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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, 1998 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the period from __________ to __________
Commission file number 333-18687
ALARIS MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3800335
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10221 WATERIDGE CIRCLE, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 458-7000
Securities registered pursuant to Section 12(b) of the Act:
NONE
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. [ ]
No common stock is held by nonaffiliates of the registrant.
As of March 12, 1999, the registrant had 1,000 shares of common stock
outstanding.
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PART I
ITEM 1. BUSINESS
BACKGROUND
ALARIS Medical Systems, Inc. ("ALARIS Medical Systems"), designs,
manufactures, distributes and services intravenous infusion therapy and 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. Additionally, Advanced Medical
changed its name to ALARIS Medical, Inc. ("ALARIS Medical"). The acquisition was
accounted for as a purchase. ALARIS Medical Systems and its subsidiaries are
collectively referred to as the "Company." ALARIS Medical Systems was
incorporated on October, 14 1988 under the laws of the State of Delaware.
On July 17, 1998, pursuant to an agreement with ALARIS Medical, ALARIS
Medical Systems, Instromedix ("Instromedix"), and the shareholders of
Instromedix as of June 24, 1998, ALARIS Medical Systems acquired all of the
outstanding common stock of Instromedix, a cardiovascular monitoring and
pacemaker follow-up company, and subsequently merged Instromedix with and into
itself.
OVERVIEW
The Company is a leading provider of infusion systems and related
technologies to the United States hospital market, with the largest installed
base of pump delivery lines ("channels"). The Company is also a leader in the
International infusion systems market. Based on installed base of infusion
pumps, the Company has a number one or two market position in eight Western
European countries, the number three market position in Germany, the largest
installed base of infusion pumps in Australia and Canada and a developing
position in Latin America and Asia. The Company's infusion systems, which are
used to deliver one or more fluids, primarily pharmaceuticals or nutritionals to
patients, consist of single and multi-channel infusion pumps and controllers,
and proprietary and non-proprietary disposable administration sets (i.e. plastic
tubing and pump interfaces). In addition, the Company is a leading provider of
patient monitoring products that measure and monitor temperature, pulse, pulse
oximetry and blood pressure, with the largest installed base of hospital
thermometry systems in the United States. Through the acquisition of
Instromedix, the Company now produces and sells arrhythmia-event recorders and
pacemaker monitors targeted for the alternate site market.
ALARIS has defined three strategic business units: North America, which
includes the United States and Canada; Instromedix, and International, which
includes all other international operations, including Europe, Asia, Australia
and Latin America.
--------------------------
The 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-,
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-Registered Trademark-, TEMP-PLUS-Registered Trademark-,
VITAL-CHECK-Registered Trademark-, ACCUSLIDE-TM-, SmartSite-Registered
Trademark- SAFSITE-Registered Trademark- is a registered trAdemark of B. Braun,
Inc., ADVANTIS-TM-, ALARIS-TM-, ALARIS Medical Systems-TM-, ORION-Registered
Trademark-, Palisade-TM-, Rhythmic-TM- is a registered trademark Of Micrel
Microelectronics E.P.E., Turbo-Temp-TM-, CarryAll-Registered Trademark-,
HeartCard-Registered Trademark-, Instromedix-Registered Trademark-, King of
Hearts Express-Registered Trademark-, LifeSigns-TM-, LifeSigns Commander-TM-,
and LifeSigns Shuttle-TM-.
2
The North American and International operating units, manufacture and
market intravenous infusion therapy devices and patient monitoring products,
primarily using a direct sales force for product distribution. The International
unit also utilizes product distributors in areas where the Company does not have
a direct sales force. Distributor sales accounted for 12.1% of International
sales in 1998. The Instromedix business segment designs, manufactures and sells
cardiology products such as arrhythmia-event recorders and pacemaker monitors.
Instromedix products are targeted to the alternate-site market and are primarily
distributed through a direct sales force. Instromedix sales represented
approximately 2% of the Company's sales in 1998.
The Company sells a full range of products through the worldwide direct
sales force consisting of over 230 salespersons and through more than 150
distributors to over 5,000 hospitals worldwide. Sales to customers located in
and outside of North America accounted for approximately 67.1% and 32.9%,
respectively, of the Company's sales for the year ended 1998. For the year ended
December 31, 1998, the Company had sales of approximately $380.1 million.
INFUSION SYSTEMS. The Company offers a wide variety of infusion pumps
designed to meet the varying price and technological requirements of its diverse
customer base. These infusion pumps include the Gemini series, consisting of
single, dual and four channel infusion pumps designed for use in all hospital
settings by customers with sophisticated technological requirements; the
Signature Edition Family, a versatile, user-friendly single and dual channel
infusion pump for use in critical and general medical and surgical settings; the
MedSystem III instrument (the "MS III"), a compact, lightweight, programmable
three channel infusion pump targeted for the hospital critical care setting and
transport applications. A single channel pump has only one fluid delivery line
to the patient, while a multi-channel pump has two or more fluid delivery lines.
Multi-channel pumps are used to service only a single patient. Generally, where
more than one fluid delivery line is required for a patient, purchasing a
multi-channel pump is less costly than purchasing an equivalent number of single
channel pumps. In addition, the Company offers the ReadyMED ambulatory infusion
pump ("ReadyMED"), which is compact, lightweight and disposable for use in the
alternate-site market, as well as a broad range of syringe infusion pumps for
use primarily outside the United States.
The Company also manufactures and sells proprietary disposable
administration sets which are required to be used with the Company's large
volume infusion pumps. Since the useful lives of the Company's infusion pumps
typically range between seven to ten years, the Company's industry-leading
installed base allows it to generate predictable and recurring revenues from
sales of disposable administration sets. For the year ended December 31, 1998,
the Company sold approximately 66.7 million disposable administration sets
(proprietary and non-proprietary) representing sales of $228.8 million or 60.2%
of sales. Disposable administration sets sales for 1998 for the North America
and International business units were $157.0 million and $71.8 million,
respectively. Many of the Company's disposable administration sets offer
protection features designed to prevent the unregulated flow of fluids into a
patient's blood stream ("free flow"). In addition, the Company also has several
enhancements to its disposable administration sets, including needle-free access
systems that are designed to reduce the risk to health care providers of
diseases, such as AIDS and hepatitis, that may be transmitted through accidental
needlesticks and, in the case of the SmartSite needle-free system, to eliminate
patient exposure to latex which can cause severe allergic or anaphylactic shock
reactions. These features continue to provide the Company's customers with the
latest cost-effective technology for the Company's installed base of infusion
pumps. For the year ended December 31, 1998, the Company's infusion systems
sales (pumps and disposables) were $315.2 million, representing approximately
82.9% of sales.
PATIENT MONITORING PRODUCTS. The Company's patient monitoring products
compete in discrete market niches, each with different competitive dynamics. The
Company primarily operates in the United States, Canada and Western Europe in
two patient monitoring products market: (i) hospital thermometry systems and
(ii) stand-alone, non-invasive, multi-parameter instruments used to measure and
monitor a combination of vital signs. For the year ended December 31, 1998, the
Company's patient monitoring
3
product sales were approximately $34.9 million, representing approximately 9.2%
of the Company's total sales. Patient monitoring sales for North America and
International for 1998 were $30.3 million and $4.6 million, respectively.
The Company's principal thermometry instruments, the electronic
thermometer and the infrared tympanic thermometer, are both widely used in
hospitals and alternate site settings. The Company believes it is the second
largest participant in the United States infrared thermometry market. The
Company's large base of installed hospital thermometry instruments allows it to
generate predictable and recurring revenues from sales of related proprietary
disposable probe covers. In 1998, the Company manufactured and sold over 635
million proprietary disposable probe covers into its worldwide installed base.
In addition, the Company participates in the hospital market of stand-alone,
non-invasive, multi-parameter instruments through its VitalOCheck product line,
which measures and monitors a combination of temperature, pulse, blood pressure
and pulse oximetry.
