UNITED STATES
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
Exchange Act of 1934 for the quarterly period ended September 30,1997
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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 Boulevard
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 .
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As of October 31, 1997, there were 19,796,216 shares of Common Stock of the
registrant outstanding.
INDEX
RESPIRONICS, INC.
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited).
Consolidated balance sheets -- September 30, 1997 and June 30, 1997.
Consolidated statements of operations -- Three months ended September
30, 1997 and 1996.
Consolidated statements of cash flows-- Three months ended September
30, 1997 and 1996.
Notes to consolidated financial statements -- September 30, 1997.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
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
September 30 June 30
1997 1997
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ASSETS
CURRENT ASSETS
Cash and short-term investments $ 20,347,212 $ 15,706,657
Trade accounts receivable, less
allowance for doubtful accounts
of $3,966,000 and $3,466,000 38,948,602 37,138,383
Inventories 31,776,539 33,699,256
Prepaid expenses and other 3,562,976 3,549,850
Deferred income tax benefits 5,008,897 5,008,897
------------ ------------
TOTAL CURRENT ASSETS 99,644,226 95,103,043
PROPERTY, PLANT AND EQUIPMENT
Land 3,328,170 3,327,775
Building 13,099,528 12,936,177
Machinery and equipment 22,473,598 19,853,845
Furniture and office equipment 19,770,530 17,059,117
Leasehold improvements 1,237,955 1,236,327
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59,909,781 54,413,241
Less allowances for depreciation
and amortization 26,378,049 23,705,759
------------ ------------
33,531,732 30,707,482
Funds held in trust for
construction of new facility 1,776,761 1,754,452
OTHER ASSETS 3,741,260 3,837,491
COST IN EXCESS OF NET ASSETS OF
BUSINESS ACQUIRED 52,618,925 52,829,458
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$191,312,904 $184,231,926
============ ============
See notes to consolidated financial statements.
September 30 June 30
1997 1997
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 6,670,090 $ 6,425,853
Accrued compensation and related expenses 4,463,496 5,626,830
Accrued expenses 6,440,161 6,898,486
Income taxes 7,358,869 4,410,825
Current portion of long-term obligations 663,156 703,211
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TOTAL CURRENT LIABILITIES 25,595,772 24,065,205
LONG-TERM OBLIGATIONS 17,869,474 17,984,933
MINORITY INTEREST 604,072 604,072
COMMITMENTS
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized
100,000,000 shares; issued and outstanding
19,782,090 shares at September 30, 1997 and
19,763,057 shares at June 30, 1997 197,821 197,631
Additional capital 68,613,096 68,351,143
Cumulative effect of foreign currency
translations (998,150) (689,813)
Retained earnings 80,102,367 74,601,203
Treasury stock (671,548) (882,448)
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TOTAL SHAREHOLDERS' EQUITY 147,243,586 141,577,716
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$191,312,904 $184,231,926
============ ============
See notes to consolidated financial statements.
4.2
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
Three months ended
September 30
1997 1996
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Net sales $51,917,509 $34,112,412
Cost of goods sold 23,516,840 15,043,248
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28,400,669 19,069,164
General and administrative expenses 6,517,743 4,622,102
Sales, marketing and commission expense 9,871,269 5,573,688
Research and development expense 2,934,648 2,492,293
Interest expense 242,724 47,480
Other income (334,323) (967,180)
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19,232,061 11,768,383
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INCOME BEFORE INCOME TAXES 9,168,608 7,300,781
Income taxes 3,667,443 2,847,305
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NET INCOME $ 5,501,165 $ 4,453,476
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Earnings per share $ 0.27 $ 0.22
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Weighted Average Number of Shares
Used in Computing Earnings Per Share 20,485,272 20,208,009
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
Three months ended
September 30
1997 1996
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OPERATING ACTIVITIES
Net income $ 5,501,164 $ 4,453,476
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,382,823 964,778
Provision for losses on accounts receivable -0- 50,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts
receivable (2,310,319) 2,229,142
Decrease (increase) in inventories and
prepaid expenses 1,909,691 (2,242,649)
Decrease in other assets 96,231 114,187
(Decrease) increase in accounts payable (64,100) 741,942
Decrease in accrued compensation
and related expenses (1,163,334) (544,526)
Decrease in accrued expenses (458,325) (146,172)
Increase in accrued income taxes 2,948,044 1,556,156
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NET CASH PROVIDED BY
OPERATING ACTIVITIES 9,841,875 7,176,334
INVESTING ACTIVITIES
Purchase of property, plant and equipment (5,496,540) (1,117,894)
Increase in funds held in trust for construction
of new facility (22,309) (8,457)
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NET CASH USED BY
INVESTING ACTIVITIES (5,518,849) (1,126,351)
FINANCING ACTIVITIES
Reduction in long-term obligations (155,514) (97,679)
Issuance of common stock 262,143 45,576
Utilization of treasury stock 210,900 -0-
Decrease in minority interest -0- (245,987)
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NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 317,529 (298,090)
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INCREASE IN CASH AND
SHORT-TERM INVESTMENTS 4,640,555 5,751,893
Cash and short-term investments at beginning of period 15,706,657 65,255,699
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CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 20,347,212 $ 71,007,592
============ ============
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
SEPTEMBER 30, 1997
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 months ended September 30, 1997
are not necessarily indicative of the results that may be expected for the year
ended June 30, 1998. 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, 1997.
