NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Respironics, Inc. and Subsidiaries
Three months ended September 30, 2007
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited
Consolidated Financial Statements have been prepared in accordance with U.S. 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 U.S. 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 of the financial position of Respironics, Inc. and Subsidiaries (the Company or Respironics) have been included. Operating results for the three months ended September 30, 2007 are not necessarily
indicative of the results that may be expected for the year ended June 30, 2008. The amounts and information as of June 30, 2007 set forth in the Consolidated Balance Sheet and notes to the Consolidated Financial Statements that follow
were derived from the Companys Annual Report on Form 10-K for the year ended June 30, 2007. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Companys Annual Report on Form
10-K for the year ended June 30, 2007.
NOTE 2: SHORT-TERM INVESTMENTS
As of September 30, 2007 and June 30, 2007, the Company invested a portion of its cash into money management funds at high credit quality financial institutions. Short-term investments consist of U.S.
Treasury bills, other government securities, commercial paper, and certificates of deposit, with maturities greater than 90 days. These investments are designated as available for sale and are stated at fair value.
NOTE 3: EARNINGS PER SHARE
Earnings per common share is
computed in accordance with Financial Accounting Standards Board (FASB) Statement No. 128 Earnings per Share. Presented below is a reconciliation of net income available to common stockholders and the differences between weighted
average common shares outstanding, which are used in computing basic earnings per share, and weighted average common and potential shares outstanding, which are used in computing diluted earnings per share (in thousands except earnings per share
information).
|
|
|
|
|
|
|
|
|
Three months ended
September 30
|
|
2007
|
|
2006
|
Numerator:
|
|
|
|
|
|
|
Net income
|
|
$
|
27,469
|
|
$
|
22,069
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Denominator for basic earnings per shareweighted-average shares
|
|
|
73,863
|
|
|
72,835
|
Effect of dilutive securitiesstock options
|
|
|
1,202
|
|
|
875
|
|
|
|
|
|
|
|
Denominator for diluted earnings per shareadjusted weighted-average shares
|
|
|
75,065
|
|
|
73,710
|
|
|
|
|
|
|
|
Basic Earnings Per Share
|
|
$
|
0.37
|
|
$
|
0.30
|
|
|
|
|
|
|
|
Diluted Earnings Per Share
|
|
$
|
0.37
|
|
$
|
0.30
|
|
|
|
|
|
|
|
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Respironics, Inc. and Subsidiaries
Three months ended September 30, 2007
NOTE 4: INVENTORIES
Inventories consisted of the following, net of allowances for obsolete and excess inventories of $24.2 million, and $21.5 million at September 30, 2007 and June 30, 2007, respectively (in thousands):
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
June 30,
2007
|
Raw materials
|
|
$
|
58,639
|
|
$
|
55,343
|
Work-in-process
|
|
|
10,663
|
|
|
11,385
|
Finished goods
|
|
|
114,769
|
|
|
105,943
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
184,071
|
|
$
|
172,671
|
|
|
|
|
|
|
|
NOTE 5: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Companys reporting currency is the U.S. dollar, and a substantial majority of the Companys sales, expenses, and cash flows are transacted in U.S. dollars.
The Company also does business in various foreign currencies, primarily the Japanese yen, the euro, and the British pound. The Company also transacts business in the Hong Kong dollar, the Canadian dollar, the Swiss franc, Australian dollar, the
Chinese yuan, Swedish krona, Danish krone, Norwegian kroner, Brazilian real, and United Arab Emirates dirham (AED). As part of the Companys risk management strategy, management has put in place a hedging program under which the Company enters
into foreign currency option and forward contracts to hedge a portion of cash flows denominated in certain foreign currencies.
The Company enters into
foreign currency contracts to reduce the risk that the Companys earnings and cash flows, resulting from certain forecasted and recognized currency transactions, will be affected by changes in foreign currency exchange rates. However, the
Company may be impacted by changes in foreign exchange rates related to the portion of the forecasted transactions that are not hedged. The success of the hedging program depends, in part, on forecasts of the Companys transactions in foreign
currencies. Hedges are placed for periods consistent with identified exposures, but not longer than the end of the year for which the Company has substantially completed its annual business plan.
