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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, 2002 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)
1010 Murry Ridge Lane
Murrysville, Pennsylvania 15668-8525
(Address of principal executive offices) (Zip Code)
(Registrant's Telephone Number, including area code) 724-387-5200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange 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, 2002, 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 $1,105,000,000.
As of August 31, 2002, there were 36,956,077 shares of Common Stock of the
registrant outstanding, of which 3,592,654 were held in treasury.
Documents incorporated by reference: Portions of the Proxy Statement for the
registrant's Annual Meeting of Shareholders to be held on November 18, 2002 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. Properties ..................................................... 15
Item 3. Legal Proceedings .............................................. 15
Item 4. Submission of Matters to a Vote of Security Holders ............ 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters ............................................ 16
Item 6. Selected Financial Data ........................................ 17
Item 7. Management's Discussion and
Analysis of Results of Operations and Financial
Condition ...................................................... 19
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk .............................................. 23
Item 8. Consolidated Financial Statements .............................. 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ............................ 48
PART III
Item 10. Directors and Executive Officers of the Registrant ............. 49
Item 11. Executive Compensation ......................................... 49
Item 12. Security Ownership of Certain Beneficial Owners and
Management ..................................................... 49
Item 13. Certain Relationships and Related Transactions ................. 49
PART IV
Item 14. Controls and Procedures ........................................ 50
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K .................................................... 50
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, including
those contained in Item 1 "Business" and Item 7 "Management's Discussion and
Analysis of Results of Operations and Financial Condition," and statements
incorporated by reference in this Form 10-K from the 2002 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 or beliefs concerning future events. The Company
cautions that such statements are qualified by important factors that could
cause actual results to differ materially from the expected results included in
the forward-looking statements. Those factors include, but are not limited to,
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, the success of the Company's marketing, sales, and
promotion programs, interest rate fluctuations, intellectual property and
related litigation, other litigation, successful integration of acquisitions,
FDA and other government regulation, anticipated levels of earnings and
revenues, and third party reimbursement.
Item 1. Business
--------
Note: This document contains a variety of technical terms pertaining to the
Company's business, which are explained below:
Continuous positive airway pressure or "CPAP" - continuous air pressure into a
patient's airway provided by an air pressurization device
Bi-level positive airway pressure or "BiPAP" - air pressure provided to a
patient's airway by an air pressurization device under which the pressure
increases and decreases based on the patient's breathing pattern
Bi-level non-invasive ventilatory support - bi-level positive airway pressure
provided into the patient's airway via a mask to supplement, but not replace,
the patient's own breathing
Invasive volume ventilators - a ventilator that delivers a mixture of air and
oxygen into a patient's lungs via a tube inserted into the patient's airway;
these patients are dependent on the ventilator for life support
Non-invasive monitors - devices that provide measurements of a patient's
physiological data via sensors that are affixed outside the patient's body (i.e.
a small clip that fits over a patient's fingertip)
Leak sensing technology - a feature of the Company's bi-level non-invasive units
whereby the units sense that an air leak has occurred between the mask and the
patient's face and the unit adjusts its air flow to compensate for the leak
Molecular sieve - material used in oxygen concentrators for separating oxygen
from room air.
Tracheal gas insufflation - a means of reducing elevated levels of carbon
dioxide in patients being treated with ventilators
3
General
Respironics, Inc. is a leading developer, manufacturer and marketer of
medical devices used primarily 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 in hospitals along with alternative care facilities and in emergency medical
settings. The Company's primary product lines are: (i) homecare products,
including continuous positive airway pressure ("CPAP") devices and bi-level
positive airway pressure devices used in the home for the treatment of
obstructive sleep apnea ("OSA"), a serious disorder characterized by the
repeated cessation of breathing during sleep, respiratory devices including
bi-level non-invasive ventilatory support units, portable invasive volume
ventilator units used in the home, home oxygen devices, diagnostic and
monitoring systems, and developmental care products used for premature infants;
(ii) hospital products, including bi-level non-invasive ventilatory support
units, critical care units that can deliver both non-invasive and invasive
ventilation, noninvasive cardiorespiratory monitors, sensors, and related
disposable accessories, all of which are used in hospital or institutional
settings; and (iii) asthma and allergy products. Respironics markets its
products through homecare, hospital, asthma and allergy, and international sales
organizations, which consist of approximately 370 direct and independent sales
representatives and sales management personnel who sell to a network of over
5,000 medical product service providers and dealers (commonly referred to as
"dealers") and, in some cases, directly to hospitals and other institutions. The
Company also rents certain of its products to dealers and, in limited cases,
directly to end users. With over 80% 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
1010 Murry Ridge Lane, Murrysville, PA 15668-8525. 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.
In April 2002, the Company acquired 100% of the outstanding common stock
of Novametrix Medical Systems Inc. ("Novametrix"), a leading cardiorespiratory
monitoring company that developed, manufactured, and marketed proprietary
state-of-the-art noninvasive monitors, sensors, and disposable accessories along
with developmental care products for premature infants. The Company issued
approximately 2,400,000 shares of its common stock to the former stockholders of
Novametrix in exchange for their Novametrix shares and reserved approximately
509,000 shares of its common stock for future issuance upon exercise of options
and warrants issued in exchange for Novametrix options and warrants outstanding.
The total value of the Company's shares issued and reserved for issuance (net of
proceeds from exercise of options and warrants) in the transaction was
approximately $81.0 million. The results of operations of Novametrix are
included in the Company's consolidated income statement beginning on the
acquisition date, April 12, 2002.
In May 2002, the Company acquired 60% of the outstanding common stock of
Fuji, RC Co., Ltd. ("Fuji"), a leading provider of homecare and hospital
products and services for respiratory-impaired patients in Japan, and entered
into an agreement to purchase all of the remaining outstanding shares of Fuji in
a multiple step acquisition by December 31, 2006. The base cash purchase price
for all of the outstanding Fuji shares is approximately $12 million, with
provisions for additional payment to one of the shareholders of Fuji to be made
based on operating performance of Fuji over the next four years. The results of
operations of Fuji, net of minority interest, are included in the Company's
consolidated income statement beginning on the acquisition date, May 31, 2002.
See Note O to the Consolidated Financial Statements for more information about
these acquisitions.
In July 1999, the Company announced a major restructuring of its United
States operations. The major components of the restructuring included the
closing of the Westminster, Colorado manufacturing facility, the closing of the
19 customer satisfaction centers throughout the United States, the downsizing of
the Georgia manufacturing facilities, the opening of a centralized distribution
and repair center in Youngwood, Pennsylvania, the realignment of the Company
into four divisions with a
4
corresponding management realignment, and a workforce reduction associated with
the facility changes and the realignment. The divisional and management
realignment took place in July 1999, and the facility changes were completed as
planned over the course of fiscal year 2000. The Westminster facility was closed
in January 2000 and sold in March 2001. See Note L to the Consolidated Financial
Statements for more information about the restructuring, including the costs
associated with the restructuring.
The following are registered trademarks of the Company as used in this
document: Respironics, REMstar, REMstar Pro, REMstar Plus, REMstar Auto, Great
Performers, Aria, Virtuoso, Duet, Encore, Soft Series Nasal Mask, Tranquility,
SmartMonitor, ASSESS, Personal Best, Wallaby, GoldSeal, GEL, Inspiration,
Esprit, Asthma Check, OptiHaler, BiPAP, PLV, Solo, OptiChamber, Alice, Stardust,
and AsthmaMentor. The following are trademarks of the Company as used in this
document: Contour Nasal Mask, Respironics Millennium, Profile, Encore SmartCard,
Simplicity, BiPAP Vision, Comfort Series and BiPAP Synchrony.
Products
The Company's principal products can be divided into three categories:
homecare products, hospital products, and asthma and allergy products.
Homecare Products
-----------------
The Company's homecare products can be separated into five major
subcategories: sleep products, non-invasive ventilation products, invasive
portable volume ventilation products, oxygen products, and infant management and
developmental care products.
Sleep Products. Respironics believes it is the worldwide market share
leader in OSA therapy devices, with a market share in excess of 50%. The
Company's primary OSA products include the REMstar Series, Solo, Aria and
Virtuoso CPAP units and the BiPAP Duet and the BiPAP S Airway Management
Systems, the Tranquility family of CPAP and bi-level units, and related
accessories such as humidifiers, masks, tubes, filters and headgear.
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 REMstar Series, Solo, and Tranquility CPAP systems are
low-cost, innovative OSA therapy devices that meet the Company's strategy of
offering units at all key price points and represent standard state-of-the-art
CPAP systems that provide high-quality treatment options at an economical price.
The Virtuoso and Tranquility Auto CPAP systems utilize innovative technology to
monitor the patient's airway and adjust output automatically in order to deliver
the appropriate pressure. The REMstar Pro, Aria and Virtuoso CPAP systems, as
well as the BiPAP Duet Airway Management System described below, also feature
built-in memory to record patient usage and quality of life data. The Company's
Encore SmartCard is an easy-to-use device to retrieve this patient data, update
air pressure settings, and change modes of operations for certain of the
Company's CPAP and bi-level devices by utilizing specially developed data
management software that is programmed onto the credit card sized Encore
SmartCard.
The BiPAP Duet Airway Management System, the BiPAP Pro, the Tranquility
Bi-level System, and the BiPAP S Airway Management System are the Company's
bi-level OSA units. These units sense the patient's breathing cycle and adjust
the pressure accordingly. The Duet and BiPAP Pro units also contain 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 Company also offers both integrated and stand-alone humidifiers as
accessories to support its strategy of enhancing patient adherence to the
therapy provided by its CPAP and bi-level devices. Humidifying the air that
flows into the patient's airway provides more comfortable therapy for certain
patients.
5
The Company also provides masks used with CPAP and bi-level devices
including the Comfort Series (consisting of the Profile Lite, ComfortSelect,
ComfortClassic, and Simplicity masks), the Contour Nasal Mask, the GEL and
GoldSeal Masks, the Soft Series Nasal Mask, and Full Face Masks. The Company
believes that its nasal mask products were the first masks to adequately seal on
a patient's face for nasal CPAP delivery, thereby minimizing patient discomfort
and promoting increased patient compliance with prescribed usage. The Company's
nasal mask products are all designed to enhance patient comfort by utilizing a
variety of shapes and designs and a variety of cushion materials to create a
comfortable mask seal around the contours of the face while delivering effective
CPAP and bi-level therapy. Full Face Masks address the needs of specific patient
groups for whom CPAP and bi-level therapy is delivered most effectively and
comfortably through masks that cover the mouth and nose.
Respironics also manufactures and distributes a wide range of
technologically advanced computer-based products for use in the diagnosis of
sleep related disorders. The Company provides advanced, technically proficient
clinical products for use in sleep disorders laboratories (commonly known as a
"sleep lab"). The Company also provides products for patient testing in the home
which allow clinicians to expand the number of patients who can be served by a
traditional sleep disorders lab.
The Company's primary sleep diagnostic product is the Alice System. Alice
is a computer-based system for use in sleep labs and other clinical settings. It
is capable of recording up to 25 channels of physiological data, which are
stored on either a desktop or portable computer prior to permanent storage on
optical cartridges. In addition to acquiring and storing the patient's
physiological data, the Alice system utilizes physician input and internal
algorithms to provide a comprehensive range of reports for clinical analysis.
Alice can be used on either infants or adults and separate software programs
were developed specifically for each type of patient.
The Company also manufactures and markets Stardust, a palm-sized portable
sleep system which monitors up to seven channels of physiological data for up to
ten hours per patient and features pre-programmed host software that simplifies
data analysis. Among other factors, Stardust is distinguished by its
physiological sensors which are specifically designed for use in the home. These
sensors record a variety of patient data and the information is subsequently
sent to the sleep lab or other clinical setting where it is interpreted by a
trained clinician.
The Synchrony Sleep Lab System, consisting of the Synchrony pressure
generator and a palm-sized remote control unit is used by clinicians in
prescribing therapy for the treatment of adult OSA once a diagnosis has been
made.
The Company estimates that in the U.S. there are in excess of 2,500 sleep
labs which currently exist at hospitals, other medical centers, and
free-standing sites where pulmonologists, technicians and other medical
professionals diagnose OSA (as well as other sleep disorders) and then prescribe
the appropriate treatment. Such sleep labs provide the most frequent source of
patient introductions to the Company's homecare sleep products.
The OSA patient can purchase or rent the Company's OSA therapy products
from home medical equipment service provider and dealer locations throughout
most of the world. Personnel at each of these locations are generally 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
unit ranges from $1,100 to $1,600, depending on type of unit, geographical
market and whether certain accessories are purchased. The retail price for a
bi-level OSA unit generally ranges from $2,300 to $3,200, depending on which
model is purchased. The Company's sleep diagnostic products are sold through
dealers and directly to clinical sites.
Non-invasive 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 Synchrony Ventilatory Support System. This device is a low-pressure,
electrically-driven flow generator with an electronic pressure control designed
to augment patient breathing
6
by supplying pressurized air to the patient. This device senses the patient's
breathing and adjusts its output to assist in inhalation and exhalation.
Additionally, the device 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 ventilators. The face masks described above are also used with the
non-invasive ventilatory support units.
The Company believes that its non-invasive ventilatory support product
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 the unit, which ranges
from $6,000 to $8,000, also compares favorably to the cost of invasive
ventilators, which generally retail for $10,000 to $28,000.
Insurance coverage by federal government insurance programs for home use
in the United States of non-invasive ventilatory support products like the
Company's BiPAP Synchrony Ventilatory Support System was modified during fiscal
year 2000. The Company's sales of these products for home use in the United
States were adversely affected by this modification. The Company expects that
opportunities for significant growth in its sales of non-invasive ventilatory
support units for home use in the United States are likely to continue to be
limited. See "Business -- Third Party Reimbursement" for additional information.
Invasive Ventilation Products. The Company believes that it is one of the
leading manufacturers and marketers of invasive portable volume ventilators that
are used in the home by individuals who are dependent on the ventilators for
continuous life support.
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-100 can be used to ventilate a wide
range of patients. 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 and can be operated in three different
ventilation modes depending on the patient's needs. 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 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 primarily 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. In certain limited cases, the Company rents
these units directly to end users.
Oxygen Products. The Company's principal oxygen products are oxygen
concentrators, which provide a continuous flow of oxygen by separating it from
room air with a molecular sieve composed of an inorganic silicate. Oxygen
concentrators are generally used in the home by patients who require
supplemental oxygen. Supplemental oxygen is prescribed for people with a variety
of chronic pulmonary disorders, such as lung cancer, emphysema, bronchitis or
acute pneumonia. These individuals generally rent an oxygen delivery system from
a home medical equipment dealer. The Company believes it is currently one of the
leaders in the manufacture and sale of oxygen concentrators in the United
States.
The Company's primary oxygen concentrator product is the Respironics
Millennium. This unit is designed to be easy to maintain and service and is
suitable for chronic patients in the advanced stages of illness and for the less
severe respiratory patient. The Respironics Millennium also features a low sound
level and is mobile, both of which are important features for devices such as
this that are used in the home.
The Company also manufactures and markets oximeter products for use in
the home. The units, which allow the caregiver to take readings of the patient's
blood oxygen levels and pulse rate, feature the capability to store up to 18
hours of data.
7
This data can be later downloaded via the Company's software, which prints
reports for oximetry analysis.
