-----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, Fav+oWG/ezroP7BPPphH/cj5LEM7jJGAnvFKEQiajM123mZ14o8exgEWGtlmDlHX LV1bQnlLJpInyz1GkVeS4g== 0000950149-97-000381.txt : 19970222 0000950149-97-000381.hdr.sgml : 19970222 ACCESSION NUMBER: 0000950149-97-000381 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970105 FILED AS OF DATE: 19970219 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: 97538624 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 THE PERIOD ENDING 1/5/97 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 JANUARY 5, 1997 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 (IRS Employer of 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 January 5, 1997 was 62,941,523. ================================================================================ Page 1 2 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements NELLCOR PURITAN BENNETT INCORPORATED CONSOLIDATED BALANCE SHEET (In thousands, except share amount, unaudited)
ASSETS January 5, 1997 July 7, 1996 --------------- ------------ Current assets: Cash and cash equivalents $ 43,375 $ 71,692 Marketable securities 6,432 5,825 Accounts receivable 178,808 158,023 Inventories 154,450 132,378 Deferred income taxes 32,412 32,375 Other current assets, net 18,434 14,589 --------- --------- Total current assets 433,911 414,882 Property, plant and equipment 142,957 132,956 Intangible and other assets 49,557 49,983 Deferred income taxes 13,112 13,101 --------- --------- $ 639,537 $ 610,922 ========= ========= LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 40,961 $ 40,269 Employee compensation and related costs 20,830 32,072 Merger and related costs 36,446 32,452 Other accrued expenses 39,145 35,133 Current maturities of long-term debt 33,933 530 Income taxes payable 4,832 20,444 --------- --------- Total current liabilities 176,147 160,900 Long-term debt, less current maturities 6,070 8,394 Deferred compensation and pensions 9,508 9,522 Deferred revenue 8,142 10,039 --------- --------- Total liabilities 199,867 188,855 --------- --------- Stockholders' equity: Common stock, par value 66 63 Additional paid-in-capital 242,567 236,461 Retained earnings 253,911 242,687 Accumulated translation adjustment 464 304 Notes receivable from stockholders (5) (5) Net unrealized gain on available-for-sale securities 1,484 1,374 Treasury stock, at cost (3,224,020 shares) (58,817) (58,817) --------- --------- Total stockholders' equity 439,670 422,067 --------- --------- $ 639,537 $ 610,922 ========= =========
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 For the Six Months Ended --------------------------- ----------------------------- January 5, December 31, January 5, December 31, 1997 1995 1997 1995 --------- ----------- ---------- ------------ Net revenue $ 186,320 $ 178,190 $ 357,213 $ 350,258 Cost of goods sold 100,484 86,399 187,709 171,502 --------- --------- --------- --------- Gross profit 85,836 91,791 169,504 178,756 --------- ----------- ---------- ------------ Operating expenses: Research and development 13,293 13,464 26,175 26,961 Selling, general and administrative 53,975 50,421 104,532 100,484 Merger and related costs 21,689 --- 21,689 92,618 --------- --------- --------- --------- 88,957 63,885 152,396 220,063 --------- --------- --------- --------- Income (loss) from operations (3,121) 27,906 17,108 (41,307) Interest income 585 1,492 1,345 3,493 Interest expense (395) (1,333) (621) (2,751) Other income (expense), net (18) 459 (239) (216) --------- --------- --------- --------- Income (loss) before income taxes (2,949) 28,524 17,593 (40,781) Provision (benefit) for income taxes 648 9,185 7,096 (1,846) --------- --------- --------- --------- Net Income (loss) $ (3,597) $ 19,339 $ 10,497 $ (38,935) ========= ========= ========= ========= Net income (loss) per common and common equivalent share $ (0.06) $ 0.30 $ 0.16 $ (0.61) ========= ========= ========= ========= Weighted average common and common equivalent shares 63,950 64,069 63,955 63,506 ========= ========= ========= =========
See accompanying note Page 3 4 NELLCOR PURITAN BENNETT INCORPORATED CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands, unaudited)
For the Six Months Ended ---------------------------------- January 5, 1997 December 31, 1995 --------------- ----------------- Cash flows from operating activities: Net income (loss) $ 10,497 ($38,935) Adjustments to reconcile net income (loss) to cash [used for] operating activities: Depreciation and amortization 15,841 16,444 Deferred income taxes --- 192 Merger and related charges 21,689 68,473 Deferred compensation and pensions --- (3,013) Other (17) 176 Increases (decreases) in cash flows, net of effect of purchased companies, as a result of changes in: Accounts receivable (16,190) (9,214) Inventories (18,397) (10,265) Other current assets (3,704) (7,953) Intangible and other assets (838) (2,685) Accounts payable (210) (4,725) Merger and related costs (14,704) --- Employee compensation and other accrued expenses (9,358) (3,201) Income taxes payable (16,605) (6,887) Deferred revenue (648) --- --------- --------- Cash [used for] operating activities (32,644) (1,593) --------- --------- Cash flows from investing activities: Aequitron net cash provided during the period from 5/1/96 - 7/7/96 46 --- Capital expenditures (22,059) (11,459) Purchase of available-for-sale securities (1,800) (1,027) Proceeds from maturities of securities held-to-maturity --- 19,218 Proceeds from the sale of available-for-sale securities 1,165 40,417 Acquisitions, net of cash acquired (5,268) (9,755) Other investing activities 851 646 --------- --------- Cash provided by (used for) investing activities (27,065) 38,040 --------- --------- Cash flows from financing activities: Issuance of common stock under the Company's stock plans and related tax benefits, net 6,094 16,113 Additions to long-term debt 27,308 42,500 Repayment of long-term debt (2,000) (100,220) Purchase of treasury shares --- (12,103) --------- --------- Cash provided by (used for) financing activities 31,402 (53,710) --------- --------- Effect of exchange rate changes on cash (10) (222) --------- --------- (Decrease) in cash and cash equivalents (28,317) (17,485) Cash and cash equivalents at the beginning of the period 71,692 84,552 --------- --------- Cash and cash equivalents at the end of the period $ 43,375 $ 67,067 ========= =========
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 and six months ended January 5, 1997 are not necessarily indicative of operating results for the full fiscal year. Combined Financial Results. The Company acquired Infrasonics Incorporated (Infrasonics) on June 27, 1996, and Aequitron Medical, Inc. (Aequitron) on December 5, 1996, in stock for stock mergers. Both mergers were intended to qualify as tax-free reorganizations and were accounted for as poolings of interests. Accordingly, the consolidated financial statements present, for all periods, the combined financial results of the Company, Infrasonics, and Aequitron. The Company's consolidated statements of operations and cash flows for the three and six month periods ended December 31, 1995 combine the results of the Company's second quarter and first six months of fiscal 1996, the period ended December 31, 1995, with Infrasonics' second quarter and first six months of fiscal 1996, the period ended December 31, 1995, and Aequitron's second quarter and first six months of fiscal 1996, the period ended October 31, 1995, respectively. Adjustments made to conform the accounting policies of the Company, Infrasonics, and Aequitron were immaterial. Separate results for each of the Company's, Infrasonics' and Aequitron's second quarter of fiscal 1996, and combined results for the three and six months ended December 31, 1995, were as follows (in thousands):
Nellcor Puritan Bennett Infrasonics Aequitron Combined Three months ended: December 31, 1995 December 31, 1995 October 31, 1995 December 31, 1995 - ------------------- ----------------- ----------------- ---------------- ----------------- Revenue $162,614 $ 5,867 $ 9,709 $178,190 - ------------------------------------------------------------------------------------------------------------------- Net Income $ 18,223 $ 403 $ 713 $ 19,339 - -------------------------------------------------------------------------------------------------------------------
Nellcor Puritan Bennett Infrasonics Aequitron Combined Six months ended: December 31, 1995 December 31, 1995 October 31, 1995 December 31, 1995 - ----------------- ----------------- ----------------- ---------------- ----------------- Revenue $ 318,864 $ 12,123 $ 19,271 $ 350,258 - -------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ (41,079) $ 706 $ 1,438 $ (38,935) - --------------------------------------------------------------------------------------------------------------------
Page 5 6 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. Interim fiscal 1997 and year-end fiscal 1996 inventory balances for the Company were as follows (in thousands):
January 5, 1997 July 7, 1996 --------------- ------------ Raw materials $ 71,676 $ 66,805 Work-in process 15,727 16,538 Finished goods 67,047 49,035 -------- -------- $154,450 $132,378 ======== ========
Statement of Cash Flows. The Company paid income taxes of approximately $22.8 million in the first six months of fiscal 1997 ended January 5, 1997, and $12.9 million in the first six months of fiscal 1996 ended December 31, 1995. Property and equipment. Depreciation expense was approximately $13.7 million in the first six months of fiscal 1997 and $11.7 million in the first six months of fiscal 1996. Marketable securities. At January 5, 1997, the Company held available-for-sale marketable securities with a fair market value of $6.4 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 periods presented were not material. The difference between the cost and market value of the Company's marketable securities at January 5, 1997, which approximates $1.5 million, is carried in stockholders' equity as a "net unrealized gain on available-for-sale securities". Acquisition of Aequitron. On December 5, 1996, the Company acquired Aequitron in a stock-for-stock merger. Under the terms of the Amended and Restated Agreement and Plan of Merger, shareholders of Aequitron received .467 of a share of the Company's common stock for each Aequitron share, resulting in the Company issuing approximately 2,322,000 shares, valued at approximately $52.5 million based on the closing price of the Company's common stock on December 5, 1996. Additionally, outstanding options to acquire Aequitron's common stock were assumed by the Company and converted into options to acquire approximately 545,000 shares of the Company's common stock. 