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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1996
Commission file number 0-27242
PHYSIO-CONTROL INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 91-1673799)
(State or other jurisdiction) (I.R.S. Employer
of incorporation or organization Identification No.
11811 Willows Road N.E., Redmond, WA 98052
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (206) 867-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ()
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 17, 1997, at a closing sale price of $19.50 as reported
by the Nasdaq National Market was approximately $320,642,420.
As of March 17, 1997, the registrant had 17,154,441 shares of Common Stock,
par value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be used in connection with
the solicitation of proxies for the 1996 Annual Meeting to be held in May 1997
are incorporated by reference in Part III, Items 10-13.
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PHYSIO-CONTROL INTERNATIONAL CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
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PAGE NO.
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PART I
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 10
Item 3. Legal Proceedings............................................. 10
Item 4. Executive Officers of the Registrant.......................... 11
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 12
Item 6. Selected Financial Data....................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
Item 8. Financial Statements and Supplementary Data................... 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 38
PART III
Item 10. Directors and Executive Officers of the Registrant............ *
Item 11. Executive Compensation........................................ *
Item 12. Security Ownership of Certain Beneficial Owners
and Management.............................................. *
Item 13. Certain Relationships and Related Transactions................ *
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K......................................... 40
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* Incorporated by reference to the Company's Proxy Statement which the Company
will file with the Commission on or before March 31, 1997, pursuant to
General Instruction 6(3) to Form 10-K.
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PART I
ITEM 1. BUSINESS.
Physio-Control International Corporation (the "Company") designs,
manufactures, markets and services an integrated line of noninvasive
emergency cardiac defibrillator and vital sign assessment devices, disposable
electrodes and data management software. The Company's products are used in
both out-of-hospital and hospital settings for the early detection and
treatment of life threatening events including trauma, heart attack and the
acute heart rhythm disturbances of ventricular fibrillation, tachycardia and
bradycardia. The Company established the market for noninvasive emergency
cardiac defibrillators with the introduction of the first commercially
available, direct current external defibrillation device for hospital use in
1961. Since that time, the Company has developed a full product line to meet
the needs of a broad spectrum of users including first responders, emergency
medical technicians ("EMTs"), paramedics, hospital code teams, critical care
nurses and physicians.
The Company was founded in 1955 by a renowned cardiac surgeon, Dr.
William Edmark, who sought to reduce deaths related to cardiac arrest. The
Company was a publicly traded corporation from 1971 through 1980 and, from
1980 to mid-1994, operated as a wholly owned subsidiary of Eli Lilly and
Company ("Lilly"). On July 29, 1994, the stock of the Company and certain
other related assets were purchased from Lilly in an acquisition led by
affiliates of Bain Capital, Inc. and certain other investors. In December
1995, the Company again became a publicly traded corporation upon the
completion of an initial public offering of 13,421,650 shares of its Common
Stock. As used herein, the term "Company" refers to Physio-Control
International Corporation and its subsidiaries, and the term "Predecessor"
refers to the Company during the period in which it was a wholly owned
subsidiary of Lilly.
Physio Control-Registered Trademark-, PHYSIO-CONTROL-Registered
Trademark-, LIFEPAK-Registered Trademark-, and FIRST MEDIC-Registered
Trademark-, are registered trademarks of the Company. QUIK-COMBO-TM-,
QUIK-VIEW-TM-, QUIK-STAT-TM-, Shock Advisory System-TM- and CODE-STAT-TM- are
trademarks.
BACKGROUND
Cardiac defibrillator and vital sign assessment devices are used in a
variety of emergency situations for the early detection, assessment and
treatment of life threatening events arising from heart disease and trauma.
The most important factor in successfully treating a life threatening
emergency is time. In an emergency situation, the first action of a caregiver
is usually an assessment of the patient's vital signs. Therefore, it is
critical to have these assessment and treatment devices readily available.
Trauma is one of the leading causes of death in the U.S. Although various
conditions are associated with trauma, the most serious are shock and cardiac
arrest. Assessment of heart rhythms and blood pressure is crucial to
determine whether a patient is in shock or cardiac arrest. The Company
believes that cardiac defibrillator and vital sign assessment devices are
used in an estimated 40% of the approximate 20 million emergency medical
services ("EMS") calls made in the U.S. annually.
THE MARKETPLACE
The Company estimates that the 1996 worldwide market for emergency
cardiac defibrillator and vital sign assessment devices, including service
and supplies, was approximately $425 million. The market can be described in
terms of the U.S. out-of-hospital market (1996 sales of approximately $105
million), the U.S. hospital market (1996 sales of approximately $115
million), and the international market (1996 sales of approximately $205
million).
U.S. OUT-OF-HOSPITAL MARKET. This market can be characterized in several
distinct segments, typically defined by the skill level of the device user:
ADVANCED LIFE SUPPORT ("ALS"). The ALS market consists of a highly
skilled paramedic group. Paramedics generally receive over 1,500 hours of
training in emergency medicine including assessment and treatment of trauma.
The ALS market demands durable and reliable products that are suitable for a
high-use, harsh environment. Cardiac defibrillator and vital sign assessment
devices sold to this market include manual defibrillation, cardioversion,
pacing and vital sign assessment capabilities.
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BASIC LIFE SUPPORT ("BLS"). The BLS market consists of both EMTs and
other medically trained caregivers who are likely to have the first contact
with a patient in an emergency. These individuals include firefighters and
others with limited training in defibrillation therapy. Cardiac defibrillator
and vital sign assessment devices sold to this user group generally do not
include pacing, cardioversion capability or 12-lead assessment. In this
segment, users rely on arrhythmia detection software for automated detection
and semi-automated delivery of defibrillation therapy. In addition, data
capture and data management software is required to ensure adherence to
protocols developed and administered by a system medical director.
FIRST RESPONDER. The first responder market consists of minimally trained
personnel such as security personnel, flight attendants and extended care
facility staff. While the potential size of this market is substantial, the
market is currently in the early development stages. Cardiac defibrillator and
vital sign assessment devices sold to this user group must be easy to use, rely
on voice-prompted protocols that assume little user training, must be low
maintenance and incorporate long battery life as well as automated self-testing
that alerts users to electromechanical problems or a low battery energy
condition. The Company obtained U.S. Food and Drug Administration ("FDA")
approval under Section 510(k) in November 1996 for a new product, the LIFEPAK
500 defibrillator, to service this market group. The Company began shipments of
the LIFEPAK 500 unit in early 1997 and to date, the Company has received orders
for over 2,000 units of the LIFEPAK 500 automated external defibrillator (AED).
U.S. HOSPITAL MARKET. Hospitals have traditionally been the largest users of
cardiac defibrillator and vital sign assessment devices both for patients
admitted for chest pain and for patients undergoing treatment for other reasons.
Many hospital procedures such as surgery, cardiac catheterization, stress
testing and general anesthesia place the patient at increased risk for
arrhythmia or cardiac arrest. Hospitals frequently use cardiac defibrillator and
vital sign assessment devices on a standby basis in connection with these
procedures. Since immediate treatment is a critical factor for successful
cardiac resuscitation, cardiac defibrillator and vital sign assessment devices
are placed throughout the hospital, including cardiac and critical care units,
emergency rooms, operating rooms, electrophysiology laboratories and
increasingly in general wards. Hospitals also use portable devices during
in-hospital transportation of patients.
INTERNATIONAL MARKET. The international market is segmented into developed
markets such as Europe, Australia and Japan, and emerging markets, such as
Eastern Europe, China, India and Latin America. In developed markets, growth is
driven by the development of out-of-hospital emergency services similar to those
which have developed in the U.S. out-of-hospital market during the past 15
years. In emerging markets, growth is driven by the development of basic medical
facilities that typically require emergency cardiac defibrillator and vital sign
assessment devices.
PRODUCTS
The Company designs, manufactures, markets and services an integrated line
of noninvasive emergency cardiac defibrillator and vital sign assessment
devices, and related disposable electrodes and data management software. The
Company's current devices include the LIFEPAK 9, the LIFEPAK 10, the LIFEPAK 11,
the LIFEPAK 300, the LIFEPAK 500, the FIRST MEDIC 510 and the FIRST MEDIC 710
product families. All are noninvasive external defibrillator and vital sign
assessment devices, some having optional noninvasive pacing and shock advisory.
The Company has consistently supported all product introductions and
enhancements with extensive support documentation and training.
The Company's products are designed to maintain functional compatibility
with its installed base of over 160,000 units through the use of common device
controls, electrodes, protocols, batteries and data management software. The
cost and time involved in training caregivers to use devices such as those sold
by the Company are significant. The Company's current focus on functional
compatibility between old and new products is important in reducing the need to
provide additional training and in reducing the risk of associated user error.
In addition, the Company's defibrillation and vital sign assessment devices
record the patient data monitored and action taken by the caregiver for
post-event review by an EMS medical director or other responsible parties,
thereby permitting post-event monitoring of caregiver performance and product
effectiveness.
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HOSPITAL PRODUCTS
The LIFEPAK 9 family of products combines cardiac vital sign assessment
and manual defibrillation. The products are also available with external
noninvasive pacing and an automated Shock Advisory System (to allow use by
minimally trained personnel). These products can be configured to provide
monitoring, defibrillation and pacing through a single pair of disposable
QUIK-COMBO electrodes. The LIFEPAK 9 products are targeted to the hospital
where they are used in the emergency room, special procedure rooms, critical
care units and general floors. These products are also used in surgical
centers, clinics and physician offices.
OUT-OF-HOSPITAL PRODUCTS
The LIFEPAK 10 family of portable products combines a cardiac vital sign
assessment device with manual defibrillation. The products are available with
external noninvasive pacing and QUIK-COMBO electrode capability. The LIFEPAK
10 unit is used primarily in the out-of-hospital ALS market and for transport
of patients within the hospital.
The LIFEPAK 11 unit is an advanced, portable product for the ALS market
that, in addition to manual defibrillation and noninvasive pacing
capabilities, also includes diagnostic 12-lead ECG capability. This product
has made the Company the leader in field collected ECGs, which allow for
earlier diagnosis and faster treatment of myocardial infarctions.
The LIFEPAK 300 defibrillator is a portable product that combines a
cardiac vital sign assessment device with a manual and automated
defibrillator. This product incorporates the Shock Advisory System, which
supports its use as an automated defibrillator by minimally trained
personnel. While the LIFEPAK 300 unit is targeted for the BLS market, it can
also be operated in manual mode by ALS personnel. The product also includes
event documentation capability and a data management software package for use
by a medical director for efficient quality assurance.
The LIFEPAK 500 AED is a lightweight automated device that is designed to
be used by first responders to cardiac emergencies. This rugged device is
extremely portable at only seven pounds. Low maintenance requirements and
simple operation make it the ideal product for the first responder market.
The FIRST MEDIC 510 product is a portable automated defibrillator
designed primarily for EMT and fire department first responders. The product
also includes event documentation capability and a data management software
package for use by a medical director for efficient quality assurance.
The FIRST MEDIC 710 defibrillator is a portable product that combines a
cardiac vital sign assessment device with manual and automated defibrillation
for mixed BLS and ALS systems. The product is designed as a platform product
to incorporate additional assessment capabilities utilized by the ALS market
such as oximetry (for determining the amount of oxygen being carried in the
blood). This device can be used in either the manual or semi-automatic mode
at the option of the caregiver and is therefore attractive to mixed ALS/BLS
applications. The product also includes event documentation capability and
data management software for use by a medical director for efficient quality
assurance.
OTHER PRODUCTS
The Company's QUIK-COMBO electrodes allow customers to upgrade from
traditional single function electrodes to multiple function electrodes
permitting the Company's pacing products to pace, defibrillate, and monitor
electrocardiograms through a single pair of electrodes. QUIK-COMBO electrodes
are compatible across the LIFEPAK product lines, enabling continuity of care
from BLS providers to ALS providers to hospital providers. With this product,
caregivers can provide one set of electrodes which remain with the patient
through different levels of care.
The Company's CODE-STAT data management system, a Windows-tm-
based software program, allows users to conduct post-event review and
analyze system data. This software stores data from the LIFEPAK 11
diagnostic cardiac monitor and LIFEPAK 300 devices. The CODE-STAT
system extends the Company's data management product line, which
began with the introduction of the QUIK-VIEW data review system and
the QUIK-STAT statistical report generator in 1988.
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SERVICE
The Company provides extensive, high quality, direct, on-site and depot
service in the U.S. and in Western Europe through a dedicated service team of
more than 150 individuals. The Company believes its service force is the
industry's only direct field service organization for the out-of-hospital
market segment. The Company also provides comprehensive service in other
markets through a network of third-party service partners. Service is
provided under the Company's standard product warranties which generally
range from 90 days to five years, through annual service contracts which the
Company sells to its customers for a fixed fee and through on demand repair
services. The services provided include repair service, scheduled preventive
maintenance, product technical support and technical training. In the
hospital market, in addition to on-site service, the Company provides support
to hospital maintenance staff in the form of parts sales, product training
programs and technical support.
PRODUCT DEVELOPMENT
The Company's product development efforts include products for the ALS,
BLS and first responder market segments, as well as data management software.
The majority of the product development effort is focused on product
enhancements and new products which span the entire spectrum of anticipated
customer and clinical needs in all resuscitation and emergency vital sign
assessment market groups. The Company's product development strategy is based
on developing product platforms which have the flexibility to be configured
to respond to a variety of customer requirements. The Company believes this
strategy provides an opportunity to reduce the cost of developing new
products for use in multiple market segments.
