EXHIBIT 13.1
[ANNUAL SHAREHOLDER REPORT]
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
APRIL 30, 1997 AND 1996 (Dollars In Thousands Except Per Share Data)
ASSETS 1997 1996
-------- --------
CURRENT ASSETS:
Cash and cash equivalents $ 2,704 $ 2,890
Accounts receivable, less allowances of $4,164 and $6,430 140,136 138,455
Inventories 110,779 106,168
Prepaid expenses and other 4,850 5,543
Deferred income tax benefits 8,304 7,904
Total current assets 266,773 260,960
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PROPERTY AND EQUIPMENT:
Land and improvements 19,757 23,669
Buildings 43,528 43,579
Equipment 85,321 82,896
Construction in progress 7,371 458
155,977 150,602
Less- Accumulated depreciation 58,985 53,826
Net property and equipment 96,992 96,776
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OTHER ASSETS:
Goodwill, less accumulated amortization of $9,828 and $6,635 39,984 45,882
Other intangibles, less accumulated amortization of $2,945 and $648 16,547 20,587
Cash surrender value and other 8,036 7,513
Total other assets 64,567 73,982
Total assets $428,332 $431,718
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The accompanying notes are an integral part of these consolidated balance sheets.
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LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1996
CURRENT LIABILITIES: -------- --------
Amounts due to bank $ 11,114 $ 7,101
Notes payable to bank 30,422 28,822
Current maturities of long-term debt -- 3,122
Accounts payable 28,674 31,764
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Accrued liabilities-
Payroll related expenses 22,910 22,014
Warranty 6,191 6,475
Other 18,280 28,465
Total current liabilities 117,591 127,763
LONG-TERM DEBT, less current maturities 57,000 81,254
DEFERRED INCOME TAXES 16,814 21,404
PENSION AND OTHER LONG-TERM LIABILITIES 45,727 45,372
CLASS A COMMON STOCK UNDER REPURCHASE AGREEMENTS (NOTE 10) 8,000 8,000
SHAREHOLDERS' EQUITY:
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Class A Common Stock, $.10 par value, 30,000,000 shares authorized,
17,602,407 and 16,060,311 shares issued 1,760 1,606
Class C Common Stock, $.01 par value, 50,000,000 shares authorized,
zero and 26,250,000 shares issued -- 263
Additional paid-in capital 52,890 31,569
Retained earnings 147,343 126,152
Treasury stock, 18,900 shares, at cost (312) --
Cumulative translation adjustment (10,481) (3,665)
Class A Common Stock under repurchase agreements (Note 10) (8,000) (8,000)
Total shareholders' equity 183,200 147,925
Total liabilities and shareholders' equity $428,332 $431,718
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The accompanying notes are an integral part of these consolidated balance sheets.
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MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED APRIL 30, 1997, 1996 AND 1995 (Dollars In Thousands Except Per Share Data)
1997 1996 1995
NET SALES $543,317 $416,293 $342,176
COST OF SALES 274,155 214,947 167,130
Gross profit 269,162 201,346 175,046
ENGINEERING EXPENSES 48,106 37,307 30,716
SELLING EXPENSES 138,044 105,259 85,072
GENERAL AND ADMINISTRATIVE EXPENSES 44,088 32,880 25,362
RESTRUCTURING EXPENSES -- 3,956 --
WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH & DEVELOPMENT -- 35,700 --
Total operating expenses 230,238 215,102 141,150
Operating income (loss) 38,924 (13,756) 33,896
INTEREST EXPENSE 8,434 4,386 2,973
OTHER EXPENSE (INCOME), net (3,604) (1,162) (107)
Income (loss) before provision for income taxes 34,094 (16,980) 31,030
PROVISION FOR INCOME TAXES 12,903 7,888 11,473
NET INCOME (LOSS) $ 21,191 $(24,868) $ 19,557
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PER CLASS A COMMON SHARE:
Net income (loss) $ 1.29 $ (1.53) $ 1.21
The accompanying notes are an integral part of
these consolidated statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30, 1997, 1996 AND 1995 (Dollars In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1996 1995
Net income (loss) $ 21,191 $ (24,868) $ 19,557
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Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation and amortization 22,026 12,042 14,378
Write-off of acquired in-process research & development -- 35,700 --
Deferred income taxes (2,540) (634) 826
Changes in assets and liabilities-
Accounts receivable (4,810) 992 364
Inventories (7,373) 2,379 (7,037)
Prepaid expenses and other assets (703) 6,497 (675)
Accounts payable and accrued liabilities (928) (8,123) 8,806
Net cash provided by operating activities 26,863 23,985 36,219
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (18,211) (11,399) (15,124)
Purchase of E for M Corporation and Corometrics
Medical Systems, Inc., net of cash acquired -- (89,171) (70,045)
Net cash used in investing activities (18,211) (100,570) (85,169)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) from notes payable to bank (1,124) 3,005 14,737
Proceeds from issuance of long-term debt -- 90,000 45,000
Payments on long-term debt (26,911) (17,000) (37,003)
Proceeds from issuance of common stock 25,484 1,393 1,110
Purchase of treasury stock (4,643) -- --
Net cash (used in) provided by financing activities (7,194) 77,398 23,844
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS (1,644) (1,253) 626
Net decrease in cash and cash equivalents (186) (440) (24,480)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,890 3,330 27,810
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,704 $ 2,890 $ 3,330
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The accompanying notes are an integral part of these consolidated statements.
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MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED APRIL 30, 1997, 1996 AND 1995 (Dollars in Thousands)
Class A Class C
Common Stock Common Stock Treasury Stock Additional
Cumulative
Paid-In Retained Translation
Shares Amount Shares Amount Shares Amount Capital Earnings Adjustment
BALANCE, April 30, 1994 15,852,355 $1,585 26,250,000 $ 263 -- $ -- $ 25,590 $131,463 $ (1,480)
Issuance of common stock
under option 94,250 9 -- -- -- -- 1,101 -- --
Cumulative translation
adjustment -- -- -- -- -- -- -- -- 626
Other -- -- -- -- -- -- 179 -- --
Net income -- -- -- -- -- -- -- 19,557 --
BALANCE, April 30, 1995 15,946,605 $1,594 26,250,000 $ 263 -- $ -- $ 26,870 $151,020 $ (854)
Issuance of common stock
under option 113,706 12 -- -- -- -- 1,381 -- --
Cumulative translation
adjustment -- -- -- -- -- -- -- -- (2,811)
Conversion of E for M stock
options into Marquette
options -- -- -- -- -- -- 3,083 -- --
Other -- -- -- -- -- -- 235 -- --
Net loss -- -- -- -- -- -- -- (24,868) --
BALANCE, April 30, 1996 16,060,311 $1,606 26,250,000 $ 263 -- $ -- $ 31,569 $126,152 $ (3,665)
Issuance of common stock
in offering 1,373,422 137 -- -- -- -- 23,471 -- --
Issuance of common stock
under option 168,674 17 -- -- -- -- 1,859 -- --
Purchase of treasury stock -- -- -- -- (281,400) (4,643) -- -- --
Cumulative translation
adjustment -- -- -- -- -- -- -- -- (6,816)
Conversion of Class C stock
into Class A stock -- -- (26,250,000) (263) 262,500 4,331 (4,069) -- --
Other -- -- -- -- -- -- 60 -- --
Net income -- -- -- -- -- -- -- 21,191 --
BALANCE, April 30, 1997 17,602,407 $1,760 -- $ -- (18,900) $ (312) $ 52,890 $147,343 $(10,481)
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The accompanying notes are an integral part of these consolidated statements.
