SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 2002
or
[ ] Transition Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ________ to ________
Commission File No. 000-16723
RESPIRONICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1304989
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1010 Murry Ridge Lane
Murrysville, Pennsylvania 15668-8525
(Address of principal executive offices) (Zip Code)
(Registrant's Telephone Number, including area code) 724-387-5200
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, 2002, there were 36,973,149 shares of Common Stock of the
registrant outstanding, of which 3,588,358 were held in treasury.
INDEX
RESPIRONICS, INC.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Independent Accountants' Review Report
Consolidated balance sheets -- September 30, 2002 and June 30, 2002.
Consolidated statements of operations -- Three months ended
September 30, 2002 and 2001.
Consolidated statements of cash flows -- Three months ended
September 30, 2002 and 2001.
Notes to consolidated financial statements - September 30, 2002.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Item 4. Controls and Procedures
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
Independent Accountants' Review Report
Board of Directors
Respironics, Inc. and Subsidiaries
We have reviewed the accompanying condensed consolidated balance sheet of
Respironics, Inc. and Subsidiaries as of September 30, 2002, and the related
condensed consolidated statements of operations for the three-month periods
ended September 30, 2002 and 2001, and the condensed consolidated statements of
cash flows for the three-month periods ended September 30, 2002 and 2001. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Respironics,
Inc. and Subsidiaries as of June 30, 2002, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the year then
ended not presented herein and in our report dated July 23, 2002, except for
Note N as to which the date is August 19, 2002, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of June 30, 2002, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
October 23, 2002
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
September 30 June 30
2002 2002
-----------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 48,745,595 $ 62,334,684
Trade accounts receivable, less allowance for
doubtful accounts of $17,998,000 and $18,458,000 120,856,308 121,281,073
Inventories 84,701,563 86,632,027
Prepaid expenses and other 25,300,040 23,875,193
Deferred income tax benefits 16,390,324 15,728,389
------------- -------------
TOTAL CURRENT ASSETS 295,993,830 309,851,366
PROPERTY, PLANT AND EQUIPMENT
Land 2,861,943 2,867,555
Building 16,161,593 16,777,382
Machinery and equipment 141,170,121 133,872,197
Furniture, office and computer equipment 70,588,116 67,768,498
Leasehold improvements 6,450,515 6,413,872
------------- -------------
237,232,288 227,699,504
Less allowances for depreciation and amortization 136,290,860 127,764,645
------------- -------------
100,941,428 99,934,859
OTHER ASSETS 33,354,144 33,802,545
GOODWILL 105,217,976 103,860,749
------------- -------------
$ 535,507,378 $ 547,449,519
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 33,167,077 $ 39,081,748
Accrued expenses and other 43,714,116 42,958,007
Current portion of long-term obligations 11,007,694 28,845,785
------------- -------------
TOTAL CURRENT LIABILITIES 87,888,887 110,885,540
LONG-TERM OBLIGATIONS 60,416,390 59,502,381
MINORITY INTEREST and OTHER 9,849,588 9,341,531
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized
100,000,000 shares; issued and outstanding
36,962,025 shares at September 30, 2002 and
36,885,795 shares at June 30, 2002 369,620 368,858
Additional capital 214,939,833 213,837,023
Accumulated other comprehensive loss (3,109,848) (2,718,213)
Retained earnings 207,336,017 198,450,389
Treasury stock (42,183,109) (42,217,990)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 377,352,513 367,720,067
------------- -------------
$ 535,507,378 $ 547,449,519
============= =============
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
Three months ended
September 30 September 30
2002 2001
-----------------------------
Net sales $ 138,642,222 $ 107,408,622
Cost of goods sold 70,506,166 56,508,529
------------- -------------
GROSS MARGIN 68,136,056 50,900,093
General and administrative expenses 17,779,005 12,909,013
Sales, marketing and commission expenses 27,216,822 19,498,801
Research and development expenses 5,484,203 4,313,602
Integration and restructuring charges 3,165,094 0
Interest expense 715,030 1,074,588
Other income (514,268) (323,432)
