-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DhKbcC6HKAJRSb7bcc3IK0F/xuf+iw3seTJasztG5/D2f50oTP9ih74fg56bcfC7 RNz1f+Y8MWywpAPQmRFtrg== 0000927356-99-000438.txt : 19990326 0000927356-99-000438.hdr.sgml : 19990326 ACCESSION NUMBER: 0000927356-99-000438 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OEC MEDICAL SYSTEMS INC CENTRAL INDEX KEY: 0000317814 STANDARD INDUSTRIAL CLASSIFICATION: X-RAY APPARATUS & TUBES & RELATED IRRADIATION APPARATUS [3844] IRS NUMBER: 942538512 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09983 FILM NUMBER: 99572307 BUSINESS ADDRESS: STREET 1: 384 WRIGHT BROTHERS DRIVE CITY: SALT LAKE CITY STATE: UT ZIP: 84116 BUSINESS PHONE: 8013289300 FORMER COMPANY: FORMER CONFORMED NAME: DIASONICS INC DATE OF NAME CHANGE: 19920703 10-K 1 ANNUAL REPORT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1998 Commission File Number 1-9983 OEC MEDICAL SYSTEMS, INC. (Exact name of registrant as specified in its charter) Delaware 94-2538512 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 384 Wright Brothers Drive 84116 Salt Lake City, Utah (Zip Code) (Address of principal executive offices) (801) 328-9300 (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act: Listed on the New York Stock Exchange (NYSE) Common Stock, $.01 par value Securities registered pursuant to Section 12(g) of the Act: None 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 short period that the Registrant was required 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 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 Common Stock held by non-affiliates (based on the closing sales price on the New York Stock Exchange) on March 1, 1999 was approximately $326,331,501. As of March 1, 1999, there were 12,753,477 shares of Common Stock with $.01 par value outstanding. Documents Incorporated by Reference: Form 10-K Part (1) Portions of Definitive Proxy Statement to be mailed to stockholders in connection with the Registrant's 1999 Annual Meeting of Stockholders I, III (2) Portions of the Annual Report to Shareholders for fiscal year ended December 31, 1998 II - -------------------------------------------------------------------------------- OEC MEDICAL SYSTEMS, INC. 1998 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I Item 1. Business 2 Item 2. Properties 5 Item 3. Legal Proceedings 5 Item 4. Submission of Matters to a Vote of Security Holders 5 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 6 Item 6. Selected Financial Data 6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 6 Item 8. Financial Statements and Supplemental Data 6 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 6 PART III Item 10. Directors and Executive Officers of Registrant 7 Item 11. Executive Compensation 8 Item 12. Security Ownership of Certain Beneficial Owners and Management 8 Item 13. Certain Relationships and Related Transactions 8 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 8 1 OEC MEDICAL SYSTEMS, INC. 1998 FORM 10-K ANNUAL REPORT PART I Except for historical information, this discussion contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Such risk and uncertainties include: product demand and market acceptance; the effect of general economic conditions and foreign currency fluctuations; the impact of competitive products and pricing; new product development and commercialization; the effect of the continuing shift in growth from domestic to international healthcare customers, and the impact of managed care initiatives in the United States and the ability to increase operating margins on higher sales as further described in the "Risk Factors" section on page 5 of this Form 10-K. Item 1. Business General. OEC Medical Systems, Inc. ("OEC" or the "Company") develops, manufactures, markets, and services computer-based X-ray fluoroscopic imaging systems for use in hospitals, outpatient clinics, physicians' offices and surgery-centers for minimally invasive intraoperative and interventional procedures. OEC was originally established in Indiana in 1942. In response to surgeons' need for improved methods to monitor and guide the implantation of various internal fixation devices, OEC entered the medical X-ray imaging market in 1972. Diasonics, Inc. ("Diasonics") in October 1983 acquired OEC as a separate operating subsidiary. The Company was merged into Diasonics in September of 1993. As part of the restructuring, the other operating businesses of Diasonics were spun off to shareholders and the Diasonics name was changed to OEC Medical Systems, Inc. Today, OEC is recognized as the pioneer and continuing United States market leader of intraoperative X-ray imaging systems. These systems combine radiographic and fluoroscopic imaging with digital image processing capabilities. X-rays are passed through the body and either recorded on radiographic film or passed through an image intensifier system and displayed as a real-time fluoroscopic image on a video monitor. Digital image processing of the fluoroscopic image improves the image quality, contributes to lowering X-ray dosage and results in reduced costs for a number of applications. OEC seeks to provide cost-effective imaging systems directed towards medical specialties in which minimally invasive techniques are replacing expensive and more traumatic open surgical procedures. High quality digital fluoroscopy has become mandatory in many of today's modern operating rooms. Further, minimally invasive techniques are expanding into many areas of vascular, neurological, orthopedic, urological, cardiac and general surgery. OEC's products are designed to meet the needs of these new procedures. Technical leadership, strong customer relationships, a cost-effective product line and full-line service capabilities have earned OEC recognition as the United States market leader in the intraoperative X-ray imaging markets which it addresses. OEC believes its international markets represent a significant growth opportunity and continues to expand its network of international distributors. Building on its leadership position in the U.S., OEC's focus is to become the worldwide leader for intraoperative and interventional fluoroscopic imaging. With this focus in mind, OEC has been investing in the future through research and development. The introductions of the Series 9600 Mobile Digital Imaging System in 1994; the UroView 2600 urology table, the Mini 6600 and Compact and Series 7600 all introduced in 1995; the 9600 Mobile Cardiac Cath Lab and the dual mode Mini 6600 introduced in 1997; and finally, the Compact and Series 7700 introduced in 1998 are the results of these investments. OEC's expanding presence in international markets is another example of the Company's investment in the future. OEC has strengthened its wholly owned subsidiaries in France, Germany, Italy and Switzerland with additional personnel and training, and has designed its new products to be more appealing and acceptable to international customers. OEC has also strengthened its international network in new markets by establishing new distributors and strengthening existing distributors throughout the world. OEC intends to continue these activities during 1999. 2 OEC's Products. The products produced by OEC consist of mobile X-ray imaging systems as well as fixed-room urological X-ray imaging systems. C-arm Products. In March 1994, OEC introduced the Series 9600 Mobile Digital -------------- Imaging System. This mobile imaging device can be wheeled from operating room to operating room to provide high quality, real-time fluoroscopic imaging for a wide variety of surgical and interventional procedures that require X-ray guidance. The modular architecture of the system allows the Series 9600 to be tailored to meet the needs of the surgeon. For example, the Series 9600 can be equipped with an expanded surgical package for general surgery and orthopedics. When equipped with a vascular special procedures module, it can perform complex subtraction angiography in the operating room, emergency room, or in radiology. Prices of the Series 9600 Mobile Digital Imaging System range from $100,000 to $230,000. The Series 9600 Mobile Cardiac Cath Lab was introduced in 1997. This proprietary version of the Series 9600 offers the same imaging capability found in many fixed room cath labs with all the convenience and cost effectiveness of a mobile imaging system. This system is the basis for the Company's strategic alliances with device manufacturers associated with minimally invasive cardiac surgeries. Surgeons use the Series 9600 Mobile Cardiac Cath Lab to confirm patency following minimally invasive cardiac procedures. Prices for the Series 9600 Mobile Cardiac Cath Lab range from $190,000 to $250,000. In response to changes brought on by managed healthcare, OEC provides three lower cost digital mobile X-ray imaging machines - the Compact 7700, Series 7700 and the Mini 6600. These smaller, lower cost machines are specifically designed to address the imaging requirements of outpatient surgery centers as well as other satellite surgery delivery sites. The move towards less invasive surgeries, with accompanying shorter recovery times, is driving the need for easy to operate, cost effective fluoroscopic imaging systems in all settings of the healthcare delivery network. The Compact 7700 Digital Mobile C-Arm is a cost effective, simple to operate, full-body imaging system that can be utilized for most routine, less complicated surgical procedures. Its compact, one-piece design (no separate monitor cart) allows for ease of transport, quick positioning and minimal storage requirements. Prices of the Compact 7700 range from $75,000 to $95,000. The Series 7700 has the same functionality as that of the Compact 7700, but it has a separate workstation. The addition of the workstation allows the Series 7700 to be upgraded with features and capabilities necessary to perform more complicated procedures. The price range for the Series 7700 is $80,000 to $110,000. The dual mode version of the Mini 6600 Digital Mobile C-Arm was introduced in 1997. Like its forerunner the Mini 6600, it is a smaller digital fluoroscopic imaging system that has been specifically designed to provide high quality images of upper and lower extremities. Areas of use include hospital operating rooms and emergency rooms, outpatient surgery centers, specialty physician offices and veterinary clinics. Prices of the Mini 6600 range from $45,000 to $70,000. During 1998, 1997 and 1996, the OEC C-arm products represented 85%, 80% and 77% of total product sales, respectively. UroView 2600 Digital Imaging System. Urology is another surgical specialty ----------------------------------- requiring intraoperative imaging that has largely moved away from the use of static X-ray films to monitor and guide procedural progress. Diagnostic and interventional urological procedures are often performed in a separate area of the operating room environment known as the "Cysto Department". Until the late 1980s, these specialized rooms were equipped with a fixed (bolted down) urological-specific patient positioning table (motorized in movement) that also had static X-ray filming capability built in. These films, once exposed, would need to be taken to a darkroom in radiology to be developed prior to being brought back to the Cysto Department for evaluation by the urologist. This resulted in long procedural delays. Additionally, real-time events could not be recorded since radiographic film produces only a static image. Eventually, real-time fluoroscopic imaging capabilities were added to these systems. In 1987, OEC introduced the UroView, which was the industry's first urological table with fully integrated digital fluoroscopy. This resulted in significant image improvement, pulsed fluoroscopy for lower dose than prior systems, and reduced costs compared to existing urological imaging systems. Prices for the UroView system presently range from $210,000 to $230,000. 