SALES AND MARKETING
The Company sells its broad product line across a diverse global customer
group, including individual hospitals, hospital buying groups, fire
departments, EMS departments, governments, militaries, as well as alternative
healthcare delivery sites including surgery centers and sub-acute care
centers. With the 1997 introduction of the LIFEPAK 500 AED as discussed
above, the Company's customer base has now been expanded to include minimally
trained first responders such as police officers and security personnel.
The Company's marketing strategy is to target specific customer groups,
as well as align itself with strategic partners that will broaden the market
spectrum through joint sales and distribution agreements. During December
1996 the Company announced a sales and marketing alliance with Ambu
International A/S, a Danish company engaged in the development, manufacture
and sale of airway management products and CPR training devices for the
emergency medical market. Ambu's products are sold throughout the world.
During February 1997 the Company also announced a sales, marketing and
technology transfer alliance with Marquette Medical Systems, Inc. located in
Milwaukee, Wisconsin. Marquette is a market leader in the diagnostic
cardiology, patient monitoring and clinical information system markets.
Through these strategic alliances, the Company has positioned itself to
provide integrated products and clinical data management capabilities, from
the point of first intervention at the scene of a medical emergency, through
the point of final treatment.
The Company principally sells its products through a direct sales force
in the U.S. The Company's U.S. sales organization consists of approximately
95 individuals, principally comprised of a direct field sales force located
around the country, a dedicated national accounts team and a telemarketing
and customer support group. In addition, the Company has executed a limited
number of distribution agreements with third parties to service the alternate
U.S. site market which includes doctors' offices, surgery centers, sub-acute
care centers and industrial accounts. This alternative distribution channel
is intended to penetrate the numerous sites where the Company's sales force
does not currently focus.
The Company's purchasing agreements with ten major hospital buying groups
(approximately 30 total buying groups) cover approximately 75% of U.S.
hospital beds. In addition, the Company has agreements with the U.S.
government and several major ambulance companies. The Company believes these
purchasing agreements contribute to growth opportunities within the evolving
managed care environment. For the year ended December 31, 1996, domestic
sales accounted for approximately 74% of the total net revenues.
In the international market, the Company sells through both a direct
sales force and through distributors. The Company's international direct
sales force consists of a team of approximately 50 individuals located in
Canada,
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United Kingdom, Eastern Europe, France, Spain, Italy, Sweden, Netherlands and
Germany. The Company sells its products in other geographical areas such as
Japan, Asia Pacific, Australia, the Middle East and Latin America using
distribution partners, many of whom have been selling the Company's products
for more than ten years. The Company also invested in the Chinese marketplace
during 1996; it established a representative office in Beijing and developed
alliances with three distribution partners in major regions of China. For the
year ended December 31, 1996, international sales accounted for approximately
26% of total net revenues.
RESEARCH AND DEVELOPMENT
As of December 31, 1996, the Company had an in-house research and
development staff of approximately 200 engineers and technicians. Product
development work is driven by small, dedicated teams which have overall
responsibility for the development of new products. These teams are supported by
a strong functional network of technical specialists who maintain expertise in
specific technologies such as software engineering, mechanical design
engineering and electrical design engineering. The work of this organization is
complemented by a number of external, proprietary development relationships,
focused primarily on the development of non-critical support or ancillary
products. During the period ended December 31, 1995 and 1996, the Company's
expenditures for research and development totaled $19.5 million and $18.8
million, respectively.
To enhance its research and development capabilities, the Company has
developed close alliances with several leading research institutions and
universities. Currently, the Company supports basic research in the areas of
cardiac predictive and assessment algorithms, cardiac assessment models and new
waveform and energy transfer techniques.
COMPETITION
The cardiac defibrillator and vital sign assessment device market is highly
competitive. The Company competes with many companies, some of which may have
access to greater financial and other resources than the Company. The Company's
primary domestic competitors include Hewlett-Packard Co., Zoll Medical
Corporation, Laerdal Medical Corporation, Heartstream, Inc., and SurVivaLink.
International competitors also include Nihon-Kohden, S&W, Bruker-Odam, and
Hellige.
The Company believes that the principal competitive factors for cardiac
defibrillator and vital sign assessment devices are ease of use, compatibility
with existing equipment, durability and technical support. In the
out-of-hospital market, additional factors include reliability of the product
and battery system, portability, automation, multi-parameter capability, data
management, as well as field service and training. The Company believes that its
products compete favorably in these areas.
GOVERNMENT REGULATION
As a manufacturer of medical devices, the Company is subject to regulation
by, among other governmental entities, the FDA and the corresponding agencies of
foreign countries in which the Company sells its products. These regulations
govern the introduction of new medical devices, the maintenance of certain
records, the tracking of device location and other matters. Noncompliance with
applicable requirements can result in warning letters, fines, injunction, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for a device, and criminal prosecution. The Company believes that it is
in substantial compliance with all such governmental regulations.
FDA REGULATION. The FDA requires that prior to introducing any medical
device in the U.S. market, the manufacturer of such device must secure either
a premarket notification clearance pursuant to Section 510(k) of the Federal
Food, Drug, and Cosmetic Act (a "510(k) clearance") or an approved premarket
approval application ("PMA"). An approved PMA indicates that the FDA has
found that a device is safe and effective for the use described in the
approved labeling. A 510(k) clearance indicates that the FDA agrees with an
applicant's determination that the product for which clearance has been
sought is substantially equivalent to a legally marketed medical device and
does not require a PMA. In addition to requiring clearance or approval for
new products, the FDA may require clearance or approval prior to marketing
products that are modifications of existing products or that change the
intended use of existing products.
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To date, the Company has obtained FDA marketing clearances only through the
510(k) clearance process. Certain products under development and certain future
product applications, however, may require approval through the PMA process.
There can be no assurance that all necessary 510(k) or PMA approvals will be
granted on a timely basis or at all. It is possible that delays in receipt of or
failure to receive any necessary clearance or approval could have a material
adverse effect on the Company. For any device that is cleared through the 510(k)
process, changes or modifications that could significantly affect safety or
effectiveness, or make a major change in the intended use of the device, require
a new 510(k) notification submission.
The Company is required to register with the FDA as a device manufacturer
and is required to comply with the FDA's good manufacturing practices ("GMP")
regulations. These regulations require that the Company manufacture its products
and maintain its records in a prescribed manner with respect to manufacturing,
testing and control activities. Further, the Company is required to comply with
FDA requirements for labeling and promotion of its products. The FDA's medical
device reporting ("MDR") regulations require that the Company provide
information to the FDA whenever there is an assertion which reasonably suggests
that one of its devices may have caused or contributed to a death or serious
injury, or that a malfunction has occurred that would be likely to cause or
contribute to a death or serious injury if the malfunction were to reoccur. Due
to the large number of the Company's products already in use and the fact that
these products are frequently used in an attempt to resuscitate patients who are
already clinically dead, the Company regularly submits MDRs to the FDA and
expects to continue to do so.
Medical device manufacturers are routinely subject to periodic inspections
by the FDA. If the FDA believes that a company may not be operating in
compliance with applicable laws and regulations, it can place the company under
observation and reinspect the facilities; issue a warning letter apprising of
violative conduct; detain or seize products; mandate a recall; enjoin future
violations, and assess civil and criminal penalties against the company, its
officers or its employees. Failure to comply with regulatory requirements or any
adverse regulatory action could have a material adverse effect on the Company.
PRODUCT RECALLS. The Company manufactures critical medical devices and has
a strong commitment to providing highly reliable products. On occasion, the
Company has, on its own initiative or in response to customer or FDA concerns,
taken voluntary action to modify and upgrade customer products at the Company's
expense or provide instructional information to customers to optimize the
reliability of its products. Under the medical device regulations, several of
these actions have been classified as "recalls" or "safety alerts" by the FDA.
While the FDA has regulatory authority to mandate medical device recalls of any
manufacturer, all of the Company's product upgrades have been voluntary. To
date, no such recall or safety alert has had a material adverse impact on the
Company, although there can be no assurance that future recalls or safety alerts
would not have such an effect.
INTERNATIONAL REGULATION. Medical device laws and regulations are also in
effect in many of the countries in which the Company does business outside the
U.S. These laws and regulations range from comprehensive device approval
requirements for some or all of the Company's medical device products to simple
requests for product data or certifications. The number and scope of these
requirements are increasing. International sales of certain medical devices
manufactured in the U.S. but not approved by the FDA for distribution in the
U.S. are subject to FDA export requirements. Thus, failure to comply with
applicable international or FDA regulations could have a material adverse effect
on the Company.
FDA CONSENT DECREE. In July 1992, the FDA filed a civil complaint against
the Company for alleged violations of the GMP and MDR regulations. The complaint
alleged, among other things, violations of the FDA's GMP regulations relating to
the methods used in, and the facilities and controls used for, the manufacture,
packing and storage of Company devices and the FDA's MDR regulations relating to
the failure to submit reports to the FDA. The Company did not agree with the
allegations and voluntarily entered into a consent decree for mutual resolution
of the complaint. Under the terms of the consent decree, the Company agreed,
among other things, to suspend shipments of all of its products until the
Company's compliance with the GMP and MDR regulations was established to the
satisfaction of the FDA. The FDA did not, either in the consent decree or by
other action, mandate the recall or redesign of any of the Company's products.
As a result of the consent decree, the Company re-engineered its manufacturing
and quality assurance processes, including documentation control, and has
successfully passed FDA inspections for GMP and MDR compliance. The FDA
complaint and the terms of the consent decree had a material adverse effect on
the Company. The Company, however, has met all obligations of the consent decree
and resumed shipping its products in stages. All substantive terms of the
consent decree have been satisfied and it has no substantive ongoing impact on
the Company's operations so long as the Company maintains compliance with
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applicable GMP and MDR regulations. The Company may petition for vacating the
consent decree anytime after July 24, 1997. Until such dissolution, failure of
the Company to comply with the terms of the consent decree could subject it to
an action by the government to hold the Company in contempt of court and the
failure to comply with the GMP, MDR and other applicable FDA regulations could
subject the Company to criminal prosecution and civil fines and to seizure and
halt of the production and marketing of the Company's products.The laws and
regulations applicable to the manufacture and sale of medical devices and other
aspects of the Company's business and the level of enforcement thereof are
subject to change. Any changes in the FDA's laws and regulations could have a
material adverse effect on the Company.
INTELLECTUAL PROPERTY
The Company believes that patents and other proprietary rights are important
to its business and relies upon them to develop and maintain its competitive
position. The Company currently holds numerous U.S. and foreign patents and
patent applications which relate to aspects of the technology used in the
Company's products. There can be no assurance that patent applications filed by
the Company will result in the issuance of patents or that any of the Company's
intellectual property will provide competitive advantages for the Company's
products or will not be challenged or circumvented by others.
The Company also relies upon trade secrets and proprietary technology for
protection of its confidential and proprietary information. There can be no
assurance that others will not independently develop substantially equivalent
proprietary information or techniques or that third parties will not otherwise
gain access to the Company's trade secrets or disclose such technology. It is
the Company's policy to require its employees, consultants, outside
collaborators, advisors and vendors to execute confidentiality agreements. These
agreements generally require that all information provided by the Company be
kept confidential and not be disclosed to third parties, except in specific
circumstances. In the case of employees and consultants, the agreements
generally provide that all technology and confidential information relating to
the Company's business that is developed while rendering services for the
Company will be the exclusive property of the Company. There can be no
assurance, however, that these agreements will provide meaningful protection or
adequate remedies for the Company's trade secrets in the event of disclosure of
such information. The Company is presently engaged in litigation regarding
certain intellectual property rights. See "Item 3, Legal Proceedings."
EMPLOYEES
As of December 31, 1996, the Company had approximately 830 full-time
employees. The Company considers its employee relations to be good.
ENVIRONMENTAL COMPLIANCE
The Company is subject to various federal, state and local laws and
regulations relating to the protection of the environment. In the course of its
business, the Company is involved in the handling, storing and disposal of
materials which are classified as hazardous; however, it does not anticipate
that any related expenditures or expenses will have a material adverse effect on
its business, financial condition or results of operations.
PRODUCT LIABILITY EXPOSURE
The design, manufacture and marketing of medical devices produced by the
Company entail an inherent risk of product liability. The Company's principal
products are designed for use in the detection of abnormal heart rhythm
disturbances and for use in applying electrical therapy to restore or maintain
appropriate heart rhythms. As such, the Company's products are most often used
in emergency response settings, both in out-of-hospital and hospital settings.
While the Company believes that, based on claims made against the Company in
the past, the amount of product liability insurance maintained by the Company is
adequate, there can be no assurance that the amount of such insurance will be
sufficient to satisfy claims made against the Company in the future or that the
Company will be able to maintain insurance in the future at satisfactory rates
or in adequate amounts. Product liability claims could result in costs or
litigation and could have a material adverse effect on the business and the
financial condition of the
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Company. In addition, the Company is required, under certain of its
contractual agreements, to indemnify third parties against certain product
liability claims.
SEASONALITY
The Company has not experienced significant seasonality over the past three
fiscal years.
BACKLOG
The information relating to backlog required by Item 1 is set forth in "Item
7, Management's Discussion and Analysis."
FOREIGN AND DOMESTIC OPERATIONS
The information relating to the foreign and domestic operations of the
Company required by Item 1 is set forth in "Item 8, Financial Statements and
Supplementary Data."
