-----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, SdDqf2z005DmIPIFrOxDOyYwVbxmGDUPX6mEFAa2Z23jisMY6TRcfyTrue2CcRA/ OR2CQz977kw2x9/SpxBLkw== 0000950149-96-001937.txt : 19961121 0000950149-96-001937.hdr.sgml : 19961121 ACCESSION NUMBER: 0000950149-96-001937 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961006 FILED AS OF DATE: 19961120 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14980 FILM NUMBER: 96669692 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 10-Q 1 FORM 10-Q FOR PERIOD ENDING OCTOBER 6, 1996 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED October 6, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ COMMISSION FILE NUMBER 0-14980 NELLCOR PURITAN BENNETT INCORPORATED (Exact name of registrant as specified in its charter) DELAWARE 94-2789249 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 4280 HACIENDA DRIVE PLEASANTON, CALIFORNIA 94588 (Address of principal executive offices) (Zip code) TELEPHONE: (510) 463-4000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of shares of Common Stock, $.001 par value, outstanding as of October 6, 1996 was 60,176,019. Page 1 2 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements NELLCOR PURITAN BENNETT INCORPORATED CONSOLIDATED BALANCE SHEET (In thousands, except share amount, unaudited)
October 6, 1996 July 7, 1996 --------------- ------------ ASSETS Current assets: Cash and cash equivalents $ 52,280 $ 68,549 Marketable securities 7,532 5,825 Accounts receivable 152,588 151,461 Inventories 145,906 128,078 Deferred income taxes 31,660 31,658 Other current assets 18,298 14,030 -------- -------- Total current assets 408,264 399,601 -------- -------- Property, plant and equipment 136,828 130,891 Intangible and other assets 48,365 44,245 Deferred income taxes 13,102 13,101 -------- -------- $606,559 $587,838 ======== ======== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Loans payable $ 10,022 $ -- Accounts payable 41,787 39,198 Employee compensation and related costs 22,724 29,918 Merger and related costs 28,356 32,452 Other accrued expenses 37,955 33,771 Current maturities of long-term debt 48 143 Income taxes payable 19,242 20,522 -------- -------- Total current liabilities 160,134 156,004 -------- -------- Long-term debt, less current maturities 6,402 6,493 Deferred compensation and pensions 9,747 9,522 Deferred revenue 8,071 10,039 -------- -------- Total liabilities 184,354 182,058 -------- -------- Stockholders' equity: Common stock, par value 63 63 Additional paid-in-capital 232,770 230,428 Retained earnings 245,696 232,433 Accumulated translation adjustment 53 304 Notes receivable from stockholders (5) (5) Net unrealized gain on available-for-sale securities 2,445 1374 Treasury stock, at cost (3,224,020 shares) (58,817) (58,817) -------- -------- Total stockholders' equity 422,205 405,780 -------- -------- $606,559 $587,838 ======== ========
See accompanying note Page 2 3 NELLCOR PURITAN BENNETT INCORPORATED CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share amounts, unaudited)
For the Three Months Ended ---------------------------- October 6, October 1, 1996 1995 ---------- ---------- Net revenue $160,626 $162,506 Cost of goods sold 82,109 80,837 -------- -------- Gross profit 78,517 81,669 Operating expenses: Research and development 12,130 12,758 Selling, general and administrative 47,438 46,649 Merger and related costs 0 92,618 -------- -------- 59,568 152,025 -------- -------- Income (loss) from operations 18,949 (70,356) Interest income 720 1,931 Interest expense (179) (1,378) Other income (expense), net (268) (690) -------- -------- Income (loss) before income taxes 19,222 (70,493) Provision (benefit) for income taxes 5,959 (11,494) -------- -------- Net Income (loss) $ 13,263 $(58,999) ======== ======== Net income (loss) per common and common equivalent share $.22 $(.97) ======== ======== Weighted average common and common equivalent shares 61,471 60,684 ======== ========
See accompanying note Page 3 4 NELLCOR PURITAN BENNETT INCORPORATED CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands, unaudited)
For the Three Months Ended ----------------------------------- October 6, 1996 October 1, 1995 --------------- --------------- Cash flows from operating activities: Net income (loss) $ 13,263 $(58,999) Adjustments to reconcile net income (loss) to cash used for operating activities: Depreciation and amortization 7,401 8,229 Deferred income taxes 0 102 Merger and related charges 0 92,618 Deferred compensation and pensions 0 19 Other 225 (48) Increases (decreases) in cash flows, net of effect of purchased companies, as a result of changes in: Accounts receivable 2,847 2,319 Inventories (16,004) (4,490) Other current assets (4,204) (15,594) Intangible and other assets 379 2,892 Accounts payable 1,037 (9,729) Merger and related costs (4,086) (17,016) Employee compensation and other accrued expenses (12,388) (1,681) Income taxes payable (1,295) (4,685) Deferred revenue (288) 0 ------- --------- Cash used for operating