**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington, DC  20549**

 

**FORM 10-Q**

 

 

**(Mark One)**

** **

ý                               **Quarterly Report Pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934**

 

**For thequarterly period ended September 30, 2002 or**

 

o                               **Transition Report Pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934**

 

**Forthe transition period from                    to                        ** 

 

 

Commission FileNumber:                   **33-26398**

 

**ALARIS MEDICAL, INC.**(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                    |   | **13-3492624**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

 

**10221Wateridge Circle, San Diego, CA  92121**(Address ofprincipal executive offices)          (ZipCode)

 

**(858)458-7000**(Registrant’stelephone number, including area code)

 

 

(Former name, former address and former fiscal year,if changed since last report)

 

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Indicate by check markwhether the registrant:  (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes: ý  No: o

 

On October 3,2002, 59,524,056 shares of Registrant’s Common Stock were outstanding,excluding shares held in Treasury.

 

 

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**ALARISMEDICAL, INC.**

 

**INDEX**

 
| **PART  I.  FINANCIAL INFORMATION**                                                                                                            |   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                                |   |   |
| Item 1 - Financial  Information:                                                                                                                    |   |   |
|                                                                                                                                                |   |   |
| Condensed  consolidated statement of operations for  the three and nine months ended September 30, 2002 and 2001 (unaudited)                        |   |   |
|                                                                                                                                                |   |   |
| Condensed  consolidated balance sheet at  September 30, 2002 (unaudited) and December 31, 2001                                                      |   |   |
|                                                                                                                                                |   |   |
| Condensed  consolidated statement of cash flows for  the nine months ended September 30, 2002 and 2001 (unaudited)                                  |   |   |
|                                                                                                                                                |   |   |
| Condensed  consolidated statement of changes  in stockholders’ equity for the period from  December 31, 2001 to September 30, 2002 (unaudited) |   |   |
|                                                                                                                                                |   |   |
| Notes  to the condensed consolidated financial statements (unaudited)                                                                               |   |   |
|                                                                                                                                                |   |   |
| Item 2 -  Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                               |   |   |
|                                                                                                                                                |   |   |
| Item 3 - Quantitative and Qualitative  Disclosures about Market Risk                                                                                |   |   |
|                                                                                                                                                |   |   |
| Item 4 - Controls and Procedures                                                                                                                    |   |   |
|                                                                                                                                                |   |   |
| Item 5 — Other Information                                                                                                                     |   |   |
|                                                                                                                                                |   |   |
| **PART II.  OTHER INFORMATION**                                                                                                                     |   |   |
|                                                                                                                                                |   |   |
| Item 6 - Exhibits and Reports on Form 8-K                                                                                                           |   |   |
|                                                                                                                                                |   |   |

 

 

2

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**Form 10 — QPart 1 - Item 1Financial Information**

 

**ALARIS MEDICAL, INC.CONDENSED CONSOLIDATED STATEMENTOF OPERATIONS (Unaudited)***(Dollar and share amounts inthousands, except per share data)*

 

 
|                                                                           |   | **Three  Months Ended  September 30,** |    | **Nine  Months Ended  September 30,** |   |
|--------------------------------------------------------------------------------|--------|----------------------------------------|---------|---------------------------------------|--------|
|                                                                           |   | **2002**                               |    | **2001**                              |   | **2002** |   | **2001** |   |
|                                                                           |   |                                   |    |                                  |   |   |   |   |   |
| Sales                                                                          |   | $                                      | 113,063 |                                  | $      | 103,624 |   | $ | 325,983 |   | $ | 300,983 |   |
|                                                                           |   |                                   |    |                                  |   |   |   |   |   |
| Cost of sales                                                                  |   | 55,519                                 |    | 53,776                                |   | 162,597 |   | 154,756 |   |
|                                                                           |   |                                   |    |                                  |   |   |   |   |   |
| Gross profit                                                                   |   | 57,544                                 |    | 49,848                                |   | 163,386 |   | 146,227 |   |
|                                                                           |   |                                   |    |                                  |   |   |   |   |   |
| Selling and  marketing expenses                                                |   | 22,512                                 |    | 19,301                                |   | 65,025 |   | 57,679 |   |
| General and  administrative expenses                                           |   | 10,108                                 |    | 11,944                                |   | 30,372 |   | 36,836 |   |
| Research and  development expenses                                             |   | 8,064                                  |    | 6,480                                 |   | 21,846 |   | 20,108 |   |
| Restructuring  and other non-recurring items                                   |   | —                                 |    | —                                |   | (585 | ) | 6,899 |   |
|                                                                           |   |                                   |    |                                  |   |   |   |   |   |
| Total operating  expenses                                                      |   | 40,684                                 |    | 37,725                                |   | 116,658 |   | 121,522 |   |
|                                                                           |   |                                   |    |                                  |   |   |   |   |   |
| Interest income  from sales-type capital leases                                |   | 1,080                                  |    | 1,252                                 |   | 3,391 |   | 3,905 |   |
|                                                                           |   |                                   |    |                                  |   |   |   |   |   |
| Income from  operations                                                        |   | 17,940                                 |    | 13,375                                |   | 50,119 |   | 28,610 |   |
|                                                                           |   |                                   |    |                                  |   |   |   |   |   |
| Other income  (expenses):                                                      |   |                                   |    |                                  |   |   |   |   |   |
| Interest income                                                                |   | 144                                    |    | 454                                   |   | 626 |   | 1,674 |   |
| Interest expense                                                               |   | (14,632                                | )       | (15,693                               | )      | (43,523 | ) | (44,981 | ) |
| Other, net                                                                     |   | (334                                   | )       | 56                                    |   | (635 | ) | (1,084 | ) |
| Total other  expense                                                           |   | (14,822                                | )       | (15,183                               | )      | (43,532 | ) | (44,391 | ) |
|                                                                           |   |                                   |    |                                  |   |   |   |   |   |
| Income (loss)  from continuing operations before income taxes                  |   | 3,118                                  |    | (1,808                                | )      | 6,587 |   | (15,781 | ) |
| Provision for  (benefit from) income taxes                                     |   | 1,246                                  |    | (592                                  | )      | 2,634 |   | (3,992 | ) |
|                                                                           |   |                                   |    |                                  |   |   |   |   |   |
| Income (loss)  from continuing operations                                      |   | 1,872                                  |    | (1,216                                | )      | 3,953 |   | (11,789 | ) |
|                                                                           |   |                                   |    |                                  |   |   |   |   |   |
| Discontinued  operations:                                                      |   |                                   |    |                                  |   |   |   |   |   |
| Gain on disposal  of business (net of applicable income tax expense of $2,492) |   | —                                 |    | —                                |   | — |   | 3,737 |   |
|                                                                           |   |                                   |    |                                  |   |   |   |   |   |
| Net income  (loss)                                                             |   | $                                      | 1,872   |                                  | $      | (1,216 | ) | $ | 3,953 |   | $ | (8,052 | ) |
|                                                                           |   |                                   |    |                                  |   |   |   |   |   |
| Income (loss)  per common share from continuing operations, basic              |   | $                                      | .03     |                                  | $      | (.02 | ) | $ | .07 |   | $ | (.20 | ) |
| Income (loss)  per common share from continuing operations, diluted            |   | $                                      | .03     |                                  | $      | (.02 | ) | $ | .06 |   | $ | (.20 | ) |
| Income per  common share from discontinued operations, basic and diluted       |   | $                                      | —  |                                  | $      | — |   | $ | — |   | $ | .06 |   |
| Net income  (loss) per common share, basic                                     |   | $                                      | .03     |                                  | $      | (.02 | ) | $ | .07 |   | $ | (.14 | ) |
| Net income  (loss) per common share, diluted                                   |   | $                                      | .03     |                                  | $      | (.02 | ) | $ | .06 |   | $ | (.14 | ) |
|                                                                           |   |                                   |    |                                  |   |   |   |   |   |
| Weighted average  common shares outstanding, basic                             |   | 59,507                                 |    | 58,845                                |   | 59,350 |   | 58,845 |   |
| Weighted average  common shares outstanding, diluted                           |   | 62,922                                 |    | 58,845                                |   | 62,112 |   | 58,845 |   |

 

*Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements*

 

 

3

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**ALARIS MEDICAL, INC.CONDENSED CONSOLIDATED BALANCE SHEET**

*(Dollar and share amounts inthousands, except per share data)*

 

 
|                                                                                                                                                         |   | **September  30,** |    | **December  31,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------|--------|
|                                                                                                                                                         |   | **2002**           |    | **2001**          |   |
|                                                                                                                                                         |   | **(Unaudited)**    |    |              |   |
|                                                                                                                                                         |   |               |    |              |   |
| **ASSETS**                                                                                                                                                   |   |
| Current assets:                                                                                                                                              |   |               |    |              |   |
| Cash and cash  equivalents                                                                                                                                   |   | $                  | 58,416  |              | $      | 51,200 |   |
| Receivables, net                                                                                                                                             |   | 82,254             |    | 67,893            |   |
| Inventories                                                                                                                                                  |   | 67,207             |    | 69,408            |   |
| Prepaid expenses  and other current assets                                                                                                                   |   | 37,807             |    | 33,815            |   |
| Total current  assets                                                                                                                                        |   | 245,684            |    | 222,316           |   |
|                                                                                                                                                         |   |               |    |              |   |
| Net investment  in sales-type capital leases, less current portion                                                                                           |   | 17,846             |    | 24,225            |   |
| Property, plant  and equipment, net                                                                                                                          |   | 55,755             |    | 57,607            |   |
| Other  non-current assets                                                                                                                                    |   | 29,497             |    | 31,201            |   |
| Goodwill, net                                                                                                                                                |   | 143,984            |    | 143,984           |   |
| Other intangible  assets, net                                                                                                                                |   | 90,664             |    | 92,394            |   |
|                                                                                                                                                         |   |               |    |              |   |
|                                                                                                                                                         |   | $                  | 583,430 |              | $      | 571,727 |   |
|                                                                                                                                                         |   |               |    |              |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                               |   |
|                                                                                                                                                         |   |               |    |              |   |
| Current  liabilities:                                                                                                                                        |   |               |    |              |   |
| Current portion  of long-term debt                                                                                                                           |   | $                  | —  |              | $      | 15,969 |   |
| Accounts payable                                                                                                                                             |   | 23,215             |    | 23,859            |   |
| Accrued expenses  and other current liabilities                                                                                                              |   | 57,049             |    | 53,120            |   |
| Total current  liabilities                                                                                                                                   |   | 80,264             |    | 92,948            |   |
| Long-term debt                                                                                                                                               |   | 522,751            |    | 509,258           |   |
| Other  non-current liabilities                                                                                                                               |   | 18,628             |    | 16,244            |   |
| Total  non-current liabilities                                                                                                                               |   | 541,379            |    | 525,502           |   |
|                                                                                                                                                         |   |               |    |              |   |
| Contingent  liabilities and commitments (Note 11)                                                                                                            |   |               |    |              |   |
|                                                                                                                                                         |   |               |    |              |   |
| Stockholders’  equity:                                                                                                                                  |   |               |    |              |   |
| Non-redeemable  preferred stock, authorized 9,000 shares, issued and outstanding: none                                                                       |   | —             |    | —            |   |
| Common stock,  authorized 75,000 shares at $.01 par value;   issued 59,976 and 59,407 shares at September 30, 2002 and December 31,  2001, respectively |   | 600                |    | 594               |   |
| Capital in  excess of par value                                                                                                                              |   | 151,189            |    | 149,325           |   |
| Accumulated  deficit                                                                                                                                         |   | (181,635           | )       | (185,588          | )      |
| Treasury stock,  at cost, 453 shares issued at September 30, 2002 and December 31, 2001                                                                      |   | (2,027             | )       | (2,027            | )      |
| Accumulated  other comprehensive loss                                                                                                                        |   | (6,340             | )       | (9,027            | )      |
| Total  stockholders’ equity                                                                                                                             |   | (38,213            | )       | (46,723           | )      |
|                                                                                                                                                         |   |               |    |              |   |
|                                                                                                                                                         |   | $                  | 583,430 |              | $      | 571,727 |   |

 

*The accompanying notes are anintegral part of these condensed consolidated financial statements*

 

