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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JANUARY 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER 0-3717
PURITAN-BENNETT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 44-0399150
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
9401 INDIAN CREEK PARKWAY
BUILDING #40, SUITE 300
P.O. Box 25905
OVERLAND PARK, KANSAS 66225
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 913-661-0444
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common stock, $1.00 par value
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of 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 on
March 29, 1995 was approximately $298,089,689. Such value was computed by
reference to the reported last sales price of such stock on March 29, 1995.
There were 12,617,553 shares of the Puritan-Bennett Corporation
Common Stock, $1.00 par value, outstanding on March 29, 1995.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual stockholders' meeting
to be held June 20, 1995 are incorporated by reference in Part III.
Portions of the Annual Report to Stockholders for the fiscal year
ending January 31, 1995 are incorporated by reference in Parts I and II.
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PART I
ITEM 1. BUSINESS
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GENERAL
Puritan-Bennett Corporation (the "Company") was reincorporated in Delaware in
August 1968. The Company is the successor to a business founded in 1913 that was
incorporated in the State of Missouri and was a pioneer in the use of oxygen as
a medicinal agent.
The Company is primarily engaged in the development, manufacture and sale of
products related to respiration. Such products are used in a wide variety of
health care settings and on aircraft. The Company's intentions are global in
scope; and it aspires to be the preeminent respiratory company in the world.
Since 1982, the Company has pursued a strategy that focuses on expanding its
leading position within the hospital and aviation markets, and on continuing to
build a major presence in the home care market. To penetrate these differing
markets more effectively, the Company has developed sales forces and other
channels of distribution to address the home care, hospital, and physician
markets. Aggressive efforts have been made to expand international sales.
The Company is organized in two main business lines. Bennett primarily covers
the hospital market and includes the Company's worldwide critical care
ventilator business, as well as the rapidly growing CliniVision(R) product line
in the U.S., and the smaller holter monitoring and international portable
ventilator product lines. Puritan includes nearly all of the rapidly growing
home care product lines and certain complementary products such as medical gases
and gas-related equipment and spirometry. Aero Systems is also included because
it shares one of the Company's larger manufacturing facilities with the Puritan
Group and is relatively small.
PRODUCTS AND RELATED MARKETS
BENNETT
The Company's strategy in the hospital market has been to expand its
historical leadership position by designing products that provide new modes of
treatment and respond to the need of hospitals to enhance labor productivity
while maintaining high standards of quality and reliability. Bennett's core
business is critical care ventilation with the 7200(R) Series ventilator system
(and its related options, accessories, repair parts and service) and the
CliniVision respiratory care management information system. The ventilator sold
to the hospital market is a microprocessor controlled ventilator. This
ventilator is designed to ease the work of patient breathing and lessen patient
discomfort. It automatically performs pulmonary function diagnostic tests and
reduces therapists' time spent attending to patients and preparing the
ventilators for patient use. The Company believes that respiratory care
activities represent an important labor cost component of a hospital's
operations and that its strategy is consistent with hospital cost-containment
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objectives. The Company is also designing its products as systems to allow for
future enhancements through integration with existing or planned Company
products.
At $121 million in FY 1995, Bennett's revenues decreased 1% from FY 1994.
However, after adjusting for the withdrawal from the U.S. portable ventilator
market and the discontinuance of the Company's intra-arterial blood gas
monitoring systems and some older products, Bennett revenues increased 7% over
prior year levels. Bennett now has a cost structure that allows it to be
profitable at the lower revenue levels the Company has been experiencing and
increasingly profitable at the growing revenue levels that can be anticipated in
the future. The Company also has an enviable resource with its worldwide
distribution system consisting of a professional direct sales and service
organization in many major markets and a distributor network elsewhere. The
Company has a platform for the 7200 Series ventilator from which it can now
offer an even wider range of features customers want. Additionally, the
CliniVision respiratory care management information system is solving
productivity problems for the Company's U.S. customers.
During the first half of FY 1995, continued uncertainty over health care
reform, as well as ongoing mergers and alliances of hospitals and hospital
groups in response to managed care trends, caused the postponement of many
capital purchases in the United States. As a result, orders for 7200 Series
ventilators and for CliniVision systems were well below the Company's
expectations. In contrast to prior years' experience, second half orders for
ventilators surged 37% in the U.S. and 26% worldwide, enabling the Company to
increase fourth quarter revenues and profitability while still rebuilding
backlog. The Company believes that the stronger than normal second half,
relative to the first half, was due to a combination of: (a) the partial release
of pentup demand for replacement equipment after health care reform
uncertainties abated; and (b) more importantly, the Company's new products and
enhancements to the 7200 Series ventilator and CliniVision.
Significant products within this business line include:
7200 SERIES VENTILATORY SYSTEM: The primary respiratory care products
purchased by hospitals are ventilators (sometimes called respirators) used to
assist or manage respiration in a variety of acute care settings. The 7200
Series ventilator is also finding increasing use in so-called sub-acute care
settings, where chronically ventilator-dependent patients who are otherwise
stable, require sophisticated ventilation modes to improve the chances of
weaning. The 7200 Series ventilator is sold in three basic configurations to
cover the wide range of cost/performance applications, and is designed to
protect the user's investment by providing upgrade paths to incorporate new
options as they are developed by the Company. The Company remains the world
leader in critical care ventilation.
The Company has strong research and development programs related to critical
care ventilation in both the U.S. and the Republic of Ireland, both of which
have significant worldwide implications for FY 1997 and beyond. In October, the
Company received FDA clearance for four new features for the 7200 Series
ventilator system: a new simplified control panel, an improved digital
communications interface, an improved flow triggering system and an automated
measurement of lung hyperinflation. The Company also received clearance for a
proprietary
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proportional solenoid valve, with improved performance and lower cost. These new
features were shown to the Company's customers for the first time at the
American Association of Respiratory Care (AARC) meeting in December 1994 and
helped create a surge in orders in January 1995 both for new ventilators and for
upgrades to the Company's large installed base. With these new products and the
Company's strong research and development program, the company has long-term
competitive strength, both in the U.S. and internationally, with products that
reinforce one another.
7250 METABOLIC MONITOR: The 7250 Metabolic Monitor, already introduced in some
international markets, was released in the U.S. in late February 1995. Clearance
from the Japanese Ministry of Health and Welfare was received about the same
time.
Metabolic monitoring is the measurement of oxygen (O2) consumption and carbon
dioxide (CO2) production and is used to determine patient nutritional
requirements and metabolic status. The 7250 Metabolic Monitor (PB 7250) measures
a patient's inspired oxygen and carbon dioxide and compares these measurements
with the patient's expired oxygen and carbon dioxide. From such measurements and
the volume of inspired and expired gas, the monitor calculates oxygen
consumption and carbon dioxide production. From these calculated parameters, the
monitor can determine values used for deciding daily caloric intake needs.
Metabolic monitoring, in general, is an important tool for detecting and
monitoring conditions that can affect clinical outcome such as nutritional
support, drug titration and respiratory muscle workload that can affect weaning
from mechanical ventilation. Until the introduction of the PB 7250, metabolic
monitoring required bulky equipment, provided only periodic measurements, had
limited accuracy and usually required specialists to operate because of the
difficulties of the measurements. The PB 7250 is integrated with the 7200 Series
ventilator, is relatively simple to use and provides more accurate, continuous
measurements of a patient's energy expenditure. The Company believes that the
attributes of the PB 7250 will make it possible for metabolic monitoring to
become even more useful in areas where patient stabilization is important (e.g.,
trauma) and in managing ventilator-dependent patients. In both cases, lower
costs of care and improved patient outcomes are anticipated. Important in its
own right, the PB 7250 also supports the position of the 7200 Series ventilator
and vice versa on a worldwide basis.
CLINIVISION: This personal computer-based patient care and respiratory therapy
department management system integrates the patient data captured and processed
by the 7200 Series ventilator, as well as other clinical data, into a management
information system that can be used by respiratory therapy department directors
and therapists to manage and monitor patient care and staffing requirements.
Once interfaced to the host hospital information system, CliniVision
electronically handles admitting, discharge, transfer, and order entry data, as
well as transmitting billing and results reporting.
The Company's customers are looking for ways to improve productivity in the
face of increased cost-containment pressure. CliniVision is a valuable
productivity tool and is finding increasing widespread acceptance in U.S.
hospitals. During this past year, CliniVision orders and
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revenue grew 24% and 39%, respectively. CliniVision systems are now installed
and operating in more than 110 hospitals.
The Company introduced significant new enhancements to its systems
communications and report generation features during FY 1994. RadioLink 3.0
allows users to transfer new work orders or work order changes to therapists
while working in remote parts of the hospital. Introduced last year, the
RadioLink product uses spread spectrum radio frequency (RF) transmission, adding
cable-free data communication capabilities to the Clinivision system. With
RadioLink 3.0, the Company has also added electronic mail, allowing supervisors
to relay messages from any workstation to therapists on the floor. These new
features allow hospitals to become more efficient in their delivery of patient
care.
The Company also released PhoneLink 2.0 during FY 1994. With this feature,
therapists can download information from any phone, rather than needing to
return to the hospital or office to transfer information. This allows the use of
CliniVision in sub-acute, nursing home and home care locations as well as the
traditional acute-care hospital.
The new Management Reports 2.0 product produces over 50 management reports,
providing each user a degree of customization in their documentation.
New customers this year include the Company's first home care site which
increases Puritan-Bennett's optimism of growing into the home care market
segment. The Company implemented CliniVision's RadioLink product at one of the
largest hospitals in the U.S. This hospital has 3.3 million square feet, over
35,000 inpatients, and over 1 million outpatients a year. Therapists are
connected to the RadioLink wireless network in all clinical areas of the 1,527
bed facility.
At the AARC meeting in December 1994, CliniVision "Lite" - an entry level,
lower cost single workstation system that enables smaller hospitals to take
advantage of productivity tools they need but without as substantial a capital
outlay - was introduced. For CliniVision Lite customers, the Company provides a
clear upgrade path for the future, which allows users to obtain the benefits of
a full CliniVision system over time as their needs evolve and their funding
permits.
The Company anticipates that its total CliniVision business will continue to
grow in FY 1996 and beyond. More importantly, this past year CliniVision became
profitable and should contribute more significantly to earnings in FY 1996 and
in subsequent years as the Company realizes the economic leverage of continued
revenue growth. Finally, in the U.S. market CliniVision supports the leading
position of the 7200 Series ventilator and vice versa.
PORTABLE VENTILATORS: Portable ventilators are used by patients requiring
breathing assistance as a result of neuromuscular disease, chronic obstructive
pulmonary disease or spinal cord injury. These ventilators are compact in size
and incorporate an internal battery for short-term emergency power outages.
Portable ventilators are used at the patient's bedside, mounted on wheelchairs
or in automobiles and airplanes. Portable ventilators offer a reduced cost
alternative to hospital care for patients who can be discharged to their home or
nursing home. The Company
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designs and manufactures the microprocessor-based Companion 2801 Portable
Ventilator in the Republic of Ireland where it is marketed to customers outside
the United States.
PB 3300(TM) SYSTEM: A January 1994 consent decree affected the Company's
intra-arterial blood gas monitoring systems requiring a cessation of shipments
to customers until compliance with Good Manufacturing Practice (GMP) regulations
was achieved. As a result, the Company ceased operations, addressed the GMP
issues and offered the technology for sale. No buyer was found and the shutdown
was completed in the third quarter of FY 1995.
PURITAN
The Puritan line, with $215 million of revenues in FY 1995, includes nearly
all of the Company's rapidly growing home care product lines as well as the
complementary medical gas and gas-related equipment, and spirometry product
lines. Aero Systems is also included because it shares one of the larger
manufacturing facilities with the Puritan Group and is relatively small.
The Company believes that both the domestic and international markets for non-
hospital respiratory products are experiencing growth for a number of reasons
including (i) growth in the population of individuals suffering from asthma,
lung cancer and severe, chronic obstructive pulmonary diseases such as
bronchitis and emphysema; (ii) technological innovations making care for
respiratory patients at home possible; (iii) growing clinical evidence
supporting the efficacy of various types of home respiratory care; and (iv)
government cost-containment pressures encouraging a shift in the delivery of
care from the hospital to lower cost alternate sites, particularly the home. As
a result, patients suffering from a variety of severe, chronic respiratory
conditions as well as patients requiring short-term respiratory therapy due to
earlier hospital discharge are increasingly being cared for at home.
The Company's principal home oxygen therapy products are oxygen concentrators
and liquid oxygen systems, both of which are manufactured in the U.S. and the
Republic of Ireland. The Company is now uniquely well positioned to supply the
entire family of products aimed at helping its customers achieve cost
reductions. For most ambulatory oxygen patients, the Company believes the most
cost-effective solution consists of the following combination of products:
OXYGEN CONCENTRATORS: Oxygen concentrators extract oxygen from room air and
generally provide the least expensive supply of oxygen for patients who require
a continuous supply, at home, and whose prescribed flow rates do not exceed five
liters per minute. This product family includes an optional OCI(TM) indicator
(Oxygen Concentration Indicator) that continuously monitors the oxygen
percentage of the output of the oxygen concentrator, and the Companion(R) 492a
and the 590 oxygen concentrator units. Worldwide, oxygen concentrator orders and
sales grew by 9% and 6%, respectively, during FY 1995.
By utilizing an oxygen concentrator at home, the patient reduces usage of
systems that require refilling, which reduces trips by the home care provider.
By supplying the OCI indicator option with the Companion 590, the home care
provider is able to verify by phone that the concentrator is generating high
oxygen concentrations, detect infrequent problems early before
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they become expensive ones and reduce trips for routine filter replacement. For
these same reasons, the Company believes the Companion with OCI indicator is
also the most cost-effective solution for most nonambulatory patients.
LIQUID OXYGEN SYSTEMS: Liquid oxygen systems store oxygen at a very low
temperature in liquid form, which is 860 times more concentrated than gaseous
oxygen under high pressure. The stationary unit can be easily refilled at home
and can be used to fill a portable device that permits greatly enhanced patient
mobility. Orders and sales for liquid oxygen systems grew 10% during FY 1995.
The Companion 550 ambulatory unit introduced during FY 1993 continued to grow
during FY 1995 as a product for highly mobile patients. This unit utilizes a
proprietary, pneumatic oxygen conserving device that requires no batteries and
is significantly smaller and lighter than its predecessor, while providing
essentially the same duration of use. In addition, it uses less oxygen for the
same amount of ambulatory time, which in turn helps reduce the frequency of
trips home care providers must make to refill the larger liquid oxygen
containers from which patients refill their portable units.
The Company recently established liquid oxygen system fabrication capabilities
in the Republic of Ireland facility, where assembly and test capability already
existed. The fabrication capabilities will increase the Company's total
fabrication capacity to accommodate additional growth, enable the Company to
serve customers in a more timely manner from both the Indianapolis and Ireland
facilities and save freight and duty costs.
COMPANION OR MARK "LOW LOSS" OXYGEN RESERVOIR: These units are designed to
supply oxygen for long periods with reduced evaporation loss until patients are
ready to refill their portable units for use outside the home. The low loss
feature helps reduce even further the frequency of home care provider trips to
refill them. The Mark Low Loss Reservoir is now available; the Companion Low
Loss Reservoir is scheduled to be available in April 1995.
The Puritan line products also include:
SLEEP APNEA SYSTEMS: Adult sleep apnea, temporary cessation of breathing while
asleep, affects millions of people in the U.S. and can become a virtually
debilitating ailment. The Company began to realize meaningful results in late
1989 with the introduction of a proprietary, patented patient circuit - the
Airway Delivery and Management System (ADAM) - used with the Company's Nasal
Continuous Positive Airway Pressure (CPAP) System. A significant new product was
developed in this field and introduced in the third quarter of 1991, the
Companion 318 Nasal CPAP System. The Companion 318 is smaller than competitive
products and offers additional diagnostic tools for sleep lab clinicians. In
addition, its many features are aimed at providing the highest level of patient
comfort. During the second quarter of FY 1994, the Company introduced the
Companion(R) 320 I/E Bi-level(TM) Respiratory System for patients requiring
higher respiratory pressures to overcome airway obstruction.
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Sleep disorder products are the most rapidly growing portion of the Company's
home care business today. This trend is expected to continue into FY 1996.
Accounting for about 21% of FY 1995 home care revenues, the Company's sleep
products revenues grew 122%. The acquisition in January 1994 of SEFAM S.A.,
accounts for much of this growth.
During the second quarter of FY 1993, the Company entered into an agreement
with Biologic Systems Corp. granting the Company distribution rights in the U.S.
to Bio-Logic's Sleepscan(R) computerized diagnostic system product line used by
hospital sleep laboratories and home care providers. SEFAM also has diagnostic
systems, principally, the Respisomnographe and the Minisommo, which the Company
is considering adapting for the U.S. market. The Company jointly concluded with
Bio-logic Systems Corp. that U.S. market economics do not permit an extra level
in the distribution chain. Effective April 1, 1995, this relationship is not
being renewed.
The Company has active sleep disorders research and development programs in
both the U.S. and France that are coordinated from a worldwide perspective. A
number of new diagnostic and therapeutic products are scheduled for introduction
in various markets throughout the coming year and beyond as regulatory
clearances are received. In addition, some of the bi-level systems planned to be
introduced in the future, subject to various regulatory clearances, can be used
for noninvasive ventilation of patients who need long-term support but for less
than 24 hours each day.
HIGH PRESSURE OXYGEN SYSTEMS: High pressure oxygen systems supply oxygen from
high pressure cylinders that require periodic exchange for refilling. These were
the first commercially viable oxygen supplementation systems for the home health
care market but have been increasingly replaced in the home by liquid oxygen
systems and oxygen concentrators. These systems are used in the home primarily
on a standby basis and for patients who need high flow rates.
MANUAL RESUSCITATORS: Portable, manually-powered, reusable resuscitators
designed for use in emergency situations to provide lung ventilation to those
individuals with impaired respiratory function have been marketed by the Company
for some time with the versatile PMR(R) 2 being marketed since 1980. In October
1989, the Company introduced its Disposable Manual Resuscitator (DMR) as a cost-
effective way to provide infection control on patients who require manual
resuscitation.
MEDICAL GASES: The production and distribution of medical gases represents the
Company's oldest product line. The Company is the largest producer of nitrous
oxide in North America. This gas is used in anesthesia and analgesia and is sold
by the Company under its own label and through other distributors. The Company
also distributes other medical gases, including oxygen, Sodalime (used to absorb
CO2 during anesthesia) and special gas mixtures that are used for calibration,
testing, and other purposes.
The Company now has 27 U.S. locations for transfilling and distributing
medical gases. From these locations the Company also serves home care providers
with bulk liquid oxygen. Three new locations were added in FY 1995 and other
locations may be added in the future as opportunities
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become available. The Company's long standing involvement in the gas industry
has also helped it develop international home care markets, where industrial gas
companies represent important distribution channels.
PB100 SPIROMETER: This small, hand held spirometer offers true portability.
The patient data memory card and the rechargeable batteries allow testing of
multiple patients at off-site locations. The base station is used for
downloading patient information to a choice of printers along with the option of
sending patient data to a computer. A disposable pneumotach eliminates cleaning
and minimizes the risk of cross-infection for both patients and staff. Marketed
under the name of Renaissance(R) Spirometry System, orders and shipments began
for this product in December 1991. In February 1995, the Company introduced a
new software feature for the Renaissance system that helps customers store,
analyze and manage the growing amount of diagnostic data now available to them.
The spirometry product line is manufactured in the Company's facility in the
Republic of Ireland.
AERO SYSTEMS: The Company is the primary supplier of chemical oxygen
generators and passenger air valves for the Boeing 737, 757, 767 and 777 and for
all current models of the European Airbus; oxygen distribution manifolds and air
valves for the Boeing 747 and 777; passenger masks for the Boeing 777; oxygen
systems for the Dutch Fokker 70 and 100, the German Dornier Do328, the British
Aerospace 146 and the Canadian RJ. The Company also supplies passenger service
units for the British Aerospace Jetstream 41 and the Swedish SAAB 2000. Market
response to the Sweep-On 2000(R), inflatable harness crew mask, continues to be
very strong with an increasing number of aircraft manufacturers selecting the
equipment as standard equipment for various models of aircraft. The Company also
supplies oxygen equipment and passenger service units for numerous aircraft in
the commuter and business aircraft market.
Airborne Closed Circuit Television (ACCTV(TM)), the small video systems
business acquired in FY 1994, experienced significant growth and its first
profitable year. The product provides remote viewing of internal and external
areas of an aircraft both in visual and infrared light for aircraft safety
purposes, as well as providing landscape camera views for passenger
entertainment. The program for the drogue-chute deployment monitoring system for
the McDonnell Douglas C-17 military transport is well underway with the delivery
of systems for 23 aircraft. Various combinations of landscape viewing, and
security and safety systems were installed in Boeing 747 and 767, Gulfstream IV,
and several Airbus aircraft models. Interest in ACCTV products is very strong
with many major airlines actively considering system installations on existing
aircraft.
Despite continued softness in the aviation market, FY 1995 orders increased
12% (to nearly $32 million) and revenues 31% (to nearly $31 million) over FY
1994 levels. Profitability also improved.
MARKETING AND SALES
The Company's U.S. hospital sales and service organization consists of
approximately 190 people who are responsible for marketing to approximately
5,000 acute care hospitals in the
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United States. The Company has also established direct hospital sales
organizations in Canada, England and Wales, Italy, France, and Germany.
The Company also employs a direct sales force of over 40 people who sell to
home care providers throughout the United States. Some of these sales
representatives also are involved in the sale of medical gases and gas
distribution/administration products. Additional sales personnel market medical
gas and gas distribution/administration products only.
The Company has targeted the international market as an important growth
opportunity. During FY 1995, international business accounted for about 33.7% of
the Company's total revenues. The Company conducts its sales in foreign
countries through its headquarters in Kansas and international sales offices
located in California, Canada, Great Britain, France, Hong Kong, Malaysia,
Argentina, Australia, Italy, Finland, Germany, Taiwan and Puerto Rico. Direct
sales organizations exist in Great Britain, Canada, France, Italy, and Germany.
The home care delivery systems of many foreign countries are far less developed
than in the U.S. The Company expects foreign countries to expand their home care
delivery systems, in part because home care is more cost-effective than hospital
care.
In an effort to strengthen its development of its international business, the
Company is positioning itself for further growth. Channels of distribution are
presently being strengthened for significant, long-term growth opportunities in
Mexico. The manufacturing operation the Company maintains in Tijuana continues
to grow. In addition, during FY 1994, the Company acquired a hospital products
distributor in Germany and in January 1994 acquired SEFAM S.A. and its 80% owned
Lit Dupont subsidiary expanding the Company's international business.
Foreign and export sales for fiscal years ending January 31, 1995, 1994 and
1993 totaled approximately $113,261,000, $86,702,000 and $94,185,000,
respectively. These sales were not concentrated in a specific geographic area.
(The information contained in Note 12 to the consolidated financial statements
on pages 38 and 39 of the Puritan-Bennett Annual Report to Stockholders for
fiscal year ending January 31, 1995 is incorporated herein by reference.)
