1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report: April 3, 1996
NELLCOR PURITAN BENNETT INCORPORATED
------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware
--------
(State or Other Jurisdiction of
Incorporation or Organization)
0-14980 94-2789249
------- ----------
(Commission File Number) (I.R.S. Employer
Identification No.)
4280 Hacienda Drive
Pleasanton, California 94588
----------------------------
(Address of Principal Executive Offices) (Zip Code)
(510) 463-4000
--------------
(Registrant's telephone number,
including area code)
2
Item 7 - FINANCIAL STATEMENTS AND EXHIBITS
(a) Not applicable.
(b) Not applicable.
(c) Exhibits.
Exhibit Number Description
- -------------- -----------
99.1 Report of Independent Auditors
PURPOSE OF FILING
On August 25, 1995, Nellcor Incorporated acquired Puritan-Bennett Corporation
in a stock-for-stock merger accounted for as a pooling of interests. The
surviving corporation was renamed Nellcor Puritan Bennett Incorporated (NPB).
NPB is in the process of completing a preliminary proxy statement to be filed
with the Securities and Exchange Commission as a result of a proposed
acquisition by NPB of Infrasonics, Inc. NPB is required to file its financial
statements in accordance with Regulation S-X, which includes presenting the
pooled financial results for Nellcor and Puritan-Bennett as of and for each of
the three years in the period ended July 2, 1995. This filing is intended to
satisfy the aforementioned requirement.
2
3
NELLCOR PURITAN BENNETT
INCORPORATED
Consolidated Financial Statements
July 2, 1995
4
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Nellcor Puritan Bennett Incorporated
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of operations, of stockholders' equity, and of cash flows present fairly, in
all material respects, the financial position of Nellcor Puritan Bennett
Incorporated and its subsidiaries at July 2, 1995 and July 3, 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended July 2, 1995 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the consolidated financial
statements of Puritan-Bennett Corporation and its subsidiaries, which statements
reflect total assets of $273,135,000 and $256,594,000 at January 31, 1995 and
1994, respectively, and total revenues of $336,026,000, $309,255,000 and
$300,060,000 for each of the three years in the period ended January 31, 1995,
respectively. Those statements were audited by other auditors whose report
thereon has been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for Puritan-Bennett Corporation and its
subsidiaries, is based solely on the report of the other auditors. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits and the report of other auditors provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
San Francisco, California
July 26, 1995, except as to Note 17, which is as of August 24, 1995
5
NELLCOR PURITAN BENNETT INCORPORATED
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -----------------------------------------------------------------------------
JULY 2, JULY 3,
1995 1994
ASSETS
Current assets:
Cash and cash equivalents $ 78,444 $ 68,876
Marketable securities 65,039 53,470
Accounts receivable, net of allowance for doubtful accounts of
$2,610 ($2,889 at July 3, 1994) 117,650 104,445
Inventories 88,987 74,708
Deferred income taxes 17,210 17,487
Other current assets, net 6,454 7,217
-------- --------
Total current assets 373,784 326,203
Property, plant and equipment, net 128,173 123,065
Intangible and other assets, net 67,848 48,620
Deferred income taxes 5,631 1,147
-------- --------
$575,436 $499,035
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 18,004 $ 27,791
Accounts payable 37,316 28,166
Employee compensation and related costs 25,286 19,106
Other accrued expenses 28,181 29,491
Current maturities of long-term debt 9,527 6,546
Income taxes payable 5,727 5,248
-------- --------
Total current liabilities 124,041 116,348
Long-term debt, less current maturities 54,492 38,656
Deferred compensation and pensions 19,303 17,444
Deferred revenue 10,895 9,962
-------- --------
Total liabilities 208,731 182,410
Commitments and contingencies -------- --------
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized;
none outstanding
Common stock, $.001 par value; 50,000,000 shares authorized;
28,925,893 shares issued and outstanding (27,994,394 in 1994) 29 28
Additional paid-in-capital 161,211 137,513
Retained earnings 241,516 193,571
Accumulated translation adjustment (259) 100
Deferred stock awards and other (1,253) (313)
Treasury stock, at cost (1,148,000 shares in 1995; 554,892 shares in 1994) (34,539) (14,274)
-------- --------
Total stockholders' equity 366,705 316,625
-------- --------
$575,436 $499,035
======== ========
See accompanying notes to consolidated financial statements.
-2-
6
NELLCOR PURITAN BENNETT INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -----------------------------------------------------------------------------
YEARS ENDED
JULY 2, JULY 3, JULY 4,
1995 1994 1993
Net revenue $600,066 $544,227 $518,246
Cost of goods sold 299,568 274,290 258,670
-------- -------- --------
Gross profit 300,498 269,937 259,576
-------- -------- --------
Operating expenses:
Research and development 47,203 48,867 48,545
Selling, general and administrative 175,401 169,691 152,069
Restructuring charges 2,654 43,669 -
-------- -------- --------
225,258 262,227 200,614
-------- -------- --------
Income from operations 75,240 7,710 58,962
Interest income and other income/(expense), net 6,954 3,695 4,011
Interest expense (5,830) (4,565) (3,720)
Litigation settlements, net - (13,000) -
Costs associated with unsolicited takeover offer (5,049) - -
-------- -------- --------
Income (loss) before income taxes and cumulative
effect of accounting change 71,315 (6,160) 59,253
Provision for income taxes 21,852 262 19,538
-------- -------- --------
Income (loss) before cumulative effect of
accounting change 49,463 (6,422) 39,715
Cumulative effect on prior years
of accounting change (Note 1) - (2,890) -
-------- -------- --------
Net income (loss) $ 49,463 $ (9,312) $ 39,715
======== ======== ========
Income (loss) per common share before
cumulative effect of accounting change $ 1.77 $ (.23) $ 1.46
Per common share effect of accounting change - (.11) -
-------- -------- --------
Net income (loss) per common share $ 1.77 $ (0.34) $ 1.46
======== ======== ========
Weighted average common equivalent shares used in
the calculation of net income (loss) per share 27,931 27,364 27,140
======== ======== ========
See accompanying notes to consolidated financial statements.
- 3 -
7
NELLCOR PURITAN BENNETT INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -----------------------------------------------------------------------------
COMMON STOCK ADDITIONAL ACCUMULATED TREASURY STOCK
--------------------- PAID-IN RETAINED TRANSLATION -------------------
SHARES PAR VALUE CAPITAL EARNINGS ADJUSTMENT OTHER SHARES PAR VALUE
Balance at July 5, 1992 26,415,255 $ 26 $105,508 $166,019 $ 204 $(1,345)
Issuance of common stock and
related tax benefits of $3,621
under employee stock plans, net
of repurchases 772,437 1 16,867 281
Compensation related to acquisition
of Radiant Systems 549
Accumulated translation adjustment (219)
Net income 39,715
Dividends declared (1,419)
---------- ------- -------- -------- ------- ------- --------- --------
Balance at July 4, 1993 27,187,692 27 122,375 204,315 (15) (515) - -
Issuance of common stock and
related tax benefits of $2,394
under employee stock plans, net
of repurchases 641,004 1 12,346 (92) $ 1,984
Acquisition of treasury stock 554,892 (16,258)
Acquisition and retirement of
common stock (210,000 (5,853)
Shares issued in a business
combination 375,698 8,645
Accumulated translation adjustment 115
Net loss (9,312)
Dividends declared (1,432)
Other 294
---------- ------- -------- -------- ------- ------- --------- --------
Balance at July 3, 1994 27,994,394 28 137,513 193,571 100 (313) 554,892 (14,274)
Issuance of common stock and
related tax benefits of $3,487
under employee stock plans 931,499 1 23,698 (646) 644
Acquisition of treasury stock, net
of shares issued to employee
benefit plan 593,108 (20,909)
Accumulated translation adjustment (359)
Net income 49,463
Dividends declared (1,518)
Other (294)
---------- ------- -------- -------- ------- ------- --------- --------
28,925,893 $ 29 $161,211 $241,516 $ (259) $(1,253) 1,148,000 $(34,539)
========== ======= ======== ======== ======= ======= ========= ========
See accompanying notes to consolidated financial statements.