3 During 1998, 1997 and 1996, the OEC urology product represented 15%, 20% and 23% of total product sales, respectively. Quality. In June 1994, the Company's Quality Assurance System received the Certificate of Compliance with ISO 9001, the international standard for quality assurance in design, development, production, installation and servicing. Sales and Service. Domestic sales are made primarily through direct representatives and exclusive independent distributors, with installation and service performed by OEC. Most of these distributors have represented OEC products over many years. In Europe, OEC distributes its products primarily through wholly owned subsidiaries in Italy, France, Germany and Switzerland. For the rest of the world, distribution is accomplished through independent dealers and distributors. OEC generally warrants its products for twelve months from the date of installation. OEC offers service contracts for products for which the warranty has expired. During 1998, 1997 and 1996, service revenue represented 12%, 11% and 13% of net sales, respectively. Manufacturing. OEC's manufacturing operations are located in Salt Lake City, Utah; Warsaw, Indiana, and Wendelstein, Germany. The Salt Lake City facility has just been expanded by 40,000 square feet to accommodate increased product demand and future anticipated growth. The Warsaw, Indiana facility manufacturers the sheet metal enclosures, the mechanical C-arm assembly and all major mechanical components for OEC's products. The electronics and imaging components for the Mini 6600, Series 9600, and Uroview 2600 are assembled at OEC's Salt Lake City facility, which also performs final assembly and test of the finished devices. The Wendelstein, Germany facility manufactures the Compact 7700 and the Series 7700. Competition. The market for mobile X-ray imaging and fixed urological imaging products is highly competitive. Many of OEC's existing and potential competitors have substantially greater financial, marketing and technological resources than OEC. In the market for products similar to OEC's Series 9600 Mobile C-arm, OEC competes with General Electric, Siemens Medical Systems, Inc., Philips Medical Systems, Inc. and Toshiba Medical Systems, Inc. Competitive companies offering products similar to the Mini 6600 include Hologic, Inc., and Lunar Corporation. The Compact 7700 and Series 7700 compete with similar products from International Medical Systems, Inc. Competitive companies offering products similar to the Uroview 2600 include Shimadzu, Picker International, Inc., Dornier Medical Systems, Inc. and Liebel-Flarsheim Company. OEC competes on the basis of price, imaging quality, technological innovation, upgradeability, reliability and the quality of service and support. Backlog. At December 31, 1998, OEC's backlog was approximately $39.5 million, as compared with approximately $32.3 million at December 31, 1997. OEC includes in backlog only firm orders deliverable within 12 months. Backlog also includes service contract revenue, which will be earned over the next twelve months. Research and Development. The medical imaging business involves rapid technological change and innovation. OEC believes that its ability to use technological innovation to advance the clinical utility of diagnostic imaging has been and will continue to be a significant factor in its success. OEC has continued to invest in research and development to identify solutions to the imaging requirements in the area of minimally invasive medical procedures. This has led to a continuous release of both improvements in existing products and the introduction of the Series 9600 Mobile Digital Imaging System in 1994 along with the introduction in 1995 of the Uroview 2600, the Mini 6600 and the Compact 7600. In 1997 OEC introduced the 9600 Mobile Cardiac Cath Lab and the Mini 6600 Dual mode systems while in 1998 the Compact 7700 and the Series 7700 were introduced. During 1998, 1997 and 1996, OEC's research and development expenses totaled $13.0 million, $11.2 million and $8.9 million, respectively, representing 6.9%, 7.2% and 6.9% of net sales. Patents. OEC's principle products are protected by patents, pending patents, trade secrets, copyrights and similar rights which OEC believes adequately protect its proprietary products. 4 Employees. On December 31, 1998, OEC had approximately 715 employees. None of OEC's employees are covered by collective bargaining agreements, and OEC considers its employee relations to be satisfactory. Acquisitions. During 1995, the Company purchased a 19.8% ownership position in Barwig Medizinische Systeme GmbH (BMS), a German manufacturer of medical equipment. On January 1, 1997, the Company purchased the remaining outstanding shares of BMS, making it a wholly owned subsidiary of the Company and changing the name to OEC Medizinische Systeme GmbH. Costs associated with this acquisition were not material. During 1998, the Company purchased a minority ownership position in Heartlab, Inc., a Rhode Island based imaging software development company specializing in cardiology. Risk Factors. The Company's business involves risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include: product demand and market acceptance; the effect of general economic conditions and foreign currency fluctuations; the impact of competitive products and pricing; new product development and commercialization; the effect of the continuing shift in growth from domestic to international healthcare customers, the impact of managed care initiatives in the United States and the ability to increase operating margins on higher sales. Such risks and uncertainties are fully discussed in the section labeled "Factors That May Affect Future Results," appearing as pages 22 through 24 of Exhibit 13, the Company's Annual Report to Stockholders. Item 2. Properties. OEC owns its corporate headquarters and manufacturing facility of 145,000 square feet in Salt Lake City, Utah, and leases another 80,000 square feet of manufacturing in Warsaw, Indiana. The lease expires on June 30, 2000. The Company has the right to renew this lease for another five years on similar terms and conditions, if it so desires, and it also has the option to buy the property. The Company leases 30,000 square feet of manufacturing in Wendelstein, Germany for the OEC GmbH operations. The lease expires in June 2000. The Company also has the right to renew this lease on similar terms and conditions at its discretion. Item 3. Legal Proceedings. A terminated distributor instituted litigation against the Company in 1986. The trial court rendered an unfavorable decision in the amount of $3.1 million in 1992. As a result of that decision, the Company established a reserve for the judgment. The Company appealed the trial court decision on a number of grounds, and in November 1993, the appellate court reversed the trial court and held for the Company on the ground that the distributor had released his claims against the Company in the settlement of other litigation and did not reach the other issues raised on appeal. The distributor filed a petition in the Indiana Supreme Court requesting that the court vacate the appellate court ruling and remand the case to the appellate court for consideration of the other issues raised on appeal. On December 31, 1996, the Indiana Supreme Court reversed the ruling of the Indiana Circuit Court of Appeals and held that the trial court correctly determined that the release executed by the distributor did not release the Company. The case was remanded back to the appellate court for consideration of the remaining issues raised on the appeal. On December 23, 1997 the appellate court affirmed the trial court's judgement "in all matters except the prejudgment interest which was reversed," and the Company appealed this judgement to the Indiana Supreme Court. On October 30, 1998 the Indiana Supreme Court denied the Company's petition to transfer. The Company paid $4.9 million, including interest, as final settlement of this matter. OEC is also a defendant in other ordinary commercial litigation. In light of available insurance and reserves, management believes that such litigation will not have a material effect on OEC's business or financial condition. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of the Company's security holders during the fourth quarter of fiscal year 1998. 5 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The Company's common stock is presently traded on the New York Stock Exchange under the trading symbol OXE. Prices shown are the range of high and low closing prices per share on the New York Stock Exchange -- Composite Transactions, as reported by the Wall Street Journal. On March 1, 1999, the number of holders of record of common stock was 1,920. Prices ------ Quarter Ended: High Low Close ------------- ---- --- ----- March 31, 1997...... 18 1/2 14 7/8 16 3/8 June 30, 1997....... 17 15/16 13 3/8 17 13/16 September 30, 1997.. 19 3/8 15 3/8 18 7/8 December 31, 1997... 20 13/16 16 11/16 19 15/16 March 31, 1998...... 24 7/16 19 3/16 23 5/8 June 30, 1998....... 24 1/2 19 7/16 22 1/2 September 30, 1998.. 26 7/16 19 7/16 21 5/8 December 31, 1998... 