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, 2000 or
-------------
Transition Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ______
Commission File No. 000-16723
RESPIRONICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1304989
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1501 Ardmore Boulevard
Pittsburgh, Pennsylvania 15221
(Address of principal executive offices) (Zip Code))
(Registrant's Telephone Number, including area code) 412-731-2100
Securities registered pursuant to Section 12(b) of the Act:
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, 2000, 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 $533,000,000.
As of August 31, 2000, there were 33,188,843 shares of Common Stock of the
registrant outstanding, of which 3,733,498 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 16, 2000 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........................................ 18
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.......................................... 23
Item 8. Consolidated Financial Statements.......................... 24
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure....................................... 45
PART III
Item 10. Directors and Executive Officers of
the Registrant............................................. 46
Item 11. Executive Compensation..................................... 46
Item 12. Security Ownership of Certain
Beneficial Owners and Management........................... 46
Item 13. Certain Relationships and Related
Transactions............................................... 46
PART IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K.......................... 47
Signatures........................................................... 49
2
PART I
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES REFORM ACT OF 1995.
The statements contained in this Annual Report on Form 10-K,
specifically those contained in Item 1 "Business" and Item 7 "Management's
Discussion and Analysis of Results of Operations and Financial Condition," and
statements incorporated by reference in this Form 10-K from the 2000 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 those in the
forward-looking statements. Results actually achieved may differ materially from
expected results included in these 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, interest rate fluctuations,
intellectual property and related litigation, other litigation, FDA and other
government regulation, third party reimbursement, restructuring activities, and
anticipated cost savings.
Item 1. Business
--------
General
Respironics, Inc. is a leading developer, manufacturer and marketer of
medical devices used for the treatment of patients suffering from respiratory
disorders. The Company's products are designed to reduce costs while improving
the effectiveness of patient care and are used primarily in the home and 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, and diagnostic and
monitoring systems; (ii) hospital products, including bi-level non-invasive
ventilatory support units, critical care units that can deliver both non-
invasive and invasive ventilation, and portable invasive volume ventilator
units, 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 175 direct and independent sales representatives and
sales management personnel who sell to a network of over 5,000 medical product
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 1501 Ardmore Boulevard, Pittsburgh, PA 15221. Unless the context indicates
otherwise, reference in this Annual Report to the "Company" or "Respironics"
refers to Respironics, Inc. and its domestic and foreign subsidiaries. Unless
the context indicates otherwise, reference in this Annual Report to "fiscal
year" refers to the twelve-month period ending on June 30 of the year indicated.
In February 1998, the Company merged a wholly-owned subsidiary with
Healthdyne Technologies, Inc. ("Healthdyne"), a leading designer, manufacturer
and marketer of technologically advanced medical devices for use in the home and
hospital, in a stock for stock merger by issuing approximately 12,000,000 shares
of the Company's common stock in exchange for the outstanding shares of
Healthdyne. The Merger was
3
accounted for as a pooling of interests. Accordingly, all discussion herein is
presented on a combined basis for all periods presented. Healthdyne was based in
Marietta, Georgia. See Note K to the Consolidated Financial Statements for more
information about this merger.
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 Marietta, 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 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, which was closed in January 2000, is currently being
offered for sale. In addition, on August 19, 1999, the Company announced the
appointment of James W. Liken as President and Chief Executive Officer,
replacing Dennis S. Meteny who resigned as an officer and a director. See Note M
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, Great Performers, Aria, Virtuoso, Duet, Encore,
Quartet, Maestro, BiPAP, Harmony, PLV, Monarch, Solo, OptiChamber, Healthdyne,
Alice, Soft Series Nasal Mask, Tranquility, SmartMonitor, ASSESS, Personal Best,
Wallaby, GoldSeal, GEL, Inspiration, Esprit, Asthma Check and Optihaler. The
following are trademarks of the Company as used in this document: Contour Nasal
Mask, Respironics Millennium, BiliChek, Profile, Encore SmartCard, Respironics
Simplicity, BiPap Vision, Stardust, Comfort Series and AsthmaMentor.
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 concentrators and monitoring
devices.
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 Solo, REMstar, Aria and Virtuoso CPAP
units and the Duet bi-level unit, the BiPAP S Airway Management System, the
Tranquility family of CPAP and bi-level units, and related accessories such as
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 Solo, REMstar 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 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 recently
introduced Encore SmartCard is an easy-to-use device to retrieve this patient
data, update air pressure settings, and change modes of operations for the Aria
and Virtuoso units by utilizing specially developed data management software
that is programmed onto the credit card sized Encore SmartCard.
The BiPAP Duet Airway Management System, the Tranquility Bi-level
System, and the BiPAP S Airway Management System are the Company's bi-level OSA
units. These units
4
sense the patient's breathing cycle and adjust the pressure accordingly. The
Duet unit also contains advanced leak-sensing technology, which improves the
unit's pressure adjustment capability. Bi-level units are used to treat severe
OSA and are useful in improving acceptance of therapy by patients who have
difficulty tolerating CPAP. The Company has received clearance from the United
States Food and Drug Administration ("FDA") for all of its CPAP and bi-level OSA
units.
The Company also provides masks used with CPAP and bi-level devices
including the Comfort Series, consisting of the Profile Lite, Respironics
Simplicity, and Contour Deluxe masks, the Contour Nasal Mask, the GEL and
GoldSeal Masks, the Soft Series Mask, Monarch Mini 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. 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
laboratory.
The Company's primary sleep diagnostic product is the Alice system.
Alice is a computer-based system for use in sleep laboratories 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 laboratory or other clinical setting where it is
interpreted by a trained clinician.
The Great Performers Clinical System, consisting of the Quartet
Clinical System, a bedside pressure generator and the Maestro Clinical Remote
Control Unit, is used by clinicians in prescribing therapy for the treatment of
adult OSA once a diagnosis has been made.
The Company estimates that in the U.S. approximately 1,500 sleep
clinics currently exist at hospitals and other medical centers where
pulmonologists, technicians and other medical professionals diagnose OSA (as
well as other sleep disorders) and then prescribe the appropriate treatment.
Such laboratories provide the most frequent source of patient introductions to
the Company's homecare sleep products.
The OSA patient can purchase or rent the Company's OSA therapy
products from home healthcare product 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 $700 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 $2,000 to $3,200, depending on which model is purchased.
The Company's sleep diagnostic products are sold through dealers and directly to
clinical sites.
5
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 products are
the BiPAP Ventilatory Support System, the initial version of which was
introduced in 1989 and the Harmony Pressure Support Ventilator, which was
introduced internationally in July 1999. Both products are low-pressure,
electrically-driven flow generators with an electronic pressure control designed
to augment patient breathing by supplying pressurized air to the patient. Both
products sense the patient's breathing and adjust their output to assist in
inhalation and exhalation. Additionally, both products compensate for mask
leaks, which often occur in the delivery of ventilatory support to the patient,
thereby providing what the Company believes is a more efficient and consistent
non-invasive therapy than competing volume ventilators. The face masks
described above are also used with the non-invasive ventilatory support units.
The Company believes that its non-invasive ventilatory support
products have 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 units,
which range from $6,000 to $9,500, 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 Ventilatory Support System was under review during fiscal years
1998 and 1999 and coverage guidelines were ultimately modified during fiscal
year 2000. During these fiscal years, the Company's sales of these products for
home use in the United States were adversely affected by the uncertainty in the
market that this review and modification created and the corresponding reduction
in purchases of these units by the Company's dealer customers during the review
and after the modification of these coverage guidelines. The Company expects
that its sales of non-invasive ventilatory support units for home use in the
United States will continue to be negatively impacted, as compared with periods
prior to the review and the issuance of the modified coverage guidelines, for
the foreseeable future. See "Business -- Third Party Reimbursement" for a
detailed discussion of this matter.
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
6
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 extremely 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. This data can be later downloaded via the Company's
software, which prints reports for oximetry analysis.
Monitoring Products. The Company's primary monitoring products are
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 episode 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 or "memory
module."
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 its initial clearance to market from the FDA. Additional
clearances from the FDA are being pursued to broaden the application of
BiliChek.
Sales of homecare products and all related accessories and replacement
parts accounted for 84%, 85%, and 87% of the Company's net sales for its fiscal
years 2000, 1999 and 1998, respectively.
Hospital Products
-----------------
The Company's original hospital product is the Hospital BiPAP
Ventilatory Support System, which includes accessories such as an airway
pressure monitor, a detachable control panel, a disposable circuit and a
mounting stand, all of which are designed to allow the BiPAP Ventilatory Support
System to be used more easily in delivering non-invasive ventilatory support in
the hospital environment.
7
The Company's next generation non-invasive unit for the hospital
market is the BiPAP Vision, which was released for international distribution
during fiscal year 1997 and for domestic distribution during fiscal year 1999.
The BiPAP Vision features an integrated display screen and an oxygen module,
provides higher flow and pressure functions than the Company's other non-
invasive units, and is designed to be easily upgradeable when advanced
technology becomes available.
During fiscal year 1999, the Company also introduced Esprit, a new
ventilator 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 when advanced
technology becomes available. The Esprit has received FDA clearance to market
and is being distributed in domestic and international markets.
The Company also manufactures, distributes and rents several other
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.
Sales of hospital products and accessories accounted for 10%, 9%, and
6% of the Company's net sales for fiscal years 2000, 1999 and 1998,
respectively.
Asthma and Allergy Products
----------------------------
The Company's asthma device market 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, with products that include the ASSESS 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's asthma products are sold through its Asthma and Allergy
Division, located in Cedar Grove, New Jersey. Several distribution channels are
used, including specialty hospital dealers.
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.
Sales of all asthma and allergy products accounted for 6%, 6%, and 7%
of the Company's net sales for its fiscal years 2000, 1999 and 1998,
respectively.
8
Manufacturing and Properties
Domestic:
The Company's corporate headquarters is located in a leased facility
in Pittsburgh, Pennsylvania and its primary domestic manufacturing operations
are located in Murrysville, Pennsylvania (approximately 20 miles east of
Pittsburgh), Marietta, Georgia (approximately 25 miles north of Atlanta), and
Vista, California (approximately 20 miles north of San Diego). The Company's
primary distribution and service facility is located in Youngwood, Pennsylvania
(approximately 30 miles east of Pittsburgh). The Company also has four
ventilation service centers throughout the United States. See Note E to the
Consolidated Financial Statements for additional information regarding leased
facilities. As part of its restructuring during fiscal year 2000, the Company
closed its Westminster, Colorado facility and its 19 Customer Satisfaction
Centers, the Marietta, Georgia facility was reduced in size, and the Youngwood,
Pennsylvania distribution and service center was opened.
