-----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, DIMuqlW0rSNDNeZUDw70ktI5KLvDC0m8QNVdBjFmk87nlPFi7fwNvFHt78Tl6Nev WP1koc0WLaJBxdhkaXC5FA== 0000950132-00-000071.txt : 20000215 0000950132-00-000071.hdr.sgml : 20000215 ACCESSION NUMBER: 0000950132-00-000071 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 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: 539716 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 December 31, 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 January 31, 2000, there were 33,033,223 shares of Common Stock of the registrant outstanding, of which 3,736,030 were held in treasury. INDEX RESPIRONICS, INC. PART I - FINANCIAL INFORMATION - ------------------------------ Item 1. Financial Statements (Unaudited). Consolidated balance sheets -- December 31, 1999 and June 30, 1999. Consolidated statements of operations -- Three months and six months ended December 31, 1999 and 1998. Consolidated statements of cash flows -- Six months ended December 31, 1999 and 1998. Notes to consolidated financial statements -- December 31, 1999. 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 - --------------------------- 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
At At December 31 June 30 1999 1999 ----------- ------- ASSETS CURRENT ASSETS Cash and short-term investments $ 14,282,174 $ 23,651,401 Trade accounts receivable, less allowance for doubtful accounts of $14,528,000 and $13,919,000 100,361,483 99,253,207 Inventories 62,794,637 61,212,368 Prepaid expenses and other 8,187,779 6,328,742 Deferred income tax benefits 11,407,404 11,407,404 ------------ ------------ TOTAL CURRENT ASSETS 197,033,477 201,853,122 PROPERTY, PLANT AND EQUIPMENT Land 3,061,203 3,342,017 Building 11,848,238 12,687,961 Machinery and equipment 61,358,789 64,603,276 Furniture, office and computer equipment 44,016,819 37,719,450 Leasehold improvements 2,507,142 1,249,044 ------------ ------------ 122,792,191 119,601,748 Less allowances for depreciation and amortization 57,425,322 58,371,315 ------------ ------------ 65,366,869 61,230,433 Funds held in trust for construction of new facility 870,239 852,631 OTHER ASSETS 15,431,177 11,822,484 GOODWILL 64,663,279 65,420,031 ------------ ------------ $343,365,041 $341,178,701 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 28,137,929 $ 26,787,172 Accrued expenses and other 22,174,644 18,762,481 Current portion of long-term obligations 1,531,075 967,387 ------------ ------------ TOTAL CURRENT LIABILITIES 51,843,648 46,517,040 LONG-TERM OBLIGATIONS 109,258,659 99,374,180 MINORITY INTEREST 0 766,035 COMMITMENTS SHAREHOLDERS' EQUITY Common Stock, $.01 par value; authorized 100,000,000 shares; issued and outstanding 33,026,963 shares at December 31, 1999 and 32,999,283 shares at June 30, 1999 330,270 329,993 Additional capital 108,992,775 108,863,191 Accumulated other comprehensive loss (3,051,901) (1,231,013) Retained earnings 119,817,719 120,709,953 Treasury stock (43,826,129) (34,150,678) ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 182,262,734 194,521,446 ------------ ------------ $343,365,041 $341,178,701 ============ ============
See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) RESPIRONICS, INC. AND SUBSIDIARIES
Three months ended Six months ended December 31 December 31 December 31 December 31 1999 1998 1999 1998 ------------------------------------------ ------------------------------------ Net sales $ 91,702,567 $ 90,197,244 $ 172,301,894 $ 176,608,820 Cost of goods sold 49,381,846 46,849,405 92,818,044 91,615,400 Cost of goods sold - restructuring charges 0 0 4,576,352 0 -------------------- ------------- ---------------- ------------- GROSS MARGIN 42,320,721 43,347,839 74,907,498 84,993,420 General and administrative expenses 11,794,695 10,434,081 21,951,087 21,085,190 Sales, marketing and commission expenses 15,662,311 15,534,088 30,343,707 30,528,166 Research and development expenses 4,001,304 4,380,119 8,327,076 8,933,900 Restructuring charges 3,325,615 0 13,428,041 0 Interest expense 1,714,588 1,063,102 3,140,203 2,181,284 Other income (284,681) (328,682) (798,940) (515,606) -------------------- ------------- ---------------- ------------- 36,213,832 31,082,708 76,391,174 62,212,934 -------------------- ------------- ---------------- ------------- INCOME (LOSS) BEFORE INCOME TAXES 6,106,889 12,265,131 (1,483,676) 22,780,486 Income taxes 2,442,756 4,906,052 (593,470) 9,112,194 -------------------- ------------- ---------------- ------------- NET INCOME (LOSS) $ 3,664,133 $ 7,359,079 $ (890,206) $ 13,668,292 ==================== ============= ================ ============= Basic earnings (loss) per share $ 0.12 $ 0.23 $ (0.03) $ 0.43 ==================== ============= ================ ============= Basic shares outstanding 29,552,425 31,764,732 29,906,970 32,088,790 Diluted earnings (loss) per share $ 0.12 $ 0.23 $ (0.03) $ 0.42 ==================== ============= ================ ============= Diluted shares outstanding 29,683,238 32,291,132 29,906,970 32,568,080
