10-Q

QuickLinks -- Click here to rapidly navigate through this document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2002 or

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

For the transition period from                              to                             

Commission File Number: 33-26398

ALARIS MEDICAL, INC.
(Exact name of registrant as specified in its charter)

Delaware	13-3492624
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
10221 Wateridge Circle, San Diego, CA	92121
(Address of principal executive offices)	(Zip Code)

(858) 458-7000
(Registrant's telephone number, including area code)

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

        Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        On April 15, 2002 59,270,003 shares of Registrant's Common Stock were outstanding.

ALARIS MEDICAL, INC.

INDEX

			Page
PART I. FINANCIAL INFORMATION
	Item 1—Financial Information:
		Condensed consolidated statement of operations for the three months ended March 31, 2002 and 2001 (unaudited)	3
		Condensed consolidated balance sheet at March 31, 2002 (unaudited) and December 31, 2001	4
		Condensed consolidated statement of cash flows for the three months ended March 31, 2002 and 2001 (unaudited)	5
		Condensed consolidated statement of changes in stockholders' equity for the period from December 31, 2001 to March 31, 2002 (unaudited)	6
		Notes to the condensed consolidated financial statements	7
	Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations		15
	Item 3—Quantitative and Qualitative Disclosures About Market Risk		24
PART II. OTHER INFORMATION
	Item 6—Exhibits and Reports on Form 8-K		26

2

Form 10-Q

Part 1—Item 1
Financial Information

ALARIS MEDICAL, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

(Dollar and share amounts in thousands, except per share data)

			Three Months Ended March 31,
			2002			2001
Sales			$	104,400		$	98,889
Cost of sales				52,688			51,059
	Gross profit			51,712			47,830
Selling and marketing expenses				21,436			18,694
General and administrative expenses				9,716			11,948
Research and development expenses				6,202			6,731
Restructuring and other non-recurring items				(585	)		5,743
	Total operating expenses			36,769			43,116
Interest income from sales-type capital leases				1,189			1,276
	Income from operations			16,132			5,990
Other income (expenses):
	Interest income			213			635
	Interest expense			(14,427	)		(13,997	)
	Other, net			(494	)		(939	)
		Total other expense		(14,708	)		(14,301	)
Income (loss) before income taxes				1,424			(8,311	)
Provision for (benefit from) income taxes				570			(2,100	)
Income (loss) from continuing operations				854			(6,211	)
Discontinued operations:
	Gain on disposal of business (net of applicable income tax expense of $2,492)			—			3,737
Net income (loss)			$	854		$	(2,474	)
	Income (loss) per common share from continuing operations		$	.01		$	(.10	)
	Income per common share from discontinued operations		$	—		$	.06
	Net income (loss) per common share, basic and diluted		$	.01		$	(.04	)
Weighted average common shares outstanding, basic				59,192			58,845
Weighted average common shares outstanding, diluted				60,599			58,845

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

ALARIS MEDICAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(Dollar and share amounts in thousands, except per share data)

			March 31, 2002			December 31, 2001
			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	47,913		$	51,200
	Receivables, net			65,764			67,893
	Inventories			69,245			69,408
	Prepaid expenses and other current assets			32,288			33,815
		Total current assets		215,210			222,316
Net investment in sales-type capital leases, less current portion				22,852			24,225
Property, plant and equipment, net				55,997			57,607
Other non-current assets				30,457			31,201
Goodwill, net				143,984			143,984
Other intangible assets, net				91,805			92,394
			$	560,305		$	571,727
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Current portion of long-term debt		$	—		$	15,969
	Accounts payable			23,577			23,859
	Accrued expenses and other current liabilities			51,198			53,120
		Total current liabilities		74,775			92,948
Long-term debt				513,648			509,258
Other non-current liabilities				16,740			16,244
		Total non-current liabilities		530,388			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 59,723 and 59,407 shares at March 31, 2002 and December 31, 2001, respectively			597			594
	Capital in excess of par value			150,257			149,325
	Accumulated deficit			(184,734	)		(185,588	)
	Treasury stock, at cost, 453 shares issued at March 31, 2002 and December 31, 2001			(2,027	)		(2,027	)
	Accumulated other comprehensive loss			(8,951	)		(9,027	)
		Total stockholders' equity		(44,858	)		(46,723	)
			$	560,305		$	571,727

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

ALARIS MEDICAL, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

(Dollars in thousands)

		Three Months Ended March 31,
		2002			2001
Net cash provided by operating activities		$	15,545		$	24,438
Cash flows from investing activities:
	Net capital expenditures		(3,387	)		(2,637	)
	Patents, trademarks and other		(363	)		(157	)
	Payments for product licenses and distribution rights		—			(625	)
	Net proceeds from sale of discontinued business		—			3,599
Net cash (used in) provided by investing activities			(3,750	)		180
Cash flows from financing activities:
	Principal payments on long-term debt and capital lease obligations		(15,969	)		(5,058	)
	Proceeds from exercise of stock options		899			—
Net cash used in financing activities			(15,070	)		(5,058	)
Effect of exchange rate changes on cash			(12	)		(198	)
Net (decrease) increase in cash			(3,287	)		19,362
Cash and cash equivalents at beginning of period			51,200			30,630
Cash and cash equivalents at end of period		$	47,913		$	49,992

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

ALARIS MEDICAL, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY (Unaudited)

(Dollar and share amounts in thousands)

		Common Stock								Treasury Stock
														Accumulated Other Comprehensive Loss
					Capital in Excess of Par Value		Accumulated Deficit										Total Stockholders' Equity			Comprehensive Income
		Shares	Amount							Shares	Amount
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							854										854		$	854
	Equity adjustment from foreign currency translation														68			68			68
	Effects of cash flow hedges included in other comprehensive income (net of tax benefit of $5)														8			8			8
Comprehensive income																				$	930
Exercise of stock options		316		3		896												899
Tax benefit from exercise of stock options						36												36
Balance at March 31, 2002		59,723	$	597	$	150,257	$	(184,734	)	453	$	(2,027	)	$	(8,951	)	$	(44,858	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

ALARIS MEDICAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollars and share amounts in thousands, except per share data)

NOTE 1—BUSINESS AND STATEMENT OF ACCOUNTING POLICY

The Company:

        ALARIS Medical, Inc. ("ALARIS Medical") was originally incorporated under the name "Advanced Medical Technologies, Inc." on September 28, 1988. ALARIS Medical is a holding company for its operating subsidiary, ALARIS Medical Systems, Inc. ("ALARIS Medical Systems"), which was formed by the merger of two pioneers in infusion systems, IMED Corporation (then an ALARIS Medical 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 statements have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures herein are adequate to make the information not misleading.

        In the opinion of the Company, the accompanying financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the Company's financial position as of March 31, 2002, the results of its operations for the three months ended March 31, 2002 and 2001, and its cash flows for the three months ended March 31, 2002 and 2001.

Use of estimates:

        The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues, costs and expenses, assets, liabilities and related disclosure of contingent amounts. While we believe our estimates and assumptions are reasonable, the inherent nature of estimates is that actual results will likely be different from the estimates made.

Shipping and handling costs:

        The Company records costs associated with shipping and handling for customer sales as a selling and marketing expense. Shipping and handling costs for customer sales for the three months ended March 31, 2002 and 2001 were $1,873 and $1,980, respectively.

Reclassifications:

        Certain prior period amounts have been reclassified to conform to the current period presentation.

NOTE 2—GOODWILL AND OTHER INTANGIBLE ASSETS—ADOPTION OF FASB STATEMENTS 141 AND 142

        Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Intangible Assets ("FAS 142") and No. 141, Business Combinations ("FAS 141"), which were issued by the Financial Accounting Standards Board in July 2001. Under FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not

7

deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). FAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method and eliminates the pooling-of-interests-method of accounting. Intangible assets that do not meet certain defined criteria in FAS 141 for recognition apart from goodwill shall be reclassified as goodwill as of the date FAS 142 is initially applied in its entirety. As required by FAS 142, the Company has completed an assessment of the categorization of its existing intangible assets and goodwill in accordance with the new criteria and has reported them appropriately on the condensed consolidated balance sheet. In accordance with FAS 141, the Company reclassified its workforce, net of its related deferred tax liability, as goodwill. The Company performed a transitional goodwill impairment test and determined the asset not to be impaired.

        Upon adoption of FAS 142, the Company determined that intangible assets related to the "IVAC" tradename and trademarks had an indefinite life and in accordance with FAS 142, should not be amortized as there are no legal, regulatory, contractual, economic or other factors that limit the useful life of these intangible assets to the reporting units. As of March 31, 2002 there was no impairment loss associated with such indefinite-lived intangible assets as their fair value exceeds the carrying amount.

        Intangible assets with finite lives will continue to be amortized over the expected economic lives of the intangible assets. The Company reassessed the useful lives of its intangible assets and determined no change in useful lives to be required for 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 workforce previously classified as an other intangible asset, and trademarks totaling $74,750 as of January 1, 2002. Adoption of the new standards resulted in not recognizing $2,316 in amortization expense for the quarter ended March 31, 2002, that would have been recognized had the previous standards been in effect.

8

        The following table presents the impact of FAS 141 and FAS 142 on income from operations, net income and earnings per share, as if they had been in effect for the quarter ended March 31, 2001 (in thousands, except per share amounts).

		Three Months Ended March 31, 2001
Income from operations, as reported		$	5,990
	Goodwill amortization		1,440
	Workforce amortization		126
	Tradename and trademark amortization		750
Pro forma operating income		$	8,306
Loss from continuing operations, as reported		$	(6,211	)
	Goodwill amortization		1,440
	Workforce amortization		126
	Tradename and trademark amortization		750
	Tax effect		(350	)
Pro forma loss from continuing operations		$	(4,245	)
Net loss, as reported		$	(2,474	)
	Goodwill amortization		1,440
	Workforce amortization		126
	Tradename and trademark amortization		750
	Tax effect		(350	)
Pro forma net loss		$	(508	)
Basic and diluted loss per common share from continuing operations, as reported		$	(.10	)
Aggregated change in amortization, net of tax			.03
Pro forma basic and diluted loss per common share from continuing operations		$	(.07	)
Basic and diluted net loss per common share, as reported		$	(.04	)
Aggregated change in amortization, net of tax			.03
Pro forma basic and diluted net loss per common share		$	(.01	)

        Acquired other intangible assets were as follows:

		March 31, 2002				December 31, 2001
		Gross Amount		Accumulated Amortization		Gross Amount		Accumulated Amortization
Patents		$	28,946	$	16,946	$	28,946	$	16,550
Distribution rights and license agreements			8,578		3,523		8,578		3,330
	Subtotal other intangible assets, net (subject to amortization)		37,524		20,469		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	$	35,719	$	127,524	$	35,130

9

        For the three months ended March 31, 2002 and 2001, amortization expense for other intangible assets, net was $589 and $1,339, respectively. The estimated future annual amortization expense for other intangible assets, net is as follows:

Fiscal Year
	2002(A)	$	1,762
	2003		2,219
	2004		2,182
	2005		2,182
	2006		2,130
	2007		1,774

(A)

Amount represents remaining estimated amortization expense for 2002.