activities (13,113) (6,063) Cash flows from investing activities: Capital expenditures (9,467) (5,355) Purchase of available-for-sale securities (1,800) (931) Proceeds from maturities of securities held-to-maturity 0 19,218 Proceeds from the sale of available-for-sale securities 1,165 31,295 Acquisitions, net of cash acquired (5,236) (4,923) Other investing activities (25) 0 -------- --------- Cash provided by (used for) investing activities (15,363) 39,304 -------- --------- Cash flows from financing activities: Issuance of common stock under the Company's stock plans and related tax benefits, net 2,342 10,170 Additions to loans payable 10,022 40,000 Repayment of long-term debt (187) (64,700) -------- -------- Cash provided by (used for) financing activities 12,177 (14,530) -------- -------- Effect of exchange rate changes on cash 30 (216) -------- -------- (Decrease) increase in cash and cash equivalents (16,269) 18,495 Cash and cash equivalents at the beginning of the period 68,549 79,565 -------- -------- Cash and cash equivalents at the end of the period $ 52,280 $ 98,060 ======== ========
See accompanying note Page 4 5 NELLCOR PURITAN BENNETT INCORPORATED NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) General. The consolidated financial statements reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position and results of operations of Nellcor Puritan Bennett Incorporated (the Company) as of the end of and for the periods indicated. The accompanying interim consolidated financial statements should be read in conjunction with the financial statements and related notes included in The Company's 1996 Annual Report to Stockholders. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission rules and regulations. The Company believes the information included in the report on Form 10-Q, when read in conjunction with the consolidated financial statements and related notes thereto included in the Company's 1996 Annual Report to Stockholders, is not misleading. The results of operations for the three months ended October 6, 1996 are not necessarily indicative of operating results for the full fiscal year. Combined Financial Results. On June 27, 1996, the Company consummated its acquisition of Infrasonics Incorporated (Infrasonics) in a stock for stock merger. The merger was intended to qualify as a tax-free reorganization and was accounted for as a pooling of interests. Accordingly, the consolidated financial statements present, for all periods, the combined financial results of the Company and Infrasonics. The Company's consolidated statement of operations and cash flows for the three months ended October 1, 1995 combine the financial results of Nellcor Puritan Bennett's first quarter of fiscal 1996, the three months ended October 1, 1995, with Infrasonics' first quarter of fiscal 1996, the three months ended September 30, 1995. Adjustments made to conform the accounting policies of Nellcor Puritan Bennett and Infrasonics were immaterial. Separate results for each of Nellcor Puritan Bennett's and Infrasonics' first quarter of fiscal 1996, and combined results for the three months ended October 1, 1995, were as follows (in thousands):
Nellcor Puritan Bennett Infrasonics Combined Three months ended: October 1, 1995 September 30, 1995 October 1, 1995 - ------------------- --------------- ------------------ ----------------- Revenue $156,250 $6,256 $162,506 - ---------------------------------------------------------------------------------------------------------- Net Income (loss) $(59,302) $ 303 $(58,999) - ----------------------------------------------------------------------------------------------------------
Inventories. Inventories are stated at the lower of cost (first-in, first-out) or market. Allowances are made for slow-moving, obsolete, unsalable, or unused inventories. Page 5 6 Interim fiscal 1997 and year-end fiscal 1996 inventory balances for the Company were as follows (in thousands):
October 6, 1996 July 7, 1996 --------------- ------------ Raw materials $ 70,928 $ 64,205 Work-in-process 9,759 15,579 Finished goods 65,219 48,294 -------- -------- $145,906 $128,078
Statement of Cash Flows. The Company paid income taxes of approximately $7.2 million during the first three months ended October 1, 1996, and $4.9 million during the first three months ended October 1, 1995. Property and equipment. Depreciation expense was approximately $6.3 million in the first three months of fiscal 1997 and $6.1 million in the first three months of fiscal 1996. Marketable securities. At October 6, 1996, the Company held available-for-sale marketable securities with a fair market value of $7.5 million. 