SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report pursuant to section 13 or 15(d) of the Securities
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Exchange Act of 1934 for the quarterly period ended March 31, 2000
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or
___ Transition Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
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Commission File No. 000-16723
RESPIRONICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1304989
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1501 Ardmore Blvd.
Pittsburgh, Pennsylvania 15221
(Address of principal executive offices) (Zip Code)
(Registrant's Telephone Number, including area code) 412-731-2100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
at least the past 90 days. Yes X No .
--- ---
As of April 30, 2000, there were 33,104,657 shares of Common Stock of the
registrant outstanding, of which 3,734,646 were held in treasury.
INDEX
RESPIRONICS, INC.
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited).
Consolidated balance sheets -- March 31, 2000 and June 30, 1999.
Consolidated statements of operations -- Three months and nine months
ended March 31, 2000 and 1999.
Consolidated statements of cash flows -- Nine months ended March 31,
2000 and 1999.
Notes to consolidated financial statements -- March 31, 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
PART II - OTHER INFORMATION
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Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
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CONSOLIDATED BALANCE SHEETS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
At At
March 31 June 30
2000 1999
-------- --------
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 8,043,792 $ 23,651,401
Trade accounts receivable, less allowance for
doubtful accounts of $18,693,000 and $13,919,000 103,836,323 99,253,207
Inventories 67,216,240 61,212,368
Prepaid expenses and other 8,446,668 6,328,742
Deferred income tax benefits 13,653,968 11,407,404
----------- ------------
TOTAL CURRENT ASSETS 201,196,991 201,853,122
PROPERTY, PLANT AND EQUIPMENT
Land 3,061,203 3,342,017
Building 12,168,954 12,687,961
Machinery and equipment 64,602,120 64,603,276
Furniture, office and computer equipment 46,334,555 37,719,450
Leasehold improvements 2,610,872 1,249,044
----------- ------------
128,777,704 119,601,748
Less allowances for depreciation
and amortization 63,214,207 58,371,315
----------- ------------
65,563,497 61,230,433
Funds held in trust for construction
of new facility 0 852,631
OTHER ASSETS 15,025,514 11,822,484
GOODWILL 63,640,283 65,420,031
----------- ------------
$ 345,426,285 $ 341,178,701
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 29,072,846 $ 26,787,172
Accrued expenses and other 18,907,613 18,762,481
Current portion of long-term obligations 1,477,508 967,387
----------- ------------
TOTAL CURRENT LIABILITIES 49,457,967 46,517,040
LONG-TERM OBLIGATIONS 108,305,374 99,374,180
MINORITY INTEREST 0 766,035
COMMITMENTS
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized
100,000,000 shares; issued and outstanding
33,098,409 shares at March 31, 2000 and
32,999,283 shares at June 30, 1999 330,984 329,993
Additional capital 109,586,447 108,863,191
Accumulated other comprehensive loss (2,500,717) (1,231,013)
Retained earnings 123,607,259 120,709,953
Treasury stock (43,361,029) (34,150,678)
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TOTAL SHAREHOLDERS' EQUITY 187,662,944 194,521,446
----------- ------------
$ 345,426,285 $ 341,178,701
=========== ============
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
Three months ended Nine months ended
March 31 March 31 March 31 March 31
2000 1999 2000 1999
------------------------------- -----------------------------
Net sales $ 97,837,028 $ 90,882,060 $ 270,138,922 $ 267,490,880
Cost of goods sold 51,484,648 46,577,974 144,302,692 138,193,374
Cost of goods sold - restructuring charges 513,986 0 5,090,338 0
------------ ------------ ------------ -----------
GROSS MARGIN 45,838,394 44,304,086 120,745,892 129,297,506
General and administrative expenses 12,038,211 10,844,007 33,989,298 31,929,197
General and administrative expenses - special items 4,500,000 0 4,500,000 0
