Note A: Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of
Respironics, Inc. (the Company), its wholly owned domestic and
foreign subsidiaries, and a foreign joint venture in which it
holds a 51% equity investment. The joint venture partner's 49%
equity interest is included in the Company's financial statements
as minority interest. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Revenue Recognition
Revenue is recognized from sales when a product is shipped.
Inventories
Inventories are valued at the lower of cost (first-in, first-out)
or market.
Property, Plant and Equipment
Property, plant and equipment is recorded on the basis of cost.
Depreciation is computed using the straight-line method based on
the estimated useful lives of the respective assets.
Income Taxes
Provisions for income taxes include deferred taxes resulting from
temporary differences in income for financial and tax purposes
using the liability method. Such temporary differences result
primarily from differences in the carrying value of assets and
liabilities.
The Company does not provide for federal income taxes on the undistributed earnings of its foreign subsidiaries (other than deemed dividends that are taxed currently) because such earnings are reinvested and, in the opinion of management, will continue to be reinvested indefinitely.
Foreign Currency Translation
The Company follows Statement of Financial Accounting Standards
No. 52 for the translation of the accounts of its foreign
subsidiaries and its joint venture. Foreign currency assets and
liabilities are translated into U.S. dollars at the rate of
exchange existing at the statement date or historical rates
depending upon the nature of the account. Income and expense
amounts are translated at the average of the monthly exchange
rates. Adjustments resulting from these translations are credited
or charged directly to a separate component of shareholders'
equity. Gains and losses resulting from foreign currency
transactions are credited or charged directly to income.
Stock Options
Stock options are granted to certain employees and certain
members of the Company's Board of Directors at fair market value
on the date of the grant. Proceeds from the exercise of common
stock options are credited to shareholders' equity at the date
the options are exercised. There are no charges or credits to
income with respect to these options. The Company follows the
requirements of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," in
accounting for stock-based compensation.
Earnings per Share
Earnings per share is based on the weighted average number of
shares outstanding during each year and the assumed exercise of
dilutive stock options (less the number of treasury shares
assumed to be purchased with the proceeds using the average
market price of the Company's common stock for primary earnings
per share and the higher of the ending market price or average
market price for fully diluted earnings per share).
Cash and Short-Term Investments
The Company considers all highly liquid investments with a
maturity of 90 days or less when purchased to be cash and
short-term investments.
Capitalized Software Development Costs
Software development costs have been capitalized and are being
amortized to the cost of product revenues over the estimated
economic lives of the products that include such software. Total
net capitalized software development costs were $2,522,000 and
$2,676,000 at June 30, 1997 and 1996, respectively.
Advertising Costs
Advertising is charged to expense during the period in which it
is incurred. Total advertising expense for the fiscal years ended
June 30, 1997, 1996 and 1995 were $394,737, $429,250 and
$430,913, respectively.
Goodwill
The cost in excess of the fair value of net assets of businesses
acquired is amortized on the straight-line method over periods
from 12 to 20 years. Accumulated amortization was $1,830,000 and
$197,000 at June 30, 1997 and 1996, respectively.
Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement No. 128, "Earnings per Share," which
is required to be adopted on December 31, 1997. At that time, the
Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The
adoption of Statement No. 128 is expected to increase the
Company's primary earnings per share (called "basic earnings
per share" under the Statement) by less than 10% and is not
expected to have a material impact on the Company's fully diluted
earnings per share (called "diluted earnings per share"
under the Statement).
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income," and Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." Both Statements become effective for the Company's fiscal year ended June 30, 1999 and relate to the disclosure of financial information not found in the basic financial statements. Statement No. 130 establishes standards for the reporting and display of "comprehensive income" and its components, in addition to net income, in financial statements. Comprehensive income is intended to include certain items that are not reflected in the statement of operations, such as foreign currency translation adjustments. Statement No. 131 changes the way public companies report segment information and establishes standards for related disclosures about products and services, geographic areas and major customers. The Company is currently studying the provisions of these Statements and has not adopted such provisions in the June 30, 1997 financial statements.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Note B: Short-Term Investments
Short-term investments consist primarily of money market accounts and certificates of deposit issued by large commercial banks located in the United States and Hong Kong. These investments are readily convertible to cash and are stated at cost that approximates market.