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997, 1996 AND 1995 (Dollars In Thousands Except Per Share Data)
(1) Nature of Operations-
Marquette Medical Systems, Inc. (the "Company", formerly known as Marquette
Electronics, Inc.) is a worldwide leader in the development and manufacture
of medical equipment and integrated systems for patient monitoring and
diagnostic cardiology applications. The Company also develops clinical
information systems, designed to be integrated with medical equipment,
consisting of hardware and software used by integrated health care delivery
networks and individual hospitals to electronically acquire, record, store,
analyze and distribute patient medical data. The Company's products are
used principally in critical and intensive care units, operating and
recovery rooms, step-down units, labor and delivery units, cardiology
departments, cardiac catheterization laboratories and related areas of
acute care hospitals. In addition, the Company's products are increasingly
being used in smaller hospitals, medical clinics, outpatient surgery
centers, physician offices and homes. The Company covers the United States
market, most of Western Europe and Australia through its own sales force.
The remainder of the international market is served by dealers.
(2) Summary of Significant Accounting Policies-
(a) Basis of consolidation-
The consolidated financial statements include the accounts of
Marquette Medical Systems, Inc. and its foreign and domestic
subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
(b) Revenue recognition-
Revenue is recognized on an accrual basis when equipment and supplies
are shipped. Revenue for service contracts is recognized over the term
of the contract, typically twelve months. Costs related to service
contracts are expensed as incurred.
(c) Supplemental disclosure of cash flow information-
Year Ended April 30,
1997 1996 1995
Cash paid during the year for-
Interest $ 8,059 $4,153 $ 2,911
Income taxes $13,409 $9,789 $11,523
The Company purchased all of the capital stock of E for M Corporation and of
Corometrics Medical Systems, Inc. for $90,333 and $70,766, in fiscal 1996 and
1995, respectively.
In conjunction with the acquisition, liabilities were assumed as follows:
Year Ended April 30,
1997 1996 1995
Fair value of assets acquired
(including goodwill) $ -- $215,524 $ 78,729
Cash paid for the capital stock -- 90,333 70,766
Stock options converted -- 3,083 --
Liabilities assumed $ -- $122,108 $ 7,963
(d)Inventories-
Inventories consist of the following:
April 30,
1997 1996
Raw materials and component parts $ 31,629 $ 35,716
Work-in-process and finished goods 56,434 45,869
Inventory on loan or consignment 22,716 24,583
$110,779 $106,168
For its domestic inventories (representing 72% and 61% of total inventories at
April 30, 1997 and 1996, respectively), the Company employs the last-in, first-
out (LIFO) cost method. The first-in, first-out (FIFO) cost method is used for
all remaining inventories. If the FIFO cost method had been used for domestic
inventories instead of the LIFO cost method, the carrying value assigned to
inventories would have been $2,206 and $1,962 less at April 30, 1997 and 1996,
respectively.
(e) Property and equipment-
Property and equipment, along with improvements that significantly
extend the useful life of existing assets, are carried at cost.
Depreciation is provided on the straight-line method over the
estimated useful lives of the assets which range from 15-20 years for
land improvements, 40-50 years for buildings and 3-7 years for
equipment.
(f) Engineering expenses-
Engineering expenses represent research and development costs and are
charged to operations as incurred. The Company also charged to
operations $35,700 related to the write-off of acquired in-process
research and development attributable to the E for M acquisition in
fiscal 1996. See Note 3 for further discussion of purchased research
and development costs.
(g) Advertising costs-
Advertising costs are charged to operations as incurred. Such charges
were $3,541, $2,260 and $1,691 in fiscal 1997, 1996 and 1995,
respectively.
(h) Cash and cash equivalents-
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents.
(i) Foreign currency-
Asset and liability accounts of the Company's foreign operations are
translated at the current exchange rate, and income and expense
accounts are translated at the average of the monthly exchange rates.
Gains and losses resulting from the translation of foreign currency
financial statements are classified as a separate component of
shareholders' equity.
Foreign currency transaction gains (losses) totalling $1,811, $744 and $124 are
included in other income in the consolidated statements of income for fiscal
1997, 1996 and 1995, respectively.
As a hedge against foreign accounts payable, the Company at times has entered
into various forward exchange contracts to exchange foreign currencies for
United States dollars at a fixed contract rate. Market value gains and losses
resulting from these contracts are recognized in the consolidated statements of
income and offset foreign exchange gains or losses on the foreign payables at
their maturity date. As of April 30, 1997, the Company has three such contracts
to exchange various foreign currencies for a total contract amount of $2,296 and
a maturity date of May 30, 1997. The carrying value of these contracts
approximates fair value.
(j) Net income per Class A
common share-
Class C Common Stock participates in income with Class A Common Stock
in the ratio of 1:100. In December, 1996, all 26,250,000 outstanding
shares of the Company's Class C common shares, $0.01 par value, were
exchanged for 262,500 shares of Class A common stock.
The weighted average shares for calculating net income per Class A
common share is equal to the sum of the weighted average number of
shares of Class A Common Stock outstanding and 1/100 of the weighted
average number of shares of Class C Common Stock outstanding during
the year. Such weighted average shares were 16,452,000, 16,254,000 and
16,172,000 for fiscal 1997, 1996 and 1995, respectively.
In March, 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128 "Earnings per Share." The Company will adopt this
statement in fiscal 1998. However, the pro forma earnings per share
for fiscal 1997, 1996 and 1995 under this statement would have been as
follows:
Year Ended April 30,
1997 1996 1995
Per share amounts
Basic EPS as reported $1.29 $(1.53) $1.21
Effect of SFAS No. 128 (.02) -- (.02)
Diluted EPS as restated $1.27 $(1.53) $1.19
(k) Goodwill-
The excess of the purchase cost over the fair value of net assets
acquired is being amortized over a range of 15-20 years on a straight-
line basis. The Company continually evaluates whether later events and
circumstances have occurred that indicate the remaining estimated
useful life of goodwill may warrant revision or that the remaining
balance of goodwill may not be recoverable. When factors indicate that
goodwill should be evaluated for possible impairment, the Company uses
an estimate of the related business segment's discounted net cash
flows over the remaining life of the goodwill in measuring whether the
goodwill is recoverable. Goodwill (net of accumulated amortization)
was $39,984 and $45,882 at April 30, 1997 and 1996, respectively.
