-----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, SfQH+kLL00M9L1sJbkj2boD1yXG/+P/fr93spAvBnriHVpRDtXXZ4C+I9sQbHGya kBV8sxJ9qQi3Bv6Fgpn4sg== 0000950149-95-000809.txt : 19951120 0000950149-95-000809.hdr.sgml : 19951120 ACCESSION NUMBER: 0000950149-95-000809 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19951001 FILED AS OF DATE: 19951115 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: 95593678 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 10-Q FOR PERIOD ENDED 10-01-95 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 1, 1995 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 October 1, 1995 was 28,467,137. ================================================================================ Page 1 Exhibit Index on Page 19 2 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements NELLCOR PURITAN BENNETT INCORPORATED CONSOLIDATED BALANCE SHEET (In thousands, unaudited)
ASSETS October 1, 1995 July 2, 1995 --------------- ------------ Current assets: Cash and cash equivalents $ 93,252 $ 78,444 Marketable securities 14,460 65,039 Accounts receivable, net of allowance for doubtful accounts of $2,418 ($2,610 at July 2, 1995) 114,951 117,650 Inventories 104,588 88,987 Deferred income taxes and other current assets 24,744 26,580 --------- --------- Total current assets 351,995 376,700 --------- --------- Property and equipment, at cost 258,075 253,037 Accumulated depreciation (132,137) (124,863) --------- --------- Net property and equipment 125,938 128,174 --------- --------- Intangibles and other assets, net of accumulated amortization 58,728 71,330 --------- --------- $ 536,661 $ 576,204 ========= ========= LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Loans payable 40,434 -- Accounts payable $ 27,529 $ 37,316 Accrued liabilities: Payroll and payroll related 21,416 25,286 Warranty 6,506 4,195 Merger and related costs 54,436 0 Other 18,804 30,510 Income taxes payable -- 5,727 --------- --------- Total current liabilities 169,125 103,034 --------- --------- Deferred compensation and pension 20,233 19,303 Deferred revenue 10,286 10,895 Long-term obligations 12,217 76,367 --------- --------- Total liabilities 211,861 209,599 --------- --------- Stockholders' equity: Common stock, par value 13,236 11,351 Additional paid-in-capital 165,226 148,641 Retained earnings 181,203 241,416 Accumulated translation adjustment (254) (259) Notes receivable from stockholders (5) (5) Unrealized loss on available-for-sale securities (67) -- Treasury stock, at cost (1,148,000 shares) (34,539) (34,539) --------- --------- Total stockholders' equity 324,800 366,605 --------- --------- $ 536,661 $ 576,204 ========= =========
See accompanying note Page 2 3 NELLCOR PURITAN BENNETT INCORPORATED CONSOLIDATED STATEMENT OF INCOME (In thousands, except per share amounts, unaudited)
For the Three Months Ended ---------------------------------- October 1, 1995 October 2, 1994 --------------- --------------- Net revenue $ 156,250 $ 136,122 Cost of goods sold 77,583 69,453 --------- --------- Gross profit 78,667 66,669 Operating expenses: Research and development 12,196 11,245 Selling, general and administrative 44,607 41,986 Merger and related costs 92,618 -- --------- --------- 149,421 53,231 --------- --------- Income (loss) from operations (70,754) 13,438 Interest income 1,856 1,025 Interest expense (1,378) (1,216) Other income (expense), net (690) 857 --------- --------- Income (loss) before income taxes (70,966) 14,104 Provision for income taxes (11,664) 4,521 --------- --------- Net Income (loss) $ (59,302) $ 9,583 ========= ========= Net income (loss) per common and common equivalent share $ (2.04) $ 0.35 ========= ========= Weighted average common and common equivalent shares used in the calculation of net income (loss) per share 29,048 27,776 ========= =========
See accompanying note Page 3 4 NELLCOR PURITAN BENNETT INCORPORATED CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands, unaudited)
For the Three Months Ended ----------------------------------- October 1, 1995 October 2, 1994 --------------- --------------- Cash flows from operating activities: Net income $(59,302) $ 9,583 Adjustments to reconcile net income to cash provided by (used for) operating activities: Depreciation and amortization 7,797 7,443 Merger and related costs 75,602 -- Restructuring charges -- (3,307) Deferred compensation and pensions 19 (1,031) Gain on disposition of assets (48) (462) Deferred income taxes 102 (452) Increases (decreases) in cash flows, as a result of changes in: Accounts receivable 2,169 5,020 Inventories (4,360) (3,762) Other current assets (15,347) 333 Other assets 2,918 148 Accounts payable (9,856) (4,550) Accrued liabilities (1,983) (2,599) Income taxes payable (4,685) 3,834 -------- -------- Cash provided by (used for) operating activities (6,974) 10,198 -------- -------- Cash flows from investing activities: Capital expenditures (5,165) (6,611) Cash used to purchase securities held-to-maturity -- (2,002) Proceeds from sales of available-for-sale securities 31,295 -- Proceeds from maturities of securities held-to-maturity 19,218 20,166 Payments for purchases of companies, net of cash acquired (4,923) (2,000) Other -- (15) -------- -------- Cash provided by investing activities 40,425 9,538 -------- -------- Cash flows from financing activities: Proceeds from the issuance of common stock under the Company's stock plans and related tax benefits, net of notes receivable from stockholders 9,901 6,348 Repayment of long-term obligations (64,700) -- Additions to loans payable 40,000 707 Dividends paid to stockholders -- (372) Purchase of treasury shares -- (2,292) -------- -------- Cash provided by (used for) financing activities (14,799) 4,391 -------- -------- Effect of exchange rate changes on cash balances (216) 134 -------- -------- Increase in cash and cash equivalents 18,436 24,261 Cash and cash equivalents at the beginning of the period 74,816 68,876 -------- -------- Cash and cash equivalents at the end of the period $ 93,252 $ 93,137 ======== ========
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. On August 25, 1995, the Company consummated its merger with Puritan-Bennett Corporation (see Merger with Puritan-Bennett below). 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 Nellcor Incorporated (Nellcor) and Puritan-Bennett Corporation (Puritan-Bennett). Comparative historical financial information presented represents the combination of the historical financial data from Nellcor's fiscal year ended July 2, 1995, and Puritan-Bennett's fiscal year ended January 31, 1995. Thus, the Company's consolidated balance sheet as of July 2, 1995 combines Nellcor's balance sheet as of the end of its fiscal 1995, July 2, 1995, with Puritan-Bennett's balance sheet as of the end of its fiscal 1995, January 31, 1995. The Company's consolidated balance sheet as of July 2, 1995 also reflects an adjustment to reduce Puritan-Bennett's valuation allowance provided for its deferred tax assets based on the combined income from operations of Nellcor and Puritan-Bennett as required by Statement of Financial Accounting Standard No. 109. The effect of this adjustment was to increase deferred tax assets and retained earnings, as presented herein, by $8.7 million. The Company's consolidated statements of income and cash flows for the three months ended October 2, 1994 combine the financial results of Nellcor's first quarter of fiscal 1995, the three months ended October 2, 1994, with Puritan-Bennett's first quarter of fiscal 1995, the three months ended April 30, 1994. The accompanying interim consolidated financial statements should be read in conjunction with the financial statements and related notes included in Nellcor's and Puritan-Bennett's 1995 Annual Reports 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 Nellcor's and Puritan-Bennett's 1995 Annual Reports to Stockholders, is not misleading. The results of operations for the three month period ended October 1, 1995 are not necessarily indicative of operating results for the full fiscal year. Inventories. Inventories are stated at the lower of cost or market (net realizable value). Prior to the merger with Nellcor, Puritan-Bennett recorded the cost of the majority of its inventory using the Last In, First Out (LIFO) method of accounting. During the first quarter of fiscal 1996, the Company changed the accounting for these inventories such that all of the Company's inventory is now recorded at cost using the First In, First Out method. The effect of this change in accounting principle was not material to the Company's financial position or results of operations for any period presented. Page 5 6 Interim and year-end inventory balances for the Company were as follows (in thousands):
October 1, 1995 July 2, 1995 --------------- ------------ Raw materials $ 56,967 $ 47,518 Work-in process 8,247 10,589 Finished goods 39,374 30,880 -------- -------- $104,588 $ 88,987
Statement of Cash Flows. The Company paid income taxes of approximately $4.8 million in the three months ended October 1, 1995, and received a refund of $0.3 million in the three months ended October 2, 1994. Property and equipment. Depreciation expense was approximately $6.0 million in the first three months of fiscal 1996 and $5.3 million in the first three months of fiscal 1995. Marketable securities. As of October 2, 1995, the Company was carrying available-for-sale marketable securities with a market value of $14.5 million. Available-for-sale marketable securities are securities which the Company does not intend to hold to maturity. The Company's marketable securities, generally, are in high quality government, municipal, and corporate obligations with original maturities of up to two years. During the first quarter of fiscal 1996, the Company transferred all marketable securities which had been classified as held-to-maturity as of July 2, 1995, to available-for-sale. The marketable securities which were transferred to available-for-sale were government and corporate issued debt securities with an amortized cost of $41.4 million, of which $31.2 million of these securities were subsequently sold during the quarter, generating a realized gain of $80,000. The Company continues to hold the remainder of these securities. The decision to classify all of the Company's marketable securities as available-for-sale was due entirely to the Company's merger with Puritan-Bennett during the quarter and the significant cash outlays which are expected to be made as part of effecting the combination of these two companies. The market value, amortized cost, and gross unrealized gains and losses of the Company's marketable securities at October 2, 1995, are summarized below (in thousands). The market value of marketable securities is based upon quoted market prices.
Gross Gross Amortized Unrealized Unrealized Market Marketable Securities Cost Gains Losses Value --------------------- --------- ---------- ---------- ------ AVAILABLE-FOR-SALE: Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies $10,166 $ 7 $ (7) $10,166 Mortgage backed securities $ 4,361 14 (81) 4,294 ------- ------- ------- ------- Marketable securities $14,527 $ 21 $ (88) $14,460 ------- ------- ------- -------
Page 6 7 The difference between the amortized cost and market value of the Company's marketable securities at October 2, 1995, a net unrealized loss of $67,000, is carried as a separate component of stockholders' equity under the caption "Unrealized loss on available-for-sale securities." Merger with Puritan-Bennett. On August 24, 1995, the merger of Nellcor and Puritan-Bennett was approved by stockholders of both companies. On August 25, the merger was consummated, and the newly combined company was renamed Nellcor Puritan Bennett. Under the terms of the merger agreement, Puritan-Bennett shareholders received .88 of a share of the Company's common stock for each Puritan-Bennett share, resulting in the Company issuing approximately 11.5 million shares, valued at approximately $600 million based upon the closing price of the Company's common stock on August 25, 1995. Additionally, outstanding options to acquire Puritan-Bennett common stock were converted to options to acquire approximately 500,000 shares of the Company's common stock. Puritan-Bennett develops, manufactures, and markets ventilators, oxygen delivery systems, home sleep diagnostic and therapeutic equipment, and certain complementary products such as medical gases, gas-related equipment, and spirometers. Puritan-Bennett reported revenue of $336.0 million and net income of $8.4 million for its fiscal 1995 ended January 31, 1995. 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 Nellcor and Puritan-Bennett. The consolidated statement of income for the three months ended October 2, 1994, combines the financial results of Nellcor's first quarter of fiscal 1995, the three months ended October 2, 1994, with Puritan-Bennett's financial results for its first quarter of fiscal 1995, the three months ended April 30, 1994. Adjustments made to conform the accounting policies of Nellcor and Puritan-Bennett were immaterial. Separate results for each of Nellcor's and Puritan-Bennett's first quarter of fiscal 1995, and combined results for the three months ended October 2, 1994, were as follows (in thousands):
Nellcor Puritan-Bennett Combined Three months ended: October 2, 1994 April 30, 1994 October 2, 1994 - ------------------- --------------- --------------- --------------- Revenue $ 55,714 $ 80,408 $136,122 - ------------------------------------------------------------------------------------- Net Income $ 5,859 $ 3,724 $ 9,583 - -------------------------------------------------------------------------------------
In connection with the merger, the Company recorded one-time merger and related costs during the quarter of $92.6 million. Included in this charge were provisions for merger transaction costs ($13.7 million), costs to combine and integrate operations ($53.8 million), certain intangible asset write-downs ($19.6 million), and other merger related costs ($5.5 million). The merger transaction costs include expenses for investment banker and professional fees, and other costs associated with completing the transaction. The costs to combine and integrate operations include provisions for severance and severance-related costs, facilities consolidations and other integration costs. The write-down of certain intangible assets, primarily goodwill associated with prior acquisitions made by both companies, results from the effect that certain integration decisions have had upon the future realization of these assets. Of the $92.6 million in merger and related costs which were accrued, approximately $38.2 million was utilized during the first quarter of fiscal 1996, primarily associated with the write-down of certain intangible assets to their net realizable value ($19.6 million) and the payment of merger transaction costs ($11.8 million). The remaining merger and related costs accrued liability balance at October 2, 1995, of $54.4 million, is expected to be substantially utilized by the end of 1996. Page 7 8 Acquisition of Melville Software Ltd. On August 23, 1995, Nellcor Puritan Bennett's EdenTec subsidiary acquired for $4.9 million in cash, Melville Software Ltd. (Melville), a privately held Canadian company that manufactures and markets sleep diagnostic products used primarily in sleep labs. In the event that certain profitability levels are achieved over the next three fiscal years, additional compensation totalling $1.0 million would be payable to the former principal stockholders of Melville who continue to manage the company. Such amounts will be expensed when, and if, earned. The acquisition of Melville has been accounted for as a purchase and, accordingly, Melville's results are included in the Company's financial statements subsequent to the acquisition date. The pro forma effect of Melville upon the Company's results of operations for the quarter is immaterial. Page 8 9 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS - QUARTER AND PERIOD ENDED OCTOBER 1, 1995, COMPARED WITH THE QUARTER AND PERIOD ENDED OCTOBER 2, 1994. The Company reported a net loss for the first quarter of fiscal 1996 of $59.3 million, or ($2.04) per share. The Company's results for the quarter reflect one-time merger and related costs of $92.6 million, ($2.55) per share, associated with the merger of Nellcor and Puritan-Bennett. Excluding the effect of these nonrecurring charges, net income for the first quarter of fiscal 1996 was $14.7 million, $0.51 per share, a 53 percent increase over combined net income of $9.6 million, $0.35 per share, for the first quarter of fiscal 1995. The Company's net revenue for the first quarter of fiscal 1996 increased to $156.3 million from combined net revenue of $136.1 million for the first quarter of fiscal 1995. The increase in net revenue principally resulted from higher sales across the Company's home care and hospital businesses. Sales of the Company's products into international markets were also particularly strong during the quarter. Home care business sales, which include the oxygen therapy, gas products and spirometry group; the sleep and respiratory support systems group; and the Aero systems group, increased 21 percent to $63.0 million from $52.2 million for the same period last year due primarily to higher sales across all the product groups, and the first full quarter of revenue from the Company's recently acquired Pierre Medical subsidiary. Revenue increased significantly within the oxygen therapy, gas products and spirometry group as a result of higher cryogenic equipment and gas product sales. The increase in cryogenic equipment sales was due primarily to strong product demand in the quarter as well as production disruptions in the prior year, which created higher order backlog levels in the first quarter of fiscal 1995. Gas product sales were higher principally as a result of the addition of two new gas branches and increased ethylene oxide sales, which were lower in the first quarter of fiscal 1995, in part, due to the imposition of a new environmental tax beginning in that quarter. Sales within the Aero systems group increased significantly due primarily to higher revenue from the replacement of passenger service units in existing aircraft and continued growth in sales of the Sweep-on(R) 2000 inflatable harness crew mask. Hospital business sales, which include the oximetry, ventilator and clinical information systems product lines, increased 11 percent to $93.3 million from $83.9 million for the same period last year. The increase in hospital business revenue was due primarily to higher sales of oximetry products and CliniVision(R) respiratory care management information systems, which are now installed in more than 125 U.S. hospitals. Oximetry product revenue increased due primarily to higher oximetry sensor volumes, partially offset by slightly lower oximetry sensor pricing. International revenue increased 26 percent to $49.2 million from $39.0 million for the first quarter of fiscal 1995. International revenue growth was strongest in the Company's Asia Pacific and European regions, where growth rates exceeded 20 and 35 percent, respectively. Favorable foreign currency exchange rates accounted for 7 percentage points of the international revenue growth during the first quarter. Page 9 10 During the quarter, the Company announced its intention to substantially reduce its future investment in the HealthQuiz(TM) product line. This decision was reached as a result of the merger of Nellcor and Puritan-Bennett, and the desire to refocus on the newly combined company's core strategy of providing products for the respiratory-impaired patient. The Company is continuing to look at third-party opportunities for this product. Gross profit as a percentage of net revenue for the first quarter of fiscal 1996 was 50 percent compared to 49 percent for the same period last year due primarily to the favorable effect which foreign currency exchange rates had upon revenue, and a slight shift in mix to higher margin oximetry and sleep products. Operating expenses for the first quarter 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 include expenses for investment banker and professional fees, and other costs associated with completing the transaction. The costs to combine and integrate operations include provisions for severance and severance-related costs, facilities consolidations and other integration costs. The write-down of certain intangible assets, primarily goodwill associated with prior acquisitions made by both companies, results from the effect that certain integration decisions have had upon the future realization of these assets. Operating expenses for the first quarter of fiscal 1996 decreased to 36 percent of net revenue from 39 percent for the first quarter last year, exclusive of the effect of the one-time merger and related charges. Research and development expenses at 8 percent of net revenue were comparable to the first quarter of fiscal 1995. Research and development expenses increased in absolute dollars primarily due to higher monitoring and ventilator systems development costs. For the first quarter of fiscal 1996, selling, general, and administrative expenses decreased to 28 percent of net revenue from 31 percent for the same period in fiscal 1995. Selling, general, and administrative expenses increased in absolute dollars in the first quarter of fiscal 1995 due primarily to the unfavorable effect foreign currency exchange rates had upon international operating expenses as well as increased funding of the Company's profit sharing and bonus programs, partially offset by the favorable effect which Puritan-Bennett's fourth quarter fiscal 1995 workforce reduction program has had upon operating expenses. Liquidity and Capital Resources At October 2, 1995, the Company had cash, cash equivalents and marketable securities of approximately $107.7 million compared to $143.5 million at the end of fiscal 1995. Operating activities provided positive cash flows of approximately $10.0 million during the first three months of fiscal 1996, exclusive of merger related cash outlays. Of the $92.6 million in merger and related charges which were recorded, approximately $17.0 million resulted in a cash outlay during the quarter. The remainder of the merger and related charges of $75.6 million was a significant non-cash operating activity during the period. Page 10 11 Sales and maturities of marketable securities were significant investing activities during the first three months of fiscal 1996. Additionally, in August, 1995, Nellcor Puritan Bennett's EdenTec subsidiary acquired for $4.9 million in cash, Melville Software Ltd. (Melville), a privately held Canadian company that manufactures and markets sleep diagnostic products used primarily in sleep labs. In the event that certain profitability levels are achieved over the next three fiscal years, additional compensation totalling $1.0 million would be payable to the former principal stockholders of Melville who continue to manage the company. Such amounts will be expensed when, and if, earned. Shares of Nellcor Puritan Bennett common stock issued under the Company's stock option plans were significant sources of cash from financing activities for the first three months of fiscal 1996. Additionally, the Company retired approximately $64.7 million of the debt that it assumed as part of its merger with Puritan-Bennett. The debt was retired using $24.7 million of the Company's cash and $40 million drawn from the Company's credit facility. As of October 2, 1995, the Company was carrying $40.4 million in current loans payable and $12.2 million in long-term obligations. The Company's inventories have increased to $104.6 million at October 2, 1995, from $89.0 million at July 2, 1995. Much of the increase in inventory occurred during the eight month period comprising the Puritan-Bennett portion of this comparison, the period from February 1, 1995 to October 1, 1995. The increase in Puritan-Bennett inventory was due primarily to production levels across several product lines which exceeded customer demands, and, in part, resulted from inventory build-ups associated with new product introductions within the sleep and respiratory support systems group. The Company anticipates that current capital resources combined with cash generated from operating activities will be sufficient to meet its liquidity and capital expenditure requirements at least through the end of fiscal 1996. As the Company continues to combine and integrate operations as part of its merger with Puritan-Bennett, it is expected that costs associated with the merger, as well as other merger related cash outlays, will continue to contribute to a net reduction in the Company's cash and cash equivalents and marketable securities during fiscal 1996. The Company may continue to use debt to fund certain capital and other strategic opportunities when deemed necessary and financially advantageous. Page 11 12 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings. In July 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, if Ohmeda sold either its adult or neonatal OxyTip sensors for use with non-Ohmeda monitors. BOC has filed notice of its intention to appeal the decision of the court. The Company filed a motion in July 1995 requesting an amendment to the Court's judgment to issue an injunction against BOC to enjoin BOC from infringing the patents. The Court denied the motion in October, 1995. 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. ITEM 4. Submission of matters to a Vote of Security Holders. a) A special meeting of stockholders was held on August 24, 1995. Four items were the subject of the meeting: (i) approval of the issuance of Company common stock in connection with the merger of Nellcor and Puritan-Bennett; (ii) approval of an amendment to Nellcor's Restated Certificate of Incorporation to change its name to Nellcor Puritan Bennett; (iii) approval of the Company's 1995 Merger Stock Incentive Plan; and (iv) approval of amendment to the Company's 1994 Equity Incentive Plan to increase the number of shares of Company common stock available for issuance under the plan from 1,500,000 shares to 2,500,000 shares. (i) Approval of issuance of Company common stock in connection with the merger of Nellcor and Puritan-Bennett
Broker For Against Abstain Non-Votes --- ------- ------- --------- 10,821,049 14,960 15,665 2,094,884
(ii) Approval of Name Change
For Against Abstain --- ------- ------- 12,874,065 56,951 15,542
(iii) Approval of 1995 Merger Stock Incentive Plan
Broker For Against Abstain Non-Votes --- ------- ------- --------- 10,674,447 121,005 56,272 2,094,834
Page 12 13 (iv) Approval of Amendment to 1994 Equity Incentive Plan
Broker For Against Abstain Non-Votes --- ------- ------- --------- 10,243,844 639,483 50,759 2,012,472
b) The Company's annual meeting of stockholders was held on October 19, 1995. Three items were the subject of the meeting: (i) the election of directors; (ii) approval of the 1995 Employee Stock Participation Plan; and (iii) the ratification of the selection of Price Waterhouse as the Company's independent public accountants for fiscal year 1996. 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, Walter J. McNerney and Edwin E. van Bronkhorst. Messrs. Glaser, Grafton, Hammond, Larkin, McNerney and van Bronkhorst are continuing directors. Mr. Dole and Mr. McDonnell were appointed to the board of directors of the Company in August 1995 and were nominated for re-election to the board pursuant to the Agreement and Plan of Merger between Nellcor and Puritan-Bennett. Dr. Lavizzo-Mourey was nominated for election to the board of directors pursuant to the terms of the Agreement and Plan of Merger between Nellcor and Puritan-Bennett. (i) Election of Directors
For Against --- ------- Burton A. Dole, Jr 24,999,615 51,119 Robert J. Glaser, M.D 25,026,291 51,119 Frederick M. Grafton 25,033,482 51,119 Donald L. Hammond 25,033,414 51,119 C. Raymond Larkin, Jr 25,029,943 51,119 Risa J. Lavizzo-Mourey, M.D 25,026,249 51,119 Thomas A. McDonnell 25,030,498 51,119 Walter J. McNerney 25,028,415 51,119 Edwin E. van Bronkhorst 25,027,851 51,119
(ii) Approval of 1995 Employee Stock Participation Plan
Broker For Against Abstain Non-Votes --- ------- ------- --------- 24,130,894 624,636 78,220 243,358
(iii) Ratification of Price Waterhouse as the Company's independent public accountants for fiscal year 1996.
