<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A No. 2
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
March 4, 1998
Mallinckrodt Inc.
(Exact name of registrant as specified in its charter)
New York 1-483 36-1263901
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
675 McDonnell Boulevard, St. Louis, MO 63134
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, (314) 654-2000
including area code
<PAGE> 2
Pursuant to Rule 12b-15 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), this form 8-K/A is hereby filed with respect to that certain
Current Report on Form 8-K of Mallinckrodt Inc. ("Mallinckrodt") filed with the
Securities and Exchange Commission ("SEC") on September 5, 1997 as amended by
that certain Form 8-K/A of Mallinckrodt filed with the SEC on November 3, 1997.
In accordance therewith, Item 7(a) Financial Statements of the business
acquired are provided.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired
(i) Following are the Nellcor Puritan Bennett Incorporated consolidated
balance sheets at July 2, 1995 and July 7, 1996 and the related
consolidated statements of operations, of stockholders' equity, and of
cash flows for each of the three fiscal years in the period ended July
7, 1996.
<PAGE> 3
NELLCOR PURITAN BENNETT INCORPORATED
Selected Financial Data
<TABLE>
<CAPTION>
Years ended (in thousands, except per share amounts) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Revenue $706,131 $623,066 $564,132 $536,935 $467,323
R&D expenses 54,322 49,182 50,730 50,357 47,284
Income (loss) from operations (47) 73,404 8,441 60,018 32,982
Income from operations (as adjusted) 108,852 (1) 76,058(2) 52,110 (3) 60,018 32,982
Net income (loss) (9,360) 48,112 (8,695) 41,006 23,680
Net income (as adjusted) 74,953 (1) 53,808(2) 50,864 (3) 41,006 23,680
Net income (loss) per share (.16) 0.82 (0.15) 0.72 0.43
Net income per share (as adjusted) 1.27 (1) 0.92(2) 0.89 (3) 0.72 0.43
Working capital 243,597 266,959 228,363 242,523 197,146
Total assets 587,838 602,390 527,569 497,610 420,253
Long-term obligations 26,054 84,690 66,062 64,351 49,085
Stockholders' equity 405,780 392,265 343,518 352,258 297,214
</TABLE>
This summary unaudited combined condensed financial information reflects the
August 1995 merger of Nellcor Incorporated (Nellcor) and Puritan-Bennett
Corporation (Puritan-Bennett), and the Company's June 1996 acquisition of
Infrasonics, Inc. (Infrasonics), both accounted for as a
pooling-of-interests; accordingly, the separate historical financial results
of Nellcor, Puritan-Bennett and Infrasonics have been combined in this table
and throughout the Annual Report.
(1) Excludes pretax merger and related charges of $108.9 million, $84.3 million
after-tax, or ($1.43) per share.
(2) Excludes pretax restructuring charge and unsolicited offer costs of $2.7
million and $5.0 million (nonoperating expense), respectively, $5.7 million
after-tax, or ($0.10) per share.
(3) Excludes pretax restructuring charges and litigation settlements of $43.7
million and $13.0 million (nonoperating expense), respectively, and a $2.9
million after-tax charge related to the adoption of a new accounting standard.
The net after-tax effect of these charges was $59.6 million, or ($1.04) per
share.
<PAGE> 4
NELLCOR PURITAN BENNETT INCORPORATED
Consolidated Balance Sheet
<TABLE>
<CAPTION>
July 7, July 2,
(in thousands, except share amounts) 1996 1995
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 68,549 $ 83,193
Marketable securities 5,825 66,028
Accounts receivable 151,461 124,005
Inventories 128,078 95,300
Deferred income taxes 31,658 17,122
Other current assets, net 14,030 6,746
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 399,601 392,394
Property, plant and equipment 130,891 130,712
Intangible and other assets 44,245 73,653
Deferred income taxes 13,101 5,631
- -------------------------------------------------------------------------------------------------------------------------
$587,838 $602,390
=========================================================================================================================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 39,198 $ 37,590
Notes payable -- 18,004
Employee compensation and related costs 29,918 25,708
Merger and related costs 32,452 --
Other accrued expenses 33,771 28,879
Current maturities of long-term debt 143 9,527
Income taxes payable 20,522 5,727
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 156,004 125,435
Long-term debt, less current maturities 6,493 54,492
Deferred compensation and pensions 9,522 19,303
Deferred revenue 10,039 10,895
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 182,058 210,125
- -------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 15 and 17)
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized; none outstanding -- --
Common stock, $.001 par value; 150,000,000 shares authorized;
62,975,926 shares issued and outstanding (60,333,242 in 1995) 63 60
Additional paid-in-capital 230,428 187,264
Retained earnings 232,433 241,103
Accumulated translation adjustment 304 (259)
Deferred stock awards and other 1,369 (1,364)
Treasury stock, at cost (3,224,020 shares in 1996; 2,296,000 shares in 1995) (58,817) (34,539)
- -------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 405,780 392,265
- -------------------------------------------------------------------------------------------------------------------------
$587,838 $602,390
=========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
NELLCOR PURITAN BENNETT INCORPORATED
Consolidated Statement of Operations
<TABLE>
<CAPTION>
Years Ended
-------------------------------------
July 7, July 2, July 3,
(in thousands, except per share amounts) 1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Net revenue $706,131 $623,066 $564,132
Cost of goods sold 346,020 312,970 284,159
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit 360,111 310,096 279,973
- ---------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 54,322 49,182 50,730
Selling, general and administrative 196,937 184,856 177,133
Restructuring charges -- 2,654 43,669
Merger and related costs 108,899 -- --
- --------------------------------------------------------------------------------------------------------------------------
360,158 236,692 271,532
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations (47) 73,404 8,441
Interest income and other income (expense), net 4,406 7,182 3,865
Interest expense (3,033) (5,830) (4,565)
Litigation settlements, net -- -- (13,000)
Costs associated with unsolicited takeover offer -- (5,049) --
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and cumulative
effect of accounting change 1,326 69,707 (5,259)
Provision for income taxes 10,686 21,595 546
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of accounting change (9,360) 48,112 (5,805)
Cumulative effect of accounting change,
net of income taxes (Note 1) -- -- (2,890)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (9,360) $ 48,112 $ (8,695)
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) per common share before cumulative
effect of accounting change $ (.16) $ .82 $ (.10)
Per common share effect of accounting change -- -- (.05)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share $ (.16) $ .82 $ (.15)
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average common and common equivalent shares 59,077 58,343 57,210
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
NELLCOR PURITAN BENNETT INCORPORATED
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional Accumulated Deferred Treasury Stock
(in thousands, ---------------------- Paid-in Retained Translation Stock Awards --------------------
except share amounts) Shares Par Value Capital Earnings Adjustment and Other Shares Par Value
---------- --------- ---------- -------- ----------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 4, 1993 56,840,064 $56 $148,096 $204,636 $ (15) $ (515) -- --
Issuance of common stock and
related tax benefits of
$2,394 under employee
stock plans 1,281,622 1 12,177 $ 1,984
Stock awards granted,
net of cancellations 16,418 374 (374)
Amortization of deferred
stock awards 282
Acquisition of treasury stock 1,109,784 (16,258)
Acquisition and retirement
of common stock (420,000) (5,853)
Shares issued in a business
combination 751,396 1 8,644
Accumulated translation
adjustment 115
Net loss (8,695)
Dividends declared (1,432)
Unrealized gain on
available-for-sale securities 294
- -------------------------------------------------------------------------------------------------------------------------------
Balance at July 3, 1994 58,469,500 58 163,438 194,509 100 (313) 1,109,784 (14,274)
Issuance of common stock and
related tax benefits of
$3,487 under employee
stock plans 1,816,665 2 22,642 644
Stock awards granted,
net of cancellations 47,077 1,184 (1,184)
Amortization of deferred
stock awards 427
Acquisition of treasury stock 1,186,216 (20,909)
Accumulated translation
adjustment (359)
Net income 48,112
Dividends declared (1,518)
Realized gain on
available-for-sale securities (294)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at July 2, 1995 60,333,242 60 187,264 241,103 (259) (1,364) 2,296,000 (34,539)
Puritan-Bennett net income
for the period from
2/1/95 - 6/30/95 690
Issuance of common stock and
related tax benefits
of $7,199 under employee
stock plans 2,642,684 3 43,164
Amortization of deferred
stock awards 1,359
Acquisition of treasury stock 928,020 (24,278)
Accumulated translation
adjustment 563
Net loss (9,360)
Unrealized gain on
available-for-sale securities 1,374
- -------------------------------------------------------------------------------------------------------------------------------
Balance at July 7, 1996 62,975,926 $63 $230,428 $232,433 $304 $1,369 3,224,020 $(58,817)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 7
NELLCOR PURITAN BENNETT INCORPORATED
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Years Ended
-------------------------------------
July 7, July 2, July 3,
(in thousands) 1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (9,360) $48,112 $ (8,695)
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation and amortization 30,952 32,849 33,037
Deferred income taxes (18,919) (4,131) (18,054)
Cumulative effect of accounting change -- -- 2,890
Restructuring charges -- 2,205 38,404
Merger and related charges 108,899 -- --
Deferred compensation and pensions (11,635) 1,859 2,536
Shares issued to employee benefit plans -- 2,376 3,317
Other 128 113 1,194
Increases (decreases) in cash flows, net of effect of purchased
companies, as a result of changes in:
Accounts receivable (31,369) (7,179) (2,744)
Inventories (23,544) (9,083) (5,643)
Other current assets (10,607) (2,540) (799)
Intangible and other assets 1,788 (3,703) 1,619
Accounts payable 5,834 (543) (2,714)
Merger and related costs (45,366) -- --
Employee compensation and other accrued expenses 5,336 8,271 625
Income taxes payable 14,686 612 2,158
Deferred revenue (920) 933 3,991
- ---------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 15,903 70,151 51,122
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Puritan-Bennett net cash used during the period from 2/1/95 - 6/30/95 (3,628) -- --
Capital expenditures (29,740) (30,959) (31,555)
Purchase of securities held-to-maturity -- (48,235) (89,190)
Purchase of available-for-sale securities (2,800) (2,100) --
Proceeds from maturities of securities held-to-maturity -- 37,654 106,634
Proceeds from the sale of available-for-sale securities 66,400 -- --
Proceeds from the sale of capital assets -- 5,893 1,362
Acquisitions, net of cash acquired (4,923) (23,415) (17,617)
Other investing activities 220 (599) (1,311)
- ---------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) investing activities 25,529 (61,761) (31,677)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of common stock under the
Company's stock plans and related tax benefits, net 43,164 20,901 10,846
Purchase of treasury stock, including shares retired (24,278) (20,909) (22,111)
Issuance (repayment) of notes payable, net (18,004) (9,787) 19,890
Additions to loans payable 40,000 -- --
Repayment of loans payable (40,000) -- --
Additions to long-term debt -- 20,000 515
Repayment of long-term debt (57,374) (6,045) (6,680)
Payment of dividends -- (1,500) (1,430)
- ---------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities (56,492) 2,660 1,030
- ---------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 416 570 218
- ---------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (14,644) 11,620 20,693
Cash and cash equivalents at beginning of the year 83,193 71,573 50,880
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the year $68,549 $83,193 $71,573
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 8
NELLCOR PURITAN BENNETT INCORPORATED
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization | Nellcor Puritan Bennett Incorporated (together with its
wholly-owned subsidiaries, the Company) is a corporation organized under the
laws of the State of Delaware in 1986 and, until the acquisition of
Puritan-Bennett Corporation (Puritan-Bennett) in August 1995, operated under
the name Nellcor Incorporated (Nellcor). The Company develops, manufactures
and markets monitoring systems and diagnostic and therapeutic products for
management of the respiratory-impaired patient across the continuum of care.
The Company's products are primarily sold to hospitals, private and
governmental institutions and health care agencies, medical equipment
distributors and rental companies, and doctors' offices. Nellcor Puritan
Bennett markets its products worldwide with international sales accounting
for approximately one-third of the Company's consolidated revenue.
Combined financial results | The mergers with Puritan-Bennett and
Infrasonics, Inc. (Infrasonics) were intended to qualify as tax-free
reorganizations and were both accounted for as a pooling-of-interests.
Accordingly, the consolidated historical financial statements for all periods
presented combine the financial results of Nellcor, Puritan-Bennett, and
Infrasonics. The Company's consolidated balance sheet at July 2, 1995
combines the historical balance sheet of Nellcor at July 2, 1995,
Puritan-Bennett at January 31, 1995 and Infrasonics at June 30, 1995. The
Company's consolidated statement of operations combines the historical
statement of operations of Nellcor for each of the two fiscal years in the
period ended July 2, 1995, Puritan-Bennett for each of the two fiscal years
in the period ended January 31, 1995, and Infrasonics for each of the two
fiscal years in the period ended June 30, 1995, respectively. The results of
operations of Puritan-Bennett for the period February 1, 1995 through June
30, 1995 of $690,000 have been recorded as an increase to stockholders'
equity for the fiscal year ended July 7, 1996. The Company's consolidated
statement of operations for the fiscal year ended July 2, 1995, also reflects
an adjustment to reduce Puritan-Bennett's valuation allowance provided for
its deferred tax assets based upon the combined income from operations of
Nellcor and Puritan-Bennett as required by Statement of Financial Accounting
Standard No. 109. The effect of this adjustment was to reduce the provision
for income taxes, as presented herein, by $3.9 million and $4.8 million in
fiscal 1995 and 1994, respectively. Adjustments made to conform the
accounting policies of Nellcor, Puritan-Bennett, and Infrasonics were
immaterial.
Principles of consolidation | The Company's significant intercompany
transactions and balances have been eliminated. The Company uses the equity
method of accounting for its investments that represent greater than 20%, but
less than 50%, of the investee. Investments which represent less than 20% of
the investee are recorded at cost. All such investments were immaterial for
all periods presented.
Fiscal year | The Company's fiscal year ends on the first Sunday in July,
which results in a 52- or 53-week fiscal year. Fiscal 1996 was a 53-week year
whereas fiscal 1995 and 1994 were 52-week years.
Foreign currency translation | Certain of the Company's foreign subsidiaries
use the local currency, while others use the U.S. dollar as their functional
currency. Subsidiaries using the local currency translate assets and
<PAGE> 9
liabilities denominated in foreign currencies at the rates of exchange at the
balance sheet date. Income and expense items are translated at average
monthly rates of exchange. Any resulting translation adjustments are recorded
as a separate component of stockholders' equity. Subsidiaries using the
dollar as the functional currency measure assets and liabilities at the
balance sheet date or historical rates depending on their nature; income and
expenses are remeasured at the weighted-average exchange rates for the year.
Foreign currency gains and losses resulting from transactions are included in
operations in the year of occurrence and have not been material.
Revenue recognition and product warranty | The Company recognizes revenue at
the time of shipment of product and provides currently for the estimated cost
to repair or replace products under the warranty provisions in effect at the
time of sale.
Deferred revenue | Deferred revenue relates to extended warranty agreements
offered by the Company which are amortized over the life of the agreement,
with the related extended warranty costs charged to expense as incurred.
Cash equivalents | The Company considers all highly liquid investments with
original maturities of three months or less to be cash equivalents. These
investments are stated at cost which approximates fair value due to their
short maturity.
Inventories | Inventories are stated at the lower of cost (first-in,
first-out) or market. Allowances are made for slow-moving, obsolete,
unsalable, or unusable inventories.
Property, plant and equipment | Depreciation is provided using the
straight-line method over the estimated useful lives of the assets which
range from three to twenty-five years. Leasehold improvements are amortized
over the life of the lease, or the estimated useful life of the asset,
whichever is shorter.
Intangible and other assets | Intangible and other assets, including excess
of cost over the fair value of identifiable net assets acquired, are
amortized on a straight-line basis over the estimated useful lives of the
assets which range from two to fifteen years. An impairment of intangible
assets is recognized when it is considered probable that the carrying amount
of an asset cannot be fully recovered, based on estimated future cash flows
of the related business.