INDUSTRY
GENERAL. In the United States, the Company sells its products primarily
in two markets: the hospital market and the alternate-site market. The United
States hospital market consists of approximately 5,300 hospitals with a total of
approximately 900,000 licensed beds. Within this market, cost containment
measures both imposed and proposed by federal and state regulators and private
payors, combined with increased utilization review and case management, have led
to greater financial pressure on hospitals. In response to these
cost-containment pressures, hospitals and other potential customers for the
Company's products are increasingly combining into group purchasing
organizations ("GPOs") which may be large and which monitor compliance with
exclusive purchase commitments. GPOs may enter into exclusive purchase
commitments with as few as one or two providers of infusion systems and/or
patient monitoring products, for a period of several years. These trends have,
in turn, led to downward pricing pressure on manufacturers of medical products,
including the Company, and greater use of care settings outside the hospital
(i.e., the alternate-site setting) for treatment. See "--Marketing and Sales."
The alternate-site market encompasses all health care provided outside
the hospital and comprises primarily home health care, freestanding clinics,
skilled nursing facilities and long-term care facilities. The market for
infusion systems used in the alternate site has recently experienced a
substantially greater growth rate than that of the hospital market. This growth
is primarily attributable to advances in technology that have facilitated the
provision of care outside of the hospital, an increased number of illnesses and
diseases considered to be treatable with home infusion therapy and increased
acceptance by the medical community of, and patient preference for, non-hospital
treatment.
The Company also sells its products internationally. The Western
European infusion therapy market, which includes infusion pumps, controllers and
disposable intravenous sets, had sales of approximately $397.0 million in 1997.
Unlike the U.S. market, syringe pumps represent a significant share of total
infusion pump placements in the international market. The Company expects the
trend toward utilization of syringe pumps to continue as hospitals favor the
lower cost associated with syringe pumps and focus on administering
pharmaceuticals and nutritionals to patients in higher concentrations. The
majority of revenues in the international market are derived from hospitals
since the alternate-site market is in a developmental stage.
The Company believes that as the worldwide infusion systems and patient
monitoring markets continue to mature, providers of goods and services in these
markets will need to increase the scale of their operations and broaden the
scope of their product lines in order to leverage worldwide sales, service and
research and development infrastructures. These trends are driving industry
consolidation both in the United States and internationally which, in turn,
provides opportunities for leading suppliers to increase market share and
participate in strategic alliances, joint ventures and acquisitions.
4
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 pumps are volumetric devices that regulate flow by
electronically measuring a specific volume of a fluid. Infusion pumps administer
precise, volumetrically measured quantities of fluids over a wide range of
infusion rates by using positive pressure to overcome the resistance of the
infusion tubing and the back pressure generated by the patient's circulatory
system. Syringe pumps operate by gradually depressing the plunger on a standard
disposable syringe, thereby delivering a more concentrated dose of medication at
a very precise rate of accuracy. Disposable pumps are single use products
designed for use primarily in alternate-site settings.
By contrast, controllers typically are nonvolumetric devices that
regulate flow by electronically counting drops rather that by measuring a
specific volume of fluid. Because infusion pumps can measure volume and can more
accurately administer fluids, they are used more frequently than controllers to
administer expensive, critical or potent therapeutics. The Company does not
currently market controllers, but some of its infusion pumps can be used in a
controller mode.
The infusion systems sold in the markets in which the Company competes
consist of single and multi-channel infusion pumps and disposable administration
sets. As treatment regimens have become more complex and as the critically ill
constitute an increasing percentage of hospital patients, the average hospital
patient now requires a greater number of intravenous lines and more potent
therapeutics, thereby creating a greater need for technologically-advanced
infusion systems.
All infusion pumps 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.
Almost all of these sets, including those manufactured by the Company, are
compatible only with their particular manufacturer's line of infusion systems.
The introduction, however, of the SmartSite needle-free system has provided the
Company with an opportunity to aggressively compete in the gravity extension set
segment of the market with innovative, cost-effective needle-free gravity sets.
PATIENT MONITORING PRODUCTS. The Company's patient monitoring products
compete in discrete market niches, each with different competitive dynamics. The
Company primarily operates in the United States, Canada and Western Europe in
two patient monitoring product markets: (i) hospital thermometry systems and
(ii) stand-alone, non-invasive, multi-parameter instruments used to measure and
monitor a combination of vital signs.
The two major instrument types in the hospital thermometry market are
electronic and infrared devices. The Company offers electronic and infrared
instruments but does not compete in the smaller glass thermometry market. As
with the infusion therapy market, the hospital thermometry market has disposable
products that are used in conjunction with instruments and, consequently, the
existence of an installed base is important for generating ongoing disposable
product sales.
5
CARDIOVASCULAR AND PACEMAKER MONITORING PRODUCTS The Company's cardiovascular
and pacemaker monitoring products are utilized in the alternate-site care
setting, primarily at the patient's home, workplace or a physician's office. As
the trend to treat patients in locations outside of the traditional hospital
setting accelerates due to cost pressures and availability of new technology,
the ability to provide remote diagnostic and telemedicine capabilities are
becoming increasingly important to both the caregiver and patient. Instromedix's
products and services include: (i) arrhythmia event recorders which are portable
or wearable devices used to monitor, record and subsequently transmit
electrocardiograms (ECGs) cardiac events via a standard or wireless telephone
link to a remote location; (ii) pacemaker monitors which are portable devices
used to help physicians and patients monitor the performance and medical
compliance longevity of implantable pacemakers; (iii) the LifeSigns system which
is a proprietary, computer-based software and hardware system that allows remote
and real time monitoring, diagnosis and data capture of selected vital signs
and; (iv) a telemonitoring laboratory service, which offers 24 hour cardiac
arrhythmia monitoring to physicians, devices and hospitals. Instromedix'
products are distributed through both direct and OEM sales channels, which
include major cardiac pacing companies in the United States.
PRODUCTS AND SERVICES
The Company manufactures and markets both single and multi-channel
infusion pumps and disposable administration sets. The Company's infusion pumps
include large volume infusion pumps such as its Gemini series, Signature Edition
Family, MS III and Model 560/570 Series pumps, syringe infusion pumps such as
P1000, P3000, PCAM, P6000 and P7000, which are sold primarily in Western Europe,
and disposable pumps such as the ReadyMED for use in the alternate-site setting.
The Company's large volume infusion pumps require the use of higher margin
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. The Company also manufactures and
markets hospital thermometry instruments and related disposable probe covers,
and stand-alone, non-invasive, multi-parameter instruments which measure and
monitor a combination of temperature, pulse and blood pressure and other vital
signs. Additionally, the Company manufactures and markets arrhythmia-event
recorders and pacemaker monitors through the Instromedix division. The table
below summarizes the key features and actual or estimated market introduction
dates with respect to the Company's products.
PRODUCT DESCRIPTION STATUS
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INFUSION SYSTEMS
LARGE VOLUME INFUSION PUMPS
SIGNATURE EDITION GOLD Single and dual channel pumps; Introduced in first quarter of
incorporates intuitive user 1999.
interface and advanced software
capabilities.
SIGNATURE EDITION Single and dual channel pumps; Marketed since 1995.
incorporates intuitive user
interface; for critical and general
care and alternate site use.
6
PRODUCT DESCRIPTION STATUS
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GEMINI Single, dual and four channel Marketed since 1987.
instruments with pump and
controller capability; programmable
drug delivery/dose calculations and
pressure history; for use in all
hospital and general medical
surgical settings.
560/570 SERIES Single channel pump; for general care Marketed since 1983 and 1990,
use in the United States, and respectively.
general and critical care use in
Europe.
597/598/599 SERIES Single channel, multi-pump Marketed internationally
configuration of reduced size and since 1993.
weight; used frequently for
delivery of nutritional products;
sold in Europe; for general care
and alternate site use.
MEDSYSTEM III Three channel pump; smallest and Originally introduced in late
lightest multi-channel pump 1980s by Siemens Infusion
available; for critical care and Systems, Ltd as MiniMed;
emergency transport use. acquired by the Company in
1993. Introduced in Europe in
1998.
ADVANTIS DL Large volume infusion pump for Technology licensed from
price-conscious consumers, Caesarea Medical Electronics
primarily in emerging international Ltd. Introduced in November 1998
markets. in French, German and English
versions.
ORION Modular infusion pump which can be Under development; market
configured as a one-to-four channel introduction planned for late
device, expected to result in lower 1999.
operating cost and better asset
utilization; for use in all
hospital and critical care settings.
