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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended DECEMBER 31, 1999 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the period from __________ to __________
Commission file number 333-18687
ALARIS MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3800335
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10221 WATERIDGE CIRCLE, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (858) 458-7000
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
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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, 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. [ ]
No common stock is held by nonaffiliates of the registrant.
As of March 2, 2000, the registrant had 1,000 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of ALARIS Medical, Inc.'s Proxy Statement for the Annual Meeting
of Stockholders to be held on May 31, 2000 ("Proxy Statement"), are
incorporated by reference as described in Part III.
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PART I
ITEM 1. BUSINESS
BACKGROUND
ALARIS Medical Systems, Inc. ("ALARIS Medical Systems"), 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
Systems was formed by the merger of two pioneers in infusion systems, IMED
Corporation and IVAC Medical Systems, Inc. on November 26, 1996. ALARIS Medical
Systems, a wholly-owned subsidiary of ALARIS Medical, Inc. ("ALARIS Medical"),
formerly Advanced Medical, Inc., was incorporated on October, 14 1988 under the
laws of the State of Delaware. ALARIS Medical Systems and its subsidiaries are
collectively referred to as the "Company."
On July 17, 1998, pursuant to an agreement with ALARIS Medical, ALARIS
Medical Systems, Instromedix ("Instromedix"), and the shareholders of
Instromedix as of June 24, 1998, ALARIS Medical Systems acquired all of the
outstanding common stock of Instromedix, a telemedicine, cardiovascular and
pacemaker monitoring company, and subsequently merged Instromedix with and into
itself.
OVERVIEW
The Company is a leading provider of infusion systems and related
technologies to the United States hospital market, with the largest installed
base of pump delivery lines ("channels"). The Company is also a leader in the
International infusion systems market. Based on installed base of infusion
pumps, the Company has a number one or two market position in seven Western
European countries, the number three market position in three others, 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 the acquisition of Instromedix, the
Company now produces and sells arrhythmia-event recorders and pacemaker monitors
targeted for the alternate site market.
ALARIS Medical Systems has defined three strategic business units:
North America, which includes the United States and Canada; Instromedix, and
International, which includes all other international operations, including
Europe, Asia, Australia and Latin America.
The North American and International operating units manufacture and
market intravenous infusion therapy devices and patient monitoring products,
primarily using a direct sales force for product distribution. The International
unit also utilizes product distributors in areas where the Company does not have
a direct sales force. Distributor sales accounted for 11.3% of International
sales in 1999. The Instromedix business segment designs, manufactures and sells
cardiology products such as arrhythmia-event recorders and pacemaker monitors.
Instromedix products are targeted to the alternate-site market and are primarily
distributed through a direct sales force. Instromedix sales represented
approximately 3% of the Company's sales in 1999. Service of the Company's
products represented approximately 5% of the Company's sales in 1999.
--------------------------------------------
The Company has registered or applied to register the following
trademarks: AccuSlide-Registered Trademark-, Advantis-TM-, ALARIS-Registered
Trademark-, ALARIS Medical Systems-TM-, Asena-TM-, Cardio Magic-Registered
Trademark-, CarryAll-Registered Trademark-, Core-Check-Registered Trademark-,
DigiStat-TM-, Gemini-Registered Trademark-, Gemini PC-1-Registered
Trademark-, Gemini PC-2-Registered Trademark-, Gemini PC-2TX-Registered
Trademark-, Gemini PC-4-Registered Trademark-, HeartCard-Registered
Trademark-, IMED-Registered Trademark-, Instromedix-Registered Trademark-,
IVAC-Registered Trademark-, IVAC Medical Systems-TM-, King of Hearts
Express-Registered Trademark-, LifeSigns-TM-, LifeSigns Commander-TM-,
LifeSigns Shuttle-TM-, Medley, MedSystem III-Registered Trademark-, Patient
Solutions, Inc.-Registered Trademark-, PCAM, ReadyMED-Registered Trademark-,
RhythmCard-Registered Trademark-, Signature Edition-Registered Trademark-,
SmartSite-Registered Trademark-, TeleLab-Registered Trademark-,
Turbo-Temp-TM-, VersaSafe-Registered Trademark-, VITAL-CHECK-Registered
Trademark-
2
The Company sells a full range of products through the worldwide direct
sales force consisting of over 250 salespersons and through more than 150
distributors to over 5,000 hospitals worldwide. Sales to customers located in
and outside of North America accounted for approximately 68.9% and 31.1%,
respectively, of the Company's sales for the year ended 1999. For the year ended
December 31, 1999, the Company had sales of approximately $402.0 million.
INFUSION SYSTEMS. The Company offers a wide variety of infusion pumps
designed to meet the varying price and technological requirements of its diverse
customer base. These infusion pumps include the Gemini series, consisting of
single, dual and four channel infusion pumps designed for use in all hospital
settings by customers with sophisticated technological requirements; the
Signature Edition Family, a versatile, user-friendly single and dual channel
infusion pump for use in critical and general medical and surgical settings; the
MedSystem III instrument (the "MS III"), a compact, lightweight, programmable
three channel infusion pump targeted for the hospital critical care setting and
transport applications. A single channel pump has only one fluid delivery line
to the patient, while a multi-channel pump has two or more fluid delivery lines.
Multi-channel pumps are used to service only a single patient. Generally, where
more than one fluid delivery line is required for a patient, purchasing a
multi-channel pump is less costly than purchasing an equivalent number of single
channel pumps. In addition, the Company offers the ReadyMED ambulatory infusion
pump ("ReadyMED"), which is compact, lightweight and disposable for use in the
alternate-site market, as well as a broad range of syringe infusion pumps for
use primarily outside the United States.
The Company also manufactures and sells dedicated disposable
administration sets which are required to be used with the Company's large
volume infusion pumps. Since the useful lives of the Company's infusion pumps
typically range between seven to ten years, the Company's industry-leading
installed base allows it to generate predictable and recurring revenues from
sales of disposable administration sets. For the year ended December 31, 1999,
the Company sold approximately 75.2 million disposable administration sets
representing sales of $244.4 million or 60.8% of sales. Disposable
administration sets sales for 1999 for the North America and International
business units were $168.6 million and $75.8 million, respectively. Many of the
Company's disposable administration sets offer protection features designed to
prevent the unregulated flow of fluids into a patient's blood stream ("free
flow"). In addition, the Company also has several enhancements to its disposable
administration sets, including needle-free access systems that are designed to
reduce the risk to health care providers of diseases, such as AIDS and
hepatitis, that may be transmitted through accidental needlesticks and, in the
case of the SmartSite needle-free system, to eliminate patient exposure to latex
which can cause severe allergic or anaphylactic shock reactions. These features
continue to provide the Company's customers with the latest cost-effective
technology for the Company's installed base of infusion pumps. For the year
ended December 31, 1999, the Company's infusion systems sales (pumps and
disposables) were $331.9 million, representing approximately 83% of sales.
PATIENT MONITORING PRODUCTS. The Company's patient monitoring products
compete in discrete market niches, each with different competitive dynamics. The
Company primarily operates in the United States, Canada and Western Europe in
two patient monitoring products markets: (i) hospital thermometry systems and
(ii) stand-alone, non-invasive, multi-parameter instruments used to measure and
monitor a combination of vital signs. For the year ended December 31, 1999, the
Company's patient monitoring product sales were approximately $34.5 million,
representing approximately 9% of the Company's total sales. Patient monitoring
sales for North America and International for 1999 were $30.1 million and $4.4
million, respectively.
The Company's principal thermometry instruments, the electronic
thermometer and the infrared tympanic thermometer, are both widely used in
hospitals and alternate site settings. The Company believes it is the second
largest participant in the United States infrared thermometry market. The
Company's large base of installed hospital thermometry instruments allows it to
generate predictable and recurring revenues from sales of related dedicated
disposable probe covers. In 1999, the Company manufactured and sold over 637
million dedicated disposable probe covers into its worldwide installed
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base. In addition, the Company participates in the hospital market of
stand-alone, non-invasive, multi-parameter instruments through its
Vital-Check product line, which measures and monitors a combination of
temperature, pulse, blood pressure and pulse oximetry.
TELEMEDICINE, CARDIOVASCULAR AND PACEMAKER MONITORING PRODUCTS. The
Company's telemedicine, cardiovascular and pacemaker monitoring products are
sold by the Instromedix business unit and are utilized in a variety of
remote-care settings, primarily at the patient's home, workplace or a
physician's office. As the trend to treat patients in locations outside of
the traditional hospital setting accelerates due to cost pressures and
availability of new technology, the ability to provide remote diagnostic and
telemedicine capabilities are becoming increasingly important to both the
caregiver and patient. Instromedix' products and services include the
LifeSigns system, which is a multi-parameter monitoring system that records
12-Lead electrocardiograms ("ECGs"), pulse oximetry and blood pressure data and
digitally transmits this information to a computer-based receiver. This
system is now used clinically in a variety of patient care models and the
Company is supporting several studies designed to assess the cost-saving
utility of the LifeSigns System. Instromedix' arrhythmia event recorders
allow patients with intermittent symptoms to record their ECG at the time the
symptom occurs. These devices are portable or wearable devices, and are used
to monitor, record and subsequently transmit ECG cardiac events via a
standard or wireless telephone link to a care-giver's location. Instromedix
also produces pacemaker monitors which provide patients with the ability to
have their pacemaker function assessed over the phone, providing a convenient
and cost effective alternative to frequent physician office visits. It also
provides a telemonitoring laboratory service, which offers 24 hour/7 day
cardiac arrhythmia monitoring to physicians and hospitals. Instromedix'
products are distributed through both direct and OEM sales channels, which
include major cardiac pacing companies in the United States.