Fair value of financial instruments | The estimated fair value of long-term
debt is determined based upon rates currently available to the Company for
debt with similar terms and remaining maturities.
Income taxes | Deferred income taxes are computed using the liability method.
Under the liability method, taxes are recorded based on the future tax effect
of the difference between the income tax and financial reporting bases of the
Company's assets and liabilities. In estimating future tax consequences, all
expected future events are considered, except for potential income tax law or
rate changes.
The Company plans to continue to finance foreign expansion and operating
requirements by reinvestment of undistributed earnings of its foreign
subsidiaries and, accordingly, has not provided for United States federal
income tax on these earnings.
Stock split | On June 27, 1996, stockholders approved a two-for-one split of
the Company's common stock. All share and per share data for all periods
presented have been restated to give effect to the split.
Net income (loss) per share | Net income (loss) per share is based upon
weighted average common shares and includes the dilutive effect of stock
options outstanding, if any (using the treasury stock method).
Accounting changes | In March 1995, The Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
To Be Disposed Of," which requires the Company to review for
<PAGE> 10
impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In
certain situations, an impairment loss would be recognized. SFAS 121 is
effective for the Company's 1997 fiscal year. The Company is evaluating the
impact of the new standard on its financial position, results of operations,
and cash flows and expects the effect to be immaterial.
In October 1995, the FASB issued SFAS 123 "Accounting for Stock-Based
Compensation" which also will be effective for the Company's 1997 fiscal
year. The Company does not expect SFAS 123 to have a material impact on its
financial position, results of operations, and cash flows. SFAS 123 allows
companies which have stock-based compensation arrangements with employees to
adopt a new fair-value basis of accounting for stock options and other equity
instruments, or it allows companies to continue to apply the existing
accounting rules under APB Opinion 25 "Accounting for Stock Issued to
Employees," but requires additional financial statement footnote disclosure.
The company expects to continue to account for stock-based compensation
arrangements under APB Opinion 25 and will include additional footnote
disclosure in its fiscal 1997 annual report.
In fiscal 1994, the Company changed its method of accounting for income
taxes to conform with SFAS No. 109 "Accounting for Income Taxes." The
cumulative effect of this change resulted in a charge to operations of $2.9
million.
Use of estimates | The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses for each fiscal period. Actual
results could differ from those estimated.
2. MARKETABLE SECURITIES
At July 7, 1996, the Company held available-for-sale marketable securities
with a fair market value of $5.8 million. Available-for-sale marketable
securities are securities which the Company does not intend to hold to
maturity. The Company's marketable securities are, generally, high quality
government, municipal, and corporate obligations with original maturities of
up to two years. The Company has established guidelines relative to
investment quality, diversification and maturities to maintain appropriate
levels of safety and liquidity.
During the first quarter of fiscal 1996, the Company transferred its
remaining marketable securities which had been classified as held-to-maturity
as of July 2, 1995, to available-for-sale. The marketable securities which
were transferred to available-for-sale were government and corporate issued
debt securities with an amortized cost of $41.4 million, which approximated
their fair value. The decision to classify all of the Company's marketable
securities as available-for-sale was due to the Company's merger with
Puritan-Bennett during the first quarter of fiscal 1996, and the significant
cash outlays which were expected to be made as part of integrating the two
companies.
Realized gains and losses resulting from the sale of available-for-sale
marketable securities during the period were not material. The difference
between the cost and market value of the Company's marketable securities at
July 7, 1996, an unrealized gain of approximately $1.4 million associated
with equity securities held by the Company, is recorded as a component of
deferred stock awards and other in stockholders' equity.
<PAGE> 11
3. INVENTORIES
Inventories are as follows:
<TABLE>
<CAPTION>
July 7, July 2,
(dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 64,205 $52,270
Work-in-process 15,579 11,064
Finished goods 48,294 31,966
- --------------------------------------------------------------------------------
Total inventories $128,078 $95,300
- --------------------------------------------------------------------------------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
July 7, July 2,
(dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Land and land improvements $ 10,838 $ 10,713
Buildings 38,575 38,221
Machinery and equipment 178,220 162,775
Leasehold improvements 11,103 9,971
Demonstration equipment 12,259 12,497
Furniture and fixtures 22,142 23,857
- --------------------------------------------------------------------------------
273,137 258,034
Less accumulated depreciation
and amortization (142,246) (127,322)
- --------------------------------------------------------------------------------
Property, plant and equipment, net $130,891 $130,712
- --------------------------------------------------------------------------------
</TABLE>
The Company leases a facility which is classified as a capital lease and
the related asset is being amortized over its estimated useful life of 15
years. As of July 7, 1996, the cost of the asset and accumulated amortization
was $4.4 million and $0.69 million, respectively, and is included in
Buildings.
Depreciation and amortization expense was approximately $23.7 million in
fiscal 1996, $22.5 million in fiscal 1995, and $21.2 million in fiscal 1994.
5. FINANCIAL INSTRUMENTS AND OFF BALANCE SHEET RISK
Foreign currency instruments | The Company enters into foreign currency
exchange contracts, primarily foreign currency forward contracts, to reduce
exposure to currency exchange risk. The effect of this practice is to
minimize the impact of foreign exchange rate movements on the Company's
operating results as gains and losses on these contracts offset losses and
gains on the assets, liabilities and transactions being hedged. The Company
does not engage in foreign currency speculation. The counterparties to
foreign currency exchange contracts are major domestic and international
financial institutions. To decrease the risk of non-performance which may
result in currency losses, the Company diversifies its selection of
counterparties. At July 7, 1996, the Company had foreign currency forward
exchange contracts with a notional amount of $65.1 million ($35.4 million at
July 2, 1995), and a fair market value of approximately $65.2 million ($35.9
million at July 2, 1995), all of which were denominated in European
currencies.
The fair market value was determined using foreign currency exchange rates
in effect at the end of each fiscal period. The Company records both the
amortized premium and any unrealized gain or loss on outstanding foreign
currency forward exchange contracts as non-operating income or expense. For
both fiscal 1996 and fiscal 1995, all outstanding foreign currency exchange
contracts were due to mature within six months of fiscal year end.
Concentration of credit risk | The Company provides credit in the form of
trade accounts receivable to hospitals, private and governmental institutions
and health care agencies, medical equipment distributors and rental
companies, and doctors' offices. The Company does not generally require
collateral to support customer receivables. The Company performs ongoing
<PAGE> 12
credit evaluations of its customers and maintains allowances which management
believes are adequate for potential credit losses. At July 7, 1996, the
Company was carrying allowances for doubtful accounts totalling $2.4 million
($2.8 million at July 2, 1995).
The credit risk associated with the Company's trade receivables is further
limited due to dispersion of the receivables over a large number of customers
in many geographic areas. Payment of certain accounts receivable is made by
the national health care systems of several member countries of the European
Economic Community. Although the Company does not currently anticipate credit
problems associated with these receivables, payment may be impacted by the
economic stability of these countries.
The Company limits credit risk exposure to foreign exchange contracts by
periodically reviewing the credit-worthiness of the counterparties to the
transactions.
6. ACQUISITIONS
Melville | On August 23, 1995, the Company acquired Melville Software Ltd.
(Melville), a privately held Canadian company that manufactures and markets
sleep diagnostic products used primarily in sleep labs for $4.9 million in
cash. In the event that certain profitability levels are achieved in the
three fiscal years following the acquisition, additional compensation
totaling $1.0 million would be payable to the former principal stockholders
of Melville who continue to manage the company. Such amounts will be expensed
when, and if, earned. At July 7, 1996, no additional compensation amounts had
been earned or accrued.
The acquisition of Melville has been accounted for as a purchase and,
accordingly, Melville's results are included in the Company's financial
statements subsequent to the acquisition date. The excess of cost over the
fair value of identifiable net assets acquired, primarily working capital, of
$3.7 million is being amortized over 7 years.
Pierre Medical | On May 3, 1995, the Company acquired Pierre Medical, a
privately held French manufacturer of respiratory products used in the home,
for $21.5 million in cash. In the event that certain performance milestones
were achieved subsequent to the acquisition, additional compensation totaling
30 million French Francs ($5.8 million as of July 7, 1996) would be payable
to the former principal stockholders of Pierre Medical who continue to manage
the company. During fiscal 1996, $3.8 million of this additional compensation
was accrued as a merger and related cost to reflect the effect that
integration decisions associated with the Company's merger with
Puritan-Bennett were expected to have upon the achievement of certain of the
performance milestones. Any additional amounts will continue to be expensed
when, and if, earned. Pierre Medical manufactures and markets noninvasive
ventilators, sleep apnea therapy systems, oxygen concentrators and related
respiratory products in Western Europe, primarily in France.
The acquisition of Pierre Medical has been accounted for as a purchase
and, accordingly, Pierre Medical's results are included in the Company's
financial statements subsequent to the acquisition date. The fair value of
identifiable net assets acquired consisted of approximately $4.0 million of
working capital. The excess of cost over the fair value of identifiable net
assets acquired of $18.1 million, including acquisition-related costs, was
subsequently written down by $2.4 million during fiscal 1996 to reflect the
effect that certain integration decisions associated with the Company's
merger with Puritan-Bennett were expected to have upon Pierre Medical's
estimated future cash flows. The remainder of the excess purchase price,
$15.7 million, is being amortized over 15 years.
In connection with the acquisition, supplemental cash flow information is
as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
-----------------------------------------------------------------------------
<S> <C>
Fair value of identifiable net assets acquired,
except for cash and cash equivalents $26,999
Liabilities assumed (5,584)
-----------------------------------------------------------------------------
Cash paid to acquire Pierre Medical, net
of cash and cash equivalents acquired $21,415
-----------------------------------------------------------------------------
</TABLE>
Hoyer Medizintechnik | During fiscal 1994, the Company acquired a German
distributor, Hoyer Medizintechnik (Hoyer), for $10.6 million in cash, of
which $8.6 million was paid in fiscal 1994 and $2.0 million was paid during
fiscal 1995.
<PAGE> 13
SEFAM S.A. | The Company also acquired SEFAM S.A., a French supplier of
diagnostic and therapeutic sleep products during fiscal 1994 for a total of
$21.6 million, of which $12.9 million was paid in cash with the remainder
paid through the issuance of 751,396 restricted shares of the Company's
common stock.
The acquisitions of SEFAM S.A. and Hoyer have been accounted for as
purchases and, accordingly, their results are included in the Company's
financial statements subsequent to their respective acquisition dates. The
excess of cost over the fair value of identifiable net assets acquired,
primarily working capital, of $22.5 million, including acquisition related
costs, was subsequently written down by $15.9 million during fiscal 1996 to
reflect the effect that certain integration decisions associated with the
Company's merger with Puritan-Bennett were expected to have upon both
entities' future estimated cash flows. The remainder of the excess purchase
price, $4.9 million, is being amortized over 15 years.
In connection with these acquisitions, supplemental cash flow information
is as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Fair value of identifiable net assets acquired,
except for cash and cash equivalents $34,481
Liabilities assumed (6,464)
Stock issued (8,645)
Other (1,755)
- ---------------------------------------------------------------------------------------------------------------------------
Cash paid to acquire SEFAM S.A. and Hoyer,
net of cash and cash equivalents acquired $17,617
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
If these acquisitions had occurred as of the beginning of the respective
fiscal years they were acquired, the revenues or results of operations of
these acquired businesses would have been immaterial to the results of
operations of the Company for fiscal 1996, 1995 and 1994.
Costs associated with an unsolicited offer | During fiscal 1995, $5.0 million
of costs were incurred in connection with an unsolicited offer to acquire
Puritan-Bennett. These costs included investment banking fees, public
relations expenses and legal fees, of which $0.9 million was paid during
fiscal 1995 and the remaining $4.1 million was paid during fiscal 1996.
7. MERGERS WITH PURITAN-BENNETT AND INFRASONICS
Puritan-Bennett | On August 24, 1995, the merger of Nellcor and
Puritan-Bennett was approved by stockholders of both companies. On August 25,
the merger was consummated, and Nellcor was renamed Nellcor Puritan Bennett
Incorporated. Under the terms of the merger agreement, Puritan-Bennett
shareholders received .88 of a share of the Company's common stock for each
Puritan-Bennett share, resulting in the Company issuing approximately 23.2
million shares, valued at approximately $600 million based upon the closing
price of the Company's common stock on August 25, 1995. Additionally,
outstanding options to acquire Puritan-Bennett common stock were replaced
with options to acquire approximately 1,047,000 shares of the Company's
common stock.
Puritan-Bennett develops, manufactures, and markets ventilators, oxygen
delivery systems, home sleep diagnostic and therapeutic equipment, and
certain complementary products such as medical gases, gas-related equipment,
and spirometers. Puritan-Bennett reported revenue of $336.0 million and net
income of $8.4 million for its fiscal 1995 ended January 31, 1995.
Infrasonics | On June 27, 1996, the Company acquired Infrasonics in a
stock-for-stock merger. The issuance of the Company's common stock in
accordance with the Agreement and Plan of Merger was approved by stockholders
at special stockholders meetings held by both companies on June 27, 1996.
Under the terms of the Agreement and Plan of Merger, shareholders of
Infrasonics received .12 of a share of the Company's common stock for each
Infrasonics share, resulting in the Company issuing approximately 2.6 million
shares, valued at $62 million based upon the closing price of the Company's
common stock on June 27, 1996. Additionally, outstanding options to acquire
<PAGE> 14
Infrasonics common stock were assumed by the Company and converted into
options to acquire approximately 130,000 shares of the Company's common
stock. Infrasonics is a respiratory equipment manufacturer of neonatal,
pediatric and adult ventilators and accessories.
Separate results for each of Nellcor's, Puritan-Bennett's, and
Infrasonics' fiscal 1995, and combined results for the twelve months ended
July 2, 1995, including the adjustment described in Note 1, were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Nellcor Puritan-Bennett Infrasonics Combined
Twelve months ended (in thousands): July 2, 1995 January 31, 1995 June 30, 1995 Adjustment July 2, 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $264,040 $336,026 $23,000 $ -- $623,066
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 37,165 $ 8,398 $(1,351) $3,900 $ 48,112
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Merger and related costs | Associated with the Company's mergers with
Puritan-Bennett and Infrasonics, one-time merger and related costs totaling
$108.9 million were recorded during fiscal 1996.
In connection with the merger with Puritan-Bennett, the Company recorded
merger and related costs during the first quarter of fiscal 1996 of $92.6
million. Included in this charge were provisions for merger transaction costs
($13.7 million), certain intangible asset write-downs ($19.6 million), costs
to combine and integrate operations ($53.8 million), and other merger-related
costs ($5.5 million). In connection with the acquisition of Infrasonics, the
Company recorded merger and related costs during the fourth quarter of fiscal
1996 of $16.3 million. Included in this charge were provisions for merger
transaction costs ($2.5 million), costs to combine and integrate operations
($11.8 million), and certain intangible asset write-downs ($2.0 million). The
merger transaction costs include expenses for investment banker and
professional fees, and other costs associated with completing the
transactions. The write-down of certain intangible assets, primarily goodwill
associated with prior acquisitions made by both companies, results from the
effect that certain integration decisions are expected to have upon the
future realization of these assets.
The costs to combine and integrate operations included provisions for the
following types of costs:
<TABLE>
<CAPTION>
Puritan-
(dollars in millions) Bennett Infrasonics Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Employee severance and
benefits termination $26.7 $ 4.1 $30.8
Product line integration
and facilities closing 18.0 2.9 20.9
Other 9.1 4.8 13.9
- ---------------------------------------------------------------------------------------------------------------------------
Total $53.8 $11.8 $65.6
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Employee severance and benefits termination costs include amounts
associated with the elimination of approximately 300 positions from the
Company's total workforce. The positions to be eliminated are primarily
associated with corporate administrative groups, field sales and customer
service organizations, and the consolidation of manufacturing sites. As of
July 7, 1996, approximately 165 positions contemplated by this workforce
consolidation, primarily in the Company's field sales and corporate
administrative groups, had been eliminated. The Company expects the remainder
of these positions to be eliminated during fiscal 1997.
