<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 March 31, 2000
--------------
or
___ Transition Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
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Commission File No. 000-16723
RESPIRONICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1304989
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1501 Ardmore Blvd.
Pittsburgh, Pennsylvania 15221
(Address of principal executive offices) (Zip Code)
(Registrant's Telephone Number, including area code) 412-731-2100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
at least the past 90 days. Yes X No .
--- ---
As of April 30, 2000, there were 33,104,657 shares of Common Stock of the
registrant outstanding, of which 3,734,646 were held in treasury.
<PAGE>
INDEX
RESPIRONICS, INC.
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements (Unaudited).
Consolidated balance sheets -- March 31, 2000 and June 30, 1999.
Consolidated statements of operations -- Three months and nine months
ended March 31, 2000 and 1999.
Consolidated statements of cash flows -- Nine months ended March 31,
2000 and 1999.
Notes to consolidated financial statements -- March 31, 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
PART II - OTHER INFORMATION
- ---------------------------
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>
At At
March 31 June 30
2000 1999
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 8,043,792 $ 23,651,401
Trade accounts receivable, less allowance for
doubtful accounts of $18,693,000 and $13,919,000 103,836,323 99,253,207
Inventories 67,216,240 61,212,368
Prepaid expenses and other 8,446,668 6,328,742
Deferred income tax benefits 13,653,968 11,407,404
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TOTAL CURRENT ASSETS 201,196,991 201,853,122
PROPERTY, PLANT AND EQUIPMENT
Land 3,061,203 3,342,017
Building 12,168,954 12,687,961
Machinery and equipment 64,602,120 64,603,276
Furniture, office and computer equipment 46,334,555 37,719,450
Leasehold improvements 2,610,872 1,249,044
----------- ------------
128,777,704 119,601,748
Less allowances for depreciation
and amortization 63,214,207 58,371,315
----------- ------------
65,563,497 61,230,433
Funds held in trust for construction
of new facility 0 852,631
OTHER ASSETS 15,025,514 11,822,484
GOODWILL 63,640,283 65,420,031
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$ 345,426,285 $ 341,178,701
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 29,072,846 $ 26,787,172
Accrued expenses and other 18,907,613 18,762,481
Current portion of long-term obligations 1,477,508 967,387
----------- ------------
TOTAL CURRENT LIABILITIES 49,457,967 46,517,040
LONG-TERM OBLIGATIONS 108,305,374 99,374,180
MINORITY INTEREST 0 766,035
COMMITMENTS
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized
100,000,000 shares; issued and outstanding
33,098,409 shares at March 31, 2000 and
32,999,283 shares at June 30, 1999 330,984 329,993
Additional capital 109,586,447 108,863,191
Accumulated other comprehensive loss (2,500,717) (1,231,013)
Retained earnings 123,607,259 120,709,953
Treasury stock (43,361,029) (34,150,678)
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TOTAL SHAREHOLDERS' EQUITY 187,662,944 194,521,446
----------- ------------
$ 345,426,285 $ 341,178,701
=========== ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31 March 31 March 31 March 31
2000 1999 2000 1999
------------------------------- -----------------------------
<S> <C> <C> <C> <C>
Net sales $ 97,837,028 $ 90,882,060 $ 270,138,922 $ 267,490,880
Cost of goods sold 51,484,648 46,577,974 144,302,692 138,193,374
Cost of goods sold - restructuring charges 513,986 0 5,090,338 0
------------ ------------ ------------ -----------
GROSS MARGIN 45,838,394 44,304,086 120,745,892 129,297,506
General and administrative expenses 12,038,211 10,844,007 33,989,298 31,929,197
General and administrative expenses - special items 4,500,000 0 4,500,000 0
Sales, marketing and commission expenses 15,983,880 14,624,638 46,327,587 45,152,804
Research and development expenses 4,436,693 3,989,291 12,763,769 12,923,191
Restructuring charges 3,718,115 0 17,146,156 0
Interest expense 1,845,572 1,377,194 4,985,775 3,558,478
Other income (261,723) (299,753) (1,060,663) (815,359)
------------ ------------ ------------ -----------
42,260,748 30,535,377 118,651,922 92,748,311
------------ ------------ ------------ -----------
INCOME BEFORE INCOME TAXES 3,577,646 13,768,709 2,093,970 36,549,195
Income taxes (benefit) (211,895) 5,507,484 (805,365) 14,619,678
------------ ------------ ------------ -----------
NET INCOME $ 3,789,541 $ 8,261,225 $ 2,899,335 $ 21,929,517
============ ============ ============ ===========
Basic earnings per share $ 0.13 $ 0.26 $ 0.10 $ 0.69
============ ============ ============ ===========
Basic shares outstanding 29,400,975 31,423,061 29,738,305 31,866,880
Diluted earnings per share $ 0.13 $ 0.26 $ 0.10 $ 0.68
============ ============ ============ ===========
Diluted shares outstanding 29,827,850 31,869,297 29,976,198 32,335,152
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Nine Months Ended March 31
2000 1999
--------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,899,335 $ 21,929,517
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 19,475,470 14,007,257
Asset write-offs 7,677,816 -0-
Changes in operating assets and liabilities:
Increase in accounts receivable (4,583,116) (21,100,704)
Increase in inventories (11,094,210) (584,155)
Change in other operating assets and liabilities (8,776,653) 2,819,341
----------- ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 5,598,642 17,071,256
INVESTING ACTIVITIES
Purchase of property, plant and equipment (20,307,991) (18,341,877)
Additional purchase price for acquired business (1,085,407) -0-
----------- ------------
NET CASH USED BY
INVESTING ACTIVITIES (21,393,398) (18,341,877)
FINANCING ACTIVITIES
Net increase in borrowings 9,441,314 28,182,263
Issuance of common stock 722,219 2,744,485
Acquisition of treasury stock, net (9,210,351) (24,879,502)
Decrease in minority interest (766,035) (38,486)
----------- ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 187,147 6,008,760
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(DECREASE) INCREASE IN CASH AND
SHORT-TERM INVESTMENTS (15,607,609) 4,738,139
Cash and short-term investments at beginning of period 23,651,401 14,874,753
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CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 8,043,792 $ 19,612,892
=========== ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
March 31, 2000
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine months ended March 31,
2000 are not necessarily indicative of the results that may be expected for the
year ended June 30, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended June 30, 1999.
NOTE B -- INVENTORIES
The composition of inventory is as follows:
<TABLE>
<CAPTION>
March 31 June 30
2000 1999
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<S> <C> <C>
Raw materials $23,669,000 $23,633,000
Work-in-process 4,518,000 7,036,000
Finished goods 39,029,000 30,543,000
----------- -----------
$67,216,000 $61,212,000
=========== ===========
</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 patents. The January 1995 and June 1996 actions have
been consolidated, and discovery is ongoing. The Court has granted the
<PAGE>
Company's various motions for summary judgment and held that the Company does
not infringe any of the competitor's four patents at issue. The competitor may
seek an appeal of those decisions. In any event, the Company intends to
continue to pursue its claims that the competitor's patents are invalid or
unenforceable.
