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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

Commission file number 1-10207

ALARIS MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code (858) 458-7000

None
———————————

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: [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [   ]

The registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ X  ] No [   ]

The aggregate market value of the common stock held by non-affiliates of the registrant, computed by reference to the price at which the common stock was last sold, as of June 30, 2003 (the last business day of the Registrant’s most recently completed second fiscal quarter) was approximately $283,341,040.

As of February 6, 2004, the registrant had 71,681,538 shares of common stock outstanding.

Documents Incorporated By Reference

Portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on April 28, 2004 (“Proxy Statement”) are incorporated by reference as described in Part III.

FORWARD-LOOKING STATEMENTS

                Certain of the matters discussed in this report, including, without limitation, matters discussed under Item 1– “Business” and Item 7– “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Certain of these forward-looking statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or “anticipates” or the negative of these terms or other comparable terminology, or by discussions of strategy, plans or intentions. Statements contained in this report that are not historical facts are forward-looking statements. Without limiting the generality of the preceding statement, all statements in this report concerning or relating to estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results are forward-looking statements. In addition, through our senior management, from time to time we make forward-looking statements concerning our expected future operations and performance and other developments. Such forward-looking statements are necessarily estimates reflecting our best judgment based upon current information and involve a number of risks and uncertainties. Other factors may affect the accuracy of these forward-looking statements and our actual results may differ materially from the results anticipated in these forward-looking statements. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include, but are not limited to, those factors or conditions described under Item 7– “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Critical Accounting Policies and Estimates” and “Factors Relating to ALARIS, Our Industry and Our Common Stock,” and general conditions in the economy and capital markets.

                We have registered, applied to register or are using the following trademarks referred to in this document: AccuSlide®, ALARIS®, ALARIS Medical Systems®, Asena™, CORE•CHECK®, Gemini PC-1®, Gemini PC-2TX®, Gemini PC-2®, Gemini PC-4®, Guardrails®, IMED®, IVAC®, IV-RIGHT™, Medication Safety At The Point of Care™, Medley™, MedSystem III®, PCAM®, ReadyMED®, Signature Edition®, SMARTServiceSM, SmartSite®, SmartSite® Plus, TEMP•PLUS®, Turbo Temp™, VITAL•CHECK®.

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INDEX

PART I

PART II

PART III

PART IV

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PART I

ITEM 1. BUSINESS

The Company

                ALARIS Medical Systems, Inc. was originally incorporated under the name Advanced Medical Technologies, Inc. on September 28, 1988. On November 26, 1996, IMED Corporation, the Company’s operating subsidiary, and IVAC Medical Systems, Inc., two pioneers in infusion systems, merged to create ALARIS Medical Systems, Inc. (“Former AMS”), and the Company changed its name to ALARIS Medical, Inc. (“AMI”). On June 30, 2003, AMI and Former AMS completed a recapitalization. In connection with the recapitalization, Former AMS merged with and into AMI, which changed its name to ALARIS Medical Systems, Inc. Unless the context otherwise requires, the terms “ALARIS,” the “Company,” “we,” “our” and “us” refer to ALARIS Medical Systems, Inc. and its consolidated subsidiaries.

Overview

                We develop and market products for the safe delivery of intravenous (IV) medications. We are a global leader in the design, development and marketing of IV medication safety and infusion therapy delivery systems, software applications, needle-free disposables and related patient monitoring equipment. Our intravenous infusion systems are used to deliver to patients one or more fluids, primarily pharmaceuticals or nutritionals, and consist of medication safety systems, single and multi-channel large volume infusion pumps, syringe pumps and dedicated and non-dedicated disposable administration sets. Our “smart” pumps, with our proprietary Guardrails Safety Software, help to reduce the risks and costs of medication errors, help to safeguard patients and clinicians and gather and record clinical information for review, analysis and interpretation.

                We provide products, professional and technical support and training services to over 5,000 hospitals and health care systems, as well as alternative care sites, in over 100 countries through a direct sales force of over 200 salespersons and more than 100 distributors. For the year ended December 31, 2003, we had total sales of $533.9 million, operating income of $98.8 million, and net loss of $7.5 million or $.11 per share, including pre-tax charges of $67.7 million related to our June 2003 recapitalization.

                We have one of the largest installed bases of large volume pump delivery lines, or channels, in the U.S. hospital market, which we believe to be approximately 32% of such channels. We also believe that we have the number one or number two market position in the large volume pump segment or the syringe pump segment, or both segments, in Belgium, France, Italy, The Netherlands, Norway, Spain, Sweden, the United Kingdom, Australia, Canada, New Zealand and South Africa. In addition, we are a leading provider of patient monitoring products that measure and monitor temperature, with a substantial installed base of hospital thermometry systems in the United States. We also provide products which measure and monitor pulse, pulse oximetry and blood pressure.

