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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 7, 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)
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DELAWARE 94-2789249
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4280 HACIENDA DRIVE
PLEASANTON, CALIFORNIA 94588
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 463-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
PREFERRED SHARE PURCHASE RIGHTS
(TITLE OF CLASS)
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 __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Approximate aggregate market value of the registrant's Common Stock held by
non-affiliates (based on the closing sales price of such stock as reported in
the Nasdaq National Market) on September 3, 1996 was $1,507,278,603.*
Number of shares of Common Stock outstanding as of September 3, 1996 was
59,915,374.**
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENT FORM 10-K PART
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(1) Annual Report to Stockholders for Fiscal Year Ended July 7, 1996 I, II, IV
(2) Proxy Statement for Annual Meeting of Stockholders scheduled to be held on III
October 17, 1996
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* Excludes 515,232 shares of Common Stock held by all directors and executive
officers at September 3, 1996. Exclusion of such shares should not be
construed to indicate that any such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of
the registrant or that such person is controlled by or under common control
with the registrant.
** On June 27, 1996, the registrant's stockholders approved a two-for-one stock
split of the registrant's Common Stock.
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THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WHICH
ARE SUBJECT TO CHANGES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
DESCRIBED IN ANY SUCH FORWARD-LOOKING STATEMENT. RISKS INHERENT IN NELLCOR
PURITAN BENNETT INCORPORATED'S BUSINESS AND FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, WITHOUT LIMITATION, THOSE DISCUSSED
UNDER "BUSINESS CONSIDERATIONS" BELOW BEGINNING ON PAGE 17.
PART I
ITEM 1. BUSINESS.
GENERAL
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 designs, manufactures and markets a
comprehensive line of products for the monitoring, diagnosis and treatment of
the respiratory-impaired patient across the spectrum of acute, alternate and
home care. The Company's product lines include pulse oximetry monitors and
sensors, critical care and portable ventilators, home oxygen therapy products
such as liquid oxygen systems and oxygen concentrators, sleep apnea diagnostic
and therapy products and medical gas products and distribution systems. Through
its wholly-owned subsidiary, Puritan-Bennett Aero Systems Co., the Company also
manufactures and markets emergency oxygen systems, passenger service units and
video systems for aircraft.
The Company's products are sold worldwide, principally through a direct
sales force, assisted by clinical consultants and specialists, corporate account
managers and independent distributors.
FISCAL YEAR 1996 AND RECENT DEVELOPMENTS
Acquisitions
On September 10, 1996, the Company announced that it had entered into an
Agreement and Plan of Merger to acquire Aequitron Medical, Inc. (Aequitron) by
means of a stock for stock merger of Aequitron into the Company. On June 27,
1996, the Company completed its acquisition of Infrasonics, Inc. (Infrasonics)
pursuant to the terms of a Restated Agreement and Plan of Merger dated as of
March 10, 1996. On August 25, 1995, the Company completed its acquisition of
Puritan-Bennett. In August 1995, the Company acquired Melville Software Ltd., a
privately held Canadian manufacturer of sleep diagnostic products used in sleep
labs. See "Acquisitions" below.
Products
During the fourth quarter of fiscal year 1996, the Company received
marketing clearance from the United States Food and Drug Administration (FDA)
for two new additions to the NELLCOR SYMPHONY (TM) patient monitoring system: a
three-lead electrocardiogram (ECG) monitoring option for the NELLCOR SYMPHONY
N-3000 pulse oximeter; and the N-3200 display/printer for viewing and printing
ECG and other parameters. The ECG monitoring option on the N-3000 expands the
versatility of the Company's most advanced pulse oximeter. The N-3200
display/printer provides the benefits of a high-resolution display and printouts
of waveforms and trends for any of the NELLCOR SYMPHONY monitors.
During the fourth quarter, the Company also received marketing clearance
from the FDA for the GOODKNIGHT (TM) 318 home-based therapeutic system for sleep
apnea. The system is quiet, lightweight, easy to use and includes a
high-efficiency reusable air filter. It also features an auto-sensing power
supply enabling it to adapt easily to varying electrical systems. An optional
compliance meter is also available to determine system utilization.
The Company released for sale during the fourth quarter of fiscal year
1996, the DURATION (TM) extended-use heat and moisture exchange device (HME) for
use with patients requiring ventilator support. The DURATION HME attaches to a
breathing tube and provides humidified air, simulating the effects of
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normal breathing. Unlike the 24-hour use recommended for conventional HME
systems, the DURATION HME can provide humidification continuously for up to
seven days, thereby reducing circuit breaks, material and labor costs and,
potentially, infection levels.
During the third quarter of fiscal year 1996, the Company received
marketing clearance from the FDA for two products used in the detection and
treatment of obstructive sleep apnea. The OXIFLOW (TM) Recording System combines
the Company's oximetry and apnea recording technology to record oxygen
saturation, airflow and pulse rate, three important respiratory parameters
during sleep, providing an effective, low-cost screening device for obstructive
sleep apnea. The KNIGHTSTAR (TM) 335 Respiratory Support System can be used in a
wide variety of settings ranging from the hospital to the sleep lab to the home
to assist breathing in patients suffering from obstructive sleep apnea or
respiratory insufficiency.
During the third quarter, the Company also announced commercial
availability of the KNIGHTSTAR 320B Bi-Level System, a respiratory assistance
device for use in the home by patients requiring high, continuous positive
airway pressure (CPAP) levels to treat periods of obstructive sleep apnea. The
320B system enhances patient comfort by offering two levels of pressure support.
During the second quarter of fiscal year 1996, the Company received
marketing clearance from the FDA for the GOODKNIGHT 314 Nasal CPAP System
designed for use in the home to treat adults with obstructive sleep apnea. The
system is lightweight, quiet, easy to use and offers a cost effective solution
for managed care providers. The device includes a reusable, high efficiency
filter that reduces the cost of replacing disposable filters.
Technology Licenses
During the fourth quarter of fiscal year 1996, the Company entered into an
agreement with Hewlett-Packard Company (HP) whereby the Company would license to
HP its proprietary fetal oximetry technology. Under the agreement, HP will use
the Company's software algorithms, calibrations and fetal sensors for measuring
fetal oxygen saturation in future integrated HP fetal/maternal monitors. The
Company believes that fetal pulse oximetry can help clinicians make
better-informed decisions regarding the status of a fetus during labor and
delivery by providing information that helps them determine if the fetus is
adequately oxygenated when the heart-rate pattern is non-reassuring.
Litigation
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, Inc. (Healthdyne) 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 Company and several of its officers and members of its Board of
Directors received notice on May 3, 1996 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
has filed a demurrer to the action and this motion is currently pending. 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. (Ohmeda), a
subsidiary of BOC Health Care, Inc. (BOC), if Ohmeda sold either its adult or
neonatal
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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.
Capitalization
On June 27, 1996, the Company effected a two-for-one stock split of the
Company's common stock. All share and per share amounts presented herein have
been adjusted to give effect to the stock split.
International
On September 30, 1996, the Company purchased from Century Medical, Inc. the
remaining 50 percent ownership interest in Nellcor-CMI, Inc. (NCI), the
Company's joint venture in Japan. NCI is now a wholly-owned subsidiary of the
Company. With the greater level of investment in NCI and increased management
involvement and marketing resources, the Company expects to pursue more
aggressively opportunities for its products in Japan.
ACQUISITIONS
The Company has established the strategic objectives of focusing on the
diagnosis, monitoring and treatment of the respiratory-impaired patient across
the global continuum of care and of growing through product line extensions,
other internal developments and through acquisitions and strategic combinations
in order to broaden its product line and enhance its competitive position. The
following transactions are in furtherance of the Company's objectives.
Aequitron Medical, Inc.
On September 10, 1996, the Company announced that it had entered into an
Agreement and Plan of Merger to acquire Aequitron Medical, Inc. (Aequitron) by
means of a stock for stock merger of Aequitron into the Company. Under the terms
of the agreement, Aequitron shareholders will receive a fraction of a share of
Company common stock for each outstanding share of Aequitron common stock. The
exchange ratio is tied to the average of the closing prices of the Company's
common stock for the ten trading days preceding the fifth trading day before the
Aequitron shareholders' meeting to approve the transaction, subject to a maximum
exchange ratio of 0.440. The Agreement contemplates that the acquisition would
qualify as a tax-free reorganization and a pooling-of-interests for tax and
financial reporting purposes. Consummation of the acquisition is subject to the
approval of Aequitron's shareholders and the satisfaction of certain other
conditions contained in the Agreement and Plan of Merger.
Aequitron is a leading producer of medical electronic respiratory products
for home health care and hospital use, and wheelchair lifts and automobile hand
controls for people who face mobility challenges. Aequitron, headquartered in
Minneapolis, Minnesota, reported revenue of $38.5 million for the fiscal year
ended April 30, 1996. The Company believes that Aequitron's product line
complements its existing product lines and includes compact, portable
ventilators which fill an important gap in the Company's ventilator product
line. The acquisition of Aequitron, the Company believes, will allow it to have
the broadest ventilator product line in the medical device industry.
Infrasonics
On June 27, 1996, the Company acquired Infrasonics in a stock-for-stock
merger. Under the terms of the Agreement and Plan of Merger, Infrasonics
shareholders received .12 share of Company 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 Infrasonics common
stock were assumed by the Company and converted into options to acquire
approximately 130,000 shares of Company common stock. Infrasonics is a
respiratory
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equipment manufacturer of infant and adult ventilators and accessories and
filled a gap in the Company's product lines with its infant and high frequency
ventilators.
Puritan-Bennett Corporation
On August 25, 1995, the Company completed the acquisition of
Puritan-Bennett. Under the terms of the Agreement and Plan of Merger,
Puritan-Bennett shareholders received .88 share of Company common stock for each
Puritan-Bennett share, resulting in the Company issuing approximately 23.2
million shares, valued at approximately $600 million based on 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 Company common stock. The Company
believes that the acquisition of Puritan-Bennett represented the combination of
market leaders in patient safety monitoring and respiratory products to create
the preeminent company serving the needs of the respiratory impaired patient
worldwide.
Melville Software
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, including SANDMAN (TM), a line of sleep
disorder diagnostic systems sold primarily in the United States and Canada.
PRODUCTS
The Company believes that it provides the most comprehensive line of
products for the monitoring, diagnosis and treatment of the respiratory-impaired
patient across the spectrum of acute, alternate and home care. The Company's
product lines include pulse oximetry monitors and sensors, critical care and
portable ventilators, home oxygen therapy products, sleep apnea diagnostic and
therapy products and medical gas products and distribution systems. The
following is a summary description of the Company's products.
HOSPITAL BUSINESS PRODUCT LINES
OXIMETRY PRODUCTS
Instruments
The Company's principal oximetry instruments are the N-180, N-185 and N-200
pulse oximeters and the N-20 and N-30 portable pulse oximeters. The N-180, N-185
and N-200 pulse oximeters provide continuous monitoring of arterial blood oxygen
saturation and heart rate and are designed for use in all areas of the hospital,
including intensive care units, intermediate care and step-down units and
general care floors, and in the alternate site care market, including
surgicenters, subacute care and skilled nursing facilities and the home.
The Company's N-20 and N-30 portable pulse oximeters provide periodic (and
in the case of the N-30, temporary continuous) monitoring of arterial blood
oxygen saturation and heart rate and are designed for use in areas of the
hospital and the alternate site care market where continuous monitoring is not
necessary or viable, for example, on the general care floor, in the home and in
prehospital, emergency care and ambulatory settings.
The Company is planning to expand into the labor and delivery market with
the N-400 fetal pulse oximeter, a product for monitoring the blood oxygen
saturation of a fetus during labor and delivery. The Company believes that the
information provided by the N-400 will aid obstetricians significantly in
evaluating fetal well-being. During the second quarter of fiscal year 1995, the
Company began limited shipments of the N-400 fetal pulse oximeter in Europe.
In the first quarter of fiscal year 1994, the FDA notified the Company that
the N-400 fetal pulse oximeter must be submitted for approval for marketing
clearance in the United States under Premarket Approval Application (PMA)
regulations and not under the 510(k) premarket notification clearance process. A
PMA application, compared to the 510(k) procedures, requires more laboratory and
clinical testing data and more
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detailed design and manufacturing information, and therefore, requires more time
for the gathering of data and preparation of the PMA application. Historically,
the time elapsed between the submission of a PMA application and receipt of
premarket approval is significantly longer than that for clearance to market
under the 510(k) procedures. Since being informed of the need to file a PMA for
the N-400, the Company focused on finalizing an IDE protocol to be used in the
conduct of United States clinical trials of the N-400. In the fourth quarter of
fiscal year 1995, the Company filed an application for an IDE for the N-400 with
the FDA. Clinical trials, which will evaluate the N-400 fetal pulse oximeter as
a tool to reduce Cesarean sections, are underway. Given the uncertainties and
delays associated with the FDA and the PMA process, there can be no assurance
that the Company will receive approval from the FDA to market the N-400 in the
United States or, when such approval, if it is granted, can be expected. For a
summary discussion of the FDA regulatory framework, see "Regulatory Matters" and
"Business Considerations" below.
OEM Modules
The Company's OEM oximetry modules are sold to manufacturers of
multi-parameter monitoring systems which incorporate the Company's oximetry
technology into their own systems. See "Competition" below. The Company
currently has agreements with 49 OEM customers. These customers include medical
equipment manufacturers in the United States, Europe, Asia, Japan and Latin
America. During fiscal year 1996, 14 new OEM agreements were entered into with,
among others, Hellige GmbH, Nascor Pty. Ltd., NEC Corporation, Vivisol S.R.L.
and Spegas Industries Ltd.
Multi-function Monitors/Systems
During the fourth quarter of fiscal year 1995, the Company received
marketing clearance from the FDA for the first two modules of the NELLCOR
SYMPHONY monitoring system, the N-3000 pulse oximeter and the N-3100 noninvasive
blood pressure monitor. The NELLCOR SYMPHONY monitoring system is designed for
use primarily in noncritical care areas throughout the hospital, particularly on
the general care floor, as well as in alternate care settings. The N-3000
incorporates OXISMART (TM) advanced signal processing and alarm management
technology and is designed to address the problem of nuisance alarms by
identifying and rejecting artifacts caused by patient movement or electronic and
optical noise interference, resulting in enhanced performance in high-motion,
low-perfusion patient environments. The N-3100 blood pressure monitor
incorporates advanced noninvasive blood pressure monitoring and employs
clinically proven oscillometric technology.
During the fourth quarter of fiscal year 1996, the Company received
marketing clearance from the FDA for two new additions to the NELLCOR SYMPHONY
monitoring system: a three-lead ECG monitoring option for the N-3000 pulse
oximeter; and the N-3200 display/printer for viewing and printing ECG and other
parameters. The ECG monitoring option on the N-3000 expands the versatility of
the Company's most advanced pulse oximeter, which can be used as a standalone
monitor or in combination with other NELLCOR SYMPHONY monitors. The N-3200
display/printer provides the benefits of a high-resolution display and printouts
of waveforms and trends for any of the NELLCOR SYMPHONY monitors. The N-3200 can
be shared among several NELLCOR SYMPHONY monitors, offering flexibility and cost
efficiency. The display and print formats can be configured for individual
preferences and offer a choice of seven languages for viewing data.
The Company's ULTRA CAP (R) N-6000 combination pulse oximeter/capnograph
combines pulse oximetry with advanced carbon dioxide monitoring technology.
While providing continuous monitoring of arterial blood oxygen saturation, the
N-6000 also measures the concentration of carbon dioxide in a patient's breath.
In some clinical situations, abnormal patterns and levels of carbon dioxide may
indicate a ventilation problem before blood oxygen levels become depressed. The
ULTRA CAP monitor is designed for use primarily in critical care settings,
particularly intensive care units, hospital emergency rooms and post-anesthesia
care units, and can be used in other hospital settings such as the operating
room and during intra-hospital transport. Pryon Corporation (Menomonee Falls,
Wisconsin) designed and manufactures the ULTRA CAP for Nellcor on a private
label basis.
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The Company's OXINET (R) II central station network is designed for use in
hospital and alternate care settings and allows for the continuous monitoring of
up to thirty patients from one centralized location using NELLCOR SYMPHONY
monitors and a central computer display.
Oximetry Sensors
The Company produces and sells a full line of proprietary adhesive (patient
dedicated) and reusable oxygen transducers (reusable sensors) for use with the
Company's own instruments, monitors and monitoring systems incorporating the
Company's OEM oximetry module, and monitors and monitoring systems licensed to
use the Company's sensors. The Company's sensors include the adhesive (patient
dedicated) OXISENSOR (R) II line of sensors, the combination adhesive/reusable
OXICLIQ (R) sensor line and reusable sensors such as the DURASENSOR (R),
DURA-Y (R), and OXIBAND (R) oxygen transducers. During fiscal year 1996, the
Company expanded its sensor recycling program which now includes more than 500
hospitals in the United States. Hospitals participating in the recycling program
are able to reduce sensor costs and medical waste by purchasing adhesive sensors
that have been returned to the Company for recycling. The recycling process
consists of re-manufacturing, testing and sterilization of the sensors.
End-Tidal CO(2) Detector/Indicator
The Company's EASY CAP (R) and PEDI-CAP (TM) end-tidal CO(2) detectors are
disposable, noninvasive carbon dioxide detection devices used in emergency
departments, on resuscitation carts and during patient transport. These
single-use devices contain a specially-impregnated paper which reacts to the
presence of carbon dioxide by changing color and provide a quick and easy way to
verify and monitor correct endotracheal tube placement during emergency
situations. The STAT CAP (R) airway CO(2) indicator is a small (hand-held),
light-weight, electronic instrument that provides a semi-quantitative estimate
(a numerical range) of end-tidal CO(2). Its durability, portability and long
battery life make the STAT CAP indicator particularly well-suited for use in
emergency care and transport, both in the hospital and ambulance. The STAT CAP
can assist clinicians in verifying proper placement of an endotracheal tube and
can be used in emergency situations to evaluate ventilation or effectiveness of
cardio pulmonary resuscitation.
In fiscal year 1996, sales of the Company's oximetry products, which
include oximetry instruments (including the N-3000 pulse oximeter), sensors and
OEM modules, accounted for more than thirty five percent of the Company's net
revenue. This is comparable to the portion of the Company's net revenues
accounted for by sales of oximetry products in each of fiscal years 1995 and
1994.
VENTILATOR AND RELATED PRODUCTS
7200 (R) Series Ventilator System
The 7200 Series ventilator system is a critical care ventilator purchased
primarily by hospitals to assist or manage patient respiration in a variety of
acute care settings. The 7200 Series ventilator is designed to ease the work of
patient breathing and lessen patient discomfort. It automatically performs
pulmonary function diagnostic tests and reduces therapists' time attending to
patients and preparing the ventilator for patient use. The 7200 Series
Ventilator is finding increasing use in sub-acute care settings, where
chronically Ventilator-dependent patients, who are otherwise stable, require
sophisticated ventilation modes to improve the prospects of weaning. The 7200
Series ventilator is sold in three basic configurations to cover the wide range
of cost/performance applications and provides upgrade paths to incorporate new
options as they become available.
INFANT STAR (TM) Ventilators
The INFANT STAR Ventilator, the first demand-flow ventilator based on
microprocessor technology, can be used on premature and fully-developed infants
and children and incorporates solid-state pressure transducers that precisely
regulate airflow. The INFANT STAR Ventilator was the first ventilator designed
with a self-contained battery and battery charger to provide uninterrupted
operation during periods of
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electrical brownout or power failure. The Company offers an upgrade package for
this system to permit high frequency ventilation (HFV).
The INFANT STAR High Frequency Ventilator (HFV Star) has computer software
enhancements that allow conventional and/or high frequency ventilation.
Conventional infant ventilators have breathing rates of up to 150 breaths per
minute. These low breathing rates, which are accompanied with high and
relatively long duration pressures, can result in damage to an infant's lung
tissue and respiratory trauma. The HFV Star delivers up to 1,320 breaths per
minute with relatively low and very short duration pressures.
ADULT STAR (TM) Ventilators
The ADULT STAR Ventilator is similar to the INFANT STAR Ventilator except
that it delivers a fixed volume of air/oxygen, precisely controlled by
microprocessors and solid-state pressure transducers. The ADULT STAR Ventilator
also collects and displays patient data such as breathing rate, volume of air
delivered, trends in ventilation parameters and pulmonary mechanics. This data
allows clinicians to monitor certain longer term changes in a patient's
breathing condition and to adjust ventilation and treatment accordingly. The
ADULT STAR High Frequency Ventilator is a fully microprocessor controlled,
pressure-preset, time cycled, high frequency ventilator. It delivers from 60 to
600 breaths per minute while monitoring airway temperature, oxygen concentration
and pressure.
COMPANION (R) 2801 Portable Ventilator
The COMPANION 2801 Portable Ventilator is marketed and sold outside the
United States for patients requiring breathing assistance as a result of
neuromuscular disease, chronic obstructive pulmonary disease or spinal cord
injury. The COMPANION 2801 Portable Ventilator is compact in size, operates from
either AC power or 12VDC battery power and incorporates an internal battery for
short-term emergency power outages. The COMPANION 2801 Portable Ventilator can
be used at the patient's bedside, mounted on wheelchairs or in automobiles and
airplanes. Portable ventilators offer a reduced cost alternative to hospital
care for patients who can be discharged to their home or a skilled nursing
facility or other alternate care site. The Company manufactures the COMPANION
2801 Portable Ventilator in the Republic of Ireland.
7250 (R) Metabolic Monitor
Metabolic monitoring is the measurement of oxygen consumption and carbon
dioxide production to determine patient nutritional requirements and metabolic
status. The 7250 Metabolic Monitor measures a patient's inspired oxygen and
carbon dioxide and compares these measurements with the patient's expired oxygen
and carbon dioxide. From such measurements and the volume of inspired and
expired gas, the 7250 Metabolic Monitor calculates oxygen consumption and carbon
dioxide production. From these calculated parameters, the monitor can determine
values used for deciding daily caloric intake needs. Metabolic monitoring, in
general, is a tool for detecting and monitoring conditions that can affect
clinical outcomes such as nutritional support, drug titration and respiratory
muscle workload, and that can affect weaning from mechanical ventilation. The
7250 Metabolic Monitor can be integrated with the 7200 series ventilator, is
relatively simple to use and provides more accurate, continuous measurements of
a patient's energy expenditure.
In fiscal year 1996, sales of the Company's ventilator products accounted
for more than twenty percent of the Company's net revenue. This is comparable to
the portion of the Company's net revenues accounted for by sales of ventilator
products in fiscal year 1995. In fiscal year 1994, sales of the Company's
ventilator products accounted for approximately twenty four percent of the
Company's net revenues.
CLINIVISION (R)
CLINIVISION is a personal, computer-based, patient care and respiratory
therapy department management information system that integrates the patient
data captured and processed by the 7200 series ventilator, as well as other
clinical data, into a management information system that can be used by
respiratory therapy department directors and therapists to manage and monitor
patient care and staffing requirements. Once
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interfaced to the host hospital's information system, CLINIVISION electronically
handles admitting, discharge, transfer, and order entry data, as well as
transmitting billing and results reporting. RADIOLINK (TM) 3.0 allows users to
transfer new work orders or work order changes to therapists while working in
remote parts of the hospital. The RADIOLINK product uses spread spectrum radio
frequency transmission, adding cable-free data communication capabilities to the
CLINIVISION system. With RADIOLINK 3.0, the Company has also added electronic
mail, allowing supervisors to relay messages from any workstation to therapists
on the floor. PHONELINK (TM) 2.0 allows therapists to download information from
any phone, rather than having to return to the hospital or office to transfer
information. CLINIVISION "Lite" is an entry level, lower cost single workstation
system that enables smaller hospitals to take advantage of productivity tools
they need but without as substantial a capital outlay.
HOMECARE BUSINESS PRODUCT LINES
OXYGEN THERAPY
Oxygen Concentrators
The Company's principal home oxygen therapy products are oxygen
concentrators and liquid oxygen systems. The COMPANION (R) 492a and 590 oxygen
concentrators (four and five liter per minute capacity units) extract oxygen
from room air and provide a supply of oxygen to home-bound patients who require
a continuous supply of oxygen and whose prescribed flow rates do not exceed five
liters per minute. The COMPANION 492a and 590 oxygen concentrators incorporate
an optional OCI (TM) indicator (Oxygen Concentration Indicator) that
continuously monitors the oxygen percentage of the output of the device and
alerts the patient in the event of performance degradation, automatically
shutting the device down in the event of significant deterioration. In the event
of such a shut down, the patient reverts to an alternate supply of oxygen. By
utilizing an oxygen concentrator at home, a patient reduces the frequency with
which a finite oxygen supply needs to be renewed. The OCI indicator option on
the COMPANION 492a and 590 allows a home care provider to verify over the phone
that the concentrator is generating high oxygen concentrations, detect problems
early before they become expensive and reduce trips for routine filter
replacement.
Liquid Oxygen Systems
For patients requiring a continuous supply of oxygen, the Company also
manufactures several liquid oxygen systems. Liquid oxygen systems store oxygen
at a very low temperature in liquid form. The Company's stationary unit can be
refilled at home and can be used to fill a portable device, thereby permitting
enhanced patient mobility. The COMPANION 550 ambulatory unit for mobile patients
utilizes a proprietary, pneumatic oxygen conserving device that requires no
batteries and is significantly smaller and lighter than its predecessor, while
providing essentially the same duration of use. The COMPANION or Mark "Low Loss"
Oxygen Reservoir is designed to refill portable liquid oxygen units for extended
periods of time with reduced evaporation loss.
Gas Products
The production and distribution of medical gases represents the Company's
oldest product line. The Company is the largest producer of nitrous oxide in
North America. This gas is used in anesthesia and analgesia and is sold by the
Company under its own label and through distributors. The Company also
distributes other medical gases, including oxygen, Sodalime (used to absorb
CO(2) during anesthesia) and special gas mixtures that are used for calibration,
testing, and other purposes. The Company also manufactures the hospital
distribution systems for medical gases.
