-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, eF876zWm7bBVltPMPFZzv3M1eqJbD8HHygwtXbbLhk/3yQsZy/WGYOCke9kODY1U 8LsYOe2QU9HhzCMuf2Z8zA== 0000950131-95-000986.txt : 19950426 0000950131-95-000986.hdr.sgml : 19950426 ACCESSION NUMBER: 0000950131-95-000986 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19950131 FILED AS OF DATE: 19950425 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PURITAN BENNETT CORP CENTRAL INDEX KEY: 0000081199 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 440399150 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-03717 FILM NUMBER: 95530930 BUSINESS ADDRESS: STREET 1: 9401 INDIAN CREEK PKWY BLDG 40 STE 300 CITY: OVERLAND PARK STATE: KS ZIP: 66210 BUSINESS PHONE: 913-338-7410 MAIL ADDRESS: STREET 1: 9401 INDIAN CREEK PARKWAY CITY: OVERLAND PARK STATE: KS ZIP: 66210 10-K 1 FORM 10-K 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. PART I ITEM 1. BUSINESS - ---------------- 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 2 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 3 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 4 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 5 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 6 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. 7 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 8 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 9 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. 10 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. 11 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 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 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 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 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 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 EXECUTIVE OFFICERS OF THE COMPANY ---------------------------------
Year First Name Office Age Elected -------- ---------- --- ------- 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
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 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 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 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 (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 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
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 - ---------------------------------------------------------------------------------------------------------------------------------- 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)
24
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS - CONTINUED (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.
25 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 * (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 (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 (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 EX-10.C 2 EXHIBIT 10C 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 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 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 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 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 ATTACHMENT A PURITAN-BENNETT CORPORATION Management Incentive
Incentive Target Level Category: (% of Salary) 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%
6 TABLE I RETURN ON ASSETS INCENTIVE SCHEDULE
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 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
7 TABLE II RETURN ON ASSETS INCENTIVE SCHEDULE
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 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 -------
8 APPENDIX I ILLUSTRATIVE EXAMPLE
PARTICIPANT - - A BUSINESS UNIT - - PURITAN GROUP, BENNETT GROUP and AERO SYSTEMS Incentive ROA Incentive Incentive Allocation X Schedule = Percent Earned 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 -------
9 EX-10.S 3 EXHIBIT 10S 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 (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- (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- 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- EX-11 4 EXHIBIT 11
STATEMENT REGARDING COMPUTATION EXHIBIT (11) OF PER SHARE EARNINGS QUARTER ENDING YEAR ENDING JANUARY 31 JANUARY 31 ------------------------- ------------------------- 1995 1994 1995 1994 ========================= ========================= 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 $(2.90) ========================= ========================= The company does not meet the 3% dilution test contained in Accounting Principles Board Opinion #15, therefore disclosure of diluted earnings per share on the face of the condensed consolidated statements of operations is not required.
EX-13 5 EXHIBIT 13 PURITAN-BENNETT CORPORATION AND SUBSIDIARIES FINANCIAL REPORT FISCAL YEAR 1995
Incoming Orders, Net Sales and Net Income (Loss) Per Share.. 21 Ten-Year Summary............................................ 22 Management's Responsibility for Financial Statements........ 24 Report of Independent Auditors.............................. 24 Consolidated Balance Sheets................................. 25 Consolidated Statements of Operations....................... 26 Consolidated Statements of Stockholders' Equity............. 27 Consolidated Statements of Cash Flow........................ 28 Notes to Consolidated Financial Statements.................. 29 Supplemental Information for the Ten-Year Summary........... 41 Management's Discussion and Analysis of Results of Operations and Financial Condition........................ 42
Incoming Orders, Net Sales ($ Millions) and Net Income (Loss) Per Share - -------------------------------------------------------------------------------
FY 1994 FY 1995 ------------------------------------- ------------------------------------- Apr. 30 July 31 Oct. 31 Jan. 31 APR. 30 JULY 31 OCT. 31 JAN. 31 ------- ------- ------- ------- ------- ------- ------- ------- 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 - ---------------------------------------------------------------------------------------------------------
21 TEN-YEAR SUMMARY PURITAN-BENNETT CORPORATION AND SUBSIDIARIES All dollar amounts in thousands, except common share data
Transition 1995 1994 1993 Period - ----------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------
See Page 41 for the supplemental information for the ten-year summary. 22