Infant Management and Developmental Care Products. The Company's primary
infant management products are monitoring devices designed for infants at risk
for sudden infant death syndrome or "SIDS." SIDS is the sudden unexpected death
of an infant which remains unexplained after investigation and is one of the
leading causes of death in the United States of infants between one month and
one year of age. Despite extensive research, the causes of SIDS remain unknown.
High-risk infants who are prescribed home monitors include infants with low
birth weight, those who are premature, those who survive serious
cardiorespiratory episodes and those born to a family with a SIDS incident
history. There are limited alternative monitoring technologies generally
available.
The Company's primary infant monitor is the SmartMonitor, a
fifth-generation microprocessor-based design that incorporates many aspects of a
physiological recorder into the traditional monitor. In addition to sounding an
alarm to alert the parents, the SmartMonitor documents patient episodes with an
internal electronic memory system, enabling physicians to study up to six
channels of patient waveforms in order to assess the medical significance of the
alarm episodes and determine the need for continued monitoring or possible
hospitalization. The data collected by the SmartMonitor can be transmitted from
the home to a clinical center over phone lines or can be extracted from the
SmartMonitor using a memory transfer device such as a computer.
The Company also manufactures and markets the Wallaby II Phototherapy
System, a cost-effective, home-based alternative to conventional overhead
phototherapy lights for treating newborn jaundice, a condition which is caused
by elevated levels of bilirubin in the blood and which, in severe cases, can
result in brain damage.
The Company also markets the BiliChek Non-Invasive Bilirubin Analyzer, a
non-invasive device that measures the level of bilirubin in the blood of
infants. The current method of measuring bilirubin levels to diagnose jaundice
in infants, the "heel stick," involves drawing blood from the infant and is a
painful, costly and time consuming procedure. BiliChek replaces the heel stick
by analyzing reflected light shined on an infant's forehead to generate
immediate and painless test results at a low cost. The Company has exclusive
distribution rights in the United States and Canada for the BiliChek, and the
device has received clearance to market from the FDA for infants before, during,
and after phototherapy treatment.
The Company also markets developmental care products and services
designed to improve the quality of care for premature infants. These
developmental care products are designed to meet the unique needs of premature
infants, including appropriately-sized infant care products, safety equipment,
and specialty feeding and skin care products. The Company also offers related
education products and programs. The Company's developmental care products are
used in the home and in neonatal and pediatric intensive care units of
hospitals.
Sales of homecare products and all related accessories and replacement
parts accounted for 83%, 85%, and 84% of the Company's net sales for its fiscal
years 2002, 2001, and 2000, respectively.
Hospital Products
-----------------
The Company has two major hospital product groups: therapeutic devices
that assist or control a patient's ventilation; and cardiorespiratory monitoring
devices that provide information about a patient's condition.
The Company's primary therapeutic devices are the BiPAP Vision and the
Esprit. The BiPAP Vision is a non-invasive ventilatory support device designed
specifically for hospital use and features an oxygen module, provides higher
flow and pressure functions than the Company's other non-invasive units, and is
designed to be easily upgradeable. The BiPAP Vision also includes integrated
airway pressure monitoring, an integrated display screen, a disposable circuit,
and a mounting stand,
8
all of which are designed to allow the unit to be used more easily in delivering
non-invasive ventilatory support in the hospital environment.
The Company also manufactures and markets the Esprit, a ventilator
designed for use in the hospital and institutional settings. Esprit is designed
to effectively deliver both invasive and noninvasive ventilation, thus
eliminating the need to use two separate ventilators for one patient and
allowing it to be used throughout the continuum of patient care. Esprit features
a graphical user interface with an infrared touch screen, alarm and status
indicators designed to allow rapid assessment of alarm conditions and patient
status, and is designed to be easily upgradeable.
The Company also manufactures, distributes, and rents several other
hospital ventilation products, including a version of the PLV-100 designed more
specifically for institutional use, and a variety of masks, tubing and headgear
similar to those used in the homecare market described above along with certain
other accessories specifically designed for hospital and institutional use.
The Company also manufactures and markets cardiorespiratory monitors,
sensors and related disposable accessories. These electronic devices provide
continuous measurements of a patient's cardiac output, carbon dioxide, oxygen
saturation, and respiratory mechanics parameters. The sensors for the Company's
devices are designed so that this patient data can be gathered noninvasively.
Noninvasive monitoring offers advantages over invasive monitoring, including a
reduced likelihood of infection and other associated complications that can
result from invasive monitoring. The Company's cardiorespiratory monitoring
devices are used in hospital operating rooms, intensive care units, emergency
departments, and while transporting patients to or within the hospital.
Sales of hospital products and accessories accounted for 12%, 10%, and
10% of the Company's net sales for fiscal years 2002, 2001, and 2000,
respectively.
Asthma and Allergy Products
---------------------------
The market for asthma devices is comprised primarily of peak flow meters
and drug delivery systems, including spacer devices. A peak flow meter provides
an objective measure of lung function and is used by the patient at home to
assist in the management of asthma. A spacer, when used with a metered dose
inhaler ("MDI"), facilitates the delivery of asthma medications.
The Company believes that it is currently the national leader in the sale
of peak flow meters, marketing products that include the ASSESS, AsthmaMentor,
and Asthma Check peak flow meters and the portable peak flow meter, Personal
Best. The Company also markets two spacer products known as OptiChamber and
OptiHaler. The revised National Asthma Education and Prevention Program
("NAEPP") Guidelines issued in March 1997 have placed further emphasis on the
use of peak flow meters and spacers to ensure effective asthma management.
OptiChamber represents an important growth area based upon NAEPP's expanded
indications for MDI anti-inflammatory therapy, including new recommendations for
use with children under five years of age.
The Company also distributes several models of medication nebulizers,
which dispense medication in a fine mist for inhalation deep into the lungs,
under the trade name Inspiration. The primary uses for nebulizers have been in
the treatment of respiratory diseases, such as emphysema and chronic bronchitis,
and conditions such as asthma or allergies. The Company's models utilize a
compressor to direct a flow of air through the nebulizer chamber which contains
medication in liquid form. An increase in the number of available respiratory
medications in recent years, coupled with the cost and efficacy of aerosol
delivery methods, has contributed to the growth of this market.
A variety of distribution channels are used for asthma and allergy
products, including specialty hospital dealers, homecare dealers, and, to a
lesser extent, pharmaceutical companies and retail pharmacies.
Sales of all asthma and allergy products accounted for 5%, 5%, and 6% of
the Company's net sales for its fiscal years 2002, 2001, and 2000, respectively.
9
Manufacturing and Properties
The Company owns or leases its manufacturing, office and
warehouse facilities. The Company's major facilities and their primary uses are
summarized below:
Square Feet Owned/Leased
United States:
Murrysville, Pennsylvania (offices) 55,000 Owned
Murrysville, Pennsylvania (offices) 20,000 Leased
Murrysville, Pennsylvania (manufacturing) 116,000 Owned
Plum Borough, Pennsylvania (offices and warehouse) 22,000 Leased
Kennesaw, Georgia (manufacturing) 129,000 Leased
Carlsbad, California (manufacturing) 85,000 Leased
Wallingford, Connecticut (manufacturing) 53,000 Leased
Cedar Grove, New Jersey (offices) 10,333 Leased
Youngwood, Pennsylvania (warehouse) 86,000 Leased
Edison, New Jersey (warehouse) 6,800 Leased
Houston, Texas (warehouse) 7,200 Leased
Concord, California (warehouse) 6,800 Leased
La Mirada, California (warehouse) 6,400 Leased
International:
Hong Kong (offices) 15,500 Leased
Shenzhen, China (manufacturing) 99,700 Leased
Subic Bay, Philippines (manufacturing) 22,700 Leased
Tokyo, Japan (offices) 4,600 Leased
Saitama City, Japan (warehouse) 7,400 Leased
Herrsching, Germany (offices and warehouse) 18,590 Leased
Nantes, France (offices and warehouse) 6,100 Leased
Paris, France (offices) 3,400 Leased
The Company also has approximately 50 sales and service centers
throughout Japan, each of which is approximately 700 square feet in size and is
leased.
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 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 augmenting the current partial second shift
work schedule at the United States facilities. 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 land adjacent to the site on
which the Murrysville manufacturing facility listed above is located. Future
expansion in Murrysville, if needed, could take place on this land.
In March 2001, the Company sold its Westminster, Colorado facility that
had been closed as part of the Company's July 1999 restructuring. A gain of
approximately $2,000,000 was recorded on the sale, and the long-term debt
related to the facility was repaid. See Note L to the Consolidated Financial
Statements for additional information.
10
The Company generally performs all major assembly work on all of its
products. It manufactures many of the plastic components for its face mask
products and uses subcontractors to supply certain other components. The Company
believes that the raw materials for nearly 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 medical equipment service providers and hospital dealers. These parties in
turn resell and rent the Company's products to end-users. The Company also sells
certain of its products directly to hospitals. The Company's products reach its
customers in the United States primarily through the Company's field network,
which consists of 36 national and regional management employees, 121 direct
sales representatives and sales support specialists, 40 independent
manufacturers' representatives, and over 5,000 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 sales
management team includes a Vice President of Homecare Sales, a Vice President of
Hospital Sales and Marketing, a Vice President of Hospital Sales, twenty-two
Regional Sales Managers, and eleven National Accounts Managers. This team
directs the activities of the independent manufacturers' representatives, direct
sales representatives, and sales support specialists.
The Company's international sales efforts are conducted through a
President of International Sales, a Vice President of Europe, Africa, and Middle
East Sales, a Vice President of Asia Pacific Sales and Marketing, and a Director
of Latin American Sales and Marketing. The Company also has direct sales
representatives and a customer satisfaction staff in the Far East, Germany and
France. Total international sales force for the Company, including approximately
135 sales representatives from the recently acquired Fuji, is approximately 173
individuals, including management, account managers, sales support specialists,
and direct sales representatives. The Company's international sales employees
sell products from all three major product groups. International sales accounted
for approximately 20% of the Company's net sales for fiscal years 2002 and 2001,
and 21% for fiscal year 2000.
In November 1999, the Company introduced its new program-oriented
approach to doing business with homecare dealer customers (who are also referred
to as "providers"). These "Power Programs for Providers" incorporate specific
products with a package of diagnostic tools and other educational materials. The
programs are designed to support a provider's desire to offer the finest care
possible while assisting the provider in growing its business. The Company
currently offers five Power Programs: Sleep Management, Chronic Respiratory
Management, Ventilation Management, Asthma, Allergy, and Sinusitis Management,
and Infant Developmental Care.
The Company's marketing organization is currently staffed by 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 U.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) continues to undergo consolidation,
particularly among dealers specializing in homecare 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.
During the fiscal year ended June 30, 2002, one customer accounted
for 10% of net sales. While other similar national homecare dealer customers in
the U.S. accounted individually for less than 10% of sales, these customers
collectively constitute an important market for the Company's products.
11
The Company offers leasing programs to certain of its customers
through arrangements with independent leasing companies. In some cases, these
arrangements call for the Company to be contingently liable, in the event of a
customer default, to the leasing companies for certain unpaid installment
receivables initiated by or transferred to the leasing companies. The Company's
total exposure for unpaid installment receivables under these leasing programs
was approximately $30,254,000 and $22,670,000 at June 30, 2002 and 2001,
respectively. Approximately $11,826,000 of the June 30, 2002 balance consisted
of installment receivables acquired as part of the Novametrix acquisition. See
Note K to the Consolidated Financial Statements for additional information.
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. Price competition has become more intense in
the last several years. 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 is a U.S. market leader in each major
market in which it competes: sleep disorders, chronic obstructive pulmonary
disease, asthma and allergy, and infant care products. However, other
manufacturers, including other larger and more experienced manufacturers of home
healthcare products, are active in these markets and the Company expects that
competition will increase. In its major product lines, the Company competes with
two principal competitors, Mallinckrodt Inc. ("Mallinckrodt") (which was
acquired by Tyco International Ltd ("Tyco") in October 2000) and ResMed, Inc.
("ResMed"). Mallinckrodt, which is the Company's largest major competitor and
has the greatest financial resources of the Company's competitors, offers an
array of products which compete with many of the Company's major products.
ResMed competes with the Company in the OSA and non-invasive ventilatory support
markets. The Company also competes with Invacare Corp., Vital Signs, Inc.,
Monaghan Medical Corp., Fisher & Paykel Healthcare Corp. Ltd., and with
divisions of Sunrise Medical, Inc. Additionally, the Company competes with a
number of foreign manufacturers, primarily in their local overseas markets and
to a lesser extent in the domestic market.
Similar to the Company's customer base, the medical device
manufacturing industry is also undergoing consolidation. Several of the
Company's competitors have been involved in acquisitions, most notably the
acquisition of Mallinckrodt by Tyco and the February 2001 acquisition by ResMed
of MAP, a German company that manufactures, among other things, CPAP devices.
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 and other physicians
and their patients in the treatment of respiratory and other 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 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 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 by upgrading its current
products as well as developing new products.
12
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 255 engineers, technicians, and support
personnel 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 $17,317,000 (3% of net sales) in fiscal
year 2002, $15,281,000 (4% of net sales) in fiscal year 2001, and $16,815,000
(5% of net sales) in fiscal year 2000 to support product enhancement and new
product development.
New product introductions in all of the Company's core product areas
took place during fiscal years 2000, 2001, and 2002, including next generation
CPAP units, such as a new auto CPAP device, the BiPAP Synchrony, the BiPAP Pro,
the H2 Heated Humidifier, new sleep diagnostic products, a variety of new face
mask products, and several new asthma devices. The Company expects to release a
variety of new devices in its core product areas in fiscal year 2003. 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."
In addition to its development efforts in its core product areas, the
Company is actively pursuing product development activities in a variety of new
markets, including congestive heart failure, tracheal gas insufflation, and
humidification.
Research has indicated that as many as 50% of the patients with
congestive heart failure also have obstructive sleep apnea or Cheyne-Stokes
Respiration ("CSR"), a form of apnea with abnormal breathing patterns. The
Company believes that if both these conditions are identified and treated, the
apneas associated with each condition can be eliminated and the quality of life
and overall health of these patients can be improved. Additionally, the Company
believes that positive pressure therapy may eliminate CSR events and their
effects on heart failure, reduce the circulatory congestion associated with
heart failure, and improve the pumping efficiency of the heart into the
patient's circulatory system. Research, including clinical trials, is being
conducted to evaluate the long-term effects of positive pressure therapy on the
heart. The Company is also in discussion with the FDA regarding the technical
and clinical information that would be necessary to market a device for certain
congestive heart failure applications.
The Company is also developing a system focused on reducing carbon
dioxide blood gas levels in many ventilator patients with elevated carbon
dioxide levels. The Company is currently planning to introduce this tracheal gas
insufflation system in calendar year 2004 pending FDA clearance to market.
The Company is also developing a hospital humidification system
designed to provide optimal humidification at lower usage cost than current
products, with a goal of introduction in fiscal year 2003; initial introductions
to occur in international markets and later in the U.S. pending FDA clearance to
market.
The Company is also continuing its research on the treatment of
insomnia.
