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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 6, 1997
OR
___TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 0-14980
NELLCOR PURITAN BENNETT INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 94-2789249
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4280 HACIENDA DRIVE
PLEASANTON, CALIFORNIA 94588
(Address of principal executive offices)
(Zip code)
TELEPHONE: (510) 463-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No _____
Number of shares of Common Stock, $.001 par value, outstanding as of
April 6, 1997 was 63,335,328.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NELLCOR PURITAN BENNETT INCORPORATED
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNT, UNAUDITED)
<TABLE>
<CAPTION>
ASSETS April 6, 1997 July 7, 1996
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $54,077 $71,692
Marketable securities 3,501 5,825
Accounts receivable 192,521 158,023
Inventories 155,671 132,378
Deferred income taxes 32,279 32,375
Other current assets, net 16,572 14,589
------------- ------------
Total current assets 454,621 414,882
Property, plant and equipment, net 144,815 132,956
Intangible and other assets, net 46,779 49,983
Deferred income taxes 13,242 13,101
------------- ------------
$659,457 $610,922
============= ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $46,654 $40,269
Employee compensation and related costs 26,358 32,072
Merger and related costs 27,481 32,452
Other accrued expenses 39,716 35,133
Current maturities of long-term debt 22,744 530
Income taxes payable 15,279 20,444
------------- ------------
Total current liabilities 178,232 160,900
Long-term debt, less current maturities 5,970 8,394
Deferred compensation and pensions 9,581 9,522
Deferred revenue 7,857 10,039
------------- ------------
Total liabilities 201,640 188,855
------------- ------------
Stockholders' equity:
Common stock, par value 67 63
Additional paid-in-capital 245,545 236,461
Retained earnings 270,501 242,687
Accumulated translation adjustment 81 304
Notes receivable from stockholders (5) (5)
Net unrealized gain on available-for-sale securities 445 1,374
Treasury stock, at cost (3,224,020 shares) (58,817) (58,817)
------------- ------------
Total stockholders' equity 457,817 422,067
------------- ------------
$659,457 $610,922
============= ============
</TABLE>
See accompanying note
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NELLCOR PURITAN BENNETT INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
------------------------------- --------------------------------
April 6, March 31, April 6, March 31,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenue $ 209,054 $ 184,750 $ 566,267 $ 535,008
Cost of goods sold 111,229 88,785 298,938 260,287
---------- ---------- ---------- ----------
Gross profit 97,825 95,965 267,329 274,721
---------- ---------- ---------- ----------
Operating expenses:
Research and development 14,545 14,854 40,720 41,815
Selling, general and
administrative 58,189 52,360 162,721 152,844
Merger and related costs --- --- 21,689 92,618
---------- ---------- ---------- ----------
72,734 67,214 225,130 287,277
---------- ---------- ---------- ----------
Income (loss) from operations 25,091 28,751 42,199 (12,556)
Interest income 710 1,304 2,055 4,797
Interest expense (489) (331) (1,110) (3,082)
Other (expense), net (1,267) (170) (1,506) (386)
---------- ---------- ---------- ----------
Income (loss) before income taxes 24,045 29,554 41,638 (11,227)
Provision for income taxes 7,454 9,406 14,550 7,560
---------- ---------- ---------- ----------
Net income (loss) $ 16,591 $ 20,148 $ 27,088 $ (18,787)
========== ========== ========== ==========
Net income (loss) per common and
Common equivalent share $ 0.26 $ 0.31 $ 0.42 $ (0.30)
========== ========== ========== ==========
Weighted average common and
common equivalent shares 64,014 64,452 63,888 63,612
========== ========== ========== ==========
</TABLE>
See accompanying note
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NELLCOR PURITAN BENNETT INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended
-----------------------------------
April 6, 1997 March 31, 1996
-----------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $27,088 ($18,787)
Adjustments to reconcile net income (loss) to
Cash provided by (used for) operating activities:
Depreciation and amortization 24,419 24,124
Deferred income taxes --- (200)
Merger and related charges 21,689 92,618
Deferred compensation and pensions --- (11,954)
Other 55 762
Increases (decreases) in cash flows, net of effect of purchased
Companies, as a result of changes in:
Accounts receivable (32,891) (14,779)
Inventories (18,217) (13,617)
Other current assets (3,506) (9,941)
Intangible and other assets (1,545) 584
