-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, H82wNDz4d8iXU4ntqt1OKFCsNyyrPBJmFhKoJHIESVdOEI5Y2HRKjadgN8XkOTfm NnanMr+1Uj9eI9PQBQUNbQ== 0000950123-94-002034.txt : 19941215 0000950123-94-002034.hdr.sgml : 19941215 ACCESSION NUMBER: 0000950123-94-002034 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 22 CONFORMED PERIOD OF REPORT: 19941031 FILED AS OF DATE: 19941214 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PURITAN BENNETT CORP CENTRAL INDEX KEY: 0000081199 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 440399150 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-03717 FILM NUMBER: 94564819 BUSINESS ADDRESS: STREET 1: 9401 INDIAN CREEK PKWY BLDG 40 STE 300 CITY: OVERLAND PARK STATE: KS ZIP: 66210 BUSINESS PHONE: 913-338-7410 MAIL ADDRESS: STREET 1: 9401 INDIAN CREEK PARKWAY CITY: OVERLAND PARK STATE: KS ZIP: 66210 10-Q 1 PURITAN-BENNETT CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended October 31, 1994 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 0-3717 PURITAN-BENNETT CORPORATION (Exact name of registrant as specified in its charter) Delaware 44-0399150 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 9401 Indian Creek Parkway Building #40, Suite 300 P.O. Box 25905 Overland Park, Kansas 66225 (Address of principal executive offices) (Zip Code) Company's telephone number, including area code 913-661-0444
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 and 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 As of December 9, 1994, there were 12,556,811 shares of the Company's $1.00 par value common stock outstanding. 2 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The unaudited condensed consolidated financial statements incorporated by reference to the Puritan-Bennett Corporation Third Quarter Report, 1995, have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended October 31, 1994 are not necessarily indicative of the results that may be expected for the year ended January 31, 1995. For further information refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended January 31, 1994. 3 PART I - FINANCIAL INFORMATION Item 1. - Financial Statements. Company or group of companies for which report is filed: PURITAN-BENNETT CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) - Three months ended October 31, 1994 and 1993; and nine months ended October 31, 1994 and 1993 (incorporated herein by reference to the Puritan-Bennett Corporation Third Quarter Report, 1995). Condensed Consolidated Balance Sheets (Unaudited) - October 31, 1994 and January 31, 1994 (incorporated herein by reference to the Puritan-Bennett Corporation Third Quarter Report, 1995). Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine months ended October 31, 1994 and 1993 (incorporated herein by reference to the Puritan-Bennett Corporation Third Quarter Report, 1995). REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS The condensed consolidated financial statements at October 31, 1994, and for the three month and nine month periods then ended have been reviewed, prior to filing, by Ernst & Young LLP, the Company's independent auditors, and their report is included herein. 4 Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1: Cost Associated with Unsolicited Offers to Acquire Company's Stock The Company recorded charges of $4.6 million for obligations associated with Thermo Electron Corporation's unsolicited tender offer. These obligations include investment banking fees, public relations expenses and legal fees. This accrual resulted in a loss of $.05 per share for the third quarter ending October 31, 1994. Without these charges, earnings per share for the quarter would have been $.31 per share. The estimated investment banking fees ($4.1 million) were derived by a formula set forth in the contract between the Company and the investment banking firm. Components of this formula include the number of shares outstanding and the stock price at the time such fees become payable in full. The Company estimated the fee using the closing stock price as of October 31, 1994, which was $26.13 per share and is considered to be the best estimate at that time. Until such fees become payable in full, the Company will revise its estimate of such fees quarterly based upon the closing stock price and any other circumstances relevant to the contract as of the close of the reporting period. Legal fees and public relations expenses will continue to be based upon the costs of services actually rendered during the period. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for the Three and Nine Months Ended October 31, 1994, Compared to the Three and Nine Months Ended October 31, 1993 RESULTS OF OPERATIONS (All dollars in thousands except where noted) NET SALES Net sales volume for the quarter ended October 31, 1994, increased 10.8% compared to the quarter ended October 31, 1993, and 8.4% on a year-to-date basis. The following tables reflect sales volume for the markets in which the Company operates:
PERCENT Q3 1995 Q3 1994 CHANGE ------------------------------------------------------------ Home Care Markets $ 32,017 $ 26,552 20.6% Hospital/Physician Markets 42,943 42,984 (0.1)% Aviation Markets 8,452 5,741 47.2% ----------- ------------ Total Net Sales $ 83,412 $ 75,277 10.8% =========== ============
PERCENT YTD 1995 YTD 1994 CHANGE ------------------------------------------------------------ Home Care Markets $ 92,799 $ 80,189 15.7% Hospital/Physician Markets 133,022 130,676 1.8% Aviation Markets 21,992 17,717 24.1% ----------- ------------ Total Net Sales $ 247,813 $ 228,582 8.4% =========== ============
Sales growth in the home care markets continues with revenues and orders up 20.6% and 15.6%, respectively, from Q3 last year and 15.7% and 19.2%, respectively on a year-to-date basis. Two major clinical areas - home oxygen therapy and the diagnosis and treatment of adult sleep disorders - contributed to this growth. With respect to the first major clinical area, the Company believes it is already the worldwide leader. Moreover, the Company has been told by Homedco Group, Inc., one of the nation's leading providers of home respiratory services, that Puritan-Bennett will be selected as one of its endorsed vendors for home oxygen equipment. Homedco is in the process of upgrading its oxygen therapy technology to achieve significantly greater operational efficiencies. (While Homedco is one of the first to recognize and act upon this opportunity, the same opportunity is available to virtually all home oxygen therapy providers. A key element of the Company's homecare strategy is to help all home oxygen suppliers recognize and act upon such opportunity.) The Company also believes its home oxygen therapy product line is unusually well suited to help home oxygen suppliers benefit from such opportunity. This announcement is the result of Homedco's formal bid process, and will be one of the largest 6 purchases of oxygen therapy equipment in Homedco's history. The selection of Puritan-Bennett as an endorsed vendor is expected to have a significant impact on the home oxygen therapy portion of the Company's business over the next two years. In addition, Homedco said it would work with the Company to adapt Puritan-Bennett's CliniVision(R) Respiratory Care Management Information System to its needs for managing its home care patients services. Heretofore, CliniVision has been almost entirely a hospital market product. With respect to the second major clinical area of its homecare product lines, the Company expects its relatively young business of diagnosing and treating adult sleep disorders to continue growing also. Recently published research clearly indicates that millions of adults in the U.S. suffer chronically from debilitating but treatable breathing disorders during sleep. The Company believes the prevalence of such disorders is also widespread in most developed nations. These disorders are only beginning to be recognized and understood by the medical community and the general population. Consequently, only a small fraction of people suffering from sleep disorders have been diagnosed and are being treated today. Therefore, while the market for such sleep products has grown rapidly in recent years, the Company believes that most of the market growth lies ahead. With the late January 1994 acquisition of SEFAM S.A., the Company believes it is among the top three in terms of worldwide market share. While the Company believes it remains the worldwide leader in critical care ventilation, hospital/physician sales have flattened as the U.S. hospital market for the 7200(R) Series ventilator has declined; international demand has continued to grow, however. The level of interest in CliniVision continues to expand and revenues are growing as hospitals increasingly focus on this system as a valuable solution to their cost-containment challenge and as the Company continues to enhance the CliniVision system. More than 100 systems have now been installed. In total, the Company expects hospital/physician market revenues to be flat in FY 1995 and for moderate growth to resume in FY 1996 due to CliniVision and five ventilator system-related new products/product enhancements recently cleared by FDA for marketing in the U.S. and recently introduced internationally. The aviation portion of the Company's business is experiencing growth in revenues and orders, up 24.1% and 26.6%, respectively, on a year-to-date basis. Revenues were up 47.2% from third quarter levels last year and orders were up 60.5%. The overall increase in the Company's aviation business is due in large part, although not entirely, to a growing interest in the offerings of Airborne Closed Circuit Television (ACCTV (TM)). These closed circuit television systems use video cameras to detect problems. Conditions such as fire, smoke and cargo movement can be detected in all lighting conditions. Additionally, exterior security as well as passenger entertainment systems are offered. Aside from ACCTV, the overall tone of the aviation industry market is showing signs of improvement from the depressed conditions of recent years. 7 INTERNATIONAL SALES GROWTH The following tables reflect the amount of sales and operating profits from the United States and foreign geographic segments:
NET SALES PERCENT Q3 1995 Q3 1994 CHANGE ---------------------------------------------- U.S. Operations $66,978 $ 62,877 6.5% Foreign Operations 16,434 12,400 32.5% ------- -------- Total Net Sales $83,412 $ 75,277 10.8% ======= ========
NET SALES PERCENT YTD 1995 YTD 1994 CHANGE ----------------------------------------------- U.S. Operations $ 193,645 $ 192,556 0.6% Foreign Operations 54,168 36,026 50.4% --------- --------- Total Net Sales $ 247,813 $ 228,582 8.4% ========= =========
OPERATING PROFIT PERCENT Q3 1995 Q3 1994 CHANGE ----------------------------------------------- U.S. Operations $ 3,009 $ 3,333 (9.7)% Foreign Operations 2,721 (1,840) __ ------- ------- Total Net Operating Profit $ 5,730 $ 1,493 284.0% ======= =======
OPERATING PROFIT PERCENT YTD 1995 YTD 1994 CHANGE ----------------------------------------------- U.S. Operations $ 6,697 $ (1,420) __ Foreign Operations 10,410 (494) __ -------- -------- Total Net Operating Profit $ 17,107 $ (1,914) __ ======== ========
The increase in foreign operations net sales and operating profit from Q3 1994 was primarily due to the addition of the SEFAM S.A. product line and a large increase in sales in Germany. The German operation was in a start-up environment during the comparable period of FY 1994. This explanation as well as a Q2 FY 1994 restructuring charge of $9.0 million accounts for the dramatic increase in the year-to-date FY 1995 net operating profit. 8 The following tables reflect sales by customer location:
Q3 1995 Q3 1994 ---------------------------------------------------------- Customers Within the U.S. $ 56,517 67.8% $ 53,337 70.9% Customers Outside the U.S. 26,895 32.2% 21,940 29.1% -------- ----- -------- ----- Total Net Sales $ 83,412 100.0% $ 75,277 100.0% ======== ===== ======== =====
YTD 1995 YTD 1994 ---------------------------------------------------------- Customers Within the U.S. $164,023 66.2% $164,670 72.0% Customers Outside the U.S. 83,790 33.8% 63,912 28.0% -------- ----- -------- ----- Total Net Sales $247,813 100.0% $228,582 100.0% ======== ===== ======== =====
During the past decade, the Company's business profile has changed substantially from being predominantly a supplier of life-support capital equipment to the United States hospital market to becoming a major supplier to the homecare market. Homecare has been, and is expected to continue to be, the fastest growing part of the Company's business. Life-support products sold in the U.S. market will likely represent a smaller share of the Company's business in the future, a trend that may help lower the Company's risks. In late January 1994, the Company finalized the previously announced acquisition of SEFAM S.A., the leading European supplier of diagnostic and therapeutic sleep disorder products, and its 80% owned Lit Dupont S.A. subsidiary, which manufactures wheelchair products. Over the past five years, the Company's home care business, which reached nearly $110 million in revenues in FY 1994 has achieved a compound annual revenue growth rate of over 22% worldwide - 31% internationally. The Company believes that the acquisition of SEFAM will help such growth trends continue. 9 GROSS PROFIT The gross profit percentage for Q3 1995 decreased 0.6% from Q3 1994 and 1.0% on a year-to-date basis. Gross profit was adversely affected by the higher costs associated with FDA Good Manufacturing Practice (GMP) compliance activities and by the continued weakness of the U.S. hospital market. These effects were partially offset by the results of operations of SEFAM, acquired late in FY94, as well as the results of restructuring actions taken late in FY 1994.
PERCENT Q3 1995 Q3 1994 CHANGE --------------------------------------------- Gross Profit $34,284 $31,367 9.3% Gross Profit Percentage 41.1% 41.7%
PERCENT YTD 1995 YTD 1994 CHANGE --------------------------------------------- Gross Profit $103,722 $97,980 5.9% Gross Profit Percentage 41.9% 42.9%
SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses for Q3 1995 remained relatively stable from Q3 1994. An increase in such expenses resulting from the acquisition of SEFAM S.A. and its 80% owned Lit Dupont S.A. subsidiary, in late FY 1994, and increased GMP related compliance activities were offset by the results of restructuring actions taken in late FY 1994.
PERCENT Q3 1995 Q3 1994 CHANGE --------------------------------------------- Selling and Administrative Exp. $23,508 $23,721 (0.9)%
PERCENT YTD 1995 YTD 1994 CHANGE --------------------------------------------- Selling and Administrative Exp. $71,790 $71,474 0.4%
10 RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses for the quarter and year-to-date have decreased approximately 18% and 24%, respectively, over the prior comparable periods. The decreases resulted entirely from the elimination of the Intra-Arterial Blood Gas Monitoring product line. Research and development continues across all remaining product lines at levels the Company considers appropriate to provide long-term growth.
PERCENT Q3 1995 Q3 1994 CHANGE ----------------------------------------------- Research and Development Exp. $5,046 $ 6,153 (18.0)%
PERCENT YTD 1995 YTD 1994 CHANGE ----------------------------------------------- Research and Development Exp. $14,825 $19,406 (23.6)%
OTHER (INCOME) EXPENSE Other income in the first nine months of FY 1995 increased over the comparable period of FY 1994 by $1,654. The increase is entirely attributable to foreign currency transaction gains in FY95 versus losses in FY94. These gains arose from the weakening of the U.S. Dollar, the Company's functional currency, in the markets in which the Company is doing business. Since October 31, 1994, the U.S. dollar has strengthened considerably. If the U.S. dollar remains at current levels, most of the foreign currency transaction gains realized in the first nine months are expected to reverse in the fourth quarter.
Q3 1995 Q3 1994 -------------------------- Other (Income) Expense $ (768) $ (773)
YTD 1995 YTD 1994 -------------------------- Other (Income) Expense $(1,949) $ (304)
INTEREST EXPENSE Interest expense increased from Q3 1994 and YTD 1994 by $560 and $759, respectively. The increase is due to higher levels of debt in FY 1995 as well as an overall increase in the Company's average interest rate. UNSOLICITED TAKEOVER OFFER The Company recorded charges of $4.6 million for obligations associated with Thermo Electron Corporation's unsolicited tender offer. These obligations include investment banking fees, public 11 relations expenses and legal fees. This accrual resulted in a loss of $.05 per share for the third quarter ending October 31, 1994. Without the charge, earnings per share for the quarter would have been $.31 per share. See Note 1 to the Condensed Consolidated Financial Statements. RESTRUCTURING CHARGES A number of market and regulatory developments converged to make FY 1994 a particularly challenging one for the Company as a whole. As a result, the Company took a number of major actions in FY 1994 to reposition itself for the future including: restructuring the hospital ventilator portion of its business; consolidating its aviation business to three facilities from four; closing its Boulder, Colorado facility and transferring the manufacture of the portable ventilators made there to its ISO (International Standards Organization) 9002 - certified facility in the Republic of Ireland and planning the shutdown of the FOxS operation and offering it for sale. As of October 31, 1994, approximately $3.9 million remained in accrued liabilities representing expected severance, cancellation penalties, remaining facility lease payments, FOxS customer refunds and other costs necessary to complete the restructuring plan in an orderly and effective manner. This amount is expected to be disbursed primarily in the fourth quarter of FY 1995 with some carryover to the first and second quarters of FY 1996. No buyer was found for the FOxS operation and the shutdown was completed in the third quarter. PROVISION FOR INCOME TAXES The Q3 1995 tax provision was affected by a year to date increase in the annualized tax rate from 20% to 28% due to the interaction of the tax valuation allowance discussed below and the shift, caused by the $4.6 million charge for obligations associated with Thermo Electron Corporation's unsolicited tender offer, in the proportion of earnings generated domestically, which are normally taxed at the U.S. statutory rate of 35%, versus earnings generated internationally, which are normally taxed at the lower foreign statutory rates averaging 10%. The Q3 1994 tax rate was 32%. The year-to-date FY 1994 tax benefit was 54% due primarily to a $9.0 million U.S. restructuring charge. The Company has a net deferred tax benefit of $27.8 million partially offset by a valuation allowance of $17.1 million as required by SFAS No. 109. The realization of the deferred tax benefit depends on the Company's ability to generate sufficient taxable income in the future. Approximately 80% of the Company's total temporary differences are expected to reverse in the next two years. As a result of the restructuring actions taken during FY 1994 and the expected continuing growth in future profitability, the Company believes it is well positioned to take advantage of this tax benefit in the future. 12 If the Company achieves sufficient profitability to use all of the deferred tax benefit, the valuation allowance will be reduced through a credit to expense. If the Company is unable to generate taxable income in the future, increases in the valuation allowance relative to the deferred tax benefit currently existing will be required through a charge to expense. FINANCIAL CONDITION WORKING CAPITAL The ratio of current assets to current liabilities was 2.2 at October 31, 1994, up from 1.6 at January 31, 1994. Working capital increased, from $51.9 million to $76.7 million. The primary reasons for the increase include a $12.1 million decrease in notes payable as a result of the issuance of new long-term notes late in Q2 1995 and an approximate $10.4 million decrease in other accrued expenses, primarily accrued restructuring expenses that were paid in Q1, Q2 and Q3 1995, offset by a $4.6 million accrual for expenses associated with an unsolicited offer to acquire the Company's stock. In addition the Company's investment in accounts receivable and inventory grew $9.3 million. LIQUIDITY AND CAPITAL RESOURCES Net cash and cash equivalents provided by operating activities decreased from October 31, 1993 due to several factors. Net income of $7,328 for year-to-date FY95 increased by approximately $12.4 million over the year-to-date loss for FY94. There was a $9.0 million increase in year-to-date FY 1994 for accrued restructuring charges versus no accrual in FY95. There was a $1.7 million payout from the deferred compensation plan in Q1 1995 for which there was no comparable event in FY 1994. The change in prepaid expenses and other current assets reflects a sale of marketable equity securities ($2.2 million) for which there was no comparable sale in FY 1994. The increase in accounts receivable is a reflection of higher sales volume as well as an increase in the proportion of non U.S. sales, which have a longer collection period than U.S. sales, to total sales (28.0% as of year-to-date FY 1994 versus 33.8% as of year-to-date FY 1995). Net cash and cash equivalents used in investing activities have decreased when compared to year-to-date 1994. This decrease is due primarily to the acquisition of Hoyer Medizintechnik; $6.6 million was paid in Q1 1994 and a final payment of $2 million was paid in Q1 1995. An increase in proceeds from the sale of capital assets was offset by an increase in capital expenditures. Net cash and cash equivalents provided by financing activities have increased when compared to year-to-date 1994. Short term notes payable have been reduced by $12.1 million in year-to-date 1995 versus an $8.3 million increase in the comparable FY 1994 period. This reduction was offset by a $20 million increase in long-term debt in year-to-date 1995. These events, combined with minimal stock repurchases in year-to-date 1995 resulted in a generation of $2.8 million from financing activities in year-to-date 1995 versus $.3 million in the same period of the prior fiscal year. 13 Long-term debt, excluding current maturities represents 33.9% of total capital (long-term debt plus stockholder's equity) at October 31, 1994, and 26.4% at January 31, 1994. At October 31, 1994, the Company had $35 million of unsecured bank lines-of-credit available, $15.5 million of which was used. U.S. HEALTH CARE SYSTEM CHANGES While broad-scale health care system reform was a major initiative of the Clinton Administration during its first two years, such broad reform does not now appear imminent. At the same time, the U.S. health care system is undergoing significant change in response to market forces. The principal change involves increasing utilization of various forms of managed care. Managed care trends are, in turn, causing hospitals to consolidate, restructure, and otherwise slow their rate of spending growth. The Company believes it is seeing the effects of such spending curtailment in its hospital capital equipment products - principally the 7200 Series Ventilatory System. The Company has not seen any significant adverse effects of managed care trends on its homecare business and homecare may, in fact, be benefiting from such trends due to its inherent cost-effectiveness relative to institutional care. However, the new Congress, with its Republican majority, is likely to emphasize further deficit reduction and there can be no assurance that homecare will not be adversely affected by deficit reduction-driven legislative changes to the Medicare and Medicaid programs. SUPPLEMENTAL INFORMATION In order to help stockholders better understand the economic dynamics and potential of the Company's business, the Company decided to begin providing supplemental information that sets forth its earnings before interest, taxes and other unusual charges (EBITOC) and revenues in its two principal components - - Puritan and Bennett. Unusual charges include any historical restructuring or current Thermo Electron-related charges. The supplemental information also excludes discontinued product lines. Supplemental pro-forma information dollars are reported in thousands. Puritan - Puritan includes the rapidly growing homecare product lines and certain hospital/physician products such as medical gases and gas-related equipment and spirometry. Aero Systems is also included because it shares one of the larger manufacturing facilities with the Puritan Group and is relatively small. Puritan revenues for the first nine months grew to $159,391 from $136,263 on a FY95 to FY94 comparison, up 17%. Third quarter FY95 revenues were up 23% to $56,187 compared to $45,751 for third quarter of FY94. Puritan now accounts for about two-thirds of the Company's total revenues. Puritan revenues for FY94 were also up from FY93, $184,239 versus $167,763. The average annual growth for the five years ended January 31, 1994 was 15%. Within Puritan, homecare products have grown at rates considerably above the overall Puritan average. Puritan EBITOC was $16,306 (10% of revenue) and $18,493 (14% of revenue) for the first nine months of FY95 and FY94, respectively. For the third quarter of this year, EBITOC was $5,995 (11% of revenue) versus $6,251 (14% of revenue) in the third quarter FY94. EBITOC was $22,939 (12% of revenue) and $24,740 (15% of revenue) in FY94 and FY93, respectively. 14 EBITOC has been higher in the recent past and, with continued revenue growth, is expected to return to higher levels next fiscal year. The Company undertook several major regulatory control and compliance initiatives in the latter part of FY94 and during FY95. These initiatives required considerable staffing and other resource additions as well as manufacturing process modifications, which temporarily increased costs faster than revenue growth. Puritan also experienced some resulting short-run operating disruptions and inefficiencies, which further increased costs. These operating disruptions have begun to diminish, and the adverse profitability effects of the costs associated with the considerable staffing and other resource additions in late FY94 and FY95 are expected to be covered by continuing rapid growth in Puritan revenues next fiscal year coupled with much slower cost growth. This combination of revenue growth and EBITOC growth as a percentage of Puritan revenues represents most of the Company's expected profitability growth next fiscal year. Bennett - Bennett includes the Company's critical care ventilator business - a business that continues to represent an exceptional and long-standing customer franchise on a global basis - as well as the CliniVision product line in the U.S., and holter monitoring and portable ventilator product lines. Since FY93, Bennett revenues have declined for several reasons including difficult market conditions, particularly in the U.S. hospital market, discontinuance of certain older products and accessories as a result of evolving regulatory standards, and the Company's withdrawal from the U.S. portable ventilator market. In addition, Bennett has also undertaken major regulatory control and compliance and new product development initiatives at significant cost. Third quarter FY95 and FY94 revenues were $27,225 and $28,838, respectively. For the first nine months of FY95 and FY94, revenues were $88,422 and $90,361, respectively. FY94 revenues were $122,751 and FY93 revenues were $131,279. On a quarter-to-quarter comparison, Bennett EBITOC was $456 for the third quarter of FY95 versus a loss of $793 for the same period of FY94. EBITOC was $2,620 and $2,718 for the first nine months of FY95 and FY94, respectively (3% of revenues for both periods). For the twelve month periods, FY94 EBITOC was $14 compared to FY93 EBITOC of $11,803 (9% of revenue). Current and recent EBITOC is not close to where the Company believes it should and will be. The Company believes the recent poor profitability of Bennett will begin to reverse itself and revenues and margins will increase as a result of continued cost reductions as well as the continued growth of CliniVision and service revenue and several other positive developments. These developments include five new products/product enhancements recently cleared by FDA for marketing in the U.S. and recently introduced internationally. In addition, other important new products are being developed for introduction a little over a year from now. Because of U.S. market conditions and these important new product development initiatives, the Company's expectations for Bennett growth in revenues and improvement in EBITOC as a percentage of revenues for next fiscal year (FY96) are less than for Puritan. Bennett revenue and profitability growth expectations are much higher after FY96, however. The Company is encouraged by the continued strong growth of Puritan and believes both Puritan and Bennett are well positioned to begin returning to higher levels of profitability. Puritan is growing 15 rapidly and does not have so far to go to return to historical profitability levels. Consequently, the Company expects Puritan's return to historical profitability as a percentage of revenues to occur largely next fiscal year. Bennett, on the other hand, has not been growing rapidly and has farther to go to return to desired profitability levels. Key to doing so are additional new products under development coupled with maintaining the Company's strong direct sales and service distribution channels in North America and Europe, which are capable of handling more volume. Such distribution channels enable these and other new products to reach their full revenue and profitability potential. Therefore, the Company expects it may take somewhat longer for Bennett profitability as a percentage of revenues to reach desired levels. The significant profitability growth expected next year from Puritan, the more moderate but still important profitability growth expected next year from Bennett, and the somewhat reduced interest expenses the Company expects to result from gradually lower borrowing levels all combine to give the Company confidence that its profitability for the fiscal year ending January 31, 1996, will grow significantly from current fiscal year levels, which profitability is, in turn, significantly higher than prior fiscal year levels. This does not include unusual charges such as the change in control-type charges recently incurred. The balance between revenue-led and cost reduction-led profitability growth plans for fiscal year 1996 will be determined more precisely by the end of this fiscal year. 16 (Letterhead of Ernst & Young LLP) Independent Accountants' Review Report The Board of Directors Puritan-Bennett Corporation We have reviewed the condensed consolidated balance sheet of Puritan-Bennett Corporation and subsidiaries as of October 31, 1994, the related condensed consolidated statements of operations for the three-month and nine-month periods ended October 31, 1994 and 1993, and the condensed consolidated statements of cash flows for the nine-month periods ended October 31, 1994 and 1993 as presented in the accompanying exhibit. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Puritan-Bennett Corporation and subsidiaries as of January 31, 1994, and the related consolidated statement of operations, stockholders' equity and cash flows for the year then ended, not presented herein, and in our report dated March 7, 1994, we expressed an unqualified opinion on those consolidated financial statements. During the year ended January 31, 1994, the Company changed its method of accounting for income taxes, postretirement benefits and postemployment benefits. In our opinion, the information set forth in the condensed consolidated balance sheet as of January 31, 1994, as presented in the accompanying exhibit, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Ernst & Young Ernst & Young LLP December 14, 1994 17 PART II - OTHER INFORMATION Item 1. Legal Proceedings. On October 7, 1994, a purported class action complaint entitled Kenneth Steiner v. Puritan-Bennett Corp., Burton A. Dole, Jr., C. Phillip Larson, Jr., Andre F. Marion, Thomas A. McDonnell, Daniel C. Weary, Frank P. Wilton, C.A. No. 13790 (the "Steiner Complaint"), was filed against the Company and its directors in the Court of Chancery of the State of Delaware in and for New Castle County (the "Chancery Court"), alleging, among other things, that the defendants have breached their fiduciary duties to the Company's stockholders as a result of the defendants' adoption of a Rights Agreement dated on or about May 17, 1989 and the directors' refusal to properly consider Thermo Electron Corporation's initial proposal to acquire all outstanding shares at a price of $21 per share (see Item 5. for additional information regarding the tender offer). Among other things, the Steiner Complaint seeks an order directing the Company's directors to carry out their fiduciary duties to the Company's stockholders by cooperating fully with Thermo Electron Corporation or any other entity or person having a bona fide interest in proposing any extraordinary transactions with the Company, including a merger or acquisition of the Company, as well as damages and costs. On October 24 and 28, 1994, respectively, two purported class action complaints entitled Louise Kovacs v. Puritan-Bennett Corp., et al., C.A. No. 13828 (the "Kovacs Complaint"), and Charles Miller v. Puritan-Bennett Corporation, et al., C.A. No. 13839 (the "Miller Complaint"), were filed against the Company and its directors in the Chancery Court, alleging, among other things, that the defendants have breached their fiduciary duties to the Company's stockholders as a result of the defendants' refusal to properly consider Thermo Electron Corporation's proposals to acquire all outstanding Shares. The material allegations and prayers for relief contained in each of these complaints are substantially similar to those contained in the Steiner Complaint filed earlier against the Company and its directors. The director defendants believe that they have fulfilled their fiduciary duties to the Company and its shareholders and intend to continue to do so. The Company and the director defendants intend to defend these actions vigorously. On November 28, 1994, counsel to plaintiffs in each of the Steiner, Kovacs and Miller actions filed an application in the Chancery Court requesting, among other things, that the court schedule a hearing on plaintiffs' motion for a preliminary injunction, which motion was filed on November 29, 1994. Plaintiffs' motion for a preliminary injunction seeks an order (i) compelling the defendants to meet with representatives of Thermo Electron Corporation to discuss the terms of the tender offer and (ii) declaring null and void certain provisions of the Executive Agreements, the Severance Agreements, the Indemnification Agreements and the Company's employee benefit plans and arrangements. On December 6, 1994, the Chancery Court issued a letter opinion in which the Chancery Court declined to schedule a hearing on plaintiff's motion. Citing the "substantial costs and disruption" to the defendants and the public of an expedited preliminary injunction proceeding, the Chancery Court found that the threatened "injury" alleged by the plaintiffs "is too speculative to warrant intervention at this time." 18 Item 5. Other Information. On October 6, 1994, the Company received an unsolicited letter from Thermo Electron Corporation proposing to acquire all of the outstanding common stock of the Company in a merger transaction for $21 per share in cash. After receiving an opinion from its financial advisor, Smith Barney Inc., on October 10, 1994, the Company rejected Thermo Electron Corporation's unsolicited proposal to acquire the Company for $21 per share in cash as grossly inadequate and not in the best interests of the Company and its shareholders other than Thermo Electron Corporation. On October 12, 1994, Thermo Electron Corporation raised its bid to $24 per share in cash. On October 25, 1994, Thermo Electron Corporation launched a tender offer to acquire all of the outstanding shares of the Company's common stock for $24.50 per share in cash expiring on November 22, 1994, subject to a number of conditions. On November 7, 1994, after receiving an opinion from Smith Barney Inc., the Board of Directors of the Company unanimously determined that the unsolicited tender offer from Thermo Electron Corporation to acquire the Company for $24.50 per share in cash was not in the best interests of the Company and its stockholders. Accordingly, the Board recommended that stockholders reject the offer and not tender their shares to Thermo Electron Corporation. On November 23, 1994, Thermo Electron Corporation extended the tender offer to November 28, 1994 and then again to December 8, 1994. On December 9, 1994, Thermo Electron Corporation terminated its tender offer without purchasing any shares. Item 6. Exhibits and Reports on Form 8-K. a. Exhibits Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index which is incorporated herein by reference. b. Reports on Form 8-K A Current Report on Form 8-K dated October 28, 1994, with respect to Item 5 relating to the Amendment Agreement amending the Company's Rights Agreement dated as of May 2, 1989, was filed with the Securities and Exchange Commission ("SEC") by the Company. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PURITAN-BENNETT CORPORATION Registrant December 14, 1994 /s/Lee A. Robbins Lee A. Robbins, Vice President, Controller-Chief Financial Officer (Principal Financial Officer, Chief Accounting Officer and duly authorized Officer to execute on behalf of registrant) 20 EXHIBIT INDEX Exhibits filed with Securities and Exchange Commission: (Number and description of exhibit) (4) Amendment Agreement dated as of October 27, 1994, between the Company and UMB Bank, N.A., amending the Rights Agreement dated as of May 2,1989 included as Exhibit 4.1 in Form 8-K dated October 28, 1994 and incorporated herein by reference. (10.1) Supplemental Agreement, dated November 7, 1994, between John H. Morrow and the Company. (10.2) Executive Agreement, dated November 7, 1994, between Robert L. Doyle and the Company. (10.3) Executive Agreement, dated November 7, 1994, between Thomas E. Jones and the Company. (10.4) Executive Agreement, dated November 7, 1994, between Alexander R. Rankin and the Company. (10.5) Executive Agreement, dated November 7, 1994, between David P. Niles and the Company. (10.6) Severance Agreement, dated November 7, 1994, between Lee A. Robbins and the Company. (10.7) Severance Agreement, dated November 7, 1994, between Derl S. Treff and the Company. (10.8) First Amendment to Puritan-Bennett Corporation Management Incentive Bonus Plan A. (10.9) First Amendment to Puritan-Bennett Corporation Management Incentive Bonus Plan B. (10.10) First Amendment to the Restated Puritan-Bennett Deferred Compensation Plan. (10.11) First Amendment to the Puritan-Bennett Supplemental Retirement Benefit Plan. (10.12) Third Amendment to the Puritan-Bennett Supplemental Retirement Benefit Plan. (10.13) First Amendment to the Puritan-Bennett Corporation Pension Benefit Make Up Plan. (10.14) Amendment Adopted on November 6, 1994 to Puritan-Bennett 1988 Employee Stock Benefit Plan. 21 (10.15) Amendment Adopted on November 6, 1994 to the Puritan-Bennett Corporation Retirement Plan for Non-Employee Directors. (10.16) SERP Agreement dated November 7, 1994, between Burton A. Dole, Jr. and the Company. (10.17) SERP Agreement dated November 7, 1994, between John H. Morrow and the Company. (11) Statement re: Computation of Per Share Earnings. (15) Letter re: Unaudited Interim Financial Information. (19) Puritan-Bennett Corporation Third Quarter Report, 1995. (27) Financial Data Schedules. EX-10.1 2 SUPP. AGREEMENT, BTWN JOHN H. MORROW & THE COMPANY 1 EXHIBIT 10.1 SUPPLEMENTAL AGREEMENT November 7, 1994 Mr. John H. Morrow Executive Vice President Puritan-Bennett Corporation 9401 Indian Creek Parkway Overland Park, Kansas 66225 Dear Mr. Morrow: This supplemental letter agreement ("Supplemental Agreement") amends and supplements the letter agreement dated June 9, 1994 (the "Agreement") between you and Puritan-Bennett Corporation. All definitions of terms in the Agreement shall apply in this Supplemental Agreement. As amended and supplemented by this Supplemental Agreement, the Agreement shall remain in full force and effect. 1. The benefits payable to you under Sections 3.1(a) and (b) of the Agreement are hereby modified by replacing Sections 3.1(a) and (b) in their entirety with the following: 3.1 Rights upon Termination by Company other than for Cause, or by Employee for Good Reason. If the Company terminates your employment other than for Cause prior to your Normal Retirement Date, or if you terminate your employment for Good Reason prior to your Normal Retirement Date, then the Company shall have the following obligations to you: (a) During the applicable Continued Payment Period, the Company shall make semi-monthly payments to you equal to your semi-monthly base salary in effect immediately prior to the Employment Termination Date plus one twenty-fourth of the annual average of your incentive bonus payments under the MIB Plan or any successor thereto with respect to the three full (12 months) fiscal years immediately preceding the Employment Termination Date (such annual average being referred to herein as the "Average Annual Incentive Payment"), such amounts to be computed without regard to any reductions which may have occurred in breach of this Agreement or following a Change in Control. Such payments shall be subject to all required withholdings. The Continued Payment Period shall commence on the Employment Termination Date and shall be a number of weeks determined by adding (a) the greater of (i) four or (ii) two times the number of years Employee has been an employee of the Company (rounding up to the next full year and excluding any intervening periods during which Employee was not an employee of the Company), plus (b) two times the number of $5,000 increments (rounded up to the next whole $5,000 increment) contained in the Employee's Annual Compensation (as defined below); provided, that the Continued Payment Period shall not 2 Mr. John H. Morrow November 7, 1994 Page 2 exceed three years. "Annual Compensation" shall mean the sum of (x) your annual base salary in effect immediately prior to the Employment Termination Date, plus (y) the Average Annual Incentive Payment. (b) Any outstanding unvested options held by you to purchase stock of the Company that have not otherwise become exercisable under the terms of the Company's stock option plans shall become fully vested and exercisable. 2. If your employment is terminated under circumstances in which you are entitled to receive payments under Section 3.1 of the Agreement, and if you are not otherwise entitled to a bonus payment with respect to the fiscal year in which your employment is terminated, the Company will pay to you within 30 days after the Employment Termination Date, and subject to required withholdings, a one-time bonus equal to the product of (i) the fraction of a full year represented by the period from the beginning of the fiscal year to the Employment Termination Date, and (ii) the Average Annual Incentive Payment. 3. If your employment is terminated under circumstances in which you are entitled to receive payments under Section 3.1 of the Agreement, then the Company will provide a benefit under the Consolidated Omnibus Budget Reconciliation Act of 1986 ("COBRA") and Section 4980B of the Internal Revenue Code of 1986, as amended (the "Code"), as follows: the Company shall pay the percentage of the cost of COBRA coverage with respect to your 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 (i) the monthly cost of COBRA coverage for your coverage status in effect immediately prior to the Employment Termination Date and (ii) your monthly contribution toward your coverage in effect immediately prior to the Employment Termination Date, and the denominator of which shall be the monthly cost of COBRA coverage for your coverage status in effect immediately prior to the Employment Termination Date. All of such amounts shall be determined as of the day immediately preceding the termination of Employee's employment. The insurance continuation benefits paid for hereunder shall be deemed to be part of your COBRA coverage. Such benefits shall be in addition to any other benefits relating to health or medical care benefits that are available under the Company's policies to you following termination of employment. 4. The severance benefits provided under the Agreement and this Supplemental Agreement will be reduced by any severance benefits to which you are entitled under the Company's Severance Benefits policy for terminated employees, or any other agreement between you and the Company for severance benefits. Except as provided in the immediately preceding sentence, all of your rights and benefits, including those under the Agreement and this Letter Agreement, shall remain in full force and effect. It is expressly agreed that payments or benefits to you under the 3 Mr. John H. Morrow November 7, 1994 Page 3 Company's SERP or under any agreement with you relating to the Company's SERP or any other retirement or pension arrangement shall not be offset against or reduce in any way any payments or benefits to which you are entitled under the Agreement or under this Supplemental Agreement. 5. Section 5 of the Agreement is hereby replaced with the following: Non-Competition. During your employment, you agree that you will not directly or indirectly compete with the Company, or engage in, or act as an officer, director, employee, or agent of any person or entity that is engaged in, any business in which the Company is engaged, without the written approval of the CEO. The foregoing shall not prohibit you 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 you shall own less than 3% of the outstanding voting stock of such corporation. If you are entitled to receive payments under Section 3.1(a), then, as to any business in which the Company is engaged as of the Employment Termination Date, you shall continue to be bound by the provisions of this Section 5 during the applicable Continued Payment Period. If you violate the provisions of this Section 5, then, in addition to any other rights at law or in equity, the Company shall be entitled to discontinue any payments otherwise due to you hereunder. 6. (a) Anything in the Agreement or this Supplemental Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be nondeductible by the Company for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of amounts payable or distributable as severance benefits hereunder shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of such severance benefits without causing any Payment to be nondeductible by the Company because of Section 280G of the Code. Anything to the contrary notwithstanding, if the Reduced Amount is zero and it is determined further that any Payment which is not part of the severance benefits payable hereunder would nevertheless be nondeductible by the Company for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of Payments which are not severance benefits under this Agreement shall also be reduced (but not below zero) to an amount expressed in present value which maximizes the aggregate present value of Payments without causing any payment to be nondeductible by the Company because of Section 280G of the Code. For purposes of this paragraph 6, present value shall be determined in accordance with Section 280G(d)(4) of the Code. 4 Mr. John H. Morrow November 7, 1994 Page 4 (b) All determinations required to be made under this paragraph 6 shall be made by an accounting firm jointly selected by you and the Company (the "Accounting Firm") and paid by the Company, and which may be the Company's independent auditors. The Accounting Firm shall provide detailed supporting calculations both to the Company and Employee within 15 business days of the Date of Termination or such earlier time as is requested by the Company and an opinion to Employee that he or she has substantial authority not to report any excise tax on his Federal income tax return with respect to any Payments. Any such determination by the Accounting Firm shall be binding upon the Company and Employee. Employee shall determine which and how much of the Payments, shall be eliminated or reduced consistent with the requirements of this paragraph 6, provided that, if Employee does not make such determination within ten business days of the receipt of the calculations made by the Accounting Firm, the Company shall elect which and how much of the Payments shall be eliminated or reduced consistent with the requirements of this paragraph 6 and shall notify Employee promptly of such election; and provided further that any Payments which do not constitute gross income to Employee shall not be reduced or eliminated unless all other Payments have first been eliminated. Within five business days thereafter, the Company shall pay to or distribute to or for the benefit of Employee such amounts as are then due to Employee under this Agreement. (c) As a result of the uncertainty in the application of Section 280G of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Payments will have been made by the Company which should not have been made ("Overpayment") or that Payments will not have been made by the Company which could have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against Employee or the Company which the Accounting Firm believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for the benefit of Employee shall be treated for all purposes as a loan ab initio to Employee which Employee shall repay to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable to the Company if and to the extent such deemed loan and payment would not either reduce the amount on which Employee is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm, based upon controlling precedent or other substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for the benefit of Employee together with interest at 120% of the applicable federal rate provided for in Section 7872(f)(2) of the Code, compounded semiannually. 7. Notwithstanding anything in the Agreement or this Supplemental Agreement to the contrary, if after giving effect to the provisions of Section 6 of this Supplemental Agreement any 5 Mr. John H. Morrow November 7, 1994 Page 5 portion of any payments to you by the Company under the Agreement, this Supplemental Agreement and any other present or future plan or program of the Company or other present or future agreement between you 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 you shall be deferred until the earliest date upon which payment thereof can be made to you without being non-deductible pursuant to Section 162(m) of the Code. In the event of such a deferral, the Company shall pay interest to you on the amount deferred at 120% of the applicable federal rate provided for in Section 7872(f)(2) of the Code, compounded semi-annually. 8. Miscellaneous. 8.1. No Assignment. No benefit hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrances or charge, and any attempt to do so shall be void. 8.2 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: Chief Executive Officer Puritan-Bennett Corporation 9401 Indian Creek Parkway Overland Park, Kansas 66225 If to the Employee: Mr. John H. Morrow 10231 Catalina Overland Park, Kansas 66207 Either party may change its address for notice by giving notice to the other party of a new address in accordance with the foregoing provisions. 8.3 Governing Law. This Agreement shall be governed by the laws of the State of Kansas. 8.4 Disputes. In the event of any dispute between the Company and Employee arising out of this Agreement, the Company's then current Alternative Dispute Resolution Procedure will be followed (a copy of the current procedure is attached hereto) and the prevailing party shall be entitled to recover its reasonable attorneys' fees and expenses incurred in connection with the enforcement of its rights hereunder. 6 Mr. John H. Morrow November 7, 1994 Page 6 8.5 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 8.6 Descriptive Headings. Descriptive headings of the several paragraphs of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. Please acknowledge your agreement to the foregoing Letter Agreement by signing the enclosed counterpart of this letter and returning it to the Company. Very truly yours, PURITAN-BENNETT CORPORATION By: /s/ Lee A. Robbins Vice President Agreed to and accepted: /s/ John H. Morrow JOHN H. MORROW EX-10.2 3 EXEC. AGREEMENT, BTWN ROBERT L. DOYLE & THE CO. 1 EXHIBIT 10.2 EXECUTIVE AGREEMENT November 7, 1994 Mr. Robert L. Doyle Senior Vice President, Marketing Puritan-Bennett Corporation 9401 Indian Creek Parkway P.O. Box 25905 Overland Park, KS 66225 Dear Mr. Doyle: This letter agreement restates and supersedes in its entirety the letter agreement dated August 31, 1994 between you and Puritan-Bennett Corporation (the "Company"). In view of your position as Senior Vice President, Marketing of the Company and in consideration of your agreement to continue serving in this or some other mutually agreeable capacity, the Board of Directors (the "Board") of the Company has approved the commitment by the Company to provide you ("Employee") with certain benefits during your employment and in the event of termination of your employment for Good Reason, if by you, and other than for Cause, if by the Company. This letter agreement (the "Agreement") establishes the terms and conditions of your continued employment by the Company, including your rights to receive certain payments and benefits during and after your employment by the Company. 1. Certain Definitions. 1.1 Cause. "Cause" means (a) the Employee's willful violation of any reasonable rule or direct order of the Board or the Company's Chief Executive Officer ("CEO"), which, after written notice to do so, the Employee 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 actual moral turpitude or dishonesty of or by the Employee, or (c) drug or alcohol abuse on Company premises or at a Company sponsored event, or (d) the Employee's material violation of any provision of this Agreement, which, after written notice to do so, the Employee fails to make reasonable efforts 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 Employee, or upon any operation, asset, product or activity of the Company, of any other sanction or remedy under the Act, including without limitation civil 2 Mr. Robert L. Doyle November 7, 1994 Page 2 money penalties, warning letters, injunctions, repairs, replacements, refunds, recalls or seizures, if the Employee 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 Good Reason. "Good Reason" means (a) 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, or (b) any of the following if the same shall occur within two years after a Change of Control: (i) reduction of the Employee's base salary, management bonus percentage or other compensation, as in effect immediately prior to the Change of Control, (ii) failure to continue in effect any medical, dental, accident, or disability plan in which the Employee is entitled to participate immediately prior to the Change of Control and failure to provide plans with substantially similar benefits (except that employee contributions may be raised to the extent of any cost increases imposed by third parties) or any action by the Company which would adversely affect the Employee's participation or reduce the Employee's benefits under any of such plans, (iii) material reduction in Employee's job responsibilities, (iv) material reduction of Employee's title or position, (v) Employee shall be requested to relocate to an office outside of the greater Atlanta or Kansas City metropolitan area, or (vi) failure or refusal of any successor company to assume the Company's obligations under this Agreement. 1.3 Change of Control. A "Change of Control" shall be deemed to have occurred at any of the following times: 1.3.1 Upon the acquisition (other than from the Company) by any person, entity or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act") (excluding, for this purpose, the Company or its affiliates, or any employee benefit plan of the Company or its affiliates which acquires beneficial ownership of voting securities of the Company) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either the then outstanding shares of common stock of the Company or the Combined Voting Power of the Company's then outstanding voting securities. "Combined Voting Power" means the combined voting 3 Mr. Robert L. Doyle November 7, 1994 Page 3 power of the Company's then outstanding voting securities generally entitled to vote in the election of directors. 1.3.2 At the time individuals who, as of the date hereof, constitute the Board (as of the date hereof, the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this subsection 1.3.2, considered as though such person were a member of the Incumbent Board; or 1.3.3 Upon the approval by the Shareholders of the Company of a reorganization, merger, consolidation (in each case, with respect to which persons who were the shareholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of the Combined Voting Power of the reorganized, merged or consolidated company's then outstanding voting securities) or a liquidation or dissolution of the Company or of the sale of all or substantially all of the assets of the Company; or 1.3.4 The occurrence of any other event which the Incumbent Board in its sole discretion determines constitutes a Change of Control. 1.4 Normal Retirement Date. "Normal Retirement Date" shall mean the earliest date (currently, the Employee's 65th birthday) upon which the Employee is eligible to retire from the Company and commence receiving full retirement benefits under the Company's then applicable retirement plan. 4 Mr. Robert L. Doyle November 7, 1994 Page 4 1.5 Employment Termination Date. The date of delivery of any notice of termination pursuant to Section 2.5 shall be the "Employment Termination Date." 1.6 Continued Payment Period. "Continued Payment Period" shall have the meaning set forth in Section 3.1(a)(i). 2. Benefits and Duties During Employment; Termination of Employment. 2.1 Base Salary. Your current annual base salary is $195,000, payable in 24 equal semi-monthly amounts, subject to required withholdings. Your base salary will be reviewed and may be adjusted annually. Your base salary will not be reduced from the current level or from any future, higher levels without your written concurrence, unless such reduction is in connection with your disability and in accordance with the Company's established disability income protection plan. 2.2 Management Bonus. For the fiscal year ending January 31, 1995, your target bonus is 35% of your annual base salary under the Company's Management Incentive Bonus Plan ("MIB Plan"). Your target bonus percentage under the MIB Plan will not be reduced from the current level or from any future, higher levels without your written concurrence, unless such reduction is in connection with your disability and in accordance with the Company's established disability income protection plan. The Company may modify the MIB Plan in the future; provided that in the event of any such modification, the Company will use reasonable efforts to provide you with a bonus opportunity under the modified plan that is equivalent to your opportunity under the current MIB Plan. 2.3 Other Employee Benefits. You will continue to be eligible for all employee benefits generally available to employees of the Company, and to the special benefit programs in which you are currently participating, or in which you are hereafter eligible to participate. These special benefits include but are not limited to: 2.3.1 Company Automobile, including reimbursement for automobile expenses. 2.3.2 Life insurance and income tax and estate planning services, subject to currently established annual limits. 5 Mr. Robert L. Doyle November 7, 1994 Page 5 2.4 Limitation on Outside Activities. You agree to devote your full business time and efforts to the rendition of such services to the Company as may be designated by the Company, subject, however, to temporary illness and customary vacations. You will at all times be subject to the direction and supervision of the CEO. You may devote a reasonable amount of time to civic and community affairs but shall not perform services during the term of your employment for any other business organization in any capacity without the prior consent of the CEO. 2.5 Employment Termination. Your employment with the Company shall continue until either you or the Company give written notice to the other of termination of your employment. 3. Rights upon Termination of Employment. 3.1 Rights upon Termination by Company other than for Cause, or by Employee for Good Reason. If the Company terminates your employment other than for Cause prior to your Normal Retirement Date, or if you terminate your employment for Good Reason prior to your Normal Retirement Date, then the Company shall have the following obligations to you: (a) (i) If such termination occurs within two years after a Change of Control, then within 30 days following the Employment Termination Date, the Company shall pay to you in a lump sum the present value, determined as of the Employment Termination Date, of the amounts that you would have been paid by the Company if, during the applicable Continued Payment Period, the Company were to make equal semi-monthly payments to you equal to your semi-monthly base salary in effect immediately prior to the Employment Termination Date plus one twenty-fourth of the annual average of your incentive bonus payments under the MIB Plan or any successor thereto with respect to the three full (12 months) fiscal years immediately preceding the Employment Termination Date (such annual average being referred to herein as the "Average Annual Incentive Payment"), such amounts to be computed without regard to any reductions which may have occurred in breach of this Agreement or following a Change in Control. Such payment shall be subject to all required withholdings. The Continued Payment Period shall commence on the Employment Termination Date, and shall be a number of weeks determined by adding (a) the greater of (i) four or (ii) two times the number of years Employee has been an employee of the Company (rounding up to the next full year and excluding any 6 Mr. Robert L. Doyle November 7, 1994 Page 6 intervening periods during which Employee was not an employee of the Company), plus (b) two times the number of $5,000 increments (rounded up to the next whole $5,000 increment) contained in the Employee's Annual Compensation (as defined below), provided, that the Continued Payment Period shall not exceed 3 years. "Annual Compensation" shall mean the sum of (x) your annual base salary in the effect immediately prior to the Employment Termination Date, plus (y) the Average Annual Incentive Payment. Present value shall be determined using a discount rate equal to the Most Applicable Treasury Security Rate compounded annually, if the Applicable Treasury Security is a Treasury Bill, and semiannually, if the Applicable Treasury Security is a Treasury Note. The "Most Applicable Treasury Security Rate" shall be the yield-to- maturity of the Applicable Treasury Security with a remaining term equal to one-half of the Continued Payment Period, as quoted in the edition of the Wall Street Journal first published after the Employment Termination Date. The "Applicable Treasury Security" shall mean a Treasury Bill if the Continued Payment Period is two years or less; and shall mean a Treasury Note if the Continued Payment Period is greater than two years. (ii) If such termination occurs at any time other than within two years after a Change of Control, then, during the applicable Continued Payment Period, the Company shall make semi-monthly payments to you equal to your semi-monthly base salary in effect immediately prior to the Employment Termination Date plus one twenty-fourth of the Average Annual Incentive Payment, such amounts to be computed without regard to any reductions which may have occurred in breach of this Agreement. Such payments shall be subject to all required withholdings. (b) Any outstanding unvested options held by you to purchase stock of the Company which have not otherwise become exercisable under the terms of the Company's stock option plans, shall become fully vested and exercisable. (c) If your employment is terminated under circumstances in which you are entitled to receive payments under Section 3.1(a) above, and if you are not otherwise entitled to a bonus payment with respect to the fiscal year in which your employment is terminated, the Company will pay to you within 30 days after the Employment Termination Date, and subject to required withholdings, a one-time bonus equal to the product 7 Mr. Robert L. Doyle November 7, 1994 Page 7 of (i) the fraction of a full year represented by the period from the beginning of the fiscal year to the Employment Termination Date, and (ii) the Average Annual Incentive Payment. (d) As soon as practical following the Employment Termination Date, the Company shall pay to you the market value, as of close of business on the Employment Termination Date, of any unvested restricted stock awarded to you, subject to required withholdings. 