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 approximately 278 U.S.
and foreign patents and has additional U.S. and foreign patent applications
pending. Some of these patents and patent applications relate to significant
aspects and features of the Company's products. Eighteen of these patents expire
in the next five years as follows: three expire in fiscal year 2003, three
expire in fiscal year 2004, four expire in fiscal year 2005, three expire in
fiscal year 2006, and five expire in fiscal year 2007. The Company believes that
the expiration of these patents will not have a material adverse impact on its
competitive position.
The Company also has approximately 275 registered U.S. and foreign
trademarks and has additional U.S. and foreign trademark applications pending.
The Company is a party to a legal action relating to the patents of
its competitors. See "Item 3 - Legal Proceedings" for more information regarding
this action.
13
Regulatory Matters
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. In
manufacturing and marketing its products, the Company must comply with FDA
regulations and is subject to various other FDA recordkeeping and reporting
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. The FDA also regulates the clinical testing of medical devices.
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 under a 510(k) notification 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 clearance 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.
Foreign regulatory approvals vary widely depending on the country.
The Company has received ISO 9001 certification for its Murrysville, Kennesaw,
Carlsbad, Wallingford, Cedar Grove, and Shenzhen facilities from the
International Organization of Standards, a quality standards organization based
in Geneva, Switzerland. The Company has also received authorization for the same
facilities, 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 facilities' quality
systems 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, these facilities have undergone
periodic update audits by such independent agencies.
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
14
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 homecare products
from the Centers for Medicare and Medicaid Services ("CMS") (formerly known as
the Healthcare Financing Administration). 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 CMS procedure code system. However,
reimbursement levels can be reduced after a procedure code has been established.
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 treat patients are provided within the DRG system. The levels of
reimbursement under the DRG system are also subject to review and change.
Employees
The Company currently has approximately 2,600 employees, including
approximately 800 hourly employees in the U.S. and 600 hourly employees in the
Far East. 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 Item 1, "Business - Sales, Distribution and
Marketing", and set forth in Note I of the Consolidated Financial Statements
included in this Annual Report.
Item 2. Properties
----------
Information with respect to the location and general character of the
principal properties of the Company is included in Item 1, "Business -
Manufacturing and Properties."
Item 3. Legal Proceedings
-----------------
U.S. ResCare Litigation
In January 1995 ResCare (now ResMed Limited; hereinafter "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 United States 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"). The patents
involved in the California suit deal with basic CPAP, mask applications and a
delay timer 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.
15
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.
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 United States of CPAP systems, the
Company infringes a fourth U.S. patent that had been recently issued to ResCare
relating to the delay timer 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. No trial date has been set.
The Court has granted the Company's various motions for summary
judgment and held that the Company does not infringe any of ResCare's four
patents at issue. ResCare may seek an appeal of those decisions. In any event,
the Company intends to continue to pursue its claims that the ResCare patents
are invalid or unenforceable.
Other
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 2002, no matters were
submitted to a vote of security holders.
PART II
Item 5. Market For Registrant's Common Equity and Related Shareholder Matters.
----------------------------------------------------------------------
As of June 30, 2002, 36,885,795 shares of the Company's common stock
were issued and outstanding, of which 3,592,725 are held in treasury. The common
stock is traded in the over-the-counter market and is reported on the NASDAQ
National Market system under the symbol "RESP". As of September 23, 2002, there
were 2,252 holders of record of the Company's common stock.
On June 21, 2002, the Company issued shares of common stock to Photios
T. Paulson, as a warrant holder for shares in Novametrix Medical Systems Inc.
("Novametrix") which was converted into a warrant to acquire the Company's
common stock in connection with the acquisition of Novametrix. In consideration
for the issuance of 2,541 shares, Photios T. Paulson paid an exercise price of
$26,248.53. The issuance of shares was exempt from the registration requirements
of the Securities Act of 1933 under section 4(2) as a transaction not involving
any public offering.
16
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 ended June 30, 2002:
First Second Third Fourth
----- ------ ----- ------
High $37.00 $37.05 $37.88 $36.36
Low $27.75 $30.54 $23.79 $30.81
Fiscal year ended June 30, 2001:
First Second Third Fourth
----- ------ ----- ------
High $19.13 $34.00 $30.75 $35.13
Low $16.25 $15.69 $22.94 $26.19
Item 6. Selected Financial Data
-----------------------
(Dollars in thousands except per share data)
Income Statement Data:
Year Ended June 30
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net sales $ 494,919 $ 422,438 $ 368,184 $ 357,571 $ 351,576
Cost of goods sold 260,795 223,362 196,520 186,487 180,650
Cost of goods sold -
restructuring charges 0 725 8,710 0 0
--------- --------- --------- --------- ---------
234,124 198,351 162,954 171,084 170,926
General and administrative
expense 60,719 50,126 48,754 48,521 37,200
Sales, marketing and
commission expense 86,189 72,428 62,772 60,899 65,560
Research and development
expense 17,317 15,281 16,815 16,714 20,225
Integration and
restructuring charges
(credits) 2,288 (1,909) 20,486 2,415 0
Impairment charge 2,006 0 0 0 0
Merger related costs 0 0 0 0 40,751
Costs associated with
unsolicited offer to acquire
Healthdyne Technologies, Inc. 0 0 0 0 650
Interest expense 3,011 7,546 6,945 5,206 4,189
Other income (1,442) (1,029) (1,394) (1,127) (1,513)
--------- --------- --------- --------- ---------
Income before income taxes 64,036 55,908 8,576 38,456 3,864
Income taxes 25,619 22,337 2,824 15,395 5,689
--------- --------- --------- --------- ---------
Net income (loss) $ 38,417 $ 33,571 $ 5,752 $ 23,061 $ (1,825)
========= ========= ========= ========= =========
Earnings (loss) per share $ 1.20 $ 1.09 $ 0.19 $ 0.72 $ (0.06)
========= ========= ========= ========= =========
Weighted average number
of shares used in computing
earnings per share 32,008 30,886 30,004 31,956 32,098
17
Balance Sheet Data:
June 30
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Working capital $198,966 $171,985 $155,095 $155,336 $137,550
Total assets 547,450 367,295 352,577 343,585 318,320
Total long-term
obligations 59,502 80,055 108,095 99,374 69,316
Shareholders' equity 367,720 235,268 191,106 194,521 200,840
- -------------------------
There were no cash dividends declared during any of the periods presented in the
above table.
18
Item 7. Management's Discussion and Analysis of Results of Operations and
-----------------------------------------------------------------
Financial Condition
-------------------
Results of Operations
Net sales for fiscal year 2002 were $494,919,000, representing a 17%
increase in sales over the $422,438,000 recorded in fiscal year 2001. Fiscal
year 2001 net sales represented a 15% increase in net sales over the
$368,184,000 recorded in fiscal year 2000. Increases in unit and dollar sales
for the Company's obstructive sleep apnea therapy devices (the Company's largest
product line) and oxygen concentrator devices, as well as increases in the sales
of masks and accessories, helped to drive the increase in sales for both fiscal
years. These product lines, along with ventilation devices, comprise the major
part of the Company's homecare product offerings. Sales of the Company's
hospital products, particularly the Vision(TM) and Esprit(R) ventilators, also
contributed to the increase in sales in the 2002 fiscal year. During fiscal year
2001, sales of the Company's hospital products also increased compared to fiscal
year 2000, including unit and dollar increases for the Company's Esprit(R)
ventilator.
Fiscal year 2002 sales included approximately $12.7 million of net sales
for Novametrix Medical Systems Inc. ("Novametrix"), a leading cardiorespiratory
monitoring company acquired by the Company during the fourth quarter of fiscal
year 2002. Included in the sales from Novametrix were approximately $9.5 million
of net sales for cardiorespiratory hospital devices and approximately $3.2
million of net sales for developmental infant care products. Fiscal year 2002
sales also include one month of sales for the distribution company Fuji, RC Co.,
Ltd ("Fuji"), in which the Company obtained a majority interest in the fourth
quarter of fiscal year 2002. The Company's results of operations include the
results from both companies since the acquisition dates. For additional
information regarding Novametrix and Fuji, see the Financial Condition,
Liquidity, and Capital Resources section of this Management's Discussion and
Analysis and Note O to the Consolidated Financial Statements.
The Company's gross profit was 47% for fiscal years 2002 and 2001, and
44% for fiscal year 2000. Excluding the impact of purchase accounting
adjustments and restructuring charges described below, the Company's gross
profit was 48% of net sales for fiscal year 2002 compared to 47% of net sales
for fiscal years 2001 and 2000. The increase in gross profit percentage for
fiscal year 2002 compared to the prior years was primarily due to higher
revenue, the impact of higher gross margin from acquired entities, and a shift
in sales mix.
General and administrative expenses, including the additions to the
allowance for doubtful accounts described below, were $60,719,000 (12% of net
sales) for fiscal year 2002, $50,126,000 (12% of net sales) for fiscal year
2001, and $48,755,000 (13% of net sales) for fiscal year 2000. The increase in
absolute dollars of expense for fiscal year 2002 was due in part to additional
general and administrative expenses for one of the Company's two acquisitions,
Novametrix. The increases in expenses for all the periods presented were due
primarily to increased information technology department expenses, credit and
collection department expenses, and other spending consistent with the growth of
the Company's business. Partially offsetting these increases in expenses in all
three fiscal years were lower operating expenses due to the Company's previous
restructuring efforts. Fiscal year 2001 general and administrative expenses
includes a previously disclosed addition to the allowance for doubtful accounts
of $1,200,000 (less than 1% of net sales) to address the potential
uncollectability of the balance due from one of the Company's significant
hospital distribution customers which ceased operations during the year. The
fiscal year 2000 general and administrative expenses includes an addition to the
allowance for doubtful accounts of $4,500,000 (1% of net sales) related to a
previously disclosed filing by one of the Company's major customers under
Chapter 11 of the U.S. Bankruptcy Code. The Company's total balance due from the
customer at the date of the Chapter 11 filing was approximately $4,500,000.
Sales, marketing and commission expenses were $86,189,000 (17% of net
sales) for fiscal year 2002 as compared to $72,428,000 (17% of net sales) for
fiscal year 2001 and $62,772,000 (17% of net sales) for fiscal year 2000. The
increases in absolute dollars of expense for fiscal years 2002 and 2001 were due
primarily to increased sales (resulting in higher commission and sales bonus
expenses) and increased sales,
19
marketing, product support, and service activity levels across the Company's
product lines, partially offset by lower operating expenses due to the Company's
previous restructuring efforts. Fiscal year 2002 also included additional sales,
marketing and commission expenses for Novametrix and Fuji since their
acquisition dates.
Research and development expenses were $17,317,000 (3% of net sales) for
fiscal year 2002, as compared to $15,281,000 (4% of net sales) for fiscal year
2001 and $16,815,000 (5% of net sales) for fiscal year 2000. The increase in
absolute dollars for the current fiscal year was due to the Company's continuing
commitment to research, development and new product introduction. The current
fiscal year also included additional research and development expense for
Novametrix. The decrease in absolute dollars of expense for fiscal year 2001
compared to fiscal year 2000 was due primarily to the timing of certain research
and development projects and the impact of certain new products transitioning
from development into production. Significant product development efforts are
ongoing, and new product launches in all of the Company's major product lines
took place in fiscal years 2002, 2001, and 2000, with additional new product
launches scheduled for fiscal year 2003. In the current fiscal year, new
products such as the REMstar(R) Auto CPAP (Continuous Positive Airway Pressure)
device, the BiPAP(R) Pro bi-level obstructive sleep apnea therapy unit, the H2
Heated Humidifier (the latest addition to the Company's line of heated
humidifiers for CPAP and bi-level devices), and two new masks, the
ComfortClassic(TM) Nasal Mask and the ComfortSelect(TM) Nasal Mask were
introduced. Additional development work and clinical trials are being conducted
in certain product areas outside the Company's current core products or patient
groups, including products designed to treat congestive heart failure.
As part of the acquisition of Novametrix, during the fourth quarter of
fiscal year 2002, the Company incurred a non-recurring purchase accounting
adjustment in cost of goods sold of $1,653,000 related to reversing acquisition
date inventory fair market value adjustments as inventory was sold subsequent to
the acquisition. Also incurred during the fourth quarter of fiscal year 2002
were non-recurring charges of $2,288,000 for integration and restructuring costs
related to the Novametrix acquisition, primarily for the elimination and
centralization of certain duplicate back office functions. During the fourth
quarter of fiscal year 2002, the Company also incurred an impairment charge of
$2,006,000 representing the write-off of intangible assets, inventory, and fixed
assets related to an oxygen monitoring technology development project that was
cancelled based in part on the results of a review of that technology by
engineers at Novametrix. See the Financial Condition, Liquidity, and Capital
Resources section of this Management's Discussion and Analysis and Note O to the
Consolidated Financial Statements for additional information regarding these
non-recurring charges.
During fiscal year 2000, the Company incurred a charge of $29,200,000
related to a previously disclosed restructuring of its U.S. operations. This
restructuring included facility closings and downsizings, a management
realignment, and a workforce reduction. The primary components of these costs
were severance and employment related costs ($6,300,000), asset write-downs to
reflect decisions made regarding product, facility, and systems rationalization
($8,900,000), and lease buyouts related to facility rationalizations and other
direct expenses of the restructuring ($14,000,000). Approximately $8,700,000 of
these charges relate to inventory write-offs in connection with product
rationalizations and have been reported as a separate component of cost of goods
sold.
During fiscal year 2001, the Company incurred additional restructuring
charges of $800,000 related to the restructuring described above, primarily for
inventory write-offs of discontinued products. Also during fiscal year 2001, the
Westminster, Colorado facility, which had been closed in the restructuring, was
sold for a gain of approximately $2,000,000 and debt on the facility totaling
approximately $4,100,000 was repaid. See the Financial Condition, Liquidity, and
Capital Resources section of this Management's Discussion and Analysis and Note
L to the Consolidated Financial Statements for additional information regarding
the restructuring.
During the fiscal year ended June 30, 2000, the Company reached an
agreement with the Internal Revenue Service regarding examinations of federal
income tax returns for certain of the Company's U.S. entities for fiscal years
1996 through 1998. Based on this agreement, the Company recorded a one-time
reduction in income tax liability and income tax expense of $1,643,000 during
fiscal year 2000.
20
The Company's effective income tax rate (excluding the one-time reduction
in income tax liability described above) was 40% for fiscal years 2002, 2001,
and 2000. The Company's effective tax rate for fiscal year 2000 including the
item above was 33%.
As a result of the factors described above, the Company's net income was
$38,417,000 (8% of net sales) or $1.20 per diluted share for fiscal year 2002 as
compared to $33,571,000 (8% of net sales) or $1.09 per diluted share for fiscal
year 2001 and $5,752,000 (2% of net sales) or $0.19 per diluted share for fiscal
year 2000.
Excluding the impact of the various non-recurring items described above,
the Company's net income was $42,270,000 (9% of net sales) or $1.32 per diluted
share for fiscal year 2002 as compared to $33,581,000 (8% of net sales) or $1.09
per diluted share for fiscal year 2001 and $25,363,000 (7% of net sales) or
$0.85 per diluted share for fiscal year 2000.
Financial Condition, Liquidity and Capital Resources
The Company had working capital of $198,966,000 and $171,985,000 at June
30, 2002 and 2001, respectively. Net cash provided by operating activities was
$87,186,000 for fiscal year 2002 as compared to $52,224,000 for fiscal year 2001
and $23,620,000 for fiscal year 2000. The increase in cash flow from operating
activities for all three fiscal years was primarily a result of higher earnings.
