----------
Net investment in sales-type leases, less current portion............................... 24,412 24,407
Property, plant and equipment, net...................................................... 65,106 68,480
Other non-current assets................................................................ 30,102 28,157
Intangible assets, net.................................................................. 268,793 275,443
---------- -----------
$ 588,478 $ 606,790
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................... $ 18,147 $ 13,769
Accounts payable.................................................................... 20,335 25,169
Accrued expenses and other current liabilities...................................... 40,270 44,606
---------- -----------
Total current liabilities....................................................... 78,752 83,544
---------- -----------
Long-term debt.......................................................................... 523,041 527,082
Other non-current liabilities........................................................... 15,816 17,115
---------- -----------
Total non-current liabilities......................................................... 538,857 544,197
---------- -----------
Contingent liabilities and commitments (Note 5)
Stockholders' equity:
Common stock, authorized 75,000 shares at $.01 par value; issued 59,296
shares and 59,295 shares at June 30, 2000
and December 31, 1999, respectively.............................................. 593 593
Capital in excess of par value...................................................... 148,992 148,991
Accumulated deficit................................................................. (170,363) (164,195)
Treasury stock...................................................................... (2,027) (2,027)
Accumulated other comprehensive loss................................................ (6,326) (4,313)
---------- -----------
Total stockholders' equity...................................................... (29,131) (20,951)
---------- -----------
$ 588,478 $ 606,790
========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
- 3 -
<PAGE>
ALARIS MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales ............................................... $ 97,742 $ 99,615 $ 189,019 $ 193,051
Cost of sales.......................................... 53,469 54,963 102,183 100,597
----------- ----------- ----------- -----------
Gross margin........................................... 44,273 44,652 86,836 92,454
----------- ----------- ----------- -----------
Selling and marketing expenses......................... 18,244 19,168 37,717 39,085
General and administrative expenses.................... 10,068 11,667 20,229 22,902
Research and development expenses...................... 5,676 6,551 12,008 12,598
Restructuring and integration charges.................. 535 1,339 535 3,438
----------- ----------- ----------- -----------
Total operating expenses........................... 34,523 38,725 70,489 78,023
----------- ----------- ----------- -----------
Lease interest income.................................. 1,323 1,019 2,453 2,080
----------- ----------- ----------- -----------
Income from operations............................. 11,073 6,946 18,800 16,511
----------- ----------- ----------- -----------
Other income (expenses):
Interest income.................................... 266 441 489 763
Interest expense................................... (14,284) (13,595) (28,599) (27,248)
Other, net......................................... 2,473 (414) 1,142 (873)
----------- ----------- ----------- -----------
Total other expense.................................... (11,545) (13,568) (26,968) (27,358)
----------- ----------- ----------- ------------
Loss before income taxes............................... (472) (6,622) (8,168) (10,847)
Provision for (benefit from) income taxes.............. 500 800 (2,000) (2,700)
----------- ----------- ----------- -----------
Net loss............................................... $ (972) $ (7,422) $ (6,168) $ (8,147)
=========== =========== =========== ===========
Net loss per common share assuming
no dilution...................................... $ (.02) $ (.13) $ (.11) $ (.14)
========== =========== =========== ===========
Net loss per common share assuming
dilution ........................................ $ (.02) $ (.13) $ (.11) $ (.14)
========== =========== =========== ===========
Weighted average common shares outstanding
assuming no dilution................................. 58,845 58,800 58,845 58,789
=========== =========== =========== ===========
Weighted average common shares outstanding
assuming dilution.................................... 58,845 58,800 58,845 58,789
=========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
- 4 -
<PAGE>
ALARIS MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
2000 1999
---------- -----------
<S> <C> <C>
Net cash provided by operating activities.............................................. $ 16,057 $ 37,842
---------- -----------
Cash flows from investing activities:
Net capital expenditures........................................................... (7,945) (16,417)
Acquisition and license of technology.............................................. (1,065) (1,250)
Patents, trademarks and other...................................................... (603) (603)
---------- -----------
Net cash used in investing activities.................................................. (9,613) (18,270)
---------- -----------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations................. (6,780) (9,349)
Proceeds from exercise of stock options............................................ 1 109
Deferred financing costs........................................................... (650) -
---------- -----------
Net cash used in financing activities.................................................. (7,429) (9,240)
---------- -----------
Effect of exchange rate changes on cash................................................ (65) (124)
---------- -----------
Net (decrease) increase in cash........................................................ (1,050) 10,208
Cash at beginning of period............................................................ 23,559 29,500
---------- -----------
Cash at end of period.................................................................. $ 22,509 $ 39,708
========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
- 5 -
<PAGE>
ALARIS MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY (UNAUDITED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER OTHER
CAPITAL IN COMPRE- COMPRE-
COMMON STOCK EXCESS OF ACCUMULATED TREASURY STOCK HENSIVE HENSIVE
SHARES AMOUNT PAR VALUE DEFICIT SHARES AMOUNT LOSS TOTAL LOSS
------ ------ --------- ------- ------ ------ --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999....... 59,295 $ 593 $148,991 $ (164,195) 453 $(2,027) $(4,313) $(20,951)
Comprehensive loss
Net loss for the period......... (6,168) (6,168) $(6,168)
Equity adjustment from foreign
currency translation........... (2,013) (2,013) (2,013)
-------
Comprehensive loss................. $(8,181)
=======
Exercise of stock options.......... 1 - 1 1
------ ------ --------- ---------- ----- ------ ------ --------
Balance at June 30, 2000........... 59,296 $ 593 $ 148,992 $ (170,363) 453 $(2,027) $(6,326) $(29,131)
====== ====== ========= ========== ===== ======= ======= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
- 6 -
<PAGE>
ALARIS MEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
NOTE 1 -- BUSINESS AND STATEMENT OF ACCOUNTING POLICY
THE COMPANY:
ALARIS Medical, Inc. ("ALARIS Medical") operating through its consolidated
subsidiaries, designs, manufactures, distributes and services intravenous
infusion therapy and patient monitoring instruments and related disposables and
accessories, as well as telemedicine, cardiovascular and pacemaker monitoring
equipment. ALARIS Medical was formed by the merger of IMED Corporation ("IMED")
and IVAC Medical Systems, Inc. ("IVAC"), on November 26, 1996. ALARIS Medical
(formerly Advanced Medical, Inc.) was incorporated on September 28, 1988 under
the laws of the state of Delaware. ALARIS Medical and its subsidiaries are
collectively referred to as the "Company."