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 Crow River Industries, Inc. subsidiary, the company also manufactures wheelchair lifts and automobile hand controls to assist individuals who have mobility limitations. For the fiscal year ended April 30, 1996, Aequitron reported revenue of $38.5 million. Page 6 7 Acquisition of Nellcor-CMI, Inc. On September 30, 1996, the Company acquired from Century Medical, Inc. the remaining 50 percent ownership interest in Nellcor-CMI, Inc. (NCI) for $5.4 million in cash. The acquisition of NCI has been accounted for as a purchase and, accordingly, the results from the Company's new wholly-owned subsidiary, Nellcor Puritan Bennett Japan, are included in the Company's financial statements subsequent to the acquisition date. Merger and related costs. In connection with the acquisition of Aequitron, the Company recorded merger and related costs during the second quarter of fiscal 1997 of $21.7 million. Included in this charge were provisions for merger transaction costs ($3.4 million), certain intangible asset write downs ($3.0 million), costs to combine and integrate operations ($14.5 million), and other merger related costs ($0.8 million). During fiscal 1996, one-time merger and related costs of $108.0 million were recorded associated with the Company's acquisitions of Puritan-Bennett and Infrasonics. Of the $130.6 million in merger and related costs accrued during fiscal 1996 and fiscal 1997, as of January 5, 1997, approximately $94.1 million had been utilized, primarily associated with the write-down (non-cash charge) of certain intangible assets to their net realizable value ($24.0 million), the payment of merger transaction costs ($15.9 million), initial costs incurred to combine and integrate operations ($50.4 million, of which $15.6 million was associated with employee severance and benefits termination costs) and other merger related costs ($3.8 million). The remaining merger and related costs accrued at January 5, 1997 of $36.5 million, approximately $34.2 million of which is expected to result in a cash outlay, should be substantially utilized by the end of fiscal 1998. Employee severance and benefit termination costs included in the merger and related costs accrual were associated with the elimination of approximately 320 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 January 5, 1997, approximately 306 positions contemplated by this workforce consolidation had been eliminated. The Company expects the remainder of these positions to be eliminated during fiscal 1997. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS - YEAR-TO-DATE PERIOD AND SECOND QUARTER ENDED JANUARY 5, 1997, COMPARED WITH THE YEAR-TO-DATE PERIOD AND SECOND QUARTER ENDED DECEMBER 31, 1995. The Company reported a net loss for the second quarter of fiscal 1997 of $3.6 million, or ($0.06) per share. The Company's results for the quarter reflect one-time merger and related costs of $21.7 million, ($0.26) per share, associated with the acquisition of Aequitron. Excluding the effect of these nonrecurring charges, net income for the second quarter of fiscal 1997 was $12.9 million, $.20 per share, compared to net income of $19.3 million, $0.30 per share, for the same period a year ago. For the first six months of fiscal 1997, the Company had net income of $10.5 million, or $.16 per share, exclusive of one-time merger and related charges associated with the acquisition of Aequitron. The Company's results for the first six months of fiscal 1996, a net loss of $38.9 million, or ($.61) per share, reflect the one-time merger and related charges of $92.6 million, ($1.17) per share, associated with the first quarter fiscal 1996 acquisition of Puritan-Bennett. Excluding the effect of these nonrecurring charges, net income for the first six months of fiscal 1997 was $27.0 million, $.42 per share, compared to net income of $35.1 million, $.55 per share for the first six months of fiscal 1996. Page 7 8 The Company's net revenue for the second quarter of fiscal 1997 was $186.3 million, a 5 percent increase over net revenue of $178.2 million for the same period a year ago, and increased to $357 million for the first six months of fiscal 1997 from $350 million in the same period last year. Hospital