------------- -------------
53,845,886 37,472,572
------------- -------------
INCOME BEFORE INCOME TAXES 14,290,170 13,427,521
Income taxes 5,404,542 5,325,355
------------- -------------
NET INCOME $ 8,885,628 $ 8,102,166
============= =============
Basic earnings per share $ 0.27 $ 0.27
============= =============
Basic shares outstanding 33,280,684 30,408,210
Diluted earnings per share $ 0.26 $ 0.26
============= =============
Diluted shares outstanding 34,155,595 31,361,104
See notes to consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
Three Months Ended September 30
2002 2001
-------------------------------
OPERATING ACTIVITIES
Net income $ 8,885,628 $ 8,102,166
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 9,858,057 8,527,596
Change in minority interest and other 508,057 0
Changes in operating assets and liabilities:
Decrease in accounts receivable 424,765 1,307,526
Decrease in inventories 1,247,648 4,080,154
Change in other operating assets and liabilities (8,313,479) (2,063,047)
------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,610,676 19,954,395
INVESTING ACTIVITIES
Purchase of property, plant and equipment (9,739,725) (7,104,159)
Additional purchase price and transaction costs for
previously acquired business (674,411) (606,511)
------------- ------------
NET CASH USED BY INVESTING ACTIVITIES (10,414,136) (7,710,670)
FINANCING ACTIVITIES
Net decrease in borrowings (16,924,082) (3,203,957)
Issuance of common stock 1,138,453 1,066,800
------------- ------------
NET CASH USED BY FINANCING ACTIVITIES (15,785,629) (2,137,157)
------------- ------------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (13,589,089) 10,106,568
Cash and cash equivalents at beginning of period 62,334,684 27,320,910
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 48,745,595 $ 37,427,478
============= ============
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
September 30, 2002
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 accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three months
ended September 30, 2002 are not necessarily indicative of the results that may
be expected for the year ended June 30, 2003. 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, 2002.
NOTE B -- INVENTORIES
The composition of inventory is as follows:
September 30 June 30
2002 2002
------------ ------------
Raw materials $ 13,658,000 $ 15,236,000
Work-in-process 8,213,000 8,136,000
Finished goods 62,831,000 63,260,000
------------ ------------
$ 84,702,000 $ 86,632,000
============ ============
NOTE C -- CONTINGENCIES
On October 11, 2002, ResMed Corp., ResMed, Inc., and ResMed Ltd. (collectively,
"ResMed") filed an action in Federal District Court against the Company alleging
that its manufacture and sale of certain nasal masks infringe seven U.S. patents
(only five of which have been issued) (the "ResMed Patents"). The complaint also
alleges a number of related causes of action. In its complaint, ResMed seeks
injunctive relief, actual and punitive damages, and an award of three times
actual damages because of the Company's alleged willful infringement of the
ResMed Patents. In its answer to ResMed's complaint, the Company denied, in all
material respects, the allegations of the complaint.
On October 15, 2002, the Company filed its own Federal District Court action
against ResMed Ltd. seeking a declaratory judgment that the seven ResMed Patents
are invalid and/or unenforceable, and that the Company does not infringe the
same. The declaratory judgment action also seeks attorneys' fees as well as
relief as to the remaining allegations in the ResMed complaint.
As previously disclosed, the Company is party to actions filed in a Federal
District Court in January 1995 and June 1996 in which ResMed alleges that the
Company's manufacture and sale in the United States of certain products
infringes four of ResMed'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. The Court has granted the Company's various motions for summary
judgment and held that the Company does not infringe any of ResMed's four
patents at issue. ResMed may seek an appeal of those decisions. In any event,
the Company intends to continue to pursue its claims that ResMed's patents are
invalid or unenforceable.
The Company is, as a normal part of its business operations, a party to other
legal proceedings in addition to those previously described by filings of the
Company. Legal counsel has been retained for each proceeding and none of these
proceedings is expected to have a material adverse impact on the Company's
results of operations or financial condition.