STATEMENT OF ACCOUNTING POLICY:
The accompanying financial statements have been prepared by the Company without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures herein are
adequate to make the information not misleading.
In the opinion of the Company, the accompanying financial statements contain all
adjustments, consisting of normal recurring adjustments, necessary for a fair
statement of the Company's financial position as of June 30, 2000, the results
of its operations for the three and six months ended June 30, 2000 and 1999, and
its cash flows for the six months ended June 30, 2000 and 1999.
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.
NOTE 2 -- INVENTORIES
<TABLE>
<CAPTION>
Inventories comprise the following: JUNE 30, DECEMBER 31,
2000 1999
----------- -----------
<S> <C> <C>
Raw materials................................................... $ 32,713 $ 34,960
Work-in-process................................................. 7,477 6,156
Finished goods.................................................. 34,057 35,653
----------- -----------
$ 74,247 $ 76,769
=========== ===========
</TABLE>
- 7 -
<PAGE>
NOTE 3 -- LOSS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------------------------------
2000 1999
---------------------- ----------------------
BASIC DILUTED BASIC DILUTED
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net loss as reported................................... $ (972) $ (972) $ (7,422) $ (7,422)
========= ========== ========== =========
Weighted average common shares outstanding............. 58,845 58,845 58,800 58,800
========= ========== ========== =========
Net loss per common share.............................. $ (.02) $ (.02) $ (.13) $ (.13)
========= ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------
2000 1999
---------------------- ----------------------
BASIC DILUTED BASIC DILUTED
<S> <C> <C> <C> <C>
Net loss as reported................................... $ (6,168) $ (6,168) $ (8,147) $ (8,147)
========= ========== ========== =========
Weighted average common shares outstanding............. 58,845 58,845 58,789 58,789
========= ========== ========== =========
Net loss per common share.............................. $ (.11) $ (.11) $ (.14) $ (.14)
========= ========= ========== =========
</TABLE>
Net loss per common share assuming no dilution and dilution are the same for the
three and six months ended June 30, 2000 and June 30, 1999, as the Company
experienced a net loss. Options outstanding at June 30, 2000 and June 30, 1999
were excluded due to their antidilutive nature. Had such options been included,
the weighted average shares would have increased by 2 and 49 for the three and
six months ended June 30, 2000 and increased by 804 and 1,036 for the three and
six months ended June 30, 1999.
The Company's 7.25% Convertible Debentures (the "Convertible Debentures") were
not included in the calculation of diluted earnings per share in the three and
six months ended June 30, 2000 and 1999 as they are antidilutive. For both the
three and six months ended June 30, 2000 and 1999, the $16,152 of Convertible
Debentures, if converted at an exercise price of $18.14 per share, would result
in an increase of 890 common shares and an increase of $176 and $352, net of
taxes, to net income due to the reduction in interest expense.
NOTE 4 -- SEGMENT INFORMATION
The Company is organized primarily based on geographic location, with the United
States and Canada drug infusion and patient monitoring business representing the
North American Segment. All other international operations including Europe,
Asia, Australia and Latin America represent the International segment. The
acquisition of Instromedix in 1998 resulted in a third separate operating
segment.
The accounting policies of the segments are the same as those described in the
"Statement of Accounting Policy" (Note 1). Segment data does not include
intersegment revenues, or charges allocating corporate-headquarters costs to
each of its operating segments. The Company evaluates the performance of its
segments and allocates resources to them based on operating income and adjusted
earnings before interest, taxes, depreciation, and amortization (EBITDA).
