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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
-- SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 1, 1995
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 INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 94-2789249
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4280 HACIENDA DRIVE
PLEASANTON, CALIFORNIA 94588
(Address of principal executive offices)
(Zip code)
TELEPHONE: (510) 463-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Number of shares of Common Stock, $.001 par value, outstanding as of
January 1, 1995 was 16,590,108.
Page 1
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PART I.FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NELLCOR INCORPORATED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
ASSETS January 1,1995 July 3, 1994
-------------- ------------
Current assets:
Cash and cash equivalents $ 94,231 $ 68,163
Marketable securities 37,645 53,470
Accounts receivable, net of allowance for doubtful
accounts of $1,059 ($1,128 at July 3, 1994) 35,784 34,308
Inventories 26,134 27,238
Deferred income taxes and other current ASSETS 6,463 5,231
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Total current assets 200,257 188,410
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Property and equipment, at cost 76,045 73,487
Accumulated depreciation (41,620) (39,315)
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Net property and equipment 34,425 34,172
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Intangibles and other assets, net of accumulated amortization 13,687 15,566
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$248,369 $238,148
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-------------- ------------
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,159 $ 14,229
Accrued liabilities:
Payroll and payroll related 10,408 11,091
Warranty 2,257 1,882
Other 5,911 4,811
Income taxes payable 3,934 1,570
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Total current liabilities 31,669 33,583
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Deferred income taxes --- 452
Stockholders' equity:
Common stock, par value 18 17
Additional paid-in-capital 100,149 90,302
Retained earnings 141,672 127,329
Accumulated translation adjustment 227 100
Notes receivable from stockholders (5) (5)
Treasury stock, at cost (883,000 shares at January 1, 1995;
522,500 shares at July 3, 1994) (25,361) (13,630)
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Total stockholders' equity 216,700 204,113
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$248,369 $238,148
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SEE ACCOMPANYING NOTE
Page 2
NELLCOR INCORPORATED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
For the Three For the Six
Months Ended Months Ended
---------------------------------- ----------------------------------
January 1, 1995 January 2, 1994 January 1, 1995 January 2, 1994
--------------- --------------- --------------- ---------------
Net revenue $ 64,017 $ 58,113 $ 119,731 $ 108,261
Cost of goods sold 25,327 23,418 48,163 44,344
-------------- -------------- ------------- ---------------
Gross profit 38,690 34,695 71,568 63,917
Operating expenses:
Research
and development 6,957 6,064 13,387 11,383
Selling, general
and administrative 19,343 18,088 37,411 34,853
Restructuring charge --- --- --- 500
-------------- -------------- ------------- ---------------
Income from operations 12,390 10,543 20,770 17,181
Interest and other, net 1,292 605 2,362 1,440
-------------- -------------- ------------- ---------------
Income before income taxes 13,682 11,148 23,132 18,621
Provision for income taxes 5,199 4,292 8,790 6,906
-------------- -------------- ------------- ---------------
Net Income $ 8,483 $ 6,856 $ 14,342 $ 11,715
-------------- -------------- ------------- ---------------
-------------- -------------- ------------- ---------------
Net income per common and
common equivalent share $ 0.50 $ 0.41 $ 0.85 $ 0.69
-------------- -------------- ------------- ---------------
-------------- -------------- ------------- ---------------
Weighted average common
and common equivalent
shares used in the calculation
of income per share 17,011 16,853 16,895 16,872
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SEE ACCOMPANYING NOTE
Page 3
NELLCOR INCORPORATED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
For the Six
Months Ended
-------------------------------
January 1, 1995 January 2, 1994
--------------- ----------------
Cash flows from operating activities:
Net income $14,342 $11,715
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 7,954 7,383
Deferred income taxes (452) 1,607
Increases (decreases) in cash flows,
as a result of changes in:
Accounts receivable (1,292) 609
Inventories 1,104 969
Other current assets (1,388) (2,616)
Other assets (1,084) (861)
Accounts payable (5,090) 576
Accrued liabilities 754 (2,109)
Income taxes payable 2,373 2,694
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Cash provided by operating activities 17,221 19,967
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Cash flows from investing activities:
Capital expenditures (5,107) (7,579)
Cash used to purchase marketable securities (7,636) (57,581)
Proceeds from sales and maturities of 23,461 47,073
marketable securities
Other (55) ---
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Cash provided (used) by investing activities 10,663 (18,087)
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Cash flows from financing activities:
Proceeds from the sale of common stock and related
tax benefits, net of notes receivable from stockholders 9,769 2,901
Purchase of treasury shares (11,731) (3,977)
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Cash used by financing activities (1,962) (1,076)
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Effect of exchange rate changes on cash balances 146 (135)
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Increase in cash and cash equivalents 26,068 669
Cash and cash equivalents at the beginning of the period 68,163 45,906
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Cash and cash equivalents at the end of the period $94,231 $46,575
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Page 4
NELLCOR INCORPORATED NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
GENERAL. The consolidated financial statements reflect, in the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position and results of operations as
of the end of and for the periods indicated.
