-----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, NhWHQpA0Jyd5xdDc8DZpvOoWCdshPwR7nOF6pszIch2icBIJXowXkKoCR1vi7CfH qSOf42VgEVlZFA8mSMm7Yw== 0001047469-97-004330.txt : 19971113 0001047469-97-004330.hdr.sgml : 19971113 ACCESSION NUMBER: 0001047469-97-004330 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 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: SEC FILE NUMBER: 000-27242 FILM NUMBER: 97715997 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 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 10-Q ----------------------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1997 COMMISSION FILE NUMBER: 0-27242 ----------------------- PHYSIO-CONTROL INTERNATIONAL CORPORATION (Exact name of registrant as specified in its charter) WASHINGTON 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) (425) 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 November 6, 1997, there were 17,278,046 shares of the Registrant's Common Stock outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1 - -------------------------------------------------------------------------------- Form 10-Q September 30, 1997 INDEX PAGE PART I. FINANCIAL INFORMATION ITEM 1. Consolidated Financial Statements - Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996............................................3 - Consolidated Statements of Operations for the three and nine months ended September 30, 1997 and 1996.........................4 - Consolidated Statements of Changes in Stockholders' Equity for the three month periods ended March 31, June 30, and September 30, 1997...............................................5 - Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1996................................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 2 PART 1. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) ................................................................................
SEPTEMBER 30, 1997 DECEMBER 31, 1996 ------------------ ----------------- ASSETS (UNAUDITED) CURRENT ASSETS Cash and cash equivalents $3,514 $3,336 Accounts receivable, net 38,042 38,869 Inventories 40,637 31,811 Prepaid income taxes 1,622 3,967 Prepaid expenses 1,906 1,401 --------- --------- Total current assets 85,721 79,384 NONCURRENT ASSETS Other assets 823 1,180 Deferred income taxes 2,175 2,175 Property, plant and equipment, net 16,402 13,123 --------- --------- TOTAL ASSETS $105,121 $95,862 --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $12,571 $9,260 Accrued liabilities 16,891 19,146 Deferred income taxes 494 494 --------- --------- Total current liabilities 29,956 28,900 --------- --------- NONCONCURRENT LIABILITIES Long-term debt 20,531 21,031 Unfunded pension obligations 1,199 1,711 --------- --------- Total noncurrent liabilities 21,730 22,742 --------- --------- 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; 17,265,346 and 17,020,245 shares issued and outstanding, respectively 173 170 Additional paid-in capital 28,372 25,707 Retained earnings 25,113 18,098 Equity adjustment from foreign currency translation (223) 245 --------- --------- Total stockholders' equity 53,435 44,220 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $105,121 $95,862 - ------------------------------------------------------------ --------- ....................................... THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3 - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED) ...............................................................................
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 1997 1996 --------- --------- --------- --------- Net sales $44,109 $41,694 $129,847 $127,372 Cost of sales 23,142 20,141 64,947 62,288 --------- --------- --------- --------- Gross margin 20,967 21,553 64,900 65,084 --------- --------- --------- --------- Research and development 5,446 5,020 15,577 14,227 Sales and marketing 9,800 8,750 28,751 25,566 General and administrative 3,151 2,614 7,999 7,754 --------- --------- --------- --------- Operating expense 18,397 16,384 52,327 47,547 --------- --------- --------- --------- Interest expense (424) (459) (1,284) (1,333) Other expense, net (25) (331) (497) (789) --------- --------- --------- --------- Other expense (449) (790) (1,781) (2,122) --------- --------- --------- --------- Income before income tax 2,121 4,379 10,792 15,415 Income tax expense (742) (1,488) (3,777) (5,241) --------- --------- --------- --------- NET INCOME $1,379 $2,891 $7,015 $10,174 --------- --------- --------- --------- Net earnings per common and common equivalent share $0.08 $0.16 $0.39 $0.57 Weighted average number of common and common equivalent shares outstanding 17,985,013 18,083,182 17,970,775 17,971,691 - --------------------------------------------------------------------------------------------
.......................................................................... THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 4 - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) ...............................................................................
