-----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, HnVCSzuH1kCqFyeH93TW4OB0PlYNnVH1CIkeuO+yYvbvWmNqqekvx/IOPkzKp3Zs FJtaDYGRppTm9aYzjFZa0g== 0000950109-99-004129.txt : 19991117 0000950109-99-004129.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950109-99-004129 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-16723 FILM NUMBER: 99756331 BUSINESS ADDRESS: STREET 1: 1501 ARDMORE BOULEVARD CITY: PITTSBURGH STATE: PA ZIP: 15221-4401 BUSINESS PHONE: 4127312100 MAIL ADDRESS: STREET 1: 1501 ARDMORE BOULEVARD CITY: PITTSBURGH STATE: PA ZIP: 15221-4401 10-Q 1 FORM 10-Q 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, 1999 ------------------ or ___ Transition Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to --------- ----------- Commission File No. 000-16723 RESPIRONICS, INC. (Exact name of registrant as specified in its charter) Delaware 25-1304989 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 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 October 31, 1999, there were 33,005,883 shares of Common Stock of the registrant outstanding, of which 3,185,683 were held in treasury. INDEX RESPIRONICS, INC. PART I - FINANCIAL INFORMATION - ------------------------------ Item 1. Financial Statements (Unaudited). Consolidated balance sheets -- September 30, 1999 and June 30, 1999. Consolidated statements of operations -- Three months ended September 30, 1999 and 1998. Consolidated statements of cash flows-- Three months ended September 30, 1999 and 1998. Notes to consolidated financial statements -- September 30, 1999. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. PART II - OTHER INFORMATION - --------------------------- 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 - ---------- CONSOLIDATED BALANCE SHEETS (UNAUDITED) RESPIRONICS, INC. AND SUBSIDIARIES
September 30 June 30 1999 1999 --------------------------------------------- ASSETS CURRENT ASSETS Cash and short-term investments $ 18,419,285 $ 23,651,401 Trade accounts receivable, less allowance for 96,254,285 99,253,207 doubtful accounts of $13,718,000 and $13,919,000 Inventories 60,072,356 61,212,368 Prepaid expenses and other 6,944,842 6,328,742 Deferred income tax benefits 11,407,404 11,407,404 --------------- ---------------- TOTAL CURRENT ASSETS 193,098,172 201,853,122 PROPERTY, PLANT AND EQUIPMENT Land 3,061,203 3,342,017 Building 11,727,405 12,687,961 Machinery and equipment 57,420,657 64,603,276 Furniture, office and computer equipment 40,714,572 37,719,450 Leasehold improvements 2,313,611 1,249,044 --------------- ---------------- 115,237,448 119,601,748 Less allowances for depreciation and amortization 52,381,231 58,371,315 --------------- ---------------- 62,856,217 61,230,433 Funds held in trust for construction of new facility 861,139 852,631 OTHER ASSETS 11,625,181 11,822,484 GOODWILL 65,600,277 65,420,031 --------------- ---------------- $ 334,040,986 $ 341,178,701 ============== =============
See notes to consolidated financial statements.
September 30 June 30 1999 1999 ----------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 23,180,729 $ 26,787,172 Accrued expenses and other 21,447,654 18,762,481 Current portion of long-term obligations 1,246,333 967,387 --------------- --------------- TOTAL CURRENT LIABILITIES 45,874,716 46,517,040 LONG-TERM OBLIGATIONS 99,654,288 99,374,180 MINORITY INTEREST 0 766,035 COMMITMENTS SHAREHOLDERS' EQUITY Common Stock, $.01 par value; authorized 100,000,000 shares; issued and outstanding 33,005,883 shares at September 30, 1999 and 32,999,283 shares at June 30, 1999 330,059 329,993 Additional capital 108,905,075 108,863,191 Accumulated other comprehensive loss (1,395,874) (1,231,013) Retained earnings 116,153,585 120,709,953 Treasury stock (35,480,863) (34,150,678) --------------- --------------- TOTAL SHAREHOLDERS' EQUITY 188,511,982 194,521,446 --------------- --------------- $334,040,986 $341,178,701 =============== ===============
See notes to consolidated financial statements. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) RESPIRONICS, INC. AND SUBSIDIARIES
Three months ended September 30 1999 1998 ---------------------------------------------------- Sales $ 80,599,327 $ 86,411,576 Cost of Sales 43,436,198 44,765,995 Cost of Sales - Restructuring 4,576,352 - ------------------- -------------------- Gross Margin 32,586,777 41,645,581 General and Administrative Expenses 10,156,392 10,651,109 Sales, Marketing, and Commission Expenses 14,681,396 14,994,078 Research and Development Expenses 4,325,772 4,553,781 Restructuring Charges 10,102,426 - Interest Expense 1,425,615 1,118,182 Other Income (514,259) (186,924) ------------------- -------------------- 40,177,342 31,130,226 ------------------- -------------------- (Loss) Income Before Income Taxes (7,590,565) 10,515,355 Income Taxes (3,036,226) 4,206,142 ------------------- -------------------- Net (Loss) Income $ (4,554,339) $ 6,309,213 =================== ==================== Basic Shares Outstanding 30,261,516 32,412,848 Basic (Loss) Earnings Per Share $ (0.15) $ 0.19 =================== ==================== Diluted Shares Outstanding 30,261,516 32,845,029 Diluted (Loss) Earnings Per Share $ (0.15) $ 0.19 =================== ====================
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) RESPIRONICS, INC. AND SUBSIDIARIES
