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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 December 31, 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 PURITAN BENNETT INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 94-2789249
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4280 HACIENDA DRIVE
PLEASANTON, CALIFORNIA 94588
(Address of principal executive offices)
(Zip code)
TELEPHONE: (510) 463-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No/ /
Number of shares of Common Stock, $.001 par value, outstanding as of
December 31, 1995 was 28,466,843.
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
NELLCOR PURITAN BENNETT INCORPORATED
CONSOLIDATED BALANCE SHEET
(In thousands, unaudited)
December 31, 1995 July 2, 1995
----------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 60,003 $ 78,444
Marketable securities 5,246 65,039
Accounts receivable, net of allowance for doubtful
accounts of $2,397 ($2,610 at July 2, 1995) 122,287 117,650
Inventories 108,716 88,987
Deferred income taxes and other current assets 25,607 26,580
--------- ---------
Total current assets 321,859 376,700
--------- ---------
Property and equipment, at cost 260,247 253,037
Accumulated depreciation (135,544) (124,863)
--------- ---------
Net property and equipment 124,703 128,174
--------- ---------
Intangibles and other assets, net of accumulated amortization 58,314 71,330
--------- ---------
$ 504,876 $ 576,204
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Loans payable $ 10,406 --
Accounts payable 28,417 $ 37,316
Accrued liabilities:
Payroll and payroll related 21,634 25,286
Warranty 5,939 4,195
Merger and related costs 46,625 --
Other 19,402 30,510
Income taxes payable 388 5,727
--------- ---------
Total current liabilities 132,811 103,034
--------- ---------
Deferred compensation and pension 17,527 19,303
Deferred revenue 10,758 10,895
Long-term obligations 7,589 76,367
--------- ---------
Total liabilities 168,685 209,599
--------- ---------
Stockholders' equity:
Common stock, par value 13,237 11,351
Additional paid-in-capital 170,844 148,641
Retained earnings 199,140 241,416
Accumulated translation adjustment (488) (259)
Notes receivable from stockholders (5) (5)
Net unrealized loss on available-for-sale securities (26) --
Treasury stock, at cost (1,357,000 shares at
December 31, 1995; 1,148,000 shares at July 2, 1995) (46,511) (34,539)
--------- ---------
Total stockholders' equity 336,191 366,605
--------- ---------
$ 504,876 $ 576,204
========= =========
See accompanying note
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NELLCOR PURITAN BENNETT INCORPORATED
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts, unaudited)
For the Three Months Ended For the Six Months Ended
---------------------------- ------------------------------
December 31, January 1, December 31, January 1,
1995 1995 1995 1995
------------ ---------- ------------ ------------
Net revenue $ 162,615 $ 148,010 $ 318,864 $ 284,132
Cost of goods sold 79,371 73,673 156,955 143,126
--------- --------- --------- ---------
Gross profit 83,244 74,337 161,909 141,006
Operating expenses:
Research
and development 12,236 11,921 24,432 23,166
Selling, general
and administrative 44,717 43,707 89,322 85,693
Merger and related costs -- -- 92,618 --
--------- --------- --------- ---------
56,953 55,628 206,372 108,859
--------- --------- --------- ---------
Income (loss) from operations 26,291 18,709 (44,463) 32,147
Interest income 1,335 1,783 3,191 2,808
Interest expense (1,254) (1,479) (2,632) (2,695)
Other income (expense), net 428 (27) (262) 830
--------- --------- --------- ---------
Income (loss) before income taxes 26,800 18,986 (44,166) 33,090
Provision for income taxes 8,577 6,259 (3,087) 10,780
--------- --------- --------- ---------
Net Income (loss) $ 18,223 $ 12,727 $ (41,079) $ 22,310
========= ========= ========= =========
Net income (loss) per common and
common equivalent share $ 0.62 $ 0.45 $ (1.41) $ 0.80
========= ========= ========= =========
Weighted average common
and common equivalent
shares used in the calculation
of net income (loss) per share 29,466 28,013 29,212 27,865
