<PAGE> 1
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
---
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
---
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
-------- --------
COMMISSION FILE NUMBER 0-14980
NELLCOR PURITAN BENNETT INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 94-2789249
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4280 HACIENDA DRIVE
PLEASANTON, CALIFORNIA 94588
(Address of principal executive offices)
(Zip code)
TELEPHONE: (510) 463-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares of Common Stock, $.001 par value, outstanding as of
March 31, 1996 was 28,782,510.
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
NELLCOR PURITAN BENNETT INCORPORATED
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
(In thousands, unaudited)
ASSETS March 31, 1996 July 2, 1995
--------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 75,712 $ 78,444
Marketable securities 3,169 65,039
Accounts receivable, net of allowance for doubtful
accounts of $2,308 ($2,610 at July 2, 1995) 126,346 117,650
Inventories 110,068 88,987
Deferred income taxes and other current assets 31,727 26,580
---------- ---------
Total current assets 347,022 376,700
---------- ---------
Property and equipment, at cost 262,778 253,037
Accumulated depreciation (137,709) (124,863)
---------- ---------
Net property and equipment 125,069 128,174
---------- ---------
Intangibles and other assets, net of accumulated amortization 55,729 71,330
---------- ---------
$ 527,820 $ 576,204
========== =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Loans payable $ 358 $ 9,527
Accounts payable 36,074 37,316
Accrued liabilities:
Payroll and payroll related 27,119 25,286
Warranty 5,847 4,195
Merger and related costs 34,300 ---
Other 22,124 20,983
Income taxes payable 9,867 5,727
---------- ---------
Total current liabilities 135,689 103,034
---------- ---------
Deferred compensation and pension 8,583 19,303
Deferred revenue 10,350 10,895
Deferred income taxes 607 ---
Long-term obligations 6,572 76,367
---------- ---------
Total liabilities 161,801 209,599
---------- ---------
Stockholders' equity:
Common stock, par value 13,404 11,351
Additional paid-in-capital 178,998 148,641
Retained earnings 220,290 241,416
Accumulated translation adjustment (110) (259)
Notes receivable from stockholders (5) (5)
Net unrealized loss on available-for-sale securities (47) ---
Treasury stock, at cost (1,357,000 shares at
March 31, 1996; 1,148,000 shares at July 2, 1995) (46,511) (34,539)
---------- ---------
Total stockholders' equity 366,019 366,605
---------- ---------
$ 527,820 $ 576,204
========== =========
</TABLE>
See accompanying note
Page 2
<PAGE> 3
NELLCOR PURITAN BENNETT INCORPORATED
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts, unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
------------------------------- -------------------------------
March 31, April 2, March 31, April 2,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenue $ 168,490 $ 154,447 $ 487,354 $ 438,579
Cost of goods sold 81,509 77,044 238,464 220,169
---------- ---------- ---------- ----------
Gross profit 86,981 77,403 248,890 218,410
Operating expenses:
Research
and development 13,539 11,591 37,971 34,757
Selling, general
and administrative 45,917 44,115 135,239 129,809
Merger and related costs --- --- 92,618 ---
---------- ---------- ---------- ----------
59,456 55,706 265,828 164,566
---------- ---------- ---------- ----------
Income (loss) from operations 27,525 21,697 (16,938) 53,844
Costs associated with
unsolicited offer --- (4,559) --- (4,559)
Interest income 1,151 1,915 4,346 4,723
Interest expense (279) (1,782) (2,911) (3,312)
Other income (expense), net (193) 790 (459) 455
---------- ---------- ---------- ----------
Income (loss) before income taxes 28,204 18,061 (15,962) 51,151
Provision for income taxes 9,026 6,643 5,939 17,424
---------- ---------- ---------- ----------
Net Income (loss) $ 19,178 $ 11,418 $ (21,901) $ 33,727
========== ========== ========== ==========
Net income (loss) per common and
common equivalent share $ 0.65 $ 0.41 $ (0.75) $ 1.21
========== ========== ========== ==========
Weighted average common
and common equivalent
shares used in the calculation
of net income (loss) per share 29,647 27,939 29,248 27,794
========== ========== ========== ==========
</TABLE>
See accompanying note
Page 3
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NELLCOR PURITAN BENNETT INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
-------------------------------
March 31, 1996 April 2, 1995
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (21,901) $ 33,727
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization 21,973 22,876
Merger and related costs 56,148 ---
Deferred compensation and pensions (11,954) 2,803
Loss (gain) on disposition of assets 128 (540)
Deferred income taxes (163) (452)
