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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
X Annual Report pursuant to section 13 or 15(d) of the Securities Exchange
-
Act of 1934 for the fiscal year ended June 30, 1997 or
-------------
Transition Report pursuant to section 13 or 15(d) of the Securities
-
Exchange Act of 1934 for the transition period from ________ to ______
Commission File No. 000-16723
RESPIRONICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1304989
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1501 Ardmore Boulevard
Pittsburgh, Pennsylvania 15221
(Address of principal executive offices) (Zip Code)
(Registrant's Telephone Number, including area code) 412-731-2100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None --
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for at least the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
--
As of August 31, 1997, the aggregate market value of the shares of the
registrant's Common Stock (based upon the last price reported by the NASDAQ
National Market System) held by non-affiliates was approximately
$420,000,000.
As of August 31, 1997, there were 19,776,855 shares of Common Stock of the
registrant outstanding.
Documents Incorporated by reference: Portions of the Proxy Statement for the
registrant's Annual Meeting of Shareholders to be held on November 19, 1997 are
incorporated by reference into Part III of this Annual Report on Form 10-K.
INDEX
Page
----
PART I
Item 1 Business.............................. 3
Item 2. Description of Property............... 16
Item 3. Legal................................. 16
Item 4. Submission of Matters to a Vote of
Security Holders...................... 18
PART II
Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters....... 19
Item 6. Selected Financial Data............... 20
Item 7. Management's Discussion and
Analysis of Results of Operations and
Financial Condition................... 21
Item 8. Consolidated Financial Statements..... 26
Item 9. Disagreements on Accounting and
Financial Disclosure.................. 44
PART III
Item 10. Directors and Executive Officers of
the Registrant........................ 45
Item 11. Executive Compensation................ 45
Item 12. Security Ownership of Certain
Beneficial Owners and Management...... 45
Item 13. Certain Relationships and Related
Transactions.......................... 45
PART IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K..... 46
Signatures ..................................... 52
2
PART I
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES REFORM ACT OF 1995.
The statements contained in this Annual Report on Form 10-K,
specifically those contained in Item 1 "Business" and Item 7 "Management's
Discussion and Analysis of Financial Condition and Operation," and statements
incorporated by reference in this Form 10-K from the 1997 Annual Report to
Shareholders, along with statements in other reports filed with the Securities
and Exchange Commission, external documents and oral presentations which are
not historical are "Forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21B of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
represent the Company's present expectations of beliefs concerning future
events. The Company cautions that such statements are qualified by important
factors that could cause actual results to differ materially from those in the
forward-looking statements. Results actually achieved may differ materially from
expected results included in these statements. Those factors include the
following: foreign currency fluctuations, regulations and other factors
affecting operations and sales outside the United States including potential
future effects of the change in sovereignty of Hong Kong, customer consolidation
and concentration, increasing price competition and other competitive factors in
the sale of products, intellectual property and related litigation, FDA and
other government regulation, and third party reimbursement.
Item 1. Business
--------
General
Respironics, Inc. is a leading developer, manufacturer and marketer of
medical devices used for the treatment of patients suffering from respiratory
disorders. The Company's products are designed to reduce costs while improving
the effectiveness of patient care and are used primarily in the home and
hospitals, as well as emergency medical settings and alternative care
facilities. The Company's primary product lines are: (i) continuous positive
airway pressure ("CPAP") devices and bi-level positive airway pressure
("BiPAP") devices for the treatment of obstructive sleep apnea ("OSA"), a
serious disorder characterized by the repeated cessation of breathing during
sleep; (ii) ventilation devices, including bi-level non-invasive ventilatory
support units and portable invasive volume ventilator units; and (iii) patient
mask products. Respironics markets its products through a sales organization
consisting of approximately 100 direct and independent sales representatives,
who sell to a network of over 2,500 medical product dealers. In certain foreign
markets, the Company's products are sold directly to end users. The Company also
rents portable volume ventilators to dealers and directly to end users in the
United States. The Company's sales are currently comprised of 63% equipment and
37% consumable and single-use products. With over 90% of its sales currently
reaching the home care market, Respironics believes that it is well-positioned
to take advantage of the growing preference for in-home treatment of patients
suffering from respiratory disorders.
Respironics is a Delaware corporation with executive offices located
at 1501 Ardmore Boulevard, Pittsburgh, PA 15221. Unless the context indicates
otherwise, reference in this Annual Report to the "Company" or "Respironics"
refers to Respironics, Inc. and its domestic and foreign subsidiaries. Unless
the context indicates otherwise, reference in this Annual Report to "fiscal
year" refers to the twelve month period ending on June 30 of the year indicated.
During the fiscal year ended June 30, 1997, the Company completed two
acquisitions. In October 1996, the Company acquired LIFECARE International, Inc.
("LIFECARE"), a developer, manufacturer and marketer of respiratory therapy
products, for $50,000,000 in cash. LIFECARE, which had its primary focus on
portable invasive home ventilation therapy products, is based in Westminster,
Colorado and has since been renamed Respironics Colorado, Inc. ("Respironics
Colorado") In addition to its Colorado manufacturing facility, Respironics
Colorado has a manufacturing facility in Herrsching, Germany and 19 Customer
Satisfaction Centers located in major metropolitan areas in the United States.
The Company has begun to utilize these customer satisfaction centers to support
the sales and marketing efforts for its OSA and non-invasive ventilation
products along with its invasive portable volume ventilator products.
3
In February 1997, the Company acquired Stimotron Medizinische Gerate
GmbH ("Stimotron"), the Company's exclusive distributor in Germany, for
$9,000,000 in cash with potential additional consideration of $5,000,000 due
over the next four years based upon the achievement of certain financial results
in Germany. Stimotron is based in Wendelstein, Germany and resells and rents
the Company's products to other dealers and to end users in that country.
See Note K to the Consolidated Financial Statements for more
information about these acquisitions.
The following are registered trademarks of the Company as used in this
document; Respironics, REMstar, Great Performers, Avia, Virtuoso, Duet, Encore,
Quartet, Maestro, BiPAP, Harmony, PAV, PLV, Gel, Monarch, Seal Easy, Circle Seal
and BagEasy. The following are trademarks of the Company as used in this
document; Solo and Vision.
Products
At the present time, the Company's principal products can be divided
into three categories: obstructive sleep apnea products, ventilation products,
and face mask and other products.
Obstructive Sleep Apnea Products
--------------------------------
Respironics believes it is the U.S. market share leader in OSA therapy
devices, with close to a 50% market share. The Company's primary OSA products
are the Great Performers family, REMstar Choice, the BiPAP S Airway Management
System, and related accessories such as masks, tubes, filters and headgear.
4
The Company introduced its sixth-generation family of OSA products, known
as the "Great Performers" product line, during fiscal years 1996 and 1997. This
new family of products includes CPAP, bi-level and clinical devices. Each of the
Company's CPAP devices consist of a small, portable air pressurization device,
an air pressure control, and a mask worn by the patient at home during sleep.
The Aria CPAP system features built-in memory to record patient usage data. The
software necessary to extract this data from the Aria unit is known as Encore.
The Solo CPAP system is an innovative OSA therapy device that meets the
Company's strategy of offering units at all key price points. The Great
Performers family of products also includes another CPAP device, known as
Virtuoso, that utilizes innovative technology to monitor the patient's airway
and adjust output automatically in order to deliver the appropriate pressure.
The BiPAP Duet Airway Management System is the bi-level unit in the Great
Performers Family. The Duet unit senses the patient's breathing cycle and
adjusts the pressure accordingly and also contains advanced leak-sensing
technology which improves the unit's pressure adjustment capability. Bi-level
units are used to treat severe OSA and are useful in improving acceptance of
therapy by patients who have difficulty tolerating CPAP. The Great Performers
Clinical System, consisting of the Quartet Clinical System, a bedside pressure
generator, and the Maestro Clinical Remote Control Unit, is used by clinicians
in prescribing therapy for the treatment of adult OSA. The Company has received
clearance from the United States Food and Drug Administration ("FDA") for all of
the Great Performers products. The Company also continues to manufacture and
market its REMstar Choice CPAP unit, which was introduced in 1991, and its
BiPAP S Airway Management System, which was introduced in 1989.
Respironics also manufactures devices related to the diagnosis and
monitoring of sleep and other respiratory-related disorders, which it obtained
through the acquisition of Vitalog Monitoring Inc. ("Vitalog") in 1995. Such
diagnostic products expand the Company's presence in sleep labs which helps
drive the market for the Company's therapeutic devices.
The Company estimates that in the U.S. approximately 1,500 sleep
clinics currently exist at hospitals and other medical centers where
pulmonologists, technicians and other medical professionals diagnose OSA (as
well as other sleep disorders) and then prescribe the appropriate treatment.
Such laboratories provide the most frequent source of patient introductions to
the Great Performers and REMstar Choice products.
The OSA patient can purchase the Great Performers products, the REMstar
Choice, or the BiPAP Airway Management System from home health care products
dealer locations worldwide. Personnel at each of these locations are equipped to
train the patient in the product's use and to maintain and service the product
(See "Sales, Distribution, and Marketing"). The retail price for a CPAP
5
unit ranges from $800 to $1,600, depending on type of unit, geographical
market and whether certain accessories are purchased. The retail price for a
BiPAP S or Duet unit generally ranges from $2,800 to $3,200, depending on which
model is purchased.
Sales of OSA products and all related accessories and replacement
parts accounted for 55%, 67%, and 67% of the Company's net sales for its fiscal
years 1997, 1996, and 1995, respectively.
Ventilation Products
--------------------
The Company believes it is the leading manufacturer and marketer of
non-invasive ventilatory support devices in the U.S. Such devices are intended
to augment the ventilation of a spontaneously breathing patient, but are not
intended to satisfy the total ventilatory requirements of the patient.
The Company's principal non-invasive ventilatory support product is
the BiPAP Ventilatory Support System, the initial version of which was
introduced in December 1989. The BiPAP Ventilatory Support System is a low-
pressure, electrically-driven flow generator with an electronic pressure control
designed to augment patient breathing by supplying pressurized air to the
patient. The BiPAP Ventilatory Support System was the first device for non-
invasive use designed specifically to compensate for mask leaks. BiPAP devices
sense the patient's breathing and adjust their output to assist in inhalation
and exhalation. The BiPAP Ventilatory Support System compensates for mask leaks,
which often occur in the delivery of ventilatory support to the patient, thereby
providing what the Company believes is a more efficient and consistent non-
invasive therapy than competing volume ventilators.
The Company believes the BiPAP Ventilatory Support System has the
potential for increasing patient comfort by adapting to the patient's breathing
cycles as opposed to requiring the patient to adapt his breathing to the
ventilator cycles and by delivering therapy effectively with a patient mask
rather than requiring intubation. The retail price for a BiPAP unit, which
ranges from $6,000 to $9,500, also compares favorably to the cost of invasive
ventilators, which generally retail for $10,000 to $28,000.
In May 1992, the Company introduced the Hospital BiPAP Ventilatory
Support System, which includes accessories such as an airway pressure monitor, a
detachable control panel, a disposable circuit and a mounting stand, all of
which are designed to allow the BiPAP Ventilatory Support System to be used more
easily in the hospital environment.
The Company is supporting clinical trials that are investigating the
possible benefits of BiPAP therapy for different types of patient populations.
Applications being studied include use by patients suffering from a variety of
respiratory disorders, as well as other in-hospital applications. The marketing
of BiPAP Ventilatory Support Systems for use in these patient populations may
require additional clearances from the FDA prior to marketing in the U.S.
6
During fiscal year 1997, the Company began international distribution
of its next generation non-invasive unit for the hospital market, the BiPAP
Vision, with domestic distribution to begin upon receipt of clearance to market
from the FDA. The BiPAP Vision features an integrated display screen and an
optional oxygen module, provides higher flow and pressure functions and is
designed to be easily upgradeable when advanced technology becomes available.
International distribution of BiPAP Harmony, the next generation
non-invasive unit for the homecare market, is expected to begin before the end
of calendar year 1997, with domestic release to follow upon receipt of clearance
to market from the FDA. The BiPAP Harmony features simple, menu driven
operations and improved portability (including AC or DC power capability) and is
also designed to be easily upgradeable.
The Company also is currently conducting research on the incorporation
of Proportional Assist Ventilation ("PAV") into its line of BiPAP ventilatory
support products. PAV is a mode of ventilatory support that provides assistance
in proportion to the needs of the patient. The Company has been granted
Investigational Device Exemptions by the FDA to conduct clinical tests in the
U.S. using PAV in both non-invasive and invasive applications. Application for
regulatory clearance to market devices that include PAV, which is required prior
to the marketing of such products in the U.S., has not yet been made. The PAV
technology was obtained by the Company through a non-exclusive licensing
arrangement with the University of Manitoba in Winnipeg, Canada.