See notes to consolidated financial statements CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) RESPIRONICS, INC. AND SUBSIDIARIES
Six Months Ended December 31 1999 1998 ------------------------------- OPERATING ACTIVITIES Net (loss) income $ (890,206) $ 13,668,292 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 12,862,784 8,983,992 Asset write-offs 6,482,156 -0- Changes in operating assets and liabilities: Increase in accounts receivable (1,108,276) (21,455,931) (Increase) decrease in inventories (6,158,621) 359,403 Change in other operating assets and liabilities (4,516,732) 6,279,181 ------------ ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 6,671,105 7,834,937 INVESTING ACTIVITIES Purchase of property, plant and equipment (15,089,439) (10,541,643) Additional purchase price for acquired business (1,085,407) -0- ------------ ------------- NET CASH USED BY INVESTING ACTIVITIES (16,174,846) (10,541,643) FINANCING ACTIVITIES Net increase in borrowings 10,448,166 22,803,985 Issuance of common stock 127,834 1,543,634 Acquisition of treasury stock (9,675,451) (14,174,808) Decrease in minority interest (766,035) (28,066) ------------ ------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 134,514 10,144,745 ------------ ------------- (DECREASE) INCREASE IN CASH AND SHORT-TERM INVESTMENTS (9,369,227) 7,438,039 Cash and short-term investments at beginning of period 23,651,401 14,874,753 ------------ ------------- CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 14,282,174 $ 22,312,792 ============ =============
See notes to consolidated financial statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) RESPIRONICS, INC. AND SUBSIDIARIES December 31, 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 and six months ended December 31, 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: December 31 June 30 1999 1999 ----------- ----------- Raw materials $22,695,000 $23,633,000 Work-in-process 7,660,000 7,036,000 Finished goods 32,440,000 30,543,000 ----------- ----------- $62,795,000 $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 currently underway. The Court had previously granted the Company's motion for summary judgment that the Company does not infringe three of the competitor's patents. In December 1999, the Court granted the Company's motion for summary judgment that the Company does not infringe the fourth and final patent. 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 ========== =========== =========== ===========
During the six months ended December 31, 1999, the Company incurred a total of $18,000,000 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 ($6,900,000), and lease buyouts related to facility rationalizations and other direct expenses of the restructuring ($5,100,000). 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 - SUBSEQUENT EVENTS 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 that normal business operations are expected to continue. 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; however, a precise determination of the ultimate collectibility of the Company's balance cannot be made at this time. Any reserves necessary to address this balance will be recorded when a more precise determination of collectibility can be made. Also in February 2000, the Company reached a preliminary 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 preliminary agreement, the Company expects to record a one-time reduction in income tax liability and income tax expense. While the exact amount of the adjustment will not be known until final agreements are executed, the Company expects that the adjustment will be in the range of $750,000 to $1,250,000. 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, 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 December 31, 1999 were $91,703,000 representing a 2% increase over the sales of $90,197,000 recorded for the quarter ended December 31, 1998. 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 non-invasive ventilation devices discussed below, 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. Partially offsetting this increase in sales was a decrease in sales of the Company's non-invasive ventilatory support devices for use in the home compared to prior year levels. These sales decreases were caused by the implementation of 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 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 and their implementation was particularly significant during the quarters ended September 30 and December 31, 1999, 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 a short period of time, the Company cannot predict with certainty the exact impact the new guidelines will have. For the quarter ended December 31, 1999, 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 December 31, 1998 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 $2,500,000 due to the foregone distributor margin. Excluding this foregone distributor margin, sales in Germany increased nearly five percent for the quarter. Reduced operating expenses in Germany partially offset this dealer margin. For the six-month period ending