ITEM 2. PROPERTIES.
The Company's manufacturing operations are carried out in an approximate
100,000 square foot facility located at the Company's headquarters in
Redmond, Washington. The Company believes that its current facility will be
sufficient to meet all of its manufacturing capacity requirements in the
foreseeable future. The Company's manufacturing facility is pledged as
collateral under its current bank credit agreement.
The Company's European headquarters is an 8,000 square foot leased
facility located in the United Kingdom. The Company also leases certain
facilities for use as sales and service offices in the United States and
throughout the world.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to certain legal actions arising in the ordinary
course of its business. Based on information presently available to the
Company, the Company believes that it has adequate legal defenses or
insurance coverage for these actions, and that the ultimate outcome of these
actions will not have a material adverse effect on the Company.
In November 1995, the Company initiated litigation in Washington State
Court against Heartstream, Inc. ("Heartstream"), a company recently 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. 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, and 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 tortious interference with business opportunities. While the Company
believes it has meritorious defenses against the suit, the ultimate
resolution of the matter could result in a loss of up to $10 million. The
parties are currently conducting discovery in this litigation and a tentative
trial date has been set for September 1997.
In addition, in January 1997 Heartstream initiated litigation against the
Company in U.S. District Court for the Western District of Washington
alleging that the Company is infringing a Heartstream patent related to
product self-test features. The Company has filed an answer denying
Heartstream's claims and alleging certain counterclaims against Heartstream
for infringement of a Company self-test patent. Discovery is in the initial
stages in this litigation.
If the Company does not prevail in these litigations 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 claims, the Company could be held liable
for significant damages.
10
<PAGE>
ITEM 4. EXECUTIVE OFFICERS OF THE REGISTRANT.
The information under this Item is furnished pursuant to Instruction 3 to
Item 401(b) of Regulation S-K. Executive officers of the Company are elected
by and serve at the discretion of the Board of Directors.
Richard O. Martin, has been Chairman of the Board and Chief Executive
Officer of the Company since February 1997 and a Director of the Company
since July 1994. Prior to that appointment, Dr. Martin was the President and
Chief Executive Officer of the Company from July 1994 and prior thereto
served as President of the Company's predecessor since April 1991. Prior to
being named President of the Company's predecessor and since November 1989,
Dr. Martin was a Vice President of SULZERmedica Inc., a medical device
company specializing in implantable products. From January 1988 to November
1989, Dr. Martin was the President and Chief Operations Officer of Positron
Corporation, a medical device company specializing in medical diagnostic
imaging equipment. Dr. Martin also serves as a director of Encore
Orthopedics, Inc., a designer and manufacturer of implantable orthopedic
devices, of Maxxim Medical Inc., a developer, manufacturer and marketer of a
diversified range of specialty medical products, and of SeaMED Corporation, a
designer and manufacturer of electromechanical products. Dr. Martin is 57
years old.
Robert M. Guezuraga has been President and Chief Operating Officer of the
Company since February 1997 and a Director of the Company since September
1994. Prior to this appointment, Mr. Guezuraga served as Executive Vice
President, Chief Operating Officer and a Director of the Company from
September 1994. From 1989 to September 1994, Mr. Guezuraga was the President,
Chief Executive Officer and a director of Positron Corporation, a medical
device company specializing in medical diagnostic imaging equipment. Mr.
Guezuraga was previously employed by General Electric Company in various
managerial positions in numerous operating divisions, including its medical
systems business division. Mr. Guezuraga is 47 years old.
Joseph J. Caffarelli has been Executive Vice President and Chief
Financial Officer of the Company since November 1994. From 1989 to November
1994, Mr. Caffarelli was the Executive Vice President and Chief Financial
Officer of OECO Corporation, a diversified electronics manufacturer. Mr.
Caffarelli was previously employed by General Electric Company in various
financial management positions including positions in its manufacturing
operations. Mr. Caffarelli is 51 years old.
V. Marc Droppert has been Executive Vice President-Law, Human Resources
and Corporate Affairs and Secretary of the Company since February 1997. Prior
to this appointment, Mr. Droppert served as Senior Vice President-Law, Human
Resources and Corporate Affairs and Secretary of the Company from December
1994. From April 1993 to December 1994, Mr. Droppert was President of
Virginia Mason Health Plan, a 40,000 member HMO, and Associate Administrator
of Virginia Mason Medical Center. Mr. Droppert was previously employed as a
consultant and by PACCAR Inc, a manufacturer of motor vehicles, in various
legal and human resources positions. Mr. Droppert serves as a director of
MEDMARC Mutual Insurance Company. Mr. Droppert is 45 years old.
11
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Common Stock commenced trading on December 12, 1995. The following
table sets forth on a per share basis, the high and low closing sale prices
per share for the Common Stock as reported by the Nasdaq National Market
during 1996 and the period from December 12, 1995 to December 31, 1995.
<TABLE>
<CAPTION>
1996 HIGH LOW
- --------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter.............................................................. 22 1/2 17 1/2
Second Quarter............................................................. 23 3/4 17 1/8
Third Quarter.............................................................. 25 1/4 15 3/8
Fourth Quarter............................................................. 24 1/8 18 1/4
1995
- ---------------------------------------------------------------------------
Fourth Quarter............................................................. 17 7/8 14 5/8
(beginning December 12, 1995)
</TABLE>
As of March 17, 1997, the Company's Common Stock was held by
approximately 67 holders of record. The Company believes, however, it has a
significantly greater number of beneficial owners.
The Company does not presently intend to pay any cash dividends on the
Common Stock in the foreseeable future. Payment of future dividends, if any,
will be at the discretion of the Company's Board of Directors after taking
into account various factors, including the Company's financial condition,
operating results, current and anticipated cash needs and plans for
expansion. Furthermore, as a holding company, the ability of the Company to
pay dividends in the future is dependent upon the receipt of dividends or
other payments from its operating subsidiaries. Such operating subsidiaries
are currently prohibited under the Company's bank credit agreement from
declaring or paying any cash dividends or otherwise transferring any cash to
the Company for the purpose of paying dividends to the holders of Common
Stock.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
Income Statement Data (1)
<TABLE>
<CAPTION>
(dollars in thousands,
except share and per
share data) Company Combined Company Predecessor
- ---------------------------------------------------- ------------ ------------ ---------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED JULY 30 TO JANUARY 1 YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, TO JULY 29, DECEMBER 31, DECEMBER 31,
1996 1995 1994 (2)(3) 1994 (2) 1994 (2) 1993 (4) 1992 (4)
------------ ------------ ------------ ------------ ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $ 173,165 $ 148,702 $ 150,028 $ 60,208 $ 89,820 $ 107,129 $ 76,998
Cost of sales........... 84,360 69,537 82,205 37,390 44,815 67,229 57,970
------------ ------------ ------------ ------------ ----------- ------------ ------------
Gross profit.......... 88,805 79,165 67,823 22,818 45,005 39,900 19,028
Research and
development........... 18,849 19,518 19,053 7,822 11,231 11,575 16,057
Selling, general and
administrative........ 44,167 41,547 44,343 18,115 26,228 40,694 42,561
Corporate expense
allocations and
management consulting
fees.................. 2,950 2,708 258 2,450 4,571 5,910
Restructuring and
special charges
(credits)............. (5,767) (5,767) 16,701 16,730
------------ ------------ ------------ ------------ ----------- ------------ ------------
Operating income
(loss).............. 25,789 15,150 7,486 (3,377) 10,863 (33,641) (62,230)
Interest expense........ (1,844) (2,836) (1,313) (1,313)
Other (expense) income,
net................... (347) (482) 51 236 (185) (456) (579)
------------ ------------ ------------ ------------ ----------- ------------ ------------
Income (loss) before
income taxes,
extraordinary item and
cumulative effect of a
change in accounting
principles............ 23,598 11,832 6,224 (4,454) 10,678 (34,097) (62,809)
Income tax (expense)
benefit............... (8,259) (4,118) (2,991) 959 (3,950) (763) 9,928
------------ ------------ ------------ ------------ ----------- ------------ ------------
Income (loss) before
extraordinary item and
cumulative effect of a
change in accounting
principles............ 15,339 7,714 3,233 (3,495) 6,728 (34,860) (52,881)
Extraordinary loss from
early extinguishment
of debt, net of income
tax benefit of $780... (1,460)
Cumulative effect of
a change in accounting
principles............ (1,087) (538)
------------ ------------ ------------ ------------ ----------- ------------ ------------
Net income (loss)....... $ 15,339 $ 6,254 $ 3,233 $ (3,495) $ 6,728 $ (35,947) $ (53,419)
------------ ------------ ------------ ------------ ----------- ------------ ------------
Net earnings per common
and common equivalent
shares................ $ 0.85
Weighted average number
of common and common
equivalent shares
outstanding........... 18,004,770
Pro forma net earnings
per common and common
equivalent shares
(unaudited)........... $ 0.38
Pro forma weighted
average number of
common and common
equivalent shares
outstanding
(unaudited)........... 16,525,664
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
(dollars in
thousands) Company Predecessor
- ------------------------------------------------------------------------- ------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993 DECEMBER 31, 1992
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Balance Sheet
Data
Working
capital........ $ 50,177 $ 35,172 $ 33,415 $ 14,863 $ 26,917
Total assets..... 95,862 78,500 93,544 83,045 81,028
Total debt....... 21,031 16,211 36,496
Stockholders'
equity......... 44,220 26,681 6,512 30,694 62,237
</TABLE>
NOTES TO SELECTED FINANCIAL DATA
(1) The periods beginning July 30, 1994 reflect data of the Company and its
subsidiaries after the acquisition of stock by Bain Capital, Inc. The
periods prior to and including July 29, 1994 reflect data of the
Predecessor, which was acquired by the Company on July 29, 1994 from Lilly.
See "Item 1, Business."
(2) The Company's domestic sales during 1994 were positively impacted by
shipments of the Company's significant backlog from 1993 and 1992. Such
large backlog in the earlier periods was due to governmental restrictions.
See "Item 1, Business."
(3) For comparative purposes, the results of operations of the Predecessor from
January 1, 1994 to July 29, 1994 and of the Company from July 30, 1994 to
December 31, 1994 have been combined.
(4) Operating results for 1992 and 1993 were adversely affected by the temporary
suspension of the Predecessor's manufacturing operations in May 1992, after
the Predecessor received notification by the FDA of alleged deficiencies in
compliance with FDA regulations. See "Item 1, Business."
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
Management's discussion and analysis provides information with respect to
the results of operations of the Company for the years ended December 31,
1996 and 1995, and the combined results of operations of the Company and the
Predecessor for the year ended December 31, 1994. On July 29, 1994, the
Company purchased all of the outstanding capital stock of the Predecessor and
certain other related assets from Lilly. For discussion and comparative
purposes, the results of operations of the Predecessor from January 1, 1994
to July 29, 1994 and of the Company from July 30, 1994 to December 31, 1994
have been combined.
This Management's Discussion and Analysis of Financial Condition and
Results of Operation contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements due to many factors,
including but not limited to those discussed in "Item 1, Business," the
effect of general economic conditions, the impact of competitive products and
pricing, customer demand, 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.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The Company reported worldwide sales of $173.2 million for the year ended
December 31, 1996, an increase of $24.5 million or 16% from 1995. Domestic
sales of $127.8 million increased $20.3 million (19%) while international
sales of $45.4 million increased $4.2 million (10%) from 1995. On a
consolidated basis, equipment sales of $116.0 million increased 11% during
the current year due primarily to increased demand for the Company's family
of LIFEPAK products, primarily the LIFEPAK 11 unit. Worldwide service revenue
of $27.2 million increased 10% and supplies revenue of $30.0 million
increased 54% from 1995, driven by disposable and accessory product sales.
The 19% increase in domestic revenue during 1996, when compared to 1995,
resulted from a 23% increase in out-of-hospital equipment sales, due mainly
to strong demand for LIFEPAK 11 products, and from a 30% increase in service
and supplies revenue (supplies revenue increased 56%). Domestic hospital
equipment sales increased 2% over 1995 in line with total hospital market
growth estimates. The 10% increase in international revenue for 1996
reflected a strong demand for LIFEPAK 9 products.
During the year ended December 31, 1996 worldwide product orders totaled
$144.0 million, an increase of $13.7 million or 11% over the comparable prior
year. 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 increased 15% and 9%,
respectively, from 1995. Conversely, product backlog at December 31, 1996 was
$9.9 million, down $4.7 million from December 31, 1995 reflecting a
company-wide focus initiated during early 1996 to improve timeliness of
customer product deliveries which resulted in a 70% reduction in cycle times
which currently average less than 14 days.
Gross profit of $88.8 million increased $9.6 million or 12% during 1996
when compared to 1995. As a percentage of sales, gross profit decreased from
53% in the prior year to 51% in 1996, largely as a result of changes in
product mix, mainly higher service and supplies revenue, as well as certain
trade-in programs established earlier in the year which resulted in higher
product discounts.
R&D expenditures during 1996 were $18.8 million, a decrease of $0.7
million or 3% from 1995. As a percentage of sales, R&D expenses decreased
from 13% in 1995 to 11% during 1996.
Selling, general and administrative ("SG&A") expenses of $44.2 million
for 1996 increased $2.6 million or 6% from 1995. 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 year. As a percentage of sales, SG&A expenses
decreased to 26% during 1996 from 28% during 1995.