                We derive a significant portion of our revenues from recurring sales to customers using our systems of our higher margin dedicated and non-dedicated disposable administration sets and components, which consist of the plastic tubing and connecting devices that act as the interface between the infusion pump and the patient. In North America, each of our current large volume pumps, including our Medley Medication Safety System large volume pump modules, uses only dedicated disposable administration sets designed and manufactured by or for us for that particular pump. Many of our disposable administration sets feature our proprietary SmartSite Needle-Free System, which is designed to reduce caregiver risks associated with accidental needlesticks. For the year ended December 31, 2003, we derived approximately 61% of our total revenues from the sale of disposable administration sets, approximately 28% of our revenues from the sale of infusion and medication safety systems and the balance from sales of our patient monitoring products and our consulting products and services.

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                We operate through two geographical business units:

                In October 2003, we continued the expansion of our medication safety strategy outside the North American market by releasing our proprietary Guardrails Software for markets outside the United States. Continuing our commitment to improving patient safety at the point of care, in December 2003, we announced the first live beta site of our joint bar-coding solution with McKesson Automation Inc. for IV medication administration. The joint solution combines the Medley Medication Safety System with the Guardrails Software and the ALARIS Network with McKesson’s Admin-Rx bar-code scanning and communications technology, to enable caregivers to confirm medication orders and verify infusion parameters electronically.

Our Industry

                Medications and fluids are commonly delivered directly into a patient’s vein by means of infusion systems that administer precise, measured quantities of fluids over a wide range of infusion rates. Large volume pumps are volumetric devices that regulate flow by electronically measuring a specific volume of a fluid and use positive pressure to overcome the resistance of the infusion tubing and the back pressure generated by the patient’s circulatory system. Syringe pumps operate by gradually depressing the plunger on a standard disposable syringe, thereby delivering a more concentrated dose of medication at a very precise rate of accuracy. The infusion systems sold in the markets in which we compete consist of single and multi-channel infusion pumps and disposable administration sets. Disposable pumps are single use products designed for use primarily in alternate-site settings. Disposable administration sets are either dedicated (designed and manufactured for use only with a particular pump) or non-dedicated (usable with various pumps of one or more manufacturers or for IV procedures when pumps are not used.)

                Historically, infusion systems have been differentiated based on a number of characteristics including size, weight, number of delivery channels, programmability and mechanism of infusion, cost and equipment service. Recently, embedded software that helps prevent medication errors has become a significant differentiating feature for infusion systems. During 2002 and 2003, the Emergency Care Research Institute (ECRI) rated a total of 28 infusion pumps manufactured by us and our competitors. The Medley System and two of our Signature Edition infusion systems with the Guardrails Safety Software remain the only products included in ECRI’s highest rated, or “preferred,” category.

                The total addressable worldwide infusion therapy systems market is estimated to exceed $1 billion annually, approximately $600 million of which represents the current U.S. market. The U.S. hospital market itself consists of over 5,000 hospitals with a total of over 950,000 beds. Within this market, cost containment measures imposed and proposed by federal and state regulators and private payers, combined with increased utilization review and case management, have led to greater financial pressure on hospitals. In response to these cost-containment pressures, most hospitals in the United States participate in group purchasing organizations (GPOs). GPOs typically enter into exclusive purchase commitments with one or more providers of infusion systems and/or patient monitoring products for a three to seven year term. We have contracts with most major GPOs in the United States. In addition, we have supply contracts with the U.S. federal government and other U.S. governmental entities. Approximately 75% of our U.S. sales in 2003 were covered by such GPO and government contracts. The existence of GPOs provides access to a large customer base, but also limits the pricing flexibility of manufacturers of medical products, including us. The existence of GPOs also presents a significant hurdle to companies which do not have GPO contracts.

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                The international infusion systems market is much more regionalized and fragmented than the U.S. market, and we develop products tailored to meet the different needs of this market. We estimate that the international infusion therapy market, which includes infusion pumps and disposable intravenous sets, is in excess of $500 million annually. Syringe pumps represent a significant share of total infusion pump placements in the international market, while large volume pumps predominate in most of the North America market and in Australia, New Zealand, South Africa and the United Kingdom. We expect the trend toward utilization of syringe pumps to continue where the clinical practice favors the use of syringe pumps for administering pharmaceuticals and nutritionals to patients in higher concentrations and the associated lower cost, including many international markets. The majority of revenues by our International business unit are derived from hospitals.

                Over the past several years, the healthcare community, particularly in the United States, and more recently in several countries in the international market, has increasingly focused on patient and caregiver safety and the prevention of medical errors. Since the release of the Institute of Medicine Report in 1999 estimating that between 44,000 and 98,000 people die annually in the United States from medical errors, there has been a growing emphasis on preventing errors in the delivery of healthcare. A study published in 2002 in the Archives of Internal Medicine entitled, “Medication Errors Observed in 36 Health Care Facilities,” found that medication errors occur in nearly 1 of every 5 doses given to patients in the typical U.S. hospital. According to a 1995 Journal of the American Medical Association article, approximately 51% of hospital medication errors are related to the administration of medication to patients. A large percentage of the most costly medical errors in the United States are medication errors related to powerful drugs that are delivered, or infused, directly into a patient’s vein. Research by David M. Bates, M.D. of Brigham and Women’s Hospital in Boston, Massachusetts, and a leading authority in the study of medication errors, has shown that a significant portion of preventable hospital medication errors that cause harm are associated with intravenous administration of drugs. We estimate, based on this published research, that the cost of medication errors to the U.S. healthcare system approximates $4 billion annually, excluding costs related to litigation.