NOTE D - SUBSEQUENT EVENT
On October 23, 2002, the Company announced the relocation of several of its
smaller product lines and related support functions from the Company's Kennesaw,
Georgia plant to its Murrysville, Pennsylvania location. This relocation will
allow the Company to standardize its manufacturing support, engineering, and
marketing functions as well as improve the overall efficiency of its
manufacturing operations in Kennesaw. The relocation activities are expected to
result in non-recurring charges of approximately $6.0 million associated
primarily with severance, transition, and relocation payments. The relocation
activities are expected to take place over the next six to eight months and the
non-recurring charges will be recorded over that period.
NOTE E -- COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, were as follows:
Three Months Ended
September 30, September 30,
2002 2001
------------- -------------
Net income $ 8,886,000 $ 8,102,000
Foreign currency translation (losses) gains (392,000) 735,000
------------- -------------
Comprehensive income $ 8,494,000 $ 8,837,000
============= =============
NOTE F -- ACQUISITIONS
On April 12, 2002, the Company completed its previously announced acquisition of
100% of the outstanding common stock of Novametrix Medical Systems Inc.
("Novametrix"), a leading cardiorespiratory monitoring company that develops,
manufactures, and markets proprietary state-of-the-art noninvasive monitors,
sensors, and disposable accessories. The acquisition of Novametrix was
consummated pursuant to an Agreement and Plan of Merger dated as of December 17,
2001, pursuant to which Respironics Holdings, Inc., a wholly owned subsidiary of
the Company, was merged with and into Novametrix. The results of operations of
Novametrix are included in the Company's consolidated income statements
beginning on the acquisition date, April 12, 2002.
The following unaudited pro forma summary presents the Company's results of
operations as if the acquisition had occurred at the beginning of the period
indicated and does not purport to be indicative of what would have occurred had
the acquisition been made as of that date or of results which may occur in the
future.
Three months ended
September 30, 2001
------------------
Pro forma sales $ 118,931,000
Pro forma net income $ 8,606,000
Pro forma net income per share $ 0.25
Restructuring and integration costs related to the Novametrix acquisition were
incurred during the fourth quarter of fiscal year 2002. Severance and related
costs of $1,647,000 for the separation of approximately 50 employees were
incurred, of which $1,336,000 was included in the purchase price for Novametrix,
and $311,000 was recorded as integration and restructuring charges. All of the
above costs are expected to be paid out during fiscal year 2003. Integration and
restructuring charges also included $1,977,000 related to eliminating and
centralizing certain corporate services functions.
During the first quarter of fiscal year 2003, the Company incurred additional
restructuring and integration costs related to the Novametrix acquisition.
Restructuring and integration costs of $3,165,000 were incurred primarily
related to the elimination and centralization of certain corporate services
functions and certain compensation related payments associated with the
acquisition and related integration activities.
In May 2002, the Company acquired a 60% controlling interest in Fuji, RC Co.,
Ltd. ("Fuji"), a leading provider of homecare and hospital products and services
for respiratory-impaired patients in Japan, and entered into an agreement to
purchase all of the
remaining outstanding shares of Fuji in a multiple step acquisition by December
31, 2006. The base cash purchase price for all of the outstanding shares is
approximately $12 million with provisions for additional payments to one of the
shareholders of Fuji to be made based on the operating performance of Fuji over
the next four years. These additional payments are being accrued as compensation
over the four-year period as they are earned by the shareholder during his
post-acquisition employment period. No amounts of the purchase price were
assigned to goodwill or other intangible assets since the initial purchase price
equaled the fair market value of the net assets acquired.
NOTE G - RECENT ACCOUNTING PRONOUNCEMENTS
Effective July 1, 2002, the Company has adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," under
which goodwill and intangible assets deemed to have indefinite lives are no
longer being amortized but will be subject to annual impairment tests. The
Company has performed the first of its required impairment tests with the
adoption of FASB No. 142 and has determined that no impairment exists as of July
1, 2002. Application of the nonamortization provisions of the Statement is
expected to result in an increase in annual net income of approximately
$3,000,000 or $0.08 per diluted share.