For Against Abstain --- ------- ------- 25,031,840 16,013 29,255
Page 13 14 ITEM 6. Exhibits and Reports on Form 8-K. a) Exhibits.
Exhibit No. Description of Exhibit ------- ---------------------- 2.1 Agreement and Plan of Merger, dated as of May 21, 1995, as amended, among Registrant, a wholly-owned subsidiary of Registrant and Puritan-Bennett Corporation (filed as Annex A to Form S-4 Registration Statement No. 33-61169 and incorporated herein by reference). 2.2 Amendment No. 1 to Agreement and Plan of Merger, dated as of June 30, 1995, among Registrant, a wholly-owned subsidiary of Registrant and Puritan-Bennett Corporation (filed as Annex B to Form S-4 Registration Statement No. 33-61169 and incorporated herein by reference). 3.1 Restated Certificate of Incorporation of Registrant. 3.2 Certificate of Determination of Preferences of Series A Junior Participating Preferred Stock (filed as Exhibit 3.2 to the Report on Form 10-K for the year ended July 7, 1991 and incorporated herein by reference). 3.3 By-laws of Registrant, as amended (filed as Exhibit 3.3 to the Report on Form 10-K for the year ended July 3, 1994 and incorporated herein by reference). 4.1 Rights Agreement, dated as of September 1, 1992, between Registrant and The First National Bank of Boston, as Rights Agent (incorporated by reference to Exhibit 2.1 of Amendment No. 1 to the Registrants' Registration Statement on Form 8-A filed with the Commission on July 13, 1995). Reference is also made to Exhibits 3.1, 3.2 and 3.3. 4.2 Credit Agreement, dated as of November 16, 1994, entered into by Registrant, the Banks Named Therein and ABN AMRO Bank N.V., San Francisco International Branch, as Agent (filed as Exhibit 10.1 to the Report on Form 10-Q for the period ended January 1, 1995 and incorporated herein by reference). 4.3 Long-term debt instruments of the Company in amounts not exceeding 10% of the total assets of the Company and its Subsidiaries on a consolidated basis will be furnished to the Commission upon request. 10.1 Employment Agreement between Puritan-Bennett and Burton A. Dole, Jr. dated April 25, 1980 (filed as an exhibit to Puritan-Bennett's annual report on Form 10K for fiscal year 1994 and incorporated herein by reference). *10.2 Employment Agreement and Separation Agreement between the Company and Burton A. Dole, Jr. dated August 18, 1995.
Page 14 15 *10.3 Employment Agreement between the Company and John H. Morrow dated August 25, 1995. *10.4 Puritan-Bennett Restated Deferred Compensation Plan (filed as an exhibit to Puritan-Bennett's annual report on Form 10K for fiscal year 1994 and incorporated herein by reference). *10.5 First Amendment to the Restated Puritan-Bennett Deferred Compensation Plan (filed as an exhibit to Puritan- Bennett's quarterly report on Form 10Q for its fiscal quarter October 31, 1994 and incorporated herein by reference). *10.6 Amended and restated Puritan-Bennett Retirement Plan for Non-Employee Directors (filed as an exhibit to Puritan-Bennett's quarterly report on Form 10Q for its fiscal quarter September 30, 1991 and incorporated herein by reference). *10.7 Amendment to the Puritan-Bennett Retirement Plan for Non-Employee Directors (filed as an exhibit to Puritan- Bennett's quarterly report on Form 10Q for its fiscal quarter October 31, 1994 and incorporated herein by reference). *10.8 Promissory note, dated December 19, 1991, between Puritan-Bennett and Robert L. and Melanie M. Doyle (filed as an exhibit to Puritan-Bennett's annual report on Form 10K for fiscal year 1991 and incorporated herein by reference). *10.9 Form of Indemnification Agreement between Puritan-Bennett and each of its directors (filed as an exhibit to Puritan-Bennett's annual report on Form 10K for fiscal year 1991 and incorporated herein by reference). *10.10 Pension Benefit Make Up Plan (filed as an exhibit to Puritan-Bennett's quarterly report on Form 10Q for its fiscal quarter July 31, 1994 and incorporated herein by reference). *10.11 First Amendment to the Puritan-Bennett Pension Benefit Make Up Plan (filed as an exhibit to Puritan-Bennett's quarterly report on Form 10Q for its fiscal quarter October 31, 1994 and incorporated herein by reference). *10.12 Executive Agreement, dated November 7, 1994, between Robert L. Doyle and Puritan-Bennett (filed as an exhibit to Puritan-Bennett's quarterly report on Form 10Q for its fiscal quarter October 31, 1994 and incorporated herein by reference). *10.13 Executive Agreement, dated November 7, 1994, between Thomas E. Jones and Puritan-Bennett (filed as an exhibit to Puritan-Bennett's quarterly report on Form 10Q for its fiscal quarter October 31, 1994 and incorporated herein by reference). *10.14 Executive Agreement, dated November 7, 1994, between Alexander R. Rankin and Puritan-Bennett (filed as an exhibit to Puritan-Bennett's quarterly report on Form 10Q for its fiscal quarter October 31, 1994 and incorporated herein by reference).
Page 15 16 *10.15 Executive Agreement, dated November 7, 1994, between David P. Niles and Puritan-Bennett (filed as an exhibit to Puritan-Bennett's quarterly report on Form 10Q for its fiscal quarter October 31, 1994 and incorporated herein by reference). *10.16 Severance Agreement, dated November 7, 1994, between Lee A. Robbins and Puritan-Bennett (filed as an exhibit to Puritan-Bennett's quarterly report on Form 10Q for its fiscal quarter October 31, 1994 and incorporated herein by reference). *10.17 Severance Agreement, dated November 7, 1994, between Derl S. Treff and Puritan-Bennett (filed as an exhibit to Puritan-Bennett's quarterly report on Form 10Q for its fiscal quarter October 31, 1994 and incorporated herein by reference). *10.18 Company's Merger Incentive Plan *10.19 Company's Retention Compensation Plan *10.20 Promissory Note secured by Deed of Trust, dated November 16, 1994 made by Kenneth Sumner in favor of the Company. *10.21 Promissory Note secured by Deed of Trust, dated October 5, 1995 made by Russell Hays in favor of the Company. *10.22 Puritan-Bennett Supplemental Retirement Benefit Plan (filed as an exhibit to Puritan-Bennett's annual report on Form 10K for fiscal year 1985 and incorporated herein by reference). *10.23 First Amendment to the Puritan-Bennett Supplemental Retirement Benefit Plan (filed as an exhibit to Puritan- Bennett's quarterly report on Form 10Q for its fiscal quarter July 31, 1994 and incorporated herein by reference). *10.24 Second Amendment to the Puritan-Bennett Supplemental Retirement Benefit Plan (filed as an exhibit to Puritan- Bennett's quarterly report on Form 10Q for its fiscal quarter July 31, 1994 and incorporated herein by reference). *10.25 Third Amendment to the Puritan-Bennett Supplemental Retirement Benefit Plan (filed as an exhibit to Puritan- Bennett's quarterly report on Form 10Q for its fiscal quarter October 31, 1994 and incorporated herein by reference). *10.26 SERP Agreement, dated November 7, 1994, between Burton A. Dole Jr. and Puritan-Bennett (filed as an exhibit to Puritan-Bennett's quarterly report on Form 10Q for its fiscal quarter October 31, 1994 and incorporated herein by reference). *10.27 SERP Agreement, dated August 25, 1995, for the benefit of John H. Morrow.
Page 16 17 11.1 Statement of computation of Net Income per share. 27 Financial Data Schedule
- ---- * An asterisk next to the number of an exhibit indicates that the exhibit is a management contract or compensatory plan or arrangement. b) Reports on Form 8-K. Form 8-K dated July 11, 1995, filed August 2, 1995, announcing under Item 5 ("Other Events") that the U.S. Federal District Court in Delaware had 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 Inc., a subsidiary of BOC Health Care Inc., if Ohmeda sold either its adult or neonatal OxyTip sensors for use with non-Ohmeda monitors. BOC Health Care had filed the suit in December 1992, seeking a declaratory judgment that Nellcor's patents were invalid and would not be infringed. Form 8-K dated July 27, 1995, filed August 23, 1995, reporting under Item 5 ("Other Events") the Company's financial results for its 1995 fiscal year ended July 2, 1995. Form 8-K dated August 25, 1995, filed September 8, 1995, reporting the consummation of the merger between Nellcor and Puritan-Bennett pursuant to Item 2 ("Acquisition or Disposition of Assets"). Page 17 18 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 14, 1995 By /s/ Michael P. Downey -------------------- ------------------------- Michael P. Downey Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Page 18 19 EXHIBIT INDEX
Page Exhibit No. Description Location in Form 10-Q ----------- ----------- --------------------- 3.1 Company's Restated Certificate of Incorporation 20 10.2 Employment and Separation between Company and 29 Burton A. Dole, Jr. 10.3 Employment Agreement between the Company and John 53 H. Morrow 10.18 Company's Merger Incentive Plan 73 10.19 Company's Retention Compensation Plan 76 10.20 Promissory Note made by Kenneth Sumner in favor of 79 the Company 10.21 Promissory Note made by Russell Hays in favor of 81 the Company 10.27 SERP Agreement for John H. Morrow 83 11.1 Statement of computation of net income per share 90 27 Financial Date Schedule 91
Page 19 EX-3.1 2 COMPANY'S RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF NELLCOR PURITAN BENNETT INCORPORATED FIRST: The name of the Corporation is Nellcor Puritan Bennett Incorporated. SECOND: The address of its registered office in the State of Delaware is 32 Loockerman Square, Suite L-100, City of Dover, County of Kent, State of Delaware. The name of its registered agent at such address is the UNITED STATES CORPORATION COMPANY. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: A. The total number of shares of stock which the Corporation shall have the authority to issue is fifty-five million (55,000,000), of which stock fifty million (50,000,000) shares, with a par value of one-tenth of one cent ($0.001) each, amounting in the aggregate to fifty thousand dollars ($50,000), shall be Common Stock, and of which five million (5,000,000) shares, with a par value of one-tenth of one cent ($0.001) each, amounting in the aggregate to five thousand dollars ($5,000), shall be Preferred Stock. B. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is authorized to fix the number of shares of any series of Preferred Stock and to determine the designation of any such series. The Board of Directors is also authorized to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock and, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series. FIFTH: The Corporation is to have perpetual existence. Page 20 2 SIXTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. SEVENTH: All the powers of the Corporation, insofar as the same may be lawfully vested by this Certificate of Incorporation in the Board of Directors are hereby conferred upon the Board of Directors, who shall have full control over the affairs of the Corporation. In furtherance and not in limitation of the powers conferred by law and by this Certificate of Incorporation, the Board of Directors is hereby expressly authorized: 1. To make, amend, repeal or otherwise alter the By-laws of the Corporation without any action on the part of the stockholders; provided, however, that any By-laws made by the directors and any and all powers conferred by any of said By-laws may be amended, altered or repealed by the stockholders. 2. To fix, determine and vary the amount to be reserved or maintained for any proper purpose and to fix the times for the declaration and payment of dividends. 3. To transfer all or any part of the assets of the Corporation by way of mortgage, or in trust or in pledge, to secure indebtedness of the Corporation, without any vote or consent of the stockholders, and to authorize and to cause to be executed instruments evidencing any and all such transfers. 4. To sell, lease or exchange any part less than all or substantially all of the property and assets, including good will and corporate franchises, of the Corporation upon such terms and conditions as the Board of Directors may deem expedient Page 21 3 for the best interests of the Corporation without any authorization, affirmative vote or written consent or other action of the stockholders or any class thereof. EIGHTH: Meetings of stockholders may be held within or without the State of Delaware as the By-laws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the By-laws of the Corporation. Elections of directors need not be by written ballot unless the By-laws of the Corporation shall so provide. The holders of any shares of the Corporation's Common Stock and Preferred Stock entitled to vote shall be entitled at all elections of directors of the Corporation to as many votes as shall equal the number of votes which (except for this provision as to cumulative voting) he would be entitled to cast for the election of directors with respect to his shares of stock multiplied by the number of directors to be elected by him, and such holder may cast all of such votes for a single director or may distribute them among the number to be voted for or for any two or more of them as he may see fit. NINTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. TENTH: The personal liability of the directors of the Corporation is hereby eliminated to the fullest extent permitted by Paragraph (7) of subsection (b) of 102 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented. ELEVENTH: CERTAIN BUSINESS COMBINATIONS (a) Vote Required for Certain Business Combinations. (1) Higher Vote for Certain Business Combinations. In addition To-any affirmative vote required by law or this Certificate of Incorporation, and except as otherwise expressly provided in paragraph (b) of this Article Eleventh: (i) any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (a) any Interested Stockholder (as hereinafter defined) or (b) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Stockholder; or Page 22 4 (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder or any Affiliate or any Interested Stockholder of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) equal to or greater than 10% of the Corporation's assets as set forth on the Corporation's most recent audited, consolidated financial statements filed with the Securities and Exchange Commission; or (iii) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Stockholder or any Affiliate of any Interested Stockholder; or (iv) any reclassification of securities (including any reverse stock split) or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Stockholder or any Affiliate of any Interested Stockholder; shall require the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (the "Voting Stock"), voting together as a single class. such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise. (2) Definition of "Business Combination." The term "Business Combination" as used in this Article Eleventh shall mean any transaction which is referred to in any one or more of clauses (i) through (iv) of subparagraph (1) of this paragraph (a). (b) When Higher Vote is Not Reguired. The provisions of paragraph (a) of this Article Eleventh shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and any other provision of this Certificate of Incorporation, if all of the conditions specified in either of the following subparagraphs (a)(1) or (a)(2) are met: Page 23 5 (1) Approval bv Disinterested Directors. The Business Combination shall have been approved by a majority of the Disinterested Directors (as hereinafter defined). (2) Price and Procedure Reaquirements. All of the following conditions shall have been met: (i) The aggregate amount of the cash and the Fair Market Value (as hereinafter defined) as of the date of consummation of the Business Combination of consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the higher of the following: (A) (if applicable) the highest per share price paid by the Interested Stockholder for any shares of Common Stock acquired by it (1) within the two-year period immediately prior to the first public announcement of the proposal of the Business combination (the "Announcement Date") or (2) in the transaction in which it became an Interested Stockholder, whichever is higher; and (B) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Stockholder became an Interested Stockholder (such latter date is referred to in this Article Eleventh as the "Determination Date"), whichever is higher. (ii) The aggregate amount of the cash and the Fair Market Value as of the date of consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any other class of outstanding Voting Stock shall be at least equal to the highest of the following (it being intended that the requirements of this subparagraph (b)(2)(ii) shall be required to be met with respect to every class of outstanding Voting Stock, whether or not the Interested Stockholder has previously acquired any shares of a particular class of Voting Stock): (A) (if applicable) the highest per share price paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it (1) within the two-year period immediately prior to the Announcement Date or (2) in the transaction in which it became an Interested Stockholder, whichever is higher; (B) (if applicable) the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; and Page 24 6 (C) the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher. (iii) The consideration to be received by holders of any particular class of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as the Interested Stockholder previously paid for shares of such class of Voting Stock. If the Interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by it. The price determined in accordance with subparagraphs (b)(2)(i) and (b)(2)(ii) shall be subject to appropriate adjustment in the event of any stock dividend, stock split, combination of shares or similar event. (iv) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder (or any subsequent provisions replacing the Exchange Act or such rules or regulations), shall be mailed to public stockholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to the Exchange Act or subsequent provisions). (c) Certain Definitions. For the purposes of this Article Eleventh: (1) A "person" shall mean any individual, firm, corporation or other entity. (2) "Interested Stockholder" shall mean any person (other than the Corporation or any Subsidiary) who or which: (i) is the beneficial owner, directly or indirectly, of more than 20% of the voting power of the outstanding Voting Stock; or (ii) is an Affiliate of the Corporation and, at any time within the two-year period immediately prior to the date in question, was the beneficial owner, directly or indirectly, of 20% or more of the voting power of the then outstanding Voting Stock; or (iii) is an assignee of or has otherwise succeeded to any shares of Voting Stock that were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Stockholder if such Page 25 7 assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. (3) A person shall be a "beneficial owner" of any Voting Stock: (i) that such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly; or (ii) that such person or any of its Affiliates or Associates has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to an agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options or otherwise; provided, however, that a person shall not be deemed the beneficial owner of securities tendered pursuant to a tender or exchange offer made by or on behalf of such person or any of such person's Affiliates or Associates until such tendered securities are accepted for purchase; or (B) the right to vote pursuant to any agreement, arrangement or understanding; provided, however, that a person shall not be deemed the beneficial owner of any security if the agreement, arrangement or understanding to vote such security (I) arises solely from a revocable proxy or consent given to such person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the Exchange Act and (II) is not also then reportable on Schedule 13D under the Exchange Act (or a comparable or successor report); or (iii) that are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except to the extent permitted by the proviso of subparagraph (c)(3)(ii)(B) above) or disposing of any shares of Voting Stock. (4) For the purposes of determining whether a person is an Interested Stockholder pursuant to subparagraph (c)(2), the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of subparagraph (c)(3) but shall not include any other shares of Voting Stock that may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options or otherwise. (5) "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act (or a comparable or successor regulation). Page 26 8 (6) "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in subparagraph (c)(2), the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. (7) "Disinterested Director" means any member of the Board of Directors of the Corporation (the "Board") who is unaffiliated with the Interested Stockholder and was a member of the Board prior to the time that the Interested Stockholder became an Interested Stockholder and any successor of a Disinterested Director who is unaffiliated with the Interested Stockholder and is recommended to succeed a Disinterested Director by a majority of Disinterested Directors then on the Board. (8) "Fair Market Value" means: (i) in the case of stock, the average of the closing sale prices during the lo-day period immediately preceding the date in question of a share of suchstock on the Composite Tape for New York Stock Exchange- Listed Stocks; or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange; or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Exchange Act on which such stock is listed; or, if the stock is not listed on any such exchange but is listed as a National Market System stock in the National Association of Securities Dealers, Inc. Automated Quotation System, as reported in that National Market System; or, if such stock is not listed on any such exchange or reported in such system, the average of the closing bid quotations with respect to a share of such stock during the 10-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotation System or any system then in use; or, if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by the Board in good faith; and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by the Board in good faith. (9) In the event of any Business Combination in which the Corporation survives, the phrase "consideration other than cash to be received" as used in subparagraphs (b)(2)(i) and (ii) of this Article Eleventh shall include the shares of Common Stock and/or of the shares of any other class of outstanding Voting Stock retained by the holders of such shares. (d) Powers of the Board of Directors. A majority of the Disinterested Directors of the Corporation shall have the power and duty to determine for the purposes of this Page 27 9 Article Eleventh on the basis of information known to them after reasonable inquiry (i) whether a person is an Interested Stockholder, (ii) the number of shares of Voting Stock beneficially owned by any person, (iii) whether a person is an Affiliate or Associate of another, and (iv) the Fair Market Value of the assets that are the subject of any Business Combination. A majority of the Disinterested Directors of the Corporation shall have the further power to interpret all of the terms and provisions of this Article Eleventh. (e) No Effect on Fiduciary Obligations of Interested Stockholders. Nothing contained in this Article Eleventh shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. (f) Amendment, Repeal, etc. Notwithstanding any other provisions of this Certificate of Incorporation or the By-laws of the Corporation (and notwithstanding the fact that a lesser percentage may be specified by law, this Certificate of Incorporation or the By-laws of the Corporation), the affirmative vote of the holders of sixty-six and two-thirds percent (66-2/3%) or more of the outstanding Voting Stock, voting together as a single class, shall be required to amend or repeal or adopt any provisions inconsistent with the Article Eleventh. Page 28 EX-10.2 3 EMPLOYMENT AGREEMENT BETWEEN COMPANY & B. DOLE JR. 1 EXHIBIT 10.2 EMPLOYMENT AND SEPARATION AGREEMENT THIS EMPLOYMENT AND SEPARATION AGREEMENT, dated as of August 18, 1995, is entered into by and among Nellcor Incorporated ("Company" or "Nellcor"), Puritan-Bennett Corporation ("PB") and Burton A. Dole, Jr. ("Executive"). In consideration of the respective undertakings of Company, PB and Executive set forth below, Company, PB and Executive agree as follows: 1. Certain Definitions. 