-----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, D8mH7wwNd2iCIwxGD+gM5BATokBJe2qC6HTO/7E4R4SzkQU5ShGwinvE2ML/CSth UhbD9c5lsJHQrR9IG87JPw== 0000950149-97-001103.txt : 19970521 0000950149-97-001103.hdr.sgml : 19970521 ACCESSION NUMBER: 0000950149-97-001103 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970406 FILED AS OF DATE: 19970520 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: 97611979 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 ENDED 4/6/97 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 APRIL 6, 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 of (IRS Employer Identification No.) incorporation or organization) 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 April 6, 1997 was 63,335,328. ================================================================================ 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 April 6, 1997 July 7, 1996 ------------- ------------ Current assets: Cash and cash equivalents $54,077 $71,692 Marketable securities 3,501 5,825 Accounts receivable 192,521 158,023 Inventories 155,671 132,378 Deferred income taxes 32,279 32,375 Other current assets, net 16,572 14,589 ------------- ------------ Total current assets 454,621 414,882 Property, plant and equipment, net 144,815 132,956 Intangible and other assets, net 46,779 49,983 Deferred income taxes 13,242 13,101 ------------- ------------ $659,457 $610,922 ============= ============ LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $46,654 $40,269 Employee compensation and related costs 26,358 32,072 Merger and related costs 27,481 32,452 Other accrued expenses 39,716 35,133 Current maturities of long-term debt 22,744 530 Income taxes payable 15,279 20,444 ------------- ------------ Total current liabilities 178,232 160,900 Long-term debt, less current maturities 5,970 8,394 Deferred compensation and pensions 9,581 9,522 Deferred revenue 7,857 10,039 ------------- ------------ Total liabilities 201,640 188,855 ------------- ------------ Stockholders' equity: Common stock, par value 67 63 Additional paid-in-capital 245,545 236,461 Retained earnings 270,501 242,687 Accumulated translation adjustment 81 304 Notes receivable from stockholders (5) (5) Net unrealized gain on available-for-sale securities 445 1,374 Treasury stock, at cost (3,224,020 shares) (58,817) (58,817) ------------- ------------ Total stockholders' equity 457,817 422,067 ------------- ------------ $659,457 $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 Nine Months Ended ------------------------------- -------------------------------- April 6, March 31, April 6, March 31, 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Net revenue $ 209,054 $ 184,750 $ 566,267 $ 535,008 Cost of goods sold 111,229 88,785 298,938 260,287 ---------- ---------- ---------- ---------- Gross profit 97,825 95,965 267,329 274,721 ---------- ---------- ---------- ---------- Operating expenses: Research and development 14,545 14,854 40,720 41,815 Selling, general and administrative 58,189 52,360 162,721 152,844 Merger and related costs --- --- 21,689 92,618 ---------- ---------- ---------- ---------- 72,734 67,214 225,130 287,277 ---------- ---------- ---------- ---------- Income (loss) from operations 25,091 28,751 42,199 (12,556) Interest income 710 1,304 2,055 4,797 Interest expense (489) (331) (1,110) (3,082) Other (expense), net (1,267) (170) (1,506) (386) ---------- ---------- ---------- ---------- Income (loss) before income taxes 24,045 29,554 41,638 (11,227) Provision for income taxes 7,454 9,406 14,550 7,560 ---------- ---------- ---------- ---------- Net income (loss) $ 16,591 $ 20,148 $ 27,088 $ (18,787) ========== ========== ========== ========== Net income (loss) per common and Common equivalent share $ 0.26 $ 0.31 $ 0.42 $ (0.30) ========== ========== ========== ========== Weighted average common and common equivalent shares 64,014 64,452 63,888 63,612 ========== ========== ========== ==========
See accompanying note Page 3 4 NELLCOR PURITAN BENNETT INCORPORATED CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS, UNAUDITED)
For the Nine Months Ended ----------------------------------- April 6, 1997 March 31, 1996 ----------------------------------- Cash flows from operating activities: Net income (loss) $27,088 ($18,787) Adjustments to reconcile net income (loss) to Cash provided by (used for) operating activities: Depreciation and amortization 24,419 24,124 Deferred income taxes --- (200) Merger and related charges 21,689 92,618 Deferred compensation and pensions --- (11,954) Other 55 762 Increases (decreases) in cash flows, net of effect of purchased Companies, as a result of changes in: Accounts receivable (32,891) (14,779) Inventories (18,217) (13,617) Other current assets (3,506) (9,941) Intangible and other assets (1,545) 584 Accounts payable 5,726 2,973 Merger and related costs (22,822) (36,470) Employee compensation and other accrued expenses 280 3,598 Income taxes payable (6,050) 1,187 Deferred revenue (939) (545) ------------ ---------- Cash provided by (used for) operating activities (6,713) 19,553 ------------ ---------- Cash flows from investing activities: Aequitron net cash provided during