3.2 Death Benefits. If you are terminated by the Company other than for Cause or terminate your employment for Good Reason, and thereafter you die during the applicable Continued Payment Period, the Company shall be obligated to pay to your spouse, if surviving, and otherwise to your estate, the amounts to which you would have been entitled under Section 3.1 had you survived. 3.3 No Obligation To Mitigate. You shall not be required to mitigate 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 for under this Agreement be reduced by any compensation earned by you as the result of employment by another employer after the Employment Termination Date, or otherwise. 3.4 COBRA Benefits. If your employment is terminated without cause by the Company, or for Good Reason by you, then the Company will provide a benefit under the Consolidated Omnibus Budget Reconciliation Act of 1986 ("COBRA") and Section 4980B of the Internal Revenue Code of 1986, as amended (the "Code"), as follows: the Company shall pay the percentage of the cost of COBRA coverage with respect to your coverage status (e.g., individual or family coverage) 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 (i) the monthly cost of COBRA coverage for your coverage status in effect immediately prior to the Employment Termination Date and (ii) your monthly contribution toward your coverage in effect immediately prior to the Employment Termination Date, and the denominator of which shall be the monthly cost of COBRA coverage for your coverage status in effect immediately prior to the Employment Termination Date. All of such amounts shall be determined as of the day immediately preceding the termination of Employee's employment. The insurance continuation benefits paid for hereunder shall be deemed to be part of Employee's COBRA coverage. 8 Mr. Robert L. Doyle November 7, 1994 Page 8 Such benefits shall be in addition to any other benefits relating to health or medical care benefits that are available under the Company's policies to Employee following termination of employment. 3.5 Other Rights. The severance benefits provided hereunder will be reduced by any severance benefits to which you are entitled under the Company's Severance Benefits policy for terminated employees, or any other agreement between you and the Company for severance benefits. Except as provided in the immediately preceding sentence, the provisions of this Agreement, and any payment provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish your existing rights or rights which would accrue solely as a result of the passage of time, under any benefit or incentive plan, employment agreement or other contract, plan or arrangement. As soon as practical following the Employment Termination Date, you will receive a cash payment for the value of your earned but unused vacation time as of the Employment Termination Date in accordance with then current Company Policy. 4. Successor To Company. The Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise to all or substantially all the business or assets of the Company, expressly and unconditionally to assume and agree to perform the Company's obligations under this Agreement, in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. In such event, the term "Company," as used in this Agreement, shall mean the Company and any successor or assignee to the business or assets which by reason hereof becomes bound by the terms and provisions of this Agreement. 5. Non-Competition. During your employment, you agree that you will not directly or indirectly compete with the Company, or engage in, or act as an officer, director, employee, or agent of any person or entity that is engaged in, any business in which the Company is engaged, without the written approval of the CEO. The foregoing shall not prohibit you 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 you shall own less than 3% of the outstanding voting stock of such corporation. If you are receiving payments under Section 3.1(a)(ii), then, as to any business in which the Company is engaged as of the Employment Termination Date, you shall continue to be bound by the provisions of this Section 5 during the applicable Continued Payment Period. 9 Mr. Robert L. Doyle November 7, 1994 Page 9 6. Confidentiality. During your employment and at all times thereafter, you will not divulge to anyone or use for your own benefit or the benefit of any other person or entity any information concerning the Company, its businesses, operations, 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 you for the preparation of personal tax returns. 7. Reduction of Payments. 7.1 (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be nondeductible by the Company for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of amounts payable or distributable as severance benefits hereunder shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of such severance benefits without causing any Payment to be nondeductible by the Company because of Section 280G of the Code. Anything to the contrary notwithstanding, if the Reduced Amount is zero and it is determined further that any Payment which is not part of the severance benefits payable hereunder would nevertheless be nondeductible by the Company for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of Payments which are not severance benefits under this Agreement shall also be reduced (but not below zero) to an amount expressed in present value which maximizes the aggregate present value of Payments without causing any payment to be nondeductible by the Company because of Section 280G of the Code. For purposes of this paragraph 7.1, present value shall be determined in accordance with Section 280G(d)(4) of the Code. (b) All determinations required to be made under this paragraph 7.1 shall be made by an accounting firm jointly selected by you and the Company (the "Accounting Firm") and paid by the Company, and which may be the Company's independent auditors. The Accounting Firm shall provide detailed supporting calculations both to the Company and Employee within 15 business days of the Date of Termination or such earlier time as is requested by the Company and an opinion to Employee 10 Mr. Robert L. Doyle November 7, 1994 Page 10 that he or she has substantial authority not to report any excise tax on his Federal income tax return with respect to any Payments. Any such determination by the Accounting Firm shall be binding upon the Company and Employee. Employee shall determine which and how much of the Payments, shall be eliminated or reduced consistent with the requirements of this paragraph 7.1, provided that, if Employee does not make such determination within ten business days of the receipt of the calculations made by the Accounting Firm, the Company shall elect which and how much of the Payments shall be eliminated or reduced consistent with the requirements of this paragraph 7.1 and shall notify Employee promptly of such election; and provided further that any Payments which do not constitute gross income to Employee shall not be reduced or eliminated unless all other Payments have first been eliminated. Within five business days thereafter, the Company shall pay to or distribute to or for the benefit of Employee such amounts as are then due to Employee under this Agreement. (c) As a result of the uncertainty in the application of Section 280G of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Payments will have been made by the Company which should not have been made ("Overpayment") or that Payments will not have been made by the Company which could have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against Employee or the Company which the Accounting Firm believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for the benefit of Employee shall be treated for all purposes as a loan ab initio to Employee which Employee shall repay to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable to the Company if and to the extent such deemed loan and payment would not either reduce the amount on which Employee is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm, based upon controlling precedent or other substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for the benefit of Employee together with interest at 120% of the applicable 11 Mr. Robert L. Doyle November 7, 1994 Page 11 federal rate provided for in Section 7872(f)(2) of the Code, compounded semiannually. 7.2 Notwithstanding anything in this Agreement to the contrary, if after giving effect to the provisions of Section 7.1 any portion of any payments to you by the Company hereunder and any other present or future plan or program of the Company or other present or future agreement between you 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 you shall be deferred until the earliest date upon which payment thereof can be made to you without being non-deductible pursuant to Section 162(m) of the Code. In the event of such a deferral, the Company shall pay interest to you on the amount deferred at 120% of the applicable federal rate provided for in Section 7872(f)(2) of the Code, compounded semi-annually. 8. Miscellaneous. 8.1. No Assignment. No benefit hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrances or charge, and any attempt to do so shall be void. 8.2 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: Chief Executive Officer Puritan-Bennett Corporation 9401 Indian Creek Parkway Overland Park, Kansas 66225 If to the Employee: Mr. Robert L. Doyle 1104 Summit Tree Duluth, Georgia 30136 12 Mr. Robert L. Doyle November 7, 1994 Page 12 Either party may change its address for notice by giving notice to the other party of a new address in accordance with the foregoing provisions. 8.3 Governing Law. This Agreement shall be governed by the laws of the State of Kansas. 8.4 Disputes. In the event of any dispute between the Company and Employee arising out of this Agreement, the Company's then current Alternative Dispute Resolution Procedure will be followed (a copy of the current procedure is attached hereto) and the prevailing party shall be entitled to recover its reasonable attorneys' fees and expenses incurred in connection with the enforcement of its rights hereunder. 8.5 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 8.6 Descriptive Headings. Descriptive headings of the several paragraphs of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. Please acknowledge your agreement to the foregoing Agreement by signing the enclosed counterpart of this letter and returning it to the Company. Very truly yours, PURITAN-BENNETT CORPORATION /s/ Lee A. Robbins By: Lee A. Robbins Title: Vice President Agreed to and accepted: /s/ Robert L. Doyle ROBERT L. DOYLE EX-10.3 4 EXEC. AGREEMENT, BTWN THOMAS E. JONES & THE CO. 1 EXHIBIT 10.3 EXECUTIVE AGREEMENT November 7, 1994 Mr. Thomas E. Jones Senior Vice President, General Manager Puritan Group Puritan-Bennett Corporation 10800 Pflumm Road Lenexa, KS 66215 Dear Mr. Jones: In view of your position as Senior Vice President, General Manager Puritan Group of Puritan-Bennett Corporation (the "Company") and in consideration of your agreement to continue serving in this or some other mutually agreeable capacity, the Board of Directors (the "Board") of the Company has approved the commitment by the Company to provide you ("Employee") with certain benefits during your employment and in the event of termination of your employment for Good Reason, if by you, and other than for Cause, if by the Company. This letter agreement (the "Agreement") establishes the terms and conditions of your continued employment by the Company, including your rights to receive certain payments and benefits during and after your employment by the Company. 1. Certain Definitions. 1.1 Cause. "Cause" means (a) the Employee's willful violation of any reasonable rule or direct order of the Board or the Company's Chief Executive Officer ("CEO"), which, after written notice to do so, the Employee 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 actual moral turpitude or dishonesty of or by the Employee, or (c) drug or alcohol abuse on Company premises or at a Company sponsored event, or (d) the Employee's material violation of any provision of this Agreement, which, after written notice to do so, the Employee fails to make reasonable efforts 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 Employee, 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, 2 Mr. Thomas E. Jones November 7, 1994 Page 2 refunds, recalls or seizures, if the Employee 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 Good Reason. "Good Reason" means (a) 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, or (b) any of the following if the same shall occur within two years after a Change of Control: (i) reduction of the Employee's base salary, management bonus percentage or other compensation, as in effect immediately prior to the Change of Control, (ii) failure to continue in effect any medical, dental, accident, or disability plan in which the Employee is entitled to participate immediately prior to the Change of Control and failure to provide plans with substantially similar benefits (except that employee contributions may be raised to the extent of any cost increases imposed by third parties) or any action by the Company which would adversely affect the Employee's participation or reduce the Employee's benefits under any of such plans, (iii) material reduction in Employee's job responsibilities, (iv) material reduction of Employee's title or position, (v) Employee shall be requested to relocate to an office outside of the greater Kansas City metropolitan area, or (vi) failure or refusal of any successor company to assume the Company's obligations under this Agreement. 1.3 Change of Control. A "Change of Control" shall be deemed to have occurred at any of the following times: 1.3.1 Upon the acquisition (other than from the Company) by any person, entity or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act") (excluding, for this purpose, the Company or its affiliates, or any employee benefit plan of the Company or its affiliates which acquires beneficial ownership of voting securities of the Company) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either the then outstanding shares of common stock of the Company or the Combined Voting Power of the Company's then outstanding voting securities. "Combined Voting Power" means the combined voting 3 Mr. Thomas E. Jones November 7, 1994 Page 3 power of the Company's then outstanding voting securities generally entitled to vote in the election of directors. 1.3.2 At the time individuals who, as of the date hereof, constitute the Board (as of the date hereof, the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this subsection 1.3.2, considered as though such person were a member of the Incumbent Board; or 1.3.3 Upon the approval by the Shareholders of the Company of a reorganization, merger, consolidation (in each case, with respect to which persons who were the shareholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of the Combined Voting Power of the reorganized, merged or consolidated company's then outstanding voting securities) or a liquidation or dissolution of the Company or of the sale of all or substantially all of the assets of the Company; or 1.3.4 The occurrence of any other event which the Incumbent Board in its sole discretion determines constitutes a Change of Control. 1.4 Normal Retirement Date. "Normal Retirement Date" shall mean the earliest date (currently, the Employee's 65th birthday) upon which the Employee is eligible to retire from the Company, and commence receiving full retirement benefits under the Company's then applicable retirement plan. 4 Mr. Thomas E. Jones November 7, 1994 Page 4 1.5 Employment Termination Date. The date of delivery of any notice of termination pursuant to Section 2.5 shall be the "Employment Termination Date." 1.6 Continued Payment Period. "Continued Payment Period" shall have the meaning set forth in Section 3.1(a)(i). 2. Benefits and Duties During Employment; Termination of Employment. 2.1 Base Salary. Your current annual base salary is $185,000, payable in 24 equal semi-monthly amounts, subject to required withholdings. Your base salary will be reviewed and may be adjusted annually. Your base salary will not be reduced from the current level or from any future, higher levels without your written concurrence, unless such reduction is in connection with your disability and in accordance with the Company's established disability income protection plan. 2.2 Management Bonus. For the fiscal year ending January 31, 1995, your target bonus is 35% of your annual base salary under the Company's Management Incentive Bonus Plan ("MIB Plan"). Your target bonus percentage under the MIB Plan will not be reduced from the current level or from any future, higher levels without your written concurrence, unless such reduction is in connection with your disability and in accordance with the Company's established disability income protection plan. The Company may modify the MIB Plan in the future; provided that in the event of any such modification, the Company will use reasonable efforts to provide you with a bonus opportunity under the modified plan that is equivalent to your opportunity under the current MIB Plan. 2.3 Other Employee Benefits. You will continue to be eligible for all employee benefits generally available to employees of the Company, and to the special benefit programs in which you are currently participating, or in which you are hereafter eligible to participate. These special benefits include but are not limited to: 2.3.1 Company Automobile, including reimbursement for automobile expenses. 2.3.2 Life insurance and income tax and estate planning services, subject to currently established annual limits. 5 Mr. Thomas E. Jones November 7, 1994 Page 5 2.3.3 Shadow Glen Golf Club Membership, including reimbursement for monthly dues, special assessments and expenses incurred in connection with business usage of dub services and facilities. You may direct the Company to transfer ownership of this membership to you, or to pay you an amount equal to the original acquisition cost of such membership, by giving notice to the Company at any time within three months after the Employment Termination Date. 2.4 Limitation on Outside Activities. You agree to devote your full business time and efforts to the rendition of such services to the Company as may be designated by the Company, subject, however, to temporary illness and customary vacations. You will at all times be subject to the direction and supervision of the CEO. You may devote a reasonable amount of time to civic and community affairs but shall not perform services during the term of your employment for any other business organization in any capacity without the prior consent of the CEO. 2.5 Employment Termination. Your employment with the Company shall continue until either you or the Company give written notice to the other of termination of your employment. 3. Rights upon Termination of Employment. 3.1 Rights upon Termination by Company other than for Cause, or by Employee for Good Reason. If the Company terminates your employment other than for Cause prior to your Normal Retirement Date, or if you terminate your employment for Good Reason prior to your Normal Retirement Date, then the Company shall have the following obligations to you: (a) (i) If such termination occurs within two years after a Change of Control, then within 30 days following the Employment Termination Date, the Company shall pay to you in a lump sum the present value, determined as of the Employment Termination Date, of the amounts that you would have been paid by the Company if, during the applicable Continued Payment Period, the Company were to make equal semi-monthly payments to you equal to your semi-monthly base salary in effect immediately prior to the Employment Termination Date plus one twenty-fourth of the annual average of your incentive bonus payments 6 Mr. Thomas E. Jones November 7, 1994 Page 6 under the MIB Plan or any successor thereto with respect to the three full (12 months) fiscal years immediately preceding the Employment Termination Date (such annual average being referred to herein as the "Average Annual Incentive Payment"), such amounts to be computed without regard to any reductions which may have occurred in breach of this Agreement or following a Change in Control. Such payment shall be subject to all required withholdings. The Continued Payment Period shall commence on the Employment Termination Date, and shall be a number of weeks determined by adding (a) the greater of (i) four or (ii) two times the number of years Employee has been an employee of the Company (rounding up to the next full year and excluding any intervening periods during which Employee was not an employee of the Company), plus (b) two times the number of $5,000 increments (rounded up to the next whole $5,000 increment) contained in the Employee's Annual Compensation (as defined below), provided, that the Continued Payment Period shall not exceed 3 years. "Annual Compensation" shall mean the sum of (x) your annual base salary in the effect immediately prior to the Employment Termination Date, plus (y) the Average Annual Incentive Payment. Present value shall be determined using a discount rate equal to the Most Applicable Treasury Security Rate compounded annually, if the Applicable Treasury Security is a Treasury Bill, and semiannually, if the Applicable Treasury Security is a Treasury Note. The "Most Applicable Treasury Security Rate" shall be the yield-to-maturity of the Applicable Treasury Security with a remaining term equal to one-half of the Continued Payment Period, as quoted in the edition of the Wall Street Journal first published after the Employment Termination Date. The "Applicable Treasury Security" shall mean a Treasury Bill if the Continued Payment Period is two years or less; and shall mean a Treasury note if the Continued Payment Period is greater than two years. (ii) If such termination occurs at any time other than within two years after a Change of Control, then, during the applicable Continued Payment Period, the Company shall make semi-monthly payments to you equal to your semi-monthly base salary in effect immediately prior to the Employment Termination Date plus one twenty-fourth of the Average Annual Incentive Payment, such amounts to be computed without regard to any reductions which may have occurred in breach of this Agreement. Such payments shall be subject to all required withholdings. (b) Any outstanding unvested options held by you to purchase stock of the Company which have not otherwise become exercisable under the 7 Mr. Thomas E. Jones November 7, 1994 Page 7 terms of the Company's stock option plans, shall become fully vested and exercisable. (c) If your employment is terminated under circumstances in which you are entitled to receive payments under Section 3.1(a) above, and if you are not otherwise entitled to a bonus payment with respect to the fiscal year in which your employment is terminated, the Company will pay to you within 30 days after the Employment Termination Date, and subject to required withholdings, a one-time bonus equal to the product of (i) the fraction of a full year represented by the period from the beginning of the fiscal year to the Employment Termination Date, and (ii) the Average Annual Incentive Payment. (d) As soon as practical following the Employment Termination Date, the Company shall pay to you the market value, as of close of business on the Employment Termination Date, of any unvested restricted stock awarded to you, subject to required withholdings. 3.2 Death Benefits. If you are terminated by the Company other than for Cause or terminate your employment for Good Reason, and thereafter you die during the applicable Continued Payment Period, the Company shall be obligated to pay to your spouse, if surviving, and otherwise to your estate, the amounts to which you would have been entitled under Section 3.1 had you survived. 3.3 No Obligation To Mitigate. You shall not be required to mitigate 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 for under this Agreement be reduced by any compensation earned by you as the result of employment by another employer after the Employment Termination Date, or otherwise. 3.4 COBRA Benefits. If your employment is terminated without cause by the Company, or for Good Reason by you, then the Company will provide a benefit under the Consolidated Omnibus Budget Reconciliation Act of 1986 ("COBRA") and Section 4980B of the Internal Revenue Code of 1986, as amended (the "Code"), as follows: the Company shall pay the percentage of the cost of COBRA coverage with respect to your coverage status (e.g., individual or family coverage) 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 (i) the monthly cost 8 Mr. Thomas E. Jones November 7, 1994 Page 8 of COBRA coverage for your coverage status in effect immediately prior to the Employment Termination Date and (ii) your monthly contribution toward your coverage in effect immediately prior to the Employment Termination Date, and the denominator of which shall be the monthly cost of COBRA coverage for your coverage status in effect immediately prior to the Employment Termination Date. All of such amounts shall be determined as of the day immediately preceding the termination of Employee's employment. The insurance continuation benefits paid for hereunder shall be deemed to be part of Employee's COBRA coverage. Such benefits shall be in addition to any other benefits relating to health or medical care benefits that are available under the Company's policies to Employee following termination of employment. 3.5 Other Rights. The severance benefits provided hereunder will be reduced by any severance benefits to which you are entitled under the Company's Severance Benefits policy for terminated employees, or any other agreement between you and the Company for severance benefits. Except as provided in the immediately preceding sentence, the provisions of this Agreement, and any payment provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish your existing rights or rights which would accrue solely as a result of the passage of time, under any benefit or incentive plan, employment agreement or other contract, plan or arrangement. As soon as practical following the Employment Termination Date, you will receive a cash payment for the value of your earned but unused vacation time as of the Employment Termination Date in accordance with then current Company Policy. 4. Successor To Company. The Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise to all or substantially all the business or assets of the Company, expressly and unconditionally to assume and agree to perform the Company's obligations under this Agreement, in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. In such event, the term "Company," as used in this Agreement, shall mean the Company and any successor or assignee to the business or assets which by reason hereof becomes bound by the terms and provisions of this Agreement. 5. Non-Competition. During your employment, you agree that you will not directly or indirectly compete with the Company, or engage in, or act as an officer, director, employee, or agent of any person or entity that is engaged in, any 9 Mr. Thomas E. Jones November 7, 1994 Page 9 business in which the Company is engaged, without the written approval of the CEO. The foregoing shall not prohibit you 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 you shall own less than 3% of the outstanding voting stock of such corporation. If you are receiving payments under Section 3.1(a)(ii), then, as to any business in which the Company is engaged as of the Employment Termination Date, you shall continue to be bound by the provisions of this Section 5 during the applicable Continued Payment Period. 6. Confidentiality. During your employment and at all times thereafter, you will not divulge to anyone or use for your own benefit or the benefit of any other person or entity any information concerning the Company, its businesses, operations, 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 you for the preparation of personal tax returns. 7. Reduction of Payments. 