<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X Quarterly Report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934 for the quarterly period ended September 30, 1997
------------------
or
Transition Report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934 for the transition period from ___________________
to _____________________
Commission file number 0-21776
HEALTHDYNE TECHNOLOGIES, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
GEORGIA 52-1756497
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1255 KENNESTONE CIRCLE, MARIETTA GEORGIA 30066
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(770) 499-1212
(Registrant's telephone number, including area code)
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
As of October 31, 1997, 12,962,756 shares of the Company's Common Stock, $.01
par value, were outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION
HEALTHDYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS September 30, December 31,
1997 1996
------------ -----------
Current assets: (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 1,857 3,041
Trade accounts and notes receivable, less
allowances of $1,591 at September 30, 1997 and $1,193
at December 31, 1996 43,404 36,164
Inventories:
Finished goods 10,677 7,862
Work in process 4,271 3,086
Raw materials 9,091 7,645
--------- -------
Total inventories 24,039 18,593
--------- -------
Deferred income taxes 1,840 1,523
Prepaid expenses and other current assets 2,064 2,296
--------- -------
Total current assets 73,204 61,617
--------- -------
Property and equipment 25,111 20,294
Less accumulated depreciation and
amortization (13,451) (11,000)
--------- -------
Net property and equipment 11,660 9,294
--------- -------
Excess of cost over net assets of businesses acquired,
less accumulated amortization of $2,396 at
September 30, 1997 and $1,815 at December 31, 1996 20,451 20,911
Intangible assets, less accumulated
amortization of $3,179 at September 30, 1997
and $2,992 at December 31, 1996 7,416 5,410
Other assets 1,695 846
--------- -------
$ 114,426 98,078
========= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE> 3
HEALTHDYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY September 30, December 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Current installments of long-term debt $ 1,098 2,610
Accounts payable, principally trade 14,664 12,375
Accrued liabilities 11,595 9,745
-------- ------
Total current liabilities 27,357 24,730
Long-term debt, excluding current installments 35,000 29,078
-------- ------
Total liabilities 62,357 53,808
-------- ------
Shareholders' equity:
Preferred stock, without par value. Authorized 10,000
shares; issued none -- --
Common stock, $.01 par value. Authorized 50,000 shares;
issued and outstanding 12,912 shares and 12,628 shares
at September 30, 1997 and December 31, 1996, respectively 129 126
Additional paid-in capital 24,716 22,755
Retained earnings 27,224 21,389
-------- ------
Total shareholders' equity 52,069 44,270
-------- ------
$114,426 98,078
======== ======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE> 4
HEALTHDYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1997 1996 1997 1996
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues $ 38,832 29,197 112,566 85,266
Cost of revenues 22,211 17,175 66,122 50,337
-------- ------- -------- -------
Gross profit 16,621 12,022 46,444 34,929
Selling and administrative expenses 8,870 7,743 25,513 21,736
Research and development expenses 2,481 1,590 6,568 4,362
-------- ------- -------- -------
Operating profit 5,270 2,689 14,363 8,831
Costs associated with an unsolicited
offer to acquire the Company (650) -- (2,800) --
Interest expense (788) (634) (2,031) (1,783)
Interest income 97 72 234 238
Other expense, net (7) (10) (42) (34)
-------- ------- -------- -------
Earnings before income taxes 3,922 2,117 9,724 7,252
Income tax expense 1,568 856 3,889 2,894
-------- ------- -------- -------
Net earnings $ 2,354 1,261 5,835 4,358
======== ======= ======== =======
Net earnings per common share and
common share equivalent $ .17 .10 .43 .34
======== ======= ======== =======
Weighted average number of common shares
and common share equivalents outstanding 13,700 12,830 13,500 12,963
======== ======= ======== =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE> 5
HEALTHDYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 5,835 4,358
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 3,219 2,621
