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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, 2000 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 April 2, 2001, 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 23, 2001 ("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. 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. ("Holdings"),
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."
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 its 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.
ALARIS Medical Systems has defined two strategic business units: North
America, which includes the United States and Canada; 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 10.4% of International
sales in 2000. Service of the Company's products represented approximately 5% of
the Company's sales in 2000.
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 68.6% and 31.4%,
respectively, of the Company's sales for the year ended 2000. For the year ended
December 31, 2000, the Company had sales of approximately $378.9 million.
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The Company has registered or applied to register the following trademarks:
AccuSlide(R), ALARIS(R), ALARIS Medical Systems(R), Asena(TM), COREoCHECK(R),
Gemini(R), Gemini PC-1(R), Gemini PC-2(R), Gemini PC-2TX(R), Gemini PC-4(R),
Guardrails(TM), IMED(R), IVAC(R), MEDLEY(TM), MedSystem III(R), Patient
Solutions, Inc.(R), PCAM(R), Profiles(TM), ReadyMED(R), Signature Edition(R),
SmartSite(R), TURBOoTEMP(TM), VersaSafe(R), VITALoCHECK(R)
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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
patient 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, 2000,
the Company sold approximately 79.0 million dedicated and non-dedicated
disposable administration sets representing sales of $237.1 million or 62.6% of
sales. Disposable administration sets sales for 2000 for the North America and
International business units were $165.6 million and $71.5 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 needleless 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, 2000, the Company's infusion systems
sales (pumps and disposables) were $326.2 million, representing approximately
86.1% 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, 2000, the
Company's patient monitoring product sales were approximately $31.1 million,
representing approximately 8% of the Company's total sales. Patient monitoring
sales for North America and International for 2000 were $27.0 million and $4.1
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 2000, the Company sold over 583 million dedicated
disposable probe covers into its worldwide installed base. In addition, the
Company participates in the hospital market of stand-alone, non-invasive,
multi-parameter instruments through its VITALoCHECK product line, which measures
and monitors a combination of temperature, pulse, blood pressure and pulse
oximetry.
3
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 5,000 hospitals with a total of
approximately 950,000 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, many hospitals and other potential customers for the
Company's products participate in 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. Historically, this has 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; the
alternate-site market is in a developmental stage.
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.
4
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 needleless 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.
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, and syringe infusion pumps such as P1000, P3000, PCAM,
P6000, P7000 and Asena GS, GH and CC, which are sold primarily in Western
Europe, and disposable pumps such as the ReadyMED for use in the alternate-site
setting. 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 needleless
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. 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
capabilities, for critical and internationally. (Successor to
general care and alternate site use. Signature Edition Classic which
was marketed since 1995.)
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PRODUCT DESCRIPTION STATUS
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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.
SYRINGE INFUSION PUMPS
ASENA Compact, lighter syringe pump with First model introduced
modular mounting design which will internationally in the third
connect to a docking station quarter of 1999.
capable of displaying all infusion
information centrally. Designed
for the international market.
P1000, P2000, P3000 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 Marketed in Europe since 1997.
technology 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.
6
PRODUCT DESCRIPTION STATUS
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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
(PATIENT CONTROLLED ANALGESIA) the United States that allows since 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.
Not available in international
markets.
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 needleless, 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 o TEMP Fast electronic thermometer; for Marketed since 1999. Not
general hospital and alternate-site available in international
use. markets.
TEMPO o PLUS II Electronic thermometer for general Marketed since mid-1980s.
hospital and alternate site use.
COREO o 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.
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PRODUCT DESCRIPTION STATUS
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OTHER PATIENT MONITORING PRODUCTS
VITAL o CHECK (MODEL 4200) Continuous monitoring device that Marketed in the United States
rapidly measures pulse, blood since late 1980s.
pressure and temperature.
VITAL o 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.
AUDITORY EVOKED POTENTIAL (AEP) Non-invasive monitoring device that Marketed since late 2000
MONITOR performs fast extraction of AEP through a global exclusive
signals, delivering near real-time license agreement; introduced
measurements of the level of in Europe under the A-Line
consciousness during general brand in January 2001.
anesthesia and IV sedation in all
areas of the hospital.
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;
programmability 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 patient 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.