31 7/16 19 3/16 31 7/16 The Company has not paid any dividends on its common stock. The Company presently intends to retain all earnings for use in the business and, therefore, does not anticipate paying any cash dividends in the foreseeable future. Item 6. Selected Financial Data. The table labeled "Five Year Summary" appearing as page 18 of Exhibit 13, the Company's Annual Report to Stockholders, is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The section labeled "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing as pages 19 through 24 of Exhibit 13, the Company's Annual Report to Stockholders, is incorporated herein by reference. Item 7a. Quantitative and Qualitative Disclosures About Market Risk. The section labeled "Factors That May Affect Future Results" appearing as pages 22 through 24 of Exhibit 13, the Company's Annual Report to Stockholders, is incorporated herein by reference. Item 8. Financial Statements and Supplemental Data. The Consolidated Financial Statements and Notes thereto appearing at pages 25 through 35 of Exhibit 13, the Company's Annual Report to Stockholders, are incorporated herein by reference. Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. 6 PART III Item 10. Directors and Executive Officers of Registrant. Information concerning the directors of the Company is incorporated by reference to the sections titled "Information with Respect to Nominees" in the definitive Proxy Statement to be filed in connection with the Annual Meeting of Stockholders (the "1999 Proxy Statement"). Information regarding executive officers is set forth as follows: Executive Officers of the Registrant Name Age Position - ---- --- -------- Joseph W. Pepper 52 President and Chief Executive Officer Randy W. Zundel 43 Chief Operating Officer, Chief Financial Officer Executive Vice President Barry K. Hanover 44 Chief Technical Officer & Executive Vice President, Engineering Larry E. Harrawood 51 Executive Vice President, Clinical & Market Development F. Daniel Edwards 43 Vice President, US Sales and Sales Support Marketing Ted L. Parrot 57 Vice President, Regulatory Affairs & Quality Assurance Clarence R. Verhoef 43 Vice President, Finance, Treasurer & Secretary Joseph W. Pepper was named President and Chief Executive Officer, and appointed to the Board of Directors of OEC Medical Systems, Inc., in May of 1997. Prior to joining OEC, he was President of the Medical Devices Division of Ohmeda, Inc., from 1995 to 1997. From 1992 to 1995, he was President of Ohmeda's Medical Systems Division, and, from 1988 to 1992, he was Vice President in charge of the Monitoring Business Unit. Prior to that time, Mr. Pepper held engineering management positions at General Electric and at the Electric Power Research Institute. He is a director on the board of Heartlab, Inc. Randy W. Zundel is an Executive Vice President and the Chief Operating Officer and the Chief Financial Officer of the Company. He was appointed Chief Operating Officer in September 1996. He has been the Chief Financial Officer of the Company since October 1993. He was the Chief Operating Officer from February 1990 to September 1993. Prior to that he was Vice President, Operations from May 1987 to February 1990. Mr. Zundel has held various other positions with OEC since 1981. Barry K. Hanover is the Chief Technical Officer and Executive Vice President, Engineering of the Company. He was appointed Chief Technical Officer in September 1996. He has been the Vice President, Engineering since December 1992. Previously, he was Director, Mechanical Engineering from October 1992 to December 1992. Prior to that, he was President of Hanover Engineering Services, an engineering consulting firm, from June 1992 to October 1992, and Vice President, Technical Development and member of the Board of Directors of Sarcos, Inc., a biomedical technology company from 1988 through 1992. Larry E. Harrawood has been Executive Vice President, Clinical & Market Development of the Company since July 1998, before which he was Vice President, Marketing & Business Development since October 1986. He was Vice President, Sales and Marketing from July 1985 to October 1986, and General Manager of X-ray operations from December 1972 to July 1985. F. Daniel Edwards was named Vice President, US Sales & Sales Support Marketing in October 1998. From January 1996 to October 1998, he held the position of National Sales Manager of the Company. Before that, he held various sales and marketing positions at OEC since joining the Company in May 1988. He has over 20 years experience in the medical imaging industry, including sales, marketing and technical service operations. 7 Ted L. Parrot was named Vice President, Quality Systems and Regulatory Affairs in 1994. Prior to joining OEC, he held various positions at PPG Biomedical Systems including Director of Marketing, Director of Engineering and Director of Quality Assurance and Regulatory Affairs. He has 30 years experience in the field of diagnostic imaging including 20 years with Philips Medical Systems. Clarence R. Verhoef has been Vice President, Finance since September 1996 and Treasurer since October 1993. He was appointed Secretary in March 1998. Mr. Verhoef held the positions of Director of Finance from August 1993 to September 1996, Assistant Secretary from August 1993 to March 1998 and Controller from October 1989 to August 1993. He has held various other positions with OEC since 1977. Pursuant to Section 16(b) of the Securities Act of 1934, the Company's directors, its executive (and certain other) officers, and any persons holding more than 10 percent of the Company's stock are required to report their ownership and any changes in beneficial ownership of the Company's stock to the Securities and Exchange Commission and to the New York Stock Exchange. Specific due dates for these reports have been established and the Company is required to report any failure to file by these dates. Item 11. Executive Compensation. Information concerning management compensation is incorporated by reference to the section titled "Cash Compensation of Executive Officers" in the 1999 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management. Information concerning the stock ownership of each person known to the Company to be a beneficial owner of five percent or more of the Company's Common Stock and management is incorporated by reference to the sections titled "Information with Respect to Nominees" and "Principal Stockholders" in the 1999 Proxy Statement. Item 13. Certain Relationships and Related Transactions. Information concerning relationships and related transactions is incorporated by reference to the section titled "Transactions with Management and Others" in the 1999 Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) 1. Index to Financial Statements The following consolidated financial statements of the Company are included in Exhibit 13 of this Form 10-K: Page in Exhibit 13 ---------- Consolidated statements of operations for each of the three years in the period ended December 31, 1998..................... 25 Consolidated balance sheets at December 31, 1998 and 1997.................. 26 Consolidated statements of stockholders' equity for each of the three years in the period ended December 31, 1998............. 27 Consolidated statements of cash flows for each of the three years in the period ended December 31, 1998..................... 28 Notes to consolidated financial statements................................. 29 Independent Auditors' Report............................................... 36 8 2. Index to Financial Statement Schedule All schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements, including the notes thereto. 3. Index to Exhibits The following exhibits (numbered in accordance with Item 601 of SEC Regulation S-K) are filed as part of this report or are incorporated by reference as indicated below. Exhibit Number Description -------- ----------- 3.1 Certificate of Incorporation, as amended. Incorporated by reference to the OEC Medical Systems, Inc. Form 10-K, filed March 30, 1994. 3.2 By-Laws, as amended May 15, 1997. Incorporated by reference to the OEC Medical Systems, Inc. Form 10-Q, filed August 8, 1997. 10.1 Diasonics, Inc. 1979 Stock Option Plan, amended and restated as of June 1, 1982. Incorporated by reference to Exhibit 10.6 of the Diasonics, Inc. Registration Statement on Form S-8, filed May 2, 1983. 10.4 Diasonics, Inc. 1990 Stock Option/Stock Purchase Plan. Incorporated by reference to Exhibit 10.79 of the Diasonics, Inc. Form S-8, filed on May 1, 1991. 10.14 Form of Option Agreement used in connection with options having service- vesting provisions. Incorporated by reference to the OEC Medical Systems, Inc. Form S-8, filed June 12, 1998. 10.15 Form of Option Agreement used in connection with options having milestone provisions. Incorporated by reference to the OEC Medical Systems, Inc. Form S-8, filed June 12, 1998. 10.16 Form of Option Agreement used in connection with automatic option grant program for non-employee directors. Incorporated by reference to the OEC Medical Systems, Inc. Form S-8, filed June 12, 1998. 10.20 Form of Warrant Agreement used in connection with grant to independent contractors for the purchase of common shares. Incorporated by reference to the OEC Medical Systems, Inc. Form 10-K, filed March 27, 1997. 10.21 Agreement dated December 17, 1996, to acquire full ownership of Barwig Medizinische Systeme GmbH (BMS). Incorporated by reference to the OEC Medical Systems, Inc. Form 10-K, filed March 27, 1997. 10.24 OEC Medical Systems, Inc. 1993 Employee Incentive Stock Acquisition Plan, as amended and restated March 31, 1998. Incorporated by reference to the OEC Medical Systems, Inc. Form S-8 filed June 12, 1998. 10.25 OEC Medical Systems, Inc. 1998 Stock Option Plan. Incorporated by reference to the OEC Medical Systems, Inc. Form S-8, filed June 12, 1998. 10.26 Form of Option Agreement used in connection with the granting of incentive stock options. Incorporated by reference to the OEC Medical Systems, Inc. Form S-8, filed June 12, 1998. 11 Statement of Computation of Per Share Earnings. 9 13 Portions of the 1998 Annual Report to Shareholders, including Five Year Summary, Management's Discussion & Analysis of Financial Condition and Results of Operations, and Consolidated Financial Statements and Notes thereto. 21 List of Subsidiaries. Incorporated by reference to the OEC Medical Systems, Inc. Form 10-Q, filed May 13, 1997. 23 Independent Auditor's Consent. 27 Financial Data Schedule (FDS) for Edgar Filing. (b) Reports on Form 8-K: Not applicable 10 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. OEC MEDICAL SYSTEMS, INC. By: /s/ Randy W. Zundel ---------------------------------- Randy W. Zundel Executive Vice President & Chief Financial Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Joseph W. Pepper and Clarence R. Verhoef and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Report and form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Date: March 24, 1999 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 and in the capacities and on the date indicated. /s/ Ruediger Naumann-Etienne Chairman of the Board March 24, 1999 - ------------------------------- Ruediger Naumann-Etienne /s/ Gregory K. Hinckley Director March 24, 1999 - ------------------------------- Gregory K. Hinckley /s/ Benno P. Lotz Director March 24, 1999 - ------------------------------- Benno P. Lotz /s/ Allan W. May Director March 24, 1999 - ------------------------------- Allan W. May /s/ Chase N. Peterson Director March 24, 1999 - ------------------------------- Chase N. Peterson /s/ Joseph W. Pepper Director March 24, 1999 - ------------------------------- Joseph W. Pepper President & CEO /s/ Randy W. Zundel Principal Financial & March 24, 1999 - ------------------------------- Randy W. Zundel Accounting Officer 11 EX-11 2 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11