- 4 -
8
NELLCOR PURITAN BENNETT INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------
YEARS ENDED
JULY 2, JULY 3, JULY 4,
1995 1994 1993
Cash flows from operating activities:
Net income (loss) $ 49,463 $ (9,312) $ 39,715
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization 31,311 31,721 26,037
Deferred income taxes (3,874) (18,311) 3,070
Cumulative effect of accounting change - 2,890 -
Restructuring charges 2,205 38,404 -
Deferred compensation and pensions 3,663 2,536 473
Shares issued to employee benefit plans 2,376 3,317 1,690
Other 113 1,194 971
Increases (decreases) in cash flows, net of
effect of purchases of companies, as a result of
changes in:
Accounts receivable (6,942) (1,641) (19,378)
Inventories (11,322) (4,523) (3,991)
Other current assets (2,511) (799) 1,166
Other assets (3,703) 1,619 (6,447)
Accounts payable (505) (2,212) 6,593
Accrued liabilities 8,082 404 1,108
Income taxes payable 612 2,158 540
Deferred compensation (1,804) - -
Deferred revenue 933 3,991 2,472
-------- -------- --------
Cash provided by operating activities 68,097 51,436 54,019
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (30,003) (29,860) (37,649)
Cash used to purchase securities held-to-maturity (47,245) (87,212) (156,078)
Proceeds from maturities of securities held-to-maturity 35,676 104,643 144,860
Proceeds from the sale of capital assets 5,893 1,362 726
Investment in nonmarketable equity securities (2,100) - -
Acquisitions, net of cash acquired (23,415) (17,617) (1,500)
Other investing activities (557) (1,227) (1,902)
-------- -------- --------
Cash used for investing activities (61,751) (29,911) (51,543)
-------- -------- --------
Cash flows from financing activities:
Proceeds from the issuance of common stock under the
Company's stock plans and related tax benefits, net 20,893 10,640 14,349
Purchase of treasury stock, including shares retired (20,909) (22,111) -
Issuance (repayment) of notes payable,net (9,787) 19,890 (4,099)
Additions to long-term debt 20,000 515 15,000
Payments on long-term debt (6,045) (6,680) (418)
Dividends paid to stockholders (1,500) (1,430) (1,062)
-------- -------- --------
Cash provided by financing activities 2,652 824 23,770
-------- -------- --------
Effect of exchange rate changes on cash balances 570 218 (790)
-------- -------- --------
Increase in cash and cash equivalents 9,568 22,567 25,456
Cash and cash equivalents at the beginning of the year 68,876 46,309 20,853
-------- -------- --------
Cash and cash equivalents at the end of the year $ 78,444 $ 68,876 $ 46,309
======== ======== ========
See accompanying notes to consolidated financial statements.
- 5 -
9
NELLCOR PURITAN BENNETT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Nellcor Puritan Bennett Incorporated (together with its wholly-owned
subsidiaries, the Company) is a corporation organized under the laws of the
State of Delaware in 1986 and, until the acquisition of Puritan-Bennett
Corporation in August 1995, operated under the name Nellcor Incorporated.
These financial statements retroactively reflect the August 1995 merger
of Nellcor Incorporated (Nellcor) and Puritan-Bennett Corporation
(Puritan-Bennett) as a pooling of interests; accordingly, the
previously-issued separate financial statements of Nellcor and Puritan-
Bennett have been combined and retroactively restated as if they had always
operated as a single combined company. (See Note 17)
PRINCIPLES OF CONSOLIDATION
The Company's significant intercompany transactions have been eliminated.
The Company uses the equity method of accounting for its investments that
represent greater than 20%, but less than 50% of the investee. Investments
which represent less than 20% of the investee are recorded at cost. All
such investments were immaterial for all periods presented.
FOREIGN CURRENCY TRANSLATION
Certain of the Company's foreign subsidiaries use the local currency, while
others use the U.S. dollar as their functional currency. Subsidiaries using
the local currency translate assets and liabilities denominated in foreign
currencies at the rates of exchange at the balance sheet date. Income and
expense items are translated at average monthly rates of exchange. Any
resulting translation adjustments are recorded as a separate component of
stockholders' equity. Subsidiaries using the dollar as the functional
currency measure assets and liabilities at year-end or historical rates
depending on their nature; income and expenses are remeasured at the
weighted-average exchange rates for the year. Foreign currency gains and
losses resulting from transactions are included in operations in the year of
occurrence.
REVENUE RECOGNITION AND PRODUCT WARRANTY
The Company recognizes revenue at the time of shipment of product and
provides currently for the estimated cost to repair or replace products
under the warranty provisions in effect at the time of sale.
DEFERRED REVENUE
Deferred revenue relates to extended warranty agreements offered by the
Company which are amortized over the life of the agreement, with the related
warranty costs charged to expense as incurred.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. These investments are stated
at cost which approximates fair value due to their short maturity.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value). Allowances are made for slow-moving, obsolete,
unsalable, or unusable inventories.
- 6 -
10
NELLCOR PURITAN BENNETT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets which range from three to twenty-five years.
Leasehold improvements are amortized over the life of the lease, or the
estimated useful life of the asset, whichever is shorter. Depreciation
expense was approximately $22.0 million in fiscal 1995, $20.7 million in
fiscal 1994, and $19.5 million in fiscal 1993.
INTANGIBLE AND OTHER ASSETS
Intangible and other assets, including excess of cost over net assets
acquired, are amortized on a straight-line basis over the estimated useful
lives of the assets which range from two to fifteen years. The cost of
patents is amortized on a straight-line basis over their approximate useful
lives, not to exceed seventeen years. An impairment of intangible assets is
recognized when it is considered probable that the carrying amount of an
asset cannot be fully recovered, based on estimated future cash flows of the
related business.
INCOME TAXES
Deferred income taxes are computed using the liability method. Under the
liability method, taxes are recorded based on the future tax effect of the
difference between the tax and financial reporting bases of the Company's
assets and liabilities. In estimating future tax consequences, all expected
future events are considered, except for potential income tax law or rate
changes.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based upon weighted average common shares and
includes the dilutive effect of stock options outstanding (using the
treasury stock method).
ACCOUNTING CHANGE
In fiscal 1994, Puritan-Bennett changed its method of accounting for income
taxes to conform with SFAS No. 109 "Accounting for Income Taxes." The
cumulative effect of this change resulted in a charge to operations of $2.9
million.
2.MARKETABLE SECURITIES
During fiscal 1995, the Company adopted SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." SFAS 115 requires that all
investment securities be classified into one of three categories:
held-to-maturity, available-for-sale, or trading. Implementation of SFAS 115
did not have a material effect on the Company's financial position or results
of operations.
The Company's marketable securities, generally, are in high-quality
government, municipal and corporate obligations with original maturities of up
to two years. The Company has established guidelines relative to investment
quality, diversification and maturities to maintain appropriate levels of
safety and liquidity.
- 7 -
11
NELLCOR PURITAN BENNETT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
At July 2, 1995, the Company had marketable securities totaling $65.0
million, of which $60.2 million were classified as held-to-maturity. These
held-to-maturity securities, which the Company has the positive intent and
ability to hold to maturity, are stated at cost, which approximates amortized
cost.
At July 2, 1995, the Company's available-for-sale investments, which the
Company does not intend to hold to maturity, totaled $4.8 million. Realized
gains and losses resulting from the sale of available-for-sale marketable
securities during the period and unrealized gains and losses at July 2, 1995,
were immaterial. No transfers between held-to-maturity and
available-for-sale marketable securities were made during the year. The
difference between the carrying value of the Company's available-for-sale
securities and the market value as shown below was immaterial as of July 2,
1995.
Marketable securities classified as held-to-maturity and available-for-sale
at July 2, 1995 are summarized below (dollars in thousands). Fair value of
marketable securities is based upon quoted market prices.
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
SECURITY TYPE
Current assets:
Marketable securities
HELD-TO-MATURITY:
Debt issued by the U.S. Treasury and other
U.S. government corporations and agencies $22,958 $17 $ (8) $22,967
Debt securities issued by the states of the
United States and political subdivisions of
the states 37,236 47 (185) 37,098
AVAILABLE-FOR-SALE:
Mortgage backed securities 4,845 17 (93) 4,769
------- --- ----- -------
Marketable securities $65,039 $81 $(286) $64,834
======= === ===== =======
- 8 -
12
NELLCOR PURITAN BENNETT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
3. INVENTORIES
Inventories are as follows (dollars in thousands):
JULY 2, JULY 3,
1995 1994
Raw materials $49,405 $38,842
Work-in-process 10,117 9,134
Finished goods 29,465 26,732
------- -------
Total inventories $88,987 $74,708
======= =======
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of (dollars in thousands):
JULY 2, JULY 3,
1995 1994
Land and land improvements $ 10,713 $ 9,971
Buildings 38,221 31,355
Machinery and equipment 174,239 161,142
Leasehold improvements 9,971 9,583
Demonstration equipment 12,155 13,093
Furniture and fixtures 7,737 7,304
--------- ---------
253,036 232,448
Less accumulated depreciation and
amortization (124,863) (109,383)
--------- ---------
Total property, plant and equipment,
net $ 128,173 $ 123,065
========= =========
5. FINANCIAL INSTRUMENTS AND OFF BALANCE SHEET RISK
FOREIGN CURRENCY INSTRUMENTS
The Company enters into foreign currency exchange contracts, primarily
forward currency contracts, to reduce exposure to currency exchange risk.
The effect of this practice is to minimize the impact of foreign exchange
rate movements on the Company's operating results as gains and losses on
these contracts offset losses and gains on the assets, liabilities and
transactions being hedged. The Company does not engage in foreign currency
speculation. The counterparties to foreign currency exchange contracts are
major domestic and international financial institutions. To decrease the
risk of non-performance which may result in currency losses, the Company
diversifies its selection of counterparties. At July 2, 1995, the Company
had foreign currency forward exchange contracts with a notional amount of
$35.4 million ($9.8 million at July 3, 1994), and a fair market value of
approximately $35.9 million ($10.0 million at July 3, 1994), all of which
were denominated in European currencies.