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The Company has developed the MEDLEY Patient Care System, a modular
system, which can currently be configured as a one-to-four channel infusion
device, including sensitive monitoring capabilities. Over time, additional
modules and capabilities are planned. The MEDLEY Patient Care System
incorporates 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. Limited
market introduction is expected in 2001.
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.
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.
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 in the United States.
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.
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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 needleless 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 needleless
system offers a fully integrated, cost-effective design and eliminates the need
for separate caps and additional cannula components. The SmartSite needleless
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 TURBOoTEMP
thermometer; an improved cost-effective and technologically advanced electronic
thermometer designed to provide a faster temperature reading. The Company also
manufactures and markets the COREoCHECK 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.
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 VITALoCHECK 4400 family provides non-invasive blood
pressure, pulse oximetry and temperature monitoring, using the Company's
electronic thermometry technology.
In December 2000, under the A-Line brand name, the Company introduced a
non-invasive monitoring device used to measure the level of consciousness during
general anesthesia and to assess the effects of anesthetics on brain activity.
Using Auditory Evoked Potential ("AEP") signals, the monitor performs fast
extraction of AEP signals, delivering near real-time measurements of the level
of consciousness during general anesthesia and intravenous sedation. Level of
consciousness monitoring enables anesthesiologists to directly assess the
effects of anesthetics on brain activity. The Company's technology consists of a
monitor that analyzes the brain's EEGs or brain waves and disposable sensors
used to collect the data. The practice of level of consciousness monitoring is
designed to improve the
10
practice of anesthesiology by allowing for the minimal use of drugs, which
should result in faster wake up times, reduced recovery time and reductions in
the side effects associated with anesthesia. This is the first commercially
available monitor for measuring the level of consciousness utilizing the AEP
technology.
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. The Company believes that the availability of such service
helps maintain strong customer relations.
MARKETING AND SALES
The Company has historically focused its sales efforts on the hospital
market, which is still its primary 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.
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)....................................... 2005 - 2005
Premier.............................................. 2004 2001 2004
In-Source (Purchase Connection)...................... 2005 2005 2005
Tenet Healthcare..................................... 2007 - 2007
Tenet Buy Power...................................... 2004 - 2004
US Government / DOD.................................. 2006 2006 2006
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
11
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:
2000 1999 1998
------------ -------- ---------
(DOLLARS IN MILLIONS)
North America............................. $ 259.8 $ 265.7 $ 248.7
International............................. 119.1 124.2 125.1
--------- -------- ---------
Total Sales.......................... $ 378.9 $ 389.9 $ 373.8
========= ======== =========
The Company believes that sales of products to customers outside of the
United States represent a 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.
MANUFACTURING
The Company is focusing on low-cost manufacturing and manufactures its
products at plants in San Diego, California; Creedmoor, North Carolina; Tijuana,
Mexico; and Hampshire, England. The San Diego facility is the primary
manufacturing facility for infusion pumps and patient monitoring instruments and
also houses a service operation for installed infusion pumps and patient
monitoring instruments. The Creedmoor facility manufactures high volume, high
automation sub-assemblies and SmartSite needleless components and is a
distribution center for North American disposable finished products. Product
release from sterilization is done in San Diego and Creedmoor. The Tijuana
facilities primarily focus on the manual assembly of disposables, and the
Hampshire facility focuses on the manufacturing of syringe pumps which are sold
primarily to the international 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 although the Company has not experienced any serious
shortages or material delays in obtaining these materials it has, on occasion,
experienced temporary delays for certain materials due to supplier shortages. 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.
12
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, 2000, the Company expended approximately $21.6
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 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 221 unexpired patents in the United
States and approximately 402 unexpired patents in foreign countries, principally
in Europe, Canada, Japan and Australia. The Company has 23 additional
applications pending or in preparation in the United States and 180 foreign
applications pending. Within the next ten years, approximately 140 of the
Company's United States patents and approximately 253 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. Pursuant to
international accords, the term of United States patents is 20 years from date
of filing and certain provisions formerly favoring United States inventors over
foreign inventors have been eliminated.
Under United States patent code, 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 sufficient importance to warrant
registration in the United States and various
13
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 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. In the United States, major competitors 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 Belgium, France, the Netherlands,
Norway, Sweden, Spain, and the United Kingdom.
The patient monitoring products market is fragmented by product type.
The Company's key competitors in the United States market are Welch Allyn, Inc.
in electronic thermometer and Sherwood Davis & Geck in infrared thermometer.