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. Realized gains and losses resulting from the sale of available-for-sale marketable securities during the period were not material. The difference between the cost and market value of the Company's marketable securities at October 6, 1996, an unrealized gain of approximately $2.4 million associated with equity securities held by the Company, is recorded as a component of net unrealized gain on available-for-sale marketable securities in stockholders' equity. Merger and related costs: Associated with the Company's mergers with Puritan-Bennett and Infrasonics, one-time merger and related costs totaling $108.9 million were recorded during fiscal 1996 of which approximately $80.5 million had been utilized as of October 6, 1996, primarily associated with the write- down (non-cash charge) of certain intangible assets to their net realizable value ($21.8 million), the payment of merger transaction costs ($14.3 million), initial costs incurred to combine and integrate operations ($41.2 million, of which $11.3 million was associated with employee severance and benefits termination costs) and other merger related costs ($3.2 million). The remaining merger and related costs accrued at October 6, 1996 of $28.4 million, approximately $26.9 million of which is expected to result in a cash outlay, should be substantially utilized by the end of fiscal year 1997. Employee severance and benefits termination costs included in the fiscal 1996 merger and related costs accrual were associated with the elimination of approximately 300 positions from the Company's total workforce. The positions to be eliminated are primarily associated with corporate administrative groups, field sales and customer service organizations, and the consolidation of manufacturing sites. As of October 6, 1996, approximately 187 positions contemplated by this workforce consolidation, primarily in the Company's field sales and corporate administrative groups, had been eliminated. The Company expects the remainder of these positions to be eliminated during fiscal 1997. Page 6 7 Acquisition of Aequitron. On September 10, 1996, the Company and Aequitron Medical, Inc. (Aequitron) announced that they had entered into a definitive agreement for Nellcor Puritan Bennett to acquire Aequitron in a stock for stock merger (valued at approximately $57 million based upon the October 6, 1996 closing stock price.) Under the terms of the amended agreement, Aequitron stockholders will receive .432 of a share of Nellcor Puritan Bennett common stock for each outstanding share of Aequitron common stock within a range between $23.14 and $26.61 per share, subject to a maximum exchange ratio of .588. Consummation of the merger is intended to qualify as a tax-free reorganization and to be accounted for as a pooling of interests for financial reporting purposes. The Company expects this transaction to close late in the second quarter of fiscal 1997. Aequitron, headquartered in Minneapolis, Minnesota is a respiratory equipment manufacturer of portable compact ventilators, infant apnea products, and sleep disorder diagnostic devices. In addition, through its subsidiary, Crow River Industries, Inc., the company also manufactures wheelchair lifts and automobile hand controls to assist individuals who have mobility limitations. For the year ended April 30, 1996, Aequitron reported revenue of $38.5 million. Acquisition of Nellcor-CMI, Inc. On September 30, 1996, the Company acquired the remaining 50 percent ownership interest in Nellcor-CMI, Inc. (NCI), its Japanese joint venture, for $5.4 million in cash. The acquisition of the remaining interest in NCI has been accounted for as a purchase and, accordingly, NCI's results are included in the Company's financial statements subsequent to the acquisition date. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS - FIRST QUARTER ENDED OCTOBER 6, 1996, COMPARED WITH THE FIRST QUARTER ENDED OCTOBER 1, 1995. The Company reported net income for the first quarter of fiscal 1997 of $13.3 million, or $0.22 per share, compared to net income of $15.0 million, $0.25 per share, for the same period a year ago, exclusive of the effect of first quarter fiscal 1996 one-time pretax merger and related charges of $92.6 million, ($1.22) per share, associated with the Company's merger with Puritan-Bennett. Including the after-tax effect of this one-time charge, the Company reported a net loss of $59.0 million, or ($.97) per share. The Company's net revenue for the first quarter of fiscal 1997 was $160.6 million, compared to net revenue of $162.5 million for the same period a year ago. Hospital product line sales, which include the oximetry, ventilator and clinical information systems product lines, decreased 2 percent to $99.2 million for the first quarter of fiscal 1997 from $100.9 million for the same period last year. The decrease in hospital product line revenue was due primarily to the transition in sales of Infrasonics products from independent distributors to the Company's direct sales force and vacancies in the U.S. hospital sales force that occurred during the quarter. These events, which particularly impacted sales of the Company's critical care ventilators during the quarter, may continue to affect overall hospital product line revenue growth rates in the near-term. Page 