                In addition, as treatment regimens have become more complex, and as the critically ill constitute an increasing percentage of hospital patients, the average hospital patient now requires a greater number of intravenous lines and more potent therapeutics, creating a greater need for technologically advanced infusion systems. As the reliance on intravenous therapy and the potency of the drugs administered have increased in recent years, the need for precise administration and monitoring of intravenous fluids has risen significantly, and the incidence of costly intravenous medication errors has become a significant concern. We believe that reducing errors at the point of administration is the most immediately available, cost-effective solution to reducing harm from medication errors.

                Our medication safety solution is designed to reduce the risks and costs of errors in the administration of intravenous therapy, to improve medication safety and clinical outcomes, to assure compliance with customer-established clinical practice guidelines and to promote “best practice” standards of medical treatment. We believe our proprietary Guardrails Safety Software is the first and most comprehensive solution designed to help reduce IV medication errors. The Guardrails Safety Software helps protect patients from infusion programming errors by allowing hospitals to configure care-specific profiles with pre-defined drug dose limits and other parameters to meet the particular needs of multiple patient areas within the hospital. Our solution offers hospitals the opportunity to reduce the risks and expense of medication errors in a cost-effective manner that can be implemented quickly without requiring a change in existing clinical practice.

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                In addition to concerns about medication errors, there is increasing pressure by regulatory agencies in the United States, such as the Occupational Safety and Health Administration, or OSHA, and the United States Food and Drug Administration, or FDA, as well as some states, for more stringent control of needles in hospitals to reduce the risk to healthcare workers and patients associated with the transmission of blood-borne diseases resulting from accidental needlesticks. OSHA requires hospitals to put in place systems to reduce the potential for accidental needlesticks and the FDA recommends using needle-free systems or protected needle systems to replace hypodermic needles for accessing intravenous lines. Healthcare workers in the United States suffer from an estimated 590,000 needlestick injuries each year resulting in increased costs to healthcare employers and a risk of transmission of HIV, Hepatitis B or Hepatitis C to healthcare workers.

                The Needlestick Safety and Prevention Act enacted by Congress in 2000 is intended to increase protection for health care workers against needlestick injuries by requiring that health care facilities implement the use of “safer medical devices” to minimize accidental needlesticks. The legislation requires that frontline workers be involved in the evaluation, selection and implementation of new safety devices. Our SmartSite Needle-Free System helps protect against risks associated with accidental needlesticks, and has a proven track record among clinicians and healthcare workers.

Products and Services

                We develop, manufacture and market medication safety systems; single and multi- channel large volume infusion pumps, several of which feature our proprietary Guardrails Safety Software; a broad range of syringe infusion pumps; and dedicated and non-dedicated disposable administration sets, many of which feature our proprietary SmartSite Needle-Free System. Our Medley Medication Safety System, with its proprietary Guardrails Safety Software, represents the next generation of “smart” medication safety technology at the point of care. This system permits integration of administration, monitoring and clinical best practice guidelines from a single platform. Our infusion pumps include large volume infusion pumps such as the Gemini series, Signature Edition Family, MedSystem III, Asena GW, and syringe infusion pumps such as P1000, P3000, PCAM, P6000, P7000 and Asena GS, GH and CC, which are sold primarily in Western Europe, and disposable pumps such as the ReadyMED for use in the alternate-site setting. In North America, each of our current large volume pumps, including our Medley System large volume pump module, uses only dedicated disposable administration sets designed and manufactured by us for that particular pump. We also sell non-dedicated disposable administration sets, including several needleless devices, for use in many infusion applications.

                Aside from our range of medication safety systems, IV pumps and monitoring products, we offer a comprehensive group of value-added services and programs, including software products, consulting services to assist our customers in database development and medication error reduction, hardware and software technical services and clinical education.

                We also manufacture and market hospital thermometry instruments and related disposable probe covers, and stand-alone, non-invasive, multi-parameter instruments which measure and monitor a combination of temperature, pulse and blood pressure and other vital signs.

                We offer a wide variety of infusion systems designed to meet the varying price and technological requirements of our diverse worldwide customer base. For the year ended December 31, 2003, our infusion systems sales (pumps, software licenses and disposable administration sets) were $475.1 million, representing 89.0% of total sales. Of this amount, infusion pumps (including related software licenses) and disposables accounted for $151.3 million and $323.8 million of total sales during that period, respectively. Disposable administration sets for 2003 for the North America and International business units were $219.1 million and $104.7 million, respectively.

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ALARIS Medication Safety Systems

                Our infusion systems incorporate our proprietary software that is designed to help prevent intravenous medication errors by alerting clinicians when a dosage calculation is wrong and intercepting any serious human error in programming. These systems also provide continuous quality improvement (CQI) data to identify IV medication errors that have been averted and could have resulted in patient harm. This CQI data helps improve IV medication safety and hospital best practices and provide a new source of information to assist hospitals in assessing their infusion practices and identifying opportunities for process improvements.