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.
14
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 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 510(k) clearance 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 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 as 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
15
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 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 uniform regulations for the European Economic Area, the
transition rule for which ended on June 16, 1998, subjected 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
16
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 those described herein. The FDA's QSR 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 of the San Diego-based manufacturing facility.
The letter stated that the Company would be required 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.
On April 29, 2000, the Company's president and chief executive officer, David L.
Schlotterbeck, certified to the FDA that, to the best of his knowledge, the
Company had initiated or completed all corrections called for in the report
issued by the independent consultant. On July 10, 2000, the Company received
correspondence from the FDA indicating that the certification adequately
addressed the FDA's concerns and stated that the Company will be required to
submit one additional certification scheduled for submission to the FDA in April
2001. In this connection, in August 2000 the FDA completed an inspection of the
Company's San Diego-based manufacturing facility. The Company received
correspondence from the FDA indicating that ALARIS' response actions adequately
addressed their concerns.
Between 1997 and 1999, the Company on nine occasions initiated product
recalls or issued safety alerts which FDA still considers active 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. The Company has submitted
to the FDA a request for closure related to all nine of the recalls but has not
received notice of closure from the FDA. Notice of closure of two additional
recalls was received from the FDA during 2000.
The Company has four active field corrections related to its products
manufactured and sold outside the United States. 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. In the first
quarter of 2000, the Company stopped shipment of a large volume pump recently
introduced in the international markets for redesign of its air-in-line sensing
capability. The Company plans to introduce the redesigned product into
international markets and provide a field correction for existing units.
17
None of the recalls or field corrections materially interfered with the
Company's operations and all such affected product lines continued or will
continue to be marketed by the Company.
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 of the costs to complete
the recalls and safety alerts 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 or safety alert could differ significantly from
management's current estimates to complete such recalls or safety alerts.
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 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.
18
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"). 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.
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 February 28, 2001, the Company employed 2,597 people, including
772 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
19
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 53, became a Director, the President and
the Chief Executive Officer of Holdings 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.
WILLIAM C. BOPP, age 57, became Senior Vice President and Chief
Financial Officer of each Holdings 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.
JAKE ST. PHILIP, age 48, 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.
FREDERIC DENEROLLE, age 41, became Vice President and General Manager
of the International Business Unit for ALARIS Medical Systems in January 2001.
Prior to joining the Company, Mr. Denerolle held leadership positions in
well-known International medical device companies. He was most recently the
executive vice president/general manager of Fresenius' Infusion Technology
Division. Mr. Denerolle is a graduate in Business Administration from Ecole
Superieure de Commerce de Nantes, which includes MBA course work at Bowling
Green State University.
SALLY M. GRIGORIEV, age 42, became the Vice President of Operations in
December 2000. She previously served as 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
20
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.
WILLIAM H. MURPHY, age 48, became Vice President, Quality and
Regulatory Affairs for ALARIS Medical Systems in December 2000. He previously
served as director of regulatory affairs. Prior to Holdings, he held senior
leadership positions at other leading medical device manufacturers including the
Kendall Company, Hudson RCI and Nellcor Puritan Bennett. Mr. Murphy holds a B.S.
degree from Augusta College.
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. The
Company also maintains a facility in Hampshire, England where syringe pumps and
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 Tijuana, Mexico and high volume,
high automation sub-assemblies and SmartSite needleless components are
manufactured in Creedmoor, North Carolina. 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.
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
On December 5, 2000, the Company filed a lawsuit in the United States
District Court for the Southern District of California, seeking unspecified
damages and equitable relief from Filtertek Inc. ("Filtertek") alleging, among
other things, that Filtertek's needle-free system (the "Filtertek System")
infringes a patent relating to needle free technology (the "Medex Patent")
licensed by Medex, Inc. ("Medex") to the Company on an exclusive basis and
seeking, as well, a declaration that the Company's needle-free system (the
"System") does not infringe a certain Filtertek patent (the "Filtertek Patent")
relating to the Filtertek System or, if it does, that the Filtertek Patent is
invalid.
On March 9, 2001, Filtertek filed a lawsuit in the United States
District Court for the Northern District of Illinois, Western Division, seeking
unspecified damages and equitable relief from the Company and Medex, alleging
that the System violates the Filtertek Patent, and seeking, as well, a
declaration, against Medex only, that the Filtertek System does not infringe the
Medex Patent.