INDUSTRY
GENERAL. In the United States, the Company sells its products primarily
in two markets: the hospital market and the alternate-site market. The United
States hospital market consists of approximately 5,300 hospitals with a total of
approximately 900,000 licensed beds. Within this market, cost containment
measures both imposed and proposed by federal and state regulators and private
payors, combined with increased utilization review and case management, have led
to greater financial pressure on hospitals. In response to these
cost-containment pressures, hospitals and other potential customers for the
Company's products are increasingly combining into group purchasing
organizations ("GPOs") which may be large and which monitor compliance with
exclusive purchase commitments. GPOs may enter into exclusive purchase
commitments with as few as one or two providers of infusion systems and/or
patient monitoring products, for a period of several years. These trends have,
in turn, led to downward pricing pressure on manufacturers of medical products,
including the Company, and greater use of care settings outside the hospital
(i.e., the alternate-site setting) for treatment. See "--Marketing and Sales."
The alternate-site market encompasses all health care provided outside
the hospital and comprises primarily home health care, freestanding clinics,
skilled nursing facilities and long-term care facilities. The market for
infusion systems used in the alternate site has experienced a greater growth
rate than that of the hospital market. This growth is primarily attributable to
advances in technology that have facilitated the provision of care outside of
the hospital, an increased number of illnesses and diseases considered to be
treatable with home infusion therapy and increased acceptance by the medical
community of, and patient preference for, non-hospital treatment.
The Company also sells its products internationally. The Western
European infusion therapy market, which includes infusion pumps, controllers,
and disposable intravenous sets, is believed to be in excess of $400 million
annually. Unlike the U.S. market, syringe pumps represent a significant share of
total infusion pump placements in the international market. The Company expects
the trend toward utilization of syringe pumps to continue as hospitals favor the
lower cost associated with syringe pumps and focus on administering
pharmaceuticals and nutritionals to patients in higher concentrations. The
majority of revenues in the international market are derived from hospitals
since the alternate-site market is in a developmental stage.
4
The Company believes that as the worldwide infusion systems and patient
monitoring markets continue to mature, providers of goods and services in these
markets will need to increase the scale of their operations and broaden the
scope of their product lines in order to leverage worldwide sales, service and
research and development infrastructures. These trends are driving industry
consolidation both in the United States and internationally which, in turn,
provide opportunities for leading suppliers to increase market share and
participate in strategic alliances, joint ventures and acquisitions.
INFUSION SYSTEMS. Intravenous infusion therapy generally involves the
delivery of one or more fluids, primarily pharmaceuticals or nutritionals, to a
patient through an infusion line inserted into the circulatory system. Over the
past 20 years, as both the reliance on intravenous drug therapy and the potency
of the drugs administered have increased, the need for extremely precise
administration and monitoring of intravenous fluids has risen significantly.
Infusion systems are differentiated based on a number of
characteristics including size, weight, number of delivery channels,
programmability, mechanism of infusion, cost and service. One of the key
differences among infusion systems is the level of control that such systems
afford to both medical staffs and patients.
Infusion pumps are volumetric devices that regulate flow by
electronically measuring a specific volume of a fluid. Infusion pumps administer
precise, volumetrically measured quantities of fluids over a wide range of
infusion rates by using positive pressure to overcome the resistance of the
infusion tubing and the back pressure generated by the patient's circulatory
system. Syringe pumps operate by gradually depressing the plunger on a standard
disposable syringe, thereby delivering a more concentrated dose of medication at
a very precise rate of accuracy. Disposable pumps are single use products
designed for use primarily in alternate-site settings.
The infusion systems sold in the markets in which the Company competes
consist of single and multi-channel infusion pumps and disposable administration
sets. As treatment regimens have become more complex and as the critically ill
constitute an increasing percentage of hospital patients, the average hospital
patient now requires a greater number of intravenous lines and more potent
therapeutics, thereby creating a greater need for technologically-advanced
infusion systems.
All infusion pumps require the use of disposable administration sets. A
set consists of a plastic interface and tubing and may have a variety of
features such as volume control, pumping segments or cassette pumping systems
for more accurate delivery, clamps for flow regulation and multiple ports for
injecting medication and delivery of more than one solution. Almost all of these
sets, including those manufactured by the Company, are compatible only with
their particular manufacturer's line of infusion systems. The introduction,
however, of the SmartSite needle-free system has provided the Company with an
opportunity to aggressively compete in the gravity extension set segment of the
market with innovative, cost-effective needle-free gravity sets.
PATIENT MONITORING PRODUCTS. The Company's patient monitoring products
compete in discrete market niches, each with different competitive dynamics. The
Company primarily operates in the United States, Canada and Western Europe in
two patient monitoring product markets: (i) hospital thermometry systems and
(ii) stand-alone, non-invasive, multi-parameter instruments used to measure and
monitor a combination of vital signs.
The two major instrument types in the hospital thermometry market are
electronic and infrared devices. The Company offers electronic and infrared
instruments but does not compete in the smaller glass thermometry market. As
with the infusion therapy market, the hospital thermometry market has disposable
products that are used in conjunction with instruments and, consequently, the
existence of an installed base is important for generating ongoing disposable
product sales.
5
PRODUCTS AND SERVICES
The Company manufactures and markets both single and multi-channel
infusion pumps and disposable administration sets. The Company's infusion pumps
include large volume infusion pumps such as its Gemini series, Signature Edition
Family, MedSystem III, Advantis and syringe infusion pumps such as P1000, P3000,
PCAM, P6000, P7000 and Asena, which are sold primarily in Western Europe, and
disposable pumps such as the ReadyMED for use in the alternate-site setting. The
Company's large volume infusion pumps require the use of higher margin dedicated
disposable administration sets. The Company also sells non-dedicated disposable
administration sets, including several needle-free devices, for use in many
infusion applications. The Company also manufactures and markets hospital
thermometry instruments and related disposable probe covers, and stand-alone,
non-invasive, multi-parameter instruments which measure and monitor a
combination of temperature, pulse and blood pressure and other vital signs.
Additionally, the Company manufactures and markets telemedicine, cardiovascular
and pacemaker monitoring products through the Instromedix division. The table
below summarizes the key features and market introduction dates with respect to
the Company's products.
PRODUCT DESCRIPTION STATUS
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INFUSION SYSTEMS
LARGE VOLUME INFUSION PUMPS
SIGNATURE EDITION GOLD Single and dual channel pumps; Introduced in first quarter of
incorporates intuitive user 1999 in the U.S. and in third
interface and advanced software quarter of 1999 inter-
capabilities, for critical and nationally. (Successor to
general care and alternate site use. Signature Edition Classic
which was marketed since 1995.)
GEMINI Single, dual and four channel pumps Marketed since 1987.
with programmable drug delivery for
use in all hospital settings.
570 SERIES Single channel pump; for general care Marketed since 1990.
use in the United States, and
general and critical care use in
Europe.
597/598 SERIES Single channel, multi-pump Marketed internationally since
configuration of reduced size and 1993.
weight; used frequently for delivery
of nutritional products; sold in
Europe; for general care
and alternate site use.
MEDSYSTEM III Three channel pump; smallest and Originally introduced in late
lightest multi-channel pump 1980s by Siemens Infusion
available; for operating room, Systems, Ltd as MiniMed;
critical care and emergency acquired by the Company in
transport use. 1993. Introduced in Europe in
1998.
6
PRODUCT DESCRIPTION STATUS
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ADVANTIS DL Large volume infusion pump for Licensed technology in 1998
price-conscious consumers, and introduced in Europe
primarily in emerging in November 1998.
international markets.
SYRINGE INFUSION PUMPS
ASENA GS, GH Compact, lighter syringe pump with Introduced internationally in
modular mounting design which will the third quarter of 1999.
connect to a docking station capable
of displaying all infusion
information centrally. Designed
for the international market.
P1000, P2000, P3000, P4000 Syringe pump for critical and Various models introduced
non-critical care use outside the between late 1980s and early
United States. 1990s.
P7000 Syringe pump with advanced features Marketed in Europe since 1996.
for critical, non-critical and
neonatal care use in markets
outside the United States.
P6000 Syringe pump using the P7000 technology Marketed in Europe since 1997.
platform designed for the
price-conscious consumer in markets
outside the United States; for
critical and non-critical care
use.
P6000 TCI Specialty P6000 iteration designed Marketed in Europe since 1998.
for anesthesia applications in the
operating room international
market. Includes the Zeneca TCI
module.
P6000 TIVA Specialty P6000 iteration designed Marketed in Europe since 1998.
for anesthesia applications in the
operating room international
market. Includes multiple drug
concentration programs.
PCAM PUMP Syringe pump used in markets outside Marketed internationally since
(PATIENT CONTROLLED ANALGESIA) the United States that allows 1995.
patients to control the delivery of
pain medication.
AMBULATORY PUMPS
READYMED Compact, lightweight, disposable 100 mL marketed in U.S. since
ambulatory infusion pump designed July 1992 and 50 mL and 250 mL
for alternate site use. marketed in U.S. since 1993.
7
PRODUCT DESCRIPTION STATUS
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RHYTHMIC Family of lightweight, self-contained Technology licensed in second
portable pumps for PCA, half of 1997. Marketed since
intermittent and continuous use at September 1998.
home in markets outside the United
States.
DISPOSABLE ADMINISTRATION SETS Dedicated and non-dedicated Marketed worldwide.
administration sets for use with
each of the Company's existing
infusion pumps.
NEEDLE-FREE ACCESS PRODUCTS
SMARTSITE Complete needle-free, capless, Marketed since 1996.
latex-free infusion system intended
to increase safety of patients and
health care workers.
VERSASAFE Needle-free infusion system component Marketed since 1994 through a
utilizing a blunt, plastic cannula license agreement.
combined with a split-septum "Y"
site.
PATIENT MONITORING
THERMOMETRY SYSTEMS
TURBO-TEMP Fast electronic thermometer; for Marketed since 1999.
general hospital and alternate-site
use.
TEMPO-PLUS II Electronic thermometer for general Marketed since mid-1980s.
hospital and alternate site use.
CORE-CHECK Infrared tympanic thermometer; for Marketed since 1991.
general hospital and alternate site
use.
DISPOSABLE PROBE COVERS Proprietary covers for use with each Marketed since late 1980s.
of the Company's existing
thermometers.
OTHER PATIENT MONITORING PRODUCTS
VITAL-CHECK (MODEL 4200) Continuous monitoring device that Marketed in the United States
rapidly measures pulse, blood since late 1980s.
pressure and temperature.