Note C: Inventories
Inventories consisted of the following:
June 30 1997 1996
___________________________________________________
Raw materials $14,827,760 $11,047,978
Work-in-process 2,291,043 2,075,329
Finished goods 16,580,453 4,740,580
___________________________________________________
$33,699,256 $17,863,887
___________________________________________________
Note D: Long-Term Obligations
Long-term obligations consisted of the following:
June 30 1997 1996
________________________________________________________________________________________________
1989 Economic Development Revenue Bonds, variable interest
rate (effective rate of 5.28%, including letter of credit and
remarketing fees, at June 30, 1997), principal payable in
annual installments of $200,000 through 2004 $ 1,600,000 $1,800,000
Industrial Development Authority Loan, payable in monthly
installments of $13,777, including interest at 3%, through
June 2005 1,154,297 1,282,938
Redevelopment Authority Loan, payable in
quarterly installments of $14,533,
including interest at 5%, through June 2005 409,934 446,420
Redevelopment Authority Loan, payable in monthly installments
of $6,296, including interest at 2%, through
July 2009 805,448 864,253
Industrial Development Authority Loan, payable in
monthly installments of $7,289, including interest
at 2%, through March 2010 996,190 1,064,883
Industrial Development Revenue Bond, payable in quarterly
installments of $40,000, including interest at a floating rate
(effective rate of 6.0% including letter of credit fees at
June 30, 1997), through November 2009 4,720,000 - 0 -
Commercial bank credit agreement, payable in one lump sum
in February 2002, interest payable monthly at a floating
rate (6.19% at June 30, 1997) 9,000,000 - 0 -
Other 2,275 80,282
________________________________________________________________________________________________
18,688,144 5,538,776
Less current portion 703,211 572,905
________________________________________________________________________________________________
$17,984,933 $4,965,871
________________________________________________________________________________________________
The Company also has $1,250,000 available under a line of credit facility with a commercial bank with a maximum interest rate equal to the bank's prime rate until the expiration date of October 31, 1997. Borrowings made on this line of credit are unsecured. The Company is required to meet certain financial covenants under this line of credit relating to current ratio, the ratio of total liabilities to tangible net worth and a minimum tangible net worth. There were no outstanding borrowings under this credit facility.
Scheduled maturities of long-term obligations for the next five years are as follows:
Maturities of Long-Term Debt
____________________________________________
1998 $ 703,211
1999 669,516
2000 678,370
2001 687,500
2002 9,696,941
Thereafter 6,252,606
____________________________________________
Total $18,688,144
____________________________________________
Note E: Operating Leases
The Company leases its corporate headquarters, customer satisfaction centers, and its offices, warehouses and manufacturing facilities in the Far East and in Europe.
The minimum rentals due under noncancelable leases with recurring terms of one year or more as of June 30, 1997 are as follows:
Year Ending June 30 Amount _________________________________________________ 1998 $1,548,673 1999 1,347,924 2000 752,944 2001 679,091 2002 652,664 _________________________________________________
Total rent expense for the years ended June 30, 1997, 1996 and 1995 was $1,133,254, $360,842 and $214,593, respectively.
Note F: Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of financial instruments:
Cash and Short-Term
Investments
The carrying amount approximates fair value because
of the short maturity of those investments.
Long-Term Obligations
The fair values of long-term debt obligations are established
from the market values of similar issues.