4

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**ALARIS MEDICAL, INC.CONDENSED CONSOLIDATED STATEMENTOF CASH FLOWS (Unaudited)***(Dollars in thousands)*

 
|                                                                                      |   | **Nine  Months Ended** |   |
|-------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                      |   | **September  30,**     |   |
|                                                                                      |   | **2002**               |   | **2001** |   |
|                                                                                      |   |                   |   |   |   |
| Cash flows from  operating activities:                                                    |   |                   |   |   |   |
| Net income  (loss)                                                                        |   | $                      | 3,953  |   | $ | (8,052 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |   |                   |   |   |   |
| Depreciation and  amortization                                                            |   | 17,409                 |   | 23,547 |   |
| Stock options  granted to non-employees for services                                      |   | 100                    |   | — |   |
| Net loss on  disposal of property, plant and equipment                                    |   | 442                    |   | 112 |   |
| Debt discount  and issue costs amortization                                               |   | 1,993                  |   | 2,168 |   |
| Accretion of  bond and paid-in-kind interest                                              |   | 13,493                 |   | 13,805 |   |
| Gain on sale of  Instromedix                                                              |   | —                 |   | (3,737 | ) |
| (Increase)  decrease in assets:                                                           |   |                   |   |   |   |
| Receivables, net                                                                          |   | (12,563                | )      | 7,040 |   |
| Inventories                                                                               |   | 2,407                  |   | (10,177 | ) |
| Prepaid expenses  and other current assets                                                |   | (3,919                 | )      | (3,029 | ) |
| Net investment  in sales-type capital leases, non-current portion                         |   | 6,379                  |   | 102 |   |
| Other non-current  assets                                                                 |   | (871                   | )      | (708 | ) |
| Increase  (decrease) in liabilities:                                                      |   |                   |   |   |   |
| Accounts payable                                                                          |   | (1,187                 | )      | 2,512 |   |
| Accrued expenses  and other current liabilities                                           |   | 3,712                  |   | 15,025 |   |
| Other  non-current liabilities                                                            |   | 2,383                  |   | 1,927 |   |
| Net cash  provided by operating activities                                                |   | 33,731                 |   | 40,535 |   |
|                                                                                      |   |                   |   |   |   |
| Cash flows from  investing activities:                                                    |   |                   |   |   |   |
| Net capital  expenditures                                                                 |   | (11,699                | )      | (9,597 | ) |
| Payments for  product licenses and distribution rights                                    |   | —                 |   | (625 | ) |
| Patents,  trademarks and other                                                            |   | (922                   | )      | (478 | ) |
| Net proceeds  from sale of discontinued business                                          |   | —                 |   | 8,069 |   |
|                                                                                      |   |                   |   |   |   |
| Net cash used in  investing activities                                                    |   | (12,621                | )      | (2,631 | ) |
|                                                                                      |   |                   |   |   |   |
| Cash flows from  financing activities:                                                    |   |                   |   |   |   |
| Principal  payments on long-term debt and capital lease obligations                       |   | (15,969                | )      | (14,930 | ) |
| Proceeds from  exercise of stock options                                                  |   | 1,695                  |   | — |   |
| Deferred  financing costs                                                                 |   | —                 |   | (658 | ) |
|                                                                                      |   |                   |   |   |   |
| Net cash used in  financing activities                                                    |   | (14,274                | )      | (15,588 | ) |
| Effect of  exchange rate changes on cash                                                  |   | 380                    |   | (186 | ) |
|                                                                                      |   |                   |   |   |   |
| Net increase in  cash                                                                     |   | 7,216                  |   | 22,130 |   |
| Cash and cash  equivalents at beginning of period                                         |   | 51,200                 |   | 30,630 |   |
|                                                                                      |   |                   |   |   |   |
| Cash and cash  equivalents at end of period                                               |   | $                      | 58,416 |   | $ | 52,760 |   |

 

*Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements*

 

5

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**CONDENSED CONSOLIDATED STATEMENT OFCHANGES****IN****STOCKHOLDERS’ EQUITY (Unaudited)***(Dollar and share amounts inthousands)*

 
|                                                                                    |   | **Common  Stock** |   | **Capital in  Excess of** |   | **Accumulated** |   | **Treasury  Stock** |   | **Accumulated  Other Compre-hensive** |     | **Total  Stockholders’** |   | **Compre-hensive** |   |
|-----------------------------------------------------------------------------------------|--------|-------------------|--------|---------------------------|--------|-----------------|--------|---------------------|--------|---------------------------------------|----------|-------------------------------|--------|--------------------|--------|
|                                                                                    |   | **Shares**        |   | **Amount**                |   | **Par Value**   |   | **Deficit**         |   | **Shares**                            |     | **Amount**                    |   | **Loss**           |   | **Equity** |   | **Income** |   |
|                                                                                    |   |              |   |                      |   |            |   |                |   |                                  |     |                          |   |               |   |   |   |   |    |
| Balance at December 31, 2001                                                            |   | 59,407            |   | $                         | 594    |            | $      | 149,325             |   | $                                     | (185,588 | )                             | 453    |               | $      | (2,027 | ) | $ | (9,027 | ) | $ | (46,723 | ) |   |   |
|                                                                                    |   |              |   |                      |   |            |   |                |   |                                  |     |                          |   |               |   |   |   |   |   |
| Comprehensive income:                                                                   |   |              |   |                      |   |            |   |                |   |                                  |     |                          |   |               |   |   |   |   |   |
| Net income for the period                                                               |   |              |   |                      |   |            |   |                | 3,953  |                                  |     |                          |   |               |   |   | 3,953 |   | $ | 3,953 |   |
| Equity adjustment from foreign currency translation                                     |   |              |   |                      |   |            |   |                |   |                                  |     |                          |   | 2,784              |   | 2,784 |   | 2,784 |   |
| Effects of cash flow hedges included in other comprehensive income  (net of tax of $70) |   |              |   |                      |   |            |   |                |   |                                  |     |                          |   | (97                | )      | (97 | ) | (97 | ) |
| Comprehensive income                                                                    |   |              |   |                      |   |            |   |                |   |                                  |     |                          |   |               |   |   |   | $ | 6,640 |   |
| Stock options granted to non-employees for services                                     |   |              |   |                      |   | 100             |   |                |   |                                  |     |                          |   |               |   | 100 |   |   |   |
| Exercise of stock options                                                               |   | 569               |   | 6                         |   | 1,689           |   |                |   |                                  |     |                          |   |               |   | 1,695 |   |   |   |
| Tax benefit from exercise of stock options                                              |   |              |   |                      |   | 75              |   |                |   |                                  |     |                          |   |               |   | 75 |   |   |   |
|                                                                                    |   |              |   |                      |   |            |   |                |   |                                  |     |                          |   |               |   |   |   |   |   |
| Balance at September 30, 2002                                                           |   | 59,976            |   | $                         | 600    |            | $      | 151,189             |   | $                                     | (181,635 | )                             | 453    |               | $      | (2,027 | ) | $ | (6,340 | ) | $ | (38,213 | ) |   |   |

 

 

*Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements*

 

6

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**ALARIS MEDICAL, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)***(Dollars and share amounts in thousands, except per share data)*

 

 

**NOTE 1 — BUSINESS AND STATEMENT OFACCOUNTING POLICY**

 

**The Company:**

                ALARIS Medical, Inc. (“ALARISMedical”) was originally incorporated under the name “Advanced MedicalTechnologies, Inc.” on September 28, 1988. ALARIS Medical is a holding company for its operating subsidiary, ALARISMedical Systems, Inc. (“ALARIS Medical Systems”), which was formed by themerger of two pioneers in infusion systems, IMED Corporation (then an ALARISMedical subsidiary) and IVAC Medical Systems, Inc., on November 26, 1996.ALARIS Medical and its subsidiaries are collectively referred to as the“Company” or “ALARIS.”

 

**Statement of accounting policy:**

                The accompanying financial statementshave been prepared by the Company without audit pursuant to the rules andregulations of the Securities and Exchange Commission.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with generallyaccepted accounting principles have been condensed or omitted pursuant to thoserules and regulations, although the Company believes that the disclosuresherein are adequate to make the information not misleading.

 

                In the opinion of the Company,the accompanying financial statements contain all adjustments, consisting ofnormal recurring adjustments, necessary for a fair statement of the Company’sfinancial position as of September 30, 2002, the results of its operations forthe three and nine months ended September 30, 2002 and 2001, and its cash flowsfor the nine months ended September 30, 2002 and 2001.

 

**Use of estimates:**

                The preparation of financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof revenues, costs and expenses, assets, liabilities and related disclosure ofcontingent amounts. While we believe our estimates and assumptions arereasonable, the inherent nature of estimates is that actual results will likelybe different from the estimates made.

 

**Reclassifications:**

                Certain prior period amountshave been reclassified to conform to the current period presentation.

 

**Shipping and handling fees and costs:**

                Shipping and handling costs forcustomer sales are classified as a selling and marketing expense.  Shipping and handling costs for customersales for the three and nine months ended September 30, 2002 were $2,369 and$6,160, respectively.  Shipping andhandling costs for customer sales for the three and nine months ended September30, 2001, were $2,110 and $6,564, respectively.

 

7

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**NOTE 2 — GOODWILL AND OTHERINTANGIBLE ASSETS — ADOPTION OF FASB**

**STATEMENTS 141 AND 142**

 

Effective January 1, 2002, the Company adoptedStatement of Financial Accounting Standards No. 142, *Goodwill and Intangible Assets*(“FAS 142”) and No. 141, *Business Combinations* (“FAS 141”), whichwere issued by the Financial Accounting Standards Board in July 2001. Under FAS 142, goodwill and intangible assetswith indefinite lives are no longer amortized but are reviewed annually (ormore frequently if impairment indicators arise) for impairment.  Separable intangible assets that are notdeemed to have indefinite lives will continue to be amortized over their usefullives (but with no maximum life). FAS 141 requires all businesscombinations initiated after June 30, 2001 to be accounted for using thepurchase method and eliminates the pooling-of-interests–method of accounting.  Intangible assets that do not meet certaindefined criteria in FAS 141 for recognition apart from goodwill shall bereclassified as goodwill as of the date FAS 142 is initially applied inits entirety. As required by FAS 142, the Company has completed anassessment of the categorization of its existing intangible assets and goodwillin accordance with the new criteria and has reported them appropriately on thecondensed consolidated balance sheet. In accordance with FAS 141, the Company reclassified its workforce, netof its related deferred tax liability, as goodwill.  The Company performed a transitional goodwill impairment test anddetermined the asset not to be impaired.

 

Upon adoption of FAS 142, the Company determined thatintangible assets related to the “IVAC” tradename and trademarks had anindefinite life and in accordance with FAS 142, should not be amortized asthere are no legal, regulatory, contractual, economic or other factors thatlimit the useful life of these intangible assets to the reporting units.  As of September 30, 2002, there was noimpairment loss associated with such indefinite-lived intangible assets astheir fair value exceeds the carrying amount.

 

Intangible assets with finite lives will continue tobe amortized over the expected economic lives of the intangible assets.  The Company reassessed the useful lives ofits intangible assets and determined no change in useful lives to be requiredfor its finite-lived assets.

 

Under these standards, the Company ceased amortizing goodwill totaling$143,984, including $2,714 ($4,523 before tax effect) of its workforcepreviously classified as an other intangible asset, and trademarks totaling$74,750 as of January 1, 2002.  Adoptionof the new standards resulted in not recognizing $2,316 and $6,948 inamortization expense for the three and nine months ended September 30, 2002,respectively, that would have been recognized had the previous standards beenin effect.