Three Months Ended September 30 1999 1998 ---------------------------------------------- OPERATING ACTIVITIES Net (loss) income $ (4,554,339) $ 6,309,213 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 6,751,065 4,519,804 Asset write offs 6,755,563 -0- Changes in operating assets and liabilities: Decrease (increase) in accounts receivable 2,998,922 (9,475,074) (Increase) decrease in inventories (3,841,421) 201,409 Change in other operating assets and liabilities (3,781,574) 875,199 -------------- --------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 4,328,216 2,430,551 INVESTING ACTIVITIES Purchase of property, plant and equipment (6,977,678) (4,509,595) Additional purchase price for acquired business (1,085,407) -0- -------------- --------------- NET CASH USED BY INVESTING ACTIVITIES (8,063,085) (4,509,595) FINANCING ACTIVITIES Net increase in borrowings 559,053 13,422,993 Issuance of common stock 39,921 213,398 Acquisition of treasury stock (1,330,185) (8,391,535) Decrease in minority interest (766,035) (19,119) -------------- --------------- NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (1,497,246) 5,225,737 -------------- --------------- (DECREASE) INCREASE IN CASH AND SHORT-TERM INVESTMENTS (5,232,115) 3,146,693 Cash and short-term investments at beginning of period 23,651,401 14,874,753 -------------- --------------- CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 18,419,286 $ 18,021,446 ============== ===============
See notes to consolidated financial statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) RESPIRONICS, INC. AND SUBSIDIARIES September 30, 1999 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, 1999 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:
September 30 June 30 1999 1999 ------------ ----------- Raw materials $19,839,405 $23,633,517 Work-in-process 7,844,961 7,036,132 Finished goods 32,387,990 30,542,719 ----------- ----------- $60,072,356 $61,212,368 =========== ===========
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 currently underway. The Court had previously granted the Company's motion for summary judgment that the Company does not infringe two of the competitor's patents. On September 30, 1999 the Court granted the Company's motion for summary judgment that the Company does not infringe a third patent. 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 -- RESTRUCTURING CHARGES During the quarter ended September 30, 1999, the Company incurred a total of $14,700,000 in charges related to a previously disclosed restructuring. The primary components of these costs were severance and employment related costs ($4,900,000), asset write downs to reflect decisions made regarding product, facility, and systems rationalization ($6,800,000), and lease buyouts related to facility rationalizations and other direct expenses of the restructuring ($3,000,000). 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. 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 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, and third party reimbursement. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Net sales for the quarter ended September 30, 1999 were $80,599,000 representing a 7% decrease over the $86,412,000 recorded for the quarter ended September 30, 1998. The Company's sales levels in the quarter ending September 30, 1999 were adversely impacted by disruptions caused by the restructuring plan which was first announced in July 1999, particularly in the domestic hospital product area where a new, dedicated sales force was put in place as part of the restructuring and the corresponding establishment of a separate hospital division. In spite of these disruptions, unit and dollar sales for the Company's sleep apnea therapy devices (the Company's largest product line) and oxygen concentrator devices increased over prior year totals. These product lines, along with non-invasive ventilation devices discussed below, comprise the major part of the Company's homecare division, which was also established as part of the restructuring. Another component of the decrease in sales for the current quarter as compared to prior year totals was 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 $2,000,000 as a result of foregone distributor margin. Reduced operating expenses in Germany largely offset this dealer margin, and for fiscal year 2000 the Company expects that the change in German distribution will be accretive to earnings. Finally, another component of the overall sales decrease was a decrease in sales of the Company's non-invasive ventilatory support products for use in the home compared to prior year levels. These sales decreases were caused by continuing uncertainty in the market concerning 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 pending resolution of the coverage guidelines. Government policymakers issued a draft coverage policy 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 were 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 was particularly significant during the quarter ended September 30, 1999 as the planned implementation date approached, and the Company's sales for these products were adversely affected, especially as compared to the quarter ended September 30, 1998 when sales of these products were at their highest level since the uncertainty regarding the coverage guidelines began. 