Deferred income taxes (317) 676
(Increase) decrease in:
Trade accounts and notes receivable (7,240) 1,352
Inventories (5,446) 1,360
Other assets (617) (1,463)
Increase (decrease) in:
Accounts payable 2,289 (661)
Accrued liabilities 1,850 (1,417)
------- ------
Net cash provided by (used in)
operating activities (427) 6,826
------- ------
Cash flows from investing activities:
Purchase of product rights (2,193) (2,714)
Purchases of property and
equipment (4,817) (3,130)
Acquisition of businesses, net
of cash acquired (121) (1,209)
------- ------
Net cash used in
investing activities $(7,131) (7,053)
------- ------
</TABLE>
(continued)
5
<PAGE> 6
HEALTHDYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net borrowings under revolving
credit agreement $ 6,500 3,500
Principal repayments of long-term debt (2,090) (2,344)
Proceeds from issuance of long-term debt -- 672
Proceeds from issuance of common stock 1,964 1,305
------- ------
Net cash provided by
financing activities 6,374 3,133
------- ------
Net increase (decrease) in cash
and cash equivalents (1,184) 2,906
Cash and cash equivalents at beginning
of period 3,041 287
------- ------
Cash and cash equivalents at end
of period $ 1,857 3,193
======= ======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
<PAGE> 7
HEALTHDYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
1. General
The consolidated condensed financial statements as of September 30,
1997 and for the three and nine months ended September 30, 1997 and
1996 are unaudited. In the opinion of management, all adjustments,
consisting of normal recurring accruals, necessary for the fair
presentation of the consolidated financial position and results of
operations and cash flows for the periods presented have been included.
Results for interim periods are not necessarily indicative of results
that may be expected for the full fiscal year.
These consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and related
notes included in the Annual Report on Form 10-K of Healthdyne
Technologies, Inc. (the "Company") for the year ended December 31,
1996.
2. Earnings Per Share of Common Stock
Primary earnings per common share and common share equivalent are based
on the weighted average number of shares outstanding and common share
equivalents derived from dilutive stock options. Fully diluted earnings
per share are not significantly different from primary earnings per
share.
3. Credit Agreement
In March 1997, the Company entered into an amendment to its revolving
credit and term loan agreement (the "Credit Agreement") which extended
the expiration date of the term loan portion to June 1999. Balances
under the Credit Agreement will all be due at that time.
4. Costs Associated With an Unsolicited Offer to Acquire the Company
Reference is made to the Company's quarterly report on Form 10-Q for
the quarter ended June 30, 1997 (the "Second Quarter 1997 Form 10-Q")
with respect to the unsolicited tender offer by Invacare Corporation
("Invacare") for all outstanding common stock of the Company.
Capitalized terms not otherwise defined have the meanings ascribed to
such terms in the Second Quarter 1997 Form 10-Q.
On July 11, 1997, Invacare reduced its slate of nominees for election
at the Company's annual meeting of shareholders to be held on July 30,
1997 (the "1997 Annual Meeting") to four nominees.
At the 1997 Annual Meeting, all seven of the Company's nominees were
re-elected as directors. The shareholders also approved Invacare's
proposals to fix the size of the Board of Directors at seven members,
to repeal certain by-law
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provisions, and to allow special shareholders meetings to be called by
the holders of 10% or more of the Company's common shares.
The Invacare Offer expired by its terms at 6:00 p.m., New York City
time, on August 1, 1997, without any shares of the Company's common
stock being purchased.
The Company and certain of its Directors are also defendants in a
lawsuit brought by Invacare, as well as in certain class action
lawsuits purportedly brought on behalf of Company shareholders. The
Company incurred $2,800 in expense in the first nine months of 1997,
primarily related to costs associated with the Invacare Offer and
defending the litigation (see Part II, Item 1 "Legal Proceedings"
herein).
5. Litigation
See Part II, Item 1 for certain information concerning the litigation
between the Company and Respironics, Inc. ("Respironics").
