EXHIBIT 13.1
[ANNUAL SHAREHOLDER REPORT]
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1998 AND 1997 (Dollars in Thousands Except Per Share Data)
ASSETS 1998 1997
-------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 5,063 $ 2,704
Accounts receivable, less allowances of $4,283 and $4,164 159,343 140,136
Inventories 109,003 110,779
Prepaid expenses and other 5,068 4,850
Deferred income tax benefits 11,337 8,304
-------------- --------------
Total current assets 289,814 266,773
-------------- --------------
PROPERTY AND EQUIPMENT:
Land and improvements 19,249 19,757
Buildings 44,656 43,528
Equipment 95,386 85,321
Construction in progress 16,594 7,371
-------------- --------------
175,885 155,977
Less-Accumulated depreciation 62,181 58,985
-------------- --------------
Net property and equipment 113,704 96,992
-------------- --------------
OTHER ASSETS:
Goodwill, less accumulated amortization of $12,773 and $9,828 33,050 39,984
Other intangibles, less accumulated amortization of $4,991 and $2,945 14,146 16,547
Cash surrender value and other 8,646 8,036
-------------- --------------
Total other assets 55,842 64,567
-------------- --------------
Total assets $ 459,360 $ 428,332
============== ==============
The accompanying notes are an integral part of these consolidated balance
sheets.
20
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES: 1998 1997
--------- ---------
Amounts due to bank $ 11,499 $ 11,114
Notes payable to bank 35,378 30,422
Accounts payable 31,122 28,674
Accrued liabilities-
Payroll related expenses 21,293 22,910
Warranty 6,656 6,191
Other 21,639 18,280
--------- ---------
Total current liabilities 127,587 117,591
--------- ---------
LONG-TERM DEBT, less current maturities 37,500 57,000
DEFERRED INCOME TAXES 15,911 16,814
PENSION AND OTHER LONG-TERM LIABILITIES 56,046 45,727
COMMON STOCK UNDER REPURCHASE AGREEMENTS (NOTE 11) 8,000 8,000
SHAREHOLDERS' EQUITY:
Common Stock, $.10 par value, 30,000,000
shares authorized, 17,905,343 and 17,602,407
shares issued 1,791 1,760
Additional paid-in capital 58,445 52,890
Retained earnings 173,982 147,343
Treasury Stock, Zero and 18,900 shares
at cost - (312)
Cumulative translation adjustment (11,902) (10,481)
Common Stock under repurchase agreements (8,000) (8,000)
(Note 11)
--------- ---------
Total Shareholders' equity 214,316 183,200
--------- ---------
Total liabilities and shareholders'
equity $ 459,360 $ 428,332
========= =========
The accompanying notes are an integral part of these consolidated balance
sheets.
21
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED APRIL 30, 1998, 1997, AND 1996 (Dollars in Thousands Except
Per Share Data)
1998 1997 1996
-------- -------- --------
NET SALES $578,260 $543,317 $416,293
COST OF SALES 287,641 274,155 214,947
-------- -------- --------
Gross profit 290,619 269,162 201,346
-------- -------- --------
ENGINEERING EXPENSES 52,594 48,106 37,307
SELLING EXPENSES 141,427 138,044 105,259
GENERAL AND ADMINISTRATIVE EXPENSES 46,926 44,088 32,880
RESTRUCTURING EXPENSES - - 3,956
WRITE-OFF OF ACQUIRED IN-PROCESS
RESEARCH & DEVELOPMENT - - 35,700
-------- -------- --------
Total operating expenses 240,947 230,238 215,102
-------- -------- --------
Operating income (loss) 49,672 38,924 (13,756)
INTEREST EXPENSE 5,982 8,434 4,386
OTHER EXPENSE (INCOME), net (323) (3,604) (1,162)
-------- -------- --------
Income (loss) before provision for income
taxes 44,013 34,094 (16,980)
Provision for income taxes 17,374 12,903 7,888
-------- -------- --------
NET INCOME (LOSS) $ 26,639 $ 21,191 $(24,868)
======== ======== ========
PER CLASS A COMMON SHARE:
Basic net income (loss) $ 1.50 $ 1.29 $ (1.53)
======== ======== ========
Diluted net income (loss) $ 1.46 $ 1.27 $ (1.53)
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
22
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30, 1998, 1997 AND 1996 (Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997 1996
--------- ---------- ----------
Net income (loss) $ 26,639 $ 21,191 $(24,868)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation and amortization 20,111 22,026 12,042
Write-off of acquired in-process research & development -- -- 35,700
Deferred income taxes 423 (2,540) (634)
Changes in assets and liabilities-
Accounts receivable (21,043) (4,810) 992
Inventories 512 (7,373) 2,379
Prepaid expenses and other assets (1,727) (703) 6,497
Accounts payable and accrues liabilities 12,487 (928) (8,123)
--------- -------- --------
Net cash provided by operating activities 37,402 26,863 23,985
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (25,537) (18,211) (11,399)
Purchase of E for M Corporation,
net of cash acquired -- -- (89,171)
--------- -------- --------
Net cash used in investing activities (25,537) (18,211) (100,570)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) from notes payable to bank 5,186 (1,124) 3,005
Proceeds from issuance of long-term debt -- -- 90,000
Payments on long-terms debt (19,500) (26,911) (17,000)
Proceeds from issuance of common stock (4,836) 25,484 1,393
Purchase of treasury stock -- (4,643) --
--------- -------- --------
Net cash (used in) provided by financing activities (9,478) (7,194) 77,398
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS (28) (1,644) (1,253)
--------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,359 (186) (440)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,704 2,890 3,330
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,063 $ 2,704 $ 2,890
========= ======== ========
The accompanying notes are an integral part of these consolidated statements.