A material part of the business of the Company is not dependent upon a single
customer or a very few customers (no single customer accounts for 10% or more of
consolidated sales), the loss of any one of which would not have a materially
adverse effect on the Company.
The Company's operations constitute one significant, reportable industry
segment consisting predominantly of the design, manufacture, and distribution of
specialized products related to respiration.
Sales by the Company of classes of similar products which, for the last three
fiscal years, contributed 10% or more of net sales are as follows:
Bennett products accounted for approximately 36%, 35% and 39% of net sales for
FY 1995, FY 1994 and FY 1993, respectively.
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Medical gas products accounted for approximately 12%, 13% and 12% of net sales
for FY 1995, FY 1994 and FY 1993, respectively.
Home care products accounted for approximately 37%, 36% and 31% of net sales
for FY 1995, FY 1994 and FY 1993, respectively.
Order back-log as of March 31, 1995 was approximately $79,148,000 compared to
$78,452,000 for March 31, 1994. All back-log is expected to be shipped during FY
1996, with the exception of approximately $192,000 within the Aero product line.
The Company is not subject to material seasonal fluctuations in business nor
is any portion of the business subject to renegotiation of profits or
termination of contracts at the election of the U.S. Government.
RAW MATERIALS
Raw materials and supplies are purchased by the Company from such diverse
industry sources as chemicals, machine components, plastic resins, electronics
and private label products and a variety of original equipment manufacturers and
suppliers. These materials have been readily available throughout the past year,
and the Company has no reason to believe that it cannot continue to obtain such
materials as needed. While the Company typically makes purchases pursuant to
multi-year contracts, it does utilize single source suppliers for a limited
number of specific component parts for its products. In addition, the Company
itself produces components made from a wide variety of raw materials that are
generally available in quantity from alternate sources of supply.
PATENTS AND TRADEMARKS
While the Company has several patents, patent applications and trademarks
relating to its products, it does not consider its business to be dependent upon
the protection of any of these or any group thereof, or that its operations
would be materially affected by the expiration or loss of any of them. In the
Company's opinion, its design, manufacturing and marketing skills, experience,
and reputation are more responsible for its industry position than its patents
or licenses.
COMPETITION
The Company competes actively with numerous other companies that manufacture
and sell products in the same markets, some of which are divisions of
substantially larger companies in terms of their total sales (taking into
account sales of non-competitive products) and assets than the Company. The
Company believes that it is one of the leaders in the market for products
related to respiration. The principal methods of competition in the Company's
main business areas are the products' contribution and support to patient care,
as well as the quality of the product and service support to the customer.
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RESEARCH AND DEVELOPMENT
The Company expended approximately $19,978,000 in FY 1995, $24,887,000 in FY
1994 and $25,849,000 in FY 1993, on research and development activities. The
decrease resulted entirely from the elimination of the intra-arterial blood gas
monitoring product line. These amounts have been utilized to improve existing
products, expand the applications of existing products, and develop new
products. All of this activity is Company-sponsored.
GOVERNMENT REGULATION
The manufacture and sale of the Company's principal products are subject to
regulation by the U.S. Food and Drug Administration (FDA). Under the Federal
Food, Drug, and Cosmetic Act, FDA regulates a wide spectrum of device
manufacturers' operations, including manufacturing processes, and the
introduction of new devices and improvements to existing devices. FDA
administers a system under which device manufacturers, distributors and users
are required to submit reports of adverse device experience. The Company's
facilities and operations are subject to unscheduled FDA inspections.
FDA can ban certain medical devices, detain or seize "adulterated or
misbranded" medical devices and order repair, replacement or refund and require
notification of health professionals and others, with regard to medical devices
that present unreasonable risks of substantial harm to the public health. FDA
also can order cessation of shipment and recall of a medical device by the
manufacturer if there are serious adverse health consequences or death.
FDA can impose civil money penalties for certain violations of the law
relating to medical devices, and can proceed through court action to enjoin and
restrain certain violations of the Federal Food, Drug, and Cosmetic Act
pertaining to medical devices or initiate criminal prosecutions for such
violations without proving criminal intent. If FDA determines that a
manufacturer is in substantial noncompliance with FDA's good manufacturing
practices regulation, the Agency can withhold product approvals (premarket
approval applications and supplements and Section 510(k) notifications) with
respect to the manufacturer's devices, and can notify the Veterans
Administration and other U.S. government agencies of such noncompliance. Such
notification may lead to a cessation of purchases of the manufacturer's devices
by the notified agencies. FDA has proposed new regulations governing good
manufacturing practices, which if adopted in their proposed form would further
increase the costs of regulatory compliance.
Increasingly stringent regulation of medical device manufacturers by FDA in
recent years is reflected in a significant reduction in the number of new
products and improvements to existing products that the Agency has cleared for
commercial release, corresponding increases in approval times, and in recent
enforcement actions by the Agency. FDA has given high priority to surveillance
and enforcement activities related to device manufacturers, especially
manufacturers of critical care devices such as Puritan-Bennett. FDA may take
stringent regulatory action upon finding deficiencies during inspections, or
upon learning of product performance problems. Lengthened product approval
times, intensified regulatory enforcement and the expense of
12
<PAGE>
compliance with FDA requirements have increased substantially the risks
associated with manufacturing and marketing medical devices in the United
States.
In January 1994, the Company entered into a consent decree with FDA under
which the Company agrees to maintain systems and procedures complying with FDA
regulations in all of its device manufacturing facilities. Under the decree,
domestic shipments of portable ventilator products and intra-arterial blood gas
(IABG) monitoring systems are suspended until FDA is satisfied with the
Company's manufacturing practices for such products. Under certain
circumstances, the consent decree permits export of such products.
The Company has decided to discontinue U.S. portable ventilator manufacturing
and is shifting production to Ireland to serve the international market. The
Company also has discontinued IABG monitoring systems production.
As the Company increases its emphasis on export sales and overseas
manufacturing of its products, device laws and regulations of other countries
will have an increasing impact on the Company's business. Such laws and
regulations vary greatly from country to country, and include comprehensive
premarket approval requirements in some countries. Throughout the world, the
trend is toward increasing device regulation.
OTHER INFORMATION
On October 6, 1994, the Company received an unsolicited letter from Thermo
Electron Corporation proposing to acquire all of the outstanding common stock of
the Company in a merger transaction for $21 per share in cash. After receiving
an opinion from its financial advisor, Smith Barney Inc., on October 10, 1994,
the Company rejected Thermo Electron Corporation's unsolicited proposal to
acquire the Company for $21 per share in cash as grossly inadequate and not in
the best interests of the Company and its shareholders other than Thermo
Electron Corporation. On October 12, 1994, Thermo Electron Corporation raised
its bid to $24 per share in cash. On October 25, 1994, Thermo Electron
Corporation launched a tender offer to acquire all of the outstanding shares of
the Company's common stock for $24.50 per share in cash expiring on November 22,
1994, subject to a number of conditions. On November 7, 1994, after receiving an
opinion from Smith Barney Inc., the Board of Directors of the Company
unanimously determined that the unsolicited tender offer from Thermo Electron
Corporation to acquire the Company for $24.50 per share in cash was not in the
best interests of the Company and its stockholders. Accordingly, the Board
recommended that stockholders reject the offer and not tender their shares to
Thermo Electron Corporation. On November 23, 1994, Thermo Electron Corporation
extended the tender offer to November 28, 1994 and then again to December 8,
1994. On December 9, 1994, Thermo Electron Corporation terminated its tender
offer without purchasing any shares. See Item 3. Legal Proceedings.
As of March 1, 1995, the Company employed approximately 2,700 employees
worldwide.
There has been no material effect on the capital expenditures, earnings, and
competitive position of the Company because of compliance with federal, state,
and local provisions regulating
13
<PAGE>
the discharge of materials into the environment or otherwise relating to the
protection of the environment.
The Company owns 56% of Medicomp, Inc., a Florida corporation that develops,
manufactures, and distributes ambulatory cardiac monitors. These solid state
devices perform real-time analysis of 24-hours of cardiac data captured through
dual channel electrodes. Real-time analysis is done by a microprocessor as data
are recorded, which allows physicians to review results within minutes.
In 1990, the Company established its first European manufacturing operation in
Galway, Republic of Ireland. The Company now maintains a manufacturing presence
within the European Community in a financially advantageous location. Its size
and scope is helping to serve the Company's European customers better,
preserving full access to these customers as the "1992 process" continues to
unfold in the European Community and improving overall financial performance. In
May 1992, the Company purchased an approximate 82,500 square foot facility in
Galway, Republic of Ireland. The Company had rented approximately half of the
facility at the time of purchase. After taking into consideration previously
announced capital grants from the Irish Development Authority, the net cost was
approximately $2.7 million.
In April 1993, the Company acquired a German distributor (Hoyer
Medizintechnik) for $10.5 million. The information contained in Note 14 to the
consolidated financial statements on page 40 of the Puritan-Bennett Annual
Report to Stockholders for FY 1995 is incorporated herein by reference.
In late January 1994, the Company acquired a French supplier of diagnostic and
therapeutic sleep products (SEFAM S.A.) for a total of $21.6 million of which
$12.9 million was paid in cash, with the remainder paid through the issuance of
426,929 shares of the Company's common stock. The information contained in Note
14 to the consolidated financial statements on page 40 of the Puritan-Bennett
Annual Report to Stockholders for FY 1995 is incorporated herein by reference.
ITEM 2. PROPERTIES
- ------------------
The Company's executive offices, occupying approximately 31,618 square feet,
are located in Building No. 40, 9401 Indian Creek Parkway, Overland Park,
Kansas, and are leased by the Company. Manufacturing and research facilities are
located in Lenexa, Kansas; Fountain Valley and Carlsbad, California; Wilmington,
Massachusetts; Indianapolis, Indiana; St. Louis, Missouri; Melbourne, Florida;
Nancy and Lyon, France; Galway, Republic of Ireland and Tijuana, Mexico. The
Company considers that its properties are generally in good condition, are well
maintained and are generally suitable and adequate to carry on the Company's
business.
The Lenexa plant is located on 30 acres of land and contains approximately
116,000 square feet, the Fountain Valley plant contains approximately 24,000
square feet, the Carlsbad facility contains approximately 225,000 square feet,
the Ireland facility contains approximately 82,500 square feet, and the Nancy,
France facility contains approximately 29,700 square feet. All of these Company-
owned plant locations contain both office and manufacturing space.
14
<PAGE>
The Wilmington plant contains approximately 16,200 square feet, the
Indianapolis facility contains approximately 68,400 square feet, the St. Louis
facility contains approximately 70,000 square feet, the Lenexa facility contains
approximately 25,400 square feet, the Melbourne facility contains approximately
21,000 square feet, the Tijuana, Mexico facility contains approximately 22,000
square feet and the Lyon, France facility contains approximately 28,600 square
feet. All of these Company-leased facilities contain both manufacturing and
office space with allocations for warehouse facilities. These leases will expire
or be extended at varying dates between the present and June 2011.
The Company produces nitrous oxide at facilities located in Galena, Kansas;
Maitland, Ontario; Pensacola, Florida and Richmond, California. Those
facilities, other than the one Company-owned location in California, are leased
from and located adjacent to its supplier of ammonium nitrate.
The Company also maintains 37 sales and/or service offices and warehouse
facilities worldwide of which 28 are leased and 9 are owned. The Company
considers that all facilities whether owned or leased are well maintained and in
good operating condition.
The Company owns approximately 27 acres of undeveloped land located in Rancho
Bernardo, California. As the Company's need for the Rancho Bernardo property has
significantly diminished, the Company continues to actively market this asset.
In fourth quarter fiscal year 1993, the Company entered into an agreement
whereby it constructed an approximately 72,000 square foot, build-to-suit
facility in the St. Louis area for its oxygen concentrator business. This leased
facility, with an option to purchase, replaces a smaller leased facility in the
same general area.
The Company previously announced it had started planning for a facility
suitable for its longer-term requirements in the Kansas City area. The Company
is moving forward on obtaining the facility site funded by selling, as the
market conditions permit, real estate and other assets that are no longer part
of the Company's long-term plans such as the unused land in Lenexa, Kansas and
Rancho Bernardo, California and the vacant El Segundo, California facility.
However, the remainder of the project has been indefinitely postponed.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
On October 7, 1994, a purported class action complaint entitled Kenneth
Steiner v. Puritan-Bennett Corp., Burton A. Dole, Jr., C. Phillip Larson, Jr.,
Andre F. Marion, Thomas A. McDonnell, Daniel C. Weary, Frank P. Wilton, C.A. No.
13790 (the "Steiner Complaint"), was filed against the Company and its directors
in the Court of Chancery of the State of Delaware in and for New Castle County
(the "Chancery Court"), alleging, among other things, that the defendants have
breached their fiduciary duties to the Company's stockholders as a result of the
defendants' adoption of a Rights Agreement dated on or about May 17, 1989 and
the directors' refusal to properly consider Thermo Electron Corporation's
initial proposal to acquire all
15
<PAGE>
outstanding shares of the Company's common stock. Among other things, the
Steiner Complaint seeks an order directing the Company's directors to carry out
their fiduciary duties to the Company's stockholders by cooperating fully with
Thermo Electron Corporation or any other entity or person having a bona fide
interest in proposing any extraordinary transactions with the Company, including
a merger or acquisition of the Company, as well as damages and costs. On October
24 and 28, 1994, respectively, two purported class action complaints entitled
Louise Kovacs v. Puritan-Bennett Corp., et al., C.A. No. 13828 (the "Kovacs
Complaint"), and Charles Miller v. Puritan-Bennett Corporation, et al., C.A. No.
13839 (the "Miller Complaint"), were filed against the Company and its directors
in the Chancery Court, alleging, among other things, that the defendants have
breached their fiduciary duties to the Company's stockholders as a result of the
defendants' refusal to properly consider Thermo Electron Corporation's proposals
to acquire all outstanding shares of the Company's common stock. The material
allegations and prayers for relief contained in each of these complaints are
substantially similar to those contained in the Steiner Complaint filed earlier
against the Company and its directors. On or about December 5, 1994, the
plaintiffs in each of the above actions filed a first amended and consolidated
complaint which contains material allegations and a prayer for relief that are
substantially similar to those contained in the above described complaints.
On November 28, 1994, counsel to plaintiffs in each of the Steiner, Kovacs and
Miller actions filed an application in the Chancery Court requesting, among
other things, that the court schedule a hearing on plaintiffs' motion for a
preliminary injunction, which motion was filed on November 29, 1994. Plaintiffs'
motion for a preliminary injunction sought an order (i) compelling the
defendants to meet with representatives of Thermo Electron Corporation to
discuss the terms of the tender offer and (ii) declaring null and void certain
provisions of certain executive agreements, severance agreements,
indemnification agreements and the Company's employee benefit plans and
arrangements. On December 6, 1994, the Chancery Court issued a letter opinion in
which the Chancery Court declined to schedule a hearing on plaintiff's motion.
Citing the "substantial costs and disruption" to the defendants and the public
of an expedited preliminary injunction proceeding, the Chancery Court found that
the threatened "injury" alleged by the plaintiffs "is too speculative to warrant
intervention at this time."
Since the Chancery Court's December 6, 1994 ruling, the parties have engaged
in discovery. The director defendants believe that they have fulfilled their
fiduciary duties to the Company and its shareholders and intend to continue to
do so. The Company and the director defendants intend to defend these actions
vigorously. See Other Information in Item 1.
Except as described above, neither the Company nor any of its subsidiaries is
involved in any material pending litigation other than ordinary routine
proceedings incident to their business.
16
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
There were no matters submitted to a vote of security holders during the
fourth quarter ending January 31, 1995.
17
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
---------------------------------
<TABLE>
<CAPTION>
Year
First
Name Office Age Elected
-------- ---------- --- -------
<S> <C> <C> <C>
Burton A. Dole Jr. Chairman of the Board, President and
Chief Executive Officer 57 1980
John H. Morrow Executive Vice President and Chief
Operating Officer 50 1979
Robert L. Doyle Sr. Vice President, Marketing 52 1988
Thomas E. Jones Sr. Vice President, General Manager
Puritan Group 51 1989
Alexander R. Rankin Sr. Vice President, General Manager
Bennett Group 59 1993
Lee A. Robbins Vice President, Chief Financial Officer
and Controller 53 1985
Derl S. Treff Treasurer and Assistant Secretary 52 1985
Daniel C. Weary Secretary and Director 67 1968
</TABLE>
The term of office of all executive officers is one year and extends until
the next Annual Meeting of the Board of Directors, generally at the time of the
Annual Meeting of Stockholders.
The business experience of executive officers of the Company during the
past five years is as follows:
Burton A. Dole Jr. President, Chief Executive Officer and Director of Company
since 1980. Subsequently elected Chairman of the Board in
1986.
John H. Morrow Vice President of Company since 1979. Executive Vice
President and Chief Operating Officer since 1989.
Robert L. Doyle Vice President of Company since 1988. Senior Vice President
since 1988.
Thomas E. Jones General Manager of Lenexa Division through May 1989. Elected
Vice President in May 1989. Currently General Manager of
Puritan Group. Senior Vice President since April 1993.
Alexander R. Rankin Group Manufacturing Manager and General Manager of
Massachusetts Medical Manufacturing Operation for Hewlett-
Packard Company Medical Products Group through March 1993.
Elected Vice President, Bennett Group Manager as of April
1993. Senior Vice President since April 1995.
Lee A. Robbins Corporate Controller of Company since December 1985. As of
July 1986, Chief Financial Officer. Elected Vice President
in May 1990.
Derl S. Treff Treasurer and Assistant Secretary of the Company since July
1985.
Daniel C. Weary Secretary of Company since October 1968. Also partner in the
law firm of Blackwell Sanders Matheny Weary and Lombardi
L.C. of Kansas City, Missouri.
18
<PAGE>
Part II
-------
Item 5. Market for Company's Common Equity and Related Stockholder Matters.
- ---------------------------------------------------------------------------
The information in Note 8 to the consolidated financial statements on
page 37 and information on pages 27 and 55 of the Puritan-Bennett Annual Report
to Stockholders for FY 1995 is incorporated herein by reference. During FY 1995
and FY 1994, the Company declared dividends of $.12 per share.
Item 6. Selected Financial Data.
- --------------------------------
The information in the Ten-Year Summary on pages 22 and 23 of the
Puritan-Bennett Annual Report to Stockholders for FY 1995 is incorporated herein
by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations.
- --------------
The information in Management's Discussion and Analysis of Results of
Operations and Financial Condition on pages 42 through 52 of the Puritan-Bennett
Annual Report to Stockholders for FY 1995 is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
- ----------------------------------------------------
The consolidated financial statements, together with the report
thereon of independent accountants, dated March 6, 1995, on pages 24 through 41
of the Puritan-Bennett Annual Report to Stockholders for FY 1995 are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure.
- ---------------------
There are no changes or disagreements to report.
19
<PAGE>
PART III
--------
Item 10. Directors and Executive Officers of the Company.
- ---------------------------------------------------------
All information required by this item is incorporated herein by
reference from the Company's proxy statement, which will be filed within 120
days of January 31, 1995, except with respect to executive officers of the
Company.
The unnumbered item, "Executive Officers of the Company", following
Item 4, Part I is incorporated by reference.
Item 11. Executive Compensation.
- --------------------------------
All information required by this item is incorporated herein by
reference from the Company's proxy statement, which will be filed within 120
days of January 31, 1995.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------------------------------------------------------------------------
All information required by this item is incorporated herein by
reference from the Company's proxy statement, which will be filed within 120
days of January 31, 1995.
Item 13. Certain Relationships and Related Transactions.
- --------------------------------------------------------
All information required by this item is incorporated herein by
reference from the Company's proxy statement, which will be filed within 120
days of January 31, 1995.
Item 405. Compliance with Section 16(a) of the Exchange Act.
- -----------------------------------------------------------
All information required by this item is incorporated herein by
reference from the Company's proxy statement, which will be filed within 120
days of January 31, 1995.
PART IV
-------
Item 14. Exhibits. Financial Statement Schedules and Reports on Form 8-K.
- -------------------------------------------------------------------------
(a) (1) and (2)--List of Financial Statements and Financial Statement
Schedules:
The following consolidated financial statements of Puritan-Bennett
Corporation and Subsidiaries, included in the Puritan-Bennett Annual
Report to Stockholders for fiscal year ending January 31, 1995, are
incorporated by reference in Item 8.
20
<PAGE>
Consolidated Balance Sheets - January 31, 1995 and 1994 (incorporated herein by
reference to page 25 of the Puritan-Bennett Annual Report to Stockholders for
fiscal year ending January 31, 1995).
Consolidated Statements of Operations - Years ended January 31, 1995, 1994 and
1993 (incorporated herein by reference to page 26 of the Puritan-Bennett Annual
Report to Stockholders for fiscal year ending January 31, 1995).
Consolidated Statements of Stockholders' Equity - Years ended January 31, 1995,
1994 and 1993 (incorporated herein by reference to page 27 of the Puritan-
Bennett Annual Report to Stockholders for fiscal year ending January 31, 1995).
Consolidated Statements of Cash Flows - Years ended January 31, 1995, 1994 and
1993 (incorporated herein by reference to page 28 of the Puritan-Bennett Annual
Report to Stockholders for fiscal year ending January 31, 1995).
Notes to Consolidated Financial Statements - January 31, 1995 (incorporated
herein by reference to pages 29 through 41 of the Puritan-Bennett Annual Report
to Stockholders for fiscal year ending January 31, 1995).
The following Consolidated Financial Statement Schedules of the Puritan-Bennett
Corporation and Subsidiaries are included in Item 14(d):
Schedule VIII - Valuation and Qualifying Accounts - Years ended January 31,
1995, 1994 and 1993.
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
(3)--Listing of Exhibits
Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index
which is incorporated herein by reference.
21
<PAGE>
(b) Reports on Form 8-K
-------------------
No Form 8-K was filed during the quarter ending January 31, 1995.
(c) Exhibits
--------
The response to this portion of Item 14 is submitted as a separate section
to this report.
(d) Financial Statement Schedules
-----------------------------
The response to this portion of Item 14 is submitted as a separate section
of this report.
22
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PURITAN-BENNETT CORPORATION
-------------------------------
(Registrant)
4/5/95 /s/ Burton A. Dole Jr.
--------------------------
Date Burton A. Dole Jr.