The Company believes that it has meritorious defenses to all Filtertek
claims and intends to defend itself vigorously. However, there can be no
assurance that such defenses will successfully defeat all of such claims. The
failure to do so could have a material adverse effect on the Company's
operations, financial condition and cash flows.
21
In February 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. In related proceedings, Amaris Software also filed an opposition
in the German trademark office on August 30, 1998 against the Company's
application for registration of its trademark ALARIS in Germany and an
opposition in the Office for Harmonization of the Internal Market ("OHIM") in
August 1998 against the Company's application for a European Community trademark
registration for ALARIS. The Company prevailed in the opposition at the OHIM but
the German opposition is still pending.
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.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCK-HOLDER
MATTERS
ALARIS Medical Systems is a wholly-owned subsidiary of Holdings. 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 Holdings. 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, 2000, 1999, 1998, 1997 and 1996, and for the
years then ended, have been derived from ALARIS Medical Systems' annual
financial statements including the consolidated balance sheet at December 31,
2000 and 1999 and the related consolidated statement of operations for the
three-year period ended December 31, 2000 and notes thereto which appear
elsewhere herein. Certain prior period amounts have been reclassified to conform
to current period presentation. (Notes 1 and 3 to the Consolidated Financial
Statements.)
22
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
2000 1999 1998 1997 (2) 1996 (1)(2)
----------- ----------- ----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Sales...................................... $ 378,948 $ 389,927 $ 373,795 $ 359,077 $ 136,371
Cost of sales.............................. 202,964 199,923 186,077 188,340 78,642
----------- ----------- ----------- ----------- -----------
Gross margin............................... 175,984 190,004 187,718 170,737 57,729
Selling and marketing expense.............. 72,340 75,749 72,155 65,797 22,273
General and administrative expense......... 37,891 40,702 39,120 37,510 13,434
Research and development expense........... 21,570 22,134 19,236 16,876 8,854
Purchased in-process research
and development ......................... - - 5,534 - 44,000
Restructuring, integration, and
other non-recurring charges ............. 7,048 2,887 139 19,767 15,277
----------- ----------- ----------- ----------- -----------
Total operating expenses .................. 138,849 141,472 136,184 139,950 103,838
Lease interest income (3).................. 5,095 4,425 4,599 4,559 2,501
----------- ----------- ----------- ----------- -----------
Income (loss) from operations.............. 42,230 52,957 56,133 35,346 (43,608)
Interest income............................ 1,313 1,373 1,129 433 184
Interest expense........................... (41,543) (39,903) (41,767) (43,123) (6,303)
Other (expense) income, net................ (140) (1,668) (1,116) (1,584) 323
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes.......... 1,860 12,759 14,379 (8,928) (49,404)
Provision (benefit) for income taxes ...... 3,200 7,600 8,400 (1,900) 1,270
----------- ----------- ----------- ----------- -----------
(Loss) income from continuing operations... (1,340) 5,159 5,979 (7,028) (50,674)
Loss from discontinued operations
(net of tax)............................. (1,308) (23,627) (25,178) - -
Gain on disposal of discontinued operation
(net of tax)............................. 1,839 - - - -
----------- ----------- ----------- ----------- -----------
Net loss................................... $ (809) $ (18,468) $ (19,199) $ (7,028) $ (50,674)
=========== =========== =========== =========== ===========
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
2000 1999 1998 1997 (2) 1996 (1)(2)
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 30,618 $ 23,539 $ 29,468 $ 6,918 $ 9,148
Working capital............................ 118,814 127,943 148,144 85,084 84,469
Total assets ............................. 564,456 600,726 644,377 563,106 586,141
Short-term debt (4)........................ 19,871 13,769 15,423 14,559 -
Long-term debt (4)......................... 344,905 382,678 399,623 415,419 423,941
Stockholder's equity....................... 95,056 101,121 123,118 38,947 50,021
ADJUSTED EBITDA (5) ........................... $ 81,197 $ 88,704 $ 95,873 $ 90,948 $ 29,023
Discontinued operations........................ 531 (23,627) (25,178) - -
Inventory purchase price
allocation adjustment (6).................. - - (40) (1,607) (4,014)
Restructuring, integration and
other non-recurring charges................ (7,048) (2,887) (139) (19,767) (15,277)
Purchased in-process research
and development............................ - - (5,534) - (44,000)
Depreciation and amortization (7).............. (31,919) (32,860) (34,027) (34,228) (9,340)
Interest income................................ 1,313 1,373 1,129 433 184
Interest expense............................... (41,543) (39,903) (41,767) (43,123) (6,303)
Other, net..................................... (140) (1,668) (1,116) (1,584) 323
(Provision for) benefit from income taxes...... (3,200) (7,600) (8,400) 1,900 (1,270)
----------- ----------- ----------- ----------- -----------
Net loss....................................... $ (809) $ (18,468) $ (19,199) $ (7,028) $ (50,674)
=========== =========== =========== =========== ===========
23
- --------------------------------
(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 Statement of Operations Data for 1996 is not
comparable to the Statement of Operations Data for subsequent years.
