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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998 COMMISSION FILE NUMBER: 0-27242
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PHYSIO-CONTROL INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1673799
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11811 WILLOWS ROAD N.E.
REDMOND, WASHINGTON 98052
(Address of principal executive offices)
(425) 867-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
----- -----
As of July 28, 1998, there were 17,724,094 shares of the Registrant's
Common Stock outstanding.
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Form 10-Q
June 30, 1998
<TABLE>
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Index Page
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PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
- Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997............................. 3
- Consolidated Statements of Earnings for the three
and six months ended June 30, 1998 and 1997....... 4
- Consolidated Statement of Changes in Stockholders'
Equity for the six months ended June 30, 1998..... 5
- Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997............... 6
- Notes to Consolidated Financial Statements............ 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 9
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings........................................ 12
ITEM 4. Submission of Matters to a Vote of Security Holders...... 12
ITEM 6. Exhibits and Reports on Form 8-K......................... 12
</TABLE>
2
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PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
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CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
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(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,291 $ 4,340
Accounts receivable, net 47,945 39,161
Inventories, net 41,080 38,711
Prepaid expense 1,233 1,237
Deferred income tax 2,463 2,463
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Total current assets 97,012 85,912
NONCURRENT ASSETS
Other assets 1,936 1,281
Deferred income tax 2,114 2,114
Property, plant and equipment, net 18,368 17,352
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TOTAL ASSETS $119,430 $106,659
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 16,704 $ 14,630
Accrued liabilities 18,286 17,103
Current portion of long term debt --- 1,000
Income tax payable 450 1,140
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Total current liabilities 35,440 33,873
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NONCURRENT LIABILITIES
Long-term debt 16,281 15,531
Unfunded pension obligations 853 1,051
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Total noncurrent liabilities 17,134 16,582
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Commitments and contingencies (Note 4)
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; 17,722,021 and
17,300,840 shares issued and outstanding, respectively 177 173
Additional paid-in capital 32,847 28,627
Retained earnings 33,952 27,430
Accumulated other comprehensive income (120) (26)
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Total stockholders' equity 66,856 56,204
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $119,430 $106,659
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</TABLE>
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
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CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net sales $ 49,280 $ 45,011 $ 93,248 $ 85,738
Cost of sales 24,140 21,959 45,306 41,805
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Gross margin 25,140 23,052 47,942 43,933
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Research and development 4,620 4,894 9,571 10,131
Sales and marketing 10,952 10,331 21,101 19,185
General and administrative 3,631 2,600 6,764 4,614
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Operating expense 19,203 17,825 37,436 33,930
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Interest expense (358) (401) (773) (860)
Other income (expense), net 107 (236) 301 (472)
----------- ----------- ----------- -----------
Other expense (251) (637) (472) (1,332)
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Income before income tax 5,686 4,590 10,034 8,671
Income tax expense (1,996) (1,607) (3,512) (3,035)
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NET EARNINGS $ 3,690 $ 2,983 $ 6,522 $ 5,636
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Basic earnings per common share $ 0.21 $ 0.17 $ 0.37 $ 0.33
Weighted average common shares outstanding 17,690,105 17,190,749 17,560,559 17,137,436
Diluted earnings per common and
common equivalent share $ 0.20 $ 0.17 $ 0.36 $ 0.32
Weighted average number of common and
common equivalent shares outstanding 18,480,587 17,629,730 18,351,041 17,539,627
</TABLE>
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
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<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
(VOTING) PAID-IN RETAINED COMPREHENSIVE
SHARES DOLLARS CAPITAL EARNINGS INCOME TOTAL
------ ------- ------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 17,300,840 $173 $28,627 $27,430 $ (26) $56,204
Issuance of common shares 67,762 1 972 973
Stock issued upon exercise
of options 353,419 3 1,343 1,346
Income tax benefit from
exercise of stock options 1,905 1,905
Comprehensive income:
Net earnings 6,522
Other comprehensive income:
Foreign currency translation
adjustments (94)
Comprehensive income 6,428
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BALANCE AT JUNE 30, 1998 17,722,021 $177 $32,847 $33,952 $(120) $66,856
---------- ---- ------- ------- ----- -------
</TABLE>
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
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<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 6,522 $ 5,636
ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization 1,749 1,136
Increase in receivables (8,784) (2,416)
Increase in inventories (2,369) (5,741)
Increase (decrease) in prepaid expense and other assets (745) 2,952
Increase (decrease) in accounts payable 2,074 (1,153)
Increase (decrease) in taxes payable (690) 2,280
Increase (decrease) in accrued and other liabilities 985 (3,051)
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Net cash used in operating activities (1,258) (357)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (2,671) (2,928)
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Net cash used in investing activities (2,671) (2,928)
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CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of current portion of long term debt (1,000) --
Borrowings under revolving debt 33,891 27,679
Repayments under revolving debt (33,141) (27,016)
Net proceeds from issuance of common stock 2,319 1,542
Income tax benefit from exercise of
stock options 1,905 747
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Net cash provided by financing activities 3,974 2,952
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Effect of foreign currency translation (94) (261)
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Net decrease in cash and cash equivalents (49) (594)
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Cash and cash equivalents at beginning of period 4,340 3,336
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,291 $ 2,742
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</TABLE>
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 1. GENERAL
The consolidated financial statements of Physio-Control International
Corporation (the "Company") at June 30, 1998 and for the three and six month
periods then ended are unaudited and reflect all adjustments (consisting only
of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position and operating
results for the interim period. The consolidated financial statements should
be read in conjunction with the Company's Annual Report on Form 10-K for the
year ended December 31, 1997. The results of operations for the three and
six month periods ended June 30, 1998 are not necessarily indicative of the
results for the entire fiscal year ending December 31, 1998.