SYRINGE INFUSION PUMPS
P1000, P2000, P3000, P4000 Syringe pump for critical and Various models introduced
non-critical care use outside the between late 1980s and early
United States. 1990s.
P7000 Syringe pump with advanced features Marketed in Europe since 1996.
for critical, non-critical and
neonatal care use in markets
outside the United States.
7
PRODUCT DESCRIPTION STATUS
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P6000 Syringe pump using the P7000 Marketed in Europe since 1997.
technology platform designed for
the price-conscious consumer in
markets outside the United States;
for critical and non-critical care
use.
TRISTAR Compact, lighter syringe pump with Market introduction planned for
modular mounting design which will 1999.
connect to a docking station
capable of displaying all infusion
information centrally. Designed
for the international market.
PCAM PUMP Syringe pump used in markets outside Marketed internationally
(PATIENT CONTROLLED ANALGESIA) the United States that allows since 1995.
patients to control the delivery of
pain medication.
AMBULATORY PUMPS
READYMED Compact, lightweight and disposable 100 mL marketed in U.S. since
ambulatory infusion pump designed July 1992 and 50 mL and 250 mL
for alternate site use. marketed in U.S. since 1993.
RHYTHMIC Family of lightweight, self-contained Agreement with Micrel Electronic
portable pumps for PCA, intermittent and Applications Centre E.P.E signed
continuous use at home in markets in second half of 1997. Marketed
outside the United States. since September 1998.
PALISADE Ambulatory, electromechanical Acquired from Invacare in May
infusion pump for use in the 1998; U.S. market introduction
alternate-site market. planned for late 1999.
DISPOSABLE ADMINISTRATION SETS Proprietary and non-proprietary Marketed worldwide.
administration sets for use with
each of the Company's existing and
proposed infusion pumps.
NEEDLE-FREE ACCESS PRODUCTS
SMARTSITE Needle-free, capless, latex-free Marketed since 1996.
infusion system intended to
increase safety of patients and
health care workers.
8
PRODUCT DESCRIPTION STATUS
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VERSASAFE Needle-free infusion system component Marketed since 1994 through a
utilizing a blunt, plastic cannula license agreement.
combined with a split-septum "Y"
site.
PATIENT MONITORING
THERMOMETRY SYSTEMS
TURBO TEMP Fast electronic thermometer; for Market introduction planned for
general hospital and alternate-site mid 1999.
use.
TEMPO PLUS II Electronic thermometer for general Marketed since mid-1980s.
hospital and alternate site use.
COREOCHECK Infrared tympanic thermometer; for Marketed since 1991.
general hospital use.
DISPOSABLE PROBE COVERS Proprietary covers for use with each Marketed since late 1980s.
of the Company's existing and
proposed thermometers.
OTHER PATIENT MONITORING PRODUCTS
VITALOCHECK (MODEL 4200) Continuous monitoring model that Marketed in the United States
rapidly measures pulse, blood since late 1980s.
pressure and temperature; for
general hospital use.
VITALOCHECK (MODEL 4400) Multi-parameter non-invasive patient Marketed in the United States
monitor providing blood pressure, since 1997 through a license
pulse oximetry and temperature agreement.
monitoring.
CARDIOVASCULAR MONITORING PRODUCTS
KING OF HEARTS EXPRESS II Pager-sized, patient-activated Introduced in the first
looping memory cardiac event and quarter of 1999.
electrocardiograph recorder, using
1-3 leads of ECG. Capable of
recording up to 60 cardiac events,
which can be subsequently
transmitted over a telephone line.
Automatically records rhythms above
or below user programmable heart
rates.
9
PRODUCT DESCRIPTION STATUS
- -------------------------------------- ---------------------------------------- ------------------------------
KING OF HEARTS EXPRESS Pager-sized, patient-activated Marketed since 1992.
looping memory cardiac event and
electrocardiograph recorder;
capable of recording up to 60
cardiac events, which can be
subsequently transmitted over a
telephone line.
HEARTCARD Credit card-sized, patient-activated Marketed since 1995.
cardiac event recorder; capable of
recording up to three cardiac
events which can be subsequently
transmitted over a telephone line.
PACEMAKER MONITORS
CARRYALL TRANSMITTER Portable transmitter for recommended Marketed since 1995.
pacemaker follow-up; used in a
patient's home to avoid unnecessary
visits to physician's office.
LIFESIGNS HOME HEALTH CARE TELEMEDICINE SYSTEM
LIFESIGNS SHUTTLE One-pound, portable, patient-worn Marketed since the fourth
vital signs monitor; programmable quarter of 1997.
to record up to 20 vital sign
recordings, including blood-oxygen
saturation and up to 12 leads of
electrocardiograph data.
LIFESIGNS COMMANDER Docking station used by patients to Marketed since the fourth
allow simultaneous data quarter of 1997.`
transmission from the LifeSigns
Shuttle to the LifeSigns Central
Station and voice interaction with
the home health care provider; also
provides non-invasive blood
pressure measurements.
LIFESIGNS CENTRAL STATION Computerized patient management Marketed since the fourth
system operating in conjunction quarter of 1997.
with the LifeSigns Shuttle and the
LifeSigns Commander to allow remote
monitoring of patient vital signs;
contains a patient database and
displays medical profiles on-screen
for expedient review and analysis
by the home health care provider.
10
ALARIS INFUSION SYSTEMS
LARGE VOLUME INFUSION PUMPS. The Company's large volume infusion pumps
are either single or multi-channel and are used in both the general care and
critical care settings. The Signature Edition family of infusion pumps includes
a single channel and dual channel pump and is designed for use primarily in
hospitals. The Signature Edition line of infusion pumps features
cost-effectiveness, ease of use, reliability and innovative features, such as
new safety features designed to minimize the chance of free flow. The Company
has initiated a voluntary recall of its Signature Edition infusion pumps to
correct a malfunction of an electronic line filter component. Further, in
November 1998, the Company issued a voluntary safety alert regarding the
Signature Edition infusion pumps advising users to check for the proper
installation of a spring in the pumping mechanism assembly. See "-Government
Regulation - Product Regulation."
The Gemini infusion pump series, which consists of single, dual and
four channel pumps, is based on a flexible hardware and software technology
platform. This technology platform has enabled the Company over time to offer
incremental feature enhancements based on evolving customer needs. The Gemini
series currently offers the following features: free flow protection (which the
Company pioneered); independent channel operation; ability to switch from pump
to controller mode without changing the disposable administration set;
programmable to automatically taper-up and taper-down infusion rates to
facilitate delivery of complex drug-dosing regimens; capability to operate in
either micro mode (0.1 to 99.9 mL/hr) for use with neonatal patients, among
others, or macro mode (1 to 999 mL/hr) for use with adult patients; drug dose
calculation; pressure monitoring; pressure history and volume/time dosing; and
nuisance alarm (alarms with no clinical significance) reduction. The Gemini PC-1
and PC-2 infusion pumps are currently subject to a voluntary recall initiated by
the Company, and the PC-2T CE (220V) will be the subject of a mandatory field
upgrade outside the U.S. The Company has also discovered certain
electro-mechanical problems with its Gemini PC-4 infusion pumps and is
evaluating ways to correct these problems. In each reported instance of this
problem, the user has been alerted to the problem by audio and visual alarms.
See "-Government Regulation - Product Regulation."
The MS III instrument is a compact, lightweight, programmable, three
channel, infusion pump used primarily in the critical care market and transport
applications. The MS III predecessor product line was acquired from Siemens
Infusion Systems, Ltd. in September 1993. Since that time, significant resources
have been invested in the MS III pump. The Company believes that as a result of
such investment, the MS III is one of the smallest, most versatile and most
technologically advanced multi-channel pumps currently on the market.
The Model 560/570 Series and the Model 597/598 Series are single
channel peristaltic infusion pumps that offer cost-effective solutions for drug
delivery in all settings.
In May 1998 the Company acquired a license to manufacture, market and
sell the Advantis DL large volume infusion pump, which is marketed primarily for
price-conscious consumers in emerging international markets. The Company will
market and sell the pump through existing distribution channels.