7.1 (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be nondeductible by the Company for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of amounts payable or distributable as severance benefits hereunder shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of such severance benefits without causing any Payment to be nondeductible by the Company because of Section 280G of the Code. Anything to the contrary notwithstanding, if the Reduced Amount is zero and it is determined further that any Payment which is not part of the severance benefits payable hereunder would nevertheless be nondeductible by the Company for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of Payments which are not severance benefits under this Agreement shall also be reduced (but not below zero) to an amount expressed in present value which maximizes the aggregate present value of Payments without causing any payment to be nondeductible by the Company because of Section 280G of the Code. 10 Mr. Thomas E. Jones November 7, 1994 Page 10 For purposes of this paragraph 7.1, present value shall be determined in accordance with Section 280G(d)(4) of the Code. (b) All determinations required to be made under this paragraph 7.1 shall be made by an accounting firm jointly selected by you and the Company (the "Accounting Firm") and paid by the Company, and which may be the Company's independent auditors. The Accounting Firm shall provide detailed supporting calculations both to the Company and Employee within 15 business days of the Date of Termination or such earlier time as is requested by the Company and an opinion to Employee that he or she has substantial authority not to report any excise tax on his Federal income tax return with respect to any Payments. Any such determination by the Accounting Firm shall be binding upon the Company and Employee. Employee shall determine which and how much of the Payments, shall be eliminated or reduced consistent with the requirements of this paragraph 7.1, provided that, if Employee does not make such determination within ten business days of the receipt of the calculations made by the Accounting Firm, the Company shall elect which and how much of the Payments shall be eliminated or reduced consistent with the requirements of this paragraph 7.1 and shall notify Employee promptly of such election; and provided further that any Payments which do not constitute gross income to Employee shall not be reduced or eliminated unless all other Payments have first been eliminated. Within five business days thereafter, the Company shall pay to or distribute to or for the benefit of Employee such amounts as are then due to Employee under this Agreement. (c) As a result of the uncertainty in the application of Section 280G of the Code at the time of the initial determination by the Company's independent auditors hereunder, it is possible that Payments will have been made by the Company which should not have been made ("Overpayment") or that Payments will not have been made by the Company which could have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against Employee or the Company which the Accounting Firm believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for the benefit of Employee shall be treated for all purposes as a loan ab initio to Employee which Employee shall repay to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; 11 Mr. Thomas E. Jones November 7, 1994 Page 11 provided, however, that no such loan shall be deemed to have been made and no amount shall be payable to the Company if and to the extent such deemed loan and payment would not either reduce the amount on which Employee is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm, based upon controlling precedent or other substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for the benefit of Employee together with interest at 120% of the applicable federal rate provided for in Section 7872(f)(2) of the Code, compounded semiannually. 7.2 Notwithstanding anything in this Agreement to the contrary, if after giving effect to the provisions of Section 7.1 any portion of any payments to you by the Company hereunder and any other present or future plan or program of the Company or other present or future agreement between you 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 you shall be deferred until the earliest date upon which payment thereof can be made to you without being non-deductible pursuant to Section 162(m) of the Code. In the event of such a deferral, the Company shall pay interest to you on the amount deferred at 120% of the applicable federal rate provided for in Section 7872(f)(2) of the Code, compounded semi-annually. 8. Miscellaneous. 8.1. No Assignment. No benefit hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrances or charge, and any attempt to do so shall be void. 8.2 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: Chief Executive Officer Puritan-Bennett Corporation 9401 Indian Creek Parkway Overland Park, Kansas 66225 12 Mr. Thomas E. Jones November 7, 1994 Page 12 If to the Employee: Mr. Thomas E. Jones 8206 Maple Lane Prairie Village, KS 66207 Either party may change its address for notice by giving notice to the other party of a new address in accordance with the foregoing provisions. 8.3 Governing Law. This Agreement shall be governed by the laws of the State of Kansas. 8.4 Disputes. In the event of any dispute between the Company and Employee arising out of this Agreement, the Company's then current Alternative Dispute Resolution Procedure will be followed (a copy of the current procedure is attached hereto) and the prevailing party shall be entitled to recover its reasonable attorneys' fees and expenses incurred in connection with the enforcement of its rights hereunder. 8.5 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 8.6 Descriptive Headings. Descriptive headings of the several paragraphs of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. 13 Mr. Thomas E. Jones November 7, 1994 Page 13 Please acknowledge your agreement to the foregoing Agreement by signing the enclosed counterpart of this letter and returning it to the Company. Very truly yours, PURITAN-BENNETT CORPORATION /s/ Lee A. Robbins By: Lee A. Robbins Title: Vice President Agreed to and accepted: /s/ Thomas E. Jones THOMAS E. JONES EX-10.4 5 EXEC. AGREEMENT, BTWN ALEXANDER R. RANKIN & CO. 1 EXHIBIT 10.4 EXECUTIVE AGREEMENT November 7, 1994 Mr. Alexander R. Rankin Senior Vice President, General Manager Bennett Group Puritan-Bennett Corporation 2200 Faraday Carlsbad, CA 92008 Dear Mr. Rankin: This letter agreement restates and supersedes in its entirety the letter agreement dated August 31, 1994 between you and Puritan-Bennett Corporation (the "Company"). In view of your position as Senior Vice President, General Manager Bennett Group of the Company and in consideration of your agreement to continue serving in this or some other mutually agreeable capacity, the Board of Directors (the "Board") of the Company has approved the commitment by the Company to provide you ("Employee") with certain benefits during your employment and in the event of termination of your employment for Good Reason, if by you, and other than for Cause, if by the Company. This letter agreement (the "Agreement") establishes the terms and conditions of your continued employment by the Company, including your rights to receive certain payments and benefits during and after your employment by the Company. 1. Certain Definitions. 1.1 Cause. "Cause" means (a) the Employee's willful violation of any reasonable rule or direct order of the Board or the Company's Chief Executive Officer ("CEO"), which, after written notice to do so, the Employee 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 actual moral turpitude or dishonesty of or by the Employee, or (c) drug or alcohol abuse on Company premises or at a Company sponsored event, or (d) the Employee's material violation of any provision of this Agreement, which, after written notice to do so, the Employee fails to make reasonable efforts 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 Employee, 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, 2 Mr. Alexander R. Rankin November 7, 1994 Page 2 refunds, recalls or seizures, if the Employee 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 Good Reason. "Good Reason" means (a) 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, or (b) any of the following if the same shall occur within two years after a Change of Control: (i) reduction of the Employee's base salary, management bonus percentage or other compensation, as in effect immediately prior to the Change of Control, (ii) failure to continue in effect any medical, dental, accident, or disability plan in which the Employee is entitled to participate immediately prior to the Change of Control and failure to provide plans with substantially similar benefits (except that employee contributions may be raised to the extent of any cost increases imposed by third parties) or any action by the Company which would adversely affect the Employee's participation or reduce the Employee's benefits under any of such plans, (iii) material reduction in Employee's job responsibilities, (iv) material reduction of Employee's title or position, (v) Employee shall be requested to relocate to an office outside of the greater San Diego metropolitan area, or (vi) failure or refusal of any successor company to assume the Company's obligations under this Agreement. 1.3 Change of Control. A "Change of Control" shall be deemed to have occurred at any of the following times: 1.3.1 Upon the acquisition (other than from the Company) by any person, entity or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act") (excluding, for this purpose, the Company or its affiliates, or any employee benefit plan of the Company or its affiliates which acquires beneficial ownership of voting securities of the Company) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either the then outstanding shares of common stock of the Company or the Combined Voting Power of the Company's then outstanding voting securities. "Combined Voting Power" means the combined voting 3 Mr. Alexander R. Rankin November 7, 1994 Page 3 power of the Company's then outstanding voting securities generally entitled to vote in the election of directors. 1.3.2 At the time individuals who, as of the date hereof, constitute the Board (as of the date hereof, the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this subsection 1.3.2, considered as though such person were a member of the Incumbent Board; or 1.3.3 Upon the approval by the Shareholders of the Company of a reorganization, merger, consolidation (in each case, with respect to which persons who were the shareholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of the Combined Voting Power of the reorganized, merged or consolidated company's then outstanding voting securities) or a liquidation or dissolution of the Company or of the sale of all or substantially all of the assets of the Company; or 1.3.4 The occurrence of any other event which the Incumbent Board in its sole discretion determines constitutes a Change of Control. 1.4 Normal Retirement Date. "Normal Retirement Date" shall mean the earliest date (currently, the Employee's 65th birthday) upon which the Employee is eligible to retire from the Company and commence receiving full retirement benefits under the Company's then applicable retirement plan. 4 Mr. Alexander R. Rankin November 7, 1994 Page 4 1.5 Employment Termination Date. The date of delivery of any notice of termination pursuant to Section 2.5 shall be the "Employment Termination Date." 1.6 Continued Payment Period. "Continued Payment Period" shall have the meaning set forth in Section 3.1(a)(i). 2. Benefits and Duties During Employment; Termination of Employment. 2.1 Base Salary. Your current annual base salary is $173,000, payable in 24 equal semi-monthly amounts, subject to required withholdings. Your base salary will be reviewed and may be adjusted annually. Your base salary will not be reduced from the current level or from any future, higher levels without your written concurrence, unless such reduction is in connection with your disability and in accordance with the Company's established disability income protection plan. 2.2 Management Bonus. For the fiscal year ending January 31, 1995, your target bonus is 35% of your annual base salary under the Company's Management Incentive Bonus Plan ("MIB Plan"). Your target bonus percentage under the MIB Plan will not be reduced from the current level or from any future, higher levels without your written concurrence, unless such reduction is in connection with your disability and in accordance with the Company's established disability income protection plan. The Company may modify the MIB Plan in the future; provided that in the event of any such modification, the Company will use reasonable efforts to provide you with a bonus opportunity under the modified plan that is equivalent to your opportunity under the current MIB Plan. 2.3 Other Employee Benefits. You will continue to be eligible for all employee benefits generally available to employees of the Company, and to the special benefit programs in which you are currently participating, or in which you are hereafter eligible to participate. These special benefits include but are not limited to: 2.3.1 Company Automobile, including reimbursement for automobile expenses. 2.3.2 Life insurance and income tax and estate planning services, subject to currently established annual limits. 5 Mr. Alexander R. Rankin November 7, 1994 Page 5 2.4 Limitation on Outside Activities. You agree to devote your full business time and efforts to the rendition of such services to the Company as may be designated by the Company, subject, however, to temporary illness and customary vacations. You will at all times be subject to the direction and supervision of the CEO. You may devote a reasonable amount of time to civic and community affairs but shall not perform services during the term of your employment for any other business organization in any capacity without the prior consent of the CEO. 2.5 Employment Termination. Your employment with the Company shall continue until either you or the Company give written notice to the other of termination of your employment. 3. Rights upon Termination of Employment. 3.1 Rights upon Termination by Company other than for Cause, or by Employee for Good Reason. If the Company terminates your employment other than for Cause prior to your Normal Retirement Date, or if you terminate your employment for Good Reason prior to your Normal Retirement Date, then the Company shall have the following obligations to you: (a) (i) If such termination occurs within two years after a Change of Control, then within 30 days following the Employment Termination Date, the Company shall pay to you in a lump sum the present value, determined as of the Employment Termination Date, of the amounts that you would have been paid by the Company if, during the applicable Continued Payment Period, the Company were to make equal semi-monthly payments to you equal to your semi-monthly base salary in effect immediately prior to the Employment Termination Date plus one twenty-fourth of the annual average of your incentive bonus payments under the MIB Plan or any successor thereto with respect to the three full (12 months) fiscal years immediately preceding the Employment Termination Date (such annual average being referred to herein as the "Average Annual Incentive Payment" [provided, if you have not been employed by the Company during all of the three full fiscal years immediately preceding the Employment Termination Date, then "Average Annual Incentive Payment" shall mean the annualized average of the bonus payments received by you, computed based on the actual period of your employment with the Company during any full fiscal year(s) of the Company with respect to which you have received a bonus]), such amounts to be computed without regard to any reductions which may 6 Mr. Alexander R. Rankin November 7, 1994 Page 6 have occurred in breach of this Agreement or following a Change in Control. Such payment shall be subject to all required withholdings. The Continued Payment Period shall commence on the Employment Termination Date, and shall be a number of weeks determined by adding (a) the greater of (i) four or (ii) two times the number of years Employee has been an employee of the Company (rounding up to the next full year and excluding any intervening periods during which Employee was not an employee of the Company), plus (b) two times the number of $5,000 increments (rounded up to the next whole $5,000 increment) contained in the Employee's Annual Compensation (as defined below), provided, that the Continued Payment Period shall not exceed 2 years. "Annual Compensation" shall mean the sum of (x) your annual base salary in the effect immediately prior to the Employment Termination Date, plus (y) the Average Annual Incentive Payment. Present value shall be determined using a discount rate equal to the Most Applicable Treasury Security Rate compounded annually, if the Applicable Treasury Security is a Treasury Bill, and semiannually, if the Applicable Treasury Security is a Treasury Note. The "Most Applicable Treasury Security Rate" shall be the yield-to-maturity of the Applicable Treasury Security with a remaining term equal to one-half of the Continued Payment Period, as quoted in the edition of the Wall Street Journal first published after the Employment Termination Date. The "Applicable Treasury Security" shall mean a Treasury Bill if the Continued Payment Period is two years or less; and shall mean a Treasury Note if the Continued Payment Period is greater than two years. (ii) If such termination occurs at any time other than within two years after a Change of Control, then, during the applicable Continued Payment Period, the Company shall make semi-monthly payments to you equal to your semi-monthly base salary in effect immediately prior to the Employment Termination Date plus one twenty-fourth of the Average Annual Incentive Payment, such amounts to be computed without regard to any reductions which may have occurred in breach of this Agreement. Such payments shall be subject to all required withholdings. (b) Any outstanding unvested options held by you to purchase stock of the Company which have not otherwise become exercisable under the terms of the Company's stock option plans, shall become fully vested and exercisable. (c) If your employment is terminated under circumstances in which you are entitled to receive payments under Section 3.1(a) above, and if 7 Mr. Alexander R. Rankin November 7, 1994 Page 7 you are not otherwise entitled to a bonus payment with respect to the fiscal year in which your employment is terminated, the Company will pay to you within 30 days after the Employment Termination Date, and subject to required withholdings, a one-time bonus equal to the product of (i) the fraction of a full year represented by the period from the beginning of the fiscal year to the Employment Termination Date, and (ii) the Average Annual Incentive Payment. (d) As soon as practical following the Employment Termination Date, the Company shall pay to you the market value, as of close of business on the Employment Termination Date, of any unvested restricted stock awarded to you, subject to required withholdings. 3.2 Death Benefits. If you are terminated by the Company other than for Cause or terminate your employment for Good Reason, and thereafter you die during the applicable Continued Payment Period, the Company shall be obligated to pay to your spouse, if surviving, and otherwise to your estate, the amounts to which you would have been entitled under Section 3.1 had you survived. 3.3 No Obligation To Mitigate. You shall not be required to mitigate 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 for under this Agreement be reduced by any compensation earned by you as the result of employment by another employer after the Employment Termination Date, or otherwise. 3.4 COBRA Benefits. If your employment is terminated without cause by the Company, or for Good Reason by you, then the Company will provide a benefit under the Consolidated Omnibus Budget Reconciliation Act of 1986 ("COBRA") and Section 4980B of the Internal Revenue Code of 1986, as amended (the "Code"), as follows: the Company shall pay the percentage of the cost of COBRA coverage with respect to your coverage status (e.g., individual or family coverage) 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 (i) the monthly cost of COBRA coverage for your coverage status in effect immediately prior to the Employment Termination Date and (ii) your monthly contribution toward your coverage in effect immediately prior to the Employment Termination Date, and the denominator of which shall be the monthly cost of COBRA coverage for your coverage status in effect immediately 8 Mr. Alexander R. Rankin November 7, 1994 Page 8 prior to the Employment Termination Date. All of such amounts shall be determined as of the day immediately preceding the termination of Employee's employment. The insurance continuation benefits paid for hereunder shall be deemed to be part of Employee's COBRA coverage. Such benefits shall be in addition to any other benefits relating to health or medical care benefits that are available under the Company's policies to Employee following termination of employment. 3.5 Other Rights. The severance benefits provided hereunder will be reduced by any severance benefits to which you are entitled under the Company's Severance Benefits policy for terminated employees, or any other agreement between you and the Company for severance benefits. Except as provided in the immediately preceding sentence, the provisions of this Agreement, and any payment provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish your existing rights or rights which would accrue solely as a result of the passage of time, under any benefit or incentive plan, employment agreement or other contract, plan or arrangement. As soon as practical following the Employment Termination Date, you will receive a cash payment for the value of your earned but unused vacation time as of the Employment Termination Date in accordance with then current Company Policy. 4. Successor To Company. The Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise to all or substantially all the business or assets of the Company, expressly and unconditionally to assume and agree to perform the Company's obligations under this Agreement, in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. In such event, the term "Company," as used in this Agreement, shall mean the Company and any successor or assignee to the business or assets which by reason hereof becomes bound by the terms and provisions of this Agreement. 5. Non-Competition. During your employment, you agree that you will not directly or indirectly compete with the Company, or engage in, or act as an officer, director, employee, or agent of any person or entity that is engaged in, any business in which the Company is engaged, without the written approval of the CEO. The foregoing shall not prohibit you 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 you shall own less than 3% of the outstanding voting stock of such corporation. If you are 9 Mr. Alexander R. Rankin November 7, 1994 Page 9 receiving payments under Section 3.1(a)(ii), then, as to any business in which the Company is engaged as of the Employment Termination Date, you shall continue to be bound by the provisions of this Section 5 during the applicable Continued Payment Period. 6. Confidentiality. During your employment and at all times thereafter, you will not divulge to anyone or use for your own benefit or the benefit of any other person or entity any information concerning the Company, its businesses, operations, 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 you for the preparation of personal tax returns. 7. Reduction of Payments. 7.1 (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be nondeductible by the Company for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of amounts payable or distributable as severance benefits hereunder shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of such severance benefits without causing any Payment to be nondeductible by the Company because of Section 280G of the Code. Anything to the contrary notwithstanding, if the Reduced Amount is zero and it is determined further that any Payment which is not part of the severance benefits payable hereunder would nevertheless be nondeductible by the Company for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of Payments which are not severance benefits under this Agreement shall also be reduced (but not below zero) to an amount expressed in present value which maximizes the aggregate present value of Payments without causing any payment to be nondeductible by the Company because of Section 280G of the Code. For purposes of this paragraph 7.1, present value shall be determined in accordance with Section 280G(d)(4) of the Code. (b) All determinations required to be made under this paragraph 7.1 shall be made by an accounting firm jointly selected by you and the 10 Mr. Alexander R. Rankin November 7, 1994 Page 10 Company (the "Accounting Firm") and paid by the Company, and which may be the Company's independent auditors. The Accounting Firm shall provide detailed supporting calculations both to the Company and Employee within 15 business days of the Date of Termination or such earlier time as is requested by the Company and an opinion to Employee that he or she has substantial authority not to report any excise tax on his Federal income tax return with respect to any Payments. Any such determination by the Accounting Firm shall be binding upon the Company and Employee. Employee shall determine which and how much of the Payments, shall be eliminated or reduced consistent with the requirements of this paragraph 7.1, provided that, if Employee does not make such determination within ten business days of the receipt of the calculations made by the Accounting Firm, the Company shall elect which and how much of the Payments shall be eliminated or reduced consistent with the requirements of this paragraph 7.1 and shall notify Employee promptly of such election; and provided further that any Payments which do not constitute gross income to Employee shall not be reduced or eliminated unless all other Payments have first been eliminated. Within five business days thereafter, the Company shall pay to or distribute to or for the benefit of Employee such amounts as are then due to Employee under this Agreement. (c) As a result of the uncertainty in the application of Section 280G of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Payments will have been made by the Company which should not have been made ("Overpayment") or that Payments will not have been made by the Company which could have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against Employee or the Company which the Accounting Firm believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for the benefit of Employee shall be treated for all purposes as a loan ab initio to Employee which Employee shall repay to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable to the Company if and to the extent such deemed loan and payment would not either reduce the amount on which Employee is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the 11 Mr. Alexander R. Rankin November 7, 1994 Page 11 Accounting Firm, based upon controlling precedent or other substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for the benefit of Employee together with interest at 120% of the applicable federal rate provided for in Section 7872(f)(2) of the Code, compounded semiannually. 7.2 Notwithstanding anything in this Agreement to the contrary, if after giving effect to the provisions of Section 7.1 any portion of any payments to you by the Company hereunder and any other present or future plan or program of the Company or other present or future agreement between you 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 you shall be deferred until the earliest date upon which payment thereof can be made to you without being non-deductible pursuant to Section 162(m) of the Code. In the event of such a deferral, the Company shall pay interest to you on the amount deferred at 120% of the applicable federal rate provided for in Section 7872(f)(2) of the Code, compounded semi-annually. 8. Miscellaneous. 8.1. No Assignment. No benefit hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrances or charge, and any attempt to do so shall be void. 8.2 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: Chief Executive Officer Puritan-Bennett Corporation 9401 Indian Creek Parkway Overland Park, Kansas 66225 12 Mr. Alexander R. Rankin November 7, 1994 Page 12 If to the Employee: Mr. Alexander R. Rankin P.O. Box 746 Rancho Sante Fe, CA 92067-0746 Either party may change its address for notice by giving notice to the other party of a new address in accordance with the foregoing provisions. 8.3 Governing Law. This Agreement shall be governed by the laws of the State of Kansas. 8.4 Disputes. In the event of any dispute between the Company and Employee arising out of this Agreement, the Company's then current Alternative Dispute Resolution Procedure will be followed (a copy of the current procedure is attached hereto) and the prevailing party shall be entitled to recover its reasonable attorneys' fees and expenses incurred in connection with the enforcement of its rights hereunder. 8.5 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 8.6 Descriptive Headings. Descriptive headings of the several paragraphs of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. 13 Mr. Alexander R. Rankin November 7, 1994 Page 13 Please acknowledge your agreement to the foregoing Agreement by signing the enclosed counterpart of this letter and returning it to the Company. Very truly yours, PURITAN-BENNETT CORPORATION /s/ Lee A. Robbins By: Lee A. Robbins Title: Vice President Agreed to and accepted: /s/ Alexander R. Rankin ALEXANDER R. RANKIN EX-10.5 6 EXEC. AGREEMENT, BTWN DAVID P. NILES & THE CO. 1 EXHIBIT 10.5 EXECUTIVE AGREEMENT November 7, 1994 Mr. David P. Niles Vice President, Quality and Regulatory Affairs Puritan-Bennett Corporation 9401 Indian Creek Parkway P.O. Box 25905 Overland Park, KS 66225 Dear Mr. Niles: This letter agreement restates and supersedes in its entirety the letter agreement dated August 31, 1994 between you and Puritan-Bennett Corporation (the "Company"). In view of your position as Vice President, Quality and Regulatory Affairs of the Company and in consideration of your agreement to continue serving in this or some other mutually agreeable capacity, the Board of Directors (the "Board") of the Company has approved the commitment by the Company to provide you ("Employee") with certain benefits during your employment and in the event of termination of your employment for Good Reason, if by you, and other than for Cause, if by the Company. This letter agreement (the "Agreement") establishes the terms and conditions of your continued employment by the Company, including your rights to receive certain payments and benefits during and after your employment by the Company. 1. Certain Definitions. 1.1 Cause. "Cause" means (a) the Employee's willful violation of any reasonable rule or direct order of the Board or the Company's Chief Executive Officer ("CEO"), which, after written notice to do so, the Employee 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 actual moral turpitude or dishonesty of or by the Employee, or (c) drug or alcohol abuse on Company premises or at a Company sponsored event, or (d) the Employee's material violation of any provision of this Agreement, which, after written notice to do so, the Employee fails to make reasonable efforts 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 Employee, 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, 2 Mr. David P. Niles November 7, 1994 Page 2 refunds, recalls or seizures, if the Employee 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 Good Reason. "Good Reason" means (a) 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, or (b) any of the following if the same shall occur within two years after a Change of Control: (i) reduction of the Employee's base salary, management bonus percentage or other compensation, as in effect immediately prior to the Change of Control, (ii) failure to continue in effect any medical, dental, accident, or disability plan in which the Employee is entitled to participate immediately prior to the Change of Control and failure to provide plans with substantially similar benefits (except that employee contributions may be raised to the extent of any cost increases imposed by third parties) or any action by the Company which would adversely affect the Employee's participation or reduce the Employee's benefits under any of such plans, (iii) material reduction in Employee's job responsibilities, (iv) material reduction of Employee's title or position, (v) Employee shall be requested to relocate to an office outside of the greater Kansas City or Minneapolis metropolitan area, or (vi) failure or refusal of any successor company to assume the Company's obligations under this Agreement. 