On June 29, 1998, the Company and Medtronic, Inc. ("Medtronic") announced the
signing of a definitive merger agreement. Pursuant to the Agreement and Plan
of Merger (the "Agreement") between Medtronic and the Company dated June 27,
1998, a wholly owned subsidiary of Medtronic will be merged with and into the
Company (the "Merger") and the merged corporation will become a wholly-owned
subsidiary of Medtronic. As a result of the merger, all shares of Physio
capital stock issued and outstanding immediately prior to the Merger shall be
canceled and converted automatically into the right to receive per share an
amount equal to $27.50 payable in Medtronic common stock (using for this
calculation the closing price of Medtronic common stock on the New York Stock
Exchange for the 19 consecutive trading days ending on and including the
trading day immediately preceding the effective time of the Merger).
The transaction is subject to conditions described in the Agreement,
including the receipt of the requisite approval of the stockholders of the
Company (at a meeting of the stockholders of the Company which is estimated
to occur in the fall of 1998) and the expiration or termination of the
applicable Hart-Scott-Rodino waiting period.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
EARNINGS PER SHARE
Basic earnings per share is calculated as income available to common
stockholders divided by the weighted average number of common shares
outstanding during the periods. Diluted earnings per share is based on the
weighted average number of shares of common stock and common stock
equivalents outstanding during the periods, including options computed using
the treasury stock method. All earnings per common share amounts from prior
periods have been restated to conform with current period presentation.
The difference between the weighted average number of common shares
outstanding used to calculate basic earnings per share and the weighted
average number of common and the weighted average number of common and common
equivalent shares outstanding used to calculate diluted earnings per share is
the incremental shares attributed to outstanding options to purchase common
stock computed using the treasury stock method.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
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<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding 17,690,105 17,190,749 17,560,559 17,137,436
Effect of dilutive options 790,482 438,981 790,482 402,191
---------- ---------- ---------- ----------
Weighted average number of common and
common equivalent shares outstanding 18,480,587 17,629,730 18,351,041 17,539,627
---------- ---------- ---------- ----------
</TABLE>
7
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RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued SFAS No. 130,
"Reporting Comprehensive Income", in June 1997. This statement establishes
new standards for reporting and displaying comprehensive income in the
financial statements. In addition to net income, comprehensive income
includes charges or credits to equity that are not the result of transactions
with shareholders. This statement is effective for fiscal years beginning
after December 15, 1997. The Company has adopted this standard as of March
31, 1998.
NOTE 3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
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<S> <C> <C>
Finished products $24,157 $22,665
Purchased parts and assemblies in process 10,174 7,544
Service parts 10,130 10,654
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44,461 40,863
Less inventory allowances 3,381 (2,152)
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TOTAL INVENTORIES $41,080 $38,711
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</TABLE>
NOTE 4: COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is party to certain legal actions arising in the ordinary course
of its business. The Company's estimates of these exposures are based
primarily on historical claims experience. The Company expects settlements
related to these claims to be paid over the next several years. The majority
of the costs associated with defending and disposing of these suits are
covered by insurance. 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.
As disclosed in the Company's Annual Report on Form 10(K) for the year ended
December 31, 1997, the Company and Heartstream, Inc. ("Heartstream") entered
into a settlement agreement during October 1997. The settlement agreement
dismissed with prejudice all previous lawsuits and claims between the Company
and Heartstream. During May 1998, Heartstream initiated litigation against
the Company that contends the Company violated the terms of the October 1997
settlement agreement. The Company had previously sent correspondence to
Heartstream regarding violations of the settlement agreement by Heartstream
and has since filed a counter-claim against Heartstream. The Company intends
to vigorously defend itself against Heartstream's claims and to pursue its
claims against Heartstream.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that involve risks and
uncertainties. The Company's future results may differ significantly from the
results discussed herein due to many factors, including, but not limited to,
product demand, the effect of general economic conditions, the impact of
competitive products and pricing, product development, commercialization and
technological difficulties, U.S. and foreign regulatory requirements, the
effects of accounting policies and financing requirements, and other such
risks and factors.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997 The
Company reported worldwide sales of $49.3 million during the second quarter
of 1998, an increase of $4.3 million or over 9% compared to the three months
ended June 30, 1997. Domestic sales aggregated $37.3 million, up 20% from
1997, driven by strong demand for the LIFEPAK-Registered Trademark- 12 and
LIFEPAK 500 products. International sales totaled $12.0 million, down 14%
compared to $14.0 million in the prior year quarter due primarily to no
counterpart to the 1997 $2.1 million shipment to Russia and a 3% decline from
unfavorable European currency translation movements. In addition, Worldwide
equipment sales of $31.7 million increased 9% from the comparable 1997
quarter, worldwide service revenue of $7.6 million increased 5% over the
comparable 1997 period, and supplies (disposable and accessories) revenue of
$10.0 million increased 16%.