VITAL-CHECK (MODEL 4400) Multi-parameter non-invasive patient Marketed in the United States
monitor providing blood pressure, since 1997 through an
pulse oximetry and temperature exclusive license agreement.
monitoring.
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PRODUCT DESCRIPTION STATUS
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LIFESIGNS HOME HEALTH CARE
TELEMEDICINE SYSTEM
LIFESIGNS SHUTTLE One-pound, portable, patient-worn vital Marketed since the fourth
signs monitor; programmable to quarter of 1997.
record up to 20 vital sign
recordings, including up to 12 leads
of electrocardiograph data
and blood-oxygen saturation.
LIFESIGNS COMMANDER Docking station used by patients to Marketed since the fourth
allow simultaneous data quarter of 1997.
transmission from the LifeSigns
Shuttle to the LifeSigns Central
Station and voice interaction
between the home health care
provider and the patient; also
provides non-invasive blood
pressure measurements.
LIFESIGNS CENTRAL STATION Computerized patient management Marketed since the fourth
system operating in conjunction quarter of 1997.
with the LifeSigns Shuttle and the
LifeSigns Commander to allow remote
monitoring of patient vital signs;
contains a patient database and
displays medical profiles on-screen
for expedient review and analysis
by the home health care provider.
CARDIOVASCULAR MONITORING PRODUCTS
KING OF HEARTS EXPRESS II Pager-sized, patient-activated Introduced in the first
looping memory cardiac event and quarter of 1999.
electrocardiograph recorder, using
1-3 leads of ECG. Capable of
recording up to 18 minutes of
cardiac events, which can be
subsequently transmitted over a
telephone line. Automatically
records rhythms above or below user
programmable heart rates.
KING OF HEARTS EXPRESS/ Pager-sized, patient-activated Marketed since 1992.
KING OF HEARTS EXPRESS 3X looping memory cardiac event and
electrocardiograph recorder;
capable of recording up to 5
minutes of cardiac events, which
can be subsequently transmitted
over a telephone line.
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PRODUCT DESCRIPTION STATUS
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HEARTCARD / RHYTHYMCARD Credit card-sized, patient-activated Marketed since 1995.
cardiac event recorder; capable of
recording up to three cardiac events
which can be subsequently
transmitted over a telephone line.
PACEMAKER MONITORS
CARRYALL TRANSMITTER Portable transmitter for recommended Marketed since 1995.
pacemaker follow-up; used in a
patient's home to avoid unnecessary
visits to physician's office.
ALARIS INFUSION SYSTEMS
LARGE VOLUME INFUSION PUMPS. The Company's large volume infusion pumps
are either single or multi-channel and are used in both the general care and
critical care settings. The Signature Edition Gold family of infusion pumps
includes a single channel and dual channel pump, incorporates intuitive user
interface and advanced software capabilities, and is designed for use primarily
in hospitals. The Signature Edition Gold line of infusion pumps features
cost-effectiveness, ease of use, reliability and innovative features, such as:
patented AccuSlide flow regulator, designed to minimize the chance of free flow,
precision flow designed to improve flow continuity and minimize hemodynamic
changes, and Advanced Infusion Management (AIM), designed to provide unique
early warning assessment tools for enhanced intravenous site management. Other
standard features include an easy-to-use drug library, which provides dose
and/or rate calculation, multi-step, which allows the clinicians to pre-program
up to 9 steps for drug delivery, and patented "learn-teach" communication link
capability for biomedical engineers.
The Gemini infusion pump series, which consists of single, dual and
four channel pumps, is based on a flexible hardware and software technology
platform. This technology platform has enabled the Company over time to offer
incremental feature enhancements based on evolving customer needs. The Gemini
series currently offers the following features: free flow protection (which the
Company pioneered); independent channel operation; ability to switch from pump
to controller mode without changing the disposable administration set;
programmable to automatically taper-up and taper-down infusion rates to
facilitate delivery of complex drug-dosing regimens; capability to operate in
either micro mode (0.1 to 99.9 mL/hr) for use with neonatal patients, among
others, or macro mode (1 to 999 mL/hr) for use with adult patients; drug dose
calculation; pressure monitoring; pressure history and volume/time dosing; and
nuisance alarm (alarms with no clinical significance) reduction.
The MedSystems III (MS III) instrument is a compact, lightweight,
programmable, three channel, infusion pump used primarily in the critical care
market and transport applications. The MS III predecessor product line was
acquired from Siemens Infusion Systems, Ltd. in September 1993. Since that time,
significant resources have been invested in the MS III pump. The Company
believes that as a result of such investment, the MS III is one of the smallest,
most versatile and most technologically advanced multi-channel pumps currently
on the market.
In May 1998 the Company acquired a license to manufacture, market and
sell the Advantis large volume infusion pump, which is marketed primarily for
price-conscious consumers in emerging international markets. The Company plans
to market and sell the pump through existing distribution channels throughout
the world including the U.S. alternate site market.
10
The Company is also in the process of developing the Medley Patient
Care System, a modular system, which can be configured as a one-to-four channel
infusion device, including sensitive monitoring capabilities. The Medley Patient
Care System will incorporate advanced programming capabilities in a small
configuration that is simpler to operate. A modular, building-block design is
intended to allow the user to configure the various features of the modular
infusion pump to unique therapy regimens and is expected to result in better
asset utilization.
SYRINGE PUMPS. The Company offers syringe pumps, which are small-volume
fluid delivery systems used in neonatal care, oncology, anesthesia, critical
care and labor and delivery. While these infusion pumps represent a relatively
small portion of the industry installed base in the United States, such pumps
are widely used in Europe, where they constitute approximately 60% of the
infusion pump market. Syringe pumps are more widely used in Europe because of
the general practice of European doctors to administer medications in smaller
volumes of fluid. The Company believes that it is one of the two largest
suppliers of syringe pumps in Western Europe, with a number one or number two
installed base market share in seven countries and the number three installed
base market position in three others.
The Company's PCAM patient controlled analgesia infusion pump allows
patients to control the delivery of pain medication. Designed for general care
settings, the PCAM syringe infusion pump is one of the most advanced patient
controlled analgesia infusion pumps on the European market today, with
pre-programmed and user programmable drug delivery protocols, comprehensive
patient history logging and an ergonomically designed handset with status
indicator.
The Company's syringe pump product line also includes the P7000 syringe
pump which has been available internationally since 1996 and the P6000 syringe
pump which was introduced to the European Market during the second quarter of
1997. The Company has received a 510(k) premarket notification clearance
("510(k)") of the P7000 syringe pump with the United States Food and Drug
Administration (the "FDA"). Designed for critical, non-critical and neonatal
care settings, the P7000 offers several advanced features, including an
automatic dose rate calculator; a pre-programmable drug menu; a range of
pre-programmed infusion administration protocols; and an automatic pressure
reduction capability in response to administration set occlusions. The P6000
syringe pump, which is based on the P7000 syringe pump technology platform, is
designed for use in critical and non-critical care settings by the price
conscious consumer.
In the third quarter of 1999, the Company introduced the ASENA syringe
pumps, representing the first component of the ASENA Patient Care System. One of
the components of the ASENA Patient Care System is the DOCStat docking station.
The station features a unique mounting system, known as Medical Device
Interface, which allows a syringe pump to be mounted to a pole, rectangular bar
or docking station without adaptors. The Company plans to market the DigiStat
patient data management software which will gather and display data from each
instrument on one monitor.
AMBULATORY PUMPS. The ReadyMED pump is a compact, lightweight
disposable pump for the intravenous administration of antibiotics in the
alternate-site market. The ReadyMED is designed to offer a number of advantages
over drug delivery systems currently in use for this purpose. Traditional
systems require the patient to attach a small intravenous bag and tubing set,
through which the antibiotics are administered, to a catheter placed in the
patient's circulatory system. Since traditional systems are gravity driven, the
bag must remain on an intravenous solution pole during infusion, thereby
restricting the patient's movement. The ReadyMED, available in multiple sizes,
provides a rapid, safe, ease-of-use delivery method for the home patient. In
addition, since the ReadyMED pump is small and uses positive pressure, the
patient is able to carry the device in a pocket or wear it on a belt. The
Company sells the ReadyMED pump through its alternate-site sales force and
distribution network.
11
The Company introduced the Rythmic family of pumps in September of
1998, a range of portable volumetric pumps specifically designed to provide
long-term infusions associated with cancer chemotherapy, post operative and
chronic pain control, antibiotic infusions and other IV medications.
DISPOSABLE ADMINISTRATION SETS. Disposable administration sets consist
of a plastic pump interface and tubing and have a variety of features, such as
volume control, pumping segments or cassette pumping systems for more accurate
delivery, clamps for flow regulation and multiple entry ports for injecting
medication and delivery of more than one application. Components such as
burettes and filters may also be added for critical drugs or special infusion.
In addition, most of the Company's disposable administration sets offer
protection features designed to prevent free flow. Each of the Company's current
large volume infusion pumps uses only dedicated disposable administration sets
designed by the Company for that particular pump.
NEEDLE-FREE ACCESS PRODUCTS. There is increasing pressure by regulatory
agencies, such as the Occupational Safety and Health Administration ("OSHA") and
the FDA, for more stringent control of needles in hospitals. OSHA requires that
hospitals must put in place systems to reduce the potential for accidental
needlesticks. The FDA recommends using needle-free systems or protected needle
systems to replace hypodermic needles for accessing intravenous lines. The
Company's needle-free access products are designed to permit access to the
Company's disposable administration sets without the use of needles, thus
reducing the potential for accidental needlesticks. The SmartSite needle-free
system offers a fully integrated, cost effective design and eliminates the need
for separate caps and additional cannula components. The SmartSite needle-free
system is latex-free and therefore reduces the risk of exposure of patients and
health care workers to latex which can cause severe allergic or anaphylactic
shock reactions. The VersaSafe system utilizes a blunt, plastic cannula combined
with a split-septum "Y" site. The Company has a non-exclusive license, which
expires in May 2003, to the VersaSafe system which was a cooperative development
effort. The Company's needle-free access products have received strong interest
from customers and provide the Company with an opportunity for incremental
revenues in what has previously been perceived as a commodity market.