Fiscal year 2002 cash flow was positively impacted by a decrease in inventory
and other current asset levels compared to increases in these balances in prior
years, as well as a positive impact of changes in accounts payable and accrued
expenses compared to fiscal year 2001.
Net cash used by investing activities was $44,556,000, $27,599,000, and
$28,390,000 for fiscal years 2002, 2001, and 2000, respectively. The majority of
the cash used by investing activities for all periods represented capital
expenditures, including the purchase of leasehold improvements and facilities,
production equipment, computer hardware and software, and telecommunications and
office equipment. In addition, cash used by investing activities in all three
fiscal years included additional purchase price paid for a previously acquired
business pursuant to the terms of that acquisition agreement. In fiscal year
2002, cash used for investing activities also included the purchase price paid
for Novametrix and Fuji, net of cash acquired. See discussion below and Note O
to the Consolidated Financial Statements for additional information about these
acquisitions. Positive cash flows from operating activities and accumulated cash
and cash equivalents provided funding for investment activities in all years.
Net cash provided by financing activities includes borrowings and
repayments under the Company's various long-term obligations, proceeds from the
issuance of common stock under the Company's stock option plans, and the
acquisition and use of treasury stock.
In connection with customer leasing programs with independent leasing
companies, the Company is contingently liable, in the event of a customer
default, to the leasing companies within certain limits for unpaid installment
receivables initiated by or transferred to the leasing companies. The transfer
of certain of these installment receivables meets the criteria of Statement of
Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities," and therefore are not
recorded on the Company's financial statements. The total exposure for unpaid
installment receivables meeting these criteria and not recorded on the Company's
financial statements was approximately $18,428,000 and $22,670,000 at June 30,
2002 and 2001, respectively. The transfer of the remainder of these installment
receivables (consisting of installment receivables acquired as part of the
Novametrix acquisition) does not meet the criteria of this Standard and
therefore must be recorded as collateralized borrowing arrangements.
Accordingly, the Company has included $11,826,000 of receivables sold with
recourse as assets in prepaid expenses and other at June 30, 2002 and has
recorded offsetting liabilities at that date in accrued expenses and other.
From August 1998 through September 1999, the Company's Board of Directors
authorized several stock buybacks which represented authorization to purchase up
to
21
4,000,000 shares of the Company's outstanding common stock. During fiscal year
2000, the Company repurchased, net of share usage, a total of 1,044,000 shares
in open market transactions resulting in a net use of cash of $9,201,000. No
shares were repurchased by the Company during fiscal years 2001 or 2002.
Including shares repurchased prior to fiscal year 2000, the Company has
repurchased a total of 3,800,000 shares under this buyback program. At June 30,
2002, approximately 3,593,000 shares remained in treasury. Shares that are
repurchased are added to treasury shares pending future use and reduce the
number of shares outstanding used in calculating earnings per share.
In May 1998, the Company finalized a $100,000,000 revolving credit
facility with a group of commercial banks. This credit facility was initially
used to refinance approximately $55,000,000 of the Company's existing long-term
debt with the remaining balance of the facility available for future borrowing.
The credit facility was also used for general corporate purposes, including the
stock buyback described above. The revolving credit facility permitted
borrowings and repayments until its maturity in May 2003. In December 1998, the
amount of the revolving credit facility was increased to $125,000,000. The
revolving credit facility was unsecured and contained certain financial
covenants with which the Company must comply. The Company is currently in
compliance with these covenants. The interest rate on the revolving credit
facility was based on a spread over the London Interbank Borrowing Rate
("LIBOR"). During fiscal years 2002 and 2001, the Company repaid $18,200,000 and
$20,000,000, respectively, on the revolving credit facility. As of June 30,
2002, the interest rate on amounts outstanding under the revolving credit
facility was approximately 2.29%.
On August 19, 2002, the Company entered into a new Revolving Credit
Agreement with a group of banks under which a total of $150,000,000 is available
with similar terms and financial covenants. The new Revolving Credit Agreement
is also unsecured and matures in August 2005. See Notes D and N to the
Consolidated Financial Statements for additional information about the credit
facilities.
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.
On August 1, 2002, one of the Company's significant homecare distribution
customers announced that it filed a voluntary petition to reorganize under
Chapter 11 of the U.S. Bankruptcy Code in order to restructure its bank debt.
According to the press release issued in connection with the filing, this
restructuring was announced as a "100-percent plan," meaning that creditors and
vendors are expected to receive all that they are owed, either immediately or
over time with interest. The press release also stated that the Company's
customer elected to seek court protection in order to facilitate the
restructuring of its debt while continuing to maintain normal business
operations. The Company believes that based on current available information,
the Company's reserve levels as of June 30, 2002, are adequate relative to its
receivable with this customer. The Company will continue to monitor the
situation.
Note L to the Consolidated Financial Statements summarizes the
restructuring charges discussed above taken in regard to the fiscal year 2000
restructuring, including the reserve balances relating to these charges that
remain at June 30, 2002. The reserves shown for employee severance, lease
buyouts, and other direct expenses will require corresponding cash expenditures
in future periods. The Company does not expect to incur additional charges in
respect to this restructuring.
Note O to the Consolidated Financial Statements summarizes the two
acquisitions that the Company made in the fourth quarter of fiscal year 2002. In
the acquisition of Novametrix, the Company issued approximately 2,400,000 shares
of its common stock and issued stock options with a total value of approximately
$81 million. In the acquisition of its majority interest in Fuji, the Company
paid $6 million in cash and assumed net indebtedness of $13 million. Total cash
expended for both acquisitions, including transaction costs and net of cash
acquired, was $4.1 million.
The Company has contractual financial obligations and commercial
financial commitments consisting primarily of long-term debt, capital lease
obligations, and non-cancelable operating leases. See Notes D, E, and N to the
Consolidated Financial Statements for additional information about these
obligations and commitments.
The following table summarizes significant contractual obligations and
commercial commitments of the Company as of June 30, 2002:
22
CONTRACTUAL OBLIGATIONS and COMMERCIAL COMMITMENTS
Payments Due By Period
------------------------------------------------------------------------------
Total Less Than 1 1-3 Years 4-5 Years After 5
Contractual Obligations Year Years
----------------------- ------------ ----------- ------------ ----------- ------------
Long-Term Debt $ 73,722,909 $23,206,736 $ 1,016,581 $49,263,213 $ 236,379
Capital Lease Obligations 14,625,257 5,639,049 7,111,164 1,875,044 0
Operating Leases 28,712,000 6,163,000 9,465,000 5,847,000 7,237,000
------------ ----------- ------------ ----------- ------------
Total Contractual Obligations $117,060,166 $35,008,785 $ 17,592,745 $56,985,257 $ 7,473,379
============ =========== ============ =========== ============
Amount of Commitment Expiration Per Period
------------------------------------------------------------------------------
Total Amounts Less Than 1 1-3 Years 4-5 Years After 5
Other Commercial Commitments Committed Year Years
---------------------------- ----------- ----------- ------------ ----------- ------------
Standby Letters of Credit $ 1,220,000 $ 1,220,000 $ 0 $ 0 $ 0
=========== =========== ============ =========== ============
The Company believes that its sources of funding --- consisting of
projected positive cash flow from operating activities, the availability of
additional funds under its revolving credit facility (totaling approximately
$85,880,000 at June 30, 2002 based on the Company's August 19, 2002 Revolving
Credit Agreement), and its accumulated cash and cash equivalents --- will be
sufficient to meet its current and presently anticipated short-term and
long-term future needs for operating activities (including payments against
restructuring accruals), investing activities, and financing activities
(primarily consisting of scheduled payments on long-term debt).
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company is exposed to market risk from changes in interest rates and
foreign exchange rates.
Interest Rates: The Company's primary interest rate risk relates to its
long-term debt obligations. At June 30, 2002, the Company had total long-term
obligations, including the current portion of those obligations, of $88,348,000.
Of that amount, $24,848,000 was in fixed rate obligations and $63,500,000 was in
variable rate obligations. Assuming a 10% increase in interest rates on the
Company's variable rate obligations (i.e., an increase from the June 30, 2002
weighted average interest rate of 2.28% to a weighted average interest rate of
2.51%), annual interest expense would be approximately $145,000 higher based on
the June 30, 2002 outstanding balance of variable rate obligations. The Company
has no interest rate swap agreements.
Foreign Exchange Rates: A substantial majority of the Company's sales,
expenses, and cash flows are transacted in U.S. dollars. The Company also does
business in various foreign currencies, primarily the Euro, the Japanese yen,
the Hong Kong dollar and the Chinese yuan. For the year ended June 30, 2002,
sales denominated in currencies other than the U.S. dollar totaled $30,784,000,
or approximately 6% of total sales. For the year ended June 30, 2002, pre-tax
income denominated in currencies other than the U.S. dollar totaled $8,742,000,
or approximately 12% of total pre-tax income. An adverse change of 10% in
exchange rates would have resulted in a decrease in sales of $3,078,000 and a
decrease in pre-tax income of $874,000 for the year ended June 30, 2002. The
Company's subsidiaries that operate in Germany, France, Japan, Hong Kong and
China have certain accounts receivable and accounts payable denominated in U.S.
dollars in addition to receivable and payable accounts in their home currencies
which can act to
23
further mitigate the impact of foreign exchange rate changes. The Company has no
significant foreign currency contracts.
Inflation
Inflation has not had a significant effect on the Company's business
during the periods discussed.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141, "Business Combinations,"
and No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statements. Other
intangible assets will continue to be amortized over their useful lives. The
Company has applied the provisions of FASB No. 141 to account for business
combinations consummated after July 1, 2001, including the acquisitions of
Novametrix and Fuji discussed above and in Note O to the Consolidated Financial
Statements.
The Company has applied the new rules under FASB No. 142 on accounting
for goodwill and other intangible assets beginning in the first quarter of
fiscal year 2003. Application of the nonamortization provisions of the Statement
is expected to result in an increase in annual net income of approximately
$3,000,000 or $0.08 per diluted share. The Company has also performed the first
of the required impairment tests of goodwill and indefinite lived intangible
assets and no impairment has been found to exist as of July 1, 2002.
In August 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations," was issued. This Statement
requires recording the fair value of a liability for an asset retirement
obligation in the period in which it is incurred, and a corresponding increase
in the carrying value of the related long-lived asset. Over time, the liability
is accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, it is either settled for its recorded amount or a gain or loss upon
settlement is recorded. FASB No. 143 is effective for the Company's fiscal year
ending June 30, 2003. The Company believes that the impact of FASB No. 143 on
its financial position and results of operations will not be material.
In August 2001, Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," was issued.
This Statement addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. This Statement supercedes FASB No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and the accounting and reporting provisions of Accounting
Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," for the disposal of
a segment of a business (as previously defined in that Opinion). FASB No. 144 is
effective for the Company's fiscal year ending June 30, 2003. The Company
believes that the impact of FASB No. 144 on its financial position and results
of operations will not be material.
Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," was issued to amend FASB No. 13 and requires sale-leaseback
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. FASB No. 145 also makes various
technical corrections to existing pronouncements that are not substantive in
nature. The Company is currently evaluating the impact FASB No. 145 will have on
its financial position and results of operations.
Statement of Financial Accounting Standards No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," addresses financial
accounting and
24
reporting for costs associated with exit or disposal activities and requires
that a liability for a cost associated with an exit or disposal activity be
recognized at fair value when the liability is incurred, rather than at the date
of an entity's commitment to an exit plan. The provisions of FASB No. 146 are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The Company is currently evaluating the
impact FASB No. 146 will have on its financial position and results of
operations.
Critical Accounting Policies
The Company's Consolidated Financial Statements are prepared in
accordance with accounting principles generally accepted in the United States,
which require the Company to make estimates and assumptions that may affect the
reported financial condition and results of operations should actual results
differ. The Company bases its estimates and assumptions on the best available
information and believes them to be reasonable under the circumstances. The
Company believes that of its significant accounting policies, the following may
involve a higher degree of judgment and complexity.
Revenue Recognition: The Company's revenues are recognized when title to
product passes to the customer, which generally occurs upon shipment to a
customer location and, in the case of rental revenue and long-term service
contracts, is recognized ratably over the period the product is rented or
services are performed. From time to time, the Company offers favorable sales
arrangements to certain of its largest customers in exchange for volume purchase
commitments. These customers make such large purchases for a variety of reasons,
including the desire to reduce shipping costs and to correspond to their own
budgeting and purchasing cycles. The Securities and Exchange Commission's Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," provides guidance on
the application of generally accepted accounting principles to selected revenue
recognition issues. The Company has concluded that its revenue recognition
policy is appropriate and in accordance with generally accepted accounting
principles and SAB No. 101.
Allowance for Uncollectible Accounts Receivable: Accounts receivable are
reduced by an allowance for amounts that may become uncollectible in the future.
Substantially all of the Company's receivables are due from health care product
providers, distributors, and hospitals. The Company's customers are located
throughout the United States and around the world. A significant portion of
products sold to providers, distributors, and hospitals, both foreign and
domestic, is ultimately funded through government reimbursement programs or
through private insurance programs. As a consequence, changes in these programs
can have an adverse impact on distributor and hospital liquidity and
profitability. In addition, because a concentration of market share exists in
the homecare product industry in the United States among national and large
regional providers, the Company experiences a comparable concentration of credit
risk with these customers. The estimated allowance for uncollectible amounts is
based primarily on the Company's evaluation of the payment pattern and financial
condition of its customers. In addition, the Company is contingently liable,
within certain limits, in the event of a customer default on unpaid installment
receivables initiated by or transferred to several independent leasing companies
in connection with customer leasing programs. The Company monitors the
collection status of these installment receivables and provides amounts
necessary for estimated losses in the allowance for doubtful accounts.
Inventories and Related Allowance for Obsolete and Excess Inventory:
Inventories are valued at the lower of cost or market value and have been
reduced by an allowance for excess and obsolete inventories. The estimated
allowance is based on the Company's review of inventories on hand compared to
estimated future usage and sales. If it is determined that inventory on hand is
in excess of estimated future usage and sales because of product obsolescence,
changes in customer demand, or other reasons, additional inventory reserves may
need to be provided. The establishment of these additional reserves may have an
adverse impact on earnings, depending on the extent and amount of inventory
affected.
Intangible and Product Technology Related Assets: Intangible and product
technology related assets are amortized to expense over their useful lives.
These
25
useful lives are based on the Company's estimates of the period that the assets
will generate revenue. Intangible and product technology related assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of such asset may not be recoverable. If such carrying
amounts are determined to be unrecoverable because of changes in technology,
extended delays in obtaining regulatory approval, competition, or other reasons,
the carrying amounts may need to be adjusted. These adjustments may have an
adverse impact on earnings, depending on the significance of the carrying
amounts and the extent of the required adjustments.
Contingencies: As a normal part of its business operations, the Company
incurs liabilities that may be difficult to quantify precisely, such as future
warranty obligations, potential liabilities relating to legal or regulatory
matters, and tax exposures. The Company follows the requirements of Statement of
Financial Accounting Standards No. 5, "Accounting for Contingencies," which
dictate when a charge to income should be taken to accrue for a loss
contingency. These requirements necessitate the application of judgment
regarding the likelihood and amount of the liability.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES REFORM ACT OF 1995.