========= ========= ========= =========
See accompanying note
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NELLCOR PURITAN BENNETT INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands, unaudited)
For the Six Months Ended
--------------------------------------
December 31, 1995 January 1, 1995
----------------- ---------------
Cash flows from operating activities:
Net income (loss) $(41,079) $ 22,310
Adjustments to reconcile net income (loss) to cash
provided by (used for) operating activities:
Depreciation and amortization 15,043 15,298
Merger and related costs 68,473 --
Restructuring charges -- (5,923)
Deferred compensation and pensions (3,013) (129)
Loss (gain) on disposition of assets 128 (477)
Deferred income taxes 229 (452)
Increases (decreases) in cash flows, as a result of changes
in:
Accounts receivable (6,351) (3,560)
Inventories (10,711) (2,220)
Other current assets (7,953) 640
Other assets (2,685) (903)
Accounts payable (4,947) (6,106)
Accrued liabilities (3,158) 3,773
Income taxes payable (6,887) 2,686
-------- --------
Cash provided by (used for) operating activities (2,911) 24,937
-------- --------
Cash flows from investing activities:
Capital expenditures (10,620) (12,919)
Cash used to purchase securities held-to-maturity -- (7,636)
Proceeds from sales of available-for-sale securities 40,417 --
Proceeds from maturities of securities held-to-maturity 19,218 23,461
Payments for purchases of companies,
net of cash acquired (4,923) (2,000)
Other 789 (55)
-------- --------
Cash provided by investing activities 44,881 851
-------- --------
Cash flows from financing activities:
Proceeds from the issuance of common stock under the
Company's stock plans and related tax benefits,
net of notes receivable from stockholders 15,519 9,792
Repayment of long-term obligations (70,081) --
Additions to loans payable 40,000 2,985
Repayment of loans payable (30,028) --
Dividends paid to stockholders -- (746)
Purchase of treasury shares (11,971) (11,738)
-------- --------
Cash provided by (used for) financing activities (56,561) 293
-------- --------
Effect of exchange rate changes on cash balances (222) 146
-------- --------
Increase (decrease) in cash and cash equivalents (14,813) 26,227
Cash and cash equivalents at the beginning of the period 74,816 68,876
-------- --------
Cash and cash equivalents at the end of the period $ 60,003 $ 95,103
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NELLCOR PURITAN BENNETT INCORPORATED
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
General. The consolidated financial statements reflect, in the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position and results of operations of
Nellcor Puritan Bennett Incorporated (the Company) as of the end of and for the
periods indicated.
On August 25, 1995, the Company consummated its merger with Puritan-Bennett
Corporation (see Merger with Puritan-Bennett below). The merger was intended to
qualify as a tax-free reorganization and was accounted for as a pooling of
interests. Accordingly, the consolidated financial statements present, for all
periods, the combined financial results of Nellcor Incorporated (Nellcor) and
Puritan-Bennett Corporation (Puritan-Bennett).
Comparative historical financial information presented represents the
combination of the historical financial data from Nellcor's fiscal year 1995
ended July 2, 1995, and Puritan-Bennett's fiscal year 1995 ended January 31,
1995. Thus, the Company's consolidated balance sheet as of July 2, 1995 combines
Nellcor's balance sheet as of the end of its fiscal 1995, July 2, 1995, with
Puritan-Bennett's balance sheet as of the end of its fiscal 1995, January 31,
1995. The Company's consolidated balance sheet as of July 2, 1995 also reflects
an adjustment to reduce Puritan-Bennett's valuation allowance provided for its
deferred tax assets based on the combined income from operations of Nellcor and
Puritan-Bennett as required by Statement of Financial Accounting Standard No.
109. The effect of this adjustment was to increase deferred tax assets and
retained earnings, as presented herein, by $8.7 million.
