-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Tq4hi1tOx0iQXqBTboDzFZGOr9D/SS7gEMp0uBJr+3zT+yl6dLziYm2bzOFtpoYB jbL4WLl9I3olJQlvEdNfEg== 0000892569-96-000359.txt : 19960404 0000892569-96-000359.hdr.sgml : 19960404 ACCESSION NUMBER: 0000892569-96-000359 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960403 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19960403 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NELLCOR PURITAN BENNETT INC CENTRAL INDEX KEY: 0000799290 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 942789249 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14980 FILM NUMBER: 96544164 BUSINESS ADDRESS: STREET 1: 4280 HACIENDA DRIVE CITY: PLEASANTON STATE: CA ZIP: 94588 BUSINESS PHONE: 4158875858 MAIL ADDRESS: STREET 1: 4280 HACIENDA DRIVE CITY: PLEASANTON STATE: CA ZIP: 94588 FORMER COMPANY: FORMER CONFORMED NAME: NELLCOR DELAWARE INC DATE OF NAME CHANGE: 19860929 8-K 1 NELLCOR PURITAN BENNETT INC. - FORM 8-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report: April 3, 1996 NELLCOR PURITAN BENNETT INCORPORATED ------------------------------------ (Exact Name of Registrant as Specified in its Charter) Delaware -------- (State or Other Jurisdiction of Incorporation or Organization) 0-14980 94-2789249 ------- ---------- (Commission File Number) (I.R.S. Employer Identification No.) 4280 Hacienda Drive Pleasanton, California 94588 ---------------------------- (Address of Principal Executive Offices) (Zip Code) (510) 463-4000 -------------- (Registrant's telephone number, including area code) 2 Item 7 - FINANCIAL STATEMENTS AND EXHIBITS (a) Not applicable. (b) Not applicable. (c) Exhibits.
Exhibit Number Description - -------------- ----------- 99.1 Report of Independent Auditors
PURPOSE OF FILING On August 25, 1995, Nellcor Incorporated acquired Puritan-Bennett Corporation in a stock-for-stock merger accounted for as a pooling of interests. The surviving corporation was renamed Nellcor Puritan Bennett Incorporated (NPB). NPB is in the process of completing a preliminary proxy statement to be filed with the Securities and Exchange Commission as a result of a proposed acquisition by NPB of Infrasonics, Inc. NPB is required to file its financial statements in accordance with Regulation S-X, which includes presenting the pooled financial results for Nellcor and Puritan-Bennett as of and for each of the three years in the period ended July 2, 1995. This filing is intended to satisfy the aforementioned requirement. 2 3 NELLCOR PURITAN BENNETT INCORPORATED Consolidated Financial Statements July 2, 1995 4 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Nellcor Puritan Bennett Incorporated In our opinion, based upon our audits and the report of other auditors, the accompanying consolidated balance sheet and the related consolidated statements of operations, of stockholders' equity, and of cash flows present fairly, in all material respects, the financial position of Nellcor Puritan Bennett Incorporated and its subsidiaries at July 2, 1995 and July 3, 1994, and the results of their operations and their cash flows for each of the three years in the period ended July 2, 1995 in conformity with generally accepted accounting principles. 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 did not audit the consolidated financial statements of Puritan-Bennett Corporation and its subsidiaries, which statements reflect total assets of $273,135,000 and $256,594,000 at January 31, 1995 and 1994, respectively, and total revenues of $336,026,000, $309,255,000 and $300,060,000 for each of the three years in the period ended January 31, 1995, respectively. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Puritan-Bennett Corporation and its subsidiaries, is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Francisco, California July 26, 1995, except as to Note 17, which is as of August 24, 1995 5 NELLCOR PURITAN BENNETT INCORPORATED CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) - -----------------------------------------------------------------------------
JULY 2, JULY 3, 1995 1994 ASSETS Current assets: Cash and cash equivalents $ 78,444 $ 68,876 Marketable securities 65,039 53,470 Accounts receivable, net of allowance for doubtful accounts of $2,610 ($2,889 at July 3, 1994) 117,650 104,445 Inventories 88,987 74,708 Deferred income taxes 17,210 17,487 Other current assets, net 6,454 7,217 -------- -------- Total current assets 373,784 326,203 Property, plant and equipment, net 128,173 123,065 Intangible and other assets, net 67,848 48,620 Deferred income taxes 5,631 1,147 -------- -------- $575,436 $499,035 ======== ======== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 18,004 $ 27,791 Accounts payable 37,316 28,166 Employee compensation and related costs 25,286 19,106 Other accrued expenses 28,181 29,491 Current maturities of long-term debt 9,527 6,546 Income taxes payable 5,727 5,248 -------- -------- Total current liabilities 124,041 116,348 Long-term debt, less current maturities 54,492 38,656 Deferred compensation and pensions 19,303 17,444 Deferred revenue 10,895 9,962 -------- -------- Total liabilities 208,731 182,410 Commitments and contingencies -------- -------- Stockholders' equity: Preferred stock, $.001 par value; 5,000,000 shares authorized; none outstanding Common stock, $.001 par value; 50,000,000 shares authorized; 28,925,893 shares issued and outstanding (27,994,394 in 1994) 29 28 Additional paid-in-capital 161,211 137,513 Retained earnings 241,516 193,571 Accumulated translation adjustment (259) 100 Deferred stock awards and other (1,253) (313) Treasury stock, at cost (1,148,000 shares in 1995; 554,892 shares in 1994) (34,539) (14,274) -------- -------- Total stockholders' equity 366,705 316,625 -------- -------- $575,436 $499,035 ======== ========
See accompanying notes to consolidated financial statements. -2- 6 NELLCOR PURITAN BENNETT INCORPORATED CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - -----------------------------------------------------------------------------
YEARS ENDED JULY 2, JULY 3, JULY 4, 1995 1994 1993 Net revenue $600,066 $544,227 $518,246 Cost of goods sold 299,568 274,290 258,670 -------- -------- -------- Gross profit 300,498 269,937 259,576 -------- -------- -------- Operating expenses: Research and development 47,203 48,867 48,545 Selling, general and administrative 175,401 169,691 152,069 Restructuring charges 2,654 43,669 - -------- -------- -------- 225,258 262,227 200,614 -------- -------- -------- Income from operations 75,240 7,710 58,962 Interest income and other income/(expense), net 6,954 3,695 4,011 Interest expense (5,830) (4,565) (3,720) Litigation settlements, net - (13,000) - Costs associated with unsolicited takeover offer (5,049) - - -------- -------- -------- Income (loss) before income taxes and cumulative effect of accounting change 71,315 (6,160) 59,253 Provision for income taxes 21,852 262 19,538 -------- -------- -------- Income (loss) before cumulative effect of accounting change 49,463 (6,422) 39,715 Cumulative effect on prior years of accounting change (Note 1) - (2,890) - -------- -------- -------- Net income (loss) $ 49,463 $ (9,312) $ 39,715 ======== ======== ======== Income (loss) per common share before cumulative effect of accounting change $ 1.77 $ (.23) $ 1.46 Per common share effect of accounting change - (.11) - -------- -------- -------- Net income (loss) per common share $ 1.77 $ (0.34) $ 1.46 ======== ======== ======== Weighted average common equivalent shares used in the calculation of net income (loss) per share 27,931 27,364 27,140 ======== ======== ========
See accompanying notes to consolidated financial statements. - 3 - 7 NELLCOR PURITAN BENNETT INCORPORATED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS) - ----------------------------------------------------------------------------- COMMON STOCK ADDITIONAL ACCUMULATED TREASURY STOCK --------------------- PAID-IN RETAINED TRANSLATION ------------------- SHARES PAR VALUE CAPITAL EARNINGS ADJUSTMENT OTHER SHARES PAR VALUE Balance at July 5, 1992 26,415,255 $ 26 $105,508 $166,019 $ 204 $(1,345) Issuance of common stock and related tax benefits of $3,621 under employee stock plans, net of repurchases 772,437 1 16,867 281 Compensation related to acquisition of Radiant Systems 549 Accumulated translation adjustment (219) Net income 39,715 Dividends declared (1,419) ---------- ------- -------- -------- ------- ------- --------- -------- Balance at July 4, 1993 27,187,692 27 122,375 204,315 (15) (515) - - Issuance of common stock and related tax benefits of $2,394 under employee stock plans, net of repurchases 641,004 1 12,346 (92) $ 1,984 Acquisition of treasury stock 554,892 (16,258) Acquisition and retirement of common stock (210,000 (5,853) Shares issued in a business combination 375,698 8,645 Accumulated translation adjustment 115 Net loss (9,312) Dividends declared (1,432) Other 294 ---------- ------- -------- -------- ------- ------- --------- -------- Balance at July 3, 1994 27,994,394 28 137,513 193,571 100 (313) 554,892 (14,274) Issuance of common stock and related tax benefits of $3,487 under employee stock plans 931,499 1 23,698 (646) 644 Acquisition of treasury stock, net of shares issued to employee benefit plan 593,108 (20,909) Accumulated translation adjustment (359) Net income 49,463 Dividends declared (1,518) Other (294) ---------- ------- -------- -------- ------- ------- --------- -------- 28,925,893 $ 29 $161,211 $241,516 $ (259) $(1,253) 1,148,000 $(34,539) ========== ======= ======== ======== ======= ======= ========= ========