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 a short period of time, the Company cannot predict with certainty the exact impact the new guidelines will have. For the quarter ended September 30, 1999, sales of non-invasive ventilatory support units for home use in the United States accounted for approximately five percent of total sales. The Company's gross profit, excluding the impact of restructuring charges, was 46% of net sales for the quarter ended September 30, 1999 compared to 48% of net sales for the quarter ended September 30, 1998. This gross profit percentage decrease was due primarily to a reduction in total sales, the foregone distributor margin in Germany as discussed above, and a shift in sales mix as compared to the prior year. General and administrative expenses were $10,156,000 (13% of net sales) for the quarter ended September 30, 1999 as compared to $10,651,000 (12% of net sales) for the quarter ended September 30, 1998. The decrease in absolute dollars of expense was due primarily to the impact of controlling expenses in response to reductions in overall sales levels and to lower operating 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. Sales, marketing and commission expenses were $14,681,000 (18% of net sales) for the quarter ended September 30, 1999 as compared to $14,994,000 (17% of net sales) for the quarter ended September 30, 1998. The decrease in absolute dollars of expense was due primarily to lower operating 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 $4,326,000 (5% of net sales) for the quarter ended September 30, 1999 as compared to $4,554,000 (5% of net sales) for the quarter ended September 30, 1998. The decrease in absolute dollars of expense was due primarily to the timing of various research and development projects. Significant product development efforts are ongoing; several new products were introduced during the quarter ended September 30, 1999, including the Profile Lite nasal mask, and new product launches in many of the Company's major product lines are scheduled for 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 quarter ended September 30, 1999, the Company incurred a total of $14,700,000 in charges 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 $4,600,000 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. The Company's effective income tax rate was 40% for the quarters ended September 30, 1999 and 1998. As a result of the factors described above, the Company's net loss was ($4,554,000) (6% of net sales) or $(0.15) per diluted share for the quarter ended September 30, 1999 as compared to net income of $6,309,000 (7% of net sales) or $0.19 per diluted share for the quarter ended September 30, 1998. Excluding the impact of the restructuring charges, the Company's net income was $4,253,000 (5% of net sales) or $0.14 per diluted share for the quarter ended September 30, 1999. Earnings per share amounts for the quarters ended September 30, 1999 and 1998 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 $147,223,000 at September 30, 1999 and $155,336,000 at June 30, 1999. Net cash provided by operating activities was $4,328,000 for the three months ended September 30, 1999 as compared to net cash provided by operating activities of $2,431,000 for the three months ended September 30, 1998. The increase in cash provided by operating activities for the current quarter was primarily due to a decrease in accounts receivable during the current quarter as compared to a significant increase in accounts receivable in last year's first quarter. Net cash used by investing activities was $8,063,000 for the three months ended September 30, 1999 as compared to $4,510,000 for the three months ended September 30, 1998. 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 quarter 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 quarters ended September 30, 1999 and 1998, the Company's buy back activity resulted in uses of cash of $1,330,000 and $8,392,000, respectively. Through October 31, 1999, a total of 3,186,000 shares have been repurchased under the program. 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. The Company believes that projected positive cash flow from operating activities, the availability of additional funds under its revolving credit facility, and its accumulated cash and short-term investments will be sufficient to meet its current and presently anticipated future needs for fiscal year 2000 for operating activities, investing activities, and financing activities (primarily consisting of payments on long term debt). Year 2000 Year 2000 State of Readiness The Company began its Year 2000 readiness plan in 1998 and is currently working towards completion. The Company has a program in place to systematically review and evaluate its systems, products, and processes for Year 2000 compliance. The Company's Year 2000 readiness plan covers business management, financial and accounting systems and processes, suppliers, vendors and procurement processes, products and services, including the customer satisfaction processes, and production, material movement and distribution systems and processes. A full time Program Management Office ("PMO") team is responsible for the project management and coordination of the Company's Year 2000 efforts, with assistance as needed by the services of a Year 2000 consulting firm and with oversight by an Executive Steering Committee. Year 2000 readiness reviews of the Company's core information technology systems are being addressed. Year 2000 compliance of the Company's core business information systems and technology have been largely addressed with the implementation of Year 2000 compliant enterprise-wide resource planning ("ERP") software