The Company's consolidated statement of income for the three months ended
January 1, 1995 combines the financial results of Nellcor's second quarter of
fiscal 1995, the three months ended January 1, 1995, with Puritan-Bennett's
second quarter of fiscal 1995, the three months ended July 31, 1994. The
Company's consolidated statements of income and cash flows for the six months
ended January 1, 1995 combine the financial results of Nellcor's first half of
fiscal 1995, the six months ended January 1, 1995, with Puritan-Bennett's
financial results for the first half of fiscal 1995, the six months ended July
31, 1994.
The accompanying interim consolidated financial statements should be read in
conjunction with the financial statements and related notes included in
Nellcor's and Puritan-Bennett's 1995 Annual Reports to Stockholders. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the Securities and Exchange Commission rules
and regulations. The Company believes the information included in the report on
Form 10-Q, when read in conjunction with the consolidated financial statements
and related notes thereto included in Nellcor's and Puritan-Bennett's 1995
Annual Reports to Stockholders, is not misleading.
The results of operations for the three and six months ended December 31, 1995
are not necessarily indicative of operating results for the full fiscal year.
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Inventories. Inventories are stated at the lower of cost or market (net
realizable value). Prior to the merger with Nellcor, Puritan-Bennett recorded
the cost of the majority of its inventory using the Last In, First Out (LIFO)
method of accounting. During the first quarter of fiscal 1996, the Company
changed the accounting for these inventories such that all of the Company's
inventory is now recorded at cost using the First In, First Out method. The
effect of this change in accounting principle was not material to the Company's
financial position or results of operations for any period presented.
Interim fiscal 1996 and year-end fiscal 1995 inventory balances for the Company
were as follows (in thousands):
December 31, 1995 July 2, 1995
----------------- ------------
Raw materials $ 65,155 $47,518
Work-in process 7,404 10,589
Finished goods 36,157 30,880
-------- -------
$108,716 $88,987
Statement of Cash Flows. The Company paid income taxes of approximately $11.9
million in the first six months of fiscal 1996 ended December 31, 1995, and $6.1
million in the first six months of fiscal 1995 ended January 1, 1995.
Property and equipment. Depreciation expense was approximately $11.2 million in
the first six months of fiscal 1996 and $10.9 million in the first six months of
fiscal 1995.
Marketable securities. As of December 31, 1995, the Company was carrying
available-for-sale marketable securities with a market value of $5.2 million.
Available-for-sale marketable securities are securities which the Company does
not intend to hold to maturity. The Company's marketable securities, generally,
are in high quality government, municipal, and corporate obligations with
original maturities of up to two years.
During the first quarter of fiscal 1996, the Company transferred all marketable
securities which had been classified as held-to-maturity as of July 2, 1995, to
available-for-sale. The marketable securities which were transferred to
available-for-sale were government and corporate issued debt securities with an
amortized cost of $41.4 million, of which $31.2 million of these securities were
subsequently sold during the quarter, generating a gain of $80,000. The decision
to classify all of the Company's marketable securities as available-for-sale was
due to the Company's merger with Puritan-Bennett during the quarter ended
October 1, 1995, and the significant cash outlays which will continue to be made
as part of effecting the combination of these two companies.
The market value, amortized cost, and gross unrealized gains and losses of the
Company's marketable securities at December 31, 1995, are summarized below (in
thousands). The market value of marketable securities is based upon quoted
market prices.
Gross Gross
Amortized Unrealized Unrealized Market
Marketable Securities Cost Gains Losses Value
--------------------- ---- ----- ------ -----
AVAILABLE-FOR-SALE:
Mortgage backed securities $5,272 $23 $(49) $5,246
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The difference between the amortized cost and market value of the Company's
marketable securities at December 31, 1995, a net unrealized loss of $26,000, is
carried as a separate component of stockholders' equity under the caption "Net
unrealized loss on available-for-sale securities."