The carrying amounts and fair values of the Company's financial instruments are as
follows:
June 30, 1997 June 30, 1996
_______________________________________________________________
Carrying Amount Fair Value Carrying Amount Fair Value
__________________________________________________________________________________________________
Cash and short-term investments $15,706,657 $15,706,657 $65,255,699 $65,255,699
Long-term obligations 17,984,933 17,984,933 4,965,871 4,965,871
__________________________________________________________________________________________________
Note G: Income Taxes
Income taxes consisted of the following:
Year Ended June 30 1997 1996 1995
__________________________________________________________________________
Current:
Federal $10,577,528 $ 8,280,388 $5,379,275
Foreign 1,485,216 96,316 197,943
State 1,771,183 1,699,154 1,459,538
__________________________________________________________________________
13,833,927 10,075,858 7,036,756
Deferred:
Federal (385,087) (216,330) (165,132)
State 23,163 (40,528) (13,687)
___________________________________________________________________________
(361,924) (256,858) (178,819)
___________________________________________________________________________
Total Income Taxes $13,472,003 $ 9,819,000 $6,857,937
___________________________________________________________________________
The difference between the statutory U.S. federal income tax rate and the Company's effective income tax rate is explained below:
Year Ended June 30 1997 1996 1995
__________________________________________________________________________
Statutory federal income tax rate 35% 35% 35%
Increases (decreases):
State taxes 3 4 5
Other items, net, none
of which individually
exceeds 5% of federal
income taxes at
statutory rates 2 - 0 - (3)
__________________________________________________________________________
Effective Income Tax Rate 40% 39% 37%
__________________________________________________________________________
Deferred income tax assets consisted of the following:
June 30 1997 1996 __________________________________________________________________________ Inventories $1,408,887 $ 329,589 Allowance for bad debts 833,910 402,575 Depreciation 942,924 609,810 Accruals 1,823,176 1,115,479 __________________________________________________________________________ Total $5,008,897 $2,457,453 __________________________________________________________________________
Income before income taxes consisted of the following:
Year Ended June 30 1997 1996 1995 __________________________________________________________________________ United States $30,259,127 $23,793,338 $17,935,537 Foreign 3,528,700 1,364,270 599,427 __________________________________________________________________________ Total $33,787,827 $25,157,608 $18,534,964 __________________________________________________________________________
Undistributed earnings of the foreign subsidiaries on which no U.S. income tax has been provided amounted to $13,718,913 at June 30, 1997.
The Company's operation in the Peoples Republic of China is affected by an income tax holiday. Net income increased by $113,215 ($0.01 per share), $433,895 ($0.02 per share) and $339,851 ($0.02 per share) for the years ended June 30, 1997, 1996 and 1995, respectively, as a result of this income tax holiday. Under the terms of the income tax holiday, the Company's operation in the Peoples Republic of China paid corporate income tax at the rate of 7.5% for the years ended June 30, 1997, 1996 and 1995. This rate will increase to 15% for years ending June 30, 1998 and thereafter. The applicable statutory income tax rate in the Peoples Republic of China is approximately 33%.
Income taxes paid were $14,694,151, $8,740,435 and $4,335,733 for the years ended June 30, 1997, 1996 and 1995, respectively.
Note H: Stock Option and Purchase Plans
The Company has the 1984 Incentive Stock Option Plan (the "1984 Plan"), which provided options to eligible employees to purchase common stock over five or ten years at fair market value at the time of the grant. Options become exercisable one year from the date of the grant at a rate not exceeding 25% per year (subject to possible acceleration in certain circumstances). The Company reserved shares of its common stock and authorized options to purchase 3,400,000 shares of common stock under the 1984 Plan. The 1984 Plan terminated as to new grants on December 31, 1993.
The Company also has the 1992 Stock Incentive Plan (the "1992 Plan"), which was approved by the Company's shareholders in November 1992. Under the 1992 Plan, eligible employees may receive options to purchase common stock over ten years at option prices that may not be less than fair market value at the date of grant. Stock options granted under the 1992 Plan become exercisable no sooner than six months from grant date (subject to possible acceleration under certain circumstances) and such options may include cash payment rights. Eligible employees may also receive awards of restricted shares of the Company's common stock under the 1992 Plan. The aggregate number of options and restricted shares that may be issued under the 1992 Plan is 1,000,000.