NOTE D -- RESTRUCTURING CHARGES
RECONCILIATION OF RESTRUCTURING RESERVES
<TABLE>
<CAPTION>
Employee Lease Buyouts
Severance Asset & Other Direct Total
Costs Write-Downs Expenses Restructuring
---------- ----------- --------------- -------------
<S> <C> <C> <C> <C>
Balance at July 1, 1999 $ - $ - $ - $ -
Restructuring charges (net) 4,900,000 6,800,000 3,000,000 14,700,000
Cash expenditures (300,000) - (1,100,000) (1,400,000)
Noncash expenditures - (400,000) - (400,000)
---------- ---------- ----------- ------------
Balance at September 30, 1999 4,600,000 6,400,000 1,900,000 12,900,000
---------- ---------- ----------- ------------
Restructuring charges (net) 1,100,000 100,000 2,100,000 3,300,000
Cash expenditures (800,000) - (2,800,000) (3,600,000)
Noncash expenditures - (1,100,000) - (1,100,000)
---------- ---------- ----------- ------------
Balance at December 31, 1999 4,900,000 5,400,000 1,200,000 11,500,000
---------- ---------- ----------- ------------
Restructuring charges (net) - 700,000 3,500,000 4,200,000
Cash expenditures (1,600,000) - (4,100,000) (5,700,000)
Noncash expenditures - (100,000) - (100,000)
---------- ---------- ----------- ------------
Balance at March 31, 2000 $ 3,300,000 $ 6,000,000 $ 600,000 $ 9,900,000
========== ========== =========== ============
</TABLE>
During the nine months ended March 31, 2000, the Company incurred a total of
$22,200,000 in charges related to a previously disclosed restructuring. The
primary components of these costs were severance and employment related costs
($6,000,000), asset write-downs to reflect decisions made regarding product,
facility, and systems rationalization ($7,600,000), and lease buyouts related to
facility rationalizations and other direct expenses of the restructuring
($8,600,000). Restructuring costs incurred but not yet paid have been credited
to accrued expense and asset write-downs have been credited against the
applicable asset accounts. The Company expects to incur and record additional
restructuring charges over the remainder of fiscal year 2000.
NOTE E - SPECIAL ITEMS
As previously disclosed, in February 2000, the parent company of one of the
Company's major customers filed a voluntary petition to reorganize under Chapter
11 of the U.S. Bankruptcy Code. The Company's customer was one of the entities
included in the filing. According to press releases issued in connection with
the filing and discussions with the customer, the election to seek court
protection was made in order to facilitate the restructuring of the parent
company's capital and lease obligations and normal business operations of
the Company's customer are continuing. The Company's total balance due from the
customer at the date of the filing was approximately $4,500,000. The Bankruptcy
Court has approved an order permitting the payment of certain pre-petition
claims of critical vendors. While discussions with the customer are continuing,
the Company did not receive definitive information on the customer's planned
payments of its pre-petition claims during the quarter ended March 31, 2000.
Because no such definitive information has been received, the Company has
recorded a $4,500,000 special increase to the Company's allowance for doubtful
accounts during the three months ended March 31, 2000.
<PAGE>
NOTE F - INCOME TAXES
During February 2000, the Company reached an agreement with the Internal Revenue
Service regarding examinations of federal income tax returns for certain of the
Company's U.S. entities for fiscal years 1996 through 1998. Based on this
agreement, the Company recorded a one-time reduction in income tax liability and
income tax expense of $1,643,000 during the quarter ended March 31, 2000.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES REFORM ACT OF 1995.
The statements contained in this Quarterly Report on Form 10-Q,
specifically those contained in Item 2 "Management's Discussion and Analysis of
Financial Condition and Results of Operations", along with statements in other
reports filed with the Securities and Exchange Commission, external documents
and oral presentations which are not historical are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21B of the Securities and Exchange Act of 1934, as amended. These
forward-looking statements represent the Company's present expectations or
beliefs concerning future events. The Company cautions that such statements are
qualified by important factors that could cause actual results to differ
materially from those in the forward-looking statements. Results actually
achieved may differ materially from expected results included in these
statements. Those factors include, but are not limited to, the following:
foreign currency fluctuations, regulations and other factors affecting
operations and sales outside the United States including potential future
effects of the change in sovereignty of Hong Kong, customer consolidation and
concentration, increasing price competition and other competitive factors in the
sale of products, interest rate fluctuations, intellectual property and related
litigation, FDA and other government regulation, third party reimbursement,
restructuring activities, and anticipated cost savings.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Net sales for the quarter ended March 31, 2000 were $97,837,000
representing an 8% increase over the sales of $90,882,000 recorded for the
quarter ended March 31, 1999. Increases in unit and dollar sales for the
Company's sleep apnea therapy devices (the Company's largest product line) and
oxygen concentrator devices, as well as increases in the sales of masks and
other accessories, helped to drive the increase in sales for the quarter. These
product lines, along with ventilation devices and oxygen systems, comprise the
major part of the Company's homecare division established as part of the
July 1999
<PAGE>
restructuring plan. Sales of the Company's hospital products also increased
during the current quarter, including unit and dollar increases for the
Company's BiPAP(R) Vision(TM) and Esprit(R) ventilators.
Partially offsetting this increase in sales was a decrease in domestic
sales, compared to prior year levels, of the Company's non-invasive ventilatory
support devices for use in the home. These sales decreases were caused by the
recently implemented revised government insurance coverage guidelines for the
home use of these products in the United States and the corresponding reduction
in purchases of these units by the Company's dealer customers.
Government policymakers issued a draft coverage policy for non-invasive
ventilation in July 1998 that was more restrictive than had been expected. The
Company, along with trade and medical associations, other device manufacturers,
and home care dealers, filed formal comments as permitted with the policy makers
indicating disagreement with the draft coverage policy. In May 1999, a revised
set of coverage guidelines was issued for implementation on October 1, 1999.
While several restrictive provisions of the July 1998 draft guidelines were
removed and potential changes in reimbursement categories were delayed, the
Company believed that these revised guidelines were still overly restrictive
relative to patient qualification and administratively burdensome for clinicians
and healthcare providers. As a result, the Company continued to work with the
government policy makers and Congress to resolve the remaining issues. Several
favorable modifications were made to the guidelines, and final guidelines
reflecting these modifications were implemented effective October 1, 1999. The
Company believes that these guidelines are still overly restrictive relative to
patient qualification and administratively burdensome and is continuing to work
with government policy makers on these issues. The uncertainty in the market
regarding these guidelines and their implementation was particularly significant
during fiscal year 2000 as the planned implementation date approached and
passed, and the Company's sales for these products were adversely affected.
The Company believes that while the guidelines as implemented are overly
restrictive, there is benefit to having certainty in the market regarding
coverage for these products and as a result there are opportunities for
increased unit sales of non-invasive ventilatory support products. However,
selling prices for such units may come under pressure and there may be mix
shifts to units with lower average selling prices because of certain patient
qualification tests that are required under the guidelines. The Company is
working closely with its dealer customers to develop strategies to reach the
appropriate patient population in the context of these new guidelines. Because
the guidelines have been in place for only six months, the Company cannot
predict with certainty the exact impact the new guidelines will have. For the
quarter ended March 31, 2000, sales of non-invasive ventilatory
<PAGE>
support units for home use in the United States accounted for approximately two
percent of total sales.
Also affecting sales for the current quarter was a decrease in sales
compared to the quarter ended March 31, 1999 resulting from the impact of the
Company's May 1999 decision to change its method of distribution in Germany from
direct patient sales to sales through a distributor. As a result of this
change, sales decreased in the quarter to quarter comparison by approximately
$2,300,000 due to the foregone distributor margin. Excluding this foregone
distributor margin, sales in Germany increased 10% for the quarter. Reduced
operating expenses in Germany partially offset this foregone dealer margin.
For the nine-month period ending March 31, 2000, net sales of $270,139,000
increased 1% from $267,491,000 in the prior year period. The increases in sales
in sleep apnea therapy devices and oxygen concentrators discussed above offset
the lower sales of non-invasive ventilation devices and the foregone foreign
distributor margin (the foregone distributor margin was approximately $6,800,000
for the nine-month comparison). Also adversely impacting the current nine-month
period were temporary disruptions in the September 30, 1999 quarter caused by
the Company's restructuring plan which was first announced in July 1999,
particularly in the domestic hospital product area where a separate hospital
division was established and a new, dedicated sales force was put in place.
These disruptions were resolved during the quarter ended December 31, 1999.
The Company's gross profit, excluding the impact of restructuring charges,
was 47% of net sales for the quarter and nine months ended March 31, 2000
compared to 49% and 48% of net sales, respectively, for the quarter and nine
months ended March 31, 1999. This gross profit percentage decrease was due
primarily to foregone dealer margin described above, a shift in sales mix as
compared to the prior year and, to a lesser extent, increased costs related to
the Company's distribution and manufacturing restructuring efforts.