Increases (decreases) in cash flows, as a result of changes
in:
Accounts receivable (10,923) (5,367)
Inventories (12,178) (5,554)
Other current assets (9,499) (2,401)
Other assets 637 (2,660)
Accounts payable 2,874 (3.418)
Accrued liabilities 2,268 3,975
Income taxes payable 1,049 1,886
--------- --------
Cash provided by operating activities 18,459 45,699
--------- --------
Cash flows from investing activities:
Capital expenditures (17,172) (21,465)
Cash used to purchase securities held-to-maturity --- (12,636)
Proceeds from sales and maturities of marketable securities 61,824 23,711
Payments for purchases of companies,
net of cash acquired (4,923) (2,000)
Other 1,139 568
--------- --------
Cash provided by (used for) investing activities 40,868 (11,822)
--------- --------
Cash flows from financing activities:
Proceeds from the issuance of common stock under the
Company's stock plans and related tax benefits,
net of notes receivable from stockholders 23,839 16,421
Repayment of long-term obligations (70,259) 3,849
Additions to loans payable 40,000 ---
Repayment of loans payable (40,000) ---
Dividends paid to stockholders --- (1,121)
Purchase of treasury shares (11,971) (20,917)
--------- --------
Cash used for financing activities (58,391) (1,768)
--------- --------
Effect of exchange rate changes on cash balances (40) 503
--------- --------
Increase in cash and cash equivalents 896 32,612
Cash and cash equivalents at the beginning of the period 74,816 68,876
--------- --------
Cash and cash equivalents at the end of the period $ 75,712 $101,488
========= ========
</TABLE>
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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 results of operations for the three and nine months ended
March 31, 1996 are not necessarily indicative of operating results for the full
fiscal year.
On August 25, 1995, the Company consummated its merger with Puritan-Bennett
Corporation (see Merger with Puritan-Bennett below). The merger was intended to
qualify as a tax-free reorganization and was accounted for as a pooling of
interests. Accordingly, the consolidated financial statements present, for all
periods, the combined financial results of Nellcor Incorporated (Nellcor) and
Puritan-Bennett Corporation (Puritan-Bennett).
Comparative historical financial information presented represents the
combination of the historical financial data from Nellcor's fiscal year 1995
ended July 2, 1995, and Puritan-Bennett's fiscal year 1995 ended January 31,
1995. Thus, the Company's consolidated balance sheet as of July 2, 1995 combines
Nellcor's balance sheet as of the end of its fiscal 1995, July 2, 1995, with
Puritan-Bennett's balance sheet as of the end of its fiscal 1995, January 31,
1995. The Company's consolidated balance sheet as of July 2, 1995 also reflects
an adjustment to reduce Puritan-Bennett's valuation allowance provided for its
deferred tax assets based on the combined income from operations of Nellcor and
Puritan-Bennett as required by Statement of Financial Accounting Standard No.
109. The effect of this adjustment was to increase deferred tax assets and
retained earnings, as presented herein, by $8.7 million.
The Company's consolidated statement of income for the three months ended April
2, 1995 combines the financial results of Nellcor's third quarter of fiscal
1995, the three months ended April 2, 1995, with Puritan-Bennett's third quarter
of fiscal 1995, the three months ended October 31, 1994. The Company's
consolidated statements of income and cash flows for the nine months ended April
2, 1995 combine the financial results of Nellcor's first nine months of fiscal
1995, the period ended April 2, 1995, with Puritan-Bennett's financial results
for the first nine months of fiscal 1995, the period ended October 31, 1994. The
Company's consolidated statement of income for the three and nine months ended
April 2, 1995, also reflects an adjustment to reduce Puritan-Bennett's valuation
allowance provided for its deferred tax assets based on the combined income from
operations of Nellcor and Puritan-Bennett as required by Statement of Financial
Accounting Standard No. 109. The effect of this adjustment was to reduce the
provision for income taxes, as presented herein, by $1.0 million.
The accompanying interim consolidated financial statements should be read in
conjunction with the financial statements and related notes included in Nellcor
Puritan Bennett's financial statements filed under Form 8-K on April 3, 1996.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this Form 10-Q pursuant to the Securities and
Exchange Commission rules and regulations. The Company believes the information
included in the report on Form 10-Q, when read in conjunction with the
consolidated financial statements and related notes thereto included in Nellcor
Puritan-Bennett's financial statements filed under Form 8-K on April 3, 1996, is
not misleading.