During the second quarter of 1998, the Company reported worldwide product
orders of $46.5 million, up $6.2 million or 16% from the comparable 1997
quarter. The increase in product orders is attributed to strong customer
demand for LIFEPAK 12 products and LIFEPAK 500 automated external
defibrillators (AEDs).
Gross margin of $25.1 million increased $2.1 million during the current
quarter from the $23.1 million reported during the comparable 1997 quarter.
As a percentage of sales, gross margin decreased to 51.0% from 51.2% during
the same 1997 quarter. The decrease in gross margin was driven primarily by
the Company's successful sales programs to stimulate customer trade-ins of
older products on new products, and higher service parts costs. Research and
development ("R&D") expenditures of $4.6 million decreased 6% during the
current quarter from $4.9 million in the comparable 1997 quarter. As a
percentage of sales, R&D expenses decreased to 9% from 11% during the
comparable prior year due to the Company's development efforts in 1997 for
the LIFEPAK 12 product platform. Sales and marketing expenditures of $11.0
million increased $0.6 million from the comparable 1997 quarter, but as a
percentage of sales decreased to 22% from 23%. The increase in expense
resulted primarily from an expansion of personnel in the domestic sales force
and is supported by the increase in sales volume. General and administrative
expenditures of $3.6 million increased from $2.6 million in the comparable
1997 quarter. The increase is mainly attributable to the 1998 bonus accruals.
Other expenses, including interest expense, totaled $0.3 million, a decrease
from $0.6 million in the comparable 1997 period and included the favorable
impact of other corporate income. Income tax expense of $2.0 million
reflected an effective tax rate of 35%, which is consistent with the 1997
rate.
As a result of the above factors, net income for the second quarter of 1998
was $3.7 million, an increase of $0.7 million (24%) from the comparable 1997
quarter. Earnings per share totaled $0.20 (diluted) and $0.21 (basic)
compared to $0.17 (basic and diluted) reported during 1997.
9
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RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
The Company reported worldwide sales of $93.2 million during the six month
period ended June 30, 1998, an increase of $7.5 million or 9% from the $85.7
million reported in the comparable 1997 period driven primarily by strong
demand for LIFEPAK 12 and LIFEPAK 500 products. Domestic sales of $69.0
million were up $8.4 million, or 14% from the prior year period.
International sales of $24.3 million, however, were down 4% or $0.9 million
from the prior year period due to no counterpart to the significant 1997
Russian shipment and from unfavorable European currency translation
movements. This was partially offset by the favorable impact of LIFEPAK 12
AND 500 sales. Worldwide equipment sales of $58.4 million increased 6%
during the current six month period while worldwide service and supplies
revenue totaled $34.9 million, an increase of 14% from the $30.5 million
reported in 1997. The increase in equipment sales from the prior six month
period was due primarily to the introduction of the LIFEPAK 12 products and
continued acceptance of the LIFEPAK 500 product. The increase in service and
supplies revenue was due primarily to growth in the Company's installed base
of customers.
During the six months ended June 30, 1998, worldwide product orders totaled
$85.0 million, an increase of $7.7 million or 10% over the comparable prior
year period. Domestic orders were up 18% while international orders
decreased 6%, mainly due to no counterpart to the 1997 Russian order.
Gross margin during the six months ended June 30, 1998 totaled $47.9 million,
an increase of $4.0 million or 9% from the comparable prior year period. As
a percentage of sales, gross margin increased from 51.2% during the prior
year period to 51.4% in the current six months due primarily to a favorable
mix in product sales, offset partially by trade-in programs and higher
service costs during the second quarter of 1998.