The statements contained in this Annual Report, including those contained
in "Management's Discussion and Analysis of Results of Operations and Financial
Condition," along with statements in 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 or beliefs concerning future events. The Company
cautions that such statements are qualified by important factors that could
cause actual results to differ materially from the expected results included in
the forward-looking statements. Those factors include, but are not limited to,
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, the success of the Company's marketing, sales, and
promotion programs, interest rate fluctuations, intellectual property and
related litigation, other litigation, successful integration of acquisitions,
FDA and other government regulation, anticipated levels of earnings and
revenues, and third party reimbursement.
Item 8. Consolidated Financial Statements
---------------------------------
Index to Consolidated Financial Statements
Report of Independent Auditors ...................................... 27
Consolidated Balance Sheets as of June 30, 2002 and 2001 ............ 28
Consolidated Statements of Operations for the
years ended June 30, 2002, 2001, and 2000 ......................... 29
Consolidated Statements of Cash Flows for the
years ended June 30, 2002, 2001, and 2000 ......................... 30
Consolidated Statements of Shareholders' Equity
for the years ended June 30, 2002, 2001, and 2000 ................. 31
Notes to Consolidated Financial Statements .......................... 32
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, 2002 and 2001, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended June 30, 2002. 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 auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Respironics, Inc.
and Subsidiaries at June 30, 2002 and 2001, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2002, in conformity with accounting principles generally accepted
in the United States. 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.
/s/Ernst & Young LLP
Pittsburgh, Pennsylvania
July 23, 2002, except for Note N as
to which the date is August 19, 2002
27
CONSOLIDATED BALANCE SHEETS
RESPIRONICS, INC. AND SUBSIDIARIES
At June 30 2002 2001
----------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 62,334,684 $ 27,320,910
Trade accounts receivable, less allowance for
doubtful accounts of $18,458,000 and $16,457,000 121,281,073 98,078,344
Inventories 86,632,027 73,417,896
Prepaid expenses and other 23,875,193 10,937,110
Deferred income tax benefits 15,728,389 14,201,951
---------------- ----------------
TOTAL CURRENT ASSETS 309,851,366 223,956,211
PROPERTY, PLANT AND EQUIPMENT
Land 2,867,555 2,506,052
Building 16,777,382 8,509,596
Machinery and equipment 133,872,197 84,559,172
Furniture, office and computer equipment 67,768,498 56,011,341
Leasehold improvements 6,413,872 5,286,891
---------------- ----------------
227,699,504 156,873,052
Less allowances for depreciation
and amortization 127,764,645 89,259,800
---------------- ----------------
99,934,859 67,613,252
OTHER ASSETS 33,802,545 15,868,930
GOODWILL 103,860,749 59,856,714
---------------- ----------------
$ 547,449,519 $ 367,295,107
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 39,081,748 $ 28,964,129
Accrued expenses and other 42,958,007 19,009,135
Current portion of long-term obligations 28,845,785 3,998,317
---------------- ----------------
TOTAL CURRENT LIABILITIES 110,885,540 51,971,581
LONG-TERM OBLIGATIONS 59,502,381 80,055,378
MINORITY INTEREST and OTHER 9,341,531 0
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized
100,000,000 shares; issued and outstanding
36,885,795 shares at June 30, 2002 and
34,013,785 shares at June 30, 2001 368,858 340,138
Additional capital 213,837,023 121,720,289
Accumulated other comprehensive loss (2,718,213) (4,237,433)
Retained earnings 198,450,389 160,033,521
Treasury stock (42,217,990) (42,588,367)
---------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 367,720,067 235,268,148
---------------- ----------------
$ 547,449,519 $ 367,295,107
================ ================
See notes to consolidated financial statements.
28
CONSOLIDATED STATEMENTS OF OPERATIONS
RESPIRONICS, INC. AND SUBSIDIARIES
Year Ended June 30 2002 2001 2000
------------------------------------------------------
Net sales $ 494,918,654 $ 422,437,862 $ 368,184,110
Cost of goods sold 260,795,012 223,362,120 196,519,907
Cost of goods sold - restructuring charges 0 724,990 8,709,895
------------- ------------ -----------
234,123,642 198,350,752 162,954,308
General and administrative expenses 60,718,793 50,125,593 48,754,853
Sales, marketing and commission expenses 86,188,885 72,428,211 62,771,648
Research and development expenses 17,317,462 15,281,233 16,814,561
Integration and restructuring charges (credit) 2,288,398 (1,908,581) 20,486,009
Impairment charge 2,005,722 0 0
Interest expense 3,011,018 7,545,535 6,945,585
Other income (1,442,853) (1,029,283) (1,394,231)
------------- ------------ -----------
170,087,425 142,442,708 154,378,425
------------- ------------ -----------
INCOME BEFORE INCOME TAXES 64,036,217 55,908,044 8,575,883
Income taxes 25,619,349 22,336,760 2,823,599
------------- ------------ -----------
NET INCOME $ 38,416,868 $ 33,571,284 $ 5,752,284
============= ============ ===========
Basic earnings per share $ 1.24 $ 1.12 $ 0.19
============= ============ ===========
Basic shares outstanding 31,079,282 29,962,366 29,660,366
Diluted earnings per share $ 1.20 $ 1.09 $ 0.19
============= ============ ===========
Diluted shares outstanding 32,008,359 30,886,043 30,003,755
See notes to consolidated financial statements.
29
CONSOLIDATED STATEMENTS OF CASH FLOWS
RESPIRONICS, INC. AND SUBSIDIARIES
Year Ended June 30 2002 2001 2000
-------------- ----------------- --------------
OPERATING ACTIVITIES
Net income $ 38,416,868 $ 33,571,284 $ 5,752,284
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 28,578,753 23,166,376 20,850,886
Amortization 5,653,328 5,171,364 5,855,565
Tax benefit from exercise of stock options 2,766,453 3,147,495 414,354
Provision for asset write-offs 2,005,722 0 11,694,013
Gain on sale of property, plant, and equipment 0 (2,302,000) 0
Provision for bad debts 3,275,000 2,000,000 4,500,000
Provision (benefit) for deferred income taxes 3,251,495 2,949,095 (4,415,676)
Changes in operating assets and liabilities:
Increase in accounts receivable (7,905,452) (3,344,649) (1,980,488)
Decrease (increase) in inventories and other current assets 9,052,239 (5,742,168) (16,049,078)
Increase in other assets (3,637,616) (1,944,496) (5,538,934)
Increase (decrease) in accounts payable and accrued expenses 5,728,845 (4,448,085) 2,537,308
------------- ------------- -------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 87,185,635 52,224,216 23,620,234
INVESTING ACTIVITIES
Purchase of property, plant and equipment (39,829,553) (28,236,464) (27,304,289)
Proceeds from sale of property, plant, and equipment 0 1,425,000 0
Acquisition of businesses, net of cash acquired (4,726,200) (787,580) (1,085,407)
------------- ------------- -------------
NET CASH USED BY
INVESTING ACTIVITIES (44,555,753) (27,599,044) (28,389,696)
FINANCING ACTIVITIES
Proceeds from long-term obligations 4,531,085 0 11,219,280
Reduction in long-term obligations (21,198,203) (25,447,952) (2,059,199)
Issuance of common stock 8,382,625 8,549,206 1,519,938
Use (acquisition) of treasury stock, net 370,377 0 (9,201,439)
Increase (decrease) in minority interest and other 298,008 0 (766,035)
------------- ------------- -------------
NET CASH (USED) PROVIDED BY
FINANCING ACTIVITIES (7,616,108) (16,898,746) 712,545
------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 35,013,774 7,726,426 (4,056,917)
Cash and cash equivalents at beginning of period 27,320,910 19,594,484 23,651,401
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 62,334,684 $ 27,320,910 $ 19,594,484
============= ============= =============
See notes to consolidated financial statements.
30
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
RESPIRONICS, INC. AND SUBSIDIARIES
Common Stock Accumulated Treasury Stock
------------------- Additional Comprehensive Retained -----------------------
Shares Amount Capital Income (Loss) Earnings Shares Amount Total
---------- -------- ------------ ------------- ----------- --------- ------------- ------------
BALANCE AT JUNE 30, 1999 32,999,332 $329,993 $108,863,191 $(1,231,013) $120,709,953 2,689,683 $(34,150,678) $194,521,446
Shares sold pursuant to stock
option plans 183,233 1,833 1,518,105 0 0 0 0 1,519,938
Net acquisition and use of
treasury stock 0 0 0 0 0 1,043,815 (9,201,439) (9,201,439)
Income tax benefit from exercise
of stock options 0 0 414,354 0 0 0 0 414,354
Comprehensive income (loss):
Net income for the year ended
June 30, 2000 0 0 0 0 5,752,284 0 0 5,752,284
Foreign currency translation
adjustments 0 0 0 (1,900,690) 0 0 0 (1,900,690)
---------- -------- ------------ ----------- ------------ --------- ------------ ------------
Total comprehensive income (loss) 0 0 0 (1,900,690) 5,752,284 0 0 3,851,594
---------- -------- ------------ ----------- ------------ --------- ------------ ------------
BALANCE AT JUNE 30, 2000 33,182,565 331,826 110,795,650 (3,131,703) 126,462,237 3,733,498 (43,352,117) 191,105,893
Shares sold pursuant to stock
option and purchase plans 831,220 8,312 7,777,144 0 0 (94,329) 763,750 8,549,206
Income tax benefit from exercise
of stock options 0 0 3,147,495 0 0 0 0 3,147,495
Comprehensive income (loss):
Net income for the year ended
June 30, 2001 0 0 0 0 33,571,284 0 0 33,571,284
Foreign currency translation
adjustments 0 0 0 (1,105,730) 0 0 0 (1,105,730)
---------- -------- ------------ ----------- ------------ --------- ------------ ------------
Total comprehensive income (loss) 0 0 0 (1,105,730) 33,571,284 0 0 32,465,554
---------- -------- ------------ ----------- ------------ --------- ------------ ------------
BALANCE AT JUNE 30, 2001 34,013,785 340,138 121,720,289 (4,237,433) 160,033,521 3,639,169 (42,588,367) 235,268,148
Shares sold pursuant to stock
option and purchase plans 472,617 4,726 8,377,899 0 0 0 0 8,382,625
Net acquisition and use of
treasury stock 0 0 0 0 0 (46,444) 370,377 370,377
Income tax benefit from exercise
of stock options 0 0 2,766,453 0 0 0 0 2,766,453
Stock issued for business acquired 2,399,393 23,994 80,972,382 0 0 0 0 80,996,376
Comprehensive income:
Net income for the year ended
June 30, 2002 0 0 0 0 38,416,868 0 0 38,416,868
Foreign currency translation
adjustments 0 0 0 1,519,220 0 0 0 1,519,220
---------- -------- ------------ ----------- ------------ --------- ------------ ------------
Total comprehensive income 0 0 0 1,519,220 38,416,868 0 0 39,936,088
---------- -------- ------------ ----------- ------------ --------- ------------ ------------
BALANCE AT JUNE 30, 2002 36,885,795 $368,858 $213,837,023 $(2,718,213) $198,450,389 3,592,725 $(42,217,990) $367,720,067
========== ======== ============ =========== ============ ========= ============ ============
See notes to consolidated financial statements.
31
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") and its wholly and majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Minority interests in majority owned subsidiaries have been recorded.
Revenue Recognition:
- --------------------
Revenue is recognized from sales when title to product passes to the customer,
which generally occurs upon shipment to a customer location. Rental and service
revenues are recognized when billed on a monthly basis consistent with the
rental and service periods.
Shipping and Handling Costs:
- ----------------------------
Shipping and handling costs are expensed as incurred and are included in cost of
goods sold.
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. Costs incurred
to purchase or develop software for internal use, including upgrades and
enhancements, are capitalized during the software application development stage
in accordance with Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Depreciation is
computed using the straight-line method based upon the estimated useful lives of
the respective assets, which are 30 years for buildings and generally range from
two to five years for other property, plant, and equipment. 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:
- -----------------------------
Foreign currency assets and liabilities are translated into U.S. 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 accumulated comprehensive
income (loss). 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 the fair market value of the Company's stock on
the date of the grant. Proceeds from the exercise of common stock options are
credited to shareholders'
32
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 ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," as amended, in accounting for stock-based compensation.
Earnings per Share:
- -------------------
Basic earnings per share are based on the weighted average number of shares
actually outstanding. Diluted earnings per share are based on the weighted
average number of shares actually outstanding and dilutive potential shares,
such as dilutive stock options and warrants which are determined using the
treasury stock method.
Cash and Cash Equivalents:
- --------------------------
The Company considers all highly liquid investments with a maturity of 30 days
or less when purchased to be cash and cash equivalents.
Capitalized Software Production Costs:
- --------------------------------------
Software development costs have been capitalized when technological feasibility
was established and are being amortized to the cost of product revenues over the
estimated economic lives (generally three to five years) of the products that
include such software. Total net capitalized software production costs were
$4,515,000 and $1,940,000 at June 30, 2002 and 2001, 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, 2002, 2001, and
2000 were $965,000, $805,000, and $1,224,000, respectively.
Goodwill and Other Long-Lived Assets:
- -------------------------------------
Goodwill is the cost in excess of the fair value of net assets of businesses
acquired and is amortized on the straight-line method over periods from 15 to 40
years. Accumulated amortization was $23,099,000 and $19,289,000 at June 30, 2002
and 2001, respectively. Through fiscal year 2002, the Company has evaluated the
carrying value of goodwill and other long-lived assets for potential impairment
on an ongoing basis. Such evaluation considers projected future operating
results, trends and other circumstances. If factors indicated that goodwill or
other long-lived assets could be impaired, the Company would use an estimate of
the related undiscounted future cash flows over the remaining life of the
goodwill or other long-lived asset in measuring whether the goodwill or other
long-lived asset is recoverable. If such an analysis indicated that impairment
had occurred, the Company would adjust the book value of the goodwill or other
long-lived asset to fair value.
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other
Intangible Assets," effective for fiscal years beginning after December 15,
2001. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives. The Company has applied the
provisions of FASB No. 141 to account for business combinations consummated
after July 1, 2001, including the acquisitions of Novametrix Medical Systems
Inc. ("Novametrix") and Fuji, RC Co., Ltd. ("Fuji") discussed in Note O to these
Consolidated Financial Statements.
Effective July 1, 2002, the Company has adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," under
which goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment tests. The Company
has performed the first of its required impairment tests with the adoption of
FASB No. 142 and has determined that no impairment exists as of July 1, 2002.
Application of the nonamortization provisions of the Statement is expected to
result in an increase in annual net income of approximately $3,000,000 or $0.08
per diluted share.
33
Accrued Expenses and Other:
- ---------------------------
Accrued expenses and other includes accrued compensation of $11,060,000 and
$6,887,000 at June 30, 2002 and 2001, respectively.
Comprehensive Income:
- ---------------------
Comprehensive income consists of net income and foreign currency translation
adjustments and is presented in the Consolidated Statements of Shareholders'
Equity.
Recent Accounting Pronouncements:
- ---------------------------------
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This Statement supercedes FASB No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of Accounting Principles Board ("APB")
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business
(as previously defined in that Opinion). FASB No. 144 is effective for the
Company's fiscal year ending June 30, 2003. The Company believes that the impact
of FASB No. 144 on its financial position and results of operations will not be
material.