Sales, marketing and commission expenses 15,983,880 14,624,638 46,327,587 45,152,804
Research and development expenses 4,436,693 3,989,291 12,763,769 12,923,191
Restructuring charges 3,718,115 0 17,146,156 0
Interest expense 1,845,572 1,377,194 4,985,775 3,558,478
Other income (261,723) (299,753) (1,060,663) (815,359)
------------ ------------ ------------ -----------
42,260,748 30,535,377 118,651,922 92,748,311
------------ ------------ ------------ -----------
INCOME BEFORE INCOME TAXES 3,577,646 13,768,709 2,093,970 36,549,195
Income taxes (benefit) (211,895) 5,507,484 (805,365) 14,619,678
------------ ------------ ------------ -----------
NET INCOME $ 3,789,541 $ 8,261,225 $ 2,899,335 $ 21,929,517
============ ============ ============ ===========
Basic earnings per share $ 0.13 $ 0.26 $ 0.10 $ 0.69
============ ============ ============ ===========
Basic shares outstanding 29,400,975 31,423,061 29,738,305 31,866,880
Diluted earnings per share $ 0.13 $ 0.26 $ 0.10 $ 0.68
============ ============ ============ ===========
Diluted shares outstanding 29,827,850 31,869,297 29,976,198 32,335,152
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
Nine Months Ended March 31
2000 1999
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OPERATING ACTIVITIES
Net income $ 2,899,335 $ 21,929,517
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 19,475,470 14,007,257
Asset write-offs 7,677,816 -0-
Changes in operating assets and liabilities:
Increase in accounts receivable (4,583,116) (21,100,704)
Increase in inventories (11,094,210) (584,155)
Change in other operating assets and liabilities (8,776,653) 2,819,341
----------- ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 5,598,642 17,071,256
INVESTING ACTIVITIES
Purchase of property, plant and equipment (20,307,991) (18,341,877)
Additional purchase price for acquired business (1,085,407) -0-
----------- ------------
NET CASH USED BY
INVESTING ACTIVITIES (21,393,398) (18,341,877)
FINANCING ACTIVITIES
Net increase in borrowings 9,441,314 28,182,263
Issuance of common stock 722,219 2,744,485
Acquisition of treasury stock, net (9,210,351) (24,879,502)
Decrease in minority interest (766,035) (38,486)
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NET CASH PROVIDED BY
FINANCING ACTIVITIES 187,147 6,008,760
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(DECREASE) INCREASE IN CASH AND
SHORT-TERM INVESTMENTS (15,607,609) 4,738,139
Cash and short-term investments at beginning of period 23,651,401 14,874,753
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CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 8,043,792 $ 19,612,892
=========== ============
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
March 31, 2000
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine months ended March 31,
2000 are not necessarily indicative of the results that may be expected for the
year ended June 30, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended June 30, 1999.
NOTE B -- INVENTORIES
The composition of inventory is as follows:
March 31 June 30
2000 1999
----------- -----------
Raw materials $23,669,000 $23,633,000
Work-in-process 4,518,000 7,036,000
Finished goods 39,029,000 30,543,000
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$67,216,000 $61,212,000
=========== ===========
NOTE C -- CONTINGENCIES
As previously disclosed, the Company is party to actions filed in a federal
District Court in January 1995 and June 1996 in which a competitor alleges that
the Company's manufacture and sale in the United States of certain products
infringes four of the competitor's patents. In its response to these actions,
the Company has denied the allegations and has separately sought judgment that
the claims under the patents are invalid or unenforceable and that the Company
does not infringe upon the patents. The January 1995 and June 1996 actions have
been consolidated, and discovery is ongoing. The Court has granted the
Company's various motions for summary judgment and held that the Company does
not infringe any of the competitor's four patents at issue. The competitor may
seek an appeal of those decisions. In any event, the Company intends to
continue to pursue its claims that the competitor's patents are invalid or
unenforceable.
