<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED October 6, 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
incorporation or organization) Identification No.)
4280 HACIENDA DRIVE
PLEASANTON, CALIFORNIA 94588
(Address of principal executive offices)
(Zip code)
TELEPHONE: (510) 463-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares of Common Stock, $.001 par value, outstanding as of
October 6, 1996 was 60,176,019.
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
NELLCOR PURITAN BENNETT INCORPORATED
CONSOLIDATED BALANCE SHEET
(In thousands, except share amount, unaudited)
<TABLE>
<CAPTION>
October 6, 1996 July 7, 1996
--------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 52,280 $ 68,549
Marketable securities 7,532 5,825
Accounts receivable 152,588 151,461
Inventories 145,906 128,078
Deferred income taxes 31,660 31,658
Other current assets 18,298 14,030
-------- --------
Total current assets 408,264 399,601
-------- --------
Property, plant and equipment 136,828 130,891
Intangible and other assets 48,365 44,245
Deferred income taxes 13,102 13,101
-------- --------
$606,559 $587,838
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Loans payable $ 10,022 $ --
Accounts payable 41,787 39,198
Employee compensation and related costs 22,724 29,918
Merger and related costs 28,356 32,452
Other accrued expenses 37,955 33,771
Current maturities of long-term debt 48 143
Income taxes payable 19,242 20,522
-------- --------
Total current liabilities 160,134 156,004
-------- --------
Long-term debt, less current maturities 6,402 6,493
Deferred compensation and pensions 9,747 9,522
Deferred revenue 8,071 10,039
-------- --------
Total liabilities 184,354 182,058
-------- --------
Stockholders' equity:
Common stock, par value 63 63
Additional paid-in-capital 232,770 230,428
Retained earnings 245,696 232,433
Accumulated translation adjustment 53 304
Notes receivable from stockholders (5) (5)
Net unrealized gain on available-for-sale securities 2,445 1374
Treasury stock, at cost (3,224,020 shares) (58,817) (58,817)
-------- --------
Total stockholders' equity 422,205 405,780
-------- --------
$606,559 $587,838
======== ========
</TABLE>
See accompanying note
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NELLCOR PURITAN BENNETT INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts, unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
----------------------------
October 6, October 1,
1996 1995
---------- ----------
<S> <C> <C>
Net revenue $160,626 $162,506
Cost of goods sold 82,109 80,837
-------- --------
Gross profit 78,517 81,669
Operating expenses:
Research
and development 12,130 12,758
Selling, general
and administrative 47,438 46,649
Merger and related costs 0 92,618
-------- --------
59,568 152,025
-------- --------
Income (loss) from operations 18,949 (70,356)
Interest income 720 1,931
Interest expense (179) (1,378)
Other income (expense), net (268) (690)
-------- --------
Income (loss) before income taxes 19,222 (70,493)
Provision (benefit) for income taxes 5,959 (11,494)
-------- --------
Net Income (loss) $ 13,263 $(58,999)
======== ========
Net income (loss) per common and
common equivalent share $.22 $(.97)
======== ========
Weighted average common
and common equivalent shares 61,471 60,684
======== ========
</TABLE>
See accompanying note
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NELLCOR PURITAN BENNETT INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
-----------------------------------
October 6, 1996 October 1, 1995
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 13,263 $(58,999)
Adjustments to reconcile net income (loss) to
cash used for operating activities:
Depreciation and amortization 7,401 8,229
Deferred income taxes 0 102
Merger and related charges 0 92,618
Deferred compensation and pensions 0 19
Other 225 (48)
Increases (decreases) in cash flows, net of effect
of purchased companies, as a result of changes in:
Accounts receivable 2,847 2,319
Inventories (16,004) (4,490)
Other current assets (4,204) (15,594)
Intangible and other assets 379 2,892
Accounts payable 1,037 (9,729)
Merger and related costs (4,086) (17,016)
Employee compensation and other accrued expenses (12,388) (1,681)