General and administrative expenses were $12,038,000 (12% of net sales) for
the quarter ended March 31, 2000 as compared to $10,844,000 (12% of net sales)
for the quarter ended March 31, 1999. For the nine months ended March 31, 2000,
general and administrative expenses were $33,989,000 (13% of net sales) as
compared to $31,929,000 (12% of net sales) for the nine months ended March 31,
1999. The increases in general and administrative expenses were due primarily to
an increase in information technology department expenses, including
depreciation expense on SAP hardware and software, and to additions to reserve
accounts. Partially offsetting these increases in expenses were lower operating
expenses due to the Company's restructuring efforts and decreased expenses in
Germany as a result of the Company's May 1999 decision to reduce its direct
sales operation in that country as discussed above.
<PAGE>
During the three months ended March 31, 2000, a special increase to the
Company's allowance for doubtful accounts was recorded related to a previously
disclosed filing by one of the Company's major customers under Chapter 11 of the
U.S. Bankruptcy Code. This $4,500,000 charge was taken because definitive
information has not been received regarding the customer's planned payments on
the Company's pre-petition claims. The Company's total balance due from the
customer at the date of the Chapter 11 filing was approximately $4,500,000.
Sales, marketing and commission expenses were $15,984,000 (16% of net
sales) for the quarter ended March 31, 2000 as compared to $14,625,000 (16% of
net sales) for the quarter ended March 31, 1999. For the nine months ended
March 31, 2000, sales, marketing, and commission expenses were $46,328,000 (17%
of net sales) compared to $45,153,000 (17% of net sales) for the prior year
nine-month period. The increase in absolute dollars of expense for the current
quarter and the current nine-month period were due primarily to increased
expenses driven by increased sales and activity levels in the Company's homecare
and hospital product lines in the third quarter, partially offset by lower
operating expenses due to the Company's restructuring efforts and decreased
expenses in Germany as a result of the Company's May 1999 decision to
reduce its direct sales operation in that country as discussed above.
Research and development expenses were $4,437,000 (5% of net sales) for the
quarter ended March 31, 2000 as compared to $3,989,000 (4% of net sales) for the
quarter ended March 31, 1999. Research and development expenses for the nine
months ended March 31, 2000 were $12,764,000 (5% of net sales) compared to
$12,923,000 (5% of net sales) for the prior year period. The increase in
absolute dollars of expense for the current quarter was due primarily to the
timing of various research and development projects. Significant product
development efforts are ongoing; a variety of new products were introduced
during the current fiscal year, including the Profile(TM) Lite nasal mask, the
Respironics Simplicity(TM) nasal mask, the Harmony(R) ST Ventilator, and the
Encore(R) SmartCard(TM) with FOSQ (Functional Outcomes of Sleep Questionnaire).
New product launches in many of the Company's major product lines are scheduled
for the remainder of fiscal year 2000. Additional development work and clinical
trials are being conducted in certain product areas outside the Company's
current core products.
During the three months and nine months ended March 31, 2000, the Company
incurred charges of $4,200,000 and $22,200,000, respectively, related to a
previously disclosed restructuring. The primary components of these costs were
severance and employment related costs, asset write-downs to reflect decisions
made regarding product, facility, and systems rationalization, and lease buyouts
related to facility rationalizations and other direct expenses of the
restructuring. Approximately $5,100,000 of these charges relate to inventory
write-offs in connection with product rationalizations and have been reported as
a separate component of
<PAGE>
cost of goods sold. The Company expects to incur and record additional
restructuring charges over the remainder of fiscal year 2000. See Note D to the
Consolidated Financial Statements for additional information about the
restructuring charges.
During the three months ended March 31, 2000, the Company reached an
agreement with the Internal Revenue Service regarding examinations of federal
income tax returns for certain of the Company's U.S. entities for fiscal years
1996 through 1998. Based on this agreement, the Company recorded a one-time
reduction in income tax liability and income tax expense of $1,643,000 during
the quarter ended March 31, 2000. Excluding this adjustment for the quarter and
nine months ended March 31, 2000, the Company's effective income tax rate was
40% for all periods presented.
As a result of the factors described above, the Company's net income was
$3,790,000 (4% of net sales) or $0.13 per diluted share for the quarter ended
March 31, 2000 as compared to net income of $8,261,000 (9% of net sales) or
$0.26 per diluted share for the quarter ended March 31, 1999. For the nine
months ended March 31, 2000, the Company's net income was $2,899,000 (1% of net
sales) or $0.10 per diluted share as compared to net income of $21,930,000 (8%
of net sales) or $0.68 per diluted share for the prior year period. Excluding
the impact of the restructuring charges, the special increase to the allowance
for doubtful accounts, and the one-time income tax liability adjustment
described above, the Company's net income for the quarter and nine months ended
March 31, 2000 was $7,386,000 (8% of net sales) or $0.25 per diluted share and
$17,298,000 (6% of net sales) or $0.58 per diluted share, respectively.
Earnings per share amounts for the quarters and nine months ended March 31,
2000 and 1999 reflect the impact of shares repurchased under the Company's stock
buyback program which is described below.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $151,739,000 at March 31, 2000 and
$155,336,000 at June 30, 1999. Net cash provided by operating activities was
$5,599,000 for the nine months ended March 31, 2000 as compared to $17,071,000
for the nine months ended March 31, 1999. The decrease in cash provided by
operating activities for the current nine-month period was primarily due to
lower earnings (including the cash portion of restructuring costs which totals
approximately $10,700,000), increases in inventory, and increases in other
assets resulting from technology investments. Partially offsetting these uses of
cash in the current period was a decrease in the growth of accounts receivable;
the prior year nine-month period included a significant increase in accounts
receivable.
Net cash used by investing activities was $21,393,000 for the nine months
ended March 31, 2000 as compared to $18,342,000 for the nine months ended March
31, 1999. Cash used by investing activities for both periods include capital
expenditures, including
<PAGE>
the purchase of leasehold improvements, production equipment, computer hardware
and software, and telecommunications and office equipment. In addition, cash
used by investing activities in the current nine-month period includes
additional purchase price paid for a previously acquired business pursuant to
the terms of that acquisition agreement. The funding for investment activities
in both periods was provided by positive cash flow from operating activities,
accumulated cash and short-term investments, and borrowings under long-term
obligations.
Net cash provided by financing activities includes borrowings and
repayments under the Company's various long-term obligations, proceeds from the
issuance of common stock under the Company's stock option plans, and the
acquisition of treasury stock. The Company has been repurchasing shares of its
outstanding common stock since August 1998 pursuant to a series of Board of
Directors' actions that have authorized stock buy backs totaling 4,000,000
shares. During the nine months ended March 31, 2000 and 1999, the Company's buy
back activity resulted in uses of cash of $9,210,000 and $24,880,000,
respectively. Through April 30, 2000, a total of 3,864,000 shares have been
repurchased under these buybacks. Shares that are repurchased are added to
treasury shares pending future use and reduce the number of shares outstanding
used in calculating earnings per share.
In July 1999, the Company announced a major restructuring of its U.S.
operations that included facility closings and downsizings, a divisional and
management realignment, and an approximate ten percent workforce reduction
associated with those changes. Most of the restructuring activities have been
completed and restructuring charges totaling $22,200,000 were recorded during
the nine-month period ended March 31, 2000. See Note D to the Consolidated
Financial Statements for an analysis of this charge, including the reserve
balances relating to the charge that remain at March 31, 2000. The reserves
shown for employee severance, lease buyouts, and other direct expenses will
require corresponding cash expenditures in future periods. The Company expects
to incur additional restructuring charges (currently estimated in a range from
$2,000,000 to $4,000,000) over the remainder of the fiscal year ending June 30,
2000, the majority of which are expected to consist of cash expenditures. As
previously disclosed, annualized savings associated with the restructuring are
expected to be approximately $10,000,000. Savings, primarily as a result of
closing a manufacturing facility and 19 customer service centers, began to be
realized during the quarter ended March 31, 2000, with additional savings
expected during the remainder of the fiscal year ending June 30, 2000. These
cost savings are expected to positively impact cost of sales, general and
administrative expenses, and sales and marketing expenses, and will be offset to
some extent by planned increases in those expenses consistent with expected
increases in sales in future periods and the Company's continuing investment in
the business.