The Murrysville facility is a 116,000 square foot building that was
first occupied in July 1990 and expanded to its current size in November 1993.
The entire facility is subject to mortgages used to secure financing related to
the construction and expansion of the facility. See Note D to the Consolidated
Financial Statements for additional information regarding the mortgages and the
financing. The facility is a one and one-half story building of steel and
concrete construction that had a total cost, including the expansion, of
approximately $7,800,000.
The Marietta facility consists of 127,000 square feet of leased space
in three essentially adjacent buildings in an industrial park. The facility is
similar in design, construction and layout to the Murrysville facility. The
leases for these three buildings terminate in November 2000. In October 2000,
the Marietta facilities will be consolidated and moved approximately five miles
into a new building in Kennesaw, Georgia. This new building will consist of
approximately 129,000 square feet of leased space which is also similar in
design, construction, and layout to the Murrysville facility.
The Company currently leases a 27,000 square foot research and
development, manufacturing, and office facility in Vista, California that house
certain of the Company's hospital product operations. Beginning in November
2000, the Vista operations will be moved approximately five miles to a new
leased facility of approximately 80,000 square feet in Carlsbad, California near
the Vista location.
The Youngwood facility is an 86,000 square foot building that is
leased and is located in an industrial park near several interstate highways and
a United Parcel Service distribution center.
The Company leases space of approximately 5,000 square feet for each
of the four ventilation service centers.
The Westminster facility, which was closed in January 2000 as part of
the Company's restructuring, is a 74,000 square foot building that was first
occupied in October 1994. The facility is owned and is subject to mortgages used
to secure financing related to the construction of the facility. See Note D to
the Consolidated Financial Statements for additional information regarding the
mortgages and the financing. The facility is a one-story building of steel and
concrete construction that had a total cost of approximately $3,700,000 and is
currently being offered for sale.
The Company also leases a 22,000 square foot office facility in Plum
Borough, Pennsylvania, approximately two miles from the existing Murrysville
facility. This leased facility currently houses certain research and
development projects.
The Company leases a 6,000 square foot facility in Cedar Grove, New
Jersey that functions as the headquarters for the Company's Asthma and Allergy
Division. See "Asthma and Allergy Products."
International:
The Company's Far East Administrative headquarters are located in a
28,000 square foot leased facility in Kowloon, Hong Kong.
9
The Company conducts a portion of its patient mask manufacturing and
certain other high volume production of plastic components in a facility in
Shenzhen City in the Peoples Republic of China, bordering Hong Kong, and in
Subic Bay, Philippines. Since 1987, the Company has operated a manufacturing
facility in Shenzhen City, one of the special economic zones established by the
People's Republic of China in 1980 to induce foreign investment. The current
Shenzhen facility, which the Company first occupied in March 2000, is leased
with total manufacturing space of approximately 99,700 square feet. The Subic
Bay facility, which currently totals 22,700 square feet, is also leased.
The Company's European facilities (all of which are leased) include a
12,000 square foot office and warehouse facility in Herrsching, Germany; a 4,000
square foot office and warehouse facility in Wendelstein, Germany; a 3,000
square foot office and warehouse facility in Nantes, France; and a 4,000 square
foot office in Paris, France.
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 approximately 20 acres of land
adjacent to the 10-acre site on which the Murrysville facility is located.
Future expansion in Murrysville, if needed, could take place on this 20-acre
site.
The Company generally performs all major assembly work on all of its
products. It manufactures the plastic components for its face mask products and
uses subcontractors to supply certain other components. The Company believes
that the raw materials for 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
homecare and hospital dealers. These parties in turn resell and rent the
Company's products to end users. The Company's products reach its customers in
the United States primarily through the Company's field network, which consists
of 20 national and regional management employees, 102 direct sales
representatives and sales support specialists, 37 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, fifteen Regional Sales Managers, and three 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 European Sales, a Director
of Latin American Sales, a Director of Asia Pacific Sales, and a Director of
North Pacific Sales. The Company also has direct sales representatives and a
customer satisfaction staff in the Far East, Germany and France. The Company's
international sales employees sell products from all three major product groups.
International sales accounted for approximately 21%, 22%, and 22% of the
Company's net sales for fiscal years 2000, 1999, and 1998, respectively.
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").
10
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 Obstructive Pulmonary Disease,
Respiratory Insufficiency and Failure, Asthma/Allergy, and Infant 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) is undergoing significant
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.
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 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") 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 all 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., 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 significant consolidation. Several of
the Company's competitors have completed mergers, most notably the acquisition
of Nellcor-Puritan Bennett by Mallinckrodt and the planned acquisition of
Mallinckrodt by Tyco International Ltd. 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
11
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.
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 160 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 $16,815,000 (5% of net sales) in fiscal year 2000,
$16,714,000 (5% of net sales) in fiscal year 1999, and $20,225,000 (6% of net
sales) in fiscal year 1998 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 1998, 1999 and 2000, including products in the
CPAP area, a new auto CPAP device, the BiPAP Vision ventilator, the Harmony
ventilator, the Esprit ventilator, the Respironics Millenium Oxygen
Concentrator, new sleep diagnostic products, a variety of new face mask
products, several new asthma devices, and BiliChek, an infant bilirubin
measurement device. The Company expects to release a variety of new devices in
its core product areas in fiscal year 2001. 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 fetal monitoring, congestive heart failure, tracheal gas
insufflation and humidification.
The Company licenses proprietary technology in the area of fetal
oximetry monitoring and is developing a fetal oximetry product utilizing this
technology. The Company's fetal oximetry technology will give clinicians oxygen
data relative to fetal well-being in addition to standard heart rate data,
thereby providing a more complete picture of the fetus's status. The fetal
oximetry product is currently undergoing evaluation.
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 that may
accelerate deterioration in cardiac function and cause higher morbidity and
mortality rates if untreated. The Company believes that if the apnea is
identified and treated, the apneas can be eliminated and the quality of life of
patients can be improved. Additionally, the Company believes that positive
pressure therapy may eliminate CSR events and reduce the effects of CSR on heart
failure. Research is being conducted to evaluate the long-term effects of
positive pressure therapy on heart failure.
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's goal is to introduce this tracheal gas
insufflation system in calendar year 2001 pending FDA clearance to market.
The Company is also developing a humidification system designed to
provide optimal humidification at lower usage cost than current products, with
a goal of introduction in calendar year 2001 pending FDA clearance to market.
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
12
companies. The Company currently has approximately 160 U.S. and foreign patents
and has additional U.S. and foreign patent applications pending.
The Company also has approximately 245 registered U.S. and foreign
trademarks and has additional U.S. and foreign trademark applications pending.
The Company is a party to one legal action relating to its patents and
the patents of its competitors. See "Item 3 - Legal Proceedings" for more
information regarding this action.
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 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 approval takes a number of years and requires the expenditure of
substantial resources. In addition, there can be no assurance that the FDA will
approve a PMA. The Company's export activities and clinical investigations also
are subject to the FDA's jurisdiction and enforcement.
Foreign regulatory approvals vary widely depending on the country. The
Company has received ISO 9001 certification for its Murrysville, Marietta and
Vista 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.
13
Third Party Reimbursement
The cost of a significant portion of medical care in the U.S. is funded
by government and private insurance programs, such as Medicare, Medicaid and
corporate health insurance programs including health maintenance organizations
and managed care organizations. The Company's future results of operations and
financial condition could be negatively affected by adverse changes made in the
reimbursement policies for medical products under these insurance programs. If
such changes were to occur, the ability of the Company's customers (medical
product distributors and dealers) to obtain adequate reimbursement for the
resale or rental of the Company's products could be reduced. In recent years,
limitations imposed on the levels of reimbursement by both government and
private insurance programs have become more prevalent.
In July 1998, after a review that began in early calendar year 1998,
government policymakers issued a new draft coverage policy for non-invasive
ventilation that was more restrictive than had been expected. The Company, along
with trade and medical associations, other device manufacturers, and homecare
dealers, filed formal comments as permitted with the policy makers indicating
disagreement with the draft coverage policy. In May 1999, a revised set of
coverage guidelines was issued for implementation on October 1, 1999. While
several restrictive provisions of the July 1998 draft guidelines were removed
and potential changes in reimbursement categories were delayed, the Company
believed that these revised guidelines were still overly restrictive relative to
patient qualification and administratively burdensome for clinicians and
healthcare providers. As a result, the Company continued to work with the
government policy makers and Congress to resolve the remaining issues. Several
favorable modifications were made to the guidelines, and final guidelines
reflecting these modifications were implemented effective October 1, 1999. The
Company believes that these guidelines are still overly restrictive relative to
patient qualification and administratively burdensome and is continuing to work
with government policy makers on these issues. The uncertainty in the market
regarding these guidelines and their implementation was particularly significant
during fiscal year 2000 as the planned implementation date approached and
passed, and the Company's sales for these products were adversely affected.
The Company believes that while the guidelines as implemented are
overly restrictive, there is benefit to having certainty in the market regarding
coverage for these products and as a result there are opportunities for
increased unit sales of non-invasive ventilatory support products. However,
selling prices for such units may come under pressure and there may be mix
shifts to units with lower average selling prices because of certain patient
qualification tests that are required under the guidelines. While the Company is
working closely with its dealer customers to develop strategies to reach the
appropriate patient population in the context of these new guidelines, it cannot
predict with certainty the exact impact the new guidelines will have. For the
fiscal year ended June 30, 2000, sales of non-invasive ventilatory support units
for home use in the United States accounted for approximately three percent of
total sales, compared to eight percent in fiscal year 1999 and twelve percent in
fiscal year 1998.
The Company has obtained "procedure codes" for its homecare products
from Healthcare Financing Administration ("HCFA"). These procedure codes enhance
the ability of medical product distributors and dealers to obtain reimbursement
for providing products to patients covered by Medicare. In addition, many
private insurance programs also use the HCFA procedure code system. However,
reimbursement levels can be reduced after a procedure code has been established.