The Company believes that it is also a leading manufacturer and
marketer of invasive portable volume ventilators that are used in the home by
individuals who are dependent on the ventilators for continuous life support.
These devices had been manufactured and marketed by LIFECARE, which was
acquired by the Company in October 1996.
The Company's principal invasive portable volume ventilator is the
PLV-100, a microprocessor controlled, electrically powered unit specifically
designed for long term use in the home and also suitable for transport, short
term, and institutional use. The PLV can be used to ventilate a wide range of
patients, including pediatric patients, most often through the use of an
endotracheal tube or a tracheostomy tube. The small, lightweight unit delivers
volume ventilation through the operation of a piston inside the unit, and it can
be powered by normal AC power or DC battery power. The PLV-100 can be operated
in three different ventilation modes depending on the patient's needs, and,
because patients using the PLV-100 are dependent on the ventilator for
life support, the unit features a variety of alarms and displays to alert
clinicians and caregivers to changes in the patient's pulmonary status or to
possible unit malfunction. The Company manufactures and distributes different
versions of
7
the PLV-100 for international markets based on language differences, and it also
manufactures and distributes a variety of accessories for use with the PLV-100.
The PLV-100 unit and related accessories reach end user patients
through the Company's network of medical product dealers who purchase or rent
the unit from the Company and resell or rent it to end users. Prior to the
acquisition of LIFECARE by the Company, LIFECARE had established rental
arrangements directly with certain patients. These existing rental arrangements
have been continued.
The Company also manufactures, distributes and rents several other
home ventilation products, including a version of the PLV-100 designed more
specifically for institutional use.
Sales and rental revenue from all ventilation products and
accessories accounted for 40%, 27%, and 26% of the Company's net sales for
fiscal years 1997, 1996, and 1995 respectively.
Face Mask and Other Products
----------------------------
The Company provides three types of patient masks: (1) masks used with
CPAP and BiPAP devices including nasal sealing flap masks, the Monarch Mini
Mask, the GEL and Gold Seal Masks; and Full Face Masks (2) disposable air-filled
cushion anesthesia masks primarily for use during surgery; and (3) disposable
SealEasy and Circle Seal resuscitation masks for use in medical emergencies. The
Company's patient masks are designed to respond to the increasing demand for
single-use products, which reduce the potential for cross-contamination among
patients and also help to minimize the exposure of medical personnel to
infectious diseases, such as tuberculosis and pneumonia. The Company believes
that its nasal sealing flap mask was the first mask to adequately seal on a
patient's face for air delivery, thereby minimizing patient discomfort and
promoting increased patient compliance with prescribed usage. The Monarch Mini
Mask is designed to enhance patient comfort with its small size and unique
placement on the patient's face; the GEL and Gold Seal Masks utilize a gel-like
cushion to create a comfortable mask seal around the contours of the face. Full
Face Masks address the needs of specific patient groups for whom CPAP and BiPAP
therapy is delivered most effectively and comfortably through masks that cover
the mouth and nose. The Company's line of disposable air-filled cushion
anesthesia masks utilizes a very thin and pliable soft plastic air-filled
cushion around the nose and mouth, which provides a uniform seal to prevent
leakage of the anesthetic gases and helps ensure compliance with anesthesia gas
exposure standards imposed on hospitals by regulatory bodies. The Company's
other products include the BagEasy Manual Resuscitator and the Rinoflow nasal
irrigation product.
Sales of all face masks (including some masks which are components of
OSA products and non-invasive ventilatory support products and which are also
included in the net sales figures for those product groups) and other products
accounted for 18%, 19%, and 17% of the Company's net sales for its fiscal years
1997, 1996, and 1995, respectively.
8
Manufacturing and Properties
The Company's corporate headquarters is located in a leased facility
in Pittsburgh, Pennsylvania and domestic manufacturing operations are located in
Murrysville, Pennsylvania (approximately 20 miles east of Pittsburgh) and
Westminster, Colorado (approximately 10 miles north of Denver). The Company also
maintains 19 Customer Satisfaction Centers in major cities throughout the United
States. See Note E to the Consolidated Financial Statements for additional
information regarding leased facilities.
The Murrysville facility is a 116,000 square foot facility that was
first occupied in July 1990 and expanded to its current size in November 1993.
The entire facility is subject to mortgages used to secure financing related to
the construction and expansion of the facility. See Note D to the Consolidated
Financial Statements for additional information regarding the mortgages and the
financing. The facility is a one and one-half story building of steel and
concrete construction that had a total cost, including the expansion, of
approximately $7,800,000.
The Westminster facility is a 74,000 square foot facility that was
first occupied in October 1994. The entire facility is subject to mortgages
used to secure financing related to the construction of the facility. See Note
D to the Consolidated Financial Statements for additional information regarding
the mortgages and the financing. The facility is a one story building of steel
and concrete construction that had a total cost of approximately $3,700,000.
This facility was the headquarters and domestic manufacturing location for
LIFECARE which was acquired by the Company in October 1996. See "Business-
General" and Note K to the Consolidated Financial Statements for additional
information about the LIFECARE acquisition.
The Company leases space ranging from 2,000 to 5,500 square feet for
each of the Customer Satisfaction Centers located in major metropolitan areas
throughout the U.S. These centers provide technical and customer service and
limited product distribution.
The Company also leases a 22,000 square foot office facility in Plum
Borough, Pennsylvania approximately two miles from the existing Murrysville
facility. This leased facility currently houses certain research and
development projects and technical service groups.
The Company began manufacturing operations in Hong Kong in 1981 where
its Far East Administrative headquarters are now located in a 28,000 square foot
facility in Kwun Tong, Kowloon, Hong Kong.
9
The Company conducts the remainder of its patient mask manufacturing
and certain other high volume production of plastic components in a facility in
Shenzhen City in the Peoples Republic of China, bordering Hong Kong and in Subic
Bay, Phillipines. The Shenzhen facility is leased and operated by the Company.
The present manufacturing space totals approximately 66,000 square feet. The
facility is located in a special economic zone (where the Company has been
operating since 1987) that was established by the Peoples Republic of China in
1980 to induce foreign investment. The Subic Bay facility, totalling
approximately 10,000 square feet, is also leased.
The Company's European facilities (all of which are leased) include a
10,000 square foot manufacturing and warehouse facility in Herrsching, Germany,
a 5,000 square foot office and warehouse facility in Wendelstein, Germany; and
5,000 square feet of office and warehouse facilities in Nantes, France. The
Herrsching facility was the European headquarters of LIFECARE, and the
Wendelstein facility was the headquarters of Stimotron. See "Business -
General" and Note K to the Consolidated Financial Statements for additional
information about these acquisitions.
The Company also maintains smaller leased facilities, each totaling
less than 5,000 square feet in size, in Wilmington, Delaware; Redwood City,
California; and Winnipeg, Manitoba.
Operations in the Far East and Europe are subject to the risks
normally associated with foreign operations including, but not limited to,
foreign currency fluctuations, possible changes in export or import restrictions
and the modification or introduction of other governmental policies with
potentially adverse effects. The July 1997 change of control in Hong Kong from
British to Chinese rule has not affected the Company's operations.
The Company believes that its present facilities are suitable and
adequate for its current and presently anticipated future needs. While several
facilities are extensively utilized, additional productive capacity is available
through a variety of means including, at the Murrysville and Westminster sites,
augmenting the current partial second shift work schedule. Rental space, which
the Company believes is readily available and reasonably priced near each
current location, could be utilized as well. The Company also owns
approximately 20 acres of land adjacent to the 10 acre site on which the
Murrysville facility is located. Future expansion in Murrysville, if needed,
could take place on this 20 acre site.
The Company generally performs all major assembly work on all of its
products. It manufactures the plastic components for its face mask products and
uses subcontractors to supply certain other components. The Company believes
that the raw materials for all of its products are readily available from a
number of suppliers.
Sales, Distribution and Marketing
The Company sells and, in some cases, rents its products primarily to
home care and hospital dealers. These parties in turn resell and rent the
10
Company's products to end users. The Company's products reach its customers
in the United States primarily through the Company's field network, which
consists of 14 sales management employees, 47 direct sales representatives and
sales support specialists, 54 independent manufacturers' representatives and
over 2,500 medical products distributors (also referred to as "dealers").
The Company manages its U.S. dealer network through the direct sales
force and independent manufacturers' representatives. The Company's U.S. sales
management team includes a Senior Vice President of Sales and Marketing, a
Director of Sales, and eight Regional Sales Managers. This team directs the
activities of 54 independent manufacturers' representatives and 43 direct sales
representatives and sales support specialists. In most areas of the U.S., the
hospital market is served by the direct sales representatives and the home care
market is served primarily by the independent manufacturers' representatives.
The Company's international sales efforts are conducted through a
European General Manager, a South American Sales Manager, a Far East Sales
Manager, and a Canadian Sales Manager. The Company also has direct sales
representatives and a customer satisfaction staff in Europe and the Far East
and direct sales representatives in Canada. All of the Company's international
sales employees serve both the home care and hospital markets. International
sales accounted for approximately 27%, 24%, and 20% of the Company's net sales
for fiscal year 1997, 1996 and 1995, respectively.
The Company's marketing organization is currently staffed with a Vice
President of Marketing and marketing-oriented Product Managers, who are assigned
to each of the Company's principal product groups. The Product Managers stay
abreast of changes in the marketplace, with an emphasis on product use
specifications, features, price, promotions, education, training and
distribution.
The Company's dealer customer base (which ranges in size from large,
publicly held dealers with several hundred branch locations to small, owner-
operated dealers with one location) is undergoing significant consolidation,
particularly among dealers specializing in home care products. The impact on the
Company of this customer consolidation is likely to continue to be reduced
selling prices for the Company's products as a result of greater purchasing
power and market dominance enjoyed by larger customers.
In October 1996, the Company announced that its status with Apria
Healthcare had changed from "primary supplier" to sole "secondary supplier"
effective in November 1996. This change adversely impacted sales levels for the
fiscal year ended June 30, 1997. Sales to Apria during the fiscal year ended
June 30, 1997 were $17,900,000 as compared to $20,500,000 for the fiscal year
ended June 30, 1996. Subsequent to the Company's change in status, it focused on
demonstrating to Apria superior effort and added value service surrounding its
product offerings. In spite of these efforts, sales to Apria of CPAP and bi-
level units and related masks during the second half of the fiscal year
decreased to approximately 40% of levels anticipated prior to the change in
status. While the Company cannot predict with certainty what actions Apria will
take relative to future supplier selection (especially in light of Apria's
announced intentions to review restructuring alternatives, including a possible
merger or sale), it is anticipated that an open bidding process will occur
again. The Company plans to participate in this bidding process with the goal of
maximizing its share of Apria's business, but there can be no assurance as to
the outcome of such a bidding process.
11
Competition
The Company believes that the principal competitive factors in all of
its markets are product and service performance and innovation. Efficient
distribution and competitive price are also very important factors. In the case
of a number of the Company's and its competitors' products, patent protection is
becoming more prevalent and of increasing competitive importance. The Company
competes on a product-by-product basis with various other companies, some of
which have significantly greater financial and marketing resources and broader
product lines.
The Company believes that it has the leading position in the U.S.
market for home care devices for the treatment of OSA. However, other
manufacturers, including other larger and more experienced manufacturers of home
health care products, have entered the market and the Company expects that
competition will increase. In its major market segments, the Company competes
with three principal competitors, Nellcor Puritan-Bennett ("Nellcor"),
Healthdyne Technologies ("Healthdyne") and ResMed through its subsidiary
Rescare ("Rescare"). Nellcor, which is the Company's largest major competitor
and has the largest financial resources of the Company's competitors, offers an
array of products which compete with all of the Company's products. Healthdyne
is the primary competitor for the Company's CPAP units and competes with the
Company in the non-invasive ventilatory support market as well. ResMed competes
with the Company in the OSA market, and is in the process of introducing devices
that will compete with the Company's non-invasive ventilatory support products.
Similar to the Company's customer base, the medical device
manufacturing industry is also undergoing significant consolidation. Several of
the Company's competitors have announced or completed mergers, most notably the
August 1995 merger of Nellcor and Puritan Bennett Group and the subsequent
planned acquisition of Nellcor-Puritan Bennett by Mallinckrodt Group, Inc. that
was announced on July 23, 1997. The impact on the Company of this competitor
consolidation is likely to be greater competition from medical device
manufacturers which can utilize the financial and technical resources that may
be made available as a result of the consolidation.