Spirometry
The RENAISSANCE (R) Spirometry System is used to test lung function in
patients with asthma and other breathing impairments. The RENAISSANCE Spirometry
System consists of the PB100 Spirometer, a small, hand held spirometer that
offers true portability, and a base station used for downloading patient
information to a choice of printers, along with the option of sending patient
data to a computer. RENAISSANCE
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Spirometry System's patient data memory card and the rechargeable batteries
allow testing of multiple patients at off-site locations.
In fiscal year 1996, sales of the Company's oxygen therapy products
accounted for more than twenty percent of the Company's net revenue. This is
comparable to the portion of the Company's net revenues accounted for by sales
of oxygen therapy products in each of fiscal years 1995 and 1994.
GLOBAL SLEEP SOLUTIONS GROUP
During the past year, the Company combined five sleep medicine business
units to create the Global Sleep Solutions Group to offer the broadest available
product line for monitoring, diagnosing and treating patients with sleep
disorders, as well as those requiring chronic ventilatory support.
Sleep Diagnostic Products
The Company designs, manufactures and markets infant and adult apnea
monitors, recorders and diagnostic systems for use in the hospital and the home.
The Company's ASSURANCE(R) 2000 Heart and Respiration Monitor provides
continuous noninvasive monitoring to detect central apnea, slow breathing, and
slow and fast heart rate. The addition of the EDENTREND(R) Memory Module to the
ASSURANCE 2000 enables the monitor to record, store and report alarm events for
up to 45 days. In the second quarter of fiscal year 1994, the Company introduced
for sale outside of the United States the ASSURANCE(R) 3000 Heart and
Respiration Monitor. The ASSURANCE 3000 Heart and Respiration Monitor has more
memory than the ASSURANCE 2000 and is lighter and more compact.
The Company's EDENTRACE II (TM) Recording System is designed to assist in
the diagnosis of sleep apnea in sleep labs, hospitals, clinics and the home. The
recording system monitors and records heart rate, respiratory effort, airflow,
oxygen saturation with motion annotation, body position and snoring sounds. The
EDENTRACE II PLUS Recording System, like the EDENTRACE II, is designed to assist
in the diagnosis of sleep apnea. However, the EDENTRACE II PLUS Recording System
can be used on infants as well as adults. The Company also markets the
EDENTRACE(R) Analysis Software for use with the EDENTRACE II and the EDENTRACE
II PLUS Recording Systems to aid clinicians in the archiving, retrieval and
analysis of patient data.
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, including the SANDMAN (TM)
polysomnography system, a flexible computer software based product used in sleep
labs that is capable of recording up to 64 physiological parameters.
During the third quarter of fiscal year 1996, the Company received
marketing clearance from the FDA for the OXIFLOW Recording System which combines
the Company's oximetry and apnea recording technology to record oximetry,
airflow and pulse rate, three important respiratory parameters during sleep,
providing an effective, low-cost screening device for obstructive sleep apnea.
Sleep Therapy Products
The Company manufactures the KNIGHTSTAR 320 I/E BI-LEVEL (TM) Respiratory
System, a therapeutic device for patients with adult sleep apnea, the temporary
cessation of breathing while asleep and requiring higher respiratory pressures
to overcome airway obstruction.
During the fourth quarter of fiscal year 1996, the Company received
marketing clearance from the FDA for the GOODKNIGHT 318 home-based therapeutic
system for obstructive sleep apnea. The system is quiet, lightweight, easy to
use and includes a high-efficiency reusable air filter. It also features an
auto-sensing power supply enabling it to adapt easily to varying electrical
systems. An optional compliance meter is also available to determine system
utilization.
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During the third quarter, the Company received marketing clearance from the
FDA for the KNIGHTSTAR 335 Respiratory Support System, a non-invasive ventilator
which can be used in a wide variety of settings ranging from the hospital to the
sleep lab to the home and assists breathing in patients suffering from
obstructive sleep apnea or respiratory insufficiency.
During the third quarter, the Company also announced commercial
availability of the KNIGHTSTAR 320B Bi-Level System, a respiratory assistance
device for use in the home by patients requiring high, continuous positive
airway pressure (CPAP) levels to treat periods of obstructive sleep apnea. The
320B enhances patient comfort by offering two levels of pressure support.
In late January 1994, the Company acquired SEFAM S.A. (SEFAM), a French
manufacturer of sleep diagnostic and therapeutic products. SEFAM products
include the REM+ CONTROL CPAP device for treating sleep disorders and the
RESPISOMNOGRAPHE and the MINISOMNO (TM) diagnostic systems used by hospital
sleep labs and home care providers.
In May 1995, the Company acquired Pierre Medical, S.A (Pierre Medical).
Pierre Medical manufactures and markets noninvasive ventilators, sleep apnea
therapy systems, oxygen concentrators and related respiratory products for sale
in Western Europe, primarily in France and Germany. Its products include the
O'MEGA (TM) oxygen concentrator for patients requiring supplemental oxygen, the
O'NYX (TM) noninvasive ventilator that provides bilevel pressure (ventilation)
for patients who have difficulty breathing, and the MORPHEE PLUS (TM)
computerized, nasal CPAP device that administers air pressure to a patient's
airway, via nasal mask, for treatment of obstructive sleep apnea. The Company
may seek United States marketing clearance for select Pierre Medical products.
AERO SYSTEMS
Through its wholly-owned subsidiary, Puritan-Bennett Aero Systems Co.
(Aero), the Company also manufactures and markets emergency oxygen systems (both
crew and passenger), passenger service units and video systems for aircraft.
Aero's Airborne Closed Circuit Television division (ACCTV(TM)) manufactures and
markets closed circuit video systems that provide remote viewing of internal and
external areas of an aircraft for aircraft safety purposes, as well as providing
landscape camera views for in-flight passenger entertainment.
PRODUCT DEVELOPMENT
The Company is continuing to develop new products to address existing and
new markets. The introduction of new products may be prevented or delayed by
engineering obstacles, regulatory procedures, clinical trials, production
difficulties and other factors. In addition, the costs of producing, promoting
and servicing new products are generally greater than in the case of mature,
higher volume products. New product introductions can also temporarily reduce
revenues by interfering with sales of existing products.
As the Company's existing products reach life cycle maturity, the Company's
ability to develop or acquire new products and technologies increases in
importance. The Company has and will continue to pursue technology and new
product and business acquisition opportunities intended to broaden the Company's
product offerings. Such activities may result in increased expenses which could
have an adverse impact on the Company's net income.
MARKETS
Customers
The Company's traditional customers have been the critical care units of
hospitals, for example, operating rooms, post-anesthesia recovery rooms and
intensive care units. However, with the increasing pressure to lower health care
costs, more patients are being treated in lower-cost areas in and outside the
hospital. The Company's products are now purchased for use throughout the
hospital, including intermediate care and step-down units, labor and delivery
rooms, emergency rooms and general care floors, and marketed and sold into the
alternate site care market, including surgicenters, subacute care and skilled
nursing facilities, ambulatory emergency care settings and the home. With the
acquisition of Puritan-Bennett, the home care market has
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become a more significant part of the Company's customer base. The Company's
sales are broadly based, and no individual customer accounts for more than 10%
of the Company's total net revenues.
Market Trends
As health care increasingly becomes managed care, patient care is shifting
to lower-cost areas of the hospital and alternate care sites outside of the
hospital, including subacute care centers, skilled nursing facilities and the
home. Additionally, in an effort to create larger, more cost-effective entities
capable of competing for managed care contracts, health care providers are
consolidating and vertically integrating, and joining local or regional multiple
health care provider systems in greater numbers. As a result of these ongoing
changes in the delivery of health care, the Company expects that a greater
proportion of its future revenue will come from sales of its products to a
smaller customer base, primarily comprised of larger, consolidated health care
providers and buying groups, and from sales of its products into the growing
alternate site care market, especially the home. Moreover, in the current health
care business environment, hospitals, which are the Company's principal
customers, face increasing pressure to control costs. This pressure may, in the
future, lead to a decrease in the average selling prices for a number of the
Company's products, which could adversely affect the Company's gross margin.
MARKETING AND SALES
North America. In North America, the Company sells its products
principally through its direct sales force, supplemented by several full-line
sales distributors, rental and "just-in-time" distributors and several sensor
distributors. The Company's sales force is consolidated under area directors and
regional business managers who oversee the sales force for the hospital and home
care markets and sensor and ventilator specialists. The Company also employs
clinical consultants (CCs), who are typically registered nurses, respiratory
therapists or nurse anesthetists, and who provide customers with continuing
education and in-service training on the use of the Company's products. The CCs
also maintain contact with clinicians and medical organizations to educate
medical professionals on new clinical applications for monitoring or assessment
for which the Company's products can be used. The Company's CC organization is
accredited by the American Nurses Association as a provider of continuing
nursing education.
Latin America. Sales into Latin America are through distributors. The
Company has distributors in all major Latin American countries, including Mexico
and Brazil.
Europe. The Company has devoted significant resources to the development
of its European markets and administrative infrastructure. The Company continues
to expand sales, service and distribution efforts in this market. Through its
acquisition of Puritan-Bennett and Pierre Medical, the Company has broadened its
product offerings in the European home care market. The Company has sales and
marketing offices and a direct sales force throughout Western Europe, including
in the Netherlands, France, Germany, the United Kingdom, Italy and Belgium.
Sales in Europe are made through the Company's direct sales force and
distributors.
Asia. The Company has a sales and marketing office in Hong Kong. The
Company has distributors in most major countries in Asia.
Japan. In fiscal year 1995, the Company increased to 50 percent its
ownership interest in NCI, the Company's Tokyo-based joint venture with Century
Medical, Inc. (CMI). On September 30, 1996, the Company purchased from CMI the
remaining 50 percent ownership interest in NCI. NCI is now a wholly-owned
subsidiary of the Company. With the greater level of investment in NCI and
increased management involvement and marketing resources, the Company plans to
pursue more aggressively opportunities for the Company's products in Japan. The
Company sells its products in Japan through NCI's direct sales force and
distributors.
Sales outside the United States (including sales by the Company's
subsidiaries) accounted for approximately 32 percent of net revenue in fiscal
year 1996, 30 percent of net revenue in fiscal year 1995 and 24 percent of net
revenue in fiscal year 1994. Financial information concerning the Company's
foreign and
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domestic operations and export sales is found in Note 16 to the Financial
Statements in the Company's 1996 Annual Report to Stockholders, which is
incorporated herein by reference.
Timing of Orders and Shipments; Backlog. Historically, orders in the first
fiscal quarter have been lower than in the second, third and fourth quarters. Of
the orders received by the Company in any fiscal quarter, a disproportionately
large percentage has typically been received and shipped toward the end of that
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 late in that quarter. Total
backlog at the end of fiscal year 1996 and fiscal year 1995 was approximately
$57 million and $89 million, respectively. The decrease in fiscal year 1996
backlog was due primarily to lower ventilator and Aero Systems product order
backlog levels.
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. See "Business Considerations" below for a further discussion on
competition.
The Company's principal competitor in pulse oximetry in the United States
is Ohmeda, a subsidiary of BOC. The Company and BOC have cross-licensed certain
patents from one another (see "Licenses and Patents" and "Item 3. Legal
Proceedings." below). The Company also faces competition from manufacturers of
multi-parameter monitoring systems, including Hewlett-Packard Co., SpaceLabs
Medical, Inc., Datascope Corporation and Protocol Systems, Inc., whose systems
frequently include pulse oximetry. In response, the Company sells OEM oximetry
modules and has licensed certain systems manufacturers to make their instruments
compatible with the Company's sensors. The Company has entered into OEM and/or
licensing agreements with the major systems manufacturers in the United States,
including Hewlett-Packard Co., SpaceLabs Medical, Inc., Datascope Corporation
and Protocol Systems, Inc.
The Company's principal competitors in ventilation are Bird Products, Inc.,
Draeger, Inc. and Siemens Medical Systems, which compete with the Company in the
acute care, adult and infant ventilation markets. In the sleep diagnostics and
sleep therapy markets, the Company's principal competitors are Healthdyne, Inc.,
Respironics, Inc. and Resmed, Inc. In the oxygen therapy markets the Company's
principal competitors are Invacare Corporation, Caire, Inc. and Sunrise Medical,
Inc.
RESEARCH AND DEVELOPMENT
The principal focus of the Company's research and development effort is to
apply technology to well-defined clinical problems through innovative
engineering. In this process, the Company is also focused on the development of
products specifically designed to meet customer demands for performance,
cost-effectiveness and environmental responsibility. Introduction of any product
now under development will require completion of development and engineering
work, successful conclusion of clinical trials, compliance with regulatory
procedures and the transfer of the product to production. There can be no
assurance that the Company's product development work will result in viable new
products. The Company's research and development expenditures were approximately
$54.3 million (8% of net revenue) in fiscal year 1996, $49.1 million (8% of net
revenue) in fiscal year 1995 and $50.7 million (9% of net revenue) in fiscal
year 1994.
MANUFACTURING AND SUPPLIERS
The Company's products are assembled using both standard components and
components manufactured to the Company's specifications such as printed circuit
board assemblies. The Company's instruments contain microprocessors for which
proprietary software is designed, written and tested by the Company. The Company
maintains test and inspection procedures for components and assembled
instruments.
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The Company currently procures most of its components from outside
suppliers, including foreign vendors. Though multiple sources are generally
available for these components, the Company also relies upon single-source
suppliers to provide certain components for its products. To the extent the
Company relies on single-source suppliers, there can be no assurance that supply
shortages or interruptions will not arise, which, if they were to occur, could
increase the cost or delay the shipment of the Company's products or cause the
Company to incur costs to develop alternative sources. Any of these occurrences
could have a material adverse effect on the Company's results of operations.
The Company produces some components for its own products made from a wide
variety of raw materials that are generally available in quantity from alternate
sources of supply.
Because the Company believes that prompt shipment of orders is important to
compete effectively, the Company maintains substantial inventories of raw
material, work in process and finished goods to be able to respond rapidly to
customer demands. Should the Company's order forecasts exceed the orders
actually achieved, excess inventories may prove unsalable or salable only at
reduced prices. The Company maintains reserves for obsolete or excess inventory
which it believes to be adequate.
LICENSES AND PATENTS
At July 7, 1996, the Company held 155 United States patents and 126 patents
in foreign countries. The Company also has patent applications pending in the
United States and in selected foreign countries covering features of its current
products and products under development. There can be no assurance that any
patents will be issued on the pending applications or that any of its issued
patents will withstand challenge. Although the patents that the Company has been
issued are of value and those for which the Company has applied would be of
additional value, the Company believes that other factors are of greater
competitive importance (see "Business Considerations" beginning on page 17
below).
Many patents in the general area of the Company's current products and
products under development have been and may in the future be issued to others.
The Company has entered into license agreements under which it may practice
certain patents for the lives of the patents. The Company may in the future
determine that it is advisable to seek licenses on other such patents. There can
be no assurance that such licenses will be available or, if available, will be
available on terms favorable to the Company.
As part of the settlement in 1986 of a patent infringement claim brought
against the Company by BOC, the parent corporation of Ohmeda, one of the
Company's principal competitors, the Company and BOC entered into cross licenses
of certain oximetry patents.
REGULATORY MATTERS
FDA Regulation
The Company manufactures and sells medical devices. The FDA regulates the
development, testing, manufacturing, packaging, distribution and marketing of
medical devices in the United States, including the products manufactured by the
Company. The development, testing, manufacturing, packaging, distribution and
marketing of medical devices in the United States are regulated under the
Medical Device Amendments of 1976 to the Federal Food, Drug, and Cosmetic Act
(the "1976 Amendments"), the Safe Medical Devices Act of 1990, the Medical
Device Amendments of 1992 and additional regulations promulgated by the FDA. The
State of California (through its Department of Health Services ("DHS")), where
the Company has manufacturing plants, as well as other states, also regulate the
manufacture of medical devices. The Company believes that it is substantially in
compliance with applicable FDA and DHS regulations.
In general, these statutes and regulations require that manufacturers
adhere to certain standards designed to ensure the safety and effectiveness of
medical devices. Under the 1976 Amendments, each medical device manufacturer
must comply with statutes and regulations applicable generally to manufacturing
practices, clinical investigations involving humans, sale and marketing of
medical devices, post-market surveillance, repairs, replacements and refunds,
recalls, and other matters. The FDA is authorized to obtain and inspect
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devices and their labeling and advertising, and to inspect the facilities in
which they are manufactured in order to ensure that a device is not improperly
manufactured or labeled.
The 1976 Amendments also require compliance with specific manufacturing and
quality assurance standards, including regulations promulgated by the FDA with
respect to good manufacturing practices. FDA regulations require that each
manufacturer establish a quality assurance program by which the manufacturer
monitors the manufacturing process and maintains records that show compliance
with the FDA regulations and the manufacturer's written specifications and
procedures relating to the devices. Compliance with the good manufacturing
practices regulation is necessary to receive FDA approval to market new products
and is necessary for a manufacturer to be able to continue to market approved
product offerings.
The FDA makes unannounced inspections of medical device manufacturers and
may issue reports of observations where the manufacturer has failed to comply
with all appropriate regulations and procedures. Failure to comply with
applicable regulatory requirements can, among other consequences, result in
warning letters, civil penalties, injunctions, suspensions or losses of
regulatory clearances, product recalls, seizure or administrative detention of
products, operating restrictions through consent decrees or otherwise, refusal
of the government to approve product license applications or allow a
manufacturer to enter into supply contracts, and criminal prosecution.
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.
The FDA requires that a new medical device or a new indication for use of
or other significant change in an existing medical device obtain either 510(k)
premarket notification clearance or an approved PMA prior to being introduced
into the market in the United States. The 510(k) premarket notification process
is applicable when the new product being submitted to the FDA can be compared to
a pre-existing commercially available product that performs similar functions (a
"substantially equivalent product"). If a product does not meet the eligibility
requirements for the 510(k) process, then it must be submitted, instead, under
the PMA process. The process of obtaining 510(k) clearance may take at least six
months from the date of filing of the application and generally requires the
submission of supporting data, which can be extensive and extend the process for
a considerable length of time. In addition, the FDA may require review by an
advisory panel as a condition for 510(k) clearances, which can further lengthen
the process. The PMA process generally takes more than two years from initial
filing and requires the submission of extensive supporting data and clinical
information. In recent years, there has been a trend for the FDA to require more
supporting data with respect to both 510(k) clearance notifications and PMA
filings. Historically, substantially all of the products of the Company have
been submitted to the FDA under the 510(k) premarket notification clearance
process. However, the Company was informed in early fiscal year 1994 that the
N-400 fetal pulse oximeter would have to be submitted under the PMA process.
Moreover, as the Company broadens is product base, new products could be
required to be submitted under the PMA process rather than the 510(k) process.
Foreign Regulation
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain clearance to sell medical devices in foreign countries may be
longer or shorter than that required for FDA clearance, and requirements for
licensing may differ significantly from FDA requirements. Some countries have
historically permitted human studies earlier in the product development cycle
than regulations in the United States. Other countries, such as Japan, have
standards similar to those of the FDA. This disparity in the regulation of
medical devices may result in more rapid product clearance in certain countries
than in the United States, while clearance in countries such as Japan may
require longer periods than in the United States. In addition, the European
Union has developed a new approach to the regulation of medical products that
may significantly change the situation in those
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countries. The receipt or denial of FDA clearance for a particular product may
affect the receipt or denial of regulatory clearance for that product in certain
other countries.
FDA/Puritan-Bennett Consent Decree
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. Burton A. Dole, Jr.,
Puritan-Bennett's former Chairman, President and Chief Executive Officers is a
party to the consent decree. Under the terms of the Agreement and Plan of Merger
between the Company and Puritan-Bennett, Mr. Dole became the Chairman of the
Company's Board of Directors in August 1995.
Impact of Puritan-Bennett Consent Decree
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. The Company
expects for Puritan-Bennett to continue to incur additional operating expenses
associated with its ongoing regulatory compliance program, but the amount of
these incremental costs currently 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 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. The Company could experience a material adverse
effect on business, operations, profitability and outlook from, among other
things: (i) requirements associated with the Puritan-Bennett consent decree;
(ii) requirements arising from continuing company-wide adherence to quality
assurance and good manufacturing practices; (iii) the results of future FDA
inspections of the operations and facilities of the Company; and (iv) any
modification, extension or adverse interpretation of the Puritan-Bennett consent
decree or any product recall, plant closure or other FDA enforcement activity
with respect to the Company.
Environmental Regulation
The Company is subject to various environmental laws and regulations both
in the United States and abroad. The operations of the Company, like those of
other medical device companies, involve the use of substances regulated under
environmental laws, primarily in the manufacturing and sterilization processes.
While it is difficult to quantify the potential impact of compliance with
environmental protection laws, management believes that such compliance will not
have a material effect on the Company's financial position. The Company believes
that it is substantially in compliance with applicable environmental laws and
regulations.
PRODUCT LIABILITY EXPOSURE
Because most of the Company's products are intended to be used on patients
who are physiologically unstable and may be severely ill, the Company is exposed
to serious potential product liability claims. From time to time, patients on
whom the Company's products are being used will sustain injury or death related
to their medical treatment or condition, and this could lead to product
liability claims against the Company. The Company has received notice of claims
of product liability in the ordinary course of its business. The Company
believes that none of these claims, either alone or in the aggregate, will have
a material adverse affect on the Company's financial position or results of
operation. There is no assurance, however, that the Company will not in the
future be subject to claims that could have a material adverse impact on the
Company's financial position, results of operations, reputation or ability to
market its products.
The Company presently carries product liability insurance coverage in
amounts which the Company feels are sufficient to protect the Company. However,
it is possible that this coverage could be insufficient to cover
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claims which might be made against the Company. The availability and cost of
such coverage varies from time to time and could be affected by product
liability claims. At times in the past, coverage has been more difficult and
more expensive to obtain than at present. There is no assurance that the Company
will always be able to obtain adequate product liability coverage on terms it
finds acceptable, or that the Company will be able to obtain such insurance at
all.
EMPLOYEES
At July 7, 1996, the Company had a total of 4,742 employees, including
3,170 employees in the United States, 522 employees in Europe, 955 employees in
Mexico and 95 employees in other countries.
Many of the Company's employees are highly skilled, and competition in
recruiting and retaining such personnel is intense in the labor markets in which
the Company operates. Locating persons with experience in regulated industries
is particularly difficult. The Company believes that its continued success is
predicated in part on its ability to continue to attract highly qualified
management, marketing, medical and technical personnel.
Other than a total of approximately 15 employees, none of the Company's
employees is subject to a collective bargaining agreement. The Company believes
that its relations with its employees are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information regarding current executive officers on the
Company's Executive Management Committee who are not also directors.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- --------------------------------------- --- ------------------------------------------------
<S> <C> <C>
Boudewijn Bollen....................... 50 Executive Vice President, Worldwide Sales and
Distribution
Laureen DeBuono........................ 39 Executive Vice President, Human Resources,
General Counsel and Secretary
Michael P. Downey...................... 49 Executive Vice President, Chief Financial
Officer
Russell D. Hays........................ 51 Executive Vice President, President, Hospital
Business
David J. Illingworth................... 43 Executive Vice President, President, Homecare
Business
Kenneth Sumner, Ph.D................... 54 Vice President, Regulatory/Clinical Affairs and
Quality Assurance
David B. Swedlow, M.D.................. 50 Senior Vice President, Medical Affairs and
Technology Development
</TABLE>
MR. BOLLEN joined the Company in 1986 as Vice President Marketing and Sales
in Europe, became Managing Director, Europe, in April 1989, and Vice President
and Managing Director, Europe, in September, 1991. Mr. Bollen currently serves
as Executive Vice President, Worldwide Sales and Distribution. Prior to joining
the Company, Mr. Bollen was Director of Marketing and Sales in Europe with
Bentley Laboratories, Inc., a manufacturer of specialized monitoring and medical
equipment.
MS. DEBUONO joined the Company in April 1992 as General Counsel and
Secretary and currently serves as Executive Vice President, Human Resources,
General Counsel and Secretary. Prior to joining the Company, Ms. DeBuono was
Division and Corporate Counsel with The Clorox Company, a diversified consumer
products company, from 1987 to 1992, and Corporate Counsel with Varian
Associates, Inc., an electronics device company, from 1984 to 1987.
MR. DOWNEY joined the Company in 1986 as Corporate Controller and became
Vice President, Finance in April 1987 and Vice President, Chief Financial
Officer in July 1989. Mr. Downey currently serves as Executive Vice President,
Chief Financial Officer. Prior to joining the Company, Mr. Downey was Vice
President, Finance with Shugart Corporation, a manufacturer of disk drives, from
1984 to 1986.
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MR. HAYS joined the Company in June 1995 as Executive Vice President,
Nellcor Operations and currently serves as Executive Vice President, President,
Hospital Business. Prior to joining the Company, Mr. Hays served as the
President and Chief Executive Officer of Sequenom from 1993 to 1995. Previously,
Mr. Hays served as President and Chief Executive Officer of Enzytech, Inc. from
1992 to 1993, and in various capacities at Baxter Healthcare Corporation from
1985 to 1992. He also served as a General Manager at Stryker Corporation from
1981 to 1985 and in various capacities at Baxter Travenol Laboratories, Inc.
from 1976 to 1981.
MR. ILLINGWORTH joined the Company in January 1993 as Vice President, Field
Operations. Mr. Illingworth currently serves as Executive Vice President,
President, Homecare Business. Prior to joining the Company, Mr. Illingworth
worked for 14 years in sales and management with General Electric Medical
Systems, a manufacturer of Diagnostic Imaging Products, most recently as Western
Region General Manager.
MR. SUMNER joined the Company in September 1994 as Vice President,
Regulatory/Clinical Affairs and Quality Assurance. Immediately prior to joining
the Company, Mr. Sumner served as Vice President, Regulatory Affairs and Quality
Assurance with Cytyc Corporation, a privately-held medical device company. From
1990 to 1993, Mr. Sumner was with the Cardiology Group of C.R. Bard, Inc. as
Vice President, Medical and Regulatory Affairs, and, from 1980 to 1990, Mr.
Sumner was Director of Clinical and Regulatory Affairs at Zimmer, Inc., an
orthopedic medical device division of Bristol-Myers Squibb, Co.
