-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Il494WxyMPAsNo/SeOP/UG4Xw/gC4bzIo0opFF4/lXO2J5CB6oC0roWN8wF0ClPJ fODcTeM0CjAj+xpGxYl7cA== 0000950132-96-000103.txt : 19960223 0000950132-96-000103.hdr.sgml : 19960223 ACCESSION NUMBER: 0000950132-96-000103 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19960222 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RESPIRONICS INC CENTRAL INDEX KEY: 0000780434 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 251304989 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-01135 FILM NUMBER: 96523888 BUSINESS ADDRESS: STREET 1: 1001 MURRY RIDGE DR CITY: MURRYSVILLE STATE: PA ZIP: 15668 BUSINESS PHONE: 4127330200 MAIL ADDRESS: STREET 1: 1001 MURRY RIDGE DRIVE CITY: MURRYSVILLE STATE: PA ZIP: 15668 S-3 1 FORM S-3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 22, 1996 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- RESPIRONICS, INC. (Exact name of registrant as specified in its governing instruments) DELAWARE 25-1304989 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) (412) 733-0200 1001 MURRY RIDGE DRIVE (Telephone number) MURRYSVILLE, PA 15668 (Address of Principal Executive Offices) DENNIS S. METENY PRESIDENT AND CHIEF EXECUTIVE OFFICER RESPIRONICS, INC. 1001 MURRY RIDGE DRIVE, MURRYSVILLE, PA 15668 (412) 733-0202 (Name, address and telephone number of agent for service) --------------- With copies to: JAMES H. HARDIE KEITH F. HIGGINS REED SMITH SHAW & MCCLAY ROPES & GRAY 435 SIXTH AVENUE ONE INTERNATIONAL PLACE PITTSBURGH, PA 15219 BOSTON, MA 02110 (412) 288-3176 (617) 951-7000 --------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [_] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant at Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
NUMBER OF PROPOSED PROPOSED AMOUNT OF TITLE OF SECURITIES SHARES TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE REGISTRATION TO BE REGISTERED REGISTERED PRICE PER SHARE* OFFERING PRICE* FEE - ---------------------------------------------------------------------------------------------------- Common Stock (par value $0.01 per share).......... 3,484,500 $21.00 $73,174,500 $25,233.00
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- * Estimated solely for purposes of calculating the registration fee and calculated, pursuant to Rule 457(c), on the basis of the average of the high and low sale prices for the registrant's Common Stock, as reported on the National Market System of the National Association of Securities Dealers, Inc. for February 20, 1996, as quoted in The Wall Street Journal, of $21.00. --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BY ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION FEBRUARY , 1996 3,030,000 Shares [LOGO of Respironics, Inc.] Common Stock -------- Of the 3,030,000 shares of Common Stock offered hereby, 2,000,000 shares are being sold by Respironics, Inc. ("Respironics" or the "Company") and 1,030,000 shares are being sold by the Selling Stockholders. See "Principal and Selling Stockholders." The Company will not receive any of the proceeds from the shares sold by the Selling Stockholders. The Common Stock is traded on the Nasdaq National Market under the symbol "RESP." On February 20, 1996, the last reported sale price of the Common Stock was $20.88 per share. See "Price Range of Common Stock." -------- FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY POTENTIAL INVESTORS, SEE "RISK FACTORS" BEGINNING ON PAGE 7. -------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ================================================================================
PRICE UNDERWRITING PROCEEDS PROCEEDS TO TO DISCOUNTS AND TO SELLING PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS - ------------------------------------------------------------------------------------------- Per Share.................. $ $ $ $ - ------------------------------------------------------------------------------------------- Total(2)................... $ $ $ $
=============================================================================== (1) Before deducting expenses of the offering estimated at $400,000 payable by the Company. (2) The Company and a Selling Stockholder have granted the Underwriters a 30- day option to purchase up to 454,500 additional shares of Common Stock solely to cover over-allotments, if any. To the extent that the option is exercised, the Underwriters will offer the additional shares at the Price to Public shown above. If the option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to Selling Stockholders will be $ , $ , $ and $ , respectively. See "Underwriting." -------- The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if delivered to and accepted by them, and subject to the right of the Underwriters to reject any order in whole or in part. It is expected that delivery of the shares of Common Stock will be made at the offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about , 1996. Alex. Brown & Sons INCORPORATED Cowen & Company Parker/Hunter INCORPORATED THE DATE OF THIS PROSPECTUS IS , 1996. OBSTRUCTIVE SLEEP APNEA Over 18 million people in the United States have symptoms which are consistent with a diagnosis of some degree of obstructive sleep apnea (OSA). Respironics offers a broad array of products for OSA therapy and diagnosis. [PHOTO] [PHOTO] [PHOTO] REMstar Choice Aria CPAP System Cricket Oximeter and CPAP System HMS 5000 Monitor NON-INVASIVE VENTILATORY SUPPORT Non-invasive ventilatory support is an emerging segment of the total ventilation market. Respironics introduced the first non-invasive bi-level ventilatory support system that compensates for mask leaks. [PHOTO] [PHOTO] BiPAP S/T BiPAP Hospital Ventilatory Support Ventilatory Support System System PATIENT MASKS AND RESUSCITATION Respironics manufactures a variety of patient masks and resuscitation products designed to enhance patient comfort and compliance in the OSA and ventilatory support markets and to provide respiratory therapy in hospital and emergency settings. [PHOTO] [PHOTO] GEL Mask BagEasy Disposable Manual Resuscitator [LOGO OF RESPIRONICS INC.] RESPIRONICS INC. Respironics' mission is to be first and best at solving problems in the cardio-pulmonary marketplace by providing its worldwide customers with the highest quality products and services. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information may be inspected and copied at the public reference facilities of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549; and at the Commission's regional office at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Reports, proxy statements and other information concerning the Company may be inspected at the National Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, DC 20006. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-3 (together with all amendments and exhibits, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Common Stock to which this Prospectus relates. This Prospectus does not contain all the information set forth in the Registration Statement, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock, reference is made to the Registration Statement. The Registration Statement may be inspected by anyone without charge at the principal office of the Commission in Washington, D.C., and copies of all or part of it may be obtained from the Commission upon payment of the prescribed fees. Except as otherwise specified, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. The Company's fiscal year ends on June 30 of each year. Unless the context indicates otherwise, reference in this Prospectus to "fiscal year" refers to the twelve-month period ending on June 30 of the year indicated. On each of March 9, 1992 and March 17, 1995 the Company effected a two-for-one stock split in the form of a stock distribution of one additional share of Common Stock for each share held of record on February 24, 1992 and March 3, 1995, respectively. All references to number of shares of Common Stock, and all information with respect thereto (including per share information in the financial information herein) have been adjusted to reflect the stock splits on a retroactive basis. See "Underwriting." Respironics(R), REMstar(R), BiPAP(R), BagEasy(R), Circle Seal(R) and SealEasy(R) are registered trademarks of the Company. Great Performers(TM), Monarch Mini Mask(TM), GEL Mask(TM), Cricket(TM), Aria(TM), Virtuoso(TM), Vitalog(TM) and HMS 5000(TM) are trademarks of the Company. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND OTHER SELLING GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMPANY'S COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and "Consolidated Financial Statements" (including the notes thereto), appearing elsewhere in this Prospectus. THE COMPANY Respironics is a leading developer, manufacturer and marketer of medical devices used for the treatment of patients suffering from respiratory disorders. The Company's products are designed to reduce costs while improving the effectiveness of patient care and are used primarily in the home and hospitals, as well as emergency medical settings and alternative care facilities. The Company's primary product lines are: (i) continuous positive airway pressure ("CPAP") devices and bi-level positive airway pressure ("BiPAP") devices for the treatment of obstructive sleep apnea ("OSA"), a serious disorder characterized by the repeated cessation of breathing during sleep; (ii) bi-level non-invasive ventilatory support devices; (iii) patient mask products; and (iv) single-use resuscitation products. Respironics markets its products through a sales organization consisting of approximately 90 direct and independent sales representatives, who sell to a network of over 2,500 medical product dealers. The Company's sales have grown from $36.0 million in fiscal year 1991 to $99.5 million in fiscal year 1995 and are currently comprised of 68% equipment and 32% consumable and single-use products. With approximately 85% 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. The Company believes it is the U.S. market share leader for both of its primary product lines, OSA treatment devices and non-invasive ventilatory support products. Devices for the treatment of OSA are estimated to constitute a $100 million annual U.S. market that is growing at 20 to 25% per year. Growth in the OSA market stems from several factors, including recognition of the serious medical implications of OSA and increasing diagnosis and treatment of the disorder. In a comprehensive study published in the April 1993 New England Journal of Medicine, OSA was estimated to affect 4% of men and 2% of women in the middle-aged work force, and the Company believes that the majority of these cases remain undiagnosed. The total U.S. ventilator market is estimated to be $250 million annually. Non-invasive ventilatory support is an emerging sector of this market, consisting primarily of products for individuals who require ventilatory assistance but who are not dependent on a ventilator for continuous life support. Respironics believes that its non-invasive ventilatory support product line represents a technological advance over traditional mechanical ventilators, which generally require intubation of patients and thus have the potential for adverse side effects such as infection. Respironics is a market-driven company that has established a record of innovation in respiratory care. In 1981, the Company introduced the first commercially available single-use air-filled cushion anesthesia mask as a cost- effective alternative to reusable anesthesia masks. In 1985, the Company introduced the first commercially available CPAP product designed to treat OSA, affording patients an alternative to surgery. In 1989, the Company introduced the BiPAP Ventilatory Support System, a non-invasive bi-level pressure support device. In March 1995, the Company introduced a new version of its BagEasy manual resuscitator. The Company recently began introducing its next-generation family of OSA products, called the "Great Performers" product line, with the first international shipments commencing in July 1995. In February 1996, the Company received clearance from the U.S. Food and Drug Administration (the "FDA") to market a new product in this line, the Aria CPAP system, and expects to begin domestic shipments of this device in spring 1996. This new family of products also includes Virtuoso, a CPAP device that utilizes 3 innovative technology to monitor the patient's airway and to continuously adjust output automatically in order to deliver the appropriate pressure. The Company currently is developing its next-generation family of ventilatory support devices which it expects to introduce in international markets in summer 1996. In fiscal year 1995, the Company completed the acquisition of Vitalog Monitoring, Inc. ("Vitalog"), a developer, manufacturer and marketer of monitoring and diagnostic devices for sleep disorders. The Vitalog acquisition is part of a strategic effort by Respironics to use the market for devices related to the diagnosis and monitoring of sleep and other respiratory-related disorders to drive the therapeutic markets for these disorders. Respironics' objective is to be the market leader in innovative devices for the treatment of respiratory disorders. The Company's strategy is to: (i) continue to commit significant resources to the development of innovative products; (ii) expand the breadth of its product lines to address the full range of respiratory disorders; (iii) expand its international distribution and manufacturing capabilities; (iv) pursue acquisitions of complementary technologies, products and businesses; (v) enhance operational quality and efficiency through process excellence; and (vi) develop partnering relationships with customers. Respironics is a Delaware corporation. The Company's executive offices are located at 1001 Murry Ridge Drive, Murrysville, Pennsylvania 15668. The Company's telephone number is (412) 733-0200. THE OFFERING Common Stock offered by the Company.............. 2,000,000 shares Common Stock offered by the Selling Stockholders. 1,030,000 shares Common Stock outstanding after the offering (1).. 18,851,860 shares Use of Proceeds.................................. Provide working capital for general corporate purposes, including the acquisition of similar or related businesses and the acquisition of marketing, manufacturing or other rights associated with products or technologies which would complement the Company's products. Nasdaq National Market Symbol.................... RESP
- -------- (1) Does not include 1,546,626 shares of Common Stock reserved for issuance pursuant to outstanding options granted at a weighted average price per share of $5.90. 4 SUMMARY FINANCIAL DATA (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AND OTHER STATISTICAL DATA)
SIX MONTHS ENDED YEAR ENDED JUNE 30 DECEMBER 31 ---------------------------------------------- --------------------- 1991 1992 1993 1994 1995 1994 1995 ------- ------- ------- ------- ------- -------- -------- (UNAUDITED) INCOME STATEMENT DATA: Net sales.............. $36,031 $48,976 $69,286 $78,171 $99,450 $45,538 $56,916 Nonrecurring charges... -0- -0- -0- 7,086(1) -0- -0- -0- Income before income taxes................. 5,553 8,059 11,096 6,816 18,535 8,121 11,030 Net income............. 3,771 5,363 7,379 4,741(1) 11,677 5,116 6,728 Earnings per share..... $ 0.26 $ 0.31 $ 0.43 $ 0.27(1) $ 0.67 $ 0.29 $ 0.38 Weighted average shares of Common Stock outstanding and equivalents........... 14,631 17,057 17,319 17,281 17,532 17,346 17,730 OTHER STATISTICAL DATA: Sales growth versus prior period.......... 57% 36% 41% 13%(2) 27%(2) 24%(2) 25% Sales by product line: Obstructive Sleep Apnea................ 55% 55% 57% 64% 67% 68% 68% Non-invasive Ventilatory Support.. 18 20 23 27 26 26 26 Patient Masks......... 22 22 18 16 15 15 16 Resuscitation......... 14 13 11 4 2 2 2 Product Line (9) (10) (9) (11) (10) (11) (12) Transfers (3)........ ---- ---- ---- ---- ---- ---- ---- 100% 100% 100% 100% 100% 100% 100% === === === === === === === International sales as a percentage of net sales.......... 14% 19% 18% 20% 20% 20% 23% Gross margin........... 51% 52% 54% 55% 57% 57% 56% Selling, general and administrative expenses as a percentage of net sales................. 31% 32% 33% 32% 32% 33% 31% Research and development expenses as a percentage of net sales................. 5% 5% 5% 6% 7% 7% 7% Net margin excluding the impact of nonrecurring charges.. 10% 11% 11% 12%(4) 12% 11% 12% Earnings per share growth versus prior year excluding the impact of nonrecurring charges............... 73% 19% 39% 21%(5) 29%(5) 16%(5) 31%
DECEMBER 31, 1995 ----------------------- ACTUAL AS ADJUSTED (6) ------- --------------- (UNAUDITED) BALANCE SHEET DATA: Working capital........................................ $44,146 $ 83,314 Total assets........................................... 83,952 123,120 Total long-term obligations............................ 5,242 5,242 Total shareholders' equity............................. 65,550 104,718
- -------- (1) In the first quarter of fiscal year 1994 and the fourth quarter of fiscal year 1994, the Company recorded nonrecurring charges of $1,966 and $5,120, respectively. Excluding these charges, net income and earnings per share would have been $9,040 and $0.52, respectively, for fiscal year 1994. (2) Excluding the impact of the discontinuance of the BagEasy product line, sales growth would have been 20% for fiscal year 1994, 30% for fiscal year 1995 and 29% for the six months ended December 31, 1994. (3) Product line transfers include sales of certain of the Company's patient mask products which are accessories for OSA products, non-invasive ventilatory support products, and resuscitation products. (4) Including the impact of the nonrecurring charges, net margin was 6% for fiscal year 1994. (5) Including the impact of the nonrecurring charges, earnings per share growth was (37%) for fiscal year 1994, 148% for fiscal year 1995 and 71% for the six months ended December 31, 1994. (6) Adjusted to give effect to the sale of 2,000,000 shares of Common Stock by the Company assuming a public offering price of $20.88 per share and after deducting estimated underwriting discounts and offering expenses payable by the Company. 5 RISK FACTORS Government Regulation. The development, testing, manufacture and marketing of the Company's products are subject to extensive regulation and periodic inspections, principally by the FDA and by corresponding foreign agencies. The testing for and preparation of required applications can be expensive, and the subsequent FDA review can be lengthy and uncertain. 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 products for which such clearances or approvals have not yet been obtained would adversely affect the marketing of such products and could adversely affect the Company's results of operations and financial condition. Also, the regulations under the FDA are subject to change from time to time. For example, a change in the regulations governing Medical Device Reports ("MDRs") that will impose additional recordkeeping and reporting requirements on device manufacturers is expected to become effective in April 1996. This and future changes in FDA regulations could have a material adverse effect on the Company's operations. See "Business--Regulatory Matters." Patent Litigation. In January 1995, ResCare Limited, an Australian corporation ("ResCare"), instituted litigation alleging that the Company's basic CPAP product, its nasal mask and an additional feature of the CPAP product infringe three United States patents owned by or licensed to ResCare. It is the Company's belief, based upon its investigation, discovery proceedings conducted in the suit to date and discussions with its counsel, that the ResCare patents are invalid or unenforceable, and that, even if the ResCare patents are valid and enforceable, the Company's products do not infringe the patents. However, there can be no assurance that the ResCare patents will be declared invalid or unenforceable or that the Company's products will be found not to infringe the ResCare patents. Because the products that are the subject of the action represent a significant portion of the Company's sales, an adverse determination could have a material adverse effect on the Company's results of operations and financial condition. See "Business--Legal Proceedings--Patent Litigation." FDA Warning Letter. Following an inspection of the Company's Murrysville, Pennsylvania facility completed in August 1994, the FDA issued a "warning letter" in December 1994 in which it took the position that the Company must submit additional "510(k) premarket notifications" (under which a product is cleared for marketing in the U.S. based on the fact that it is substantially equivalent to another product already being legally marketed) to cover certain technical features of the Company's BiPAP product and to market its BiPAP product for ventilatory uses other than the treatment of OSA in adults. The Company believes that it is in substantial compliance with FDA requirements relating to its products and that the existing 510(k) clearances for BiPAP cover the technical features cited in the warning letter and encompass the marketing of BiPAP products for ventilatory uses in addition to the treatment of OSA in adults. The Company nevertheless has elected to file 510(k) submissions for indications in addition to adult OSA and for the technical features cited in the FDA warning letter. Although there has been no interruption in the Company's business in the 14 months since receipt of the warning letter, there can be no assurance that the FDA will not take enforcement action with respect to the Company's prior or continued marketing of the BiPAP products or that FDA clearances for the additional 510(k) premarket notifications that the Company has submitted will be cleared by the FDA. Sales of BiPAP and related accessories for ventilatory support applications accounted for approximately 26% of the Company's sales for the six-month period ended December 31, 1995. See "Business--Regulatory Matters." Industry Dependence on Third Party Reimbursement. The cost of a significant portion of medical care in the United States is funded by government and private insurance programs, such as Medicare, Medicaid and corporate health insurance programs including health maintenance organizations and managed care organizations. The Company's future results of operations and financial condition could be negatively affected by adverse changes made in the reimbursement policies for medical products under these insurance programs. If such changes were to occur, the ability of the Company's customers (medical 6 product distributors and dealers) to obtain adequate reimbursement for the resale or rental of the Company's products could be affected. In recent years, limitations imposed on the levels of reimbursement by both government and private insurance programs have become more prevalent. See "Business--Third Party Reimbursement." Industry Consolidation and Customer Concentration. The past several years have seen a trend toward consolidation in the health care industry generally and in the Company's customer base in particular. In August 1995, the Company's two largest customers merged to form a company that in the first six months of fiscal 1996 accounted for 17% of the Company's revenues, compared with a combined total of 18% for such two customers in the same period in the prior fiscal year. Industry consolidation, as well as buying practices by other large customers, has contributed to a decrease in the average selling price of certain of the Company's products and correspondingly has placed pressure on the Company's gross margins. The Company expects this trend to continue. If the Company is unable to control operating expenses to counteract the impact of downward pricing, its operating results would be adversely affected. In addition, a decision by any of the Company's large customers to significantly reduce its purchases could have a material adverse effect on the Company's results of operations or financial condition. See "Business-- Customers." Competition. The Company competes on a product by product basis with various other companies, some of which may have significantly greater financial and marketing resources or broader product lines than the Company. Other manufacturers, including other larger and more experienced manufacturers of home health care products, have entered the OSA market, and the Company expects that competition in this market will continue to increase. See "Business--Competition." Foreign Operations and Sales. The Company manufactures certain of its products, principally plastic single-use products, in Hong Kong and in the Peoples Republic of China. Operations in these locations are subject to the risks normally associated with foreign operations including, but not limited to, possible changes in export or import restrictions and the modification or introduction of other governmental policies with potentially adverse effects. The Company cannot anticipate the effect on it of the change of sovereignty of Hong Kong scheduled for 1997. An extended interruption in its foreign manufacturing operations could have a material adverse effect on the Company's business. In addition, foreign sales account for approximately 23% of the Company's revenues. Although substantially all such sales currently are denominated and collected in U.S. dollars, foreign currency fluctuations could impact the level of foreign sales. See "Business--Manufacturing." 7 PRICE RANGE OF COMMON STOCK The Common Stock is quoted on the Nasdaq National Market. The table below sets forth, for the quarters indicated, the high and low sales prices per share of the Common Stock as reported on the Nasdaq National Market.
HIGH LOW ---- --- Fiscal Year ended June 30, 1994 First Quarter................................................... $11.63 $ 8.88 Second Quarter.................................................. 10.00 7.88 Third Quarter................................................... 12.00 9.13 Fourth Quarter.................................................. 10.63 8.38 Fiscal Year ended June 30, 1995 First Quarter................................................... $10.63 $ 8.00 Second Quarter.................................................. 12.25 9.75 Third Quarter................................................... 16.88 11.63 Fourth Quarter.................................................. 17.00 10.50 Fiscal Year ended June 30, 1996 First Quarter................................................... $19.75 $13.75 Second Quarter.................................................. 22.25 17.00 Third Quarter (through February 20, 1996)....................... 24.75 17.00
On February 20, 1996, the last reported sale price of the Common Stock as reported on the Nasdaq National Market was $20.88 per share. On February 20, 1996, there were approximately 1,400 holders of record of the Common Stock. USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,000,000 shares of Common Stock offered hereby by the Company are estimated to be $39.2 million ($46.7 million if the Underwriters' over-allotment option is exercised in full), assuming a public offering price of $20.88 per share and after deducting estimated underwriting discounts and offering expenses payable by the Company. The Company will not receive any proceeds from the sale of the 1,030,000 shares of Common Stock offered hereby by the Selling Stockholders. The proceeds received by the Company will be added to the Company's working capital to be used for general corporate purposes, including the acquisition of similar or related businesses and the acquisition of marketing, manufacturing or other rights associated with products or technologies which would complement the Company's products. The proceeds will enable the Company to take advantage of opportunities which it foresees may develop in these areas. The Company does not presently have any understandings or agreements with respect to the acquisition of additional businesses, products or rights. Pending their use, the proceeds received by the Company will be invested in short-term, interest bearing money market funds, commercial bank certificates of deposit or similar investments. DIVIDEND POLICY Payment of cash dividends by the Company is subject to the discretion of the Board of Directors. The current policy of the Board of Directors is to reinvest all earnings in the development and expansion of the Company's business. The Company has never paid a cash dividend on its Common Stock, and its Board of Directors has no present intention of paying cash dividends. 8 CAPITALIZATION The following table sets forth the capitalization of the Company at December 31, 1995 and as adjusted to give effect to the sale of 2,000,000 shares of Common Stock by the Company at an assumed public offering price of $20.88 per share, after deducting the estimated underwriting discounts and offering expenses payable by the Company. This table should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto that appear elsewhere in this Prospectus.
DECEMBER 31, 1995 ------------------------ ACTUAL AS ADJUSTED ---------- ------------- (DOLLARS IN THOUSANDS) Long-Term Obligations (less current portion)........... $ 5,242 $ 5,242 ========== =========== Shareholders' Equity: Common Stock, par value $.01 per share, authorized 40,000,000 shares; issued and outstanding 16,851,860 shares at December 31, 1995, and 18,851,860 shares at December 31, 1995 (as adjusted) (1)............... $ 169 $ 189 Additional Capital.................................... 19,706 58,854 Retained Earnings..................................... 45,675 45,675 ---------- ----------- Total Shareholders' Equity............................. 65,550 104,718 ---------- ----------- Total Capitalization................................... $ 70,792 $ 109,960 ========== ===========
- -------- (1) Does not include 1,546,626 shares of Common Stock reserved for issuance under stock options outstanding at December 31, 1995 and 862,688 shares of Common Stock reserved for future grant under the Company's stock option plans. 9 SELECTED FINANCIAL DATA The selected consolidated financial data presented below for each of the five years ended June 30, 1995, are derived from the Company's consolidated financial statements which have been audited by Ernst & Young LLP, independent auditors. The selected consolidated financial data as of December 31, 1995 and for the six months ended December 31, 1994 and 1995 have been derived from the Company's unaudited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial condition and results of operations for these periods. Operating results for the six months ended December 31, 1995 are not necessarily indicative of the results expected for the entire year. This data should be read in conjunction with the Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Results of Operations and Financial Condition" appearing elsewhere in this Prospectus.