1.1 Cause. "Cause" means (i) a material breach of this Agreement by Executive if Executive fails to make treasonable efforts to correct such breach within a reasonable time after receipt of written notice from Nellcor, (ii) conviction of a crime, or entry of a plea of nolo contendere with regard to a crime, involving an offense against the Company or dishonesty of or by the Executive, or (iii) drug or alcohol abuse on the premises of Company or any subsidiary or affiliate of the Company, or at an event sponsored by the Company or any affiliate or subsidiary of the Company. Failure to provide the consultation contemplated under Section 3.2 of this Agreement shall not constitute "Cause" or other grounds for termination of Executive or a basis for any claim for breach of contract. "Cause" shall not include any matter other than those specified in the preceding clauses (i) through (iii) above and, without limiting the generality of the foregoing statement, Cause shall not include (x) any charge or conviction of a crime, or entry of a plea of nolo contendere with regard to a crime, under the Federal Food, Drug, and Cosmetic Act, as amended, or any successor statute thereto (the "Act"), or (y) the imposition or attempt to impose upon the Executive, or upon any operation, asset, product or activity of the Company or PB, of any other sanction or remedy under the Act including, without limitation, civil money penalties, warning letters, injunctions, repairs, replacements, refunds, recalls or seizures, if in either such case the Executive acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company. 1.2 Code. "Code" means the Internal Revenue Code of 1986, as amended. 1.3 Continued Payment Period. "Continued Payment Period" shall have the meaning ascribed to it in Section 6.3. 1.4 Effective Time. "Effective Time" means the date on which the Effective Time of the merger occurs under the Merger Agreement. Page 29 2 1.5 Employment Termination Date. "Employment Termination Date" means the date of any termination of Executive's employment by Company and PB after the Effective Time and prior to March 1, 2005. 1.6 FY 1996 Bonus Payment. "FY 1996 Bonus Payment" means that certain bonus available to Executive pursuant to PB's Merger Incentive Compensation Plan, but only to the extent available to Executive by the terms of such plan. 1.7 401(k) Plan. "401(k) Plan" means that certain Restated Puritan-Bennett Retirement Savings and Stock Ownership Plan, as amended. 1.8 401(k) Benefits. "401(k) Benefits" means those certain benefits payable to Executive pursuant to the 401(k) Plan, but only to the extent available to Executive by the terms of such plan. 1.9 Good Reason. "Good Reason" means (1) reduction in Executive's base salary from that described herein, (2) material reduction in benefits provided to Executive from those described herein, (3) a material reduction in Executive's job responsibilities, title or position from those contemplated herein, if such reduction is not corrected within 30 days after written notice to Company thereof, (4) Executive is requested to relocate to an office outside the greater Kansas City metropolitan area, (5) Company or PB materially breaches any agreement with Executive and such breach is not corrected within ninety (90) days after written notice to Company of such breach. Executive shall have one year following the occurrence of (1) or (3) above to terminate his employment for Good Reason. Executive shall have ninety (90) days following the occurrence of (2), (4) or (5) above to give notice to Company of such occurrence and shall have sixty (60) days thereafter (which sixty day period shall commence immediately after the expiration of any cure period specified in such (5)) to terminate his employment for Good Reason. 1.10 Merger Agreement. "Merger Agreement" means the Agreement and Plan of Merger dated as of May 21, 1995, as amended, by and among the Company, Puma Merger Corporation and PB. 1.11 1980 Employment Agreement. "1980 Employment Agreement" means that certain Employment Agreement between Executive and PB dated as of April 25, 1980. 1.12 PB Agreements and Benefits. "PB Agreements and Benefits" mean all written or oral agreements relating to the terms and conditions of Executive's employment with PB or the provision to Executive of employee benefits. 1.13 PB Deferred Compensation Benefits. "PB Deferred Compensation Benefits" shall mean the benefits payable to Executive after the Effective Time as provided in Section 2.6 of this Agreement under the PB Deferred Compensation Plan. Page 30 3 1.14 PB Deferred Compensation Plan. "PB Deferred Compensation Plan" means the Restated Puritan-Bennett Deferred Compensation Plan, as amended. 1.15 PB Make Up Plan. "PB Make Up Plan" means PB's Pension Benefit Make Up Plan effective as of January 1, 1994, as amended. 1.16 PB Pension and Make Up Benefits. "Pension and Make Up Benefits" means those certain defined benefit retirement benefits payable to Executive pursuant to the PB Pension Plan and the PB Make Up Plan from time to time after the Effective Time. 1.17 PB Pension Plan. "PB Pension Plan" means the Restated Puritan-Bennett Pension Plan, a defined benefit plan of PB qualified under Section 401(a) of the Code. 1.18 PB Separation Benefits. "PB Separation Benefits" shall mean (i) the severance benefits payable to Executive in accordance with Section 2.2 of the 1980 Employment Agreement as contemplated by Section 2.1 of this Agreement, (ii) all accrued but unused vacation held by Executive at PB as of the Effective Time, (iii) the PB SERP Benefits, (iv) the PB Pension and Make Up Benefits, (v) the PB Deferred Compensation Benefits, (vi) any PB stock options or awards held by Executive, (vii) the 401(k) Benefits, (viii) the FY 1996 Bonus Payment, and (ix) the Retention Bonus Payment. 1.19 PB SERP. "PB SERP" means that certain Puritan-Bennett Corporation Supplemental Retirement Benefit Plan effective as of September 1, 1985 as amended. 1.20 PB SERP Benefits. "PB SERP Benefits" means those benefits payable to Executive from and after the Effective Time as contemplated by Sections 2.3, 2.4 and 2.5 of this Agreement pursuant to the PB SERP as supplemented by that certain letter dated November 7, 1994 between Executive and PB. 1.21 Retention Bonus Payment. "Retention Bonus Payment" means that certain bonus available to Executive pursuant to PB's Retention Compensation Plan, but only to the extent available to Executive by the terms of such plan. 1.22 Tax Rate. "Tax Rate" shall have the meaning ascribed to it in Section 6.4. 2. Employment Separation; PB Separation Benefits. 2.1 Notwithstanding any other provision of this Agreement to the contrary, including but not limited to Section 3.4, PB and Executive agree that effective as of the Effective Time, Executive's employment with PB is terminated by PB without cause as Page 31 4 contemplated by Section 2.2 of the 1980 Employment Agreement and that from and after the Effective Time, PB shall pay to Executive the severance payments under such 1980 Employment Agreement in the amounts and at the times set forth in Schedule A-1 hereto and subject to the terms and conditions of such 1980 Employment Agreement; provided, that such terms shall be applied as if Executive has terminated employment with PB, notwithstanding the terms of Section 3.4 hereof. 2.2 Notwithstanding any other provision of this Agreement to the contrary, including but not limited to Section 3.4, PB shall pay to Executive within ten (10) days after the Effective Time, an amount equal to all accrued but unused vacation held by him at PB as of the Effective Time paid at his current rate of compensation as of May 21, 1995. The amount of such unused vacation is currently expected to be as listed in Schedule A-2 hereto. 2.3 Notwithstanding any other provision of this Agreement to the contrary, including but not limited to Section 3.4, PB and Executive agree that Executive shall receive monthly payments under the PB SERP in the amount of $23,083 per month (regardless of any occurrence of disability) commencing on the first of the month after the Effective Time and subject to the terms and conditions of the PB SERP; provided, that such terms shall be applied as if Executive has terminated employment with PB, notwithstanding the terms of Section 3.4 hereof. Such $23,083 per month amount is based on a straight life annuity, and Executive may elect a different form, as provided in the PB SERP. 2.4 Following termination of employment with Nellcor and its affiliates, Executive's monthly PB SERP payments shall be reduced by the amount of monthly payments Executive would have received under the PB Pension and Make Up Plans (based upon Executive's accrued benefit under such plans as of the Effective Time) calculated as if the date of termination of employment had been Executive's benefit commencement date under the PB Pension and Make Up Plans and the Executive had elected to receive benefits under such plans in the same form as the form of SERP payment elected (i.e., single life annuity or the particular form of joint and survivor annuity elected); provided, however, that the reduction required by this Section 2.4 shall not take effect prior to March 1, 2005. 2.5 If Executive dies before payments under the PB SERP commence, the 50% continuation to Executive's spouse or other designated beneficiary shall be based upon the amounts set forth in Sections 2.3 and 2.4 above. 2.6 Notwithstanding any other provision of this Agreement to the contrary, Executive shall be entitled to receive after the Effective Time any deferred compensation benefits to which he is entitled in accordance with the terms of the PB Deferred Compensation Plan (but Executive shall not be entitled to defer additional compensation under such plan from and after the Effective Time). Page 32 5 3. Employment After Effective Time. 3.1 The Company shall employ Executive, after the Effective Time, as Chairman of the Board of the Company for a period of two years from the Effective Time, and thereafter the Company shall employ Executive as a part-time employee until March 1, 2005. In consideration of Executive serving as an employee of Company, Executive shall be entitled to receive a salary payable at the times and in the amounts set forth in Schedule B-1. 3.2 Executive's duties as Chairman of the Board of Directors will be in a non-operational capacity with a focus on external communications responsibilities as agreed to by Company's Chief Executive Officer. Specifically, Executive will represent Company on the Boards of Directors of the Health Industry Manufacturers Association (HIMA) and the Anesthesia Patient Safety Foundation or such other equivalent organizations as Company and Executive may agree (the "Outside Board(s)"). Executive shall use his best efforts to attend a majority of the meetings of such Outside Boards. Executive shall coordinate with Company's Chief Executive Officer regarding issues related to Company that arise in his representation on such Outside Boards. Executive shall also perform additional work in connection with HIMA by attending conferences and engaging in lobbying activities consistent with his past practice at PB and subject to coordination with Company's Chief Executive Officer. Executive will also provide consulting services to Company in an amount equal to up to 8 hours at the time of each Company Board meeting, such consulting to be solely as and to the extent requested from time to time by Company's Chief Executive Officer. Executive will also perform additional consultation with senior management of Company solely as and to the extent requested by Company's current Chief Executive Officer. Executive will have no power to execute contracts or bind Company except as expressly authorized by the Board of Directors. Executive will chair Board of Directors meetings, but the agenda for, and the conduct of, Board meetings will be set by, and under the direction of, Company's Chief Executive Officer. 3.3 After Executive's initial two-year period of employment by Company as Chairman of the Board of Directors, his employment by Company shall become part-time employment and his obligations to the Company shall be to represent Company on the Board of Directors of the Anesthesia Patient Safety Foundation or such other equivalent organization as Company and Executive may agree. Executive shall use his best efforts to attend a majority of the meetings of such Outside Boards. If requested by Company's Chief Executive Officer, Executive shall also continue to represent Company in connection with HIMA, or such other equivalent organization as Company and Executive may agree, with the scope of such duties to be mutually agreeable to Executive and Company's Chief Executive Officer. Executive shall coordinate with Company's Chief Executive Officer regarding issues related to Company that arise in his representation on such Outside Board. Page 33 6 3.4 From and after the Effective Time, Executive shall also be a part-time employee of PB with limited obligations to PB as follows (the "PB Part-Time Employment"): Executive shall be a member of the Board of Directors of PB subject to removal at the discretion of the Company. Executive shall represent PB on the Board of Directors of the Anesthesia Patient Safety Foundation or such other equivalent organization as PB and Executive may agree. Executive shall use his best efforts to attend a majority of the meetings of such Outside Board. If requested by PB's Board of Directors, Executive shall also represent PB in connection with HIMA, or such other equivalent organization as PB and Executive may agree, with the scope of such duties to be mutually agreeable to Executive and PB's Board of Directors. Executive shall coordinate with PB's Board of Directors regarding issues related to PB that arise in his representation on the Boards of Directors of HIMA and the Anesthesia Patient Safety Foundation or any other Outside Board. In consideration of Executive serving as a part-time employee of PB, Executive shall be entitled to receive a salary payable at the times and in the amounts set forth in Schedule B-2. Executive's employment with PB may be terminated upon mutual agreement of Company and Executive. 3.5 During his employment by Company, Executive's office shall be in the greater Kansas City metropolitan area or such other location chosen by Executive at his sole expense. 4. Other Terms of Employment. 4.1 During his employment as Chairman of the Board of the Company, Executive agrees to devote such time and effort to the rendition of services to the Company as may be required to perform his duties hereunder. Executive may devote a reasonable amount of time to civic and community affairs and his own personal business activities (which shall mean services rendered with respect to any business organization a majority of which is owned by Executive), but shall not perform services for compensation during the term of his employment for any other business organization in any capacity without the prior consent of the Chief Executive Officer (except that Executive may be an outside director of non-competing companies during his term as Chairman or thereafter or a consultant or part-time employee of non-competing companies after expiration of his term as Chairman). 4.2 The employment relationship between the parties shall also be governed by the general employment policies and practices of the Company including, but not limited to, any rules, regulations and policies now or hereafter appearing in the Company's Executive Handbook and other policy statements, except that when the terms of this Agreement differ from or are in conflict with the Company's employment policies and practices, this Agreement shall control. 4.3 During his employment by Company, Executive shall receive the following benefits: (A) during the first two years, while Executive serves as Chairman of Page 34 7 Company's Board of Directors, Executive shall receive the same employee benefits (including, but not limited to, vacation, health and dental, life, disability, sick leave, retirement, deferred compensation, but not including any equity based compensation) as are generally made available to executive officers of Company, and (B) after the first two years while Executive serves as a part-time employee of Company, Executive shall be entitled to participate in Company's medical and dental plans, and in Company's life insurance programs to the same extent and at the same cost to Executive as generally available to senior officers of Company (the amount of life insurance available under such plans may be limited to a multiple of his then current rate of compensation). During his part-time employment by PB, Executive shall not be entitled to receive any additional employee benefits from PB other than the PB Separation Benefits provided to Executive under Section 2 hereof. 4.4 Executive shall be immediately eligible for the employee benefits referred to in clause (A) of Section 4.3. Executive's health and dental benefits shall not be subject to any pre-existing condition limitation for Executive or any covered family member. To the extent that an employee's period of service with the Company is relevant in determining eligibility for or vesting in any such benefits, Executive shall receive credit for service with PB as service with the Company. Executive may elect to participate in any health benefits of PB that are generally available at the time, in lieu of (and to the same extent as) any health benefits that would otherwise be available to him from Company under the terms of this Agreement. 4.5 During his employment by Company or PB, Executive shall be entitled to reimbursement of reasonable travel and other business expenses incurred by him in relation to Company business in accordance with the Company's standard policies. 5. Stock Compensation. 5.1 On the Effective Time, the Company shall (A) substitute Company incentive stock options ("ISOs") and Company non-qualified stock options ("NQSOs") for all outstanding ISOs and NQSOs, respectively, held by Executive under PB's 1988 Stock Benefit Plan that expired unexercised as of the Effective Time, and (B) to the extent that any stock options under PB's 1979 Employee Stock Benefit Plan would terminate as of the Effective Time as a result of the Merger, substitute equivalent Company stock options in replacement thereof. The substituted Company options will have the terms provided in the Merger Agreement. 5.2 Executive shall not be eligible to participate in the Company's equity incentive compensation plans from and after the Effective Time except to the extent of previously issued PB stock options which shall become Company options after the Effective Time as herein provided. 6. Termination of Employment; Gross Up Payments. Page 35 8 6.1 The Company and PB may not terminate Executive's employment hereunder except for Cause and Executive may not terminate his employment except for Good Reason or as contemplated by Sections 6.2 or 7 hereof. 6.2 In the event of Executive's death or disability (as defined in the Company's long-term disability plan last effective on or before the date of disability), Executive's employment shall terminate. On termination of Executive's employment by reason of death or disability, or by the Company for Cause, or by Executive other than for Good Reason, Executive shall be entitled to receive, without duplication, (i) the full amount of any accrued but unpaid salary through the Employment Termination Date at the rate in effect at the time of the notice of termination, (ii) all other amounts to which Executive is entitled under any compensation or benefit plan of the Company or PB in which Executive is then participating to the extent the same continue in accordance with their respective terms after the particular circumstances of termination, death or disability, as the case may be, of the Executive at the time and in the amounts such payments are due in accordance with the terms of such plans, and (iii) the amounts payable to Executive and Benefits provided to Executive pursuant to Sections 6.6, 6.7, 11.1 and 11.10 of this Agreement (but again only to the extent the same are available in accordance with their respective terms after the particular circumstances of termination, death or disability, as the case may be, of Executive). Other than the foregoing, Company and PB shall have no further obligations to Executive. 