at each of the Company's major locations. The Company's telecommunication systems have been inventoried, tested, and determined to meet Year 2000 readiness certification. In addition, other network and desktop systems are presently being tested and remediated according to plan, with critical systems targeted for November 1999 completion/certification. A technical review of the Company's current and discontinued product lines addressing Year 2000 issues has been completed. Three products were identified as having minor compliance anomalies and solutions in the form of upgrades and users manual inserts are available to customers. A strategy has been implemented for systematically responding to customer inquiries about the Company's product compliance status. The Year 2000 product review also covers products that are currently in research and development or are near launch. Based on this review, no additional issues were noted, and the Company's investments in research and development (including acquired technology rights) do not appear to be affected. The Company's infrastructure, facilities, and embedded systems have been inventoried and compliance status evaluation of critical items is nearing completion. Vendors of embedded software products have been contacted with the compliance status of their specific products identified and, where applicable, remediation or contingency plans are being put into place. No non-compliance issues have been identified related to these items, and, where applicable and cost-beneficial, remediation solutions include compliant upgrades. The Company's suppliers, service providers and dealer customers have been contacted and queried about their Year 2000 readiness. Readiness status of critical suppliers and service providers is nearing completion. Year 2000 Costs Total costs for the Company's Year 2000 compliance efforts are currently estimated to be approximately $11,000,000. The majority of these costs relate to the ERP system installations and upgrades and have been, and will be, capitalized and charged to expense over the estimated useful life of the associated software and hardware. The remaining costs have been, and will continue to be, charged directly to expense. Additional costs could be incurred if significant remediation activities are required with third party suppliers (see below). Costs associated with Year 2000 compliance are funded through the Company's operating cash flows. Risks and Contingency Plans Based on the Year 2000 compliance work conducted to date and described above, the Company's most significant risk, and its reasonably likely worst case scenario relative to Year 2000 compliance, appears to be that upon completion of its review of its third party product and service providers' Year 2000 compliance, it determines that certain of its third party product and service suppliers may not be Year 2000 compliant. If such product and service suppliers in fact do not become Year 2000 compliant in a timely manner and these suppliers cannot provide the Company with products and services in a timely and cost effective manner, future operating results could be adversely affected. The Company believes that the vendor management process that is currently in place will identify these potential risks. Site-level contingency plans are currently being put into place. The contingency planning scope of work focuses on the Company's highest risks, including, but not limited to, suppliers and third party product and service providers. For products and services where the Company's needs are not unique or where a long term relationship with a supplier does not exist, a search for alternative suppliers who are Year 2000 compliant would be conducted and suppliers changed as needed prior to January 1, 2000. While the Company believes that raw materials and components for its products are readily available from a number of suppliers and believes that its service needs are not significantly unique from other companies, it is possible that for some of its suppliers who are identified as being non-compliant, certain remediation strategies with the supplier may be employed, at least initially, as an alternative to switching suppliers because of the operational difficulties that switching suppliers could cause. These remediation strategies include, but are not limited to, increasing purchases from the suppliers in question prior to January 1, 2000 to provide a safety stock if the supplier experiences difficulty and providing the Company's Year 2000 compliance resources to assist the supplier in becoming compliant. PART 2 OTHER INFORMATION, Item 1: Legal Proceedings - ------- ----------------- U.S. ResCare Litigation In January 1995 ResCare (now ResMed Limited; hereinafter "ResCare"), a former subsidiary of ResMed, 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 with 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. In January 1998, the Court granted the Company's motion for summary judgment that it does not infringe ResCare's mask patent. In September 1998, the Court granted the Company's motion for summary judgment that it does not infringe ResCare's basic CPAP patent. In September 1999, the Court granted the Company's motion for summary judgment that it does not infringe ResCare's delay timer patent, which was the third of the original three patents on which ResCare sued the Company. It is the Company's belief, based upon its investigation and discovery to date, that the ResCare patents are invalid or unenforceable and that, even if they are valid and enforceable, none of the Company's products infringe any of the patents. The Company intends to vigorously defend and pursue this litigation and strongly believes that the outcome should be favorable to the Company. 