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) SIX MONTHS ENDED YEAR ENDED JUNE 30 DECEMBER 31 --------------------------------------------- ------------------ 1991 1992 1993 1994 1995 1994 1995 ------- ------- ------- ------- ------- -------- -------- INCOME STATEMENT DATA: (UNAUDITED) Net sales............... $36,031 $48,976 $69,286 $78,171 $99,450 $ 45,538 $ 56,916 Cost of goods sold...... 17,554 23,360 32,114 34,830 43,077 19,660 24,896 ------- ------- ------- ------- ------- -------- -------- 18,477 25,616 37,172 43,341 56,373 25,878 32,020 General & administrative expenses............... 5,295 6,538 10,581 10,028 14,050 6,812 7,848 Sales, marketing & commission expenses.... 6,045 9,211 12,313 15,069 17,696 8,299 9,513 Research & development expenses............... 1,646 2,311 3,556 4,794 7,077 3,060 4,061 Nonrecurring charges.... -0- -0- -0- 7,086(1) -0- -0- -0- Interest expense........ 300 201 176 171 194 96 101 Other income............ (362) (704) (550) (623) (1,179) (510) (533) ------- ------- ------- ------- ------- -------- -------- 12,924 17,557 26,076 36,525 37,838 17,757 20,990 ------- ------- ------- ------- ------- -------- -------- Income before income taxes............... 5,553 8,059 11,096 6,816 18,535 8,121 11,030 Income taxes............ 1,782 2,696 3,717 2,075 6,858 3,005 4,302 ------- ------- ------- ------- ------- -------- -------- Net income............ $ 3,771 $ 5,363 $ 7,379 $ 4,741(1) $11,677 $ 5,116 $ 6,728 ======= ======= ======= ======= ======= ======== ======== Earnings per share...... $ 0.26 $ 0.31 $ 0.43 $ 0.27(1) $ 0.67 $ 0.29 $ 0.38 ======= ======= ======= ======= ======= ======== ======== Weighted average shares of Common Stock outstanding and equivalents............ 14,631 17,057 17,319 17,281 17,532 17,346 17,730
JUNE 30 --------------------------------------- DECEMBER 31 1991 1992 1993 1994 1995 1995 ------- ------- ------- ------- ------- ----------- BALANCE SHEET DATA: (UNAUDITED) Working capital......... $16,086 $19,979 $25,172 $31,032 $39,413 $44,146 Total assets............ 36,140 43,462 54,331 58,917 78,039 83,952 Total long-term obligations............ 4,535 4,291 4,288 4,854 5,538 5,242 Total shareholders' equity................. 25,799 31,391 39,148 44,224 58,369 65,550
- -------- (1) In the first quarter of fiscal year 1994, the Company recorded nonrecurring charges related to the discontinuance of its BagEasy product line. In the fourth quarter of fiscal year 1994, the Company recorded nonrecurring charges for the write-off of a prepayment for inventory under the terms of a distribution agreement. See Note I and Note J to the Consolidated Financial Statements for additional information regarding these nonrecurring charges. Excluding these charges, net income and earnings per share would have been $9,040 and $0.52, respectively, for fiscal year 1994. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL Statements in this section and elsewhere in this Prospectus about the Company's belief or expectations or about whether any particular event or circumstance is likely to occur or continue are forward-looking statements that are subject to risks and uncertainties. For a discussion of factors that could cause actual results to vary materially, see "Risk Factors" above. The Company's revenues are derived from the sale of medical devices used for the treatment of patients suffering from respiratory disorders. The Company's primary product lines are devices for the treatment of OSA, non-invasive ventilatory support devices, patient mask products for OSA and non-invasive ventilatory support therapy and single-use resuscitation products. The OSA product line and related accessories comprise the largest portion of the Company's sales and are growing rapidly, accounting for 68% of total sales for the six months ended December 31, 1995 versus 57% of sales for fiscal year 1993. Non-invasive ventilatory support products and related accessories are the next largest product line and are growing rapidly as well, accounting for 26% of sales for the six months ended December 31, 1995 versus 23% of sales for fiscal year 1993. The Company's sales currently are comprised of 68% equipment and 32% consumable and single-use products. Consumable and single-use products consist primarily of patient masks and related accessories used with the Company's OSA and non-invasive ventilatory support devices, disposable anesthesia masks and the BagEasy manual resuscitator and are an important component of the Company's business. The Company expects to continue to derive significant sales revenue from consumable and single-use products. The Company exports its products to foreign markets, primarily Europe, Canada and the Far East. International sales have increased from 18% of net sales in fiscal year 1993 to 20% of net sales in fiscal year 1995 and 23% of net sales for the six months ended December 31, 1995. The Company expects its international sales to grow at least as fast as overall sales, consistent with its strategy of expanding its international distribution and manufacturing organization. The Company's gross margin percentage has increased from 54% of sales for fiscal year 1993 to 57% of sales for fiscal year 1995, principally due to a shift in sales mix over the period to the Company's higher margin products and to increased operating leverage. For the six months ended December 31, 1995, the gross margin percentage declined to 56% of sales, principally due to decreasing average selling prices for certain of the Company's major products. The Company believes that downward pressure on gross margins is likely to continue, primarily due to decreases in selling prices resulting from increased purchasing influence of major customers, competition in the Company's major product lines and continuing efforts by third party and government payors to control reimbursement for medical products and services, including products sold by the Company. Despite this downward pressure on gross margins, operating income increased from 17% of sales for the six months ended December 31, 1994 to 19% for the period ended December 31, 1995. This increase in operating income as a percent of sales is due to operating expenses increasing at rates less than the rate of growth in sales. In future periods, it is the Company's intent to focus on continuing to control operating expenses to counteract the downward pressure on gross margins. 11 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of net sales represented by items in the Consolidated Statements of Operations.
SIX MONTHS YEAR ENDED ENDED JUNE 30 DECEMBER 31 ---------------- ------------- 1993 1994 1995 1994 1995 ---- ---- ---- ----- ----- Net sales..................................... 100% 100% 100% 100% 100% Cost of goods sold............................ 46 45 43 43 44 --- --- --- ----- ----- Gross profit.................................. 54 55 57 57 56 General and administrative expenses........... 15 13 14 15 14 Sales, marketing and commission expenses...... 18 19 18 18 17 Research and development expenses............. 5 6 7 7 7 Nonrecurring charges.......................... 0 9 0 0 0 Interest expense.............................. 0 0 0 0 0 Other income.................................. 0 (1) (1) (1) (1) --- --- --- ----- ----- INCOME BEFORE INCOME TAXES.................. 16 9 19 18 19 Income taxes.................................. 5 3 7 7 7 --- --- --- ----- ----- NET INCOME................................ 11% 6% 12% 11% 12% === === === ===== =====
Six Months Ended December 31, 1995 vs. Six Months Ended December 31, 1994 Net sales for the six months ended December 31, 1995 were $56,916,000, an increase of 25% over the $45,538,000 recorded in the year earlier period. The increase in net sales was primarily attributable to increases in total unit and dollar sales for the Company's OSA and non-invasive ventilatory support products. Sales of the Company's face masks and other patient interface devices used as accessories for its OSA and non-invasive ventilatory support units increased significantly during this period in both unit and dollar terms. The Company's gross profit for the six months ended December 31, 1995 was 56% of net sales as compared to 57% of net sales for the year earlier period. The decrease in the gross profit percentage was caused by reduced average selling prices, primarily for the Company's REMstar Nasal CPAP systems, during the current quarter and six-month period. These reductions in average selling prices resulted from increasing competition in the OSA market, particularly relative to the Company's large, national customers who receive lower prices in exchange for volume purchase commitments. General and administrative expenses were $7,848,000 (14% of net sales) for the six months ended December 31, 1995 as compared to $6,812,000 (15% of net sales) for the year earlier period. The decrease in these expenses as a percentage of net sales reflects the Company's ability, during the current six-month period, to limit spending increases in these areas to rates less than the rate of sales increase. The increase in absolute dollars was due primarily to increased legal fees incurred relating to the previously disclosed patent litigation. Sales, marketing and commission expenses were $9,513,000 (17% of net sales) for the six months ended December 31, 1995 as compared to $8,299,000 (18% of net sales) for the year earlier period. The decrease in these expenses as a percentage of net sales reflects the Company's ability, during the current six-month period, to limit spending increases in these areas to rates less than the rate of sales increase. The increase in absolute dollars was due primarily to costs associated with trade shows and related travel expenses, salary expenses for new employees and commission expenses based on higher sales levels achieved. 12 Research and development expenses were $4,061,000 (7% of net sales) for the six months ended December 31, 1995 as compared to $3,060,000 (7% of net sales) for the year earlier period. The increase in absolute dollars reflects the extensive new product development efforts during the period and currently underway to support new product introductions in the Company's major product groups and also to explore opportunities in other respiratory product areas. Several new products have been introduced during the current fiscal year, and other new product introductions are scheduled for the remainder of the fiscal year, in some cases with initial distribution limited to international markets until regulatory clearance to market in the United States is obtained. Subsequent to the end of the six-month period ended December 31, 1995, the Company received clearance from the FDA to market its new Aria CPAP System and two new face mask products in the United States. The Company's effective income tax rate was 39% for the six months ended December 31, 1995 as compared to 37% for the year earlier period. Changes in the Company's effective income tax rate are due primarily to changes in the relative proportion of the Company's taxable income attributable to its United States operation versus taxable income attributable to its Hong Kong and Peoples Republic of China operations. The United States operation pays income taxes at a higher rate (approximately 41% before available income tax credits) than do the Hong Kong and Peoples Republic of China operations. During the six months ended December 31, 1995, the proportion of taxable income attributable to the United States operation increased. In addition, the research and development tax credit expired effective July 1, 1995. This income tax credit had been available during prior fiscal years to reduce income taxes paid by the United States operation and therefore reduced the effective income tax rate. As a result of the factors described above, the Company's net income was $6,728,000 (12% of net sales) for the six months ended December 31, 1995 as compared to $5,116,000 (11% of net sales) for the six months ended December 31, 1994. Fiscal 1995 vs. Fiscal 1994 and Fiscal 1993 Net sales for fiscal year 1995 were $99,450,000, representing a 27% increase in net sales over the $78,171,000 recorded in fiscal year 1994. Fiscal year 1994 net sales represented a 13% increase over the $69,286,000 recorded in fiscal year 1993. The increase in net sales from fiscal year 1994 to fiscal year 1995 was primarily attributable to increases in total unit sales of the Company's OSA and non-invasive ventilatory support products and reflects sales growth across all of the Company's market bases for these product groups. In addition, sales of the Company's face mask products, including those used as accessories for its OSA and non-invasive ventilatory support products and those manufactured and sold on an OEM basis (disposable anesthesia masks), increased in both unit and dollar terms. Finally, the overall increase in net sales was accomplished in spite of a decrease in sales of the Company's resuscitation products resulting from the Company's November 1993 decision to discontinue production and shipment of its BagEasy line of disposable manual resuscitators, which accounted for 2% of net sales for fiscal year 1994. Excluding the impact of the discontinuance of the BagEasy product line, sales growth would have been 30% and 20% for fiscal years 1995 and 1994, respectively. In March 1995, the Company introduced a redesigned version of the BagEasy product, and sales for this redesigned version accounted for less than one-half of one percent of fiscal year 1995 sales. The increase in net sales from fiscal year 1993 to fiscal year 1994 was also primarily attributable to increases in total unit sales for the Company's OSA and non-invasive ventilatory support products. Sales of resuscitation products decreased from fiscal year 1993 to fiscal year 1994 as a result of the discontinuance of the BagEasy manual resuscitator product discussed above (BagEasy accounted for 8% of net sales for fiscal year 1993). Finally, sales of the Company's disposable anesthesia masks decreased in both unit and dollar terms from fiscal year 1993 to fiscal year 1994 due primarily to reduced orders from the Company's customer for disposable anesthesia masks. The reduction in disposable anesthesia mask sales was also due 13 to a reduction in the unit selling price of the masks under the terms of the June 1993 supply agreement with the Company's sole customer for these masks. Under the 1993 agreement, the customer may choose to pay a lower unit price for the masks in exchange for assuming responsibility for freight and duty costs related to mask shipments. The Company's gross profit was 57% of net sales for fiscal year 1995 as compared to 55% of net sales for fiscal year 1994 and 54% of net sales for fiscal year 1993. The increases in gross profit percentage were due primarily to the Company's ability to limit the growth of its manufacturing support costs to rates less than the rate of sales increases achieved and a shift in sales mix toward the Company's higher margin products. In addition, the increase in fiscal year 1994 gross profit was partially offset by a temporary diversion of engineering resources away from research and development activities and to manufacturing support activities in response to recommendations resulting from an FDA inspection. General and administrative expenses were $14,050,000 (14% of net sales) for fiscal year 1995 as compared to $10,028,000 (13% of net sales) for fiscal year 1994 and $10,581,000 (15% of net sales) for fiscal year 1993. The increase in these costs from fiscal year 1994 to fiscal year 1995 was due to a provision for year-end profit sharing bonuses and to higher administrative costs related to the growth of the Company, including staffing increases, increased legal fees, and increased provisions for uncollectible accounts receivable. The decrease in these costs, both in absolute dollars and as a percentage of net sales, from fiscal year 1993 to fiscal year 1994 was due primarily to the absence of profit sharing bonuses in fiscal year 1994 based on financial results achieved in that year. Sales, marketing and commission expenses were $17,696,000 (18% of net sales) for fiscal year 1995 as compared to $15,069,000 (19% of net sales) for fiscal year 1994 and $12,313,000 (18% of net sales) for fiscal year 1993. These increases in absolute dollars were due to increased commission expenses paid to independent sales representatives resulting from a shift in sales mix towards products handled by these representatives, increased trade show and training expenses, increased salary expenses for new employees in sales and marketing management, and, for the fiscal year 1994 to fiscal year 1995 comparison, product literature and advertising expenses incurred in anticipation of new product launches. Research and development expenses were $7,077,000 (7% of net sales) for fiscal year 1995 as compared to $4,794,000 (6% of net sales) for fiscal year 1994 and $3,556,000 (5% of net sales) for fiscal year 1993. The continuing increases in research and development spending reflect the Company's commitment to investment in future product development and product enhancements in all of the Company's major product groups. Extensive new product development efforts were conducted during fiscal years 1994 and 1995 in anticipation of new product introductions in each major product group during calendar year 1995. Development work was conducted on new families of OSA and non-invasive ventilatory support devices and the redesigned BagEasy manual resuscitator. Certain new models of the OSA devices were introduced in the first quarter of fiscal year 1996, the redesigned BagEasy manual resuscitator was introduced in March 1995, and a variety of patient interface devices were introduced at various times during the three-year period. Additional costs were also incurred throughout the three-year period to fund clinical studies. Finally, the increase from 1994 to 1995 resulted, to a lesser extent, from the temporary diversion during fiscal year 1994 of engineering resources away from research and development activities and to manufacturing support activities in response to recommendations resulting from an FDA inspection. Nonrecurring charges totaled $7,086,000 (9% of net sales) for fiscal year 1994. The first component of these charges, recorded in the first quarter, totaled $1,966,000 and represented costs incurred by the Company in connection with its November 1993 decision, discussed above, to discontinue the production and sale of its BagEasy line of manual resuscitators and recall all remaining BagEasy products in distribution channels and customer inventories and included provisions for write-offs of inventories and fixed assets, the satisfaction of purchase order and compensation commitments, and costs associated with the recall. The second component of these nonrecurring charges, recorded in the fourth quarter of fiscal year 1994, 14 totaled $5,120,000 and represented the write-off of the remaining balance on the prepayment for inventory and the net book value of units that had been purchased under the terms of a distribution agreement. See Notes I and J to the Consolidated Financial Statements for additional information regarding these charges. The Company did not incur any nonrecurring charges in fiscal years 1995 or 1993. The Company's effective income tax rate was 37% for fiscal year 1995 as compared to 30% for fiscal year 1994 and 33% for fiscal year 1993. Changes in the Company's effective income tax rate were due primarily to changes in the relative proportions of taxable income attributable to its United States operation versus taxable income attributable to its Hong Kong and Peoples Republic of China operations because the United States operation pays income taxes at a higher rate (approximately 41% before available income tax credits) than do the Hong Kong and Peoples Republic of China operations. The proportion of taxable income attributable to the United States operation has increased, with the exception of fiscal year 1994. During that year, the nonrecurring charges described above were incurred almost exclusively by the United States operation, reducing taxable income attributable to the U.S. operation and correspondingly reducing the Company's overall effective income tax rate. As a result of the factors described above, the Company's net income was $11,677,000 (12% of net sales) for fiscal year 1995 as compared to $4,741,000 (6% of net sales) for fiscal year 1994 and $7,379,000 (11% of net sales) for fiscal year 1993. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company had working capital of $44,146,000 at December 31, 1995 and $39,413,000 at June 30, 1995. Net cash used by operating activities was $2,846,000 for the six months ended December 31, 1995 as compared to net cash provided by operating activities of $3,295,000 for the six months ended December 31, 1994. The net use of cash for the six-month period ended December 31, 1995 was due primarily to increases in inventories and accounts receivable in amounts greater than the changes in those accounts during the first six months of last fiscal year. The increase in trade accounts receivable in the six-month period comparison was due to growth in international sales at a rate greater than total sales (all international sales are made on extended payment terms) and to a continued increase in the portion of the Company's domestic sales that are being made on extended payment terms. The increase in inventories was due to the Company's purchase of raw materials for, and the initial production of, many of its new products, including those introduced during the current six- month period and those scheduled for introduction during the remainder of the fiscal year. The Company had working capital of $39,413,000 and $31,032,000 at June 30, 1995 and 1994, respectively. Net cash provided by operating activities was $9,469,000, $4,568,000 and $10,669,000 for fiscal years 1995, 1994 and 1993, respectively. The increase in cash provided by operating activities from fiscal year 1994 to fiscal year 1995 was due to an increase in net income, a decrease in refundable income taxes, and increases in accounts payable and accrued expenses during fiscal year 1995 as compared to decreases or smaller increases in those liability accounts during fiscal year 1994. The reduction in cash provided by operating activities from fiscal year 1993 to fiscal year 1994 was due primarily to increases in accounts receivable and refundable income taxes as well as decreases in accounts payable and accrued expenses. Trade accounts receivable increased from June 30, 1994 to June 30, 1995 at a rate greater than the percentage change in sales for the fiscal years ending on those dates primarily because the Company's quarterly sales were at their highest level for those two fiscal years during the last quarter of fiscal year 1995. In addition, the aging of the Company's receivables increased as a result of extended payment terms offered by the Company under several flexible financing programs. 15 Net cash used by investing activities was $3,604,000 for the six months ended December 31, 1995 as compared to $2,974,000 for the six months ended December 31, 1994. Essentially all of the cash used by investing activities for both periods represented capital expenditures, including the purchase of production equipment, computer and telecommunications equipment and office equipment. The funding for capital expenditures in the current six-month period was provided by accumulated cash and short-term investment balances, and in the first six months of last fiscal year was provided by positive cash flows from operating activities and by accumulated cash and short-term investment balances. Net cash used by investing activities was $7,711,000, $8,415,000, and $6,363,000 for fiscal years 1995, 1994 and 1993, respectively. Net cash used for capital expenditures was $6,941,000, $7,735,000 and $6,363,000 for the respective years. Approximately $2,643,000 of the capital expenditures for fiscal year 1995 and $1,203,000 of the capital expenditures for fiscal year 1993 were for the purchase and development of additional land and expansion costs related to the Company's headquarters and manufacturing facility in Murrysville, Pennsylvania. The remainder of the significant capital expenditures for fiscal years 1995, 1994 and 1993 were for the purchase of production equipment, office equipment and computers. In addition, fiscal year 1995 investing activities included an expenditure of $745,000 representing a portion of the purchase price of an acquired business plus related acquisition expenses. The remainder of the purchase price was paid with shares of the Company's Common Stock. See Note L to the Consolidated Financial Statements for additional information about this acquisition. In November 1993, the Company completed a 46,000 square foot addition to its headquarters and manufacturing facility in Murrysville, Pennsylvania. Financing for the addition includes a $978,000 Redevelopment Authority loan that was received in June 1994 and a $1,100,000 loan that was received from the Pennsylvania Industrial Development Authority in February 1995. Both loans have a 2% fixed interest rate and a 15-year repayment term. See Note D to the Consolidated Financial Statements for additional information about the Company's long-term obligations. Funding for the remainder of the facility addition and the other capital expenditures was provided by positive cash flows from operating activities and from cash and short-term investment balances. Net cash provided by financing activities also includes proceeds from the issuance of Common Stock under the Company's stock option plans and the receipt of a minority interest investment in a joint venture and is reduced by payments made on long-term obligations. In October 1995, the Company entered into a new line of credit facility with a commercial bank that provides for the availability of $1,250,000 at the bank's prime interest rate until the expiration date of the agreement on October 31, 1996. The Company expects that this line of credit facility will be renewed upon its expiration. See Note D to the Consolidated Financial Statements for a discussion of the line of credit. As discussed above, in November 1993 the Company discontinued the production and sale of its BagEasy line of manual resuscitators and recalled all remaining BagEasy products in distribution channels and customer inventories. The BagEasy product represented approximately 8% of the Company's total sales for the year ended June 30, 1993 (the last full fiscal year it was sold) and did not make significant contributions to profitability. In March 1995, the Company began shipping a redesigned version of the BagEasy manual resuscitator. The Company has not provided a valuation allowance for deferred income tax assets because it has determined that it is more likely than not that such assets can be realized, at a minimum, through carrybacks to prior years in which taxable income was generated. The Company believes that positive cash flow from operating and financing activities, its $1,250,000 line of credit facility, and its accumulated cash and short-term investments will be sufficient to meet its current and presently anticipated needs for the next 12 months for operating activities, investing activities and financial activities (primarily consisting of payments on long-term debt). 16 INFLATION Inflation has not had a significant effect on the Company's business during the periods discussed. QUARTERLY RESULTS OF OPERATIONS The following table sets forth selected operating results for the ten quarters ending December 31, 1995. In the opinion of the Company's management, this unaudited information has been prepared on the same basis as the audited financial information, and includes all adjustments (consisting only of normal, recurring adjustments) necessary to present this information fairly. This financial information should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. These operating results are not necessarily indicative of results for any future period. (IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED ------------------------------------------ SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 1993 1993 1994 1994 ------------ ----------- -------- ------- Net sales......................... $18,224 $18,600 $19,308 $22,039 Gross profit...................... 9,989 10,100 10,704 12,547 Nonrecurring charges.............. 1,966(1) -0- -0- 5,120(2) Net income (loss)................. 873 2,064 2,244 (440) Earnings (loss) per share......... $ 0.05 $ 0.12 $ 0.13 $ (0.03) THREE MONTHS ENDED ------------------------------------------ SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 1994 1994 1995 1995 ------------ ----------- -------- ------- Net sales......................... $21,670 $23,868 $25,599 $28,313 Gross profit...................... 12,199 13,679 14,486 16,009 Net income........................ 2,420 2,696 3,072 3,489 Earnings per share................ $ 0.14 $ 0.15 $ 0.17 $ 0.20 THREE MONTHS ENDED ------------------------- SEPTEMBER 30 DECEMBER 31 1995 1995 ------------ ----------- Net sales......................... $26,675 $30,241 Gross profit...................... 15,160 16,860 Net income........................ 3,219 3,509 Earnings per share................ $ 0.18 $ 0.20
