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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)
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)
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
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.
NAME AGE POSITION WITH THE COMPANY
- --------------------------------------- --- ------------------------------------------------
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
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
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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
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
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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
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
BROKER
FOR AGAINST ABSTAIN NON-VOTES
- ----------- ---------- ------- ----------
20,336,667 859,713 51,596 3,386,035
(ii)Approval of amendment to Restated Certificate of Incorporation and
stock split
FOR AGAINST ABSTAIN
- ----------- ---------- -------
21,119,120 3,494,531 50,360
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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.
HIGH LOW
------- -------
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
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.
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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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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:
PAGE IN 1996
ANNUAL REPORT
TO STOCKHOLDERS
---------------
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
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
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
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).
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EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
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).
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27
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
*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).
26
28
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
*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).
27
29
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
*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
- ---------------
* 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
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
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------- ----------------
/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
29