1.3 Change of Control. A "Change of Control" shall be deemed to have occurred at any of the following times: 1.3.1 Upon the acquisition (other than from the Company) by any person, entity or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act") (excluding, for this purpose, the Company or its affiliates, or any employee benefit plan of the Company or its affiliates which acquires beneficial ownership of voting securities of the Company) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either the then outstanding shares of common stock of the Company or the Combined Voting Power of the Company's then outstanding voting securities. "Combined Voting Power" means the combined voting 3 Mr. David P. Niles November 7, 1994 Page 3 power of the Company's then outstanding voting securities generally entitled to vote in the election of directors. 1.3.2 At the time individuals who, as of the date hereof, constitute the Board (as of the date hereof, the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this subsection 1.3.2, considered as though such person were a member of the Incumbent Board; or 1.3.3 Upon the approval by the Shareholders of the Company of a reorganization, merger, consolidation (in each case, with respect to which persons who were the shareholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of the Combined Voting Power of the reorganized, merged or consolidated company's then outstanding voting securities) or a liquidation or dissolution of the Company or of the sale of all or substantially all of the assets of the Company; or 1.3.4 The occurrence of any other event which the Incumbent Board in its sole discretion determines constitutes a Change of Control. 1.4 Normal Retirement Date. "Normal Retirement Date" shall mean the earliest date (currently, the Employee's 65th birthday) upon which the Employee is eligible to retire from the Company and commence receiving full retirement benefits under the Company's then applicable retirement plan. 4 Mr. David P. Niles November 7, 1994 Page 4 1.5 Employment Termination Date. The date of delivery of any notice of termination pursuant to Section 2.5 shall be the "Employment Termination Date." 1.6 Continued Payment Period. "Continued Payment Period" shall have the meaning set forth in Section 3.1(a)(i). 2. Benefits and Duties During Employment; Termination of Employment. 2.1 Base Salary. Your current annual base salary is $168,000, payable in 24 equal semi-monthly amounts, subject to required withholdings. Your base salary will be reviewed and may be adjusted annually. Your base salary will not be reduced from the current level or from any future, higher levels without your written concurrence, unless such reduction is in connection with your disability and in accordance with the Company's established disability income protection plan. 2.2 Management Bonus. For the fiscal year ending January 31, 1995, your target bonus is 25% of your annual base salary under the Company's Management Incentive Bonus Plan ("MIB Plan"). Your target bonus percentage under the MIB Plan will not be reduced from the current level or from any future, higher levels without your written concurrence, unless such reduction is in connection with your disability and in accordance with the Company's established disability income protection plan. The Company may modify the MIB Plan in the future; provided that in the event of any such modification, the Company will use reasonable efforts to provide you with a bonus opportunity under the modified plan that is equivalent to your opportunity under the current MIB Plan. 2.3 Other Employee Benefits. You will continue to be eligible for all employee benefits generally available to employees of the Company, and to the special benefit programs in which you are currently participating, or in which you are hereafter eligible to participate. These special benefits include but are not limited to: 2.3.1 Company Automobile, including reimbursement for automobile expenses. 2.3.2 Life insurance and income tax and estate planning services, subject to currently established annual limits. 5 Mr. David P. Niles November 7, 1994 Page 5 2.4 Limitation on Outside Activities. You agree to devote your full business time and efforts to the rendition of such services to the Company as may be designated by the Company, subject, however, to temporary illness and customary vacations. You will at all times be subject to the direction and supervision of the CEO. You may devote a reasonable amount of time to civic and community affairs but shall not perform services during the term of your employment for any other business organization in any capacity without the prior consent of the CEO. 2.5 Employment Termination. Your employment with the Company shall continue until either you or the Company give written notice to the other of termination of your employment. 3. Rights upon Termination of Employment. 3.1 Rights upon Termination by Company other than for Cause, or by Employee for Good Reason. If the Company terminates your employment other than for Cause prior to your Normal Retirement Date, or if you terminate your employment for Good Reason prior to your Normal Retirement Date, then the Company shall have the following obligations to you: (a) (i) If such termination occurs within two years after a Change of Control, then within 30 days following the Employment Termination Date, the Company shall pay to you in a lump sum the present value, determined as of the Employment Termination Date, of the amounts that you would have been paid by the Company if, during the applicable Continued Payment Period, the Company were to make equal semi-monthly payments to you equal to your semi-monthly base salary in effect immediately prior to the Employment Termination Date plus one twenty-fourth of the annual average of your incentive bonus payments under the MIB Plan or any successor thereto with respect to the three full (12 months) fiscal years immediately preceding the Employment Termination Date (such annual average being referred to herein as the "Average Annual Incentive Payment"), such amounts to be computed without regard to any reductions which may have occurred in breach of this Agreement or following a Change in Control. Such payment shall be subject to all required withholdings. The Continued Payment Period shall commence on the Employment Termination Date, and shall be a number of weeks determined by adding (a) the greater of (i) four or (ii) two times the number of years Employee has been an employee of the Company (rounding up to the next full year and excluding any 6 Mr. David P. Niles November 7, 1994 Page 6 intervening periods during which Employee was not an employee of the Company), plus (b) two times the number of $5,000 increments (rounded up to the next whole $5,000 increment) contained in the Employee's Annual Compensation (as defined below), provided, that the Continued Payment Period shall not exceed 2 years. "Annual Compensation" shall mean the sum of (x) your annual base salary in the effect immediately prior to the Employment Termination Date, plus (y) the Average Annual Incentive Payment. Present value shall be determined using a discount rate equal to the Most Applicable Treasury Security Rate compounded annually, if the Applicable Treasury Security is a Treasury Bill, and semiannually, if the Applicable Treasury Security is a Treasury Note. The "Most Applicable Treasury Security Rate" shall be the yield-to-maturity of the Applicable Treasury Security with a remaining term equal to one-half of the Continued Payment Period, as quoted in the edition of the Wall Street Journal first published after the Employment Termination Date. The "Applicable Treasury Security" shall mean a Treasury Bill if the Continued Payment Period is two years or less; and shall mean a Treasury Note if the Continued Payment Period is greater than two years. (ii) If such termination occurs at any time other than within two years after a Change of Control, then, during the applicable Continued Payment Period, the Company shall make semi-monthly payments to you equal to your semi-monthly base salary in effect immediately prior to the Employment Termination Date plus one twenty-fourth of the Average Annual Incentive Payment, such amounts to be computed without regard to any reductions which may have occurred in breach of this Agreement. Such payments shall be subject to all required withholdings. (b) Any outstanding unvested options held by you to purchase stock of the Company which have not otherwise become exercisable under the terms of the Company's stock option plans, shall become fully vested and exercisable. (c) If your employment is terminated under circumstances in which you are entitled to receive payments under Section 3.1(a) above, and if you are not otherwise entitled to a bonus payment with respect to the fiscal year in which your employment is terminated, the Company will pay to you within 30 days after the Employment Termination Date, and subject to required withholdings, a one-time bonus equal to the product 7 Mr. David P. Niles November 7, 1994 Page 7 of (i) the fraction of a full year represented by the period from the beginning of the fiscal year to the Employment Termination Date, and (ii) the Average Annual Incentive Payment. (d) As soon as practical following the Employment Termination Date, the Company shall pay to you the market value, as of close of business on the Employment Termination Date, of any unvested restricted stock awarded to you, subject to required withholdings. 3.2 Death Benefits. If you are terminated by the Company other than for Cause or terminate your employment for Good Reason, and thereafter you die during the applicable Continued Payment Period, the Company shall be obligated to pay to your spouse, if surviving, and otherwise to your estate, the amounts to which you would have been entitled under Section 3.1 had you survived. 3.3 No Obligation To Mitigate. You shall not be required to mitigate 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 for under this Agreement be reduced by any compensation earned by you as the result of employment by another employer after the Employment Termination Date, or otherwise. 3.4 COBRA Benefits. If your employment is terminated without cause by the Company, or for Good Reason by you, then the Company will provide a benefit under the Consolidated Omnibus Budget Reconciliation Act of 1986 ("COBRA") and Section 4980B of the Internal Revenue Code of 1986, as amended (the "Code"), as follows: the Company shall pay the percentage of the cost of COBRA coverage with respect to your coverage status (e.g., individual or family coverage) 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 (i) the monthly cost of COBRA coverage for your coverage status in effect immediately prior to the Employment Termination Date and (ii) your monthly contribution toward your coverage in effect immediately prior to the Employment Termination Date, and the denominator of which shall be the monthly cost of COBRA coverage for your coverage status in effect immediately prior to the Employment Termination Date. All of such amounts shall be determined as of the day immediately preceding the termination of Employee's employment. The insurance continuation benefits paid for hereunder shall be deemed to be part of Employee's COBRA coverage. 8 Mr. David P. Niles November 7, 1994 Page 8 Such benefits shall be in addition to any other benefits relating to health or medical care benefits that are available under the Company's policies to Employee following termination of employment. 3.5 Other Rights. The severance benefits provided hereunder will be reduced by any severance benefits to which you are entitled under the Company's Severance Benefits policy for terminated employees, or any other agreement between you and the Company for severance benefits. Except as provided in the immediately preceding sentence, the provisions of this Agreement, and any payment provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish your existing rights or rights which would accrue solely as a result of the passage of time, under any benefit or incentive plan, employment agreement or other contract, plan or arrangement. As soon as practical following the Employment Termination Date, you will receive a cash payment for the value of your earned but unused vacation time as of the Employment Termination Date in accordance with then current Company Policy. 4. Successor To Company. The Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise to all or substantially all the business or assets of the Company, expressly and unconditionally to assume and agree to perform the Company's obligations under this Agreement, in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. In such event, the term "Company," as used in this Agreement, shall mean the Company and any successor or assignee to the business or assets which by reason hereof becomes bound by the terms and provisions of this Agreement. 5. Non-Competition. During your employment, you agree that you will not directly or indirectly compete with the Company, or engage in, or act as an officer, director, employee, or agent of any person or entity that is engaged in, any business in which the Company is engaged, without the written approval of the CEO. The foregoing shall not prohibit you 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 you shall own less than 3% of the outstanding voting stock of such corporation. If you are receiving payments under Section 3.1(a)(ii), then, as to any business in which the Company is engaged as of the Employment Termination Date, you shall continue to be bound by the provisions of this Section 5 during the applicable Continued Payment Period. 9 Mr. David P. Niles November 7, 1994 Page 9 6. Confidentiality. During your employment and at all times thereafter, you will not divulge to anyone or use for your own benefit or the benefit of any other person or entity any information concerning the Company, its businesses, operations, 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 you for the preparation of personal tax returns. 7. Reduction of Payments. 7.1 (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be nondeductible by the Company for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of amounts payable or distributable as severance benefits hereunder shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of such severance benefits without causing any Payment to be nondeductible by the Company because of Section 280G of the Code. Anything to the contrary notwithstanding, if the Reduced Amount is zero and it is determined further that any Payment which is not part of the severance benefits payable hereunder would nevertheless be nondeductible by the Company for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of Payments which are not severance benefits under this Agreement shall also be reduced (but not below zero) to an amount expressed in present value which maximizes the aggregate present value of Payments without causing any payment to be nondeductible by the Company because of Section 280G of the Code. For purposes of this paragraph 7.1, present value shall be determined in accordance with Section 280G(d)(4) of the Code. (b) All determinations required to be made under this paragraph 7.1 shall be made by an accounting firm jointly selected by you and the Company (the "Accounting Firm") and paid by the Company, and which may be the Company's independent auditors. The Accounting Firm shall provide detailed supporting calculations both to the Company and Employee within 15 business days of the Date of Termination or such earlier time as is requested by the Company and an opinion to Employee 10 Mr. David P. Niles November 7, 1994 Page 10 that he or she has substantial authority not to report any excise tax on his Federal income tax return with respect to any Payments. Any such determination by the Accounting Firm shall be binding upon the Company and Employee. Employee shall determine which and how much of the Payments, shall be eliminated or reduced consistent with the requirements of this paragraph 7.1, provided that, if Employee does not make such determination within ten business days of the receipt of the calculations made by the Accounting Firm, the Company shall elect which and how much of the Payments shall be eliminated or reduced consistent with the requirements of this paragraph 7.1 and shall notify Employee promptly of such election; and provided further that any Payments which do not constitute gross income to Employee shall not be reduced or eliminated unless all other Payments have first been eliminated. Within five business days thereafter, the Company shall pay to or distribute to or for the benefit of Employee such amounts as are then due to Employee under this Agreement. (c) As a result of the uncertainty in the application of Section 280G of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Payments will have been made by the Company which should not have been made ("Overpayment") or that Payments will not have been made by the Company which could have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against Employee or the Company which the Accounting Firm believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for the benefit of Employee shall be treated for all purposes as a loan ab initio to Employee which Employee shall repay to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable to the Company if and to the extent such deemed loan and payment would not either reduce the amount on which Employee is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm, based upon controlling precedent or other substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for the benefit of Employee together with interest at 120% of the applicable 11 Mr. David P. Niles November 7, 1994 Page 11 federal rate provided for in Section 7872(f)(2) of the Code, compounded semiannually. 7.2 Notwithstanding anything in this Agreement to the contrary, if after giving effect to the provisions of Section 7.1 any portion of any payments to you by the Company hereunder and any other present or future plan or program of the Company or other present or future agreement between you 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 you shall be deferred until the earliest date upon which payment thereof can be made to you without being non-deductible pursuant to Section 162(m) of the Code. In the event of such a deferral, the Company shall pay interest to you on the amount deferred at 120% of the applicable federal rate provided for in Section 7872(f)(2) of the Code, compounded semi-annually. 8. Miscellaneous. 8.1. No Assignment. No benefit hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrances or charge, and any attempt to do so shall be void. 8.2 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: Chief Executive Officer Puritan-Bennett Corporation 9401 Indian Creek Parkway Overland Park, Kansas 66225 If to the Employee: Mr. David P. Niles 9663 Juniper St. Coon Rapids, Minnesota 55433 12 Mr. David P. Niles November 7, 1994 Page 12 Either party may change its address for notice by giving notice to the other party of a new address in accordance with the foregoing provisions. 8.3 Governing Law. This Agreement shall be governed by the laws of the State of Kansas. 8.4 Disputes. In the event of any dispute between the Company and Employee arising out of this Agreement, the Company's then current Alternative Dispute Resolution Procedure will be followed (a copy of the current procedure is attached hereto) and the prevailing party shall be entitled to recover its reasonable attorneys' fees and expenses incurred in connection with the enforcement of its rights hereunder. 8.5 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 8.6 Descriptive Headings. Descriptive headings of the several paragraphs of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. Please acknowledge your agreement to the foregoing Agreement by signing the enclosed counterpart of this letter and returning it to the Company. Very truly yours, PURITAN-BENNETT CORPORATION /s/ Lee A. Robbins By: Lee A. Robbins Title: Vice President Agreed to and accepted: /s/ David P. Niles DAVID P. NILES EX-10.6 7 SEVERANCE AGREEMENT, BTWN LEE A. ROBBINS & THE CO. 1 EXHIBIT 10.6 SEVERANCE AGREEMENT November 7, 1994 Mr. Lee A. Robbins Vice President and Chief Financial Officer Puritan-Bennett Corporation 9401 Indian Creek Parkway P.O. Box 25905 Overland Park, KS 66225-5905 Dear Mr. Robbins: In view of your position as Vice President, Chief Financial Officer and Controller at Puritan-Bennett Corporation (the "Company"), and in consideration of your services in such capacity, the Board of Directors (the "Board") has approved the commitment by the Company to you ("Employee") to provide you with certain benefits in the event your employment is terminated for specified reasons within two years after a Change of Control. The purpose of this letter agreement (the "Agreement") is to set forth the terms and conditions of the Company's agreement with you concerning such benefits. 1. Termination Benefits. If, within two years after the date of a Change of Control, Employee's employment is terminated (a) by the Company for any reason other than for Cause or Employee's death or Disability or (b) by Employee for Good Reason, Employee will be entitled to receive the following benefits: 1.1 Within 30 days following the Date of Termination, the Company shall pay to you in a lump sum the present value, determined as of the Date of Termination, of the amounts that you would have been paid by the Company if, during the Continued Payment Period, the Company were to make weekly payments to you each equal to one fifty-second of your Annual Compensation. Such payment shall be subject to all required withholdings. The Continued Payment Period shall commence on the Date of Termination, and shall be a number of weeks determined by adding (a) the greater of (i) four or (ii) two times the number of years Employee has been an employee of the Company (rounding up to the next full year and excluding any intervening periods during which Employee was not an employee of the Company), plus (b) two times the number of $5,000 increments (rounded up to the next whole $5,000 increment) contained in the Employee's Annual Compensation; provided, that the Continued Payment Period shall not exceed two years. Present value shall be determined using a discount rate, compounded annually, equal to the yield- to-maturity of a U.S. Treasury Bill with a remaining term equal to one-half of the Continued Payment Period, as quoted in the edition of the Wall Street Journal first published after the Date of Termination. If Employee should die before receiving all amounts payable to Employee hereunder, any unpaid amounts will be paid to Employee's spouse, if living, and otherwise to Employee's estate. Employee shall be entitled to receive interest on any amount payable hereunder from the date payment was due to the date actually paid at the rate of the lesser of 12% or the highest rate legally 2 Mr. Lee A. Robbins November 7, 1994 Page 2 permissible. Employee will not be required to mitigate the amount of the payments due to Employee hereunder by seeking other employment or otherwise. Any amount earned by Employee as the result of employment by another employer or otherwise after the Date of Termination shall not reduce the Company's obligation to Employee hereunder. 1.2 Any outstanding unvested options held by Employee to purchase stock of the Company that have not otherwise become exercisable under the terms of the Company's stock option plans shall become fully vested and exercisable. 1.3 COBRA Benefits. The Company will provide a benefit under the Consolidated Omnibus Budget Reconciliation Act of 1986 ("COBRA") and Section 4980B of the Internal Revenue Code of 1986, as amended (the "Code"), as follows: the Company shall pay the percentage of the cost of COBRA coverage with respect to your coverage status (e.g., individual or family) in effect immediately prior to the Date of Termination, which percentage shall be the fraction (expressed as a percentage), the numerator of which shall be the difference between (i) the monthly cost of COBRA coverage for your coverage status in effect immediately prior to the Date of Termination and (ii) your monthly contribution toward your coverage in effect immediately prior to the Date of Termination, and the denominator of which shall be the monthly cost of COBRA coverage for your coverage status in effect immediately prior to the Date of Termination. All of such amounts shall be determined as of the day immediately preceding the termination of Employee's employment. The insurance continuation benefits paid for hereunder shall be deemed to be part of Employee's COBRA coverage. Such benefits shall be in addition to any other benefits relating to health or medical care benefits that are available under the Company's policies to Employee following termination of employment. 1.4 Offset for Other Arrangements. The severance benefits provided hereunder will be reduced by the amount of any severance benefits to which Employee is entitled under the Company's Severance Benefits policy for terminated employees, or any other agreement between Employee and the Company for severance benefits. 2. Notice of Termination. Any termination by the Company for Cause or by Employee for Good Reason shall be communicated by written notice to the other party given by hand delivery or by registered or certified mail, return receipt requested, postage prepaid, if to Employee, then to Employee at his or her address as set forth in the Company's records, and, if to the Company, to Puritan-Bennett Corporation, Human Relations Division, 9401 Indian Creek Parkway, Overland Park, Kansas 66207. Any notices given pursuant to this paragraph 2 shall be effective the earlier of when such notice is actually received by the addressee or three days after such notice is delivered or sent. 3 Mr. Lee A. Robbins November 7, 1994 Page 3 3. Definitions. 3.1 "Annual Compensation" means the greater of (a) the sum of (i) the Employee's annual base salary ("Base Salary") in effect on the Date of Termination, plus (ii) the annual average of the Employee's incentive bonus payments under the Company's Management Incentive Bonus Plan or any successor thereto with respect to the three full (12 months) fiscal years ("Average Bonus") immediately preceding the Date of Termination; or (b) the sum of (x) the Employee's Base Salary in effect on the date of the Change of Control, plus (y) the Employee's Average Bonus computed with respect to the three full (12 months) fiscal years immediately preceding the date of the Change of Control (provided, if Employee has not been employed by the Company during all of the three full fiscal years immediately preceding the Date of Termination or the date of the Change of Control, as the case may be, then "Average Bonus" shall mean the annualized average of the bonus payments received by the Employee, computed based on the actual period of Employee's employment with the Company during any full fiscal year(s) of the Company with respect to which Employee has received a bonus). 3.2 "Cause" means (a) the Employee's willful violation of any reasonable rule or direct order of the Board, the Company's Chief Executive Officer ("CEO") or other elected officer, where such officer is Employee's direct supervisor, which, after written notice to do so, the Employee 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 actual moral turpitude or dishonesty of or by the Employee, or (c) drug or alcohol abuse on Company premises or at a Company sponsored event, or (d) the Employee's material violation of any provision of this Agreement, which, after written notice to do so, the Employee fails to make reasonable efforts 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 Employee, 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 the Employee 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. 3.3 Change of Control. A "Change of Control" shall be deemed to have occurred at any of the following times: 3.3.1 Upon the acquisition (other than from the Company) by any person, entity or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act") (excluding, for this purpose, the Company or its affiliates, or any employee 4 Mr. Lee A. Robbins November 7, 1994 Page 4 benefit plan of the Company or its affiliates which acquires beneficial ownership of voting securities of the Company) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either the then outstanding shares of common stock of the Company or the Combined Voting Power of the Company's then outstanding voting securities. "Combined Voting Power" means the combined voting power of the Company's then outstanding voting securities generally entitled to vote in the election of directors. 3.3.2 At the time individuals who, as of the date hereof, constitute the Board (as of the date hereof, the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a- 11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this subsection 3.3.2, considered as though such person were a member of the Incumbent Board; or 3.3.3 Upon the approval by the Shareholders of the Company of a reorganization, merger, consolidation (in each case, with respect to which persons who were the shareholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of the Combined Voting Power of the reorganized, merged or consolidated company's then outstanding voting securities) or a liquidation or dissolution of the Company or of the sale of all or substantially all of the assets of the Company; or 3.3.4 The occurrence of any other event which the Incumbent Board in its sole discretion determines constitutes a Change of Control. 5 Mr. Lee A. Robbins November 7, 1994 Page 5 3.4 "Date of Termination" means the date of receipt of the written notice of termination pursuant to paragraph 2 or any later date specified therein, as the case may be; provided, however, that (a) if Employee's employment is terminated by the Company other than for Cause or by reason of death or Disability, the Date of Termination shall be the date on which the Company notifies Employee of such termination and (b) if Employee's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death or determination of Disability pursuant to paragraph 3.5, as the case may be. 3.5 "Disability" means disability that, at least 26 weeks after its commencement, is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to Employee or Employee's legal representative (such acceptance not to be unreasonably withheld). 3.6 "Good Reason" means (i) reduction of the Employee's base salary, management bonus percentage or other compensation, as in effect immediately prior to the Change of Control, (ii) failure to continue in effect any medical, dental, accident, or disability plan in which the Employee is entitled to participate immediately prior to the Change of Control and failure to provide plans with substantially similar benefits (except that employee contributions may be raised to the extent of any cost increases imposed by third parties) or any action by the Company which would adversely affect the Employee's participation or reduce the Employee's benefits under any of such plans, (iii) material reduction in Employee's job responsibilities, (iv) material reduction of Employee's title or position, (v) Employee shall be requested to relocate to an office outside of the greater Kansas City metropolitan area, or (vi) failure or refusal of any successor company to assume the Company's obligations under this Agreement. 4. Nonexclusivity. Nothing in this Agreement shall prevent or limit Employee's continuing or future participation in any benefit, bonus, incentive or other plans, programs, policies or practices provided by the Company and for which Employee may otherwise qualify, nor shall anything herein limit or otherwise affect such rights as any Employee may have under any stock option or other agreements with the Company. Except as otherwise expressly provided herein, amounts which are vested benefits or which Employee is otherwise entitled to receive under any plan, policy, practice or program of the Company at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program. 