Of the $108.9 million in merger and related costs which were accrued,
approximately $76.4 million had been utilized as of July 7, 1996, primarily
associated with the write-down (non-cash charge) of certain intangible assets
to their net realizable value ($21.8 million), the payment of merger
transaction costs ($14.3 million), initial costs incurred to combine and
integrate operations ($37.2 million, of which $8.5 million was associated
with employee severance) and other merger-related costs ($3.1 million). The
remaining merger and related costs accrued at July 7, 1996 of $32.5 million,
approximately $31 million of which is expected to result in a cash outlay,
should be substantially utilized by the end of fiscal year 1997.
<PAGE> 15
8. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of:
<TABLE>
<CAPTION>
July 7, July 2,
(dollars in thousands) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Excess of cost over fair value of
identifiable net assets acquired $43,751 $56,192
Other intangibles from
acquisitions, and purchased
technologies and rights 10,144 13,502
Other assets 16,073 27,423
- ---------------------------------------------------------------------------------------------------------------------------
Total cost 69,968 97,117
Less accumulated amortization (25,723) (23,464)
- ---------------------------------------------------------------------------------------------------------------------------
Intangible and other assets, net $44,245 $73,653
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
9. NOTES PAYABLE AND CREDIT FACILITY
The Company has a $50 million credit facility with a group of four banks
which provides an option to convert outstanding borrowings under the facility
to a term loan repayable over four years. The rate of interest payable under
this facility is a floating rate, which is a function of the London Interbank
Offered Rate. A facility fee equal to 0.25% of the total commitment is paid
quarterly. The credit facility contains various covenants which require the
Company to maintain specified financial ratios, limit liens, regulate asset
dispositions, and subsidiary indebtedness, and restrict certain acquisitions
and investments. During fiscal 1996, the Company borrowed $40 million against
the credit facility. These funds were in turn used to pay down a portion of
the long-term debt the Company had assumed in its merger with
Puritan-Bennett. At July 7, 1996, the Company was in compliance with the
credit facility covenants and all borrowings had been repaid.
10. LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
July 7, July 2,
(dollars in thousands) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unsecured promissory notes payable:
Various notes with interest rates, both
fixed and variable, ranging from 5.13%
to 9.85%, interest payable
semi-annually and principal payable in
annual installments with maturities
from December 1997 through July 2000 -- $56,843
Secured bank note payable:
Interest rate 7.95%, principal payable
in monthly installments through
August 2003, collateralized by a
building $1,530 1,707
Capital lease:
Interest rate 7.0%, principal payable
in monthly installments through
February 2009 4,645 4,782
Other 461 687
- ---------------------------------------------------------------------------------------------------------------------------
6,636 64,019
Less current maturities (143) (9,527)
- ---------------------------------------------------------------------------------------------------------------------------
Total long-term debt $6,493 $54,492
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 16
The estimated fair value of total long-term debt at July 7, 1996 was
approximately $6.6 million.
The future minimum lease payments required under the capital lease
are included in the aggregate maturities of long-term debt listed below.
As of July 7, 1996, the Company was in compliance with the provisions
of its debt agreements. The aggregate maturities of long-term debt during
each of the next five fiscal years are as follows: 1997 - $143,000; 1998 -
$452,000; 1999 - $487,000; 2000 - $587,000; and 2001 - $631,000.
Interest paid related to all Company debt in 1996, 1995 and 1994
totaled $2.7 million, $6.1 million and $4.7 million, respectively.
11. RESTRUCTURING CHARGES
During fiscal 1995, Puritan-Bennett recorded a $2.7 million restructuring
charge associated with a workforce reduction.
During fiscal 1994, Puritan-Bennett restructured the hospital
ventilator and portable ventilator portions of its business, consolidated its
aviation facilities and substantially reduced a division's operations to
improve profitability. In connection with the restructuring, during fiscal
1994 Puritan-Bennett recorded restructuring charges of $43.2 million.
Included in these charges were provisions for personnel-related charges ($7.7
million), non-cash asset write-downs ($29.7 million), consolidation of
manufacturing and marketing facilities ($1.3 million), and other
restructuring-related costs ($4.5 million). During the third quarter of
fiscal 1995, Puritan-Bennett completed the shut down of the division. During
fiscal 1994, Nellcor recorded a restructuring charge of $.5 million
associated with the consolidation of two of Nellcor's divisions. As of July
7, 1996, substantially all of these restructuring charges had been utilized.
12. EMPLOYEE BENEFITS
Defined benefit plans | The Company's wholly-owned subsidiary,
Puritan-Bennett, has non-contributory, defined benefit pension plans covering
certain employees in the U.S., and substantially all employees in Canada,
Ireland, and Germany. The Company contributes to each plan on an annual basis
the amounts necessary to satisfy the funding requirements of the various
jurisdictions in which the plans are established.
The U.S. defined benefit pension plan was terminated as of October
24, 1995. The costs associated with terminating the plan were not material.
As of June 11, 1996, all participants in the plan had either received a lump
sum distribution or had an annuity purchased on their behalf.
The Canadian defined benefit pension plan provides retirement
benefits based upon the employee's average earnings and years of service. The
Irish plan provides benefits equal to a certain percentage of the
participant's final salary. Puritan-Bennett has an unfunded supplemental
retirement plan covering certain key employees which provides supplemental
retirement benefits based upon average earnings. Puritan-Bennett also has an
unfunded retirement plan for its former outside directors.
A summary of the components of net costs for the defined benefit plans
follows:
<TABLE>
<CAPTION>
Pension Supplemental
---------------------------- -----------------------------
(dollars in thousands) 1996 1995 1994 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost - benefits earned during the year $169 $2,189 $1,832 $105 $ 85 $ 25
Interest cost 148 3,811 3,615 374 287 268
Return on plan assets (341) 466 (615) -- -- --
Net amortization and deferral 98 (3,932) (3,494) 72 105 104
- ---------------------------------------------------------------------------------------------------------------------------
Net cost $ 74 $2,534 $1,338 $551 $477 $397
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Assumptions used in determining the net cost for the defined benefit plans
were:
<TABLE>
<CAPTION>
Pension Supplemental
---------------------------- ------------------------------
1996 1995 1994 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted average discount rates 8.00% 7.50% 8.75% 8.00% 8.50% 8.50%
Rate of increase in compensation levels 4.50% 4.50% 6.00% 4.50% 4.50% 6.00%
Expected long-term rate of return 9.75% 9.00% 10.00% N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 17
The following table sets forth the funded status and amounts recognized in
the Company's consolidated balance sheets at July 7, 1996 and July 2, 1995,
for the defined benefit plans:
<TABLE>
<CAPTION>
Pension Supplemental
--------------------- ----------------------
(dollars in thousands) 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Vested benefit obligation $1,540 $39,858 $5,117 $3,233
- ---------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 1,540 40,897 5,117 3,233
- ---------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation 2,233 49,302 -- 3,677
Plan assets at fair value 3,048 35,280 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Projected plan assets in (excess of) or less than projected
benefit obligation (815) 14,022 5,117 3,677
Unrecognized net gain (loss) (238) (5,788) (770) (592)
Unrecognized net (asset) liability 314 2,309 -- (144)
- ---------------------------------------------------------------------------------------------------------------------------
Net (asset) liability recognized in the consolidated balance sheet $ (739) $10,543 $4,347 $2,941
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Assumptions used in determining the actuarial present value of the projected
benefit obligation for the pension plans were:
<TABLE>
<CAPTION>
U.S. Canada Ireland
----------------- ----------------- --------------------
1996(1) 1995 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted average discount rate 8.00% 8.50% 8.00% 8.50% 8.75% 8.75%
Rate of increase in compensation levels 4.50% 4.50% 4.50% 4.50% 6.00% 6.00%
Expected long-term rate of return on assets N/A 9.00% 9.50% 9.50% 10.00% 10.00%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Supplemental plan only
Both the Canadian and Irish plan assets are invested in pooled mutual
funds. For the unfunded supplemental retirement benefits plan, the Company
has purchased company-owned life insurance policies intended to ultimately
fund the cost of the plan.
As part of the merger of Nellcor and Puritan-Bennett, future benefit
accruals under the supplemental portion of the U.S. defined benefit pension
plan were eliminated. As this decision reduced expected years of future
service, the event resulted in a curtailment charge of $560,000 which was
recorded as a component of merger and related costs.
Postretirement benefits other than pensions | The Company provides
postretirement health care benefits to certain eligible retirees of its
subsidiary, Puritan-Bennett. The cost of the postretirement medical plan is
shared by the Company and eligible retirees through such features as annually
adjusted contributions, deductibles and coinsurance. The retiree's
contribution is a factor of age and service at the time of retirement. The
postretirement health care benefits are funded by the Company as claims are
paid. The Company accounts for these benefits in accordance with SFAS No.
106, "Employers Accounting for Postretirement Benefits other than Pensions."
In the valuation of the liability, an 8.5% discount assumption was used.
Medical costs were trended at 7%, trailing down to 6%. The components of the
Company's postretirement benefits obligation are as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation $1,003 $1,754
Less unrecognized amounts:
Unrecognized net liability 1,659
Net (gain) (509) (411)
- ---------------------------------------------------------------------------------------------------------------------------
Net liability $1,512 $ 506
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following summarizes the components of the annual net cost of the
postretirement benefits:
<PAGE> 18
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Service cost $ 31 $ 39
Interest cost 125 131
Net amortization and deferral 64 85
- -------------------------------------------------------------------------------
Total $220 $255
- -------------------------------------------------------------------------------
</TABLE>
As a result of the merger of Nellcor and Puritan-Bennett, it was
determined that employees retiring from Puritan-Bennett on or after January
1, 1997 would no longer be eligible for postretirement medical coverage. This
decision resulted in a curtailment charge of $971,000, which was recorded as
a component of merger and related costs.
Voluntary Investment Plus (VIP) plan | The Company has a Voluntary Investment
Plus (VIP) 401(k) Plan under which substantially all U.S. employees may elect
to contribute up to 15% of their earnings. The Company matches each
employee's contributions, up to a maximum of $1,000 each calendar year.
Prior to the merger with Nellcor, Puritan-Bennett had a 401(k) plan under
which substantially all U.S. employees were eligible to participate. The
Puritan-Bennett Board of Directors amended Puritan-Bennett's 401(k) plan at
the merger date to provide a matching consistent with the Company's plan. The
plan assets were subsequently merged into the Company's VIP plan.
Infrasonics has a 401(k) plan under which substantially all U.S. employees
may elect to contribute up to 15% of their earnings. Infrasonics contributes
an additional 25% for up to 6% of each individual's contribution. This plan
will continue to exist until January 1997, when it will be merged into the
Company's VIP plan. The amount charged to expense under all plans was $2.3
million, $1.8 million, and $1.8 million in fiscal 1996, 1995 and 1994,
respectively.
13. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended
- -------------------------------------------------------------------------------
July 7, July 2, July 3,
( in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $22,474 $18,978 $12,723
Deferred (17,156) (2,860) (12,336)
- -------------------------------------------------------------------------------
5,318 16,118 387
- -------------------------------------------------------------------------------
State:
Current 2,338 3,355 3,246
Deferred (1,562) (456) (3,138)
- -------------------------------------------------------------------------------
776 2,899 108
- -------------------------------------------------------------------------------
Foreign:
Current 4,793 3,393 2,631
Deferred (201) (815) (2,580)
- -------------------------------------------------------------------------------
4,592 2,578 51
- -------------------------------------------------------------------------------
$10,686 $21,595 $ 546
- -------------------------------------------------------------------------------
</TABLE>
Pretax income from foreign operations used to determine related tax
liabilities amounted to $4,151,000; $14,541,000; and $1,372,000 for fiscal
1996, 1995, and 1994, respectively. The Company has manufacturing operations
in Ireland which qualify for a reduced tax rate of 10 percent. The reduced
rate available on manufacturing profits earned in Ireland will expire in
fiscal year 2011.
<PAGE> 19
The most significant components of the Company's deferred tax assets and
liabilities at July 7, 1996 and July 2, 1995 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
July 7, 1996 July 2, 1995
Deferred Tax Deferred Tax
-------------------------- -----------------------
(in thousands) Assets Liabilities Assets Liabilities
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Inventory and product allowances $20,442 $ 1,714 $11,773 --
Property, plant and equipment 2,934 8,070 -- $ 5,657
Intangible assets 3,469 -- 832 759
Employee benefits 7,292 -- 10,144 --
Deferred revenue 3,112 -- 3,785 --
State income tax accrual 1,188 -- 1,392 --
Provision for accounts receivable 983 -- 642 --
Tax/book year end difference -- 2,716 -- 1,504
Losses carried forward 5,254 -- 7,447 --
Merger and related costs 12,394 -- -- --
Credits carried forward 2,842 -- 2,666 --
Other 1,218 381 8,065 2,376
- -------------------------------------------------------------------------------------------------------
Total 61,128 12,881 46,746 10,296
Less: valuation allowance (3,488) -- (13,697) --
- -------------------------------------------------------------------------------------------------------
Deferred income taxes $57,640 $12,881 $ 33,049 $10,296
- -------------------------------------------------------------------------------------------------------
</TABLE>
As of July 7, 1996, the Company had net operating loss carryforwards
resulting from the acquisition of Puritan-Bennett, which expire beginning in
fiscal year 2006 and ending in fiscal year 2010.
The valuation allowance decreased by $10.2 million during fiscal 1996,
reflecting the portion of Puritan-Bennett's operating loss carryforwards
which were realized ($2.1 million), or are expected to be realized ($7.2
million) in the future based upon the current and projected profitability of
Puritan-Bennett, and the realization of remaining EdenTec net operating loss
carryforwards ($0.9 million). The decrease in the EdenTec valuation allowance
was recorded as a reduction of the remaining net book value of the EdenTec
goodwill.
The Company paid income taxes of approximately $11.1 million, $21.6
million, and $13.9 million in fiscal 1996, 1995, and 1994, respectively.
The difference between the Company's actual effective income tax rate and
the United States federal statutory income tax rate is reconciled as follows:
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------------
July 7, 1996 July 2, 1995 July 3, 1994
------------------- ------------ -------------
(dollars in thousands) $ % % %
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal statutory rate $ 463 35.0% 35.0% (35.0)%
State income taxes, net of federal benefit 504 38.1 2.2 (6.9)
Research and experimental credits (166) (12.5) (1.7) (43.7)
Tax legislation changes -- -- (13.7)
Foreign statutory tax rate differences (3,818) (287.9) (6.8) (26.5)
Merger and related costs 23,363 1,761.8 -- --
Increase (decrease) in valuation allowance (9,300) (701.4) 1.7 120.7
Net operating loss utilized (1,351) (101.9) -- --
Foreign earnings taxed in U.S. 399 30.1 -- --
Other 592 44.6 .6 15.5
- ---------------------------------------------------------------------------------------------------------------------------
Income tax provision $10,686 805.9% 31% 10.4%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
14. STOCKHOLDERS' EQUITY
Common stock | On June 27, 1996, stockholders approved a two-for-one stock
split of the Company's common stock. As of July 7, 1996, taking into account
the two-for-one stock split, an aggregate of 12,167,110 shares of authorized
but unissued Company common stock remained reserved for issuance under the
Infrasonics 1995 Stock Option Plan (the "Infrasonics 1995 Plan"), the 1995
Merger Stock Incentive Plan (the "1995 Plan"), the 1994 Equity Incentive
Plan, as amended (the "1994 Plan"), the Infrasonics 1991 Stock Option Plan
(the "Infrasonics 1991 Plan"), the 1991 Equity Incentive Plan, as amended
(the "1991 Plan"), the 1988 Stock Option Plan for Non-Employee Directors, as
amended (the "1988 Plan"), the 1985 Equity Incentive Plan (the "1985
<PAGE> 20
Plan"), the Infrasonics 1983 Employee Stock Option Plan (the "Infrasonics
1983 Plan"), the 1986 Employee Stock Participation Plan as amended (the "1986
ESPP"), which terminated August 1996, and the 1995 Employee Stock
Participation Plan (the "1995 ESPP").