6.3 If the Company terminates Executive's employment other than for Cause, or if Executive terminates employment for Good Reason, (i) the vesting of all of Executive's replacement Company ISOs and NQSOs (as hereinafter defined) shall accelerate, and (ii) the Company and PB shall have the obligation to continue to make or provide the various payments and benefits that they would have been obligated to make or provide by the terms of this Agreement for the balance of Executive's employment periods under this Agreement as if Executive had not been so terminated (the "Continued Payment Period"), and in the event of Executive's death prior to expiration of the Continued Payment Period, such amounts and benefits shall be paid or provided to Executive's spouse or designated beneficiary. Such payments shall be made at the rate in effect as of the termination of Executive and at the same times as they would otherwise have been payable but for the termination of Executive. For the sake of clarity, the provisions of Section 6.2 of this Agreement, and not this Section 6.3, shall apply in the event of termination of Executive's employment due to death or disability (as defined in the Company's long-term disability plan last effective on or before the date of disability). 6.4 To the extent that the accelerated vesting of any ISO upon the termination of Executive as provided in Section 6.3 herein causes the ISO to become a NQSO (such options are referred to herein as the "Disqualified Options" and do not include ISOs that were exercised prior to acceleration and hence did not become NQSOs), the Company will pay to Executive an amount that, after payment of taxes by Executive, is equal to the "Lost ISO Value," as determined pursuant to Section 6.5. The after-tax Page 36 9 amount shall be calculated using the maximum tax rate applicable to such payment (based upon the combined federal and state and local income, earnings, Medicare and any other tax rates applicable to Executive, in each case determined without regard to Executive's actual tax rates) (the "Tax Rate"), for the tax year in which the payment under this Section 6.4 is made. Payment of the Lost ISO Value shall be made within 10 days following acceleration. 6.5 The "Lost ISO Value" ("V") shall be determined by the formula V=(S x T)-PV(S x FT), where: (a) S equals the difference between the per share exercise price and the fair market value of the Company Stock (ignoring all options which are "out of the money," in other words any excess of the exercise price over fair market value shall not reduce S), multiplied by the number of shares subject to the Disqualified Options; "fair market value," for this purpose, means the mean of the high and low prices of the Company Stock on the Employment Termination Date as reported on the principal market or transaction reporting system through which trading of such securities is then made or reported (or on the next preceding date on which the stock was traded if no trades are reported on such principal market or transaction reporting system for the Employment Termination Date); (b) T equals the Tax Rate for the tax year in which the Employment Termination Date occurs; (c) FT equals the future income tax that would have been payable by Executive if (1) the Disqualified Options were exercised as ISOs on the Employment Termination Date, (2) the Company Stock received on exercise was held by Executive until attainment of age 68 and then sold at a price equal to the fair market value of the Company Stock on the Employment Termination Date, as determined above, and (3) the tax laws and rates in effect on the Employment Termination Date were effective for the tax year in which Executive attains age 68; and (d) PV means the present value of (S x FT) as of the Employment Termination Date discounting at 120% of the "applicable federal rate" on that date (within the meaning of section 1274(d) of the Code). Attached hereto as Schedule C is a sample of the computation of "Lost ISO Value." 6.6 Subject to restrictions under the terms of Company's then existing health and welfare plans, Company shall continue to make available to Executive after any termination of employment with Company health and dental coverage to the same extent as such coverage is generally available to full-time Company employees with the sole cost of such participation (both the employer and employee portion of all premiums), to be borne by Executive; provided that Company's obligation shall be to use reasonable efforts to seek to obtain coverage the terms of which would cover Executive within the meaning of this sentence (so long as the inclusion of Executive does not make Company's cost for the plan uncompetitive with alternative plans or have a material adverse effect on the taxation of benefits provided to Company's employees under the plan). The amounts payable to Executive, and benefits receivable by Executive pursuant to this Section 6.6 and Sections 2, 3.1, 3.4, 6.7, 11.1 and 11.10 shall be available to Executive whether or not Executive is terminated for Cause or otherwise terminates employment except that such amounts and benefits shall only be available to the extent the same continue in accordance with their Page 37 10 respective terms after the particular circumstances of termination and the amounts payable under Section 3.1 and 3.4 shall not be payable if Executive voluntarily quits employment. 6.7 In the event that any payment to Executive from Company or PB, or any other compensation, benefit or other amount from the Company or PB for the benefit of Executive ("Parachute Payments"), will be subject to the tax imposed by section 4999 of the Code (including any applicable interest and penalties, the "Excise Tax"), no Parachute Payment shall be reduced (except for required tax withholdings) and the Company shall pay to Executive within 30 days of the date such Excise Tax becomes payable, an additional amount (the "Gross-Up Payment") such that the net amount retained by Executive, after deduction of any Excise Tax on the Parachute Payments and taxes based upon the Tax Rate and Excise Tax upon the payment provided for by this Section 6.7, shall be equal to the amount the Executive would have received if no Excise Tax had been imposed. For purposes of determining whether any of the Parachute Payments will be subject to the Excise Tax and the amount of the Excise Tax, (a) any other payments, benefits or other amounts received or to be received by Executive at any time from the Company or any entity at any time affiliated with the Company (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company or any person affiliated with the Company) shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company and acceptable to Executive such other payments or benefits (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of section 280G(b)(4) of the Code, (b) the amount of the Parachute Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (1) the total amount of the Parachute Payments or (2) the amount of any excess parachute payments within the meaning of section 280G(b)(1) and (4) (after applying clause (a), above, and after deducting any excess parachute payments in respect of which payments have been made under this Section 6.7), and (c) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company in accordance with the principles of section 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay taxes at the Tax Rate applicable at the time of the Gross-Up Payment. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder, Executive shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined the portion of the Gross-Up Payment attributable to such reduction plus interest on the amount of such repayment at the rate provided in section 1274(d)(1) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional gross-up payment in respect of such Page 38 11 excess (plus any interest payable in respect of such excess) at the time that the amount of such excess is finally determined. 6.8 All payments made under this Agreement shall be subject to all required withholdings. 6.9 The severance benefits provided Executive under this Section 6 shall be reduced by any severance benefits to which Executive is entitled under the Company's severance benefits policies for terminated employees generally. However, it is expressly agreed that PB Separation Benefits shall not be offset against or reduce in any way any payments or benefits to which Executive is entitled under this Agreement. 6.10 Notwithstanding anything in this Agreement to the contrary, if any portion of any payments to Executive by the Company or PB under this Agreement and any other present or future plan of the Company or PB or other present or future agreement between Executive and the Company or PB would not be deductible by the Company for federal income tax purposes by reason of application of section 162(m) of the Code, then payment of that portion to Executive shall be deferred until the earliest date upon which payment thereof can be made to Executive without being non-deductible pursuant to section 162(m) of the Code. In the event of such deferral, the Company or PB, as the case may be, shall pay interest to Executive on the deferred amount at 120% of the applicable federal rate provided for in section 1274(d)(1) of the Code. 7. Non-Competition. During Executive's employment by Company, and for a period of three years after any cessation of Executive's employment by Company, Executive agrees that he will not directly or indirectly compete with the Company or PB, or engage in, or act as an officer, director, employee or agent of any person or entity that is engaged in (or intends to enter into at such time), any business in which the Company or PB is engaged as of the date of Executive's separation from employment. The foregoing shall not prohibit Executive from investing in any securities of a corporation whose securities, or any of them, are listed on a national securities exchange or traded in the over-the-counter market so long as Executive shall own less than 3% of the outstanding voting securities of such corporation. If Executive wishes to become a full-time executive of a non-competing company prior to the expiration of his term as Chairman of the Board of Directors of Company, Executive shall at the option of Company relinquish his position as Chairman of the Board of Directors of Company and as a director of PB and terminate his employment with Company and PB (which would not be deemed termination for "Good Reason"). 8. Confidentiality. During Executive's employment and at all times thereafter, Executive agrees that he will not divulge to anyone or use for Executive's own benefit or the benefit of any other person or entity any information concerning the Company or PB, or the businesses, operations, finances, products, plans, employees, or other aspects of either of them, including, without limitation, trade secrets and other proprietary information, except for information that has been published by or with the Page 39 12 consent of the Company and is as a result thereof generally available to the public, or information reasonably required by Executive for the preparation of personal tax returns. The foregoing restrictions shall not be applicable to any information that is or becomes part of the public domain other than as a result of disclosure by Executive. 9. No Obligation to Mitigate. Executive shall not be required to mitigate the damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided under this Agreement be reduced by any compensation earned by Executive as the result of employment by another employer after any Employment Termination Date, or otherwise. 10. Release and Termination of Rights. 10.1 As of the Effective Time, all PB Agreements and Benefits shall terminate except for the PB Separation Benefits and the PB Part Time Employment provided herein. Executive and his representatives, heirs, successors, and assigns do hereby completely release and forever discharge Company, PB, any affiliate of either of them, and the present and former shareholders, officers, directors, agents, employees, attorneys, successors, and assigns of any of them (collectively, "Released Parties") from all claims, rights, demands, actions, obligations, liabilities and causes of action of every kind and character, known or unknown, mature or unmatured, which Executive may now have or has ever had, whether based on tort, contract (express or implied including the PB Agreements and Benefits) or any federal, state or local law, statute or regulation, relating in any manner whatsoever to the PB Agreements and Benefits, his employment by PB or the termination of his employment (except for the PB Separation Benefits and the amounts set forth in Schedule D) (collectively, the "Released Claims"). By way of example and not in limitation of the foregoing, Released Claims shall include any claims arising under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, and the Americans with Disabilities Act, as well as any claims asserting wrongful termination, breach of contract, breach of the covenant of good faith and fair dealing, negligent or intentional infliction of emotional distress, negligent or intentional misrepresentation, negligent or intentional interference with contract or prospective economic advantage, defamation, invasion of privacy, and claims related to disability. Released Claims shall also include, but not be limited to, claims for any severance pay, bonuses, sick leave, vacation pay, life or health insurance, or any other fringe benefit. Executive likewise releases the Released Parties from any and all obligations for attorneys' fees incurred in regard to the above claims or otherwise. 10.2 Notwithstanding the foregoing, Released Claims shall not include (A) amounts payable to Executive pursuant to PB Agreements and Benefits relating to (i) reimbursement for out-of-pocket expenses incurred in connection with the business of PB, (ii) wages and salary earned, and (iii) other items as described in Schedule D Page 40 13 hereto, in each case only to the extent that such amounts are accrued but unpaid prior to the Effective Time, and (B) the PB Separation Benefits described herein. 10.3 The parties understand and agree that the Released Claims include not only claims presently known to Executive, but also include all unknown or unanticipated claims, rights, demands, actions, obligations, liabilities, and causes of action of every kind and character that would otherwise come within the scope of the Released Claims as described herein. Executive understands that he may hereafter discover facts different from what he now believes to be true, which if known, could have materially affected this Agreement, but he nevertheless waives any claims or rights based on different or additional facts. Executive knowingly and voluntarily waives any and all rights or benefits that he may now have, or in the future may have, under the terms of Section 1542 of the California Civil Code (or any other similar protection of law), which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. 10.4 Executive shall not sue or initiate against any Released Party any compliance review, action, or proceeding, or participate in the same, individually or as a member of a class, under any contract (express or implied), or any federal, state, or local law, statute, or regulation pertaining in any manner to the Released Claims. 10.5 Executive understands and agrees that, by entering into this Agreement, (i) he is waiving any rights or claims he might have under the Age Discrimination in Employment Act, as amended by the Older Workers Benefit Protection Act; (ii) he has received consideration beyond that to which he was previously entitled; (iii) he has been advised to consult with an attorney before signing this Agreement; and (iv) he has been offered the opportunity to evaluate the terms of this Agreement for not less than twenty-one (21) days prior to his execution of the Agreement. Executive may revoke this Agreement (by written notice to Company) for a period of seven (7) days after his execution of the Agreement, and it shall become enforceable only upon the expiration of this revocation period without prior revocation by Executive. 11. Miscellaneous. 11.1 Interest. Any amounts owed to Executive by Company or PB from and after the Effective Time as referred to in this Agreement (other than amounts pursuant to the 1980 Employment Agreement) and not paid when due shall bear interest at the rate of one-fortieth of one percent (00.025%) per day until paid in full. Any partial payment shall first be applied toward interest. Page 41 14 11.2 No Assignment; Successors. No benefit hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to do so shall be void. This Agreement and the rights and obligations of the parties hereto shall bind and inure to the benefit of any successor or successors of the Company or PB by way of reorganization, merger, acquisition or consolidation, and any assignee of all or substantially all of the business and properties or either of them. 11.3 Notices. All notices hereunder shall be in writing, and shall be delivered in person, by facsimile or by certified mail-return receipt requested. Notices shall be delivered as follows: If to the Company or PB: c/o Nellcor Incorporated 4280 Hacienda Drive Pleasanton, CA 94288 Attention: Laureen DeBuono, Esq. Executive Vice President, Human Resources, General Counsel and Corporate Secretary Tel: (510) 463-4214 Fax: (510) 463-4218 If to the Executive: Burton A. Dole, Jr. 9605 West 191st Street Bucyrus, Kansas 66013 Any party may change its address by notice giving notice to the other party of a new address in accordance with the foregoing provisions. 11.4 Governing Law. This Agreement shall be governed by the laws of the State where Executive's principal office with PB is located at the time a dispute hereunder shall arise. 11.5 Arbitration. (a) All disputes between Executive (and his attorneys, successors and assigns) and Company or PB (and their affiliates, shareholders, directors, officers, employees, agents, successors, attorneys and assigns) relating in any manner whatsoever to the employment or termination of Executive, including, without limitation, all disputes arising under this Agreement ("Arbitrable Claims") shall be resolved by arbitration. All persons and entities specified in the Page 42 15 preceding sentence (other than Company, PB and Executive) shall be considered third-party beneficiaries of the rights and obligations created by this Section on Arbitration. Arbitrable Claims shall include, but are not limited to, contract (express or implied) and tort claims of all kinds, as well as all claims based on any federal, state or local law, statute or regulation, excepting only claims under applicable workers' compensation law and unemployment insurance claims. By way of example and not in limitation of the foregoing, Arbitrable Claims shall include any claims arising under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, as well as any claims asserting wrongful termination, breach of contract, breach of the covenant of good faith and fair dealing, negligent or intentional infliction of emotional distress, negligent or intentional misrepresentation, negligent or intentional interference with contract or prospective economic advantage, defamation, invasion of privacy and claims related to disability. Arbitration shall be final and binding upon the parties and shall be the exclusive remedy for all Arbitrable Claims. THE PARTIES HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO TRIAL BY JURY IN REGARD TO ARBITRABLE CLAIMS. (b) Arbitration of Arbitrable Claims shall be in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association ("AAA Employment Rules"), except as provided otherwise in this Agreement. The burden of proof in any arbitration shall be allocated as provided by applicable law, unless otherwise specified in this Agreement. Either party may bring an action in court to compel arbitration under this Agreement and to enforce an arbitration award. Otherwise, neither party shall initiate or prosecute any lawsuit or administrative action in any way related to any Arbitrable Claim. All arbitration hearings under this Agreement shall be conducted in San Francisco, California. The Federal Arbitration Act shall govern the interpretation and enforcement of this Section 11.5 (c) All disputes involving Arbitrable Claims shall be decided by a single arbitrator. The arbitrator shall be selected by mutual agreement of the parties within thirty (30) days of the effective date of the notice initiating the arbitration. If the parties cannot agree on an arbitrator, then the complaining party shall notify the AAA and request selection of an arbitrator in accordance with the AAA Employment Rules. The arbitrator shall have authority to award equitable relief, damages, costs, and fees to the same extent as a court would be permitted by law for the particular claim(s) asserted. The fees of the arbitrator shall be split between both parties equally. The arbitrator shall have exclusive authority to resolve all Arbitrable Claims, including, but not limited to, any claim that all or any part of this Agreement is void or enforceable and any dispute regarding whether particular claims are arbitrable. (d) All proceedings and all documents prepared in connection with any Arbitrable Claim shall be confidential and, unless otherwise required by law, the Page 43 16 subject matter thereof shall not be disclosed to any person other than the parties to the proceedings, their counsel, witnesses and experts, the arbitrator, and, if involved, the court and court staff. All documents filed with the arbitrator or with a court shall be filed under seal. The parties shall stipulate to all arbitration and court orders necessary to effectuate fully the provisions of this subsection concerning confidentiality. (e) The rights and obligations of Executive, PB and Company set forth in this Section 16.4 on Arbitration shall survive the termination of Executive's employment and the termination of this Agreement. 