Research and Development
The Company believes that its ability to identify product
opportunities, to respond to the needs of cardiopulmonary physicians and their
patients in the treatment of respiratory disorders and to incorporate the latest
technological innovations into its medical products has been and will continue
to be important to its success. The Company's research and development efforts
are focused on understanding the problems faced by cardiopulmonary physicians
and their
12
patients' needs and on maintaining the Company's technological leadership in its
core product areas. The Company maintains both formal and informal relationships
with physician practitioners and researchers (including sleep laboratories) to
supplement these research and development efforts. The Company's research and
development efforts enable it to capitalize on opportunities in the respiratory
medical product market, through upgrading its current products as well as
developing new products.
The Company conducts substantially all of its research and development
for existing and potential new products in the U.S.. The Company currently
employs approximately 135 engineers and technicians in such activities. The
research and development staff performs overall conceptual design work for all
products and the design work related to the manufacturing, engineering and
tooling for products manufactured by the Company. The Company spent
approximately $10,768,000 (6% of net sales) in fiscal year 1997, $9,328,000 (7%
of net sales) in fiscal year 1996 and $7,077,000 (7% of net sales) in fiscal
year 1995 to support product enhancement and new product development.
A variety of new product introductions took place during fiscal years
1996 and 1997, including all of the products in the Great Performers family, the
BiPAP Vision Hospital Ventilatory Support System, and several new face mask
products. By the end of fiscal year 1998, the Company expects to have
introduced the next generation of products in the Great Performers family and
the BiPAP Harmony Home Ventilatory Support System. In some cases, initial
distribution has been, and will be, conducted in international markets until
regulatory clearance to market in the U.S. is obtained. See "Regulatory
Matters."
Patents, Trademarks and Licenses
The Company seeks patent protection for certain of its products
through the prosecution and acquisition of patents and exclusive licensing
arrangements. In addition, the Company aggressively defends its patents when
infringed by other companies. The Company currently has 63 U.S. and foreign
patents and has additional U.S. and foreign patent applications pending.
The Company owns the proprietary rights to a variety of its products,
including patents on the BiPAP Airway Management System, the BiPAP Ventilatory
Support System, and various masks and related accessories.
The Company also has 55 registered U.S. and foreign trademarks and has
additional U.S. and foreign trademark applications pending.
The Company is a party to several legal actions relating to its
patents and the patents of its competitors. See "Item 3 - Legal Proceedings"
for more information regarding these actions.
Regulatory Matters
13
The Company's products are subject to regulation by, among other
governmental entities, the FDA and corresponding foreign agencies. The FDA
regulates the introduction, manufacture, advertising, labeling, packaging,
marketing and distribution of and recordkeeping for such products. On June 1,
1997, new FDA regulations governing the manufacture of medical devices took
effect. These regulations imposed new requirements on device manufacturers such
as design controls. In manufacturing and marketing its products, the Company
must comply with FDA regulations and is subject to various other FDA
recordkeeping requirements and to inspections by the FDA. The testing for and
preparation of required applications can be expensive, and subsequent FDA review
can be lengthy and uncertain. Moreover, clearance or approval, if granted, can
include significant limitations on the indicated uses for which a product may be
marketed. Failure to comply with applicable FDA regulations can result in fines,
civil penalties, suspensions or revocation of clearances or approvals, recalls
or product seizures, operating restrictions or criminal penalties. Delays in
receipt of, or failure to receive, clearances or approvals for the Company's
products for which such clearances or approvals have not yet been obtained would
adversely affect the marketing of such products in the U.S. and could adversely
affect the results of future operations.
The Company must obtain FDA or foreign regulatory approval or
clearance for marketing the Company's new devices prior to their release. There
are two primary means by which the FDA permits a medical device to be marketed.
A manufacturer may seek clearance for the device by filing a 510(k) premarket
notification with the FDA. To obtain such clearance, the 510(k) premarket
notification must establish that the device is "substantially equivalent" to a
device that has been legally marketed or was marketed before May 28, 1976. The
manufacturer may not place the device into commercial distribution in the U.S.
until a substantial equivalence determination notice is issued by the FDA. The
FDA, however, may determine that the proposed device is not substantially
equivalent, or require further information, such as additional test data or
clinical data, or require the Company to modify its product labeling, before it
will make a finding of substantial equivalence. The process of obtaining FDA
clearance of a 510(k) premarket notification, including testing, preparation of
the 510(k) premarket notification and subsequent FDA review, can take a number
of years and require the expenditure of substantial resources.
If a manufacturer cannot establish to the FDA's satisfaction that a
new device is substantially equivalent to a legally marketed device, it will
have to seek approval to market the device through the premarket approval
application ("PMA") process. This process involves preclinical studies and
clinical trials. The process of completing clinical trials, submitting a PMA and
obtaining FDA approval takes a number of years and requires the expenditure of
substantial resources. In addition, there can be no assurance that the FDA will
approve a PMA. The Company's export activities and clinical investigations also
are subject to the FDA's jurisdiction and enforcement.
14
Foreign regulatory approvals vary widely depending on the country. In
January 1996, the Company received ISO 9001 certification from the International
Organization of Standards, a quality standards organization based in Geneva,
Switzerland. At the same time, the Company received authorization, under the
European Union's Medical Device Directives, to affix the "CE Mark" to the
Company's products marketed throughout the world. The primary component of the
certification process was an audit of the Company's quality system conducted by
an independent agency authorized to perform conformity assessments under ISO
guidelines and the Medical Device Directives. Since receiving its original ISO
9001 certification, the Company has undergone two annual update audits by such
independent agencies, neither of which revealed any non-conformities.
In December 1994 the Company received a warning letter from the FDA.
A "warning letter" is a statement issued by the FDA that the agency believes
significant violations have occurred and that the agency is prepared to take
enforcement action if corrective measures are not taken. As discussed in its
Annual Report on Form 10-K for the fiscal year ended June 30, 1996, the Company
believes that the issues raised in the warning letter have been resolved.
Third Party Reimbursement
The cost of a significant portion of medical care in the U.S. is
funded by government and private insurance programs, such as Medicare,
Medicaid and corporate health insurance programs including health maintenance
organizations and managed care organizations. The Company's future results of
operations and financial condition could be negatively affected by adverse
changes made in the reimbursement policies for medical products under these
insurance programs. If such changes were to occur, the ability of the Company's
customers (medical product distributors and dealers) to obtain adequate
reimbursement for the resale or rental of the Company's products could be
reduced. In recent years, limitations imposed on the levels of reimbursement by
both government and private insurance programs have become more prevalent.
The Company has obtained "procedure codes" for its home care
products from the Health Care Financing Administration ("HCFA"). These
procedure codes enhance the ability of medical product distributors and dealers
to obtain reimbursement for providing products to patients covered by Medicare.
In addition, many private insurance programs also use the HCFA procedure code
system. However, reimbursement levels can be reduced after a procedure code has
been established, as was the case in January 1994 when the reimbursement level
for all nasal CPAP systems was reduced.
The amount of reimbursement that a hospital can obtain under the
Medicare diagnosis related group ("DRG") payment system for utilizing the
Company's products in treating patients is a primary determinant of the revenue
that can be realized by medical product distributors and dealers who resell or
rent the Company's hospital products. Many private insurance programs also
utilize the Medicare DRG system. The various uses of the Company's hospital
products to
15
treat patients are provided within the DRG system. The levels of reimbursement
under the DRG system are also subject to review and change.
Employees
As of June 30, 1997, the Company had 1,565 employees, including 456
hourly employees in the U.S. 489 hourly employees in Hong Kong and the Peoples
Republic of China, and 2 hourly employees in Europe. None of the Company's
employees are covered by collective bargaining agreements. The Company considers
its labor relations to be good and has never suffered a work stoppage as a
result of a labor conflict.
Financial Information About Foreign and Domestic Operations and Export Sales
Financial information concerning foreign and domestic operations and
export sales is discussed in Part I "Sales, Distribution and Marketing" and
set forth in Note I of the Consolidated Financial Statements included in this
Annual Report.
Item 2. Description of Properties
-------------------------
Information with respect to the location and general character of the
principal properties of the Company is included in Item 1 "Manufacturing and
Properties".
Item 3. Legal Proceedings
-----------------
Australian ResCare Litigation.
ResCare Limited, an Australian corporation ("ResCare") and a
subsidiary of ResMed, Inc. ("ResMed"), filed suit in Australia (the "Australian
suit") against the Company's Australian distributor in 1992, alleging that the
Company's CPAP products then being sold by such distributor in Australia
infringed upon an Australian patent (the "Australian Patent") embodying a
substantial part of ResCare's CPAP technology. After trial, the Australian trial
court held that the Company's products infringed the Australian Patent (which
the Court also held to be valid). This decision was appealed, and in May 1994
the Australian Court of Appeals reversed the decision of the trial court,
declaring the Australian Patent invalid. This decision also nullified the trial
court's finding that the Company's products infringed upon the Australian
Patent. In October 1994, the Supreme Court of Australia refused to accept an
appeal of the decision of the Court of Appeals. No further appeals can be made
by ResCare with respect to the decision of the Australian Court of Appeals. In
June 1997, the Company received a Court determined amount of approximately
$240,000 to offset a portion of the expenses it incurred in pursuing the
Australian suit. The receipt of this expense reimbursement effectively closes
the Australian suit.
16
U.S. ResCare Litigation.
In January 1995 ResCare filed an action (the "California suit")
against the Company in the United States District Court for the Southern
District of California alleging that in the manufacture and sale in the U.S. of
nasal masks and CPAP systems and components, the Company infringes three U.S.
patents, two of which are owned by and one of which is licensed to ResCare (the
"ResCare Patents"). One of the three ResCare Patents was filed in the U.S.
shortly after the Australian Patent was issued and most of its claims are the
same as or similar to the Australian Patent. The other two patents involved in
the California suit deal with mask applications and with a "ramp" feature of
ResCare's CPAP devices. In the complaint, ResCare seeks preliminary and
permanent injunctive relief, an accounting for damages and an award of three
times actual damages because of the Company's alleged willful infringement of
the ResCare patents.
In its answers to ResCare's complaint, the Company denied, in all
material respects, the allegations of the complaint. The Company also filed an
action in the United States District Court for the Western District of
Pennsylvania against ResCare seeking declaratory judgments that the ResCare
patents in issue are either invalid or unenforceable or that the Company does
not infringe the patents. In June 1997, the Court granted the Company's motion
for summary judgment that it does not infringe ResCare's mask patent.
Also as part of its response to the ResCare complaint, the Company
filed a motion in the United States District Court for the Southern District of
California seeking to transfer the California suit to the United States District
Court for the Western District of Pennsylvania and to consolidate the two suits.
The motion was granted and the cases have been consolidated in Pittsburgh,
Pennsylvania.
In June 1996 ResCare filed another action against the Company in the
United States District Court for the Western District of Pennsylvania alleging
that in the manufacture and sale in the U.S. of CPAP systems, the Company
infringes a fourth U.S. patent that had been recently issued to ResCare
relating to the ramp technology component used in CPAP systems. In this
additional litigation, ResCare seeks similar damages as in the pre-existing
patent suits. This suit was consolidated, upon the Company's motion, with the
pre-existing patent suits described above and discovery is now proceeding on the
consolidated action.
It is the Company's belief, based upon its investigation and discovery
to date, that the ResCare patents are invalid or unenforceable and that, even if
they are valid and enforceable, none of the Company's products infringe any of
the patents. The Company intends to vigorously defend and pursue this litigation
and strongly believes that the outcome should be favorable to it.
BiPAP Litigation
17
In November 1996, the Company filed an action in the United States
District Court for the Western District of Pennsylvania against Airsep
Corporation ("Airsep") alleging that Airsep infringes one of the Company's
patents covering its BiPAP technology and seeking a preliminary and permanent
injunction, damages for infringing sales, and special damages for willful
infringement. In June 1997, the Company filed a similar action in the same
Court against Healthdyne Technologies, Inc. ("Healthdyne").
Airsep has answered the Company's complaint and has denied, in all
material respects, the allegations of the Company's complaint and has filed a
counterclaim alleging that the Company's BiPAP patent involved in the litigation
is invalid and is unenforceable. Discovery is proceeding in this action.
Healthdyne has answered the Company's complaint and has denied, in all
material respects, the allegations of the Company's complaint and has filed a
counterclaim alleging that the Company's BiPAP patent is invalid, is not
infringed, and is unenforceable. Discovery has not yet begun in this action.
It is the Company's belief, based upon its investigation and discovery
to date (including the work it performed to obtain the BiPAP patent) that it
will prevail in both the Airsep and Healthdyne actions. It should be noted that
the Company submitted extensive prior art to the U.S. Patent and Trademark
Office as part of the patent application process. The U.S. Patent and Trademark
Office considered this prior art before granting the Company its BiPAP patent.
Other Matters
The Company is, as a normal part of its business operations, a party
to other legal proceedings in addition to those described above. Legal counsel
has been retained for each proceeding and none of these proceedings is expected
to have a material adverse impact on the Company's results of operations or
financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
During the fourth quarter of the fiscal year 1997, no matters were
submitted to a vote of security holders.