23
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED APRIL 30, 1998, 1997 AND 1996 (Dollars in Thousands)
Class A Class C
Common Stock Common Stock Treasury Stock Additional
----------------------- ------------------------- ----------------------- Paid-In
Shares Amount Shares Amount Shares Amount Capital
---------- ---------- ---------- ---------- ---------- ---------- -----------
BALANCE, APRIL 30, 1995 15,946,605 $1,594 26,250,000 $ 263 -- $-- $26,870
....................................................................................................................................
Issuance of common stock
under option 113,706 12 -- -- -- -- 1,381
....................................................................................................................................
Cumulative translation
adjustment -- -- -- -- -- -- --
....................................................................................................................................
Conversion of E for M stock
options into Marquette options -- -- -- -- -- -- 3,083
....................................................................................................................................
Tax benefit related to options -- -- -- -- -- -- 235
....................................................................................................................................
Net loss -- -- -- -- -- -- --
.....................................----------...---------......------------...----------.....----------...---------....-----------
BALANCE, APRIL 30, 1996 16,060,311 $1,606 26,250,000 $ 263 -- $-- $31,569
....................................................................................................................................
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 -- -- -- -- -- -- --
....................................................................................................................................
Conversion of Class C stock
into Class A stock -- -- (26,250,000) (263) 262,500 4,331 (4,069)
....................................................................................................................................
Tax benefit related to options -- -- -- -- -- -- 60
....................................................................................................................................
Net income -- -- -- -- -- -- --
.....................................----------...---------......------------...----------.....----------...---------....-----------
BALANCE, APRIL 30,1997 17,602,407 $1,760 -- $-- (18,900) $ (312) $52,890
....................................................................................................................................
Issuance of common stock
under option 302,936 31 -- -- 18,900 312 4,495
....................................................................................................................................
Cummulative translation
adjustment -- -- -- -- -- -- --
....................................................................................................................................
Tax benefit related to options -- -- -- -- -- -- 1,060
....................................................................................................................................
Net income -- -- -- -- -- -- --
.....................................----------...---------......------------...----------.....----------...---------....-----------
BALANCE, APRIL 30, 1998 17,905,343 $1,791 -- $-- -- $-- $58,445
.....................................==========...=========......===========-...==========.....==========...=========....===========
Cumulative
Retained Translation
Earnings Adjustment
------------ ----------------
BALANCE, APRIL 30, 1995 $151,020 $ (854)
...........................................................................
Issuance of common stock
under option -- --
...........................................................................
Cumulative translation
adjustment -- (2,811)
...........................................................................
Conversion of E for M stock
options into Marquette options -- --
...........................................................................
Tax benefit related to options -- --
...........................................................................
Net loss (24,868) --
.......................................------------..........--------------
BALANCE, APRIL 30, 1996 $126,152 $ (3,665)
...........................................................................
Issuance of common stock
in offering -- --
...........................................................................
Issuance of common stock
under option -- --
...........................................................................
Purchase of treasury stock -- --
...........................................................................
Cumulative translation
adjustment -- (6,816)
...........................................................................
Conversion of Class C stock
into Class A stock -- --
...........................................................................
Tax benefit related to options -- --
...........................................................................
Net income 21,191 --
.......................................------------..........--------------
BALANCE, APRIL 30,1997 $147,343 $(10,481)
...........................................................................
Issuance of common stock
under option -- --
...........................................................................
Cummulative translation
adjustment -- (1,421)
...........................................................................
Tax benefit related to options -- --
...........................................................................
Net income 26,639 --
.......................................------------..........--------------
BALANCE, APRIL 30, 1998 $173,982 $(11,902)
.......................................============..........==============
The accompanying notes are an integral part of these consolidated statements.
24
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998, 1997 AND 1996 (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) SUPPLEMENT DISCLOSURE OF CASH FLOW INFORMATION-
Year Ended April 30,
------------------------------
1998 1997 1996
--------- -------- -------
Cash paid during the year for-
Interest $ 5,560 $ 8,059 $ 4,153
Income taxes $ 17,794 $13,409 $ 9,789
The Company purchased all of the capital stock of E for M Corporation for
$90,333 in fiscal 1996.