Income taxes payable (1,295) (4,685)
Deferred revenue (288) 0
------- ---------
Cash used for operating activities (13,113) (6,063)
Cash flows from investing activities:
Capital expenditures (9,467) (5,355)
Purchase of available-for-sale securities (1,800) (931)
Proceeds from maturities of securities held-to-maturity 0 19,218
Proceeds from the sale of available-for-sale securities 1,165 31,295
Acquisitions, net of cash acquired (5,236) (4,923)
Other investing activities (25) 0
-------- ---------
Cash provided by (used for) investing activities (15,363) 39,304
-------- ---------
Cash flows from financing activities:
Issuance of common stock under the Company's
stock plans and related tax benefits, net 2,342 10,170
Additions to loans payable 10,022 40,000
Repayment of long-term debt (187) (64,700)
-------- --------
Cash provided by (used for) financing activities 12,177 (14,530)
-------- --------
Effect of exchange rate changes on cash 30 (216)
-------- --------
(Decrease) increase in cash and cash equivalents (16,269) 18,495
Cash and cash equivalents at the beginning of the period 68,549 79,565
-------- --------
Cash and cash equivalents at the end of the period $ 52,280 $ 98,060
======== ========
</TABLE>
See accompanying note
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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 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 months ended October 6, 1996 are not
necessarily indicative of operating results for the full fiscal year.
Combined Financial Results. On June 27, 1996, the Company consummated its
acquisition of Infrasonics Incorporated (Infrasonics) in a stock for stock
merger. 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 the Company and Infrasonics.
The Company's consolidated statement of operations and cash flows for the three
months ended October 1, 1995 combine the financial results of Nellcor Puritan
Bennett's first quarter of fiscal 1996, the three months ended October 1, 1995,
with Infrasonics' first quarter of fiscal 1996, the three months ended
September 30, 1995. Adjustments made to conform the accounting policies of
Nellcor Puritan Bennett and Infrasonics were immaterial. Separate results for
each of Nellcor Puritan Bennett's and Infrasonics' first quarter of fiscal
1996, and combined results for the three months ended October 1, 1995, were as
follows (in thousands):
<TABLE>
<CAPTION>
Nellcor Puritan Bennett Infrasonics Combined
Three months ended: October 1, 1995 September 30, 1995 October 1, 1995
- ------------------- --------------- ------------------ -----------------
<S> <C> <C> <C>
Revenue $156,250 $6,256 $162,506
- ----------------------------------------------------------------------------------------------------------
Net Income (loss) $(59,302) $ 303 $(58,999)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
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.
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Interim fiscal 1997 and year-end fiscal 1996 inventory balances for the Company
were as follows (in thousands):
<TABLE>
<CAPTION>
October 6, 1996 July 7, 1996
--------------- ------------
<S> <C> <C>
Raw materials $ 70,928 $ 64,205
Work-in-process 9,759 15,579
Finished goods 65,219 48,294
-------- --------
$145,906 $128,078
</TABLE>
Statement of Cash Flows. The Company paid income taxes of approximately $7.2
million during the first three months ended October 1, 1996, and $4.9 million
during the first three months ended October 1, 1995.
Property and equipment. Depreciation expense was approximately $6.3 million in
the first three months of fiscal 1997 and $6.1 million in the first three
months of fiscal 1996.
Marketable securities. At October 6, 1996, the Company held available-for-sale
marketable securities with a fair market value of $7.5 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 period were not material. The difference
between the cost and market value of the Company's marketable securities at
October 6, 1996, an unrealized gain of approximately $2.4 million associated
with equity securities held by the Company, is recorded as a component of net
unrealized gain on available-for-sale marketable securities in stockholders'
equity.