The Company believes that projected positive cash flow from operating
activities, the availability of additional funds under
<PAGE>
its revolving credit facility (totaling approximately $19,810,000 at March 31,
2000), and its accumulated cash and short-term investments will be sufficient to
meet its current and presently anticipated future needs for the next 12 months
for operating activities (including restructuring), investing activities, and
financing activities (primarily consisting of payments on long term debt).
Year 2000
The Company completed its Year 2000 readiness plan during the quarter ended
December 31, 1999 and the program was in place at December 31, 1999. At that
time and during the months since then, no major compliance anomalies have
occurred. The transition from December 31, 1999 to Year 2000 went as expected,
and the Company's contingency plans related to third party product and service
providers were not utilized.
Total costs for the Company's Year 2000 compliance efforts approximated
$11,000,000 and were funded through the Company's operating cash flows. The
majority of these costs relate to the ERP system installations and upgrades and
have been capitalized and charged to expense over the estimated useful life of
the associated hardware and software. The remaining costs have been charged
directly to expense. The Company will continue to monitor for any anomalies
that may arise.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company is exposed to market risk from changes in interest rates and
foreign exchange rates.
Interest Rates: The Company's primary interest rate risk relates to its
long-term debt obligations. At March 31, 2000, the Company had total long-term
debt obligations, including the current portion of those obligations, of
$109,783,000. Of that amount, $3,483,000 was in fixed rate obligations and
$106,300,000 was in variable rate obligations. Assuming a 10% increase in
interest rates on the Company's variable rate obligations (i.e. an increase from
the March 31, 2000 weighted average interest rate of 6.64% to a weighted average
interest rate of 7.30%), annual interest expense would be approximately $706,000
higher based on the March 31, 2000 outstanding balance of variable rate
obligations. The Company has no interest rate swap or exchange agreements.
Foreign Exchange Rates: Information relating to the sensitivity to foreign
currency exchange rate changes is omitted because foreign exchange exposure risk
has not materially changed
<PAGE>
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"), filed
an action (the "California suit") against the Company in the United States
District Court for the Southern District of California alleging that in the
manufacture and sale in the U.S. of nasal masks and CPAP systems and components,
the Company infringes three U.S. patents, two of which are owned by and one of
which is licensed to ResCare (the "ResCare Patents"). The patents involved in
the California suit deal with basic CPAP, mask applications and a delay timer
feature of ResCare's CPAP devices. In the complaint, ResCare seeks preliminary
and permanent injunctive relief, an accounting for damages and an award of three
times actual damages because of the Company's alleged willful infringement of
the ResCare patents.
In its answers to ResCare's complaint, the Company denied, in all material
respects, the allegations of the complaint. The Company also filed an action in
the United States District Court for the Western District of Pennsylvania
against ResCare seeking declaratory judgments that the ResCare patents in issue
are either invalid or unenforceable or that the Company does not infringe the
patents.
Also as part of its response to the ResCare complaint, the Company filed a
motion in the United States District Court for the Southern District of
California seeking to transfer the California suit to the United States District
Court for the Western District of Pennsylvania and to consolidate the two suits.
The motion was granted and the cases have been consolidated in Pittsburgh,
Pennsylvania.
In June 1996 ResCare filed another action against the Company in the United
States District Court for the Western District of Pennsylvania alleging that in
the manufacture and sale in the U.S. of CPAP systems, the Company infringes a
fourth U.S. patent that had been recently issued to ResCare relating to the
delay timer technology component used in CPAP systems. In this additional
litigation, ResCare seeks similar damages as in the pre-existing patent suits.
This suit was consolidated, upon the Company's motion, with the pre-existing
patent suits described above and discovery is now proceeding on the consolidated
action. No trial date has been set.
<PAGE>
The Court has granted the Company's various motions for summary judgement
and held that the Company does not infringe any of ResCare's four patents at
issue. ResCare may seek an appeal of those decisions. In any event, the
Company intends to continue to pursue its claims that the ResCare patents are
invalid or unenforceable.
Item 2: Change in Securities
- ------- --------------------
(a) Not applicable
(b) Not applicable
(c) Not applicable
Item 3: Defaults Upon Senior Securities
- ------- -------------------------------
(a) Not applicable
(b) Not applicable
Item 4: Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
Not applicable.
Item 5: Other Information
- ------- -----------------
Not applicable
Item 6: Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
Exhibit 10.40 Employment Agreement, made as of October 1, 1999, by and
between the Company and James W. Liken filed as Exhibit 10.40 to this Form
10-Q for the quarter ended March 31, 2000.
(b) Reports on Form 8-K
Not applicable
<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: May 15, 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
<PAGE>
Exhibit 10.40
EMPLOYMENT AGREEMENT
--------------------
(James W. Liken)
THIS AGREEMENT, made as of October 1, 1999 ("Effective Date"), by and
between RESPIRONICS, INC., a Delaware corporation (the "Company"), and JAMES W.
LIKEN, of Pittsburgh, Pennsylvania ("Executive").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company is engaged in the business of the design,
development, manufacture, marketing and sale principally of respiratory and
other medical equipment;
WHEREAS, Executive is a Director of the Company and possesses valuable
knowledge and skills that have contributed and will contribute to the successful
operation of the Company's business;
WHEREAS, the Company and Executive have agreed to execute and deliver
this Agreement in consideration, among other things, of (i) the access Executive
has had and will continue to have to confidential or proprietary information of
the Company, (ii) the access Executive will have to confidential or proprietary
information to be acquired hereafter by the Company, (iii) the willingness of
the Company to make valuable benefits available hereafter to Executive and (iv)
Executive's receipt of compensation from time to time by the Company; and
WHEREAS, the Company desires to retain the services of Executive, and
Executive is willing to accept employment with the Company, upon the terms and
subject to the conditions hereinafter set forth.
NOW, THEREFORE, intending to be legally bound, the Company agrees to
employ Executive, and Executive hereby agrees to be employed by the Company,
upon the following terms and conditions:
ARTICLE I
EMPLOYMENT
----------
1.01. Office. Executive is hereby employed as President and Chief
------
Executive Officer of the Company and in such other executive and managerial
capacities as the Board of Directors of the Company may from time to time
determine, and in such capacity or capacities shall use his best energies or
<PAGE>
abilities in the performance of his duties hereunder and as prescribed in the
By-Laws of the Company.
1.02. Term.
----
(a) Subject to the terms and provisions of Article II hereof,
Executive shall be employed by the Company for a period of three (3) years (the
"Initial Term"), commencing on the Effective Date of this Employment Agreement
and ending on September 30, 2002.
(b) Subject to the terms and provisions of Article II hereof, the
Initial Term shall automatically be extended for a period of three (3) years
(the "Extended Term") unless (i) not less than thirty (30) days prior to the
expiration of the Initial Term, the Company shall advise Executive that the
Extended Term will not apply or (ii) not less than ninety (90) days prior to the
expiration of the Initial Term, Executive shall advise the Company that the
Extended Term shall not apply.
(c) Subject to the terms and provisions of Article II hereof, the
Extended Term (if applicable) shall automatically be extended for successive one
(1) year periods (such that the Extended Term will annually be extended to a
three (3) year period) unless, not less than ninety (90) days prior to the
expiration of the then current first year of the Extended Term, either Executive
or the Company shall advise the other that the Extended Term will not be further
extended.
(e) The Initial Term and the Extended Term (if applicable) are herein
referred to as the "Term."