NOTE 3—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Foreign currency:

        As part of the strategy to manage the risk of foreign currency fluctuations, the Company enters into forward exchange contracts to hedge anticipated cash receipts and payments denominated in currencies other than the U.S. dollar for periods consistent with identified exposures, but generally no longer than the end of the year for which the Company has substantially completed its annual business plan. Gains and losses related to qualifying hedges of these exposures are deferred and recognized in income when the underlying hedged transaction occurs. There were no gains or losses on forward exchange contracts for the quarter ended March 31, 2002. The Company also enters into foreign currency options to hedge anticipated transactions where there is a high probability that anticipated exposures will materialize. Premiums on foreign currency options and any gains realized on such options that qualify as hedges are deferred and recognized in other income or expense when the underlying hedged transaction occurs. The option premium cost represents the entire risk associated with these derivatives. For the quarter ended March 31, 2002, the net charge in other expense related to the option program was $62, which consisted entirely of premium costs. At March 31, 2002, $13 ($8 after tax) was included in accumulated other comprehensive loss, representing the market value of the unrealized hedged transactions, net of the related option premium cost.

        As of March 31, 2002, the Company's only derivatives in place were forward contracts valued at $346 and designated as hedges of anticipated cash flows in various foreign currencies and foreign currency option contracts valued at $234 to hedge anticipated transactions (primarily the Euro).

NOTE 4—SALE OF INSTROMEDIX

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

        The Asset Purchase Agreement and the other agreements executed in connection with the Sale required the Company to assist Buyer in setting up a fully independent headquarters and manufacturing facility in San Diego, California. Pursuant to these agreements, $5,000 of the $30,000 purchase price was placed in escrow. The Company received such escrowed amount, after certain offsets, upon completion of its obligations under the agreements in the first quarter of 2001 and recognized a gain. The total after-tax gain recorded related to the Sale was $5,576, with $3,737, or $.06 per share, recorded during 2001 and $1,839, or $.03 per share recorded in 2000.

10

NOTE 5—INVENTORIES

        Inventories comprise the following:

	March 31, 2002		December 31, 2001
Raw materials	$	41,500	$	40,546
Work-in-process		4,322		4,993
Finished goods		23,423		23,869
	$	69,245	$	69,408

NOTE 6—LONG-TERM DEBT

Convertible Debentures:

        ALARIS Medical's 7¹/4% convertible subordinated debentures ("Convertible Debentures") were retired at their scheduled maturity on January 15, 2002.

        The indentures governing the 11⁵/8% senior secured notes and the 9³/4% senior subordinated notes permit ALARIS Medical Systems to make distributions to ALARIS Medical if it has satisfied certain financial performance requirements. In addition, these indentures allow ALARIS Medical Systems to invest up to $15,000 of its cash on hand in a wholly owned unrestricted subsidiary. ALARIS Medical Systems made such investment partially in December 2001 and the remainder in January 2002. In December 2001, the unrestricted subsidiary, in open market purchases, purchased $183 in principal amount of the Convertible Debentures at an approximate 1% discount. The bonds acquired by the unrestricted subsidiary were then acquired and retired by ALARIS Medical. As a result, the total principal amount outstanding was reduced to $15,969 as of December 31, 2001. ALARIS Medical was able to complete the retirement of the $15,969 Convertible Debentures in January 2002 by using proceeds of a loan from the unrestricted subsidiary along with cash proceeds from employee stock option exercises, including exercises by certain key executives of certain "callable" stock options, the granting of which was previously agreed to by ALARIS Medical in anticipation of the need to call some or all of these options to complete the Convertible Debenture retirement. In connection with the exercise, three of the Company's executive officers received interest-bearing, short-term loans, aggregating $620 from ALARIS Medical Systems. These loans were subsequently repaid in full.

NOTE 7—EARNINGS PER SHARE

        Basic net earnings (loss) per common share have been computed using the weighted-average number of shares of common stock outstanding. Diluted net earnings (loss) per share is computed using the weighted-average number of common stock outstanding during the period increased to include dilutive potential common shares that were outstanding during 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 continuing operations earnings (loss) per share. For the three months ended March 31, 2002, both basic and diluted earnings per share were $.01, using weighted average common shares of 59,192 and 60,599, respectively. Weighted average common shares used in the calculation of diluted earnings per share includes common stock equivalents of 1,407. As the Company experienced a net loss from continuing operations for the three months ended March 31, 2001, basic and diluted net loss per share are the same. If the Company had earnings from continuing operations for the three months ended March 31, 2001, common stock equivalents of 268 would have been added to the weighted shares outstanding. At March 31, 2002 and 2001, outstanding options to purchase 2,610 and 6,863 shares of common stock were excluded from the calculation of common stock equivalents because the options have an exercise price greater than or equal to the average market value of ALARIS Medical's common stock during the period.

11

        Shares issuable upon the assumed conversion of ALARIS Medical's 7¹/4% convertible subordinated debentures were not included in the calculation of diluted earnings per share for the three months ended March 31, 2001 as the impact would have been anti-dilutive. The $16,152 of such Convertible Debentures outstanding at March 31, 2001, if converted at an exercise price of $18.14 per share, would have resulted in an increase of 890 common shares and an increase of $176, net of taxes, to net income, due to the reduction in interest expense.

NOTE 8—SEGMENT INFORMATION

        The Company's segment performance is based on results of two geographical business segments within the same line of business—North America and International.

        The Company is organized primarily based on geographic location with the United States and Canada drug infusion and patient monitoring business, and Mexico manufacturing activities, representing the North America segment. All other international operations, including Europe, Asia, Australia and Latin America, represent the International segment.

        The accounting policies of the segments are the same as those described in the consolidated financial statements. The geographical data does not include intersegment revenues, or charges allocating corporate headquarters costs to each of its operating segments. The Company evaluates the performance of its segments based on operating income and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Adjusted EBITDA represents income from operations before restructuring, other non-recurring items, depreciation and amortization. Adjusted EBITDA does not represent net income or cash flows from operations, as these terms are defined under generally accepted accounting principles, and should not be considered as an alternative to net income as an indicator of the Company's operating performance or to cash flows as a measure of liquidity.

        The table below presents information about reported segments for the three months ended March 31:

		North America			International		Total
2002
	Sales	$	69,446		$	34,954	$	104,400
	Operating income		8,541			7,591		16,132
	Adjusted EBITDA		11,423			9,836		21,259
2001
	Sales	$	64,213		$	34,676	$	98,889
	Operating (loss) income		(1,859	)		7,849		5,990
	Adjusted EBITDA		9,824			9,659		19,483

12

        Reconciliation of total segment adjusted EBITDA to consolidated income (loss) from continuing operations before taxes:

		Three Months Ended March 31,
		2002			2001
Adjusted EBITDA
	Total adjusted EBITDA	$	21,259		$	19,483
	Depreciation and amortization		(5,712	)		(7,750	)
	Interest (net)		(14,214	)		(13,362	)
	Restructuring and other non-recurring items		585			(5,743	)
	Other, net		(494	)		(939	)
	Consolidated income (loss) from continuing operations before income taxes	$	1,424		$	(8,311	)

NOTE 9—CASH FLOW INFORMATION

        During the quarters ended March 31, 2002 and 2001, Federal, state and foreign income taxes paid, net of tax refunds, totaled $558 and $691, respectively. Interest paid during the quarters ended March 31, 2002 and 2001 totaled $579 and $3,678, respectively.

NOTE 10—RESTRUCTURING AND OTHER NON-RECURRING ITEMS

        The Company recorded a non-recurring benefit of $1,125 during the first quarter of 2002 for an insurance settlement. The settlement related to damages and losses incurred at one of the Company's disposable products manufacturing plants in Mexico in 1993 as a result of flooding. The contingency related to the insurance settlement was resolved in the first quarter of 2002, when the Company received proceeds of $1,020 during the quarter and notification of an additional payment due of $105, which was received during April 2002.

        During the first quarter of 2002, the Company initiated a plan to restructure its Central European technical services. In this connection, the Company recorded a charge of $540 which included $400 of severance costs for 21 positions affected by the relocation of the German operation and $140 related to lease termination. The restructuring is anticipated to be completed during the third quarter of 2002. As of March 31, 2002, no payments have been made related to the restructuring.

        Restructuring and other non-recurring charges of $5,743 in the first quarter of 2001 included $2,364 of legal, advisory and consultant expenses related to obtaining an amendment to the ALARIS Medical Systems bank credit agreement. This amendment was completed in April 2001. The Company also recorded $3,379 in restructuring and other non-recurring charges during the first quarter of 2001. These activities related to streamlining of operations in the North American business and resulted in the elimination of 71 positions. The restructuring and other non-recurring charges in the first quarter of 2001 were composed of severance and related benefits of $2,879 and consulting fees of approximately $500. Adjusted EBITDA for the first quarter of 2002 and 2001 excludes the non-recurring items.

NOTE 11—CONTINGENCIES AND LITIGATION

Litigation

        On December 5, 2000, the Company filed a lawsuit in the United States District Court for the Southern District of California against Filtertek, Inc., seeking a declaration that the Company's own needle-free system does not infringe a Filtertek patent relating to a Filtertek needle-free device as well

13

as seeking unspecified damages and equitable relief from Filtertek, for infringement of a patent relating to a needle-free system licensed to the Company on an exclusive basis by Medex, Inc. On March 9, 2001, Filtertek filed a lawsuit in the United States District Court for the Northern District of Illinois seeking unspecified damages and equitable relief from the Company claiming that the Company's needle-free system infringes the Filtertek patent and seeking, as well, a declaration, against Medex only, that Filtertek's needle-free device does not infringe the needle-free system patent licensed to the Company by Medex. The Company subsequently withdrew its claim for damages and equitable relief relating to the Medex patent. As a result of motions made by the parties, the California action was transferred to the Illinois court. The Illinois court granted the Company's motion to bifurcate discovery related to liability and damages. Discovery relating to liability recently ended, while discovery relating to damages is currently abated.