Accounts payable 5,726 2,973
Merger and related costs (22,822) (36,470)
Employee compensation and other accrued expenses 280 3,598
Income taxes payable (6,050) 1,187
Deferred revenue (939) (545)
------------ ----------
Cash provided by (used for) operating activities (6,713) 19,553
------------ ----------
Cash flows from investing activities:
Aequitron net cash provided during the period from 5/1/96 - 7/7/96 46 ---
Capital expenditures (33,822) (18,354)
Purchase of available-for-sale securities (1,800) ---
Proceeds from maturities of securities held-to-maturity --- 61,842
Proceeds from the sale of available-for-sale securities 3,057 ---
Acquisitions, net of cash acquired (5,268) (9,713)
Other investing activities 1,417 713
------------ ----------
Cash provided by (used for) investing activities (36,370) 34,488
------------ ----------
Cash flows from financing activities:
Issuance of common stock under the
Company's stock plans and related tax benefits, net 9,073 24,533
Additions to long-term debt 29,049 2,500
Repayment of long-term debt (11,854) (70,473)
Purchase of treasury shares --- (12,103)
------------ ----------
Cash provided by (used for) financing activities 26,268 (55,543)
------------ ----------
Effect of exchange rate changes on cash (800) (40)
------------ ----------
Decrease in cash and cash equivalents (17,615) (1,542)
Cash and cash equivalents at the beginning of the period 71,692 84,552
------------ ----------
Cash and cash equivalents at the end of the period $54,077 $83,010
============ ==========
</TABLE>
See accompanying note
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NELLCOR PURITAN BENNETT INCORPORATED
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
GENERAL. The consolidated financial statements reflect, in the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position and results of operations of
Nellcor Puritan Bennett Incorporated (the Company) as of the end of and for the
periods indicated.
The accompanying interim consolidated financial statements should be read in
conjunction with the financial statements and related notes included in the
Company's 1996 Annual Report to Stockholders. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the Securities and Exchange Commission rules and regulations. The
Company believes the information included in the report on Form 10-Q, when read
in conjunction with the consolidated financial statements and related notes
thereto included in the Company's 1996 Annual Report to Stockholders, is not
misleading.
The results of operations for the three and nine months ended April 6, 1997
are not necessarily indicative of operating results for the full fiscal year.
COMBINED FINANCIAL RESULTS. The Company acquired Infrasonics Incorporated
(Infrasonics) on June 27, 1996, and Aequitron Medical, Inc. (Aequitron) on
December 5, 1996, in stock for stock mergers. Both mergers were intended to
qualify as tax-free reorganizations and were accounted for as poolings of
interests. Accordingly, the consolidated financial statements present, for all
periods, the combined financial results of the Company, Infrasonics, and
Aequitron.
The Company's consolidated statements of operations and cash flows for the
three and nine month periods ended March 31, 1996 combine the results of the
Company's third quarter and first nine months of fiscal 1996, the period ended
March 31, 1996, with Infrasonics' third quarter and first nine months of fiscal
1996, the period ended March 31, 1996, and Aequitron's third quarter and first
nine months of fiscal 1996, the period ended January 31, 1996, respectively.
Adjustments made to conform the accounting policies of the Company,
Infrasonics, and Aequitron were immaterial. Separate results for each of the
Company's, Infrasonics' and Aequitron's third quarter of fiscal 1996, and
combined results for the three and nine months ended March 31, 1996, were as
follows (in thousands):
<TABLE>
<CAPTION>
Nellcor Puritan Bennett Infrasonics Aequitron Combined
Three months ended: March 31, 1996 March 31, 1996 January 31, 1996 March 31, 1996
- ------------------- ----------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Revenue $ 168,490 $ 7,148 $ 9,112 $ 184,750
Net income $ 19,178 $ 600 $ 370 $ 20,148
Nellcor Puritan Bennett Infrasonics Aequitron Combined
Nine months ended: March 31, 1996 March 31, 1996 January 31, 1996 March 31, 1996
- ------------------ ----------------- -------------- ---------------- --------------
Revenue $ 487,354 $ 19,271 $ 28,383 $ 535,008
Net income (loss) $(21,901) $ 1,306 $ 1,808 $(18,787)
</TABLE>
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INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out)
or market. Allowances are made for slow-moving, obsolete, unsalable, or unused
inventories.