1.03. Compensation.
------------
(a) Base Salary. During the Term, compensation shall be paid to
-----------
Executive by the Company at the rate of $100,000 per annum (the "Base Salary"),
payable in equal installments every other week. The Base Salary to be paid to
Executive shall not be adjusted during the Initial Term. During the Extended
Term (if applicable), the Base Salary to be paid to Executive may be adjusted
upward or downward (but not below $100,000) by the Board of Directors of the
Company at any time (but not less frequently than annually) based upon
Executive's contribution to the success of the Company and on such other factors
as the Board of Directors of the Company shall deem appropriate.
(b) Stock Options. As of the Effective Date of this Agreement,
-------------
Executive shall be granted options to acquire 263,700 shares of the Company's
common stock (the "Stock Options") under
-2-
<PAGE>
the Company's 1992 Stock Incentive Plan (the "1992 Plan") at an exercise price
equal to $8 3/8 per share. Subject to the terms hereof and the terms of the
Stock Option Agreement to be entered into in accordance with the terms of the
1992 Plan (the "Option Agreement"), the Stock Options shall vest and shall
become exercisable as follows: one-twelfth of the Stock Options shall vest and
become exercisable on the first day of each calendar quarter commencing January
1, 2000 if this Agreement has not been terminated by the Company or Executive
effective on or before the last day of the immediately preceding calendar
quarter.
1.04. Executive Benefits. At all times during the Term, Executive
------------------
shall have the right to participate in and receive benefits under and in
accordance with the then-current provisions of all incentive, profit sharing,
retirement, stock option or purchase plans, life, health and accident insurance,
hospitalization and other incentive and benefit plans or programs (except for
any such plan in which Executive may not participate pursuant to the terms of
such plan or Executive's geographic location) which the Company may at any time
or from time to time have in effect for executive employees of the Company or
its subsidiaries, Executive's participation to be on a basis commensurate with
other executive employees considering their respective responsibilities and
compensation. Executive shall also be entitled to be reimbursed for all
reasonable expenses incurred by him in the performance of his duties hereunder.
In addition, the Company shall reimburse Executive for his membership dues at
the Duquesne Club in Pittsburgh, Pennsylvania.
1.05. Principal Place of Business. The headquarters and principal
---------------------------
place of business of the Company is located in Pittsburgh (Forest Hills),
Pennsylvania. Executive's principal place of business will be at that site and
he will reside within a reasonable distance thereof.
ARTICLE II
TERMINATION
-----------
2.01. Illness, Incapacity. If, during the Term of Executive's
-------------------
employment hereunder, the Board of Directors of the Company shall determine that
Executive shall be prevented from effectively performing all his duties
hereunder by reason of illness or disability and such failure so to perform
shall have continued for a period of not less than three (3) months, then the
Company may, by written notice to Executive, terminate Executive's employment
hereunder effective at any time after such three (3) month period. Upon
delivery to Executive of such notice, together with payment of any salary
accrued and unpaid
-3-
<PAGE>
under Section 1.03 hereof, Executive's employment and all obligations of the
Company under Article I hereof shall forthwith terminate. The obligations of
Executive under Article IV hereof shall continue notwithstanding termination of
Executive's employment pursuant to this Section 2.01.
2.02. Death. If Executive dies during the Term of his employment
-----
hereunder, Executive's employment hereunder shall terminate and all obligations
of the Company hereunder, other than any obligations with respect to the payment
of accrued and unpaid salary, shall terminate.
2.03. Company Termination. (a) For Cause. In the event that, in
------------------- ---------
the reasonable judgment of the Board of Directors of the Company, Executive
shall have (a) been guilty of any act of dishonesty material with respect to the
Company, or (b) been convicted of a crime involving moral turpitude, or (c)
intentionally disregarded the provisions of this Agreement or (d) intentionally
disregarded the express instructions of the Board of Directors of the Company
with respect to matters of policy continuing (in the case of clause (d)) for a
period of not less than thirty (30) days after notice of such disregard, the
Company may terminate this Agreement effective at such date as it shall specify
in a written notice to Executive. Any such termination by the Company shall be
deemed to be termination "for cause". Upon delivery to Executive of such notice
of termination, together with payment of any salary accrued and unpaid under
Section 1.03 hereof, Executive's employment and all obligations of the Company
under Article I hereof shall forthwith terminate. The obligations of Executive
under Article IV hereof shall continue notwithstanding termination of
Executive's employment pursuant to this Section 2.03(a).
(b) Without Cause. Executive's employment hereunder may be
-------------
terminated at any time by the Company without cause if the Board of Directors of
the Company, by resolution duly adopted by the Board, so determines. Except as
set forth in Section 2.05, all obligations of the Company under Articles I and
II cease upon termination. The obligations of Executive under Article IV hereof
shall continue notwithstanding termination of Executive's employment pursuant to
this Section 2.03(b).
2.04. Executive Termination. Executive agrees to give the Company
---------------------
ninety (90) days prior written notice of the termination of his employment with
the Company. Simultaneously with such notice, Executive shall inform the Company
in writing as to his employment/consulting plans following the termination of
his employment with the Company. In the event Executive has terminated his
employment with the Company because, in his
-4-
<PAGE>
reasonable judgment, there has been: (a) a material downgrading in Executive's
duties, titles or responsibilities, (b) a change in the Executive's principal
place of business to a location not within 30 miles of its present location, (c)
any significant and prolonged increase in the traveling requirements applicable
to the discharge of Executive's responsibilities or (d) any other significant
material adverse change in working conditions, responsibilities or prestige
(including a notice under Section 1.02(c) hereof that the Extended Term (if
applicable) will not be further extended), Executive shall be entitled to the
compensation provided for in Section 2.05(b) upon such termination; provided
--------
that Executive must provide notice of a termination within ninety (90) days of
the occurrence of a change Executive believes to be covered by clause (a), (b)
or (c) herein in order to claim that the termination is because of such change.
Otherwise, all obligations of the Company under Article I cease upon
termination, except for the payment of any salary accrued and unpaid under
Section 1.03. The obligations of Executive under Article IV hereof shall
continue notwithstanding termination of Executive's employment pursuant to this
Section 2.04.
2.05. Termination Payments - Discharge Without Cause.
----------------------------------------------
(a) If the Company terminates Executive's employment without cause
pursuant to Section 2.03(b) effective at any time on or before September 30,
2000, Executive shall not be entitled to any termination payments or other
benefits hereunder.
(b) If the Company terminates Executive's employment without cause
pursuant to Section 2.03(b) effective at any time after September 30, 2000,
Executive shall be paid for the balance of the Term the Base Salary then in
effect; provided that if Executive's notice of termination occurs within ninety
--------
(90) days of a reduction in Executive's Base Salary, the Base Salary prior to
the reduction shall be used for purposes of this Section 2.05(b) (it being
agreed that if such termination occurs before October 1, 2002, then for purposes
of this Section 2.05(b) the Base Salary used to determine the amount to which
Executive is entitled for the remainder of the Term shall be deemed to be
$400,000). Additionally, for the balance of the Term, the Company will provide
Executive with health and dental insurance coverage as though Executive remained
an employee. Executive will be required to pay the same portion of the premium
for such insurance coverage as if Executive remained an employee. Executive
agrees to inform the Company of his employment/consulting jobs during the period
of time which Executive is receiving money under this Section.
-5-
<PAGE>
2.06. Termination Payments - After Change of Control.
----------------------------------------------
(a) Change of Control shall mean the occurrence of any of the
following events:
(i) Individuals who on December 1, 1999 constitute the Board of
Directors ("Board") of the Company (the "Incumbent Directors") cease
for any reason to constitute at least a majority of the Board,
provided that any person becoming a director subsequent to December 1,
1999, whose election or nomination for election was approved by a vote
of at least two-thirds of the Incumbent Directors then on the Board
(either by a specific vote or by approval of the proxy statement of
the Company in which such person is named as a nominee for director,
without written objection by such Incumbent Directors to such
nomination) shall be deemed to be an Incumbent Director.