December 31, 1999, net sales of $172,302,000 decreased 2% from $176,609,000 in the prior year period. Despite the increases in sales in sleep apnea therapy devices and oxygen concentrators discussed above, lower sales of non-invasive ventilation devices and the foregone foreign distributor margin discussed above (totaling approximately $4,500,000 for the six-month comparison) contributed to the decrease in sales for the six-month period. Also adversely impacting the current six-month period were temporary disruptions in the September 30, 1999 quarter caused by the 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. During the current quarter ended December 31, 1999, these disruptions were resolved. The Company's gross profit, excluding the impact of restructuring charges, was 46% of net sales for the quarter and six months ended December 31, 1999 compared to 48% of net sales for the quarter and six months ended December 31, 1998. 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 $11,795,000 (13% of net sales) for the quarter ended December 31, 1999 as compared to $10,434,000 (12% of net sales) for the quarter ended December 31, 1998. For the six months ended December 31, 1999, general and administrative expenses were $21,951,000 (13% of net sales) as compared to $21,085,000 (12% of net sales) for the six months ended December 31, 1998. The increase in general and administrative expenses was due primarily to an increase in information technology department expenses, including depreciation expense on SAP hardware and software, and to increases in reserve accounts, including those applicable to accounts receivable. Partially offsetting this increase in expenses were 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, and the impact of controlling expenses in response to reductions in overall sales levels during the first quarter of the current year. Sales, marketing and commission expenses were $15,662,000 (17% of net sales) for the quarter ended December 31, 1999 as compared to $15,534,000 (17% of net sales) for the quarter ended December 31, 1998. For the six months ended December 31, 1999, sales, marketing, and commission expenses were $30,344,000 (18% of net sales) compared to $30,528,000 (17% of net sales) for the prior year six-month period. The small increase in absolute dollars of expense for the current quarter and the decrease in absolute dollars of expense for the current six-month period were 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, partially offset by increased expenses driven by increased sales and activity levels in the Company's homecare and hospital product lines in the second quarter. Research and development expenses were $4,001,000 (4% of net sales) for the quarter ended December 31, 1999 as compared to $4,380,000 (5% of net sales) for the quarter ended December 31, 1998. Research and development expenses for the six months ended December 31, 1999 were $8,327,000 (5% of net sales) compared to $8,934,000 (5% of net sales) for the prior year period. 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. During the quarter ended December 31, 1999, the Respironics Simplicity nasal mask and Harmony ST Ventilator were introduced. 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 three months and six months ended December 31, 1999, the Company incurred charges of $3,300,000 and $18,000,000, 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 $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 all periods presented. As a result of the factors described above, the Company's net income was $3,664,000 (4% of net sales) or $0.12 per diluted share for the quarter ended December 31, 1999 as compared to net income of $7,359,000 (8% of net sales) or $0.23 per diluted share for the quarter ended December 31, 1998. For the six months ended December 31, 1999, the Company's net loss was ($890,000) (1% of net sales) or ($0.03) per diluted share compared to net income of $13,668,000 (8% of net sales) or $0.42 per diluted share for the prior year period. Excluding the impact of the restructuring charges, the Company's net income for the quarter and six months ended December 31, 1999 was $5,660,000 (6% of net sales) or $0.19 per diluted share and $9,912,000 (6% of net sales) or $0.33 per diluted share, respectively. Earnings per share amounts for the quarters and six months ended December 31, 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 $145,190,000 at December 31, 1999 and $155,336,000 at June 30, 1999. Net cash provided by operating activities was $6,671,000 for the six months ended December 31, 1999 as compared to net cash provided by operating activities of $7,835,000 for the six months ended December 31, 1998. The decrease in cash provided by operating activities for the current six-month period was primarily due to lower earnings, 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 six-month period included a significant increase in accounts receivable. Net cash used by investing activities was $16,175,000 for the six months ended December 31, 1999 as compared to $10,542,000 for the six months ended December 31, 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 six-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 six months ended December 31, 1999 and 1998, the Company's buy back activity resulted in uses of cash of $9,675,000 and $14,175,000, respectively. Through January 31, 2000, a total of 3,864,000 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. 