6. Subsequent Events
On November 10, 1997, the Company entered into an Agreement and Plan of
Reorganization with Respironics and its wholly-owned subsidiary, RIGA,
Inc. ("RIGA"), and a related Agreement and Plan of Merger by and among
the same parties (collectively, the "Merger Agreement"). As provided in
the Merger Agreement, RIGA will be merged with and into the Company,
which will be the surviving corporation (the "Merger"). In the Merger,
each outstanding share of the Company's common stock will be converted
into and become a right to receive $24.00 in value of Respironics
common stock (the "Respironics Shares"), based on the trading value of
the Respironics Shares during a period preceding the closing of the
Merger as set forth in the Merger Agreement, provided that each share
of the Company's common stock will be converted into no more than
approximately .92 Respironics Shares nor less than approximately .77
Respironics Shares.
The Merger is subject to customary conditions including, among others,
approval of the Merger Agreement by a majority of the outstanding
Company shares, approval of the issuance of the Respironics Shares by a
majority of the Respironics Shares represented at the Respironics
shareholders' meeting and expiration or termination of the applicable
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
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<PAGE> 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
Except for the historical information contained herein, this report contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in this section, and in the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, as well as factors discussed or identified
from time to time in the Company's other filings with the Securities and
Exchange Commission.
GENERAL
Healthdyne Technologies' revenues are derived from sales of technologically
advanced medical devices primarily for use in the home and alternate care sites.
These products include diagnostic and therapeutic devices for the evaluation and
treatment of sleep disorders, oxygen delivery systems, noninvasive ventilators,
medication nebulizers, peak flow meters and drug delivery systems for the
treatment of respiratory disorders, and monitors for infants at risk for SIDS,
as well as a limited line of obstetrical care products. The Company markets its
products, both domestically and internationally, through a dedicated sales force
and a network of independent manufacturers' representatives and distributors.
The Company was the subject of an unsolicited hostile tender offer from Invacare
Corporation ("Invacare"), which expired on August 1, 1997 with no shares of the
Company's common stock being purchased. The Company has incurred non-operating
charges during the first nine months of 1997 related to the Invacare hostile
tender offer, as discussed herein. Please see Note 4 of Notes to Consolidated
Condensed Financial Statements herein.
The Company has announced the planned introduction of numerous new products in
1997 and 1998. These actions are scheduled to be completed on an accelerated
timetable. Timely introduction of products is dependent on several factors,
including but not limited to, timely completion of design and engineering work,
successfully tested prototypes, clinical device testing, clearance or approval
where necessary by the Food and Drug Administration ("FDA"), intellectual
property matters and availability of materials and components from suppliers.
There can be no assurance that each of these products will be introduced, the
products will be introduced in accordance with planned schedules, or that, once
introduced, products will be commercially successful. In some instances, levels
of coverage and reimbursement for these new products by third party payors has
not been established. The anticipated rapid development cycle also may result in
higher than anticipated warranty claims, which also could adversely affect
future financial performance.
The Company competes in a highly competitive environment with numerous
competitors which are financially strong and capable of competing effectively
with the Company in the marketplace. Such competitors may take actions to meet
the Company's new product introductions and other initiatives. Some competitors
may be willing to accept lower margins and to reduce prices to compete with the
Company. As a result, the Company could fail to achieve anticipated sales
increases, to realize anticipated price increases, or otherwise fail to meet its
anticipated results. Any of such circumstances would likely have an adverse
effect on future financial performance, which effect could be material.
The Company's present operations and future prospects may be influenced by
several factors, including developments in the healthcare industry, third-party
reimbursement policies and practices, and changes in regulatory requirements
with respect to approval and sale of medical devices. As a result of the
increasing cost of healthcare in the
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<PAGE> 10
United States, government and third party payors are becoming increasingly
focused on promoting cost-effective health care services, and payors, in
particular, have become more involved in decisions regarding diagnosis and
treatment to ensure that care is delivered in a cost-effective manner. As a
result of this focus on cost-effective healthcare delivery, the Company believes
that home-based healthcare services and medical products will continue to
provide a viable and cost-effective alternative to treatment in traditional
institutional care settings in many instances.