Net income and earnings per share excluding amortization expense are as follows:
Three Months Ended
September 30, 2002 September 30, 2001
---------------------------------------
Net income as reported $ 8,885,628 $ 8,102,166
Goodwill amortization expense - 825,464
---------------------------------------
Net income excluding goodwill amortization expense $ 8,885,628 $ 8,927,630
=======================================
Basic earnings per share:
Net income as reported $ 0.27 $ 0.27
Goodwill amortization expense - 0.03
---------------------------------------
Basic earnings per share excluding goodwill amortization expense $ 0.27 $ 0.30
=======================================
Diluted earnings per share:
Net income as reported $ 0.26 $ 0.26
Goodwill amortization expense - 0.03
---------------------------------------
Diluted earnings per share excluding goodwill amortization expense $ 0.26 $ 0.29
=======================================
In August 2001, Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," was issued. This Statement
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. This Statement supercedes FASB No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and the accounting and reporting provisions of Accounting Principles Board
("APB") Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," for the disposal of a segment
of a business (as previously defined in that Opinion). The Company adopted FASB
No. 144 on July 1, 2002. The Company believes that the impact of FASB No. 144 on
its financial position and results of operations will not be material, but the
Company will continue to evaluate the impact of FASB No. 144 throughout fiscal
year 2003.
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," addresses financial accounting and
reporting for costs associated with exit or disposal activities and requires
that a liability for a cost associated with an exit or disposal activity be
recognized at fair value when the liability is incurred, rather than at the date
of an entity's commitment to an exit plan. The provisions of FASB No.
146 are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged.
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, including
those contained in Item 2 "Management's Discussion and Analysis of Financial
Condition and Results of Operations", along with statements in other sections of
this document and 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 the expected results included in
the forward-looking 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, the success of the Company's marketing, sales, and
promotion programs, interest rate fluctuations, intellectual property and
related litigation, other litigation, successful integration of acquisitions,
FDA and other government regulation, anticipated levels of earnings and
revenues, and third party reimbursement.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Net sales for the three months ended September 30, 2002 were $138,642,000,
representing a 29% increase over the sales of $107,409,000 recorded for the
three months ended September 30, 2001. 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
accessories, helped to drive the increase in sales for the quarter. These
product lines comprise the major part of the Company's homecare product
offerings. Sales of the Company's hospital products also increased during the
current quarter, particularly sales of the Company's BiPAP(R) Vision(R) and
Esprit(R) ventilators.
Sales for the three months ended September 30, 2002 also included
approximately $11,823,000 of net sales for the products of Novametrix, which was
acquired by the Company during the fourth quarter of fiscal year 2002. Included
in the sales from Novametrix were approximately $8,215,000 of net sales for
cardiorespiratory hospital devices and approximately $3,608,000 of net sales for
developmental infant care products. Sales for the three months ended September
30, 2002 also included sales for Fuji, in which the Company obtained a majority
interest in the fourth quarter of fiscal year 2002. The Company's results of
operations include the results of both companies since the acquisition dates.
For additional information regarding Novametrix and Fuji, see Note F to the
Consolidated Financial Statements.
The Company's gross profit was 49% and 47% of net sales, respectively, for
the three months ended September 30, 2002 and 2001. The increase in gross profit
percentage for the three months ended September 30, 2002 compared to the prior
year was primarily due to higher revenue and the impact of higher gross margin
from acquired entities.
General and administrative expenses were $17,779,000 (13% of net sales) for
the quarter ended September 30, 2002 as compared to $12,909,000 (12% of net
sales) for the quarter ended September 30, 2001. The increase in absolute
dollars for the three months ended September 30, 2002 was due in part to general
and administrative expenses for the Company's two acquired companies, Novametrix
and Fuji. The remaining increases in general and administrative expenses
resulted from higher spending in a variety of areas, such as information
systems, consistent with the growth of the Company's business.
Sales, marketing and commission expenses were $27,217,000 (20% of net
sales) for the quarter ended September 30, 2002 as compared to $19,499,000 (18%
of net sales) for the quarter ended September 30, 2001. The majority of the
increase in expense for the current quarter was due to sales and marketing
expenses for the Company's
two acquired companies, Novametrix and Fuji. The remainder of the increase was
due to increased investments in the Company's core sales and marketing efforts.