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
/s/ Burton A. Dole Jr. 4/5/95 /s/ Daniel C. Weary 4/5/95
- -------------------------------------- --------------------------------------
Burton A. Dole Jr. Date Daniel C. Weary Date
Chairman of the Board, Director
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Charles A. Duboc 4/5/95 /s/ Frank P. Wilton 4/5/95
- -------------------------------------- --------------------------------------
Charles A. Duboc Date Frank P. Wilton Date
Director Director
/s/ Lee A. Robbins 4/5/95
- --------------------------------------
Lee A. Robbins Date
Vice President, Chief Financial
Officer and Controller
(Principal Financial Officer and
Principal Accounting Officer)
23
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
- ----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
--------------------------------------
DESCRIPTION Balance at Begin- (1) (2) Deductions-Describe Balance at End
ning of Period Charged to Costs Charged to Other of Period
and Expenses Accounts - Describe
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year Ended January 31, 1995:
Allowances deducted from
asset accounts:
Allowance for doubtful accounts $1,760,966 663,885 __ 1,088,756(A) $1,336,095
Inventory reserves $7,155,690 2,211,810 3,088,539(G) 2,609,904(B) $9,846,135
Deferred revenue $9,961,795 __ 3,939,454 3,006,054 $10,895,195(C)
Tax Valuation $15,696,000 5,412,000 __ __ $21,108,000
Year Ended January 31, 1994:
Allowances deducted from
asset accounts:
Allowance for doubtful accounts $645,590 928,658 408,868(E) 222,150(A) $1,760,966
Inventory reserves $1,502,182 2,683,723 4,717,959(F) 1,748,174(B) $7,155,690
Deferred revenue $5,531,088 __ 5,774,744 1,344,037 $9,961,795(C)
Tax Valuation $0 11,148,000 4,548,000(D) __ $15,696,000
Year Ended January 31, 1993:
Allowances deducted from
asset accounts:
Allowance for doubtful accounts $546,126 449,426 __ 349,962(A) $645,590
Inventory reserves $3,026,118 995,415 __ 2,519,351(B) $1,502,182
Deferred revenue $3,058,780 __ 3,079,308 607,000 $5,531,088(C)
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS - CONTINUED
<S> <C>
(A) Represents accounts written off, net of recoveries.
(B) Represents inventory disposed of or otherwise written off.
(C) Relates to extended warranty agreements offered by the company which are amortized over the life of the agreement with the
related warranty costs charged to expense as incurred.
(D) This amount was recorded in the cumulative effect at the date of adoption of SFAS 109.
(E) Write-downs related to restructuring ($207,000) and the sale of the Company's home care services business in South Florida
($201,868).
(F) Write-down related to restructuring.
(G) Related to returned goods expensed through the FY 1994 restructuring charge.
</TABLE>
25
<PAGE>
EXHIBIT INDEX
EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION
(NUMBER AND DESCRIPTION OF EXHIBIT)
(2) (a) Stock Purchase Agreement dated December 14, 1993 included in Form
8-K dated January 28, 1994, and incorporated herein by reference.
(3) (a) Restated Certificate of Incorporation as amended on May 7, 1987,
included in Annual Report for 1987 on Form 10-K and incorporated
herein by reference.
(b) Amendment of Certificate of Incorporation filed June 6, 1990 with the
Delaware Secretary of State included in Form 10-Q for the Quarter
ended June 30, 1990 and incorporated herein by reference.
(c) By-laws adopted on July 31, 1991, included in Form 10-Q for the
Quarter ended September 30, 1991 and incorporated herein by reference.
(4) (a) Shareholder Rights Agreement dated May 2, 1989, included in Form 8-K
dated May 15, 1989 and incorporated herein by reference.
(b) Amendment Agreement dated as of October 27, 1994, between the Company
and UMB Bank, N.A., amending the Rights Agreement dated as of May 2,
1989, included in Form 10-Q for the Quarter ended October 31, 1994 and
incorporated herein by reference.
Long-term debt instruments of the Company in amounts not exceeding 10% of
the total assets of the Company and its Subsidiaries on a consolidated
basis will be furnished to the Commission upon request.
(10) (a)* Employment agreement - Burton A. Dole, Jr. included in the Annual
Report for fiscal year 1994 on Form 10-K and incorporated herein by
reference.
(b)* 1979 Employee Stock Benefit Plan (as amended and restated through the
eighth amendment) and the ninth amendment thereto included in the
Annual Report for 1989 on Form 10-K and incorporated herein by
reference.
(c)* Management Incentive Compensation Plan A, as amended.
(d)* (i) Supplemental Retirement Benefit Plan, included in the Annual
Report for 1985 on Form 10-K and incorporated herein by reference.
26
<PAGE>
* (ii) Agreement dated August 13, 1993 between the Company and Burton A.
Dole, Jr., included in the Annual Report for fiscal year 1994 on Form
10-K and incorporated herein by reference.
* (iii) Agreement dated August 10, 1993, between the Company and John H.
Morrow included in the Annual Report for fiscal year 1994 on Form 10-K
and incorporated herein by reference.
* (iv) First Amendment to the Puritan-Bennett Supplemental Retirement
Benefit Plan included in Form 10-Q for the Quarter ended October 31,
1994 and incorporated herein by reference.
* (v) Second Amendment to the Puritan-Bennett Supplemental Retirement
Benefit Plan included in Form 10-Q for the Quarter ended July 31, 1994
and included herein by reference.
* (vi) Third Amendment to the Puritan-Bennett Supplemental Retirement
Benefit Plan included in Form 10-Q for the Quarter ended October 31,
1994 and incorporated herein by reference.
* (vii) SERP Agreement dated November 7, 1994, between Burton A. Dole
Jr. and the Company included in Form 10-Q for the Quarter ended
October 31, 1994 and incorporated herein by reference.
* (vii) SERP Agreement dated November 7, 1994, between John H. Morrow
and the Company included in Form 10-Q for the Quarter ended
October 31, 1994 and incorporated herein by reference.
(e)* (i) Employment Agreement Between the Company and John H. Morrow dated
June 9, 1994 included in Form 10-Q for the Quarter ended October 31,
1994 and incorporated herein by reference.
* (ii) Supplemental Agreement dated November 7, 1994, between John H.
Morrow and the Company included in Form 10-Q for the Quarter ended
October 31, 1994 and incorporated herein by reference.
(f)* (i) Restated Deferred Compensation Plan included in the Annual Report
for fiscal year 1994 on Form 10-K and incorporated herein by
reference.
* (ii) First Amendment to the Restated Puritan-Bennett Deferred
Compensation Plan included in Form 10-Q for the Quarter ended
October 31, 1994 and incorporated herein by reference.
27
<PAGE>
(g)* (i) Amended and restated Retirement Plan for Non-Employee Directors
included in Form 10-Q for the Quarter ended September 30, 1991, and
incorporated herein by reference.
* (ii) Amendment Adopted on November 6, 1994, to the Puritan-Bennett
Corporation Retirement Plan for Non-Employee Directors included in
Form 10-Q for the Quarter ended October 31, 1994 and incorporated
herein by reference.
(h)* (i) 1988 Employee Stock Benefit Plan, as amended, included in the
Annual Report for fiscal year 1993 on Form 10-K and incorporated
herein by reference.
* (ii) Amendment Adopted on November 6, 1994, to Puritan-Bennett 1988
Employee Stock Benefit Plan included in Form 10-Q for the Quarter
ended October 31, 1994, and incorporated herein by reference.
(i)* Promissory note dated December 19, 1991, between the Company and
Robert L. and Melanie M. Doyle included in the Annual Report for 1991
on Form 10-K and incorporated herein by reference.
(j)* Promissory note dated June 21, 1993 between the Company and
Alexander R. and Suzanne D. Rankin included in the Annual Report for
1994 on Form 10-K and incorporated herein by reference.
(k)* Indemnification Agreement among the Company and its Directors
included in the Annual Report for fiscal year 1994 on Form 10-K and
incorporated herein by reference
(l)* (i) Pension Benefit Make Up Plan included in Form 10-Q for the Quarter
ended July 31, 1994 and incorporated herein by reference.
* (ii) First Amendment to the Puritan-Bennett Corporation Pension
Benefit Make Up Plan included in Form 10-Q for the Quarter ended
October 31, 1994 and incorporated herein by reference.
(m)* Executive Agreement, dated November 7, 1994, between Robert L. Doyle
and the Company included in Form 10-Q for the Quarter ended
October 31, 1994 and incorporated herein by reference.
(n)* Executive Agreement, dated November 7, 1994, between Thomas E. Jones
and the Company included in Form 10-Q for the Quarter ended
October 31, 1994 and incorporated herein by reference.
28
<PAGE>
(o)* Executive Agreement, dated November 7, 1994, between Alexander R.
Rankin and the Company included in Form 10-Q for the Quarter ended
October 31, 1994 and incorporated herein by reference.
(P)* Executive Agreement, dated November 7, 1994, between David P. Niles
and the Company included in Form 10-Q for the Quarter ended October
31, 1994 and incorporated herein by reference.
(q)* Severance Agreement, dated November 7, 1994, between Lee A. Robbins
and the Company included in Form 10-Q for the Quarter ended October
31, 1994 and incorporated herein by reference.
(r)* Severance Agreement, dated November 7, 1994, between Derl S. Treff and
the Company included in Form 10-Q for the Quarter ended October 31,
1994 and incorporated herein by reference.
(s) Lease of residential real estate dated August 30, 1994, between
Robert Doyle and the Company.
(11) Statement re: Computation of Per Share Earnings.
(13) Excerpts of the Puritan-Bennett Corporation Annual Report to Stockholders
for fiscal year ending January 31, 1995.
(21) Subsidiaries of the Company.
(23) Consent of Independent Accountants.
(27) Financial Data Schedule.
* Represents a management contract or compensatory plan or arrangement.
(All other exhibits are inapplicable)
Copies of the above exhibits are available upon written request to the
Stockholder Services Department, Puritan-Bennett Corporation, 9401
Indian Creek Parkway, Overland Park, Kansas 66210.
29
<PAGE>
EXHIBIT 10 (c)
PURITAN-BENNETT CORPORATION
MANAGEMENT INCENTIVE COMPENSATION PLAN A
(REVISED APRIL 4, 1995)
Puritan-Bennett's Incentive Compensation Plan A has been established to
provide an incentive to key managers (other than quality and regulatory affairs
professionals, who are covered by Plan B) to attain the highest financial
performance possible each year. This Plan recognizes that other vehicles exist
to encourage building shareholder value over longer periods of time. The Plan
provides key managers with an opportunity to add to their total cash
compensation if prescribed levels of return on assets are attained but only to
the extent that FY 1996 Earnings Per Share still equals at least $2.00 per share
after incentive compensation accruals but before any additional charges from
Thermo Electron's unsolicited tender offer or similar matters. The Plan is
designed to retain and reward capable managers and to align their interests with
the interests of shareholders by recognizing financial performance by
groups/divisions and on a corporate basis. Details of the Plan follow:
I. Management Incentive Compensation Calculation.
----------------------------------------------
Incentive compensation targets for each participant in the Plan will be
established upon entrance of the participants into the Plan using the
percentage of salary guidelines prescribed in Attachment A and reviewed
periodically. To achieve target, both the corporation and, in case of the
group/divisional personnel, the individual group/division must attain a
prescribed Return on Assets (ROA) as defined in Tables I and II. For FY
1996, the 1987 Corporate ROA schedule and factors continue to apply except
that the
1
<PAGE>
ROA schedule has been converted to an after-tax schedule at a 35%
tax rate. This change was made at both the Corporate and group/division
levels in recognition of the fact that our decision to establish a
manufacturing operation in Ireland tends to decrease pretax profits but
decrease taxes also. For FY 1996, Table I is intended to be all inclusive
(i.e., include Medicomp, any unused land or major building program in-
progress assets, and the vacant El Segundo, California facility) except for
any additional charges from Thermo Electron's unsolicited tender offer or
similar matters. Table II applies to the Bennett Group, the Puritan Group,
and Aero Systems, and is intended to exclude Medicomp and any unused land
(Carlsbad, Rancho Bernardo, Cedar Creek, and Lenexa), or any major building
program in-progress assets. For the corporation, ROA has been defined as
the pre-incentive after-tax annual profit, excluding certain extraordinary
gains and losses, divided by the sum of the ending total assets for each
quarter, in turn divided by four.
For the groups/divisions, ROA has been defined as the pre-incentive after-
tax profit (after Corporate unallocated expenses, primarily interest, are
allocated to the groups/divisions), excluding certain extraordinary gains
and losses, divided by the ending sum of inventory, receivables, net fixed
assets and Corporate assets (except for unused land and buildings as
discussed above) not directly identifiable to a particular group/division
(which are allocated to such group/division) for each quarter, in turn
divided by four. Such unidentifiable corporate assets are allocated based
on the ratio of the sales of the respective group/division to total
corporate sales. P-B Ireland and P-B Mexico assets will be allocated
directly to the groups/divisions where such assets are so identifiable;
unidentifiable Ireland and Mexico assets will be allocated based upon the
mix of Ireland
2
<PAGE>
and Mexico inter-company sales. Corporate unallocated expenses are prorated
among the groups/divisions based on their ratios of group/division assets
to total corporate assets.
For FY 1996, the ROA formula calculation determines 100% of a participant's
cash incentive compensation. In the formula calculation, incentive
compensation payouts for all group/division participants will be weighted
40% based on Corporate ROA and 60% on group/divisional ROA. For all
others, the incentive computation will be based 100% on Corporate ROA.
An example of an incentive calculation is set forth in Appendix I.
The maximum cash incentive payment to each participant in the plan is
limited to 100% of the current year's earned salary (excluding incentive).
II. Administration
--------------
a) Selection of Participants and Incentive Compensation Levels
-----------------------------------------------------------
Selection of participants and incentive target levels will be
established by the CEO and/or COO, subject to Board Compensation
Committee and full Board approval for certain individuals.
b) Determination of Incentive Award
--------------------------------
Following the completion of the year-end audit, the actual cash
incentive compensation amount for each participant will be calculated
according to the ROA formula.
c) Approval by Compensation Committee
----------------------------------
The Compensation Committee of the Board of Directors will approve
proposed incentive compensation payments for the Chairman and CEO, all
Corporate Officers and all managers reporting to the CEO, whether or
not they are Corporate
3
<PAGE>
Officers. The CEO and/or COO will approve all other proposed incentive
payments. The CEO/COO and the Compensation Committee reserve the right
to withhold some or all of the cash incentive amounts otherwise earned
under the financial/ROA formula in cases of significant shortcomings
with respect to quality and regulatory compliance systems and
procedures. In the event that (because of the FY 1996 $2.00 EPS floor)
incentive compensation amounts calculated under the ROA formula can be
paid partially but not fully, then such amounts will be reduced by the
same percentage for all Plan A participants.
d) Communication
Participants will be informed of their incentive targets during April
of the February-January fiscal year.
e) Other Considerations
--------------------
1. Incentive awards will be paid only to participants who are
actively
employed as of the incentive calculation date (January 31).
2. Profit for incentive determination will be inclusive of any
changes in reserves, but will normally exclude any capital gains
or losses and other unusual gains or losses such as proceeds of
fire or casualty insurance. For FY 1996, any additional charges
from Thermo Electron's unsolicited tender offer or similar matters
are to be excluded. In cases of uncertainty, the decision of the
CEO will be final.
3. The addition of new participants, including new employees, to the
plan during the year and the target levels of these individuals,
must be approved initially by the CEO and/or COO and in selected
cases (officers
4
<PAGE>
and non-officer direct reports to the CEO) by the Compensation
Committee. Any changes for participants, regardless of the reason,
(promotion, change of responsibility, upgrading of salary in the
same position) must be similarly approved. In any case, approval
must be obtained prior to communication to the individual
concerned.
4. Unless otherwise approved by the CEO and/or COO, this Incentive
Compensation Plan will be the sole cash incentive plan under which
participants included in this Plan shall be compensated.
5. In the event of the routine retirement of a participant during
the fiscal year, the amount of incentive award will be based on
the number of months worked as a percent of the full year and
will reflect results of the full year.
6. The Board of Directors and its Compensation Committee reserve
the right to modify this Plan retroactively to the beginning of
the year.
5
<PAGE>
ATTACHMENT A
PURITAN-BENNETT CORPORATION
Management Incentive
<TABLE>
<CAPTION>
Incentive Target Level
Category: (% of Salary)
<S> <C> <C> <C>
A. Chairman, President 35 - 65%
B. Senior Corporate Officers 25 - 50%
C. Heads of substantial 15 - 30%
business units and other
officers
D. Other key managers Up to 25%
</TABLE>
6
<PAGE>
TABLE I
RETURN ON ASSETS INCENTIVE SCHEDULE
<TABLE>
<CAPTION>
Corporate 1987
Pre-Incentive Pre Tax Pre-Incentive After-Tax Corporate and Beyond
- ----------------------------- ---------------------------- -----------------------
At Least Not More Than At Least Not More Than 1985 1986
<S> <C> <C> <C> <C> <C> <C>
5.0 5.5 3.2 3.6 .400 0 0
5.5 6.0 3.6 3.9 .475 0 0
6.0 6.5 3.9 4.2 .550 0 0
6.5 7.0 4.2 4.6 .625 0 .025
7.0 7.5 4.6 4.9 .700 .400 .100
7.5 8.0 4.9 5.2 .775 .500 .175
8.0 8.5 5.2 5.5 .850 .600 .250
8.5 9.0 5.5 5.8 .925 .700 .325
-------
9.0 9.5 5.8 6.2 1.000 .800 .400
-------
9.5 10.0 6.2 6.5 1.050 .900 .475
====================================================================================================================
-------
10.0 10.5 6.5 6.8 1.100 1.000 .550
-------
10.5 11.0 6.8 7.2 1.150 1.050 .625
11.0 11.5 7.2 7.5 1.200 1.100 .700
11.5 12.0 7.5 7.8 1.250 1.150 .775
12.0 12.5 7.8 8.1 1.300 1.200 .850
-------
12.5 13.0 8.1 8.4 1.350 1.250 1.000
-------
13.0 13.5 8.4 8.8 1.400 1.300 1.100
13.5 14.0 8.8 9.1 1.450 1.350 1.200
-------
14.0 14.5 9.1 9.4 1.500 1.400 1.300
-------
14.5 15.0 9.4 9.8 1.550 1.450 1.400
====================================================================================================================
------- -------
15.0 15.5 9.8 10.1 1.600 1.500 1.500
------- -------
15.5 16.0 10.1 10.4 1.650 1.550 1.600
16.0 16.5 10.4 10.7 1.700 1.600 1.700
16.5 17.0 10.7 11.0 1.750 1.650 1.800
17.0 17.5 11.0 11.4 1.800 1.700 1.900
-------
17.5 18.0 11.4 11.7 1.850 1.750 2.000
-------
18.0 18.5 11.7 12.0 1.900 1.800 2.071
18.5 19.0 12.0 12.4 1.950 1.850 2.143
-------
19.0 19.5 12.4 12.7 2.000 1.900 2.214
-------
19.5 20.0 12.7 13.0 2.050 1.950 2.286
====================================================================================================================
-------
20.0 20.5 13.0 13.3 2.050 2.000 2.357
-------
20.5 21.0 13.3 13.6 2.050 2.100 2.429
21.0 21.5 13.6 14.0 2.050 2.200 2.500
21.5 22.0 14.0 14.3 2.050 2.300 2.572
22.0 22.5 14.3 14.6 2.050 2.400 2.643
-------
22.5 23.0 14.6 15.0 2.050 2.500 2.715
-------
23.0 23.5 15.0 15.3 2.050 2.500 2.786
23.5 24.0 15.3 15.6 2.050 2.500 2.858
24.0 24.5 15.6 15.9 2.050 2.500 2.929
-------
24.5 25.0 15.9 16.2 2.050 2.500 3.000
-------
====================================================================================================================
25.0 or higher 16.2 or higher 2.050 2.500 3.000
</TABLE>
7
<PAGE>
TABLE II
RETURN ON ASSETS INCENTIVE SCHEDULE
<TABLE>
<CAPTION>
Business Unit Results (Puritan
Group, Bennett Group and Aero
Pre-Incentive Pre Tax Pre-Incentive After-Tax Puritan Group Systems) for 1990 and Beyond
- ----------------------------- ---------------------------- ------------------------- -------------------------------
At Least Not More Than At Least Not More Than 1986 1987-1989
<S> <C> <C> <C> <C> <C> <C>
7.0 7.5 4.6 4.9 0 0 0
7.5 8.0 4.9 5.2 0 0 .063
8.0 8.5 5.2 5.5 0 0 .125
8.5 9.0 5.5 5.8 0 0 .188
9.0 9.5 5.8 6.2 0 0 .250
9.5 10.0 6.2 6.5 0 0 .313
====================================================================================================================
10.0 10.5 6.5 6.8 0 0 .375
10.5 11.0 6.8 7.2 0 0 .438
11.0 11.5 7.2 7.5 .400 .400 .500
11.5 12.0 7.5 7.8 .475 .475 .563
12.0 12.5 7.8 8.1 .550 .550 .625
12.5 13.0 8.1 8.4 .625 .625 .688
13.0 13.5 8.4 8.8 .700 .700 .750
13.5 14.0 8.8 9.1 .775 .775 .813
14.0 14.5 9.1 9.4 .850 .850 .875
14.5 15.0 9.4 9.8 .925 .925 .938
====================================================================================================================
------- ------- -------
15.0 15.5 9.8 10.1 1.000 1.000 1.000
------- ------- -------
15.5 16.0 10.1 10.4 1.075 1.067 1.063
16.0 16.5 10.4 10.7 1.150 1.134 1.125
16.5 17.0 10.7 11.0 1.225 1.201 1.188
17.0 17.5 11.0 11.4 1.300 1.268 1.250
17.5 18.0 11.4 11.7 1.375 1.335 1.313
-------
18.0 18.5 11.7 12.0 1.450 1.402 1.375
-------
18.5 19.0 12.0 12.4 1.525 1.469 1.438
------- -------
19.0 19.5 12.4 12.7 1.600 1.536 1.500
------- -------
19.5 20.0 12.7 13.0 1.675 1.603 1.563
====================================================================================================================
20.0 20.5 13.0 13.3 1.750 1.670 1.625
20.5 21.0 13.3 13.6 1.825 1.737 1.688
21.0 21.5 13.6 14.0 1.900 1.804 1.750
-------
21.5 22.0 14.0 14.3 1.975 1.871 1.813
22.0 22.5 14.3 14.6 2.050 1.938 1.875
------- -------
22.5 23.0 14.6 15.0 2.050 2.005 1.938
------- -------
23.0 23.5 15.0 15.3 2.050 2.072 2.000
-------
23.5 24.0 15.3 15.6 2.050 2.139 2.063
24.0 24.5 15.6 15.9 2.050 2.206 2.125
24.5 25.0 15.9 16.2 2.050 2.273 2.188
====================================================================================================================
25.0 25.5 16.2 16.6 2.050 2.340 2.250
25.5 26.0 16.6 16.9 2.050 2.407 2.313
-------
26.0 26.5 16.9 17.2 2.050 2.474 2.375
26.5 27.0 17.2 17.6 2.050 2.541 2.438
------- -------
27.0 27.5 17.6 17.9 2.050 2.608 2.500
-------
27.5 28.0 17.9 18.2 2.050 2.675 2.563
28.0 28.5 18.2 18.5 2.050 2.742 2.625
28.5 29.0 18.5 18.8 2.050 2.809 2.688
29.0 29.5 18.8 19.2 2.050 2.876 2.750
29.5 30.0 19.2 19.5 2.050 2.943 2.813
====================================================================================================================
-------
30.0 30.5 19.5 19.8 2.050 3.000 2.875
-------
30.5 to 31.0 19.8 20.2 2.050 3.000 2.938
-------
31.0 or higher 20.2 or higher 2.050 3.000 3.000
-------
</TABLE>
8
<PAGE>
APPENDIX I
ILLUSTRATIVE EXAMPLE
<TABLE>
<CAPTION>
PARTICIPANT - - A
BUSINESS UNIT - - PURITAN GROUP, BENNETT GROUP
and AERO SYSTEMS
Incentive ROA Incentive Incentive
Allocation X Schedule = Percent Earned
<S> <C> <C> <C>
After-Tax
ROA Formula - -
Business Unit 9.9% 60% 1.00 60.0%
----
Corporate 8.3% 40% 1.00 40.0%
--- ---- ----
100% 100.0%
TARGET % OF SALARY 15.0%
----
PAYOUT % OF SALARY 15.0%
----
EARNED SALARY - - FY 1996 $70,000
-------
INCENTIVE EARNED $10,500
-------
</TABLE>
9
<PAGE>
L E A S E EXHIBIT 10(s)
---------
THIS LEASE, made as of this 30th day of August, 1994, by and
between ROBERT DOYLE, with an address at 1104 Summit Tree Parkway,
Duluth, Georgia 30136 (herein called "Owner"), and PURITAN-BENNETT
CORPORATION, with an address at 9401 Indian Creek Parkway, Overland
Park, Kansas 66225 (herein called "Tenant");
WITNESSETH:
That for and in consideration of their mutual covenants
hereinafter contained, the parties hereto agree and bind themselves as
follows:
Section 1. Premises.