Stock option plans | The Company maintains six employee stock option plans:
the Infrasonics 1995 Plan, the 1995 Plan, the 1994 Plan, the Infrasonics 1991
Plan, the 1991 Plan and the Infrasonics 1983 Plan. In August 1995, the
Company obtained stockholder approval of the 1995 Plan, which authorized the
issuance of up to 1,558,000 shares of Company common stock in the form of
replacement stock options to holders of unexercised options to purchase
Puritan-Bennett stock as of the effective date of the merger between Nellcor
and Puritan-Bennett. Replacement options representing 1,046,996 shares of
Company common stock were issued. No additional options will be granted from
the 1995 Plan. As of the effective date of the merger between the Company and
Infrasonics, the Company assumed the Infrasonics 1995 Plan, the Infrasonics
1991 Plan and the Infrasonics 1983 Plan (the "Infrasonics Plans") and
authorized the issuance of Company common stock upon exercise of options
outstanding under the Infrasonics Plans. As of the effective date of the
merger, options to purchase approximately 130,000 shares of Company common
stock were outstanding under the Infrasonics Plans. No additional options
will be granted from the Infrasonics Plans.
In October 1994, the Company obtained stockholder approval of the 1994
Plan, which authorized the issuance of up to 3,000,000 shares of common stock
to executive officers, other key employees and consultants in the form of
incentive and nonqualified stock options, stock bonuses and restricted stock.
The 1994 Plan satisfies the performance-based compensation requirements of
the Omnibus Budget Reconciliation Act of 1993. In August 1995, the
stockholders approved an amendment to the 1994 Plan to increase the number of
shares authorized for issuance from 3,000,000 to 5,000,000.
The Company obtained stockholder approval of the 1991 Plan in October
1991. Upon stockholder approval of the 1991 Plan, the Company's 1982
Incentive Stock Option Plan (The "1982 Plan") and the 1985 Plan were
terminated; however, shares available for issuance under these plans at the
time of termination, including shares underlying outstanding options that
later expire or are canceled, totaling approximately 938,500 shares were
pooled with the 1,500,000 additional shares reserved for issuance under the
1991 Plan. In October 1992, the Company obtained stockholder approval for an
amendment to the 1991 Plan increasing the number of shares authorized for
issuance under the 1991 Plan by an additional 3,000,000 shares.
Restricted stock grants totaling 19,400 shares have been made under the
1991 Plan, of which 5,000 shares were subsequently canceled. These grants
vest on an annual basis over a three-year period. Stock bonus awards totaling
37,600 shares have been made under the 1991 and 1994 plans.
Options granted under the Infrasonics plans vest on an annual basis over a
four-year period. Non-employee directors of Infrasonics were granted options
that vest 100% at the date of grant. Options granted under the 1995 Plan
generally vest on an annual basis over a period of two years. Options granted
under the 1994 and 1991 Plans generally vest on a quarterly basis over a
period of four years from the date of grant. A one-year waiting period is
required before vesting in the case of initial grants under the 1994 and 1991
Plans. The 1995, 1994, 1991, and Infrasonics Plans authorize the grant of
incentive stock options at exercise prices equal to the fair market value of
the Company's common stock on the date of grant and permit the grant of
nonqualified stock options at exercise prices not less than 85 percent of
fair market value on the date of grant. To date, only incentive stock options
and nonqualified stock options with exercise prices equal to the fair market
value of the underlying common stock on the date of grant have been granted
under these Plans.
As of July 7, 1996, options representing 2,652,711 shares, including
options issued under the Infrasonics Plans, the 1995, 1994 and 1991 Plans and
the terminated 1982 and 1985 Plans, were outstanding and exercisable, and the
Company, as of such date, had 5,084,973 shares available for issuance under
the 1994 and 1991 Plans.
Certain options issued under the 1994 and 1991 Plans permit exercise prior
to vesting. As to these options, if the optionee's relationship with the
Company is terminated prior to the complete vesting of the options, the
Company has the right to repurchase unvested shares at the exercise price
plus interest. As of July 7, 1996, no shares were subject to repurchase by
the Company under these options.
<PAGE> 21
The following is a summary of option activity under the 1995, 1994, 1991
and Infrasonics Plans:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Options Aggregate Range of Exercise Prices
Available Options Exercise Price (per share)
For Grant Outstanding (in thousands) High Low
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at July 4, 1993 3,613,714 4,556,382 $49,066 34.42 3.94
Granted (1,404,250) 1,404,250 16,561 14.25 10.00
Exercised -- (943,376) (6,517) 18.25 4.63
Canceled 602,100 (642,276) (7,822) 16.00 5.00
- ---------------------------------------------------------------------------------------------------------------------------
Balance at July 3, 1994 2,811,564 4,374,980 51,288 34.42 4.63
Increase in options available
for grant 3,000,000 --
Granted (1,788,840) 1,788,840 27,159 23.13 13.50
Exercised -- (1,323,328) (14,022) 17.07 5.00
Canceled 407,198 (470,558) (5,943) 17.07 5.32
- ---------------------------------------------------------------------------------------------------------------------------
Balance at July 2, 1995 4,429,922 4,369,934 58,482 34.42 5.00
Increase in options available
for grant 3,558,000
Granted (2,636,402) 2,636,402 55,184 32.50 5.61
Exercised -- (1,255,745) (16,021) 27.88 5.00
Canceled 248,241 (277,089) (4,802) 32.50 9.38
Unissuable (514,788)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at July 7, 1996 5,084,973 5,473,502 92,843 34.42 5.00
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
1988 Plan. In October 1988, the Company obtained stockholder approval of
the 1988 Plan which authorized the non-discretionary grant of options to
non-employee Directors. Under the 1988 Plan, non-employee Directors
automatically receive stock option grants upon joining the Board of Directors
and annually thereafter. Until amended in May 1994, the 1988 Plan provided
for an initial grant of an option to purchase 40,000 shares of common stock
upon a Director joining the Board and an annual grant of an option to
purchase 20,000 shares of stock. On May 14, 1994, the Board of Directors
amended the 1988 Plan to reduce the number of shares issuable to non-employee
Directors in the form of options to an initial grant of 20,000 shares and
annual grant of 10,000 shares. Options issued to non-employee Directors under
the 1988 Plan are nonqualified stock options having a five-year term and an
exercise price equal to the fair market value of the Company's common stock
on the date of grant and vesting over a four year period in the case of
initial options grants and over the succeeding fiscal year in the case of
annual grants.
In October 1994, the Company obtained stockholder approval to amend the
1988 Plan to increase the number of shares authorized for issuance by 150,000
shares and the term of options to be issued under the plan from five to ten
years.
As of July 7, 1996, options representing 250,000 shares were outstanding
and exercisable under the 1988 Plan, and the Company, as of such date, had
170,000 shares available for issuance under the 1988 Plan.
The following is a summary of option activity under the 1988 Plan:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Aggregate Range of Exercise Prices
Available Options Exercise Price (per share)
For Grant Outstanding (thousands) High Low
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at July 4, 1993 260,000 295,000 $2,991 12.81 4.69
Granted (100,000) 100,000 1,175 11.75 11.75
Exercised -- (10,000) (47) 13.75 4.69
- ---------------------------------------------------------------------------------------------------------------------------
Balance at July 3, 1994 160,000 385,000 4,119 12.81 6.81
Increase in options available for grant 150,000
Granted (50,000) 50,000 662 13.25 13.25
Exercised -- (110,000) (1,055) 10.38 7.12
- ---------------------------------------------------------------------------------------------------------------------------
Balance at July 2, 1995 260,000 325,000 3,726 13.25 6.81
Granted (90,000) 90,000 2,175 26.81 22.34
Exercised -- (125,000) (1,451) 28.50 24.38
- ---------------------------------------------------------------------------------------------------------------------------
Balance at July 7, 1996 170,000 290,000 $4,450 26.81 6.81
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Stock purchase plans | Under the 1986 ESPP and the 1995 ESPP, qualified
employees, not including members of the Board of Directors and executive
officers, may purchase semi-annually, up to a specified maximum amount,
shares of the Company's common stock through payroll deductions at a price
<PAGE> 22
equal to 85% of the fair market value of the stock at the beginning or end of
the six month plan period, whichever is less. In August 1996, the 1986 ESPP
expired with 148,635 shares remaining authorized and unissued. In October
1995, the Company obtained stockholder approval of the 1995 ESPP, which
authorized the issuance of up to 1,000,000 shares of common stock. As of July
7, 1996, 1,651,365 shares of common stock had been purchased under the 1986
ESPP since inception and 1,000,000 shares remained available for purchase by
employees under the 1995 ESPP.
Stock repurchase programs | During the fourth quarter of fiscal 1993, the
Board of Directors approved a Limited Stock Repurchase Program (the "Limited
Program") which commenced early in fiscal 1994. The objective of the Limited
Program is to utilize a portion of available cash balances to repurchase on
the open market shares of the Company's common stock to mitigate the dilutive
effects of the issuance of shares under the Company's stock option and
participant plans. Repurchases made under the Limited Program totaled $24.3
million (928,020 shares) and $20.9 million (1,251,000 shares) during the
fiscal years ended July 7, 1996, and July 2, 1995, respectively.
In addition to the Limited Program, the Board of Directors approved a
General Stock Repurchase Program (the "General Program") during the second
quarter of fiscal 1994 to repurchase and retire up to 1 million shares of the
Company's common stock. The object of this General Program is to more
effectively utilize an additional portion of available cash balances. No
repurchases under the General Program were made in fiscal 1996 and 1995;
420,000 shares were repurchased and retired during fiscal 1994, totaling $5.9
million.
Stock rights -- Series A Junior Participating Preferred Stock | During fiscal
1991, the Board of Directors of the Company declared a dividend of one
preferred share purchase right for each outstanding share of common stock.
Each right entitles the holder to purchase from the Company one two-hundredth
of a share of Series A Junior Participating Preferred Stock, par value $.001
per share, initially at a price of $160 per one two-hundredth of a preferred
share. Each one two-hundredth of a preferred share is substantially the
economic equivalent of one share of common stock.
In the event that a third party acquires 15 percent or more of the
Company's common stock or announces an offer which would result in such
party's owning 15 percent or more of the Company's common stock, the rights
will become exercisable. on March 8, 1996, the Board of Directors of the
Company approved amendments which extend the expiration date of the rights to
March 8, 2006, and allow for their redemption, subject to certain conditions,
at a price of $.01 per right.
Supplemental cash flow information | Puritan-Bennett had a restricted stock
award program which was terminated following the merger with Nellcor.
Non-cash amounts, net of cancellations, included in additional paid in
capital for this program were $1.2 million and $.4 million for fiscal 1995
and 1994, respectively. No shares of stock were granted to employees under
this program in fiscal 1996.
15. COMMITMENTS
The Company leases its facilities under agreements that expire at various
dates through June 2011. Rental expense was approximately $11.8 million,
$11.7 million and $11.7 million in fiscal years 1996, 1995 and 1994,
respectively.
Aggregate minimum annual rental commitments under long-term operating
leases are as follows:
(in thousands)
<TABLE>
<CAPTION>
Fiscal Years
- -------------------------------------------------------------------------------
<S> <C>
1997 $ 7,798
1998 7,653
1999 6,130
2000 5,134
2001 4,506
After 2001 16,943
- -------------------------------------------------------------------------------
Total rental commitments $48,164
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 23
16. GEOGRAPHIC INFORMATION AND EXPORT SALES
The Company operates within a single industry segment in which it develops,
manufactures, and markets monitoring systems and diagnostic and therapeutic
products for management of the respiratory-impaired patient across the
continuum of care. The Company's products are sold worldwide through a direct
sales force, assisted by clinical education consultants and supplemented by
distributors in selected countries.
Geographic information with respect to the Company's operations is as
follows:
<TABLE>
<CAPTION>
Transfers
Sales to Between Operating
Unaffiliated Geographic Income Identifiable
(in thousands) Customers Areas Total (Loss) Assets
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996:
United States domestic $481,154 $-- $481,154 $11,778 $407,271
United States export 92,734 28,071 120,805 -- --
Europe 132,243 131,178 263,421 13,854 151,594
Corporate and other -- -- -- -- 55,893
Eliminations -- (159,249) (159,249) (25,679) (26,920)
- ---------------------------------------------------------------------------------------------------------------------------
Consolidated 706,131 -- 706,131 (47) 587,838
- ---------------------------------------------------------------------------------------------------------------------------
1995:
United States domestic 439,177 -- 439,177 56,338 335,135
United States export 79,142 23,966 103,108 -- --
Europe 104,747 43,063 147,810 17,391 146,860
Corporate and other -- -- -- -- 160,210
Eliminations -- (67,029) (67,029) (325) (39,815)
- ---------------------------------------------------------------------------------------------------------------------------
Consolidated 623,066 -- 623,066 73,404 602,390
- ---------------------------------------------------------------------------------------------------------------------------
1994:
United States domestic 425,782 -- 425,782 6,524 338,769
United States export 69,031 17,628 86,659 -- --
Europe 69,319 25,472 94,791 1,104 103,738
Corporate and other -- -- -- -- 123,315
Eliminations -- (43,100) (43,100) 813 (38,253)
- ---------------------------------------------------------------------------------------------------------------------------
Consolidated $564,132 $-- $564,132 $ 8,441 $527,569
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Transfers between geographic areas are generally recorded at amounts above
cost and in accordance with the rules and regulations of the governing tax
authorities. Operating income (loss) is total revenue less cost of sales and
operating expenses and does not include interest expense, interest income and
other income (expense), net, litigation settlements, costs associated with
unsolicited takeover offer and income taxes. Identifiable assets of
geographic areas are those assets used in the Company's operations in each
area. Identifiable corporate assets consist primarily of cash and cash
equivalents, marketable securities and other assets.
17. LITIGATION
From time to time the Company has received, and in the future may receive,
notice of claims against it, which in some instances have developed, or may
develop, into lawsuits. The claims may involve such matters, among others, as
product liability, patent infringement, and employment-related claims. In
management's opinion, the ultimate resolution of claims currently pending
will not have a material adverse effect on the Company's financial position
or results of operations.
On May 15, 1996, the Company brought an action in Kansas Federal District
Court, requesting a temporary restraining order, preliminary injunction and
damages against Healthdyne Technologies and two former Company employees
based on misappropriation of trade secrets, utilization of trade secrets and
various other causes of action. The Company was granted a permanent
injunction against Healthdyne enjoining it from utilizing the Company's trade
secrets and limiting the scope of work of one of the former employees. The
second employee was terminated by Healthdyne, and the Company was granted a
permanent injunction against that employee relating to use of trade secrets
and limiting the scope of the former employee's future work. The Court has
ongoing jurisdiction to enforce the injunctions and related matters.
On May 3, 1996, the Company and several of its officers and members of its
Board of Directors received notice that they had been named as defendants in
a class action lawsuit seeking unspecified damages based upon alleged
violations of California state securities and other laws. The complaint
alleges misrepresentations during the period from September 29, 1995 through
April 16, 1996 with respect to the Company's business, particularly about
<PAGE> 24
the merger with Puritan-Bennett and the integration of Nellcor and
Puritan-Bennett. The Company believes that the action, filed in the Superior
Court of the State of California, County of Alameda, is without merit and
intends to vigorously defend against the action.
On July 11, 1995, the U.S. Federal District Court in Delaware issued a
decision in favor of the Company, ruling that four key oximeter and sensor
technology patents are valid and would be infringed by Ohmeda, Inc., a
subsidiary of BOC Health Care, Inc., if Ohmeda sold either its adult or
neonatal OxyTip sensors for use with non-Ohmeda monitors. BOC Health Care
filed an appeal with the Court of Appeals Federal Circuit relating to one of
these key patents and the Company is awaiting the outcome of that appeal. BOC
Health Care had filed a suit against the Company in December 1992, seeking a
declaratory judgment that the Company's patents were invalid and would not be
infringed.