In November 1991, the Company's shareholders approved the adoption of the 1991 Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). The aggregate number of shares that may be issued and as to which grants of options may be made under the Directors' Plan is presently 300,000 under a November 1996 plan amendment approved by the Company's shareholders. All options under the Directors' Plan are granted to members of the Company's Board of Directors who are not employees of the Company. Such options are granted at fair market value on the date of grant.
Under the provisions of the Directors' Plan, in November 1991 each of the four non-employee directors who had been non-employee directors for at least two years prior to the approval of the Directors' Plan received a one-time option to purchase 10,000 shares at an option price of $6.13 per share. In addition, each of the five non-employee directors (regardless of years of service) received an option to purchase 5,100 shares at an option price of $6.13 per share. In succeeding years, each non-employee director receives an option to purchase an additional 5,100 shares on the third business day following the Company's annual meeting of shareholders. These grants will continue until options for all the shares available under the Directors' Plan have been granted.
The one-time option granted to non-employee directors with more than two years of service was exercisable in full three months after the date of grant. For all other options granted under the Directors' Plan, 25% of the shares are exercisable one year after the date of the grant, 25% are exercisable two years after the date of grant, and the remaining 50% are exercisable three years after the date of grant. All options granted under the Directors' Plan expire ten years after the date of grant.
Pertinent information regarding options under all Plans is as follows:
Option Shares
________________________________
Year Ended June 30 1997 1996 1995
______________________________________________________________________________
Outstanding at beginning of period 1,516,431 1,621,401 1,921,926
Granted:
Price range ($14.85 - $23.25) 165,250
Price range ($13.38 - $22.75) 90,425
Price range ($11.25 - $16.25) 78,252
Exercised:
Price range ($1.00 - $16.25) (457,651)
Price range ($1.00 - $16.25) (187,032)
Price range ($1.00 - $10.07) (315,001)
Canceled (1,000) (8,363) (63,776)
_______________________________________________________________________________
Outstanding at end of period 1,223,030 1,516,431 1,621,401
_______________________________________________________________________________
Exercisable at end of period 871,408 1,232,224 1,256,387
_______________________________________________________________________________
Shares available for future grant 642,613 807,863 898,288
_______________________________________________________________________________
The per share weighted-average fair value of stock options granted during 1997 and 1996 was $7.86 and $9.43, respectively, on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
1997 1996
_______________________________________________________________________
Expected volatility 39.75% 40.20%
Expected dividend yield none none
Risk-free interest rate 6.11% 7.49%
Expected life of stock options (in years) 5 5
_______________________________________________________________________
The Company applies Accounting Principles Board Opinion No. 25 in accounting for its stock option plans and accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under Statement No. 123, the Company's net earnings and related per share amounts would have been reduced to the pro forma amounts indicated below:
1997 1996
_____________________________________________________________________
Net earnings:
As reported $20,315,824 $15,338,608
Pro forma 19,976,857 15,250,462
Net earnings per share:
As reported 1.00 0.84
Pro forma 0.99 0.83
_____________________________________________________________________
Pro forma net earnings reflect only options granted in 1997 and 1996. Therefore, the full effect of calculating compensation cost for stock options under Statement No. 123 is not reflected in the pro forma net earnings and related per share amounts presented above because compensation cost is reflected over the vesting period of the options and compensation cost for options granted prior to July 1, 1995 is not considered.
In March 1997, the Company adopted, subject to shareholder approval, an Employee Stock Purchase Plan (Plan) under which employees can purchase common stock of the Company through payroll deductions. The purchase price under the Plan is the lesser of 85% of the market value of the Company's common stock on either the first or last day of the Plan year. The maximum amount each employee can purchase is equal to 20% of annual compensation. There are no charges or credits to income in connection with the plan. Shares will be purchased with the funds set aside through payroll deductions at the end of each Plan year.