The accompanying interim consolidated financial statements should be read in
conjunction with the financial statements and related notes included in the
Company's 1994 Annual Report to Stockholders. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the Security and Exchange Commission rules and regulations. The
Company believes the information included in the report on Form 10-Q, when read
in conjunction with the Consolidated Financial Statements and related Notes
thereto included in the Company's 1994 Annual Report to Stockholders, is not
misleading. Information reflecting the financial position of the Company at
July 3, 1994 is derived from audited financial statements.
The results of operations for the three month and six month periods ended
January 1, 1995 are not necessarily indicative of operating results for the full
fiscal year.
INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out)
or market (net realizable value). Interim and year-end inventory balances were
as follows (IN THOUSANDS):
January 1, July 3,
1995 1994
---------- ---------
Raw materials $ 12,038 $ 10,040
Work-in process 3,818 5,180
Finished goods 10,278 12,018
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$26,134 $27,238
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STATEMENT OF CASH FLOWS. The Company paid income taxes of approximately $5.7
million and $4.4 million in the six months ended January 1, 1995 and January 2,
1994, respectively.
PROPERTY AND EQUIPMENT. Depreciation expense was approximately $5.0 million in
the first six months of fiscal 1995 and $5.2 million in the first six months of
fiscal 1994.
Page 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS - YEAR-TO-DATE PERIOD AND SECOND QUARTER ENDED JANUARY 1,
1995, COMPARED WITH THE YEAR-TO-DATE PERIOD AND SECOND QUARTER ENDED JANUARY 2,
1994.
The Company's net revenue for the second quarter of fiscal 1995 increased to
$64.0 million from $58.1 million in the second quarter of fiscal 1994 and
increased to $119.7 million for the first six months of fiscal 1995 from $108.3
million in the same period last year. The increase in net revenue principally
resulted from higher sales of oximetry products across the Company's domestic
and international markets as well as increased sales of EDENTEC[REGISTERED
TRADEMARK] apnea products. The Company's oximetry products include oximetry
instruments, sensors, and OEM modules.
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, which is the oximetry module in the NELLCOR SYMPHONY-
TM- multiparameter monitoring system. For the second quarter and first six
months of fiscal 1995, net revenue from oximetry instruments increased primarily
due to international sales of the N-3000, which was first introduced to
international markets in the third quarter of fiscal 1994, and higher sales of
the N-20 portable pulse oximeter. Standalone and portable pulse oximetry
instrument average selling prices were comparable to the same periods a year
ago.
Oximetry sensors include adhesive, reusable, and recycled sensor product lines.
Revenue from oximetry sensors increased for the second quarter and first six
months of 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.
Revenue from OEM oximetry modules for the second quarter of fiscal 1995 was
comparable to the same period a year ago as higher unit shipments were partially
offset by slightly lower average selling prices. For the first six months of
fiscal 1995, OEM oximetry module revenue increased primarily due to higher unit
shipments. With the recent addition of four new international OEM customers,
Nellcor now has more than 30 OEM agreements with medical systems and monitoring
customers worldwide.
The Company's primary gas products include the ULTRA CAP[REGISTERED TRADEMARK]
combination pulse oximeter and capnograph, the STAT CAP[REGISTERED TRADEMARK]
airway carbon dioxide indicator and EASY CAP[REGISTERED TRADEMARK]
end-tidal carbon dioxide detector, and related accessories. Revenue from
gas products for the second quarter and first six months of fiscal 1995
decreased compared to the same periods a year ago primarily due to lower sales
of the discontinued N-1000 multi-function monitor, N-1500 anesthetic agent
monitor, and the N-2500 anesthesia safety monitor. Sales of these discontinued
monitors represented approximately 2 percent and less than 1 percent of net
revenue for the first six months of fiscal 1994 and fiscal 1995, respectively.