18
PART II
Item 5. Market For Registrant's Common Equity and Related Shareholder Matters.
----------------------------------------------------------------------
As of June 30, 1997, 19,763,057 shares of the Company's common stock
were issued and outstanding. These shares are traded in the over-the-counter
market and are reported on the NASDAQ National Market system under the symbol
"RESP". As of September 17, 1997, there were 1,409 holders of record of the
Company's common stock.
The Company has never paid a cash dividend with respect to its common
stock and does not intend to pay cash dividends in the foreseeable future.
High and low sales price information for the Company's common stock
for the applicable quarters is shown below.
Fiscal year ending June 30, 1997:
First Second Third Fourth
------ ------ ------ ------
High $25.00 $25.00 $22.25 $21.50
Low $17.25 $13.50 $16.75 $17.75
Fiscal year ending June 30, 1996:
First Second Third Fourth
------ ------ ------ ------
High $19.75 $22.25 $24.75 $23.50
Low $13.75 $17.00 $17.00 $17.25
19
Item 6. Selected Financial Data
-------------------------------
(Dollars in thousands except per share data)
Income Statement Data:
Year Ended June 30
1997 1996 1995 1994 1993
---------- ------------ ------------ ------------- -------------
Net sales $ 178,560 $ 125,766 $ 99,450 $ 78,171 $ 69,286
Cost of goods sold 79,554 55,249 43,077 34,830 32,114
---------- ------------ ----------- ------------ ------------
99,006 70,517 56,373 43,341 37,172
General and administrative expense 21,506 16,602 14,050 10,028 10,581
Sales, marketing and commission
expense 34,368 20,845 17,696 15,069 12,313
Research and development expense 10,768 9,328 7,077 4,794 3,556
Nonrecurring charges -0- -0- -0- 7,086 -0-
Interest expense 616 200 194 171 176
Other income (2,040) (1,615) (1,179) (623) (550)
---------- ------------ ----------- ----------- ------------
Income before income taxes 33,788 25,157 18,535 6,816 11,096
Income taxes 13,472 9,818 6,858 2,075 3,717
---------- ------------ ----------- ----------- ------------
Net income $ 20,316 $ 15,339 $ 11,677 $ 4,741 $ 7,379
========== ============ =========== =========== ============
Earnings per share $ 1.00 $ 0.84 $ 0.67 $ 0.27 $ 0.43
========== ============ =========== =========== ============
Weighted average number of shares
used in computing earnings
per share 20,271,933 18,324,500 17,532,422 17,280,680 17,318,606
Balance Sheet Data:
June 30
1997 1996 1995 1994 1993
---------- ------------ ----------- ----------- ------------
Working capital $ 71,038 $ 99,435 $ 39,413 $ 31,032 $ 25,172
Total assets 184,232 143,947 78,039 58,917 54,331
Total long-term obligations 17,985 4,966 5,538 4,854 4,288
Shareholder's equity 141,578 121,545 58,369 44,224 39,148
- -------------------------
There were no cash dividends declared during any of the periods presented in
the above table.
20
Item 7. Management's Discussion and Analysis of Results of
--------------------------------------------------
Operations and Financial Condition
----------------------------------
Results of Operations
Net sales for fiscal year 1997 were $178,560,000, representing a 42%
increase in net sales over the $125,766,000 recorded in fiscal year 1996. 1996
net sales represented a 26% increase over the $99,450,000 recorded in fiscal
year 1995. Sales for the fiscal year ended June 30, 1997 included approximately
$24,191,000 generated by LIFECARE International, Inc. since its acquisition by
the Company on October 21, 1996 (LIFECARE International, Inc. has since been
renamed Respironics Colorado, Inc.). Sales for the fiscal year ended June 30,
1997 also included approximately $7,120,000 generated by Stimotron Medizinische
Gerate GmbH ("Stimotron") which was acquired on February 26, 1997. Both
acquisitions were treated as purchases for financial accounting purposes, and
accordingly the Company's results of operations include the results of
operations of Respironics Colorado, Inc. and Stimotron since the acquisition
dates. The remaining increases in net sales (23% for the year ended June 30,
1997) were attributable to increases in total unit and dollar sales for the
Company's ventilatory support and OSA products. Sales of the Company's face
masks and other patient interface devices used as accessories for its OSA and
ventilatory support units also increased significantly in both unit and dollar
terms.
The Company's gross profit was 55% of net sales for fiscal year 1997
as compared to 56% of net sales for fiscal year 1996 and 57% of net sales for
fiscal year 1995. The decreases in gross margin percentage over the three year
period were primarily caused by reduced average selling prices for certain of
the Company's products. These reductions in average selling price, which had
been expected, resulted from increasing competition in the Company's primary
product lines, particularly in OSA, relative to the Company's large, national
customers who received lower prices in exchange for volume purchase commitments.
In addition, manufacturing support costs grew from fiscal year 1995 to fiscal
year 1996 at a rate higher than the overall rate of sales growth.
General and administrative expenses were $21,506,000 (12% of net
sales) for fiscal year 1997 as compared to $16,602,000 (13% of net sales) for
fiscal year 1996 and $14,050,000 (14% of net sales) for fiscal year 1995. The
increase in absolute dollars from fiscal year 1996 to fiscal year 1997 was due
primarily to the addition of expenses incurred by the Company's new
subsidiaries, Respironics Colorado, Inc. and Stimotron, since their acquisitions
on October 21, 1996 and February 26, 1997, respectively. In addition,
amortization of the goodwill generated by those acquisitions began on those
dates, with the expense being included in general and administrative expenses.
Offsetting these increases was a reduction in the provision for year end profit
sharing bonuses for fiscal year 1997 based on financial results achieved. The
increase in absolute dollars from fiscal 1995 to fiscal year 1996 was due
primarily to an increased provision for year end profit sharing bonuses based on
financial results achieved and to increased legal fees, including those incurred
related to the previously disclosed ResCare patent litigation. The
21
overall increases in absolute dollars for both comparisons were still at rates
less than the rate of increase in overall sales.
Sales, marketing and commission expenses were $34,368,000 (19% of net
sales) for fiscal year 1997 as compared to $20,845,000 (17% of net sales) for
fiscal year 1996 and $17,696,000 (18% of net sales) for fiscal year 1995. The
increase from fiscal year 1996 to fiscal year 1997 was due primarily to the
addition of expenses incurred by the Company's new subsidiaries, Respironics
Colorado, Inc. and Stimotron. Respironics Colorado, Inc. has a network of 19
fully staffed customer satisfaction centers throughout the U.S., a portion of
the costs of which are included in sales, marketing and commissions. In
addition, because Stimotron serves as the Company's exclusive distributor in
Germany, most of its operating expenses are included in sales, marketing and
commissions. Increased costs were also incurred for the Company's sales and
marketing efforts elsewhere in Europe. The increase in absolute dollars from
fiscal 1995 to fiscal 1996 was due to higher commissions paid to independent
sales representatives based on the increased sales levels achieved, increased
trade show and related travel expenses, and increased salary expenses, primarily
for new employees in sales and marketing management and training and medical
education.
Research and development expenses were $10,768,000 (6% of net sales)
for fiscal year 1997 as compared to $9,328,000 (7% of net sales) for fiscal year
1996 and $7,077,000 (7% of net sales) for fiscal year 1995. The increase in
absolute dollars from fiscal year 1996 to fiscal year 1997 reflects the
significant new product development efforts undertaken to support product
introductions in the Company's major product groups, including the Solo CPAP
unit, the BiPAP S/T-D 30, the BiPAP DUET system along with several mask and
patient interface products. Major product development work was also done on
several new products for which FDA clearance to market in the U.S. is pending.
The increase in absolute dollars from fiscal 1995 to fiscal 1996 primarily
reflects the costs associated with developing a new family of OSA therapy
devices, the Great Performers line, that was introduced starting in fiscal year
1996. Additional costs were also incurred throughout the three year period to
fund clinical studies and work involving opportunities in other respiratory
product areas.
The Company's effective income tax rate was 40% for fiscal year 1997 as
compared to 39% for fiscal year 1996 and 37% for fiscal year 1995. Changes in
the Company's effective income tax rate are due primarily to changes in the
relative proportions of taxable income attributable to its U.S. and European
operations versus taxable income attributable to its Hong Kong and Peoples
Republic of China operations because the U.S. and European operations pay income
taxes at a higher rate (approximately 41% before available income tax credits)
than do the Hong Kong and Peoples Republic of China operations. For the fiscal
year 1996 to 1997 comparison, the proportion of taxable income attributable to
the U.S. and European
22
operations increased, due in part to taxable income generated by the Company's
new subsidiaries, Respironics Colorado, Inc. and Stimotron, since their
acquisitions. In addition, the amortization of the goodwill generated by the
acquisitions is not a tax deductible expense, and therefore also contributed to
the increased effective income tax rate. For the fiscal year 1995 to 1996
comparison, the proportion of taxable income attributable to the U.S. operation
also increased, and a research and development tax credit that was available in
fiscal year 1995 expired in fiscal year 1996, further contributing to the
increased income tax rate (this tax credit was reinstated for fiscal year 1997).
As a result of the factors described above, the Company's net income
was $20,316,000 (11% of net sales) or $1.00 per share for fiscal year 1997 as
compared to $15,339,000 (12% of net sales) or $0.84 per share for fiscal year
1996 and $11,677,000 (12% of net sales) or $0.67 per share for fiscal year 1995.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement No. 128, "Earnings Per Share", which is required to be adopted
on December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The adoption of Statement
No. 128 is expected to increase the Company's primary earnings per share (called
"basic earnings per share" under the Statement) by less than 10% and is not
expected to have a material impact on the Company's fully diluted earnings per
share (called "diluted earnings per share" under the Statement).
Financial Condition, Liquidity and Capital Resources
The Company had working capital of $71,038,000 and $99,435,000 at
June 30, 1997 and 1996, respectively. Net cash provided by operating
activities was $13,388,000, $7,838,000, and $9,469,000 for fiscal years 1997,
1996 and 1995, respectively. The increase in cash provided by operating
activities from fiscal year 1996 to fiscal year 1997 was due primarily to higher
earnings in fiscal year 1997 and to an increase in accounts receivable in
fiscal year 1997 in an amount smaller than the increase in that account in the
prior year. The decrease in cash provided by operating activities from fiscal
year 1995 to fiscal year 1996 was due primarily to an increase in accounts
receivable during fiscal year 1996 in an amount greater than the increase in
that account during fiscal year 1995 and to a tax refund received during fiscal
year 1995.
The increase in accounts receivable during fiscal year 1996 described
above was due to growth in international sales at a rate greater than overall
sales growth (all of the Company's international sales are made on extended
payment terms), an increase in the portion of the Company's domestic sales that
were made on extended payment terms, and, to a lesser extent, an increase in the
proportion of the Company's sales made late in the fiscal year.
Net cash used by investing activities was $63,063,000, $6,255,000, and
$7,711,000 for fiscal years 1997, 1996 and 1995, respectively. Net cash used
by investing activities for fiscal year 1997 included $49,208,000 relating to
the October 21, 1996 acquisition of LIFECARE International, Inc. and $9,000,000
relating to the February 26, 1997 acquisition of Stimotron. Additional
consideration of up to $5,000,000 over the next four years may be due for the
Stimotron acquisition based upon financial results achieved in Germany. Net
cash used by investing activities for fiscal year 1995 included an expenditure
of $745,000 representing a portion of the purchase price for the acquisition of
Vitalog. The remainder of the purchase price for the Vitalog
23
acquisition was paid with shares of the Company's common stock. See Note K to
the Consolidated Financial Statements for additional information regarding these
acquisitions.
Net cash used for capital expenditures, consisting primarily of the
purchase of production equipment, computer hardware and software, and office
equipment, was $4,930,000, $6,220,000, and $6,941,000 for fiscal years 1997,
1996 and 1995, respectively.
Funding for the LIFECARE and Vitalog acquisitions was provided by
accumulated cash and short term investment balances. Funding for the Stimotron
acquisition was provided by a $9,000,000 loan received from a commercial bank in
February 1997 under the terms of a credit agreement. Funding for a portion of
a 46,000 square foot addition to the Company's manufacturing facility in
Murrysville, Pennsylvania was provided by a $1,133,000 Pennsylvania Industrial
Development Authority Loan received in February 1995. See Notes D and K to the
Consolidated Financial Statements for additional information about long-term
obligations and acquisition financing.
Funding for the other investment activities in fiscal years 1997, 1996
and 1995 was provided by positive cash flows from operating activities and
accumulated cash and short-term investment balances.
Net cash provided by financing activities includes $46,832,000
from a public offering of 2,373,589 shares of common stock completed in April
1996 and proceeds from the issuance of common stock under the Company's stock
option plans during each of the years presented. Net cash provided by financing
activities also reflects, for fiscal year 1997, the Company's acquisition of
46,000 shares of its common stock for $844,000 in the open market pursuant to a
stock buy back program announced in November 1996.
