-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FwQRU29iyDTV2ltvFHWejwWPg0XLZ5WJLXkaTKoUOeD8kHiaQu1Ip+TbeQph0pnf QlzEk912j01mULTQS/RamQ== 0000912057-96-025673.txt : 19961113 0000912057-96-025673.hdr.sgml : 19961113 ACCESSION NUMBER: 0000912057-96-025673 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961112 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHYSIO CONTROL INTERNATIONAL CORP \DE\ CENTRAL INDEX KEY: 0001003088 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 911673799 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27242 FILM NUMBER: 96659365 BUSINESS ADDRESS: STREET 1: 11811 WILLOWS RD NE CITY: REDMOND STATE: WA ZIP: 98052 BUSINESS PHONE: 2068674331 MAIL ADDRESS: STREET 1: 11811 WILLOWS ROAD NE CITY: REDMOND STATE: WA ZIP: 98052 FORMER COMPANY: FORMER CONFORMED NAME: PHYSIO CONTROL HOLDING CORP \DE\ DATE OF NAME CHANGE: 19951106 10-Q 1 FORM 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 __________________ FORM 10-Q __________________ (Mark One) X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange - -- Act of 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1996 OR Transition report pursuant to Section 13 or 15(d) of the Securities - -- Exchange Act of 1934 COMMISSION FILE NUMBER: 0-27242 PHYSIO-CONTROL INTERNATIONAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 91-1673799 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11811 WILLOWS ROAD N.E. REDMOND, WASHINGTON 98052 (Address of principal executive offices) (206) 867-4000 (Registrant's telephone number, including area code) 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 X No --- --- As of October 25, 1996, there were 16,910,107 shares of the Registrant's Common Stock outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PHYSIO-CONTROL INTERNATIONAL CORPORATION 2 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Form 10-Q September 30, 1996
Index Page ----- ---- PART I. FINANCIAL INFORMATION ITEM 1. Consolidated Financial Statements - Consolidated Statements of Operations for the three months ended September 30, 1996 and 1995 and for the nine months ended September 30, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . 3 - Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . 4 - Consolidated Statement of Changes in Stockholders' Equity for the nine months ended September 30, 1996 . . . . . . . . . . . . . . . 5 - Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . 6 - Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ITEM 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . 12
PHYSIO-CONTROL INTERNATIONAL CORPORATION 3 PART I. Financial Information ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) - --------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 1996 1995 ----------- ------------ ------------- ------------ (UNAUDITED) (UNAUDITED) (UNAUDITED) Net sales $41,694 $34,733 $127,372 $108,271 Cost of sales 20,141 16,295 62,288 51,158 ------- ------- -------- ------- Gross profit 21,553 18,438 65,084 57,113 ------- ------- -------- ------- Research and development 5,020 4,924 14,227 13,716 Sales and marketing 8,192 7,635 24,029 21,834 General and administrative 3,172 2,530 9,291 8,878 Management consulting fees -- 983 -- 2,950 ------- ------- -------- ------- Operating expense 16,384 16,072 47,547 47,378 ------- ------- -------- ------- Interest expense (459) (623) (1,333) (2,160) Other (expense) income, net (331) 40 (789) (196) ------- ------- -------- ------- Other expense (790) (583) (2,122) (2,356) ------- ------- -------- ------- Income before income taxes 4,379 1,783 15,415 7,379 Income tax expense (1,488) (614) (5,241) (2,570) ------- ------- -------- ------- Net income $2,891 $1,169 $10,174 $4,809 ------- ------- -------- ------- ------- ------- -------- ------- (UNAUDITED) Net earnings per common and common equivalent share $0.16 $0.57 Weighted average number of common and common equivalent shares outstanding 18,083,182 17,971,691 Pro forma net earnings per common and common equivalent share $0.07 $0.31 Pro forma weighted average number of common and common equivalent shares outstanding 15,759,194 15,523,876
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. PHYSIO-CONTROL INTERNATIONAL CORPORATION 4 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) - --------------------------------------------------------------------------------