R&D expenses for the six months ended June 30, 1998 were $9.6 million, a
decrease of $0.6 million or 6% over the comparable prior year period. As a
percentage of sales, R&D expenses decreased from 12% in the comparable 1997
period to 10% during the current year period. Sales and marketing
expenditures of $21.1 million during the current six month period increased
$1.9 million, or 10% from the comparable 1997 period. The increase was due
to costs incurred for sales and marketing efforts aimed at introducing the
Company's new LIFEPAK 12 product during the first quarter of 1998, as well as
a planned expansion of the domestic sales force. As a percentage of sales,
sales and marketing expenses remained essentially flat with the prior year
period at approximately 23%. General and administrative expenditures of $6.7
million increased $2.1 million from the comparable prior year period due
mainly to the 1998 employee bonus accrual and higher depreciation expense
related to the Company's new computer system. As a percentage of sales,
general and administrative expenses increased from 5% during the comparable
prior year period to 7% during the current year period.
Other expenses, including interest expense, totaled $0.5 million, a decrease
of $0.9 million from the prior year period and was driven primarily from the
favorable impact related to other corporate income. Income tax expense of
$3.5 million reflects an effective tax rate of 35% in both 1998 and 1997.
As a result of the above factors, net income for the six month period ended
June 30, 1998 totaled $6.5 million, an increase of $0.9 million (16%) from
the comparable 1997 period. Earnings per share totaled $0.36 (diluted) and
$0.37 (basic) compared to $0.32 (diluted) and $0.33 (basic) reported during
1997.
10
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LIQUIDITY AND CAPITAL RESOURCES
Management assesses the Company's liquidity by its ability to generate cash
to fund operations. Significant factors in the management of liquidity are:
funds provided or used by operations, capital expenditures, levels of
accounts receivable, inventories, accounts payable, as well as adequate lines
of credit.
During the six months ended June 30, 1998, the Company used $1.2 million in
cash to finance operations. The use of working capital funds was attributed
to increased inventories as well as higher accounts receivables resulting
from a significant higher sales volume during the six month time period.
Cash used in investing activities during the six months ended June 30, 1998
totaled $2.7 million and related to capital expenditures. Capital
expenditures during the six month period ended June 30, 1998 primarily
related to purchases of research and engineering equipment and tooling for
new products as well as continued software enhancements. The Company does
not have any capital commitments outside the ordinary course of business.
The Company's principal working capital requirements are financing accounts
receivable and inventories. At June 30, 1998, the Company had net working
capital of $61.5 million, consisting of accounts receivable of $47.9 million,
inventories of $41.1 million, accounts payable of $16.7 million and accrued
liabilities of $18.2 million.
The Company currently operates under a $30.0 million revolving bank credit
facility (the Credit Agreement) of which up to $5.0 million may be used for
issuance of standby letters of credit. The Credit Agreement matures May 2000
and bears interest at the borrower's option, at either (i) Libor plus 0.5% or
(ii) the reference rate (the higher of the lender's prime rate or federal
funds rate plus 1%) or (iii) quoted rate (rate quoted by lender and accepted
by borrower plus 0.5%). Such rates are subject to increase in the event that
the Company does not meet the fixed charge coverage ratio as defined in the
Credit Agreement. The Company is required to pay a commitment fee equal to
0.125% of the amount by which the available credit exceeds the outstanding
advances on a quarterly basis. This rate is also subject to increase in the
event that the Company does not meet the fixed charge coverage ratio as
discussed above.
The Credit Agreement is secured by all of the accounts receivable and
inventories of the Company located in the United States. The credit facility
includes various affirmative and negative financial covenants which require,
among other things, that the Company maintain a certain fixed charge coverage
ratio, debt to net worth ratios, as well as a minimum tangible net worth, as
defined. As of June 30, 1998 the Company had $14.7 million outstanding under
the Credit Agreement and the interest rate on such advances was 6.4%.
In addition, the Company has subordinated notes payable to Eli Lilly and
Company totaling $1.5 million which originated in the acquisition by the
Company of certain foreign assets. These notes mature on January 31, 2001
and bear interest at LIBOR plus 3.25% . A note with a principal balance of
$1.0 million matured November 15, 1998; however, the Company elected to
prepay and repaid the debt during June 1998.
The Company believes, based upon the current level of operations and
anticipated growth, that funds generated from operations and available
borrowings under the Credit Agreement, will be sufficient over the next
twelve months for the Company to make anticipated capital expenditures and
fund working capital requirements.
Approximately 26% of the Company's sales during the six months ended June 30,
1998 were to international customers and the Company expects that sales to
international customers will continue to represent a material portion of its
revenues. Certain of the Company's international receivables are denominated
in foreign currencies and exchange rate fluctuations impact the carrying
value of these receivables. The Company has elected to hedge certain assets
denominated in foreign currencies with the purchase of forward contracts.
Historically, fluctuations in foreign currency exchange rates have not had a
material effect on the Company's results of operations and, with certain
hedging activities, the Company does not expect such fluctuations to be
material in the foreseeable future.