The Company is also in the process of developing the Orion product, a
modular infusion system, which can be configured as a one-to-four channel
device, and is the basis for its next generation of infusion pumps. In addition
to all of the features available on the Gemini series, the Orion product will
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 and is expected to result in lower cost operation and better asset
utilization.
SYRINGE PUMPS. The Company offers syringe pumps, which are small-volume
fluid delivery systems used in neonatal care, oncology, anesthesia, critical
care and labor and delivery. While these
11
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 eight countries and the
number three installed base market position in Germany.
The Company's PCAM patient controlled analgesia infusion pump allows
patients to control the delivery of pain medication. Designed for general care
settings, the PCAM syringe infusion pump is one of the most advanced patient
controlled analgesia infusion pumps on the European market today, with
pre-programmed and user programmable drug delivery protocols, comprehensive
patient history logging and an ergonomically designed handset with status
indicator. The Company has initiated a mandatory field upgrade of its P-1000,
P-2000, P-3000 and P-4000 syringe pumps because under certain circumstances a
rate change can occur. See "-Government Regulation - Product Regulation."
The Company's syringe pump product line also includes the P7000 syringe
pump which has been available internationally since 1996 and the P6000 syringe
pump which was introduced to the European Market during the second quarter of
1997. The Company recently received a 510(k) premarket notification clearance
("510(k)") of the P7000 syringe pump with the United States Food and Drug
Administration (the "FDA"). Designed for critical, non-critical and neonatal
care settings, the P7000 offers several advanced features, including an
automatic dose rate calculator; a pre-programmable drug menu; a range of
pre-programmed infusion administration protocols; and an automatic pressure
reduction capability in response to administration set occlusions. The P6000
syringe pump, which is based on the P7000 syringe pump technology platform, is
designed for use in critical and non-critical care settings by the price
conscious consumer.
AMBULATORY PUMPS. The ReadyMED pump is a compact, lightweight
disposable pump for the intravenous administration of antibiotics in the
alternate-site market. The ReadyMED is designed to offer a number of advantages
over drug delivery systems currently in use for this purpose. Traditional
systems require the patient to attach a small bag and tubing set, through which
the antibiotics are administered, to a catheter placed in the patient's
circulatory system. Since traditional systems are gravity driven, the bag must
remain on an intravenous solution pole during infusion, thereby restricting the
patient's movement. The ReadyMED pump is available in 50 mL, 100 mL and 250 mL
sizes, 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. The
Company sells the ReadyMED pump through its alternate-site sales force and
distribution network.
In May 1998, the Company acquired from Invacare the Palisade pump, a
multi-therapy, ambulatory infusion pump along with a broad range of accessories
and intravenous disposables for use in the ambulatory infusion market. These
products have been developed specifically for home care applications and will be
distributed by the Company's alternate-site sales force.
DISPOSABLE ADMINISTRATION SETS. Disposable administration sets consist
of a plastic pump interface and tubing and have a variety of features, such as
volume control, pumping segments or cassette pumping systems for more accurate
delivery, clamps for flow regulation and multiple entry ports for injecting
medication and delivery of more than one 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 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
12
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, plastic cannula combined
with a split-septum "Y" site. The Company has a non-exclusive license, which
expires in May 2003, to the VersaSafe system which was a cooperative development
effort of IMED, Elcam Plastic of Israel and Medical Associates Network. The
Company's latest needle-free access product, the SmartSite needle-free system,
offers a fully integrated, cost effective design and eliminates the need for
separate caps and additional cannula components. The SmartSite needle-free
system is latex-free and therefore reduces the risk of exposure of patients and
health care workers to latex which can cause severe allergic or anaphylactic
shock reactions. The 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.
ALARIS PATIENT MONITORING PRODUCTS. Patient monitoring instruments are
used to measure temperature, pulse, blood pressure, and other vital signs.
Instruments sold in this market have varying levels of technological
sophistication and are used in a variety of diagnostic and health care settings.
The Company competes in two key niches: hospital thermometry systems and
stand-alone, non-invasive, multi-parameter patient monitoring products.
THERMOMETRY. The Company is a leader in hospital thermometry systems,
which consist of thermometers and disposable probe covers, and maintains a
strong position in both the United States and Western Europe. The Company's
primary product is an electronic thermometer which is widely used in hospitals
and alternate-site settings. The Company is currently launching Turbo Temp
thermometer, an improved cost-effective and technologically advanced electronic
thermometer designed to provide a faster temperature reading. The Company also
manufactures and markets the CoreoCheck system, a thermometer that measures
temperature by detecting the emission of infrared energy in the ear. In the
infrared market, the Company believes it is the second largest participant. The
only disposable probe covers which can be used with the Company's thermometry
instruments are those manufactured by the Company.
OTHER PATIENT MONITORING PRODUCTS. The Company also produces
stand-alone, non-invasive, multi-parameter patient monitoring products which
measure a combination of pulse, pulse-oximetry, temperature and blood pressure.
In January 1997, the Company entered into two agreements with Criticare
Systems, Inc., ("Criticare") a manufacturer of patient monitoring systems and
non-invasive sensors for use in the hospital and alternate-site markets. Under
these agreements, Criticare obtained the right to use the Company's electronic
thermometry technology in certain monitoring systems to be manufactured and
distributed by both Criticare 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 VitaloCheck 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.
13
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 and sells its products through a combined direct sales force
consisting of over 230 salespersons and through more than 150 distributors.
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 proprietary 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 five-year dual source supply agreement with Premier for the purchase of
large volume infusion pumps and associated disposable administration sets.
In December 1997, the Company and Tenet Healthcare Corporation
("Tenet") entered into a ten-year, sole-source agreement for intravenous
infusion pumps and associated IV disposables. In addition, the Company is named
as one of two approved sources by Tenet for needle-free IV sets and components.
The Company also has supply agreements with other leading GPOs, including
Novation, Inc., Amerinet, Inc. and Medecon Services, Inc.
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.
No single account is material to the business or operations of the
Company.
INTERNATIONAL OPERATIONS
The Company markets products in approximately 120 countries through its
direct sales force and distributors. The primary markets for the Company's
products outside the United States are Western Europe, Canada and Australia. The
Company also has a developing position in Asia and Latin America. The principal
products sold by the Company outside the United States are large volume and
syringe infusion pumps and related disposable administration sets. The Company
has manufacturing operations in England and Mexico. The Company has also
contracted with a number of foreign manufacturers to provide certain of its
sourcing needs. The following table sets forth, for each period presented, the
approximate amount of sales made to customers by each business unit over the
last three fiscal years:
1996(1) 1997 1998
--------- ------------ --------------
(DOLLARS IN MILLIONS)
North America........................................ $ 236.0 $ 240.5 $ 246.7
International........................................ 110.3 118.6 125.0
Instromedix.......................................... - - 8.4
--------- -------- ---------
Total Sales..................................... $ 346.3 $ 359.1 $ 380.1
--------- -------- ---------
--------- -------- ---------
- -------------------------
(1) Presented on a pro forma basis. Exclusive of the Merger, sales to
customers in North America and internationally were $105.6 million and
$30.8 million during the year ended December 31, 1996.
14
The Company believes that sales of products to customers outside of the
United States represent a significant potential source of growth. Foreign
operations are subject to special risks that can materially affect the sales,
profits and cash flows of the Company, including currency exchange rate
devaluations and fluctuations, the impact of inflation, exchange controls, labor
unrest, political instability, export duties and quotas, domestic and
international customs and tariffs, unexpected changes in regulatory
environments, potentially adverse tax consequences and other risks. Changes in
certain exchange rates could have an adverse effect on the Company's ability to
meet interest and principal obligations with respect to its United States
dollar-denominated debt and could also have a material adverse effect on the
business, financial condition, results of operations or prospects of the
Company.