 

8

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The followingtable presents the impact of FAS 141 and FAS 142 on income from operations, netloss and loss per common share, as if they had been in effect for the three andnine months ended September 30, 2001.

 
|                                                                                         |   | **Three  Months Ended** |   | **Nine  Months Ended** |   |
|----------------------------------------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                                                                         |   | **September  30,**      |   | **September  30,**     |   |
|                                                                                         |   | **2001**                |   | **2001**               |   |
|                                                                                         |   |                    |   |                   |   |
| Income from  operations, as reported                                                         |   | $                       | 13,375 |                   | $      | 28,610 |   |
| Goodwill  amortization                                                                       |   | 1,440                   |   | 4,320                  |   |
| Workforce  amortization                                                                      |   | 126                     |   | 378                    |   |
| Tradename and  trademark amortization                                                        |   | 750                     |   | 2,250                  |   |
| Pro forma income  from operations                                                            |   | $                       | 15,691 |                   | $      | 35,558 |   |
|                                                                                         |   |                    |   |                   |   |
| Loss from  continuing operations, as reported                                                |   | $                       | (1,216 | )                      | $      | (11,789 | ) |
| Goodwill  amortization                                                                       |   | 1,440                   |   | 4,320                  |   |
| Workforce  amortization                                                                      |   | 126                     |   | 378                    |   |
| Tradename and  trademark amortization                                                        |   | 750                     |   | 2,250                  |   |
| Tax effect                                                                                   |   | (350                    | )      | (1,050                 | )      |
| Pro forma income  (loss) from continuing operations                                          |   | $                       | 750    |                   | $      | (5,891 | ) |
|                                                                                         |   |                    |   |                   |   |
| Net loss, as  reported                                                                       |   | $                       | (1,216 | )                      | $      | (8,052 | ) |
| Goodwill  amortization                                                                       |   | 1,440                   |   | 4,320                  |   |
| Workforce  amortization                                                                      |   | 126                     |   | 378                    |   |
| Tradename and  trademark amortization                                                        |   | 750                     |   | 2,250                  |   |
| Tax effect                                                                                   |   | (350                    | )      | (1,050                 | )      |
| Pro forma net  income (loss)                                                                 |   | $                       | 750    |                   | $      | (2,154 | ) |
|                                                                                         |   |                    |   |                   |   |
| Basic and  diluted loss per common share from continuing operations, as reported             |   | $                       | (.02   | )                      | $      | (.20 | ) |
| Aggregated  change in amortization, net of tax                                               |   | .03                     |   | .10                    |   |
| Pro forma basic  and diluted income (loss) per common share from continuing  operations |   | $                       | .01    |                   | $      | (.10 | ) |
|                                                                                         |   |                    |   |                   |   |
| Basic and  diluted net loss per common share, as reported                                    |   | $                       | (.02   | )                      | $      | (.14 | ) |
| Aggregated  change in amortization, net of tax                                               |   | .03                     |   | .10                    |   |
| Pro forma basic  and diluted net income (loss) per common share                              |   | $                       | .01    |                   | $      | (.04 | ) |

 

9

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Acquired otherintangible assets were as follows:

 
|                                                             |   | **September  30, 2002** |    | **December  31, 2001** |   |
|------------------------------------------------------------------|--------|-------------------------|---------|------------------------|--------|
|                                                             |   | **Gross**               |    | **Accumulated**        |   | **Gross** |   | **Accumulated** |   |
|                                                             |   | **Amount**              |    | **Amortization**       |   | **Amount** |   | **Amortization** |   |
|                                                             |   |                    |    |                   |   |   |   |   |   |
| Patents                                                          |   | $                       | 28,946  |                   | $      | 17,736 |   | $ | 28,946 |   | $ | 16,550 |   |
| Distribution  rights and license agreements                      |   | 8,578                   |    | 3,874                  |   | 8,578 |   | 3,330 |   |
| Subtotal other  intangible assets, net (subject to amortization) |   | 37,524                  |    | 21,610                 |   | 37,524 |   | 19,880 |   |
|                                                             |   |                    |    |                   |   |   |   |   |   |
| Acquired other  intangible assets (not subject to amortization): |   |                    |    |                   |   |   |   |   |   |
|                                                             |   |                    |    |                   |   |   |   |   |   |
| IVAC tradename  and trademarks                                   |   | 90,000                  |    | 15,250                 |   | 90,000 |   | 15,250 |   |
|                                                             |   |                    |    |                   |   |   |   |   |   |
| Other intangible  assets, net                                    |   | $                       | 127,524 |                   | $      | 36,860 |   | $ | 127,524 |   | $ | 35,130 |   |

 

                For the quarter ended September30, 2002 and 2001, amortization expense for other intangible assets, net was$561 and $1,338, respectively.   For thenine months ended September 30, 2002 and 2001, amortization expense for otherintangible assets, net was $1,730 and $4,018, respectively.  The estimated future annual amortizationexpense for other intangible assets, net is as follows:

 
| **Fiscal Year** |   |   |   |
|-----------------|--------|--------|--------|
| 2002 (A)        |   | $      | 621    |   |
| 2003            |   | 2,219  |   |
| 2004            |   | 2,182  |   |
| 2005            |   | 2,182  |   |
| 2006            |   | 2,130  |   |
| 2007            |   | 1,774  |   |
|                 |        |        |        |  |

----

(A) Amountrepresents remaining estimated amortization expense for 2002.

 

**NOTE3 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES**

 

**Foreign currency:**

 

                As of September 30, 2002, theCompany’s only derivatives in place were forward contracts valued at negative$99 and designated as hedges of anticipated cash flows in various foreigncurrencies and foreign currency option contracts valued at $69 to hedgeanticipated transactions (primarily the Euro).

 

                As part of the Company’s riskmanagement strategy, management put in place a hedging program beginning in2001 under which the Company enters into forward foreign exchange and currencyoption contracts to hedge a portion of forecasted cash receipts and paymentsdenominated in currencies other than the U.S. dollar.  These contracts are entered into to reduce the risk that theCompany’s earnings and cashflows resulting from certain forecasted transactionswill be affected by changes in foreign currency exchange rates.  However, the Company may be impacted bychanges in foreign exchange rates related to 

 

10

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the unhedgedportion of the forecasted transactions. The success of the hedging programdepends, in part, on forecasts of Company transactions in various currencies(primarily the Euro).  Hedges are placedfor periods consistent with identified exposures, but generally no longer thanthe end of the year for which we have substantially completed our annual businessplan. The Company may experience unanticipated foreign currency exchange gainsor losses to the extent that there are timing differences between forecastedand actual activity during periods of currency volatility.  However, since the critical terms ofcontracts designated as cash flow hedges are the same as the underlyingforecasted transaction, changes in fair value of contracts should be highlyeffective in offsetting the change in value of the expected cash flows from theforecasted transaction.  The ineffectiveportion of any changes in the fair value of option contracts designated ashedges is recognized immediately in earnings. The Company did not recognize material gains or losses resulting fromeither hedge ineffectiveness or changes in forecasted transactions during thenine months ended September 30, 2002.

 

                The effective portion of anychanges in the fair value of the derivative instruments, designated as cashflowhedges, is recorded in other comprehensive income (OCI) until the hedged forecastedtransaction occurs.  Once the forecastedtransaction occurs, the effective portion of any related gains or losses on thecash flow hedge is reclassified from OCI to earnings.  In the event the hedged forecasted transaction does not occur, orit becomes probable that it will not occur, the ineffective portion of any gainor loss on the related cashflow hedge would be reclassified from OCI toearnings at that time.

 

                For the three and nine monthsended September 30, 2002, the Company recognized net charges related to thedesignated cashflow hedges of forecasted transactions in the amounts of $300and $498, respectively, in other expense, which consisted entirely of premiumcosts for option contacts.  At September30, 2002, $312 ($184 after tax) was included in accumulated other comprehensiveloss.  This represents the remainingoption premium costs net of the market value of the open option contracts thatare designated as cash flow hedges. This loss is expected to be charged to earnings over the next threemonths as the hedged transactions occur.

 

In addition to forecasted cashflow transactions, theCompany hedges the majority of its net recognized foreign currencytransactional exposures with forward foreign exchange contracts to reduce therisk that the Company’s earnings and cashflows will be affected by changes inforeign currency exchange rates.  Thesederivative instruments do not subject the Company’s earnings or cash flows tomaterial risk due to exchange rate movements because gains and losses on thesecontracts offset losses and gains on the assets and liabilities beinghedged.  These forward foreign exchangecontracts are generally entered into for periods of one to six months. The losson forward foreign exchange contracts for the nine months ended September 30,2002 was $1,339 and is included in other expense.  This loss was substantially offset by unrealized gains on theunderlying assets hedged. For the nine months ended September 30, 2002, the netcharge to other income and expense for all foreign exchange transactions,realized and unrealized, was $73.

 

 

 

11

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**NOTE 4 — SALE OF INSTROMEDIX**

 

                On August 31, 2000, pursuant to an Asset PurchaseAgreement dated as of August 17, 2000, the Company sold the assets and certainliabilities of its Instromedix division to Card Guard Technologies, Inc.(“Buyer”) for $30,000 in cash (the “Sale”).

 

The Asset Purchase Agreement and the other agreementsexecuted in connection with the Sale required the Company to assist Buyer insetting up a fully independent headquarters and manufacturing facility in SanDiego, California. Pursuant to these agreements, $5,000 of the $30,000 purchaseprice was placed in escrow. The Company received such escrowed amount, after certainoffsets, upon completion of its obligations under the agreements in the firstquarter of 2001 and recognized a gain. The total after-tax gain recordedrelated to the Sale was $5,576, with $3,737, or $.06 per share, recorded during2001 and $1,839, or $.03 per share recorded in 2000.

 

**NOTE5 — INVENTORIES**

 

Inventoriescomprise the following:
|            |   | **September  30,** |   | **December  31,** |   |
|-----------------|--------|--------------------|--------|-------------------|--------|
|            |   | **2002**           |   | **2001**          |   |
|            |   |               |   |              |   |
| Raw materials   |   | $                  | 37,808 |              | $      | 40,546 |   |
| Work-in-process |   | 5,703              |   | 4,993             |   |
| Finished goods  |   | 23,696             |   | 23,869            |   |
|            |   | $                  | 67,207 |              | $      | 69,408 |   |

 

**NOTE 6 —LONG-TERM DEBT**

 

**Convertible Debentures:**

 

                ALARIS Medical’s 7-1/4%convertible subordinated debentures (“Convertible Debentures”) were retired attheir scheduled maturity on January 15, 2002.

 

The indentures governing ALARIS Medical Systems’11-5/8% senior secured notes and 9-3/4% senior subordinated notes permit ALARISMedical Systems to use $15,000 of its cash on hand to invest in a wholly ownedunrestricted subsidiary. ALARIS Medical Systems made such investment and theunrestricted subsidiary used a portion of the proceeds of such investment toacquire $183 in principal amount of the Convertible Debentures at anapproximate 1% discount in the open market in 2001.  In 2002, the remaining $14,812 was loaned to ALARIS Medical,which used the proceeds of such loan and proceeds from the exercise of stockoptions to retire the $15,969 of Convertible Debentures.  A portion of the stock option exerciseproceeds resulted from the exercise by some of our executive officers of stockoptions.  In connection with theexercise, three of our executive officers received interest-bearing, short-termloans, aggregating $620, from ALARIS Medical Systems.  These loans were subsequently repaid in full.  ALARIS Medical was entitled to require suchexecutive officers to exercise such options in order to provide ALARIS Medicalwith sufficient funds to retire the Convertible Debentures.  Such options were granted to these executiveofficers in anticipation of ALARIS Medical’s need to require such exercise inorder to complete the retirement of the Convertible Debentures.

 

12

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**NOTE 7 — EARNINGS PER SHARE**

 

                Basic net earnings (loss) percommon share have been computed using the weighted-average number of shares ofcommon stock outstanding. Diluted net earnings (loss) per share is computedusing the weighted-average number of common stock outstanding during the periodincreased to include dilutive potential common shares that were outstandingduring the period.  Diluted earnings(loss) per share from discontinued operations and total diluted earnings (loss)per share are calculated using the weighted average shares for continuingoperations earnings (loss) per share.

 

                For the quarter ended September30, 2002, both basic and diluted earnings per share were $.03, using weightedaverage common shares of 59,507 for basic, and weighted average common sharesand common stock equivalents of 62,922 for diluted earnings per share. For thenine months ended September 30, 2002, basic and diluted earnings per share were$.07 and .06, using weighted average common shares of 59,350 for basic andweighted average common shares and common stock equivalents of 62,112, fordiluted earnings per share.  Weightedaverage common shares used in the calculation of diluted earnings per share forthe three and nine months ended September 30, 2002, includes common stockequivalents of 3,415 and 2,762, respectively. For the three and nine months ended September 30, 2002, options to purchase309 and 263 shares of common stock, respectively, were excluded from thecalculation of common stock equivalents becausethe options have an exercise price greater than or equal to the average marketvalue of ALARIS Medical’s common stock during the period. For the three andnine months ended September 30, 2002, the average market value was $5.91 and$4.55, respectively.

 

                As the Company experienced a netloss from continuing operations for the three and nine months ended September30, 2001, basic and diluted net loss per share are the same.   If the Company had earnings from continuingoperations for the three and nine months ended September 30, 2001, common stockequivalents of 4 and 387, respectively would have been added to the weightedaverage shares outstanding**.** For the three and nine months ended September 30, 2001, options topurchase 5,493 and 6,185 shares of common stock, respectively, were excludedfrom the calculation of common stock equivalents because the options have an exercise price greater than or equal to theaverage market value of ALARIS Medical’s common stock during the period. Forthe three and nine months ended September 30, 2001, the average market valuewas $1.64 and $1.43, respectively.

 

                Shares issuable upon the assumed conversionof ALARIS Medical’s 7-1/4% convertible subordinated debentures were notincluded in the calculation of diluted earnings per share for the three andnine months ended September 30, 2001 as the impact would have beenanti-dilutive.  The $16,152 of suchConvertible Debentures outstanding at September 30, 2001, if converted at anexercise price of $18.14 per share, would have resulted in an increase of 890common shares and an increase of $176 and $528, net of taxes, to net income,due to the reduction in interest expense.

 

**NOTE 8 — SEGMENT INFORMATION**

 

                The Company’s segmentperformance is based on results of two geographical business segments withinthe same line of business - North America and International.