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," addresses financial accounting and
reporting for costs associated with exit or disposal activities and requires
that a liability for a cost associated with an exit or disposal activity be
recognized at fair value when the liability is incurred, rather than at the date
of an entity's commitment to an exit plan. The provisions of FASB No. 146 are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The Company is currently evaluating the
impact FASB No. 146 will have on its financial position and results of
operations.
Use of Estimates:
- -----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Changes in Presentation of Comparative Financial Statements:
- ------------------------------------------------------------
Certain amounts in the June 30, 2001 and 2000 financial statements were
reclassified to conform with the presentation in the current period.
NOTE B - CASH EQUIVALENTS
Cash equivalents consist primarily of money market accounts and certificates of
deposit issued by large commercial banks located in the United States and Hong
Kong.
34
NOTE C -- INVENTORIES
Inventories consisted of the following:
June 30
2002 2001
----------- -----------
Raw materials $15,236,332 $20,738,160
Work-in-process 8,135,768 5,960,618
Finished goods 63,259,927 46,719,118
----------- -----------
$86,632,027 $73,417,896
=========== ===========
NOTE D - LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
June 30
2002 2001
----------- ------------
Commercial Bank Credit Agreement,
payable in one lump sum in August 2005
including interest at a floating rate
(2.29% at June 30, 2002); see Note N $62,900,000 $81,100,000
Bank Debt with varying maturities
(final maturity in September 2005)
including interest rates ranging from
0.833% to 2.25% 8,675,928 0
Capital Lease Obligations, payable in
monthly installments with varying completion
dates through April 2007 including interest
rates ranging from 2.9% to 3.0% 14,625,257 0
Other 2,146,981 2,953,695
----------- -----------
88,348,166 84,053,695
Less current portion 28,845,785 3,998,317
----------- -----------
$59,502,381 $80,055,378
=========== ===========
Other long-term obligations in the above table includes an Economic Development
Revenue Bond, Industrial Development Authority Loans, and a Redevelopment
Authority Loan that are secured by mortgages on the Company's manufacturing
facility in Murrysville, Pennsylvania. Proceeds from the bonds and the loans
were used to finance the construction and expansion of some of the Company's
facilities. The Capital Lease Obligations are primarily for ventilators and
other equipment rented to outside customers by the Company's Fuji subsidiary.
The Commercial Bank Credit Agreement, under which a total of $125,000,000 was
available, was unsecured. The Company was required to meet certain financial
covenants in connection with these obligations, including those relating to
current ratio, ratio of total liabilities to tangible net worth, minimum
tangible net worth, leverage, and interest coverage. At June 30, 2002, the
Company was in compliance with these covenants. The Commercial Bank Revolving
Credit Agreement included a commitment fee, currently equal to 0.150%, on the
unused portion of the facility.
35
Scheduled maturities of long-term obligations for the next five years are as
follows:
Maturities of
Long-Term Debt
--------------
2003 $28,845,785
2004 4,910,823
2005 3,216,922
2006 50,497,208
2007 641,049
Thereafter 236,379
------------
TOTAL $88,348,166
============
Interest paid was $2,983,000, $7,870,000, and $6,590,000, for the years ended
June 30, 2002, 2001, and 2000, respectively.
NOTE E - OPERATING LEASES
The Company leases its service centers, its central distribution center, and
certain of its offices, warehouses and manufacturing facilities in the United
States and also leases 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, 2002 are as follows:
Year Ending June 30 Amount
- ------------------- --------
2003 $ 6,163,000
2004 5,265,000
2005 4,200,000
2006 3,183,000
2007 2,664,000
Thereafter 7,237,000
-----------
TOTAL $28,712,000
===========
Total rent expense for the years ended June 30, 2002, 2001, and 2000, was
$5,255,000, $4,605,000, and $3,841,000, 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 CASH EQUIVALENTS
- -------------------------
The carrying amount approximates fair value because of the short maturity of
those investments.
LONG-TERM OBLIGATIONS
- ---------------------
The fair values of long-term debt obligations are established from the market
values of similar issues. The carrying amounts of the Company's obligations
approximate their fair values at June 30, 2002 and 2001.
36
NOTE G -- INCOME TAXES
Income (loss) before income taxes consisted of the following:
Year Ended June 30
2002 2001 2000
----------- ----------- -----------
United States $55,870,449 $56,058,248 $ 10,020,446
Foreign 8,165,768 (150,204) (1,444,563)
----------- ----------- ------------
TOTAL $64,036,217 $55,908,044 $ 8,575,883
=========== =========== ============
Income taxes (benefit) consisted of:
Year Ended June 30
2002 2001 2000
----------- ----------- -----------
Current:
Federal $16,873,746 $17,157,270 $ 5,975,847
Foreign 1,617,787 (595,422) 184,800
State 3,876,321 2,825,817 1,078,628
Tax benefit from exercise
of stock options (2,766,453) (3,147,495) (414,354)
----------- ----------- -----------
19,601,401 16,240,170 6,824,921
Deferred:
Federal 2,921,678 2,579,968 (3,775,687)
State 329,817 369,127 (639,989)
----------- ----------- -----------
3,251,495 2,949,095 (4,415,676)
----------- ----------- -----------
Credit to additional paid-in-
capital for tax benefit
from stock option
exercises 2,766,453 3,147,495 414,354
----------- ----------- -----------
TOTAL INCOME TAXES $25,619,349 $22,336,760 $ 2,823,599
=========== =========== ===========
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
2002 2001 2000
------ ------ -----
Statutory federal income tax rate 35% 35% 35%
Increases (decreases):
State taxes, net of federal benefit 4 4 3
Foreign taxes (2) 0 7
Tax credits (1) (1) (8)
Tax liability adjustment 0 0 (19)
Non-deductible expenses (primarily
goodwill amortization) 3 1 14
Other items, net 1 1 1
---- ---- ----
EFFECTIVE INCOME TAX RATE 40% 40% 33%
==== ==== ====
37
Deferred income tax assets consisted of the following:
June 30
2002 2001
---------- -----------
Allowance for bad debts $ 6,796,484 $ 5,849,756
Depreciation (1,071,411) (987,067)
Inventory reserves 3,497,260 4,663,616
Restructuring reserves 1,096,489 840,349
Net operating loss carryforward,
limited by Section 382 1,724,127 0
Business credits carryforward,
limited by Section 383 711,870 0
Other 2,973,570 3,835,297
----------- -----------
TOTAL $15,728,389 $14,201,951
=========== ===========
Undistributed earnings of the foreign subsidiaries on which no U.S. income tax
has been provided amounted to $12,932,775 at June 30, 2002.
Income taxes paid were $19,170,284, $19,533,062, and $3,286,051, for the years
ended June 30, 2002, 2001, and 2000, respectively.
On April 12, 2002, the Company acquired Novametrix Medical Systems Inc. which
had a federal and state net operating loss for the period ending April 12, 2002
of approximately $5,800,000. Such net operating loss on a carryforward basis
expires in 2022. Additionally, Novametrix had unused research tax credits of
approximately $475,000 which expire in varying amounts through 2013 and
alternative minimum tax credits of $237,000 which do not have expiration dates.
As a result of the ownership change, the utilization of the net operating loss
and the credit carryforwards is limited each year by Internal Revenue Code
Sections 382 and 383, respectively. The Company expects to fully utilize the net
operating loss and credit carryforwards.
The change in deferred income tax assets between June 30, 2001 and June 30, 2002
includes $4,777,933 resulting from acquisitions.
During fiscal year 2000, the Company reached an agreement with the Internal
Revenue Service regarding examinations of federal income tax returns for certain
of the Company's U.S. entities for fiscal years 1996 through 1998. Based on this
agreement, the Company recorded a one-time reduction in income tax liability and
income tax expense of $1,643,000 during that year.
NOTE H -- STOCK OPTION AND PURCHASE PLANS
The Company has in place the 1984 Incentive Stock Option Plan (the "1984 Plan"),
the 1992 Stock Incentive Plan (the "1992 Plan") and the 2000 Stock Incentive
Plan (the "2000 Plan"), which provide options to eligible employees, and in the
case of the 2000 Plan, to eligible consultants and non-employee directors (as
described below in the case of non-employee directors), to purchase common stock
for a period up to ten years at option prices not less than fair market value at
the time of the grant. Under the 1984 and 1992 Plans, options become exercisable
no sooner than six months from the date of the grant at rates that vary
depending on the plan and are subject to possible acceleration in certain
circumstances. Under the 2000 Plan, options become exercisable at such times or
upon the occurrence of such events as determined by the Committee administering
the 2000 Plan. Under the 1992 and 2000 Plans, options may include cash payment
rights and restricted shares of the Company's common stock may also be awarded.
The 1984 Plan, which terminated as to new grants in 1993, had 3,400,000 shares
approved for issuance. The 1992 Plan has a total of 3,000,000 shares approved
for issuance, including 1,000,000 options that were approved by the Company's
shareholders when the 1992 Plan was adopted and an additional 2,000,000 shares
that were approved by the Company's shareholders in November 1998. The 2000 Plan
has a total of 1,400,000 shares approved for issuance.
The Company also has in place the 1991 Non-Employee Directors' Stock Option Plan
(the "Directors' Plan"), the shares available under which were exhausted in
2001. The 2000 Plan replaced the Directors' Plan for current grants. Options
previously granted under
38
the Directors' Plan, and currently granted under the 2000 Plan, are granted to
members of the Company's Board of Directors who are not employees of the
Company. Each non-employee director receives an option to purchase 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 2000 Plan have been granted. Such options are granted at
fair market value on the date of grant. For options granted to non-employee
directors, 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 and the 2000 Plan expire ten years after the date of
grant. The Directors' Plan had 300,000 options approved for issuance, which were
exhausted in 2001.
Healthdyne had in place, prior to its merger with the Company, four stock option
plans: the 1993 Stock Option Plan; the 1993 Nonemployee Director Stock Option
Plan; the 1995 Stock Option Plan II; and the 1996 Stock Option Plan. At the date
of the merger, the outstanding Healthdyne options were converted into a total of
1,360,061 options to purchase Respironics common stock. Under the terms of the
Healthdyne plans, all such options became immediately exercisable at the date of
the merger and the plans terminated as to new grants. All future stock option
grants will be made from Respironics stock option plans.
Novametrix had in place, prior to its merger with the Company, five stock option
plans: the 1990 Stock Option Plan; the 1994 Stock Option Plan; the 1997 Long
Term Incentive Plan; the 1999 Incentive Plan; and the 2000 Long Term Incentive
Plan. Novametrix also had in place certain stock option agreements, separately
from its plans, with its President and its Chief Operating Officer. At the date
of the merger, the outstanding Novametrix options were converted into a total of
416,125 options to purchase Respironics common stock. Under the terms of the
Novametrix plans and agreements, all such options become immediately exercisable
in connection with the merger and the plans terminated as to new grants. All
future stock option grants will be made from Respironics stock option plans.
Pertinent information regarding options under all Plans is as follows:
Option Shares
-------------
Year Ended June 30
2002 2001 2000
---------- ---------- ----------
Outstanding at beginning of period 2,173,989 2,584,479 1,950,861
Granted:
Price range ($10.33 - $33.75) 1,180,959
Price range ($16.13 - $29.93) 604,000
Price range ($ 7.94 - $14.44) 1,092,247
Exercised:
Price range ($ 6.22 - $26.19) (486,225)
Price range ($ 4.50 - $24.63) (833,840)
Price range ($ 2.81 - $16.25) (183,233)
Canceled (104,695) (180,650) (275,396)
---------- ---------- ----------
Outstanding at end of period (Weighted average
price $19.69) 2,764,028 2,173,989 2,584,479
========== ========== ==========
Exercisable at end of period 1,104,509 647,692 1,100,821
========== ========== ==========
Shares available for future grant 1,648,722 2,308,861 1,332,211
========== ========== ==========
39
The range of grant and exercise prices above includes the post-conversion option
prices for options granted by Novametrix prior to its merger with the Company.
The per share weighted-average fair value of stock options granted during 2002,
2001, and 2000, was $17.35, $10.39, and $4.81, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
2002 2001 2000
------ ------ ------
Expected volatility 53.0% 57.1% 56.8%
Expected dividend yield none none none
Risk-free interest rate 4.1% 5.0% 6.0%
Expected life of stock options 5 5 5
The Company applies APB Opinion No. 25, as amended, 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 Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," the Company's net earnings and related per share
amounts would have been reduced to the pro forma amounts indicated below:
2002 2001 2000
----------- ----------- -----------
Net earnings:
As reported $38,416,868 $33,571,284 $ 5,752,284
Pro forma 33,311,365 30,202,284 3,365,284
Diluted earnings per share:
As reported 1.20 1.09 0.19
Pro forma 1.04 0.98 0.11
Novametrix also had in place, prior to its merger with the Company, warrants
outstanding to purchase shares of its common stock. At the date of the merger,
the outstanding Novametrix warrants were converted into a total of 91,013
warrants to purchase Respironics common stock with exercise prices ranging from
$10.33 per share to $29.52 per share. The warrants expire at various dates
through March 2005 and are all currently exercisable.
In March 1997, the Company adopted the 1997 Employee Stock Purchase Plan (the
"1997 Plan") under which employees could purchase common stock of the Company
through payroll deductions during each Plan year beginning in 1997 through 2001.
The 1997 Plan terminated as to future grants after 2001. In August 2001, the
Company adopted the 2002 Employee Stock Purchase Plan (the "2002 Plan") under
which employees can purchase common stock of the Company through payroll
deductions during each Plan year beginning in 2002 through 2006. The purchase
price under each 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 currently under the 2002 Plan, and
historically could purchase under the 1997 Plan, is equal to 20% of annual
compensation. There are no charges or credits to income in connection with the
Plans. Shares are purchased at the end of each Plan year with the funds set
aside through payroll deductions.
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.
40
NOTE I - INDUSTRY SEGMENT, FINANCIAL INFORMATION BY GEOGRAPHIC AREAS AND MAJOR
CUSTOMERS
The Company conducts its operations in one reportable industry segment; the
design, development, manufacture and sale of medical devices. Sales by product
within this segment are as follows:
Year Ended June 30
2002 2001 2000
------------ ------------ -----------
NET SALES
Homecare $410,796,354 $357,223,198 $307,644,676
Hospital 60,813,140 43,235,211 38,595,151
Asthma and Allergy 23,309,160 21,979,453 21,944,283
------------ ------------ ------------
NET SALES $494,918,654 $422,437,862 $368,184,110
============ ============ ============
Financial information about the Company by geographic area is presented below.
The term "Foreign" is used to describe the Company's operations in Hong Kong,
Germany, China, Japan, and France.