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<PAGE> 6
Inventories. Inventories are stated at the lower of cost or market (net
realizable value). Prior to the merger with Nellcor, Puritan-Bennett recorded
the cost of the majority of its inventory using the Last In, First Out (LIFO)
method of accounting. During the first quarter of fiscal 1996, the Company
changed the accounting for these inventories such that all of the Company's
inventory is now recorded at cost using the First In, First Out method. The
effect of this change in accounting principle was not material to the Company's
financial position or results of operations for any period presented.
Interim fiscal 1996 and year-end fiscal 1995 inventory balances for the Company
were as follows (in thousands):
<TABLE>
<CAPTION>
March 31, 1996 July 2, 1995
-------------- ------------
<S> <C> <C>
Raw materials $ 58,270 $47,518
Work-in process 10,565 10,589
Finished goods 41,233 30,880
-------------- ------------
$110,068 $88,987
</TABLE>
Statement of Cash Flows. The Company paid income taxes of approximately $12.1
million in the first nine months of fiscal 1996 ended March 31, 1996, and $11.1
million in the first nine months of fiscal 1995 ended April 2, 1995.
Property and equipment. Depreciation expense was approximately $17.1 million in
the first nine months of fiscal 1996 and $16.4 million in the first nine months
of fiscal 1995.
Marketable securities. As of March 31, 1996, the Company was carrying
available-for-sale marketable securities with a market value of $3.2 million.
Available-for-sale marketable securities are securities which the Company does
not intend to hold to maturity. The Company's marketable securities, generally,
are in high quality government, municipal, and corporate obligations with
original maturities of up to two years.
During the first quarter of fiscal 1996, the Company transferred all marketable
securities which had been classified as held-to-maturity as of July 2, 1995, to
available-for-sale. The marketable securities which were transferred to
available-for-sale were government and corporate issued debt securities with an
amortized cost of $41.4 million, of which $31.2 million were subsequently sold
during the quarter, generating a gain of $80,000. 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
ended October 1, 1995, and the significant cash outlays which will continue to
be made as part of effecting the combination of these two companies.
The market value, amortized cost, and gross unrealized gains and losses of the
Company's marketable securities at March 31, 1996, are summarized below (in
thousands). The market value of marketable securities is based upon quoted
market prices.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Marketable Securities Cost Gains Losses Value
--------------------- --------- ---------- ---------- ------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
Mortgage backed securities $3,216 $ --- $ (47) $ 3,169
====== ======== ======= ========
</TABLE>
Page 6
<PAGE> 7
The difference between the amortized cost and market value of the Company's
marketable securities at March 31, 1996, a net unrealized loss of $47,000, is
carried as a separate component of stockholders' equity under the caption "Net
unrealized loss on available-for-sale securities."
Merger with Puritan-Bennett. On August 24, 1995, the merger of Nellcor and
Puritan-Bennett was approved by stockholders of both companies. On August 25,
the merger was consummated, and Nellcor was renamed Nellcor Puritan Bennett
Incorporated. Under the terms of the merger agreement, Puritan-Bennett
shareholders received .88 of a share of Nellcor's common stock for each
Puritan-Bennett share, resulting in the Company issuing approximately 11.5
million shares, valued at approximately $600 million based upon the closing
price of Nellcor's common stock on August 25, 1995. Additionally, outstanding
options to acquire Puritan-Bennett common stock were converted to options to
acquire approximately 500,000 shares of the Company's common stock.
Puritan-Bennett developed, manufactured, and marketed ventilators, oxygen
delivery systems, home sleep diagnostic and therapeutic equipment, and certain
complementary products such as medical gases, gas-related equipment, and
spirometers. Puritan-Bennett reported revenue of $336.0 million and net income
of $8.4 million for its fiscal 1995 ended January 31, 1995.