In a related matter, in the third quarter of fiscal 1994, the Company
agreed to settle trade secrets and patent litigation with BOC Health Care,
Inc., and its Ohmeda, Inc. subsidiary, and Square One Technology. Under the
terms of the agreement, the patent in issue was assigned to the Company. The
Company also received a $2.0 million pretax payment and receives ongoing
royalties. The $2.0 million payment was recorded as non-operating income.
In the fourth quarter of fiscal 1994, the Company agreed to settle its
patent litigation with Camino Laboratories, Inc., ("Camino") of San Diego,
CA. Under the terms of the settlement, Camino agreed not to sue the Company
or its current or future customers relating to the use or sale of the
Company's sensors and monitors intended for use with such sensors. A cash
payment of $15.0 million was made by the Company to Camino and was recorded
as a non-operating expense. This settlement neither recognizes the validity
nor acknowledges infringement of the Camino patent at issue.
NELLCOR PURITAN BENNETT INCORPORATED
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
The following sets forth, for the indicated periods, the relationship that
certain items bear to net revenue:
<TABLE>
<CAPTION>
Years Ended
-------------------------
July 7, July 2, July 3,
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenue 100% 100% 100%
Gross margin 51% 50% 50%
Operating expenses:
Research and development 8% 8% 9%
Selling, general and administrative 28% 30% 31%
Restructuring charges -- -- 8%
Merger and related costs 15% -- --
Total operating expenses 51% 38% 48%
Income (loss) from operations -- 12% 1%
Litigation settlements, net -- -- (2%)
Costs associated with unsolicited
takeover offer -- (1%) --
Income (loss) before income taxes -- 11% (1%)
Net income (loss) (1%) 8% (2%)
- -------------------------------------------------------------------------------
</TABLE>
Revenue
1996 vs 1995.
The Company's net revenue for fiscal 1996 increased 13 percent to $706.1
million from $623.1 million in fiscal 1995. Both the hospital and home care
product lines experienced revenue growth over fiscal 1995 of 12 percent and
16 percent, respectively. Revenue from sales in the United States increased
10 percent in fiscal 1996 while international revenue grew by 22 percent.
<PAGE> 25
Hospital product line revenue, which includes the oximetry, ventilator and
clinical information systems product lines, increased to $440.5 million in
fiscal 1996 from $394.9 million in fiscal 1995. The increase in hospital
product sales is due primarily to higher sales of oximetry and ventilator
products.
Oximetry product revenue increased due to higher oximetry sensor and
instrument sales. Oximetry sensor revenue increased due to continued growth
in the installed base of the Company's monitors and the products of the
Company's licensees and OEM customers that use the Company's sensors.
Oximetry instrument revenue increased due primarily to higher sales of the
N-3000 pulse oximeter. Average selling prices for oximetry sensors decreased
slightly whereas average selling prices for oximetry instruments were
moderately lower in comparison to the prior year.
Sales of ventilator products increased due primarily to higher sales of
critical care ventilators and Infrasonics' neonatal, pediatric and adult
ventilators and accessories. Higher sales volume for the Company's adult
ventilators was partially offset by moderately lower average selling prices.
Sales from the home care product lines, which include the Oxygen Therapy,
Gas Products and Spirometry Group, the Global Sleep Solutions Group and the
Aero Systems Group, increased to $265.6 million in fiscal 1996 from $228.2
million in fiscal 1995, due to higher sales volume across all product lines.
The revenue growth was also due to the first full year of sales from the
Company's Pierre Medical subsidiary and the inclusion of revenue from
Melville after its acquisition in the first quarter of fiscal 1996. Revenue
from these two acquisitions accounted for approximately one-half of the
fiscal 1996 home care product line revenue growth. Overall home care product
line revenue growth rates during fiscal 1996 were impacted by changes to the
Company's home care product distribution structure. These changes included
the termination of the Company's independent home care sales network at the
end of the second quarter, and the transition to a newly integrated direct
home care sales force during the third quarter of fiscal 1996. Because of
these changes to the Company's home care distribution channels, this period
of transition may continue to affect home care product line revenue growth
rates in the near term.
International revenue increased 22 percent to $225.0 million from $183.9
million in fiscal 1995. Much of the international revenue growth occurred in
Europe, principally due to higher oximetry and ventilator product unit sales
and to the first full year of revenue from the Company's Pierre Medical
subsidiary, which was acquired in the fourth quarter of fiscal 1995. The
favorable effect of foreign currency exchange rates accounted for 2
percentage points of the international revenue growth.
1995 vs 1994.
The Company's net revenue for fiscal 1995 increased 10 percent to $623.1
million from $564.1 million in fiscal 1994. The increase in net revenue
principally resulted from higher unit sales across the Company's hospital and
home care product lines. Sales of the Company's products into international
markets were also particularly strong.
Hospital product sales increased 9 percent to $394.9 million in fiscal
1995 from $363.5 million in fiscal 1994.
Oximetry instrument revenue for fiscal 1995 increased slightly as higher
unit sales of the N-3000 pulse oximeter and the N-20 portable pulse oximeter
were partially offset by lower average selling prices.
Revenue from oximetry sensors increased moderately during fiscal 1995
primarily due to continued growth in the installed base of the Company's
monitors and the products of the Company's licensees and OEM customers that
use the Company's sensors. Higher unit sales were partially offset by
slightly lower average selling prices for adhesive and recycled sensors.
OEM oximetry module revenue increased significantly in fiscal 1995 as
higher unit shipments were partially offset by moderately lower average
selling prices. At the end of fiscal 1995, the Company had OEM or licensing
agreements in place with 40 medical systems and monitor manufacturers
worldwide.
Revenue related to the critical care ventilator product line, the
CliniVision product line and the small Holter monitoring and international
portable ventilator product lines decreased 1 percent from fiscal 1994. The
decrease is primarily the result of the Company's decision to withdraw from
the United States portable ventilator market.
Home care product sales increased 14 percent to $228.2 million in fiscal
1995 from $200.6 million in fiscal 1994. Home care product line revenue
increased due primarily to higher unit sales of sleep and respiratory support
systems products.
Sleep and respiratory support systems products include the Assurance 2000
and 3000 heart and respiration monitors, the EdenTrace II and II Plus
multichannel recording systems and related products, the GoodKnight 314 and
318 nasal CPAP (continuous positive airway pressure) systems used to treat
sleep apnea, and the KnightStar 320 bilevel device and 335 respiratory
support system for patients with apnea or respiratory insufficiency. The
therapeutic products also include a variety of masks and accessories such as
the innovative ADAM nasal pillow interface. During the fourth quarter of
fiscal 1995, the Company acquired Pierre Medical, a privately held French
manufacturer of respiratory products used in the home. Pierre Medical markets
the O'Nyx noninvasive ventilation system, the Omega(TM) oxygen concentrator
and the Morphee(TM) and Morphee Plus(TM) sleep apnea therapy systems in
Western Europe, primarily in France. Revenue from the above mentioned home
health care products increased significantly during fiscal 1995 primarily due
to higher sales of the EdenTrace II Plus and the Assurance 3000, as well as
sales from Pierre Medical included in the Company's results subsequent to its
May 3, 1995 acquisition. In addition, the Company had a full year of revenue
from SEFAM S.A., a European supplier of diagnostic and therapeutic sleep
disorder products, which was acquired in January 1994.
<PAGE> 26
International revenue increased 33 percent to $183.9 million in fiscal
1995 from $138.3 million in fiscal 1994. International revenue increased
significantly across all markets principally due to higher unit sales of
oximetry sensors, the N-3000 pulse oximeter, OEM oximetry modules, the
acquisition of SEFAM S.A., and the favorable effect of foreign currency
exchange rates.
Gross margin | Gross margin improved to 51 percent of net revenue in fiscal
1996 from 50 percent in fiscal 1995 due primarily to improved manufacturing
efficiencies, the favorable effect which foreign currency exchange rates had
upon revenue, and savings associated with producing certain ventilator
components internally.
Gross margin at 50 percent of net revenue in fiscal 1995 was comparable to
the prior year, as pricing pressures across a number of hospital and home
care product lines were offset by improved sleep product margins and the
favorable effect which foreign currency exchange rates had upon revenue.
Research and development expenses | In fiscal 1996, research and
development expenses as a percentage of net revenue remained constant from
fiscal 1995 at 8 percent but increased in absolute dollars by $5.1 million
due primarily to higher spending on ventilator product development and costs
associated with perinatal product clinical studies.
Research and development expenses decreased to 8 percent of net revenue
during fiscal 1995 from 9 percent for fiscal 1994 and decreased in absolute
dollars from fiscal 1994. The decrease was due to the elimination of the
intra-arterial blood gas monitoring product line during fiscal 1994,
partially offset by higher spending on the development of additional modules
of the Nellcor Symphony monitoring system, and increased sleep product
development costs.
Selling, general and administrative expenses | Selling, general and
administrative expenses in fiscal 1996 decreased to 28 percent of net revenue
from 30 percent of net revenue in fiscal 1995. Selling, general and
administrative expenses increased in absolute dollars due primarily to
operating expenses associated with the Company's recently acquired Pierre
Medical and Melville subsidiaries, and the unfavorable effect foreign
currency exchange rates had upon international operating expenses.
Selling, general and administrative expenses in fiscal 1995 decreased to
30 percent of net revenue from 31 percent of net revenue in fiscal 1994.
Selling, general and administrative expenses increased in absolute dollars
due primarily to the unfavorable effect foreign currency exchange rates had
upon international operating expenses, the inclusion of operating expenses
from Pierre Medical and SEFAM S.A. subsequent to their acquisition, and
increased costs related to the Company's profit sharing and bonus plans,
partially offset by lower patent litigation expenses.
Net income | The Company reported a net loss for fiscal 1996 of $9.4 million
or ($0.16) per share compared to net income of $48.1 million, $0.82 per
share, for fiscal 1995. Excluding the effect of merger and related costs of
$108.9 million, fiscal 1996 net income of $75.0 million, $1.27 per share,
increased 39 percent over net income of $53.8 million, $0.92 per share for
fiscal 1995, exclusive of the restructuring and unsolicited takeover charges
discussed below.
The Company's net income for fiscal 1995 was $48.1 million, $0.82 per
share, compared to a net loss of $8.7 million, ($0.15) per share, for fiscal
1994. Excluding the effect of the restructuring and unsolicited takeover
attempt charges, fiscal 1995 net income of $53.8 million, $0.92 per share,
increased 6 percent over net income of $50.9 million, $0.89 per share for
fiscal 1994, exclusive of the restructuring charges and litigation
settlements discussed below.
UNUSUAL AND/OR NONRECURRING ITEMS
Restructuring charges | During fiscal 1995, Puritan-Bennett recorded a $2.7
million restructuring charge associated with a workforce reduction.
During fiscal 1994, Puritan-Bennett restructured the hospital ventilator
and portable ventilator portions of its business, consolidated its aviation
facilities and substantially reduced a division's operations to improve
profitability. In connection with the restructuring, during fiscal 1994
Puritan-Bennett recorded restructuring charges of $43.2 million. Included in
these changes were provisions for personnel-related charges ($7.7 million),
non-cash asset write-downs ($29.7 million), consolidations of manufacturing
and marketing facilities ($1.3 million), and other restructuring related
costs ($4.5 million). During the third quarter of fiscal 1995,
Puritan-Bennett completed the shutdown of the division. During fiscal 1994,
Nellcor recorded a restructuring charge of $0.5 million associated with the
consolidation of two of Nellcor's divisions.
<PAGE> 27
Merger and related costs | The Company's results for fiscal 1996 reflect
merger and related costs of $108.9 million associated with the Company's
first quarter and fourth quarter acquisitions of Puritan-Bennett ($92.6
million in merger and related costs) and Infrasonics ($16.3 million in merger
and related costs), respectively. For additional information on the costs
included in this charge, see the separate discussion on mergers and
acquisitions below.
Litigation settlements, net | In the third quarter of fiscal 1994, the
Company agreed to settle trade secrets and patent litigation with BOC Health
Care, Inc., and its Ohmeda, Inc. subsidiary, and Square One Technology. Under
the terms of the agreement, the patent in issue was assigned to the Company.
The Company also received a $2.0 million pretax payment and receives ongoing
royalties. The $2.0 million payment was recorded as non-operating income.
In the fourth quarter of fiscal 1994, the Company agreed to settle its
patent litigation with Camino Laboratories, Inc., ("Camino") of San Diego,
CA. Under the terms of the settlement, Camino agreed not to sue the Company
or its current or future customers relating to the use or sale of the
Company's sensors and monitors intended for use with such sensors. A cash
payment of $15.0 million was made by the Company to Camino and was recorded
as a non-operating expense. This settlement neither recognizes the validity
nor acknowledges infringement of the Camino patent at issue.
Costs associated with an unsolicited offer | During fiscal 1995, $5.0 million
of costs were incurred associated with an unsolicited offer to acquire
Puritan-Bennett. These costs included investment banking fees, public
relations expenses and legal fees, of which $0.9 million was paid during
fiscal 1995 and the remaining $4.1 million was paid during fiscal 1996.
BUSINESS CONSIDERATIONS
Mergers and acquisitions | The Company has either merged with or acquired
four companies during fiscal 1995 and 1996. Each acquisition was intended to
broaden the Company's product offerings and expand sales into hospital and
emerging markets, such as home health care. The Company intends to continue
pursuing acquisition opportunities in the future.
Puritan-Bennett. On August 25, 1995 the merger of Nellcor and
Puritan-Bennett was consummated. The issuance of Company common stock in
connection with the Agreement and Plan of Merger was approved by shareholders
at special shareholder meetings held by both companies on August 24, 1995.
Under the terms of the agreement, shareholders of Puritan-Bennett received
0.88 of a share of the Company's common stock for each Puritan-Bennett share.
These financial statements and Management's Discussion and Analysis reflect
the consummation of this transaction as a pooling-of-interests, resulting in
the combining of the two company's balance sheets and income statements for
all periods presented.
Upon consummation of the merger, the Company recorded one-time merger and
related costs of $92.6 million during the first quarter of fiscal 1996.
Included in this charge were provisions for merger transaction costs ($13.7
million), costs to combine and integrate operations ($53.8 million), certain
intangible asset write-downs ($19.6 million), and other merger-related costs
($5.5 million). The merger transaction costs included expenses for investment
banker and professional fees, and other costs associated with completing the
transaction. The costs to combine and integrate operations included
provisions for severance and severance-related costs, facilities
consolidations and other integration costs. The write-down of certain
intangible assets, primarily goodwill associated with prior acquisitions made
by both companies, results from the effect that certain integration decisions
have had upon the future realization of these assets.
Nellcor Puritan Bennett is headquartered in Pleasanton, California, site
of Nellcor's headquarters.
Infrasonics. On June 27, 1996 the Company acquired Infrasonics in a
stock-for-stock merger. The issuance of Company common stock in connection
with the Agreement and Plan of Merger was approved by shareholders at special
shareholder meetings held by both companies on June 27, 1996. Under the terms
of the agreement, shareholders of Infrasonics received .12 of a share of
Company common stock for each Infrasonics share. These financial statements
and management's discussion and analysis reflect the consummation of this
transaction as a pooling-of-interests, resulting in the combining of the two
companies' balance sheets and income statements for all periods presented.
Infrasonics is a respiratory equipment manufacturer of neonatal, pediatric
and adult ventilators and accessories.
Upon consummation of the merger, the Company recorded one-time merger and
related costs of $16.3 million during the fourth quarter of fiscal 1996.
Included in this charge were provisions for merger transaction costs ($2.5
million), costs to combine and integrate operations ($11.8 million), and
certain intangible asset write-downs ($2.0 million). The merger transaction
<PAGE> 28
costs include expenses for investment banker and professional fees, and other
costs associated with completing the transaction. The costs to combine and
integrate operations include provisions for severance and severance-related
costs, facilities consolidations, and other integration costs. The write-down
of certain intangible assets, primarily intangibles associated with prior
acquisitions by Infrasonics, results from the effect that certain integration
decisions have had upon the future realization of these assets.
