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, 1995 or
-------------
- Transition Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
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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)
1001 Murry Ridge Drive
Murrysville, Pennsylvania 15668
(Address of principal executive offices) (Zip Code)
(Registrant's Telephone Number, including area code) 412-733-0200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None --
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
at least the past 90 days. Yes X No .
--- ---
As of August 31, 1995, the aggregate market value of the shares of the
registrant's Common Stock held by non-affiliates was approximately
$235,000,000.
As of August 31, 1995, there were 16,805,085 shares of Common Stock of the
registrant outstanding.
Documents Incorporated by reference: Portions of the Proxy Statement for the
registrant's Annual Meeting of Shareholders to be held on November 8, 1995 are
incorporated by reference into Part III of this Annual Report on Form 10-K.
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. X
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INDEX
Page
----
PART I
Item 1 Business.................................... 1
Item 2. Description of Property..................... 15
Item 3. Legal....................................... 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............. 17
Item 6. Selected Financial Data..................... 18
Item 7. Management's Discussion and
Analysis of Results of Operations and
Financial Condition......................... 19
Item 8. Consolidated Financial Statements........... 24
Item 9. Disagreements on Accounting and
Financial Disclosure........................ 41
PART III
Item 10. Directors and Executive Officers of the
Registrant.................................. 42
Item 11. Executive Compensation...................... 42
Item 12. Security Ownership of Certain Beneficial
Owners and Management....................... 42
Item 13. Certain Relationships and Related
Transactions................................ 42
PART IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K........... 43
Signatures ............................................... 49
PART I
Item 1. Business
--------
General
Respironics, Inc. designs, manufactures and markets medical products
which address a wide range of respiratory and pulmonary problems by assisting
patient breathing. These products are used in the home, in hospitals and in
emergency medical situations. The Company is a Delaware corporation which was
originally incorporated in Pennsylvania in 1976 as the successor company for
certain products of Lanz Medical Products Corporation. As part of a corporate
reorganization completed in 1984, the Company became a Delaware corporation.
The Company has two principal operating subsidiaries, Respironics (HK)
Limited, which is wholly-owned and based in Hong Kong, and Respironics Medical
Products (Shenzhen) Ltd., which is wholly-owned by Respironics (HK) Limited and
is based in the Peoples Republic of China. The Company has another wholly-owned
subsidiary, RIC Investments, Inc., a Delaware corporation which conducts its
operations in Delaware. The Company's executive offices are located at 1001
Murry Ridge Drive, Murrysville, PA 15668. Unless the context indicates
otherwise, reference in this Annual Report to the "Company" or "Respironics"
refers to Respironics, Inc. and its subsidiaries.
In 1981, the Company developed and introduced the first commercially
available single-use air-filled cushion anesthesia mask. The Company was the
sole manufacturer of such masks for approximately four years and the Company
believes that it continues to be one of the leading manufacturers of single-use
anesthesia masks which are marketed in the United States. In 1985, the Company
developed and introduced the first commercially available product designed to
treat the sleeping disorder known as obstructive sleep apnea. After a two year
period during which the Company was the primary provider of non-invasive sleep
apnea therapy products, other and larger companies entered the market for
products designed to treat obstructive sleep apnea. Currently, the Company
believes that its REMstar Choice product (the fifth generation device in the
sleep apnea product line) and certain of its BiPAP products (see below) continue
to be the leading products in the obstructive sleep apnea therapy market in the
United States.
In 1989, the Company introduced the BiPAP Airway Management and
Ventilatory Support Systems which are unique products that deliver non-
invasive pressure support therapy to patients who require ventilatory
assistance but are not dependent on a ventilator for life support and to those
suffering from severe cases of obstructive sleep apnea.
1
The Company's other products are generally single-patient use products
designed to provide an effective and comfortable means of patient ventilation
which reduce the risk of cross contamination among patients and medical
personnel. This product group includes the Company's redesigned BagEasy manual
resuscitator, which was introduced in March 1995. A predecessor version of
BagEasy was manufactured and sold by the Company from 1988 through 1993.
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 1995, the Company's Board of Directors declared a two-for-
one stock split of the Company's common stock, distributing on March 17, 1995
one additional share of common stock for each share held of record on March 3,
1995. All agreements concerning stock options were amended to provide for
issuance of two shares of common stock for every one share issuable prior to the
split. An amount equal to the par value of the shares issued was transferred
from additional capital to the common stock account. This transfer has been
reflected in the Consolidated Statements of Changes in Shareholders' Equity at
July 1, 1992. All references to number of shares, except shares authorized, and
to per-share information in the consolidated financial statements have been
adjusted to reflect the stock split on a retroactive basis.
"Respironics", "REMstar", "BiPAP", and "BagEasy" are registered
trademarks of the Company. "The Hayek Oscillator" is a registered trademark of
Flexco Medical Instruments.
Products
At the present time, the Company's principal products can be divided into
four categories: obstructive sleep apnea products, ventilation products, face
mask products and resuscitation products.
Obstructive Sleep Apnea Products
--------------------------------
One of the Company's principal products is its REMstar Choice Nasal CPAP
system, which is designed to treat a sleeping disorder known as obstructive
sleep apnea. The Company believes that this product leads the market in the
United States for the treatment of obstructive sleep apnea.
Obstructive sleep apnea is the repeated cessation of breathing during
sleep caused by anatomical disorders. It is characterized by very loud,
irregular snoring or other labored breathing sounds during sleep of which the
patient may not be fully aware. The disorder is commonly found in obese
individuals, and the consumption of alcohol, sleeping pills and tranquilizers by
obstructive sleep apnea sufferers can make the problem worse. The most common
symptom associated with obstructive sleep apnea is daytime sleepiness or
fatigue.
2
The Company estimates that in the United States approximately 1,500 sleep
clinics currently exist at hospitals and other medical centers where
pulmonologists, technicians and other medical professionals diagnose
obstructive sleep apnea (as well as other sleep disorders) and then prescribe
the appropriate treatment. Such laboratories provide the most frequent source
of patient introductions to the REMstar Choice product.
REMstar Choice consists of a small, portable air pressurization device
and a patient's breathing circuit. A nasal or full face mask is purchased
separately based upon the patient's clinical needs and personal preference. All
of these are prescribed by a medical professional as explained above. The mask
is connected to the breathing circuit and is worn by the patient at home during
sleep, and utilizes a pulmonary procedure known as Continuous Positive Airway
Pressure ("CPAP"). CPAP involves the delivery of air under continuous positive
pressure, generally through the patient's nose, and acts like a mechanical or
pneumatic "splint" to prevent upper airway collapse or obstruction. The Company
markets nasal and full face masks for use with each REMstar Choice unit and also
markets nasal and full face masks, tubing, filters, and headgears for the
replacement market.
The REMstar Choice unit, the fifth generation device in the sleep apnea
product line, was introduced in November 1991. REMstar Choice offers improved
functional features compared to its predecessor devices, including improved
pressure stability, reduced operating noise, and a "ramp" feature which
gradually increases the pressure delivered to the patient as he or she falls
asleep. The REMstar Choice unit also includes a cordless remote controller which
can be used to turn the unit on and off and can also be used to activate the
ramp feature. Severe cases of obstructive sleep apnea can also be treated with
two models of the BiPAP Airway Management System (see "Products-Ventilation
Products"). The use of a BiPAP unit in these cases is generally more comfortable
to the patient because of the higher pressure levels required to treat severe
obstructive sleep apnea.
When accompanied by a physician's authorized prescription, the
obstructive sleep apnea patient can purchase REMstar Choice or the BiPAP Airway
Management System from home health care products dealer locations worldwide.
Personnel at each of these locations are equipped to train the patient in the
product's use and to maintain and service the product (See "Marketing, Sales,
and Distribution"). The retail price for a REMstar Choice unit generally ranges
from $700 to $1,300, depending on geographical market and whether certain
accessories are purchased. The retail price for a BiPAP unit generally ranges
from $2,800 to $8,000, depending on which model is purchased.
In April 1995, the Company completed the acquisition of Vitalog
Monitoring, Inc., a developer, manufacturer, and marketer of monitoring and
diagnostic devices for sleep and other respiratory disorders. These diagnostic
devices record and retain a variety of physiological data that is collected from
a patient via sensor interfaces. Both of Vitalog's primary products, the VX4
Recording Oximeter and the HMS 5000 Monitor, interface with a personal computer
to download and display the collected data. The retail price for the VX4 ranges
from $1,600 to $1,800 and for the HMS 5000 ranges from $20,000 to $25,000
depending on which product configuration is ordered.
3
The acquisition of Vitalog will allow the Company to enter the market for
devices related to the diagnosis and monitoring of sleep and other respiratory-
related disorders and will also give the Company access to technology and
development efforts led by Vitalog personnel. The Company believes that the
acquisition will enhance its marketing efforts in the obstructive sleep apnea
area by expanding the Company's presence in sleep labs and permitting the
Company to sell diagnostic equipment that is complementary to its therapeutic
devices (REMstar Choice and BiPAP).
Sales of obstructive sleep apnea products and all related accessories and
replacement parts accounted for 67%, 64%, and 57% of the Company's net sales for
its fiscal years 1995, 1994, and 1993, respectively.
Ventilation Products
--------------------
The Company's principal ventilation product is the BiPAP Ventilatory
Support System. Introduced in December 1989, this product is a unique, non-
invasive pressure support ventilator which provides ventilatory assistance to
those individuals who experience difficulty in breathing but are not dependent
on a ventilator for life support. The BiPAP Ventilatory Support System is a
low-pressure, electrically-driven flow generator with an electronic pressure
control which is designed to augment patient ventilation by supplying
pressurized air to the patient. BiPAP takes its name from "bi-level positive
airway pressure" because it senses the patient's breathing and adjusts its
output to assist in inhalation or exhalation. The BiPAP Ventilatory Support
System minimizes the work of breathing in the presence of most mask leaks which
can sometimes occur in the delivery of ventilation to the patient, thereby
providing what the Company believes is a more consistent therapy than most
competing ventilators. In May 1992, the Company introduced the Hospital BiPAP
Ventilatory Support System which includes accessories such as an airway pressure
monitor, a detachable control panel, a disposable circuit, and a mounting stand,
all of which are designed to allow the system to be used more easily in the
hospital environment.
The Company believes that the BiPAP Ventilatory Support System offers a
number of benefits compared to other volume ventilators and that it has the
potential for greater patient comfort, because it adapts to the patient's
breathing cycles rather than requiring the patient to adapt his or her breathing
to the ventilator cycles and because it can be effectively used with a face
mask. The BiPAP Ventilatory Support System is being used in hospitals and in
home care applications. Pulmonary physicians and respiratory therapists are the
primary caregivers and referral sources for patients currently being treated
with BiPAP. The retail price for a BiPAP Ventilatory Support System generally
ranges from $4,000 to $8,000, depending on which model is purchased.
The Company is monitoring and sponsoring clinical trials which are
investigating the benefits of BiPAP therapy for different types of patient
populations.
4
The marketing of BiPAP Ventilatory Support Systems for use in these patient
populations will most likely require additional 510(k) clearances from the
United States Food and Drug Administration ("FDA") (see "Regulatory Matters").