EQUITY ADJUSTMENT COMMON STOCK ADDITIONAL FROM FOREIGN --------------------------- PAID-IN RETAINED CURRENCY SHARES DOLLARS CAPITAL EARNINGS TRANSLATION TOTAL ------------ ------------- ------------- ----------- ------------------- --------- BALANCE AT DECEMBER 31, 1996 17,020,245 $ 170 $ 25,707 $ 18,098 $ 245 $ 44,220 Issuance of common shares 46,791 1 915 916 Stock issued upon exercise of options 87,405 1 407 408 Income tax benefit from exercise of stock options 428 428 Net income 2,653 2,653 Equity adjustment from foreign currency translation (324) (324) ------------ ------- ------------- ---------- ------- -------- BALANCE AT MARCH 31, 1997 17,154,441 172 27,457 20,751 (79) 48,301 Stock issued upon exercise of options 81,692 1 217 218 Income tax benefit from exercise of stock options 319 319 Net income 2,983 2,983 Equity adjustment from foreign currency translation 63 63 ------------ ------- ------------- ---------- ------- -------- BALANCE AT JUNE 30, 1997 17,236,133 173 27,993 23,734 (16) 51,884 Issuance of common shares 14,202 145 145 Stock issued upon exercise of options 15,011 205 205 Income tax benefit from exercise of stock options 29 29 Net income 1,379 1,379 Equity adjustment from foreign currency translation (207) (207) ------------ ------- ------------- ---------- ------- -------- BALANCE AT SEPTEMBER 30, 1997 17,265,346 $ 173 $ 28,372 $ 25,113 $ (223) $ 53,435 ------------ ------- ------------- ---------- ------- --------
.......................................................................... THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 5 - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED) ...............................................................................
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 1997 1996 --------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 7,015 $ 10,174 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: Depreciation and amortization 1,895 1,090 Decrease (increase) in receivables 827 (5,155) Increase in inventories (8,826) (3,102) Decrease in prepaid income taxes 2,345 1,513 Increase in prepaid expense and other assets (391) (408) Increase (decrease) in accounts payable 3,311 (1,190) Decrease in accrued and other liabilities (2,767) (4,911) --------- ---------- Net cash provided by (used in) operating activities 3,409 (1,989) --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant and equipment (4,931) (5,938) --------- ---------- Net cash used in investing activities (4,931) (5,938) --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of common stock 1,892 512 Borrowings under revolving debt 35,683 47,242 Repayments of revolving debt (36,183) (40,811) Income tax benefit from exercise of stock options 776 735 --------- ---------- Net cash provided by financing activities 2,168 7,678 --------- ---------- Effect of foreign currency translation (468) (71) --------- ---------- Net increase (decrease) in cash and cash equivalents 178 (320) Cash and cash equivalents at beginning of period 3,336 4,575 --------- ---------- Cash and cash equivalents at end of period $ 3,514 $ 4,255 - ----------------------------------------------------------------------------------- ----------
.......................................................................... THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 6 - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED) ............................................................................... NOTE 1. General The consolidated financial statements of Physio-Control International Corporation (the "Company") at September 30, 1997 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 on Form 10-K for the year ended December 31, 1996. The results of operations for the three and nine month periods ended September 30, 1997 are not necessarily indicative of the results for the entire fiscal year ending December 31, 1997. During May 1997, the Company (previously a Delaware Corporation) was re-incorporated in the State of Washington. Also in June 1997, a wholly-owned subsidiary of the Company, Physio-Control Corporation ("PCC") was re-incorporated in the State of Washington. During July 1997, the Company formed a new wholly-owned subsidiary, Physio-Control Manufacturing Corporation, ("PCMC") which was incorporated as a Washington corporation. 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. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement 128"), which is effective for financial statements for periods ending after December 15, 1997. At that time, the Company will be required to change its method for calculating earnings per share and restate all prior periods presented. The impact of Statement 128 on the calculation of net earnings per share for all current and prior periods is not expected to have material impact. RECLASSIFICATIONS Certain amounts in the prior periods have been reclassified to conform with the current period presentation. NOTE 3. INVENTORIES Inventories consist of the following:
SEPTEMBER 30, 1997 DECEMBER 31, 1996 ------------------ ----------------- Finished products $23,955 $17,318 Purchased parts and assemblies in process 7,445 6,534 Service parts 10,960 10,453 ------- ------- 42,360 34,305 Less inventory allowances (1,723) (2,494) ------- ------- TOTAL INVENTORIES, NET $40,637 $31,811 ------- ------- ------- -------