The Company's success is dependent to a large extent upon the ability of its
customers to obtain adequate reimbursement from third-party payors, such as
government and private insurance programs, for procedures using the Company's
products. The Balanced Budget Act of 1997 ("Act"), recently signed by the
President into law, imposes a plan for balancing the budget by 2002. The Act
would reduce Medicare payments by $115 billion over a five year period,
including reducing the national payment limit for oxygen and oxygen equipment by
25 percent in 1998 and an additional five percent in 1999. The 30 percent
reduction would apply in each subsequent year. Congress has indicated that the
Act's reductions and payments for oxygen and home oxygen equipment are in lieu
of the Administration's proposed reductions through the regulatory process.
Thus, the Act supersedes the proposed rule issued by the Health Care Financing
Administration (HCFA) on July 16, 1997, which would reduce the national limited
monthly payment rate for stationary home oxygen services beginning in 1998 by
40.11 percent. The Company does not believe that these reductions in the
reimbursement rates that the Company's customers receive for services rendered
will have a material adverse impact on the Company.
In addition to cutting Medicare reimbursement for home oxygen and oxygen
equipment, the Act authorizes the Secretary of Health and Human Services
(Secretary) to (1) establish separate classes for any item of oxygen and oxygen
equipment and separate national limited monthly payment rates for each of such
classes as long as this action is budget neutral; (2) establish service
standards for home oxygen providers; (3) arrange for peer review organizations
to evaluate access to, and quality of, home oxygen equipment; and (4) conduct
competitive bidding demonstration projects for the furnishing of Medicare Part B
equipment and supplies (except for physician services). The Secretary would be
authorized to establish up to five demonstration projects at three sites each.
The Act requires that at least one demonstration project include oxygen and
oxygen equipment. All competitive bidding projects pursuant to the Act will
terminate not later that December 31, 2002.
The Act further authorizes the General Accounting Office to study and report to
the House Ways and Means and Commerce Committees and Senate Finance Committee on
access to oxygen equipment, including recommendations for legislation, within 18
months after the date of enactment of the Act.
The Company's business also may be affected by changes in government regulation
to which the Company's products are subject or changes in the manner in which
such regulations are enforced or medical devices are approved. Performance
standards in proposed form for monitors for infants at risk for SIDS recently
have been published for comment by the FDA. The Company is unable to predict
whether, or in what form, these performance standards ultimately will be
adopted, but anticipates that it should be able to design and manufacture
products that will comply with any such standards. In addition, various entities
(NAMDRC, HIMA, etc.) have provided a range of clinical information and
guidelines to the DMERCs to assist them in developing guidelines for approved
use of noninvasive positive pressure ventilators in the home. The Company is
unable to predict whether, when and in what form the DMERCs will address the
appropriate use of noninvasive positive pressure ventilators.
A number of businesses within the healthcare industry, including in some
instances customers of the Company, recently have begun to consolidate in order,
among other things, to increase the size, efficiency and purchasing power of the
entities in question, to broaden the number and nature of products and services
offered to consumers
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or simply to better serve the changing healthcare industry with its focus upon
cost-effective medical care. Many large national healthcare dealers have the
capability of exerting significant price pressure on manufacturers. Changing
buying patterns may also have a negative effect on the Company's business. The
Company expects that consolidation among home care dealers is likely to
continue; however, the Company cannot predict the effect of such mergers and
consolidations on its business.
The Company has depended, and will continue to depend, substantially on its
technological expertise in the development and manufacture of its current and
future products. In addition, the Company depends, and will likely continue to
depend, on trade secret protection and licensing arrangements and, to a lesser
extent, on various patents, to strengthen its proprietary position. Trademark
registrations have been issued for a variety of the Company's products and
registration applications are pending with respect to the names of various other
products. The Company typically requires its employees to execute appropriate
confidentiality agreements in connection with their employment with the Company.