See accompanying notes to consolidated financial statements. - 4 - 8 NELLCOR PURITAN BENNETT INCORPORATED CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS) - -----------------------------------------------------------------------------
YEARS ENDED JULY 2, JULY 3, JULY 4, 1995 1994 1993 Cash flows from operating activities: Net income (loss) $ 49,463 $ (9,312) $ 39,715 Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 31,311 31,721 26,037 Deferred income taxes (3,874) (18,311) 3,070 Cumulative effect of accounting change - 2,890 - Restructuring charges 2,205 38,404 - Deferred compensation and pensions 3,663 2,536 473 Shares issued to employee benefit plans 2,376 3,317 1,690 Other 113 1,194 971 Increases (decreases) in cash flows, net of effect of purchases of companies, as a result of changes in: Accounts receivable (6,942) (1,641) (19,378) Inventories (11,322) (4,523) (3,991) Other current assets (2,511) (799) 1,166 Other assets (3,703) 1,619 (6,447) Accounts payable (505) (2,212) 6,593 Accrued liabilities 8,082 404 1,108 Income taxes payable 612 2,158 540 Deferred compensation (1,804) - - Deferred revenue 933 3,991 2,472 -------- -------- -------- Cash provided by operating activities 68,097 51,436 54,019 -------- -------- -------- Cash flows from investing activities: Capital expenditures (30,003) (29,860) (37,649) Cash used to purchase securities held-to-maturity (47,245) (87,212) (156,078) Proceeds from maturities of securities held-to-maturity 35,676 104,643 144,860 Proceeds from the sale of capital assets 5,893 1,362 726 Investment in nonmarketable equity securities (2,100) - - Acquisitions, net of cash acquired (23,415) (17,617) (1,500) Other investing activities (557) (1,227) (1,902) -------- -------- -------- Cash used for investing activities (61,751) (29,911) (51,543) -------- -------- -------- Cash flows from financing activities: Proceeds from the issuance of common stock under the Company's stock plans and related tax benefits, net 20,893 10,640 14,349 Purchase of treasury stock, including shares retired (20,909) (22,111) - Issuance (repayment) of notes payable,net (9,787) 19,890 (4,099) Additions to long-term debt 20,000 515 15,000 Payments on long-term debt (6,045) (6,680) (418) Dividends paid to stockholders (1,500) (1,430) (1,062) -------- -------- -------- Cash provided by financing activities 2,652 824 23,770 -------- -------- -------- Effect of exchange rate changes on cash balances 570 218 (790) -------- -------- -------- Increase in cash and cash equivalents 9,568 22,567 25,456 Cash and cash equivalents at the beginning of the year 68,876 46,309 20,853 -------- -------- -------- Cash and cash equivalents at the end of the year $ 78,444 $ 68,876 $ 46,309 ======== ======== ========
See accompanying notes to consolidated financial statements. - 5 - 9 NELLCOR PURITAN BENNETT INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Nellcor Puritan Bennett Incorporated (together with its wholly-owned subsidiaries, the Company) is a corporation organized under the laws of the State of Delaware in 1986 and, until the acquisition of Puritan-Bennett Corporation in August 1995, operated under the name Nellcor Incorporated. These financial statements retroactively reflect the August 1995 merger of Nellcor Incorporated (Nellcor) and Puritan-Bennett Corporation (Puritan-Bennett) as a pooling of interests; accordingly, the previously-issued separate financial statements of Nellcor and Puritan- Bennett have been combined and retroactively restated as if they had always operated as a single combined company. (See Note 17) PRINCIPLES OF CONSOLIDATION The Company's significant intercompany transactions have been eliminated. The Company uses the equity method of accounting for its investments that represent greater than 20%, but less than 50% of the investee. Investments which represent less than 20% of the investee are recorded at cost. All such investments were immaterial for all periods presented. FOREIGN CURRENCY TRANSLATION Certain of the Company's foreign subsidiaries use the local currency, while others use the U.S. dollar as their functional currency. Subsidiaries using the local currency translate assets and liabilities denominated in foreign currencies at the rates of exchange at the balance sheet date. Income and expense items are translated at average monthly rates of exchange. Any resulting translation adjustments are recorded as a separate component of stockholders' equity. Subsidiaries using the dollar as the functional currency measure assets and liabilities at year-end or historical rates depending on their nature; income and expenses are remeasured at the weighted-average exchange rates for the year. Foreign currency gains and losses resulting from transactions are included in operations in the year of occurrence. REVENUE RECOGNITION AND PRODUCT WARRANTY The Company recognizes revenue at the time of shipment of product and provides currently for the estimated cost to repair or replace products under the warranty provisions in effect at the time of sale. DEFERRED REVENUE Deferred revenue relates to extended warranty agreements offered by the Company which are amortized over the life of the agreement, with the related warranty costs charged to expense as incurred. CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. These investments are stated at cost which approximates fair value due to their short maturity. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value). Allowances are made for slow-moving, obsolete, unsalable, or unusable inventories. - 6 - 10 NELLCOR PURITAN BENNETT INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT Depreciation is provided using the straight-line method over the estimated useful lives of the assets which range from three to twenty-five years. Leasehold improvements are amortized over the life of the lease, or the estimated useful life of the asset, whichever is shorter. Depreciation expense was approximately $22.0 million in fiscal 1995, $20.7 million in fiscal 1994, and $19.5 million in fiscal 1993. INTANGIBLE AND OTHER ASSETS Intangible and other assets, including excess of cost over net assets acquired, are amortized on a straight-line basis over the estimated useful lives of the assets which range from two to fifteen years. The cost of patents is amortized on a straight-line basis over their approximate useful lives, not to exceed seventeen years. An impairment of intangible assets is recognized when it is considered probable that the carrying amount of an asset cannot be fully recovered, based on estimated future cash flows of the related business. INCOME TAXES Deferred income taxes are computed using the liability method. Under the liability method, taxes are recorded based on the future tax effect of the difference between the tax and financial reporting bases of the Company's assets and liabilities. In estimating future tax consequences, all expected future events are considered, except for potential income tax law or rate changes. NET INCOME (LOSS) PER SHARE Net income (loss) per share is based upon weighted average common shares and includes the dilutive effect of stock options outstanding (using the treasury stock method). ACCOUNTING CHANGE In fiscal 1994, Puritan-Bennett changed its method of accounting for income taxes to conform with SFAS No. 109 "Accounting for Income Taxes." The cumulative effect of this change resulted in a charge to operations of $2.9 million. 2.MARKETABLE SECURITIES During fiscal 1995, the Company adopted SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities." SFAS 115 requires that all investment securities be classified into one of three categories: held-to-maturity, available-for-sale, or trading. Implementation of SFAS 115 did not have a material effect on the Company's financial position or results of operations. The Company's marketable securities, generally, are in high-quality government, municipal and corporate obligations with original maturities of up to two years. The Company has established guidelines relative to investment quality, diversification and maturities to maintain appropriate levels of safety and liquidity. - 7 - 11 NELLCOR PURITAN BENNETT INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- At July 2, 1995, the Company had marketable securities totaling $65.0 million, of which $60.2 million were classified as held-to-maturity. These held-to-maturity securities, which the Company has the positive intent and ability to hold to maturity, are stated at cost, which approximates amortized cost. At July 2, 1995, the Company's available-for-sale investments, which the Company does not intend to hold to maturity, totaled $4.8 million. Realized gains and losses resulting from the sale of available-for-sale marketable securities during the period and unrealized gains and losses at July 2, 1995, were immaterial. No transfers between held-to-maturity and available-for-sale marketable securities were made during the year. The difference between the carrying value of the Company's available-for-sale securities and the market value as shown below was immaterial as of July 2, 1995. Marketable securities classified as held-to-maturity and available-for-sale at July 2, 1995 are summarized below (dollars in thousands). Fair value of marketable securities is based upon quoted market prices.