(1) In the three months ended September 30, 1993, the Company recorded nonrecurring charges related to the discontinuance of its BagEasy product line. See Note J to the Consolidated Financial Statements for additional information regarding these nonrecurring charges. (2) In the three months ended June 30, 1994, the Company recorded nonrecurring charges for the write-off of a prepayment for inventory under the terms of a distribution agreement. See Note I to the Consolidated Financial Statements for additional information regarding these nonrecurring charges. 17 BUSINESS Respironics is a leading developer, manufacturer and marketer of medical devices used for the treatment of patients suffering from certain respiratory disorders. The Company's products are designed to reduce costs while improving the effectiveness of patient care and are used primarily in the home and hospitals, as well as emergency medical settings and alternative care facilities. The Company's primary product lines are: (i) continuous positive airway pressure ("CPAP") devices and bi-level positive airway pressure ("BiPAP") devices for the treatment of obstructive sleep apnea ("OSA"), a serious disorder characterized by the repeated cessation of breathing during sleep; (ii) bi-level non-invasive ventilatory support devices; (iii) patient mask products; and (iv) single-use resuscitation products. Respironics markets its products through a sales organization consisting of approximately 90 direct and independent sales representatives, who sell to a network of over 2,500 medical product dealers. The Company's sales have grown from $36.0 million in fiscal year 1991 to $99.5 million in fiscal year 1995 and are currently comprised of 68% equipment and 32% consumable and single-use products. With approximately 85% 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. COMPANY'S MARKET The Company competes in the respiratory products market, which was estimated in 1995 to be approximately $2 billion annually in the U.S. Growth in this market has been driven by the aging U.S. population and the shift in treatment to lower cost delivery sites such as post-acute facilities and the home. This shift has resulted from increasing pressure to reduce escalating health care costs and has been enabled by improvements in technology which permit the delivery of high quality care in non-hospital environments. Within the overall respiratory products market, the Company's products compete in the OSA, non- invasive ventilatory support, patient mask and resuscitation segments. Obstructive Sleep Apnea It is estimated that devices for the treatment of OSA constitute a $100 million annual U.S. market that is growing at 20 to 25% per year. This growth is driven primarily by the increasing recognition by the medical community and the general public of the prevalence of, and the serious medical complications resulting from, OSA. Although an increasing number of OSA cases are being diagnosed and treated, the National Commission on Sleep Disorders Research has indicated that the vast majority of patients with sleep disorders currently remain undiagnosed. OSA is a serious disorder caused by obstruction of the upper airway during sleep. The condition is characterized by cycles of heavy snoring, obstructive choking (apnea) and partial awakening. OSA sufferers can experience hundreds of these cycles every night, resulting in repeated arousals from sleep that lead to debilitating daytime sleepiness, which in turn impairs functioning and has been linked to increased industrial and automobile accidents. The National Commission has also indicated that OSA may lead to higher incidence of strokes, heart disease and other serious medical conditions. According to a January 1993 report by the National Commission, more than 18 million people in the U.S. have symptoms which are consistent with a diagnosis of some degree of OSA. An April 1993 study published in the New England Journal of Medicine concluded that 4% of men and 2% of women in the middle- aged work force suffer from a clinically important degree of sleep apnea. Other studies have shown that OSA also occurs in infants, children and the elderly. In 1985, Respironics introduced the first commercially available CPAP product designed for the treatment of OSA as an alternative to a surgical technique referred to as uvulopalatopharyngoplasty ("UP3"), the standard surgical method of treatment available at that time. UP3 involves a procedure 18 performed on the upper airway of a patient to remove excess tissue and to streamline the shape of the airway. The treatment of OSA with CPAP involves the use of a small portable air compressor to supply room air at a predetermined positive pressure to a sleeping patient through flexible tubing and a comfortably fitting mask. The continuous positive airway pressure applied in this manner acts as a pneumatic splint, keeping the nasopharyngeal airway open and unobstructed throughout the breathing cycle. Diagnosis of OSA and other forms of sleep disorders is usually made by overnight testing with a multichannel recorder in a sleep disorders laboratory. Patients are referred to a sleep laboratory by their family physician or by a pulmonologist, neurologist or psychiatrist. The number of sleep labs in the U.S. has grown dramatically during the past decade. The Company estimates that there are currently approximately 1,300 sleep labs in the U.S., up from 450 in 1988. Patients diagnosed with OSA for whom nasal CPAP treatment is prescribed usually undergo a second night's testing in the sleep laboratory to confirm that the treatment is effective and to determine the level of CPAP that they require. Currently, there is a trend for more testing to be performed in the home with portable monitoring units. These home studies may either be attended by a sleep technician or unattended with the recorded patient data ultimately transferred to a diagnostic unit for analysis by a sleep professional. The U.S. market for sleep disorder related diagnostic and monitoring devices is estimated to be $30 to $40 million annually. Non-Invasive Ventilatory Support The overall U.S. ventilation market is estimated to be $250 million annually. Ventilators are used to augment or maintain patient breathing. Non- invasive ventilatory support is an emerging sector of the overall ventilation market, and is currently estimated to be approximately 10% of that market. In 1989, Respironics introduced the first non-invasive bi-level ventilatory support device specifically designed to compensate for mask leaks. Growth factors in the non-invasive ventilatory support market consist primarily of the growing awareness in the medical community of the benefits of non-invasive ventilatory support over traditional invasive ventilation and the aging of the U.S. population with the resultant need for ventilatory assistance. While certain critically ill patients require invasive ventilation, non-invasive devices may be able to provide ventilatory assistance to certain patients who are not dependent on a ventilator for continuous life support. Non-invasive ventilatory support is provided through an external nasal mask and therefore does not involve intubation. Patient Masks The markets served by the Company's patient mask products include the delivery of CPAP and non-invasive ventilatory support therapy using the BiPAP Ventilatory Support System, the delivery of emergency resuscitation to patients who have stopped breathing and the delivery of anesthesia gases to patients before, during and after surgical procedures. The use of patient masks in the delivery of CPAP and BiPAP therapy has increased, and the Company expects that this usage will continue to increase as new applications for such therapy are identified and cleared for marketing by the FDA and also as the installed base of the Company's CPAP products and BiPAP Ventilatory Support Systems in the field grows. Resuscitation The market for manual resuscitators is estimated to be $50 million annually and growing at 8 to 10% per year. Growth in this market is driven primarily by concerns in the medical community about cross-contamination and the resulting preference for products that are used by only one patient, including those used once and then disposed of and those used several times by one patient and then disposed of. The market served by the Company's resuscitation products consists primarily of the market for disposable manual resuscitators, including the Company's BagEasy product. Manual resuscitators are used to ventilate the lungs of a patient by squeezing a self-inflating bag connected to a patient mask or endotracheal tube. These devices can be used to resuscitate patients who have stopped breathing and to sustain proper breathing function for a short period of time, typically during transport, in critically ill patients. 19 STRATEGY Respironics' objective is to be the market leader in innovative devices for the treatment of respiratory disorders. The Company's strategy is to: (i) continue to commit significant resources to the development of innovative products; (ii) expand the breadth of its product lines to address the full range of respiratory disorders; (iii) expand its international distribution and manufacturing capabilities; (iv) pursue acquisitions of complementary technologies, products and businesses; (v) enhance operational quality and efficiency through process excellence; and (vi) develop partnering relationships with customers. Develop Innovative Products. Respironics has established a record of innovation in respiratory care and is committed to developing next-generation respiratory devices that offer significant competitive advantages over currently available products. The Company has consistently increased research and development expenditures and expects to maintain research and development spending at significant levels. The Company recently began introducing its new generation of OSA products, the Great Performers line, and is currently developing its next-generation family of non-invasive ventilatory support devices which it expects to introduce in international markets in summer 1996. The new OSA products include a CPAP device, Virtuoso, that will incorporate automatic feedback technology, an important technological advance in OSA therapy. The Company believes that innovation will allow it to maintain its leading market position. Expand the Breadth of Its Product Lines. The Company plans to broaden its current product lines and to add new product lines to address an increasing range of respiratory disorders through new product development or acquisition of technologies and products. These products will be offered at multiple price points throughout the entire spectrum of health care delivery locations, from hospitals and post-acute facilities to sleep labs to the home. The Company's goal is to have the best products available for treating patients at each health care delivery site. The Company believes that expanding the breadth of its product lines will enable it to better meet the needs of the marketplace and leverage its existing distribution network. Expand International Distribution and Manufacturing Capabilities. Respironics intends to expand its position in international markets by capitalizing on its established distribution and manufacturing infrastructure. The Company's international distribution organization consists of over 100 distributors in 58 countries worldwide. Over the past 24 months, the Company has significantly expanded its international staff and established new distribution relationships. International sales represented 23% of revenue for the six-month period ended December 31, 1995, up from 20% in the prior year's comparable period. In January 1996, the Company received ISO 9001 certification from the International Organization of Standards and, at the same time, received authorization under the European Union's Medical Device Directives to affix the "CE Mark" to the Company's products marketed throughout the world. The Company believes that expansion of its international capabilities will enable it to capitalize on growth opportunities in both existing and developing foreign markets. Acquire Complementary Technologies, Products and Businesses. Respironics intends to pursue the acquisition of technologies, products and entire businesses. The Company believes that, as consolidation within the medical technology industry continues, there will be attractive acquisitions available to complement the Company's current product offerings. Consistent with this strategy, in 1995 the Company completed the acquisition of Vitalog, a developer, manufacturer and marketer of monitoring and diagnostic devices for sleep and other respiratory disorders. The Company believes acquisitions will allow it to quickly broaden its product lines and leverage its existing distribution network. Enhance Operational Quality and Efficiency Through Process Excellence. Respironics' management continuously reviews key aspects of the Company's operations, such as manufacturing, marketing and research and development, to determine whether certain processes can be performed more efficiently. The Company has implemented a series of process improvements in several operational areas that have resulted in cost efficiencies. The Company believes these continuous process improvements will 20 enhance its reputation as a high-quality supplier while contributing to its ability to maintain its operating margins. Develop Partnering Relationships with Customers. The Company intends to continue to expand the scope of its relationships with its customers by becoming an active partner with these customers as they distribute, service and support the Company's products. These partnering activities have taken a variety of forms to date, including providing training and medical education programs for the customers' staffs and sales forces and maintaining a consistent record of shipping over 90% of customer orders within 24 hours of receipt. The Company believes these partnering relationships and programs help to positively differentiate it from the other participants in the marketplace and allow the Company to maintain and improve its competitive position. The Company plans to expand the scope of these activities, particularly as the Company's customer base consolidates. PRODUCTS The Company's principal products are described in the following table:
PRODUCT DESCRIPTION DELIVERY SITES ------- ----------- -------------- OBSTRUCTIVE SLEEP APNEA REMstar Choice Small portable air pressurization CPAP Home CPAP System therapy unit. Features a cordless remote controller, air pressure stability, minimal operating noise and consumer-oriented design. Six models, retailing for $700 to $1,300. Aria CPAP System Lightweight, compact and quiet Home microprocessor-driven CPAP system. Features easy set up, built-in memory to record patient usage data, dual time meters and LCD display. First product introduction in the Great Performers series. Currently being distributed in international markets. Recently received 510(k) clearance and expected to begin selling into the U.S. market in spring 1996. Virtuoso Smart Self-adjusting CPAP system providing three Home and sleep labs CPAP System different therapy modes. Tracks patients' changing needs and automatically adjusts the pressure level, providing appropriate therapy over time. Includes built-in memory to record patient usage/therapy data. Currently sold internationally and is pending 510(k) clearance. BiPAP S Airway BiPAP unit with automatic compensation for Home and sleep labs Management System mask leaks. Used to treat severe cases of OSA with bi-level pressure, which is more comfortable to the patient than higher pressures of CPAP therapy. Two models, retailing for $2,800 to $3,000.
21
PRODUCT DESCRIPTION DELIVERY SITES ------- ----------- -------------- Cricket Oximeter and Lightweight, portable and battery powered Home, hospitals and HMS 5000 Monitor devices that record and retain a variety of sleep labs patient physiological data via sensors. Both units interface with a personal computer to download and display the collected data. Cricket retails for approximately $1,800 and the more sophisticated HMS 5000 retails for $10,000 to $25,000 (based on number of monitoring channels). NON-INVASIVE VENTILATORY SUPPORT BiPAP S/T Ventilatory Non-invasive bi-level device with automatic Home Support System compensation for mask leaks and two separate therapy modes. Designed specifically for mask supplied ventilatory support. Two models, retailing for $6,000 to $8,000. BiPAP Hospital Ventilatory Non-invasive bi-level device that enhances Hospitals and Support System functionality of BiPAP S/T for use in the post-acute hospital environment. Two models, retailing facilities for $5,000 to $8,000. PATIENT MASKS Face Masks Various face masks designed to provide a Home, hospitals comfortable seal when used with the and post-acute Company's CPAP and BiPAP products. The facilities Company offers both reusable masks (for home use) and disposable masks (for hospital use) in a wide range of sizes. Includes nasal sealing flap masks, as well as the new GEL Mask and Monarch Mini Mask. Air-filled cushion Disposable face masks used to deliver Hospitals anesthesia masks anesthesia gases during surgical procedures. Provide a uniform seal around the patient's nose and mouth via a soft plastic air-filled cushion. Nine sizes manufactured for an exclusive marketer on an OEM basis. RESUSCITATION BagEasy Disposable Self-inflating bag used to manually Hospitals and Manual Resuscitator resuscitate patients who have stopped emergency breathing and to sustain proper breathing settings function for a short period of time. Three models of the device currently offered.
22 Obstructive Sleep Apnea Products Respironics believes it is the U.S. market share leader in OSA therapy devices, with an approximate 50% market share. The Company's primary OSA products are REMstar Choice and the BiPAP S Airway Management System and related products such as masks, tubes, filters and headgear. Sales of OSA products amounted to $38.7 million (68% of the Company's sales) for the six- month period ended December 31, 1995, a 25% increase over the comparable period in the prior year. REMstar Choice is the Company's fifth generation CPAP device for the treatment of OSA. REMstar Choice consists of a small, portable air pressurization device, air pressure control, a cordless remote on-and-off control and a mask worn by the patient at home during sleep. REMstar Choice offers improved functional features compared to its predecessor devices, including improved pressure stability, reduced operating noise and a smaller design. The BiPAP S Airway Management System is used to treat severe OSA and is useful in improving acceptance of therapy by patients who have difficulty tolerating CPAP. The unit senses the patient's breathing cycles and adjusts the pressure accordingly. See "--Non-invasive Ventilatory Support Products" for a further description of the BiPAP devices. The Company recently introduced its next-generation family of OSA products, known as the "Great Performers" product line, with the first international shipments commencing in July 1995. This new family of products will include several products including CPAP, bi-level and clinical units. In February 1996, the Company received FDA clearance for one of these products, the Aria CPAP system, and expects to begin domestic shipments of this device in spring 1996. The Aria CPAP system features built-in memory to record patient usage data. The software necessary to extract this data from the Aria unit is expected to be available in fall 1996. This software may require clearance to market through the 510(k) process. This new family of products also includes a CPAP device, known as Virtuoso, that utilizes innovative technology to monitor the patient's airway and adjust output automatically in order to deliver the appropriate pressure. Separate 510(k) filings are in process for Virtuoso and other devices in the Great Performers series of products. There can be no assurance that such 510(k) clearances for Virtuoso or any other products in the Great Performers product line will be obtained in a timely manner or at all. See "--Regulatory Matters." Products in the Great Performers product line are being initially distributed solely in international markets until regulatory clearance to market each product in the U.S. is obtained. Respironics also manufactures devices related to the diagnosis and monitoring of sleep and other respiratory-related disorders, which it obtained through the acquisition of Vitalog in 1995. The Vitalog acquisition provides the Company with access to technology and products complementary to its own, particularly in the OSA product line and is part of the Company's strategic effort to enter the diagnostic market. The Company believes that the Vitalog acquisition will enhance its marketing efforts in the OSA area by expanding the Company's presence in sleep labs and permitting the Company to sell diagnostic equipment, which helps drive the market for the Company's therapeutic devices. Non-invasive Ventilatory Support Products The Company believes it is the leading manufacturer and marketer of non- invasive ventilatory support devices in the U.S. for individuals who require ventilatory assistance but who are not dependent on a ventilator for continuous life support. Non-invasive ventilatory support products represented $14.9 million (26% of the Company's sales) in the six months ended December 31, 1995, a 27% increase over the comparable period in the prior year. The Company's principal non-invasive ventilatory support product is the BiPAP Ventilatory Support System. Introduced in December 1989, the BiPAP Ventilatory Support System is a low-pressure, electrically-driven flow generator with an electronic pressure control designed to augment patient breathing by supplying pressurized air to the patient. The BiPAP Ventilatory Support System was the first device for non-invasive use designed specifically to compensate for mask leaks. BiPAP devices sense the 23 patient's breathing and adjust their output to assist in inhalation and exhalation. The BiPAP Ventilatory Support System 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 Company believes the BiPAP Ventilatory Support System has the potential for increasing patient comfort because the BiPAP Ventilatory Support System adapts to the patient's breathing cycles as opposed to requiring the patient to adapt his breathing to the ventilator cycles and because it can be used effectively with a patient mask rather than requiring intubation. The retail price for a BiPAP unit also compares favorably to the cost of invasive ventilators, which generally retail for $10,000 to $28,000. In May 1992, the Company introduced the Hospital BiPAP Ventilatory Support System, which includes accessories such as an airway pressure monitor, a detachable control panel, a disposable circuit and a mounting stand, all of which are designed to allow the BiPAP Ventilatory Support System to be used more easily in the hospital environment. The Company is supporting clinical trials that are investigating the possible benefits of BiPAP therapy for different types of patient populations. The results of recent studies have been favorable with respect to the use of the BiPAP Ventilatory Support System for patients with chronic respiratory deficiencies and patients with nocturnal breathing disorders who benefit from ventilatory support. Applications being studied include use by patients suffering from emphysema and other respiratory disorders, as well as other in- hospital applications. The marketing of BiPAP Ventilatory Support Systems for use in these patient populations may require additional clearances from the FDA prior to marketing in the United States. The Company also is currently incorporating Proportional Assist Ventilation ("PAV") into its line of BiPAP ventilatory support products. PAV is a mode of ventilatory support that provides assistance in proportion to the needs of the patient. The Company began sponsoring clinical trials investigating PAV in 1995. Application for regulatory clearance to market devices that include PAV, which is required prior to the marketing of such products in the U.S., has not yet been made. The PAV technology was obtained by the Company through a non- exclusive licensing arrangement with the University of Manitoba in Winnipeg, Canada. Patient Mask Products Patient masks represented $9.1 million (16% of the Company's sales) in the six months ended December 31, 1995, an increase of 33% over the comparable period in the prior year. The Company provides three types of patient masks: (1) masks used with CPAP and BiPAP devices including nasal sealing flap masks, the Monarch Mini Mask and, in the near future, the GEL Mask; (2) disposable air-filled cushion anesthesia masks primarily for use during surgery; and (3) disposable SealEasy and Circle Seal resuscitation masks for use in medical emergencies. The Company's patient masks are designed to respond to the increasing demand for single-use products, which reduce the potential for cross-contamination among patients and also help to minimize the exposure of medical personnel to infectious diseases, such as tuberculosis and pneumonia. The Company believes that its nasal sealing flap mask was the first mask to adequately seal on a patient's face for air delivery, thereby minimizing patient discomfort and promoting increased patient compliance with prescribed usage. The Company recently received 510(k) clearance to market the Monarch Mini Mask and GEL Mask for use with its CPAP and BiPAP devices. The Monarch Mini Mask is designed to enhance patient comfort with its small size and unique placement on the patient's face; the GEL Mask utilizes a gel-like cushion to create a comfortable mask seal around the contours of the face. The Company's line of disposable air-filled cushion anesthesia masks utilizes a very thin and pliable soft plastic air-filled cushion around the nose and mouth, which provides a uniform seal to prevent leakage of the anesthetic gases and helps ensure compliance with anesthesia gas exposure standards imposed on hospitals by regulatory bodies. 24 Resuscitation Products The Company's other products consist of single-use resuscitation products. The new BagEasy resuscitator represents a comprehensive redesign of an earlier version of this product and includes significantly fewer components and requires significantly fewer assembly steps than did the previous version. In addition, the new BagEasy product includes features such as a flexible design and an integral pressure valve that the Company believes distinguish it from competitive products. A recent comparative study published in Respiratory Care showed the BagEasy resuscitator to be the only manual resuscitator which met all of the relevant standards established by the American Society for Testing and Materials. SALES, DISTRIBUTION AND MARKETING The Company sells its products primarily to home care and hospital dealers. These parties in turn resell and rent the Company's products to end users. The Company's products reach its customers primarily through the Company's field network, which consists of 11 sales management employees, 28 direct sales representatives, 54 independent manufacturers' representatives and over 2,500 medical products distributors (also referred to as "dealers"). The Company manages its U.S. dealer network through a direct sales force and independent manufacturers' representatives. The Company's U.S. sales management team includes a Vice President of Sales and Marketing, a Director of Sales and eight Regional Sales Managers. This team directs the activities of 54 independent manufacturers' representatives and 26 direct sales representatives and sales support specialists. In most areas of the U.S., the hospital market is served by the direct sales representatives and the home care market is served primarily by the independent manufacturers' representatives. The Company's international sales efforts are conducted currently through a European General Manager, a European Sales Manager, a South American Sales Manager and a Pacific Rim Sales Manager. The Company also has two direct sales representatives in Europe. All of the Company's international sales employees serve both the home care and hospital markets. The Company's international sales consist primarily of BiPAP Ventilatory Support Systems, BiPAP S Airway Management Systems, REMstar Choice, Aria and related accessories. The Company's marketing organization is currently staffed with a Director of Marketing and marketing-oriented Product Managers, who are assigned to each of the Company's four 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. CUSTOMERS The Company's primary customers are home care and hospital medical equipment dealers. These dealers purchase products from the Company for resale or rental to patients (in the case of home care dealers) or to hospitals (in the case of hospital dealers). The Company's dealers, numbering over 2,500, range in size from large publicly-held companies with several hundred branch locations, to small, owner-operated companies with one location. Consolidation among these dealers, particularly those specializing in home care products, has taken place recently as many larger dealers have acquired smaller dealers. In addition, the Company's two largest home care dealer customers, both of which were publicly held and had branch locations throughout the U.S., merged in August 1995. The Company expects that consolidation among home care dealers is likely to continue. Respironics is committed to quality and customer satisfaction and has received the Zenith Award from the American Association of Respiratory Care for three of the last five years. This award, which the Company last received in December 1994, honors suppliers of respiratory medical products for outstanding service to customers. Evaluation categories for the award include product and service quality. 25 RESEARCH AND DEVELOPMENT The Company believes that its ability to identify product opportunities, to respond to the needs of cardiopulmonary physicians and their patients in the treatment of respiratory 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 (including sleep laboratories) 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, through upgrading its current products as well as developing new products. The Company conducts substantially all of its research and development for existing and potential new products in the U.S. As of December 31, 1995, the Company employed approximately 85 engineers 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 $4.1 million (7% of sales) during the six-month period ended December 31, 1995, up from 5% of sales in fiscal year 1993, to support product enhancement and new product development. Several new product introductions took place during fiscal year 1995 and early in fiscal year 1996 (including a redesigned BagEasy manual resuscitator, new face masks, and part of the family of new OSA products), with additional new product introductions expected to follow later in fiscal year 1996. By the end of fiscal year 1996, the Company expects to have introduced additional new products in both the Great Performers OSA product line and the non-invasive ventilatory support product line. In some cases, initial distribution has been, and will be, conducted in international markets until regulatory clearance to market in the United States is obtained. See "--Regulatory Matters." MANUFACTURING The Company generally seeks to perform all major assembly work in its own manufacturing facilities. The Company currently operates manufacturing facilities in the U.S., Hong Kong and the Peoples Republic of China. The Company's corporate headquarters and domestic manufacturing operations are owned by the Company and are located in a 116,000 square foot facility in Murrysville, Pennsylvania, where the Company conducts final assembly of its OSA, non-invasive ventilatory support and resuscitation products. The Company also leases, on a month to month basis, a 22,000 square foot office facility in Plum Borough, Pennsylvania approximately two miles from the existing corporate headquarters facility. This leased facility currently houses the Company's customer satisfaction and technical service groups. In 1981, the Company began manufacturing operations in Hong Kong, where it currently manufactures a portion of its patient mask products. The Company's warehousing, assembly and administrative activities in Hong Kong are located in an approximately 28,000 square foot light manufacturing complex in Kwun Tong, Kowloon, Hong Kong. The premises are leased under a renewable agreement expiring on April 30, 1997. The landlord of this space, Micro Electronics, Ltd., is a shareholder of the Company. The Company conducts the remainder of its patient mask manufacturing in a facility in Shenzen City in the Peoples Republic of China, bordering Hong Kong. The facility is leased and operated by the Company. The present manufacturing space totals approximately 66,000 square feet. The facility is located in a special economic zone (where the Company has been operating since 1987) that was established by the Peoples Republic of China in 1980 to induce foreign investment. 