NOTE B -- INVENTORIES
The composition of inventory is as follows:
September 30 June 30
1997 1997
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Raw materials $ 12,152,812 $ 14,827,760
Work-in-process 2,688,027 2,291,043
Finished goods 16,935,700 16,580,453
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$ 31,776,539 $ 33,699,256
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NOTE C -- CONTINGENCIES
As previously disclosed, the Company is a party to actions filed in a federal
District Court in January 1995 and June 1996 in which a competitor alleges that
the Company's sale in the United States of certain products infringes a total of
four of the competitor's patents. In its response to these actions, the Company
has denied the allegations and has separately sought judgment that the claims
under the patents are invalid or unenforceable and that the Company does not
infringe upon the patents. In June 1997, the Court granted the Company's
motion for summary judgement that the Company does not infringe one of the
competitor's patents. In addition, the January 1995 and June 1996 actions have
been consolidated, and discovery is currently underway. The Company believes
that none of its products infringe any of the patents in question in the event
that any one or more of such patents should be held to be valid, and it intends
to vigorously defend this position.
NOTE D -- ACQUISITIONS
As previously disclosed, the Company acquired LIFECARE International, Inc.
(since renamed Respironics Colorado, Inc.) on October 21, 1996 and Stimotron
Medizinische Gerate GmbH on February 26, 1997. Both transactions were treated as
purchases for financial accounting purposes, and accordingly the Company's
results of operations include the results of operations of Respironics Colorado,
Inc. and Stimotron since their acquisition dates. The results of operations of
both entities are therefore included in the Company's results of operations for
the three months ended September 30, 1997 but are not included in the Company's
results of operations for the three months ended September 30, 1996.
The following unaudited pro forma summary presents the Company's results of
operations as if the acquisitions had occurred at the beginning of the period
indicated and does not purport to be indicative of what would have occurred had
the acquisitions been made as of that date or of results which may occur in the
future.
Three months ended
September 30, 1996
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Pro Forma Sales $46,726,383
Pro Forma Net Income $ 4,610,534
Pro Forma Net Income per Share $ 0.23
NOTE E -- SUBSEQUENT EVENT
On November 11, 1997, the Company announced that it had entered into a
definitive agreement to merge with Healthdyne Technologies, Inc. ("Healthdyne").
Under the terms of the agreement, the Company will issue a number of shares of
its common stock determined by multiplying $24.00 by the number of outstanding
shares of Healthdyne (resulting in a transaction value of approximately
$336,000,000) and dividing by the Company's then current share price within a
collar of $26.03 to $31.03. The transaction is expected to be accounted for as a
pooling of interests and is subject to approval by the shareholders of both
companies, regulatory approval, and customary closing conditions. Healthdyne is
a publicly held company headquartered in Marietta, Georgia and is a leading
designer, manufacturer and marketer of technologically advanced medical devices
for use in the home, hospital, and alternate clinical settings. Its sales for
the twelve months ending September 30, 1997 were $146,000,000. The Company
expects to incur one time charges and related adjustments of between $25,000,000
and $30,000,000 in connection with the transaction, representing transaction
costs and other one time charges. The transaction is expected to close in the
first quarter of calendar year 1998.
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 Results of
Operations and Financial Condition", 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, which were discussed in detail in the Company's
Annual Report on Form 10-K for the year ended June 30, 1997, include the
following: foreign currency fluctuations, regulations and other factors
affecting operations and sales outside the United States including potential
future effects of the change in sovereignty of Hong Kong, customer consolidation
and concentration, increasing price competition and other competitive factors in
the sale of products, intellectual property and related litigation, FDA and
other government regulation, and third party reimbursement.