GROSS GROSS UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE SECURITY TYPE Current assets: Marketable securities HELD-TO-MATURITY: Debt issued by the U.S. Treasury and other U.S. government corporations and agencies $22,958 $17 $ (8) $22,967 Debt securities issued by the states of the United States and political subdivisions of the states 37,236 47 (185) 37,098 AVAILABLE-FOR-SALE: Mortgage backed securities 4,845 17 (93) 4,769 ------- --- ----- ------- Marketable securities $65,039 $81 $(286) $64,834 ======= === ===== =======
- 8 - 12 NELLCOR PURITAN BENNETT INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- 3. INVENTORIES Inventories are as follows (dollars in thousands):
JULY 2, JULY 3, 1995 1994 Raw materials $49,405 $38,842 Work-in-process 10,117 9,134 Finished goods 29,465 26,732 ------- ------- Total inventories $88,987 $74,708 ======= =======
4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of (dollars in thousands):
JULY 2, JULY 3, 1995 1994 Land and land improvements $ 10,713 $ 9,971 Buildings 38,221 31,355 Machinery and equipment 174,239 161,142 Leasehold improvements 9,971 9,583 Demonstration equipment 12,155 13,093 Furniture and fixtures 7,737 7,304 --------- --------- 253,036 232,448 Less accumulated depreciation and amortization (124,863) (109,383) --------- --------- Total property, plant and equipment, net $ 128,173 $ 123,065 ========= =========
5. FINANCIAL INSTRUMENTS AND OFF BALANCE SHEET RISK FOREIGN CURRENCY INSTRUMENTS The Company enters into foreign currency exchange contracts, primarily forward currency contracts, to reduce exposure to currency exchange risk. The effect of this practice is to minimize the impact of foreign exchange rate movements on the Company's operating results as gains and losses on these contracts offset losses and gains on the assets, liabilities and transactions being hedged. The Company does not engage in foreign currency speculation. The counterparties to foreign currency exchange contracts are major domestic and international financial institutions. To decrease the risk of non-performance which may result in currency losses, the Company diversifies its selection of counterparties. At July 2, 1995, the Company had foreign currency forward exchange contracts with a notional amount of $35.4 million ($9.8 million at July 3, 1994), and a fair market value of approximately $35.9 million ($10.0 million at July 3, 1994), all of which were denominated in European currencies. - 9 - 13 NELLCOR PURITAN BENNETT INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- The fair market value was determined based upon foreign currency exchange rates in effect at the end of each fiscal period. The Company records both the amortized premium and any unrealized gain or loss on outstanding foreign currency forward exchange contracts as non-operating income or expense. For both fiscal 1995 and fiscal 1994, all outstanding foreign currency exchange contracts were due to mature within six months of fiscal year end. CONCENTRATION OF CREDIT RISK The Company provides credit in the form of trade accounts receivable to hospitals, private and governmental institutions and health care agencies, medical equipment distributors and rental companies, and doctors' offices. The Company does not generally require collateral to support customer receivables. The Company performs ongoing credit evaluations of its customers and maintains allowances which management believes are adequate for potential credit losses. The credit risk associated with the Company's trade receivables is further limited due to dispersion of the receivables over a large number of customers in many geographic areas. Payment of certain accounts receivable is made by the national health care systems of several member countries of the European Economic Community. Although the Company does not currently anticipate credit problems associated with these receivables, payment is contingent upon the economic stability of these countries. The Company limits credit risk exposure to foreign exchange contracts by periodically reviewing the credit worthiness of the counterparties to the transactions. 6. ACQUISITIONS PIERRE MEDICAL On May 3, 1995, the Company's EdenTec subsidiary acquired Pierre Medical, a privately-held French manufacturer of respiratory products used in the home, for $21.5 million in cash. In the event that certain performance milestones are achieved subsequent to the acquisition, additional compensation totaling 30 million French Francs ($6.2 million as of July 2, 1995) would be payable to the former principal stockholders of Pierre who continue to manage the company. Such amounts will be expensed when, and if, earned. Pierre Medical manufactures and markets noninvasive ventilators, sleep apnea therapy systems, oxygen concentrators and related respiratory products in Western Europe, primarily in France. The acquisition of Pierre Medical has been accounted for as a purchase and, accordingly, Pierre Medical's results are included in the Company's financial statements subsequent to the acquisition date. Identifiable net assets acquired consisted of approximately $4.0 million of working capital. The excess of cost over identifiable net assets of $18.1 million, including acquisition related costs, is being amortized over 15 years, the period of the estimated future benefit. - 10 - 14 NELLCOR PURITAN BENNETT INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- In connection with the acquisition, supplemental cash flow information is as follows (dollars in thousands): Fair value of assets acquired, except for cash and cash equivalents $ 26,999 Liabilities assumed (5,584) --------- Cash paid to acquire Pierre Medical, net of cash and cash equivalents acquired $ 21,415 =========
Hoyer Medizintechink During fiscal 1994, Puritan-Bennett acquired a German distributor, Hoyer Medizintechnik (Hoyer), for $10.6 million, of which $2.0 million was paid during fiscal 1995. SEFAM S.A. Puritan-Bennett also acquired SEFAM S.A., a French supplier of diagnostic and therapeutic sleep products during fiscal 1994 for a total of $21.6 million, of which $12.9 million was paid in cash with the remainder paid through the issuance of 375,698 restricted shares, adjusted for the merger discussed in note 17, of the Company's common stock. The acquisitions of SEFAM S.A. and Hoyer have been accounted for as purchases and, accordingly, SEFAM S.A.'s and Hoyer's results are included in the Company's financial statements subsequent to the acquisition dates. The purchase price has been allocated to assets acquired and liabilities assumed, reflecting their estimated fair value as of the date of the acquisitions with the remaining excess purchase price to be amortized over 15 years, the period of the estimated future benefit. In connection with these acquisitions by Puritan-Bennett, supplemental cash flow information is as follows (dollars in thousands): Fair value of assets acquired, except for cash and cash equivalents $34,481 Liabilities assumed (6,464) Stock issued (8,645) Other (1,755) ------- Cash paid to acquire SEFAM S.A. and Hoyer, net of cash and cash equivalents acquired $17,617 =======
If these acquisitions had occurred as of the beginning of the respective years they were acquired, the revenues or results of operations of these acquired businesses would have been immaterial to the results of operations of the Company for fiscal years 1995 and 1994. COSTS ASSOCIATED WITH AN UNSOLICITED OFFER During 1995, $5.0 million of costs were incurred associated with an unsolicited offer to acquire Puritan-Bennett. These costs include investment banking fees, public relations expenses and legal fees. As of year end, $4.1 million remained in accrued liabilities which is expected to be paid during fiscal 1996. - 11 - 15 Nellcor Puritan Bennett Incorporated Notes to Consolidated Financial Statements - ----------------------------------------------------------------------------- 7. INTANGIBLES AND OTHER ASSETS Intangibles and other assets consist of (dollars in thousands):
JULY 2, JULY 3, 1995 1994 Excess of cost over fair value of net assets acquired $56,192 $37,357 Other intangibles from acquisitions, and purchased technologies and rights 9,965 11,040 Other assets 22,655 15,305 -------- -------- Total cost 88,812 63,702 Less accumulated amortization (20,964) (15,082) -------- -------- Intangibles and other assets, net $ 67,848 $ 48,620 ======== ========
8. NOTES PAYABLE AND CREDIT FACILITY Notes payable consist primarily of lines of credit with five banks. These unsecured lines of credit allow Puritan-Bennett to borrow a maximum of $35 million (at the quoted rate of each bank) and the lines of credit can be withdrawn at each bank's option. There are no withdrawal restrictions on any cash balances maintained at the various banks. Total amounts outstanding under the lines of credit at July 2, 1995 and July 3, 1994 were $18.0 million (interest at 6.4%) and $27.8 million (interest at 3.5%), respectively. Nellcor has a $50 million credit facility, which was obtained during fiscal 1995, with a group of four banks which provides an option to convert outstanding borrowings under the facility to a term loan repayable over four years. The rate of interest payable under this facility is a floating rate, which is a function of the London Interbank Offered Rate. A facility fee equal to 0.25% of the total commitment is paid quarterly. The credit facility contains various covenants which require the Company to maintain a specified financial ratio, limit liens, regulate asset disposition, and subsidiary indebtedness, and restrict certain acquisitions and investments. At July 2, 1995, Nellcor was in compliance with these covenants and no borrowings had been made under the credit facility at July 2, 1995. - 12 - 16 NELLCOR PURITAN BENNETT INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- 9. LONG-TERM DEBT Puritan-Bennett long-term debt is summarized as follows (dollars in thousands):
July 2, July 3, 1995 1994 Unsecured promissory notes payable: Interest rate 9.85%, interest payable semi-annually through October 1998, principal is payable in annual installments through October 1998 $11,333 $15,333 Interest rate 6.64%, interest payable semi-annually through December 1999, principal is payable in annual installments through December 1999 15,000 15,000 Interest rate 9.02%, interest payable semi-annually through December 1997, principal is payable in annual installments through December 1997 6,000 8,000 Interest rate 7.57%, interest payable semi-annually through July 2000, principal is payable in annual installments through July 2000 20,000 - Variable interest rate, 5.13% through December 1995, interest payable annually through December 1998, principal is payable in full in December 1998 4,510 4,510 Secured bank note payable: Interest rate 7.95%, principal payable in monthly installments through August 2003, collateralized by a building 1,707 1,662 Capital lease: Interest rate 7.0%, principal payable in monthly installments through February 2009 4,782 - Other 687 697 ------- ------- 64,019 45,202 Less current maturities (9,527) (6,546) ------- ------- Total long-term debt $54,492 $38,656 ======= =======