In October 1996, the Company entered into a new line of credit
facility with a commercial bank that provides for the availability of $1,250,000
at a maximum interest rate equal to the bank's prime interest rate until the
expiration date of the agreement on October 31, 1997. The Company expects that
this line of credit facility will be renewed prior to its expiration. See Note D
to the Consolidated Financial Statements for a discussion of the line of credit.
In October 1996, the Company announced that its status with Apria
Healthcare ("Apria") had changed from "primary supplier" to sole "secondary
supplier" effective in November 1996. This change adversely affected sales
levels for the year ended June 30, 1997. Sales to Apria during the fiscal year
ended June 30, 1997 were $17,900,000 as compared to $20,500,000 for the fiscal
year ended June 30, 1996. Subsequent to the Company's change in status, it
focused on demonstrating to Apria superior effort and added value service
surrounding its product offerings. In spite of these efforts, sales to Apria of
CPAP and bi-level units and related masks during the second half of the fiscal
year decreased to approximately 40% of levels anticipated prior to the change in
status. While the Company cannot predict with certainty what actions Apria will
take relative to future supplier selection (especially in light of Apria's
announced intentions to review restructuring alternatives, including a possible
merger or sale), it is anticipated that an open bidding process will occur
again. The Company plans to participate in this bidding process with the goal of
maximizing its share of Apria's business, but there can be no assurance as to
the outcome of such a bidding process.
The Company has not provided a valuation allowance for deferred income
tax assets because it has determined that it is more likely than not that such
assets can be realized, at a minimum, through carrybacks to prior years in which
taxable income was generated.
24
The Company believes that positive cash flow from operating and
financing activities, the availability of the full amount of funds under its
commercial bank line of credit, commercial bank financing committed for the
additional consideration that may be due for the Stimotron acquisition, and its
accumulated cash and short-term investments will be sufficient to meet its
current and presently anticipated future needs for fiscal year 1998 for
operating activities, investing activities, and financing activities (primarily
consisting of payments on long-term debt ).
Inflation
Inflation has not had a significant effect on the Company's business
during the periods discussed.
25
Item 8. Consolidated Financial Statements
---------------------------------
Index to Consolidated Financial Statements
Report of Independent Auditors.................................. 27
Consolidated Balance Sheets as of June 30, 1997 and 1996 ....... 28
Consolidated Statements of Operations for the
years ended June 30, 1997, 1996 and 1995...................... 30
Consolidated Statements of Cash Flows for the
years ended June 30, 1997, 1996 and 1995...................... 31
Consolidated Statements of Shareholders' Equity
for the years ended June 30, 1997, 1996 and 1995.............. 32
Notes to Consolidated Financial Statements...................... 33
26
Report of Independent Auditors
Board of Directors
Respironics, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Respironics,
Inc. and Subsidiaries as of June 30, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended June 30, 1997. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Respironics, Inc. and Subsidiaries at June 30, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young, LLP
Pittsburgh, Pennsylvania
September 10, 1997
27
CONSOLIDATED BALANCE SHEETS
RESPIRONICS, INC. AND SUBSIDIARIES
June 30
1997 1996
---------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 15,706,657 $ 65,255,699
Trade accounts receivable, less allowance for
doubtful accounts of $3,466,000
and $1,200,000 37,138,383 27,883,365
Inventories 33,699,256 17,863,887
Prepaid expenses and other 3,549,850 2,522,327
Deferred income tax benefits 5,008,897 2,457,453
-------------- -------------
TOTAL CURRENT ASSETS 95,103,043 115,982,731
PROPERTY, PLANT AND EQUIPMENT
Land 3,327,775 2,771,934
Buildings 12,936,177 8,907,692
Machinery and equipment 19,853,845 17,219,371
Furniture and office equipment 17,059,117 11,642,943
Leasehold improvements 1,236,327 1,068,851
-------------- -------------
54,413,241 41,610,791
Less allowances for depreciation
and amortization 23,705,759 19,294,440
-------------- -------------
30,707,482 22,316,351
Funds held in trust for construction
of new facility 1,754,452 746,114
OTHER ASSETS 3,837,491 3,210,802
COST IN EXCESS OF NET ASSETS OF
BUSINESSES ACQUIRED 52,829,458 1,690,636
-------------- -------------
$ 184,231,926 $ 143,946,634
============== =============
See notes to consolidated financial statements.
28
June 30
1997 1996
----------------------- ---------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 6,425,853 $ 4,178,301
Accrued compensation and related expenses 5,626,830 5,088,077
Accrued expenses 6,898,486 3,801,780
Income taxes 4,410,825 2,907,545
Current portion of long-term obligations 703,211 572,905
----------------------- ---------------------
TOTAL CURRENT LIABILITIES 24,065,205 16,548,608
LONG-TERM OBLIGATIONS 17,984,933 4,965,871
MINORITY INTEREST 604,072 887,320
COMMITMENTS
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized
100,000,000 shares at June 30, 1997 and
40,000,000 shares at June 30, 1996; issued
and outstanding 19,763,057 shares
at June 30, 1997 and 19,305,406
shares at June 30, 1996 197,631 193,054
Additional capital 68,351,143 67,105,290
Cumulative effect of foreign currency
translations (689,813) -0-
Retained earnings 74,601,203 54,285,379
Treasury stock (882,448) (38,888)
----------------------- ---------------------
TOTAL SHAREHOLDERS' EQUITY 141,577,716 121,544,835
----------------------- ---------------------
$ 184,231,926 $ 143,946,634
======================= =====================
See notes to consolidated financial statements.
29
CONSOLIDATED STATEMENTS OF OPERATIONS
RESPIRONICS, INC. AND SUBSIDIARIES
Year Ended June 30
1997 1996 1995
------------ ------------ -------------
Net sales $178,559,736 $125,766,388 $ 99,450,333
Cost of goods sold 79,554,031 55,248,973 43,077,158
------------ ------------ -------------
99,005,705 70,517,415 56,373,175
General and administrative expenses 21,505,558 16,602,072 14,050,071
Sales, marketing and commission
expenses 34,368,202 20,844,836 17,696,059
Research and development expenses 10,767,916 9,328,293 7,077,216
Interest expense 615,947 199,926 193,550
Other income (2,039,745) (1,615,320) (1,178,685)
------------ ----------- -------------
65,217,878 45,359,807 37,838,211
------------ ----------- -------------
INCOME BEFORE INCOME TAXES 33,787,827 25,157,608 18,534,964
Income taxes 13,472,003 9,819,000 6,857,937
------------ ----------- -------------
NET INCOME $ 20,315,824 $15,338,608 $ 11,677,027
============ =========== =============
Earnings per share $ 1.00 $ 0.84 $ 0.67
============ =========== =============
Weighted average number of shares
used in computing earnings
per share 20,271,933 18,324,500 17,532,422
See notes to consolidated financial statements.
30
CONSOLIDATED STATEMENTS OF CASH FLOWS
RESPIRONICS, INC. AND SUBSIDIARIES
Year Ended
June 30
1997 1996 1995
-----------------------------------------
OPERATING ACTIVITIES
Net income $ 20,315,824 $ 15,338,608 $ 11,677,027
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,902,669 4,008,668 3,831,793
Provision for deferred income taxes (361,924) (256,858) (178,819)
Provision for losses on accounts receivable 250,000 500,000 175,000
Loss on sale of equipment -0- -0- 35,719
Changes in operating assets and liabilities:
Increase in accounts receivable (173,845) (8,935,178) (4,515,077)
Decrease in refundable income taxes -0- -0- 1,787,265
Increase in inventories and prepaid
expenses (4,325,801) (5,298,192) (5,770,417)
Increase in other assets (295,295) (542,210) (1,448,295)
(Decrease) increase in accounts payable (5,433,806) (680,253) 1,680,521
(Decrease) increase in accrued compensation
and related expenses (562,821) 1,260,890 764,557
(Decrease) increase in accrued expenses (1,196,781) 1,107,482 516,442
(Decrease) increase in accrued income taxes (1,730,096) 1,335,424 912,999
------------ ------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 13,388,124 7,838,381 9,468,715
INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired (58,066,208) -0- (745,433)
Purchase of property, plant and equipment (4,930,957) (6,220,314) (6,940,667)
Proceeds from sale of equipment -0- -0- 5,503
Increase in funds held in trust for construction
of new facility (66,048) (35,185) (30,557)
------------ ------------ ------------
NET CASH USED BY
INVESTING ACTIVITIES (63,063,213) (6,255,499) (7,711,154)
FINANCING ACTIVITIES
Proceeds from long-term obligations 9,000,000 -0- 1,132,760
Reduction in long-term obligations (8,997,575) (497,370) (355,920)
Issuance of common stock 1,250,430 47,875,919 1,191,649
Acquisition of treasury stock (843,560) (38,888) -0-
(Decrease) increase in minority interest (283,248) 206,252 16,800
------------ ------------ ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 126,047 47,545,913 1,985,289
------------ ------------ ------------
(DECREASE) INCREASE IN CASH AND
SHORT-TERM INVESTMENTS (49,549,042) 49,128,795 3,742,850
Cash and short-term investments at beginning of period 65,255,699 16,126,904 12,384,054
------------ ------------ ------------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 15,706,657 $ 65,255,699 $ 16,126,904
============ ============ ============
See notes to consolidated financial statements.
31
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
RESPIRONICS, INC. AND SUBSIDIARIES
Cumulative
Effect of
Common Stock Foreign Treasury Stock
----------------------- Additional Currency Retained ----------------------
Shares Amount Capital Translations Earnings Shares Amount Total
----------- --------- ------------ ------------ ------------ ---------- ---------- ------------
BALANCE AT JUNE 30, 1994 16,344,690 $ 163,446 $ 16,790,919 $ -0- 27,269,744 -0- $ -0- $44,224,109
Net income for the year
ended June 30, 1995 -0- -0- -0- -0- 11,677,027 -0- -0- 11,677,027
Shares sold pursuant to
stock option plans 315,001 3,150 1,188,499 -0- -0- -0- -0- 1,191,649
Acquisition of a business 85,094 852 1,275,559 -0- -0- -0- -0- 1,276,411
----------- --------- ------------ ------------ ------------ ---------- ---------- ------------
BALANCE AT JUNE 30, 1995 16,744,785 167,448 19,254,977 -0- 38,946,771 -0- -0- 58,369,196
Net income for the year
ended June 30, 1996 -0- -0- -0- -0- 15,338,608 -0- -0- 15,338,608
Shares sold pursuant to
stock option plans 187,032 1,870 1,018,722 -0- -0- -0- -0- 1,020,592
Acquisition of treasury
stock -0- -0- -0- -0- -0- 1,819 (38,888) (38,888)
Net proceeds from shares
sold in public offering 2,373,589 23,736 46,831,591 -0- -0- -0- -0- 46,855,327
----------- --------- ------------ ------------ ------------ ---------- ---------- -----------
BALANCE AT JUNE 30, 1996 19,305,406 193,054 67,105,290 -0- 54,285,379 1,819 (38,888) 121,544,835
Net income for the year
ended June 30, 1997 -0- -0- -0- -0- 20,315,824 -0- -0- 20,315,824
Shares sold pursuant to
stock option plans 457,651 4,577 1,175,479 -0- -0- -0- -0- 1,180,056
Acquisition of treasury
stock -0- -0- -0- -0- -0- 46,000 (843,560) (843,560)
Income tax benefit from
exercise of
stock options -0- -0- 70,374 -0- -0- -0- -0- 70,374
Translation adjustments -0- -0- -0- (689,813) -0- -0- -0- (689,813)
----------- --------- ------------ ------------ ------------ ---------- ---------- -----------
BALANCE AT JUNE 30, 1997 19,763,057 $ 197,631 $ 68,351,143 $ (689,813) $ 74,601,203 47,819 $ (882,448) $141,577,716
=========== ========= ============ ============ ============ ========= ========== ============
See notes to consolidated financial statements.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESPIRONICS, INC. AND SUBSIDIARIES
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
- ---------------------------
The consolidated financial statements include the accounts of Respironics, Inc.
(the Company), its wholly owned domestic and foreign subsidiaries, and a foreign
joint venture in which it holds a 51% equity investment. The joint venture
partner's 49% equity interest is included in the Company's financial statements
as minority interest. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Revenue Recognition:
- -------------------
Revenue is recognized from sales when a product is shipped.
Inventories:
- -----------
Inventories are valued at the lower of cost (first-in, first-out) or market.
Property, Plant and Equipment:
- -----------------------------
Property, plant and equipment is recorded on the basis of cost. Depreciation is
computed using the straight-line method based upon the estimated useful lives of
the respective assets. Amortization of assets under capital leases is included
in depreciation expense.