ALARIS PATIENT MONITORING PRODUCTS
Patient monitoring instruments are used to measure temperature, pulse,
blood pressure, and other vital signs. Instruments sold in this market have
varying levels of technological sophistication and are used in a variety of
diagnostic and health care settings. The Company competes in two key niches:
hospital thermometry systems and stand-alone, non-invasive, multi-parameter
patient monitoring products.
THERMOMETRY. The Company is a leader in hospital thermometry systems,
which consist of thermometers and disposable probe covers, and maintains a
strong position in both the United States and Western Europe. The Company's
primary product is an electronic thermometer which is widely used in hospitals
and alternate-site settings. In 1999, the Company launched the Turbo Temp
thermometer, an improved cost-effective and technologically advanced electronic
thermometer designed to provide a faster temperature reading. The Company also
manufactures and markets the Core-Check system, a thermometer that measures
temperature by detecting the emission of infrared energy in the ear. In the
infrared market, the Company believes it is the second largest participant. The
only disposable probe covers which can be used with the Company's thermometry
instruments are those manufactured by the Company.
OTHER PATIENT MONITORING PRODUCTS. The Company also produces
stand-alone, non-invasive, multi-parameter patient monitoring products which
measure a combination of pulse, pulse-oximetry, temperature and blood pressure.
12
In January 1997, the Company entered into an agreement with Criticare
Systems, Inc., ("Criticare") a manufacturer of patient monitoring systems and
non-invasive sensors for use in the hospital and alternate-site markets. Under
this agreement, the Company obtained exclusive distribution rights to certain of
these monitoring systems in the United States hospital market and in all
Canadian markets. The Vital-Check 4400 family provides non-invasive blood
pressure, pulse oximetry and temperature monitoring, using the Company's
electronic thermometry technology.
TELEMEDICINE, CARDIOVASCULAR AND PACEMAKER MONITORING PRODUCTS
The LifeSigns system is a multi-parameter monitoring system that
records 12-Lead ECG, pulse oximetry, and blood pressure data. This information
is digitally transmitted to a computer-based receiver. This system is now used
clinically in a variety of patient care models and the Company is supporting
several studies designed to assess the cost-saving utility of the LifeSigns
System. While the LifeSigns System revenues were not significant in 1999, the
market response to the system has been favorable and the system may provide
future sales growth for the Company.
Instromedix created the product segment of cardiac event recording,
where patients with intermittent symptoms can record their ECG at the time the
symptom occurred. In 1999, the King of Hearts Express II was launched. This
sophisticated new product introduced additional diagnostic capabilities and
on-board intelligence that appeal to cardiologists that specialize in the
treatment of arrhythmia. Sales of cardiac event recorders generate approximately
40% of Instromedix revenues.
Instromedix maintains a strong market position in transtelephonic
pacemaker monitors. The CarryAll product family provides customers with the
ability to have their pacemaker function assessed over the phone, providing a
convenient and cost effective alternative to frequent physician office visits.
These product revenues represent over 35% of Instromedix revenues.
CUSTOMER SERVICE
The Company provides repair service for its products at its facilities
in San Diego or on-site at the customer's facilities through third-party
contractors. Customers may elect to enter into service agreements or to receive
service on a time and materials basis. The Company also trains customers as to
the use of its products and maintains a technical support help-line to answer
customers' questions. In addition, the Company maintains its parts inventory at
levels which enable it to deliver critical supplies immediately and minimize
back-ordered products. The Company believes that the availability of such
services is important for maintaining strong customer relations.
MARKETING AND SALES
The Company has historically focused its sales efforts on the hospital
market. In response to the industry shift toward health care delivery outside of
the hospital, the Company has expanded its selling efforts and products to the
alternate-site market. The Company's sales strategy emphasizes increasing
instrument placements and the number of units installed in order to increase
sales of its proprietary disposable administration sets and probe covers. Sales
representatives work closely with on-site primary decision makers, which include
physicians, pharmacists, nurses, materials managers, biomedical staff and
administrators. The Company has over 5,000 hospital customers worldwide and
sells its products through a combined direct sales force consisting of over 250
salespersons and through more than 150 distributors.
The Company's domestic marketing efforts are supported by a staff of
nurses and pharmacists who consult with customers, providing ongoing clinical
support in the evaluation, installation and use of the Company's products. The
Company believes its sales force in the United States and internationally plays
a key role in the effective introduction of new products.
13
The Company has a strong business portfolio of key infusion device and
patient monitoring contracts with group purchasing organizations as set forth
below:
PURCHASING ORGANIZATION DRUG INFUSION THERMOMETRY NEEDLE-FREE
----------------------- ------------- ----------- ------------
(YEAR IN WHICH CONTRACT EXPIRES)
AmeriNet............................................. 2003 2002 2003
Health Trust (Columbia / HCA)........................ - 2004 -
HSCA................................................. 2002 2002 2002
Magnet............................................... 2003 2003 2003
MedEcon.............................................. 2003 2003 2003
Novation (VHA/UHC)................................... 2000 - 2000
Premier.............................................. 2002 2002 -
In-Source (Purchase Connection)...................... 2005 2005 2005
Tenet Healthcare..................................... 2007 - 2007
US Government / DOD.................................. 2000 2000 2003
No single account is material to the business or operations of the
Company.
INTERNATIONAL OPERATIONS
The Company markets products in approximately 120 countries through its
direct sales force and distributors. The primary markets for the Company's
products outside the United States are Western Europe, Canada and Australia. The
Company also has a developing position in Asia and Latin America. The principal
products sold by the Company outside the United States are large volume and
syringe infusion pumps and related disposable administration sets. The Company
has manufacturing operations in England and Mexico. The Company has also
contracted with a number of foreign manufacturers to provide certain of its
sourcing needs. The following table sets forth, for each period presented, the
approximate amount of sales made to customers by each business unit over the
last three fiscal years:
1999 1998 1997
-------- -------- ---------
(DOLLARS IN MILLIONS)
North America........................................ $ 263.5 $ 246.7 $ 240.5
International........................................ 124.8 125.0 118.6
Instromedix.......................................... 13.7 8.4 -
--------- -------- ---------
Total Sales..................................... $ 402.0 $ 380.1 $ 359.1
========= ======== =========
The Company believes that sales of products to customers outside of the
United States represent a significant potential source of growth. Foreign
operations are subject to special risks that can materially affect the sales,
profits and cash flows of the Company, including currency exchange rate
devaluations and fluctuations, the impact of inflation, exchange controls, labor
unrest, political instability, export duties and quotas, domestic and
international customs and tariffs, unexpected changes in regulatory
environments, potentially adverse tax consequences and other risks. Changes in
certain exchange rates could have an adverse effect on the Company's ability to
meet interest and principal obligations with respect to its United States
dollar-denominated debt and could also have a material adverse effect on the
business, financial condition, results of operations or prospects of the
Company.
14
MANUFACTURING
The Company is focusing on low-cost manufacturing and manufactures its
products at plants in San Diego, California; Creedmoor, North Carolina; Tijuana,
Mexico; and Hampshire, England. In the second quarter of 1999, the Company
relocated the Instromedix operations, including manufacturing of Instromedix
products, from Hillsboro, Oregon to San Diego. The San Diego facility is the
primary manufacturing facility for infusion pumps, patient monitoring
instruments and cardiac monitoring products, and also houses a service operation
for installed infusion pumps and patient monitoring instruments. The Creedmoor
facility houses a portion of the current disposables operations and is a
distribution center for North American disposable finished products. Product
release from sterilization is done in San Diego and Creedmoor. The Tijuana
facilities primarily focus on the manual assembly of disposables, and the
Hampshire facility focuses on the manufacturing of syringe pumps and Advantis
which are sold primarily to the international market. Disposable products for
international markets are currently supported through a number of foreign
manufacturers.
The Company has designed and implemented an integrated network of
quality systems, including control procedures that are planned and executed by
technically-trained professionals. Through these systems, the Company has
established written specifications for raw materials, packaging, labels,
sterilization and overall manufacturing process control. A substantial number of
raw materials require certificates of analysis to help ensure that finished
products conform to specifications. In addition, the Company regularly tests
components and products at various stages of the manufacturing process to ensure
compliance with applicable specifications.
The Company purchases raw materials worldwide in the ordinary course of
business from numerous suppliers. The vast majority of these materials are
generally available and the Company has not experienced any serious shortages or
material delays in obtaining these materials. In some situations, the Company
has long-term supply contracts, although the Company purchases a significant
amount of its requirements of certain raw materials by purchase order. Although
the Company is generally not dependent upon any single source of supply, it
relies upon a limited number of suppliers for circuit boards and other parts
which are used in certain of its infusion systems. The loss of any such supplier
would result in a temporary interruption in the manufacturing of the Company's
products. The Company believes, however, that these materials are available as
needed from alternative sources.
RESEARCH AND DEVELOPMENT
The Company believes that a well-targeted research and development
program constitutes an essential part of the Company's activities and is an
integral part of its future success. The Company is actively engaged in
research and development programs to develop and improve products. These
activities are performed in the United States and, to a lesser extent, in the
United Kingdom. For the year ended December 31, 1999, the Company expended
approximately $23.8 million on in-house research and development.
Substantially all of such amount was dedicated to the development of new
products.
The Company intends to focus a significant portion of its research and
development efforts on the development of new products. The Company is currently
developing several new products and product line extensions.
PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS
The Company relies heavily on patented and other proprietary
technology. The Company believes its issued and pending patents are important to
its competitive position. There can be no assurance that patent applications
submitted by the Company or its licensors will result in patents being issued or
that, if issued, such patents and patents already issued will afford protection
against competitors with similar technology. In addition, there can be no
assurance that any patents issued to or licensed by
15
the Company will not be infringed or designed around by others, that others
will not obtain patents that the Company will need to license or design
around, that the Company's products will not inadvertently infringe the
patents of others, or that others will not manufacture and distribute similar
products upon expiration of such patents. There can also be no assurance that
key patents of the Company will not be invalidated or that the Company or its
licensors will have adequate funds to finance the high costs of prosecuting
or defending patent validity or infringement issues.