15
<PAGE>
Management consulting fees due to Bain Capital, Inc. totaled $2.9 million
during 1995. During the fourth quarter of 1995, the management consulting
agreement was terminated. No management consulting fees were incurred during
1996.
Interest expense totaled $1.8 million during 1996, a decrease of $1.0
million from 1995. The decrease resulted from lower interest expense
attributable to a reduction of the Company's outstanding debt and lower interest
rates obtained in the refinancing of the Company's credit facility during
December 1995.
As a result of the above factors, net income totaled $15.3 million during
1996, an increase of $9.1 million or 145% from the comparable 1995 year.
COMPANY YEAR ENDED DECEMBER 31, 1995 COMPARED TO COMBINED YEAR ENDED
DECEMBER 31, 1994
For the year ended December 31, 1995, the Company reported net income of
$6.3 million, or $0.38 per share (pro forma), an increase of 93% from 1994
earnings of $3.2 million. As discussed below, 1995 results include two
nonrecurring charges: a $2.9 million consulting fee payable to Bain Capital,
Inc. and a charge of $1.5 million, net of tax, relating to the write-off of
certain loan fees. Net income for 1995, excluding these two nonrecurring items,
was $9.6 million, or $0.58 per share (pro forma).
The Company reported worldwide sales of $148.7 million for 1995,
reflecting a decrease of $1.3 million or 1% from 1994. Domestic sales for the
year were $107.5 million, down 8% from 1994, while international sales of $41.2
million represented a 22% increase from 1994.
The reduction in domestic sales volume is not considered representative of
1995 domestic sales activity because 1994 domestic sales were positively
impacted by a $27.7 million reduction of the Company's domestic order backlog.
During 1995, domestic backlog levels increased 16% from the beginning to the end
of the year. The Company's domestic product orders in 1995 increased 31% over
1994. The increase in product orders resulted from strong performance in both
the out-of-hospital and hospital markets bolstered by new product introductions,
including the QUIK-COMBO adapter for the LIFEPAK 9 family of products, the
LIFEPAK 10C defibrillator/monitor/pacemaker, and the LIFEPAK 11 monitor. The
increase in international sales was primarily attributable to the Company's
investment in a dedicated European sales force focused exclusively on selling
its products.
Gross profit increased 17% to $79.2 million during 1995 from $67.8
million for 1994. As a percentage of sales, gross profit improved to 53% from
45% in 1994. The improvement in gross profit was primarily attributable to
improved efficiencies due to higher manufacturing volumes, lower material
costs, and a $5.5 million write-up of the Company's inventories on July 29,
1994 that was charged to cost of goods sold during 1994.
Research and development expense increased 2% to $19.5 million during 1995,
from $19.1 million during 1994. Increased expenditures reflected the Company's
continued development of new products, including a first responder external
defibrillator product (LIFEPAK 500 AED) and the LIFEPAK 11 defibrillator, which
was introduced into the market in 1995.
SG&A expenses decreased $2.8 million or 6% to $41.5 million during 1995,
from $44.3 million during 1994 and, as a percentage of sales, decreased to
28% during 1995 from 30% during 1994. The decrease was primarily attributable
to a $0.9 million reduction in depreciation expense related to the write-down
of fixed assets in conjunction with the acquisition on July 29, 1994.
During 1995, corporate expense allocations and management consulting fees
increased $0.2 million as a result of a $2.9 million nonrecurring consulting fee
payable to Bain Capital, Inc. under a management advisory agreement, which was
terminated on December 15, 1995. Charges during 1994 reflected a $2.4 million
corporate expense allocation from Lilly and a $0.3 million consulting fee paid
to Bain Capital, Inc.
There were no restructuring charges or credits during 1995. Restructuring
credits of $5.8 million during 1994 reflected a $10.0 million credit from the
reversal of a charge taken during 1993 for planned downsizing associated with
the Company's temporary suspension of manufacturing operations, partially offset
by a $4.2 million charge taken during 1994 to record the cost of certain product
upgrades.
16
<PAGE>
Other expenses increased $2.1 million to $3.3 million during 1995, primarily
attributable to a $1.5 million increase in interest expense as a result of
interest costs on the Company's long term debt for the entire 1995 year versus
the period July 30, 1994 to December 31, 1994.
As discussed in "Liquidity and Capital Resources," the Company refinanced
its existing indebtedness during 1995 in connection with its initial public
offering. The Company incurred a nonrecurring charge of $1.5 million, net of
tax, related to the writeoff of loan fees associated with this refinanced debt.
QUARTERLY RESULTS
The Company's results of operations may fluctuate from quarter to quarter.
Various factors may affect results of operations, including variations in timing
of product orders, changes in product mix, timing of new product introductions,
changes in distribution channels, actions of competitors and budgetary practices
of the Company's customers.
LIQUIDITY AND CAPITAL RESOURCES
Since July 30, 1994, the Company has financed its operations primarily
through funds provided from operations and bank borrowings, as well as the 1995
receipt of approximately $23.7 million from Lilly in connection with purchase
price adjustments. Prior to July 29, 1994, the financing requirements of the
Company were funded by Lilly through intercompany transfers. Net cash used by
operating activities for the period July 30, 1994 through December 31, 1994
totaled approximately $16.6 million. For the year ended December 31, 1995, the
Company generated approximately $12.2 million in cash from operating activities,
primarily as a result of the receipt of $23.7 million from Lilly, which was
partially offset by decreases in income taxes payable and accrued liabilities
and increases in receivables and inventories. For the year ended December 31,
1996, the Company used $0.4 million in cash from operations.
During the period from July 30, 1994 to December 31, 1994 and for the years
ended December 31, 1995 and 1996, the Company made capital expenditures of
approximately $2.0 million, $5.9 million and $9.9 million, respectively. During
1994 and 1995 the majority of these capital expenditures were for manufacturing
molds, computer equipment and maintenance equipment. During 1996 the majority of
the capital expenditures related to the purchase and implementation of the
Company's new computer business system. The Company currently has no capital
commitments outside the ordinary course of business.
The Company's principal working capital requirements are for financing
accounts receivable and inventories. At December 31, 1996, the Company had
working capital of $50.2 million, including approximately $38.8 million of trade
accounts and other receivables and $31.8 million of inventories.
In connection with the Company's initial public offering in December 1995,
the Company refinanced its existing indebtedness under its existing credit
agreement and entered into the Amended and Restated Credit Agreement. The
Amended and Restated Credit Agreement provides for a revolving credit facility
in an amount not to exceed $30.0 million. The revolving credit facility 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 December
31, 1996, the average interest rate on amounts outstanding under the credit
facility were at various rates ranging from 6.5% to 6.8%. The Company's current
indebtedness is secured by substantially all of the Company's domestic assets
and outstanding stock and contains representations, warranties, affirmative and
negative covenants, and events of default customarily found in credit
arrangements of this type. At December 31, 1996, the Company had borrowing
availability under the credit facility of approximately $10.9 million available
for future borrowings after consideration of outstanding letters of credit of
$0.6 million, and was in compliance with all related loan covenants.
During 1994 and 1995, the Company issued subordinated promissory notes to
Lilly related to certain assets purchased. The first notes, totaling $1.5
million bear interest at LIBOR plus 3.25% per annum (9% at December 31, 1996)
and mature on January 31, 2001. An additional note payable dated October 30,
1995 totaling $1.0 million bears interest at LIBOR plus 3.0% per annum (8.75% at
December 31, 1996) and matures November 15, 1998. At
17
<PAGE>
December 31, 1996, the Company had an aggregate indebtedness of approximately
$2.5 million to Lilly under such notes.
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 existing credit
facility, will be sufficient over the next twelve months for the Company to make
anticipated capital expenditures and fund working capital requirements.
One of the Company's strategies is to evaluate and make strategic
acquisitions of and/or alliances with companies with complementary product
lines. Future acquisitions may be financed by issuance of additional common
stock, borrowings, or excess cash flow.
Approximately 26% of the Company's net revenues during 1996 were from
international customers and the Company expects that sales to international
customers will continue to represent a material portion of its net sales.
Certain of the Company's international receivables are denominated in foreign
currency, and exchange rate fluctuations impact the carrying value of these
receivables. The Company has elected to hedge certain assets denominated in
foreign currency 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 together, with certain hedging
activities, the Company does not expect such fluctuations to be material in the
foreseeable future.
EFFECT OF INFLATION
Inflation generally affects the Company by increasing the interest expense
of floating rate indebtedness and by increasing the cost of labor, equipment and
raw materials. The Company does not believe that inflation has had any material
effect on the Company's business over the past three years.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Report of Independent Accountants--Company........................................ 20
Report of Independent Accountants--Predecessor.................................... 20
Consolidated Balance Sheets of the Company at December 31, 1996 and 1995.......... 21
Consolidated Statements of Operations of the Company for the years ended December
31, 1996 and 1995, and for the period July 30, 1994 through December 31, 1994... 22
Combined Statement of Operations of the Predecessor for the period January 1, 1994
through July 29, 1994........................................................... 22
Consolidated Statements of Changes in Stockholders' Equity of the Company for the
years ended December 31, 1996 and 1995 and for the period July 30, 1994 through
December 31, 1994............................................................... 23
Combined Statement of Changes in Stockholders' Equity of the Predecessor for the
period January 1, 1994 through July 29, 1994.................................... 23
Consolidated Statements of Cash Flows of the Company for the years ended December
31, 1996 and 1995 and for the period July 30, 1994 through December 31, 1994.... 24
Combined Statement of Cash Flows of the Predecessor for the period January 1, 1994
through July 29, 1994........................................................... 24
Notes to Consolidated/Combined Financial Statements............................... 25
Financial Statement Schedules:
Report of Independent Accountants............................................... S-1
Schedule II Valuation and Qualifying Accounts and Reserves...................... S-2
</TABLE>
All other financial statement schedules have been omitted because they are
not applicable or the required information is included elsewhere herein or
incorporated by reference.