- 8 -
<PAGE>
The table below presents information about reported segments for the:
Three months ended June 30,
<TABLE>
<CAPTION>
NORTH SHARED
AMERICA INTERNATIONAL INSTROMEDIX SERVICES(A) TOTAL
------- ------------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C>
2000
Sales ......................... $ 65,612 $ 28,831 $ 3,299 $ - $ 97,742
Operating income (loss)........ 11,214 4,136 (613) (3,664) 11,073
Adjusted EBITDA................ 15,134 6,447 (138) (1,235) 20,208
1999
Sales ......................... $ 67,255 $ 28,985 $ 3,375 $ - $ 99,615
Operating income (loss)........ 5,901 5,976 623 (5,554) 6,946
Adjusted EBITDA................ 12,740 7,368 (320) (2,205) 17,583
</TABLE>
Reconciliation of total segment adjusted EBITDA to consolidated loss before
taxes:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
ADJUSTED EBITDA
Total adjusted EBITDA for reportable segments................................... $ 20,208 $ 17,583
Depreciation and amortization................................................... (8,600) (9,298)
Interest, net................................................................... (14,018) (13,154)
Restructuring and integration charges........................................... (535) (1,339)
Other reconciling items......................................................... 2,473 (414)
----------- -----------
Consolidated loss before income taxes........................................ $ (472) $ (6,622)
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30,
NORTH SHARED
AMERICA INTERNATIONAL INSTROMEDIX SERVICES(A) TOTAL
------- ------------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C>
2000
Sales ......................... $ 123,782 $ 58,750 $ 6,487 $ - $ 189,019
Operating income (loss)........ 18,484 8,824 (1,235) (7,273) 18,800
Adjusted EBITDA................ 26,216 12,814 (288) (2,432) 36,310
1999
Sales ......................... $ 124,590 $ 61,048 $ 7,413 $ - $ 193,051
Operating income (loss)........ 18,621 13,497 (5,619) (9,988) 16,511
Adjusted EBITDA................ 25,387 16,339 24 (3,309) 38,441
</TABLE>
(A) Shared services includes amortization of intangibles and certain legal,
business development and executive costs.
Reconciliation of total segment adjusted EBITDA to consolidated loss before
taxes:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
ADJUSTED EBITDA
Total adjusted EBITDA for reportable segments................................... $ 36,310 $ 38,441
Depreciation and amortization................................................... (16,975) (18,492)
Interest, net................................................................... (28,110) (26,485)
Restructuring and integration charges........................................... (535) (3,438)
Other reconciling items......................................................... 1,142 (873)
----------- -----------
Consolidated loss before income taxes........................................ $ (8,168) $ (10,847)
=========== ===========
</TABLE>
- 9 -
<PAGE>
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 material 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 and could result in the Company losing its ability to contract
with government agencies. 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 products, to require the Company to cease distribution
and to notify users to stop using the product. The FDA could also refuse to
issue or renew certificates to export the Company's products to foreign
countries. Such actions could also result in an inability of the Company to
obtain additional clearances or approvals to market its devices.
In October 1999, the Company received a warning letter from the FDA related
to earlier inspections of the San Diego based manufacturing facility. These
FDA inspections noted several areas of non-compliance with FDA regulatory
requirements for specific products manufactured in the San Diego facility.
The letter stated that to resolve this matter, the Company would be required
until October 2001 to submit to the FDA periodic certifications as to its
state of compliance based on the outcome of inspections conducted by outside
regulatory consultants employed by the Company for this purpose. In addition,
product approvals, clearances and certificates for device exports, including
renewals, would not be provided for specific products manufactured in the San
Diego facility until the FDA is satisfied with the Company's corrective
action. The FDA has informed the Company that the corrective action plan it
submitted in response to the warning letter is adequate. In April 2000, as
requested by the FDA, independent regulatory experts audited the Company's
progress. Based on the audit, on April 29, 2000 the Company's president and
chief executive officer, David L. Schlotterbeck, certified to the FDA that,
to the best of his knowledge, the Company has initiated or completed all
corrections called for in the report issued by the independent consultant. On
July 10, 2000, the Company received correspondence from the FDA indicating
that the certification adequately addresses the FDA's concerns and that
product approvals, clearances and certificates for device exports will no
longer be deferred. In addition, the FDA has reduced the frequency of the
certifications by the Company from quarterly to annually. The corrective
actions are subject to verification during future inspections.
- 10 -
<PAGE>
Since 1995, the Company has on fourteen occasions initiated product recalls
or issued safety alerts regarding its products regulated by the FDA. In each
case this was done because the products were found not to meet the Company's
specifications. Of the fourteen recalls, four are closed and notice to that
effect has been received from the FDA. The Company has submitted to the FDA a
request for closure related to eight of the recalls but has not received
notice of closure from the FDA. The remaining two recalls are still active.
Additionally, the Company has two active field corrections related to its
products manufactured and sold outside the United States. None of the recalls
or field corrections materially interfered with the Company's operations and
all such affected product lines continued to be marketed by the Company, with
the exception of the Model 599 Series infusion pump, for which the Company
continues to sell administration sets and replacement parts only.
The costs incurred related to the Company's recall activities have historically
been significant. These costs include labor and materials, as well as travel and
lodging for repair technicians. Estimates to complete are often quite difficult
to determine due to uncertainty surrounding how many affected units are still in
service and how many units customers will fix without Company assistance. Due to
these difficulties in estimating costs, it is possible that the actual costs to
complete each individual recall could differ significantly from management's
current estimates to complete. Although there can be no assurances, the Company
believes it has adequate reserves to cover the remaining estimated aggregate
costs related to these active recalls.