DR. SWEDLOW joined the Company in June 1987 as Vice President, Medical
Affairs and currently serves as Senior Vice President, Medical Affairs and
Technology Development. Prior to joining the Company, Dr. Swedlow was employed
by the University of Pennsylvania as an Assistant Professor of Anesthesia and
Pediatrics at the University of Pennsylvania School of Medicine and as an
Anesthesiologist and Critical Care Attending Physician and Director of Research
in the Department of Anesthesia and Critical Care of The Children's Hospital of
Philadelphia.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
Section 16(a) of the Securities and Exchange Act of 1934, as amended,
requires the Company's executive officers and directors to file reports of
beneficial ownership on Form 3 and changes in beneficial ownership on Forms 4 or
5 with the Securities and Exchange Commission ("SEC"). Executive officers and
directors are also required by SEC rules to furnish the Company with copies of
all Section 16(a) reports filed. As part of a Section 16 compliance program
established by the Company for its executive officers and directors, the Company
undertakes to file these reports on their behalf. Based solely on its review of
the Forms 3, 4 and 5 filed on behalf of its executive officers and directors,
the Company believes that, during the fiscal year ended July 7, 1996, all
Section 16(a) filing requirements applicable to its executive officers and
directors were complied with pursuant to SEC rules.
BUSINESS CONSIDERATIONS
The Company is an 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
17
<PAGE> 19
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.
The Company 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. The Company
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.
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
18
<PAGE> 20
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
19
<PAGE> 21
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.
ITEM 2. PROPERTIES.
The Company's headquarters occupy a newly constructed 141,000 square foot
two-story facility built for the Company in Hacienda Business Park, Pleasanton,
California. The Pleasanton facility is being leased under a lease with an
initial 12 1/2 year term with options to renew for two additional five-year
periods at a rent approximating the then fair market value.
The Company maintains a manufacturing facility and related office space in
an approximately 225,000 square foot, Company-owned facility in Carlsbad,
California. The Company currently leases approximately 80,000 square feet of
warehouse space in Carlsbad, which will be replaced by a 100,000 square foot,
Company-owned warehouse under construction. The Company also maintains
manufacturing facilities and related offices in the following Company-owned
facilities containing approximately the space indicated parenthetically; Lenexa,
Kansas (116,000 square feet), Fountain Valley, California (24,000 square feet);
Galway, Republic of Ireland (82,500 square feet); and Nancy, France (29,700
square feet).
The Company also maintains manufacturing facilities and related offices in
the following leased facilities containing approximately the space indicated
parenthetically; Chula Vista, California (90,000 square feet); Sorrento,
California (80,000) square feet; Indianapolis, Indiana (68,400 square feet); St.
Louis, Missouri (70,000 square feet); Lenexa, Kansas (25,400 square feet); Eden
Prairie, Minnesota (21,000 square feet); Tijuana, Mexico (60,000 square feet);
and Lyon, France (28,600 square feet). These leases will expire or be extended
at varying dates through June 2011.
The Company expects to complete the consolidation of its facilities in
Chula Vista and Sorrento, California, into its facilities in Carlsbad during
fiscal year 1997.
The Company leases additional office space in Lenexa, Kansas, which is used
for certain of the Company's research and development, and Coral Springs,
Florida, which is used to service Latin America. The Company leases additional
space for its international operations in the Netherlands, France, United
Kingdom, Belgium, Germany, Italy, Tokyo and Hong Kong.
The Company believes that its facilities are adequate for its space
requirements through fiscal year 1997. If additional space is required in the
future, the Company believes that suitable facilities can readily be leased on
commercially reasonable terms.
ITEM 3. 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,
either individually or in the aggregate, will not have a material adverse effect
on the Company's financial condition or results of operations. There can be no
assurance that the Company's financial condition or results of operations will
not be materially adversely affected as a result of future claims that may be
commenced against the Company.
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.
20
<PAGE> 22
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
has filed a demurrer to this action, and this motion is currently pending. 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.
In a related matter, in the third quarter of fiscal 1994, the Company
agreed to settle trade secrets and patent litigation with BOC, Ohmeda 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY OWNERS.
A special meeting of stockholders was held on June 27, 1996. Two items were
the subject of the meeting: (i) approval of the Amended and Restated Agreement
and Plan of Merger, dated as of May 14, 1996, between the Company and
Infrasonics and the issuance of Company common stock pursuant to the terms
thereof; and (ii) approval of amendment to the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of Company common
stock to 150,000,000 shares and to effect a two-for-one stock split of the
Company's issued stock.
(i)Approval of Amended and Restated Agreement and Plan of Merger and
issuance of Company common stock pursuant thereto
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES
- ----------- ---------- ------- ----------
<S> <C> <C> <C>
20,336,667 859,713 51,596 3,386,035
</TABLE>
(ii)Approval of amendment to Restated Certificate of Incorporation and
stock split
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
- ----------- ---------- -------
<S> <C> <C> <C>
21,119,120 3,494,531 50,360
</TABLE>
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<PAGE> 23
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock is traded on the Nasdaq National Market under
the symbol NELL. The following table sets forth the high and low prices for the
Company's common stock as reported in that system for each quarter in the
Company's fiscal years 1996 and 1995. These prices reflect interdealer prices,
without retail mark-up, mark-down or commission. Prices have been adjusted to
reflect a two-for-one stock split effective July 1, 1996.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fiscal 1996:
Fourth Quarter......................................... $36.375 $23.00
Third Quarter.......................................... 36.75 27.25
Second Quarter......................................... 31.125 23.50
First Quarter.......................................... 27.875 22.00
Fiscal 1995:
Fourth Quarter......................................... 23.875 18.00
Third Quarter.......................................... 19.125 15.75
Second Quarter......................................... 17.00 14.125
First Quarter.......................................... 15.75 13.00
</TABLE>
At July 7, 1996, the Company had approximately 2,024 stockholders of record
(not including beneficial holders of stock held in street name). The Company has
not paid or declared dividends on its common stock. The Company presently
intends to retain its earnings for use in its business and therefore does not
anticipate paying any cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
The section labeled "Selected Financial Data" appearing on page 22 of the
Company's 1996 Annual Report to Stockholders is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The section labeled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing on pages 40 through 46 of the
Company's 1996 Annual Report to Stockholders is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Report of Independent Accountants appearing on page 47, the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
appearing on pages 23 through 39, and the section entitled "Selected Quarterly
Data" appearing on page 47 of the Company's 1996 Annual Report to Stockholders,
are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
22
<PAGE> 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) The section labeled "Proposal One -- Election of Directors" appearing
on pages 2 through 6 of the Company's Proxy Statement dated September 16, 1996
is incorporated herein by reference.
(b) Information concerning the Company's executive officers who are not
directors is set forth in Part I of this Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The sections labeled "Executive Compensation" and "Nominating and
Compensation Committee Report on Executive Compensation", appearing on pages 9
through 19 of the Company's Proxy Statement dated September 16, 1996 are
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The section labeled "Beneficial Owners of Voting Securities" appearing on
pages 7 and 8 of the Company's Proxy Statement dated September 16, 1996 is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The section labeled "Indebtedness of Management" appearing on page 14 of
the Company's Proxy Statement dated September 16, 1996 are incorporated herein
by reference.
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<PAGE> 25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) 1. INDEX TO FINANCIAL STATEMENTS
THE FOLLOWING FINANCIAL STATEMENTS ARE INCLUDED IN THE COMPANY'S 1996
ANNUAL REPORT TO STOCKHOLDERS AND ARE INCORPORATED HEREIN BY REFERENCE PURSUANT
TO ITEM 8:
<TABLE>
<CAPTION>
PAGE IN 1996
ANNUAL REPORT
TO STOCKHOLDERS
---------------
<S> <C>
Consolidated Balance Sheet at July 7, 1996 and July 2, 1995............ 23
Consolidated Statement of Operations for each of the three years in the
period ended July 7, 1996............................................ 24
Consolidated Statement of Stockholders' Equity for each of the three
years in the period ended July 7, 1996............................... 25
Consolidated Statement of Cash Flows for each of the three years in the
period ended July 7, 1996............................................ 26
Notes to Consolidated Financial Statements............................. 27-39
Report of Independent Accountants...................................... 47
Selected Quarterly Data (Unaudited).................................... 47
</TABLE>
2. INDEX TO FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not applicable or not required
or because the required information is included in the consolidated financial
statements or notes thereto.
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of May 21, 1995, as amended, among
Registrant, a wholly-owned subsidiary of Registrant and Puritan-Bennett Corporation
(filed as Annex A to Form S-4 Registration Statement No. 33-61169 and incorporated
herein by reference).
2.2 Amendment No. 1 to Agreement and Plan of Merger, dated as of June 30, 1995, among
Registrant, a wholly-owned subsidiary of Registrant and Puritan-Bennett Corporation
(filed as Annex B to Form S-4 Registration Statement No. 33-61169 and incorporation
herein by reference).
2.3 Amended and Restated Agreement and Plan of Merger, dated as of March 10, 1996,
between Registrant and Infrasonics, Inc. (filed as Appendix A to Form S-4
Registration Statement No. 33-04683 and incorporated herein by reference).
2.4 Agreement and Plan of Merger, dated as of September 9, 1996, between Registrant and
Aequitron Medical, Inc.
3.1 Restated Certificate of Incorporation of Registrant (filed as Exhibit 3.1 to the
Report on Form 10-K for the year ended July 7, 1991 and incorporated herein by
reference).
3.2 Certificate of Determination of Preferences of Series A Junior Participating
Preferred Stock (filed as Exhibit 3.2 to the Report on Form 10-K for the year ended
July 7, 1991 and incorporated herein by reference).
3.3 By-laws of Registrant, as amended (filed as Exhibit 3.3 to the Report on Form 10-K
for the year ended July 3, 1994 and incorporated herein by reference).
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
<C> <S>
4.1 Amended and Restated Rights Agreement, dated as of March 8, 1996, between Registrant
and The First National Bank of Boston, as Rights Agent (incorporated by reference to
Exhibit 2.1 of Amendment No. 2 to the Registrants' Registration Statement on Form
8-A filed with the Commission on March 14, 1996). Reference is also made to Exhibits
3.1, 3.2 and 3.3.
4.2 Credit Agreement, dated as of November 16, 1994, entered into by Registrant, the
Banks Named Therein and ABN AMRO Bank N.V., San Francisco International Branch, as
Agent (filed as Exhibit 10.1 to the Report on Form 10-Q for the period ended January
1, 1995 and incorporated herein by reference).
10.1 Lease Agreement dated August 17, 1983 between Registrant and Crow-Spieker-Singleton
#87, together with Lease Amendment No. One thereto, dated January 3, 1994, Lease
Amendment No. Two thereto, dated as of May 5, 1986, and related letters dated July
31, 1984 and October 15, 1984 (filed as Exhibit 10.1 to Form S-1 Registration
Statement No. 33-8211, filed August 22, 1986 and incorporated herein by reference).
10.2 Lease Agreement dated March 31, 1986 between Registrant and Crow-Spieker-Singleton
#115 (filed as Exhibit 10.2 to Form S-1 Registration Statement No. 33-8211, filed
August 22, 1986 and incorporated herein by reference).
10.3 Letters dated June 17, 1987 and April 28, 1987 relating to the terms of the Lease
Agreement listed as Exhibits 10.1 and 10.2 (filed as Exhibit 10.4 to the Report on
Form 10-K for the year ended June 28, 1987 and incorporated herein by reference).
10.4 Lease Agreement dated October 21, 1987 between Registrant and Crow-Spieker-Singleton
#87 (filed as Exhibit 19.1 to the Report on Form 10-Q for the period ended December
27, 1987 and incorporated herein by reference).
10.5 Lease Agreement dated July 10, 1989 between Registrant and Baja de Mar, S.A. de C.V.
(filed as Exhibit 10.14 to the Report on Form 10-K for the year ended July 2, 1989
and incorporated herein by reference).
10.6 Lease Agreement dated February 1, 1990 between Registrant and Eastlake Development
Company (filed as Exhibit 19.1 to the Report on Form 10-Q for the period ended April
1, 1990 and incorporated hereby by reference).
10.7 First Amendment dated September 26, 1990 to Lease Agreement listed as Exhibit 10.6
(filed as Exhibit 10.13 to the Report on Form 10-K for the year ended July 1, 1990
and incorporated herein by reference).
10.8 Lease Agreement dated April 18. 1991 between Registrant and Britannia Developments,
Inc. (filed as Exhibit 10.8 to the Report on Form 10-K for the year ended July 7,
1991 and incorporated herein by reference) and the First Amendment to the Lease
Agreement dated February 13, 1992 between the Registrant and Britannia Developments,
Inc.
10.9 Settlement Agreement effective as of June 1, 1986 between Registrant and The BOC
Group (portions with respect to which confidentiality has been requested were filed
separately with the request for confidential treatment) (filed as Exhibit 10.4 to
Amendment No. 3 to Form S-1 Registration Statement No. 33-8211, filed April 16, 1987
and incorporated herein by reference).
10.10 Settlement Agreement dated as of December 15, 1986 between Registrant and Robert F.
Shaw and related documents (filed as Exhibit 10.21 to Amendment No. 3 to Form S-1
Registration Statement No. 33-8211, filed April 16, 1987 and incorporated herein by
reference).
*10.11 Registrant's 1982 Incentive Stock Option Plan, as amended (filed as Exhibit 10.16 to
the Report on Form 10-K for the year ended June 26, 1988 and incorporated herein by
reference), and forms of documents in connection with the 1982 Plan (filed as
Exhibit 28.1 to Amendment No. 1 to Form S-8 Registration Statement No. 33-16590,
filed August 31, 1987 and incorporated herein by reference).
</TABLE>
25
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
<C> <S>
*10.12 Registrant's 1985 Equity Incentive Plan, as amended (filed as Exhibit 10.22 to the
Report on Form 10-K for the year ended July 1, 1990 and incorporated herein by
reference) and forms of documents used in connection with the 1985 Plan (filed as
Exhibit 10.22 to the Report on Form 10-K for the year ended July 1, 1990 and
incorporated herein by reference).
*10.13 Registrant's 1988 Stock Option Plan for Non-Employee Directors and forms of
documents used in connection with such Plan, as amended (filed as Exhibit 10.13 to
the Report on Form 10-K for the year ended July 7, 1991 and incorporated herein by
reference).
*10.14 Registrant's 1991 Equity Incentive Plan (filed as Exhibit 10.14 to the Report on
Form 10-K for the year ended July 7, 1991 and incorporated herein by reference).
*10.15 Notice of Grant of Stock Options and Stock Option Grant Agreement dated March 30,
1988 between Registrant and Frederick M. Grafton (filed as Exhibit 10.21 to the
Report on Form 10-K for the year ended June 26, 1988 and incorporated herein by
reference).
10.16 Fourth Amended Registration Rights Agreement dated as of December 31, 1984, January
15, 1985, March 6, 1985, March 29, 1985 and April 19, 1985 between Registrant and
certain purchasers of its securities (filed as Exhibit 10.15 to Form S-1
Registration Statement No. 33-8211, filed August 22, 1986 and incorporated herein by
reference).
10.17 Amendment to Fourth Amended Registration Rights Agreement listed as Exhibit 10.16
dated as of August 19, 1986 (filed as Exhibit 10.21 to Amendment No. 1 to Form S-1
Registration Statement No. 33-8211, filed September 10, 1986 and incorporated herein
by reference).
10.18 Second Amendment to Fourth Amended Registration Rights Agreement listed as Exhibit
10.16 dated as of December 24, 1986 (filed as Exhibit 10.20 to Amendment No. 3 to
Form S-1 Registration Statement No. 33-8211, filed April 16, 1987 and incorporated
herein by reference).
*10.19 Indemnification Agreement dated as of June 17, 1986 between Registrant and Robert S.
Smith (filed as Exhibit 10.16 to Form S-1 Registration Statement No. 33-8211, filed
August 22, 1986, and incorporated herein by reference).
*10.20 Form of Indemnification Agreement entered into between Registrant and each of its
directors, current officers and one former officer (filed as Exhibit 10.22 to
Amendment No. 3 to Form S-1 Registration Statement No. 33-8211, filed April 16, 1987
and incorporated herein by reference).
10.21 License Agreement between Registrant and Andros Analyzers Incorporated dated October
30, 1987 (portions with respect to which confidentiality has been requested were
filed separately with the request for confidential treatment) (Filed as Exhibit
10.37 to the Report on Form 10-K for the year ended June 26, 1988 and incorporated
herein by reference).
*10.22 Letter agreement between Registrant and Paul J. Malloy, dated September 11, 1989
(filed as Exhibit 10.18 to the Report on Form 10-K for the year ended July 2, 1989
and incorporated herein by reference), letter agreement between Registrant and James
E. Corenman, dated May 19, 1989 (filed as Exhibit 10.19 to the Report on Form 10-K
for the year ended July 2, 1989 and incorporated herein by reference), letter
agreement and letter of indemnification between Registrant and Robert S. Smith dated
August 5, 1989 (filed as Exhibit 10.20 to the Report on Form 10-K for the year ended
July 2, 1989 and incorporated herein by reference), letter agreement between
Registrant and Charles C. Wilson dated October 5, 1989 (filed as Exhibit 10.35 to
the Report on Form 10-K for the period ended July 1, 1990 and incorporated herein by
reference), letter agreement between Registrant and L. Jack Lloyd dated March 16,
1990 (filed as Exhibit 10.36 to the Report on Form 10-K for the period ended July 1,
1990 and incorporated herein by reference) and letter agreement between Registrant
and Tibor Foldvari dated June 27, 1990 (filed as Exhibit 10.37 to the Report on Form
10-K for the period ended July 1, 1990 and incorporated herein by reference).
</TABLE>
26
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
<C> <S>
*10.23 Agreement and General Release dated as of July 24, 1991 between Registrant and
Lauren F. Yazolino (filed as Exhibit 10.23 to the Report on Form 10-K for the year
ended July 7, 1991 and incorporated herein by reference) and the First Amendment to
the Agreement and General Release dated May 1, 1992.
*10.24 Employment Agreement dated effective as of May 23, 1989 between Registrant and
Virginia Perry, Vice President, Quality Assurance and Regulatory Affairs (filed as
Exhibit 10.38 to the Report on Form 10-K for the period ended July 1, 1990 and
incorporated herein by reference).
*10.25 Employment Agreement dated as of September 2, 1991 between Registrant and Theodore
H. Toch, Vice President and General Manager, Instruments (filed as Exhibit 10.25 to
the Report on Form 10-K for the year ended July 7, 1991 and incorporated herein by
reference).
10.26 Agreement and Plan of Reorganization dated as of March 2, 1990 by and among
Registrant, Nellcor Merger Corporation, Radiant Systems, Inc., Jeffrey J. Alholm and
Edward Kleban and related Letter Agreement and Exchange Agreement (filed as Exhibits
19.2, 19.3 and 19.4 to the Report on Form 10-Q for the period ended April 1, 1990
and incorporated herein by reference).
10.27 Buy-Sell Agreement for Rights and Products between Registrant and Colin Medical
Instruments dated April 23, 1990, as amended July 24, 1990 (filed as Exhibit 10.34
to the Report on Form 10-K for the period ended July 1, 1990 and incorporated herein
by reference).
10.28 Amendment dated February 8, 1991 to the Buy-Sell Agreement for the Rights and
Products listed as Exhibit 10.27 (filed as Exhibit 10.28 to the Report on Form 10-K
for the period ended July 7, 1991 and incorporated herein by reference) and the
Third Amendment dated June 1, 1992 to the Buy-Sell Agreement aforementioned.
10.29 Stock Purchase Agreement dated August 12, 1991 among Registrant, EdenTec Corporation
and the Stockholders and Optionholders of EdenTec Corporation and related Employment
Agreements between Registrant and Edward Schuck and Bruce Bowman, respectively
(filed as Exhibit 10.29 to the Report on Form 10-K for the year ended July 7, 1991
and incorporated herein by reference).
10.30 Asset Purchase Agreement dated September 20, 1991 among Registrant, Fenem, Inc.,
Carl Fehder, M.D. and Edward Nemerovsky (filed as Exhibit 10.30 to the Report on
Form 10-K for the year ended July 7, 1991 and incorporated herein by reference).
*10.31 Letter agreement dated November 1, 1992, regarding Offer of Employment between
Registrant and David J. Illingworth (filed as Exhibit 10.31 to the Report on Form
10-K for the year ended July 4, 1993 and incorporated herein by reference).
*10.32 Promissory Note secured by Deed of Trust, dated February 18, 1993 made by David J.
Illingworth in favor of Registrant (filed as Exhibit 10.32 to the Report on Form
10-K for the year ended July 4, 1993 and incorporated herein by reference).
*10.33 Separation Agreement and General Release between Registrant and Theodore H. Toch
dated as of January 15, 1993 (filed as Exhibit 10.33 to the Report on Form 10-K for
the year ended July 4, 1993 and incorporated herein by reference).
*10.34 Separation Agreement and General Release between Registrant and Walter J. McBride
dated as of March 9, 1993 (filed as Exhibit 10.34 to the Report on Form 10-K for the
year ended July 4, 1993 and incorporated herein by reference).
*10.35 Separation Agreement between Registrant and Robert M. Johnson dated November 24,
1993 (filed as Exhibit 10.35 to the Report on Form 10-K for the year ended July 3,
1994 and incorporated herein by reference).
*10.36 Agreement between Registrant and Virginia Perry dated March 16, 1994 (filed as
Exhibit 10.36 to the Report on Form 10-K for the year ended July 3, 1994 and
incorporated herein by reference).
</TABLE>
27
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
<C> <S>
*10.37 Separation Agreement between Registrant and Julio Guardado dated May 16, 1994 (filed
as Exhibit 10.37 to the Report on Form 10-K for the year ended July 3, 1994 and
incorporated herein by reference).
*10.38 Separation Agreement between Registrant and Patricia E. Bashaw dated May 27, 1994
(filed as Exhibit 10.38 to the Report on Form 10-K for the year ended July 3, 1994
and incorporated herein by reference).
*10.39 Agreement between Registrant and David L. Schlotterbeck dated June 13, 1994 (filed
as Exhibit 10.39 to the Report on Form 10-K for the year ended July 3, 1994 and
incorporated herein by reference).
*10.40 Forms of Chief Executive Officer, Executive Officer and Key Employee Severance
Agreements (filed as Exhibits 10.2, 10.3 and 10.4 to the Report on Form 10-Q for the
period ended January 1, 1995 and incorporated herein by reference).
*10.41 Registrant's 1994 Equity Incentive Plan, as amended (filed as Exhibit 4.5 to Form
S-8 Registration Statement No. 33-87490 and incorporated herein by reference).
*10.42 Registrant's 1995 Merger Stock Incentive Plan (filed as Exhibit 4.5 to Form S-8
Registration Statement No. 33-62465 and incorporated herein by reference).
13.1 Excerpts from 1996 Annual Report to Stockholders.
21.1 List of Subsidiaries.
23.1 Consent of Independent Public Accountants (Price Waterhouse). Reference is made to
pages S-1 hereof.
27 Financial Data Schedule
</TABLE>
- ---------------
* An asterisk next to the number of an exhibit indicates that the exhibit is a
management contract or compensatory plan or arrangement.
(B) REPORTS ON FORM 8-K
Form 8-K dated March 8, 1996, filed March 21, 1996, reporting the entering
into by the Company and Infrasonics, Inc. of an Agreement and Plan of Merger
dated as of March 8, 1996 pursuant to Item 5 ("Other Event").
Form 8-K dated April 3, 1996, filed April 3, 1996, for the purpose of
filing with the Securities and Exchange Commission the Company's financial
statements presenting the pooled financial results of Nellcor and
Puritan-Bennett as of and for the three years in the period ended July 2, 1995.
Form 8-K/A dated April 3, 1996, filed May 31, 1996, for the purpose of
amending the Company's current report on Form 8-K dated April 3, 1996 and filed
April 3, 1996.
Form 8-K dated June 27, 1996, filed June 27, 1996, reporting the completion
of the Company's acquisition of Infrasonics, Inc. pursuant to Item 2
("Acquisition or Disposition of Assets").
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").
28
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
NELLCOR PURITAN BENNETT INCORPORATED
By: /s/ C. RAYMOND LARKIN, JR.
---------------------------------------
C. Raymond Larkin, Jr.
President and Chief Executive Officer
Date: October 4, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------- ----------------
<C> <S> <C>
/s/ C. RAYMOND LARKIN, JR. Director, President and Chief October 4, 1996
- ------------------------------------------ Executive Officer (Principal
C. Raymond Larkin, Jr. Executive Officer)
Director, Chairman of the Board October 4, 1996
- ------------------------------------------
Burton A. Dole, Jr.
/s/ MICHAEL P. DOWNEY Executive Vice President and October 4, 1996
- ------------------------------------------ Chief Financial Officer
Michael P. Downey (Principal Financial and
Accounting Officer)
/s/ ROBERT J. GLASER, M.D. Director October 4, 1996
- ------------------------------------------
Robert J. Glaser, M.D.
Director October 4, 1996
- ------------------------------------------
Frederick M. Grafton
/s/ DONALD L. HAMMOND Director October 4, 1996
- ------------------------------------------
Donald L. Hammond
Director October 4, 1996
- ------------------------------------------
Risa J. Lavizzo-Mourey, M.D.
/s/ THOMAS A. MCDONNELL Director October 4, 1996
- ------------------------------------------
Thomas A. McDonnell
Director October 4, 1996
- ------------------------------------------
Walter J. McNerney
/s/ EDWIN E. VAN BRONKHORST Director October 4, 1996
- ------------------------------------------
Edwin E. van Bronkhorst
</TABLE>
29
<PAGE> 1
Exhibit 2.4
Agreement and Plan of Merger between Registrant and Acquitron Medical.