7 - ------------------------------------------------------------------------------- NOTE 4. BANK BORROWINGS During June 1997, PCC refinanced its existing indebtedness and entered into a new $30.0 million revolving bank credit facility ("the Agreement") of which up to $5.0 million may be used for issuance of standby letters of credit. The Agreement, which matures during May 2000, replaced an existing $30.0 million revolving bank credit agreement which was to expire during December 1998. Interest on advances under the Agreement bear interest, at the borrower's option, at (i) LIBOR plus 0.5% or (ii) the reference rate (the higher of the lender's prime rate or federal funds rate plus 1%) or (iii) quoted rate (rate quoted by lender and accepted by borrower plus 0.5%). Such rates are subject to increase in the event that the Company does not meet the fixed charge coverage ratio as defined in the Agreement. The Company is required to pay a commitment fee equal to 0.125% of the amount by which the available credit exceeds the outstanding advances on a quarterly basis. This rate is subject to increase in the event that the Company does not meet the fixed charge coverage ratio as defined. The revolving credit facility is secured by a first priority security interest in and lien on all of the accounts receivable and inventories of PCC, (located in the United States) and is guaranteed by the Company and PCMC. The Agreement includes various affirmative and negative financial covenants which require, among other things, that the Company maintain a certain fixed charge coverage ratio, debt to net worth ratios, as well as a minimum tangible net worth, as defined in the Agreement. As of September 30, 1997, the Company had $18.6 million outstanding under the Agreement, including $0.6 million in letters of credit. NOTE 5: COMMITMENTS AND CONTINGENCIES LITIGATION The Company is party to certain product liability actions arising in the ordinary course of its business. The Company's estimates of these exposures are based primarily on historical claims experience. The Company expects settlements related to these claims to be paid over the next several years. The majority of the costs associated with defending and disposing of these suits are covered by insurance. During 1995, the Company initiated litigation in Washington State Court against Heartstream, Inc. ("Heartstream"), a company formed to develop, manufacture and market defibrillators, as well as certain individuals who were formerly employed by the Company and who are founders of and employees of Heartstream. In its answer to the complaint from the Company, Heartstream denied the Company's claims and alleged certain counterclaims against the Company. Additionally, during January 1997, Heartstream initiated litigation against the Company alleging certain patent infringements. The Company denied Heartstream's claims and alleged certain counter claims against Heartstream. During October of 1997, the Company and Heartstream reached an agreement, through mediation, to settle all outstanding claims between the two companies. The terms of the settlement are confidential. 8 - ------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company's future results may differ significantly from the results discussed herein due to many factors, including, but not limited to, product demand, the effect of general economic conditions, the impact of competitive products and pricing, product development, commercialization and technological difficulties, U.S. and foreign regulatory requirements, the effects of accounting policies and financing requirements, and other such risks and factors. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 The Company reported worldwide sales of $44.1 million during the third quarter of 1997, reflecting an increase of $2.4 million or 6% from the comparable 1996 quarter. International sales of $11.2 million were up 11% from the comparable prior year period. The increase in the international market was driven by strong sales in the United Kingdom, Eastern Europe, and Canada while sales in Germany remained weak. Domestic sales during the current quarter aggregated $32.9 million, up 4% from the $31.6 million reported in the prior year period. Worldwide equipment sales of $28.2 million increased 1% from the comparable 1996 quarter, driven by strong sales of the LIFEPAK-Registered Trademark- 500 product, partially offset by no counterpart to a $2.3 million out-of-hospital shipment during 1996. Worldwide service and supply revenue of $15.9 million increased 14% over the comparable prior year quarter. Supplies (disposable and accessories) totaled $9.0 million, up 23% from the comparable 1996 period, due to strong demand for the Company's disposable products, primarily QUIK-COMBO-TM- electrodes. Service revenue increased 5% from the comparable prior year quarter due to the Company's growing customer base. Domestic sales increased $1.3 million (4%) from the comparable 1996 quarter due to strong market acceptance of the LIFEPAK 500 automated external defibrillator ("AED"). The Company continues to benefit from success in the basic life support ("BLS") market and the expanding commercial and allied health sector, evidenced by a significant increase in order and shipment rates for all AED products. Hospital sales totaled $7.8 million during the current quarter, essentially unchanged from 1996. During the third quarter of 1997, the Company reported worldwide product orders of $36.9 million, down 2% from the comparable 1996 quarter. Domestic orders increased 2% while the international order rate declined (12%) from the prior period, mainly due to no counterpart to a large ($0.8 million) Middle East order. Gross margin of $20.9 million decreased $0.6 million during the current quarter from the $21.5 million reported during the comparable 1996 quarter. As a percentage of sales, gross margin decreased to 47.5% from 51.7% during the comparable 