26 The Company believes that its present facilities in the United States, Hong Kong and the Peoples Republic of China are suitable and adequate for its current and presently anticipated future needs. While each facility is currently extensively utilized, additional productive capacity is available through a variety of means including, at the Murrysville site, augmenting the current partial second shift work schedule. Rental space, which the Company believes is readily available and reasonably priced near each current location, could be utilized as well. The Company also owns approximately 20 acres of land adjacent to the 10 acre site on which the Murrysville facility is located. Future expansion in Murrysville, if needed, will take place on this 20 acre site. The Company generally performs all major assembly work on all of its products. It manufactures the plastic components for its patient mask products and uses subcontractors to supply certain other components. The Company believes that the raw materials for substantially all of its products are readily available from a number of suppliers. REGULATORY MATTERS The Company's products are subject to regulation by, among other governmental entities, the FDA and corresponding foreign agencies. The FDA regulates the introduction, manufacture, advertising, labeling, packaging, marketing and distribution of and recordkeeping for such products. In manufacturing and marketing its products, the Company must comply with FDA regulations and is subject to various other FDA recordkeeping requirements and to inspections by the FDA. The testing for and preparation of required applications can be expensive, and subsequent FDA review can be lengthy and uncertain. 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 United States and could adversely affect the results of future operations. The Company must obtain FDA or foreign regulatory approval or clearance for marketing the Company's new devices prior to their release. There are two primary means by which the FDA permits a medical device to be marketed. A manufacturer may seek clearance for the device by filing a 510(k) premarket notification with the FDA. To obtain such clearance, the 510(k) premarket notification must establish that the device is "substantially equivalent" to a device that has been legally marketed or was marketed before May 28, 1976. The manufacturer may not place the device into commercial distribution in the United States until a substantial equivalence determination notice is issued by the FDA. This notice may be issued within 90 days of submission, but usually takes longer. 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. In addition, the FDA may inspect the Company's manufacturing facility before issuing a notice of substantial equivalence and may delay or decline to issue such notice until the facility is found to be in compliance with Good Manufacturing Practice requirements. The process of obtaining FDA clearance of a 510(k) premarket notification, including testing, preparation and subsequent FDA review, can take a number of years and require the expenditure of substantial resources. If a manufacturer cannot establish to the FDA's satisfaction that a new device is substantially equivalent to a legally marketed device, it will have to seek approval to market the device through the premarket approval application ("PMA") process. This process involves preclinical studies and clinical trials. The process of completing clinical trials, submitting a PMA and obtaining FDA approval takes a number of years and requires the expenditure of substantial resources. In addition, there can be no 27 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. In January 1996, the Company received ISO 9001 certification from the International Organization of Standards, a quality standards organization based in Geneva, Switzerland. At the same time, the Company received authorization, 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 Company's quality system conducted by an independent agency authorized to perform conformity assessments under ISO guidelines and the Medical Device Directives. Four FDA inspections have been conducted at the Company's facilities since July 1, 1993. The first inspection took place from July 1993 through October 1993 at the Company's leased facility in Plum Borough, Pennsylvania where the BagEasy product was then manufactured. A report on FDA Form 483 was issued by the FDA investigators setting forth the results of the inspection, identifying shortcomings with respect to systems procedures and documentation in the BagEasy manufacturing process. Because making the modifications identified by the FDA findings would have significantly delayed shipment to dealers and customers and because the Company believed that a significant recall of BagEasy products arising from an unrelated matter was necessary, the Company discontinued the production and sale of the BagEasy product and recalled all BagEasy products remaining in the field. The Company also responded to the Form 483 findings with particular attention to implementing the required improvements that were applicable to the systems, procedures and documentation utilized at the Company's main facility in Murrysville, Pennsylvania. The BagEasy recall is the only one of the five recalls since July 1, 1992 (all of which have been voluntary) that resulted in a material adverse effect on the Company's results of operations or financial condition. The second inspection took place at various times between May 1994 and August 1994 at the Murrysville facility. In late August 1994, the FDA investigators issued a report on an FDA Form 483 setting forth their observations from this inspection. The Company responded to these findings in September 1994. On December 22, 1994 the Company received a warning letter from the FDA relating to the FDA's August 1994 Form 483 findings and the Company's response thereto. A "warning letter" is a statement issued by the FDA that significant violations have occurred and that the agency is prepared to take enforcement action if corrective measures are not taken. In the warning letter, the FDA raised issues relating to: (i) alleged shortcomings in the Company's complaint processing procedures, (ii) the Company's alleged failure to file certain MDRs and (iii) the Company's alleged failure to obtain 510(k) premarket notification clearances that the FDA indicated were necessary for certain features of the Company's BiPAP systems and for certain claims regarding that product's use. Each of these issues is discussed below. Complaint Procedure. The FDA stated that the Company's complaint records did not comply with Good Manufacturing Practice regulations. The Company has revised its procedures and complaint recordkeeping to address this issue. In addition, the Company's complaint processing system has been automated. Based on the results of a follow-up investigation described below, the Company believes that this aspect of the FDA's warning letter has been resolved. Medical Device Reports. An MDR is required to be filed if a manufacturer receives a report that (i) a death or serious injury has occurred and its products may have caused or contributed to the death or serious injury or (ii) its product has malfunctioned and the product would be likely to cause or contribute to a death or serious injury if the malfunction were to recur. The FDA stated in its warning letter that the Company had not filed an MDR for what the FDA believed to be a reportable malfunction. In response, 28 the Company has filed MDRs with respect to certain malfunctions which the FDA referred to at the time of its 1994 inspections, and the Company has also changed certain procedures with respect to the determination of when an MDR will be filed. Based on the results of a follow-up investigation described below, the Company believes that this aspect of the FDA's warning letter has been resolved. 510(k) BiPAP Ventilation Issues. In 1987, the Company submitted to the FDA its original 510(k) premarket notification for its bi-level ventilatory support device. This 510(k) notification contained an intended use statement indicating that the device was a non-continuous ventilator "for the treatment of various pulmonary diseases." This notification identified the Bird(R) Mark 7(R) respirator as the predicate device. The FDA cleared this 510(k) notification in 1987. The Company believes that it has all 510(k) premarket notification clearances required for the uses for which it markets its BiPAP ventilatory products. The concerns cited in the FDA warning letter with respect to the Company's 510(k) premarket notification clearances related solely to its BiPAP systems and involved allegations that the Company had modified the previously cleared devices so as to require additional clearances and that the Company was marketing the devices for uses that were not within the scope of its 510(k) premarket notification clearances. In connection with the December 1994 warning letter, some FDA officials have advised the Company that the existing 510(k) clearances for BiPAP are limited to the treatment of OSA in adults. Based on the language in the Company's 1987 510(k) notification that was cleared by the FDA, the Company disagrees with this position. Since receiving the warning letter, in an effort to cooperate with the FDA's current requests, the Company has filed with the FDA additional 510(k) premarket notifications with respect to the features that were cited in the warning letter and certain uses beyond adult OSA, in each case indicating that the application was filed without prejudice to the Company's position that no additional filing was required. The FDA has reviewed the 510(k) applications filed and has requested additional information. The Company has provided, and is currently preparing, responses to the FDA's requests. There can be no assurance that the FDA will clear any of the 510(k) premarket notifications or that the clearances, if obtained, will be obtained in a timely manner, nor can there be any assurance that the FDA will not take enforcement action with respect to the prior or continued marketing of the devices for certain indications or with certain features. Respironics is cooperating with the FDA in attempting to resolve the issues which gave rise to the warning letter. Among other things, it has improved its record keeping and complaint procedures and filed MDRs and 510(k) premarket notification requests even where the Company believed such filings were not required. The Company believes that it is in substantial compliance with FDA requirements relating to its products and believes that the existing 510(k) clearances for BiPAP encompass claims in addition to the treatment of OSA in adults and the technical features cited in the FDA warning letter. However, the Company does not know what, if any, action the FDA ultimately will take in response to the Company's responses and additional 510(k) filings relating to the warning letter. The Company does not believe that there is likely to be any interruption of its business as a result of the issues raised in the December 1994 warning letter, but there can be no assurance that such will not occur or that the FDA will not take enforcement action. The third FDA inspection took place at the Murrysville facility in January 1995. A report on a Form 483 was issued by the FDA investigator setting forth the results of the inspection, which had focused on a voluntary recall conducted by the Company. The Form 483 also reiterated the FDA's position relative to the 510(k) clearances for BiPAP. The Company responded to the Form 483 findings in February 1995. The fourth FDA inspection took place at the Murrysville facility in May 1995. A report on a Form 483 was issued by the FDA investigators setting forth the results of the inspection, which had focused on the Company's revised systems complaints and MDRs. Revisions had been made to these systems as described above. The Form 483 issued for this inspection did not refer to MDRs or complaint handling, but contained only the FDA's reiteration of its position relative to the 510(k) clearances for BiPAP. The Company responded to the Form 483 findings in June 1995. 29 The Company recently has received 510(k) clearance for three products; a CPAP device and two masks. In addition to the BiPAP 510(k) notifications currently pending, the Company plans to file additional 510(k) notifications as part of its continuing product development process. THIRD PARTY REIMBURSEMENT The cost of a significant portion of medical care in the United States is funded by government and private insurance programs, such as Medicare, Medicaid and corporate health insurance programs including health maintenance organizations and managed care organizations. The Company's future results of operations and financial condition could be negatively affected by adverse changes made in the reimbursement policies for medical products under these insurance programs. If such changes were to occur, the ability of the Company's customers (medical product distributors and dealers) to obtain adequate reimbursement for the resale or rental of the Company's products could be reduced. In recent years, limitations imposed on the levels of reimbursement by both government and private insurance programs have become more prevalent. The Company has obtained "procedure codes" for its home care products from the Health Care Financing Administration ("HCFA"). These procedure codes enhance the ability of medical product distributors and dealers to obtain reimbursement for providing products to patients covered by Medicare. In addition, many private insurance programs also use the HCFA procedure code system. However, reimbursement levels can be reduced after a procedure code has been established, as was the case in January 1994 when the reimbursement level for all nasal CPAP systems was reduced. 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. LEGAL PROCEEDINGS Patent Litigation. ResCare Limited, an Australian corporation ("ResCare") and a subsidiary of ResMed, Inc. ("ResMed"), filed suit in Australia (the "Australian suit") against the Company's Australian distributor in 1992, alleging that the Company's CPAP products then being sold by such distributor in Australia infringed upon an Australian patent (the "Australian Patent") embodying a substantial part of ResCare's CPAP technology. After trial, the Australian trial court held that the Company's products infringed the Australian Patent (which the Court also held to be valid). This decision was appealed, and in May 1994 the Australian Court of Appeals reversed the decision of the trial court, declaring the Australian Patent invalid. This decision also nullified the trial court's finding that the Company's products infringed upon the Australian Patent. In October 1994, the Supreme Court of Australia refused to accept an appeal of the decision of the Court of Appeals. No further appeals can be made by ResCare with respect to the decision of the Australian Court of Appeals. The Company now is seeking to collect from ResCare that portion of the Company's expenses in pursuing the Australian suit which the Company believes it is entitled to recover under applicable Australian law. On January 9, 1995 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 U.S. of nasal masks and CPAP systems and components the Company infringes three U.S. patents (the "ResCare Patents"), two of which are owned by and one of which is licensed to ResCare. One of the three ResCare Patents was filed in the U.S. shortly after the Australian Patent was issued and most of its claims are the same as or similar to the Australian Patent. The other two patents involved in the California suit 30 deal with mask applications and with a "ramp" feature of ResCare's CPAP devices. In its complaint, ResCare seeks preliminary and permanent injunctive relief, an accounting for damages and an award of three times actual damages because of the Company's alleged actual knowledge of the alleged infringement. On February 1, 1995 the Company filed an action in the United States District Court for the Western District of Pennsylvania against ResCare seeking a declaratory judgment that the three ResCare Patents are either invalid or unenforceable or that the Company does not infringe the patents. The Company also 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. This motion was granted and both cases have been consolidated in Pittsburgh, Pennsylvania. Discovery has been underway since early spring 1995. In its answer to ResCare's complaint the Company denied, in all material respects, the allegations of the complaint. It is the Company's belief, based upon its investigation and discovery to date and upon discussions with its counsel, that the ResCare Patents are invalid or unenforceable and that, even if they are valid and enforceable, none of its products infringe any of the ResCare Patents. The Company intends vigorously to defend and pursue this litigation and strongly believes that the outcome should be favorable to it. Nevertheless, it is possible that the ResCare patents could be held valid and the Company's OSA products could be found to infringe the ResCare patents. If that were to happen, the Company may be required to pay damages and either would need to redesign its products so as not to infringe or would need to obtain a license to use the ResCare Patents, any of which could have a material adverse effect on the Company's financial condition and results of operations. The sale of the products which ResCare alleges infringe the ResCare Patents constitute approximately one-half of the Company's sales of OSA products. Other Matters. The Company is, as a normal part of its business operations, a party to other legal proceedings in addition to those described above. Legal counsel has been retained for each proceeding and none of these proceedings is expected to have a material adverse impact on the Company's results of operations or financial condition. See "--Regulatory Matters" for information concerning FDA matters. 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 are also very important factors for its more mature products. In the case of a number of the Company's and its competitors' products, patent protection is becoming more prevalent and of increasing competitive importance. 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 has the leading position in the U.S. market for home care devices for the treatment of OSA. However, other manufacturers, including other larger and more experienced manufacturers of home health care products, have been in the market and the Company expects that competition will increase. In its major market segments, the Company competes with three principal competitors, Nellcor Puritan-Bennett ("Nellcor"), Healthdyne Technologies ("Healthdyne") and ResMed. Nellcor, which is the Company's largest major competitor and has the largest financial resources of the Company's competitors, offers an array of products which compete with all of the Company's products. Healthdyne is the primary competitor for the Company's CPAP units and competes with the Company in the non-invasive ventilatory support market as well. ResMed competes with the Company in the OSA market, principally through its subsidiary, ResCare. The manual resuscitator market, which the Company recently reentered with its new version of BagEasy, is a very competitive, price-sensitive market. PATENTS, TRADEMARKS AND LICENSES The Company seeks patent protection for its products through the acquisition of patents and exclusive licensing arrangements. In addition, the Company defends its patents when infringed by other 31 companies. The Company currently has approximately 20 U.S. and foreign patents and 40 additional U.S. and foreign patent applications pending. The Company owns the proprietary rights to most of its current products, including patents on the BiPAP Airway Management System, BiPAP Ventilatory Support System, SealEasy, components of its nasal sealing flap mask and other valve and mask related accessories. In July 1995, the Company received additional method and technical patent protection related to its BiPAP devices. The method patent protection applies to the use of bi-level pressure to treat OSA. The technical patent protection covers the manner in which the device uses flow signals to trigger and apply pressure. The Company currently has approximately 50 registered U.S. and foreign trademarks and 90 additional U.S. and foreign trademark applications have been filed. EMPLOYEES As of December 31, 1995, the Company had 1,116 employees, including approximately 244 hourly employees in the United States and 454 in Hong Kong and the Peoples Republic of China. None of the Company's employees is 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. 32 MANAGEMENT The executive officers and directors of the Company are listed below, followed by a brief description of their business experience and certain other information. The Company's Board of Directors is divided into three classes, with each class of directors serving a term of three years.
NAME AGE POSITION WITH THE COMPANY ---- --- ------------------------------ Gerald E. McGinnis 61 Chairman of the Board Dennis S. Meteny 42 President, Chief Executive Officer and Director Ronald J. Zdrojkowski, Ph.D. 53 Vice President -- Research and Development Robert D. Crouch 48 Vice President -- Sales and Marketing Robert A. Oates 52 Vice President -- Engineering Daniel J. Bevevino 36 Controller and Chief Financial Officer Daniel P. Barry 48 Director Douglas A. Cotter, Ph.D. 52 Director James H. Hardie 66 Director Joseph C. Lawyer 50 Director George J. Magovern, M.D. 72 Director Bernard Shou-Chung Zau 58 Director
Mr. McGinnis has been a director of the Company since 1977 and has been Chairman of the Board since November 1994. Mr. McGinnis is also an employee of the Company, primarily responsible for coordination of strategic planning as well as Board liaison with senior management of the Company. Mr. McGinnis was the Chief Executive Officer of the Company from 1977 until November 1994 and was its President from 1984 until November 1994. Prior to 1977, Mr. McGinnis founded and was President of Lanz Medical Products Corporation, the predecessor of the Company ("Lanz"). Prior to founding Lanz, Mr. McGinnis worked at two Pittsburgh hospitals serving in various research capacities and at Westinghouse Electric Corporation in the Bio-Engineering Department. Mr. Meteny has been a director of the Company since January 1986 and has been President and Chief Executive Officer since November 1994. Mr. Meteny was the Company's Executive Vice President and Chief Operating Officer from August 1992 until November 1994. He was Vice President--General Manager and Chief Financial Officer of the Company from January 1988 through August 1992 and was Vice President--Finance and Accounting from 1984 through January 1988. For eight years prior to joining the Company he was employed as an accountant in various auditing capacities by Ernst & Young LLP. Dr. Zdrojkowski has been Vice President--Research and Development since late 1990. Dr. Zdrojkowski was Vice President--Engineering for the Company from 1987 to 1990 and also held that position from 1977 to 1985. From 1985 to 1987 he was Product Development Manager. Dr. Zdrojkowski joined the Company in 1977 and has worked on the design, development and manufacturing of most of the Company's products. Prior to joining the Company, he worked as a consultant for various companies, assisting in the design of new medical products. Mr. Crouch has been Vice President--Sales and Marketing of the Company since May 1989. He joined the Company as Director of Sales and Marketing in January 1989. From 1986 to 1989, Mr. Crouch worked as a consultant for various companies on administrative and governmental affairs issues. From 1985 to 1986, he was employed by Cryogenic Associates, serving as Executive Vice President and later President. From 1983 to 1985, Mr. Crouch was President, Chief Executive Officer and Chairman of the Board of Beta Med Pharmaceuticals, Inc., a start-up manufacturer of parenteral products. 33 Mr. Oates has been Vice President--Engineering of the Company since July 1992. From 1982 to July 1992, he was employed by Westinghouse Electric Corporation's Science & Technology Center, serving as the Manager of Communication Systems, Sensor Development and Electro-optic Systems. Mr. Bevevino has been Chief Financial Officer and Controller of the Company since November 1994. Mr. Bevevino joined the Company in 1988, serving as Manager of Cost Accounting until 1990 when he was elected Controller. Prior to joining the Company, Mr. Bevevino worked for five years as an accountant in various auditing capacities at Ernst & Young LLP. Mr. Barry has been a director of the Company since August 1995. Currently he is Vice Chairman of AMSCO International, Inc. ("AMSCO"), a manufacturer of surgical sterilization equipment. He served as President and Chief Executive Officer of AMSCO from October 1994 through July 1995 and Senior Vice President--Financial and Planning (CFO) of AMSCO from April 1993 to October 1994. Prior thereto he served in various executive and consulting capacities with AMSCO since 1981; he has been a director of AMSCO since 1991. He is also a director of Tollgrade Communications, Inc., a designer and marketer of proprietary products used by telephone companies in their diagnosis of lines containing both copper and fiber optics. Dr. Cotter has been a director of the Company since February 1989. Since 1985 he has been President of Healthcare Decisions, Inc., a Massachusetts health care and biotechnology consulting firm specializing in corporate development, strategic planning and acquisitions. For nineteen years prior to joining Healthcare Decisions he was employed by Corning Glass Works, where he held various management positions in research, product development and clinical information systems. Dr. Cotter is also a director of Applied Microbiology, Inc., a developer, manufacturer and marketer of antimicrobial food preservatives and specialty medical food products. Mr. Hardie has been a director of the Company since November 1991. He is a lawyer and a partner of Reed Smith Shaw & McClay, a law firm with principal offices in Pittsburgh, Washington and Philadelphia, which since 1988 has performed legal services for the Company. Mr. Hardie has been a partner of that firm since 1962. He is a Director of Access Corporation, a marketer and developer of document and image handling systems and related software. He is also a director of a number of other corporations the securities of which are not publicly traded. Mr. Lawyer has been a director since November 1994. Since 1988, he has been President and Chief Executive Officer and a Director of Chatwins Group, Inc. ("CGI"), headquartered in Pittsburgh, Pennsylvania, which designs, manufactures and markets a broad range of fabricated and machined parts and products, in a variety of industries primarily to original equipment manufacturers. From 1986 to 1988 he was President and Chief Executive Officer and a Director of CP Industries, a predecessor company of CGI. Prior thereto, he held various operations, marketing, sales, finance and strategic planning positions for U.S. Steel Corporation for 17 years. Dr. Magovern has been a director of the Company since 1983 and was Chairman of the Board from November 1986 until November 1994. Since 1968 Dr. Magovern has been director of the Department of Surgery, Allegheny General Hospital, a 736-bed, acute care teaching hospital in Pittsburgh. He has been affiliated with Cardio-Thoracic Surgical Associates, Inc., a professional corporation, since 1970. He has been a Clinical Associate Professor of Surgery at the University of Pittsburgh School of Medicine and is currently a Professor of Surgery at the Medical College of Pennsylvania. Dr. Magovern has participated in the development of the application of bio-engineering to cardiac and thoracic surgery at Allegheny General Hospital. Mr. Zau has been a director of the Company since July 1984. Since prior to 1984, Mr. Zau has been the Managing Director of Micro Electronics, Ltd., a privately-held manufacturer of electrical components located in Hong Kong and a shareholder in the Company. He currently serves as director of several other privately-held entities in Hong Kong. He resides in Hong Kong. 34 PRINCIPAL AND SELLING STOCKHOLDERS The following table shows the number of shares of Common Stock beneficially owned by each director of the Company, the Chief Executive Officer and the four other most highly compensated executive officers for fiscal year 1995 who continue to be officers, and by all directors and executive officers of the Company as a group, as of February 20, 1996. Management of the Company does not know of any other person who beneficially owned as of the record date more than five percent of the outstanding shares of the Company's Common Stock. As used herein, "beneficial ownership" means the sole or shared power to vote, or to direct the voting of, a security, or the sole or shared investment power with respect to a security (i.e., the power to dispose of, or to direct the disposition of, a security). A person is deemed, as of any date, to have "beneficial ownership" of any security that the person has the right to acquire within 60 days after that date. Except as otherwise indicated, each of the persons listed has sole investment and voting power with respect to the shares indicated.
