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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, 1997 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 33-26398
ALARIS MEDICAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3492624
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10221 WATERIDGE CIRCLE, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 458-7000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $0.01 par value NASDAQ
7 1/4% Convertible Subordinated Debentures American Stock Exchange
due 2002
Securities registered pursuant to Section 12(g) of the Act:
NONE
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. YES: X NO:
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the shares of the registrant's common stock,
$0.01 par value per share ("Common Stock"), held by nonaffiliates of the
registrant, computed by reference to the price at which such stock was last
sold, on March 23, 1998, was $61,082,630. Solely for purposes of this
calculation, the following persons, who beneficially owned in the aggregate
47,382,011 shares of Common Stock at March 23, 1998, have been deemed to be
affiliates of the registrant: directors of the registrant, the Named
Executive Officers (as defined) and known stockholders of the registrant
beneficially owning 5% or more of the outstanding shares of Common Stock.
As of March 23, 1998, the registrant had 59,122,035 shares of Common Stock
outstanding.
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PART I
ITEM 1. BUSINESS
BACKGROUND
ALARIS Medical, Inc. ("ALARIS Medical"), formerly Advanced Medical,
Inc., operating through its consolidated subsidiaries, designs, manufactures,
distributes and services intravenous infusion therapy and periodic patient
monitoring instruments and related disposables and accessories. On November
26, 1996, IMED Corporation ("IMED"), then a wholly-owned subsidiary of
Advanced Medical, Inc., ("Advanced Medical") acquired all of the outstanding
stock of IVAC Holdings, Inc. ("IVAC Holdings") and its subsidiaries including
IVAC Medical Systems, Inc. In connection with the acquisition, IMED and IVAC
Medical Systems, Inc. were merged into IVAC Holdings (the "Merger"), which
then changed its name to ALARIS Medical Systems, Inc. ("ALARIS Medical
Systems"). The acquisition was accounted for as a purchase. ALARIS Medical
and its subsidiaries are collectively referred to as the "Company." ALARIS
Medical was incorporated on September 28, 1988 under the laws of the State of
Delaware.
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"). In addition, the Company is a
leader in the international infusion systems market. The Company, based on
installed base of infusion pumps, has a number one or two market position in
eleven Western European countries, the number three market position in
Germany and Italy, 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 fluids, generally
pharmaceuticals or nutritionals, accurately and safely to patients, consist
of single and multi-channel infusion pumps and controllers, and proprietary
and non-proprietary disposable administration sets (plastic tubing and pump
interfaces). In addition, the Company is a leading provider of patient
monitoring products that measure and monitor temperature, pulse 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 direct sales force
consisting of over 200 salespersons and through more than 150 distributors to
over 5,000 hospitals worldwide. The Company's United States sales and sales
to customers located outside the United States accounted for approximately
63% and 37%, respectively, of the Company's sales for 1997. For the year
ended December 31, 1997, the Company had sales of approximately $359.1
million.
INFUSION SYSTEMS. The Company offers a wide variety of infusion pumps
designed to meet the varying price and technological requirements of its
broad array of customers. 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 system, a versatile, user-friendly single
and dual channel infusion pump for use in general medical and surgical
settings; the MedSystem III instrument ("MS III"), a compact, lightweight,
programmable three channel infusion pump targeted for the hospital critical
care and transport applications; and the 560/570 Series,
________________________________
The Company has registered or applied to register the following
trademarks: IMED-Registered Trademark-, Accuset-Registered Trademark-,
Graviset-Registered Trademark-, Microset-Registered Trademark-,
Flo-Stop-Registered Trademark-, Gemini-Registered Trademark-, Gemini
PC-1-Registered Trademark-, Gemini PC-2-Registered Trademark-, Gemini
PC-4-Registered Trademark-, Gemini PC-2TX-Registered Trademark-,
Autotaper-Registered Trademark-, Versataper-Registered Trademark-,
ReadyMED-Registered Trademark-, VersaSafe-Registered Trademark-,
IVAC-Registered Trademark-, IVAC MEDICAL SYSTEMS-TM-, CORE-CHECK-Registered
Trademark-, DYNAMIC MONITORING-TM-, MEDSYSTEM III-Registered Trademark-,
PCAM-TM-, SIGNATURE EDITION-TM-, TEMP-PLUS-Registered Trademark-,
VITAL-CHECK-Registered Trademark-, ACCUSLIDE-TM-, and
Smart-Site-TM-SAFSITE-Registered Trademark- is a registered trademark of B.
Braun, Inc.
2
consisting of single channel infusion pumps designed for the price-conscious
customer. In addition, the Company offers the ReadyMED ambulatory infusion
pump ("ReadyMED"), which is compact, lightweight and disposable, for use in
the alternate site market and a variety of syringe infusion pumps for use
primarily outside the United States.
The Company manufactures higher margin proprietary disposable
administration sets which can only be used with the Company's large volume
infusion pumps. Since the useful life of the Company's infusion pumps is
typically seven to ten years, the Company's industry-leading installed base
allows it to generate stable, predictable and recurring revenues from sales
of disposable administration sets. 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
has introduced 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
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,
1997, the Company's infusion systems sales were $306.2 million, representing
approximately 85% of the Company's total sales.
PATIENT MONITORING PRODUCTS. The patient monitoring products market
consists of discrete market niches, each of which has different competitive
dynamics. The Company primarily operates in the United States, Canada and
Western Europe in two market niches of the patient monitoring products
market: (i) hospital thermometry systems and (ii) stand-alone, non-invasive,
multi-parameter patient monitoring products which measure a combination of
pulse, temperature and blood pressure. The Company's large base of installed
hospital thermometry instruments allows it to generate stable, predictable
and recurring revenues from sales of related disposable probe covers. In
1997, the Company manufactured and sold over 595 million proprietary
disposable probe covers. For the year ended December 31, 1997, the Company's
patient monitoring products sales were $33.4 million, representing
approximately 9% of the Company's total sales.
At December 31, 1996, the Company's installed base of thermometry
instruments constituted approximately 42% of the United States hospital
electronic and infrared thermometry market, making the Company the largest
provider of hospital thermometry systems in the United States. The Company's
principal thermometry instruments are the TEMP-PLUS II electronic thermometer
and the CORE-CHECK infrared thermometer, both of which are widely used in
hospitals and alternate site settings. The Company is also the second largest
participant in the United States infrared thermometry market, the fastest
growing segment of the hospital thermometry market, and, at December 31,
1996, had approximately 31% of the United States hospital installed base. In
addition, the Company's hospital installed base of stand-alone, non-invasive,
multi-parameter patient monitoring products, which measure a combination of
pulse, temperature and blood pressure, is the second largest in this market
niche in the United States.
INDUSTRY
GENERAL. Cost containment measures both imposed and proposed by federal
and state regulators and private payors, combined with increased utilization
review and case management, have led to greater financial pressure on
hospitals. In response to these cost-containment pressures, hospitals and
other potential customers for the Company's products are increasingly
combining into group purchasing organizations ("GPOs") which may be large and
which effectively police 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 vital signs measurement products, for a
period of several years. See "-Marketing and Sales." These trends have, in
turn, led to downward pricing pressure on manufacturers of medical products,
including the Company, and greater use of alternate sites for treatment.
Growth in the alternate site market is also 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
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therapy and increased acceptance by the medical community of, and patient
preference for, non-hospital treatment. As both the complexity of infusion
therapy treatments and the potency of drugs administered have increased, the
demand for technologically-advanced infusion systems has risen significantly.
In the patient monitoring products markets, similar trends of cost reduction
of health care delivery and technological innovation have resulted in the
creation of a number of new products and product areas, such as infrared
thermometry products, pulse oximetry and multi-parameter patient monitoring
products.
The Company believes that as the infusion system and patient monitoring
products 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 which, in turn, provides opportunities for leading
suppliers to increase market share and participate in strategic alliances,
joint ventures and acquisitions.
The United States hospital market consists of approximately 5,300
hospitals with a total of approximately 900,000 licensed beds and can be
divided into three major areas: critical care (E.G., adult, pediatric and
neonatal intensive care units), specialty units (E.G., oncology, ob/gyn,
coronary care and emergency room/trauma) and general medical/surgical. The
alternate site market encompasses all health care provided outside a hospital
and is comprised primarily of home health care, freestanding clinics, skilled
nursing facilities and long-term care facilities.