1996 quarter. The decrease was driven primarily by lower overhead cost capitalization resulting from lower production volume of certain products scheduled for phase out and aggressive pricing in international markets. Research and development ("R&D") expenditures of $5.4 million increased 8% during the current quarter from $5.0 million in the comparable 1996 quarter. As a percentage of sales, R&D expenses remained essentially unchanged at 12%. R&D expenditures increased over the prior year quarter due to the Company's continuing investment in new product development as well as the commitment to conduct ongoing research for future products and technology. Sales and marketing expenditures of $9.8 million increased 12% from the comparable 1996 quarter. The increase resulted from enhanced sales and marketing efforts worldwide as well as additional selling expenses associated with the Company's recent strategic alliance with Marquette Medical Systems, Inc. ("Marquette"). General and administrative expenditures of $3.2 million increased $0.5 million from the comparable 1996 quarter and is due primarily to an increase in legal expenses. Other expenses, consisting primarily of interest expense, totaled $0.5 million and 9 - ------------------------------------------------------------------------------- reflects a 43% reduction from the prior year quarter. This decrease in the current quarter is attributed to the gain on sale of certain intangible assets. Income tax expense of $0.7 million reflected an increase in the Company's effective tax rate from 34% in the comparable 1996 quarter to 35% during the current quarter. As a result of the above factors, net income for the third quarter of 1997 was $1.4 million, a decrease of $1.5 million from the comparable 1996 quarter. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 The Company reported worldwide sales of $129.8 million during the nine month period ended September 30, 1997, an increase of $2.5 million or 2% compared to the same period in the prior year. Domestic sales of $93.5 million were down 3% from the $96.2 million recorded in the prior year period. International sales of $36.3 million, however, were up 17% or $5.2 million from the prior year due in part to a second quarter Russian sale totaling $2.1 million and continuing strong results in the United Kingdom. In the domestic market segment, hospital sales during the nine months ended September 30, 1997, totaled $21.9 million as compared to $24.5 million in the comparable 1996 period and out-of-hospital sales totaled $36.7 million versus $38.4 million in the respective periods. Worldwide equipment sales of $82.9 million decreased 3% during the current nine month period while worldwide service and supplies revenue totaling $46.9 million increased 13% from the $41.6 million recorded during 1996. The decrease in equipment sales from the prior nine month period was due primarily to lower demand in the domestic hospital market as well as a decrease in advanced life support ("ALS") defibrillator sales, as 1996 was bolstered by the introduction of LIFEPAK 11, partly offset by the success of LIFEPAK 500 sales in the AED market. The increase in service and supplies revenue was due primarily to growth in the Company's installed base of customers. During the nine months ended September 30, 1997, worldwide product orders totaled $114.3 million, an increase of $8.7 million or 8% over the comparable prior year period. Domestic orders were up 8% while international orders increased 9% and included the $2.1 million Russian order discussed above. Gross margin during the nine months ended September 30, 1997 totaled $64.9 million, a decrease of $0.2 million from the comparable prior year period. As a percentage of sales, gross margin decreased from 51.1% in the prior year period to 50.0% in the current nine months, largely due to lower overhead cost capitalization related to certain products during the most recent three month period as discussed above, and aggressive pricing in the international markets. R&D expenses for the nine months ended September 30, 1997 were $15.6 million, an increase of $1.4 million or 9% over the comparable prior year period. As a percentage of sales, R&D expenses increased slightly from 11% in the comparable 1996 period to 12% during the current year period. Sales and marketing expenditures of $28.7 million during the current nine month period increased $3.2 million, or 12% from the comparable 1996 period. The increase was due to costs incurred for sales and marketing efforts aimed at introducing the Company's new LIFEPAK 500 product earlier in 1997 as well as increased domestic selling costs related to new system applications and new product programs, such as the Company's strategic alliance with Marquette. As a percentage of sales, sales and marketing expenses increased from 20% during the prior year period to 22% during the current year period. General and administrative expenditures of $8.0 million increased 3%, or $0.2 million, from the comparable prior year period mainly due to increased legal expenses offset by no counterpart during 1997 to the 1996 bonus accrual. General and administrative expenses remained consistent with the prior year period at 6% of sales in each of 1997 and 1996. Other expenses, consisting 10 - ------------------------------------------------------------------------------- primarily of interest expense, totaled $1.8 million as compared to $2.1 million in the prior year. This decrease is attributed to a reduction in interest costs and gain on sale of assets. Income tax expense of $3.8 million reflected an increase in the Company's