Computation of Earnings Per Share: (In thousands, except per share amounts) 1998 1997 1996 ---- ---- ---- Net income* $16,102 $12,178 $12,912 Earnings per common share: Basic $ 1.27 $ 0.98 $ 1.05 Diluted $ 1.20 $ 0.93 $ 1.01 Shares outstanding (average): Common shares 13,773 13,330 12,991 Treasury shares (1,075) (930) (728) ------- ------- ------- Common shares - basic (average) 12,698 12,400 12,263 Options: common equivalents 674 679 526 Warrants: common equivalents 19 -- 8 ------- ------- ------- Common shares - diluted (average) 13,391 13,079 12,797 ======= ======= =======
*Note: The Company did not have any outstanding preferred stock for the periods ending December 31, 1996 through 1998. EX-13 3 FINANCIAL INFORMATION EXHIBIT 13 Financial Information Table of Contents Five Year Financial Summary ..................................... Page 18 Management's Discussion & Analysis .............................. Page 19 Consolidated Financial Statements ............................... Page 25 Notes to Consolidated Financial Statements ...................... Page 29 Independent Auditors' Report .................................... Page 36 [GRAPHIC APPEARS HERE] seventeen Five Year Summary -------------------------------------------------------------
Years Ended December 31, 1998 1997 1996 1995 1994 (In thousands, except per share amounts) Income Statement Data Net sales Product $ 165,338 $ 137,723 $ 111,383 $ 86,415 $ 85,206 Service 23,363 17,703 16,602 15,121 12,952 ----------------------------------------------------------------------------- Total net sales 188,701 155,426 127,985 101,536 98,158 ----------------------------------------------------------------------------- Cost of sales Product 92,538 78,837 65,334 51,408 52,734 Service 16,851 12,863 11,372 8,922 7,942 ----------------------------------------------------------------------------- Total cost of sales 109,389 91,700 76,706 60,330 60,676 ----------------------------------------------------------------------------- Gross margin 79,312 63,726 51,279 41,206 37,482 ----------------------------------------------------------------------------- Operating expenses Research and development 13,023 11,159 8,854 7,728 8,416 Marketing and sales 31,975 25,986 21,494 17,668 16,487 Administrative, general and other 9,890 8,653 7,260 5,498 5,776 ----------------------------------------------------------------------------- Total operating expenses 54,888 45,798 37,608 30,894 30,679 ----------------------------------------------------------------------------- Operating income 24,424 17,928 13,671 10,312 6,803 Interest income 1,007 916 786 676 346 Interest expense (247) (419) (9) (11) (257) [GRAPHIC APPEARS HERE] ----------------------------------------------------------------------------- Income before income taxes 25,184 18,425 14,448 10,977 6,892 Income tax expense (benefit) 9,082 6,247 1,536 (856) (1,816) ----------------------------------------------------------------------------- Net income $16,102 $12,178 $12,912 $11,833 $8,708 ============================================================================= Net income per common share - diluted $ 1.20 $ .93 $ 1.01 $ .94 $ .69 ============================================================================= Common and common equivalent shares - diluted 13,391 13,079 12,797 12,585 12,552 ============================================================================= Balance Sheet Data Cash and securities $ 19,660 $ 20,345 $ 17,103 $16,584 $ 7,608 Working capital 80,732 63,961 53,847 43,900 31,199 Total assets 146,247 130,687 111,946 91,462 81,555 Stockholders' equity 111,969 94,552 82,174 69,070 58,913 -----------------------------------------------------------------------------
eighteen Management's Discussion and Analysis ------------------------------------------ RESULTS OF OPERATIONS Year Ended December 31, 1998 Compared to Year Ended December 31, 1997. For the year ended December 31, 1998, OEC Medical Systems, Inc., had net income of $16.1 million compared to $12.2 million for the prior year, which was a 32% increase. Operating income improved 36% from $17.9 million in 1997 to $24.4 million in 1998. The following table sets forth OEC's operating results as a percentage of net sales: 1998 1997 1996 Net sales Product 87.6% 88.6% 87.0% Service 12.4 11.4 13.0 --------------------------------- Total net sales 100.0 100.0 100.0 --------------------------------- Cost of sales Product 49.0 50.7 51.1 Service 9.0 8.3 8.9 --------------------------------- Total cost of sales 58.0 59.0 60.0 --------------------------------- Gross margin 42.0 41.0 40.0 --------------------------------- Operating expenses Research and development 6.9 7.2 6.9 Marketing and sales 16.9 16.7 16.8 Administrative, general and other 5.3 5.5 5.7 --------------------------------- Total operating expenses 29.1 29.4 29.4 --------------------------------- Operating income 12.9 11.6 10.6 Net income 8.5 7.8 10.0 [GRAPHIC APPEARS HERE] Net Sales Net sales for the year ended December 31, 1998 increased 21% to $188.7 million compared to $155.4 million in 1997. Product sales in 1998 were $165.3 million compared to $137.7 million in 1997, an increase of 20%. The increase was due to gain in market share and a growth in the use of mobile C-arms in new minimally invasive procedures. The Company introduced two new products in 1998, the Compact 7700 and the Series 7700 mobile C-arms. International sales for all products were up 2% compared to 1997. Domestic bookings in 1998 were $141.4 million compared to $122.2 million in 1997, an increase of 16%. International bookings increased 24% to $30.2 million in 1998 compared to 1997. Bookings in Europe were particularly strong with an increase of 33%. Worldwide, the Company's C-arm product bookings increased 17% from the prior year while the urology bookings increased 21%. At December 31, 1998, the Company's backlog had grown to approximately $39.5 million compared to $32.3 million at the prior year end. The Company includes in backlog only firm orders deliverable within 12 months. Backlog also includes service contract revenue, which will be earned over the next twelve months. The Company's service revenue increased 32%, from $17.7 million in 1997 to $23.4 million in 1998. The growth was the result of several factors: increased product sales, aggressive service pricing strategies and the return of customers who were dissatisfied with third party service organizations. nineteen Margin Analysis The Company's gross margin increased in 1998 to 42% of sales compared to 41% in 1997. Increased demand for the high performance cardiac, vascular and large field of view C-arm products, combined with the manufacturing efficiencies associated with higher production volumes, offset the pricing pressures on the lower priced products. The Company's net service costs increased 31% or $4.0 million from 1997, with the primary increase being parts costs and investment in additional service personnel. The additional personnel are needed to handle the broadened product lines, the increase in number of systems sold and to maintain product support for existing customers. R&D Expense R & D expense increased 17% in 1998 to $13.0 million compared to $11.2 million in 1997. The increase reflects the costs associated with the development and introduction of new products along with the increase in sustaining engineering expense associated with the broadened product offering. As a percent of net sales, R & D expense decreased slightly over 1997. The Company anticipates that R & D expense will grow proportionally with increasing revenues. Marketing and Sales Expense Marketing and sales expense increased in 1998 by $6.0 million to $32.0 million, or a 23% increase over 1997. The majority of the increase in expense was due to additional commission expense resulting from increased revenue and sales incentives. In addition, the Company expanded support of physician training workshops, which reinforce the use of OEC equipment for new applications and are intended to generate leads for future business. Administrative, General & Other Expense Administrative, general and other expenses increased 14% in 1998 to $9.9 million compared to $8.7 million in 1997. As a percentage of net sales, these expenses were down 0.3%. The increase reflects the Company's continuing investment in computer systems and the associated training of personnel. [GRAPHIC APPEARS HERE] Income Tax During 1998, the Company recorded tax expense of $9.1 million compared to $6.2 million for 1997. The Company's effective tax rate increased from 34% in 1997 to 36% in 1998 due to the effects of European net operating losses. The Company also recorded $2.3 million and $1.1 million of tax benefit directly to stockholders' equity for the benefit derived from stock options exercised during the years ended December 31, 1998 and 1997, respectively. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996. Net Sales Net sales for the year ended December 31, 1997 were $155.4 million compared to $128.0 million in 1996. Product sales in 1997 were $137.7 million compared to $111.4 million in 1996, an increase of 24%. The increase was due to several factors: a broadened product line, gain in market share of the Company's existing products and an expansion of international distribution. International sales for all products were up 27% compared to 1996. Domestic bookings in 1997 were approximately $122.2 million compared to $92.0 million in 1996, an increase of 33%. International bookings were basically flat at $24.4 million in 1997 compared to 1996 due to the devaluation of foreign currencies against the U.S. dollar. Worldwide, the Company's C-arm product bookings increased 31% from the prior year while the urology bookings increased approximately 5%. As a result, at December 31, 1997, the Company's backlog had grown to approximately $32.3 million compared to $24.1 million at the prior year end. The Company's service revenue increased 7%, from $16.6 million in 1996 to $17.7 million in 1997. The slower growth was a result of pricing pressures for service contracts, continuing improvement in product reliability and competition from third party service organizations. twenty Margin Analysis The Company's gross margin increased in 1997 to 41% of sales compared to 40% in 1996 in a very competitive market. There continues to be pricing pressures worldwide for the Company's products. In spite of the pricing pressures, the Company has been able to increase the gross margin by continuing to focus on cost containment and manufacturing efficiencies along with an increased mix of higher margin products. The Company's net service costs increased 13%, or $1.5 million, from 1996. The largest part of the cost increase was attributable to investment in additional service personnel to handle the broadened product lines. R&D Expense R & D expense increased 36% in 1997 to $11.2 million compared to $8.9 million in 1996. The increase reflects the costs associated with the development and introduction of two new products in 1997 along with the increase in sustaining engineering expense associated with the broadened product offering. Marketing and Sales Expense Marketing and sales expense increased in 1997 by $4.5 million to $26.0 million, or a 21% increase over 1996. The largest part of the increase in expense was due to the increase in commission expense in direct relation to increased revenue. The other factor was the continuing investment worldwide for coverage due to broadened product lines and new markets addressed by the new products. Administrative, General & Other Expense Administrative, general and other expenses increased 19% in 1997 to $8.7 million, versus $7.3 million in 1996. The main increase in expense resulted from costs associated with the implementation of a new company-wide computer system and the associated training costs for personnel. The conversion was completed by year-end 1997. [GRAPHIC APPEARS HERE] Income Tax During 1997, the Company recorded tax expense of $6.2 million compared to $1.5 million for 1996. Included in the 1996 tax expense was a deferred benefit of $4.3 million resulting from the reversal of the valuation allowance as the Company recognized the likelihood of fully utilizing the deferred tax assets. The Company also recorded $1.1 million and $0.9 million of tax benefit directly to stockholders' equity for the benefit derived from stock options exercised during the years ended December 31, 1997 and 1996, respectively. General Information Liquidity & Capital Resources Cash provided by the Company's operations was $7.7 million in 1998 compared to $10.2 million in 1997 and $6.3 million in 1996. The primary uses of cash in both 1998 and 1997 were increases in accounts receivable and inventory which is a reflection of the Company's decision to utilize its cash position to assist the sales force through extended credit terms and more demonstration equipment. During 1998, the Company increased the manufacturing inventory levels to support expanded product lines and the increased production. In addition, during 1998, the Company paid $4.9 million as final settlement of a lawsuit. The Company's capital expenditures totalled $5.2 million in 1998 compared to $5.6 million in 1997 and $4.5 million in 1996. Additions to the Salt Lake City facilities as well as investments in manufacturing equipment were the primary capital expenditures positioning the Company to meet its growth expectations. Cash and cash equivalents decreased to $4.4 million at December 31, 1998 from $17.5 million at December 31, 1997 as the Company increased securities available for sale by $12.4 million. During 1998, the Company invested $1.6 million for a minority interest in Heartlab, Inc., a medical imaging software development company with a focus on cardiology. twenty-one A stock repurchase program of 1,000,000 shares of the Company's outstanding common stock was authorized in April 1998. As of December 31, 1998, 230,000 shares have been repurchased. During 1997, the combination of the repurchase of 200,000 warrants (See Note 4) and a prior stock repurchase program had resulted in the total acquisition of 369,000 shares. OEC believes that it has sufficient liquidity and anticipated cash flow to meet its obligations in 1999 and continue its stock repurchase program. In addition, OEC continues to carry an unused $10 million line of credit. To date, the Company has not experienced any significant effects from inflation. Factors That May Affect Future Results Certain statements contained in this document and other written and oral statements made from time to time by the Company do not relate strictly to historical or current facts. As such, they are considered "forward-looking statements" which provide current expectations or forecasts of future events. Such statements can be identified by the use of terminology such as "anticipate," "believe," "estimate," "expect," "intend," "may," and similar words or expressions. The Company's forward-looking statements generally relate to its growth strategies, financial results, product development and regulatory approval programs, and sales efforts. One must carefully consider forward-looking statements and understand that such statements involve a variety of risks and uncertainties, known and unknown, and actual results may vary materially. OEC's future operating results are dependent on its ability to develop, manufacture and market innovative products that meet customers' needs. The process of developing new high technology medical products is complex and uncertain and requires innovative designs that anticipate customer needs, technological trends and healthcare shifts. There can be no assurance that the Company will be able to develop and market new products on a cost-effective and timely basis, that such products will compete favorably with products developed by others or that existing technology will not be superseded by new discoveries or breakthroughs. [GRAPHIC APPEARS HERE] Because of the substantial length of time and expense associated with bringing new products through development and regulatory approval to the marketplace, the medical device industry places considerable importance on obtaining patent, trademark, copyright and trade secret protection for new technologies, products and processes. The loss of protection could have a material adverse effect on the Company's business. OEC depends on some significant vendors for certain important component parts for certain products. While the Company believes any of these single-source items could be replaced over time, abrupt disruption in the supply of a part for a product could have an adverse effect on the Company's production and on its financial condition and results of operations in cases where the existing inventory of the components is not adequate to meet the Company's demand for the component during such disruption. The testing, marketing and sale of human healthcare products entails an inherent risk of product liability. There can be no assurance that product liability claims will not be asserted against OEC. Although OEC has product liability insurance coverage, there can be no assurance that such coverage will provide adequate coverage against all potential claims. As a manufacturer of medical devices, OEC is subject to extensive and rigorous governmental regulation, principally by the FDA and corresponding state and foreign agencies. Failure to comply with FDA and other regulations could result in sanctions being imposed, including restrictions on the marketing of or recall of the affected products. OEC's facilities and manufacturing processes have been periodically inspected by the FDA and other agencies, but remain subject to further inspections from time to time. OEC continues to devote substantial human and financial resources to regulatory compliance and believes that it remains in substantial compliance with all applicable federal and state regulations. twenty-two Nevertheless, there can be no assurance that the FDA or a state agency will agree with OEC's positions, or that its GMP or ISO compliance will not be challenged at some subsequent point in time. A portion of the Company's research and development activities, some of its single-source vendors, its corporate headquarters and other critical business operations are located near a major earthquake fault. The ultimate impact on the Company, significant suppliers and the general infrastructure is unknown, but operating results could be materially affected in the event of a major earthquake. Although OEC believes that it has the product offerings and resources needed for continuing success, future revenue and margin trends cannot be reliably predicted and may cause the Company to adjust its operations. Factors external to the Company can result in volatility of the Company's common stock price. Foreign Currency Rate Exposure The Company has operating subsidiaries located in Europe and utilizes forward exchange contracts with durations generally less than six months to hedge against the effect of exchange rate fluctuations of European income. The Company's forward exchange contracts are not material. The Company also has other customers located throughout the world; however, these customers' invoices are denominated in U.S. dollars. As a result, the Company has not incurred material gains or losses resulting from foreign currency fluctuations. However, adverse fluctuations of exchange rates can affect the purchasing power of international customers that can result in volatility of international demand. Interest Rate Risk Exposure The Company has purchased certain debt obligations of the U.S. government and various corporations with original maturities of less than one year. As of December 31, 1998, such investments totaled approximately $15.2 million and the difference between fair market value and amortized cost is immaterial. Interest rate risk and default risk underlying these securities is not considered to be significant. [GRAPHIC APPEARS HERE] Other Exposures The Company has not entered into any speculative derivatives and does not foresee utilizing such instruments in the future. The Company does not utilize commodities in the normal course of its manufacturing process. Accordingly, the Company does not believe it has any significant commodity risks or exposures. Year 2000 Readiness Disclosure The Company has completed a review of its business information systems with regards to Year 2000 compliance and will either replace or correct those computer systems that have been found to have date-related deficiencies. New integrated business information