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 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 systems are generally designed for
either critical care or general care use, with the latter group being used
both in hospitals and at alternate site facilities.
The United States infusion therapy market had sales of approximately
$1.5 billion in 1996 and has grown at an estimated compound annual growth
rate of approximately 3.8% from 1992 to 1996. There are two principal markets
for infusion systems: the hospital market and the alternate site market.
These markets had sales in the United States of approximately $1.1 billion
and $360 million, respectively, in 1996, and estimated annual compound growth
rates of approximately 1.6% and 12%, respectively, from 1992 to 1996.
Infusion systems include three major delivery technologies:
pumps/controllers, disposable ambulatory pumps and gravity delivery products.
In 1996, these three segments had sales in the United States of approximately
$800 million, $80 million and $350 million, respectively. While the Company
competes in the pumps/controllers and disposable pumps segments, it has never
competed in gravity delivery products because of the commodity nature of this
market.
Controllers typically are nonvolumetric devices that regulate flow by
electronically counting drops rather than by measuring a specific volume of
fluid. The Company does not currently market a traditional controller, but
some of its infusion pumps can be used in a controller mode. Infusion pumps
use positive pressure to overcome the resistance in the infusion tubing and
the back pressure generated by the patient's circulatory system. Infusion
pumps administer precise, volumetrically measured quantities of fluids more
accurately and over a wider range of infusion rates than controllers. For
this reason, infusion pumps are used more frequently than controllers to
administer expensive, critical or potent therapeutics. Syringe pumps operate
by gradually depressing the plunger on a standard disposable syringe, thereby
delivering a more
4
concentrated dose of medication at a very precise rate of accuracy.
Disposable pumps are single-use products designed for use primarily in
general care settings.
Historically, controllers have held a major share of the installed base
of infusion instruments, principally because they were significantly less
expensive than infusion pumps. As infusion pump prices declined and their
technological capabilities increased, the purchasing trend has been toward
infusion pumps. As of the end of 1996, infusion pumps represented
approximately 98%, and controllers represented approximately 2%, of the
installed base of infusion instruments in the United States hospital market
and less than 1% of the infusion instruments sold in 1996 were controllers.
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. As a result, United States sales
of channels relating to multi-channel infusion pumps have increased from
approximately 28% of total United States channels sold in 1991 to
approximately 39% of total United States channels sold in 1996.
All infusion pumps and controllers 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. Components such as burettes and filters may also be added
for critical drugs or special infusion. Almost all of these sets, including
those manufactured by the Company, are compatible only with their particular
manufacturer's line of infusion systems. Since these disposable
administration sets tend to have significantly higher margins than infusion
pumps, the establishment of an extensive installed base, such as the
Company's, is important for generating ongoing disposable administration set
sales and enhancing overall margins.
PATIENT MONITORING PRODUCTS. Patient monitoring products are used to
measure and monitor pulse, temperature, blood pressure and respiration rate.
Products sold in this market have varying levels of technological
sophistication and are used in a variety of diagnostic and health care
settings. The patient monitoring products market consists of discrete market
niches, each of which has different competitive dynamics. The Company
competes in two niches - hospital thermometry systems, and stand-alone,
non-invasive, multi-parameter patient monitoring products which measure a
combination of pulse, temperature and blood pressure. In the United States,
these two market niches had sales of approximately $55.0 million and $140.0
million, respectively, in 1996.
The three major instrument types in the hospital thermometry market are
glass, electronic and infrared devices, which in 1996 accounted for
approximately 5%, 65% and 30%, respectively, of the United States hospital
market installed base. The Company offers electronic and infrared instruments
but does not compete in the glass thermometry market. Over the last several
years, there has been a shift toward increased use of infrared instruments
due primarily to their ease of use. While infrared thermometers constituted
only approximately 31% of the installed base in the United States in 1996,
sales of these products accounted for approximately 41% of total market sales
in 1996.
As with the infusion therapy market, the hospital thermometry market has
higher margin disposable products that are used in concert with instruments
and, consequently, the existence of an installed base is important for
generating ongoing disposable product sales and enhancing overall margins.
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, the
Signature Edition system, MS III and 560/570 Seriespumps, syringe infusion
pumps
5
such as P1000, P3000, PCAM and P7000, which are sold primarily in Western
Europe, and the ReadyMED system. The Company's large volume infusion pumps
require the use of higher margin proprietary disposable administration sets.
The Company also sells non-proprietary disposable administration sets for use
with syringe infusion pumps manufactured by the Company and others.
Furthermore, the Company manufactures and markets hospital thermometry
instruments and related disposable probe covers, and stand-alone,
non-invasive, multi-parameter instruments which measure and monitor
temperature, pulse and blood pressure. In the United States hospital
electronic and infrared thermometry market, the Company had an installed base
market share of approximately 42% in 1996 and was the second largest supplier
of hospital thermometry products in the infrared market. In its niche of
stand-alone, non-invasive, multi-parameter instruments, the Company had an
installed base market share of approximately 14% in the United States in
1996.
The table set forth below summarizes the key features, actual or
estimated market introduction dates and predecessor product line information
with respect to the Company's product line and products in development.
PRODUCT DESCRIPTION STATUS
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LARGE VOLUME INFUSION
PUMPS
SIGNATURE EDITION Single and dual channel pump; incorporates Selectively marketed since
(MODEL 7100/7200) intuitive user interface; for critical and September 1995; full
general care use commercial availability in
the United States
achieved in the first
quarter of 1996;
introduced in Europe
during the second half of
1997
SIGNATURE EDITION GP Single channel pump using the Signature Market introduction in
(MODEL 7000) Edition technology platform designed for 1997
the price-conscious consumer; intended to
be marketed in the United States for
general care and alternate site markets
GEMINI PC-1 Single channel instrument with pump and Marketed since 1988
controller capability; for use in all
hospital settings
GEMINI PC-2T Dual channel instrument with pump and Marketed since 1987
controller capability; for use in all
hospital settings
GEMINI PC-2TX Dual channel instrument with pump and Marketed since May 1994
controller capability; programmable drug
delivery/dose calculations and pressure
history; for use in all hospital settings
6
PRODUCT DESCRIPTION STATUS
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GEMINI PC-4 Four channel instrument with pump and Marketed since December
controller capability; programmable drug 1992
delivery/dose calculations and pressure
history; for use in critical care settings
MODULAR INFUSION PUMP Compact, flexible, lightweight modular Market introduction
infusion pump with an adjustable planned for 1999
hardware and software platform with
advanced programming capabilities; for
use in all hospital and alternate site
settings
560/570 SERIES Single channel pump with largest installed On market since 1983 and
base worldwide; for general care use in the 1990, respectively
United States, and general and critical care
use in Europe
597/598 SERIES Single channel, multi-pump configuration On market in Euroope since
of reduced size and weight; used 1993
frequently for delivery of nutritional
products; sold in Europe; for general care
and alternate site use
MS III Three channel pump; smallest and lightest Originally introduced in
multi-channel pump available on the late 1980s by Siemens
United States market; for critical care use Infusion Systems, Ltd. as
MiniMed; reengineered
since its acquisition in
1993
SYRINGE INFUSION PUMPS
P1000, P2000, P3000, Preferred method of delivery in many Various models introduced
P4000 markets outside the United States; for between late 1980s and
critical and non-critical care use early 1990s
P7000 Syringe pump with advanced features for Introduced to European
critical, non-critical and neonatal care use market during second
in markets outside the United States quarter of 1996
P6000 Syringe pump using the P7000 technology Introduced to European
platform designed for the price-conscious market during the second
consumer in markets outside the United half of 1997
States; for critical and non-critical
care use
P6000-TIVA Syringe pump designed for critical and non- Introduced during third
critical care use quarter 1997
P6000-TCI Syringe pump that incorporates Diprifusor Introduced during fourth
module from Zeneca quarter 1997
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PRODUCT DESCRIPTION STATUS
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PCAM (PATIENT Syringe pump used in markets outside the Introduced internationally
CONTROLLED ANALGESIA United States that allows patients to in first quarter of 1995
PUMP) control the delivery of pain medication
AMBULATORY PUMPS
READYMED Compact, disposable, lightweight 100 mL marketed since
ambulatory infusion pump designed for July 1992 and 50 mL and
alternate site use 250 mL introduced in 1993
RYTHMIC Family of lightweight, self-contained Agreement with Micrel
portable pumps for PCA, intermittent and signed in second half of
continuous use at home in international 1997, 1998 launch
markets planned
DISPOSABLE Proprietary and non-proprietary On market and in
ADMINISTRATION administration sets for use with each of the development
SETS Company's existing and proposed infusion
pumps
NEEDLE-FREE ACCESS
PRODUCTS
SMARTSITE SYSTEM Needle-free, capless, latex-free infusion Introduced in 1996
system component intended to increase
safety of patients and health care workers
VERSASAFE Infusion system component utilizing a blunt Marketed since 1994
cannula device combined with a split- through a non-exclusive
septum "Y" site license
PATIENT MONITORING:
THERMOMETRY SYSTEMS
TEMP-PLUS II Electronic thermometer; for general hospital On market since mid-
(MODEL 2080) and alternate site use 1980s
TEMP-PLUS III Electronic thermometer; a 7-to-10-second Market introduction
version of the Model 2080; intended for planned for 1998
CORE-CHECK Infrared tympanic thermometer that saves On market since 1991
(MODEL 2090) time, patient interruption and
lowers risk of infection; for general
hospital use
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PRODUCT DESCRIPTION STATUS
- ----------------------- ------------------------------------------- -----------------------------
DISPOSABLE PROBE Proprietary covers for use with each of the On market since mid-
COVERS Company's existing and proposed 1980s
thermometers
OTHER PATIENT MONITORING
PRODUCTS
VITAL-CHECK Continuous monitoring model that rapidly On market in the United
(MODEL 4200) measures pulse, blood pressure and States since late 1980s
temperature; for general hospital use
VITAL-CHECK Multiparameter non-invasive patient Introduced during fourth
(MODEL 4400) monitor providing blood pressure, pulse quarter of 1997
oximetry and temperature monitoring
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 large volume infusion pumps consist of
volumetric piston cassette pumps, which regulate the flow of fluid through a
syringe-like mechanism, and peristaltic pumps, which regulate fluid flow by
means of a multi-finger-like mechanism that alternately compresses sections
of the tubing contained in the pumping chamber. Peristaltic pumps represent
the largest portion of the Company's installed base of infusion pumps. The
Company discontinued manufacturing piston cassette pumps in the first quarter
of 1995.