the period from 5/1/96 - 7/7/96 46 --- Capital expenditures (33,822) (18,354) Purchase of available-for-sale securities (1,800) --- Proceeds from maturities of securities held-to-maturity --- 61,842 Proceeds from the sale of available-for-sale securities 3,057 --- Acquisitions, net of cash acquired (5,268) (9,713) Other investing activities 1,417 713 ------------ ---------- Cash provided by (used for) investing activities (36,370) 34,488 ------------ ---------- Cash flows from financing activities: Issuance of common stock under the Company's stock plans and related tax benefits, net 9,073 24,533 Additions to long-term debt 29,049 2,500 Repayment of long-term debt (11,854) (70,473) Purchase of treasury shares --- (12,103) ------------ ---------- Cash provided by (used for) financing activities 26,268 (55,543) ------------ ---------- Effect of exchange rate changes on cash (800) (40) ------------ ---------- Decrease in cash and cash equivalents (17,615) (1,542) Cash and cash equivalents at the beginning of the period 71,692 84,552 ------------ ---------- Cash and cash equivalents at the end of the period $54,077 $83,010 ============ ==========
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 nine months ended April 6, 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 nine month periods ended March 31, 1996 combine the results of the Company's third quarter and first nine months of fiscal 1996, the period ended March 31, 1996, with Infrasonics' third quarter and first nine months of fiscal 1996, the period ended March 31, 1996, and Aequitron's third quarter and first nine months of fiscal 1996, the period ended January 31, 1996, 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 third quarter of fiscal 1996, and combined results for the three and nine months ended March 31, 1996, were as follows (in thousands):
Nellcor Puritan Bennett Infrasonics Aequitron Combined Three months ended: March 31, 1996 March 31, 1996 January 31, 1996 March 31, 1996 - ------------------- ----------------- --------------- ---------------- -------------- Revenue $ 168,490 $ 7,148 $ 9,112 $ 184,750 Net income $ 19,178 $ 600 $ 370 $ 20,148 Nellcor Puritan Bennett Infrasonics Aequitron Combined Nine months ended: March 31, 1996 March 31, 1996 January 31, 1996 March 31, 1996 - ------------------ ----------------- -------------- ---------------- -------------- Revenue $ 487,354 $ 19,271 $ 28,383 $ 535,008 Net income (loss) $(21,901) $ 1,306 $ 1,808 $(18,787)
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):
APRIL 6, 1997 JULY 7, 1996 ---------------- ---------------- RAW MATERIALS $67,711 $66,805 WORK-IN-PROCESS 16,981 16,538 FINISHED GOODS 70,979 49,035 ---------------- ---------------- $155,671 $132,378 ================ ================
STATEMENT OF CASH FLOWS. The Company paid income taxes of approximately $19.7 million in the first nine months of fiscal 1997 ended April 6, 1997, and $13.4 million in the first nine months of fiscal 1996 ended March 31, 1996. PROPERTY AND EQUIPMENT. Depreciation expense was approximately $21.2 million in the first nine months of fiscal 1997 and $18.0 million in the first nine months of fiscal 1996. MARKETABLE SECURITIES. At April 6, 1997, the Company held available-for-sale marketable securities with a fair market value of $3.5 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 periods presented were not material. The difference between the cost and market value of the Company's marketable securities at April 6, 1997, an unrealized gain of approximately $.4 million, is carried in stockholders' equity as a "net unrealized gain on available-for-sale securities". ACCOUNTING CHANGES. In February 1997, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). SFAS 128 supercedes Accounting Principles Board Opinion No. 15, "Earnings Per Share" and is effective for financial statements for both interim and annual periods ending after December 15, 1997. SFAS 128 requires dual presentation of basic and diluted earnings per share (EPS) on the face of the income statement for entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to Opinion 15. Under SFAS 128, the pro forma net income per share for the three month period ended April 6, 1997 was $0.26 for both basic and diluted earnings per share. 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. 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. Page 6 7 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 $108.9 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 April 6, 1997, approximately $103.1 million had been utilized, primarily associated with the write-down (non-cash charge) of certain assets to their net realizable value ($24.3 million), the payment of merger transaction costs ($17.6 million), initial costs incurred to combine and integrate operations ($57.4 million, of which $17.2 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 April 6, 1997 of $27.5 million, approximately $25.5 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 April 6, 1997, approximately 306 positions contemplated by this workforce reduction had been eliminated. The Company expects the remainder of these positions to be eliminated during fiscal 