The published results of recent studies have continued to be favorable with
respect to the BiPAP Ventilatory Support System's use with patients with both
acute and chronic respiratory insufficiency and patients with nocturnal
breathing disorders who benefit from assisted ventilation.
Sales of ventilatory products and all related accessories and replacement
parts accounted for 26%, 27%, and 23% of the Company's net sales for its fiscal
years 1995, 1994, and 1993, respectively.
Face Mask Products
------------------
The Company currently provides three primary types of face masks: (1)
reusable and disposable Nasal Sealing Flap Masks for use with REMstar and BiPAP
devices; (2) disposable air-filled cushion anesthesia masks primarily for use
during surgery; and (3) disposable resuscitation masks for use in emergency
medical situations. The Company's face masks are designed, in part, to respond
to the increasing demand for single patient use ventilation products which
reduce the potential for cross-contamination among patients and supporting
medical personnel from contagious diseases.
The Company believes that its Nasal Sealing Flap Mask was the first mask
to adequately seal on a patient's face for CPAP and BiPAP therapy. The Nasal
Sealing Flap Mask is used with the Company's obstructive sleep apnea and
ventilation products.
The Company's line of disposable anesthesia masks utilizes a very thin
and pliable soft plastic air-filled cushion around the nose and mouth which
provides a uniform seal to prevent leakage of the anesthetic gases. The Company
believes that Vital Signs, Inc., the exclusive marketer of the anesthesia masks
produced by the Company, is the market share leader in the United States in
single patient use anesthesia masks.
Sales of all face masks (including some masks which are components of
obstructive sleep apnea products, ventilation products, and resuscitation
products and which are also included in the net sales figures for those product
groups) accounted for 15%, 16%, and 18% of the Company's net sales for its
fiscal years 1995, 1994, and 1993, respectively.
5
Resuscitation Products
----------------------
The Company's primary resuscitation product is a manual disposable
resuscitator called BagEasy, which is used in emergency and critical care
medicine. Manual resuscitators are used to ventilate the lungs of a patient by
squeezing a self-inflating bag connected to a face mask or endotracheal tube.
The device can be used to resuscitate patients who have stopped breathing and to
sustain proper breathing function for a short period of time in critically ill
patients. The BagEasy manual resuscitator is designed, among other things, to
respond to the increasing demand for single patient use resuscitation products
which reduce the potential for cross-contamination among patients and supporting
medical personnel from contagious diseases. The current version of BagEasy was
introduced in March 1995.
In November 1993, the Company discontinued a predecessor version of the
BagEasy and voluntarily recalled all remaining products in distribution channels
and customer inventories. See Note J to the Consolidated Financial Statements
for additional information regarding this discontinuance.
The Company's other resuscitation products include several disposable
resuscitation masks and non-rebreathing valves that are used primarily in the
emergency medical market and in hospitals. Sales of resuscitation products
accounted for 2%, 4%, and 11% of the Company's net sales for its fiscal years
1995, 1994, 1993, respectively. BagEasy sales were 0.33%, 2%, and 8% of the
Company's net sales for fiscal years 1995, 1994, and 1993 respectively.
Manufacturing and Properties
The Company's corporate headquarters and domestic manufacturing
operations are located in Murrysville, Pennsylvania (approximately 20 miles east
of Pittsburgh) in a 116,000 square foot facility that was first occupied by the
Company in July 1990. The facility includes a 46,000 square foot addition that
was completed 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 in which manufacturing,
related support departments, and research and development activities comprise
approximately 106,000 square feet, with the remaining 10,000 square feet devoted
to corporate headquarters functions. The total cost of the facility, including
the addition, was approximately $7,800,000.
The Company also leases, on a month to month basis, a 22,000 square foot
office facility in Plum Borough, Pennsylvania approximately two miles
6
from the existing corporate headquarters facility. This leased facility
currently houses the Company's customer satisfaction and technical service
groups.
The operations of Vitalog, which was acquired by the Company in April
1995, are conducted in a 2,500 square foot leased facility in Redwood City,
California.
The Company began manufacturing operations in Hong Kong in 1981 where it
currently manufactures a portion of its patient mask products. The Company's
warehousing, manufacturing and administrative activities in Hong Kong are
conducted in a 28,000 square foot light manufacturing complex in Kwun Tong,
Kowloon, Hong Kong. The premises are leased under a renewable agreement
expiring on April 30, 1997. The landlord of this space, Micro Electronics,
Ltd., is a shareholder of the Company. Bernard Shou-Chung Zau, a shareholder
and Director of the Company, is also a shareholder and a Director of Micro
Electronics, Ltd..
The Company conducts the remainder of its patient mask manufacturing in a
facility in Shenzhen City in the Peoples Republic of China, bordering Hong Kong.
The Shenzhen facility is leased and operated by the Company. The present
manufacturing space totals approximately 66,000 square feet. The facility is
located in a special economic zone (where the Company has been operating since
1987) that was established by the Peoples Republic of China in 1980 to induce
foreign investment. During fiscal year 1992, this facility, which had been
operated under a "sub-contract" agreement pursuant to which the subcontractor
provided employees on a monthly fee basis, began operating under a new
arrangement under which the workers at the facility are employees of the
Company. The Company believes that this arrangement results in improved
control over the facility's operations. In addition, the Company believes that
the establishment of corporate presence in the Peoples Republic of China well in
advance of the 1997 transfer of control of Hong Kong to the Peoples Republic of
China will reduce the likelihood that this transfer of control will affect the
Company's operations.
The Company believes that its present facilities in the United
States, Hong Kong, and the Peoples Republic of China are suitable and adequate
for its current and presently anticipated future needs. While each facility is
extensively utilized, additional productive capacity is available through a
variety of means including, at the Murrysville site, augmenting the current
partial second shift work schedule. Rental space, which the Company believes is
readily available and reasonably priced near each current location, could be
utilized as well. The Company also owns approximately 20 acres of land adjacent
to the 10 acre site on which the Murrysville facility is located. Future
expansion in Murrysville, if needed, would likely 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
7
believes that the raw materials for all of its products are readily available
from a number of suppliers.
Marketing, Sales and Distribution
The Company sells its products to approximately 2,500 homecare and
hospital dealers worldwide, and to Vital Signs, Inc. ("Vital Signs"), the
exclusive customer for the Company's disposable anesthesia masks. These
customers in turn resell and rent the Company's products to end users.
The Company manages this dealer network through its sales management team,
its own 23 person direct sales force, and approximately 60 independent
manufacturers' representatives. The Company's sales management team consists
of a Vice President of Sales and Marketing, a Director of Sales, and ten
Regional Sales Managers. Two of the Regional Sales Managers and two of the
direct sales representatives concentrate exclusively on international sales.
The Company serves the home health care market with products such as
REMstar Choice and the BiPAP Airway Management and Ventilatory Support systems;
the hospital market with products such as the Hospital BiPAP Ventilatory Support
System, the BagEasy disposable manual resuscitator, and several disposable
resuscitation masks and valves; and the field emergency medical services market
with products such as BagEasy and the disposable resuscitation masks and
valves.
The Company also sells its REMstar Choice, BiPAP and accessory products
outside the United States, primarily in Europe and Canada, and to an increasing
extent in South America, Latin America, Australia and the Far East (including
the Peoples Republic of China). International sales accounted for approximately
20%, 20%, and 18% of the Company's net sales for its 1995, 1994, and 1993 fiscal
years, respectively.
The Company provides sales and promotional materials, training, and in-
depth technical assistance to its dealer network. The Company also advertises
in trade journals and is represented at all major trade shows for respiratory
medical products.
The Company's marketing organization is currently staffed with a Director
of Marketing and marketing-oriented product managers who are assigned to each of
the Company's principal product groups. The product managers monitor changes in
the marketplace, with an emphasis on product use specifications, features,
price, promotions, education and training, and distribution.
8
Vital Signs is the exclusive marketer for the Company's air-filled
cushion anesthesia masks. Vital Signs is an unaffiliated corporation based in
Totowa, New Jersey, which specializes in the distribution of anesthesia medical
products directly to hospitals. Sales to Vital Signs, primarily of air-filled
cushion anesthesia masks, accounted for 5%, 6%, and 10% of the Company's net
sales for its 1995, 1994, and 1993 fiscal years, respectively. Sales of air-
filled cushion anesthesia masks to Vital Signs are made under the terms of a
supply agreement which will expire in June, 1997.
The Company's customer base is undergoing significant consolidation. The
Company's two largest customers (both of which were home care dealers) recently
merged, and many smaller customers have been acquired by larger entities. This
consolidation is likely to result in pricing pressure as a result of greater
purchasing power and market dominance enjoyed by larger customers, however
opportunities are expected to develop for increased unit sales volumes under
partnering arrangements.
Competition
The Company believes that the principal competitive factor in all of its
markets is differentiated product performance. Efficient and effective
distribution and competitive price are also very important factors for its more
mature products. 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.
Because of the specialized nature of the Company's products, there is only
one company, Nellcor Puritan-Bennett, which offers an array of products which
compete with all of the Company's major products. In addition, the Company
competes on a product-by-product basis with various other companies which
develop and manufacture respiratory medical products for use in the home, in
hospitals and in emergency medical situations. In many cases, these companies
have significantly greater financial and marketing resources and broader product
lines than the Company.
The Company believes that it has the leading position in the market for
home care devices for the treatment of obstructive sleep apnea in the United
States. However, other manufacturers, including other larger and more
experienced manufacturers of home health care products, have entered the market
and the Company expects that strong competition will continue and increase.
Healthdyne Technologies, Inc. is the primary competitor for the Company's
REMstar Choice units. In addition, Nellcor Puritan-Bennett, DeVilbiss, Inc.
(a division of Sunrise Medical) and ResMed Inc. compete with the Company in the
obstructive sleep apnea market.
ResMed offers a bi-level system for use in the obstructive sleep apnea
market, and Nellcor Puritan Bennett offers a bi-level system for use in both the
obstructive sleep apnea and ventilation markets.
9
Internationally, in addition to the U.S. companies described above, the Company
competes with several European manufacturers of both obstructive sleep
apnea and ventilation units.
The disposable anesthesia mask and disposable manual resuscitator markets
have become very competitive, with particular emphasis on price, and the Company
expects that this trend will continue.
Similar to the Company's customer base, the medical device manufacturing
industry is also undergoing significant consolidation. Several of the
Company's competitors have announced or completed mergers, most notably the
recently completed merger of Nellcor and Puritan Bennett. The impact on the
Company of this consolidation is likely to be greater competition from medical
device manufacturers who can utilize greater financial and technical resources
available from larger consolidated entities.
Research and Development
The Company conducts substantially all of its research and development for
existing and potential new products in the United States. As of June 30,
1995, it employed a total of 84 engineers and technicians in such activities.