        The Company believes that it has meritorious defenses to all of Filtertek's claims and it intends to defend itself vigorously. The Company has offered to submit to mediation or arbitration to expedite the resolution of this case, but the Company and Filtertek have not reached agreement to do so. Based on the evidence to date, the Company intends to move for a summary adjudication of the claims. If that does not resolve all claims, the Company will press for a prompt trial of the remaining claims. There can be no assurance that the Company's defenses will defeat all of Filtertek's claims and the failure to do so could have a material adverse effect on the Company's business, financial condition, results of operations and cash flows.

United States Customs Service Matter

        During the years 1988 through 1995, Cal Pacifico acted as the Company's United States customs broker and importer of record with respect to the importation into the United States of finished products assembled at the Company's two maquiladora assembly plants in Tijuana, Mexico. Cal Pacifico received a pre-penalty notice of intent from the United States Customs Service ("Customs") to assess additional duties and penalties against Cal Pacifico for its alleged failure to comply with certain documentary requirements regarding the importation of goods on behalf of its clients, including the Company. The Company believes that it is unlikely that Customs will assess any portion of the disputed amounts against the Company. Customs has not initiated any proceedings against the Company in respect of such matters. Nonetheless, Cal Pacifico advised the Company that it may seek recovery from the Company, through arbitration, for any portion of the disputed amounts which it is required to pay to Customs. The ultimate outcome of such proceeding cannot be predicted, nor is the Company able to estimate the possible loss resulting from such proceeding, should one occur. The Company believes that it has meritorious defenses to claims Cal Pacifico might raise against the Company. Although management does not believe it is probable that the Cal Pacifico dispute will result in a material claim against the Company, it will continue to monitor the matter.

Other

        The Company is also a defendant in various actions, claims, and legal proceedings arising from its normal business operations. Management believes they have meritorious defenses and intends to vigorously defend against all allegations and claims. As the ultimate outcome of these matters is uncertain, no contingent liabilities or provisions have been recorded in the accompanying financial statements for such matters. However, in management's opinion, based on discussions with legal counsel, liabilities arising from such matters, if any, will not have a material adverse effect on the Company's business, financial condition, results of operations or cash flows.

14

Part I—Item 2

Management's Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

        Certain of the matters discussed in this report, including, without limitation, matters discussed under Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Certain of these forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates," or "anticipates" or the negative of these terms or other comparable terminology, or by discussions of strategy, plans or intentions. Statements contained in this report that are not historical facts are forward-looking statements. Without limiting the generality of the preceding statement, all statements in this report concerning or relating to estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results are forward-looking statements. In addition, through our senior management, from time to time we make forward-looking statements concerning our expected future operations and performance and other developments. Such forward-looking statements are necessarily estimates reflecting our best judgment based upon current information and involve a number of risks and uncertainties. Other factors may affect the accuracy of these forward-looking statements and our actual results may differ materially from the results anticipated in these forward-looking statements. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include, but are not limited to, those factors or conditions described under Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report and under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates" and "Factors That Could Affect Future Financial Condition and Results" in our Annual Report on Form 10-K for the year ended December 31, 2001, and general conditions in the economy and capital markets.

Overview

        We are a leading developer, manufacturer and provider of infusion systems and related technologies in the United States and internationally. Our intravenous infusion systems are used to deliver to patients one or more fluids, primarily pharmaceuticals or nutritionals, and consist of medication safety systems, single and multi-channel large volume infusion pumps, syringe pumps and dedicated and non-dedicated disposable administration sets. We have the largest installed base of large volume pump delivery lines in the United States hospital market, representing approximately 31% of such installed lines. We also believe that we have the number one or number two market position in the large volume 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 monitoring products that measure and monitor temperature, with a substantial installed base of hospital thermometry systems in the United States. We also provide products which measure and monitor pulse, pulse oximetry and blood pressure. We sell our products primarily to the hospital market through a worldwide direct sales force of over 200 salespersons and more than 100 distributors to over 5,000 hospitals in more than 120 countries worldwide.

        ALARIS Medical is a holding company for ALARIS Medical Systems. ALARIS Medical also identifies and evaluates potential acquisitions and investments, and performs various corporate functions. As a holding company, ALARIS Medical currently has no revenues to fund its operating and interest expense and relies on its existing cash and cash generated from operations of ALARIS Medical Systems to meet its obligations.

15

Critical Accounting Policies and Estimates

        Our discussion and analysis of our operating results and financial condition is based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles.

        On December 12, 2001, the Securities and Exchange Commission issued Release No. FR-60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies." Critical accounting policies are those that involve subjective or complex judgments, often as a result of the need to make estimates. The following areas all require the use of judgments and estimates: inventory valuation, allowances for uncollectible accounts receivable and estimated rebates, cost of field corrective actions, deferred tax asset valuation and carrying value of intangible assets. Estimates in each of these areas are based on historical experience and various judgments and assumptions that we believe are appropriate. Actual results may differ from these estimates. Our accounting practices are discussed in more detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and note 2 to our consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2001.

Results of Operations

        The following table sets forth, for the periods indicated, selected financial information expressed as a percentage of sales. Beginning January 1, 2002, in accordance with new accounting standards, goodwill and certain other intangibles are no longer amortized. As required by FAS 142, prior year data in the following tables has not been restated and, therefore, contains amortization expense that is not included in current year information (see note 2 to the condensed consolidated financial statements).

		Three Months Ended March 31,
		2002		2001
Sales		100.0	%	100.0	%
Cost of sales		50.5		51.6
Gross margin		49.5	%	48.4	%
Selling and marketing expenses		20.5		18.9
General and administrative expenses		9.3		12.1
Research and development expenses		5.9		6.8
Restructuring and other non-recurring items		(0.6	)	5.8
Interest income from sales-type capital leases		1.1		1.3
Income from operations		15.5		6.1
Interest expense, net		(13.6	)	(13.5	)
Other, net		(0.6	)	(1.0	)
Income (loss) from continuing operations before income taxes		1.3		(8.4	)
Provision for (benefit from) income taxes		0.5		(2.1	)
Income (loss) from continuing operations		0.8		(6.3	)
Gain on disposal of discontinued operations (net of tax)		—		3.8
Net income (loss)		0.8	%	(2.5	)%
Other Data:
	Adjusted EBITDA(1)	20.4	%	19.7	%

16

	Three Months Ended March 31,
	2002			2001
Adjusted EBITDA(1)	$	21,259		$	19,483
Restructuring and other non-recurring items		585			(5,743	)
Depreciation and amortization(2)		(5,712	)		(7,750	)
Interest income		213			635
Interest expense		(14,427	)		(13,997	)
Other, net		(494	)		(939	)
(Provision for) benefit from income taxes		(570	)		2,100
Income (loss) from continuing operations	$	854		$	(6,211	)

(1)

Adjusted EBITDA represents income from operations before restructuring, other non-recurring items, discontinued operations, interest, taxes, other, net, depreciation and amortization. Adjusted EBITDA does not represent net income or cash flows from operations, as these terms are defined under generally accepted accounting principles, and should not be considered as an alternative to net income as an indicator of our operating performance or to cash flows as a measure of liquidity. We have included information concerning Adjusted EBITDA herein because we use such information as a measure of assessing cash flows and ability to service debt and understand that such information is used by investors as one measure of an issuer's ability to service debt. Restructuring and other one-time items are excluded from Adjusted EBITDA as we believe that the inclusion of these items would not be helpful to an investor's understanding of our ability to service debt. Our computation of Adjusted EBITDA may not be comparable to similar titled measures of other companies.

(2)

Depreciation and amortization excludes amortization of debt discount and issuance costs included in interest expense.

17

        Our sales results are reported consistent with our two geographical business units: North America and International. The following table summarizes sales to customers by each geographical business unit.

		Three Months Ended March 31,
		2002		2001
		(Dollars in millions)
North America Business Unit
Infusion Instruments		$	12.5	$	9.4
Dedicated Disposables			33.8		33.3
Other Disposables and Service			17.0		14.7
	Subtotal		63.3		57.4
Patient Monitoring			6.1		6.8
	North America Business Unit Total	$	69.4	$	64.2
International Business Unit
Infusion Instruments		$	12.5	$	12.9
Dedicated Disposables			17.1		17.5
Other Disposables and Service			4.2		3.1
	Subtotal		33.8		33.5
Patient Monitoring			1.2		1.2
	International Business Unit Total	$	35.0	$	34.7
ALARIS Medical Inc. Total		$	104.4	$	98.9

Three Months Ended March 31, 2002 Compared with Three Months Ended March 31, 2001

Sales

        For the three months ended March 31, 2002, sales were $104.4 million, an increase of $5.5 million, or 6% (8% in constant currency), over the prior year. North America sales increased $5.2 million, or 8%, and International sales increased $0.3 million or 1% (6% in constant currency), compared with the prior year. The North America sales increase is due to higher volumes of both drug infusion instruments and disposable administration sets, resulting in an increase of $5.9 million over prior year drug infusion and service revenue. Contributing to the North America increase was $1.8 million in sales of our new MEDLEY™ Medication Safety System, which product was not available for sale during the first quarter of 2001. These increases were partially offset by lower volumes of patient monitoring instruments and disposables, resulting in a net decrease of $.7 million from the prior year patient monitoring sales. The International sales increase was due to higher volumes of non-dedicated disposable administration sets and large volume pumps offset by lower syringe pump volumes and revenue compared with the prior year. International sales in the prior year first quarter were very strong due to additional National Health System funding in the United Kingdom during that period, and sales continue to grow from this higher base. The increase in large volume pump sales for the International business is primarily attributed to the Asena GW, a new product launched in late 2001.