1991 1990 1989 1988 1987 1986 1985 - ------------------------------------------------------------------ 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 - ------------------------------------------------------------------
23 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 CONSOLIDATED BALANCE SHEETS PURITAN-BENNETT CORPORATION AND SUBSIDIARIES Dollars in thousands, except per share data
January 31 1995 1994 ------------------ 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 ======== ========
See notes to consolidated financial statements. 25 CONSOLIDATED STATEMENTS OF OPERATIONS PURITAN-BENNETT CORPORATION AND SUBSIDIARIES Dollars in thousands, except per share data
Year Ended January 31 1995 1994 1993 ------------------------------------ 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 ========== ========== ==========
See notes to consolidated financial statements. 26 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY PURITAN-BENNETT CORPORATION AND SUBSIDIARIES Dollars in thousands, except per share data
Additional Deferred Common Stock Paid-In Retained Stock Treasury Shares Par Value Capital Earnings Awards Stock --------------------------------------------------------------- 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) $ -- ========== ======= ======= ======== ======= =======
See notes to consolidated financial statements. 27 CONSOLIDATED STATEMENTS OF CASH FLOWS PURITAN-BENNETT CORPORATION AND SUBSIDIARIES Dollars in thousands
Year Ended January 31 1995 1994 1993 ------------------------------ 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 ======== ======== ========
See notes to consolidated financial statements. 28 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 $64,000,000 as of January 31, 1995. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTING CHANGES: During 1994, the Company changed its method of accounting for income taxes to conform with Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes" (see Note 6). On January 31, 1994, the Company changed its method of accounting for postemployment benefits, retroactive to February 1, 1993, to conform with SFAS No. 112 "Employers' Accounting for Postemployment Benefits" (see Note 5). The cumulative effect of these changes was as follows: Dollars in thousands, except per share data
Year Ended January 31 1994 ---------- Income taxes ($.23 per share) $(2,755) Postemployment benefits, net of taxes of $31 ($.01 per share) (135) ------- $(2,890) =======
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:
1995 1994 (Dollars in thousands) ---------------------- 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 ======= =======
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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3: PLANT AND EQUIPMENT Plant and equipment consist of:
1995 1994 (Dollars in thousands) ---------------------- 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 ======== ========
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:
1995 1994 1993 (Dollars in thousands) ----------------------------- 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%
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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: EMPLOYEE BENEFITS (CONTINUED) A summary of the components of net cost for the defined benefit plans follows:
Pension Supplemental 1995 1994 1993 1995 1994 1993 (Dollars in thousands) --------------------------- ------------------- 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 ======= ======= ======= ===== ===== =====
Assumptions used in determining the net cost for the defined benefit plans were:
Pension Supplemental 1995 1994 1993 1995 1994 1993 ---------------------- -------------------- 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% -- -- --
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:
Pension Supplemental 1995 1994 1995 1994 (Dollars in thousands) ------------------- ----------------- 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 ======= ======= ====== ======
Assumptions used in determining the actuarial present value of the projected benefit obligation for the pension plans were:
U.S. Canada Ireland 1995 1994 1995 1994 1995 1994 ------------ ------------- --------------- 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%
32 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:
1995 1994 (Dollars in thousands) ---------------------- Service cost $ 39 $ 35 Interest cost 131 166 Amortization of unrecognized net liability 85 92 ------ ------ Net Cost $ 255 $ 293 ====== ======
The components of the Company's postretirement benefits obligation recognized in the consolidated balance sheet were as follows:
1995 1994 (Dollars in thousands) ---------------------- 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 ====== ======
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 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:
Deferred Liability Method Method 1995 1994 1993 CURRENT: (Dollars in thousands) --------------------------- 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 ====== ======== ======
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 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:
1995 1994 ASSETS LIABILITIES NET Assets Liabilities Net (Dollars in thousands) ---------------------------------- ------------------------------------- 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 ======= ====== ======= ======= ====== =======
The components of the deferred income tax provision for the year prior to adoption of SFAS No. 109 result from the following:
1993 (Dollars in thousands) ---------------------- 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 =======
A reconciliation of the provision for (benefit from) income taxes to the statutory federal rate is as follows:
1995 1994 1993 (Dollars in thousands) ------------------------------------------------------------------------ EFFECTIVE Effective Effective AMOUNT RATE Amount Rate Amount Rate ------- --------- -------- --------- ------- --------- 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% ======= ==== ======== ====== ======= =====
35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7: LONG-TERM DEBT
Long-term debt is summarized as follows: 1995 1994 (Dollars in thousands) ---------------------- 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 ======= =======
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 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.