<PAGE> 2
APPENDIX A
AGREEMENT
AND PLAN OF MERGER
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I: THE MERGER......................................................... A-1
1.1 The Merger......................................................... A-1
1.2 Effective Time of the Merger....................................... A-1
ARTICLE II: THE SURVIVING CORPORATION.......................................... A-1
2.1 Certificate of Incorporation....................................... A-1
2.2 By-laws............................................................ A-1
2.3 Directors and Officers of Surviving Corporation.................... A-1
ARTICLE III: CONVERSION OF SHARES............................................... A-2
3.1 Exchange Ratio..................................................... A-2
3.2 Exchange of Shares................................................. A-2
3.3 Dividends; Transfer Taxes.......................................... A-3
3.4 No Fractional Shares............................................... A-3
3.5 Closing of AMI Transfer Books...................................... A-4
3.6 Closing............................................................ A-4
3.7 Supplementary Action............................................... A-4
3.8 Dissenting Shares.................................................. A-4
ARTICLE IV: REPRESENTATIONS AND WARRANTIES OF AMI.............................. A-4
4.1 Organization....................................................... A-5
4.2 Capitalization..................................................... A-5
4.3 Authority Relative to this Agreement............................... A-5
4.4 Consents and Approvals; No Violations.............................. A-6
4.5 Reports and Financial Statements................................... A-6
4.6 Absence of Certain Changes or Events............................... A-6
4.7 Information in Registration Statement and Proxy Statement.......... A-7
4.8 Litigation......................................................... A-7
4.9 Contracts.......................................................... A-7
4.10 Employee Benefit Plans............................................. A-8
4.11 Tax Matters........................................................ A-9
4.12 Compliance with Applicable Law..................................... A-11
4.13 Subsidiaries....................................................... A-11
4.14 Interested Party Transactions...................................... A-11
4.15 Labor and Employment Matters....................................... A-11
4.16 Ownership of Shares of NPB Common Stock............................ A-11
4.17 Insurance.......................................................... A-11
4.18 Contracts with Physicians, Hospitals, HMOs and Third Party
Providers.......................................................... A-12
4.19 Environmental Protection........................................... A-12
4.20 Intellectual Property Rights....................................... A-13
4.21 FDA and Related Matters............................................ A-14
4.22 Real Property...................................................... A-14
4.23 Complete Copies of Requested Reports............................... A-15
4.24 Share Ownership.................................................... A-15
4.25 Opinion of Financial Advisors...................................... A-15
</TABLE>
i
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
4.26 Pooling of Interests............................................... A-15
4.27 Accounts Receivable................................................ A-15
4.28 Customers and Suppliers............................................ A-16
4.29 Representations Complete........................................... A-16
4.30 Takeover Statutes.................................................. A-16
4.31 Voting Arrangements................................................ A-16
4.32 Ownership of Shares................................................ A-16
4.33 Inventories........................................................ A-16
4.34 Product Liability Matters.......................................... A-16
4.35 No Undisclosed Liabilities......................................... A-17
ARTICLE V: REPRESENTATIONS AND WARRANTIES OF NPB.............................. A-17
5.1 Organization....................................................... A-17
5.2 Capitalization..................................................... A-17
5.3 Authority Relative to this Agreement............................... A-18
5.4 Consents and Approvals; No Violations.............................. A-18
5.5 Reports and Financial Statements; Absence of Certain Changes....... A-18
5.6 Information in Registration Statement and Proxy Statement.......... A-19
5.7 Share Ownership.................................................... A-19
5.8 Compliance With Applicable Law..................................... A-19
5.9 Ownership of Shares of AMI Common Stock............................ A-19
5.10 Complete Copies of Requested Reports............................... A-19
5.11 Pooling of Interests............................................... A-19
5.12 Representations Complete........................................... A-19
ARTICLE VI: CONDUCT OF BUSINESS PENDING THE MERGER............................. A-20
6.1 Conduct of Business by AMI and NPB Pending the Merger.............. A-20
6.2 Compensation Plans................................................. A-22
6.3 Current Information................................................ A-22
6.4 Letters of AMI's and NPB's Auditors................................ A-22
6.5 Legal Conditions to Merger......................................... A-22
6.6 Affiliates; Pooling of Interests................................... A-23
6.7 Advice of Changes; Government Filings.............................. A-23
6.8 Accounting Methods................................................. A-24
ARTICLE VII: ADDITIONAL AGREEMENTS.............................................. A-24
7.1 Access and Information............................................. A-24
7.2 No Solicitation of Transactions.................................... A-24
7.3 Registration Statement............................................. A-24
7.4 Proxy Statement; Stockholder Approval.............................. A-24
7.5 Nasdaq National Market............................................. A-25
7.6 Antitrust Laws..................................................... A-25
7.7 Certain Employee Benefit Plans Matters............................. A-25
7.8 Stock Options and Warrants......................................... A-26
7.9 Director and Officer Indemnification, Etc.......................... A-26
7.10 Public Announcements............................................... A-26
7.11 Expenses........................................................... A-27
</TABLE>
ii
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
7.12 Additional Agreements.............................................. A-27
7.13 AMI Accruals and Reserves.......................................... A-27
7.14 FIRPTA............................................................. A-27
7.15 Takeover Statutes.................................................. A-27
7.16 Management Incentive Plan.......................................... A-28
7.17 Existing Agreements With AMI Officers and Employees................ A-28
7.18 Consulting Agreements.............................................. A-28
ARTICLE VIII: CONDITIONS TO CONSUMMATION OF THE MERGER........................... A-28
8.1 Conditions to Each Party's Obligation to Effect the Merger......... A-28
8.2 Conditions to Obligation of AMI to Effect the Merger............... A-29
8.3 Conditions to Obligations of NPB to Effect the Merger.............. A-30
ARTICLE IX: TERMINATION, AMENDMENT AND WAIVER.................................. A-30
9.1 Termination........................................................ A-30
9.2 Effect of Termination.............................................. A-31
9.3 Cancellation Fees; Expenses........................................ A-31
9.4 Amendment.......................................................... A-32
9.5 Extension; Waiver.................................................. A-32
ARTICLE X: GENERAL PROVISIONS................................................. A-32
10.1 Survival of Representations, Warranties and Agreements............. A-32
10.2 Brokers............................................................ A-32
10.3 Notices............................................................ A-33
10.4 Descriptive Headings............................................... A-33
10.5 Entire Agreement; Assignment....................................... A-33
10.6 Governing Law...................................................... A-33
10.7 Counterparts....................................................... A-33
10.8 Validity........................................................... A-33
10.9 Jurisdiction and Venue............................................. A-34
10.10 Investigation...................................................... A-34
10.11 Consents........................................................... A-34
</TABLE>
iii
<PAGE> 6
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of September 9, 1996 by and among
Nellcor Puritan Bennett Incorporated, Delaware corporation ("NPB"), and
Aequitron Medical, Inc., a Minnesota corporation ("AMI").
WHEREAS, the Boards of Directors of NPB and AMI each have determined that
the acquisition of AMI by NPB is in the best interests of their respective
companies and stockholders and presents an opportunity for their respective
companies to achieve long-term strategic and financial benefits, and accordingly
have agreed to effect the merger provided for herein upon the terms and subject
to the conditions set forth herein; and
WHEREAS, for federal income tax purposes, it is intended that the merger
contemplated herein shall qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
and for financial accounting purposes shall be accounted for as a pooling of
interests.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.2 hereof), AMI shall be merged with
and into NPB, NPB shall be the surviving corporation (the "Surviving
Corporation") and the separate existence of AMI shall thereupon cease (the
"Merger"). The Merger shall have the effects set forth in Section 259 of the
General Corporation Law of the State of Delaware (the "DGCL") and Section
302A.641 of the Minnesota Business Corporations Act ("MBCA").
1.2 Effective Time of the Merger. The Merger shall become effective when a
properly executed Certificate of Merger is duly filed with the Secretary of
State of the State of Delaware and the Secretary of State of the State of
Minnesota, which filings shall be made as soon as practicable after the closing
of the transactions contemplated by this Agreement in accordance with Section
3.6 hereof upon satisfaction or waiver of the conditions set forth in Article
VIII. When used in this Agreement, the term "Effective Time" shall mean the date
and time at which both such Certificates of Merger have been so filed.
ARTICLE II
THE SURVIVING CORPORATION
2.1 Certificate of Incorporation. The Certificate of Incorporation of NPB
shall be the Certificate of Incorporation of the Surviving Corporation, until
duly amended in accordance with the terms thereof and the DGCL.
2.2 Bylaws. The Bylaws of NPB as in effect at the Effective Time shall be
the Bylaws of the Surviving Corporation, until duly amended in accordance with
the terms thereof and the DGCL.
2.3 Directors and Officers of Surviving Corporation.
(a) The directors of NPB shall be the directors of the Surviving
Corporation and shall hold office from the Effective Time until their respective
successors are duly elected or appointed and qualified or until their earlier
death, resignation or removal in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation, or as otherwise provided
by law.
(b) The officers of NPB at the Effective Time shall be the initial officers
of the Surviving Corporation and shall hold office from the Effective Time until
removed or until their respective successors are duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance
with the Certificate of Incorporation and Bylaws of the Surviving Corporation,
or as otherwise provided by law.
A-1
<PAGE> 7
ARTICLE III
CONVERSION OF SHARES
3.1 Exchange Ratio. At the Effective Time, by virtue of the Merger and
without any action on the part of the holder thereof:
(a) Subject to Section 3.4 hereof, each share of common stock, no par value
("AMI Common Stock"), of AMI that is issued and outstanding immediately prior to
the Effective Time (other than shares of AMI Common Stock to be canceled
pursuant to Section 3.1(b)) shall be converted at the Effective Time into the
right to receive that fraction of a share of NPB of common stock, par value
$0.001 per share, of NPB equal to the Exchange Ratio (as defined below) together
with the corresponding preferred stock purchase rights associated with such
shares of NPB common stock in accordance with the NPB Rights Agreement (as
defined in Section 5.2(b)) ("NPB Common Stock"). All references herein to NPB
Common Stock, including the shares issuable in the Merger, shall be deemed to
include the associated preferred stock purchase rights, except where the context
otherwise clearly requires.
The exchange ratio for the Merger ("Exchange Ratio") shall be calculated as
follows:
1. If the Closing Market Value (as defined below) is greater than or equal
to $23.14 and less than or equal to $26.61, the Exchange Ratio will be .432;
2. If the Closing Market Value is greater than $26.61, the Exchange Ratio
will be the quotient of (A) $11.50 divided by (B) the Closing Market Value,
rounded to the nearest one-one thousandth of a share;
3. If the Closing Market Value is less than $23.14 and greater than or
equal to $22.75, the Exchange Ratio will be the quotient of (A) $10.00 divided
by (B) the Closing Market Value, rounded to the nearest one-one thousandth of a
share; and
4. If the Closing Market Value is less than $22.75, the Exchange Ratio will
be .440.
For purposes of this Agreement, the "Closing Market Value" shall mean the
average of the closing prices of NPB Common Stock as reported by the Nasdaq
National Market for the ten trading days ending on the fifth trading day prior
to the AMI shareholders meeting referred to in Section 7.4.
At the Effective Time, all such shares of AMI Common Stock shall no longer
be outstanding and shall automatically be canceled and retired and shall cease
to exist, and each certificate previously representing any such shares of AMI
Common Stock (a "Certificate") shall thereafter represent the right to receive
(i) the number of whole shares of NPB Common Stock and (ii) cash in lieu of
fractional shares into which the shares of AMI Common Stock represented by such
Certificate have been converted pursuant to Section 3.2 and Section 3.4 hereof.
Each Certificate shall be exchanged for (x) certificates representing whole
shares of NPB Common Stock, and (y) cash in lieu of fractional shares, issued in
consideration therefor upon the surrender of such Certificate in accordance with
the provisions hereof, without interest thereon. If prior to the Effective Time
NPB should split or combine the shares of NPB Common Stock, or pay a stock
dividend or other stock distribution, in, or in exchange of, shares of NPB
Common Stock, or engage in any similar transaction, then the Exchange Ratio will
be appropriately adjusted to reflect such split, combination, dividend, exchange
or other distribution or similar transaction.
At the Effective Time, all stock options, warrants and convertible
securities to purchase AMI Common Stock then outstanding shall be assumed by NPB
in accordance with Section 7.8.
(b) Each share of AMI Common Stock held in the treasury of AMI and each
share of AMI Common Stock held by NPB or any subsidiary of NPB immediately prior
to the Effective Time shall be canceled and retired and cease to exist, and no
shares of NPB Common Stock shall be issued in exchange therefor. All shares of
NPB Common Stock owned by AMI or any subsidiary of AMI shall become treasury
stock of NPB.
3.2 Exchange of Shares.
(a) Prior to the Effective Time, NPB shall select, and enter into an
agreement (in form and substance reasonably satisfactory to AMI) with, a bank or
trust company to act as Exchange Agent hereunder (the
A-2
<PAGE> 8
"Exchange Agent"). Within a reasonable period of time after the Effective Time,
NPB shall make available, and each holder of shares of AMI Common Stock (other
than Excluded Shares) will be entitled to receive upon surrender to the Exchange
Agent of one or more Certificates, certificates representing the number of whole
shares of NPB Common Stock and cash in lieu of fractional shares into which such
shares of AMI Common Stock are converted in the Merger. The shares of NPB Common
Stock into which the shares of AMI Common Stock shall be converted in the Merger
shall be deemed to have been issued at the Effective Time.
(b) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of AMI Common Stock (i) a
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such other
provisions as NPB may reasonably specify that are not inconsistent with the
terms of this Agreement) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing shares
of NPB Common Stock. Upon surrender of a Certificate for cancellation to the
Exchange Agent together with such letter of transmittal, duly executed, the
holder of such Certificate shall be entitled to receive in exchange therefor (i)
a certificate representing that number of whole shares of NPB Common Stock and
(ii) a check representing the amount of cash in lieu of fractional shares, if
any, which such holder has the right to receive in respect of the Certificate so
surrendered pursuant to the provisions of this Article III.
(c) In the event that any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed, NPB will issue or cause to be
issued in exchange for such lost, stolen or destroyed Certificate the number of
whole shares of NPB Common Stock and cash in lieu of fractional shares into
which the shares of AMI Common Stock represented by the Certificate are
converted in the Merger in accordance with this Article III. When authorizing
such issuance in exchange therefor, NPB may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed Certificate to give NPB a bond in such sum as it may direct
as indemnity, or such other form of indemnity, as it shall direct, against any
claim that may be made against NPB with respect to the Certificate alleged to
have been lost, stolen or destroyed.
3.3 Dividends; Transfer Taxes. No dividends that are declared on shares of
NPB Common Stock after the Effective Time will be paid to persons entitled to
receive certificates representing shares of NPB Common Stock until such persons
surrender their Certificates. Upon such surrender, there shall be paid to the
person in whose name the certificates representing such shares of NPB Common
Stock shall be issued, any dividends which shall have become payable with
respect to such shares of NPB Common Stock between the Effective Time and the
time of such surrender. In no event shall the person entitled to receive such
dividends be entitled to receive interest on such dividends. If any certificates
for any shares of NPB Common Stock are to be issued in a name other than that in
which the Certificate surrendered in exchange therefor is registered, it shall
be a condition of such exchange that the person requesting such exchange shall
(a) pay to the Exchange Agent any transfer or other taxes required by reason of
the issuance of certificates for such shares of NPB Common Stock in a name other
than that of the registered holder of the Certificate surrendered or (b)
establish to the satisfaction of the Exchange Agent that such tax has been paid
or is not applicable. Notwithstanding anything in this Agreement to the
contrary, neither the Exchange Agent nor any party hereto shall be liable to a
holder of shares of AMI Common Stock for any shares of NPB Common Stock or
dividends thereon or, in accordance with Section 3.4 hereof, the cash payment
for fractional interests, delivered to a public official pursuant to applicable
escheat laws following the passage of time specified therein.
3.4 No Fractional Shares. No fractional shares of NPB Common Stock shall
be issued pursuant to the Merger. In lieu of the issuance of any such fractional
share of NPB Common Stock pursuant to Section 3.2, cash adjustments will be paid
to holders in respect of any fractional share of NPB Common Stock that would
otherwise be issuable. The amount of such adjustment shall be the product of
such fraction of a share of NPB Common Stock multiplied by the closing sales
price per share of NPB Common Stock on the Nasdaq National Market on the
business day immediately preceding the Closing Date.
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3.5 Closing of AMI Transfer Books. At the Effective Time, the stock
transfer books of AMI shall be closed and no transfer of shares of AMI Common
Stock shall thereafter be made. If, after the Effective Time, Certificates are
presented to the Surviving Corporation, they shall be canceled and exchanged for
certificates representing shares of NPB Common Stock or cash in lieu of
fractional shares in accordance with the terms hereof. At and after the
Effective Time, the holders of shares of AMI Common Stock to be exchanged for
shares of NPB Common Stock pursuant to this Agreement shall cease to have any
rights as stockholders of AMI, except for the right to surrender such
Certificates in exchange for shares of NPB Common Stock as provided hereunder or
such dissenters' rights as are provided under applicable law.
3.6 Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Morrison &
Foerster, 19900 MacArthur Boulevard, 12th Floor, Irvine, California 92765 at
9:00 a.m., local time, on the first business day (the "Closing Date") following
the date on which the AMI stockholders' meeting referred to in Section 7.4
hereof shall have occurred; provided that if all of the other conditions set
forth in Article VIII hereof are not satisfied or waived at such date the
Closing Date shall be the business day following the day on which all such
conditions have been satisfied or waived, or at such other date, time and place
as NPB and AMI shall agree.
3.7 Supplementary Action. If at any time after the Effective Time, any
further assignments or assurances in law or any other things are necessary or
desirable to vest or to perfect or confirm of record in the Surviving
Corporation the title to any property or rights of AMI, or otherwise to carry
out the provisions of this Agreement, the officers and directors of the
Surviving Corporation are hereby authorized and empowered on behalf of AMI in
the name of and on behalf of AMI to execute and deliver any and all things
necessary or proper to vest or to perfect or confirm title to such property or
rights in the Surviving Corporation, and otherwise to carry out the purposes and
provisions of this Agreement.
3.8 Dissenting Shares. If holders of AMI Common Stock are entitled to
dissent from the Merger and demand appraisal of any such AMI Common Stock under
applicable law (each person electing to exercise such rights, a "Dissenting
Holder"), any shares of AMI Common Stock held by a Dissenting Holder as to which
appraisal has been so demanded ("Excluded Shares") shall not be converted as
described in Section 3.1, but shall from and after the Effective Time represent
only the right to receive such consideration as may be determined to be due such
Dissenting Holder pursuant to applicable law; provided, however, that each share
of AMI Common Stock held by a Dissenting Holder who shall, after the Effective
Time, withdraw its demand for appraisal or lose its rights of appraisal with
respect to such shares of AMI Common Stock, in either case pursuant to
applicable law, shall not be deemed an Excluded Share, but shall be deemed to be
converted, as of the Effective Time, into the right to receive NPB Common Stock
in accordance with the Exchange Ratio.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF AMI
As used in this Agreement, (a) the term "Material Adverse Effect" means,
with respect to AMI or NPB, as the case may be, a material adverse effect on the
business, assets, operations or results of operation or condition (financial or
otherwise) of AMI or NPB, in each case including its subsidiaries taken as a
whole, or on its ability to perform its obligations hereunder and (b) the word
"subsidiary" when used with respect to any party means any corporation or other
organization, whether incorporated or unincorporated, of which such party or any
other subsidiary of such party is a general partner (excluding partnerships the
general partnership interests of which held by such party or any subsidiary of
such party do not have a majority of the voting interests in such partnership)
or of which at least a majority of the securities or other interests having by
their terms ordinary voting power to elect a majority of the Board of Directors
or others performing similar functions with respect to such corporations or
other organizations is directly or indirectly owned or controlled by such party
and/or by any one or more of the subsidiaries.
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Except as set forth in the disclosure letter delivered to NPB at or prior
to the execution of this Agreement ("AMI Disclosure Schedule"), AMI represents
and warrants to NPB as follows:
4.1 Organization. AMI is a corporation duly organized, validly existing
and in good standing under the laws of the State of Minnesota and has the
corporate power to carry on its business as it is now being conducted. AMI is
duly qualified as a foreign corporation to do business, and is in good standing
in each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities makes such qualification necessary, except
where the failure to be so qualified will not in the aggregate have a Material
Adverse Effect. Each subsidiary of AMI is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or organization, has the corporate power to carry on its business
as it is now being conducted and is duly qualified as a foreign corporation to
do business, and is in good standing in each jurisdiction where the character of
its properties owned or held under lease or the nature of its activities makes
such qualification necessary, except where the failure to be so duly organized,
validly existing and in good standing, to have such corporate power or to be so
qualified will not in the aggregate have a Material Adverse Effect. AMI has
delivered to NPB or its counsel complete and correct copies of its and its
subsidiaries' Articles of Incorporation and Bylaws.
4.2 Capitalization.
(a) As of September 1, 1996, the authorized capital stock of AMI consists
of 15,000,000 shares of AMI Common Stock. As of September 1, 1996, 4,950,842
shares of AMI Common Stock were issued and outstanding, stock options to acquire
1,177,400 shares of AMI Common Stock (the "AMI Stock Options") were outstanding
under all stock option plans of AMI, 417,955 additional shares of AMI Common
Stock were reserved for issuance under AMI's stock option plans. No changes have
occurred in such capitalization since September 1, 1996 that, in the aggregate,
would be material to AMI, except for option exercises in the ordinary course of
business. All of the issued and outstanding shares of AMI Common Stock are
validly issued, fully paid, nonassessable and free of preemptive rights or
similar rights created by statute, the Articles of Incorporation or Bylaws of
AMI or any agreement to which AMI or any of its subsidiaries is a party or by
which AMI or any of its subsidiaries is bound. Since September 1, 1996, AMI has
not issued any shares of its capital stock, except upon the exercise of AMI
Stock Options.
(b) Except as set forth in Section 4.2, there are not now, and at the
Effective Time there will not be, any shares of capital stock of AMI issued or
outstanding or any options, warrants, subscriptions, calls, rights, convertible
securities or other agreements or commitments obligating AMI to issue, transfer
or sell any shares of its capital stock. As of the date hereof, no bonds,
debentures, notes or other indebtedness having the right to vote (or convertible
into or exercisable for securities having the right to vote) on any matters on
which stockholders may vote ("Voting Debt") of AMI were issued or outstanding,
nor will there be any issued or outstanding at the Effective Time. All
outstanding shares of the capital stock of AMI's subsidiaries are validly
issued, fully paid, non-assessable and owned by AMI or one of its subsidiaries
free and clear of any liens, security interest, pledges, agreements, claims,
charges or encumbrances of any nature whatsoever. There are no voting trust or
other agreements or understandings to which AMI is a party with respect to the
voting of the capital stock of AMI or any of its subsidiaries. None of AMI or
its subsidiaries is required to redeem, repurchase or otherwise acquire shares
of capital stock of AMI, or any of its subsidiaries, respectively, as a result
of the transactions contemplated by this Agreement. Immediately after the
Effective Time, there will be no option, warrant, call, right or agreement
obligating AMI or any subsidiary of AMI to issue, deliver or sell, or cause to
be issued, delivered or sold, any shares of AMI Common Stock or any Voting Debt,
or obligating AMI or any subsidiary of AMI to grant, extend or enter into any
such option, warrant, call, right or agreement.
4.3 Authority Relative to this Agreement. AMI has the corporate power to
enter into this Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement by AMI and the consummation by AMI of
the transactions contemplated hereby have been duly authorized by AMI's Board of
Directors and, except for the favorable vote of a majority of the shares of
outstanding capital stock of AMI entitled to vote thereon in accordance with
applicable law, no other corporate proceedings on the part of AMI are necessary
to approve this Agreement or the transactions contemplated hereby. This
Agreement has been
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duly and validly executed and delivered by AMI and constitutes a valid and
binding agreement of AMI, enforceable against AMI in accordance with its terms.
4.4 Consents and Approvals; No Violations. Except for applicable
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"HSR Act"), the Securities Act of 1933, as amended (the "Securities Act"), the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), state or
foreign laws relating to takeovers, if applicable, state securities or blue sky
laws, and the filing and recordation of a Certificate of Merger as required by
the DGCL and MBCA, no filing with, and no permit, authorization, consent or
approval of, any public or governmental body or authority is necessary for the
consummation by AMI of the transactions contemplated by this Agreement, except
where a failure to make such filing or to obtain such permit, registration,
authorization, consent or approval will not in the aggregate have a Material
Adverse Effect. Neither the execution and delivery of this Agreement by AMI, nor
the consummation by AMI of the transactions contemplated hereby, nor compliance
by AMI with any of the provisions hereof, will (a) conflict with or result in
any breach of any provisions of the Articles of Incorporation or Bylaws of AMI
or any of its subsidiaries, (b) result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation, acceleration or change in
the award, grant, vesting or determination) under, or give rise to creation of
any lien, charge, security interest or encumbrance upon any of the respective
properties or assets of AMI or any of its subsidiaries under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
license, contract, lease, agreement, arrangement or other instrument or
obligation to which AMI or any of its subsidiaries is a party or by which any of
them or any of their properties or assets may be bound or affected or (c)
violate any order, writ, injunction, decree, statute, rule or regulation of any
court or government authority applicable to AMI, any of its subsidiaries or any
of their properties or assets, except in the case of clauses (b) and (c) for
violations, breaches, defaults (or rights of termination, cancellation,
acceleration or change), liens, charges, security interests or encumbrances
which would not in the aggregate have a Material Adverse Effect.
4.5 Reports and Financial Statements. AMI has filed all reports required
to be filed with the Securities and Exchange Commission (the "SEC") pursuant to
the Exchange Act since May 1980 including, without limitation, Annual Reports on
Form 10-K for the years ended April 30, 1994, April 30, 1995 and April 30, 1996
(all such reports and amendments thereto, collectively, the "AMI SEC Reports"),
and has previously furnished or made available to NPB true and complete copies
of all AMI SEC Reports filed with respect to periods beginning after April 30,
1992 (including any exhibits thereto) and will promptly deliver to NPB any AMI
SEC Reports filed between the date hereof and the Effective Time. None of such
AMI SEC Reports, as of their respective dates (as amended through the date
hereof), contained or, with respect to the AMI SEC Reports filed after the date
hereof, will contain any untrue statement of a material fact or omitted or, with
respect to the AMI SEC Reports filed after the date hereof, will omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Each of the balance sheets (including the related notes) included in
the AMI SEC Reports fairly presents the consolidated financial position of AMI
and its subsidiaries as of the date thereof, and the other related statements
(including the related notes) included therein fairly present the results of
operations and the changes in cash flows of AMI and its subsidiaries for the
respective periods set forth therein, all in conformity with generally accepted
accounting principles consistently applied during the periods involved, except
as otherwise noted therein and subject, in the case of the unaudited interim
financial statements, to (a) normal year end adjustments which would not in the
aggregate be material in amount or effect and (b) the permitted exclusion of all
footnotes that would otherwise be required by generally acceptable accounting
principles.