product line sales, which include the oximetry, ventilator and clinical information systems product lines, decreased 1 percent to $106.7 million for the second quarter of fiscal 1997 from $107.3 million for the same period last year. The decrease in hospital product line revenue was due primarily to lower sales of the Company's critical care ventilators, partially offset by continued growth in sales of the Company's oximetry products. Sales of critical care ventilators in the U.S. were lower due to the effect that distribution changes had upon sales of the Adult Star series ventilators and a higher than normal number of open positions in the U.S. hospital sales force. Internationally, ventilator product line revenue was significantly impacted by the pending transition from an independent distributor to the Company's direct sales force in Japan. These events are expected to continue to affect overall hospital product line revenue growth rates in the near-term. For the second quarter of fiscal 1997, home care product line sales, which include the oxygen therapy and sleep apnea product lines as well as Aequitron products, increased 13 percent to $71.6 million from $63.1 million for the same period last year. The increase in home care product line sales was due primarily to higher sales of oxygen therapy products as an easing of concerns over oxygen reimbursement levels as well as sales growth at a national account level contributed to higher oxygen concentrator sales. Gas product sales also increased, principally as a result of higher cylinder gas and bulk nitrous oxide sales and continued growth in the number of Company operated gas branches, four of which were added during the quarter. Aero business sales were $8.0 million for the second quarter of fiscal 1997 compared to $7.8 million for the same period last year. Separately, international revenue of $58.4 million represents an increase of 3 percent over international revenue of $56.6 million for the second quarter of fiscal 1996. Strong sales growth in the Company's Latin America and Canadian markets was largely offset by sales levels in Europe and Asia which were comparable to the prior year. Foreign currency exchange rates unfavorably impacted international revenue by 2 percentage points during the second quarter. Gross profit as a percentage of net revenue for the second quarter of fiscal 1997 was 46 percent compared to 52 percent for the same period last year. This decline was due primarily to lower ventilator revenue and ventilator production levels, new product production start up costs and lower margins within certain home care product lines. The Company's gross margins are expected to improve slightly over the remainder of the fiscal year. Operating expenses for the second quarter of fiscal 1997 and the second quarter of fiscal 1996 were 36 percent of net revenue, exclusive of the effect of the one-time merger and related charges. Operating expenses for the first six months of fiscal 1997 were 37 percent of net revenue compared to 36 percent of net revenue for the same period one year ago, exclusive of the effect of one-time merger and related charges. Research and development expenses were 7 percent of net revenue in the second quarter of fiscal 1997 compared to 8 percent for the second quarter of fiscal 1996. The slight decrease in research and development expenses is due primarily to synergies resulting from the consolidation of certain hospital product development activities. For the second quarter of fiscal 1997, selling, general, and administrative expenses increased to 29 percent of net revenue from 28 percent for the same period in fiscal 1996. Page 8 9 Operating expenses for the second quarter of fiscal 1997 reflect the effect of one-time merger and related costs of $21.7 million associated with the Company's acquisition of Aequitron. Included in this charge were provisions for merger transaction costs ($3.4 million), certain intangible asset write-downs ($3.0 million), costs to combine and integrate operations ($14.5 million), and other merger related costs ($.8 million). Operating expenses for the first six 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). Liquidity and Capital Resources At January 5, 1997, the Company had cash, cash equivalents and marketable securities of approximately $49.8 million compared to $77.5 million at the end of fiscal 1996. Cash used for operating activities was approximately $17.9 million during the first six months of fiscal 1997, exclusive of $14.7 million in merger related cash outlays. Inventory and accounts receivable growth and employee profit sharing and income tax payments during the year were major contributors to this use of cash for operating activities. The Company's inventories increased to $154.5 million at January 5, 1997 from $132.4 million at July 7, 1996 due primarily to lower than planned sales levels, inventory buildups in advance of product line relocations and the consolidation of Southern California