There can be no assurance that these arrangements will not be breached or that
the Company will have adequate remedies for such breach. Furthermore, no
assurance can be given that competitors will not independently develop
substantially equivalent proprietary information, that the Company can
meaningfully protect its rights in unpatented proprietary technology, or that
licensing arrangements will be continued. Litigation may be necessary to protect
trade secrets or know-how owned by the Company or to enforce patents or
trademarks used by the Company. From time to time, the Company and its
subsidiaries receive letters from patent holders alleging that one or more
products manufactured or under development by the Company infringe one or more
patents of such patent holders. At present, one such patent infringement claim
is pending in court (see Part II, Item 1 herein), and there can be no assurance
that other allegations will not lead to litigation involving the Company or its
subsidiaries. Any such litigation could result in substantial cost to, and might
have a material adverse effect on, the Company.
The Company acquired HealthScan Products during 1994 and acquired Fiberoptic
Medical Products, Inc. and certain assets of Trent Products Limited during 1996
in an effort to broaden its product offerings and will continue to examine
possible candidates for acquisition in the future should the opportunity arise.
No assurance, however, can be given that any such acquisitions will be
consummated by the Company or, if consummated, that they will be financially or
operationally successful.
On May 22, 1995, Healthdyne consummated a transaction pursuant to which the
10,000 shares of the Company's Common Stock owned at that time by Healthdyne
were distributed to Healthdyne's shareholders as a tax-free dividend (the
"Spin-off"). In an effort to facilitate the Spin-off, the Board of Directors of
the Company adopted a special stock option plan pursuant to which options to
purchase 1,344 shares of the Company's common stock were granted to holders,
including employees of the Company, of outstanding Healthdyne stock options.
Although the Company derives a portion of its revenues from foreign customers,
substantially all of these sales have historically been invoiced in U.S. Dollars
and, therefore, the Company has not been exposed to any significant foreign
exchange rate risk. The Company does not expect that a significant portion of
its foreign sales in the future will be invoiced in currencies other than U.S.
Dollars and, therefore, does not anticipate that it will be exposed to a
material amount of exchange rate risk. However, no assurance can be given that
this will be the case.
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with financial information herein and
the Company's consolidated financial statements and related notes presented in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996 as
filed with the Securities and Exchange Commission.
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Operating Results
The following table sets forth the percentage of revenues represented by line
items in the Consolidated Condensed Statements of Earnings for the three and
nine months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30,
--------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
Cost of revenues 57 59 59 59
---- ---- ---- ----
Gross profit 43 41 41 41
Selling and administrative expenses 23 27 22 26
Research and development expenses 6 5 6 5
---- ---- ---- ----
Operating profit 14 9 13 10
Costs associated with an unsolicited
offer to acquire the Company (2) -- (2) --
Interest expense, net (2) (2) (2) (2)
---- ---- ---- ----
Earnings before income taxes 10 7 9 8
Income tax expense 4 3 4 3
---- ---- ---- ----
Net earnings 6% 4% 5% 5%
==== ==== ==== ====
</TABLE>
Revenues for the three and nine months ended September 30, 1997 increased 33%
and 32%, respectively, to $38,832 and $112,566 from $29,197 and $85,266 in the
equivalent periods in 1996. These strong increases in revenue are primarily
attributable to sales growth in most of the Company's principal product lines.