Amortization of goodwill was $3,193 in fiscal 1997, $2,453 in fiscal
1996, and $1,871 in fiscal 1995. See Note 3 for further discussion
related to the goodwill attributable to the E for M and Corometrics
acquisitions.
In March, 1995, FASB issued SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of", which addresses accounting for the impairment of long-
lived assets that either will be held and used in operations or that
will be disposed of. The Company adopted this statement on May 1, 1996
with no material impact on the financial position or results of
operations of the Company.
(l) Use of estimates-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(m) Reclassification of prior year amounts-
Certain prior year amounts have been reclassified to conform with
current year presentations.
(3) Acquisition of Corometrics Medical Systems, Inc. and E for M Corporation-
On May 31, 1994, the Company acquired 100% of the common stock of
Corometrics Medical Systems, Inc. ("Corometrics"), a manufacturer of fetal
monitors and related products. The purchase price was approximately $70,800
and was paid in cash. Related to this purchase, the Company borrowed
$49,200 under a bank loan
agreement. As of April 30, 1996, these borrowings have been paid in full.
The acquisition has been accounted for as a purchase, and the excess of the
purchase price over the fair value of net assets acquired has been
allocated to goodwill. The value of such goodwill is $23,230.
Effective January 1, 1996, the Company acquired 100% of the common stock of
E for M Corporation ("E for M"), an international medical equipment,
software and supplies company serving patient monitoring and cardiology,
which includes cardiac catheterization and electrophysiology laboratories.
The purchase price was approximately $93,400 and was paid in cash and
through the issuance of stock options. The Company converted outstanding
options for E for M stock into options for Marquette stock as part of the
transaction. The fair value of the converted options was $3,083. Related to
this purchase, the Company borrowed $90,000 under bank loan agreements
payable periodically over the next five years. The acquisition has been
accounted for as a purchase and the excess of the purchase price over the
fair value of the net assets acquired has been allocated to goodwill. The
value of such goodwill is $26,022. In addition, the Company acquired
intangible assets related to in-process research and development (R&D),
product technologies and tradenames with values of $35,700, $12,672 and
$8,468, respectively. The acquired in-process R&D was entirely written-off
during the year. The remaining intangibles have estimated useful lives
ranging from 7 to 40 years.
In connection with the acquisition, the Company implemented a restructuring
plan for the purpose of integrating the E for M operation into the
Company's existing operations. This restructuring plan included
consolidation of facilities as well as a reduction in the number of
employees required for the combined operations. The costs expected to be
incurred with respect to this restructuring plan were recorded as
liabilities of E for M which were assumed in the purchase transaction. The
total restructuring charges attributable to E for M were $10,120, of which
$8,447 was estimated at the time of the acquisition in fiscal 1996. An
additional $1,673 was recorded in fiscal 1997 as a change in estimate. The
total charges include $7,205 of severance costs, $992 of dealer termination
costs and $1,923 of facility closing, legal and other costs.
As of April 30, 1997 and 1996, $1,537 and $7,662, respectively, of the
restructuring charges remained in "Other current liabilities" in the
Consolidated Balance Sheets. Unaudited pro-forma results of operations,
assuming the acquisition of both Corometrics and E for M as of May 1, 1994,
and the $35,700 write-off of acquired in-process R&D in fiscal 1996, would
be as follows:
Year Ended April 30,
1996 1995
Net Sales $540,936 $541,138
Net Income (Loss) (27,430) 11,493
Net Income (Loss) Per Class
A Common Share (1.69) .71
(4) Income Taxes-
Deferred income taxes are recorded to reflect the tax consequences on
future years on differences between the tax basis of assets and liabilities
and their financial reporting amounts at fiscal year end. Deferred tax
expense is the result of changes in deferred tax assets and liabilities.
The provision for income taxes consists of the following:
Year Ended April 30,
1997 1996 1995
Current-
Federal $13,069 $7,692 $ 8,609
State 1,990 1,072 1,547
Foreign 384 (242) 491
15,443 8,522 10,647
Deferred (2,540) (634) 826
$12,903 $7,888 $11,473
A reconciliation of the statutory Federal income tax rate to the consolidated
effective income tax rate is as follows:
Year Ended April 30,
1997 1996 1995
Statutory Federal income tax rate 35.0% (35.0)% 35.0%
State and local income taxes, net of Federal income
tax benefit 3.8 4.1 3.4
Tax credits (0.9) (0.6) (1.9)
Foreign tax rate differences and foreign tax
loss utilization (1.5) 7.4 0.2
FSC benefit (1.7) (2.7) (1.4)
Purchased R&D -- 73.6 --
Goodwill 1.3 0.8 --
Other 1.8 (1.1) 1.7
Effective income tax rate 37.8% 46.5% 37.0%
Temporary differences which give rise to the deferred tax assets and liabilities
at April 30, 1997 and 1996 are as follows:
April 30,
1997 1996
Short-term deferred tax assets (liabilities):
Net operating loss carryforward $ 16,638 $ 18,230
Employee benefits 3,890 3,330
Warranty reserve 1,448 1,350
Inventories 284 (513)
Restructuring reserve -- 4,371
Bad debt reserve 177 201
Capital loss carryforward 167 532
Deferred revenue 427 --
Other 357 406
Valuation allowance (15,084) (20,003)
$ 8,304 $ 7,904
Long-term deferred tax assets (liabilities):
Tax Basis Difference of Fixed Assets $ (6,933) $ (8,724)
Tax Basis Difference of Intangible Assets (10,428) (12,199)
Other 547 (481)
$(16,814) $(21,404)
(5) Notes Payable to Bank-
The Company has an unsecured line of credit with a bank whereby it may
borrow up to $25,000. As of April 30, 1997, the borrowings outstanding are
$8,000. Standby letters of credit of $292 reduce the available credit to
$16,708 as of April 30, 1997.
The Company has loan authorizations and overdraft facilities with various
banks whereby it may borrow up to $45,336 (or Eurocurrency equivalent) to
be used for general purposes. As of April 30, 1997, the borrowings
outstanding are $22,422. Outstanding bank guarantees of $5,393 reduce the
available credit to $17,521 as
of April 30, 1997.
The carrying value of notes payable approximates fair value.
The Company has entered into some of the above foreign currency loans in an
amount and term similar to the expected collection period of foreign
accounts receivable as a natural hedge against these amounts. The amount
outstanding on such loans was $9,754 and $6,236 at April 30, 1997 and 1996,
respectively.