In conjunction with the acquisition, liabilities were assumed as follows:
Year Ended April 30,
-------------------------------
1998 1997 1996
-------- --------- ---------
Fair value of assets
acquired (including
goodwill) $ - $ - $215,524
Cash paid for the capital
stock - - 90,333
Stock options converted - - 3,083
-------- --------- -------
Liabilities assumed $ - $ - $122,108
======== ========= ========
25
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998, 1997 AND 1996 (Dollars in Thousands Except Per Share Data)
(D) INVENTORIES-
Inventories consist of the following:
April, 30
---------------------
1998 1997
-------- --------
Raw materials and component parts $ 30,350 $ 31,629
Work-in-process and finished goods 54,602 56,434
Inventory on loan or consignment 24,051 22,716
-------- --------
$109,003 $110,779
======== ========
For its domestic inventories (representing 70% and 72% of total
inventories at April 30, 1998, and 1997, 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 costs method, the carrying value assigned to inventories
would have been $2,197 and $2,206 less at April 30, 1998 and 1997,
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 4 for further discussion of purchased research
and development costs.
(G) ADVERTISING COSTS-
Advertising costs are charged to operations as incurred. Such charges
were $4,052, $3,541 and $2,260 in fiscal 1998, 1997 and 1996,
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 separate component of
shareholders' equity.
Foreign currency transaction gains (losses) totalling $774, $1,811 and
26
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998, 1997 AND 1996 (Dollars in Thousands Except Per Share Data)
$744 are included in other income in the consolidated statements of
income for fiscal 1998, 1997, and 1996, respectively.
As a hedge against foreign accounts payable, the Company at times has
entered into various forward exchange contracts to exchange foreign
contracts to exchange foreign currencies for United States dollars at
a fixed 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 30,1998 the Company has two such
contracts to exchange various foreign currencies for a total contract
amount of $1,639 and a maturity date of May 29, 1998. The carrying
value of these contracts approximates fair value.
(J) NET INCOME PER 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.
In March, 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No.128 "Earnings per Share." The Company has adopted this
statement in fiscal 1998.
The weighted average shares for calculating basic 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.
Basic earnings per common share were computed by dividing net income
by the weighted average number of shares of common stock outstanding
during he year. Diluted earnings per common share were determined on
the assumption that the outstanding stock options issued by the
Company (see Note 10) were exercised with dilution calculated using
the treasury method. The earnings per share calculations are as
follows:
Year Ended April 30,
---------------------------
1998 1997 1996
---- ---- ----
Net income (loss) available
to common stockholders
for basic and diluted $26,639 $21,191 $(24,868)
======= ======= =========
Weighted average shares for
basic EPS 17,726 16,452 16,254
Impact of options issued
to employees 524 273 --
------- ------- --------
Weighted average shares
for diluted EPS 18,250 16,725 16,254
======= ======= ========
Basic EPS $1.50 $1.29 $(1.53)
======= ======= ========
Diluted EPS $1.46 $1.27 $(1.53)
======= ======= ========
(K) GOODWILL-
The excess of the purchase cost over the
27
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998, 1997 AND 1996 (Dollars in Thousands Except Per Share Data)
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. Amortization of goodwill was $2,945 in fiscal 1998, $3,193
in fiscal 1997, and $2,453 in fiscal 1996. The Company continually
evaluates its long-lived assets, including goodwill, and concluded that
there is no impairment of these assets as of April 30, 1998.
(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) NEW ACCOUNTING PRONOUNCEMENTS-
Statement of Position (SOP) 97-2 "Software Revenue Recognition,"
issued in October, 1997, is effective for transactions entered into
beginning May, 1998. This statement supersedes SOP 91-1 and provides
guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions. The Company is currently
analyzing the implementation of SOP 97-2 and the impact it will have
on the Company's financial condition and results of operations.
During June, 1997, the Financial Accounting Standards Board released
SFAS No. 130, "Reporting Comprehensive Income," effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 establishes
standards for reporting and displaying in the financial statements
total net income and components of all other non-owner changes in
equity, referred to as comprehensive income. The Company will adopt
SFAS No. 130 in fiscal 1999 and is currently analyzing the impact it
will have on the financial statements.
28
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998, 1997 AND 1996 (Dollars in Thousands Except Per Share Data)
During June, 1997, the Financial Accounting Standards Board released
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," effective for fiscal years beginning after December 15,
1997. SFAS No. 131 requires disclosures of business and geographic
segments in the consolidated financial statements of the Company. The
Company will adopt SFAS No. 131 in fiscal 1999 and is currently
analyzing the impact it will have on the disclosures in its financial
statements.
(4) ACQUISITION OF E FOR M CORPORATION-
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 was accounted
for as a purchase, and the excess of the purchase price over the fair
value of the net assets acquired was allocated to goodwill. The value
of such goodwill amounted to $22,649. In addition, the Company
acquired intangible assets related to in-process research and
development (R&D), product technologies and trade names with values of
$35,700, $12,672 and $8,468, respectively. The acquired in-process R&D
was entirely written off during fiscal 1996. The remaining intangibles
have estimated useful lives ranging from 7 to 40 years.