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 $18,000,000 were recorded during the six-month period ended December 31, 1999. 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 December 31, 1999. 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, with these savings expected to be realized beginning in the quarter ending March 31, 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, 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 (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 month of January 2000, 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 December 31, 1999, the Company had total long term debt obligations, including the current portion of those obligations, of $110,790,000. Of that amount, $4,410,000 was in fixed rate obligations and $106,380,000 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 December 31, 1999 weighted average interest rate of 6.72% to a weighted average interest rate of 7.39%), annual interest expense would be approximately $715,000 higher based on the December 31, 1999 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 of the Company's firmly committed sales transactions, in addition to what is presented in Item 2 of this filing, 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 - ------- ----------------- 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. In December 1999, the Court dismissed ResCare's infringement claims as to the fourth and final patent. The Company intends to continue to pursue its claims that the ResCare patents are invalid or unenforceable. 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 - ------- --------------------------------------------------- The Company's Annual Meeting of Shareholders was held on November 18, 1999. The holders of 28,824,561 shares of the Company's stock (approximately 96% of the outstanding shares) were present at the meeting in person or by proxy. The only matters voted upon at the meeting were: (i) the election of four persons to serve as directors for a three year term expiring at the Annual Meeting of Shareholders in 2002; the election of one person to serve as director for a two year term expiring at the Annual Meeting of Shareholders in 2001; the election of one person to serve as director for a one year term expiring at the Annual Meeting of Shareholders in 2000, (ii) the ratification of the selection of Ernst & Young, LLP as independent public accountants to audit the financial statements of the Company for the fiscal year ending June 30, 2000. The results of voting were as follows: (i) Daniel P. Barry, J. Terry Dewberry, Donald H. Jones, and James W. Liken, the nominees of the Company's Board of Directors, were elected to serve until the Annual Meeting of Shareholders in 2002; Candace L. Littell, the nominee of the Company's Board of Directors, was elected to serve until the Annual Meeting of Shareholders in 2001; J. Paul Yokubinas, the nominee of the Company's Board of Directors, was elected to serve until the Annual Meeting of Shareholders in 2000. There were no other nominees. Shares were voted as follows: Name For Withhold Vote For - -------------------- ---------- ----------------- Daniel P. Barry 25,612,492 280,703 J. Terry Dewberry 25,454,507 280,703 Donald H. Jones 25,618,096 280,783 James W. Liken 25,483,422 280,783 Candace L. Littell 25,594,047 280,783 J. Paul Yokubinas 25,454,358 280,783 (ii) the selection of Ernst & Young, LLP as independent public accountants for the 2000 fiscal year was ratified: affirmative votes, 25,785,460; negative votes, 107,388. Item 5: Other Information - ------- ----------------- Not applicable Item 6: Exhibits and Reports on Form 8-K - ------- -------------------------------- (a) Exhibits Not applicable (b) Reports on Form 8-K Not applicable 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: 2/14/2000 /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-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 31, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS 6-MOS JUN-30-2000 JUN-30-1999 JUL-01-1999 JUL-01-1998 DEC-31-1999 DEC-31-1998 14,282,174 22,312,793 0 0 114,889,483 111,113,051 14,528,000 8,626,000 62,794,637 58,688,361 197,033,477 222,426,685 122,792,191 106,074,865 57,425,322 52,374,095 343,365,041 358,726,960 51,843,648 60,437,403 0 0 0 0 0 0 330,270 328,574 181,932,464 202,887,868 343,365,041 358,726,960 172,301,894 176,608,820 172,301,894 176,608,820 92,818,044 91,615,400 97,394,396 91,615,400 74,049,911 60,547,256 0 0 3,140,203 2,181,284 (1,483,676) 22,780,486 (593,470) 9,112,194 (890,206) 13,668,292 0 0 0 0 0 0 (890,206) 13,668,292 (0.03) 0.43 (0.03) 0.42
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