The following table summarizes certain information regarding these
short-term borrowings:
Year Ended April 30,
1997 1996 1995
Maximum amount
of borrowings $52,628 $28,742 $27,256
Average amount
of borrowings 39,879 21,975 20,924
Weighted average interest
rate during year 6.7% 6.8% 6.1%
Weighted average interest
rate at year end 6.7% 6.5% 6.7%
(6) Long-Term Debt-
Long-term debt consists of the following:
April 30,
1997 1996
Senior notes, due in installments
through August 29, 2008, bearing
interest at 7.46% $30,000 $ --
Term note, due in installments through
October 31, 2000, bearing interest at
LIBOR + 1% (6.6875% at April 30, 1997) 9,000 27,000
Term note, due in installments through
October 31, 2000, bearing interest at
LIBOR + 1% (6.6875% at April 30, 1997) 9,000 27,000
Term note, due in installments through
October 31, 2000, bearing interest at
LIBOR + 1% (6.6875% at April 30, 1997) 9,000 27,000
Installment promissory note, paid in
fiscal 1997, bearing interest at
fixed rate of 7.175% -- 1,224
Installment promissory note,
paid in fiscal 1997, bearing interest
at fixed rate of 8.750% -- 1,687
Other -- 465
57,000 84,376
Less- Current maturities -- 3,122
$57,000 $81,254
Scheduled maturities:
Year Ending
April 30, Amount
1998 $ --
1999 4,500
2000 22,500
2001 --
2002 --
Thereafter 30,000
$57,000
The carrying value of long-term debt approximates fair value.
The senior notes and term notes contain restrictive covenants which, among
other things, require the
Company to maintain a minimum tangible net worth, a minimum interest
coverage ratio and a maximum liabilities to tangible net worth ratio. The
Company was in compliance with all such covenants at April 30, 1997.
(7) Commitments and Contingencies-
The Company leases plant, office space, and automobiles under various
operating lease agreements. Minimum rental commitments under leases having
initial or remaining terms of greater than one year are as follows:
Year Ending
April 30, Amount
1998 $5,511
1999 4,118
2000 2,586
2001 5,245
Rental expense charged to operations was $6,076, $1,585 and $1,591 in
fiscal 1997, 1996 and 1995, respectively.
The Company leases automobiles from a company owned by two directors.
Rental expense was $314, $589 and $1,028 in fiscal 1997, 1996 and 1995,
respectively.
Various lawsuits and claims are pending against the Company. Although the
outcome of such lawsuits and claims cannot be predicted with certainty, the
resolution of these lawsuits and claims will not, in the opinion of
management, result in a material adverse effect on the financial position
or results of operations of the Company.
(8) Shareholders' Equity-
In March, 1997, the Company sold, through an underwritten public offering,
1,373,422 Class A common shares at a net price of $17.37 per share. The net
proceeds of this offering were used to repay existing bank debt.
In December, 1996, the Company adopted a shareholder rights plan and
declared a dividend of one preferred share purchase right on each
outstanding share of the Company's Class A Common Stock. Under certain
conditions, each right may be exercised to purchase one one-hundredth share
of a new series of nonredeemable preferred stock at an exercise price of
$80, subject to adjustment. The rights may be exercised only after a public
announcement that a party acquired or will make a tender offer to acquire
20% or more of the Company's common stock. The rights, which do not have
voting rights, expire on December 18, 2006 and may be redeemed by the
Company at a price of $0.01 per right at any time prior to their expiration
or the acquisition of 20% of the Company's common stock.
In the event that the Company is acquired in a merger or other business
combination transaction, provisions 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, the 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.
9) Stock Option Plans-
The Company has reserved 3,500,000 shares of Class A Common Stock for
issuance under the Amended and Restated Stock Option Plan for Employees of
Marquette Medical Systems, Inc. (the "Plan"). Under the Plan, incentive
options may be granted to purchase shares at or above fair market value on
the date of grant and expire within ten years, and non-qualified options
may be granted at or above 85% of fair market value on the date of grant
and expire within fifteen years. If stock options granted under the Plan
expire or otherwise terminate without being exercised, the Class A Common
Stock not issued under such stock options shall again become available for
issuance under the Plan.
Option activity during fiscal 1997, 1996 and 1995 is as follows:
Number Weighted
of Shares Average
Under Option Exercise Price
Outstanding, April 30, 1994 1,304,666 $14.28
Granted 292,200 18.43
Exercised (94,250) 11.78
Cancelled (80,250) 14.29
Outstanding, April 30, 1995 1,422,366 15.30
Granted 895,600 17.76
Exercised (96,800) 13.76
Cancelled (407,950) 14.92
Outstanding, April 30, 1996 1,813,216 16.68
Granted 396,000 19.34
Exercised (56,908) 14.57
Cancelled (119,558) 16.80
Outstanding, April 30, 1997 2,032,750 $17.25
The Company has reserved 276,042 shares of Class A Common Stock for
issuance under the E for M 1991 Stock Option Plan and E for M 1991 Key
Employee Stock Option Plan. The E for M stock options outstanding on the
acquisition date were converted into stock options of the Company in
conjunction with the acquisition. Each option converted by the Company
continues to have, and is subject to, the same terms and conditions set
forth in E for M's stock option plan prior to the acquisition. The E for M
stock options were converted into 276,042 stock options of the Company
pursuant to this plan based on an exchange ratio of the average price of
Marquette stock at the acquisition date to the tender price of E for M
stock .
Option activity related to this plan in fiscal 1997 and 1996 is as follows:
Number Weighted
of Shares Average
Under Option Exercise Price
Outstanding, April 30, 1995 -- $--
Granted 276,042 8.58
Exercised (16,906) 3.57
Cancelled -- --
Outstanding, April 30, 1996 259,136 8.91
Granted -- --
Exercised (111,766) 9.36
Cancelled (24,978) 8.21
Outstanding, April 30, 1997 122,392 $8.64
The options outstanding under the Plan at April 30, 1997, consist of the
following:
Weighted Average Weighted Average
Price Range Number of Options Exercise Price Years Remaining in
Per Share Outstanding Exercisable Outstanding Exercisable Contractual Life
$11.20-$14.99 504,150 213,650 $14.19 $14.14 6.4
$15.00-$21.50 1,528,600 181,000 $18.26 $17.75 8.5
2,032,750 394,650 $17.25 $15.79 8.0
The options outstanding under the E for M stock option plans at April 30,
1997, consist of the following:
Weighted Average Weighted Average
Weighted Average Weighted Average
Price Range Number of Options Exercise Price Years Remaining in
Per Share Outstanding Exercisable Outstanding Exercisable Contractual Life
$ 6.17-$ 8.99 78,427 40,570 $ 6.43 $ 6.48 7.9
$ 9.00-$12.76 43,965 24,337 $12.57 $12.49 7.4
122,392 64,907 $ 8.64 $ 8.73 7.3
On August 25, 1994, the Company's shareholders approved the Marquette
Electronics, Inc. Directors' (Non-Employee) Stock Option Plan (the
"Directors' Plan"). The Directors' Plan is designed to compensate non-
employee members of the Board of Directors by an annual grant of non-
qualified options for 4,000 shares of Class A Common Stock at the then fair
market value of the stock. These options become exercisable in four equal
annual installments on each of the first four anniversaries of the date of
grant and expire on the tenth anniversary date. The aggregate number of
shares that may be issued under the Directors' Plan shall not exceed
250,000. During fiscal 1994, options to purchase 16,000 shares were granted
at $14.50 per share. During fiscal 1995, options to purchase 20,000 shares
were granted at $16.00 per share. During fiscal 1996, options to purchase
20,000 shares were granted at $16.25 per share. During fiscal 1997, options
to purchase 16,000 shares were granted at $18.50 per share. All options
granted were outstanding at April 30, 1997, 32,000 shares of which were
exercisable.