NOTE D -- RESTRUCTURING CHARGES
RECONCILIATION OF RESTRUCTURING RESERVES
Employee Lease Buyouts
Severance Asset & Other Direct Total
Costs Write-Downs Expenses Restructuring
---------- ----------- --------------- -------------
Balance at July 1, 1999 $ - $ - $ - $ -
Restructuring charges (net) 4,900,000 6,800,000 3,000,000 14,700,000
Cash expenditures (300,000) - (1,100,000) (1,400,000)
Noncash expenditures - (400,000) - (400,000)
---------- ---------- ----------- ------------
Balance at September 30, 1999 4,600,000 6,400,000 1,900,000 12,900,000
---------- ---------- ----------- ------------
Restructuring charges (net) 1,100,000 100,000 2,100,000 3,300,000
Cash expenditures (800,000) - (2,800,000) (3,600,000)
Noncash expenditures - (1,100,000) - (1,100,000)
---------- ---------- ----------- ------------
Balance at December 31, 1999 4,900,000 5,400,000 1,200,000 11,500,000
---------- ---------- ----------- ------------
Restructuring charges (net) - 700,000 3,500,000 4,200,000
Cash expenditures (1,600,000) - (4,100,000) (5,700,000)
Noncash expenditures - (100,000) - (100,000)
---------- ---------- ----------- ------------
Balance at March 31, 2000 $ 3,300,000 $ 6,000,000 $ 600,000 $ 9,900,000
========== ========== =========== ============
During the nine months ended March 31, 2000, the Company incurred a total of
$22,200,000 in charges related to a previously disclosed restructuring. The
primary components of these costs were severance and employment related costs
($6,000,000), asset write-downs to reflect decisions made regarding product,
facility, and systems rationalization ($7,600,000), and lease buyouts related to
facility rationalizations and other direct expenses of the restructuring
($8,600,000). Restructuring costs incurred but not yet paid have been credited
to accrued expense and asset write-downs have been credited against the
applicable asset accounts. The Company expects to incur and record additional
restructuring charges over the remainder of fiscal year 2000.
NOTE E - SPECIAL ITEMS
As previously disclosed, in February 2000, the parent company of one of the
Company's major customers filed a voluntary petition to reorganize under Chapter
11 of the U.S. Bankruptcy Code. The Company's customer was one of the entities
included in the filing. According to press releases issued in connection with
the filing and discussions with the customer, the election to seek court
protection was made in order to facilitate the restructuring of the parent
company's capital and lease obligations and normal business operations of
the Company's customer are continuing. The Company's total balance due from the
customer at the date of the filing was approximately $4,500,000. The Bankruptcy
Court has approved an order permitting the payment of certain pre-petition
claims of critical vendors. While discussions with the customer are continuing,
the Company did not receive definitive information on the customer's planned
payments of its pre-petition claims during the quarter ended March 31, 2000.
Because no such definitive information has been received, the Company has
recorded a $4,500,000 special increase to the Company's allowance for doubtful
accounts during the three months ended March 31, 2000.
NOTE F - INCOME TAXES
During February 2000, the Company reached an agreement with the Internal Revenue
Service regarding examinations of federal income tax returns for certain of the
Company's U.S. entities for fiscal years 1996 through 1998. Based on this
agreement, the Company recorded a one-time reduction in income tax liability and
income tax expense of $1,643,000 during the quarter ended March 31, 2000.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES REFORM ACT OF 1995.
The statements contained in this Quarterly Report on Form 10-Q,
specifically those contained in Item 2 "Management's Discussion and Analysis of
Financial Condition and Results of Operations", along with statements in other
reports filed with the Securities and Exchange Commission, external documents
and oral presentations which are not historical are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21B of the Securities and Exchange Act of 1934, as amended. These
forward-looking statements represent the Company's present expectations or
beliefs concerning future events. The Company cautions that such statements are
qualified by important factors that could cause actual results to differ
materially from those in the forward-looking statements. Results actually
achieved may differ materially from expected results included in these
statements. Those factors include, but are not limited to, the following:
foreign currency fluctuations, regulations and other factors affecting
operations and sales outside the United States including potential future
effects of the change in sovereignty of Hong Kong, customer consolidation and
concentration, increasing price competition and other competitive factors in the
sale of products, interest rate fluctuations, intellectual property and related
litigation, FDA and other government regulation, third party reimbursement,
restructuring activities, and anticipated cost savings.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Net sales for the quarter ended March 31, 2000 were $97,837,000
representing an 8% increase over the sales of $90,882,000 recorded for the
quarter ended March 31, 1999. Increases in unit and dollar sales for the
Company's sleep apnea therapy devices (the Company's largest product line) and
oxygen concentrator devices, as well as increases in the sales of masks and
other accessories, helped to drive the increase in sales for the quarter. These
product lines, along with ventilation devices and oxygen systems, comprise the
major part of the Company's homecare division established as part of the
July 1999
restructuring plan. Sales of the Company's hospital products also increased
during the current quarter, including unit and dollar increases for the
Company's BiPAP(R) Vision(TM) and Esprit(R) ventilators.
