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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
X Annual Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended June 30, 1999 or
-------------
Transition Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ______
Commission File No. 000-16723
RESPIRONICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1304989
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1501 Ardmore Boulevard
Pittsburgh, Pennsylvania 15221
(Address of principal executive offices) (Zip Code))
Telephone Number, including area code) 412-731-2100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
------------------- ---------------------
None --
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for at least the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ X ]
--
As of August 31, 1999, the aggregate market value of the shares of the
registrant's Common Stock (based upon the last price reported by the NASDAQ
National Market System) held by non-affiliates was approximately $288,000,000.
As of August 31, 1999, there were 33,005,283 shares of Common Stock of the
registrant outstanding, of which 2,689,683 were held in treasury.
Documents Incorporated by reference: Portions of the Proxy Statement for the
registrant's Annual Meeting of Shareholders to be held on November 18, 1999 are
incorporated by reference into Part III of this Annual Report on Form 10-K.
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INDEX
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Page
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PART I
Item 1. Business.................................................... 3
Item 2. Description of Property..................................... 17
Item 3. Legal....................................................... 17
Item 4. Submission of Matters to a Vote of
Security Holders............................................ 19
PART II
Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters............................. 19
Item 6. Selected Financial Data..................................... 20
Item 7. Management's Discussion and
Analysis of Results of Operations and
Financial Condition......................................... 21
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk........................................... 26
Item 8. Consolidated Financial Statements........................... 27
Item 9. Disagreements on Accounting and
Financial Disclosure........................................ 48
PART III
Item 10. Directors and Executive Officers of
the Registrant.............................................. 49
Item 11. Executive Compensation...................................... 49
Item 12. Security Ownership of Certain
Beneficial Owners and Management............................ 49
Item 13. Certain Relationships and Related
Transactions................................................ 49
PART IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K........................... 50
Signatures ........................................................... 56
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PART I
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES REFORM ACT OF 1995.
The statements contained in this Annual Report on Form 10-K,
specifically those contained in Item 1 "Business" and Item 7 "Management's
Discussion and Analysis of Financial Condition and Operation," and statements
incorporated by reference in this Form 10-K from the 1999 Annual Report to
Shareholders, along with statements in other reports filed with the Securities
and Exchange Commission, external documents and oral presentations which are not
historical are "Forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21B of the Securities
Exchange Act of 1934, as amended. These forward-looking statements represent the
Company's present expectations of beliefs concerning future events. The Company
cautions that such statements are qualified by important factors that could
cause actual results to differ materially from those in the forward-looking
statements. Results actually achieved may differ materially from expected
results included in these statements. Those factors include the following:
foreign currency fluctuations, regulations and other factors affecting
operations and sales outside the United States including potential future
effects of the change in sovereignty of Hong Kong, customer consolidation and
concentration, increasing price competition and other competitive factors in the
sale of products, interest rate fluctuations, intellectual property and related
litigation, FDA and other government regulation, and third party reimbursement.
Item 1. Business
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General
Respironics, Inc. is a leading developer, manufacturer and marketer of
medical devices used for the treatment of patients suffering from respiratory
disorders. The Company's products are designed to reduce costs while improving
the effectiveness of patient care and are used primarily in the home and
hospitals, as well as emergency medical settings and alternative care
facilities. The Company's primary product lines are: (i) homecare products,
including continuous positive airway pressure ("CPAP") devices and bi-level
positive airway pressure devices used in the home for the treatment of
obstructive sleep apnea ("OSA"), a serious disorder characterized by the
repeated cessation of breathing during sleep; respiratory devices such as
ventilation devices, including bi-level non-invasive ventilatory support units
and portable invasive volume ventilator units used in the home; and oxygen and
monitoring systems; (ii) hospital products, including bi-level non-invasive
ventilatory support units and portable and standard invasive volume ventilator
units used in the hospital or institutional settings and related accessories;
and (iii) asthma and allergy products. Respironics markets its products through
homecare, hospital, and asthma and allergy sales organizations, which consist of
approximately 140 direct and independent sales representatives, who sell to a
network of over 5,000 medical product dealers. In certain markets, the Company's
products are sold directly to end users. The Company also rents portable volume
ventilators to dealers and directly to end users in the United States. With the
vast majority of its sales currently reaching the home care market, Respironics
believes that it is well-positioned to take advantage of the growing preference
for in-home treatment of patients suffering from respiratory disorders.
Respironics is a Delaware corporation with executive offices located
at 1501 Ardmore Boulevard, Pittsburgh, PA 15221. Unless the context indicates
otherwise, reference in this Annual Report to the "Company" or "Respironics"
refers to Respironics, Inc. and its domestic and foreign subsidiaries. Unless
the context indicates otherwise, reference in this Annual Report to "fiscal
year" refers to the twelve month period ending on June 30 of the year indicated.
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In February 1998, the Company merged a wholly-owned subsidiary with
Healthdyne Technologies, Inc. ("Healthdyne"), a leading designer, manufacturer
and marketer of medical devices for use in the home and hospital, in a stock for
stock merger by issuing approximately 12,000,000 shares of the Company's common
stock in exchange for the outstanding shares of Healthdyne. The Merger was
accounted for as a pooling of interests. Accordingly, all discussion herein is
presented on a combined basis for all periods presented. Healthdyne was based in
Marietta, Georgia and has since been renamed Respironics Georgia, Inc. See Note
K to the Consolidated Financial Statements for more information about this
merger.
In July 1999, the Company announced a major restructuring of its
United States operations. The major components of the restructuring include the
closing of the Westminster, Colorado manufacturing facility, the closing of the
19 customer satisfaction centers throughout the United States, the downsizing of
the Marietta, Georgia manufacturing facilities, the opening of a centralized
distribution and repair center in Youngwood, Pennsylvania, the realignment of
the Company into four divisions with a corresponding management realignment and
a workforce reduction associated with the facility changes and the realignment.
The majority of facility changes are expected to be completed during the second
quarter of fiscal year 2000, and the divisional realignment is currently in
place. In addition, on August 19, 1999, the Company announced the appointment of
James W. Liken as President and Chief Executive Officer, replacing Dennis S.
Meteny who resigned as an officer and a director. See Note M to the Consolidated
Financial Statements for more information about the restructuring.
The following are registered trademarks of the Company as used in this
document: Respironics, REMstar, Great Performers, Aria, Virtuoso, Duet, Encore,
Quartet, Maestro, BiPAP, PLV, Monarch, Solo, OptiChamber, Healthdyne,
Quantum, Alice, Alliance, Healthaire, Soft Series Nasal Mask, Tranquility,
SmartMonitor, ASSESS, PERSONAL BEST, Wallaby, GoldSeal, GEL and Optihaler. The
following are trademarks of the Company as used in this document: Inspiration,
Contour Nasal Mask, Millennium, Esprit, BiliChek, NightWatch, Profile and
Vision.
Products
At the present time, the Company's principal products can be divided
into three categories: homecare products, hospital products, and asthma and
allergy products.
Homecare Products
-----------------
The Company's homecare products can be separated into five major
subcategories: sleep products, non-invasive ventilation products, invasive
portable volume ventilation products, oxygen concentrators and monitoring
devices.
Sleep Products. Respironics believes it is the world-wide market share
leader in OSA therapy devices, with a market share in excess of 50%. The
Company's primary OSA products are the Great Performers family, including the
Solo, REMstar, Aria and Virtuoso CPAP units and the Duet bi-level unit, the
BiPAP S Airway Management System, the Tranquility family of CPAP and bi-level
units, and related accessories such as masks, tubes, filters and headgear.
The Company's CPAP devices in both the Great Performers and
Tranquility families consist of a small, portable air pressurization device, an
air pressure control and a mask worn by the patient at home during sleep. The
Solo, REMstar and Tranquility CPAP systems are innovative OSA therapy devices
that meet the Company's strategy of offering units at all key price and feature
points. The Company's Solo and REMstar products represent standard state of the
art CPAP systems that provide high quality treatment options at an economical
price. The Aria CPAP system features built-in memory to record patient usage
data. The software necessary to extract this data from the Aria unit is known as
Encore. The Virtuoso and Tranquility Auto CPAP systems utilize innovative
technology to monitor the patient's airway and adjust output
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automatically in order to deliver the appropriate pressure. The BiPAP Duet
Airway Management System, the Tranquility Bi-level System, and the BiPAP S
Airway Management System are the Company's bi-level OSA units. These units sense
the patient's breathing cycle and adjust the pressure accordingly. The Duet unit
also contains advanced leak-sensing technology which improves the unit's
pressure adjustment capability. Bi-level units are used to treat severe OSA and
are useful in improving acceptance of therapy by patients who have difficulty
tolerating CPAP. The Great Performers Clinical System, consisting of the Quartet
Clinical System, a bedside pressure generator and the Maestro Clinical Remote
Control Unit, is used by clinicians in prescribing therapy for the treatment of
adult OSA. The Company has received clearance from the United States Food and
Drug Administration ("FDA") for all of the Great Performers, Tranquility and
BiPAP S Airway Management Products.
Respironics also manufactures and distributes a wide range of
technologically advanced computer-based products for use in the diagnosis of
sleep related disorders. The Company provides advanced, technically proficient
clinical products for use in sleep disorders laboratories. The Company also
develops products for patient testing in the home which allow clinicians to
expand the number of patients who can be served by a traditional sleep disorders
laboratory.
The Company's primary sleep diagnostic product is the Alice system.
Alice is a computer-based system for use in sleep laboratories and other
clinical settings. It is capable of recording up to 25 channels of physiological
data, which is stored on either a desktop or portable computer prior to
permanent storage on optical cartridges. In addition to acquiring and storing
the patient's physiological data, the Alice system utilizes physician input and
internal algorithms to provide a comprehensive range of reports for clinical
analysis. Alice can be used on either infants or adults and separate software
programs were developed specifically for each type of patient.
The Company also manufactures and markets Nightwatch, a portable sleep
system which monitors up to nine channels of physiological data for up to ten
hours per patient. Among other factors, Nightwatch is distinguished by a unique
software algorithm for the analysis of sleep states. In addition, its
physiological sensors are specifically designed for use in the home. These
sensors record a variety of patient data and transmit the information to a base
recording station located in the patient's room. The information may
subsequently be sent by modem to the sleep laboratory or other clinical setting
where it is monitored by a trained clinician. A single Nightwatch system can be
expanded economically to conduct sleep studies at multiple locations by adding
additional recorders to the central system in order to collect data from several
patients simultaneously.
The Company estimates that in the U.S. approximately 1,500 sleep
clinics currently exist at hospitals and other medical centers where
pulmonologists, technicians and other medical professionals diagnose OSA (as
well as other sleep disorders) and then prescribe the appropriate treatment.
Such laboratories provide the most frequent source of patient introductions to
the Company's homecare sleep products.
The OSA patient can purchase or rent the Company's OSA therapy
products from home health care products dealer locations worldwide. Personnel at
each of these locations are equipped to train the patient in the product's use
and to maintain and service the product (See "Sales, Distribution, and
Marketing"). The retail price for a CPAP unit generally ranges from $700 to
$1,600, depending on type of unit, geographical market and whether certain
accessories are purchased. The retail price for a bi-level OSA unit generally
ranges from $2,000 to $3,200, depending on which model is purchased. The
Company's sleep diagnostic products are sold through dealers and directly to
clinical sites.
The Company also provides masks used with CPAP and bi-level devices
including the Contour Nasal Mask, the GEL and GoldSeal Masks, the Profile and
Profile Lite masks,
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the Soft Series Mask, Monarch Mini Mask, and Full Face Masks. The Company
believes that its Contour Nasal Mask was the first mask to adequately seal on a
patient's face for air delivery, thereby minimizing patient discomfort and
promoting increased patient compliance with prescribed usage. The Monarch Mini
Mask is designed to enhance patient comfort with its small size and unique
placement on the patient's face; the GEL, GoldSeal, Profile, Profile Lite and
Soft Series Masks utilize a variety of cushion materials to create a comfortable
mask seal around the contours of the face. Full Face Masks address the needs of
specific patient groups for whom CPAP and bi-level therapy is delivered most
effectively and comfortably through masks that cover the mouth and nose.
Non-invasive Ventilation Products. The Company believes it is the
leading manufacturer and marketer of non-invasive ventilatory support devices in
the U.S. Such devices are intended to augment the ventilation of a spontaneously
breathing patient, but are not intended to satisfy the total ventilatory
requirements of the patient.
The Company's principal non-invasive ventilatory support products for
the home are the BiPAP Ventilatory Support System, the initial version of which
was introduced in 1989 and the Quantum Pressure Support Ventilator, which was
introduced in 1995. Both products are low-pressure, electrically-driven flow
generators with an electronic pressure control designed to augment patient
breathing by supplying pressurized air to the patient. Both products sense the
patient's breathing and adjust their output to assist in inhalation and
exhalation. Additionally, both products compensate for mask leaks, which often
occur in the delivery of ventilatory support to the patient, thereby providing
what the Company believes is a more efficient and consistent non-invasive
therapy than competing volume ventilators. The face masks described above are
also used with the non-invasive ventilatory support units.
The Company believes that its non-invasive ventilatory support
products have the potential for increasing patient comfort by adapting to the
patient's breathing cycles as opposed to requiring the patient to adapt his
breathing to the ventilator cycles and by delivering therapy effectively with a
patient mask rather than requiring intubation. The retail price for the units,
which generally range from $6,000 to $9,500, also compares favorably to the cost
of invasive ventilators, which generally retail for $10,000 to $28,000.
The Company also is currently working to incorporate Proportional
Assist(R) Ventilation ("PAV(R)") into its line of BiPAP ventilatory support
products. PAV(R) is a mode of ventilatory support that provides assistance in
proportion to the needs of the patient. The Company has conducted extensive
clinical studies in Europe using PAV(R) and has been granted Investigational
Device Exemptions by the FDA to conduct clinical tests in the U.S. using PAV(R)
in both non-invasive and invasive applications. Upon completion of such tests,
application for regulatory clearance to market devices that include PAV(R),
which is required prior to the marketing of such products in the U.S., are
expected to be made. The PAV(R) technology was obtained by the Company through a
non-exclusive licensing arrangement with the University of Manitoba in Winnipeg,
Canada.
Insurance coverage by federal government insurance programs for home
use in the United States of non-invasive ventilatory support products like the
Company's BiPAP Ventilatory Support System and the Quantum Pressure Support
Ventilator is currently under review. During fiscal years 1998 and 1999, the
Company's sales of these products for home use in the United States were
adversely affected by the uncertainty in the market that this review created and
the corresponding reduction in purchases of these
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units by the Company's dealer customers pending resolution of these coverage
guidelines. The Company expects that its sales of non-invasive ventilatory
support units for home use in the United States will continue to be negatively
impacted and could be further depressed as compared with periods prior to this
government review until final coverage guidelines are issued, or for the
foreseeable future if final guidelines are issued that are either as restrictive
as, or more restrictive than, the currently drafted guidelines. See "Business --
Third Party Reimbursement" for a detailed discussion of this matter.
Invasive Ventilation Products. The Company believes that it is also
the leading manufacturer and marketer of invasive portable volume ventilators
that are used in the home by individuals who are dependent on the ventilators
for continuous life support.
The Company's principal invasive portable volume ventilator is the
PLV-100, a microprocessor-controlled, electrically-powered unit specifically
designed for long term use in the home and also suitable for transport, short
term, and institutional use. The PLV can be used to ventilate a wide range of
patients. The small, lightweight unit delivers volume ventilation through the
operation of a piston inside the unit, and it can be powered by normal AC power
or DC battery power and can be operated in three different ventilation modes
depending on the patient's needs. The unit features a variety of alarms and
displays to alert clinicians and caregivers to changes in the patient's
pulmonary status or to possible unit malfunction. The Company manufactures and
distributes different versions of the PLV-100 for international markets based on
language differences, and it also manufactures and distributes a variety of
accessories for use with the PLV-100. The PLV-100 unit and related accessories
reach end user patients primarily through the Company's network of medical
product dealers who purchase or rent the unit from the Company and resell or
rent it to end users. In certain limited cases, the Company rents these units
directly to end users.
Oxygen Products. The Company's principal oxygen products are oxygen
concentrators, which provide a continuous flow of oxygen by separating it from
room air with a molecular sieve composed of an inorganic silicate. Oxygen
concentrators are generally used in the home by patients who require
supplemental oxygen. Supplemental oxygen is prescribed for people with a variety
of chronic pulmonary disorders, such as lung cancer, emphysema, bronchitis or
acute pneumonia. These individuals generally rent an oxygen delivery system from
a home medical equipment dealer. The Company believes it is currently one of the
leaders in the manufacture and sale of oxygen concentrators in the United
States.
The Company offers two primary oxygen concentrator products, the
Alliance series and the recently introduced Millenium series, both of which
produce a continuous flow of up to 95% oxygen. Both units are designed to be
easy to maintain and service and are suitable for chronic patients in the
advanced stages of illness and for the less severe respiratory patient.
The Company also manufactures and markets oximeter products for use in
the home. The units, which allow patients to take readings of their blood oxygen
levels and pulse rate, feature the capability to store up to 18 hours of data.
This data can be later downloaded via the Company's software, which prints
reports for oximetry analysis.
Monitoring Products. The Company's primary monitoring products are
designed for infants at risk for sudden infant death syndrome or "SIDS". SIDS is
the sudden unexpected death of an infant which remains unexplained after
investigation and is one of the leading causes of death in the United States of
infants between one month and one year of age. Despite extensive research, the
causes of SIDS remain unknown. High risk infants who are prescribed home
monitors include infants with low birth weight, those who are premature, those
who survive serious cardiorespiratory episode and those born to a family with a
SIDS incident history. There are limited alternative monitoring technologies
generally available.
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The Company's primary infant monitor is the SmartMonitor, a fifth-
generation microprocessor-based design that incorporates many aspects of a
physiological recorder into the traditional monitor. In addition to sounding an
alarm to alert the parents, the SmartMonitor documents patient episodes with an
internal electronic memory system, enabling physicians to study up to six
channels of patient waveforms in order to assess the medical significance of the
alarm episodes and determine the need for continued monitoring or possible
hospitalization. The data collected by the SmartMonitor can be transmitted from
the home to a clinical center over phone lines or can be extracted from the
SmartMonitor using a memory transfer device such as a computer or "memory
module."
The Company also manufactures and markets the Wallaby II Phototherapy
System, a cost-effective alternative to conventional overhead phototherapy
lights for treating newborn jaundice, a condition which is caused by elevated
levels of bilirubin in the blood and which, in severe cases, can result in brain
damage.
The Company also markets the BiliCheck Non-Invasive Bilirubin
Analyzer, a non-invasive device that measures the level of bilirubin in the
blood of infants. The current method of measuring bilirubin levels to diagnose
jaundice in infants, the "heel stick", involves drawing blood from the infant
and is a painful, costly and time consuming procedure. BiliCheck replaces the
heel stick by analyzing reflected light shined on an infant's forehead to
generate immediate and painless test results at a low cost. The Company has
exclusive distribution rights in the United States for the BiliCheck, and the
device has received its initial clearance to market from the FDA. Additional
clearances from the FDA are being pursued to broaden the application of the
BiliCheck.
Sales of homecare products accounted for 85%, 87%, and 88% of the
Company's net sales for its fiscal years 1999, 1998 and 1997, respectively.
Hospital Products
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The Company's original hospital product is the Hospital BiPAP
Ventilatory Support System, which includes accessories such as an airway
pressure monitor, a detachable control panel, a disposable circuit and a
mounting stand, all of which are designed to allow the BiPAP Ventilatory Support
System to be used more easily in delivering non-invasive ventilatory support in
the hospital environment.
The Company's next generation non-invasive unit for the hospital
market is the BiPAP Vision, which was released for domestic distribution during
fiscal year 1999. The BiPAP Vision features an integrated display screen and an
optional oxygen module, provides higher flow and pressure functions than the
Company's other non-invasive units, and is designed to be easily upgradeable
when advanced technology becomes available.
During fiscal year 1999, the Company also introduced Esprit, a new
ventilator for use in the hospital and institutional settings. Esprit is
designed to effectively deliver both invasive and noninvasive ventilation, thus
eliminating the need to use two separate ventilators for one patient and
allowing it to be used throughout the continuum of patient care. Esprit features
a Graphical User Interface with an infrared touch screen, alarm and status
indicators designed to allow rapid assessment of alarm conditions and patient
status, and is designed to be easily upgradeable when advanced technology
becomes available. The Esprit has received FDA clearance to market and is being
distributed in domestic and international markets.
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The Company also manufactures, distributes and rents several other
ventilation products, including a version of the PLV-100 designed more
specifically for institutional use.
Sales of hospital products accounted for 9%, 6%, and 6% of the
Company's net sales for fiscal years 1999, 1998 and 1997, respectively.
Asthma and Allergy Products
----------------------------
The asthma device market is comprised primarily of peak flow meters
and drug delivery systems, including spacer devices. A peak flow meter provides
an objective measure of lung function and is used by the patient at home to
assist in the management of asthma. A spacer, when used with a metered dose
inhaler (MDI), facilitates the delivery of asthma medications.
The Company believes that it is currently the national leader in the
sale of peak flow meters, with products that include the ASSESS peak flow meter
and the portable peak flow meter, PERSONAL BEST. The Company's drug delivery
device, OptiHaler, is consistent with new medical reimbursement guidelines,
which give preference to metered-dose delivery systems. The Company also markets
a spacer product known as OptiChamber. In addition, the revised National Asthma
Education and Prevention Program ("NAEPP") Guidelines issued in March 1997 have
placed further emphasis on the use of peak flow meters and spacers to ensure
effective asthma management. OptiChamber represents an important growth area
based upon NAEPP's expanded indications for MDI anti-inflammatory therapy,
including new recommendations for use with children under five years of age.
The Company's asthma products are sold through its subsidiary,
Respironics HealthScan, Inc., ("HealthScan") located in Cedar Grove, New Jersey.
Several distribution channels are used, including specialty hospital dealers.
The Company also distributes several models of medication nebulizers,
which dispense medication in a fine mist for inhalation deep into the lungs,
under the trade name Inspiration. The primary uses for nebulizers have been in
the treatment of respiratory diseases, such as emphysema and chronic bronchitis,
and conditions such as asthma or allergies. The Company's models utilize a
compressor to direct a flow of air through the nebulizer chamber which contains
medication in liquid form. An increase in the number of available respiratory
medications in recent years, coupled with the cost of efficacy of aerosol
delivery methods, has contributed to the growth of this market.
Sales of asthma and allergy products accounted for 6%, 7%, and 6% of
the Company's net sales for fiscal years 1999, 1998 and 1997, respectively.
Manufacturing and Properties
Domestic:
The Company's corporate headquarters is located in a leased facility
in Pittsburgh, Pennsylvania and its primary domestic manufacturing operations
are located in Murrysville, Pennsylvania (approximately 20 miles east of
Pittsburgh), Marietta, Georgia (approximately 25 miles north of Atlanta), and
Westminster, Colorado (approximately 10 miles north of Denver). The Company's
primary distribution and service facility is located in Youngwood, Pennsylvania
(approximately 30 miles east of Pittsburgh). The Company also maintains 19
Customer Satisfaction Centers in major cities throughout the United States. See
Note E to the Consolidated Financial Statements for additional information
regarding leased facilities. As part of its planned restructuring, the Company
will be closing its Westminster, Colorado facility and its 19 Customer
Satisfaction Centers. The majority of these
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facilities are expected to be closed by December 31, 1999. Additionally, the
Marietta, Georgia facility will be reduced in size by the end of the current
fiscal year.
The Murrysville facility is a 116,000 square foot building that was
first occupied in July 1990 and expanded to its current size in November 1993.
The entire facility is subject to mortgages used to secure financing related to
the construction and expansion of the facility. See Note D to the Consolidated
Financial Statements for additional information regarding the mortgages and the
financing. The facility is a one and one-half story building of steel and
concrete construction that had a total cost, including the expansion, of
approximately $7,800,000.
The Marietta facility consists of 127,000 square feet of leased space
in three essentially adjacent buildings in an industrial park. The facility is
similar in design, construction and layout to the Murrysville and Westminster
facilities.
The Westminster facility is a 74,000 square foot building that was
first occupied in October 1994. The facility is owned and is subject to
mortgages used to secure financing related to the construction of the facility.
See Note D to the Consolidated Financial Statements for additional information
regarding the mortgages and the financing. The facility is a one story building
of steel and concrete construction that had a total cost of approximately
$3,700,000.
The Youngwood facility is an 86,000 square foot building that is
leased and is located in an industrial park near several interstate highways and
a United Parcel Service distribution center.
The Company leases space ranging from 2,000 to 5,500 square feet for
each of the Customer Satisfaction Centers.
The Company leases a 28,000 square foot research and development,
manufacturing, and office facility in Vista, California that houses certain of
the Company's hospital product operations.
The Company also leases a 22,000 square foot office facility in Plum
Borough, Pennsylvania, approximately two miles from the existing Murrysville
facility. This leased facility currently houses certain research and development
projects and technical service groups.
The Company leases a 6,000 square foot facility in Cedar Grove, New
Jersey that functions as the headquarters for the Company's Respironics
HealthScan subsidiary. See "Asthma and Allergy Products".
International:
The Company's Far East Administrative headquarters are located in a
28,000 square foot leased facility in Kowloon, Hong Kong.
The Company conducts a portion of its patient mask manufacturing and
certain other high volume production of plastic components in a facility in
Shenzhen City in the Peoples Republic of China, bordering Hong Kong, and in
Subic Bay, Philippines. The Shenzhen facility is leased and the present
manufacturing space totals approximately 66,000 square feet. The facility is
located in a special economic zone (where the Company has been operating since
1987) that was established by the Peoples Republic of China in 1980 to induce
foreign investment. The Subic Bay facility, totaling approximately 10,000 square
feet, is also leased.
The Company's European facilities (all of which are leased) include a
12,000 square foot office and warehouse facility in Herrsching, Germany; a
4,000 square foot office and warehouse facility in Wendelstein, Germany; a
3,000 square feet office and warehouse facility in Nantes, France; and a 500
square foot office in Paris, France.
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Operations in the Far East and Europe are subject to the risks
normally associated with foreign operations including, but not limited to,
foreign currency fluctuations, possible changes in export or import restrictions
and the modification or introduction of other governmental policies with
potentially adverse effects. The change of control in Hong Kong from British to
Chinese rule has not affected the Company's operations.
The Company believes that the restructured facility configuration
described above is suitable and adequate for its current and presently
anticipated future needs. While several facilities are extensively utilized,
additional productive capacity is available through a variety of means including
augmenting the current partial second shift work schedule at the United States
facilities. Rental space, which the Company believes is readily available and
reasonably priced near each current location, could be utilized as well. The
Company also owns approximately 20 acres of land adjacent to the 10 acre site on
which the Murrysville facility is located. Future expansion in Murrysville, if
needed, could take place on this 20 acre site.
The Company generally performs all major assembly work on all of its
products. It manufactures the plastic components for its face mask products and
uses subcontractors to supply certain other components. The Company believes
that the raw materials for all of its products are readily available from a
number of suppliers.
Sales, Distribution and Marketing
The Company sells and, in some cases, rents its products primarily to
home care and hospital dealers. These parties in turn resell and rent the
Company's products to end users. The Company's products reach its customers in
the United States primarily through the Company's field network, which consists
of 15 sales management employees, 93 direct sales representatives and sales
support specialists, 40 independent manufacturers' representatives and over
5,000 medical products distributors (also referred to as "dealers").
The Company manages its U.S. dealer network through the direct sales
force and independent manufacturers' representatives. The Company's sales
management team includes a Vice President of Homecare Sales, a Vice President of
Hospital Sales, a manager of Asthma and Allergy sales, twelve Regional Sales
Managers, and a National Accounts Manager. This team directs the activities of
the independent manufacturers' representatives, direct sales representatives and
sales support specialists.
The Company's international sales efforts are conducted through a Vice
President of International Sales, a Director of European Sales, a South
American Sales Manager, and a Director of Far East Sales. The Company also has
direct sales representatives and a customer satisfaction staff in the Far East,
Germany and France. The Company's international sales employees sell products
from all three major product groups. International sales accounted for
approximately 22%, 22%, and 21% of the Company's net sales for fiscal year 1999,
1998 and 1997, respectively.
The Company's marketing organization is currently staffed by Product
Managers, who are assigned to each of the Company's principal product groups.
The Product Managers stay abreast of changes in the marketplace, with an
emphasis on product use specifications, features, price, promotions, education,
training and distribution.
The Company's U.S. dealer customer base (which ranges in size from
large, publicly held dealers with several hundred branch locations to small,
owner-operated dealers with one location) is undergoing significant
consolidation, particularly among dealers specializing in home care products.
The impact on the Company of this customer consolidation is likely to continue
to be reduced selling prices for the Company's
11
<PAGE>
products as a result of greater purchasing power and market dominance enjoyed by
larger customers.
Competition
The Company believes that the principal competitive factors in all of
its markets are product and service performance and innovation, efficient
distribution and competitive price. Price competition has become more intense in
the last several years. In the case of a number of the Company's and its
competitors' products, patent protection is becoming more prevalent and of
increasing competitive importance. The Company competes on a product-by-product
basis with various other companies, some of which have significantly greater
financial and marketing resources and broader product lines.
The Company believes that it is the U.S. market leader for OSA therapy
products, non-invasive ventilatory support products, infant monitors, sleep
diagnostic devices, and peak flow meters. However, other manufacturers,
including other larger and more experienced manufacturers of home health care
products, are active in these markets and the Company expects that competition
will increase. In its major product lines, the Company competes with two
principal competitors, Mallinckrodt, Inc. ("Mallinckrodt") and ResMed, Inc.
("ResMed"). Mallinckrodt, which is the Company's largest major competitor and
has the greatest financial resources of the Company's competitors, offers an
array of products which compete with all of the Company's major products. ResMed
competes with the Company in the OSA and non-invasive ventilatory support
markets. In its other product lines, the Company also competes with Invacare
Corp., Monaghan Medical Corporation, and with divisions of Sunrise Medical, Inc.
and Thermo Election Corporation. Additionally, the Company competes with a
number of foreign manufacturers, primarily in their local overseas markets and
to a lesser extent in the domestic market.
Similar to the Company's customer base, the medical device
manufacturing industry is also undergoing significant consolidation. Several of
the Company's competitors have completed mergers, most notably the acquisition
of Nellcor-Puritan Bennett by Mallinckrodt. The impact on the Company of this
competitor consolidation is likely to be greater competition from medical device
manufacturers which can utilize the financial and technical resources that may
be made available as a result of the consolidation.
Research and Development
The Company believes that its ability to identify product
opportunities, to respond to the needs of cardiopulmonary and other physicians
and their patients in the treatment of respiratory and other disorders and to
incorporate the latest technological innovations into its medical products has
been and will continue to be important to its success. The Company's research
and development efforts are focused on understanding the problems faced by
cardiopulmonary physicians and their patients' needs and on maintaining the
Company's technological leadership in its core product areas. The Company
maintains both formal and informal relationships with physician practitioners
and researchers to supplement these research and development efforts. The
Company's research and development efforts enable it to capitalize on
opportunities in the respiratory medical product market by upgrading its current
products as well as developing new products.
The Company conducts substantially all of its research and development
for existing and potential new products in the U.S. The Company currently
employs approximately 190 engineers, technicians and support personnel in such
activities. The research and development staff performs overall conceptual
design work for all products and the design work related to the manufacturing,
engineering and tooling for products manufactured by the Company. The Company
spent approximately $16,714,000 (5% of net sales in fiscal year 1999),
$20,225,000 (6% of net sales) in fiscal year 1998 and
12
<PAGE>
$17,836,000 (6% of net sales) in fiscal year 1997 to support product enhancement
and new product development.
New product introductions in all of the Company's core product areas
took place during fiscal year 1997, 1998 and 1999, including products in the
Great Performers family, the BiPAP Vision, the Esprit ventilator, new versions
of the Tranquility and Quantum Units, the Millenium Oxygen Concentrator, a new
sleep diagnostic product, several new face mask products, and BiliChek, an
infant bilirubin measurement device. The Company expects to release a variety of
new devices in its core product areas in fiscal year 2000. In some cases,
initial distribution has been, and will be, conducted in international markets
until regulatory clearance to market in the U.S. is obtained. See "Regulatory
Matters".
In addition to its development efforts in its core product areas, the
Company is actively pursuing product development activities in a variety of new
markets, including fetal monitoring, congestive heart failure, tracheal gas
insufflation and humidification.
The Company licenses proprietary technology in the area of fetal
oximetry monitoring and is developing a fetal oximetry product utilizing this
technology. The current technology utilized in the United States for determining
fetal well-being during labor and delivery involves monitoring fetal heart rate.
The Company believes that fetal heart rate is reliable as a measure of fetal
distress only about 50% of the time, and as a result unnecessary cesarean
deliveries are performed, increasing costs and medical/legal exposure. The
Company's fetal oximetry technology will give clinicians new oxygen data
relative to fetal well being and will also provide heart rate data, thereby
providing a more complete picture of the fetus's status. The fetal oximetry
product is currently undergoing clinical evaluation.
Research has indicated that more than 50% of the patients with
congestive heart failure also have apnea, and one-third of the patients also
experience Cheyne-Stokes respiration ("CSR"), a form of sleep apnea with
abnormal breathing patterns that may accelerate deterioration in cardiac
function and cause higher morbidity and mortality rates if untreated. The
Company believes that if the apnea is identified and treated, the apneas can be
eliminated and the quality of life of patients can be improved. Additionally,
the Company believes that positive pressure therapy may eliminate CSR events and
reduce the effects of CSR on heart failure. Research is being conducted to
evaluate the long-term effects of positive pressure therapy on heart failure.
The Company is also developing a system capable of reducing carbon
dioxide blood gas levels in patients with elevated carbon dioxide levels. This
tracheal gas insufflation system is expected to be introduced in calendar year
2000 pending FDA clearance to market.
The Company is also developing a humidification system designed to
provide optional humidification at lower usage cost than current products, and
is expected to be introduced in calendar year 2000 pending FDA clearance to
market.
The Company maintains a New Ventures Group at its facility in Plum
Borough, Pennsylvania. Lead by a Senior Vice President, this group of employees,
which includes engineers, researchers and technicians, is charged with
identifying product, technology, and business opportunities outside of the
Company's core products areas.
Patents, Trademarks and Licenses
The Company seeks patent protection for certain of its products
through the prosecution and acquisition of patents and exclusive licensing
arrangements. In addition, the Company aggressively defends its patents when
infringed by other
13
<PAGE>
companies. The Company currently has approximately 150 U.S. and foreign patents
and has additional U.S. and foreign patent applications pending.
The Company also has approximately 225 registered U.S. and foreign
trademarks and has additional U.S. and foreign trademark applications pending.
The Company is a party to one legal action relating to its patents
and the patents of its competitors. See "Item 3 - Legal Proceedings" for more
information regarding these actions.
Regulatory Matters
The Company's products are subject to regulation by, among other
governmental entities, the FDA and corresponding foreign agencies. The FDA
regulates the introduction, manufacture, advertising, labeling, packaging,
marketing and distribution of and recordkeeping for such products. In
manufacturing and marketing its products, the Company must comply with FDA
regulations and is subject to various other FDA recordkeeping requirements and
to inspections by the FDA. The testing for and preparation of required
applications can be expensive, and subsequent FDA review can be lengthy and
uncertain. The FDA also regulates the clinical testing of medical devices.
Moreover, clearance or approval, if granted, can include significant limitations
on the indicated uses for which a product may be marketed. Failure to comply
with applicable FDA regulations can result in fines, civil penalties,
suspensions or revocation of clearances or approvals, recalls or product
seizures, operating restrictions or criminal penalties. Delays in receipt of, or
failure to receive, clearances or approvals for the Company's products for which
such clearances or approvals have not yet been obtained would adversely affect
the marketing of such products in the U.S. and could adversely affect the
results of future operations.
The Company must obtain FDA or foreign regulatory approval or
clearance for marketing the Company's new devices prior to their release. There
are two primary means by which the FDA permits a medical device to be marketed.
A manufacturer may seek clearance for the device by filing a 510(k) premarket
notification with the FDA. To obtain such clearance, the 510(k) premarket
notification must establish that the device is "substantially equivalent" to a
device that has been legally marketed or was marketed before May 28, 1976. The
manufacturer may not place the device into commercial distribution in the U.S.
until a substantial equivalence determination notice is issued by the FDA. The
FDA, however, may determine that the proposed device is not substantially
equivalent, or require further information, such as additional test data or
clinical data, or require the Company to modify its product labeling, before it
will make a finding of substantial equivalence. The process of obtaining FDA
clearance of a 510(k) premarket notification, including testing, preparation of
the 510(k) premarket notification and subsequent FDA review, can take a number
of years and require the expenditure of substantial resources.
If a manufacturer cannot establish to the FDA's satisfaction that a
new device is substantially equivalent to a legally marketed device, it will
have to seek approval to market the device through the premarket approval
application ("PMA") process. This process involves preclinical studies and
clinical trials. The process of completing clinical trials, submitting a PMA and
obtaining FDA approval takes a number of years and requires the expenditure of
substantial resources. In addition, there can be no assurance that the FDA will
approve a PMA. The Company's export activities and clinical investigations also
are subject to the FDA's jurisdiction and enforcement.
Foreign regulatory approvals vary widely depending on the country. The
Company has received ISO 9001 certification for its Murrysville, Marietta and
Westminster facilities from the International Organization of Standards, a
quality standards organization based in Geneva, Switzerland. The Company has
also received authorization for the same facilities, under the European Union's
Medical Device
14
<PAGE>
Directives, to affix the "CE Mark" to the Company's products marketed throughout
the world. The primary component of the certification process was an audit of
the facilities' quality systems conducted by an independent agency authorized to
perform conformity assessments under ISO guidelines and the Medical Device
Directives. Since receiving its original ISO 9001 certification, these
facilities have undergone periodic update audits by such independent agencies.
Third Party Reimbursement
The cost of a significant portion of medical care in the U.S. is
funded by government and private insurance programs, such as Medicare, Medicaid
and corporate health insurance programs including health maintenance
organizations and managed care organizations. The Company's future results of
operations and financial condition could be negatively affected by adverse
changes made in the reimbursement policies for medical products under these
insurance programs. If such changes were to occur, the ability of the Company's
customers (medical product distributors and dealers) to obtain adequate
reimbursement for the resale or rental of the Company's products could be
reduced. In recent years, limitations imposed on the levels of reimbursement by
both government and private insurance programs have become more prevalent.
Early in calendar year 1998, government policy makers began a review
of the coverage guidelines for home use in the United States of non-invasive
ventilatory support products like the Company's BiPAP Ventilatory Support
Systems and Quantum Pressure Support Ventilators. The majority of end users of
these products participate in federal government insurance programs that are
impacted by the decisions of HCFA regarding these coverage guidelines. As part
of this review process, the DMERC's, which are the entities that process
insurance claims for federal government insurance programs, attended a
"consensus conference" on non-invasive ventilation in February 1998. This
consensus conference was organized and attended by members of the National
Association for Medical Direction of Respiratory Care, an association of
clinicians involved in respiratory care. Other attendees included
representatives from HCFA, the DMERC's, representatives from major medical and
trade associations and equipment manufacturers and distributors. The conference
was intended to develop a consensus regarding appropriate clinical criteria for
the use of non-invasive ventilation in the home. During the third and fourth
quarters of fiscal year 1998 and throughout fiscal year 1999, the Company's
sales of non-invasive ventilatory support products for home use in the United
States were adversely affected by the uncertainty in the market that this
coverage guideline review created and the corresponding reduction in the
purchase of these units by the Company's dealer customers pending resolution of
the coverage guidelines.
In July 1998, the DMERC's issued their draft basic coverage policy for
the use of non-invasive ventilation in the home. These draft guidelines as
issued were believed by industry observers to be more restrictive than the
findings of the consensus conference, particularly with regard to the
certifications required of prescribing physicians, the requirement of in-
hospital testing prior to use and the requirement for a three part evaluation
during this in-hospital testing. In addition, the guidelines as drafted appeared
to contemplate changes in reimbursement classifications in addition to changes
in coverage policies.
The Company filed formal comments on the DMERC draft guidelines in
September 1998 as permitted by DMERC and HCFA regulations. A variety of trade
and medical associations, device manufacturers and home care distributors also
filed formal comments. The Company, and the other groups filing comments, agreed
that while coverage guidelines were needed, the guidelines as drafted were too
restrictive, did not reflect the findings of the consensus conference and would
in fact increase the total cost of medical care for patients who could benefit
from non-invasive ventilatory support in the home while at the same time
limiting patient access to this type of therapy.
15
<PAGE>
On May 28, 1999, revised coverage guidelines were issued, which
included significant revisions to the initial draft guidelines. The revised
guidelines reflected input from the medical community and helped clarify many of
the questions regarding the identification of appropriate patients for non-
invasive positive pressure ventilation therapy. Additionally, the DMERCs removed
certain restrictive provisions from the policy, including provisions limiting
the prescription of the therapy to only board certified pulmonologists and
requiring sleep lab testing for all patients with Chronic Obstructive Pulmonary
Disease. Further the DMERCs added special provisions for patients already on
this therapy that permits continued coverage without the need to meet the
testing parameters set forth under the new coverage policy. In addition, the
Company was informed that HCFA has delayed the proposed changes in reimbursement
classification from the "frequent and substantial service" category to the
"capped rental" category.
In spite of those revisions, the Company believes that the DMERCs have
still eliminated other important conclusions reached in the consensus conference
report and, as a result, the current draft proposal is still overly restrictive
for patients and administratively burdensome for clinicians and healthcare
providers. In addition, the DMERCs added a provision to the guidelines that
requires the use of bi-level OSA therapy to determine its effectiveness before
bi-level non-invasive positive pressure ventilation therapy can be utilized and
covered. The Company intends to diligently support the physician organizations
in their efforts to establish acceptable prescription guidelines and to work
cooperatively with the DMERCs to assure appropriate patient access.
The revised coverage guidelines described above are currently
scheduled to become effective on October 1, 1999. The Company plans to
aggressively continue its education and lobbying efforts up through the
currently planned effective date. While it is possible that this effective date
may be delayed pending further review or that the coverage guidelines may be
changed, the Company cannot predict with certainty the final timing or content
of the coverage guidelines.
Because of the continued uncertainty of the marketplace caused by this
continuing guideline review, sales of the Company's non-invasive ventilatory
support products for home use in the United States were adversely affected
during fiscal year 1999. The Company expects that its sales of these units will
continue to be negatively impacted and could be further depressed as compared
with periods prior to the government review until the final guidelines are
issued, or for the foreseeable future if final guidelines are issued that are
either as restrictive as, or more restrictive than, the currently drafted
guidelines. During the quarter ended June 30, 1999, sales of non-invasive
ventilatory support units for home use in the United States accounted for
approximately 7% of the Company's total sales.
The Company has obtained "procedure codes" for its home care products
from HCFA. These procedure codes enhance the ability of medical product
distributors and dealers to obtain reimbursement for providing products to
patients covered by Medicare. In addition, many private insurance programs also
use the HCFA procedure code system. However, reimbursement levels can be reduced
after a procedure code has been established.
The amount of reimbursement that a hospital can obtain under the
Medicare diagnosis related group ("DRG") payment system for utilizing the
Company's products in treating patients is a primary determinant of the revenue
that can be realized by medical product distributors and dealers who resell or
rent the Company's hospital products. Many private insurance programs also
utilize the Medicare DRG system. The various uses of the Company's hospital
products to treat patients are provided within the DRG system. The levels of
reimbursement under the DRG system are also subject to review and change.
16
<PAGE>
Employees
The Company currently has approximately 1,900 employees, including
approximately 700 hourly employees in the U.S. and 375 hourly employees in the
Far East. None of the Company's employees are covered by collective bargaining
agreements. The Company considers its labor relations to be good and has never
suffered a work stoppage as a result of a labor conflict.
Financial Information About Foreign and Domestic Operations and Export Sales
Financial information concerning foreign and domestic operations and
export sales is discussed in Item I "Business-Sales, Distribution and Marketing"
and set forth in Note I of the Consolidated Financial Statements included in
this Annual Report.
Item 2. Properties
----------
Information with respect to the location and general character of the
principal properties of the Company is included in Item 1 "Business-
Manufacturing and Properties".
Item 3. Legal Proceedings
-----------------
U.S. ResCare Litigation
In January 1995 ResCare (now ResMed Limited; hereinafter "ResCare"),
a former subsidiary of ResMed, filed an action (the "California suit") against
the Company in the United States District Court for the Southern District of
California alleging that in the manufacture and sale in the U.S. of nasal masks
and CPAP systems and components, the Company infringes three U.S. patents, two
of which are owned by and one of which is licensed to ResCare (the "ResCare
Patents"). The patents involved in the California suit deal with basic CPAP,
mask applications and with a delay timer feature of ResCare's CPAP devices. In
the complaint, ResCare seeks preliminary and permanent injunctive relief, an
accounting for damages and an award of three times actual damages because of the
Company's alleged willful infringement of the ResCare patents.
In its answers to ResCare's complaint, the Company denied, in all
material respects, the allegations of the complaint. The Company also filed an
action in the United States District Court for the Western District of
Pennsylvania against ResCare seeking declaratory judgments that the ResCare
patents in issue are either invalid or unenforceable or that the Company does
not infringe the patents.
Also as part of its response to the ResCare complaint, the Company
filed a motion in the United States District Court for the Southern District of
California seeking to transfer the California suit to the United States District
Court for the Western District of Pennsylvania and to consolidate the two suits.
The motion was granted and the cases have been consolidated in Pittsburgh,
Pennsylvania.
In June 1996 ResCare filed another action against the Company in the
United States District Court for the Western District of Pennsylvania alleging
that in the manufacture and sale in the U.S. of CPAP systems, the Company
infringes a fourth U.S. patent that had been recently issued to ResCare relating
to the delay timer technology component used in CPAP systems. In this additional
litigation, ResCare seeks similar damages as in the pre-existing patent suit.
This suit was consolidated, upon the
17
<PAGE>
Company's motion, with the pre-existing patent suits described above and
discovery is now proceeding on the consolidated action. No trial date has been
set.
In January 1998, the Court granted the Company's motion for summary
judgment that it does not infringe ResCare's mask patent. In September 1998, the
Court granted the Company's motion for summary judgment that it does not
infringe ResCare's basic CPAP patent. The Company's motion for summary judgment
as to non-infringement of a third ResMed patent is pending. It is the Company's
belief, based upon its investigation and discovery to date, that the ResCare
patents are invalid or unenforceable and that, even if they are valid and
enforceable, none of the Company's products infringe any of the patents. The
Company intends to vigorously defend and pursue this litigation and strongly
believes that the outcome should be favorable to the Company.
AirSep Patent Infringement Litigation
In November 1996, the Company filed an action in the United States
District Court for the Western District of Pennsylvania against Airsep
Corporation ("Airsep") alleging that Airsep infringes one of the Company's
patents covering its bi-level OSA technology and seeking a preliminary and
permanent injunction, damages for infringing sales, and special damages for
willful infringement.
Airsep answered the Company's complaint and denied, in all material
respects, the allegations of the Company's complaint and filed a counterclaim
alleging that the Company's bi-level patent involved in the litigation was
invalid and was unenforceable.
After a hearing, the Court entered an injunction in November 1997
preliminarily enjoining AirSep from infringing the Company's bi-level patent.
AirSep filed an appeal with the United States Court of Appeals for the Federal
Circuit. In September 1998 the Appeals Court affirmed the preliminary
injunction.
Pursuant to a settlement agreement, the Court entered a Final
Judgment ending the litigation in March 1999. The Final Judgment concluded that
AirSep infringed the Respironics patent, rejecting AirSep's legal challenges to
the validity and enforceability of the Respironics' patent. The Final Judgment
also put in place a permanent injunction preventing AirSep from selling
infringing bi-level sleep therapy products.
Healthdyne Technologies, Inc. Shareholders Litigation
As noted in the Healthdyne Technologies Form 10-Q for the quarter
ended June 30, 1997, Healthdyne Technologies, Inc. (now Respironics Georgia,
Inc.) ("Healthdyne") and certain of its directors were defendants in a class
action lawsuit brought on behalf of Healthdyne shareholders in connection with
an unsuccessful takeover bid for Healthdyne made by Invacare Corp. The
shareholder litigation was covered by insurance, and the Company previously
stated that it believed the lawsuit was mooted by the merger of Healthdyne with
and into a wholly-owned subsidiary of the Company. The District Court dismissed
this matter in February, 1999.
Other Matters
The Company is, as a normal part of its business operations, a party
to other legal proceedings in addition to those described above. Legal counsel
has been retained for each proceeding and none of these proceedings is expected
to have a material adverse impact on the Company's results of operations or
financial condition.
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<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
During the fourth quarter of the fiscal year 1999, no matters were
submitted to a vote of security holders.
PART II
Item 5. Market For Registrant's Common Equity and Related Shareholder Matters.
---------------------------------------------------------------------
As of June 30, 1999, 32,999,283 shares of the Company's common stock
were issued and outstanding, of which 2,689,683 are held in treasury. 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 7, 1999, there
were 2,303 holders of record of the Company's common stock.
The Company has never paid a cash dividend with respect to its common
stock and does not intend to pay cash dividends in the foreseeable future.
High and low sales price information for the Company's common stock
for the applicable quarters is shown below.
Fiscal year ending June 30, 1999:
First Second Third Fourth
------ ------ ------ ------
High $19.88 $20.75 $21.38 $16.12
Low $11.25 $ 9.88 $10.81 $12.38
Fiscal year ending June 30, 1998:
First Second Third Fourth
------ ------ ------ ------
High $28.13 $30.38 $29.63 $29.13
Low $21.00 $21.50 $20.63 $14.50
19
<PAGE>
Item 6. Selected Financial Data
-----------------------
<TABLE>
<CAPTION>
(Dollars in thousands except per share data)
Income Statement Data:
Year Ended June 30
1999 1998 1997 1996 1995
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales $ 357,571 $ 351,576 $ 314,542 $236,471 $203,704
Cost of goods sold 186,487 180,650 161,283 120,597 108,794
--------- --------- --------- -------- --------
171,084 170,926 153,259 115,874 94,910
General and administrative
expense 43,521 37,200 30,103 23,038 19,824
Sales, marketing and
commission expense 60,899 65,560 58,391 42,327 36,423
Research and development
expense 16,714 20,225 17,836 14,567 11,413
Restructuring charges 2,415 -0- -0- -0- -0-
General and administrative
expense - special addition
to allowance for doubtful
accounts 5,000 -0- -0- -0- -0-
Merger related costs -0- 40,751 -0- -0- -0-
Costs associated with
unsolicited offer to acquire
Healthdyne Technologies, Inc. -0- 650 2,150 -0- -0-
Interest expense 5,206 4,189 3,173 2,514 1,625
Other income (1,127) (1,513) (2,379) (1,900) (1,619)
--------- --------- --------- -------- --------
Income before income taxes 38,456 3,864 43,984 35,328 27,244
Income taxes 15,395 5,689 17,559 13,842 10,323
--------- --------- --------- -------- --------
Net income $ 23,061 $ (1,825) $ 26,425 $ 21,486 $ 16,921
========= ========= ========= ======== ========
Earnings per share $ 0.72 $ (0.06) $ 0.82 $ 0.71 $ 0.58
========= ========= ========= ======== ========
Weighted average number
of shares used in computing
earnings per share 31,956 32,098 32,352 30,285 29,008
Balance Sheet Data:
June 30
1999 1998 1997 1996 1995
--------- --------- --------- -------- --------
Working capital $ 155,336 $ 137,550 $ 110,566 $135,564 $ 71,292
Total assets 341,179 318,320 294,769 232,924 154,088
Total long-term
obligations 99,374 69,316 48,985 33,035 30,113
Shareholder's equity 194,521 200,840 191,056 162,644 91,185
</TABLE>
- -------------------------
There were no cash dividends declared during any of the periods presented in the
above table.
20
<PAGE>
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Net sales for fiscal year 1999 were $357,571,000, representing a 2%
increase in net sales over the $351,576,000 recorded in fiscal year 1998. Fiscal
year 1998 net sales represented a 12% increase over the $314,542,000 recorded in
fiscal year 1997. The fiscal year 1998 to fiscal year 1999 increase was due
primarily to increases in unit and dollar sales of the Company's obstructive
sleep apnea therapy products, non-invasive ventilatory support products for
hospital use, and oxygen concentrator products, offset by decreases in unit and
dollar sales of the Company's non-invasive ventilatory support products for home
use. The fiscal year 1997 to fiscal year 1998 increase was due to increases in
unit and dollar sales for all of the Company's major product lines and, to a
lesser extent, to sales generated by two companies acquired during fiscal year
1997 (see Note K to the Consolidated Financial Statements for additional
information regarding these acquisitions).
Sales for the second half of fiscal year 1998 and all of fiscal year
1999 were adversely impacted by decreases in sales of the Company's non-invasive
ventilatory support products for use in the home compared to prior year levels.
These sales decreases were caused by uncertainty in the market concerning
government insurance coverage guidelines for the home use of these products in
the United States and the corresponding reduction in purchases of these units by
the Company's dealer customers pending resolution of the coverage guidelines.
Government policymakers issued a draft coverage policy in July 1998 that was
more restrictive than had been expected. The Company, along with trade and
medical associations, other device manufacturers, and home care dealers, filed
formal comments as permitted with the policy makers indicating disagreement with
the draft coverage policy. In May 1999, a revised set of coverage guidelines
were issued for implementation on October 1, 1999. While several restrictive
provisions of the July 1998 draft guidelines were removed and potential changes
in reimbursement categories have been delayed, the Company believes that this
latest set of guidelines is still overly restrictive relative to patient
qualification and administratively burdensome for clinicians and healthcare
providers. As a result, the Company plans to continue to work with the
government policy makers and Congress to resolve the remaining issues. The
Company believes that until final guidelines are issued, sales of its non-
invasive ventilatory support units for home use in the United States will
continue to be negatively impacted as compared with periods prior to the
issuance of the guidelines. If the final guidelines issued are either as
restrictive as, or more restrictive than, the currently drafted guidelines, or
if significant changes in reimbursement categories are ultimately made, the
Company's sales of its non-invasive ventilatory support units for home use in
the United States will continue to be negatively impacted and could be further
depressed. In addition, the Company is also experiencing more general challenges
in its marketplace due to the January 1998 reductions in Medicare reimbursement
for oxygen therapy, which adversely affected many of the Company's dealer
customers.
The Company's gross profit was 48% of net sales for fiscal year 1999
compared to 49% of net sales for fiscal years 1998 and 1997. The decrease in
the gross margin percentage for fiscal year 1999 was due primarily to reductions
in gross margin in the fourth quarter of that year caused by a change in
distribution method for sales in Germany (see below), increased manufacturing
overhead expenses, and sales mix. The constant gross margin percentage for
fiscal years 1999 (other than the fourth quarter items noted above), 1998 and
1997 reflects the fact that decreases in average selling prices for the
Company's major products (which had been expected over the period) were offset
by manufacturing support costs increasing at rates less than the rate of sales
increase, lower product costs and sales mix.
General and administrative expenses, including additions to the
allowance for uncollectible accounts receivable, were $48,522,000 (14% of net
sales) for fiscal year
21
<PAGE>
1999 compared to $37,200,000 (11% of net sales) for fiscal year 1998 and
$30,103,000 (10% of net sales) for fiscal year 1997. The fiscal year 1999 total
shown above includes a special addition of $5,000,000 (1% of net sales) to the
Company's allowance for uncollectible accounts receivable. This special addition
was made primarily to address accounts receivable remaining uncollected that
were generated by Healthdyne Technologies, Inc. ("Healthdyne") prior to its
merger with the Company in February 1998. This addition was made in the fourth
quarter of fiscal year 1999 as a change in previous estimates resulting from
slow collections, aging deterioration, and issues affecting customers related to
accounts that management expected to collect during fiscal year 1999. The
remaining increases in expenses for the periods presented were due primarily to
increased information systems costs, legal fees, allowances for doubtful
accounts other than the special addition described above, and other
administrative expenses. The increase from fiscal year 1997 to fiscal year 1998
was also due to costs incurred by the Company's Respironics Colorado, Inc.
("Respironics Colorado") and Stimotron Medizinische Gerate GmbH ("Stimotron")
subsidiaries, since their acquisitions in October 1996 and February 1997,
respectively. Finally, amortization of the goodwill generated by those
acquisitions is included in general and administrative expenses starting at the
date of acquisitions. Increased expenses for fiscal years 1998 and 1999 were
partially offset by cost reductions that the Company obtained since the
February 1998 merger with Healthdyne.
Sales, marketing and commission expenses were $60,899,000 (17% of net
sales) for fiscal year 1999 as compared to $65,560,000 (19% of net sales) for
fiscal year 1998 and $58,391,000 (19% of net sales) for fiscal year 1997. The
decrease in these expenses from fiscal year 1998 to fiscal year 1999 was due
primarily to the cost reductions that the Company achieved since the February
1998 merger with Healthdyne. The increase in absolute dollars in these expenses
from fiscal year 1997 to fiscal year 1998 was due primarily to increased costs
for advertising, trade shows and related marketing communication activities,
international sales and marketing activities and sales and marketing management.
The increases were also due to costs incurred by the Company's Respironics
Colorado and Stimotron subsidiaries since their acquisition.
Research and development expenses were $16,714,000 (5% of net sales)
for fiscal year 1999 as compared to $20,225,000 (6% of net sales) for fiscal
year 1998 and $17,836,000 (6% of net sales) for fiscal year 1997. The decrease
in these expenses from fiscal year 1998 to fiscal year 1999 was due primarily to
the elimination of duplicate product development efforts following the merger
with Healthdyne in February 1998. The increase in these expenses from fiscal
year 1997 to fiscal year 1998 was due to continuing development work by both
Respironics and Healthdyne on a variety of new products in each major product
line. Significant product development efforts are ongoing, and new product
launches in all of the Company's major product lines took place in fiscal year
1999 with additional new product launches scheduled for fiscal year 2000.
Additional development work and clinical trials are being conducted in certain
product areas outside the Company's current core products.
During fiscal year 1999, the Company incurred $2,415,000 in costs
related to its May 1999 decision to enter into a new distribution arrangement
for sales of its products in Germany. Under the new arrangement, the Company's
products will be distributed by an independent dealer in Germany, and the
Company's direct sales efforts in that country will be significantly reduced.
Accordingly, costs were incurred to reduce the Company's German workforce and
facilities and such costs are included in the charge. As a result of this change
in distribution, the Company's sales and gross margins in Germany were reduced
starting in May 1999 because of the foregone dealer margin; however selling,
administrative, and distribution costs have been, and will continue to be,
reduced as well. The Company expects that the change in distribution will be
accretive to earnings in fiscal year 2000.
In July 1999, the Company announced a major restructuring of its
United States operations. The major components of the restructuring include the
closing of the
22
<PAGE>
Westminster, Colorado manufacturing facility, the closing of the 19 customer
satisfaction centers throughout the United States, the downsizing of the
Marietta, Georgia manufacturing facilities, the opening of the Youngwood,
Pennsylvania distribution and repair facility, the realignment of the Company
into four divisions with a corresponding management realignment and a workforce
reduction associated with the facility changes and the realignment. The majority
of facility changes are expected to be completed during the second quarter of
fiscal year 2000, and the divisional realignment is currently in place.
The total charges associated with the change in German distribution
and the restructuring described above are expected to be approximately
$25,000,000. As noted above, $2,415,000 of the charges were recorded in fiscal
year 1999 with the remainder expected to be recorded in fiscal year 2000. See
Note M to the Consolidated Financial Statements for additional information
regarding the restructuring.
During the fiscal year 1998, the Company incurred $40,751,000 in costs
related to the merger with Healthdyne. The primary components of these costs
were direct expenses of the transaction such as legal and investment banking
fees ($9,500,000), severance and other employment related costs ($9,500,000) and
asset write downs to reflect decisions made regarding product and operational
standardization (inventory; $11,000,000, other assets, $8,000,000). See Note N
to the Consolidated Financial Statements for additional information regarding
merger costs. During fiscal years 1998 and 1997, the Company also incurred a
total of $2,800,000 in costs associated with an unsolicited offer by a third
party to acquire Healthdyne.
The Company's effective income tax rate from operations (i.e.
excluding the impact of the merger costs described above) was 40% for fiscal
years 1999, 1998 and 1997. The Company's effective income tax rate for fiscal
year 1998 including the impact of the merger charges was 147% because certain of
the direct expenses of the merger transaction, such as investment banking and
legal fees, were assumed to be non-deductible for income tax purposes.
As a result of the factors described above, the Company's net income
(loss) was $23,061,000 (6% of net sales) or $0.72 per diluted share for fiscal
year 1999 as compared to $(1,825,000) (1% of net sales) or $(.06) per diluted
share for fiscal year 1998 and $26,425,000 (8% of net sales) or $0.82 per
diluted share for fiscal year 1997.
Excluding the impact of the special addition to the allowance for
uncollectible accounts receivable, restructuring costs, merger costs and the
costs associated with the unsolicited offer to acquire Healthdyne, the Company's
net income was $27,522,000 (8% of net sales) or $0.86 per diluted share for
fiscal year 1999 as compared to $27,270,000 (8% of net sales) or $0.82 per
diluted share for fiscal year 1998 and $27,714,000 (9% of net sales) or $0.86
per diluted share for fiscal year 1997.
Financial Condition, Liquidity and Capital Resources
The Company had working capital of $155,336,000 and $137,550,000 at
June 30, 1999 and 1998, respectively. Net cash provided by operating activities
was $34,158,000 for fiscal year 1999, as compared to net cash used by operating
activities of $13,042,000 for fiscal year 1998 and net cash provided by
operating activities of $19,904,000 for fiscal year 1997. The improvement in
cash flow from operating activities from fiscal year 1998 to fiscal year 1999
was due primarily to higher earnings in fiscal year 1999, including the impact
of merger costs incurred in fiscal year 1998. The deterioration in cash flow
from operating activities from fiscal year 1997 to fiscal year 1998 was due
primarily to lower earnings in fiscal year 1998 (including the impact of merger
costs incurred in fiscal year 1998), increases in inventory and accounts
receivable and decreases in accounts payable and accrued expenses.
23
<PAGE>
Net cash used by investing activities was $25,629,000, $20,013,000,
and $69,717,000 for fiscal years 1999, 1998, and 1997, respectively. Net cash
used by investing activities for fiscal year 1997 included $49,865,000 relating
to the October 1996 acquisition of LIFECARE International, Inc. and $9,000,000
relating to the February 1997 acquisition of Stimotron. The majority of the
remaining cash used by investing activities for all periods represented capital
expenditures, including the purchase of production equipment, software, computer
and telecommunications equipment, and office equipment. Funding for the LIFECARE
acquisition was provided by the proceeds from a public offering completed in
April 1996. Funding for the Stimotron acquisition was provided by a $9,000,000
loan received from a commercial bank in February 1997 under the terms of a
credit agreement The funding for the remainder of the investment activities in
all periods was provided by positive cash flows from financing activities,
accumulated cash and short-term investment balances, and for fiscal years 1999
and 1997, positive cash flows from operating activities. See Note K to the
Consolidated Financial Statements for additional information regarding these
acquisitions. See Notes D and K to the Consolidated Financial Statements for
additional information about long-term obligations and acquisition financing.
Net cash provided by financing activities includes borrowings and
repayments under the Company's various long-term obligations, proceeds from the
issuance of common stock under the Company's stock option plans, and the
acquisition of treasury stock.
In August 1998, the Company's Board of Directors authorized a stock
buy back of up to 1,000,000 shares of the Company's outstanding common stock. In
October 1998, the Board of Directors increased the authorization to a total of
up to 2,000,000 shares and in March 1999 increased the authorization to a total
of up to 3,000,000 shares. In September 1999, the Board of Directors increased
the authorization to a total of up to 4,000,000 shares. During fiscal year 1999,
the Company repurchased a total of 2,640,000 shares in open market transactions
resulting in a use of cash of $33,055,000. Shares that are repurchased are added
to treasury shares pending future use and reduce the number of shares
outstanding used in calculating earnings per share.
In May 1998, the Company finalized a $100,000,000 revolving credit
facility with a group of commercial banks. This credit facility was initially
used to refinance approximately $55,000,000 of the Company's existing long term
debt with the remaining balance of the facility available for future borrowing
and has also been used for general corporate purposes, including the stock buy
back described above. The revolving credit facility permits borrowings and
repayments until its maturity in May 2003. In December 1998, the amount of the
revolving credit facility was increased to $125,000,000. The revolving credit
facility is unsecured and contains certain financial covenants with which the
Company must comply. The Company is currently in compliance with these
covenants. The interest rate on the revolving credit facility is based on a
spread over the London Interbank Borrowing Rate ("LIBOR"). As of June 30, 1999,
the resulting interest rate on amounts outstanding under the revolving credit
facility was approximately 5.81 %. See Note D to the Consolidated Financial
Statements for additional information about the credit facility.
The Company has not provided a valuation allowance for deferred income
tax assets because it has determined that it is more likely than not that such
assets can be realized, at a minimum, through carrybacks to prior years in which
taxable income was generated.
The Company believes that positive cash flow from operating and
financing activities, the availability of additional funds under its revolving
credit facility, and its accumulated cash and short-term investments will be
sufficient to meet its current and presently anticipated future needs for fiscal
year 2000 for operating activities, investing activities, and financing
activities (primarily consisting of payments on long-term debt).
24
<PAGE>
Year 2000
Year 2000 State of Readiness
The Company began its Year 2000 readiness plan in 1998 and is
currently working towards completion. The Company has a program in place to
systematically review and evaluate its systems, products, and processes for Year
2000 compliance. The Company's Year 2000 readiness plan covers business
management, financial and accounting systems and processes, suppliers, vendors
and procurement processes, products and services, including the customer
satisfaction processes, and production, material movement and distribution
systems and processes. A full time Program Management Office ("PMO") team is
responsible for the project management and coordination of the Company's Year
2000 efforts, with assistance as needed by the services of a Year 2000
consulting firm and with oversight by an Executive Steering Committee.
Year 2000 readiness reviews of the Company's core information
technology systems are being addressed. Year 2000 compliance of the Company's
core business information systems and technology have been largely addressed
with the implementation of Year 2000 compliant enterprise-wide resource planning
("ERP") software at each of the Company's major locations. The Company's
telecommunication systems have been inventoried, tested, and determined to meet
Year 2000 readiness certification. In addition, other network and desktop
systems are presently being tested and remediated according to plan, with
critical systems targeted for November 1999 completion/certification.
A technical review of the Company's current and discontinued product
lines addressing Year 2000 issues has been completed. Three products were
identified as having minor compliance anomalies and solutions in the form of
upgrades and users manual inserts are available to customers. A strategy has
been implemented for systematically responding to customer inquiries about the
Company's product compliance status. The Year 2000 product review also covers
products that are currently in research and development or are near launch.
Based on this review, no additional issues were noted, and the Company's
investments in research and development (including acquired technology rights)
do not appear to be affected.
The Company's infrastructure, facilities, and embedded systems have
been inventoried and compliance status evaluation of critical items is nearing
completion. Vendors of embedded software products have been contacted with the
compliance status of their specific products identified and, where applicable,
remediation or contingency plans are being put into place. No non-compliance
issues have been identified related to these items, and, where applicable and
cost-beneficial, contingency plans will include compliant upgrades. The
Company's suppliers, service providers and dealer customers have been contacted
and queried about their Year 2000 readiness. Readiness status of critical
suppliers and service providers is nearing completion.
Year 2000 Costs
Total costs for the Company's Year 2000 compliance efforts are
currently estimated to be approximately $11,000,000. The majority of these costs
relate to the ERP system installations and upgrades and have been, and will be,
capitalized and charged to expense over the estimated useful life of the
associated software and hardware. The remaining costs have been, and will
continue to be, charged directly to expense. Additional costs could be incurred
if significant remediation activities are required with third party suppliers
(see below). Costs associated with Year 2000 compliance are funded through the
Company's operating cash flows.
Risks and Contingency Plans
Based on the Year 2000 compliance work conducted to date and described
above, the Company's most significant risk, and its reasonably likely worst case
scenario relative to Year 2000 compliance, appears to be that upon completion of
its review of its third party product and service providers' Year 2000
compliance, it determines that certain of its third party product and service
suppliers may not be Year 2000 compliant. If such product and service suppliers
in fact do not become Year 2000 compliant in a timely manner and these suppliers
cannot provide the Company with products and services in a timely and cost
effective manner, future operating results could be adversely affected. The
Company believes that the vendor management process that is currently in place
will identify these potential risks.
25
<PAGE>
Efforts to formalize contingency plans across the company are
underway. The contingency planning scope of work will focus on third party
products and service providers. In addition, contingency plans will be developed
as needed in the event that risks arise other than those related to third party
product and service providers.
For products and services where the Company's needs are not unique or
where a long term relationship with a supplier does not exist, a search for
alternative suppliers who are Year 2000 compliant would be conducted and
suppliers changed as needed prior to January 1, 2000. While the Company believes
that raw materials and components for its products are readily available from a
number of suppliers and believes that its service needs are not significantly
unique from other companies, it is possible that for some of its suppliers who
are identified as being non-compliant, certain remediation strategies with the
supplier may be employed, at least initially, as an alternative to switching
suppliers because of the operational difficulties that switching suppliers could
cause. These remediation strategies include, but are not limited to, increasing
purchases from the suppliers in question prior to January 1, 2000 to provide a
safety stock if the supplier experiences difficulty and providing the Company's
Year 2000 compliance resources to assist the supplier in becoming compliant.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates
and foreign exchange rates.
Interest Rates: The Company's primary interest rate risk relates to
its long term debt obligations. At June 30, 1999, the Company had total long
term obligations, including the current portion of those obligations, of
$100,342,000. Of that amount, $3,282,000 was in fixed rate obligations and
$97,060,000 was in variable rate obligations. Assuming a 10% increase in
interest rates on the Company's variable rate obligations (i.e., an increase
from the June 30, 1999 weighted average interest rate of 5.76% to a weighted
average interest rate of 6.34 %), annual interest expense would be approximately
$559,000 higher based on the June 30, 1999 outstanding balance of variable rate
obligations. The Company has no interest rate swap or exchange agreements.
Foreign Exchange Rates: A substantial majority of the Company's sales,
expenses, and cash flows are transacted in U.S. dollars. For the year ended June
30, 1999, sales denominated in currencies other than the U.S. dollar (primarily
the German mark, and to a lesser extent the French franc and the Chinese yuan)
totaled $23,325,000, or approximately 7% of total sales. For the year ended June
30, 1999, pre-tax income (loss) denominated in currencies other than the U.S.
dollar (primarily the Hong Kong dollar and the German mark) totaled ($772,000),
or approximately (2%) of total pre-tax income. An adverse change of 10% in
exchange rates would have resulted in a decrease in sales of $2,333,000 and an
increase in net income of $77,000 for the year ended June 30, 1999. The
Company's entities that operate in Germany, France, Hong Kong and China have
certain accounts receivable and accounts payable denominated in U.S. dollars in
addition to receivable and payable accounts in their home currencies which can
act to further mitigate the impact of foreign exchange rate changes. The Company
has no significant foreign currency exchange contracts that expose it to market
risk.
Inflation
Inflation has not had a significant effect on the Company's business
during the periods discussed.
26
<PAGE>
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133 "Accounting for Derivative Instruments and Hedging
Activities". As amended by FASB Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133", FASB No. 133 will be required to be adopted as of the first
quarter of fiscal year 2001. The Company intends to adopt FASB No. 133 by the
effective date although earlier adoption is permitted. The statement requires
the foreign currency contracts used by the Company to manage the risks
associated with foreign currency exchange volatility to be recorded at fair
market value, with changes in fair value reflected in earnings to the extent the
foreign currency contracts do not qualify as hedges in accordance with the
statement. The Company has evaluated its existing foreign currency contracts and
management does not believe the statement will have a material effect on
earnings for existing contracts.
Item 8. Consolidated Financial Statements
---------------------------------
Index to Consolidated Financial Statements
Report of Independent Auditors.................................. 28
Consolidated Balance Sheets as of June 30, 1999 and 1998........ 29
Consolidated Statements of Operations for the
years ended June 30, 1999, 1998 and 1997...................... 31
Consolidated Statements of Cash Flows for the
years ended June 30, 1999, 1998 and 1997...................... 32
Consolidated Statements of Shareholders' Equity
for the years ended June 30, 1999, 1998 and 1997.............. 33
Notes to Consolidated Financial Statements...................... 34
27
<PAGE>
Report of Independent Auditors
Board of Directors
Respironics, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Respironics,
Inc. and Subsidiaries as of June 30, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended June 30, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Respironics, Inc. and Subsidiaries at June 30, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1999, 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.
/s/ Ernst & Young, LLP
Pittsburgh, Pennsylvania
July 23, 1999
28
<PAGE>
CONSOLIDATED BALANCE SHEETS
RESPIRONICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
June 30
1999 1998
-----------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 23,651,401 $ 14,874,753
Trade accounts receivable, less allowance for
doubtful accounts of $13,919,000 and $8,246,000 99,253,207 90,985,120
Inventories 61,212,368 58,897,764
Prepaid expenses and other 6,328,742 5,195,638
Deferred income tax benefits 11,407,404 14,948,226
------------- -------------
TOTAL CURRENT ASSETS 201,853,122 184,901,501
PROPERTY, PLANT AND EQUIPMENT
Land 3,342,017 3,360,885
Building 12,687,961 13,564,623
Machinery and equipment 64,603,276 54,087,893
Furniture, office and computer equipment 37,719,450 27,170,001
Leasehold improvements 1,249,044 1,148,251
------------- -------------
119,601,748 99,331,653
Less allowances for depreciation
and amortization 58,371,315 50,408,095
------------- -------------
61,230,433 48,923,558
Funds held in trust for construction
of new facility 852,631 817,820
OTHER ASSETS 11,822,484 14,774,380
GOODWILL 65,420,031 68,902,667
------------- -------------
$ 341,178,701 $ 318,319,926
============= =============
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
<TABLE>
<CAPTION>
June 30
1999 1998
-----------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 26,787,172 $ 20,966,011
Accrued expenses and other 18,762,481 23,266,112
Current portion of long-term obligations 967,387 3,119,617
----------------- ----------------
TOTAL CURRENT LIABILITIES 46,517,040 47,351,740
LONG-TERM OBLIGATIONS 99,374,180 69,316,177
MINORITY INTEREST 766,035 812,116
COMMITMENTS - -
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized
100,000,000 shares; issued and outstanding
32,999,283 shares at June 30, 1999 and
32,678,632 shares at June 30, 1998 329,993 326,786
Additional capital 108,863,191 105,376,608
Accumulated other comprehensive loss (1,231,013) (1,416,465)
Retained earnings 120,709,953 97,648,469
Treasury stock (34,150,678) (1,095,505)
----------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 194,521,446 200,839,893
----------------- ----------------
$ 341,178,701 $ 318,319,926
================= ================
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
RESPIRONICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year ended
June 30
1999 1998 1997
--------------------------------------------------
<S> <C> <C>
Net sales $ 357,570,743 $ 351,576,443 $314,541,736
Cost of goods sold 186,486,458 180,650,363 161,283,031
-------------- ------------- ------------
171,084,285 170,926,080 153,258,705
General and administrative expenses 41,921,573 34,362,146 27,764,668
General and administrative expenses - increase to allowance for bad debts 6,600,000 2,838,000 2,338,000
Sales, marketing and commission expenses 60,899,432 65,560,336 58,391,202
Research and development expenses 16,713,796 20,224,584 17,835,838
Merger related costs -0- 40,751,079 -0-
Restructuring charges 2,414,844 -0- -0-
Costs related to unsolicited offer to acquired Healthdyne -0- 650,000 2,150,000
Interest expense 5,206,767 4,188,740 3,173,497
Other income (1,127,847) (1,513,291) (2,378,746)
-------------- ------------- ------------
132,628,565 167,061,594 109,274,459
-------------- ------------- ------------
INCOME BEFORE INCOME TAXES 38,455,720 3,864,486 43,984,246
Income taxes 15,394,236 5,689,220 17,559,494
-------------- ------------- ------------
NET INCOME (LOSS) $ 23,061,484 $ (1,824,734) $ 26,424,752
============== ============= ============
Basic earnings (loss) per share $ 0.73 $ (0.06) $ 0.84
============== ============= ============
Basic shares outstanding 31,521,296 32,097,955 31,292,658
Diluted earnings (loss) per share $ 0.72 $ (0.06) $ 0.82
============== ============= ============
Diluted shares outstanding 31,956,088 32,097,955 32,352,208
</TABLE>
See notes to consolidated financial statements
31
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
RESPIRONICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended
June 30
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 23,061,484 $ (1,824,734) $ 26,424,752
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 11,554,345 10,586,890 7,420,375
Amortization 4,546,355 3,428,791 2,773,294
Provision for asset write offs -0- 18,134,483 -0-
Provision for bad debts 6,600,000 2,838,000 2,335,000
Provision for deferred income taxes 3,540,822 (8,152,329) (803,924)
Changes in operating assets and liabilities:
Increase in accounts receivable (14,868,087) (11,834,737) (9,403,845)
Increase in inventories and other current assets (3,447,708) (10,499,884) (5,850,801)
Decrease (increase) in other assets 1,853,366 (1,902,889) (4,705,223)
Increase (decrease) in accounts payable and
accrued expenses 1,317,530 (13,815,149) 1,714,683
------------- ------------ ------------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 34,158,107 (13,041,558) 19,904,311
INVESTING ACTIVITIES
Purchase of property, plant and equipment (23,005,235) (20,012,780) (11,186,005)
Acquisition of businesses, net of cash acquired -0- -0- (58,531,208)
------------- ------------ ------------
NET CASH USED BY
INVESTING ACTIVITIES (23,005,235) (20,012,780) (69,717,213)
FINANCING ACTIVITIES
Proceeds from long-term obligations 28,500,000 68,500,000 21,750,000
Reduction in long-term obligations (1,450,212) (46,850,350) (22,168,575)
Issuance of common stock 3,489,790 8,378,449 3,132,056
Acquisition of treasury stock (33,055,173) (213,057) (843,560)
(Decrease) increase in minority interest (46,081) 210,044 (283,248)
------------- ------------ ------------
NET CASH (USED) PROVIDED BY
FINANCING ACTIVITIES (2,561,676) 30,025,086 1,586,673
EFFECT OF EXCHANGE RATE CHANGES ON CASH 185,452 (726,652) (689,813)
------------- ------------ ------------
INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS 8,776,648 (3,755,904) (48,916,042)
Cash and short-term investments at beginning of period 14,874,753 18,630,657 67,546,699
------------- ------------ ------------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 23,651,401 $ 14,874,753 $ 18,630,657
============= ============ ============
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
RESPIRONICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income (Loss)-
Common Stock Foreign Treasury Stock
------------------- Additional Currency Retained ----------------------
Shares Amount Capital Translations Earnings Shares Amount Total
---------- ------- ------------ -------------- ------------ ---------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1996 30,929,982 $309,300 $ 89,327,044 $ 0 $ 73,046,379 1,819 $ (38,888) $ 162,643,835
Net income for the year
ended June 30, 1997 0 0 0 0 26,426,824 0 0 26,426,824
Shares sold pursuant to
stock option plans 726,918 7,269 3,124,787 0 0 0 0 3,132,056
Acquisition of treasury
stock 0 0 0 0 0 46,000 (843,560) (843,560)
Income tax benefit from
exercise of stock
options 0 0 386,374 0 0 0 0 386,374
Translation adjustments 0 0 0 (689,813) 0 0 0 (689,813)
---------- -------- ------------ ---------- ------------ --------- ------------- -------------
BALANCE AT JUNE 30, 1997 31,656,900 316,569 92,838,205 (689,813) 99,473,203 47,819 (882,448) 191,055,716
Net loss for the year
ended June 30, 1998 0 0 0 0 (1,824,734) 0 0 (1,824,734)
Shares sold pursuant to
stock option plans 1,021,732 10,217 8,368,232 0 0 0 0 8,378,449
Net acquisition and use
of treasury stock 0 0 0 0 0 2,208 (213,057) (213,057)
Income tax benefit from
exercise of stock
options 0 0 4,170,171 0 0 0 0 4,170,171
Translation adjustments 0 0 0 (726,652) 0 0 0 (726,652)
---------- -------- ------------ ----------- ------------ --------- ------------- -------------
BALANCE AT JUNE 30, 1998 32,678,632 326,786 105,376,608 (1,416,465) 97,648,469 50,027 (1,095,505) 200,839,893
Net income for the year
ended June 30, 1999 0 0 0 0 23,061,484 0 0 23,061,484
Shares sold pursuant to
stock option plans 320,700 3,207 2,850,897 0 0 0 0 2,854,104
Net acquisition and use
of treasury stock 0 0 0 0 0 2,639,656 (33,055,173) (33,055,173)
Income tax benefit from
exercise stock options 0 0 635,686 0 0 0 0 635,686
Translation adjustments 0 0 0 185,452 0 0 0 185,452
---------- -------- ------------ ----------- ------------ --------- ------------- -------------
BALANCE AT JUNE 30, 1999 32,999,332 $329,993 $108,863,191 $(1,231,013) $120,709,953 2,689,683 $ (34,150,678) $ 194,521,446
========== ======== ============ =========== ============ ========= ============= =============
</TABLE>
See notes to consolidated financial statements.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESPIRONICS, INC. AND SUBSIDIARIES
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
- ---------------------------
The consolidated financial statements include the accounts of Respironics, Inc.
(the "Company"), its wholly owned subsidiaries, and a foreign joint venture in
which it holds a 51% ownership interest. 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 to a customer
location.
Inventories:
- -----------
Inventories are valued at the lower of cost (first-in, first-out) or market.
Property, Plant and Equipment:
- -----------------------------
Property, plant and equipment is recorded on the basis of cost. Depreciation is
computed using the straight-line method based upon the estimated useful lives of
the respective assets, which range from five to 30 years. Amortization of assets
under capital leases is included in depreciation expense.
Income Taxes:
- ------------
Provisions for income taxes include deferred taxes resulting from temporary
differences in income for financial and tax purposes using the liability method.
Such temporary differences result primarily from differences in the carrying
value of assets and liabilities.
The Company does not provide for federal income taxes on the undistributed
earnings of its foreign subsidiaries (other than deemed dividends which are
taxed currently) because such earnings are reinvested and, in the opinion of
management, will continue to be reinvested indefinitely.
Foreign Currency Translation:
- ----------------------------
The Company follows Statement of Financial Accounting Standards No. 52 for the
translation of the accounts of its foreign subsidiaries and its joint venture.
Foreign currency assets and liabilities are translated into United States
dollars at the rate of exchange existing at the statement date or historical
rates depending upon the nature of the account. Income and expense amounts are
translated at the average of the monthly exchange rates. Adjustments resulting
from these translations are credited or charged directly to accumulated other
comprehensive income (loss). Gains and losses resulting from foreign currency
transactions are credited or charged directly to income.
34
<PAGE>
Stock Options:
- -------------
Stock options are granted to certain employees and certain members of the
Company's Board of Directors at fair market value on the date of the grant.
Proceeds from the exercise of common stock options are credited to shareholders'
equity at the date the options are exercised. There are no charges or credits to
income with respect to these options. The Company follows the requirements of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" in accounting for stock based compensation.
Earnings per Share:
- ------------------
Basic earnings per share are based on the weighted average number of shares
actually outstanding. Diluted earnings per share are based on the weighted
average number of shares actually outstanding and dilutive potential shares,
such as dilutive stock options which are determined using the treasury stock
method.
Cash and Short-Term Investments:
- -------------------------------
The Company considers all highly liquid investments with a maturity of 90 days
or less when purchased to be cash and short-term investments.
Capitalized Software Costs:
- ---------------------------
Software development costs have been capitalized and are being amortized to the
cost of product revenues over the estimated economic lives (generally three to
five years) of the products that include such software. Total net capitalized
software costs were $1,096,000 and $1,978,000 at June 30, 1999 and
1998, respectively.
Advertising Costs:
- -----------------
Advertising is charged to expenses during the period in which it is incurred.
Total advertising expenses for the fiscal years ended June 30, 1999, 1998 and
1997 were $975,000, $1,138,000 and $1,006,000 respectively.
Goodwill and other Long Lived Assets:
- ------------------------------------
Goodwill is the cost in excess of the fair value of net assets of businesses
acquired and is amortized on the straight line method over periods from 15 to 40
years. Accumulated amortization was $11,664,000 and $8,117,000 at June 30, 1999
and 1998 respectively. The Company evaluates the carrying value of goodwill and
other long lived assets for potential impairment on an ongoing basis. Such
evaluation considers projected future operating results, trends and other
circumstances. If factors indicated that goodwill or other long lived assets
could be impaired, the Company would use an estimate of the related undiscounted
future cash flows over the remaining life of the goodwill or other long lived
asset in measuring whether the goodwill or other long lived asset is
recoverable. If such an analysis indicated that impairment had occurred, the
Company would adjust the book value of the goodwill or other long lived asset to
fair value.
Accrued Expenses and Other:
- --------------------------
Accrued expense and other includes accrued compensation of $6,532,000 and
$6,062,000 at June 30, 1999 and 1998 respectively.
Comprehensive Income:
- --------------------
The Company adopted Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income", during the fiscal year ended June 30, 1999.
This statement establishes standards for the reporting and display of
"comprehensive income" and its components, in addition to net income, in the
financial statements. Comprehensive income consists of net income and foreign
currency translation adjustments and is presented in the Consolidated Statement
of Shareholders' Equity. The adoption of Statement No. 130 had no impact on
total shareholders' equity. Prior year financial statements have been
reclassified to conform to the Statement No. 130 requirements.
35
<PAGE>
Use of Estimates:
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Changes in Presentation of Comparative Financial Statements:
- -----------------------------------------------------------
Certain amounts in the June 30, 1998 and 1997 financial statements were
reclassified to conform with the presentation in the current period.
NOTE B -- SHORT-TERM INVESTMENTS
Short-term investments consist primarily of money market accounts and
certificates of deposit issued by large commercial banks located in the United
States and Hong Kong. These investments are readily convertible to cash and are
stated at cost which approximates market.
NOTE C -- INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
June 30
1999 1998
----------- -----------
<S> <C> <C>
Raw materials $23,633,517 $18,540,521
Work-in-process 7,036,132 7,570,524
Finished goods 30,542,719 32,786,719
----------- -----------
$61,212,368 $58,897,764
=========== ===========
</TABLE>
36
<PAGE>
NOTE D -- LONG TERM OBLIGATIONS
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
June 30
1999 1998
----------- ------------
<S> <C> <C>
1989 Economic Development Revenue
Bonds, variable interest rate
(effective rate of 4.63%, including
letter of credit and remarketing
fees, at June 30, 1999), principal
payable in annual installments of
$200,000 through 2004 $ 1,200,000 $ 1,400,000
Industrial Development Authority
Loan, payable in monthly install-
ments of $13,777, including interest
at 3%, through June 2005 885,249 1,021,786
Redevelopment Authority Loan,
payable in quarterly installments
of $14,533, including interest at 5%,
through June 2005 331,289 371,589
Redevelopment Authority Loan,
payable in monthly installments of
$6,296, including interest at 2%,
through July 2009 684,253 746,275
Industrial Development Authority
Loan, payable in monthly install-
ments of $7,289, including interest
at 2%, through March 2010 854,713 926,144
Industrial Development Revenue Bond,
payable in quarterly installments of
$40,000 plus interest at a floating
rate (effective rate of 4.96% including
letter of credit fees at June 30, 1999)
through November 2009 4,360,000 4,520,000
Commercial Bank Credit Agreement, payable
in one lump sum in May 2003 including
interest at a floating rate
(5.81% at June 30, 1999) 91,500,000 63,000,000
Other 526,063 450,000
------------ -----------
$100,341,567 $72,435,794
Less current portion 967,387 3,119,617
------------ -----------
$ 99,374,180 $69,316,177
============ ===========
</TABLE>
37
<PAGE>
The Economic Development Revenue Bonds, the Industrial Development Authority
Loans, and the Redevelopment Authority Loans are secured by mortgages on the
Company's manufacturing facility in Murrysville, Pennsylvania. The Revenue Bond
is secured by a mortgage on the Company's facility in Westminster, Colorado.
Proceeds from the bonds and the loans were used to finance the construction and
expansion of the facilities. The Commercial Bank Credit Agreement, under which a
total of $125,000,000 is available, is unsecured. The Company is required to
meet certain financial covenants in connection with these obligations, including
those relating to current ratio, ratio of total liabilities to tangible net
worth, minimum tangible net worth, leverage, and interest coverage. At June 30,
1999 the Company was in compliance with these covenants. The Commercial Bank
Revolving Credit Agreement includes a commitment fee, currently equal to 0.15%,
on the unused portion of the facility.
Scheduled maturities of long-term obligations for the next five years are as
follows:
<TABLE>
<CAPTION>
Maturities of
Long-Term Debt
--------------
<S> <C>
2000 $ 967,387
2001 924,815
2002 696,941
2003 92,207,480
2004 716,735
Thereafter 4,828,209
------------
TOTAL $100,341,567
============
</TABLE>
Interest paid was $5,228,000, $3,790,000 and $2,962,000 for the years ended June
30, 1999, 1998 and 1997, respectively.
NOTE E - OPERATING LEASES
The Company leases its corporate headquarters, its customer satisfaction centers
and certain of its offices, warehouses and manufacturing facilities in the
United States and also leases its offices, warehouses and manufacturing
facilities in the Far East and in Europe.
The minimum rentals due under noncancelable leases with recurring terms of one
year or more as of June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Year ending June 30 Amount
- ------------------- ------
<S> <C>
2000 $3,346,000
2001 2,212,000
2002 1,732,000
2003 1,534,000
2004 1,315,000
Thereafter 164,000
</TABLE>
Total rent expense for the years ended June 30, 1999, 1998 and 1997 was
$3,900,000, $3,318,000 and $2,533,000, respectively.
38
<PAGE>
NOTE F -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
financial instruments:
CASH AND SHORT-TERM INVESTMENTS
- -------------------------------
The carrying amount approximates fair value because of the short maturity of
those investments.
LONG TERM OBLIGATIONS
- ---------------------
The fair values of long-term debt obligations are established from the market
values of similar issues.
The carrying amounts of the Company's cash and short-term investments and
long-term obligations approximate their fair values at June 30, 1999 and 1998.
NOTE G -- INCOME TAXES
Income (loss) before income taxes consisted of the following:
<TABLE>
<CAPTION>
Year ended June 30
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
United States $39,228,046 $ 253,254 $40,455,546
Foreign (772,326) 3,611,232 3,528,700
----------- ----------- -----------
Total $38,455,720 $3,864,486 $43,984,246
=========== =========== ===========
<CAPTION>
Year Ended June 30
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income taxes (benefit) consisted of:
Current
Federal $10,725,807 $11,046,816 $14,578,734
Foreign (849,893) 648,804 1,485,216
State 1,977,500 2,145,929 2,299,468
Tax benefit from exercise
of stock options (635,686) (4,170,171) (386,374)
------------ ------------ ------------
11,217,728 9,671,378 17,977,044
Deferred:
Federal 2,994,679 (7,017,573) (796,731)
State 546,143 (1,134,756) (7,193)
------------ ------------ ------------
3,540,822 (8,152,329) (803,924)
------------ ------------ ------------
</TABLE>
39
<PAGE>
<TABLE>
<S> <C> <C> <C>
Credit to additional paid in
capital for tax benefit
from stock option
exercises 635,686 4,170,171 386,374
----------- ---------- -----------
TOTAL INCOME TAXES
$15,394,236 $5,689,220 $17,559,494
=========== ========== ===========
</TABLE>
The difference between the statutory U.S. federal income tax rate and the
Company's effective income tax rate is explained below:
<TABLE>
<CAPTION>
Year Ended June 30
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
Statutory federal income tax rate 35% 35% 35%
Increases (decreases):
State taxes 4 17 3
Foreign taxes (2) (13) -0-
Tax credits (2) (29) -0-
Non-deductible expenses (primarily
goodwill amortization and
certain merger related costs) 5 137 -0-
Other items, net -0- -0- 2
------ ------ ------
EFFECTIVE INCOME TAX RATE 40% 147% 40%
====== ====== ======
</TABLE>
Deferred income tax assets consisted of the following:
<TABLE>
<CAPTION>
June 30
1999 1998
---------- -----------
<S> <C> <C>
Allowance for bad debts $ 4,196,645 $ 2,527,747
Depreciation (14,895) 1,709,546
Accruals and reserves(including
inventories)not deducted for
tax purposes 7,225,654 10,710,933
----------- -----------
Total $11,407,404 $14,948,226
============ ===========
</TABLE>
Undistributed earnings of the foreign subsidiaries on which no U.S. income tax
has been provided amounted to $7,587,000 at June 30, 1999.
Income taxes paid were $9,352,998, $18,473,851 and $17,674,183 for the years
ended June 30, 1999, 1998 and 1997, respectively.
40
<PAGE>
NOTE H -- STOCK OPTION AND PURCHASE PLANS
The Company has in place the 1984 Incentive Stock Option Plan (the "1984 Plan")
and the 1992 Stock Incentive Plan (the "1992 Plan") which provide options to
eligible employees to purchase common stock over five or ten years at option
prices not less than fair market value at the time of the grant. Options become
exercisable no sooner than six months from the date of the grant at rates that
vary depending on the plan and are subject to possible acceleration in certain
circumstances. Under the 1992 Plan, options may include cash payment rights and
eligible employees may receive awards of restricted shares of the Company's
common stock. The 1984 Plan, which terminated as to new grants in 1993, had
3,400,000 options approved for issuance. The 1992 Plan has a total of 3,000,000
options and restricted shares approved for issuance, including 1,000,000 options
that were approved by the Company's shareholders when the 1992 Plan was adopted
and an additional 2,000,000 options that were approved by the Company's
shareholders in November 1998.
The Company also has in place the 1991 Non-Employee Directors' Stock Option Plan
(the "Directors' Plan"). All options under the Directors' Plan are granted to
members of the Company's Board of Directors who are not employees of the
Company. Each non-employee director receives an option to purchase 5,100 shares
on the third business day following the Company's annual meeting of
shareholders. These grants will continue until options for all the shares
available under the Directors' Plan have been granted. Such options are granted
at fair market value on the date of grant. For options granted under the
Directors' Plan, 25% of the shares are exercisable one year after the date of
the grant, 25% are exercisable two years after the date of grant, and the
remaining 50% are exercisable three years after the date of grant. All options
granted under the Directors' Plan expire ten years after the date of grant. The
Directors' Plan has 300,000 options approved for issuance.
Healthdyne had in place, prior to its merger with the Company, four stock option
plans: the 1993 Stock Option Plan; the 1993 Nonemployee Director Stock Option
Plan; the 1995 Stock Option Plan II; and 1996 Stock Option Plan. At the date of
the merger, the outstanding Healthdyne options were converted into a total of
1,360,061 options to purchase Respironics common stock. Under the terms of the
Healthdyne plans, all such options became immediately exercisable at the date of
the merger and the plans terminated as to new grants. All future stock option
grants will be made from Respironics stock option plans.
Pertinent information regarding options under all Plans is as follows:
<TABLE>
<CAPTION>
Option Shares
-------------
Year Ended June 30
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Outstanding at beginning of period 1,843,278 2,696,987 3,122,661
Granted:
Price range ($12.00 - $19.13) 498,906
Price range ($18.56 - $26.84) 248,500
Price range ($ 9.70 - $23.25) 429,274
</TABLE>
41
<PAGE>
<TABLE>
<S> <C> <C> <C>
Exercised:
Price range ($ 1.38 - $24.63) (320,683)
Price range ($ 1.00 - $22.75) (1,017,589)
Price range ($ 1.00 - $16.25) (684,111)
Canceled (70,640) (84,350) (170,837)
--------- --------- ----------
Outstanding at end of period (Weighted average
price $12.74) 1,950,861 1,843,278 2,696,987
========= ========== ==========
Exercisable at end of period 1,187,288 1,458,557 2,345,365
========== ========== ==========
Shares available for future grant 2,149,111 577,377 741,527
========== ========== ==========
</TABLE>
The per share weighted-average fair value of stock options granted during 1999,
1998 and 1997 was $ 6.04, $12.09 and $7.86, respectively, on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Expected volatility 52.7% 43.1% 39.8%
Expected dividend yield none none none
Risk-free interest rate 6.0% 5.7% 6.1%
Expected life of stock options 5 5 5
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its stock option plans
and accordingly, no compensation cost has been recognized for its stock options
in the financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS 123, the
Company's net earnings and related per share amounts would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net earnings (loss):
As reported $23,061,484 $(1,824,734) $26,424,752
Pro forma 21,391,820 (3,243,498) 25,462,011
Diluted earnings (loss) per share:
As reported 0.72 (0.06) 0.82
Pro forma 0.67 (0.10) 0.79
</TABLE>
In March 1997, the Company adopted an Employee Stock Purchase Plan ("Plan")
under which employees can purchase common stock of the Company through payroll
deductions. The purchase price under the Plan is the lesser of 85% of the market
value of the Company's common stock on either the first or last day of the Plan
year. The maximum amount each employee can purchase is equal to 20% of annual
compensation. There are no charges or credits to income in connection with the
Plan. Shares are purchased with the funds set aside through payroll deductions
at the end of each Plan year.
42
<PAGE>
In June 1996, the Company adopted a shareholders' rights plan under which
existing and future shareholders received a right for each share outstanding
entitling such shareholders to purchase shares of the Company's common stock at
a specified exercise price. The right to purchase such shares is not currently
exercisable, but would become exercisable in the future if certain events
occurred relating to a person or group (the "acquiror") acquiring or attempting
to acquire 20% or more of the Company's outstanding shares of common stock. In
the event the rights become exercisable, each right would entitle the holder
(other than the acquiror) to purchase shares of the Company's common stock
having a value equal to two times the specified exercise price.
NOTE I - INDUSTRY SEGMENT, FINANCIAL INFORMATION BY GEOGRAPHIC AREAS AND MAJOR
CUSTOMERS
The Company conducts its operations in one reportable industry segment; the
design, development, manufacture and sale of medical devices. Financial
information about the Company by geographic area is presented below.
<TABLE>
<CAPTION>
Year Ended June 30
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
NET SALES
United States:
Unaffiliated customers $324,070,103 $317,032,121 $290,988,977
Interarea transfers 100,953,047 25,318,249 16,030,250
------------ ------------ ------------
425,023,150 342,350,370 307,019,227
Europe:
Unaffiliated customers 23,324,507 24,094,532 14,348,947
Far East:
Unaffiliated customers 10,176,133 10,449,790 9,203,812
Interarea transfers 6,505,547 4,713,133 4,883,257
------------ ------------ ------------
16,681,680 15,162,923 14,087,069
Elimination--Transfers 107,458,594 30,031,382 20,913,507
------------ ------------ ------------
NET SALES $357,570,743 $351,576,443 $314,541,736
============ ============ ============
OPERATING PROFIT
United States $ 54,013,927 $ 52,861,539 $ 50,800,333
Europe (1,173,304) 1,037,896 2,138,534
Far East 3,640,863 4,172,253 3,453,349
------------ ------------ ------------
OPERATING PROFIT 56,481,486 58,071,688 56,392,216
Corporate expense 12,818,999 50,018,462 9,234,473
Interest expense 5,206,767 4,188,740 3,173,497
------------ ------------ ------------
INCOME BEFORE INCOME
TAXES $ 38,455,720 $ 3,864,486 $ 43,984,246
============ ============ ============
</TABLE>
Interarea transfers are accounted for at prices comparable to unaffiliated
43
<PAGE>
customer sales reduced by an approximation of costs not incurred on internal
sales.
Additional information regarding assets and liabilities by geographic area
follows:
<TABLE>
<CAPTION>
June 30
1999 1998
------------ ------------
<S> <C> <C>
IDENTIFIABLE ASSETS
United States $275,915,304 $257,892,111
Europe 20,687,292 20,032,689
Far East 9,517,300 10,572,147
------------ ------------
306,119,896 288,496,947
Corporate assets (primarily
cash and short-term
investments and deferred
income taxes) 35,058,805 29,822,979
------------ ------------
TOTAL ASSETS $341,178,701 $318,319,926
============ ============
TOTAL ASSETS
United States $304,873,461 $280,174,789
Europe 21,772,570 20,718,545
Far East 14,532,670 17,426,592
------------ ------------
$341,178,701 $318,319,926
============ ============
TOTAL LIABILITIES
United States $138,300,426 $109,122,934
Europe 4,022,739 4,844,086
Far East 4,334,090 3,513,013
------------ ------------
$146,657,255 $117,480,033
============ ============
</TABLE>
The Company develops, manufactures and markets medical devices for the treatment
of patients suffering from respiratory disorders. Its products are used
primarily in the home and in hospitals, as well as emergency medical settings
and alternative care facilities. The Company sells and rents primarily to
distributors in the health care industry and closely monitors the extension of
credit to both domestic and foreign customers, including obtaining and analyzing
credit applications for all new accounts and maintaining an active program to
contact customers promptly when invoices become past due. No single customer
accounted for 10% or more of net sales for the years ended June 30, 1999, 1998,
or 1997.
NOTE J -- RETIREMENT PLANS
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. Total Company contributions to these plans was $1,270,000,
44
<PAGE>
$877,000 and $759,000 for the years ended June 30, 1999, 1998 and 1997,
respectively. The Company's current benefit program does not provide
postretirement benefits to employees.
NOTE K-- SIGNIFICANT ACQUISITIONS
In February 1998, the Company merged a wholly owned subsidiary with Healthdyne
Technologies, Inc. ("Healthdyne") in a stock for stock merger by issuing
approximately 12,000,000 shares of the Company's common stock in exchange for
the outstanding shares of Healthdyne. The merger was accounted for as a pooling
of interests. Accordingly, the consolidated financial statements include, for
all periods presented, the combined financial results and financial position of
the Company and Healthdyne.
In February 1997, the Company acquired the capital stock of Stimotron
Medizinische Gerate GmbH ("Stimotron"). Stimotron was based in Wendelstein,
Germany and was the exclusive distributor for the Company's products in that
country. The initial consideration paid was $9,000,000 in cash, with the terms
of the transaction providing for additional consideration of up to $5,000,000 in
cash over the next four years based upon the achievement of certain financial
results in Germany. Financing for the initial consideration was obtained from a
commercial bank, and financing for the additional consideration, if needed, is
expected to come from the Company's Commercial Bank Credit Agreement. The
acquisition was treated as a purchase for financial reporting purposes, and
accordingly the Company's results of operations include the results of
operations of Stimotron since the acquisition date. Goodwill generated by the
acquisition is being amortized over 20 years on a straight line basis.
In October 1996, the Company acquired the capital stock of LIFECARE
International, Inc. ("LIFECARE"), a developer, manufacturer and marketer of
respiratory therapy products, with its primary focus on portable home
ventilation therapy, based in Westminster, Colorado. Consideration paid was
$50,000,000 in cash. Financing for the acquisition came primarily from the
proceeds of a public offering completed by the Company in April 1996. The
acquisition was treated as a purchase for financial accounting purposes, and
accordingly the Company's results of operations include the results of
operations of LIFECARE since the acquisition date. Goodwill generated by the
acquisition is being amortized over 20 years on a straight line basis.
NOTE L -- CONTINGENCIES
The Company is a party to actions filed in a federal District Court in January
1995 and June 1996 in which a competitor alleges that the Company's sale in the
United States of certain products infringes a total of four of the competitor's
patents. In its response to these actions, the Company has denied the
allegations and has separately sought judgment that the claims under the patents
are invalid and that the Company does not infringe upon the patents. The January
1995 and June 1996 actions have been consolidated, and discovery is currently
underway. The Court has granted the Company's motions for summary judgment that
the Company does not infringe two of the competitor's patents. 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.
45
<PAGE>
In connection with customer leasing programs with independent leasing companies,
the Company is contingently liable, in the event of a customer default, to the
leasing companies within certain limits for unpaid installment
receivables transferred to the leasing companies. The total exposure for unpaid
installment receivables was approximately $16,320,000 and $13,721,000 at June
30, 1999 and 1998, respectively.
NOTE M - RESTRUCTURING
During fiscal year 1999, the Company incurred $2,415,000 in costs related to its
decision to enter into a new distribution arrangement for sales of its products
in Germany. Under the new arrangement, the Company's products will be
distributed by an independent dealer in Germany, and the Company's direct sales
efforts in that country will be significantly reduced. Accordingly, costs were
incurred to reduce the Company's German workforce and facilities as follows;
employment related costs ($1,400,000), asset writeoffs ($200,000), and lease
buyouts and other direct expenses ($815,000).
In July 1999, the Company announced a major restructuring of its United States
operations. The major components of the restructuring include the closing of the
Westminster, Colorado manufacturing facility, the closing of the 20 customer
satisfaction centers throughout the United States, the downsizing of the
Marietta, Georgia manufacturing facilities, the opening of a centralized
distribution and repair center in Youngwood, Pennsylvania, the realignment of
the Company into four divisions with a corresponding management realignment, and
a workforce reduction associated with the facility changes and the
realignment. The majority of the facility changes are expected to be completed
during the second quarter of fiscal year 2000, and the divisional realignment is
currently in place.
The total charges associated with the change in German distribution and the
restructuring described above are expected to be approximately $25,000,000. The
primary components of these charges are employment related costs ($11,000,000),
asset write offs ($7,000,000), lease buyouts and other direct restructuring
expenses ($7,000,000). As noted above, $2,415,000 of the charges were recorded
in fiscal year 1999 with the remainder expected to be recorded in fiscal year
2000.
NOTE N -- MERGER COSTS
During the year ended June 30, 1998, the Company incurred approximately
$41,000,000 in costs related to the merger with Healthdyne. The primary
components of these costs were direct expenses of the transaction ($9,500,000),
employment related costs ($9,500,000), asset write downs to reflect decisions
made regarding product and operational standardization (inventory; $11,000,000,
other assets; $8,000,000), and other merger related costs ($3,000,000).
Transaction and employment costs incurred but not yet paid have been credited to
accrued expense and asset write downs have been credited against the applicable
asset accounts. Included in asset write downs is $1,000,000 resulting from
Healthdyne and Respironics conforming accounting practices as they relate to the
recording of the allowance for doubtful accounts. Approximately $1,100,000 of
merger related costs remain unpaid at June 30, 1999.
NOTE O - STOCK REPURCHASE
In August 1998, the Company's Board of Directors authorized a stock buy back of
up to 1,000,000 shares of the Company's outstanding common stock. In October
1998, the Board of Directors increased the authorization to a total of up to
2,000,000 shares and in March 1999 increased the authorization to a total of up
to 3,000,000 shares. During fiscal year 1999, the Company repurchased a total of
2,640,000 shares in open market transactions resulting in a use of cash of
$33,055,000. Shares that are repurchased are
46
<PAGE>
added to treasury shares pending future use and reduce the number of shares
outstanding used in calculating earnings per share.
NOTE P-- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Year Ended June 30
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net Income (loss) $ 23,061,484 $ (1,824,734) $ 26,424,752
Denominator:
Denominator for basic earnings per share-
weighted average shares 31,521,296 32,097,955 31,292,658
Effect of Dilutive Securities
Stock Options 434,792 -0- 1,059,550
---------- ---------- ----------
Denominator for diluted earnings per share
- - adjusted weighted average shares and
assumed conversions 31,956,088 32,097,955 32,352,208
========== ========== ==========
Basic Earnings (Loss) Per Share $ 0.73 $ (0.06) $ 0.84
========== ========== ==========
Diluted Earnings (Loss) Per Share $ 0.72 $ (0.06) $ 0.82
========== ========== ==========
</TABLE>
NOTE Q-- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Following are the unaudited quarterly results of operations for the fiscal years
ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999
----
Three Months Ended
September 30 December 31 March 31 June 30
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Net Sales $ 86,412,000 $ 90,197,000 $ 90,882,000 90,080,000
Gross Profit 41,646,000 43,348,000 44,304,000 41,786,000
Special Addition to Allowance
For Uncollectible Receivables -- -- -- 5,000,000
Restructuring Costs -- -- -- 2,415,000
Net Income 6,309,000 7,359,000 8,261,000 1,132,000
Basic Earnings Per Share .19 .23 .26 .04
Diluted Earnings Per Share .19 .23 .26 .04
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
1998
----
Three Months Ended
September 30 December 31 March 31 June 30
------------ ----------- ---------- ---------
<S> <C> <C> <C> <C>
Net Sales $90,750,000 $95,472,000 $80,128,000 $85,227,000
Gross Profit 45,022,000 47,093,000 38,228,000 40,583,000
Merger Related Costs -- -- 37,503,000 3,248,000
Costs Associated with
Unsolicited Offer to
Acquire Healthdyne 650,000 -- -- --
Net Income (Loss) 7,854,000 8,953,000 (22,250,000) 3,618,000
Basic Earnings (Loss) Per Share .25 .28 (.69) .11
Diluted Earnings (Loss) Per Share .24 .27 (.69) .11
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure.
---------------------
None.
48
<PAGE>
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,
1999 the Company will file with the Commission a definitive Proxy Statement
which involves the election of Directors at its Annual Meeting of Shareholders
to be held on November 18, 1999, which Proxy Statement will contain such
information. The information required by Items 10, 11, 12 and 13 is incorporated
herein by reference to such Proxy Statement.
49
<PAGE>
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 July 23, 1999,
filed as part of this Annual Report on Form 10-K are listed in the index to
Consolidated Financial Statements in Item 8.
(a) (2) Financial Statement Schedules:
------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statement Schedules:
Valuation and Qualifying Accounts.......... 50
(a) (3) Exhibits:.................................. 51
--------
</TABLE>
FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
RESPIRONICS, INC.
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
ADDITIONS
Balance at Charged to Charged to Balance
Beginning of Costs and Other Accts.- Deductions at End
DESCRIPTION Period Expenses Describe Describe of Period
------------ ---------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1999:
Deducted from asset accounts:
Allowance for doubtful
accounts $8,246,000 $6,600,000 $ $927,000(b) $13,919,000
========== ========== =========== ======== ===========
Year ended June 30, 1998:
Deducted from asset accounts:
Allowance for doubtful
accounts $4,908,000 $2,838,000 $ 500,000(a) $ $ 8,246,000
========== ========== =========== ======== ===========
Year ended June 30, 1997:
Deducted from asset accounts:
Allowance for doubtful
accounts $2,566,000 $2,342,000 $ $ $ 4,908,000
========== ========== =========== ======== ===========
</TABLE>
(a) Added in connection with a business combination accounted for as a purchase.
(b) Write off of uncollectible accounts.
50
<PAGE>
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 Amendment to Restated Certificate of Incorporation of the
Company, filed as Exhibit 4.2 to Company's Registration Statement
on Form S-8, Registration No. 33-36459.
3.4 Amendment to Restated Certificate of Incorporation of the
Company, filed as Exhibit 4.2 to Company's Registration Statement
on Form S-8, Registration No. 33-89308.
3.5 Amendment to Restated Certificate of Incorporation of the
Company, filed as Exhibit 3.5 to Form 10-Q for fiscal quarter
ended December 31, 1996.
3.6 By-Laws of the Company, filed as Exhibit 3.4 to Amendment No. 2
to Form S-1, Registration No. 33-20899.
3.7 Amendment to By-Laws of the Company on June 3, 1998, filed as
Exhibit 3.7 to Form 10-K for the fiscal year ended June 30, 1998.
3.8 Amendment to By-Laws of the Company on November 18, 1998, filed
as Exhibit 3.8 to Form 10-Q for fiscal quarter ending December
31, 1998.
4.1 Loan Agreement dated November 1, 1989 between the Company and the
Pennsylvania Economic Development Financing Authority, filed as
Exhibit 4.1 to Annual Report on Form 10-K for Fiscal Year ending
June 30, 1990.
4.2 Consent, Subordination, and Assumption Agreement dated April 20,
1990 between the Company and the Greater Murrysville Industrial
Corporation, filed as Exhibit 4.2 to Annual Report on Form 10-K
for Fiscal Year ending June 30, 1990.
4.3 Loan Agreement dated June 5, 1990 between the Company and the
Redevelopment Authority of the County of Westmoreland, to be
filed with the Commission upon request.
4.4 Consent, Subordination, and Assumption Agreement dated June 21,
1994 between the Company and the Redevelopment Authority of the
County of Westmoreland, filed as Exhibit 4.4 to Annual Report on
Form 10-K for Fiscal Year ending June 30, 1994.
4.5 Consent, Subordination, and Assumption Agreement dated February
22, 1995 between the Company and the Central Westmoreland
Development Corporation, filed as Exhibit 4.5 to Annual Report on
Form 10-K for Fiscal Year ending June 30, 1995.
4.6 Form of Rights Agreement between Respironics, Inc. and Chase
Mellon Shareholder Services, L.L.C. filed as Exhibit 1 to Form 8A
filed by the Company on June 28, 1996.
51
<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 Amended and Restated Employment Agreement between the Company and
Gerald E. McGinnis, filed as Exhibit 10.37 to Form 10-Q for
fiscal quarter ended March 31, 1999.
10.3 Incentive Bonus Plan dated January 26, 1985, filed as Exhibit
10.16 to Form S-1, Registration No. 33-20899.
10.4 Consulting Agreement dated July 1, 1988 between the Company and
Dr. Mark Sanders, filed as Exhibit 10.15 to Annual Report on Form
10-K for Fiscal Year ending June 30, 1989.
10.5 Distribution Agreement dated June 20, 1991 between the Company
and Flexco Medical Instruments AG, filed as Exhibit 10.15 to
Annual Report on Form 10-K for Fiscal Year ending June 30, 1991.
10.6 Employment Agreement dated and effective as of April 1, 1995
between the Company and Gerald E. McGinnis, filed as Exhibit
10.19 to Annual Report on Form 10-K for Fiscal Year ending June
30,1995.
10.7 Employment Agreement dated and effective as of December 1, 1994
between the Company and Robert D. Crouch, filed as Exhibit 1 to
Quarterly Report on Form 10-Q for the quarter ended December 31,
1994.
10.8 Employment Agreement dated and effective as of December 1, 1994
between the Company and Dennis S. Meteny, filed as Exhibit 2 to
Quarterly Report on Form 10-Q for the quarter ended December 31,
1994.
10.9 1991 Non-Employee Directors' Stock Option Plan, filed as Exhibit
A to 1991 Proxy Statement incorporated by reference into Annual
Report on Form 10-K for Fiscal Year ending June 30, 1991.
10.10 1992 Stock Incentive Plan, filed as Exhibit A to 1992 Proxy
Statement incorporated by reference into Annual Report on Form
10-K for Fiscal Year ending June 30, 1992.
10.11 Healthdyne Technologies, Inc. 1996 Stock Option Plan, filed as
Exhibit 10.13 to Form 10-K for the fiscal year ended June 30,
1998.
10.12 Healthdyne Technologies, Inc. Stock Option Plan, filed as Exhibit
10.8 to the Healthdyne Technologies, Inc. Registration Statement
on Form S-1, Registration No. 33-60706.
10.13 Healthdyne Technologies, Inc. Non-Employee Director Stock Option
Plan, filed as Exhibit 10.9 to the Healthdyne Technologies, Inc.
Registration Statement on Form S-1, Registration No. 33-60706.
10.14 Healthdyne Technologies, Inc. Stock Option Plan II, filed as an
Exhibit to the Healthdyne Technologies, Inc. Annual Report on
Form 10-K for the year ended December 31, 1994.
10.15 Credit Agreement by and among RESPIRONICS, INC. as the Borrower,
THE BANKS PARTY HERETO, as the Lenders hereunder, and PNC BANK,
NATIONAL ASSOCIATION as the Issuing Bank, PNC BANK NATIONAL
ASSOCIATION as the Administrative Agent and the Syndication Agent
and BANK OF AMERICA NATIONAL TRUST AND SAVINGS
52
<PAGE>
ASSOCIATION as the Documentation Agent, dated as of May 8, 1998,
filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998.
10.16 Employment Agreement dated December 30, 1996 between the Company
and Steven P. Fulton, filed as Exhibit 10.15 to Annual Report on
Form 10-K for the fiscal year ended June 30, 1997.
10.17 Employment Agreement dated October 21, 1996 between the Company
and Geoffrey C. Waters, filed as Exhibit 10.16 to Annual Report
on Form 10-K for the fiscal year ended June 30, 1997.
10.18 Agreement and Plan of Reorganization and related Agreement and
Plan of Merger, each dated as of November 10, 1997, by and among
Respironics, Inc., Healthdyne Technologies, Inc., and RIGA, Inc.
a wholly owned subsidiary of Respironics, filed as Exhibit 10.17
to Quarterly Report on Form 10-Q (File No. 000-16723) dated
November 14, 1997.
10.19 Form of Amendment to Agreement and Plan of Reorganization and
related Agreement and Plan of Merger, dated as of December __,
1997 by and among Respironics, Inc., Healthdyne Technologies,
Inc., and RIGA, Inc., a wholly owned subsidiary of Respironics,
filed as Exhibit 10.17 to Quarterly Report on Form 10-Q (File No.
000-16723) dated November 14, 1997.
10.20 Employment Agreement dated November 11, 1977 between the Company
and Craig B. Reynolds, filed as Exhibit 10.22 to Form 10-K for
the fiscal year ended June 30, 1998.
10.21 Supplemental Employment Agreement dated November 11, 1997 between
the Company and Craig B. Reynolds, filed as Exhibit 10.23 to Form
10-K for the Fiscal Year ended June 30, 1998.
10.22 Employment Agreement dated November 10, 1997 between the Company
and John L. Miclot, filed as Exhibit 10.24 to Form 10-K for the
Fiscal Year ended June 30, 1998.
10.23 Supplemental Employment Agreement dated November 10, 1997 between
the Company and John L. Miclot, filed as Exhibit 10.25 to Form
10-K for the Fiscal Year ended June 30, 1998.
10.24 Corporate Services Agreement dated as of April 23, 1995 by and
between Healthdyne, Inc., now Matria Healthcare, Inc., and
Healthdyne Technologies, Inc., now Respironics Georgia, Inc.,
filed as Exhibit 10.21 to the Healthdyne Technologies, Inc. Form
8-K dated April 20, 1995.
10.25 Tradename License Agreement dated as of April 21, 1995 by and
between Healthdyne, Inc., now Matria Healthcare, Inc., and
Healthdyne Technologies, Inc., now Respironics Georgia, Inc.,
filed as Exhibit 10.23 to the Healthdyne Technologies, Inc. Form
8-K dated April 20, 1995.
10.26 Form of letter agreement by and among the Company, Healthdyne
Technologies, Inc. and Matria Healthcare, Inc. confirming and
amending Corporate Services Agreement and Tradename License
Agreement between Healthdyne, Inc., now Matria Healthcare, Inc.,
and Healthdyne Technologies, Inc., now Respironics, Georgia,
Inc., filed as Appendix D to Exhibit 10.17 to Quarterly Report on
Form 10-Q (File No. 000-16723) dated November 14, 1997.
53
<PAGE>
10.27 Amendment No. 1 to Healthdyne Technologies, Inc. Stock Option
Plan, filed as Exhibit 10.40 to Healthdyne Technologies, Inc.
Form 10-K/A for the year ended December 31, 1996.
10.28 Amendment No. 2 to Healthdyne Technologies, Inc. Stock Option
Plan, filed as Exhibit 10.41 to Healthdyne Technologies, Inc.
Form 10-K/A for the year ended December 31, 1996.
10.29 Tax Sharing Agreement, dated April 21, 1995 between Healthdyne
Technologies, Inc., now Respironics Georgia, Inc., and
Healthdyne, Inc., now Matria Healthcare, Inc., filed as an
Exhibit to the Healthdyne Technologies, Inc. Annual Report on
Form 10-K for the year ended December 31, 1995.
10.30 Administrative Services Agreement, dated March 31, 1993, between
Healthdyne Technologies, Inc., now Respironics Georgia, Inc., and
Healthdyne, Inc., now Matria Healthcare, Inc., filed as Exhibit
10.2 to the Healthdyne Technologies, Inc. Registration Statement
on Form S-1, Registration No. 33-60706.
10.31 Tax Indemnity Agreement, dated as of April 21, 1995, by and
between Healthdyne, Inc., now Matria Healthcare, Inc., and
Healthdyne Technologies, Inc., now Respironics Georgia, Inc.,
filed as Exhibit 10.20 to the Healthdyne Technologies, Inc. Form
8-K dated April 20, 1995.
10.32 Lease Agreement, dated December 20, 1993, between Max L.
Kuniansky, David L. Kuniansky, Amy Kuniansky Clark, Douglas S.
Kuniansky and Healthdyne Technologies, Inc., now Respironics
Georgia, Inc., filed as an Exhibit to the Healthdyne
Technologies, Inc. Annual Report on Form 10-K for the year ended
December 31, 1993.
10.33 Employment Agreement dated November 10, 1997 between the Company
and Robert Tucker, filed as Exhibit 10.35 to Form 10-K for the
fiscal year ended June 30, 1998.
10.34 Supplemental Employment Agreement dated November 10, 1997 between
the Company and Robert Tucker, filed as Exhibit 10.36 to Form
10-K for the fiscal year ended June 30, 1998.
10.35 Respironics, Inc. 1997 Non-Employee Directors' Fee Plan, filed as
Exhibit 10.35 to this Annual Report.
10.36 First Amendment to the Credit Agreement by and among RESPIRONICS,
INC. as the Borrower, THE BANKS PARTY HERETO, as the Lenders
hereunder, PNC BANK, NATIONAL ASSOCIATION as the Issuing bank,
PNC BANK, NATIONAL ASSOCIATION as the Administrative Agent and
the Syndication Agent and BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION as the Documentation Agent, dated as of
August 19, 1998, filed as Exhibit 10.37 to Quarterly Report on
Form 10-Q for the quarter ended December 31, 1998.
10.37 Second Amendment to the Credit Agreement by and among
RESPIRONICS, INC. as a the Borrower, THE BANKS PARTY HERETO, as
the Lenders hereunder, PNC BANK, NATIONAL ASSOCIATION as the
Issuing bank, PNC BANK, NATIONAL ASSOCIATION, as the
Administrative Agent and the Syndication Agent and BANK OF
AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION as the
Documentation Agent, dated as of December 9, 1998, filed as
Exhibit 10.38 to Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998.
21.1 List of Subsidiaries, filed as Exhibit 21.1 to this Annual
Report.
54
<PAGE>
23.1 Consent of Ernst & Young, filed as Exhibit 23.1 to this Annual
Report.
(b) Reports on Form 8-K:
--------------------
Not applicable.
55
<PAGE>
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/ James W. Liken
By: ______________________________________
James W. Liken, President and
Chief Executive Officer
Date: September 28, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
in the capacities indicated on September 28, 1999:
/s/ James W. Liken /s/ James H. Hardie
------------------------------------- -------------------------------------
James W. Liken James H. Hardie
(President and (Director)
Chief Executive Officer
and Director)
(Principal Executive Officer)
/s/ Daniel J. Bevevino
------------------------------------- -------------------------------------
Daniel J. Bevevino Donald H. Jones
(Vice President and Chief Financial (Director)
Officer)
(Principal Accounting Officer)
/s/ Gerald E. McGinnis /s/ Craig B. Reynolds
------------------------------------- -------------------------------------
Gerald E. McGinnis Craig B. Reynolds
(Chairman of the (Director)
Board of Directors)
/s/ Daniel P. Barry
------------------------------------- -------------------------------------
Daniel P. Barry Joseph C. Lawyer
(Director) (Director)
/s/ Douglas A. Cotter
------------------------------------- -------------------------------------
Douglas A. Cotter J. Terry Dewberry
(Director) (Director)
-------------------------------------
J. Paul Yokubinas
(Director)
56
<PAGE>
EXHIBITS INDEX
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
3.1 Restated Certificate of Incorporation of the Company, filed as
Exhibit 3.2 to Amendment No. 1 to Form S-1, Registration
No.33-20899.
3.2 Amendment to Restated Certificate of Incorporation of the Company,
filed as Exhibit 3.2 to Form S-1, Registration No.33-39938.
3.3 Amendment to Restated Certificate of Incorporation of the Company,
filed as Exhibit 4.2 to Company's Registration Statement on Form
S-8, Registration No.33-36459.
3.4 Amendment to Restated Certificate of Incorporation of the Company,
filed as Exhibit 4.2 to Company's Registration Statement on Form
S-8, Registration No.33-89308.
3.5 Amendment to Restated Certificate of Incorporation of the Company,
filed as Exhibit 3.5 to Form 10-Q for fiscal quarter ended December
31, 1996.
3.6 By-Laws of the Company, filed as Exhibit 3.4 to Amendment No.2 to
Form S-1, Registration No.33-20899.
3.7 Amendment to By-Laws of the Company on June 3, 1998, filed as
Exhibit 3.7 to Form 10-K for the fiscal year ended June 30, 1998.
3.8 Amendment to By-Laws of the Company on November 18, 1998, filed as
Exhibit 3.8 to Form 10-Q for fiscal quarter ending December 31,
1998.
4.1 Loan Agreement dated November 1, 1989 between the Company and the
Pennsylvania Economic Development Financing Authority, filed as
Exhibit 4.1 to Annual Report on Form 10-K for Fiscal Year ending
June 30, 1990.
4.2 Consent, Subordination, and Assumption Agreement dated April 20,
1990 between the Company and the Greater Murrysville Industrial
Corporation, filed as Exhibit 4.2 to Annual Report on Form 10-K for
Fiscal Year ending June 30, 1990.
4.3 Loan Agreement dated June 5, 1990 between the Company and the
Redevelopment Authority of the County of Westmoreland, to be filed
with the Commission upon request.
4.4 Consent, Subordination, and Assumption Agreement dated June 21,
1994 between the Company and the Redevelopment Authority of the
County of Westmoreland, filed as Exhibit 4.4 to Annual Report on
Form 10-K for Fiscal Year ending June 30, 1994.
4.5 Consent, Subordination, and Assumption Agreement dated February 22,
1995 between the Company and the Central Westmoreland Development
Corporation, filed as Exhibit 4.5 to Annual Report on Form 10-K for
Fiscal Year ending June 30, 1995.
4.6 Form of Rights Agreement between Respironics, Inc. and Chase Mellon
Shareholder Services, L.L.C. filed as Exhibit 1 to Form 8A filed by
the Company on June 28, 1996.
57
<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 Amended and Restated Employment Agreement between the Company and
Gerald E. McGinnis, filed as Exhibit 10.37 to Form 10-Q for fiscal
quarter ended March 31, 1999.
10.3 Incentive Bonus Plan dated January 26, 1985, filed as Exhibit 10.16
to Form S-1, Registration No. 33-20899.
10.4 Consulting Agreement dated July 1, 1988 between the Company and Dr.
Mark Sanders, filed as Exhibit 10.15 to Annual Report on Form 10-K
for Fiscal Year ending June 30, 1989.
10.5 Distribution Agreement dated June 20, 1991 between the Company and
Flexco Medical Instruments AG, filed as Exhibit 10.15 to Annual
Report on Form 10-K for Fiscal Year ending June 30, 1991.
10.6 Employment Agreement dated and effective as of April 1, 1995
between the Company and Gerald E. McGinnis, filed as Exhibit 10.19
to Annual Report on Form 10-K for Fiscal Year ending June 30,1995.
10.7 Employment Agreement dated and effective as of December 1, 1994
between the Company and Robert D. Crouch, filed as Exhibit 1 to
Quarterly Report on Form 10-Q for the quarter ended December 31,
1994.
10.8 Employment Agreement dated and effective as of December 1, 1994
between the Company and Dennis S. Meteny, filed as Exhibit 2 to
Quarterly Report on Form 10-Q for the quarter ended December 31,
1994.
10.9 1991 Non-Employee Directors' Stock Option Plan, filed as Exhibit A
to 1991 Proxy Statement incorporated by reference into Annual
Report on Form 10-K for Fiscal Year ending June 30, 1991.
10.10 1992 Stock Incentive Plan, filed as Exhibit A to 1992 Proxy
Statement incorporated by reference into Annual Report on Form 10-K
for Fiscal Year ending June 30, 1992.
10.11 Healthdyne Technologies, Inc. 1996 Stock Option Plan, filed as
Exhibit 10.13 to Form 10-K for the fiscal year ended June 30, 1998.
10.12 Healthdyne Technologies, Inc. Stock Option Plan, filed as Exhibit
10.8 to the Healthdyne Technologies, Inc. Registration Statement on
Form S-1, Registration No. 33-60706.
10.13 Healthdyne Technologies, Inc. Non-Employee Director Stock Option
Plan, filed as Exhibit 10.9 to the Healthdyne Technologies, Inc.
Registration Statement on Form S-1, Registration No. 33-60706.
10.14 Healthdyne Technologies, Inc. Stock Option Plan II, filed as an
Exhibit to the Healthdyne Technologies, Inc. Annual Report on Form
10-K for the year ended December 31, 1994.
58
<PAGE>
10.15 Credit Agreement by and among RESPIRONICS, INC. as the Borrower,
THE BANKS PARTY HERETO, as the Lenders hereunder, and PNC BANK,
NATIONAL ASSOCIATION as the Issuing Bank, PNC BANK NATIONAL
ASSOCIATION as the Administrative Agent and the Syndication Agent
and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION as the
Documentation Agent, dated as of May 8, 1998, filed as Exhibit 10.1
to Quarterly Report on Form 10-Q for the quarter ended March 31,
1998.
10.16 Employment Agreement dated December 30, 1996 between the Company
and Steven P. Fulton, filed as Exhibit 10.15 to Annual Report on
Form 10-K for the fiscal year ended June 30, 1997.
10.17 Employment Agreement dated October 21, 1996 between the Company and
Geoffrey C. Waters, filed as Exhibit 10.16 to Annual Report on Form
10-K for the fiscal year ended June 30, 1997.
10.18 Agreement and Plan of Reorganization and related Agreement and Plan
of Merger, each dated as of November 10, 1997, by and among
Respironics, Inc., Healthdyne Technologies, Inc., and RIGA, Inc. a
wholly owned subsidiary of Respironics, filed as Exhibit 10.17 to
Quarterly Report on Form 10-Q (File No. 000-16723) dated November
14, 1997.
10.19 Form of Amendment to Agreement and Plan of Reorganization and
related Agreement and Plan of Merger, dated as of December, 1997
by and among Respironics, Inc., Healthdyne Technologies, Inc., and
RIGA, Inc., a wholly owned subsidiary of Respironics, filed as
Exhibit 10.17 to Quarterly Report on Form 10-Q (File No. 000-16723)
dated November 14, 1997.
10.20 Employment Agreement dated November 11, 1977 between the Company
and Craig B. Reynolds, filed as Exhibit 10.22 to Form 10-K for the
fiscal year ended June 30, 1998.
10.21 Supplemental Employment Agreement dated November 11, 1997 between
the Company and Craig B. Reynolds, filed as Exhibit 10.23 to Form
10-K for the Fiscal Year ended June 30, 1998.
10.22 Employment Agreement dated November 10, 1997 between the Company
and John L. Miclot, filed as Exhibit 10.24 to Form 10-K for the
Fiscal Year ended June 30, 1998.
10.23 Supplemental Employment Agreement dated November 10, 1997 between
the Company and John L. Miclot, filed as Exhibit 10.25 to Form 10-K
for the Fiscal Year ended June 30, 1998.
10.24 Corporate Services Agreement dated as of April 23, 1995 by and
between Healthdyne, Inc., now Matria Healthcare, Inc., and
Healthdyne Technologies, Inc., now Respironics Georgia, Inc., filed
as Exhibit 10.21 to the Healthdyne Technologies, Inc. Form 8-K
dated April 20, 1995.
10.25 Tradename License Agreement dated as of April 21, 1995 by and
between Healthdyne, Inc., now Matria Healthcare, Inc., and
Healthdyne Technologies, Inc., now Respironics Georgia, Inc., filed
as Exhibit 10.23 to the Healthdyne Technologies, Inc. Form 8-K
dated April 20, 1995.
59
<PAGE>
10.26 Form of letter agreement by and among the Company, Healthdyne
Technologies, Inc. and Matria Healthcare, Inc. confirming and
amending Corporate Services Agreement and Tradename License
Agreement between Healthdyne, Inc., now Matria Healthcare, Inc.,
and Healthdyne Technologies, Inc., now Respironics, Georgia, Inc.,
filed as Appendix D to Exhibit 10.17 to Quarterly Report on Form
10-Q (File No. 000-16723) dated November 14, 1997.
10.27 Amendment No. 1 to Healthdyne Technologies, Inc. Stock Option Plan,
filed as Exhibit 10.40 to Healthdyne Technologies, Inc. Form 10-K/A
for the year ended December 31, 1996.
10.28 Amendment No. 2 to Healthdyne Technologies, Inc. Stock Option Plan,
filed as Exhibit 10.41 to Healthdyne Technologies, Inc. Form 10-K/A
for the year ended December 31, 1996.
10.29 Tax Sharing Agreement, dated April 21, 1995 between Healthdyne
Technologies, Inc., now Respironics Georgia, Inc., and Healthdyne,
Inc., now Matria Healthcare, Inc., filed as an Exhibit to the
Healthdyne Technologies, Inc. Annual Report on Form 10-K for the
year ended December 31, 1995.
10.30 Administrative Services Agreement, dated March 31, 1993, between
Healthdyne Technologies, Inc., now Respironics Georgia, Inc., and
Healthdyne, Inc., now Matria Healthcare, Inc., filed as Exhibit
10.2 to the Healthdyne Technologies, Inc. Registration Statement on
Form S-1, Registration No. 33-60706.
10.31 Tax Indemnity Agreement, dated as of April 21, 1995, by and between
Healthdyne, Inc., now Matria Healthcare, Inc., and Healthdyne
Technologies, Inc., now Respironics Georgia, Inc., filed as Exhibit
10.20 to the Healthdyne Technologies, Inc. Form 8-K dated April 20,
1995.
10.32 Lease Agreement, dated December 20, 1993, between Max L. Kuniansky,
David L. Kuniansky, Amy Kuniansky Clark, Douglas S. Kuniansky and
Healthdyne Technologies, Inc., now Respironics Georgia, Inc., filed
as an Exhibit to the Healthdyne Technologies, Inc. Annual Report on
Form 10-K for the year ended December 31, 1993.
10.33 Employment Agreement dated November 10, 1997 between the Company
and Robert Tucker, filed as Exhibit 10.35 to Form 10-K for the
fiscal year ended June 30, 1998.
10.34 Supplemental Employment Agreement dated November 10, 1997 between
the Company and Robert Tucker, filed as Exhibit 10.36 to Form 10-K
for the fiscal year ended June 30, 1998.
10.35 Respironics, Inc. 1997 Non-Employee Directors' Fee Plan, filed as
Exhibit 10.35 to this Annual Report.
10.36 First Amendment to the Credit Agreement by and among RESPIRONICS,
INC. as the Borrower, THE BANKS PARTY HERETO, as the Lenders
hereunder, PNC BANK, NATIONAL ASSOCIATION as the Issuing bank, PNC
BANK, NATIONAL ASSOCIATION as the Administrative Agent and the
Syndication Agent and BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION as the Documentation Agent, dated as of August 19,
1998, filed as Exhibit 10.37 to Quarterly Report on Form 10-Q for
the quarter ended December 31, 1998.
60
<PAGE>
10.37 Second Amendment to the Credit Agreement by and among RESPIRONICS,
INC. as a the Borrower, THE BANKS PARTY HERETO, as the Lenders
hereunder, PNC BANK, NATIONAL ASSOCIATION as the Issuing bank, PNC
BANK, NATIONAL ASSOCIATION, as the Administrative Agent and the
Syndication Agent and BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION as the Documentation Agent, dated as of December 9,
1998, filed as Exhibit 10.38 to Quarterly Report on Form 10-Q for
the quarter ended December 31, 1998.
21.1 List of Subsidiaries, filed as Exhibit 21.1 to this Annual Report.
23.1 Consent of Ernst & Young, filed as Exhibit 23.1 to this Annual
Report.
61
<PAGE>
Exhibit 10.35
RESPIRONICS, INC.
1997 Non-Employee Directors' Fee Plan
The purpose of the 1997 Non-Employee Directors' Fee Plan (the "Plan")
is to provide in respect of each director of Respironics, Inc. (the "Company")
who is not also an employee of the Company or any of its subsidiaries (a "non-
employee Director") for the payment of her or his retainer fees (as opposed to
meeting attendance fees) for services to be performed by such non-employee
Director ("Director Fees") as a member of the Board of Directors of the Company
(the "Board") in shares of Common Stock of the Company. The purposes of the Plan
are further to promote the long-term success of the Company by creating a long-
term mutuality of interests between the non-employee Directors and stockholders
of the Company, to provide an additional inducement for each non-employee
Director to continue to serve as a Director of the Company and to provide a
means through which the Company may continue to attract able persons to serve as
Directors of the Company.
SECTION 1
Administration
The Plan shall be administered by a Committee (the "Committee")
appointed by the Board of Directors of the Company (the "Board") and consisting
of not less than two members of the Board. The Committee shall keep records of
action taken at its meetings. A majority of the Committee shall constitute a
quorum at any meeting, and the acts of a majority of the members present at any
meeting at which a quorum is present, or acts approved in writing by a majority
of the Committee, shall be the acts of the Committee.
The Committee shall interpret the Plan and prescribe such rules,
regulations and procedures in connection with the operation of the Plan as it
shall deem to be necessary or advisable for the administration of the Plan
consistent with the purposes of the Plan. All questions of interpretation and
application of the Plan or as to stock issued under the Plan shall be subject to
the determination of the Committee, which shall be final and binding.
Notwithstanding the above, the selection of the Directors to whom
stock may be issued for Director Fees, the timing of such issuance and the
number of shares subject to any issuance shall be as hereinafter provided, and
the Committee shall have no discretion as to such matters.
SECTION 2
Shares Available under the Plan
The aggregate number of shares which may be issued or delivered under
the Plan is 25,000 shares of the Common Stock, par value $.01 per share, of the
Company (the "Common Stock"), subject to adjustment and substitution as set
forth in Section 4. The shares which may be issued or delivered under the Plan
may be either authorized but unissued shares or treasury (reacquired) shares or
partly each, as shall be determined from time to time by the Board.
<PAGE>
SECTION 3
Payment of Director Fees
Commencing with the calendar quarter ending December 31, 1997 each
non-employee Director shall automatically and without further action by the
Board or the Committee receive payment of Director Fees by the issuance to the
non-employee Director of shares of Common Stock in the following manner:
(A) Within a reasonable time after each regularly scheduled
quarterly meeting of the Board, each non-employee Director shall be awarded a
number of shares of Common Stock determined by dividing the Directors Fees
payable for such quarter by the fair market value (as determined in paragraph
(D) below) of the Common Stock on the second trading day preceding such meeting.
(B) The number of shares of Common Stock determined as provided
in paragraph (A) shall be rounded up or down to the nearest full share.
(C) Certificates or other evidence of shares of Common Stock so
awarded shall only be issued or evidenced in "round" (100 share or an integral
multiple) lots except for the last certificate or evidence issuable to the non-
employee Director under the Plan. Awards for shares not issued in certificates
or otherwise evidenced shall be carried forward to be combined with the number
awarded in respect of the next quarter.
(D) Fair market value of the Common Stock shall be the following
price, as applicable, for the date as of which fair market value is to be
determined as quoted in The Wall Street Journal (or in such other reliable
-----------------------
publication as the Committee, in its discretion, may determine to rely upon):
(a) if the Common Stock is listed on the New York Stock Exchange, the last sales
prices per share of the Common Stock as quoted in the NYSE-Composite
Transactions listing for such date, (b) if the Common Stock is not listed on
such exchange, the last sales prices per share of Common Stock for such date on
(or on any composite index including) the principal United States securities
exchange registered under the Securities Exchange Act of 1934 (the "1934 Act")
on which the Common Stock is listed, or (c) if the Common Stock is not listed on
any such exchange, the last sales prices per share of the Common Stock for such
date on the National Association of Securities Dealers Automated Quotations
System or any successor system then in use ("NASDAQ"). If there are no such
sales price quotations for the date as of which fair market value is to be
determined but there are such sale price quotations within a reasonable period
both before and after such date, then fair market value shall be determined by
taking a weighted average of the means between the highest and lowest sales
prices per share of the Common Stock as so quoted on the nearest date before and
the nearest date after the date as of which fair market value is to be
determined. The average should be weighted inversely by the respective numbers
of trading days between the selling dates and the date as of which fair market
value is to be determined. If there are no such sale price quotations on or
within a reasonable period both before and after the date as of which fair
market value is to be determined, then fair market value of the Common Stock
shall be the mean between the bona fide bid and asked prices per share of Common
Stock as so quoted for such date on NASDAQ, or if none, the weighted average of
the means between such bona fide bid and asked prices on the nearest trading
date before and the nearest trading date after the date as of which fair market
value is to be determined, if both such dates are within a reasonable period.
The average is to be determined in the manner described above in this Section 3.
If the fair market value of the Common Stock cannot be determined on the basis
previously set forth in this Section 3 for the date as of which fair market
value is to be determined, the Committee shall in good faith determine the fair
market value of the Common Stock on such date.
2
<PAGE>
SECTION 4
Adjustment and Substitution of Shares
For purposes of the Plan the Common Stock shall be the Common Stock of
the Company outstanding and publicly traded from time to time or such securities
as the Common Stock shall be changed into or exchangeable for whether of the
Company or another corporation, whether through reorganization,
reclassification, recapitalization, stock split-up, combination of shares,
merger or consolidation.
No adjustment or substitution provided for in this Section 4 shall
require the Company to issue or deliver or sell a fraction of a share or other
security. Accordingly, all fractional shares or other securities which result
from any such adjustment or substitution shall be eliminated and not carried
forward to any subsequent adjustment or substitution.
SECTION 5
Effect of the Plan on the Rights of Company and Stockholders
Nothing in the Plan or in any Director Fees paid shall confer any
right to any person to continue as a Director of the Company or interfere in any
way with the rights of the stockholders of the Company or the Board of Directors
to elect and remove Directors.
SECTION 6
Amendment and Termination
The right to amend the Plan at any time and from time to time and the
right to terminate the Plan at any time are hereby specifically reserved to the
Board; provided always that no amendment of the Plan shall (a) be made without
stockholder approval if stockholder approval of the amendment is at the time
required for the Common Stock awarded under the Plan to qualify for the
exemption from Section 16(b) of the 1934 Act provided by Rule 16b-3 or by the
rules of the NASDAQ National Market System or any stock exchange on which the
Common Stock may then be listed, or (b) otherwise amend the Plan in any manner
that would cause stock options under the Plan not to qualify for the exemption
provided by Rule 16b-3.
Notwithstanding anything contained in the preceding paragraph or any
other provision of the Plan, the Board shall have the power to amend the Plan in
any manner deemed necessary or advisable for stock issued for Director Fees to
qualify for the exemption provided by Rule 16b-3 (or any successor rule relating
to exemption from Section 16(b) of the 1934 Act), and any such amendment shall,
to the extent deemed necessary or advisable by the Board, be applicable to any
Common Stock previously awarded under the Plan.
SECTION 7
Effective Date and Duration of Plan
The Plan was approved in principle by the Board on August 15, 1997.
The effective date and date of adoption of the Plan shall be November 1, 1997,
the date as of which formal ratification of the Plan by the Board was made. No
stock may be issued for Director Fees under the Plan subsequent to October 31,
2005.
3
<PAGE>
Exhibit 21.1
LIST OF SUBSIDIARIES
State or Country of
Name Incorporation
- ---- -------------
RIC Investments, Inc. Delaware
Respironics (HK) Ltd. Hong Kong
RCM Manufacturing, Inc. Philippines
Sigma Manufacturing Ltd. Hong Kong
Wegot Investments Ltd. Hong Kong
Respironics Medical Products (Shenzhen) Ltd. Hong Kong
Respironics Technologies Ltd. Hong Kong
Respironics Technologies (Guangzhou) Ltd. China
Respironics France France
Respironics Colorado, Inc. Colorado
Respironics Deutschland GmbH and Co. KG Germany
Respironics Verwaltungsgesellschaft GmbH Germany
Respironics Georgia, Inc. Georgia
Respironics California, Inc. California
Respironics Healthscan, Inc. New Jersey
Respironics International, Inc. Delaware
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Post Effective Amendment No. 1 on Form S-8 to Form S-4 No. 333-43703)
pertaining to the Healthdyne Technologies, Inc. 1996 Stock Option Plan,
Healthdyne Technologies, Inc. Stock Option Plan, Healthdyne Technologies, Inc.
Nonemployee Director Stock Option Plan, and Healthdyne Technologies, Inc. Stock
Option Plan II; (Form S-8 No. 333-22639) pertaining to the 1997 Employee Stock
Purchase Plan; (Form S-8 No. 333-16721) pertaining to the Respironics, Inc.
Retirement Savings Plan; (Form S-8 No. 33-89308) pertaining to the 1992 Stock
Incentive Plan; (Form S-8 No. 33-44716) pertaining to the 1991 Nonemployee
Directors' Stock Option Plan; (Form S-8 No. 33-36459) pertaining to the Amended
and Restated Incentive Stock Option Plan of Respironics, Inc. and Gerald E.
McGinnis and the Consulting Agreement dated July 1, 1988 between Respironics,
Inc. and Mark H. Sanders, M.D.; and (Form S-8 No. 333-87335) pertaining to the
Respironics, Inc. 1997 Non-Employee Directors' Fee Plan of our report dated July
23, 1999, with respect to the consolidated financial statements and schedule of
Respironics, Inc. and Subsidiaries included in the Annual Report Form 10-K for
the year June 30, 1999.
/s/ Ernst & Young, LLP
Pittsburgh, Pennsylvania
September 28, 1999
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