Merger with Puritan-Bennett. On August 24, 1995, the merger of Nellcor and
Puritan-Bennett was approved by stockholders of both companies. On August 25,
the merger was consummated, and Nellcor was renamed Nellcor Puritan Bennett.
Under the terms of the merger agreement, Puritan-Bennett shareholders received
.88 of a share of the Company's common stock for each Puritan-Bennett share,
resulting in the Company issuing approximately 11.5 million shares, valued at
approximately $600 million based upon the closing price of the Company's common
stock on August 25, 1995. Additionally, outstanding options to acquire
Puritan-Bennett common stock were converted to options to acquire approximately
500,000 shares of the Company's common stock.
Puritan-Bennett develops, manufactures, and markets ventilators, oxygen delivery
systems, home sleep diagnostic and therapeutic equipment, and certain
complementary products such as medical gases, gas-related equipment, and
spirometers. Puritan-Bennett reported revenue of $336.0 million and net income
of $8.4 million for its fiscal 1995 ended January 31, 1995.
The merger was intended to qualify as a tax-free reorganization and was
accounted for as a pooling of interests. Accordingly, the consolidated financial
statements present, for all periods, the combined financial results of Nellcor
and Puritan-Bennett. The consolidated statement of income for the three and six
months ended January 1, 1995, combines the financial results of Nellcor's second
quarter and first half of fiscal 1995, the three and six months ended January 1,
1995, with Puritan-Bennett's financial results for its second quarter and first
half of fiscal 1995, the three and six months ended July 31, 1994. Adjustments
made to conform the accounting policies of Nellcor and Puritan-Bennett were
immaterial. Separate results for each of Nellcor's and Puritan-Bennett's second
quarter and first six months of fiscal 1995, and combined results for the three
and six months ended January 1, 1995, were as follows (in thousands):
Nellcor Puritan-Bennett Combined
Three months ended: January 1,1995 July 31,1994 January 1,1995
- ------------------- -------- -------- --------
Revenue $ 64,017 $ 83,993 $148,010
-------- -------- --------
Net Income $ 8,483 $ 4,244 $ 12,727
-------- -------- --------
Nellcor Puritan-Bennett Combined
Six months ended: January 1,1995 July 31,1994 January 1,1995
- ----------------- -------- -------- --------
Revenue $119,731 $164,401 $284,132
-------- -------- --------
Net Income $ 14,342 $ 7,968 $ 22,310
-------- -------- --------
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In connection with the merger, the Company recorded one-time merger and related
costs during the first quarter of $92.6 million. 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.
Of the $92.6 million in merger and related costs which were accrued,
approximately $46.0 million had been utilized as of December 31, 1995, primarily
associated with the write-down of certain intangible assets to their net
realizable value ($19.6 million), the payment of merger transaction costs ($13.1
million), and initial costs incurred to combine and integrate operations ($11.8
million). The remaining merger and related costs accrued at December 31, 1995,
of $46.6 million, are expected to be substantially utilized by the end of 1996.
Acquisition of Melville Software Ltd. On August 23, 1995, Nellcor Puritan
Bennett's EdenTec subsidiary acquired for $4.9 million in cash, Melville
Software Ltd. (Melville), a privately held Canadian company that manufactures
and markets sleep diagnostic products used primarily in sleep labs. In the event
that certain profitability levels are achieved over the next three fiscal years,
additional compensation totalling $1.0 million would be payable to the former
principal stockholders of Melville who continue to manage the company. Such
amounts will be expensed when, and if, earned.
The acquisition of Melville has been accounted for as a purchase and,
accordingly, Melville's results are included in the Company's financial
statements subsequent to the acquisition date. The pro forma effect of Melville
upon the Company's results of operations for the quarter and year-to-date
periods is immaterial.
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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 DECEMBER
31, 1995, COMPARED WITH THE YEAR-TO-DATE PERIOD AND SECOND QUARTER ENDED JANUARY
1, 1995.