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Physio-Control International Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the
financial position of Physio-Control International Corporation and its
subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years ended December 31, 1996 and
1995 and the period from July 30, 1994 (inception) to December 31, 1994, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Seattle, Washington
January 24, 1997
To the Board of Directors and Stockholders of
Physio-Control International Corporation
In our opinion, the accompanying combined statements of operations, of
changes in stockholder's equity and of cash flows of Physio-Control Corporation
(predecessor of Physio-Control International Corporation--see Note 1) present
fairly, in all material respects, the results of its operations and its cash
flows for the period from January 1, 1994 to July 29, 1994, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
October 30, 1995
20
<PAGE>
Physio-Control International Corporation
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(dollars in thousands, except share and per share data)
- ---------------------------------------------------------------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents.............................. $ 3,336 $ 4,575
Accounts receivable, net............................... 36,352 26,938
Other receivables...................................... 2,517 596
Inventories, net....................................... 31,811 30,208
Prepaid income taxes................................... 3,967 2,637
Prepaid expenses....................................... 1,094 640
Deferred income taxes.................................. 2,790
------- -------
Total current assets................................. 79,077 68,384
Noncurrent Assets
Other assets........................................... 1,487 1,278
Deferred income taxes.................................. 2,175 3,124
Property, plant and equipment, net..................... 13,123 5,714
------- -------
Total assets......................................... $ 95,862 $ 78,500
------- -------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable....................................... $ 9,260 $ 10,109
Accrued liabilities.................................... 19,146 23,103
Deferred income taxes.................................. 494
------- -------
Total current liabilities............................ 28,900 33,212
------- -------
Noncurrent Liabilities
Long-term debt......................................... 21,031 16,211
Unfunded pension obligations........................... 1,711 2,396
------- -------
Total noncurrent liabilities......................... 22,742 18,607
------- -------
Commitments and contingencies (Note 16)
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; 17,020,245 and
16,754,909 shares issued and outstanding at 1996 and
1995, respectively................................... 170 168
Additional paid-in capital............................. 25,707 23,615
Retained earnings...................................... 18,098 2,759
Equity adjustment from foreign currency translation.... 245 139
------- -------
Total stockholders' equity........................... 44,220 26,681
------- -------
Total liabilities and stockholders' equity........... $ 95,862 $ 78,500
------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Physio-Control International Corporation
CONSOLIDATED/COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA) COMPANY PREDECESSOR
- --------------------------------------------------------------------------------------------- -----------------
FOR THE PERIOD FOR THE PERIOD
YEAR ENDED YEAR ENDED JULY 30, 1994 TO JANUARY 1, 1994 TO
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 JULY 29, 1994
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales............................ $ 173,165 $ 148,702 $ 60,208 $ 89,820
Cost of sales........................ 84,360 69,537 37,390 44,815
----------------- ----------------- ------- -------
Gross profit....................... 88,805 79,165 22,818 45,005
----------------- ----------------- ------- -------
Research and development............. 18,849 19,518 7,822 11,231
Sales and marketing.................. 32,021 30,073 13,477 18,353
General and administrative........... 12,146 11,474 4,638 7,875
Corporate expense allocation and
management consulting fees......... 2,950 258 2,450
Restructuring and special credits.... (5,767)
----------------- ----------------- ------- -------
Operating expenses................. 63,016 64,015 26,195 34,142
----------------- ----------------- ------- -------
Interest expense..................... (1,844) (2,836) (1,313)
Other (expense) income, net.......... (347) (482) 236 (185)
----------------- ----------------- ------- -------
Other expense...................... (2,191) (3,318) (1,077) (185)
----------------- ----------------- ------- -------
Income (loss) before income taxes and
extraordinary item................. 23,598 11,832 (4,454) 10,678
Income tax (expense) benefit......... (8,259) (4,118) 959 (3,950)
----------------- ----------------- ------- -------
Income (loss) before extraordinary
item............................... 15,339 7,714 (3,495) 6,728
Extraordinary loss from early
extinguishment of debt, net of
income tax benefit of $780......... (1,460)
----------------- ----------------- ------- -------
Net income (loss).................... $ 15,339 $ 6,254 $ (3,495) $ 6,728
----------------- ----------------- ------- -------
Net earnings per common and common
equivalent shares.................. $ 0.85
-----------------
Weighted average number of common and
common equivalent shares
outstanding........................ 18,004,770
-----------------
Pro forma net earnings per common and
common equivalent shares
(unaudited)........................ $ 0.38
-----------------
Pro forma weighted average number of
common and common equivalent shares
outstanding (unaudited)............ 16,525,664
-----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
Physio-Control International Corporation
CONSOLIDATED/ COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(dollars in thousands, except
share data)
- --------------------------------------------------------------------------------------------------------------------------
EQUITY
COMMON STOCK COMMON STOCK ADJUSTMENT
CLASS L (VOTING) (VOTING) ADDITIONAL RETAINED FROM FOREIGN
------------------------ ------------------------- PAID-IN EARNINGS CURRENCY
SHARES DOLLARS SHARES DOLLARS CAPITAL (DEFICIT) TRANSLATION
----------- ----------- ------------ ----------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Predecessor
Balance at December 31, 1993.... $ 36,218 $ (4,771) $ (753)
Parent company contribution of
payable for corporate expense
allocation.................... 2,450
Equity adjustment from foreign
currency translation.......... 373
Net income...................... 6,728
----------- --- ------------ ----- --------- --------- -----
Balance at July 29, 1994........ $ 38,668 $ 1,957 $ (380)
----------- --- ------------ ----- --------- --------- -----
Company
Sale of common stock in
formation of the Company...... 1,354,615 $ 14 12,191,533 $ 122 $ 9,464
Sale of common stock to
management.................... 56,021 1 504,169 5 409
Equity adjustment from foreign
currency translation.......... $ (8)
Net loss........................ $ (3,495)
----------- --- ------------ ----- --------- --------- -----
Balance at December 31, 1994.... 1,410,636 15 12,695,702 127 9,873 (3,495) (8)
Issuance of common shares in
acquisition................... 705,953 8 15
Conversion of Class L shares
immediately preceding initial
public offering............... (1,410,636) (15) 2,219,754 22 (7)
Net proceeds from initial public
offering...................... 1,133,500 11 13,734
Equity adjustment from foreign
currency translation.......... 147
Net income...................... 6,254
----------- --- ------------ ----- --------- --------- -----
Balance at December 31, 1995.... 16,754,909 168 23,615 2,759 139
Issuance of common shares....... 11,318 212
Stock issued upon exercise of
options....................... 254,018 2 363
Income tax benefit from exercise
of stock options.............. 1,517
Equity adjustment from foreign
currency translation.......... 106
Net income...................... 15,339
----------- --- ------------ ----- --------- --------- -----
Balance at December 31, 1996.... 17,020,245 $ 170 $ 25,707 $ 18,098 $ 245
----------- --- ------------ ----- --------- --------- -----
<CAPTION>
TOTAL
---------
<S> <C>
Predecessor
Balance at December 31, 1993.... $ 30,694
Parent company contribution of
payable for corporate expense
allocation.................... 2,450
Equity adjustment from foreign
currency translation.......... 373
Net income...................... 6,728
---------
Balance at July 29, 1994........ $ 40,245
---------
Company
Sale of common stock in
formation of the Company...... $ 9,600
Sale of common stock to
management.................... 415
Equity adjustment from foreign
currency translation.......... (8)
Net loss........................ (3,495)
---------
Balance at December 31, 1994.... 6,512
Issuance of common shares in
acquisition................... 23
Conversion of Class L shares
immediately preceding initial
public offering...............
Net proceeds from initial public
offering...................... 13,745
Equity adjustment from foreign
currency translation.......... 147
Net income...................... 6,254
---------
Balance at December 31, 1995.... 26,681
Issuance of common shares....... 212
Stock issued upon exercise of
options....................... 365
Income tax benefit from exercise
of stock options.............. 1,517
Equity adjustment from foreign
currency translation.......... 106
Net income...................... 15,339
---------
Balance at December 31, 1996.... $ 44,220
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
Physio-Control International Corporation
CONSOLIDATED/ COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(dollars in thousands) COMPANY PREDECESSOR
- ------------------------------------------------------------------------------------------- -----------------
FOR THE PERIOD FOR THE PERIOD
YEAR ENDED YEAR ENDED JULY 30, 1994 TO JANUARY 1, 1994 TO
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 JULY 29, 1994
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Cash Flows From Operating
Activities
Net income (loss)................. $ 15,339 $ 6,254 $ (3,495) $ 6,728
Adjustments to Reconcile Net
Income (Loss) to Net Cash (Used
in) Provided by Operating
Activities:
Depreciation and amortization..... 1,006 1,677 198 3,278
Restructuring and special
credits......................... (5,767)
Gain on disposal of property,
plant and equipment............. (232)
Extraordinary loss from early
extinguishment of debt, net..... 1,460
Increase in accounts
receivables..................... (9,414) (5,151) (86) (4,698)
Decrease (increase) in other
receivables..................... (1,921) 24,259 (23,700)
Decrease (increase) in
inventories..................... (1,603) (4,577) 6,176 6,140
Increase in prepaid income
taxes........................... (1,330) (2,637) (467)
Decrease (increase) in prepaid
expenses and other assets....... (947) 1,906 372 (1,193)
Decrease (increase) in deferred
income taxes.................... 4,233 3,619 (8,160) 237
Increase in income tax payable to
parent.......................... 4,065
(Decrease) increase in accounts
payable......................... (849) 1,687 3,664 (91)
(Decrease) increase in accrued
liabilities..................... (4,642) (9,919) 1,277 (1,099)
(Decrease) increase in income
taxes payable................... (6,354) 7,134
Change in due to/from affiliated
companies....................... (5,071)
------- ------- ------- ------
Net cash (used in) provided by
operating activities............ (360) 12,224 (16,620) 2,062
------- ------- ------- ------
Cash Flows From Investing
Activities
Purchases of property, plant and
equipment....................... (9,919) (5,853) (1,979) (5,005)
Acquisition of net assets, net of
cash acquired................... (2,044) (18,729)
Proceeds from sale/leaseback
activity........................ 1,788 1,540
Proceeds from sale of property,
plant and equipment............. 232
------- ------- ------- ------
Net cash used in investing
activities...................... (7,899) (6,357) (20,708) (5,005)
------- ------- ------- ------
Cash Flows From Financing
Activities
Net proceeds from issuance of
common stock.................... 577 13,768 10,015
Proceeds from issuance of
long-term debt.................. 38,000
Debt issue costs.................. (151) (2,950)
Repayment of term debt............ (10,000) (2,500)
Borrowings under revolving debt... 59,395 17,031
Repayments on revolving debt...... (54,575) (27,316)
Income tax benefit from exercise
of stock options................ 1,517
Parent company contributions...... 2,450
----------------- ------- ------- ------
Net cash provided by (used in)
financing activities............ 6,914 (6,668) 42,565 2,450
----------------- ------- ------- ------
Effect of exchange rate changes... 106 147 (8) 372
----------------- ------- ------- ------
Net (decrease) increase in cash
equivalents..................... (1,239) (654) 5,229 (121)
Cash and cash equivalents at
beginning of period............. 4,575 5,229 121
Cash and cash equivalents at end
of period....................... $ 3,336 $ 4,575 $ 5,229
----------------- ------- ------- ------
Supplemental Information
Cash paid during the period for
interest........................ $ 1,561 $ 3,145 $ 900
Cash paid during the period for
income taxes.................... $ 4,498 $ 3,405 $ 6,000
Note payable to Lilly for partial
acquisition consideration....... $ 996
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
NOTES TO CONSOLIDATED/ COMBINED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
NOTE 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Physio-Control International Corporation as successor by merger to
Physio-Control Acquisition, Inc. (the "Company" or "Successor") was incorporated
in Delaware during 1994 to effect the acquisition on July 29, 1994 (the
"Acquisition") of Physio-Control Corporation and certain assets of its
affiliates (the "Predecessor") from Eli Lilly and Company ("Lilly").
The consolidated financial statements of the Company include its wholly
owned subsidiary, Physio-Control Corporation ("PCC") and European and Canadian
subsidiaries of PCC. The Company's primary business activity is the design,
manufacture, distribution and servicing of an integrated line of noninvasive
emergency cardiac defibrillators and vital sign assessment devices, disposable
electrodes and data management software. The Company is headquartered in
Redmond, Washington and operations consist of manufacturing facilities in
Redmond, Washington and strategically located sales and service offices
worldwide.
Prior to July 29, 1994, the Predecessor was a wholly owned subsidiary of
Lilly. The combined financial statements through July 29, 1994 include the
results of the Predecessor's U.S. operations and operations whose activities
were conducted as either a division of Lilly or a joint venture. Certain costs
associated with these operations (compensation, facilities, overhead, etc.) were
charged by the Lilly entities to the Predecessor on various bases which, in the
opinion of management, are reasonable.
The financial statements of the Company and the Predecessor are not
comparable in certain respects due to differences between the cost bases of
certain assets and liabilities. The Predecessor financial statements represent
the "carve-out" results of operations and cash flows for the period presented.
The financial information of the Predecessor presented herein does not
necessarily reflect what the results of operations of the Company would have
been had it operated as a stand alone entity during the period covered and may
not be indicative of future operations.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist the
reader in understanding and evaluating the accompanying financial statements.
These policies are in conformity with generally accepted accounting principles
that apply to both the Company and the Predecessor and have been consistently
applied unless otherwise noted.
PRINCIPLES OF CONSOLIDATION
The consolidated/combined financial statements include all majority owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
EMPLOYEE STOCK OPTIONS
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its stock-based compensation plans.
EARNINGS PER SHARE
Net earnings per common and common equivalent share is computed using the
weighted average number of shares outstanding, adjusted for 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.
25
<PAGE>
PRO FORMA EARNINGS PER SHARE (UNAUDITED)
As a result of the changes in the Company's capital structure effective with
the initial public offering during December 1995 as described in Note 12,
historical earnings per common and common equivalent share amounts would not be
meaningful and therefore have not been presented for 1995. 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
Recapitalization described in Note 12.
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 assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments, with an original
maturity of three months or less, to be cash equivalents. These amounts are
stated at cost, which approximates fair value.
INVENTORIES
Inventories are stated at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation is
determined using the straight-line method over the estimated useful lives of the
assets, which are as follows: buildings and land improvements 18 to 40 years;
machinery and equipment 3 to 10 years; and furniture and fixtures 5 to 10 years.
All direct costs associated with the acquisition and implementation of software
for internal use are capitalized. Expenditures for renewals and betterments are
capitalized, and maintenance and repairs are charged to operations.
INCOME TAXES
Deferred income taxes are provided for all significant temporary differences
in reporting items of income and expense for financial statement purposes versus
income tax reporting. Income taxes in the accompanying financial statements for
the period ending July 29, 1994 have been computed assuming the Predecessor
filed separate income tax returns worldwide. Subsequent to the Acquisition, the
Company has filed a consolidated income tax return with its wholly owned
subsidiaries.
FOREIGN CURRENCY
Prior to the Acquisition, asset and liability accounts of the Predecessor's
affiliated foreign operations were translated at the current exchange rate and
income accounts were translated at average exchange rates prevailing during the
period. Gains and losses resulting from the translation of foreign currency
financial statements were classified as a separate component of stockholders'
equity. The functional currency of each affiliate was the local currency in its
respective country.
Subsequent to the Acquisition and the restructuring of the Company's foreign
operations, the functional currency of each of the Company's foreign
subsidiaries is the local currency in its respective country. Asset and
liability accounts of each entity are translated at the current exchange rate
and income accounts are translated at average exchange rates prevailing during
the period. Gains and losses resulting from the translation of these foreign
currency financial statements are classified as a separate component of
stockholders' equity. For other foreign operations of the Company, all monetary
assets and liabilities denominated in foreign currencies are remeasured into
U.S. dollars at current exchange rates. Income and expense items are remeasured
at average exchange rates prevailing during the period. The Company hedges its
position in all material foreign currency exposures. Exchange gains and losses
arising from remeasurement and hedge revaluations are a component of operating
results and are not material.
CONCENTRATION OF CREDIT RISK/FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to credit risk
consist principally of trade receivables. Trade receivables from international
customers account for a substantial portion of receivables, for which collateral
is generally not required. The risk associated with this concentration is
limited due to the large number of distributors and their geographic dispersion.
26
<PAGE>
The carrying values of cash equivalents and other current assets and
liabilities (such as accounts receivable and payable) approximate fair value at
December 31, 1996. The carrying value of the revolving credit facility
approximates fair value as the interest rate adjusts based upon market interest
rate changes.
REVENUE RECOGNITION
Revenue from product sales are recorded by the Company when products are
shipped to customers. Provision for sales returns is recorded for estimated
products returned by customers. Service revenue is recognized upon the
completion of service repair work. Additional service revenue earned on extended
warranty contracts is recognized on a straight-line basis over the life of the
contract period which is generally one year or less.