Melville. During the first quarter of fiscal 1996, the Company acquired
Melville Software Ltd. (Melville), a privately held Canadian company that
manufactures and markets sleep diagnostic products used primarily in sleep
labs for $4.9 million in cash. In the event that certain profitability levels
are achieved over the next three fiscal years, additional compensation
totaling $1.0 million would be payable to the former principal stockholders
of Melville who continue to manage the company. Such amounts will be expensed
when, and if, earned. The acquisition of Melville was accounted for under the
purchase method and its results are included since the date of acquisition.
Pierre Medical. During the fourth quarter of fiscal 1995, the Company
acquired Pierre Medical, a privately held French manufacturer of respiratory
products used in the home, for $21.5 million in cash. In the event that
certain profitability targets are achieved or certain of Pierre Medical's
products receive FDA approval for marketing in the United States subsequent
to the acquisition, additional compensation totaling 30 million French Francs
($5.8 million as of July 7, 1996), would be payable to the former principal
stockholders of Pierre Medical who will continue to manage the company.
During fiscal 1996, $3.8 million of this additional compensation was accrued
as a merger and related cost to reflect the effect that integration decisions
associated with the Company's merger with Puritan-Bennett would have upon the
achievement of certain of the performance milestones. Pierre Medical
manufactures and markets noninvasive ventilators, sleep apnea therapy
systems, oxygen concentrators, and related respiratory products in Western
Europe, primarily France. The acquisition of Pierre Medical was accounted for
under the purchase method and its results are included since the date of
acquisition.
International markets | During fiscal 1996 and 1995, sales of the Company's
products into international markets accounted for 32 and 30 percent,
respectively, of the Company's consolidated revenue. International revenue
grew 22 percent to $225.0 million in fiscal 1996 from $183.9 million in
fiscal 1995.
Although the Company experienced sales growth in all its international
markets during fiscal 1996, the strongest growth occurred in Europe. The
Company continues to expand sales, service and distribution operations in
this market, and has broadened its product offerings through recent
acquisitions.
The Company continues to devote significant resources to the development
of its other international markets, particularly Asia Pacific, and believes
that growth in international revenue and market shares will be key factors in
the Company's overall long-term performance.
Timing of orders and shipments | Historically, orders in the first quarter
have been lower than in the second, third and fourth quarters. Of the orders
received by the Company in any quarter, a disproportionately large percentage
have typically been received and shipped toward the end of the quarter.
Accordingly, backlog has historically been modest and not an accurate
predictor of future revenues, and results for a given quarter can be
adversely affected if there is a substantial order shortfall in that quarter.
Accounting changes | In March 1995, The Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," which requires the Company to review for impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In certain situations, an
impairment loss would be recognized. SFAS 121 is effective for the Company's
1997 fiscal year. The Company is evaluating the impact of the new standard on
its financial position, results of operations, and cash flows and expects the
effect to be immaterial.
In October 1995, the FASB issued SFAS 123 "Accounting for Stock-Based
Compensation" which also will be effective for the Company's 1997 fiscal
year. The Company does not expect SFAS 123 to have a material impact on its
financial position, results of operations, and cash flows. SFAS 123 allows
companies which have stock-based compensation arrangements with employees to
adopt a new fair-value basis of accounting for stock options and other equity
instruments, or to continue to apply the existing accounting rules under APB
Opinion 25 "Accounting for Stock Issued to Employees" but with additional
<PAGE> 29
financial statement disclosure. The company expects to continue to account
for stock-based compensation arrangements under APB Opinion 25 and will
include additional footnote disclosure in its fiscal 1997 annual report.
Other business considerations | The Company is a United States Food and Drug
Administration (FDA) regulated business operating in the rapidly changing
health care industry. From time to time the Company may report, through its
press releases and/or Securities and Exchange Commission filings, certain
matters that would be characterized as forward-looking statements that are
subject to risks and uncertainties that could cause actual results to differ
materially from those projected. Certain of these risks and uncertainties are
beyond management's control. Such risks and uncertainties may include, among
other things, the following items.
Integration of Acquired Businesses. Since the acquisition of
Puritan-Bennett, the Company has dedicated, and will continue to dedicate,
substantial management resources in order to achieve the anticipated
operating efficiencies from integrating the two companies. While the Company
has achieved certain operating cost savings to date, difficulties encountered
in integrating the two companies' operations could adversely impact the
business, results of operations or financial condition of the Company. Also,
the Company intends to pursue additional acquisition opportunities in the
future. The integration of any business that the Company might acquire could
require substantial management resources. There can be no assurance that any
such integration will be accomplished without having a short or potentially
long-term adverse impact on the business, results of operations or financial
condition of the Company or that the benefits expected from any such
integration will be fully realized.
Managed Care and Other Health Care Provider Organizations. Managed care
and other health care provider organizations have grown substantially in
terms of the percentage of the population in the United States that receives
medical benefits through such organizations and in terms of the influence and
control that they are able to exert over an increasingly large portion of the
health care industry. These organizations are continuing to consolidate and
grow, which may increase the ability of these organizations to influence the
practices and pricing involved in the purchase of medical devices, including
the products sold by the Company.
Health Care Reform/Pricing Pressure. The health care industry in the
United States is experiencing a period of extensive change. Health care
reform proposals have been formulated by the current administration and by
members of Congress. In addition, state legislatures periodically consider
various health care reform proposals. Federal, state and local government
representatives will, in all likelihood, continue to review and assess
alternative health care delivery systems and payment methodologies, and
ongoing public debate of these issues can be expected. Cost containment
initiatives, market pressures and proposed changes in applicable laws and
regulations may have a dramatic effect on pricing or potential demand for
medical devices, the relative costs associated with doing business and the
amount of reimbursement by both government and third-party payors. In
particular, the industry is experiencing market-driven reforms from forces
within the industry that are exerting pressure on health care companies to
reduce health care costs. These market-driven reforms are resulting in
industry-wide consolidation that is expected to increase the downward
pressure on health care product margins, as larger buyer and supplier groups
exert pricing pressure on providers of medical devices and other health care
products. Both short-term and long-term cost containment pressures, as well
as the possibility of regulatory reform, may have an adverse impact on the
Company's results of operations.
Government Regulation; Consent Decree. There has been a trend in recent
years, both in the United States and abroad, toward more stringent regulation
of, and enforcement of requirements applicable to, medical device
manufacturers. The continuing trend of more stringent regulatory oversight in
product clearance and enforcement activities has caused medical device
manufacturers to experience longer approval cycles, more uncertainty, greater
risk and higher expenses. At the present time, there are no meaningful
indications that this trend will be discontinued in the near-term or the
long-term either in the United States or abroad.
Puritan-Bennett has been subject to significant FDA enforcement activity
with respect to its operations in recent years. In January 1994,
Puritan-Bennett entered into a consent decree with the FDA pursuant to which
Puritan-Bennett agreed to maintain systems and procedures complying with the
FDA's good manufacturing practices regulation and medical device reporting
regulation in all of its device manufacturing facilities.
Puritan-Bennett has experienced and will continue to experience
incremental operating costs due to ongoing compliance requirements and
quality assurance programs initiated in part as a result of the FDA consent
decree. Puritan-Bennett expects to continue to incur additional operating
expenses associated with its ongoing regulatory compliance program, but the
amount of these incremental costs cannot be completely predicted and will
depend upon a variety of factors, including future changes in statutes and
regulations governing medical device manufacturers and the manner in which
the FDA continues to enforce and interpret the requirements of the consent
decree. There can be no assurance that such compliance requirements and
quality assurance programs will not have an adverse impact on the business,
results of operations or financial condition of the Company or that the
Company will not experience problems associated with FDA regulatory
compliance, including increased general costs of ongoing regulatory
compliance and specific costs associated with the Puritan-Bennett consent
decree.
<PAGE> 30
Intellectual Property Rights. From time to time, the Company has received,
and in the future may receive, notices of claims with respect to possible
infringement of the intellectual property rights of others or notices of
challenges to its intellectual property rights. In some instances such
notices have given rise to, or may give rise to, litigation. Any litigation
involving the intellectual property rights of the Company may be resolved by
means of a negotiated settlement or by contesting the claim through the
judicial process. There can be no assurance that the business, results of
operations or the financial condition of the Company will not suffer an
adverse impact as a result of intellectual property claims that may be
commenced against the Company in the future.
Competition. The medical device industry is characterized by rapidly
evolving technology and increased competition. There are a number of
companies that currently offer, or are in the process of developing, products
that compete with products offered by the Company. Some of these competitors
may have substantially greater capital resources, research and development
staffs and experience in the medical device industry, including with respect
to regulatory compliance in the development, manufacturing and sale of
medical products similar to those offered by the Company. These competitors
may succeed in developing technologies and products that are more effective
than those currently used or produced by the Company or that would render
some products offered by the Company obsolete or noncompetitive. Competition
based on price is expected to become an increasingly important factor in
customer purchasing patterns as a result of cost containment pressures on,
and consolidation in, the health care industry. Such competition has exerted,
and is likely to continue to exert, downward pressure on the prices the
Company is able to charge for its products. The Company may not be able to
offset such downward price pressure through corresponding cost reductions.
Any failure to offset such pressure could have an adverse impact on the
business, results of operations or financial condition of the Company.
New Product Introductions. As the Company's existing products become more
mature and its existing markets more saturated, the importance of developing
or acquiring new products will increase. The development of any such products
will entail considerable time and expense, including research and development
costs and the time and expense required to obtain necessary regulatory
approvals, which could adversely affect the business, results of operations
or financial condition of the Company. There can be no assurance that such
development activities will yield products that can be commercialized
profitably, or that any product acquisitions can be consummated on
commercially reasonable terms or at all. Any failure to acquire or develop
new products to supplement more mature products could have an adverse impact
on the business, results of operations or financial condition of the Company.
Product Liability Exposure. Because its products are intended to be used
in health care settings on patients who are physiologically unstable and may
also be seriously or critically ill, the Company is exposed to potential
product liability claims. From time to time, patients using the Company's
products have suffered serious injury or death, which has led to product
liability claims against the Company. The Company does not believe that any
of these claims, individually or in the aggregate, will have a material
adverse impact on its business, results of operations or financial condition.
However, the Company may, in the future, be subject to product liability
claims that could have such an adverse impact.
The Company maintains product liability insurance coverage in amounts that
it deems sufficient for its business. However, there can be no assurance that
such coverage will ultimately prove to be adequate, or that such coverage
will continue to remain available on acceptable terms or at all.
Impact of Currency Fluctuations; Importance of Foreign Sales. Because
sales of products by the Company outside the United States typically are
denominated in local currencies and such sales are growing at a rate that is
generally faster than domestic sales, the results of operations of the
Company are expected to continue to be affected by changes in exchange rates
between certain foreign currencies and the United States Dollar. Although the
Company currently engages in some hedging activities, there can be no
assurance that the Company will not experience currency fluctuation effects
in future periods, which could have an adverse impact on its business,
results of operation or financial condition. The operations and financial
results of the Company also may be significantly affected by other
international factors, including changes in governmental regulations or
import and export restrictions, and foreign economic and political conditions
generally.
Possible Volatility of Stock Price. The market price of the Company's
stock is, and is expected to continue to be, subject to significant
fluctuations in response to variations in quarterly operating results, trends
in the health care industry in general and the medical device industry in
particular, and certain other factors beyond the control of the Company. In
addition, broad market fluctuations, as well as general economic or political
conditions and initiatives such as health care reform, may adversely impact
the market price of the Company's stock, regardless of the Company's
operating performance.
LIQUIDITY AND CAPITAL RESOURCES
At July 7, 1996, the Company had cash, cash equivalents, and marketable
securities of approximately $74.4 million compared to $149.2 million at the
end of fiscal 1995.
The Company's fiscal 1996 operating activities provided positive cash
flows of $61.2 million, exclusive of merger-related cash outlays.
Depreciation and amortization were significant non-cash operating activities
for all years presented.
Of the $108.9 million in merger and related charges which were recorded
during the first and fourth quarters of fiscal 1996, approximately $45.4
million resulted in a cash outlay and $31.0 million was utilized for non-cash
charges during the year. Approximately $31 million of the remaining merger
and related costs are expected to result in cash outlays during fiscal 1997.
<PAGE> 31
Sales and maturities of marketable securities were significant investing
activities during fiscal 1996. Capital expenditures were approximately $29.7
million in fiscal 1996, primarily reflecting additional investments in
business computer systems and production machinery and equipment. The Company
expects that capital expenditures will be slightly higher in fiscal 1997,
principally due to the construction of a new distribution facility and
leasehold improvements as part of the consolidation of certain manufacturing
and distribution operations into the Company's Carlsbad location.
Shares of Company common stock issued under the Company's stock option
plans were significant sources of cash from financing activities in fiscal
1996. Additionally, the Company retired approximately $75.4 million in notes
payable and debt that it assumed as part of its merger with Puritan-Bennett.
To initially consolidate a portion of this debt, during fiscal 1996 the
Company borrowed $40 million against a $50 million credit facility that it
has in place with a group of four banks. This borrowing was subsequently
repaid during the third quarter of fiscal 1996, and the Company was in
compliance with all credit facility covenants at July 7, 1996.
The Company's inventories have increased to $128.1 million at July 7,
1996, from $95.3 million at July 2, 1995. Much of the increase in inventory
occurred from February 1, 1995 and is comprised primarily of an increase in
Puritan-Bennett inventory. The increase in Puritan-Bennett inventory was due
primarily to production levels across several product lines which exceeded
customer demands, and in part resulted from inventory build-ups associated
with several new product introductions within the Global Sleep Solutions
Group. Additionally, inventory levels across several hospital and home care
product lines were increased in line with higher sales demands.
The Company anticipates that current capital resources combined with cash
to be generated from operating activities will be sufficient to meets its
liquidity and capital expenditure requirements at least through the end of
fiscal 1997. The Company may use debt to fund certain capital and other
strategic opportunities when deemed necessary and financially advantageous.
<PAGE> 32
NELLCOR PURITAN BENNETT INCORPORATED
Report of Independent Accountants
To the Board of Directors
of Nellcor Puritan Bennett Incorporated
In our opinion, based upon our audits and the reports of other auditors, the
accompanying consolidated balance sheet and the related consolidated
statements of operations, of stockholders' equity, and of cash flows present
fairly, in all material respects, the financial position of Nellcor Puritan
Bennett Incorporated and its subsidiaries at July 7, 1996 and July 2, 1995,
and the results of their operations and their cash flows for each of the
three years in the period ended July 7, 1996 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We did not
audit the consolidated financial statements of Puritan-Bennett Corporation
and its subsidiaries, which statements reflect total assets of $273,135,000
at January 31, 1995, and total revenues of $336,026,000, and $309,255,000 for
each of the two years in the period ended January 31, 1995, respectively, or
Infrasonics, which statements reflect total assets of $26,954,000 at June 30,
1995, and total revenues of $23,000,000 and $19,906,000 for each of the two
years in the period ended June 30, 1995, respectively. Those statements were
audited by other auditors whose reports thereon have been furnished to us,
and our opinion expressed herein, insofar as it relates to the amounts
included for Puritan-Bennett Corporation and its subsidiaries and
Infrasonics, is based solely on the reports of the other auditors. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits and the reports of other auditors provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
San Francisco, California
July 31, 1996
<PAGE> 33
SELECTED QUARTERLY DATA
<TABLE>
<CAPTION>
Year ended July 7, 1996
--------------------------------------------------------
Unaudited (in thousands except per share amounts) 1st quarter 2nd quarter 3rd quarter 4th quarter
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue $162,506 $168,481 $175,638 $199,506
Gross profit 81,669 86,519 90,898 101,025
Income (loss) from operations (70,356)(1) 26,832 28,201 15,276(2)
Net income (loss) (58,999)(1) 18,626 19,778 11,235(2)
Net income (loss) per share (.97)(1) .30 .32 .19(2)
--------------------------------------------------------
Year ended July 2, 1995
--------------------------------------------------------
Unaudited (in thousands except per share amounts) 1st quarter 2nd quarter 3rd quarter 4th quarter
- ---------------------------------------------------------------------------------------------------------------------
Net revenue $140,714 $153,661 $159,873 $168,818
Gross profit 68,835 76,643 79,463 85,155
Income from operations 13,405 17,569 20,960 21,470
Net income 9,588 11,648 10,994 15,882
Net income per share .16 .20 .19 .27
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes pretax merger and related charges of $92.6 million, $74.0
million after-tax, or ($1.26) per share.