The Company's policy is to secure patent protection for significant
inventions. The Company holds approximately 249 unexpired patents in the United
States and approximately 420 unexpired patents in foreign countries, principally
in Europe, Canada, Japan and Australia. The Company has 25 additional
applications pending or in preparation in the United States and 178 foreign
applications pending. Within the next ten years, approximately 161 of the
Company's United States patents and approximately 292 of the Company's foreign
patents will expire. Due to ongoing development activities, the Company does not
believe that the expiration of any such patents will, individually or in the
aggregate, have a material adverse effect on the business, financial condition,
results of operations, or prospects of the Company.
The patent positions of medical device firms, including the Company,
are uncertain and involve complex legal and factual questions for which certain
legal principles are unresolved. The coverage claimed in a patent application
can be significantly reduced before a patent is issued. In addition, patent law
has recently been revised to give effect to international accords to which the
United States has become a party. Pursuant to such accords, the patent term has
been changed from 17 years from date of grant to 20 years from date of filing
and certain provisions favoring United States inventors over foreign inventors
have been eliminated.
The United States patent code was recently amended. As a result,
certain statutory remedies for patent infringement are no longer available for a
medical practitioner's otherwise infringing performance of a medical activity.
As defined in the United States patent code, a patent may not be enforced
against a medical practitioner's performance, or the performance by a related
health care entity of a "medical activity" which is defined as the performance
of a medical or surgical procedure on a body. However, a "medical activity" does
not include "the use of a patented machine, manufacture or composition of matter
in violation of such patent." Hence, remedies are still available against
manufacturers and distributors. The aforesaid amendment does not apply to
patents issued before September 30, 1996.
The Company sells its products under a variety of trademarks, some of
which are considered by the Company to be of importance to warrant registration
in the United States and various foreign countries in which the Company does
business. The Company also relies on trade secrets, unpatented know-how and
continuing technological advancement to maintain its competitive position. It is
the Company's practice to enter into confidentiality agreements with key
technical employees and consultants. There can be no assurance that these
measures will prevent the unauthorized disclosure or use of the Company's trade
secrets and know-how or that others may not independently develop similar trade
secrets or know-how or obtain access to the Company's trade secrets, know-how or
proprietary technology. In addition, the Company from time to time seeks
copyright protection for the software used in certain of its products.
COMPETITION
The Company faces substantial competition in all of its markets. Many
of the Company's competitors have greater financial, research and development
and marketing resources than the Company. Some of the Company's principal
competitors are able to offer volume discounts based on bundled purchases of a
broad range of their medical equipment and supplies. The Company seeks to
improve its competitive position in this area by developing or licensing
technologically superior products. The Company expects the trend toward volume
discounts to continue in the future. The Company
16
believes that the competitive factors most important in its markets are
quality of products and services, technological innovation and price.
The primary markets for the Company's products are relatively mature
and highly competitive. Major competitors in this market include Baxter
International, Inc., Abbott Laboratories, Inc. and McGaw, Inc. The Company's
success is therefore dependent on the development of new infusion
technologies and products and the development of other markets for its
products. The Company's older infusion therapy product lines have experienced
declining sales and market share recently, primarily due to competitors who
offer volume discounts based on bundled purchases of a broader range of
medical equipment and supplies, as well as to the aging of the Company's core
products. The Company's introduction of new products may offset future
declines in sales and market share. There can be no assurance, however, that
new products will be successfully completed or marketed for sale, will not
necessitate upgrades or technical adjustments after market introduction, can
be manufactured in sufficient volumes to satisfy demand, or will offset
declines in sales and market share experienced with respect to existing
products. See "--Products and Services."
The European infusion systems market is much more regionalized and
fragmented, with a few strong competitors in each regional market. Major
competitors encountered in several markets include Graseby, Fresenius and B.
Braun Melsungen AG. The Company is among the leaders in a number of Western
European markets, with a number one or number two installed base market share in
seven countries and the number three installed base market share in three
others. The Western European countries in which the Company has a number one or
number two installed base market share are France, Norway, Sweden, the United
Kingdom, Belgium, the Netherlands and Spain.
The patient monitoring products market is fragmented by product type.
The Company's key competitor in the United States electronic thermometer market
is Welch Allyn, Inc. (f/k/a Diatek, Inc.) and its key competitor in the infrared
thermometer market is Sherwood Medical Company (d/b/a Sherwood, Davis & Geck)
("Sherwood").
The Instromedix business unit faces substantial competition in each of
its market segments. Key competitors in the cardiac event recorder segment
include Cor-Digital/CardGuard, Universal Medical, MicroMedical, Aerotel and
PaceArt. In the pacemaker monitor subsegment, the major competitor is Universal
Medical. In the telemedicine area, the major competitors include Advanced
Medical Devices, Health Hero and American Telecare.
GOVERNMENT REGULATION
PRODUCT REGULATION. The research, development, testing, production and
marketing of the Company's products are subject to extensive governmental
regulation in the United States at the federal, state and local levels, and in
certain other countries. Non-compliance with applicable requirements may result
in recall or seizure of products, total or partial suspension of production,
refusal of the government to allow clinical testing or commercial distribution
of products, civil penalties or fines and criminal prosecution and/or repairing
the device and/or refunding the purchase price.
The United States Food and Drug Administration ("FDA") regulates the
development, production, distribution and promotion of medical devices in the
United States. Virtually all of the products being developed, manufactured and
sold by the Company in the United States (and products likely to be developed,
manufactured or sold in the foreseeable future) are subject to regulation as
medical devices by the FDA. Pursuant to the Federal Food, Drug, and Cosmetic Act
(the "FDC Act"), a medical device is classified as a Class I, Class II or Class
III device. Class I devices are subject to general controls, including
registration, device listing, recordkeeping requirements, labeling requirements,
"Quality Systems Regulation" ("QSR" as defined in FDA Quality System
regulations), prohibitions on
17
adulteration and misbranding, reporting of certain adverse events ("MDR") and
in some instances, FDA marketing submissions. In addition to general
controls, Class II devices may be subject to special controls that include a
510(k) notification and could include performance standards, postmarket
surveillance, patient registries, guidelines, recommendations and other
actions as the FDA deems necessary to provide reasonable assurance of safety
and effectiveness. New Class III devices must meet the most stringent
regulatory requirements and must be approved by the FDA before they can be
marketed. Such premarket approval can involve extensive preclinical and
clinical testing to prove safety and effectiveness of the devices.
Virtually all of the Company's products are Class II devices. Unless
otherwise exempt, all Class II and Class III medical devices introduced to the
market since 1976 are required by the FDA, as a condition of marketing, to
secure a 510(k) or a Premarket Approval Application ("PMA"). A medical device
will be cleared by the FDA under a 510(k) if it is found to be substantially
equivalent to another legally marketed medical device that was on the U.S.
market prior to May 28, 1976 or to a device that has previously received a
510(k) and is lawfully on the U.S. market ("predicate device"). In general, if a
product is not substantially equivalent to a predicate device, and not otherwise
exempt, the FDA must first reclassify the device or approve a PMA before it can
be marketed. An approved PMA indicates that the FDA has determined the product
has been demonstrated, through the submission of clinical data and manufacturing
and other information, to be safe and effective for its labeled indications. The
PMA process typically takes more than a year from submission and requires the
submission of significant quantities of clinical data and supporting
information. The process of obtaining a 510(k) clearance currently takes, on
average, approximately six months from the date of submission. However, the
review process for a particular product may be shorter or substantially longer
depending upon the circumstances. Moreover, there can be no assurance that a
510(k) will be cleared. The 510(k) must include submission of supporting
information, including labeling, and may be required to contain safety and
efficacy data. Product modifications intended to be made to a cleared device or
new product claims also may require submission and clearance of a new 510(k)
application or submission and approval of a PMA, before the modified product can
be distributed in interstate commerce. Although there can be no assurance, the
Company believes that its proposed products under development will qualify for a
clearance or approval.
The FDA conducts investigations regarding the safety or effectiveness
of medical devices in connection with applications for clearances or approvals.
If after a result of such investigation, the FDA determined that the Company's
application was inadequate or non-compliant, that determination could impair the
Company's ability to market a particular device or cause the Company to need to
generate additional data to support submissions for such clearance or approval.
Future products developed by the Company may require FDA clearance through
either the 510(k), PMA, new drug approval application procedures or abbreviated
new drug approval application procedures. There can be no assurance that
marketing clearances or approvals will be obtained on a timely basis or at all.
Delays in receiving such clearances or approvals could have a material adverse
effect on the Company.
The FDA also regulates the commencement and conduct of any clinical
investigations required by the agency in order to determine the safety and
effectiveness of devices. This specifically includes investigations of devices
not cleared or approved for marketing, and investigations involving new intended
uses of previously cleared or approved devices. Clinical investigations are
regulated by the FDA under the investigational device exemption ("IDE")
regulations. The IDE regulations include significant requirements that must be
met, including patient informed consent, criteria for selection of study
investigators and monitors, review and approval of research protocols, reporting
obligations to the FDA, recordkeeping and prohibitions against commercialization
of investigational devices. A sponsor must obtain FDA approval of an IDE before
starting the investigation, unless the device is found to be a non-significant
risk device by the sponsor and each institutional review board ("IRB") that
reviews the study. The FDA, however, has the authority to determine that a study
designated as involving a non-significant risk device by the sponsor and IRBs
involves a significant risk device and an IDE application must be
18
submitted and approved before the study can resume. In addition, a study of a
non-significant risk device must still comply with certain provisions of the
IDE regulations, and meet other regulatory requirements. The violation of the
IDE regulations can result in a variety of sanctions, such as warning
letters, prohibition against additional clinical research, the refusal to
accept data and criminal prosecution.