In June 1996, the Company adopted a shareholders' rights plan under which existing and future shareholders received a right for each share outstanding, entitling such shareholders to purchase shares of the Company's common stock at a specified exercise price. The right to purchase such shares is not currently exercisable but would become exercisable in the future if certain events occurred relating to a person or group (the acquiror) acquiring or attempting to acquire 20% or more of the Company's outstanding shares of common stock. In the event the rights become exercisable, each right would entitle the holder (other than the acquiror) to purchase shares of the Company's common stock having a value equal to two times the specified exercise price.
Note I: Financial Information by Geographic Areas and Major Customers
Year Ended June 30 1997 1996 1995
___________________________________________________________________________
NET SALES
United States:
Unaffiliated customers $155,006,977 $121,356,370 $97,730,086
Interarea transfers 16,030,250 551,002 750,744
___________________________________________________________________________
171,037,227 121,907,372 98,480,830
Europe:
Unaffiliated customers 14,348,947 - 0 - - 0 -
Far East:
Unaffiliated customers 9,203,812 4,410,018 1,720,248
Interarea transfers 4,883,257 7,433,684 8,430,823
___________________________________________________________________________
14,087,069 11,843,702 10,151,071
Eliminations -- transfers (20,913,507) (7,984,686) (9,181,567)
___________________________________________________________________________
Net Sales $178,559,736 $125,766,388 $99,450,333
___________________________________________________________________________
OPERATING PROFIT
United States $35,143,364 $ 28,536,740 $22,239,437
Europe 2,138,534 - 0 - - 0 -
Far East 3,453,349 1,543,241 877,325
___________________________________________________________________________
Operating Profit 40,735,247 30,079,981 23,116,762
Corporate expense 6,331,473 4,722,447 4,388,248
Interest expense 615,947 199,926 193,550
___________________________________________________________________________
Income Before Income Taxes $ 33,787,827 $ 25,157,608 $18,534,964
___________________________________________________________________________
Interarea transfers are accounted for at prices comparable to unaffiliated customer sales reduced by an approximation of costs not incurred on internal sales.
Additional information regarding assets and liabilities by geographic area follows:
June 30 1997 1996
_____________________________________________________________________
Identifiable Assets
United States $143,919,695 $ 68,133,435
Europe 10,019,490 - 0 -
Far East 9,652,898 8,416,965
_____________________________________________________________________
163,592,083 76,550,400
Corporate assets (primarily cash and
short-term investments) 20,639,843 67,396,234
_____________________________________________________________________
Total Assets $184,231,926 $143,946,634
_____________________________________________________________________
Total Assets
United States $157,346,230 $129,744,562
Europe 10,897,618 - 0 -
Far East 15,988,078 14,202,072
_____________________________________________________________________
$184,231,926 $143,946,634
_____________________________________________________________________
Total Liabilities
United States $ 34,037,189 $ 19,375,782
Europe 6,036,274 - 0 -
Far East 2,580,747 3,026,017
_____________________________________________________________________
$ 42,654,210 $ 22,401,799
_____________________________________________________________________
The Company develops, manufactures and markets medical devices for the treatment of patients suffering from respiratory disorders. Its products are used primarily in the home and in hospitals, as well as emergency medical settings and alternative care facilities. The Company sells and rents to distributors in the health care industry and closely monitors the extension of credit to both domestic and foreign customers, including obtaining and analyzing credit applications for all new accounts and maintaining an active program to contact customers promptly when invoices become past due. Sales to one customer of the U.S. segment accounting for 10% or more of net sales were $17,890,859 and $20,495,000 for the years ended June 30, 1997 and 1996 and $10,955,000 to a company that was a predecessor of this customer for the year ended June 30, 1995.
Note J: Retirement Plan
The Company has a Retirement Savings Plan that is available to all U.S. employees. Employees may contribute up to 15% (to a defined maximum) of their compensation. The Company matches employee contributions (up to 3% of each employee's compensation) at a 100% rate and may make discretionary contributions. The Company contributed $520,000, $433,000 and $420,000 to the plan for the years ended June 30, 1997, 1996 and 1995, respectively.