--------------------
Owner leases to Tenant and Tenant rents from Owner the residence,
adjacent yard, and furniture and equipment located therein, if any,
described as 2008 South Pacific, Oceanside, California (the
"Premises").
Section 2. Term.
----------------
The term of this Lease shall be for a period of two years and
shall commence on September 1, 1994, and shall expire on August 30,
1996.
Section 3. Rent.
----------------
Tenant agrees to pay to Owner, without prior demand therefor and
without any deduction or offset whatsoever, as rent hereunder, the sum
of Two Thousand Five Hundred and No/100 Dollars ($2,500.00) per month
each month of the term of this Lease, and to pay the same on the first
day of each month, in advance, at the address of Owner as set forth
above.
Section 4. Right of Entry.
--------------------------
Owner shall have the right to enter the Premises at reasonable
hours in order to inspect the Premises, make repairs, decorations,
alterations or improvements, supply services or exhibit the Premises
to prospective or actual purchasers, mortgagees, tenants or workmen.
Owner shall have the right to keep a "For Sale" sign displayed on the
Premises.
Section 5. Condition of the Premises.
--------------------------------------
Tenant is fully familiar with the physical condition of the
Premises, and Owner has made no representations as to the condition of
the Premises or the fitness or suitability of the Premises for any
particular use, and Tenant shall accept the Premises in an "as is"
condition.
Section 6. Use of Premises.
---------------------------
Tenant shall use the Premises solely as a private residence, and
not place any signs or advertisements on the Premises. Tenant shall
not keep birds, dogs, cats or other animals or pets on the Premises
without the prior written consent of Owner. Tenant shall keep all
sidewalks, entrances and doorways free from obstructions, and shall
not permit anything to be done on the Premise that will annoy,
embarrass, inconvenience, or damage owner or Tenant's neighbors.
Section 7. Utility Charges; Taxes.
----------------------------------
(A) Tenant shall promptly pay all charges for water, electricity,
heat, gas or any other utility consumed on the Premises, and shall
contract for the same in its own name.
(B) Owner shall pay all real estate taxes, special assessments
and homeowners association dues (if any) levied on the Premises.
Section 8. Indemnification by Tenant; Release of Landlord.
-----------------------------------------------------------
(A) To the extent allowed by law, Tenant will protect, indemnify
and save harmless Owner from and against all liabilities, obligations,
claims, damages, penalties, causes of action, costs and expenses
(including, without limitation, attorneys' fees) arising or occurring
during the term of this Lease or any period during which Tenant is
occupying the Premises by reason of
<PAGE>
(i) any damage to the Premises caused directly or indirectly, wholly
or in part, by Tenant, its employees, agents, guests or invitees;
(ii) any accident, injury to or death of persons or loss of or damage
to property occurring on or about the Premises or any part
thereof or the adjoining streets or ways;
(iii) any use, nonuse or condition of the Premises or any part
thereof or the adjoining street or ways;
(iv) any failure on the part of Tenant to perform or comply with any
of the terms of this Lease; or
(v) the performance of any labor or services or the furnishing of any
materials or other property in respect of the Premises or any
part thereof.
In case any such action, suit or proceeding is brought against Owner by reason
of any such occurrence, Tenant, upon Owner's request, will, at Tenant's expense,
resist and defend such action, suit or proceeding, or cause the same to be
resisted and defended by counsel designated by Tenant and approved by Owner.
The obligations of Tenant as aforesaid shall survive any termination of the
Lease.
(B) To the extent allowed by law, neither Owner nor any of his heirs or
representatives shall be liable or responsible for any harm, loss, damage or
injury suffered or incurred by Tenant, any guest of Tenant, or any other party,
regardless of the reason or cause thereof.
Section 9. Tenant's Right to Assign and Sublet.
- -----------------------------------------------
Tenant shall not assign this Lease or sublet all or any part of the
Premises without the prior written consent of Owner.
Section 10. Waste or Nuisance and Compliance With Laws.
- -------------------------------------------------------
Tenant shall not commit nor suffer to be committed any waste upon the
Premises, or any nuisance, and Tenant shall hold Owner harmless with respect to
a breach of this covenant.
Section 11. Alterations.
- ------------------------
Tenant shall not make or cause to be made any alterations, changes or
additions to the Premises without the prior written consent of Owner.
Section 12. Repairs.
- --------------------
Tenant shall, at its cost, maintain and keep the Premises in a good and
clean condition (including, but not limited to, yard care) and shall obey all
laws, ordinances and regulations affecting the Premises.
Section 13. Additional Rules.
- -----------------------------
In addition to the covenants contained in this Lease, Tenant agrees to
abide by the following rules:
(A) All commodes and other water apparatus shall not be used for any
purpose other than that for which they were constructed, and no sweepings,
rubbish, rags, papers, ashes or other substances shall be thrown therein. Any
damage resulting to them from misuse of any nature or character whatever shall
be paid for by Tenant.
(B) No tacks, screws, hooks or nails shall be driven into the walls or
woodwork of the Premises without the prior consent of Owner.
(C) There shall be no cooking or baking done except in the kitchen.
(D) Tenant shall not interfere in any manner with any portion of the
heating or lighting apparatus in or about the Premises.
(E) No additional locks shall be placed upon any door of the Premises
without the consent of Owner, and in the event that additional locks are so
placed upon any door of the Premises, said locks shall be left in place when the
Premises are surrendered to Owner.
-2-
<PAGE>
(F) All other rules adopted from time to time by Owner.
Section 14. Destruction of Premises.
- ------------------------------------
If the Premises shall be destroyed or damaged by fire or other casualty so
as to become untenantable, either party may terminate this Lease by giving
notice of the intention to do so within ten (10) days after such casualty. If
neither party elects to terminate this Lease, or if the Premises shall not be
rendered untenantable by such casualty, Owner shall, subject to the obligation
of Tenant under Section 8(A) above, and otherwise to the extent of the insurance
proceeds from such casualty, proceed to repair the Premises, and during such
period of repair there shall be no abatement of rent, unless the Premises have
been rendered untenantable, in which case rent shall abate until completion of
Owner's repair.
Section 15. Mechanics Liens.
- ----------------------------
Tenant shall not cause or permit Owner's estate to be made subject to any
mechanic's or materialmen's lien or to any other lien or liability under the
lien laws of the state in which the Premises is located, but if such liens are
filed, Tenant shall immediately discharge or pay the same, at Tenant's cost.
Section 16. Default Provisions.
- -------------------------------
If default shall be made by Tenant in the due and punctual payment of any
rent or other charge due under this Lease when and as the same shall become due
and payable, and such default shall continue for a period of ten (10) days after
written notice thereof from Owner to Tenant, then Owner shall have the right, at
Owner's election, without further notice or demand to Tenant, to terminate this
Lease and to enter into and upon the Premises and take possession of the same,
and Owner may hold and retain the Premises as of its first or former estate. If
Owner takes possession of the Premises in accordance herewith, Owner shall be
entitled to recover damage from Tenant on account of Tenant's default as
provided by law.
Section 17. Surrender, Removal and Restoration by Tenant.
- ---------------------------------------------------------
On the last day of the term or on the sooner termination thereof, Tenant
shall (i) peaceably surrender the Premises (including all repairs, changes,
alterations, building equipment and furniture owned by Owner therein) broom-
clean and in good order, condition and repair except for reasonable wear and
tear, and (ii) at its expense remove from the Premises all of Tenant's furniture
and other personal property therein, and any such property not so removed may,
at Owner's election and without limiting Owner's right to compel removal
thereof, be deemed abandoned.
Section 18. Hold Over.
- ----------------------
In the event Tenant remains in possession of the Premises after expiration
of the tenancy created hereunder, Tenant, at the option of Owner, shall be
deemed to be occupying the Premises as a tenant from month-to-month, at the rent
set forth in Section 3 above, subject to all the other conditions, provisions
and obligations of this Lease as the same are applicable to a month-to-month
tenancy; provided, however, nothing set forth herein shall be construed as an
authorization by Owner to Tenant to hold over under this Lease.
Section 19. Sale of Premises.
- -----------------------------
In the event that Owner shall receive an offer to purchase the Premises,
Owner shall have the right to terminate this Lease upon thirty days' notice to
Tenant. Tenant shall surrender the Premises to Owner on the date specified in
such notice in accordance with the provisions of Section 17 above.
Section 20. Remedies Cumulative.
- --------------------------------
Owner's and Tenant's rights and remedies shall be cumulative and may be
exercised and enforced concurrently. Any right or remedy conferred upon Owner
or Tenant under this Lease shall not be deemed to be exclusive of any other
right or remedy it may have.
Section 21. Waiver.
- -------------------
The waiver by Owner or Tenant of any breach of any term, covenant or
condition herein contained shall not be deemed to be a waiver of any
-3-
<PAGE>
subsequent breach of the same or any other term, covenant or condition herein
contained. No covenant, term or condition of this Lease shall be deemed to have
been waived unless such waiver be in writing, signed by the party charge
therewith.
Section 22. Notices.
- --------------------
Whenever any notice is required or permitted under this Lease, such notice
shall be in writing. All notices by Tenant to Owner shall be sent to Owner by
registered or certified mail, at the address of Owner and Tenant first
hereinabove given, or to such other address(es) as Owner or Tenant may later
designate in writing. All notices shall be deemed given as of the date of
mailing in accordance with the foregoing provisions.
Section 23. Entire Agreement.
- -----------------------------
This Lease sets forth all the covenants, promises, agreements, conditions
and understandings between owner and Tenant concerning the Premises. There are
no oral agreements or understandings between the parties hereto affecting this
Lease, and this Lease supersedes and cancels any and all previous negotiations,
arrangements, agreements and understandings, if any, between the parties hereto
with respect to the subject matters hereof, and none thereof shall be used to
interpret or construe this Lease.
Section 24. Survival.
- ---------------------
Any obligation of Tenant, which by its nature involves performance after
the end of the term, shall survive the expiration of the term. The covenants
herein contained shall run with the Premises and bind the heirs, executors,
administrators, assigns and successors, of Owner and Tenant respectively.
Section 25. Insurance.
- ----------------------
Owner shall be responsible for maintaining property and general liability
insurance on the Premises. Owner shall not be obligated to carry insurance on
Tenant's personal property, and it is suggested that Tenant obtain insurance to
cover any damage or loss.
IN WITNESS WHEREOF, the parties hereto have executed this Lease the date
first above written.
OWNER:
/s/ Robert Doyle
----------------------------------------
Robert Doyle
TENANT: PURITAN-BENNETT CORPORATION
By: /s/ L. A. Robbins
-------------------------------------
Name: L.A. Robbins
-----------------------------------
Title: Vice President & Chief Financial Officer
-----------------------------------------
-4-
<PAGE>
<TABLE>
<CAPTION>
STATEMENT REGARDING COMPUTATION EXHIBIT (11)
OF PER SHARE EARNINGS
QUARTER ENDING YEAR ENDING
JANUARY 31 JANUARY 31
------------------------- -------------------------
1995 1994 1995 1994
========================= =========================
<S> <C> <C> <C> <C>
PRIMARY
Weighted average shares outstanding at end of period 12,566,862 12,080,319 12,508,718 11,955,957
Assuming exercise of options reduced by the number of
shares which could have been purchased with the
proceeds from exercise 66,406 (285,197) 42,044 (161,998)
------------------------- -------------------------
Shares outstanding for computation of per share earnings 12,633,268 11,795,122 12,550,762 11,793,959
========================= =========================
Net income $1,069,000 $(29,548,000) $8,397,000 $(34,669,000)
========================= =========================
Primary earnings per share $0.08 $(2.51) $0.67 $(2.94)
========================= =========================
FULLY DILUTED
Weighted average shares outstanding at end of period 12,566,862 12,080,319 12,508,718 11,955,957
Assuming exercise of options reduced by the number of
shares which could have been purchased with the
proceeds from exercise 66,406 (90,333) 92,398 (89,259)
------------------------- -------------------------
Shares outstanding for computation of per share earnings 12,633,268 11,989,986 12,601,116 11,866,698
========================= =========================
Net income $1,069,000 $(29,548,000) $8,397,000 $(34,669,000)
========================= =========================
Fully diluted earnings per share $0.08 $(2.46) $0.67 $(2.92)
========================= =========================
REPORTED EARNINGS PER SHARE $0.08 $(2.47) $0.67 $(2.90)
========================= =========================
The company does not meet the 3% dilution test contained in Accounting Principles Board Opinion #15, therefore
disclosure of diluted earnings per share on the face of the condensed consolidated statements of operations is not
required.
</TABLE>
<PAGE>
PURITAN-BENNETT CORPORATION AND SUBSIDIARIES
FINANCIAL
REPORT
FISCAL YEAR 1995
<TABLE>
<CAPTION>
<S> <C>
Incoming Orders, Net Sales and Net Income (Loss) Per Share.. 21
Ten-Year Summary............................................ 22
Management's Responsibility for Financial Statements........ 24
Report of Independent Auditors.............................. 24
Consolidated Balance Sheets................................. 25
Consolidated Statements of Operations....................... 26
Consolidated Statements of Stockholders' Equity............. 27
Consolidated Statements of Cash Flow........................ 28
Notes to Consolidated Financial Statements.................. 29
Supplemental Information for the Ten-Year Summary........... 41
Management's Discussion and Analysis of Results of
Operations and Financial Condition........................ 42
</TABLE>
Incoming Orders, Net Sales ($ Millions) and Net Income (Loss) Per Share
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FY 1994 FY 1995
------------------------------------- -------------------------------------
Apr. 30 July 31 Oct. 31 Jan. 31 APR. 30 JULY 31 OCT. 31 JAN. 31
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MEDICAL - Orders $65.4 $75.6 $69.9 $ 85.0 $71.9 $76.2 $74.9 $82.9
Net Sales 69.4 71.9 69.6 75.0 73.7 77.2 74.9 79.5
AERO - Orders 5.6 7.0 5.1 10.4 8.2 6.0 8.1 9.2
Net Sales 6.0 6.0 5.7 5.7 6.7 6.8 8.5 8.7
TOTAL - Orders $71.0 $82.6 $75.0 $ 95.4 $80.1 $82.2 $83.0 $92.1
Net Sales 75.4 77.9 75.3 80.7 80.4 84.0 83.4 88.2
BACKLOG INCREASE
(DECREASE) $(4.4) $ 4.7 $(0.3) $ 14.7 $ (.3) $ (1.8) $(0.4) $ 3.9
NET INCOME (LOSS) BEFORE
CUMULATIVE EFFECT
PER SHARE $ .15 $(.41) $ .06 $(2.46) $ .30 $ .34 $(.05) $ .08
CUMULATIVE EFFECT OF
ACCOUNTING CHANGES
PER SHARE $(.23) $ -- $ -- $ (.01) $ -- $ -- $ -- $ --
NET INCOME (LOSS) PER SHARE $(.08) $(.41) $ .06 $(2.47) $ .30 $ .34 $(.05) $ .08
- ---------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
TEN-YEAR SUMMARY
PURITAN-BENNETT CORPORATION AND SUBSIDIARIES
All dollar amounts in thousands, except common share data
<TABLE>
<CAPTION>
Transition
1995 1994 1993 Period
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING RESULTS
Net Sales
Puritan Group $184,101 172,438 146,420 9,833
Bennett Group 121,269 113,399 128,442 7,901
Aero Systems 30,656 23,418 25,198 1,948
Industrial Division -- -- -- --
-------- ------- ------- -------
Total Net Sales 336,026 309,255 300,060 19,682
Gross Profit 139,639 128,671 130,152 7,153
Selling and
Administrative Expense 96,112 95,756 83,178 6,326
Research and Development
Expense 19,978 24,887 25,849 2,361
Restructuring Charges 2,654 43,169 -- --
-------- ------- ------- -------
Operating Profit (Loss) 20,895 (35,141) 21,125 (1,534)
Costs Associated with an
Unsolicited Offer to
Acquire the Company (5,049) -- -- --
Other Income (Expense) (4,478) (4,017) (2,718) (639)
-------- ------- ------- -------
Income (Loss) Before
Income Taxes 11,368 (39,158) 18,407 (2,173)
Income Tax Provision
(Benefit) 2,970 (7,379) 3,812 118
-------- ------- ------- -------
Net Income (Loss) Before
Cumulative Effect 8,398 (31,779) 14,595 (2,291)
Cumulative Effect of
Accounting Changes -- (2,890) -- (3,059)
-------- ------- ------- -------
Net Income (Loss) $ 8,398 (34,669) 14,595 (5,350)
======== ======= ======= =======
- -----------------------------------------------------------------------------
FINANCIAL STATISTICS
Gross Profit 41.6% 41.6 43.4 36.3
Effective Tax Rate 26.1% -- 20.7 --
Net Income As a
Percentage of Sales 2.5% -- 4.9 --
Long-Term Debt to Total
Capital 31.7% 26.4 24.3 22.9
Return on Average
Stockholders' Equity 7.5% -- 11.7 --
Return on Average Assets 3.2% -- 6.5 --
Current Ratio 2.0 1.6 2.8 2.8
Average Asset Turnover 1.3 1.2 1.3 --
- -----------------------------------------------------------------------------
COMMON SHARE DATA
Net Income (Loss) Before
Cumulative Effect $ 0.67 (2.66) 1.24 (0.20)
Cumulative Effect of
Accounting Changes $ -- (0.24) -- (0.26)
Net Income (Loss) $ 0.67 (2.90) 1.24 (0.46)
Dividends Declared $ 0.12 0.12 0.12 --
Net Book Value $ 9.32 8.67 11.23 9.91
Weighted-Average Shares
Outstanding 12,509 11,956 11,812 11,633
- -----------------------------------------------------------------------------
OTHER DATA
Net Working Capital $ 73,572 51,882 81,086 68,534
Long-Term Debt $ 54,492 38,656 42,840 34,510
Stockholders' Equity $117,284 107,712 133,723 115,920
Capital Expenditures $ 18,097 15,727 22,882 --
Total Assets $273,135 256,594 244,408 206,331
- -----------------------------------------------------------------------------
</TABLE>
See Page 41 for the supplemental information for the ten-year summary.
22
<PAGE>
<TABLE>
<CAPTION>
1991 1990 1989 1988 1987 1986 1985
- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
116,994 100,993 86,178 77,043 69,272 64,558 49,803
112,314 120,268 110,892 107,240 86,433 67,553 58,948
26,814 30,615 29,724 20,117 17,026 17,607 13,283
-- -- -- -- -- -- 1,961
- ------- ------- ------- ------- ------- ------- -------
256,122 251,876 226,794 204,400 172,731 149,718 123,995
100,340 113,062 104,348 91,572 79,863 63,675 49,846
75,763 69,831 63,873 60,544 50,637 44,633 38,143
24,137 19,682 15,238 13,327 9,681 7,367 5,763
-- -- -- -- -- -- --
- ------- ------- ------- ------- ------- ------- -------
440 23,549 25,237 17,701 19,545 11,675 5,940
-- -- -- -- -- -- --
(3,162) (334) (850) 3,876 (161) 7,217 1,325
- ------- ------- ------- ------- ------- ------- -------
(2,722) 23,215 24,387 21,577 19,384 18,892 7,265
(3,296) 7,342 8,389 7,438 8,297 7,952 2,337
- ------- ------- ------- ------- ------- ------- -------
574 15,873 15,998 14,139 11,087 10,940 4,928
-- -- -- -- -- -- --
- ------- ------- ------- ------- ------- ------- -------
574 15,873 15,998 14,139 11,087 10,940 4,928
======= ======= ======= ======= ======= ======= =======
- ------------------------------------------------------------------
39.2 44.9 46.0 44.8 46.2 42.5 40.2
-- 31.6 34.4 34.5 42.8 42.1 32.2
0.2 6.3 7.1 6.9 6.4 7.3 4.0
22.2 22.9 17.4 20.7 8.1 10.3 2.4
0.5 14.6 17.4 18.4 17.4 18.0 8.2
0.3 8.9 10.5 11.1 10.5 11.7 5.3
2.8 3.8 3.1 3.3 2.3 2.4 2.7
1.3 1.4 1.5 1.6 1.6 1.6 1.3
- ------------------------------------------------------------------
0.05 1.39 1.42 1.27 1.00 0.99 0.40
-- -- -- -- -- -- --
0.05 1.39 1.42 1.27 1.00 0.99 0.40
0.12 0.12 0.11 0.11 0.11 0.10 0.10
10.35 10.20 8.82 7.48 6.26 5.30 4.98
11,617 11,451 11,297 11,168 11,057 11,087 12,470
- ------------------------------------------------------------------
70,847 81,405 64,308 60,309 40,997 37,841 34,896
34,510 34,926 21,121 21,883 6,100 6,723 1,577
120,929 117,368 100,432 83,921 69,476 58,234 63,030
26,545 24,928 12,401 19,046 13,098 6,757 5,049
208,788 193,157 163,549 140,886 114,533 97,300 90,508
- ------------------------------------------------------------------
</TABLE>
23
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
PURITAN-BENNETT CORPORATION AND SUBSIDIARIES
The consolidated financial statements and related footnotes on the following
pages have been prepared in conformity with generally accepted accounting
principles. The integrity and objectivity of data in these consolidated
financial statements, including estimates in judgments relating to matters not
concluded by year-end, are the primary responsibility of management. Financial
information included elsewhere in this Annual Report is consistent with the
consolidated financial statements. The opinion of Ernst & Young LLP, the
Company's independent auditors, on the consolidated financial statements is
included herein.
Puritan-Bennett Corporation and subsidiaries maintain internal accounting
control systems designed to provide reasonable assurance that assets are
safeguarded, that transactions are executed in accordance with management's
authorization and are properly recorded and that accounting records are adequate
for preparation of financial statements and other financial information. The
systems are tested and evaluated regularly by the Company's internal auditors as
well as by the independent auditors in connection with their annual audit. The
design, monitoring and revision of internal accounting control systems involve,
among other things, management's judgment with respect to the relative costs and
expected benefits of specific control measures.