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.
14
Employees
The Company currently has approximately 1,900 employees, including
approximately 700 hourly employees in the U.S. and 500 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.
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.
15
Other
Private citizens may make claims against companies for violations of
healthcare laws in actions known as qui tam suits. The Company is a defendant in
a qui tam proceeding. The federal government may intervene in, and take control
of, such actions; however, after investigating the allegations, the government
has declined to intervene in or take control of this action. The Company intends
to vigorously defend its position in the suit.
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 2000, 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, 2000, 33,182,565 shares of the Company's common stock
were issued and outstanding, of which 3,733,498 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 8, 2000, there
were 2,892 holders of record of the Company's common stock.
The Company has never paid a cash dividend with respect to its common
stock and does not intend to pay cash dividends in the foreseeable future.
High and low sales price information for the Company's common stock for
the applicable quarters is shown below.
Fiscal year ended June 30, 2000:
First Second Third Fourth
------- ------ ------ ------
High $15.13 $ 8.69 $15.94 $18.00
Low $ 8.13 $ 7.50 $ 7.94 $11.25
Fiscal year ended June 30, 1999:
First Second Third Fourth
------- ------ ------ ------
High $19.88 $20.75 $21.38 $16.12
Low $11.25 $ 9.88 $10.81 $12.38
16
Item 6. Selected Financial Data
-----------------------
(Dollars in thousands except per share data)
Income Statement Data:
Year Ended June 30
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Net sales $368,184 $357,571 $351,576 $314,542 $236,471
Cost of goods sold 196,520 186,487 180,650 161,283 120,597
Cost of goods sold -
restructuring charges 8,710 0 0 0 0
-------- -------- -------- -------- --------
162,954 171,084 170,926 153,259 115,874
General and administrative
expense 44,254 43,521 37,200 30,103 23,038
Sales, marketing and
commission expense 62,772 60,899 65,560 58,391 42,327
Research and development
expense 16,815 16,714 20,225 17,836 14,567
Restructuring charges 20,486 2,415 0 0 0
General and administrative
expense - special addition
to allowance for doubtful
accounts 4,500 5,000 0 0 0
Merger related costs 0 0 40,751 0 0
Costs associated with
unsolicited offer to acquire
Healthdyne Technologies, Inc. 0 0 650 2,150 0
Interest expense 6,945 5,206 4,189 3,173 2,514
Other income (1,394) (1,127) (1,513) (2,378) (1,900)
-------- -------- -------- -------- --------
Income before income taxes 8,576 38,456 3,864 43,984 35,328
Income taxes 2,824 15,395 5,689 17,559 13,842
-------- -------- -------- -------- --------
Net income (loss) $ 5,752 $ 23,061 $ (1,825) $ 26,425 $ 21,486
======== ======== ======== ======== ========
Earnings (loss) per share $0.19 $0.72 $(0.06) $0.82 $0.71
======== ======== ======== ======== ========
Weighted average number
of shares used in computing
earnings per share 30,004 31,956 32,098 32,352 30,285
Balance Sheet Data:
June 30
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Working capital $155,095 $155,336 $137,550 $110,566 $135,564
Total assets 353,002 343,585 318,320 294,769 232,924
Total long-term
obligations 108,095 99,374 69,316 48,985 33,035
Shareholders' equity 191,106 194,521 200,840 191,056 162,644
- -------------------------
There were no cash dividends declared during any of the periods presented in
the above table.
17
Item 7. Management's Discussion and Analysis of Results of Operations and
-----------------------------------------------------------------
Financial Condition
-------------------
Results of Operations
Net sales for fiscal year 2000 were $368,184,000, representing a 3%
increase in sales over the $357,571,000 recorded in fiscal year 1999. Fiscal
year 1999 net sales represented a 2% increase in net sales over the $351,576,000
recorded in fiscal year 1998. 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 other accessories, helped to drive the increase in sales for the
current fiscal year, offset by decreases in unit and dollar sales of the
Company's non-invasive ventilatory support products for home use. These product
lines, along with ventilation devices and oxygen systems, comprise the major
part of the Company's homecare division established as part of the July 1999
restructuring plan. Sales of the Company's hospital products also increased
during the current fiscal year, including unit and dollar increases for the
Company's Vision(TM) and Esprit(R) ventilators. The fiscal year 1998 to fiscal
year 1999 increase was due primarily to increases in unit and dollar sales of
the Company's obstructive sleep apnea therapy products, non-invasive ventilatory
support products for hospital use, and oxygen concentrator products, offset by
decreases in unit and dollar sales of the Company's non-invasive ventilatory
support products for home use.
Sales for the second half of fiscal year 1998 and all of fiscal years
1999 and 2000 were adversely impacted by decreases in sales of the Company's
non-invasive ventilatory support products for use in the home compared to prior
year levels. These sales decreases were caused at first by uncertainty in the
market concerning government insurance coverage guidelines for the home use of
these products in the United States and the corresponding reduction in purchases
of these units by the Company's dealer customers pending resolution of the
coverage guidelines. Government policymakers issued a draft coverage policy for
non-invasive ventilation in July 1998 that was more restrictive than had been
expected. The Company, along with trade and medical associations, other device
manufacturers, and homecare dealers, filed formal comments as permitted with the
policy makers indicating disagreement with the draft coverage policy. In May
1999, a revised set of coverage guidelines was issued for implementation on
October 1, 1999. While several restrictive provisions of the July 1998 draft
guidelines were removed and potential changes in reimbursement categories were
delayed, the Company believed that these revised guidelines were still overly
restrictive relative to patient qualification and administratively burdensome
for clinicians and healthcare providers. As a result, the Company continued to
work with the government policy makers and Congress to resolve the remaining
issues. Several favorable modifications were made to the guidelines, and final
guidelines reflecting these modifications were implemented effective October 1,
1999. The Company believes that these guidelines are still overly restrictive
relative to patient qualification and administratively burdensome and is
continuing to work with government policy makers on these issues. The
uncertainty in the market regarding these guidelines and their implementation
was particularly significant during fiscal year 2000 as the planned
implementation date approached and passed, and the Company's sales for these
products were adversely affected.
The Company believes that while the guidelines as implemented are
overly restrictive, there is benefit to having certainty in the market regarding
coverage for these products and as a result there are opportunities for
increased unit sales of non-invasive ventilatory support products. However,
selling prices for such units may come under pressure and there may be mix
shifts to units with lower average selling prices because of certain patient
qualification tests that are required under the guidelines. While the Company is
working closely with its dealer customers to develop strategies to reach the
appropriate patient population in the context of these new guidelines, it cannot
predict with certainty the exact impact the new guidelines will have. For the
fiscal year ended June 30, 2000, sales of non-invasive ventilatory support units
for home use in the United States accounted for approximately three percent of
total sales, compared to eight percent in fiscal year 1999 and twelve percent in
fiscal year 1998. In addition, the Company is also experiencing more general
challenges in its marketplace due to the January 1998 reductions in Medicare
reimbursement for oxygen therapy, which adversely affected many of the Company's
dealer customers.
18
Also affecting sales for the current fiscal year was a decrease in
sales compared to fiscal year 1999 resulting from the impact of the Company's
May 1999 decision to change its method of distribution in Germany from direct
patient sales to sales through a distributor. As a result of this change, sales
decreased in the year to year comparison by approximately $7,300,000 due to the
foregone distributor margin. Excluding this foregone distributor margin, sales
in Germany increased 13% for the current fiscal year. Operating expenses
in Germany were reduced to help offset this foregone dealer margin.
The Company's gross profit, excluding the impact of restructuring, was
47% of net sales for fiscal year 2000 as compared to 48% and 49% of net sales
for fiscal years 1999 and 1998, respectively. The decrease in gross profit
percentage for fiscal year 2000 compared to the prior year was primarily due to
the foregone dealer margin described above, a shift in sales mix and, to a
lesser extent, increased costs related to the Company's distribution and
manufacturing restructuring efforts. The decrease in the gross margin percentage
for fiscal year 1999 was due primarily to reductions in gross margin in the
fourth quarter of that year caused by the change in distribution method for
sales in Germany, increased manufacturing overhead expenses, and sales mix.
General and administrative expenses, including additions to the
allowance for doubtful accounts, were $48,755,000 (13% of net sales) for fiscal
year 2000, $48,522,000 (14% of net sales) for fiscal year 1999, and $37,200,000
(11% of net sales) for fiscal year 1998. The fiscal year 2000 general and
administrative expenses includes a special 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. The fiscal year 1999
total shown above includes a special addition of $5,000,000 (1% of net sales) to
the Company's allowance for doubtful accounts. This special addition was made
primarily to address accounts receivable remaining uncollected that were
generated by Healthdyne Technologies, Inc. ("Healthdyne") prior to its merger
with the Company in February 1998. This addition was made in the fourth quarter
of fiscal year 1999 as a change in previous estimates resulting from slow
collections, aging deterioration, and issues affecting customers related to
accounts that management expected to collect during fiscal year 1999. The
remaining increases in expenses for the periods presented were due primarily to
increased information technology department expenses, including depreciation
expense on SAP hardware and software, legal fees, and other administrative
expenses. Partially offsetting these increases in expenses in fiscal year 2000
were lower operating expenses due to the Company's restructuring efforts and
decreased expenses in Germany as a result of the Company's May 1999 decision to
reduce its direct sales operation in that country as described above. Increased
expenses for fiscal year 1999 were partially offset by cost reductions that the
Company obtained since the February 1998 merger with Healthdyne.
Sales, marketing and commission expenses were $62,772,000 (17% of net
sales) for fiscal year 2000 as compared to $60,899,000 (17% of net sales) for
fiscal year 1999 and $65,560,000 (19% of net sales) for fiscal year 1998. The
increase in absolute dollars of expense for the current fiscal year were due
primarily to increased expenses driven by increased sales and activity levels in
the Company's homecare and hospital product lines, partially offset by lower
operating expenses due to the Company's restructuring efforts and decreased
operating expenses in Germany as a result of the Company's May 1999 decision to
reduce its direct sales operation in that country as discussed above. The
decrease in these expenses from fiscal year 1998 to fiscal year 1999 was due
primarily to the cost reductions that the Company achieved since the February
1998 merger with Healthdyne. See Notes K and N to the Consolidated Financial
Statements for more information regarding this merger.