1997. SUBSEQUENT EVENT. On May 7, 1997, the Company announced that it will consolidate home care product line activities spread across six existing U.S. sites into three sites. The Company is undertaking this action as part of its operations improvement plan focused on increasing productivity, reducing cost and improving the effectiveness of product development activities. Overall, the Company expects to eliminate approximately 80-85 positions in the sleep products divisions and 30-50 positions in the oxygen therapy products divisions. In addition, the portion of the Company's critical care ventilator research and development operations located in Ireland will be absorbed into the R&D operations in Carlsbad, California. The Company expects to record one-time restructuring charges of $15-20 million in the fiscal 1997 fourth quarter associated with these consolidations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS - YEAR-TO-DATE PERIOD AND THIRD QUARTER ENDED APRIL 6, 1997, COMPARED WITH THE YEAR-TO-DATE PERIOD AND THIRD QUARTER ENDED MARCH 31, 1996. The Company reported net income for the third quarter of fiscal 1997 of $16.6 million, or $0.26 per share, compared to net income of $20.1 million, $0.31 per share, for the same period a year ago. For the first nine months of fiscal 1997, the Company reported net income of $27.1 million, or $0.42 per share, including one-time merger and related charges of $21.7 million, ($0.26) per share, associated with the acquisition of Aequitron. The Company's results for the first nine months of fiscal 1996, a net loss of $18.8 million, or ($0.30) per share, reflect 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 nine months of fiscal 1997 was $43.6 million, $0.68 per share, compared to net income of $55.2 million, $0.86 per share, for the first nine months of fiscal 1996. Page 7 8 The Company's net revenue for the third quarter of fiscal 1997 was $209.1 million, a 13 percent increase over net revenue of $184.8 million for the same period a year ago. Net revenue for the first nine months of fiscal 1997 increased 6 percent to $566.3 million from $535.0 million in the same period last year. Hospital product line sales increased 7 percent to $123.6 million for the third quarter of fiscal 1997 from $115.7 million for the same period last year as higher oximetry revenue was partially offset by slightly lower sales of the Company's critical care ventilators. Oximetry product line sales increased due to higher sales of the Company's sensors and sales of the NPB-4000 multiparameter monitor, a product which has been well received in international markets since its introduction in the first quarter of fiscal 1997. Sales of the Company's critical care ventilators were lower due primarily to reduced sales of the ADULT STAR series ventilator. Home care product line sales increased 24 percent to $73.9 million from $59.6 million for the same period last year. The increase in home care product line sales was due primarily to higher sales across the company's oxygen therapy, sleep therapy and portable ventilator product lines. Growth in national account business contributed to higher U.S. home care sales levels. In addition, international home care revenue was strong, primarily the result of higher European sales of sleep therapy devices. Aero business sales increased 23 percent to $11.6 million for the third quarter of fiscal 1997 compared to $9.4 million for the same period last year. Separately, international revenue of $61.8 million represents an increase of 13 percent over international revenue of $54.6 million for the third quarter of fiscal 1996. International sales growth was strongest in Asia where the Company benefited from strong sales within its newly established Japanese subsidiary. Foreign currency exchange rates unfavorably impacted international revenue growth by 5 percentage points during the third quarter. Gross profit as a percentage of net revenue for the third quarter of fiscal 1997 was 47 percent compared to 52 percent for the same period last year. This decline was due primarily to unfavorable product mix and lower average selling prices within certain home care and hospital product lines and the unfavorable effect that foreign currency exchange rates had upon international sales. The Company's gross margins are expected to improve slightly in the fourth quarter of this fiscal year. Operating expenses for the third quarter of fiscal 1997 were 35 percent of net revenue versus 36 percent for the third quarter of fiscal 1996. Operating expenses for the first nine months of 1997 and 1996 were comparable at 36 percent of net revenue, exclusive of the effect of one-time merger and related charges. Research and development expenses were 7 percent of net revenue in the third quarter of fiscal 1997 compared to 8 percent for the third 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. Selling, general and administrative expenses for the third quarter of fiscal 1997 and fiscal 1996 were comparable at 28 percent of net revenue. Selling, general and administrative expenses increased in absolute dollars due primarily to the inclusion of expenses from the Company's newly