The adequacy of the Company's internal financial controls and the accounting
principles employed in financial reporting are under the general surveillance of
the Audit Committee of the Board of Directors, consisting of three outside
directors. The independent auditors and corporate internal auditors meet
periodically with the committee to discuss accounting, auditing and financial
reporting matters. The committee also recommends to the directors the
designation and fees of the independent auditors. The independent auditors have
direct access to the Audit Committee, with or without the presence of management
representatives, to discuss the scope and results of their audit work and their
comments, on the adequacy of internal accounting controls and the quality of
financial reporting.
/s/ Burton A. Dole Jr. /s/ Lee A. Robbins
Burton A. Dole Jr. Lee A. Robbins
Chairman, President and Vice President, Chief Financial
Chief Executive Officer Officer and Controller
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Puritan-Bennett Corporation
We have audited the accompanying consolidated balance sheets of Puritan-
Bennett Corporation and subsidiaries as of January 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended January 31, 1995. 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Puritan-Bennett
Corporation and subsidiaries at January 31, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended January 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, during the
year ended January 31, 1994, the company changed its method of accounting for
income taxes, postretirement benefits and postemployment benefits.
/s/ Ernst & Young LLP
Kansas City, Missouri
March 6, 1995
24
<PAGE>
CONSOLIDATED BALANCE SHEETS
PURITAN-BENNETT CORPORATION AND SUBSIDIARIES
Dollars in thousands, except per share data
<TABLE>
<CAPTION>
January 31
1995 1994
------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,802 $ 713
Trade notes and accounts receivable, less allowance for doubtful accounts
(1995--$1,336; 1994--$1,761) 73,346 70,137
Inventories 57,541 47,470
Prepaid expenses and other 4,416 5,567
Deferred income tax benefits 6,628 10,760
-------- --------
Total Current Assets 144,733 134,647
Plant and Equipment, Net 92,360 88,893
Other Assets:
Patents--at cost, less accumulated amortization (1995--$920; 1994--$762) 1,809 1,682
Cost in excess of amounts assigned to net assets of businesses acquired, less
accumulated amortization (1995--$3,605; 1994--$1,677) 22,445 24,355
Deferred income tax benefits 3,483 --
Other assets 8,305 7,017
-------- --------
Total Other Assets 36,042 33,054
-------- --------
Total Assets $273,135 $256,594
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 18,004 $ 27,791
Trade accounts payable 16,619 13,937
Employee compensation, payroll taxes and withholdings 8,575 8,015
Accrued self-insurance expenses 950 1,299
Other accrued expenses 14,589 21,140
Dividends payable 377 359
Income taxes payable 2,520 3,678
Current maturities of long-term debt 9,527 6,546
-------- --------
Total Current Liabilities 71,161 82,765
Long-Term Debt, less current maturities 54,492 38,656
Deferred Compensation and Pensions 19,303 17,444
Deferred Income Taxes -- 55
Deferred Revenue 10,895 9,962
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $1.00 per share--authorized 30,000,000 shares; issued
and outstanding, 12,581,412 shares in 1995 and 12,427,653 shares in 1994 12,581 12,428
Additional paid-in capital 37,629 34,794
Retained earnings 68,322 61,736
Deferred stock awards (1,248) (602)
Treasury stock, 36,809 shares in 1994 -- (644)
-------- --------
Total Stockholders' Equity 117,284 107,712
-------- --------
Total Liabilities and Stockholders' Equity $273,135 $256,594
======== ========
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
PURITAN-BENNETT CORPORATION AND SUBSIDIARIES
Dollars in thousands, except per share data
<TABLE>
<CAPTION>
Year Ended January 31
1995 1994 1993
------------------------------------
<S> <C> <C> <C>
Net Sales $ 336,026 $ 309,255 $ 300,060
Cost of Goods Sold 196,387 180,584 169,908
---------- ---------- ----------
Gross Profit 139,639 128,671 130,152
Selling and Administrative Expense 96,112 95,756 83,178
Research and Development Expense 19,978 24,887 25,849
Restructuring Charges 2,654 43,169 --
---------- ---------- ----------
Operating Profit (Loss) 20,895 (35,141) 21,125
Other Income (Expense)
Interest Income 372 477 572
Interest Expense (5,830) (4,565) (3,720)
Costs Associated with an Unsolicited Offer
to Acquire the Company (5,049) -- --
Miscellaneous, Net 980 71 430
---------- ---------- ----------
Total Other Income (Expense) (9,527) (4,017) (2,718)
---------- ---------- ----------
Income (Loss) Before Income Taxes
and Cumulative Effect 11,368 (39,158) 18,407
Provision for (Benefit from) Income Taxes 2,970 (7,379) 3,812
---------- ---------- ----------
Net Income (Loss) Before Cumulative Effect
of Accounting Changes 8,398 (31,779) 14,595
Cumulative Effect of Accounting Changes
(Net of Income Taxes) -- (2,890) --
---------- ---------- ----------
Net Income (Loss) $ 8,398 $ (34,669) $ 14,595
========== ========== ==========
Weighted-Average Shares Outstanding 12,508,718 11,955,957 11,812,298
Net Income (Loss) Before Cumulative Effect
Per Common Share $ 0.67 $ (2.66) $ 1.24
Cumulative Effect of Accounting Changes
Per Common Share (Net of Income Taxes) -- (0.24) --
========== ========== ==========
Net Income (Loss) Per Common Share $ 0.67 $ (2.90) $ 1.24
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PURITAN-BENNETT CORPORATION AND SUBSIDIARIES
Dollars in thousands, except per share data
<TABLE>
<CAPTION>
Additional Deferred
Common Stock Paid-In Retained Stock Treasury
Shares Par Value Capital Earnings Awards Stock
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at February 1, 1992 11,696,768 $11,697 $20,647 $ 84,367 $ (791) $ --
Net income -- -- -- 14,595 -- --
Dividends declared, $.12 per share -- -- -- (1,419) -- --
Stock awards canceled (4,368) (4) (92) -- 96 --
Stock awards granted 9,560 9 264 -- (273) --
Amortization of deferred stock awards -- -- -- -- 458 --
Stock options exercised 152,274 152 2,071 -- -- --
Shares received and retired upon exercise
of stock options (11,938) (12) (383) -- -- --
Shares issued to employee benefit plans 60,465 61 1,629 -- -- --
Tax benefit related to stock options -- -- 651 -- -- --
---------- ------- ------- -------- ------- -------
Balances at January 31, 1993 11,902,761 11,903 24,787 97,543 (510) --
Net loss -- -- -- (34,669) -- --
Dividends declared, $.12 per share -- -- -- (1,432) -- --
Stock awards canceled (3,643) (3) (79) -- 82 --
Stock awards granted 22,300 22 434 -- (456) --
Amortization of deferred stock awards -- -- -- -- 282 --
Stock options exercised 23,087 23 202 -- -- --
Shares received and retired upon exercise
of stock options (2,209) (2) (43) -- -- --
Shares issued to employee benefit plans 58,428 58 1,275 -- -- 1,984
Shares issued in business acquisition 426,929 427 8,218 -- -- --
Shares repurchased -- -- -- -- -- (2,628)
Unrealized holding gain on available-for-sale
securities, net of income taxes of $187 -- -- -- 294 -- --
---------- ------- ------- -------- ------- -------
Balances at January 31, 1994 12,427,653 12,428 34,794 61,736 (602) (644)
Net income -- -- -- 8,398 -- --
Dividends declared, $.12 per share -- -- -- (1,518) -- --
Stock awards canceled (4,104) (4) (89) -- 93 --
Stock awards granted 57,600 57 1,109 -- (1,166) --
Amortization of deferred stock awards -- -- -- -- 427 --
Stock options exercised 20,130 20 208 -- -- --
Shares received and retired upon exercise
of stock options (2,174 (2) (43) -- -- --
Shares issued to employee benefit plans 82,307 82 1,650 -- -- 644
Reversal of unrealized holding gain on
available-for-sale securities, net of
income taxes of $187 -- -- -- (294) -- --
---------- ------- ------- -------- ------- -------
Balances at January 31, 1995 12,581,412 $12,581 $37,629 $ 68,322 $(1,248) $ --
========== ======= ======= ======== ======= =======
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
PURITAN-BENNETT CORPORATION AND SUBSIDIARIES
Dollars in thousands
<TABLE>
<CAPTION>
Year Ended January 31
1995 1994 1993
------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 8,398 $(34,669) $ 14,595
Adjustments to reconcile net income to net cash and
cash equivalents provided by operating activities:
Depreciation and amortization 15,222 15,440 12,884
Deferred income tax provision (benefit) 594 (12,057) 1,652
Cumulative effect of changes in accounting principles -- 2,890 --
Restructuring charges 2,205 38,404 --
Deferred compensation and pensions 3,663 2,536 473
Provision for losses on accounts receivable 398 929 449
Loss (gain) on disposition of assets (285) 265 (27)
Shares issued to employee benefit plans 2,376 3,317 1,690
Change in operating assets and liabilities:
Trade notes and accounts receivable (3,606) (423) (16,332)
Inventories (10,071) 153 (4,042)
Prepaid expenses and other 670 520 (598)
Other assets (165) 1,714 (3,948)
Trade accounts payable and accrued expenses (3,845) (4,021) 5,908
Deferred compensation (1,804) -- --
Income taxes payable/receivable (989) 4,003 1,623
Deferred revenue 933 3,991 2,472
-------- -------- --------
Net Cash and Cash Equivalents Provided by
Operating Activities 13,694 22,992 16,799
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of capital assets 5,893 1,362 726
Capital expenditures (18,097) (15,727) (22,882)
Purchases of intangible assets (252) (547) (1,902)
Acquisitions, net of cash acquired (2,000) (17,617) (1,500)
-------- -------- --------
Net Cash and Cash Equivalents Used in
Investing Activities (14,456) (32,529) (25,558)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance (repayment) of notes payable (9,787) 19,890 (4,099)
Additions to long-term debt 20,000 515 15,000
Payments on long-term debt (6,045) (6,680) (418)
Dividends paid to stockholders (1,500) (1,430) (1,062)
Stock options exercised 228 225 2,223
Stock repurchased (45) (2,673) (395)
-------- -------- --------
Net Cash and Cash Equivalents Provided by
Financing Activities 2,851 9,847 11,249
-------- -------- --------
Net Increase in Cash and Cash Equivalents 2,089 310 2,490
Cash and Cash Equivalents at Beginning of Year 713 403 (2,087)
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 2,802 $ 713 $ 403
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PURITAN-BENNETT CORPORATION AND SUBSIDIARIES January 31, 1995
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS: The Company's operations consist predominantly of the design,
manufacture and distribution of specialized equipment for emergency, therapeutic
and surgical pulmonary care. In addition, the Company manufactures and
distributes gas products administered with this equipment. These products are
distributed to hospitals, home care providers, clinics, physicians, nursing
homes, airlines and airframe manufacturers.
REVENUE RECOGNITION: Revenue from product sales is principally recognized at
the time of shipment. Deferred revenue relates to extended warranty agreements
offered by the Company which are amortized over the life of the agreement with
the related warranty costs charged to expense as incurred.
FOREIGN CURRENCY: The Company's functional currency is the U.S. dollar.
Accordingly, assets and liabilities of the Company's foreign operations are
remeasured at year-end or historical rates depending on their nature; income and
expenses are remeasured at the weighted-average exchange rates for the year.
Foreign currency gains and losses resulting from transactions are included in
consolidated operations in the year of occurrence. The Company recorded foreign
transaction gains and (losses) of $392,000, ($583,000) and ($607,000) in 1995,
1994 and 1993, respectively.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company and its subsidiaries, substantially all of which are
wholly-owned. All intercompany accounts, transactions and profits have been
eliminated.
INVENTORIES: Inventories are stated at the lower of cost or market. The Last
In, First Out (LIFO) method was used for determining the cost of approximately
72% of total inventories. The cost for the remaining portion of the inventories
was determined using the First In, First Out (FIFO) method.
PLANT AND EQUIPMENT: Plant and equipment are recorded at cost. Provisions
for depreciation and amortization of all fixed assets including capitalized
leases are computed using the straight-line method.
OTHER ASSETS: The cost of patents is amortized on a straight-line basis over
their approximate useful lives, not to exceed seventeen years. The costs in
excess of amounts assigned to net assets of businesses acquired are amortized on
a straight-line basis over periods ranging from fifteen to forty years. The
Company periodically reviews market position and market expansion as well as the
value of ongoing business to assess and measure any impairment in value which is
other than temporary. Other assets include unamortized capitalized software
development costs of $2,071,000 and $947,000 at January 31, 1995 and 1994,
respectively. These costs are amortized using the straight-line method over a
five year period. Amortization expense related to software development costs for
1995, 1994 and 1993 was $248,000, $495,000 and $514,000, respectively.
INCOME TAXES: The Company plans to continue to finance foreign expansion and
operating requirements by reinvestment of undistributed earnings of its foreign
subsidiaries and, accordingly, has not provided for United States federal income
taxes on such earnings. At January 31, 1995, the amount of undistributed
earnings considered to be indefinitely reinvested was approximately $41,000,000.
As discussed below, the Company changed its method of accounting for income
taxes effective February 1, 1993.
NET INCOME PER COMMON SHARE: Net income per common share is based on the
weighted-average number of shares outstanding during each year. The potential
dilutive effect of stock options is not material.
STATEMENTS OF CASH FLOWS: The Company considers all highly-liquid
investments purchased within three months of maturity to be cash equivalents. As
of January 31, 1995, cash equivalents consisted primarily of overnight
depository balances. Non-cash activity during 1995 included the acquisition of
land and a building, with a cost of $4,862,000, through a capital lease.
INVESTMENTS: During the year, the Company sold an investment that was
classified as available-for-sale. A pretax gain of $289,000 was realized, which
is included in other income (expense).
FINANCIAL INSTRUMENTS: Financial instruments consist primarily of cash and
cash equivalents, trade notes and accounts receivable and notes and trade
accounts payable, all of which are stated at amounts which approximate fair
value except for long-term debt which has an estimated fair value of
approximately $64,000,000 as of January 31, 1995.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING CHANGES: During 1994, the Company changed its method of
accounting for income taxes to conform with Statement of Financial Accounting
Standards (SFAS) No. 109 "Accounting for Income Taxes" (see Note 6). On January
31, 1994, the Company changed its method of accounting for postemployment
benefits, retroactive to February 1, 1993, to conform with SFAS No. 112
"Employers' Accounting for Postemployment Benefits" (see Note 5). The cumulative
effect of these changes was as follows:
Dollars in thousands, except per share data
<TABLE>
<CAPTION>
Year Ended
January 31
1994
----------
<S> <C>
Income taxes ($.23 per share) $(2,755)
Postemployment benefits, net of taxes
of $31 ($.01 per share) (135)
-------
$(2,890)
=======
</TABLE>
Effective February 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" using the
prospective basis which amortizes the unrecognized net liability on a straight-
line basis over 20 years. SFAS No. 106 requires accrual of the expected cost of
providing postretirement benefits to employees and their dependents or
beneficiaries during the years in which employees earn benefits. Prior to
adoption, postretirement benefit expenses were recognized on a pay-as-you-go
basis. The adoption of SFAS No. 106 did not materially affect earnings.
NOTE 2: INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
1995 1994
(Dollars in thousands)
----------------------
<S> <C> <C>
Finished goods $18,714 $16,163
Work in process 5,746 4,437
Raw materials and supplies 37,369 30,894
------- -------
61,829 51,494
Excess of FIFO cost over LIFO cost (4,288) (4,024)
------- -------
Total Inventories $57,541 $47,470
======= =======
</TABLE>
During the years ended January 31, 1995 and 1993, the Company had
liquidations of LIFO inventories that increased income before taxes by $442,000
and $487,000, respectively. During the year ended January 31, 1994, the effect
of such liquidations was not significant.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: PLANT AND EQUIPMENT
Plant and equipment consist of:
<TABLE>
<CAPTION>
1995 1994
(Dollars in thousands)
----------------------
<S> <C> <C>
Land and land improvements $ 10,713 $ 9,971
Buildings 38,221 31,355
Machinery and equipment 117,182 113,328
Leasehold improvements 5,024 4,307
-------- --------
171,140 158,961
Less accumulated depreciation and amortization 78,780 70,068
-------- --------
Total Plant and Equipment, Net $ 92,360 $ 88,893
======== ========
</TABLE>
During 1993, the Company increased the estimated useful life of its computer
equipment from three to five years to more closely reflect replacement patterns.
The effects of this change in accounting estimate were to decrease 1993
depreciation expense by approximately $1,072,000 and increase 1993 net income by
approximately $654,000, or $.06 per share.
NOTE 4: NOTES PAYABLE
Notes payable consist primarily of bank lines of credit with five banks.
Unsecured bank lines of credit allow the Company to borrow a maximum of
$35,000,000 (at the quoted rate of each bank). There are no withdrawal
restrictions on any cash balances maintained at the various banks. The lines of
credit can be withdrawn at each bank's option. The following information relates
to bank line-of-credit borrowings:
<TABLE>
<CAPTION>
1995 1994 1993
(Dollars in thousands)
-----------------------------
<S> <C> <C> <C>
Bank lines of credit outstanding at the end of the year $18,000 $27,600 $ 7,200
Weighted-average interest rate at year-end 6.4% 3.5% 3.5%
Maximum amount outstanding during the year $32,500 $27,700 $24,100
Average amount outstanding during the year $21,897 $12,085 $16,252
Weighted-average interest rate during the year 4.8% 3.5% 4.1%
</TABLE>
The average amounts outstanding and weighted-average interest rates during
each year are calculated based on daily outstanding balances.
NOTE 5: EMPLOYEE BENEFITS
DEFINED BENEFIT PLANS: The Company and its subsidiaries have
noncontributory, defined benefit pension plans covering substantially all full-
time employees in the U.S., Canada and Ireland. The Company contributes amounts
necessary to satisfy the minimum funding requirements of the Employee Retirement
Income Security Act of 1974 for the U.S. plan. Amounts necessary to satisfy the
funding requirements of Regulation 63 of the Ontario Pension Benefits Act, 1987
are contributed by the Company for the Canadian plan. The funding policy for the
Irish plan is determined by the Company and is consistent with standard
practices in that country. Contributions for the Irish plan are made by both the
Company and the participants. The U.S. and Canadian defined benefit pension
plans provide retirement benefits based upon the employees' average earnings and
years of service. The Irish plan provides benefits equal to a certain percentage
of the participant's final salary. The Company also has an unfunded supplemental
retirement plan covering certain key employees which provides supplemental
retirement benefits based upon average earnings.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: EMPLOYEE BENEFITS (CONTINUED)
A summary of the components of net cost for the defined benefit plans
follows:
<TABLE>
<CAPTION>
Pension Supplemental
1995 1994 1993 1995 1994 1993
(Dollars in thousands)
--------------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost--benefits earned during the year $ 2,189 $ 1,832 $ 1,488 $ 85 $ 25 $ 13
Interest cost on projected benefit obligation 3,811 3,615 3,224 287 268 293
Actual return on plan assets 466 (615) (2,885) -- -- --
Net amortization and deferral (3,932) (3,494) (1,057) 105 104 132
------- ------- ------- ----- ----- -----
Net Cost $ 2,534 $ 1,338 $ 770 $ 477 $ 397 $ 438
======= ======= ======= ===== ===== =====
</TABLE>
Assumptions used in determining the net cost for the defined benefit plans
were:
<TABLE>
<CAPTION>
Pension Supplemental
1995 1994 1993 1995 1994 1993
---------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted-average discount rate 7.50% 8.75% 8.75% 8.50% 8.50% 8.50%
Rate of increase in compensation levels 4.50% 6.00% 6.00% 4.50% 6.00% 6.00%
Expected long-term rate of return on assets 9.00% 10.00% 10.00% -- -- --
</TABLE>
For the Canadian plan, the rate of increase in compensation levels was 5.0%
for 1995. For the Irish plan, the weighted-average discount rate was 8.75%, the
rate of increase in compensation levels was 6.0% and the expected long-term rate
of return on assets was 10.0% for 1995. Other assumptions are as reported in the
table above.
The following table sets forth the funded status and amounts recognized in
the consolidated balance sheets at January 31, 1995 and 1994, for the Company's
defined benefit plans:
<TABLE>
<CAPTION>
Pension Supplemental
1995 1994 1995 1994
(Dollars in thousands)
------------------- -----------------
<S> <C> <C> <C> <C>
Vested Benefit Obligation $39,858 $37,851 $3,233 $3,406
======= ======= ====== ======
Accumulated Benefit Obligation $40,897 $39,004 $3,233 $3,406
======= ======= ====== ======
Projected benefit obligation $49,302 $48,003 $3,677 $3,009
Plan assets at fair value 35,280 37,721 -- --
------- ------- ------ ------
Projected benefit obligation in excess of plan assets 14,022 10,282 3,677 3,009
Unrecognized net gain (loss) (5,788) (4,459) (592) 267
Unrecognized net asset (liability) 2,309 2,436 (144) (676)
------- ------- ------ ------
Net Liability Recognized in the Consolidated Balance Sheet $10,543 $ 8,259 $2,941 $2,600
======= ======= ====== ======
</TABLE>
Assumptions used in determining the actuarial present value of the projected
benefit obligation for the pension plans were:
<TABLE>
<CAPTION>
U.S. Canada Ireland
1995 1994 1995 1994 1995 1994
------------ ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Weighted-average discount rate 8.50% 7.50% 8.50% 7.50% 8.75% 8.75%
Rate of increase in compensation levels 4.50% 4.50% 4.50% 5.00% 6.00% 6.00%
Expected long-term rate of return on assets 9.00% 10.00% 9.50% 9.00% 10.00% 10.00%
</TABLE>
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: EMPLOYEE BENEFITS (CONTINUED)
The foreign defined benefit pension plans were not material in 1993.
Accordingly, the related pension cost has not been included in prior year
amounts.
The U.S. pension plan assets at January 31, 1995 and 1994, were invested in
listed stocks and bonds, including common stock of the Company. The market value
of Company stock included in plan assets at January 31, 1995 and 1994, was
$3,889,000 and $3,660,000, respectively. Both the Canadian and Irish plan assets
are invested in pooled mutual funds. For the unfunded supplemental plan, the
Company has purchased life insurance policies intended to ultimately fund the
cost of the plan.
During 1993, the Company discontinued one of its foreign pension plans which
resulted in no gain or loss. All active employees in the plan became fully
vested upon discontinuance and were offered either a transfer of the current
value of their benefit to the Company's defined contribution plan or the
purchase of an annuity contract. All funds were transferred to the defined
contribution plan.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS: The Company provides
postretirement health care benefits to certain eligible retirees. The cost of
the postretirement medical plan is shared by the Company and retirees through
such features as annually adjusted contributions, deductibles and coinsurance.
The retiree's contribution is a factor of age and service at the time of
retirement. The postretirement health care benefits are funded by the Company as
claims are paid.