Revenues from the Company's ventilation product line grew from approximately
$3,300 and $7,600, respectively, in the three and nine months ended September
30, 1996 to approximately $8,500 and $23,500, respectively, in the equivalent
periods of 1997, due to the continued outstanding market acceptance received by
Quantum(TM), the Company's noninvasive ventilator. Revenues from the respiratory
therapy product line increased 11% in the third quarter of 1997 and 7% in the
first nine months of 1997 as compared to the comparable periods of 1996, while
revenues from the Company's asthma management product line grew 62% and 49% in
the three and nine month periods ended September 30, 1997, respectively. The
sleep disorders product line grew 31% and 20% from the third quarter and first
nine months of 1996, respectively, due principally to the continued growth of
the Tranquility(R) sleep therapy system and the introduction of the Company's
new Tranquility(R) Bilevel product. The Tranquility(R) Bilevel was introduced
internationally late in the first quarter of 1997 and was approved by the FDA
for U.S. distribution in April 1997. Excluding the effect of the acquisition of
Fiberoptic Medical Products, Inc. in June, 1996, revenues from the infant
management product line increased 6% and 20%, respectively, in the three and
nine months ended September 30, 1997 over the year-earlier periods, primarily
due to the achievement of greater market share.
In the first quarter of 1997 the Company entered into an agreement with
Allegiance Healthcare for distribution of certain of the Company's asthma
management products. This agreement is part of the Company's ongoing efforts to
increase its distribution strength in large national accounts; however, there
can be no assurance that the agreement will be successful in improving the
Company's position with such accounts.
The Company's gross profit margin remained relatively constant at 41% for the
nine months ended September 30, 1997 as compared to the nine months ended
September 30, 1996. The Company's gross profit margin improved approximately two
percentage points in the
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third quarter of 1997 over the third quarter of 1996. This increase was
primarily due to improved product mix and product cost reductions in 1997.
Selling and administrative expenses decreased as a percentage of revenues from
27% and 26% to 23% and 22%, respectively, in the third quarter and first nine
months of 1997 as compared to the similar periods of 1996 due primarily to
operating efficiencies generated as a result of accelerated revenue growth.
Research and development expenses increased to $2,481 and $6,568 in the three
and nine months ended September 30, 1997, respectively, from $1,590 and $4,362
in the year-earlier periods, respectively, primarily due to the addition of
engineering staff and engineering costs relating principally to the development
and introduction of new products. As a percentage of revenues, these expenses
increased from 5% to 6%. In the first half of 1997, the Company successfully
introduced its new spacer device, the OptiChamber(TM), and successfully
introduced its new Tranquility(R) Bilevel product. There are several existing
competing products for both the Company's new asthma spacer device and the new
bilevel device. While the Company is hopeful that the features and pricing of
these devices will allow rapid market acceptance, there can be no assurances
that these products will gain market acceptance or, if attained, over what
period of time. See also Part II, Item 1 herein for information concerning a
lawsuit involving certain of the Company's products.
Non-operating charges of $650 and $2,800 for expenses associated with the
Invacare hostile tender offer and related litigation were recorded in the three
and nine months ended September 30, 1997, respectively.
Interest expense increased in the three and nine months ended September 30, 1997
as compared to the same periods in 1996 primarily due to higher average balances
outstanding under the Company's credit facility.
The effective income tax rate remained relatively constant at 40% in the three
and nine months ended September 30, 1997 and 1996.
The Company had deferred tax assets of $1,840 at September 30, 1997, which
resulted from allowances for uncollectible accounts and accruals and reserves
recorded for financial statement purposes but not yet deducted for income tax
purposes. Management believes such deferred tax assets will be recoverable
through reduced income taxes payable in future periods.
Liquidity and Capital Resources
The Company had working capital of approximately $45,800 as of September 30,
1997 and the current ratio was 2.7 to 1.0.
Operating activities used cash of $427 in the nine months ended September 30,
1997 as compared to cash provided by operating activities of $6,826 in the nine
months ended September 30, 1996. This decline is primarily attributable to
increases in trade accounts receivable and inventories, offset somewhat by
increases in accounts payable and accrued liabilities. The increase in these
working capital accounts is principally due to the growth in the Company's
revenue. Cash used in investing activities remained relatively constant in the
nine months ended September 30, 1997 as compared to the same period in 1996.