The estimated fair value of total long-term debt at January 31, 1995 was approximately $64 million. Puritan-Bennett leases a facility which is classified as a capital lease and the related asset is being amortized over its estimated useful life, 15 years. As of July 2, 1995, the net book value of the asset and accumulated amortization was $4.4 million and $0.3 million, respectively. The future minimum lease payments required under the capital lease are included in the aggregate maturities of long-term debt listed below. -13- 17 NELLCOR PURITAN BENNETT INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- As of July 2, 1995, Puritan-Bennett was in compliance with the provisions of its debt agreements. The aggregate maturities of long-term debt during each of the next five fiscal years are as follows: 1996 - $9.5 million; 1997 - $12.7 million; 1998 - $11.5 million; 1999 - $13.9 million; and 2000 - $7.5 million. Interest paid related to the above Puritan-Bennett debt in 1995, 1994 and 1993 totaled $5.8 million, $4.7 million and $3.4 million, respectively. 10. RESTRUCTURING CHARGES During fiscal 1994, Puritan-Bennett restructured the hospital ventilator and portable ventilator portions of its business, consolidated its aviation facilities and substantially reduced the FOxS operations to improve profitability. In connection with the restructuring, during fiscal 1994 Puritan-Bennett recorded restructuring charges of $43.2 million. Included in these charges were provisions for personnel-related charges ($7.7 million), non-cash asset write-downs ($29.7 million), consolidation of manufacturing and marketing facilities ($1.3 million), and other restructuring related costs ($4.5 million). During the third quarter of 1995, Puritan-Bennett completed the shut down of the FOxS operations. As of July 2, 1995, approximately $1.9 million remained in accrued liabilities and is expected to be disbursed primarily in the first quarter of fiscal 1996. As of July 3, 1994, approximately $12 million remained in accrued liabilities primarily representing expected severance, cancellation penalties, remaining facility lease payments and other costs necessary to complete the 1994 restructuring plan. During fiscal 1994, Nellcor recorded a restructuring charge of $.5 million associated with the consolidation of two of Nellcor's divisions. 11. PURITAN-BENNETT EMPLOYEE BENEFITS DEFINED BENEFIT PLANS Puritan-Bennett has noncontributory, defined benefit pension plans covering substantially all full-time employees in the U.S., Canada and Ireland. Puritan-Bennett contributes amounts necessary to satisfy the funding requirements of the various jurisdictions in which the plans are established. The U.S. and Canadian defined benefit pension plans provide retirement benefits based upon the employees' average earnings and years of service. The Irish plan provides benefits equal to a certain percentage of the participant's final salary. Puritan-Bennett also has an unfunded supplemental retirement plan covering certain key employees which provides supplemental retirement benefits based upon average earnings. -14- 18 NELLCOR PURITAN BENNETT INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- A summary of the components of net costs for the defined benefit plans follows:
PENSION SUPPLEMENTAL ------- ------------ 1995 1994 1993 1995 1994 1993 (Dollars in thousands) Service cost - benefits earned during the year $ 2,189 $ 1,832 1,488 $ 85 $ 25 $ 13 Interest cost on projected benefit obligation 3,811 3,615 3,224 287 268 293 Actual return on plan assets 466 (615) (2,885) - - - Net amortization and deferral (3,932) (3,494) (1,057) 105 104 132 ------- ------- ------- ---- ---- ---- Net cost $ 2,534 $ 1,338 $ 770 $477 $397 $438 ======= ======= ======= ==== ==== ====
Assumptions used in determining the net cost for the defined benefit plans were:
PENSION SUPPLEMENTAL ------- ------------ 1995 1994 1993 1995 1994 1993 Weighted-average discount rate 7.50% 8.75% 8.75% 8.50% 8.50% 8.50% Rate of increase in compensation levels 4.50% 6.00% 6.00% 4.50% 6.00% 6.00% Expected long-term rate of return on assets 9.00% 10.00% 10.00% - - -
The following table sets forth the funded status and amounts recognized in the consolidated balance sheets at January 31, 1995 and 1994, for Puritan-Bennett's defined benefit plans:
PENSION SUPPLEMENTAL ------ ------------ 1995 1994 1995 1994 (Dollars in thousands) Vested benefit obligation $39,858 37,851 $ 3,233 $3,406 ======= ====== ======= ====== Accumulated benefit obligation $40,897 39,004 $ 3,233 $3,406 ======= ====== ======= ====== Projected benefit obligation $49,302 48,003 $ 3,677 $3,009 Plan assets at fair value 35,280 37,721 - - ------- ------ ------- ------ Projected benefit obligation in excess of plan assets 14,022 10,282 3,677 3,009 Unrecognized net gain (loss) (5,788) (4,459) (592) 267 Unrecognized net asset (liability) 2,309 2,436 (144) (676) ------- ------ ------- ------ Net Liability recognized in the consolidated balance sheet $10,543 $ 8,259 $ 2,941 $2,600 ======= ====== ======= ======
Assumptions used in determining the actuarial present value of the projected benefit obligation for the pension plans were:
U.S. CANADA IRELAND ---- ------ ------- 1995 1994 1995 1994 1995 1994 Weighted-average discount rate 8.50% 7.50% 8.50% 7.50% 8.75% 8.75% Rate of increase in compensation levels 4.50% 4.50% 4.50% 5.00% 6.00% 6.00% Expected long-term rate of return on assets 9.00% 10.00% 9.50% 9.00% 10.00% 10.00%
The U.S. pension plan assets were invested in listed stocks and bonds, including common stock of Puritan-Bennett prior to the merger with Nellcor (see Note 17). The market value of Puritan-Bennett stock included in plan assets at the end of fiscal 1995 and 1994, was $3.9 million and $3.7 million, respectively. Both the Canadian and Irish plan assets are invested in pooled mutual funds. For the unfunded supplemental plan, Puritan-Bennett has purchased life insurance policies intended to ultimately fund the cost of the plan. - 15 - 19 NELLCOR PURITAN BENNETT INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company provides postretirement health care benefits to certain eligible retirees of Puritan-Bennett. The cost of the postretirement medical plan is shared by the Company and eligible retirees through such features as annually adjusted contributions, deductibles and coinsurance. The retiree's contribution is a factor of age and service at the time of retirement. The postretirement health care benefits are funded by the Company as claims are paid. The Company accounts for these benefits in accordance with SFAS No. 106, "Employers Accounting for Postretirement Benefits other than Pensions." The net cost, accumulated benefit obligation and net liability related to such benefits were not material to the Company's financial position and results of operations. RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN The Company has a retirement savings and stock ownership plan under which substantially all U.S. Puritan-Bennett employees may elect to contribute up to 20% of their earnings. This includes a basic contribution of up to 10% and an additional voluntary contribution of up to 10%. The Company contributes an additional 35% of each individual's basic contribution (decreased to 10% as of February 15, 1995) not to exceed 6% of the employees' total compensation. Contributions are placed in trust for investment in defined funds, including a stock fund for investment in common stock of Puritan-Bennett prior to the merger with Nellcor (see Note 17.) The plan trustee purchases the Puritan-Bennett stock at fair market value. The amount charged to expense under the plan was $1.2 million, $1.2 million and $1.1 million in 1995, 1994 and 1993, respectively. 12. PROVISION FOR INCOME TAXES The provision for income taxes consists of the following (in thousands):
YEARS ENDED JULY 2, JULY 3, JULY 4, 1995 1994 1993 Federal: Current $ 18,978 $ 12,737 $ 11,936 Deferred (2,603) (12,603) 1,450 -------- -------- -------- 16,375 134 13,386 -------- -------- -------- State: Current 3,355 3,205 3,200 Deferred (456) (3,128) 326 ------- -------- -------- 2,899 77 3,526 ------- -------- -------- Foreign: Current 3,393 2,631 1,332 Deferred (815) (2,580) 1,294 -------- -------- -------- 2,578 51 2,626 -------- -------- -------- $ 21,852 $ 262 $ 19,538 ======== ======== ========
- 16 - 20 NELLCOR PURITAN BENNETT INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- Pretax income from foreign operations used to determine related tax liabilities amounted to $14.5 million, $1.4 million and $13.3 million for fiscal 1995, 1994 and 1993, respectively. The most significant components of the Company's deferred tax assets and liabilities at July 2, 1995 and July 3, 1994 are as follows (in thousands):
JULY 2, 1995 JULY 3, 1994 DEFERRED TAX DEFERRED TAX ASSETS LIABILITIES ASSETS LIABILITIES Inventory and product allowances $ 11,514 $ 7,229 Accelerated depreciation $5,541 $6,548 Intangible assets 832 1,852 Accounts receivable 642 693 Compensated absences 753 607 Accrued employee benefits 9,391 8,358 State income tax accrual 1,392 979 NOL and R&D carryforwards 9,196 4,423 Deferred revenue 3,785 2,898 187 Restructuring costs 2,125 10,051 Tax/book year end difference 1,504 1,516 Other accruals 5,940 2,376 3,445 1,521 -------- ------ -------- ------ Total 45,570 9,421 40,535 9,772 Less: valuation allowance (13,308) (12,129) -------- ------ -------- ------ Deferred income taxes $ 32,262 $9,421 $ 28,406 $9,772 ======== ====== ======== ======
Puritan-Bennett has $15.8 million of U.S. and foreign net operating loss carryforwards, of which $1.0 million and $11.2 million will expire by fiscal years 2000 and 2010, respectively, and the remaining $2.4 million has no limitation as to its use. In addition, as a result of Puritan-Bennett changing its fiscal year end, the Company has a net operating loss carryforward of $1.2 million for tax purposes which will be utilized over the next three years. Puritan-Bennett has research and development credit carryforwards of $2.5 million which will also expire by fiscal year 2010. A valuation allowance of $13.3 and $12.1 million at July 2, 1995 and July 3, 1994, respectively, has been provided for Puritan-Bennett net operating loss and research and development credit carryforwards, and certain foreign temporary differences, which will be realized to the extent of future taxable income of Puritan-Bennett. - 17 - 21 NELLCOR PURITAN BENNETT INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- The difference between the Company's effective income tax rate and the United States federal statutory income tax rate is summarized as follows:
YEARS ENDED JULY 2, JULY 3, JULY 4, 1995 1994 1993 Federal statutory rate 35.0% (35.0)% 34.0% State income taxes, net of federal benefit 2.2 (6.8) 3.9 Foreign statutory tax rate differences (7.0) (22.7) (3.2) Research and experimental credits (1.8) (37.3) (0.9) Tax legislation changes (11.7) Nondeductible amortization and depreciation 1.7 8.9 1.5 Increase in valuation allowance 2.1 103.1 Other (1.6) 5.7 (2.3) ---- ----- ---- Effective tax rate 30.6% 4.2% 33.0% ==== ===== ====
The Company paid income taxes of approximately $21.4 million, $13.9 million, and $12.5 million in fiscal 1995, 1994 and 1993, respectively. 13. STOCKHOLDERS' EQUITY COMMON STOCK As of July 2, 1995, an aggregate of 4,773,785 shares of authorized but unissued common stock remained reserved for issuance under the 1994 Equity Incentive Plan (the "1994 Plan"), the 1991 Equity Incentive Plan, as amended (the "1991 Plan"), the 1988 Stock Option Plan for Non-Employee Directors, as amended (the "1988 Plan"), and the 1986 Employee Stock Participation Plan, as amended (the "ESPP"). STOCK OPTION PLANS 1994 and 1991 Plans. Nellcor maintains two employee stock option plans, the 1994 Plan and the 1991 Plan. In October 1994, the Company obtained stockholder approval of the 1994 Plan, which authorizes the issuance of up to 1,500,000 shares of common stock to executive officers, other key employees and consultants in the form of incentive and - 18 - 22 NELLCOR PURITAN BENNETT INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- nonqualified stock options, stock bonuses and restricted stock. The 1994 Plan satisfies the performance-based compensation requirements of The Omnibus Budget Reconciliation Act of 1993. The Company obtained shareholder approval of the 1991 Plan in October 1991. Upon stockholder approval of the 1991 Plan, the Company's 1982 Incentive Stock Option Plan (the "1982 Plan") and the 1985 Equity Incentive Plan (the "1985 Plan") were terminated; however, shares available for issuance under these plans at the time of termination, including shares underlying outstanding options, that later expire or are canceled, were pooled with the 750,000 additional shares reserved for issuance under the 1991 Plan. In October 1992, the Company obtained stockholder approval for an amendment to the 1991 Plan increasing the number of shares authorized for issuance under the 1991 Plan by an additional 1,500,000 shares. Options granted under the 1994 and 1991 Plans generally vest on a quarterly basis over a period of four years from the date of grant. A one-year waiting period is required before vesting in the case of initial grants. The 1994 and 1991 Plans authorize the grant of incentive stock options at exercise prices equal to the fair market value of the Company's common stock on the date of grant and permit the grant of nonqualified stock options at exercise prices not less than 85 percent of fair market value on the date of grant. To date, only nonqualified stock options with exercise prices equal to the fair market value of the underlying common stock on the date of grant have been granted under both Plans. No stock bonus or restricted stock grants have been made under the 1994 or 1991 Plans. As of July 2, 1995, options representing 946,130 shares, including options issued under the 1994 and 1991 Plans and the terminated 1982 and 1985 Plans, were outstanding and exercisable at an aggregate exercise price of approximately $22.8 million, and the Company, as of such date, had 2,201,041 shares available for issuance under the 1991 and 1994 Plans. Certain options issued under the 1994 and 1991 Plans permit exercise prior to vesting. As to these options, if the optionee's relationship with the Company is terminated prior to the complete vesting of the options, the Company has the right to repurchase unvested shares at the exercise price plus interest. As of July 2, 1995, no shares were subject to repurchase by the Company under these options. Supplemental cash flow information: Puritan-Bennett had a deferred stock award program. Non cash amounts, net of cancellations, included in additional paid in capital for this program were $1.1 million, $.4 million and $.8 million for fiscal 1995, 1994 and 1993, respectively. - 19 - 23 NELLCOR PURITAN BENNETT INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- The following is a summary of option activity under the 1994 and 1991 Plans:
RANGE OF EXERCISE AVAILABLE OPTIONS FOR GRANT OUTSTANDING HIGH LOW Balance at July 5, 1992 648,958 2,945,325 $32.00 $ 4.19 Increase in options available for grant 1,500,000 Granted (683,710) 833,398 34.13 24.00 Exercised (610,740) 31.75 4.19 Canceled 235,769 (241,951) 32.00 9.38 --------- --------- Balance at July 4, 1993 1,701,017 2,926,032 34.13 4.50 Granted (668,405) 856,286 28.50 20.00 Exercised (483,989) 26.75 4.50 Canceled 301,050 (319,618) 32.00 10.00 --------- --------- Balance at July 3, 1994 1,333,662 2,978,711 32.00 4.50 Increase in options available for grant 1,500,000 Granted (836,220) 1,002,320 46.25 18.25 Exercised (679,006) 34.13 4.50 Canceled 203,599 (249,443) 34.13 10.63 --------- --------- Balance at July 2, 1995 2,201,041 3,052,582 $46.25 $ 4.50 ========= =========
1988 Plan. In October 1988, the Company obtained stockholder approval of the 1988 Plan which authorized the non-discretionary grant of options to non-employee Directors. Under the 1988 Plan, non-employee Directors automatically receive stock option grants upon joining the Board of Directors and annually thereafter. Until amended in May of 1994, the 1988 Plan provided for an initial grant of an option to purchase 20,000 shares of common stock upon a Director joining the Board and an annual grant of an option to purchase 10,000 shares of stock. On May 14, 1994, the Board of Directors amended the 1988 Plan to reduce the number of shares issuable to non-employee Directors in the form of options to an initial grant of 10,000 shares and annual grants of 5,000 shares. Options issued to non-employee Directors under the 1988 Plan are nonqualified stock options having a five-year term and an exercise price equal to the fair market value of the Company's common stock on the date of grant and vesting over a four year period in the case of initial option grants and over the succeeding fiscal year in the case of annual grants. In October 1994, the Company obtained stockholder approval to amend the 1988 Plan to increase the number of shares authorized for issuance by 75,000 shares and the term of options to be issued under the plan from five to ten years. - 20 - 24 NELLCOR PURITAN BENNETT INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- As of July 2, 1995, options representing 162,500 shares were outstanding and exercisable under the 1988 Plan at exercise prices ranging from $13.63 to $26.50 for an aggregate exercise price of $3.7 million, and the Company, as of such date, had 130,000 shares available for issuance under the 1988 Plan. STOCK PURCHASE PLANS Under the ESPP, qualified employees, not including members of the Board of Directors and executive officers, may purchase semi-annually up to a specified maximum amount of shares of the Company's common stock through payroll deductions at a price equal to 85% of the fair market value of the stock at the beginning or end of the six month plan period, whichever is less. In October 1994, the Company obtained stockholder approval to increase the number of shares available for purchase under the ESPP by 250,000 shares. As of July 2, 1995, 726,783 shares of common stock had been purchased under the ESPP since inception and 173,217 shares remained available for purchase by employees. STOCK REPURCHASE PROGRAMS During the fourth quarter of fiscal 1993, the Board of Directors approved a Limited Stock Repurchase Program (the "Limited Program") which commenced early in fiscal 1994. The objective of the Limited Program is to utilize a portion of available cash balances to repurchase on the open market shares of the Company's common stock, to mitigate the dilutive effects of the issuance of shares under the 1994 Plan, 1991 Plan, and ESPP. Repurchases made under the Limited Program totaled $20.9 million (625,500 shares) and $13.6 million (554,892 shares) during the fiscal years ended July 2, 1995 and July 3, 1994, respectively. In addition to the Limited Program, the Board of Directors approved a General Stock Repurchase Program (the "General Program") during the second quarter of fiscal 1994 to repurchase and retire up to 1 million shares of the Company's common stock. The object of this General Program is to more effectively utilize an additional portion of available cash balances. No repurchases under the General Program were made in fiscal 1995; 210,000 shares were repurchased and retired during 1994, totaling $5.9 million. STOCK RIGHTS - SERIES A JUNIOR PARTICIPATING PREFERRED STOCK During fiscal 1991, the Board of Directors declared a dividend distribution of one purchase right for each outstanding share of common stock. Each right entitles the holder to purchase from the Company one one-hundredth of a share of Series A Junior participating preferred stock, par value $.001, initially at a price of $90 per one-hundredth of a preferred share. Each one one-hundredth of a share of new preferred stock is substantially the economic equivalent of one share of common stock. - 21 - 25 NELLCOR PURITAN BENNETT INCORPORATED NOTES TO CONSOLDIATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- In the event that a third party acquires 15 percent or more of the Company's common stock or announces an offer which would result in such party's owning 15 percent or more of the Company's common stock, the rights will become exercisable. The rights expire on June 26, 2001, and subject to certain conditions, may be redeemed by the Board of Directors at a price of $.001 per right. 14. COMMITMENTS The Company leases its facilities under agreements that expire at various dates through June 2006, which include options to renew through June 2016. Rental expenses were approximately $11.2 million, $11.3 million and $10.1 million in fiscal years 1995, 1994 and 1993, respectively. Aggregate minimum annual rental commitments under long-term operating leases are as follows (dollars in thousands):
Fiscal Years 1996 $ 7,277 1997 7,013 1998 6,301 1999 5,301 2000 3,934 After 2000 16,208 ------- Total rental commitments $46,034 =======