4.6 Absence of Certain Changes or Events. Except as disclosed in the AMI
SEC Reports filed prior to the date of this Agreement, since April 30, 1996,
neither AMI nor any of its subsidiaries: (a) has taken any of the actions
prohibited in Section 6.1 or Section 6.2 hereof; (b) has incurred any material
liability, except in the ordinary course of its business and consistent with
past practices; (c) has suffered any change, or any event involving a
prospective change, in its business, assets, financial condition or results of
operation which has had, or is reasonably likely to have, in the aggregate a
Material Adverse Effect (other than as a result of changes or proposed changes
in federal or state health care (including health care reimbursement) laws or
regulations of
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general applicability or interpretations thereof, changes in generally accepted
accounting principles and changes that could, under the circumstances,
reasonably have been anticipated in light of disclosures made in writing by AMI
to NPB prior to the execution of this Agreement); or (d) subsequent to the date
hereof, except as permitted by Section 6.1 or Section 6.2 hereof, will conduct
its business and operations other than in the ordinary course of business and
consistent with past practices.
4.7 Information in Registration Statement and Proxy Statement. The
information relating to AMI and its subsidiaries to be contained in (a) the
Registration Statement on Form S-4 to be filed with the SEC by NPB under the
Securities Act for the purpose of registering the shares of NPB Common Stock to
be issued in the Merger or pursuant to this Agreement (the "Registration
Statement") and (b) the proxy statement to be distributed in connection with
AMI's meeting of stockholders to vote upon this Agreement and related matters
(the "Proxy Statement"), will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading.
4.8 Litigation. As of the date of this Agreement, except as disclosed in
the AMI SEC Reports filed prior to the date of this Agreement and except to the
extent that in the aggregate they would not reasonably be expected to have a
Material Adverse Effect: (a) there is no action, suit, judicial or
administrative proceeding, arbitration or investigation pending or, to the best
knowledge of AMI, threatened against or involving AMI or any of its
subsidiaries, or any of their properties or rights, before any court,
arbitrator, or administrative or governmental body; (b) there is no judgment,
decree, injunction, rule or order of any court, governmental department,
commission, agency, instrumentality or arbitrator outstanding against AMI or any
of its subsidiaries; and (c) AMI and its subsidiaries are not in violation of
any term of any judgments, decrees, injunctions or orders outstanding against
them.
4.9 Contracts.
(a) Each of the material contracts, instruments, mortgages, notes, security
agreements, leases, agreements or understandings, whether written or oral, to
which AMI or any of its subsidiaries is a party that relates to or affects the
assets or operations of AMI or any of its subsidiaries or to which AMI or any of
its subsidiaries or their respective assets or operations may be bound or
subject is a valid and binding obligation of AMI and in full force and effect
with respect to AMI or such subsidiary and, to the best knowledge of AMI, with
respect to all other parties thereto. Except to the extent that the consummation
of the transactions contemplated by this Agreement may require the consent of
third parties, there are no existing defaults by AMI or any of its subsidiaries
thereunder or, to the knowledge of AMI, by any other party thereto, and no event
of default has occurred, and no event, condition or occurrence exists, that
(whether with or without notice, lapse of time, the declaration of default or
other similar event) would constitute a default by AMI or any of its
subsidiaries thereunder, other than defaults that would not in the aggregate
have a Material Adverse Effect. Section 4.9(a) of the AMI Disclosure Schedule
lists all consents of third parties required for the consummation of the
transactions contemplated by this Agreement.
(b) Except (i) as set forth in the AMI SEC Reports (including the exhibits
thereto) filed prior to the date of this Agreement, and (ii) for this Agreement,
as of the date of this Agreement neither AMI nor any of its subsidiaries is a
party to any oral or written (v) consulting agreement, (w) joint venture, (x)
noncompetition or similar agreement that restricts AMI or its subsidiaries from
engaging in a line of business, (y) agreement with any executive officer or
other employee of AMI or any subsidiary the benefits of which are contingent, or
the terms of which are altered, upon the occurrence of a transaction involving
AMI of the nature contemplated by this Agreement, or (z) agreement with respect
to any executive officer of AMI or any subsidiary providing any term of
employment or compensation guaranty. AMI has no agreement or plan, including any
stock option plan, stock appreciation rights plan, restricted stock plan or
stock purchase plan, any of the benefits of which will be increased, or the
vesting of the benefits of which will be accelerated, by the occurrence of any
of the transactions contemplated by this Agreement or the value of any of the
benefits of which will be calculated on the basis of any of the transactions
contemplated by this Agreement.
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(c) AMI has no agreements or arrangements to sell or otherwise dispose of,
or lease, acquire or otherwise invest in, any property, lines of business or
other assets that are in the aggregate material to AMI's business.
4.10 Employee Benefit Plans.
(a) Section 4.10(a) of the AMI Disclosure Schedule sets forth a true and
complete list of each written or oral employee benefit plan (including, without
limitation, any "employee benefit plan" as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), policy or
agreement (including, without limitation, any employment agreement or severance
agreement) that is maintained (all of the foregoing, the "AMI Plans"), or is or
was contributed to by AMI or pursuant to which AMI is still potentially liable
for payments, benefits or claims. A copy of each AMI Plan as currently in effect
and, if applicable, the most recent Annual Report, Actuarial Report or
Valuation, Summary Plan Description, Trust Agreement and a Determination Letter
issued by the IRS for each AMI Plan have heretofore been delivered to NPB or its
counsel. Neither AMI nor any trade or business, whether or not incorporated (an
"ERISA Affiliate"), which together with AMI would be deemed a "single employer"
within the meaning of Section 4001 of ERISA, has maintained or contributed to
any plan subject to Title IV of ERISA or Section 412 of the Code (including any
"multiemployer plan," as defined in Section 3(37) of ERISA ("Multiemployer
Plan")) during the six calendar years preceding the date of this Agreement.
(b) Each AMI Plan which is an "employee benefit plan," as defined in
Section 3(3) of ERISA, complies by its terms and in operation with the
requirements provided by any and all statutes, orders or governmental rules or
regulations currently in effect and applicable to AMI Plans, including but not
limited to ERISA and the Code, except for instances of noncompliance that would
not in the aggregate have a Material Adverse Effect.
(c) All reports, forms and other Reports required to be filed with any
government entity with respect to any AMI Plan (including without limitation,
summary plan descriptions, Forms 5500 and summary annual reports) have been
timely filed and are accurate, except for instances of noncompliance that would
not in the aggregate have a Material Adverse Effect.
(d) Each AMI Plan intended to qualify under Section 401(a) of the Code has
been determined by the Internal Revenue Service to so qualify after January 1,
1985, and each trust maintained pursuant thereto has been determined by the
Internal Revenue Service to be exempt from taxation under Section 501 of the
Code. Nothing has occurred since the date of the Internal Revenue Service's
favorable determination letter that could adversely affect the qualification of
the AMI Plan and its related trust, except such adverse effects as would not in
the aggregate constitute a Material Adverse Effect. AMI and each ERISA Affiliate
of AMI have timely and properly applied for a written determination by the
Internal Revenue Service on the qualification of each such AMI Plan and its
related trust under Section 401(a) of the Code, as amended by the Tax Reform Act
of 1986 and subsequent legislation enacted through the date hereof, and Section
501 of the Code.
(e) All contributions or other amounts payable by AMI or its subsidiaries
as of the Effective Time with respect to each AMI Plan and in respect of current
or prior plan years have been or will be (prior to the Effective Time) either
paid or accrued on the Financial Statements of AMI in accordance with past
practice and the recommended contribution in any actuarial report.
(f) No AMI Plan provides benefits, including without limitation death or
medical benefits (whether or not insured), with respect to current or former
employees for periods extending beyond their retirement or other termination of
service (other than (i) continuation group health coverage pursuant to Section
4980B of the Code, (ii) death benefits or retirement benefits under any
"employee pension plan," as that term is defined in Section 3(2) of ERISA, (iii)
deferred compensation benefits with respect to which there is an accrual of
liability on the books of AMI or its ERISA Affiliates, or (iv) benefits the full
cost of which is borne by the current or former employee (or his or her
beneficiary)).
(g) All insurance premiums (including premiums to the Pension Benefit
Guaranty Corporation) have been paid in full, subject only to normal
retrospective adjustments in the ordinary course, with regard to AMI Plans for
plan years ending on or before the date hereof.
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(h) As of the date hereof, no AMI Plan subject to Title IV of ERISA, and no
employee benefit plan maintained by an ERISA Affiliate of AMI and subject to
Title IV of ERISA, has benefit liabilities (as defined in Section 4001(a)(16) of
ERISA) exceeding the assets of such plan or has been completely or partially
terminated.
(i) With respect to each AMI Plan:
(i) no prohibited transactions (as defined in Section 406 or 407 of
ERISA or Section 4975 of the Code) have occurred for which a statutory
exemption is not available;
(ii) no reportable event (as defined in Section 4043 of ERISA) has
occurred as to which a notice would be required to be filed with the
Pension Benefit Guaranty Corporation;
(iii) no action or claims (other than routine claims for benefits made
in the ordinary course of Plan administration for which Plan administrative
review procedures have not been exhausted) are pending or, to the knowledge
of AMI, threatened or imminent against or with respect to AMI Plan, any
employer who is participating (or who has participated) in any Plan or any
fiduciary (as defined in Section 3(21) of ERISA), of the AMI Plan; and
(iv) neither AMI nor any fiduciary has any knowledge of any facts
which could give rise to any such action or claim.
(j) Neither AMI nor any ERISA Affiliate of AMI has any liability or is
threatened with any liability (whether joint or several) (i) for the termination
of any single employer plan under Sections 4062 or 4064 of ERISA or any multiple
employer plan under Section 4063 of ERISA, (ii) for any lien imposed under
Section 302(f) of ERISA or Section 412(n) of the Code, (iii) for any interest
payments required under Section 302(e) of ERISA or Section 412(m) of the Code,
(iv) for any excise tax imposed by Sections 4971, 4975, 4976, 4977 or 4979 of
the Code, (v) for any minimum funding contributions under Section 302(c)(11) of
ERISA or Section 412(c)(11) of the Code, (vi) to a fine under Section 502 of
ERISA, or (vii) for any transaction within the meaning of Section 4069 of ERISA.
(k) AMI has not incurred any withdrawal liability with respect to any
Multiemployer Plan within the meaning of Sections 4201 and 4204 of ERISA, and no
liabilities exist with respect to withdrawals from any Multiemployer Plans which
could subject AMI to any controlled group liability under Section 4001(b) of
ERISA.
(l) All of the AMI Plans, to the extent applicable, are in compliance with
the continuation of group health coverage provisions contained in Section 4980B
of the Code and Section 601 through 608 of ERISA, except for such instances of
noncompliance which would not in the aggregate have a Material Adverse Effect.
4.11 Tax Matters. AMI makes the following representations and warranties
with respect to tax matters.
(a) Definitions. For purposes of this Section 4.11, the following
definitions shall apply:
(i) The term "AMI Group" shall mean, individually and collectively,
(A) AMI and (B) any individual, trust, corporation, partnership or any
other entity as to which AMI is liable for Taxes incurred by such
individual or entity either as a transferee, or pursuant to Treasury
Regulations Section 1.1502-6, or pursuant to any other provision of
federal, territorial, state, local or foreign law or regulations.
(ii) The term "Taxes" shall mean all taxes, however denominated,
including any interest, penalties or other additions to tax that may become
payable in respect thereof, imposed by any federal, territorial, state,
local or foreign government or any agency or political subdivision of any
such government, which taxes shall include, without limiting the generality
of the foregoing, all income or profits taxes (including, but not limited
to, federal income taxes and state income taxes), payroll and employee
withholding taxes, unemployment insurance, social security taxes, sales and
use taxes, ad valorem taxes, excise taxes, franchise taxes, gross receipts
taxes, business license taxes, occupation taxes, real and personal property
taxes, stamp taxes, transfer taxes, workers' compensation, Pension Benefit
Guaranty Corporation premiums and other governmental charges, and other
obligations of the same or of a similar nature to any of the foregoing,
which the AMI Group is required to pay, withhold or collect.
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(iii) The term "Returns" shall mean all reports, estimates,
declarations of estimated tax, information statements and returns relating
to, or required to be filed in connection with, any Taxes, including
information returns or reports with respect to backup withholding and other
payments to third parties.
(b) Returns Filed and Taxes Paid. (i) All Returns required to be filed by
or on behalf of members of the AMI Group have been duly filed on a timely basis
and such Returns are true, complete and correct in all material respects, (ii)
all Taxes shown to be payable on the Returns or on subsequent assessments with
respect thereto have been paid in full on a timely basis, and (iii) no other
Taxes are payable by the AMI Group with respect to items or periods covered by
such Returns (whether or not shown on or reportable on such Returns) or with
respect to any period prior to the date of this Agreement. Each member of the
AMI Group has withheld and paid over all Taxes required to have been withheld
and paid over, and complied with all information reporting and backup
withholding requirements, including maintenance of required records with respect
thereto, in connection with amounts paid or owing to any employee, creditor,
independent contractor, or other third party. There are no liens on any of the
assets of any member of the AMI Group with respect to Taxes, other than liens
for Taxes not yet due and payable or for Taxes that a member of the AMI Group is
contesting in good faith through appropriate proceedings and for which
appropriate reserves have been established.
(c) Tax Reserves. The amount of AMI's liability for unpaid Taxes for all
periods ending on or before the date of this Agreement does not in the aggregate
exceed the amount of the current liability accruals for Taxes (excluding
reserves for deferred Taxes) reflected on the consolidated balance sheet of AMI
included in the AMI SEC Report for the quarter ending closest to the date of
this Agreement, and the amount of AMI's liability for unpaid Taxes for all
periods ending on or before the Effective Time shall not in the aggregate
materially exceed the amount of the current liability accruals for Taxes
(excluding reserves for deferred Taxes), as such accruals are reflected on the
consolidated balance sheet of AMI included in the AMI SEC Report for the quarter
ending closest to the Effective Time, plus additions thereto accrued through the
Effective Time that are consistent with past practice and in the ordinary course
of business.
(d) Consolidated Returns Furnished. NPB has been furnished by AMI true and
complete copies of (i) income tax audit reports, statements of deficiencies,
closing or other agreements received by AMI Group or on behalf of the AMI Group
relating to federal income taxes, and (ii) all federal income tax returns for
the AMI Group, in each case for all periods ending on and after April 30, 1992.
AMI has never been a member of an affiliated group filing consolidated returns
other than a group of which AMI was the common parent.
(e) Tax Deficiencies; Audits; Statutes of Limitations. No deficiencies
exist or have been asserted (either in writing or verbally, formally or
informally) or are expected to be asserted with respect to Taxes of the AMI
Group that would cause AMI's reserves for taxes to be understated by an amount
material to AMI. No federal income tax returns of the AMI Group are currently
under audit, and no waiver or extension of the statute of limitations is in
effect with respect to any federal income tax returns.
(f) Tax Sharing Agreements. AMI is not (nor has it ever been) a party to
any tax sharing agreement.
(g) Tax Elections and Special Tax Status. NPB is not required to withhold
tax on the acquisition of the stock of AMI by reason of Section 1445 of the
Code. No member of the AMI Group is a "consenting corporation" under Section
341(f) of the Code.
(h) Section 6038A Compliance. (i) AMI has filed all reports and has
created and/or retained all records required under Section 6038A of the Code
with respect to its ownership by and transactions with related parties; (ii)
each related foreign person required to maintain records under Section 6038A
with respect to transactions between AMI and the related foreign person has
maintained such records; (iii) all material Reports that are required to be
created and/or preserved by the related foreign person with respect to
transactions with AMI are either maintained in the United States, or AMI is
exempt from the record maintenance requirements of Section 6038A with respect to
such transactions under Treasury Regulation section 1.6038A-1; (iv) AMI is not a
party to any record maintenance agreement with the Internal Revenue Service with
respect to Section 6038A; and (v) each related foreign person that has engaged
in transactions with AMI has authorized AMI to act as its limited agent solely
for purposes of Sections 7602, 7603, and 7604
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of the Code with respect to any request by the Internal Revenue Service to
examine records or produce testimony related to any transaction with AMI, and
each such authorization remains in full force and effect.
4.12 Compliance With Applicable Law. AMI and each of its subsidiaries
holds all licenses, franchises, permits, variances, exemptions, orders,
approvals and authorizations necessary for the lawful conduct of its business
under and pursuant to, and the business of each of AMI and its subsidiaries is
not being conducted in violation of, any provision of any federal, state, local
or foreign statute, law, ordinance, rule, regulation, judgment, decree, order,
concession, grant, franchise, permit or license or other governmental
authorization or approval applicable to AMI or any of its subsidiaries, except
to the extent that the failure or violation would not in the aggregate have a
Material Adverse Effect.
4.13 Subsidiaries. Exhibit 21 to AMI's most recent Form 10-K included in
the AMI SEC Reports lists all the subsidiaries of AMI as of the date of this
Agreement and indicates for each such subsidiary as of such date the
jurisdiction of incorporation or organization.
4.14 Interested Party Transactions. Except as disclosed in the AMI SEC
Reports, neither AMI nor any of its subsidiaries is indebted to any director,
officer, employee or agent of AMI or any of its subsidiaries (except for amounts
due as normal salaries and bonuses and in reimbursement of ordinary expenses),
and no such person is indebted to AMI or any of its subsidiaries, and there have
been no other transactions of the type required to be disclosed pursuant to
Items 402 and 404 of Regulation S-K promulgated under the Securities Act and
Exchange Act since April 30, 1992.
4.15 Labor and Employment Matters.
(a) (i) Except for such matters that would not in the aggregate have a
Material Adverse Effect, AMI and its subsidiaries are and have been in
compliance with all applicable laws respecting employment and employment
practices, terms and conditions of employment and wages and hours, including,
without limitation, the Immigration Reform and Control Act, the Worker
Adjustment and Retraining Notification Act, and such laws respecting employment
discrimination, equal opportunity, affirmative action, worker's compensation,
occupational safety and health requirements and unemployment insurance and
related matters, and are not engaged in and have not engaged in any unfair labor
practice. (ii) No investigation or review by or before any governmental entity
concerning any violations of any such applicable laws is pending or, to the
knowledge of AMI, threatened, nor has any such investigation occurred during the
last seven years, and no governmental entity has provided any notice to AMI or
any of its subsidiaries asserting an intention to conduct any such
investigation. (iii) There is no labor strike, dispute, slowdown or stoppage
actually pending or, to the knowledge of AMI, threatened against AMI or any of
its subsidiaries. (iv) No union representation question or union organizational
activity exists respecting the employees of AMI or any of its subsidiaries. (v)
Neither AMI nor any of its subsidiaries has experienced any work stoppage or
other labor difficulty. (vi) No collective bargaining agreement exists which is
binding on AMI or any of its subsidiaries.
(b) In the event of termination of the employment of any officers,
directors, employees or agents of AMI or any of its subsidiaries, neither AMI,
any of its subsidiaries, NPB, the Surviving Corporation, nor any other
subsidiaries of NPB, will pursuant to any agreement or by reason of anything
done prior to the Effective Time by AMI or any of its subsidiaries be liable to
any of said officers, directors, employees or agents for so-called "severance
pay" or any other similar payments or benefits, including, without limitation,
post-employment healthcare (other than pursuant to COBRA) or insurance benefits.
4.16 Ownership of Shares of NPB Common Stock. As of the date hereof,
neither AMI nor, to its knowledge, any of its affiliates or associates (as such
terms are defined under the Exchange Act), (a) beneficially owns, directly or
indirectly, or (b) is party to any agreement, arrangement or understanding for
the purpose of acquiring, holding, voting or disposing of, in each case, shares
of NPB Common Stock, except for shares of NPB Common Stock in the aggregate
representing less than 1% of the outstanding shares of NPB Common Stock.
4.17 Insurance. As of the date hereof, AMI and each of its subsidiaries
are insured by insurers reasonably believed by AMI to be of recognized financial
responsibility against such losses and risks and in such amounts as are
customary in the businesses in which they are engaged. All material policies of
insurance
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and fidelity or surety bonds insuring AMI or any of its subsidiaries or their
respective businesses, assets, employees, officers and directors are in full
force and effect. As of the date hereof, there are no material claims by AMI or
any of its subsidiaries under any such policy or instrument as to which any
insurance company is denying liability or defending under a reservation of
rights clause.
4.18 Contracts with Physicians, Hospitals, HMOs and Third Party
Providers. AMI has made available to representatives of NPB a list and copies
of all outstanding contracts, partnerships, joint ventures and other
arrangements or understandings (written or oral) that are material to AMI's
business and that are between (a) AMI or any of its subsidiaries and (b) any
physician, hospital, HMO, other managed care organization, home care or other
third-party provider relating to the sale or supply of medical devices, the
provision of medical or consulting services, treatments or patient referrals or
any other similar activities.
4.19 Environmental Protection.
(a) None of AMI, AMI's subsidiaries, or any AMI Property (as defined in
subsection (d) below) is or has been in violation of any federal, state or local
law, ordinance or regulation concerning industrial hygiene or environmental
conditions, including, but not limited to, soil and groundwater conditions
("Environmental Laws").
(b) Neither AMI nor any of its subsidiaries has reported any, or has had
knowledge of any circumstances giving rise to any reporting requirement under
applicable Environmental Laws as to any, spills or releases of any Hazardous
Materials on, under or about any AMI Property, nor has AMI or any of its
subsidiaries received any notices of spills or releases of Hazardous Materials
on, under or about any AMI Property. "Hazardous Material" shall mean any
substance, chemical, waste or other material which is listed, defined or
otherwise identified as hazardous, toxic or dangerous under any applicable law;
as well as any petroleum, petroleum product or by-product, crude oil, natural
gas, natural gas liquids, liquefied natural gas, or synthetic gas useable for
fuel, and "source," "special nuclear," and "by-product" material as defined in
the Atomic Energy Act of 1954, 42 U.S.C. sec.sec. 2011 et seq.
(c) There is no proceeding or investigation pending or, to the knowledge of
AMI, threatened by any governmental entity or other person with respect to the
presence of Hazardous Material on, under or about AMI Properties or the
migration thereof from or to other property. Neither AMI nor any of its
subsidiaries has ever been required by any governmental entity to treat, clean
up, or otherwise dispose of, remove or neutralize any Hazardous Material on,
under or about any AMI Property.
(d) Neither AMI, any current or former subsidiary of AMI, nor to AMI's
knowledge, any other person has engaged in any activity that might reasonably be
expected to involve the generation, use, manufacture, treatment, transportation,
storage in tanks or otherwise, or disposal of Hazardous Material on or from any
property that AMI or any of its current or former subsidiaries now owns or
leases or has previously owned or leased or in which AMI or any such subsidiary
now holds or has previously held any security interest, mortgage, or other lien
or interest ("AMI Property") which generation, use, manufacture, treatment,
transportation, storage or disposal would in the aggregate have a Material
Adverse Effect, and no (i) presence, release, threatened release, discharge,
spillage or migration of Hazardous Material, (ii) condition that has resulted or
could result in any use, ownership or transfer restriction, or (iii) to the
knowledge of AMI, condition of actual or potential nuisance has occurred on or
from such AMI Property, and to the knowledge of AMI, no condition exists that
could give rise to any suit, claim, action, proceeding or investigation by any
person or governmental entity against AMI, any of its subsidiaries or any other
person or such AMI Property as a result of or in connection with (a) any of the
foregoing events, (b) any failure to obtain any required permits or approvals of
any governmental entity, (c) the violation of any terms or conditions of such
permits, or (d) any other violation of Environmental Laws.
(e) To the knowledge of AMI, there are no substances or conditions in or on
AMI Property which may support claims or causes of action under any applicable
Environmental Law.
(f) For purposes of this Section 4.19, the term "Material Adverse Effect"
includes (i) any material injunction or criminal action or proceeding against or
involving AMI and (ii) any requirement that executive
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officers of NPB or AMI be subjected to a consent decree or become individually
involved in any proceeding in clause (i) above.
4.20 Intellectual Property Rights.
(a) Section 4.20(a) of the AMI Disclosure Schedule sets forth an accurate
and complete list of all (i) patents, applications for patents, registrations of
trademarks (including service marks) and applications therefor and registrations
of copyrights and applications therefor that are owned by AMI or any of AMI's
subsidiaries; (ii) other Intellectual Property Rights (as defined below) that
are owned by AMI or AMI's subsidiaries; (iii) unexpired licenses relating to AMI
Intellectual Property Rights (as defined in (i) below) that have been granted to
or by AMI or any of AMI's subsidiaries; and (iv) other agreements relating to
Intellectual Property Rights.
(b) AMI and AMI's subsidiaries collectively own and have the right to use,
and to license others to use, all AMI Intellectual Property Rights. Such
ownership and right to use, and to license others to use, are free and clear of,
and without liability under, all liens and security interests of third parties.
Such ownership and right to use, and to license others to use, are free and
clear of, and without liability under, all claims and rights of third parties.
(c) AMI has taken reasonable steps sufficient to safeguard and maintain the
secrecy and confidentiality of, or AMI's proprietary rights in, the unpatented
know-how, technology, proprietary processes, formulae and other information that
is utilized in the conduct of AMI's business, including, without limitation, the
know-how, technology, proprietary processes, formulae, and other information
listed as trade secrets in Section 4.20(c) of the AMI Disclosure Schedule.
Without limitation of the generality of the foregoing, AMI and AMI's
subsidiaries have obtained confidentiality and inventions assignment agreements
from all AMI's and such subsidiaries' past and present employees and independent
contractors involved in the creation or development of AMI Intellectual Property
Rights (including, without limitation, from all employees and contractors who
are inventors, authors, creators or developers of AMI Intellectual Property
Rights).