Our Advanced Medication Safety Systems include:

                The Medley Medication Safety System, incorporating a computer at the point of care. This integrated technology platform is designed to reduce the incidence of medication errors associated with the use of drug infusion instruments. The Medley System is a modular medical technology platform that incorporates a point-of-care computer to integrate infusion, patient monitoring and an institution’s clinical best practice guidelines to achieve optimal outcomes. We implemented full market release of the Medley System in January 2002.

                The Medley System offers several key advantages over traditional infusion devices:

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                With the Medley System, our customers are able to tailor the treatment to the patient, improve patient outcomes, assure compliance with customer-established clinical practice guidelines, promote “best practice” standards of medical treatment and reduce the cost of care.

                In 2003, we continued to advance our professional field support services team through the ALARIS Center for Medication Safety and Clinical Improvement to help customers achieve their IV medication safety goals. These teams work with customers to expedite the implementation process through professional project management support by providing an immediate impact on patient and caregiver safety. At the same time we leverage our knowledge of best practice experience across all customers to support the hospital’s IV medication data set development for the Guardrails Software. This is accomplished while minimizing disruption to staff’s workflow and offering clinical education and support from technology conversion through the “Go Live” process.

                In December 2003, ALARIS and McKesson Automation, Inc. connected the ALARIS Network to our Medley Medication Safety System with its Guardrails Safety Software and McKesson’s Admin-Rx bar-code scanning and communications technology at Ohio Valley General Hospital in Pittsburgh. The ALARIS Network provides real-time visibility into events occurring at the point of care to users throughout the hospital. It allows hospitals to collect, interpret and respond to CQI data as it is collected. ALARIS Medical Systems and McKesson will market their respective applications as the IV-RIGHT application and Connect-IV application, respectively. Our IV-Right application and McKesson Connect-IV solution combine to help to reduce the risk of harm from IV-programming errors, provide electronic documentation and give the pharmacy staff real-time information about the status of IV infusions. The handheld Connect-IV device scans bar codes from the caregiver, patient, medication and infusion channel, which are instantly compared with the physician’s order; while the IV-Right application consists of the Medley System with the Guardrails Software and the ALARIS Network, which provides real-time alerts of potential dosing errors and tracks averted harm.

                The Asena Medication Safety System. The Asena Infusion System, which consists of syringe pumps, volumetric infusion pumps and the Asena Docking Station, has already established a leadership position outside the United States, where syringe pumps are frequently the instruments of choice to administer critical drugs intravenously.

                In October 2003, we announced the release of the Asena CC Syringe Pump with our proprietary Guardrails Safety Software for markets outside the United States. We are collaborating with key institutions in a number of countries, including New Zealand and the United Kingdom, to implement our error-prevention software and help improve medication safety. We have also started to compile CQI data from customers using the Asena CC Syringe Pump with the Guardrails Software.

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                We believe that the addition of the Guardrails Safety Software will provide additional clinical benefits for our large international customer base and will help provide medication safety where the risk of harm to patients is the greatest, at the point of care. We are also in the process of developing an Asena large volume pump with the Guardrails Software and enhanced hospital connectivity through a departmental safety network.

                The Asena Medication Safety System includes the Asena Dedicated Docking Station (Asena DDS) or the Asena Intelligent Docking Station (Asena IDS) which adds certain communication capabilities to the Asena DDS. The docking stations feature a versatile mounting system, known as a medical device interface, which allows syringe pumps and volumetric infusion pumps to be mounted to a pole, a Draeger bar, the Asena DDS or the Asena IDS without adapters.

Our Basic Medication Safety System includes:

                 The Signature Edition GOLD Infusion System. In the fourth quarter of 2002, we expanded the market for our Guardrails Safety Software by making it available to existing and new customers of our Signature Edition GOLD Infusion System. The installed base of Signature Edition GOLD Infusion Systems exceeds 50,000 instruments and Guardrails Safety Software has been installed on 15,000 units. Signature Edition GOLD Infusion Systems include a single channel and dual channel pump and incorporates intuitive user interface and advanced software capabilities. This line contains the following innovative features: a patented AccuSlide flow regulator, designed to minimize unregulated flow of fluids into a patient’s blood stream; precision flow capability, designed to improve flow continuity and minimize hemodynamic changes; and Advanced Infusion Management, designed to provide unique early warning assessment tools for enhanced intravenous site management. Other standard features include an easy-to-use drug library, which permits dose and/or rate calculation; a multi-step feature, which allows the clinicians to pre-program up to nine steps for drug delivery; and a patented “learn teach” communication link capability for biomedical engineers, which streamlines the configuration and set-up process.

ALARIS Medical Systems Large Volume Infusion Pumps

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ALARIS Medical Systems Syringe Pumps

                We also sell a broad range of syringe infusion pumps. Syringe pumps deliver a smaller amount of fluid in more concentrated amounts, and are used where medical practice does not require large levels of hydration in connection with infusion therapy. In North America, syringe pumps are used primarily in neonatal care, oncology, anesthesia and critical care. While syringe pumps represent a relatively small portion of the industry installed base in the U.S. market, they are widely used in Western Europe, where they constitute approximately 60% of the infusion pump market. Syringe pumps are more widely used where clinical practice favors administering medications in smaller volumes of fluid.

