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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 JANUARY 5, 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 (IRS Employer
of incorporation or organization) Identification No.)
4280 HACIENDA DRIVE
PLEASANTON, CALIFORNIA 94588
(Address of principal executive offices)
(Zip code)
TELEPHONE: (510) 463-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ----
Number of shares of Common Stock, $.001 par value, outstanding as of
January 5, 1997 was 62,941,523.
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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 January 5, 1997 July 7, 1996
--------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 43,375 $ 71,692
Marketable securities 6,432 5,825
Accounts receivable 178,808 158,023
Inventories 154,450 132,378
Deferred income taxes 32,412 32,375
Other current assets, net 18,434 14,589
--------- ---------
Total current assets 433,911 414,882
Property, plant and equipment 142,957 132,956
Intangible and other assets 49,557 49,983
Deferred income taxes 13,112 13,101
--------- ---------
$ 639,537 $ 610,922
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 40,961 $ 40,269
Employee compensation and related costs 20,830 32,072
Merger and related costs 36,446 32,452
Other accrued expenses 39,145 35,133
Current maturities of long-term debt 33,933 530
Income taxes payable 4,832 20,444
--------- ---------
Total current liabilities 176,147 160,900
Long-term debt, less current maturities 6,070 8,394
Deferred compensation and pensions 9,508 9,522
Deferred revenue 8,142 10,039
--------- ---------
Total liabilities 199,867 188,855
--------- ---------
Stockholders' equity:
Common stock, par value 66 63
Additional paid-in-capital 242,567 236,461
Retained earnings 253,911 242,687
Accumulated translation adjustment 464 304
Notes receivable from stockholders (5) (5)
Net unrealized gain on available-for-sale securities 1,484 1,374
Treasury stock, at cost (3,224,020 shares) (58,817) (58,817)
--------- ---------
Total stockholders' equity 439,670 422,067
--------- ---------
$ 639,537 $ 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 Six Months Ended
--------------------------- -----------------------------
January 5, December 31, January 5, December 31,
1997 1995 1997 1995
--------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Net revenue $ 186,320 $ 178,190 $ 357,213 $ 350,258
Cost of goods sold 100,484 86,399 187,709 171,502
--------- --------- --------- ---------
Gross profit 85,836 91,791 169,504 178,756
--------- ----------- ---------- ------------
Operating expenses:
Research
and development 13,293 13,464 26,175 26,961
Selling, general
and administrative 53,975 50,421 104,532 100,484
Merger and related costs 21,689 --- 21,689 92,618
--------- --------- --------- ---------
88,957 63,885 152,396 220,063
--------- --------- --------- ---------
Income (loss) from operations (3,121) 27,906 17,108 (41,307)
Interest income 585 1,492 1,345 3,493
Interest expense (395) (1,333) (621) (2,751)
Other income (expense), net (18) 459 (239) (216)
--------- --------- --------- ---------
Income (loss) before income taxes (2,949) 28,524 17,593 (40,781)
Provision (benefit) for income taxes 648 9,185 7,096 (1,846)
--------- --------- --------- ---------
Net Income (loss) $ (3,597) $ 19,339 $ 10,497 $ (38,935)
========= ========= ========= =========
Net income (loss) per common and
common equivalent share $ (0.06) $ 0.30 $ 0.16 $ (0.61)
========= ========= ========= =========
Weighted average common
and common equivalent
shares 63,950 64,069 63,955 63,506
========= ========= ========= =========
</TABLE>
See accompanying note
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NELLCOR PURITAN BENNETT INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
----------------------------------
January 5, 1997 December 31, 1995
--------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 10,497 ($38,935)
Adjustments to reconcile net income (loss) to
cash [used for] operating activities:
Depreciation and amortization 15,841 16,444
Deferred income taxes --- 192
Merger and related charges 21,689 68,473
Deferred compensation and pensions --- (3,013)
Other (17) 176
Increases (decreases) in cash flows, net of effect of purchased
companies, as a result of changes in:
Accounts receivable (16,190) (9,214)
Inventories (18,397) (10,265)
Other current assets (3,704) (7,953)
Intangible and other assets (838) (2,685)
Accounts payable (210) (4,725)
Merger and related costs (14,704) ---
Employee compensation and other accrued expenses (9,358) (3,201)
Income taxes payable (16,605) (6,887)
Deferred revenue (648) ---
--------- ---------
Cash [used for] operating activities (32,644) (1,593)
--------- ---------
Cash flows from investing activities:
Aequitron net cash provided during the period from 5/1/96 - 7/7/96 46 ---
Capital expenditures (22,059) (11,459)
Purchase of available-for-sale securities (1,800) (1,027)
Proceeds from maturities of securities held-to-maturity --- 19,218
Proceeds from the sale of available-for-sale securities 1,165 40,417
Acquisitions, net of cash acquired (5,268) (9,755)
Other investing activities 851 646
--------- ---------
Cash provided by (used for) investing activities (27,065) 38,040
--------- ---------
Cash flows from financing activities:
Issuance of common stock under the
Company's stock plans and related tax benefits, net 6,094 16,113