The Company reported net income for the second quarter of fiscal 1996 of $18.2
million, or $0.62 per share, a 43 percent increase over net income of $12.7
million, $0.45 per share, for the same period a year ago. The Company's results
for the first six months of fiscal 1996, a net loss of $41.1 million, or $(1.41)
per share, reflect one-time merger and related charges of $92.6 million, ($2.55)
per share, associated with the first quarter merger of Nellcor and
Puritan-Bennett. Excluding the effect of these nonrecurring charges, net income
for the first six months of fiscal 1996 was $32.9 million, $1.13 per share, a 48
percent increase over net income of $22.3 million, $0.80 per share, for the
first six months of fiscal 1995.
The Company's net revenue for the second quarter of fiscal 1996 increased to
$162.6 million from net revenue of $148.0 million for the second quarter of
fiscal 1995 and increased to $318.9 million for the first six months of fiscal
1996 from $284.1 million in the same period last year. 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, ventilator and clinical
information systems product lines, increased 7 percent to $99.0 million for the
second quarter of fiscal 1996 from $92.5 million for the same period last year.
The increase in hospital business revenue was due primarily to continued sales
growth across the Company's oximetry product line, partially offset by lower
sales of ventilator and clinical information systems products. Sales of the
ventilator and clinical information systems products during the quarter were
particularly impacted by the consolidation and restructuring of the Company's
worldwide sales organizations following the merger of Nellcor and
Puritan-Bennett.
For the second quarter of fiscal 1996, 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 14 percent to $63.6
million from $55.6 million for the same period last year due primarily to the
first full quarter of revenue from the Company's recently acquired Pierre
Medical subsidiary, and higher gas product sales. Gas product sales increased
principally as a result of continued growth in the gas products market and the
addition of two new gas branches to the Company's distribution network.
International revenue increased 23 percent to $51.8 million from $42.2 million
for the second quarter of fiscal 1995. International revenue growth was
strongest in the Company's Asia Pacific and European regions, where growth rates
exceeded 25 percent. Favorable foreign currency exchange rates accounted for 3
percentage points of the international revenue growth during the second quarter.
Gross profit as a percentage of net revenue for the second quarter of fiscal
1996 was 51 percent compared to 50 percent for the same period last year due
primarily to the favorable effect which foreign currency exchange rates had upon
revenue, a slight shift in product mix to higher margin oximetry products, and
increased factory efficiency.
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Operating expenses for the second quarter of fiscal 1996 decreased to 35 percent
of net revenue from 38 percent for the second quarter last year, primarily due
to the favorable effects of initial merger synergies and Puritan-Bennett's
fourth quarter fiscal 1995 workforce reduction program.
Research and development expenses at 8 percent of net revenue were comparable to
the second quarter of fiscal 1995. Research and development expenses increased
only slightly in absolute dollars. For the second quarter of fiscal 1996,
selling, general, and administrative expenses, though increasing in absolute
dollars, decreased to 28 percent of net revenue from 30 percent for the same
period in fiscal 1995. Selling, general, and administrative expenses increased
in absolute dollars in the second quarter of fiscal 1996 due primarily to the
unfavorable effect foreign currency exchange rates had upon international
operating expenses as well as additional operating expenses associated with the
Company's newly acquired Pierre Medical and Melville subsidiaries.
Operating expenses for the first six months of fiscal 1996 reflect the effect of
one-time merger and related costs of $92.6 million associated with the merger of
Nellcor and Puritan-Bennett. Included in this charge were provisions for merger
transaction costs ($13.7 million), costs to combine and integrate operations
($53.8 million), certain intangible asset write-downs ($19.6 million), and other
merger related costs ($5.5 million). 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.
Liquidity and Capital Resources
At December 31, 1995, the Company had cash, cash equivalents and marketable
securities of approximately $65.2 million compared to $143.5 million at the end
of fiscal 1995.