- 9 -
13
NELLCOR PURITAN BENNETT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
The fair market value was determined based upon foreign currency exchange
rates in effect at the end of each fiscal period. The Company records
both the amortized premium and any unrealized gain or loss on outstanding
foreign currency forward exchange contracts as non-operating income or
expense. For both fiscal 1995 and fiscal 1994, all outstanding foreign
currency exchange contracts were due to mature within six months of fiscal
year end.
CONCENTRATION OF CREDIT RISK
The Company provides credit in the form of trade accounts receivable to
hospitals, private and governmental institutions and health care
agencies, medical equipment distributors and rental companies, and
doctors' offices. The Company does not generally require collateral to
support customer receivables. The Company performs ongoing credit
evaluations of its customers and maintains allowances which management
believes are adequate for potential credit losses. The credit risk
associated with the Company's trade receivables is further limited due to
dispersion of the receivables over a large number of customers in many
geographic areas.
Payment of certain accounts receivable is made by the national health
care systems of several member countries of the European Economic
Community. Although the Company does not currently anticipate credit
problems associated with these receivables, payment is contingent upon
the economic stability of these countries.
The Company limits credit risk exposure to foreign exchange contracts by
periodically reviewing the credit worthiness of the counterparties to the
transactions.
6. ACQUISITIONS
PIERRE MEDICAL
On May 3, 1995, the Company's EdenTec subsidiary acquired Pierre Medical,
a privately-held French manufacturer of respiratory products used in the
home, for $21.5 million in cash. In the event that certain performance
milestones are achieved subsequent to the acquisition, additional
compensation totaling 30 million French Francs ($6.2 million as of
July 2, 1995) would be payable to the former principal stockholders of
Pierre who continue to manage the company. Such amounts will be expensed
when, and if, earned. Pierre Medical manufactures and markets
noninvasive ventilators, sleep apnea therapy systems, oxygen
concentrators and related respiratory products in Western Europe,
primarily in France.
The acquisition of Pierre Medical has been accounted for as a purchase
and, accordingly, Pierre Medical's results are included in the Company's
financial statements subsequent to the acquisition date. Identifiable net
assets acquired consisted of approximately $4.0 million of working
capital. The excess of cost over identifiable net assets of $18.1 million,
including acquisition related costs, is being amortized over 15 years, the
period of the estimated future benefit.
- 10 -
14
NELLCOR PURITAN BENNETT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
In connection with the acquisition, supplemental cash flow information is
as follows (dollars in thousands):
Fair value of assets acquired,
except for cash and cash equivalents $ 26,999
Liabilities assumed (5,584)
---------
Cash paid to acquire Pierre Medical, net
of cash and cash equivalents acquired $ 21,415
=========
Hoyer Medizintechink
During fiscal 1994, Puritan-Bennett acquired a German distributor, Hoyer
Medizintechnik (Hoyer), for $10.6 million, of which $2.0 million was
paid during fiscal 1995.
SEFAM S.A.
Puritan-Bennett also acquired SEFAM S.A., a French supplier of
diagnostic and therapeutic sleep products during fiscal 1994 for a total of
$21.6 million, of which $12.9 million was paid in cash with the remainder
paid through the issuance of 375,698 restricted shares, adjusted for the
merger discussed in note 17, of the Company's common stock.
The acquisitions of SEFAM S.A. and Hoyer have been accounted for as
purchases and, accordingly, SEFAM S.A.'s and Hoyer's results are included
in the Company's financial statements subsequent to the acquisition dates.
The purchase price has been allocated to assets acquired and liabilities
assumed, reflecting their estimated fair value as of the date of the
acquisitions with the remaining excess purchase price to be amortized over
15 years, the period of the estimated future benefit.
In connection with these acquisitions by Puritan-Bennett, supplemental cash
flow information is as follows (dollars in thousands):
Fair value of assets acquired, except
for cash and cash equivalents $34,481
Liabilities assumed (6,464)
Stock issued (8,645)
Other (1,755)
-------
Cash paid to acquire SEFAM S.A. and Hoyer,
net of cash and cash equivalents acquired $17,617
=======
If these acquisitions had occurred as of the beginning of the respective
years they were acquired, the revenues or results of operations of these
acquired businesses would have been immaterial to the results of
operations of the Company for fiscal years 1995 and 1994.
COSTS ASSOCIATED WITH AN UNSOLICITED OFFER
During 1995, $5.0 million of costs were incurred associated with an
unsolicited offer to acquire Puritan-Bennett. These costs include
investment banking fees, public relations expenses and legal fees. As of
year end, $4.1 million remained in accrued liabilities which is expected
to be paid during fiscal 1996.
- 11 -
15
Nellcor Puritan Bennett Incorporated
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------------------
7. INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consist of (dollars in thousands):
JULY 2, JULY 3,
1995 1994
Excess of cost over fair value of net
assets acquired $56,192 $37,357
Other intangibles from acquisitions,
and purchased technologies and rights 9,965 11,040
Other assets 22,655 15,305
-------- --------
Total cost 88,812 63,702
Less accumulated amortization (20,964) (15,082)
-------- --------
Intangibles and other assets, net $ 67,848 $ 48,620
======== ========
8. NOTES PAYABLE AND CREDIT FACILITY
Notes payable consist primarily of lines of credit with five banks.
These unsecured lines of credit allow Puritan-Bennett to borrow a
maximum of $35 million (at the quoted rate of each bank) and the lines
of credit can be withdrawn at each bank's option. There are no
withdrawal restrictions on any cash balances maintained at the various
banks. Total amounts outstanding under the lines of credit at July 2,
1995 and July 3, 1994 were $18.0 million (interest at 6.4%) and $27.8
million (interest at 3.5%), respectively.
Nellcor has a $50 million credit facility, which was obtained during
fiscal 1995, with a group of four banks which provides an option to
convert outstanding borrowings under the facility to a term loan repayable
over four years. The rate of interest payable under this facility is a
floating rate, which is a function of the London Interbank Offered Rate.
A facility fee equal to 0.25% of the total commitment is paid quarterly.
The credit facility contains various covenants which require the Company
to maintain a specified financial ratio, limit liens, regulate asset
disposition, and subsidiary indebtedness, and restrict certain
acquisitions and investments. At July 2, 1995, Nellcor was in compliance
with these covenants and no borrowings had been made under the credit
facility at July 2, 1995.
- 12 -
16
NELLCOR PURITAN BENNETT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
9. LONG-TERM DEBT
Puritan-Bennett long-term debt is summarized as follows (dollars in
thousands):
July 2, July 3,
1995 1994
Unsecured promissory notes payable:
Interest rate 9.85%, interest payable semi-annually
through October 1998, principal is payable in
annual installments through October 1998 $11,333 $15,333
Interest rate 6.64%, interest payable semi-annually
through December 1999, principal is payable in
annual installments through December 1999 15,000 15,000
Interest rate 9.02%, interest payable semi-annually
through December 1997, principal is payable in
annual installments through December 1997 6,000 8,000
Interest rate 7.57%, interest payable semi-annually
through July 2000, principal is payable in annual
installments through July 2000 20,000 -
Variable interest rate, 5.13% through December 1995,
interest payable annually through December 1998,
principal is payable in full in December 1998 4,510 4,510
Secured bank note payable:
Interest rate 7.95%, principal payable in monthly
installments through August 2003, collateralized
by a building 1,707 1,662
Capital lease:
Interest rate 7.0%, principal payable in monthly
installments through February 2009 4,782 -
Other 687 697
------- -------
64,019 45,202
Less current maturities (9,527) (6,546)
------- -------
Total long-term debt $54,492 $38,656
======= =======
The estimated fair value of total long-term debt at January 31, 1995 was
approximately $64 million.
Puritan-Bennett leases a facility which is classified as a capital lease
and the related asset is being amortized over its estimated useful life,
15 years. As of July 2, 1995, the net book value of the asset and
accumulated amortization was $4.4 million and $0.3 million, respectively.
The future minimum lease payments required under the capital lease are
included in the aggregate maturities of long-term debt listed below.
-13-
17
NELLCOR PURITAN BENNETT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
As of July 2, 1995, Puritan-Bennett was in compliance with the
provisions of its debt agreements. The aggregate maturities of
long-term debt during each of the next five fiscal years are as follows:
1996 - $9.5 million; 1997 - $12.7 million; 1998 - $11.5 million;
1999 - $13.9 million; and 2000 - $7.5 million.
Interest paid related to the above Puritan-Bennett debt in 1995, 1994
and 1993 totaled $5.8 million, $4.7 million and $3.4 million,
respectively.