Income Taxes:
- ------------
Provisions for income taxes include deferred taxes resulting from temporary
differences in income for financial and tax purposes using the liability method.
Such temporary differences result primarily from differences in the carrying
value of assets and liabilities.
The Company does not provide for federal income taxes on the undistributed
earnings of its foreign subsidiaries (other than deemed dividends which are
taxed currently) because such earnings are reinvested and, in the opinion of
management, will continue to be reinvested indefinitely.
Foreign Currency Translation:
- ----------------------------
The Company follows Statement of Financial Accounting Standards No. 52 for the
translation of the accounts of its foreign subsidiaries and its joint venture.
Foreign currency assets and liabilities are translated into United States
dollars at the rate of exchange existing at the statement date or historical
rates depending upon the nature of the account. Income and expense amounts are
translated at the average of the monthly exchange rates. Adjustments resulting
from these translations are credited or charged directly to a separate component
of shareholders' equity. Gains and losses resulting from foreign currency
transactions are credited or charged directly to income.
Stock Options:
- -------------
Stock options are granted to certain employees and certain members of the
Company's Board of Directors at fair market value on the date of the grant.
Proceeds from the exercise of common stock options are credited to shareholders'
equity at the date the options are exercised. There are no charges or credits to
income with respect to these options. The Company follows the requirements of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" in accounting for stock based compensation.
Earnings per Share:
- ------------------
Earnings per share is based on the weighted average number of shares outstanding
during each year and the assumed exercise of dilutive stock options (less the
number of treasury shares assumed to be purchased with the proceeds using the
average market price of the Company's common stock for primary earnings per
share and the higher of the ending market price or average market price for
fully diluted earnings per share).
Cash and Short-Term Investments:
- ---------------------------------
The Company considers all highly liquid investments with a maturity of 90 days
or less when purchased to be cash and short-term investments.
33
Capitalized Software Development Costs:
- ---------------------------------------
Software development costs have been capitalized and are being amortized to the
cost of product revenues over the estimated economic lives of the products that
include such software. Total net capitalized software development costs were
$2,522,000 and $2,676,000 at June 30, 1997 and 1996, respectively.
Advertising Costs:
- ------------------
Advertising is charged to expenses during the period in which it is incurred.
Total advertising expenses for the fiscal years ended June 30, 1997, 1996, and
1995 were $394,737, $429,250, and $430,913 respectively.
Goodwill:
- ---------
The cost in excess of the fair value of net assets of businesses acquired is
amortized on the straight line method over periods from 12 to 20 years.
Accumulated amortization was $1,830,000 and $197,000 at June 30, 1997 and 1996
respectively.
Recently Issued Accounting Standards:
- -------------------------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings Per Share", which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The adoption of Statement
No. 128 is expected to increase the Company's primary earnings per share (called
"basic earnings per share" under the Statement) by less than 10% and is not
expected to have a material impact on the Company's fully diluted earnings per
share (called "diluted earnings per share" under the Statement).
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" and Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information". Both Statements become effective for the Company's fiscal
year ended June 30, 1999 and relate to the disclosure of financial information
not found in the basic financial statements. Statement No. 130 establishes
standards for the reporting and display of "comprehensive income" and its
components, in addition to net income, in financial statements. Comprehensive
income is intended to include certain items that are not reflected in the
statement of operations, such as foreign currency translation adjustments.
Statement No. 131 changes the way public companies report segment information
and establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company is currently studying the
provisions of these Statements and has not adopted such provisions in the June
30, 1997 financial statements.
Use of Estimates:
- ------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statement and accompanying notes.
Actual results could differ from those estimates.
NOTE B -- SHORT-TERM INVESTMENTS
Short-term investments consist primarily of money market accounts and
certificates of deposit issued by large commercial banks located in the United
States and Hong Kong. These investments are readily convertible to cash and
are stated at cost which approximates market.
NOTE C -- INVENTORIES
Inventories consisted of the following:
June 30
1997 1996
----------- -----------
Raw materials $14,827,760 $11,047,978
Work-in-process 2,291,043 2,075,329
Finished goods 16,580,453 4,740,580
----------- -----------
$33,699,256 $17,863,887
=========== ===========
34
NOTE D -- LONG TERM OBLIGATIONS
Long-term obligations consisted of:
June 30
1997 1996
---------- -----------
1989 Economic Development
Revenue Bonds, variable interest
rate (effective rate of 5.28%,
including letter of credit and
remarketing fees, at June
30, 1997), principal payable in
annual installments of $200,000
through 2004 $1,600,000 $1,800,000
Industrial Development Authority
Loan, payable in monthly install-
ments of $13,777, including interest
at 3%, through June 2005 1,154,297 1,282,938
Redevelopment Authority Loan,
payable in quarterly installments
of $14,533, including interest at 5%,
through June 2005 409,934 446,420
Redevelopment Authority Loan,
payable in monthly installments of
$6,296, including interest at 2%,
through July 2009 805,448 864,253
Industrial Development Authority
Loan, payable in monthly install-
ments of $7,289, including interest
at 2%, through March 2010 996,190 1,064,883
Industrial Development Revenue Bond,
payable in quarterly installments of
$40,000 including interest at a floating
rate (effective rate of 6.0% including
letter of credit fees at June 30, 1997)
through November 2009 4,720,000 -0-
Commercial Bank credit agreement
payable in one lump sum on February 2002
including interest at a floating rate
(6.19% at June 30, 1997) 9,000,000 -0-
Other 2,275 80,282
----------- ----------
18,688,144 5,538,776
Less current portion 703,211 572,905
----------- ----------
$17,984,933 $4,965,871
=========== ==========
The Economic Development Revenue Bonds, the Industrial Development Authority
Loans, and the Redevelopment Authority Loans are secured by mortgages upon the
Company's manufacturing facility in Murrysville, Pennsylvania. The Revenue
Bond is secured by a mortgage upon the Company's facility in Westminster,
Colorado. Proceeds from the bonds and the loans were used to finance the
construction and expansion of the facilities. The commercial bank credit
agreement is unsecured. The Company is required to meet certain financial
covenants in connection with these obligations, including those relating to
current ratio,
35
ratio of total liabilities to tangible net worth, and minimum tangible net
worth. At June 30, 1997 the Company was in compliance with these covenants.
The Company also has $1,250,000 available under a line of credit facility with a
commercial bank with a maximum interest rate equal to the bank's prime rate
until the expiration date of October 31, 1997. Borrowings made on this line of
credit are unsecured. The Company is required to meet certain financial
covenants under this line of credit relating to current ratio, the ratio of
total liabilities to tangible net worth and a minimum tangible net worth. There
were no outstanding borrowings under this credit facility.
Scheduled maturities of long-term obligations for the next five years are as
follows:
Maturities of
Long-Term Debt
--------------
1998 $ 703,211
1999 669,516
2000 678,370
2001 687,500
2002 9,696,941
Thereafter 6,252,606
-----------
Total $18,688,144
===========
Interest paid was $457,510, $203,764, and $194,220 for the years ended June 30,
1997, 1996, and 1995, respectively.
NOTE E - OPERATING LEASES
The Company leases its corporate headquarters, customer satisfaction centers,
and its offices, warehouses and manufacturing facilities in the Far East and in
Europe.
The minimum rentals due under noncancelable leases with recurring terms of one
year or more as of June 30, 1997 are as follows:
Year ending June 30 Amount
- ------------------- ------
1998 $1,548,673
1999 1,347,924
2000 752,944
2001 679,091
2002 652,664
Total rent expense for the years ended June 30, 1997, 1996, and 1995 was
$1,133,254, $360,842, and $214,593, respectively.
NOTE F -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
financial instruments:
CASH AND SHORT-TERM INVESTMENTS
- -------------------------------
The carrying amount approximates fair value because of the short maturity of
those investments.
36
LONG TERM OBLIGATIONS
- ---------------------
The fair values of long-term debt obligations are established from the market
values of similar issues.
The carrying amounts and fair values of the Company's financial instruments are
as follows:
June 30, 1997 June 30, 1996
Carrying Carrying
Amount Fair Value Amount Fair Value
------------ ---------- ----------- ----------
Cash and Short Term
Investments $15,706,657 $15,706,657 $65,255,699 $65,255,699
Long Term Obligations 17,984,933 17,984,933 4,965,871 4,965,871
NOTE G -- INCOME TAXES
Year Ended June 30
1997 1996 1995
----------- ----------- -----------
Income taxes consisted of:
Current
Federal $10,577,528 $ 8,280,388 $ 5,379,275
Foreign 1,485,216 96,316 197,943
State 1,771,183 1,699,154 1,459,538
----------- ----------- -----------
13,833,927 10,075,858 7,036,756
Deferred:
Federal (385,087) (216,330) (165,132)
State 23,163 (40,528) (13,687)
----------- ----------- -----------
(361,924) (256,858) (178,819)
----------- ----------- -----------
TOTAL INCOME TAXES $13,472,003 $ 9,819,000 $ 6,857,937
=========== =========== ===========
The difference between the statutory U.S. federal income tax rate and the
Company's effective income tax rate is explained below:
Year Ended June 30
1997 1996 1995
----- ----- -----
Statutory federal income tax rate 35% 35% 35%
Increases (decreases):
State taxes 3 4 5
Other items, net, none of which
individually exceeds 5% of
federal income taxes at statutory
rates 2 -0- (3)
---- ---- ----
EFFECTIVE INCOME TAX RATE 40% 39% 37%
==== ==== ====
37
Deferred income tax assets consisted of the following:
June 30
1997 1996
----------- -----------
Inventories $ 1,408,887 $ 329,589
Allowance for bad debts 833,910 402,575
Depreciation 942,924 609,810
Accruals 1,823,176 1,115,479
----------- -----------
Total $ 5,008,897 $ 2,457,453
=========== ===========
Income before income taxes consisted of the following:
Year ended June 30
1997 1996 1995
----------- ----------- -----------
United States $30,259,127 $23,793,338 $17,935,537
Foreign 3,528,700 1,364,270 599,427
----------- ----------- -----------
Total $33,787,827 $25,157,608 $18,534,964
=========== =========== ===========
Undistributed earnings of the foreign subsidiaries on which no U.S. income tax
has been provided amounted to $13,718,913 at June 30, 1997.
The Company's operation in the Peoples Republic of China is affected by an
income tax holiday. Net income increased by $113,215 ($0.01 per share),
$433,895 ($0.02 per share), and $339,851 ($0.02 per share) for the years ended
June 30, 1997,1996, and 1995 respectively, as a result of this income tax
holiday. Under the terms of the income tax holiday, the Company's operation
in the Peoples Republic of China paid income tax of 7.5% for the years ended
June 30, 1997, 1996 and 1995. The tax rate will then increase to 15% for years
thereafter. The applicable statutory income tax rate in the Peoples Republic
of China is approximately 33%.
Income taxes paid were $14,694,151, $8,740,435, and $4,335,733 for the years
ended June 30, 1997, 1996, and 1995, respectively.
NOTE H -- STOCK OPTION AND PURCHASE PLANS
The Company has the 1984 Incentive Stock Option Plan (the "1984 Plan") which
provided options to eligible employees to purchase common stock over five or
ten years at fair market value at the time of the grant. Options become
exercisable one year from the date of the grant at a rate not exceeding 25% per
year (subject to possible acceleration in certain circumstances). The Company
reserved shares of its common stock and authorized options to purchase 3,400,000
shares of common stock under the 1984 Plan. The 1984 Plan terminated as to new
grants on December 31, 1993.
The Company also has the 1992 Stock Incentive Plan (the "1992 Plan") which was
approved by the Company's shareholders in November 1992. Under the 1992 Plan,
eligible employees may receive options to purchase common stock over ten years
at option prices that may not be less than fair market value at the date of
grant. Stock options granted under the 1992 Plan become exercisable no sooner
than six months from grant date (subject to possible acceleration under certain
circumstances) and such options may include cash payment rights. Eligible
employees may also receive awards of restricted shares of the Company's common
stock under the 1992 Plan. The aggregate number of options and restricted
shares which may be issued under the 1992 Plan is 1,000,000.
In November 1991, the Company's shareholders approved the adoption of the 1991
Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). The
aggregate number of shares which may be issued and as to which grants of options
may be made under the Directors' Plan is presently 300,000 under a November
1996 plan amendment approved by the
38
Company's shareholders. All options under the Directors' Plan are granted to
members of the Company's Board of Directors who are not employees of the
Company. Such options are granted at fair market value on the date of grant.