OTHER
The Company is also a defendant in various actions, claims, and legal
proceedings arising from its normal business operations. Management believes the
Company has 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.
- 11 -
<PAGE>
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
GENERAL
ALARIS Medical is a holding company for ALARIS Medical Systems, 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 its existing cash, cash generated from
operations of ALARIS Medical Systems and external borrowings 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 seven Western European countries, the
number three market position in three countries, 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 dedicated and non-dedicated
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 Instromedix division, 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 over 250 sales persons and through more than 150
distributors to over 5,000 hospitals worldwide. Sales by the Company's
International business unit represented 29.5% and 31.1% of the Company's total
sales for the three and six months ended June 30, 2000. For the six months ended
June 30, 2000, the Company had sales of $189.0 million and Adjusted EBITDA of
$36.3 million.
In recent years, the Company's results of operations have been affected by the
cost containment pressures applicable to health care providers. Notwithstanding
this, 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
worldwide 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 insure compliance
with exclusive buying arrangements for their members. These buying arrangements,
in certain situations, also may result in the GPO requiring removal of the
Company's existing infusion pumps. The Company expects that such GPOs will
become increasingly more common and may have an adverse effect on the Company's
future profitability. Finally, the enactment of national health care reform or
other legislation affecting payment mechanisms
- 12 -
<PAGE>
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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales.................................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................................... 54.7 55.2 54.1 52.1
----- ----- ----- -----
Gross margin........................................... 45.3 44.8 45.9 47.9
Selling and marketing expenses......................... 18.7 19.2 20.0 20.2
General and administrative expenses.................... 10.3 11.7 10.6 11.9
Research and development expenses...................... 5.8 6.6 6.4 6.5
Restructuring and integration charges.................. 0.6 1.3 0.3 1.8
Lease interest income.................................. 1.4 1.0 1.3 1.1
----- ----- ----- -----
Income from operations................................. 11.3 7.0 9.9 8.6
Interest expense....................................... (14.6) (13.6) (15.1) (14.1)
Other, net............................................. 2.8 - 0.9 (.1)
----- ----- ----- -----
Loss before income taxes............................... (0.5) (6.6) (4.3) (5.6)
Provision for (benefit from) income taxes.............. 0.5 0.8 (1.0) (1.4)
----- ----- ----- -----
Net loss............................................... (1.0%) (7.4%) (3.3%) (4.2%)
===== ===== ===== =====
OTHER DATA:
Adjusted EBITDA................................... 20.7% 17.7% 19.2% 19.9%
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ----------------------------
2000 1999 2000 1999
---------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Adjusted EBITDA (1).................................... $ 20,208 $ 17,583 $ 36,310 $ 38,441
Restructuring and integration charges.................. (535) (1,339) (535) (3,438)
Depreciation and amortization (2)...................... (8,600) (9,298) (16,975) (18,492)
Interest income........................................ 266 441 489 763
Interest expense....................................... (14,284) (13,595) (28,599) (27,248)
Other, net............................................. 2,473 (414) 1,142 (873)
(Provision for) benefit from income taxes.............. (500) (800) 2,000 2,700
----------- ----------- ----------- -----------
Net loss............................................... $ (972) $ (7,422) $ (6,168) $ (8,147)
=========== =========== =========== ===========
</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
- 13 -
<PAGE>
information is used by investors as one measure of an issuer's
historical ability to service debt. Integration and other one-time
non-recurring charges are excluded from Adjusted EBITDA as ALARIS
Medical believes that the inclusion of these items would not be helpful
to an investor's understanding of ALARIS Medical's ability to service
debt. ALARIS Medical's computation of Adjusted EBITDA may not be
comparable to similar titled measures of other companies.
(2) Depreciation and amortization excludes amortization of debt discount
and issuance costs included in interest expense.
The Company's sales results are reported consistent with the Company's three
strategic business units: North America, International, and Instromedix. The
following table summarizes sales to customers by each business unit.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
2000 1999 2000 1999
--------- -------- --------- ---------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
North America sales....................................... $ 65.6 $ 67.3 $ 123.8 $ 124.6
International sales....................................... 28.8 29.0 58.7 61.0
Instromedix sales......................................... 3.3 3.4 6.5 7.4
-------- --------- --------- --------
Total sales.......................................... $ 97.7 $ 99.7 $ 189.0 $ 193.0
======== ========= ========= ========
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
SALES
Sales decreased $1.9 million, or 2%, for the quarter ended June 30, 2000
compared with the same quarter last year. North America sales decreased $1.6
million, or 2%, compared with the second quarter of 1999. An increase in North
America drug infusion disposable administration set revenue approximately offset
a decrease in sales of drug infusion instruments. A decrease versus prior year
in patient monitoring equipment and service revenue accounted for $1.5 million
of the North America revenue decline.
International sales decreased approximately $0.2 million, or 1%. This decrease
in European sales was primarily the result of foreign currency exchange rate
fluctuations. The majority of the Company's international sales are denominated
in foreign currency. Due to a stronger U.S. dollar in 2000 compared with the
actual foreign currency exchange rates in effect during 1999, translation of
2000 International sales were adversely impacted by $2.2 million. Using constant
exchange rates, International sales increased approximately 7% compared with the
second quarter of 1999.