10. RESTRUCTURING CHARGES
During fiscal 1994, Puritan-Bennett restructured the hospital ventilator
and portable ventilator portions of its business, consolidated its
aviation facilities and substantially reduced the FOxS operations to
improve profitability. In connection with the restructuring, during
fiscal 1994 Puritan-Bennett recorded restructuring charges of $43.2
million. Included in these charges were provisions for personnel-related
charges ($7.7 million), non-cash asset write-downs ($29.7 million),
consolidation of manufacturing and marketing facilities ($1.3 million),
and other restructuring related costs ($4.5 million). During the third
quarter of 1995, Puritan-Bennett completed the shut down of the FOxS
operations. As of July 2, 1995, approximately $1.9 million remained in
accrued liabilities and is expected to be disbursed primarily in the
first quarter of fiscal 1996. As of July 3, 1994, approximately $12
million remained in accrued liabilities primarily representing expected
severance, cancellation penalties, remaining facility lease payments and
other costs necessary to complete the 1994 restructuring plan. During
fiscal 1994, Nellcor recorded a restructuring charge of $.5 million
associated with the consolidation of two of Nellcor's divisions.
11. PURITAN-BENNETT EMPLOYEE BENEFITS
DEFINED BENEFIT PLANS
Puritan-Bennett has noncontributory, defined benefit pension plans
covering substantially all full-time employees in the U.S., Canada and
Ireland. Puritan-Bennett contributes amounts necessary to satisfy the
funding requirements of the various jurisdictions in which the plans are
established. The U.S. and Canadian defined benefit pension plans provide
retirement benefits based upon the employees' average earnings and years
of service. The Irish plan provides benefits equal to a certain
percentage of the participant's final salary. Puritan-Bennett also has
an unfunded supplemental retirement plan covering certain key employees
which provides supplemental retirement benefits based upon average
earnings.
-14-
18
NELLCOR PURITAN BENNETT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
A summary of the components of net costs for the defined benefit plans
follows:
PENSION SUPPLEMENTAL
------- ------------
1995 1994 1993 1995 1994 1993
(Dollars in thousands)
Service cost - benefits earned during the year $ 2,189 $ 1,832 1,488 $ 85 $ 25 $ 13
Interest cost on projected benefit obligation 3,811 3,615 3,224 287 268 293
Actual return on plan assets 466 (615) (2,885) - - -
Net amortization and deferral (3,932) (3,494) (1,057) 105 104 132
------- ------- ------- ---- ---- ----
Net cost $ 2,534 $ 1,338 $ 770 $477 $397 $438
======= ======= ======= ==== ==== ====
Assumptions used in determining the net cost for the defined benefit
plans were:
PENSION SUPPLEMENTAL
------- ------------
1995 1994 1993 1995 1994 1993
Weighted-average discount rate 7.50% 8.75% 8.75% 8.50% 8.50% 8.50%
Rate of increase in compensation levels 4.50% 6.00% 6.00% 4.50% 6.00% 6.00%
Expected long-term rate of return on assets 9.00% 10.00% 10.00% - - -
The following table sets forth the funded status and amounts recognized
in the consolidated balance sheets at January 31, 1995 and 1994, for
Puritan-Bennett's defined benefit plans:
PENSION SUPPLEMENTAL
------ ------------
1995 1994 1995 1994
(Dollars in thousands)
Vested benefit obligation $39,858 37,851 $ 3,233 $3,406
======= ====== ======= ======
Accumulated benefit obligation $40,897 39,004 $ 3,233 $3,406
======= ====== ======= ======
Projected benefit obligation $49,302 48,003 $ 3,677 $3,009
Plan assets at fair value 35,280 37,721 - -
------- ------ ------- ------
Projected benefit obligation in excess of plan assets 14,022 10,282 3,677 3,009
Unrecognized net gain (loss) (5,788) (4,459) (592) 267
Unrecognized net asset (liability) 2,309 2,436 (144) (676)
------- ------ ------- ------
Net Liability recognized in the consolidated
balance sheet $10,543 $ 8,259 $ 2,941 $2,600
======= ====== ======= ======
Assumptions used in determining the actuarial present value of the
projected benefit obligation for the pension plans were:
U.S. CANADA IRELAND
---- ------ -------
1995 1994 1995 1994 1995 1994
Weighted-average discount rate 8.50% 7.50% 8.50% 7.50% 8.75% 8.75%
Rate of increase in compensation levels 4.50% 4.50% 4.50% 5.00% 6.00% 6.00%
Expected long-term rate of return on
assets 9.00% 10.00% 9.50% 9.00% 10.00% 10.00%
The U.S. pension plan assets were invested in listed stocks and bonds,
including common stock of Puritan-Bennett prior to the merger with
Nellcor (see Note 17). The market value of Puritan-Bennett stock
included in plan assets at the end of fiscal 1995 and 1994, was $3.9
million and $3.7 million, respectively. Both the Canadian and Irish plan
assets are invested in pooled mutual funds. For the unfunded
supplemental plan, Puritan-Bennett has purchased life insurance policies
intended to ultimately fund the cost of the plan.
- 15 -
19
NELLCOR PURITAN BENNETT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides postretirement health care benefits to certain
eligible retirees of Puritan-Bennett. The cost of the postretirement
medical plan is shared by the Company and eligible retirees through
such features as annually adjusted contributions, deductibles and
coinsurance. The retiree's contribution is a factor of age and service
at the time of retirement. The postretirement health care benefits are
funded by the Company as claims are paid. The Company accounts for these
benefits in accordance with SFAS No. 106, "Employers Accounting for
Postretirement Benefits other than Pensions." The net cost, accumulated
benefit obligation and net liability related to such benefits were not
material to the Company's financial position and results of operations.
RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN
The Company has a retirement savings and stock ownership plan under which
substantially all U.S. Puritan-Bennett employees may elect to contribute
up to 20% of their earnings. This includes a basic contribution of up to
10% and an additional voluntary contribution of up to 10%. The Company
contributes an additional 35% of each individual's basic contribution
(decreased to 10% as of February 15, 1995) not to exceed 6% of the
employees' total compensation. Contributions are placed in trust for
investment in defined funds, including a stock fund for investment in
common stock of Puritan-Bennett prior to the merger with Nellcor (see Note
17.) The plan trustee purchases the Puritan-Bennett stock at fair market
value. The amount charged to expense under the plan was $1.2 million,
$1.2 million and $1.1 million in 1995, 1994 and 1993, respectively.
12. PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following (in thousands):
YEARS ENDED
JULY 2, JULY 3, JULY 4,
1995 1994 1993
Federal:
Current $ 18,978 $ 12,737 $ 11,936
Deferred (2,603) (12,603) 1,450
-------- -------- --------
16,375 134 13,386
-------- -------- --------
State:
Current 3,355 3,205 3,200
Deferred (456) (3,128) 326
------- -------- --------
2,899 77 3,526
------- -------- --------
Foreign:
Current 3,393 2,631 1,332
Deferred (815) (2,580) 1,294
-------- -------- --------
2,578 51 2,626
-------- -------- --------
$ 21,852 $ 262 $ 19,538
======== ======== ========
- 16 -
20
NELLCOR PURITAN BENNETT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
Pretax income from foreign operations used to determine related tax
liabilities amounted to $14.5 million, $1.4 million and $13.3 million for
fiscal 1995, 1994 and 1993, respectively.
The most significant components of the Company's deferred tax assets and
liabilities at July 2, 1995 and July 3, 1994 are as follows (in
thousands):
JULY 2, 1995 JULY 3, 1994
DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES ASSETS LIABILITIES
Inventory and product allowances $ 11,514 $ 7,229
Accelerated depreciation $5,541 $6,548
Intangible assets 832 1,852
Accounts receivable 642 693
Compensated absences 753 607
Accrued employee benefits 9,391 8,358
State income tax accrual 1,392 979
NOL and R&D carryforwards 9,196 4,423
Deferred revenue 3,785 2,898 187
Restructuring costs 2,125 10,051
Tax/book year end difference 1,504 1,516
Other accruals 5,940 2,376 3,445 1,521
-------- ------ -------- ------
Total 45,570 9,421 40,535 9,772
Less: valuation allowance (13,308) (12,129)
-------- ------ -------- ------
Deferred income taxes $ 32,262 $9,421 $ 28,406 $9,772
======== ====== ======== ======
Puritan-Bennett has $15.8 million of U.S. and foreign net operating loss
carryforwards, of which $1.0 million and $11.2 million will expire by
fiscal years 2000 and 2010, respectively, and the remaining $2.4 million
has no limitation as to its use. In addition, as a result of
Puritan-Bennett changing its fiscal year end, the Company has a net
operating loss carryforward of $1.2 million for tax purposes which will be
utilized over the next three years. Puritan-Bennett has research and
development credit carryforwards of $2.5 million which will also expire by
fiscal year 2010.
A valuation allowance of $13.3 and $12.1 million at July 2, 1995 and July
3, 1994, respectively, has been provided for Puritan-Bennett net operating
loss and research and development credit carryforwards, and certain
foreign temporary differences, which will be realized to the extent of
future taxable income of Puritan-Bennett.