Under the provisions of the Directors' Plan, in November 1991 each of the four
non-employee directors who had been non-employee directors for at least two
years prior to the approval of the Directors' Plan received a one-time option to
purchase 10,000 shares at an option price of $6.13 per share. In addition, each
of the five non-employee directors (regardless of years of service) received an
option to purchase 5,100 shares at an option price of $6.13 per share. In
succeeding years, each non-employee director receives an option to purchase an
additional 5,100 shares on the third business day following the Company's annual
meeting of shareholders. These grants will continue until options for all the
shares available under the Directors' Plan have been granted.
The one time option granted to non-employee directors with more than two years
of service was exercisable in full three months after the date of grant. For all
other options granted under the Directors' Plan, 25% of the shares are
exercisable one year after the date of the grant, 25% are exercisable two years
after the date of grant, and the remaining 50% are exercisable three years after
the date of grant. All options granted under the Directors' Plan expire ten
years after the date of grant.
Pertinent information regarding options under all Plans is as follows:
Option Shares
-------------
Year Ended June 30
1997 1996 1995
--------- --------- ---------
Outstanding at beginning of period 1,516,431 1,621,401 1,921,926
Granted:
Price range ($14.85 - $23.25) 165,250
Price range ($13.38 - $22.75) 90,425
Price range ($11.25 - $16.25) 78,252
Exercised:
Price range ($1.00 - $16.25) (457,651)
Price range ($1.00 - $16.25) (187,032)
Price range ($1.00 - $10.07) (315,001)
Canceled (1,000) (8,363) (63,776)
--------- --------- ---------
Outstanding at end of period 1,223,030 1,516,431 1,621,401
========= ========= =========
Exercisable at end of period 871,408 1,232,224 1,256,387
========= ========= =========
Shares available for future grant 642,613 807,863 898,288
========= ========= =========
The per share weighted-average fair value of stock options granted during 1997
and 1996 was $7.86 and $9.43, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
1997 1996
------ ------
Expected volatility 39.75% 40.20%
Expected dividend yield none none
Risk-free interest rate 6.11% 7.49%
Expected life of stock options 5 5
The Company applies APB Opinion No. 25 in accounting for its stock option plans
and accordingly, no compensation cost has been recognized for its stock options
in the financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS 123, the
Company's net earnings and related per share amounts would have been reduced to
the pro forma amounts indicated below:
39
1997 1996
----------- -----------
Net earnings:
As reported $20,315,824 $15,338,608
Pro forma 19,976,857 15,250,462
Net earnings per share:
As reported 1.00 0.84
Pro forma 0.99 0.83
Pro forma net earnings reflect only options granted in 1997 and 1996.
Therefore, the full effect of calculating compensation cost for stock options
under SFAS 123 is not reflected in the pro forma net earnings and related per
share amounts presented above because compensation cost is reflected over the
vesting period of the options and compensation cost for options granted prior to
July 1, 1995 is not considered.
In March 1997, the Company adopted, subject to shareholder approval, an Employee
Stock Purchase Plan ("Plan") under which employees can purchase common stock of
the Company through payroll deductions. The purchase price under the Plan is the
lesser of 85% of the market value of the Company's common stock on either the
first or last day of the Plan year. The maximum amount each employee can
purchase is equal to 20% of annual compensation. There are no charges or credits
to income in connection with the plan. Shares will be purchased with the funds
set aside through payroll deductions at the end of each Plan year.
In June 1996, the Company adopted a shareholders' rights plan under which
existing and future shareholders received a right for each share outstanding
entitling such shareholders to purchase shares of the Company's common stock at
a specified exercise price. The right to purchase such shares is not currently
exercisable, but would become exercisable in the future if certain events
occurred relating to a person or group (the "acquiror") acquiring or attempting
to acquire 20% or more of the Company's outstanding shares of common stock. In
the event the rights become exercisable, each right would entitle the holder
(other than the acquiror) to purchase shares of the Company's common stock
having a value equal to two times the specified exercise price.
NOTE I -- FINANCIAL INFORMATION BY GEOGRAPHIC AREAS AND MAJOR
CUSTOMERS
Year Ended June 30
1997 1996 1995
------------ ------------ -----------
NET SALES
United States:
Unaffiliated customers $155,006,977 $121,356,370 $97,730,086
Interarea transfers 16,030,250 551,002 750,744
------------ ------------ -----------
171,037,227 121,907,372 98,480,830
Europe:
Unaffiliated customers 14,348,947 -0- -0-
Far East:
Unaffiliated customers 9,203,812 4,410,018 1,720,248
Interarea transfers 4,883,257 7,433,684 8,430,823
------------ ------------ -----------
14,087,069 11,843,702 10,151,071
Eliminations--transfers (20,913,507) (7,984,686) (9,181,567)
------------ ------------ -----------
NET SALES $178,559,736 $125,766,388 $99,450,333
============ ============ ===========
OPERATING PROFIT
United States $ 35,143,364 $ 28,536,740 $22,239,437
Europe 2,138,534 -0- -0-
Far East 3,453,349 1,543,241 877,325
------------ ------------ -----------
OPERATING PROFIT 40,735,247 30,079,981 23,116,762
Corporate expense 6,331,473 4,722,447 4,388,248
Interest expense 615,947 199,926 193,550
------------ ------------ -----------
INCOME BEFORE INCOME
TAXES $ 33,787,827 $ 25,157,608 $18,534,964
============ ============ ===========
40
Interarea transfers are accounted for at prices comparable to unaffiliated
customer sales reduced by an approximation of costs not incurred on internal
sales.
Additional information regarding assets and liabilities by geographic area
follows:
June 30
1997 1996
------------ ------------
IDENTIFIABLE ASSETS
United States $143,919,695 $ 68,133,435
Europe 10,019,490 -0-
Far East 9,652,898 8,416,965
------------ ------------
163,592,083 76,550,400
Corporate assets (primarily
cash and short-term
investments) 20,639,843 67,396,234
------------ ------------
TOTAL ASSETS $184,231,926 $143,946,634
============ ============
TOTAL ASSETS
United States $157,346,230 $129,744,562
Europe 10,897,618 -0-
Far East 15,988,078 14,202,072
------------ ------------
$184,231,926 $143,946,634
============ ============
TOTAL LIABILITIES
United States $ 34,037,189 $ 19,375,782
Europe 6,036,274 -0-
Far East 2,580,747 3,026,017
------------ ------------
$ 42,654,210 $ 22,401,799
============ ============
The Company develops, manufactures and markets medical devices for the treatment
of patients suffering from respiratory disorders. Its products are used
primarily in the home and in hospitals, as well as emergency medical settings
and alternative care facilities. The Company sells and rents primarily to
distributors in the health care industry and closely monitors the extension of
credit to both domestic and foreign customers, including obtaining and analyzing
credit applications for all new accounts and maintaining an active program to
contact customers promptly when invoices become past due. Sales to one customer
of the United States segment accounting for 10% or more of net sales were
$17,890,859 and $20,495,000 for the years ended June 30, 1997 and 1996 and
$10,955,000 to a company that was a predecessor of this customer for the year
ended June 30, 1995.
NOTE J -- RETIREMENT PLAN
The Company has a Retirement Savings Plan which is available to all United
States employees. Employees may contribute up to 15% (to a defined maximum) of
their compensation. The Company matches employee contributions (up to 3% of
each employee's compensation) at a 100 % rate and may make discretionary
contributions. The Company contributed $520,000, $433,000, and $420,000 to the
plan for the years ended June 30, 1997, 1996, and 1995, respectively.
The Company's current benefit program does not provide postretirement benefits
to employees.
NOTE K-- ACQUISITIONS
On February 26, 1997, the Company acquired the capital stock of Stimotron
Medizinische Gerate GmbH ("Stimotron"). Stimotron is based in Wendelstein,
Germany and is the exclusive distributor for the Company's products in that
country. The initial consideration paid was $9,000,000 in cash, with the terms
of the transaction providing for additional consideration of up to $5,000,000 in
cash over the next four years based upon the achievement of certain financial
results in Germany. Financing for the initial consideration was obtained from
a commercial bank and a commitment for financing for the additional
consideration has been obtained from the same commercial bank. The acquisition
was treated as a purchase for financial reporting purposes, and
41
accordingly the Company's results of operations include the results of
operations of Stimotron since the acquisition date. Goodwill generated by the
acquisition will be amortized over 20 years on a straight line basis.
On October 21, 1996, the Company acquired the capital stock of LIFECARE
International, Inc. a developer, manufacturer and marketer of respiratory
therapy products, with its primary focus on portable home ventilation therapy,
based in Westminster, Colorado (LIFECARE International, Inc. has since been
renamed Respironics Colorado, Inc.). Consideration paid was $50,000,000 in
cash. Financing for the acquisition came primarily from the proceeds of a
public offering completed by the Company in April 1996. The acquisition was
treated as a purchase for financial accounting purposes, and accordingly the
Company's results of operations include the results of operations of Respironics
Colorado, Inc. since the acquisition date. Goodwill generated by the
acquisition will be amortized over 20 years on a straight line basis.
The following unaudited pro forma summary presents the Company's results of
operations as if the acquisitions had occurred at the beginning of the periods
presented and does not purport to be indicative of what would have occurred had
the acquisitions been made as of those dates or of results which may occur in
the future.
Years ended June 30
1997 1996
------------ ------------
Pro Forma Sales $198,900,129 $170,382,998
Pro Forma Net Income $ 21,346,582 $ 14,529,455
Pro Forma Net Income per Share $ 1.05 $ 0.79
On April 6, 1995, the Company acquired Vitalog Monitoring, Inc., a California
company that designs, manufactures and markets sleep monitoring and diagnostic
equipment. Consideration paid was $745,000 in cash and 85,094 shares of the
Company's common stock valued at $1,276,000. The acquisition was treated as a
purchase for financial reporting purposes, and accordingly the Company's results
of operations include the results of operations of Vitalog since the acquisition
date. Goodwill generated by the acquisition will be amortized over 12 years on
a straight line basis. Vitalog's operations were not material in relation to
the Company's consolidated financial statements and pro forma information has
therefore not been presented.
NOTE L -- CONTINGENCY
The Company is a party to actions filed in a federal District Court in January
1995 and June 1996 in which a competitor alleges that the Company's sale in the
United States of certain products infringes a total of four of the competitor's
patents. In its response to these actions, the Company has denied the
allegations and has separately sought judgment that the claims under the patents
are invalid and that the Company does not infringe upon the patents. In June
1997, the Court granted the Company's motion for summary judgment that the
Company does not infringe one of the competitor's patents. In addition, the
January 1995 and June 1996 actions have been consolidated, and discovery is
currently underway. The Company believes that none of its products infringe
any of the patents in question in the event that any one or more of such
patents should be held to be valid and it intends to vigorously defend this
position.
42
NOTE M -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Following are the unaudited quarterly results of operations for the fiscal years
ended June 30, 1997 and 1996:
1997
----
Three Months Ended
September 30 December 31 March 31 June 30
------------ ----------- ----------- -----------
Net Sales $34,112,412 $43,001,308 $47,814,403 $53,631,613
Gross Profit 19,069,164 23,459,486 26,528,564 29,948,491
Net Income 4,453,476 4,868,757 5,094,290 5,899,301
Earnings Per Share 0.22 0.24 0.25 0.29
1996
----
Three Months Ended
September 30 December 31 March 31 June 30
------------ ----------- ----------- -----------
Net Sales $26,674,675 $30,241,119 $32,651,155 $36,199,439
Gross Profit 15,160,165 16,860,310 18,174,637 20,322,303
Net Income 3,219,272 3,508,968 3,799,113 4,811,256
Earnings Per Share 0.18 0.20 0.21 0.24
43
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure.
---------------------
None.
44
PART III
Items 10 through 13.
- --------------------
In accordance with the provisions of General Instruction G to Form
10-K, the information required by Item 10 (Directors and Executive Officers of
the Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership
of Certain Beneficial Owners and Management) and Item 13 (Certain Relationships
and Related Transactions) is not set forth herein because prior to October 28,
1997 the Company will file with the Commission a definitive Proxy Statement
which involves the election of Directors at its Annual Meeting of Shareholders
to be held on November 19, 1997, which Proxy Statement will contain such
information. The information required by Items 10, 11, 12 and 13 is
incorporated herein by reference to such Proxy Statement.
45
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
-------------------------------------------------------
Form 8-K.
---------
The financial statements, financial statement schedules and exhibits
listed below are filed as part of this annual report.
(a) (1) Financial Statements:
---------------------
The Consolidated Financial Statements of the Company and its
subsidiaries, together with the report of Ernst & Young LLP dated September 10,
1997, filed as part of this Annual Report on Form 10-K are listed in the index
to Consolidated Financial Statements in Item 8.
(a) (2) Financial Statement Schedules:
------------------------------
Page
----
Financial Statement Schedules:
Valuation and Qualifying Accounts.......... 47
(a) (3) Exhibits:.................................. 48
--------
46
FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
RESPIRONICS, INC.