The Signature Edition line of peristaltic infusion pumps includes a
single channel and dual channel pump. The Signature Edition line of infusion
pumps is designed for use primarily in hospitals. The Signature Edition line
of infusion pumps features include cost-effectiveness, ease of use,
reliability and innovative features, such as new safety features designed to
minimize the chance of free flow.
The Gemini peristaltic infusion pump series, which consists of single,
dual and four channel pumps, is based on a flexible hardware and software
technology platform. This technology platform has enabled the Company over
time to offer incremental feature enhancements based on evolving customer
needs. The Gemini series currently offers the following features: free flow
protection (which the Company pioneered); independent channel operation;
ability to switch from pump to controller mode without changing the
disposable administration set; programmable to automatically taper-up and
taper-down infusion rates to facilitate delivery of complex drug-dosing
regimens; capability to operate in either micro mode (0.1 to 99.9 mL/hr) for
use with neonatal patients, among others, or macro mode (1 to 999 mL/hr) for
use with adult patients; drug dose calculation; pressure monitoring; pressure
history and volume/time dosing; and nuisance alarm (alarms with no clinical
significance) reduction. The Gemini PC-1 infusion pump is currently subject
to a voluntary recall initiated by the Company. See "-Government Regulation -
Product Regulation."
The MedSystem III instrument is a compact, lightweight, programmable,
three channel, peristaltic infusion pump used primarily in the critical care
market. The MedSystem III predecessor product line was acquired from Siemens
Infusion Systems, Ltd. in September 1993. Since such time, significant
resources have been invested to reengineer the MedSystem III pump. The
Company believes that as a result of this reengineering, the MedSystem III
system is one of the smallest, most versatile and most technologically
advanced multi-channel pumps currently on the market.
The 560/570 Series and the 597/598 Series are single channel peristaltic
infusion pumps that offer cost-effective solutions for drug delivery in the
general care setting. The Company believes that the 560/570 Series has the
largest installed base of any individual infusion pump worldwide.
9
During the fourth quarter of 1993, the Company commenced designing a
modular infusion pump, which can operate in a one to four channel mode, as the
basis for its next generation of infusion pumps. In addition to all of the
features available on the Gemini series, the modular infusion pump is being
designed to incorporate advanced programming capabilities in a smaller infusion
pump 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
specific situations resulting in lower cost operation and greater asset
utilization.
SYRINGE PUMPS. The Company offers syringe pumps, which are small-volume
fluid delivery systems used in neonatal care, oncology, anesthesia, critical
care and labor and delivery. While these infusion pumps represent a relatively
small portion of the industry installed base in the United States, such pumps
are widely used in Europe, where they constitute approximately 60% of the
infusion pump market. Syringe pumps are more widely used in Europe because of
the general practice of European doctors to administer medications in smaller
volumes of fluid. The Company believes that it is one of the two largest
suppliers of syringe pumps in Western Europe, with a number one or number two
installed base market share in eleven countries and the number three installed
base market share in Germany and Italy. The Company is currently evaluating
customer interest and regulatory requirements in the United States for syringe
pumps.
In 1995, the Company introduced the PCAM patient controlled analgesia
infusion pump that allows patients to control the delivery of pain medication.
Designed for general care settings, the PCAM 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 continued to expand its syringe pump product line by
introducing the P7000 syringe pump to the international market during the second
quarter of 1996 and the P6000 syringe pump to the European Market during the
second quarter of 1997. Designed for critical, non-critical and neonatal care
settings, the P7000 offers several advanced features, including an automatic
dose rate calculator; a pre-programmable drug menu; a range of pre-programmed
infusion administration protocols; and an automatic pressure reduction
capability in response to administration set occlusions. The P6000 syringe pump,
which is based on the P7000 syringe pump technology platform, is designed for
use in critical and non-critical care settings by the price conscious consumer.
The Company has initiated a voluntary safety alert of its P1000, P2000,
P3000 and P4000 syringe pumps. These syringe pumps are marketed
internationally. See "--Government Regulation --Product Regulation."
AMBULATORY PUMPS. The ReadyMED pump is a disposable, compact, ambulatory
pump for the intravenous administration of antibiotics. ReadyMED is designed to
offer a number of advantages over systems currently in use for this purpose.
Traditional systems require the patient to attach a small bag and tubing set,
through which the antibiotics are administered, to a catheter placed in the
patient's circulatory system. The patient must eliminate all air from the system
and set a manual rate adjustment clamp, a process that generally must be
repeated every four to six hours. 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 pump is pre-filled (in 50 mL,
100 mL and 250 mL sizes) and pre-primed, allowing infusion to be initiated when
the patient simply opens a clamp. 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. In March 1992, the Company entered into a five-year
agreement with McGaw, Inc. ("McGaw") pursuant to which McGaw obtained the
exclusive right to distribute the 50 mL, 100 mL and 250 mL sizes of the ReadyMED
pump in the United States and Puerto Rican alternate site markets. The Company
and McGaw amended their distribution agreement during 1997, extending its term
until March 31, 1998, and converting McGaw's exclusive distribution right into a
non-exclusive distribution right. Effective April 1998, the Company will
initiate direct sales of ReadyMED through its alternate site sales force and
distribution network.
10
DISPOSABLE ADMINISTRATION SETS. The Company estimates that it has
approximately 212,000 single and multi-channel large volume infusion pumps
installed in the United States, each of which uses proprietary disposable
administration sets designed and manufactured only by the Company. 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
solution. Components such as burettes and filters may also be added for critical
drugs or special infusion. In addition, many of the Company's disposable
administration sets offer protection features designed to prevent free flow.
Each of the Company's current and proposed large volume infusion pumps uses only
disposable administration sets designed by the Company for that particular pump.