The merger was intended to qualify as a tax-free reorganization and was
accounted for as a pooling of interests. Accordingly, the consolidated financial
statements present, for all periods, the combined financial results of Nellcor
and Puritan-Bennett. The Company's consolidated statement of income for the
three and nine months ended April 2, 1995, combines the financial results of
Nellcor's third quarter and first nine months of fiscal 1995, the three and nine
months ended April 2, 1995, with Puritan-Bennett's financial results for its
third quarter and first nine months of fiscal 1995, the three and nine months
ended October 31, 1994. The Company's consolidated statement of income for the
three and nine months ended April 2, 1995, also reflects an adjustment to reduce
Puritan-Bennett's valuation allowance provided for its deferred tax assets based
on the combined income from operations of Nellcor and Puritan-Bennett as
required by Statement of Financial Accounting Standard No. 109. The effect of
this adjustment was to reduce the provision for income taxes, as presented
herein, by $1.0 million. Adjustments made to conform the accounting policies of
Nellcor and Puritan-Bennett were immaterial. Separate results for each of
Nellcor's and Puritan-Bennett's third quarter and first nine months of fiscal
1995, and combined results for the three and nine months ended April 2, 1995,
including the aforementioned adjustment, were as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended: Nellcor Puritan-Bennett Combined
- ------------------- April 2, 1995 October 31, 1994 Adjustment April 2, 1995
------------- ---------------- ---------- -------------
<S> <C> <C> <C> <C>
Revenue $ 71,035 $ 83,412 $ --- $ 154,447
- -----------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 11,058 $ (640) $ 1,000 $ 11,418
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Nine months ended: Nellcor Puritan-Bennett Combined
- ------------------ April 2, 1995 October 31, 1994 Adjustment April 2, 1995
------------- ---------------- ---------- -------------
<S> <C> <C> <C> <C>
Revenue $ 190,766 $247,813 $ --- $ 438,579
- -----------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 25,400 $ 7,327 $ 1,000 $ 33,727
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 7
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In connection with the merger, the Company recorded one-time merger and related
costs during the first quarter 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). The merger
transaction costs include expenses for investment banker and professional fees,
and other costs associated with completing the transaction. 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.
The costs to combine and integrate operations included provisions for the
following types of costs (in millions):
<TABLE>
<CAPTION>
<S> <C>
Employee severance $ 21.3
Product line terminations 9.4
Facilities closing 8.6
Other employee/benefits
termination costs 5.4
Conformance of accounting policies
which did not materially affect any
prior year 4.3
Other 4.8
-------
Total $ 53.8
=======
</TABLE>
Employee severance costs include costs 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 March 31, 1996, approximately 150 positions
contemplated by this workforce consolidation, primarily in the Company's field
sales and corporate administrative groups, had been eliminated.
Of the $92.6 million in merger and related costs which were accrued,
approximately $58.3 million had been utilized as of March 31, 1996, primarily
associated with the write-down (non-cash charge) of certain intangible assets to
their net realizable value ($19.6 million), the payment of merger transaction
costs ($13.7 million), and initial costs incurred to combine and integrate
operations ($25.0 million, of which $5.5 million was associated with employee
severance). The merger and related costs accrued at March 31, 1996 of $34.3
million, should be substantially utilized by the end of fiscal year 1997, with
approximately $30 million of the remaining accrual expected to result in a cash
outlay.
Acquisition of Melville Software Ltd. On August 23, 1995, Nellcor Puritan
Bennett's EdenTec subsidiary acquired for $4.9 million in cash, Melville
Software Ltd. (Melville), a privately held Canadian company that manufactures
and markets sleep diagnostic products used primarily in sleep labs. In the event
that certain profitability levels are achieved over the next three fiscal years,
additional compensation totalling $1.0 million would be payable to the former
principal stockholders of Melville who continue to manage the company. Such
amounts will be expensed when, and if, earned.
The acquisition of Melville has been accounted for as a purchase and,
accordingly, Melville's results are included in the Company's financial
statements subsequent to the acquisition date. The pro forma effect of Melville
upon the Company's results of operations for the quarter and year-to-date
periods is immaterial.
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Pending merger with Infrasonics, Inc. On March 11, 1996, Nellcor Puritan Bennett
and Infrasonics, Inc. (Infrasonics) announced that they had entered into a
definitive agreement for Nellcor Puritan Bennett to acquire Infrasonics in a
stock for stock merger valued at approximately $66 million.