SHARES SHARES TO BE BENEFICIALLY BENEFICIALLY OWNED PRIOR NUMBER OF OWNED AFTER TO OFFERING SHARES OFFERING(1) NAME OF ----------------- BEING ----------------- BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT ----------------- --------- ------- --------- --------- ------- Daniel P. Barry.................. 0 0.0% 0 0 0.0% Douglas A. Cotter, Ph.D. (2)..... 26,356 0.2 0 26,356 0.1 Robert D. Crouch (3)............. 280,000 1.6 0 280,000 1.5 James H. Hardie (2), (4)......... 25,616 0.2 5,000 20,616 0.1 Joseph C. Lawyer (2), (5)........ 1,272 0.0 0 1,272 0.0 George J. Magovern, M.D. (2), (6)............................. 923,909 5.5 300,000 623,909 3.3 Gerald E. McGinnis (7)........... 1,426,784 8.3 500,000 926,784 4.8 Dennis S. Meteny (8)............. 422,568 2.5 40,000 382,568 2.0 Bernard Shou-Chung Zau (2)....... 369,032 2.2 40,000 329,032 1.7 Ronald J. Zdrojkowski, Ph.D...... 753,328 4.5 119,472 633,856 3.4 All of the directors and executive officers as a group (12 persons) (9)..... 4,292,215 24.3 1,004,472 3,287,743 16.7 Former shareholders of Vitalog (10)............................ 85,094 0.5 25,528 59,566 0.3
- -------- (1) Assumes no exercise of the Underwriters' over-allotment option. If the over-allotment option is exercised in full, the percentage ownership of Dr. Magovern and Messrs. Hardie, McGinnis, Meteny, Zau and Zdrojkowski would be 3.2%, 0.1%, 4.3%, 2.0%, 1.7% and 3.3%, respectively. (2) Includes shares subject to currently exercisable stock options granted under the Company's Non-Employee Directors' Stock Option Plan in the following amounts: Dr. Cotter, 24,016 shares; Mr. Hardie, 12,016 shares; Mr. Lawyer, 1,272 shares; Dr. Magovern, 24,016 shares; and Mr. Zau, 24,016 shares. (3) Includes 200,000 shares subject to currently exercisable stock options granted under the Company's stock option plans. (4) Includes 13,000 shares of the Company's Common Stock held by a partnership in which Mr. Hardie is the general partner. Does not include 16,000 shares owned by Mr. Hardie's wife, as to which he disclaims any beneficial ownership. (5) Does not include 550 shares held by Mr. Lawyer's wife, as to which he disclaims beneficial ownership. 35 (6) Includes 863,383 shares held jointly with Dr. Magovern's wife, as to which voting and investment power is shared, 28,000 shares held by the Magovern Grandchildren's Trust of which Dr. Magovern and his wife are the trustees and 8,510 shares held by the Magovern Family Foundation Trust of which Dr. Magovern and his wife are the Trustees. Dr. Magovern's business address is 320 E. North Ave., Pittsburgh, PA 15212. Does not include 117,647 shares, all or part of which Dr. Magovern has the right to acquire in exchange for interests in the partnership which owns such shares. (7) Includes 992,384 shares held jointly with Mr. McGinnis' wife, as to which voting and investment power is shared. Also includes 385,000 shares which would be outstanding upon the exercise of currently exercisable stock options granted to Mr. McGinnis. Also includes 34,400 shares held in the Gerald E. McGinnis Charitable Trust. Does not include 106,000 shares held by Mr. McGinnis' wife, as to which Mr. McGinnis disclaims beneficial ownership. Mr. McGinnis' business address is 1001 Murry Ridge Drive, Murrysville, PA 15668. (8) Includes 184,000 shares held jointly with Mr. Meteny's wife, as to which voting and investment power is shared, and 4,000 shares held by Mr. Meteny's minor children, as to which he controls voting and investment power. Also includes 112,000 shares subject to currently exercisable stock options granted under the Company's stock option plans. (9) Includes, in addition to the shares listed in the table for the named officers and directors, 1,000 shares owned by an executive officer not named in the table and 62,350 shares which would be outstanding upon the exercise by two executive officers not named in the table of currently exercisable stock options under the Company's stock option plans. Does not include any shares of a former director and executive officer who resigned such positions in August 1995, but continues as an employee of a subsidiary. (10) Zeala Dunlop-Miles, Laughton E. Miles and a trust of which they are the trustees, and a maximum of five other persons, all former Vitalog shareholders, are selling an aggregate of 25,528 shares of the 85,094 shares of Common Stock they received in the acquisition of Vitalog by the Company. None of the former Vitalog shareholders owns more than 1% of the outstanding shares of Common Stock. The information presented is based upon the knowledge of management and, in the case of the named individuals, upon information furnished by them. 36 UNDERWRITING Subject to the terms and the conditions of the Underwriting Agreement, the Underwriters named below (the "Underwriters"), through their Representatives, Alex. Brown & Sons Incorporated, Cowen & Company and Parker/Hunter Incorporated, have severally agreed to purchase from the Company and the Selling Stockholders the following respective numbers of shares of Common Stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus:
NUMBER OF UNDERWRITER SHARES ----------- --------- Alex. Brown & Sons Incorporated....................................... Cowen & Company....................................................... Parker/Hunter Incorporated............................................ --------- Total................................................................. 3,030,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will purchase all shares of the Common Stock offered hereby if any such shares are purchased. The Company and the Selling Stockholders have been advised by the Representatives of the Underwriters that the Underwriters propose to offer the shares of Common Stock to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the public offering, the offering price and other selling terms may be changed by the Representatives of the Underwriters. The Company and a Selling Stockholder have granted to the Underwriters an option, exercisable not later than 30 days after the date of this Prospectus, to purchase up to 454,500 additional shares of Common Stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by it shown in the above table bears to 3,030,000, and the Company and such Selling Stockholder will be obligated, pursuant to the option, to sell such shares to the Underwriters. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of Common Stock offered hereby. If purchased, the Underwriters will offer such additional shares on the same terms as those on which the 3,030,000 shares are being offered. In connection with this offering, certain Underwriters and selling group members (if any) or their respective affiliates who are qualified registered market makers on the Nasdaq National Market may engage in passive market making on Nasdaq in accordance with Rule 10b-6A under the Exchange Act during the two business day period before the commencement of the offers of sales of the Common Stock. The passive market making transactions must comply with applicable volume and price limits and be identified as such. In general, a passive market maker may display its bid at a price not in excess of the highest independent bid for such security; if all independent bids are lowered below the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are exceeded. 37 The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. The Company, its officers and directors, and certain Selling Stockholders, beneficially owning in the aggregate approximately 3,300,000 shares of Common Stock, have agreed not to offer, sell or otherwise dispose of any such Common Stock for a period of 90 days after the date of this Prospectus without the prior written consent of Alex. Brown & Sons Incorporated, on behalf of the Representatives of the Underwriters. LEGAL MATTERS Legal matters in connection with the sale of the shares offered by this Prospectus are being passed upon for the Company and the Selling Stockholders by Reed Smith Shaw & McClay, James H. Reed Building, 435 Sixth Avenue, Pittsburgh, Pennsylvania 15219. James H. Hardie, a director of the Company and a Selling Stockholder, is a partner of Reed Smith Shaw & McClay and is the beneficial owner of 25,616 shares of Common Stock. Certain legal matters in connection with the sale of the shares offered by this Prospectus are being passed upon for the Underwriters by Ropes & Gray, One International Place, Boston, Massachusetts 02110. EXPERT The consolidated financial statements of the Company at June 30, 1995 and 1994, and for each of the three years in the period ended June 30, 1995, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents heretofore filed with the Commission by the Company are incorporated in this Prospectus by reference and made a part hereof: (1) The Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, filed pursuant to Section 13 of the Exchange Act. (2) The Company's Quarterly Reports on Form 10-Q for the quarters ended September 30, 1995 and December 31, 1995, filed pursuant to Section 13 of the Exchange Act. (3) The description of the Common Stock set forth in the Company's Registration Statement on Form 8-A, effective May 12, 1988, including all reports updating such description. Each document or report subsequently filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the termination of this offering shall be deemed to be incorporated by reference into this Prospectus and to be a part of this Prospectus from the date of filing of such document or report. Any statement contained herein, or in a document all or a portion of which is incorporated or deemed to be incorporated by reference herein, shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to any person to whom this Prospectus is delivered, on the written or oral request of such person, a copy of any or all of the foregoing documents incorporated by reference, other than exhibits to such documents, unless such exhibits are specifically incorporated by reference into such documents. Written requests should be directed to: Investor Relations, Respironics, Inc., 1001 Murry Ridge Drive, Murrysville, PA 15668. Telephone requests may be directed to the Company at (412) 733-0209. 38 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors.............................................. F-2 Consolidated Balance Sheets................................................. F-3 Consolidated Statements of Operations....................................... F-4 Consolidated Statements of Cash Flows....................................... F-5 Consolidated Statements of Shareholders' Equity............................. F-6 Notes to Consolidated Financial Statements.................................. F-7
F-1 REPORT OF INDEPENDENT AUDITORS Board of Directors Respironics, Inc. We have audited the accompanying consolidated balance sheets of Respironics, Inc. and subsidiaries as of June 30, 1995 and 1994, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Respironics, Inc. and subsidiaries at June 30, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1995, in conformity with generally accepted accounting principles. As discussed in Note A to the consolidated financial statements, the Company changed its method of accounting for income taxes in 1994. Ernst & Young LLP Pittsburgh, Pennsylvania September 11, 1995 F-2 RESPIRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JUNE 30 DECEMBER 31 1994 1995 1995 ----------- ----------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS Cash and short-term investments...... $12,384,054 $16,126,904 $ 9,792,908 Trade accounts receivable, less allowance for doubtful accounts of $525,000, $700,000 and $850,000..... 15,011,285 19,448,187 25,026,073 Refundable income taxes.............. 1,787,265 -0- -0- Inventories.......................... 7,833,755 13,136,664 17,300,722 Prepaid expenses and other........... 1,168,167 1,951,358 2,338,969 Deferred income tax benefits......... 2,021,776 2,200,595 2,200,595 ----------- ----------- ----------- TOTAL CURRENT ASSETS............. 40,206,302 52,863,708 56,659,267 PROPERTY, PLANT AND EQUIPMENT Land................................. 2,417,334 2,589,117 2,773,246 Building............................. 7,713,405 8,674,675 8,779,610 Machinery and equipment.............. 10,849,230 14,155,510 15,762,719 Furniture and office equipment....... 7,240,447 9,394,000 10,681,202 Leasehold improvements............... 519,744 577,175 979,717 ----------- ----------- ----------- 28,740,160 35,390,477 38,976,494 Less allowances for depreciation and amortization........................ 11,929,911 15,443,041 17,207,404 ----------- ----------- ----------- 16,810,249 19,947,436 21,769,090 Funds held in trust for construction of new facility..................... 680,372 710,929 729,087 OTHER ASSETS........................... 1,220,297 2,668,592 3,024,794 COST IN EXCESS OF NET ASSETS OF BUSINESS ACQUIRED...................... -0- 1,847,905 1,769,271 ----------- ----------- ----------- $58,917,220 $78,038,570 $83,951,509 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable..................... $ 3,086,776 $ 4,858,554 $ 3,974,185 Accrued compensation and related expenses............................ 3,055,420 3,827,187 2,932,812 Accrued expenses..................... 1,968,977 2,694,298 3,479,913 Income taxes......................... 658,364 1,572,121 1,633,650 Current portion of long-term obligations......................... 404,866 498,150 492,729 ----------- ----------- ----------- TOTAL CURRENT LIABILITIES........ 9,174,403 13,450,310 12,513,289 LONG-TERM OBLIGATIONS.................. 4,854,440 5,537,996 5,241,953 MINORITY INTEREST...................... 664,268 681,068 646,199 COMMITMENTS SHAREHOLDERS' EQUITY Common Stock, $.01 par value; authorized 40,000,000 shares; issued and outstanding 16,344,690 shares at June 30, 1994, 16,744,785 shares at June 30, 1995, and 16,851,860 shares at December 31, 1995.................. 163,446 167,448 168,519 Additional capital................... 16,790,919 19,254,977 19,706,538 Retained earnings.................... 27,269,744 38,946,771 45,675,011 ----------- ----------- ----------- TOTAL SHAREHOLDERS' EQUITY....... 44,224,109 58,369,196 65,550,068 ----------- ----------- ----------- $58,917,220 $78,038,570 $83,951,509 =========== =========== ===========
See notes to consolidated financial statements. F-3 RESPIRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30 SIX MONTHS ENDED DECEMBER 31 1993 1994 1995 1994 1995 ----------- ----------- ----------- -------------- -------------- (UNAUDITED) Net sales............... $69,285,613 $78,171,028 $99,450,333 $ 45,537,612 $ 56,915,794 Cost of goods sold...... 32,113,280 34,830,308 43,077,158 19,659,362 24,895,319 ----------- ----------- ----------- -------------- -------------- 37,172,333 43,340,720 56,373,175 25,878,250 32,020,475 General and administrative expenses............... 10,580,602 10,027,842 14,050,071 6,811,820 7,847,827 Sales, marketing and commission expenses.... 12,313,483 15,069,159 17,696,059 8,298,675 9,513,054 Research and development expenses............... 3,555,903 4,794,242 7,077,216 3,060,328 4,061,333 Nonrecurring charges.... -0- 7,086,085 -0- -0- -0- Interest expense........ 175,843 171,223 193,550 95,943 100,595 Other income............ (549,635) (624,180) (1,178,685) (509,783) (532,235) ----------- ----------- ----------- -------------- -------------- 26,076,196 36,524,371 37,838,211 17,756,983 20,990,574 ----------- ----------- ----------- -------------- -------------- INCOME BEFORE INCOME TAXES...... 11,096,137 6,816,349 18,534,964 8,121,267 11,029,901 Income taxes............ 3,717,206 2,075,105 6,857,937 3,004,871 4,301,661 ----------- ----------- ----------- -------------- -------------- NET INCOME........ $ 7,378,931 $ 4,741,244 $11,677,027 $ 5,116,396 $ 6,728,240 =========== =========== =========== ============== ============== Earnings per Share...... $ 0.43 $ 0.27 $ 0.67 $ 0.29 $ 0.38 =========== =========== =========== ============== ============== Weighted Average Number of Shares Used in Computing Earnings Per Share.................. 17,318,606 17,280,680 17,532,422 17,346,028 17,730,325
See notes to consolidated financial statements. F-4 RESPIRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED YEAR ENDED JUNE 30 DECEMBER 31 1993 1994 1995 1994 1995 ----------- ----------- ----------- ----------- ---------- (UNAUDITED) OPERATING ACTIVITIES Net income.................. $ 7,378,931 $ 4,741,244 $11,677,027 $ 5,116,396 $6,728,240 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............. 3,858,339 3,571,500 3,831,793 1,956,623 1,842,997 Provision for deferred income taxes.... (1,390,181) 191,763 (178,819) -0- -0- Provision for losses on write-off of equipment................ -0- 270,791 -0- -0- -0- Provision for losses on accounts receivable............... 100,000 75,000 175,000 75,000 150,000 Loss on sale of equipment................ -0- -0- 35,719 -0- -0- Provision for nonrecurring charges..... -0- 5,120,000 -0- -0- -0- Changes in operating assets and liabilities: Increase in accounts receivable.... (2,198,685) (3,812,916) (4,515,077) (2,793,514) (5,727,886) (Increase) decrease in refundable income taxes.................. -0- (1,787,265) 1,787,265 1,787,265 -0- Increase in inventories and prepaid expenses............... (705,007) (1,057,575) (5,770,417) (2,387,016) (4,551,669) Decrease (increase) in other assets........... 289,908 (949,001) (1,448,295) (73,948) (356,202) Increase (decrease) in accounts payable....... 1,547,383 (738,842) 1,680,521 (765,318) (884,369) Increase (decrease) in accrued compensation and related expenses... 1,642,235 (947,563) 764,557 (36,256) (894,375) (Decrease) increase in accrued expenses....... (42,716) 528,074 516,442 447,217 785,615 Increase (decrease) in accrued income taxes... 188,668 (636,912) 912,999 (31,624) 61,529 ----------- ----------- ----------- ----------- ---------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES.............. 10,668,875 4,568,298 9,468,715 3,294,825 (2,846,120) INVESTING ACTIVITIES Purchase of property, plant and equipment........ (6,362,511) (7,734,854) (6,940,667) (2,961,843) (3,586,017) Proceeds from sale of equipment.................. -0- -0- 5,503 -0- -0- Increase in funds held in trust for construction of new facility................... -0- (680,372) (30,557) (12,595) (18,158) Acquisition of a business, net of cash acquired................... -0- -0- (745,433) -0- -0- ----------- ----------- ----------- ----------- ---------- NET CASH USED BY INVESTING ACTIVITIES.............. (6,362,511) (8,415,226) (7,711,154) (2,974,438) (3,604,175) FINANCING ACTIVITIES Proceeds from long- term obligations........... -0- 978,396 1,132,760 -0- -0- Reduction in long-term obligations................ (263,601) (382,508) (355,920) (233,028) (301,464) Issuance of common stock...................... 377,962 335,280 1,191,649 400,305 452,632 Increase (decrease) in minority interest.......... -0- 664,268 16,800 4,601 (34,869) ----------- ----------- ----------- ----------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES.............. 114,361 1,595,436 1,985,289 171,878 116,299 ----------- ----------- ----------- ----------- ---------- INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS............. 4,420,725 (2,251,492) 3,742,850 492,265 (6,333,996) Cash and short-term investments at beginning of period.................... 10,214,821 14,635,546 12,384,054 12,384,054 16,126,904 ----------- ----------- ----------- ----------- ---------- CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD..................... $14,635,546 $12,384,054 $16,126,904 $12,876,319 $9,792,908 =========== =========== =========== =========== ==========
See notes to consolidated financial statements. F-5 RESPIRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ------------------- ADDITIONAL RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL ---------- -------- ----------- ----------- ----------- Balance at July 1, 1992 as previously reported. 8,065,907 $ 80,659 $16,160,464 $15,149,569 $31,390,692 Two-for-one stock split. 8,065,907 80,659 (80,659) -0- -0- ---------- -------- ----------- ----------- ----------- BALANCE AT JULY 1, 1992 AS ADJUSTED...... 16,131,814 161,318 16,079,805 15,149,569 31,390,692 Net income for the year ended June 30, 1993.... -0- -0- -0- 7,378,931 7,378,931 Shares sold pursuant to stock option plans..... 89,346 894 343,668 -0- 344,562 Shares sold pursuant to consulting agreement.. 8,000 80 33,320 -0- 33,400 ---------- -------- ----------- ----------- ----------- BALANCE AT JUNE 30, 1993.................. 16,229,160 162,292 16,456,793 22,528,500 39,147,585 Net income for the year ended June 30, 1994.... -0- -0- -0- 4,741,244 4,741,244 Shares sold pursuant to stock option plans..... 107,530 1,074 289,526 -0- 290,600 Shares sold pursuant to consulting agreement... 8,000 80 44,600 -0- 44,680 ---------- -------- ----------- ----------- ----------- BALANCE AT JUNE 30, 1994.................. 16,344,690 163,446 16,790,919 27,269,744 44,224,109 Net income for the year ended June 30, 1995.... -0- -0- -0- 11,677,027 11,677,027 Shares sold pursuant to stock option plans..... 315,001 3,150 1,188,499 -0- 1,191,649 Acquisition of a business............... 85,094 852 1,275,559 -0- 1,276,411 ---------- -------- ----------- ----------- ----------- BALANCE AT JUNE 30, 1995.................. 16,744,785 167,448 19,254,977 38,946,771 58,369,196 Net income for the six months ended December 31, 1995 (unaudited)... -0- -0- -0- 6,728,240 6,728,240 Shares sold pursuant to stock option plans (unaudited)............. 107,075 1,071 451,561 -0- 452,632 ---------- -------- ----------- ----------- ----------- BALANCE AT DECEMBER 31, 1995 (unaudited).. 16,851,860 $168,519 $19,706,538 $45,675,011 $65,550,068 ========== ======== =========== =========== ===========
See notes to consolidated financial statements. F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RESPIRONICS, INC. AND SUBSIDIARIES (INFORMATION PERTAINING TO THE SIX MONTH PERIODS ENDED DECEMBER 31, 1994 AND 1995 IS UNAUDITED.) NOTE A--SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of Respironics, Inc. (the Company), its consolidated wholly owned foreign subsidiary, Respironics (HK) Ltd., its wholly owned domestic subsidiary, RIC Investments, Inc., and a foreign joint venture in which it holds a 51% equity investment. The joint venture partner's 49% equity interest is included in the Company's financial statements as minority interest. All significant intercompany accounts and transactions have been eliminated in consolidation. Revenue Recognition: Revenue is recognized from sales when a product is shipped. Inventories: Inventories are valued at the lower of cost (first-in, first- out) or market. Property, Plant and Equipment: Property, plant and equipment is recorded on the basis of cost. Depreciation is computed using the straight-line method based upon the estimated useful lives of the respective assets, except for assets under capital leases which are depreciated using the straight-line method over the shorter of the lease term or the estimated useful lives of such assets. Amortization of assets under capital leases is included in depreciation expense. Income Taxes: Effective July 1, 1993, the Company adopted Statement of Financial Accounting Standards #109, "Accounting for Income Taxes". Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when differences are expected to reverse. The Company has elected not to restate the consolidated financial statements of any prior years. The cumulative effect of the adoption and the effect of the adoption on the results of operations for the year ended June 30, 1994 were not material. The Company does not provide for federal income taxes on the undistributed earnings of its foreign subsidiary (other than deemed dividends which are taxed currently) because such earnings are reinvested and, in the opinion of management, will continue to be reinvested indefinitely. Foreign Currency Translation: The Company follows Statement of Financial Accounting Standards No. 52 for the translation of the accounts of its foreign subsidiary, Respironics (HK) Ltd., and its joint venture. Foreign currency assets and liabilities are translated into United States dollars at the rate of exchange existing at the statement date or historical rates depending upon the nature of the account. Income and expense amounts are translated at the average of the monthly exchange rates. Adjustments resulting from these translations are immaterial. Stock Split: In February 1995, the Company's Board of Directors declared a two-for-one stock split of the Company's common stock, distributing on March 17, 1995 one additional share of common stock for each share held of record on March 3, 1995. All agreements concerning stock options were amended to provide for issuance of two shares of common stock for every one share issuable prior to the split. An amount equal to the par value of the shares issued was transferred from additional capital to the common stock account. This transfer has been reflected in the consolidated statements of changes in shareholders' equity at July 1, 1992. All references to number of shares, except shares authorized, and to per-share information in the consolidated financial statements have been adjusted to reflect the stock split on a retroactive basis. Stock Options: Stock options are granted to certain employees and certain members of the Company's Board of Directors at fair market value on the date of the grant. Proceeds from the exercise of common stock options are credited to shareholders' equity at the date the options are exercised. There are no charges or credits to income with respect to these options. F-7 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: In 1994, the Company commenced development of software to be included in certain of its new products. Software development costs have been capitalized and will be amortized to the cost of product revenues over the estimated economic lives of the products that will include such software. The products that include such software are expected to be introduced for sale during the year ending June 30, 1996. Total capitalized software development costs were $675,000, $1,982,000 and $2,552,000 at June 30, 1994, June 30, 1995, and December 31, 1995, respectively. NOTE B--SHORT-TERM INVESTMENTS Short-term investments consist primarily of money market accounts and certificates of deposit issued by large commercial banks located in the United States and Hong Kong. These investments are readily convertible to cash and are stated at cost which approximates market. NOTE C--INVENTORIES Inventories consisted of the following:
JUNE 30 DECEMBER 31 1994 1995 1995 ---------- ----------- ----------- (UNAUDITED) Raw materials............................. $5,268,039 $ 7,960,573 $12,821,590 Work-in-process........................... 818,400 1,105,010 1,496,414 Finished goods............................ 1,747,316 4,071,081 2,982,718 ---------- ----------- ----------- $7,833,755 $13,136,664 $17,300,722 ========== =========== ===========
F-8 NOTE D--LONG TERM OBLIGATIONS Long-term obligations consisted of:
JUNE 30 DECEMBER 31 1994 1995 1995 ---------- ---------- ----------- (UNAUDITED) 1989 Economic Development Revenue Bonds, variable interest rate (effective rate of 6.38%, including letter of credit and remarketing fees, at December 31, 1995), principal payable in annual installments of $100,000 through 1996 and $200,000 thereafter through 2004................. $2,000,000 $1,900,000 $1,800,000 Industrial Development Authority Loan, payable in monthly installments of $13,777, including interest at 3%, through June 2005....................... 1,528,469 1,407,312 1,345,358 Redevelopment Authority Loan, payable in quarterly installments of $14,533, including interest at 5%, through June 2005.................................... 514,172 481,137 463,994 Capital lease obligation, payable in quarterly installments of $19,834 including interest at a floating rate (2.25% at December 31, 1995) through June 1997............................... 201,353 131,581 95,245 Redevelopment Authority Loan, payable in monthly installments of $6,296, including interest at 2%, through July 2009.................................... 978,395 921,894 893,217 Capital lease obligation, payable in monthly installments of $1,860, including interest at 4.60%, through January 1996............................ 36,917 13,889 2,005 Industrial Development Authority Loan, payable in monthly installments of $7,289, including interest at 2%, through March 2010...................... -0- 1,132,240 1,099,487 Capital lease obligation, payable in monthly installments of $2,284, including interest at 4.62%, through April 1997.............................. -0- 48,093 35,376 ---------- ---------- ---------- 5,259,306 6,036,146 5,734,682 Less current portion..................... 404,866 498,150 492,729 ---------- ---------- ---------- $4,854,440 $5,537,996 $5,241,953 ========== ========== ==========
The Economic Development Revenue Bonds, the Industrial Development Authority Loans, and the Redevelopment Authority Loans are secured by mortgages upon the Company's headquarters and manufacturing facility in Murrysville, Pennsylvania. Proceeds from the bonds and the loans were used to finance the construction and expansion of the facility. The Company is required to meet certain financial covenants in connection with these obligations, including those relating to current ratio, ratio of total liabilities to tangible net worth, and minimum tangible net worth. At June 30, 1994, June 30, 1995 and December 31, 1995 the Company was in compliance with these covenants. The Company is a party to capital lease agreements with commercial banks relating to certain of its fixed assets. The lease terms are two to four years with options for the Company to purchase the assets at the end of the lease. Assets under capital leases at June 30, 1995 and December 31, 1995 consist of machinery and equipment and office equipment with a net book value of $149,228 and $94,863, respectively. Capital lease obligations incurred are considered non-cash items and, accordingly, are not F-9 considered in the consolidated statements of cash flows. Capital lease obligations incurred were $52,265 for the year ended June 30, 1995, and there were none incurred for the six month period ended December 31, 1995. The Company also has $1,250,000 available under a line of credit facility with a commercial bank at the bank's prime rate until the expiration date of October 31, 1996. 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 six months ended June 30, 1996 and the next five years are as follows:
MATURITIES OF MINIMUM LEASE INTEREST ON LONG- PAYMENTS UNDER CAPITAL TERM DEBT CAPITAL LEASES LEASES TOTAL ------------- -------------- ----------- ---------- Six months ended June 30, 1996................ $ 143,193 $ 55,381 $(3,043) $ 195,531 1997.................... 492,623 82,343 (2,055) 572,911 1998.................... 500,847 -0- -0- 500,847 1999.................... 509,516 -0- -0- 509,516 2000.................... 518,370 -0- -0- 518,370 2001.................... 527,507 -0- -0- 527,507 Thereafter.............. 2,910,000 -0- -0- 2,910,000 ---------- -------- ------- ---------- Total................... $5,602,056 $137,724 $(5,098) $5,734,682 ========== ======== ======= ==========
Interest paid was $180,421, $167,718 and $194,220 for the years ended June 30, 1993, 1994, and 1995, respectively and was $93,790 and $100,892 for the six months ended December 31, 1994 and 1995, respectively. NOTE E--INCOME TAXES
YEAR ENDED JUNE 30 1993 1994 1995 ----------- ---------- ---------- Income taxes consisted of: Current: Federal................................ $ 3,988,590 $1,509,015 $5,379,275 Foreign................................ 94,746 60,112 197,943 State.................................. 1,024,051 314,214 1,459,538 ----------- ---------- ---------- 5,107,387 1,883,341 7,036,756 Deferred: Federal................................ (1,071,993) 151,826 (165,132) State.................................. (318,188) 39,938 (13,687) ----------- ---------- ---------- (1,390,181) 191,764 (178,819) ----------- ---------- ---------- TOTAL INCOME TAXES..................... $ 3,717,206 $2,075,105 $6,857,937 =========== ========== ==========
F-10 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 1993 1994 1995 ------ ------ ------ Statutory federal income tax rate.................. 34% 34% 35% Increases (decreases): State taxes...................................... 4 3 5 Tax credits utilized............................. (3) (7) (3) Tax on foreign earnings at less than the statutory rate.................................. (5) (5) -0- Other items, net, none of which individually exceeds 5% of federal income taxes at statutory rates................................. 3 5 -0- ------ ------ ------ EFFECTIVE INCOME TAX RATE....................... 33% 30% 37% ====== ====== ======
Deferred income tax assets consisted of the following:
JUNE 30 1994 1995 ---------- ---------- Deferred compensation............................... $ 204,546 $ -0- Inventories......................................... 418,607 600,513 Allowance for bad debts............................. 210,720 245,804 Depreciation........................................ 617,944 635,128 Accruals............................................ 555,645 673,926 Other............................................... 14,314 45,224 ---------- ---------- Total............................................... $2,021,776 $2,200,595 ========== ==========
Income before income taxes consisted of the following:
YEAR ENDED JUNE 30 1993 1994 1995 ----------- ---------- ----------- United States........................... $ 9,038,558 $5,578,476 $17,935,537 Foreign................................. 2,057,579 1,237,873 599,427 ----------- ---------- ----------- Total................................... $11,096,137 $6,816,349 $18,534,964 =========== ========== ===========
Undistributed earnings of the foreign subsidiary on which no U.S. income tax has been provided amounted to $9,537,838 at June 30, 1995. The Company's operation in the Peoples Republic of China is affected by an income tax holiday. Net income increased by $568,955 ($0.03 per share), $345,564 ($0.02 per share), and $339,851 ($0.02 per share) for the years ended June 30, 1993, 1994, 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 no income tax for the years ended June 30, 1993 and 1994. The income tax rate increased to 7.5% for the year ended June 30, 1995 and will remain at 7.5% for years ending June 30, 1996 and 1997 and will then increase to 15% for years thereafter. The applicable statutory income tax rate in the Peoples Republic of China is approximately 33%. Income taxes paid were $4,918,719, $4,620,928, and $4,335,733 for the years ended June 30, 1993, 1994, and 1995, respectively and were $3,036,495 and $4,240,132 for the six months ended December 31, 1994 and 1995, respectively. F-11 NOTE F--STOCK OPTION PLANS The Company has the 1984 Incentive Stock Option Plan (the "1984 Plan") which provided options to eligible employees to purchase common stock over five or ten years at fair market value at the time of the grant. Options become exercisable one year from the date of the grant at a rate not exceeding 25% per year (subject to possible acceleration in certain circumstances). The Company reserved shares of its common stock and authorized options to purchase 3,400,000 shares of common stock under the 1984 Plan. The 1984 Plan terminated as to new grants on December 31, 1993. Pertinent information regarding options under the 1984 Plan follows:
OPTION SHARES ------------------------------------------------- SIX MONTHS ENDED YEAR ENDED JUNE 30 DECEMBER 31 1993 1994 1995 1995 --------- --------- --------- ---------------- (UNAUDITED) Outstanding at beginning of period................ 1,330,562 1,277,860 1,298,466 929,314 Granted: $ 8.25 per share........ 5,000 -0- -0- -0- $ 8.32 per share........ -0- 2,000 -0- -0- $ 9.25 per share........ -0- 132,000 -0- -0- $10.07 per share........ 104,362 -0- -0- -0- $10.38 per share........ 1,000 -0- -0- -0- Exercised: $ 1.00 per share........ (12,400) (10,100) (2,000) (400) $ 1.38 per share........ (6,400) (46,600) (80,000) (2,000) $ 2.82 per share........ (9,800) (11,800) (18,300) (2,956) $ 4.50 per share........ (48,920) (34,610) (187,250) (77,972) $ 5.41 per share........ -0- -0- (600) -0- $ 6.22 per share........ (11,426) (4,420) (20,696) (6,787) $ 8.32 per share........ -0- -0- -0- (500) $10.07 per share........ -0- -0- (1,580) (1,600) Canceled................. (74,118) (5,864) (58,726) (2,100) --------- --------- --------- ------- Outstanding at end of period................... 1,277,860 1,298,466 929,314 834,999 ========= ========= ========= ======= Exercisable at end of period................... 911,866 802,758 749,134 738,354 ========= ========= ========= ======= Shares available for future grant............. 191,236 -0- -0- -0- ========= ========= ========= =======
The Company also has the 1992 Stock Incentive Plan (the "1992 Plan") which was approved by the Company's shareholders in November 1992. Under the 1992 Plan, eligible employees may receive options to purchase common stock over ten years at option prices that may not be less than fair market value at the date of grant. Stock options granted under the 1992 Plan become exercisable no sooner than six months from grant date (subject to possible acceleration under certain circumstances) and such options may include cash payment rights. Eligible employees may also receive awards of restricted shares of the Company's common stock under the 1992 Plan. The aggregate number of options and restricted shares which may be issued under the 1992 Plan is 1,000,000. Options to purchase 106,960 shares at $9.88 per share were granted during the year ended June 30, 1994 and options to purchase 52,752 shares at $16.25 per share and 5,000 shares at $13.38 per share were granted during the year ended June 30, 1995. Options to purchase 2,575 shares at $9.88 per share were exercised during the year ended June 30, 1995. Options to purchase 60 shares at $9.88 per share were exercised during the six months ended December 31, 1995. Options to purchase 5,050 shares were canceled during the year ended June 30, 1995. Options to F-12 purchase 1,000 shares were cancelled during the six months ended December 31, 1995. At June 30, 1995, total options to purchase 157,087 shares were outstanding under the 1992 Plan, of which 23,628 were exercisable. At December 31, 1995, total options to purchase 156,027 shares were outstanding under the 1992 Plan, of which 25,019 were exercisable. In connection with an initial public offering that was completed in June 1988, an officer of the Company exchanged his rights in certain non-patented products for an option to purchase 400,000 shares of common stock at a price of $1.88 per share. The option to purchase 80,000 of the shares was exercisable immediately, and options to purchase 80,000 shares became exercisable on each of June 30, 1989, 1990, 1991, and 1992. The option will be exercisable for a maximum period of ten years after grant. Options to purchase 15,000 shares were exercised during the six months ended December 31, 1995. In November 1991, the Company's shareholders approved the adoption of the 1991 Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). The aggregate number of shares which may be issued and as to which grants of options may be made under the Directors' Plan is 200,000. All options under the Directors' Plan are granted to members of the Company's Board of Directors who are not employees of the Company. Such options are granted at fair market value on the date of grant. Under the provisions of the Directors' Plan, in November 1991 each of the four non-employee directors who had been non-employee directors for at least two years prior to the approval of the Directors' Plan received a one-time option to purchase 10,000 shares at an option price of $6.13 per share. In addition, each of the five non-employee directors (regardless of years of service) received an option to purchase 5,100 shares at an option price of $6.13 per share. In November 1992, each non-employee director received an option to purchase 5,100 shares at an option price of $10.63 per share. In November 1993, each non-employee director received an option to purchase 5,100 shares at an option price of $9.50 per share. In November 1994, each non- employee director received an option to purchase 5,100 shares at an option price of $11.25 per share. In November 1995, each non-employee director received an option to purchase 5,100 shares at $19.69 per share. In the future, each non-employee director will receive an option to purchase an additional 5,100 shares on the third business day following the Company's annual meeting of shareholders. These grants will continue until options for all the share available under the Directors' Plan have been granted. The one time option granted to non-employee directors with more than two years of service was exercisable in full three months after the date of grant. For all other options granted under the Directors' Plan, 25% of the shares are exercisable one year after the date of the grant, 25% are exercisable two years after the date of grant, and the remaining 50% are exercisable three years after the date of grant. All options granted under the Directors' Plan expire ten years after the date of grant. Options to purchase 2,000 shares at $6.13 per share were exercised during the year ended June 30, 1995. F-13 NOTE G--FINANCIAL INFORMATION BY GEOGRAPHIC AREAS AND MAJOR CUSTOMERS
SIX MONTHS ENDED YEAR ENDED JUNE 30 DECEMBER 31 1993 1994 1995 1994 1995 ------------ ----------- ----------- ----------- ----------- (UNAUDITED) NET SALES Hong Kong: Unaffiliated customers............ $ 1,157,402 $ 1,462,292 $ 1,720,248 $ 983,886 $ 1,114,715 Interarea transfers... 9,281,661 7,312,399 8,430,823 3,945,241 4,112,123 ------------ ----------- ----------- ----------- ----------- 10,439,063 8,774,691 10,151,071 4,929,127 5,226,838 United States: Unaffiliated customers............ 68,128,211 76,708,736 97,730,086 44,553,726 55,801,079 Interarea transfers... 794,124 543,883 750,744 642,446 311,631 ------------ ----------- ----------- ----------- ----------- 68,922,335 77,252,619 98,480,830 45,196,172 56,112,710 Eliminations-- transfers............ (10,075,785) (7,856,282) (9,181,568) (4,587,687) (4,423,754) ------------ ----------- ----------- ----------- ----------- Net Sales.............. $ 69,285,613 $78,171,028 $99,450,333 $45,537,612 $56,915,794 ============ =========== =========== =========== =========== OPERATING PROFIT Hong Kong.............. $ 2,359,200 $ 1,538,966 $ 877,325 $ 649,632 $ 431,162 United States.......... 12,411,549 9,315,357 22,239,437 9,416,007 13,363,737 ------------ ----------- ----------- ----------- ----------- Operating Profit........ 14,770,749 10,854,323 23,116,762 10,065,639 13,794,899 Corporate expense...... 3,498,769 3,866,751 4,388,248 1,848,429 2,664,403 Interest expense....... 175,843 171,223 193,550 95,943 100,595 ------------ ----------- ----------- ----------- ----------- Income Before Income Taxes.................. $ 11,096,137 $ 6,816,349 $18,534,964 $ 8,121,267 $11,029,901 ============ =========== =========== =========== ===========
Interarea transfers are accounted for at prices comparable to unaffiliated customer sales reduced by an approximation of costs not incurred on internal sales. The Company sells to distributors in the health care industry and closely monitors the extension of credit to both domestic and foreign customers, including obtaining and analyzing credit applications for all new accounts and maintaining an active program to contact customers promptly when invoices become past due. Sales to one customer accounting for 10% or more of net sales were $6,711,000 for the year ended June 30, 1993. Sales to another customer (accounting for 10% or more of net sales) were $8,569,000 for the year ended June 30, 1994 and $10,955,000 for the year ended June 30, 1995. Sales to the same customer (which merged with another customer in August 1995) were $5,160,000 and $9,595,000 for the six months ended December 31, 1994 and 1995. F-14 Additional information regarding assets and liabilities by geographic area follows:
JUNE 30 DECEMBER 31 1994 1995 1995 ----------- ----------- ----------- (UNAUDITED) IDENTIFIABLE ASSETS Hong Kong.............................. $ 3,773,038 $ 5,597,154 $ 6,591,846 United States.......................... 40,738,352 54,113,917 65,366,160 ----------- ----------- ----------- 44,511,390 59,711,071 71,958,006 Corporate assets (primarily cash and short-term investments).............. 14,405,830 18,327,499 11,993,503 ----------- ----------- ----------- Total Assets.......................... $58,917,220 $78,038,570 $83,951,509 =========== =========== =========== TOTAL ASSETS Hong Kong.............................. $ 9,328,819 $11,140,130 $11,497,391 United States.......................... 49,588,401 66,898,440 72,454,118 ----------- ----------- ----------- $58,917,220 $78,038,570 $83,951,509 =========== =========== =========== TOTAL LIABILITIES Hong Kong.............................. $ 1,548,270 $ 2,712,833 $ 2,905,218 United States.......................... 13,144,841 16,956,541 15,496,223 ----------- ----------- ----------- $14,693,111 $19,669,374 $18,401,441 =========== =========== ===========
NOTE H--RETIREMENT PLAN The Company has a Retirement Savings Plan which is available to all United States employees. Employees may contribute up to 15% (to a defined maximum) of their compensation. The Company matches employee contributions (up to 3% of each employee's compensation) at a 100% rate and may make discretionary contributions. The Company contributed $169,000, $357,000 and $420,000 to the plan for the years ended June 30, 1993, 1994, and 1995, respectively and $191,000 and $292,000 for the six months ended December 31, 1994 and 1995. The Company's current benefit program does not provide postretirement benefits to employees. NOTE I--DISTRIBUTION AGREEMENT In June 1991, the Company entered into a distribution agreement with the owner of a non-invasive ventilator product. Under the terms of the agreement, the Company had the exclusive United States distribution rights for a product that was to be produced by the manufacturer. The initial term of the agreement was three years with provisions to extend the term for additional periods. A six-month extension of the initial term expired December 31, 1994. As part of the agreement, the Company paid $5,000,000 to the manufacturer, representing a partial prepayment for the product to be sold by the Company during the initial term of the agreement. Because of the manufacturer's repeated failures to meet stipulated requirements, particularly in assuring compliance with Good Manufacturing Practice as required by FDA law and regulations, and the Company's resulting inability to introduce the product for sale, in June 1994 the Company concluded that the ultimate realizability of the prepayment was no longer probable. Accordingly, during the quarter ended June 30, 1994, the Company recorded nonrecurring charges totaling $5,120,000 to write off the remaining balance on the prepayment and the net book value of units that had been purchased. F-15 NOTE J--DISCONTINUANCE OF PRODUCT LINE In November 1993, the Company discontinued the production and sale of its BagEasy line of disposable manual resuscitators and recalled all remaining BagEasy products in distribution channels and customer inventories. Accordingly, during the quarter ended September 30, 1993, the Company recorded nonrecurring charges of $1,966,000 which included provisions for write-offs of inventories and fixed assets, the satisfaction of purchase order and compensation commitments, and costs associated with the recall. NOTE K--JOINT VENTURE During the quarter ended December 31, 1993, the Company completed a 51% equity investment, totaling approximately $600,000, in a joint venture with a company located in the Peoples Republic of China. The Company believes that this joint venture will facilitate the wider distribution of the Company's products in the Peoples Republic of China and will also manufacture and distribute medical products and over-the-counter medicines in that country. The joint venture is not expected to be fully operational until the second half of fiscal year 1996. NOTE L--ACQUISITION On April 6, 1995, the Company acquired Vitalog Monitoring, Inc., a California company that designs, manufactures and markets sleep monitoring and diagnostic equipment. This combination was treated for financial reporting purposes as a purchase. Vitalog's results of operations have been included in the Company's consolidated financial statements beginning April 7, 1995. Vitalog's operations were not material in relation to the Company's consolidated financial statements and pro forma financial information has therefore not been presented. Consideration paid was $745,000 in cash (including transactions costs) and 85,094 shares of the Company's common stock valued at $1,276,000 in exchange for the outstanding stock of Vitalog, related patents, and non-competition agreements. The cost in excess of net assets acquired was $1,887,000 and is being amortized on a straight line basis over 12 years. NOTE M--CONTINGENCY The Company is a party to an action filed in a federal District Court in January 1995 in which a competitor alleges that the Company's sale in the United States of certain products infringes three of the competitor's patents. In its response to the action, the Company has denied the allegations and has separately sought a declaratory judgment that the claims under the patents are invalid and that the Company does not infringe upon the patents. Discovery in the case is continuing. The Company believes that none of its products infringe any of the patents in question in the event that any one or more of such patents should be held to be valid and enforceable, and it intends to vigorously defend this position. F-16 NOTE N--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Following are the unaudited quarterly results of operations for the fiscal years ended June 30, 1994, 1995 and 1996:
1994 ------------------------------------------------ THREE MONTHS ENDED SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 ------------ ----------- ----------- ----------- Net Sales................. $18,224,518 $18,600,037 $19,307,611 $22,038,862 Gross Profit.............. 9,989,061 10,099,895 10,704,488 12,547,276 Nonrecurring Charges...... 1,966,085 -0- -0- 5,120,000 Net Income (Loss)......... 873,481 2,063,884 2,244,295 (440,416) Earnings (Loss) Per Share. $ 0.05 $ 0.12 $ 0.13 $ (0.03) 1995 ------------------------------------------------ THREE MONTHS ENDED SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 ------------ ----------- ----------- ----------- Net Sales................. $21,669,809 $23,867,803 $25,599,736 $28,312,985 Gross Profit.............. 12,199,078 13,679,172 14,485,883 16,009,042 Net Income................ 2,420,016 2,696,380 3,071,740 3,488,891 Earnings Per Share........ $ 0.14 $ 0.15 $ 0.17 $ 0.20 1996 ------------------------------------------------ THREE MONTHS ENDED SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 ------------ ----------- ----------- ----------- Net Sales................. $26,674,675 $30,241,119 -- -- Gross Profit.............. 15,160,165 16,860,310 -- -- Net Income................ 3,219,272 3,508,968 -- -- Earnings Per Share........ $ 0.18 $ 0.20 -- --
F-17 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------ TABLE OF CONTENTS Page Available Information...................................................... 2 Additional Information..................................................... 2 Prospectus Summary......................................................... 3 Risk Factors............................................................... 6 Price Range of Common Stock................................................ 8 Use of Proceeds............................................................ 8 Dividend Policy............................................................ 8 Capitalization............................................................. 9 Selected Financial Data.................................................... 10 Management's Discussion and Analysis of Results of Operations and Financial Condition................................................................. 11 Business................................................................... 18 Management................................................................. 33 Principal and Selling Stockholders......................................... 35 Underwriting............................................................... 37 Legal Matters.............................................................. 38 Experts.................................................................... 38 Incorporation of Certain Documents by Reference............................ 38 Index to Consolidated Financial Statements................................. F-1
------------ - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 3,030,000 Shares [LOGO of Respironics, Inc.] Common Stock ------------ PROSPECTUS ------------ Alex. Brown & Sons INCORPORATED Cowen & Company Parker/Hunter INCORPORATED , 1996 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the expenses in connection with the offering described in this Registration Statement. All such amounts (except the SEC Registration Fee, the National Association of Securities Dealers, Inc. filing fee and the Nasdaq National Market listing fee) are estimated: Securities and Exchange Commission registration fee................. $25,233 National Association of Securities Dealers, Inc. filing fee......... 7,817 Nasdaq National Market listing fee.................................. 17,500 Printing, postage and mailing costs................................. 175,000 Marketing costs..................................................... 30,000 Accounting fees and expenses........................................ 35,000 Legal fees and expenses, including blue sky......................... 65,000 Blue sky fees and expenses.......................................... 10,000 Transfer agent and registar fees and expenses....................... 5,000 Miscellaneous....................................................... 29,450 -------- Total............................................................. $400,000 ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. 1. Section 145 of Delaware General Corporation Law. Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expense (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon plea of nolo contendere of its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Section 145 also provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or II-1 the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. To the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to above, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. Any such indemnification (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because such person has met the applicable standard of conduct set forth above. Such determination shall be made: (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding; or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion; or (3) by the stockholders. Section 145 permits a Delaware business corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against such person and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify such person against such liability. 2. Section 102(b)(7) of Delaware General Corporation Law. Section 102(b)(7) of the Delaware General Corporation Law provides that a corporation may set forth in its Certificate of Incorporation a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of such General Corporation Law regarding the unlawful payment of dividends or approval of stock repurchases or redemptions and (iv) for any transaction from which the director derived an improper personal benefit. No such provision shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective (in the case of the Company, May 8, 1987). As noted in 3 below, the Company's Certificate of Incorporation includes a provision contemplated by Section 102(b)(7) of the Delaware General Corporation Law. 3. Certificate of Incorporation Provision of Liability of Directors. The Company's Certificate of Incorporation limits the liability of its directors to the fullest extent permitted under the Delaware General Corporation Law. The Company's directors are not liable for monetary damages for breach of their fiduciary duty as directors, except for liability for any breach of the directors' duty of loyalty to the Company or its stockholders, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law, and for any transactions from which a director derived an improper personal benefit. This provision does not eliminate the duty of care and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non- monetary relief available under Delaware law. II-2 4. Certificate of Incorporation Provisions on Indemnity. The Company's Certificate of Incorporation provides that the Company shall indemnify its directors, officers, employees and agents against claims arising out of their actions as agents of the Company and will advance expenses of defending against such claims. The Certificate of Incorporation requires the Company to advance litigation expenses in the case of shareholder derivative or other actions against an undertaking by the officer or director to repay such advances if it is ultimately determined that the officer or director is not entitled to indemnification. The Certificate of Incorporation further provides that the Company may obtain directors' and officers' liability insurance on such terms and conditions acceptable to the Company. 5. Director and Officer Liability Insurance. The Company has purchased director and officer liability insurance. Such insurance covers its directors and officers with respect to liability which they may incur in connection with their serving as such. Under this type of insurance, the Company will receive reimbursement for amounts as to which the directors and officers would be indemnified. The insurance also provides certain additional coverage for the directors and officers against certain liability even though such liability would not be subject to indemnification. ITEM 16. EXHIBITS. An Exhibit Index, containing a list of all exhibits filed with this Registration Statement, is included on page II-7. ITEM 17. UNDERTAKINGS. (b) Filings incorporating subsequent Exchange Act Documents by Reference. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the 1933 Act, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the 1934 Act that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (h) Request for Acceleration of Effective Date. Insofar as indemnification for liabilities arising under the 1933 Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described under Item 15 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue. (i) Rule 430A Offerings. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. II-3 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN MURRYSVILLE, PENNSYLVANIA, ON THE 22ND DAY OF FEBRUARY, 1996. Respironics, Inc. By: /s/ Dennis S. Meteny -------------------------------- Dennis S. Meteny, President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dennis S. Meteny, Daniel J. Bevevino and James C. Woll, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitutes, may lawfully do or cause to be done by virtue thereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND AS OF FEBRUARY 22, 1996.