Gross Profit

        Gross profit increased $3.9 million, or 8%, during the quarter ended March 31, 2002, compared with the same quarter last year. The gross margin percentage increased to 49.5% in the first quarter of 2002, from 48.4% in the first quarter of 2001. The improved margin percentage was due to increased

18

volume of disposables (which have higher margins than instruments) and to lower product costs resulting from continuing manufacturing efficiencies and improvements, including the benefits from higher production volumes and related favorable utilization.

Selling and Marketing Expenses

        Selling and marketing expense increased $2.7 million, or 15%, during the quarter ended March 31, 2002, compared with the same period in 2001, primarily due to increased selling costs resulting from higher sales volume in the first quarter of 2002 compared with the prior year and to higher sales and marketing costs related to increased personnel and related activities supporting the North America launch of the MEDLEY Medication Safety System. These increases were partially offset by reductions in our distribution costs over the prior year. As a percentage of sales, selling and marketing expenses increased to 20.5% from 18.9% for the first quarter of 2001.

General and Administrative Expenses

        General and administrative expense decreased $2.2 million, or 19%, during the quarter ended March 31, 2002, compared with the same period in the prior year. This decrease is due to a $2.3 million reduction in amortization expense resulting from our adopting Statement of Financial Accounting Standard No. 142, "Goodwill and Intangible Assets" and No. 141, "Business Combinations", effective January 1, 2002, under which our goodwill and certain other amortization expense ceased. Inflationary cost increases in general and administrative expenses were generally offset by lower bonus accruals. General and administrative expense decreased from 12.1% of sales during the first quarter of 2001 to 9.3% of sales for the first quarter of 2002. Had the newly adopted accounting standards been in effect a year ago, general and administrative expense for 2001 would have been 9.7% of sales. See note 2 to the condensed consolidated financial statements.

Research and Development Expenses

        Research and development expense decreased approximately $.5 million, or 8%, during the quarter ended March 31, 2002, primarily due to higher spending requirements for outside consulting in the prior year for the limited North America launch of the MEDLEY Medication Safety System in 2001. Research and development spending in the International business also decreased in 2002 as a result of the launch of Asena GW, which accounted for significant costs in the prior year. Research and development expense decreased to 5.9% of sales for the first quarter of 2002, compared with 6.8% of sales for the first quarter of 2001.

Restructuring and Other Non-recurring Items

        We recorded a non-recurring benefit of $1.1 million during the first quarter of 2002 for an insurance settlement. The settlement related to damages and losses incurred at one of our disposable products manufacturing plants in Mexico in 1993 as a result of flooding. The contingency related to the insurance settlement was resolved in the first quarter of 2002, when we received proceeds of $1.0 million during the quarter and notification of an additional payment due of $.1 million, which was received during April 2002.

        During the first quarter of 2002, we initiated a plan to restructure our Central European technical services. In this connection, we recorded a charge of $.5 million which included $.4 million of severance costs for 21 positions affected by the relocation of the German operation and $.1 million related to lease termination. The restructuring is anticipated to be completed during the third quarter of 2002. As of March 31, 2002, no payments have been made related to the restructuring.

        Restructuring and other non-recurring charges of $5.7 million in the first quarter of 2001 included $2.4 million of legal, advisory and consultant expenses related to obtaining an amendment to the

19

ALARIS Medical Systems bank credit agreement. This amendment was completed in April 2001. We also recorded $3.3 million in restructuring and other non-recurring charges during the first quarter of 2001. These activities related to streamlining of operations in the North American business and resulted in the elimination of 71 positions. The restructuring and other non-recurring charges in the first quarter of 2001 were composed of severance and related benefits of $2.8 million and consulting fees of approximately $.5 million. Adjusted EBITDA for the first quarter of 2002 and 2001 excludes the non-recurring items.

Adjusted EBITDA

        Adjusted EBITDA increased $1.8 million during the three months ended March 31, 2002 compared with the three months ended March 31, 2001. As a percentage of sales, Adjusted EBITDA increased from 19.7%, or $19.5 million, during the three months ended March 31, 2001 to 20.4%, or $21.3 million, during the three months ended March 31, 2002 due to the reasons discussed above. See note 1 under "Results of Operations."

Interest Expense

        Interest expense increased $.4 million, or 3%, during the quarter ended March 31, 2002 compared with the same period in the prior year. The increase in interest is due to increased accretion on our 11¹/8% senior discount notes.

Interest Income

        Interest income decreased $.4 million during the quarter ended March 31, 2002 compared with the same quarter in 2001 due to lower interest rates earned on cash balances in 2002 compared with 2001.

Other, net

        Other expense decreased $.4 million during the quarter ended March 31, 2002 compared with the same quarter in the prior year due to a decrease in foreign currency transaction losses of $.9 million. During the first quarter of 2001, we received $.5 million of other income relating to the sale of a tradename. We did not receive comparable income in the current year, which partially offset the decrease from foreign currency transaction losses.

Discontinued Operations

        During the third quarter of 2000, we sold our Instromedix® division to Card Guard Technologies, Inc. ("Card Guard"). The agreement with Card Guard provided that we would assist the buyer in setting up a fully independent headquarters and manufacturing facility. During the first quarter of 2001, we completed our obligations related to the agreement and recorded a gain of $3.7 million, net of taxes.

Liquidity and Capital Resources

        We expect to continue to meet our 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 primarily for operating expenses, including planned expenditures for new research and development programs, capital expenditures and scheduled interest payments on outstanding indebtedness.

        At March 31, 2002, we had $513.6 million combined outstanding indebtedness composed of obligations of ALARIS Medical and ALARIS Medical Systems. ALARIS Medical's indebtedness consisted of $163.6 million of 11¹/8% senior discount notes due 2008 ("Senior Discount Notes").

20

ALARIS Medical Systems' indebtedness consisted of $170.0 million of 11⁵/8% senior secured notes due 2006 ("Senior Secured Notes"), which were issued on October 16, 2001 and $180.0 million of 9³/4% senior subordinated notes due 2006 ("Senior Subordinated Notes"). The Senior Secured Notes bear interest at 11⁵/8%, payable semi-annually in arrears beginning June 1, 2002, with all principal due at maturity on December 1, 2006. The Senior Subordinated Notes bear interest at 9³/4%, payable semi-annually in arrears on June 1 and December 1, with all principal due at maturity on December 1, 2006.

        The Senior Discount Notes accrete to $189.0 million principal amount on August 1, 2003. Prior thereto, interest accruing on the Senior Discount Notes is added to the outstanding principal balance through July 31, 2003. Interest on the Senior Discount Notes accruing subsequent to July 31, 2003 is payable in cash semi-annually in arrears on February 1 and August 1, commencing February 1, 2004. The indentures governing the Senior Secured Notes and the Senior Subordinated Notes permit ALARIS Medical Systems to make distributions, or "restricted payments," to ALARIS Medical if at the time of the restricted payment, ALARIS Medical Systems satisfies the two conditions described in the following paragraphs. Management believes that when ALARIS Medical is required to begin making cash interest payments on the Senior Discount Notes in 2004, ALARIS Medical Systems will have satisfied these conditions.

        The first condition which must be satisfied prior to making a restricted payment is that at the time of the distribution, ALARIS Medical Systems must have a Fixed Charge Coverage Ratio (as calculated in accordance with the indentures as described below) of at least 2.5 to 1 calculated for the four complete calendar quarters preceding the distribution as though the distribution had been made at the beginning of such period. The Fixed Charge Coverage Ratio will be determined by dividing ALARIS Medical Systems' Consolidated EBITDA (as defined in the indentures) by its Consolidated Interest Expense, as defined in the indentures. Based on the interest rate on and the amount of debt outstanding at ALARIS Medical Systems at March 31, 2002, the interest expense to be included in future calculations of the Fixed Charge Coverage Ratio is approximately $38.9 million. As a result, the minimum required annual Consolidated EBITDA to meet the ratio will be approximately $97.3 million.

        The calculation of Consolidated EBITDA for purposes of the indentures is different from our calculation of Adjusted 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 Income of such Person and its Restricted Subsidiaries for such period, plus, to the extent deducted in computing Consolidated Net Income: (i) provision for taxes based on income or profits of such Person and its Restricted Subsidiaries for such 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 other non-cash charges (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash charges in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Restricted Subsidiaries for such period; and any extraordinary or non-recurring loss and any net loss realized in connection with either an Asset Sale or the extinguishment of indebtedness, in each case, on a consolidated basis determined in accordance with GAAP. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization and other non-cash charges of, a Restricted Subsidiary of a Person shall be added to Consolidated Net Income to compute Consolidated EBITDA only to the extent (and in the same proportion) that the Net Income of such Restricted Subsidiary was included in calculating the Consolidated Net Income of such Person."

21

        Consolidated EBITDA, per the indentures, as calculated for the quarter reconciled to those reported by ALARIS Medical and ALARIS Medical Systems is as follows:

	Three months ended March 31, 2002
	(Dollars in thousands)
ALARIS Medical Systems consolidated net income, as reported	$	3,749
Provision for income taxes		2,498
Interest expense		9,880
Depreciation and amortization		5,712
Non-cash items		60
Extraordinary/non-recurring items		540
Consolidated EBITDA, per indentures	$	22,439
Less insurance settlement	$	(1,125	)
Less non-cash items		(60	)
Less interest income		(214	)
Other, net		494
ALARIS Medical Systems Adjusted EBITDA, as reported	$	21,534
ALARIS Medical operating expenses		(275	)
ALARIS Medical Adjusted EBITDA, as reported	$	21,259

        The second condition which must be satisfied prior to making a restricted payment is that the distribution, together with certain other restricted payments, may not exceed a sum determined by reference to ALARIS Medical Systems' cumulative Consolidated Net Income (as defined in the indentures) for the period since January 1, 1997 and cash capital contributions made after such date, less restricted payments made. This condition provides that the Consolidated Net Income of ALARIS Medical Systems will be added to the amount available each quarter until such time as historical net losses of $39.9 million are exhausted. Subsequent to such time, 50% of future ALARIS Medical Systems net income will be added to the amount available. At March 31, 2002, the amount available for future restricted payments was $13.6 million.

        The preceding description of the provisions of the indentures which govern restricted payments, including the defined terms, is a summary only and is qualified in its entirety by the text of the indentures, which ALARIS Medical and ALARIS Medical Systems have previously filed with the Securities and Exchange Commission.

