<PAGE>
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
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Commission File No. 000-16723
RESPIRONICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1304989
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1501 Ardmore Blvd.
Pittsburgh, Pennsylvania 15221
(Address of principal executive offices) (Zip Code)
(Registrant's Telephone Number, including area code) 412-731-2100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
at least the past 90 days. Yes X No .
--- ---
As of 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.
<PAGE>
INDEX
RESPIRONICS, INC.
PART I - FINANCIAL INFORMATION
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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
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Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
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<PAGE>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
September 30 June 30
1999 1999
---------------------------------------------
<S> <C> <C>
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 $13,919,000
Inventories 60,072,356 61,212,368
Prepaid expenses and other 6,944,842 6,328,742
Deferred income tax benefits 11,407,404 11,407,404
--------------- ----------------
TOTAL CURRENT ASSETS 193,098,172 201,853,122
PROPERTY, PLANT AND EQUIPMENT
Land 3,061,203 3,342,017
Building 11,727,405 12,687,961
Machinery and equipment 57,420,657 64,603,276
Furniture, office and computer equipment 40,714,572 37,719,450
Leasehold improvements 2,313,611 1,249,044
--------------- ----------------
115,237,448 119,601,748
Less allowances for depreciation
and amortization 52,381,231 58,371,315
--------------- ----------------
62,856,217 61,230,433
Funds held in trust for construction
of new facility 861,139 852,631
OTHER ASSETS 11,625,181 11,822,484
GOODWILL 65,600,277 65,420,031
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$ 334,040,986 $ 341,178,701
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</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
September 30 June 30
1999 1999
-----------------------------------------------
<S> <C> <C>
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)
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TOTAL SHAREHOLDERS' EQUITY 188,511,982 194,521,446
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$334,040,986 $341,178,701
=============== ===============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three months ended
September 30
1999 1998
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<S> <C> <C>
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)
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40,177,342 31,130,226
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(Loss) Income Before Income Taxes (7,590,565) 10,515,355
Income Taxes (3,036,226) 4,206,142
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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
=================== ====================
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended September 30
1999 1998
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<S> <C> <C>
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
============== ===============
</TABLE>
See notes to consolidated financial statements
<PAGE>
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:
<TABLE>
<CAPTION>
September 30 June 30
1999 1999
------------ -----------
<S> <C> <C>
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
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$60,072,356 $61,212,368
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</TABLE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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-
<PAGE>
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
<PAGE>
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]
<PAGE>
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
<PAGE>
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."
<PAGE>
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JUN-30-2000 JUN-30-1999
<PERIOD-START> JUL-01-1999 JUL-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 18,419,285 18,021,446
<SECURITIES> 0 0
<RECEIVABLES> 109,972,285 109,462,194
<ALLOWANCES> 13,718,000 9,002,000
<INVENTORY> 60,072,356 58,696,355
<CURRENT-ASSETS> 193,098,172 206,329,638
<PP&E> 115,237,448 100,609,757
<DEPRECIATION> 52,381,231 49,501,561
<TOTAL-ASSETS> 334,040,986 341,235,479
<CURRENT-LIABILITIES> 45,87,716 55,036,079
<BONDS> 0 85,186,815
0 0
0 0
<COMMON> 330,059 327,081
<OTHER-SE> 188,181,923 199,892,507
<TOTAL-LIABILITY-AND-EQUITY> 334,040,986 341,892,507
<SALES> 80,599,327 86,411,576
<TOTAL-REVENUES> 80,599,327 86,411,576
<CGS> 43,436,198 44,765,995
<TOTAL-COSTS> 48,012,550 44,765,995
<OTHER-EXPENSES> 38,751,728 30,012,044
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,425,615 1,118,182
<INCOME-PRETAX> (7,590,565) 10,515,355
<INCOME-TAX> (3,036,226) 4,206,142
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,554,339) 6,309,213
<EPS-BASIC> (0.15) 0.19
<EPS-DILUTED> (0.15) 0.19
</TABLE>