Additions to long-term debt 27,308 42,500
Repayment of long-term debt (2,000) (100,220)
Purchase of treasury shares --- (12,103)
--------- ---------
Cash provided by (used for) financing activities 31,402 (53,710)
--------- ---------
Effect of exchange rate changes on cash (10) (222)
--------- ---------
(Decrease) in cash and cash equivalents (28,317) (17,485)
Cash and cash equivalents at the beginning of the period 71,692 84,552
--------- ---------
Cash and cash equivalents at the end of the period $ 43,375 $ 67,067
========= =========
</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 six months ended January 5, 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 six month periods ended December 31, 1995 combine the results of the
Company's second quarter and first six months of fiscal 1996, the period ended
December 31, 1995, with Infrasonics' second quarter and first six months of
fiscal 1996, the period ended December 31, 1995, and Aequitron's second quarter
and first six months of fiscal 1996, the period ended October 31, 1995,
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 second quarter of fiscal 1996,
and combined results for the three and six months ended December 31, 1995, were
as follows (in thousands):
<TABLE>
<CAPTION>
Nellcor Puritan Bennett Infrasonics Aequitron Combined
Three months ended: December 31, 1995 December 31, 1995 October 31, 1995 December 31, 1995
- ------------------- ----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Revenue $162,614 $ 5,867 $ 9,709 $178,190
- -------------------------------------------------------------------------------------------------------------------
Net Income $ 18,223 $ 403 $ 713 $ 19,339
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Nellcor Puritan Bennett Infrasonics Aequitron Combined
Six months ended: December 31, 1995 December 31, 1995 October 31, 1995 December 31, 1995
- ----------------- ----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Revenue $ 318,864 $ 12,123 $ 19,271 $ 350,258
- --------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (41,079) $ 706 $ 1,438 $ (38,935)
- --------------------------------------------------------------------------------------------------------------------
</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>
January 5, 1997 July 7, 1996
--------------- ------------
<S> <C> <C>
Raw materials $ 71,676 $ 66,805
Work-in process 15,727 16,538
Finished goods 67,047 49,035
-------- --------
$154,450 $132,378
======== ========
</TABLE>
Statement of Cash Flows. The Company paid income taxes of approximately $22.8
million in the first six months of fiscal 1997 ended January 5, 1997, and $12.9
million in the first six months of fiscal 1996 ended December 31, 1995.
Property and equipment. Depreciation expense was approximately $13.7 million in
the first six months of fiscal 1997 and $11.7 million in the first six months of
fiscal 1996.
Marketable securities. At January 5, 1997, the Company held available-for-sale
marketable securities with a fair market value of $6.4 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 January 5, 1997, which approximates $1.5 million, is carried in
stockholders' equity as a "net unrealized gain on available-for-sale
securities".
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.
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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.
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 $108.0 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 January 5, 1997, approximately $94.1 million had been
utilized, primarily associated with the write-down (non-cash charge) of certain
intangible assets to their net realizable value ($24.0 million), the payment of
merger transaction costs ($15.9 million), initial costs incurred to combine and
integrate operations ($50.4 million, of which $15.6 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 January
5, 1997 of $36.5 million, approximately $34.2 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 January 5, 1997, approximately 306 positions contemplated by this workforce
consolidation had been eliminated. The Company expects the remainder of these
positions to be eliminated during fiscal 1997.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS - YEAR-TO-DATE PERIOD AND SECOND QUARTER ENDED JANUARY 5,
1997, COMPARED WITH THE YEAR-TO-DATE PERIOD AND SECOND QUARTER ENDED DECEMBER
31, 1995.
The Company reported a net loss for the second quarter of fiscal 1997 of $3.6
million, or ($0.06) per share. The Company's results for the quarter reflect
one-time merger and related costs of $21.7 million, ($0.26) per share,
associated with the acquisition of Aequitron. Excluding the effect of these
nonrecurring charges, net income for the second quarter of fiscal 1997 was $12.9
million, $.20 per share, compared to net income of $19.3 million, $0.30 per
share, for the same period a year ago. For the first six months of fiscal 1997,
the Company had net income of $10.5 million, or $.16 per share, exclusive of
one-time merger and related charges associated with the acquisition of
Aequitron. The Company's results for the first six months of fiscal 1996, a net
loss of $38.9 million, or ($.61) per share, reflect the 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 six months of fiscal 1997
was $27.0 million, $.42 per share, compared to net income of $35.1 million, $.55
per share for the first six months of fiscal 1996.