- 17 -
21
NELLCOR PURITAN BENNETT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
The difference between the Company's effective income tax rate and the
United States federal statutory income tax rate is summarized as follows:
YEARS ENDED
JULY 2, JULY 3, JULY 4,
1995 1994 1993
Federal statutory rate 35.0% (35.0)% 34.0%
State income taxes, net of federal benefit 2.2 (6.8) 3.9
Foreign statutory tax rate differences (7.0) (22.7) (3.2)
Research and experimental credits (1.8) (37.3) (0.9)
Tax legislation changes (11.7)
Nondeductible amortization and depreciation 1.7 8.9 1.5
Increase in valuation allowance 2.1 103.1
Other (1.6) 5.7 (2.3)
---- ----- ----
Effective tax rate 30.6% 4.2% 33.0%
==== ===== ====
The Company paid income taxes of approximately $21.4 million, $13.9
million, and $12.5 million in fiscal 1995, 1994 and 1993, respectively.
13. STOCKHOLDERS' EQUITY
COMMON STOCK
As of July 2, 1995, an aggregate of 4,773,785 shares of authorized but
unissued common stock remained reserved for issuance under the 1994
Equity Incentive Plan (the "1994 Plan"), the 1991 Equity Incentive Plan,
as amended (the "1991 Plan"), the 1988 Stock Option Plan for Non-Employee
Directors, as amended (the "1988 Plan"), and the 1986 Employee Stock
Participation Plan, as amended (the "ESPP").
STOCK OPTION PLANS
1994 and 1991 Plans. Nellcor maintains two employee stock option
plans, the 1994 Plan and the 1991 Plan. In October 1994, the Company
obtained stockholder approval of the 1994 Plan, which authorizes the
issuance of up to 1,500,000 shares of common stock to executive officers,
other key employees and consultants in the form of incentive and
- 18 -
22
NELLCOR PURITAN BENNETT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
nonqualified stock options, stock bonuses and restricted stock. The 1994
Plan satisfies the performance-based compensation requirements of The
Omnibus Budget Reconciliation Act of 1993.
The Company obtained shareholder approval of the 1991 Plan in October
1991. Upon stockholder approval of the 1991 Plan, the Company's 1982
Incentive Stock Option Plan (the "1982 Plan") and the 1985 Equity
Incentive Plan (the "1985 Plan") were terminated; however, shares
available for issuance under these plans at the time of termination,
including shares underlying outstanding options, that later expire or are
canceled, were pooled with the 750,000 additional shares reserved for
issuance under the 1991 Plan. In October 1992, the Company obtained
stockholder approval for an amendment to the 1991 Plan increasing the
number of shares authorized for issuance under the 1991 Plan by an
additional 1,500,000 shares.
Options granted under the 1994 and 1991 Plans generally vest on a
quarterly basis over a period of four years from the date of grant. A
one-year waiting period is required before vesting in the case of initial
grants. The 1994 and 1991 Plans authorize the grant of incentive stock
options at exercise prices equal to the fair market value of the
Company's common stock on the date of grant and permit the grant of
nonqualified stock options at exercise prices not less than 85 percent of
fair market value on the date of grant. To date, only nonqualified stock
options with exercise prices equal to the fair market value of the
underlying common stock on the date of grant have been granted under both
Plans. No stock bonus or restricted stock grants have been made under
the 1994 or 1991 Plans.
As of July 2, 1995, options representing 946,130 shares, including
options issued under the 1994 and 1991 Plans and the terminated 1982 and
1985 Plans, were outstanding and exercisable at an aggregate exercise
price of approximately $22.8 million, and the Company, as of such date,
had 2,201,041 shares available for issuance under the 1991 and 1994
Plans.
Certain options issued under the 1994 and 1991 Plans permit exercise
prior to vesting. As to these options, if the optionee's relationship
with the Company is terminated prior to the complete vesting of the
options, the Company has the right to repurchase unvested shares at the
exercise price plus interest. As of July 2, 1995, no shares were subject
to repurchase by the Company under these options.
Supplemental cash flow information: Puritan-Bennett had a deferred stock
award program. Non cash amounts, net of cancellations, included in
additional paid in capital for this program were $1.1 million, $.4
million and $.8 million for fiscal 1995, 1994 and 1993, respectively.
- 19 -
23
NELLCOR PURITAN BENNETT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
The following is a summary of option activity under the 1994 and 1991
Plans:
RANGE OF EXERCISE
AVAILABLE OPTIONS
FOR GRANT OUTSTANDING HIGH LOW
Balance at July 5, 1992 648,958 2,945,325 $32.00 $ 4.19
Increase in options
available for grant 1,500,000
Granted (683,710) 833,398 34.13 24.00
Exercised (610,740) 31.75 4.19
Canceled 235,769 (241,951) 32.00 9.38
--------- ---------
Balance at July 4, 1993 1,701,017 2,926,032 34.13 4.50
Granted (668,405) 856,286 28.50 20.00
Exercised (483,989) 26.75 4.50
Canceled 301,050 (319,618) 32.00 10.00
--------- ---------
Balance at July 3, 1994 1,333,662 2,978,711 32.00 4.50
Increase in options
available for grant 1,500,000
Granted (836,220) 1,002,320 46.25 18.25
Exercised (679,006) 34.13 4.50
Canceled 203,599 (249,443) 34.13 10.63
--------- ---------
Balance at July 2, 1995 2,201,041 3,052,582 $46.25 $ 4.50
========= =========
1988 Plan. In October 1988, the Company obtained stockholder approval of
the 1988 Plan which authorized the non-discretionary grant of options to
non-employee Directors. Under the 1988 Plan, non-employee Directors
automatically receive stock option grants upon joining the Board of
Directors and annually thereafter. Until amended in May of 1994, the
1988 Plan provided for an initial grant of an option to purchase 20,000
shares of common stock upon a Director joining the Board and an annual
grant of an option to purchase 10,000 shares of stock. On May 14, 1994,
the Board of Directors amended the 1988 Plan to reduce the number of
shares issuable to non-employee Directors in the form of options to an
initial grant of 10,000 shares and annual grants of 5,000 shares.
Options issued to non-employee Directors under the 1988 Plan are
nonqualified stock options having a five-year term and an exercise price
equal to the fair market value of the Company's common stock on the date
of grant and vesting over a four year period in the case of initial
option grants and over the succeeding fiscal year in the case of annual
grants.
In October 1994, the Company obtained stockholder approval to amend the
1988 Plan to increase the number of shares authorized for issuance by
75,000 shares and the term of options to be issued under the plan from
five to ten years.
- 20 -
24
NELLCOR PURITAN BENNETT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
As of July 2, 1995, options representing 162,500 shares were outstanding
and exercisable under the 1988 Plan at exercise prices ranging from
$13.63 to $26.50 for an aggregate exercise price of $3.7 million, and the
Company, as of such date, had 130,000 shares available for issuance under
the 1988 Plan.
STOCK PURCHASE PLANS
Under the ESPP, qualified employees, not including members of the Board
of Directors and executive officers, may purchase semi-annually up to a
specified maximum amount of shares of the Company's common stock through
payroll deductions at a price equal to 85% of the fair market value of
the stock at the beginning or end of the six month plan period, whichever
is less.
In October 1994, the Company obtained stockholder approval to increase
the number of shares available for purchase under the ESPP by 250,000
shares. As of July 2, 1995, 726,783 shares of common stock had been
purchased under the ESPP since inception and 173,217 shares remained
available for purchase by employees.
STOCK REPURCHASE PROGRAMS
During the fourth quarter of fiscal 1993, the Board of Directors approved
a Limited Stock Repurchase Program (the "Limited Program") which
commenced early in fiscal 1994. The objective of the Limited Program is
to utilize a portion of available cash balances to repurchase on the open
market shares of the Company's common stock, to mitigate the dilutive
effects of the issuance of shares under the 1994 Plan, 1991 Plan, and
ESPP. Repurchases made under the Limited Program totaled $20.9 million
(625,500 shares) and $13.6 million (554,892 shares) during the fiscal
years ended July 2, 1995 and July 3, 1994, respectively.
In addition to the Limited Program, the Board of Directors approved a
General Stock Repurchase Program (the "General Program") during the
second quarter of fiscal 1994 to repurchase and retire up to 1 million
shares of the Company's common stock. The object of this General Program
is to more effectively utilize an additional portion of available cash
balances. No repurchases under the General Program were made in fiscal
1995; 210,000 shares were repurchased and retired during 1994, totaling
$5.9 million.
STOCK RIGHTS - SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
During fiscal 1991, the Board of Directors declared a dividend
distribution of one purchase right for each outstanding share of common
stock. Each right entitles the holder to purchase from the Company one
one-hundredth of a share of Series A Junior participating preferred
stock, par value $.001, initially at a price of $90 per one-hundredth of a
preferred share. Each one one-hundredth of a share of new preferred
stock is substantially the economic equivalent of one share of common
stock.
- 21 -
25
NELLCOR PURITAN BENNETT INCORPORATED
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
In the event that a third party acquires 15 percent or more of the
Company's common stock or announces an offer which would result in such
party's owning 15 percent or more of the Company's common stock, the
rights will become exercisable. The rights expire on June 26, 2001, and
subject to certain conditions, may be redeemed by the Board of Directors
at a price of $.001 per right.