SEPTEMBER 30, 1996 DECEMBER 31, 1995 ------------------ ----------------- (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents $4,255 $4,575 Accounts receivable, net 32,285 27,130 Inventories 33,310 30,208 Prepaid income taxes -- 2,637 Prepaid expenses 1,115 1,044 Deferred income taxes 3,179 2,790 ------- ------- Total current assets 74,144 68,384 NONCURRENT ASSETS Debt issue costs 115 151 Other assets 1,287 1,127 Deferred income taxes 3,124 3,124 Property, plant and equipment, net 10,775 5,714 ------- ------- Total assets $89,445 $78,500 ------- ------- ------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $8,919 $10,109 Accrued liabilities 18,641 23,103 ------- ------- Total current liabilities 27,560 33,212 ------- ------- NONCURRENT LIABILITIES Long-term debt 22,642 16,211 Unfunded pension obligations 1,947 2,396 ------- ------- Total noncurrent liabilities 24,589 18,607 ------- ------- Commitments and contingencies (Note 5) STOCKHOLDERS' EQUITY Preferred stock, par value $0.01 per share, 5,000,000 shares authorized, no shares issued or outstanding -- -- Common stock, voting, par value $0.01 per share, 40,000,000 shares authorized; 16,908,139 and 16,754,909 shares issued and outstanding, respectively 169 168 Additional paid-in capital 24,126 23,615 Retained earnings 12,933 2,759 Equity adjustment from foreign currency translation 68 139 ------- ------- Total stockholders' equity 37,296 26,681 ------- ------- Total liabilities and stockholders' equity $89,445 $78,500 - ----------------------------------------------------------------------- ------- - ----------------------------------------------------------------------- -------
- --------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. PHYSIO-CONTROL INTERNATIONAL CORPORATION 5 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) - --------------------------------------------------------------------------------
(UNAUDITED) EQUITY COMMON STOCK ADJUSTMENT (VOTING) ADDITIONAL FROM FOREIGN -------------------- PAID-IN RETAINED CURRENCY SHARES DOLLARS CAPITAL EARNINGS TRANSLATION TOTAL --------- ------- ---------- -------- ------------ ------- BALANCE AT DECEMBER 31, 1995 16,754,909 $168 $23,615 $2,759 $139 $26,681 Issuance of common shares 11,318 -- 212 -- -- 212 Stock issued upon exercise of options 141,912 1 299 -- -- 300 Equity adjustment from foreign currency translation -- -- -- -- (71) (71) Net income -- -- -- 10,174 -- 10,174 ---------- ------ -------- ------ ------ -------- BALANCE AT SEPTEMBER 30, 1996 16,908,139 $169 $24,126 $12,933 $68 $37,296 - --------------------------------------------- -------- -------- ---------- ------ -------- - --------------------------------------------- -------- -------- ---------- ------ --------
- -------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. PHYSIO-CONTROL INTERNATIONAL CORPORATION 6 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 ------------ ------------ (UNAUDITED) Cash Flows From Operating Activities Net income $10,174 $4,809 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: Depreciation and amortization 1,090 1,193 Decrease (increase) in receivables (5,155) 20,958 Increase in inventories (3,102) (2,720) Decrease (increase) in prepaid income taxes 2,637 (2,276) Decrease (increase) in prepaid expense and other assets (408) 1,251 Decrease (increase) in deferred tax asset (389) 2,607 Decrease in accounts payable (1,190) (2,691) Decrease in accrued and other liabilities (4,911) (2,356) Decrease in income taxes payable -- (7,134) ------------ ------------ Net cash provided by (used in) operating activities (1,254) 13,641 ------------ ------------ Cash Flows From Investing Activities Acquisition of net assets, net of cash acquired -- (2,044) Purchases of property, plant and equipment (5,938) (4,033) ------------ ------------ Net cash used in investing activities (5,938) (6,077) ------------ ------------ Cash Flows From Financing Activities Net proceeds from issuance of common stock 512 -- Repayment of term debt -- (1,249) Borrowings under revolving debt 47,242 10,000 Repayments on revolving debt (40,811) (18,250) ------------ ------------ Net cash provided by (used in) financing activities 6,943 (9,499) ------------ ------------ Effect of exchange rate changes (71) 101 ------------ ------------ Decrease in cash and cash equivalents (320) (1,834) Cash and cash equivalents at beginning of period 4,575 5,229 ------------ ------------ Cash and cash equivalents at end of period $4,255 $3,395 - ----------------------------------------------------------------------- ------------ - ----------------------------------------------------------------------- ------------