        ALARIS Medical's Convertible Debentures were retired at their scheduled maturity on January 15, 2002. The indentures governing the Senior Secured Notes and the Senior Subordinated Notes permitted ALARIS Medical Systems to use $15 million of its cash on hand to invest in a wholly owned unrestricted subsidiary. ALARIS Medical Systems made such investment and the unrestricted subsidiary used a portion of the proceeds of such investment to acquire $ .2 million Convertible Debentures in the open market in 2001. In 2002, $14.8 million was loaned to ALARIS Medical, which used the proceeds of such loan and proceeds from the exercise of stock options to retire the Convertible Debentures. A portion of the stock option exercise proceeds resulted from the exercise by some of our executive officers of stock options. In connection with the exercise, three of our executive officers received interest-bearing, short-term loans, aggregating $.6 million, from ALARIS Medical Systems. These loans were subsequently repaid in full. ALARIS Medical was entitled to require such executive officers to exercise such options in order to provide ALARIS Medical with sufficient funds to retire the Convertible Debentures. Such options were granted to these executive officers in anticipation of

22

ALARIS Medical's need to require such exercise in order to complete the retirement of the Convertible Debentures (see note 6 to the condensed consolidated financial statements).

        ALARIS Medical Systems is required over the next twelve months (through March 31, 2003) to make interest payments on the Senior Secured Notes in the amount of $22.2 million and interest payments on the Senior Subordinated Notes in the amount of $17.6 million. On January 15, 2002, ALARIS Medical made its final interest payment on the Convertible Debentures of $.6 million.

        Although we have no further principal amortization requirements until the maturity of the Senior Secured Notes and the Senior Subordinated Notes in December 2006, management will continue to monitor the capital markets prior to such time for opportunities to improve our capital structure. We anticipate that we will refinance our entire debt structure prior to December 2006 since we believe that it is unlikely that ALARIS Medical Systems will generate sufficient cash flow from operations to repay the Senior Secured Notes and the Senior Subordinated Notes at maturity in 2006 and to permit it to make distributions to ALARIS Medical to enable it to repay the Senior Discount Notes at maturity in 2008. Such refinancing may involve an offering of debt securities of ALARIS Medical Systems or ALARIS Medical (or both), an offering of equity securities of ALARIS Medical to reduce the level of indebtedness of ALARIS Medical Systems or ALARIS Medical (or both), or a combination of any of the foregoing. The ability of ALARIS Medical Systems or ALARIS Medical, or both, to obtain such debt or equity financing will be dependent upon many factors, including overall financial market and economic conditions and our operating performance and expectations at such time.

        Should ALARIS Medical Systems not repay its indebtedness at maturity in 2006, should ALARIS Medical not repay the Senior Discount Notes in 2008, or should ALARIS Medical Systems not be able to make distributions to ALARIS Medical commencing in 2004 in order to permit ALARIS Medical to make cash interest payments on the Senior Discount Notes, these events could have a material adverse effect on our business, financial condition and results of operations and could result in a default by ALARIS Medical, ALARIS Medical Systems, or both, and possible acceleration of all or a portion of such indebtedness, unless ALARIS Medical, ALARIS Medical Systems, or both, could refinance such indebtedness or obtain the required funds from other sources.

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

        Net cash provided by operating activities for the three months ended March 31, 2002 was $15.5 million compared with $24.4 million provided by operating activities in the first quarter of 2001. Net cash used in investing activities for the three months ended March 31, 2002 was $3.8 million. Net cash provided by investing activities for the three months ended March 31, 2001 was $.2 million, which included $3.6 million of net proceeds from the sale of a discontinued operation. Net cash used in financing activities for the three months ended March 31, 2002 and 2001 was $15.1 million and $5.1 million, respectively and was primarily composed of principal payments on long-term debt.

        We made capital expenditures of approximately $3.5 million during the three months ended March 31, 2002 and anticipate additional capital expenditures of approximately $16.5 million during the remainder of 2002.

23

        The following schedule summarizes our contractual obligations and commitments to make future payments as of March 31, 2002.

	Contractual Obligations & Commitments
Payments Due by Period	Long-term Debt		Operating Leases		Interest Payments		Total
2002(A)	$	—	$	4.6	$	39.8	$	44.4
2003		—		6.2		37.4		43.6
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	$	29.9	$	294.1	$	863.0

(A)

Amount represents remaining contractual obligation during 2002.

Backlog

        The amount of unfilled orders, believed to be firm, at March 31, 2002 and 2001 was $8.4 million and $11.4 million, respectively.

Foreign Operations

        We have significant foreign operations and, as a result, are subject to various risks arising therefrom, including foreign currency risks. This risk did not materially change during the first quarter of 2002. For the quarters ended March 31, 2002 and 2001, approximately 35% and 37%, respectively, of our sales were denominated in currencies other than the U.S. dollar. For the quarters ended March 31, 2002 and 2001, approximately 31% and 25%, respectively, of our operating expenses were denominated in currencies other than the U.S. dollar. These foreign currencies are primarily those of Western Europe, Canada, Mexico and Australia. Additionally, substantially all of the receivables and payables of our foreign subsidiaries are denominated in currencies other than the U.S. dollar. Due to changes in foreign currency exchange rates during 2002 and 2001, primarily a strengthening of the U.S. dollar against many European currencies, we recognized foreign currency transaction losses of $.4 million and $1.3 million during 2002 and 2001, respectively. Such losses were recorded in other expense in the statement of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Exchange Risk Management

        As part of the strategy to manage the risk of foreign currency fluctuations, we enter into forward exchange contracts to hedge anticipated cash receipts and payments denominated in currencies other than the U.S. dollar for periods consistent with identified exposures, but generally no longer than the end of the year for which we have substantially completed our annual business plan. Gains and losses related to qualifying hedges of these exposures are deferred and recognized in income when the underlying hedged transaction occurs. Currently, we also enter into foreign currency options to hedge anticipated transactions where there is a high probability that anticipated exposures will materialize. Premiums on foreign currency options and any gains realized on such options that qualify as hedges are deferred and recognized in income when the underlying hedged transaction occurs. In addition, any deferred gains and losses on hedges which are terminated prior to the transaction date would be recognized in current income when the underlying hedged transaction occurs.

24

        As a matter of policy, we will only enter into currency contracts with counterparties that have at least an investment grade or equivalent credit rating from a major rating agency. The counterparties to these contracts are major financial institutions. We do not have significant exposure to any one counterparty. Management believes the risk of loss related to counterparty default is remote and would only consist of the net market value gain of the underlying instrument. The contracts have varying maturities with none exceeding twelve months. Costs associated with entering into contracts are not expected to be material to our financial results. Currency option and forward contracts are discussed in note 3 to the condensed consolidated financial statements.

Derivative Financial Instruments

        We address certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments.

        During the first quarter of 2001, we began a foreign exchange risk management strategy as described above. Under the program, we utilize foreign currency options and forward contracts to reduce the effect of exchange rate fluctuations. We categorize these instruments as entered into for purposes other than trading. We do not utilize derivative instruments for trading or speculative purposes. As of March 31, 2002 our only derivatives in place were forward contracts valued at $.3 million and designated as hedges of anticipated cash flows in various foreign currencies and foreign currency option contracts valued at $.2 million to hedge anticipated transactions (primarily the Euro).    This amount is recorded as a current asset in our consolidated balance sheet (see note 3 to the condensed consolidated financial statements).

Market Risk

        We incur option premium cost in connection with our currency hedging activities. The option premium cost represents the entire risk associated with these derivatives. Option premium costs are reflected in the period the underlying transaction is recognized.

25

Part II
Other Information

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits

3.2	ALARIS Medical, Inc. By-Laws (as amended through May 23, 2001)	Incorporated by reference to ALARIS Medical's Form 10-Q for the quarterly period ended June 30, 2001
10.2	Changes to the Employment Letter dated April 13, 1999 by and between David L. Schlotterbeck, ALARIS Medical and ALARIS Medical Systems are described in ALARIS Medical's Proxy Statement dated April 12, 2002 under the heading "Employment Contracts, Termination of Employment and Change-in-Control Arrangements."	Incorporated by reference to ALARIS Medical's Proxy Statement dated April 12, 2002.
10.4	ALARIS Medical's 1996 Stock Option Plan, as amended	Filed herewith

(b)

Reports on Form 8-K

        None.

26

SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ALARIS MEDICAL, INC. (Registrant)
Date: May 1, 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)

27

QuickLinks

ALARIS MEDICAL, INC. INDEX
Part 1—Item 1 Financial Information
ALARIS MEDICAL, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (Dollar and share amounts in thousands, except per share data)
ALARIS MEDICAL, INC. CONDENSED CONSOLIDATED BALANCE SHEET (Dollar and share amounts in thousands, except per share data)
ALARIS MEDICAL, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Dollars in thousands)
ALARIS MEDICAL, INC. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) (Dollar and share amounts in thousands)
ALARIS MEDICAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars and share amounts in thousands, except per share data)
Part I—Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Part II Other Information

Item 6. Exhibits and Reports on Form 8-K

SIGNATURES

EX-10.4

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 10.4

EXHIBIT A

ALARIS MEDICAL, INC.
1996 STOCK OPTION PLAN

(AS MODIFIED EFFECTIVE JANUARY 1, 2002)

1.    NAME.    

        The name of this plan is the ALARIS Medical, Inc. 1996 Stock Option Plan.

2.    DEFINITIONS.    

        For the purposes of the Plan, the following terms shall be defined as set forth below:

        (a)  "Affiliate" means any partnership, corporation, firm, joint venture, association, trust, unincorporated organization or other entity (other than a Subsidiary) that, directly or indirectly through one or more intermediaries, is controlled by the Company, where the term "controlled by" means the possession, direct or indirect, of the power to cause the direction of the management and policies of such entity, whether through the ownership of voting interests or voting securities, as the case may be, by contract or otherwise. For purposes of Section 11 below, "Affiliate" means any partnership, corporation, firm, joint venture, association, trust, unincorporated organization or other entity that, directly or indirectly through one or more intermediaries, is "controlled by" (as defined above) Jeffry M. Picower or the Picower Group (as defined in Section 11(b)(i) below).

        (b)  "Board" means the board of directors of the Company.