7 8 For the first quarter of fiscal 1997, home care product line sales, which include the products of the Oxygen Therapy, Gas Products and Spirometry Group and the Global Sleep Solutions Group, decreased 1 percent to $53.0 million from $53.3 million for the same period last year. The decrease in home care product line sales was due primarily to the effect that renewed concerns over potential reductions in government home oxygen therapy reimbursement levels had upon sales of the Company's home oxygen therapy products. Aero business sales were $8.5 million for the first quarter of fiscal 1997 compared to $8.2 million for the same period last year. International revenue of $52.8 million was comparable to the first quarter of fiscal 1996. Foreign currency exchange rates unfavorably impacted international revenue by 2 percentage points during the first quarter. Gross profit as a percentage of net revenue for the first quarter of fiscal 1997 was 49 percent compared to 50 percent for the same period last year due primarily to the unfavorable effect which foreign currency exchange rates had upon revenue and lower international ventilator pricing. Operating expenses for the first quarter of fiscal 1997 and the first quarter of 1996 were 37 percent of net revenue, exclusive of the effect of the one-time merger and related charges. Research and development expenses at 8 percent of net revenue in the first quarter of fiscal 1997 were comparable to the first quarter of fiscal 1996. For the first quarter of fiscal 1997, selling, general, and administrative expenses increased to 30 percent of net revenue from 29 percent for the same period in fiscal 1996, due primarily to the slight decrease in revenue. Operating expenses for the first three months of fiscal 1996 reflect the effect of one-time merger and related costs of $92.6 million associated with the merger of Nellcor and Puritan-Bennett. 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 included expenses for investment banker and professional fees, and other costs associated with completing the transaction. The costs to combine and integrate operations included 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, resulted from the effect that certain integration decisions had upon the future realization of these assets. Liquidity and Capital Resources At October 6, 1996, the Company had cash, cash equivalents and marketable securities of approximately $59.8 million compared to $74.4 million at the end of fiscal 1996. Cash used for operating activities was approximately $9.0 million during the first three months of fiscal 1997, exclusive of $4.1 million in merger related cash outlays. Inventory growth and employee profit sharing payments during the quarter were major contributors to this use of cash from operating activities. The Company's inventories increased to $145.9 million at October 6, 1996, from $128.1 million at July 7, 1996 due primarily to inventory buildups in advance of product line relocations and factory consolidations, certain new product introductions, and lower than planned sales levels. In September 1996, the Company acquired the remaining 50 percent ownership interest in Nellcor-CMI, Inc. (NCI), its Japanese joint venture, for $5.4 million in cash. As part of completing this acquisition, the Company increased its short-term borrowings by $10 million during the quarter. Page 8 9 On September 10, 1996, the Company and Aequitron Medical, Inc. (Aequitron) announced that they had entered into a definitive agreement for Nellcor Puritan Bennett to acquire Aequitron in a stock for stock merger (valued at approximately $57 million based upon the October 6, 1996, closing stock price.) Under the terms of the amended agreement, Aequitron stockholders will receive .432 of a share of Nellcor Puritan Bennett common stock for each outstanding share of Aequitron common stock within a range between $23.14 and $26.61 per share, subject to a maximum exchange rate of .588. Consummation of the merger is intended to qualify as a tax-free reorganization and to be accounted for as a pooling of interests for financial reporting purposes. The Company expects this transaction to close late in the second quarter of fiscal 1997. Aequitron, headquartered in Minneapolis, Minnesota is a respiratory equipment manufacturer of portable compact ventilators, infant apnea products, and sleep disorder diagnostic devices. In addition, through its subsidiary, Crow River Industries, Inc., the company also manufactures wheelchair lifts and automobile hand controls to assist individuals who have mobility limitations. For the year ended April 30, 1996, Aequitron reported revenue of $38.5 million. The Company anticipates that current capital resources, combined with cash to be generated from operating activities will be sufficient to meet its liquidity and capital expenditure requirements at least through the end of fiscal 1997. The Company may continue to use debt to fund certain capital and other strategic opportunities