Research and development expenses were $16,815,000 (5% of net sales)
for fiscal year 2000 as compared to $16,714,000 (5% of net sales) for fiscal
year 1999 and $20,225,000 (6% of net sales) for fiscal year 1998. The increase
in absolute dollars of expense for the current fiscal year was due primarily to
the timing of various research and development projects. The decrease in these
expenses from fiscal year 1998 to fiscal year 1999 was due primarily to the
elimination of duplicate product development efforts following the merger with
Healthdyne in February 1998. Significant product development efforts are
ongoing, and new product launches in all of the Company's major product lines
took place in fiscal years 1998, 1999, and 2000 with additional new product
launches scheduled for fiscal year 2001. In the current fiscal year, new
19
products such as the Profile Lite nasal mask, the Respironics Simplicity nasal
mask, the Harmony ST Ventilator, the AsthmaMentor, and the Encore SmartCard with
FOSQ (Functional Outcomes of Sleep Questionnaire) were introduced. Additional
development work and clinical trials are being conducted in certain product
areas outside the Company's current core products.
In July 1999, the Company announced a major restructuring of its U.S.
operations. The major components of the restructuring included the closing of
the Westminster, Colorado manufacturing facility, the closing of 19 customer
satisfaction centers throughout the United States, the downsizing of the
Marietta, Georgia manufacturing facilities, the opening of the Youngwood,
Pennsylvania central distribution and repair center, the realignment of the
Company into four divisions with a corresponding management realignment, and an
approximate 10% workforce reduction associated with the facility changes and the
management realignment. The facility changes were completed during fiscal year
2000, and the divisional realignment is currently in place.
During fiscal year 2000, the Company incurred a charge of $29,200,000
for the restructuring described above. 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 relates to inventory write-offs in connection with product
rationalizations and have been reported as a separate component of cost of goods
sold. The Company does not expect to incur additional charges related to this
restructuring. See the Financial Condition, Liquidity, and Capital Resources
section of this Management's Discussion and Analysis and Note M to the
Consolidated Financial Statements for additional information regarding the
restructuring.
During fiscal year 1999, the Company incurred $2,415,000 in costs
related to its May 1999 decision to enter into a new distribution arrangement
for sales of its products in Germany. Under the new arrangement, the Company's
products are being distributed by an independent dealer in Germany, and the
Company's direct sales efforts in that country were significantly reduced.
Accordingly, costs were incurred to reduce the Company's German workforce and
facilities and such costs have been included in the charge. As a result of this
change in distribution, the Company's sales and gross margins in Germany were
reduced starting in May 1999 because of the foregone dealer margin; however
selling, administrative, and distribution costs have been reduced as well.
During fiscal year 1998, the Company incurred $40,751,000 in costs
related to the merger with Healthdyne. The primary components of these costs
were direct expenses of the transaction such as legal and investment banking
fees ($9,500,000), severance and other employment related costs ($9,500,000) and
asset write-downs to reflect decisions made regarding product and operational
standardization (inventory; $11,000,000, other assets, $8,000,000). See Note N
to the Consolidated Financial Statements for additional information regarding
merger costs. During fiscal year 1998, the Company also incurred a total of
$650,000 in costs associated with an unsolicited offer by a third party to
acquire Healthdyne.
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. The Company's effective income tax rate from operations (i.e.
excluding the impact of the one-time reduction in income tax liability, the
restructuring charges, the special additions to the allowance for doubtful
accounts, and the merger costs described above) was 40% for fiscal years 2000,
1999, and 1998. The Company's effective tax rate for fiscal year 2000 including
the impact of the items listed above was 33%. The Company's effective income tax
rate for fiscal year 1998 including the impact of the merger charges was 147%
because certain of the direct expenses of the merger transaction, such as
investment banking and legal fees, were assumed to be non-deductible for income
tax purposes.
As a result of the factors described above, the Company's net income
(loss) was $5,752,000 (2% of net sales) or $0.19 per diluted share for fiscal
year 2000 as
20
compared to $23,061,000 (6% of net sales) or $0.72 per diluted share for fiscal
year 1999 and $(1,825,000) (1% of net sales) or $(0.06) per diluted share for
fiscal year 1998.
Excluding the impact of the special additions to the allowance for
doubtful accounts, restructuring costs, merger costs, the costs associated with
the unsolicited offer to acquire Healthdyne, and the one-time income tax
liability adjustment, the Company's net income was $25,363,000 (7% of net sales)
or $0.85 per diluted share for fiscal year 2000, $27,522,000 (8% of net sales)
or $0.86 per diluted share for fiscal year 1999, and $27,270,000 (8% of net
sales) or $0.82 per diluted share for fiscal year 1998.
Financial Condition, Liquidity and Capital Resources
The Company had working capital of $155,095,000 and $155,336,000 at
June 30, 2000 and 1999, respectively. Net cash provided by operating activities
was $25,107,000 for fiscal year 2000, as compared to $35,926,000 for fiscal year
1999 and net cash used by operating activities of $13,042,000 for fiscal year
1998. The deterioration in cash flow from operating activities from fiscal year
1999 to fiscal year 2000 was primarily a result of lower earnings in fiscal year
2000, including the impact of restructuring costs in fiscal year 2000. The
improvement in cash flow from operating activities from fiscal year 1998 to
fiscal year 1999 was also related primarily to higher earnings in fiscal year
1999, including the impact of restructuring costs incurred in fiscal year 1999
and merger costs incurred in fiscal year 1998.
Net cash used by investing activities was $28,390,000, $25,629,000, and
$20,013,000 for fiscal years 2000, 1999, and 1998, respectively. The majority of
the cash used by investing activities for all periods represented capital
expenditures, including the purchase of leasehold improvements, production
equipment, computer hardware and software, and telecommunications and office
equipment. In addition, cash used by investing activities in the current fiscal
year includes additional purchase price paid for a previously acquired business
pursuant to the terms of that acquisition agreement. Positive cash flows from
operating activities in fiscal years 2000 and 1999, positive cash flows from
financing activities in fiscal years 2000 and 1998, and accumulated cash and
short-term investments provided funding for investment activities. See Note K to
the Consolidated Financial Statements for additional information regarding these
acquisitions. See Notes D and K to the Consolidated Financial Statements for
additional information about long-term obligations and acquisition financing.
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 of treasury stock.
In August 1998, the Company's Board of Directors authorized a stock
buyback of up to 1,000,000 shares of the Company's outstanding common stock. In
October 1998, the Board of Directors increased the authorization to a total of
up to 2,000,000 shares and in March 1999 increased the authorization to a total
of up to 3,000,000 shares. In September 1999, the Board of Directors increased
the authorization up to the present total of up to 4,000,000 shares. During
fiscal year 1999, the Company repurchased, net of share usage, a total of
2,640,000 shares in open market transactions resulting in a net use of cash of
$33,055,000. 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. 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 has also been used for general corporate purposes, including
the stock buyback described above. The revolving credit facility permits
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 is unsecured and contains 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 is based on
a
21
spread over the London Interbank Borrowing Rate ("LIBOR"). As of June 30, 2000,
the resulting interest rate on amounts outstanding under the revolving credit
facility was approximately 7.50%. See Note D to the Consolidated Financial
Statements for additional information about the credit facility.
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.
As previously stated, in July 1999, the Company announced a major
restructuring of its U.S. operations that included facility closings and
downsizings, a divisional and management realignment, and an approximate ten
percent workforce reduction associated with those changes. The restructuring
activities have been completed and restructuring charges totaling $29,200,000
were recorded during the fiscal year ended June 30, 2000. See Note M to the
Consolidated Financial Statements for a description of this charge, including
the reserve balances relating to the charge that remain at June 30, 2000. 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 restructuring charges for this action. As
previously disclosed, annualized savings associated with the restructuring are
expected to be approximately $10,000,000. Savings, primarily as a result of
closing a manufacturing facility and 19 customer service centers, began to be
realized during the third quarter of fiscal year 2000. These cost savings are
expected to positively impact cost of sales, general and administrative
expenses, and sales and marketing expenses, and will be offset to some extent by
planned increases in those expenses consistent with expected increases in sales
in future periods and the Company's continuing investment in the business.
The Company believes that projected positive cash flow from operating
activities, the availability of additional funds under its revolving credit
facility (totaling approximately $20,000,000 at June 30, 2000), and its
accumulated cash and short-term investments will be sufficient to meet its
current and presently anticipated future needs for fiscal year 2001 for
operating activities (including payments against restructuring accruals),
investing activities, and financing activities (primarily consisting of payments
on long-term debt).
Year 2000
The Company began its Year 2000 readiness plan in 1998 and completed it
during the second quarter of fiscal year 2000. The Year 2000 readiness plan
included a review of the Company's core business information systems and
technology, the implementation of Year 2000 compliant enterprise-wide resource
planning ("ERP") software, and reviews of the Company's telecommunications
systems, product lines, infrastructure, facilities, and embedded systems.
Through September 2000, no major compliance anomalies have occurred.
Total costs for the Company's Year 2000 compliance efforts approximated
$11,000,000 and were funded through the Company's operating cash flows. The
majority of these costs relate to the ERP system installations and upgrades and
have been capitalized and are being charged to expense over the estimated useful
life of the associated hardware and software. The remaining costs have been
charged directly to expense.
22
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, 2000, the Company had total long-term
obligations, including the current portion of those obligations, of
$109,502,000. Of that amount, $3,202,000 was in fixed rate obligations and
$106,300,000 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, 2000 weighted average interest rate of 7.37% to a weighted
average interest rate of 8.11%), annual interest expense would be approximately
$784,000 higher based on the June 30, 2000 outstanding balance of variable rate
obligations. The Company has no interest rate agreements.