 

                The Company is organizedprimarily based on geographic location with the United States and Canada druginfusion and patient monitoring business, and Mexico manufacturing activities,representing 

 

13

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the North Americasegment. All other international operations, including Europe, Asia, Australiaand Latin America, represent the International segment.

 

                The accounting policies of thesegments are the same as those described in the consolidated financialstatements included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2001. The geographical data does not include intersegmentrevenues.  All expenses associated withthe corporate headquarters appear in the North America business unit. TheCompany evaluates the performance of its segments based on operating income andadjusted earnings before interest, taxes, depreciation, and amortization(EBITDA). Adjusted EBITDA represents income from operations beforerestructuring, other non-recurring items, depreciation and amortization.Adjusted EBITDA does not represent net income or cash flows from operations, asthese terms are defined under generally accepted accounting principles, andshould not be considered as an alternative to net income as an indicator of theCompany’s operating performance or to cash flows as a measure of liquidity.

 

The table belowpresents information about reported segments for the:

 

Three months endedSeptember 30,

 
|             |   | **North**   |   |              |   |      |   |
|------------------|--------|-------------|--------|-------------------|--------|-----------|--------|
|             |   | **America** |   | **International** |   | **Total** |   |
| **2002**         |   |        |   |              |   |      |   |
| Sales            |   | $           | 78,060 |              | $      | 35,003    |   | $ | 113,063 |   |
| Operating income |   | 9,998       |   | 7,942             |   | 17,940    |   |
| Adjusted EBITDA  |   | 14,168      |   | 9,816             |   | 23,984    |   |
|             |   |        |   |              |   |      |   |
| **2001**         |   |        |   |              |   |      |   |
| Sales            |   | $           | 74,475 |              | $      | 29,149    |   | $ | 103,624 |   |
| Operating income |   | 7,994       |   | 5,381             |   | 13,375    |   |
| Adjusted EBITDA  |   | 14,146      |   | 7,118             |   | 21,264    |   |
|             |   |        |   |              |   |      |   |

 

Reconciliation oftotal segment adjusted EBITDA to consolidated income (loss) from continuingoperations before income taxes:

 
|                                                                       |   | **2002** |   | **2001** |   |
|----------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| **Adjusted EBITDA**                                                        |   |     |   |     |   |
| Total adjusted  EBITDA                                                     |   | $        | 23,984 |     | $      | 21,264 |   |
| Depreciation and  amortization                                             |   | (6,044   | )      | (7,889   | )      |
| Interest, net                                                              |   | (14,488  | )      | (15,239  | )      |
| Other  reconciling items                                                   |   | (334     | )      | 56       |   |
| Consolidated  income (loss) from continuing operations before income taxes |   | $        | 3,118  |     | $      | (1,808 | ) |

 

 

14

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Nine months endedSeptember 30,
|             |   | **North**   |    |              |   |      |   |
|------------------|--------|-------------|---------|-------------------|--------|-----------|--------|
|             |   | **America** |    | **International** |   | **Total** |   |
| **2002**         |   |        |    |              |   |      |   |
| Sales            |   | $           | 224,965 |              | $      | 101,018   |   | $ | 325,983 |   |
| Operating income |   | 27,943      |    | 22,176            |   | 50,119    |   |
| Adjusted EBITDA  |   | 38,936      |    | 28,007            |   | 66,943    |   |
|             |   |        |    |              |   |      |   |
| **2001**         |   |        |    |              |   |      |   |
| Sales            |   | $           | 207,462 |              | $      | 93,521    |   | $ | 300,983 |   |
| Operating income |   | 10,514      |    | 18,096            |   | 28,610    |   |
| Adjusted EBITDA  |   | 35,698      |    | 23,358            |   | 59,056    |   |

 

Reconciliation oftotal segment adjusted EBITDA to consolidated income (loss) from continuingoperations before income taxes:

 
|                                                                       |   | **2002** |   | **2001** |   |
|----------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| **Adjusted  EBITDA**                                                       |   |     |   |     |   |
| Total adjusted  EBITDA                                                     |   | $        | 66,943 |     | $      | 59,056 |   |
| Depreciation and  amortization                                             |   | (17,409  | )      | (23,547  | )      |
| Interest, net                                                              |   | (42,897  | )      | (43,307  | )      |
| Restructuring  and other non-recurring items                               |   | 585      |   | (6,899   | )      |
| Other  reconciling items                                                   |   | (635     | )      | (1,084   | )      |
| Consolidated  income (loss) from continuing operations before income taxes |   | $        | 6,587  |     | $      | (15,781 | ) |

 

**NOTE 9****-****CASH FLOW INFORMATION**

 

                For the nine months endedSeptember 30, 2002, Federal, state and foreign income taxes paid, net of taxrefunds, totaled $7,097. For the nine months ended September 30, 2001, Federal,state and foreign income taxes paid, net of tax refunds, resulted in a cashinflow of $1,770.  Interest paid duringthe nine months ended September 30, 2002 and 2001 totaled $21,706 and $22,507,respectively.

 

**NOTE 10****-****RESTRUCTURING AND OTHERNON-RECURRING ITEMS**

 

The Company did not record restructuring ornon-recurring items during the second or third quarters of 2002.  During the first quarter of 2002, theCompany recorded a non-recurring benefit of $1,125 for an insurancesettlement.  The settlement related todamages and losses incurred at one of the Company’s disposable productsmanufacturing plants in Mexico in 1993 as a result of flooding.  The contingency related to the insurancesettlement was resolved in the first quarter of 2002, when the Company receivedproceeds of  $1,020 during the quarterand notification of an additional payment due of $105, which was receivedduring April 2002.

 

During the first quarter of 2002, the Companyinitiated a plan to restructure its technical services operations in CentralEurope.  In this connection, the Companyrecorded a charge of $540, which included $400 of severance costs for 21positions affected by the relocation of the German operation and $140 

 

15

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related to lease termination. As of September 30, 2002, all of the severance costs have been paid tothe identified employees.

 

                Restructuring and othernon-recurring charges of $6,899 during the nine months ended September 30, 2001included $3,520 of legal, advisory and consultant expenses related to obtainingan amendment to the ALARIS Medical Systems’ bank credit agreement.  This amendment was completed in April2001.  The Company also recorded $3,379for restructuring activities.  Theseactivities related to streamlining of operations in the North American businessand resulted in the elimination of 71 positions.  The restructuring charges were composed of severance and related benefitsof $2,879 and consulting fees of approximately $500.  Adjusted EBITDA for the nine months ended September 30, 2002 and2001 excludes the non-recurring items.

 

**NOTE 11 — CONTINGENCIES ANDLITIGATION**

 

**Litigation**

 

                On December 5, 2000, theCompany filed a lawsuit in the United States District Court for the SouthernDistrict of California against Filtertek, Inc., seeking a declaration that theCompany’s own needle-free system does not infringe a Filtertek patent relatingto a Filtertek needle-free device as well as seeking unspecified damages andequitable relief from Filtertek, for infringement of a patent relating to aneedle-free system licensed to the Company on an exclusive basis by Medex,Inc.  On March 9, 2001, Filtertekfiled a lawsuit in the United States District Court for the Northern Districtof Illinois seeking unspecified damages and equitable relief from the Companyclaiming that the Company’s needle-free system infringes the Filtertek patentand seeking, as well, a declaration, against Medex only, that Filtertek’sneedle-free device does not infringe the needle-free system patent licensed tothe Company by Medex. The Company subsequently withdrew its claim for damagesand equitable relief relating to the Medex patent. As a result of motions madeby the parties, the California action was transferred to the Illinoiscourt.  The Illinois court granted theCompany’s motion to bifurcate discovery related to liability and damages.  Discovery relating to liability recentlyended, while discovery relating to damages is currently abated.  The Court-appointed Special Master conducteda claims construction hearing and provided the Court with recommendations onhow the single claim of the patent which is at issue should be construed, whichthe Court has since adopted.

 

                The Company believes that it hasmeritorious defenses to all of Filtertek’s claims and it intends to defenditself vigorously.  The Company hasoffered to submit to mediation or arbitration to expedite the resolution ofthis case, but the Company and Filtertek have not reached agreement to doso.  Based on the evidence to date, theCompany intends to move for a summary adjudication of the claims.  If that does not resolve all claims, theCompany will press for a prompt trial of the remaining claims.  There can be no assurance that the Company’sdefenses will defeat all of Filtertek’s claims and the failure to do so couldhave a material adverse effect on the Company’s business, financial condition,results of operations and cash flows.

 

16

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**United States Customs Service Matter**

 

***               ***During the years 1988 through 1995, CalPacifico acted as the Company’s United States customs broker and importer ofrecord with respect to the importation into the United States of finishedproducts assembled at the Company’s two maquiladora assembly plants in Tijuana,Mexico. Cal Pacifico received a pre-penalty notice of intent from the UnitedStates Customs Service (“Customs”) to assess additional duties and penaltiesagainst Cal Pacifico for its alleged failure to comply with certain documentaryrequirements regarding the importation of goods on behalf of its clients,including the Company.  The Companybelieves that it is unlikely that Customs will assess any portion of thedisputed amounts against the Company. Customs has not initiated any proceedings against the Company in respectof such matters.  Nonetheless, CalPacifico advised the Company that it may seek recovery from the Company,through arbitration, for any portion of the disputed amounts which it isrequired to pay to Customs. The ultimate outcome of such proceeding cannot bepredicted, nor is the Company able to estimate the possible loss resulting fromsuch proceeding, should one occur. The Company believes that it has meritoriousdefenses to claims Cal Pacifico might raise against the Company.  Although management does not believe it isprobable that the Cal Pacifico dispute will result in a material claim againstthe Company, it will continue to monitor the matter.

 

**Other**

 

                The Company is also a defendantin various actions, claims, and legal proceedings arising from its normalbusiness operations. Management believes they have meritorious defenses andintends to vigorously defend against all allegations and claims. As theultimate outcome of these matters is uncertain, no contingent liabilities orprovisions have been recorded in the accompanying financial statements for suchmatters. However, in management’s opinion, based on discussions with legal counsel,liabilities arising from such matters, if any, will not have a material adverseeffect on the Company’s business, financial condition, results of operations orcash flows.

 

17

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**Part I —Item 2**

**Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

**FORWARD-LOOKING STATEMENTS**

 

                Certain of the matters discussedin this report, including, without limitation, matters discussed under Item 2,“Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” may constitute forward–looking statements within the meaningof Section 21E of the Securities Exchange Act of 1934, as amended. Certain ofthese forward–looking statements can be identified by the use of forward–lookingterminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,”“approximately,” “intends,” “plans,” “estimates,” or “anticipates” or thenegative of these terms or other comparable terminology, or by discussions ofstrategy, plans or intentions. Statements contained in this report that are nothistorical facts are forward-looking statements.  Without limiting the generality of the preceding statement, allstatements in this report concerning or relating to estimated and projectedearnings, margins, costs, expenditures, cash flows, growth rates and financialresults are forward-looking statements. In addition, through our seniormanagement, from time to time we make forward-looking statements concerning ourexpected future operations and performance and other developments. Suchforward-looking statements are necessarily estimates reflecting our bestjudgment based upon current information and involve a number of risks anduncertainties. Other factors may affect the accuracy of these forward–lookingstatements and our actual results may differ materially from the resultsanticipated in these forward–looking statements. While it is impossibleto identify all such factors, factors that could cause actual results to differmaterially from those estimated by us include, but are not limited to, thosefactors or conditions described under Item 2, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” in this report andunder Item 7, “Management’s Discussion and Analysis of Financial Condition andResults of Operations—Critical Accounting Policies and Estimates” and “FactorsThat Could Affect Future Financial Condition and Results” in our Annual Reporton Form 10-K for the year ended December 31, 2001, and general conditions inthe economy and capital markets.

 

**Overview**

 

                We develop practical solutionsfor medication safety at the point of care. We design, manufacture and marketintravenous (IV) medication delivery and infusion therapy devices, needle-freedisposables and patient monitoring equipment. Our “smart” technology, tools and services are designed to reduce therisks and costs of medication errors, and safeguard patients and clinicians. Weprovide our products, professional and technical support and training servicesto over 5,000 hospital and health care systems, as well as alternative caresites in more than 120 countries through a worldwide direct sales force anddistributors. We have one of the largest installed bases of large volume pumpdelivery lines in the United States hospital market, representing approximately32% of such installed lines.  We alsobelieve that we have the number one or number two market position in the largevolume pump segment or the syringe pump segment, or both segments, in Belgium,France, Italy, The Netherlands, Norway, Spain, Sweden, the United Kingdom,Australia, Canada, New Zealand and South Africa.  In addition, we are a leading provider of patient monitoringproducts that measure and monitor temperature, with a substantial installedbase of hospital thermometry systems in the United States.  We also provide products which measure andmonitor pulse, pulse oximetry and blood pressure.