The Company adopted SFAS No. 123 "Accounting for Stock-Based Compensation"
with footnote disclosure. The Company still accounts for all of its stock
option plans under APB Option No. 25, under which no compensation cost has
been recognized. Had compensation cost for these plans been determined per
SFAS No. 123, the Company's net income and earnings per share would have
been reduced to the following pro forma amounts:
Year Ending April 30,
1997 1996
Net Income (Loss) $21,191 $(24,868)
As Reported 20,151 (25,519)
Pro Forma
Net Income (Loss) Per Share
As Reported $ 1.29 $ (1.53)
Pro Forma 1.22 (1.57)
Because the SFAS No. 123 method of accounting does not apply to options
granted prior to May 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The weighted average fair value of options granted in fiscal 1997 and
fiscal 1996 were $8.08 and $8.40, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used
for grants in fiscal 1997 and fiscal 1996, respectively: risk-free rates of
5.8% and 6.3%, expected dividend yields of zero, expected lives of 7.0
years and 8.8 years, and expected volatility of 25% and 23% .
(10) Stock Repurchase Agreements-
By agreement, the Company is obligated to repurchase up to $4,000 worth of
Class A Common Stock from each of two shareholders, in each case at the
shareholder's death and at a price per share determined in accordance with
the agreements. Life insurance with a face value of $6,986 has been secured
on the lives of the two shareholders to fund the payments required under
the repurchase agreements. As of April 30, 1997, 397,516 shares of Class A
Common Stock were subject to these stock repurchase agreements. The amount
of the purchase price is
payable within 210 days of the death of the shareholder.
(11) Restructuring of Operations-
In fiscal 1996, the Company initiated and began to implement a plan to
restructure its worldwide operations, primarily in Europe. The
restructuring plan consists of a consolidation of European offices as well
as a corresponding reduction in the number of employees. The restructuring
plan is undertaken for purposes of consolidating the distribution function
in Europe in order to address competitive conditions. In addition, the
restructuring plan is necessary as the existing Marquette operations are
integrated with E for M's European operations. In connection with these
actions, the Company recorded restructuring charges of $3,956 to operating
expenses in fiscal 1996. These charges include $1,267 of severance costs,
$1,366 of facility closing costs including asset write-offs, and $1,323 of
other costs such as dealer termination fees and related legal fees. This
restructuring plan implementation was completed during fiscal 1997.
(12) Employee Benefit Plans-
Profit Sharing and 401(k) Plan - The Company has a Profit Sharing and
401(k) Plan (the "Plan") covering substantially all non-union employees.
The Plan allows participants to make annual contributions ranging from 1%
to 12% of their compensation, subject to certain limitations imposed by the
Internal Revenue Code. The Company matches 30% of the Participants'
contributions, subject to maximum annual matching per participant of five
hundred dollars or 1.5% of the participants' qualified compensation,
whichever is greater. The Company may make annual discretionary
contributions as authorized by the Board of Directors. Total Company
contributions were $3,961, $3,313 and $3,300 in fiscal 1997, 1996 and 1995,
respectively.
Defined Benefit Plans - Marquette Hellige GmbH has an unfunded
noncontributory defined pension plan covering substantially all of its
German-based employees over 25 years of age and with at least 10 years of
service. The benefits are based on an employee's final month's salary and
the number of years of continuous service with E for M.
The Plan was amended in September, 1996 by increasing the retirement age
for some employees and reducing the pension benefit rate for both new and
active employees. The impact of the amendment results in an unrecognized
gain as of April 30, 1997 of $2,084. This will be amortized over the
remaining service life of active employees which is 14 years.
The components of net periodic pension cost for the year ended April 30,
1997 and four month period ended April 30, 1996, respectively, are:
April 30, April 30,
1997 1996
Service costs $ 1,122 $ 377
Interest costs 3,056 1,127
Unrecognized net loss -- (503)
Net pension costs $ 4,178 $ 1,001
The following is a reconciliation of the plan's projected benefit
obligation to the recorded pension obligation:
April 30, April 30,
1997 1996
Accumulated benefit obligation $36,563 $41,099
Vested benefit obligation $34,430 $38,364
Projected benefit obligation $39,679 $45,339
Unrecognized net gain (loss) 408 (503)
Unrecognized gain from Plan Amendment 2,084 --
Accrued pension obligation $42,171 $44,836
Assumptions used in the actuarial calculation are as follows:
Fiscal Fiscal
1997 1996
Discount Rate 7% 7%
Salary Increases 2.75% 2.75%
Corometrics established a defined benefit pension plan for certain of its
union employees effective June 1, 1994. Pension expense charges to
operations in fiscal 1997, 1996 and 1995 were not material.
(13) Segment and Geographic Information-
The Company operates primarily in one business segment, the medical
electronics equipment industry. Financial information by geographic area is
summarized as follows:
Year Ended April 30,
1997 1996 1995
Net sales originating from:
United States $426,469 $355,689 $321,408
Europe 172,558 98,137 45,634
Australia 6,364 5,479 6,281
Corporate and
eliminations (62,074) (43,012) (31,147)
$543,317 $416,293 $342,176
Income (loss) from
operations:
United States $ 41,529 $ 11,307 $ 34,198
Europe (2,615) (27,481) (1,103)
Australia 250 (157) 321
Corporate and
eliminations (240) 2,575 480
$ 38,924 $(13,756) $ 33,896
Identifiable assets:
United States $314,832 $332,492 $237,224
Europe 96,238 98,141 21,199
Australia 2,089 2,680 2,167
Corporate and
eliminations 15,173 (1,595) 4,275
$428,332 $431,718 $264,865
Transfers between geographic areas are recorded at market-based transfer
prices.
Export sales, excluding sales to affiliates, totalled $51,517, $39,566 and
$38,731 in fiscal 1997, 1996 and 1995, respectively.