Interim fiscal 1997 and year-end fiscal 1996 inventory balances for the Company
were as follows
(in thousands):
<TABLE>
<CAPTION>
APRIL 6, 1997 JULY 7, 1996
---------------- ----------------
<S> <C> <C>
RAW MATERIALS $67,711 $66,805
WORK-IN-PROCESS 16,981 16,538
FINISHED GOODS 70,979 49,035
---------------- ----------------
$155,671 $132,378
================ ================
</TABLE>
STATEMENT OF CASH FLOWS. The Company paid income taxes of approximately $19.7
million in the first nine months of fiscal 1997 ended April 6, 1997, and $13.4
million in the first nine months of fiscal 1996 ended March 31, 1996.
PROPERTY AND EQUIPMENT. Depreciation expense was approximately $21.2 million
in the first nine months of fiscal 1997 and $18.0 million in the first nine
months of fiscal 1996.
MARKETABLE SECURITIES. At April 6, 1997, the Company held available-for-sale
marketable securities with a fair market value of $3.5 million. The Company's
marketable securities, generally, are in high quality government, municipal,
and corporate obligations with original maturities of up to two years. The
Company has established guidelines relative to investment quality,
diversification and maturities to maintain appropriate levels of safety and
liquidity.
Realized gains and losses resulting from the sale of available-for-sale
marketable securities during the periods presented were not material. The
difference between the cost and market value of the Company's marketable
securities at April 6, 1997, an unrealized gain of approximately $.4 million,
is carried in stockholders' equity as a "net unrealized gain on
available-for-sale securities".
ACCOUNTING CHANGES. In February 1997, the Financial Accounting Standards Board
issued Statement of Accounting Standards No. 128, "Earnings Per Share" (SFAS
128). SFAS 128 supercedes Accounting Principles Board Opinion No. 15,
"Earnings Per Share" and is effective for financial statements for both interim
and annual periods ending after December 15, 1997. SFAS 128 requires dual
presentation of basic and diluted earnings per share (EPS) on the face of the
income statement for entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to Opinion 15. Under SFAS 128, the pro forma net income
per share for the three month period ended April 6, 1997 was $0.26 for both
basic and diluted earnings per share.
ACQUISITION OF AEQUITRON. On December 5, 1996, the Company acquired Aequitron
in a stock-for-stock merger. Under the terms of the Amended and Restated
Agreement and Plan of Merger, shareholders of Aequitron received .467 of a
share of the Company's common stock for each Aequitron share, resulting in the
Company issuing approximately 2,322,000 shares, valued at approximately $52.5
million based on the closing price of the Company's common stock on December 5,
1996. Additionally, outstanding options to acquire Aequitron's common stock
were assumed by the Company and converted into options to acquire approximately
545,000 shares of the Company's common stock.
Aequitron, headquartered in Minneapolis, Minnesota, is a respiratory equipment
manufacturer of portable compact ventilators, infant apnea products, and sleep
disorder diagnostic devices. In addition, through its Crow River Industries,
Inc. subsidiary, the company also manufactures wheelchair lifts and automobile
hand controls to assist individuals who have mobility limitations. For the
fiscal year ended April 30, 1996, Aequitron reported revenue of $38.5 million.
ACQUISITION OF NELLCOR-CMI, INC. On September 30, 1996, the Company acquired
from Century Medical, Inc. the remaining 50 percent ownership interest in
Nellcor-CMI, Inc. (NCI) for $5.4 million in cash. The acquisition of NCI has
been accounted for as a purchase and, accordingly, the results from the
Company's new wholly-owned subsidiary, Nellcor Puritan Bennett Japan, are
included in the Company's financial statements subsequent to the acquisition
date.
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MERGER AND RELATED COSTS. In connection with the acquisition of Aequitron, the
Company recorded merger and related costs during the second quarter of fiscal
1997 of $21.7 million. Included in this charge were provisions for merger
transaction costs ($3.4 million), certain intangible asset write downs ($3.0
million), costs to combine and integrate operations ($14.5 million), and other
merger related costs ($0.8 million). During fiscal 1996, one-time merger and
related costs of $108.9 million were recorded associated with the Company's
acquisitions of Puritan-Bennett and Infrasonics.