(ii) Any "person" (as such term is defined in Section 3(a)(9) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")
and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is
or becomes a "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company
representing a majority of the combined voting power of the Company's
then outstanding securities eligible to vote for the election of the
Board ("Company Voting Securities"); provided, however, that the event
-------- -------
described in this paragraph (ii) shall not be deemed to be a Change of
Control by virtue of any of the following acquisitions: (A) by the
Company or any subsidiary, (B) by any employee benefit plan sponsored
or maintained by the Company or any subsidiary, or by any employee
stock benefit trust created by the Company or any subsidiary or (C) by
any underwriter temporarily holding securities pursuant to an offering
of such securities.
(iii) Consummation of any merger, consolidation, stock-for-stock
exchange or similar transaction (collectively, "Business Combination")
involving the Company or any of its subsidiaries that requires the
approval of the Company's shareholders (whether for such transaction
or the issuance of securities in the transaction), in which the
holders of Company Voting Securities immediately prior to consummation
of the Business Combination own, as a group, immediately after
consummation of the Business Combination, voting
-6-
<PAGE>
securities of the Company (or, if the Company does not survive the
Business Combination, voting securities of the corporation surviving
the Business Combination) having less than 50% of the total voting
power in an election of directors of the Company (or such other
surviving corporation), excluding securities received by any holders
of Company Voting Securities in the Business Combination which
represent disproportionate percentage increases in their shareholdings
in comparison to other holders of Company Voting Securities.
(iv) Consummation of any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions, excluding any
Business Combination) of all or substantially all of the assets of the
Company to a person or entity which is not controlled by or under
common control with the Company.
(b) If Executive is terminated without cause upon or within eighteen
(18) months after a Change of Control, or if Executive provides notice (as
provided for in Section 2.04) to the Company upon or within eighteen (18) months
after the occurrence of a Change of Control that he is terminating employment
with the Company because, in his reasonable judgment, there has been: (i) a
material downgrading in Executive's duties, titles or responsibilities, (ii) a
change in Executive's principal place of business to a location not within
thirty (30) miles of its present location, (iii) any significant and prolonged
increase in the traveling requirements applicable to the discharge of
Executive's responsibilities or (iv) any other significant material adverse
change in working conditions, responsibilities or prestige, Executive shall be
entitled to the payments and other benefits provided for in Section 2.05(b) upon
such termination; provided that in this Change of Control circumstance,
notwithstanding Section 2.05(b), the termination payments shall be in an amount
equal to three (3) full years of Executive's Base Salary (regardless of the
remaining Term), and such payment shall be made to Executive in a lump sum to be
paid to Executive within five (5) business days after the termination of
employment (it being agreed that notwithstanding the parenthetical at the end of
the first sentence of Section 2.05(b), if such termination occurs before October
1, 2002, the Base Salary used to determine the amounts to which Executive is
entitled pursuant to this Section 2.06(b) shall be $100,000 and not $400,000).
Otherwise, all obligations of the Company under Article I cease upon
termination, except for the payment of any salary accrued and unpaid under
Section 1.03 hereof. The obligations of Executive under Article IV hereof shall
continue
-7-
<PAGE>
notwithstanding termination of Executive's employment pursuant to this Section
2.06.
(c) After a Change of Control, Executive has the option to terminate
his employment with the Company for any reason by providing notice (as provided
for in Section 2.04) of termination to the Company, such notice to be provided
to the Company at any time within six (6) months after the Change of Control.
Within five (5) business days after a termination of employment governed by this
provision, Executive shall receive from the Company a lump sum payment equal to
one (1) year of Executive's Base Salary. Additionally, for one (1) year after
the termination, the Company will provide Executive with health and dental
insurance coverage as though Executive remained an employee. Executive will be
required to pay the same portion of the premium for such insurance coverage as
if Executive remained an employee. Otherwise, all obligations of the Company
under Article I cease upon termination, except for the payment of any salary
accrued and unpaid under Section 1.03 hereof. The obligations of Executive
under Article IV hereof shall continue notwithstanding termination of
Executive's employment pursuant to this Section 2.06.
2.07. Treatment of Stock Options Upon Termination and Change of
---------------------------------------------------------
Control. The Option Agreement to be entered into in connection with the Stock
- -------
Options shall provide as follows in connection with the treatment of the Stock
Options in the event of termination of this Agreement and a Change of Control:
(a) Termination by the Company Pursuant to Section 2.01. Termination
---------------------------------------------------
of Executive's employment by the Company pursuant to Section 2.01 shall be
governed by the terms of the 1992 Plan applicable to termination of a "Disabled
Grantee" (as defined in the 1992 Plan), such that all Stock Options shall
immediately vest and become exercisable and remain exercisable for a period of
one (1) year after termination (but in no event after the expiration date for
the Stock Options).
(b) Termination Pursuant to Section 2.02. Termination of Executive's
------------------------------------
employment pursuant to Section 2.02 shall be governed by the terms of the 1992
Plan applicable in the case of death of an optionee during employment, such that
all Stock Options shall immediately vest and become exercisable and shall remain
exercisable by executive's estate or legal representative for a period of one
(1) year after the date of death (but in no event after the expiration date for
the Stock Options).
(c) Termination by the Company Pursuant to Section 2.03(a).
------------------------------------------------------
Termination of Executive's employment by the Company
-8-
<PAGE>
pursuant to Section 2.03(a) shall be governed by the terms of the 1992 Plan
applicable to termination of employment other than for reason of voluntary
termination with consent of the Company, retirement or death, such that all
unexercised Stock Options (whether vested or unvested) shall automatically and
immediately terminate.
(d) Termination by the Company Pursuant to Section 2.03(b).
------------------------------------------------------
Termination of Executive's employment by the Company pursuant to Section 2.03(b)
shall be deemed to be a "voluntary termination with consent" for purposes of the
1992 Plan, such that all Stock Options which have vested and become exercisable
prior to the date of termination shall be exercisable for the periods set forth
in the 1992 Plan (generally, three months from termination in the case of Stock
Options which are incentive stock options and one year in the case of Stock
Options which are non-statutory stock options, but in no event after the
expiration date for the Stock Options). In accordance with the 1992 Plan, all
unvested Stock Options shall terminate immediately upon termination of
Executive's employment by the Company pursuant to Section 2.03(b).
(e) Termination by Executive Pursuant to Section 2.04. Termination of
-------------------------------------------------
Executive's employment by Executive pursuant to Section 2.04 shall be governed
by the terms of the 1992 Plan applicable to termination of employment other than
for reason of voluntary termination with consent of the Company, retirement or
death, such that all unexercised Stock Options (whether vested or unvested)
shall automatically and immediately terminate.
(f) Effect of Change of Control and Termination After Change of
-----------------------------------------------------------
Control. Notwithstanding Section 8 of the 1992 Plan or any other provision
- -------
thereof, in the event of a Change of Control all Stock Options shall immediately
vest and become exercisable and shall remain exercisable for the period during
which Executive remains employed by the Company and for a period of one (1) year
after termination in accordance with Sections 2.06(b) or (c) hereof (but in no
event after the expiration date for the Stock Options).
ARTICLE III
EXECUTIVE'S ACKNOWLEDGMENTS
---------------------------
Executive recognizes and acknowledges that: (a) in the course of
Executive's employment by the Company it will be necessary for Executive to
acquire information including, without limitation, information concerning the
Company's sales, sales volume, sales methods, sales proposals, customers and
prospective customers, identity of customers and prospective customers,
-9-
<PAGE>
identity of key purchasing personnel in the employ of customers and prospective
customers, amount or kind of customer's purchases from the Company, the
Company's sources of supply, the Company's computer programs, system
documentation, special hardware, product hardware, related software development,
the Company's manuals, formulae, processes, methods, machines, compositions,
ideas, improvements, inventions or other confidential or proprietary information
belonging to the Company or relating to the Company's affairs (collectively
referred to herein as the "Confidential Information"); (b) for purposes of this
Agreement, confidential information of an affiliate of the Company or a person
or entity with which the Company explores or conducts business is considered to
be Confidential Information; (c) the Confidential Information is the property of
the Company; (d) the use, misappropriation or disclosure of the Confidential
Information would constitute a breach of trust and could cause irreparable
injury to the Company; and (e) it is essential to the protection of the
Company's good will and to the maintenance of the Company's competitive position
that the Confidential Information be kept secret and that Executive not disclose
the Confidential Information to others or use the Confidential Information to
Executive's own advantage or the advantage of others. For purposes of this
Agreement, "Confidential Information" shall not include any information that is
in the public domain, so long as such information is not in the public domain as
a result of any action or inaction by Executive which would constitute a
violation of this Agreement or the Company's policies with respect to such
information.