In connection with the acquisition,the Company implemented a
restructing 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 restructing plan were
recorded as liabilities of E for M which were assumed in the purchase
transaction. The total restructing charges attributable to E for M
were $10,120, of which $8,447 was estimated at the time of the
acquisition and an additional $1,673 was related to a revision in the
estimate. This total liability included $7,205 of severance costs,
$992 of dealer termination costs and $1,923 of facility closing, legal
and other costs. Restructing
29
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998, 1997 AND 1996 (Dollars in Thousands Except Per Share Data)
was completed in fiscal 1998 with no additional significant revision to
the Company's estimate.
Unaudited pro forma results of operations, assuming the acquisition of E
for M as of May 1, 1995, and the $35,700 write-off of acquired
in-process R&D in fiscal 1996, would be as follows:
Year Ended
April 30, 1996
-----------------
Net Sales $540,936
Net Income (Loss) (27,430)
Net Income (Loss) Per Class
A Common Share (1.69)
(5) 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.
Income (loss) before income taxes consisted of the following:
Year Ended April 30,
--------------------------------
1998 1997 1996
-------- -------- --------
United States $ 46,500 $ 35,768 $ 25,554
Foreign (2,487) (1,674) (42,534)
-------- -------- --------
Total $ 44,013 $ 34,094 $(16,980)
======== ======== ========
The provision for income taxes consists of the following:
Year Ended April 30,
--------------------------------
1998 1997 1996
-------- -------- --------
Current-
Federal $13,484 $13,069 $ 7,692
State 2,582 1,990 1,072
Foreign 885 384 (242)
-------- -------- --------
16,951 15,443 8,522
Deferred 423 (2,540) (634)
-------- -------- --------
$17,374 $12,903 $ 7,888
======== ======== ========
A reconciliation of the statutory Federal income tax rate to the
consolidated effective income tax rate is as follows:
Year Ended April 30,
--------------------------------
1998 1997 1996
-------- -------- --------
Statutory Federal income
tax rate 35.0% 35.0% (35.0)%
State and local income taxes,
net of Federal income
tax benefit 3.8 3.8 4.1
Tax credits (1.9) (0.9) (0.6)
Foreign tax rate differences and
foreign tax loss utilization 1.4 (1.5) 7.4
FSC benefit (1.6) (1.7) (2.7)
Purchased R&D - - 73.6
Goodwill 0.8 1.3 0.8
Other 2.0 1.8 (1.1)
-------- -------- --------
Effective income tax rate 39.5% 37.8% 46.5%
======== ======== ========
30
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 AND 1996 (Dollars in Thousands Except Per Share Data)
Temporary differences which give rise to the deferred tax assets and
liabilities at April 30, 1998 and 1997 are as follows:
April 30
------------------------
1998 1997
-------- --------
Short-term deferred tax
assets (liabilities):
Net operating loss carryforward $19,297 $16,638
Employee benefits 1,834 3,890
Warranty reserve 1,599 1,448
Inventories 488 284
Bad debt reserve 104 177
Capital loss carryforward 162 167
Deferred revenue -- 427
Other 433 357
Valuation allowance (12,580) (15,084)
------- --------
$11,337 $ 8,304
======== ========
Long-term deferred tax
assets (liabilities):
Tax Basis Difference
of Fixed Assets $ (9,567) $ (6,933)
Tax Basis Difference
of Intangible Assets (9,030) (10,428)
Deferred revenue 2,245 --
Other 441 547
-------- --------
$(15,911) $(16,814)
======= ========
The Company has tax benefits related to net operating losses of $15,801,
$1,784, $410, $320 and $982 in Germany, France, Austria, Spain and the
United Kingdom, respectively, which are all carried forward. The net
operating losses in Germany and the United Kingdom can be carried
forward, indefinitely. The net operating losses in Austria expire
beginning in fiscal 2004 through fiscal 2005. The net operating losses
in France expire beginning in fiscal 2002 through fiscal 2003. The net
operating loss in Spain expires in fiscal 1999 through fiscal 2001.
(6) 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, 1998, the borrowings outstanding
are $7,000. Standby letters of credit of $370 reduce the available
credit to $17,630 as of April 30, 1998.
The Company has loan authorizations and overdraft facilities with
various banks whereby it may borrow up to $49,744 (or Eurocurrency
equivalent) to be used for general purposes. As of April 30, 1998, the
borrowings outstanding are $28,378. Outstanding bank guarantees of
$10,438 reduce the available credit to $10,928 as of April 30, 1998.
The carrying value of notes payable approximates fair market 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 $11,217 and $9,754 at April 30, 1998 and
April 30, 1997, respectively.