Our selection of syringe pumps includes:

ALARIS Medical Systems Disposable Pumps

                We also offer the ReadyMED disposable infusion pump often selected for ambulatory use. The ReadyMED infusion pump, a compact, lightweight and disposable pump used in the intravenous administration of antibiotics, offers several key advantages over traditional systems. Traditional systems are gravity driven and require a patient to use a small intravenous bag and tubing set that must remain on an intravenous solution pole during infusion, thereby restricting the patient’s movement. In contrast, our ReadyMED pump uses positive pressure and thereby allows the patient to carry the device in a pocket or wear it on a belt. We sell the ReadyMED pump through our alternate-site sales force and distribution network in the United States.

ALARIS Medical Systems Disposable Administration Sets and Needle-Free Access Products

                Our intravenous infusion systems require the use of disposable administration sets, which represent a significant portion of our sales. For the year ended December 31, 2003, we sold 137.9 million disposable administration sets, representing sales of $323.8 million, or 60.6% of total sales. Sales of disposable administration sets for the year ended December 31, 2003 for the North American and International business units were $219.1 million and $104.7 million, respectively. With the exception of certain models of the Asena GW family, all of our current large volume pump systems use only dedicated disposable administration sets, designed and manufactured by or for us for that particular pump. We also manufacture and sell non-dedicated disposable administration sets for use with our infusion pump systems.

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                Our needle-free products are designed to permit access to disposable administration sets without the use of needles. Our proprietary SmartSite Needle-Free System allows healthcare institutions to comply with the Needlestick Safety and Prevention Act and addresses healthcare workers’ safety concerns by allowing them to access IV lines without needles. Our disposable administration sets utilizing our SmartSite Needle-Free System offer a fully integrated, cost-effective design, which eliminates the need for separate caps and additional cannula components. These safety features help reduce the risk to healthcare providers of accidental needlesticks, which can result in the transmission of diseases, such as AIDS and Hepatitis B and Hepatitis C. Our introduction of the SmartSite Needle-Free system has provided us with an opportunity to compete aggressively in the gravity and extension set and components segment of the market with innovative, cost-effective, needle-free gravity and extension sets and components. We also intend to expand our SmartSite Needle-Free System business through supply agreements with potential customers, including pharmaceutical companies.

ALARIS Medical Systems Patient Monitoring Products

                We operate primarily in two patient monitoring product markets: hospital thermometry systems and related disposables and stand alone, non-invasive, multi-parameter instruments. These products are widely used in hospital and alternate-site settings. For the year ended December 31, 2003, sales of our patient monitoring instruments and related dedicated disposables were approximately $29.8 million or 5.6% of total sales. Patient monitoring sales for North America and International for the year ended December 31, 2003 were $24.7 million and $5.1 million, respectively.

                Thermometry Systems. We are a leader in hospital thermometry systems, which consist of thermometers and disposable probe covers, and maintain a strong market position in the United States. Our large installed base of hospital thermometry instruments allows us to generate predictable and recurring revenues from sales of our related dedicated disposable probe covers, which are the only probe covers that can be used with our thermometry instruments. For the year ended December 31, 2003, we sold over 549 million boxes of dedicated disposable probe covers.

                Our primary thermometry product is the electronic thermometer. In 1999, we supplemented our TEMP•PLUS II product line by introducing the Turbo Temp thermometer, an improved, cost-effective and technologically advanced electronic thermometer designed to provide a faster temperature reading. We also manufacture and market the CORE•CHECK system, a thermometer that measures temperature by detecting the emission of infrared energy in the ear.

                Other Patient Monitoring Products. We also sell stand-alone, non-invasive, multi-parameter patient monitoring products which measure a combination of pulse, pulse-oximetry, temperature and blood pressure.

                Since 1997, the VITAL•CHECK Vital Signs Monitor series has been marketed in U.S. and Canadian hospitals under a private label agreement with its manufacturer. The VITAL•CHECK 4400 series, marketed in the North America through an exclusive license agreement, measures non-invasive blood pressure, pulse oximetry, pulse and temperature. In August 2001, we released the VITAL•CHECK 4500 Vital Signs Monitor series (successor to the VITAL•CHECK 4200 series) with non-invasive blood pressure, heart rate and temperature monitoring features. Both monitor series utilize our IVAC thermometer technology.

Customer Service

                We provide repair service for our products at certain of our facilities around the world or on-site at our customers’ facilities and elsewhere through third-party contractors. Customers may elect to enter into service agreements or to receive service on a time-and-materials basis. We also train customers as to the use of our products and maintain a technical support help-line to answer customers’ questions. We believe that the availability of such service helps maintain strong customer relations. Repair and other services represented approximately 5% of our sales for the year ended December 31, 2003.