systems for the order administration, financial and manufacturing processes were put in place in 1997. A few minor corrective actions are required to make these systems Year 2000 compliant and these corrections are expected to be completed by mid-year 1999. The business information system for the service process is being replaced with a planned completion date by the end of the third quarter of 1999. The Company's products being shipped today have been assessed and found to be Year 2000 compliant provided that the user perform a reset of the date upon first use in the Year 2000. The Company believes that products previously shipped are either Year 2000 compliant or can be made Year 2000 compliant with the purchase of an upgrade or a date reset performed upon first use in the Year 2000. The Company is also assessing facility and telecommunications systems and systems used to support the product design and manufacturing processes to ensure that these will be Year 2000 ready. It is anticipated that any required corrective actions will be completed by mid-year 1999. The Company relies on third party providers for materials and services such as telecommunications, utilities, financial services and other key services. Interruption of those materials or services due to Year 2000 issues could affect the Company's operations. The Company has completed the process of contacting its major suppliers and has determined that all major suppliers are in the process of ensuring Year 2000 compliance. However, since the Company is dependent on key third twenty-three parties, there can be no guarantee that the Company's efforts will prevent a material adverse impact on its financial position, results of operations or liquidity in future periods in the event that a significant number of suppliers and/or customers experience business disruptions as a result of their lack of Year 2000 readiness. The Company estimates that it has incurred costs of approximately $4 million, to date, in external and internal costs to address its Year 2000 readiness issues, the majority of which are the new business information systems installed in 1997. The Company currently estimates that it will incur additional costs of approximately $2 million to complete its Year 2000 readiness projects. Both the Company's cost estimates and completion time frames could be influenced by the Company's ability to successfully identify all Year 2000 issues, the nature and amount of corrective action required, the availability and cost of trained personnel in this area and the Year 2000 success that key third parties and customers attain. While these and other unforeseen factors could have a material adverse impact on the Company's financial position, results of operations or liquidity in future periods, management believes that it has implemented an effective Year 2000 compliance program that will minimize the possible negative consequences to the Company. Throughout 1999, the Company will determine areas where contingency planning is needed. The planning efforts will include, but are not limited to, identification and mitigation of potential serious business interruptions, adjustments of inventory levels to meet customer needs, and establishing crisis response processes to address unexpected problems. [GRAPHIC APPEARS HERE] twenty-four
Consolidated Statements of Income --------------------------------------------- Years Ended December 31, 1998 1997 1996 (In thousands, except per share amounts) Net sales Product $ 165,338 $ 137,723 $ 111,383 Service 23,363 17,703 16,602 --------------------------------------- Total net sales 188,701 155,426 127,985 --------------------------------------- Cost of sales Product 92,538 78,837 65,334 Service 16,851 12,863 11,372 --------------------------------------- Total cost of sales 109,389 91,700 76,706 --------------------------------------- Gross margin 79,312 63,726 51,279 --------------------------------------- Operating expenses Research and development 13,023 11,159 8,854 Marketing and sales 31,975 25,986 21,494 Administrative, general and other 9,890 8,653 7,260 --------------------------------------- Total operating expenses 54,888 45,798 37,608 --------------------------------------- Operating income 24,424 17,928 13,671 [GRAPHIC APPEARS Interest income 1,007 916 786 HERE] Interest expense (247) (419) (9) --------------------------------------- Income before income taxes 25,184 18,425 14,448 Income tax expense 9,082 6,247 1,536 --------------------------------------- Net income $16,102 $12,178 $12,912 ======================================= Net income per common share: Diluted $ 1.20 $ .93 $ 1.01 Basic $ 1.27 $ .98 $ 1.05 Common shares: Diluted 13,391 13,079 12,797 Basic 12,698 12,400 12,263
See accompanying notes to consolidated financial statements. twenty-five Consolidated Balance Sheets ---------------------------------------------------
December 31, 1998 1997 (In thousands, except par value amounts) Assets Current assets: Cash and cash equivalents $ 4,438 $ 17,502 Securities available for sale 15,222 2,843 Accounts receivable, net of allowances of $1,288 and $1,114, respectively 44,365 40,058 Inventories, net 42,579 28,376 Prepaid expenses and other current assets 1,079 2,988 Income taxes receivable 629 1,025 Deferred income taxes 6,698 7,304 ------------------------ Total current assets 115,010 100,096 Long-term receivables 1,520 998 Property and equipment, net 17,242 15,307 Cost in excess of net assets acquired, net of accumulated amortization of $10,126 and $9,155, respectively 9,922 10,893 Deferred income taxes 256 2,643 Investment in unconsolidated affiliate 1,421 -- Other assets 876 750 ------------------------ Total $ 146,247 $ 130,687 ======================== [GRAPHIC APPEARS HERE] Liabilities and Stockholders' Equity Current liabilities: Accounts payable $12,101 $10,339 Accrued salaries and benefits 6,485 5,172 Accrued warranty and installation costs 2,702 2,258 Deferred income and customer deposits 4,647 5,075 Accrued legal fees and litigation settlements -- 4,697 Accrued distributor commissions 3,795 3,725 Other accrued liabilities 4,548 4,869 ------------------------ Total current liabilities 34,278 36,135 ------------------------ Stockholders' equity: Preferred stock, $.01 par value; Authorized -- 2,000 shares, none outstanding Common stock, $.01 par value; Authorized -- 30,000 shares Issued -- 13,976 and 13,474 shares, respectively 140 135 Capital in excess of par value 88,990 82,317 Retained earnings 38,066 21,964 Treasury stock, 1,200 and 970 shares at cost, respectively (15,036) (9,678) Accumulated other comprehensive expense (191) (186) ------------------------ Total stockholders' equity 111,969 94,552 ------------------------ Total $ 146,247 $ 130,687 ========================
See accompanying notes to consolidated financial statements. twenty-six Consolidated Statements of Stockholders' Equity --------------------------------
Capital Retained Accumulated Common Stock In Excess Earnings/ Treasury Stock Other Stock ---------------- of Par (Accumulated ---------------- Comprehensive Subscription (In thousands) Shares Amount Value Deficit) Shares Amount Income/(Expense) Receivable --------------------------------------------------------------------------------------------- Balance, January 1, 1996 12,789 $ 128 $ 76,344 $ (3,126) (560) $ (4,056) $ (10) $ (210) --------------------------------------------------------------------------------------------- Comprehensive income: Net income -- -- -- 12,912 -- -- -- -- Foreign currency translation -- -- -- -- -- -- (225) -- Total comprehensive income Stock issued under benefit plans 369 4 2,115 -- -- -- -- -- Tax benefit attributable to stock options exercised -- -- 882 -- -- -- -- -- Purchases of treasury stock -- -- -- -- (241) (2,794) -- -- Receipt of stock subscription receivable -- -- -- -- -- -- -- 210 --------------------------------------------------------------------------------------------- Balance, December 31, 1996 13,158 132 79,341 9,786 (801) (6,850) (235) -- --------------------------------------------------------------------------------------------- Comprehensive income: Net income -- -- -- 12,178 -- -- -- -- Foreign currency translation -- -- -- -- -- -- 49 -- Total comprehensive income Stock issued under benefit plans 316 3 2,411 -- -- -- -- -- Tax benefit attributable to stock options exercised -- -- 1,137 -- -- -- -- -- Purchases of treasury stock -- -- -- -- (169) (2,828) -- -- Purchase of stock warrants -- -- (1,000) -- -- -- -- -- Valuation of non-employee stock options granted -- -- 428 -- -- -- -- -- --------------------------------------------------------------------------------------------- Balance, December 31, 1997 13,474 135 82,317 21,964 (970) (9,678) (186) -- --------------------------------------------------------------------------------------------- [GRAPHIC APPEARS HERE] Comprehensive income: Net income -- -- -- 16,102 -- -- -- -- Foreign currency translation -- -- -- -- -- -- (5) -- Total comprehensive income Stock issued under benefit plans 502 5 4,191 -- -- -- -- -- Tax benefit attributable to stock options exercised -- -- 2,336 -- -- -- -- -- Purchases of treasury stock -- -- -- -- (230) (5,358) -- -- Valuation of non-employee stock options granted -- -- 146 -- -- -- -- -- --------------------------------------------------------------------------------------------- Balance, December 31, 1998 13,976 $ 140 $ 88,990 $ 38,066 (1,200) $ (15,036) $ (191) -- --------------------------------------------------------------------------------------------- (In thousands) Total ----------- Balance, January 1, 1996 $ 69,070 ----------- Comprehensive income: Net income 12,912 Foreign currency translation (225) ----------- Total comprehensive income 12,687 Stock issued under benefit plans 2,119 Tax benefit attributable to stock options exercised 882 Purchases of treasury stock (2,794) Receipt of stock subscription receivable 210 ----------- Balance, December 31, 1996 82,174 ----------- Comprehensive income: Net income 12,178 Foreign currency translation 49 ----------- Total comprehensive income 12,227 Stock issued under benefit plans 2,414 Tax benefit attributable to stock options exercised 1,137 Purchases of treasury stock (2,828) Purchase of stock warrants (1,000) Valuation of non-employee stock options granted 428 ----------- Balance, December 31, 1997 94,552 ----------- Comprehensive income: Net income 16,102 Foreign currency translation (5) ----------- Total comprehensive income 16,097 Stock issued under benefit plans 4,196 Tax benefit attributable to stock options exercised 2,336 Purchases of treasury stock (5,358) Valuation of non-employee stock options granted 146 ----------- Balance, December 31, 1998 $ 111,969 -----------