 

                ALARIS Medical is a holdingcompany for ALARIS Medical Systems. ALARIS Medical also identifies andevaluates potential acquisitions and investments, and performs variouscorporate functions. As a holding company, ALARIS Medical currently has norevenues to fund its operating and interest expense and relies on its existingcash and cash generated from operations of ALARIS Medical Systems to meet itsobligations.

 

 

18

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**Critical Accounting Policies andEstimates**

 

Our discussion and analysis of our operating resultsand financial condition is based upon our condensed consolidated financialstatements, which have been prepared in accordance with United States generallyaccepted accounting principles.

 

Critical accounting policies are those that involvesubjective or complex judgments, often as a result of the need to makeestimates.  The following areas allrequire the use of judgments and estimates: inventory valuation, allowances foruncollectible accounts receivable and estimated rebates, cost of field correctiveactions, deferred tax asset valuation and carrying value of intangibleassets.  Estimates in each of theseareas are based on historical experience and various judgments and assumptionsthat we believe are appropriate.  Actualresults may differ from these estimates. Our critical accounting policies are discussed in more detail in“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and note 2 to our consolidated financial statements contained inour Annual Report on Form 10-K for the year ended December 31, 2001.

 

**Results of Operations**

 

                The following tablesets forth, for the periods indicated, selected financial information expressedas a percentage of sales.  BeginningJanuary 1, 2002, in accordance with new accounting standards, goodwill and certainother intangibles are no longer amortized. As required by FAS 142, prior year data in the following tables has notbeen restated and, therefore, contains amortization expense that is notincluded in current year information. (See note 2 to the condensed consolidated financial statements.)

 
|                                                               |   | **Three  Months Ended** |   | **Nine  Months Ended** |   |
|--------------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                                               |   | **September  30,**      |   | **September  30,**     |   |
|                                                               |   | **2002**                |   | **2001**               |   | **2002** |   | **2001** |   |
|                                                               |   |                    |   |                   |   |   |   |   |   |
| Sales                                                              |   | 100.0                   | %      | 100.0                  | %      | 100.0 | % | 100.0 | % |
| Cost of sales                                                      |   | 49.1                    |   | 51.9                   |   | 49.9 |   | 51.4 |   |
| Gross margin                                                       |   | 50.9                    |   | 48.1                   |   | 50.1 |   | 48.6 |   |
| Selling and  marketing expenses                                    |   | 19.9                    |   | 18.6                   |   | 19.9 |   | 19.2 |   |
| General and  administrative expenses                               |   | 8.9                     |   | 11.5                   |   | 9.3 |   | 12.2 |   |
| Research and  development expenses                                 |   | 7.1                     |   | 6.3                    |   | 6.7 |   | 6.7 |   |
| Restructuring  and other non-recurring items                       |   | —                  |   | —                 |   | (0.2 | ) | 2.3 |   |
| Interest income  from sales-type capital leases                    |   | .9                      |   | 1.2                    |   | 1.0 |   | 1.3 |   |
| Income from  operations                                            |   | 15.9                    |   | 12.9                   |   | 15.4 |   | 9.5 |   |
| Interest  expense, net                                             |   | (12.8                   | )      | (14.7                  | )      | (13.2 | ) | (14.3 | ) |
| Other, net                                                         |   | (.3                     | )      | 0.1                    |   | (0.2 | ) | (0.4 | ) |
| Income (loss) from  continuing operations before income taxes      |   | 2.8                     |   | (1.7                   | )      | 2.0 |   | (5.2 | ) |
| Provision for  (benefit from) income taxes                         |   | 1.1                     |   | (0.5                   | )      | 0.8 |   | (1.3 | ) |
| Income (loss)  from continuing operations                          |   | 1.7                     |   | —                 |   | 1.2 |   | (3.9 | ) |
| Gain on disposal  of discontinued operations (net of income taxes) |   | —                  |   | —                 |   | — |   | 1.2 |   |
| Net income  (loss)                                                 |   | 1.7                     | %      | (1.2%                  | )      | 1.2 | % | (2.7 | )% |
| **Other Data:**                                                    |   |                    |   |                   |   |   |   |   |   |
| Adjusted EBITDA                                                    |   | 21.2                    | %      | 20.5                   | %      | 20.5 | % | 19.6 | % |

 

 

19

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|                                         |   | **Three  Months Ended** |   | **Nine  Months Ended** |   |
|----------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                         |   | **September  30,**      |   | **September  30,**     |   |
|                                         |   | **2002**                |   | **2001**               |   | **2002** |   | **2001** |   |
|                                         |   | **(in millions)**       |   | **(in millions)**      |   |
|                                         |   |                    |   |                   |   |   |   |   |   |
| Adjusted EBITDA  (1)                         |   | $                       | 24.0   |                   | $      | 21.3 |   | $ | 66.9 |   | $ | 59.1 |   |
| Restructuring  and other non-recurring items |   | —                  |   | —                 |   | .6 |   | (6.9 | ) |
| Depreciation and  amortization (2)           |   | (6.0                    | )      | (7.9                   | )      | (17.4 | ) | (23.6 | ) |
| Interest income                              |   | .1                      |   | .4                     |   | .6 |   | 1.7 |   |
| Interest expense                             |   | (14.6                   | )      | (15.7                  | )      | (43.5 | ) | (45.0 | ) |
| Other, net                                   |   | (.3                     | )      | .1                     |   | (.6 | ) | (1.1 | ) |
| (Provision for)  benefit from income taxes   |   | (1.3                    | )      | .6                     |   | (2.6 | ) | 4.0 |   |
|                                         |   |                    |   |                   |   |   |   |   |   |
| Income (loss)  from continuing operations    |   | $                       | 1.9    |                   | $      | (1.2 | ) | $ | 4.0 |   | $ | (11.8 | ) |

----

(1)           Adjusted EBITDA represents income from operations beforerestructuring, other non-recurring items, discontinued operations, interest,taxes, other, net, depreciation and amortization. Adjusted EBITDA does notrepresent net income or cash flows from operations, as these terms are definedunder generally accepted accounting principles, and should not be considered asan alternative to net income as an indicator of our operating performance or tocash flows as a measure of liquidity. We have included information concerningAdjusted EBITDA herein because we use such information as a measure ofassessing cash flows and ability to service debt and understand that suchinformation is used by investors as one measure of an issuer’s ability toservice debt. Restructuring and other one-time items are excluded from AdjustedEBITDA as we believe that the inclusion of these items would not be helpful toan investor’s understanding of our ability to service debt. Our computation ofAdjusted EBITDA may not be comparable to similar titled measures of othercompanies.

 

 (2)        Depreciationand amortization excludes amortization of debt discount and issuance costsincluded in interest expense.

 

            Our sales results are reportedconsistent with our two geographical business units: North America andInternational. The following table summarizes sales to customers by eachgeographical business unit.

 
|                               |   | **Three  Months Ended** |   | **Nine  Months Ended** |   |
|------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                               |   | **September 30,**       |   | **September  30,**     |   |
|                               |   | **2002**                |   | **2001**               |   | **2002** |   | **2001** |   |
|                               |   | **(in millions)**       |   | **(in millions)**      |   |
| **North America business unit**    |   |                    |   |                   |   |   |   |   |   |
|                               |   |                    |   |                   |   |   |   |   |   |
| Infusion  instruments              |   | $                       | 18.4   |                   | $      | 19.4 |   | $ | 49.1 |   | $ | 42.1 |   |
| Dedicated  disposables             |   | 34.9                    |   | 32.2                   |   | 103.3 |   | 98.3 |   |
| Other disposables  and service     |   | 18.3                    |   | 15.5                   |   | 53.4 |   | 46.4 |   |
| Subtotal                           |   | 71.6                    |   | 67.1                   |   | 205.8 |   | 186.8 |   |
|                               |   |                    |   |                   |   |   |   |   |   |
| Patient  monitoring                |   | 6.5                     |   | 7.4                    |   | 19.2 |   | 20.7 |   |
| North America  business unit total |   | $                       | 78.1   |                   | $      | 74.5 |   | $ | 225.0 |   | $ | 207.5 |   |

 

20

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|                               |   | **Three  Months Ended** |   | **Nine  Months Ended** |   |
|------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                               |   | **September  30,**      |   | **September  30,**     |   |
|                               |   | **2002**                |   | **2001**               |   | **2002** |   | **2001** |   |
|                               |   | **(in millions)**       |   | **(in millions)**      |   |
| **International business unit**    |   |                    |   |                   |   |   |   |   |   |
|                               |   |                    |   |                   |   |   |   |   |   |
| Infusion  instruments              |   | $                       | 9.9    |                   | $      | 7.6 |   | $ | 29.8 |   | $ | 27.4 |   |
| Dedicated  disposables             |   | 18.5                    |   | 16.1                   |   | 53.0 |   | 50.9 |   |
| Other  disposables and service     |   | 5.3                     |   | 3.9                    |   | 14.1 |   | 11.3 |   |
| Subtotal                           |   | 33.7                    |   | 27.6                   |   | 96.9 |   | 89.6 |   |
|                               |   |                    |   |                   |   |   |   |   |   |
| Patient  monitoring                |   | 1.3                     |   | 1.5                    |   | 4.1 |   | 3.9 |   |
| International  business unit total |   | $                       | 35.0   |                   | $      | 29.1 |   | $ | 101.0 |   | $ | 93.5 |   |
|                               |   |                    |   |                   |   |   |   |   |   |
| ALARIS Medical,  Inc. total        |   | $                       | 113.1  |                   | $      | 103.6 |   | $ | 326.0 |   | $ | 301.0 |   |

** **

**ThreeMonths Ended September 30, 2002 Compared with Three Months Ended September 30,2001**

 

***Sales***

                  Sales increased $9.4 million,an increase of 9% (7% in constant currency) for the quarter ended September 30,2002 compared with the same quarter last year. North America sales were $78.1million, an increase of $3.6 million, or 5%, compared with the third quarter of2001. The increase was primarily due to higher volumes of drug infusiondedicated and non-dedicated disposable administration sets. International saleswere $35.0 million, an increase of 20% (11% in constant currency). The increasewas primarily due to increased volume of drug infusion volumetric and syringepumps and dedicated and non-dedicated disposable administration sets comparedwith the same period in the prior year.

 

***Gross Profit***

Gross profit increased$7.7 million, or 15%, during the quarter ended September 30, 2002, comparedwith the same quarter last year. The gross margin percentage increased to 50.9%in the third quarter of 2002, from 48.1% in the third quarter of 2001. Theimproved margin percentage was due to increased volume of disposables (whichhave higher margins than instruments) and to a higher percentage ofinternational sales, which have higher margins.

 

***Selling and Marketing Expenses***

                  Selling and marketing expensesincreased $3.2 million, or 17%, during the quarter ended September 30, 2002,compared with the same period in 2001 as a result of higher sales volume in thethird quarter of 2002 compared with the prior year, as well as higher sellingand marketing costs related to increased personnel and related activitiessupporting the North America launch of the MEDLEYTM Medication Safety System.Also contributing to this increase were higher marketing expenses related tonew product strategies. These increases were partially offset by reductions inour distribution costs over the prior year. As a percentage of sales, sellingand marketing expenses increased to 19.9% for the third quarter of 2002 from18.6% in the third quarter of 2001.

 

***General and Administrative Expenses***

                General and administrativeexpenses decreased $1.8 million, or 15%, during the three months endedSeptember 30, 2002, compared with the three months ended September 30,2001.  As a percentage of sales, generaland administrative expenses decreased to 8.9% in the third quarter of 2002 from11.5% in the third quarter of 2001. This decrease was due to a $2.3 millionreduction in amortization expense resulting from our adoption of new accountingrequirements effective January 1, 2002, under which our goodwill and certainother amortization expense ceased.  Hadthe newly adopted accounting standards been in effect during the third quarterof 2001, general and administrative expense for such quarter would have been9.3% of sales. 

 

21

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(See note 2 to thecondensed consolidated financial statements.) Other cost increases in generaland administrative expenses were generally offset by lower bonus expense in thecurrent period.

 

***Research and Development Expenses***

                Research and developmentexpenses increased approximately $1.6 million, or 24%, during the three monthsended September 30, 2002 compared with the three months ended September 30,2001 due to an increase in personnel. As a percentage of sales, spending on research and development was 7.1%for the third quarter of 2002, compared with 6.3% for the third quarter of2001.

 

***Restructuring and Non-Recurring Items***

We did not incur any restructuring or non-recurringitems in the third quarter of 2002 or 2001.

 

***Income from Operations***

                Income from operations increased$4.6 million during the three months ended September 30, 2002, compared withthe three months ended September 30, 2001, primarily due to an increase ingross profit and lower amortization expense.