Research and development expenses were $5,484,000 (4% of net sales) for the
quarter ended September 30, 2002 as compared to $4,314,000 (4% of net sales) for
the quarter ended September 30, 2001. The majority of the increase in absolute
dollars for the current quarter was due to research and development expenses
incurred at Novametrix. The remaining increase in absolute dollars of expense
for the current quarter was due to the Company's continuing commitment to
research, development and new product introductions. Significant product
development efforts are ongoing and new product launches in many of the
Company's major product lines are scheduled for the next twelve to eighteen
months. Additional development work and clinical trials are being conducted in
certain product areas outside the Company's current core products or patient
groups, including products designed to treat congestive heart failure patients
and products for patients with other sleep disorders.
During the three months ended September 30, 2002, the Company incurred
non-recurring charges for integration and restructuring costs of $3,165,000
related to the Novametrix acquisition, primarily related to the elimination and
centralization of certain corporate services functions and certain compensation
related payments associated with the acquisition and related integration
activities. See Note F to the Consolidated Financial Statements for additional
information regarding these non-recurring charges.
The Company's effective income tax rate was approximately 38% for the
quarter ended September 30, 2002 as compared to 40% for the quarter ended
September 30, 2001. This reduction was due primarily to the impact of
eliminating goodwill amortization effective July 1, 2002.
As a result of the factors described above, the Company's net income was
$8,886,000 (6% of net sales) or $0.26 per diluted share for the quarter ended
September 30, 2002 as compared to net income of $8,102,000 (8% of net sales) or
$0.26 per diluted share for the quarter ended September 30, 2001. Excluding the
non-recurring integration and restructuring charge described above, the
Company's net income for the quarter ended September 30, 2002 was $10,854,000
(8% of net sales) or $0.32 per diluted share.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $208,105,000 at September 30, 2002 and
$198,966,000 at June 30, 2002. Net cash provided by operating activities was
$12,611,000 for the three months ended September 30, 2002 as compared to
$19,954,000 for the three months ended September 30, 2001. The decrease in cash
provided by operating activities for the current three-month period was
primarily due to a decrease in accounts payable and smaller
decreases in accounts receivable and inventory levels in the current quarter
compared to the prior year.
Net cash used by investing activities was $10,414,000 for the three months
ended September 30, 2002 as compared to $7,711,000 for the three months ended
September 30, 2001. Cash used by investing activities for both periods includes
capital expenditures, including the purchase of leasehold improvements,
production equipment, computer hardware and software, and telecommunications and
office equipment. In addition, cash used by investing activities in the prior
year period includes additional purchase price paid for a previously acquired
business pursuant to the terms of that acquisition agreement. In the current
fiscal year, cash used for investing activities also includes transaction costs
related to the Novametrix acquisition. The funding for investment activities in
both periods was provided by positive cash flow from operating activities and
accumulated cash and cash equivalents.
Net cash used or provided by financing activities consists primarily of
repayments under the Company's various long-term obligations and proceeds from
the issuance of common stock under the Company's stock option plans. Net cash
used by financing activities was $15,786,000 for the three months ended
September 30, 2002 as compared to $2,137,000 for the three months ended
September 30, 2001. Included in net cash used by financing activities were net
debt paydowns of $16,924,000 and $3,204,000 for the three-month periods ended
September 30, 2002 and 2001, respectively.
The Company has contractual financial obligations and commercial financial
commitments consisting primarily of long-term debt, capital lease obligations,
and non-cancelable operating leases. The composition and nature of these
obligations and commitments have not changed materially since June 30, 2002,
other than the new Revolving Credit Agreement described below.
On August 19, 2002, the Company entered into a new Revolving Credit
Agreement with a group of banks under which a total of $150,000,000 is available
with terms and financial covenants similar to those contained in the Company's
prior credit facility. The new Revolving Credit Agreement is also unsecured and
matures in August 2005.