The Company has begun to review the impact of the Year 2000 upon its business
products. The Company has recently completed a successful transition to a
new, fully integrated, computer system with a heavy emphasis in the
manufacturing process. The transition also included migration to a PC based,
network environment. The new manufacturing and financial modules within the
system are designed to deal with the Year 2000. The Company's European
computer system, currently used for administration purposes, is scheduled for
a modest software upgrade that is Year 2000 compliant. This upgrade is
scheduled for the beginning of 1999. Based in its initial assessment, the
Company does not believe the software in the Company's products currently in
the marketplace will be materially affected by the Year 2000. The Company has
not yet determined the full effect this event may have on its customers,
suppliers, and other business partners.
RECENT ACCOUNTING PRONOUNCEMENTS
In June, 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes new standards
for reporting information about operating segments in interim and annual
financial statements. This statement is effective for fiscal years beginning
after December 15, 1997. The Company is currently evaluating the impact, if
any, this statement will have on disclosures in the consolidated financial
statements.
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 affect on the Company's business over the past several years.
11
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to certain legal actions arising in the ordinary course
of its business. The Company's estimates of these exposures are based
primarily on historical claims experience. The Company expects settlements
related to these claims to be paid over the next several years. The majority
of the costs associated with defending and disposing of these suits are
covered by insurance. 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.
As disclosed in the Company's Annual Report on Form 10(K) for the year ended
December 31, 1997, the Company and Heartstream, Inc. ("Heartstream") entered
into a settlement agreement during October 1997. The settlement agreement
dismissed with prejudice all previous lawsuits and claims between the Company
and Heartstream. During May 1998, Heartstream initiated litigation against
the Company that contends the Company violated the terms of the October 1997
settlement agreement. The Company had previously sent correspondence to
Heartstream regarding violations of the settlement agreement by Heartstream
and has since filed a counter-claim against Heartstream. The Company intends
to vigorously defend itself against Heartstream's claims and to pursue its
claims against Heartstream.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual meeting of Shareholders held on May 5, 1998, the
following actions were taken:
<TABLE>
<S> <C> <C> <C>
1. Election of Nominated Directors For: 15,500,881 Against: 0 Abstain: 70,867
2. Ratification of Price Waterhouse LLP For: 15,562,353 Against: 6,325 Abstain: 3,070
as Independent Auditors
</TABLE>
No other matters were submitted to or actions taken by the Shareholders at
said Annual Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------
<S> <C>
10.22 Supplemental Retirement Plan for the Executive officers of the
Company.
27.1 Financial Data Schedule.
</TABLE>
REPORT ON FORM 8-K
On July 10, 1998, the Company filed a Form 8-K dated June 27, 1998, reporting
the anticipated merger with Medtronic, Inc. and filing a copy of the related
Agreement and Plan of Merger.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized to sign on behalf of the registrant and
as the principal financial officer thereof.
Dated August 15, 1998
PHYSIO-CONTROL INTERNATIONAL CORPORATION
By /s/ Joseph J. Caffarelli
--------------------------------------------
Joseph J. Caffarelli
Executive Vice President and Chief Financial
Officer
13
<PAGE>
PHYSIO-CONTROL
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
PHYSIO-CONTROL INTERNATIONAL CORPORATION
11811 WILLOWS ROAD NORTHEAST
POST OFFICE BOX 97006
REDMOND, WA 98073-9706 USA
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1. Administration 3
2. Application to Physio-Control Corporation 3
3. Eligibility and Participation 4
4. Retirement Benefits 4
5. Time and Manner of Payment 5
6. Pre-retirement Death Benefit 6
7. Disability Benefit 6
8. Benefits After Termination of Employment 7
9. Absence of funding 8
10. Claims Procedure 8
11. Amendment and Termination 8
12. General Provisions 9
13. Effective Date 10
</TABLE>
2
<PAGE>
PHYSIO-CONTROL
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Physio-Control International Corporation ("Physio-Control") provides
retirement benefits for its employees and the employees of its domestic
subsidiaries through the Physio-Control Team Savings Plan (the "Savings
Plan") and The Physio-Control Retirement Plan (the "Retirement Plan").
In order to supplement benefits provided for key executives under the
Retirement Plan and the Savings Plan, Physio-Control adopts the
Physio-Control Supplemental Executive Retirement Plan (the "Plan"), effective
as of April 1, 1998. Benefits under the Retirement and Savings Plan are
separate from and in addition to any benefits under this Plan.
1. ADMINISTRATION
1.1 This Plan shall be administered by a Plan Administrator who shall
be the chief executive officer of Physio-Control (the "CEO"). The CEO shall
consult with and delegate responsibilities to such other persons as the CEO
may choose.
1.2 The Plan Administrator shall interpret and administer the Plan,
consistent with and pursuant to the terms of this Plan, and for that purpose
may make, amend or revoke rules and regulations at any time. The Plan
Administrator shall also make determinations about benefits. Any decision of
the Plan Administrator within his or her authority shall be final and binding
on all parties.
1.3 This Plan is intended to be and shall be administered and
maintained as an unfunded plan primarily for the purpose of providing
deferred compensation for a select group of management or highly compensated
employees within the meaning of sections 201(2), 301(a)(3), and 401(a)(1) of
the Employee Retirement Income Security Act of 1974 (ERISA), as amended.