when deemed necessary and financially advantageous. BUSINESS CONSIDERATIONS The Company is a United States Food and Drug Administration (FDA) regulated business operating in the rapidly changing healthcare industry. From time to time the Company may report, through its press releases and/or Securities and Exchange Commission filings, certain matters that would be characterized as forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Certain of these risks and uncertainties are beyond management's control. Such risks and uncertainties include, among other things, the following items. Integration of Acquired Businesses. Since the acquisition of Puritan-Bennett, the Company has dedicated and will continue to dedicate, substantial management resources in order to achieve the anticipated operating efficiencies from integrating the two companies. While the Company has achieved certain operating cost savings to date, difficulties encountered in integrating the two companies' operations could adversely impact the business, results of operations or financial condition of the Company. Also, the Company intends to pursue acquisition opportunities in the future. The integration of any businesses that the Company might acquire could require substantial management resources. There can be no assurance that any such integration will be accomplished without having a short or potentially long-term adverse impact on the business, results of operations or financial condition of the Company or that the benefits expected from any such integration will be fully realized. Page 9 10 Managed Care And Other Healthcare Provider Organizations. Managed care and other large healthcare provider organizations have grown substantially in terms of the percentage of the population in the United States that receives medical benefits through such organizations and in terms of the influence and control that they are able to exert over an increasingly large portion of the health care industry. These organizations are continuing to consolidate and grow, which may increase the ability of these organizations to influence the practices and pricing involved in the purchase of medical devices, including the products sold by the Company. Health Care Reform/Pricing Pressure. The health care industry in the United States is experiencing a period of extensive change. Health care reform proposals have been formulated by the current administration and by members of Congress. In addition, state legislatures periodically consider various health care reform proposals. Federal, state and local government representatives will, in all likelihood, continue to review and assess alternative health care delivery systems and payment methodologies, and ongoing public debate of these issues can be expected. Cost containment initiatives, market pressures and proposed changes in applicable laws and regulations may have a dramatic effect on pricing for medical devices, the relative costs associated with doing business and the amount of reimbursement by both government and third-party payors. In particular, the industry is experiencing market-driven reforms from forces within the industry that are exerting pressure on health care companies to reduce health care costs. These market-driven reforms are resulting in industry-wide consolidation that is expected to increase the downward pressure on health care product margins, as larger buyer and supplier groups exert pricing pressure on providers of medical devices and other health care products. Both short-term and long-term cost containment pressures, as well as the possibility of regulatory reform, may have an adverse impact on the Company's results of operations. Government Regulation; Consent Decree. There has been a trend in recent years, both in the United States and outside the United States, toward more stringent regulation of, and enforcement of requirements applicable to, medical device manufacturers. The continuing trend of more stringent regulatory oversight in product clearance and enforcement activities has caused medical device manufacturers to experience longer approval cycles, more uncertainty, greater risk and higher expenses. At the present time, there are no meaningful indications that this trend will be discontinued in the near-term or the long-term either in the United States or abroad. Puritan-Bennett has been subject to significant FDA enforcement activity with respect to its operations in recent years. In January 1994, Puritan-Bennett entered into a consent decree with the FDA pursuant to which Puritan-Bennett agreed to maintain systems and procedures complying with the FDA's good manufacturing practices regulation and medical device reporting regulation in all of its device manufacturing facilities. Puritan-Bennett has experienced and will continue to experience incremental operating costs due to ongoing compliance requirements and quality assurance programs initiated in part as a result of the FDA consent decree. Puritan-Bennett