Page 6
The principal apnea monitoring and recording products sold by EdenTec include
the ASSURANCE[REGISTERED TRADEMARK] 2000 heart and respiration monitor, the
ASSURANCE 3000 heart and respiration monitor, and the EDENTRACE[REGISTERED
TRADEMARK] II and EDENTRACE II PLUS-TM- multi-channel recording systems, and
related accessories. Revenue from apnea products for the second quarter and
first six months of fiscal 1995 increased from the same periods a year ago due
primarily to higher sales of the ASSURANCE 2000 and EDENTRACE II PLUS products
into alternate care markets, including the home.
International revenue increased 40 percent in the second quarter of fiscal 1995
to $14.3 million from $10.2 million for the second quarter of fiscal 1994. For
the first six months of fiscal 1995, international revenue increased 34 percent
to $24.2 million from $18.1 million for the same period a year ago.
International revenue increased across all markets during the quarter primarily
due to higher sales of oximetry sensors and OEM modules, and sales of the N-
3000 pulse oximeter. Favorable foreign currency exchange rates accounted for 8
and 7 percentage points of the international revenue growth during the second
quarter and first six months of fiscal 1995, respectively.
During the second quarter of fiscal 1995, the Company received marketing
clearance from the U.S. Food and Drug Administration (FDA) for the PEDI-CAP-TM-
end-tidal carbon dioxide detector. The Company also filed a 510(K) with the FDA
to obtain approval to market the N-3100 noninvasive blood pressure monitor
domestically. The N-3100, which is the second module of the NELLCOR SYMPHONY
multiparameter monitoring system, was introduced to international markets in the
first quarter of fiscal 1995.
Sales of the HEALTHQUIZ-TM- system, a patient-driven automated medical history
system that electronically captures patient information, have been limited since
the product was first introduced during the fourth quarter of fiscal 1994. The
Company continues to devote substantial marketing, sales, and engineering
resources to the product. During the third quarter of fiscal 1995, the Company
will establish a dedicated HEALTHQUIZ sales force to further focus its efforts
on sales of the product.
In the second half of fiscal 1991, the Company began commercial shipments of the
N-CAT[REGISTERED TRADEMARK] non-invasive continuous blood pressure monitor
developed and manufactured by Colin Electronics of Japan (Colin). Shipments of
the N-CAT monitor to date have been limited, and since the fourth quarter of
fiscal 1992, shipments have been suspended pending evaluation of new versions of
the product software developed by Colin intended to improve the product's
operating performance. Costs associated with this evaluation were not material
during the second quarter of fiscal 1995 and were expensed as incurred. After
evaluating the most recent enhancements to the product's software, the Company
is now satisfied with the performance of the N-CAT monitor. Because of
modifications made to the product's software, Colin plans to resubmit a 510(K)
to the FDA to gain clearance to market the product in the U.S. While there is
no assurance that U.S. marketing clearance will be granted by the FDA, the
Company may consider marketing the N-CAT monitor internationally in order to
begin recovering its investment in N-CAT monitor assets and marketing rights.
Gross profit as a percentage of net revenue for the second quarter of fiscal
1995 at 60 percent was comparable to the second quarter of fiscal 1994. For the
first six months of fiscal 1995, gross margin increased to 60 percent from 59
percent for the same period last year primarily due to the favorable effect
foreign currency exchange rates had upon revenue, margin improvement at EdenTec,
and a decrease in revenue from lower margin discontinued gas products.
Page 7
Operating expenses for the second quarter of fiscal 1995 decreased to 41 percent
of net revenue from 42 percent for the second quarter last year. Operating
expenses for the first six months of fiscal 1995 decreased to 42 percent from 43
percent of net revenue for the same period a year ago.
Research and development expenses at 11 percent of net revenue for the second
quarter of fiscal 1995 were comparable to the same period in fiscal 1994.
Research and development expenses increased in absolute dollars primarily due to
higher OEM oximetry module and HEALTHQUIZ development costs. For the second
quarter of fiscal 1995, selling, general, and administrative expenses decreased
to 30 percent of net revenue from 31 percent for the same period in fiscal 1994.
Selling, general, and administrative expenses increased in absolute dollars in
the second quarter of fiscal 1995 due primarily to higher funding of the
Company's profit sharing and bonus programs.
