<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
-----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------ ------------------
Commission file number 1-9983
OEC MEDICAL SYSTEMS, INC.
(Registrant)
Incorporated in the State of Delaware
I.R.S. Employer Identification Number 94-2538512
384 Wright Brothers Drive, Salt Lake City, Utah 84116
(Address of Principal Executive Offices)
Telephone: (801) 328-9300
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 requirements for the past 90 days.
Yes X No
--- ----
As of October 31, 1994, there were 12,480,230 shares of Common Stock ($.01 par
value) outstanding.
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
OEC MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
1994 1993 1994 1993
----- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales
Product $23,859 $23,959 $60,452 $64,219
Service 3,444 2,663 9,495 7,638
------- ------- ------- -------
Total net sales 27,303 26,622 69,947 71,857
------- ------- ------- -------
Cost of sales
Product 15,172 13,446 37,199 36,205
Service 1,781 2,155 5,714 5,969
------ ------ ------ ------
Total cost of sales 16,953 15,601 42,913 42,174
------- ------ ------ ------
Gross margin 10,350 11,021 27,034 29,683
------- ------ ------ ------
Operating Expenses
Research and development 1,888 2,098 6,388 6,286
Marketing and sales 4,133 4,453 12,194 12,261
Administrative, general and other 1,733 2,019 4,022 6,444
------- ----- ------ ------
Total operating expenses 7,754 8,570 22,604 24,991
------- ----- ------ ------
Operating income 2,596 2,451 4,430 4,692
Interest income 84 196 267 467
Interest expense (30) (79) (253) (79)
------ ----- ----- -----
Income before income taxes 2,650 2,568 4,444 5,080
Income tax benefit 293 2,000 1,119 2,000
----- ----- ----- -----
Income from continuing operations 2,943 4,568 5,563 7,080
Loss from operation of discontinued operations
(net of income tax expense of $86 and $239,
respectively, for the three and nine months ended
September 30, 1993) -- (3,517) -- (13,060)
------ ------- ------ -------
Net income (loss) $2,943 $ 1,051 $5,563 $(5,980)
------ ------- ------ -------
------ ------- ------ -------
Income (loss) per common and
common equivalent share:
Continuing operations $ 0.23 $ 0.36 $0.44 $ 0.57
Discontinued operations -- (0.28) -- (1.05)
------ ------ ------ -------
Net income (loss) $ 0.23 $ 0.08 $0.44 $(0.48)
------ ------ ------ -------
------ ------ ------ -------
Common and common equivalent shares 12,591 12,471 12,539 12,463
</TABLE>
See accompanying notes
Page 2 of 9
<PAGE>
OEC MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1994 AND DECEMBER 31, 1993
(In thousands)
<TABLE>
ASSETS
<CAPTION>
1994 1993
---- ----
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and temporary cash investments $ 5,751 $ 5,383
Accounts and notes receivable, net of
allowances of $533 and $2,024, respectively 21,398 25,184
Inventories 20,246 19,120
Prepaid expenses and other current assets 1,121 1,098
------- --------
Total current assets 48,516 50,785
Long-term receivables 1,021 1,361
Property and equipment, net 11,389 10,698
Cost in excess of net assets acquired, net of
accumulated amortization of $6,741 and $6,260, respectively 11,655 12,136
Deferred income taxes 4,971 2,000
Patents, licenses, purchased technologies and other assets,
net of accumulated amortization of $952 and $836,
respectively 38 154
-------- --------
$ 77,590 $ 77,134
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,301 $ 4,242
Note payable to related party 4,475 9,700
Accrued salaries and benefits 2,516 2,341
Accrued warranty and installation costs 784 1,363
Deferred income and customer deposits 5,483 4,816
Income taxes payable 260 816
Accrued legal fees and litigation settlements 4,194 4,075
Accrued restructuring costs 1,681 3,259
Accrued distributor commissions 1,806 2,422
Other accrued liabilities 1,337 802
--------- --------
Total current liabilities 26,837 33,836
--------- --------
Stockholders' equity:
Preferred stock, $.01 par value
Authorized--2,000 shares, including 1,100 shares
of convertible preferred stock, none outstanding
Common stock, $.01 par value
Authorized--30,000 shares
Outstanding--12,480 and 12,411 shares, respectively 125 124
Capital in excess of par value 68,809 66,858
Accumulated deficit (18,104) (23,667)
Foreign currency translation adjustment (77) (17)
-------- -------
Total stockholders' equity 50,753 43,298
-------- --------
$ 77,590 $ 77,134
-------- --------
-------- --------
</TABLE>
See accompanying notes
Page 3 of 9
<PAGE>