(2) Beginning fourth quarter of 2000, the Company is required to classify
shipping and handling revenues in sales. The Company has included such
costs in sales for the year ended December 31, 2000 and has conformed 1999
and 1998 Statements of Operations Data to the current period presentation.
Shipping and handling revenues were not segregated in earlier periods,
therefore, 1997 and 1996 Statements of Operations Data is not comparable to
later periods. (See Note 1 to the Consolidated Financial Statements.)
(3) Lease interest income consists of interest income associated with contracts
or agreements pursuant to which a third party acquires infusion pumps under
sales-type leases.
(4) In 1996, in connection with the Merger, the Company entered into a $250,000
credit facility and also issued $200,000 of 9 3/4% senior subordinated
notes due 2006.
(5) Adjusted EBITDA represents income from operations before restructuring,
integration and other non-recurring charges, non-cash purchase accounting
charges and depreciation and amortization. Adjusted EBITDA does not
represent net income or cash flows from operations, as these terms are
defined under generally accepted accounting principles, and should not be
considered as an alternative to net income as an indicator of the Company's
operating performance or to cash flows as a measure of liquidity. ALARIS
Medical Systems has included information concerning Adjusted EBITDA herein
because it understands that such information is used by certain investors
as one measure of an issuer's historical ability to service debt.
Integration and other one-time non-recurring charges are excluded from
Adjusted EBITDA as ALARIS Medical Systems believes that the inclusion of
these items would not be helpful to an investor's understanding of ALARIS
Medical Systems' ability to service debt. ALARIS Medical Systems'
computation of Adjusted EBITDA may not be comparable to similar titled
measures of other companies.
(6) Amounts in 1996 and 1997 represent that portion of the purchase accounting
adjustments made to adjust acquired inventory to its estimated fair value
on the acquisition date. This adjustment to inventory was subsequently
charged to cost of sales during December 1996 and the first quarter of
1997. The 1998 amount represents that portion of the purchase accounting
adjustments made to adjust the 1998 acquired inventories to the estimated
fair value on the acquisition dates which was subsequently charged to cost
of sales.
(7) Depreciation and amortization excludes amortization of debt discount and
issuance costs included in interest expense of $3,114, $2,730, $2,889,
$3,012, $1,113 and $248 for the years ended December 31, 2000, 1999, 1998,
1997 and 1996, respectively.
(8) During the third quarter of 2000, the Company sold the assets and certain
liabilities of its Instromedix division to Card Guard Technologies, Inc.,
which had been acquired in 1998. Losses for discontinued operations for
2000, 1999 and 1998 are net of applicable income tax benefits of $872,
$4,200 and $1,000, respectively. Discontinued operations for 1999 include a
pretax charge of $19,200 resulting from the write-off of goodwill and other
intangible assets and approximately $4,600 in integration charges.
Discontinued operations in 1998 include a charge of $22,800 in write-offs
related to in-process research and development. (See Note 3 to the
Consolidated Financial Statements.)
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF ALARIS MEDICAL SYSTEMS AND THE RELATED NOTES THERETO
INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. CERTAIN PRIOR PERIOD AMOUNTS HAVE BEEN
RECLASSIFIED TO CONFORM TO CURRENT PERIOD PRESENTATION. (NOTES 1 AND 3 TO THE
CONSOLIDATED FINANCIAL STATEMENTS.)