11.6 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction, arbitrator or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in force and effect and shall in no way be affected, impaired or invalidated. It is the intention of the parties that the provisions of Section 7 of this Agreement shall be enforced to the greatest extent (but to no greater extent) in time, area, and degree of participation as is permitted by the law of that jurisdiction whose law is found to be applicable to any acts allegedly in breach of Section 7. It being the purpose of this Agreement to govern competition by Executive anywhere throughout the world, Section 7 shall be governed by and construed according to that law (from among those jurisdictions whose law is arguably applicable to this Agreement and those in which a breach of Section 9 is alleged to have occurred or to be threatened) which best gives effect to Section 7 of this Agreement. 11.7 Consultation with Counsel. Executive acknowledges (a) that he has been given the opportunity to consult with counsel of his own choice concerning this Agreement, and (b) that he has read and understands the Agreement, is fully aware of its legal effect, and has entered into it freely based upon his own judgment with or without the advice of such counsel 11.8 Descriptive Headings. Descriptive headings of the several sections and subsections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. 11.9 Amendments; Waivers. This Agreement may not be modified, amended, or terminated except by an instrument in writing, signed by Executive and by a duly authorized representative of each of the Company and PB other than Executive. By an instrument in writing similarly executed, any party may waive compliance by another party or parties with respect to any provision of this Agreement that such other party was or is obligated to comply with or perform, provided, however, that such waiver shall not operate as a waiver of, or estoppel with respect to, any other or subsequent failure. No failure to exercise and no delay in exercising any right, remedy or power hereunder shall operate as a waiver thereof or as a waiver of any other right, remedy or power, nor shall any single or partial exercise of any right, remedy or power Page 44 17 hereunder preclude any other or further exercise of any other right, remedy, or other power provided herein or by law or in equity. 11.10 Attorney's Fees. In the event of a breach by PB or Company, Company shall pay Executive's attorney's fees and costs. 11.11 Interpretation. This Agreement shall be construed as a whole, according to its fair meaning, and not in favor of or against any party. By way of example Page 45 18 and not in limitation of the foregoing, this Agreement shall not be construed in favor of the party receiving a benefit nor against the party responsible for any particular language in this Agreement. 11.12 Integration. The parties understand and agree that the preceding Sections recite the sole consideration for this Agreement; that no representation or promise has been made by Company, PB or Executive concerning the subject matter of this Agreement, except as expressly set forth in this Agreement; and that all agreements and understandings between the parties concerning the subject matter of this Agreement are embodied and expressed in this Agreement. This Agreement shall supersede all prior agreements and understandings among the parties whether written or oral, express or implied, with respect to the employment, termination and benefits of Executive, including without limitation, any employment-related agreement or benefit plan, except to the extent that the provisions of any such agreement or plan have been expressly referred to in this Agreement as having continued effect. Nellcor Incorporated By: Name: ------------------------ Title: ------------------------ Puritan-Bennett Corporation By: Name: ------------------------ Title: ------------------------ Executive --- Burton A. Dole, Jr. Page 46 19 Schedule A-1 $211,700 per annum for a period of 90 months, such period commencing at the Effective Time. Such amounts are payable at the times executive payroll is normally processed by PB. Page 47 20 Schedule A-2 400 hours of unused vacation at $163.47 per hour equals $65,388. Page 48 21 Schedule B-1 $230,000 per annum for a period of 24 months, such period commencing at the Effective Time, and thereafter $24,000 per annum for a period of 90 months, such period commencing August 25, 1997. In each case, such compensation will be payable at the times executive payroll is normally processed by Nellcor. Page 49 22 Schedule B-2 $20,000 per annum payable at the times payroll for executives is otherwise processed by PB for a period of 114 months, such period commencing at the Effective Time. Page 50 23 Schedule C LOST ISO VALUE SAMPLE CALCULATION Assume that Executive has 10,000 ISOs with an exercise price of $20 per share which are accelerated on termination of employment, and that no other ISOs first become exercisable in the year of termination. Assume, further, that (1) the fair market value of Nellcor-PB stock on the employment termination date is $40, (2) Executive has attained age 63 on the Employment Termination Date, (3) the Tax Rate is 50%, (4) 120% of the applicable federal rate for obligations with a maturity of 5 years is 7.5%, (5) under the tax law in effect on the Employment Termination Date, ISO stock held for more than one year and then sold would qualify for capital gain treatment, with an applicable tax rate of 40% (rather than 50% applicable to disqualifying dispositions). As a result of acceleration, options first exercisable in a year in excess of $100,000 (based upon the stock price at the date of grant) are disqualified. Thus, 5,000 of Executive's ISOs are "Disqualified Options." The Lost ISO Value of such options is calculated as follows: S=$20 ($40-$20) T=.50 FT=.40 V=5,000[$20 x .5]-5,000PV[$20 x .4] V=$50,000-5,000PV[$8] PV$8 receivable in 5 years discounted at 7.5% per annum=$5.57 V=$50,000-(5,000 x $5.57) V=$50,000-$27,850 V=$22,150 page 51 24 Schedule D Claims under medical plans included in PB Agreements and Benefits in which Executive and his family participate, for services rendered prior to the Effective Time. All fringe benefits earned by Executive prior to the Effective Time for services rendered prior to the Effective Time if such fringe benefits have not previously been paid or provided for the benefit of Executive. Page 52 EX-10.3 4 EMPLOYMENT AGREEMENT BETWEEN COMPANY & J. MORROW 1 EXHIBIT 10.3 EMPLOYMENT AGREEMENT THIS AGREEMENT, dated as of August 25, 1995, is entered into by and among Nellcor Incorporated ("Company" or "Nellcor"), Puritan-Bennett Corporation ("PB") and John H. Morrow ("Executive") and supersedes and replaces any prior employment agreement previously entered into between Company or any subsidiary thereof, including PB and Employee. In consideration of the respective undertakings of Company and Executive set forth below, Company and Executive agree as follows: 1. Certain Definitions. 1.1 Cause. "Cause" means (a) the Executive's willful violation of any reasonable rule or direct order of the Board or the Company Chief Executive Officer ("CEO"), which, after written notice to do so, the Executive fails to make reasonable efforts to correct within a reasonable time, or (b) conviction of a crime, or entry of a plea of nolo contendere with regard to a crime, involving an offense against the Company or dishonesty of or by the Executive, or (c) drug or alcohol abuse on the premises of Company or any subsidiary or affiliate of the Company, or at an event sponsored by the Company or any affiliate or subsidiary of the Company, or (d) Executive's material violation of any provision of this Agreement, which, after written notice to do so, the Executive fails to correct within a reasonable time. "Cause" shall not include any matter other than those specified in (a) through (d) above and, without limiting the generality of the foregoing statement, Cause shall not include (x) any charge or conviction of a crime, or entry of a plea of nolo contendere with regard to a crime, under the Federal Food, Drug, and Cosmetic Act, as amended, or any successor statute thereto (the "Act"), or (y) the imposition or attempt to impose upon the Executive, or upon any operation, asset, product or activity of the Company, of any other sanction or remedy under the Act including, without limitation, civil money penalties, warning letters, injunctions, repairs, replacements, refunds, recalls or seizures, if in either such case the Executive acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company. 1.2 Code. "Code" means the Internal Revenue Code of 1986, as amended. 1.3 Continued Payment Period. "Continued Payment Period" shall have the meaning ascribed to it in Section 7.1. 1.4 Company SERP. "Company SERP" means that certain Supplemental Retirement Benefit Plan in the form attached hereto as Exhibit A adopted by the Page 53 2 Company and effective as of the Effective Date providing for certain supplemental retirement. 1.5 Effective Date. "Effective Date" means the date on which the effective time of the merger occurs under the Merger Agreement. 1.6 Employment Termination Date. "Employment Termination Date" means the date specified in any notice of termination provided pursuant to Section 2.2 or other date of termination of Executive's employment after the Effective Date. 1.7 FY 1996 Bonus Plan. "FY 1996 Bonus Plan" means that certain bonus available to Executive pursuant to PB's Merger Incentive Compensation Plan, but only to the extent available to Executive by the terms of such plan. 1.8 401(k) Plan. "401(k) Plan" means that certain Restated Puritan-Bennett Retirement Savings and Stock Ownership Plan, as amended. 1.9 Good Reason. (a) "Good Reason" means, on or prior to the first anniversary of the Effective Date of this Agreement (1) Executive ceases to hold the position provided to him in Section 2.1, (2) reduction in Executive's total compensation or in salary from that described in Section 3, (3) requiring Executive to locate from the greater Kansas City metropolitan area other than in connection with becoming Chief Operating Officer of the Company; or (4) failure to afford Executive the employee benefits described in Section 4, if such failure is not corrected within thirty (30) days after written notice to the Company thereof. Executive shall have one year following the occurrence of (1) or (2) above to terminate his employment for Good Reason. Executive shall have ninety (90) days following the occurrence of (3) or (4) above to give notice to Company of such occurrence and shall have sixty (60) days (which sixty day period shall commence immediately after the expiration of any cure period specified in such (3) and (4)) to terminate his employment for Good Reason. (b) "Good Reason" means, after the first anniversary of the Effective Date of this Agreement, (1) any act of the Company constituting "Good Reason" under Section 1.9(a) above (subject to the last sentence of Section 1.9(a), (2) any material reduction in the nature or scope of the Executive's authority or duties from those described in Section 2.1 (including if such reduction occurred prior to the first anniversary of the Effective Date), if such failure is not corrected within thirty (30) days after written notice to the Company thereof, or (3) material breach by the Company or any successor company of any of the provisions of this Agreement not corrected within ninety (90) days after written notice to the Company thereof. Executive shall have ninety (90) days following the occurrence of (2) or (3) above to give notice to Company of such occurrence and Page 54 3 shall have sixty (60) days (which sixty day period shall commence immediately after the expiration of any cure period specified in such (2) or (3)) to terminate his employment for Good Reason. (c) "Good Reason" means, after the second anniversary of the Effective Date of this Agreement, (1) any act of the Company constituting "Good Reason" under Section 1.9(a) (subject to the last sentence of Section 1.9(a)) or Section 1.9(b) above (subject to the last sentence of Section 1.9(b)), or (2) failure of the Company to offer Executive the position of Chief Operating Officer of the Company (with a commensurate compensation level). Executive shall have until the third anniversary of the Effective Date of this Agreement to terminate his employment for "Good Reason" as a result of the failure of the Company to offer him the position of Chief Operating Officer of the Company. 1.10 Merger Agreement. "Merger Agreement" means the Agreement and Plan of Merger dated as of May 21, 1995, as amended by and among the Company, Puma Merger Corporation and PB. 1.11 PB Agreements and Benefits. "PB Agreements and Benefits" mean all written or oral agreements relating to the terms and conditions of Executive's employment with PB, and the provision to Executive of employee benefits, including, but not limited to (a) the letter agreement dated June 9, 1994, between PB and Executive, (b) the supplemental letter agreement dated November 7, 1994, between PB and Executive, (c) the PB Supplemental Retirement Benefit Plan adopted by PB effective as of September 1, 1985 (the "PB SERP"), (d) the agreement made as of November 7, 1994, between PB and Executive changing the PB SERP as applicable to Executive, and (e) the PB Pension Benefit Make Up Plan as applicable to Executive. Notwithstanding the foregoing, "PB Agreements and Benefits" shall not include benefits and rights under (i) the employee benefit plans of the Company constituting qualified plans under section 401(a) of the Code, (ii) any PB stock options or awards held by Executive, (iii) the Restated PB Deferred Compensation Plan, (iv) the 401(k) Plan, (v) the FY 1996 Bonus Plan, or (vi) the Retention Bonus Plan. 1.12 Retention Bonus Plan. "Retention Bonus Plan" means that certain bonus available to Executive pursuant to PB's Retention Compensation Plan, but only to the extent available to Executive by the terms of such plan. 1.13 Tax Rate. "Tax Rate" shall have the meaning ascribed to it in Section 7.3. 2. Employment. 2.1 The Company shall employ Executive, as of the Effective Date, as Executive Vice President of the Company and President of the Company's Home Health Care Business, which will include the PB Puritan Group and Aero Systems Group, as constituted on the Effective Date, the PB Republic of Ireland operation, and the Page 55 4 Company's Edentec and Pierre Medical operation, except to the extent that for any reason any of such operations are no longer part of the operations of the Company and its subsidiaries. Executive shall also serve as a member of the Board of Directors of PB subject to removal at the discretion of the Company. 2.2 Subject to the foregoing, Executive shall continue in his employment with the Company until either Company or the Executive gives written notice to the other of termination of Executive's employment. Such notice shall specify the date of termination of employment. Subject to making any payments required to be made under Sections 6 and 7 of this Agreement, the Company may terminate Executive's employment at any time with or without cause and with or without advance notice. The Company's right to terminate the Executive shall be governed solely by the terms of this Agreement and may not be modified by any other express or implied employment practices, policies or agreements except a specific written agreement amending this provision signed by Company and Executive. 2.3 During his employment with the Company, Executive agrees to devote his full business time and efforts to the rendition of services to the Company subject, however, to illness and customary vacations. Executive will at all times be subject to the direction and supervision of the Chief Executive Officer ("CEO") of the Company. Executive may devote a reasonable amount of time to civic and community affairs but shall not perform services during the term of his employment for any other business organization in any capacity without the prior consent of the CEO. 2.4 The employment relationship between the parties shall also be governed by the general employment policies and practices of the Company including, but not limited to, any rules, regulations and policies now or hereafter appearing in the Company's Employee Handbook and other policy statements, except that when the terms of this Agreement differ from or are in conflict with the Company's employment policies and practices, this Agreement shall control. Notwithstanding the foregoing, nothing in this Section 2.4 shall in any way limit the Company's rights under Section 2.3. 3. Salary and Bonus. Executive's initial base salary shall be $275,000 per annum, payable at the times payroll for other executives is processed, subject to required withholdings. Executive shall participate in Company's Short-Term Cash Incentive Program for Officers and Directors as in effect from time to time with an initial target bonus of 50% of base salary based on the achievement of Company and individual objectives. Executive's base salary and bonus will be reviewed and adjusted at the same time as for other similarly situated executives. 4. Other Employee Benefits. 4.1 Executive shall be immediately eligible for all employee benefits generally available to executive officers of the Company including, but not limited to, vacation, Page 56 5 sick leave, health insurance, dental insurance, life insurance, disability insurance and deferred compensation. Executive shall not be entitled to receive, and hereby waives, any right to benefits under PB's Director's Post-Retirement Income Plan. Executive's health and dental benefits shall not be subject to any pre-existing condition limitation for Executive or any covered family member. To the extent that an employee's period of service with the Company is relevant in determining eligibility for or vesting in any such benefits, Executive shall receive credit for service with PB as service with the Company. Notwithstanding the foregoing, Executive may elect to participate in any health benefits of PB that are generally available at the time, in lieu of (and to the same extent as) any health benefits that would otherwise be available to him from Company under the terms of this Agreement. 4.2 Executive shall be provided a Company automobile, including reimbursement for reasonable automobile expenses. 4.3 Executive shall be entitled to reimbursement of reasonable travel and other business expenses incurred by him in relation to Company business in accordance with the Company's standard policies. 4.4 Executive's membership in Shadow Glen Golf Club shall be continued, including reimbursement for monthly dues and assessments as well as reasonable expenses incurred in connection with business usage of the club services and facilities. If Executive is required to relocate from the Kansas City area, the Company shall use all reasonable efforts to transfer to Executive ownership of the Shadow Glen Golf Club membership. 4.5 Executive shall be entitled to an annual allowance of $2,500 which he may use to obtain income tax, estate planning and other similar services. 4.6 Executive shall be provided with a loan in the amount and containing the terms provided in Exhibit B so as to enable Executive to pay certain income taxes arising in connection with the acceleration of restricted stock as a result of the merger. 4.7 Company shall pay to Executive within 10 days of the Effective Date, an amount equal to all accrued but unused vacation held by him at PB paid at his rate of compensation as of the Effective Date of $275,000 per annum. The amount of such unused vacation is currently expected to be as listed in Exhibit C hereto. 5. Stock Compensation. 5.1 As of the Effective Date, the Company shall (A) substitute Company incentive stock options ("ISOs") and Company non-qualified stock options ("NQSOs") for all outstanding ISOs and NQSOs, respectively, under PB's 1988 Stock Benefit Plan expired unexercised as of the Effective Date, and (B) to the extent that any stock options under PB's 1979 Employee Stock Benefit Plan would terminate as of the Page 57 6 Effective Time as a result of the Merger, substitute equivalent Company stock options in replacement thereof. The substituted Company options will have the terms provided in the Merger Agreement. 5.2 Executive shall be eligible to participate in the Company's equity incentive compensation plans to the same extent as are generally made available to similarly situated executives of the Company. However, to the extent that the plan in question is a discretionary award plan, the amount of any award to Executive under the plan shall be in the sole discretion of the Nominating and Compensation Committee of the Company's Board of Directors, or any successor thereto. 6. Rights Upon Termination of Employment by Death or Disability or on Termination of Employment by the Company for Cause, or by Executive other than for Good Reason; Gross Up Payments. In the event of Executive's death or disability (as defined in the Company's long-term disability plan last effective on or before the date of disability), Executive's employment shall terminate. On termination of Executive's employment by reason of death or disability, or by the Company for Cause, or by Executive other than for Good Reason, Executive shall be entitled to receive the full amount of any accrued but unpaid salary through the Employment Termination Date at the rate in effect at the time of the notice of termination, plus all other amounts to which Executive is entitled under any compensation or benefit plan of the Company in which Executive is then participating, at the time and in the amounts such payments are due in accordance with the terms of such plans, and the Company shall have no further obligations to Executive. 