OEC MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
(In thousands)
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Income from continuing operations $ 5,563 $7,080
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operations:
Depreciation and amortization 2,320 1,869
Bad debt expense 90 1,390
Legal settlement recorded as reduction of note payable to
related party (750) --
Deferred income tax benefit (1,365) (2,000)
Changes in current assets and liabilities:
Accounts and notes receivable 3,696 941
Receivable from related party -- (2,106)
Inventories (1,126) (5,742)
Prepaid expenses and other current assets (23) (83)
Accounts payable 59 726
Accrued salaries and benefits 175 229
Accrued warranty and installation costs (579) 8
Deferred income and customer deposits 667 1,678
Income taxes payable (556) (173)
Accrued legal fees and litigation settlements 119 (1,525)
Accrued restructuring costs (1,578) (335)
Accrued distributor commissions (616) (285)
Other accrued liabilities 535 (566)
Other -- 127
------ -----
Net cash provided by continuing operations 6,631 1,233
Net cash provided by discontinued operations -- 1,461
----- -----
Net cash provided by operating activities 6,631 2,694
----- -----
INVESTING ACTIVITIES:
Reduction (increase) in long-term receivables 340 (1,470)
Additions to property and equipment, net (2,414) (1,681)
Change in net long-term assets of discontinued operations -- (396)
Other (60) --
------ -----
Net cash provided (used) by investing activities (2,134) (3,547)
----- -----
FINANCING ACTIVITIES --
Sales of common stock, net 346 908
Payment on note to related party (4,475) --
Long-term debt repayments -- (55)
----- -----
Net cash provided (used) by financing activities (4,129) 5,703
------ -----
Net increase in cash and temporary cash investments 368 --
Cash and temporary cash investments at beginning of period 5,383 1,924
------- ------
Cash and temporary cash investments at end of period $ 5,751 $1,924
------- ------
------- ------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (for continuing operations only):
Cash paid during the period for interest $250 --
Cash paid during the period for income taxes 312 --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended September 30, 1994, the Company increased its net deferred income tax asset by
$2,971 as a result of reducing the valuation allowance on the deferred tax assets. Of the total $2,971 of
valuation allowance reallocation, $1,606 was credited directly to stockholders' equity and $1,365 was recorded as
a deferred tax benefit.
</TABLE>
See accompanying notes
Page 4 of 9
<PAGE>
OEC MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 1994
1. Interim information is unaudited but, in the opinion of Company management,
all adjustments necessary for a fair presentation of interim results have
been included. The results for the nine months ended September 30, 1994
are not necessarily indicative of the results to be expected for the entire
year. These financial statements and notes should be read in conjunction
with the Company's financial statements for the year ended December 31,
1993, filed on Form 10-K.
2. Inventories are stated at the lower of cost, utilizing the first-in/first-
out method, or market. Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- ------------
(In thousands)
<S> <C> <C>
Purchased parts and
completed subassemblies $ 8,990 $ 7,819
Work-in-process 3,216 4,145
Finished goods 6,356 6,800
Service and repair parts 4,514 3,389
------- -------
23,076 22,153
Less: reserves (2,830) (3,033)
------- -------
$ 20,246 $ 19,120
-------- --------
-------- --------
</TABLE>
3. The Company adopted Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," effective January 1, 1993. This
statement superseded SFAS No. 96, "Accounting for Income Taxes," which was
adopted by the Company in 1987. As a result of the Restructuring/
Distribution and subsequent earnings history, some of the uncertainties
regarding the Company's potential for utilization of its net operating loss
carryforwards and tax credits have been reduced, and certain of the
reserves against its deferred tax asset were determined to no longer be
required, resulting in a $2 million dollar reversal of reserves in the
third quarter of 1993. In addition, reserves totaling $2,971,000 were
reversed in 1994. Of this amount, $1,606,000 related to tax benefits
arising out of the exercise of stock options in prior years and, as a
result, were recognized in paid-in capital and did not impact the
consolidated statement of operations.