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 - ------- --------------------------------------------------- Not applicable Item 5: Other Information - ------- ----------------- On July 30, 1999, the Company amended its Rights Agreement, dated as of June 28, 1996, by eliminating the "continuing directors" provision, which amendment is filed herewith as Exhibit 10.39. Item 6: Exhibits and Reports on Form 8-K - ------- -------------------------------- (a) Exhibits Exhibit 10.38 Separation Agreement and Complete Release dated September 2, 1999 between the Company and Dennis S. Meteny filed as Exhibit 10.38 to this Form 10-Q for the quarter ended September 30, 1999. Exhibit 10.39 Amendment No. 1 to Rights Agreement, dated as of June 28, 1996 filed as Exhibit 10.39 to this Form 10-Q for the quarter ended September 30, 1999. (b) Reports on Form 8-K On August 23, 1999, the Company filed a Form 8-K to report details of a previously announced restructuring and to report that James W. Liken was named Chief Executive Officer of the Company. SIGNATURES ---------- 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 15, 1999 /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 Principal Accounting Officer EX-10.38 2 SEPARATION AGREEMENT Exhibit 10.38 SEPARATION AGREEMENT AND COMPLETE RELEASE WHEREAS, RESPIRONICS, INC. (hereinafter referred to as "RI") employed Dennis S. Meteny (hereinafter referred to as "Meteny") pursuant to an employment agreement dated as of December 1, 1994 (the "Employment Agreement"), AND WHEREAS, the Board of Directors of RI terminated Meteny's employment without cause in accordance with the terms of the Employment Agreement, AND WHEREAS, the Board of Directors of RI has determined to provide Meteny with certain payments and other benefits in addition to those which Meteny is entitled to under the Employment Agreement and RI's employee benefit programs, AND WHEREAS, RI and Meteny wish to set forth their understandings and agreements with respect to termination of Meteny's employment and to resolve any and all matters between them relating to Meteny's employment with RI and termination thereof. NOW THEREFORE, Meteny and RI, each intending to be legally bound by, and in consideration of, the following mutual promises and covenants, agree as follows: I. Termination of Employment Without Cause. Meteny's employment with RI was --------------------------------------- terminated by RI without cause pursuant to Section 2.03(b) of the Employment Agreement on August 19, 1999. Meteny has resigned as a member of the Board of Directors of RI. Meteny agrees to resign as a member of the Board of Directors and/or an officer of each subsidiary of RI for which he serves as such, at RI's request. II. Termination Date. Meteny's official termination date with RI will be ---------------- August 19, 1999 ("Termination Date"). Thereafter, Meteny will cease accruing time or credit (vesting or otherwise) with respect to any type of RI-related or RI-sponsored benefit, including but not limited to vacation, 401(k) plan, executive annuity program and stock options, and Meteny hereby waives any claim to the contrary. III. Future Payments and Benefits: ---------------------------- A. Separation Payments. The parties acknowledges that, under Section ------------------- 2.05 of the Employment Agreement, Meteny is entitled to receive his current base salary (which is $360,750 annually) for the remainder of the current term of the Employment Agreement (which runs through November 30, 2001). Notwithstanding these provisions, the Board has determined that, as further consideration to Meteny, RI will pay Meteny his current base salary for the full three (3) year period from the Termination Date (that is, through August 19, 2002). These payments represent separation pay and will be paid on a bi-weekly basis in equal installments of $13,875. RI will withhold appropriate federal, state, and local income taxes from these payments. RI will not withhold any amounts for any other benefit or program, except as expressly provided for herein. RI expressly acknowledges and agrees that (i) the separation payments shall be paid to Meteny through August 19, 2002 even if he obtains other employment and (ii) if Meteny dies before August 19, 2002, the separation payments shall be paid to his estate through August 19, 2002. B. Medical and Other Insurance Benefits. As further consideration to ------------------------------------ Meteny, RI will provide Meteny with medical (including the executive physical program to the extent provided to other executive officers of RI in any given year), dental and personal life insurance (not key man life insurance for which RI is the beneficiary) only for a maximum period of up to August 19, 2002 under the same terms and conditions which would be applicable to Meteny had he remained employed for this additional length of time (including credit for the current number of Wellness Credits). By executing this Separation Agreement And Complete Release ("Separation Agreement"), Meteny authorizes RI to deduct from his separation payments sufficient funds to cover his portion of the monthly premium for this