Year Ended June 30
2002 2001 2000
------------ ------------ -----------
NET SALES
United States:
Unaffiliated customers $458,470,999 $400,361,214 $342,454,391
Interarea transfers 21,176,011 17,644,344 81,490,976
------------ ------------ ------------
479,647,010 418,005,558 423,945,367
Foreign:
Unaffiliated customers 36,447,655 22,076,648 25,729,719
Interarea transfers 15,223,575 9,882,463 8,071,010
------------ ------------ ------------
51,671,230 31,959,111 33,800,729
Elimination--Transfers 36,399,586 27,526,807 89,561,986
------------ ------------ ------------
NET SALES $494,918,654 $422,437,862 $368,184,110
============ ============ ============
OPERATING PROFIT
United States $ 73,762,027 $ 72,736,494 $ 53,214,768
Foreign 9,555,227 1,124,102 2,435,236
------------ ------------ ------------
OPERATING PROFIT 83,317,254 73,860,596 55,650,004
Corporate expense, including non-
recurring items 16,270,019 10,407,017 40,128,536
Interest expense 3,011,018 7,545,535 6,945,585
------------ ------------ ------------
INCOME BEFORE INCOME TAXES $ 64,036,217 $ 55,908,044 $ 8,575,883
============ ============ ============
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:
41
June 30
2002 2001
------------ ------------
IDENTIFIABLE ASSETS
United States $401,844,394 $303,913,079
Foreign 67,542,052 21,859,167
------------ ------------
469,386,446 325,772,246
Corporate assets (cash and
cash equivalents and
deferred income taxes) 78,063,073 41,522,861
------------ ------------
TOTAL ASSETS $547,449,519 $367,295,107
============ ============
TOTAL ASSETS
United States $463,359,111 $339,291,183
Foreign 84,090,408 28,003,924
------------ ------------
TOTAL ASSETS $547,449,519 $367,295,107
============ ============
TOTAL LIABILITIES
United States $137,931,564 $130,484,540
Foreign 41,797,888 1,542,419
------------ ------------
TOTAL LIABILTIES $179,729,452 $132,026,959
============ ============
The Company develops, manufactures and markets medical devices primarily 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 providers and distributors in the healthcare 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.
During the fiscal year ended June 30, 2002, one customer accounted for 10% of
net sales. During the fiscal year ended June 30, 2001, that same customer
accounted for 11% of net sales. No single customer accounted for 10% or more of
net sales for the fiscal year ended June 30, 2000.
NOTE J -- RETIREMENT PLANS
The Company has a Retirement Savings Plan which is available to all U.S.
employees. Employees may contribute up to 15% (to a defined maximum) of their
compensation. Effective July 1, 2002, this contribution rate increases to up to
30% (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. Total Company contributions to these plans was
$1,774,000, $1,307,000, and $1,528,000, for the years ended June 30, 2002, 2001,
and 2000, respectively. The Company's current benefit program does not provide
any other postretirement benefits to employees.
NOTE K -- CONTINGENCIES
The Company is party to actions filed in a Federal District Court in January
1995 and June 1996 in which a competitor alleges that the Company's manufacture
and sale in the United States of certain products infringes 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 or unenforceable and that the Company does not infringe upon
the patents. The January 1995 and June 1996 actions have been consolidated, and
discovery is ongoing. The Court has granted the Company's various motions for
summary judgment and held that the Company does not infringe any of the
competitor's four patents at issue. The competitor may seek an appeal of those
42
decisions. In any event, the Company intends to continue to pursue its claims
that the competitor's patents are invalid or unenforceable.
The Company is, as a normal part of its business operations, a party to other
legal proceedings in addition to those previously described by filings of the
Company. 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.
In connection with customer leasing programs with independent leasing companies,
the Company is contingently liable, in the event of a customer default, to the
leasing companies within certain limits for unpaid installment receivables
initiated by or transferred to the leasing companies. The transfer of certain of
these installment receivables meets the criteria of Statement of Financial
Accounting Standards No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," and therefore are not
recorded on the Company's financial statements. The total exposure for unpaid
installment receivables meeting these criteria and not recorded on the Company's
financial statements was approximately $18,428,000 and $22,670,000 at June 30,
2002 and 2001, respectively. The transfer of the remainder of these installment
receivables (consisting of installment receivables acquired as part of the
Novametrix acquisition) does not meet the criteria of this Standard and
therefore must be recorded as collateralized borrowing arrangements.
Accordingly, the Company has included $11,826,000 of receivables sold with
recourse as assets in prepaid expenses and other at June 30, 2002 and has
recorded offsetting liabilities at that date in accrued expenses and other.
NOTE L -- RESTRUCTURING
In July 1999, the Company announced a major restructuring of its U.S. operations
that included facility closings and downsizings, a management realignment, and a
workforce reduction associated with those changes. The workforce reduction
involved approximately 200 employees in areas of executive management,
manufacturing, engineering, sales and marketing, administration, and service.
The following table summarizes these restructuring charges and corresponding
expenditures.
Reconciliation of Restructuring Reserves
Employee Lease Buyouts
Severance Asset & Other Direct Total
Costs Write-Downs Expenses Restructuring
-------- ----------- -------------- --------------
Balance at July 1, 1999 $ 0 $ 0 $ 0 $ 0
Restructuring charges (net) 6,300,000 8,900,000 14,000,000 29,200,000
Cash expenditures (3,100,000) 0 (12,900,000) (16,000,000)
Noncash expenditures 0 (1,700,000) 0 (1,700,000)
----------- ----------- ------------- --------------
Balance at June 30, 2000 3,200,000 7,200,000 1,100,000 11,500,000
Restructuring charges (net)(1) (200,000) 1,000,000 0 800,000
Cash expenditures (1,500,000) 0 (900,000) (2,400,000)
Noncash expenditures 0 (2,500,000) 0 (2,500,000)
----------- ----------- ------------- --------------
Balance at June 30, 2001 1,500,000 5,700,000 200,000 7,400,000
Restructuring charges (net) 0 0 0 0
Cash expenditures (1,400,000) 0 (100,000) (1,500,000)
Noncash expenditures 0 (3,400,000) 0 (3,400,000)
----------- ----------- ------------- --------------
Balance at June 30, 2002 $ 100,000 $ 2,300,000 $ 100,000 $ 2,500,000
=========== =========== ============= ==============
(1) During the year ended June 30, 2001, the Company also recorded a gain of
approximately $2,000,000 on the sale of the Westminster, Colorado facility.
43
During fiscal year 2000, the Company incurred a total of $29,200,000 in charges
related to this restructuring. The primary components of these charges were
severance and employment related costs ($6,300,000), asset write-downs to
reflect decisions made regarding product, facility, and systems rationalization
($8,900,000), and lease buyouts related to facility rationalizations and other
direct expenses of the restructuring ($14,000,000). The non-cash expenditures
presented as reductions of the asset write-down restructuring charge represent
disposals of fully written-down assets, including rationalized inventories and
impairments to long-lived assets held for disposal consisting of machinery,
equipment, and computer software.
During fiscal year 2001, the Westminster, Colorado facility was sold as planned,
and a gain of approximately $2,000,000 was recorded on the sale. Also during
fiscal year 2001, final restructuring expenses of $800,000 were incurred,
primarily for inventory write-offs of discontinued products.
Restructuring costs incurred but not yet paid have been credited to accrued
expense and asset write-downs have been credited against the applicable asset
accounts. Substantially all of the remaining restructuring accruals as of June
30, 2002 are expected to be paid out during fiscal year 2003.
NOTE M -- STOCK REPURCHASE
From August 1998 through September 1999, the Company's Board of Directors
authorized several stock buybacks which represented authorization to purchase up
to 4,000,000 shares of the Company's outstanding common stock. During fiscal
year 2000, the Company repurchased, net of share usage, a total of 1,044,000
shares in open market transactions resulting in a net use of cash of $9,201,000.
No shares were repurchased during fiscal years 2001 or 2002. Including shares
repurchased prior to fiscal year 2000, the Company has repurchased a total of
3,800,000 shares under this buyback program. Shares that are repurchased are
added to treasury shares pending future use and reduce the number of shares
outstanding used in calculating earnings per share.
NOTE N -- SUBSEQUENT EVENT
On August 19, 2002, the Company entered into a new Revolving Credit Agreement
under which a total of $150,000,000 is available, with similar terms and
financial covenants to the Commercial Bank Credit Agreement (see Note D) and
which expires in August 2005. The new Revolving Credit Agreement is also
unsecured.
NOTE O - ACQUISITIONS
On April 12, 2002, the Company completed its previously announced acquisition of
100% of the outstanding common stock of Novametrix Medical Systems Inc.
("Novametrix"), a leading cardiorespiratory monitoring company that develops,
manufactures, and markets proprietary state-of-the-art noninvasive monitors,
sensors, and disposable accessories. The acquisition of Novametrix was
consummated pursuant to an Agreement and Plan of Merger dated as of December 17,
2001, pursuant to which Respironics Holdings, Inc., a wholly owned subsidiary of
the Company, was merged with and into Novametrix (the "Merger"). The Company
made this acquisition for various reasons, including: (a) the Novametrix
monitoring products complement the Company's therapeutic products used in the
hospital environment, (b) the Novametrix developmental care products complement
the Company's infant management products and programs, (c) the Novametrix
cardiac output monitoring technologies have the potential to support the
Company's initiatives in the congestive heart failure area, and with the
acquisition, (d) the Company's "critical mass" of products, revenues, profits,
and assets in these markets increased, and (e) the Company expects to reduce
costs by integrating Novametrix's business functions and processes. The results
of operations of Novametrix are included in the Company's consolidated income
statement beginning on the acquisition date, April 12, 2002.
Upon consummation of the Merger, approximately 2,400,000 shares of the Company's
common stock were issued to the former stockholders of Novametrix, reflecting an
exchange ratio of .2541 shares of the Company's common stock for each share of
Novametrix common stock. The exchange ratio was determined based on the weighted
average selling price of $31.48
44
for the Company's common stock for the 20 day trading period from March 11
through April 8, 2002. Novametrix stockholders received the Company's stock in
an amount equal to $8.00 per Novametrix share based upon the weighted average
selling price. In addition, approximately 509,000 shares of the Company's common
stock were reserved for issuance upon exercise of options and warrants issued in
exchange for Novametrix options and warrants that were not exercised prior to
the consummation of the Merger. As of the close of trading on April 12, 2002,
Novametrix common stock ceased to be traded on the Nasdaq National Market.
The total value of the Company's shares issued and reserved for issuance in the
transaction was approximately $81.0 million based on the average fair market
value of the Company's' common stock during the three-day periods both before
and after the first day the number of shares issued became fixed, plus the fair
market value of the Company's common stock reserved for issuance. In addition,
the Company incurred approximately $3.4 million in transaction costs (consisting
primarily of investment banking and other professional fees and severance costs
for certain Novametrix employees), bringing the total acquisition cost to
approximately $84.4 million.
The following table summarizes the fair value of the assets acquired and
liabilities assumed at the date of acquisition. The allocation of the purchase
price may be subject to further refinement, primarily due to final determination
of the recoverability and disposition of assets and liabilities based on events
that existed at the acquisition date.
At April 12, 2002
Current assets, primarily
consisting of accounts
receivable and inventories $24,500,000
Property, plant and equipment 2,900,000
Intangible assets 17,700,000
Other noncurrent assets 1,400,000
Goodwill 47,500,000
-----------
Total assets acquired $94,000,000
Current liabilities, primarily
consisting of accounts
payable, accrued expenses,
and current portion of
debt 9,600,000
-----------
Net assets acquired $84,400,000
===========
The amounts assigned to major classes of intangible assets are shown below:
Technology related assets,
primarily patents $17,300,000
Non-compete agreements 400,000
-----------
Total intangible assets $17,700,000
===========
The weighted average amortization period is approximately 15 years for the
technology related assets, approximately three years for the non-compete
agreements, and approximately 14 years in total.
Approximately $3.1 million of goodwill is expected to be deductible for tax
purposes.
Restructuring and integration costs related to the Novametrix acquisition were
incurred during fiscal year 2002. Severance costs of $1,647,000 for the
separation of
45
approximately 50 employees were incurred, of which $1,336,000 was included in
the acquisition costs shown above, and $311,000 was recorded as integration and
restructuring charges. All severance is expected to be paid out during fiscal
year 2003. Integration and restructuring charges also included $1,977,000
related to eliminating and centralizing certain duplicate back office functions.
Cost of goods sold included $1,653,000 related to reversing acquisition date
inventory fair market value adjustments as inventory was sold subsequent to the
acquisition.
In the fourth quarter of fiscal year 2002, the Company ceased work on an oxygen
monitoring technology development project based in part on the results of a
review of that technology by engineers from Novametrix that was conducted after
the acquisition. This decision resulted in an impairment charge totaling
$2,006,000 in the fourth quarter representing the write-off of intangible
assets, inventory and fixed assets related to the project.
The pro forma summary below presents the Company's results of operations as if
the acquisition had occurred at the beginning of the periods presented and does
not purport to be indicative of what would have occurred had the acquisition
been made as of those dates or of results which may occur in the future. These
results do not include costs related to the acquisition or related restructuring
and integration costs recorded in fiscal year 2002 or the positive impact of
cost reductions and other synergies that are expected to be realized as a result
of the acquisition.
Year ended June 30
2002 2001
---- ----
Pro Forma Sales $531,606,000 $477,120,000
Pro Forma Net Income 37,857,000 33,049,000
Pro Forma Earnings
Per Share 1.12 0.99
Novametrix had an April fiscal year-end, which differed from the Company's June
year-end. In order to develop the fiscal year 2002 pro forma information, the
Company's income statement for the year ended June 30, 2002 (which included
Novametrix's results of operations effective April 12, 2002) was combined with
Novametrix's unaudited income statement for the period July 1, 2001 through
April 12, 2002. In order to develop the fiscal year 2001 pro forma information,
the Company's income statement for the year ended June 30, 2001 was combined
with Novametrix's income statement for the year ended April 29, 2001. Earnings
per share data are based on the Company's weighted average number of common
shares outstanding plus the total number of the Company's common shares and
equivalents delivered to Novametrix stockholders as part of the acquisition.
In May 2002, the Company acquired a 60% controlling interest in Fuji, RC Co.,
Ltd., a leading provider of homecare and hospital products and services for
respiratory-impaired patients in Japan, and entered into an agreement to
purchase all of the remaining outstanding shares of Fuji in a multiple step
acquisition by December 31, 2006. The base cash purchase price for all of the
outstanding shares is approximately $12 million with provisions for additional
payment to one of the shareholders of Fuji to be made based on operating
performance of Fuji over the next four years. These additional payments will be
accrued as compensation over the four-year period as they are earned by the
shareholder during his post-acquisition employment period. No amounts of the
purchase price were assigned to goodwill or other intangible assets since the
initial purchase price equaled the fair market value of the net assets acquired.