Devices manufactured by the Company in the United States are exported
by the Company to other countries. Such devices, if not approved or cleared for
sale in the United States, are subject to the FDA export requirements, and
cannot be commercially distributed in the United States.
The Company's products are subject to varying degrees of government
regulation in the countries in which the Company has operations, and the general
trend is toward regulation of increasing stringency. The degree of government
regulation affecting the Company varies considerably among countries, ranging
from stringent design, testing, manufacturing, approval requirements, and
post-approval requirements to more simple registration. In general the Company
has not encountered material delays or unusual regulatory impediments in
marketing its products internationally. The Company has received ISO 9001 or ISO
9002 certification for all of its manufacturing facilities regarding the quality
of its manufacturing systems, a requirement for doing business in EC countries.
Establishment of new uniform regulations for the European Economic Area, the
transition rule for which ended on June 16, 1998, subjects the Company to a
single extensive regulatory scheme for all of the participating countries. The
EU Medical Device Directive requires that medical devices marketed in
participating countries have a "CE" mark affixed to the device certifying
compliance with the applicable medical device requirements. The Company has been
granted approval to affix the CE mark, pursuant to the EC Medical Device
Directives, on substantially all of its products. CE marking does not
necessarily preclude, however, additional restrictions on marketing in any
individual country in the EC. The Company is required to classify its medical
devices into one of four classes; meet certain essential requirements generally
relating to device design, construction, labeling, manufacture and other
standards; certify, for Class I devices, or in the case of a medium or high risk
device, obtain certification from a recognized non-governmental body (notified
body) that its device conforms to the applicable requirements. In addition,
other regulatory requirements apply, including but not limited to registration,
vigilance or adverse event reporting, recordkeeping, and labeling and
promotional restrictions. Companies and medical devices in the EU are also
subject to enforcement actions, including administrative, civil and criminal
penalties.
Certain countries require the Company to obtain clearances for its
products prior to marketing the products in those countries. In addition,
certain countries impose product specifications, standards or other requirements
which differ from or are in addition to those mandated in the United States. The
EC and certain countries are in the process of developing new modes of
regulating medical products which may result in lengthening the time required to
obtain permission to market new products. These changes could have a material
adverse effect on the Company's ability to market its products in such countries
and would hinder or delay the successful implementation of the Company's planned
international expansion.
The Company is registered as a medical device manufacturer with the
FDA. In addition, the Company lists all of its devices with the FDA. The Company
also has a Medical Device Manufacturing License from the State of California
Department of Health Services, which is renewed annually, and the Company is
subject to the regulatory requirements of that state as well as other states in
which the Company does business. The FDA inspects the Company periodically to
determine whether the Company is in compliance with the FDC Act and regulations,
including regulations relating to MDR reporting, product labeling and promotion,
and medical device QSRs governing design, manufacturing, testing, quality
control, product packaging and storage practices. California conducts similar
inspections related to the same requirements. Other states may also conduct
inspections of aspects of the Company's business particular to that state. An
inspection may result in a determination that the Company is not in compliance
with certain FDA or state requirements, may require the Company to undertake
corrective action, and could result in legal action against the Company and its
products, including actions such as
19
those described herein. These revised regulations include new requirements
such as design control, which may increase the cost of regulatory compliance
for the Company. The MDR regulations promulgated by the FDA require the
Company to provide information to the FDA on certain malfunctions, as well as
serious injuries or deaths which may have been associated with the use of a
product. The EC Medical Device Directives also require reporting of serious
injuries or deaths which may be associated with the use of a medical device
to the competent authority in the country where the incident occurred.
A determination that the Company is in 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. These FDA inspections noted several areas of
non-compliance with FDA regulatory requirements. The letter stated that to
resolve this matter, the Company is 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, will not be provided 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. The Company believes that it has the resources
necessary to complete the corrective action plan, but is not able to determine
if, or when the FDA will be satisfied with the Company's actions.
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, three 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 four of the recalls but has not received
notice back from the FDA. The remaining seven are still active. None of the
recalls 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.
In the first quarter of 1997 the Company identified and in March 1998
initiated a voluntary recall of approximately 50,000 of its Gemini model PC-1
and PC-2 infusion pumps because failure of specific electrical components.
In the second quarter of 1998, the Company initiated a voluntary recall
of its Signature Edition infusion pumps to correct a malfunction of an
electronic line filter component. Further, in the third quarter of 1998, the
Company initiated a voluntary safety alert regarding the Signature Edition
infusion pumps advising to check for the proper installation of a spring in the
pumping mechanism assembly.
In the third quarter of 1998, the Company initiated a voluntary recall
of its Gemini PC-4 pumps to correct certain electro-mechanical problems which
may cause one or more channels of the device to audibly and visibly alarm and
temporarily cease operation. In the third quarter of 1999, the Company initiated
a voluntary recall of its Gemini PC-4 pumps to correct certain software problems
which may cause all channels of the device to audibly and visibly alarm and
temporarily cease operation. In the second quarter of 1999, the Company also
initiated a mandatory field upgrade of the Gemini PC-2T CE
20
(220V) product, distributed only in certain countries outside the U.S. for
failure to audibly alarm when a certain type of failure occurs.
In the second quarter of 1999 the Company initiated a voluntary recall
of a certain version of its MedSystem III infusion pump to replace a capacitor
used on the pumps' power supply board. Failure of this capacitor may cause the
pump to cease operation without an alarm notifying the user.
Additionally, in the second quarter of 1999, the Company initiated
three voluntary recalls of certain versions of its P series syringe pumps, which
are manufactured in the United Kingdom and sold outside the United States,
primarily in Europe. These voluntary recalls relate to software and hardware
upgrades of the P series syringe pumps.
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.
ANTI-REMUNERATION LAWS. The sale of the Company's products is subject
to the illegal remuneration/"anti-kickback" provisions of the Social Security
Act of 1935, as amended (the "Social Security Act"), which prohibits knowingly
and willfully the offering, receiving or paying of any remuneration, whether
directly or indirectly, in return for inducing the purchase of items or
services, or patient referrals to providers of services, for which payment may
be made in whole or in part by Medicare, Medicaid or other federally funded
health care programs. Violations of the statute are punishable by civil and
criminal penalties and the exclusion of the provider from future participation
in other federally funded health care programs. The Social Security Act contains
exceptions to these prohibitions for, among other things, properly reported
discounts, rebates and payments of certain administrative fees to GPOs. Because
of the breadth of the statutory prohibitions, the lack of court decisions or
other authority addressing the types of arrangements that are permissible under
the law and the narrowness of statutory exceptions, the Secretary of Health and
Human Services published regulations creating "safe harbors" identifying certain
practices that will not be treated as violating the "anti-kickback" provisions
of the Social Security Act. While failure to satisfy all of the criteria for a
safe harbor does not necessarily mean that an arrangement is unlawful, engaging
in a business practice for which there is a safe harbor may be regarded as
suspect if the practice fails to meet each of the prescribed criteria of the
appropriate safe harbor. The enumerated safe harbors include safe harbors which
implement, and further refine, the statutory exceptions for discounts and
payments to GPOs. Because the Company sells some of its products to customers at
prices below list price and in various combinations, the Company is engaged in
giving discounts within the meaning of the Social Security Act. The regulations
require sellers to fully and accurately report all discounts and inform buyers
of their obligations to report such discounts. The Company also pays
administrative fees to certain purchasing agents within the meaning of the
Social Security Act. In order to qualify for the GPO safe harbor, certain
requirements must be met including disclosure of the existence of the GPO fee
arrangement to GPO members and that members are neither wholly owned by the GPO
nor subsidiaries of a parent corporation that wholly owns the GPO. Certain of
the Company's discounts and arrangements with purchasing agents may not meet all
the requirements of the appropriate safe harbors.
Several states also have statutes or regulations prohibiting financial
relationships with referral sources that are not limited to services for which
Medicare, Medicaid or other state or federal health care program payment may be
made. A finding of non-compliance with these anti-remuneration laws by
21
federal or state regulatory officials, including non-compliance with
appropriate safe harbors, could have a material adverse effect on the Company.
COVERAGE AND REIMBURSEMENT. The Company's products are purchased or
leased by health care providers or suppliers which submit claims for
reimbursement for such products to third-party payors such as Medicare, Medicaid
and private health insurers. Although the Company has no knowledge that
third-party payors will adopt measures that would limit coverage of, or
reimbursement for, its products, any such measures that were applied to the
Company's products could have a material adverse effect on the Company.
ENVIRONMENTAL MATTERS. The Company is subject to regulation by OSHA,
the Environmental Protection Agency ("EPA") and their respective state and local
counterparts, and under extensive and changing foreign, federal, state and local
environmental standards, including those governing the handling and disposal of
solid and hazardous wastes, discharges to the air and water, and the remediation
of contamination associated with releases of hazardous substances. Such
standards are imposed by, among other statutes, the Toxic Substances Control
Act, the Clean Air Act, the Federal Water Pollution Control Act, the Resource
Conservation and Recovery Act and the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"). Although there can be no assurances,
the Company believes that it is currently in material compliance with current
environmental standards. Nevertheless, the Company uses hazardous substances in
its day-to-day operations and, as is the case with manufacturers in general, if
a release of hazardous substances occurs on or from the Company's properties,
the Company may be held liable and may be required to pay the cost of remedying
the condition. The amount of any such liability could be material.
The Company has made, and will continue to make, expenditures to comply
with current and future environmental standards. Although no material capital or
operating expenditures relating to environmental controls are anticipated, there
can be no assurance that changes in, additions to, or differing interpretations
of statutory and regulatory requirements will not require material expenditures
in the future.
The Company is subject to liability under CERCLA and analogous state
laws for the investigation and remediation of environmental contamination at
properties owned and/or operated by it and at off-site locations where it has
arranged for the disposal of hazardous substances. Courts have determined that
liability under CERCLA is, in most cases, joint and several, meaning that any
responsible party could be held liable for all costs necessary for investigating
and remediating a release or threatened release of hazardous substances. As a
practical matter, liability at most CERCLA (and similar) sites is shared among
all the solvent "potentially responsible parties" ("PRPs"). The most relevant
factors in determining the probable liability of a party at a CERCLA site
usually are the cost of the investigation and remediation, the relative amount
of hazardous substances contributed by the party to the site and the number of
solvent PRPs.