Partially offsetting this increase in sales was a decrease in domestic
sales, compared to prior year levels, of the Company's non-invasive ventilatory
support devices for use in the home. These sales decreases were caused by the
recently implemented revised government insurance coverage guidelines for the
home use of these products in the United States and the corresponding reduction
in purchases of these units by the Company's dealer customers.
Government policymakers issued a draft coverage policy for non-invasive
ventilation in July 1998 that was more restrictive than had been expected. The
Company, along with trade and medical associations, other device manufacturers,
and home care dealers, filed formal comments as permitted with the policy makers
indicating disagreement with the draft coverage policy. In May 1999, a revised
set of coverage guidelines was issued for implementation on October 1, 1999.
While several restrictive provisions of the July 1998 draft guidelines were
removed and potential changes in reimbursement categories were delayed, the
Company believed that these revised guidelines were still overly restrictive
relative to patient qualification and administratively burdensome for clinicians
and healthcare providers. As a result, the Company continued to work with the
government policy makers and Congress to resolve the remaining issues. Several
favorable modifications were made to the guidelines, and final guidelines
reflecting these modifications were implemented effective October 1, 1999. The
Company believes that these guidelines are still overly restrictive relative to
patient qualification and administratively burdensome and is continuing to work
with government policy makers on these issues. The uncertainty in the market
regarding these guidelines and their implementation was particularly significant
during fiscal year 2000 as the planned implementation date approached and
passed, and the Company's sales for these products were adversely affected.
The Company believes that while the guidelines as implemented are overly
restrictive, there is benefit to having certainty in the market regarding
coverage for these products and as a result there are opportunities for
increased unit sales of non-invasive ventilatory support products. However,
selling prices for such units may come under pressure and there may be mix
shifts to units with lower average selling prices because of certain patient
qualification tests that are required under the guidelines. The Company is
working closely with its dealer customers to develop strategies to reach the
appropriate patient population in the context of these new guidelines. Because
the guidelines have been in place for only six months, the Company cannot
predict with certainty the exact impact the new guidelines will have. For the
quarter ended March 31, 2000, sales of non-invasive ventilatory
support units for home use in the United States accounted for approximately two
percent of total sales.
Also affecting sales for the current quarter was a decrease in sales
compared to the quarter ended March 31, 1999 resulting from the impact of the
Company's May 1999 decision to change its method of distribution in Germany from
direct patient sales to sales through a distributor. As a result of this
change, sales decreased in the quarter to quarter comparison by approximately
$2,300,000 due to the foregone distributor margin. Excluding this foregone
distributor margin, sales in Germany increased 10% for the quarter. Reduced
operating expenses in Germany partially offset this foregone dealer margin.
For the nine-month period ending March 31, 2000, net sales of $270,139,000
increased 1% from $267,491,000 in the prior year period. The increases in sales
in sleep apnea therapy devices and oxygen concentrators discussed above offset
the lower sales of non-invasive ventilation devices and the foregone foreign
distributor margin (the foregone distributor margin was approximately $6,800,000
for the nine-month comparison). Also adversely impacting the current nine-month
period were temporary disruptions in the September 30, 1999 quarter caused by
the Company's restructuring plan which was first announced in July 1999,
particularly in the domestic hospital product area where a separate hospital
division was established and a new, dedicated sales force was put in place.
These disruptions were resolved during the quarter ended December 31, 1999.
The Company's gross profit, excluding the impact of restructuring charges,
was 47% of net sales for the quarter and nine months ended March 31, 2000
compared to 49% and 48% of net sales, respectively, for the quarter and nine
months ended March 31, 1999. This gross profit percentage decrease was due
primarily to foregone dealer margin described above, a shift in sales mix as
compared to the prior year and, to a lesser extent, increased costs related to
the Company's distribution and manufacturing restructuring efforts.
General and administrative expenses were $12,038,000 (12% of net sales) for
the quarter ended March 31, 2000 as compared to $10,844,000 (12% of net sales)
for the quarter ended March 31, 1999. For the nine months ended March 31, 2000,
general and administrative expenses were $33,989,000 (13% of net sales) as
compared to $31,929,000 (12% of net sales) for the nine months ended March 31,
1999. The increases in general and administrative expenses were due primarily to
an increase in information technology department expenses, including
depreciation expense on SAP hardware and software, and to additions to reserve
accounts. Partially offsetting these increases in expenses were lower operating
expenses due to the Company's restructuring efforts and decreased expenses in
Germany as a result of the Company's May 1999 decision to reduce its direct
sales operation in that country as discussed above.