(d) There are no royalties, honoraria, fees or other payments payable by
AMI or AMI subsidiaries to any person by reason of the ownership, use, license,
sale or disposition of any of AMI Intellectual Property Rights.
(e) Neither AMI nor any of AMI's subsidiaries (i) knows of any infringement
in the conduct of AMI's business the right or claimed right of any other party
with respect to any Intellectual Property Rights known to AMI, or (ii) has
knowledge of any alleged or claimed infringement by any product or process
manufactured, used, sold or under development by or for AMI or AMI's
subsidiaries in the conduct of AMI's business.
(f) No independent contractors who have performed services related to AMI's
business have any right, title or interest in AMI Intellectual Property Rights.
(g) The execution, delivery and performance of this Agreement by AMI, and
the consummation by AMI of the transactions contemplated hereby, will not
breach, violate or conflict with any agreement governing AMI Intellectual
Property Rights, will not cause the forfeiture or termination or give rise to a
right of forfeiture or termination of AMI's Intellectual Property Right or in
any way impair the right of AMI to use, sell, license or dispose of, or bring
any action for the infringement of, AMI Intellectual Property Rights or any
portion thereof.
(h) For purposes of this Section 4.20, "use," with respect to Intellectual
Property Rights, includes make, reproduce, display or perform (publicly or
otherwise), prepare derivative works based on, sell, distribute, disclose and
otherwise exploit such Intellectual Property Rights and products incorporating
or subject to such Intellectual Property Rights.
(i) As used in this Agreement, the term "Intellectual Property Rights"
means intellectual property rights, including, without limitation, patents,
patent applications, patent rights, trademarks, trademark applications, trade
names, service marks, service mark applications, copyrights, copyright
applications, publication rights, computer programs and other computer software
(including source codes and object codes), inventions, know-how, trade secrets,
technology, proprietary processes and formulae. As used in this
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Agreement, the term "AMI Intellectual Property Rights" means all Intellectual
Property Rights that are part of the conduct of the business of AMI.
4.21 FDA and Related Matters.
(a) AMI has made and will continue to make available to NPB (i) all
Regulatory or Warning Letters, Notices of Adverse Findings and Section 305
notices and similar letters or notices issued by the Food and Drug
Administration ("FDA") or any other governmental entity that is concerned with
the safety, efficacy, reliability or manufacturing of the medical products sold
by AMI or its subsidiaries (hereafter in this Section 4.21 "Medical Device
Regulatory Agency") to AMI or any of its subsidiaries; (ii) all United States
Pharmacopoeia product problem reporting program complaints or reports, MedWatch
FDA forms 3500 and device experience network complaints received by AMI or any
of its subsidiaries and all Medical Device Reports filed by AMI or any of its
subsidiaries, which complaints or reports pertain to any incident involving
death or serious injury, and for which incident there has been (x) a notice or
followup inquiry to AMI by the FDA, (y) a litigation or arbitration claim or
cause of action commenced, or (z) a notice to any insurance carrier of AMI
tendering the defense or giving any notice of a possible or actual claim against
AMI; (iii) all product recalls and safety alerts conducted by or issued to AMI
or any of its subsidiaries and any requests from the FDA or any Medical Device
Regulatory Agency requesting AMI or any of its subsidiaries to cease to
investigate, test or market any product; (iv) any civil penalty actions begun by
FDA or any Medical Device Regulatory Agency against AMI or any of its
subsidiaries and known about by AMI or any of its subsidiaries and all consent
decrees entered into by the FDA and AMI or AMI's subsidiaries; and (v) any other
written communications between AMI or any of its subsidiaries, on the one hand,
and the FDA or any Medical Device Regulatory Agency, on the other hand.
(b) Except to the extent that such items would not, individually or in the
aggregate, have a Material Adverse Effect: (i) AMI (or, if applicable, a
subsidiary of AMI) has obtained all consents, approvals, certifications,
authorizations and permits of, and has made all filings with, or notifications
to, all Medical Device Regulatory Agencies pursuant to applicable requirements
of all FDA laws, rules and regulations, and all corresponding state and foreign
laws, rules and regulations applicable to AMI or any of its subsidiaries and
relating to its medical device business or otherwise applicable to AMI's or its
subsidiaries' business; (ii) all representations made by AMI or any of its
subsidiaries in connection with any such consents, approvals, certifications,
authorizations, permits, filings and notifications were true and correct in all
material respects at the time such representations and warranties were made, and
AMI's products, and the products of AMI's subsidiaries, comply with, and perform
in accordance with the specifications described in, such representation; (iii)
AMI and AMI's subsidiaries are in compliance with all applicable FDA laws, rules
and regulations, (including Good Manufacturing Practices and Medical Device
Reporting requirements) and all corresponding applicable state and foreign laws,
rules and regulations relating to medical device manufacturers and distributors
or otherwise applicable to AMI's or AMI's subsidiaries' business; (iv) AMI has
no reason to believe that any of the consents, approvals, authorizations,
registrations, certifications, permits, filings or notifications that it or any
of its subsidiaries has received or made to operate their respective businesses
have been or are being revoked or challenged; and (v) there are no
investigations or inquiries pending or threatened relating to the operation of
AMI's or its subsidiaries' businesses or AMI's or its subsidiaries' compliance
with applicable laws relating to its medical device business or otherwise
applicable to AMI's or its subsidiaries' businesses.
4.22 Real Property.
(a) Section 4.22(a) of the AMI Disclosure Schedule lists all of the real
property owned, leased or currently used by AMI or its subsidiaries in the
course of their businesses (the "AMI Real Property"). Section 4.22(a)of the AMI
Disclosure Schedule also lists all material real property owned or used by AMI
or its subsidiaries in the course of their businesses at any time since April
30, 1992, other than AMI Real Property.
(b) All AMI Real Property is in all material respects suitable and adequate
for the uses for which it is currently devoted. AMI or its subsidiaries has good
and marketable title in fee simple absolute to AMI Real Property indicated on
Section 4.22(a) of the AMI Disclosure Schedule to be owned by it, and to the
buildings,
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structures and improvements thereon, and a valid leasehold interest in all other
AMI Real Property, in each case free and clear of all Material Encumbrances.
"Material Encumbrance" means any mortgage, lien, pledge, encumbrance, security
interest, deed of trust, option, encroachment, reservation, order, decree,
judgment, condition, restriction, charge, Other Agreement, claim or equity of
any kind, except for any of the foregoing which (i) secures a liability which is
accurately reflected in the financial statements of the party whose interest in
property is affected thereby; (ii) liens for taxes not yet due; (iii) easements
or other similar rights which do not in the aggregate materially interfere with
the present use of the property affected thereby; and (iv) other encumbrances.
"Other Agreements" means any agreement or arrangement between two or more
persons (or entities) with respect to their relative rights and/or obligations
or with respect to a thing done or to be done (whether or not conditional,
executory, express, implied, in writing or meeting the requirements of
contract), including, without limitation, contracts, leases, promissory notes,
covenants, easements, rights of way, commitments or understanding.
(c) All buildings, structures, fixtures and other improvements on AMI Real
Property are in good repair, to the knowledge of AMI free of defects (latent or
patent), and fit for the uses to which they are currently devoted. To the
knowledge of AMI, all such buildings, structures, fixtures and improvements on
AMI's Real Property conform to all applicable laws. To the knowledge of AMI, the
buildings, structures, fixtures and improvements on each parcel of AMI Real
Property lie entirely within the boundaries of such parcel of AMI Real Property,
and no structures of any kind encroach on AMI Real Property.
(d) To the knowledge of AMI, none of the AMI Real Property is subject to
any Other Agreement or other restriction of any nature whatsoever (recorded or
unrecorded) preventing or limiting AMI's right to use it in the manner that such
property is currently being used or that it is contemplated to be used.
(e) No portion of the AMI Real Property or any building, structure, fixture
or improvement thereon is the subject of, or affected by, any condemnation,
eminent domain or inverse condemnation proceeding currently instituted or
pending, and AMI has no knowledge that any of the foregoing are, or will be, the
subject of, or affected by, any such proceeding.
(f) The AMI Real Property has direct and unobstructed access to adequate
electric, gas, water, sewer and telephone lines, and public streets, all of
which are adequate for the uses to which the AMI Real Property is currently
devoted.
4.23 Complete Copies of Requested Reports. AMI has delivered or made
available true and complete copies of each document that has been requested by
NPB or its counsel in connection with their legal and accounting review of AMI
and its subsidiaries. The minute books of AMI and its subsidiaries made
available to NPB contain a complete and accurate summary of all meetings of
directors and stockholders or actions by written consent since the time of
incorporation of AMI and its subsidiaries through the date of this Agreement,
and reflect all transactions referred to in such minutes accurately.
4.24 Share Ownership. Except as reflected in the AMI SEC Reports as of the
date hereof, to AMI's knowledge there are no stockholders with beneficial
ownership (as defined in the Exchange Act) of more than 5% of AMI Common Stock.
4.25 Opinion of Financial Advisors. AMI has received the opinion of Dain
Bosworth Incorporated to the effect that, as of the date hereof, the Exchange
Ratio is fair to the holders of AMI Common Stock from a financial point of view.
4.26 Pooling of Interests. Based upon consultation with its independent
accountants, neither AMI nor any of its subsidiaries, nor any of their
respective directors, officers or, to the knowledge of AMI, stockholders, has
taken any action that would interfere with NPB's ability to account for the
Merger as a pooling of interests.
4.27 Accounts Receivable. The accounts receivable disclosed in the AMI SEC
Reports as of April 30, 1996, and, with respect to accounts receivable created
since such date, disclosed in any subsequently filed AMI SEC Reports, or as
accrued on the books of AMI in the ordinary course of business consistent with
past practices in accordance with generally accepted accounting principles since
the last filed AMI SEC Reports
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represent and will represent bona fide claims against debtors for sales and
other charges, are not subject to discount except for normal cash and immaterial
trade discounts, and the amount reserved for doubtful accounts and allowances
disclosed in lieu of such AMI SEC Reports or accrued on such books is sufficient
to provide for any losses that may be sustained or realized of tax receivables.
4.28 Customers and Suppliers. As of the date hereof, no customers that
individually accounted for more than 5% of AMI's gross revenues during the
12-month period preceding the date hereof has indicated to AMI that it will
stop, or decrease the rate of, buying services or products of AMI, or has at any
time on or after April 30, 1996 decreased materially its purchase of the
products of AMI. As of the date hereof, no material supplier of AMI has
indicated that it will stop, or decrease the rate of, supplying materials,
products or services to AMI. AMI has not knowingly breached, so as to provide a
benefit to AMI that was not intended by the parties, any agreement with, or
engaged in any fraudulent conduct with respect to, any customer or supplier of
AMI.
4.29 Representations Complete. None of the representations or warranties
made by AMI herein or in any schedule hereto, including the AMI Disclosure
Schedule, or certificate furnished by AMI pursuant to this Agreement, or the AMI
SEC Reports, contain or will contain at the Effective Time any untrue statement
of a material fact or omits or will omit at the Effective Time to state any
material fact necessary in order to make the statements contained herein or
therein, in light of the circumstances under which they were made, not
misleading. To the extent such representations permit omissions of items
otherwise required to be discussed because they are not material or do not or
would not have a Material Adverse Effect on AMI, such omissions in the aggregate
would not and do not have a Material Adverse Effect on AMI.
4.30 Takeover Statutes. No "fair price," "moratorium," "control share
acquisition" or other similar antitakeover statute (each, a "Takeover Statute")
is applicable to the Merger, except for such statutes or regulations as to which
all necessary action has been taken by AMI and its Board of Directors to permit
the consummation of the Merger in accordance with the terms hereof.
4.31 Voting Arrangements. To the knowledge of AMI, there are no
outstanding stockholder agreements, voting trusts, proxies or other arrangements
or understandings among the stockholders of AMI relating to the voting of their
respective shares.
4.32 Ownership of Shares. As of the date hereof, neither AMI nor its
affiliates and associates (as such terms are defined under the Exchange Act) (a)
beneficially own, directly or indirectly, or (b) are parties to any agreement,
arrangement or understanding for the purpose of acquiring, holding, voting or
disposing in each case, shares of capital stock of another company that in the
aggregate represents 10% or more of the outstanding shares of capital stock of
such other company.
4.33 Inventories. The inventories of AMI reflected in the April 30, 1996
balance sheet consist of items that are usable or salable in the ordinary course
of business and do not include below-standard quality, damaged, defective or
obsolete items the value of which has not been fully written down or with
respect to which adequate reserves have not been provided, adjusted for
operations and transactions through the Effective Time in accordance with the
past custom and practice of AMI. The AMI Disclosure Schedule discloses the
addresses of all warehouses or other facilities and customers, if any, in which
or with whom any material amounts of the inventories of AMI are located.
4.34 Product Liability Matters. As of the date of this Agreement, neither
AMI nor any of its subsidiaries has submitted to its product liability insurance
carriers any claims with respect to potential product liability of AMI nor knows
of any such claims which should have been submitted to its product liability
insurance carriers. NPB has previously been afforded access to all files
containing, or been furnished with copies of, all pleadings, claims complaints
and relevant Reports in connection with the foregoing. Neither AMI, nor any of
its subsidiaries, nor to AMI's knowledge, any employee or agent of AMI or any of
its subsidiaries, has made any untrue statement of a material fact or omitted to
state a material fact in connection with obtaining or renewing any insurance
policy providing product liability coverage in respect of the products of AMI or
any of its subsidiaries which could reasonably result in the loss of any
material portion of such coverage and AMI has not received any written notice
from any insurance company stating that any insurance
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policy of AMI or any of its subsidiaries may not provide coverage up to the
limits of such policy for any liability, loss or damage which may be incurred or
suffered by AMI in connection with product liability claims other than the
possible lack of coverage for punitive damages and claims for deductible
amounts.
4.35 No Undisclosed Liabilities. Except to the extent specifically
reflected or reserved against in the Balance Sheet of AMI as of April 30, 1996,
or as otherwise set forth on the AMI Disclosure Schedule, AMI does not have any
material liabilities or obligations of any nature, whether absolute, accrued,
contingent or otherwise and obligations arising after April 30, 1996 in the
ordinary course of business.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF NPB
Except as set forth in the disclosure letter delivered to AMI at or prior
to the execution of this Agreement ("NPB Disclosure Schedule"), NPB represents
and warrants to AMI as follows:
5.1 Organization. NPB is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and has the
corporate power to carry on its business as it is now being conducted. NPB is
duly qualified as a foreign corporation to do business, and is in good standing,
in each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities makes such qualification necessary, except
where the failure to be so qualified will not in the aggregate have a Material
Adverse Effect. Each subsidiary of NPB is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or organization, has the corporate power to carry on its business
as it is now being conducted and is duly qualified to do business, and is in
good standing in each jurisdiction where the character of its properties owned
or held under lease or the nature of its activities makes such qualification
necessary, except where the failure to be so duly organized, validly existing
and in good standing, to have such corporate power or to be so qualified will
not in the aggregate have a Material Adverse Effect. NPB has delivered to AMI or
its counsel complete and correct copies of its Certificate of Incorporation and
Bylaws.
5.2 Capitalization.
(a) As of September 1, 1996, the authorized capital stock of NPB consists
of 150,000,000 shares of NPB Common Stock, and 5,000,000 shares of Preferred
Stock, par value $0.001 per share (the "NPB Preferred Stock"). As of September
1, 1996, 59,915,374 shares of NPB Common Stock were issued and outstanding,
stock options to acquire 7,313,881 shares of NPB Common Stock were outstanding
under all stock option plans of NPB, no warrants to acquire shares of NPB Common
Stock were outstanding, no shares of NPB Preferred Stock were issued and
outstanding, and 3,623,772 additional shares of NPB Common Stock (under NPB's
stock option plans) and 500,000 shares of NPB Preferred Stock were reserved for
issuance. No changes in such capitalization have occurred since September 1,
1996 that, in the aggregate, would be material to NPB, except for option
exercises in the ordinary course of business. All of the issued and outstanding
shares of NPB Common Stock are validly issued, fully paid, nonassessable and
free of preemptive rights or similar rights created by statute, the Certificate
of Incorporation or Bylaws of NPB or any agreement to which NPB or any of its
subsidiaries is a party or by which NPB or any of its subsidiaries is bound.
Since September 1, 1996, NPB has not issued any shares of its capital stock,
except upon the exercise of stock options to acquire shares of NPB Common Stock
to employees under employee benefit plans. All of the shares of NPB Common Stock
issuable in exchange for shares of Common Stock at the Effective Time in
accordance with this Agreement will be, when so issued, duly authorized, validly
issued, fully paid and nonassessable.
(b) Except pursuant to NPB's employee benefit plans and as otherwise
provided in this Agreement and that certain Rights Agreement dated September 1,
1992, as amended, between NPB and The First National Bank of Boston as Rights
Agent (the "NPB Rights Agreement"), there are not now, and at the Effective Time
there will not be, any shares of capital stock of NPB issued or outstanding or
any options, warrants, subscriptions, calls, rights, convertible securities or
other agreements or commitments obligating NPB to issue, transfer or sell any
shares of its capital stock. As of the date hereof, no Voting Debt of NPB was
issued and outstanding and none will be outstanding as of the Effective Time.
All outstanding shares of the capital stock
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of NPB's subsidiaries are validly issued, fully paid, non-assessable and owned
by NPB or one of its subsidiaries free and clear of any liens, security
interest, pledges, agreements, claims, charges, or encumbrances of any nature
whatsoever. There are no voting trust or other agreements or understandings to
which NPB is a party with respect to the voting of the capital stock of NPB or
any of its subsidiaries. None of NPB or its subsidiaries is required to redeem,
repurchase or otherwise acquire shares of capital stock of NPB, or any of its
subsidiaries, respectively, as a result of the transactions contemplated by this
Agreement. Except for options and warrants described above or as contemplated by
Section 7.8 below, immediately after the Effective Time, there will be no
option, warrant, call, right or agreement obligating NPB or any subsidiary of
NPB to issue, deliver or sell, or cause to be issued, delivered or sold, any
shares of NPB Common Stock or any Voting Debt, or obligating NPB or any
subsidiary of NPB to grant, extend, or enter into any such option, warrant,
call, right or agreement.
5.3 Authority Relative to this Agreement. NPB has the corporate power to
enter into this Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement by NPB and the consummation by NPB of
the transactions contemplated hereby have been duly authorized by the Board of
Directors of NPB and no other corporate proceedings on the part of NPB are
necessary to approve this Agreement or the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by NPB and
constitutes a valid and binding agreement of NPB, enforceable against NPB in
accordance with its terms.
5.4 Consents and Approvals; No Violations. Except for applicable
requirements of the HSR Act, Securities Act, Exchange Act, state or foreign laws
relating to takeovers, if applicable, state securities or blue sky laws, and the
filing and recordation of a Certificate of Merger as required by the DGCL and
MBCA, no filing with, and no permit, authorization, consent or approval of, any
public or governmental body or authority is necessary for the consummation by
NPB of the transactions contemplated by this Agreement, except where a failure
to make such filing or to obtain such permit, registration, authorization,
consent or approval will not in the aggregate have a Material Adverse Effect.
Neither the execution and delivery of this Agreement by NPB, nor the
consummation by NPB of the transactions contemplated hereby, nor compliance by
NPB with any of the provisions hereof, will (a) result in any breach of the
Certificate of Incorporation or Bylaws of NPB or any of its subsidiaries, (b)
result in a violation or breach of, or constitute (with or without due notice or
lapse of time or both) a default (or give rise to any right of termination,
cancellation, acceleration or change in the award, grant, vesting or
determination) under, or give rise to creation of any lien, charge, security
interest or encumbrance upon, any of the respective properties or assets of NPB
or any of its subsidiaries under, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, deed of trust, license, contract, lease,
agreement, arrangement, or other instrument or obligation to which NPB or any of
its subsidiaries is a party or by which any of them or any of their properties
or assets may be bound or affected, or (c) violate any order, writ, injunction,
decree, statute, rule or regulation of any court or government authority
applicable to NPB, any of its subsidiaries, or any of their properties or
assets, except in the case of clauses (b) and (c) for violations, breaches,
defaults (or rights of termination, cancellation, acceleration or change),
liens, charges, security interests or encumbrances that would not in the
aggregate have a Material Adverse Effect.
5.5 Reports and Financial Statements; Absence of Certain Changes. NPB has
filed all reports required to be filed with the SEC pursuant to the Exchange Act
since July 7, 1984 including, without limitation, an Annual Report on Form 10-K
for the fiscal year ended July 3, 1995 and Quarterly Reports on Form 10-Q dated
November 15, 1995, February 14, 1996 and May 15, 1996 (all such reports,
collectively, the "NPB SEC Reports"), and has previously furnished or made
available to AMI true and complete copies of all NPB SEC Reports filed with
respect to periods beginning after December 31, 1992 (including any exhibits
thereto) and will promptly deliver to AMI any NPB SEC Reports filed between the
date hereof and the Effective Time. None of such NPB SEC Reports, as of their
respective dates (as amended through the date hereof), contained or, with
respect to the NPB SEC Reports filed after the date hereof, will contain any
untrue statement of a material fact or omitted or, with respect to the NPB SEC
Reports filed after the date hereof, will omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. Each of the
balance sheets (including the related notes) included in the NPB SEC Reports
fairly presents the consolidated financial position of NPB
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and its subsidiaries as of the date thereof, and the other related statements
(including the related notes) included therein fairly present the results of
operations and the changes in cash flows of NPB and its subsidiaries for the
respective periods set forth therein, all in conformity with generally accepted
accounting principles consistently applied during the periods involved, except
as otherwise noted therein and subject, in the case of the unaudited interim
financial statements, to normal year-end adjustments which would not in the
aggregate be material in amount or effect. Except as specifically contemplated
by this Agreement or reflected in the NPB SEC Reports, since May 15, 1996 there
has not been (a) any change or event having a Material Adverse Effect on NPB,
(b) any declaration setting aside or payment of any dividend or distribution
with respect to the NPB Common Stock other than consistent with past practices,
or (c) any material change in NPB's accounting principles, procedures or
methods.
5.6 Information in Registration Statement and Proxy Statement. The
information relating to NPB and its subsidiaries to be contained in the
Registration Statement and the Proxy Statement will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading.
5.7 Share Ownership. Except as reflected in the NPB SEC Reports, as of the
date hereof, to NPB's knowledge there are no stockholders with beneficial
ownership (as defined in the Exchange Act) of more than 5% of the NPB Common
Stock.
5.8 Compliance With Applicable Law. Except as disclosed in the NPB SEC
Reports filed prior to the date of this Agreement, NPB and each of its
subsidiaries holds all licenses, franchises, permits, variances, exemptions,
orders, approvals and authorizations necessary for the lawful conduct of its
business under and pursuant to, and the business of each of NPB and its
subsidiaries is not being conducted in violation of, any provision of any
federal, state, local or foreign statute, law, ordinance, rule, regulation,
judgment, decree, order, concession, grant, franchise, permit or license or
other governmental authorization or approval applicable to NPB or any of its
subsidiaries, except to the extent that the failure or violation would not in
the aggregate have a Material Adverse Effect.
5.9 Ownership of Shares of AMI Common Stock. As of the date hereof,
neither NPB nor, to its knowledge, any of its affiliates or associates (as such
terms are defined under the Exchange Act), (a) beneficially owns, directly or
indirectly, or (b) is party to any agreement, arrangement or understanding for
the purpose of acquiring, holding, voting or disposing of, in each case, shares
of AMI Common Stock, except for (i) shares of AMI Common Stock in the aggregate
representing less than 1% of the outstanding shares of AMI Common Stock and (ii)
the "standstill" provisions of the Confidentiality Agreement, dated July 3,
1996, as amended September 5, 1996 (the "Confidentiality Agreement") relating to
the acquisition of AMI Common Stock.
5.10 Complete Copies of Requested Reports. NPB has delivered or made
available (through public sources or directly) true and complete copies of each
document that has been requested by AMI or its counsel in connection with their
legal and accounting review of NPB and its subsidiaries.
5.11 Pooling of Interests. Based upon consultation with its independent
accountants, neither NPB nor any of its subsidiaries, nor any of their
respective directors, officers or, to the knowledge of NPB, stockholders, has
taken any action that would interfere with NPB's ability to account for the
Merger as a pooling of interests.
5.12 Representations Complete. None of the representations or warranties
made by NPB herein or in any Schedule hereto, including the NPB Disclosure
Schedule, or certificate furnished by NPB pursuant to this Agreement, or the NPB
SEC Reports, contain or will contain at the Effective Time any untrue statement
of a material fact or omits or will omit at the Effective Time to state any
material fact necessary in order to make the statements contained herein or
therein, in light of the circumstances under which they were made, not
misleading. To the extent such representations permit omissions of items
otherwise required to be disclosed because they are not material or do not or
would not have a Material Adverse Effect on NPB, such omissions in the aggregate
would not and do not have a Material Adverse Effect on NPB.