The Company was involved in two such matters; one, at the Seaboard
Chemical site in Jamestown, North Carolina, and another at the Caldwell Systems,
Inc. site in Lenoir, North Carolina. In relation to the Seaboard Chemical site,
the Company has entered into a DE MICROMIS administrative order on consent with
the North Carolina Department of Environment, Health and Natural Resources and a
group of PRPs, settling its liability for past and future response costs
associated with the site. Under the consent order, the Company received a
release from further liability associated with the site, a covenant not to sue
by the other PRPs entering into the consent order, and protection under CERCLA
against contribution actions for matters addressed by the consent order.
Protection from further liability is conditioned on the absence of information
indicating that the Company disposed of a greater quantity of hazardous
substances at the site than currently known.
22
In relation to the Caldwell Systems site, the Company has entered into
a DE MINIMIS administrative order on consent with the EPA and a group of PRPs,
settling its potential liability for past and future response costs associated
with the site. Under the consent order, the Company received a covenant not to
sue by the EPA and by other PRPs entering into the consent order, and protection
under CERCLA against contribution actions for matters addressed by the consent
order. Protection from further liability is conditioned on the absence of
information indicating that the Company disposed of a greater quantity of
hazardous substances at the site than currently known.
In 1997, the Company received a Notice of Intent to Sue from a
citizen's group which claimed that the Company had violated California's Safe
Drinking Water and Toxic Enforcement Act of 1986 ("Proposition 65") in the
warning it provided with respect to DEHP, a plasticizer used in certain of the
Company's IV sets. Proposition 65 requires, among other things, that warnings be
given in connection with the exposure of consumers to products containing
certain listed substances. The Company entered into a settlement agreement,
pursuant to which the Company received a release and covenant not to sue from
the group.
EMPLOYEES
As of January 31, 2000, the Company employed 2,919 people, including
1,073 in the United States. The Company has not experienced any work stoppages
related to employment matters other than in connection with a contract dispute
with Cal Pacifico.
Cal Pacifico was the operator of the Company's two maquiladora assembly
plants in Tijuana, Mexico. For over eight years, the Company assembled
disposable administration sets at these two plants, which utilized more than
1,200 workers employed by Cal Pacifico, under a contract with Cal Pacifico. A
dispute originated in April 1997 when the Company, in accordance with the terms
of such contract, informed Cal Pacifico that it would be terminating its
contractual arrangements effective August 1, 1997. Cal Pacifico objected to such
notification and proposed the systematic termination of the workforce. In
response to such objection, the Company on June 6, 1997 hired substantially all
of the workers at the plants directly. On June 11, 1997, Cal Pacifico locked the
Company's administrative personnel and production employees out of the plants
and would not allow the Company access to its production equipment or inventory.
On June 26, 1997, the Company entered into a settlement agreement with Cal
Pacifico. As a result of the settlement agreement, the assembly plants resumed
full operations on June 27, 1997. The Company now directly operates these plants
with no assistance from or interaction with Cal Pacifico.
ALARIS Medical Systems' operations are supported by persons employed by
ALARIS Medical Systems and its subsidiaries. The Company's principal executive
offices are located at 10221 Wateridge Circle, San Diego, California 92121.
EXECUTIVE OFFICERS OF THE REGISTRANT
DAVID L. SCHLOTTERBECK, age 52, became a Director, the President and
the Chief Executive Officer of ALARIS Medical and ALARIS Medical Systems on
November 1, 1999. Mr. Schlotterbeck joined ALARIS Medical Systems on April 19,
1999, as President and Chief Operating Officer. Previously, Mr. Schlotterbeck
was President and Chief Operating Officer of Pacific Scientific Company, a
former NYSE-traded company prior to its acquisition by Danaher Corporation in
March 1998. He was President and COO of Pacific Scientific, an international
manufacturer of motion control, process measurement and safety products, from
1997 to March 1998. From 1995 to 1997, he was President and CEO of Vitalcom,
Inc., a medical network manufacturer. From 1991 to 1994, Mr. Schlotterbeck was
Executive Vice President and COO for 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.
He holds an M.S. in electrical engineering from Purdue University, and completed
the Executive Institute at Stanford University in 1984.
23
WILLIAM C. BOPP, age 56, became Senior Vice President and Chief
Financial Officer of each ALARIS Medical and ALARIS Medical Systems on November
1, 1999. Mr. Bopp joined the companies on March 22, 1999 as Vice President and
Chief Financial Officer. Prior to joining ALARIS, he was executive vice
president and chief financial officer of C.R. Bard, Inc. since 1995. Since 1980,
Mr. Bopp held positions of increasing responsibility with Bard, a $1.2 billion
developer, manufacturer and marketer of health care products, including
vascular, urological and oncological and interventional products. In addition to
his most recent position, from 1995 until 1999, Mr. Bopp also served as a member
of the board of directors of Bard. He is a graduate of Harvard College,
Cambridge, MA, and completed his M.B.A., Finance, from the Harvard Business
School.
JOHN A. DE GROOT, age 44, became Senior Vice President and General
Counsel of each of ALARIS Medical and ALARIS Medical Systems on November 1,
1999. In March 1997 he became the Secretary of ALARIS Medical and ALARIS Medical
Systems. Mr. de Groot became a Vice President and General Counsel of ALARIS
Medical Systems as of November 1996. Prior thereto, Mr. de Groot served as a
Vice President and General Counsel of IVAC Holdings, Inc. and IVAC Medical
Systems since April 1995. From January 1991 to December 1996, Mr. de Groot was a
partner in the law firm of Brobeck, Phleger & Harrison LLP, a firm he had been
associated with since March 1987. Mr. de Groot holds a B.B.A. and Juris Doctor
from the University of Notre Dame.
ANTHONY B. SEMEDO, age 48, became Vice President of Corporate
Development in January 1998. From November 1996 until February 1998, Mr. Semedo
served as Vice President of Research, Development and Engineering of ALARIS
Medical Systems. Prior thereto, Mr. Semedo served as Vice President of Research
and Development of IVAC Medical Systems since February 1995. From September 1994
to February 1995, Mr. Semedo served as Vice President of Quality of IVAC Medical
Systems. From August 1992 to September 1994, Mr. Semedo served as the Business
Development Manager of the cardiovascular business and the Quality Assurance
Manager of the medical devices and diagnostics division of Eli Lilly and
Company. Eli Lilly and Company are engaged in the discovery, development,
manufacture and sale of products, and the provision of services in the life
sciences industry. Mr. Semedo holds a B.S. degree in Engineering from the
University of Massachusetts, Lowell Campus.
RICHARD M. MIRANDO, age 56, became Vice President and General Manager
of Instromedix on August 2, 1999. He was previously Vice President of Operations
of ALARIS Medical Systems, a position he assumed as of November 1996. Prior
thereto, Mr. Mirando served as Vice President and General Manager of
International Business of IVAC Medical Systems since January 1995. From 1978 to
January 1995, Mr. Mirando held various positions, including Marketing Manager,
Director of Market Planning and Research, Director of Sales, Executive Director
of International Operations, Vice President Sales and Marketing-Fluid Delivery
Division, Vice President-Corporate Accounts and Pricing, and Vice
President-Corporate Quality/ Service Business Unit, with IVAC Medical Systems.
Mr. Mirando holds an M.B.A. and a B.S. degree, Industrial Engineering, from
Northeastern University.
HENK VAN ROSSEM, age 57, became Vice President and General Manager,
International of ALARIS Medical Systems in January 1997. Prior thereto, Mr. van
Rossem held various international marketing and sales positions with
Mallinckrodt Group, Inc. since 1984. Prior to Mallinckrodt, he worked in
marketing and sales promotions for Philips-Duphar health Products. Mr. van
Rossem attended the Amsterdam School of Business Administration, where he
graduated with a degree in Marketing. He later completed the NSEAD Executive
Management Program in France.
JAKE ST. PHILIP, age 47, became Vice President and General Manager,
North America, as of July 1998. He previously served as Vice President of Sales,
North America of ALARIS Medical Systems as of November 1996. Prior thereto, Mr.
St. Philip served as Vice President of Sales, North America of IVAC Medical
Systems since June 1994. From 1981 to June 1994, Mr. St. Philip held various
sales and marketing positions with IVAC Medical Systems. Additional prior
experience includes sales positions with Johnson & Johnson and M&M/Mars. Mr. St.
Philip holds a B.S. degree in Marketing from the University of New Orleans.
24
JOERGEN LYNGSGAARD, age 56, became Vice President of Operations, ALARIS
Medical Systems, on August 23, 1999. Prior to joining ALARIS Medical, he was
senior director, product development of Mallinckrodt, Inc.'s Carlsbad, CA
division, formerly known as Nellcor Puritan Bennett. Mr. Lyngsgaard joined
Nellcor in 1993 and was responsible for product development of patient monitors.
Nellcor Puritan Bennett was acquired in July 1997 by Mallinckrodt. From 1991 to
1993, he was vice president, product engineering for Harman Electronics, an
audio automotive original equipment manufacturer. From 1987 to 1991, Mr.
Lyngsgaard was vice president and general manager of Horiba Automation Division,
responsible for development, production and installation of complex
custom-specified pollution monitoring systems used worldwide in automotive and
industrial applications. His prior experience includes positions of increasing
responsibility with Calcomp, Beckman Instruments, Ford Motor Company and
Uniroyal Tire Company. Mr. Lyngsgaard holds a B.S. in Electrical Engineering
from Soenderborg Teknikum, Denmark, and a M.S. in Electrical Engineering from
the University of Detroit. He completed his M.B.A from Cal State Fullerton and
attended post-graduate coursework at Stanford University.