Instromedix sales decreased $0.1 million during the quarter to $3.3 million
compared with $3.4 million for the same quarter last year.
GROSS MARGIN
Gross margin decreased $0.4 million, or 1%, during the quarter ended June 30,
2000 compared with the same quarter last year. The gross margin percentage
increased to 45.3% in the second quarter of 2000, from 44.8% in the second
quarter of 1999. Prior year second quarter margins were adversely impacted by a
$2.5 million one-time charge related to manufacturing issues. Second quarter
2000 costs of sales were negatively impacted by higher production costs due, in
part, to lower than planned volumes in both the U.S. and UK manufacturing
plants. These higher production costs, as well as the effect of a stronger U.S.
dollar, served to reduce gross margins.
- 14 -
<PAGE>
SELLING AND MARKETING EXPENSES
Selling and marketing expense decreased $0.9 million, or 5%, during the quarter
ended June 30, 2000 compared with the same period in 1999 due to lower sales
volume, reduced distribution costs and the effect of spending controls.
Additionally, the 1999 results included costs of approximately $0.5 million that
were not repeated in 2000 for management consulting fees associated with
developing and validating product strategies. As a percentage of sales, selling
and marketing expenses decreased to 18.7% for the second quarter of 2000 from
19.2% in the second quarter of 1999.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased $1.6 million, or 14%, during the
three months ended June 30, 2000 compared with the three months ended June 30,
1999. This decrease is primarily due to lower amortization expense in the
current period resulting from intangible assets becoming fully amortized and
from a write-off of certain Instromedix intangible assets during the fourth
quarter of 1999. As a percent of sales, general and administrative expenses
decreased to 10.3% in the second quarter of 2000 from 11.7% in the second
quarter of 1999.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased approximately $0.9 million, or 13%,
during the three months ended June 30, 2000 compared with the three months ended
June 30, 1999 as the second quarter of 1999 contained significant material costs
for the development of prototype instruments that were not repeated in 2000.
RESTRUCTURING AND INTEGRATION CHARGES
Restructuring and integration charges decreased $0.8 million during the quarter
ended June 30, 2000 compared with the same period in the prior year. The 2000
costs represent the first portion of previously announced restructuring
activities the Company has initiated which are anticipated to total
approximately $6.5 million this year. These actions are intended to save
approximately $6 million per year when fully implemented and involve facilities
in Creedmoor, N.C., Basingstoke, England and San Diego. The primary focus of
this activity is in the Creedmoor manufacturing operation. This plant will be
restructured to include disposables engineering, automated manufacturing of
selected products and distribution operations. Manual assembly operations will
be relocated to the Company's facilities in Tijuana, Mexico, and certain
operations will be outsourced. Additionally, the Basingstoke and San Diego
operations will be matched to the mix of requirements resulting from current and
future product line rationalization efforts. The restructuring charges taken
during the current period were comprised of severance ($0.3 million), legal
($0.1 million) and project termination costs ($0.1 million).
The 1999 costs represent integration costs associated with the movement of the
Company's Instromedix business from Portland, Oregon to San Diego. These
activities were completed in 1999. In connection with these integration
activities, the Company incurred $1.3 million in costs in the second quarter of
1999, including personnel relocation costs of $0.7 million, retention bonuses of
$0.1 million, and $0.5 million in other related costs.
INCOME FROM OPERATIONS
Income from operations increased $4.1 million during the three months ended June
30, 2000 compared with the three months ended June 30, 1999 primarily due to
reduced operating expenses in the current year and other activities discussed
above.
- 15 -
<PAGE>
ADJUSTED EBITDA
Adjusted EBITDA increased $2.6 million during the three months ended June 30,
2000 compared with the three months ended June 30, 1999. As a percentage of
sales, Adjusted EBITDA increased from 17.7%, or $17.6 million, during the three
months ended June 30, 1999 to 20.7%, or $20.2 million, during the three months
ended June 30, 2000 due to the reasons discussed above. Adjusted EBITDA
represents income from operations before restructuring, integration and other
non-recurring, 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 investors as one
measure of an issuer's historical ability to service debt. Integration and other
one-time non-recurring charges are excluded from Adjusted EBITDA as the Company
believes that the inclusion of these items would not be helpful to an investor's
understanding of the Company's ability to service debt. The Company's
computation of Adjusted EBITDA may not be comparable to similar titled measures
of other companies.
INTEREST EXPENSE
Interest expense increased $0.7 million, or 5%, during the three months ended
June 30, 2000 compared with the three months ended June 30, 1999 due to
increased interest accretion on the Company's 11 1/8% senior discount notes as
well as higher interest rates in 2000 on the Company's other outstanding debt.
(See Liquidity and Capital Resources.)