Liquidity and Capital Resources
At January 1, 1995, the Company had cash, cash equivalents and marketable
securities of approximately $131.9 million compared to $121.6 million at the end
of fiscal 1994. The Company has met its liquidity and capital requirements from
internally generated cash.
Operating activities provided positive cash flows of approximately $17.2 million
during the first six months of fiscal 1995. Depreciation and amortization were
significant non-cash operating activities during the period. Sales of
marketable securities, partially offset by capital expenditures, principally for
manufacturing equipment, were significant sources of cash from investing
activities during the first six months of fiscal 1995.
Shares of Nellcor common stock issued under the Company's stock option plans
were significant sources of cash from financing activities for the first six
months of fiscal 1995. Repurchases of shares of Nellcor common stock during the
first six months of fiscal 1995 under the Company's Limited Stock Repurchase
Program 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 option plans and the 1986 Employee
Stock Participation Plan, as amended. No shares were repurchased under the
Company's General Stock Repurchase Program, which authorizes the repurchase and
retirement of up to a total of one million shares of common stock from time to
time in the open market. The Company does not plan to resume share repurchases
under the General Stock Repurchase Program in the near term.
Page 8
During the second quarter of fiscal 1995, the Company secured a $50 million
credit facility with a syndicate of banks. The credit facility is available to
the Company for general corporate purposes and provides the Company with
additional financial resources to take advantage of strategic business
opportunities. As of January 1, 1995, the Company had not drawn against this
credit facility and had no long term debt obligations. 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 1995.
The Company adopted Statement of Financial Accounting Standards Number 115
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115)
during the first quarter of fiscal 1995. Implementation of SFAS 115 did not
have a material effect on Nellcor's financial position or results of operations.
Page 9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
With regard to the patent litigation with BOC Health Care, Inc., claims by BOC
that certain Nellcor patents are invalid or, if found by the court to be valid,
then not infringed by BOC, remain to be resolved in litigation between Nellcor
and BOC, Inc. currently pending in Delaware federal district court. The Company
completed trial and post trial briefing work in this litigation, and awaits the
opinion of the federal district court. The Company is vigorously defending its
patents in this litigation, and believes that the outcome of this legal
proceeding will not have an adverse effect on the Company's financial position
or results of operations.
ITEM 5. OTHER INFORMATION.
CREDIT FACILITY
During the second quarter of fiscal 1995, the Company entered into a Credit
Agreement with a syndicate of banks led by ABN AMRO Bank N.V., San Francisco
International Branch as agent for the banks. Under the Credit Agreement, the
Company has available an unsecured credit facility of up to $50,000,000 for use
for general corporate purposes.
SEVERANCE AGREEMENTS
During the second quarter of fiscal 1995, the Board of Directors of the Company
determined that it is in the best interests of the Company and its stockholders
to ensure the continued dedication and services of the Company's executive
officers and certain key employees in the event of a change in control. In
furtherance of this determination, the Board approved the entering into by the
Company of severance agreements with its executive officers and certain key
employees. The Company has entered into severance agreements (the "Severance
Agreements") with each of C. Raymond Larkin, Jr., President and Chief Executive
Officer, executive officers Boudewijn L. Bollen, Charles H. Bowden, M.D.,
Laureen DeBuono, Michael P. Downey, David J. Illingworth, Lee M. Middleman,
Ph.D., Kenneth Sumner, Ph.D. and David B. Swedlow, M.D., and certain other key
employees of the Company (each of such individuals being hereinafter referred to
as the "Executive" or collectively as the "Executives").
Each Severance Agreement has a twenty-four month term, with an automatic one
year extension on each anniversary date thereof beginning the second anniversary
date, unless the Company or the Executive gives written notice to the other that
the term of the Severance Agreement shall not be extended. However, in no event
will a Severance Agreement expire prior to the expiration of twenty-four months
after the occurrence of a "change in control", as defined below.
Page 10
Under the Severance Agreements, if an Executive's employment with the Company is
terminated by the Company for "cause" (as defined below), disability or death,
or by the Executive other than for "good reason" (as defined below) during the
term of the Severance Agreement and within two years following a "change in
control", the Executive shall be entitled to accrued but unpaid compensation
and, if such termination is other than by the Company for "cause", a prorated
bonus.