MANUFACTURING
The Company is focusing on low-cost manufacturing and manufactures its
products at plants in San Diego, California; Creedmoor, North Carolina; Tijuana,
Mexico; and Hampshire, England. In February 1999 the Company announced its plans
to relocate the Instromedix operations, including manufacturing of Instromedix
products, from Hillsboro, Oregon to San Diego. The San Diego facility is the
primary manufacturing facility for infusion pumps and patient monitoring
instruments and also houses a service operation for installed infusion pumps and
patient monitoring instruments. The Creedmoor facility houses a portion of the
current disposables operations and is a distribution center for North American
disposable finished products. Product release from sterilization is done in San
Diego and Creedmoor. The Tijuana facilities primarily focus on the manual
assembly of disposables, and the Hampshire facility focuses on the manufacturing
of syringe pumps and Advantis which are sold primarily to the international
market. Disposable products for international markets are currently supported
through a number of foreign manufacturers.
The Company has designed and implemented an integrated network of
quality systems, including control procedures that are planned and executed by
technically-trained professionals. Through these systems, the Company has
established written specifications for raw materials, packaging, labels,
sterilization and overall manufacturing process control. A substantial number of
raw materials require certificates of analysis to help ensure that finished
products conform to specifications. In addition, the Company regularly tests
components and products at various stages of the manufacturing process to ensure
compliance with applicable specifications.
The Company purchases raw materials worldwide in the ordinary course of
business from numerous suppliers. The vast majority of these materials are
generally available and the Company has not experienced any serious shortages or
material delays in obtaining these materials. In some situations, the Company
has long-term supply contracts, although the Company purchases a significant
amount of its requirements of certain raw materials by purchase order. Although
the Company is generally not dependent upon any single source of supply, it
relies upon a limited number of suppliers for circuit boards and other parts
which are used in certain of its infusion systems. The loss of any such supplier
would result in a temporary interruption in the manufacturing of the Company's
products. The Company believes, however, that these materials are available as
needed from alternative sources.
RESEARCH AND DEVELOPMENT
The Company believes that a well-targeted research and development
program constitutes an essential part of the Company's activities and is an
integral part of its future success. The Company is actively engaged in
research and development programs to develop and improve products. These
activities are performed in the United States and, to a lesser extent, in the
United Kingdom. For the year ended December 31, 1998, the Company expended
approximately $20.1 million on in-house research and development. Substantially
all of such amount was dedicated to the development of new products.
15
The Company intends to focus a significant portion of its research and
development efforts on the development of new products. The Company is currently
developing several new products and product line extensions.
PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS
The Company relies heavily on patented and other proprietary
technology. The Company believes its issued and pending patents are important to
its competitive position. There can be no assurance that patent applications
submitted by the Company or its licensors will result in patents being issued or
that, if issued, such patents and patents already issued will afford protection
against competitors with similar technology. In addition, there can be no
assurance that any patents issued to or licensed by the Company will not be
infringed or designed around by others, that others will not obtain patents that
the Company will need to license or design around, that the Company's products
will not inadvertently infringe the patents of others, or that others will not
manufacture and distribute similar products upon expiration of such patents.
There can also be no assurance that key patents of the Company will not be
invalidated or that the Company or its licensors will have adequate funds to
finance the high costs of prosecuting or defending patent validity or
infringement issues.
The Company's policy is to secure patent protection for significant
inventions. The Company holds approximately 239 unexpired patents in the United
States and approximately 400 unexpired patents in foreign countries, principally
in Europe, Canada, Japan and Australia. The Company has 18 additional
applications pending or in preparation in the United States and 395 foreign
applications pending. Within the next ten years, approximately 142 of the
Company's United States patents and approximately 218 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 business, financial condition, results of operations, or prospects
of the Company.
The patent positions of medical device firms, including the Company,
are uncertain and involve complex legal and factual questions for which certain
legal principles are unresolved. The coverage claimed in a patent application
can be significantly reduced before a patent is issued. In addition, patent law
has recently been revised to give effect to international accords to which the
United States has become a party. Pursuant to such accords, the patent term has
been changed from 17 years from date of grant to 20 years from date of filing
and certain provisions favoring United States inventors over foreign inventors
have been eliminated.
The United States patent code was recently amended. As a result,
certain statutory remedies for patent infringement are no longer available for a
medical practitioner's otherwise infringing performance of a medical activity.
As defined in the United States patent code, a patent may not be enforced
against a medical practitioner's performance, or the performance of a related
health care entity of a "medical activity" which is defined as the performance
of a medical or surgical procedure on a body. However, a "medical activity" does
not include "the use of a patented machine, manufacture or composition of matter
in violation of such patent." Hence, remedies are still available against
manufacturers and distributors. The aforesaid amendment does not apply to
patents issued before September 30, 1996.
The Company sells its products under a variety of trademarks, some of
which are considered by the Company to be of importance to warrant registration
in the United States and various foreign countries in which the Company does
business. The Company also relies on trade secrets, unpatented know-how and
continuing technological advancement to maintain its competitive position. It is
the Company's practice to enter into confidentiality agreements with key
technical employees and consultants. There can be no assurance that these
measures will prevent the unauthorized disclosure or use of the Company's trade
secrets and know-how or that others may not independently develop similar
16
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 internal developments and
seeking acquisitions or alliances 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. Major competitors in this market include Baxter
International, Inc., Abbott Laboratories, Inc. and McGaw. The Company's success
is therefore dependent on the development of new infusion technologies and
products and the development of other markets for its products. The Company's
older infusion therapy product lines have experienced declining sales and market
share recently, primarily due to competitors who offer volume discounts based on
bundled purchases of a broader range of medical equipment and supplies, as well
as to the aging of the Company's core products. The Company's introduction of
new products may offset future declines in sales and market share. There can be
no assurance, however, that new products will be successfully completed or
marketed for sale, will not necessitate upgrades or technical adjustments after
market introduction, can be manufactured in sufficient volumes to satisfy
demand, or will offset declines in sales and market share experienced with
respect to existing products. See "--Products and Services."
The European infusion systems market is much more regionalized and
fragmented, with a few strong competitors in each regional market. Major
competitors encountered in several markets include Graseby, Fresenius and B.
Braun Melsungen AG. The Company is among the leaders in a number of Western
European markets, with a number one or number two installed base market share in
eight countries and the number three installed base market share in Germany. The
Western European countries in which the Company has a number one or number two
installed base market share are France, Norway, Sweden, the United Kingdom,
Belgium, the Netherlands, Spain and Italy.
The patient monitoring products market is fragmented by product type.
The Company's key competitor in the United States electronic thermometer market
is Welch Allyn, Inc. (f/k/a Diatek, Inc.) and its key competitor in the infrared
thermometer market is Sherwood.
GOVERNMENT REGULATION
PRODUCT REGULATION. The research, development, testing, production and
marketing of the Company's products are subject to extensive governmental
regulation in the United States at the federal, state and local levels, and in
certain other countries. Non-compliance with applicable requirements may result
in recall or seizure of products, total or partial suspension of production,
refusal of the government to allow clinical testing or commercial distribution
of products, civil penalties or fines and criminal prosecution and/or dues for
repair and/or refund.
The United States FDA regulates the development, production,
distribution and promotion of medical devices in the United States. Virtually
all of the products being developed, manufactured and
17
sold by the Company in the United States (and products likely to be developed,
manufactured or sold in the foreseeable future) are subject to regulation as
medical devices by the FDA. Pursuant to the Federal Food, Drug, and Cosmetic Act
(the "FDC Act"), a medical device is classified as a Class I, Class II or Class
III device. Class I devices are subject to general controls, including
registration, device listing, recordkeeping requirements, labeling requirements,
"Quality Systems Regulation" ("QSR" as defined in FDA Quality System
regulations) prohibitions on adulteration and misbranding, and reporting of
certain adverse events ("MDR"). In addition to general controls, Class II
devices may be subject to special controls that include notification and could
include performance standards, postmarket surveillance, patient registries,
guidelines, recommendations and other actions as the FDA deems necessary to
provide reasonable assurance of safety and effectiveness. New Class III devices
must meet the most stringent regulatory requirements and must be approved by the
FDA before they can be marketed. Such premarket approval can involve extensive
preclinical and clinical testing to prove safety and effectiveness of the
devices.