 

***Adjusted EBITDA***

                Adjusted EBITDA increased $2.7million during the three months ended September 30, 2002, compared with thethree months ended September 30, 2001. As a percentage of sales, AdjustedEBITDA increased from 20.5%, or $21.3 million, during the three months endedSeptember 30, 2001, to 21.2%, or $24.0 million, during the three months endedSeptember 30, 2002, due to the reasons discussed above.  (See note 1 under “Results of Operations.”)

 

***Interest Expense***

                Interest expense decreased $1.1million, or 7%, during the three months ended September 30, 2002, compared withthe three months ended September 30, 2001. This decrease resulted from lower overall interest rates on ouroutstanding indebtedness due to the replacement of ALARIS Medical Systems’ bankcredit facility with a public debt offering in October, 2001.  The decrease was partially offset byincreased accretion on our 11 1/8% senior discount notes.

 

***Interest Income***

                Interest income decreased $0.3million during the quarter ended September 30, 2002 compared with the samequarter in 2001 due to lower interest rates earned on cash balances in 2002compared with 2001.

 

***Other, net***

                Other, net decreased to $0.3million of expense during the quarter ended September 30, 2002, compared with$0.1 million of income for the same period in the prior year.  The change is due primarily to an increasein foreign currency transaction losses of approximately $0.2 million from theprior year.

 

**NineMonths Ended September 30, 2002 Compared with Nine Months Ended September 30,2001**

 

***Sales***

                For the nine months endedSeptember 30, 2002, sales were $326.0 million, an increase of $25.0 million, or8% (also 8% in constant currency as the slight favorable foreign currencybenefit of a weaker U.S dollar was less than 1% of consolidated sales) comparedwith $301.0 million over the same period in the prior year. Higher volumes ofboth drug infusion instruments and disposable administration sets in NorthAmerica resulted in an increase in revenues of $17.5 million, or 8%, over theprior year.  Contributing to the NorthAmerica increase was $14.6 million in sales of our new MEDLEYTM MedicationSafety System, compared with $5.5 million during the nine month period in 2001.The increases in drug infusion products in North 

 

22

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America werepartially offset by lower volumes of patient monitoring instruments anddisposables compared with the prior year. International sales increased $7.5million, or 8% (6% in constant currency), due to higher volumes and revenues ofnon-dedicated disposable administration sets, large volume pumps and syringepumps compared with the prior year. The increase in large volume pump sales forthe International business is primarily attributable to the Asena GW, a newproduct launched in late 2001.

 

***Gross Profit***

Gross profit increased $17.2 million, or 12%, duringthe nine months ended September 30, 2002, compared with the nine months endedSeptember 30, 2001, due to higher sales and an increase in gross marginpercentage. The gross margin percentage increased to 50.1% in the nine monthsended September 30, 2002, from 48.6% in the nine months ended September 30,2001. The improved margin percentage was due to increased volume of disposables(which have higher margins than instruments) and higher overall margins on druginfusion instruments and disposables and on patient monitoring products.

 

***Selling and Marketing Expenses***

                Selling and marketing expensesincreased $7.3 million, or 13%, during the nine months ended September 30,2002, compared with the nine months ended September 30, 2001, due to increasedselling costs resulting from higher sales volume in the first nine months of2002 compared with the prior year and to higher sales and marketing costsrelated to increased personnel and related activities supporting the NorthAmerica launch of the MEDLEYTM Medication Safety System.  These increases were partially offset byreductions in our distribution costs over the same period in the prioryear.  As a percentage of sales, sellingand marketing expenses increased to 19.9% for the first nine months of 2002from 19.2% for the same period in 2001.

 

***General and Administrative Expenses***

General and administrative expenses decreased $6.5million, or 18%, during the nine months ended September 30, 2002, compared withthe nine months ended September 30, 2001. As a percentage of sales, general andadministrative expense decreased to 9.3% during the nine months ended September30, 2002 compared with 12.2% for the same period in the prior year. Thisdecrease is due to a $6.9 million reduction in amortization expense resultingfrom our adoption of new accounting requirements effective January 1, 2002,under which our goodwill and certain other amortization expense ceased. Hadthese accounting requirements been in effect during the first three quarters of2001, general and administrative expense for such period would have been 9.9%of sales. (See note 2 to the condensed consolidated financial statements.)Overall cost increases in general and administrative expenses were generallyoffset by lower bonus expense in the current period.

 

***Research and Development Expenses***

                Researchand development expenses increased approximately $1.7 million, or 9%, duringthe nine months ended September 30, 2002 compared with the nine months endedSeptember 30, 2001due to an increase in personnel in the current year.  As a percentage of sales, spending onresearch and development was 6.7% for the nine months ended September 30, 2002,consistent with the prior year comparative period.

 

***Restructuring and Non-Recurring Items***

We did not record restructuring or non-recurring itemsduring the second or third quarters of 2002. During the first quarter of 2002, we recorded a non-recurring benefit of$1.1 million for an insurance settlement. The settlement related to damages and losses incurred at one of ourdisposable products manufacturing plants in Mexico in 1993 as a result offlooding.  The contingency related tothe insurance settlement was resolved in the first quarter of 2002, when wereceived proceeds of $1.0 million during the quarter and notification of anadditional payment due of $0.1 million, which was received during April 2002.

 

23

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During the first quarter of 2002, we initiated a planto restructure our technical services operations in Central Europe.  In this connection, we recorded a charge of$0.5 million which included $0.4 million for severance costs for 21 positionsaffected by the relocation of the German operation and $0.1 million related tolease termination.  As of September 30,2002, all severance payments have been made to the identified employees.

 

                Restructuring and othernon-recurring charges of $6.9 million during the nine months ended September30, 2001 included $3.5 million of legal, advisory, and other consultant expensesrelated to obtaining an amendment to the ALARIS Medical Systems bank creditagreement. This amendment was completed in April 2001.  We also recorded $3.4 million forrestructuring activities. These activities related to streamlining ofoperations in the North American business and resulted in the elimination of 71positions. The restructuring charges were composed of severance and relatedbenefits of $2.9 million and consulting fees of $0.5 million.   Adjusted EBITDA for the nine months endedSeptember 30, 2002 and 2001 excludes non-recurring items.

 

***Adjusted EBITDA***

                Adjusted EBITDA increased $7.9million during the nine months ended September 30, 2002 compared with the ninemonths ended September 30, 2001. As a percentage of sales, Adjusted EBITDA increasedfrom 19.6%, or $59.1 million, during the nine months ended September 30, 2001to 20.5%, or $66.9 million, during the nine months ended September 30, 2002 dueto the reasons discussed above. (See note 1 under “-Results of Operations.”)

 

***Interest Expense***

                Interest expense decreased $1.5million, or 3%, during the nine months ended September 30, 2002, compared withthe nine months ended September 30, 2001. This decrease resulted from loweroverall interest rates on our outstanding indebtedness due to the replacementof ALARIS Medical Systems’ bank credit facility with a public debt offering inOctober, 2001.  The decrease waspartially offset by increased accretion on our 11 1/8% senior discount notes.

 

***Interest Income***

                Interest income decreased $1.0million during the nine months ended September 30, 2002 compared with the sameperiod in 2001 due to lower interest rates earned on cash balances in 2002compared with 2001.

 

***Other, net***

                Other expense decreased $0.4million during the nine months ended September 30, 2002, compared with the sameperiod in the prior year. Our foreign currency transaction losses decreased$1.4 million in the current year and were partially offset by an increase incost of $0.5 million related to the hedging program. Banking fees decreasedapproximately $.2 million due to the elimination of ALARIS Medical Systems’bank credit facility during the prior year, and other income decreasedapproximately $0.9 million from the prior year.  During the first quarter of 2001, we received $0.5 million ofother income relating to the sale of a tradename.  We did not receive comparable income in the current year.

 

***Discontinued Operations***

                During the third quarter of2000, we sold our Instromedix® division to Card Guard Technologies, Inc. (“CardGuard”). The agreement with Card Guard provided that we would assist the buyerin setting up a fully independent headquarters and manufacturing facility.  During the first quarter of 2001, wecompleted our obligations related to the agreement and recorded a gain of $3.7million, net of taxes.

 

**Liquidity and Capital Resources**

                We expect to continue to meetour short-term liquidity needs, including capital expenditure requirements,with cash flow from operations of ALARIS Medical Systems and cash on hand.  We will continue to use our funds primarilyfor operating expenses, including planned expenditures for new research anddevelopment programs, capital expenditures and scheduled interest payments onoutstanding indebtedness.

 

24

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                At September 30, 2002, we had$522.8 million combined outstanding indebtedness composed of obligations ofALARIS Medical and ALARIS Medical Systems. ALARIS Medical’s indebtednessconsisted of $172.8 million of 11-1/8% seniordiscount notes due 2008 (“Senior Discount Notes”).  ALARIS Medical Systems’ indebtedness consisted of $170.0 millionof 11-5/8% senior secured notes due 2006 (“Senior Secured Notes”), which wereissued on October 16, 2001 and $180.0 million of 9-3/4% senior subordinatednotes due 2006 (“Senior Subordinated Notes”). The Senior Secured Notes bearinterest at 11-5/8%, payable semi-annually on June 1 and December 1, , with allprincipal due at maturity on December 1, 2006. The Senior Subordinated Notesbear interest at 9-3/4%, payable semi-annually in arrears on June 1 andDecember 1, with all principal due at maturity on December 1, 2006.

 

                The Senior DiscountNotes accrete to $189.0 million principal amount on August 1, 2003.  Prior thereto, interest accruing on the SeniorDiscount Notes is added to the outstanding principal balance through July 31,2003.  Interest on the Senior DiscountNotes accruing subsequent to July 31, 2003 is payable in cash semi-annually inarrears on February 1 and August 1, commencing February 1, 2004.  The indentures governing the Senior SecuredNotes and the Senior Subordinated Notes permit ALARIS Medical Systems to makedistributions, or “restricted payments,” to ALARIS Medical if at the time ofthe restricted payment, ALARIS Medical Systems satisfies the two conditionsdescribed in the following paragraphs. Additionally, dividends to ALARISMedical to fund interest payments on the now retired Convertible Debentures,and to fund up to $1.5 million annually in other ALARIS Medical operating or capitalexpenses are defined as restricted payments but do not require meeting theFixed Charge Coverage Ratio. Management believes that when ALARIS Medical isrequired to begin making cash interest payments on the Senior Discount Notes in2004, ALARIS Medical Systems will have satisfied these conditions.

 

The first condition which mustbe satisfied prior to making a restricted payment is that at the time of thedistribution, ALARIS Medical Systems must have a Fixed Charge Coverage Ratio(as calculated in accordance with the indentures as described below) of atleast 2.5 to 1 calculated for the four complete calendar quarters preceding thedistribution as though the distribution had been made at the beginning of suchperiod.  The Fixed Charge Coverage Ratiowill be determined by dividing ALARIS Medical Systems’ Consolidated EBITDA (asdefined in the indentures) by its Consolidated Interest Expense (as defined inthe indentures).   Based on the interestrate on and the amount of debt outstanding at ALARIS Medical Systems atSeptember 30, 2002, the interest expense to be included in future calculationsof the Fixed Charge Coverage Ratio is approximately $38.9 million.  As a result, the minimum required annualConsolidated EBITDA to meet the ratio will be approximately $97.3 million.

 

The calculation of ConsolidatedEBITDA for purposes of the indentures is different from our calculation ofAdjusted EBITDA described elsewhere in this report. Under the indentures,Consolidated EBITDA is defined as follows: “With respect to any Person for any period, the Consolidated Net Incomeof such Person and its Restricted Subsidiaries for such period, plus, to theextent deducted in computing Consolidated Net Income: (i) provision for taxesbased on income or profits of such Person and its Restricted Subsidiaries forsuch period; (ii) Consolidated Interest Expense of such Person for such period;and (iii)  depreciation and amortization(including amortization of goodwill and other intangibles) and all othernon-cash charges (excluding any such non-cash charge to the extent that itrepresents an accrual of or reserve for cash charges in any future period oramortization of a prepaid cash expense that was paid in a prior period) of suchPerson and its Restricted Subsidiaries for such period; and (iv) anyextraordinary or non-recurring loss and any net loss realized in connectionwith either an Asset Sale or the extinguishment of indebtedness, in each case,on a consolidated basis determined in accordance with GAAP. Notwithstanding theforegoing, the provision for taxes based on the income or profits of, and thedepreciation and amortization and other non-cash charges of, a RestrictedSubsidiary of a Person shall be added to Consolidated Net Income to computeConsolidated EBITDA only to the extent (and in the same proportion) that theNet Income of such Restricted Subsidiary was included in calculating theConsolidated Net Income of such Person.”