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 countries, the
largest installed base of infusion pumps in Australia and Canada and a
developing position in Latin America and Asia. The Company's infusion systems,
which are used to deliver one or more fluids, primarily pharmaceuticals or
nutritionals, to patients, consist of single and multi-channel infusion pumps
and dedicated and non-dedicated disposable administration sets (i.e., plastic
tubing and pump interfaces). In addition, the Company is a leading provider of
patient monitoring products that measure and monitor temperature, pulse, pulse
oximetry and blood pressure, with the largest installed base of hospital
thermometry systems in the United States.
The Company sells a full range of products through a worldwide direct
sales force consisting of over 250 sales persons and through more than 150
distributors to over 5,000 hospitals worldwide. Sales by the Company's
International business unit represented 31.4% of the Company's total sales for
the year ended December 31, 2000. For the year ended December 31, 2000, the
Company had sales of $378.9 million and Adjusted EBITDA of $81.2 million.
Historically, the Company's results of operations have been affected by
the cost containment pressures applicable to health care providers.
Notwithstanding cost containment pressures, unit sales volume of the Company's
disposable administration sets increased in every year since 1993, primarily as
a result of the growth in its worldwide installed base of infusion pumps.
However, uncertainty remains with regard to future changes within the healthcare
industry. The trend towards managed care and economically motivated buyers in
the U.S. may result in continued pressure on selling prices of products and
compression on gross margins. The U.S. marketplace is characterized by
consolidation among healthcare providers and purchasers of medical products. The
Company's profitability is affected by the use of Group Purchasing Organizations
("GPOs") which are better able to negotiate favorable pricing from providers of
infusion systems, such as the Company, and which insure compliance with
exclusive buying arrangements for their members. These buying arrangements, in
certain situations, also may result in the GPO requiring removal of the
Company's existing infusion pumps. As a result, GPOs may have an adverse effect
on the Company's future profitability. Finally, the enactment of national health
care reform or other legislation affecting payment mechanisms and health care
delivery could affect the Company's future results of operations. It is
impossible to predict the extent to which the Company may be affected by any
such change in legislation.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
financial information expressed as a percentage of sales. Certain prior period
amounts have been reclassified to conform to current period presentation. (Notes
1 and 3 to the Consolidated Financial Statements.)
25
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2000 1999 1998
---------- ---------- ---------
(% OF SALES) (% OF SALES) (% OF SALES)
Sales ....................................................... 100.0% 100.0% 100.0%
Cost of sales.................................................. 53.6 51.3 49.8
---------- ---------- ---------
Gross margin................................................... 46.4 48.7 50.2
Selling and marketing expenses................................. 19.1 19.4 19.3
General and administrative expenses............................ 10.0 10.4 10.5
Research and development expenses.............................. 5.7 5.7 5.1
Purchased in-process research and
development................................................. - - 1.5
Restructuring, integration and other
non-recurring charges....................................... 1.9 .7 -
Lease interest income.......................................... (1.4) (1.1) (1.2)
---------- ---------- ---------
Income from continuing operations............................. 11.1 13.6 15.0
Interest income................................................ .3 .3 .3
Interest expense............................................... (11.0) (10.2) (11.2)
Other, net..................................................... - (.4) (.3)
---------- ----------- ---------
Income from continuing operations before income taxes.......... .4 3.3 3.8
Provision for income taxes..................................... .8 1.9 2.2
---------- ---------- ---------
Net (loss) income from continuing operations loss.............. (.4) 1.4 1.6
---------- ---------- ---------
Loss from discontinued operations.............................. (.3) (6.1) (6.7)
Gain on disposal of discontinued operations.................... .5 - -
---------- ---------- ---------
Net loss....................................................... (.2)% (4.7)% (5.1)%
========== ========== =========
Other Data:
Adjusted EBITDA............................................ 21.4% 22.7% 25.6%
========== ========== =========
The following table summarizes sales to customers by each business
unit:
YEAR ENDED DECEMBER 31, (A)
--------------------------------------------------
2000 1999 1998
---------- ---------- ------------
(IN MILLIONS)
North America sales............................................ $ 259.8 $ 265.7 $ 248.7
International sales............................................ 119.1 124.2 125.1
---------- ---------- ---------
Total sales................................................ $ 378.9 $ 389.9 $ 373.8
========== ========== =========
(A) The Company's sales results are reported consistent with the Company's two
strategic business units: North America and International.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
SALES. Sales decreased $11.0 million, or 3%, during 2000 compared
with 1999. North America sales decreased $5.8 million, or 2.2% and
International sales decreased $5.2 million or 4.2%. The decrease in North
America sales in 2000 is primarily due to a decrease in drug infusion
disposable administration set revenue of $3.0 million and patient monitoring
26
instruments and disposable revenue of $3.1 million, partially offset by an
increase in drug infusion instrument revenue of $1.1 million. Disposable set
revenue was lower than a year ago in major markets worldwide. The Company
estimates that about $3 million of its dedicated disposable sets were purchased
in 1999 as safety stock in anticipation of possible Y2K problems at year-end.