During the three months ended March 31, 2000, a special increase to the
Company's allowance for doubtful accounts was recorded related to a previously
disclosed filing by one of the Company's major customers under Chapter 11 of the
U.S. Bankruptcy Code. This $4,500,000 charge was taken because definitive
information has not been received regarding the customer's planned payments on
the Company's pre-petition claims. The Company's total balance due from the
customer at the date of the Chapter 11 filing was approximately $4,500,000.
Sales, marketing and commission expenses were $15,984,000 (16% of net
sales) for the quarter ended March 31, 2000 as compared to $14,625,000 (16% of
net sales) for the quarter ended March 31, 1999. For the nine months ended
March 31, 2000, sales, marketing, and commission expenses were $46,328,000 (17%
of net sales) compared to $45,153,000 (17% of net sales) for the prior year
nine-month period. The increase in absolute dollars of expense for the current
quarter and the current nine-month period were due primarily to increased
expenses driven by increased sales and activity levels in the Company's homecare
and hospital product lines in the third quarter, partially offset by lower
operating expenses due to the Company's restructuring efforts and decreased
expenses in Germany as a result of the Company's May 1999 decision to
reduce its direct sales operation in that country as discussed above.
Research and development expenses were $4,437,000 (5% of net sales) for the
quarter ended March 31, 2000 as compared to $3,989,000 (4% of net sales) for the
quarter ended March 31, 1999. Research and development expenses for the nine
months ended March 31, 2000 were $12,764,000 (5% of net sales) compared to
$12,923,000 (5% of net sales) for the prior year period. The increase in
absolute dollars of expense for the current quarter was due primarily to the
timing of various research and development projects. Significant product
development efforts are ongoing; a variety of new products were introduced
during the current fiscal year, including the Profile(TM) Lite nasal mask, the
Respironics Simplicity(TM) nasal mask, the Harmony(R) ST Ventilator, and the
Encore(R) SmartCard(TM) with FOSQ (Functional Outcomes of Sleep Questionnaire).
New product launches in many of the Company's major product lines are scheduled
for the remainder of fiscal year 2000. Additional development work and clinical
trials are being conducted in certain product areas outside the Company's
current core products.
During the three months and nine months ended March 31, 2000, the Company
incurred charges of $4,200,000 and $22,200,000, respectively, related to a
previously disclosed restructuring. The primary components of these costs were
severance and employment related costs, asset write-downs to reflect decisions
made regarding product, facility, and systems rationalization, and lease buyouts
related to facility rationalizations and other direct expenses of the
restructuring. Approximately $5,100,000 of these charges relate to inventory
write-offs in connection with product rationalizations and have been reported as
a separate component of
cost of goods sold. The Company expects to incur and record additional
restructuring charges over the remainder of fiscal year 2000. See Note D to the
Consolidated Financial Statements for additional information about the
restructuring charges.
During the three months ended March 31, 2000, the Company reached an
agreement with the Internal Revenue Service regarding examinations of federal
income tax returns for certain of the Company's U.S. entities for fiscal years
1996 through 1998. Based on this agreement, the Company recorded a one-time
reduction in income tax liability and income tax expense of $1,643,000 during
the quarter ended March 31, 2000. Excluding this adjustment for the quarter and
nine months ended March 31, 2000, the Company's effective income tax rate was
40% for all periods presented.
As a result of the factors described above, the Company's net income was
$3,790,000 (4% of net sales) or $0.13 per diluted share for the quarter ended
March 31, 2000 as compared to net income of $8,261,000 (9% of net sales) or
$0.26 per diluted share for the quarter ended March 31, 1999. For the nine
months ended March 31, 2000, the Company's net income was $2,899,000 (1% of net
sales) or $0.10 per diluted share as compared to net income of $21,930,000 (8%
of net sales) or $0.68 per diluted share for the prior year period. Excluding
the impact of the restructuring charges, the special increase to the allowance
for doubtful accounts, and the one-time income tax liability adjustment
described above, the Company's net income for the quarter and nine months ended
March 31, 2000 was $7,386,000 (8% of net sales) or $0.25 per diluted share and
$17,298,000 (6% of net sales) or $0.58 per diluted share, respectively.