7. Rights Upon Termination of Employment By Company other than for Cause, or by Executive for Good Reason. If the Company terminates Executive's employment other than for Cause, or if Executive terminates employment for Good Reason, the Company shall have the obligation to make the payments specified in this Section 7. For sake of clarity, the provisions of Section 6 of this Agreement, and not this Section 7, shall apply in the event of termination of Executive's employment on death or disability (as defined in the Company's long-term disability plan last effective on or before the date of disability). 7.1 Executive shall receive severance pay for a period of three years from the Employment Termination Date (the "Continued Payment Period"), at an annual rate equal to the sum of (a) the Executive's highest base salary rate from the Company in effect prior to the Employment Termination Date, plus (b) the highest bonus paid to Executive under the Company's Short-Term Cash Incentive Program for any fiscal year, such severance award to be payable, other than as provided in the next sentence, in equal installments payable at the times Company's payroll for executives is processed for a period of three years. If the Company terminates Executive's employment other than for Cause or if Executive terminates employment for Good Reason, in each case prior to the end of the first fiscal year of the Company beginning after the Effective Date, then Executive's bonus for purposes of calculating severance Page 58 7 payments under this Section 7.1 shall be deemed to be equal to the bonus Executive would have earned under the Company's Short-Term Cash Incentive Program for the first fiscal year ending after the Effective Date had he been employed for all twelve months of such fiscal year and satisfied his employment objectives. The Company shall make a lump-sum payment to Executive of any amount of severance payments due under this Section 7.1 in connection with the portion of the severance payments pertaining to Executive's bonus under (b) above, within 10 business days following the determination by the Company after the end of such fiscal year that the Company has achieved plan performance criteria for the payment of incentive compensation. For purposes of the calculation of Executive's base salary and bonus under this Section 7.1, no deduction shall be made for amounts deferred by Executive under any qualified plan, cafeteria plan or deferred compensation plan maintained by the Company. In addition, under no circumstances shall Executive's base salary and bonus for purposes of Section 7.1 include the value of any benefits provided to Executive under this Agreement or any other plan or agreement other than base salary and bonus determined under Section 3 hereof. 7.2 The Company shall use all reasonable efforts to transfer to Executive ownership of the Shadow Glen Golf Club membership. 7.3 Any Company ISOs or NQSOs awarded to Executive pursuant to Section 5.1 of this Agreement that have not previously vested and become exercisable on the Employment Termination Date shall become fully vested and exercisable on that date. To the extent that the vesting of any ISO causes the ISO to become a NQSO (such options are referred to herein as the "Disqualified Options" and do not include ISOs that were exercised prior to acceleration and hence did not become NQSOs), the Company will pay to Executive an amount that, after payment of taxes by Executive, is equal to the "Lost ISO Value," as determined pursuant to Section 7.4. The after-tax amount shall be calculated using the Executive's effective tax rate applicable to such payment (based upon the combined federal and state and local income, earnings, Medicare and any other tax rates applicable to Executive, net of the reduction in federal income taxes which could be obtained by deduction of such state and local taxes) (the "Tax Rate") for the tax year in which payment occurs. Payment of the Lost ISO Value shall be made within 60 days following acceleration. 7.4 The "Lost ISO Value" ("V") shall be determined by the formula V=(S x T)-PV(S x FT), where: (a) S equals the difference between the per share exercise price and the fair market value of the Company Stock (ignoring all options which are "out of the money," in other words any excess of the exercise price over fair market value shall not reduce S), multiplied by the number of shares subject to the Disqualified Options; "fair market value," for this purpose, means the mean of the high and low prices of the Company Stock on the Employment Termination Date as reported on the principal market or transaction reporting system through which trading of such securities is then made or reported (or on the next preceding date on which the stock Page 59 8 was traded if no trades are reported on such principal market or transaction reporting system for the Employment Termination Date); (b) T equals the Tax Rate for the tax year in which the Employment Termination Date occurs; (c) FT equals the future income tax that would have been payable by Executive if (1) the Disqualified Options were exercised as ISOs on the Employment Termination Date, (2) the Company Stock received on exercise was held by Executive until attainment of age 65 and then sold at a price equal to the fair market value of the Company Stock on the Employment Termination Date, as determined above, and (3) the tax laws and rates in effect on the Employment Termination Date were effective for the tax year in which Executive attains age 65; and (d) PV means the present value of (S x FT) as of the Employment Termination Date discounting at 120% of the "applicable federal rate" on that date (within the meaning of section 1274(d) of the Code). Attached hereto as Exhibit D is a sample of the computation of "Lost ISO Value." 7.5 The Company will provide a benefit to Executive under the Consolidated Omnibus Budget Reconciliation Act of 1986 ("COBRA") and section 4980B of the Code, as follows: the Company shall pay for the maximum required period of coverage under section 4980B(f)(2) of the Code the percentage of the cost of COBRA coverage with respect to Executive's coverage status (e.g., individual or family) in effect immediately prior to the Employment Termination Date, which percentage shall be the fraction (expressed as a percentage), the numerator of which shall be the difference between (a) the monthly cost of COBRA coverage for Executive's coverage status in effect immediately prior to the Employment Termination Date and (b) Executive's monthly contribution toward Executive's coverage in effect immediately prior to your Employment Termination Date, and the denominator of which shall be the monthly cost of COBRA coverage for Executive's coverage status in effect immediately prior to Executive's Employment Termination Date. All such amounts shall be determined as of the day immediately preceding the termination of Executive's employment. The insurance continuation benefits paid for hereunder shall be deemed to be part of Executive's COBRA coverage. Such benefits shall be in addition to any other benefits relating to health or medical care benefits that are available under Company's policies to Executive following termination of employment. Subject to restrictions under the terms of Company's then existing health and welfare plans, Company shall continue to make available to Executive after termination of employment with Company, until Executive attains the age of 65, health and dental coverage to the same extent as such coverage is generally available to full-time Company employees with the sole cost of such participation (both the employer and employee portion of all premiums), to be borne by Executive; provided that Company's obligation shall be to use reasonable efforts to seek to obtain coverage the terms of which would cover Executive within the meaning of this sentence (so long as the inclusion of Executive does not make Company's cost for the plan uncompetitive with alternative plans or have a material adverse effect on the taxation of benefits provided to Company's employees under the plan). Page 60 9 7.6 In the event that Executive becomes entitled to payments under this Section 7, then if any of such payments or any other compensation, benefit or other amount from the Company or PB for the benefit of Executive ("Parachute Payments"), will be subject to the tax imposed by section 4999 of the Code (including any applicable interest and penalties, the "Excise Tax"), no Parachute Payment shall be reduced (except for required tax withholdings) and the Company shall pay to Executive within 30 days of the date such Excise Tax becomes payable, an additional amount (the "Gross-Up Payment") such that the net amount retained by Executive, after deduction of any Excise Tax on the Parachute Payments and taxes based upon the Tax Rate and Excise Tax upon the payment provided for by this Section 7.6, shall be equal to the amount the Executive would have received if no Excise Tax had been imposed. For purposes of determining whether any of the Parachute Payments will be subject to the Excise Tax and the amount of the Excise Tax, (a) any other payments, benefits or other amounts received or to be received by Executive in connection with Executive's termination of employment at any time from the Company or any entity at any time affiliated with the Company (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company or any person affiliated with the Company) shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company and acceptable to Executive such other payments or benefits (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of section 280G(b)(4) of the Code, (b) the amount of the Parachute Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (1) the total amount of the Parachute Payments or (2) the amount of any excess parachute payments within the meaning of section 280G(b)(1) and (4) (after applying clause (a), above, and after deducting any excess parachute payments in respect of which payments have been made under this Section 7.6), and (c) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company in accordance with the principles of section 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay taxes at the Tax Rate applicable at the time of the Gross-Up Payment. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of Executive's employment, Executive shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined the portion of the Gross-Up Payment attributable to such reduction plus interest on the amount of such repayment at the rate provided in section 1274(d)(1) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of termination of the Executive's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional gross-up payment in respect of such excess (plus any interest payable in respect of such excess) at the time that the amount of such excess is finally determined. Page 61 10 7.7 All payments made under this Section 7 shall be subject to all required withholdings. 7.8 The severance benefits provided Executive under this Section 7 shall be reduced by any severance benefits to which Executive is entitled under the Company's severance benefits policies for terminated employees generally. However, it is expressly agreed that payments or benefits to Executive under the Company SERP or under any agreement with Executive relating to the Company SERP or any other retirement, deferred compensation or pension arrangement shall not be offset against or reduce in any way any payments or benefits to which Executive is entitled under this Agreement. 7.9 Notwithstanding anything in this Agreement to the contrary, if any portion of any payments to Executive by the Company under this Agreement and any other present or future plan of the Company or other present or future agreement between Executive and the Company would not be deductible by the Company for federal income tax purposes by reason of application of section 162(m) of the Code, then payment of that portion to Executive shall be deferred until the earliest date upon which payment thereof can be made to Executive without being non-deductible pursuant to section 162(m) of the Code. In the event of such deferral, the Company shall pay interest to Executive on the deferred amount at 120% of the applicable federal rate provided for in section 1274(d)(1) of the Code. 7.10 Executive shall be paid within 10 business days of Executive's Employment Termination Date, a prorated bonus based on the number of days elapsed in the fiscal year in which his employment terminates and such prorated bonus shall be calculated assuming that the Company achieved its performance objectives and the individual achieved his objectives used in calculating the bonus award for Executive. 8. Death Benefits. If Executive is terminated under circumstances entitling him to payments under Section 7 of this Agreement and thereafter dies during the Continued Payment Period, the Company shall be obligated to pay to Executive's spouse, if surviving, and otherwise to Executive's estate, the amount to which Executive would have been entitled under Section 7 of this Agreement had Executive survived. 9. Non-Competition. During Executive's employment and, if applicable, during the Continued Payment Period, Executive agrees that he will not directly or indirectly compete with the Company or PB, or engage in, or act as an officer, director, employee or agent of any person or entity that is engaged in (or intends to enter into at such time) any business in which the Company or PB is engaged as of the Employment Termination Date, without the written approval of the CEO of the Company. The foregoing shall not prohibit Executive from investing in any securities of a corporation whose securities, or any of them, are listed on a national securities exchange or traded Page 62 11 in the over-the-counter market so long as Executive shall own less than 3% of the outstanding voting securities of such corporation. 10. Confidentiality. During Executive's employment and at all times thereafter, Executive agrees that he will not divulge to anyone or use for Executive's own benefit or the benefit of any other person or entity any information concerning the Company, its businesses, operations, finances, products, plans, employees, or otherwise, including, without limitation, trade secrets and other proprietary information, except for information that has been published by or with the consent of the Company and is as a result thereof generally available to the public, or information reasonably required by Executive for the preparation of personal tax returns. The foregoing restrictions shall not be applicable to any information that is or becomes part of the public domain other than as a result of disclosure by Executive. 11. No Obligation to Mitigate. Executive shall not be required to mitigate the damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided under this Agreement be reduced by any compensation earned by Executive as the result of employment by another employer after the Employment Termination Date, or otherwise. 12. Other Rights. Except as specifically provided herein, the provisions of this Agreement, and any payment provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish Executive's existing rights or rights which would accrue solely as a result of the passage of time, under any benefit or incentive plan, employment arrangement or other contract, plan or arrangement of the Company. As soon as practicable following the Employment Termination Date, Executive shall receive cash payment(s) for: (a) the value of Executive's earned but unused vacation time as of the Employment Termination Date in accordance with then current Company policy, and (b) the value of Executive's deferred compensation account(s) under any Company or PB deferred compensation plan in accordance with Executive's then current payment election. 13. Release and Termination of Rights. As of the Effective Date, the PB Agreements and Benefits shall terminate. Executive and his representatives, heirs, successors, and assigns do hereby completely release and forever discharge Company, any affiliate, and its and their present and former shareholders, officers, directors, agents, employees, attorneys, successors, and assigns (collectively, "Released Parties") from all claims, rights, demands, actions, obligations, liabilities and causes of action of every kind and character, known or unknown, mature or unmatured, which Executive may now have or has ever had, whether based on tort, contract (express or implied) or any federal, state or local law, statute or regulation, relating in any manner whatsoever to the PB Agreements and Benefits or his employment by PB (collectively, the "Released Claims"). Notwithstanding the foregoing, Released Claims shall not include amounts payable to Executive pursuant to PB Agreements and Benefits relating to (i) out-of-pocket expenses incurred in connection with the business Page 63 12 of PB, (ii) wages and salary earned, and (iii) other items as described in Exhibit E hereto, in each case only to the extent that such amounts are accrued but unpaid prior to the Effective Date. 14. Successors. This Agreement and the rights and obligations of the parties hereto shall bind and inure to the benefit of any successor or successors of the Company by way of reorganization, merger, acquisition or consolidation, and any assignee of all or substantially all of its business and properties. 15. Amendments; Waivers. This Agreement may not be modified, amended, or terminated except by an instrument in writing, signed by Executive and by a duly authorized representative of the Company other than Executive. By an instrument in writing similarly executed, either party may waive compliance by the other party with any provision of this Agreement that such other party was or is obligated to comply with or perform, provided, however, that such waiver shall not operate as a waiver of, or estoppel with respect to, any other or subsequent failure. No failure to exercise and no delay in exercising any right, remedy or power hereunder shall operate as a waiver thereof or as a waiver of any other right, remedy or power, nor shall any single or partial exercise of any right, remedy or power hereunder preclude any other or further exercise of any other right, remedy, or other power provided herein or by law or in equity. 16. Miscellaneous. 16.1 No Assignment. No benefit hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to do so shall be void. 16.2 Notices. All notices hereunder shall be in writing, and shall be delivered in person, by facsimile or by certified mail-return receipt requested. Notices shall be delivered as follows: If to the Company or PB: c/o Nellcor Incorporated 4280 Hacienda Drive Pleasanton, CA 94288 Attention: Laureen DeBuono, Esq. Executive Vice President Human Resources, General Counsel and Corporate Secretary Tel: (510) 463-4214 Fax: (510) 463-4218 Page 64 13 If to the Employee: John H. Morrow 10231 Catalina Overland Park, Kansas 66207 Any party may change its address by notice giving notice to the other party of a new address in accordance with the foregoing provisions. 16.3 Governing Law. This Agreement shall be governed by the laws of the State where Executive's principal office with the Company is located at the time a dispute hereunder shall arise. 16.4 Arbitration. (a) All disputes between Executive (and his attorneys, successors and assigns) and Company (and its affiliates, shareholders, directors, officers, employees, agents, successors, attorneys and assigns) relating in any manner whatsoever to the employment or termination of Executive, including, without limitation, all disputes arising under this Agreement ("Arbitrable Claims") shall be resolved by arbitration. All persons and entities specified in the preceding sentence (other than Company and Executive) shall be considered third-party beneficiaries of the rights and obligations created by this Section on Arbitration. Arbitrable Claims shall include, but are not limited to, contract (express or implied) and tort claims of all kinds, as well as all claims based on any federal, state or local law, statute or regulation, excepting only claims under applicable workers' compensation law and unemployment insurance claims. By way of example and not in limitation of the foregoing, Arbitrable Claims shall include any claims arising under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, as well as any claims asserting wrongful termination, breach of contract, breach of the covenant of good faith and fair dealing, negligent or intentional infliction of emotional distress, negligent or intentional misrepresentation, negligent or intentional interference with contract or prospective economic advantage, defamation, invasion of privacy and claims related to disability. Arbitration shall be final and binding upon the parties and shall be the exclusive remedy for all Arbitrable Claims. THE PARTIES HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO TRIAL BY JURY IN REGARD TO ARBITRABLE CLAIMS. (b) Arbitration of Arbitrable Claims shall be in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association ("AAA Employment Rules"), except as provided otherwise in this Agreement. The burden of proof in any arbitration shall be allocated as provided by applicable law, unless otherwise specified in this Agreement. Either party may bring an action in court to compel arbitration under this Agreement and to enforce an Page 65 14 arbitration award. Otherwise, neither party shall initiate or prosecute any lawsuit or administrative action in any way related to any Arbitrable Claim. All arbitration hearings under this Agreement shall be conducted in San Francisco, California. The Federal Arbitration Act shall govern the interpretation and enforcement of this Section 16.4. (c) All disputes involving Arbitrable Claims shall be decided by a single arbitrator. The arbitrator shall be selected by mutual agreement of the parties within thirty (30) days of the effective date of the notice initiating the arbitration. If the parties cannot agree on an arbitrator, then the complaining party shall notify the AAA and request selection of an arbitrator in accordance with the AAA Employment Rules. The arbitrator shall have authority to award equitable relief, damages, costs, and fees to the same extent as a court would be permitted by law for the particular claim(s) asserted. The fees of the arbitrator shall be split between both parties equally. The arbitrator shall have exclusive authority to resolve all Arbitrable Claims, including, but not limited to, any claim that all or any part of this Agreement is void or enforceable and any dispute regarding whether particular claims are arbitrable. (c) All proceedings and all documents prepared in connection with any Arbitrable Claim shall be confidential and, unless otherwise required by law, the subject matter thereof shall not be disclosed to any person other than the parties to the proceedings, their counsel, witnesses and experts, the arbitrator, and, if involved, the court and court staff. All documents filed with the arbitrator or with a court shall be filed under seal. The parties shall stipulate to all arbitration and court orders necessary to effectuate fully the provisions of this subsection concerning confidentiality. (d) The rights and obligations of Executive and Company set forth in this Section 16.4 on Arbitration shall survive the termination of Executive's employment and the termination of this Agreement. 