NEEDLE-FREE ACCESS PRODUCTS. There is increasing pressure by regulatory
agencies, such as the Occupational Safety and Health Administration ("OSHA") and
the FDA, for more stringent control of needles in hospitals. OSHA requires that
hospitals must put in place systems to reduce the potential for accidental
needlesticks. The FDA recommends using needle-free systems or protected needle
systems to replace hypodermic needles for accessing intravenous lines. The
Company's needle-free access products are designed to permit access to the
Company's disposable administration sets without the use of needles, thus
reducing the potential for accidental needlesticks. The VersaSafe system
utilizes a blunt cannula device combined with a split-septum "Y" site. The
Company has a non-exclusive license, which expires in April 2000, to the
VersaSafe system which was a cooperative development effort of IMED, Elcam
Plastic of Israel and Medical Associates Network. The Company's SmartSite
Needle-Free System, introduced in the third quarter of 1996, is a component
which is compatible with standard luer or luer-locking syringes and disposable
administration sets, thereby allowing users to integrate the Needle-Free System
into existing care practices. The Company's latest needle-free access product,
the SmartSite System, offers a fully integrated design and eliminates the need
for separate caps to maintain an infection control barrier. The SmartSite 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 Company's needle-free access products have received strong
interest from customers and provide the Company with an opportunity to increase
revenues in what has previously been a commodity market.
PATIENT MONITORING PRODUCTS. Patient monitoring instruments are used to
measure pulse, temperature and blood pressure. Products 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
believes that in 1997 its installed base comprised approximately 42% of the
United States hospital electronic and infrared thermometry market, thereby
making the Company the largest provider of hospital thermometry systems in the
United States. The Company's primary product is an electronic thermometer which
is widely used in hospitals and alternate site settings. The Company is
currently developing the TEMP-PLUS III instrument (formerly known as the "Fast"
2080), an improved cost-effective and technologically-advanced electronic
thermometer designed to provide a temperature reading in seven-to-ten seconds.
The Company also manufactures and markets the CORE-CHECK system, a thermometer
that measures temperature by detecting the emission of infrared energy in the
ear. In the infrared market, the fastest growing segment of the industry's
market, the Company is currently the second largest domestic participant, with a
United States hospital installed base market share of approximately 31% at
December 31, 1996. The only disposable probe covers which can be used with the
Company's thermometry instruments are those manufactured by the Company.
11
OTHER PATIENT MONITORING PRODUCTS. The Company also produces stand-alone,
non-invasive, multi-parameter patient monitoring products which measure a
combination of pulse, temperature and blood pressure. The Company's hospital
installed base of these instruments is the second largest in the United States.
In January 1997, the Company entered into two agreements with Criticare
Systems, Inc., a manufacturer of patient monitoring systems and non-invasive
sensors for use in the hospital and alternate site markets. Under these
agreements, Criticare Systems, Inc. obtained the right to use the Company's
electronic thermometry technology in certain monitoring systems to be
manufactured and distributed by both Criticare Systems, Inc. and the Company.
The Company also obtained exclusive distribution rights to certain of these
monitoring systems in the United States hospital market and in all Canadian
markets. The first of these exclusive systems is the Vital-Check 4400, which
provides non-invasive blood pressure, pulse oximetry and temperature monitoring.
CUSTOMER SERVICE. The Company provides repair service for its products
at its facilities in San Diego or on site at the customer's facilities
through third-party contractors. Customers may elect to enter into service
agreements or to receive service on a time and materials basis. The Company
also trains customers as to the use of its products and maintains a technical
support help-line to answer customers' questions. In addition, the Company
maintains its parts inventory at levels which enable it to deliver critical
supplies immediately and minimize back-ordered products. The Company believes
that the availability of such services is important for maintaining strong
customer relations.
MARKETING AND SALES
The Company has historically focused its sales efforts on the hospital
market. In response to the industry shift toward health care delivery outside of
the hospital, the Company has recently begun to expand 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.
The Company has contracts with ten GPOs. GPOs have emerged in response to
cost containment pressures and health care reform. GPOs often enter into
exclusive purchase commitments with as few as one or two providers of infusion
systems and/or vital signs measurement products for a period of several years.
If the Company is not one of the selected providers, it may be precluded from
making sales to members of a GPO for several years and, in certain situations,
the GPO may require removal of the Company's existing installed infusion pumps,
which would result in a loss of the related disposable administration set sales.
Even if the Company is one of the selected providers, the Company may be at a
disadvantage relative to other selected providers which are able to offer volume
discounts based on "bundled" purchases or a broader range of medical equipment
and supplies. Further, the Company may be required to commit to pricing which
has a material adverse effect on net sales and profit margins. See
"--Competition."
In January 1997, the Company entered into a five-year sole-source supply
contract with Premier Purchasing Partners, L.P. ("Premier"), an affiliate of
Premier, Inc., the nation's largest healthcare alliance GPO, for tympanic and
electronic thermometry instruments and related disposable probe covers. Under
this agreement, Premier agreed to purchase 80% of its needs for such products
from the Company. In addition, in March 1997, the Company entered into a dual
source supply agreement with Premier for the purchase of large volume infusion
pumps and associated disposable administration sets. The dual source agreement
is for a five year period with a two-year renewal option. Premier had previously
signed a seven-year supply contract with Baxter International, Inc. covering a
number of hospital supplies, including a dual source award for large volume
infusion pumps and disposable administration sets.
12
In December 1997, the Company and Tenet Healthcare Corporation entered into
a ten-year, sole-source agreement for intravenous infusion pumps and associated
IV disposables. In addition, ALARIS Medical is named as one of two approved
sources by Tenet for needleless IV tubing sets and components, which are
included in the $100 million Tenet expects to spend on IV-related equipment over
the term of the contract.
No single account is material to the business or operations of the Company.
The Company sells its products through a combined direct sales force
consisting of over 200 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.
INTERNATIONAL OPERATIONS
The Company markets products in approximately 120 countries through its
direct sales force, affiliates and distributors. The primary markets for the
Company's products outside the United States are Western Europe, Canada and
Australia. The Company also has a developing position in Asia and Latin America.
The principal products sold by the Company outside the United States are large
volume and syringe infusion pumps and related disposable administration sets.
The Company has manufacturing operations in England and Mexico. The Company has
also contracted with a number of foreign manufacturers to provide certain of its
sourcing needs. The following table sets forth, on a pro forma basis as if the
Merger had occurred at the beginning of each period presented, the approximate
amount of sales made to customers in each of the geographic locations set forth
below over the last three fiscal years:
1995 1996 1997
-------- -------- --------
(DOLLARS IN MILLIONS)
United States............... $ 238.3 $ 224.6 $ 227.0
International............... 114.4 121.7 132.1
-------- -------- --------
Total sales............ $ 352.7 $ 346.3 $ 359.1
-------- -------- --------
-------- -------- --------
The Company believes that sales of products to customers outside of the
United States represents a significant potential source of growth. As part of
its operating strategy, the Company intends to selectively pursue international
expansion opportunities, particularly in Europe, Japan, Southeast Asia and Latin
America.
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
Company.
MANUFACTURING
The Company manufactures its products at plants in San Diego, California;
Creedmoor, North Carolina; Tijuana, Mexico; and Hampshire, England. The San
Diego facilities are the primary manufacturing facilities for infusion pumps and
vital signs measurement instruments and also house a service operation for
installed infusion pumps and vital signs measurement instruments. The Creedmoor,
North Carolina facility houses a portion of the current disposables operations
and is a distribution center for North American disposable finished products.
Product release from sterilization is done in San Diego,
13
California and Creedmoor, North Carolina. The Tijuana facilities primarily
focus on the manual assembly of disposables, and the England facility focuses
on the manufacturing of syringe pumps. 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. These systems result in establishing written
specifications for raw materials, packaging, labels, sterilization and overall
manufacturing process control. A substantial number of raw materials require
certificates of analysis to help ensure that finished products conform to
specifications. In addition, the Company regularly tests components and products
at various stages of the manufacturing process to ensure compliance with
applicable specifications.
The Company purchases raw materials worldwide in the ordinary course of
business from numerous suppliers. The vast majority of these materials are
generally available and the Company has not experienced any serious shortages or
material delays in obtaining these materials. In some situations, the Company
has long-term supply contracts, although the Company purchases a significant
amount of its requirements of certain raw materials by purchase order. Although
the Company is generally not dependent upon any single source of supply, it
relies upon a limited number of suppliers for PC 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.
The Company has identified the reduction of production and operating costs
as a key component of its operating strategy. As part of this strategy, the
Company has reduced overall head count through termination and attrition. The
Company continues to focus on the following programs: (i) consolidating supply
sources and (ii) design improvements.
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, 1997, the Company expended approximately $16.9
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
14
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 212 unexpired patents in the United
States and approximately 385 unexpired patents in foreign countries, principally
in Europe, Canada, Japan and Australia. Additional applications are pending or
in preparation. Within the next ten years, approximately 122 of the Company's
United States patents and approximately 168 of the Company's foreign patents
will expire. 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 Company's results of operations, business or financial condition.