NAME TITLE ---- ----- /s/ Daniel J. Bevevino Chief Financial Officer and Controller - ------------------------ (Principal Financial and Accounting Officer) Daniel J. Bevevino Director - ------------------------ Daniel P. Barry /s/ Douglas A. Cotter Director - ------------------------ Douglas A. Cotter /s/ James H. Hardie Director - ------------------------ James H. Hardie /s/ Joseph C. Lawyer Director - ------------------------ Joseph C. Lawyer /s/ George J. Magovern Director - ------------------------ George J. Magovern, M.D. /s/ Gerald E. McGinnis Chairman of the Board and Director - ------------------------ Gerald E. McGinnis /s/ Dennis S. Meteny President, Chief Executive Officer and Director - ------------------------ (Principal Executive Officer) Dennis S. Meteny Director - ------------------------ Bernard Shou-Chung Zau
II-4 RESPIRONICS, INC. COMMON STOCK ---------------- REGISTRATION STATEMENT ON FORM S-3 ---------------- EXHIBIT INDEX (PURSUANT TO ITEM 601 OF REGULATION S-K)
PAGE NUMBER IN SEQUENTIAL EXHIBIT NUMBERING NO. DESCRIPTION AND METHOD OF FILING SYSTEM ------- -------------------------------- ------------- 1.1 Underwriting Agreement (filed herewith)................. -- 4.1 Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.2 to the Company's Form S-1 Registration Statement No. 33- 20899).................................................. N/A 4.2 Articles of Amendment to Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 4.2 to the Company's Form S-8 Registration Statement No. 33-36459). N/A 4.3 Bylaws of Company (incorporated herein by reference to Exhibit 3.2 to the Company's Form S-1 Registration Statement No. 33-20899)................................. N/A 5.1 Opinion of Reed Smith Shaw & McClay as to the legality of the Common Shares being registered (filed herewith).. -- 23.1 Consent of Reed Smith Shaw & McClay (included in Exhibit 5.1 filed herewith)..................................... N/A 23.2 Consent of Independent Auditors (filed herewith)........ -- 24.1 Power of Attorney (set forth on page II-4 of the Registration Statement)................................. N/A
II-5 EX-1.1 2 UNDERWRITING AGREEMENT EXHIBIT 1.1 Shares --------------- Respironics, Inc. Common Stock ($.01 Par Value) UNDERWRITING AGREEMENT ---------------------- , 1996 --------------- Alex. Brown & Sons Incorporated Cowen & Company Parker/Hunter Incorporated As Representatives of the Several Underwriters c/o Alex. Brown & Sons Incorporated 135 East Baltimore Street Baltimore, Maryland 21202 Gentlemen: Respironics, Inc., a Delaware corporation (the "Company"), and certain shareholders of the Company (the "Selling Shareholders") propose to sell to the several underwriters (the "Underwriters") named in Schedule I hereto for whom you are acting as representatives (the "Representatives") an aggregate of 3,030,000 shares of the Company's Common Stock, $.01 par value (the "Firm Shares"), of which 2,000,000 shares will be sold by the Company and 1,030,000 shares will be sold by the Selling Shareholders. The respective amounts of the Firm Shares to be so purchased by the several Underwriters are set forth opposite their names in Schedule I hereto, and the respective amounts to be sold by the Selling Shareholders are set forth opposite their names in Schedule II hereto. The Company and the Selling Shareholders are sometimes referred to herein collectively as the "Sellers." The Company and a Selling Shareholder also propose to sell at the Underwriters' option an aggregate of up to 454,500 additional shares of the Company's Common Stock (the "Option Shares") as set forth below. As the Representatives, you have advised the Company and the Selling Shareholders (a) that you are authorized to enter into this Agreement on behalf of the several Underwriters, and (b) that the several Underwriters are willing, acting severally and not jointly, to purchase the numbers of Firm Shares set forth opposite their respective names in Schedule I, plus their pro rata portion of the Option Shares if you elect to exercise the over-allotment option in whole or in part for the accounts of the several Underwriters. The Firm Shares and the Option Shares (to the extent the aforementioned option is exercised) are herein collectively called the "Shares." In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows: 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING SHAREHOLDERS. -------------------------------------------------------------------------- (a) The Company represents and warrants as follows: (i) A registration statement on Form S-3 (File No. 333-______) with respect to the Shares has been carefully prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended, (the "Act") and the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission under the Act. The Company has complied with the conditions for the use of Form S-3 with respect to the proposed offering. Copies of such registration statement, including any amendments thereto, the preliminary prospectuses (meeting the requirements of Rule 430A of the Rules and Regulations) contained therein and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to you. Such registration statement, together with any registration ------------------------------ statement filed by the Company pursuant to Rule 462(b) of the Act, herein - ------------------------------------------------------------------ referred to as the "Registration Statement," which shall be deemed to include all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, has been declared effective by the Commission under the Act and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. The form of prospectus first filed by the Company with the Commission pursuant to its Rule 424(b) and Rule 430A is herein referred to as the "Prospectus." Each preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "Preliminary Prospectus." Any reference herein to any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein, as of the date of such Preliminary Prospectus or Prospectus, as the case may be, and, in the case of any reference herein to any Prospectus, also shall be deemed to include any documents incorporated by reference therein, and any supplements -2- or amendments thereto, filed with the Commission after the date of filing of the Prospectus under Rules 424(b) and 430A, and prior to the termination of the offering of the Shares by the Underwriters. (ii) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own its properties and conduct its business as described in the Registration Statement; each of the subsidiaries of the Company (collectively, the "Subsidiaries") has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; the Company and each of the Subsidiaries are duly qualified to transact business in all jurisdictions in which the conduct of their business requires such qualification; the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and non-assessable and to the extent shown in Exhibit A hereto are owned by the Company or another Subsidiary free and clear of all liens, encumbrances and security interests; and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into shares of capital stock or ownership interests in the Subsidiaries are outstanding. (iii) The outstanding shares of Common Stock of the Company, including all shares to be sold by the Selling Shareholders, have been duly authorized and validly issued and are fully paid and non-assessable; the portion of the Shares to be issued and sold by the Company have been duly authorized and when issued and paid for as contemplated herein will be validly issued, fully paid and non- assessable; and no preemptive rights of stockholders exist with respect to any of the Shares or the issue and sale thereof. (iv) The Shares conform with the statements concerning them in the Registration Statement. (v) The Commission has not issued an order preventing or suspending the use of any Preliminary Prospectus relating to the proposed offering of the Shares nor instituted proceedings for that purpose. The Registration Statement contains and the Prospectus and any amendments or supplements thereto will contain all statements which are required to be stated therein by, and in all respects conform or will conform, as the case may be, to the requirements of, the Act and the Rules and Regulations. The documents incorporated by reference in the Prospectus, at the time they will be filed with the Commission will conform at the time of filing, in all respects to the requirements of the Securities Exchange Act of 1934 or the Act, as applicable, and the Rules and Regulations of the Commission thereunder. Neither the Registration Statement nor any amendment thereto, and neither the Prospectus nor any supplement thereto, including any documents incorporated by reference therein, contains or will contain, as the case may be, any untrue statement of a material fact or omits or will omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company -3- makes no representations or warranties as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, or any documents incorporated by reference therein, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of any Underwriter through the Representatives, specifically for use in the preparation thereof. (vi) The consolidated financial statements of the Company and the Subsidiaries, together with related notes and schedules as set forth in the Registration Statement, present fairly the financial position and the results of operations of the Company and Subsidiaries consolidated, at the indicated dates and for the indicated periods. Such financial statements have been prepared in accordance with generally accepted principles of accounting, consistently applied throughout the periods involved, and all adjustments necessary for a fair presentation of results for such periods have been made. The summary financial and statistical data included in the Registration Statement presents fairly the information shown therein and have been compiled on a basis consistent with the financial statements presented therein. (vii) There is no action or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of the Subsidiaries before any court or administrative agency which might result in any material adverse change in the business or condition of the Company and of the Subsidiaries taken as a whole, except as set forth in the Registration Statement. (viii) The Company and the Subsidiaries have good and marketable title to all of the properties and assets reflected in the financial statements (or as described in the Registration Statement) hereinabove described, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except those reflected in such financial statements (or as described in the Registration Statement) or which are not material in amount. The leases under which the Company and the Subsidiaries occupy their leased properties conform to the description thereof set forth in the Registration Statement and, to the best of the Company's knowledge, such leases are valid and binding obligations of the landlords. (ix) The Company and the Subsidiaries have filed all Federal, State and foreign income tax returns which have been required to be filed and have paid all taxes indicated by said returns and all assessments received by them or any of them to the extent that such taxes have become due and are not being contested in good faith. (x) Since the respective dates as of which information is given in the Registration Statement, as it may be amended or supplemented, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole or the earnings, business affairs, management, or business prospects of the Company and its Subsidiaries taken as a whole, whether or not occurring in the ordinary course of business, and there has not been any material transaction entered into by the Company or the Subsidiaries, other -4- than transactions in the ordinary course of business and changes and transactions contemplated by the Registration Statement, as it may be amended or supplemented. The Company and the Subsidiaries have no material contingent obligations which are not disclosed in the Registration Statement, as it may be amended or supplemented. (xi) Neither the Company nor any of the Subsidiaries is in default under any agreement, lease, contract, indenture or other instrument or obligation to which it is a party or by which it or any of its properties is bound and which default is of material significance in respect of the business or financial condition of the Company and the Subsidiaries taken as a whole. The consummation of the transactions herein contemplated and the fulfillment of the terms hereof will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any Subsidiary is a party, or of the Charter or by-laws of the Company or any order, rule or regulation applicable to the Company or any Subsidiary of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. (xii) Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (except such additional steps as may be required by the National Association of Securities Dealers, Inc. (the "NASD") or may be necessary to qualify the Shares for public offering by the Underwriters under State securities or Blue Sky laws) has been obtained or made and is in full force and effect. (xiii) The Company owns or possesses adequate licenses or other rights to use all patents, patent applications, trademarks, trademark applications, service marks, service mark applications, tradenames, copyrights, manufacturing processes, formulae, trade secrets and know-how or other information (collectively, "Intellectual Property") described in the Prospectus as owned by or used by it or which is necessary to the conduct of its business as now conducted or proposed to be conducted as described in the Prospectus. To the knowledge of the Company, none of the patent rights owned or licensed by the Company are unenforceable or invalid. Except as disclosed in the Prospectus, the Company is not aware of any infringement of or conflict with the rights or claims of others with respect to any of the Company's products or Intellectual Property which could have a material adverse effect on the business or financial condition of the Company or the Subsidiaries, taken as a whole. The Company is not aware of any infringement of any of the Company's Intellectual Property rights by any third party which could have a material adverse effect on the business or financial condition of the Company and the Subsidiaries, taken as a whole. (xiv) Except as described in the Prospectus, the Company and each of the Subsidiaries are conducting their business in compliance with all the laws, rules and regulations of the jurisdictions in which they are conducting business, including, without limitation, those of the United States Food and ------ Drug Administration (the "FDA"), except where failure to be so in -5- compliance, singly or in the aggregate, would not have a material adverse effect on the business or financial condition of the Company and the Subsidiaries, taken as a whole. (xv) Except as described in the Prospectus, each of the Company and the Subsidiaries (i) holds and is operating in compliance with all licenses, authorizations, consents, approvals, certificates and permits (individually, a "Permit") from any regulatory body or administrative agency or other governmental body having jurisdiction including, without limitation, the FDA, (ii) has made all necessary filings required under any Federal, State or foreign law, rule or regulation and (iii) has obtained all necessary authorizations, consents, and approvals (individually, an "Approval") from other persons which are necessary to own or lease its properties and assets and to the conduct of its business, except where the failure to so hold or comply with any Permit, the failure to make any such filing or the failure to obtain any Approval would not have, singly or in the aggregate, a material adverse effect on the business or financial condition of the Company and the Subsidiaries, taken as a whole. Neither the Company nor any Subsidiary has received any notice of proceedings relating to the revocation or modification of any such Permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, could have a material adverse effect on the business or financial condition of the Company and the Subsidiaries. To the best of the Company's knowledge, all of the properties now or formerly owned or leased by the Company or any Subsidiary, all research and manufacturing operations conducted thereon (including discharges and emissions therefrom) and all research and manufacturing equipment now or formerly used at said properties, have been and are in compliance with all Federal, state, local and foreign status, ordinances, regulations, rules and standards concerning or relating to industrial hygiene and the protection of health, safety, welfare and the environment (collectively, "the Environmental Laws"), except to the extent that any failure to be in compliance, singly or in the aggregate, would not have a material adverse effect on the business or financial condition of the Company and the Subsidiaries, taken as a whole. Neither the Company nor any Subsidiary has received notice or has actual or constructive knowledge, of any claim, demand, investigation, regulatory action, suit or other action instituted or threatened against it or said property relating to any of the Environmental Laws. (xvi) The Company has not distributed and, prior to the later to occur of (i) the Closing Date and (ii) completion of the distribution of the Shares, will not distribute any offering material in connection with the offering and sale of the Shares other than the Registration Statement, the Preliminary Prospectus, the Prospectus or other materials, if any, permitted by the Act. (xvii) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded -6- accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xviii) To the Company's knowledge, neither the Company nor any of its Subsidiaries nor any employee or agent of the Company or any Subsidiary has made any payment of funds of the Company or any Subsidiary or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of character required to be disclosed in the Prospectus. (xix) No holder of any security of the Company has any right, which right has not been duly waived or exercised or has lapsed, to require registration of shares of Common Stock or any other security of the Company because of the filing of the Registration Statement or consummation of the transactions contemplated by this Agreement. (xx) The Company has filed in a timely manner each document or report required to be filed by it pursuant to the Exchange Act and the rules and regulations thereunder; each such document or report at the time it was filed conformed to the requirements of the Exchange Act and the rules and regulations thereunder; and none or such documents or reports contained an untrue statement of any material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (xxi) Ernst & Young LLP, who have certified certain of the financial statements filed with the Commission as part of the Registration Statement, are independent public accountants as required by the Act and the Rules and Regulations. (xxii) The Shares to be issued and sold by the Company have been listed on the Nasdaq National Market System, subject to notice of issuance. (b) Each of the Selling Shareholders severally represents and warrants as follows: (i) Such Selling Shareholder has and at the Closing Date and the Option Closing Date (as such dates are hereinafter defined) will have good and valid title to the Firm Shares and the Option Shares to be sold by such Selling Shareholder, free of any liens, encumbrances, equities and claims, and full right, power and authority to effect the sale and delivery of such Firm Shares and Option Shares; and upon the delivery of and payment for such Firm Shares and Option Shares pursuant to this Agreement, good and valid title thereto, free of any liens, encumbrances, equities and claims, will be transferred to the several Underwriters. (ii) The consummation by such Selling Shareholder of the transactions herein contemplated and the fulfillment by such Selling Shareholder of the terms hereof will not result in a breach of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which such Selling Shareholder is a -7- party, or of any order, rule or regulation applicable to such Selling Shareholder of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. (iii) Such Selling Shareholder has not taken and will not take, directly or indirectly, any action designed to, or which has constituted, or which might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock of the Company. (iv) Without having undertaken to determine independently the accuracy or completeness of either the representations and warranties of the Company contained herein or the information contained in the Registration Statement and documents incorporated by reference therein, such Selling Shareholder has no reason to believe that the representations and warranties of the Company contained in this Section 1 are not true and correct, is familiar with the Registration Statement and has no knowledge of any material fact, condition or information not disclosed in the Registration Statement or the documents incorporated by reference therein which has adversely affected or may adversely affect the business of the Company or any of the Subsidiaries; and the sale of the Firm Shares and the Option Shares by such Selling Shareholder pursuant hereto is not prompted by any information concerning the Company or any of the Subsidiaries which is not set forth in the Registration Statement or the documents incorporated by reference therein. 2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES. On the basis of the ---------------------------------------------- representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Sellers agree to sell to the Underwriters and each Underwriter agrees, severally and not jointly, to purchase, at a price of $_____ per share, the number of Firm Shares set forth opposite the name of each Underwriter in Schedule I hereof, subject to adjustments in accordance with Section 9 hereof. The number of Firm Shares to be purchased by each Underwriter from each Seller shall be as nearly as practicable in the same proportion to the total number of Firm Shares being sold by each Seller as the number of Firm Shares being purchased by each Underwriter bears to the total number of Firm Shares to be sold hereunder. The obligations of the Company and of each of the Selling Shareholders to sell the Firm Shares shall be several and not joint. Certificates in negotiable form for the total number of the Shares to be sold hereunder by the Selling Shareholders have been placed in custody with ____________________ as custodian (the "Custodian") pursuant to the Custodian Agreement executed by each Selling Shareholder for delivery of all Firm Shares and any Option Shares to be sold hereunder by the Selling Shareholders. Each of the Selling Shareholders specifically agrees that the Firm Shares and any Option Shares represented by the certificates held in custody for the Selling Shareholders under the Custodian Agreement are subject to the interests of the Underwriters hereunder, that the arrangements made by the Selling Shareholders for such custody are to that extent irrevocable, and that the obligations of the Selling Shareholders hereunder shall not be terminable by any act or deed of the Selling Shareholders (or by any other person, firm or corporation including the -8- Company, the Custodian or the Underwriters) or by operation of law (including the death of an individual Selling Shareholder or the dissolution of a corporate Selling Shareholder) or by the occurrence of any other event or events, except as set forth in the Custodian Agreement. If any such event should occur prior to the delivery to the Underwriters of the Firm Shares or the Option Shares hereunder, certificates for the Firm Shares or the Option Shares, as the case may be, shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such event has not occurred. The Custodian is authorized to receive and acknowledge receipt of the proceeds of sale of the Shares held by it against delivery of such Shares. Payment for the Firm Shares to be sold hereunder is to be made in New York Clearing House funds by certified or bank cashier's checks drawn to the order of the Company for the shares to be sold by it and to the order of "____________________" for the shares to be sold by the Selling Shareholders, in each case against delivery of certificates therefor to the Representatives for the several accounts of the Underwriters. Such payment and delivery are to be made at the offices of Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland, at 10:00 a.m., Baltimore time, on [fill in date for ----------------- T+3] or at such other time and date thereafter as you and the Company shall - --- agree upon, such time and date being herein referred to as the "Closing Date." (As used herein, "business day" means a day on which the New York Stock Exchange is open for trading and on which banks in New York are open for business and not permitted by law or executive order to be closed.) The certificates for the Firm Shares will be delivered in such denominations and in such registrations as the Representatives requests in writing not later than the second full business day ------ prior to the Closing Date, and will be made available for inspection by the Representatives at least one business day prior to the Closing Date . In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company and a Selling Shareholder listed on Schedule III hereto hereby grants an option to the several Underwriters to purchase the Option Shares at the price per share as set forth in the first paragraph of this Section 2. The maximum number of Option Shares to be sold by the Company and the Selling Shareholders is set forth opposite their respective names on Schedule III hereto. The option granted hereby may be exercised in whole or in part but only once and at any time upon written notice given within 30 days after the date of this Agreement, by you, as Representatives of the several Underwriters, to the Company and the Custodian setting forth the number of Option Shares as to which the several Underwriters are exercising the option, the names and denominations in which the Option Shares are to be registered and the time and date at which such certificates are to be delivered. If the option granted hereby is exercised in part, the respective number of Option Shares to be sold by the Company and each of the Selling Shareholders listed in Schedule III hereto shall be determined on a pro rata basis in accordance with the percentages set forth opposite their names on Schedule II hereto, adjusted by you in such manner as to avoid fractional shares. The time and date at which certificates for Option Shares are to be delivered shall be determined by the Representatives but shall not be earlier than three nor later than 10 full business days after the exercise of such option, nor in any event prior to the Closing Date (such time and date being -9- herein referred to as the "Option Closing Date"). If the date of exercise of the option is three or more days before the Closing Date, the notice of exercise shall set the Closing Date as the Option Closing Date. The number of Option Shares to be purchased by each Underwriter shall be in the same proportion to the total number of Option Shares being purchased as the number of Firm Shares being purchased by such Underwriter bears to the total number of Firm Shares, adjusted by you in such manner as to avoid fractional shares. The option with respect to the Option Shares granted hereunder may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters. You, as Representatives of the several Underwriters, may cancel such option at any time prior to its expiration by giving written notice of such cancellation to the Company. To the extent, if any, that the option is exercised, payment for the Option Shares shall be made on the Option Closing Date in New York Clearing House funds by certified or bank cashier's check drawn to the order of the Company for the Option Shares to be sold by it and to the order of "____________________" for the Option Shares to be sold by the Selling Shareholders against delivery of certificates therefor at the offices of Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland. 3. OFFERING BY THE UNDERWRITERS. It is understood that the several ---------------------------- Underwriters are to make a public offering of the Firm Shares as soon as the Representatives deems it advisable to do so. The Firm Shares are to be initially offered to the public at the initial public offering price set forth in the Prospectus. The Representatives may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any Option Shares are purchased pursuant to Section 2 hereof, the Underwriters will offer them to the public on the foregoing terms. It is further understood that you will act as the Representatives for the Underwriters in the offering and sale of the Shares in accordance with a Master Agreement Among Underwriters entered into by you and the several other Underwriters. 4. COVENANTS OF THE COMPANY AND THE SELLING SHAREHOLDERS. ----------------------------------------------------- (a) The Company covenants and agrees with the several Underwriters and the Selling Shareholders that: (i) The Company will (i) prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations, (ii) not file any amendment to the Registration Statement or supplement to the Prospectus or document incorporated by reference therein of which the Representatives shall not previously have been advised and furnished with a copy or to which the Representatives shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations and (iii) file on a timely basis all reports and any definitive proxy or information statements required to be filed by the Company with the Commission subsequent to the date of the Prospectus and prior to the termination of the offering of the Shares by the Underwriters. -10- (ii) The Company will advise the Representatives promptly of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, or of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose, and the Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (iii) The Company will cooperate with the Representatives in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions as the Representatives may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares. (iv) The Company will deliver to, or upon the order of, the Representatives, from time to time, as many copies of any Preliminary Prospectus as the Representatives may reasonably request. The Company will deliver to, or upon the order of, the Representatives during the period when delivery of a Prospectus is required under the Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representatives may reasonably request. The Company will deliver to the Representatives at or before the Closing Date, four signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Representatives such number of copies of the Registration Statement, including documents incorporated by reference therein, but without exhibits, and of all amendments thereto, as the Representatives may reasonably request. (v) If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer any event shall occur as a result of which, in the judgment of the Company or in the opinion of counsel for the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will either (i) prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus or (ii) prepare and file with the Commission an appropriate filing under the Securities Exchange Act of 1934 which shall be incorporated by reference in the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with the law. -11- (vi) The Company will make generally available to its security holders, as soon as it is practicable to do so, but in any event not later than 18 months after the effective date of the Registration Statement, an earning - -- statement (which need not be audited) in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earning statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you in writing when such statement has been so made available. (vii) The Company will, for a period of five years from the Closing Date, deliver to the Representatives copies of annual reports and copies of all other documents, reports and information furnished by the Company to its stockholders or filed with any securities exchange pursuant to the requirements of such exchange or with the Commission pursuant to the Act or the Securities Exchange Act of 1934, as amended. The Company will deliver to the Representatives similar reports with respect to significant subsidiaries, as that term is defined in the Rules and Regulations, which are not consolidated in the Company's financial statements. (viii) No offering, sale or other disposition of any Common Stock of the Company will be made for a period of 120 days after the date of this Agreement, directly or indirectly, by the Company otherwise than hereunder or with the prior written consent of the Representatives except that the Company may, without such consent, issue shares upon the exercise of options outstanding on the date of this Agreement. (ix) The Company will apply the net proceeds from the sale of the Shares to be sold by it hereunder substantially in accordance with the description in the Prospectus. (b) Each of the Selling Shareholders covenants and agrees with the several Underwriters and the Company that: (i) For a period of 90 days after the date of this Agreement, he will not offer to sell, contract to sell, transfer or otherwise dispose of, directly or indirectly, any shares of Common Stock, any options, rights or warrants to purchase any shares of Common Stock (including any stock appreciation right, or similar right with an exercise or conversion privilege at a price related to, or derived from, the market price of the Common Stock) or any securities convertible into or exchangeable for shares of Common Stock owned directly by such Selling Shareholder with respect to which he has the power of disposition (including, without limitation, shares of Common Stock that he may be deemed to beneficially own in accordance with the rules and regulations promulgated under the Exchange Act), or (ii) engage in any hedging transactions with respect to the Common Stock that may have an impact on the market price of the Common Stock, otherwise than hereunder or with the prior written consent of the Representatives. (ii) In order to document the Underwriters' compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 and the Interest and Dividend Tax Compliance Act of 1983 with respect to the transactions herein contemplated, -12- each of the Selling Shareholders agrees to deliver to you prior to or on the Closing Date a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). 