The Company believes that most of this customer inventory was worked-off in the
first quarter of 2000 resulting in 1999 shipments and revenues that otherwise
would have been shipped and recorded in 2000. The majority of the Company's
international sales are denominated in foreign currency. Due to a stronger U.S.
dollar in 2000 compared with the actual foreign currency exchange rates in
effect during 1999, translation of 2000 international sales were adversely
impacted by $10.0 million. Using constant exchange rates, International sales
increased 4% due primarily to unit growth in syringe pumps and large volume
pumps.
GROSS MARGIN. Gross margin decreased $14.0 million or 7% during 2000
compared with 1999. The gross margin percentage decreased from 48.7% in 1999 to
46.4% in 2000 due to changes in product mix and unfavorable manufacturing
variances. Contributing to the margin decrease in 2000 was the overall worldwide
mix of increased instrument sales and lower disposables sales, lower
international sales which typically carry higher margins than U.S. sales and a
stronger U.S. dollar.
SELLING AND MARKETING EXPENSE. Selling and marketing expenses decreased
$3.4 million, or 5%, during 2000 compared with 1999 due to lower sales and the
favorable effect on international expenses of a strong U.S. dollar.
Additionally, the 1999 results included costs of approximately $2.1 million that
were not repeated in 2000 for management consulting fees associated with
developing and validating product strategies. As a percentage of sales, selling
and marketing expenses decreased from 19.4% in 1999 to 19.1% in 2000.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
decreased $2.8 million, or 7%, during 2000 compared with 1999. This decrease is
primarily due to lower amortization expense in 2000 resulting from certain
intangible assets becoming fully amortized. These decreases were partially
offset by increased information technology costs for the Company's new
International operating system implemented in late 1999 and higher medical
benefits costs than in the prior year. As a percentage of sales, general and
administrative expense decreased from 10.4% for 1999 to 10.0% for 2000.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
decreased approximately $0.6 million, or 3%, during 2000. As a percentage of
sales, research and development spending remained consistent with the prior
year.
RESTRUCTURING, INTEGRATION AND OTHER NON-RECURRING CHARGES.
Restructuring, integration and other non-recurring charges increased $4.2
million during 2000 compared with the prior year. The 2000 costs represent
restructuring activities the Company initiated which totaled approximately $7.0
million. These actions are intended to save approximately $6 million per year
when fully implemented and involve facilities in Creedmoor, N.C., Basingstoke,
England and San Diego. The primary focus of this activity is in the Creedmoor
manufacturing operation. This plant is being restructured to include disposables
engineering, automated manufacturing of selected products and distribution
operations. Manual assembly operations will be relocated to the Company's
facilities in Tijuana, Mexico, and certain operations will be outsourced.
Additionally, the Basingstoke and San Diego operations are being matched to the
mix of requirements resulting from current and future product line
rationalization efforts. The restructuring and other non-recurring charges of
$7.0 million taken during the current period were composed of severance ($5.3
million), fixed asset write-offs ($1.0 million), termination of a product
distribution agreement ($0.6 million) and closure of a foreign sales office
($0.1 million).
27
Integration and other non-recurring charges for 1999 includes a third
quarter charge of $2.8 million for two patent license agreements related to
patent infringement lawsuits (see Note 14 to the accompanying Consolidated
Financial Statements).
LEASE INTEREST INCOME. Lease interest income during both periods
consists of interest income associated with contracts or agreements pursuant to
which a third party acquired infusion pumps under sales-type leases. Lease
interest income increased $0.7 million in 2000 compared with 1999 due to
increased sales activity associated with such leases.
INCOME FROM OPERATIONS. Income from operations decreased $10.7 million
during 2000 compared with 1999 primarily due to lower sales and gross margins
and restructuring charges, which were partially offset by lower operating
spending.
INTEREST EXPENSE. Interest