See accompanying notes to consolidated financial statements. twenty-seven Consolidated Statements of Cash Flows -----------------------------------------
Years Ended December 31, 1998 1997 1996 (In thousands) Operating Activities Net income $ 16,102 $ 12,178 $ 12,912 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,344 3,203 3,117 Deferred income tax expense (benefit) 2,993 1,938 (3,177) Current tax benefit attributable to stock options exercised 2,336 1,137 882 Non-employee stock option expense 146 154 -- Changes in current assets and liabilities: Accounts receivable, net (4,307) (6,725) (8,209) Income taxes 396 (1,534) 97 Inventories, net (14,203) (3,783) (5,837) Prepaid expenses and other current assets 1,909 (1,455) (566) Other assets (126) (234) (157) Accounts payable 1,762 1,957 2,685 Accrued salaries and benefits 1,313 1,045 1,207 Accrued warranty and installation costs 444 510 489 Deferred income and customer deposits (428) (387) (49) Accrued legal fees and litigation settlements (4,697) 635 269 Accrued distributor commissions 70 834 999 Other accrued liabilities (321) 725 1,683 ----------------------------------- Net cash provided by operating activities 7,733 10,198 6,345 ----------------------------------- [GRAPHIC APPEARS HERE] Investing Activities Long-term receivables (522) (469) (625) Additions to property and equipment (5,154) (5,612) (4,511) Purchase of securities available for sale (12,379) (2,843) -- Payment for the purchase of unconsolidated affiliate (1,575) -- -- Other (5) 265 (225) ----------------------------------- Net cash used in investing activities (19,635) (8,659) (5,361) ----------------------------------- Financing Activities Common stock issued under benefit plans and other 4,196 2,688 2,329 Purchases of treasury stock (5,358) (2,828) (2,794) Purchase of stock warrants -- (1,000) -- ----------------------------------- Net cash used in financing activities (1,162) (1,140) (465) ----------------------------------- Net increase (decrease) in cash and cash equivalents (13,064) 399 519 Cash and cash equivalents at beginning of year 17,502 17,103 16,584 ----------------------------------- Cash and cash equivalents at end of year $ 4,438 $ 17,502 $ 17,103 =================================== Supplemental disclosures of cash flow information Cash paid during the year for interest $ 38 $ 21 $ 9 Cash paid during the year for income taxes $ 3,357 $ 5,843 $ 3,734
See accompanying notes to consolidated financial statements. twenty-eight Notes To Consolidated Financial Statements ------------------------------------ For The Years Ended December 31, 1998, 1997 and 1996 1. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include those of OEC Medical Systems, Inc., and its wholly-owned subsidiaries (the Company). All material intercompany balances and transactions have been eliminated in consolidation. Operations The Company designs, manufactures, markets and services computer-based medical equipment (primarily X-ray imaging systems) for use in hospitals, outpatient clinics, and private practice surgi-centers. The products and services of the Company are managed as a single segment. The manufacturing facilities are located in Salt Lake City, Utah, Warsaw, Indiana and Wendelstein, Germany. The systems are marketed through direct sales forces of the Company and through independent distributors and dealers worldwide (See Note 6). Use of Estimates in Preparing Financial Statements 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. Revenue Recognition Sales are generally recognized at the time the products are shipped, as are provisions for estimated installation costs, warranty costs, agents' commissions and sales allowances. Amounts received upon the sale of service contracts are deferred and recognized as service revenue over the lives of the contracts. [GRAPHIC APPEARS HERE] Cash and Cash Equivalents and Line of Credit The Company considers all highly liquid investments with original maturities of less than 90 days to be cash equivalents. All such investments are stated at cost, which approximates market. As of December 31, 1998 and 1997, the Company had a line of credit for $10 million which expires in May 1999. No borrowings had been made under this line during the years ended December 31, 1998 and 1997. Securities Available for Sale The Company's securities were comprised of debt obligations of the U.S. Government and various corporations and mature in less than one year. All of the Company's securities are classified as available for sale and are carried at fair market value with the unrealized gains and losses recorded as a separate component of stockholders' equity. As of December 31, 1998 and 1997, the difference between fair market value and amortized cost was immaterial. The cost of investment securities sold is determined using the specific identification method. Interest rate risk and default risk underlying the securities is not considered to be significant. During the years ended December 31, 1998 and 1997, there were no significant gains or losses on disposals of securities. Comprehensive Income In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for the reporting of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. Accordingly, the Company has adopted the provisions of SFAS No. 130 and has retroactively presented the amounts for the years ended December 31, 1998, 1997 and 1996. During these years, the only amounts deemed to be included as a component of other comprehensive income are the cumulative effects of foreign currency translation adjustments. twenty-nine Inventories Inventories are stated at the lower of cost (utilizing the first-in/first-out method) or market. Inventories consist of the following: December 31, (In thousands) 1998 1997 Purchased parts and completed subassemblies $ 21,893 $ 13,340 Work-in-process 5,816 4,301 Finished goods 2,268 456 Demonstration equipment 11,476 8,985 Service and repair parts 5,870 5,077 ----------------------- Total 47,323 32,159 Reserves for excess and obsolete inventory (4,744) (3,783) ----------------------- Net $ 42,579 $ 28,376 ======================= Long-lived Assets Impairment of long-lived assets is determined in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and of Long-Lived Assets to be Disposed Of," which was adopted on January 1, 1996. There were no impairments as of December 31, 1998 and 1997. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. The Company uses the straight-line method to depreciate and amortize the cost of assets over their estimated useful lives as follows: [GRAPHIC APPEARS HERE]
December 31, (In thousands) Estimated 1998 1997 Useful Lives ------------ Buildings and land 30 years $ 10,882 $ 10,170 Machinery and equipment 3 to 10 years 11,880 10,503 Leasehold improvements Life of lease (June 2000) 965 971 Furniture and fixtures 2 to 5 years 1,330 376 Computer equipment and related software 2 to 4 years 5,813 5,457 ------------------------------ Total 30,870 27,477 Less accumulated depreciation and amortization (13,628) (12,170) ------------------------------ Net $ 17,242 $ 15,307 ==============================
Cost in Excess of Net Assets Acquired Cost in excess of net assets acquired consists of the following:
December 31, (In thousands) 1998 1997 Cost in excess of net assets acquired $ 20,048 $ 20,048 Less accumulated amortization (10,126) (9,155) ------------------------------ Net $ 9,922 $ 10,893 ==============================
Cost in excess of net assets acquired is being amortized on a straight-line basis over approximately 5 to 30 years. Amortization amounted to approximately $971,000 during each of the years ended December 31, 1998 and 1997 and approximately $641,000 in the year ended December 31, 1996. thirty Investment in Unconsolidated Affiliate During the year ended December 31, 1998, the Company acquired a minority equity position in Heartlab, Inc., for $1,575,000. The Company accounts for this investment using the equity method of accounting. As of December 31, 1998, the Company's equity in the underlying net assets of the affiliate totaled approximately $600,000. Accordingly, the difference is being amortized on a straight line basis over five years. Contingencies As a manufacturer of medical products, the Company is subject to certain regulations of the United States Food and Drug Administration (FDA) and various state and foreign agencies. These regulations require review or approval of the Company's products, facilities and manufacturing processes, including periodic inspections of manufacturing facilities for compliance with Good Manufacturing Practices as established by the FDA. The Company has devoted substantial human and financial resources to regulatory compliance and believes that it is in substantial compliance with all applicable federal and state regulations. Net Income Per Common Share Net income per common share is computed by both the basic method, which uses the weighted average number of the Company's common shares outstanding, and the diluted method, which includes the dilutive common shares from stock options and warrants as calculated using the treasury stock method. The difference between the Company's basic and diluted earnings per share is attributable to stock options and warrants. The effect of stock options and warrants was to increase the number of common shares by approximately 693,000, 679,000 and 534,000, during the years ended December 31, 1998, 1997 and 1996, respectively. Foreign Currency Translation The financial statements of the Company's foreign subsidiaries are measured using local currencies as the functional currency. Assets and liabilities are translated into U.S. dollars at year-end rates of exchange and results of operations are translated at average rates of exchange for the year, with the difference included in accumulated other comprehensive expense until such time as the subsidiary's operations are discontinued, sold or substantially liquidated. [GRAPHIC APPEARS HERE] 2. INCOME TAXES Income tax expense consists of the following: Years Ended December 31, (In thousands) 1998 1997 1996 Current Expense: Federal $ 8,234 $ 5,630 $ 6,507 Less utilization of tax credits (3,035) (2,057) (2,513) ---------------------------------- Net federal 5,199 3,573 3,994 State 812 736 719 Foreign 78 -- -- ---------------------------------- Total current 6,089 4,309 4,713 ================================== Deferred Expense (Benefit): Reversal of valuation allowance -- -- (4,306) Utilization of tax credits 3,035 2,057 2,513 Other deferred tax assets created (42) (119) (1,384) ---------------------------------- Total deferred 2,993 1,938 (3,177) ---------------------------------- Net $ 9,082 $ 6,247 $ 1,536 ================================== thirty-one Income tax expense differs from the amount computed by applying the statutory Federal tax rate to income before income taxes for the following reasons: Years Ended December 31, (In thousands) 1998 1997 1996 Computed Federal income tax expense at statutory rate of 35% $ 8,814 $ 6,449 $ 5,057 State income taxes 812 736 719 Generation of research and development tax credits (895) (1,008) -- Effects of foreign subsidiaries on U.S. tax rates 257 (30) (58) Reversal of valuation allowance -- -- (4,306) Permanent differences 94 100 124 ----------------------------- Income tax expense $ 9,082 $ 6,247 $ 1,536 =============================