        (c)  "Cause" as applied to any Participant means: (i) the conviction of such individual for the commission of any felony; (ii) the commission by such individual of any crime involving moral turpitude (E.G., larceny, embezzlement) which results in harm to the business, reputation, prospects or financial condition of the Company, any Subsidiary or Affiliate; or (iii) the willful neglect, failure or refusal of such individual to carry out his duties, which results in harm to the business, reputation, prospects or financial condition of the Company, any Subsidiary or Affiliate, which neglect, failure or refusal continues for a period of ten consecutive business days following notice thereof, or ten cumulative business days following successive notices thereof, to such individual from the Company; PROVIDED, HOWEVER, that such willful neglect, failure or refusal is not due to the death or disability (i.e., as a result of an injury or sickness such individual is rendered unable to perform his duties as an Officer, Employee, consultant or independent contractor, as the case may be, on a full-time basis for an extended period) of such individual or illness leading to the death or disability of such individual.

        (d)  "Closing Price" means, except as otherwise reasonably determined by the Committee based on reported prices of a Share, (i) the daily closing price of a Share as reported in the American Stock Exchange (or the principal exchange on which the Shares are then traded) composite transactions published in the Eastern Edition of THE WALL STREET JOURNAL or (ii) if the Shares are traded in the over-the-counter market, the daily average of the highest bid and lowest asked prices per Share as reported through the NASDAQ system or any successor thereto.

        (e)  "Code" means the Internal Revenue Code of 1986, as amended from time to time and the Treasury regulations promulgated thereunder.

        (f)    "Committee" means the Board or a committee appointed by the Board to administer the Plan as provided in Section 4(a).

        (g)  "Common Stock" means the $.01 par value common stock of the Company or any security of the Company identified by the Committee as having been issued in substitution or exchange therefor or in lieu thereof.

        (h)  "Company" means ALARIS Medical, Inc., a Delaware corporation.

        (i)    "Director" means an individual who: (i) is now, or hereafter becomes, a member of the Board or of the board of directors of any Subsidiary or Affiliate; and (ii) is not eligible to participate in the Non-Employee Director NQSO Plan.

        (j)    "Employee" means an individual employed by the Company, a Subsidiary, or an Affiliate whose wages, if an employee in the United States, are subject to the withholding of federal income tax under Section 3401 of the Code.

        (k)  "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute.

        (l)    "Fair Market Value" of a Share as of a specified date means, except as otherwise reasonably determined by the Committee based on reported prices of a Share, (i) the average of the highest and lowest market prices of a Share on such date as reported in the American Stock Exchange (or the principal exchange on which the Shares are then traded) composite transactions published in the Eastern Edition of THE WALL STREET JOURNAL or, if no trading of Common Stock is reported for that day, the next preceding day on which trading was reported, or (ii) if the Shares are traded in the over-the-counter market, the average of the highest bid and lowest asked prices per Share on the specified date (or the next preceding date on which trading was reported) as reported through the NASDAQ system or any successor thereto.

        (m)  "ISO" means any stock option granted pursuant to the Plan that is intended to be and is specifically designated as an "incentive stock option" within the meaning of Section 422 of the Code.

        (n)  "Non-Employee Director NQSO Plan" means the Company's Third Amended and Restated 1990 Non-Qualified Stock Option Plan for Non-Employee Directors, as may be amended from time to time.

        (o)  "NQSO" means any stock option granted pursuant to the provisions of the Plan that is not an ISO.

        (p)  "Officer" means an individual elected or appointed by the Board or by the board of directors of a Subsidiary or Affiliate or chosen in such other manner as may be prescribed by the by-laws of the Company, a Subsidiary or Affiliate, as the case may be, to serve as such, or, in the case of an Affiliate which is not a corporation, any individual elected or appointed to fulfill a similar function by a body or individual exercising similar authority.

        (q)  "Option" means an ISO or a NQSO (including a NQSO which is designated as a Performance Option) granted under the Plan.

        (r)  "Participant" means an individual who is granted an Option under the Plan.

        (s)  "Performance Option" means any NQSO which is designated as a Performance Option and is subject to the performance vesting provisions set forth in Section 9(d) and the Stock Option Agreement.

        (t)    "Plan" means this ALARIS Medical, Inc. 1996 Stock Option Plan, as it may be amended from time to time.

        (u)  "Rule 16b-3" means Rule 16b-3 promulgated by the Securities and Exchange Commission under the Exchange Act, or any successor or replacement rule adopted by the Securities and Exchange Commission.

        (v)  "Share" means one share of Common Stock, adjusted in accordance with Section 10(b), if applicable.

        (w)  "Stock Option Agreement" means the written agreement between the Company and the Participant that contains the terms and conditions pertaining to an Option.

2

        (x)  "Subsidiary" means any corporation of which the Company, directly or indirectly, is the beneficial owner of fifty percent (50%) or more of the total combined voting power of all classes of its stock having voting power and which qualifies as a subsidiary corporation pursuant to Section 424(f) of the Code.

        (y)  "Target Date" means the date, as described in Section 9(d), on which a Target Price is achieved with respect to a Performance Option.

        (z)  "Target Price" means a target price of a Share, as determined by the Committee in its sole and absolute discretion and so designated in the Stock Option Agreement, upon the attainment of which the applicable Vesting Percentage portion of a Performance Option shall become vested, as described in Section 9(d).

        (aa)    "Ten Percent Shareholder" means a Participant who prior to the grant of an ISO owned, directly or indirectly within the meaning of Section 424(d) of the Code, ten percent (10%) or more of the total combined voting power of all classes of stock of the Company, any Subsidiary or any parent of the Company (as defined in Section 424(e) of the Code).

        (bb)    "Vesting Percentage" means a specified percentage of a Performance Option, as determined by the Committee in its sole and absolute discretion and set forth in the Stock Option Agreement, which shall become vested upon the attainment of a Target Price in accordance with Section 9(d).

3.    PURPOSE.    

        The purpose of the Plan is to enable the Company to provide incentives, which are linked directly to increases in shareholder value, to certain key personnel in order that they will be encouraged to promote the financial success and progress of the Company.

4.    ADMINISTRATION.    

        (a)    COMPOSITION OF THE COMMITTEE.    

        The Plan shall be administered by the Board or a committee appointed by the Board. Members of that committee shall not be entitled to participate in the Plan. Subject to the provisions of the first sentence of this Section 4(a), the Board may from time to time remove members from, or add members to, that committee. Vacancies on that committee, however caused, shall be filled by the Board.

        (b)    ACTIONS BY THE COMMITTEE.    

        The Committee shall hold meetings (in person or telephonically) at such times and places as it may determine. Acts approved by a majority of the members of the Committee present at a meeting at which a quorum is present, or acts reduced to or approved in writing by a majority of the members of the Committee, shall be the valid acts of the Committee.

        (c)    POWERS OF THE COMMITTEE.    

        Subject to the express terms and conditions hereof, the Committee shall have the authority to administer the Plan in its sole and absolute discretion. To this end, the Committee is authorized to construe and interpret the Plan and to make all other determinations necessary or advisable for the administration of the Plan, including, but not limited to, the authority to determine the eligible individuals who shall be granted Options, the number of Options to be granted, the vesting period, if any, for all Options granted hereunder, the date on which any Option becomes first exercisable, the number of Shares subject to each Option, the exercise price for the Shares subject to each Option, and, whether the Option to be granted is an ISO or a NQSO. The Committee may delegate to an Officer its authority to grant Options to eligible individuals under the Plan who are not Officers; provided, however, that Options to purchase no more than 50,000 Shares may be granted to any individual in any calendar year pursuant to such delegation of authority. Any determination, decision or action of the

3

Committee in connection with the construction, interpretation, administration or application of the Plan shall be final, conclusive and binding upon all Participants and any person validly claiming under or through a Participant.

        (d)    LIABILITY OF COMMITTEE MEMBERS.    

        No member of the Board or the Committee will be liable for any action or determination made in good faith by the Board or the Committee with respect to the Plan or any grant or exercise of an Option thereunder.

        (e)    OPTION ACCOUNTS.    

        The Committee shall maintain or cause to be maintained a journal in which a separate account for each Participant shall be established. Whenever an Option is granted to or exercised by a Participant, the Participant's account shall be appropriately credited or debited. Appropriate adjustment shall also be made in the journal with respect to each account in the event of an adjustment pursuant to Section 10(b).

5.    EFFECTIVE DATE AND TERM OF THE PLAN.    

        (a)    EFFECTIVE DATE OF THE PLAN.    

        The Plan was adopted by the Board on November 26, 1996, and became effective on such date, subject to approval by the shareholders of the Company, which was obtained at a meeting held on June 11, 1997. An amendment of the Plan was approved by the Board and became effective on May 28, 1998, subject to approval by the shareholders of the Company, which was obtained at a meeting held on June 24, 1998. A further amendment of the Plan was approved by the Board and became effective on December 23, 1999, subject to approval by the shareholders of the Company at a meeting duly called and held within twelve months following such date.

        (b)    TERM OF PLAN.    

        No Option shall be granted pursuant to the Plan on or after November 26, 2006, but Options theretofore granted may extend beyond that date.

6.    TYPE OF OPTIONS AND SHARES SUBJECT TO THE PLAN.    

        Options granted under the Plan may be either ISOs or NQSOs. Each Option that is a Performance Option must be a NQSO. Each Stock Option Agreement shall specify whether the Option covered thereby is an ISO or a NQSO and, in the case of a NQSO, whether the Option is a Performance Option.

        The maximum aggregate number of Shares that may be issued with respect to Options (other than Performance Options) under the Plan is 6,700,000 Shares. The maximum number of Shares that may be issued with respect to Performance Options under the Plan is 2,800,000. However, no more than 1,000,000 Shares (subject to adjustment as described below) shall be awarded with respect to any one or more Options granted to any Participant in any calendar year. The limitation on the number of Shares which may be granted under the Plan shall be subject to adjustment as provided in Section 10(b).

        If any Option granted under the Plan expires or is terminated for any reason, any Shares as to which the Option has not been exercised shall again be available for purchase under Options subsequently granted; PROVIDED, HOWEVER, that (i) Shares which were subject to Performance Options shall again be available for purchase only under Performance Options subsequently granted, and (ii) Shares which were subject to Options which were not Performance Options shall again be available for purchase only under Options subsequently granted which are not Performance Options. At all times during the term of the Plan, the Company shall reserve and keep available for issuance such

4

number of Shares as the Company is obligated to issue upon the exercise of all then outstanding Options.