COL. A COL. B COL. C COL. D COL. E
Balance at ADDITIONS Balance at
Beginning of Charged to Costs Charged to Other End of
DESCRIPTION Period and Expenses Accounts-Describe Deductions-Describe Period
- ----------------------------- ----------- ---------------- ----------------- ------------------- ----------
Year ended June 30, 1997:
Deducted from asset accounts:
Allowance for doubtful
accounts $1,200,000 $250,000 $2,016,000(a) $ 0 $3,466,000
========== ======== ========== ==== ============
Year ended June 30, 1996:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 700,000 $500,000 $ 0 $ 0 $1,200,000
========== ======== ========== ==== ===========
Year ended June 30, 1995:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 525,000 $175,000 $ 0 $ 0 $ 700,000
========== ======== ========== ==== ============
(a) Allowances for doubtful accounts from acquired companies and reclassifications from other reserves
47
EXHIBITS
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
3.1 Restated Certificate of Incorporation of the Company, Filed as
Exhibit 3.2 to Amendment No. 1 to Form S-1, Registration No. 33-
20899.
3.2 Amendment to Restated Certificate of Incorporation of the Company,
filed as Exhibit 3.2 to Form S-1, Registration No. 33-39938.
3.3 By-Laws of the Company, filed as Exhibit 3.4 to Amendment No. 2 to
Form S-1, Registration No. 33-20899.
4.1 Loan Agreement dated November 1, 1989 between the Company and the
Pennsylvania Economic Development Financing Authority, filed as
Exhibit 4.1 to Annual Report on Form 10-K for Fiscal Year ending
June 30, 1990.
4.2 Consent, Subordination, and Assumption Agreement dated April 20,
1990 between the Company and the Greater Murrysville Industrial
Corporation, filed as Exhibit 4.2 to Annual Report on Form 10-K
for Fiscal Year ending June 30, 1990.
4.3 Loan Agreement dated June 5, 1990 between the Company and the
Redevelopment Authority of the County of Westmoreland, to be filed
with the Commission upon request.
4.4 Consent, Subordination, and Assumption Agreement dated June 21,
1994 between the Company and the Redevelopment Authority of the
County of Westmoreland, filed as Exhibit 4.4 to Annual Report on
Form 10-K for Fiscal Year ending June 30, 1994
4.5 Consent, Subordination, and Assumption Agreement dated February
22, 1995 between the Company and the Central Westmoreland
Development Corporation, filed as Exhibit 4.5 to Annual Report on
Form 10-K for Fiscal Year ending June 30, 1995.
4.6 Form of Rights Agreement between Respironics, Inc. and Chase
Mellon Shareholder Services, L.L.C. filed as Exhibit 1 to Form 8A
filed by the Company on June 28, 1996.
10.1 Amended and Restated Incentive Stock Option Plan of Respironics,
Inc. and form of Stock Option Agreement used for Stock Options
granted after December 31, 1987, filed as Exhibit 10.2 to Form S-
1, Registration No. 33-20899.
10.2 Agreements between the Company and Gerald E. McGinnis, filed as
Exhibit 10.4 to Amendment No. 2 to Form S-1, Registration No. 33-
20899.
48
10.3 Letter Agreements between the Company and Vital Signs, Inc., filed
as Exhibit 10.11 to Form S-1, Registration No. 33-20899.
10.4 Incentive Bonus Plan dated January 26, 1985, filed as Exhibit
10.16 to Form S-1, Registration No. 33-20899.
10.5 Consulting Agreement dated July 1, 1988 between the Company and
Dr. Mark Sanders, filed as Exhibit 10.15 to Annual Report on Form
10-K for Fiscal Year ending June 30, 1989.
10.6 Supply Agreement with Vital Signs, Inc. effective July 1, 1993 and
expiring June 30, 2001, filed as Exhibit 10.12 to Annual Report on
Form 10-K for fiscal year ending June 30, 1993.
49
10.7 Distribution Agreement dated June 20, 1991 between the Company and
Flexco Medical Instruments AG, filed as Exhibit 10.15 to Annual
Report on Form 10-K for Fiscal Year ending June 30, 1991.
10.8 Employment Agreement dated and effective as of April 1, 1995
between the Company and Gerald E. McGinnis, filed as Exhibit 10.19
to Annual Report on Form 10-K for Fiscal Year ending June 30,
1995.
10.9 Employment Agreement dated and effective as of December 1, 1994
between the Company and Robert D. Crouch, filed as Exhibit 1 to
Quarterly Report on Form 10-Q for the quarter ended December 31,
1994.
10.10 Employment Agreement dated and effective as of December 1, 1994
between the Company and Dennis S. Meteny, filed as Exhibit 2 to
Quarterly Report on Form 10-Q for the quarter ended December 31,
1994.
10.11 1991 Non-Employee Directors' Stock Option Plan, filed as Exhibit A
to 1991 Proxy Statement incorporated by reference into Annual
Report on form 10-K for Fiscal Year ending June 30, 1991.
10.12 1992 Stock Incentive Plan, filed as Exhibit A to 1992 Proxy
Statement incorporated by reference into Annual Report on form 10-
K for Fiscal Year ending June 30, 1992.
50
10.13 Agreement for Purchase and Sale of Stock dated as of August 21,
1996 among Respironics, Inc., LIFECARE International, Inc. and
LIFECARE stockholders, filed as Exhibit 10.25 Annual Report on
Form 10-K for fiscal year ended June 30, 1996.
10.14 Credit Agreement between Respironics, Inc. and PNC Bank, National
Association dated February 19, 1997, filed as Exhibit 10.26 to
Quarterly Report on Form 10-Q for the quarter ended March 31,
1997.
10.15 Employment Agreement dated December 30, 1996 between the Company
and Steven P. Fulton, filed as Exhibit 10.15 to this Annual
Report.
10.16 Employment Agreement dated October 21, 1996 between the Company
and Geoffrey C. Waters, filed as Exhibit 10.16 to this Annual
Report.
11.1 Statement re: Earnings per share, filed as Exhibit 11.1 to this
Annual Report.
21.1 List of Subsidiaries, filed as Exhibit 21.1 to this Annual Report.
23.1 Consent of Ernst & Young, filed as Exhibit 23.1 to this Annual
Report.
51
(b) Reports on Form 8-K:
--------------------
One Form 8-K was filed resulting from events that occurred during the
fourth quarter of fiscal year 1997. On May 19, 1997, the Company filed a Form
8-K announcing the appointment of Raymond W. Dyer to the new position of Vice
President - Marketing and the promotion of Robert W. Crouch to the new position
of Senior Vice President - Sales and Marketing.
52
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RESPIRONICS, INC.
/s/ Dennis S. Meteny
_______________________________
By: Dennis S. Meteny, President and
Chief Executive Officer
Date: September 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
in the capacities indicated on September 26, 1997:
/s/ Dennis S. Meteny /s/ James H. Hardie
------------------------------------- -------------------------------------
Dennis S. Meteny James H. Hardie
(President and (Director)
Chief Executive Officer
and Director)
(Principal Executive Officer)
/s/ Daniel J. Bevevino
------------------------------------- -------------------------------------
Daniel J. Bevevino Donald H. Jones
(Vice President and Chief Financial (Director)
Officer)
(Principal Accounting Officer)
/s/ Gerald E. McGinnis
------------------------------------- -------------------------------------
Gerald E. McGinnis Candace A. Littell
(Chairman of the (Director)
Board of Directors)
/s/ Daniel P. Barry
------------------------------------- -------------------------------------
Daniel P. Barry Joseph C. Lawyer
(Director) (Director)
/s/ Douglas A. Cotter
------------------------------------- -------------------------------------
Douglas A. Cotter George J. Magovern, M.D.
(Director) (Director)
53
EXHIBITS INDEX
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
3.1 Restated Certificate of Incorporation of the Company, Filed as
Exhibit 3.2 to Amendment No. 1 to Form S-1, Registration No. 33-
20899.
3.2 Amendment to Restated Certificate of Incorporation of the Company,
filed as Exhibit 3.2 to Form S-1, Registration No. 33-39938.
3.3 By-Laws of the Company, filed as Exhibit 3.4 to Amendment 3.1
No. 2 to Form S-1, Registration No. 33-20899.
4.1 Loan Agreement dated November 1, 1989 between the Company and the
Pennsylvania Economic Development Financing Authority, filed as
Exhibit 4.1 to Annual Report on Form 10-K for Fiscal Year ending
June 30, 1990.
4.2 Consent, Subordination, and Assumption Agreement dated April 20,
1990 between the Company and the Greater Murrysville Industrial
Corporation, filed as Exhibit 4.2 to Annual Report on Form 10-K
for Fiscal Year ending June 30, 1990.
4.3 Loan Agreement dated June 5, 1990 between the Company and the
Redevelopment Authority of the County of Westmoreland, to be filed
with the Commission upon request.
4.4 Consent, Subordination, and Assumption Agreement dated June 21,
1994 between the Company and the Redevelopment Authority of the
County of Westmoreland, filed as Exhibit 4.4 to Annual Report on
Form 10-K for Fiscal Year ending June 30, 1994.
4.5 Consent, Subordination, and Assumption Agreement dated February
22, 1995 between the Company and the Central Westmoreland
Development Corporation, filed as Exhibit 4.5 to Annual Report on
Form 10-K for Fiscal Year ending June 30, 1995.
4.6 Form of Rights Agreement between Respironics, Inc. and Chase
Mellon Shareholder Services, L.L.C. filed as Exhibit 1 to Form 8A
filed by the Company on June 28, 1996.
10.1 Amended and Restated Incentive Stock Option Plan of Respironics,
Inc. and form of Stock Option Agreement used for Stock Options
granted after December 31, 1987, filed as Exhibit 10.2 to Form S-
1, Registration No. 33-20899.
54
10.2 Agreements between the Company and Gerald E. McGinnis, filed as
Exhibit 10.4 to Amendment No. 2 to Form S-1, Registration No. 33-
20899.
10.3 Letter Agreements between the Company and Vital Signs, Inc., filed
as Exhibit 10.11 to Form S-1, Registration No. 33-20899.
10.4 Incentive Bonus Plan dated January 26, 1985, filed as Exhibit
10.16 to Form S-1, Registration No. 33-20899.
10.5 Consulting Agreement dated July 1, 1988 between the Company and
Dr. Mark Sanders, filed as Exhibit 10.15 to Annual Report on Form
10-K for Fiscal Year ending June 30, 1989.
10.6 Supply Agreement with Vital Signs, Inc. effective July 1, 1993 and
expiring June 30, 2001, filed as Exhibit 10.12 to Annual Report on
Form 10-K for fiscal year ending June 30, 1993.
55
10.7 Distribution Agreement dated June 20, 1991 between the Company and
Flexco Medical Instruments AG, filed as Exhibit 10.15 to Annual
Report on Form 10-K for Fiscal Year ending June 30, 1991.
10.8 Employment Agreement dated and effective as of April 1, 1995
between the Company and Gerald E. McGinnis, filed as Exhibit 10.19
to Annual Report on Form 10-K for Fiscal Year ending June 30,
1995.
10.9 Employment Agreement dated and effective as of December 1, 1994
between the Company and Robert D. Crouch, filed as Exhibit 1 to
Quarterly Report on Form 10-Q for the quarter ended December 31,
1994.
10.10 Employment Agreement dated and effective as of December 1, 1994
between the Company and Dennis S. Meteny, filed as Exhibit 2 to
Quarterly Report on Form 10-Q for the quarter ended December 31,
1994.
10.11 1991 Non-Employee Directors' Stock Option Plan, filed as Exhibit A
to 1991 Proxy Statement incorporated by reference into Annual
Report on form 10-K for Fiscal Year ending June 30, 1991.
56
10.12 1992 Stock Incentive Plan, filed as Exhibit A to 1992 Proxy
Statement incorporated by reference into Annual Report on form
10-K for Fiscal Year ending June 30, 1992.
10.13 Agreement for Purchase and Sale of Stock dated as of August 21,
1996 among Respironics, Inc., LIFECARE International, Inc. and
LIFECARE stockholders, filed as Exhibit 10.25 to Annual Report on
Form 10-K for fiscal year ended June 30, 1996.
10.14 Credit Agreement between Respironics, Inc. and PNC Bank, National
Association dated February 19, 1997, filed as Exhibit 10.26 to
Quarterly Report on Form 10-Q for the quarter ended March 31,
1997.
10.15 Employment Agreement dated December 30, 1996 between the Company
and Steven P. Fulton, filed herewith at page .
-----
10.16 Employment Agreement dated October 21, 1996 between the Company
and Geoffrey C. Waters, filed herewith at page .
-----
11.1 Statement re: Earnings per share, filed herewith at page .
-----
21.1 List of Subsidiaries filed herewith at page .
-----
23.1 Consent of Ernst & Young, filed herewith at page .
-----
57