- ------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. PHYSIO-CONTROL INTERNATIONAL CORPORATION 7 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 (DOLLARS IN THOUSANDS) - -------------------------------------------------------------------------------- (UNAUDITED) NOTE 1. GENERAL The consolidated financial statements of Physio-Control International Corporation (the "Company") at September 30, 1996 and for the three and nine month periods then ended are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim period. The consolidated financial statements should be read in conjunction with the Company's Annual Report to Shareholders incorporated by reference on Form 10-K for the fiscal year ended December 31, 1995. The results of operations for the three and nine month periods ended September 30, 1996 are not necessarily indicative of the results for the entire fiscal year ending December 31, 1996. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES EARNINGS PER SHARE Net earnings per common and common equivalent share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock. Fully diluted net earnings per common and common equivalent share is not materially different from primary net earnings per common and common equivalent share and is therefore not presented. As a result of the changes in the Company's capital structure effective with the initial public offering in December 1995, historical earnings per common share amounts would not be meaningful and therefore, have not been presented in these financial statements for the three and nine month periods ended September 30, 1995. PRO FORMA EARNINGS PER SHARE For purposes of calculating pro forma net earnings per share, the weighted average number of shares outstanding has been calculated giving retroactive effect to the equity recapitalization described in Note 11 of the Consolidated Financial Statements included in the Company's Annual Report to Shareholders incorporated by reference on Form 10-K for the fiscal year ended December 31, 1995. RECENT ACCOUNTING PRONOUNCEMENT During October 1995, the Financial Accounting Standards Board issued FAS 123, "Accounting for Stock-Based Compensation", which established financial accounting and reporting standards for stock-based employee compensation plans and for the issuance of equity instruments to acquire goods and services from nonemployees. The Company has not determined its method of adoption for the fiscal year ended December 31, 1996. RECLASSIFICATIONS Certain amounts in the prior period have been reclassified to conform with the current period presentation. PHYSIO-CONTROL INTERNATIONAL CORPORATION 8 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE 3. INVENTORIES Inventories consist of the following: SEPTEMBER 30, 1996 DECEMBER 31, 1995 ------------------ ----------------- Finished products $21,138 $16,504 Purchased parts and assemblies in process 7,924 7,884 Service parts 9,396 9,507 ------------------ ----------------- 38,458 33,895 Less-Inventory allowances (5,148) (3,687) ------------------ ----------------- Total inventories $33,310 $30,208 ------------------ ----------------- ------------------ ----------------- NOTE 4. STOCK OPTIONS On January 30, 1996, the Company authorized the granting of 474,000 stock options with an exercise price of $20.50 to 188 employees under the 1996 Stock Incentive Plan. In addition, on May 23, 1996 the Company authorized the granting of 24,000 stock options with an exercise price of $19.75 and on August 5, 1996, the Company authorized the granting of 400,500 options with an exercise price of $15.38. All options granted were at the fair-market value on that date and vest in equal installments over a five year period. NOTE 5: COMMITMENTS AND CONTINGENCIES LITIGATION The Company has been named as a defendant in several product lawsuits. The Company has provided for its estimated exposure, including costs of litigation with respect to all liability claims. The Company's estimates of these expenses are based primarily on historical claims experience. The Company expects the cash amounts related to these accruals to be paid out over the next several years. The majority of the costs associated with defending and disposing of these suits are covered by insurance. The Company's estimates of insurance recoveries are based on existing deductibles and coverage limits. Further, product liability claims may be asserted in the future for events not currently known by management. Although the ultimate liability from these potential claims cannot be ascertained at September 30, 1996, management does not anticipate that any related settlement, after consideration of potential insurance recovery, would have a material adverse effect on the Company's financial position, operating results or cash flows. On November 13, 1995, the Company initiated litigation in Washington State Court against Heartstream, Inc. ("Heartstream"), a company recently formed to develop defibrillators, and certain individuals who were formerly employed by the Company and are founders of and current employees of Heartstream. The Company's claims are based on its belief that Heartstream and such individuals have, among other things, misappropriated certain of the Company's intellectual property and that such individuals have breached contractual obligations to the Company. The Company received an answer to its complaint from Heartstream during December 1995. In its answer, Heartstream denies the Company's claims and