 

25

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Consolidated EBITDA, per the indentures, as calculatedfor the three and nine months ended September 30, 2002 reconciled to thosereported by ALARIS Medical and ALARIS Medical Systems is as follows:

 
|                                                         |   | **Three  Months Ended**    |   | **Nine  Months Ended**  |   |
|--------------------------------------------------------------|--------|----------------------------|--------|-------------------------|--------|
|                                                         |   | **September  30, 2002**    |   | **September  30, 2002** |   |
|                                                         |   | **(dollars in thousands)** |   |
| ALARIS Medical  Systems consolidated net income, as reported |   | $                          | 4,940  |                    | $      | 12,974 |   |
| Provision for  income taxes                                  |   | 3,293                      |   | 8,649                   |   |
| Interest expense                                             |   | 9,882                      |   | 29,647                  |   |
| Depreciation and  amortization                               |   | 6,044                      |   | 17,409                  |   |
| Non-cash items                                               |   | 626                        |   | (970                    | )      |
| Extraordinary/non-recurring  items                           |   | —                     |   | 540                     |   |
| Consolidated  EBITDA, per indentures                         |   | 24,785                     |   | 68,249                  |   |
|                                                         |   |                       |   |                    |   |
| Less insurance  settlement                                   |   | —                     |   | (1,125                  | )      |
| Less non-cash  items                                         |   | (626                       | )      | 970                     |   |
| Less interest  income                                        |   | (141                       | )      | (624                    | )      |
| Other, net                                                   |   | 335                        |   | 635                     |   |
| ALARIS Medical  Systems Adjusted EBITDA, as reported         |   | $                          | 24,353 |                    | $      | 68,105 |   |
|                                                         |   |                       |   |                    |   |
| ALARIS Medical  operating expenses                           |   | (369                       | )      | (1,162                  | )      |
| ALARIS Medical  Adjusted EBITDA, as reported                 |   | $                          | 23,984 |                    | $      | 66,943 |   |

 

The second condition which mustbe satisfied prior to making a restricted payment is that the distribution,together with certain other restricted payments, may not exceed a sumdetermined by reference to ALARIS Medical Systems’ cumulative Consolidated NetIncome (as defined in the indentures) for the period since January 1, 1997 andcash capital contributions received after such date, less restricted paymentsmade.  This condition provides that theConsolidated Net Income of ALARIS Medical Systems will be added to the amountavailable each quarter until such time as historical net losses of $30.6million are exhausted. Subsequent to such time, 50% of future ALARIS MedicalSystems net income will be added to the amount available.  At September 30, 2002, the amount availablefor future restricted payments was $24.5 million.

 

26

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The following represents thechanges in the amount available for restricted payments:

 
|                                                             |   | **1997  through**           |    | **Full Year** |   | **First  Quarter** |   | **Second  Quarter** |    | **Third  Quarter** |   |
|------------------------------------------------------------------|--------|-----------------------------|---------|---------------|--------|--------------------|--------|---------------------|---------|--------------------|--------|
|                                                             |   | **2000**                    |    | **2001**      |   | **2002**           |   | **2002**            |    | **2002**           |   |
|                                                             |   | **(dollars  in thousands)** |    |
| Available for  restricted payments — beginning of period    |   | $                           | —  |          | $      | 28,850             |   | $                   | 28,176  |               | $      | 16,306 |   | $ | 19,941 |   |
| ALARIS Medical  Systems’ net income / (loss) for the period |   | (45,504                     | )       | 1,894         |   | 3,749              |   | 4,285               |    | 4,940              |   |
|                                                             |   |                        |    |          |   |               |   |                |    |               |   |
| Restricted  Payments:  (A)                                  |   |                        |    |          |   |               |   |                |    |               |   |
| Dividends to  ALARIS Medical for operating expenses              |   | (4,228                      | )       | (1,210        | )      | (221               | )      | (650                | )       | (355               | )      |
| Interest payment  on Convertible Debentures                      |   | (4,684                      | )       | (1,171        | )      | (585               | )      |                |    |               |   |
| Fund  unrestricted subsidiary to purchase Convertible Debentures |   |                        |    | (187          | )      | (14,813            | )      |                |    |               |   |
|                                                             |   |                        |    |          |   |               |   |                |    |               |   |
| Cash capital  contributions received by ALARIS Medical Systems   |   | 83,266                      |    |          |   |               |   |                |    |               |   |
| Available for  Restricted Payments — end of period          |   | $                           | 28,850  |          | $      | 28,176             |   | $                   | 16,306  |               | $      | 19,941 |   | $ | 24,526 |   |
|                                                             |   |                        |    |          |   |               |   |                |    |               |   |
| Change in Net  Loss:                                             |   |                        |    |          |   |               |   |                |    |               |   |
| Cumulative net  loss — beginning of period                  |   | $                           | —  |          | $      | (45,504            | )      | $                   | (43,610 | )                  | $      | (39,861 | ) | $ | (35,576 | ) |
| ALARIS Medical  Systems’ net income / (loss) for the period |   | (45,504                     | )       | 1,894         |   | 3,749              |   | 4,285               |    | 4,940              |   |
| Cumulative net  loss — end of period                        |   | $                           | (45,504 | )             | $      | (43,610            | )      | $                   | (39,861 | )                  | $      | (35,576 | ) | $ | (30,636 | ) |

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(A)       The ALARIS Medical Systems' indentures allow certain“restricted payments” to be made without meeting the Fixed Charge CoverageRatio.

 

The preceding description of theprovisions of the indentures which govern restricted payments, including thedefined terms, is a summary only and is qualified in its entirety by the textof the indentures, which ALARIS Medical and ALARIS Medical Systems have previouslyfiled with the Securities and Exchange Commission.

 

                ALARIS Medical’s ConvertibleDebentures were retired at their scheduled maturity on January 15, 2002.  The indentures governing the Senior SecuredNotes and the Senior Subordinated Notes permitted ALARIS Medical Systems to use$15 million of its cash on hand to invest in a wholly owned unrestrictedsubsidiary. ALARIS Medical Systems made such investment and the unrestrictedsubsidiary used a portion of the proceeds of such investment to acquire $0.2million Convertible Debentures in the open market in 2001.  In 2002, the remaining $14.8 million wasloaned to ALARIS Medical, which used the proceeds of such loan and proceedsfrom the exercise of stock options to retire the Convertible Debentures.  A portion of the stock option exerciseproceeds resulted from the exercise by some of our executive officers of stockoptions.  In connection with theexercise, three of our executive officers received interest-bearing, short-termloans, aggregating $0.6 million, from ALARIS Medical Systems.  These loans were subsequently repaid infull.  ALARIS Medical was entitled torequire such executive officers to exercise such options in order to provideALARIS Medical with sufficient funds to retire the Convertible Debentures.  Such options were granted to these executiveofficers in anticipation of ALARIS Medical’s need to require such exercise inorder to complete the retirement of the Convertible Debentures. (See note 6 tothe condensed consolidated financial statements.)

 

                ALARIS Medical Systems isrequired over the next twelve months (through September 30, 2003) to makeinterest payments on the Senior Secured Notes in the amount of $19.8 million($9.9 million in December of 2002 and 9.9 million in June of 2003) and interestpayments on the Senior Subordinated Notes in the amount 

 

27

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of $17.6 million($8.8 million in December of 2002 and $8.8 million in June of 2003).  On January 15, 2002, ALARIS Medical made itsfinal interest payment on the Convertible Debentures of $0.6 million.

 

                Although we have no furtherprincipal amortization requirements until the maturity of the Senior SecuredNotes and the Senior Subordinated Notes in December 2006, management ismonitoring the capital markets for opportunities to improve our capitalstructure prior to such time.

 

                 We anticipate that we will refinance our entire debt structureprior to December 2006 since we believe that it is unlikely that ALARIS MedicalSystems will generate sufficient cash flow from operations to repay the SeniorSecured Notes and the Senior Subordinated Notes at maturity in 2006 and topermit it to make distributions to ALARIS Medical to enable it to repay theSenior Discount Notes at maturity in 2008.  Such refinancing may involve an offering of debt securities ofALARIS Medical Systems or ALARIS Medical, or both, an offering of equitysecurities of ALARIS Medical to reduce the level of indebtedness of ALARIS MedicalSystems or ALARIS Medical, or both, or a combination of any of theforegoing.  The ability of ALARISMedical Systems or ALARIS Medical, or both, to obtain such debt or equityfinancing will be dependent upon many factors, including overall financial marketand economic conditions and our operating performance and expectations at suchtime.

 

                Should ALARIS Medical Systemsnot repay its indebtedness at maturity in 2006, should ALARIS Medical not repaythe Senior Discount Notes in 2008, or should ALARIS Medical Systems not be ableto make distributions to ALARIS Medical commencing in 2004 in order to permitALARIS Medical to make cash interest payments on the Senior Discount Notes,these events could have a material adverse effect on our business, financialcondition and results of operations and could result in a default by ALARISMedical, ALARIS Medical Systems, or both, and possible acceleration of all or aportion of such indebtedness, unless ALARIS Medical, ALARIS Medical Systems, orboth, could refinance such indebtedness or obtain the required funds from othersources.

 

                In response to customer requeststo finance their payments related to equipment purchases over time, we haveidentified an unrelated third party financing company to assist our customersin such area.  In recent years, $12 millionto $16 million annually of drug infusion equipment sales to North Americancustomers have been financed by this third party.  If such third party financing source were no longer available toour customers, it could require us to find another party or to finance suchcustomer purchases and require use of our cash.  Additionally, our operating results could also be affected, as itis possible that customers could look to make their purchases from ourcompetitors who might be able to finance such purchases at a lower cost offunds.

 

                As identified in the condensedconsolidated statement of cash flows, net cash provided by operating activitiesfor the nine months ended September 30, 2002 was $33.7 million compared with$40.5 million provided by operating activities in the first nine months of2001.  Net cash used in investingactivities for the nine months ended September 30, 2002 was $12.6 million.  Net cash used in investing activities forthe nine months ended September 30, 2001 was $2.6 million, which included $8.1million of net proceeds from the sale of a discontinued operation. Net cashused in financing activities for the nine months ended September 30, 2002 and2001 was $14.3 million and $15.6 million, respectively, and was primarilycomposed of principal payments on long-term debt.

 

                We made capital expenditures ofapproximately $11.8 million during the nine months ended September 30, 2002 andanticipate additional capital expenditures not to exceed $8 million during theremainder of 2002.

 

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                The following schedulesummarizes our contractual obligations and commitments to make future paymentsas of September 30, 2002.

 

**Contractual Obligations &Commitments**

 
|                                |   | **Long-term** |   | **Operating** |   | **Interest** |   |      |   |
|-------------------------------------|--------|---------------|--------|---------------|--------|--------------|--------|-----------|--------|
| **Payments  Due by Period**         |   | **Debt**      |   | **Leases**    |   | **Payments** |   | **Total** |   |
|                                |   |          |   |          |   |         |   |      |   |
| 2002 (A)                            |   | $             | — |          | $      | 1.7          |   | $         | 18.7   |   | $ | 20.4 |   |
| 2003                                |   | —        |   | 6.2           |   | 37.3         |   | 43.5      |   |
| 2004                                |   | —        |   | 5.9           |   | 58.3         |   | 64.2      |   |
| 2005                                |   | —        |   | 5.9           |   | 58.3         |   | 64.2      |   |
| 2006                                |   | 350.0         |   | 1.7           |   | 58.3         |   | 410.0     |   |
| Thereafter                          |   | 189.0         |   | 5.6           |   | 42.0         |   | 236.6     |   |
|                                |   |          |   |          |   |         |   |      |   |
| Total  Contractual Cash Obligations |   | $             | 539.0  |          | $      | 27.0         |   | $         | 272.9  |   | $ | 838.9 |   |
|                                     |        |               |        |               |        |              |        |           |        |  |  |  |  |  |

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(A) Amountrepresents remaining contractual obligation during 2002.

 

***Backlog***

                The amount ofunfilled orders, believed to be firm, at September 30, 2002 and 2001, was $12.9million and $10.6 million, respectively. Included in the $12.9 million was $6.4million of orders related to our

MEDLEY TM Medication Safety System.

 

***Foreign Operations***

                We have significant foreignoperations and, as a result, are subject to various risks arising therefrom,including foreign currency risks.  Thisrisk did not materially change during the first nine months of 2002. For the nine months ended September 30, 2002 and 2001, approximately 32% and 36% ofour sales, respectively, and 30% and 27% of our operating expenses,respectively, were denominated in currencies other than the U.S. dollar. Theseforeign currencies are primarily those of Western Europe, Canada, Mexico andAustralia.  Additionally, substantiallyall of the receivables and payables of our foreign subsidiaries are denominatedin currencies other than the U.S. dollar. During the first nine months of 2002, the net effect of foreign currencytransactions to the income statement was approximately $0.1 million.  Due to changes in foreign currency exchangerates during the first nine months of 2001, primarily a strengthening of theU.S. dollar against many European currencies, we recognized foreign currencytransaction losses of $1.3 million. Such losses were recorded in other expensein the statement of operations. (See note 3 to the condensed consolidatedfinancial statements.)