7.    SOURCE OF SHARES ISSUED UNDER THE PLAN.    

        Common Stock issued under the Plan may consist, in whole or in part, of authorized or unissued Shares or treasury Shares, as determined in the sole and absolute discretion of the Committee. No fractional Shares shall be issued under the Plan.

8.    ELIGIBILITY.    

        The individuals eligible for the grant of Options under the Plan shall be: (i) all Directors, Officers and Employees; and (ii) such individuals determined by the Committee to be rendering substantial services as a consultant or independent contractor to the Company or any Subsidiary or Affiliate of the Company, as the Committee shall determine from time to time in its sole and absolute discretion; PROVIDED, HOWEVER, that (i) only Employees of the Company or any Subsidiary shall be eligible to receive ISOs, and (ii) only Officers and Employees who are appointed or designated as corporate or divisional vice presidents or directors of the Company (and such other categories of Employees and consultants and independent contractors as shall be specifically approved by the Committee) shall be eligible to receive Performance Options. Any Participant shall be eligible to be granted more than one Option hereunder.

9.    OPTIONS.    

        (a)    GRANT OF OPTIONS.    

        Subject to any applicable requirements of the Code and any regulations issued thereunder, the date of the grant of an Option shall be the date on which the Committee determines to grant the Option.

        (b)    EXERCISE PRICE OF ISOS AND PERFORMANCE OPTIONS.    

        The exercise price of each Share subject to an ISO or a Performance Option shall be determined by the Committee but shall not be less than the Fair Market Value of a Share on the date of grant of the ISO or Performance Option, as the case may be; PROVIDED HOWEVER, except that in the case of a grant of an ISO to a Participant who at the time such ISO was granted was a Ten Percent Shareholder, the exercise price shall not be less than 110% of the Fair Market Value of a Share on the date of grant of the ISO.

        (c)    EXERCISE PRICE OF NQSOS (OTHER THAN PERFORMANCE OPTIONS).    

        The exercise price of each Share subject to a NQSO (other than a Performance Option) shall be determined by the Committee at the time of grant but shall not be less than the par value of a Share.

        (d)    EXERCISE PERIOD.    

        Each Option granted hereunder shall vest and become first exercisable as determined by the Committee in its sole and absolute discretion and set forth in the Stock Option Agreement. Notwithstanding the foregoing, the vesting schedule applicable to each Performance Option shall be subject to the following requirements; PROVIDED, HOWEVER, that notwithstanding the failure to achieve any applicable Target Price(s), an outstanding Performance Option shall vest on the date that is seven (7) years after the date of grant of the Performance Option.

          (i)  The Committee shall designate one or more Vesting Percentage(s) and a Target Price applicable to each such Vesting Percentage(s) with respect to each Performance Option granted pursuant to this Plan. The total sum of such designated Vesting Percentage(s), (or, in the case of only one Vesting Percentage, such Vesting Percentage) shall equal 100% of such Performance Option.

5

        (ii)  That portion of each Performance Option equal to a designated Vesting Percentage shall vest and become first exercisable on the date ("Target Date") on which the Closing Price has equaled or exceeded the Target Price applicable to such Vesting Percentage with respect to the Shares on each day (with exception permitted for up to six days) during the ninety calendar day period preceding such Target Date.

        (e)    TERMS AND CONDITIONS.    

        All Options granted pursuant to the Plan shall be evidenced by a Stock Option Agreement (which need not be the same for each Participant or Option), approved by the Committee which shall be subject to the following express terms and conditions and the other terms and conditions as are set forth in this Section 9, and to such other terms and conditions as shall be determined by the Committee in its sole and absolute discretion which are not inconsistent with the terms of the Plan:

          (i)  the failure of an Option to vest when due to vest pursuant to its terms for any reason whatsoever shall cause the unvested Option to expire and be of no further force or effect;

        (ii)  unless terminated earlier pursuant to Sections 9(i) or 11, the term of any Option granted under the Plan shall be specified in the Stock Option Agreement but shall be no greater than ten years from the date of grant; PROVIDED, HOWEVER, that no ISO granted to a Ten Percent Shareholder shall have a term of more than five years from the date of grant;

        (iii)  the Committee shall have the discretion to accelerate vesting upon termination of employment of a Participant.

        (iv)  in the case of an ISO, the aggregate Fair Market Value (determined as of the time the ISO is granted) of Shares exercisable for the first time by a Participant during any calendar year (under the Plan and any other incentive stock option plans of the Company, any Subsidiary or any parent of the Company (as defined in {}Section 424(e) of the Code) shall not exceed $100,000;

        (v)  no Option or interest therein may be pledged, hypothecated, encumbered or otherwise made subject to execution, attachment or similar process, and no Option or interest therein shall be assignable or transferable by the holder otherwise than by will or by the laws of descent and distribution or to a beneficiary upon the death of a Participant, and an Option shall be exercisable during the lifetime of the holder only by him or by his guardian or legal representative, except that an Option (other than an ISO) may be transferred to one or more transferees during the lifetime of the Participant, and may be exercised by such transferee in accordance with the terms of such Option, but only if and to the extent such transfers are permitted by the Committee pursuant to the express terms of the Stock Option Agreement (subject to any terms and conditions which the Committee may impose thereon). A transferee or other person claiming any rights under the Plan from or through any Participant shall be subject to all terms and conditions of the Plan and any Stock Option Agreement applicable to such Participant, except as otherwise determined by the Committee, and to any additional terms and conditions deemed necessary or appropriate by the Committee; and

        (vi)  payment for the Shares to be received upon exercise of an Option may be made in cash or, if so provided by the Committee in the Stock Option Agreement, in Shares (determined with reference to their Fair Market Value on the date of exercise), or any combination thereof acceptable to the Company.

        (f)    ADDITIONAL MEANS OF PAYMENT.    

        Any Stock Option Agreement may, in the sole and absolute discretion of the Committee, permit payment by any other form of legal consideration consistent with applicable law and any rules and regulations relating thereto, including, but not limited to, the execution and delivery of a full recourse promissory note by the Participant to the Company.

6

        (g)    EXERCISE.    

        The holder of an Option may exercise the same by filing with the Corporate Secretary of the Company a written election, in such form as the Committee may determine, specifying the number of Shares with respect to which such Option is being exercised, and accompanied by payment in full of the exercise price for such Shares. Notwithstanding the foregoing, the Committee may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent the Participant from exercising the Option with respect to the full number of Shares as to which the Option is then exercisable.

        (h)    WITHHOLDING TAXES.    

        Prior to issuance of the Shares upon exercise of an Option, the Participant shall pay or make adequate provision for the payment of any federal, state, local or foreign withholding obligations of the Company or any Subsidiary or Affiliate of the Company, if applicable. In the event a Participant shall fail to make adequate provision for the payment of such obligations, the Company shall have the right to withhold an amount of Shares otherwise deliverable to the Participant sufficient to pay such withholding obligations or, in the discretion of the Committee, to refuse to honor the exercise.

        (i)    TERMINATION OF OPTIONS.    

        Options granted under the Plan shall be subject to the following events of termination, unless otherwise provided in the Stock Option Agreement:

          (i)  in the event a Participant who is a Director (but not an Officer or Employee) is removed from the Board or the board of directors of a Subsidiary or an Affiliate, as the case may be, for cause (as contemplated by the charter, by-laws or other organizational or governing documents), all unexercised Options held by such Participant on the date of such removal (whether or not vested) shall expire immediately;

        (ii)  in the event the employment of a Participant who is an Officer or Employee is terminated for Cause, or in the event the services of a Participant who is a consultant or independent contractor are terminated for Cause, all unexercised Options held by such Participant on the date of such termination (whether or not vested) shall expire immediately;

        (iii)  in the event a Participant ceases to be a Director, Officer or Employee as a result of death or disability (within the meaning of the Company's long-term disability plan as then in effect), the Option shall expire one year thereafter;

        (iv)  in the event the Participant ceases to be a Director, Officer or Employee after attainment of age 55 and after completing five years of employment with the Company (measured from the Optionee's most recent date of hire), the Option shall expire three (3) years thereafter; and

        (v)  in the event a Participant is no longer a Director, Officer, Employee, consultant or independent contractor, other than for the reasons set forth in Sections 9(i)(i), 9(i)(ii), 9(i)(iii) and 9(i)(iv), all Options which remain unvested on the date the Participant ceases to be a Director, Officer or Employee, as the case may be, shall expire immediately, and all Options which have vested prior to such date shall expire three (3) months thereafter unless by their terms they expire sooner.

10.    RECAPITALIZATION.    

        (a)    CORPORATE FLEXIBILITY.    

        The existence of the Plan and the Options granted hereunder shall not affect or restrict in any way the right or power of the Board or the shareholders of the Company, in their sole and absolute discretion, to make, authorize or consummate any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company,

7

any issue of bonds, debentures, common stock, preferred or prior preference stock ahead of or affecting the Company's capital stock or the rights thereof, the dissolution or liquidation of the Company or any sale or transfer of all or any part of its assets or business, or any other grant of rights, issuance of securities, transaction, corporate act or proceeding and notwithstanding the fact that any such activity, proceeding, action, transaction or other event may have, or be expected to have, an impact (whether positive or negative) on the value of any Option or underlying Shares.

        (b)    ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.    

        Except as otherwise provided in Section 11, in the event of any change in capitalization affecting the Common Stock of the Company, such as a stock dividend, stock split or recapitalization, the Committee shall make proportionate adjustments with respect to: (i) the aggregate number of Shares available for issuance under the Plan; (ii) the number of Shares available for any individual award; (iii) the number and exercise price of Shares subject to outstanding Options; PROVIDED, HOWEVER, that the number of Shares subject to any Option shall always be a whole number; (iv) the Target Price with respect to any Performance Options; and (v) such other matters as shall be appropriate in light of the circumstances.