Of the $130.6 million in merger and related costs accrued during fiscal 1996
and fiscal 1997, as of April 6, 1997, approximately $103.1 million had been
utilized, primarily associated with the write-down (non-cash charge) of certain
assets to their net realizable value ($24.3 million), the payment of merger
transaction costs ($17.6 million), initial costs incurred to combine and
integrate operations ($57.4 million, of which $17.2 million was associated with
employee severance and benefits termination costs) and other merger related
costs ($3.8 million). The remaining merger and related costs accrued at April
6, 1997 of $27.5 million, approximately $25.5 million of which is expected to
result in a cash outlay, should be substantially utilized by the end of fiscal
1998.
Employee severance and benefit termination costs included in the merger and
related costs accrual were associated with the elimination of approximately 320
positions from the Company's total workforce. The positions to be eliminated
are primarily associated with corporate administrative groups, field sales and
customer service organizations, and the consolidation of manufacturing sites.
As of April 6, 1997, approximately 306 positions contemplated by this workforce
reduction had been eliminated. The Company expects the remainder of these
positions to be eliminated during fiscal 1997.
SUBSEQUENT EVENT. On May 7, 1997, the Company announced that it will
consolidate home care product line activities spread across six existing U.S.
sites into three sites. The Company is undertaking this action as part of its
operations improvement plan focused on increasing productivity, reducing cost
and improving the effectiveness of product development activities. Overall,
the Company expects to eliminate approximately 80-85 positions in the sleep
products divisions and 30-50 positions in the oxygen therapy products
divisions. In addition, the portion of the Company's critical care ventilator
research and development operations located in Ireland will be absorbed into
the R&D operations in Carlsbad, California. The Company expects to record
one-time restructuring charges of $15-20 million in the fiscal 1997 fourth
quarter associated with these consolidations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS - YEAR-TO-DATE PERIOD AND THIRD QUARTER ENDED APRIL 6,
1997, COMPARED WITH THE YEAR-TO-DATE PERIOD AND THIRD QUARTER ENDED MARCH 31,
1996.
The Company reported net income for the third quarter of fiscal 1997 of $16.6
million, or $0.26 per share, compared to net income of $20.1 million, $0.31
per share, for the same period a year ago. For the first nine months of fiscal
1997, the Company reported net income of $27.1 million, or $0.42 per share,
including one-time merger and related charges of $21.7 million, ($0.26) per
share, associated with the acquisition of Aequitron. The Company's results for
the first nine months of fiscal 1996, a net loss of $18.8 million, or ($0.30)
per share, reflect one-time merger and related charges of $92.6 million,
($1.17) per share, associated with the first quarter fiscal 1996 acquisition of
Puritan-Bennett. Excluding the effect of these nonrecurring charges, net
income for the first nine months of fiscal 1997 was $43.6 million, $0.68 per
share, compared to net income of $55.2 million, $0.86 per share, for the first
nine months of fiscal 1996.
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The Company's net revenue for the third quarter of fiscal 1997 was $209.1
million, a 13 percent increase over net revenue of $184.8 million for the same
period a year ago. Net revenue for the first nine months of fiscal 1997
increased 6 percent to $566.3 million from $535.0 million in the same period
last year.
Hospital product line sales increased 7 percent to $123.6 million for the third
quarter of fiscal 1997 from $115.7 million for the same period last year as
higher oximetry revenue was partially offset by slightly lower sales of the
Company's critical care ventilators. Oximetry product line sales increased due
to higher sales of the Company's sensors and sales of the NPB-4000
multiparameter monitor, a product which has been well received in international
markets since its introduction in the first quarter of fiscal 1997. Sales of
the Company's critical care ventilators were lower due primarily to reduced
sales of the ADULT STAR series ventilator.
Home care product line sales increased 24 percent to $73.9 million from $59.6
million for the same period last year. The increase in home care product line
sales was due primarily to higher sales across the company's oxygen therapy,
sleep therapy and portable ventilator product lines. Growth in national
account business contributed to higher U.S. home care sales levels. In
addition, international home care revenue was strong, primarily the result of
higher European sales of sleep therapy devices.