Operating activities provided positive cash flows of approximately $21.2 million
during the first six months of fiscal 1996, exclusive of merger related cash
outlays. Of the $92.6 million in merger and related charges which were recorded
during the first quarter of fiscal 1996, approximately $24.1 million resulted in
a cash outlay during the first six months. The remainder of the merger and
related charges of $68.5 million was a significant non-cash operating activity
during the period.
Sales and maturities of marketable securities were significant investing
activities during the first six months of fiscal 1996. Additionally, in August,
1995, Nellcor Puritan Bennett's EdenTec subsidiary acquired for $4.9 million in
cash, Melville Software Ltd. (Melville), a privately held Canadian company that
manufactures and markets sleep diagnostic products used primarily in sleep labs.
In the event that certain profitability levels are achieved over the next three
fiscal years, additional compensation totalling $1.0 million would be payable to
the former principal stockholders of Melville who continue to manage the
company. Such amounts will be expensed when, and if, earned.
Shares of Nellcor Puritan Bennett 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 1996. The Company also resumed its Limited Stock
Repurchase Program, repurchasing a total of 209,000 shares during the second
quarter. Additionally, the Company retired approximately $70.1 million of the
debt that it assumed as part of its merger with Puritan-Bennett. As of October
2, 1995, the Company was carrying $10.4 million in current loans payable and
$7.6 million in long-term obligations.
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The Company's inventories have increased to $108.7 million at December 31, 1995,
from $89.0 million at July 2, 1995. Much of the increase in inventory occurred
during the eleven month period comprising the Puritan-Bennett portion of this
comparison, the period from February 1, 1995 to December 31, 1995. The increase
in Puritan-Bennett inventory was due primarily to production levels across
several product lines which exceeded customer demands, and, in part, resulted
from inventory build-ups associated with new product introductions within the
sleep and respiratory support systems group.
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. As the
Company continues to combine and integrate operations as part of its merger with
Puritan-Bennett, it is expected that costs associated with the merger, as well
as other merger related cash outlays, will continue to contribute to a net
reduction in the Company's cash and cash equivalents and marketable securities
during fiscal 1996. The Company may continue to use debt to fund certain capital
and other strategic opportunities when deemed necessary and financially
advantageous.
BUSINESS CONSIDERATIONS
The Company is an FDA regulated business operating in the rapidly changing
healthcare industry. From time to time the Company may report, through its press
releases and/or Securities and Exchange Commission filings, certain matters that
would be characterized as forward-looking statements that are subject to risks
and uncertainties that could cause actual results to differ materially from
those projected. Certain of these risks and uncertainties are beyond
management's control. Such risks and uncertainties may include, among other
things, the following items.
Integration of Acquired Businesses. Since the acquisition of Puritan-Bennett,
the Company has dedicated and will continue to dedicate, substantial management
resources in order to achieve the anticipated operating efficiencies from
integrating the two companies. While the Company has achieved certain operating
costs savings to date, difficulties encountered in integrating the two
companies' operations could adversely impact the business, results of operations
or financial condition of the Company. Also, the Company intends to pursue
acquisition opportunities from time to time. The integration of any businesses
that the Company might acquire could require substantial management resources.
There can be no assurance that any such integration will be accomplished without
having a short or potentially long-term adverse impact on the business, results
of operations or financial condition of the Company or that the benefits
expected from any such integration will be fully realized.
Managed Care And Other Healthcare Provider Organizations. Managed care and other
healthcare provider organizations have grown substantially in terms of the
percentage of the population in the United States that receives medical benefits
through such organizations and in terms of the influence and control that they
are able to exert over an increasingly large portion of the health care
industry. These organizations are continuing to consolidate and grow, which may
increase the ability of these organizations to influence the practices and
pricing involved in the purchase of medical devices, including the products sold
by the Company.