(14) Derivative Financial Instruments-
The Company uses foreign currency forward exchange contracts to hedge
specific foreign currency exposures. These derivative financial instruments
are not used for trading purposes.
(15) Quarterly Data (Unaudited)-
1997
- --------------------------------------------------------------------------------
1st 2nd 3rd 4th
- --------------------------------------------------------------------------------
Net Sales $124,794 $136,908 $137,714 $143,901
Gross Profit 60,385 66,310 67,480 74,987
Net Income (loss) 3,270 5,216 5,898 6,807
Per Class A
Common Share .20 .32 .37 .40
1996
- --------------------------------------------------------------------------------
1st 2nd 3rd 4th
- --------------------------------------------------------------------------------
Net Sales $ 81,127 $ 84,511 $ 10,309 $140,346
Gross Profit 38,641 43,843 53,578 65,284
Net Income (loss) 979 4,043 (30,665) 775
Per Class A
Common Share .06 .25 (1.89) .05
The following table sets forth the high and low sales prices for the Class
A common stock as reported on the NASDAQ National Market System. The prices
reflect inter-dealer prices, without retail mark-up, mark-down or
commission:
Year Ended
April 30, 1997 April 30, 1996
High Low High Low
First Quarter 18 3/4 15 3/4 19 13
Second Quarter 18 1/2 15 1/2 18 3/4 15 3/4
Third Quarter 22 3/8 14 3/4 21 17 3/4
Fourth Quarter 21 3/4 18 3/8 20 16 1/2
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
To the Shareholders of Marquette
Medical Systems, Inc.:
We have audited the accompanying consolidated balance sheets of MARQUETTE
MEDICAL SYSTEMS, INC. (a Wisconsin corporation) and subsidiaries as of
April 30, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the
period ended April 30, 1997. 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 mis-statement. 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 financial position of Marquette Medical
Systems, Inc. and subsidiaries as of April 30, 1997 and 1996, and the
results of their operations and their cash flows for each of the three
years in the period ended April 30, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
June 5, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
Fiscal 1997 compared to Fiscal 1996
Net sales for fiscal 1997 increased by 30.5% to $543.3 million from $416.3
million for fiscal 1996. The Company's patient monitoring, diagnostic cardiology
and supplies and service product lines achieved sales growth of $52.6 million,
$53.9 million and $20.5 million, or 25.3%, 43.3% and 24.5%, respectively. The
fiscal 1997 results include a full year of activity from operations related to E
for M Corporation which was acquired on January 1, 1996. The increase in net
sales is partly attributable to the E for M acquisition. However, all existing
product lines achieved significant growth over last year.
The introduction of new products in both the patient monitoring and diagnostic
cardiology product lines as well as improved distribution have both contributed
to the sales growth. New product introductions at lower price points have
allowed the Company to increase its potential market by adding depth to its
product lines. These lower price point products are important in terms of
increasing the Company's potential market overseas. The increase in net sales
also reflects the effects of a strengthening market for health care equipment in
the U. S. particularly for the patient monitoring product line. The sales growth
for the fiscal year was negatively affected by a softer market in Western
Europe, particularly Germany, France and the United Kingdom, as well the
negative currency conversions due to a stronger U.S. dollar.
Gross profit for fiscal 1997 increased 33.7% to $269.2 million from $201.3
million in fiscal 1996. Gross margin increased to 49.5% for fiscal 1997,
compared to 48.4% for fiscal 1996. The increase relates to manufacturing
efficiencies gained as E for M was fully integrated into Marquette as well as
product mix. The gross margins were negatively impacted by continued pricing
pressures, especially in Europe. However, the mix of higher margin products in
addition to the manufacturing efficiencies offset this negative impact. The
Company expects continued currency fluctuations and European pricing pressures
to affect future gross margins.
Engineering expenses for fiscal 1997 increased 28.9% to $48.1 million from $37.3
million in fiscal 1996. The increase is mainly attributable to the incremental
expenses related to the E for M operations. Engineering expenses as a percentage
of sales decreased slightly to 8.9% for fiscal 1997 from 9.0% for fiscal 1996.
The Company will continue to invest significantly in both new product
developments and continued enhancements to current products. Due to the
competitiveness and technological nature of the medical systems and equipment
industry, this investment is necessary in order to maintain the Company's
competitive position in the health care industry.
Selling expenses for fiscal 1997 increased 31.1% to $138.0 million from $105.3
million for fiscal 1996, due primarily to the E for M acquisition. In addition
to the incremental expenses related to the E for M operations, the expenses for
fiscal 1997 include increased sales bonuses as the Company's bookings for the
year exceeded the bonus thresholds. The increased bookings are reflected in an
increased backlog. These increases in selling expenses were partially offset by
the cost reductions gained through the restructuring of European distribution.
For fiscal 1997, selling expenses increased slightly as a percentage of sales to
25.4% from 25.3% of net sales for fiscal 1996.
General and administrative expenses for fiscal 1997 increased 34.1% to $44.1
million from $32.9 million in fiscal 1996. E for M operations accounted for a
significant portion of the increase. General and administrative expenses as a
percentage of sales were 8.1% for fiscal 1997 as compared to 7.9% for fiscal
1996. A portion of the increase as a percentage of sales relates to the
additional amortization expense for goodwill and other intangibles which were
recorded in connection with the E for M acquisition. During fiscal 1997, $3.5
million of goodwill and intangible amortization were expensed as compared to
$1.2 million of amortization expense related to the E for M acquisition in
fiscal 1996. Exclusive of the increased amortization, general and administrative
expenses as a percentage of sales would have declined from fiscal 1996. The
decline reflects the benefits realized from the restructuring of the European
operations and the E for M operations.
Operating income for fiscal 1997 was $38.9 million as compared to an operating
loss of $13.8 million for fiscal
1996. The fiscal 1996 operating loss was attributable to a one-time charge
associated with the write-off of purchased research and development in-process
of $35.7 million in connection with the E for M acquisition and to a $4.0
million restructuring charge mainly related to the European operations.
Operating income for fiscal 1996, exclusive of these charges, was $25.9 million.
The increase for fiscal 1997 relates to the increased gross profit attributable
to sales growth and increased margins as well as cost savings associated with
the restructuring.
Interest expense for fiscal 1997 increased to $8.4 million from $4.4 million for
fiscal 1996. The increased interest expense related to the additional debt
outstanding for the entire fiscal year in connection with the E for M
acquisition. In addition, the proceeds received in the public offering of $24.0
million in March, 1997 were used to repay bank term loans incurred in the E for
M acquisition. The Company intends to continue to pay down bank term loans and
foreign lines of credit with any free cash flow in subsequent years. This,
coupled with the reduction in debt associated with the public offering proceeds,
should reduce interest expense in subsequent years.