WARRANTY AND SERVICE UPDATE ALLOWANCES
Provision is recorded for the estimated cost of product coverage programs,
which includes warranty and service updates. Such costs are accrued at the time
revenue is recognized.
RECLASSIFICATION
Certain amounts have been reclassified in the prior periods in order to
conform to the current year presentation.
NOTE 3. ACQUISITION
Effective July 29, 1994, the Company acquired the stock of the Predecessor
and certain foreign assets from Lilly in a transaction structured as a
combination stock and asset purchase. The Acquisition has been accounted for by
the purchase method of accounting in accordance with Accounting Principles Board
Opinion No. 16, "Business Combinations." Accordingly, the purchase price plus
direct costs of acquisition have been allocated to the assets acquired and
liabilities assumed based on management's estimates and arms-length negotiations
with Lilly.
A summary of assets acquired, liabilities assumed and purchase price paid is
as follows:
<TABLE>
<S> <C>
Consideration:
Cash............................................................... $ 44,922
Notes payable to Lilly............................................. 2,457
Purchase price adjustment from Lilly............................... (25,161)
Costs of acquisition............................................... 1,107
---------
23,325
Liabilities assumed................................................ 37,800
---------
Cost of assets acquired............................................ $ 61,125
---------
</TABLE>
The final cost allocated to each of the Company's assets and liabilities at
the date of the Acquisition, as determined in accordance with the purchase
method of accounting, is presented in the table below. The preliminary fair
values allocated to acquired property, plant and equipment was $32,271. Since
the estimated fair value of the net assets acquired exceeded total acquisition
costs, the excess purchase price over net assets acquired of $32,271 was
allocated as a reduction to the Company's fixed assets.
<TABLE>
<S> <C>
Cash............................................................... $ 3,600
Accounts receivable................................................ 22,859
Inventories........................................................ 31,061
Prepaids and other current assets.................................. 1,191
Deferred income taxes.............................................. 1,373
Property and equipment.............................................
Other long term assets............................................. 1,041
Accounts payable and accrued liabilities........................... (37,800)
---------
Net assets acquired................................................ $ 23,325
---------
</TABLE>
27
<PAGE>
The Acquisition was financed by $38.0 million of bank debt, $10.0 million of
equity, and $2.5 million in notes to Lilly. In addition to the Acquisition, a
portion of the total bank proceeds was used for acquisition costs of $1.1
million and for working capital purposes.
NOTE 4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Trade receivables...................................... $ 37,118 $ 27,587
Less allowances........................................ (766) (649)
------- -------
Total accounts receivable.............................. $ 36,352 $ 26,938
------- -------
</TABLE>
NOTE 5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Finished products...................................... $ 18,734 $ 16,504
Purchased parts and assemblies in process.............. 6,534 7,884
Service parts.......................................... 9,037 9,507
------- -------
34,305 33,895
Less inventory allowances.............................. (2,494) (3,687)
------- -------
Total inventories...................................... $ 31,811 $ 30,208
------- -------
</TABLE>
In connection with the Acquisition (see Note 3) the Company's total
inventories were written up $5.5 million at the date of the Acquisition and
subsequently charged to cost of goods sold during the period July 30, 1994
through December 31, 1994.
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Land................................................... $ 880 $ 880
Buildings and land improvements........................ 388 361
Machinery, equipment, furniture and fixtures........... 13,571 5,467
------- ------
14,839 6,708
Less accumulated depreciation.......................... (1,716) (994)
------- ------
Total property, plant and equipment.................... $ 13,123 $ 5,714
------- ------
</TABLE>
The Company has entered into several agreements for the sale and
leaseback of a portion of its production and operating equipment. The leases
are classified as operating leases in accordance with FAS 13, "Accounting for
Leases." The net book value of the equipment sold during 1996 and 1995
totaled $1,539 and $1,393, respectively, and the gain realized on these
transactions was $0 and $147 in 1996 and 1995, respectively. The gain in 1995
was deferred and will decrease lease expense over the lease terms (36
months). Rental expense related to these operating leases during 1996 and
1995 was $1,220 and $69, respectively. Future minimum lease payments are
included in the schedule in Note 16.
28
<PAGE>
NOTE 7. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Employee compensation.................................. $ 6,634 $ 5,780
Deferred service contract revenue...................... 3,045 2,352
Product and technical service upgrades and updates..... 2,287 3,910
Warranty charges....................................... 997 1,292
Restructuring charges.................................. 487 2,664
Other accruals......................................... 5,696 7,105
------- -------
Total accrued liabilities.............................. $ 19,146 $ 23,103
------- -------
</TABLE>
PRODUCT AND TECHNICAL SERVICE UPGRADES AND UPDATES
As of December 31, 1996, the Company has recorded its best estimate of the
cost to provide future update and upgrade services for its existing product
lines. The liability at December 31, 1995 related primarily to non-FDA related
product upgrades and updates which were completed during 1996; specifically, the
cost of an adapter that enhanced the functionality of two of the Company's
products and the estimated cost of certain product service updates to replace
certain cables in two of the Company's products. The liabilities at December 31,
1996 and 1995 represent management's best estimate of (i) the number of upgrades
that will be made, (ii) the related cost of each upgrade, and (iii) the cost of
certain product service updates. Management believes that any liability that may
ultimately result from the resolution of product upgrades and updates in excess
of amounts provided will not have a material adverse effect on the financial
position or results of operations of the Company.
NOTE 8. LONG-TERM DEBT
As a result of the Company's initial public offering in December 1995, the
Company received net proceeds of $13.7 million (after underwriting discounts and
other charges of approximately $2.7 million). Of this amount, the Company used
$12.0 million to reduce its term loan and its revolving credit facility in
December 1995 which resulted in an extraordinary loss of $1,460 ($0.09 per
share), net of an income tax benefit of $780. Immediately thereafter, the
Company entered into an Amended and Restated Credit Agreement with a bank for a
$30.0 million revolving credit facility (the "Revolver") which matures December
15, 1998. Of this amount, up to $5.0 million may be used for issuance of
commercial and standby letters of credit on behalf of the Company.
Interest on drawings under the Revolver bear 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 December 31, 1996, the
interest rates on drawings on the revolving loan facility were at various
rates between 6.5% and 6.8%.
The Company is required to pay a commitment fee equal to 0.125 percent of
the amount by which the available revolving credit exceeds the outstanding
Revolver loans on a quarterly basis. The outstanding balance on the Revolver was
$18,500 at December 31, 1996 with $10,900 available for future borrowings, after
consideration of outstanding letters of credit of $600.
The Revolver is secured by a first priority interest in and lien on all of
the assets of PCC, a pledge by the Company on all of the outstanding 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 Revolver includes various
affirmative and negative financial 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 earnings before income taxes, interest, depreciation
and amortization.
The Company has subordinated notes payable to Lilly in connection with the
acquisition of certain foreign assets. Notes with a principal balance of $1,530
mature on January 31, 2001 and bear interest at LIBOR plus 3.25% (9.0% at
December 31, 1996). An additional note payable with a principal balance of
$1,000 matures November 15, 1998 and bears interest at LIBOR plus 3.0% (8.75% at
December 31, 1996).
29
<PAGE>
NOTE 9. RELATED PARTY TRANSACTIONS
The Predecessor's statement of operations for the period ending July 29,
1994 reflect certain expense and revenue items incurred by Lilly which were
allocated to the Predecessor, consisting primarily of certain foreign sales and
marketing expenses, and expenses relating to Lilly's Medical Device and
Diagnostic Business Planning Group.
A summary of this allocation is as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1994
TO JULY 29,
1994
---------------
<S> <C>
General and administrative.................................................... $ 1,049
Business Planning Group....................................................... 1,336
International sales and marketing............................................. 65
------
Total corporate expense allocations........................................... $ 2,450
------
</TABLE>
Operating expenses during the period ended July 29, 1994 include certain
services performed by Lilly or its affiliates and charged directly to the
Predecessor. Other transactions include intercompany purchases and sales,
services fees, and interest. Transactions with affiliated companies are as
follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1994
TO
JULY 29, 1994
-----------------
<S> <C>
From Lilly (Parent):
Personnel benefits......................................................... $ 2,663
Income taxes............................................................... 6,000
Insurance.................................................................. 2,551
Interest expense........................................................... 95
Miscellaneous.............................................................. 263
-------
$ 11,572
-------
From Lilly (Affiliates):
Interest expense........................................................... $ 77
-------
To Lilly (Affiliates):
Product sales and service.................................................. $ 614
-------
</TABLE>
Included in management consulting fees for the year ended December 31, 1995
and for the period July 30, 1994 to December 31, 1994 are amounts paid to Bain
Capital, Inc. for management consulting services in the amount of $2,950 and
$258, respectively.
NOTE 10. RESTRUCTURING AND SPECIAL CREDITS
The Predecessor provided for "Other restructuring and special credits" in
the amount of $5,767 during the period ending July 29, 1994, which is due to a
$10,000 credit related to the discontinuance of certain downsizing actions,
partially offset by a $4,233 charge taken for the anticipated cost of providing
an adapter that would enhance the functionality of two of the Company's
products.
NOTE 11. ACQUISITION OF FIRST MEDIC
On April 5, 1995, the Company completed the acquisition of substantially
all of the assets and the liabilities of the FIRST MEDIC Division of
SpaceLabs Medical Inc. ("FIRST MEDIC"), consisting primarily of inventory,
fixed assets, certain intangibles, and warranty liabilities. FIRST MEDIC is
an out-of-hospital, portable defibrillator product line. The acquisition was
accounted for by the purchase method of accounting in accordance with
30
<PAGE>
Accounting Principles Board No. 16, "Business Combinations" and, accordingly,
the operating results from FIRST MEDIC product sales have been included in
the consolidated operating results since the date of acquisition. The
purchase price of the acquisition was $2.1 million in cash and 705,953 shares
of voting common stock, which was assigned a value of $23 ($0.033 per share)
as agreed between the parties. The fair value of the net assets acquired
approximated the purchase price and accordingly no goodwill was recorded.
NOTE 12. STOCKHOLDERS' EQUITY
RECAPITALIZATION
Immediately prior to the completion of the 1995 initial public offering, the
Company's outstanding shares of capital stock were reclassified into one class
of common stock and effected a 2.6246-for-one split of all of the then
outstanding shares of common stock (the "Recapitalization"). In connection with
the Recapitalization, each outstanding share of Class L common stock was
reclassified into one share of common stock plus an additional number of shares
of common stock determined by dividing a preferential payment amount for such
share of Class L common stock by the value of a share of common stock based on
the initial public offering price in the offering. The preferential payment
amount was equal to the original cost of such share plus an amount which
accumulated on a daily basis at 12.5% per annum on such cost and on the amount
so accumulated in prior quarters. Upon conversion, each share of Class L common
stock was entitled to the aforementioned preferential payment upon any
distribution by the Company to holders of its capital stock (whether by
dividend, liquidating distribution or otherwise). An aggregate of 2,219,754
shares of common stock was issued in exchange for the outstanding shares of
Class L common stock in connection with the Recapitalization. All references in
the accompanying consolidated financial statements to the number of common
shares, per share amounts, and options exercisable into common stock have been
restated to reflect the stock split.
1994 STOCK PURCHASE AND OPTION PLAN
During 1994, the Company adopted the 1994 Stock Purchase and Option Plan
(the "1994 Plan"), which authorizes grants of stock options to current or future
employees, directors, consultants, or advisors of the Company. The 1994 Plan
authorizes the granting of stock options for up to an aggregate of 262,460
shares of Class L common stock and 2,624,600 shares of common stock. The stock
option grants are of three types: time option grants, target option grants, and
fair market value option grants.
Time option grants are granted at the fair market value of the common stock
on the date of grant. Prior to the effectiveness of the Company's registration
statement under the Securities Act of 1933, the options vested in five equal
installments on each anniversary of the grant date. Effective with the offering,
all options vested immediately. At December 31, 1996 there were options
outstanding to purchase 386,954 shares of common stock at an exercise price of
$0.03 per share.
Target option grants are granted at the fair market value of the common
stock on the date of grant. Prior to the effectiveness of the Company's
registration statement, the options vested on the earlier of ten years or upon
the occurrence of one of several events, including a change in ownership.
Effective with the offering, all options vested immediately. At December 31,
1996 there were options outstanding to purchase 306,892 shares of common stock
at an exercise price of $0.03 per share.
Fair market value options granted during 1994 (229,786) became fully vested
with the effectiveness of the Company's offering. Fair market value options
granted during 1995 (533,364) vest annually in five equal installments
commencing on December 31, 1995 of which 271,590 options vested upon the
completion of the offering. The exercise price of the stock option is determined
on the date the option vests and is equivalent to the fair market value of the
common stock on the vesting date. On October 16, 1995 the 1994 Plan was amended
to fix the exercise price of the fair market value options at $12.57 per share.
At December 31, 1996, 707,634 options were outstanding and a total of 570,675
fair market value options were vested.
1996 STOCK INCENTIVE PLAN
In December 1995, the Company adopted the Physio-Control International
Corporation 1996 Stock Incentive Plan (the "1996 Plan"). The 1996 Plan provides
for the granting to employees and other key individuals who perform services for
the Company and its subsidiaries the following types of incentive awards: stock
options, stock appreciation rights, restricted stock, performance grants and
other types of awards. An aggregate of 1,250,000 shares
31
<PAGE>
of Common Stock have been reserved for issuance under the 1996 Plan. Any
additional shares of Common Stock to be authorized for issuance must be
approved by the stockholders of the Company.