effective tax rate from 34% in the comparable 1996 period to 35% during the current nine month period. As a result of the above factors, net income for the nine month period ended September 30, 1997 was $7 million, a decrease of $3.2 million, or 31% from the comparable 1996 nine month period. LIQUIDITY AND CAPITAL RESOURCES Management assesses the Company's liquidity by its ability to generate cash to fund operations. Significant factors in the management of liquidity are: funds provided or used by operations, capital expenditures, levels of accounts receivable, inventories, accounts payable, as well as adequate lines of credit. During the nine months ended September 30, 1997, the Company generated $3.4 million in cash from operations. The source of working capital funds was attributed to operating net income and increase in current liabilities, offset by increased inventory levels. Increases in inventory during the current year are attributed to the diversification of products now offered by the Company. The Company has acquired demonstration products as a result of its representation of Marquette in certain market segments and also now acts as a distributor for the American Heart Association for literature and training materials. Cash used in investing activities during the nine months ended September 30, 1997 totaled $4.9 million and related to capital expenditures. Approximately one-half of current capital expenditures related to the final implementation of the Company's new computer business system and on-going system enhancements. Additional capital expenditures during the current nine month period related to purchases of research and engineering equipment and tooling for new products. The Company does not have any capital commitments outside the ordinary course of business. The Company's principal working capital requirements are financing accounts receivable and inventories. At September 30, 1997, the Company had net working capital of $55.8 million, primarily consisting of accounts receivable of $38.0 million, inventories of $40.6 million, accounts payable of $12.6 million and accrued liabilities of $16.9 million. During the second quarter of 1997, PCC refinanced its existing indebtedness and entered into a new $30.0 million revolving bank credit facility as discussed in Notes to Consolidated Financial Statements, Part 1, Item 1, included herein. The Agreement, which matures during May 2000 offers a lower cost of borrowing with reduced interest rates and affords the Company greater flexibility in cash management by reducing the number of banking institutions at which the Company consolidates cash balances. The Company is required to pay a commitment fee equal to 0.125% of the amount by which the available credit exceeds the outstanding advances on a quarterly basis. This rate is subject to increase in the event that the Company does not meet the fixed charge coverage ratio as defined in the Agreement. The credit facility is secured by a first priority security interest in and lien on all of the accounts receivable and inventories of PCC (located in the United States) and is guaranteed by the Company and PCMC. The credit facility includes various affirmative and negative financial covenants which require, among other things, that the Company maintain a certain fixed charge coverage ratio, debt to net worth ratio, as well as a minimum tangible net worth, as defined in the Agreement. As of September 30, 1997 the Company had $18.6 million outstanding under the Agreement, including $0.6 million in letters of credit. 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 assets. 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%. 11 - ------------------------------------------------------------------------------- The Company believes, based upon current levels of operations and anticipated growth, that funds generated from operations and available borrowings under the credit Agreement will be sufficient over the next twelve months for the Company to make anticipated capital expenditures and fund working capital requirements. Approximately 28% of the Company's sales during the nine months ended September 30, 1997 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. The Company has elected to hedge certain assets denominated in foreign currencies with the purchase of forward contracts. Historically, fluctuations in foreign currency exchange rates have not had a material effect on the Company's results of operations and, with certain hedging activities, the Company does not expect such fluctuations to be material in the foreseeable future. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As reported in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, the Company was involved in litigation with Heartstream, Inc. The litigation between the two companies alleged, among other things, trade secret misappropriation and certain patent infringements. During October of 1997, the Company and Heartstream reached an agreement, through mediation, to settle all outstanding claims. The terms of the settlement are confidential. 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, 1997. 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 7, 1997 PHYSIO-CONTROL INTERNATIONAL CORPORATION By /S/ JOSEPH J. CAFFARELLI -------------------------------- Joseph J. Caffarelli Executive Vice President and Chief Financial Officer 12 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 3,514 0 38,042 0 40,637 85,721 16,402 0 105,121 29,956 0 0 0 173 53,262 105,121 129,847 129,847 64,947 64,947 0 0 1,284 10,792 3,777 7,015 0 0 0 7,015 0.39 0
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