11.    CHANGE OF CONTROL    

        (a)  In the event of a Change of Control (as defined below), unless otherwise determined by the Committee at the time of grant or by amendment (with the holder's consent) of such grant, all Options (other than Performance Options) not vested on or prior to the effective time of any such Change of Control shall vest immediately prior to such effective time. Unless otherwise determined by the Committee in the Stock Option Agreement or at the time of a Change of Control, in the event of a Change of Control, all outstanding Options (including Performance Options) shall terminate and cease to be outstanding immediately following the Change of Control; PROVIDED, HOWEVER, that no such Option termination shall occur unless a Participant shall have been given five business days, following prior written notice, to exercise such Participant's outstanding vested Options at the effective time of the Change of Control, or at the discretion of the Committee to receive cash in an amount per Share subject to such Options equal to the amount by which the price paid for a Share (determined on a fully diluted basis and taking into account the exercise price, as determined by the Committee) in the Change of Control exceeds the per share exercise price of such Options. The Committee in its sole and absolute discretion may make provisions for the assumption of outstanding Options, or the substitution for outstanding Options of new incentive awards covering the stock of a successor corporation or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices so as to prevent dilution or enlargement of rights.

        (b)  A "Change of Control" will be deemed to occur on the date any of the following events occur:

          (i)  any person or persons acting together which would constitute a "group" for purposes of Section 13(d) of the Exchange Act (other than the Company, any Subsidiary and Jeffry M. Picower (including, any of his Affiliates and any lineal descendant of Mr. Picower, any widow or then current spouse of Mr. Picower or of any such lineal descendant, a trust established principally for the benefit of any of the foregoing, any entity which is at least 90% beneficially owned by any of the foregoing, and the executor, administrator or personal representative of the estate of any of the foregoing (any one or more of the foregoing being sometimes referred to herein as the "Picower Group")) beneficially own (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, securities of the Company or any Significant Subsidiary (as defined below) representing greater than 10% of the total combined voting power of the Company or the Significant Subsidiary entitled to vote in the election of the board of directors of the Company or the Significant Subsidiary; PROVIDED, HOWEVER, that such event shall not constitute a Change of Control unless and until the combined voting power of such securities owned beneficially, directly or

8

indirectly, by such person or persons is greater than the combined voting power of all such securities owned beneficially, directly or indirectly, by Mr. Picower and the Picower Group;

        (ii)  persons other than the Current Directors (as herein defined) constitute a majority of the members of the Board (for these purposes, a "Current Director" means any member of the Board as of November 27, 1996, and any successor of any such member whose election, or nomination for election by the Company's shareholders, was approved by at least a majority of the Current Directors then on the Board or by Mr. Picower or the Picower Group);

        (iii)  the consummation of (A) a plan of liquidation of all or substantially all of the assets of the Company or any Subsidiary owning directly or indirectly all or substantially all of the consolidated assets of the Company (a "Significant Subsidiary"), or (B) an agreement providing for the merger or consolidation of the Company or a Significant Subsidiary (1) in which the Company or the Significant Subsidiary is not the continuing or surviving corporation (other than a consolidation or merger with a wholly-owned subsidiary of the Company in which all shares of Common Stock of the Company or common stock in the Significant Subsidiary outstanding immediately prior to the effectiveness thereof are changed into or exchanged for all or substantially all of the common stock of the surviving corporation and (if the Company ceases to exist) the surviving corporation assumes all outstanding Options) or (2) pursuant to which, even though the Company is the continuing or surviving corporation, the shares of Common Stock of the Company or common stock in the Significant Subsidiary are converted into cash, securities or other property; PROVIDED, HOWEVER, that no "Change of Control" shall be deemed to occur as the result of a consolidation or merger of the Company or a Significant Subsidiary in which the holders of the shares of Common Stock of the Company immediately prior to the consolidation or merger have, as a result thereof, directly or indirectly, at least a majority of the combined voting power of all classes of voting stock of the continuing or surviving corporation or its parent immediately after such consolidation or merger or in which the Board immediately prior to the merger or consolidation would, immediately after the merger or consolidation, constitute a majority of the board of directors of the continuing or surviving corporation or its parent; or

        (iv)  the consummation of an agreement (or agreements) providing for the sale or other disposition (in one transaction or a series of transactions) of all or substantially all of the assets of the Company or a Significant Subsidiary other than such a sale or disposition immediately after which such assets will be owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the shares of Common Stock immediately prior to such sale or disposition.

        (c)  Notwithstanding the foregoing provisions of this Section 11, unless otherwise determined by the Committee at the time of grant or by amendment (with the holder's consent) of such grant, in the event of a Sale Transaction (as defined below), all Performance Options not fully vested on or prior to the effective time of any such Sale Transaction shall vest immediately prior to such effective time, in whole or in part, if and only to the extent the price to be paid per Share (determined on a fully diluted basis and taking into account the exercise price, as determined by the Committee) in the Sale Transaction equals or exceeds the Target Price with respect to the applicable vesting percentage of such Performance Option. For purposes of this Section 11, a "Sale Transaction" will be deemed to have occurred on the date any of the following events shall have occurred:

          (i)  any person or persons acting together which would constitute a "group" for purposes of Section 13(d) of the Exchange Act (other than the Company, any Subsidiary, Jeffry M. Picower and the Picower Group) acquire all or substantially all of the Common Stock of the Company;

        (ii)  the consummation of (A) a plan of liquidation of all or substantially all of the assets of the Company, or (B) an agreement providing for the merger or consolidation of the Company (1) in which the Company is not the continuing or surviving corporation (other than a

9

consolidation or merger with a wholly-owned subsidiary of the Company in which all shares of Common Stock outstanding immediately prior to the effectiveness thereof are changed into or exchanged for all or substantially all of the common stock of the surviving corporation and (if the Company ceases to exist) the surviving corporation assumes all outstanding Options) or (2) pursuant to which, even though the Company is the continuing or surviving corporation, the shares of Common Stock are converted into cash, securities or other property; PROVIDED, HOWEVER, that no "Sale Transaction" shall be deemed to occur as the result of a consolidation or merger of the Company in which the holders of the shares of Common Stock immediately prior to the consolidation or merger have, as a result thereof, directly or indirectly, at least a majority of the combined voting power of all classes of voting stock of the continuing or surviving corporation or its parent immediately after such consolidation or merger or in which the Board immediately prior to the merger or consolidation would, immediately after the merger or consolidation, constitute a majority of the board of directors of the continuing or surviving corporation or its parent; or

        (iii)  the consummation of an agreement (or agreements) providing for the sale or other disposition (in one transaction or a series of transactions) of all or substantially all of the assets of the Company other than such a sale or disposition immediately after which such assets will be owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the shares of common stock of the Company immediately prior to such sale or disposition.

12.    SECURITIES LAW REQUIREMENTS.    

        No Shares shall be issued under the Plan unless and until: (i) the Company and the Participant have taken all actions required to register the Shares under the Securities Act of 1933, as amended, or perfect an exemption from the registration requirements thereof; (ii) any applicable listing requirement of any stock exchange or national market system on which the Common Stock is listed has been satisfied; and (iii) any other applicable provision of state or federal law has been satisfied. The Company shall be under no obligation to register the Shares with the Securities and Exchange Commission or to effect compliance with the registration or qualification requirements of any state securities laws or stock exchange.

13.    AMENDMENT AND TERMINATION.    

        (a)    MODIFICATIONS TO THE PLAN.    

        The Board may, insofar as permitted by law, from time to time, with respect to any Shares at the time not subject to Options, suspend or terminate the Plan or revise or amend the Plan in any respect whatsoever. However, unless the Board specifically otherwise provides, any revision or amendment that would cause the Plan to fail to comply with Section 422 or 162(m) of the Code or any other requirement of applicable law or regulation if such amendment were not approved by the shareholders of the Company, shall not be effective unless and until such approval is obtained.

        (b)    RIGHTS OF PARTICIPANT.    

        No amendment, suspension or termination of the Plan or of any Option that would adversely affect the right of any Participant with respect to an Option previously granted under the Plan will be effective without the written consent of the affected Participant.

14.    MISCELLANEOUS.    

        (a)    SHAREHOLDERS' RIGHTS    

        No Participant and no beneficiary or other person claiming under or through such Participant shall acquire any rights as a shareholder of the Company by virtue of such Participant having been granted an Option under the Plan. No Participant and no beneficiary or other person claiming under or

10

through such Participant will have any right, title or interest in or to any Shares allocated or reserved under the Plan or subject to any Option, except as to Shares, if any, that have been issued or transferred to such Participant. No adjustment shall be made for dividends or distributions or other rights for which the record date is prior to the date of exercise of an Option, except as may be provided in the Stock Option Agreement.

        (b)    OTHER COMPENSATION ARRANGEMENTS.    

        Nothing contained in the Plan shall prevent the Board from adopting other compensation arrangements, subject to shareholder approval if such approval is required. Such other arrangements may be either generally applicable or applicable only in specific cases.

        (c)    TREATMENT OF PROCEEDS.    

        Proceeds realized from the exercise of Options under the Plan shall constitute general funds of the Company.

        (d)    COSTS OF THE PLAN.    

        The costs and expenses of administering the Plan shall be borne by the Company.

        (e)    NO RIGHT TO CONTINUE EMPLOYMENT OR SERVICES.    

        Nothing contained in the Plan or in any instrument executed pursuant to the Plan will confer upon any Participant any right to continue to render services to the Company, a Subsidiary or Affiliate; to continue as a Director, Officer, Employee, consultant or independent contractor; or affect the right of the Company, a Subsidiary, an Affiliate, the Board, the board of directors of a Subsidiary or an Affiliate, the shareholders of the Company or a Subsidiary, or the holders of interests of an Affiliate, as applicable, to terminate the directorship, office, employment or consultant or independent contractor relationship, as the case may be, of any Participant at any time with or without Cause. The term "Cause" as defined herein is included solely for the purposes of the Plan and is not, and shall not be deemed to be: (i) a restriction on the right of the Company, a Subsidiary or Affiliate, as the case may be, to terminate any Officer or Employee for any reason whatsoever; or (ii) a part of the employment relationship (whether oral or written, express or implied) of any such individual.

        (f)    SEVERABILITY.    

        The provisions of the Plan shall be deemed severable and the validity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

        (g)    GOVERNING LAW.    

        The Plan and all actions taken thereunder shall be enforced, governed and construed by and interpreted under the laws of the State of Delaware applicable to contracts made and to be performed wholly within such State without giving effect to the principles of conflict of laws thereof.

        (h)    HEADINGS.    

        The headings contained in this Plan are for reference purposes only and shall not affect in any way the meaning or interpretation of this Plan.

11

QuickLinks

Exhibit 10.4

EXHIBIT A ALARIS MEDICAL, INC. 1996 STOCK OPTION PLAN