The Company entered into a Secured Revolving Credit Agreement in June 1993 (the
"Credit Agreement") with two commercial banks and in December 1994 entered into
an amendment to the Credit Agreement which increased the total commitment from
$15,000 to $25,000. During the last half of 1995, the Credit Agreement was
amended to increase the total commitment to $35,000 and was further amended in
June 1996 to add a term loan commitment
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of $15,000. In March 1997, the Credit Agreement was amended again to extend the
expiration date of the term loan to June 1999. Both the revolving credit
facility and the term loan now expire and are payable in full in June 1999. This
facility may be used for general corporate purposes and is secured by all
accounts receivable, inventory, deposit accounts and all intangible assets of
the Company and contains various covenants, including but not limited to net
worth and financial ratio requirements. As of September 30, 1997, the Company
had outstanding borrowings of $35,000 under its Credit Agreement at interest
rates ranging from 7.6% to 9.0%.
The Company believes that its existing cash balances, together with internally
generated funds and remaining amounts available under its Credit Agreement, will
be sufficient to meet the Company's operating capital requirements for at least
the next twelve months. Additional indebtedness and/or equity, in all
likelihood, would be needed to finance possible acquisitions should the Company
decide to pursue such transactions in the future.
As of September 30, 1997, the Company had outstanding commitments for capital
expenditures of approximately $1,000 relating primarily to manufacturing
tooling.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 26, 1997, Respironics, Inc. commenced a lawsuit against the
Company in the United States District Court for the Western District of
Pennsylvania, Case No. 97-1156. The Complaint alleges that two of the
Company's products - the Quantum(TM) noninvasive ventilator and the
Tranquility(R) Bilevel - infringe Respironics' Patent No. 5,433,193.
The lawsuit was not served on the Company until July 11, 1997. On July
11, 1997, Respironics also filed a Motion for Preliminary Injunction,
Motion for Expedited Discovery, and related discovery documents.
The Company has answered the Complaint and has filed a Counterclaim
seeking a declaratory judgment of patent invalidity, non-infringement,
and unenforceability. The Company has or will oppose the Motions filed
by Respironics. The matter is currently pending and, in connection with
the proposed merger of the Company with a subsidiary of Respironics
(the "Merger"), the parties have agreed to seek a stay of the
proceedings in this case until the Merger is consummated or the
Agreement and Plan of Reorganization relating to the Merger is
terminated. See Note 6 of Notes to Consolidated Condensed Financial
Statements herein.
As last updated in the Company's Form 10-Q for the quarter ended March
31, 1997, the Company and certain of its Directors are defendants in a
lawsuit brought by Invacare, as well as in certain class action
lawsuits brought on behalf of Company shareholders.
On July 3, 1997, the United States District Court for the Northern
District of Georgia, Atlanta Division (the "District Court"), entered
an order upholding the Continuing Director provision of the Company's
Shareholder Rights Plan and invalidating a by-law amendment proposed by
Invacare designed to circumvent such Continuing Director provision. On
July 10, 1997, the Eleventh Circuit Court of Appeals denied a motion
filed by Invacare seeking expedited review of the District Court's July
3 order. On July 25, 1997, the District Court entered an order
upholding the Company's position that Invacare's proposed by-law
amendment relating to the Shareholder Rights Plan be presented on a
contingent basis only at the Company's Annual Meeting of Shareholders.
The July 3 order of the District Court is currently on appeal to the
Eleventh Circuit Court of Appeals.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on July 30, 1997.