The Company's current benefit program does not provide postretirement benefits to employees.
Note K: Acquisitions
On February 26, 1997, the Company acquired the capital stock of Stimotron Medizinische Geräte GmbH (Stimotron). Stimotron is based in Wendelstein, Germany, and is the exclusive distributor for the Company's products in that country. The initial consideration paid was $9,000,000 in cash, with the terms of the transaction providing for additional consideration of up to $5,000,000 in cash over the next four years based on the achievement of certain financial results in Germany. Financing for the initial consideration was obtained from a commercial bank, and a commitment for financing for the additional consideration has been obtained from the same commercial bank. The acquisition was treated as a purchase for financial reporting purposes, and accordingly the Company's results of operations include the results of operations of Stimotron since the acquisition date. Goodwill generated by the acquisition will be amortized over 20 years on a straight-line basis.
On October 21,1996, the Company acquired the capital stock of LIFECARE International, Inc., a developer, manufacturer and marketer of respiratory therapy products with its primary focus on portable home ventilation therapy, based in Westminster, Colorado (LIFECARE International, Inc. has since been renamed Respironics Colorado, Inc.). Consideration paid was $50,000,000 in cash. Financing for the acquisition came primarily from the proceeds of a public offering completed by the Company in April 1996. The acquisition was treated as a purchase for financial accounting purposes, and accordingly the Company's results of operations include the results of operations of Respironics Colorado, Inc. since the acquisition date. Goodwill generated by the acquisition will be amortized over 20 years on a straight-line basis.
The following unaudited pro forma summary presents the Company's results of operations as if the acquisitions had occurred at the beginning of the periods presented and does not purport to be indicative of what would have occurred had the acquisitions been made as of those dates or of results that may occur in the future.
Year Ended June 30 1997 1996 _____________________________________________________________ Pro forma sales $198,900,129 $170,382,998 Pro forma net income $ 21,346,582 $ 14,529,455 Pro forma net income per share $1.05 $0.79 _____________________________________________________________
On April 6, 1995, the Company acquired Vitalog Monitoring, Inc., a California company that designs, manufactures and markets sleep monitoring and diagnostic equipment. Consideration paid was $745,000 in cash and 85,094 shares of the Company's common stock valued at $1,276,000. The acquisition was treated as a purchase for financial reporting purposes, and accordingly the Company's results of operations include the results of operations of Vitalog since the acquisition date. Goodwill generated by the acquisition will be amortized over 12 years on a straight-line basis. Vitalog's operations were not material in relation to the Company's consolidated financial statements and pro forma information has therefore not been presented.
Note L: Contingency
The Company is a party to actions filed in a federal District Court in January 1995 and June 1996 in which a competitor alleges that the Company's sale in the United States of certain products infringes a total of four of the competitor's patents. In its response to these actions, the Company has denied the allegations and has separately sought judgment that the claims under the patents are invalid and that the Company does not infringe upon the patents. Discovery in both cases is currently under way. The Company believes that none of its products infringes any of the patents in question in the event that any one or more of such patents should be held to be valid and it intends to vigorously defend this position.
Note M: Quarterly Results of Operations (Unaudited)
Following are the unaudited quarterly results of operations for the fiscal years ended June 30, 1997 and 1996:
1997 Three Months Ended September 30 December 31 March 31 June 30 _________________________________________________________________________________ Net sales $34,112,412 $43,001,308 $47,814,403 $53,631,613 Gross profit 19,069,164 23,459,486 26,528,564 29,948,491 Net income 4,453,476 4,868,757 5,094,290 5,899,301 Earnings per share 0.22 0.24 0.25 0.29 1996 Three Months Ended September 30 December 31 March 31 June 30 _________________________________________________________________________________ Net sales $26,674,675 $30,241,119 $32,651,155 $36,199,439 Gross profit 15,160,165 16,860,310 18,174,637 20,322,303 Net income 3,219,272 3,508,968 3,799,113 4,811,256 Earnings per share 0.18 0.20 0.21 0.24