Executive further recognizes and acknowledges that it is essential for
the proper protection of the business of the Company that Executive be
restrained, but only to the extent hereinafter provided (a) from soliciting or
inducing any employee of the Company to leave the employ of the Company, (b)
from hiring or attempting to hire any employee of the Company, (c) from
soliciting the trade of or trading with the customers and suppliers of the
Company, and (d) from competing against the Company for a reasonable period
following the termination of Executive's employment with the Company.
Executive further recognizes and understands that his duties at the
Company may include the preparation of materials, including written or graphic
materials, and that any such materials conceived or written by him shall be done
as "work made for hire" as defined and used in the Copyright Act of 1976, 17 USC
(S) 1 et seq. In the event of publication of such materials, Executive
-- ---
understands that the Company will solely retain and own all rights in said
materials, including right of copyright, and that the Company may, at its
discretion, on a case-by-case basis,
-10-
<PAGE>
grant Executive by-line credit on such materials as the Company may deem
appropriate.
For purposes of interpreting Article III and Article IV hereof, the
acknowledgements, covenants and obligations of Executive with respect to the
Company shall apply equally with respect to its affiliates.
ARTICLE IV
EXECUTIVE'S COVENANTS AND AGREEMENTS
------------------------------------
4.01. Non-Disclosure of Confidential Information. Executive agrees
------------------------------------------
to hold and safeguard the Confidential Information in trust for the Company, its
successors and assigns and agrees that he shall not, without the prior written
consent of the Company, misappropriate or disclose or make available to anyone
for use outside the Company's organization at any time, either during his
employment with the Company or subsequent to the termination of his employment
with the Company for any reason, including without limitation termination by the
Company for cause or without cause, any of the Confidential Information, whether
or not developed by Executive, except as required in the performance of
Executive's duties to the Company.
4.02. Disclosure of Works and Inventions/Assignment of Patents and
------------------------------------------------------------
Other Rights. (a) Executive shall disclose promptly to the Company or its
- ------------
nominee any and all works, inventions, discoveries and improvements authored,
conceived or made by Executive during the period of employment and related to
the business, prospective business or activities of the Company, and hereby
assigns and agrees to assign all his interest therein to the Company or its
nominee. Whenever requested to do so by the Company, Executive shall execute
any and all applications, assignments or other instruments, and otherwise
cooperate with the Company at no expense to Executive, to assist the Company in
applying for and obtaining Letters Patent or Copyrights of the United States or
any foreign country or to otherwise protect the Company's interest therein.
Such obligations shall continue beyond the termination of employment with
respect to works, inventions, discoveries and improvements authored, conceived
or made by Executive during the period of employment, and shall be binding upon
Executive's assigns, executors, administrators and other legal representatives.
(b) Executive agrees that in the event of publication by Executive of
written or graphic materials the Company will retain and own all rights in said
materials, including right of copyright.
-11-
<PAGE>
4.03. Duties. Executive agrees to be a loyal employee of the
------
Company. Executive agrees to devote his best efforts full time to the
performance of his duties for the Company, to give proper time and attention to
furthering the Company's business, and to comply with all rules, regulations and
instruments established or issued by the Company. Executive further agrees that
during the term of this Agreement, Executive shall not, directly or indirectly,
engage in any business which would detract from Executive's ability to apply his
best efforts to the performance of his duties hereunder. Executive also agrees
that he shall not usurp any corporate opportunities of the Company.
4.04. Return of Materials. Upon the termination of Executive's
-------------------
employment with the Company for any reason, including without limitation
termination by the Company for cause or without cause, Executive shall promptly
deliver to the Company all correspondence, drawings, blueprints, manuals,
letters, notes, notebooks, reports, flow-charts, programs, proposals and any
documents concerning the Company's customers or concerning products or processes
used by the Company and, without limiting the foregoing, will promptly deliver
to the Company any and all other documents or materials containing or
constituting Confidential Information.
4.05. Restrictions on Competition. Executive covenants and agrees
---------------------------
that during the period of Executive's employment hereunder plus a period of two
(2) years (or such longer period, not in excess of three (3) years, in respect
of which base salary is paid to Executive pursuant to (S) 2.04 or 2.05)
following the termination of Executive's employment, including without
limitation termination by the Company for cause or without cause, Executive
shall not, in the United States of America or in any other country of the world
in which the Company has done business at any time during the last three years
prior to termination of Executive's employment with the Company, engage,
directly or indirectly, whether as principal or as agent, officer, director,
employee, consultant, shareholder, or otherwise, alone or in association with
any other person, corporation or other entity, in any Competing Business. For
purposes of this Agreement, the term "Competing Business" shall mean and include
any person, corporation or other entity which develops, manufactures, sells or
markets or attempts to develop, manufacture, sell or market any product or
services which are the same as, similar to or compete with the products and
services (i) sold by the Company at any time and from time to time during the
last three years prior to the termination of Executive's employment hereunder or
(ii) which are active research and development projects of the Company of which
Executive is aware at the time of termination; provided, however, that for
-------- -------
purposes
-12-
<PAGE>
of determining what constitutes a Competing Business there shall not be included
(x) any product or service of any entity which product or service Executive
determines is not material to the business or prospects of the Company and which
product or service the Company's Board, having been requested to do so by
Executive, also so determines; or (y) any product or service of any entity so
long as the Executive and such entity can demonstrate to the reasonable
satisfaction of the Company that Executive is and will continue to be
effectively isolated from and not participate in the development, manufacture,
sale or marketing of such product or service, but only so long as Executive is
effectively so isolated and does not so participate. In the event the employment
of Executive terminates at the conclusion of the Term before Executive obtains
the age of 65 and because the Company has elected not to further extend the Term
pursuant to (S) 1.02, then the provisions of this (S) 4.05 and (S)'s 4.06 and
4.07 shall not be applicable after the conclusion of the Term unless the Company
advises Executive at least six months prior to conclusion of the Term that it
will continue to pay the Base Salary in effect at conclusion of the Term for
such two-year period or such shorter portion thereof as the Company may specify
(which specification shall foreshorten such two-year period accordingly) and the
Company pays such amounts during such two-year or shorter period.
4.06. Non-Solicitation of Customers and Suppliers. Executive agrees
-------------------------------------------
that during his employment with the Company he shall not, directly or
indirectly, solicit the trade of, or trade with, any customer, prospective
customer, supplier, or prospective supplier of the Company for any business
purpose other than for the benefit of the Company, with respect to any products
competitive with those of the Company. Executive further agrees that for two
(2) years following termination of his employment with the Company, including
without limitation termination by the Company for cause or without cause,
Executive shall not, directly or indirectly, solicit the trade of, or trade
with, any customers or suppliers, or prospective customers or suppliers, of the
Company with respect to any products competitive with those of the Company.
4.07. Non-Solicitation of Employees. Executive agrees that, during
-----------------------------
his employment with the Company and for two (2) years following termination of
Executive's employment with the Company, including without limitation
termination by the Company for cause or without cause, Executive shall not,
directly or indirectly, solicit or induce, or attempt to solicit or induce, any
employee of the Company to leave the Company for any reason whatsoever, or hire
any employee of the Company.