Foreign Exchange Rates: A substantial majority of the Company's sales,
expenses, and cash flows are transacted in U.S. dollars. For the year ended June
30, 2000, sales denominated in currencies other than the U.S. dollar (primarily
the German mark, and to a lesser extent, the French franc and the Chinese yuan)
totaled $21,541,000, or approximately 6% of total sales. For the year ended June
30, 2000, pre-tax income denominated in currencies other than the U.S. dollar
(primarily the Hong Kong dollar and the German mark) totaled $1,122,000
excluding restructuring charges, or approximately 3% of total pre-tax income,
excluding restructuring and special charges. An adverse change of 10% in
exchange rates would have resulted in a decrease in sales of $2,154,000 and a
decrease in net income of $112,000 for the year ended June 30, 2000. The
Company's entities that operate in Germany, France, 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 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 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." As amended by FASB Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," FASB No. 133 will be required to be adopted as of the first
quarter of fiscal year 2001. The Company adopted FASB No. 133 on July 1, 2000.
The statement required, among other things, derivative instruments to be
recorded at market value, with changes in fair value reflected in earnings to
the extent the derivative instruments do not qualify as hedges in accordance
with the statement. The Company has evaluated FASB No. 133, and management does
not believe the statement will have a material effect on earnings during fiscal
year 2001.
In December 1999, the Staff of the Securities and Exchange Commission
released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," to
provide guidance on the recognition, presentation, and disclosure of revenues in
financial statements. This statement will become effective during fiscal year
2001.
23
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES REFORM ACT OF 1995.
The statements contained in this Annual Report, specifically 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 those in the forward-looking
statements. Results actually achieved may differ materially from expected
results included in these 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, interest rate fluctuations, intellectual property and
related litigation, other litigation, FDA and other government regulation, third
party reimbursement, restructuring activities, and anticipated cost savings.
Item 8. Consolidated Financial Statements
---------------------------------
Index to Consolidated Financial Statements
Report of Independent Auditors................................. 25
Consolidated Balance Sheets as of June 30, 2000 and 1999....... 26
Consolidated Statements of Operations for the
years ended June 30, 2000, 1999 and 1998...................... 28
Consolidated Statements of Cash Flows for the
years ended June 30, 2000, 1999 and 1998...................... 29
Consolidated Statements of Shareholders' Equity
for the years ended June 30, 2000, 1999 and 1998.............. 30
Notes to Consolidated Financial Statements..................... 31
24
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, 2000 and 1999, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended June 30, 2000. 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, 2000 and 1999, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2000, 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 25, 2000
25
CONSOLIDATED BALANCE SHEETS
RESPIRONICS, INC. AND SUBSIDIARIES
June 30
2000 1999
----------------------------------------------
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 19,594,484 $ 23,651,401
Trade accounts receivable, less allowance for
doubtful accounts of $17,975,000 and $13,919,000 96,733,695 99,253,207
Inventories 67,769,192 61,212,368
Prepaid expenses and other 6,568,646 6,328,742
Deferred income tax benefits 18,229,780 13,814,104
--------------- ---------------
TOTAL CURRENT ASSETS 208,895,797 204,259,822
PROPERTY, PLANT AND EQUIPMENT
Land 3,061,203 3,342,017
Building 12,292,111 12,687,961
Machinery and equipment 67,293,530 64,603,276
Furniture, office and computer equipment 49,142,950 37,719,450
Leasehold improvements 2,613,240 1,249,044
--------------- ---------------
134,403,034 119,601,748
Less allowances for depreciation
and amortization 67,618,053 58,371,315
--------------- ---------------
66,784,981 61,230,433
Funds held in trust for construction
of new facility 0 852,631
OTHER ASSETS 14,558,526 11,822,484
GOODWILL 62,762,589 65,420,031
--------------- ---------------
$ 353,001,893 $ 343,585,401
=============== ===============
See notes to consolidated financial statements.
26
June 30
2000 1999
------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Account payable $ 27,302,609 $ 26,787,172
Accrued expenses and other 25,091,742 21,169,181
Current portion of long-term obligations 1,406,556 967,387
----------- -----------
TOTAL CURRENT LIABILITIES 53,800,907 48,923,740
LONG-TERM OBLIGATIONS 108,095,093 99,374,180
MINORITY INTEREST 0 766,035
COMMITMENTS 0 0
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized
100,000,000 shares; issued and outstanding
33,182,565 shares at June 30, 2000 and
32,999,332 shares at June 30, 1999 331,826 329,993
Additional capital 110,795,650 108,863,191
Accumulated comprehensive loss (3,131,703) (1,231,013)
Retained earnings 126,462,237 120,709,953
Treasury stock (43,352,117) (34,150,678)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 191,105,893 194,521,446
----------- -----------
$353,001,893 $343,585,401
=========== ===========
See notes to consolidated financial statements.
27
CONSOLIDATED STATEMENTS OF OPERATIONS
RESPIRONICS, INC. AND SUBSIDIARIES
Year Ended
June 30
2000 1999 1998
------------------------------------------------------
Net sales $ 368,184,110 $ 357,570,743 $ 351,576,443
Cost of goods sold 196,519,907 186,486,458 180,650,363
Cost of goods sold - restructuring charges 8,709,895 0 0
----------- ---------- -----------
162,954,308 171,084,285 170,926,080
General and administrative expenses 44,254,853 41,921,573 34,362,146
General and administrative expenses - increase to allowance
for bad debts 4,500,000 6,600,000 2,838,000
Sales, marketing and commission expenses 62,771,648 60,899,432 65,560,336
Research and development expenses 16,814,561 16,713,796 20,224,584
Merger related costs 0 0 40,751,079
Restructuring charges 20,486,009 2,414,844 0
Costs related to unsolicited offer to acquire Healthdyne 0 0 650,000
Interest expense 6,945,585 5,206,767 4,188,740
Other income (1,394,231) (1,127,847) (1,513,291)
----------- ---------- -----------
154,378,425 132,628,565 167,061,594
----------- ---------- -----------
INCOME BEFORE INCOME TAXES 8,575,883 38,455,720 3,864,486
Income taxes 2,823,599 15,394,236 5,689,220
----------- ---------- -----------
NET INCOME (LOSS) $ 5,752,284 $ 23,061,484 $ (1,824,734)
=========== ========== ===========
Basic earnings (loss) per share $ 0.19 $ 0.73 $ (0.06)
=========== ========== ===========
Basic shares outstanding 29,660,366 31,521,296 32,097,955
Diluted earnings (loss) per share $ 0.19 $ 0.72 $ (0.06)
=========== ========== ===========
Diluted shares outstanding 30,003,755 31,956,088 32,097,955
See notes to consolidated financial statements.
28
CONSOLIDATED STATEMENTS OF CASH FLOWS
RESPIRONICS, INC. AND SUBSIDIARIES
Year Ended
June 30
2000 1999 1998
-------------- -------------- --------------
OPERATING ACTIVITIES
Net income (loss) $ 5,752,284 $ 23,061,484 $ (1,824,734)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation 20,850,886 13,977,822 10,586,890
Amortization 5,259,653 5,253,215 3,428,791
Provision for asset write-offs 11,694,013 0 18,134,483
Provision for bad debts 4,500,000 6,600,000 2,838,000
Provision for deferred income taxes (4,415,676) 3,540,822 (8,152,329)
Changes in operating assets and liabilities:
Increase in accounts receivable (1,980,488) (14,868,087) (11,834,737)
Increase in inventories and other current assets (16,049,078) (3,447,708) (10,499,884)
(Increase) decrease in other assets (4,943,022) 491,141 (1,902,889)
Increase (decrease) in accounts payable and accrued expenses 4,437,998 1,317,530 (13,815,149)
-------------- -------------- ---------------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 25,106,570 35,926,219 (13,041,558)
INVESTING ACTIVITIES
Purchase of property, plant and equipment (27,304,289) (25,629,332) (20,012,780)
Acquisition of businesses (1,085,407) 0 0
-------------- -------------- ---------------
NET CASH USED BY
INVESTING ACTIVITIES (28,389,696) (25,629,332) (20,012,780)
FINANCING ACTIVITIES
Proceeds from long-term obligations 11,219,280 29,355,985 68,500,000
Reduction in long-term obligations (2,059,199) (1,450,212) (46,850,350)
Issuance of common stock 1,934,292 3,489,790 8,378,449
Acquisition of treasury stock, net (9,201,439) (33,055,173) (213,057)
(Decrease) increase in minority interest (766,035) (46,081) 210,044
-------------- -------------- ---------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 1,126,899 (1,705,691) 30,025,086
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,900,690) 185,452 (726,652)
-------------- -------------- ---------------
(DECREASE) INCREASE IN CASH AND
SHORT-TERM INVESTMENTS (4,056,917) 8,776,648 (3,755,904)
Cash and short-term investments at beginning of period 23,651,401 14,874,753 18,630,657
-------------- -------------- ---------------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 19,594,484 $ 23,651,401 $ 14,874,753
============== ============== ==============
See notes to consolidated financial statements.
29
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
RESPIRONICS, INC. AND SUBSIDIARIES
Accumulated
Common Stock Additional Comprehensive Retained Treasury Stock
------------------- --------------------
Shares Amount Capital Income (Loss) Earnings Shares Amount Total
--------- -------- ----------- ------------ ----------- -------- --------- ----------
BALANCE AT JUNE 30, 1997 31,656,900 $316,569 $92,838,205 $ (689,813) $ 99,473,203 47,819 $ (882,448) $191,055,716
Shares sold pursuant to stock
option plans 1,021,732 10,217 8,368,232 0 0 0 0 8,378,449
Net acquisition and use of treasury
stock 0 0 0 0 0 2,208 (213,057) (213,057)
Income tax benefit from exercise
of stock options 0 0 4,170,171 0 0 0 0 4,170,171
Comprehensive loss:
Net loss for the year ended
June 30, 1998 0 0 0 0 (1,824,734) 0 0 (1,824,734)
Foreign currency translation
adjustments 0 0 0 (726,652) 0 0 0 (726,652)
---------- -------- ------------ ----------- ------------ --------- ------------ ------------
Total comprehensive loss 0 0 0 (726,652) (1,824,734) 0 0 (2,551,386)
---------- -------- ------------ ----------- ------------ --------- ------------ ------------
BALANCE AT JUNE 30, 1998 32,678,632 326,786 105,376,608 (1,416,465) 97,648,469 50,027 (1,095,505) 200,839,893
Shares sold pursuant to stock
option plans 320,700 3,207 2,850,897 0 0 0 0 2,854,104
Net acquisition and use of
treasury stock 0 0 0 0 0 2,639,656 (33,055,173) (33,055,173)
Income tax benefit from exercise
of stock options 0 0 635,686 0 0 0 0 635,686
Comprehensive income:
Net income for the year ended
June 30, 1999 0 0 0 0 23,061,484 0 0 23,061,484
Foreign currency translation
adjustments 0 0 0 185,452 0 0 0 185,452
---------- -------- ------------ ----------- ------------ --------- ------------ ------------
Total comprehensive income 0 0 0 185,452 23,061,484 0 0 23,246,936
---------- -------- ------------ ----------- ------------ --------- ------------ ------------
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
========== ======== ============ =========== ============ ========= ============ ============
See notes to consolidated financial statements.