14. COMMITMENTS
The Company leases its facilities under agreements that expire at various
dates through June 2006, which include options to renew through June
2016. Rental expenses were approximately $11.2 million, $11.3 million
and $10.1 million in fiscal years 1995, 1994 and 1993, respectively.
Aggregate minimum annual rental commitments under long-term operating
leases are as follows (dollars in thousands):
Fiscal Years
1996 $ 7,277
1997 7,013
1998 6,301
1999 5,301
2000 3,934
After 2000 16,208
-------
Total rental commitments $46,034
=======
15. GEOGRAPHIC INFORMATION AND EXPORT SALES
Nellcor Puritan Bennett Incorporated operates within a single industry
segment in which it develops, manufactures, and markets monitoring
systems and diagnostic and therapeutic products for management of the
respiratory-impaired patient across the continuum of care. The
Company's patient safety monitors and sensors provide intermittent and
real-time monitoring of physiologically unstable patients. Ventilation
and oxygen systems are used in hospitals and home care to provide
assisted respiration. Home care products are used primarily for
monitoring, diagnosis and treatment of sleep apnea and providing home
oxygen therapy. The Company's products are sold worldwide through a
direct sales force, assisted by clinical education consultants and
supplemented by distributors in selected countries.
- 22 -
26
NELLCOR PURITAN BENNETT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Geographic information with respect to the Company's operations is as
follows (dollars in thousands):
YEARS ENDED
JULY 2, JULY 3, JULY 4,
1995 1994 1993
Net revenue:
United States domestic $ 455,772 $ 439,734 $ 429,747
United States export 55,753 47,341 49,295
Europe 160,426 107,049 94,627
Intersegment eliminations (71,885) (49,897) (55,423)
---------- ---------- ----------
Total net revenue $ 600,066 $ 544,227 $ 518,246
========== ========== ==========
Income (loss) from operations:
United States $ 58,570 $ 6,060 $ 47,332
Europe 16,995 837 11,483
Corporate and eliminations (325) 813 147
---------- ---------- ----------
Total operating income $ 75,240 $ 7,710 $ 58,962
========== ========== ==========
Identifiable assets:
United States $ 307,319 $ 309,676 $ 319,943
Europe 153,274 108,439 77,302
Corporate and other 154,658 119,173 110,774
Eliminations (39,815) (38,253) (38,005)
---------- ---------- ----------
Total assets $ 575,436 $ 499,035 $ 470,014
========== ========== ==========
Transfers between geographic areas are generally recorded at amounts
above cost and in accordance with the rules and regulations of the
governing tax authorities. Operating income is total revenue less cost
of sales and operating expenses and does not include interest expense,
interest income and other income (expense), net, litigation settlements,
costs associated with unsolicited takeover offer and income taxes.
Identifiable assets of geographic areas are those assets used in the
Company's operations in each area. Identifiable corporate assets consist
primarily of cash and cash equivalents, marketable securities and other
assets.
16. LITIGATION
From time to time the Company has received, and in the future may
receive, notice of claims against it, which in some instances have
developed, or may develop, into lawsuits. The claims may involve such
matters, among others, as product liability, patent infringement, and
employment-related claims. In management's opinion, the ultimate
resolution of claims currently pending will not have a material adverse
effect on the Company's financial position or results of operations.
- 23 -
27
NELLCOR PURITAN BENNETT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
On July 11, 1995, the U.S. Federal District Court in Delaware issued a
decision in favor of Nellcor, ruling that four key oximeter and sensor
technology patents are valid and would be infringed by Ohmeda, Inc., a
subsidiary of BOC Health Care, Inc., if Ohmeda sold either its adult or
neonatal OxyTip sensors for use with non-Ohmeda monitors. BOC Health Care
has filed a notice to appeal the decision of the U.S. Federal District
Court in Delaware. BOC Health Care had filed a suit against Nellcor
in December 1992, seeking a declaratory judgment that Nellcor's
patents were invalid and would not be infringed.
In a related matter, in the third quarter of fiscal 1994, Nellcor agreed
to settle trade secrets and patent litigation with BOC Health Care, Inc.,
and its Ohmeda, Inc. subsidiary, and Square One Technology. Under the
terms of the agreement, the patent in issue was assigned to Nellcor.
Nellcor also received a pretax $2.0 million payment and will receive
ongoing royalties. The $2.0 million payment was recorded as non-
operating income.
In the fourth quarter of fiscal 1994, Nellcor 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
Nellcor or its current or future customers relating to the use or sale of
Nellcor's sensors and monitors intended for use with such sensors. A
cash payment of $15.0 million was made by Nellcor 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.
17. MERGER OF NELLCOR AND PURITAN-BENNETT
On May 22, 1995, Nellcor Incorporated and Puritan-Bennett Corporation
announced that their Boards of Directors had approved a definitive
agreement to merge the two companies. The merger is intended to qualify
as a tax free reorganization and has been accounted for as a pooling of
interests. The issuance of Nellcor common stock in connection with the
Agreement and Plan of Merger was approved by shareholders at special
shareholder meetings held by both companies on August 24, 1995. Under the
terms of the agreement, shareholders of Puritan-Bennett received 0.88 of a
share of Nellcor common stock for each Puritan-Bennett share, or
approximately 11.6 million shares of Nellcor common stock. The Board of
Directors also adopted and, on August 24, 1995, the Company's stockholders
also approved, the 1995 Merger Stock Incentive Plan (the "1995 Plan"),
which authorized the issuance of up to 779,000 shares of Company common
stock in the form of stock options. The purpose of the 1995 Plan is to
allow the Company to comply with its obligations in the Agreement and Plan
of Merger with Puritan-Bennett, whereby the Company would issue its
options to holders of unexercised options of Puritan-Bennett stock as of
the effective date of the merger.
The new company, Nellcor Puritan Bennett Incorporated (Nellcor Puritan
Bennett) is headquartered in Pleasanton, California, site of Nellcor's
current headquarters. The Board of Directors of Nellcor Puritan Bennett
has nine members; six from Nellcor, two from Puritan-Bennett, and one
to be selected by both companies.
- 24 -
28
NELLCOR PURITAN BENNETT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
Upon consummation of the merger, the Company recorded one-time merger and
related costs of $92.6 million during the first quarter of fiscal 1996.
Included in this charge were provisions for merger transaction costs
($13.7 million), costs to combine and integrate operations ($53.8
million), certain intangible asset write-downs ($19.6 million), and other
merger related costs ($5.5 million). The merger transaction costs
include expenses for investment banker and professional fees, and other
costs associated with completing the transaction. The costs to combine
and integrate operations include provisions for severance and
severance-related costs, facilities consolidations and other integration
costs. The write-down of certain intangible assets, primarily goodwill
associated with prior acquisitions made by both companies, results from
the effect that certain integration decisions have had upon the future
realization of these assets.
For the purpose of preparing the Nellcor Puritan Bennett Incorporated
Consolidated Balance Sheet, Nellcor's balance sheet at July 2, 1995 and
July 3, 1994 was combined with Puritan-Bennett's balance sheet at January
31, 1995 and 1994, respectively. For the purpose of preparing the Nellcor
Puritan Bennett Consolidated Statements of Operations, of Stockholders'
Equity and of Cash Flows, Nellcor's historical results for each of the
three fiscal years in the period ended July 2, 1995 have been combined
with Puritan-Bennett's historical results for each of the three fiscal
years in the period ended January 31, 1995. Nellcor's fiscal year ends
on the first Sunday in July, which results in a 52 or 53 week fiscal
year.
The only adjustment required to conform the accounting policies
was to reduce Puritan-Bennett's valuation allowance provided for its
deferred tax assets based upon the combined income from operations before
tax of Nellcor and Puritan-Bennett as required by SFAS No. 109,
"Accounting for Income Taxes." In addition, certain reclassifications
have been made to the consolidated financial statements of Puritan-Bennett
to conform to Nellcor's financial statement presentation.