5. Successor to Company. The Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Company, expressly and unconditionally to assume and agree to perform the Company's obligations under this Agreement, in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. In such event, the term "Company," as used in 6 Mr. Lee A. Robbins November 7, 1994 Page 6 this Agreement, shall mean the Company as hereinafter defined and any successor or assignee to the business or assets which by reason hereof becomes bound by the terms and provisions of this Agreement. 6. Certain Reduction of Payments. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be nondeductible by the Company for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of amounts payable or distributable as severance benefits hereunder shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of such severance benefits without causing any Payment to be nondeductible by the Company because of Section 280G of the Code. Anything to the contrary notwithstanding, if the Reduced Amount is zero and it is determined further that any Payment which is not part of the severance benefits payable hereunder would nevertheless be nondeductible by the Company for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of Payments which are not severance benefits under this Agreement shall also be reduced (but not below zero) to an amount expressed in present value which maximizes the aggregate present value of Payments without causing any payment to be nondeductible by the Company because of Section 280G of the Code. For purposes of this paragraph 6, present value shall be determined in accordance with Section 280G(d)(4) of the Code. (b) All determinations required to be made under this paragraph 6 shall be made by an accounting firm jointly selected by you and the Company (the "Accounting Firm") and paid by the Company, and which may be the Company's independent auditors. The Accounting Firm shall provide detailed supporting calculations both to the Company and Employee within 15 business days of the Date of Termination or such earlier time as is requested by the Company and an opinion to Employee that he or she has substantial authority not to report any excise tax on his Federal income tax return with respect to any Payments. Any such determination by the Accounting Firm shall be binding upon the Company and Employee. Employee shall determine which and how much of the Payments shall be eliminated or reduced consistent with the requirements of this paragraph 6; provided that, if Employee does not make such determination within ten business days of the receipt of the calculations made by the Accounting Firm, the Company shall elect which and how much of the Payments shall be eliminated or reduced consistent with the requirements of this paragraph 6 and shall notify Employee promptly of such election; and provided further that any Payments which do not constitute gross income to Employee shall not be reduced or eliminated unless all other Payments have first been eliminated. Within five business days thereafter, the Company shall pay to or distribute to or for the benefit of Employee such amounts as are then due to Employee under this Agreement. 7 Mr. Lee A. Robbins November 7, 1994 Page 7 (c) As a result of the uncertainty in the application of Section 280G of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Payments will have been made by the Company which should not have been made ("Overpayment") or that Payments will not have been made by the Company which could have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against Employee or the Company which the Accounting Firm believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for the benefit of Employee shall be treated for all purposes as a loan ab initio to Employee which Employee shall repay to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable to the Company if and to the extent such deemed loan and payment would not either reduce the amount on which Employee is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm, based upon controlling precedent or other substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for the benefit of Employee together with interest at 120% of the applicable federal rate provided for in Section 7872(f)(2) of the Code, compounded semiannually. (d) Notwithstanding anything in this Agreement to the contrary, if after giving effect to the provisions of paragraphs 6(a)-(c) any portion of any payments to Employee by the Company hereunder 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 Employee shall be deferred until the earliest date upon which payment thereof can be made to Employee without being non-deductible pursuant to Section 162(m) of the Code. In the event of such a deferral, the Company shall pay interest to you on the amount deferred at 120% of the applicable federal rate provided for in Section 7872(f)(2) of the Code, compounded semiannually. 7. Amendments and Termination. The Incumbent Board may from time to time supplement, amend or terminate this Agreement or make any other provisions which the Company may deem necessary or desirable, without the approval of Employee; provided, however, that from and after such time there has been a Change of Control, this Agreement shall not be amended in any manner which would adversely affect the interests of Employee without the written consent of Employee. Subject to the foregoing, this Agreement establishes and vests in Employee a contractual right to the benefits to which Employee is entitled hereunder, enforceable by Employee against the Company. The form of any proper amendment or termination of this Agreement shall be a written instrument signed by a duly authorized officer or officers of the Company certifying that the amendment or termination has been approved by the Incumbent Board. 8 Mr. Lee A. Robbins November 7, 1994 Page 8 8. Miscellaneous. 8.1 Employment Status. This Agreement does not constitute a contract of employment or impose on Employee or the Company any obligation to retain Employee as an employee, to change the status of Employee's employment, or to change the Company's policies regarding termination of employment. 8.2 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. 8.3 Governing Law. This Agreement shall be governed by the laws of the State of Kansas. 8.4 Expenses of Suit. In the event of any dispute or litigation between the Company and Employee arising out of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and expenses incurred in connection with the enforcement of its rights hereunder. 8.5 Severability. If any term, provision, covenants or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 8.6 Descriptive Headings. Descriptive headings of the several paragraphs of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. Please acknowledge your agreement to the foregoing agreement by signing the enclosed counterpart of this letter and returning it to the Company. Very truly yours, PURITAN-BENNETT CORPORATION By: /s/ Derl S. Treff Derl S. Treff, Treasurer Agreed to and Accepted: /s/ Lee A. Robbins LEE A. ROBBINS EX-10.7 8 SEVERANCE AGREEMENT, BTWN DERL S. TREFF & THE CO. 1 EXHIBIT 10.7 SEVERANCE AGREEMENT November 7, 1994 Mr. Derl S. Treff Treasurer Puritan-Bennett Corporation 9401 Indian Creek Parkway P.O. Box 25905 Overland Park, KS 66225-5905 Dear Mr. Treff: In view of your position as Treasurer for Puritan-Bennett Corporation (the "Company"), and in consideration of your services in such capacity, the Board of Directors (the "Board") has approved the commitment by the Company to you ("Employee") to provide you with certain benefits in the event your employment is terminated for specified reasons within two years after a Change of Control. The purpose of this letter agreement (the "Agreement") is to set forth the terms and conditions of the Company's agreement with you concerning such benefits. 1. Termination Benefits. If, within two years after the date of a Change of Control, Employee's employment is terminated (a) by the Company for any reason other than for Cause or Employee's death or Disability or (b) by Employee for Good Reason, Employee will be entitled to receive the following benefits: 1.1 Within 30 days following the Date of Termination, the Company shall pay to you in a lump sum the present value, determined as of the Date of Termination, of the amounts that you would have been paid by the Company if, during the Continued Payment Period, the Company were to make weekly payments to you each equal to one fifty-second of your Annual Compensation. Such payment shall be subject to all required withholdings. The Continued Payment Period shall commence on the Date of Termination, and shall be a number of weeks determined by adding (a) the greater of (i) four or (ii) two times the number of years Employee has been an employee of the Company (rounding up to the next full year and excluding any intervening periods during which Employee was not an employee of the Company), plus (b) two times the number of $5,000 increments (rounded up to the next whole $5,000 increment) contained in the Employee's Annual Compensation; provided, that the Continued Payment Period shall not exceed two years. Present value shall be determined using a discount rate, compounded annually, equal to the yield- to-maturity of a U.S. Treasury Bill with a remaining term equal to one-half of the Continued Payment Period, as quoted in the edition of the Wall Street Journal first published after the Date of Termination. If Employee should die before receiving all amounts payable to Employee hereunder, any unpaid amounts will be paid to Employee's spouse, if living, and otherwise to Employee's estate. Employee shall be entitled to receive interest on any amount payable hereunder from the date payment was due to the date actually paid at the rate of the lesser of 12% or the highest rate legally permissible. Employee will not be required to mitigate the amount of the payments due to Employee hereunder by seeking other employment or otherwise. Any amount earned by 2 Mr. Derl S. Treff November 7, 1994 Page 2 Employee as the result of employment by another employer or otherwise after the Date of Termination shall not reduce the Company's obligation to Employee hereunder. 1.2 Any outstanding unvested options held by Employee to purchase stock of the Company that have not otherwise become exercisable under the terms of the Company's stock option plans shall become fully vested and exercisable. 1.3 COBRA Benefits. The Company will provide a benefit under the Consolidated Omnibus Budget Reconciliation Act of 1986 ("COBRA") and Section 4980B of the Internal Revenue Code of 1986, as amended (the "Code"), as follows: the Company shall pay the percentage of the cost of COBRA coverage with respect to your coverage status (e.g., individual or family) in effect immediately prior to the Date of Termination, which percentage shall be the fraction (expressed as a percentage), the numerator of which shall be the difference between (i) the monthly cost of COBRA coverage for your coverage status in effect immediately prior to the Date of Termination and (ii) your monthly contribution toward your coverage in effect immediately prior to the Date of Termination, and the denominator of which shall be the monthly cost of COBRA coverage for your coverage status in effect immediately prior to the Date of Termination. All of such amounts shall be determined as of the day immediately preceding the termination of Employee's employment. The insurance continuation benefits paid for hereunder shall be deemed to be part of Employee's COBRA coverage. Such benefits shall be in addition to any other benefits relating to health or medical care benefits that are available under the Company's policies to Employee following termination of employment. 1.4 Offset for Other Arrangements. The severance benefits provided hereunder will be reduced by the amount of any severance benefits to which Employee is entitled under the Company's Severance Benefits policy for terminated employees, or any other agreement between Employee and the Company for severance benefits. 2. Notice of Termination. Any termination by the Company for Cause or by Employee for Good Reason shall be communicated by written notice to the other party given by hand delivery or by registered or certified mail, return receipt requested, postage prepaid, if to Employee, then to Employee at his or her address as set forth in the Company's records, and, if to the Company, to Puritan-Bennett Corporation, Human Relations Division, 9401 Indian Creek Parkway, Overland Park, Kansas 66207. Any notices given pursuant to this paragraph 2 shall be effective the earlier of when such notice is actually received by the addressee or three days after such notice is delivered or sent. 3. Definitions. 3.1 "Annual Compensation" means the greater of (a) the sum of (i) the Employee's annual base salary ("Base Salary") in effect on the Date of Termination, plus (ii) the annual average of the Employee's incentive bonus payments under the Company's 2 3 Mr. Derl S. Treff November 7, 1994 Page 3 Management Incentive Bonus Plan or any successor thereto with respect to the three full (12 months) fiscal years ("Average Bonus") immediately preceding the Date of Termination; or (b) the sum of (x) the Employee's Base Salary in effect on the date of the Change of Control, plus (y) the Employee's Average Bonus computed with respect to the three full (12 months) fiscal years (or applicable shorter period) immediately preceding the date of the Change of Control (provided, if Employee has not been employed by the Company during all of the three full fiscal years immediately preceding the Date of Termination or the date of the Change of Control, as the case may be, then "Average Bonus" shall mean the annualized average of the bonus payments received by the Employee, computed based on the actual period of Employee's employment with the Company during any full fiscal year(s) of the Company with respect to which Employee has received a bonus). 3.2 "Cause" means (a) the Employee's willful violation of any reasonable rule or direct order of the Board, the Company's Chief Executive Officer ("CEO") or other elected officer, where such officer is Employee's direct supervisor, which, after written notice to do so, the Employee 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 actual moral turpitude or dishonesty of or by the Employee, or (c) drug or alcohol abuse on Company premises or at a Company sponsored event, or (d) the Employee's material violation of any provision of this Agreement, which, after written notice to do so, the Employee fails to make reasonable efforts 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 Employee, 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 the Employee 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. 3.3 Change of Control. A "Change of Control" shall be deemed to have occurred at any of the following times: 3.3.1 Upon the acquisition (other than from the Company) by any person, entity or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act") (excluding, for this purpose, the Company or its affiliates, or any employee benefit plan of the Company or its affiliates which acquires beneficial ownership of voting securities of the Company) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either the then outstanding shares of common 3 4 Mr. Derl S. Treff November 7, 1994 Page 4 stock of the Company or the Combined Voting Power of the Company's then outstanding voting securities. "Combined Voting Power" means the combined voting power of the Company's then outstanding voting securities generally entitled to vote in the election of directors. 3.3.2 At the time individuals who, as of the date hereof, constitute the Board (as of the date hereof, the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a- 11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this subsection 3.3.2, considered as though such person were a member of the Incumbent Board; or 3.3.3 Upon the approval by the Shareholders of the Company of a reorganization, merger, consolidation (in each case, with respect to which persons who were the shareholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of the Combined Voting Power of the reorganized, merged or consolidated company's then outstanding voting securities) or a liquidation or dissolution of the Company or of the sale of all or substantially all of the assets of the Company; or 3.3.4 The occurrence of any other event which the Incumbent Board in its sole discretion determines constitutes a Change of Control. 4 5 Mr. Derl S. Treff November 7, 1994 Page 5 3.4 "Date of Termination" means the date of receipt of the written notice of termination pursuant to paragraph 2 or any later date specified therein, as the case may be; provided, however, that (a) if Employee's employment is terminated by the Company other than for Cause or by reason of death or Disability, the Date of Termination shall be the date on which the Company notifies Employee of such termination and (b) if Employee's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death or determination of Disability pursuant to paragraph 3.5, as the case may be. 3.5 "Disability" means disability that, at least 26 weeks after its commencement, is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to Employee or Employee's legal representative (such acceptance not to be unreasonably withheld). 3.6 "Good Reason" means (i) reduction of the Employee's base salary, management bonus percentage or other compensation, as in effect immediately prior to the Change of Control, (ii) failure to continue in effect any medical, dental, accident, or disability plan in which the Employee is entitled to participate immediately prior to the Change of Control and failure to provide plans with substantially similar benefits (except that employee contributions may be raised to the extent of any cost increases imposed by third parties) or any action by the Company which would adversely affect the Employee's participation or reduce the Employee's benefits under any of such plans, (iii) material reduction in Employee's job responsibilities, (iv) material reduction of Employee's title or position, (v) Employee shall be requested to relocate to an office outside of the greater Kansas City metropolitan area, or (vi) failure or refusal of any successor company to assume the Company's obligations under this Agreement. 4. Nonexclusivity. Nothing in this Agreement shall prevent or limit Employee's continuing or future participation in any benefit, bonus, incentive or other plans, programs, policies or practices provided by the Company and for which Employee may otherwise qualify, nor shall anything herein limit or otherwise affect such rights as any Employee may have under any stock option or other agreements with the Company. Except as otherwise expressly provided herein, amounts which are vested benefits or which Employee is otherwise entitled to receive under any plan, policy, practice or program of the Company at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program. 5. Successor to Company. The Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Company, expressly and unconditionally to assume and agree to perform the Company's obligations under this Agreement, in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. In such event, the term "Company," as used in 5 6 Mr. Derl S. Treff November 7, 1994 Page 6 this Agreement, shall mean the Company as hereinafter defined and any successor or assignee to the business or assets which by reason hereof becomes bound by the terms and provisions of this Agreement. 6. Certain Reduction of Payments. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be nondeductible by the Company for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of amounts payable or distributable as severance benefits hereunder shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of such severance benefits without causing any Payment to be nondeductible by the Company because of Section 280G of the Code. Anything to the contrary notwithstanding, if the Reduced Amount is zero and it is determined further that any Payment which is not part of the severance benefits payable hereunder would nevertheless be nondeductible by the Company for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of Payments which are not severance benefits under this Agreement shall also be reduced (but not below zero) to an amount expressed in present value which maximizes the aggregate present value of Payments without causing any payment to be nondeductible by the Company because of Section 280G of the Code. For purposes of this paragraph 6, present value shall be determined in accordance with Section 280G(d)(4) of the Code. (b) All determinations required to be made under this paragraph 6 shall be made by an accounting firm jointly selected by you and the Company (the "Accounting Firm") and paid by the Company, and which may be the Company's independent auditors. The Accounting Firm shall provide detailed supporting calculations both to the Company and Employee within 15 business days of the Date of Termination or such earlier time as is requested by the Company and an opinion to Employee that he or she has substantial authority not to report any excise tax on his Federal income tax return with respect to any Payments. Any such determination by the Accounting Firm shall be binding upon the Company and Employee. Employee shall determine which and how much of the Payments shall be eliminated or reduced consistent with the requirements of this paragraph 6; provided that, if Employee does not make such determination within ten business days of the receipt of the calculations made by the Accounting Firm, the Company shall elect which and how much of the Payments shall be eliminated or reduced consistent with the requirements of this paragraph 6 and shall notify Employee promptly of such election; and provided further that any Payments which do not constitute gross income to Employee shall not be reduced or eliminated unless all other Payments have first been eliminated. Within five business days thereafter, the Company shall pay to or distribute to or for the benefit of Employee such amounts as are then due to Employee under this Agreement. 6 7 Mr. Derl S. Treff November 7, 1994 Page 7 (c) As a result of the uncertainty in the application of Section 280G of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Payments will have been made by the Company which should not have been made ("Overpayment") or that Payments will not have been made by the Company which could have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against Employee or the Company which the Accounting Firm believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for the benefit of Employee shall be treated for all purposes as a loan ab initio to Employee which Employee shall repay to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable to the Company if and to the extent such deemed loan and payment would not either reduce the amount on which Employee is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm, based upon controlling precedent or other substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for the benefit of Employee together with interest at 120% of the applicable federal rate provided for in Section 7872(f)(2) of the Code, compounded semiannually. (d) Notwithstanding anything in this Agreement to the contrary, if after giving effect to the provisions of paragraphs 6(a)-(c) any portion of any payments to Employee by the Company hereunder 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 Employee shall be deferred until the earliest date upon which payment thereof can be made to Employee without being non-deductible pursuant to Section 162(m) of the Code. In the event of such a deferral, the Company shall pay interest to you on the amount deferred at 120% of the applicable federal rate provided for in Section 7872(f)(2) of the Code, compounded semiannually. 7. Amendments and Termination. The Incumbent Board may from time to time supplement, amend or terminate this Agreement or make any other provisions which the Company may deem necessary or desirable, without the approval of Employee; provided, however, that from and after such time there has been a Change of Control, this Agreement shall not be amended in any manner which would adversely affect the interests of Employee without the written consent of Employee. Subject to the foregoing, this Agreement establishes and vests in Employee a contractual right to the benefits to which Employee is entitled hereunder, enforceable by Employee against the Company. The form of any proper amendment or termination of this Agreement shall be a written instrument signed by a duly authorized officer or officers of the Company certifying that the amendment or termination has been approved by the Incumbent Board. 7 8 Mr. Derl S. Treff November 7, 1994 Page 8 8. Miscellaneous. 8.1 Employment Status. This Agreement does not constitute a contract of employment or impose on Employee or the Company any obligation to retain Employee as an employee, to change the status of Employee's employment, or to change the Company's policies regarding termination of employment. 8.2 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. 8.3 Governing Law. This Agreement shall be governed by the laws of the State of Kansas. 8.4 Expenses of Suit. In the event of any dispute or litigation between the Company and Employee arising out of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and expenses incurred in connection with the enforcement of its rights hereunder. 8.5 Severability. If any term, provision, covenants or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 8.6 Descriptive Headings. Descriptive headings of the several paragraphs of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. Please acknowledge your agreement to the foregoing agreement by signing the enclosed counterpart of this letter and returning it to the Company. Very truly yours, PURITAN-BENNETT CORPORATION By: /s/ Lee A. Robbins Vice President Agreed to and Accepted: /s/ Derl S. Treff DERL S. TREFF 8 EX-10.8 9 1ST AMEND. TO MANAGEMENT INCENTIVE BONUS PLAN A 1 EXHIBIT 10.8 FIRST AMENDMENT TO PURITAN-BENNETT CORPORATION MANAGEMENT INCENTIVE BONUS PLAN A THIS AMENDMENT of the Puritan-Bennett Corporation Management Incentive Bonus Plan A (the "Plan") is made by the Puritan-Bennett Corporation (which, together with its subsidiaries and affiliates, shall be referred to herein as the "Corporation"), effective as of the 7th day of November, 1994. WHEREAS, as part of the Plan, the Corporation reserved the right, at any time, by action of its Board of Directors, to modify or amend, in whole or in part, any or all provisions of the Plan; and WHEREAS, the Corporation now desires to amend the Plan. NOW, THEREFORE, the Plan is hereby amended as follows: 1. Section e)1. on page 6 of the Plan is hereby amended by the addition of the following at the end of such section: ; provided that in the event that a participant is terminated without Cause (as defined below) or resigns for Good Reason (as defined below) within two years following a Change in Control (as defined below), the Company shall pay to the participant as soon as possible following such termination the maximum bonus amount for which such participant was eligible with respect to the fiscal year of termination, prorated to the date of termination. The following definitions shall apply: "Cause" means (a) a participant's willful violation of any reasonable rule or direct order of the Board or the Company's Chief Executive Officer ("CEO") or other elected officer, where such officer is the participant's direct supervisor, which, after written notice to do so, the participant 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 actual moral turpitude or dishonesty of or by the participant, or (c) drug or alcohol abuse on Company premises or at a Company sponsored event, or (d) the participant's material violation of any provision of this Agreement, which, after written notice to do so, the participant fails to make reasonable efforts to correct within a reasonable time. "Cause" shall not include any matter other than these 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 a participant, or upon any operation, 2 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 the participant acted in good faith and in a manner which the participant reasonably believed to be in or not opposed to the best interests of the Company. "Good Reason" means any of the following: (a) breach by the Company or any successor company of any of the provisions of any employment agreement between the participant and the Company not corrected within ninety (90) days after written notice to the Company thereof, (b) reduction of a participant's base salary, management bonus percentage or other compensation, as in effect immediately prior to the Change of Control, (c) failure to continue in effect any medical, dental, accident, or disability plan in which the participant is entitled to participate immediately prior to the Change of Control and failure to provide plans with substantially similar benefits (except that employee contributions may be raised to the extent of any cost increases imposed by third parties) or any action by the Company which would adversely affect the participant's participation or reduce the participant's benefits under any of such plans, (d) material reduction in the participant's job responsibilities, (iv) material reduction of participant's title or position, (v) the participant shall be requested to relocate to an office outside of the metropolitan area in which the office to which he was assigned prior to the Change of Control is located, or (vi) failure or refusal of any successor company to assume the Company's obligations under this plan or any employment agreement between the participant and the Company. A "Change of Control" shall be deemed to have occurred at any of the following times: A. Upon the acquisition (other than from the Company) by any person, entity or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act") (excluding, for this purpose, the Company or its affiliates, or any employee benefit plan of the Company or its affiliates which acquires beneficial ownership of voting securities of the Company) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either the then outstanding shares of common stock of the Company or the Combined Voting Power of the Company's then outstanding voting securities. "Combined Voting -2- 3 Power" means the combined voting power of the Company's then outstanding voting securities generally entitled to vote in the election of directors. B. At the time individuals who, as of November 7, 1994, constitute the Board (as of November 7, 1994, the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to November 7, 1994 whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this subparagraph B, considered as though such person were a member of the Incumbent Board; or C. Upon the approval by the shareholders of the Company of a reorganization, merger, consolidation (in each case, with respect to which persons who were the shareholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of the Combined Voting Power of the reorganized, merged or consolidated company's then outstanding voting securities) or a liquidation or dissolution of the Company or of the sale of all or substantially all of the assets of the Company; or D. The occurrence of any other event which the Incumbent Board in its sole discretion determines constitutes a Change of Control. 