Research and development activities cover overall conceptual design work through
production start up and are conducted on a project basis. The Company spent
approximately $7,100,000, $4,794,000, and $3,556,000 in research and development
in fiscal years 1995, 1994, and 1993, respectively, to support active, ongoing
product enhancement and new product development on all of the Company's product
lines. Several new product introductions took place during fiscal year 1995 and
early in fiscal year 1996 (including a redesigned BagEasy manual resuscitator,
new face masks, and part of the family of new obstructive sleep apnea products),
with additional new product introductions to follow later in fiscal year 1996.
By the end of fiscal year 1996, the Company expects to have introduced new
families of products in both the obstructive sleep apnea and ventilation areas.
In some cases, initial distribution has been, and will be, conducted in
international markets until regulatory clearance to market in the United States
is obtained (see "Regulatory Matters").
The Company also maintains both formal and informal ethical relationships
with physician practitioners and researchers (including sleep laboratories).
Patent, Trademarks and Licenses
The Company seeks patent protection for certain of its products through the
acquisition of patents and exclusive licensing arrangements. In addition, the
Company aggressively defends its patents against infringement by other
companies. The Company currently has approximately 20 U.S. and foreign patents
and 21 additional U.S. and foreign patent applications pending.
10
The Company owns the proprietary rights to most of its current products,
including patents on the BiPAP Airway Management System (which was strengthened
in July 1995 with receipt of additional protection under a Continuation In Part
patent), components of Nasal Sealing Flap Mask and other valve and mask related
accessories. Certain proprietary rights to the disposable anesthesia mask are
owned by Vital Signs, Inc. (see "Marketing, Sales and Distribution"). A
competitor, ResMed, Inc., through its subsidiary ResCare Limited, has brought
suit alleging that certain of the Company's products infringe its patents. See
"Legal Proceedings".
The Company currently has approximately 55 registered U.S. and foreign
trademarks and 10 additional U.S. and foreign trademark applications have been
filed.
Regulatory Matters
The Company's products are subject to regulation by, among other
governmental entities, the United States Food and Drug Administration ("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. Failure to comply with
applicable FDA regulations can result in fines, civil penalties, suspensions or
revocation of approvals, recalls or product seizures, operating restrictions or
criminal penalties. The portion of the FDA regulations relating to
manufacturing, labeling, packaging, distribution and recordkeeping is known as
"Good Manufacturing Practice".
The Company must also obtain, in certain cases, FDA or foreign regulatory
approval for marketing the Company's new devices prior to their release. The
testing for, preparation of, and subsequent FDA review of required applications
for approval is expensive, lengthy and uncertain. Moreover, regulatory
approval, if granted, can include significant limitations on the indicated uses
for which a product may be marketed.
There are two primary means by which the FDA permits a medical device to
be marketed. First, a manufacturer may seek clearance for the device by filing a
510(k) premarket notification with the FDA. The manufacturer or distributor may
not market the device until a "substantial equivalence" determination notice is
issued by the FDA. This notice may be issued within 90 days of submission, but
usually takes longer and often involves responding to questions from the FDA. If
significant questions are raised, obtaining FDA clearance of a 510(k) premarket
notification can take a number of years and require the expenditure of
substantial resources.
11
If a manufacturer cannot establish to FDA's satisfaction that a new
device is substantially equivalent to a previously marketed device, it will have
to seek approval to market the device through the premarket approval application
("PMA") process. This is a far more complex and costly process.
Foreign regulatory approvals vary widely depending on the country.
Exports to foreign countries are also currently subject to FDA's jurisdiction.
Three FDA inspections of the Company were conducted during fiscal year
1995. The first took place at various times between May 1994 and August 1994 at
the Murrysville facility. In late August 1994, the FDA investigators issued an
FDA Form 483 setting forth the results of this inspection. The Company responded
to these findings in September 1994. On December 22, 1994, the Company received
a "warning letter" from the FDA relating to the FDA's August 1994 inspection. A
warning letter is a statement by the FDA that the agency believes that
significant violations have occurred and is prepared to take enforcement action
if corrective measures are not taken. In the warning letter, the FDA raised
issues relating to: (i) alleged shortcomings in the Company's complaint
processing procedures, (ii) the Company's alleged failure to file certain
medical device reports ("MDR's") and (iii) the Company's alleged failure to
obtain 510(k) premarket notification clearances that the FDA indicated were
necessary for certain features of the Company's BiPAP systems and for certain
claims regarding product use. Each of these issues is discussed below.
Complaint Procedure.
-------------------
The FDA stated that the Company's complaint records did not comply with Good
Manufacturing Practice regulations. Prior to receipt of the warning letter, the
Company had revised its procedures and complaint recordkeeping to address this
issue. In addition, the Company's complaint processing system has been
automated. Based on the results of a follow up investigation described below,
the Company believes that this aspect of the FDA's warning letter has been
resolved.
Medical Device Reports.
----------------------
An MDR report is required to be filed (i) if a death or serious injury occurs
and a manufacturer's products may have caused or contributed to the death or
serious injury or (ii) if a manufacturer's product malfunctions and the product
would be likely to cause or contribute to a death or serious injury if the
malfunction were to recur. The FDA stated in its warning letter that the Company
had not filed an MDR for what the FDA believed to be a reportable malfunction.
In response, the Company has filed MDRs with respect to certain malfunctions
which the FDA referred to during the 1994 inspections, and the Company has also
changed certain procedures with respect to the determination of when
12
an MDR will be filed. Based on the results of a follow up investigation
described below, the Company believes that this aspect of the FDA's warning
letter has been resolved.
510(k) BiPAP Ventilation Issues.
-------------------------------
The Company believes that it has all 510(k) premarket notification clearances
required for the uses for which it markets its BiPAP ventilatory products and
for the BiPAP product itself and all of its features. The concerns cited in the
FDA warning letter with respect to the Company's 510(k) premarket notification
clearances related solely to its BiPAP systems and involved allegations that the
Company had modified the approved devices so as to require additional clearances
and that the Company was marketing the devices for uses that were not within the
scope of their 510(k) premarket notification clearances. The FDA has expressed
its concerns regarding the marketing of the BiPAP device for indications other
than adult obstructive sleep apnea. As noted above, the Company believes that it
has appropriate 510(k) premarket notification clearance for the uses for which
it is marketing the device and for the device itself. During the course of the
FDA inspections described above, and prior to the issuance of the FDA warning
letter, the Company discontinued marketing its BiPAP products for invasive
applications (which the FDA stated in the warning letter were not clearly
covered in the 510(k) premarket notifications).
Since receiving the warning letter, the Company has filed with the FDA
additional 510(k) premarket notification requests with respect to the technical
features that were cited in the warning letter and to certain uses beyond adult
obstructive sleep apnea, in each case indicating that the application was filed
without prejudice to the Company's position that no additional filing is
required. The Company cannot predict whether the FDA will clear any of the
510(k) premarket notifications or that the clearances, if obtained, will be
obtained in a timely manner.
Respironics is continuing its past practice of cooperating with the FDA
in attempting to resolve the issues which gave rise to the warning letter. Among
other things, it is further improving its record keeping and complaint
procedures and filing MDR's and 510(k) premarket notification requests even
where the Company believes such filings are not required. The Company believes
that it is in substantial compliance with FDA requirements relating to its
products and also believes that its existing 510(k) clearances for BiPAP
encompass ventilatory claims in addition to the treatment of obstructive sleep
apnea in adults and the technical features cited in the FDA warning letter.
While the Company cannot predict what action, if any, the FDA will take, the
Company believes that there is not likely to be any interruption of its business
as a result of the issues raised in the warning letter.
The second FDA inspection took place at the Murrysville facility in
January 1995. A report on Form 483 was issued by the FDA investigator setting
forth the results of the inspection, which had focused on a voluntary
recall conducted by the Company. The Form 483 also reiterated, as expected,
13
the FDA's position relative to the 510(k) clearances for BiPAP. The Company
responded to the Form 483 findings in February 1995.
The third FDA inspection took place at the Murrysville facility in May
1995. A report on Form 483 was issued by the FDA investigators setting forth the
results of the inspection, which had focused on the Company's revised systems
complaints and MDR's. Revisions had been made to these systems as described
above. The Form 483 issued for this inspection did not refer to MDR's or
complaint handling, but contained only the FDA's expected reiteration of its
position relative to the 510(k) clearances for BiPAP. The Company responded to
the Form 483 findings in June 1995.
During the last three fiscal years, the Company has conducted five recalls
of its products, all of which were voluntary and conducted with the knowledge of
the FDA. Except for the voluntary BagEasy recall (and the related product line
discontinuance) described above and in Note J to the Consolidated Financial
Statements, none of these recalls has had a material adverse affect on the
Company's results of operations or financial condition.
Third Party Reimbursement
The cost of a significant portion of medical care in the United States is
funded by government and private insurance programs, such as Medicare, Medicaid,
and corporate health insurance plans including health maintenance organizations
and managed care organizations. If adverse changes are made in reimbursement
policies for medical products under these insurance programs, the ability of the
Company's customers (medical product dealers) to obtain adequate reimbursement
for their 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.
For the Company's products used in home care, "procedure codes" have been
obtained from the Health Care Financing Administration ("HCFA"). These procedure
codes provide the mechanism for home care dealers to obtain reimbursement for
providing products for patients covered by Medicare. In addition, many private
insurance programs also utilize the HCFA procedure code system. However, the
rate of reimbursement associated with each code can be reduced after a code is
established (as the reimbursement level for the Company's REMstar Choice system
was in January 1994). The Company has in the past, and plans in the future to
take a very active role in working closely with HCFA and similar agencies as
such agencies consider changes in reimbursement practices.
For the Company's products that are used in hospitals, the primary
determinant of the revenue that can be realized by hospital dealers who resell
or
14
rent the Company's products is the amount of reimbursement that a hospital
can obtain under the Medicare diagnosis related group ("DRG") payment system for
utilizing such products in treating patients. Many private insurance programs
also utilize the Medicare DRG system. The various uses of the Company's
hospital products to treat patients are accepted in the DRG system. The
levels of reimbursement under the DRG system are also subject to review and
change.
Employees
As of June 30, 1995, the Company had 1,181 employees, including 257
hourly employees in the United States and 532 hourly employees in Hong Kong
and the Peoples Republic of China. None of the Company's employees are covered
by collective bargaining agreements. The Company considers its labor relations
to be good and has never suffered a work stoppage as a result of a labor
conflict.
Financial Information About Foreign and Domestic Operations and Export Sales
Financial Information concerning foreign and domestic operations and
export sales is discussed in Part I "Marketing, Sales and Distribution" and
set forth in Note G of the Consolidated Financial Statements included in this
Annual Report.
Item 2. Description of Properties
Information with respect to the location and general character of the
principal properties of the Company is included in Item 1.
Item 3. Legal Proceedings
Patent Litigation:
The Company is a party to an action currently before the United States
District Court for the Western District of Pennsylvania that was filed in
January 1995 by ResCare Limited ("ResCare"), a competitor, in which ResCare
alleges that in the manufacture and sale in the U.S. of nasal masks and CPAP
systems and components, the Company infringes three U.S. patents, two of which
are owned by and one of which is licensed to ResCare. In its 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 actual
knowledge of the alleged infringement. In its response to the action, the
Company has denied the allegations and has separately sought a declaratory
judgment that the ResCare patents in question are invalid and that the Company
does not infringe upon the patents in any event.
15
Discovery in the case is currently under way and is scheduled to end in January
1996. The Company believes that none of its products infringes any of the
patents in question in the event that any one or more of such patents should be
held to be valid, and it intends to vigorously defend this position.
Other Matters:
The Company is, as a normal part of its business operations, a party
to several legal proceedings in addition to the action described above. Legal
counsel has been retained for each proceeding and none of these proceedings are
expected to have a material adverse impact on the Company's operations or
financial position.
Item 4. Submission of Matters to a Vote of Security Holders.
During the fourth quarter of the fiscal year 1995, no matters were
submitted to a vote of security holders.
16
PART II
Item 5. Market For Registrant's Common Equity and Related
-------------------------------------------------
Shareholder Matters.
-------------------
16,744,785 shares of the Company's common stock were issued and
outstanding as of June 30, 1995. These shares are traded in the over-the-
counter market and are reported on the NASDAQ National Market System under the
symbol "RESP". As of September 8, 1995, there were 1,400 holders of record of
the Company's common stock. In February 1995, the Company's Board of Directors
declared a two-for-one stock split of the Company's common stock, distributing
on March 17, 1995 one additional share of common stock for each share held of
record on March 3, 1995. See "Item 1 - Business" for a discussion of the stock
split.
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 closing sales price information for the Company's common
stock for the applicable quarters is shown below.
Fiscal year ending June 30, 1995:
First Second Third Fourth
----- ------ ----- ------
High $10.63 $12.25 $16.88 $17.00
Low $ 8.00 $ 9.75 $11.63 $10.50
Fiscal year ending June 30, 1994:
First Second Third Fourth
----- ------ ----- ------
High $11.25 $ 9.88 $12.00 $10.63
Low $ 9.00 $ 8.32 $ 9.25 $ 8.38
17
Item 6. Selected Financial Data
-----------------------
Note: Per share data and number of shares outstanding have been adjusted
retroactively to reflect the two-for-one stock split effected in fiscal year
1995.
(Dollars in thousands except per share data)
Income Statement Data:
Year Ended June 30
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
Net sales $99,450 $78,171 $69,286 $48,976 $36,031
Cost of goods sold 43,077 34,830 32,114 23,360 17,554
------- ------- ------- ------- -------
56,373 43,341 37,172 25,616 18,477
General and administrative expense 14,050 10,028 10,581 6,538 5,295
Sales, marketing and commission expense 17,696 15,069 12,313 9,211 6,045
Research and development expense 7,077 4,794 3,556 2,311 1,646
Nonrecurring charges -0- 7,086 -0- -0- -0-
Interest expense 194 171 176 201 300
Other income (1,179) (623) (550) (704) (362)
------- ------- ------- ------- -------
Income before income taxes 18,535 6,816 11,096 8,059 5,553
Income taxes 6,858 2,075 3,717 2,696 1,782
------- ------- ------- ------- -------
Net income $11,677 $ 4,741 $ 7,379 $ 5,363 $ 3,771
======= ======= ======= ======= =======
Primary earnings per share $ 0.67 $ 0.27 $ 0.43 $ 0.31 $ 0.26
======= ======= ======= ======= =======
Weighted average shares of Common Stock
outstanding and equivalents 17,532,422 17,280,680 17,318,606 17,056,704 14,630,592
Balance Sheet Data:
June 30
1995 1994 1993 1992 1991
---------- ---------- ---------- ------- ----------
Working capital $ 39,413 $ 31,032 $ 25,172 $19,979 $ 16,086
Total assets 78,039 58,917 54,331 43,462 36,140
Total long-term obligations 5,538 4,854 4,288 4,291 4,535
Shareholder's equity 58,369 44,224 39,148 31,391 25,799
- - ------------
There were no cash dividends declared during any of the periods presented in the
above table.
18
Item 7. Management's Discussion and Analysis of Results of
--------------------------------------------------
Operations and Financial Condition
----------------------------------
Results of Operations
Net sales for fiscal year 1995 were $99,450,000, representing a 27%
increase in net sales over the $78,171,000 recorded in fiscal year 1994. 1994
net sales represented a 13% increase over the $69,286,000 recorded in fiscal
year 1993.
The increase in net sales from fiscal year 1994 to fiscal year 1995
was primarily attributable to increases in total unit sales of the Company's
obstructive sleep apnea and ventilatory support products and reflects sales
growth across all of the Company's market bases for these product groups. In
addition, sales of the Company's face mask products, including those used as
accessories for its obstructive sleep apnea and ventilatory support products and
those manufactured and sold on an OEM basis (disposable anesthesia masks),
increased in both unit and dollar terms. Finally, the overall increase in net
sales was accomplished in spite of a decrease in sales of the Company's
resuscitation products resulting from the Company's November 1993 decision to
discontinue production and shipment of its BagEasy line of disposable manual
resuscitators, which accounted for 2% of net sales for fiscal year 1994. In
March 1995, the Company introduced a redesigned version of the BagEasy product,
however sales for this redesigned version accounted for less than one-half of
one percent of fiscal year 1995 sales.
The increase in net sales from fiscal year 1993 to fiscal year 1994
was also primarily attributable to increases in total unit sales for the
Company's obstructive sleep apnea and ventilatory support products. Sales of
resuscitation products decreased from fiscal year 1993 to fiscal year 1994 as a
result of the discontinuance of the BagEasy manual resuscitator product
discussed above (BagEasy accounted for 8% of net sales for fiscal year 1993).
Finally, sales of the Company's disposable anesthesia masks decreased in both
unit and dollar terms from fiscal year 1993 to fiscal year 1994 due primarily to
reduced orders from the Company's customer for disposable anesthesia masks.
The reduction in disposable anesthesia mask sales was also due to a reduction in
the unit selling price of the masks under the terms of the June 1993 supply
agreement with the Company's sole customer for these masks. Under the 1993
agreement, the customer may choose to pay a lower unit price for the masks in
exchange for assuming responsibility for freight and duty costs related to mask
shipments.
The Company's gross profit was 57% of net sales for fiscal year 1995
as compared to 55% of net sales for fiscal year 1994 and 54% of net sales for
fiscal year 1993. The increases in gross profit percentage were due primarily to
the Company's ability to limit the growth in its manufacturing support costs to
rates less than the rate of sales increases achieved and a shift in sales mix
toward the Company's higher margin products. In addition, fiscal year 1994
gross margin was reduced because of a temporary diversion during that year of
19
engineering resources away from research and development activities and to
manufacturing support activities in response to recommendations resulting from
an FDA inspection.
General and administrative expenses were $14,050,000 (14% of net
sales) for fiscal year 1995 as compared to $10,028,000 (13% of net sales) for
fiscal year 1994 and $10,581,000 (15% of net sales) for fiscal year 1993. The
increase in these costs from fiscal year 1994 to fiscal year 1995 was due to a
provision for year-end profit sharing bonuses based on financial results
achieved in fiscal year 1995 and to higher administrative costs related to the
growth of the Company, including staffing increases, increased legal fees, and
increased provisions for uncollectible accounts receivable. The decrease in
these costs, both in absolute dollars and as a percentage of net sales, from
fiscal year 1993 to fiscal year 1994 was due primarily to the absence of profit
sharing bonuses in fiscal year 1994 based on financial results achieved in that
year.
Sales, marketing and commission expenses were $17,696,000 (18% of
nets sales) for fiscal year 1995 as compared to $15,069,000 (19% of net sales)
for fiscal year 1994 and $12,313,000 (18% of net sales) for fiscal year 1993.
These increases in absolute dollars were due to increased commission expenses
paid to independent sales representatives resulting from a shift in sales mix
towards products handled by these representatives, increased trade show and
training expenses, increased salary expenses for new employees in sales and
marketing management, and, for the fiscal 1994 to fiscal 1995 comparison,
product literature and advertising expenses incurred in anticipation of new
product launches.
Research and development expenses were $7,077,000 (7% of net sales)
for fiscal year 1995 as compared to $4,794,000 (6% of net sales) for fiscal year
1994 and $3,556,000 (5% of net sales) for fiscal year 1993. The continuing
increases in research and development spending reflect the Company's commitment
to investment in future product development and product enhancements in all of
the Company's major product groups. Extensive new product development efforts
were conducted during fiscal years 1994 and 1995 in anticipation of new product
introductions in each major product group during calendar year 1995.
Development work was conducted on new families of obstructive sleep apnea and
ventilation devices and the redesigned BagEasy manual resuscitator. Certain new
models of the obstructive sleep apnea devices were introduced in the first
quarter of fiscal year 1996, the redesigned BagEasy manual resuscitator was
introduced in March 1995, and a variety of patient interface devices were
introduced at various times during the three year period. Additional costs
were also incurred throughout the three year period to fund clinical studies.
Finally, the increase from 1994 to 1995 resulted, to a lesser extent, from the
temporary diversion during fiscal year 1994 of engineering resources away from
research and development activities and to manufacturing support activities in
response to recommendations resulting from an FDA inspection.
20
Nonrecurring charges totaled $7,086,000 (9% of net sales) for fiscal
year 1994. The first component of these charges, recorded in the first
quarter, totaled $1,966,000 and represented costs incurred by the Company in
connection with its November 1993 decision to discontinue the production and
sale of its BagEasy line of disposable manual resuscitators and recall all
remaining BagEasy products in distribution channels and customer inventories and
included provisions for write-offs of inventories and fixed assets, the
satisfaction of purchase order and compensation commitments, and costs
associated with the recall. The second component of these nonrecurring
charges, recorded in the fourth quarter, totaled $5,120,000 and represented
the write-off of the remaining balance on the prepayment for Hayek Oscillators
and the net book value of units that had been purchased under the terms of the
distribution agreement for that product. See Notes I and J to the
Consolidated Financial Statements for additional information regarding these
charges. The Company did not incur any nonrecurring charges in fiscal year 1995
or 1993.
The Company's effective income tax rate was 37% for fiscal year 1995
as compared to 30% for fiscal year 1994 and 33% for fiscal year 1993. Changes
in the Company's effective income tax rate were due primarily to changes in the
relative proportions of taxable income attributable to its United States
operation versus taxable income attributable to its Hong Kong and Peoples
Republic of China operations because the United States operation pays income
taxes at a higher rate (approximately 41% before available income tax credits)
than do the Hong Kong and Peoples Republic of China operations. The proportion
of taxable income attributable to the United States operation has increased,
with the exception of fiscal year 1994. During that year, the non-recurring
charges described above were incurred almost exclusively by the United States
operation, reducing taxable income attributable to the U.S. operation and
correspondingly reducing the Company's overall effective income tax rate.
As a result of the factors described above, the Company's net income
was $11,677,000 (12% of net sales) for fiscal year 1995 as compared to
$4,741,000 (6% of net sales) for fiscal year 1994 and $7,379,000 (11% of net
sales) for fiscal year 1993.
Financial Condition, Liquidity and Capital Resources
The Company had working capital of $39,413,000 and $31,032,000 at
June 30, 1995 and 1994, respectively. Net cash provided by operating
activities was $9,469,000, $4,568,000 and $10,669,000 for fiscal years 1995,
1994 and 1993, respectively. The increase in cash provided by operating
activities from fiscal year 1994 to fiscal year 1995 was due to an increase in
net income, a decrease in refundable income taxes, and increases in accounts
payable and accrued expenses during fiscal year 1995 as compared to decreases or
smaller increases in those liability accounts during fiscal year 1994. The
reduction in cash provided by operating activities from fiscal year 1993 to
fiscal year 1994 was due primarily to increases in accounts receivable
21
and refundable income taxes as well as decreases in accounts payable and accrued
expenses.
Trade accounts receivable increased from June 30, 1994 to June 30,
1995 at a rate greater than the percentage change in sales for the fiscal years
ending on those dates primarily because the Company's quarterly sales were at
their highest level for those two fiscal years during the last quarter of fiscal
year 1995. In addition, the aging of the Company's receivables increased as a
result of extended payment terms offered by the Company under several flexible
financing programs.
Net cash used by investing activities was $7,711,000, $8,415,000, and
$6,363,000 for fiscal years 1995, 1994 and 1993, respectively. Net cash used
for capital expenditures was $6,941,000, $7,735,000 and $6,363,000 for the
respective years. Approximately $2,643,000 of the capital expenditures for
fiscal year 1994 and $1,203,000 of the capital expenditures for fiscal year 1993
were for the purchase and development of additional land and expansion costs
related to the Company's headquarters and manufacturing facility in Murrysville,
Pennsylvania. The remainder of the significant capital expenditures for fiscal
years 1995, 1994 and 1993 were made for the purchase of production equipment,
office equipment and computers. In addition, fiscal year 1995 investing
activities included an expenditure of $745,000 representing a portion of the
purchase price of an acquired business plus related acquisition expenses. The
remainder of the purchase price was paid with shares of the Company's common
stock. See Note L to the Consolidated Financial Statements for additional
information about this acquisition.
In November 1993, the Company completed a 46,000 square foot addition
to its headquarters and manufacturing facility in Murrysville, Pennsylvania.
Financing for the addition includes a Redevelopment Authority Loan for $978,000
that was received in June 1994 and a $1,100,000 loan that received from the
Pennsylvania Industrial Development Authority in February 1995. Both loans have
a 2% fixed interest rate and a 15 year repayment term. See Note D to the
Consolidated Financial Statements for additional information about long-term
obligations. Funding for the remainder of the facility addition and the other
capital expenditures has been provided by positive cash flows from operating
activities and from cash and short-term investment balances.
Net cash provided by financing activities also includes proceeds from
the issuance of common stock under the Company's stock option plans and the
receipt of a minority interest investment in a joint venture and is reduced by
payments made on long-term obligations. In October 1994, the Company entered
into a new line of credit facility with a commercial bank that provides for the
availability of $1,250,000 at the bank's prime interest rate until the
expiration date of the agreement on October 31, 1995. The Company expects that
this line of credit facility will be renewed upon its expiration. See Note D to
the Consolidated Financial Statements for a discussion of the line of credit.
22
As discussed above, in November 1993 the Company discontinued the
production and sale of its BagEasy line of disposable manual resuscitators and
recalled all remaining BagEasy products in distribution channels and customer
inventories. The BagEasy product represented approximately 8% of the Company's
total sales for the year ended June 30, 1993 (the last full fiscal year it was
sold) and did not make significant contributions to profitability. In March
1995, the Company began shipping a redesigned version of the BagEasy manual
resuscitator.
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.
The Company believes that positive cash flow from operating and
financing activities, its $1,250,000 line of credit facility, and its
accumulated cash and short-term investments will be sufficient to meet its
current and presently anticipated needs for fiscal year 1996 for operating
activities, investing activities and financing activities (primarily consisting
of payments on long-term debt).
Inflation
Inflation has not had a significant effect on the Company's business
during the periods discussed.
23
Item 8. Consolidated Financial Statements
Index to Consolidated Financial Statements
Report of Independent Auditors............................ 25
Consolidated Balance Sheets as of June 30, 1995 and 1994.. 26
Consolidated Statements of Operations for the
years ended June 30, 1995, 1994 and 1993............... 28
Consolidated Statements of Shareholders' Equity
for the years ended June 30, 1995, 1994 and 1993....... 29
Consolidated Statements of Cash Flows for the
years ended June 30, 1995, 1994 and 1993............... 30
Notes to Consolidated Financial Statements................ 31
24
Report of Independent Auditors
Board of Directors
Respironics, Inc.
We have audited the accompanying consolidated balance sheets of Respironics,
Inc. and subsidiaries as of June 30, 1995 and 1994, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended June 30, 1995. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Respironics, Inc.
and subsidiaries at June 30, 1995 and 1994, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1995, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note A to the consolidated financial statements, the Company
changed its method of accounting for income taxes in 1994.
Ernst & Young LLP
Pittsburgh, Pennsylvania
September 11, 1995
25
CONSOLIDATED BALANCE SHEETS
RESPIRONICS, INC. AND SUBSIDIARIES
June 30
1995 1994
------------------------
ASSETS
CURRENT ASSETS
Cash and short-term investments $16,126,904 $12,384,054
Trade accounts receivable, less allowance for
doubtful accounts of $700,000 and $525,000 19,448,187 15,011,285
Refundable income taxes -0- 1,787,265
Inventories 13,136,664 7,833,755
Prepaid expenses and other 1,951,358 1,168,167
Deferred income tax benefits 2,200,595 2,021,776
----------- ----------
TOTAL CURRENT ASSETS 52,863,708 40,206,302
PROPERTY, PLANT AND EQUIPMENT
Land 2,589,117 2,417,334
Buildings 8,674,675 7,713,405
Machinery and equipment 14,155,510 10,849,230
Furniture and office equipment 9,394,000 7,240,447
Leasehold improvements 577,175 519,744
----------- ----------
35,390,477 28,740,160
Less allowances for depreciation
and amortization 15,443,041 11,929,911
----------- ----------
19,947,436 16,810,249
Funds held in trust for construction
of new facility 710,929 680,372
OTHER ASSETS 2,668,592 1,220,297
COST IN EXCESS OF NET ASSETS OF
BUSINESS ACQUIRED 1,847,905 -0-
----------- -----------
$78,038,570 $58,917,220
=========== ===========
See notes to consolidated financial statements.
26
June 30
1995 1994
-------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,858,554 $ 3,086,776
Accrued compensation and related expenses 3,827,187 3,055,420
Accrued expenses 2,694,298 1,968,977
Income taxes 1,572,121 658,364
Current portion of long-term obligations 498,150 404,866
----------- -----------
TOTAL CURRENT LIABILITIES 13,450,310 9,174,403
LONG-TERM OBLIGATIONS 5,537,996 4,854,440
MINORITY INTEREST 681,068 664,268
COMMITMENTS
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized
40,000,000 shares; issued and outstanding
16,744,785 shares at June 30, 1995 and
16,344,690 shares at June 30, 1994 167,448 163,446
Additional capital 19,254,977 16,790,919
Retained earnings 38,946,771 27,269,744
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 58,369,196 44,224,109
----------- -----------
$78,038,570 $58,917,220
=========== ===========
See notes to consolidated financial statements.
27
CONSOLIDATED STATEMENTS OF OPERATIONS
RESPIRONICS, INC. AND SUBSIDIARIES
Year Ended June 30
1995 1994 1993
Net sales $99,450,333 $78,171,028 $69,285,613
Cost of goods sold 43,077,158 34,830,308 32,113,280
----------- ----------- -----------
56,373,175 43,340,720 37,172,333
General and administrative expenses 14,050,071 10,027,842 10,580,602
Sales, marketing and commission expenses 17,696,059 15,069,159 12,313,483
Research and development expenses 7,077,216 4,794,242 3,555,903
Nonrecurring charges -0- 7,086,085 0
Interest expense 193,550 171,223 175,843
Other income (1,178,685) (624,180) (549,635)
----------- ----------- -----------
37,838,211 36,524,371 26,076,196
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 18,534,964 6,816,349 11,096,137
Income taxes 6,857,937 2,075,105 3,717,206
----------- ----------- -----------
NET INCOME $11,677,027 $ 4,741,244 $ 7,378,931
=========== =========== ===========
Earnings per share $ 0.67 $ 0.27 $ 0.43
=========== =========== ===========
Weighted Average Number of Shares
Used in Computing Earnings Per Share 17,532,422 17,280,680 17,318,606
See notes to consolidated financial statements.
28
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
RESPIRONICS, INC. AND SUBSIDIARIES
Common Stock
------------------- Additional Retained
Shares Amount Capital Earnings Total
--------- -------- ---------- ---------- ----------
Balance at July 1, 1992 as
previously reported 8,065,907 $ 80,659 $16,160,464 $15,149,569 $31,390,692
Two-for-one stock split 8,065,907 80,659 (80,659) -0- -0-
---------- -------- ----------- ----------- -----------
BALANCE AT JULY 1, 1992 AS ADJUSTED 16,131,814 161,318 16,079,805 15,149,569 31,390,692
Net income for the year ended
June 30, 1993 -0- -0- -0- 7,378,931 7,378,931
Shares sold pursuant to stock option
plans 89,346 894 343,668 -0- 344,562
Shares sold pursuant to consulting
agreement 8,000 80 33,320 -0- 33,400
---------- -------- ----------- ----------- -----------
BALANCE AT JUNE 30, 1993 16,229,160 162,292 16,456,793 22,528,500 39,147,585
Net income for the year ended
June 30, 1994 -0- -0- -0- 4,741,244 4,741,244
Shares sold pursuant to stock option
plans 107,530 1,074 289,526 -0- 290,600
Shares sold pursuant to consulting
agreement 8,000 80 44,600 -0- 44,680
---------- -------- ----------- ----------- -----------
BALANCE AT JUNE 30, 1994 16,344,690 163,446 16,790,919 27,269,744 44,224,109
Net income for the year ended
June 30, 1995 -0- -0- -0- 11,677,027 11,677,027
Shares sold pursuant to stock
option plans 315,001 3,150 1,188,499 -0- 1,191,649
Acquistion of a business 85,094 852 1,275,559 -0- 1,276,411
---------- -------- ----------- ----------- -----------
BALANCE AT JUNE 30, 1995 16,744,785 $167,448 $19,254,977 $38,946,771 $58,369,196
========== ======== =========== =========== ===========
See notes to consolidated financial statements.
29
CONSOLIDATED STATEMENTS OF CASH FLOWS
RESPIRONICS, INC. AND SUBSIDIARIES
Year Ended June 30
1995 1994 1993
------------------------------------------
OPERATING ACTIVITIES
Net income $11,677,027 $ 4,741,244 $ 7,378,931
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,831,793 3,571,500 3,858,339
Provision for deferred income taxes (178,819) 191,763 (1,390,181)
Provision for losses on write-off of equipment -0- 270,791 -0-
Provision for losses on accounts receivable 175,000 75,000 100,000
Loss on sale of equipment 35,719 -0- -0-
Provision for nonrecurring charges -0- 5,120,000 -0-
Changes in operating assets and liabilities:
Increase in accounts receivable (4,515,077) (3,812,916) (2,198,685)
Decrease (increase) in refundable income taxes 1,787,265 (1,787,265) -0-
Increase in inventories and prepaid
expenses (5,770,417) (1,057,575) (705,007)
(Increase) decrease in other assets (1,448,295) (949,001) 289,908
Increase (decrease) in accounts payable 1,680,521 (738,842) 1,547,383
Increase (decrease) in accrued compensation
and related expenses 764,557 (947,563) 1,642,235
Increase (decrease) in accrued expenses 516,442 528,074 (42,716)
Increase (decrease) in accrued income taxes 912,999 (636,912) 188,668
----------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 9,468,715 4,568,298 10,668,875
INVESTING ACTIVITIES
Purchase of property, plant and equipment (6,940,667) (7,734,854) (6,362,511)
Proceeds from sale of equipment 5,503 -0- -0-
Increase in funds held in trust for construction
of new facility (30,557) (680,372) -0-
Acquisition of a business, net of cash acquired (745,433) -0- -0-
----------- ----------- -----------
NET CASH USED BY
INVESTING ACTIVITIES (7,711,154) (8,415,226) (6,362,511)
FINANCING ACTIVITIES
Proceeds from long-term obligations 1,132,760 978,396 -0-
Reduction in long-term obligations (355,920) (382,508) (263,601)
Issuance of common stock 1,191,649 335,280 377,962
Increase in minority interest 16,800 664,268 -0-
----------- ----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 1,985,289 1,595,436 114,361
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS 3,742,850 (2,251,492) 4,420,725
Cash and short-term investments at beginning of year 12,384,054 14,635,546 10,214,821
----------- ----------- -----------
CASH AND SHORT-TERM INVESTMENTS AT END OF YEAR $16,126,904 $12,384,054 $14,635,546
=========== =========== ===========
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), its consolidated wholly owned foreign subsidiary, Respironics
(HK) Ltd., its wholly owned domestic subsidiary, RIC Investments, Inc., and a
foreign joint venture in which it holds a 51% equity investment. The joint
venture partner's 49% equity interest is included in the Company's financial
statements as minority interest. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Revenue Recognition:
- - -------------------
Revenue is recognized from sales when a product is shipped.
Inventories:
- - -----------
Inventories are valued at the lower of cost (first-in, first-out) or market.
Property, Plant and Equipment:
- - -----------------------------
Property, plant and equipment is recorded on the basis of cost. Depreciation is
computed using the straight-line method based upon the estimated useful lives of
the respective assets, except for assets under capital leases which are
depreciated using the straight-line method over the shorter of the lease term or
the estimated useful lives of such assets. Amortization of assets under capital
leases is included in depreciation expense.
Income Taxes:
- - ------------
Effective July 1, 1993, the Company adopted Statement of Financial Accounting
Standards #109, "Accounting for Income Taxes". Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when differences are expected
to reverse. The Company has elected not to restate the consolidated financial
statements of any prior years. The cumulative effect of the adoption and the
effect of the adoption on the results of operations for the year ended June 30,
1994 were not material.
The Company does not provide for federal income taxes on the undistributed
earnings of its foreign subsidiary (other than deemed dividends which are taxed
currently) because such earnings are reinvested and, in the opinion of
management, will continue to be reinvested indefinitely.
Foreign Currency Translation:
- - ----------------------------
The Company follows Statement of Financial Accounting Standards No. 52 for the
translation of the accounts of its foreign subsidiary, Respironics (HK) Ltd.,
and its joint venture. Foreign currency assets and liabilities are translated
into United States dollars at the rate of exchange existing at the statement
date or historical rates depending upon the nature of the account. Income and
expense amounts are translated at the average of the monthly exchange rates.
Adjustments resulting from these translations are immaterial.
Stock Split:
- - -----------
In February 1995, the Company's Board of Directors declared a two-for-one stock
split of the Company's common stock, distributing on March 17, 1995 one
additional share of common stock for each share held of record on March 3, 1995.
All agreements concerning stock options were amended to provide for issuance of
two shares of common stock for every one share issuable prior to the split. An
amount equal to the par value of the shares issued was transferred from
additional capital to the common stock account. This transfer has been reflected
in the consolidated statements of changes in shareholders' equity at July 1,
1992. All references to number of shares, except shares authorized, and to per-
share information in the consolidated financial statements have been adjusted to
reflect the stock split on a retroactive basis.
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.
Earnings per Share:
- - ------------------
Earnings per share is based on the weighted average number of shares outstanding
during each year and the assumed exercise of dilutive stock options (less the
number of treasury shares assumed to be purchased with the proceeds using the
average market price of the Company's common
31
stock for primary earnings per share and the higher of the ending market price
or average market price for fully diluted earnings per share).
Cash and Short-Term Investments:
- - -------------------------------
The Company considers all highly liquid investments with a maturity of 90 days
or less when purchased to be cash and short-term investments.
Capitalized Software Development Costs:
- - --------------------------------------
In 1994, the Company commenced development of software to be included in certain
of its new products. Software development costs have been capitalized and will
be amortized to the cost of product revenues over the estimated economic lives
of the products that will include such software. The products that include such
software are expected to be introduced for sale during the year ending June 30,
1996. Total capitalized software development costs were $1,982,000 and $ 675,000
at June 30, 1995 and 1994, respectively.
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
1995 1994
-----------------------
Raw materials $ 7,960,573 $5,268,039
Work-in-process 1,105,010 818,400
Finished goods 4,071,081 1,747,316
----------- ----------
$13,136,664 $7,833,755
=========== ==========
32
NOTE D -- LONG TERM OBLIGATIONS
Long-term obligations consisted of:
June 30
1995 1994
----------------------
1989 Economic Development
Revenue Bonds, variable interest
rate (effective rate of 5.28%,
including letter of credit and
remarketing fees, at June
30,1995), principal payable in
annual installments of $100,000
through 1996 and $200,000
thereafter through 2004 $1,900,000 $2,000,000
Industrial Development Authority
Loan, payable in monthly install-
ments of $13,777, including interest
at 3%, through June 2005 1,407,312 1,528,469
Redevelopment Authority Loan,
payable in quarterly installments
of $14,533, including interest at 5%,
through June 2005 481,137 514,172
Capital lease obligation, payable in
quarterly installments of $19,834
including interest at a floating rate
(2.25% at June 30, 1995)
through June 1997 131,581 201,353
Redevelopment Authority Loan,
payable in monthly installments of
$6,296, including interest at 2%,
through July 2009 921,894 978,395
Capital lease obligation, payable in
monthly installments of $1,860,
including interest at 4.60%,
through January 1996 13,889 36,917
Industrial Development Authority
Loan, payable in monthly install-
ments of $7,289, including interest
at 2%, through March 2010 1,132,240 -0-
Capital lease obligation, payable in
monthly installments of $2,284,
including interest at 4.62%,
through April 1997 48,093 -0-
---------- ----------
6,036,146 5,259,306
Less current portion 498,150 404,866
---------- ----------
$5,537,996 $4,854,440
========== ==========
The Economic Development Revenue Bonds, the Industrial Development Authority
Loans, and the Redevelopment Authority Loans are secured by mortgages upon the
Company's headquarters and manufacturing facility in Murrysville, Pennsylvania.
Proceeds from the bonds and the loans were used to finance the construction and
expansion of the facility. The Company is required to meet certain financial
33
covenants in connection with these obligations, including those relating to
current ratio, ratio of total liabilities to tangible net worth, and minimum
tangible net worth. At June 30, 1995 the Company was in compliance with these
covenants.
The Company is a party to capital lease agreements with commercial banks
relating to certain of its fixed assets. The lease terms are two to four years
with options for the Company to purchase the assets at the end of the lease.
Assets under capital leases at June 30, 1995 consist of machinery and equipment
and office equipment with a net book value of $149,228. Capital lease
obligations incurred are considered non-cash items and, accordingly, are not
considered in the consolidated statements of cash flows. Capital lease
obligations incurred were $52,265 for the year ended June 30, 1995.
The Company also has $1,250,000 available under a line of credit facility with a
commercial bank at the bank's prime rate until the expiration date of October
31, 1995. Borrowings made on this line of credit are unsecured. The Company
is required to meet certain financial covenants under this line of credit
relating to current ratio, the ratio of total liabilities to tangible net worth
and a minimum tangible net worth. There were no outstanding borrowings under
this credit facility.
Scheduled maturities of long-term obligations for the next five years are as
follows:
Minimum Lease Interest on
Maturities of Payments Under on Capital
Long-Term Debt Capital Leases Leases Total
-------------- -------------- ----------- ----------
1996 $ 384,875 $120,837 $(7,562) $ 498,150
1997 492,623 82,343 (2,055) 572,911
1998 500,847 -0- -0- 500,847
1999 509,516 -0- -0- 509,516
2000 518,370 518,370
Thereafter 3,436,352 -0- -0- 3,436,352
---------- -------- ------- ----------
Total $5,842,583 $203,180 $(9,617) $6,036,146
========== ======== ======= ==========
Interest paid was $194,220, $167,718, and $180,421 for the years ended June 30,
1995, 1994, and 1993, respectively.
NOTE E -- INCOME TAXES
Year Ended June 30
1995 1994 1993
-----------------------------------
Income taxes consisted of:
Current:
Federal $5,379,275 $1,509,015 $ 3,988,590
Foreign 197,943 60,112 94,746
State 1,459,538 314,214 1,024,051
---------- ---------- -----------
7,036,756 1,883,341 5,107,387
Deferred:
Federal (165,132) 151,826 (1,071,993)
State (13,687) 39,938 (318,188)
---------- ---------- -----------
(178,819) 191,764 (1,390,181)
---------- ---------- -----------
TOTAL INCOME TAXES $6,857,937 $2,075,105 $ 3,717,206
========== ========== ===========
34
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
1995 1994 1993
------------------
Statutory federal income tax rate 35% 34% 34%
Increases (decreases):
State taxes 5 3 4
Tax credits utilized (3) (7) (3)
Tax on foreign earnings
at less than
the statutory rate -0- (5) (5)
Other items, net, none of which
individually exceeds 5% of
federal income taxes at
statutory rates -0- 5 3
----- ---- ----
EFFECTIVE INCOME TAX RATE 37% 30% 33%
===== ==== ====
Deferred income tax assets consisted of the following:
June 30
1995 1994
---------- ----------
Deferred compensation $ -0- $204,546
Inventories 600,513 418,607
Allowance for bad debts 245,804 210,720
Depreciation 635,128 617,944
Accruals 673,926 555,645
Other 45,224 14,314
---------- ----------
Total $2,200,595 $2,021,776
========== ==========
Income before income taxes consisted of the following:
Year ended June 30
1995 1994 1993
------------------------------------
United States $17,935,537 $5,578,476 $ 9,038,558
Foreign 599,427 1,237,873 2,057,579
----------- ---------- -----------
Total $18,534,964 $6,816,349 $11,096,137
=========== ========== ===========
Undistributed earnings of the foreign subsidiary on which no U.S. income tax has
been provided amounted to $9,537,838 at June 30, 1995.
The Company's operation in the Peoples Republic of China is affected by an
income tax holiday. Net income increased by $339,851 ($0.02 per share),
$345,564 ($0.02 per share), and $568,955 ($0.03 per share) for the years ended
June 30, 1995,1994, and 1993 respectively, as a result of this income tax
holiday. Under the terms of the income tax holiday, the Company's operation
in the Peoples Republic of China paid no income tax for the years ended June 30,
1993 and 1994. The income tax rate increased to 7.5% for the year ended June
30, 1995 and will remain at 7.5% for years ending June 30, 1996 and 1997 and
will then increase to 15% for years thereafter. The applicable statutory
income tax rate in the Peoples Republic of China is approximately 33%.
Income taxes paid were $4,335,733, $4,620,928, and $4,918,719 for the years
ended June 30, 1995, 1994, and 1993, respectively.
35
NOTE F -- STOCK OPTION PLANS
The Company has the 1984 Incentive Stock Option Plan (the "1984 Plan") which
provided options to eligible employees to purchase common stock over five or
ten years at fair market value at the time of the grant. Options become
exercisable one year from the date of the grant at a rate not exceeding 25% per
year (subject to possible acceleration in certain circumstances). The Company
reserved shares of its common stock and authorized options to purchase 3,400,000
shares of common stock under the 1984 Plan. The 1984 Plan terminated as to new
grants on December 31, 1993.
Pertinent information regarding options under the 1984 Plan follows:
Option Shares
-------------
Year Ended June 30
1995 1994 1993
---------------------------------
Outstanding at beginning of period 1,298,466 1,277,860 1,330,562
Granted:
$ 8.25 per share -0- -0- 5,000
$ 8.32 per share -0- 2,000 -0-
$ 9.25 per share -0- 132,000 -0-
$10.07 per share -0- -0- 104,362
$10.38 per share -0- -0- 1,000
Exercised:
$ 1.00 per share (2,000) (10,100) (12,400)
$ 1.38 per share (80,000) (46,600) (6,400)
$ 2.82 per share (18,300) (11,800) (9,800)
$ 4.50 per share (187,250) (34,610) (48,920)
$ 5.41 per share (600) -0- -0-
$ 6.22 per share (20,696) (4,420) (11,426)
$10.07 per share (1,580) -0- -0-
Canceled (58,726) (5,864) (74,118)
--------- --------- ---------
Outstanding at end of period 929,314 1,298,466 1,277,860
========= ========= =========
Exercisable at end of period 749,134 802,758 911,866
========= ========= =========
Shares available for future grant -0- -0- 191,236
========= ========= =========
The Company also has the 1992 Stock Incentive Plan (the "1992 Plan") which was
approved by the Company's shareholders in November 1992. Under the 1992 Plan,
eligible employees may receive options to purchase common stock over ten years
at option prices that may not be less than fair market value at the date of
grant. Stock options granted under the 1992 Plan become exercisable no sooner
than six months from grant date (subject to possible acceleration under certain
circumstances) and such options may include cash payment rights. Eligible
employees may also receive awards of restricted shares of the Company's common
stock under the 1992 Plan. The aggregate number of options and restricted shares
which may be issued under the 1992 Plan is 1,000,000. Options to purchase
106,960 shares at $9.88 per share were granted during the year ended June 30,
1994 and options to purchase 52,752 shares at $16.25 per share were granted
during the year ended June 30, 1995. Options to purchase 2,575 shares at $9.88
per share were exercised during the year ended June 30, 1995. Options to
purchase 5,050 shares were canceled during the year ended June 30, 1995. At June
30, 1995, total options to purchase 152,087 shares were outstanding under the
1992 Plan, of which 23,628 were exercisable.
In connection with an initial public offering that was completed in June 1988,
an officer of the Company exchanged his rights in certain non-patented products
for an option to purchase 400,000 shares of common stock at a price of $1.88 per
share. The option to purchase 80,000 of the shares was exercisable immediately,
and options to purchase 80,000 shares became exercisable on each of June 30,
1989, 1990, 1991, and 1992. The option will be exercisable for a maximum period
of ten years after grant. No options have been exercised under this plan.
36
In November 1991, the Company's shareholders approved the adoption of the 1991
Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). The
aggregate number of shares which may be issued and as to which grants of options
may be made under the Directors' Plan is 200,000. All options under the
Directors' Plan are granted to members of the Company's Board of Directors who
are not employees of the Company. Such options are granted at fair market
value on the date of grant.
Under the provisions of the Directors' Plan, in November 1991 each of the four
non-employee directors who had been non-employee directors for at least two
years prior to the approval of the Directors' Plan received a one-time option to
purchase 10,000 shares at an option price of $6.13 per share. In addition, each
of the five non-employee directors (regardless of years of service) received an
option to purchase 5,100 shares at an option price of $6.13 per share. In
November 1992, each non-employee director received an option to purchase 5,100
shares at an option price of $10.63 per share. In November 1993, each non-
employee director received an option to purchase 5,100 shares at an option price
of $9.50 per share. In November 1994, each non-employee director received an
option to purchase 5,100 shares at an option price of $11.25 per share. In the
future, each non-employee director will receive an option to purchase an
additional 5,100 shares on the third business day following the Company's annual
meeting of shareholders. These grants will continue until options for all the
share available under the Directors' Plan have been granted.
The one time option granted to non-employee directors with more than two years
of service was exercisable in full three months after the date of grant. For all
other options granted under the Directors' Plan, 25% of the shares are
exercisable one year after the date of the grant, 25% are exercisable two years
after the date of grant, and the remaining 50% are exercisable three years after
the date of grant. All options granted under the Directors' Plan expire ten
years after the date of grant. Options to purchase 2,000 shares at $6.13 per
share were exercised during the yearEended June 30, 1995.
NOTE G -- FINANCIAL INFORMATION BY GEOGRAPHIC AREAS AND MAJOR
CUSTOMERS
Year Ended June 30
1995 1994 1993
----------------------------------------
NET SALES
Hong Kong:
Unaffiliated Customers $ 1,720,248 $ 1,462,292 $ 1,157,402
Interarea transfers 8,430,823 7,312,399 9,281,661
----------- ----------- ------------
10,151,071 8,774,691 10,439,063
United States:
Unaffiliated Customers 97,730,086 76,708,736 68,128,211
Interarea transfers 750,744 543,883 794,124
----------- ----------- ------------
98,480,830 77,252,619 68,922,335
Eliminations--transfers (9,181,567) (7,856,282) (10,075,785)
----------- ----------- ------------
NET SALES $99,450,333 $78,171,028 $ 69,285,613
=========== =========== ============
OPERATING PROFIT
Hong Kong $ 877,325 $ 1,538,966 $ 2,359,200
United States 22,239,437 9,315,357 12,411,549
----------- ----------- ------------
OPERATING PROFIT 23,116,762 10,854,323 14,770,749
Corporate expense 4,388,248 3,866,751 3,498,769
Interest expense 193,550 171,223 175,843
----------- ----------- ------------
INCOME BEFORE INCOME
TAXES $18,534,964 $ 6,816,349 $ 11,096,137
=========== =========== ============
37
Interarea transfers are accounted for at prices comparable to unaffiliated
customer sales reduced by an approximation of costs not incurred on internal
sales.
The Company sells to distributors in the health care industry and closely
monitors the extension of credit to both domestic and foreign customers,
including obtaining and analyzing credit applications for all new accounts and
maintaining an active program to contact customers promptly when invoices become
past due. Sales to one customer accounting for 10% or more of net sales were
$10,955,000 for the year ended June 30, 1995 and $8,569,000 for the year ended
June 30, 1994. Sales to another customer (accounting for 10% or more of net
sales) were $6,711,000 for the year ended June 30, 1993.
Additional information regarding assets and liabilities by geographic area
follows:
June 30
1995 1994
------------------------
IDENTIFIABLE ASSETS
Hong Kong $ 5,597,154 $ 3,773,038
United States 54,113,917 40,738,352
----------- -----------
59,711,071 44,511,390
Corporate assets (primarily
cash and short-term
investments) 18,327,499 14,405,830
----------- -----------
TOTAL ASSETS $78,038,570 $58,917,220
=========== ===========
TOTAL ASSETS
Hong Kong $11,140,130 $ 9,328,819
United States 66,898,440 49,588,401
----------- -----------
$78,038,570 $58,917,220
=========== ===========
TOTAL LIABILITIES
Hong Kong $ 2,712,833 $ 1,548,270
United States 16,956,541 13,144,841
----------- -----------
$19,669,374 $14,693,111
=========== ===========
NOTE H-- RETIREMENT PLAN
The Company has a Retirement Savings Plan which is available to all United
States employees. Employees may contribute up to 15% (to a defined maximum) of
their compensation. The Company matches employee contributions (up to 3% of
each employee's compensation) at a 100 % rate and may make discretionary
contributions. The Company contributed $420,000, $357,000 and $169,000 to the
plan for the years ended June 30, 1995, 1994, and 1993, respectively.
The Company's current benefit program does not provide postretirement benefits
to employees.
NOTE I-- DISTRIBUTION AGREEMENT
In June 1991, the Company entered into a distribution agreement with the owner
of non-invasive ventilator product. Under the terms of the agreement, the
Company had the exclusive United States distribution rights for a product (The
Hayek Oscillator) that is produced by the manufacturer. The initial term of the
agreement was three years with provisions to extend the term for additional
periods. A six-month extension of the initial term expired December 31, 1994.
As part of the agreement, the Company paid $5,000,000 to the manufacturer,
representing a partial prepayment for the product to be sold by the Company
during the initial term of the agreement.
Because of the manufacturer's repeated failures to meet stipulated requirements,
particularly in assuring compliance with Good Manufacturing Practice as required
by FDA law and regulations, and the Company's resulting inability to introduce
the product for sale, in June 1994 the Company concluded that the ultimate
38
realizability of the prepayment was no longer probable. Accordingly, during
the quarter ended June 30, 1994, the Company recorded nonrecurring charges
totaling $5,120,000 to write off the remaining balance on the prepayment and the
net book value of units that had been purchased.
NOTE J-- DISCONTINUANCE OF PRODUCT LINE
In November 1993, the Company discontinued the production and sale of its
BagEasy line of disposable manual resuscitators and recalled all remaining
BagEasy products in distribution channels and customer inventories. Accordingly,
during the quarter ended September 30, 1993, the Company recorded non-recurring
charges of $1,966,000 which included provisions for write-offs of inventories
and fixed assets, the satisfaction of purchase order and compensation
commitments, and costs associated with the recall.
NOTE K-- JOINT VENTURE
During the quarter ended December 31, 1993, the Company completed a 51% equity
investment, totaling approximately $600,000, in a joint venture with a company
located in the Peoples Republic of China. This joint venture will facilitate
the wider distribution of the Company's products in the Peoples Republic of
China and will also manufacture and distribute medical products and over-the-
counter medicines in that country. The joint venture is not expected to be
fully operational until the second half of fiscal year 1996.
NOTE L-- ACQUISITION
On April 6, 1995, the Company acquired Vitalog Monitoring, Inc., a California
company that designs, manufactures and markets sleep monitoring and diagnostic
equipment. This combination was treated for financial reporting purposes as a
purchase. Vitalog's results of operations have been included in the Company's
consolidated financial statements beginning April 7, 1995. Vitalog's operations
were not material in relation to the Company's consolidated financial statements
and pro forma financial information has therefore not been presented.
Consideration paid was $745,000 in cash (including transactions costs) and
85,094 shares of the Company's common stock valued at $1,276,000 in exchange for
the outstanding stock of Vitalog, related patents, and non-competition
agreements. The cost in excess of net assets acquired was $1,887,000 and is
being amortized on a straight line basis over 12 years.
NOTE M -- CONTINGENCY
The Company is a party to an action filed in a federal District Court in January
1995 in which a competitor alleges that the Company's sale in the United States
of certain products infringes three of the competitor's patents. In its
response to the action, the Company has denied the allegations and has
separately sought a declaratory judgment that the claims under the patents are
invalid and that the Company does not infringe upon the patents. Discovery in
the case is currently underway and is scheduled to end in January 1996. The
Company believes that none of its products infringe any of the patents in
question in the event that any one or more of such patents should be held to be
valid and it intends to vigorously defend this position.
39
NOTE N -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Following are the unaudited quarterly results of operations for the fiscal years
ended June 30, 1995 and 1994:
1995
----
Three Months Ended
September 30 December 31 March 31 June 30
------------ ----------- ----------- -----------
Net Sales $21,669,809 $23,867,803 $25,599,736 $28,312,985
Gross Profit 12,199,078 13,679,172 14,485,883 16,009,042
Net Income 2,420,016 2,696,380 3,071,740 3,488,891
Earnings Per Share 0.14 0.15 0.17 0.20
1994
----
Three Months Ended
September 30 December 31 March 31 June 30
------------ ----------- ----------- -----------
Net Sales $18,224,518 $18,600,037 $19,307,611 $22,038,862
Gross Profit 9,989,061 10,099,895 10,704,488 12,547,276
Non-recurring charges 1,966,085 -0- -0- 5,120,000
Net Income (Loss) 873,481 2,063,884 2,244,295 (440,416)
Earnings (Loss)
Per Share 0.05 0.12 0.13 (0.03)
40
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure.
--------------------
None.
41
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, 1995
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 8, 1995, 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.
42
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
------------------------------------------------------
Form 8-K.
---------
The financial statements, financial statement schedules and exhibits
listed below are filed as part of this annual report.
(a) (1) Financial Statements:
---------------------
The Consolidated Financial Statements of the Company and its
subsidiaries, together with the report of Ernst & Young LLP, dated September 11,
1995, filed as part of this annual report are listed in the index to
Consolidated Financial Statements in Item 8.
(a) (2) Financial Statement Schedules:
------------------------------
Page
----
Financial Statement Schedules:
Schedule II-Valuation and Qualifying Accounts................ 44
Schedule I, III, IV and V are omitted since the subject
matter thereof is not present.
(a) (3) Exhibits:.................................................... 45
43
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
RESPIRONICS, INC.
COL. A COL. B COL. C COL. D COL. E
- - ---------------------------------------------------------------------------------------------------------------------------
ADDITIONS
Balance at ------------------------------------ Balance at
Beginning of Charged to Costs Charged to Other End of
DESCRIPTION Period and Expenses Accounts-Describe Deductions-Describe Period
----------- ------------ ---------------- ----------------- ------------------- -----------
Year ended June 30, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts $525,000 $175,000 $0 $700,000
======== ======== == ========
Year ended June 30, 1994:
Deducted from asset accounts:
Allowance for doubtful accounts $450,000 $ 75,000 $0 $525,000
======== ======= == ========
Year ended June 30, 1993:
Deducted from asset accounts:
Allowance for doubtful accounts $350,000 $100,000 $0 $450,000
======== ======== == ========
44
EXHIBITS
Exhibit No. Description and Method of Filing
- - ----------- --------------------------------
3.1 Restated Certificate of Incorporation of the Company, Filed as
Exhibit 3.2 to Amendment No. 1 to Form S-1, Registration No. 33-
20899.
3.2 Amendment to Restated Certificate of Incorporation of the
Company, filed as Exhibit 3.2 to Form S-1, Registration No. 33-
39938.
3.3 By-Laws of the Company, filed as Exhibit 3.4 to Amendment No. 2
to Form S-1,Registration No. 33-20899.
3.4 Amendment to Restated Certificate of Incorporation of the Company,
filed as Exhibit 4.2 to Form S-8, Registration No. 33-89308.
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 this Annual Report.
10.1 Amended and Restated Incentive Stock Option Plan of Respironics,
Inc. and form of Stock Option Agreement used for Stock Options
granted after December 31, 1987, filed as Exhibit 10.2 to Form S-
1, Registration No. 33-20899.
10.2 Agreements between the Company and Gerald E. McGinnis, filed as
Exhibit 10.4 to Amendment No. 2 to Form S-1, Registration No. 33-
20899.
45
10.3 Employment Agreement, dated September 2, 1982, and effective
October 1, 1982, between the Company and Kam-Kwen Ng, filed as
Exhibit 10.5 to Form S-1, Registration No. 33-20899.
10.4 Employment Agreement dated September 1983 between the Company and
Eugene N. Scarberry, filed as Exhibit 10.6 to Form S-1,
Registration No. 33-20899.
10.5 Letter Agreements between the Company and Vital Signs, Inc.,
filed as Exhibit 10.11 to Form S-1, Registration No. 33-20899.
10.7 Respironics, Inc. Retirement Savings Plan, filed as Exhibit 10.11
to Annual Report on Form 10-K for Fiscal Year ending June 30,
1989.
10.8 Incentive Bonus Plan dated January 26, 1985, filed as Exhibit
10.16 to Form S-1, Registration No. 33-20899.
10.10 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.
10.11 Employment and Royalty Agreement dated September 21, 1982 and
March 1, 1989 and effective October 1, 1982 and March 1, 1989
between the Company and Ronald J. Zdrojkowski, filed as Exhibit 1
to the Company's Form 10-Q for the quarter ended September 30,
1989.
10.12 Supply Agreement with Vital Signs, Inc. effective July 1, 1993 and
expiring June 30, 1997, filed as Exhibit 10.12 to Annual Report on
Form 10-K for fiscal year ending June 30, 1993.
46
10.18 Line of Credit Agreement dated November 14, 1994 with PNC Bank,
filed as Exhibit 10.18 to this Annual Report.
10.19 Employment Agreement dated and effective as of April 1, 1995
between the Company and Gerald E. McGinnis, filed as Exhibit 10.19
to this Annual Report.
10.20 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.
10.21 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.
10.22 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.
10.23 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.
11.1 Statement re: Earnings per share, filed as Exhibit 11.1 to this
Annual Report.
21.1 List of Subsidiaries, amending Exhibit 22.1 to Form S-1,
Registration No. 33-20899, filed as Exhibit 22.1 to Annual Report
on Form 10-K for Fiscal Year ending June 30, 1992.
23.1 Consent of Ernst & Young, filed as Exhibit 23.1 to this Annual
Report
47
(b) Reports on Form 8-K:
--------------------
No events which resulted in the filing of a current report on Form 8-K
occurred during the fourth quarter of fiscal year 1995.
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.
/s/ Dennis S. Meteny
-------------------------------
By: Dennis S. Meteny, President and
Chief Executive Officer
Date: September 27, 1995
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 27, 1995:
/s/ Dennis S. Meteny /s/ James H. Hardie
- - -------------------------------- ---------------------------------
Dennis S. Meteny James H. Hardie
(President and (Director)
Chief Executive Officer
and Director)
/s/ Daniel J. Bevevino
- - -------------------------------- ---------------------------------
Daniel J. Bevevino Joseph C. Lawyer
(Controller and Chief Financial (Director)
and Accounting Officer)
/s/ Gerald E. McGinnis /s/ George J. Magovern
- - -------------------------------- ---------------------------------
Gerald E. McGinnis George J. Magovern, M.D.
(Chairman of the (Director)
Board of Directors)
- - -------------------------------- ---------------------------------
Daniel P. Barry Bernard Shou-Chung Zau
(Director) (Director)
/s/ Douglas A. Cotter
- - --------------------------------
Douglas A. Cotter
(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 By-Laws of the Company, filed as Exhibit 3.4 to Amendment No. 2 to
Form S-1, Registration No. 33-20899
3.4 Amendment to Restated Certificate of Incorporation of the Company,
filed as Exhibit 4.2 to Form S-8, Registration No. 33-89308.
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 herewith at page
---------
10.1 Amended and Restated Incentive Stock Option Plan of Respironics,
Inc. and form of Stock Option Agreement used for Stock Options
granted after December 31, 1987, filed as Exhibit 10.2 to Form S-1,
Registration No. 33-20899.
10.2 Agreements between the Company and Gerald E. McGinnis, filed as
Exhibit 10.4 to Amendment No. 2 to Form S-1, Registration
No. 33-20899.
10.3 Employment Agreement, dated September 2, 1982, and effective
October 1, 1982, between the Company and Kam-Kwen Ng, filed as
Exhibit 10.5 to Form S-1, Registration No. 33-20899.
10.4 Employment Agreement dated September 1983 between the
Company and Eugene N. Scarberry, filed as Exhibit 10.6 to
Form S-1, Registration No. 33-20899.
10.5 Letter Agreements between the Company and Vital Signs, Inc.,
filed as Exhibit 10.11 to Form S-1, Registration No. 33-20899.
10.7 Respironics, Inc. Retirement Savings Plan, filed as Exhibit 10.11
to Annual Report on Form 10-K for Fiscal Year ending June 30, 1989.
10.8 Incentive Bonus Plan dated January 26, 1985, filed as Exhibit
10.16 to Form S-1, Registration No. 33-20899.
10.10 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.
10.11 Employment and Royalty Agreement dated September 21, 1982 and March
1, 1989 and effective October 1, 1982 and March 1, 1989 between
the Company and Ronald J. Zdrojkowski, filed as Exhibit 1 to the
Company's Form 10-Q for the quarter ended September 30, 1989.
10.12 Supply Agreement with Vital Signs, Inc. effective July 1, 1993 and
expiring June 30, 1997, filed as Exhibit 10.12 to Annual Report on
Form 10-K for fiscal year ending June 30, 1993.
10.18 Line of Credit Agreement dated November 14, 1994 with PNC Bank,
filed herewith at page .
-------
10.19 Employment Agreement dated and effective as of April 1, 1995 between
the Company and Gerald E. McGinnis, filed herewith at page .
------
10.20 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.
10.21 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.
10.22 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.
10.23 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.
11.1 Statement re: Earnings per share, filed herewith at page .
-------
21.1 List of Subsidiaries, amending Exhibit 22.1 to Form S-1,
Registration No. 33-20899, filed as Exhibit 22.1 to Annual Report
on Form 10-K for Fiscal Year ending June 30, 1992.
23.1 Consent of Ernst & Young, filed herewith at page .
-----------