The patent positions of medical device firms, including the Company, are
uncertain and involve complex legal and factual questions for which certain
legal principles are unresolved. The coverage claimed in a patent application
can be significantly reduced before a patent is issued. In addition, patent law
has recently been revised to give effect to international accords to which the
United States has become a party. Pursuant to such accords, the patent term has
been changed from 17 years from date of grant to 20 years from date of filing
and certain provisions favoring United States inventors over foreign inventors
have been eliminated.
The United States patent code was recently amended. As a result, certain
statutory remedies for patent infringement are no longer available for a medical
practitioner's otherwise infringing performance of a medical activity. As
defined in the United States patent code, medical activity does not include "the
use of a patented machine, manufacture or composition of matter in violation of
such patent." The aforesaid amendment does not apply to patents issued before
September 30, 1996. Legislation which would have prohibited the issuance of
patents directed to surgical and medical procedures did not pass in the 104th
Congress and no such legislation presently is pending.
The Company sells its products under a variety of trademarks, some of which
are considered by the Company to be of importance to warrant registration in the
United States and various foreign countries in which the Company does business.
The Company also relies on trade secrets, unpatented know-how and continuing
technological advancement to maintain its competitive position. It is the
Company's practice to enter into confidentiality agreements with key technical
employees and consultants. There can be no assurance that these measures will
prevent the unauthorized disclosure or use of the Company's trade secrets and
know-how or that others may not independently develop similar trade secrets or
know-how or obtain access to the Company's trade secrets, know-how or
proprietary technology. In addition, the Company from time to time seeks
copyright protection for the software used in certain of its products.
COMPETITION
The Company faces substantial competition in all of its markets. Many of
the Company's competitors have greater financial, research and development and
marketing resources than the Company. Some of the Company's principal
competitors are able to offer volume discounts based on "bundled" purchases of a
broad range of their medical equipment and supplies. The Company intends to
improve its competitive position in this area by seeking acquisitions that will
allow or enhance its own "bundles" of devices and instruments. 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. The Company's success is therefore dependent on the
development of new infusion technologies and the development of other markets
for its products. The Company's older infusion therapy and thermometry
product lines have experienced declining sales and market share recently,
primarily due to competitors who
15
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." Moreover, there can be no assurance
that the Company's efforts to take advantage of opportunities it perceives in
the alternate site and international markets will be successful. In addition,
although the pace of technological change in the Company's industry
historically has been relatively slow, the Company is unable to predict the
pace of such change in the future. There can be no assurance that
technological change will not place one or more of the Company's existing or
proposed products at a significant competitive disadvantage. Additionally, to
the extent the Company does not successfully reposition existing products for
sale to different markets, the introduction of new products by the Company
will reduce sales of such existing products.
At December 31, 1996, on a pro forma basis, the Company had a market share
of approximately 40% of the installed base of infusion pump channels in the
United States. Major competitors in this market include Baxter International,
Inc., Abbott Laboratories, Inc. and McGaw, which in the aggregate had a market
share of approximately 55% of the installed base of infusion pump channels in
the United States at December 31, 1997.
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
eleven countries and the number three installed base market share in Germany and
Italy. The Western European countries in which the Company has a number one or
number two installed base market share are France, Denmark, Finland, Norway,
Sweden, the United Kingdom, Belgium, the Netherlands, Luxembourg, Spain and
Portugal.
The vital signs measurement products market is fragmented by product type.
The Company's key competitor in the United States electronic thermometer market
is Diatek and its key competitor in the infrared thermometer market is Sherwood
Medical Company.
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.
The 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 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" (as defined in FDA Quality System regulations) ("QSR"), prohibitions
on adulteration and misbranding, and reporting of certain adverse events
("MDR"). In addition to general controls, Class II devices may be subject to
special controls that could include performance standards, postmarket
16
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. The
Company is not currently developing, manufacturing or distributing any Class
III devices, although it may do so in the future. Unless otherwise exempt,
all medical devices introduced to the market since 1976 are required by the
FDA, as a condition of marketing, to secure a 510(k) premarket notification
clearance ("510(k)") or a Premarket Approval Application ("PMA"). A product
will be cleared by the FDA under a 510(k) if it is found to be substantially
equivalent in terms of safety, effectiveness and intended use to another
legally marketed medical device that was on the market prior to May 28, 1976
or to a product that has previously received a 510(k) and is lawfully on the
market. In general, if a product is not substantially equivalent to such a
medical device, and not otherwise exempt, the FDA must first approve a PMA
before it can be marketed. An approved PMA indicates that the FDA has
determined the product has been proven, 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)
currently takes, on average, approximately six months from the date of
submission. However, the review process for a particular product may be
shorter or substantially longer depending upon the circumstances. Moreover,
there can be no assurance that a 510(k) will be cleared. The 510(k) must
include submission of supporting information, including design details and
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, during which time the modified product
cannot be distributed in interstate commerce. Although there can be no
assurance, the Company believes that its proposed products under development
will qualify for the 510(k) procedure.
As part of its normal course of business, the FDA regularly conducts
investigations regarding the safety or efficacy of medical products,
including those manufactured by the Company, which may result in the
Company's inability to market a particular device or cause the Company to
need to generate additional data to support submissions for market clearance.
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 clinical
investigations to determine the safety and effectiveness of devices,
including investigations of devices not cleared or approved for marketing,
and investigations involving new intended uses of previously cleared or
approved devices. Clinical investigations are regulated by the FDA under the
investigational device exemption ("IDE") regulations. The IDE regulations
include significant requirements that must be met, including informed patient
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,
17
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 for sale in the
United States, are subject to the FDA export requirements, including
restriction on distribution in the United States.
The Company has received ISO 9000 certification for all of its
facilities regarding the quality of its manufacturing systems, a requirement
for doing business in EC countries. The Company has been granted approval to
affix the CE mark, pursuant to the EC Medical Device Directives, on certain
of its products. Approval to affix the CE mark to a product does not
necessarily preclude, however, additional restrictions on marketing in any
individual country in the EC.
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 other 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
and certain state agencies. These agencies inspect the Company periodically
to determine whether the Company is in compliance with the FDC Act and
regulations, including regulations relating to MDR reporting, product
labeling and promotion, and medical device GMPs governing design,
manufacturing, testing, quality control, product packaging and storage
practices. The FDA has recently revised the GMP regulations. These revised
regulations include new requirements such as design control, which may
increase the cost of regulatory compliance for the Company. The MDR
regulations promulgated by the FDA require the Company to provide information
to the FDA on certain malfunctions, as well as serious injuries or deaths
which may have been associated with the use of a product. The EC Medical
Device Directives also require reporting of serious injuries or deaths which
may be associated with the use of a medical device to the competent authority
in the country where the incident occurred.
A determination that the Company is in material violation of the FDC Act
or such FDA regulations could lead to the issuance of warning letters,
imposition of civil or criminal sanctions against the Company, its officers
and employees, including fines, recalls, repair, replacement or refund to the
user of the cost of such products. 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 seek criminal sanctions or seek to close some or all of the
Company's manufacturing facilities. Such actions could also result in an
inability of the Company to obtain additional market clearances. Since 1992,
the Company has on sixteen occasions removed products from the market that
were found not to meet performance standards. None of such recalls materially
interfered with the Company's operations and all such affected product lines,
except the 599 Series infusion pumps (as noted below), were subsequently
returned to the market. One such product recall, a recent voluntary recall
related to the Company's Signature Edition infusion pumps, has not yet been
terminated or otherwise closed by the FDA and the FDA could take further
regulatory action against the Company, including actions such as those
described above. The Signature Edition infusion pumps were recalled because
of an unacceptable level of malfunction alarms due to less than expected
reliability of their pressure monitoring systems. The user of these pumps is
notified of such malfunction alarms by both a continuous audible signal and a
visual message. The Company has completed the upgrade and replacement, at no
charge to its customers, the current pressure monitoring system contained in
certain of the infusion pumps included within the Signature Edition product
line. This recall was completed at the
18
end of the second quarter of 1997. In addition, a voluntary recall of
approximately 645 Gemini PC-1 infusion pumps (limited to distribution outside
the United States) was initiated by the Company in June 1996. At this time,
the Company has completed required modifications.