Aero business sales increased 23 percent to $11.6 million for the third quarter
of fiscal 1997 compared to $9.4 million for the same period last year.
Separately, international revenue of $61.8 million represents an increase of 13
percent over international revenue of $54.6 million for the third quarter of
fiscal 1996. International sales growth was strongest in Asia where the
Company benefited from strong sales within its newly established Japanese
subsidiary. Foreign currency exchange rates unfavorably impacted international
revenue growth by 5 percentage points during the third quarter.
Gross profit as a percentage of net revenue for the third quarter of fiscal
1997 was 47 percent compared to 52 percent for the same period last year. This
decline was due primarily to unfavorable product mix and lower average selling
prices within certain home care and hospital product lines and the unfavorable
effect that foreign currency exchange rates had upon international sales. The
Company's gross margins are expected to improve slightly in the fourth quarter
of this fiscal year.
Operating expenses for the third quarter of fiscal 1997 were 35 percent of net
revenue versus 36 percent for the third quarter of fiscal 1996. Operating
expenses for the first nine months of 1997 and 1996 were comparable at 36
percent of net revenue, exclusive of the effect of one-time merger and related
charges.
Research and development expenses were 7 percent of net revenue in the third
quarter of fiscal 1997 compared to 8 percent for the third quarter of fiscal
1996. The slight decrease in research and development expenses is due
primarily to synergies resulting from the consolidation of certain hospital
product development activities.
Selling, general and administrative expenses for the third quarter of fiscal
1997 and fiscal 1996 were comparable at 28 percent of net revenue. Selling,
general and administrative expenses increased in absolute dollars due primarily
to the inclusion of expenses from the Company's newly established NPB Japan
subsidiary, selling expenses increasing in line with the revenue growth rates
and higher information systems conversion costs.
Operating expenses for the first nine months of fiscal 1997 reflect the effect
of one-time merger and related costs of $21.7 million associated with the
Company's acquisition of Aequitron. Included in this charge were provisions
for merger transaction costs ($3.4 million), certain intangible asset
write-downs ($3.0 million), costs to combine and integrate operations ($14.5
million), and other merger related costs ($0.8 million).
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Operating expenses for the first nine months of fiscal 1996 reflect the effect
of one-time merger and related costs of $92.6 million associated with the
merger of Nellcor and Puritan-Bennett. Included in this charge were provisions
for merger transaction costs ($13.7 million), costs to combine and integrate
operations ($53.8 million), certain intangible asset write-downs ($19.6
million), and other merger related costs ($5.5 million).
Other expense for the third quarter of fiscal 1997 was $1.3 million compared to
$.2 million reported in the prior year. Other expense increased due primarily
to the recording of higher bad debt reserve provisions associated with
continued sales growth in emerging markets.
LIQUIDITY AND CAPITAL RESOURCES
At April 6, 1997, the Company had cash, cash equivalents and marketable
securities of approximately $57.6 million compared to $77.5 million at the end
of fiscal 1996.
Cash provided by operating activities was approximately $16.1 million during
the first nine months of fiscal 1997, exclusive of $22.8 million in merger
related cash outlays. Accounts receivable and inventory growth and income tax
payments during the year were major contributors to the net use of cash for
operating activities. The Company's accounts receivable increased to $192.5
million at April 6,1997, from $158.0 million at July 7, 1996, due primarily to
the assumption of accounts receivable from NCI subsequent to its acquisition and
a trend towards extended credit terms. The Company's inventories increased to
$155.7 million at April 6, 1997 from $132.4 million at July 7, 1996 due
primarily to lower than planned sales levels, inventory buildups in advance of
product line relocations and the consolidation of Southern California hospital
business manufacturing sites, and certain new product introductions. The
Company is actively working to reduce inventory levels over the remainder of
1997. In part to fund incremental working capital requirements, net of
repayments of $11.9 million, the Company increased borrowings by $17.2 million
during the first nine months of fiscal 1997.
On September 30, 1996, the Company acquired the remaining 50 percent ownership
interest in NCI for $5.4 million in cash. Debt of $8 million was assumed as
part of this acquisition.