Other income for fiscal 1997 increased to $3.6 million from $1.2 million in
fiscal 1996. The increase was primarily related to foreign exchange gains of
$1.8 million in fiscal 1997 as compared to $0.6 million in fiscal 1996. The
significant strengthening of the U.S. dollar and the devaluation of the German
mark contributed to the increased exchange gains.
The provision for income taxes for fiscal 1997 was $12.9 million as compared to
$7.9 million in fiscal 1996. The effective tax rate for fiscal 1997 was 37.8%.
In fiscal 1996, the effective tax rate, excluding the impact of the one-time
charge of $35.7 million related to purchased research and development in-
process, was 42.1%. The decrease in the effective rate is attributable to
reduced foreign losses not benefited, the utilization of certain foreign net
operating losses in fiscal 1997, and the reinstatement of the research and
development credit for a significant portion of the fiscal year. The decreases
in the effective rate are offset to some extent by the additional goodwill
expense incurred in connection with the E for M acquisition. Due to the
expiration of the research and development credit in fiscal 1998, management
believes the effective tax rate will increase in fiscal 1998 unless the credit
is reinstated. In addition, the ability to continue to utilize foreign net
operating losses will have an impact on future effective tax rates. If the
European market continues to weaken in the health care industry, unbenefited net
operating losses would increase the Company's effective tax rate.
Fiscal 1996 Compared to Fiscal 1995
Net sales for fiscal 1996 increased 21.7% to $416.3 million from $342.2 million
for fiscal 1995. The fiscal 1996 results included four months of activity from
operations related to E for M. Approximately $54.5 million of the increase in
net sales was due to sales of E for M products. The remaining increase in net
sales for fiscal 1996 of $19.6 million, or 5.7%, was related to the Company's
historic product lines. An improving health care market as well as the E for M
acquisition contributed to an increase in net sales of $27.3 million or 15.1%
for the patient monitoring line and $29.7 million or 31.3% for the diagnostic
cardiology product line. The supplies and service product lines recorded a sales
increase of $17.2 million, or 25.9%, from fiscal 1995. Fiscal 1995 results
included eleven months activity from operations related to Corometrics, which
was acquired in May, 1994.
Gross profit for fiscal 1996 increased 15.0% to $201.3 million from $175.0
million in fiscal 1995. Gross margin decreased to 48.4% for fiscal 1996,
compared to 51.1% for fiscal 1995. The decrease was primarily attributable
to the lower gross margin realized on E for M products. The gross margin
realized on E for M products for the four months of E for M operations included
in fiscal 1996 was 38.1%. Lower than expected shipment levels of E for M
products, attributable in part to the integration of E for M operations into
Marquette, resulted in an inability to fully absorb fixed costs. All of the
Company's product lines experienced decreases in gross margins, mainly
attributable to increased pricing pressures, especially in Europe. In addition,
the ultrasound imaging line inventory at Corometrics was liquidated at a
significant discount, resulting in a margin decline in that line.
Engineering expenses for fiscal 1996 increased 21.5% to $37.3 million from $30.7
million in fiscal 1995. Most of this increase was related to the acquisition of
E for M, which had $4.9 million of engineering expense for the four months of E
for M operations included in fiscal 1996. The remaining increase was a result of
increased new product development costs, particularly in operating room and
emergency care products. Engineering expenses as a percentage of net sales
remained at 9.0% for fiscal 1996, the same percentage as for fiscal 1995.
Selling expenses for fiscal 1996 increased 23.7% to $105.3 million from $85.1
million for fiscal 1995, due primarily to the E for M acquisition. Of the total
increase, $13.1 million related to the four months of E for M operations
included in fiscal 1996. In addition to the increased expenses related to E for
M, a portion of the increase was also related to the incremental month of
Corometrics expenses included in fiscal 1996 compared to fiscal 1995. The
remaining increase was primarily related to an increased sales staff for all
product lines. For fiscal 1996, selling expenses increased slightly as
percentage of net sales to 25.3%, from 24.9% of net sales for fiscal 1995.
General and administrative expenses for fiscal 1996 increased 29.5% to $32.9
million from $25.4 million in fiscal 1995. General and administrative expenses
increased $6.0 million for fiscal 1996, primarily due to the operations of E for
M. The remaining operations of the Company had an increase of $1.5 million for
fiscal 1996 compared to fiscal 1995. In addition to the increase related to E
for M, an incremental month of Corometrics expenses in fiscal 1996 contributed
to the remaining difference. General and administrative expenses as a percentage
of net sales were 7.9% for fiscal 1996, compared to 7.4% for fiscal 1995.
The Company incurred a restructuring charge of $4.0 million for fiscal 1996,
primarily related to its European operations. The restructuring was undertaken
for purposes of consolidating the distribution function in Europe as well as the
integration of E for M operations into Marquette.
During 1996, the Company took a charge related to the write-off of purchased in-
process research and development ("R&D") in the amount of $35.7 million. This
one-time charge is attributable to the in-process R&D acquired with E for M. The
purchase price of E for M was allocated to the fair value of net tangible and
intangible assets acquired. The portion of the purchase price allocated to the
in-process R&D costs of E for M was written-off resulting in this non-recurring
charge.
Interest expense for fiscal 1996 increased to $4.4 million from $3.0 million for
fiscal 1995. The increased interest expense related to the E for M acquisition
was partially offset by the repayment of $8.0 million of debt originally
incurred in connection with the Corometrics acquisition in May 1994. Cash flow
from operations enabled the Company to retire the remaining debt related to the
Corometrics acquisition during fiscal 1996.
Other income for fiscal 1996 increased to $1.2 million from $0.1 million in
fiscal 1995, primarily due to increased foreign exchange gains of $0.6 million.
In addition, losses related to equity investments were $0.7 million less in
fiscal 1996 as compared to fiscal 1995.
The provision for income taxes for fiscal 1996 was $7.9 million. Even though the
Company incurred
a before-tax loss of $17.0 million for the year, the $35.7 million charge
related to purchased in-process R&D was a permanent tax difference for which the
Company did not receive any tax benefit, either current or deferred. Excluding
this charge, the effective tax rate for fiscal 1996 was 42.1% compared to 37.0%
for fiscal 1995. This increase in the effective tax rate for fiscal 1996 was
partly due to the expiration of the R&D credit (a 1.9% benefit in 1995). This
credit was reinstated prospectively on July 1, 1996. The additional increase in
the tax rate for fiscal 1996 was related to foreign net operating losses which
the Company was unable to utilize.
Financial Outlook
In as much as the Company's principal product lines are all related to the
health care industry, they are subject to the current uncertainty surrounding
the industry including consolidation of hospital groups and a move towards
managed care. While the Company cannot predict the impact, if any, that such
modifications might have on its business, the Company's operating results are
closely linked to the health care economy. If revenue or earnings fail to meet
expectations of the investment community, there could be a significant impact of
the trading price for the Company's stock. Management believes that the
introduction of new products and the partnership relationships being established
with the hospitals will keep the Company in a competitive position as the health
care economy demand for new equipment increases.