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Marketing and Sales

                Our sales efforts focus primarily on the hospital market. Our focus has been on moving hospitals to our medication safety systems and assisting our partner hospitals in averting patient harm from IV medication delivery. Sales representatives work closely with primary decision-makers at these institutions, which include hospital executives, safety officers and nursing, pharmacy and physician leaders. We have over 5,000 hospital customers worldwide and sell our products through a combined direct sales force consisting of over 200 salespersons and through more than 100 distributors. No single hospital customer is material to our business or operations. Our International business unit utilizes product distributors in areas where we do not have a direct sales force. Sales to distributors accounted for 15.0% of International sales for the year ended December 31, 2003.

                Our ALARIS Center for Medication Safety and Clinical Improvement, with our team of professional nurses, pharmacists and project managers continues to pioneer improvements in best practice for IV medication safety. We believe our sales force in the United States and internationally plays a vital role in the effective introduction of new products.

                We contract with GPOs in the United States, the U.S. federal government and other governmental entities, to support the sales of our products, including the following:

Manufacturing

                Our products are manufactured at plants in San Diego, California; Creedmoor, North Carolina; Tijuana, Mexico; and Basingstoke, England. The San Diego, California facility is the primary manufacturing facility for infusion pumps and patient monitoring instruments in North America. The service operation for installed infusion pumps and patient monitoring instruments is also located in this facility. The Creedmoor, North Carolina facility manufactures automated sub-assemblies used in our disposable products and is a distribution center for disposable finished products. The Tijuana, Mexico facilities assemble a majority of the disposable products distributed in North America, and the Basingstoke, England facility manufactures syringe pumps and large volume pumps for Europe and other segments of the international market. Disposable products for international markets are currently supported through a number of foreign manufacturers and our Tijuana, Mexico and Creedmoor, North Carolina facilities.

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                We have established procedures and other controls designed to ensure that manufactured and purchased parts products perform as expected by our customers. We also have in place a system designed to ensure timely and effective corrective and preventative action to manage non-conformities reported by customers or detected within our operations.

                We purchase raw materials, assemblies and finished product for resale worldwide in the ordinary course of business from numerous suppliers. Although the vast majority of these materials are generally available and we have not experienced any material delays in obtaining these materials, we have, on occasion, experienced temporary delays for certain materials due to supplier shortages. In some situations, we have long-term supply contracts, although we purchase a significant amount of our requirements of certain raw materials by purchase order.

Research and Development

                We believe that a well-targeted research and development program constitutes an essential part of our activities and is an integral part of our business. We are actively engaged in research and development programs to develop and improve products. These activities are performed in the United States and, to a lesser extent, in the United Kingdom.  For the years ended December 31, 2003, 2002 and 2001, we expended $38.4 million, $30.4 million and $27.1 million, respectively, on in-house research and development. We expect to expend approximately 7% of revenues for such purposes in 2004. Substantially all of such amounts were and will be dedicated to the development of new products.

Patents, Trademarks and Other Proprietary Rights

                We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent they are covered by valid and enforceable patents, trademarks and copyrights or are effectively maintained as trade secrets. Accordingly, we rely heavily on patented and other proprietary technology to maintain our competitive position. We seek to protect our proprietary rights in a manner that balances the costs of such protection against obtaining the greatest value for the company.

                Our policy is to file patent applications in the United States and foreign countries in order to protect technology, inventions and improvements to inventions that are commercially important to our business. As of December 31, 2003, we held more than 200 patents in the United States and more than 300 patents in foreign countries, mainly in Europe, Canada, Japan and Australia.

                We sell our products under various trademarks. We register those trademarks, in the United States and foreign countries, which we believe to be of sufficient importance to our business. In addition, we seek copyright protection for the software and other original works we use in many of our products. We also rely on trade secrets, unpatented know-how and continuing technological advancement to maintain our competitive position and seek protection, in part, through confidentiality and proprietary information agreements.

                We operate in an industry susceptible to significant patent legal claims. At any given time, we are often involved, either as a plaintiff or defendant, in one or more patent infringement actions. Patent litigation can result in significant payments or result in injunctions that can prevent the sale of products. During the past several years, we were involved in one patent infringement lawsuit which was dismissed in 2003. (See note 14 to the consolidated financial statements for information about that lawsuit.)

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Competition

                We face substantial competition in all of our markets. We believe that we hold 32% of the installed base of large volume pump channels in the U.S. Our primary competitors in the United States and their respective market share are: Baxter International, Inc. with 33%, Abbott Laboratories, Inc. with 26% and B. Braun Medical, Inc. with 6%. Despite the growing concern with medication safety, some institutions may still select products based on price rather than safety. Because of our primary competitors’ size and product breadth, they sell their infusion products at prices which are lower than ours by offering pricing structures which permit their customers to acquire infusion pumps and disposables at a substantially reduced price if those customers purchase other medical equipment, pharmaceuticals and supplies. In addition, GPO contracts are typically structured to discourage customers from considering alternative products.

                Since we believe that selecting infusion products based on price rather than safety features is ultimately more expensive for hospitals, our marketing strategy focuses on educating hospitals about the costs of medication errors. One of our business strategies is to be recognized as the leader in intravenous medication safety solutions by developing or licensing technologically superior products, thereby providing customers with demonstrably superior clinical value through better capital asset utilization and better patient outcomes. We expect that this approach will improve our competitive position, as we believe that the competitive factors that are most important in our markets are quality of products and services, technological innovation and the value proposition of improving patient outcomes while reducing overall costs associated with medication safety. In 2003, we continued to improve our competitive positioning as a result of increasing market acceptance of the importance of IV medication safety. By the end of 2003, over 140 hospitals have purchased our Guardrails Safety Software.