On December 5, 1996, the Company acquired Aequitron in a stock-for-stock
merger. Under the terms of the Amended and Restated Agreement and Plan of
Merger, shareholders of Aequitron received .467 a share of the Company's common
stock for each Aequitron share, resulting in the Company issuing approximately
2,322,000 shares, valued at approximately $52.5 million based on the closing
price of the Company's common stock on December 5, 1996. Additionally,
outstanding options to acquire Aequitron's common stock were assumed by the
Company and converted into options to acquire approximately 545,000 shares of
the Company's common stock.
Aequitron, headquartered in Minneapolis, Minnesota, is a respiratory equipment
manufacturer of portable compact ventilators, infant apnea products, and sleep
disorder diagnostic devices. In addition, through its Crow River Industries,
Inc. subsidiary, the company also manufactures wheelchair lifts and automobile
hand controls to assist individuals who have mobility limitations. For the
year ended April 30, 1996, Aequitron reported revenue of $38.5 million.
On May 7, 1997, the Company announced that it will consolidate home care
product line activities spread across six existing U.S. sites into three sites.
The Company is undertaking this action as part of its operations improvement
plan focused on increasing productivity, reducing cost and improving the
effectiveness of product development activities. Overall, the Company expects
to eliminate approximately 80-85 positions in sleep products and 30-50
positions in oxygen therapy products. In addition, the portion of the
Company's critical care ventilator research and development operations located
in Ireland will be absorbed into the R&D operations in Carlsbad, California.
The Company expects to record one-time restructuring charges of $15-20 million
in the fiscal 1997 fourth quarter associated with these consolidations.
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On January 15, 1997 the Company rescinded the general stock repurchase program,
which had originally been implemented on December 8, 1993.
The Company anticipates that current working capital resources, combined with
cash to be generated from operating activities, will be sufficient to meet its
liquidity and capital expenditure requirements at least through the end of
fiscal 1997. The Company may continue to use debt to fund certain working
capital and other strategic opportunities when deemed necessary and financially
advantageous.
BUSINESS CONSIDERATIONS
The Company is a United States Food and Drug Administration (FDA) regulated
business operating in the rapidly changing healthcare industry. From time to
time the Company may report, through its press releases and/or Securities and
Exchange Commission filings, certain matters that would be characterized as
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those projected. Certain
of these risks and uncertainties are beyond management's control. Such risks
and uncertainties include, among other things, the following items.
INTEGRATION OF ACQUIRED BUSINESSES. The Company has dedicated and will
continue to dedicate, substantial management resources in order to achieve the
anticipated operating efficiencies from integrating Puritan-Bennett,
Infrasonics, and Aequitron. While the Company has achieved certain operating
cost savings to date, difficulties encountered in integrating the companies'
operations could adversely impact the business, results of operations or
financial condition of the Company. Also, the Company intends to pursue
acquisition opportunities in the future. The integration of any businesses
that the Company might acquire could require substantial management resources.
There can be no assurance that any such integration will be accomplished
without having a short or potentially long-term adverse impact on the business,
results of operations or financial condition of the Company or that the
benefits expected from any such integration will be fully realized.
MANAGED CARE AND OTHER HEALTHCARE PROVIDER ORGANIZATIONS. Managed care and
other large healthcare provider organizations have grown substantially in terms
of the percentage of the population in the United States that receives medical
benefits through such organizations and in terms of the influence and control
that they are able to exert over an increasingly large portion of the health
care industry. These organizations are continuing to consolidate and grow,
which may increase the ability of these organizations to influence the
practices and pricing involved in the purchase of medical devices, including
the products sold by the Company.
HEALTH CARE REFORM/PRICING PRESSURE. The health care industry in the United
States is experiencing a period of extensive change. Health care reform
proposals have been formulated by the current administration and by members of
Congress. In addition, state legislatures periodically consider various health
care reform proposals. Federal, state and local government representatives
will, in all likelihood, continue to review and assess alternative health care
delivery systems and payment methodologies, and ongoing public debate of these
issues can be expected. Cost containment initiatives, market pressures and
proposed changes in applicable laws and regulations may have a dramatic effect
on pricing for medical devices, the relative costs associated with doing
business and the amount of reimbursement by both government and third-party
payors. In particular, the industry is experiencing market-driven reforms from
forces within the industry that are exerting pressure on health care companies
to reduce health care costs. These market-driven reforms are resulting in
industry-wide consolidation that is expected to increase the downward pressure
on health care product margins, as larger buyer and supplier groups exert
pricing pressure on providers of medical devices and other health care
products. Both short-term and long-term cost containment pressures, as well as
the possibility of regulatory reform, may have an adverse impact on the
Company's results of operations.