insurance. Because the qualifying event -- Meteny's termination -- occurred on August 19, 1999, Meteny acknowledges that if these benefits continue in effect for eighteen (18) months or more, Meteny will not be entitled to COBRA coverage. C. Termination of Medical and Other Insurance Benefits. If Meteny --------------------------------------------------- obtains employment which provides for medical, dental and/or life insurance benefits, the medical, dental and/or life insurance benefits, as applicable, described in paragraph III.B shall immediately cease, without further obligation. D. Car Allowance and Club Memberships. As further consideration to ---------------------------------- Meteny, Meteny will continue to receive his current car allowance (which is $700 per month) and current reimbursement of club memberships (which consist of Duquesne Club membership dues of $185 per month and Duquesne Club health club membership dues of $60 per month, for a total amount of $245 per month, payable quarterly in accordance with Duquesne Club billing practices) for a maximum period up to August 19, 2002. These benefits will cease if Meteny obtains employment which provides for a car allowance or reimbursement of club memberships, as applicable. E. Stock Options. At various times during his employment, Meteny was ------------- granted stock options. The schedule attached hereto reflects RI's records with respect to the grant of such options. RI records further indicate that as of August 19, 1999, 56,155 of these options were vested and exercisable according to the terms of the applicable stock option plans. Both parties acknowledge that, in accordance with the terms of the applicable stock option plans, Meteny's termination shortens the time period in which Meteny is permitted to exercise options which vested prior to his termination to three (3) months from the effective termination date of August 19, 1999. RI further acknowledges that Meteny's termination is a voluntary termination with the consent of RI for purposes of the applicable stock option plans. F. Outplacement Services. As further consideration to Meteny, RI will --------------------- pay the reasonable fees and expenses (not to exceed $30,000 in the aggregate) of an outplacement firm selected by Meteny to assist him in finding employment; provided, that RI shall notify RI of the -------- outplacement firm he proposes to use and RI shall have the right to approve such firm, such approval not to be unreasonably withheld or delayed. This benefit shall cease on the earlier of Meteny's obtaining employment or September 1, 2001. G. Certain Equipment. As further consideration to Meteny, RI agrees that ----------------- he may retain the following items of equipment which he was using as of August 19, 1999: laptop computer, cell phone, "Palm Wizard", printer for laptop computer, fax machine and calling card. With respect to Meteny's usage of the cell phone and calling card, for the period until August 19, 2000, RI shall reimburse Meteny for charges incurred by Meteny for such usage relating to RI business and efforts by Meteny to obtain employment. H. Notice of Other Employment and Benefits. Meteny shall notify RI --------------------------------------- promptly of any employment which he obtains during the period when RI is providing any payments or benefits under this Separation Agreement, including information concerning the medical, dental and personal life insurance benefits and car allowances and reimbursement for club memberships provider by his employer(s). IV. No Other Payments or Obligations. Meteny understands and agrees that -------------------------------- neither RI nor any successor of RI will be obligated in any way to provide him with future employment, compensation and/or benefits, other than those provided herein, in any amount or for any reason. The above payments include all payments due Meteny pursuant to the Employment Agreement. This provision and the release set forth in section VI below do not affect the rights of Meteny, as a former employee, under the provisions of RI's 401(k) Plan or stock option plans as they relate to terminated employees. V. No Admissions by RI or Meteny. It is expressly understood and agreed that ----------------------------- by entering into this Separation Agreement, neither RI nor Meteny in any way admits that it or he has treated Meteny or RI, respectively, unlawfully or wrongfully in any way. Neither this Separation Agreement, nor the implementation thereof, shall be construed to be, or shall be admissible in any proceedings as, evidence of an admission by RI or Meteny of any violation of, or failure to comply with, any federal, state or local law, ordinance, agreement, rule, regulation, or order. However, Meteny agrees that this section does not preclude introduction of this Separation Agreement by RI to establish that all of Meteny's claims were settled, compromised and released according to the terms of this Separation Agreement. VI. Release. In consideration for the items described in section III above, ------- Meteny, on behalf of himself, his heirs, representatives, administrators, estates, successors and assigns, does hereby irrevocably and unconditionally remise, release and forever discharge RI, RI's predecessors, parents, subsidiaries, affiliates, benefit plans and their past, present and future officers, directors, trustees, administrators, agents and employees, as well as the heirs, successors