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The Company's net revenue for the second quarter of fiscal 1997 was $186.3
million, a 5 percent increase over net revenue of $178.2 million for the same
period a year ago, and increased to $357 million for the first six months of
fiscal 1997 from $350 million in the same period last year.
Hospital product line sales, which include the oximetry, ventilator and clinical
information systems product lines, decreased 1 percent to $106.7 million for the
second quarter of fiscal 1997 from $107.3 million for the same period last year.
The decrease in hospital product line revenue was due primarily to lower sales
of the Company's critical care ventilators, partially offset by continued growth
in sales of the Company's oximetry products. Sales of critical care ventilators
in the U.S. were lower due to the effect that distribution changes had upon
sales of the Adult Star series ventilators and a higher than normal number of
open positions in the U.S. hospital sales force. Internationally, ventilator
product line revenue was significantly impacted by the pending transition from
an independent distributor to the Company's direct sales force in Japan. These
events are expected to continue to affect overall hospital product line revenue
growth rates in the near-term.
For the second quarter of fiscal 1997, home care product line sales, which
include the oxygen therapy and sleep apnea product lines as well as Aequitron
products, increased 13 percent to $71.6 million from $63.1 million for the same
period last year. The increase in home care product line sales was due primarily
to higher sales of oxygen therapy products as an easing of concerns over oxygen
reimbursement levels as well as sales growth at a national account level
contributed to higher oxygen concentrator sales. Gas product sales also
increased, principally as a result of higher cylinder gas and bulk nitrous oxide
sales and continued growth in the number of Company operated gas branches, four
of which were added during the quarter.
Aero business sales were $8.0 million for the second quarter of fiscal 1997
compared to $7.8 million for the same period last year. Separately,
international revenue of $58.4 million represents an increase of 3 percent over
international revenue of $56.6 million for the second quarter of fiscal 1996.
Strong sales growth in the Company's Latin America and Canadian markets was
largely offset by sales levels in Europe and Asia which were comparable to the
prior year. Foreign currency exchange rates unfavorably impacted international
revenue by 2 percentage points during the second quarter.
Gross profit as a percentage of net revenue for the second quarter of fiscal
1997 was 46 percent compared to 52 percent for the same period last year. This
decline was due primarily to lower ventilator revenue and ventilator production
levels, new product production start up costs and lower margins within certain
home care product lines. The Company's gross margins are expected to improve
slightly over the remainder of the fiscal year.
Operating expenses for the second quarter of fiscal 1997 and the second quarter
of fiscal 1996 were 36 percent of net revenue, exclusive of the effect of the
one-time merger and related charges. Operating expenses for the first six months
of fiscal 1997 were 37 percent of net revenue compared to 36 percent of net
revenue for the same period one year ago, exclusive of the effect of one-time
merger and related charges.
Research and development expenses were 7 percent of net revenue in the second
quarter of fiscal 1997 compared to 8 percent for the second 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. For the second quarter of fiscal 1997, selling, general,
and administrative expenses increased to 29 percent of net revenue from 28
percent for the same period in fiscal 1996.
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Operating expenses for the second quarter 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 ($14.5 million), and other
merger related costs ($.8 million).
Operating expenses for the first six 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).
Liquidity and Capital Resources
At January 5, 1997, the Company had cash, cash equivalents and marketable
securities of approximately $49.8 million compared to $77.5 million at the end
of fiscal 1996.
Cash used for operating activities was approximately $17.9 million during the
first six months of fiscal 1997, exclusive of $14.7 million in merger related
cash outlays. Inventory and accounts receivable growth and employee profit
sharing and income tax payments during the year were major contributors to this
use of cash for operating activities. The Company's inventories increased to
$154.5 million at January 5, 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 fiscal
1997. The Company's accounts receivable increased to $178.8 million at January
5,1997, 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. In part to fund incremental working capital requirements,
the Company increased short term borrowing by $27.3 million during the first six
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. Short-term 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 January 15, 1997 the Company rescinded the general stock repurchase program,
which had originally been implemented on December 8, 1993.
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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.
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
Page 11
<PAGE> 12
pressures on, and consolidation in, the health care industry. Such competition
has exerted, and is likely to continue to exert, downward pressure on the prices
the Company is able to charge for its products. The Company may not be able to
offset such downward price pressure through corresponding cost reductions. Any
failure to offset such pressure could have an adverse impact on the business,
results of operations or financial condition of the Company.