At the annual meeting, the Company's shareholders voted on the election
of seven directors in a contested election and on three proposals
submitted by Invacare in conjunction with Invacare's hostile takeover
attempt of the Company. The results of the voting were as follows:
15
<PAGE> 16
<TABLE>
<S> <C> <C>
1. Election of Directors
FOR WITHHELD
Company Nominees:
Craig B. Reynolds 6,472,567 148,326
Parker H. Petit 6,472,201 148,692
J. Terry Dewberry 6,472,201 148,692
Alexander H. Lorch 6,472,567 148,326
J. Leland Strange 6,472,372 148,521
James J. Wellman, M.D. 6,472,374 148,519
J. Paul Yokubinas 6,247,201 148,692
Invacare Nominees:
Donald F. Hastings 3,727,699 434,318
John H. Outcalt 3,727,699 434,318
James Allen Rutherford 3,727,699 434,318
Bill R. Sanford 3,952,114 434,903
2. Proposal to amend the Company's By-Laws to fix the size of the Board at seven directors:
For: 6,306,672
Against: 4,447,729
Abstain: 28,509
3. Proposal to repeal certain of the Company's By-Laws:
For: 6,504,546
Against: 4,253,294
Abstain: 25,070
4. Proposal to amend the Company's special meeting requirements:
For: 5,957,935
Against: 4,613,888
Abstain: 211,087
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this Report:
(11) Computation of Earnings Per Common Share
(27) Financial Data Schedule (for SEC use only)
(b) The Company filed a current report on Form 8-K dated July 22,
1997 reporting the adoption by the Board of Directors of an
amendment to the Company's Rights Agreement authorizing the
establishment of a fund for the benefit of Continuing
Directors.
The Company filed a current report on Form 8-K dated September
3, 1997 with respect to recent amendments to the Company's
By-Laws.
16
<PAGE> 17
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.
HEALTHDYNE TECHNOLOGIES, INC.
November 14, 1997 By: /s/ M. Wayne Boylston
--------------------------------------
M. Wayne Boylston
Vice President - Finance,
Chief Financial Officer and Treasurer
(duly authorized and
principal financial officer)
17
<PAGE> 1
EXHIBIT 11
HEALTHDYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
------- ------ ------ ------
<S> <C> <C> <C> <C>
Primary
Net earnings $ 2,354 1,261 5,835 4,358
======= ====== ====== ======
Shares:
Weighted average number of
common shares outstanding 12,875 12,624 12,772 12,559
Shares issuable from assumed
exercise of options and warrants 825 206 728 404
------- ------ ------ ------
Weighted average number of
common shares and common
share equivalents 13,700 12,830 13,500 12,963
======= ====== ====== ======
Net earnings per common share
and common share equivalent $ .17 .10 .43 .34
======= ====== ====== ======
Fully Diluted
Net earnings $ 2,354 1,261 5,835 4,358
======= ====== ====== ======
Shares:
Weighted average number of
common shares outstanding as
adjusted per primary
computation above 13,700 12,830 13,500 12,963
Additional shares issuable from
assumed exercise of options and
warrants computed on a fully
diluted basis 69 -- 85 36
------- ------ ------ ------
13,769 12,830 13,585 12,999
======= ====== ====== ======
Net earnings per common share
and common share equivalent $ .17 .10 .43 .34
======= ====== ====== ======
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF HEALTHDYNE TECHNOLOGIES, INC AND
SUBSIDIARIES FOR THE PERIOD ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,857
<SECURITIES> 0
<RECEIVABLES> 44,995
<ALLOWANCES> 1,591
<INVENTORY> 24,039
<CURRENT-ASSETS> 73,204
<PP&E> 25,111
<DEPRECIATION> 13,451
<TOTAL-ASSETS> 114,426
<CURRENT-LIABILITIES> 27,357
<BONDS> 35,000
0
0
<COMMON> 129
<OTHER-SE> 51,940
<TOTAL-LIABILITY-AND-EQUITY> 114,426
<SALES> 112,566
<TOTAL-REVENUES> 112,566
<CGS> 66,122
<TOTAL-COSTS> 66,122
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,031
<INCOME-PRETAX> 9,724
<INCOME-TAX> 3,889
<INCOME-CONTINUING> 5,835
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,835
<EPS-PRIMARY> .43
<EPS-DILUTED> .43
</TABLE>