- 25 -
29
NELLCOR PURITAN BENNETT INCORPORATED
- -----------------------------------------------------------------------------
SELECTED QUARTERLY DATA
Unaudited (in thousands except per share amounts)
YEAR ENDED JULY 2, 1995
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
Net revenue $136,122 $148,010 $154,447 $161,487
Gross profit 66,669 74,337 77,403 82,089
Income from operations 13,438 18,709 21,697 21,396
Net income 9,583 12,727 11,418 15,735
Net income per share 0.35 0.45 0.41 0.56
YEAR ENDED JULY 3, 1994
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
Net revenue $125,539 $136,027 $136,923 $145,738
Gross profit 62,440 68,090 69,015 70,392
Income from operations 9,869 3,905 13,866 (19,930)
Litigation settlements - - 2,000 (15,000)
Net income 3,953 1,893 10,100 (25,258)
Net income per share 0.14 0.07 0.37 (.92)
- 26 -
30
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
The following sets forth, for the indicated periods, the relationship that
certain items bear to net revenue:
Increase
(Decrease)
Years ended Over Prior Year
July 2, 1995 July 3, 1994 July 4, 1993 FY 95 vs. FY 94 FY 94 vs. FY 93
------------ ------------ ------------ --------------- ---------------
Net revenue 100% 100% 100% 10% 5%
Gross margin 50% 50% 50% 11% 4%
Operating expenses:
Research and development 8% 9% 9% (3%) 1%
Selling, general, and administrative 29% 31% 29% 3% 12%
Restructuring charges, -- 8% -- -- --
Total operating expenses 38% 48% 39% (14%) 31%
Income from operations 13% 1% 11% 876% (87%)
Litigation settlements, net -- (2%) -- -- --
Income (loss) before income taxes 12% (1%) 11% N/M (110%)
Net income (loss) 8% (2%) 8% N/M (136%)
N/M = Not meaningful
1995 VS 1994
REVENUE
The Company's net revenue for fiscal 1995 increased 10% to $600.1 million from
$544.2 million in fiscal 1994. The increase in net revenue principally
resulted from higher sales across the Company's hospital and home care
businesses. Sales of the Company's products into international markets were
also particularly strong.
Hospital business sales, which include the oximetry, critical care ventilator
and clinical information systems product lines, increased 9% to $372.8 million
in fiscal 1995 from $343.6 million in fiscal 1994.
The Company's principal oximetry instruments include the N-20 portable pulse
oximeter, the N-180, N-185, N-200 and N-250 standalone pulse oximeters, and the
N-3000 pulse oximeter, a module of the NELLCOR SYMPHONY(TM) monitoring system.
Oximetry instrument revenue for fiscal 1995 increased slightly as higher unit
sales of the N-3000 pulse oximeter and the N-20 portable pulse oximeter were
partially offset by lower average selling prices.
Oximetry sensors include adhesive, reusable and recycled sensor product lines.
Revenue from oximetry sensors increased moderately during fiscal 1995 primarily
due to continued growth in the installed base of the Company's monitors and the
products of the Company's licensees and OEM customers that use the Company's
sensors. Higher unit sales were partially offset by slightly lower average
selling prices for adhesive and recycled sensors.
27
31
OEM oximetry module revenue increased significantly in fiscal 1995 as higher
unit shipments were partially offset by moderately lower average selling
prices. At the end of fiscal 1995, the Company had OEM or licensing agreements
in place with 40 medical systems and monitor manufacturers worldwide.
Revenues related to the critical care ventilator business, the CliniVision
product line in the United States, and the small holter monitoring and
international portable ventilator product lines decreased 1% from fiscal 1994.
The decrease is the result of the Company's decision to withdraw from the
United States portable ventilator market and to discontinue sales of some older
products. After adjusting for the loss of sales from these products, revenues
increased 7% over fiscal 1994.
Home care business sales, which include the oxygen therapy, gas products and
spirometry group; the sleep and respiratory support systems group; and the aero
systems group, increased 13% to $227.3 million in fiscal 1995 from $200.6
million in fiscal 1994. Home care business revenue increased due primarily to
higher sales within the sleep and respiratory support systems group.
The products within the sleep and respiratory support systems group include the
ASSURANCE 2000 and 3000 heart and respiration monitor, the EDENTRACE II and II
PLUS multichannel recording systems and related products, the Airway Delivery
and Management System (ADAM) and the Nasal Continuous Positive Airway Pressure
(CPAP) System both used in the Therapy Headgear product, and Companion 318 and
320 Airway Pressure Respiratory Systems which deliver controlled airflow to
patients when air obstruction occurs. During the fourth quarter of fiscal
1995, the Company acquired Pierre Medical, a privately held French Manufacturer
of respiratory products used in the home. Pierre Medical markets the ONYX
noninvasive ventilation system, the OMEGA oxygen concentrator and the MORPHEE
and MORPHEE PLUS sleep apnea therapy systems in Western Europe, primarily in
France. Revenue from the above mentioned home health care products increased
significantly during fiscal 1995 primarily due to higher sales of the EDENTRACE
II PLUS and the ASSURANCE 3000, as well as sales from Pierre Medical included
in the Company's results subsequent to its May 3, 1995 acquisition. In
addition, the Company has a full year of revenue from SEFAM S.A., a European
supplier of diagnostic and therapeutic sleep disorder products, which was
acquired in January 1994.
International revenue (net of intersegment eliminations) increased 44% to
$133.4 million in fiscal 1995 from $92.8 million in fiscal 1994.
International revenue increased significantly across all markets principally
due to higher sales of oximetry sensors, the N-3000 pulse oximeter, OEM
oximetry modules, the acquisitions of Pierre Medical and SEFAM S.A., and the
favorable effect of foreign currency exchange rates.
GROSS MARGIN
Gross margin at 50% of net revenue in fiscal 1995 was comparable to the prior
year, as pricing pressures experienced in both the hospital and home care
businesses were offset by improved margins in EdenTec and the favorable effect
which foreign currency exchange rates had upon revenue.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased to 8% of net revenue during fiscal
1995 from 9% for both fiscal 1994 and 1993, and decreased in absolute dollars
from fiscal 1994. The decrease was due to the elimination of the
intra-arterial blood gas monitoring product line during fiscal 1994, partly
offset by an increase in research and development expenses related to the
development of additional modules of the NELLCOR SYMPHONY(TM) monitoring
system, and higher sleep product development costs at EdenTec. The Company
expects to continue to invest in the research and development of new products.
28
32
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses in fiscal 1995 decreased to 29%
of net revenue from 31% of net revenue in fiscal 1994. Selling, general, and
administrative expenses increased in absolute dollars due primarily to the
unfavorable effect foreign currency exchange rates had upon international
operating expenses, the inclusion of operating expenses from Pierre Medical and
SEFAM S.A. subsequent to their acquisition, and increased costs related to the
Company's profit sharing and bonus plans, partially offset by lower patent
litigation expenses.
NET INCOME
The Company's net income for fiscal 1995 was $49.5 million, $1.77 per share,
compared to a net loss of $9.3 million, ($0.34) per share, for the same period a
year ago. As described below, the fiscal 1994 net loss includes the effect of a
pretax restructuring charge of $43.7 million, a net $13.0 million pretax charge
for trade secrets and patent litigation settlements, and the $2.9 million after
tax effect of the adoption of a new accounting standard. The fiscal 1995 net
income reflects the effect of a $2.7 million restructuring charge associated
with a 6% reduction in Puritan-Bennett's work force, and $5.0 million in costs
associated with an unsolicited takeover attempt. Excluding the after-tax effect
of these unusual charges, fiscal 1995 net income of $54.8 million, $1.96 per
share, increased 14% over net income of $47.9 million, or $1.75 per share for
fiscal 1994.
1994 VS 1993
REVENUE
The Company's net revenue for fiscal 1994 increased 5% to $544.2 million from
$518.2 in fiscal 1993. The increase is principally due to higher sales within
the Company's home care business, are discussed below.
Hospital business sales at $343.7 million in fiscal 1994 were comparable to the
prior year, as higher sales of adhesive and reusable sensors were offset by a
decrease in sales of critical care ventilators and clinical information
systems. Sales of adhesive and reusable sensors increased primarily due to
continued growth in the installed base of the Company's monitors and the
products of the Company's licensee and OEM customers that use the Company's
sensors.
Oximetry instrument revenue decreased slightly in fiscal 1994 primarily due to
lower average selling prices and a continued shift to lower-priced portable
pulse oximeters such as the N-20. Unit sales of oximetry instruments decreased
slightly in fiscal 1994.
OEM oximetry module revenue increased in fiscal 1994 principally due to
significantly higher unit shipments, partially offset by lower average selling
prices. Selling prices for certain OEM modules were reduced beginning in the
third quarter of fiscal 1994.
Unit orders of the 7200 Series ventilator system grew 10% internationally in
spite of recessionary economic conditions in Europe; unit orders fell 18% in
the United States. The Company expected United States demand for the 7200
Series ventilator to stabilize generally around fiscal year 1993 levels and
international demand to continue growing. After a very slow start caused by
United States health care reform uncertainty, CliniVision orders increased
significantly in the second half of the year as the Company continued to
enhance the CliniVision system.
29
33
Home care business sales increased 15 percent to $200.6 million in fiscal 1994
from $174.6 million in fiscal 1993 due primarily to higher sleep and
respiratory support and oxygen therapy systems sales.
Sleep and respiratory support systems group revenue increased primarily due to
rapid market growth and market share gains, principally in the United States.
In January 1994, the Company acquired SEFAM, S.A. (Nancy, France), a supplier
of diagnostic and therapeutic sleep disorder products in Europe.
Home oxygen therapy (principally liquid oxygen systems and oxygen
concentrators) experienced growth of 15% during fiscal 1994. The Company
expects its home oxygen therapy business to continue growing.