Virtually all of the Company's products are Class II devices. The
Company is currently developing and manufacturing a Class III device for a third
party. This device is pending Premarket Approval Application ("PMA"). Unless
otherwise exempt, all Class II and Class III medical devices introduced to the
market since 1976 are required by the FDA, as a condition of marketing, to
secure a 510(k) or a PMA. A product will be cleared by the FDA under a 510(k) if
it is found to be substantially equivalent because it has the same intended use
and the same technological characteristics as 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 ("predicate device"),
or if it has different technological characteristics if it is demonstrated that
the device is as safe and effective as the predicate device and raises no new
safety or efficacy questions. In general, if a product is not substantially
equivalent to a predicate device, and not otherwise exempt, the FDA must first
reclassify the device or approve a PMA before it can be marketed. An approved
PMA indicates that the FDA has determined the product has been demonstrated,
through the submission of clinical data and manufacturing and other information,
to be safe and effective for its labeled indications. The PMA process typically
takes more than a year from submission and requires the submission of
significant quantities of clinical data and supporting information. The process
of obtaining a 510(k) 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 for cause 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")
18
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, 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 9001 or ISO 9002 certification for all of
its manufacturing facilities regarding the quality of its manufacturing systems,
a requirement for doing business in EC countries. The Company has been granted
approval to affix the CE mark, pursuant to the EC Medical Device Directives, on
substantially all of its products. Products not CE marked cannot be distributed
in the EC after June 16, 1998. CE marking does not necessarily preclude,
however, additional restrictions on marketing in any individual country in the
EC.
The Company's products are subject to varying degrees of government
regulation in the countries in which the Company has operations, and the general
trend is toward regulation of increasing stringency. The degree of government
regulation affecting the Company varies considerably among countries, ranging
from stringent design, testing, manufacturing, approval requirements, and
post-approval requirements to more simple registration. In general the Company
has not encountered material delays or unusual regulatory impediments in
marketing its products internationally. Establishment of new uniform regulations
for the European Economic Area, the transition rule for which ended on June 16,
1998, subjects the Company to a single extensive regulatory scheme for all of
the participating countries. The EU Medical Device Directive requires that
medical devices marketed in participating countries have a "CE" mark affixed to
the device certifying compliance with the applicable medical device
requirements. The Company is required to classify its medical devices into one
of four classes; meet certain essential requirements generally relating to
device design, construction, labeling, manufacture and other standards; certify,
for Class I devices, or in the case of a medium or high risk device, obtain
certification from a recognized non-governmental body (notified body) that its
device conforms to the applicable requirements. In addition, other regulatory
requirements apply, including but not limited to registration, vigilance or
adverse event reporting, recordkeeping, and labeling and promotional
restrictions. Companies and medical devices in the EU are also subject to
enforcement actions, including administrative, civil and criminal penalties.
Certain countries require the Company to obtain clearances for its
products prior to marketing the products in those countries. In addition,
certain countries impose product specifications, standards or other requirements
which differ from or are in addition to those mandated in the United States. The
EC and certain countries are in the process of developing new modes of
regulating medical products which may result in lengthening the time required to
obtain permission to market new products. These changes could have a material
adverse effect on the Company's ability to market its products in such countries
and would hinder or delay the successful implementation of the Company's planned
international expansion.
19
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 QSRs governing design, manufacturing, testing, quality
control, product packaging and storage practices. An inspection may result in a
determination that the Company is not in compliance with certain FDA or state
requirements, may require the Company to undertake corrective action, and could
result in legal action against the Company and its products, including actions
such as those described herein. The FDA has recently revised the QSR
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 1994, the Company has on
seventeen occasions temporarily removed products from the market or issued
safety alerts regarding products 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 Model 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, was recently closed by the FDA, however, 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. Without charge to its customers, the Company has completed
the upgrade and replacement of 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 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. The Company has completed required modifications and was recently
notified that this recall has been closed with the FDA.
In the first quarter of 1997 the Company identified and in March 1998
initiated a voluntary recall of approximately 50,000 of its Gemini model PC-1
and PC-2 infusion pumps because failure of specific electrical components 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 recall. The
Company is not aware of any injuries sustained in known battery overcharging
incidents. The Company recorded a charge of $2.5 million to cost of sales during
the first quarter of 1997 for this recall and believes it has adequately accrued
for this matter. However, there can be no assurance that this recall can be
implemented for an amount consistent with management's estimate.
20
The Company has initiated a voluntary safety alert of its Model 597/598
and Model 599 Series infusion pumps. The Company discontinued selling the Model
599 Series infusion pumps in March 1997. The 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 initiated a voluntary recall of certain MS III disposable
administration sets affecting 44,000 units. This recall advised 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 has initiated a voluntary recall of its Signature Edition
infusion pumps to correct a malfunction of an electronic line filter component
(which malfunction may occur when a user fails to follow the Company's written
cleaning instructions and can result in an electrical short). Further, in
November, 1998, the Company initiated a voluntary safety alert regarding the
Signature Edition infusion pumps advising to check for the proper installation
of a spring in the pumping mechanism assembly. In the third quarter of 1998, the
Company initiated a recall of its Gemini PC-4 pumps to correct certain
electro-mechanical problems which may cause one or more channels of the device
to audibly and visibly alarm and temporarily cease operation. The Company is not
aware of the occurrence of any injury incidents relating to a malfunction of
this type. The Company has also initiated a mandatory field upgrade of its
P-1000, P-2000, P-3000 and P-4000 syringe pumps because under certain
circumstances a rate change can occur. In April 1999, the Company will initiate
a mandatory field upgrade of the Gemini PC-2T CE (220V) product, distributed
only in certain countries outside the U.S., for failure to audibly alarm when a
certain type of failure occurs.
Although there can be no assurance, the Company believes that the
voluntary recalls, Safety Alerts, recalls and field upgrades, along with
adjustments and corrections that may be made to various Company products from
time to time as an ordinary part of the business of the Company, will not have a
material adverse effect on the business, financial condition, results of
operation or cash flows of the Company.
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 other federally funded
health care programs. Violations of the statute are punishable by civil and
criminal penalties and the exclusion of the provider from future participation
in other federally funded health care programs. The Social Security Act contains
exceptions to these prohibitions for, among other things, properly reported
discounts, rebates and payments of certain administrative fees to GPOs. Because
of the breadth of the statutory prohibitions, the lack of court decisions or
other authority addressing the types of arrangements that are permissible under
the law and the narrowness of statutory exceptions, the Secretary of Health and
Human Services published regulations creating "safe harbors" identifying certain
practices that will not be treated as violating the "anti-kickback" provisions
of the Social Security Act. While failure to satisfy all of the criteria for a
safe harbor does not necessarily mean that an arrangement is unlawful, engaging
in a business practice for which there is a safe harbor may be regarded as
suspect if the practice fails to meet each of the prescribed criteria of the
appropriate safe harbor. The enumerated safe harbors include safe harbors which
implement, and further refine, the statutory exceptions for discounts and
payments to GPOs. Because the Company sells some of its products to customers at
prices below list price and in various combinations,
21
the Company is engaged in giving discounts within the meaning of the Social
Security Act. The regulations require sellers to fully and accurately report all
discounts and inform buyers of their obligations to report such discounts. The
Company also pays administrative fees to certain purchasing agents within the
meaning of the Social Security Act. In order to qualify for the GPO safe harbor,
certain requirements must be met including disclosure of the existence of the
GPO fee arrangement to GPO members and that members are neither wholly owned by
the GPO nor subsidiaries of a parent corporation that wholly owns the GPO.
Certain of the Company's discounts and arrangements with purchasing agents may
not meet all the requirements of the appropriate safe harbors.
Several states also have statutes or regulations prohibiting financial
relationships with referral sources that are not limited to services for which
Medicare, Medicaid or other state or federal health care program payment may be
made. A finding of non-compliance with these anti-remuneration laws by federal
or state regulatory officials, including non-compliance with appropriate safe
harbors, could have a material adverse effect on the Company.
COVERAGE AND REIMBURSEMENT. The Company's products are purchased or
leased by health care providers or suppliers which submit claims for
reimbursement for such products to third-party payors such as Medicare, Medicaid
and private health insurers. Although the Company has no knowledge that
third-party payors will adopt measures that would limit coverage of, or
reimbursement for, its products, any such measures that were applied to the
Company's products could have a material adverse effect on the Company.