2. APPLICATION TO PHYSIO-CONTROL AFFILIATES
2.1 Physio-Control has adopted this Plan and any affiliate approved by
Physio-Control may adopt this Plan with respect to its employees by a
statement in writing that is signed by the affiliate and CEO.
3
<PAGE>
2.2 "Affiliate" means a corporation, person or other entity that is a
member, with Physio-Control, of a controlled group of corporations or a group
of trades or businesses under common control under sections 414(b) or (c) of
the Internal Revenue Code. "Employer" means Physio-Control and any adopting
affiliate.
2.3 If an Employer ceases to be an affiliate of Physio-Control, the
Plan shall be terminated as to the participants employed by that Employer and
paragraph 11.2 shall apply.
2.4 If an Employer merges, consolidates or otherwise reorganizes or if
its business or assets are acquired by another entity and it remains an
affiliate of Physio-Control, this Plan shall continue with respect to those
eligible individuals who continue as employees of the successor company. The
transition of Employers shall not be considered a termination of employment
for purposes of this Plan.
2.5 Transfer of employment to a non-adopting affiliate shall not cause
a termination of participation in this Plan.
2.6 Benefits payable under this Plan shall be an obligation of
Physio-Control, which may charge the cost back to the employer of the
participant.
3. ELIGIBILITY AND PARTICIPATION
3.1 Any key executive of an Employer shall be eligible to participate
in this Plan. The Board of Directors of Physio-Control (the "Board") shall
select the participants from those eligible employees recommended by the CEO.
3.2 Subject to paragraph 11.2, participation shall continue until
death, retirement or other termination of employment.
4. RETIREMENT BENEFITS
4.1 A participant shall be entitled to retirement benefits under this
Plan on termination of employment after reaching one of the following dates:
(a) Normal retirement date, which is age 65.
(b) Early retirement date, which is any day after age 60, but
before age 65.
4.2 A participant's normal retirement benefit shall be an annual
annuity for the life of the participant equal to 40 percent of the
participant's Final Average Annual Pay under paragraph 4.4.
4.3 A participant's early retirement benefit shall be an annual
annuity for the life of the participant that is the actuarial equivalent of
the participant's normal retirement benefit under paragraph 4.2
4
<PAGE>
4.4 "Final Average Annual Pay" means the highest average annual
compensation in any three calendar years as follows:
(a) Compensation shall be considered only during the last five
consecutive calendar years of employment by Employer, or all
years if fewer than three.
(b) Years of reduced compensation during an absence for medical,
disability or other authorized reasons shall be disregarded.
(c) Years separated by a period when the participant is not
employed by Employer, or a period described in (b) above,
shall be treated as consecutive.
4.5 A participant's "Compensation" means total direct pay reportable
on Form W-2, subject to the following provisions:
(a) Employee elective contributions pursuant to salary reduction
arrangements under the Savings Plan, a nonqualified deferred
compensation plan or any cafeteria plan under Internal
Revenue Code Section 125 shall be added back.
(b) Extraordinary pay, such as cashouts of accumulated sick or
vacation pay, amounts received from the Retirement or
Savings Plans or a nonqualified deferred compensation plan,
severance pay, gains on the exercise of stock options and
imputed income from expense reimbursements or taxable fringe
benefits shall be excluded.
4.6 "Actuarial equivalents" shall be determined by an enrolled actuary
retained for the Plan based upon the following:
(a) Interest rates shall be the interest rates that would be
used (as of January 1 in the pertinent calendar year) by the
Pension Benefit Guaranty Corporation for determining the
present value of a lump sum distribution on plan
termination.
(b) Mortality rates shall be based on the 1984 Unisex Pension
mortality table (UP-84).
5. TIME AND MANNER OF PAYMENT
5.1 Retirement benefits shall start as of the first day of the second
month after early or normal retirement.
5.2 A participant may elect to delay the start of early retirement
benefits to any date before age 65. Regardless of the time payments start,
the value of the benefit shall be the actuarial equivalent of the early
retirement benefits under paragraph 4.3
5
<PAGE>
5.3 A participant may elect the form of retirement benefit as follows:
(a) Regardless of the form, the value of the benefit shall be the
actuarial equivalent of the normal or early retirement benefit
under paragraph 4.2 or 4.3, as applicable.
(b) The forms of benefit shall be the following:
(1) An annual annuity, payable monthly, for the
life of the participant.
(2) If the participant is married, a contingent
annuity with reduced payments during the
participant's life and a fixed percentage, as
elected by the participant, of the payments
continuing to the surviving spouse after the
participant's death.
6. PRE-RETIREMENT DEATH BENEFIT
6.1 A benefit shall be paid to the surviving spouse of a participant,
whether or not vested, who dies when the participant is legally married to
the surviving spouse at death and was throughout the year before death.