alleges certain counterclaims against the Company for, among other things, monopolization of the industry and tortuous interference with business opportunities and seeks monetary damages in excess of $10 million. The parties are currently conducting discovery in this litigation. If the Company does not prevail in this litigation or otherwise successfully resolve its claims, its ability to design and market certain future products may be adversely affected. In addition, if a court were to find in favor of Heartstream on its counterclaims, the Company could be held liable for significant damages. PHYSIO-CONTROL INTERNATIONAL CORPORATION 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 The Company reported worldwide sales of $41.7 million during the third quarter of 1996, an increase of $7.0 million or 20% from the comparable 1995 quarter. Domestic sales for the current quarter aggregated $31.6 million, up 21% from the comparable 1995 quarter and international sales totaled $10.1 million, up 19% from 1995. On a consolidated basis, equipment sales of $27.8 million increased 15% over the comparable quarter of 1995, mainly due to higher LIFEPAK-Registered Trademark- 11 and LIFEPAK 9 shipments. Service and supplies revenue of $13.9 million increased 32% over the comparable quarter of 1995 with service revenue of $6.6 million up 15% from the prior period and supplies (disposables and accessories) of $7.3 million, up 53% from the third quarter of 1995 driven by QUIK-COMBO-TM- electrode and LIFEPAK 11 accessory sales. The 21% increase in domestic revenue was driven by sharply higher out-of- hospital market sales of $12.8 million, up 34% from the comparable 1995 quarter, primarily due to the strong demand for LIFEPAK 11 products. Hospital sales aggregated $7.8 million or $0.5 million (6%) lower than the third quarter of 1995 largely due to timing of orders as hospital sales during the second quarter of 1996 were up 15% from the second quarter of 1995. The 19% increase in international revenue was largely attributed to higher sales of LIFEPAK 9 products. During the third quarter of 1996, the Company reported product orders of $38.9 million, up $3.7 million or 11% from the comparable 1995 quarter due to significant orders for the LIFEPAK 11 and LIFEPAK 9 products. Although domestic product orders showed only modest growth from record orders received in the third quarter of 1995, international product orders increased 41% over the comparable 1995 quarter. Gross profit of $21.6 million increased $3.1 million or 17% from the comparable 1995 quarter. As a percentage of sales, gross profit decreased slightly to 51.7% during the current quarter from 53.1% in the comparable 1995 quarter. The decrease of 140 basis points in gross margin resulted primarily from a changing product mix, including higher service and supply sales. Research and development ("R&D") expenditures of $4.9 million for the third quarter of 1996 increased $0.1 million from the comparable 1995 quarter. As a percentage of sales, R&D expenses decreased to 12% during the current 1996 quarter from 14% during the comparable 1995 quarter. The Company's significant investment in R&D activities reflect ongoing commitment to the development of new products as well as advancing research for the development of future products. Selling, general and administrative ("SG&A") expenses of $10.2 million during the third quarter of 1996 increased $1.2 million or 12% from the comparable 1995 quarter. The increase resulted primarily from costs incurred to further develop and expand the Company's direct sales and service operations in Europe. Domestic SG&A expenses, however, remained relatively constant during both periods. As a percentage of sales, the Company's SG&A expenses decreased to 27% during the current 1996 quarter from 29% during the comparable 1995 quarter. Management consulting fees payable to Bain Capital, Inc. decreased $1.0 million from the comparable quarter of 1995. The management consulting agreement was terminated during 1995 and the fees associated with the contract were not applicable during 1996. Other expenses increased $0.2 million from the comparable 1995 quarter from $0.6 million in 1995 to $0.8 million in 1996. This increase is primarily attributed to a non-recurring international expense during the third quarter of 1996. PHYSIO-CONTROL INTERNATIONAL CORPORATION 10 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- As a result of the above factors, 1996 third quarter net income of $2.9 million increased $1.7 million or 147% from the comparable 1995 quarter. NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 The Company reported worldwide sales of $127.4 million during the nine month period ended September 30, 1996, an increase of $19.1 million or 18% from the comparable 1995 period. Domestic sales of $96.2 