2. Section e)2 is hereby amended by the deletion of the text of such section and the substitution in lieu thereof of the following paragraph: Profit for bonus determination will be inclusive of any changes in reserves, but will exclude any capital gains or losses, other unusual gains or losses such as proceeds of fire or casualty insurance, and extraordinary items. In cases of uncertainty, the decision of the CEO will be final. In the event of a Change of Control, the Compensation Committee shall adjust profit for bonus determination purposes hereunder to remove distortions in -3- 4 the Company's profits, and distortions in the method of measuring such profits, and distortions in the methods used to determine and measure the realization of the performance targets hereunder for bonus calculation purposes, that have occurred as a result of the Change of Control. In addition, the Compensation Committee shall have the authority, in its sole and absolute discretion, to adjust the performance targets hereunder for bonus calculation purposes to remove distortions in the realization of such targets and distortions in the method of measuring such realization and such targets, caused by actions taken or expenses incurred by the Company in connection with a proposal for a transaction described in subparagraphs A or C of the definition of Change of Control set forth in subsection e)1. above, or any other extraordinary transaction, whether or not consummated. No changes in reserves shall be taken into account for purposes of bonus calculations hereunder with respect to the fiscal year in which a Change of Control occurs and the immediately following fiscal year. IN WITNESS WHEREOF, the Corporation has executed this Amendment to the Plan, effective as of the date first written above. PURITAN-BENNETT CORPORATION /s/ Lee A. Robbins By: Lee A. Robbins Title: Vice President ATTEST: By: /s/ Daniel C. Weary Title: Secretary -4- EX-10.9 10 1ST AMEND. TO MANAGEMENT INCENTIVE BONUS PLAN B 1 EXHIBIT 10.9 FIRST AMENDMENT TO PURITAN-BENNETT CORPORATION MANAGEMENT INCENTIVE BONUS PLAN B THIS AMENDMENT of the Puritan-Bennett Corporation Management Incentive Bonus Plan B (the "Plan") is made by the Puritan-Bennett Corporation (which, together with its subsidiaries and affiliates, shall be referred to herein as the "Corporation"), effective as of the 7th day of November, 1994. WHEREAS, as part of the Plan, the Corporation reserved the right, at any time, by action of its Board of Directors, to modify or amend, in whole or in part, any or all provisions of the Plan; and WHEREAS, the Corporation now desires to amend the Plan. NOW, THEREFORE, the Plan is hereby amended as follows: 1. Section e)1. on page 6 of the Plan is hereby amended by the addition of the following at the end of such section: ; provided that in the event that a participant is terminated without Cause (as defined below) or resigns for Good Reason (as defined below) within two years following a Change in Control (as defined below), the Company shall pay to the participant as soon as possible following such termination the maximum bonus amount for which such participant was eligible with respect to the fiscal year of termination, prorated to the date of termination. The following definitions shall apply: "Cause" means (a) a participant's willful violation of any reasonable rule or direct order of the Board or the Company's Chief Executive Officer ("CEO") or other elected officer, where such officer is participant's direct supervisor, which, after written notice to do so, the participant 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 actual moral turpitude or dishonesty of or by the participant, or (c) drug or alcohol abuse on Company premises or at a Company sponsored event, or (d) the participant's material violation of any provision of this Agreement, which, after written notice to do so, the participant fails to make reasonable efforts to correct within a reasonable time. "Cause" shall not include any matter other than these 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 a participant, or upon any operation, 2 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 the participant acted in good faith and in a manner which the participant reasonably believed to be in or not opposed to the best interests of the Company. "Good Reason" means any of the following: (a) breach by the Company or any successor company of any of the provisions of any employment agreement between the participant and the Company not corrected within ninety (90) days after written notice to the Company thereof, (b) reduction of a participant's base salary, management bonus percentage or other compensation, as in effect immediately prior to the Change of Control, (c) failure to continue in effect any medical, dental, accident, or disability plan in which the participant is entitled to participate immediately prior to the Change of Control and failure to provide plans with substantially similar benefits (except that employee contributions may be raised to the extent of any cost increases imposed by third parties) or any action by the Company which would adversely affect the participant's participation or reduce the participant's benefits under any of such plans, (d) material reduction in the participant's job responsibilities, (iv) material reduction of participant's title or position, (v) the participant shall be requested to relocate to an office outside of the metropolitan area in which the office to which he was assigned prior to the Change of Control is located, or (vi) failure or refusal of any successor company to assume the Company's obligations under this plan or any employment agreement between the participant and the Company. A "Change of Control" shall be deemed to have occurred at any of the following times: A. Upon the acquisition (other than from the Company) by any person, entity or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act") (excluding, for this purpose, the Company or its affiliates, or any employee benefit plan of the Company or its affiliates which acquires beneficial ownership of voting securities of the Company) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either the then outstanding shares of common stock of the Company or the Combined Voting Power of the Company's then outstanding voting securities. "Combined Voting Power" means the combined voting power of the Company's then outstanding voting -2- 3 securities generally entitled to vote in the election of directors. B. At the time individuals who, as of November 7, 1994, constitute the Board (as of November 7, 1994, the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to November 7, 1994 whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this subparagraph B, considered as though such person were a member of the Incumbent Board; or C. Upon the approval by the shareholders of the Company of a reorganization, merger, consolidation (in each case, with respect to which persons who were the shareholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of the Combined Voting Power of the reorganized, merged or consolidated company's then outstanding voting securities) or a liquidation or dissolution of the Company or of the sale of all or substantially all of the assets of the Company; or D. The occurrence of any other event which the Incumbent Board in its sole discretion determines constitutes a Change of Control. 2. Section e)2 is hereby amended by the deletion of the text of such section and the substitution in lieu thereof of the following paragraph: Profit for bonus determination will be inclusive of any changes in reserves, but will exclude any capital gains or losses, other unusual gains or losses such as proceeds of fire or casualty insurance, and extraordinary items. In cases of uncertainty, the decision of the CEO will be final. In the event of a Change of Control, the Compensation Committee shall adjust profit for bonus determination purposes hereunder to remove distortions in the Company's profits, and distortions in the method of measuring such profits, and distortions in the methods used to -3- 4 determine and measure the realization of the performance targets hereunder for bonus calculation purposes, that have occurred as a result of the Change of Control. In addition, the Compensation Committee shall have the authority, in its sole and absolute discretion, to adjust the performance targets hereunder for bonus calculation purposes to remove distortions in the realization of such targets and distortions in the method of measuring such realization and such targets, caused by actions taken or expenses incurred by the Company in connection with a proposal for a transaction described in subparagraphs A or C of the definition of Change of Control set forth in subsection e)1. above, or any other extraordinary transaction, whether or not consummated. No changes in reserves shall be taken into account for purposes of bonus calculations hereunder with respect to the fiscal year in which a Change of Control occurs and the immediately following fiscal year. IN WITNESS WHEREOF, the Corporation has executed this Amendment to the Plan, effective as of the date first written above. PURITAN-BENNETT CORPORATION /s/ Lee A. Robbins By: Lee A. Robbins Title: Vice President ATTEST: By: /s/ Daniel C. Weary Title: Secretary -4- EX-10.10 11 1ST AMEND. TO RESTATED DEFERRED COMPENSATION PLAN 1 EXHIBIT 10.10 FIRST AMENDMENT TO THE RESTATED PURITAN-BENNETT DEFERRED COMPENSATION PLAN THIS AMENDMENT of the Restated Puritan-Bennett Deferred Compensation Plan (the "Plan") is made by the Puritan-Bennett Corporation (which, together with its subsidiaries and affiliates, shall be referred to herein as the "Corporation"), effective as of the 7th day of November, 1994. WHEREAS, as part of the Plan, the Corporation reserved the right, at any time, by action of its Board of Directors, to modify or amend, in whole or in part, any or all provisions of the Plan, including specifically the right to make any such amendment effective retroactively; and WHEREAS, the Corporation now desires to amend the Plan. NOW, THEREFORE, Article VI of the Plan is hereby amended by the addition of the following at the end of such article: Notwithstanding any provision herein to the contrary, no amendment or termination of this Plan which is made on or after the occurrence of a "Change in Control," as such term is defined in Section 1.1 of the Trust Agreement, shall be effective with respect to any Participant or beneficiary without the express written consent of such Participant or beneficiary, except that the Plan may be amended to prohibit further Contributions by Active Participants after the date such amendment is adopted by the Corporation, and any other amendment which does not adversely affect a Participant or beneficiary. IN WITNESS WHEREOF, the Corporation has executed this Amendment to the Plan, effective as of the date first written above. PURITAN-BENNETT CORPORATION /s/ Lee A. Robbins By: Lee A. Robbins Title: Vice President ATTEST: By: /s/ Daniel C. Weary Title: Secretary EX-10.11 12 1ST AMEND. TO SUPPLEMENTAL RETIREMENT BENEFIT PLAN 1 EXHIBIT 10.11 FIRST AMENDMENT PURITAN-BENNETT CORPORATION SUPPLEMENTAL RETIREMENT BENEFIT PLAN THIS AMENDMENT to the Puritan-Bennett Corporation Supplemental Retirement Benefit Plan (the "Plan") is made effective as of the 1st day of September, 1993 by Puritan-Bennett Corporation, a Delaware corporation (hereinafter referred to as the "Corporation"). WHEREAS, the Corporation has adopted the Plan effective as of September 1, 1985, which provides benefits that supplement benefits provided under the Restated Puritan-Bennett Pension Plan (the "Qualified Plan"); and WHEREAS, the Corporation and the participants in the Plan have agreed to amendment of the Plan in the manner set forth below. NOW, THEREFORE, the Plan is amended effective as of September 1, 1993 as follows: 1. Section 2.02, the definition of "Average Monthly Compensation," is amended in its entirety to read as follows: Section 2.02. The term "Average Monthly Compensation" shall have the meaning provided in the Qualified Plan (currently Section 2.08 thereof), provided that the dollar limitation on Compensation provided in the Qualified Plan (currently Section 2.14 thereof) shall not be applicable for purposes of determining Average Monthly Compensation under this Plan. 2. Section 2.03, the definition of "Beneficiary," is amended in its entirety to read as follows: Section 2.03. The term "Beneficiary" shall have the meaning provided for in the Qualified Plan (currently Section 2.09 thereof). 3. Section 2.13, the definition of "Years of Service," is amended in its entirety to read as follows: Section 2.13. The term "Years of Service" shall mean the number of years for which a Member is given credit for the purpose of determining eligibility for benefits (vesting) under the Qualified Plan (as currently defined in Section 2.41 of the Qualified Plan). 4. Section 2, "Definitions," shall be amended by the addition of the following new Section 2.14: 2 Section 2.14. The term "Years of Participation" shall mean the number of years (twelve month periods) of the Member's participation in this Plan, measured from the date he first became a Member (as herein defined) to the date of his termination of employment. 5. The first paragraph of Section 4.01 is amended in its entirety to read as follows: Section 4.01-Supplemental Monthly Retirement Benefit. A Member who has at the date of his termination of employment with an Employer attained age fifty-five (55) and completed seven (7) Years of Participation 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 the percentage of the Member's Average Monthly Compensation specified in such Member's Plan Agreement, reduced by an amount computed under Section 4.01(a). The amount so reduced shall be further adjusted based upon the vesting schedule set out in Section 4.01(b). The amount resulting from the application of Sections 4.01(a) and (b) shall then be adjusted as provided in Section 4.01(c). 6. Section 4, "Retirement Benefits," shall be amended by the addition of the following new Section 4.02: Section 4.02-Time of Commencement of Supplemental Monthly Retirement Benefit. Payment of the Supplemental Monthly Retirement Benefit to which a Member is entitled pursuant to Section 4.01 shall commence as of the first day of the calendar month coinciding with or next following the termination of the Member's employment (the "Benefit Commencement Date"). Actual payment of such Supplemental Monthly Retirement Benefit, in the Normal Form or other form provided in Section 4.03, shall, however, be subject to the following: if the Member shall have elected the form of payment of his Supplemental Monthly Retirement Benefit pursuant to Section 4.03 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 Member did not make an election pursuant to Section 4.03 during a Preceding Year, but shall make 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 Member does not make an election pursuant to Section 4.03 during either a Preceding or the Termination Year, then such Member 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; provided that any time actual payment of a Member's Supplemental Monthly Retirement Benefit shall 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 -2- 3 date 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 period beginning on the Benefit Commencement Date and ending on the date payments actually commence, as quoted in the edition of the Wall Street Journal first published after the Benefit Commencement Date. 7. Section 4, "Retirement Benefits," shall be amended by the addition of the following new Section 4.03: Section 4.03-Form of Payment of Supplemental Monthly Retirement Benefits. The "Normal Form" of payment of a Member's Supplemental Monthly Retirement Benefit, and the form on which the amount of such Benefit is calculated pursuant to Section 4.01, shall be a single life annuity payable for the Member's life only commencing as of his Benefit Commencement Date. A Member may, however, 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 Member's Benefit Commencement Date) of the Normal Form single life annuity. (a) Ten Year Certain and Continuous Option. Pursuant to this option, the Member's Supplemental Monthly Retirement Benefit shall be payable during the Member's life only; provided that if the Member dies within ten years of his Benefit Commencement Date, payments in the same amount will continue to be made to the Member's Beneficiary until a total of 120 monthly payments have been made. (b) Early Retirement Level Income Option. Pursuant to this option, the Member's Supplemental Monthly Retirement Benefit payments will be made during the Member's life only. Larger payments shall be made until the first day the Member is eligible to receive social security benefits (age 62). At that time payments to the Member shall be reduced by the amount of the Member's social security benefit that was estimated as part of the determination of all payments to be made under this Section 4.03(c). No payments shall be made after the Member's death. (c) 50%, 75% and 100% Contingent Annuitant Option. Pursuant to this option, the Member's Supplemental Monthly Retirement Benefit payments shall be made during the life of the Member, with payments continuing to the Member's designated contingent annuitant ("Contingent Annuitant") for the life of such Contingent Annuitant following the Member's death. The Contingent Annuitant and the percentage to be paid to such Contingent Annuitant must be designated by the Member at the time this payment form is elected. If the Contingent Annuitant predeceases the Member, no benefits shall be paid after the Member's death. The amount -3- 4 paid to the Member's Contingent Annuitant shall be either 50%, 75% or 100% of the amount received by the Member during the Member's life. 8. Section 5, "Death Benefits", is amended in its entirety to read as follows: Section 5-Death Benefits. Section 5.01-Death Before Commencement of Benefits. In the event of the death of a Member or a Disabled Member prior to his Benefit Commencement Date, leaving a surviving Spouse, then if such Member had prior to his death completed seven (7) Years of Participation, 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 which would have been payable to the Member 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 4.03(c) and designated his Spouse as the contingent annuitant. If the Member 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 Member would have attained age fifty- five (55), and no Death Benefit shall be payable in the event his surviving Spouse shall die before such date. No Death Benefit will be paid hereunder if the Member dies before his Benefit Commencement Date and is not then married. Section 5.02-Death After Commencement of Benefits. If the Member dies after his Benefit Commencement Date, the Member'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 Member's Supplemental Monthly Retirement Benefit was being paid or was payable prior to his death). If the Member 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 Member. 9. New Section 9.03 is added to the Plan to read as follows: Section 9.03-Plan Interpretation. The Corporation shall have sole and absolute discretion and authority to interpret all provisions of this Plan and to resolve all questions arising under this Plan; including, but not limited to, determining whether any person is eligible to contribute to this Plan, whether any person shall receive any payments pursuant to this Plan, and the amount of any payments to be paid pursuant to this Plan. Any interpretation, resolution or determination of the Corporation pursuant to this Section shall be final and binding upon all concerned. -4- 5 IN WITNESS WHEREOF, this Amendment is adopted as of the date set forth above. PURITAN-BENNETT CORPORATION /s/ Lee A. Robbins By: Lee A. Robbins Title: Vice President ATTEST: By: /s/ Daniel C. Weary Title: Secretary -5- EX-10.12 13 3RD AMEND. TO SUPPLEMENTAL RETIREMENT BENEFIT PLAN 1 EXHIBIT 10.12 THIRD AMENDMENT PURITAN-BENNETT CORPORATION SUPPLEMENTAL RETIREMENT BENEFIT PLAN THIS AMENDMENT to the Puritan-Bennett Corporation Supplemental Retirement Benefit Plan (the "Plan") is made this 7th day of November, 1994 by Puritan-Bennett Corporation, a Delaware corporation (hereinafter referred to as the "Corporation"). WHEREAS, the Corporation has adopted the Plan effective as of September 1, 1985, which provides benefits that supplement benefits provided under the Restated Puritan-Bennett Pension Plan (the "Qualified Plan"); and WHEREAS, the Plan was heretofore amended by a First Amendment thereto effective on or about September 1, 1993 and a Second Amendment thereto effective January 1, 1994; and WHEREAS, the Corporation and the Members of the Plan have agreed to the further amendment of the Plan in the manner set forth below. NOW, THEREFORE, the Plan, as heretofore amended, is amended effective October 1, 1994 as follows: A. Section 4.01(a)(i) is amended to read in its entirety as follows: Section 4.01(a)(i). The amount payable shall be reduced by one hundred percent (100%) of the monthly income or Pension benefits payable or which would be payable to the Member under the Qualified Plan in the form of a single life annuity commencing as of the the Member's Benefit Commencement Date. B. Section 8.05 is amended to include the following sentence at the end of the first paragraph: Notwithstanding any provision herein to the contrary, no amendment or termination of this Plan which is made on or after the occurrence of a "Change in Control," as such term is defined in Section 1.1 of the Trust Agreement, shall affect any rights or benefits to which any Member or beneficiary had become entitled pursuant to this Plan prior to the date of such amendment or termination without the express written consent of said Member or beneficiary. C. A new Section 10 is added to read in its entirety as follows: Section 10.01 - Trust Fund. The Corporation has established a trust fund pursuant to an agreement with Wachovia Bank of North Carolina, N.A., as trustee (the "Trustee"), dated November 7, 1994 (the "Trust Agreement"). Any payments to a Participant from such trust fund shall, to the extent thereof, discharge the Corporation's obligations pursuant to this Plan. 2 IN WITNESS WHEREOF, this Third Amendment is adopted as of the date set forth above. PURITAN-BENNETT CORPORATION /s/ Lee A. Robbins By: Lee A. Robbins Title: Vice President ATTEST: By: /s/ Daniel C. Weary Title: Secretary -2- EX-10.13 14 1ST AMEND. TO PENSION BENEFIT MAKE UP PLAN 1 EXHIBIT 10.13 FIRST AMENDMENT TO THE PURITAN-BENNETT CORPORATION PENSION BENEFIT MAKE UP PLAN THIS AMENDMENT to the Puritan-Bennett Corporation Pension Benefit Make Up Plan (the "Plan") is made by the Puritan-Bennett Corporation (the "Corporation"), effective as of the 7th day of November, 1994. WHEREAS, the Corporation reserved the right to amend the Plan at any time and from time to time; and WHEREAS, the Corporation now desires to amend the Plan as of the date first written above. NOW, THEREFORE, the Plan is amended as follows: 1. Section 5.01 of Article V is amended to include the following sentence at the end of the first paragraph: Notwithstanding any provision herein to the contrary, no amendment or termination of this Plan which is made on or after the occurrence of a "Change in Control," as such term is defined in Section 1.1 of the Trust Agreement, shall affect any rights or benefits to which any Participant or beneficiary had become entitled pursuant to this Plan prior to the date of such amendment or termination without the express written consent of such Participant or beneficiary. 2. A new Article VI is added to read in its entirety as follows: ARTICLE VI TRUST FUND The Corporation has established a trust fund pursuant to an agreement with Wachovia Bank of North Carolina, N.A., as trustee (the "Trustee"), dated November 7, 1994 (the "Trust Agreement"). Any payments to a Participant from such trust fund shall, to the extent thereof, discharge the Corporation's obligations pursuant to this Plan. IN WITNESS WHEREOF, the Corporation has executed this Amendment, effective as of the date first written above. PURITAN-BENNETT CORPORATION /s/ Lee A. Robbins By: Lee A. Robbins Title: Vice President 2 ATTEST: By: /s/ Daniel C. Weary Title: Secretary -2- EX-10.14 15 AMEND. TO 1988 EMPLOYEE STOCK BENEFIT PLAN 1 EXHIBIT 10.14 AMENDMENT ADOPTED ON NOVEMBER 6, 1994 TO PURITAN-BENNETT 1988 EMPLOYEE STOCK BENEFIT PLAN THIS AMENDMENT of the Puritan-Bennett 1988 Stock Benefit Plan (the "Plan") is made by the Puritan-Bennett Corporation (which, together with its subsidiaries and affiliates, shall be referred to herein as the "Corporation"), effective as of the 7th day of November, 1994. WHEREAS, as part of the Plan, the Corporation reserved the right, at any time, by action of its Board of Directors, to modify or amend, in whole or in part, any or all provisions of the Plan; and WHEREAS, the Corporation now desires to amend the Plan. NOW, THEREFORE, the Plan is hereby amended to include the following language at the end of Section 9: At the sole discretion of the Committee, and on such terms and conditions as it deems appropriate, the Committee may provide either by the terms of an option granted under the Plan or by a resolution adopted prior to the occurrence of an event described in clauses (x), (y) or (z) above, that upon such event, such option shall be assumed by the successor corporation, or a parent or subsidiary thereof, or shall be substituted for by a similar option, covering the stock of the successor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and exercise prices. In the event that the Committee provides for such assumption or substitution of options, the assumed or substituted options shall continue to be subject to their original vesting schedules notwithstanding the provision for acceleration of vesting set forth above. IN WITNESS WHEREOF, the Corporation has executed this Amendment to the Plan, effective as of the date first written above. PURITAN-BENNETT CORPORATION /s/ Lee A. Robbins By: Lee A. Robbins Title: Vice President ATTEST: By: /s/ Daniel C. Weary Title: Secretary EX-10.15 16 AMEND. TO RETIREMENT PLAN FOR NON-EMP. DIRECTORS 1 EXHIBIT 10.15 AMENDMENT TO THE PURITAN-BENNETT CORPORATION DIRECTORS POST-RETIREMENT INCOME PLAN THIS AMENDMENT to the Puritan-Bennett Corporation Directors Post-Retirement Income Plan (the "Plan") is made by the Puritan-Bennett Corporation (the "Corporation"), effective as of the 7th day of November, 1994. WHEREAS, subject to certain restrictions, the Corporation reserved the right to amend the Plan by action of the Board of Directors at any time and from time to time; and WHEREAS, the Corporation now desires to amend the Plan as of the date first written above by resolution of the Board of Directors. NOW, THEREFORE, the Plan is amended by the addition of new Section 5.4, which shall read as follows: 5.4 Trust. The Corporation has established a trust fund pursuant to an agreement with Wachovia Bank of North Carolina, N.A., as trustee (the "Trustee"), dated November 7, 1994 (the "Trust Agreement"). Any payments to a Director from such trust fund shall, to the extent thereof, discharge the Corporation's obligations pursuant to the Plan. PURITAN-BENNETT CORPORATION /s/ Lee A. Robbins By: Lee A. Robbins Title: Vice President ATTEST: By: Daniel C. Weary Title: Secretary EX-10.16 17 SERP AGREEMENT BTWN BURTON A. DOLE, JR. AND THE CO 1 EXHIBIT 10.16 AGREEMENT THIS AGREEMENT is made this 7th day of November, 1994 by and between Puritan-Bennett Corporation, a Delaware corporation (hereinafter referred to as the "Corporation"), and Burton A. Dole, Jr. (hereinafter referred to as the "Employee"). WHEREAS, the Corporation has adopted the Puritan-Bennett Corporation Supplemental Retirement Benefit Plan effective as of September 1, 1985 (the "Plan"), which provides benefits that supplement benefits provided under the Restated Puritan-Bennett Pension Plan (the "Pension Plan"); and WHEREAS, the Corporation and the Employee have entered into an agreement pursuant to which the Employee became a Member under the terms of the Plan; and WHEREAS, the Employee and the Corporation desire to make the following changes to the Plan as it applies to Employee; and WHEREAS, contemporaneously herewith the Corporation is agreeing to pay COBRA benefits for all employees of the Corporation under certain circumstances and the Corporation and Employee desire that the same agreement shall be made for Employee. NOW, THEREFORE, in consideration of the mutual covenants set forth herein, the Employee and the Corporation agree that: 1. Plan Benefits. Solely for purposes of determining the Employee's and his beneficiaries' rights under the Plan and not for purposes of determining the rights of any other individual under the Plan, the terms of the Plan applicable to Employee shall be amended as follows: A. Section 4, "Retirement Benefits," shall be amended by the addition of the following new Section 4.04. Section 4.04-Exceptions for Certain Terminations of Employment. Notwithstanding the foregoing provisions of this Section 4 or any other provision(s) of this Plan, in the event of the termination of employment of a Member within two years following the occurrence of a Change in Control for Good Reason (if initiated by the Member), and/or other than for Cause (if initiated by the Corporation), then (a) even if the Member has not at the date of termination of employment attained age fifty-five (55) and/or completed seven (7) Years of Participation, he shall nevertheless be entitled to the Supplemental Monthly Retirement Benefit provided under Section 4.01 hereof; (b) the Member shall be deemed to have completed ten or more Years of Service and to be 100% vested in the Supplemental Monthly Retirement Benefit pursuant to Section 4.01(b) hereof; and (c) the Member 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 the Supplemental Monthly Retirement Benefit (as adjusted by Section 4.01(a)) pursuant to Section 4.01(c). 