and assigns of any of such persons or such entities (hereinafter separately and collectively called "Releasees") from all manner of suits actions, causes of action, damages and claims, known or unknown, that he has, or may have, against any of the Releasees for any actions up to and including the date hereof and the continuing effects thereof. Except for the performance of the provisions of this Separation Agreement, it is the intention of Meteny to effect a general release of all such claims. This release includes, but is not limited to, claims which were asserted, could have been asserted or could be asserted by Meteny, or on his behalf, arising out of his employment with RI or the termination thereof, including but not limited to, claims under the federal Age Discrimination In Employment Act of 1967, as amended, Title VII of the Federal Civil Rights Act of 1964, as amended, the Pennsylvania Human Relations Act and other federal, state and local statutes, ordinances, executive orders and regulations prohibiting age, race, sex, non-job-related disability and other types of discrimination, the Employee Retirement Income Security Act of 1974, as amended, and state or local law claims of any kind. VII. Continuing Obligations. Meteny agrees that he has continuing obligations ---------------------- pursuant to the terms of the Employment Agreement, the Invention Disclosure between RI and Meteny and other similar agreements, including without limitation obligations relating to confidentiality, non- competition and non-solicitation of customers, suppliers and employees under Article IV of the Employment Agreement. In consideration of the benefits provided to Meteny under the Employment Agreement and the consideration described in item III above, Meteny agrees to honor all obligations under these agreements in accordance with the terms thereof. VIII. Confidentiality. Meteny agrees that, except as required by law, legal --------------- process, rules of court and as necessary to enforce the terms of this Separation Agreement, the terms and conditions of this Separation Agreement will be kept completely confidential and will not be discussed, disclosed or revealed, directly or indirectly, to any person, corporation or other entity other than to Meteny's family and professional advisors consulted by Meteny concerning the interpretation, application and legal effect of this Separation Agreement. Meteny acknowledges that RI has been and may in the future be required to make public disclosures concerning the termination of his employment, include press releases and filings with the Securities and Exchange Commission. IX. No Public Statements. Meteny agrees to refrain from making any statements, -------------------- claims, allegations or assertions against RI or its employees, agents or advisors regarding the matters covered by this Separation Agreement. X. Certain Acknowledgements. Meteny acknowledges that he has been given the ------------------------ opportunity to consider this Separation Agreement for at least twenty-one (21) days, which is a reasonable period of time, and that he has been advised to consult with an attorney in relation thereto, prior to executing this Separation Agreement. Meteny further acknowledges that he has had a full and fair opportunity to consult with an attorney and that he has carefully read and fully understands all of the provisions of this Separation Agreement intending to be legally bound thereby. RI acknowledges that it is not aware of any basis for any claims against Meteny as of the date of this Agreement. XI. Revocation Period. For a period of seven (7) days following the execution ----------------- of this Separation Agreement, Meteny may revoke this Separation Agreement by delivery of a written notice revoking the same, within that seven-day period, to the attention of William R. Decker at RI. This Separation shall not become effective or enforceable until that seven-day revocation period has expired. Once that (7) day period has expired, this Separation Agreement will be forever enforceable. XII. Entire Agreement. The parties hereto further understand, covenant and ---------------- agree that the terms and conditions of this Separation Agreement constitute the full and complete understandings, agreements and arrangements of the parties and that there are no agreements, covenants, promises or arrangements other than those set for herein. Any subsequent alteration in, or variance from, and term or condition of this Separation Agreement shall be effective only if executed in writing and signed by Meteny and an authorized representative of RI. XIII. Governing Law. This Separation Agreement shall be governed by and ------------- construed in accordance with the laws of the Commonwealth of Pennsylvania. XIV. Successors and Assigns. This Separation Agreement shall be binding on the ---------------------- parties hereto and their respective successors, heirs, representatives, administrators, estates and assigns. The Separation Agreement shall be binding upon any entity which acquires all or substantially all of the assets or stock of RI, including the surviving entity in any merger, consolidation or other business combination in which RI is not the surviving entity. This Agreement may not be assigned by either party without the prior written consent of the other party. XV. Remedies. In the event of a breach by Meteny or RI of the terms of this -------- Separation