16.5 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction, arbitrator or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in force and effect and shall in no way be affected, impaired or invalidated. It is the intention of the parties that the provisions of Section 9 of this Agreement shall be enforced to the greatest extent (but to no greater extent) in time, area, and degree of participation as is permitted by the law of that jurisdiction whose law is found to be applicable to any acts allegedly in breach of Section 9. It being the purpose of this Agreement to govern competition by Executive anywhere throughout the world, Section 9 shall be governed by and construed according to that law (from among those jurisdictions whose law is arguably applicable to this Agreement and those in which a breach of Section 9 is alleged to have occurred or to be threatened) which best gives effect to Section 9 of this Agreement. Page 66 15 16.6 Consultation with Counsel. Executive acknowledges (a) that he has been given the opportunity to consult with counsel of his own choice concerning this Agreement, and (b) that he has read and understands the Agreement, is fully aware of its legal effect, and has entered into it freely based upon his own judgment with or without the advice of such counsel 16.7 Descriptive Headings. Descriptive headings of the several sections and subsections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. 16.8 Integration. The parties understand and agree that the preceding Sections recite the sole consideration for this Agreement; that no representation or promise has been made by Company or Executive concerning the subject matter of this Agreement, except as expressly set forth in this Agreement; and that all agreements and understandings between the parties Page 67 16 concerning the subject matter of this Agreement are embodied and expressed in this Agreement. This Agreement shall supersede all prior agreements and understandings among the parties whether written or oral, express or implied, with respect to the employment, termination and benefits of Employee, including without limitation, any employment-related agreement or benefit plan, except to the extent that the provisions of any such agreement or plan have been expressly referred to in this Agreement as having continued effect. 16.9 Attorney's Fees. In the event of a breach by PB or Company, Company shall pay Executive's attorney's fees and costs. Nellcor Incorporated By: Name: ------------------------ Title: ------------------------ Puritan-Bennett Corporation By: Name: ------------------------ Title: ------------------------ Executive --- John H. Morrow Page 68 17 Exhibit B The amount of the loan shall be up to that amount required in order for Executive to pay his state and federal income taxes associated with the acceleration of his shares of unvested restricted stock less the amount of accrued vacation (after applicable withholdings) paid to Executive in accordance with Section 4.7 of his Employment Agreement. The principal loan shall be repaid by Executive in three equal installments on those dates that his shares of unvested restricted stock would have vested but for the accelerated vesting that occurred as a result of the Merger. The loan shall bear interest at the applicable federal rate (as defined in the Code) for a three year loan and such interest shall be paid on each principal repayment installment date. Page 69 18 Exhibit C Unused Vacation 320.72 hours of unused vacation at $132.22 per hour equals $42,405.60 Page 70 19 Exhibit D Lost ISO Value Calculations Assume that Executive has 10,000 ISOs with an exercise price of $20 per share which are accelerated on termination of employment, and that no other ISOs first become exercisable in the year of termination. Assume, further, that (1) the fair market value of Nellcor-PB stock on the Employment Termination Date is $40, (2) Executive has attained age 60 on the Employment Termination Date, (3) the Tax Rate is 50%, (4) 120% of the applicable federal rate for obligations with a maturity of 5 years is 7.5%, (5) under the tax law in effect on the Employment Termination Date, ISO stock held for more than one year and then sold would qualify for capital gain treatment, with an applicable tax rate of 40% (rather than 50% applicable to disqualifying dispositions). As a result of acceleration, options first exercisable in a year in excess of $100,000 (based upon the stock price at the date of grant) are disqualified. Thus, 5,000 of Executive's ISOs are "Disqualified Options." The Lost ISO Value of such options is calculated as follows: S = $20 ($40 - $20) T = .50 FT = .40 V = 5,000[$20 x .5] - 5,000PV[$20 x .4] V = $50,000 - 5,000PV[$8] PV$8 receivable in 5 years discounted at 7.5% per annum = $5.57 V = $50,000 -(5,000 x $5.57) V = $50,000 - $27,850 V = $22,150 Page 71 20 Exhibit E Claims under medical plans included in PB Agreements and Benefits in which Executive and his family participate, for services rendered prior to the Effective Date. All fringe benefits earned by Executive prior to the Effective Time for services rendered prior to the Effective Time if such fringe benefits have not previously been paid or provided for the benefit of Executive. Page 72 EX-10.18 5 COMPANY'S MERGER INCENTIVE PLAN 1 EXHIBIT 10.18 PURITAN-BENNETT CORPORATION NELLCOR MERGER INCENTIVE PLAN 1. PURPOSE OF THE PLAN The Puritan-Bennett Corporation Nellcor Merger Incentive Plan (the "Plan") has been adopted in connection with the merger (the "Merger") of Puma Merger Corporation ("Sub"), a Delaware corporation and wholly owned subsidiary of Nellcor Incorporated ("Nellcor"), with and into Puritan-Bennett Corporation, a Delaware corporation ("P-B"), pursuant to which P-B became a wholly-owned subsidiary of Nellcor as provided in the Agreement and Plan of Merger among Nellcor, P-B and Sub dated as of May 21, 1995, as amended (the "Agreement and Plan of Merger"). The purpose of the Plan is to provide for payment of incentive compensation payments to certain P-B employees who remain employed by either Nellcor or P-B after the Merger. 2. ADMINISTRATION OF THE PLAN A. Board of Directors The Plan shall be administered by the Board of Directors of P-B under the supervision of Nellcor with all actions, interpretations under the Plan to be made by the Board of Directors only with the approval of Nellcor. B. Authority of the Board of Directors Subject to the approval rights of Nellcor, the Board of Directors shall have plenary authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan and to make all other determinations deemed necessary or advisable in administering the Plan. All decisions, determinations and interpretations of the Board of Directors that are approved by Nellcor shall be conclusive and binding on all participants. 3. ELIGIBILITY AND TERMS AND CONDITIONS A. Eligibility All persons who were participating in P-B's Management Incentive Compensation Plan A and Plan B for Fiscal Year 1996 as of April 30, 1995 and who remain actively employed by P-B as of August 25, 1995 are eligible to participate in the Plan. A listing of such participants is attached as Annex 1 hereto. B. Vesting of Incentive Payment Awards Participants shall be entitled to receive a lump sum payment (the "Incentive Payment") in the amount determined as hereinafter provided upon the occurrence of either of the following: (i) if such participant is terminated by P-B or Nellcor other than for Cause (Cause shall mean Page 73 2 (A) substantial and material violation by such individual of the policies of Nellcor or P-B, which violations are not corrected within 30 days after written notice to the individual, or (B) material misconduct by such individual), on or prior to February 1, 1996 (the "Vesting Date"), or (ii) if such participant remains employed by P-B or Nellcor on the Vesting Date. C. Determination of Incentive Payment Amounts Unless otherwise agreed to in writing by Nellcor, the Incentive Payment amount for each participant shall be based upon the performance targets previously used for such participant under P-B's Management Incentive Compensation Plan A and Plan B for Fiscal Year 1996, as the case may be, as in effect as of April 30, 1995 except that (i) there shall be no $2.00 per share earnings minimum, and (ii) Incentive Payments will be based upon P-B's results of operation for P-B's 1996 fiscal year through August 25, 1995 as herein provided. Incentive Payments will be prorated based upon a partial year as follows: (a) any award shall be prorated against the amount of full year awards by a factor of 56.44% which has been calculated based upon the number of days that have elapsed in P-B's fiscal year prior to the Merger (i.e., 206/365) and (b) the calculation of ROA under the plan will be based upon P-B's results of operations for the first six months of operation in fiscal 1996 through July 31, 1995, as confirmed by Burton A. Dole, Jr. in consultation with Nellcor's CEO. Accounting changes required under Section 7.13 of the Agreement and Plan of Merger will not be included in any calculation of ROA under the plan. ROA will be calculated in accordance with past practices under P-B's Management Incentive Compensation Plan A and Plan B. For individuals whose awards depend upon objectives related to quality or regulatory compliance related business improvement objectives or any other subjective appraisal under P-B's Management Incentive Compensation Plan A and Plan B for Fiscal Year 1996, the amount of Incentive Payments will be determined by Burton A. Dole, Jr. (with input from other officers of P-B in accordance with past practice under P-B's Management Incentive Compensation) in consultation with Nellcor's CEO, applying the same principles for prorating the award amount based upon a partial year as outlined herein. All such awards remain subject to vesting requirements as provided elsewhere herein. Subject to the specific terms of the Plan, awards under the Plan will otherwise be determined on a basis consistent with past practice under P-B's Management Incentive Compensation Plan A and Plan B. D. Nontransferability No Incentive Payment shall be transferable otherwise than by will or the laws of descent and distribution. E. Payment All Incentive Payments shall be paid within 30 days of the Vesting Date. F. Tax Withholding Page 74 3 All Incentive Payments under the Plan shall be subject to reduction for any applicable withholding. 4. NO EMPLOYMENT RIGHTS Nothing in the Plan or any action taken pursuant to the Plan shall confer on any individual any right to be or to continue in the employ of Nellcor, P-B or any of their respective Affiliates or shall interfere in any way with the right of Nellcor, P-B or any of their respective Affiliates to terminate the employment of any individual at any time. 5. AMENDMENT Upon the approval of Nellcor, the Board of Directors of P-B shall have complete power and authority to amend the Plan; provided, however, that no amendment of the Plan may, without the consent of any participant under the Plan, adversely affect the rights of such participant. Page 75 EX-10.19 6 COMPANY'S RETENTION COMPENSATION PLAN 1 EXHIBIT 10.19 PURITAN-BENNETT CORPORATION RETENTION COMPENSATION PLAN 1. PURPOSE OF THE PLAN The Puritan-Bennett Corporation Retention Compensation Plan (the "Plan") has been adopted in connection with the merger (the "Merger") of Puma Merger Corporation, a Delaware corporation and wholly owned subsidiary of Nellcor Incorporated ("Nellcor"), with and into Puritan-Bennett Corporation, a Delaware corporation ("P-B"), pursuant to which P-B became a wholly-owned subsidiary of Nellcor. The purpose of the Plan is to provide for retention compensation payments to certain P-B employees who remain employed by either Nellcor or P-B after the Merger. 2. ADMINISTRATION OF THE PLAN A. Board of Directors The Plan shall be administered by the Board of Directors of P-B under the supervision of Nellcor with all actions, interpretations under the Plan to be made by the Board of Directors only with the approval of Nellcor. B. Authority of the Board of Directors Subject to the approval rights of Nellcor, the Board of Directors shall have plenary authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan and to make all other determinations deemed necessary or advisable in administering the Plan. All decisions, determinations and interpretations of the Board of Directors that are appoved by Nellcor shall be conclusive and binding on all participants. 3. ELIGIBILITY AND TERMS AND CONDITIONS A. Eligibility; Payment Conditions Each of the following individuals shall be entitled to receive a lump sum payment (the "Retention Payment") in the amount indicated next to his or her name upon the occurrence of either of the following: (i) if such individual is terminated by P-B or Nellcor other than for Cause (Cause shall mean (A) substantial and material violation by such individual of the policies of Nellcor, which violations are not corrected within 30 days after written notice to the individual, or (B) material misconduct by such individual), on or prior to August 26, 1996 (the "Anniversary Date"), or (ii) if such individual remains employed by P-B or Nellcor on the Anniversary Date. Page 76 2 B. Nontransferability No Retention Payment shall be transferable otherwise than by will or the laws of descent and distribution. C. Payment The Retention Payment shall be paid within 10 days of the date on which the individual becomes entitled to receive it in accordance with Paragraph 3(A) above. D. Tax Withholding All Retention Payments under the Plan shall be subject to reduction for any applicable withholding. 4. NO EMPLOYMENT RIGHTS Nothing in the Plan or any action taken pursuant to the Plan shall confer on any individual any right to be or to continue in the employ of Nellcor, P-B or any of their respective Affiliates or shall interfere in any way with the right of Nellcor, P-B or any of their respective Affiliates to terminate the employment of any individual at any time. Page 77 3 5. AMENDMENT Upon the approval of Nellcor, the Board of Directors of P-B shall have complete power and authority to amend the Plan; provided, however, that no amendment of the Plan may, without the consent of any participant under the Plan, adversely affect the rights of such participant. Page 78 EX-10.20 7 PROMISSORY NOTE BY KENNETH SUMNER 1 EXHIBIT 10.20 PROMISSORY NOTE SECURED BY DEED OF TRUST FOR VALUE RECEIVED, Kenneth Sumner and Linda Sumner (collectively, "Maker") promise to pay to Nellcor Incorporated, a Delaware corporation ("Holder"), or order, at 4280 Hacienda Drive Pleasanton, California, or any other place designated by Holder, the principal sum of ONE HUNDRED TWENTY FIVE THOUSAND DOLLARS ($125,000) plus interest according to the terms contained in this Note. Interest only at the annual rate of 7.55% (the "Note Rate") on the principal sum of this Note, shall be due and payable in arrears in semi-annual installments on or before May 16 and November 16 of each year. All payments shall be applied first to interest on the principal balance of the Note, and any balance shall be applied to reduction of principal, and interest shall thereafter cease to accrue on the principal so paid. The entire principal outstanding together with all accrued and unpaid interest shall be due and payable on the Maturity Date. "Maturity Date" shall mean the date on which this Note shall be due and payable in full, and shall be the earlier of (i) the sale of the residence of Maker, which property is encumbered by a Deed of Trust securing this Note and is located at 18 Rima Court, Danville, California 94526 (ii) the resignation or termination of Maker's employment with Holder, or (iii) November 16, 2004. MAKER HEREBY ACKNOWLEDGES AND AGREES THAT THE ENTIRE PRINCIPAL BALANCE OF THIS NOTE MAY BE UNPAID AND SHALL BE DUE AND PAYABLE ON THE MATURITY DATE. This Note may be prepaid at any time, in whole or in part, without any prepayment penalty. Maker waives diligence, presentment and demand, notice of protest, and demand, of nonpayment, of dishonor and of maturity and agrees that time is of the essence of every provision hereof. Anything herein to the contrary notwithstanding, the obligations of Maker under this Note shall be subject to the limitation that payments of interest shall not be required to the extent that payment hereof would be contrary to applicable provisions of law limiting rates of interest which may be charged or collected by Holder. This Note may not be amended or modified orally in any manner. This Note may be amended or modified only by a writing duly executed by Maker and Holder. No provision of this Note may be waived by Holder, except in writing executed by Holder, and which expressly refers to this Note. No such express written waiver shall affect any other provision of this Note, or cover any default or time period or event, other than the matter as to which an express written waiver has been given hereunder, as specified in such written waiver. Maker agrees to pay all costs of collection when incurred, including but not limited to reasonable attorneys' fees. If any suit or action is instituted to enforce this Note, Maker promises to pay, in addition to the costs and disbursements otherwise allowed by law, such sum as the court may adjudge reasonable attorneys' fees in such suit or action. Maker agrees to pay any additional attorneys' fees incurred in enforcing any such judgment, separately from and in addition to any other attorneys' fees herein. This Note will be governed by California law. Page 79 2 This Note is secured by a Deed of Trust of even date herewith, executed by Maker in favor of Holder. IN WITNESS WHEREOF, Maker has executed this Note as of November 16, 1994. ------------------------- Kenneth Sumner ------------------------- Linda Sumner Page 80 EX-10.21 8 PROMISSORY NOTE MADE BY RUSSELL HAYS 1 EXHIBIT 10.21 PROMISSORY NOTE SECURED BY DEED OF TRUST FOR VALUE RECEIVED, Russell D. Hays and Barbara Hays(collectively, "Maker") promise to pay to Nellcor Puritan Bennett Incorporated, a Delaware corporation ("Holder"), or order, at 4280 Hacienda Drive Pleasanton, California, or any other place designated by Holder, the principal sum of THREE HUNDRED AND FIFTY THOUSAND DOLLARS ($350,000) plus interest according to the terms contained in this Note. Interest only at the annual rate of 6.56% (the "Note Rate") on the principal sum of this Note, shall be due and payable in arrears in semi-annual installments on or before August __ and February __ of each year. All payments shall be applied first to interest on the principal balance of the Note, and any balance shall be applied to reduction of principal, and interest shall thereafter cease to accrue on the principal so paid. The entire principal outstanding together with all accrued and unpaid interest shall be due and payable on the Maturity Date. "Maturity Date" shall mean the date on which this Note shall be due and payable in full, and shall be the earlier of (i) the sale of the residence of Maker, which property is encumbered by a Deed of Trust securing this Note and is located at _____ [address of property], California [zip] (ii) the resignation or termination of Maker's employment with Holder, or (iii) August --, 2005. MAKER HEREBY ACKNOWLEDGES AND AGREES THAT THE ENTIRE PRINCIPAL BALANCE OF THIS NOTE MAY BE UNPAID AND SHALL BE DUE AND PAYABLE ON THE MATURITY DATE. This Note may be prepaid at any time, in whole or in part, without any prepayment penalty. Maker waives diligence, presentment and demand, notice of protest, and demand, of nonpayment, of dishonor and of maturity and agrees that time is of the essence of every provision hereof. Anything herein to the contrary notwithstanding, the obligations of Maker under this Note shall be subject to the limitation that payments of interest shall not be required to the extent that payment hereof would be contrary to applicable provisions of law limiting rates of interest which may be charged or collected by Holder. This Note may not be amended or modified orally in any manner. This Note may be amended or modified only by a writing duly executed by Maker and Holder. No provision of this Note may be waived by Holder, except in writing executed by Holder, and which expressly refers to this Note. No such express written waiver shall affect any other provision of this Note, or cover any default or time period or event, other than the matter as to which an express written waiver has been given hereunder, as specified in such written waiver. Maker agrees to pay all costs of