30
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 owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Revenue Recognition:
- -------------------
Revenue is recognized from sales when a product is shipped to a customer
location, at which point title passes to the customer.
Inventories:
- -----------
Inventories are valued at the lower of cost (first-in, first-out) or market.
Property, Plant and Equipment:
- -----------------------------
Property, plant and equipment is recorded on the basis of cost. Depreciation is
computed using the straight-line method based upon the estimated useful lives of
the respective assets, which range from five to 30 years. Amortization of assets
under capital leases is included in depreciation expense.
Income Taxes:
- ------------
Provisions for income taxes include deferred taxes resulting from temporary
differences in income for financial and tax purposes using the liability
method. Such temporary differences result primarily from differences in the
carrying value of assets and liabilities.
The Company does not provide for federal income taxes on the undistributed
earnings of its foreign subsidiaries (other than deemed dividends which are
taxed currently) because such earnings are reinvested and, in the opinion of
management, will continue to be reinvested indefinitely.
Foreign Currency Translation:
- ----------------------------
The Company follows Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation," for the translation of the accounts of its foreign
subsidiaries. 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 fair market value on the date of the grant.
Proceeds from the exercise of common stock options are credited to shareholders'
equity at the date the options are exercised. There are no charges or credits
to income with respect to these options. The Company follows the requirements
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," in accounting for stock-based compensation.
31
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 which are determined using the treasury
stock method.
Cash and Short-Term Investments:
- -------------------------------
The Company considers all highly liquid investments with a maturity of 90 days
or less when purchased to be cash and short-term investments.
Capitalized Software Production Costs:
- -------------------------------------
Software development costs have been capitalized 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 $772,000 and $1,096,000 at June 30, 2000 and
1999, 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, 2000, 1999, and
1998 were $1,224,000, $975,000, and $1,138,000, 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 $15,514,000 and $11,664,000 at June 30, 2000
and 1999, respectively. The Company evaluates 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 .
Accrued Expenses and Other:
- --------------------------
Accrued expenses and other includes accrued compensation of $5,757,000 and
$6,532,000 at June 30, 2000 and 1999, respectively.
Comprehensive Income:
- --------------------
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," during the fiscal year ended June 30, 1999.
This statement establishes standards for the reporting and display of
"comprehensive income" and its components, in addition to net income, in the
financial statements. Comprehensive income consists of net income and foreign
currency translation adjustments and is presented in the Consolidated Statement
of Shareholders' Equity. The adoption of Statement No. 130 had no impact on
total shareholders' equity. Prior year financial statements have been
reclassified to conform to the Statement No. 130 requirements.
32
Use of Estimates:
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Changes in Presentation of Comparative Financial Statements:
- -----------------------------------------------------------
Certain amounts in the June 30, 1999 and 1998 financial statements were
reclassified to conform with the presentation in the current period.
NOTE B -- SHORT-TERM INVESTMENTS
Short-term investments consist primarily of money market accounts and
certificates of deposit issued by large commercial banks located in the United
States and Hong Kong. These investments are readily convertible to cash and are
stated at cost, which approximates market.
NOTE C -- INVENTORIES
Inventories consisted of the following:
June 30
2000 1999
----------- -----------
Raw materials $21,560,937 $23,633,517
Work-in-process 5,825,137 7,036,132
Finished goods 40,383,118 30,542,719
----------- -----------
$67,769,192 $61,212,368
=========== ===========
33
NOTE D - LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
June 30
2000 1999
----------- ------------
1989 Economic Development
Revenue Bonds, variable interest
rate (effective rate of 4.01%,
including letter of credit and
remarketing fees, at June
30, 2000), principal payable in
annual installments of $200,000
through November 2004 $ 1,000,000 $ 1,200,000
Industrial Development Authority
Loan, payable in monthly install-
ments of $13,777, including interest
at 3%, through June 2005 756,440 885,249
Redevelopment Authority Loan,
payable in quarterly installments
of $14,533, including interest at 5%,
through December 2005 278,020 331,289
Redevelopment Authority Loan,
payable in monthly installments of
$6,296, including interest at 2% 0 684,253
Industrial Development Authority
Loan, payable in monthly install-
ments of $7,289, including interest
at 2%, through March 2010 789,494 854,713
Industrial Development Revenue Bond,
payable in quarterly installments of
$40,000 plus interest at a floating
rate (effective rate of 5.04% including
letter of credit fees at June 30, 2000)
through November 2009 4,200,000 4,360,000
Commercial Bank Credit Agreement,
payable in one lump sum in May 2003
including interest at a floating rate
(7.50% at June 30, 2000) 101,100,000 91,500,000
Other 1,377,695 526,063
------------ ------------
109,501,649 100,341,567
Less current portion 1,406,556 967,387
------------ ------------
$108,095,093 $ 99,374,180
============ ============
34
The Economic Development Revenue Bonds, the Industrial Development Authority
Loans, and the Redevelopment Authority Loans are secured by mortgages on the
Company's manufacturing facility in Murrysville, Pennsylvania. The Revenue Bond
is secured by a mortgage on the Company's facility in Westminster, Colorado.
Proceeds from the bonds and the loans were used to finance the construction and
expansion of the facilities. One of the Redevelopment Authority Loans was repaid
during the year ended June 30, 2000. The Commercial Bank Credit Agreement, under
which a total of $125,000,000 is available, is unsecured. The Company is
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, 2000, the Company was in compliance with these
covenants. The Commercial Bank Revolving Credit Agreement includes a commitment
fee, currently equal to 0.225%, on the unused portion of the facility.
Scheduled maturities of long-term obligations for the next five years are as
follows:
Maturities of
Long-Term Debt
--------------
2001 $ 1,406,556
2002 1,158,262
2003 101,809,390
2004 649,223
2005 645,692
Thereafter 3,832,526
--------------
TOTAL $109,501,649
==============
Interest paid was $6,590,000, $5,228,000, and $3,790,000 for the years ended
June 30, 2000, 1999, and 1998, respectively.
NOTE E - OPERATING LEASES
The Company leases its corporate headquarters, its vent 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, 2000 are as follows:
Year Ending June 30 Amount
- ------------------- ---------
2001 $ 4,164,000
2002 4,124,000
2003 3,872,000
2004 3,566,000
2005 2,379,000
Thereafter 9,415,000
-----------
TOTAL $27,520,000
===========
Total rent expense for the years ended June 30, 2000, 1999, and 1998 was
$3,841,000, $3,900,000, and $3,318,000, respectively.
35
NOTE F -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
financial instruments:
CASH AND SHORT-TERM INVESTMENTS
- -------------------------------
The carrying amount approximates fair value because of the short maturity of
those investments.
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, 2000 and 1999.
NOTE G -- INCOME TAXES
Income (loss) before income taxes consisted of the following:
Year Ended June 30
2000 1999 1998
------------ ------------ -----------
United States $ 10,020,446 $ 39,228,046 $ 253,254
Foreign (1,444,563) (772,326) 3,611,232
------------ ----------- -----------
TOTAL $ 8,575,883 $ 38,455,720 $ 3,864,486
============ =========== ===========
Year Ended June 30
2000 1999 1998
------------ -------------- ------------
Income taxes (benefit) consisted of:
Current:
Federal $ 5,975,847 $ 10,725,807 $11,046,816
Foreign 184,800 (849,893) 648,804
State 1,078,628 1,977,500 2,145,929
Tax benefit from exercise
of stock options (414,354) (635,686) (4,170,171)
------------- ------------ -----------
6,824,921 11,217,728 9,671,378
Deferred:
Federal (3,775,687) 2,994,679 (7,017,573)
State (639,989) 546,143 (1,134,756)
------------ ------------ -----------
(4,415,676) 3,540,822 (8,152,329)
------------ ------------ -----------
Credit to additional paid-in-
capital for tax benefit
from stock option
exercises 414,354 635,686 4,170,171
------------ ------------ ---------
TOTAL INCOME TAXES
$ 2,823,599 $ 15,394,236 $ 5,689,220
============ ============ ===========
36
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
2000 1999 1998
------ ------ -----
Statutory federal income tax rate 35% 35% 35%
Increases (decreases):
State taxes, net of federal benefit 3 4 17
Foreign taxes 7 (2) (13)
Tax credits (8) (2) (29)
Tax liability adjustment (19) 0 0
Non-deductible expenses (primarily
goodwill amortization and
certain merger related costs) 14 5 137
Other items, net 1 0 0
--- -- ---
EFFECTIVE INCOME TAX RATE 33% 40% 147%
=== == ===
Deferred income tax assets consisted of the following:
June 30
2000 1999
-------- -------
Allowance for bad debts $ 6,308,089 $ 4,196,645
Depreciation (240,205) (14,895)
Inventory reserves 5,143,403 3,731,186
Restructuring reserves 1,427,546 0
Other 5,590,947 5,901,168
----------- -----------
TOTAL $18,229,780 $13,814,104
=========== ===========
Undistributed earnings of the foreign subsidiaries on which no U.S. income tax
has been provided amounted to $10,296,390 at June 30, 2000.
Income taxes paid were $3,286,051, $9,352,998, and $18,473,851 for the years
ended June 30, 2000, 1999, and 1998, respectively.
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 the year.