In the first quarter of 1998 the Company will initiate a voluntary field
correction of approximately 50,000 of its Gemini model PC-1 and PC-2 infusion
pumps because failure of specific electrical components on the power
regulator printed circuit board may result in improper regulation of the
battery charge voltage, which can cause the battery to overheat. Such
overheating could result in product failure and discharge of hydrogen gas
which may accumulate within the instrument's case. As an interim measure, the
Company has advised its customers of simple precautions that can be taken to
minimize the potential for an adverse incident pending completion of the
field correction. The Company is not aware of any injuries sustained in known
battery overcharging incidents.
As a result, the Company recorded a charge of $2.5 million to cost of
sales during the first quarter of 1997. Based on management's current
understanding of these incidents, the Company believes it has adequately
accrued for this matter. However, since the Company's analysis of this matter
is preliminary, there can be no assurances that it can be resolved for an
amount consistent with management's estimated cost.
In addition, the Company has initiated a voluntary safety alert of its
599 Series infusion pumps, which it discontinued selling in March 1997. This
safety alert advises customers to inspect and, if necessary, make an
adjustment to the infusion pump in order to prevent misloading of disposable
administration sets. The Company has initiated a product recall of certain MS
III disposable administration sets affecting 44,000 units. This recall
advises the user to return the affected product for replacement. The sets
were recalled due to a low level assembly defect which could result in
reverse flow.
The Company's manufacturing facilities in San Diego have been licensed
by the State of California Department of Health Services, Food and Drug
Branch, under the applicable GMP and other regulations.
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
similar state programs. Violations of the statute are punishable by civil and
criminal penalties and exclusion of the provider from future participation in
the Medicare and Medicaid programs. The Social Security Act contains
exceptions to these prohibitions for, among other things, properly reported
discounts and payment 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
19
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 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.
HEALTH CARE REFORM. Because the cost of health care delivery has been
steadily rising and because the cost of a significant portion of medical care
in the United States and other countries is typically funded by governmental
insurance programs, there have been a number of government initiatives to
reduce health care costs. Congress and various state legislatures currently
are proposing changes in law and regulation that could effect major
restructuring of the health care industry. Although many of these proposals
may seek to maintain or expand access to health care services, the common
objective of the proposed legislation is to achieve cost containment in the
health care sector. Changes in governmental support of health care services,
the methods by which such services are delivered, the prices for such
services or the regulations governing such services or mandated benefits may
all have a material adverse effect on the Company. Even if the ultimate
impact of any such changes on net sales is positive, no assurance can be
given that the costs of complying with possible new requirements would not
have a negative impact on the Company's future earnings. No assurance can be
given that any such legislation will not have a material adverse effect on
the Company.
ENVIRONMENTAL MATTERS. The Company is subject to regulation by OSHA,
the Environmental Protection Agency and their state and local counterparts,
and under extensive and changing foreign, federal, state and local
environmental standards, including those governing the handling and disposal
of solid and hazardous wastes, discharges to the air and water, and the
remediation of contamination associated with releases of hazardous
substances. Such standards are imposed by, among other statutes, the Toxic
Substances Control Act, the Clean Air Act, the Federal Water Pollution
Control Act, the Resource Conservation and Recovery Act and the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"). Although
there can be no assurances, the Company believes that it is currently in
material compliance with current environmental standards. Nevertheless, the
Company uses hazardous substances in its day-to-day operations and, as is the
case with manufacturers in general, if a release of hazardous substances
occurs on or from the Company's properties, the Company may be held liable
and may be required to pay the cost of remedying the condition. The amount of
any such liability could be material.
The Company has made, and will continue to make, expenditures to comply
with current and future environmental standards. Although no material capital
or operating expenditures relating to environmental controls are anticipated,
there can be no assurance that changes in, additions to or differing
interpretations of, statutory and regulatory requirements will not require
material expenditures in the future.
The Company is subject to liability under CERCLA and analogous state
laws for the investigation and remediation of environmental contamination at
properties owned and/or operated by it and at off-site locations where it has
arranged for the disposal of hazardous substances. Courts have determined
that liability under CERCLA is, in most cases, joint and several, meaning
that any responsible party could be
20
held liable for all costs necessary for investigating and remediating a
release or threatened release of hazardous substances. As a practical matter,
liability at most CERCLA (and similar) sites is shared among all the solvent
"potentially responsible parties" ("PRPs"). The most relevant factors in
determining the probable liability of a party at a CERCLA site usually are
the cost of the investigation and remediation, the relative amount of
hazardous substances contributed by the party to the site and the number of
solvent PRPs.
The Company is currently involved in two such matters; one, at the
Seaboard Chemical site in Jamestown, North Carolina, and another at the
Caldwell Systems, Inc., site in Lenoir, North Carolina. In relation to the
Seaboard Chemical site, the Company has entered into a DE MICROMIS
administrative order on consent with the North Carolina Department of
Environment, Health and Natural Resources and a group of PRPs, settling its
liability for past and future response costs associated with the site. Under
the consent order, the Company receives a release from further liability
associated with the site, a covenant not to sue by the other PRPs entering
into the consent order, and protection under CERCLA against contribution
actions for matters addressed by the consent order. Protection from further
liability is conditioned on the absence of information indicating that the
Company disposed of a greater quantity of hazardous substances at the site
than currently known. Although there can be no assurance that such further
information does not exist, the Company believes the amount of its liability
at this site will be DE MINIMIS.
In relation to the Caldwell Systems site, the Company has agreed to
enter into a DE MICROMIS administrative order on consent with the US
Environmental Protection Agency (US EPA) and a group of PRPs, settling its
potential liability for past and future response costs associated with the
site. Under the consent order, the Company will receive a covenant not to
sue by the US EPA and by other PRPs entering into the consent order, and
protection under CERCLA against contribution actions for matters addressed by
the consent order.
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, 1998, the Company employed 2,588 people including
1,018 in the United States.
ALARIS Medical's 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.
21
ITEM 2. PROPERTIES
The Company has long-term leases on substantially all of its major
facilities. The Company maintains its primary instrument manufacturing
facilities in San Diego, California and Hampshire, England. Disposable
administration set manufacturing facilities are located in Creedmoor, North
Carolina and Tijuana, Mexico. The disposable manufacturing facility in
Creedmoor, North Carolina is owned by the Company. The disposable
manufacturing facilities in Tijuana, Mexico are maintained under one year
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, Canada and Australia.
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
The Company is a defendant in a lawsuit filed in June 1996 by Sherwood
Medical Company ("Sherwood") against IVAC. The lawsuit, which is pending in
the United States District Court for the Southern District of California,
alleges infringement of two Sherwood patents by reason of certain activities
including the sale by IVAC of disposable probe covers for use with infrared
tympanic thermometers. The lawsuit seeks injunctive relief, treble damages
and the recovery of costs and attorney fees. The discovery phase of the
lawsuit has recently commenced. The Company is currently unable to quantify
its exposure in the lawsuit. The Company believes it has sufficient defenses
to all claims by Sherwood, including the defenses of noninfringement and
invalidity. However, there can be no assurance that the Company will
successfully defend all claims made by Sherwood and the failure of the
Company to successfully prevail in this lawsuit could have a material adverse
effect on the Company's operations, business and financial condition.
The Company is a defendant in a QUI TAM lawsuit filed by a former IMED
employee in the United States District Court for the Northern District of
Illinois. On November 15, 1996, an amended complaint was filed which alleges
fraud in the inducement, breach of employment contract, common law fraud and
violations of the Federal False Claims Act and Medicare Fraud and Abuse Act.
To date, the United States has declined to intervene in this action. The
Company believes it has sufficient defenses to all claims by the plaintiff.
However, there can be no assurance that the Company will successfully defend
all claims made in this lawsuit and the failure of the Company to prevail in
this lawsuit could have a material adverse effect on the Company's
operations, financial condition and cash flows.
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 operations, business or financial
condition. 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.
22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCK-HOLDER
MATTERS
The Common Stock was listed and traded on the American Stock Exchange
under the symbol ALRS through June 9, 1997. Beginning June 10, 1997, the
Common Stock listing and trading was moved to NASDAQ. The following table
sets forth the high and low reported sale prices for the Common Stock as
reported by the stock exchanges for the quarters indicated.