46
NOTE P -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Year Ended June 30
2002 2001 2000
---- ---- ----
Numerator:
Net Income $38,416,868 $33,571,284 $ 5,752,284
Denominator:
Denominator for basic earnings per share-
Weighted average shares 31,079,282 29,962,366 29,660,366
Effect of Dilutive Securities-
Stock Options and Warrants 929,077 923,677 343,389
----------- ----------- -----------
Denominator for diluted earnings per
share - Adjusted weighted average shares
and assumed conversions 32,008,359 30,886,043 30,003,755
=========== =========== ===========
Basic Earnings Per Share $ 1.24 $ 1.12 $ 0.19
=========== =========== ===========
Diluted Earnings Per Share $ 1.20 $ 1.09 $ 0.19
=========== =========== ===========
NOTE Q -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Following are the unaudited quarterly results of operations for the fiscal years
ended June 30, 2002 and 2001:
2002
----
Three Months Ended
September 30 December 31 March 31 June 30
------------ ----------- -------- -------
Net Sales $107,409,000 $117,384,000 $126,708,000 $143,418,000
Gross Profit 50,900,000 54,699,000 59,564,000 68,961,000
Integration, Restructuring and
Impairment Charges 0 0 0 4,294,000
Net Income 8,102,000 9,957,000 11,316,000 9,042,000
Basic Earnings Per Share 0.27 0.33 0.37 0.28
Diluted Earnings Per Share 0.26 0.32 0.36 0.27
47
2001
----
Three Months Ended
September 30 December 31 March 31 June 30
------------ ----------- -------- -------
Net Sales $92,064,000 $104,548,000 $110,208,000 $115,618,000
Gross Profit Including
Restructuring Costs 43,402,000 49,436,000 50,787,000 54,726,000
Gross Profit Excluding
Restructuring Costs 43,402,000 49,436,000 51,512,000 54,726,000
Restructuring Costs
(Credits) - Net 0 0 (1,184,000) 0
Net Income 6,291,000 8,010,000 9,313,000 9,957,000
Basic Earnings Per Share 0.21 0.27 0.31 0.33
Diluted Earnings Per Share 0.21 0.26 0.30 0.32
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure.
---------------------
None.
48
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,
2002 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 18, 2002, 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.
49
PART IV
Item 14. Controls and Procedures
-----------------------
Not applicable.
Item 15. 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 on Form 10-K.
(a) (1) Financial Statements:
---------------------
The Consolidated Financial Statements of the Company and its
subsidiaries, together with the report of Ernst & Young LLP dated July 23, 2002,
except for Note N as to which the date is August 19, 2002, 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 ......... 50
FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
RESPIRONICS, INC.
COL. A COL. B COL. C COL. D COL. E
ADDITIONS
Balance at Charged to Charged to Balance
Beginning of Costs and Other Accts- Deductions- at End
DESCRIPTION Period Expenses Describe Describe of Period
- ----------- ------------ ---------- ------------ ----------- ---------
Year ended June 30, 2002:
Deducted from asset accounts:
Allowance for doubtful
accounts $16,457,000 $3,275,000 $ $1,274,000(a) $18,458,000
=========== ========== ======== ========== ===========
Year ended June 30, 2001:
Deducted from asset accounts:
Allowance for doubtful
accounts $17,975,000 $2,000,000 $ $3,518,000(a) $16,457,000
=========== ========== ======== ========== ===========
Year ended June 30, 2000:
Deducted from asset accounts:
Allowance for doubtful
accounts $13,919,000 $4,500,000 $ $ 444,000(a) $17,975,000
=========== ========== ======== ========== ===========
(a) Write-off of uncollectible accounts.
All other Financial Statement Schedules have been omitted because
they are not applicable to the Company.
50
(a) (3) Exhibits
--------
Those exhibits listed on the exhibit index beginning on page 55 of
this Form 10-K are filed herewith or incorporated by reference.
(b) Reports on Form 8-K:
--------------------
Current Report on Form 8-K of Respironics, Inc. with a report date of April
26, 2002, announcing the completion of the acquisition of Novametrix Medical
Systems Inc. by the Company.
Current Report on Form 8-K of Respironics, Inc. with a report date of June
25, 2002, providing pro forma financial information relating to the acquisition
of Novametrix Medical Systems Inc. by the Company.
51
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.
By: /s/ James W. Liken
-----------------------------------
James W. Liken, President and
Chief Executive Officer
Date: September 30, 2002
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 30, 2002:
/s/ James W. Liken /s/ James H. Hardie
------------------------------------- --------------------------------------
James W. Liken James H. Hardie
(President and (Director)
Chief Executive Officer
and Director)
(Principal Executive Officer)
/s/ Daniel J. Bevevino /s/ Donald H. Jones
------------------------------------- --------------------------------------
Daniel J. Bevevino Donald H. Jones
(Vice President and Chief Financial (Director)
Officer)
(Principal Accounting Officer)
/s/ Gerald E. McGinnis /s/ Craig B. Reynolds
------------------------------------- --------------------------------------
Gerald E. McGinnis Craig B. Reynolds
(Chairman of the (Director)
Board of Directors)
/s/ John C. Miles II /s/ Joseph C. Lawyer
------------------------------------- --------------------------------------
John C. Miles II Joseph C. Lawyer
(Director) (Director)
/s/ Douglas A. Cotter /s/ J. Terry Dewberry
------------------------------------- --------------------------------------
Douglas A. Cotter J. Terry Dewberry
(Director) (Director)
/s/ Sean McDonald /s/ Candace L. Littell
------------------------------------- --------------------------------------
Sean McDonald Candace L. Littell
(Director) (Director)
52
CERTIFICATIONS
I, James W. Liken, certify that:
1. I have reviewed this annual report on Form 10-K of Respironics, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: September 26, 2002
/s/ James W. Liken
--------------------------------------
James W. Liken
President and Chief Executive Officer
53
I, Daniel J. Bevevino, certify that:
1. I have reviewed this annual report on Form 10-K of Respironics, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: September 26, 2002
/s/ Daniel J. Bevevino
------------------------------------------
Daniel J. Bevevino
Vice President and Chief Financial Officer
54
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 Amendment to Restated Certificate of Incorporation of the Company,
filed as Exhibit 4.2 to Company's Registration Statement on Form
S-8, Registration No. 33-36459.
3.4 Amendment to Restated Certificate of Incorporation of the Company,
filed as Exhibit 4.2 to Company's Registration Statement on Form
S-8, Registration No. 33-89308.
3.5 Amendment to Restated Certificate of Incorporation of the Company,
filed as Exhibit 3.5 to Form 10-Q for fiscal quarter ended December
31, 1996.
3.6 By-Laws of the Company, filed as Exhibit 3.4 to Amendment No. 2 to
Form S-1, Registration No. 33-20899.
3.7 Amendment to By-Laws of the Company on June 3, 1998, filed as
Exhibit 3.7 to Form 10-K for the fiscal year ended June 30, 1998.
3.8 Amendment to By-Laws of the Company on November 18, 1998, filed as
Exhibit 3.8 to Form 10-Q for fiscal quarter ending December 31,
1998.
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 Amended and Restated Employment Agreement between the Company and
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Gerald E. McGinnis, filed as Exhibit 10.37 to Quarterly Report on
Form 10-Q for fiscal quarter ended March 31, 1999.
10.3 Incentive Bonus Plan dated January 26, 1985, filed as Exhibit 10.16
to Form S-1, Registration No. 33-20899.
10.4 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.
10.5 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.
10.6 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.
10.7 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.
10.8 Separation Agreement and Complete Release dated September 2, 1999
between the Company and Dennis S. Meteny filed as Exhibit 10.38 to
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999.
10.9 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.
10.10 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.
10.11 Healthdyne Technologies, Inc. 1996 Stock Option Plan, filed as
Exhibit 10.13 to Annual Report on Form 10-K for the fiscal year
ended June 30, 1998.
10.12 Healthdyne Technologies, Inc. Stock Option Plan, filed as Exhibit
10.8 to the Healthdyne Technologies, Inc. Registration Statement on
Form S-1, Registration No. 33-60706.
10.13 Healthdyne Technologies, Inc. Non-Employee Director Stock Option
Plan, filed as Exhibit 10.9 to the Healthdyne Technologies, Inc.
Registration Statement on Form S-1, Registration No. 33-60706.
10.14 Healthdyne Technologies, Inc. Stock Option Plan II, filed as an
Exhibit to the Healthdyne Technologies, Inc. Annual Report on Form
10-K, for the year ended December 31, 1994.
10.15 Credit Agreement by and among RESPIRONICS, INC. as the Borrower,
THE BANKS PARTY HERETO, as the Lenders hereunder, and PNC BANK,
NATIONAL ASSOCIATION as the Issuing Bank, PNC BANK NATIONAL
ASSOCIATION as the Administrative Agent and the Syndication Agent
and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION as the
Documentation Agent, dated as of May 8, 1998, filed as Exhibit 10.1
to Quarterly Report on Form 10-Q for the quarter ended March 31,
1998.
10.16 Amended and Restated Employment Agreement dated September 1, 2000
between the Company and Steven P. Fulton, filed as Exhibit 10.16 to
Annual Report on Form 10-K for the fiscal year ended June 30, 2001.
10.17 Employment Agreement dated October 21, 1996 between the Company and
Geoffrey C. Waters, filed as Exhibit 10.16 to Annual
56
Report on Form 10-K for the fiscal year ended June 30, 1997.
10.18 Amended and Restated Employment Agreement dated September 1, 2000
between the Company and Daniel J. Bevevino, filed as Exhibit 10.18
to Annual Report on Form 10-K for the fiscal year ended June 30,
2001.
10.19 Employment Agreement dated November 11, 1997 between the Company
and Craig B. Reynolds, filed as Exhibit 10.22 to Annual Report on
Form 10-K for the fiscal year ended June 30, 1998.
10.20 Supplemental Employment Agreement dated November 11, 1997 between
the Company and Craig B. Reynolds, filed as Exhibit 10.23 to Annual
Report on Form 10-K for the fiscal year ended June 30, 1998.
10.21 Amendment No. 1 to the Employment Agreements between the Company
and Craig B. Reynolds dated February 11, 1998, filed as Exhibit
10.23 to Annual Report on Form 10-K for the fiscal year ended June
30, 2000.
10.22 Amendment to the Employment Agreements between the Company and
Craig B. Reynolds dated June 29, 2000, filed as Exhibit 10.24 to
Annual Report on Form 10-K for the fiscal year ended June 30, 2000.
10.23 Employment Agreement dated November 10, 1997 between the Company
and John L. Miclot, filed as Exhibit 10.24 to Annual Report on Form
10-K for the fiscal year ended June 30, 1998.
10.24 Supplemental Employment Agreement dated November 10, 1997 between
the Company and John L. Miclot, filed as Exhibit 10.25 to Annual
Report on Form 10-K for the fiscal year ended June 30, 1998.
10.25 Tradename License Agreement dated as of April 21, 1995 by and
between Healthdyne, Inc., now Matria Healthcare, Inc., and
Healthdyne Technologies, Inc., now Respironics Georgia, Inc., filed
as Exhibit 10.23 to the Healthdyne Technologies, Inc. Form 8-K
dated April 20, 1995.
10.26 Form of letter agreement by and among the Company, Healthdyne
Technologies, Inc. and Matria Healthcare, Inc. confirming and
amending Corporate Services Agreement and Tradename License
Agreement between Healthdyne, Inc., now Matria Healthcare, Inc.,
and Healthdyne Technologies, Inc., now Respironics Georgia, Inc.,
filed as Appendix D to Exhibit 10.17 to Quarterly Report on Form
10-Q (File No. 000-16723) dated November 14, 1997.
10.27 Amendment No. 1 to Healthdyne Technologies, Inc. Stock Option Plan,
filed as Exhibit 10.40 to Healthdyne Technologies, Inc. Form 10-K/A
for the year ended December 31, 1996.
10.28 Amendment No. 2 to Healthdyne Technologies, Inc. Stock Option Plan,
filed as Exhibit 10.41 to Healthdyne Technologies, Inc. Form 10-K/A
for the year ended December 31, 1996.
10.29 Lease Agreement, dated December 20, 1993, between Max L. Kuniansky,
David L. Kuniansky, Amy Kuniansky Clark, Douglas S. Kuniansky and
Healthdyne Technologies, Inc., now Respironics Georgia, Inc., filed
as an Exhibit to the Healthdyne Technologies, Inc. Annual Report on
Form 10-K for the year ended December 31, 1993.
10.30 Employment Agreement dated November 10, 1997 between the Company
and Robert Tucker, filed as Exhibit 10.35 to Annual Report on Form
10-K for the fiscal year ended June 30, 1998.
10.31 Supplemental Employment Agreement dated November 10, 1997 between
the Company and Robert Tucker, filed as Exhibit 10.36 to Annual
Report on Form 10-K for the fiscal year ended June 30, 1998.
57
10.32 Respironics, Inc. 1997 Non-Employee Directors' Fee Plan, filed as
Exhibit 10.35 to Annual Report on Form 10-K for the fiscal year
ended June 30, 1999.
10.33 Amendment No. 1 to Rights Agreement, dated as of June 28, 1996,
filed as Exhibit 10.39 to Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999.
10.34 Employment Agreement, made as of October 1, 1999, by and between
the Company and James W. Liken, filed as Exhibit 10.40 to Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000.
10.35 First Amendment to the Credit Agreement by and among RESPIRONICS,
INC. as the Borrower, THE BANKS PARTY HERETO, as the Lenders
hereunder, PNC BANK, NATIONAL ASSOCIATION as the Issuing bank, PNC
BANK, NATIONAL ASSOCIATION as the Administrative Agent and the
Syndication Agent and BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION as the Documentation Agent, dated as of August 19,
1998, filed as Exhibit 10.37 to Quarterly Report on Form 10-Q for
the quarter ended December 31, 1998.
10.36 Second Amendment to the Credit Agreement by and among RESPIRONICS,
INC. as the Borrower, THE BANKS PARTY HERETO, as the Lenders
hereunder, PNC BANK, NATIONAL ASSOCIATION as the Issuing bank, PNC
BANK, NATIONAL ASSOCIATION, as the Administrative Agent and the
Syndication Agent and BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION as the Documentation Agent, dated as of December 9,
1998, filed as Exhibit 10.38 to Quarterly Report on Form 10-Q for
the quarter ended December 31, 1998.
10.37 Amendment to the Employment Agreements between the Company and
Craig B. Reynolds dated August 8, 2000, filed as Exhibit 10.43 to
Quarterly Report on Form 10-Q for the quarter ended September 30,
2000.
10.38 Amendment to the Employment Agreements between the Company and
Craig B. Reynolds dated August 16, 2000, filed as Exhibit 10.44 to
Quarterly Report on Form 10-Q for the quarter ended September 30,
2000.
10.39 Third Amendment to the Credit Agreement by and among RESPIRONICS,
INC. as the Borrower, THE BANKS PARTY HERETO, as the Lenders
hereunder, PNC BANK, NATIONAL ASSOCIATION as the Issuing Bank, PNC
BANK, NATIONAL ASSOCIATION, as the Administrative Agent, BANK of
AMERICA, N.A. as the Syndication Agent and FIRST UNION NATIONAL
BANK as the Documentation Agent, dated as of July 7, 2000, filed as
Exhibit 10.45 to Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000.
10.40 Separation Agreement between the Company and Robert D. Crouch dated
October 12, 2000, filed as Exhibit 10.46 to Quarterly Report on
Form 10-Q for the quarter ended December 31, 2000.
10.41 2000 Stock Incentive Plan, filed as Exhibit A to 2000 Proxy
Statement incorporated by reference into Annual Report on Form 10-K
for the fiscal year ended June 30, 2000.
10.42 Respironics, Inc. Non-Employee Director Deferred Compensation Plan,
filed as Exhibit 10.42 to this Annual Report on Form 10-K for the
fiscal year ended June 30, 2002.
21.1 List of Subsidiaries filed as Exhibit 21.1 to this Annual Report on
Form 10-K.
23.1 Consent of Ernst & Young LLP, filed as Exhibit 23.1 to this Annual
Report on Form 10-K.
58
99.1 Certification of James W. Liken, President and Chief Executive
Officer
99.2 Certification of Daniel J. Bevevino, Vice President and Chief
Financial Officer
59