15. GEOGRAPHIC INFORMATION AND EXPORT SALES Nellcor Puritan Bennett Incorporated operates within a single industry segment in which it develops, manufactures, and markets monitoring systems and diagnostic and therapeutic products for management of the respiratory-impaired patient across the continuum of care. The Company's patient safety monitors and sensors provide intermittent and real-time monitoring of physiologically unstable patients. Ventilation and oxygen systems are used in hospitals and home care to provide assisted respiration. Home care products are used primarily for monitoring, diagnosis and treatment of sleep apnea and providing home oxygen therapy. The Company's products are sold worldwide through a direct sales force, assisted by clinical education consultants and supplemented by distributors in selected countries. - 22 - 26 NELLCOR PURITAN BENNETT INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- Geographic information with respect to the Company's operations is as follows (dollars in thousands):
YEARS ENDED JULY 2, JULY 3, JULY 4, 1995 1994 1993 Net revenue: United States domestic $ 455,772 $ 439,734 $ 429,747 United States export 55,753 47,341 49,295 Europe 160,426 107,049 94,627 Intersegment eliminations (71,885) (49,897) (55,423) ---------- ---------- ---------- Total net revenue $ 600,066 $ 544,227 $ 518,246 ========== ========== ========== Income (loss) from operations: United States $ 58,570 $ 6,060 $ 47,332 Europe 16,995 837 11,483 Corporate and eliminations (325) 813 147 ---------- ---------- ---------- Total operating income $ 75,240 $ 7,710 $ 58,962 ========== ========== ========== Identifiable assets: United States $ 307,319 $ 309,676 $ 319,943 Europe 153,274 108,439 77,302 Corporate and other 154,658 119,173 110,774 Eliminations (39,815) (38,253) (38,005) ---------- ---------- ---------- Total assets $ 575,436 $ 499,035 $ 470,014 ========== ========== ==========
Transfers between geographic areas are generally recorded at amounts above cost and in accordance with the rules and regulations of the governing tax authorities. Operating income is total revenue less cost of sales and operating expenses and does not include interest expense, interest income and other income (expense), net, litigation settlements, costs associated with unsolicited takeover offer and income taxes. Identifiable assets of geographic areas are those assets used in the Company's operations in each area. Identifiable corporate assets consist primarily of cash and cash equivalents, marketable securities and other assets. 16. LITIGATION From time to time the Company has received, and in the future may receive, notice of claims against it, which in some instances have developed, or may develop, into lawsuits. The claims may involve such matters, among others, as product liability, patent infringement, and employment-related claims. In management's opinion, the ultimate resolution of claims currently pending will not have a material adverse effect on the Company's financial position or results of operations. - 23 - 27 NELLCOR PURITAN BENNETT INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- On July 11, 1995, the U.S. Federal District Court in Delaware issued a decision in favor of Nellcor, ruling that four key oximeter and sensor technology patents are valid and would be infringed by Ohmeda, Inc., a subsidiary of BOC Health Care, Inc., if Ohmeda sold either its adult or neonatal OxyTip sensors for use with non-Ohmeda monitors. BOC Health Care has filed a notice to appeal the decision of the U.S. Federal District Court in Delaware. BOC Health Care had filed a suit against Nellcor in December 1992, seeking a declaratory judgment that Nellcor's patents were invalid and would not be infringed. In a related matter, in the third quarter of fiscal 1994, Nellcor agreed to settle trade secrets and patent litigation with BOC Health Care, Inc., and its Ohmeda, Inc. subsidiary, and Square One Technology. Under the terms of the agreement, the patent in issue was assigned to Nellcor. Nellcor also received a pretax $2.0 million payment and will receive ongoing royalties. The $2.0 million payment was recorded as non- operating income. In the fourth quarter of fiscal 1994, Nellcor agreed to settle its patent litigation with Camino Laboratories, Inc., ("Camino") of San Diego, CA. Under the terms of the settlement, Camino agreed not to sue Nellcor or its current or future customers relating to the use or sale of Nellcor's sensors and monitors intended for use with such sensors. A cash payment of $15.0 million was made by Nellcor to Camino and was recorded as a non-operating expense. This settlement neither recognizes the validity nor acknowledges infringement of the Camino patent at issue. 17. MERGER OF NELLCOR AND PURITAN-BENNETT On May 22, 1995, Nellcor Incorporated and Puritan-Bennett Corporation announced that their Boards of Directors had approved a definitive agreement to merge the two companies. The merger is intended to qualify as a tax free reorganization and has been accounted for as a pooling of interests. The issuance of Nellcor common stock in connection with the Agreement and Plan of Merger was approved by shareholders at special shareholder meetings held by both companies on August 24, 1995. Under the terms of the agreement, shareholders of Puritan-Bennett received 0.88 of a share of Nellcor common stock for each Puritan-Bennett share, or approximately 11.6 million shares of Nellcor common stock. The Board of Directors also adopted and, on August 24, 1995, the Company's stockholders also approved, the 1995 Merger Stock Incentive Plan (the "1995 Plan"), which authorized the issuance of up to 779,000 shares of Company common stock in the form of stock options. The purpose of the 1995 Plan is to allow the Company to comply with its obligations in the Agreement and Plan of Merger with Puritan-Bennett, whereby the Company would issue its options to holders of unexercised options of Puritan-Bennett stock as of the effective date of the merger. The new company, Nellcor Puritan Bennett Incorporated (Nellcor Puritan Bennett) is headquartered in Pleasanton, California, site of Nellcor's current headquarters. The Board of Directors of Nellcor Puritan Bennett has nine members; six from Nellcor, two from Puritan-Bennett, and one to be selected by both companies. - 24 - 28 NELLCOR PURITAN BENNETT INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- Upon consummation of the merger, the Company recorded one-time merger and related costs of $92.6 million during the first quarter of fiscal 1996. Included in this charge were provisions for merger transaction costs ($13.7 million), costs to combine and integrate operations ($53.8 million), certain intangible asset write-downs ($19.6 million), and other merger related costs ($5.5 million). The merger transaction costs include expenses for investment banker and professional fees, and other costs associated with completing the transaction. The costs to combine and integrate operations include provisions for severance and severance-related costs, facilities consolidations and other integration costs. The write-down of certain intangible assets, primarily goodwill associated with prior acquisitions made by both companies, results from the effect that certain integration decisions have had upon the future realization of these assets. For the purpose of preparing the Nellcor Puritan Bennett Incorporated Consolidated Balance Sheet, Nellcor's balance sheet at July 2, 1995 and July 3, 1994 was combined with Puritan-Bennett's balance sheet at January 31, 1995 and 1994, respectively. For the purpose of preparing the Nellcor Puritan Bennett Consolidated Statements of Operations, of Stockholders' Equity and of Cash Flows, Nellcor's historical results for each of the three fiscal years in the period ended July 2, 1995 have been combined with Puritan-Bennett's historical results for each of the three fiscal years in the period ended January 31, 1995. Nellcor's fiscal year ends on the first Sunday in July, which results in a 52 or 53 week fiscal year. The only adjustment required to conform the accounting policies was to reduce Puritan-Bennett's valuation allowance provided for its deferred tax assets based upon the combined income from operations before tax of Nellcor and Puritan-Bennett as required by SFAS No. 109, "Accounting for Income Taxes." In addition, certain reclassifications have been made to the consolidated financial statements of Puritan-Bennett to conform to Nellcor's financial statement presentation. - 25 - 29 NELLCOR PURITAN BENNETT INCORPORATED - ----------------------------------------------------------------------------- SELECTED QUARTERLY DATA Unaudited (in thousands except per share amounts)
YEAR ENDED JULY 2, 1995 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER Net revenue $136,122 $148,010 $154,447 $161,487 Gross profit 66,669 74,337 77,403 82,089 Income from operations 13,438 18,709 21,697 21,396 Net income 9,583 12,727 11,418 15,735 Net income per share 0.35 0.45 0.41 0.56
YEAR ENDED JULY 3, 1994 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER Net revenue $125,539 $136,027 $136,923 $145,738 Gross profit 62,440 68,090 69,015 70,392 Income from operations 9,869 3,905 13,866 (19,930) Litigation settlements - - 2,000 (15,000) Net income 3,953 1,893 10,100 (25,258) Net income per share 0.14 0.07 0.37 (.92)
- 26 - 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS: The following sets forth, for the indicated periods, the relationship that certain items bear to net revenue:
Increase (Decrease) Years ended Over Prior Year July 2, 1995 July 3, 1994 July 4, 1993 FY 95 vs. FY 94 FY 94 vs. FY 93 ------------ ------------ ------------ --------------- --------------- Net revenue 100% 100% 100% 10% 5% Gross margin 50% 50% 50% 11% 4% Operating expenses: Research and development 8% 9% 9% (3%) 1% Selling, general, and administrative 29% 31% 29% 3% 12% Restructuring charges, -- 8% -- -- -- Total operating expenses 38% 48% 39% (14%) 31% Income from operations 13% 1% 11% 876% (87%) Litigation settlements, net -- (2%) -- -- -- Income (loss) before income taxes 12% (1%) 11% N/M (110%) Net income (loss) 8% (2%) 8% N/M (136%)