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 of which approximately $80.5 million had been utilized as of
October 6, 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 ($41.2 million, of which $11.3 million was
associated with employee severance and benefits termination costs) and other
merger related costs ($3.2 million). The remaining merger and related costs
accrued at October 6, 1996 of $28.4 million, approximately $26.9 million of
which is expected to result in a cash outlay, should be substantially utilized
by the end of fiscal year 1997.
Employee severance and benefits termination costs included in the fiscal 1996
merger and related costs accrual were 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 October 6, 1996, approximately 187 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.
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Acquisition of Aequitron. On September 10, 1996, the Company and Aequitron
Medical, Inc. (Aequitron) announced that they had entered into a definitive
agreement for Nellcor Puritan Bennett to acquire Aequitron in a stock for stock
merger (valued at approximately $57 million based upon the October 6, 1996
closing stock price.) Under the terms of the amended agreement, Aequitron
stockholders will receive .432 of a share of Nellcor Puritan Bennett common
stock for each outstanding share of Aequitron common stock within a range
between $23.14 and $26.61 per share, subject to a maximum exchange ratio of
.588. Consummation of 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. The Company expects this transaction to close late in the
second quarter of fiscal 1997.
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 subsidiary, Crow River
Industries, Inc., 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.
Acquisition of Nellcor-CMI, Inc. On September 30, 1996, the Company acquired
the remaining 50 percent ownership interest in Nellcor-CMI, Inc. (NCI), its
Japanese joint venture, for $5.4 million in cash. The acquisition of the
remaining interest in NCI has been accounted for as a purchase and, accordingly,
NCI's results are included in the Company's financial statements subsequent to
the acquisition date.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS - FIRST QUARTER ENDED OCTOBER 6, 1996, COMPARED WITH THE
FIRST QUARTER ENDED OCTOBER 1, 1995.
The Company reported net income for the first quarter of fiscal 1997 of $13.3
million, or $0.22 per share, compared to net income of $15.0 million, $0.25 per
share, for the same period a year ago, exclusive of the effect of first quarter
fiscal 1996 one-time pretax merger and related charges of $92.6 million, ($1.22)
per share, associated with the Company's merger with Puritan-Bennett. Including
the after-tax effect of this one-time charge, the Company reported a net loss of
$59.0 million, or ($.97) per share.
The Company's net revenue for the first quarter of fiscal 1997 was $160.6
million, compared to net revenue of $162.5 million for the same period a year
ago.
Hospital product line sales, which include the oximetry, ventilator and clinical
information systems product lines, decreased 2 percent to $99.2 million for the
first quarter of fiscal 1997 from $100.9 million for the same period last year.
The decrease in hospital product line revenue was due primarily to the
transition in sales of Infrasonics products from independent distributors to the
Company's direct sales force and vacancies in the U.S. hospital sales force that
occurred during the quarter. These events, which particularly impacted sales of
the Company's critical care ventilators during the quarter, may continue to
affect overall hospital product line revenue growth rates in the near-term.
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For the first quarter of fiscal 1997, home care product line sales, which
include the products of the Oxygen Therapy, Gas Products and Spirometry Group
and the Global Sleep Solutions Group, decreased 1 percent to $53.0 million from
$53.3 million for the same period last year. The decrease in home care product
line sales was due primarily to the effect that renewed concerns over potential
reductions in government home oxygen therapy reimbursement levels had upon sales
of the Company's home oxygen therapy products.
Aero business sales were $8.5 million for the first quarter of fiscal 1997
compared to $8.2 million for the same period last year. International revenue
of $52.8 million was comparable to the first quarter of fiscal 1996. Foreign
currency exchange rates unfavorably impacted international revenue by 2
percentage points during the first quarter.
Gross profit as a percentage of net revenue for the first quarter of fiscal
1997 was 49 percent compared to 50 percent for the same period last year due
primarily to the unfavorable effect which foreign currency exchange rates had
upon revenue and lower international ventilator pricing.
Operating expenses for the first quarter of fiscal 1997 and the first quarter
of 1996 were 37 percent of net revenue, exclusive of the effect of the one-time
merger and related charges.