Number of Shares ---------------------------------- 1988 OPTION PLAN: Reserved Granted Available --------- ------- --------- 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 ========= ======= =========
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).
Number of Shares ------------------------------- 1988 AWARD PLAN: Reserved Granted Available -------- ------- --------- 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 ======= ======= =======
37 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:
(Dollars in thousands) ---------------------- 1996 $ 3,160 1997 2,723 1998 2,362 1999 1,445 2000 480 Thereafter 1,775 ------- Total minimum lease payments $11,945 =======
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 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:
(Dollars in thousands) _______________________________________________________________________________ Transfers Sales to Between Operating Unaffiliated Geographic Profit Identifiable Customers Areas Total (Loss) Assets ____________ __________ ________ _________ ____________ 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 ======== ======== ======== ======== ========
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 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:
(Dollars in thousands) ---------------------- 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 =======
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 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:
Quarter Ended (Dollars in thousands, except per share data) --------------------------------------------- Apr. 30 July 31 Oct. 31 Jan. 31 ------- ------- ------- ------- 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)
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 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:
Percent 1995 1994 Change ------------------------ 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% ====== ======
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 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:
Net Sales Percent Operating Profit (Loss) Percent 1995 1994 Change 1995 1994 Change ------ ------ ------- ----- ------- ------- 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) -- ====== ====== ===== ======
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:
Net Sales Percent of Sales 1995 1994 1995 1994 ------ ------ ----- ----- 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% ====== ====== ===== =====
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.
Percent 1995 1994 Change ------ ------ ------- Gross Profit $139.6 $128.7 8.5% Gross Profit Percentage 41.6% 41.6% --
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 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 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Percent 1995 1994 Change ------------------------ 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) -- ===== =====
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 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 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.
1995 1994 1993 --------------------------------- Revenue $214.8 $184.2 $167.8 EBITOC $ 20.0 $ 22.9 $ 24.7 % of Revenue 9.3% 12.4% 14.7%
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.
1995 1994 1993 --------------------------------- Revenue $121.2 $122.8 $131.3 EBITOC $ 5.4 $ .0 $ 11.8 % of Revenue 4.5% -- 9.0%
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 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
1995 1994 1993 ------------------------- Revenue $336.0 $307.0 $299.0 EBITOC $ 25.4 $ 22.9 $ 36.5 % of Revenue 7.6% 7.5% 12.2%
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:
Percent 1994 1993 Change ------------------------- Puritan $184.2 $167.8 9.8% Bennett 125.1 132.3 (5.4)% ------ ------ Total Net Sales $309.3 $300.1 3.1% ====== ======
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 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:
Net Sales Percent Operating Profit (Loss) Percent 1994 1993 Change 1994 1993 Change ------------------------ ----------------------------------- 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)% ====== ====== ======= =====
The following table reflects sales by customer location:
Net Sales Percent of Sales 1994 1993 1994 1993 -------------------------------------- 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% ====== ====== ====== ======
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 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.
Percent 1994 1993 Change ------------------------- Gross Profit $128.7 $130.2 (1.2)% Gross Profit Percentage 41.6% 43.4% (1.8)%
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.
Percent 1994 1993 Change ------------------------- Selling and Administrative Expenses $95.8 $83.2 15.1%
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.
Percent 1994 1993 Change ------------------------- Research and Development Expenses $24.9 $25.8 (3.5)%
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 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 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.
Percent 1994 1993 Change ---------------------- Other Expense $4.0 $2.7 48.1%
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 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 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 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.
MARKET PRICE INFORMATION PER NASDAQ: FY 1995 MARKET PRICE ---------------------------------- QUARTER HIGH LOW DIVIDENDS ------- ------ ------ --------- 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
55 EX-21 6 EXHIBIT 21 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. EX-23 7 EXHIBIT 23 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 EX-27 8 EXHIBIT 27
5 1,000 YEAR JAN-31-1995 FEB-01-1994 JAN-31-1995 2,121 681 74,682 1,336 57,541 144,733 171,139 78,779 273,135 71,161 54,492 12,581 0 0 104,703 273,135 336,026 336,026 196,387 118,744 (1,352) 5,049 5,830 11,368 2,970 8,398 0 0 0 8,398 0.67 0.67
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