hospital business manufacturing sites, and certain new product introductions. The Company is actively working to reduce inventory levels over the remainder of fiscal 1997. The Company's accounts receivable increased to $178.8 million at January 5,1997, from $158.0 million at July 7, 1996, due primarily to the assumption of accounts receivable from NCI subsequent to its acquisition and a trend towards extended credit terms. In part to fund incremental working capital requirements, the Company increased short term borrowing by $27.3 million during the first six months of fiscal 1997. On September 30, 1996, the Company acquired the remaining 50 percent ownership interest in NCI for $5.4 million in cash. Short-term debt of $8 million was assumed as part of this acquisition. On December 5, 1996, the Company acquired Aequitron in a stock-for-stock merger. Under the terms of the Amended and Restated Agreement and Plan of Merger, shareholders of Aequitron received .467 a share of the Company's common stock for each Aequitron share, resulting in the Company issuing approximately 2,322,000 shares, valued at approximately $52.5 million based on the closing price of the Company's common stock on December 5, 1996. Additionally, outstanding options to acquire Aequitron's common stock were assumed by the Company and converted into options to acquire approximately 545,000 shares of the Company's common stock. 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 Crow River Industries, Inc. subsidiary, 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. On January 15, 1997 the Company rescinded the general stock repurchase program, which had originally been implemented on December 8, 1993. Page 9 10 The Company anticipates that current working 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 working 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. The Company has dedicated and will continue to dedicate, substantial management resources in order to achieve the anticipated operating efficiencies from integrating Puritan-Bennett, Infrasonics, and Aequitron. While the Company has achieved certain operating cost savings to date, difficulties encountered in integrating the 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. 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. Page 10 11 Government Regulation; Consent Decree. Both in the United States and outside the United States, there has been a trend 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 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. 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. Moreover, competition based on price has become and is expected to continue to be an increasingly important factor in customer purchasing patterns as a result of cost containment Page 11 12 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. 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 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. A second demurrer was filed by the Company and is scheduled to be heard by the Court on February 26, 1997. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company's annual meeting of stockholders was held on October 17, 1996. Two items were the subject of the meeting: (i) the election of directors; and (ii) the ratification of the selection of Price Waterhouse LLP as the Company's independent accountants for fiscal year 1997. The following directors were elected at the meeting for one-year terms: Burton A. Dole, Jr., Robert J. Glaser, M.D., Frederick M. Grafton, Donald L. Hammond, C. Raymond Larkin, Jr., Risa J. Lavizzo-Mourey, M.D., Thomas A. McDonnell and Edwin E. van Bronkhorst. All are continuing directors. (i) Election of Directors
For Against --- ------- Burton A. Dole, Jr. 49,908,183 4,127,060 Robert J. Glaser, M.D. 49,908,183 4,127,060 Frederick M. Grafton 49,908,183 4,127,060 Donald L. Hammond 49,908,183 4,127,060 C. Raymond Larkin, Jr. 49,908,183 4,127,060 Risa J. Lavizzo-Mourey, M.D. 49,908,183 4,127,060 Thomas A. McDonnell 49,908,183 4,127,060 Edwin E. van Bronkhorst 49,908,183 4,127,060
(ii) Ratification of Price Waterhouse LLP as the Company's independent accountants for fiscal year 1997.
For Against Abstain - --- ------- ------- 54,012,433 60,068 35,351
Page 13 14 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 December 5, 1996 filed December 10, 1996, reporting the completion of the Company's acquisition of Aequitron pursuant to Item 2 ("Acquisition or Disposition of Assets"). 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 February 19, 1997 By: /s/ Michael P. Downey ----------------------------------- Michael P. Downey Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Page 14 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS JUL-06-1997 OCT-07-1996 JAN-05-1997 43,375 6,432 178,808 3,812 154,450 433,911 142,957 161,533 639,537 176,147 0 0 0 66 439,604 639,537 186,320 186,320 100,484 100,484 88,957 0 395 (2,949) 648 (3,597) 0 0 0 (3,597) (.06) (.06)
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