31
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998, 1997 AND 1996 (Dollars in Thousands Except Per Share Data)
The following table summarizes certain information regarding these
short-term borrowings:
Year Ended April 30,
-------------------------------
1998 1997 1996
--------- ------- ---------
Maximum amount
of borrowings $47,570 $52,628 $ 28,742
Average amount
of borrowings 39,380 39,879 21,975
Weighted average interest
rate during year 6.7% 6.7% 6.8%
Weighted average interest
rate at year end 6.8% 6.7% 6.5%
(7) LONG-TERM-DEBT-
Long-term debt consists of the following:
April 30,
----------------------
1998 1997
---------- ---------
Senior notes, due in installments
through August 29, 2008, bearing
interest at 7.46% $30,000 $30,000
Term note, due installments through
October 31, 2000, bearing interest at
LIBOR + 1% (6.6563% at April 30, 1998) $ 2,500 $ 9,000
Term note, due installments through
October 31, 2000, bearing interest at
LIBOR + 1% (6.6563% at April 30, 1998) $ 2,500 $ 9,000
Term note, due installments through
October 31, 2000, bearing interest at
LIBOR + 1% (6.6563% at April 30, 1998) $ 2,500 $ 9,000
------- -------
$37,500 $57,000
Less- Current maturities - -
------- -------
$37,500 $57,000
======= =======
Scheduled maturities:
Year Ending
April 30, Amount
----------- ---------
1999 $ -
2000 7,500
2001 -
2002 -
2003 -
Thereafter 30,000
-------
$37,500
=======
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 as April 30, 1998.
(8) 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
------------ ---------
1999 $5,198
2000 3,034
2001 2,115
Thereafter 4,834
Rental expense charged to operations was $6,609, $6,076 and $1,585 in
fiscal 1998, 1997 and 1996, 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.
32
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998, 1997 AND 1996 (Dollars in Thousands Except Per Share Data)
(9) SHAREHOLDERS' EQUITY-
In March, 1997, the Company sold, through an underwritten public
offering 1,373,422 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 Common Stock. Under certain
conditions, each right may be exercised to purchase one-hundreth 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 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
there of 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.
(10) STOCK OPTION PLANS-
The Company has reserved 3,500,000 share of 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 Common Stock not issued under such stock options
shall again become available for issuance under the Plan.
33
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998, 1997 AND 1997 (Dollars in Thousands Except Per Share Data)
Option activity during fiscal 1998, 1997 and 1996 is as follows:
Number Weighted
of Shares Average
Under Option Exercise Price
------------ --------------
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
Granted 586,900 23.49
Exercised (312,910) 15.73
Cancelled (525,390) 18.07
------------
Outstanding, April 30, 1998 1,781,350 19.33
============
The number of exercisable options as of April 30, 1998, 1997 and 1996 were
296,050, 394,650 and 313,366, respectively. The additional shares available
for grant were 748,407, 809,917 and 86,359 as of April 30, 1998, 1997 and
1996, respectively.
The options outstanding at April 30, 1998, 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
------------- --------------------------- --------------------------- ------------------
$14.00-$17.99 730,300 183,500 $15.75 $14.97 6.7
$18.00-$21.99 475,850 112,550 $19.79 $20.10 8.1
$22.00-$27.00 575,200 -- $23.50 $ -- 9.6
--------- --------- $19.33 $16.92 8.1
1,781,350 296,050
========= =========
34
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998, 1997 AND 1996 (Dollars in Thousands Except Per Share Data)
In addition, in June, 1997, the Company, pursuant to resolutions adopted by
the Board of Directors, granted its chairman options to purchase 250,000
shares of Common Stock at an exercise price of $20.63 per share. The
options vested immediately and expire in June, 2007. All of the options are
outstanding as of April 30, 1998. Such options were not granted under terms
of the Plan.
The Company has reserved 276,042 shares of 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 1998 and 1997 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
Granted -- --
Exercised (17,426) 9.02
Cancelled (14,190) 7.39
------------
Outstanding, April 30, 1998 $ 90,776 8.76
============
The number of exercisable options as of April 30, 1998, 1997 and 1996 were
66,534, 64,907 and 140,510 respectively.
The options outstanding at April 30, 1998, 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
- ------------- --------------------------- --------------------------- ------------------
$ 6.17-$ 8.99 57,556 44,251 $ 6.52 $ 6.54 6.1
$ 9.00-$12.76 33,220 22,283 $12.65 $12.59 6.8
--------- --------- $ 8.76 $ 8.57 6.3
90,776 66,534
========= =========
35
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998, 1997 AND 1996 (Dollars in Thousands Except Per Share Data)
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 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. During fiscal 1998, options
to purchase 16,000 shares were granted at $26.75 per share. All
options granted were outstanding at April 30, 1998, 48,000 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 Ended April 30,
----------------------------
1998 1997 1996
-------- -------- --------
Net Income (Loss):
As Reported $26,639 $21,191 $(24,868)
Pro Forma $25,653 $20,151 $(25,519)
Basic Net Income
(Loss) Per Share:
As Reported $1.50 $1.29 $(1.53)
Pro Forma $1.45 $1.22 $(1.57)
Diluted Net Income
(Loss) Per Share:
As Reported $1.46 $1.27 $(1.53)
Pro Forma $1.41 $1.20 $(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.