-13-
<PAGE>
ARTICLE V
EXECUTIVE'S REPRESENTATIONS AND WARRANTIES
------------------------------------------
5.01. No Prior Agreements. Executive represents and warrants that he
-------------------
is not a party to or otherwise subject to or bound by the terms of any contract,
agreement or understanding which in any manner would limit or otherwise affect
his ability to perform his obligations hereunder, including without limitation
any contract, agreement or understanding containing terms and provisions similar
in any manner to those contained in Article IV hereof. Executive further
represents and warrants that his employment with the Company will not require
him to disclose or use any confidential information belonging to prior employers
or other persons or entities.
5.02. Executive's Abilities. Executive represents that his
---------------------
experience and capabilities are such that the provisions of Article IV will not
prevent him from earning his livelihood, and acknowledges that it would cause
the Company serious and irreparable injury and cost if Executive were to use his
ability and knowledge in competition with the Company or to otherwise breach the
obligations contained in Article IV.
5.03. Remedies. In the event of a breach by Executive of the terms
--------
of this Agreement, the Company shall be entitled, if it shall so elect, to
institute legal proceedings to obtain damages for any such breach, or to enforce
the specific performance of this Agreement by Executive and to enjoin Executive
from any further violation of this Agreement and to exercise such remedies
cumulatively or in conjunction with all other rights and remedies provided by
law. Executive acknowledges, however, that the remedies at law for any breach
by him of the provisions of this Agreement may be inadequate and that the
Company shall be entitled to injunctive relief against him in the event of any
breach.
ARTICLE VI
MISCELLANEOUS
-------------
6.01. Authorization to Modify Restrictions. It is the intention of
------------------------------------
the parties that the provisions of Article IV hereof shall be enforceable to the
fullest extent permissible under applicable law, but that the unenforceability
(or modification to conform to such law) of any provision or provisions hereof
shall not render unenforceable, or impair, the remainder thereof. If any
provision or provisions hereof shall be deemed invalid or unenforceable, either
in whole or in part, this Agreement shall
-14-
<PAGE>
be deemed amended to modify, as necessary, the offending provision or provisions
and to alter the bounds thereof in order to render it valid and enforceable or,
if necessary, to delete the offending provision.
6.02. Tolling Period. The non-competition, non-disclosure and non-
--------------
solicitation obligations contained in Article IV hereof shall be extended by the
length of time during which Executive shall have been in breach of any of the
provisions of such Article IV.
6.03. Entire Agreement. This Agreement represents the entire
----------------
agreement of the parties with respect to the employment of Executive by the
Company and may be amended only by a writing signed by each of them.
6.04. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the Commonwealth of Pennsylvania.
6.05. Consent to Jurisdiction; Venue. Executive hereby irrevocably
------------------------------
submits to the personal jurisdiction of the United States District Court for the
Western District of Pennsylvania or the Court of Common Pleas of Allegheny
County, Pennsylvania in any action or proceeding arising out of or relating to
this Agreement, and Executive hereby irrevocably agrees that all claims in
respect of any such action or proceeding may be heard and determined in either
such court. Executive hereby irrevocably waives any objection which he now or
hereafter may have to the laying of venue of any action or proceeding arising
out of or relating to this Agreement brought in the United States District Court
for the Western District of Pennsylvania or the Court of Common Pleas of
Allegheny County, Pennsylvania and any objection on the ground that any such
action or proceeding in either of such Courts has been brought in an
inconvenient forum. Nothing in this Section 6.05 shall affect the right of the
Company to bring any action or proceeding against Executive or his property in
the courts of other jurisdictions where the Executive resides or has his
principal place of business or where such property is located.
6.06. Service of Process. Executive hereby irrevocably consents to
------------------
the service of any summons and complaint and any other process which may be
served in any action or proceeding arising out of or related to this Agreement
brought in the United States District Court for the Western District of
Pennsylvania or the Court of Common Pleas of Allegheny County by the mailing by
certified or registered mail of copies of such
-15-
<PAGE>
process to Executive at his address as set forth on the signature page hereof.
6.07. Agreement Binding. The obligations of Executive under this
-----------------
Agreement shall continue after the termination of his employment with the
Company for any reason, with or without cause, and shall be binding on, and
inure to the benefit of, his heirs, executors, legal representatives if the
Executive should die while any amounts are still payable to him or her
hereunder, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to the Executive's devisee, legatee,
or designee or, if there be no such designee, to the Executive's estate. This
Agreement also shall be binding upon, and inure to the benefit of, any
successors and assigns of the Company.
6.08. Successor to the Company. The Company will require any
------------------------
successor or assign (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company, by agreement in form and substance satisfactory to the
Executive, to expressly, absolutely and unconditionally to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession or assignment had
taken place. Any failure of the Company to obtain such agreement prior to the
effectiveness of any such succession or assignment shall be a material breach of
this Agreement and shall entitle the Executive to terminate the Executive's
employment and to receive the payments and other benefits set forth in Section
2.06(b) as if Executive had been terminated without cause upon a Change of
Control. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor or assign to its business and/or assets
as aforesaid.
6.09. Counterparts, Section Headings. This Agreement may be executed
------------------------------
in any number of counterparts, each of which shall be deemed to be an original,
but all of which together shall constitute one and the same instrument. The
section headings of this Agreement are for convenience of reference only and
shall not affect the construction or interpretation of any of the provisions
hereof.
6.10. Notices. All notices, requests, demands and other
-------
communications hereunder shall be in writing and shall be deemed to have been
duly given if (a) hand delivered or (b) mailed, registered mail, first class
postage paid, return receipt requested, or (c) sent via overnight delivery
service or
-16-
<PAGE>
courier, delivery acknowledgment requested, or (d) via any other delivery
service with proof of delivery:
if to the Company:
Respironics, Inc.
1501 Ardmore Blvd.
Pittsburgh, PA 15221-4401
Attention: General Counsel
if to Executive, at the address set forth on the signature page hereof
or to such other address or to such other person as either party hereto shall
have last designated by notice to the other party.
Executive acknowledges that he has read and understands the foregoing
provisions and that such provisions are reasonable and enforceable.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or
caused this Agreement to be executed the day and year first above written.
Witness:
/s/ Daniel J. Bevevino /s/ James W. Liken
- -------------------------------- ---------------------------------
James W. Liken
Address: 5 Deer Spring Lane
-----------------------
Pittsburgh, PA 15238
-----------------------
Attest
RESPIRONICS, INC.
/s/ Dorita A. Pishko By: /s/ G. E. McGinnis
- --------------------------------- ------------------------------
Secretary
Title: Board Chairman
---------------------------
[Corporate Seal]
-17-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 2000 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-2000 JUN-30-1999
<PERIOD-START> JUL-01-1999 JUL-01-1998
<PERIOD-END> MAR-31-2000 MAR-31-1999
<CASH> 8,043,792 19,612,892
<SECURITIES> 0 0
<RECEIVABLES> 122,529,323 121,353,824
<ALLOWANCES> 18,693,000 9,268,000
<INVENTORY> 67,216,240 59,481,919
<CURRENT-ASSETS> 201,196,991 222,715,143
<PP&E> 128,777,704 113,009,824
<DEPRECIATION> 63,214,207 55,054,194
<TOTAL-ASSETS> 345,426,285 361,263,526
<CURRENT-LIABILITIES> 49,457,967 60,670,443
<BONDS> 0 0
0 0
0 0
<COMMON> 330,984 329,780
<OTHER-SE> 187,331,960 199,830,592
<TOTAL-LIABILITY-AND-EQUITY> 345,426,285 361,263,526
<SALES> 270,138,922 267,490,880
<TOTAL-REVENUES> 270,138,922 267,490,880
<CGS> 144,302,692 138,193,374
<TOTAL-COSTS> 149,393,030 138,193,374
<OTHER-EXPENSES> 114,726,810 90,005,192
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,985,775 3,558,478
<INCOME-PRETAX> 2,093,970 36,549,195
<INCOME-TAX> (805,365) 14,619,678
<INCOME-CONTINUING> 2,899,335 21,929,517
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,899,335 21,929,517
<EPS-BASIC> 0.10 0.69
<EPS-DILUTED> 0.10 0.68
</TABLE>