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Health Care Reform/Pricing Pressure. The health care industry in the United
States is experiencing a period of extensive change. Health care reform
proposals have been formulated by the current administration and by members of
Congress. In addition, state legislatures periodically consider various health
care reform proposals. Federal, state and local government representatives will,
in all likelihood, continue to review and assess alternative health care
delivery systems and payment methodologies, and ongoing public debate of these
issues can be expected. Cost containment initiatives, market pressures and
proposed changes in applicable laws and regulations may have a dramatic effect
on pricing or potential demand for medical devices, the relative costs
associated with doing business and the amount of reimbursement by both
government and third-party payors. In particular, the industry is experiencing
market-driven reforms from forces within the industry that are exerting
pressure on health care companies to reduce health care costs. These
market-driven reforms are resulting in industry-wide consolidation that is
expected to increase the downward pressure on health care product margins, as
larger buyer and supplier groups exert pricing pressure on providers of medical
devices and other health care products. Both short-term and long-term cost
containment pressures, as well as the possibility of regulatory reform, may
have an adverse impact on the Company's results of operations.
Government Regulation; Consent Decree. There has been a trend in recent years,
both in the United States and outside the United States, toward more stringent
regulation of, and enforcement of requirements applicable to, medical device
manufacturers. The continuing trend of more stringent regulatory oversight in
product clearance and enforcement activities has caused medical device
manufacturers to experience longer approval cycles, more uncertainty, greater
risk and higher expenses. At the present time, there are no meaningful
indications that this trend will be discontinued in the near-term or the
long-term either in the United States or abroad.
Puritan-Bennett, which is now a wholly-owned subsidiary of the Company, has been
subject to significant United States Food and Drug Administration ("FDA")
enforcement activity with respect to its operations in recent years. In January
1994, Puritan-Bennett entered into a consent decree with the FDA pursuant to
which Puritan-Bennett agreed to maintain systems and procedures complying with
the FDA's good manufacturing practices regulation and medical device reporting
regulation in all of its device manufacturing facilities.
Puritan-Bennett has experienced and will continue to experience incremental
operating costs due to ongoing compliance requirements and quality assurance
programs initiated in part as a result of the FDA consent decree.
Puritan-Bennett expects to continue to incur additional operating expenses
associated with its ongoing regulatory compliance program, but the amount of
these incremental costs cannot be completely predicted and will depend upon a
variety of factors, including future changes in statutes and regulations
governing medical device manufacturers and the manner in which the FDA continues
to enforce and interpret the requirements of the consent decree. There can be no
assurance that such compliance requirements and quality assurance programs will
not have an adverse impact on the business, results of operations or financial
condition of the Company or that the Company will not experience problems
associated with FDA regulatory compliance, including increased general costs
of ongoing regulatory compliance and specific costs associated with the
Puritan-Bennett consent decree.
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Intellectual Property Rights. From time to time, the Company has received, and
in the future may receive, notices of claims with respect to possible
infringement of the intellectual property rights of others or notices of
challenges to its intellectual property rights. In some instances such notices
have given rise to, or may give rise to, litigation. Any litigation involving
the intellectual property rights of the Company may be resolved by means of a
negotiated settlement or by contesting the claim through the judicial process.
There can be no assurance that the business, results of operations or the
financial condition of the Company will not suffer an adverse impact as a
result of intellectual property claims that may be commenced against the
Company in the future.
Competition. The medical device industry is characterized by rapidly evolving
technology and increased competition. There are a number of companies that
currently offer, or are in the process of developing, products that compete with
products offered by the Company. Some of these competitors may have
substantially greater capital resources, research and development staffs and
experience in the medical device industry, including with respect to regulatory
compliance in the development, manufacturing and sale of medical products
similar to those offered by the Company. These competitors may succeed in
developing technologies and products that are more effective than those
currently used or produced by the Company or that would render some products
offered by the Company obsolete or non-competitive. Competition based on price
is expected to become an increasingly important factor in customer purchasing
patterns as a result of cost containment pressures on, and consolidation in, the
health care industry. Such competition has exerted, and is likely to continue to
exert, downward pressure on the prices the Company is able to charge for its
products. The Company may not be be able to offset such downward price pressure
through corresponding cost reductions. Any failure to offset such pressure could
have an adverse impact on the business, results of operations or financial
condition of the Company.