established NPB Japan subsidiary, selling expenses increasing in line with the revenue growth rates and higher information systems conversion costs. Operating expenses for the first nine months 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 ($0.8 million). Page 8 9 Operating expenses for the first nine 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). Other expense for the third quarter of fiscal 1997 was $1.3 million compared to $.2 million reported in the prior year. Other expense increased due primarily to the recording of higher bad debt reserve provisions associated with continued sales growth in emerging markets. LIQUIDITY AND CAPITAL RESOURCES At April 6, 1997, the Company had cash, cash equivalents and marketable securities of approximately $57.6 million compared to $77.5 million at the end of fiscal 1996. Cash provided by operating activities was approximately $16.1 million during the first nine months of fiscal 1997, exclusive of $22.8 million in merger related cash outlays. Accounts receivable and inventory growth and income tax payments during the year were major contributors to the net use of cash for operating activities. The Company's accounts receivable increased to $192.5 million at April 6,1997, 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. The Company's inventories increased to $155.7 million at April 6, 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 1997. In part to fund incremental working capital requirements, net of repayments of $11.9 million, the Company increased borrowings by $17.2 million during the first nine 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. 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 May 7, 1997, the Company announced that it will consolidate home care product line activities spread across six existing U.S. sites into three sites. The Company is undertaking this action as part of its operations improvement plan focused on increasing productivity, reducing cost and improving the effectiveness of product development activities. Overall, the Company expects to eliminate approximately 80-85 positions in sleep products and 30-50 positions in oxygen therapy products. In addition, the portion of the Company's critical care ventilator research and development operations located in Ireland will be absorbed into the R&D operations in Carlsbad, California. The Company expects to record one-time restructuring charges of $15-20 million in the fiscal 1997 fourth quarter associated with these consolidations. Page 9 10 On January 15, 1997 the Company rescinded the general stock repurchase program, which had originally been implemented on December 8, 1993. 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. Page 11 12 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 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, filed in the Superior Court of the State of California, County of Alameda, alleged 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. On April 2, 1997, the Superior Court granted the Company's demurrer to the amended complaint and dismissed the complaint with prejudice. On April 14, 1997, another complaint containing essentially the same allegations against the Company and the other defendants was filed in the United States District Court for the Northern District of California. As it has consistently maintained, the Company believes that the allegations are completely without merit and intends to defend against them vigorously. On May 5, 1997, the Company filed a complaint in the United States District Court for the Southern District of Indiana against Healthdyne Technologies, Inc., Trent Products Limited, Jay L. Hayes and Jeffrey P. Hayes alleging misappropriation of trade secrets, breach of contract, breach of fiduciary duty, fraudulent procurement of patent and unfair competition. Jay Hayes, a former employee and officer of Puritan-Bennett and general manager of its cryogenic equipment division for over a decade, is now a principal of Trent Products. Trent Products, the Company believes, is making extensive use of the Company's trade secrets to develop a competitive line of cryogenic equipment for sale to Healthdyne. The Company also believes that Mr. Hayes used the Company's trade secrets to fraudulently procure a patent to a new oxygen-to-patient delivery mechanism in the name of his son, Jeffrey Hayes. Except as noted above, neither the Company nor any of its subsidiaries is involved in any material pending litigation other than ordinary routine proceedings incident to their business. 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. A form 8-K dated March 26, 1997 was filed May 1, 1997, reporting the naming of Dean O. Morton to the Company's Board of Directors and the amendment of the Company's bylaws pursuant to Item 5 ("Other Events"). 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 May 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 JAN-06-1997 APR-06-1997 54,077 3,501 192,521 4,660 155,671 454,621 144,815 161,008 659,457 178,232 0 0 0 67 457,750 659,457 209,054 209,054 111,229 111,229 72,734 0 489 24,045 7,454 16,591 0 0 0 16,591 .26 .26
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