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
RESULTS OF OPERATIONS
Net sales for the quarter ended September 30, 1997 were $51,918,000 representing
a 52% increase over the $34,112,000 recorded for the quarter ended September 30,
1996. Sales for the current quarter included approximately $9,411,000,
generated by Respironics Colorado, Inc. which was acquired by the Company on
October 21, 1996 (prior to its acquisition by the Company, Respironics Colorado,
Inc. was named LIFECARE International, Inc.). Sales for the current quarter
also include $4,418,000, generated by Stimotron Medizinische Gerate GmbH
("Stimotron") which was acquired on February 26, 1997. Both acquisitions were
treated as purchases for financial accounting purposes, and accordingly the
Company's results of operations for the quarter ended September 30, 1997 include
the results of operations of Respironics Colorado, Inc. and Stimotron, while
results of operations for the quarter ended September 30, 1996 do not.
Excluding the impact of these acquisitions, sales grew by 18% in the quarter to
quarter comparison. This increase was attributable primarily to increases in
unit and dollar sales for the Company's ventilation, face mask, and obstructive
sleep apnea therapy products.
The Company's gross profit was 55% of net sales for the quarter ended September
30, 1997 as compared to 56% for the quarter ended September 30, 1996 . This
decrease in gross margin percentage was primarily caused by reduced average
selling prices for certain of the Company's products. These reductions in
average selling price, which had been expected, resulted from increasing
competition in the Company's primary product lines, particularly in OSA,
relative to the Company's large, national customers who received lower prices.
In addition, during the current quarter, manufacturing support costs increased
at a rate slightly higher than the overall rate of sales growth.
General and administrative expenses were $6,518,000 (13% of net sales) for the
quarter ended September 30, 1997 as compared to $4,622,000 (14% of net sales)
for the quarter ended September 30, 1996. The increase in absolute dollars was
due primarily to the addition of expenses incurred by the Company's new
subsidiaries, Respironics Colorado, Inc. and Stimotron. In addition,
amortization of the goodwill generated by the acquisitions of these companies is
included in general and administrative expenses for the quarter ended September
30, 1997.
Sales, marketing and commission expenses were $9,871,000 (19% of net sales) for
the quarter ended September 30, 1997 as compared to $5,574,000 (16% of net
sales) for the quarter ended September 30, 1996. The increase in these
expenses was due primarily to the addition of expenses incurred by Respironics
Colorado, Inc. and Stimotron for the quarter ended September 30, 1997.
Respironics Colorado, Inc. has a network of 19 fully staffed customer
satisfaction centers throughout the United States, a portion of the costs of
which are included in sales, marketing and commissions. In addition, because
Stimotron serves as the Company's exclusive distributor in Germany, most of its
operating expenses are included in sales, marketing, and commissions.
Research and development expenses were $2,935,000 (6% of net sales) for the
quarter ended September 30, 1997 as compared to $2,492,000 (7% of net sales) for
the quarter ended September 30, 1996. This increase in absolute dollars
reflects the new product development efforts conducted during the quarter to
support product introductions in the Company's major product groups, including
the next generation of products in the Great Performers family and the BiPAP
Harmony Home Ventilatory Support System. In some cases, initial distribution
has been, and will be, conducted in international markets until regulatory
clearance to market in the U.S. is obtained.
The Company's effective income tax rate was 40% for the quarter ended September
30, 1997 as compared to 39% for the quarter ended September 30, 1996. 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 and European operations versus taxable income attributable to its Far
East operations because the United States and European operations pay income
taxes at a higher rate (approximately 41%
before available income tax credits) than do the Far East operations. For the
quarterly comparison, the proportion of taxable income attributable to the
United States and European operations increased, due in part to taxable income
generated by the Company's new subsidiaries, Respironics Colorado, Inc. and
Stimotron. In addition, the amortization of the goodwill generated by the
acquisitions is not a tax deductible expense, and therefore also contributed to
the increased effective income tax rate.
As a result of the factors described above, the Company's net income was
$5,501,000 (11% of net sales) or $0.27 per share for the quarter ended September
30, 1997 as compared to $4,453,000 (13% of net sales) or $0.22 per share for
the quarter ended September 30, 1996.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $74,048,000 at September 30, 1997 and
$71,038,000 at June 30, 1997. Net cash provided by operating activities was
$9,842,000 for the quarter ended September 30, 1997 as compared to $7,176,000
for the quarter ended September 30, 1996. The increase in net cash provided
by operating activities for the current quarter was due primarily to higher
earnings, a decrease in inventory, and an increase in accrued income taxes.
Net cash used by investing activities was $5,519,000 for the quarter ended
September 30, 1997 as compared to $1,126,000 for the quarter ended September 30,
1996. The majority 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 the investment activities in the current and prior quarter was
provided by positive cash flows from operating activities.