collection when incurred, including but not limited to reasonable attorneys' fees. If any suit or action is instituted to enforce this Note, Maker promises to pay, in addition to the costs and disbursements otherwise allowed by law, such sum as the court may adjudge reasonable attorneys' fees in such suit or action. Maker agrees to pay any additional attorneys' fees incurred in enforcing any such judgment, separately from and in addition to any other attorneys' fees herein. This Note will be governed by California law. Page 81 2 This Note is secured by a Deed of Trust of even date herewith, executed by Maker in favor of Holder. IN WITNESS WHEREOF, Maker has executed this Note as of October 15, 1995. ------------------------- Russell D. Hays ------------------------- Barbara Hays Page 82 EX-10.27 9 SERP AGREEMENT OF JOHN H. MORROW 1 EXHIBIT 10.27 JOHN H. MORROW SUPPLEMENTAL RETIREMENT BENEFIT PLAN NELLCOR INCORPORATED (the "Corporation") hereby establishes the John H. Morrow Retirement Benefit Plan (the "Plan") for the benefit of John H. Morrow (the "Executive"). Section 1. PURPOSE The purpose of this Plan is to provide, through an unfunded, nonqualified arrangement, supplemental retirement benefits to the Executive as an incentive to attract and retain his services. Section 2. DEFINITIONS As used herein, the following words and phrases shall have the meanings specified below unless a different meaning is clearly required by the context: Section 2.01. Average Monthly Compensation. "Average Monthly Compensation" means one-sixtieth (1/60) of the Executive's total Compensation for the five (5) consecutive Plan Years during which he received the largest total amount of Compensation and which will result in the highest such monthly amount. If the Executive has been an employee for less than five (5) consecutive Plan Years, but at least one full Plan Year, "Average Monthly Compensation" means his Compensation for all full Plan Years, divided by the total number of months within such full Plan Years. If the Executive has been an employee for less than one full Plan Year, "Average Monthly Compensation" means his Compensation for the period of employment divided by the number of full and fraction months of employment. Section 2.02. Beneficiary. "Beneficiary" shall have the meaning provided in the Qualified Plan. Section 2.03. Board of Directors. "Board of Directors" means the Board of Directors of the Corporation. Section 2.04. Committee. "Committee" means the Compensation Committee of the Board of Directors of the Corporation which shall administer this Plan or such other committee as may be appointed to administer the Plan. Section 2.05. Compensation. "Compensation" means, for a Plan Year or other period, (i) all salary and cash bonuses received by the Executive from the Employer and (ii) any salary or cash bonuses deferred by the Executive pursuant to either the Corporation's deferred compensation plan, a qualified cash or deferred arrangement under Section 401(k) of the Code, or a plan qualified under Section 125. The term "Compensation" does not include any other form of compensation, including but not limited to any amounts paid from any severance pay plan, any deferred compensation plan or any other plan, from the Employer, whether or not constituting "wages" for purposes of Section 3401(a) of the Code. Page 83 2 Section 2.06. Death Benefit. "Death Benefit" means any benefit paid to a Beneficiary upon the death of the Executive as provided under the terms of this Plan. Section 2.07. Disability or Disabled. "Disability" or "Disabled" means eligibility for disability benefits under the terms of the Corporation's Long-Term Disability Plan in effect at the time the Executive becomes disabled. In the event such a plan does not exist, disability shall be determined using the definition under the Corporation's last effective Long-Term Disability Plan. Section 2.08. Employer. "Employer" means the Corporation, its successors and assigns, or the subsidiary by which the Executive is employed, and any organization into which the Employer may be merged or consolidated or to which substantially all of its assets may be transferred. Section 2.09. Employment Contract. "Employment Contract" means the Employment Contract between the Corporation, Puritan-Bennett Corporation ("PB") and the Executive dated August 25, 1995, and any amendments thereto. Section 2.10. Plan Year. "Plan Year" means each twelve (12) month period ending on an anniversary of the Executive's first day of employment with the Corporation. Section 2.11. Supplemental Monthly Retirement Benefits. "Supplemental Monthly Retirement Benefits" means a monthly income due the Executive hereunder. Section 2.12. Qualified Plan. "Qualified Plan" means the PB Pension Plan (Restated effective January 1, 1989), as amended from time to time. Section 2.13. Spouse. "Spouse" means the legal wife of the Executive at the Executive's date of death. Section 3. RETIREMENT BENEFITS Section 3.01. Supplemental Monthly Retirement Benefit. If the Executive terminates employment with the Employer after attaining age fifty-five (55), he shall be entitled to a Supplemental Monthly Retirement Benefit. Such Supplemental Monthly Retirement Benefit, payable in the form of a single life annuity (the "Normal Form"), shall be an amount equal to sixty percent (60%) of the Executive's Average Monthly Compensation, reduced by an amount computed under Section 3.01(a). The amount resulting from the application of Section 3.01(a) shall then be adjusted as provided in Section 3.01(b). Section 3.01(a). The amount payable shall be reduced by one hundred percent (100%) of the monthly income or benefit to the extent such income or benefit is payable or could be payable to the Executive (as if paid in the form of a single life annuity commencing as of the Executive's Benefit Commencement Date) under either (A) the Qualified Plan, (B) any annuity contract distributable in connection with the termination of the Qualified Plan (regardless of the method of distribution selected by Executive), (C) the PB Supplemental Retirement Plan, or (D) the PB Make Up Plan. Page 84 3 Section 3.01(b). The Executive's Supplemental Monthly Retirement Benefit (as adjusted by Section 3.01(a)) shall be reduced or increased based upon age at time of termination, in accordance with the following table:
Amount of Supplemental Monthly Retirement Benefit (as adjusted by Age at Termination Sections 3.01(a)) of Employment To Which Executive Entitled - ------------------ --------------------------- Less than 55 0 55 50% 60 75% 65 100% 70 125%
In the event the Executive's age at termination of employment is within a five-year bracket, the percentage adjustment to the Supplemental Monthly Retirement Benefit shall be calculated by interpolation on a straight-line basis. Section 3.02. Time of Commencement of Supplemental Monthly Retirement Benefit. Payment of the Supplemental Monthly Retirement Benefit to which the Executive is entitled pursuant to Section 3.01 shall commence as of the first day of the calendar month coinciding with or next following the termination of the Executive's employment (the "Benefit Commencement Date"). However, actual payment of such Supplemental Monthly Retirement Benefit, in the Normal Form or other form provided in Section 3.03, shall be subject to the following. If the Executive has elected the form of payment of his Supplemental Monthly Retirement Benefit pursuant to Section 3.03 during a calendar year (a "Preceding Year") preceding the calendar year during which his termination of employment occurs (the "Termination Year"), then actual payment of his Supplemental Monthly Retirement Benefit shall commence on or as soon as practical following his Benefit Commencement Date. If the Executive did not make an election pursuant to Section 3.03 during a Preceding Year, but makes such an election during the Termination Year, actual payment of his Supplemental Monthly Retirement Benefit shall commence on the first day of the next following calendar year (the "Succeeding Year"). If the Executive does not make an election pursuant to Section 3.03 during either a Preceding Year or the Termination Year, then the Executive shall be deemed to have elected to receive payment in the Normal Form single life annuity commencing on the first day of the Succeeding Year. Notwithstanding the foregoing, any time actual payment of the Executive's Supplemental Monthly Retirement Benefit does not commence on his Benefit Commencement Date, then the first payment made shall include all payments that would have been made on or before such actual commencement date if actual payment had commenced on the Benefit Commencement Date, together with interest on all deferred payments (from the date when each such payment would have been made if actual payment had commenced on the Benefit Commencement Date) at the Most Applicable Treasury Security Rate compounded annually. The "Most Applicable Treasury Security Rate" shall be the yield-to-maturity of the Treasury Bill with a remaining term equal to one-half of the Page 85 4 period beginning on the Benefit Commencement Date and ending on the date when payments actually commence, as quoted in the edition of the Wall Street Journal first published after the Benefit Commencement Date. Section 3.03. Form of Payment of Supplemental Monthly Retirement Benefits. The "Normal Form" of payment of the Executive's Supplemental Monthly Retirement Benefit, and the form on which the amount of such Supplemental Monthly Retirement Benefit is calculated pursuant to Section 3.01, shall be a single life annuity payable for the Executive's life only commencing as of his Benefit Commencement Date. The Executive, however, may elect in writing, filed with the Committee prior to the end of the Termination Year, to receive payment of his Supplemental Monthly Retirement Benefit in one of the following optional forms, each of which will be the "Actuarial Equivalent" (which term shall have the meaning provided in the Qualified Plan as of the Executive's Benefit Commencement Date, or in the event the Qualified Plan is terminated, as of the termination of the Qualified Plan) of the Normal Form single life annuity. (a) Ten-Year Certain and Continuous Option. Pursuant to this option, the Executive's Supplemental Monthly Retirement Benefit shall be payable during the Executive's life only; provided that if the Executive dies within ten years after his Benefit Commencement Date, payments in the same amount will continue to be made to the Executive's Beneficiary until a total of 120 monthly payments have been made. (b) Early Retirement Level Income Option. Pursuant to this option, the Executive's Supplemental Monthly Retirement Benefit payments will be made during the Executive's life only. Larger payments shall be made until the first day when the Executive is eligible to receive Social Security benefits (age 62). At that time, payments to the Executive shall be reduced by the amount of the Executive's Social Security benefit that was estimated as part of the determination of all payments to be made under this Section 3.03(b). No payments shall be made after the Executive's death. (c) 50%, 75%, and 100% Contingent Annuitant Option. Pursuant to this option, the Executive's Supplemental Monthly Retirement Benefit payments shall be made during the life of the Executive, with payments continuing to the Executive's designated contingent annuitant ("Contingent Annuitant") for the life of such Contingent Annuitant following the Executive's death. The Contingent Annuitant and the percentage to be paid to such Contingent Annuitant must be designated by the Executive at the time when this payment form is elected. If the Contingent Annuitant predeceases the Executive, no benefits shall be paid after the Executive's death. The amount paid to the Executive's Contingent Annuitant shall be 50%, 75%, or 100% of the amount received by the Executive during the Executive's life. Section 3.04. Exceptions for Certain Terminations of Employment. Notwithstanding the foregoing provisions of this Section 3 or any other provision(s) of this Plan, in the event of the termination of employment of the Executive for Good Reason (if initiated by the Executive), and/or other than for Cause (if initiated by the Corporation), then (a) even if the Executive has not at the date of termination of employment attained age fifty-five (55), he shall nevertheless be entitled to the Supplemental Monthly Retirement Benefit provided under Section 3.01 hereof; (b) the Executive shall be deemed to have been age sixty-five (65) (unless his actual age shall be greater) at the date of termination of employment so as to be entitled to 100% of Page 86 5 the Supplemental Monthly Retirement Benefit (as adjusted by Section 3.01(a)) pursuant to Section 3.01(b); (c) the Benefit Commencement Date under Section 3.02 shall be the first day of the calendar month coinciding with or next following the later of the date the Executive attains age 55 or the date of his termination of employment for Good Reason or other than for Cause; provided, however, that in no event shall the Benefit Commencement Date be prior to the date all severance payments have been made pursuant to the Employment Contract; and (d) for purposes of Sections 2.01 and 2.05, the Executive shall be deemed to be employed for the full Plan Year in which he terminates employment, and the Executive's Compensation for the year of termination of employment shall be deemed to be equal to the Compensation the Executive would have earned had he remained employed for the entire year and met any individual performance goals, but based on the Company's actual performance. For the purposes of this Section 3.04, the terms "Cause" and "Good Reason" shall have the meanings set forth in the Employment Contract. Section 4. DEATH BENEFITS Section 4.01. Death Before Commencement of Benefits. In the event the Executive dies or becomes Disabled prior to his Benefit Commencement Date and has a surviving Spouse, then his surviving Spouse shall be entitled to a Death Benefit in the form of a monthly annuity payable for the life of the Spouse only. The monthly Death Benefit shall be an amount equal to 50% of the annuity amount that would have been payable to the Executive during his life if he had survived, terminated employment at the later of age fifty-five (55) or the date of his death, elected immediate payment in the form of a 50% contingent annuity pursuant to Section 3.03(c), and designated his Spouse as the Contingent Annuitant. If the Executive had not attained age fifty-five (55) at the time of his death, payment of the Death Benefit hereunder to his surviving Spouse will not commence until the date that the deceased Executive would have attained age fifty-five (55), and no Death Benefit shall be payable in the event his surviving Spouse dies before such date. No Death Benefit will be paid hereunder if the Executive dies before his Benefit Commencement Date and is not then married. Section 4.02. Death After Commencement of Benefits. If the Executive dies after his Benefit Commencement Date, the Executive's Beneficiary shall be entitled to receive, in a single lump sum, a Special Death Benefit in an amount equal to twelve (12) times the monthly Supplemental Monthly Retirement Benefit calculated on the basis of the Normal Form single life annuity (regardless of the form in which such Executive's Supplemental Monthly Retirement Benefit was being paid or was payable prior to his death). If the Executive dies following his Benefit Commencement Date, no other or additional death benefits will be payable except to the extent provided under any optional form of payment selected by the Executive Section 5. DISABILITY Section 5.01. Disability. If the Executive is Disabled, the Executive shall commence receiving benefits under this Plan at such time as he commences receiving benefits under the Corporation's Long-Term Disability Plan, as it may be amended from time to time, or any successor plan, or, in the absence of such a plan, at the time benefits would have been payable under the Corporation's last effective Long-Term Disability Plan. At such time, Page 87 6 Supplemental Monthly Retirement Benefits shall be paid as determined in Section 3.01 hereunder as though the Executive had retired on the date of his Disability. Section 6. PLAN ADMINISTRATION Section 6.01. Committee. The Committee shall administer the Plan and keep records of the Executive's benefits. Section 6.02. Legal Counsel and Advisors. The Committee may employ such counsel, accountants, actuaries, and other agents as it deems advisable. The Corporation shall pay the compensation of such counsel, accountants, actuaries, and other agents and any other expense incurred by the Committee in the administration of the Plan. Section 7. MISCELLANEOUS PROVISIONS Section 7.01. No Guarantee of Employment. Nothing contained in this Plan shall be deemed to give the Executive the right to be retained in the service of the Employer or to interfere with the right of the Employer to discharge the Executive at any time regardless of the effect which such discharge shall have upon him as a member of this Plan. Section 7.02. Nature of Employer's Obligations. The benefits provided under this Plan shall be payable solely from the general assets of the Employer, and neither the Executive nor the Executive's Spouse or estate shall have any interest in any assets of the Employer by virtue of this Plan. Section 7.03. Rights Not Assignable. Except insofar as this provision may be contrary to applicable law, no sale, transfer, alienation, assignment, pledge, collateralization, or attachment of any benefits under this Plan shall be valid or recognized by the Committee. Section 7.04. Inurements; Successors, Mergers, or Consolidations. This Plan shall inure to the benefit of and be binding upon (i) the Employer and its successors and assigns, including, without limitation, any person, organization, or corporation which may acquire substantially all assets and business of the Employer, or any corporation with which or into which the Employer may be merged or consolidated, and (ii) the Executive and his heirs, executors, administrators, and legal representatives. Section 7.05. Construction. This Plan shall be governed by, and interpreted and enforced in accordance with, the laws of the State in which the Executive resides at the time the dispute arises. Section 7.06. Plurality Clause. Words in the singular shall be read and construed as though used in the plural in all cases where they would so apply. Section 7.07. Benefits Upon Removal from Plan. The Executive shall not be removed from membership in this Plan unless: (a) The Executive is convicted for a felonious act against the Employer; or Page 88 7 (b) The Executive breaches the terms of the Agreement. If a Executive is removed from this Plan pursuant to this Section, all future benefits payable under this Plan to the Executive or Beneficiary shall cease. Section 7.08. Conditions to Payment of Benefits. The payment of benefits to the Executive or Beneficiary under this Plan is conditioned upon and subject to the following conditions: (a) Competition Restriction. During the period of employment and during the period that the Executive is receiving Supplemental Monthly Retirement Benefits under this Plan, the Executive shall not directly or indirectly become or serve as an officer, director or employee of, or consultant to, or independent contractor for any individual, partnership, joint venture or corporation, nor owner of any business, nor member of any partnership or joint venture which, in the judgment of the Committee, competes with the Employer, unless the Executive shall have obtained the prior written consent of the Committee. (b) Advisory Services. The Executive agrees that, as long as he is to receive any payment from the Plan, and as long as he is physically and mentally able to do so, he will render to the Corporation, as an independent contractor, such advice, counsel, or other services as the Corporation may reasonably and from time to time require, at the times and places mutually agreeable to Executive and Corporation. For such advice, counsel, and other services as the Executive may render in accordance with the provisions of this Section, the Executive shall be compensated by the Corporation as an independent contractor in such amounts as shall be reasonably agreed to between the Executive and the Corporation. In addition, the Corporation shall reimburse the Executive for reasonable travel expense from whatever place the Executive may then be living and for other reasonable expenses incurred by the Executive in rendering such advisory services. Section 7.09. Arbitration and Amendment; Waivers. The arbitration and amendment/waiver provisions set forth in the Employment Contract are hereby incorporated into this Plan. IN WITNESS WHEREOF, the Corporation has caused this Plan to be executed this 25th day of August, 1995, to be effective on such date. ATTEST: (SEAL) NELLCOR INCORPORATED By: By: ------------------------ ------------------------ Secretary President Page 89 EX-11.1 10 STATEMENT OF COMPUTATION OF NET INCOME 1 EXHIBIT 11.1 NELLCOR PURITAN BENNETT INCORPORATED STATEMENT OF COMPUTATION OF NET INCOME PER SHARE (In thousands, except per share amounts, unaudited)
For the Three Months Ended -------------------------- October 1, October 2, 1995 1994 -------------------------- Computation of common and common equivalent shares outstanding: Common stock 28,246 27,137 Common stock equivalents 802 639 -------- -------- Common and common equivalent shares used in the calculation of net income per share 29,048 27,776 ======== ======== Net income (loss) $(59,302) $ 9,583 ======== ======== Net income (loss) per common and common equivalent share $ (2.04) $ 0.35 ======== ========
Page 90 EX-27 11 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS JUL-07-1996 JUL-03-1995 OCT-01-1995 93,252 14,460 114,951 2,418 104,588 351,995 125,938 132,137 536,661 169,125 0 13,236 0 0 311,564 536,661 156,250 156,250 77,583 77,583 149,421 0 1,378 (70,966) (11,664) (59,302) 0 0 0 (59,302) (2.04) (2.04)
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