The Company has research and development tax credit carryforwards of approximately $287,000 expiring in the year 2013, plus alternative minimum tax credit carryforwards of approximately $2,236,000. The Company also has foreign net operating losses in Germany and France and various states in the U.S. which expire in the period from 2008 through 2013. Deferred income taxes reflect the net tax effects of: (a)temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes; and (b)operating loss and tax credit carryforwards. The tax effects of significant items comprising the Company's deferred tax assets are as follows: [GRAPHIC APPEARS HERE] December 31, (In thousands) 1998 1997 Deferred tax assets: Reserves not currently deductible for tax purposes: Allowance for bad debts $ 404 $ 366 Inventory 739 840 Litigation -- 1,666 Warranty 724 686 Deferred income 597 383 Marketing 334 105 Depreciation 307 (101) Vacation accrual 504 227 Other 590 269 Foreign & state net operating loss carryforwards 232 843 Tax credit carryforwards 2,523 4,663 ------------------ Total $ 6,954 $ 9,947 ================== 3. COMMITMENTS The Company leases certain of its manufacturing facilities and certain equipment under operating leases. Future minimum annual lease payments under the Company's operating leases are as follows: Years Ending December 31, (In thousands) 1999 $1,772 2000 1,339 2001 303 2002 204 ------ Total $3,618 ====== thirty-two Total rent expense under the operating leases in 1998, 1997 and 1996 was approximately $1,667,000, $1,346,000 and $1,296,000, respectively. The Company sponsors a 401(k) savings plan in which most domestic salaried employees of the Company are eligible to participate. Contributions made to the plan by the Company are based on a percentage of employee contributions and totaled approximately $961,000, $883,000 and $766,000 in 1998, 1997 and 1996, respectively. 4. COMMON STOCK The Company's 1998 Stock Option Plan and 1990 Stock Plan (which incorporates active options under predecessor plans) permits officers, directors, employees and independent contractors to acquire options or other rights to purchase the Company's common stock. The purchase price for the shares is their fair market value on the date the option or purchase right was granted. Options and purchase rights generally vest over a four to six year period. During 1998, the Company's Board of Directors passed a resolution stating that the total outstanding options may not exceed 20% of the issued and outstanding shares of the Company. As of December 31, 1998, the outstanding options were 14% of the issued and outstanding shares of the Company. In addition, the Board of Directors passed a resolution which disallowed the cancellation/re-grant provision of the 1998 Stock Option Plan. The Company also maintains an Incentive Stock Acquisition Plan (ISAP) in which only employees may participate. Under the ISAP, the purchase price is 85 percent of the fair market value of the shares on the trading day before the six-month participation period begins or the last trading day of the participation period, whichever is less. A summary of stock plan activities is as follows: [GRAPHIC APPEARS HERE]
Years Ended December 31, 1998 1997 1996 (In thousands, except average prices) Number Weighted Number Weighted Number Weighted of Avg. of Avg. of Avg. Shares Exercise Shares Exercise Shares Exercise Price Price Price Options: Outstanding beginning of year 2,015 $ 9.17 2,000 $ 7.80 1,740 $ 6.02 Granted 264 20.49 319 16.25 579 11.84 Cancelled (58) 16.73 (35) 12.99 (8) 6.09 Exercised (451) 7.42 (269) 6.94 (311) 5.43 ------------------------------------------------------------------- Outstanding end of year 1,770 $ 11.10 2,015 $ 9.17 2,000 $ 7.80 ------------------------------------------------------------------- Weighted average fair market value of options granted during year $ 8.60 $ 6.53 $ 5.34 Shares purchased under ISAP 51 47 58 Weighted average fair market value of shares purchased under ISAP $ 2.83 $ 2.16 $ 1.28
thirty-three The following table summarizes information about stock options outstanding as of December 31, 1998 (in thousands, except price and life information). Options Outstanding Options Exercisable - ---------------------------------------------------- ------------------------ Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price $ 5.38 -$6.13 694 5.74 years $ 5.88 683 $ 5.88 6.13 -16.13 669 6.78 years 11.66 389 11.00 16.13 -22.19 407 8.95 years 19.10 109 18.16 - ---------------------------------------------------- ------------------------ $ 5.38 -$22.19 1,770 6.87 years $11.10 1,181 $ 8.70 - ---------------------------------------------------- ------------------------ The Company accounts for stock options granted using Accounting Principles Board (APB) Opinion No. 25. Accordingly, compensation cost of approximately $146,000, $154,000 and $0 for the years ended December 31, 1998, 1997, and 1996 respectively, has been recognized for stock options granted to non-employees. Had compensation cost for the Company's stock-based compensation plans for employees been recorded based on the fair value at the grant dates for awards under those plans, the Company's net income and net income per common share would have changed to the pro forma amounts indicated below. December 31, (In thousands) 1998 1997 1996 Net income: As reported $16,102 $12,178 $12,912 Pro forma $15,015 $10,894 $12,286 [GRAPHIC APPEARS HERE] Net income per common share-diluted: As reported $1.20 $.93 $1.01 Pro forma $1.12 $.83 $ .96 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996: dividend yield of 0.00%; expected volatility ranging from 36.59% to 40.29%; risk-free interest rates ranging from 5.50% to 6.56%, and expected lives of 2.5 years subsequent to vesting date. Warrants In connection with the signing of a product development agreement in 1990, the Company, through its predecessor, issued warrants to purchase 200,000 shares of its common stock. The warrants were exercisable at a price of $12.70 per share over the period August31, 1994 through August 31, 1997. On January 26, 1997, the Company repurchased the warrants for $1.0 million which was recorded as a reduction to capital in excess of par value. During 1996, the Company issued warrants to purchase 38,000 shares to independent distributors which are exercisable at a price of $11.75 per share during the period of October 1, 1999 to December 31, 1999. 5. LITIGATION A lawsuit instituted against the Company by a terminated distributor in 1988 was resolved in November 1998 resulting in the Company paying the distributor approximately $4.9 million. This judgment amount was previously fully reserved for by the Company. The Company is also a defendant in other ordinary commercial litigation. In light of available insurance and reserves, management believes that such litigation will not have a material effect on its financial position or results of operations. thirty-four 6. FOREIGN SALES The Company markets its products internationally through subsidiaries in Switzerland, Germany, France and Italy as well as dealers and distributors in other countries. The following table summarizes approximate foreign product sales: 1998 1997 1996 Europe $17,926 $16,099 $11,892 Other 8,617 9,988 8,689 --------------------------------- Total foreign sales $26,543 $26,087 $20,581 ================================= 7. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 1998 and 1997 is as follows (in thousands, except per share data): Quarter First Second Third Fourth 1998 Net sales $41,595 $45,547 $47,880 $53,679 Gross margin 17,398 19,353 20,372 22,189 Net income 3,245 3,875 4,316 4,666 Income per share: Diluted $ .24 $ .29 $ .32 $ .35 Basic $ .26 $ .31 $ .34 $ .36 1997 Net sales $32,314 $38,880 $38,959 $45,273 Gross margin 12,697 15,963 16,129 18,937 Net income 2,301 2,743 3,445 3,689 Income per share: Diluted $ .18 $ .21 $ .26 $ .28 Basic $ .19 $ .22 $ .27 $ .30 [GRAPHIC APPEARS HERE] 8. ACQUISITION OF BMS During 1995, the Company purchased a 19.8% ownership position in Barwig Medizinische Systeme GmbH (BMS), a German manufacturer of medical equipment. Effective January 1, 1997, the Company increased its ownership of BMS to 100% in exchange for cash payments of approximately $193,000, stock options valued at approximately $274,000, and cancellation of loans to BMS of approximately $615,000. The Company accounted for the acquisition using the purchase method which resulted in the recording of approximately $1.6 million of goodwill which is being amortized over a 5 year period. The pro forma financial information reflecting this transaction for 1996 has not been presented as it is not materially different from the Company's historical results. 9. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Management does not expect the adoption of SFAS No. 133 to be material. thirty-five Independent Auditors' Report ------------------------------------------ The Board of Directors and Stockholders of OEC Medical Systems, Inc.: We have audited the accompanying consolidated balance sheets of OEC Medical Systems, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of OEC Medical Systems, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. [GRAPHIC APPEARS HERE] /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Salt Lake City, Utah January 20, 1999 thirty-six EX-23 4 INDEPENDENT AUDITOR'S CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements Nos. 33- 69672, 33-37396, and 33-40280 of OEC Medical Systems, Inc. on Forms S-8 of our report dated January 20, 1999, appearing in and incorporated by reference in the Annual Report on Form 10-K of OEC Medical Systems, Inc. for the year ended December 31, 1998. /s/ DELOITTE & TOUCHE LLP Salt Lake City, Utah March 24, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO EXHIBIT 13 OF THE 1998 FORM 10-K. 1,000 USD YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 4,438 15,222 45,653 1,288 42,579 115,010 30,870 13,628 146,247 34,278 0 0 0 140 111,829 146,247 165,338 188,701 92,538 109,389 54,768 120 247 25,184 9,082 16,102 0 0 0 16,102 1.27 1.20
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