ENVIRONMENTAL MATTERS. The Company is subject to regulation by OSHA,
the Environmental Protection Agency ("EPA") and their respective state and local
counterparts, and under extensive and changing foreign, federal, state and local
environmental standards, including those governing the handling and disposal of
solid and hazardous wastes, discharges to the air and water, and the remediation
of contamination associated with releases of hazardous substances. Such
standards are imposed by, among other statutes, the Toxic Substances Control
Act, the Clean Air Act, the Federal Water Pollution Control Act, the Resource
Conservation and Recovery Act and the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"). Although there can be no assurances,
the Company believes that it is currently in material compliance with current
environmental standards. Nevertheless, the Company uses hazardous substances in
its day-to-day operations and, as is the case with manufacturers in general, if
a release of hazardous substances occurs on or from the Company's properties,
the Company may be held liable and may be required to pay the cost of remedying
the condition. The amount of any such liability could be material.
The Company has made, and will continue to make, expenditures to comply
with current and future environmental standards. Although no material capital or
operating expenditures relating to environmental controls are anticipated, there
can be no assurance that changes in, additions to, or differing interpretations
of statutory and regulatory requirements will not require material expenditures
in the future.
The Company is subject to liability under CERCLA and analogous state
laws for the investigation and remediation of environmental contamination at
properties owned and/or operated by it and at off-site locations where it has
arranged for the disposal of hazardous substances. Courts have determined that
liability under CERCLA is, in most cases, joint and several, meaning that any
responsible party could be held liable for all costs necessary for investigating
and remediating a release or threatened release of hazardous substances. As a
practical matter, liability at most CERCLA (and similar) sites is shared among
all the solvent "potentially responsible parties" ("PRPs"). The most relevant
factors in determining the probable liability of a party at a CERCLA site
usually are the cost of the investigation and remediation, the relative amount
of hazardous substances contributed by the party to the site and the number of
solvent PRPs.
22
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 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 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, 1999, the Company employed 2,716 people including
1,167 in the United States. The Company has not experienced any work stoppages
related to employment matters other than in connection with a contract dispute
with Cal Pacifico.
Cal Pacifico was the operator of the Company's two maquiladora assembly
plants in Tijuana, Mexico. For over eight years, the Company assembled
disposable administration sets at these two plants, which utilized more than
1,200 workers employed by Cal Pacifico, under a contract with Cal Pacifico. A
dispute originated in April 1997 when the Company, in accordance with the terms
of such contract, informed Cal Pacifico that it would be terminating its
contractual arrangements effective August 1, 1997. Cal Pacifico objected to such
notification and proposed the systematic termination of the workforce. In
response to such objection, the Company on June 6, 1997 hired substantially all
of the workers at the plants directly. On June 11, 1997, Cal Pacifico locked the
Company's administrative personnel and production employees out of the plants
and would not allow the Company access to its production equipment or inventory.
On June 26, 1997, the Company entered into a settlement agreement with Cal
Pacifico. As a result of the settlement agreement, the assembly plants resumed
full operations on June 27, 1997. The Company now directly operates these plants
with no assistance from or interaction with Cal Pacifico.
ALARIS Medical Systems' operations are supported by persons employed by
ALARIS Medical Systems and its subsidiaries. The Company's principal executive
offices are located at 10221 Wateridge Circle, San Diego, California 92121.
23
ITEM 2. PROPERTIES
The Company has long-term leases on substantially all of its major
facilities. The Company maintains an instrument manufacturing facility in San
Diego, California where infusion pumps and patient monitoring instruments for
both the North America and International business units are manufactured. The
Company also maintains a facility in Hampshire, England where syringe pumps and
the Advantis pump, products marketed for countries outside of the United States,
are manufactured. The manufacturing facility for the Instromedix operating unit
is located in Hillsboro, Oregon. In February, 1999 the Company announced its
plans to relocate the Instromedix operations, including manufacturing of
Instromedix products, to San Diego. Disposable administration set manufacturing
facilities for the North America and International business units are located in
Creedmoor, North Carolina and Tijuana, Mexico. The disposable manufacturing
facility in Creedmoor, North Carolina is owned by the Company. The disposable
manufacturing facilities in Tijuana, Mexico are maintained under 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, Norway and Australia. The North American sales office for
Canada is also maintained under a long-term lease.
The Company's principal offices are located in San Diego, California
and its International headquarters are located in Hampshire, England. These
facilities are maintained under long-term lease arrangements.
ITEM 3. LEGAL PROCEEDINGS
The Company was a defendant in a lawsuit filed in June 1996 by Sherwood
Medical Company (d/b/a Sherwood, Davis & Geck) ("Sherwood") against IVAC Medical
Systems. The lawsuit was filed in the United States District Court for the
Southern District of California, alleging infringement of two Sherwood patents
by reason of certain activities including the sale by IVAC Medical Systems of
disposable probe covers for use with the Company's infrared tympanic
thermometers. The lawsuit sought injunctive relief, treble damages and the
recovery of costs and attorney fees. The jury failed to reach a verdict in this
litigation and the Court has declared a mistrial. Sherwood has asked the Court
for a retrial, which is tentatively scheduled for August, 1999. The Company
believes it has sufficient defenses to all claims by Sherwood, including the
defenses of noninfringement and invalidity and intends to vigorously defend this
action. 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, financial condition, and cash flows.
The Company is a defendant in a lawsuit filed on April 20, 1998 and
served on October 28, 1998, by Becton Dickinson and Company ("Becton") against
ALARIS Medical Systems, Inc., which alleges infringement of a patent licensed to
Becton by reason of certain activities, including the sale of the Company's
SmartSite needle-free system. Becton has requested a permanent injunction
enjoining the Company from infringing the patent in suit. No amount of monetary
damages has been specified by Becton, however the complaint requests damages as
appropriate and all gains, profits and advantages derived by or from the
Company's infringement of the patent, as well as prejudgment interest, costs,
expenses and reasonable attorney's fees. The Company believes it has sufficient
defenses to all claims, and intends to vigorously defend this action. However,
there can be no assurance that the Company will successfully defend all claims
made by Becton and the failure of the Company to successfully prevail in this
lawsuit could have a material adverse effect on the Company's operations,
financial condition and cash flows. In addition, the Company filed a lawsuit on
December 4, 1998 against Becton. The lawsuit, which is pending in the United
States District Court for the Southern District of California, alleges
infringement of two patents, one owned by the Company and one licensed to the
Company, by reason of
24
certain activities, including the sale of Becton's Atrium needle-free valve. The
lawsuit seeks injunctive relief, damages and the recovery of costs and attorney
fees.
The Company is also involved in a number of legal proceedings arising
in the ordinary course of its business, none of which is expected to have a
material adverse effect on the Company's business, financial condition, results
of operations or prospects of the Company. The Company maintains insurance
coverage against claims in an amount which it believes to be adequate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCK-HOLDER
MATTERS
ALARIS Medical Systems is a wholly-owned subsidiary of ALARIS Medical.