                In our International business unit, our largest infusion system competitors include Fresenius Medical Care AG, B. Braun Melsungen AG and Graseby Medical Limited.

                The patient monitoring products market is fragmented by product type. Our key competitors in the North American market include Welch Allyn, Inc. and Sherwood-Davis & Geck (Tyco) in electronic and infrared thermometers, respectively.

Government Regulation

                Product Regulation. Our products are classified as medical devices subject to regulation in the United States by the Food and Drug Administration. Our new products generally require FDA clearance under a procedure known as 510(k) premarket notification. A 510(k) premarket notification clearance indicates FDA agreement with an applicant’s determination that the product for which clearance has been sought is substantially equivalent to another medical device that was on the market prior to 1976 or that has received 510(k) premarket notification clearance. Some products have been continuously produced, remarketed and sold since May 1976 and require no 510(k) premarket clearance. Our products generally are Class II products with the FDA, meaning that our products must meet certain FDA standards and controls and are subject to the 510(k) premarket notification clearance discussed above. FDA clearance is subject to continual review, and later discovery of previously unknown problems may result in restrictions on a product’s marketing, recall or withdrawal of the product from the market.

                In 2000, the U.S. Congress passed the Needlestick Safety and Prevention Act, which revised the OSHA Bloodborne Pathogens Standard of 1991. This Act reflected the development of new safer medical devices, such as needleless systems, for the protection of healthcare workers from sharps injuries. The Needlestick Safety and Prevention Act requires employers to implement the use of safety medical devices designed to eliminate or minimize occupational exposure to blood borne pathogens through needlestick or other injuries. Under the Needlestick Safety and Prevention Act, healthcare facilities must (1) review and update exposure control plans to reflect technological advances, (2) maintain a sharp injury log in areas where sharp devices are used, noting the type and brand of device used, and (3) seek input on engineering and work practice controls from the affected healthcare workers.

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                We have quality control/regulatory compliance groups that are tasked with monitoring compliance with design specifications and relevant government regulations for all of our products. We and substantially all of our products manufactured or sold in the United States are subject to the provisions of the Federal Food, Drug and Cosmetic Act of 1938, as amended by the Medical Device Amendments of 1976, the Safe Medical Device Act of 1990, as amended in 1992, the Medical Device User Fee and Modernization Act of 2002, and similar foreign regulations. In addition, certain of our products are indirectly subject to the Needlestick Safety and Prevention Act.

                As a manufacturer of medical devices, we are required to adhere to applicable requirements for FDA Quality System Regulations and to engage in extensive recordkeeping and reporting. In addition, our manufacturing processes and facilities are subject to periodic on-site inspections and continuing review by the FDA to insure compliance with Quality System Regulations as specified in Title 21, Code of Federal Regulation (CFR) part 820. We market our products in a number of foreign markets. Requirements pertaining to our products vary widely from country to country, ranging from simple product registrations to detailed submissions such as those required by the FDA. While we cannot assure you that our products meet all U.S. and international regulatory requirements, we believe that our products currently meet applicable standards for the countries in which they are marketed.

                We are required to report to the FDA information that a device has or may contribute to a death or a serious injury and have submitted such reports to the FDA in the past. We are also subject to product recalls and have made product recalls in the past. No such report or recall has had a material effect on our financial condition, but there can be no assurance regulatory issues may not have a material adverse effect in the future.

                Failure to comply with applicable governmental regulations can result in various penalties, including fines, recalls or seizure of product, total or partial suspension of production, refusal or delay in product approvals or clearances, increased quality control costs or criminal prosecution.

                Any change in existing federal, state or foreign laws or regulations, or in the interpretation or enforcement thereof, or the promulgation of any additional laws or regulations could have an adverse effect on our business, financial condition, results of operations or cash flows.

                 Environmental Regulation. We are also subject to various environmental laws and regulations, both within and outside the United States. Like other medical device companies, our operations involve the use of substances regulated under environmental laws, primarily in manufacturing and sterilization processes. While it is difficult to quantify the potential impact of compliance with environmental protection laws, we believe that we are in material compliance with current environmental standards and that continued compliance will not have a material impact on our financial position, results of operations or liquidity.

Employees

                As of January 31, 2004, we employed approximately 3,000 people, including approximately 1,000 in the United States. We believe that our relations with our employees are satisfactory.

Executive Officers of the Registrant

                David L. Schlotterbeck, age 56, has served as a member of our Board and as our President and Chief Executive Officer since November 1, 1999. From April 1999 to November 1999, Mr. Schlotterbeck served as our President and Chief Operating Officer. Before joining the Company, Mr. Schlotterbeck served as President and Chief Operating Officer of Pacific Scientific Company, an international manufacturer of motion control, process measurement and safety products which was subsequently acquired by Danaher Corporation, and of Vitalcom, Inc., a medical network manufacturer. He also served as Executive Vice President and Chief Operating Officer of Nellcor, Inc., a medical device manufacturer subsequently acquired by Mallinckrodt, Inc. Mr. Schlotterbeck is a graduate of the General Motors Institute with a B.S. in electrical engineering. Mr. Schlotterbeck holds an M.S. in electrical engineering from Purdue University and completed the Executive Institute at Stanford University in 1984.