36
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998, 1997 AND 1996 (Dollars in Thousands Except Per Share Data)
The weighted average fair value of options granted in fiscal 1998,
fiscal 1997 and fiscal 1996 were $8.68, $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 1998, fiscal
1997 and fiscal 1996, respectively: risk-free rates of 6.0%, 5.8% and
6.3%, expected dividend yields of zero, expected lives of 7.0 years,
7.0 years and 8.8 years, and expected volatility of 16%, 25% and 23%.
(11) STOCK REPURCHASE AGREEMENTS-
By agreement, the Company is obligated to repurchase up to $4,000
worth of 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,
1998, 296,296 shares of 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.
(12) 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 consisted of a consolidation of European offices as
well as a corresponding reduction in the number of employees. The
restructuring plan was undertaken for purposes of consolidating the
distribution function in Europe in order to address competitive
conditions. In addition, the restructuring plan was 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 included $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.
(13) 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
35% of the Participants' contributions, subject to maximum annual
matching per participant of five hundred dollars or 1.5% of the
participants qualified
37
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998, 1997 AND 1996 (Dollars in Thousands Except Per Share Data)
compensation, whichever is greater. The Company may make annual discretionary
contributions as authorized by the Board of Directors. Total Company
contributions were $4,835, $3,961 and $3,313 in fiscal 1998, 1997 and 1996,
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.
In February, 1998 the Financial Accounting Standards Board ("FASB") issued SFAS
No. 132 "Employers' Disclosure about Pensions and Other Post-Retirement
Benefits." The Company has adopted this statement in fiscal 1998.
The following is a reconciliation of the change in benefit obligation for the
years ended April 30, 1998 and 1997:
Year Ended April 30,
--------------------
1998 1997
------ ------
Benefit obligation, beginning of year $39,679 $45,339
Service costs 819 1,122
Interest costs 2,649 3,056
Benefits paid (1,345) (1,396)
Actuarial loss (gain) 170 (3,245)
Foreign currency exchange
rate changes (1,453) (5,196)
-------- --------
Benefit obligation, end of year 40,519 39,679
Unrecognized net
actuarial gain 1,258 2,492
--------- ---------
Accrued benefit cost $41,777 $42,171
========= =========
Assumptions used in the actuarial calculations are as follows:
Fiscal Fiscal Fiscal
1996 1997 1996
------- ------- -------
Discount Rate 6.5% 7.0% 7.0%
Salary Increases 2.5% 2.75% 2.75%
38
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998, 1997 AND 1996 (Dollars in Thousands Except Per Share Data)
The components of net periodic pension cost for the years ended April
30, 1998 and 1997 and four month period ended April 30, 1996,
respectively, are:
Period ended April 30,
---------------------------------
1998 1997 1996
------- --------- ---------
Service costs $ 819 $ 1,122 $ 377
Interest costs 2,649 3,056 1,127
Recognized net actuarial gain (145) - (503)
Net periodic ------ -------- -------
benefits cost $3,323 $ 4,178 $ 1,001
====== ======== =======
(14) 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,
--------------------------------
1998 1997 1996
--------- --------- ---------
Net sales originating from:
United States $ 463,845 $ 426,469 $355,689
Europe 179,864 172,558 98,137
Australia 9,648 6,364 5,479
Corporate and
eliminations (75,097) (62,074) (43,012)
--------- --------- --------
$ 578,260 $ 543,317 $416,293
========= ========= ========
Income (loss) from operations:
United States $ 46,909 $ 41,529 $ 11,307
Europe 2,839 (2,615) (27,481)
Australia 414 250 (157)
Corporate and
eliminations (490) (240) 2,575
--------- --------- --------
$ 49,672 $38,924 $(13,756)
========= ========= ========
Identifiable assets:
United States $ 335,730 $ 314,832 $332,492
Europe 107,982 96,238 98,141
Australia 3,987 2,089 2,680
Corporate and
eliminations 11,661 15,173 (1,595)
--------- --------- --------
$ 459,360 $ 428,332 $431,718
========= ========= ========
Transfers between geographic areas are recorded at market-based
transfer prices.
39
MARQUETTE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998, 1997 AND 1996 (Dollars in Thousands Except Per Share Data)
Export sales, excluding sales to affiliates, totalled $36,898, $51,517
and $39,566 in fiscal 1998, 1997 and 1996, respectively.
(15) 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.