A summary of the components of annual net cost for the postretirement
benefits are as follows:
<TABLE>
<CAPTION>
1995 1994
(Dollars in thousands)
----------------------
<S> <C> <C>
Service cost $ 39 $ 35
Interest cost 131 166
Amortization of unrecognized net liability 85 92
------ ------
Net Cost $ 255 $ 293
====== ======
</TABLE>
The components of the Company's postretirement benefits obligation recognized
in the consolidated balance sheet were as follows:
<TABLE>
<CAPTION>
1995 1994
(Dollars in thousands)
----------------------
<S> <C> <C>
Retirees $1,198 $1,690
Future retirees 556 579
------ ------
Total accumulated benefit obligation 1,754 2,269
Less unrecognized amounts:
Unrecognized net liability 1,659 1,751
Net (Gain) Loss (411) 152
------ ------
Net Liability Recognized in the Consolidated Balance Sheet $ 506 $ 366
====== ======
</TABLE>
For measurement purposes, an annual health care trend rate of 10% was assumed
beginning in 1994, decreasing over five years to 6% and remaining constant
thereafter. A one percent increase in these assumed trend rates would not have a
material effect on the accumulated postretirement benefits obligation as of
January 31, 1995, and January 31, 1994, and the net periodic postretirement
benefits cost for 1995 and 1994. The discount rate used in determining the
accumulated postretirement benefits obligation was 8.50% and 7.50% for January
31, 1995 and 1994, respectively.
The cost of providing postretirement benefits in 1993, which was recorded on
a pay-as-you-go basis, was approximately $275,000.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: EMPLOYEE BENEFITS (CONTINUED)
RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN: The Company has a retirement
savings and stock ownership plan under which substantially all U.S. employees
may elect to contribute up to 20% of their earnings. This includes a basic
contribution of up to 10% and an additional voluntary contribution of up to 10%.
The Company contributes an additional 35% (decreased to 10% as of February 15,
1995) for up to 6% of each individual's basic contribution. Contributions are
placed in trust for investment in defined funds, including a stock fund for
investment in common stock of the Company. The plan trustee purchases the
Company's stock at fair market value. The amount charged to expense under this
plan was $1,187,000, $1,190,000 and $1,059,000 in 1995, 1994 and 1993,
respectively.
DEFERRED COMPENSATION PLAN: The Company has a deferred compensation plan for
the benefit of certain employees. Deferred compensation expense was $406,000,
$418,000 and $866,000 for 1995, 1994 and 1993, respectively.
POSTEMPLOYMENT BENEFITS: In the fourth quarter of 1994, the Company adopted
SFAS No. 112. Prior to adoption, postemployment benefit expenses were recognized
on a pay-as-you-go basis. The Company elected to immediately recognize the
cumulative effect of the change in accounting for postemployment benefits of
$166,000 ($135,000 after taxes), which represents the unfunded accumulated
postemployment benefit obligation as of January 31, 1994. The amount charged to
expense in 1995 was not material.
NOTE 6: INCOME TAXES
The provision for (benefit from) income taxes consists of the following:
<TABLE>
<CAPTION>
Deferred
Liability Method Method
1995 1994 1993
CURRENT: (Dollars in thousands)
---------------------------
<S> <C> <C> <C>
Federal $ 277 $ 1,941 $1,002
Foreign 2,099 2,215 934
State and local __ 522 224
------ -------- ------
Total Current 2,376 4,678 2,160
DEFERRED:
Federal 621 (8,817) 247
Foreign (134) (1,956) 1,294
State and local 107 (1,284) 111
------ -------- ------
Total Deferred 594 (12,057) 1,652
------ -------- ------
Total Provision (Benefit) $2,970 $ (7,379) $3,812
====== ======== ======
</TABLE>
Total income taxes paid in 1995, 1994, and 1993 were $3,180,000, $620,000 and
$720,000, respectively. As of January 31, 1995, the Company had a net operating
loss carryforward of $1,182,000 for tax purposes resulting from the transition
period which will be utilized over the next three years. In addition, the
Company has $14,618,000 U.S. and foreign net operating loss carryforwards, of
which $1,041,000 and $11,190,000 will expire by fiscal years 2000 and 2010,
respectively. The Company has research and development credit carryforwards of
$2,473,000 which will also expire by fiscal year 2010.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
as of January 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
ASSETS LIABILITIES NET Assets Liabilities Net
(Dollars in thousands)
---------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Inventory valuation $ 8,615 $ -- $ 5,119 $ --
Accrued employee benefits 9,391 -- 8,358 --
NOL carryforwards 6,723 -- 3,323 --
Accelerated depreciation -- 4,495 -- 6,095
Deferred revenue 3,785 -- 2,898 187
R&D credit carryforwards 2,473 -- 1,100 --
Restructuring costs 2,125 -- 10,051 --
Other 3,390 788 2,294 460
------- ------ ------- ------- ------ -------
Total $36,502 $5,283 $31,219 $33,143 $6,742 $26,401
Less: Valuation allowance 21,108 -- 21,108 15,696 -- 15,696
------- ------ ------- ------- ------ -------
Total $15,394 $5,283 $10,111 $17,447 $6,742 $10,705
======= ====== ======= ======= ====== =======
</TABLE>
The components of the deferred income tax provision for the year prior to
adoption of SFAS No. 109 result from the following:
<TABLE>
<CAPTION>
1993
(Dollars in thousands)
----------------------
<S> <C>
Accelerated depreciation for tax purposes $ 655
Timing differences in reporting the taxable portion
of Domestic International Sales Corporation income (50)
Inventory valuation 381
Accrued employee benefits (374)
Accrued costs not deductible for tax purposes until paid 2,350
Deferred extended warranty (1,008)
Alternative minimum tax carryforward (396)
Other, net 94
-------
Total Deferred Income Tax Provision $ 1,652
=======
</TABLE>
A reconciliation of the provision for (benefit from) income taxes to the
statutory federal rate is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
(Dollars in thousands)
------------------------------------------------------------------------
EFFECTIVE Effective Effective
AMOUNT RATE Amount Rate Amount Rate
------- --------- -------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Computed tax at statutory federal rate $ 3,865 34.0% $(13,314) (34.0)% $ 6,259 34.0%
Foreign Sales Corporation tax benefit (426) (3.7) (566) (1.4) (477) (2.6)
State taxes, net of federal tax benefit (545) (4.8) (1,900) (4.9) 221 1.2
Nondeductible amortization and
depreciation 550 4.8 32 0.1 258 1.4
Nondeductible foreign loss -- -- -- -- 378 2.0
Research and development tax credit, net (702) (6.2) (1,813) (4.6) (509) (2.8)
Foreign statutory tax rate differences (5,307) (46.7) (1,490) (3.8) (2,377) (12.9)
Increase in valuation allowance 5,412 47.6 11,148 28.5 -- --
Other, net 123 1.1 524 1.3 59 0.4
------- ---- -------- ------ ------- -----
Total Provision (Benefit) $ 2,970 26.1% $ (7,379) (18.8)% $ 3,812 20.7%
======= ==== ======== ====== ======= =====
</TABLE>
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt is summarized as follows: 1995 1994
(Dollars in thousands)
----------------------
<S> <C> <C>
Unsecured promissory notes payable--
Interest rate 9.85%, interest payable semi-annually through October 1998, principal
is payable in annual installments from October 1993 through October 1998 $11,333 $15,333
Interest rate 6.64%, interest payable semi-annually through December 1999, principal
is payable in annual installments from December 1995 through December 1999 15,000 15,000
Interest rate 9.02%, interest payable semi-annually through December 1997, principal
is payable in annual installments from December 1993 through December 1997 6,000 8,000
Interest rate 7.57%, interest payable semi-annually through July 2000, principal
is payable in annual installments from July 1996 through July 2000 20,000 --
Variable interest rate, 5.13% through December 1995, interest payable annually
through December 1998, principal is payable in full in December 1998 4,510 4,510
Secured bank note payable--
Interest rate 7.95%, principal payable in monthly installments through
August 2003, collateralized by a building 1,707 1,662
Capital Lease--
Interest rate 7.0%, principal payable in monthly installments through
February 2009 4,782 --
Other 687 697
------- -------
64,019 45,202
Less current maturities 9,527 6,546
------- -------
Total Long-Term Debt $54,492 $38,656
======= =======
</TABLE>
As of January 31, 1995, the Company was in compliance with the modified
provisions of its debt agreements; however, the future payment of dividends will
be limited by the extent to which future earnings of the Company exceed
$1,200,000.
During the second quarter of 1995, the Company arranged through a private
placement $20,000,000 of unsecured promissory notes.
The Company leases a facility which is classified as a capital lease and is
being amortized over fifteen years. As of January 31, 1995, the cost of the
asset and accumulated amortization was $4,404,000 and $307,000, respectively.
The future minimum lease payments required under the capital lease are included
in the aggregate maturities of long-term debt listed below.
The aggregate maturities of long-term debt during each of the next five
fiscal years are as follows: 1996--$9,527,000; 1997--$12,704,000;
1998--$11,453,000; 1999--$13,892,000; and 2000--$7,481,000.
Interest paid on all debt in 1995, 1994 and 1993 totaled $5,846,000,
$4,694,000 and $3,391,000, respectively.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8: STOCK OPTIONS AND AWARDS
The Company has a stock option plan that provides for the purchase of the
Company's common stock by officers and key employees at the fair market value of
shares at the date of grant. Stockholders approved a new stock benefit plan in
1988. This approval also allowed the termination of the 1979 plan. The 1988
Stock Benefit Plan reserved 800,000 common shares for stock options and 200,000
common shares for stock awards. During 1993, the Company reserved an additional
1,000,000 common shares for stock options. At the discretion of the Compensation
Committee of the Board of Directors, the plans allow all vested stock option
holders to elect an alternative settlement method in lieu of purchasing common
stock at the exercise price. The alternative settlement method permits the
employee to receive, without payment to the Company, cash, shares of common
stock or a combination thereof, of up to 100% of the value of market increase in
common stock over the option purchase price; however, alternative settlements
involving the disbursement of cash require approval of the Compensation
Committee of the Board of Directors. Options are granted for terms of ten years
to become exercisable (vested) in 50% installments as of the first and second
anniversary dates from the date of grant, except where vesting is limited in
annual periods in order to meet requirements for qualification as Incentive
Stock Options under the Internal Revenue Code. In such cases, vesting is
extended beyond the two years but is limited to a maximum of the ten year grant
term. Under the 1979 plan, options exercisable and outstanding at January 31,
1995 and 1994, were 106,100 and 125,225, respectively. During 1995, 13,125
options from the 1979 plan were exercised at prices ranging from $4.50 to $19.13
per share. Options exercisable at January 31, 1995 and 1994, under the 1988 plan
were 599,742 and 467,090, respectively.
<TABLE>
<CAPTION>
Number of Shares
----------------------------------
1988 OPTION PLAN: Reserved Granted Available
--------- ------- ---------
<S> <C> <C> <C>
Balance at January 31, 1993 1,648,869 639,044 1,009,825
Exercised ($16.50 to $21.75 per share) (2,200) (2,200) --
Granted ($17.50 to $22.75 per share) -- 213,500 (213,500)
Lapsed -- (17,600) 17,600
--------- ------- ---------
Balance at January 31, 1994 1,646,669 832,744 813,925
Exercised ($16.50 to $24.50 per share) (7,005) (7,005) --
Granted ($18.25 to $21.00 per share) -- 188,750 (188,750)
Lapsed -- (46,095) 46,095
--------- ------- ---------
Balance at January 31, 1995 1,639,664 968,394 671,270
========= ======= =========
</TABLE>
Under the stock award plan, shares are granted to employees at no cost.
Awards vest at the rate of 25% annually, commencing one year from the date of
award, provided the recipient is still employed by the Company on the vesting
date. The cost of stock awards, based on the fair market value at the date of
grant, is charged to expense over the four-year vesting period ($427,000 in
1995, $282,000 in 1994 and $458,000 in 1993).
<TABLE>
<CAPTION>
Number of Shares
-------------------------------
1988 AWARD PLAN: Reserved Granted Available
-------- ------- ---------
<S> <C> <C> <C>
Balance at January 31, 1993 145,212 27,983 117,229
Granted -- 22,300 (22,300)
Vested (14,574) (14,574) --
Canceled -- (3,643) 3,643
------- ------- -------
Balance at January 31, 1994 130,638 32,066 98,572
Granted -- 57,600 (57,600)
Vested (8,970) (8,970) --
Canceled -- (4,104) 4,104
------- ------- -------
Balance at January 31, 1995 121,668 76,592 45,076
======= ======= =======
</TABLE>
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: OPERATING LEASES
Total rental expense for operating leases, principally buildings, amounted to
$6,450,000, $6,781,000 and $6,118,000 for 1995, 1994 and 1993, respectively.
Some of the operating leases have options to renew and there are no contingent
rentals or financial restrictions in any of the operating leases. Future minimum
lease payments on all noncancelable leases are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
----------------------
<S> <C>
1996 $ 3,160
1997 2,723
1998 2,362
1999 1,445
2000 480
Thereafter 1,775
-------
Total minimum lease payments $11,945
=======
</TABLE>
NOTE 10: COMMITMENTS AND CONTINGENCIES
Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company and certain of its
subsidiaries. While it is not feasible to predict the outcome of these suits and
other legal proceedings and claims with certainty, management is of the opinion
that their ultimate disposition should not have a material effect on the
consolidated financial statements of the Company.
During 1995, the Company guaranteed approximately $3,200,000 of debt related
to the sale of equipment through a leasing Company. The debt is collateralized
by a security agreement. Additionally, the Company sold a lease receivable
during 1994 and guarantees performance over four years under a conditional sales
agreement. At January 31, 1995, the outstanding guarantee is approximately
$2,700,000.
NOTE 11: STOCKHOLDERS' EQUITY
In May 1989, the Company declared a dividend of one common share purchase
right on each outstanding share of common stock. One right is issued with each
share of common stock issued after May 17, 1989. The rights are neither
presently exercisable nor separable from the common stock. If they become
exercisable following the occurrence of certain specified events, each right
will entitle the holder to purchase one-half share of common stock for $45,
subject to certain antidilution adjustments. The rights do not have any voting
privileges nor are they entitled to dividends. The rights are redeemable by the
Company at $.01 each until a person or group acquires 20% of the Company's
common stock or until they expire on May 1, 1999. In the event that the Company
is acquired in a merger or other business combination transaction or 50% or more
of its assets or earning power is sold, provision shall be made so that each
holder of a right shall have the right to receive, upon exercise thereof at the
then current exercise price, that number of shares of common stock of the
surviving Company which at the time of such transaction would have a market
value of two times the exercise price of the right. At January 31, 1995,
6,500,000 shares were reserved for future issuance in accordance with the above
plan.
NOTE 12: INDUSTRY SEGMENTS AND EXPORT SALES
The Company's operations consist predominantly of the design, manufacture and
distribution of specialized equipment for emergency, therapeutic and surgical
pulmonary care. In addition, the Company manufactures and distributes gas
products administered with this equipment. These products are distributed to
hospitals, home care providers, clinics, physicians, nursing homes, airlines and
airframe manufacturers. Net sales, operating profit (loss) and identifiable
assets of these operations account for 100% of the consolidated amounts for
1995, 1994 and 1993.
Export sales billed from domestic locations for 1995, 1994 and 1993 totaled
approximately $39,723,000, $36,133,000 and $39,914,000, respectively. These
sales were not concentrated in a specific geographic area.
Income before income taxes from foreign operations accounted for $12,241,000,
$72,000 and $12,386,000 of consolidated income (loss) before income taxes in
1995, 1994 and 1993, respectively.
Transfers between United States and foreign operations are recorded at
varying discounts depending on the country and the type of market. Areas
representing a significant portion of the Company's foreign operations include
Europe, Canada, the Pacific Rim and Latin America.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12: INDUSTRY SEGMENTS AND EXPORT SALES (CONTINUED)
Net sales, operating profit (loss) and identifiable assets of the Company for
the United States and foreign geographic segments are summarized as follows for
1995, 1994 and 1993:
<TABLE>
<CAPTION>
(Dollars in thousands)
_______________________________________________________________________________
Transfers
Sales to Between Operating
Unaffiliated Geographic Profit Identifiable
Customers Areas Total (Loss) Assets
____________ __________ ________ _________ ____________
<S> <C> <C> <C> <C> <C>
1995:
United States $262,488 $ 11,712 $274,200 $ 8,547 $174,575
Foreign 73,538 43,063 116,601 12,348 98,560
Eliminations -- (54,775) (54,775) -- --
________ ________ ________ ________ ________
Consolidated $336,026 $ -- $336,026 $ 20,895 $273,135
======== ======== ======== ======== ========
1994:
United States $258,686 $ 11,829 $270,515 $(35,374) $170,605
Foreign 50,569 25,472 76,041 233 85,989
Eliminations -- (37,301) (37,301) -- --
________ ________ ________ ________ ________
Consolidated $309,255 $ -- $309,255 $(35,141) $256,594
======== ======== ======== ======== ========
1993:
United States $245,789 $ 30,348 $276,137 $ 8,537 $191,469
Foreign 54,271 11,619 65,890 12,588 52,939
Eliminations -- (41,967) (41,967) -- --
________ ________ ________ ________ ________
Consolidated $300,060 $ -- $300,060 $ 21,125 $244,408
======== ======== ======== ======== ========
</TABLE>
NOTE 13: RESTRUCTURING CHARGES
As part of the Company's plan to enhance shareholder value during 1995, the
Company implemented a strategic cost cutting initiative that is expected to
significantly lower overhead and other expenses while preserving growth
potential. This plan included a restructuring for which a charge of $2,654,000
was recorded in 1995. This charge represents severance payments and other costs
of implementing a near 6% reduction in workforce. As of January 31, 1995,
approximately $2,205,000 remained in accrued liabilities related to these
charges. The Company expects to disburse this accrual primarily in the first
quarter of 1996.
During 1994, the Company recorded restructuring charges of $43,169,000.
Included in the charges were restructuring actions taken during the second
quarter of 1994 (approximately $9,014,000) principally made up of severance
costs related to an employment level reduction in the Company's ventilator and
blood gas monitoring divisions; the closing of its facilities in El Segundo,
California; the consolidation of its facilities including offices in its
aviation business, blood gas monitoring operations and sales and service
operations in France and the U.S. and a revaluation of certain production
assets. Fourth quarter 1994 charges (approximately $34,155,000) were principally
made up of severance costs and the write-down of assets in connection with the
closing of the portable ventilator facility in Boulder, Colorado and the
curtailment of the intra-arterial blood gas monitoring operation in Carlsbad,
California. Portable ventilators continue to be sold to customers outside the
U.S.; manufacturing was transferred to the Company's facility in the Republic of
Ireland. A buyer for the intra-arterial blood gas monitoring product line was
not found and the Company closed the operation in the third quarter of 1995. As
of January 31, 1995, approximately $1,882,000 remained in accrued liabilities
and is expected to be disbursed primarily in the first quarter of 1996. As of
January 31, 1994, approximately $12,000,000 remained in accrued liabilities
representing primarily expected severance, cancellation penalties, remaining
facility lease payments and other costs necessary to complete the 1994
restructuring plan.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14: ACQUISITIONS
In April 1993, the Company acquired a German distributor (Hoyer
Medizintechnik) for $10,550,000, of which $2,000,000 was paid in 1995. The
Company also acquired a French supplier of diagnostic and therapeutic sleep
products (SEFAM S.A.) in late January 1994 for a total of $21,592,000, of which
$12,947,000 was paid in cash with the remainder paid through the issuance of
426,929 restricted shares of the Company's common stock. These acquisitions were
accounted for using the purchase method of accounting, and the purchase price
has been allocated to assets acquired and liabilities assumed, reflecting their
estimated fair value as of the dates of the acquisitions with the remaining
excess purchase price to be amortized over fifteen years. The results of
operations of the acquired businesses, which were not significant to 1994
results, have been included in the accompanying statements of operations,
stockholders' equity and cash flows since the dates of acquisition. In
conjunction with these acquisitions, the purchase price consisted of the
following:
<TABLE>
<CAPTION>
(Dollars in thousands)
----------------------
<S> <C>
Fair value of assets acquired other than
cash and cash equivalents acquired $34,481
Liabilities assumed or incurred (6,464)
Stock issued (8,645)
Fiscal year 1993 cash payment (1,500)
Assets contributed (255)
-------
Fair value of assets acquired, net of cash
and cash equivalents acquired $17,617
=======
</TABLE>
NOTE 15: COSTS ASSOCIATED WITH AN UNSOLICITED OFFER TO ACQUIRE THE COMPANY
During 1995, the Company recorded charges of $5,049,000 for costs incurred
associated with an unsolicited offer to acquire the Company. These costs include
investment banking fees, public relations expenses and legal fees. Of the total
charges, $4,067,000 remained in accrued liabilities at January 31, 1995. The
Company expects to pay this amount during the first half of FY 1996.
The estimated investment banking fees ($4,309,000 included in the charge
described above) were derived by a formula set forth in the contract between the
Company and the investment banking firm. Components of this formula include the
number of shares outstanding and the stock price at the time such fees become
payable in full. The Company estimated the fee using the closing stock price as
of January 31, 1995, which was $21.25 per share and was considered to be the
best estimate at that time. Until such fees become payable in full, the Company
will revise its estimate of such fees quarterly based upon the closing stock
price and any other circumstances relevant to the contract as of the close of
the reporting period. Legal fees and public relations expenses will continue to
be based upon the costs of services actually rendered during the respective
period.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16: SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
the years ended January 31, 1995 and 1994:
<TABLE>
<CAPTION>
Quarter Ended
(Dollars in thousands, except per share data)
---------------------------------------------
Apr. 30 July 31 Oct. 31 Jan. 31
------- ------- ------- -------
<S> <C> <C> <C> <C>
FY 1995
Net sales $80,408 $83,993 $83,412 $ 88,213
Gross profit 33,791 35,647 34,284 35,917
Net income (loss) 3,724 4,244 (640) 1,070
Net income (loss) per common share .30 .34 (.05) .08
FY 1994
Net sales $75,391 $77,914 $75,277 $ 80,673
Gross profit 33,218 33,395 31,367 30,691
Net income (loss) before cumulative effect 1,849 (4,963) 748 (29,413)
Net income (loss) (906) (4,963) 748 (29,548)
Net income (loss) before cumulative effect
per common share .15 (.41) .06 (2.46)
Net income (loss) per common share (.08) (.41) .06 (2.47)
</TABLE>
In the third and fourth quarters of 1995, the Company recorded charges of
$4,559,000 and $490,000, respectively, for obligations associated with an
unsolicited offer to acquire the Company as discussed in Note 15.
In the fourth quarter of 1995, the Company recorded $2,654,000 for
restructuring as discussed in Note 13.
In the second quarter of 1994, a $9,014,000 restructuring charge was
recorded. In the fourth quarter, the Company recorded an additional $34,155,000
of restructuring charges as discussed in Note 13.
SUPPLEMENTAL INFORMATION FOR THE TEN-YEAR SUMMARY (UNAUDITED)
In 1985, the Industrial Division net assets were sold at a gain of $1,854,000
which is included in other income (expense).
In 1986, the Los Angeles facility was sold at a gain of $7,286,000 which is
included in other income (expense).
In 1986, a previously-acquired product line was written off at a loss of
$1,070,000 which is included in gross profit.
In 1988, certain assets and marketing rights were sold at a gain of
$6,000,000 which is included in other income (expense).
In 1991, the Company incurred expenses of $1,948,000 associated with limited
voluntary early retirement benefit programs.