Research and development expenses at 8 percent of net revenue in the first
quarter of fiscal 1997 were comparable to the first quarter of fiscal 1996.
For the first quarter of fiscal 1997, selling, general, and administrative
expenses increased to 30 percent of net revenue from 29 percent for the same
period in fiscal 1996, due primarily to the slight decrease in revenue.
Operating expenses for the first three 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 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, resulted from the effect that certain
integration decisions had upon the future realization of these assets.
Liquidity and Capital Resources
At October 6, 1996, the Company had cash, cash equivalents and marketable
securities of approximately $59.8 million compared to $74.4 million at the end
of fiscal 1996.
Cash used for operating activities was approximately $9.0 million during the
first three months of fiscal 1997, exclusive of $4.1 million in merger related
cash outlays. Inventory growth and employee profit sharing payments during the
quarter were major contributors to this use of cash from operating activities.
The Company's inventories increased to $145.9 million at October 6, 1996, from
$128.1 million at July 7, 1996 due primarily to inventory buildups in advance
of product line relocations and factory consolidations, certain new product
introductions, and lower than planned sales levels.
In September 1996, the Company acquired the remaining 50 percent ownership
interest in Nellcor-CMI, Inc. (NCI), its Japanese joint venture, for $5.4
million in cash. As part of completing this acquisition, the Company increased
its short-term borrowings by $10 million during the quarter.
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On September 10, 1996, the Company and Aequitron Medical, Inc. (Aequitron)
announced that they had entered into a definitive agreement for Nellcor Puritan
Bennett to acquire Aequitron in a stock for stock merger (valued at
approximately $57 million based upon the October 6, 1996, closing stock price.)
Under the terms of the amended agreement, Aequitron stockholders will receive
.432 of a share of Nellcor Puritan Bennett common stock for each outstanding
share of Aequitron common stock within a range between $23.14 and $26.61 per
share, subject to a maximum exchange rate of .588. Consummation of 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. The Company
expects this transaction to close late in the second quarter of fiscal 1997.
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 subsidiary, Crow River
Industries, Inc., 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.
The Company anticipates that current 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 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. 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
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.
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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.
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 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 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.
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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.
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 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.
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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.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
From time to time the Company has received, and in the future may receive,
notice of claims against it, which in some instances have developed, or may
develop, into lawsuits. The claims may involve such matters, among others, as
product liability, patent infringement, and employment- related claims. In
management's opinion, the ultimate resolution of claims currently pending will
not have a material adverse effect on the Company's financial position or
results of operations.
On May 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 the merger with
Puritan-Bennett and the integration of Nellcor and Puritan-Bennett. The Company
filed a demurrer to this action which was sustained on October 9, 1996 with
leave to amend. Plaintiffs filed an amended complaint on November 1, 1996. 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, a subsidiary of BOC, if
Ohmeda sold either its adult or neonatal OxyTip sensors for use with non-Ohmeda
monitors. BOC had filed a suit against the Company in December 1992, seeking a
declaratory judgment that Nellcor's patents were invalid and would not be
infringed. BOC filed an appeal of the District Court's decision with the Court
of Appeals Federal Circuit. On September 13, 1996, the Court of Appeals
affirmed the District Court's decision.
ITEM 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
27.1 Financial Data Schedule (filed electronically only)
b) Reports on Form 8-K.
Form 8-K dated September 9, 1996, filed September 9, 1996, reporting
the entering into by the Company and Aequitron Medical, Inc. of an
Agreement and Plan of Merger dated as of September 9, 1996 pursuant to
Item 5 ("Other Event").
Page 13
<PAGE> 14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be filed on its behalf by the
undersigned thereunto duly authorized.
NELLCOR PURITAN BENNETT INCORPORATED
DATED November 19, 1996 By /s/ Michael P. Downey
-------------------------------
Michael P. Downey
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 14
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