 

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**Item 3.****   Quantitative andQualitative Disclosures About Market Risk**

 

**Risk Management — Foreign CurrencyHedging Program, Derivative Financial Instruments and Market Risk**

 

                As part of our risk managementstrategy, we put in place a hedging program beginning in 2001 under which weenter into forward foreign exchange and currency option contracts to hedge aportion of forecasted cash receipts and payments denominated in currenciesother than the U.S. dollar. These contracts are entered into to reduce the riskthat our earnings and cashflows, resulting from certain forecastedtransactions, will be affected by changes in foreign currency exchangerates.  However, we may be impacted bychanges in foreign exchange rates related to the unhedged portion of theforecasted transactions. The success of the hedging program depends, in part,on forecasts of our transactions in various currencies (primarily theEuro).  Hedges are placed for periodsconsistent with identified exposures, but generally no longer than the end ofthe year for which we have substantially completed our annual business plan. Wemay experience unanticipated foreign currency exchange gains or losses to theextent that there are timing differences between forecasted and actual activityduring periods of currency volatility. However, since the critical terms of contracts designated as cash flowhedges are the same as the underlying forecasted transaction, changes in fairvalue of contracts should be highly effective in offsetting the present valueof changes in the expected cash flows from the forecasted transaction.  The ineffective portion of any changes inthe fair value of option contracts designated as hedges is recognizedimmediately in earnings.  We did notrecognize material gains or losses resulting from either hedge ineffectivenessor changes in forecasted transactions during 2002.

 

                As a matter of policy, we willonly enter into currency contracts with counterparties that have at least aninvestment grade or equivalent credit rating from a major rating agency.  The counterparties to these contracts aremajor financial institutions.  We do nothave significant exposure to any one counterparty.  We believe the risk of loss related to counterparty default isremote and would only consist of the net market value gain (if any) of theunderlying instrument. Costs associated with entering into contracts are notexpected to be material to our financial results.  (See note 3 to the condensed consolidated financial statements.)

 

**Item 4.****   Controls andProcedures**

 

*Evaluation of Disclosure Controls and Procedures*

 

                As of September 30,2002, an evaluation was performed under the supervision and with theparticipation of the Company’s management, including the Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures.  Based on that evaluation, the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,concluded that the Company’s disclosure controls and procedures were effectiveas of September 30, 2002.

 

*Changes in Internal Controls*

 

                There have been nosignificant changes (including corrective actions with regard to significantdeficiencies or material weaknesses) in our internal controls or in otherfactors that could significantly affect internal controls subsequent toSeptember 30, 2002.

 

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**Item 5.****   Other Information**

 

At the May 2002 meeting of the Board of Directors ofALARIS Medical, Inc. (“the Board”), the Board established a third committee,granting it the authority to establish, review and recommend qualifications andnominations to the Board and to consider matters relating to corporategovernance.

 

This committee, known as the Nominating and CorporateGovernance Committee, has since approved its charter, which was approved by theBoard at its October 29, 2002 meeting.

 

The Nominating and Corporate Governance Committee hasalso begun to review the subject matter within its area of responsibility.Among other things, it has reviewed the independence of the Company’sdirectors, reviewed the committee structure and reported that all members ofthe three committees of the Board are independent directors as defined by theAmerican Stock Exchange.  As aconsequence of its work, the Nominating and Corporate Governance Committeemakes the following report regarding the Company’s directors and theirindependence:

 
| • |   | Hank Brown has served as a member of our Board since  July 2000.  Mr. Brown serves as Chair  of the Audit Committee and serves as a member of the Compensation Committee  and Nominating and Corporate Governance Committee.  Mr. Brown is the Chief Executive Officer of the Daniels Fund, a  charitable foundation.  From 1998 to  mid-2002, Mr. Brown served as President of the University of Northern  Colorado.  From January 1997 to July  1998, Mr. Brown served as Director of the Center for Public Policy at the  University of Denver.  From 1990 to  1997, Mr. Brown served as a United States Senator from the State of  Colorado.  From 1980 to 1990, Mr.  Brown served five consecutive terms in the U. S. House of Representatives,  representing Colorado’s 4th Congressional District.  From 1972 to 1976, Mr. Brown served in the  Colorado State Senate.  From 1968 to  1980, Mr. Brown served as Vice President of Monfort of Colorado, Inc., a meat  packing company subsequently acquired by ConAgra Foods, Inc.  Mr. Brown served as a director of U.S.  West Inc. from 1998 until its acquisition by Qwest Communications  International, Inc., and thereafter served as a director of Qwest until  September 2002.  Mr. Brown is a  director of Sealed Air Corporation and StarTek, Inc.  Mr. Brown is a certified public accountant  and holds a doctor of law degree and a master of law degree in taxation. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| • |   | Norman M. Dean has served as a member of our Board,  including through a predecessor company, since 1989 and as Chair of our Board  since May 2000.  Mr. Dean serves as  Chair of the Nominating and Corporate Governance Committee and as a member of  the Audit Committee and Compensation Committee.  Previously, Mr. Dean served as Chairman of the board of  directors and President of United Bank of Greeley, United Bank of Brighton  and United Bank of La Salle.  Previously,  Mr. Dean served as Chairman of the board of directors of Montana Bancsystems,  Inc. and as a member of the board of directors of United Banks of  Colorado.  Since May 1990, Mr. Dean  has served as Chairman of the board of directors of Miller Diversified Corp.,  a company involved in commercial cattle feeding, trucking, oil and gas and  purified water.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| • |   | Henry Green has served as a member of our Board,  including through a predecessor company, since 1991.  Mr. Green serves as a member of the Audit  Committee.  From 1993 to his  retirement in 1997, Mr. Green served as an executive officer of Physician  Computer Network, Inc. (“PCN”).  He  also has been a director of PCN and its successor since 1993.  In December 1999, PCN filed for bankruptcy  and its bankruptcy plan was confirmed in March 2000.  Before its bankruptcy, PCN was controlled  by the Company’s largest shareholder, Jeffry M. Picower.  From 1988 to 1990, Mr. Green was Vice President  of Johnson and Johnson International.   From 1980 to 1988, Mr. Green served as President of Vistakon, Inc., a  subsidiary of Johnson and Johnson.   Prior to joining Johnson and Johnson, Mr. Green held a variety of  management positions at Warner Lambert Company.  Mr. Green serves as a director of a biomedical company  controlled by Mr. Picower which is not publicly traded.                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

 

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| • |   | Barry D. Shalov has served as a member of our Board  since May 2000.  Mr. Shalov has been a  partner in the law firm of Piper Rudnick LLP since May 2000.  Previously, Mr. Shalov was a partner in  the law firm of Gordon Altman Weitzen Shalov & Wein LLP for more than 20  years.  Piper Rudnick performs legal  services for the Company primarily as general corporate and securities  counsel and as lead counsel in certain patent litigation.  The Company and its operating subsidiaries  paid Piper Rudnick $1.4 million for legal services through the first nine  months of 2002, $2.2 million in 2001 and $0.6 million in 2000.  The Company paid Gordon Altman Weitzen  Shalov & Wein $0.1 million for legal services in 2000.  Piper Rudnick has served from time to time  as legal counsel to the Company’s largest shareholder, Jeffry Picower, and to  other entities controlled by Mr. Picower.   Mr. Shalov serves as a director of a biomedical company controlled by  Mr. Picower which is not publicly traded.   Previously, Mr. Shalov served as trustee of a private medical research  organization founded by Mr. Picower. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| • |   | David L. Schlotterbeck has served as a member of our  Board and as our President and Chief Executive Officer since November  1999.  From April 1999 to November 1999, Mr. Schlotterbeck served as our  President and Chief Operating Officer.  From 1997 to March 1998,  Mr. Schlotterbeck was President and Chief Operating Officer of Pacific  Scientific Company, an international manufacturer of motion control, process  measurement and safety products and former New York Stock Exchange company,  subsequently acquired by Danaher Corporation.  From 1995 to 1997, Mr.  Schlotterbeck was President and Chief Executive Officer of  Vitalcom, Inc., a medical network manufacturer.  From 1991 to 1994,  Mr. Schlotterbeck was Executive Vice President and Chief Operating  Officer of Nellcor, Inc., a medical device manufacturer subsequently acquired  by Mallinckrodt, Inc.  Mr. Schlotterbeck holds a B.S. in  Electrical Engineering from General Motors Institute.  Mr. Schlotterbeck  holds an M.S. in Electrical Engineering from Purdue University and completed  the Executive Institute at Stanford University.      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| • |   | William T. Tumber has served as a member of our  Board since May 2000.  Mr. Tumber serves as Chair of the  Compensation Committee.  From 1996 to his retirement in 1998,  Mr. Tumber was Senior Vice President of C.R. Bard, Inc., a medical  products manufacturer.  From 1991 to 1996, Mr. Tumber served as Group  Vice President, responsible for several of Bard’s operating divisions.   Since 1980, Mr. Tumber has held various other positions with Bard,  including President of its Davol division.  Prior to joining Bard,  Mr. Tumber held a variety of management positions with the General  Electric Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

Audit Committee Approval

 

The Audit Committee of ALARIS Medical, Inc. hasapproved the Company’s independent auditors, PricewaterhouseCoopers, to providetax services to the Company.

 

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**PartII**

**Other Information**

 

 

**Item 6.**** Exhibits and Reports on Form 8-K**

 

(a)     Exhibits

 
| 99.3   |   | Certification by David L. Schlotterbeck Pursuant to  18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 | Filed herewith |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|----------------|
|   |   |                                                                                                                                               |           |
| 99.4   |   | Certification by William C. Bopp Pursuant to 18  U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002        | Filed herewith |

 

(b)     Reports on Form 8-K

 

                Duringthe quarter ended September 30, 2002, the Company filed a report on Form 8-Kdated August 9, 2002.  This reportcontained voluntary executed sworn statements of the type required of the 947largest public companies, pursuant to Securities and Exchange Commission OrderNo. 4-460.

 

 

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SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 

          ALARIS MEDICAL, INC.          *(Registrant)*

 

 

 
| Date:  | October 31, 2002 | By:                                                | /s/ WILLIAM C.  BOPP            |
|--------|------------------|----------------------------------------------------|---------------------------------|
|   |             |                                               | William C. Bopp                 |
|   |             | Senior Vice  President and Chief Financial Officer |
|   |             |                                               | (Principal Financial Officer)   |
|   |             |                                               |                            |
|   |             | By:                                                | /s/ ROBERT F. MATHEWS           |
|   |             |                                               | Robert F.  Mathews              |
|   |             | Vice President -  Finance and Treasurer            |
|   |             |                                               | (Principal  Accounting Officer) |
|        |                  |                                                    |                                 |  |

 

 

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**CERTIFICATION BY DAVID L. SCHLOTTERBECK PURSUANT TOSECURITIES EXCHANGE ACT RULE 13a-14**

I, David L. Schlotterbeck, certify that:

1. I have reviewed this quarterly report on Form10-Q of ALARIS Medical, Inc.;

2. Based on my knowledge, this quarterly report doesnot contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

3. Based on my knowledge, the financial statements,and other financial information included in this quarterly report, fairlypresent in all material respects the financial condition, results of operationsand cash flows of the registrant as of, and for, the periods presented in thisquarterly report;

4. The registrant’s other certifying officers and Iare responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

a) designed such disclosure controls and proceduresto ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

b) evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and Ihave disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

a) all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

b) any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

6. The registrant’s other certifying officers and Ihave indicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

Date: October 31, 2002

/s/ DAVID L. SCHLOTTERBECKDavid L.SchlotterbeckPresident and Chief Executive Officer

 

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**CERTIFICATION BY WILLIAM C. BOPP PURSUANT TOSECURITIES EXCHANGE ACT RULE 13a-14**

 

I, William C. Bopp, certify that:

1. I have reviewed this quarterly report on Form10-Q of ALARIS Medical, Inc.;

2. Based on my knowledge, this quarterly report doesnot contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

3. Based on my knowledge, the financial statements,and other financial information included in this quarterly report, fairlypresent in all material respects the financial condition, results of operationsand cash flows of the registrant as of, and for, the periods presented in thisquarterly report;

4. The registrant’s other certifying officers and Iare responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

a) designed such disclosure controls and proceduresto ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

b) evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and Ihave disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

a) all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

b) any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

6. The registrant’s other certifying officers and Ihave indicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

Date: October 31, 2002

/s/ WILLIAM C. BOPPWilliam C. BoppSenior Vice President and Chief Financial Officer

 

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