In the transition period, the Company recorded $3,059,000 of expense as a
result of a change in accounting for deferred compensation.
In 1993, the Company made a change in estimate reducing depreciation expense
by $1,072,000, which is included in selling and administrative expense.
In 1994, the Company recorded $43,169,000 in restructuring charges. The
cumulative effect of accounting changes includes $2,755,000 for the adoption of
SFAS No. 109 "Accounting for Income Taxes" and $135,000 for the adoption of SFAS
No. 112 "Employers' Accounting for Postemployment Benefits."
In 1995, the Company recorded $2,654,000 for restructuring and $5,049,000
related to obligations associated with an unsolicited offer to acquire the
Company.
The summary should be read in conjunction with the auditors' report,
consolidated financial statements and related footnotes included on pages 24 to
41 of this report.
Prior year common share data have been adjusted for the two-for-one stock
splits that took place in 1987 and 1986.
41
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS - JANUARY 31, 1995 COMPARED TO JANUARY 31, 1994
All tables reflect dollars in millions.
NET SALES
Net sales for the year ended January 31, 1995 (FY 1995) increased nearly 9%
compared to the year ended January 31, 1994 (FY 1994). The following table
reflects sales for the Company's primary business lines:
<TABLE>
<CAPTION>
Percent
1995 1994 Change
------------------------
<S> <C> <C> <C>
Puritan $214.8 $184.2 16.6%
Bennett 121.2 122.8 (1.3)%
------ ------
Continuing Product Lines 336.0 307.0 9.4%
Discontinued Product Line -- 2.3 --
------ ------
Total Net Sales $336.0 $309.3 8.6%
====== ======
</TABLE>
The Puritan line includes nearly all of the Company's rapidly growing home
care product lines as well as the complementary medical gas and gas related
equipment and spirometry product lines. Aero Systems is also included because it
shares one of the Company's larger manufacturing facilities with the Puritan
Group and is relatively small. Puritan sales growth continues with revenues and
orders up 17% and 14%, respectively, from last year.
Two major clinical areas, home oxygen therapy and the diagnosis and treatment
of adult sleep disorders, contributed to the Puritan growth. With respect to the
first major clinical area, the Company believes it is the worldwide leader and
that the home oxygen therapy market will continue growing worldwide. With
respect to the second major clinical area of its home care product lines, the
Company expects the emerging field of diagnosing and treating adult sleep
disorders to continue growing also. Recently published research clearly
indicates that millions of adults in the United States suffer chronically from
debilitating but treatable breathing disorders during sleep. The Company
believes the prevalence of such disorders is also widespread in most developed
nations. These disorders are only beginning to be recognized and understood by
the medical community and the general population. Consequently, only a small
fraction of people suffering from sleep disorders have been diagnosed and are
being treated today. Therefore, while the market for such sleep products has
grown rapidly in recent years, the Company believes that most of the market
growth lies ahead. With the late January 1994 acquisition of SEFAM S.A.(Nancy,
France), the Company believes it has the second largest share of the therapeutic
portion of the worldwide sleep market.
The aviation portion of Puritan's business is experiencing growth in revenues
and orders, up 31% and 12%, respectively, from the prior year. The overall
increase in the Company's aviation business is due in part to a growing interest
in the offerings of Airborne Closed Circuit Television (ACCTV ), the Airbus
A330/A340 program and the new Sweep-On 2000 inflatable harness crew masks. The
Company considers this growth to be encouraging in light of the difficult
industry conditions that continued in FY 1995.
The Bennett line includes the Company's worldwide critical care ventilator
business, as well as the CliniVision(R) product line in the United States. The
small holter monitoring and international portable ventilator product lines are
also included. Fiscal year 1995 Bennett revenues decreased 1% from FY 1994. This
decrease is a result of the Company's decision to withdraw from the United
States portable ventilator market and to discontinue some older products. After
adjusting for the loss of sales from these products, revenues increased 7% from
FY 1994 levels. The Company believes it remains the worldwide leader in critical
care ventilation. Uncertainty over health care reform in 1994 and 1993, as well
as ongoing mergers and alliances of hospitals and hospital groups in response to
managed care trends, caused the postponement of many capital purchases in the
United States. International demand, however, has continued to grow; half of the
revenues from these products now come from international markets. The level of
interest in CliniVision continues to expand as hospitals increasingly focus on
this system as a valuable solution to their cost-containment challenge and as
the Company continues to enhance the CliniVision system. More than 110 systems
have now been installed. In total, the Company expects a moderate rate of growth
for Bennett's revenues in FY 1996 due to CliniVision, the 7250 Metabolic
Monitor, released to the U.S. market in February 1995, and five ventilator
system-related new products and product enhancements recently cleared by FDA for
marketing in the U.S. and recently introduced internationally.
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
INTERNATIONAL SALES AND PROFITABILITY
The following tables reflect sales and operating profits from the Company's
United States and foreign geographic segments:
<TABLE>
<CAPTION>
Net Sales Percent Operating Profit (Loss) Percent
1995 1994 Change 1995 1994 Change
------ ------ ------- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. Operations $262.5 $258.7 1.5% $ 8.6 $(35.4) --
Foreign Operations 73.5 50.6 45.3% 12.3 .3 --
------ ------ ----- ------
Total $336.0 $309.3 8.6% $20.9 $(35.1) --
====== ====== ===== ======
</TABLE>
The increase in foreign operations' net sales and operating profit from FY
1994 was primarily due to the acquisition of SEFAM S.A. and a large increase in
sales in Germany. The German operation was in a start-up environment during FY
1994.
In addition to the above, operating profit for the Company, as a whole,
increased significantly due to lower restructuring charges of $2.7 million in FY
1995 as compared to $43.2 million in FY 1994.
The following table reflects sales by customer location:
<TABLE>
<CAPTION>
Net Sales Percent of Sales
1995 1994 1995 1994
------ ------ ----- -----
<S> <C> <C> <C> <C>
Customers Within the U.S. $222.8 $222.6 66.3% 72.0%
Customers Outside the U.S. 113.2 86.7 33.7% 28.0%
------ ------ ----- -----
Total Net Sales $336.0 $309.3 100.0% 100.0%
====== ====== ===== =====
</TABLE>
In late January 1994, the Company finalized the acquisition of SEFAM S.A.,
the leading European supplier of diagnostic and therapeutic sleep disorder
products, and its 80% owned Lit Dupont S.A. subsidiary, which manufactures
wheelchair products. Over the past five years, the Company's home care product
business, which reached nearly $125 million in revenues in FY 1995, has achieved
a compound annual revenue growth rate of over 21% worldwide -- 26%
internationally.
GROSS PROFIT
The gross profit percentage for FY 1995 was unchanged from FY 1994. Gross
profit was adversely affected by the more rapid growth of lower gross margin
home care and aviation product lines and by higher costs associated with
strengthening the operating systems and procedures of the Company's research and
manufacturing operations. These effects were offset by the results of operations
of SEFAM S.A., acquired late in FY 1994, as well as the results of restructuring
actions taken late in FY 1994. Additional cost-cutting actions taken at the end
of FY 1995 are expected to lead to a higher gross profit percentage in FY 1996.
<TABLE>
<CAPTION>
Percent
1995 1994 Change
------ ------ -------
<S> <C> <C> <C>
Gross Profit $139.6 $128.7 8.5%
Gross Profit Percentage 41.6% 41.6% --
</TABLE>
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses for FY 1995 remained relatively unchanged
from FY 1994. An increase in such expenses resulting from the acquisition of
SEFAM S.A. and its 80% owned Lit Dupont S.A. subsidiary in late FY 1994, and
investments in stronger operating systems and procedures were offset by the
results of restructuring
43
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
actions taken in late FY 1994. Fiscal year 1995 includes charges of $.5 million
associated with the Company's recently announced cost cutting initiatives that
are discussed elsewhere. These cost cutting actions are expected to lead to
somewhat lower selling and administrative expenses in FY 1996.
Percent
1995 1994 Change
---------------------
Selling and Administrative Expenses $96.1 $95.8 .3%
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for FY 1995 decreased approximately 20%
from FY 1994. The decrease resulted entirely from the elimination of the intra-
arterial blood gas monitoring product line. Research and development continues
across all remaining product lines at levels the Company considers appropriate
to provide long-term growth. Such expenses are expected to be somewhat higher in
FY 1996.
Percent
1995 1994 Change
---------------------
Research and Development Expenses $20.0 $24.9 (19.7)%
COST CUTTING INITIATIVES INCLUDING RESTRUCTURING
As part of the Company's plan to enhance shareholder value during FY 1995,
the Company implemented a strategic cost-cutting initiative that is expected to
significantly lower overhead and other expenses while preserving growth
potential. This plan included a restructuring for which charges of $2.7 million
were recorded. The Company expects the cost reduction program to generate nearly
$14 million in savings during FY 1996. The $2.7 million represents severance
payments and other costs of implementing a near 6% reduction in workforce. As of
January 31, 1995, approximately $2.2 million remained in accrued liabilities
related to these charges. This amount is expected to be disbursed primarily in
the first quarter of FY 1996. In addition to the restructuring, the Company sold
its airplane and reduced the matching contribution rate regarding its 401(k)
plan. Operational changes resulting in significant freight savings, the
scheduled phasing in of a new proportional solenoid valve for the 7200 Series
ventilator and the scheduled transfer of the spirometry product line to the
Company's facility in Mexico from its facility in Ireland are also included in
the Company's cost cutting initiatives. The Company also recorded charges
totaling $.7 million that represent non-restructuring actions associated with
the cost-cutting initiative. These actions primarily include facility
consolidations and a loss on the sale of the Company's airplane. The associated
accrued liability at January 31, 1995 of $.5 million will be paid out primarily
over the course of FY 1996.
As of January 31, 1995, approximately $1.9 million relative to the FY 1994
restructuring remained in accrued liabilities representing costs necessary to
complete the restructuring plan in an orderly and effective manner. This amount
is expected to be disbursed primarily in the first quarter of FY 1996. No buyer
was found for the FOxS operation and the shutdown was completed in the third
quarter of FY 1995.
OTHER INCOME (EXPENSE)
Other expense in FY 1995 increased from FY 1994. Interest expense increased
by $1.2 million due to higher levels of debt in FY 1995 as well as an overall
increase in the Company's average interest rate. The increase was offset by
foreign currency transaction gains in FY 1995 versus losses in FY 1994. These
gains arose from the weakening of the U.S. Dollar, the Company's functional
currency, in the markets in which the Company conducts business. The Company
recorded charges of $5.0 million for obligations associated with an unsolicited
offer to acquire the Company. These obligations include investment banking fees,
public relations expenses and legal fees. Of the $5.0 million, $4.1 million is
recorded in accrued liabilities. The Company expects to disburse this amount in
the first half of FY 1996.
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
<TABLE>
<CAPTION>
Percent
1995 1994 Change
------------------------
<S> <C> <C> <C>
Interest Income $ .4 $ .5 (20.0)%
Interest Expense (5.8) (4.6) 26.1%
Costs Associated With an Unsolicited Offer
To Acquire the Company (5.0) -- --
Miscellaneous, Net .9 .1 --
----- -----
Total Other Income (Expense) $(9.5) $(4.0) --
===== =====
</TABLE>
PROVISION FOR INCOME TAXES
The FY 1995 effective tax rate was 26.1% versus a U.S. statutory rate of 34%.
This lower rate was due to the interaction of the tax valuation allowance
discussed below and the shift in the proportion of earnings generated
domestically versus internationally, which were taxed at foreign statutory rates
averaging 12% in FY 1995. The shift in the proportion of earnings was caused by
the $5.0 million charge for obligations associated with an unsolicited offer to
acquire the Company and the $3.4 million charge for restructuring and other
cost-cutting actions. The FY 1994 effective tax benefit rate of 18.8% was due to
non-deductible amortization combined with losses for which there was no current
benefit.
The Company has net deferred tax assets of $31.2 million partially offset by
a valuation allowance of $21.1 million. The realization of the deferred tax
benefit depends on the Company's ability to generate sufficient U.S. taxable
income (approximately $20 million) in the future. Approximately 65% of the
Company's total temporary differences are expected to reverse in the next two
years. As a result of the restructuring actions taken during FY 1994 and FY 1995
and the expected continuing growth in future profitability, the Company believes
it is well positioned to take advantage of this tax benefit in the future.
If the Company achieves sufficient profitability to use all of the deferred
tax benefit, the valuation allowance will be reduced through a credit to
expense. If the Company is unable to generate taxable income in the future,
increases in the valuation allowance relative to the deferred tax benefit
currently existing will be required through a charge to expense.
FINANCIAL CONDITION
WORKING CAPITAL
The ratio of current assets to current liabilities was 2.0 as of January 31,
1995, up from 1.6 as of January 31, 1994. Working capital increased to $73.6
million from $51.9 million. The primary reasons for the increase included a $9.8
million decrease in notes payable as a result of the issuance of new long-term
notes late in the second quarter of FY 1995 and an approximate $10.1 million
decrease in other accrued expenses related to accrued FY 1994 restructuring
expenses that were paid in FY 1995, offset by a $4.1 million accrual for
expenses associated with an unsolicited offer to acquire the Company and $2.2
million in FY 1995 accrued restructuring expenses. In addition, the Company's
investment in accounts receivable and inventory grew $13.3 million offset
somewhat by a $4.3 million decrease in deferred income tax benefits.
LIQUIDITY AND CAPITAL RESOURCES
After removing the effect of the restructuring charges, the cumulative effect
of changes in accounting principles and the income tax provision (benefit), the
Company generated an increase of $16 million in net income in FY 1995 over FY
1994. This additional net income was offset by an increase in accounts
receivable of $3.6 million, which is a reflection of higher sales as well as an
increase in the proportion of non-U.S. sales to total sales. Non-U.S. sales
traditionally have a longer collection period. Inventory balances also increased
approximately $10 million due to a planned effort to raise levels of inventory
to meet expected demand. Income taxes payable changed significantly as the
Company was in a net income position in FY 1995 versus a net loss position in FY
1994. In addition, a $1.9 million payout from the deferred compensation plan
occurred in the first quarter of FY 1995 for which there was no comparable event
in FY 1994. Further, deferred revenue increased in the current year due to both
sales of warranties and amortization of past warranties sold where the
comparative amount in FY 1994 included warranty sales and limited amortization.
45
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Net cash and cash equivalents used in investing activities decreased when
compared to FY 1994. This decrease was primarily due to the FY 1994 acquisition
of Hoyer Medizintechnik and SEFAM S.A. This accounts for $15.6 million of the
decrease. The remaining decrease of approximately $2.5 million was the result of
an increase in capital expenditures more than offset by the sale of certain
fixed assets during FY 1995. Fiscal year 1996 capital expenditures are expected
to increase relative to current year levels as the Company continues to improve
and replace existing facilities and other fixed assets as appropriate. The
Company also expects to make additional expenditures for land as part of its
previously announced long-term facilities development plans.
Net cash and cash equivalents provided by financing activities have decreased
when compared to FY 1994. Short-term notes payable have been reduced by $9.8
million in FY 1995 versus a $19.9 million increase in FY 1994. This reduction
was offset by a $20 million increase in long-term debt in FY 1995 (discussed
below). These events, combined with minimal stock repurchases in FY 1995 versus
$2.7 million in stock repurchases in FY 1994 resulted in a generation of $2.9
million from financing activities in FY 1995 versus $9.8 million in FY 1994.
As of January 31, 1994, the Company was not in compliance with several
provisions of its long-term debt agreements including current ratio and
restrictions on payments of dividends and purchases of treasury stock. The
Company must normally maintain a current ratio of 1.75 but obtained a waiver to
lower this ratio to 1.6 through January 31, 1995. During the second quarter of
FY 1995, the Company arranged, through a private placement, $20 million of
unsecured promissory notes using the proceeds to extinguish several short-term
notes, thereby bringing the current ratio covenant agreed to under the various
long-term debt agreements into compliance with such agreements. The current
ratio as of January 31, 1995 was 2.0. This increase in long-term debt would have
violated a covenant in several of the Company's debt agreements requiring senior
funded debt not to exceed 45% of net tangible assets. However, waivers were
obtained setting the maximum allowable amount of senior funded debt to 50% of
net tangible assets through October 31, 1994. As of January 31, 1995, the
Company was in compliance with the most restrictive of these agreements. Waivers
through January 31, 1995, were also obtained for payment of dividends and
purchases of treasury stock limited to a maximum of $1.7 million. After January
31, 1995, the most restrictive payment covenant returns to the base of $4.5
million plus 75% of the net income less 100% of losses since June 30, 1988. As
of January 31, 1995, the Company was in compliance with the modified provisions
of its debt agreements; however, the future payment of dividends will be limited
by the extent to which future earnings of the Company exceed $1.2 million. The
Company is confident that first quarter earnings will exceed the $1.2 million
level. The Company expects no need for additional waivers.
Long-term debt, excluding current maturities, represents 31.7% of long-term
debt plus stockholders' equity at January 31, 1995, and 26.4% at January 31,
1994. At January 31, 1995, the Company had $35 million of unsecured bank lines-
of-credit available, $18.0 million of which was used.
U.S. HEALTH CARE SYSTEM CHANGES
The U.S. health care system is undergoing significant changes in response to
market forces. The principal change involves increasing utilization of various
forms of managed care. Managed care trends are, in turn, causing hospitals to
consolidate, restructure, and otherwise slow their rate of spending growth. The
Company believes it is seeing the effects of such spending curtailment in its
hospital capital equipment products -- principally the 7200 Series ventilatory
system. The Company has not seen any significant adverse effects of managed care
trends on its home care products business and home care may, in fact, be
benefiting from such trends due to its inherent cost-effectiveness relative to
institutional care. However, the new Congress, with its Republican majority, is
likely to further emphasize deficit reduction and there can be no assurance that
home care will not be adversely affected by deficit reduction-driven legislative
changes to the Medicare and Medicaid programs.
SUPPLEMENTAL INFORMATION
In order to help stockholders better understand the economic dynamics and
potential of the Company's business, the Company decided to begin providing
supplemental information that sets forth its revenues and earnings before
interest, taxes and other unusual charges (EBITOC) in its two primary business
lines - Puritan and Bennett. The information excludes FOxS operations, which
were shut down in the third quarter of FY 1995, restructuring, other strategic
cost-cutting initiative charges and charges related to an unsolicited offer to
acquire the Company, but otherwise includes fully allocated corporate office
expenses.
46
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
PURITAN - Puritan includes the rapidly growing home care product lines and
certain complementary products such as medical gases and gas-related equipment
and spirometry. Aero Systems is also included because it shares one of the
larger manufacturing facilities with the Puritan Group and is relatively small.
<TABLE>
<CAPTION>
1995 1994 1993
---------------------------------
<S> <C> <C> <C>
Revenue $214.8 $184.2 $167.8
EBITOC $ 20.0 $ 22.9 $ 24.7
% of Revenue 9.3% 12.4% 14.7%
</TABLE>
Puritan now accounts for about two-thirds of the Company's total revenues.
The average annual growth for the five years ended January 31, 1995 was 14%.
Within Puritan, home care product revenues have grown at rates considerably
above the overall Puritan average.
Puritan's EBITOC has been higher in the recent past and, with the recently
implemented cost-cutting initiative, is expected to return to higher levels in
FY 1996. Fiscal year 1995 was a year in which the Company placed a very high
priority upon strengthening the operating systems and procedures of Puritan's
research and manufacturing operations, most of which have grown very rapidly in
recent years. This effort increases the Company's ability to continue growing
rapidly in the future while maintaining control over the quality of its products
during such growth. At the same time, however, this investment was not without
initial higher costs and lost revenues, both of which compressed EBITOC as a
percent of revenue. Part of this price involved disruptions as the Company
installed new operating systems and procedures and moved into two larger
facilities and expanded in a third. Such disruptions also prevented the Company
from keeping pace with growing customer demand and caused some temporary loss of
revenues. As of January 31, 1995, these investment measures resulted in virtual
immediate product delivery in all of the Company's home care product lines.
BENNETT - Bennett includes the Company's critical care ventilator business -
a business that continues to represent an exceptional and long-standing customer
franchise on a global basis - as well as the rapidly growing CliniVision product
line in the U.S., and the small holter monitoring and international portable
ventilator product lines.
<TABLE>
<CAPTION>
1995 1994 1993
---------------------------------
<S> <C> <C> <C>
Revenue $121.2 $122.8 $131.3
EBITOC $ 5.4 $ .0 $ 11.8
% of Revenue 4.5% -- 9.0%
</TABLE>
Since FY 1993, Bennett revenues have declined for several reasons including
difficult market conditions, particularly in the U.S. hospital market,
discontinuation of certain older products and accessories and the Company's
withdrawal from the U.S. portable ventilator market. In addition, Bennett has
also undertaken major initiatives at significant costs to strengthen the
operating systems and procedures of its research and manufacturing operations.
Bennett EBITOC as a percent of revenues improved considerably in FY 1995 over
FY 1994 in spite of the significant investment made in strengthening its
operating systems and procedures for the future. Profitability is expected to
improve further in FY 1996 as a result of recent cost-cutting actions and
revenue growth is expected as a result of a number of new products and product
enhancements recently introduced internationally and cleared for introduction in
the United States. Profitability growth is expected to continue in FY 1997 as
additional new products are introduced.
TOTAL COMPANY - The Company is encouraged by the continued strong growth of
Puritan and believes both Puritan and Bennett are well positioned to begin
returning to higher levels of profitability. Puritan is growing rapidly and is
expected to return to historical profitability as a percentage of revenues
primarily in FY 1996. Bennett, on the other hand, has not been growing as
rapidly. Key elements to increasing profitability are additional new products
under development coupled with maintaining the Company's strong direct sales and
service distribution channels in North America and Europe, which are capable of
handling more volume. Such distribution channels enable these and other new
products to reach their full revenue and profitability potential. The Company
expects it may take somewhat longer for Bennett profitability as a percentage of
revenues to reach desired levels.
47
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
<TABLE>
<CAPTION>
1995 1994 1993
-------------------------
<S> <C> <C> <C>
Revenue $336.0 $307.0 $299.0
EBITOC $ 25.4 $ 22.9 $ 36.5
% of Revenue 7.6% 7.5% 12.2%
</TABLE>
Significant profitability growth is expected next year from both Puritan and
Bennett due to year-end FY 1995 cost-cutting actions and continued revenue
growth. Anticipated profitability growth is before any additional charges
flowing from an unsolicited offer to acquire the Company or similar matters.
RESULTS OF OPERATIONS--JANUARY 31, 1994 COMPARED TO JANUARY 31, 1993
All tables reflect dollars in millions.
NET SALES
Net sales for the year ending January 31, 1994 (FY 1994), increased 3%
compared to the year ended January 31, 1993 (FY 1993). The following tables
reflect sales for the Company's primary business lines:
<TABLE>
<CAPTION>
Percent
1994 1993 Change
-------------------------
<S> <C> <C> <C>
Puritan $184.2 $167.8 9.8%
Bennett 125.1 132.3 (5.4)%
------ ------
Total Net Sales $309.3 $300.1 3.1%
====== ======
</TABLE>
Puritan continued its pattern of growth, particularly in the U.S. market.