Options granted under the 1996 Stock Plan are issued at the fair market
value on the date of grant, and vest in equal installments over a five year
period. At December 31, 1996, 890,700 options were outstanding and a total of
178,300 options were vested. The table below summarizes the Company's stock
option activity:
<TABLE>
<CAPTION>
OPTION PRICE
--------------------------
NUMBER OF SHARES PER SHARE TOTAL
----------------- --------------- ---------
<S> <C> <C> <C>
Balance at December 31, 1994....................................... 1,148,901 $ 0.03-$12.57 $ 2,919
Granted............................................................ 533,391 $ 12.57 6,705
Canceled...........................................................
Exercised..........................................................
----------------- --------------- ---------
Balance at December 31, 1995....................................... 1,682,292 $ 0.03-$12.57 9,624
Granted............................................................ 898,500 $ 15.38-$20.50 16,351
Canceled...........................................................
Exercised.......................................................... (254,018) $ 0.03-$12.57 (369)
Forfeited.......................................................... (34,594) $ 12.57-$20.50 (496)
----------------- --------------- ---------
Balance at December 31, 1996....................................... 2,292,180 $ 0.03-$20.50 $ 25,110
----------------- --------------- ---------
</TABLE>
EMPLOYEE SHARE PURCHASE PLAN
In December 1995, the Company adopted the Physio-Control International
Corporation Employee Share Purchase Plan (the "Share Purchase Plan"), which
permits employees of the Company to purchase Common Stock at 85% of the lower of
its beginning-of-the-year or end-of-year market price through payroll
deductions. All employees of the Company are eligible to participate in the
Share Purchase Plan. An aggregate of 600,000 shares of Common Stock have been
authorized for issuance under the Share Purchase Plan. During January 1997, a
total of 37,795 shares were purchased by employees from contributions made
during 1996.
CERTAIN PRO FORMA DISCLOSURES (UNAUDITED)
As discussed above, the Company has three stock-based compensation plans;
the 1994 Stock Purchase and Option Plan, the 1996 Stock Incentive Plan, and the
Employee Share Purchase Plan. The Company accounts for these plans in accordance
with the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." In October 1995 the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123 (FAS
123), "Accounting for Stock-Based Compensation," which established a fair value
based method of accounting for employee stock option plans and share purchase
plans. FAS 123 provides for the disclosure of the value of compensation
associated with options held by participants, based on a fair value methodology.
If compensation cost for the Company's stock-based compensation plans had been
determined based on the fair value at the grant and/or purchase dates, as
prescribed by FAS 123, the Company's pro forma net income and pro forma net
earnings per common and common equivalent share would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Net income:
As reported.......................................... $ 15,339 $ 6,254
Pro forma............................................ $ 7,792 $ 2,611
Net earnings per common and common equivalent share
As reported.......................................... $ 0.85 $ 0.38
Pro forma............................................ $ 0.43 $ 0.16
</TABLE>
32
<PAGE>
STOCK OPTION PLANS. For the purpose of the FAS 123 pro forma disclosures,
the fair value of each option grant has been estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions used
for grants during 1996 and 1995: dividend yield of 0.0% for both periods;
expected volatility of 1.9% for both periods; risk-free interest rates of 4.4%
and 4.7% for options granted during 1996 and 1995, respectively; and an expected
option term of five years for options granted during 1996 and 1995,
respectively.
EMPLOYEE SHARE PURCHASE PLAN. For the purpose of the FAS 123 pro forma
disclosures, the fair value of the employees' purchase rights was estimated
using the Black-Scholes model with the following assumptions for 1996: dividend
yield of 0.0%; expected life of one year; expected volatility of 1.9%; and
risk-free interest rates of 4.5%. The weighted-average fair value of those
purchase rights granted during 1996 was $17.20.
Because additional option grants and share purchases are expected to be made
in future years, the above pro forma disclosures are not representative of pro
forma effects on reported net income for future years.
NOTE 13. FEDERAL INCOME TAXES
Income taxes have been provided as follows:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
------------------------------------------------------- -----------------
FOR THE PERIOD FOR THE PERIOD
YEAR ENDED YEAR ENDED JULY 30, 1994 TO JANUARY 1, 1994 TO
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 JULY 29, 1994
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Current Income Tax (Expense) Benefit
U.S. federal tax (expense) benefit......... $ (2,030) $ 1,363 $ (6,702) $ (3,622)
Foreign tax expense........................ (1,996) (1,862) (497) (328)
------- ------ -------- ------
Total current tax expense.................. (4,026) (499) (7,199) (3,950)
Deferred Income Tax (Expense) Benefit...... (4,233) (3,619) 8,158
------- ------ -------- ------
Total income tax (expense) benefit......... $ (8,259) $ (4,118) $ 959 $ (3,950)
------- ------ -------- ------
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
included in the provisions referred to above are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards....................... $ 2,897
Property, plant and equipment.......................... $ 2,175 3,124
Accrued product upgrades and service updates........... 864 1,486
Restructuring and special charges...................... 541 1,039
Accrued pension liability.............................. 791 1,051
Vacation liability..................................... 439 460
Warranty accrual....................................... 397 491
Research and development credit........................ 341
Subpart F income....................................... 463
Other.................................................. 210 418
------ ------
Total deferred tax assets.............................. 5,880 11,307
------ ------
Deferred Tax Liabilities:
Inventories............................................ (4,199) (5,393)
------ ------
Net deferred taxes..................................... $ 1,681 $ 5,914
------ ------
</TABLE>
At December 31, 1996 and 1995 the Company has not provided a valuation
allowance against its deferred tax assets because the Company believes it is
more likely than not that the assets will be realized.
33
<PAGE>
A reconciliation of income taxes computed at federal statutory rates to the
reported income tax (expense) benefit is as follows:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
------------------------------------------------------- -----------------
FOR THE PERIOD FOR THE PERIOD
YEAR ENDED YEAR ENDED JULY 30, 1994 TO JANUARY 1, 1994 TO
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 JULY 29, 1994
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Income tax (expense) benefit computed at
federal statutory tax rates................ $ (8,259) $ (4,023) $ 1,514 $ (3,631)
Permanent differences........................ (181) (286) (643) (108)
State taxes, net of federal tax (expense)
benefit.................................... (433) (190) 88 (211)
Research tax credit.......................... 181 210
Effect of international operations........... 167 171
Other........................................ 266
------- ------- ------ -------
Income tax (expense) benefit................. $ (8,259) $ (4,118) $ 959 $ (3,950)
------- ------- ------ -------
</TABLE>
Pretax income for the periods presented was taxed under the following
jurisdictions:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
------------------------------------------------------- -----------------
FOR THE PERIOD FOR THE PERIOD
YEAR ENDED YEAR ENDED JULY 30, 1994 TO JANUARY 1, 1994 TO
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 JULY 29, 1994
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Domestic............................. $ 17,895 $ 6,513 $ (5,874) $ 9,742
Foreign.............................. 5,703 5,319 1,420 936
------- ------- ------- -------
Total pretax income (loss)........... $ 23,598 $ 11,832 $ (4,454) $ 10,678
------- ------- ------- -------
</TABLE>
NOTE 14. EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN
The Company has a noncontributory defined benefit retirement plan that
covers substantially all United States employees. Benefits under this plan prior
to its amendment in September 1994 were calculated by using one of several
formulas. These formulas were based on a combination of years of service, final
average earnings, primary social security benefits and age. Effective September
1, 1994, the defined benefit plan was amended to become a cash balance plan.
Under the amended plan, the Company makes contributions to the plan based on
certain percentages of the participants' salaries.
The Company's funding policy for all plans is consistent with governmental
and tax funding requirements. Plan assets consist of equity and fixed income
instruments.
Net pension expense for the U.S. retirement plan includes the following
components:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
--------------------------------------------------------- -----------------
FOR THE PERIOD FOR THE PERIOD
YEAR ENDED YEAR ENDED JULY 30, 1994 TO JANUARY 1, 1994 TO
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 JULY 29, 1994
----------------- ----------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Service costs-benefits earned during
the period......................... $ 23 $ 32 $ 338 $ 975
Interest cost on projected benefit
obligation......................... 750 359 431 908
Actual return on plan assets......... (1,564) (876) (573) (1,026)
Net amortization and deferral........ 106 (409) (109) 43
Settlement gain...................... (1,233)
Cost of special termination
benefits........................... 1,806
------ ------ ----- ------
Net pension (benefit) expense........ $ (685) $ (321) $ 87 $ 900
------ ------ ----- ------
</TABLE>
34
<PAGE>
On December 1, 1994, the Company offered for a short period of time (through
January 15, 1995) special benefits to its employees in connection with their
voluntary early retirement. The terms of the offer included the option of a
lump-sum payment (settlement) and the automatic addition of two years of service
and three years to the participants' age in the calculation of the termination
benefits due (special termination benefits). The lump-sum payments and the
resulting relief of the plan's obligation to the participants and special
termination benefits offered constitute a settlement and special termination
benefits respectively, under FAS No. 88, "Employers' Accounting for Settlement
and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,"
which resulted in a settlement gain of $1,233 and a special termination benefits
cost of $1,806 during the year ended December 31, 1995. The decrease in the
projected benefit obligation and the plan assets was primarily a result of the
early retirement program and the associated lump sum payments made.
The following table sets forth the funded status and amounts recognized in
the accompanying financial statements:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.............................. $ 9,976 $ 10,726
Nonvested benefit obligation........................... 313 517
------- -------
Accumulated benefit obligation......................... $ 10,289 $ 11,243
------- -------
Plan assets at fair value.............................. $ 15,910 $ 14,641
Projected benefit obligation........................... 10,289 11,243
------- -------
Plan assets in excess of projected benefit
obligation........................................... 5,621 3,398
Unrecognized prior service cost........................ (6,796) (7,197)
Unrecognized net asset arising at transition........... 1,162 1,267
Unrecognized net gain (loss)........................... (1,698) 136
------- -------
Unfunded pension obligation............................ $ (1,711) $ (2,396)
------- -------
</TABLE>
The assumptions used in the actuarial computations are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------- ---------------------
<S> <C> <C>
Discount rate.......................................... 7.5% 7.0%
Expected long-term rate of return on plan assets....... 8.0% 8.0%
</TABLE>
Prior to July 29, 1994 the Predecessor also had employees outside the U.S.
who were covered by retirement plans maintained by Lilly. Expenses attributable
to the Predecessor's employees outside of the U.S. are included in the results
of operations of the Predecessor.
TEAM SAVINGS PLAN
The Company also has defined contribution savings plans that cover eligible
employees worldwide. Participation in a given plan is dependent upon the country
in which the participant is employed. Certain employees are eligible to
participate in the plans. The purpose of the plans is generally to provide
additional financial security during retirement by providing employees with an
incentive to make regular savings. Contributions to the plans are determined by
the Company based on employee contributions and the level of the Company match.
The Predecessor and Company contributions to the plans were as follows:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
----------- -------------
<S> <C> <C>
The period January 1, 1994 to July 29, 1994........................... $ 593
The period July 30, 1994 to December 31, 1994......................... $ 130
Year ended December 31, 1995.......................................... $ 703
Year ended December 31, 1996.......................................... $ 405
</TABLE>
35
<PAGE>
NOTE 15. GEOGRAPHICAL INFORMATION
<TABLE>
<CAPTION>
COMBINED
PERIODS ENDED
JANUARY 1 TO
JULY
29, 1994 AND
JULY 30 TO
YEAR ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, 1996 DECEMBER 31, 1995 1994
----------------- ----------------- ----------------
<S> <C> <C> <C>
Net Sales
United States sales to unaffiliated customers............ $ 137,928 $ 117,194 $ 123,445
Transfers to other geographic areas...................... 9,323 8,491 4,875
-------- -------- --------
Total domestic sales..................................... 147,251 125,685 128,320
International sales...................................... 35,237 31,508 26,583
Eliminations............................................. (9,323) (8,491) (4,875)
-------- -------- --------
Net sales................................................ $ 173,165 $ 148,702 $ 150,028
-------- -------- --------
Income Before Taxes
Domestic................................................. $ 20,813 $ 9,151 $ 7,300
International............................................ 5,703 5,319 2,356
Eliminations............................................. (2,918) (2,638) (3,432)
-------- -------- --------
Income before taxes...................................... $ 23,598 $ 11,832 $ 6,224
-------- -------- --------
Total Assets
United States............................................ $ 70,591 $ 61,335 $ 72,332
International............................................ 26,158 18,055 21,515
Eliminations............................................. (887) (890) (303)
-------- -------- --------
Total assets............................................. $ 95,862 $ 78,500 $ 93,544
-------- -------- --------
</TABLE>
Export sales were $10,120 and $9,734 for the years ended December 31, 1996
and 1995, respectively, $3,663 for the period July 30, 1994 to December 31, 1994
and $3,467 for the period January 1, 1994 to July 29, 1994.