million were up $17.8 million while international sales of $31.2 million were up $1.3 million from the comparable 1995 period. On a consolidated basis, equipment sales of $85.7 million were up 13% during the current nine month period due primarily to increased demand for the Company's family of LIFEPAK products. Worldwide service revenue of $20.1 million increased 12% and supplies revenue of $21.5 million increased 46% from 1995, driven by QUIK-COMBO electrode and LIFEPAK 11 accessory product sales. For the nine month period ending September 30, 1996, the 23% increase in domestic revenue, when compared to the 1995 period, resulted from a 31% increase in out-of-hospital equipment sales, mainly LIFEPAK 11, and from a 30% increase in service and supplies revenue, mainly QUIK-COMBO electrodes and LIFEPAK 11 accessories. Domestic hospital equipment sales were up 4% over the comparable 1995 period. For the current nine month period, the 4% increase in international revenue reflected a 16% increase in service and supplies revenue. During the nine months ended September 30, 1996, worldwide product orders totaled $106.7 million, an increase of $10.6 million or 11% over the comparable prior year period. The increase in product orders resulted primarily from strong demand for the LIFEPAK 11 products, and solid performance in the international markets. International and domestic orders both increased 11% over the comparable 1995 period. Conversely, product backlog at September 30, 1996 was $11.4 million, down $4.1 million from September 30, 1995 which reflects a company-wide focus initiated during early 1996 to improve timeliness of customer product deliveries. Gross profit of $65.1 million increased $8.0 million or 14% for the nine month period ended September 30, 1996 when compared to the prior 1995 period. As a percentage of sales, gross profit decreased from 52.7% in the prior year period to 51.1% in the current 1996 period, largely as a result of changes in product mix as well as the Company's trade-in programs earlier in the year (resulting in higher product discounts) which were targeted at an increasing market share. R&D expenses for the nine months ended September 30, 1996 were $14.2 million, an increase of $0.5 million or 4% over the comparable period in 1995. As a percentage of sales, R&D expenses decreased from 13% in the comparable 1995 period to 11% during the current period. SG&A expenses of $33.3 million for the nine months ended September 30, 1996 increased $2.6 million, or 8% from the comparable 1995 period. The increase resulted from costs incurred to further develop the Company's direct sales and service operations in Europe, as well as increased selling expense related to higher sales volume in the current nine month period. As a percentage of sales, SG&A expenses decreased to 26% during the current year period from 28% during the prior year period. Management consulting fees payable to Bain Capital, Inc. decreased $3.0 million from the comparable 1995 period. During 1995, the management consulting agreement was terminated and the fees associated with the contract are not applicable in 1996. Other expenses of $2.1 million decreased $0.3 million in the nine month period ended September 30, 1996. The overall decrease resulted from lower interest expense, mainly due to (i) a reduction of the Company's debt and (ii) lower interest rates obtained as a result of refinancing the Company's debt during December 1995. PHYSIO-CONTROL INTERNATIONAL CORPORATION 11 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- As a result of the above factors, net income totaled $10.2 million for the nine month period ended September 30, 1996, an increase of $5.4 million or 112% from the comparable 1995 period. LIQUIDITY AND CAPITAL RESOURCES Management assesses the Company's liquidity by its ability to generate cash to fund its operations. Significant factors in the management of liquidity are: funds provided or used by operations; levels of accounts receivable, inventories, accounts payable and capital expenditures; and adequate lines of credit. For the nine months ended September 30, 1996, the Company used $1.3 million in cash to finance operations. The use of working capital funds was primarily attributable to increased sales volume evidenced by higher accounts receivable and inventories, partially offset by net income. The Company believes that, based upon current levels of operations and anticipated growth, funds generated from operations and available borrowings under the credit facility described below, will be sufficient over the next twelve months for the Company to make anticipated capital expenditures and fund working capital requirements. Cash used in investing activities during the nine months ended September 30, 1996 totaled $5.9 million and related to capital