(16) QUARTERLY DATA (UNAUDITED)-
1998
--------------------------------------------
1st 2nd 3rd 4th
--------------------------------------------
Net Sales $132,069 $148,568 $143,724 $153,900
Gross Profit 67,808 74,266 69,921 78,625
Net Income 4,301 6,698 7,571 8,068
Per Common
Share
Basic .24 .38 .43 .45
Diluted .24 .36 .41 .44
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 3,270 5,216 5,896 6,807
Per Common
Share
Basic .20 .32 .37 .40
Diluted .20 .32 .36 .39
The following table sets forth the high and low sales prices for the
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, 1998 April 30, 1997
-------------------- --------------------
High Low High Low
First Quarter $28 1/2 $19 7/8 $18 3/4 $15 3/4
Second Quarter 31 3/4 23 18 1/2 15 1/2
Third Quarter 28 1/4 22 1/4 22 3/8 14 3/4
Fourth Quarter 29 24 3/4 21 3/4 18 3/8
40
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, 1998 and 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the
period ended April 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three
years in the period ended April 30, 1998, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
June 1, 1998
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales for fiscal 1998 increased by 6.4% to $578.3 million from $543.3
million for fiscal 1997. The sales growth was entirely attributable to the
Monitoring group, consisting of adult, pediatric, neonatal and fetal monitoring,
and the related clinical information systems, which achieved sales growth of
$42.8 million, or 17.0%. The increased sales for the Monitoring group related
mainly to the strong domestic demand, especially for its modular bedside
monitors. Based on the continued strong level of incoming orders, management
believes that this area will continue to provide growth opportunity.
Both the Cardiology group and the Supplies and Service product lines had slight
decreases in net sales for fiscal 1998 as compared to fiscal 1997. For the
Cardiology group, sales decreased by $5.4 million, or 2.9%. The Supplies and
Service product line had a net sales decrease of $2.5 million, or 2.4%. The
decrease is mainly attributable to the negative currency conversions related to
the stronger U.S. dollar. While the Monitoring group's strong U.S. shipments
more than offset its negative currency conversions on its international sales,
the Cardiology group and Supplies and Service product lines did not achieve
sufficient volume growth to offset all of their negative currency conversions.
For the Company, a stable U.S. dollar, as compared with last year, would have
provided additional net sales of $23.8 million, or 4.4% for the year. Since it
is management's belief that the major growth opportunities continue to be in
the international markets, the currency conversion will continue to be a factor
in the total sales growth.
Gross profit for fiscal 1998 increased 7.9% to $290.6 million from $269.2
million in fiscal 1997. Gross margin increased to 50.3% for fiscal 1998 as
compared to 49.5% for fiscal 1997. The increase relates mainly to the product
mix towards higher margin products, especially in the Monitoring group. In
addition, the Company typically realizes higher margins on its domestic sales as
compared to international sales. The Company has experienced continued pricing
pressures in its international markets, especially in the Asian markets impacted
by the currency crisis and in the European market. Therefore, the strong level
of U.S. sales contributed to the increased gross margins for the year. The
currency fluctuations have offset the increased gross margins to some extent.
The Company believes that ongoing efforts to increase manufacturing efficiencies
will enable it to maintain its gross margins even as product mix and geographic
mix may shift towards lower gross margins.
Engineering expenses for fiscal 1998 increased 9.3% to $52.6 million from $48.1
million in fiscal 1997. Engineering expenses as a percentage of sales increased
slightly to 9.1% for fiscal 1998 as compared to 8.9% for fiscal 1997. The
increase relates to the Company's ongoing product development projects. The
medical equipment and systems industry is highly competitive and technological
in nature. As a result, in order to compete effectively, the Company must
continue to make significant investments in both new
42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
product development and continued enhancements to current products.
Selling expenses for fiscal 1998 increased 2.5% to $141.4 million as compared
to $138.0 million for fiscal 1997. Selling expenses decreased as a percentage of
sales to 24.5% as compared to 25.4% for fiscal 1997. The increase in selling
expenses is mainly a result of the costs required to support the increased sales
volume in fiscal 1998, such as additional commissions and other sales support
costs. Offsetting the increases to some extent are the efficiencies gained in
the improved distribution channels. One of management's goals for fiscal 1998
was to reduce the Company's selling expenses as a percentage of net sales. A
headcount reduction in the European distribution channel has contributed to the
decrease as a percentage of net sales.
General and administrative expenses for fiscal 1998 increased 6.4% to 46.9
million from $44.1 million in fiscal 1997. The increase is a result of the
ongoing conversion costs attributable to the conversion of a new business system
as well as additional support costs necessary to support the increased sales
volume. The increase was offset to some extent by a European headcount reduction
as part of management's plan to increase operating margins. General and
administrative expenses as a percentage of net sales remained constant at 8.1%
for fiscal 1998 as compared to fiscal 1997.
Operating income for fiscal 1998 increased by 27.6% to $49.7 million as compared
to $38.9 million in fiscal 1997. The increased gross profit for fiscal 1998
relates to the sales growth as well as the increased gross margin realized on
fiscal 1998 net sales. Operating margin for fiscal 1998 was 8.6% as compared to
7.2% in fiscal 1997. The margin increase is mainly attributable to the efforts
of management to reduce the selling expenses in order to achieve more efficiency
in the cost per sales dollar.
Interest expense for fiscal 1998 decreased to $6.0 million from $8.4 million for
fiscal 1997. The decreased interest expense is attributable to the use of
proceeds from a public stock offering completed in March, 1997 for repayment of
a portion of bank term debt. In addition, the Company was unable to use its free
cash flow generated in fiscal 1998 to pay down additional long-term debt.