(2) Includes pretax merger and related charges of $16.3 million, $10.3
million after-tax, or ($0.17) per share.
<PAGE> 34
(ii) Following are the Nellcor Puritan Bennett Incorporated consolidated
balance sheets as of July 7, 1996 and April 6, 1997, consolidated
statements of operations for the three months and nine months ended
March 31, 1996 and April 6, 1997 and consolidated statements of cash
flows for the nine months ended March 31, 1996 and April 6, 1997.
<PAGE> 35
NELLCOR PURITAN BENNETT INCORPORATED
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNT, UNAUDITED)
<TABLE>
<CAPTION>
ASSETS April 6, 1997 July 7, 1996
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $54,077 $71,692
Marketable securities 3,501 5,825
Accounts receivable 192,521 158,023
Inventories 155,671 132,378
Deferred income taxes 32,279 32,375
Other current assets, net 16,572 14,589
------------- ------------
Total current assets 454,621 414,882
Property, plant and equipment, net 144,815 132,956
Intangible and other assets, net 46,779 49,983
Deferred income taxes 13,242 13,101
------------- ------------
$659,457 $610,922
============= ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $46,654 $40,269
Employee compensation and related costs 26,358 32,072
Merger and related costs 27,481 32,452
Other accrued expenses 39,716 35,133
Current maturities of long-term debt 22,744 530
Income taxes payable 15,279 20,444
------------- ------------
Total current liabilities 178,232 160,900
Long-term debt, less current maturities 5,970 8,394
Deferred compensation and pensions 9,581 9,522
Deferred revenue 7,857 10,039
------------- ------------
Total liabilities 201,640 188,855
------------- ------------
Stockholders' equity:
Common stock, par value 67 63
Additional paid-in-capital 245,545 236,461
Retained earnings 270,501 242,687
Accumulated translation adjustment 81 304
Notes receivable from stockholders (5) (5)
Net unrealized gain on available-for-sale securities 445 1,374
Treasury stock, at cost (3,224,020 shares) (58,817) (58,817)
------------- ------------
Total stockholders' equity 457,817 422,067
------------- ------------
$659,457 $610,922
============= ============
</TABLE>
See accompanying note
<PAGE> 36
NELLCOR PURITAN BENNETT INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
------------------------------- --------------------------------
April 6, March 31, April 6, March 31,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenue $ 209,054 $ 184,750 $ 566,267 $ 535,008
Cost of goods sold 111,229 88,785 298,938 260,287
---------- ---------- ---------- ----------
Gross profit 97,825 95,965 267,329 274,721
---------- ---------- ---------- ----------
Operating expenses:
Research and development 14,545 14,854 40,720 41,815
Selling, general and
administrative 58,189 52,360 162,721 152,844
Merger and related costs --- --- 21,689 92,618
---------- ---------- ---------- ----------
72,734 67,214 225,130 287,277
---------- ---------- ---------- ----------
Income (loss) from operations 25,091 28,751 42,199 (12,556)
Interest income 710 1,304 2,055 4,797
Interest expense (489) (331) (1,110) (3,082)
Other (expense), net (1,267) (170) (1,506) (386)
---------- ---------- ---------- ----------
Income (loss) before income taxes 24,045 29,554 41,638 (11,227)
Provision for income taxes 7,454 9,406 14,550 7,560
---------- ---------- ---------- ----------
Net income (loss) $ 16,591 $ 20,148 $ 27,088 $ (18,787)
========== ========== ========== ==========
Net income (loss) per common and
common equivalent share $ 0.26 $ 0.31 $ 0.42 $ (0.30)
========== ========== ========== ==========
Weighted average common and
common equivalent shares 64,014 64,452 63,888 63,612
========== ========== ========== ==========
</TABLE>
See accompanying note
<PAGE> 37
NELLCOR PURITAN BENNETT INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended
-----------------------------------
April 6, 1997 March 31, 1996
-----------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $27,088 ($18,787)
Adjustments to reconcile net income (loss) to
cash provided by (used for) operating activities:
Depreciation and amortization 24,419 24,124
Deferred income taxes --- (200)
Merger and related charges 21,689 92,618
Deferred compensation and pensions --- (11,954)
Other 55 762
Increases (decreases) in cash flows, net of effect of purchased
companies, as a result of changes in:
Accounts receivable (32,891) (14,779)
Inventories (18,217) (13,617)
Other current assets (3,506) (9,941)
Intangible and other assets (1,545) 584
Accounts payable 5,726 2,973
Merger and related costs (22,822) (36,470)
Employee compensation and other accrued expenses 280 3,598
Income taxes payable (6,050) 1,187
Deferred revenue (939) (545)
------------ ----------
Cash provided by (used for) operating activities (6,713) 19,553
------------ ----------
Cash flows from investing activities:
Aequitron net cash provided during the period from 5/1/96 - 7/7/96 46 ---
Capital expenditures (33,822) (18,354)
Purchase of available-for-sale securities (1,800) ---
Proceeds from maturities of securities held-to-maturity --- 61,842
Proceeds from the sale of available-for-sale securities 3,057 ---
Acquisitions, net of cash acquired (5,268) (9,713)
Other investing activities 1,417 713
------------ ----------
Cash provided by (used for) investing activities (36,370) 34,488
------------ ----------
Cash flows from financing activities:
Issuance of common stock under the
Company's stock plans and related tax benefits, net 9,073 24,533
Additions to long-term debt 29,049 2,500
Repayment of long-term debt (11,854) (70,473)
Purchase of treasury shares --- (12,103)
------------ ----------
Cash provided by (used for) financing activities 26,268 (55,543)
------------ ----------
Effect of exchange rate changes on cash (800) (40)
------------ ----------
Decrease in cash and cash equivalents (17,615) (1,542)
Cash and cash equivalents at the beginning of the period 71,692 84,552
------------ ----------
Cash and cash equivalents at the end of the period $54,077 $83,010
============ ==========
</TABLE>
See accompanying note
<PAGE> 38
NELLCOR PURITAN BENNETT INCORPORATED
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
GENERAL. The consolidated financial statements reflect, in the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position and results of operations of
Nellcor Puritan Bennett Incorporated (the Company) as of the end of and for the
periods indicated.
The accompanying interim consolidated financial statements should be read in
conjunction with the financial statements and related notes included in the
Company's 1996 Annual Report to Stockholders. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the Securities and Exchange Commission rules and regulations. The
Company believes the information included in the report on Form 10-Q, when read
in conjunction with the consolidated financial statements and related notes
thereto included in the Company's 1996 Annual Report to Stockholders, is not
misleading.
The results of operations for the three and nine months ended April 6, 1997
are not necessarily indicative of operating results for the full fiscal year.
COMBINED FINANCIAL RESULTS. The Company acquired Infrasonics Incorporated
(Infrasonics) on June 27, 1996, and Aequitron Medical, Inc. (Aequitron) on
December 5, 1996, in stock for stock mergers. Both mergers were intended to
qualify as tax-free reorganizations and were accounted for as poolings of
interests. Accordingly, the consolidated financial statements present, for all
periods, the combined financial results of the Company, Infrasonics, and
Aequitron.
The Company's consolidated statements of operations and cash flows for the
three and nine month periods ended March 31, 1996 combine the results of the
Company's third quarter and first nine months of fiscal 1996, the period ended
March 31, 1996, with Infrasonics' third quarter and first nine months of fiscal
1996, the period ended March 31, 1996, and Aequitron's third quarter and first
nine months of fiscal 1996, the period ended January 31, 1996, respectively.
Adjustments made to conform the accounting policies of the Company,
Infrasonics, and Aequitron were immaterial. Separate results for each of the
Company's, Infrasonics' and Aequitron's third quarter of fiscal 1996, and
combined results for the three and nine months ended March 31, 1996, were as
follows (in thousands):
<TABLE>
<CAPTION>
Nellcor Puritan Bennett Infrasonics Aequitron Combined
Three months ended: March 31, 1996 March 31, 1996 January 31, 1996 March 31, 1996
- ------------------- ----------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Revenue $ 168,490 $ 7,148 $ 9,112 $ 184,750
- --------------------------------------------------------------------------------------------------------------------
Net income $ 19,178 $ 600 $ 370 $ 20,148
- --------------------------------------------------------------------------------------------------------------------
Nellcor Puritan Bennett Infrasonics Aequitron Combined
Nine months ended: March 31, 1996 March 31, 1996 January 31, 1996 March 31, 1996
- ------------------ ----------------- -------------- ---------------- --------------
Revenue $ 487,354 $ 19,271 $ 28,383 $ 535,008
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $(21,901) $ 1,306 $ 1,808 $(18,787)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 39
INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out)
or market. Allowances are made for slow-moving, obsolete, unsalable, or unused
inventories.
Interim fiscal 1997 and year-end fiscal 1996 inventory balances for the Company
were as follows
(in thousands):
<TABLE>
<CAPTION>
APRIL 6, 1997 JULY 7, 1996
---------------- ----------------
<S> <C> <C>
Raw materials $67,711 $66,805
Work-in-process 16,981 16,538
Finished goods 70,979 49,035
---------------- ----------------
$155,671 $132,378
================ ================
</TABLE>
STATEMENT OF CASH FLOWS. The Company paid income taxes of approximately $19.7
million in the first nine months of fiscal 1997 ended April 6, 1997, and $13.4
million in the first nine months of fiscal 1996 ended March 31, 1996.
PROPERTY AND EQUIPMENT. Depreciation expense was approximately $21.2 million
in the first nine months of fiscal 1997 and $18.0 million in the first nine
months of fiscal 1996.
MARKETABLE SECURITIES. At April 6, 1997, the Company held available-for-sale
marketable securities with a fair market value of $3.5 million. The Company's
marketable securities, generally, are in high quality government, municipal,
and corporate obligations with original maturities of up to two years. The
Company has established guidelines relative to investment quality,
diversification and maturities to maintain appropriate levels of safety and
liquidity.
Realized gains and losses resulting from the sale of available-for-sale
marketable securities during the periods presented were not material. The
difference between the cost and market value of the Company's marketable
securities at April 6, 1997, an unrealized gain of approximately $.4 million,
is carried in stockholders' equity as a "net unrealized gain on
available-for-sale securities".
ACCOUNTING CHANGES. In February 1997, the Financial Accounting Standards Board
issued Statement of Accounting Standards No. 128, "Earnings Per Share" (SFAS
128). SFAS 128 supercedes Accounting Principles Board Opinion No. 15,
"Earnings Per Share" and is effective for financial statements for both interim
and annual periods ending after December 15, 1997. SFAS 128 requires dual
presentation of basic and diluted earnings per share (EPS) on the face of the
income statement for entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to Opinion 15. Under SFAS 128, the pro forma net income
per share for the three month period ended April 6, 1997 was $0.26 for both
basic and diluted earnings per share.
ACQUISITION OF AEQUITRON. On December 5, 1996, the Company acquired Aequitron
in a stock-for-stock merger. Under the terms of the Amended and Restated
Agreement and Plan of Merger, shareholders of Aequitron received .467 of a
share of the Company's common stock for each Aequitron share, resulting in the
Company issuing approximately 2,322,000 shares, valued at approximately $52.5
million based on the closing price of the Company's common stock on December 5,
1996. Additionally, outstanding options to acquire Aequitron's common stock
were assumed by the Company and converted into options to acquire approximately
545,000 shares of the Company's common stock.
Aequitron, headquartered in Minneapolis, Minnesota, is a respiratory equipment
manufacturer of portable compact ventilators, infant apnea products, and sleep
disorder diagnostic devices. In addition, through its Crow River Industries,
Inc. subsidiary, the company also manufactures wheelchair lifts and automobile
hand controls to assist individuals who have mobility limitations. For the
fiscal year ended April 30, 1996, Aequitron reported revenue of $38.5 million.
ACQUISITION OF NELLCOR-CMI, INC. On September 30, 1996, the Company acquired
from Century Medical, Inc. the remaining 50 percent ownership interest in
Nellcor-CMI, Inc. (NCI) for $5.4 million in cash. The acquisition of NCI has
been accounted for as a purchase and, accordingly, the results from the
Company's new wholly-owned subsidiary, Nellcor Puritan Bennett Japan, are
included in the Company's financial statements subsequent to the acquisition
date.
<PAGE> 40
MERGER AND RELATED COSTS. In connection with the acquisition of Aequitron, the
Company recorded merger and related costs during the second quarter of fiscal
1997 of $21.7 million. Included in this charge were provisions for merger
transaction costs ($3.4 million), certain intangible asset write downs ($3.0
million), costs to combine and integrate operations ($14.5 million), and other
merger related costs ($0.8 million). During fiscal 1996, one-time merger and
related costs of $108.9 million were recorded associated with the Company's
acquisitions of Puritan-Bennett and Infrasonics.
Of the $130.6 million in merger and related costs accrued during fiscal 1996
and fiscal 1997, as of April 6, 1997, approximately $103.1 million had been
utilized, primarily associated with the write-down (non-cash charge) of certain
assets to their net realizable value ($24.3 million), the payment of merger
transaction costs ($17.6 million), initial costs incurred to combine and
integrate operations ($57.4 million, of which $17.2 million was associated with
employee severance and benefits termination costs) and other merger related
costs ($3.8 million). The remaining merger and related costs accrued at April
6, 1997 of $27.5 million, approximately $25.5 million of which is expected to
result in a cash outlay, should be substantially utilized by the end of fiscal
1998.
Employee severance and benefit termination costs included in the merger and
related costs accrual were associated with the elimination of approximately 320
positions from the Company's total workforce. The positions to be eliminated
are primarily associated with corporate administrative groups, field sales and
customer service organizations, and the consolidation of manufacturing sites.
As of April 6, 1997, approximately 306 positions contemplated by this workforce
reduction had been eliminated. The Company expects the remainder of these
positions to be eliminated during fiscal 1997.
SUBSEQUENT EVENT. On May 7, 1997, the Company announced that it will
consolidate home care product line activities spread across six existing U.S.
sites into three sites. The Company is undertaking this action as part of its
operations improvement plan focused on increasing productivity, reducing cost
and improving the effectiveness of product development activities. Overall,
the Company expects to eliminate approximately 80-85 positions in the sleep
products divisions and 30-50 positions in the oxygen therapy products
divisions. In addition, the portion of the Company's critical care ventilator
research and development operations located in Ireland will be absorbed into
the R&D operations in Carlsbad, California. The Company expects to record
one-time restructuring charges of $15-20 million in the fiscal 1997 fourth
quarter associated with these consolidations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS - YEAR-TO-DATE PERIOD AND THIRD QUARTER ENDED APRIL 6,
1997, COMPARED WITH THE YEAR-TO-DATE PERIOD AND THIRD QUARTER ENDED MARCH 31,
1996.
The Company reported net income for the third quarter of fiscal 1997 of $16.6
million, or $0.26 per share, compared to net income of $20.1 million, $0.31
per share, for the same period a year ago. For the first nine months of fiscal
1997, the Company reported net income of $27.1 million, or $0.42 per share,
including one-time merger and related charges of $21.7 million, ($0.26) per
share, associated with the acquisition of Aequitron. The Company's results for
the first nine months of fiscal 1996, a net loss of $18.8 million, or ($0.30)
per share, reflect one-time merger and related charges of $92.6 million,
($1.17) per share, associated with the first quarter fiscal 1996 acquisition of
Puritan-Bennett. Excluding the effect of these nonrecurring charges, net
income for the first nine months of fiscal 1997 was $43.6 million, $0.68 per
share, compared to net income of $55.2 million, $0.86 per share, for the first
nine months of fiscal 1996.
<PAGE> 41
The Company's net revenue for the third quarter of fiscal 1997 was $209.1
million, a 13 percent increase over net revenue of $184.8 million for the same
period a year ago. Net revenue for the first nine months of fiscal 1997
increased 6 percent to $566.3 million from $535.0 million in the same period
last year.