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GOVERNMENT REGULATION; CONSENT DECREE. Both in the United States and outside
the United States, there has been a trend toward more stringent regulation of,
and enforcement of requirements applicable to, medical device manufacturers.
The continuing trend of more stringent regulatory oversight in product
clearance and enforcement activities has caused medical device manufacturers to
experience longer approval cycles, more uncertainty, greater risk and higher
expenses. At the present time, there are no meaningful indications that this
trend will be discontinued in the near-term or the long-term either in the
United States or abroad.
Puritan-Bennett has been subject to significant FDA enforcement activity with
respect to its operations. In January 1994, Puritan-Bennett entered into a
consent decree with the FDA pursuant to which Puritan-Bennett agreed to
maintain systems and procedures complying with the FDA's good manufacturing
practices regulation and medical device reporting regulation in all of its
device manufacturing facilities.
Puritan-Bennett has experienced and will continue to experience incremental
operating costs due to ongoing compliance requirements and quality assurance
programs initiated in part as a result of the FDA consent decree.
Puritan-Bennett expects to continue to incur additional operating expenses
associated with its ongoing regulatory compliance program, but the amount of
these incremental costs cannot be completely predicted and will depend upon a
variety of factors, including future changes in statutes and regulations
governing medical device manufacturers and the manner in which the FDA
continues to enforce and interpret the requirements of the consent decree.
There can be no assurance that such compliance requirements and quality
assurance programs will not have a material adverse effect on the business,
results of operations or financial condition of the Company or that the Company
will not experience problems associated with FDA regulatory compliance,
including increased general costs of ongoing regulatory compliance and specific
costs associated with the Puritan-Bennett consent decree.
INTELLECTUAL PROPERTY RIGHTS. From time to time, the Company has received, and
in the future may receive, notices of claims with respect to possible
infringement of the intellectual property rights of others or notices of
challenges to its intellectual property rights. In some instances such notices
have given rise to, or may give rise to, litigation. Any litigation involving
the intellectual property rights of the Company may be resolved by means of a
negotiated settlement or by contesting the claim through the judicial process.
There can be no assurance that the business, results of operations or the
financial condition of the Company will not suffer a material adverse effect as
a result of intellectual property claims that may be commenced against the
Company in the future.
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COMPETITION. The medical device industry is characterized by rapidly evolving
technology and increased competition. There are a number of companies that
currently offer, or are in the process of developing, products that compete
with products offered by the Company. Some of these competitors may have
substantially greater capital resources, research and development staffs and
experience in the medical device industry, including with respect to regulatory
compliance in the development, manufacturing and sale of medical products
similar to those offered by the Company. These competitors may succeed in
developing technologies and products that are more effective than those
currently used or produced by the Company or that would render some products
offered by the Company obsolete or non-competitive. Moreover, competition
based on price has become and is expected to continue to be an increasingly
important factor in customer purchasing patterns as a result of cost
containment pressures on, and consolidation in, the health care industry. Such
competition has exerted, and is likely to continue to exert, downward pressure
on the prices the Company is able to charge for its products. The Company may
not be able to offset such downward price pressure through corresponding cost
reductions. Any failure to offset such pressure could have an adverse impact
on the business, results of operations or financial condition of the Company.
NEW PRODUCT INTRODUCTIONS. As the existing products of the Company become more
mature and its existing markets more saturated, the importance of developing or
acquiring new products will increase. The development of any such products
will entail considerable time and expense, including research and development
costs and the time and expense required to obtain necessary regulatory
approvals, which could adversely affect the business, results of operations or
financial condition of the Company. There can be no assurance that such
development activities will yield products that can be commercialized
profitably, or that any product acquisitions can be consummated on commercially
reasonable terms or at all. Any failure to acquire or develop new products to
supplement more mature products could have an adverse impact on the business,
results of operations or financial condition of the Company.