4. Revenues from the discontinued operations for the quarter and nine months
ended September 30, 1993 were $46.7 million and $139.7 million,
respectively.
See accompanying notes
Page 5 of 9
<PAGE>
OEC MEDICAL SYSTEMS, INC
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the third quarter and nine months ended September 30, 1994, OEC Medical
Systems, Inc. had income of $2.9 million and $5.6 million, respectively,
compared with income from continuing operations of $4.6 million and $7.1
million, respectively for the same periods last year. The results of the nine
month period ended September 30, 1994 include a net tax benefit of $1.1 million
or $.09 per share from the reversal of certain reserves against deferred tax
assets which were established upon the adoption of Statement of Financial
Accounting Standard No. 109. This compares to $2.0 million or $.16 per share
for the same period in 1993.
The following table sets forth OEC's operating results as a percent of net
sales:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales
Product 87.4% 90.0% 86.4% 89.4%
Service 12.6% 10.0% 13.6% 10.6%
----- ----- ----- -----
Total net sales 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
----- ----- ----- -----
Cost of sales
Product 55.6% 50.5% 53.2% 50.4%
Service 6.5% 8.1% 8.2% 8.3%
------ ----- ----- -----
Total cost of sales 62.1% 58.6% 61.4% 58.7%
------ ----- ----- -----
Gross margin 37.9% 41.4% 38.6% 41.3%
------ ----- ----- ----
Operating expenses:
Research and development 6.9% 7.9% 9.1% 8.7%
Marketing and sales 15.1% 16.7% 17.4% 17.1%
Administrative, general and
other 6.4% 7.6% 5.8% 9.0%
---- ---- ---- ----
Total operating expenses 28.4% 32.2% 32.3% 34.8%
----- ----- ---- ----
----- ----- ---- ----
Operating income 9.5% 9.2% 6.3% 6.5%
Income from continuing operations 10.8% 17.2% 8.0% 9.9%
Net income (loss) 10.8% 3.9% 8.0% (8.3%)
</TABLE>
SALES AND MARKETS
Net product sales for the quarter and nine months ended September 30, 1994, were
$23.9 million and $60.5 million, respectively, compared to net product sales of
$24.0 million and $64.2 million, respectively, for the comparable periods of
1993. Product sales gained momentum during the quarter after the difficulties
experienced in the second quarter from start-up delays with the Series 9600.
The Series 9600 has had very good market acceptance domestically as well as
internationally, especially in the Asian markets in comparison to prior years.
See accompanying notes
Page 6 of 9
<PAGE>
Healthcare reform uncertainties still remain a larger factor for OEC in the
urology market where system prices tend to be higher and therefore subject to
greater limitations on capital expenditures. As a result of these uncertainties
and continuing competitive pressures, urology sales were down approximately 20%
from the same nine month period a year ago.
Service revenue for the quarter and nine months ended September 30, 1994 was
$3.4 million and $9.5 million, respectively, up from the previous year's $2.7
million and $7.6 million. Service revenue increased through continued
improvements in contract capture rates.
MARGIN ANALYSIS
OEC's gross margin expressed as a percentage of net sales declined 3.5% for the
third quarter and 2.7% for the nine months when compared with the same periods
in 1993. This was due to increased manufacturing costs of the Series 9600 over
prior models as well as increases in reserves for obsolete inventory. The
company is focusing its attention on manufacturing efficiencies and product cost
reductions to improve its gross margin. However, the benefits of these efforts
are not expected until the second half of 1995.
Service expenses were lower than prior periods due to continued cost containment
efforts and more efficient utilization of manpower.