37
NOTE H -- STOCK OPTION AND PURCHASE PLANS
The Company has in place the 1984 Incentive Stock Option Plan (the "1984 Plan")
and the 1992 Stock Incentive Plan (the "1992 Plan") which provide options to
eligible employees to purchase common stock over five or ten years at option
prices not less than fair market value at the time of the grant. 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 1992 Plan, options may include cash payment rights and
eligible employees may receive awards of restricted shares of the Company's
common stock. The 1984 Plan, which terminated as to new grants in 1993, had
3,400,000 options approved for issuance. The 1992 Plan has a total of 3,000,000
options and restricted 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 options that were approved by the Company's
shareholders in November 1998.
The Company also has in place the 1991 Non-Employee Directors' Stock Option Plan
(the "Directors' Plan"). All options under the Directors' 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 Directors' Plan have been granted. Such options are granted
at fair market value on the date of grant. For options granted under the
Directors' Plan, 25% of the shares are exercisable one year after the date of
the grant, 25% are exercisable two years after the date of grant, and the
remaining 50% are exercisable three years after the date of grant. All options
granted under the Directors' Plan expire ten years after the date of grant. The
Directors' Plan has 300,000 options approved for issuance.
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.
Pertinent information regarding options under all Plans is as follows:
Option Shares
--------------
Year Ended June 30
2000 1999 1998
--------- --------- --------
Outstanding at beginning of period 1,950,861 1,843,278 2,696,987
Granted:
Price range ($ 7.94 - $14.44) 1,092,247
Price range ($12.00 - $19.13) 498,906
Price range ($18.56 - $26.84) 248,500
Exercised:
Price range ($ 2.81 - $16.25) (183,233)
Price range ($ 1.38 - $24.63) (320,683)
Price range ($ 1.00 - $22.75) (1,017,589)
Canceled (275,396) (70,640) (84,620)
--------- --------- ----------
Outstanding at end of period (Weighted
average price $10.91) 2,584,479 1,950,861 1,843,278
========= ========= ==========
38
Exercisable at end of period 1,100,821 1,187,288 1,458,557
========= ========= =========
Shares available for future grant 1,332,211 2,149,111 577,377
========= ========= ========
The per share weighted-average fair value of stock options granted during 2000,
1999, and 1998 was $4.81, $6.04, and $12.09, respectively, on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
2000 1999 1998
------ ------ ------
Expected volatility 56.8% 52.7% 43.1%
Expected dividend yield none none none
Risk-free interest rate 6.0% 6.0% 5.7%
Expected life of stock options 5 5 5
The Company applies APB Opinion No. 25 in accounting for its stock option plans
and accordingly, no compensation cost has been recognized for its stock options
in the financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under 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:
2000 1999 1998
----------- ----------- -----------
Net earnings (loss):
As reported $ 5,752,284 $23,061,484 $(1,824,734)
Pro forma 3,365,284 21,391,820 (3,243,498)
Diluted earnings (loss) per share:
As reported 0.19 0.72 (0.06)
Pro forma 0.11 0.67 (0.10)
In March 1997, the Company adopted an Employee Stock Purchase Plan ("Plan")
under which employees can purchase common stock of the Company through payroll
deductions. The purchase price under the Plan is the lesser of 85% of the market
value of the Company's common stock on either the first or last day of the Plan
year. The maximum amount each employee can purchase is equal to 20% of annual
compensation. There are no charges or credits to income in connection with the
Plan. Shares 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.
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:
39
Year Ended June 30
2000 1999 1998
------------ ------------ ------------
NET SALES
Homecare $307,644,676 $299,685,569 $305,506,031
Hospital 38,595,151 34,943,095 21,373,050
Asthma and Allergy 21,944,283 22,942,079 24,697,362
------------ ------------ ------------
NET SALES $368,184,110 $357,570,743 $351,576,443
============ ============ ============
Financial information about the Company by geographic area is presented below.
Year Ended June 30
2000 1999 1998
------------ ------------ ------------
NET SALES
United States:
Unaffiliated customers $342,454,391 $324,070,103 $317,032,121
Interarea transfers 81,490,976 100,953,047 25,318,249
------------ ------------ ------------
423,945,367 425,023,150 342,350,370
Europe:
Unaffiliated customers 18,851,063 23,324,507 24,094,532
Interarea transfers 821,544 0 0
------------ ------------ ------------
19,672,607 23,324,507 24,094,532
Far East:
Unaffiliated customers 6,878,656 10,176,133 10,449,790
Interarea transfers 7,249,466 6,505,547 4,713,133
------------ ------------ ------------
14,128,122 16,681,680 15,162,923
Elimination--Transfers 89,561,986 107,458,594 30,031,382
------------ ------------ ------------
NET SALES $368,184,110 $357,570,743 $351,576,443
============ ============ ============
OPERATING PROFIT
United States $ 53,214,768 $ 54,013,927 $ 52,861,539
Europe 1,417,203 (1,173,304) 1,037,896
Far East 1,018,033 3,640,863 4,172,253
------------ ------------ ------------
OPERATING PROFIT 55,650,004 56,481,486 58,071,688
Corporate expense 40,128,536 12,818,999 50,018,462
Interest expense 6,945,585 5,206,767 4,188,740
------------ ------------ ------------
INCOME BEFORE INCOME
TAXES $ 8,575,883 $ 38,455,720 $ 3,864,486
============ ============ ============
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:
40
June 30
2000 1999
------------ ------------
IDENTIFIABLE ASSETS
United States $289,065,119 $275,915,304
Europe 18,808,344 20,687,292
Far East 7,304,166 9,517,300
------------ ------------
315,177,629 306,119,896
Corporate assets (cash and
short-term investments
and deferred income taxes) 37,824,264 37,465,505
------------ ------------
TOTAL ASSETS $353,001,893 $343,585,401
============ ============
TOTAL ASSETS
United States $318,747,490 $307,280,161
Europe 24,321,516 21,772,570
Far East 9,932,887 14,532,670
------------ ------------
$353,001,893 $343,585,401
============ ============
TOTAL LIABILITIES
United States $158,314,914 $140,707,126
Europe 987,844 4,022,739
Far East 2,593,242 4,334,090
------------ ------------
$161,896,000 $149,063,955
============ ============
The Company develops, manufactures and markets medical devices for the treatment
of patients suffering from respiratory disorders. Its products are used
primarily in the home and in hospitals, as well as emergency medical settings
and alternative care facilities. The Company sells and rents primarily to
distributors in the 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. No single customer
accounted for 10% or more of net sales for the fiscal years ended June 30, 2000,
1999, or 1998.
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. 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 $1,528,000,
$1,270,000, and $877,000 for the years ended June 30, 2000, 1999, and 1998,
respectively. The Company's current benefit program does not provide
postretirement benefits to employees.
NOTE K-- SIGNIFICANT ACQUISITIONS
In February 1998, the Company merged a wholly owned subsidiary with Healthdyne
Technologies, Inc. ("Healthdyne") in a stock for stock merger by issuing
approximately 12,000,000 shares of the Company's common stock in exchange for
the outstanding shares of Healthdyne. The merger was accounted for as a pooling
of interests. Accordingly, the consolidated financial statements include, for
all periods presented, the combined financial results and financial position of
the Company and Healthdyne.
41
In February 1997, the Company acquired the capital stock of Stimotron
Medizinische Gerate GmbH ("Stimotron"). The initial consideration paid was
$9,000,000 in cash, with the terms of the transaction providing for additional
consideration of up to $5,000,000 in cash over the next four years based upon
the achievement of certain financial results in Germany. Financing for the
initial consideration was obtained from a commercial bank, and financing for the
additional consideration, if needed, is expected to come from the Company's
Commercial Bank Credit Agreement. As of June 30, 2000, $1,085,000 of additional
consideration has been paid. There is a maximum of $2,500,000 that may be paid
through the end of the earnout period in July 2001.
NOTE L -- 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
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 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.
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
transferred to the leasing companies. The total exposure for unpaid installment
receivables was approximately $20,928,000 and $16,320,000 at June 30, 2000 and
1999, respectively. The transfer of these installment receivables meets the
criteria of Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,"
and therefore, these receivables are not recorded on the Company's financial
statements.
NOTE M -- RESTRUCTURING
In July 1999, the Company announced a major restructuring of its U.S.
operations. The major components of the restructuring included the closing of
the Westminster, Colorado manufacturing facility, the closing of 19 customer
satisfaction centers throughout the United States, the downsizing of the
Marietta, 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 corresponding management realignment, and
a workforce reduction of approximately 10% associated with the facility changes
and the realignment. The facility changes and workforce reduction were completed
during fiscal year 2000, and the divisional realignment is currently in place.
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
=========== ============ ============ ============
42
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). 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, 2000 will be paid out during
the next two years.
During fiscal year 1999, the Company incurred $2,415,000 in costs related to its
decision to enter into a new distribution arrangement for sales of its products
in Germany. Under the new arrangement, the Company's products are being
distributed by an independent dealer in Germany, and the Company's direct sales
efforts in that country have been significantly reduced. Accordingly, costs were
incurred to reduce the Company's German workforce and facilities as follows:
employment related costs ($1,400,000), asset write-offs ($200,000), and lease
buyouts and other direct expenses ($815,000). Substantially all of these costs
have been paid.
NOTE N -- MERGER COSTS
During the year ended June 30, 1998, the Company incurred approximately
$41,000,000 in costs related to the merger with Healthdyne. The primary
components of these costs were direct expenses of the transaction ($9,500,000),
employment related costs ($9,500,000), asset write-downs to reflect decisions
made regarding product and operational standardization (inventory, $11,000,000;
other assets, $8,000,000), and other merger related costs ($3,000,000).
Transaction and employment costs incurred but not yet paid have been credited to
accrued expense and asset write-downs have been credited against the applicable
asset accounts. Included in asset write-downs is $1,000,000 resulting from
Healthdyne and Respironics conforming accounting practices as they relate to the
recording of the allowance for doubtful accounts. Approximately $722,000 of
merger related costs remain unpaid at June 30, 2000. Those amounts are expected
to be paid over the next five years.
NOTE O -- STOCK REPURCHASE
In August 1998, the Company's Board of Directors authorized a stock buyback of
up to 1,000,000 shares of the Company's outstanding common stock. In October
1998, the Board of Directors increased the authorization to a total of up to
2,000,000 shares and in March 1999 increased the authorization to a total of up
to 3,000,000 shares. In September 1999, the Company's Board of Directors
increased the authorization to the present total of up to 4,000,000 shares.
During fiscal year 1999, the Company repurchased, net of share usage, a total of
2,640,000 shares in open market transactions resulting in a net use of cash of
$33,055,000. 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. 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 P -- SPECIAL ITEMS
In February 2000, the parent company of one of the Company's major customers
filed a voluntary petition to reorganize under Chapter 11 of the U.S. Bankruptcy
Code. The Company's customer was one of the entities included in the filing.
According to press releases issued in connection with the filing and discussions
with the customer, the election to seek court protection was made in order to
facilitate the restructuring of the parent company's capital and lease
obligations and normal business operations of the Company's customer are
continuing. The Company's total balance due from the customer at the date of the
filing was approximately $4,500,000, and accordingly, the Company has recorded a
$4,500,000 special increase to the Company's allowance for doubtful accounts.
43
NOTE Q -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Year Ended June 30
2000 1999 1998
----------- ----------- -----------
Numerator:
Net Income (Loss) $ 5,752,284 $23,061,484 $(1,824,734)
Denominator:
Denominator for basic earnings per share- 29,660,366 31,521,296 32,097,955
weighted average shares
Effect of Dilutive Securities
Stock Options 343,389 434,792 0
----------- ----------- -----------
Denominator for diluted earnings per share
- adjusted weighted average shares and
assumed conversions 30,003,755 31,956,088 32,097,955
=========== =========== ===========
Basic Earnings (Loss) Per Share $ 0.19 $ 0.73 $ (0.06)
=========== =========== ===========
Diluted Earnings (Loss) Per Share $ 0.19 $ 0.72 $ (0.06)
=========== =========== ===========
NOTE R -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Following are the unaudited quarterly results of operations for the fiscal years
ended June 30, 2000 and 1999:
2000
----
Three Months Ended
September 30 December 31 March 31 June 30
------------ ----------- ----------- -----------
Net Sales $80,599,000 $91,703,000 $97,837,000 $98,045,000
Gross Profit Including
Restructuring Costs 32,587,000 42,321,000 45,838,000 42,208,000
Gross Profit Excluding
Restructuring Costs 37,163,000 42,321,000 46,352,000 45,828,000
Special Addition to Allowance
for Uncollectible Receivables 0 0 4,500,000 0
Restructuring Costs 14,679,000 3,326,000 4,232,000 6,959,000
Net Income (Loss) (4,554,000) 3,664,000 3,789,000 2,853,000
Basic Earnings (Loss) Per Share (0.15) 0.12 0.13 0.10
Diluted Earnings (Loss) Per Share (0.15) 0.12 0.13 0.09
44
1999
----
Three Months Ended
September 30 December 31 March 31 June 30
------------ ----------- ----------- -----------
Net Sales $86,412,000 $90,197,000 $90,882,000 $90,080,000
Gross Profit 41,646,000 43,348,000 44,304,000 41,786,000
Special Addition to Allowance
for Uncollectible Receivables 0 0 0 5,000,000
Restructuring Costs 0 0 0 2,415,000
Net Income 6,309,000 7,359,000 8,261,000 1,132,000
Basic Earnings Per Share 0.19 0.23 0.26 0.04
Diluted Earnings Per Share 0.19 0.23 0.26 0.04
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure.
---------------------
None.
45
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,
2000 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 16, 2000, 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.
46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
-------------------------------------------------------
Form 8-K.
---------
The financial statements, financial statement schedules and exhibits
listed below are filed as part of this Annual Report 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 25, 2000,
filed as part of this Annual Report on Form 10-K are listed in the index to
Consolidated Financial Statements in Item 8.
(a) (2) Financial Statement Schedules:
------------------------------
Page
----
Financial Statement Schedules:
Valuation and Qualifying Accounts.......... 47
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
Period Expenses Describe Describe of Period
------------ ---------- ------------- ---------- -----------
DESCRIPTION
Year ended June 30, 2000:
Deducted from asset accounts:
Allowance for doubtful
accounts $13,919,000 $4,500,000 $ $444,000(b) $17,975,000
=========== ========== ======== ======== ===========
Year ended June 30, 1999:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 8,246,000 $6,600,000 $ $927,000(b) $13,919,000
=========== ========== ======== ======== ===========
Year ended June 30, 1998:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 4,908,000 $2,838,000 $500,000(a) $ 8,246,000
=========== ========== ======== ======== ===========
(a) Added in connection with a business combination accounted for as a
purchase.
(b) Write-off of uncollectible accounts.
All other Financial Statement Schedules have been omitted because they
are not applicable to the Company.
47
(a) (3) Exhibits
--------
Those exhibits listed on the exhibit index beginning on page 50 of
this Form 10-K are filed herewith or incorporated by reference.
(b) Reports on Form 8-K:
--------------------
Not applicable.
48
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 28, 2000
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 28, 2000:
/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
- ------------------------------------- -------------------------------------
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/ Daniel P. Barry /s/ Joseph C. Lawyer
- ------------------------------------- -------------------------------------
Daniel P. Barry Joseph C. Lawyer
(Director) (Director)
/s/ Douglas A. Cotter
- ------------------------------------- -------------------------------------
Douglas A. Cotter J. Terry Dewberry
(Director) (Director)
- ------------------------------------- -------------------------------------
J. Paul Yokubinas Candace L. Littell
(Director) (Director)
49
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
Gerald E. McGinnis, filed as Exhibit 10.37 to Form 10-Q for
fiscal
50
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 Employment Agreement dated and effective as of December 1, 1994
between the Company and Dennis S. Meteny, filed as Exhibit 2 to
Quarterly Report on Form 10-Q for the quarter ended December 31,
1994.
10.9 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.
10.10 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.
10.11 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.
10.12 Healthdyne Technologies, Inc. 1996 Stock Option Plan, filed as
Exhibit 10.13 to Form 10-K for the fiscal year ended June 30,
1998.
10.13 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.
10.14 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.
10.15 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.
10.16 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.
10.17 Employment Agreement dated December 30, 1996 between the Company
and Steven P. Fulton, filed as Exhibit 10.15 to Annual Report on
Form 10-K for the fiscal year ended June 30, 1997.
51
10.18 Employment Agreement dated October 21, 1996 between the Company
and Geoffrey C. Waters, filed as Exhibit 10.16 to Annual Report
on Form 10-K for the fiscal year ended June 30, 1997.
10.19 Agreement and Plan of Reorganization and related Agreement and
Plan of Merger, each dated as of November 10, 1997, by and among
Respironics, Inc., Healthdyne Technologies, Inc., and RIGA, Inc.
a wholly owned subsidiary of Respironics, filed as Exhibit 10.17
to Quarterly Report on Form 10-Q (File No. 000-16723) dated
November 14, 1997.
10.20 Form of Amendment to Agreement and Plan of Reorganization and
related Agreement and Plan of Merger, dated as of December 1997
by and among Respironics, Inc., Healthdyne Technologies, Inc.,
and RIGA, Inc., a wholly owned subsidiary of Respironics, filed
as Exhibit 10.17 to Quarterly Report on Form 10-Q (File No. 000-
16723) dated November 14, 1997.
10.21 Employment Agreement dated November 11, 1997 between the Company
and Craig B. Reynolds, filed as Exhibit 10.22 to Form 10-K for
the fiscal year ended June 30, 1998.
10.22 Supplemental Employment Agreement dated November 11, 1997 between
the Company and Craig B. Reynolds, filed as Exhibit 10.23 to Form
10-K for the fiscal year ended June 30, 1998.
10.23 Amendment No. 1 to the Employment Agreements between the Company
and Craig B. Reynolds dated February 11, 1998, filed as Exhibit
10.23 to this Annual Report on Form 10-K.
10.24 Amendment to the Employment Agreements between the Company and
Craig B. Reynolds dated June 29, 2000, filed as Exhibit 10.24 to
this Annual Report on Form 10-K.
10.25 Employment Agreement dated November 10, 1997 between the Company
and John L. Miclot, filed as Exhibit 10.24 to Form 10-K for the
fiscal year ended June 30, 1998.
10.26 Supplemental Employment Agreement dated November 10, 1997 between
the Company and John L. Miclot, filed as Exhibit 10.25 to Form
10-K for the fiscal year ended June 30, 1998.
10.27 Corporate Services Agreement dated as of April 23, 1995 by and
between Healthdyne, Inc., now Matria Healthcare, Inc., and
Healthdyne Technologies, Inc., now Respironics Georgia, Inc.,
filed as Exhibit 10.21 to the Healthdyne Technologies, Inc. Form
8-K dated April 20, 1995.
10.28 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.
10.29 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.
10.30 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.
52
10.31 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.
10.32 Tax Sharing Agreement, dated April 21, 1995 between Healthdyne
Technologies, Inc., now Respironics Georgia, Inc., and
Healthdyne, Inc., now Matria Healthcare, Inc., filed as an
Exhibit to the Healthdyne Technologies, Inc. Annual Report on
Form 10-K for the year ended December 31, 1995.
10.33 Administrative Services Agreement, dated March 31, 1993, between
Healthdyne Technologies, Inc., now Respironics Georgia, Inc., and
Healthdyne, Inc., now Matria Healthcare, Inc., filed as Exhibit
10.2 to the Healthdyne Technologies, Inc. Registration Statement
on Form S-1, Registration No. 33-60706.
10.34 Tax Indemnity 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 10.20 to the Healthdyne Technologies, Inc. Form
8-K dated April 20, 1995.
10.35 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.
10.36 Employment Agreement dated November 10, 1997 between the Company
and Robert Tucker, filed as Exhibit 10.35 to Form 10-K for the
fiscal year ended June 30, 1998.
10.37 Supplemental Employment Agreement dated November 10, 1997 between
the Company and Robert Tucker, filed as Exhibit 10.36 to Form 10-
K for the fiscal year ended June 30, 1998.
10.38 Respironics, Inc. 1997 Non-Employee Directors' Fee Plan, filed as
Exhibit 10.35 to Form 10-K for the fiscal year ended June 30,
1999.
10.39 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.
10.40 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.
10.41 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.
10.42 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.
53
21.1 List of Subsidiaries filed as Exhibit 21.1 to this Annual Report
on Form 10-K.
23.1 Consent of Ernst & Young, filed as Exhibit 23.1 to this Annual
Report on Form 10-K.
54