2 For the purposes of this Section 4.04, the terms Cause, Good Reason and Change in Control shall be defined as follows: (a) Cause. "Cause" means (i) the Member's willful violation of any reasonable rule or direct order of the Corporation's board of directors (the "Board"), which, after written notice to do so, the Member fails to make reasonable efforts to correct within a reasonable time, or (ii) conviction of a crime, or entry of a plea of nolo contendere with regard to a crime, involving actual moral turpitude or dishonesty of or by the Member, or (iii) drug or alcohol abuse on Corporation premises or at a Corporation sponsored event, or (iv) the Member's material violation of any provision of his employment agreement with the Corporation, which, after written notice to do so, the Member fails to make reasonable efforts to correct within a reasonable time. "Cause" shall not include any matter other than these specified in (i) through (iv) 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 Member, or upon any operation, asset, product or activity of the Corporation, 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 the Member acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation. (b) Good Reason. "Good Reason" means (i) breach by the Corporation or any successor company of any of the provisions of the employment agreement between the Corporation and the Member (the "Employment Agreement") not corrected within ninety (90) days after written notice to the Corporation thereof, or (ii) any of the following if the same shall occur within two years after a Change in Control: (A) reduction of the Member's base salary, management bonus percentage or other compensation, as in effect immediately prior to the Change in Control, (B) failure to continue in effect any medical, dental, accident, or disability plan in which the Member is entitled to participate immediately prior to the Change in Control and failure to provide plans with substantially similar benefits (except that employee contributions may be raised to the extent of any cost increases imposed by third parties) or any action by the Corporation which would adversely affect the Member's participation or reduce the Member's benefits under any of such plans, (C) material reduction in Member's job responsibilities, (D) material reduction of Member's title or position, (E) Member shall be requested to relocate to an office outside of the greater Kansas City metropolitan area, or (F) failure or refusal of any successor company to assume the Corporation's obligations under the Employment Agreement. -2- 3 (c) Change in Control. A "Change in Control" shall be deemed to have occurred at any of the following times: (i) Upon the acquisition (other than from the Corporation) by any person, entity or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act") (excluding, for this purpose, the Corporation or its affiliates, or any employee benefit plan of the Corporation or its affiliates which acquires beneficial ownership of voting securities of the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either the then outstanding shares of common stock of the Corporation or the Combined Voting Power of the Corporation's then outstanding voting securities. "Combined Voting Power" means the combined voting power of the Corporation's then outstanding voting securities generally entitled to vote in the election of directors. (ii) At the time individuals who, as of the date hereof, constitute the Board (as of the date hereof, the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Corporation's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Corporation, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this subsection 1.3.2, considered as though such person were a member of the Incumbent Board; or (iii) Upon the approval by the shareholders of the Corporation of a reorganization, merger, consolidation (in each case, with respect to which persons who were the shareholders of the Corporation immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of the Combined Voting Power of the reorganized, merged or consolidated company's then outstanding voting securities) or a liquidation or dissolution of the Corporation or of the sale of all or substantially all of the assets of the Corporation; or -3- 4 (iv) The occurrence of any other event which the Incumbent Board in its sole discretion determines constitutes a Change in Control. B. A new Section 11 is added to read in its entirety as follows: Section 11--Certain Reduction of Payments. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Corporation to or for the benefit of Member (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be nondeductible by the Corporation for Federal income tax purposes because of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then the aggregate present value of amounts payable or distributable hereunder shall be reduced to the Reduced Amount; provided, however, that Payments shall not include any amount payable pursuant to the Agreement between Member and the Corporation dated April 25, 1980. The "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of such benefits without causing any Payment to be nondeductible by the Corporation because of Section 280G of the Code. Anything to the contrary notwithstanding, if the Reduced Amount is zero and it is determined further that any Payment which is not part of the benefits payable hereunder would nevertheless be nondeductible by the Corporation for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of Payments which are not benefits hereunder shall also be reduced (but not below zero) to an amount expressed in present value which maximizes the aggregate present value of Payments without causing any payment to be nondeductible by the Corporation because of Section 280G of the Code. For purposes of this Section 11, present value shall be determined in accordance with Section 280G(d)(4) of the Code. (b) All determinations required to be made under this Section 11 shall be made by an accounting firm jointly selected by Member and the Corporation (the "Accounting Firm") and paid by the Corporation, and which may be the Company's independent auditors. The Accounting Firm shall provide detailed supporting calculations both to the Corporation and Member within 15 business days of the date of termination of Member's employment by the Corporation (the "Employment Termination Agreement") or such earlier time as is requested by the Corporation and an opinion to Member that he has substantial authority not to report any excise tax on his Federal income tax return with respect to any Payments. Any such determination by the Accounting Firm shall be binding upon the Corporation and Member. Member shall determine which and how much of the Payments, shall be eliminated or reduced consistent with -4- 5 the requirements of this Section 11, provided that, if Member does not make such determination within ten business days of the receipt of the calculations made by the Accounting Firm, the Corporation shall elect which and how much of the Payments shall be eliminated or reduced consistent with the requirements of this Section 11 and shall notify Member promptly of such election; and provided further that any Payments which do not constitute gross income to Member shall not be reduced or eliminated unless all other Payments have first been eliminated. Within five business days thereafter, the Corporation shall pay to or distribute to or for the benefit of Employee such amounts as are then due to Member under this Agreement. (c) As a result of the uncertainty in the application of Section 280G of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Payments will have been made by the Corporation which should not have been made ("Overpayment") or that Payments will not have been made by the Corporation which could have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against Member or the Corporation which the Accounting Firm believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Corporation to or for the benefit of Member shall be treated for all purposes as a loan ab initio to Member which Member shall repay to the Corporation together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable to the Corporation if and to the extent such deemed loan and payment would not either reduce the amount on which Member is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm, based upon controlling precedent or other substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Corporation to or for the benefit of Member together with interest at 120% of the applicable federal rate provided for in Section 7872(f)(2) of the Code, compounded semiannually. (d) Notwithstanding anything in this Agreement to the contrary, if after giving effect to the provisions of Section 11(a)-(c) any portion of any payments to Member by the Corporation hereunder would not be deductible by the Corporation for Federal income tax purposes by reason of application of Section 162(m) of the Code, then payment of that portion to Member shall be deferred until the earliest date upon which payment thereof can be made to Member without being non-deductible pursuant to Section 162(m) of the Code. In the event of a such a deferral, the Corporation shall pay interest to Member on the amount deferred at 120% of the applicable -5- 6 federal rate provided for in Section 7872(f)(2) of the Code, compounded semiannually. 2. COBRA Benefits. In the event of the termination of employment of Employee without Cause (if initiated by the Corporation) or for Good Reason (if initiated by Employee), the Corporation will provide a benefit under the Consolidated Omnibus Budget Reconciliation Act of 1986 ("COBRA") and Section 4980B of the Internal Revenue Code of 1986, as amended, as follows: the Corporation shall pay the percentage of the cost of COBRA coverage with respect to Employee's coverage status (e.g., individual or family) in effect immediately prior to such termination of employment, which percentage shall be the fraction (expressed as a percentage), the numerator of which shall be the difference between (i) the monthly cost of COBRA coverage for Employee's coverage status in effect immediately prior to the Employment Termination Date and (ii) Employee's monthly contribution toward Employee's coverage in effect immediately prior to the Employment Termination Date, and the denominator of which shall be the monthly cost of COBRA coverage for Employee's coverage status in effect immediately prior to the Employment Termination Date. All of such amounts shall be determined as of the day immediately preceding the termination of Employee's employment. The insurance continuation benefits paid for hereunder shall be deemed to be part of Employee's COBRA coverage. Such benefits shall be in addition to any other benefits relating to health or medical care benefits that, under the Corporation's policies, are available to Employee following termination of employment. IN WITNESS WHEREOF, this Agreement has been made as of the date set forth above. CORPORATION: PURITAN-BENNETT CORPORATION /s/ Lee Robbins --------------------------------- By: Lee Robbins Title: Vice President EMPLOYEE: /s/ Burton A. Dole, Jr. - --------------------------- Burton A. Dole, Jr. 9605 W. 191st Street Bucyrus, Kansas 66013 -6- EX-10.17 18 SERP AGREEMENT BTWN JOHN H. MORROW & THE COMPANY 1 EXHIBIT 10.17 AGREEMENT THIS AGREEMENT is made as of November 7, 1994 by and between Puritan-Bennett Corporation, a Delaware corporation (hereinafter referred to as the "Corporation"), and John H. Morrow (hereinafter referred to as the "Employee"). WHEREAS, the Corporation has adopted the Puritan-Bennett Corporation Supplemental Retirement Benefit Plan effective as of September 1, 1985 (the "Plan"), which provides benefits that supplement benefits provided under the Restated Puritan-Bennett Pension Plan (the "Pension Plan"); and WHEREAS, the Corporation and the Employee have entered into an agreement pursuant to which the Employee became a Member under the terms of the Plan; and WHEREAS, the Employee and the Corporation desire to make the following changes to the Plan as it applies to Employee. NOW, THEREFORE, in consideration of the mutual covenants set forth herein, the Employee and the Corporation agree that, solely for purposes of determining the Employee's and his beneficiaries' rights under the Plan and not for purposes of determining the rights of any other individual under the Plan, the terms of the Plan applicable to Employee shall be amended as follows: A. Section 4, "Retirement Benefits," shall be amended by the addition of the following new Section 4.04. Section 4.04-Exceptions for Certain Terminations of Employment. Notwithstanding the foregoing provisions of this Section 4 or any other provision(s) of this Plan, in the event of the termination of employment of a Member for Good Reason (if initiated by the Member), and/or other than for Cause (if initiated by the Corporation), then (a) even if the Member has not at the date of termination of employment attained age fifty-five (55) and/or completed seven (7) Years of Participation, he shall nevertheless be entitled to the Supplemental Monthly Retirement Benefit provided under Section 4.01 hereof; (b) the Member shall be deemed to have completed ten or more Years of Service and to be 100% vested in the Supplemental Monthly Retirement Benefit pursuant to Section 4.01(b) hereof; (c) the Member 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 the Supplemental Monthly Retirement Benefit (as adjusted by Section 4.01(a)) pursuant to Section 4.01(c); and (d) the Benefit Commencement Date under Section 4.02 shall be the first day of the calendar month coinciding with or next following the earlier of--(i) the first date following termination of Member's employment on which the Corporation is in material breach of its obligations pursuant to the contracts between the Member and the Corporation dated June 9, 1994, and November 7, 1994 (the "Contracts"); or 2 (ii) the later of: (I) the date the Member attains age fifty-five (55), or (II) the latest date on which the last payment pursuant to the Contracts is scheduled to be made (which date shall be determined without regard to whether the payment is in fact made prior to such scheduled date). For the purposes of this Section 4.04, the terms Cause and Good Reason shall be defined as follows: (a) Cause. "Cause" means (i) the Member's willful violation of any reasonable rule or direct order of the Corporation's board of directors (the "Board") or the Corporation's Chief Executive Officer ("CEO"), which, after written notice to do so, the Member fails to make reasonable efforts to correct within a reasonable time, or (ii) conviction of a crime, or entry of a plea of nolo contendere with regard to a crime, involving actual moral turpitude or dishonesty of or by the Member, or (iii) drug or alcohol abuse on Corporation premises or at a Corporation sponsored event, or (iv) the Member's material violation of any provision of his employment agreement with the Corporation, which, after written notice to do so, the Member fails to make reasonable efforts to correct within a reasonable time. "Cause" shall not include any matter other than these specified in (i) through (iv) 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 Member, or upon any operation, asset, product or activity of the Corporation, 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 the Member acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation. (b) Good Reason. "Good Reason" means (i) breach by the Corporation or any successor company of any of the provisions of the employment agreement between the Corporation and the Member (the "Employment Agreement") not corrected within ninety (90) days after written notice to the Corporation thereof, or (ii) any of the following: (A) reduction of the Member's base salary, management bonus percentage or other compensation, (B) failure to continue in effect any medical, dental, accident, or disability plan in which the Member is entitled to participate and failure to provide plans with substantially similar benefits (except that employee contributions may be raised to the extent of any cost increases imposed by third parties) or any action by the Corporation which would adversely affect the Member's participation or reduce the Member's benefits under any of such plans, (C) material reduction in Member's job responsibilities, (D) material reduction of Member's title or position, (E) Member shall be requested to relocate to an office outside -2- 3 of the greater Kansas City metropolitan area, or (F) failure or refusal of any successor company to assume the Corporation's obligations under the Employment Agreement. B. Section 9.02(a) is amended to read in its entirety as follows: (a) Competition Restriction. During the period of employment and during the period that the Member is receiving Supplemental Monthly Retirement Benefits under this Plan, the Member 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 Member shall have obtained the prior written consent of the Committee. IN WITNESS WHEREOF, this Agreement has been made as of the date set forth above. CORPORATION: PURITAN-BENNETT CORPORATION /s/ Burton A. Dole, Jr. --------------------------------- By: Burton A. Dole, Jr. Title: President EMPLOYEE: /s/ John H. Morrow - ---------------------------- John H. Morrow 10231 Catalina Overland Park, Kansas 66207 -3- EX-11 19 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS 1 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Quarter Ending Nine Months Ending October 31 October 31 ----------------------------- --------------------------- 1994 1993 1994 1993 ----------- ----------- ----------- ----------- PRIMARY Weighted average shares outstanding at end of period 12,533,709 11,908,653 12,478,113 11,914,627 Assuming exercise of options reduced by the number of shares which could have been purchased with the proceeds from exercise 0 80,664 33,924 11,746 ----------- ----------- ----------- ----------- Shares outstanding for computation of per share earnings 12,533,709 11,989,317 12,512,037 11,926,373 =========== =========== =========== =========== Net income $ (640,423) $ (748,000 $ 7,327,664 $ (5,121,00) =========== =========== =========== =========== Primary earnings per share $ (0.05) $ 0.06 $ 0.59 $ (0.43) =========== =========== =========== =========== FULLY DILUTED Weighted average shares outstanding at end of period 12,533,709 11,908,653 12,478,113 11,914,627 Assuming exercise of options reduced by the number of shares which could have been purchased with the proceeds from exercise 190,988 80,664 101,062 40,574 ----------- ----------- ----------- ----------- Shares outstanding for computation of per share earnings 12,724,697 11,989,317 12,579,175 11,955,201 =========== =========== =========== =========== Net income $ (640,423) $ 748,000 $ 7,327,664 $ (5,121,000) =========== =========== =========== =========== Fully diluted earnings per share $ (0.05) $ 0.06 $ 0.58 $ (0.43) =========== =========== =========== =========== REPORTED EARNINGS PER SHARE $ (0.05) $ 0.06 $ 0.59 $ (0.43) =========== =========== =========== ===========
The company does not meet the 3% dilution test contained in Accounting Principles Board Opinion #15, therefore disclosure of diluted earnings per share on the face of the condensed consolidated statements of operations is not required. EX-15 20 LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION 1 EXHIBIT 15 (Ernst & Young LLP Letterhead) Letter Regarding Unaudited Interim Financial Information The Board of Directors Puritan-Bennett Corporation We are aware of the incorporation by reference in the following registration statements of Puritan-Bennett Corporation: No. 2-98132 on Form S-8 and Form S-3 dated June 23, 1985, No. 33-6804 on Form S-3 dated July 24, 1986, No. 33-26495 on Form S-8 and Form S-3 dated January 31, 1989, No. 33-36497 on Form S-8 dated August 21, 1990, and No. 33-67634 on Form S-8 dated August 18, 1993, of our report dated December , 1994 relating to the unaudited condensed consolidated interim financial statements of Puritan-Bennett Corporation and subsidiaries which are included in its Form 10-Q for the quarter ended October 31, 1994. Pursuant to Rule 436(c) of the Securities Act of 1933, our reports are not part of the registration statement prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933. /s/ Ernst & Young ERNST & YOUNG LLP December 14, 1994 EX-19 21 PURITAN-BENNETT- CORP. 3RD QTR REPORT 1 LETTER TO OUR STOCKHOLDERS The company recorded charges of $4.6 million for obligations associated with Thermo Electron Corp.'s unsolicited tender offer resulting in a reported loss of $640,000 or $.05 per share for the third quarter ending October 31, 1994. Without the charge, earnings per share for the quarter would have been $.31 per share, up 15% from the $.27 per share (adjusted to eliminate losses associated with the FOxS blood gas monitoring system) for the same period last year. Orders of $83,018,000 and revenues of $83,412,000 for the quarter were up 11% over the same period last year. For the first nine months, orders of $245,271,000 and revenues of $247,813,000 were up 7% and 8%, respectively, over the same period last year. The company also was told by Homedco Group, Inc., one of the nation's leading providers of home respiratory services, that Puritan-Bennett will be selected as one of its endorsed vendors for home oxygen equipment. Homedco has been in the process of upgrading its oxygen therapy technology to achieve greater operational efficiencies. This announcement is the result of Homedco's formal bid process, and will be one of the largest purchases of oxygen therapy equipment in Homedco's history. In addition, Homedco said it would work with the company to adapt Puritan-Bennett's CliniVision(R) Respiratory Care Management Information System to the homecare respiratory management needs of its patients. SUPPLEMENTAL PRO-FORMA INFORMATION: In order to help our stockholders better understand the economic dynamics and potential of the company's business, we have decided to begin providing supplemental information that sets forth the company's earnings before interest, taxes and other unusual charges (EBITOC) in its two main lines of business - Puritan and Bennett. Unusual charges include any historical restructuring or current Thermo Electron-related charges. The supplemental information also excludes discontinued lines of business. Supplemental pro-forma information dollars are reported in thousands. PURITAN - Puritan includes our rapidly growing homecare product lines as well as our medical gas and gas-related equipment and spirometry product lines. Aero Systems is also included because it shares one of our larger manufacturing facilities with the Puritan Group and is relatively small. Revenue for the first nine months grew to $159,391 from $136,263 on a FY95 to FY94 comparison, up 17%. Third quarter FY95 revenues are also up, $56,187 compared to $45,751, for the third quarter of FY94. Puritan now accounts for about two-thirds of the company's total revenues. Puritan revenue for FY94 was also up from FY93, $184,239 versus $167,763. The average annual growth for the five years ended January 31, 1994 was 15%. Within Puritan, homecare products continue to grow at rates considerably above the overall Puritan average. Puritan's EBITOC was $16,306 (10% of revenue) and $18,493 (14% of revenue) for the first nine months of FY95 and FY94, respectively. For the third quarter of this year, EBITOC was $5,995 (11% of revenue) versus $6,251 (14% of revenue) in the third quarter FY94. EBITOC was $22,939 (12% of revenue) and $24,740 (15% of revenue) in FY94 and FY93, respectively. EBITOC has been higher in the recent past and we expect it to return to those higher levels in the future, as we realize the benefits of several major regulatory control and compliance initiatives undertaken in the latter part of FY94 and during FY95. These initiatives required considerable staffing and other resource additions as well as manufacturing process modifications. As a result, we experienced certain significant short-run operating disruptions and inefficiencies, which increased our costs. BENNETT - The Bennett line of business consists of our critical care ventilator business - a business that continues to represent an exceptional and long-standing customer franchise on a global basis - as well as our CliniVision product line in the U.S., and our holter monitoring and portable ventilator product lines. Since FY93, revenues have declined for several reasons including difficult market conditions, particularly in the U.S. hospital market, discontinuance of certain older products and accessories as a result of evolving regulatory standards, and our withdrawal from the U.S. portable ventilator market. In addition, Bennett has also undertaken major regulatory control and compliance initiatives at significant cost. Third quarter FY95 and FY94 revenues were $27,225 and $28,838. For the first nine months of FY95 and FY94, revenues were $88,422 and $90,361, respectively. FY94 revenues were $122,751 and FY93 revenues were $131,279. On a quarter-to-quarter comparison, EBITOC was $456 for the third quarter of FY95 versus a loss of $793 for the same period of FY94. EBITOC was $2,620 and $2,718 for the first nine months of FY95 and FY94, respectively (3% of revenues for both periods). FY94 EBITOC was $14 compared to FY93 EBITOC of $11,803 (9% of revenue). Current and recent EBITOC is not close to where we believe it should and will be. We believe the recent poor profitability of Bennett will begin to reverse itself and both revenues and margins will 2 increase as a result of the benefits from full implementation of our regulatory compliance initiatives, continued growth of CliniVision and service revenue and several other positive developments. These developments include the new products/product enhancements recently cleared by FDA for marketing in the U.S. and recently introduced internationally. In addition, other important new products are being developed for introductions a little over a year from now. In summary, we are encouraged by the continued strong growth of Puritan in the third quarter and believe both Puritan and Bennett are well positioned to begin returning to historical levels of profitability. We will continue to build upon our unique franchise in the critical care ventilator area while continuing to invest in and grow the exciting homecare businesses that make up the bulk of our Puritan business line. /s/ BURTON A. DOLE JR. ------------------------- Burton A. Dole Jr. Chairman, President and November 21, 1994 Chief Executive Officer CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Dollars in thousands, except per share data
THREE MONTHS ENDED NINE MONTHS ENDED OCTOBER 31 OCTOBER 31 ---------------------------- ----------------------------- 1994 1993 1994 1993 ---------------------------- ----------------------------- Net Sales $ 83,412 $ 75,277 $ 247,813 $ 228,582 Cost of Goods Sold 49,128 43,910 144,091 130,602 ----------- ----------- ------------ ------------ Gross Profit 34,284 31,367 103,722 97,980 Selling and Administrative Expense 23,508 23,721 71,790 71,474 Research and Development Expense 5,046 6,153 14,825 19,406 Restructuring Charges -- -- -- 9,014 ----------- ----------- ------------ ------------ Operating Profit (Loss) 5,730 1,493 17,107 (1,914) Interest Expense 1,719 1,159 4,319 3,560 Cost Associated with Unsolicited Offers to Acquire Company's Stock 4,559 -- 4,559 -- Other Expense (Income), net (768) (773) (1,949) (304) ----------- ----------- ------------ ------------ Income (Loss) Before Income Taxes 220 1,107 10,178 (5,170) Provision for (Benefit from) Income Taxes 860 359 2,850 (2,804) ----------- ----------- ------------ ------------ Net Income (Loss) Before Cumulative Effect (640) 748 7,328 (2,366) Cumulative Effect of a Change in Accounting for Income Taxes -- -- -- (2,755) ----------- ----------- ------------ ------------ Net Income (Loss) $ (640) $ 748 $ 7,328 $ (5,121) =========== =========== ============ ============ Weighted Average Number of Shares Outstanding 12,533,709 11,908,653 12,478,113 11,914,627 Net Income (Loss) Before Cumulative Effect Per Share $ (.05) $ .06 $ .59 $ (.20) Cumulative Effect of a Change in Accounting for Income Taxes Per Share -- -- -- (.23) ----------- ----------- ------------ ------------ Net Income (Loss) Per Share $ (.05) $ .06 $ .59 $ (.43) =========== =========== ============ ============ Dividends Declared Per Share $ .03 $ .03 $ .09 $ .09 =========== =========== ============ ============
3 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) Dollars in thousands
OCTOBER 31 January 31 ASSETS 1994 1994 ---------------------------- Current Assets: Cash and cash equivalents $ 603 $ 713 Trade notes and accounts receivable, net 72,204 70,137 Inventories: Finished goods 18,271 16,163 Work in process 5,951 4,437 Raw materials and supplies 34,904 30,894 ----------- ----------- 59,126 51,494 Less excess of FIFO cost over LIFO cost (4,478) 4,024 ----------- ----------- 54,648 47,470 Prepaid expenses and other 4,678 5,567 Deferred income tax benefits 10,760 10,760 ----------- ----------- Total current assets 142,893 134,647 Plant and Equipment 171,011 158,961 Less accumulated depreciation and amortization 75,658 70,068 ----------- ----------- 95,353 88,893 Other Assets, net 32,190 33,054 ----------- ----------- Total Assets $ 270,436 $ 256,594 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable $ 15,644 $ 27,791 Trade accounts payable 15,436 13,937 Employee compensation, payroll taxes and withholdings 8,220 8,015 Accrued self-insurance expenses 1,132 1,299 Other accrued expenses 15,238 21,140 Dividends payable 376 359 Income taxes payable 3,507 3,678 Current maturities of long-term debt 6,672 6,546 ----------- ----------- Total current liabilities 66,225 82,765 Long-Term Debt, less current maturities 59,388 38,656 Deferred Compensation and Pensions 18,352 17,444 Deferred Income Taxes 55 55 Deferred Revenue 10,786 9,962 Stockholders' Equity: Common stock, par value $1.00 per share -- Authorized 30,000,000 shares; issued and outstanding, 12,530,208 shares in October and 12,427,653 shares in January 12,530 12,428 Additional paid-in capital 37,052 34,794 Retained earnings 67,460 61,736 Deferred stock awards (1,412) (602) Treasury stock -- (644) ----------- ----------- Total Stockholders' Equity 115,630 107,712 ----------- ----------- Total Liabilities and Stockholders' Equity $ 270,436 $ 256,594 =========== ===========
4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Dollars in thousands
NINE MONTHS ENDED OCTOBER 31 ------------------------- CASH FLOWS FROM OPERATING ACTIVITIES 1994 1993 ------------------------- Net income (loss) $ 7,328 $(5,121) Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: Depreciation and amortization 11,010 11,426 Deferred income tax benefit -- (3,671) Cumulative effect of a change in accounting principles -- 2,755 Restructuring charges -- 9,014 Deferred compensation and pensions 908 1,507 Provision for losses on accounts receivable 81 677 Asset dispositions, net (540) (85) Shares issued to employee benefit plans 1,895 2,523 Change in operating assets and liabilities: Trade notes and accounts receivable (2,148) 6,176 Inventories (7,178) (3,772) Prepaid expenses 408 (114) Other assets 194 539 Trade accounts payable and accrued expenses (2,365) (2,833) Federal and state income taxes payable/receivable (171) (1,028) Deferred revenue 824 1,550 ------- ------- Net Cash and Cash Equivalents Provided by Operating Activities 10,246 19,543 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of capital assets 3,072 1,592 Capital expenditures (13,976) (12,140) Purchases of intangible assets (216) (421) Acquisitions, net of cash acquired (2,000) (6,624) ------- ------- Net Cash and Cash Equivalents Used in Investing Activities (13,120) (17,593) CASH FLOWS FROM FINANCING ACTIVITIES Issuance (repayment) of notes payable (12,147) 8,289 Issuance of long-term debt 20,000 -- Payments on long-term debt (4,004) (4,667) Dividends paid to stockholders (1,121) (1,073) Stock options exercised 43 205 Stock repurchased (7) (2,495) ------- ------- Net Cash and Cash Equivalents Provided by Financing Activities 2,764 259 ------- ------- Net Increase (Decrease) in Cash and Cash Equivalents (110) 2,209 Cash and Cash Equivalents at the Beginning of the Year 713 403 ------- ------- Cash and Cash Equivalents at the End of the Period $ 603 $ 2,612 ======= =======
5 INCOMING ORDERS, NET SALES ($ MILLIONS) AND NET INCOME (LOSS) PER SHARE
FY 1994 FY 1995 ----------------------------------------- ------------------------------- Apr. 30 July 31 Oct. 31 Jan. 31 Apr. 30 July 31 OCT. 31 ------- ------- ------- ------- ------- ------- ------- MEDICAL - Orders $ 65.4 $ 75.6 $69.9 $ 85.0 $ 71.9 $ 76.2 $ 74.9 Net Sales 69.4 71.9 69.6 75.0 73.7 77.2 74.9 AERO - Orders 5.6 7.0 5.1 10.4 8.2 6.0 8.1 Net Sales 6.0 6.0 5.7 5.7 6.7 6.8 8.5 TOTAL - Orders $ 71.0 $ 82.6 $75.0 $ 95.4 $ 80.1 $ 82.2 $ 83.0 Net Sales 75.4 77.9 75.3 80.7 80.4 84.0 83.4 BACKLOG INCREASE (DECREASE) $ (4.4) $ 4.7 $(0.3) $ 14.7 $ (0.3) $ (1.8) $ (0.4) ------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT PER SHARE $ .15 $ (.41) $ .06 $(2.46) $ .30 $ .34 $ (0.5) CUMULATIVE EFFECT OF ACCOUNTING CHANGES PER SHARE (.23) -- -- (.01) -- -- -- ------ ------ ----- ------ ------ ------ ------ NET INCOME (LOSS) PER SHARE $ (.08) $ (.41) $ .06 $(2.47) $ .30 $ .34 $ (0.5) ====== ====== ===== ====== ====== ====== ======
EX-27 22 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1000 9-MONTHS JAN-31-1995 FEB-01-1994 OCT-31-1994 14 589 74,206 2,002 54,648 142,893 171,011 75,658 270,436 66,225 59,388 12,530 0 0 103,100 270,436 247,813 247,813 144,091 230,706 6,929 0 4,319 10,178 2,850 7,328 0 0 0 7,328 0.59 0.59
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