HIGH LOW
------ -------
1996:
First Quarter . . . . . . . . . . . . . . . . . . . . 3-1/8 2-1/4
Second Quarter. . . . . . . . . . . . . . . . . . . . 3-1/16 2-1/8
Third Quarter . . . . . . . . . . . . . . . . . . . . 4-1/16 2-1/16
Fourth Quarter. . . . . . . . . . . . . . . . . . . . 3-7/8 2-11/16
1997:
First Quarter . . . . . . . . . . . . . . . . . . . . 5-3/4 3-11/16
Second Quarter. . . . . . . . . . . . . . . . . . . . 4-7/8 2-7/8
Third Quarter . . . . . . . . . . . . . . . . . . . . 4-3/4 3-1/16
Fourth Quarter. . . . . . . . . . . . . . . . . . . . 6-3/4 4-1/8
At March 23, 1998, there were 515 holders of record of the Common Stock.
ALARIS Medical has not paid any dividends on the Common Stock since its
organization, and it is not contemplated that it will pay any dividends on
the Common Stock in the foreseeable future. ALARIS Medical is prohibited from
declaring and paying dividends on the Common Stock under the bank credit
facility entered into in connection with the Merger. In addition, the bank
credit facility limits ALARIS Medical System's ability to declare and pay
dividends and to make other distributions and payments to ALARIS Medical. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
23
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data of ALARIS
Medical at December 31, 1993, 1994, 1995, 1996 and 1997, and for the years
then ended, have been derived from ALARIS Medical's annual financial
statements including the consolidated balance sheet at December 31, 1996 and
1997 and the related consolidated statement of operations for the three-year
period ended December 31, 1997 and notes thereto which appear elsewhere
herein.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- --------- -------- -------
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Sales. . . . . . . . . . . . . . . . . . . . . . . . . $119,858 $112,122 $112,551 $136,371 $359,077
Cost of sales. . . . . . . . . . . . . . . . . . . . . 72,209 65,590 63,219 78,616 188,340
-------- -------- -------- -------- --------
Gross margin . . . . . . . . . . . . . . . . . . . . . 47,649 46,532 49,332 57,755 170,737
Total operating expenses (1) . . . . . . . . . . . . . (51,057) (33,941) (34,614) (105,614) (142,806)
Lease interest income (2). . . . . . . . . . . . . . . 2,627 2,449 2,333 2,501 4,559
-------- -------- -------- -------- --------
Income (loss) from operations. . . . . . . . . . . . . (781) 15,040 17,051 (45,358) 32,490
Interest income. . . . . . . . . . . . . . . . . . . . 140 77 192 1,193 532
Interest expense . . . . . . . . . . . . . . . . . . . (10,880) (8,690) (8,153) (13,393) (44,413)
Debt conversion expense (6). . . . . . . . . . . . . . - - - (10,000) -
Other (expense) income, net. . . . . . . . . . . . . . 6,004 1,136 313 1,222 (1,535)
-------- -------- -------- -------- --------
Income (loss) before income taxes,
minority interests, extraordinary
item and cumulative effect of change
in accounting principle (3). . . . . . . . . . . . . (5,517) 7,563 9,403 (66,336) (12,926)
Provision (benefit) for income taxes . . . . . . . . . 926 1,886 (9,374) (730) (3,300)
Minority interests in consolidated
subsidiaries . . . . . . . . . . . . . . . . . . . . 3,755 - (6,500) - -
-------- -------- -------- -------- --------
Income (loss) before extraordinary
item and cumulative effect of change
in accounting principle. . . . . . . . . . . . . . . (2,688) 5,677 12,277 (65,606) (9,626)
Dividends and accretion on mandatorily
redeemable preferred stock . . . . . . . . . . . . . 1,387 874 650 962 -
-------- -------- -------- -------- --------
Income (loss) applicable to common
stock before extraordinary item and
cumulative effect of change in
accounting principle . . . . . . . . . . . . . . . . $ (4,075) $ 4,803 $ 11,627 $(66,568) $ (9,626)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Income (loss) per common share before
extraordinary item and cumulative
effect of change in accounting
principle assuming no dilution (4) . . . . . . . . . $ (.29) $ .34 $ .75 $ (3.27) $ (.16)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Income (loss) per common share before
extraordinary item and cumulative
effect of change in accounting
principle assuming dilution (4). . . . . . . . . . . $ (.29) $ .23 $ .38 $ (3.27) $ (.16)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average common shares
outstanding assuming no dilution (4) . . . . . . . . 14,073 14,069 15,506 20,343 58,644
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average common shares
outstanding assuming dilution (4). . . . . . . . . . 14,073 24,304 33,236 20,343 58,644
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
24
DECEMBER 31,
------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- -------- --------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents. . . . . . . . . . . . . . . $ 1,762 $ 1,340 $ 1,862 $ 12,084 $ 6,984
Working capital (deficit). . . . . . . . . . . . . . . (2,833) 29,576 31,938 87,785 84,047
Total assets . . . . . . . . . . . . . . . . . . . . 142,891 132,124 169,630 593,382 565,297
Short-term debt (5) (6). . . . . . . . . . . . . . . . 35,815 1,214 322 3,963 14,559
Long-term debt . . . . . . . . . . . . . . . . . . . . 70,999 91,803 86,789 436,130 431,571
Mandatorily redeemable equity securities . . . . . . . 6,478 6,567 7,217 - -
Stockholders' (deficit) equity (3) (6) (7) . . . . . . (8,274) (2,238) 31,532 46,053 31,949
ADJUSTED EBITDA (8) . . . . . . . . . . . . . . . . . . . $ 18,420 $ 22,851 $ 24,626 $ 27,775 $ 89,287
Inventory purchase price allocation
adjustment (9). . . . . . . . . . . . . . . . . . . . . - - - (4,014) (1,607)
Restructuring, integration and other
non-recurring charges . . . . . . . . . . . . . . . . . (9,352) - - (15,277) (20,902)
Purchased in-process research and
development . . . . . . . . . . . . . . . . . . . . . . - - - (44,000) -
Depreciation and amortization (10). . . . . . . . . . . . (9,849) (7,811) (7,575) (9,842) (34,288)
Interest income . . . . . . . . . . . . . . . . . . . . . 140 77 192 1,193 532
Interest expense. . . . . . . . . . . . . . . . . . . . . (10,880) (8,690) (8,153) (13,393) (44,413)
Debt conversion expense . . . . . . . . . . . . . . . . . - - - (10,000) -
Other, net. . . . . . . . . . . . . . . . . . . . . . . . 6,004 1,136 313 1,222 (1,535)
(Provision) benefit for income taxes. . . . . . . . . . . (926) (1,886) 9,374 730 3,300
Minority interests in consolidated
subsidiaries. . . . . . . . . . . . . . . . . . . . . . 3,755 - (6,500) - -
Extraordinary gain (loss) . . . . . . . . . . . . . . . . - - 15,177 (1,630) -
Cumulative effect of change in
accounting principle . . . . . . . . . . . . . . . . . 3,985 - - - -
--------- -------- --------- -------- --------
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ 1,297 $ 5,677 $ 27,454 $(67,236) $ (9,626)
--------- -------- --------- -------- --------
--------- -------- --------- -------- --------
- ------------
(1) In 1993 and 1996 ALARIS Medical restructured its operations. During 1997,
the Company incurred significant non-recurring integration and other
non-recurring expense resulting from the Merger. Operating expenses for
the years ended December 31, 1993, 1996 and 1997 include restructuring,
integration and other non-recurring charges of $9,352, $15,277 and $20,902,
respectively. Additionally, in 1996, the Company recorded $44,000 of
purchased in-process research and development in connection with the
Merger.
(2) 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.
(3) In 1995, ALARIS Medical completed exchanges wherein $43,848 of ALARIS
Medical's 7 1/4% convertible subordinated debentures were exchanged for an
aggregate of $21,924 of the Company's 15% subordinated debentures and 2,062
shares of ALARIS Medical's common stock. As a result of these transactions
ALARIS Medical's long term debt was reduced $21,924 and ALARIS Medical
recorded an extraordinary gain on extinguishment of debt of $15,177. For
further discussion, see Note 4 to the Consolidated Financial Statements.
(4) In February, 1997 the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128") which specifies the computation, presentation, and disclosure
requirements for earnings per share. The statement is effective for all
periods ending after December 15, 1997 and requires all prior-period
earnings per share data to be restated to conform with the provisions of
the Statement. As a result of the application of this statement, prior
period numbers presented may not agree with the earnings per share data
previously reported.