N/M = Not meaningful 1995 VS 1994 REVENUE The Company's net revenue for fiscal 1995 increased 10% to $600.1 million from $544.2 million in fiscal 1994. The increase in net revenue principally resulted from higher sales across the Company's hospital and home care businesses. Sales of the Company's products into international markets were also particularly strong. Hospital business sales, which include the oximetry, critical care ventilator and clinical information systems product lines, increased 9% to $372.8 million in fiscal 1995 from $343.6 million in fiscal 1994. The Company's principal oximetry instruments include the N-20 portable pulse oximeter, the N-180, N-185, N-200 and N-250 standalone pulse oximeters, and the N-3000 pulse oximeter, a module of the NELLCOR SYMPHONY(TM) monitoring system. Oximetry instrument revenue for fiscal 1995 increased slightly as higher unit sales of the N-3000 pulse oximeter and the N-20 portable pulse oximeter were partially offset by lower average selling prices. Oximetry sensors include adhesive, reusable and recycled sensor product lines. Revenue from oximetry sensors increased moderately during fiscal 1995 primarily due to continued growth in the installed base of the Company's monitors and the products of the Company's licensees and OEM customers that use the Company's sensors. Higher unit sales were partially offset by slightly lower average selling prices for adhesive and recycled sensors. 27 31 OEM oximetry module revenue increased significantly in fiscal 1995 as higher unit shipments were partially offset by moderately lower average selling prices. At the end of fiscal 1995, the Company had OEM or licensing agreements in place with 40 medical systems and monitor manufacturers worldwide. Revenues related to the critical care ventilator business, the CliniVision product line in the United States, and the small holter monitoring and international portable ventilator product lines decreased 1% from fiscal 1994. The decrease is the result of the Company's decision to withdraw from the United States portable ventilator market and to discontinue sales of some older products. After adjusting for the loss of sales from these products, revenues increased 7% over fiscal 1994. Home care business sales, which include the oxygen therapy, gas products and spirometry group; the sleep and respiratory support systems group; and the aero systems group, increased 13% to $227.3 million in fiscal 1995 from $200.6 million in fiscal 1994. Home care business revenue increased due primarily to higher sales within the sleep and respiratory support systems group. The products within the sleep and respiratory support systems group include the ASSURANCE 2000 and 3000 heart and respiration monitor, the EDENTRACE II and II PLUS multichannel recording systems and related products, the Airway Delivery and Management System (ADAM) and the Nasal Continuous Positive Airway Pressure (CPAP) System both used in the Therapy Headgear product, and Companion 318 and 320 Airway Pressure Respiratory Systems which deliver controlled airflow to patients when air obstruction occurs. During the fourth quarter of fiscal 1995, the Company acquired Pierre Medical, a privately held French Manufacturer of respiratory products used in the home. Pierre Medical markets the ONYX noninvasive ventilation system, the OMEGA oxygen concentrator and the MORPHEE and MORPHEE PLUS sleep apnea therapy systems in Western Europe, primarily in France. Revenue from the above mentioned home health care products increased significantly during fiscal 1995 primarily due to higher sales of the EDENTRACE II PLUS and the ASSURANCE 3000, as well as sales from Pierre Medical included in the Company's results subsequent to its May 3, 1995 acquisition. In addition, the Company has a full year of revenue from SEFAM S.A., a European supplier of diagnostic and therapeutic sleep disorder products, which was acquired in January 1994. International revenue (net of intersegment eliminations) increased 44% to $133.4 million in fiscal 1995 from $92.8 million in fiscal 1994. International revenue increased significantly across all markets principally due to higher sales of oximetry sensors, the N-3000 pulse oximeter, OEM oximetry modules, the acquisitions of Pierre Medical and SEFAM S.A., and the favorable effect of foreign currency exchange rates. GROSS MARGIN Gross margin at 50% of net revenue in fiscal 1995 was comparable to the prior year, as pricing pressures experienced in both the hospital and home care businesses were offset by improved margins in EdenTec and the favorable effect which foreign currency exchange rates had upon revenue. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses decreased to 8% of net revenue during fiscal 1995 from 9% for both fiscal 1994 and 1993, and decreased in absolute dollars from fiscal 1994. The decrease was due to the elimination of the intra-arterial blood gas monitoring product line during fiscal 1994, partly offset by an increase in research and development expenses related to the development of additional modules of the NELLCOR SYMPHONY(TM) monitoring system, and higher sleep product development costs at EdenTec. The Company expects to continue to invest in the research and development of new products. 28 32 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general, and administrative expenses in fiscal 1995 decreased to 29% of net revenue from 31% of net revenue in fiscal 1994. Selling, general, and administrative expenses increased in absolute dollars due primarily to the unfavorable effect foreign currency exchange rates had upon international operating expenses, the inclusion of operating expenses from Pierre Medical and SEFAM S.A. subsequent to their acquisition, and increased costs related to the Company's profit sharing and bonus plans, partially offset by lower patent litigation expenses. NET INCOME The Company's net income for fiscal 1995 was $49.5 million, $1.77 per share, compared to a net loss of $9.3 million, ($0.34) per share, for the same period a year ago. As described below, the fiscal 1994 net loss includes the effect of a pretax restructuring charge of $43.7 million, a net $13.0 million pretax charge for trade secrets and patent litigation settlements, and the $2.9 million after tax effect of the adoption of a new accounting standard. The fiscal 1995 net income reflects the effect of a $2.7 million restructuring charge associated with a 6% reduction in Puritan-Bennett's work force, and $5.0 million in costs associated with an unsolicited takeover attempt. Excluding the after-tax effect of these unusual charges, fiscal 1995 net income of $54.8 million, $1.96 per share, increased 14% over net income of $47.9 million, or $1.75 per share for fiscal 1994. 1994 VS 1993 REVENUE The Company's net revenue for fiscal 1994 increased 5% to $544.2 million from $518.2 in fiscal 1993. The increase is principally due to higher sales within the Company's home care business, are discussed below. Hospital business sales at $343.7 million in fiscal 1994 were comparable to the prior year, as higher sales of adhesive and reusable sensors were offset by a decrease in sales of critical care ventilators and clinical information systems. Sales of adhesive and reusable sensors increased primarily due to continued growth in the installed base of the Company's monitors and the products of the Company's licensee and OEM customers that use the Company's sensors. Oximetry instrument revenue decreased slightly in fiscal 1994 primarily due to lower average selling prices and a continued shift to lower-priced portable pulse oximeters such as the N-20. Unit sales of oximetry instruments decreased slightly in fiscal 1994. OEM oximetry module revenue increased in fiscal 1994 principally due to significantly higher unit shipments, partially offset by lower average selling prices. Selling prices for certain OEM modules were reduced beginning in the third quarter of fiscal 1994. Unit orders of the 7200 Series ventilator system grew 10% internationally in spite of recessionary economic conditions in Europe; unit orders fell 18% in the United States. The Company expected United States demand for the 7200 Series ventilator to stabilize generally around fiscal year 1993 levels and international demand to continue growing. After a very slow start caused by United States health care reform uncertainty, CliniVision orders increased significantly in the second half of the year as the Company continued to enhance the CliniVision system. 29 33 Home care business sales increased 15 percent to $200.6 million in fiscal 1994 from $174.6 million in fiscal 1993 due primarily to higher sleep and respiratory support and oxygen therapy systems sales. Sleep and respiratory support systems group revenue increased primarily due to rapid market growth and market share gains, principally in the United States. In January 1994, the Company acquired SEFAM, S.A. (Nancy, France), a supplier of diagnostic and therapeutic sleep disorder products in Europe. Home oxygen therapy (principally liquid oxygen systems and oxygen concentrators) experienced growth of 15% during fiscal 1994. The Company expects its home oxygen therapy business to continue growing. International revenue at $92.8 million in fiscal 1994 was comparable to fiscal 1993, as higher sales of adhesive and reusable sensors, the ULTRA CAP and the E-300, were offset by lower sales of oxygen concentrators, and the unfavorable effect which foreign currency exchange rates had upon revenue. During fiscal 1993 there was a sizable oxygen concentrator fleet replacement by a single customer for which there was no comparable event in fiscal 1994. GROSS MARGIN Gross margin at 50% of net revenue in fiscal 1994 was comparable to the prior year, as pricing pressures experienced in both the hospital and home care businesses were offset by improved margin at EdenTec and a slight shift in mix to higher margin sensors. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses in absolute dollars for 1994 increased due primarily to the development of the HealthQuiz(TM) PreScreen(TM) automated preanesthetic medical history system. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general, and administrative expenses in fiscal 1994 increased over the prior year both as a percentage of net revenue and in absolute dollars. This increase is primarily due to the Company's growing home care business and higher patent litigation expenses. The increase can also be attributed to an increase in selling expenses related to the intra-arterial blood gas monitoring products and costs associated with restructuring actions, discussed below. RESTRUCTURING AND OTHER UNUSUAL CHARGES During fiscal 1994, Puritan-Bennett restructured the hospital ventilator and portable ventilator portions of its business, consolidated its aviation products facilities and substantially reduced the FOxS operations to improve profitability. In connection with the restructuring, during fiscal 1994 Puritan-Bennett recorded restructuring charges of $43.2 million. Included in these charges were provisions for personnel-related charges ($7.7 million), non-cash asset write-downs ($29.7 million), consolidation of manufacturing and marketing facilities ($1.3 million), and other restructuring related costs ($4.5 million). In the third quarter of 1995, the Company completed the shut down of the FOxS operations. Nellcor also recorded a restructuring charge of $0.5 million, during fiscal 1994, associated with the consolidation of two of Nellcor's divisions. During the third quarter of fiscal 1994, Nellcor agreed to settle trade secrets and patent litigation with BOC Health Care, Inc., and its Ohmeda, Inc. subsidiary, and Square One Technology. Under the terms of the agreement, the patent in issue was assigned to the Company. The Company also received a $2.0 million payment and will receive ongoing royalties. The $2.0 million payment was recorded as nonoperating income in the third quarter of fiscal 1994. During the fourth quarter of fiscal 1994, Nellcor announced that it had agreed to settle its patent litigation with Camino Laboratories Inc. ("Camino") of San Diego, CA. Under the terms of the settlement, Camino agreed not to sue the 30 34 Company or its current or future customers relating to the use or sale of the Company's sensors and monitors intended for use with such sensors. A cash payment of $15.0 million was subsequently made by the Company to Camino. The payment was recorded as a nonoperating expense in the fourth quarter of fiscal 1994. In July, 1995, Nellcor announced that the US Federal District Court in Delaware had issued a decision in favor of Nellcor in the Company's patent litigation with Ohmeda and BOC Health Care, Inc. The Court ruled that Nellcor oximeter and sensor technology patents are valid and would be infringed if Ohmeda, a subsidiary of BOC Health Care, Inc., sold its adult or neonatal Oxy Tip sensors for use with non-Ohmeda monitors. BOC Health Care has filed a notice to appeal the decision of the US Federal District Court in Delaware. BUSINESS FACTORS ACQUISITIONS During the fourth quarter of fiscal 1994, Puritan-Bennett acquired SEFAM S.A., a French supplier of diagnostic and therapeutic sleep products, for $21.6 million, of which $12.9 million was paid in cash with the remainder paid through the issuance of 375,678 restricted shares of Puritan-Bennett common stock, adjusted for the merger with Puritan-Bennett discussed below. During the fourth quarter of fiscal 1995, the Company's EdenTec subsidiary acquired Pierre Medical, a privately held French manufacturer of respiratory products used in the home, for $21.5 million in cash. In the event that certain profitability targets are achieved or certain of Pierre Medical's products receive FDA approval for marketing in the United States subsequent to the acquisition, additional compensation totaling 30 million French Francs ($6.2 million as of July 2, 1995) would be payable to the former principal stockholders of Pierre Medical who will continue to manage the company. Pierre Medical manufactures and markets noninvasive ventilators, sleep apnea therapy systems, oxygen concentrators, and related respiratory products in Western Europe, primarily France. The acquisitions were accounted for under the purchase method and were intended to broaden the Company's product offerings and to provide opportunities to expand sales. MERGER BETWEEN NELLCOR AND PURITAN-BENNETT On August 25, 1995 the merger of Nellcor and Puritan-Bennett was consummated. The issuance of Nellcor common stock in connection with the Agreement and Plan of Merger was approved by shareholders at special shareholder meetings held by both companies on August 24, 1995. Under the terms of the agreement, shareholders of Puritan-Bennett received 0.88 of a share of Nellcor common stock for each Puritan-Bennett share. These financial statements and management's discussion and analysis reflect the consummation of this transaction as a pooling of interests, resulting in the combining of the two company's balance sheets and income statements as if they had always operated as a single combined company. Upon consummation of the merger, the Company recorded one-time merger and related costs of $92.6 million during the first quarter of fiscal 1996. Included in this charge were provisions for merger transaction costs ($13.7 million), costs to combine and integrate operations ($53.8 million), certain intangible asset write-downs ($19.6 million), and other merger related costs ($5.5 million). The merger transaction costs include expenses for investment banker and professional fees, and other costs associated with completing the transaction. The costs to combine and integrate operations include provisions for severance and severance-related costs, facilities consolidations and other integration costs. The write-down of certain intangible assets, primarily goodwill associated with prior acquisitions made by both companies, results from the effect that certain integration decisions have had upon the future realization of these assets. 31 35 The new company, Nellcor Puritan Bennett, is headquartered in Pleasanton, California, site of Nellcor's headquarters. The Board of Directors of Nellcor Puritan Bennett is comprised of nine members: six from Nellcor, two from Puritan-Bennett and to be one selected by both companies. PRODUCTS The Company is continuing to develop new products to address existing and new markets. The introduction of new products may be prevented or delayed by engineering obstacles, regulatory procedures, clinical trials, production difficulties, and other factors. In addition, the costs of producing, promoting, and servicing new products are generally greater than in the case of mature, higher volume products. New product introductions can also temporarily reduce revenues by interfering with sales of existing products. MARKET CONDITIONS As health care increasingly becomes managed care, patient care is shifting to lower-cost areas of the hospital and alternate care sites outside the hospital, including subacute care centers, skilled nursing facilities, and the home. Additionally, in an effort to create larger, more cost-effective entities capable of competing for managed care contracts, health care providers are consolidating and vertically integrating, and hospitals are joining local or regional multiple hospital systems in greater numbers. As a result of these ongoing changes in the delivery of health care, the Company expects that a greater proportion of its future revenue will come from sales of its products to a smaller customer base, primarily comprised of larger, consolidated health care providers and buying groups, and from sales of its products into the growing alternate care markets. In the current health care business environment, hospitals, which are the Company's principal customers, face increasing pressure to control costs. These pressures may, in the future, lead to a decrease in the average selling price for a number of the Company's products, which could adversely affect the Company's gross margins. During fiscal 1995 and fiscal 1994, the Company offered a number of promotional programs in an effort to increase the installed base of the Company's oximetry and OEM modules. These programs also had the effect of reducing pulse oximetry pricing. Competition in fiscal 1995 caused further price reductions for oximeters and multifunction monitors. The Company is continually seeking manufacturing cost reductions; however, these reductions may not offset the impact of future price declines. LIQUIDITY AND CAPITAL RESOURCES During fiscal 1995, the Company generated a net increase in cash and cash equivalents and marketable securities of $21.1 million. At July 2, 1995, the Company had cash, cash equivalents, and marketable securities amounting to approximately $143.5 million compared to $122.3 million at the end of fiscal 1994. The Company's operating activities provided positive cash flows of $68.1 million during fiscal 1995. Depreciation expense and amortization expense were significant non-cash operating activities for all years presented. Purchases of marketable securities and fixed assets, principally manufacturing equipment, and the acquisition of Pierre Medical were the principal uses of cash from investing activities. Shares of the Company's common stock issued due to the exercise of stock options under the Company's stock option plans and additions to long-term debt were significant sources of cash from financing activities in fiscal 1995. Shares of common stock repurchased in fiscal 1995 under the Company's Limited Stock Repurchase Program and repayment of notes payable and current maturities of long-term debt were significant uses of cash from financing activities. Shares repurchased under the Limited Stock Repurchase Program are repurchased to offset the dilutive effects of the Company's stock plans. No repurchases of shares under the General Stock Repurchase Program, which authorizes the repurchase and retirement of up to one million shares of common stock from time to time in the open market, were made in fiscal 1995. During the second quarter of fiscal 1995, the Company secured a $50 million credit facility with a syndicate of four banks led by ABN AMRO Bank N.V. The credit facility was obtained to provide the Company with additional financial resources and flexibility to take advantage of strategic business opportunities. Under the terms of the credit facility, a commitment fee of 0.25% is paid quarterly and at the end of November 1996, outstanding borrowings are convertible into four-year term loans. As of July 2, 1995, the Company had not drawn against this credit facility. The Company anticipates that current capital resources combined with cash generated from operating activities will be sufficient to meet its liquidity and capital expenditure requirements at least through the end of fiscal 1996. The Company plans to make significant repayments of notes payable and term debt associated with the merger with Puritan-Bennett. It is expected that these repayments along with costs associated with the merger, and other merger-related cash outlays, will lead to a net reduction in the Company's cash and cash equivalents and marketable securities during fiscal 1996. The Company may consider using debt to fund certain capital and other strategic opportunities when deemed necessary and financially advantageous. 32 36 * * * * Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. NELLCOR PURITAN BENNETT INCORPORATED Date: April 3, 1996 /s/ LAUREEN DEBUONO -------------------------------- Laureen DeBuono Secretary and General Counsel EX-99.1 2 REPORT OF INDEPENDENT AUDITORS 1 REPORT OF INDEPENDENT AUDITORS Exhibit 99.1 Board of Directors Puritan-Bennett Corporation We have audited the accompanying consolidated balance sheets of Puritan-Bennett Corporation and subsidiaries as of January 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended January 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Puritan-Bennett Corporation and subsidiaries at January 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, during the year ended January 31, 1994, the Company changed its method of accounting for income taxes, postretirement benefits and postemployment benefits. Ernst & Young LLP Kansas City, Missouri March 6, 1995 24 -----END PRIVACY-ENHANCED MESSAGE-----