SALLY M. GRIGORIEV, age 41, is the Vice President of Quality and
Regulatory Affairs for ALARIS Medical Systems. 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. While at Block Medical, she established and implemented all
quality and regulatory systems. Ms. Grigoriev held various management positions
at IMED Corporation from 1982 to 1990, including Principal Manufacturing
Engineer, Quality Engineering Manager, Manufacturing Engineering Manager, and
Quality Assurance Manager. Ms. Grigoriev holds a B.S. degree, Chemical
Engineering, from the University of California, Santa Barbara.
L. JAMES RUNCHEY, age 43, is the Vice President of Human Resources for
ALARIS Medical Systems. He joined IVAC Medical Systems in May 1995. Prior to
IVAC, Mr. Runchey served as Vice President of Human Resources and Administration
for Magma Power Company from 1988 to 1995, where he was responsible for all
aspects of Human Resources management, facilities, safety and training. Mr.
Runchey holds a B.S. degree in Management from San Diego State University.
There are no family relationships among the above executive officers.
ITEM 2. PROPERTIES
The Company has long-term leases on substantially all of its major
facilities. The Company maintains an instrument manufacturing facility in San
Diego, California where infusion pumps and patient monitoring instruments for
both the North America and International business units are manufactured.
Arrhythmic event recorders and pacemaker monitors are also manufactured in the
San Diego facility for the Instromedix division. The Company also maintains a
facility in Hampshire, England where syringe pumps and the Advantis pump,
products marketed for countries outside of the United States, are manufactured.
Disposable administration set manufacturing facilities for the North America and
International business units are located in Creedmoor, North Carolina and
Tijuana, Mexico. The disposable manufacturing facility in Creedmoor, North
Carolina is owned by the Company. The disposable manufacturing facilities in
Tijuana, Mexico are maintained under short term lease agreements.
The Company's principal International sales offices are maintained
under long-term leases in England, Germany, Spain, France, Sweden, Belgium, The
Netherlands, Italy, Norway, South Africa, New Zealand and Australia. The North
American sales office for Canada is also maintained under a long-term lease.
25
The Company's principal offices are located in San Diego, California
and its International headquarters are located in Hampshire, England. These
facilities are maintained under long-term lease arrangements.
ITEM 3. LEGAL PROCEEDINGS
ALARIS Medical Systems was a defendant in a lawsuit filed in June
1996 by Sherwood, a unit of Tyco Healthcare Group ("Tyco"), against IVAC
Medical Systems. The lawsuit was filed in the United States District Court
for the Southern District of California, alleging infringement of two
Sherwood patents by reason of certain activities including the sale by IVAC
Medical Systems of disposable probe covers for use with the Company's
infrared tympanic thermometers. On August 31, 1999 the Company entered into
an agreement under which Tyco granted ALARIS Medical Systems a paid-up
license to certain patents and settled the patent infringement lawsuit. In
connection with this agreement, the Company made a one-time payment of $4.0
million during the third quarter of 1999. ALARIS Medical Systems will not be
required to pay any future royalties on patents covered by the agreement.
The Company was a defendant in a lawsuit filed on April 20, 1998 and
served on October 28, 1998, by Becton Dickinson and Company ("Becton")
against ALARIS Medical Systems, Inc., which alleged infringement of a patent
licensed to Becton by reason of certain activities, including the sale of the
Company's SmartSite-Registered Trademark- needle-free system. Becton had
requested a permanent injunction enjoining the Company from infringing the
patent in suit. In addition, the Company filed a lawsuit on December 4, 1998
against Becton. The lawsuit alleged infringement of two patents, one owned by
the Company and one licensed to the Company, by reason of certain activities,
including the sale of Becton's Atrium needle-free valve. On October 13, 1999,
the Company entered into an agreement with Becton which grants between the
two companies paid-up licenses to certain patents and settled the patent
infringement lawsuits. In connection with this agreement, the Company paid a
total of $6.7 million during the fourth quarter of 1999. The Company will not
be required to pay any future royalties on patents covered by the agreement.
In January 2000, the Company was notified that Amaris Software
Entwicklungsgesellschaft mbH ("Amaris Software"), a German company, contends
that the Company's use of the trademark "ALARIS" infringes Amaris Software's
registered trademark "Amaris" that is the subject of a German trademark
registration.
The Company has denied that the two marks are confusingly similar and
contends that the Company's intended use of the trademark "ALARIS" is only with
medical goods and services, which are outside Amaris Software's registration.
The Company believes it has sufficient defenses to all claims by Amaris
Software. However, there can be no assurance that the Company will successfully
defend all claims made by Amaris Software.
The Company is also involved in a number of legal proceedings arising
in the ordinary course of its business, none of which is expected to have a
material adverse effect on the Company's business, financial condition, results
of operations or cash flows of the Company. The Company maintains insurance
coverage against claims in an amount which it believes to be adequate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
26
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
ALARIS Medical Systems is a wholly-owned subsidiary of ALARIS
Medical. There is no established public trading market for ALARIS Medical
Systems' common stock. In addition, the Company's bank credit facility limits
ALARIS Medical System's ability to declare and pay dividends and to make
other distributions and payments to ALARIS Medical. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data of
ALARIS Medical Systems at December 31, 1999, 1998, 1997, 1996 and 1995, and
for the years then ended, have been derived from ALARIS Medical Systems'
annual financial statements including the consolidated balance sheet at
December 31, 1999 and 1998 and the related consolidated statement of
operations for the three-year period ended December 31, 1999 and notes
thereto which appear elsewhere herein.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1999 1998 1997 1996 (1) 1995 (1)
----------- ----------- ----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Sales...................................... $ 401,978 $ 380,068 $ 359,077 $ 136,371 $ 112,551
Cost of sales.............................. 208,739 191,232 188,340 78,642 63,270
--------- --------- --------- --------- ---------
Gross margin............................... 193,239 188,836 170,737 57,729 49,281
Selling and marketing expense.............. 77,510 72,202 65,797 22,273 16,567
General and administrative expense......... 44,639 40,952 37,510 13,434 8,893
Research and development expense........... 23,769 20,059 16,876 8,854 7,386
Purchased in-process research
and development (2)...................... - 28,334 - 44,000 -
Restructuring, integration, and
other non-recurring charges (2).......... 26,589 1,901 19,767 15,277 -
--------- --------- --------- --------- ---------
Total operating expenses (2)............... (172,507) (163,448) (139,950) (103,838) (32,846)
Lease interest income (3).................. 4,425 4,599 4,559 2,501 2,333
--------- --------- --------- --------- ---------
Income (loss) from operations.............. 25,157 29,987 35,346 (43,608) 18,768
Interest income............................ 1,373 1,128 433 184 28
Interest expense........................... (39,949) (41,814) (43,123) (6,303) (2,052)
Other (expense) income, net................ (1,649) (1,100) (1,584) 323 (379)
--------- --------- --------- --------- ---------
(Loss) income before income taxes......... (15,068) (11,799) (8,928) (49,404) 16,365
Provision (benefit) for income taxes ...... 3,400 7,400 (1,900) 1,270 8,099
--------- --------- --------- --------- ---------
Net (loss) income.......................... $ (18,468) $ (19,199) $ (7,028) $ (50,674) $ 8,266
========= ========= ========= ========= =========
27
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997 1996 (1) 1995 (1)
--------- --------- --------- ----------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash....................................... $ 23,539 $ 29,468 $ 6,918 $ 9,148 $ 436
Working capital............................ 127,943 148,144 85,084 84,469 25,753
Total assets ............................. 600,726 644,377 563,106 586,141 122,597
Short-term debt (4)........................ 13,769 15,423 14,559 - -
Long-term debt (4)......................... 382,678 399,623 415,419 423,941 11,353
Stockholder's equity....................... 101,121 123,118 38,947 50,021 32,477
ADJUSTED EBITDA (5) ........................... $ 89,139 $ 96,584 $ 90,948 $ 29,023 $ 25,310
Inventory purchase price
allocation adjustment (6).................. - (274) (1,607) (4,014) -
Restructuring, integration and
other non-recurring charges................ (26,589) (1,901) (19,767) (15,277) -
Purchased in-process research
and development............................ - (28,334) - (44,000) -
Depreciation and amortization (7).............. (37,393) (36,088) (34,228) (9,340) (6,542)
Interest income................................ 1,373 1,128 433 184 28
Interest expense............................... (39,949) (41,814) (43,123) (6,303) (2,052)
Other, net..................................... (1,649) (1,100) (1,584) 323 (379)
(Provision for) benefit from income taxes...... (3,400) (7,400) 1,900 (1,270) (8,099)
--------- --------- --------- --------- ----------
Net (loss) income.............................. $ (18,468) $ (19,199) $ (7,028) $ (50,674) $ 8,266
========= ========= ========= ========= ==========
- ---------------------------------
(1) ALARIS Medical Systems was formed as a result of the merger of IMED
Corporation and IVAC Medical Systems, Inc. in November 1996 ("the
Merger"). As a result of the Merger, the Balance Sheet Data for 1995 and
the Statement of Operations Data for 1995 and 1996 are not comparable to
the Balance Sheet and Statement of Operations Data for subsequent years.
(2) Operating expenses for the years ended December 31, 1999, 1998, 1997 and
1996 include restructuring, integration and other non-recurring charges of
$26,589, $1,901, $19,767 and $15,277, respectively. In 1996 ALARIS Medical
Systems restructured its operations. During 1997, the Company incurred
significant restructuring, integration and other non-recurring expense
resulting from the 1996 Merger. During 1998, the Company incurred
integration costs and other non-recurring expenses resulting from the
acquisitions of Instromedix and Patient Solutions. In 1999, the Company
incurred integration charges related to the consolidation of the
Instromedix operation into its San Diego, California facilities.
Additionally, in 1996, the Company recorded $44,000 of purchased
in-process research and development in connection with the Merger. In
1998, in connection with the acquisitions and licensing of Instromedix,
Caesarea and Patient Solutions, the Company recorded $28,334 of purchased
in-process research and development. In 1999, the Company wrote-off
$19,172 of goodwill and other intangible assets related to the Instromedix
business unit. Also included in 1999 operating expenses are charges of
$2,838 related to two patent license agreements. For further discussion
see Notes 2 and 9 to the Consolidated Financial Statements.
(3)