The following table summarizes significant contractual obligations and
commercial commitments of the Company as of September 30, 2002:
Contractual Obligations and Commercial Commitments
Payments Due by Period
-----------------------------------------------------------------------
Less Than 1-3 4-5 After 5
Contractual Obligations Total 1 Year Years Years Years
--------------------------------------------------------------------------------------------------------
Long-Term Debt $ 56,609,717 $ 5,390,411 $ 48,768,147 $ 2,214,780 $ 236,379
Capital Lease Obligations 14,814,367 5,617,283 6,998,528 2,198,556 -
Operating Leases 27,171,324 5,938,548 8,944,290 6,860,608 5,427,878
-----------------------------------------------------------------------
Total Contractual Obligations $ 98,595,408 $ 16,946,242 $ 64,710,965 $ 11,273,944 $ 5,664,257
=======================================================================
Amount of Commitment Expiration Per Period
--------------------------------------------------------
Total Amounts Less Than 1-3 4-5 Over 5
Other Commercial Commitments Committed 1 Year Years Years Years
--------------------------------------------------------------------------------------------------------
Standby Letters of Credit $ 1,369,175 $ 1,369,175 $ - $ - $ -
=======================================================================
See the Notes to the Company's Consolidated Financial Statements in its
Annual Report on Form 10-K for the year ended June 30, 2002 for information
about these obligations and commitments.
In connection with customer leasing programs with independent leasing
companies, the Company is contingently liable, in the event of a customer
default, to the leasing companies within certain limits for unpaid installment
receivables initiated by or transferred to the leasing companies. The transfer
of certain of these installment receivables meets the criteria of Statement of
Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities," and therefore are not
recorded on the Company's financial statements. The total exposure for unpaid
installment receivables meeting these criteria and not recorded on the Company's
financial statements was approximately $19,557,000 at September 30, 2002 as
compared to $18,428,000 at June 30, 2002. The transfer of the remainder of these
installment receivables (consisting of installment receivables acquired as part
of the Novametrix acquisition) does not meet the criteria of this Standard and
therefore must be recorded as collateralized borrowing arrangements.
Accordingly, at September 30, 2002 and June 30, 2002, the Company has included
$12,182,000 and $11,826,000, respectively, of receivables sold with recourse as
assets in prepaid expenses and other, and has recorded offsetting liabilities at
those dates in accrued expenses and other.
On August 1, 2002, one of the Company's significant homecare distribution
customers announced that it filed a voluntary petition to reorganize under
Chapter 11 of the U.S. Bankruptcy Code in order to restructure its bank debt.
According to the press release issued in connection with the filing, this
restructuring was announced as a "100-percent plan," meaning that creditors and
vendors are expected to receive all that they are owed, either immediately or
over time with interest. The press release also stated that the Company's
customer elected to seek court protection in order to facilitate the
restructuring of its debt while continuing to maintain normal business
operations. The Company believes that based on current available information,
the Company's reserve levels as of September 30, 2002, are adequate relative to
its receivable with this customer. The Company will continue to monitor the
situation.
The Company believes that its sources of funding -- consisting of projected
positive cash flow from operating activities, the availability of additional
funds under its revolving credit facility (totaling approximately $101,231,000
at September 30, 2002), and its accumulated cash and cash equivalents -- will be
sufficient to meet its current and presently anticipated short-term and
long-term future needs for operating activities (including payments against
restructuring accruals), investing activities, and financing activities
(primarily consisting of scheduled payments on long-term debt).
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 September 30, 2002, the Company had total
long-term debt and capital lease obligations, including the current portion of
those obligations, of $71,424,000. Of that amount, $23,424,000 was in fixed rate
obligations and $48,000,000 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 September 30, 2002 weighted average interest rate of 2.75% to
a weighted average interest rate of 3.03%), annual interest expense would be
approximately $132,000 higher based on the September 30, 2002 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 from that disclosed in the Company's Annual Report on
Form 10-K for the year ended June 30, 2002.
Inflation
Inflation has not had a significant effect on the Company's business during
the periods discussed.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," was issued to amend FASB No. 13 and requires sale-leaseback
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. FASB No. 145 also makes various
technical corrections to existing pronouncements that are not substantive in
nature. The Company is currently evaluating the impact FASB No. 145 will have on
its financial position and results of operations.