expects to continue to incur additional operating expenses associated with its ongoing regulatory compliance program, but the amount of these incremental costs cannot be completely predicted and will depend upon a variety of factors, including future changes in statutes and regulations governing medical device manufacturers and the manner in which the FDA continues to enforce and interpret the requirements of the consent decree. There can be no assurance that such compliance requirements and quality assurance programs will not have a material adverse effect on the business, results of operations or financial condition of the Company or that the Company will not experience problems associated with FDA regulatory compliance, including increased general costs of ongoing regulatory compliance and specific costs associated with the Puritan-Bennett consent decree. Page 10 11 Intellectual Property Rights. From time to time, the Company has received, and in the future may receive, notices of claims with respect to possible infringement of the intellectual property rights of others or notices of challenges to its intellectual property rights. In some instances such notices have given rise to, or may give rise to, litigation. Any litigation involving the intellectual property rights of the Company may be resolved by means of a negotiated settlement or by contesting the claim through the judicial process. There can be no assurance that the business, results of operations or the financial condition of the Company will not suffer a material adverse effect as a result of intellectual property claims that may be commenced against the Company in the future. Competition. The medical device industry is characterized by rapidly evolving technology and increased competition. There are a number of companies that currently offer, or are in the process of developing, products that compete with products offered by the Company. Some of these competitors may have substantially greater capital resources, research and development staffs and experience in the medical device industry, including with respect to regulatory compliance in the development, manufacturing and sale of medical products similar to those offered by the Company. These competitors may succeed in developing technologies and products that are more effective than those currently used or produced by the Company or that would render some products offered by the Company obsolete or non-competitive. Competition based on price is expected to become an increasingly important factor in customer purchasing patterns as a result of cost containment pressures on, and consolidation in, the health care industry. Such competition has exerted, and is likely to continue to exert, downward pressure on the prices the Company is able to charge for its products. The Company may not be able to offset such downward price pressure through corresponding cost reductions. Any failure to offset such pressure could have an adverse impact on the business, results of operations or financial condition of the Company. New Product Introductions. As the existing products of the Company become more mature and its existing markets more saturated, the importance of developing or acquiring new products will increase. The development of any such products will entail considerable time and expense, including research and development costs and the time and expense required to obtain necessary regulatory approvals, which could adversely affect the business, results of operations or financial condition of the Company. There can be no assurance that such development activities will yield products that can be commercialized profitably, or that any product acquisitions can be consummated on commercially reasonable terms or at all. Any failure to acquire or develop new products to supplement more mature products could have an adverse impact on the business, results of operations or financial condition of the Company. Product Liability Exposure. Because its products are intended to be used in health care settings on patients who are physiologically unstable and may also be seriously or critically ill, the Company is exposed to potential product liability claims. From time to time, patients using the Company's products have suffered serious injury or death, which has led to product liability claims against the Company. The Company does not believe that any of these claims, individually or in the aggregate, will have a material adverse effect on its business, results of operations or financial condition. However, the Company may, in the future, be subject to product liability claims that could have such an adverse impact. The Company maintains product liability insurance coverage in amounts that it deems sufficient for its business. However, there can be no assurance that such coverage will ultimately prove to be adequate, or that such coverage will continue to remain available on acceptable terms or at all. Page 11 12 Impact of Currency Fluctuations; Importance