25
(5) On December 4, 1995, ALARIS Medical issued a $25,000 secured promissory
note which was converted to common stock during 1996 in connection with
the Merger.
(6) 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. Additionally, convertible promissory notes in the aggregate principal
amount of $37,500 were exchanged for 29,416 shares of Common Stock,
including 3,333 shares issued as an inducement to convert, which resulted
in $10,000 of debt conversion expense. ALARIS Medical also redeemed the
remaining $21,924 principal amount of its 15% subordinated debentures due
1999 and recorded an extraordinary loss on extinguishment of debt of $1,630
as a result of this transaction. For further discussion, see Note 4 to the
Consolidated Financial Statements.
(7) ALARIS Medical has never paid dividends on the Common Stock.
(8) Adjusted EBITDA represents income from operations before restructuring,
integration and other non-recurring charges, non-cash purchase accounting
charges and depreciation and amortization. Adjusted EBITDA does not
represent net income or cash flows from operations, as these terms are
defined under generally accepted accounting principles, and should not be
considered as an alternative to net income as an indicator of the Company's
operating performance or to cash flows as a measure of liquidity. ALARIS
Medical has included information concerning Adjusted EBITDA herein because
it understands that such information is used by certain investors as one
measure of an issuer's historical ability to service debt. Restructuring
and other one-time non-recurring charges are excluded from Adjusted EBITDA
as ALARIS Medical believes that the inclusion of these items would not be
helpful to an investor's understanding of ALARIS Medical's ability to
service debt. ALARIS Medical's computation of Adjusted EBITDA may not be
comparable to similar titled measures of other companies.
(9) Amount represents that portion of the purchase accounting adjustments made
to adjust the acquired IVAC inventory to its estimated fair value on the
Merger date which was charged to cost of sales during December 1996 and the
first quarter of 1997.
(10) Depreciation and amortization excludes amortization of debt discount and
issuance costs included in interest expense of $732, $681, $521, $1,332 and
$3,125 for the years ended December 31, 1993, 1994, 1995, 1996 and 1997,
respectively.
26
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 AND THE RELATED NOTES THERETO INCLUDED
ELSEWHERE IN THIS ANNUAL REPORT.
OVERVIEW
ALARIS Medical is a holding company for ALARIS Medical Systems. ALARIS
Medical also identifies and evaluates potential acquisitions and investments,
and performs various corporate functions. As a holding company, ALARIS
Medical currently has no revenues to fund its operating and interest expense
and relies on its existing cash, cash generated from operations of ALARIS
Medical Systems and external borrowings to meet its obligations. Capitalized
terms used but not defined herein have the meaning ascribed to them in the
Notes to the Consolidated Financial Statements.
As a result of the Merger on November 26, 1996, the operating results
reported for the year ended December 31, 1997 are not comparable to 1995 or
1996. The 1995 operating results and cash flows represent those of Advanced
Medical and IMED. The 1996 operating results and cash flows include those of
IVAC from November 27, 1996 through December 31, 1996.
The Company sells and services infusion systems primarily in the United
States, Western Europe, Canada, Australia, Latin America and the Middle East.
The Company generates revenues from the sale and/or lease of infusion pumps and
sales of associated proprietary disposable administration sets. Additionally,
as a result of the Merger, the Company now generates revenue from the sale of
patient monitoring products.
In recent years, the Company's results of operations have been affected by
the cost containment pressures applicable to health care providers. In
particular, in order to reduce costs, certain hospitals have adopted a protocol
increasing the maximum time between disposable administration set changes from
every 24 hours to as much as every 72 hours. Notwithstanding this change in
protocol, unit sales volume of the Company's disposable administration sets
increased in every year since 1993, primarily as a result of the growth in its
installed base of infusion pumps. However, uncertainty remains with regard to
future changes within the healthcare industry. The trend towards managed care
and economically motivated buyers in the U.S. may result in continued pressure
on selling prices of products and compression on gross margins. The U.S.
marketplace is increasingly characterized by consolidation among healthcare
providers and purchasers of medical products. The Company's profitability is
affected by the increasing use of Group Purchasing Organizations ("GPOs") which
are better able to negotiate favorable pricing from providers of infusion
systems, such as the Company, and which police compliance with exclusive buying
arrangements for their members. These buying arrangements, in certain
situations, also may result in the GPO requiring removal of the Company's
existing infusion pumps. The Company expects that such GPOs will become
increasingly more common and may have an adverse effect on the Company's future
profitability. Finally, the enactment of national health care reform or other
legislation affecting payment mechanisms and health care delivery would affect
the Company's future results of operations. Although the final form of any such
legislation is not known, it is likely that any such legislation may impose
limits on the number and type of medical procedures which may be performed and
may restrict a provider's ability to select specific devices or products for use
in administering care which, in turn, could adversely impact demand and/or
pricing for the Company's infusion systems. It is impossible to predict the
extent to which the Company may be affected by any such change in legislation.
27
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
financial information expressed as a percentage of sales, as well as pro
forma year ended 1996 operating results in thousands of dollars. The pro
forma data is based on the historical operating results of Advanced Medical
and IVAC Holdings, Inc., adjusted to give effect to the Merger as if it
occurred on January 1, 1996. The data excludes non-recurring charges related
to the Merger, as well as the operating results of River Medical, Inc., a
subsidiary of IVAC which was divested prior to the consummation of the Merger.
The pro forma financial data is not necessarily indicative of the
Company's results of operations that might have occurred had such
transactions been completed at the beginning of the period specified, and do
not purport to represent what the Company's consolidated results of
operations might be for any future period.
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------
AS REPORTED AS REPORTED PRO FORMA PRO FORMA AS REPORTED
1995 1996 1996 1996 1997
----------- ----------- --------- --------- -----------
(% OF SALES) (% OF SALES) ($ IN THOUSANDS) (% OF SALES)
Sales . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% $346,348 100.0% 100%
Cost of sales . . . . . . . . . . . . . . . . . 56.2 57.6 184,742 53.3 52.5
------ ------ -------- ----- ----
Gross margin. . . . . . . . . . . . . . . . . . 43.8 42.4 161,606 46.7 47.5
Selling and marketing expenses. . . . . . . . . 14.7 16.3 65,385 18.9 18.3
General and administrative expenses . . . . . . 9.5 11.2 39,985 11.5 10.9
Research and development expenses . . . . . . . 6.6 6.5 18,142 5.2 4.7
Purchased in-process research and development . - 32.3 - - -
Restructuring, integration and other
non-recurring charges . . . . . . . . . . . - 11.2 - - 5.8
Lease interest income . . . . . . . . . . . . . 2.1 1.8 4,601 1.2 1.2
------ ------ -------- ----- ----
Income (loss) from operations . . . . . . . . . 15.1 (33.3) 42,695 12.3 9.0
Interest income . . . . . . . . . . . . . . . . .2 .9 363 .1 .1
Interest expense. . . . . . . . . . . . . . . . (7.2) (9.8) (41,692) (12.0) (12.4)
Debt conversion expense . . . . . . . . . . . . - (7.3) - - -
Other, net. . . . . . . . . . . . . . . . . . . .3 .9 1,009 .3 (.3)
------ ------ -------- ----- ----
Income (loss) before income taxes, minority
interests and extraordinary item . . . . . . 8.4 (48.6) 2,375 .7 (3.6)
Provision for (benefit from) income taxes . . . (8.3) (.5) 3,250 .9 (.9)
Income (loss) before minority interests
and extraordinary item . . . . . . . . . . . 16.7% (48.1%) $ (875) (.2%) (2.7%)
------ ------ -------- ----- ----
------ ------ -------- ----- ----
OTHER DATA:
Adjusted EBITDA . . . . . . . . . . . . . . 21.9% 20.4% $ 75,883 21.9% 24.9%
29
The following table summarizes sales to customers located in the United
States and international locations:
YEAR ENDED DECEMBER 31,
------------------------------------------------
AS REPORTED AS REPORTED PRO FORMA AS REPORTED
1995 1996 1996 1997
----------- ----------- --------- -----------
(IN MILLIONS)
U.S. sales. . . . . . . . . . . . . . . $ 92.2 $ 100.2 $ 224.6 $ 227.0
International sales . . . . . . . . . . 20.4 36.2 121.7 132.1
------- -------- -------- --------
Total sales . . . . . . . . . . . . $ 112.6 $ 136.4 $ 346.3 $ 359.1
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