Earnings per share amounts for the quarters and nine months ended March 31,
2000 and 1999 reflect the impact of shares repurchased under the Company's stock
buyback program which is described below.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $151,739,000 at March 31, 2000 and
$155,336,000 at June 30, 1999. Net cash provided by operating activities was
$5,599,000 for the nine months ended March 31, 2000 as compared to $17,071,000
for the nine months ended March 31, 1999. The decrease in cash provided by
operating activities for the current nine-month period was primarily due to
lower earnings (including the cash portion of restructuring costs which totals
approximately $10,700,000), increases in inventory, and increases in other
assets resulting from technology investments. Partially offsetting these uses of
cash in the current period was a decrease in the growth of accounts receivable;
the prior year nine-month period included a significant increase in accounts
receivable.
Net cash used by investing activities was $21,393,000 for the nine months
ended March 31, 2000 as compared to $18,342,000 for the nine months ended March
31, 1999. Cash used by investing activities for both periods include capital
expenditures, including
the purchase of leasehold improvements, production equipment, computer hardware
and software, and telecommunications and office equipment. In addition, cash
used by investing activities in the current nine-month period includes
additional purchase price paid for a previously acquired business pursuant to
the terms of that acquisition agreement. The funding for investment activities
in both periods was provided by positive cash flow from operating activities,
accumulated cash and short-term investments, and borrowings under long-term
obligations.
Net cash provided by financing activities includes borrowings and
repayments under the Company's various long-term obligations, proceeds from the
issuance of common stock under the Company's stock option plans, and the
acquisition of treasury stock. The Company has been repurchasing shares of its
outstanding common stock since August 1998 pursuant to a series of Board of
Directors' actions that have authorized stock buy backs totaling 4,000,000
shares. During the nine months ended March 31, 2000 and 1999, the Company's buy
back activity resulted in uses of cash of $9,210,000 and $24,880,000,
respectively. Through April 30, 2000, a total of 3,864,000 shares have been
repurchased under these buybacks. Shares that are repurchased are added to
treasury shares pending future use and reduce the number of shares outstanding
used in calculating earnings per share.
In July 1999, the Company announced a major restructuring of its U.S.
operations that included facility closings and downsizings, a divisional and
management realignment, and an approximate ten percent workforce reduction
associated with those changes. Most of the restructuring activities have been
completed and restructuring charges totaling $22,200,000 were recorded during
the nine-month period ended March 31, 2000. See Note D to the Consolidated
Financial Statements for an analysis of this charge, including the reserve
balances relating to the charge that remain at March 31, 2000. The reserves
shown for employee severance, lease buyouts, and other direct expenses will
require corresponding cash expenditures in future periods. The Company expects
to incur additional restructuring charges (currently estimated in a range from
$2,000,000 to $4,000,000) over the remainder of the fiscal year ending June 30,
2000, the majority of which are expected to consist of cash expenditures. As
previously disclosed, annualized savings associated with the restructuring are
expected to be approximately $10,000,000. Savings, primarily as a result of
closing a manufacturing facility and 19 customer service centers, began to be
realized during the quarter ended March 31, 2000, with additional savings
expected during the remainder of the fiscal year ending June 30, 2000. These
cost savings are expected to positively impact cost of sales, general and
administrative expenses, and sales and marketing expenses, and will be offset to
some extent by planned increases in those expenses consistent with expected
increases in sales in future periods and the Company's continuing investment in
the business.
The Company believes that projected positive cash flow from operating
activities, the availability of additional funds under
its revolving credit facility (totaling approximately $19,810,000 at March 31,
2000), and its accumulated cash and short-term investments will be sufficient to
meet its current and presently anticipated future needs for the next 12 months
for operating activities (including restructuring), investing activities, and
financing activities (primarily consisting of payments on long term debt).
Year 2000
The Company completed its Year 2000 readiness plan during the quarter ended
December 31, 1999 and the program was in place at December 31, 1999. At that
time and during the months since then, no major compliance anomalies have
occurred. The transition from December 31, 1999 to Year 2000 went as expected,
and the Company's contingency plans related to third party product and service
providers were not utilized.