of Foreign Sales. Because sales of products by the Company outside the United States typically are denominated in local currencies and such sales are growing at a rate that is generally faster than domestic sales, the results of operations of the Company are expected to continue to be affected by changes in exchange rates between certain foreign currencies and the United States Dollar. Although the Company currently engages in some hedging activities, there can be no assurance that the Company will not experience currency fluctuation effects in future periods, which could have an adverse impact on its business, results of operation or financial condition. The operations and financial results of the Company also may be significantly affected by other international factors, including changes in governmental regulations or import and export restrictions, and foreign economic and political conditions generally. Possible Volatility of Stock Price. The market price of the Company's stock is, and is expected to continue to be, subject to significant fluctuations in response to variations in quarterly operating results, trends in the health care industry in general and the medical device industry in particular, and certain other factors beyond the control of the Company. In addition, broad market fluctuations, as well as general economic or political conditions and initiatives such as health care reform, may adversely affect the market price of the Company's stock, regardless of the Company's operating performance. Page 12 13 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings. 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. On May 15, 1996, the Company brought an action in Kansas Federal District Court, requesting a temporary restraining order, preliminary injunction and damages against Healthdyne Technologies and two former Company employees based on misappropriation of trade secrets, utilization of trade secrets and various other causes of action. The Company was granted a permanent injunction against Healthdyne enjoining it from utilizing the Company's trade secrets and limiting the scope of work of one of the former employees. The second employee was terminated by Healthdyne, and the Company was granted a permanent injunction against that employee relating to use of trade secrets and limiting the scope of the former employee's future work. The Court has ongoing jurisdiction to enforce the injunctions and related matters. On May 3, 1996, the Company and several of its officers and members of its Board of Directors received notice that they had been named as defendants in a class action lawsuit seeking unspecified damages based upon alleged violations of California state securities and other laws. The complaint alleges misrepresentations during the period from September 29, 1995 through April 16, 1996 with respect to the Company's business, particularly about the merger with Puritan-Bennett and the integration of Nellcor and Puritan-Bennett. The Company filed a demurrer to this action which was sustained on October 9, 1996 with leave to amend. Plaintiffs filed an amended complaint on November 1, 1996. The Company believes that the action, filed in the Superior Court of the State of California, County of Alameda, is without merit and intends to vigorously defend against the action. On July 11, 1995, the U.S. Federal District Court in Delaware issued a decision in favor of the Company, ruling that four key oximeter and sensor technology patents are valid and would be infringed by Ohmeda, a subsidiary of BOC, if Ohmeda sold either its adult or neonatal OxyTip sensors for use with non-Ohmeda monitors. BOC had filed a suit against the Company in December 1992, seeking a declaratory judgment that Nellcor's patents were invalid and would not be infringed. BOC filed an appeal of the District Court's decision with the Court of Appeals Federal Circuit. On September 13, 1996, the Court of Appeals affirmed the District Court's decision. ITEM 6. Exhibits and Reports on Form 8-K. a) Exhibits. 27.1 Financial Data Schedule (filed electronically only) b) Reports on Form 8-K. Form 8-K dated September 9, 1996, filed September 9, 1996, reporting the entering into by the Company and Aequitron Medical, Inc. of an Agreement and Plan of Merger dated as of September 9, 1996 pursuant to Item 5 ("Other Event"). Page 13 14 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be filed on its behalf by the undersigned thereunto duly authorized. NELLCOR PURITAN BENNETT INCORPORATED DATED November 19, 1996 By /s/ Michael P. Downey ------------------------------- Michael P. Downey Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Page 14 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS JUL-06-1997 JUL-08-1996 OCT-06-1996 52,280 7,532 152,588 3,169 145,906 408,264 136,828 148,564 606,559 160,134 0 0 0 63 422,142 606,559 160,626 160,626 82,109 82,109 59,568 0 179 19,222 5,959 13,263 0 0 0 13,263 .22 .22
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