In October 1996, the Company announced that its status with Apria Healthcare
("Apria") had changed from "primary supplier" to sole "secondary supplier"
effective in November 1996. This change adversely affected sales levels for the
three month period ended September 30, 1997. Subsequent to the Company's
change in status, it has focused on demonstrating to Apria superior effort and
added value service surrounding its product offerings. In spite of these
efforts, sales to Apria during the current quarter decreased from prior year's
levels. While the Company cannot predict with certainty what actions Apria will
ultimately take relative to future supplier selection (especially in light of
Apria's announced intentions to review restructuring alternatives, including a
possible merger or sale), the Company has been requested to submit a proposal to
Apria for a one year supply agreement covering calendar year 1998. The Company
plans to submit its proposal with the goal of maximizing its share of Apria's
business, but there can be no assurance as to the outcome of the proposal
process.
On November 11, 1997, the Company announced that it had entered into a
definitive agreement to merge with Healthdyne Technologies, Inc. ("Healthdyne").
Under the terms of the agreement, the Company will issue a number of shares of
its common stock determined by multiplying $24.00 by the number of outstanding
shares of Healthdyne (resulting in a transaction value of approximately
$336,000,000) and dividing by the Company's then current share price within a
collar of $26.03 to $31.03. The transaction is expected to be accounted for as a
pooling of interests and is subject to approval by the shareholders of both
companies, regulatory approval, and customary closing conditions. Healthdyne is
a publicly held company headquartered in Marietta, Georgia and is a leading
designer, manufacturer and marketer of technologically advanced medical devices
for use in the home, hospital, and alternate clinical settings. Its sales for
the twelve months ending September 30, 1997 were $146,000,000. The Company
expects to incur one time charges and related adjustments of between $25,000,000
and $30,000,000 in connection with the transaction, representing transaction
costs and other one time charges. The cash portion of these charges is expected
to be approximately $16,000,00. The transaction is expected to close in the
first quarter of calendar year 1998.
The Company believes that positive cash flow from operating activities projected
for the remainder of the fiscal year, the availability of the full amount of
funds under its commercial bank line of credit, commercial bank financing
committed for the additional consideration that may be due for the Stimotron
acquisition, and its accumulated cash and short-term investments will be
sufficient to meet its current and presently anticipated future needs for the
remainder of fiscal year 1998 for operating activities, investing activities,
and financing activities (primarily consisting of payments on long-term debt ).
The Company has not yet determined whether financing will be required for the
cash portion of the one time charges described above, but expects to be able to
obtain such financing if necessary.
PART 2 OTHER INFORMATION
Item 1: Legal Proceedings
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On November 13, 1997, the Company announced that a federal judge had granted the
Company's motion for preliminary injunction in its previously disclosed patent
infringement suit filed in the United States District Court for the Western
District of Pennsylvania against AirSep Corporation of Buffalo, New York. The
decision prevents AirSep from manufacturing, distributing and offering for sale
AirSep's Remedy device or any other device using Respironics' patented bi-level
airway pressure technology, including bi-level devices for the treatment of
obstructive sleep apnea. AirSep can appeal the judge's decision.
Item 2: Change in Securities
- ------- --------------------
(a) Not applicable
(b) Not applicable
(c) Not applicable
Item 3: Defaults Upon Senior Securities
- ------- -------------------------------
(a) Not applicable
(b) Not applicable
Item 4: Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
(a) Not applicable
(b) Not applicable
(c) Not applicable
(d) Not applicable
Item 5: Other Information
- ------- -----------------
See Management's Discussion and Analysis above concerning the Company's proposed
merger with Healthdyne which was announced on November 11, 1997. Also see
Exhibit 10.17 filed herewith which contains the terms and conditions of the
merger.
Item 6: Exhibits and Reports on Form 8-K
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(a) Exhibits
Exhibit 10.17 - Agreement and Plan of Reorganization By and Among Respironics,
Inc., RIGA, Inc., and Healthdyne Technologies, Inc. Dated as of November 10,
1997.
(b) Reports on Form 8-K
A Form 8-K was filed on September 4, 1997 to report that Dr. Bruce D. Ward,
Vice President New Product Development Process, and Eugene A. Rindels, Chief
Information Officer joined the Company on September 2, 1997.
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: November 14, 1997 /s/ Daniel J. Bevevino
----------------------- ---------------------------------
Daniel J. Bevevino
Vice President, and Chief
Financial and Principal Accounting
Officer
Signing on behalf of the registrant
and as Chief Financial and
Accounting Officer