PRODUCT LIABILITY EXPOSURE. Because its products are intended to be used in
health care settings on patients who are physiologically unstable and may also
be seriously or critically ill, the Company is exposed to potential product
liability claims. From time to time, patients using the Company's products
have suffered serious injury or death, which has led to product liability
claims against the Company. The Company does not believe that any of these
claims, individually or in the aggregate, will have a material adverse effect
on its business, results of operations or financial condition. However, the
Company may, in the future, be subject to product liability claims that could
have such an adverse impact.
The Company maintains product liability insurance coverage in amounts that it
deems sufficient for its business. However, there can be no assurance that
such coverage will ultimately prove to be adequate, or that such coverage will
continue to remain available on acceptable terms or at all.
IMPACT OF CURRENCY FLUCTUATIONS; IMPORTANCE OF FOREIGN SALES. Because sales of
products by the Company outside the United States typically are denominated in
local currencies and such sales are growing at a rate that is generally faster
than domestic sales, the results of operations of the company are expected to
continue to be affected by changes in exchange rates between certain foreign
currencies and the United States Dollar. Although the Company currently
engages in some hedging activities, there can be no assurance that the Company
will not experience currency fluctuation effects in future periods, which could
have an adverse impact on its business, results of operation or financial
condition. The operations and financial results of the Company also may be
significantly affected by other international factors, including changes in
governmental regulations or import and export restrictions, and foreign
economic and political conditions generally.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's stock
is, and is expected to continue to be, subject to significant fluctuations in
response to variations in quarterly operating results, trends in the health
care industry in general and the medical device industry in particular, and
certain other factors beyond the control of the Company. In addition, broad
market fluctuations, as well as general economic or political conditions and
initiatives such as health care reform, may adversely affect the market price
of the Company's stock, regardless of the Company's operating performance.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time the Company has received, and in the future may receive,
notice of claims against it, which in some instances have developed, or may
develop, into lawsuits. The claims may involve such matters, among others, as
product liability, patent infringement, and employment- related claims. In
management's opinion, the ultimate resolution of claims currently pending will
not have a material adverse effect on the Company's financial position or
results of operations.
On May 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, filed in the
Superior Court of the State of California, County of Alameda, alleged
misrepresentations during the period from September 29, 1995 through April 16,
1996 with respect to the Company's business, particularly about the merger with
Puritan-Bennett and the integration of Nellcor and Puritan-Bennett. The
Company filed a demurrer to this action which was sustained on October 9, 1996
with leave to amend. Plaintiffs filed an amended complaint on November 1,
1996. On April 2, 1997, the Superior Court granted the Company's demurrer to
the amended complaint and dismissed the complaint with prejudice. On April 14,
1997, another complaint containing essentially the same allegations against the
Company and the other defendants was filed in the United States District Court
for the Northern District of California. As it has consistently maintained,
the Company believes that the allegations are completely without merit and
intends to defend against them vigorously.
On May 5, 1997, the Company filed a complaint in the United States District
Court for the Southern District of Indiana against Healthdyne Technologies,
Inc., Trent Products Limited, Jay L. Hayes and Jeffrey P. Hayes alleging
misappropriation of trade secrets, breach of contract, breach of fiduciary
duty, fraudulent procurement of patent and unfair competition. Jay Hayes, a
former employee and officer of Puritan-Bennett and general manager of its
cryogenic equipment division for over a decade, is now a principal of Trent
Products. Trent Products, the Company believes, is making extensive use of the
Company's trade secrets to develop a competitive line of cryogenic equipment
for sale to Healthdyne. The Company also believes that Mr. Hayes used the
Company's trade secrets to fraudulently procure a patent to a new
oxygen-to-patient delivery mechanism in the name of his son, Jeffrey Hayes.
Except as noted above, neither the Company nor any of its subsidiaries is
involved in any material pending litigation other than ordinary routine
proceedings incident to their business.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits.
27.1 Financial Data Schedule (filed electronically only)
b) Reports on Form 8-K.
A form 8-K dated March 26, 1997 was filed May 1, 1997, reporting the naming of
Dean O. Morton to the Company's Board of Directors and the amendment of the
Company's bylaws pursuant to Item 5 ("Other Events").
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be filed on its behalf by the
undersigned thereunto duly authorized.
NELLCOR PURITAN BENNETT INCORPORATED
DATED May 19, 1997 BY /s/ Michael P. Downey
------------------------------------
Michael P. Downey
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 14
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