OTHER INCOME (EXPENSE)
Other income (expense) increased to $2.5 million of income during the quarter
ended June 30, 2000 compared with $0.4 million of expense for the same period in
the prior year. The increase was primarily due to the favorable resolution of
tradename disputes, which resulted in payments to ALARIS of approximately $2.8
million in the second quarter of 2000.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
SALES
Sales decreased $4.0 million, or 2%, for the six months ended June 30, 2000
compared with the six months ended June 30, 1999. North America sales decreased
$0.8 million, or 1%, compared with the six months ended June 30, 1999. North
America drug infusion instrument revenue increased by approximately $1.9 million
for the first six months of 2000, compared with the same period in the prior
year. The increase in North America instrument sales was more than offset by a
decrease in sales of drug infusion disposable administration sets, patient
monitoring equipment and services revenue. Disposable set revenue was lower than
a year ago in major markets worldwide. The Company estimates that about $3
million of its dedicated disposable sets were purchased in 1999 as safety stock
in anticipation of possible Y2K problems at year-end. The Company believes that
most of this inventory was worked off in the first quarter of 2000.
International sales decreased $2.3 million, or 4%, compared with 1999. Sales
decreased approximately $3.5 million in the United Kingdom, the Company's
largest international market. The Company believes the UK decrease was due in
part to the Y2K disposables issue described above and in part to a limitation in
governmental funds available for healthcare expenditures in the first quarter of
2000, which was the final quarter of the UK's fiscal year. Additionally, foreign
currency rate changes had an adverse effect on International sales in the first
six months of 2000. The majority of the Company's international sales
- 16 -
<PAGE>
are denominated in foreign currencies. Due to a stronger U.S. dollar in 2000
compared with the actual foreign currency exchange rates in effect during 1999,
translation of 2000 International sales were adversely impacted by $3.8 million,
or 6%. Using constant exchange rates, International sales increased 2%.
Instromedix sales decreased $0.9 million during the six months ended June 30,
2000 to $6.5 million compared with $7.4 million for the six months ended June
30, 1999.
GROSS MARGIN
Gross margin decreased $5.6 million, or 6.1%, during the six months ended June
30, 2000 compared with the six months ended June 30, 1999 due to lower sales and
changes in product mix. The gross margin percentage decreased to 45.9% in the
six months ended June 30, 2000, from 47.9% in the six months ended June 30,
1999. Contributing to the margin decrease in 2000 was the overall worldwide mix
of increased instrument sales and lower disposables sales, lower international
sales which typically carry higher margins than U.S. sales, as well as less
favorable production costs in the six months ended June 30, 2000 compared with
the six months ended June 30, 1999.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses decreased $1.4 million, or 4%, during the six
months ended June 30, 2000 compared with the six months ended June 30, 1999 due
to lower sales volume, reduced distribution costs and the effect of spending
controls. Additionally, the 1999 results included costs of approximately $0.5
million that were not repeated in 2000 for management consulting fees associated
with developing and validating product strategies. As a percentage of sales,
selling and marketing expenses decreased to 20.0% for 2000 from 20.2% for 1999.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased $2.7 million, or 12%, during the
six months ended June 30, 2000 compared with the six months ended June 30, 1999.
This decrease is primarily due to lower amortization expense in 2000 resulting
both from intangible assets becoming fully amortized and from the write-off of
certain Instromedix intangible assets during the fourth quarter of 1999. These
decreases were partially offset by increased information technology costs for
the Company's new International operating system implemented in late 1999.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased approximately $0.6 million, or 5%,
during the six months ended June 30, 2000 compared with the six months ended
June 30, 1999 which contained significant material costs for the development of
prototype instruments that were not repeated in 2000.
RESTRUCTURING AND INTEGRATION CHARGES
Restructuring and integration charges decreased $2.9 million during the six
months ended June 30, 2000 compared with the same period in the prior year. The
2000 costs represent the first portion of previously announced restructuring
activities the Company has initiated which are anticipated to total
approximately $6.5 million this year. These actions are intended to save
approximately $6 million per year when fully implemented and involve facilities
in Creedmoor, N.C., Basingstoke, England and San Diego. The primary focus of
this activity is in the Creedmoor manufacturing operation. This plant will be
restructured to include disposables engineering, automated manufacturing of
selected products and distribution operations. Manual assembly operations will
be relocated to the Company's facilities in Tijuana, Mexico, and certain
operations will be outsourced. Additionally, the Basingstoke and San Diego
operations will be matched to the mix of requirements resulting from current and
future product
- 17 -
<PAGE>
line rationalization efforts. The restructuring charges taken during the current
period were comprised of severance ($0.3 million), legal ($0.1 million) and
project termination costs ($0.1 million).
The 1999 costs represent integration costs associated with the movement of the
Company's Instromedix business from Portland, Oregon to San Diego. These
activities were completed in 1999. In connection with these integration
activities, the Company incurred $3.4 million in costs in 1999, including
severance and related termination benefits of $1.1 million, retention bonuses of
$0.3 million, personnel relocation costs of $0.7 million, asset dispositions of
$0.5 million, lease termination costs of $0.3 million and $0.5 million in other
related costs.
INCOME FROM OPERATIONS
Income from operations increased $2.3 million, or 14%, during the six months
ended June 30, 2000 compared with the six months ended June 30, 1999 primarily
due to lower operating expenses and the completion of the Instromedix
integration in 1999. These savings were partially offset by lower gross margins
in the current period discussed above.