Agreement, the non-breaching party shall be entitled, if it or he shall so elects, to institute legal proceedings to obtain damages for any such breach, or to enforce the specific performance of this Separation Agreement by the breaching party and to enjoin the breaching party from any further violation of this Separation Agreement and to exercise such remedies cumulatively or in conjunction with all other rights and remedies provided by law. Meteny and RI acknowledge, however, that the remedies at law for any breach by him or it of the provisions of this Separation Agreement may be inadequate and that RI or Meteny, as the case may be, shall be entitled to injunctive relief against him or it in the event of any breach. XVI. Attorneys' Fees. If RI or Meteny finally prevails in a proceeding for --------------- damages or injunctive relief under this Separation Agreement, in addition to other relief, the prevailing party shall be entitled to reasonable attorneys' fees, costs and the expenses of litigation incurred by the prevailing party in securing the relief granted by the Court. XVII.Right to Indemnification. Nothing contained in this Separation Agreement ------------------------ shall be deemed to affect or limit the right of Meteny to indemnification from RI and its subsidiaries as an officer and director of RI and its subsidiaries under the terms of RI's [Remainder of this page intentionally left blank] Restated Certificate of Incorporation and Bylaws, its directors and officers liability insurance policy and the Delaware General Corporation Law or other applicable laws and policies. IN WITNESS WHEREOF, the aforesaid parties, having read this Separation Agreement and intending to be legally bound hereby, have caused this Separation Agreement to be executed as of this 2nd day of September, 1999. WITNESS: DENNIS S. METENY /s/ Dennis Unkovic /s/ Dennis S. Meteny - --------------------------------- ---------------------------------- (signature) Date: September 2, 1999 ATTEST: RESPIRONICS, INC. By: /s/ Dorita A. Pishko /s/ Steven P. Fulton - --------------------------------- ---------------------------------- Secretary (signature) [Corporate Seal] Date: September 2, 1999 EX-10.39 3 AMENDMENT #1 TO RIGHTS AGREEMENT Exhibit 10.39 AMENDMENT NO. 1 TO RIGHTS AGREEMENT THIS AMENDMENT NO. 1 TO RIGHTS AGREEMENT (this "Amendment No.1"), dated as of July 30, 1999, amending that certain Rights Agreement, dated as of June 28, 1996 (the "Original Rights Agreement" and as amended hereby, the "Rights Agreement"), by and between RESPIRONICS, INC., a Delaware corporation (the "Company"), and CHASEMELLON SHAREHOLDER SERVICES, L.L.C. (the "Rights Agent"). WHEREAS, the Company desires to, and is permitted by Section 26 of the Original Rights Agreement to, make certain amendments to the Original Rights Agreement, and the proposed amendments are acceptable to the Rights Agent. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: 1. Amendments. (a) Section 1 of the Original Rights Agreement shall be amended by deleting the definition of "Independent Director" in its entirety. (b) The entire Original Rights Agreement shall be amended by deleting therefrom in each location in which they occur the phrases "a majority of the Independent Directors" and "the majority of the Independent Directors" and substituting therefor in each such location the phrase "the Board of Directors of the Company". (c) Section 28 of the Original Rights Agreement shall be amended by deleting the phrase "by the board or" in the last sentence. (d) Section 20(c) of the Rights Agreement shall be amended by adding the following words to the end of such section: "Anything to the contrary notwithstanding, in no event shall the Rights Agent be liable for special, punitive, indirect, consequential or incidental loss or damage of any kind whatsoever (including but not limited to lost profits), even if the Rights Agent has been advised of the likelihood of such loss or damage." 2. Continuing Effect. Except as amended hereby, the Original Rights Agreement shall continue in full force and effect. 3. Governing Law. This Amendment No. 1 shall be governed by, and construed in accordance with, the laws of the State of Delaware. 4. Counterparts. This Amendment No. 1 may be executed (including by facsimile) in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original, but all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. RESPIRONICS, INC. By: /s/ Daniel J. Bevevino ---------------------- Name: Daniel J. Bevevino Title: Vice President & Chief Financial Officer CHASEMELLON SHAREHOLDER SERVICES, L.L.C. By: /s/ Kathleen Kennelly --------------------- Name: Kathleen Kennelly Title: Vice President EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SEPTEMBER 30, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS 3-MOS JUN-30-2000 JUN-30-1999 JUL-01-1999 JUL-01-1998 SEP-30-1999 SEP-30-1998 18,419,285 18,021,446 0 0 109,972,285 109,462,194 13,718,000 9,002,000 60,072,356 58,696,355 193,098,172 206,329,638 115,237,448 100,609,757 52,381,231 49,501,561 334,040,986 341,235,479 45,87,716 55,036,079 0 85,186,815 0 0 0 0 330,059 327,081 188,181,923 199,892,507 334,040,986 341,892,507 80,599,327 86,411,576 80,599,327 86,411,576 43,436,198 44,765,995 48,012,550 44,765,995 38,751,728 30,012,044 0 0 1,425,615 1,118,182 (7,590,565) 10,515,355 (3,036,226) 4,206,142 0 0 0 0 0 0 0 0 (4,554,339) 6,309,213 (0.15) 0.19 (0.15) 0.19
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