Liquidity and Capital Resources
Working capital was $149.2 million at April 30, 1997 as compared to $133.2
million at April 30, 1996. Inventories increased by 4.3% to $110.8 million
primarily due to increased sales levels and to give the Company the continued
ability to effectively manage its backlog. Current liabilities decreased to
$117.6 million at April 30, 1997 from $127.8 million at April 30, 1996 as a
result of the payment of restructuring liabilities from the cash flow from
operations.
As of April 30, 1997, the Company had $8.0 million outstanding on U.S. lines of
credit of $25.0 million. In addition, the Company had $22.4 million, U.S. dollar
equivalent, outstanding on foreign lines of credit. The foreign currency
denominated borrowings are used to reduce the currency risks associated with
foreign currency receivables. As of April 30, 1996, the amounts outstanding on
the U.S. and foreign lines of credit were $14.5 million and $14.3 million,
respectively.
Capital expenditures for fiscal 1997 were $18.2 million as compared to $11.4
million in fiscal 1996. The increase relates primarily to the acquisition of a
new business system offset by the disposal of land in Germany.
The $90.3 million acquisition of E for M was funded by three variable rate bank
term loans each in the amount of $30.0 million. Each bank term loan is payable
in eight equal semi-annual installments of $3.75 million each beginning on April
30, 1997 and continuing on each October 31 and April 30 thereafter through
October 31, 2000. As of April 30, 1997, the Company had repaid or refinanced
$63.0 million of such bank term debt. Cash flow from operations was used to
repay $9.0 million of such debt, cash proceeds in an underwritten public
offering of 1,373,422 shares at a net price of $17.37 were used to repay $24.0
million of the such bank term debt, and the remaining $30.0 million was
converted into longer term fixed-rate senior debt. This senior debt accrues
interest at a fixed rate of 7.46% per annum and matures on August, 29, 2008. The
$27.0 million of bank term debt that remained outstanding as of April 30, 1997
accrued interest at a rate equal to the LIBOR rate plus one percent, reset
monthly. At April 30, 1997, the rate was 6.6875% per annum. The Company intends
to repay the interest and retire the remaining debt through cash flow from
operations.
In October, 1996, the Company repurchased 281,400 shares of Common Stock at a
price of $16.50 per share. The $4.6 million used to repurchase the treasury
stock was funded through cash flow from operations. In December, 1996, 262,500
of the treasury shares were used in the exchange of Class C common
stock for Class A common stock. The Company retained 18,900 shares of treasury
stock as of April 30, 1997.
Management believes the Company has the financial resources to meet its short
term and long term cash requirements. Management believes its cash flow from
operations will be sufficient to continue to fund its current obligations as
well as fund the internal growth of the Company. The current U.S. inflation rate
has little impact on Company operations.
On March 3, 1997, FASB released SFAS No. 128, "Earnings per Share," which
simplifies the standards for computing earnings per share and requires a dual
presentation of basic and diluted earnings per share on the income statement.
This statement will apply to fiscal 1998. However, the impact of the change has
been reported in footnote 2(j).
BOARD OF DIRECTORS
Michael J. Cudahy
Chairman
Marquette Medical Systems, Inc.
Timothy C. Mickelson
President
Marquette Medical Systems, Inc.
Peter P. Tong
Marquette Medical Systems, Inc.
Frederick G. Luber
Chairman
Super Steel Products Corp.
Melvin S. Newman
Attorney
Schoenberg, Fisher & Newman, Ltd.
Walter L. Robb
Retired
Senior Vice President
General Electric Company
John G. Bollinger
Dean, College of Engineering
University of Wisconsin-Madison
OFFICERS
Michael J. Cudahy
Chairman and Chief Executive Officer
Timothy C. Mickelson
President and Chief Operating Officer
Mary M. Kabacinski
Sr. Vice President and Chief Financial Officer
Steven G. Books
Division President, Cardiology
Karl F. Braun
Vice President, Europe, Middle East, Africa (EMEA)
P. Michael Breedlove
Division President, E for M Imaging Systems
Gerald J. Lentz
Division President, Service
James R. Mertens
Division President, E for M Cath Lab
Louis P. Scafuri
Division President,
Corometrics Medical Systems, Inc.
Mark Stega
Division President,
QMI Clinical Information Systems
Mark R. Tauscher
Division President, Supplies
Gerald G. Woodard
Division President, Patient Monitoring
Gordon W. Petersen
Secretary
Melvin S. Newman
Assistant Secretary
GENERAL INFORMATION
The 1997 annual meeting of shareholders will be held at 9:00 a.m. local time on
Wednesday, August 13, 1997 at the Company's principal offices, 8200 West Tower
Avenue, Milwaukee, WI 53223.
World Headquarters:
Marquette Medical Systems, Inc.
8200 W. Tower Avenue
Milwaukee, WI 53223
Independent Public Accountants:
Arthur Andersen LLP
Milwaukee, WI
Legal Counsel:
Schoenberg, Fisher & Newman, Ltd.
Chicago, IL
Principal International Subsidiaries
and Offices:
Marquette Medical Systems (Australia) Pty Ltd
Sydney, AUSTRALIA
Hellige Ges.m.b.H.
Vienna, AUSTRIA
Marquette Benelux n.v./s.a.
Brussels, BELGIUM
Marquette Medical Systems, Inc.
Asia Pacific District
Tokyo, Japan
Marquette Hellige S.A.S.
Paris, FRANCE
Marquette Hellige GmbH
Freiburg, GERMANY
Marquette Hellige Italia, Srl
Milano, ITALY
Marquette Hellige Espana S.A.
Madrid, SPAIN
Marquette Scandinavia
Stockholm, SWEDEN
Marquette Hellige (U.K.) Ltd.
Manchester, UNITED KINGDOM
Stockholder and Security Analyst Inquiries and Requests for Form 10-K should be
directed to:
Mary M. Kabacinski
Chief Financial Officer
Marquette Medical Systems, Inc.
8200 W. Tower Avenue
Milwaukee, WI 53223
(414) 362-2560
Stock Listing - Symbol MARQ:
Marquette Medical Systems, Inc. Class A Common Stock is listed on NASDAQ
National Market System.
Transfer Agent/Registrar:
Firstar Trust Company
777 E. Wisconsin Avenue
Milwaukee, WI 53202
The Company's Class A common stock, par value $0.10, is traded on the NASDAQ
National Market System under the symbol MARQ.
At July 1, 1997, Marquette had approximately 638 shareholders of record
(excluding beneficial owners of stock held in street names). Marquette has not
declared or paid dividends on its Class A common stock. The Company intends to
retain its earnings for use in its business and therefore does not anticipate
paying any cash dividends in the foreseeable future.