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                William C. Bopp, age 60, has served as our Senior Vice President and Chief Financial Officer since November 1, 1999. From March 1999 to November 1999, Mr. Bopp served as our Vice President, Chief Financial Officer and Treasurer. Prior to joining the Company, Mr. Bopp served as Executive Vice President, Chief Financial Officer and a member of the board of directors of C.R. Bard, Inc., a developer, manufacturer and marketer of healthcare products. Mr. Bopp is a graduate of Harvard College and holds an MBA, Finance, from the Harvard Business School.

                Frederic Denerolle, age 44, has served as the Vice President and General Manager of our International Business Unit since January 2001. From 1996 to 2001, Mr. Denerolle was Executive Vice President of the Infusion Technology Division of Fresenius Vial. Prior thereto, Mr. Denerolle held positions of increasing responsibility with Becton Dickinson, including General Manager of its Infusion System business. Mr. Denerolle is a graduate in Business Administration from Ecole Supérieure de Commerce de Nantes.

                Sally M. Grigoriev, age 45, has served as our Vice President of Operations since December 2000. From January 1995 to December 2000, Ms. Grigoriev served as our Vice President of Quality and Regulatory Affairs. Prior to joining IVAC Medical Systems in January 1995, she served as the Vice President of Quality and Regulatory Affairs at U.S. Medical Instruments, Inc. and Block Medical, Inc. respectively. Ms. Grigoriev holds a B.S. degree, Chemical Engineering, from the University of California, Santa Barbara.

                Robert F. Mathews, age 40, has served as our Vice President of Finance and Treasurer since February 2002. From January 2001 to February 2002, he served as our Vice President of Finance and Corporate Controller and, from July 1996 to January 2001, he served as our Corporate Controller. Before joining the Company, Mr. Mathews held various positions of increasing responsibility with PriceWaterhouse, LLP. Mr. Mathews is a certified public accountant and holds a B.S. degree in business administration from San Diego State University.

                William H. Murphy, age 51, has served as our Vice President of Quality and Business Systems since May 2003. From December 2000 to May 2003, he served as our Vice President of Quality and Regulatory Affairs. In February 2000, Mr. Murphy joined ALARIS Medical Systems as Director of Regulatory Affairs. Before joining the Company, Mr. Murphy served as Director of Regulatory Compliance of Nellcor Puritan Bennett Inc., which was subsequently acquired by Mallinckrodt. Prior thereto, Mr. Murphy provided private consulting services in the area of regulatory compliance, quality system development and process validation. Mr. Murphy holds a B.S. degree from Augusta College.

                Stuart E. Rickerson, age 55, has served as our Vice President, General Counsel and Secretary since July 2001. Before joining the Company, Mr. Rickerson served as General Counsel to Golden Triangle Ltd., a legal management consulting firm; he was General Counsel and a member of the board of directors of Keene Corporation; and he served as Vice President and General Counsel of Cardiac Pacemakers, Inc., then a subsidiary of Eli Lilly and Company and now part of Guidant Corporation. Earlier in his career, he held several legal and management positions of increasing responsibility with Eli Lilly. Mr. Rickerson is a graduate of Princeton University and holds a J.D. from Georgetown University.

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                Jake St. Philip, age 51, has served as Vice President and General Manager, North America of ALARIS Medical Systems since July 1998. From November 1996 to July 1998, he served as Vice President of Sales, North America of ALARIS Medical Systems. From November 1981 to the merger that formed ALARIS in November 1996, Mr. St. Philip held various sales and marketing positions with IVAC Medical Systems. Previously, he held various sales positions of increasing responsibility with Johnson & Johnson and M&M/Mars. Mr. St. Philip holds a B.S. degree in Marketing from the University of New Orleans and completed the Executive Program at Stanford University in 1999.

Available Information

                Our website address is www.alarismed.com. Through a link on the Investor Relations section of our website, we make available the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Statements of Beneficial Ownership on Forms 3, 4 and 5, and any amendments to those reports filed or furnished pursuant to Section 13(a), 15(d) or 16 of the Exchange Act. By the date of our 2004 annual meeting of stockholders, we will post on our website the following corporate governance documents: the charters of our Audit, Compensation, and Nominating and Corporate Governance Committees, our Corporate Governance Guidelines and our Business Ethics Policy and Code of Conduct. We will also post any amendments to or waivers of our Business Ethics Policy and Code of Conduct that relate to our principal executive officer, principal financial officer and principal accounting officer. These SEC filings and corporate governance documents can be printed free of charge from our website and are also available in print to any stockholder requesting a copy from our corporate secretary at our principal executive offices. Information contained on our website is not part of this report.

ITEM 2. PROPERTIES

                We own or lease the following properties which are material to our operations: