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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
X Annual Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended June 30, 2002 or
Transition Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ______
Commission File No. 000-16723
RESPIRONICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1304989
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1010 Murry Ridge Lane
Murrysville, Pennsylvania 15668-8525
(Address of principal executive offices) (Zip Code)
(Registrant's Telephone Number, including area code) 724-387-5200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
------------------- ---------------------
None --
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for at least the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of August 31, 2002, the aggregate market value of the shares of the
registrant's Common Stock (based upon the last price reported by the NASDAQ
National Market System) held by non-affiliates was approximately $1,105,000,000.
As of August 31, 2002, there were 36,956,077 shares of Common Stock of the
registrant outstanding, of which 3,592,654 were held in treasury.
Documents incorporated by reference: Portions of the Proxy Statement for the
registrant's Annual Meeting of Shareholders to be held on November 18, 2002 are
incorporated by reference into Part III of this Annual Report on Form 10-K.
INDEX
Page
----
PART I
Item 1. Business ....................................................... 3
Item 2. Properties ..................................................... 15
Item 3. Legal Proceedings .............................................. 15
Item 4. Submission of Matters to a Vote of Security Holders ............ 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters ............................................ 16
Item 6. Selected Financial Data ........................................ 17
Item 7. Management's Discussion and
Analysis of Results of Operations and Financial
Condition ...................................................... 19
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk .............................................. 23
Item 8. Consolidated Financial Statements .............................. 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ............................ 48
PART III
Item 10. Directors and Executive Officers of the Registrant ............. 49
Item 11. Executive Compensation ......................................... 49
Item 12. Security Ownership of Certain Beneficial Owners and
Management ..................................................... 49
Item 13. Certain Relationships and Related Transactions ................. 49
PART IV
Item 14. Controls and Procedures ........................................ 50
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K .................................................... 50
Signatures ............................................................... 52
2
PART I
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES REFORM ACT OF 1995.
The statements contained in this Annual Report on Form 10-K, including
those contained in Item 1 "Business" and Item 7 "Management's Discussion and
Analysis of Results of Operations and Financial Condition," and statements
incorporated by reference in this Form 10-K from the 2002 Annual Report to
Shareholders, along with statements in other reports filed with the Securities
and Exchange Commission, external documents and oral presentations which are not
historical are "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21B of the Securities
Exchange Act of 1934, as amended. These forward-looking statements represent the
Company's present expectations or beliefs concerning future events. The Company
cautions that such statements are qualified by important factors that could
cause actual results to differ materially from the expected results included in
the forward-looking statements. Those factors include, but are not limited to,
the following: foreign currency fluctuations, regulations and other factors
affecting operations and sales outside the United States including potential
future effects of the change in sovereignty of Hong Kong, customer consolidation
and concentration, increasing price competition and other competitive factors in
the sale of products, the success of the Company's marketing, sales, and
promotion programs, interest rate fluctuations, intellectual property and
related litigation, other litigation, successful integration of acquisitions,
FDA and other government regulation, anticipated levels of earnings and
revenues, and third party reimbursement.
Item 1. Business
--------
Note: This document contains a variety of technical terms pertaining to the
Company's business, which are explained below:
Continuous positive airway pressure or "CPAP" - continuous air pressure into a
patient's airway provided by an air pressurization device
Bi-level positive airway pressure or "BiPAP" - air pressure provided to a
patient's airway by an air pressurization device under which the pressure
increases and decreases based on the patient's breathing pattern
Bi-level non-invasive ventilatory support - bi-level positive airway pressure
provided into the patient's airway via a mask to supplement, but not replace,
the patient's own breathing
Invasive volume ventilators - a ventilator that delivers a mixture of air and
oxygen into a patient's lungs via a tube inserted into the patient's airway;
these patients are dependent on the ventilator for life support
Non-invasive monitors - devices that provide measurements of a patient's
physiological data via sensors that are affixed outside the patient's body (i.e.
a small clip that fits over a patient's fingertip)
Leak sensing technology - a feature of the Company's bi-level non-invasive units
whereby the units sense that an air leak has occurred between the mask and the
patient's face and the unit adjusts its air flow to compensate for the leak
Molecular sieve - material used in oxygen concentrators for separating oxygen
from room air.
Tracheal gas insufflation - a means of reducing elevated levels of carbon
dioxide in patients being treated with ventilators
3
General
Respironics, Inc. is a leading developer, manufacturer and marketer of
medical devices used primarily for the treatment of patients suffering from
respiratory disorders. The Company's products are designed to reduce costs while
improving the effectiveness of patient care and are used primarily in the home
and in hospitals along with alternative care facilities and in emergency medical
settings. The Company's primary product lines are: (i) homecare products,
including continuous positive airway pressure ("CPAP") devices and bi-level
positive airway pressure devices used in the home for the treatment of
obstructive sleep apnea ("OSA"), a serious disorder characterized by the
repeated cessation of breathing during sleep, respiratory devices including
bi-level non-invasive ventilatory support units, portable invasive volume
ventilator units used in the home, home oxygen devices, diagnostic and
monitoring systems, and developmental care products used for premature infants;
(ii) hospital products, including bi-level non-invasive ventilatory support
units, critical care units that can deliver both non-invasive and invasive
ventilation, noninvasive cardiorespiratory monitors, sensors, and related
disposable accessories, all of which are used in hospital or institutional
settings; and (iii) asthma and allergy products. Respironics markets its
products through homecare, hospital, asthma and allergy, and international sales
organizations, which consist of approximately 370 direct and independent sales
representatives and sales management personnel who sell to a network of over
5,000 medical product service providers and dealers (commonly referred to as
"dealers") and, in some cases, directly to hospitals and other institutions. The
Company also rents certain of its products to dealers and, in limited cases,
directly to end users. With over 80% of its sales currently reaching the home
care market, Respironics believes that it is well positioned to take advantage
of the growing preference for in-home treatment of patients suffering from
respiratory disorders.
Respironics is a Delaware corporation with executive offices located at
1010 Murry Ridge Lane, Murrysville, PA 15668-8525. Unless the context indicates
otherwise, reference in this Annual Report to the "Company" or "Respironics"
refers to Respironics, Inc. and its domestic and foreign subsidiaries. Unless
the context indicates otherwise, reference in this Annual Report to "fiscal
year" refers to the twelve-month period ending on June 30 of the year indicated.
In April 2002, the Company acquired 100% of the outstanding common stock
of Novametrix Medical Systems Inc. ("Novametrix"), a leading cardiorespiratory
monitoring company that developed, manufactured, and marketed proprietary
state-of-the-art noninvasive monitors, sensors, and disposable accessories along
with developmental care products for premature infants. The Company issued
approximately 2,400,000 shares of its common stock to the former stockholders of
Novametrix in exchange for their Novametrix shares and reserved approximately
509,000 shares of its common stock for future issuance upon exercise of options
and warrants issued in exchange for Novametrix options and warrants outstanding.
The total value of the Company's shares issued and reserved for issuance (net of
proceeds from exercise of options and warrants) in the transaction was
approximately $81.0 million. The results of operations of Novametrix are
included in the Company's consolidated income statement beginning on the
acquisition date, April 12, 2002.
In May 2002, the Company acquired 60% of the outstanding common stock of
Fuji, RC Co., Ltd. ("Fuji"), a leading provider of homecare and hospital
products and services for respiratory-impaired patients in Japan, and entered
into an agreement to purchase all of the remaining outstanding shares of Fuji in
a multiple step acquisition by December 31, 2006. The base cash purchase price
for all of the outstanding Fuji shares is approximately $12 million, with
provisions for additional payment to one of the shareholders of Fuji to be made
based on operating performance of Fuji over the next four years. The results of
operations of Fuji, net of minority interest, are included in the Company's
consolidated income statement beginning on the acquisition date, May 31, 2002.
See Note O to the Consolidated Financial Statements for more information about
these acquisitions.
In July 1999, the Company announced a major restructuring of its United
States operations. The major components of the restructuring included the
closing of the Westminster, Colorado manufacturing facility, the closing of the
19 customer satisfaction centers throughout the United States, the downsizing of
the Georgia manufacturing facilities, the opening of a centralized distribution
and repair center in Youngwood, Pennsylvania, the realignment of the Company
into four divisions with a
4
corresponding management realignment, and a workforce reduction associated with
the facility changes and the realignment. The divisional and management
realignment took place in July 1999, and the facility changes were completed as
planned over the course of fiscal year 2000. The Westminster facility was closed
in January 2000 and sold in March 2001. See Note L to the Consolidated Financial
Statements for more information about the restructuring, including the costs
associated with the restructuring.
The following are registered trademarks of the Company as used in this
document: Respironics, REMstar, REMstar Pro, REMstar Plus, REMstar Auto, Great
Performers, Aria, Virtuoso, Duet, Encore, Soft Series Nasal Mask, Tranquility,
SmartMonitor, ASSESS, Personal Best, Wallaby, GoldSeal, GEL, Inspiration,
Esprit, Asthma Check, OptiHaler, BiPAP, PLV, Solo, OptiChamber, Alice, Stardust,
and AsthmaMentor. The following are trademarks of the Company as used in this
document: Contour Nasal Mask, Respironics Millennium, Profile, Encore SmartCard,
Simplicity, BiPAP Vision, Comfort Series and BiPAP Synchrony.
Products
The Company's principal products can be divided into three categories:
homecare products, hospital products, and asthma and allergy products.
Homecare Products
-----------------
The Company's homecare products can be separated into five major
subcategories: sleep products, non-invasive ventilation products, invasive
portable volume ventilation products, oxygen products, and infant management and
developmental care products.
Sleep Products. Respironics believes it is the worldwide market share
leader in OSA therapy devices, with a market share in excess of 50%. The
Company's primary OSA products include the REMstar Series, Solo, Aria and
Virtuoso CPAP units and the BiPAP Duet and the BiPAP S Airway Management
Systems, the Tranquility family of CPAP and bi-level units, and related
accessories such as humidifiers, masks, tubes, filters and headgear.
The Company's CPAP devices consist of a small, portable air
pressurization device, an air pressure control and a mask worn by the patient at
home during sleep. The REMstar Series, Solo, and Tranquility CPAP systems are
low-cost, innovative OSA therapy devices that meet the Company's strategy of
offering units at all key price points and represent standard state-of-the-art
CPAP systems that provide high-quality treatment options at an economical price.
The Virtuoso and Tranquility Auto CPAP systems utilize innovative technology to
monitor the patient's airway and adjust output automatically in order to deliver
the appropriate pressure. The REMstar Pro, Aria and Virtuoso CPAP systems, as
well as the BiPAP Duet Airway Management System described below, also feature
built-in memory to record patient usage and quality of life data. The Company's
Encore SmartCard is an easy-to-use device to retrieve this patient data, update
air pressure settings, and change modes of operations for certain of the
Company's CPAP and bi-level devices by utilizing specially developed data
management software that is programmed onto the credit card sized Encore
SmartCard.
The BiPAP Duet Airway Management System, the BiPAP Pro, the Tranquility
Bi-level System, and the BiPAP S Airway Management System are the Company's
bi-level OSA units. These units sense the patient's breathing cycle and adjust
the pressure accordingly. The Duet and BiPAP Pro units also contain advanced
leak-sensing technology, which improves the unit's pressure adjustment
capability. Bi-level units are used to treat severe OSA and are useful in
improving acceptance of therapy by patients who have difficulty tolerating CPAP.
The Company also offers both integrated and stand-alone humidifiers as
accessories to support its strategy of enhancing patient adherence to the
therapy provided by its CPAP and bi-level devices. Humidifying the air that
flows into the patient's airway provides more comfortable therapy for certain
patients.
5
The Company also provides masks used with CPAP and bi-level devices
including the Comfort Series (consisting of the Profile Lite, ComfortSelect,
ComfortClassic, and Simplicity masks), the Contour Nasal Mask, the GEL and
GoldSeal Masks, the Soft Series Nasal Mask, and Full Face Masks. The Company
believes that its nasal mask products were the first masks to adequately seal on
a patient's face for nasal CPAP delivery, thereby minimizing patient discomfort
and promoting increased patient compliance with prescribed usage. The Company's
nasal mask products are all designed to enhance patient comfort by utilizing a
variety of shapes and designs and a variety of cushion materials to create a
comfortable mask seal around the contours of the face while delivering effective
CPAP and bi-level therapy. Full Face Masks address the needs of specific patient
groups for whom CPAP and bi-level therapy is delivered most effectively and
comfortably through masks that cover the mouth and nose.
Respironics also manufactures and distributes a wide range of
technologically advanced computer-based products for use in the diagnosis of
sleep related disorders. The Company provides advanced, technically proficient
clinical products for use in sleep disorders laboratories (commonly known as a
"sleep lab"). The Company also provides products for patient testing in the home
which allow clinicians to expand the number of patients who can be served by a
traditional sleep disorders lab.
The Company's primary sleep diagnostic product is the Alice System. Alice
is a computer-based system for use in sleep labs and other clinical settings. It
is capable of recording up to 25 channels of physiological data, which are
stored on either a desktop or portable computer prior to permanent storage on
optical cartridges. In addition to acquiring and storing the patient's
physiological data, the Alice system utilizes physician input and internal
algorithms to provide a comprehensive range of reports for clinical analysis.
Alice can be used on either infants or adults and separate software programs
were developed specifically for each type of patient.
The Company also manufactures and markets Stardust, a palm-sized portable
sleep system which monitors up to seven channels of physiological data for up to
ten hours per patient and features pre-programmed host software that simplifies
data analysis. Among other factors, Stardust is distinguished by its
physiological sensors which are specifically designed for use in the home. These
sensors record a variety of patient data and the information is subsequently
sent to the sleep lab or other clinical setting where it is interpreted by a
trained clinician.
The Synchrony Sleep Lab System, consisting of the Synchrony pressure
generator and a palm-sized remote control unit is used by clinicians in
prescribing therapy for the treatment of adult OSA once a diagnosis has been
made.
The Company estimates that in the U.S. there are in excess of 2,500 sleep
labs which currently exist at hospitals, other medical centers, and
free-standing sites where pulmonologists, technicians and other medical
professionals diagnose OSA (as well as other sleep disorders) and then prescribe
the appropriate treatment. Such sleep labs provide the most frequent source of
patient introductions to the Company's homecare sleep products.
The OSA patient can purchase or rent the Company's OSA therapy products
from home medical equipment service provider and dealer locations throughout
most of the world. Personnel at each of these locations are generally equipped
to train the patient in the product's use and to maintain and service the
product. See "Sales, Distribution, and Marketing". The retail price for a CPAP
unit ranges from $1,100 to $1,600, depending on type of unit, geographical
market and whether certain accessories are purchased. The retail price for a
bi-level OSA unit generally ranges from $2,300 to $3,200, depending on which
model is purchased. The Company's sleep diagnostic products are sold through
dealers and directly to clinical sites.
Non-invasive Ventilation Products. The Company believes it is the leading
manufacturer and marketer of non-invasive ventilatory support devices in the
U.S. Such devices are intended to augment the ventilation of a spontaneously
breathing patient, but are not intended to satisfy the total ventilatory
requirements of the patient.
The Company's principal non-invasive ventilatory support product is the
BiPAP Synchrony Ventilatory Support System. This device is a low-pressure,
electrically-driven flow generator with an electronic pressure control designed
to augment patient breathing
6
by supplying pressurized air to the patient. This device senses the patient's
breathing and adjusts its output to assist in inhalation and exhalation.
Additionally, the device compensates for mask leaks, which often occur in the
delivery of ventilatory support to the patient, thereby providing what the
Company believes is a more efficient and consistent non-invasive therapy than
competing ventilators. The face masks described above are also used with the
non-invasive ventilatory support units.
The Company believes that its non-invasive ventilatory support product
has the potential for increasing patient comfort by adapting to the patient's
breathing cycles as opposed to requiring the patient to adapt his breathing to
the ventilator cycles and by delivering therapy effectively with a patient mask
rather than requiring intubation. The retail price for the unit, which ranges
from $6,000 to $8,000, also compares favorably to the cost of invasive
ventilators, which generally retail for $10,000 to $28,000.
Insurance coverage by federal government insurance programs for home use
in the United States of non-invasive ventilatory support products like the
Company's BiPAP Synchrony Ventilatory Support System was modified during fiscal
year 2000. The Company's sales of these products for home use in the United
States were adversely affected by this modification. The Company expects that
opportunities for significant growth in its sales of non-invasive ventilatory
support units for home use in the United States are likely to continue to be
limited. See "Business -- Third Party Reimbursement" for additional information.
Invasive Ventilation Products. The Company believes that it is one of the
leading manufacturers and marketers of invasive portable volume ventilators that
are used in the home by individuals who are dependent on the ventilators for
continuous life support.
The Company's principal invasive portable volume ventilator is the
PLV-100, a microprocessor-controlled, electrically-powered unit specifically
designed for long-term use in the home and also suitable for transport,
short-term, and institutional use. The PLV-100 can be used to ventilate a wide
range of patients. The small, lightweight unit delivers volume ventilation
through the operation of a piston inside the unit, and it can be powered by
normal AC power or DC battery power and can be operated in three different
ventilation modes depending on the patient's needs. The unit features a variety
of alarms and displays to alert clinicians and caregivers to changes in the
patient's pulmonary status or to possible unit malfunction. The Company
manufactures and distributes different versions of the PLV-100 for international
markets based on language differences, and it also manufactures and distributes
a variety of accessories for use with the PLV-100. The PLV-100 unit and related
accessories reach end user patients primarily through the Company's network of
medical product dealers who purchase or rent the unit from the Company and
resell or rent it to end users. In certain limited cases, the Company rents
these units directly to end users.
Oxygen Products. The Company's principal oxygen products are oxygen
concentrators, which provide a continuous flow of oxygen by separating it from
room air with a molecular sieve composed of an inorganic silicate. Oxygen
concentrators are generally used in the home by patients who require
supplemental oxygen. Supplemental oxygen is prescribed for people with a variety
of chronic pulmonary disorders, such as lung cancer, emphysema, bronchitis or
acute pneumonia. These individuals generally rent an oxygen delivery system from
a home medical equipment dealer. The Company believes it is currently one of the
leaders in the manufacture and sale of oxygen concentrators in the United
States.
The Company's primary oxygen concentrator product is the Respironics
Millennium. This unit is designed to be easy to maintain and service and is
suitable for chronic patients in the advanced stages of illness and for the less
severe respiratory patient. The Respironics Millennium also features a low sound
level and is mobile, both of which are important features for devices such as
this that are used in the home.
The Company also manufactures and markets oximeter products for use in
the home. The units, which allow the caregiver to take readings of the patient's
blood oxygen levels and pulse rate, feature the capability to store up to 18
hours of data.
7
This data can be later downloaded via the Company's software, which prints
reports for oximetry analysis.
Infant Management and Developmental Care Products. The Company's primary
infant management products are monitoring devices designed for infants at risk
for sudden infant death syndrome or "SIDS." SIDS is the sudden unexpected death
of an infant which remains unexplained after investigation and is one of the
leading causes of death in the United States of infants between one month and
one year of age. Despite extensive research, the causes of SIDS remain unknown.
High-risk infants who are prescribed home monitors include infants with low
birth weight, those who are premature, those who survive serious
cardiorespiratory episodes and those born to a family with a SIDS incident
history. There are limited alternative monitoring technologies generally
available.
The Company's primary infant monitor is the SmartMonitor, a
fifth-generation microprocessor-based design that incorporates many aspects of a
physiological recorder into the traditional monitor. In addition to sounding an
alarm to alert the parents, the SmartMonitor documents patient episodes with an
internal electronic memory system, enabling physicians to study up to six
channels of patient waveforms in order to assess the medical significance of the
alarm episodes and determine the need for continued monitoring or possible
hospitalization. The data collected by the SmartMonitor can be transmitted from
the home to a clinical center over phone lines or can be extracted from the
SmartMonitor using a memory transfer device such as a computer.
The Company also manufactures and markets the Wallaby II Phototherapy
System, a cost-effective, home-based alternative to conventional overhead
phototherapy lights for treating newborn jaundice, a condition which is caused
by elevated levels of bilirubin in the blood and which, in severe cases, can
result in brain damage.
The Company also markets the BiliChek Non-Invasive Bilirubin Analyzer, a
non-invasive device that measures the level of bilirubin in the blood of
infants. The current method of measuring bilirubin levels to diagnose jaundice
in infants, the "heel stick," involves drawing blood from the infant and is a
painful, costly and time consuming procedure. BiliChek replaces the heel stick
by analyzing reflected light shined on an infant's forehead to generate
immediate and painless test results at a low cost. The Company has exclusive
distribution rights in the United States and Canada for the BiliChek, and the
device has received clearance to market from the FDA for infants before, during,
and after phototherapy treatment.
The Company also markets developmental care products and services
designed to improve the quality of care for premature infants. These
developmental care products are designed to meet the unique needs of premature
infants, including appropriately-sized infant care products, safety equipment,
and specialty feeding and skin care products. The Company also offers related
education products and programs. The Company's developmental care products are
used in the home and in neonatal and pediatric intensive care units of
hospitals.
Sales of homecare products and all related accessories and replacement
parts accounted for 83%, 85%, and 84% of the Company's net sales for its fiscal
years 2002, 2001, and 2000, respectively.
Hospital Products
-----------------
The Company has two major hospital product groups: therapeutic devices
that assist or control a patient's ventilation; and cardiorespiratory monitoring
devices that provide information about a patient's condition.
The Company's primary therapeutic devices are the BiPAP Vision and the
Esprit. The BiPAP Vision is a non-invasive ventilatory support device designed
specifically for hospital use and features an oxygen module, provides higher
flow and pressure functions than the Company's other non-invasive units, and is
designed to be easily upgradeable. The BiPAP Vision also includes integrated
airway pressure monitoring, an integrated display screen, a disposable circuit,
and a mounting stand,
8
all of which are designed to allow the unit to be used more easily in delivering
non-invasive ventilatory support in the hospital environment.
The Company also manufactures and markets the Esprit, a ventilator
designed for use in the hospital and institutional settings. Esprit is designed
to effectively deliver both invasive and noninvasive ventilation, thus
eliminating the need to use two separate ventilators for one patient and
allowing it to be used throughout the continuum of patient care. Esprit features
a graphical user interface with an infrared touch screen, alarm and status
indicators designed to allow rapid assessment of alarm conditions and patient
status, and is designed to be easily upgradeable.
The Company also manufactures, distributes, and rents several other
hospital ventilation products, including a version of the PLV-100 designed more
specifically for institutional use, and a variety of masks, tubing and headgear
similar to those used in the homecare market described above along with certain
other accessories specifically designed for hospital and institutional use.
The Company also manufactures and markets cardiorespiratory monitors,
sensors and related disposable accessories. These electronic devices provide
continuous measurements of a patient's cardiac output, carbon dioxide, oxygen
saturation, and respiratory mechanics parameters. The sensors for the Company's
devices are designed so that this patient data can be gathered noninvasively.
Noninvasive monitoring offers advantages over invasive monitoring, including a
reduced likelihood of infection and other associated complications that can
result from invasive monitoring. The Company's cardiorespiratory monitoring
devices are used in hospital operating rooms, intensive care units, emergency
departments, and while transporting patients to or within the hospital.
Sales of hospital products and accessories accounted for 12%, 10%, and
10% of the Company's net sales for fiscal years 2002, 2001, and 2000,
respectively.
Asthma and Allergy Products
---------------------------
The market for asthma devices is comprised primarily of peak flow meters
and drug delivery systems, including spacer devices. A peak flow meter provides
an objective measure of lung function and is used by the patient at home to
assist in the management of asthma. A spacer, when used with a metered dose
inhaler ("MDI"), facilitates the delivery of asthma medications.
The Company believes that it is currently the national leader in the sale
of peak flow meters, marketing products that include the ASSESS, AsthmaMentor,
and Asthma Check peak flow meters and the portable peak flow meter, Personal
Best. The Company also markets two spacer products known as OptiChamber and
OptiHaler. The revised National Asthma Education and Prevention Program
("NAEPP") Guidelines issued in March 1997 have placed further emphasis on the
use of peak flow meters and spacers to ensure effective asthma management.
OptiChamber represents an important growth area based upon NAEPP's expanded
indications for MDI anti-inflammatory therapy, including new recommendations for
use with children under five years of age.
The Company also distributes several models of medication nebulizers,
which dispense medication in a fine mist for inhalation deep into the lungs,
under the trade name Inspiration. The primary uses for nebulizers have been in
the treatment of respiratory diseases, such as emphysema and chronic bronchitis,
and conditions such as asthma or allergies. The Company's models utilize a
compressor to direct a flow of air through the nebulizer chamber which contains
medication in liquid form. An increase in the number of available respiratory
medications in recent years, coupled with the cost and efficacy of aerosol
delivery methods, has contributed to the growth of this market.
A variety of distribution channels are used for asthma and allergy
products, including specialty hospital dealers, homecare dealers, and, to a
lesser extent, pharmaceutical companies and retail pharmacies.
Sales of all asthma and allergy products accounted for 5%, 5%, and 6% of
the Company's net sales for its fiscal years 2002, 2001, and 2000, respectively.
9
Manufacturing and Properties
The Company owns or leases its manufacturing, office and
warehouse facilities. The Company's major facilities and their primary uses are
summarized below:
Square Feet Owned/Leased
United States:
Murrysville, Pennsylvania (offices) 55,000 Owned
Murrysville, Pennsylvania (offices) 20,000 Leased
Murrysville, Pennsylvania (manufacturing) 116,000 Owned
Plum Borough, Pennsylvania (offices and warehouse) 22,000 Leased
Kennesaw, Georgia (manufacturing) 129,000 Leased
Carlsbad, California (manufacturing) 85,000 Leased
Wallingford, Connecticut (manufacturing) 53,000 Leased
Cedar Grove, New Jersey (offices) 10,333 Leased
Youngwood, Pennsylvania (warehouse) 86,000 Leased
Edison, New Jersey (warehouse) 6,800 Leased
Houston, Texas (warehouse) 7,200 Leased
Concord, California (warehouse) 6,800 Leased
La Mirada, California (warehouse) 6,400 Leased
International:
Hong Kong (offices) 15,500 Leased
Shenzhen, China (manufacturing) 99,700 Leased
Subic Bay, Philippines (manufacturing) 22,700 Leased
Tokyo, Japan (offices) 4,600 Leased
Saitama City, Japan (warehouse) 7,400 Leased
Herrsching, Germany (offices and warehouse) 18,590 Leased
Nantes, France (offices and warehouse) 6,100 Leased
Paris, France (offices) 3,400 Leased
The Company also has approximately 50 sales and service centers
throughout Japan, each of which is approximately 700 square feet in size and is
leased.
Operations in the Far East and Europe are subject to the risks normally
associated with foreign operations including, but not limited to, foreign
currency fluctuations, possible changes in export or import restrictions and the
modification or introduction of other governmental policies with potentially
adverse effects. The change of control in Hong Kong from British to Chinese rule
has not affected the Company's operations.
The Company believes that its present facilities are suitable and
adequate for its current and presently anticipated future needs. While several
facilities are extensively utilized, additional productive capacity is available
through a variety of means including augmenting the current partial second shift
work schedule at the United States facilities. Rental space, which the Company
believes is readily available and reasonably priced near each current location,
could be utilized as well. The Company also owns land adjacent to the site on
which the Murrysville manufacturing facility listed above is located. Future
expansion in Murrysville, if needed, could take place on this land.
In March 2001, the Company sold its Westminster, Colorado facility that
had been closed as part of the Company's July 1999 restructuring. A gain of
approximately $2,000,000 was recorded on the sale, and the long-term debt
related to the facility was repaid. See Note L to the Consolidated Financial
Statements for additional information.
10
The Company generally performs all major assembly work on all of its
products. It manufactures many of the plastic components for its face mask
products and uses subcontractors to supply certain other components. The Company
believes that the raw materials for nearly all of its products are readily
available from a number of suppliers.
Sales, Distribution and Marketing
The Company sells and, in some cases, rents its products primarily to
home medical equipment service providers and hospital dealers. These parties in
turn resell and rent the Company's products to end-users. The Company also sells
certain of its products directly to hospitals. The Company's products reach its
customers in the United States primarily through the Company's field network,
which consists of 36 national and regional management employees, 121 direct
sales representatives and sales support specialists, 40 independent
manufacturers' representatives, and over 5,000 medical products distributors
(also referred to as "dealers").
The Company manages its U.S. dealer network through the direct sales
force and independent manufacturers' representatives. The Company's sales
management team includes a Vice President of Homecare Sales, a Vice President of
Hospital Sales and Marketing, a Vice President of Hospital Sales, twenty-two
Regional Sales Managers, and eleven National Accounts Managers. This team
directs the activities of the independent manufacturers' representatives, direct
sales representatives, and sales support specialists.
The Company's international sales efforts are conducted through a
President of International Sales, a Vice President of Europe, Africa, and Middle
East Sales, a Vice President of Asia Pacific Sales and Marketing, and a Director
of Latin American Sales and Marketing. The Company also has direct sales
representatives and a customer satisfaction staff in the Far East, Germany and
France. Total international sales force for the Company, including approximately
135 sales representatives from the recently acquired Fuji, is approximately 173
individuals, including management, account managers, sales support specialists,
and direct sales representatives. The Company's international sales employees
sell products from all three major product groups. International sales accounted
for approximately 20% of the Company's net sales for fiscal years 2002 and 2001,
and 21% for fiscal year 2000.
In November 1999, the Company introduced its new program-oriented
approach to doing business with homecare dealer customers (who are also referred
to as "providers"). These "Power Programs for Providers" incorporate specific
products with a package of diagnostic tools and other educational materials. The
programs are designed to support a provider's desire to offer the finest care
possible while assisting the provider in growing its business. The Company
currently offers five Power Programs: Sleep Management, Chronic Respiratory
Management, Ventilation Management, Asthma, Allergy, and Sinusitis Management,
and Infant Developmental Care.
The Company's marketing organization is currently staffed by Product
Managers, who are assigned to each of the Company's principal product groups.
The Product Managers stay abreast of changes in the marketplace, with an
emphasis on product use specifications, features, price, promotions, education,
training and distribution.
The Company's U.S. dealer customer base (which ranges in size from
large, publicly held dealers with several hundred branch locations to small,
owner-operated dealers with one location) continues to undergo consolidation,
particularly among dealers specializing in homecare products. The impact on the
Company of this customer consolidation is likely to continue to be reduced
selling prices for the Company's products as a result of greater purchasing
power and market dominance enjoyed by larger customers.
During the fiscal year ended June 30, 2002, one customer accounted
for 10% of net sales. While other similar national homecare dealer customers in
the U.S. accounted individually for less than 10% of sales, these customers
collectively constitute an important market for the Company's products.
11
The Company offers leasing programs to certain of its customers
through arrangements with independent leasing companies. In some cases, these
arrangements call for the Company to be contingently liable, in the event of a
customer default, to the leasing companies for certain unpaid installment
receivables initiated by or transferred to the leasing companies. The Company's
total exposure for unpaid installment receivables under these leasing programs
was approximately $30,254,000 and $22,670,000 at June 30, 2002 and 2001,
respectively. Approximately $11,826,000 of the June 30, 2002 balance consisted
of installment receivables acquired as part of the Novametrix acquisition. See
Note K to the Consolidated Financial Statements for additional information.
Competition
The Company believes that the principal competitive factors in all of
its markets are product and service performance and innovation, efficient
distribution and competitive price. Price competition has become more intense in
the last several years. In the case of a number of the Company's and its
competitors' products, patent protection is becoming more prevalent and of
increasing competitive importance. The Company competes on a product-by-product
basis with various other companies, some of which have significantly greater
financial and marketing resources and broader product lines.
The Company believes that it is a U.S. market leader in each major
market in which it competes: sleep disorders, chronic obstructive pulmonary
disease, asthma and allergy, and infant care products. However, other
manufacturers, including other larger and more experienced manufacturers of home
healthcare products, are active in these markets and the Company expects that
competition will increase. In its major product lines, the Company competes with
two principal competitors, Mallinckrodt Inc. ("Mallinckrodt") (which was
acquired by Tyco International Ltd ("Tyco") in October 2000) and ResMed, Inc.
("ResMed"). Mallinckrodt, which is the Company's largest major competitor and
has the greatest financial resources of the Company's competitors, offers an
array of products which compete with many of the Company's major products.
ResMed competes with the Company in the OSA and non-invasive ventilatory support
markets. The Company also competes with Invacare Corp., Vital Signs, Inc.,
Monaghan Medical Corp., Fisher & Paykel Healthcare Corp. Ltd., and with
divisions of Sunrise Medical, Inc. Additionally, the Company competes with a
number of foreign manufacturers, primarily in their local overseas markets and
to a lesser extent in the domestic market.
Similar to the Company's customer base, the medical device
manufacturing industry is also undergoing consolidation. Several of the
Company's competitors have been involved in acquisitions, most notably the
acquisition of Mallinckrodt by Tyco and the February 2001 acquisition by ResMed
of MAP, a German company that manufactures, among other things, CPAP devices.
The impact on the Company of this competitor consolidation is likely to be
greater competition from medical device manufacturers which can utilize the
financial and technical resources that may be made available as a result of the
consolidation.
Research and Development
The Company believes that its ability to identify product
opportunities, to respond to the needs of cardiopulmonary and other physicians
and their patients in the treatment of respiratory and other disorders and to
incorporate the latest technological innovations into its medical products has
been and will continue to be important to its success. The Company's research
and development efforts are focused on understanding the problems faced by
cardiopulmonary physicians and their patients' needs and on maintaining the
Company's technological leadership in its core product areas. The Company
maintains both formal and informal relationships with physician practitioners
and researchers to supplement these research and development efforts. The
Company's research and development efforts enable it to capitalize on
opportunities in the respiratory medical product market by upgrading its current
products as well as developing new products.
12
The Company conducts substantially all of its research and
development for existing and potential new products in the U.S. The Company
currently employs approximately 255 engineers, technicians, and support
personnel in such activities. The research and development staff performs
overall conceptual design work for all products and the design work related to
the manufacturing, engineering and tooling for products manufactured by the
Company. The Company spent approximately $17,317,000 (3% of net sales) in fiscal
year 2002, $15,281,000 (4% of net sales) in fiscal year 2001, and $16,815,000
(5% of net sales) in fiscal year 2000 to support product enhancement and new
product development.
New product introductions in all of the Company's core product areas
took place during fiscal years 2000, 2001, and 2002, including next generation
CPAP units, such as a new auto CPAP device, the BiPAP Synchrony, the BiPAP Pro,
the H2 Heated Humidifier, new sleep diagnostic products, a variety of new face
mask products, and several new asthma devices. The Company expects to release a
variety of new devices in its core product areas in fiscal year 2003. In some
cases, initial distribution has been, and will be, conducted in international
markets until regulatory clearance to market in the U.S. is obtained. See
"Regulatory Matters."
In addition to its development efforts in its core product areas, the
Company is actively pursuing product development activities in a variety of new
markets, including congestive heart failure, tracheal gas insufflation, and
humidification.
Research has indicated that as many as 50% of the patients with
congestive heart failure also have obstructive sleep apnea or Cheyne-Stokes
Respiration ("CSR"), a form of apnea with abnormal breathing patterns. The
Company believes that if both these conditions are identified and treated, the
apneas associated with each condition can be eliminated and the quality of life
and overall health of these patients can be improved. Additionally, the Company
believes that positive pressure therapy may eliminate CSR events and their
effects on heart failure, reduce the circulatory congestion associated with
heart failure, and improve the pumping efficiency of the heart into the
patient's circulatory system. Research, including clinical trials, is being
conducted to evaluate the long-term effects of positive pressure therapy on the
heart. The Company is also in discussion with the FDA regarding the technical
and clinical information that would be necessary to market a device for certain
congestive heart failure applications.
The Company is also developing a system focused on reducing carbon
dioxide blood gas levels in many ventilator patients with elevated carbon
dioxide levels. The Company is currently planning to introduce this tracheal gas
insufflation system in calendar year 2004 pending FDA clearance to market.
The Company is also developing a hospital humidification system
designed to provide optimal humidification at lower usage cost than current
products, with a goal of introduction in fiscal year 2003; initial introductions
to occur in international markets and later in the U.S. pending FDA clearance to
market.
The Company is also continuing its research on the treatment of
insomnia.
Patents, Trademarks and Licenses
The Company seeks patent protection for certain of its products
through the prosecution and acquisition of patents and exclusive licensing
arrangements. In addition, the Company aggressively defends its patents when
infringed by other companies. The Company currently has approximately 278 U.S.
and foreign patents and has additional U.S. and foreign patent applications
pending. Some of these patents and patent applications relate to significant
aspects and features of the Company's products. Eighteen of these patents expire
in the next five years as follows: three expire in fiscal year 2003, three
expire in fiscal year 2004, four expire in fiscal year 2005, three expire in
fiscal year 2006, and five expire in fiscal year 2007. The Company believes that
the expiration of these patents will not have a material adverse impact on its
competitive position.
The Company also has approximately 275 registered U.S. and foreign
trademarks and has additional U.S. and foreign trademark applications pending.
The Company is a party to a legal action relating to the patents of
its competitors. See "Item 3 - Legal Proceedings" for more information regarding
this action.
13
Regulatory Matters
The Company's products are subject to regulation by, among other
governmental entities, the FDA and corresponding foreign agencies. The FDA
regulates the introduction, manufacture, advertising, labeling, packaging,
marketing and distribution of and recordkeeping for such products. In
manufacturing and marketing its products, the Company must comply with FDA
regulations and is subject to various other FDA recordkeeping and reporting
requirements and to inspections by the FDA. The testing for and preparation of
required applications can be expensive, and subsequent FDA review can be lengthy
and uncertain. The FDA also regulates the clinical testing of medical devices.
Moreover, clearance or approval, if granted, can include significant limitations
on the indicated uses for which a product may be marketed. Failure to comply
with applicable FDA regulations can result in fines, civil penalties,
suspensions or revocation of clearances or approvals, recalls or product
seizures, operating restrictions or criminal penalties. Delays in receipt of, or
failure to receive, clearances or approvals for the Company's products for which
such clearances or approvals have not yet been obtained would adversely affect
the marketing of such products in the U.S. and could adversely affect the
results of future operations.
The Company must obtain FDA or foreign regulatory approval or
clearance for marketing the Company's new devices prior to their release. There
are two primary means by which the FDA permits a medical device to be marketed.
A manufacturer may seek clearance for the device by filing a 510(k) premarket
notification with the FDA. To obtain such clearance, the 510(k) premarket
notification must establish that the device is "substantially equivalent" to a
device that has been legally marketed under a 510(k) notification or was
marketed before May 28, 1976. The manufacturer may not place the device into
commercial distribution in the U.S. until a substantial equivalence
determination notice is issued by the FDA. The FDA, however, may determine that
the proposed device is not substantially equivalent, or require further
information, such as additional test data or clinical data, or require the
Company to modify its product labeling, before it will make a finding of
substantial equivalence. The process of obtaining FDA clearance of a 510(k)
premarket notification, including testing, preparation of the 510(k) premarket
notification and subsequent FDA review, can take a number of years and require
the expenditure of substantial resources.
If a manufacturer cannot establish to the FDA's satisfaction that a
new device is substantially equivalent to a legally marketed device, it will
have to seek approval to market the device through the premarket approval
application ("PMA") process. This process involves preclinical studies and
clinical trials. The process of completing clinical trials, submitting a PMA and
obtaining FDA clearance takes a number of years and requires the expenditure of
substantial resources. In addition, there can be no assurance that the FDA will
approve a PMA. The Company's export activities and clinical investigations also
are subject to the FDA's jurisdiction and enforcement.
Foreign regulatory approvals vary widely depending on the country.
The Company has received ISO 9001 certification for its Murrysville, Kennesaw,
Carlsbad, Wallingford, Cedar Grove, and Shenzhen facilities from the
International Organization of Standards, a quality standards organization based
in Geneva, Switzerland. The Company has also received authorization for the same
facilities, under the European Union's Medical Device Directives, to affix the
"CE Mark" to the Company's products marketed throughout the world. The primary
component of the certification process was an audit of the facilities' quality
systems conducted by an independent agency authorized to perform conformity
assessments under ISO guidelines and the Medical Device Directives. Since
receiving its original ISO 9001 certification, these facilities have undergone
periodic update audits by such independent agencies.
Third Party Reimbursement
The cost of a significant portion of medical care in the U.S. is
funded by government and private insurance programs, such as Medicare, Medicaid
and corporate health insurance programs including health maintenance
organizations and managed care organizations. The Company's future results of
operations and financial condition could be negatively affected by adverse
changes made in the reimbursement policies for medical
14
products under these insurance programs. If such changes were to occur, the
ability of the Company's customers (medical product distributors and dealers) to
obtain adequate reimbursement for the resale or rental of the Company's products
could be reduced. In recent years, limitations imposed on the levels of
reimbursement by both government and private insurance programs have become more
prevalent.
The Company has obtained "procedure codes" for its homecare products
from the Centers for Medicare and Medicaid Services ("CMS") (formerly known as
the Healthcare Financing Administration). These procedure codes enhance the
ability of medical product distributors and dealers to obtain reimbursement for
providing products to patients covered by Medicare. In addition, many private
insurance programs also use the CMS procedure code system. However,
reimbursement levels can be reduced after a procedure code has been established.
The amount of reimbursement that a hospital can obtain under the
Medicare diagnosis related group ("DRG") payment system for utilizing the
Company's products in treating patients is a primary determinant of the revenue
that can be realized by medical product distributors and dealers who resell or
rent the Company's hospital products. Many private insurance programs also
utilize the Medicare DRG system. The various uses of the Company's hospital
products to treat patients are provided within the DRG system. The levels of
reimbursement under the DRG system are also subject to review and change.
Employees
The Company currently has approximately 2,600 employees, including
approximately 800 hourly employees in the U.S. and 600 hourly employees in the
Far East. None of the Company's employees are covered by collective bargaining
agreements. The Company considers its labor relations to be good and has never
suffered a work stoppage as a result of a labor conflict.
Financial Information About Foreign and Domestic Operations and Export Sales
Financial information concerning foreign and domestic operations and
export sales is discussed in Item 1, "Business - Sales, Distribution and
Marketing", and set forth in Note I of the Consolidated Financial Statements
included in this Annual Report.
Item 2. Properties
----------
Information with respect to the location and general character of the
principal properties of the Company is included in Item 1, "Business -
Manufacturing and Properties."
Item 3. Legal Proceedings
-----------------
U.S. ResCare Litigation
In January 1995 ResCare (now ResMed Limited; hereinafter "ResCare")
filed an action (the "California suit") against the Company in the United States
District Court for the Southern District of California alleging that in the
manufacture and sale in the United States of nasal masks and CPAP systems and
components, the Company infringes three U.S. patents, two of which are owned by
and one of which is licensed to ResCare (the "ResCare patents"). The patents
involved in the California suit deal with basic CPAP, mask applications and a
delay timer feature of ResCare's CPAP devices. In the complaint, ResCare seeks
preliminary and permanent injunctive relief, an accounting for damages and an
award of three times actual damages because of the Company's alleged willful
infringement of the ResCare patents.
15
In its answers to ResCare's complaint, the Company denied, in all
material respects, the allegations of the complaint. The Company also filed an
action in the United States District Court for the Western District of
Pennsylvania against ResCare seeking declaratory judgments that the ResCare
patents in issue are either invalid or unenforceable or that the Company does
not infringe the patents.
Also as part of its response to the ResCare complaint, the Company
filed a motion in the United States District Court for the Southern District of
California seeking to transfer the California suit to the United States District
Court for the Western District of Pennsylvania and to consolidate the two suits.
The motion was granted and the cases have been consolidated in Pittsburgh,
Pennsylvania.
In June 1996 ResCare filed another action against the Company in the
United States District Court for the Western District of Pennsylvania alleging
that in the manufacture and sale in the United States of CPAP systems, the
Company infringes a fourth U.S. patent that had been recently issued to ResCare
relating to the delay timer technology component used in CPAP systems. In this
additional litigation, ResCare seeks similar damages as in the pre-existing
patent suits. This suit was consolidated, upon the Company's motion, with the
pre-existing patent suits described above and discovery is now proceeding on the
consolidated action. No trial date has been set.
The Court has granted the Company's various motions for summary
judgment and held that the Company does not infringe any of ResCare's four
patents at issue. ResCare may seek an appeal of those decisions. In any event,
the Company intends to continue to pursue its claims that the ResCare patents
are invalid or unenforceable.
Other
The Company is, as a normal part of its business operations, a party
to other legal proceedings in addition to those described above. Legal counsel
has been retained for each proceeding and none of these proceedings is expected
to have a material adverse impact on the Company's results of operations or
financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
During the fourth quarter of the fiscal year 2002, no matters were
submitted to a vote of security holders.
PART II
Item 5. Market For Registrant's Common Equity and Related Shareholder Matters.
----------------------------------------------------------------------
As of June 30, 2002, 36,885,795 shares of the Company's common stock
were issued and outstanding, of which 3,592,725 are held in treasury. The common
stock is traded in the over-the-counter market and is reported on the NASDAQ
National Market system under the symbol "RESP". As of September 23, 2002, there
were 2,252 holders of record of the Company's common stock.
On June 21, 2002, the Company issued shares of common stock to Photios
T. Paulson, as a warrant holder for shares in Novametrix Medical Systems Inc.
("Novametrix") which was converted into a warrant to acquire the Company's
common stock in connection with the acquisition of Novametrix. In consideration
for the issuance of 2,541 shares, Photios T. Paulson paid an exercise price of
$26,248.53. The issuance of shares was exempt from the registration requirements
of the Securities Act of 1933 under section 4(2) as a transaction not involving
any public offering.
16
The Company has never paid a cash dividend with respect to its
common stock and does not intend to pay cash dividends in the foreseeable
future.
High and low sales price information for the Company's common
stock for the applicable quarters is shown below.
Fiscal year ended June 30, 2002:
First Second Third Fourth
----- ------ ----- ------
High $37.00 $37.05 $37.88 $36.36
Low $27.75 $30.54 $23.79 $30.81
Fiscal year ended June 30, 2001:
First Second Third Fourth
----- ------ ----- ------
High $19.13 $34.00 $30.75 $35.13
Low $16.25 $15.69 $22.94 $26.19
Item 6. Selected Financial Data
-----------------------
(Dollars in thousands except per share data)
Income Statement Data:
Year Ended June 30
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net sales $ 494,919 $ 422,438 $ 368,184 $ 357,571 $ 351,576
Cost of goods sold 260,795 223,362 196,520 186,487 180,650
Cost of goods sold -
restructuring charges 0 725 8,710 0 0
--------- --------- --------- --------- ---------
234,124 198,351 162,954 171,084 170,926
General and administrative
expense 60,719 50,126 48,754 48,521 37,200
Sales, marketing and
commission expense 86,189 72,428 62,772 60,899 65,560
Research and development
expense 17,317 15,281 16,815 16,714 20,225
Integration and
restructuring charges
(credits) 2,288 (1,909) 20,486 2,415 0
Impairment charge 2,006 0 0 0 0
Merger related costs 0 0 0 0 40,751
Costs associated with
unsolicited offer to acquire
Healthdyne Technologies, Inc. 0 0 0 0 650
Interest expense 3,011 7,546 6,945 5,206 4,189
Other income (1,442) (1,029) (1,394) (1,127) (1,513)
--------- --------- --------- --------- ---------
Income before income taxes 64,036 55,908 8,576 38,456 3,864
Income taxes 25,619 22,337 2,824 15,395 5,689
--------- --------- --------- --------- ---------
Net income (loss) $ 38,417 $ 33,571 $ 5,752 $ 23,061 $ (1,825)
========= ========= ========= ========= =========
Earnings (loss) per share $ 1.20 $ 1.09 $ 0.19 $ 0.72 $ (0.06)
========= ========= ========= ========= =========
Weighted average number
of shares used in computing
earnings per share 32,008 30,886 30,004 31,956 32,098
17
Balance Sheet Data:
June 30
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Working capital $198,966 $171,985 $155,095 $155,336 $137,550
Total assets 547,450 367,295 352,577 343,585 318,320
Total long-term
obligations 59,502 80,055 108,095 99,374 69,316
Shareholders' equity 367,720 235,268 191,106 194,521 200,840
- -------------------------
There were no cash dividends declared during any of the periods presented in the
above table.
18
Item 7. Management's Discussion and Analysis of Results of Operations and
-----------------------------------------------------------------
Financial Condition
-------------------
Results of Operations
Net sales for fiscal year 2002 were $494,919,000, representing a 17%
increase in sales over the $422,438,000 recorded in fiscal year 2001. Fiscal
year 2001 net sales represented a 15% increase in net sales over the
$368,184,000 recorded in fiscal year 2000. Increases in unit and dollar sales
for the Company's obstructive sleep apnea therapy devices (the Company's largest
product line) and oxygen concentrator devices, as well as increases in the sales
of masks and accessories, helped to drive the increase in sales for both fiscal
years. These product lines, along with ventilation devices, comprise the major
part of the Company's homecare product offerings. Sales of the Company's
hospital products, particularly the Vision(TM) and Esprit(R) ventilators, also
contributed to the increase in sales in the 2002 fiscal year. During fiscal year
2001, sales of the Company's hospital products also increased compared to fiscal
year 2000, including unit and dollar increases for the Company's Esprit(R)
ventilator.
Fiscal year 2002 sales included approximately $12.7 million of net sales
for Novametrix Medical Systems Inc. ("Novametrix"), a leading cardiorespiratory
monitoring company acquired by the Company during the fourth quarter of fiscal
year 2002. Included in the sales from Novametrix were approximately $9.5 million
of net sales for cardiorespiratory hospital devices and approximately $3.2
million of net sales for developmental infant care products. Fiscal year 2002
sales also include one month of sales for the distribution company Fuji, RC Co.,
Ltd ("Fuji"), in which the Company obtained a majority interest in the fourth
quarter of fiscal year 2002. The Company's results of operations include the
results from both companies since the acquisition dates. For additional
information regarding Novametrix and Fuji, see the Financial Condition,
Liquidity, and Capital Resources section of this Management's Discussion and
Analysis and Note O to the Consolidated Financial Statements.
The Company's gross profit was 47% for fiscal years 2002 and 2001, and
44% for fiscal year 2000. Excluding the impact of purchase accounting
adjustments and restructuring charges described below, the Company's gross
profit was 48% of net sales for fiscal year 2002 compared to 47% of net sales
for fiscal years 2001 and 2000. The increase in gross profit percentage for
fiscal year 2002 compared to the prior years was primarily due to higher
revenue, the impact of higher gross margin from acquired entities, and a shift
in sales mix.
General and administrative expenses, including the additions to the
allowance for doubtful accounts described below, were $60,719,000 (12% of net
sales) for fiscal year 2002, $50,126,000 (12% of net sales) for fiscal year
2001, and $48,755,000 (13% of net sales) for fiscal year 2000. The increase in
absolute dollars of expense for fiscal year 2002 was due in part to additional
general and administrative expenses for one of the Company's two acquisitions,
Novametrix. The increases in expenses for all the periods presented were due
primarily to increased information technology department expenses, credit and
collection department expenses, and other spending consistent with the growth of
the Company's business. Partially offsetting these increases in expenses in all
three fiscal years were lower operating expenses due to the Company's previous
restructuring efforts. Fiscal year 2001 general and administrative expenses
includes a previously disclosed addition to the allowance for doubtful accounts
of $1,200,000 (less than 1% of net sales) to address the potential
uncollectability of the balance due from one of the Company's significant
hospital distribution customers which ceased operations during the year. The
fiscal year 2000 general and administrative expenses includes an addition to the
allowance for doubtful accounts of $4,500,000 (1% of net sales) related to a
previously disclosed filing by one of the Company's major customers under
Chapter 11 of the U.S. Bankruptcy Code. The Company's total balance due from the
customer at the date of the Chapter 11 filing was approximately $4,500,000.
Sales, marketing and commission expenses were $86,189,000 (17% of net
sales) for fiscal year 2002 as compared to $72,428,000 (17% of net sales) for
fiscal year 2001 and $62,772,000 (17% of net sales) for fiscal year 2000. The
increases in absolute dollars of expense for fiscal years 2002 and 2001 were due
primarily to increased sales (resulting in higher commission and sales bonus
expenses) and increased sales,
19
marketing, product support, and service activity levels across the Company's
product lines, partially offset by lower operating expenses due to the Company's
previous restructuring efforts. Fiscal year 2002 also included additional sales,
marketing and commission expenses for Novametrix and Fuji since their
acquisition dates.
Research and development expenses were $17,317,000 (3% of net sales) for
fiscal year 2002, as compared to $15,281,000 (4% of net sales) for fiscal year
2001 and $16,815,000 (5% of net sales) for fiscal year 2000. The increase in
absolute dollars for the current fiscal year was due to the Company's continuing
commitment to research, development and new product introduction. The current
fiscal year also included additional research and development expense for
Novametrix. The decrease in absolute dollars of expense for fiscal year 2001
compared to fiscal year 2000 was due primarily to the timing of certain research
and development projects and the impact of certain new products transitioning
from development into production. Significant product development efforts are
ongoing, and new product launches in all of the Company's major product lines
took place in fiscal years 2002, 2001, and 2000, with additional new product
launches scheduled for fiscal year 2003. In the current fiscal year, new
products such as the REMstar(R) Auto CPAP (Continuous Positive Airway Pressure)
device, the BiPAP(R) Pro bi-level obstructive sleep apnea therapy unit, the H2
Heated Humidifier (the latest addition to the Company's line of heated
humidifiers for CPAP and bi-level devices), and two new masks, the
ComfortClassic(TM) Nasal Mask and the ComfortSelect(TM) Nasal Mask were
introduced. Additional development work and clinical trials are being conducted
in certain product areas outside the Company's current core products or patient
groups, including products designed to treat congestive heart failure.
As part of the acquisition of Novametrix, during the fourth quarter of
fiscal year 2002, the Company incurred a non-recurring purchase accounting
adjustment in cost of goods sold of $1,653,000 related to reversing acquisition
date inventory fair market value adjustments as inventory was sold subsequent to
the acquisition. Also incurred during the fourth quarter of fiscal year 2002
were non-recurring charges of $2,288,000 for integration and restructuring costs
related to the Novametrix acquisition, primarily for the elimination and
centralization of certain duplicate back office functions. During the fourth
quarter of fiscal year 2002, the Company also incurred an impairment charge of
$2,006,000 representing the write-off of intangible assets, inventory, and fixed
assets related to an oxygen monitoring technology development project that was
cancelled based in part on the results of a review of that technology by
engineers at Novametrix. See the Financial Condition, Liquidity, and Capital
Resources section of this Management's Discussion and Analysis and Note O to the
Consolidated Financial Statements for additional information regarding these
non-recurring charges.
During fiscal year 2000, the Company incurred a charge of $29,200,000
related to a previously disclosed restructuring of its U.S. operations. This
restructuring included facility closings and downsizings, a management
realignment, and a workforce reduction. The primary components of these costs
were severance and employment related costs ($6,300,000), asset write-downs to
reflect decisions made regarding product, facility, and systems rationalization
($8,900,000), and lease buyouts related to facility rationalizations and other
direct expenses of the restructuring ($14,000,000). Approximately $8,700,000 of
these charges relate to inventory write-offs in connection with product
rationalizations and have been reported as a separate component of cost of goods
sold.
During fiscal year 2001, the Company incurred additional restructuring
charges of $800,000 related to the restructuring described above, primarily for
inventory write-offs of discontinued products. Also during fiscal year 2001, the
Westminster, Colorado facility, which had been closed in the restructuring, was
sold for a gain of approximately $2,000,000 and debt on the facility totaling
approximately $4,100,000 was repaid. See the Financial Condition, Liquidity, and
Capital Resources section of this Management's Discussion and Analysis and Note
L to the Consolidated Financial Statements for additional information regarding
the restructuring.
During the fiscal year ended June 30, 2000, the Company reached an
agreement with the Internal Revenue Service regarding examinations of federal
income tax returns for certain of the Company's U.S. entities for fiscal years
1996 through 1998. Based on this agreement, the Company recorded a one-time
reduction in income tax liability and income tax expense of $1,643,000 during
fiscal year 2000.
20
The Company's effective income tax rate (excluding the one-time reduction
in income tax liability described above) was 40% for fiscal years 2002, 2001,
and 2000. The Company's effective tax rate for fiscal year 2000 including the
item above was 33%.
As a result of the factors described above, the Company's net income was
$38,417,000 (8% of net sales) or $1.20 per diluted share for fiscal year 2002 as
compared to $33,571,000 (8% of net sales) or $1.09 per diluted share for fiscal
year 2001 and $5,752,000 (2% of net sales) or $0.19 per diluted share for fiscal
year 2000.
Excluding the impact of the various non-recurring items described above,
the Company's net income was $42,270,000 (9% of net sales) or $1.32 per diluted
share for fiscal year 2002 as compared to $33,581,000 (8% of net sales) or $1.09
per diluted share for fiscal year 2001 and $25,363,000 (7% of net sales) or
$0.85 per diluted share for fiscal year 2000.
Financial Condition, Liquidity and Capital Resources
The Company had working capital of $198,966,000 and $171,985,000 at June
30, 2002 and 2001, respectively. Net cash provided by operating activities was
$87,186,000 for fiscal year 2002 as compared to $52,224,000 for fiscal year 2001
and $23,620,000 for fiscal year 2000. The increase in cash flow from operating
activities for all three fiscal years was primarily a result of higher earnings.
Fiscal year 2002 cash flow was positively impacted by a decrease in inventory
and other current asset levels compared to increases in these balances in prior
years, as well as a positive impact of changes in accounts payable and accrued
expenses compared to fiscal year 2001.
Net cash used by investing activities was $44,556,000, $27,599,000, and
$28,390,000 for fiscal years 2002, 2001, and 2000, respectively. The majority of
the cash used by investing activities for all periods represented capital
expenditures, including the purchase of leasehold improvements and facilities,
production equipment, computer hardware and software, and telecommunications and
office equipment. In addition, cash used by investing activities in all three
fiscal years included additional purchase price paid for a previously acquired
business pursuant to the terms of that acquisition agreement. In fiscal year
2002, cash used for investing activities also included the purchase price paid
for Novametrix and Fuji, net of cash acquired. See discussion below and Note O
to the Consolidated Financial Statements for additional information about these
acquisitions. Positive cash flows from operating activities and accumulated cash
and cash equivalents provided funding for investment activities in all years.
Net cash provided by financing activities includes borrowings and
repayments under the Company's various long-term obligations, proceeds from the
issuance of common stock under the Company's stock option plans, and the
acquisition and use of treasury stock.
In connection with customer leasing programs with independent leasing
companies, the Company is contingently liable, in the event of a customer
default, to the leasing companies within certain limits for unpaid installment
receivables initiated by or transferred to the leasing companies. The transfer
of certain of these installment receivables meets the criteria of Statement of
Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities," and therefore are not
recorded on the Company's financial statements. The total exposure for unpaid
installment receivables meeting these criteria and not recorded on the Company's
financial statements was approximately $18,428,000 and $22,670,000 at June 30,
2002 and 2001, respectively. The transfer of the remainder of these installment
receivables (consisting of installment receivables acquired as part of the
Novametrix acquisition) does not meet the criteria of this Standard and
therefore must be recorded as collateralized borrowing arrangements.
Accordingly, the Company has included $11,826,000 of receivables sold with
recourse as assets in prepaid expenses and other at June 30, 2002 and has
recorded offsetting liabilities at that date in accrued expenses and other.
From August 1998 through September 1999, the Company's Board of Directors
authorized several stock buybacks which represented authorization to purchase up
to
21
4,000,000 shares of the Company's outstanding common stock. During fiscal year
2000, the Company repurchased, net of share usage, a total of 1,044,000 shares
in open market transactions resulting in a net use of cash of $9,201,000. No
shares were repurchased by the Company during fiscal years 2001 or 2002.
Including shares repurchased prior to fiscal year 2000, the Company has
repurchased a total of 3,800,000 shares under this buyback program. At June 30,
2002, approximately 3,593,000 shares remained in treasury. Shares that are
repurchased are added to treasury shares pending future use and reduce the
number of shares outstanding used in calculating earnings per share.
In May 1998, the Company finalized a $100,000,000 revolving credit
facility with a group of commercial banks. This credit facility was initially
used to refinance approximately $55,000,000 of the Company's existing long-term
debt with the remaining balance of the facility available for future borrowing.
The credit facility was also used for general corporate purposes, including the
stock buyback described above. The revolving credit facility permitted
borrowings and repayments until its maturity in May 2003. In December 1998, the
amount of the revolving credit facility was increased to $125,000,000. The
revolving credit facility was unsecured and contained certain financial
covenants with which the Company must comply. The Company is currently in
compliance with these covenants. The interest rate on the revolving credit
facility was based on a spread over the London Interbank Borrowing Rate
("LIBOR"). During fiscal years 2002 and 2001, the Company repaid $18,200,000 and
$20,000,000, respectively, on the revolving credit facility. As of June 30,
2002, the interest rate on amounts outstanding under the revolving credit
facility was approximately 2.29%.
On August 19, 2002, the Company entered into a new Revolving Credit
Agreement with a group of banks under which a total of $150,000,000 is available
with similar terms and financial covenants. The new Revolving Credit Agreement
is also unsecured and matures in August 2005. See Notes D and N to the
Consolidated Financial Statements for additional information about the credit
facilities.
The Company has not provided a valuation allowance for deferred income
tax assets because it has determined that it is more likely than not that such
assets can be realized, at a minimum, through carrybacks to prior years in which
taxable income was generated.
On August 1, 2002, one of the Company's significant homecare distribution
customers announced that it filed a voluntary petition to reorganize under
Chapter 11 of the U.S. Bankruptcy Code in order to restructure its bank debt.
According to the press release issued in connection with the filing, this
restructuring was announced as a "100-percent plan," meaning that creditors and
vendors are expected to receive all that they are owed, either immediately or
over time with interest. The press release also stated that the Company's
customer elected to seek court protection in order to facilitate the
restructuring of its debt while continuing to maintain normal business
operations. The Company believes that based on current available information,
the Company's reserve levels as of June 30, 2002, are adequate relative to its
receivable with this customer. The Company will continue to monitor the
situation.
Note L to the Consolidated Financial Statements summarizes the
restructuring charges discussed above taken in regard to the fiscal year 2000
restructuring, including the reserve balances relating to these charges that
remain at June 30, 2002. The reserves shown for employee severance, lease
buyouts, and other direct expenses will require corresponding cash expenditures
in future periods. The Company does not expect to incur additional charges in
respect to this restructuring.
Note O to the Consolidated Financial Statements summarizes the two
acquisitions that the Company made in the fourth quarter of fiscal year 2002. In
the acquisition of Novametrix, the Company issued approximately 2,400,000 shares
of its common stock and issued stock options with a total value of approximately
$81 million. In the acquisition of its majority interest in Fuji, the Company
paid $6 million in cash and assumed net indebtedness of $13 million. Total cash
expended for both acquisitions, including transaction costs and net of cash
acquired, was $4.1 million.
The Company has contractual financial obligations and commercial
financial commitments consisting primarily of long-term debt, capital lease
obligations, and non-cancelable operating leases. See Notes D, E, and N to the
Consolidated Financial Statements for additional information about these
obligations and commitments.
The following table summarizes significant contractual obligations and
commercial commitments of the Company as of June 30, 2002:
22
CONTRACTUAL OBLIGATIONS and COMMERCIAL COMMITMENTS
Payments Due By Period
------------------------------------------------------------------------------
Total Less Than 1 1-3 Years 4-5 Years After 5
Contractual Obligations Year Years
----------------------- ------------ ----------- ------------ ----------- ------------
Long-Term Debt $ 73,722,909 $23,206,736 $ 1,016,581 $49,263,213 $ 236,379
Capital Lease Obligations 14,625,257 5,639,049 7,111,164 1,875,044 0
Operating Leases 28,712,000 6,163,000 9,465,000 5,847,000 7,237,000
------------ ----------- ------------ ----------- ------------
Total Contractual Obligations $117,060,166 $35,008,785 $ 17,592,745 $56,985,257 $ 7,473,379
============ =========== ============ =========== ============
Amount of Commitment Expiration Per Period
------------------------------------------------------------------------------
Total Amounts Less Than 1 1-3 Years 4-5 Years After 5
Other Commercial Commitments Committed Year Years
---------------------------- ----------- ----------- ------------ ----------- ------------
Standby Letters of Credit $ 1,220,000 $ 1,220,000 $ 0 $ 0 $ 0
=========== =========== ============ =========== ============
The Company believes that its sources of funding --- consisting of
projected positive cash flow from operating activities, the availability of
additional funds under its revolving credit facility (totaling approximately
$85,880,000 at June 30, 2002 based on the Company's August 19, 2002 Revolving
Credit Agreement), and its accumulated cash and cash equivalents --- will be
sufficient to meet its current and presently anticipated short-term and
long-term future needs for operating activities (including payments against
restructuring accruals), investing activities, and financing activities
(primarily consisting of scheduled payments on long-term debt).
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company is exposed to market risk from changes in interest rates and
foreign exchange rates.
Interest Rates: The Company's primary interest rate risk relates to its
long-term debt obligations. At June 30, 2002, the Company had total long-term
obligations, including the current portion of those obligations, of $88,348,000.
Of that amount, $24,848,000 was in fixed rate obligations and $63,500,000 was in
variable rate obligations. Assuming a 10% increase in interest rates on the
Company's variable rate obligations (i.e., an increase from the June 30, 2002
weighted average interest rate of 2.28% to a weighted average interest rate of
2.51%), annual interest expense would be approximately $145,000 higher based on
the June 30, 2002 outstanding balance of variable rate obligations. The Company
has no interest rate swap agreements.
Foreign Exchange Rates: A substantial majority of the Company's sales,
expenses, and cash flows are transacted in U.S. dollars. The Company also does
business in various foreign currencies, primarily the Euro, the Japanese yen,
the Hong Kong dollar and the Chinese yuan. For the year ended June 30, 2002,
sales denominated in currencies other than the U.S. dollar totaled $30,784,000,
or approximately 6% of total sales. For the year ended June 30, 2002, pre-tax
income denominated in currencies other than the U.S. dollar totaled $8,742,000,
or approximately 12% of total pre-tax income. An adverse change of 10% in
exchange rates would have resulted in a decrease in sales of $3,078,000 and a
decrease in pre-tax income of $874,000 for the year ended June 30, 2002. The
Company's subsidiaries that operate in Germany, France, Japan, Hong Kong and
China have certain accounts receivable and accounts payable denominated in U.S.
dollars in addition to receivable and payable accounts in their home currencies
which can act to
23
further mitigate the impact of foreign exchange rate changes. The Company has no
significant foreign currency contracts.
Inflation
Inflation has not had a significant effect on the Company's business
during the periods discussed.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141, "Business Combinations,"
and No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statements. Other
intangible assets will continue to be amortized over their useful lives. The
Company has applied the provisions of FASB No. 141 to account for business
combinations consummated after July 1, 2001, including the acquisitions of
Novametrix and Fuji discussed above and in Note O to the Consolidated Financial
Statements.
The Company has applied the new rules under FASB No. 142 on accounting
for goodwill and other intangible assets beginning in the first quarter of
fiscal year 2003. Application of the nonamortization provisions of the Statement
is expected to result in an increase in annual net income of approximately
$3,000,000 or $0.08 per diluted share. The Company has also performed the first
of the required impairment tests of goodwill and indefinite lived intangible
assets and no impairment has been found to exist as of July 1, 2002.
In August 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations," was issued. This Statement
requires recording the fair value of a liability for an asset retirement
obligation in the period in which it is incurred, and a corresponding increase
in the carrying value of the related long-lived asset. Over time, the liability
is accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, it is either settled for its recorded amount or a gain or loss upon
settlement is recorded. FASB No. 143 is effective for the Company's fiscal year
ending June 30, 2003. The Company believes that the impact of FASB No. 143 on
its financial position and results of operations will not be material.
In August 2001, Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," was issued.
This Statement addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. This Statement supercedes FASB No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and the accounting and reporting provisions of Accounting
Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," for the disposal of
a segment of a business (as previously defined in that Opinion). FASB No. 144 is
effective for the Company's fiscal year ending June 30, 2003. The Company
believes that the impact of FASB No. 144 on its financial position and results
of operations will not be material.
Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," was issued to amend FASB No. 13 and requires sale-leaseback
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. FASB No. 145 also makes various
technical corrections to existing pronouncements that are not substantive in
nature. The Company is currently evaluating the impact FASB No. 145 will have on
its financial position and results of operations.
Statement of Financial Accounting Standards No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," addresses financial
accounting and
24
reporting for costs associated with exit or disposal activities and requires
that a liability for a cost associated with an exit or disposal activity be
recognized at fair value when the liability is incurred, rather than at the date
of an entity's commitment to an exit plan. The provisions of FASB No. 146 are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The Company is currently evaluating the
impact FASB No. 146 will have on its financial position and results of
operations.
Critical Accounting Policies
The Company's Consolidated Financial Statements are prepared in
accordance with accounting principles generally accepted in the United States,
which require the Company to make estimates and assumptions that may affect the
reported financial condition and results of operations should actual results
differ. The Company bases its estimates and assumptions on the best available
information and believes them to be reasonable under the circumstances. The
Company believes that of its significant accounting policies, the following may
involve a higher degree of judgment and complexity.
Revenue Recognition: The Company's revenues are recognized when title to
product passes to the customer, which generally occurs upon shipment to a
customer location and, in the case of rental revenue and long-term service
contracts, is recognized ratably over the period the product is rented or
services are performed. From time to time, the Company offers favorable sales
arrangements to certain of its largest customers in exchange for volume purchase
commitments. These customers make such large purchases for a variety of reasons,
including the desire to reduce shipping costs and to correspond to their own
budgeting and purchasing cycles. The Securities and Exchange Commission's Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," provides guidance on
the application of generally accepted accounting principles to selected revenue
recognition issues. The Company has concluded that its revenue recognition
policy is appropriate and in accordance with generally accepted accounting
principles and SAB No. 101.
Allowance for Uncollectible Accounts Receivable: Accounts receivable are
reduced by an allowance for amounts that may become uncollectible in the future.
Substantially all of the Company's receivables are due from health care product
providers, distributors, and hospitals. The Company's customers are located
throughout the United States and around the world. A significant portion of
products sold to providers, distributors, and hospitals, both foreign and
domestic, is ultimately funded through government reimbursement programs or
through private insurance programs. As a consequence, changes in these programs
can have an adverse impact on distributor and hospital liquidity and
profitability. In addition, because a concentration of market share exists in
the homecare product industry in the United States among national and large
regional providers, the Company experiences a comparable concentration of credit
risk with these customers. The estimated allowance for uncollectible amounts is
based primarily on the Company's evaluation of the payment pattern and financial
condition of its customers. In addition, the Company is contingently liable,
within certain limits, in the event of a customer default on unpaid installment
receivables initiated by or transferred to several independent leasing companies
in connection with customer leasing programs. The Company monitors the
collection status of these installment receivables and provides amounts
necessary for estimated losses in the allowance for doubtful accounts.
Inventories and Related Allowance for Obsolete and Excess Inventory:
Inventories are valued at the lower of cost or market value and have been
reduced by an allowance for excess and obsolete inventories. The estimated
allowance is based on the Company's review of inventories on hand compared to
estimated future usage and sales. If it is determined that inventory on hand is
in excess of estimated future usage and sales because of product obsolescence,
changes in customer demand, or other reasons, additional inventory reserves may
need to be provided. The establishment of these additional reserves may have an
adverse impact on earnings, depending on the extent and amount of inventory
affected.
Intangible and Product Technology Related Assets: Intangible and product
technology related assets are amortized to expense over their useful lives.
These
25
useful lives are based on the Company's estimates of the period that the assets
will generate revenue. Intangible and product technology related assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of such asset may not be recoverable. If such carrying
amounts are determined to be unrecoverable because of changes in technology,
extended delays in obtaining regulatory approval, competition, or other reasons,
the carrying amounts may need to be adjusted. These adjustments may have an
adverse impact on earnings, depending on the significance of the carrying
amounts and the extent of the required adjustments.
Contingencies: As a normal part of its business operations, the Company
incurs liabilities that may be difficult to quantify precisely, such as future
warranty obligations, potential liabilities relating to legal or regulatory
matters, and tax exposures. The Company follows the requirements of Statement of
Financial Accounting Standards No. 5, "Accounting for Contingencies," which
dictate when a charge to income should be taken to accrue for a loss
contingency. These requirements necessitate the application of judgment
regarding the likelihood and amount of the liability.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES REFORM ACT OF 1995.
The statements contained in this Annual Report, including those contained
in "Management's Discussion and Analysis of Results of Operations and Financial
Condition," along with statements in reports filed with the Securities and
Exchange Commission, external documents and oral presentations which are not
historical are "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21B of the Securities
Exchange Act of 1934, as amended. These forward-looking statements represent the
Company's present expectations or beliefs concerning future events. The Company
cautions that such statements are qualified by important factors that could
cause actual results to differ materially from the expected results included in
the forward-looking statements. Those factors include, but are not limited to,
the following: foreign currency fluctuations, regulations and other factors
affecting operations and sales outside the United States including potential
future effects of the change in sovereignty of Hong Kong, customer consolidation
and concentration, increasing price competition and other competitive factors in
the sale of products, the success of the Company's marketing, sales, and
promotion programs, interest rate fluctuations, intellectual property and
related litigation, other litigation, successful integration of acquisitions,
FDA and other government regulation, anticipated levels of earnings and
revenues, and third party reimbursement.
Item 8. Consolidated Financial Statements
---------------------------------
Index to Consolidated Financial Statements
Report of Independent Auditors ...................................... 27
Consolidated Balance Sheets as of June 30, 2002 and 2001 ............ 28
Consolidated Statements of Operations for the
years ended June 30, 2002, 2001, and 2000 ......................... 29
Consolidated Statements of Cash Flows for the
years ended June 30, 2002, 2001, and 2000 ......................... 30
Consolidated Statements of Shareholders' Equity
for the years ended June 30, 2002, 2001, and 2000 ................. 31
Notes to Consolidated Financial Statements .......................... 32
26
Report of Independent Auditors
Board of Directors
Respironics, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Respironics,
Inc. and Subsidiaries as of June 30, 2002 and 2001, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended June 30, 2002. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Respironics, Inc.
and Subsidiaries at June 30, 2002 and 2001, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2002, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/Ernst & Young LLP
Pittsburgh, Pennsylvania
July 23, 2002, except for Note N as
to which the date is August 19, 2002
27
CONSOLIDATED BALANCE SHEETS
RESPIRONICS, INC. AND SUBSIDIARIES
At June 30 2002 2001
----------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 62,334,684 $ 27,320,910
Trade accounts receivable, less allowance for
doubtful accounts of $18,458,000 and $16,457,000 121,281,073 98,078,344
Inventories 86,632,027 73,417,896
Prepaid expenses and other 23,875,193 10,937,110
Deferred income tax benefits 15,728,389 14,201,951
---------------- ----------------
TOTAL CURRENT ASSETS 309,851,366 223,956,211
PROPERTY, PLANT AND EQUIPMENT
Land 2,867,555 2,506,052
Building 16,777,382 8,509,596
Machinery and equipment 133,872,197 84,559,172
Furniture, office and computer equipment 67,768,498 56,011,341
Leasehold improvements 6,413,872 5,286,891
---------------- ----------------
227,699,504 156,873,052
Less allowances for depreciation
and amortization 127,764,645 89,259,800
---------------- ----------------
99,934,859 67,613,252
OTHER ASSETS 33,802,545 15,868,930
GOODWILL 103,860,749 59,856,714
---------------- ----------------
$ 547,449,519 $ 367,295,107
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 39,081,748 $ 28,964,129
Accrued expenses and other 42,958,007 19,009,135
Current portion of long-term obligations 28,845,785 3,998,317
---------------- ----------------
TOTAL CURRENT LIABILITIES 110,885,540 51,971,581
LONG-TERM OBLIGATIONS 59,502,381 80,055,378
MINORITY INTEREST and OTHER 9,341,531 0
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized
100,000,000 shares; issued and outstanding
36,885,795 shares at June 30, 2002 and
34,013,785 shares at June 30, 2001 368,858 340,138
Additional capital 213,837,023 121,720,289
Accumulated other comprehensive loss (2,718,213) (4,237,433)
Retained earnings 198,450,389 160,033,521
Treasury stock (42,217,990) (42,588,367)
---------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 367,720,067 235,268,148
---------------- ----------------
$ 547,449,519 $ 367,295,107
================ ================
See notes to consolidated financial statements.
28
CONSOLIDATED STATEMENTS OF OPERATIONS
RESPIRONICS, INC. AND SUBSIDIARIES
Year Ended June 30 2002 2001 2000
------------------------------------------------------
Net sales $ 494,918,654 $ 422,437,862 $ 368,184,110
Cost of goods sold 260,795,012 223,362,120 196,519,907
Cost of goods sold - restructuring charges 0 724,990 8,709,895
------------- ------------ -----------
234,123,642 198,350,752 162,954,308
General and administrative expenses 60,718,793 50,125,593 48,754,853
Sales, marketing and commission expenses 86,188,885 72,428,211 62,771,648
Research and development expenses 17,317,462 15,281,233 16,814,561
Integration and restructuring charges (credit) 2,288,398 (1,908,581) 20,486,009
Impairment charge 2,005,722 0 0
Interest expense 3,011,018 7,545,535 6,945,585
Other income (1,442,853) (1,029,283) (1,394,231)
------------- ------------ -----------
170,087,425 142,442,708 154,378,425
------------- ------------ -----------
INCOME BEFORE INCOME TAXES 64,036,217 55,908,044 8,575,883
Income taxes 25,619,349 22,336,760 2,823,599
------------- ------------ -----------
NET INCOME $ 38,416,868 $ 33,571,284 $ 5,752,284
============= ============ ===========
Basic earnings per share $ 1.24 $ 1.12 $ 0.19
============= ============ ===========
Basic shares outstanding 31,079,282 29,962,366 29,660,366
Diluted earnings per share $ 1.20 $ 1.09 $ 0.19
============= ============ ===========
Diluted shares outstanding 32,008,359 30,886,043 30,003,755
See notes to consolidated financial statements.
29
CONSOLIDATED STATEMENTS OF CASH FLOWS
RESPIRONICS, INC. AND SUBSIDIARIES
Year Ended June 30 2002 2001 2000
-------------- ----------------- --------------
OPERATING ACTIVITIES
Net income $ 38,416,868 $ 33,571,284 $ 5,752,284
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 28,578,753 23,166,376 20,850,886
Amortization 5,653,328 5,171,364 5,855,565
Tax benefit from exercise of stock options 2,766,453 3,147,495 414,354
Provision for asset write-offs 2,005,722 0 11,694,013
Gain on sale of property, plant, and equipment 0 (2,302,000) 0
Provision for bad debts 3,275,000 2,000,000 4,500,000
Provision (benefit) for deferred income taxes 3,251,495 2,949,095 (4,415,676)
Changes in operating assets and liabilities:
Increase in accounts receivable (7,905,452) (3,344,649) (1,980,488)
Decrease (increase) in inventories and other current assets 9,052,239 (5,742,168) (16,049,078)
Increase in other assets (3,637,616) (1,944,496) (