NOTE 16. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space, automobiles and equipment under various
operating lease agreements. Total rent expense is as follows:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
----------- -----------
<S> <C> <C>
The period January 1, 1994 to July 29, 1994........................... $ 1,051
The period July 30, 1994 to December 31, 1994......................... $ 507
Year ended December 31, 1995.......................................... $ 1,539
Year ended December 31, 1996.......................................... $ 1,735
</TABLE>
Future minimum annual rental commitments on all operating leases at December
31, 1996 are as follows:
<TABLE>
<S> <C>
Year ended December 31
1997...................................................... $ 4,605
1998...................................................... 4,218
1999...................................................... 1,646
2000...................................................... 174
2001...................................................... 551
-------
Total future minimum annual rental commitments............ $11,194
-------
</TABLE>
36
<PAGE>
FDA COMPLIANCE
The Company is subject to routine inspections by the Food and Drug
Administration ("FDA"). The FDA issued a report of its observations, Form FDA
483, to the Predecessor on May 14, 1992, which contained observations that the
Predecessor's manufacturing processes and methods of documentation were not in
compliance with FDA current Good Manufacturing Practices ("GMP") and Medical
Device Reporting ("MDR") regulations. On May 18, 1992, the Predecessor
voluntarily suspended its manufacturing operations for the U.S. in order to
evaluate its operations and to assure compliance with GMP. In July 1992, the
Predecessor entered into a consent decree with the government which, among other
things, required that the Predecessor be subject to FDA inspection and approval
in order to resume production and distribution of its current products in the
United States. The consent decree is in effect for a minimum of five years from
July 1992, after which time the Company may apply for its termination. The
Company has met all obligations of the consent decree and resumed shipping its
products in stages.
LITIGATION
The Company is a party to certain legal actions arising in the ordinary
course of its business. The Company has recorded liabilities of approximately
$273 and $295 at December 31, 1996 and 1995, respectively, to cover such claims.
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 out over the next several years. The majority of the costs associated with
defending and disposing of these suits are covered by insurance.
In November 1995, the Company initiated litigation in Washington State Court
against Heartstream, Inc. ("Heartstream"), a company recently 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. 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, and 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 tortious interference with business
opportunities. While the Company believes it has meritorious defenses against
the suit, the ultimate resolution of the matter could result in a loss of up to
$10 million. The parties are currently conducting discovery in this litigation
and a tentative trial date has been set for September 1997.
In addition, in January 1997 Heartstream initiated litigation against the
Company in U.S. District Court for the Western District of Washington alleging
that the Company is infringing a Heartstream patent related to product self-test
features. The Company has filed an answer denying Heartstream's claims and
alleging certain counterclaims against Heartstream for infringement of a Company
self-test patent. Discovery is in the initial stages in this litigation.
If the Company does not prevail in these litigations 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 claims, the Company could be held liable for
significant damages.
In the opinion of management, the amount of ultimate liability with respect
to these actions will not materially affect the financial position of the
Company.
37
<PAGE>
NOTE 17. SUMMARY OF QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
1996
------------------------------------------
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales............................................................. $ 42,755 $ 42,923 $ 41,694 $ 45,793
Gross profit.......................................................... 21,323 22,208 21,553 23,721
Operating expenses.................................................... 15,475 15,688 16,384 15,469
Net income............................................................ 3,396 3,887 2,891 5,165
Net earnings per common and common equivalent shares.................. 0.19 0.22 0.16 0.29
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales............................................................. $ 36,721 $ 36,817 $ 34,733 $ 40,431
Gross profit.......................................................... 18,850 19,824 18,438 22,053
Operating expenses.................................................... 15,261 16,044 16,072 16,638
Income before extraordinary item...................................... 1,818 1,822 1,169 2,905
Net income............................................................ 1,818 1,822 1,169 1,445
Pro forma net earnings per common and common equivalent shares before
extraordinary item.................................................. 0.11 0.12 0.07 0.18
Pro forma net earnings per common and common and common equivalent
shares.............................................................. 0.11 0.12 0.07 0.09
--------- --------- --------- ---------
</TABLE>
As a result of the Company's initial public offering in December 1995, the
Company received net proceeds of $13.7 million (after underwriting discounts and
other charges of approximately $2.7 million). Of this amount, the Company used
$12.0 million to reduce its term loan and its revolving credit facility in
December 1995 which resulted in an extraordinary loss of $1,460 ($0.09 per
share), net of an income tax benefit of $780.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
38
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to Directors of the Company is set forth in the
Proxy Statement under the heading "Election of Directors," which information
is incorporated herein by reference. Information regarding the executive
officers of the Company is included as Item 4 of Part I of this Form 10-K.
Information required by Item 405 of Regulation S-K is set forth in the Proxy
Statement under the heading "Compliance with Section 16(a) of the Securities
Exchange Act of 1934," which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to executive compensation is set forth in the
Proxy Statement under the heading "Compensation of Executive Officers," which
information is incorporated herein by reference (except for the Compensation
Committee Report on Executive Compensation and the Performance Graph).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Beneficial
Ownership of Common Stock," which information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to certain relationships and related
transactions is set forth in the Proxy Statement under the headings "Election
of Directors --Compensation Committee Interlocks and Insider Participation"
and "Election of Directors --Certain Relationships and Related Transactions,"
which information is incorporated herein by reference.
39
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of this report:
1. Financial Statements. Reference is made to the Index to
Consolidated/Combined Financial Statements and Supplementary Data included
in Item 8 herein.
2. Financial Statement Schedules. Reference is made to the Index to
Consolidated/Combined Financial Statements and Supplementary Data included
in Item 8 herein.
3. Exhibits. The Company will furnish to any eligible stockholder, upon
written request of such stockholder, a copy of any exhibit listed below upon
the payment of a reasonable fee equal to the Company's expenses in
furnishing such exhibit.
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Stock Purchase Agreement, dated July 29, 1994, between Eli Lilly and Physio Control Acquisition Corp. (1)
3.1(i) Restated Certificate of Incorporation of the Company. (2)
3.1(ii) Amended and Restated By-laws of the Company. (2)
4.1 Form of certificate representing shares of Common Stock, par value $0.01 per share.(1)
4.2 Registration Rights Agreement, dated July 29, 1994, among the Company and the stockholders named therein.
(1)
4.3 Stockholders Agreement, dated July 29, 1994, among the Company and the stockholders named therein. (1)
10.1 Credit Agreement dated July 29, 1994, between the Company, the banks named therein and
Creditanstalt-Bankverein, as administrative agent. (1)
10.2 Pledge Agreement, dated July 29, 1994, between the Company and Creditanstalt-Bankverein, as collateral
agent. (1)
10.3 Security Agreement, dated July 29, 1994, between the Company and Creditanstalt-Bankverein, as collateral
agent. (1)
10.4 Subordinated Promissory Notes issued by the Company in favor of Eli Lilly and Company on July 29, 1994.
(1)
10.5 1994 Stock Purchase and Option Plan. (1)*
10.6 Amended and Restated Management Agreements for Messrs. Martin and Guezuraga. (1)*
10.7 Management Advisory Agreement, dated July 29, 1994, between the Company and Bain Capital, Inc. (1)
10.8 Physio-Control International Corporation 1996 Stock Incentive Plan. (2)*
10.9 Indemnification Agreement between the Company and its directors and executive officers. (2)*
10.10 Physio-Control International Corporation Employee Share Purchase Plan. (2)*
10.11 Letter, dated October 18, 1994, to Joseph J. Caffarelli regarding severance arrangement. (1)*
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
PAGE #
----------
<C> <S>
10.12 Amended and Restated Management Agreements for Messrs. Caffarelli and Droppert. (2)*
10.13 Amended and Restated Credit Agreement, dated December 15, 1995, by and among Physio-Control
Corporation, certain banks and Creditanstalt-Bankverein, as administrative agent and
collateral agent. (2)
10.14 Reaffirmation, dated December 15, 1995, between Physio-Control International Corporation and
Creditanstalt-Bankverein, as collateral agent. (2)
10.15 Amended and Restated Pledge Agreement, dated December 15, 1995, between Physio-Control
Corporation and Creditanstalt-Bankverein, as collateral agent. (2)
21.1 Subsidiaries of the Company (2)
23.1 Consent of Price Waterhouse LLP............................................................... 43
24.1 Power of Attorney for 1995 Annual Report on Form 10-K (2)
27 Financial Schedule............................................................................ 44
</TABLE>
- ------------------------
(1) Incorporated herein by reference to the same numbered exhibit filed with the
Securities and Exchange Commission as part of the Company's Registration
Statement on Form S-1, as amended (Registration No. 33-98856), as declared
effective by the Commission on December 12, 1995.
(2) Incorporated herein by reference to the same numbered exhibit filed with the
Securities and Exchange Commission as part of the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
* Denotes a management contract or compensatory plan or arrangement required
to be filed with this Form 10-K pursuant to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K.
None.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on this 17th day of
March, 1997.
PHYSIO-CONTROL INTERNATIONAL
CORPORATION
By /s/ JOSEPH J. CAFFARELLI
--------------------------------------
Joseph J. Caffarelli
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on this 17th day of March, 1997.
SIGNATURE CAPACITY
- ------------------------------ ---------------------------
Chairman of the Board,
/s/ RICHARD O. MARTIN Chief Executive Officer
- ------------------------------ and Director (Principal
Richard O. Martin Executive Officer)
/s/ ROBERT M. GUEZURAGA President, Chief Operating
- ------------------------------ Officer and Director
Robert M. Guezuraga
Executive Vice President
and Chief Financial
/s/ JOSEPH J. CAFFARELLI Officer
- ------------------------------ (Principal
Joseph J. Caffarelli Financial Officer and
Principal Accounting
Officer)
Executive Vice
/s/ V. MARC DROPPERT President-Law, Human
- ------------------------------ Resources and Corporate
V. Marc Droppert Affairs and Secretary
STEPHEN G. PAGLIUCA Director
- ------------------------------
Stephen G. Pagliuca
RONALD W. DOLLENS Director
- ------------------------------
Ronald W. Dollens
ROBERT A. SANDLER Director
- ------------------------------
Robert A. Sandler
ROBERT C. GAY Director
- ------------------------------
Robert C. Gay
JOHN J. O'MALLEY Director
- ------------------------------
John J. O'Malley
42
<PAGE>
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors and Stockholders of Physio-Control
International Corporation
Our audits of the Physio-Control International Corporation consolidated
financial statements and the Physio-Control Corporation (predecessor to
Physio-Control International Corporation) combined financial statements
referred to in our reports dated January 24, 1997 and October 30, 1995,
respectively, appearing on page 20 of this Annual Report on Form 10-K, also
included an audit of the Financial Statement Schedule listed in Item 14(a)
of this Form 10-K. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related financial statements.
Price Waterhouse LLP
Seattle, Washington
January 24, 1997
S-1
<PAGE>
PHYSIO-CONTROL INTERNATIONAL CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNT AND RESERVES
(dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Balance at Charge to Costs Balance at
Description Beginning of Period and Expenses Deductions End of Period
- ----------- -------------------------------- ------------------------
<S> <C> <C> <C> <C>
Company
Year ended December 31, 1996
Allowance for doubtful accounts $649 $280 $(163) $766
Inventory allowances 3,687 4,513 (5,706) 2,494
Year ended December 31, 1995
Allowance for doubtful accounts 918 673 (942) 649
Inventory allowances 1,778 6,981 (5,072) 3,687
Period July 30,1994-December 31, 1994
Allowance for doubtful accounts 918 918
Inventory allowances 1,778 1,778
Predecessor
Period January 1, 1994-July 29, 1994
Allowance for doubtful accounts 724 204 (171) 757
Inventory allowances 13,446 5,938 (6,384) 13,000
Income tax valuation allowance 18,497 18,497
</TABLE>
S-2
<PAGE>
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the
Registration Statement on Form S-8 (Nos. 333-00248 and 333-00640) of
Physio-Control International Corporation of our reports dated January 24,
1997 and October 30, 1995, appearing on page 20 of this Form 10-K. We also
consent to the incorporation by reference of our report on the Financial
Statement Schedule, which appears on page S-1 of this Form 10-K.
Price Waterhouse LLP
Seattle, Washington
March 28, 1997
43
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,336
<SECURITIES> 0
<RECEIVABLES> 36,352
<ALLOWANCES> 0
<INVENTORY> 31,811
<CURRENT-ASSETS> 79,077
<PP&E> 13,123
<DEPRECIATION> 0
<TOTAL-ASSETS> 95,862
<CURRENT-LIABILITIES> 28,900
<BONDS> 0
0
0
<COMMON> 170
<OTHER-SE> 44,050
<TOTAL-LIABILITY-AND-EQUITY> 95,862
<SALES> 173,165
<TOTAL-REVENUES> 173,165
<CGS> 84,360
<TOTAL-COSTS> 84,360
<OTHER-EXPENSES> 63,016
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,844
<INCOME-PRETAX> 23,598
<INCOME-TAX> 8,259
<INCOME-CONTINUING> 15,339
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,339
<EPS-PRIMARY> .85
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,336
<SECURITIES> 0
<RECEIVABLES> 36,352
<ALLOWANCES> 0
<INVENTORY> 31,811
<CURRENT-ASSETS> 79,077
<PP&E> 13,123
<DEPRECIATION> 0
<TOTAL-ASSETS> 95,862
<CURRENT-LIABILITIES> 28,900
<BONDS> 0
0
0
<COMMON> 170
<OTHER-SE> 44,050
<TOTAL-LIABILITY-AND-EQUITY> 95,862
<SALES> 173,165
<TOTAL-REVENUES> 173,165
<CGS> 84,360
<TOTAL-COSTS> 84,360
<OTHER-EXPENSES> 63,016
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,844
<INCOME-PRETAX> 23,598
<INCOME-TAX> 8,259
<INCOME-CONTINUING> 15,339
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,339
<EPS-PRIMARY> .85
<EPS-DILUTED> 0
</TABLE>