5. COSTS AND EXPENSES. The Company will pay all costs, expenses and fees ------------------ incident to the performance of the obligations of the Sellers under this Agreement, including, without limiting the generality of the foregoing, the following: accounting fees of the Company; the fees and disbursements of counsel for the Company; the cost of printing and delivering to, or as requested by, the Underwriters copies of the Registration Statement, Preliminary Prospectuses, the Prospectus, this Agreement, the Agreement Among Underwriters, the Underwriters' Selling Memorandum, the Underwriters' Questionnaire, the Invitation Letter, the Power of Attorney, the Listing Application, the Blue Sky Survey and any supplements or amendments thereto; the filing fees of the Commission; the filing fees and expenses incident to securing any required review by the National Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of the Shares; the Listing Fee of the Nasdaq National Market System; and the expenses, including the fees and disbursements of counsel for the Underwriters, incurred in connection with the qualification of the Shares under State securities or Blue Sky laws. To the extent, if at all, that any of the Selling Shareholders engage special legal counsel to represent them in connection with this offering, the fees and expenses of such counsel shall be borne by such Selling Shareholder. Any transfer taxes imposed on the sale of the Shares to the several Underwriters will be paid by the Sellers pro rata. The Sellers shall not, however, be required to pay for any of the Underwriters expenses (other than those related to qualification under State securities or Blue Sky laws) except that, if this Agreement shall not be consummated because the conditions in Section 7 hereof are not satisfied, or because this Agreement is terminated by the Representatives pursuant to Section 6 hereof, or by reason of any failure, refusal or inability on the part of the Company or the Selling Shareholders to perform any undertaking or satisfy any condition of this Agreement or to comply with any of the terms hereof on their part to be performed, unless such failure to satisfy said condition or to comply with said terms be due to the default or omission of any Underwriter, then the Company shall reimburse the several Underwriters for reasonable out-of-pocket expenses, including fees and disbursements of counsel, reasonably incurred in connection with investigating, marketing and proposing to market the Shares or in contemplation of performing their obligations hereunder; but the Company and the Selling Shareholders shall not in any event be liable to any of the several Underwriters for damages on account of loss of anticipated profits from the sale by them of the Shares. 6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS. The several obligations of --------------------------------------------- the Underwriters to purchase the Firm Shares on the Closing Date and the Option Shares, if any, on the Option Closing Date are subject to the accuracy, as of the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company and the Selling Shareholders contained herein, and to the performance by the Company and the Selling Shareholders of their covenants and obligations hereunder and to the following additional conditions: -13- (a) No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company or the Selling Shareholders, shall be contemplated by the Commission. (b) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Reed Smith Shaw & McClay, counsel for the Company and the Selling Shareholders, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters to the effect that: (i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own its properties and conduct its business as described in the Prospectus; each of the Subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own its properties and conduct its business as described in the Prospectus; the Company and each of the Subsidiaries are duly qualified to transact business in all jurisdictions in which the conduct of their business requires such qualification, or in which the failure to qualify would have a materially adverse effect upon the business of the Company and the Subsidiaries taken as a whole; and the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and non-assessable and are owned by the Company or a Subsidiary, to the best of such counsel's knowledge, free and clear of all liens, encumbrances and security interests; to the best of such counsel's knowledge, except as stated in the Prospectus, there are outstanding no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into any shares of capital stock or of ownership interests in the Subsidiaries. (ii) The Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus; the authorized shares of its Common Stock have been duly authorized; the outstanding shares of its Common Stock, including the Shares to be sold by the Selling Shareholders, have been duly authorized and validly issued and are fully paid and non- assessable; all of the Shares conform to the description thereof contained in the Prospectus; the certificates for the Shares are in due and proper form; the shares of Common Stock, including the Option Shares, if any, to be sold by the Company pursuant to this Agreement have been duly authorized and, when issued and paid for as contemplated by this Agreement, will be validly issued, fully paid and non-assessable; and no preemptive rights of stockholders exist with respect to any of the Shares or the issue and sale thereof. (iii) The Registration Statement has become effective under the Act and, to the best of the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act. -14- (iv) The Registration Statement, all Preliminary Prospectuses, the Prospectus and each amendment or supplement thereto and document incorporated by reference therein comply as to form in all material respects with the requirements of the Act or the Securities Exchange Act of 1934, as applicable and the applicable rules and regulations thereunder (except that such counsel need express no opinion as to the financial statements, schedules and other financial information included or incorporated by reference therein). (v) Such counsel does not know of any contracts or documents required to be filed as exhibits to or incorporated by reference in the Registration Statement or described in the Registration Statement or the Prospectus which are not so filed, incorporated by reference or described as required, and such contracts and documents as are summarized in the Registration Statement or the Prospectus are fairly summarized in all material respects. (vi) Such counsel knows of no material legal proceedings pending or threatened against the Company or any of the Subsidiaries except as set forth in the Prospectus. (vii) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated do not and will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, the Charter or by-laws of the Company, or any agreement or instrument known to such counsel to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries may be bound or violate any applicable law or regulation or, to the best of such counsel's knowledge, any order, writ, injunction or decree of any jurisdiction, court or governmental instrumentality binding upon the Company, any Subsidiary or any of their properties, except that counsel need express no opinion as to state securities or blue sky laws. (viii) This Agreement has been duly authorized, executed and delivered by the Company. (ix) No approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body is necessary in connection with the execution and delivery of this Agreement and the consummation of the transactions herein contemplated (other than as may be required by the National Association of Securities Dealers, Inc. or as required by State securities and Blue Sky laws as to which such counsel need express no opinion) except such as have been obtained or made, specifying the same. (x) This Agreement has been duly authorized, executed and delivered on behalf of the Selling Shareholders. (xi) Each Selling Shareholder has full legal right, power and authority, and any approval required by law (other than as required by State securities and Blue Sky laws as to which such counsel need express no opinion), to sell, assign, transfer and deliver the portion of the Shares to be sold by such Selling Shareholder. -15- (xii) The Custodian Agreement has been duly authorized, executed and ------------------------ delivered by each Selling Shareholder and, pursuant to the Custodian Agreement, ----------------------------------------- each Selling Shareholder has authorized the attorneys-in-fact named therein to - ------------------------------------------------------------------------------ carry out the transactions contemplated by the Underwriting Agreement on its - ---------------------------------------------------------------------------- behalf and to deliver the Shares to be sold by such Selling Shareholder pursuant - -------------------------------------------------------------------------------- to this Agreement. - ------------------ (xiii) The Underwriters (assuming that they are bona fide purchasers within the meaning of the Uniform Commercial Code) have acquired good and marketable title to the Shares being sold by each Selling Shareholder on the Closing Date, free and clear of all claims, liens, encumbrances and security interests whatsoever. In rendering such opinion Reed Smith Shaw & McClay may rely as to matters governed by the laws of states other than Pennsylvania, the Delaware General Corporation Law or Federal laws on counsel in such jurisdictions and as to the matters set forth in subparagraphs (xi), (xii) and (xiii) on opinions of other counsel representing the respective Selling Shareholders, provided that in each case Reed Smith Shaw & McClay shall state that they believe that they and the Underwriters are justified in relying on such other counsel. In addition to the matters set forth above, such opinion shall also include a statement to the effect that such counsel believes that the Registration Statement, as of the --------------------- time it became effective under the Act, the Prospectus or any amendment or supplement thereto, on its date and on the Closing Date, or any of the documents incorporated by reference therein, as of the date of effectiveness of the Registration Statement or, in the case of documents incorporated by reference in the Prospectus after the date of effectiveness of the Registration Statement, as of the respective dates when such documents were filed with the Commission, as the case may be, did not contain an untrue statement of a material fact or omit ------- to state a material fact required to be stated therein or necessary to make the statements therein not misleading (except that such counsel need express no view as to financial statements, schedules and other financial information included or incorporated by reference therein). With respect to such statement, Reed Smith Shaw & McClay may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (c) The Representatives shall have received on the Closing Date the opinion of Hyman, Phelps & McNamara, P.C., regulatory counsel for the Company, dated the Closing Date addressed to the Underwriters in form and substance reasonably satisfactory to the Underwriters and their counsel. (d) The Representatives shall have received from Ropes & Gray, counsel for the Underwriters, an opinion dated the Closing Date or the Option Closing Date, as the case may be, substantially to the effect specified in subparagraphs (ii) (with respect to the Shares), (iii), (iv) and (viii) of Paragraph (b) of this Section 6, and that the Company is a validly organized and existing corporation under the laws of the State of Delaware. In rendering such opinion Ropes & Gray may rely as to all matters governed other than by the Delaware General Corporation Law or -16- Federal laws on the opinion of counsel referred to in Paragraph (b) of this Section 6. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that the Registration Statement, as of the time it became effective under the Act, and the Prospectus or any amendment or supplement thereto, on its date and on the Closing Date, or any of the documents incorporated by reference therein, as of the date of effectiveness of the Registration Statement or, in the case of documents incorporated by reference in the Prospectus after the date of effectiveness of the Registration Statement, as of the respective dates when such documents were filed with the Commission, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading (except that such counsel need express no view as to financial statements, schedules and other financial information included or incorporated by reference therein). With respect to such statement, Ropes & Gray may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (e) The Representatives shall have received at or prior to the Closing Date from Ropes & Gray a memorandum or summary, in form and substance satisfactory to the Representatives, with respect to the qualification for offering and sale by the Underwriters of the Shares under the State securities or Blue Sky laws of such jurisdictions as the Representatives may reasonably have designated to the Company. (f) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, a signed letter from Ernst & Young LLP, dated the Closing Date or the Option Closing Date, as the case may be, which shall confirm, on the basis of a review in accordance with the procedures set forth in the letter signed by such firm and dated and delivered to the Representatives on the date hereof that nothing has come to their attention during the period from the date five days prior to the date hereof, to a date not more than five days prior to the Closing Date or the Option Closing Date, as the case may be, which would require any change in their letter dated the date hereof if it were required to be dated and delivered on the Closing Date or the Option Closing Date, as the case may be. All such letters shall be in form and substance satisfactory to the Representatives and their counsel. (g) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, a certificate or certificates of the Chief Executive Officer and the Chief Financial Officer of the Company to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them severally represents as follows: (i) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registrations Statement has been issued, and no proceedings for such purpose have been taken or are, to his knowledge, contemplated by the Commission. -17- (ii) He does not know of any litigation instituted or threatened against the Company of a character required to be disclosed in the Registration Statement which is not so disclosed; he does not know of any material contract required to be filed as an exhibit to the Registration Statement which is not so filed; and the representations and warranties of the Company contained in Section 1 hereof are true and correct as of the Closing Date or the Option Closing Date, as the case may be . (iii) He has carefully examined the Registration Statement and the Prospectus and, in his opinion, as of the effective date of the Registration Statement, the statements contained in the Registration Statement, including any document incorporated by reference therein, were true and correct, and such Registration Statement and Prospectus or any document incorporated by reference therein did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading and, in his opinion, since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment. (h) The Company and the Selling Shareholders shall have furnished to the Representatives such further certificates and documents confirming the representations and warranties contained herein and related matters as the Representatives may reasonably have requested. (i) The Firm Shares and Option Shares, if any, have been approved for listing upon notice of issuance on the Nasdaq National Market System. (j) The Company shall have furnished to you "lock-up" letters, in form and substance satisfactory to you, signed by each director and executive officer who is not a Selling Shareholder. The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects satisfactory to the Representatives and to Ropes & Gray, counsel for the Underwriters. If any of the conditions hereinabove provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representatives by notifying the Company and the Selling Shareholders of such termination in writing or by telegram at or prior to the Closing Date or the Option Closing Date, as the case may be. In such event, the Selling Shareholders, the Company and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof). -18- 7. CONDITIONS OF THE OBLIGATIONS OF THE SELLERS. The obligations of the -------------------------------------------- Sellers to sell and deliver the portion of the Shares required to be delivered as and when specified in this Agreement are subject to the conditions that at the Closing Date or the Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened. 8. INDEMNIFICATION. --------------- (a) The Company and the Selling Shareholders, jointly and severally, agree to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act against any losses, claims, damages or liabilities to which such Underwriter or such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained or incorporated by reference in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter and each such controlling person for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that the Company and the Selling Shareholders will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission made or incorporated by reference in the Registration Statement, any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. In no event, however, shall the liability of any Selling Shareholder for indemnification under this Section 8(a) exceed the proceeds received by such Selling Shareholder from the Underwriters in the offering. This indemnity agreement will be in addition to any liability which the Company or the Selling Shareholders may otherwise have. (b) Each Underwriter will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement, the Selling Shareholders, and each person, if any, who controls the Company or any Selling Shareholder within the meaning of the Act, against any losses, claims, damages or liabilities to which the Company or any such director, officer, Selling Shareholder or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained or incorporated by reference in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein -19- not misleading in the light of the circumstances under which they were made; and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, Selling Shareholder or controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made or incorporated by reference in the Registration Statement, any Preliminary Prospectus, the Prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 8, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in Section 8(a) or (b) shall be available to any party who shall fail to give notice as provided in this Section 8(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of Section 8(a) or (b). In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm for all such indemnified parties. Such firm shall be designated in writing by you in the case of parties indemnified pursuant to Section 8(a) and by the Company and the Selling Shareholders in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgement for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. -20- (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under Section 8(c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the Selling Shareholders on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Shareholders bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Shareholders on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Shareholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter, (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation, and (iii) no Selling Shareholder shall be required to contribute any amount in excess of the proceeds received by such Selling Shareholder from the Underwriters in the offering. The Underwriters' obligations in this Section 8(d) to contribute are several in proportion to their respective underwriting obligations and not joint. -21- (e) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him or it as an additional defendant in any such proceeding in which such other contributing party is a party. 9. DEFAULT BY UNDERWRITERS. If on the Closing Date or the Option Closing ----------------------- Date, as the case may be, any Underwriter shall fail to purchase and pay for the portion of the Shares which such Underwriter has agreed to purchase and pay for on such date (otherwise than by reason of any default on the part of the Company or a Selling Shareholder), you, as Representatives of the Underwriters, shall use your best efforts to procure within 24 hours thereafter one or more of the other Underwriters, or any others, to purchase from the Company and the Selling Shareholders such amounts as may be agreed upon and upon the terms set forth herein, the Firm Shares or Option Shares, as the case may be, which the defaulting Underwriter or Underwriters failed to purchase. If during such 24 hours you, as such Representatives, shall not have procured such other Underwriters, or any others, to purchase the Firm Shares or Option Shares, as the case may be, agreed to be purchased by the defaulting Underwriter or Underwriters, then (a) if the aggregate number of shares with respect to which such default shall occur does not exceed 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the other Underwriters shall be obligated, severally, in proportion to the respective numbers of Firm Shares or Option Shares, as the case may be, which they are obligated to purchase hereunder, to purchase the Firm Shares or Option Shares, as the case may be, which such defaulting Underwriter or Underwriters failed to purchase, or (b) if the aggregate number of shares of Firm Shares or Option Shares, as the case may be, with respect to which such default shall occur exceeds 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the Company and the Selling Shareholders or you as the Representatives of the Underwriters will have the right, by written notice given within the next 24-hour period to the parties to this Agreement, to terminate this Agreement without liability on the part of the non-defaulting Underwriters or of the Company or of the Selling Shareholders except to the extent provided in Section 8 hereof. In the event of a default by any Underwriter or Underwriters, as set forth in this Section 9, the Closing Date or Option Closing Date, as the case may be, may be postponed for such period, not exceeding seven days, as you, as Representatives, may determine in order that the required changes in the Registration Statement or in the Prospectus or in any other documents or arrangements may be effected. The term "Underwriter" includes any person substituted for a defaulting Underwriter. Any action taken under this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. NOTICES. All communications hereunder shall be in writing and, except as ------- otherwise provided herein, will be mailed, delivered or telegraphed and confirmed as follows: if to the Underwriters, to Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, -22- Maryland 21202, Attention: Steven R. Schuh; if to the Company or the Selling Shareholders, to Respironics, Inc., 1001 Murry Ridge Drive, Murrysville, Pennsylvania 15668, Attention: Dennis S. Meteny. 11. TERMINATION. This Agreement may be terminated by you by notice to the ----------- Sellers as follows: (a) at any time prior to the earlier of (i) the time the Shares are released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on the first business day following the date of this Agreement; (b) at any time prior to the Closing Date if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole or the earnings, business affairs, management or business prospects of the Company and its Subsidiaries taken as a whole, whether or not arising in the ordinary course of business, (ii) any outbreak or escalation of hostilities or declaration of war or national emergency after the date hereof or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, escalation, declaration, emergency, calamity, crisis or change on the financial markets of the United States would, in your reasonable judgment, make the offering or delivery of the Shares impracticable or inadvisable, (iii) suspension of trading in securities on the New York Stock Exchange or the American Stock Exchange or limitation on prices (other than limitations on hours or numbers of days of trading) for securities on either such Exchange, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in your reasonable opinion materially and adversely affects or will materially or adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by either federal or New York State authorities, or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in your reasonable opinion has a material adverse effect on the securities markets in the United States; or (c) as provided in Sections 6 and 9 of this Agreement. This Agreement also may be terminated by you, by notice to the Sellers, as to any obligation of the Underwriters to purchase the Option Shares, upon the occurrence at any time prior to the Option Closing Date of any of the events described in subparagraph (b) above or as provided in Sections 6 and 9 of this Agreement. 12. SUCCESSORS. This Agreement has been and is made solely for the benefit of ---------- the Underwriters , the Company and the Selling Shareholders and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons -23- referred to herein, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Shares merely because of such purchase. 13. MISCELLANEOUS. The reimbursement, indemnification and contribution ------------- agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers and (c) delivery of and payment for the Shares under this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Maryland. -24- If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Selling Shareholders, the Company and the several Underwriters in accordance with its terms. Very truly yours, RESPIRONICS, INC. By -------------------------------------------- President Selling Shareholders listed on Schedule II By -------------------------------------------- Attorney-in-Fact The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. ALEX. BROWN & SONS INCORPORATED COWEN & COMPANY PARKER/HUNTER INCORPORATED As Representatives of the several Underwriters listed on Schedule I By: Alex. Brown & Sons Incorporated By: --------------------------- Authorized Officer -25- SCHEDULE I Schedule of Underwriters Number of Firm Shares Underwriter to be Purchased ----------- --------------------- Alex. Brown & Sons Incorporated Cowen & Company Parker/Hunter Incorporated ---------- Total ---------- -26- SCHEDULE II Schedule of Selling Shareholders Number of Firm Shares Selling Shareholder to be Sold - ------------------- -------------------------- ---------- Total ---------- -27- SCHEDULE III Schedule of Option Shares Maximum Number Percentage of of Option Shares Total Number of Name of Seller to be Sold Option Shares - -------------- -------------------- ----------------- ------ Total 100% ------ --- -28- EX-5.1 3 OPINION OF REED SMITH EXHIBIT 5.1 [LETTERHEAD OF REED SMITH SHAW & MCCLAY] February 22, 1996 Respironics, Inc. 1001 Murry Ridge Drive Murrysville, PA 15668 Re: Registration Statement on Form S-3 for the Registration of 3,484,500 Shares of Common Stock ------------------------------------------------ Gentlemen: We are counsel for Respironics, Inc., a Delaware corporation (the "Company"), and have acted as such in connection with the proposed sale by the Company and certain of its stockholders (the "Selling Stockholders") of up to 3,484,500 shares (including 454,500 upon exercise of the Underwriters' over- allotment) in the aggregate (the "Shares") of the Company's Common Stock, par value $.01 per share, pursuant to an Underwriting Agreement to be entered into among the Company, the Selling Stockholders, Alex. Brown & Sons Incorporated, Cowen & Company and Parker/Hunter Incorporated, as representatives of the several Underwriters named therein (the "Underwriting Agreement"). This opinion is furnished in connection with the filing by the Company of a Registration Statement on Form S-3 under the Securities Act of 1933, as amended, relating to such proposed sale. We have examined such public and corporate records and documents and such question of law, and have made such other investigation, as we deemed appropriate for purposes of this opinion. Based upon the foregoing, we are pleased to advise you that in our opinion the Shares, upon issuance and delivery and payment therefor in the manner described in the Underwriting Agreement, will be duly authorized, validly issued, fully paid and nonassessable. In rendering the foregoing opinion, we have not examined the laws of any jurisdiction other than the laws of the Commonwealth of Pennsylvania, the corporate laws of the State of Delaware and the federal laws of the United States of America and the foregoing opinion is limited to such laws. We hereby consent to the filing of this opinion as an exhibit to such Registration Statement and to the reference to us under the caption "Legal Matters" in the Prospectus contained therein. Yours truly, Reed Smith Shaw & McClay JHH:ARN EX-23.2 4 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Financial Data" and "Experts" and the use of our report dated September 11, 1995, in the Registration Statement (Form S-3 No. 333- ) and related Prospectus of Respironics, Inc. (the "Company") for the registration of 3,484,500 shares of its Common Stock. We also consent to the incorporation by reference of our report dated September 11, 1995, with respect to the consolidated financial statements of the Company included in its Annual Report (Form 10-K) for the year ended June 30, 1995, filed with the Securities and Exchange Commission. Ernst & Young LLP Pittsburgh, Pennsylvania February 21, 1996 -----END PRIVACY-ENHANCED MESSAGE-----