6.2 The spouse's death benefit shall be determined in accordance with
the following rules:
(a) The benefit shall be an annual annuity for the life of
the spouse.
(b) If the participant was eligible to retire, the benefit
shall be determined as though the participant had
retired on the date of death, selected a 50 percent
contingent annuity and then died.
(c) If the participant was not eligible to retire, the
benefit shall be based on the accrued benefit at death
and shall be determined as though the participant was
fully vested and had separated from service on the date
of death, survived until earliest retirement age,
retired, selected a 50 percent contingent annuity and
then died. No benefits shall accrue after death or
other separation from service.
6.3 The spouse's death benefit shall start as of the first day of the
second month after the participant's death.
6.4 If a participant dies before age 65, the surviving spouse may
elect to delay the start of death benefits to any date before the day the
participant would have attained age 65.
6.5 Regardless of the time payments begin, the spouse's death benefit
shall be the actuarial equivalent of the benefit under paragraph 6.3.
7. DISABILITY BENEFIT
7.1 A participant who is disabled as defined in the Retirement Plan
shall be treated as employed and continue to accrue Years of Service under
this Plan.
6
<PAGE>
7.2 Pay shall not be projected during a period of disability. A
disabled participant who continues to accrue Years of Service shall be
treated like any other participant until the disability ends or the
participant dies, reaches age 65 or reaches a termination date under
paragraph 11.2. In the event of death, attainment of age 65 or a termination
date after disability, the participant's benefits under this Plan shall be
determined in the same manner as for any other participant.
8. BENEFITS AFTER TERMINATION OF EMPLOYMENT
8.1 A participant whose employment terminates before eligibility for
retirement shall be entitled only to vested, accrued benefits.
8.2 Subject to 8.4 and 8.5, a participant shall be vested in accrued
benefits as follows based on Years of Service:
<TABLE>
<CAPTION>
Years of Service Vesting Percentage
---------------- ------------------
<S> <C>
Less than 5 0%
5 or more 100%
</TABLE>
8.3 Subject to 7.1, a "Year of Service" means a Year of Service on or
after January 1, 1992 for vesting under the Retirement Plan.
8.4 A participant who becomes eligible for retirement while employed
by Employer shall be fully vested.
8.5 The four participants in the Plan effective as of April 1, 1998
(Richard O. Martin, Robert M. Guezuraga, Joseph J. Caffarelli, V. Marc
Droppert) shall be 100 percent vested in their accrued benefits upon
involuntary termination without cause. The following shall constitute cause
for this purpose:
(a) Persistent, material failure or refusal by the
participant to carry out with reasonable competence
assigned duties consistent with the participant's
position and scope of responsibilities.
(b) Misconduct by the participant materially injurious to
Physio-Control.
(c) Conviction of the participant of a felony.
8.6 A participant's accrued benefit at any time shall be the normal
retirement benefit under paragraph 4.2, based on Final Annual Average Pay at
that time.
8.7 Benefits for a vested, terminated participant shall be paid as
follows:
(a) Benefits shall normally start as of the first day of
the second month after normal retirement date.
(b) A vested terminated participant may elect to
accelerate the start of benefits to any date after
age 60. Regardless of the time payments start,
the value of the benefits shall be the actuarial
equivalent of those payable at age 65.
7
<PAGE>
(c) A participant may elect among the forms of benefit in
paragraph 5.3(b). Regardless of the form, the value of
the benefit shall be the actuarial equivalent of the
normal retirement benefit under 4.2.
9. ABSENCE OF FUNDING
This Plan and any benefits payable under it shall be unfunded and shall
be payable only from the general assets of Physio-Control. Participants and
spouses shall have no interest in any assets of Physio-Control and shall have
no rights greater than the rights of any unsecured general creditor of
Physio-Control.
10. CLAIMS PROCEDURE
10.1 Any person claiming a payment or requesting information, an
interpretation or a ruling under this Plan shall present the request in
writing to the Plan Administrator, who shall respond in writing as soon as
practicable.
10.2 If the claim or request is denied, the written notice of denial
shall state the following:
(a) The reasons for denial, with specific reference to the Plan
provisions on which the denial is based.
(b) A description of any additional material or information
required and an explanation of why it is necessary.
(c) An explanation of the Plan's claim review procedure.
10.3 Any person whose claim or request is denied or who has not
received a response within 30 days may request review by notice in writing to
the Plan Administrator. The initial claim decision shall be review by the
Plan Administrator who may, but shall not be required to, grant the claimant
a hearing. On review, whether or not there is a hearing, the claimant may
have representation, examine pertinent documents and submit issues and
comments in writing.
10.4 The decision on review shall normally be made within 60 days. If
an extension is required for a hearing or other special circumstances, the
claimant shall be so notified and the time limit shall be 120 days. The
decision shall be in writing and shall state the reasons and relevant Plan
provisions. All decisions on review shall be final and bind all parties
concerned.