There is no established public trading market for ALARIS Medical Systems' common
stock. In addition, the Company's bank credit facility limits ALARIS Medical
System's ability to declare and pay dividends and to make other distributions
and payments to ALARIS Medical. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data of ALARIS
Medical Systems at December 31, 1994, 1995, 1996, 1997 and 1998, and for the
years then ended, have been derived from ALARIS Medical Systems' annual
financial statements including the consolidated balance sheet at December 31,
1997 and 1998 and the related consolidated statement of operations for the
three-year period ended December 31, 1998 and notes thereto which appear
elsewhere herein.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Sales...................................... $ 112,122 $ 112,551 $ 136,371 $ 359,077 $ 380,068
Cost of sales.............................. 65,641 63,270 78,642 188,340 191,232
----------- ----------- ----------- ----------- -----------
Gross margin............................... 46,481 49,281 57,729 170,737 188,836
Selling and marketing expense.............. 16,850 16,567 22,273 65,797 72,202
General and administrative expense......... 8,726 8,893 13,434 37,510 40,952
Research and development expense........... 6,345 7,386 8,854 16,876 20,059
Purchased in-process research
and development (1)...................... - - 44,000 - 28,334
Restructuring, integration, and
other non-recurring charges (1).......... - - 15,277 19,767 1,901
----------- ----------- ----------- ----------- -----------
Total operating expenses (1)............... (31,921) (32,846) (103,838) (139,950) (163,448)
Lease interest income (2).................. 2,449 2,333 2,501 4,559 4,599
----------- ----------- ----------- ----------- -----------
Income (loss) from operations.............. 17,009 18,768 (43,608) 35,346 29,987
Interest income............................ 12 28 184 433 1,128
Interest expense........................... (2,805) (2,052) (6,303) (43,123) (41,814)
Other (expense) income, net................ (261) (379) 323 (1,584) (1,100)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes.......... 13,955 16,365 (49,404) (8,928) (11,799)
Provision (benefit) for income taxes ...... 8,310 8,099 1,270 (1,900) 7,400
----------- ----------- ----------- ----------- -----------
Net income (loss).......................... $ 5,645 $ 8,266 $ (50,674) $ (7,028) $ (19,199)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
25
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash....................................... $ 1,124 $ 436 $ 9,148 $ 6,918 $ 29,468
Working capital............................ 30,189 25,753 84,469 85,084 148,144
Total assets ............................. 122,983 122,597 586,141 563,106 644,377
Short-term debt (3)........................ - - - 14,559 15,423
Long-term debt (3)......................... 19,647 11,353 423,941 415,419 399,623
Stockholder's equity....................... 32,929 32,477 50,021 38,947 123,118
ADJUSTED EBITDA (4) ........................... $ 23,715 $ 25,310 $ 29,023 $ 90,948 $ 96,584
Inventory purchase price
allocation adjustment (5).................. - - (4,014) (1,607) (274)
Restructuring, integration and
other non-recurring charges................ - - (15,277) (19,767) (1,901)
Purchased in-process research
and development............................ - - (44,000) - (28,334)
Depreciation and amortization (6).............. (6,706) (6,542) (9,340) (34,228) (36,088)
Interest income................................ 12 28 184 433 1,128
Interest expense............................... (2,805) (2,052) (6,303) (43,123) (41,814)
Other, net..................................... (261) (379) 323 (1,584) (1,100)
(Provision for) benefit from income taxes...... (8,310) (8,099) (1,270) 1,900 (7,400)
----------- ----------- ----------- ----------- -----------
Net income (loss).............................. $ 5,645 $ 8,266 $ (50,674) $ (7,028) $ (19,199)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
- ---------------------------------
(1) In 1996 ALARIS Medical Systems restructured its operations. During 1997,
the Company incurred significant non-recurring integration and other
non-recurring expense resulting from the Merger. During 1998, the Company
incurred integration costs and other non-recurring expenses resulting from
the acquisitions of Instromedix and Patient Solutions. Operating expenses
for the years ended December 31, 1996, 1997 and 1998 include restructuring,
integration and other non-recurring charges of $15,277, $19,767 and $1,901,
respectively. Additionally, in 1996, the Company recorded $44,000 of
purchased in-process research and development in connection with the
Merger. In 1998, in connection with the acquisitions and licensing, the
Company recorded $28,334 of purchased in-process research and development.
(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 1996, in connection with the Merger, the Company entered into a
$250,000 credit facility and also issued $200,000 of 9 3/4% senior
subordinated notes due 2006.
(4) Adjusted EBITDA represents income from operations before restructuring,
integration and other non-recurring charges, non-cash purchase accounting
charges and depreciation and amortization. Adjusted EBITDA does not
represent net income or cash flows from operations, as these terms are
defined under generally accepted accounting principles, and should not be
considered as an alternative to net income as an indicator of the
Company's operating performance or to cash flows as a measure of
liquidity. ALARIS Medical Systems has included information concerning
Adjusted EBITDA herein because it understands that such information is
used by certain investors as one measure of an issuer's historical ability
to service debt. Restructuring and other one-time non-recurring charges
are excluded from Adjusted EBITDA as ALARIS Medical Systems believes that
26
the inclusion of these items would not be helpful to an investor's
understanding of ALARIS Medical Systems' ability to service debt. ALARIS
Medical Systems' computation of Adjusted EBITDA may not be comparable to
similar titled measures of other companies.
(5) Amount in 1996 and 1997 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. The 1998 amount represents
that portion of the purchase accounting adjustments made to adjust the
acquired Patient Solutions and Instromedix inventories to the estimated
fair value on the merger date which was charged to cost of sales.
(6) Depreciation and amortization excludes amortization of debt discount and
issuance costs included in interest expense of $263, $248, $1,113, $3,012
and $2,889 for the years ended December 31, 1994, 1995, 1996, 1997 and
1998, respectively.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF ALARIS MEDICAL SYSTEMS AND THE RELATED NOTES THERETO
INCLUDED ELSEWHERE IN THIS ANNUAL REPORT.
OVERVIEW
The Company is a leading provider of infusion systems and related
technologies to the United States hospital market, with the largest installed
base of pump delivery lines ("channels"). The Company is also a leader in the
international infusion systems market. Based on installed base of infusion
pumps, the Company has a number one or two market position in eight Western
European countries, the number three market position in Germany, the largest
installed base of infusion pumps in Australia and Canada and a developing
position in Latin America and Asia. The Company's infusion systems, which are
used to deliver one or more fluids, primarily pharmaceuticals or nutritionals,
to patients, consist of single and multi-channel infusion pumps and controllers,
and proprietary and non-proprietary disposable administration sets (i.e.,
plastic tubing and pump interfaces). In addition, the Company is a leading
provider of patient monitoring products that measure and monitor temperature,
pulse, pulse oximetry and blood pressure, with the largest installed base of
hospital thermometry systems in the United States. Through its July 17, 1998
acquisition of Instromedix, the Company also designs, manufactures and sells
cardiology products such as arrhythmia-event recorders and pacemaker monitors.
The Company sells a full range of products through a worldwide
direct sales force consisting of over 230 sales persons and through more than
150 distributors to over 5,000 hospitals worldwide. Sales by the Company's
International business unit represented 32.9% of the Company's total sales
for the year ended December 31, 1998. For the year ended December 31, 1998,
the Company had sales of $380.1 million and Adjusted EBITDA of $96.6 million.
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 1996. The
1996 operating results and cash flows represent those of Advanced Medical
(ALARIS Medical's predecessor) and IMED and include those of IVAC from November
27, 1996 through December 31, 1996.
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
worldwide installed base of infusion pumps. However, uncertainty remains with
regard to future changes within the healthcare industry. The trend towards
managed care and economically motivated buyers in the U.S. may result in
continued pressure on selling prices of products and compression on gross
margins. The U.S. marketplace is increasingly characterized by consolidation
among healthcare providers and purchasers of medical products. The Company's
profitability is affected by the increasing use of Group Purchasing
Organizations ("GPOs") which are better able to negotiate favorable pricing from
providers of infusion systems, such as the Company, and which insure compliance
with exclusive buying arrangements for their members. These buying arrangements,
in certain situations, also may result in the GPO requiring removal of the
Company's existing infusion pumps. The Company expects that such GPOs will
become increasingly more common and may have an adverse effect on the Company's
future profitability. Finally, the enactment of national health care reform or
other legislation affecting payment mechanisms and health care delivery could
affect the Company's future results of operations. It is impossible to predict
the extent to which the Company may be affected by any such change in
legislation.
28
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 ALARIS Medical Systems 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 PRO FORMA PRO FORMA AS REPORTED AS REPORTED
1996 1996 1996 1997 1998
----------- --------- --------- ----------- -----------
(% of sales) ($ in thousands)(% of sales)(% of sales)(% of sales)
Sales .......................................... 100.0% $346,348 100.0% 100.0% 100.0%
Cost of sales..................................... 57.7 184,768 53.3 52.5 50.3
-------- ---------- ------- ------- -------
Gross margin...................................... 42.3 161,580 46.7 47.5 49.7
Selling and marketing expenses.................... 16.3 65,385 18.9 18.3 19.0
General and administrative expenses............... 9.8 38,215 11.0 10.4 10.7
Research and development expenses................. 6.5 18,142 5.2 4.7 5.3
Purchased in-process research and
development.................................... 32.3 - - - 7.5
Restructuring, integration and other
non-recurring charges...............