Average borrowings, both short-term and long-term, decreased to $80.1 million in
fiscal 1998 from $98.7 million in fiscal 1997. The Company intends to continue
to pay down bank term loans and foreign lines of credit with any free cash flow
in subsequent years.
Other income for fiscal 1998 decreased to $0.3 million from $3.6 million in
fiscal 1997. The decrease was primarily related to decreased foreign exchange
gains in the current year as compared to fiscal 1997.
The provision for income taxes for fiscal 1998 was $17.4 million as compared to
$12.9 million for fiscal 1997. The effective tax rate for fiscal 1998 was 39.5%.
For fiscal 1997, the effective tax rate was 37.8%. The increase in the effective
rate was mainly attributable to foreign losses which have not been benefited.
The ability to utilize these unbenefited foreign losses in the future will have
an impact on the effective tax rate.
43
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 as 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 effect 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
44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
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 and 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 of 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 E and 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
out-standing 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
45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
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.
FINANCIAL OUTLOOK
Inasmuch 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
on 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 $162.2 million at April 30, 1998 as compared to $149.2
million at April 30, 1997. Accounts receivable increased 13.7% to $159.3 million
from $140.1 million, reflecting increased sales levels. Inventory decreased
slightly from $110.8 million to $109.0 million. Management continues to focus on
controlling inventory levels even as net sales are increasing. Inventory turns
increased to 2.6 for fiscal 1998 as compared to 2.5 for fiscal 1997.
As of April 30, 1998, the Company had $7.0 million outstanding on U.S lines of
credit of $25.0 million. In addition, the Company had $28.4 million, U.S. dollar
equivalent, outstanding on foreign lines of credit of $49.7 million. A portion
of the foreign currency denominated borrowings are used to reduce the currency
risks associated with foreign currency receivables. As of April 30, 1997, the
amounts outstanding on the U.S. and foreign lines of credit were $8.0 million
and $22.4 million, respectively.
Net capital expenditures for fiscal 1998 were $25.5 million as compared to $18.2
million for fiscal 1997. The increase was due to the continued capital
expenditures related to the acquisition of a new business system. In addition,
the prior year net capital expenditure amount includes the proceeds from a sale
of German land. The capital purchases were funded by cash flow from operations.
As of April 30, 1998, the Company had $37.5 million of long-term debt compared
with $57.0 million of long-term debt as of April 30, 1997. Of the long-term
debt, $30.0 million is senior long-term fixed rate debt which was incurred
during the year ended April 30, 1997 in order to refinance a portion of bank
long-term debt.
46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
This senior debt accrues interest at a fixed rate of 7.46% per annum and matures
through August 29, 2008. The remaining long-term debt consists of three variable
rate bank term loans. During fiscal 1998, $19.5 million of bank term debt was
repaid by the Company through both cash flow from operations as well as draws
from its working capital line of credit. The next and final required installment
owed by the Company is $7.5 million on October 31, 2000. The $7.5 million of
remaining bank term debt outstanding on April 30, 1998 accrued interest at a
rate equal to the LIBOR rate plus one percent, reset monthly. At April 30, 1998,
the rate was 6.6563% per annum. The Company intends to pay the interest and
retire the remaining long-term debt through cash flow from operations.
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 the COmpany's operations.
The Company is currently in the process of investigating all of its products to
determine if any have a potential incompatibility with the Year 2000. Most
products are currently compatible with the Year 2000. In addition, the Company
has been converting its internal systems to an entirely new business system.
This new business system has addressed the Year 2000 issues regarding all
internal systems. The Company does not believe any further Year 2000 compliance
costs will be material to its financial statements.
The Management Discussion and Analysis of Financial Conditions and Results of
Operations section in this report may contain certain forward-looking statements
regarding the Company and its products. These forward-looking statements are
based on current expectations, and the Company assumes no obligation to update
this information. The Company's actual results could differ materially from
those discussed in this document.
47
BOARD OF DIRECTORS OFFICERS
MICHAEL J. CUDAHY FREDERICK A. ROBERTSON, M.D.
Chairman Chief Executive Officer and
Marquette Medical Systems, Inc. Monitoring Group President
FREDERICK G. LUBER LOUIS P. SCAFURI
Chairman Chief Operating officer and
Super Steel Products Corp. Cardiology Group President
MELVIN S. NEWMAN MARY M. KABACINSKI
Attorney Senior Vice President and
Schoenberg, Fisher & Newman, Ltd. Chief Financial Officer
STEVEN G. BOOKS
WALTER L. ROBB Senior Vice President,
Manufacturing
Retired
Senior Vice President GERALD J. LENTZ
General Electric Company Senior Vice President,
Service
JOHN G. BOLLINGER, PH.D. MARK R. TAUSCHER
Dean, College of Engineering Senior Vice President, Supplies
University of Wisconsin-Madison
GORDON W. PETERSEN
Secretary
FREDERICK A. ROBERTSON, M.D.
Chief Executive Officer and MELVIN S. NEWMAN
Monitoring Group President Assistant Secretary
Marquette Medical Systems, Inc.
48