Total costs for the Company's Year 2000 compliance efforts approximated
$11,000,000 and were funded through the Company's operating cash flows. The
majority of these costs relate to the ERP system installations and upgrades and
have been capitalized and charged to expense over the estimated useful life of
the associated hardware and software. The remaining costs have been charged
directly to expense. The Company will continue to monitor for any anomalies
that may arise.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company is exposed to market risk from changes in interest rates and
foreign exchange rates.
Interest Rates: The Company's primary interest rate risk relates to its
long-term debt obligations. At March 31, 2000, the Company had total long-term
debt obligations, including the current portion of those obligations, of
$109,783,000. Of that amount, $3,483,000 was in fixed rate obligations and
$106,300,000 was in variable rate obligations. Assuming a 10% increase in
interest rates on the Company's variable rate obligations (i.e. an increase from
the March 31, 2000 weighted average interest rate of 6.64% to a weighted average
interest rate of 7.30%), annual interest expense would be approximately $706,000
higher based on the March 31, 2000 outstanding balance of variable rate
obligations. The Company has no interest rate swap or exchange agreements.
Foreign Exchange Rates: Information relating to the sensitivity to foreign
currency exchange rate changes is omitted because foreign exchange exposure risk
has not materially changed
from that disclosed in the Company's Annual Report on Form 10-K for the year
ended June 30, 1999.
PART 2 OTHER INFORMATION
Item 1: Legal Proceedings
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U.S. ResCare Litigation
In January 1995 ResCare (now ResMed Limited; hereinafter "ResCare"), filed
an action (the "California suit") against the Company in the United States
District Court for the Southern District of California alleging that in the
manufacture and sale in the U.S. of nasal masks and CPAP systems and components,
the Company infringes three U.S. patents, two of which are owned by and one of
which is licensed to ResCare (the "ResCare Patents"). The patents involved in
the California suit deal with basic CPAP, mask applications and a delay timer
feature of ResCare's CPAP devices. In the complaint, ResCare seeks preliminary
and permanent injunctive relief, an accounting for damages and an award of three
times actual damages because of the Company's alleged willful infringement of
the ResCare patents.
In its answers to ResCare's complaint, the Company denied, in all material
respects, the allegations of the complaint. The Company also filed an action in
the United States District Court for the Western District of Pennsylvania
against ResCare seeking declaratory judgments that the ResCare patents in issue
are either invalid or unenforceable or that the Company does not infringe the
patents.
Also as part of its response to the ResCare complaint, the Company filed a
motion in the United States District Court for the Southern District of
California seeking to transfer the California suit to the United States District
Court for the Western District of Pennsylvania and to consolidate the two suits.
The motion was granted and the cases have been consolidated in Pittsburgh,
Pennsylvania.
In June 1996 ResCare filed another action against the Company in the United
States District Court for the Western District of Pennsylvania alleging that in
the manufacture and sale in the U.S. of CPAP systems, the Company infringes a
fourth U.S. patent that had been recently issued to ResCare relating to the
delay timer technology component used in CPAP systems. In this additional
litigation, ResCare seeks similar damages as in the pre-existing patent suits.
This suit was consolidated, upon the Company's motion, with the pre-existing
patent suits described above and discovery is now proceeding on the consolidated
action. No trial date has been set.
The Court has granted the Company's various motions for summary judgement
and held that the Company does not infringe any of ResCare's four patents at
issue. ResCare may seek an appeal of those decisions. In any event, the
Company intends to continue to pursue its claims that the ResCare patents are
invalid or unenforceable.
Item 2: Change in Securities
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(a) Not applicable
(b) Not applicable
(c) Not applicable
Item 3: Defaults Upon Senior Securities
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(a) Not applicable
(b) Not applicable
Item 4: Submission of Matters to a Vote of Security Holders
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Not applicable.
Item 5: Other Information
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Not applicable
Item 6: Exhibits and Reports on Form 8-K
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(a) Exhibits
Exhibit 10.40 Employment Agreement, made as of October 1, 1999, by and
between the Company and James W. Liken filed as Exhibit 10.40 to this Form
10-Q for the quarter ended March 31, 2000.
(b) Reports on Form 8-K
Not applicable
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RESPIRONICS, INC.
Date: May 15, 2000 /s/ Daniel J. Bevevino
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Daniel J. Bevevino
Vice President, and Chief
Financial and Principal
Accounting Officer
Signing on behalf of the
registrant and as Chief
Financial and Principal
Accounting Officer