Under the terms of the agreement, Infrasonics stockholders will receive .095
shares of Nellcor Puritan Bennett common stock for each outstanding share of
Infrasonics common stock. This exchange ratio is subject to adjustment based on
the trading value of Nellcor Puritan Bennett common stock in order that the
value of the consideration to be received by Infrasonics stockholders will not
be less than $6.25 a share. Consummation of the acquisition is subject to the
approval of Nellcor Puritan Bennett's and Infrasonics' stockholders. The merger
is intended to qualify as a tax-free reorganization and to be accounted for as a
pooling of interests for financial reporting purposes.
Infrasonics, headquartered in San Diego, CA is a respiratory equipment
manufacturer of neonatal, pediatric and adult ventilators and accessories. For
the fiscal year ended June 30, 1995, Infrasonics reported revenue of $23
million.
Page 9
<PAGE> 10
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS - THE THREE AND NINE MONTHS ENDED MARCH 31, 1996, COMPARED
WITH THE THREE AND NINE MONTHS ENDED APRIL 2, 1995.
The Company reported net income for the third quarter of fiscal 1996 of $19.2
million, or $0.65 per share, a 68 percent increase over net income of $11.4
million, $0.41 per share, for the same period a year ago. The third quarter
fiscal 1995 results included a pretax charge of approximately $4.6 million
associated with an unsolicited offer to acquire Puritan-Bennett. Excluding the
after-tax effect of this charge of $3.4 million, $0.12 per share, net income for
the third quarter of fiscal 1996 increased 30 percent over net income of $14.8
million, $0.53 per share, for the third quarter of fiscal 1995. Net income for
the first nine months of fiscal 1996, excluding the effect of one-time merger
and related charges of $92.6 million, ($2.53) per share, associated with the
first quarter merger of Nellcor and Puritan-Bennett, was $52.1 million, $1.78
per share, a 42 percent increase over net income of $36.8 million, $1.32 per
share, for the same period a year ago, exclusive of the aforementioned
unsolicited offer charge.
The Company's net revenue for the third quarter of fiscal 1996 increased 9
percent to $168.5 million from net revenue of $154.4 million for the third
quarter of fiscal 1995 and increased 11 percent to $487.4 million for the first
nine months of fiscal 1996 from $438.6 million in the same period last year. The
increase in net revenue principally resulted from higher sales across the
Company's hospital and home care businesses. Sales of the Company's products
into international markets were also particularly strong.
Hospital business sales, which include the oximetry, ventilator and clinical
information systems product lines, increased 11 percent to $106.0 million for
the third quarter of fiscal 1996 from $95.7 million for the same period last
year. The increase in hospital business revenue was due primarily to higher
sales of the Company's ventilator systems and oximetry product lines,
particularly in international markets.
For the third quarter of fiscal 1996, home care business sales, which include
the oxygen therapy, gas products and spirometry group; the sleep and respiratory
support systems group; and the Aero systems group, increased 6 percent to $62.5
million from $58.7 million for the same period last year due primarily to
revenue from the Company's recently acquired Pierre Medical subsidiary. Revenue
growth rates during the third quarter of fiscal 1996 across a number of the home
care business product lines were negatively impacted by the termination of the
Company's home care distributor network at the end of the second quarter, and
the transition to a newly integrated direct sales force. Because of these
significant changes in the Company's home care distribution channels, this
period of transition may continue to slow home care revenue growth rates in the
near term.
International revenue increased 17 percent to $50.0 million from $42.8 million
for the third quarter of fiscal 1995. International revenue growth was strongest
in the Company's European and Canadian markets. Favorable foreign currency
exchange rates accounted for 2 percentage points of the international revenue
growth during the third quarter.
Gross profit as a percentage of net revenue for the third quarter of fiscal 1996
was 52 percent compared to 50 percent for the same period last year due
primarily to the favorable effect which foreign currency exchange rates had upon
revenue, a slight shift in product mix to higher margin oximetry products, and
increased factory efficiency.
Page 10
<PAGE> 11
Operating expenses for the third quarter of fiscal 1996 decreased to 35 percent
of net revenue from 36 percent for the third quarter last year, primarily due to
the favorable effects of initial merger synergies and Puritan-Bennett's fourth
quarter fiscal 1995 workforce reduction program.