Worldwide, the Company's home care business grew over 18% reaching nearly $110
million. This growth was offset by a 7% decline in Puritan's aviation related
revenues. In the U.S., the Company's home care products business grew about 34%
while outside the U.S. this business declined about 14% from prior year levels.
The Company did not believe the international decline represented a trend as FY
1993 revenues included a sizable oxygen concentrator fleet replacement by a
single European customer whereas FY 1994 revenues did not.
Home oxygen therapy (principally liquid oxygen systems and oxygen
concentrators) represented nearly three-quarters of the Company's Puritan home
care products business. The home oxygen therapy business grew 15% over the prior
year, in spite of that year's unusual oxygen concentrator fleet replacement by a
European customer. The Company expected its home oxygen therapy business to
continue growing, more slowly in the United States but with international growth
resuming.
Worldwide, the sleep disorder diagnosis and treatment products business grew
more than 75% reflecting both rapid market growth and market share gains, again
principally in the United States. In late January 1994, the Company finalized
the previously announced acquisition of SEFAM S.A. (Nancy, France), the leading
European supplier of diagnostic and therapeutic sleep disorder products. It is
the Company's belief that this acquisition places Puritan-Bennett in the leading
market share position in Europe and in the number two position worldwide in what
the Company expects will continue to be a rapidly growing sleep disorders
market. Sleep disorder products should account for an increasing share of the
Company's growing worldwide home care business.
Puritan's aviation revenues declined 7% last year but orders grew 16% from
prior year levels. This order growth mainly reflected a growing interest in the
offerings of the small Airborne Closed Circuit Television (ACCTV) operation
acquired a year ago. Of the $28 million in aviation orders received, ACCTV
accounted for nearly $3.8 million, $2.9 million of which is for the drogue-chute
deployment monitoring system on the McDonnell Douglas C-17 military air
transport. Most of ACCTV's orders last year represented future revenue. The
Company believes ACCTV is on the verge of becoming a meaningful revenue and
profit contributor.
Aviation's order improvement also reflected growing interest in other new
products. Demand for these new products is not limited by rates of new aircraft
production; these products can be used on existing aircraft. Due to such new
product offerings and the facility consolidation, the Company believes its
aviation business will grow and become more profitable during the coming year.
48
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Bennett products did not fare well last year. At approximately $137 million,
orders remained essentially unchanged from the prior year. At approximately $125
million, revenues were down 5%.
Although unit orders for the 7200 Series ventilator system grew 10%
internationally in spite of recessionary economic conditions in Europe, unit
orders fell 18% in the United States. The Company expected United States demand
for the 7200 Series ventilator to stabilize generally around FY 1993 levels and
international demand to continue growing. The Company also expected that service
revenues associated with its growing installed base of hospital ventilators
would continue to increase, as they did in FY 1993. Finally, the Company
expected revenues from its CliniVision Respiratory Care Management Information
System to continue to grow. After a very slow start caused by United States
health care reform uncertainty, CliniVision orders increased significantly in
the second half of the year as hospitals increasingly focused on CliniVision as
a valuable solution to their cost-containment challenge and as the Company
continued to enhance the CliniVision system.
INTERNATIONAL SALES AND PROFITABILITY
The decrease in foreign operations' operating profit in FY 94 was the result
of several events. As expected, the German operation, which was in a start-up
environment, had an operating loss of approximately $1.7 million. Fiscal
year 1993 foreign operating profit also included a sizable oxygen concentrator
fleet replacement by a single customer for which there was no comparable event
in FY 1994. This accounted for approximately $2.3 million of the decrease in
foreign operating profit. In addition, approximately $.9 million of FY 1993
operating profit related to the manufacture of portable ventilators and manual
resuscitators in Ireland. The manufacture of this equipment was transferred back
to the U.S. in FY 1994. Approximately $3.4 million recorded in FY 1994 related
to a change in technology transfer costs recorded by foreign operations in FY
1993, FY 1991 and FY 1990 in accordance with the Company's revised transfer
pricing study. The effect of this adjustment decreased the U.S. operating loss
and the foreign operating profit. The recession in Europe, which caused a
reduction in sales and an increase in bad debt expense (primarily one customer),
contributed to the majority of the remaining decrease. The following tables
reflect the amount of sales and operating profits from the United States and
foreign geographic segments:
<TABLE>
<CAPTION>
Net Sales Percent Operating Profit (Loss) Percent
1994 1993 Change 1994 1993 Change
------------------------ -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Operations $258.7 $245.8 5.2% $(35.4) $ 8.5 --
Foreign Operations 50.6 54.3 (6.8)% .3 12.6 (97.6)%
------ ------ ------- -----
Total $309.3 $300.1 3.1% $(35.1) $21.1 (266.4)%
====== ====== ======= =====
</TABLE>
The following table reflects sales by customer location:
<TABLE>
<CAPTION>
Net Sales Percent of Sales
1994 1993 1994 1993
--------------------------------------
<S> <C> <C> <C> <C>
Customers Within the U.S. $222.6 $205.9 72.0% 68.6%
Customers Outside the U.S. 86.7 94.2 28.0% 31.4%
------ ------ ------ ------
Total Net Sales $309.3 $300.1 100.0% 100.0%
====== ====== ====== ======
</TABLE>
During the past decade, the Company's business profile has changed
substantially from being predominately a supplier of life-support capital
equipment to the United States hospital market. The Company's home care product
line has been, and is expected to continue to be, the fastest growing part of
our business. Life-support products sold in the U.S. market will likely
represent a smaller share of the Company's business in the future, a trend that
does help lower the Company's U.S. regulatory and health care reform risks. At
the same time, the Company will consider utilizing more fully its direct
hospital sales and service organizations in the U.S., Canada, France, Germany,
Italy and the United Kingdom to handle complementary products from other
companies.
In late January 1994, the Company finalized the previously announced
acquisition of SEFAM S.A., the leading European supplier of diagnostic and
therapeutic sleep disorder products, and its 80% owned Lit Dupont S.A.
subsidiary, which makes wheelchair products. Over the past five years, the
Company's home care product business,
49
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
which reached nearly $110 million in revenues in FY 1994, achieved a compound
annual revenue growth rate of over 22% worldwide--31% internationally. The
Company believes that the acquisition of SEFAM S.A. will help such growth trends
continue.
GROSS PROFIT
The gross profit percentage for FY 1994 decreased 2% from FY 1993. The
reduced profitability of Bennett products was the primary contributor to this
decrease. As discussed elsewhere, several factors, including health care reform
uncertainty, recessionary economic conditions in Europe and a fire at Maimonides
Medical Center in Brooklyn, New York, affected the Company's market for Bennett
products. Restructuring actions were taken to improve the profitability of this
part of the business within the context of considerably lower revenue
expectations than the Company has had in the past.
<TABLE>
<CAPTION>
Percent
1994 1993 Change
-------------------------
<S> <C> <C> <C>
Gross Profit $128.7 $130.2 (1.2)%
Gross Profit Percentage 41.6% 43.4% (1.8)%
</TABLE>
SELLING AND ADMINISTRATIVE EXPENSE
Selling and administrative expenses for FY 1994 increased 15% over FY 1993.
This increase was due primarily to the German operation and a small acquisition
made late in FY 1993. This accounted for approximately $3.9 million of the
increase. Approximately $1.9 million was from increased selling expense earlier
in the year related to the intra-arterial blood gas monitoring products.
Approximately $3.7 million was increased selling and administrative expense
relating to the Company's growing Puritan business. An additional $2.3 million
increase was the net result of a credit for a change in estimate for
depreciation expense, an insurance premium refund in FY 1993 and expense
associated with the investigation of the fire in Brooklyn. As discussed
elsewhere, the restructuring actions were expected to help control the rate of
growth in selling and administrative spending.
<TABLE>
<CAPTION>
Percent
1994 1993 Change
-------------------------
<S> <C> <C> <C>
Selling and Administrative Expenses $95.8 $83.2 15.1%
</TABLE>
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for FY 1994 decreased nearly 4% from FY
1993. This decrease resulted almost entirely from reduced spending on the intra-
arterial blood gas monitoring product. In FY 1993, significant research and
development expense was incurred to ready the product for market. When shipment
of the product commenced in late FY 1993, the need for research and development
spending was reduced. As discussed elsewhere, shipments of this product ceased
in December 1993 and future spending on this technology was eliminated by the
restructuring action taken in the fourth quarter of FY 1994. In the future,
research and development activities will continue across all remaining product
lines, however, overall expense will be reduced due to the elimination of the
intra-arterial blood gas monitoring product.
<TABLE>
<CAPTION>
Percent
1994 1993 Change
-------------------------
<S> <C> <C> <C>
Research and Development Expenses $24.9 $25.8 (3.5)%
</TABLE>
RESTRUCTURING CHARGES
Although the Company's Puritan business had a year of growth and
profitability, a number of market and regulatory developments converged to make
FY 1994 a particularly challenging one for the Company as a whole. In addition
to weakness in the aviation market, the combination of health care reform
uncertainty in the United States and recessionary economic conditions in Europe
reduced demand for the Company's hospital capital equipment products, especially
early in the year. Moreover, a tragic fire at Brooklyn, New York's Maimonides
Medical Center in September 1993 called into question the safety of certain of
the Company's products, which were absolved four months later by the findings of
an extensive, independent investigation. However, initial reports that the
Company's
50
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITIONS
products might have caused the fire may have prompted the Food and Drug
Administration (FDA) to conduct additional investigations at some of the
Company's facilities prior to completion of its planned improvement programs and
renew the issue of a consent decree. The January 1994 consent decree primarily
affected the Company's portable ventilator facility in Boulder, Colorado and the
FOxS intra-arterial blood gas monitoring operation in Carlsbad, California. The
agreement also required compliance with GMP and Medical Device Reporting (MDR)
requirements, where applicable, throughout the Company. In response to these
developments, the Company took a number of major actions to reposition itself
for the future.
The Company restructured the hospital ventilator portion of its business in
order to improve its profitability at lower levels of revenue than previously
anticipated. The Company consolidated its aviation business to three facilities
from four so that this part of the business remained profitable in the current
market conditions. The Company closed its Boulder, Colorado facility and
transferred the manufacture of the portable ventilators to its ISO
(International Standards Organization) 9002-certified facility in the Republic
of Ireland from where the Company will serve customers outside the U.S. for the
Companion 2801 portable ventilator. The Company substantially reduced the FOxS
operation, addressed its GMP compliance issues and offered it for sale. No buyer
was found for the FOxS operation and the shutdown was completed in the third
quarter of FY 1995.
As a result of the plan for restructuring, during FY 1994 the Company
recorded restructuring charges of $43.2 million. Included in the charges were
restructuring actions taken during the second quarter (approximately $9 million)
principally made up of severance costs related to a 4.9% employment level
reduction in the Company's ventilator and blood gas monitoring divisions (126
employees), the closing of its aviation facility in El Segundo, California, a
revaluation of certain productive assets, the consolidation of its facilities
including offices in its aviation business, blood gas monitoring operations, and
sales and service operations in France and the U.S., as well as other
miscellaneous charges and costs associated with matching the size of the
Company's operation with the various markets in which the Company operates. The
second quarter charge consisted of approximately $3.3 million in personnel
related charges, $4.4 million in non-cash asset write-downs and $1.3 million for
the consolidation of manufacturing and marketing facilities.
In the fourth quarter of FY 1994, the Company effected a second restructuring
which resulted in a 7.5 % reduction in its work force (188 employees). The
restructuring plan included the closing of the portable ventilator facility in
Boulder, Colorado and the curtailment of the intra-arterial blood gas monitoring
operation in Carlsbad, California. The restructuring resulted in an additional
charge of $34.2 million in the fourth quarter of FY 1994. This charge consisted
of approximately $4.4 million in personnel-related charges, $9.6 million in non-
cash write-downs of inventory, facilities and equipment, and $15.7 million in
non-cash write-downs of certain prepaid royalties, capitalized software and
patents. Portable ventilators will continue to be sold to customers outside the
U.S.; manufacturing was transferred to the Company's facility in the Republic of
Ireland. The expected costs for this period, approximately $4.5 million, which
represent an effective and orderly completion of the stated restructuring plan
and do not include the costs of continuing operations, were accrued.
As of January 31, 1994 approximately $12.0 million remained in accrued
liabilities representing primarily expected severance, cancellation penalties,
remaining facility lease payments, and other costs necessary to complete the
restructuring plan in an orderly and effective manner. This amount was expected
to be disbursed primarily over the first three quarters of FY 1995. After the
third quarter, the Company expected to see the real cash flow benefit of the
restructuring plan. It was not expected that the restructuring would require
significant borrowing. Because of the historical drain on cash flow and the
higher than expected costs developing the proprietary intra-arterial blood gas
monitoring system, the Company expected improved cash flow and profitability
once the restructuring plan was completed. The Company also expected improved
efficiency and profitability from the consolidation of the marketing offices of
the hospital/physician sales force in the United States and the consolidation of
the aviation operation from four locations to three.
51
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITIONS
OTHER EXPENSES
Other expenses increased by 48% in FY 1994 when compared to FY 1993. This
primarily resulted from increased interest expense and unfavorable foreign
currency adjustments which are primarily the result of market fluctuations and
the strengthening of the U.S. Dollar.
<TABLE>
<CAPTION>
Percent
1994 1993 Change
----------------------
<S> <C> <C>
Other Expense $4.0 $2.7 48.1%
</TABLE>
PROVISION FOR INCOME TAXES
The FY 1994 effective benefit rate of 18.8% changed from the FY 1993
effective tax rate of 20.7%. Nondeductible amortization combined with losses for
which there was no current benefit caused the FY 1994 benefit rate to be less
than the statutory benefit rate. In contrast, the FY 1993 effective tax rate was
less than the U.S. statutory rate of 34% because a significant portion of
international income was taxed at the lower foreign statutory rate of 10% in FY
1994.
The Company has a tax valuation allowance of $15.7 million as required by
SFAS No. 109. The realization of this deferred tax benefit depends on the
Company's ability to generate sufficient taxable income in the U.S. in the
future. Approximately 80% of the Company's total temporary differences are
expected to reverse in the next two years. During the past decade, the Company's
business has changed substantially from being predominately a supplier of life-
support capital equipment to the U.S. hospital market towards supplying the home
care market. This trend should help lower the Company's U.S. regulatory and
health care reform risks. Additionally, the Company has undergone substantial
restructuring during FY 1994. As a result, the Company believes it is well
positioned to take advantage of this benefit in the future.
52
<PAGE>
PURITAN-BENNETT CORPORATION AND SUBSIDIARIES
DIRECTORS
Burton A. Dole Jr./4/
Chairman, President and
Chief Executive Officer
Puritan-Bennett Corporation
Overland Park, Kansas
Charles Duboc/1-3/
Chairman (Retired)
Western Casualty and
Surety Company
Kansas City, Missouri
C. Philip Larson Jr., M.D., M.S./4-5/
Professor of Anesthesiology
UCLA School of Medicine
Los Angeles, California
Andre F. Marion/1-2-5/
Vice President (Retired)
Perkin Elmer Corporation
President (Retired)
Applied Biosystems Division
Foster City, California
Thomas A. McDonnell/1-2/
President and
Chief Executive Officer
DST Systems, Inc.
Kansas City, Missouri
Daniel C. Weary/1-3/
Attorney
Blackwell Sanders
Matheny Weary &
Lombardi L.C.
Kansas City, Missouri
Frank P. Wilton/2-3-5/
Chairman, President and
Chief Executive Officer
Ethox Corporation
Buffalo, New York
/1/Member of the Compensation Committee
/2/Member of the Audit Committee
/3/Member of the Pension Committee
/4/Member of the Technology Committee
/5/Member of the Quality and Regulatory
Affairs Committee
MEDICAL ADVISORY BOARD
Reuben M. Cherniack, M.D.
Professor Medicine,
University of Colorado,
National Jewish Center for
Immunology & Respiratory
Medicine
C. Philip Larson Jr. M.D., M.S.
Professor of Anesthesiology
UCLA School of Medicine
Los Angeles, California
John J. Marini, M.D.
Professor of Medicine
University of Minnesota
Medical School, Director,
Pulmonary/Critical Care
St. Paul-Ramsey Medical
Center
Allan I. Pack, M.D., Ph.D.
Director
Center for Sleep & Respiratory
Neurobiology
University of Pennsylvania
Medical Center
Hospital of the University
of Pennsylvania
Henning Pontoppidan, M.D.
Reginald Jenney Professor
Emeritus of Anaesthesia,
Harvard Medical School;
Senior Anesthetist,
Massachusetts
General Hospital
Allen K. Ream, M.S., M.S., M.D.
Clinical Associate Professor
of Anesthesia
Stanford University
Jean E. Rinaldo, M.D.
Professor of Medicine
Vanderbilt University
Chief Pulmonary Medicine/
Critical Care Medicine,
Nashville Department of
Veterans Affairs, Medical
Center
Gordon L. Snider, M.D.
Maurice B. Straus
Professor of Medicine, and
Vice Chairman, Department
of Medicine
Boston University School of
Medicine
Chief, Medical Services,
Boston Veterans
Administration Medical
Center
The Medical Advisory Board meets at regular
intervals to offer its guidance and advice
related to new product programs.
53
<PAGE>
PURITAN-BENNETT CORPORATION AND SUBSIDIARIES
CORPORATE OFFICERS
Burton A. Dole Jr.
Chairman, President and
Chief Executive Officer
John H. Morrow
Executive Vice President and
Chief Operating Officer
Robert L. Doyle
Senior Vice President,
Marketing
Thomas E. Jones
Senior Vice President,
General Manager
Puritan Group
Alexander R. Rankin
Senior Vice President,
General Manager
Bennett Group
Lee A. Robbins
Vice President, Chief
Financial Officer and
Controller
Derl S. Treff
Treasurer
Daniel C. Weary
Secretary
OPERATING OFFICERS
William C. Fettes
Vice President,
General Manager
Gas Products Division
Thomas J. Gaskin
Vice President,
Managing Director
Puritan-Bennett Ireland,
Limited
Nathan B. Hope
Vice President,
Bennett Group
Sales and Marketing
Karl K. Jonietz
Vice President,
General Manager
Lenexa Medical Division
Gregory R. Miller
Vice President,
General Manager
Oxygen Concentrator Division
Judson S. Neal
Vice President,
Puritan Group
Sales and Marketing
David P. Niles
Vice President,
Quality and Regulatory
Affairs
Ernest E. Ross
Vice President,
General Manager
Aero Systems
Evan R. Stewart
Vice President,
Information Services
Francis E. Stowell
Vice President,
Human Relations
Paul L. Woodring
Vice President,
Research and Development
Manager, Ventilator Systems
OTHER
Pierrick Haan
President,
SEFAM S.A.
54
<PAGE>
PURITAN-BENNETT CORPORATION AND SUBSIDIARIES
CORPORATE HEADQUARTERS
9401 Indian Creek Parkway
Post Office Box 25905
Overland Park, Kansas 66225-
5905
Phone: 913-661-0444
Fax: 913-661-0234
GENERAL COUNSEL
Blackwell Sanders Matheny
Weary & Lombardi L.C.
Kansas City, Missouri
TRANSFER AGENT AND REGISTRAR
UMB Bank, N.A.,
Kansas City, Missouri
INDEPENDENT AUDITORS
Ernst & Young LLP
Kansas City, Missouri
AVAILABILITY OF 10-K REPORT:
Puritan-Bennett's Annual Report on Form 10-K, filed with the Securities and
Exchange Commission, will be provided to stockholders without charge upon
written request to corporate headquarters, Attention: Derl S. Treff, Treasurer.
NASDAQ LISTING
Puritan-Bennett's common stock trades on the Nasdaq National Market System. The
Nasdaq symbol is PBEN. The Company had approximately 1,000 stockholders of
record as of March 24, 1995. Market price information is shown below.
<TABLE>
<CAPTION>
MARKET PRICE INFORMATION
PER NASDAQ: FY 1995 MARKET PRICE
----------------------------------
QUARTER HIGH LOW DIVIDENDS
------- ------ ------ ---------
<S> <C> <C> <C> <C>
FIRST 22 3/4 19 1/2 $0.03
SECOND 21 5/8 17 1/4 $0.03
THIRD 26 1/8 15 5/8 $0.03
FOURTH 26 18 3/4 $0.03
FY 1994 Market Price
----------------------------------
Quarter High Low Dividends
------- ------ ------ ---------
First 29 7/8 15 1/4 $0.03
Second 22 3/4 16 5/8 $0.03
Third 20 3/4 16 $0.03
Fourth 21 15 $0.03
</TABLE>
55
<PAGE>
Exhibit (21)
SUBSIDIARIES OF THE COMPANY
Registrant:
PURITAN-BENNETT CORPORATION
Subsidiaries of Registrant:
Place of
Name Incorporation
---- -------------
Puritan-Bennett International, Inc. Guam
Puritan-Bennett Canada, Ltd. Canada
Puritan-Bennett International Corp. Maryland
Puritan-Bennett Aero Systems Co. California
Puritan-Bennett UK Limited United Kingdom
Puritan-Bennett (H.K.) Limited Hong Kong
Puritan-Bennett France SARL France
Medicomp, Inc. (56% held by Registrant) Florida
Puritan-Bennett Italia S.r.l. Italy
Puritan-Bennett Australia Pty., Limited Australia
Puritan-Bennett Nederland B.V. The Netherlands
Puritan-Bennett Holdings Ireland Limited Ireland
Puritan-Bennett Ireland Limited Ireland
Puritan-Bennett de Mexico S.A. de C.V. Mexico
Puritan-Bennett Helsinki OY Finland
Puritan-Bennett GmbH Germany
SEFAM S.A. France
Puritan-Bennett France Holdings S.A. France
Lit Dupont S.A. (80% held by SEFAM S.A.) France
Air S.T. SARL (50% held by SEFAM S.A.) France
Puritan-Bennett Ireland Distribution Limited Ireland
All of the above Subsidiaries are included in Registrant's consolidated
financial statements and are wholly-owned by Registrant, unless otherwise
indicated.
<PAGE>
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Puritan-Bennett Corporation and subsidiaries of our report dated March 6,
1995, included in the Annual Report of Puritan-Bennett and subsidiaries for the
fiscal year ending January 31, 1995.
Our audits also included the financial statement schedule listed in Item 14(a).
This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
the financial statement schedule referred to above, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We also consent to the incorporation by reference in Registration Statements:
No. 2-98132 on Form S-8 and Form S-3 dated June 23, 1985,
No. 33-6804 on Form S-3 dated July 24, 1986,
No. 33-26495 on Form S-8 and Form S-3 dated January 31, 1989,
No. 33-36497 on Form S-8 dated August 21, 1990,
No. 33-67634 on Form S-8 dated August 18, 1993, and,
No. 33-58471 on Form S-3 dated April 7, 1995,
of our report dated March 6, 1995, with respect to the consolidated financial
statements and schedule of Puritan-Bennett Corporation and subsidiaries included
and/or incorporated by reference in this Annual Report (Form 10-K) for the year
ended January 31, 1995.
/s/ERNST & YOUNG LLP
Kansas City, Missouri
April 25, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-START> FEB-01-1994
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0
0
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</TABLE>