New Product Introductions. As the existing products of the Company become more
mature and its existing markets more saturated, the importance of developing or
acquiring new products will increase. The development of any such products will
entail considerable time and expense, including research and development costs
and the time and expense required to obtain necessary regulatory approvals,
which could adversely affect the business, results of operations or financial
condition of the Company. There can be no assurance that such development
activities will yield products that can be commercialized profitably, or that
any product acquisitions can be consummated on commercially reasonable terms or
at all. Any failure to acquire or develop new products to supplement more mature
products could have an adverse impact on the business, results of operations or
financial condition of the Company.
Product Liability Exposure. Because its products are intended to be used in
health care settings on patients who are physiologically unstable and may also
be seriously or critically ill, the Company is exposed to potential product
liability claims. From time to time, patients using the Company's products have
suffered serious injury or death, which has led to product liability claims
against the Company. The Company does not believe that any of these claims,
individually or in the aggregate, will have a material adverse impact on its
business, results of operations or financial condition. However, the Company
may, in the future, be subject to product liability claims that could have such
an adverse impact.
The Company maintains product liability insurance coverage in amounts that it
deems sufficient for its business. However, there can be no assurance that such
coverage will ultimately prove to be adequate, or that such coverage will
continue to remain available on acceptable terms or at all.
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Impact of Currency Fluctuations; Importance of Foreign Sales. Because sales of
products by the Company outside the United States typically are denominated in
local currencies and such sales are growing at a rate that is generally faster
than domestic sales, the results of operations of the Company are expected to
continue to be affected by changes in exchange rates between certain foreign
currencies and the United States Dollar. Although, the Company currently engages
in some hedging activities, there can be no assurance that the Company will not
experience currency fluctuation effects in future periods, which could have an
adverse impact on its business, results of operation or financial condition. The
operations and financial results of the Company also may be significantly
affected by other international factors, including changes in governmental
regulations or import and export restrictions, and foreign economic and
political conditions generally.
Possible Volatility of Stock Price. The market price of the Company's stock is,
and is expected to continue to be, subject to significant fluctuations in
response to variations in quarterly operating results, trends in the health care
industry in general and the medical device industry in particular, and certain
other factors beyond the control of the Company. In addition, broad market
fluctuations, as well as general economic or political conditions and
initiatives such as health care reform, may adversely impact the market price of
the Company's stock, regardless of the Company's operating performance.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
In July 1995, the U.S. Federal District Court in Delaware issued a decision in
favor of the Company, ruling that four key oximeter and sensor technology
patents are valid and would be infringed by Ohmeda, if Ohmeda sold either its
adult or neonatal OxyTip sensors for use with non-Ohmeda monitors. BOC has filed
notice of its intention to appeal the decision of the court.
The Company filed a motion in July 1995 requesting an amendment to the Court's
judgment to issue an injunction against BOC to enjoin BOC from infringing the
patents. The Court denied the motion in October, 1995.
Except as noted above, neither the Company nor any of its subsidiaries is
involved in any material pending litigation other than ordinary routine
proceedings incident to their business.
ITEM 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
11.1 Statement of computation of net income per share.
27.1 Financial Data Schedule (filed electronically only)
b) Reports on Form 8-K.
No reports on form 8-K were filed during the quarter ended December 31,
1995.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be filed on its behalf by the
undersigned thereunto duly authorized.
NELLCOR PURITAN BENNETT INCORPORATED
DATED February 14, 1996 By /s/ Michael P. Downey
---------------------
Michael P. Downey
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
Exhibit No. Description
- ----------- ---------------
11.1 Statement of Computation of net income per share.
27 Financial Data Schedule.