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ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
6.1 Conduct of Business by AMI and NPB Pending the Merger. During the
period from the date of this Agreement and continuing until the Effective Time,
except as agreed to in writing by the other party or as set forth in Section 6.1
of the AMI Disclosure Schedule or NPB Disclosure Schedule:
(a) the respective businesses of AMI and its subsidiaries shall be
conducted only in the ordinary and usual course of business and consistent with
past practices;
(b) neither AMI nor its subsidiaries shall (i) sell or pledge or agree to
sell or pledge any stock owned by it in any of its subsidiaries; (ii) amend its
Articles of Incorporation or Bylaws; or (iii) split, combine or reclassify any
shares of its outstanding capital stock or declare, set aside or pay any
dividend or other distribution payable in cash, stock or property in respect of
its capital stock, or directly or indirectly redeem, purchase or otherwise
acquire any shares of its capital stock or other securities or shares of the
capital stock or other securities of any of its subsidiaries, other than in
connection with the use of shares of capital stock to pay the exercise price or
tax withholdings in connection with its stock-based employee benefit plans in
the ordinary course of business in accordance with past practice;
(c) neither AMI nor any of its subsidiaries shall (i) authorize for
issuance, issue, sell, pledge, dispose of, encumber, deliver or agree or commit
to issue, sell, pledge, or deliver any additional shares of, or rights of any
kind to acquire any shares of, its capital stock of any class or exchangeable
into shares of stock of any class or any Voting Debt (whether through the
issuance or granting of options, warrants, commitments, subscriptions, rights to
purchase or otherwise), except for unissued shares of AMI Common Stock reserved
for issuance upon the exercise of the stock options or warrants described in the
AMI Disclosure Schedule pursuant to AMI's employee stock plans; (ii) acquire,
dispose of, transfer, lease, license, mortgage, pledge or encumber any fixed or
other assets, other than in the ordinary course of business and consistent with
past practices; (iii) incur, assume or prepay any indebtedness, liability or
obligation or any other liabilities or issue any debt securities, other than in
the ordinary course of business and consistent with past practices; (iv) assume,
guarantee, endorse or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other person (other than a
wholly-owned subsidiary), other than in the ordinary course of business and
consistent with past practices; (v) make any loans, advances or capital
contributions to, or investments in, any other person (other than to
wholly-owned subsidiaries), other than in the ordinary course of business and
consistent with past practices; or (vi) fail to maintain adequate insurance
consistent with past practices for their businesses and properties;
(d) AMI shall use its best efforts to preserve intact the business
organization of AMI and its subsidiaries to keep available the services of its
and its subsidiaries' present officers and key employees, and to preserve the
goodwill of those having business relationships with it and its subsidiaries;
provided, however, that no breach of this representation shall be deemed to have
occurred if a failure to comply with this Section 6.1(d) occurs as a result of
any matter arising out of the transactions contemplated by this Agreement or any
acquisition proposals made to AMI or the public announcement thereof;
(e) neither AMI nor any of its subsidiaries, nor NPB nor any of its
subsidiaries shall (i) take, or allow to be taken, any action which would
jeopardize the treatment of the Merger as a pooling of interests for accounting
purposes or (ii) take, or allow to be taken or fail to take any action which act
or omission would jeopardize qualification of the Merger as a reorganization
within the meaning of Section 368(a) of the Code;
(f) AMI shall pay and cause its subsidiaries to pay debts and taxes when
due subject to good faith disputes thereof, and pay or perform other obligations
when due;
(g) neither AMI nor any of its subsidiaries, nor NPB nor any of its
subsidiaries shall fail to use all reasonable efforts to take or omit to take
any action nor shall they agree, in writing or otherwise, to take or omit to
take any action, which would make any representation or warranty of AMI or NPB,
respectively, herein untrue or incorrect;
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(h) AMI and its subsidiaries shall not enter into any contract or
commitment, or violate, amend or otherwise modify or waive any of the terms of
any contract or commitment, other than in the ordinary course of business
consistent with past practice;
(i) AMI and its subsidiaries shall not transfer to any person or entity any
AMI Intellectual Property Rights other than in the ordinary course of business
consistent with past practice;
(j) AMI and its subsidiaries shall not enter into or amend any agreements
pursuant to which any other party is granted distribution, marketing or other
rights of any type or scope with respect to any of its products or technology;
(k) AMI and its subsidiaries shall not enter into any operating lease other
than in the ordinary course of business consistent with past practices and in no
event in excess of an aggregate of $10,000 over the term of such lease;
(l) AMI and its subsidiaries shall not pay, discharge or satisfy in an
amount in excess of $10,000 in any one case or $100,000 in the aggregate, any
claim, liability or obligation (absolute, accrued, asserted or unasserted,
contingent or otherwise) arising other than in the ordinary course of business,
other than the payment, discharge or satisfaction of liabilities reflected or
reserved against in the AMI Financial Statements or reasonably incurred in
connection with the transactions contemplated by this Agreement;
(m) AMI and its subsidiaries shall not make any capital expenditures,
capital additions or capital improvements except in the ordinary course of
business and consistent with past practice;
(n) AMI and its subsidiaries shall not materially reduce the amount of any
material insurance coverage provided by existing insurance policies;
(o) AMI and its subsidiaries shall not (i) hire any new director level or
officer level employee, (ii) pay any special bonus or special remuneration to
any employee or member of the Board of Directors other than automatic grants, or
(iii) increase the salaries, wage rates, fringe benefits or other compensation
of its members of the Board of Directors, officers or employees, except in the
case of (ii) and (iii) with respect to non-officer employees in the ordinary
course of business and consistent with past practices;
(p) AMI and its subsidiaries shall not grant any severance or termination
pay (i) to any director or officer or (ii) to any other employee except (A)
payments made pursuant to standard written agreements outstanding on the date
hereof or (B) grants which are made in the ordinary course of business in
accordance with its standard past practice;
(q) AMI and its subsidiaries shall not commence a lawsuit other than (i)
for the routine collection of bills, (ii) in such cases where it in good faith
determines that failure to commence suit would result in the material impairment
of a valuable aspect of its business, provided that it consults with NPB prior
to the filing of such a suit, or (iii) for a breach of this Agreement or related
agreements (e.g., the Confidentiality Agreement);
(r) AMI and its subsidiaries shall not acquire or agree to acquire by
merging or consolidating with, or by purchasing a substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or otherwise
acquire or agree to acquire any assets which are material, individually or in
the aggregate, to its and its subsidiaries' business, taken as a whole;
(s) AMI and its subsidiaries shall not other than in the ordinary course of
business, make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, file any material Return or
any amendment to a material Return, enter into any closing agreement, settle any
claim or assessment in respect of Taxes, or consent to any extension or waiver
of the limitation period applicable to any claim or assessment in respect to
Taxes;
(t) AMI and its subsidiaries shall give all notices and other information
required prior to the Effective Time to be given to the employees of AMI, any
collective bargaining unit representing any group of employees of AMI, and any
applicable government authority under the WARN Act, the National Labor Relations
Act,
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the Internal Revenue Code, the Consolidated Omnibus Budget Reconciliation Act,
and other applicable law in connection with the transactions provided for in
this Agreement and NPB shall cooperate with AMI to give such notices and
information;
(u) AMI and its subsidiaries shall not revalue any of its assets, including
without limitation, writing down the value of inventory or writing off notes or
accounts receivable, except as required under generally accepted accounting
practices and in the ordinary course of business; and
(v) AMI and its subsidiaries shall not enter into any contract, agreement,
commitment or arrangement with respect to any of the items prohibited by this
Section 6.1.
(w) NPB shall not amend its Certificate of Incorporation in any manner that
would adversely affect the rights, preferences, or privileges of the holders of
Common Stock.
6.2 Compensation Plans. During the period from the date of this Agreement
and continuing until the Effective Time, AMI agrees as to itself and its
subsidiaries that it will not, without the prior written consent of NPB (except
as required by applicable law or pursuant to existing contractual arrangements
or solely to the extent necessary to make compensation increases in the ordinary
course of business consistent with past practices or make available existing
benefit arrangements to new or promoted employees in the ordinary course of
business in accordance with past practice): (a) enter into, adopt or amend any
bonus, profit sharing, compensation, stock option, pension, retirement, deferred
compensation, employment, severance or other employee benefit plan, agreement,
trust, plan, fund or other arrangement between AMI and one or more of its
officers, directors or employees (collectively, "Compensation Plans"), (b)
institute any new employee benefit, welfare program or Compensation Plan, (c)
make any change in any Compensation Plan or other employee welfare or benefit
arrangement or enter into any employment or similar agreement or arrangement
with any employee, or (d) enter into or renew any contract, agreement,
commitment or arrangement providing for the payment to any director, officer or
employee of compensation or benefits contingent, or the terms of which are
materially altered in favor of such individual, upon the occurrence of any of
the transactions contemplated by this Agreement.
6.3 Current Information. From the date of this Agreement to the Effective
Time, AMI will cause one or more of its designated representatives to confer on
a regular and frequent basis (not less than semi-monthly) with representatives
of NPB and to report the general status of its ongoing operations and to deliver
to NPB (not less than quarterly) unaudited consolidated balance sheets and
related consolidated statements of income, changes in stockholders equity and
changes in financial position for the period since the last such report. AMI
will promptly notify the other of any material change in the normal course of
its or its subsidiaries' business or in its or its subsidiaries' properties.
6.4 Letters of AMI's and NPB's Auditors. AMI shall use all reasonable
efforts to cause to be delivered to NPB a letter of Ernst & Young LLP ("Ernst &
Young"), AMI's independent auditors, and NPB shall use all reasonable efforts to
cause to be delivered to AMI a letter of Price Waterhouse, LLP ("Price
Waterhouse"), NPB's independent auditors, each such letter dated a date within
two business days before the date on which the Registration Statement shall
become effective and addressed to NPB or AMI, as applicable, in form and
substance reasonably satisfactory to such recipient, and in scope and substance
consistent with applicable professional standards for letters delivered by
independent public accountants in connection with registration statements
similar to the Registration Statement. Each of AMI and NPB shall use reasonable
efforts to cause to be delivered to the other an update, dated the Closing Date,
of the letter of its independent auditors described in the preceding sentence.
6.5 Legal Conditions to Merger. Each of AMI and NPB shall, and shall cause
its subsidiaries to, use all reasonable efforts (a) to take, or cause to be
taken, all actions necessary to comply promptly with all legal requirements that
may be imposed on such party or its subsidiaries with respect to the Merger and
the consummation of the transactions contemplated by this Agreement, subject to
the appropriate vote or consent of stockholders and (b) to obtain (and to
cooperate with the other party to obtain) any consent, authorization, order or
approval of, or any exemption by, any governmental entity or any other public or
private third party that is required to be obtained or made by such party or any
of its subsidiaries in connection with the Merger
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and the transactions contemplated by this Agreement; provided, however, that a
party shall not be obligated to take any action pursuant to the foregoing if the
taking of such action or such compliance or the obtaining of such consent,
authorization, order, approval or exemption would, in such party's reasonable
opinion, (i) be materially burdensome to such party and its subsidiaries taken
as a whole or impact in such a materially adverse manner the economic or
business benefits of the transactions contemplated by this Agreement as to
render inadvisable the consummation of the Merger or (ii) to result in the
imposition of a condition or restriction on such party or on the Surviving
Corporation of the type referred to in Section 8.1(e). Each of AMI and NPB will
promptly cooperate with and furnish information to the other in connection with
any such burden suffered by, or requirement imposed upon, any of them or any of
their subsidiaries in connection with the foregoing.
6.6 Affiliates; Pooling of Interests. Neither NPB nor AMI shall take or
case to be taken any action, whether before or after the Closing Date, which
would disqualify the transaction contemplated herein as a pooling of interests
for accounting purposes. NPB and AMI shall use their best efforts to prevent
their stockholders from taking any action prohibited under the Affiliate
Agreements that would disqualify the transaction contemplated herein as a
pooling of interests for accounting purposes.
(a) The parties shall deliver to one another a list identifying all
persons, if any, who at the time the Merger is submitted for approval to the
stockholders of AMI ("Affiliates"), may be deemed "affiliates" of AMI and NPB
for purposes of Rule 145 under the Securities Act and for purposes of qualifying
for pooling of interests accounting treatment. AMI and NPB shall use their best
efforts to cause each Affiliate to deliver to the other party, on or prior to
October 1, 1996, a written agreement ("Affiliate Agreement"), in the form of
Exhibit 6.6 hereto, that such Affiliate will not sell, pledge, transfer or
otherwise dispose of any shares of NPB Common Stock issued to such Affiliate
pursuant to the Merger, except pursuant to an effective registration statement
or in compliance with Rule 145 or an exemption from the registration
requirements of the Securities Act. The parties shall promptly advise one
another if any person becomes or ceases to be an Affiliate.
(b) The parties shall use their best efforts to cause each person who is
identified as an Affiliate to deliver to the other party, on or prior to the
mailing of the Proxy Statement referred to in Section 7.4, a written agreement
in the form of Exhibit 6.6, providing that such Affiliate will not thereafter
sell or in any way reduce such Affiliate's risk relative to any shares of AMI
Common Stock during the period commencing 30 days prior to the AMI stockholders
meeting and will not sell or otherwise reduce such person's risk relative to any
shares of NPB Common Stock acquired under this Agreement until publication of
financial results covering at least 30 days of combined operations of NPB and
AMI within the meaning of the Securities and Exchange Commission's Financial
Reporting Release No. 1, "Codification of Financial Reporting Policies,"
sec.201.01 47 F.R. 21039 (April 15, 1982), except as permitted by Staff
Accounting Bulletin No. 76 issued by the Securities Exchange Commission, or such
later time as notified by NPB so as to ensure that the transactions contemplated
by this Agreement qualify as a pooling of interests. During the period between
the date of this Agreement and the thirtieth day prior to the AMI stockholders
meeting, AMI shall use its best efforts to cause each person who is identified
as an Affiliate to formally notify AMI of any and all proposed sales or
acquisitions of AMI or NPB Common Stock in advance of any such acquisition or
sale. Such notification will permit NPB to review the circumstances of the
proposed transaction with its advisors to ensure that pooling of interests
accounting is not compromised by such sales or purchases.
6.7 Advice of Changes; Government Filings. Each party shall confer on a
regular and frequent basis with the other, report on operational matters and
shall promptly advise the other both orally and in writing of any change or
event having, or which, insofar as can reasonably be foreseen, could have, a
Material Adverse Effect on such party or which would cause or constitute a
material breach of any of the representations, warranties or covenants of such
party contained herein. NPB and AMI shall file all reports required to be filed
by each of them with the SEC between the date of this Agreement and the
Effective Time and shall deliver to the other party copies of all such reports
promptly after the same are filed. Except where prohibited by applicable
statutes and regulations, and subject to Section 7.1 hereof, each party shall
promptly provide the other (or its counsel) with copies of all other filings
made by such party with any state or federal government entity in connection
with this Agreement or the transactions contemplated hereby.
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6.8 Accounting Methods. Except as otherwise contemplated by Section 7.13,
AMI shall not change its methods of accounting in effect at April 30, 1996,
except as required by changes in generally accepted accounting principles as
concurred in by such party's independent auditors. AMI will not change its
fiscal year.
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1 Access and Information.
(a) AMI and NPB and their respective subsidiaries shall each afford to the
other and to the other's financial advisors, legal counsel, accountants,
consultants and other representatives access during normal business hours
throughout the period from the date hereof to the Effective Time to all of its
books, records, properties, facilities, personnel commitments and records
(including but not limited to Returns) and, during such period, each shall
furnish promptly to the other all information concerning its business,
properties and personnel as such other party may reasonably request. No
investigation pursuant to this Section 7.1 shall affect any representations or
warranties made herein or the conditions to the obligations of the respective
parties to consummate the Merger.
(b) All information furnished by AMI to NPB or furnished by NPB to AMI
pursuant hereto shall be treated as the sole property of the party furnishing
the information until consummation of the Merger contemplated hereby. The
parties will hold any such information which is nonpublic in confidence to the
extent required by, and in accordance with the Confidentiality Agreement, and
such Confidentiality Agreement shall survive the termination of this Agreement.
7.2 No Solicitation of Transactions. From the date hereof until the
earlier of termination of this Agreement or consummation of the Merger, neither
AMI nor any of its subsidiaries will, directly or indirectly, whether through
any director, officer, employee, financial advisor, legal counsel, accountant,
other agent or representative (as used in this Section 7.2, "affiliates") or
otherwise, (a) initiate, solicit or encourage, or take any other action to
facilitate any inquiries or the making of any proposal with respect to, or (b)
except to the extent required in the exercise of the fiduciary duties of the
Board of Directors of AMI under applicable law as advised by independent counsel
in connection with an unsolicited proposal, engage or participate in
negotiations concerning, provide any nonpublic information or data to, or have
any discussions with, any person other than a party hereto or their affiliates
relating to, any (i) acquisition, (ii) tender offer (including a self-tender
offer), (iii) exchange offer, (iv) merger, (v) consolidation, (vi) acquisition
of beneficial ownership of (or the right to vote securities representing) 10% or
more of the total voting power of such entity or any of its subsidiaries, (vii)
dissolution, (viii) business combination, (ix) purchase of all or any
significant portion of the assets or any division of (or any equity interest in)
such entity or any subsidiary, or (x) any similar transaction other than the
Merger (such proposals, announcements, or transactions being referred to as
"Acquisition Proposals"). AMI will notify NPB orally (within one business day)
and in writing (as promptly as practicable) if any such Acquisition Proposals
(including the identity of the persons making such proposals and, subject to the
fiduciary duties of the Board of Directors of AMI, the terms of such proposals)
are received and furnish to NPB a copy of any written proposal relating thereto.
7.3 Registration Statement. As promptly as practicable, NPB and AMI shall
cooperate and prepare and NPB shall file with the SEC the Registration Statement
and use reasonable efforts to have the Registration Statement declared
effective. NPB shall also use reasonable efforts to take any action required to
be taken under state securities or blue sky laws in connection with the issuance
of the shares of NPB Common Stock pursuant hereto. AMI shall furnish NPB with
all information concerning AMI and the holders of its capital stock and shall
take such other action as NPB may reasonably request in connection with such
Registration Statement and issuance of shares of NPB Common Stock.
7.4 Proxy Statement; Stockholder Approval. AMI, acting through its Board
of Directors, shall, in accordance with applicable law and its Articles of
Incorporation and Bylaws:
(a) promptly and duly call, give notice of, convene and hold as soon as
practicable following the date upon which the Registration Statement becomes
effective a meeting of its stockholders for the purpose of
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voting to approve and adopt this Agreement and shall use its best efforts,
except to the extent required in the exercise of the fiduciary duties of the
Board of Directors of AMI under applicable law as advised by independent
counsel, to obtain such stockholders' approval; and
(b) except to the extent required in the exercise of the fiduciary duties
of the Board of Directors of AMI under applicable law as advised by independent
counsel, recommend approval and adoption of this Agreement by the stockholders
of AMI, and include in the Proxy Statement such recommendation, and take all
lawful action to solicit such approval.
(c) As promptly as practicable, the parties shall prepare and file with the
SEC a preliminary Proxy Statement and, after consultation with each other,
respond to any comments of the SEC with respect to the preliminary Proxy
Statement and cause the definitive Proxy Statement to be mailed to AMI
stockholders. At the stockholders' meeting of AMI, NPB shall vote or cause to be
voted in favor of approval and adoption of this Agreement all shares of AMI
Common Stock which it beneficially owns at such time, if any. Whenever any event
occurs which should be set forth in an amendment or a supplement to the Proxy
Statement or any filing required to be made with the SEC, each party will
promptly inform the other and will cooperate in filing with the SEC and/or
mailing to AMI's stockholders such amendment or supplement. The Proxy Statement,
and all amendments and supplements thereto, shall comply with applicable law and
be in form and substance satisfactory to NPB and AMI.
7.5 Nasdaq National Market. NPB shall notify the Nasdaq National Market of
the listing of the shares of NPB Common Stock to be issued pursuant to the
Merger.
7.6 Antitrust Laws. As promptly as practicable, AMI and NPB shall make all
filings and submissions under the HSR Act as may be reasonably required to be
made in connection with this Agreement and the transactions contemplated hereby.
Subject to Section 7.1 hereof, AMI will furnish to NPB, and NPB will furnish to
AMI, such information and assistance as the other may reasonably request in
connection with the preparation of any such filings or submissions. Subject to
Section 7.1 hereof, AMI will provide NPB, and NPB will provide AMI, with copies
of all correspondence, filings or communications (or memoranda setting forth the
substance thereof) between such party or any of its representatives, on the one
hand, and any governmental agency or authority or members of their respective
staffs, on the other hand, with respect to this Agreement and the transactions
contemplated hereby, except to the extent that NPB or AMI is advised by
independent counsel that the provision of such information would be inadvisable
under applicable antitrust laws.
7.7 Certain Employee Benefit Plans Matters.
(a) NPB confirms to AMI that it is NPB's present intent to provide after
the Effective Time to continuing employees of AMI and its subsidiaries employee
benefit programs that in the aggregate are generally not less favorable to such
employees than those being provided to NPB's employees on the date of this
Agreement, except as otherwise provided in Schedule 7.7(a). To the extent the
NPB employee benefit programs provide medical or dental welfare benefits after
the Closing Date, NPB shall cause all pre-existing condition exclusions and
actively at work requirements to be waived, and NPB shall provide that any
expenses incurred on or before the Closing Date shall be taken into account
under the NPB employee benefit programs for purposes of satisfying the
applicable deductible, coinsurance and maximum out-of-pocket provisions for such
employees and their covered dependents.
(b) AMI hereby confirms to NPB that (i) all AMI Stock Options under the AMI
1985 Incentive Stock Option Plan and Amended and Restated 1988 Stock Option Plan
shall carry over and become options to acquire NPB Common Stock, and (ii) AMI's
Board of Directors shall not cause such options vesting or exercisability to be
accelerated unless and except to the extent that such acceleration is automatic
under the terms of the applicable agreement.
(c) AMI shall take no action from and after the date hereof to deposit into
any trust (including any "rabbi trust") amounts in respect of any employee
benefit obligations.
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7.8 Stock Options and Warrants.
(a) As of the Effective Time, any stock options, warrants or convertible
securities, which are outstanding as of the date hereof and have not expired as
of the Effective Time shall be assumed by NPB and converted into options,
warrants or convertible securities, as the case may be to purchase the number of
shares of NPB Common Stock (rounded up to the nearest whole share) equal to the
number of shares of AMI Common Stock subject to such options, warrants or
convertible security, as the case may be, multiplied by the Exchange Ratio, at
an exercise price per share of NPB Common Stock (rounded down to the nearest
penny) equal to the former exercise price per share of AMI Common Stock under
such options, warrants or convertible securities, as the case may be,
immediately prior to the Effective Time divided by the Exchange Ratio; provided,
however, that in the case of any AMI stock option to which Section 421 of the
Code applies by reason of its qualification under Section 422 of the Code, the
conversion formula shall be adjusted, if necessary, to comply with Section
424(a) of the Code to the effect that the number of shares shall be rounded down
to the nearest whole share and the exercise price shall be rounded up to the
nearest penny. Except as provided above, the converted stock options, warrants
or convertible securities, as the case may be, shall be subject to the same
terms and conditions (including, without limitation, expiration date, vesting
and exercise provisions) as were applicable to stock options, warrants or
convertible securities, as the case may be, immediately prior to the Effective
Time.
(b) No such option, warrant or convertible security shall be converted into
a stock option, warrant or convertible security to purchase a partial share of
NPB Common Stock.
(c) The consummation of the Merger shall not be treated as a termination of
employment for purposes of such stock options, warrants or convertible
securities.
(d) NPB agrees that as soon as practicable after the Effective Time it will
cause to be filed one or more registration statements on Form S-8 under the
Securities Act, or amendments to its existing registration statements on Form
S-8 or amendments to the Registration Statement, in order to register the shares
of NPB Common Stock issuable upon exercise of the aforesaid converted AMI Stock
Options.
7.9 Director and Officer Indemnification, Etc.
(a) For a period of six (6) years from the Effective Time, NPB and the
Surviving Corporation each agrees that for acts occurring prior to the Effective
Time, all rights to indemnification and advancement of expenses existing in
favor of the directors and officers of AMI (the "Indemnified Parties") under the
provisions existing on the date hereof of the Articles of Incorporation, Bylaws
and indemnification agreements of AMI shall survive the Effective Time, and NPB
and the Surviving Corporation each agrees to indemnify and advance expenses to
the Indemnified Parties to the full extent required or permitted under the
provisions existing on the date hereof of AMI's Articles of Incorporation and
Bylaws and indemnification agreements of AMI. The provisions of this Section 7.9
shall be binding on NPB's successors and assigns.
(b) For a period of six (6) years after the Effective Time, NPB shall
maintain, with respect to claims arising from facts or events which occurred
before the Effective Time, officers' and directors' liability insurance covering
the Indemnified Parties who are currently covered (in their capacities as
officers and directors) by AMI's existing officers' and directors' liability
insurance policies, on terms substantially no less advantageous to such officers
and directors than such existing insurance.
7.10 Public Announcements. The initial press release relating to this
Agreement shall be a joint press release and thereafter, so long as this
Agreement is in effect, NPB and AMI agree that they will each obtain the
approval of the other party prior to issuing any press release or any other
written communication (including any written communication to employees) and
that they will use their best efforts to consult with one another before
otherwise making any public statement or responding to any press inquiry with
respect to this Agreement or the transactions contemplated hereby, except as may
be required by law or any governmental agency if required by such agency or the
rules of the National Association of Securities Dealers, Inc.
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7.11 Expenses. Except as provided in Section 9.3, all costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby (whether or not the Merger is consummated) shall be paid by the party
incurring such expenses, except that if the Merger is not consummated NPB and
AMI shall share equally the expenses incurred in connection with filings under
the HSR Act, printing and mailing the Proxy Statement and all aspects of the
Registration Statement.
7.12 Additional Agreements.
(a) Subject to the terms and conditions herein provided, each of the
parties hereto agrees to use all reasonable efforts to take, or cause to be
taken, all action and to do, or cause to be done, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement, including using all
reasonable efforts to obtain all necessary waivers, consents and approvals, and
to effect all necessary registrations and filings and to obtain from each
natural person who owns of record any shares of the capital stock of any
subsidiary of AMI a power of attorney, in form acceptable to NPB and its
counsel, appointing one or more representatives of NPB as attorney in fact for
such person, effective as of the Effective Time, for purposes of executing any
Reports and taking any other actions required to transfer record ownership of
such shares to such entity as NPB shall determine. In case at any time after the
Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement, the proper officers and/or directors of NPB and AMI
shall take all such necessary action.
(b) NPB and AMI each will cooperate with one another and use all reasonable
efforts to prepare all necessary documentation to effect promptly all necessary
filings and to obtain all necessary permits, consents, approvals, orders and
authorizations of or any exemptions by, all third parties and governmental
bodies necessary to consummate the transactions contemplated by this Agreement.
(c) Each party will keep the other party apprised of the status of any
inquiries made of such party by the Department of Justice, the SEC, or any other
governmental agency or authority or members of their respective staffs with
respect to this Agreement or the transactions contemplated herein.