expenditures. Consistent with the first half of 1996, primary capital expenditures during the current quarter included software development costs for internal use software, purchases of research equipment, and tooling for new products. The Company currently has no capital commitments outside the ordinary course of business. The Company's principal working capital requirements are financing accounts receivable and inventories. At September 30, 1996, the Company had net working capital of $46.6 million, including accounts receivable of $32.3 million, inventories of $33.3 million, accounts payable of $8.9 million and accrued liabilities of $18.6 million. During December 1995, the Company refinanced its existing indebtedness and entered into the Amended and Restated Credit Agreement ("the Credit Agreement"), which provides for a revolving credit facility ("the Revolver") not to exceed $30.0 million. The revolver bears interest, at the Company's option, at either (i) the lender's base rate (the higher of such lender's prime rate or the federal funds rate plus 0.5%) or (ii) LIBOR plus 1.0%. Such rates are subject to increase in the event that the Company does not meet certain leverage and interest coverage ratios. At September 30, 1996, the average interest rate on amounts outstanding under the Revolver was 6.7%. The Company's indebtedness under the Revolver is secured by a first priority interest in and lien on all of the assets of Physio-Control Corporation ("PCC"), a pledge by the Company on all of the outstanding common stock of PCC and 65% of the outstanding stock of PCC's subsidiaries and other guaranties and pledges as defined in the Credit Agreement. The Credit Agreement includes various affirmative and negative covenants which require, among other things, that the Company maintain certain debt to equity and net worth ratios, limitations on capital expenditures, restrictions on the declaration and payment of dividends and minimum earning requirements. At September 30, 1996, the Company had borrowing availability of approximately $9.9 million under the Revolver and was in compliance with all related loan covenants of the Credit Agreement. In addition, the Company has subordinated notes payable to Eli Lilly and Company totaling $2.5 million which originated in the acquisition of PCC and certain foreign operations. Notes with a principal balance totaling $1.5 million mature on January 31, 2001 and bear interest at LIBOR plus 3.25%. A note with a principal balance of $1.0 million matures November 15, 1998 and bears interest at LIBOR plus 3.0%. PHYSIO-CONTROL INTERNATIONAL CORPORATION 12 - -------------------------------------------------------------------------------- The Company believes that, based upon current levels of operations and anticipated growth, funds generated from operations, together with other available sources of liquidity, including borrowings under the Revolver, will be sufficient over the next twelve months for the Company to make anticipated capital expenditures and fund working capital requirements. Approximately 25% of the Company's sales in the nine months ended September 30, 1996 were to international customers and the Company expects that sales to international customers will continue to represent a material portion of its revenues. Certain of the Company's international receivables are denominated in foreign currencies, and exchange rate fluctuations impact the carrying value of these receivables. Historically, fluctuations in foreign currency exchange rates have not had a material effect on the Company's results of operations and the Company does not expect such fluctuations to be material in the foreseeable future. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There have been no material changes in the litigation reported in the Company's Annual Report on Form 10-K for the year ended December 31, 1995, filed on March 29, 1996 except as reflected in the discussion under Note 5 of the Notes to Consolidated Financial Statements in Part I, Item 1, above. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. EXHIBIT NO. DESCRIPTION OF EXHIBIT 27.1 Financial Data Schedule No reports on Form 8-K were filed during the quarter ended September 30, 1996. 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 to sign on behalf of the registrant and as the principal financial officer thereof. Dated: November 1, 1996 PHYSIO-CONTROL INTERNATIONAL CORPORATION By /s/ Joseph J. Caffarelli ------------------------------------- Joseph J. Caffarelli Executive Vice President and Chief Financial Officer EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 4,255 0 32,285 0 33,310 74,144 10,775 0 89,445 27,560 0 0 0 169 37,127 89,445 127,372 127,372 62,288 62,288 47,547 0 1,333 15,415 5,241 10,174 0 0 0 10,174 .57 0
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