International revenue at $92.8 million in fiscal 1994 was comparable to fiscal
1993, as higher sales of adhesive and reusable sensors, the ULTRA CAP and the
E-300, were offset by lower sales of oxygen concentrators, and the unfavorable
effect which foreign currency exchange rates had upon revenue. During fiscal
1993 there was a sizable oxygen concentrator fleet replacement by a single
customer for which there was no comparable event in fiscal 1994.
GROSS MARGIN
Gross margin at 50% of net revenue in fiscal 1994 was comparable to the prior
year, as pricing pressures experienced in both the hospital and home care
businesses were offset by improved margin at EdenTec and a slight shift in mix
to higher margin sensors.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses in absolute dollars for 1994 increased due
primarily to the development of the HealthQuiz(TM) PreScreen(TM) automated
preanesthetic medical history system.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses in fiscal 1994 increased over the
prior year both as a percentage of net revenue and in absolute dollars. This
increase is primarily due to the Company's growing home care business and
higher patent litigation expenses. The increase can also be attributed to an
increase in selling expenses related to the intra-arterial blood gas monitoring
products and costs associated with restructuring actions, discussed below.
RESTRUCTURING AND OTHER UNUSUAL CHARGES
During fiscal 1994, Puritan-Bennett restructured the hospital ventilator and
portable ventilator portions of its business, consolidated its aviation
products facilities and substantially reduced the FOxS operations to improve
profitability. In connection with the restructuring, during fiscal 1994
Puritan-Bennett recorded restructuring charges of $43.2 million. Included in
these charges were provisions for personnel-related charges ($7.7 million),
non-cash asset write-downs ($29.7 million), consolidation of manufacturing and
marketing facilities ($1.3 million), and other restructuring related costs
($4.5 million). In the third quarter of 1995, the Company completed the shut
down of the FOxS operations. Nellcor also recorded a restructuring charge of
$0.5 million, during fiscal 1994, associated with the consolidation of two of
Nellcor's divisions.
During the third quarter of fiscal 1994, Nellcor agreed to settle trade secrets
and patent litigation with BOC Health Care, Inc., and its Ohmeda, Inc.
subsidiary, and Square One Technology. Under the terms of the agreement, the
patent in issue was assigned to the Company. The Company also received a $2.0
million payment and will receive ongoing royalties. The $2.0 million payment
was recorded as nonoperating income in the third quarter of fiscal 1994.
During the fourth quarter of fiscal 1994, Nellcor announced that it had 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
30
34
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 subsequently made by the Company to Camino. The
payment was recorded as a nonoperating expense in the fourth quarter of fiscal
1994.
In July, 1995, Nellcor announced that the US Federal District Court in Delaware
had issued a decision in favor of Nellcor in the Company's patent litigation
with Ohmeda and BOC Health Care, Inc. The Court ruled that Nellcor oximeter
and sensor technology patents are valid and would be infringed if Ohmeda, a
subsidiary of BOC Health Care, Inc., sold its adult or neonatal Oxy Tip sensors
for use with non-Ohmeda monitors. BOC Health Care has filed a notice to appeal
the decision of the US Federal District Court in Delaware.
BUSINESS FACTORS
ACQUISITIONS
During the fourth quarter of fiscal 1994, Puritan-Bennett acquired SEFAM S.A.,
a French supplier of diagnostic and therapeutic sleep products, for $21.6
million, of which $12.9 million was paid in cash with the remainder paid
through the issuance of 375,678 restricted shares of Puritan-Bennett common
stock, adjusted for the merger with Puritan-Bennett discussed below.
During the fourth quarter of fiscal 1995, the Company's EdenTec subsidiary
acquired Pierre Medical, a privately held French manufacturer of respiratory
products used in the home, for $21.5 million in cash. In the event that
certain profitability targets are achieved or certain of Pierre Medical's
products receive FDA approval for marketing in the United States subsequent to
the acquisition, additional compensation totaling 30 million French Francs
($6.2 million as of July 2, 1995) would be payable to the former principal
stockholders of Pierre Medical who will continue to manage the company. Pierre
Medical manufactures and markets noninvasive ventilators, sleep apnea therapy
systems, oxygen concentrators, and related respiratory products in Western
Europe, primarily France.
The acquisitions were accounted for under the purchase method and were intended
to broaden the Company's product offerings and to provide opportunities to
expand sales.
MERGER BETWEEN NELLCOR AND PURITAN-BENNETT
On August 25, 1995 the merger of Nellcor and Puritan-Bennett was consummated.
The issuance of Nellcor common stock in connection with the Agreement and Plan
of Merger was approved by shareholders at special shareholder meetings held by
both companies on August 24, 1995. Under the terms of the agreement,
shareholders of Puritan-Bennett received 0.88 of a share of Nellcor common
stock for each Puritan-Bennett share. These financial statements and
management's discussion and analysis reflect the consummation of this
transaction as a pooling of interests, resulting in the combining of the two
company's balance sheets and income statements as if they had always operated
as a single combined company.
Upon consummation of the merger, the Company recorded one-time merger and
related costs of $92.6 million during the first quarter of fiscal 1996.
Included in this charge were provisions for merger transaction costs ($13.7
million), costs to combine and integrate operations ($53.8 million), certain
intangible asset write-downs ($19.6 million), and other merger related costs
($5.5 million). The merger transaction costs include expenses for investment
banker and professional fees, and other costs associated with completing the
transaction. The costs to combine and integrate operations include provisions
for severance and severance-related costs, facilities consolidations and other
integration costs. The write-down of certain intangible assets, primarily
goodwill associated with prior acquisitions made by both companies, results
from the effect that certain integration decisions have had upon the future
realization of these assets.
31
35
The new company, Nellcor Puritan Bennett, is headquartered in Pleasanton,
California, site of Nellcor's headquarters. The Board of Directors of Nellcor
Puritan Bennett is comprised of nine members: six from Nellcor, two from
Puritan-Bennett and to be one selected by both companies.
PRODUCTS
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.
MARKET CONDITIONS
As health care increasingly becomes managed care, patient care is shifting to
lower-cost areas of the hospital and alternate care sites outside 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 hospitals are joining local or
regional multiple hospital 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 care markets.
In the current health care business environment, hospitals, which are the
Company's principal customers, face increasing pressure to control costs.
These pressures may, in the future, lead to a decrease in the average selling
price for a number of the Company's products, which could adversely affect the
Company's gross margins.
During fiscal 1995 and fiscal 1994, the Company offered a number of promotional
programs in an effort to increase the installed base of the Company's oximetry
and OEM modules. These programs also had the effect of reducing pulse oximetry
pricing. Competition in fiscal 1995 caused further price reductions for
oximeters and multifunction monitors. The Company is continually seeking
manufacturing cost reductions; however, these reductions may not offset the
impact of future price declines.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1995, the Company generated a net increase in cash and cash
equivalents and marketable securities of $21.1 million. At July 2, 1995, the
Company had cash, cash equivalents, and marketable securities amounting to
approximately $143.5 million compared to $122.3 million at the end of fiscal
1994.
The Company's operating activities provided positive cash flows of $68.1
million during fiscal 1995. Depreciation expense and amortization expense were
significant non-cash operating activities for all years presented. Purchases
of marketable securities and fixed assets, principally manufacturing equipment,
and the acquisition of Pierre Medical were the principal uses of cash from
investing activities.
Shares of the Company's common stock issued due to the exercise of stock
options under the Company's stock option plans and additions to long-term debt
were significant sources of cash from financing activities in fiscal 1995.
Shares of common stock repurchased in fiscal 1995 under the Company's Limited
Stock Repurchase Program and repayment of notes payable and current maturities
of long-term debt were significant uses of cash from financing activities.
Shares repurchased under the Limited Stock Repurchase Program are repurchased
to offset the dilutive effects of the Company's stock plans. No repurchases of
shares under the General Stock Repurchase Program, which authorizes the
repurchase and retirement of up to one million shares of common stock from time
to time in the open market, were made in fiscal 1995.
During the second quarter of fiscal 1995, the Company secured a $50 million
credit facility with a syndicate of four banks led by ABN AMRO Bank N.V. The
credit facility was obtained to provide the Company with additional financial
resources and flexibility to take advantage of strategic business
opportunities. Under the terms of the credit facility, a commitment fee of
0.25% is paid quarterly and at the end of November 1996, outstanding borrowings
are convertible into four-year term loans. As of July 2, 1995, the Company had
not drawn against this credit facility.
The Company anticipates that current capital resources combined with cash
generated from operating activities will be sufficient to meet its liquidity
and capital expenditure requirements at least through the end of fiscal 1996.
The Company plans to make significant repayments of notes payable and term debt
associated with the merger with Puritan-Bennett. It is expected that these
repayments along with costs associated with the merger, and other
merger-related cash outlays, will lead to a net reduction in the Company's cash
and cash equivalents and marketable securities during fiscal 1996. The Company
may consider using debt to fund certain capital and other strategic
opportunities when deemed necessary and financially advantageous.
32
36
* * * *
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NELLCOR PURITAN BENNETT
INCORPORATED
Date: April 3, 1996 /s/ LAUREEN DEBUONO
--------------------------------
Laureen DeBuono
Secretary and General Counsel