7.13 AMI Accruals and Reserves. Prior to the Closing Date, AMI shall
review and, to the extent determined necessary or advisable, consistent with
generally accepted accounting principles and the accounting rules, regulations
and interpretations of the SEC and its staff, modify and change its accrual,
reserve and provision policies and practices to (a) reflect the Surviving
Corporation's plans with respect to the conduct of AMI's business following the
Merger and (b) make adequate provision (for the costs and expenses relating
thereto) so as to be applied consistently on a mutually satisfactory basis with
those of NPB. The parties agree to cooperate in preparing for the implementation
of the adjustments contemplated by this Section 7.13. Notwithstanding the
foregoing, AMI shall not be obligated to take in any respect any such action
pursuant to this Section 7.13 (other than pursuant to the preceding sentence)
unless and until NPB acknowledges that all conditions to its obligation to
consummate the Merger have been satisfied.
7.14 FIRPTA. AMI shall, prior to the Closing Date, provide NPB with a
properly executed Foreign Investment and Real Property Tax Act of 1980
("FIRPTA") Notification Letter which states that shares of capital stock of AMI
do not constitute "United States real property interests" under Section 897(c)
of the Code, for purposes of satisfying NPB's obligations under Treasury
Regulation Section 1.1445-2(c)(3). In addition, simultaneously with delivery of
such Notification Letter, AMI shall have provided NPB, as agent for AMI, a form
of notice to the Internal Revenue Service in accordance with the requirements of
Treasury Regulation Section 1.897-2(h)(2) along with written authorization for
Acquiror to deliver such notice form to the Internal Revenue Service on behalf
of AMI upon the Closing of the Merger.
7.15 Takeover Statutes. If any Takeover Statute shall become applicable to
the transaction contemplated hereby, AMI and the members of the Board of
Directors of AMI shall grant such approvals and take such actions as are
necessary so that the Merger and the transactions contemplated hereby may be
commenced as promptly as practicable in the terms contemplated hereby and
otherwise act to eliminate or minimize the effects of such statute or regulation
in the transaction contemplated hereby, except, in each such case, to the extent
required in the exercise of the fiduciary duties of the Board of Directors of
AMI under applicable law as advised by independent counsel.
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7.16 Management Incentive Plan. AMI shall cause its current Management
Incentive Plan ("MIC Plan") to terminate effective as of the Closing Date. Each
of the participants in the MIC Plan on the Closing Date shall be entitled to
receive a pro rata amount equal to the amounts accrued with respect to such
participant under the MIC Plan as of such date.
7.17 Existing Agreements With AMI Officers and Employees. NPB confirms
that upon consummation of the Merger, it shall assume the obligations of AMI
under those certain agreements with AMI officers and employees set forth on
Schedule 7.17.
7.18 Consulting Agreements. NPB shall enter into consulting agreements on
the terms and conditions set forth on Schedule 7.18 with the individuals
indicated on such schedule.
ARTICLE VIII
CONDITIONS TO CONSUMMATION OF THE MERGER
8.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the satisfaction at or prior to the Effective Time of the following conditions,
any one of which may be waived by both AMI and NPB:
(a) Any waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.
(b) The Registration Statement shall have become effective in
accordance with the provisions of the Securities Act, and shall be
effective at the Effective Time, and no stop order suspending effectiveness
of the Registration Statement shall have been issued, no action, suit,
proceedings or investigation by the SEC to suspend the effectiveness
thereof shall have been initiated and be continuing, and all necessary
approvals under state securities laws relating to the issuance or trading
of the NPB Common Stock to be issued to AMI stockholders in connection with
the Merger shall have been received.
(c) This Agreement and the transactions contemplated hereby shall have
been approved and adopted by the favorable vote of a majority of the shares
of outstanding capital stock of AMI entitled to vote thereon at a
stockholders meeting at which a quorum is present in accordance with
applicable law.
(d) No preliminary or permanent injunction or other order by any
federal, state or foreign court of competent jurisdiction which prohibits
the consummation of the Merger shall have been issued and remain in effect.
No statute, rule, regulation, executive order, stay, decree, or judgment
shall have been enacted, entered, issued, promulgated or enforced by any
court or governmental authority which prohibits or restricts the
consummation of the Merger. Other than the filing of the Certificate of
Merger with the Secretary of State of Delaware and the Secretary of State
of Minnesota, all authorizations, consents, orders or approvals of, or
declarations or filings with, and all expirations of waiting periods
imposed by, any governmental entity (all of the foregoing, "Consents")
which are necessary for the consummation of the Merger, other than Consents
the failure to obtain which would not materially, adversely affect the
consummation of the Merger or in the aggregate have a Material Adverse
Effect on the Surviving Corporation and its subsidiaries, taken as a whole,
shall have been filed, occurred or been obtained (all such permits,
approvals, filings and consents and the lapse of all such waiting periods
being referred to as the "Requisite Regulatory Approvals") and all such
Requisite Regulatory Approvals shall be in full force and effect. NPB shall
have received all state securities or blue sky permits and other
authorizations necessary to issue the shares of NPB Common Stock in
exchange for the shares of AMI Common Stock and to consummate the Merger.
(e) There shall not be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Merger, by any federal or state governmental entity which, in connection
with the grant of a Requisite Regulatory Approval, imposes any condition or
restriction upon the Surviving Corporation or its subsidiaries (or, in the
case of any disposition of assets required in connection with such
Requisite Regulatory Approval, upon NPB or its subsidiaries or AMI or its
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subsidiaries), including, without limitation, requirements relating to the
disposition of assets, which in any such case would so materially adversely
impact the economic or business benefits of the transactions contemplated
by this Agreement as to render inadvisable the consummation of the Merger.
(f) NPB and AMI shall have received (i) a letter, dated the Closing
Date, addressed to NPB from Price Waterhouse, in response to a letter from
NPB summarizing the relevant facts and in form and substance reasonably
satisfactory to NPB, a copy of which shall be provided to AMI, and (ii) a
letter, dated the Closing Date, addressed AMI from Ernst & Young LLP, in
response to a letter from AMI summarizing the relevant facts and in form
and substance reasonably satisfactory to AMI, a copy of which shall be
given to NPB, in each case to the effect that Price Waterhouse and Ernst &
Young LLP concur with NPB management's and AMI management's conclusion,
respectively, that the Merger qualifies for "pooling of interests"
treatment for financial reporting purposes and that such accounting
treatment is in accordance with generally accepted accounting principles.
Price Waterhouse shall also have received from Ernst & Young, a letter in
form and substance satisfactory to Price Waterhouse, that Ernst & Young is
not aware of any fact concerning AMI or any of its affiliates that would
preclude NPB from accounting for the Merger by the "pooling of interests"
method for financial reporting purposes.
(g) The aggregate amount of cash required to paid on account of all
Excluded Shares and with respect to any cash payments for fractional shares
pursuant to Section 3.4 shall not exceed ten percent (10%) of the value
(determined in accordance with APB Opinion No. 16) of the shares of NPB
Common Stock issuable in exchange for shares of AMI Common Stock at the
Effective Time.
8.2 Conditions to Obligation of AMI to Effect the Merger. The obligation
of AMI to effect the Merger shall be further subject to the satisfaction at or
prior to the Effective Time of the following additional conditions, which may be
waived by AMI:
(a) NPB shall have performed in all material respects its obligations
under this Agreement required to be performed by it at or prior to the
Effective Time and the representations and warranties of NPB contained in
this Agreement shall be true and correct in all material respects at and as
of the Effective Time as if made at and as of such time, except as
contemplated by this Agreement, and AMI shall have received a certificate
of the President or an Executive Vice President of NPB as to the
satisfaction of this condition.
(b) AMI shall have received an opinion of Best & Flanagan, PLLP,
counsel to AMI, dated the Closing Date, substantially to the effect that,
on the basis of facts, representations, and assumptions set forth in such
opinion which are consistent with the state of facts existing at the
Closing Date, the Merger will be treated for federal income tax purposes as
a reorganization within the meaning of Section 368(a) of the Code and that
NPB and AMI will each be a party to the reorganization within the meaning
of Section 368(b) of the Code. In rendering any such opinion, such counsel
may require and, to the extent they deem necessary and appropriate, may
rely upon representations made in certificates of officers of NPB, AMI,
affiliates of the foregoing and others. In addition, AMI shall have
received the opinion, dated the Closing Date, of Morrison & Foerster,
counsel for NPB, covering the matters set forth in Exhibit 8.2(b).
(c) There shall not have occurred following the date of this Agreement
and prior to the Closing Date any change, or any event involving a
prospective change, in NPB's business, assets, financial condition or
results of operation which has had, or is reasonably likely to have, in the
aggregate a Material Adverse Effect (other than as a result of changes or
proposed changes in federal or state health care (including health care
reimbursement) laws or regulations of general applicability or
interpretations thereof, changes in generally accepted accounting
principles and changes that could, under the circumstances, reasonably have
been anticipated in light of disclosures made in writing by NPB to AMI
prior to the execution of this Agreement).
(d) The shares of NPB Common Stock to be issued in connection with the
Merger shall have been approved for listing on the Nasdaq National Market.
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8.3 Conditions to Obligations of NPB to Effect the Merger. The obligations
of NPB to effect the Merger shall be further subject to the satisfaction at or
prior to the Effective Time of the following additional conditions, which may be
waived by NPB:
(a) AMI shall have performed in all material respects its obligations
under this Agreement required to be performed and complied with by it at or
prior to the Effective Time and the representations and warranties of AMI
contained in this Agreement shall be true and correct in all material
respects at and as of the Effective Time as if made at and as of such time,
except as contemplated by this Agreement, and NPB shall have received a
Certificate of the President or an Executive Vice President of AMI as to
the satisfaction of this condition.
(b) AMI shall have obtained the consent or approval of each person
whose consent or approval shall be required in order to permit the
succession by the Surviving Corporation pursuant to the Merger to any
obligation, right or interest of AMI or any subsidiary under any loan or
credit agreement, note, mortgage, indenture, lease, license or other
agreement or instrument, except those for which failure to obtain such
consents and approvals would not materially adversely affect the
consummation of the transactions contemplated hereby or in the aggregate
have a Material Adverse Effect on the Surviving Corporation and its
subsidiaries taken as a whole.
(c) NPB shall have received the opinion of Morrison & Foerster,
counsel to NPB, dated the Closing Date and addressed to NPB, to the effect
that, on the basis of facts, representations, and assumptions set forth in
such opinion which are consistent with the state of facts existing at the
Effective Time, the Merger will be treated for federal income tax purposes
as a reorganization within the meaning of Section 368(a) of the Code, and
that NPB and AMI will each be a party to that reorganization within the
meaning of Section 368(b) of the Code. In rendering any such opinion, such
counsel may require and, to the extent they deem necessary and appropriate,
may rely upon representations made in certificates of officers of AMI, NPB,
affiliates of the foregoing and others. In addition, NPB shall have
received the opinion, dated the Closing Date, of Best & Flanagan, PLLP,
counsel for AMI, covering the matters set forth in Exhibit 8.3(c).
(d) There shall not have occurred following the date of this Agreement
and prior to the Closing Date any change, or any event involving a
prospective change, in AMI's business, assets, financial condition or
results of operation which has had, or is reasonably likely to have, in the
aggregate a Material Adverse Effect (other than as a result of changes or
proposed changes in federal or state health care (including health care
reimbursement) laws or regulations of general applicability or
interpretations thereof, changes in generally accepted accounting
principles and changes that could, under the circumstances, reasonably have
been anticipated in light of disclosures made in writing by AMI to NPB
prior to the execution of this Agreement).
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
9.1 Termination. This Agreement may be terminated and the Merger
contemplated hereby abandoned at any time prior to the Effective Time, whether
before or after approval by the stockholders of AMI or NPB:
(a) by mutual written consent of NPB and AMI;
(b) by either NPB or AMI if the Merger shall not have been consummated
on or before February 28, 1997
(c) by AMI if there shall have been any material breach of a
representation and warranty or material obligation of NPB hereunder and, if
such breach is curable, such default shall have not been remedied within 10
days after receipt by NPB of notice in writing from AMI specifying such
breach and requesting that it be remedied; provided, that such 10 day
period shall be extended for so long as NPB shall be making all reasonable
attempts to cure such breach, unless the breach is not susceptible of a
cure;
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(d) by NPB if there shall have been any material breach of a
representation and warranty or material obligation of AMI hereunder and, if
such breach is curable, such default shall not have been remedied within 10
days after receipt by AMI of notice in writing from NPB specifying such
breach and requesting that it be remedied; provided, that such 10 day
period shall be extended for so long as AMI shall be making all reasonable
attempts to cure such breach, unless the breach is not susceptible of a
cure;
(e) by NPB if the Board of Directors of AMI shall have (i) withdrawn
or modified in a manner adverse to NPB its approval or recommendation (or
failed to make such recommendation) of this Agreement or the Merger, or
shall have resolved to do any of the foregoing, or (ii) recommended an
Acquisition Proposal other than the Merger;
(f) by either NPB or AMI if any court of competent jurisdiction in the
United States or other United States governmental body shall have issued an
order, decree or ruling or taken any other action restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling or any
other action shall have become final and non-appealable; provided, that the
party seeking to terminate this Agreement pursuant to this clause (f) shall
have used all reasonable efforts to remove such order, decree or ruling;
(g) by NPB, upon written notice to AMI, if any approval of the
stockholders of AMI required for the consummation of the Merger submitted
for approval shall not have been obtained by reason of the failure to
obtain the required vote at a duly held meeting of stockholders or at any
adjournment thereof;
(h) by AMI, if its Board of Directors, in the exercise of its good
faith judgment as to its fiduciary duties to its stockholders under
applicable law as advised by independent counsel, determines that such
termination is required by reason of another Acquisition Proposal being
made with respect to AMI; or
(i) by AMI, if the Closing Market Value of NPB Common Stock is less
than $22.75; provided that NPB may negate such termination by notifying
AMI, within 24 hours of receiving AMI's termination notice (both of which
notices may be given orally), of NPB's election to determine the Exchange
Ratio by dividing (A) $10.00 by (B) the Closing Market Value.
9.2 Effect of Termination. In the event of termination of this Agreement
as provided above, this Agreement shall forthwith become of no further effect
and, except for a termination resulting from a breach by a party of this
Agreement, there shall be no liability or obligation on the part of either NPB
or AMI or their respective officers or directors (except as set forth in Section
7.1(b) hereof and except for Sections 7.11, 9.3, and 10.2 hereof which shall
survive the termination). Moreover, in the event of termination of this
Agreement pursuant to Section 9.1(c) or 9.1(d), nothing herein shall prejudice
the ability of the non-breaching party from seeking damages from any other party
for any breach of this Agreement, including, without limitation, attorneys' fees
and the right to pursue any remedy at law or in equity. Upon request therefor,
each party will redeliver or, at the option of the party receiving such request,
destroy all Reports, work papers and other material of any other party relating
to the transactions contemplated hereby, whether obtained before or after the
execution hereof, to the party furnishing same.
9.3 Cancellation Fees; Expenses.
(a) If at any time (i) AMI shall have entered into an agreement, including
without limitation an agreement in principle, with respect to an Acquisition
Proposal, other than the Merger contemplated by this Agreement; (ii) AMI shall
breach any of the provisions of Section 7.2 above or shall recommend or approve
an Acquisition Proposal pursuant to Section 7.2; or (iii) any person, entity or
group of persons or entities acting in concert shall acquire beneficial
ownership of more than fifteen percent (15%) of the voting securities of AMI as
a result of an Acquisition Proposal and, in the case of (i) or (ii), this
Agreement is terminated pursuant to Section 9.1(d), Section 9.1(e), Section
9.1(g) or Section 9.1(h); then NPB shall be entitled to be paid by AMI a fee in
cash or immediately available funds of One Million Eight Hundred Thousand U.S.
Dollars ($1,800,000) (the "Cancellation Fee").
(b) AMI shall pay to NPB the Cancellation Fee provided in Section 9.3(a)
above within ten (10) days of written demand therefor by the NPB. The payment of
the Cancellation Fee shall be conditioned on there
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being no material breach of the obligations of NPB hereunder. If AMI fails to
pay any amount due NPB pursuant to this Section 9.3 when due, AMI shall pay
interest thereon, from the date due until the date paid in full, at the Prime
Rate as announced from time to time by Bank of America or any successor thereto
(the "Prime Rate") and shall reimburse NPB for all reasonable attorneys' fees
and other costs and expenses incurred by NPB in collecting such amount from AMI.
(c) In the event that either AMI or NPB terminates this Agreement pursuant
to, respectively, Section 9.1(c) or Section 9.1(d) hereof, then the
nonterminating party shall pay to the terminating party the terminating party's
reasonable out-of-pocket expenses incurred in connection with the negotiation,
execution and performance of this Agreement and the transactions contemplated
hereby (including, without limitation, the fees and expenses of its advisors,
accountants and legal advisors) ("Expense Reimbursement Payment"); provided,
however, that the terminating party shall not be entitled to any Expense
Reimbursement Payment pursuant to this Section 9.3(c) if at the time of
termination the nonterminating party also would have been entitled to terminate
this Agreement pursuant to Section 9.1(c) or Section 9.1(d), as applicable.
(d) In the event that this Agreement is terminated pursuant to Section
9.1(a), (b), or (f), then NPB shall pay to AMI a reimbursement fee equal to the
lesser of $500,000 or all of AMI's documented out-of-pocket expenses with
respect to the matters set forth in Schedule 9.3(d).
9.4 Amendment. This Agreement may be amended by action taken by NPB and
AMI at any time before or after approval hereof by the stockholders of AMI, but,
after any such approval, no amendment shall be made which alters the Exchange
Ratio or which in any way materially adversely affects the rights of such
stockholders, without the further approval of such stockholders. This Agreement
may not be amended except by an instrument in writing signed on behalf of each
of the parties hereto.
9.5 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto may (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto, and (c) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party. Such waiver shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
ARTICLE X
GENERAL PROVISIONS
10.1 Survival of Representations, Warranties and Agreements. No
representations, warranties or agreements contained herein shall survive beyond
the Effective Time except that the agreements contained in Sections 3.1, 3.2,
3.3, 3.4, 3.5, 3.7, 7.7, 7.8, 7.9, 7.11, 7.12(a), 7.16, 7.17, 7.18, 9.3, 10.1,
10.6 and 10.7 hereof shall survive beyond the Effective Time, and the agreements
of the Affiliates delivered pursuant to Section 6.6 shall survive beyond the
Effective Time.
10.2 Brokers.
(a) AMI represents and warrants to NPB that, (i) except for its financial
advisor, Dain Bosworth Incorporated, no broker, finder or financial advisor is
entitled to any brokerage, finder's or other fee or commission in connection
with the Merger or the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of AMI and (ii) a true and complete copy of
all engagement letters or agreements between AMI and Dain Bosworth Incorporated
and between AMI and any third party for whom any amounts payable contingent upon
consummation of the Merger, have previously been delivered to NPB.
(b) NPB represents and warrants to AMI that, (i) except for its financial
advisors, Robertson, Stephens & Company, L.P., no broker, finder or financial
advisor is entitled to any brokerage, finder's or other fee or commission in
connection with the Merger or the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of NPB and (ii) a true and complete
copy of engagement letter or agreement between NPB and Robertson, Stephens &
Company, L.P. and between NPB and any third party
A-32
<PAGE> 38
for whom any amounts payable are contingent upon consummation of the Merger,
have previously been delivered to AMI.
10.3 Notices. All notices, claims, demands and other communications
hereunder shall be in writing and shall be deemed given if delivered personally
or by telex or telecopy or mailed by registered or certified mail (postage
prepaid, return receipt requested) to the respective parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) If to NPB, to:
Nellcor Puritan Bennett Incorporated
4280 Hacienda Drive
Pleasanton, California 94588
Attention:Laureen DeBuono
Executive Vice President, Human Resources,
General Counsel and Corporate Secretary
with a copy to:
Morrison & Foerster LLP
Twelfth Floor
19900 MacArthur Boulevard
Irvine, California 92612
Attention: Robert M. Mattson, Jr., Esq.
(b) If to AMI, to:
Aequitron Medical, Inc.
14800 -- 28th Avenue North
Minneapolis, Minnesota 55447
Attention:Bill Milne
Chief Financial Officer
with a copy to:
Best & Flanagan, PLLP
4000 First Bank Place
601 Second Avenue South
Minneapolis, Minnesota 55402-4331
Attention: Robert J. Christianson, Esq.
10.4 Descriptive Headings. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
10.5 Entire Agreement; Assignment. This Agreement (including the Exhibits,
Disclosure Schedules and other Reports and instruments referred to herein) and
the Confidentiality Agreement (a) constitute the entire agreement and supersedes
all other prior agreements and understandings, both written and oral, among the
parties or any of them, with respect to the subject matter hereof; (b) except
for Sections 7.7, 7.8, 7.9, 7.16, 7.17, and 7.18, is not intended to confer upon
any other person any rights or remedies hereunder; and (c) shall not be assigned
by operation of law or otherwise, provided that NPB may assign its rights and
obligations hereunder to a direct or indirect subsidiary of NPB, but no such
assignment shall relieve NPB of its obligations hereunder.
10.6 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without giving effect to the
provisions thereof relating to conflicts of law.
10.7 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
shall constitute one and the same agreement.
10.8 Validity. The invalidity or unenforceability of any provision of this
Agreement shall not effect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
A-33
<PAGE> 39
10.9 Jurisdiction and Venue. Each party hereto hereby agrees that any
proceeding relating to this Agreement and the Merger shall be brought in a state
court of Delaware. Each party hereto hereby consents to personal jurisdiction in
any such action brought in any such Delaware court, consents to service of
process by registered mail made upon such party and such party's agent and
waives any objection to venue in any such Delaware court or to any claim that
such Delaware court is an inconvenient forum.
10.10 Investigation. The respective representations of warranty of NPB and
AMI contained herein or in the certificates or other Reports delivered prior to
the Closing shall not be deemed waived or otherwise affected by any
investigation made by any party hereto.
10.11 Consents. For purposes of any provision of this Agreement requiring,
permitting or providing for the consent of NPB or AMI, the written consent of
the Chief Executive Officer of NPB or AMI, as the case may be shall be
sufficient to constitute such consent.
IN WITNESS WHEREOF, each of NPB and AMI has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
Nellcor Puritan Bennett Incorporated
By: /s/ C. RAYMOND LARKIN,
JR.
------------------------------------
Name: C. Raymond Larkin, Jr.
Title: President and Chief
Executive Officer
Aequitron Medical, Inc.
By: /s/ JAMES B. HICKEY, JR.
------------------------------------
Name: James B. Hickey
Title: Chief Executive Officer and
President
A-34
<PAGE> 1
EXHIBIT 13.1
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) 1.271 0.922 0.893 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> 2
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
- ---------------------------------------------------------------------------------------------------------------------------
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> 3
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> 4
NELLCOR PURITAN BENNETT INCORPORATED
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Additional Accumulated Deferred
(in thousands, Common Stock Paid-in Retained Translation Stock Awards Treasury Stock
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> 5
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 the end of the year $68,549 $83,193 $71,573
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
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> 7
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> 8
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> 9
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
- ---------------------------------------------------------------------------------------------------------------------------
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
<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> 10
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 totaling $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> 11
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> 12
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> 13
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>
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> 14
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> 15
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> 16
<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> 17
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> 18
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> 19
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> 20
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.
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> 21
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> 22
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> 23
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, 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> 24
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> 25
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
<PAGE> 26
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 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
<PAGE> 27
additional 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> 28
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> 29
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> 30
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> 31
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 .192
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> 1
Exhibit 21.1
Name Jurisdiction
of
incorporation
- ---------------------------------------------------------------------
Nellcor Puritan Bennett Europe BV Netherlands
Nellcor Puritan Bennett Benelux BV Netherlands
Nellcor Puritan Bennett Germany GmbH Germany
Nellcor Puritan Bennett Belgium NV/SA Belgium
Nellcor Puritan Bennett Hong Kong Limited Hong Kong
Nellcor Puritan Bennett France Holdings SARL France
Pierre Medical S.A. France
Nellcor Puritan Bennett (Melville) Ltd. Canada
Nellcor Iberia S.L. Spain
Nellcor Puritan Bennett Export Inc. USA, Delaware
Nellcor Foreign Sales Corporation Barbados
Nellcor-CMI, Inc. Japan
Puritan-Bennett Corporation USA, Delaware
Nellcor Puritan Bennett Ireland Holdings Limited Ireland
Puritan-Bennett Ireland Distribution Ltd Ireland
Nellcor Puritan Bennett Ireland Limited Ireland
Puritan-Bennett Aero Systems Co. USA, California
Nellcor Puritan Bennett de Mexico, SA de CV Mexico
Nellcor Puritan Bennett Finland OY Finland
Nellcor Puritan Bennett France SARL France
SEFAM SA France
Nellcor Puritan Bennett International Corp USA, Delaware
Nellcor Puritan Bennett U.K. Limited England
Nellcor Puritan Bennett Italia Srl Italy
Nellcor Puritan Bennett Canada Ltd Canada
Nellcor Puritan Bennett Australia Pty, Ltd Australia
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-16590, 33-25586, 33-25587, 33-32521, 33-38241,
33-45010, 33-87490, 33-87492, 33-87496, 33-62463, and 33-62465) of Nellcor
Puritan Bennett Incorporated of our report dated July 31, 1996, appearing on
page 47 of the Annual Report to Stockholders which is incorporated in this
Annual Report on Form 10-K for the year ended July 7, 1996.
PRICE WATERHOUSE LLP
San Francisco, California
October 4, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-07-1996
<PERIOD-START> JUL-03-1995
<PERIOD-END> JUL-07-1996
<CASH> 68,549
<SECURITIES> 5,825
<RECEIVABLES> 151,461
<ALLOWANCES> 2,400
<INVENTORY> 128,078
<CURRENT-ASSETS> 399,601
<PP&E> 130,891
<DEPRECIATION> 142,246
<TOTAL-ASSETS> 587,838
<CURRENT-LIABILITIES> 156,004
<BONDS> 0
0
0
<COMMON> 63
<OTHER-SE> 405,717
<TOTAL-LIABILITY-AND-EQUITY> 587,838
<SALES> 706,131
<TOTAL-REVENUES> 706,131
<CGS> 346,020
<TOTAL-COSTS> 346,020
<OTHER-EXPENSES> 360,158
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,033
<INCOME-PRETAX> 1,326
<INCOME-TAX> 10,686
<INCOME-CONTINUING> (9,360)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,360)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