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," addresses financial accounting and
reporting for costs associated with exit or disposal activities and requires
that a liability for a cost associated with an exit or disposal activity be
recognized at fair value when the liability is incurred, rather than at the date
of an entity's commitment to an exit plan. The provisions of FASB No. 146 are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged.
Critical Accounting Policies
The Company's Consolidated Financial Statements are prepared in accordance
with accounting principles generally accepted in the United States, which
require the Company to make estimates and assumptions that may affect the
reported financial condition and results of operations should actual results
differ. The Company bases its estimates and assumptions on the best available
information and believes them to be reasonable under the circumstances. There
has been no change in the Company's critical accounting policies as disclosed in
the Company's Annual Report on Form 10-K for the year ended June 30, 2002. In
addition, no new critical accounting policies have been adopted in the first
three months of fiscal year 2003.
Item 4. Controls and Procedures
The Chief Executive Officer and the Chief Financial Officer of the Company
(its principal executive officer and principal financial officer, respectively)
have concluded, based on their evaluation as of a date within 90 days prior to
the date of the filing of this Report, that the Company's disclosure controls
and procedures are effective to ensure that information required to be disclosed
by the Company in the reports filed or submitted by it under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
include controls and procedures designed to ensure that information required to
be disclosed by the Company in such reports is accumulated and communicated to
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of such evaluation.
PART 2 OTHER INFORMATION
Item 1: Legal Proceedings
On October 11, 2002, ResMed Corp., ResMed, Inc., and ResMed Ltd. (collectively,
"ResMed") filed an action in the United States District Court for the Southern
District of California against the Company alleging that its manufacture and
sale of certain nasal masks infringe seven U.S. patents (only five of which have
been issued) (the "ResMed Patents"). The complaint also alleges a number of
related causes of action. In its complaint,
ResMed seeks injunctive relief, actual and punitive damages, and an award of
three times actual damages because of the Company's alleged willful infringement
of the ResMed Patents. In its answer to ResMed's complaint, the Company denied,
in all material respects, the allegations of the complaint.
On October 15, 2002, the Company filed its own action in the United States
District Court for the Western District of Pennsylvania against ResMed Ltd.
seeking a declaratory judgment that the seven ResMed Patents are invalid and/or
unenforceable, and that the Company does not infringe the same. The declaratory
judgment action also seeks attorneys' fees as well as relief as to the remaining
allegations in the ResMed complaint.
The Company is, as a normal part of its business operations, a party to other
legal proceedings in addition to those previously described by filings of the
Company. Legal counsel has been retained for each proceeding and none of these
proceedings is expected to have a material adverse impact on the Company's
results of operations or financial condition.
Item 2: Changes 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 10.43 Credit Agreement by and among RESPIRONICS, INC. as the
Borrower, THE BANKS PARTY THERETO, as
the Lenders thereunder, and PNC BANK, NATIONAL
ASSOCIATION as Agent, PNC CAPITAL MARKETS, INC. as Lead
Arranger, and CITIZENS BANK OF PENNSYLVANIA and FLEET
NATIONAL BANK as the Documentation Agents, dated as of
August 19, 2002, filed as Exhibit 10.43 to this
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002.
Exhibit 10.44 Amendment No. 1 to Employment Agreement between the
Company and James W. Liken dated August 26, 2002, filed
as Exhibit 10.44 to this Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002.
Exhibit 15 Acknowledgement of Ernst & Young LLP.
Exhibit 99.1 Certification of James W. Liken, President and Chief
Executive Officer, Pursuant to 18 U.S.C. Section 1350
Exhibit 99.2 Certification of Daniel J. Bevevino, Vice President and
Chief Financial Officer, Pursuant to 18 U.S.C. Section
1350
(b) Reports on Form 8-K
None.
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: 11/14/02 /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
CERTIFICATION
I, James W. Liken, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Respironics, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ James W. Liken
----------------------------------------------
Name: James W. Liken
Title: President and Chief Executive Officer
CERTIFICATION
I, Daniel J. Bevevino, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Respironics, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Daniel J. Bevevino
--------------------------------------------------
Name: Daniel J. Bevevino
Title: Vice President and Chief Financial Officer