ADJUSTED EBITDA
Adjusted EBITDA decreased $2.1 million during the six months ended June 30, 2000
compared with the six months ended June 30, 1999. As a percentage of sales,
Adjusted EBITDA decreased from 19.9%, or $38.4 million, during the six months
ended June 30, 1999 to 19.2%, or $36.3 million, during the six months ended June
30, 2000 due to the reasons discussed above. Adjusted EBITDA represents income
from operations before restructuring, integration and other non-recurring,
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 investors as one measure of an
issuer's historical ability to service debt. Integration and other one-time
non-recurring charges are excluded from Adjusted EBITDA as 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 $1.4 million, or 5%, during the six months ended June
30, 2000 compared with the six months ended June 30, 1999 primarily due to
increased interest accretion on the Company's 11 1/8% senior discount notes as
well as higher interest rates in 2000 on the Company's other outstanding debt.
(See Liquidity and Capital Resources.)
OTHER INCOME (EXPENSE)
Other income (expense) increased to $1.1 million of income during the six months
ended June 30, 2000 compared with $0.9 million of expense for the same period in
the prior year. The increase was primarily due to the favorable resolution of
two tradename disputes, which resulted in payments to ALARIS of approximately
$2.8 million in the second quarter of 2000. This increase was offset by foreign
currency transaction losses resulting from the strengthening of the U.S. dollar
in 2000 compared with the actual foreign currency exchange rates in effect
during 1999.
- 18 -
<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 of ALARIS Medical Systems. In addition to operating expenses, the
Company's primary future use of funds, on a short-term and long-term basis, will
continue to be to fund capital expenditures and to pay debt service on
outstanding indebtedness.
At June 30, 2000, the Company's outstanding indebtedness was $541.2 million,
which includes $189.3 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 $135.4 million (including accretion) of
senior discount notes due 2008 ("Senior Discount Notes") 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 reporting period and until August of 2000, all borrowings under the
Credit Facility were subject to interest rate risk. In June of 2000, the Company
entered into an interest rate protection agreement on a $100 million notional
amount at a three month eurodollar benchmark interest rate of 7.245%, covering
the period of August 2000 through January 2002. The agreement effectively fixes
the interest rate on approximately 54% of the outstanding Credit Facility term
loan borrowings. As of August 2000, this resulted in a weighted average rate of
10.34% on all Credit Facility borrowings. At August 1, 2000, a 10% increase
(approximately 1 percentage point) in the applicable interest rate would result
in a $0.9 million annual increase in interest expense. Included in total
consolidated debt, at June 30, 2000, ALARIS Medical had outstanding $16.2
million of 7 1/4% Convertible Debentures (the "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 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 $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 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, 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.
- 19 -
<PAGE>
As a result of the Company's significant indebtedness, the Company expects to
incur significant interest expense in future periods. The Company believes that
its existing cash and cash provided by operations will be sufficient to meet its
interest expense obligations.
Annual principal amortization of the Company's indebtedness is $7.0 million for
the remaining six months of 2000 and $22.1 million and $45.1 million for 2001
and 2002, 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 Credit Facility requires the Company, under most
circumstances, to obtain consent from its bank group to allow ALARIS Medical to
repay the Convertible Debentures at maturity. The Notes allow distributions to
ALARIS Medical to fund the repayment of the Convertible Debentures at maturity
if certain performance measures are met. Although there can be no assurances,
the Company anticipates that its bank group will consent to, and its operating
performance will meet the performance measures required to, repay the
Convertible Debentures at maturity.
During the six months ended June 30, 2000, the Company made cash payments of
approximately $0.4 million related to Instromedix integration costs which were
accrued at December 31, 1999. In June 1999, the Company consolidated the
operations of Instromedix into its San Diego, California facilities. In
connection with these relocation and integration activities, the Company
incurred nonrecurring charges of approximately $4.6 million before related
income tax benefits in 1999. Of this charge, approximately $0.2 million is
accrued at June 30, 2000.
On July 7, 2000, the Company announced plans for restructuring activities which
are anticipated to total approximately $6.5 million this year. These actions are
intended to save approximately $6 million per year when fully implemented and
involve facilities in Creedmoor, N.C., Basingstoke, England and San Diego. The
primary focus of this activity is in the Creedmoor manufacturing operation. This
plant will be restructured to include disposables engineering, automated
manufacturing of selected products and distribution operations. Manual assembly
operations will be relocated to the Company's facilities in Tijuana, Mexico, and
certain operations will be outsourced. Additionally, the Basingstoke and San
Diego operations will be matched to the mix of requirements resulting from
current and future product line rationalization efforts. Approximately $1
million of the total estimated restructuring charge will be non-cash. During the
second quarter of 2000, the Company made cash payments of $0.5 million for the
first portion of the restructuring charges. The majority of the restructuring
charges are expected to be paid throughout the remainder of 2000.
The Company made capital expenditures of approximately $8 million during the six
months ended June 30, 2000 and anticipates additional capital expenditures of
approximately $15 million during the remainder of 2000.