11. AMENDMENT AND TERMINATION
11.1 The Board may amend this Plan at any time subject to the
following:
(a) No amendment shall reduce any participant's previously
accrued benefit or the vested percentage of that accrued
benefit, or, prior to January 1, 2000, change the rate at
which benefits accrue under paragraph 4 and vest under
paragraph 8.
8
<PAGE>
(b) No amendment shall reduce the rights preserved on
termination under paragraph 11.2
11.2 The Board may terminate this Plan or terminate the participation
of one or more participants at any time as follows:
(a) The termination date shall not be effective earlier than the
first day of January, 2000, and shall in no event be
effective until written notice is given to affected
participants.
(b) Each affected participant's vested, accrued benefits as of
the termination date shall be payable in accordance with the
rules of paragraph 11.3.
(c) Final Average Annual Pay and Years of Service shall be
determined as of the termination date. No further benefits
shall accrue after that date. Benefits that are not vested
as of the termination date shall be forfeited.
11.3 Vested, accrued benefits under paragraph 11.2(b) shall be payable
as follows:
(a) Subject to (b), the benefits shall be paid under the terms
of the Plan in effect as of the termination date.
(b) No pre-retirement death benefit shall be paid to the
surviving spouse of an affected participant who dies after
the termination date.
12. GENERAL PROVISIONS
12.1 No interest of any participant or spouse under this Plan may be
directly or indirectly assigned, transferred, seized by legal process or
subjected to the claims of creditors in any way. This Agreement shall be
binding on the successors and assigns of Physio-Control.
12.2 Nothing in this Plan shall give any employee the right to continue
employment. This Plan shall not prevent discharge of any employee at any
time for any reason.
12.3 This Plan shall be construed according to the laws of Washington
except as preempted by Federal law.
12.4 Notice to a participant under this Plan shall be in writing and
shall be effective when actually delivered or, if mailed, when deposited
postpaid as first-class mail. Mail shall be directed to the address shown on
Physio-Control records or such other address as a participant may specify by
notice in writing to Physio-Control.
12.5 If suit or action is instituted to enforce any rights under this
Plan, the prevailing party may recover from the other party reasonable
attorney's fees at trial and on any appeal.
9
<PAGE>
12.6 Physio-Control shall indemnify and defend the Plan Administrator,
or any other officer, director or employee of an Employer from any claim or
liability that arises from any action or inaction in connection with the
Plan, subject to the following rules:
(a) Coverage shall be limited to actions taken in good faith
that the fiduciary reasonably believed were not opposed to
the best interests of the Plan.
(b) Negligence by the fiduciary shall be covered to the fullest
extent permitted by law.
(c) Coverage shall be reduced to the extent of any insurance
coverage.
12.7 The Plan Administrator may decide that because of the mental or
physical condition of a person entitled to payments, or because of other
relevant factors, it is in the person's best interest to make payments to
others for the benefit of the person entitled to payment. In that event the
Plan Administrator may in its discretion direct that payment be made to one
or more of the following:
(a) To a parent or spouse or a child of legal age.
(b) To a legal guardian.
(c) To one furnishing maintenance, support or hospitalization.
12.8 In the event that any portion of the value of a participant's
benefit under this Plan shall cause a participant to be subject to the tax
(the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of
1986, as amended (the "Code"), Physio-Control shall pay to such participant
at the time specified below, an amount (the "Gross Up Payment") such that the
net amount retained by the employee of such payment, after deduction of (i)
any Excise Tax (plus interest and penalties on such tax) on the portion of
the value of participant's benefit under the Plan, and (ii) any federal,
state and local income tax, FICA-Health Insurance tax, and Excise Tax
(including any penalties and interest on such taxes) upon the payment
provided for by this paragraph, shall be equal to zero. Such payment shall
be made thirty days prior to the date the participant is obligated to pay the
Excise Tax. Physio-Control's outside accountants shall determine the amount
of the Gross up Payments, in cooperation with and as approved by the
participant's accountants or attorneys.
13. EFFECTIVE DATE
This Plan shall be effective as of April 1, 1998.
PHYSIO-CONTROL INTERNATIONAL CORPORATION
By :_______________________________
Title:_____________________________
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,291
<SECURITIES> 0
<RECEIVABLES> 48,875
<ALLOWANCES> (930)
<INVENTORY> 41,080
<CURRENT-ASSETS> 97,012
<PP&E> 24,303
<DEPRECIATION> (5,935)
<TOTAL-ASSETS> 119,430
<CURRENT-LIABILITIES> 35,440
<BONDS> 0
0
0
<COMMON> 177
<OTHER-SE> 66,679
<TOTAL-LIABILITY-AND-EQUITY> 119,430
<SALES> 93,248
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<CGS> 45,306
<TOTAL-COSTS> 45,306
<OTHER-EXPENSES> 37,436
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<INTEREST-EXPENSE> 773
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</TABLE>