New Product Introductions. As the existing products of the Company become more
mature and its existing markets more saturated, the importance of developing or
acquiring new products will increase. The development of any such products will
entail considerable time and expense, including research and development costs
and the time and expense required to obtain necessary regulatory approvals,
which could adversely affect the business, results of operations or financial
condition of the Company. There can be no assurance that such development
activities will yield products that can be commercialized profitably, or that
any product acquisitions can be consummated on commercially reasonable terms or
at all. Any failure to acquire or develop new products to supplement more mature
products could have an adverse impact on the business, results of operations or
financial condition of the Company.
Product Liability Exposure. Because its products are intended to be used in
health care settings on patients who are physiologically unstable and may also
be seriously or critically ill, the Company is exposed to potential product
liability claims. From time to time, patients using the Company's products have
suffered serious injury or death, which has led to product liability claims
against the Company. The Company does not believe that any of these claims,
individually or in the aggregate, will have a material adverse effect on its
business, results of operations or financial condition. However, the Company
may, in the future, be subject to product liability claims that could have such
an adverse impact.
The Company maintains product liability insurance coverage in amounts that it
deems sufficient for its business. However, there can be no assurance that such
coverage will ultimately prove to be adequate, or that such coverage will
continue to remain available on acceptable terms or at all.
Impact of Currency Fluctuations; Importance of Foreign Sales. Because sales of
products by the Company outside the United States typically are denominated in
local currencies and such sales are growing at a rate that is generally faster
than domestic sales, the results of operations of the Company are expected to
continue to be affected by changes in exchange rates between certain foreign
currencies and the United States Dollar. Although the Company currently engages
in some hedging activities, there can be no assurance that the Company will not
experience currency fluctuation effects in future periods, which could have an
adverse impact on its business, results of operation or financial condition. The
operations and financial results of the Company also may be significantly
affected by other international factors, including changes in governmental
regulations or import and export restrictions, and foreign economic and
political conditions generally.
Possible Volatility of Stock Price. The market price of the Company's stock is,
and is expected to continue to be, subject to significant fluctuations in
response to variations in quarterly operating results, trends in the health care
industry in general and the medical device industry in particular, and certain
other factors beyond the control of the Company. In addition, broad market
fluctuations, as well as general economic or political conditions and
initiatives such as health care reform, may adversely affect the market price of
the Company's stock, regardless of the Company's operating performance.
Page 12
<PAGE> 13
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 alleges
misrepresentations during the period from September 29, 1995 through April 16,
1996 with respect to the Company's business, particularly about the merger with
Puritan-Bennett and the integration of Nellcor and Puritan-Bennett. The Company
filed a demurrer to this action which was sustained on October 9, 1996 with
leave to amend. Plaintiffs filed an amended complaint on November 1, 1996. A
second demurrer was filed by the Company and is scheduled to be heard by the
Court on February 26, 1997. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's annual meeting of stockholders was held on October 17, 1996. Two
items were the subject of the meeting: (i) the election of directors; and (ii)
the ratification of the selection of Price Waterhouse LLP as the Company's
independent accountants for fiscal year 1997.
The following directors were elected at the meeting for one-year terms: Burton
A. Dole, Jr., Robert J. Glaser, M.D., Frederick M. Grafton, Donald L. Hammond,
C. Raymond Larkin, Jr., Risa J. Lavizzo-Mourey, M.D., Thomas A. McDonnell and
Edwin E. van Bronkhorst. All are continuing directors.
(i) Election of Directors
<TABLE>
<CAPTION>
For Against
--- -------
<S> <C> <C>
Burton A. Dole, Jr. 49,908,183 4,127,060
Robert J. Glaser, M.D. 49,908,183 4,127,060
Frederick M. Grafton 49,908,183 4,127,060
Donald L. Hammond 49,908,183 4,127,060
C. Raymond Larkin, Jr. 49,908,183 4,127,060
Risa J. Lavizzo-Mourey, M.D. 49,908,183 4,127,060
Thomas A. McDonnell 49,908,183 4,127,060
Edwin E. van Bronkhorst 49,908,183 4,127,060
</TABLE>
(ii) Ratification of Price Waterhouse LLP as the Company's independent
accountants for fiscal year 1997.
<TABLE>
<CAPTION>
For Against Abstain
- --- ------- -------
<S> <C> <C>
54,012,433 60,068 35,351
</TABLE>
Page 13
<PAGE> 14
ITEM 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
27.1 Financial Data Schedule (filed electronically only)
b) Reports on Form 8-K.
Form 8-K dated December 5, 1996 filed December 10, 1996, reporting the
completion of the Company's acquisition of Aequitron pursuant to Item 2
("Acquisition or Disposition of Assets").
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 February 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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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-06-1997
<PERIOD-START> OCT-07-1996
<PERIOD-END> JAN-05-1997
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