In addition to routine capital expenditures, and in connection with prior
acquisitions, the Company made significant expenditures for the acquisition
of enterprise-wide information system software and hardware and the related
design, testing and implementation. During the fiscal years 1996 through 1999
the Company made combined capital and operating expenditures of approximately
$19.0 million related to the new enterprise-wide information system, and
expenditures of $0.5 million for the six months ended June 30, 2000, which
completed the remaining significant phases of the project.
- 20 -
<PAGE>
The Company believes that, on both a short-term and long-term basis, based on
current levels of performance, it will generate cash flow from operations,
together with its existing cash, sufficient to fund its operations, make planned
capital expenditures and make principal amortization and interest payments under
the Credit Facility and interest payments on the 9 3/4% Notes. However, on A
long-term basis, the Company may not generate sufficient cash flow from
operations to repay the 9 3/4% Notes at maturity in the amounT of $200.0
million, to make scheduled payments on the Senior Discount Notes or to repay the
Senior Discount Notes in the amount of $189.0 million at maturity. Accordingly,
the Company may have to refinance the 9 3/4% Notes and the Senior Discount Notes
at or prior to maturity or sell assets or raise equity capital to repay such
debt. Based on current interest rates and debt outstanding as of June 30, 2000,
over the next twelve months, the Company is required to make principal and
interest payments under its Credit Facility in the amount of $37.2 million and
interest payments on the 9 3/4% Notes and the Convertible Debentures in the
amount of $19.5 million and $1.2 million, respectively. In addition, the
Company's ability to fund its operations, to make planned capital expenditures
and to make scheduled principal and interest payments will be dependent on the
Company's future operating performance, which is itself dependent on a number of
factors, many of which the Company cannot control, including conditions
affecting the Company's foreign operations, prevailing economic conditions,
availability of other sources of liquidity, and financial, business, regulatory
and other factors affecting the Company's business and operations.
BACKLOG
The backlog of orders, believed to be firm, at June 30, 2000 and 1999 was $6.1
million and $6.3 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. The Company
has not entered into foreign currency contracts for purposes of hedging or
speculation. Due to changes in foreign currency exchange rates during 2000 and
1999, 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 $1.5 million and $0.5 million during
the six months ended June 30, 2000 and 1999, respectively. For the six months
ended June 30, 2000 and 1999, approximately 33% and 35% of the Company's sales
and 32% and 27% 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. As part of a comprehensive approach to risk management, the
Company is presently evaluating alternatives to address this risk.
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.
- 21 -
<PAGE>
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements as defined in 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 the effect of legislative and regulatory
changes affecting 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 including
obtaining regulatory approvals, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information is set forth under the subcaption "Liquidity and Capital
Resources" contained under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Item 2.
- 22 -
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 5 to the Condensed Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of ALARIS Medical, Inc. was held on
May 31, 2000.
(b) The following resolutions were voted upon and the results of the voting
are as follows:
1. Election of directors
<TABLE>
<CAPTION>
VOTES VOTES
FOR WITHHELD
---------- ---------
<S> <C> <C>
David L. Schlotterbeck 56,790,334 1,061,998
Norman N. Dean 56,741,008 1,061,998
Henry Green 56,536,267 1,061,998
Barry D. Shalov 56,771,187 1,061,998
William T. Tumber 56,810,644 1,061,998
</TABLE>
2. Approval of amendment to the ALARIS Medical, Inc. 1996 Stock
Option Plan
<TABLE>
<CAPTION>
VOTES VOTES BROKER
FOR WITHHELD ABSTAIN NON-VOTES
---------- -------- ------- ---------
<S> <C> <C> <C>
49,770,156 2,392,391 47,426 5,581,913
</TABLE>
3. Approval of amendment to the ALARIS Medical, Inc. Third
Amended and Restated 1990 Non-Qualified Stock Option Plan for
Non-Employee Directors
<TABLE>
<CAPTION>
VOTES VOTES BROKER
FOR WITHHELD ABSTAIN NON-VOTES
---------- -------- ------- ---------
<S> <C> <C> <C>
51,028,470 1,129,518 51,985 5,581,913
</TABLE>
4. Ratification of appointment of PricewaterhouseCoopers LLP as
independent accountants
<TABLE>
<CAPTION>
VOTES VOTES BROKER
FOR WITHHELD ABSTAIN NON-VOTES
---------- -------- ------- ---------
<S> <C> <C> <C>
57,652,175 122,092 17,619 0
</TABLE>
- 23 -
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.18 -- Change in Control Agreement dated April 20, 2000 between ALARIS
Medical, Inc. and Hazel M. Aker
10.19 -- Amendment to ALARIS Medical, Inc.'s 1996 Stock Option Plan
(incorporated by reference to the Company's Proxy Statement
dated April 26, 2000).
10.20 -- Amendment to ALARIS Medical, Inc.'s Third Amended and
Restated 1990 Nonqualified Stock Option Plan for Non-Employee
Directors (incorporated by reference to the Company's Proxy
Statement dated April 26, 2000).
27 -- Financial Data Schedule
-----------------------------------------
(b) Reports on Form 8-K
None.
- 24 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ALARIS MEDICAL, INC.
(REGISTRANT)
Date: August 10, 2000 By: /S/ WILLIAM C. BOPP
-----------------------------
William C. Bopp
Senior Vice President and
Chief Financial Officer
- 25 -