Research and development expenses at 8 percent of net revenue were comparable to
the third quarter of fiscal 1995. Research and development expenses increased in
absolute dollars due primarily to higher ventilator product development costs
and increased perinatal product clinical study expenses. For the third quarter
of fiscal 1996, selling, general, and administrative expenses, though increasing
in absolute dollars, decreased to 27 percent of net revenue from 29 percent for
the same period in fiscal 1995. Selling, general, and administrative expenses
increased in absolute dollars in the third quarter of fiscal 1996 due primarily
to operating expenses associated with the Company's newly acquired Pierre
Medical and Melville subsidiaries, and the unfavorable effect foreign currency
exchange rates had upon international operating expenses. As of March 31, 1996,
approximately 150 positions had been eliminated, primarily in the Company's
field sales and corporate administrative groups, as part of the workforce
consolidation following the merger of Nellcor and Puritan-Bennett.
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). The merger transaction
costs include expenses for investment banker and professional fees, and other
costs associated with completing the transaction. The costs to combine and
integrate operations include provisions for severance and severance-related
costs, facilities consolidations and other integration costs. The write-down of
certain intangible assets, primarily goodwill associated with prior acquisitions
made by both companies, results from the effect that certain integration
decisions have had upon the future realization of these assets.
Liquidity and Capital Resources
At March 31, 1996, the Company had cash, cash equivalents and marketable
securities of approximately $78.9 million compared to $143.5 million at the end
of fiscal 1995.
Operating activities provided positive cash flows of approximately $50.8 million
during the first nine months of fiscal 1996, exclusive of merger related cash
outlays. Of the $92.6 million in merger and related charges which were recorded
during the first quarter of fiscal 1996, approximately $32.4 million resulted in
a cash outlay and $25.9 was utilized for non-cash charges during the first nine
months. Approximately $30 million of the remaining merger and related costs
accrued at March 31, 1996 are expected to result in a cash outlay.
Sales and maturities of marketable securities were significant investing
activities during the first nine months of fiscal 1996. Additionally, in August,
1995, Nellcor Puritan Bennett's EdenTec subsidiary acquired for $4.9 million in
cash, Melville Software Ltd. (Melville), a privately held Canadian company that
manufactures and markets sleep diagnostic products used primarily in sleep labs.
In the event that certain profitability levels are achieved over the next three
fiscal years, additional compensation totalling $1.0 million would be payable to
the former principal stockholders of Melville who continue to manage the
company. Such amounts will be expensed when, and if, earned.
Shares of Nellcor Puritan Bennett common stock issued under the Company's stock
option plans were significant sources of cash from financing activities for the
first nine months of fiscal 1996. Additionally, the Company retired
approximately $70.3 million of the debt that it assumed as part of its merger
with Puritan-Bennett.
Page 11
<PAGE> 12
The Company's inventories have increased to $110.1 million at March 31, 1996,
from $89.0 million at July 2, 1995. Much of the increase in inventory occurred
from the period from February 1, 1995 to March 31, 1996, 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 new product introductions within the sleep
and respiratory support systems group.
On March 11, 1996, Nellcor Puritan Bennett and Infrasonics, Inc. (Infrasonics)
announced that they had entered into a definitive agreement for Nellcor Puritan
Bennett to acquire Infrasonics in a stock for stock merger valued at
approximately $66 million. Under the terms of the agreement, Infrasonics
stockholders will receive .095 shares of Nellcor Puritan Bennett common stock
for each outstanding share of Infrasonics common stock. This exchange ratio is
subject to adjustment based on the trading value of Nellcor Puritan Bennett
common stock in order that the value of the consideration to be received by
Infrasonics stockholders will not be less than $6.25 a share. Consummation of
the acquisition is subject to the approval of Nellcor Puritan Bennett's and
Infrasonics' stockholders. The merger is intended to qualify as a tax-free
reorganization and to be accounted for as a pooling of interests for financial
reporting purposes.
Infrasonics, headquartered in San Diego, CA is a respiratory equipment
manufacturer of neonatal, pediatric and adult ventilators and accessories. For
the fiscal year ended June 30, 1995, Infrasonics reported revenue of $23
million.
The Company anticipates that current capital resources combined with cash
generated from operating activities will be sufficient to meet its liquidity and
capital expenditure requirements at least through the end of fiscal 1997. As the
Company continues to combine and integrate operations as part of its acquisition
of Puritan-Bennett, it is expected that costs associated with the merger, as
well as other merger related cash outlays, will continue to contribute to a net
reduction in the Company's cash and cash equivalents and marketable securities
during fiscal 1997. The Company may use debt to fund certain capital and other
strategic opportunities when deemed necessary and financially advantageous.