OPERATING EXPENSES
When compared to the previous year, operating expenses as a percentage of net
sales were 3.8% lower in the third quarter and 2.5% lower for the nine months
ended September 30, 1994, due to expense control and reduction.
INCOME TAXES
Through the nine months ended September 30, 1994, the Company has booked
$246,000 of provision for domestic income taxes. This is offset by tax benefit
of $1,365,000 due to the the reversal of certain reserves against deferred tax
assets. In the nine months ended September 30, 1993, there was $2.0 million of
tax benefit recorded.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1994, OEC had cash and temporary cash investments of $5.8
million and an unused $10 million line of credit .
Operating cash flow for the nine months was a positive $6.6 million, which
compares favorably with operating cash flow of $1.2 million for the same period
in 1993.
OEC made an installment payment of $4.7 million to Diasonics Ultrasound, Inc.,
on August 12, 1994 in connection with a note payable established at the time of
the restructuring of the Company in October 1993. The second installment of
approximately $4.9 million, or 50% of the original note, has been cancelled as a
result of the acquisition of Diasonics Ultrasound, Inc., by Elbit, Ltd.,
completed on October 19, 1994. The cancellation of this note will result in an
adjustment to equity in the fourth quarter.
Capital expenditures for the nine months ended September 30, 1994 totalled $2.4
million, which was higher than the same period in 1993. The increase was
primarily due to additional tooling and fixtures associated with the new Series
9600, plus an addition to the manufacturing facilities in Salt Lake City for
better production efficiencies. There are no current material commitments for
capital expenditures.
The Company believes that existing cash reserves and the unused $10 million line
of credit is sufficient to handle the liquidity requirement for the foreseeable
future.
See accompanying notes
Page 7 of 9
<PAGE>
PART II. Other information.
ITEM 1. Legal proceedings
The Company is a co-defendant along with Toshiba America Medical Systems, Inc.
("Toshiba") in a series of legal actions and proceedings arising out of the
Company's discontinued MRI business which was sold to Toshiba in 1989. In
December, 1993, the Company received a favorable arbitrations ruling that
Toshiba was required to indemnify the Company for compensatory and punitive
damages, if any, awarded against the Company as well as attorney's fees and
expenses incurred by the Company in the underlying legal proceedings, whether
existing or later filed, and regardless of whether the claims asserted against
the Company involve allegations of intentional misconduct or fraud. During the
quarter, the favorable arbitration award which the Company obtained against
Toshiba was sustained in a legal challenge in California state court filed by
Toshiba. Toshiba has indicated that it plans to appeal the Court's ruling.
While the Company believes that it will continue to prevail against Toshiba's
legal challenges to the arbitration award, defense of the underlying legal
proceedings is a significant continuing expense, and there is a risk that the
Company could incur a material, adverse judgment prior to final resolution of
the Toshiba appeals.
ITEM 6. Exhibits
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
(b) Reports on Form 8-K
Not applicable.
See accompanying notes
Page 8 of 9
<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.
OEC MEDICAL SYSTEMS, INC.
(Registrant)
By /s/ Randy W. Zundel
-----------------------
Randy W. Zundel
Chief Financial Officer
(Principal Accounting Officer)
Date: November 8, 1994
See accompanying notes
Page 9 of 9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
ART. 5 FDS FOR 3RD QUARTER 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 5,751
<SECURITIES> 0
<RECEIVABLES> 21,931
<ALLOWANCES> 533
<INVENTORY> 20,246
<CURRENT-ASSETS> 48,516
<PP&E> 18,130
<DEPRECIATION> 6,741
<TOTAL-ASSETS> 77,590
<CURRENT-LIABILITIES> 26,837
<BONDS> 0
<COMMON> 125
0
0
<OTHER-SE> 50,628
<TOTAL-LIABILITY-AND-EQUITY> 50,753
<SALES> 60,452
<TOTAL-REVENUES> 69,947
<CGS> 37,199
<TOTAL-COSTS> 42,913
<OTHER-EXPENSES> 22,604
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 253
<INCOME-PRETAX> 4,444
<INCOME-TAX> (1,119)
<INCOME-CONTINUING> 5,563
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,563
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
</TABLE>