Hospital product line sales increased 7 percent to $123.6 million for the third
quarter of fiscal 1997 from $115.7 million for the same period last year as
higher oximetry revenue was partially offset by slightly lower sales of the
Company's critical care ventilators. Oximetry product line sales increased due
to higher sales of the Company's sensors and sales of the NPB-4000
multiparameter monitor, a product which has been well received in international
markets since its introduction in the first quarter of fiscal 1997. Sales of
the Company's critical care ventilators were lower due primarily to reduced
sales of the ADULT STAR series ventilator.
Home care product line sales increased 24 percent to $73.9 million from $59.6
million for the same period last year. The increase in home care product line
sales was due primarily to higher sales across the company's oxygen therapy,
sleep therapy and portable ventilator product lines. Growth in national
account business contributed to higher U.S. home care sales levels. In
addition, international home care revenue was strong, primarily the result of
higher European sales of sleep therapy devices.
Aero business sales increased 23 percent to $11.6 million for the third quarter
of fiscal 1997 compared to $9.4 million for the same period last year.
Separately, international revenue of $61.8 million represents an increase of 13
percent over international revenue of $54.6 million for the third quarter of
fiscal 1996. International sales growth was strongest in Asia where the
Company benefited from strong sales within its newly established Japanese
subsidiary. Foreign currency exchange rates unfavorably impacted international
revenue growth by 5 percentage points during the third quarter.
Gross profit as a percentage of net revenue for the third quarter of fiscal
1997 was 47 percent compared to 52 percent for the same period last year. This
decline was due primarily to unfavorable product mix and lower average selling
prices within certain home care and hospital product lines and the unfavorable
effect that foreign currency exchange rates had upon international sales. The
Company's gross margins are expected to improve slightly in the fourth quarter
of this fiscal year.
Operating expenses for the third quarter of fiscal 1997 were 35 percent of net
revenue versus 36 percent for the third quarter of fiscal 1996. Operating
expenses for the first nine months of 1997 and 1996 were comparable at 36
percent of net revenue, exclusive of the effect of one-time merger and related
charges.
Research and development expenses were 7 percent of net revenue in the third
quarter of fiscal 1997 compared to 8 percent for the third quarter of fiscal
1996. The slight decrease in research and development expenses is due
primarily to synergies resulting from the consolidation of certain hospital
product development activities.
Selling, general and administrative expenses for the third quarter of fiscal
1997 and fiscal 1996 were comparable at 28 percent of net revenue. Selling,
general and administrative expenses increased in absolute dollars due primarily
to the inclusion of expenses from the Company's newly established NPB Japan
subsidiary, selling expenses increasing in line with the revenue growth rates
and higher information systems conversion costs.
Operating expenses for the first nine months of fiscal 1997 reflect the effect
of one-time merger and related costs of $21.7 million associated with the
Company's acquisition of Aequitron. Included in this charge were provisions
for merger transaction costs ($3.4 million), certain intangible asset
write-downs ($3.0 million), costs to combine and integrate operations ($14.5
million), and other merger related costs ($0.8 million).
<PAGE> 42
Operating expenses for the first nine months of fiscal 1996 reflect the effect
of one-time merger and related costs of $92.6 million associated with the
merger of Nellcor and Puritan-Bennett. Included in this charge were provisions
for merger transaction costs ($13.7 million), costs to combine and integrate
operations ($53.8 million), certain intangible asset write-downs ($19.6
million), and other merger related costs ($5.5 million).
Other expense for the third quarter of fiscal 1997 was $1.3 million compared to
$.2 million reported in the prior year. Other expense increased due primarily
to the recording of higher bad debt reserve provisions associated with
continued sales growth in emerging markets.
LIQUIDITY AND CAPITAL RESOURCES
At April 6, 1997, the Company had cash, cash equivalents and marketable
securities of approximately $57.6 million compared to $77.5 million at the end
of fiscal 1996.
Cash provided by operating activities was approximately $16.1 million during
the first nine months of fiscal 1997, exclusive of $22.8 million in merger
related cash outlays. Accounts receivable and inventory growth and income tax
payments during the year were major contributors to the net use of cash for
operating activities. The Company's accounts receivable increased to $192.5
million at April 6,1997, from $158.0 million at July 7, 1996, due primarily to
the assumption of accounts receivable from NCI subsequent to its acquisition and
a trend towards extended credit terms. The Company's inventories increased to
$155.7 million at April 6, 1997 from $132.4 million at July 7, 1996 due
primarily to lower than planned sales levels, inventory buildups in advance of
product line relocations and the consolidation of Southern California hospital
business manufacturing sites, and certain new product introductions. The
Company is actively working to reduce inventory levels over the remainder of
1997. In part to fund incremental working capital requirements, net of
repayments of $11.9 million, the Company increased borrowings by $17.2 million
during the first nine months of fiscal 1997.
On September 30, 1996, the Company acquired the remaining 50 percent ownership
interest in NCI for $5.4 million in cash. Debt of $8 million was assumed as
part of this acquisition.
On December 5, 1996, the Company acquired Aequitron in a stock-for-stock
merger. Under the terms of the Amended and Restated Agreement and Plan of
Merger, shareholders of Aequitron received .467 a share of the Company's common
stock for each Aequitron share, resulting in the Company issuing approximately
2,322,000 shares, valued at approximately $52.5 million based on the closing
price of the Company's common stock on December 5, 1996. Additionally,
outstanding options to acquire Aequitron's common stock were assumed by the
Company and converted into options to acquire approximately 545,000 shares of
the Company's common stock.
Aequitron, headquartered in Minneapolis, Minnesota, is a respiratory equipment
manufacturer of portable compact ventilators, infant apnea products, and sleep
disorder diagnostic devices. In addition, through its Crow River Industries,
Inc. subsidiary, the company also manufactures wheelchair lifts and automobile
hand controls to assist individuals who have mobility limitations. For the
year ended April 30, 1996, Aequitron reported revenue of $38.5 million.
On May 7, 1997, the Company announced that it will consolidate home care
product line activities spread across six existing U.S. sites into three sites.
The Company is undertaking this action as part of its operations improvement
plan focused on increasing productivity, reducing cost and improving the
effectiveness of product development activities. Overall, the Company expects
to eliminate approximately 80-85 positions in sleep products and 30-50
positions in oxygen therapy products. In addition, the portion of the
Company's critical care ventilator research and development operations located
in Ireland will be absorbed into the R&D operations in Carlsbad, California.
The Company expects to record one-time restructuring charges of $15-20 million
in the fiscal 1997 fourth quarter associated with these consolidations.
<PAGE> 43
On January 15, 1997 the Company rescinded the general stock repurchase program,
which had originally been implemented on December 8, 1993.
The Company anticipates that current working capital resources, combined with
cash to be generated from operating activities, will be sufficient to meet its
liquidity and capital expenditure requirements at least through the end of
fiscal 1997. The Company may continue to use debt to fund certain working
capital and other strategic opportunities when deemed necessary and financially
advantageous.
BUSINESS CONSIDERATIONS
The Company is a United States Food and Drug Administration (FDA) regulated
business operating in the rapidly changing healthcare industry. From time to
time the Company may report, through its press releases and/or Securities and
Exchange Commission filings, certain matters that would be characterized as
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those projected. Certain
of these risks and uncertainties are beyond management's control. Such risks
and uncertainties include, among other things, the following items.
INTEGRATION OF ACQUIRED BUSINESSES. The Company has dedicated and will
continue to dedicate, substantial management resources in order to achieve the
anticipated operating efficiencies from integrating Puritan-Bennett,
Infrasonics, and Aequitron. While the Company has achieved certain operating
cost savings to date, difficulties encountered in integrating the companies'
operations could adversely impact the business, results of operations or
financial condition of the Company. Also, the Company intends to pursue
acquisition opportunities in the future. The integration of any businesses
that the Company might acquire could require substantial management resources.
There can be no assurance that any such integration will be accomplished
without having a short or potentially long-term adverse impact on the business,
results of operations or financial condition of the Company or that the
benefits expected from any such integration will be fully realized.
MANAGED CARE AND OTHER HEALTHCARE PROVIDER ORGANIZATIONS. Managed care and
other large healthcare provider organizations have grown substantially in terms
of the percentage of the population in the United States that receives medical
benefits through such organizations and in terms of the influence and control
that they are able to exert over an increasingly large portion of the health
care industry. These organizations are continuing to consolidate and grow,
which may increase the ability of these organizations to influence the
practices and pricing involved in the purchase of medical devices, including
the products sold by the Company.
HEALTH CARE REFORM/PRICING PRESSURE. The health care industry in the United
States is experiencing a period of extensive change. Health care reform
proposals have been formulated by the current administration and by members of
Congress. In addition, state legislatures periodically consider various health
care reform proposals. Federal, state and local government representatives
will, in all likelihood, continue to review and assess alternative health care
delivery systems and payment methodologies, and ongoing public debate of these
issues can be expected. Cost containment initiatives, market pressures and
proposed changes in applicable laws and regulations may have a dramatic effect
on pricing for medical devices, the relative costs associated with doing
business and the amount of reimbursement by both government and third-party
payors. In particular, the industry is experiencing market-driven reforms from
forces within the industry that are exerting pressure on health care companies
to reduce health care costs. These market-driven reforms are resulting in
industry-wide consolidation that is expected to increase the downward pressure
on health care product margins, as larger buyer and supplier groups exert
pricing pressure on providers of medical devices and other health care
products. Both short-term and long-term cost containment pressures, as well as
the possibility of regulatory reform, may have an adverse impact on the
Company's results of operations.
Page 10
<PAGE> 44
GOVERNMENT REGULATION; CONSENT DECREE. Both in the United States and outside
the United States, there has been a trend toward more stringent regulation of,
and enforcement of requirements applicable to, medical device manufacturers.
The continuing trend of more stringent regulatory oversight in product
clearance and enforcement activities has caused medical device manufacturers to
experience longer approval cycles, more uncertainty, greater risk and higher
expenses. At the present time, there are no meaningful indications that this
trend will be discontinued in the near-term or the long-term either in the
United States or abroad.
Puritan-Bennett has been subject to significant FDA enforcement activity with
respect to its operations. In January 1994, Puritan-Bennett entered into a
consent decree with the FDA pursuant to which Puritan-Bennett agreed to
maintain systems and procedures complying with the FDA's good manufacturing
practices regulation and medical device reporting regulation in all of its
device manufacturing facilities.
Puritan-Bennett has experienced and will continue to experience incremental
operating costs due to ongoing compliance requirements and quality assurance
programs initiated in part as a result of the FDA consent decree.
Puritan-Bennett expects to continue to incur additional operating expenses
associated with its ongoing regulatory compliance program, but the amount of
these incremental costs cannot be completely predicted and will depend upon a
variety of factors, including future changes in statutes and regulations
governing medical device manufacturers and the manner in which the FDA
continues to enforce and interpret the requirements of the consent decree.
There can be no assurance that such compliance requirements and quality
assurance programs will not have a material adverse effect on the business,
results of operations or financial condition of the Company or that the Company
will not experience problems associated with FDA regulatory compliance,
including increased general costs of ongoing regulatory compliance and specific
costs associated with the Puritan-Bennett consent decree.
INTELLECTUAL PROPERTY RIGHTS. From time to time, the Company has received, and
in the future may receive, notices of claims with respect to possible
infringement of the intellectual property rights of others or notices of
challenges to its intellectual property rights. In some instances such notices
have given rise to, or may give rise to, litigation. Any litigation involving
the intellectual property rights of the Company may be resolved by means of a
negotiated settlement or by contesting the claim through the judicial process.
There can be no assurance that the business, results of operations or the
financial condition of the Company will not suffer a material adverse effect as
a result of intellectual property claims that may be commenced against the
Company in the future.
<PAGE> 45
COMPETITION. The medical device industry is characterized by rapidly evolving
technology and increased competition. There are a number of companies that
currently offer, or are in the process of developing, products that compete
with products offered by the Company. Some of these competitors may have
substantially greater capital resources, research and development staffs and
experience in the medical device industry, including with respect to regulatory
compliance in the development, manufacturing and sale of medical products
similar to those offered by the Company. These competitors may succeed in
developing technologies and products that are more effective than those
currently used or produced by the Company or that would render some products
offered by the Company obsolete or non-competitive. Moreover, competition
based on price has become and is expected to continue to be an increasingly
important factor in customer purchasing patterns as a result of cost
containment pressures on, and consolidation in, the health care industry. Such
competition has exerted, and is likely to continue to exert, downward pressure
on the prices the Company is able to charge for its products. The Company may
not be able to offset such downward price pressure through corresponding cost
reductions. Any failure to offset such pressure could have an adverse impact
on the business, results of operations or financial condition of the Company.
NEW PRODUCT INTRODUCTIONS. As the existing products of the Company become more
mature and its existing markets more saturated, the importance of developing or
acquiring new products will increase. The development of any such products
will entail considerable time and expense, including research and development
costs and the time and expense required to obtain necessary regulatory
approvals, which could adversely affect the business, results of operations or
financial condition of the Company. There can be no assurance that such
development activities will yield products that can be commercialized
profitably, or that any product acquisitions can be consummated on commercially
reasonable terms or at all. Any failure to acquire or develop new products to
supplement more mature products could have an adverse impact on the business,
results of operations or financial condition of the Company.
PRODUCT LIABILITY EXPOSURE. Because its products are intended to be used in
health care settings on patients who are physiologically unstable and may also
be seriously or critically ill, the Company is exposed to potential product
liability claims. From time to time, patients using the Company's products
have suffered serious injury or death, which has led to product liability
claims against the Company. The Company does not believe that any of these
claims, individually or in the aggregate, will have a material adverse effect
on its business, results of operations or financial condition. However, the
Company may, in the future, be subject to product liability claims that could
have such an adverse impact.
The Company maintains product liability insurance coverage in amounts that it
deems sufficient for its business. However, there can be no assurance that
such coverage will ultimately prove to be adequate, or that such coverage will
continue to remain available on acceptable terms or at all.
IMPACT OF CURRENCY FLUCTUATIONS; IMPORTANCE OF FOREIGN SALES. Because sales of
products by the Company outside the United States typically are denominated in
local currencies and such sales are growing at a rate that is generally faster
than domestic sales, the results of operations of the Company are expected to
continue to be affected by changes in exchange rates between certain foreign
currencies and the United States Dollar. Although the Company currently
engages in some hedging activities, there can be no assurance that the Company
will not experience currency fluctuation effects in future periods, which could
have an adverse impact on its business, results of operation or financial
condition. The operations and financial results of the Company also may be
significantly affected by other international factors, including changes in
governmental regulations or import and export restrictions, and foreign
economic and political conditions generally.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's stock
is, and is expected to continue to be, subject to significant fluctuations in
response to variations in quarterly operating results, trends in the health
care industry in general and the medical device industry in particular, and
certain other factors beyond the control of the Company. In addition, broad
market fluctuations, as well as general economic or political conditions and
initiatives such as health care reform, may adversely affect the market price
of the Company's stock, regardless of the Company's operating performance.
<PAGE> 46
<TABLE>
<CAPTION>
Filed with
Incorporated Herein by Electronic
Exhibit Description Reference to Submission
- ------- ----------- ---------------------- -----------
<S> <C>
23.1 Consent of Price Waterhouse LLP X
</TABLE>
###
Mallinckrodt Inc.
ROGER A. KELLER
Vice President, Secretary
and General Counsel
DATE: March 4, 1998
<PAGE> 1
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-42325) and
in the Registration Statements on Form S-8 (Nos. 2-65727, 2-80553, 2-90910,
2-94151, 33-10381, 33-32109, 33-40246, 33-43925, 333-34489, 333-38291 and
333-38293) of Mallinckrodt Inc., of our report dated July 31, 1996 relating to
the consolidated financial statements of Nellcor Puritan Bennett Incorporated,
which appears in the Current Report of Form 8-K/A of Mallinckrodt Inc. dated
March 4, 1998.
PRICE WATERHOUSE LLP
San Francisco, California
March 4, 1998