BUSINESS CONSIDERATIONS
The Company is an 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 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
costs 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
acquisition opportunities from time to time. The integration of any businesses
that the Company might acquire could require substantial
Page 12
<PAGE> 13
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
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 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 outside the United States, 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, which is now a wholly-owned subsidiary of the Company, has been
subject to significant United States Food and Drug Administration ("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
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<PAGE> 14
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.
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 non-competitive. 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 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.
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<PAGE> 15
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.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
On May 3, 1996, Nellcor Puritan Bennett and several of its officers and members
of its Board of Directors received notice that they had been named as defendants
in a purported 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 Nellcor Puritan Bennett's business, particularly
about the acquisition of 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.
In July 1995, the U.S. Federal District Court in Delaware issued a decision in
favor of the Company, ruling that four key oximeter and sensor technology
patents are valid and would be infringed by Ohmeda, if Ohmeda sold either its
adult or neonatal OxyTip sensors for use with non-Ohmeda monitors. BOC has filed
an appeal of the decision of the court.
The Company filed a motion in July 1995 requesting an amendment to the Court's
judgment to issue an injunction against BOC to enjoin BOC from infringing the
patents. The Court denied the motion in October, 1995.
Except as noted above, neither the Company nor any of its subsidiaries is
involved in any material pending litigation other than ordinary routine
proceedings incident to their business.
ITEM 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
11.1 Statement of computation of net income per share.
27.1 Financial Data Schedule (filed electronically only)
b) Reports on Form 8-K.
Form 8-K dated March 8, 1996, filed March 21, 1996, announcing under
Item 5 ("Other Events") that Nellcor Puritan Bennett had entered into
an Agreement and Plan of Merger with Infrasonics pursuant to which
Nellcor Puritan Bennett would acquire Infrasonics through a merger of
Infrasonics into Nellcor Puritan Bennett.
Form 8-K filed on April 3, 1996, reporting under Item 5 ("Other
Events") the audited consolidated balance sheet of Nellcor Puritan
Bennett at July 2, 1995 and July 3, 1994, and related consolidated
statements of operations, of stockholders' equity, and of cash flows
for each of the three years in the period ended July 2, 1995.
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<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be filed on its behalf by the
undersigned thereunto duly authorized.
NELLCOR PURITAN BENNETT INCORPORATED
DATED May 15, 1996 By /s/ Michael P. Downey
-------------------- --------------------------------------------
Michael P. Downey
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 17
<PAGE> 18
EXHIBIT 11.1
NELLCOR PURITAN BENNETT INCORPORATED
STATEMENT OF COMPUTATION OF NET INCOME
PER SHARE
In thousands, except per share amounts, unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
------------------------------- ------------------------------
March 31, April 2, March 31, April 2,
1996 1995 1996 1995
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Computation of common
and common equivalent
shares outstanding:
Common stock 28,614 27,587 28,238 27,253
Common stock equivalents 1,033 352 1,010 541
------- ------- --------- -------
Common and common
equivalent shares used in the
calculation of net income
(loss) per share 29,647 27,939 29,248 27,794
======= ======= ========= =======
Net income (loss) $19,178 $11,418 $ (21,901) $33,727
======= ======= ========= =======
Net income (loss) per common and
common equivalent share $ 0.65 $ 0.41 $ (0.75) $ 1.21
======= ======= ========= =======
</TABLE>
Page 18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-07-1996
<PERIOD-START> JUL-03-1995
<PERIOD-END> MAR-31-1996
<CASH> 75,712
<SECURITIES> 3,169
<RECEIVABLES> 126,346
<ALLOWANCES> 2,308
<INVENTORY> 110,068
<CURRENT-ASSETS> 347,022
<PP&E> 262,778
<DEPRECIATION> 137,709
<TOTAL-ASSETS> 527,820
<CURRENT-LIABILITIES> 135,689
<BONDS> 0
0
0
<COMMON> 13,404
<OTHER-SE> 352,615
<TOTAL-LIABILITY-AND-EQUITY> 527,820
<SALES> 487,354
<TOTAL-REVENUES> 487,354
<CGS> 238,464
<TOTAL-COSTS> 238,464
<OTHER-EXPENSES> 265,828
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,911
<INCOME-PRETAX> (15,962)
<INCOME-TAX> 5,939
<INCOME-CONTINUING> (21,901)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,901)
<EPS-PRIMARY> (.75)
<EPS-DILUTED> (.75)
</TABLE>