If an Executive's employment with the Company is terminated by the Company
without "cause" or by the Executive for "good reason" during the term of the
Severance Agreement and within two years following a "change in control", the
Executive shall be entitled to: (i) a lump-sum severance payment equal to three
times base salary plus bonus in the case of Mr. Larkin, two times base salary
plus bonus in the case of other executive officers and one time base salary plus
bonus in the case of certain key employees; (ii) accrued but unpaid compensation
and a prorated bonus for the year in which the Executive is terminated; (iii)
medical and insurance benefits for the Executive and the Executive's dependents
for three years in the case of Mr. Larkin, two years in the case of other
executive officers and one year in the case of certain key employees, such
benefits to be limited to the extent that the Executive obtains comparable
benefits pursuant to subsequent employment; (iii) the immediate vesting of, and
lapsing of restrictions on, all outstanding equity incentive awards held by the
Executive, including stock options and restricted stock; and (iv) outplacement
and career counseling services.
Each Severance Agreement provides that if any amounts due to an Executive
thereunder become subject to the "golden parachute" rules set forth in Section
280G of the Internal Revenue Code, then such amounts will be reduced to the
extent necessary to avoid the application of such rules.
A termination of employment is for "cause" under the Severance Agreements if the
basis of the termination is fraud, misappropriation, embezzlement or willful
engagement by the Executive in misconduct which is demonstrably and materially
injurious to the Company and its subsidiaries taken as a whole. "Good reason"
includes, among other things, (i) an adverse change in the Executive's status,
title, position, duties or responsibilities; (ii) a reduction in the Executive's
base compensation or benefits; (iii) the relocation of the Executive; (iv) the
discontinuance by the Company of any material compensation or employee benefit
plan in which the Executive participates; (v) the insolvency or the filing of a
petition for bankruptcy of the Company; (vi) breach by the Company of the
Severance Agreement; and (vii) failure or refusal of any successor to the
Company to assume and perform the Severance Agreement.
Page 11
Pursuant to the Severance Agreements, a "change in control" shall be deemed to
have occurred (i) upon the acquisition by any person, entity or group (other
than the Company, certain affiliated entities, or other person described in
(iii) (A) through (C) below) of beneficial ownership of twenty-five percent or
more of the combined voting power of the Company's then outstanding voting
securities; (ii) if the individuals who constitute the Board of Directors of the
Company as of the date that the Severance Agreements are approved by the Board
(the "Incumbent Board") cease for any reason to constitute at least a majority
of the Board, provided that any new director approved by a vote of at least two-
thirds of the Incumbent Board shall be considered a member of the Incumbent
Board (other than an individual initially assuming office as a result of either
an actual or threatened election contest or other actual or threatened
solicitation of proxies or consents by or on behalf of a person, entity or group
other than the Incumbent Board); (iii) upon approval by the stockholders of the
Company of a merger, consolidation or reorganization involving the Company,
unless (A) the stockholders of the Company immediately before such merger,
consolidation or reorganization own immediately thereafter at least fifty one
percent of the combined voting power of the outstanding voting securities of the
surviving corporation in substantially the same proportion as their ownership of
securities immediately before any such transaction; (B) the individuals
constituting the Incumbent Board immediately prior to such merger, consolidation
or reorganization constitute at least a majority of the board of the surviving
corporation; and (C) no person, entity or group (other than the Company and/or
certain affiliated entities) has beneficial ownership of twenty five percent or
more of the combined voting power of the surviving corporation's then
outstanding voting securities; (iv) upon a complete liquidation or dissolution
of the Company; or (v) upon an agreement for the sale or other disposition of
all or substantially all of the assets of the Company to any person, entity or
group (other than a transfer to a Company subsidiary).
Page 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits.
10.1 Credit facility agreement
10.2 Form of President / Chief Executive Officer Severance Agreement
10.3 Form of Executive Officer Severance Agreement
10.4 Form of Key Employee Severance Agreement
11.1 Statement of computation of net income per share.
b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended January 1, 1995.
Page 13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be filed on its behalf by the
undersigned thereunto duly authorized.
NELLCOR INCORPORATED
DATED February 13, 1995 By /s/ Michael P. Downey
----------------------- ------------------------------------
Michael P. Downey
Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 14
EXHIBIT INDEX
Exhibit Location in Form
No. Description 10-Q
------- ----------- ----------------
10.1 Credit line facility agreement ------
10.2 Form of President / Chief Executive ------
Officer Severance Agreement
10.3 Form of Executive Officer Severance ------
Agreement
10.4 Form of Key Employee Severance ------
Agreement
11.1 Statement of computation of net income ------
per share
Page 15