During the fourth quarter of 2007, the Company entered into a 14-month Japanese yen-based cross currency interest rate swap, with aggregate notional principal amounts of
¥1.9 billion Japanese Yen (JPY) and $15.8 million that matures on July 31, 2008. This swap effectively hedges a portion of the Companys net investment in its Japanese Fuji subsidiary. During the term of this transaction, the Company
will remit to, and receive from, its counterparty interest payments based on rates that are reset quarterly equal to three-month JPY LIBOR and three-month U.S. LIBOR rates, respectively. The Company has designated this hedging instrument as a hedge
of a portion of the net investment in its Japanese Fuji subsidiary, and will use the spot rate method of accounting for changes in the fair value of the hedging instrument attributable to currency rate fluctuations. As such, at September 30,
2007 and June 30, 2007, the fair market value of the hedging instrument attributable to changes in the spot rate of ($1.0) million and $0.4 million, respectively, is recorded as a (debit) credit in other comprehensive income (with a
corresponding amount that is classified with prepaid and other current assets in the Consolidated Balance Sheet as of September 30, 2007 and June 30, 2007). The change in fair market value of the cross currency swap offsets the change in a
portion of the JPY-denominated net investment in the Companys Japanese Fuji subsidiary. Amounts recorded to foreign currency translation within accumulated other comprehensive income will remain there until the net investment is disposed. The
Company recorded $0.2 million in interest income during the three months ended September 30, 2007 in connection with the cross currency interest rate swap.
NOTE 6: COMMITMENTS AND CONTINGENCIES
Invacare Litigation
On March 5, 2004, the Company filed a lawsuit against Invacare Corporation (Invacare) in the United States District Court for the Western District of Pennsylvania alleging that Invacares manufacture, sale
and marketing of a new Continuous Positive Airway Pressure (CPAP) device infringes one or more of 11 U.S. patents of the Company. In its complaint, the Company has sought preliminary and permanent injunctive relief, damages and an award of three
times actual damages. In its answer to the complaint, Invacare has denied the infringement allegations of the complaint and has asserted that the Companys patents are invalid.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Respironics, Inc. and Subsidiaries
Three months ended September 30, 2007
Discovery has concluded, and by Order dated August 30, 2006, the Court decided certain issues regarding the
interpretation of patent claims involved in the case. On April 26, 2007, the Court issued a summary judgment decision in which it (1) held the Respironics patent claims asserted to be valid; (2) held that Invacares current CPAP
with SoftX product does not infringe three Respironics patents; and (3) held that it could not decide on summary judgment whether a prior version of the Invacare CPAP with SoftX product infringed a fourth Respironics patent. The trial on the
infringement claim concerning the prior CPAP with SoftX product began on November 5, 2007 and resulted in a jury verdict in Respironics favor. Respironics intends to seek an appeal of the noninfringment aspects of the Courts prior
decisions.
On August 6, 2004, Invacare filed a lawsuit against the Company in the United States District Court in the Northern District of Ohio
alleging that the Company has engaged in monopolization, restraint of trade and unfair competition in the sale and distribution of sleep apnea products. The lawsuits claims include allegations that the Companys actions and alleged market
power have foreclosed competitors from alleged markets and have created markets where there has not been competitive pricing or availability of competitive product offerings. In the lawsuit, Invacare seeks damages in an unspecified amount and to
treble such damages pursuant to the antitrust laws, as well as attorneys fees and punitive damages. Invacare also seeks injunctive relief as to certain marketing practices.
By Order dated October 23, 2006, the Court granted partial summary judgment in the Companys favor, dismissing Invacares monopolization, attempted monopolization, price discrimination, and unfair
competition claims. The Court also limited future discovery in the case to the two remaining claims, parallel restraint of trade claims under both federal and state law. On October 31, 2006, Invacare filed a motion asking the Court to
reconsider portions of its decision granting partial summary judgment. By Order entered on July 19, 2007, the Court denied Invacares motion for reconsideration. The Company continues to vigorously defend itself against these claims.
Other
The Company is, as a normal part of its
business operations, a party to other legal proceedings in addition to those described above and in previous 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 Companys results of operations, financial condition or cash flows.
Contingent Obligations Under Recourse Provisions:
In connection with customer leasing programs, the Company uses independent leasing companies for the purpose of providing financing to certain customers
for the purchase of the Companys products. In some cases, 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 FASB No. 140 and therefore are not recorded on the Companys financial statements.
As of September 30, 2007, the total exposure for unpaid installment receivables approximates $11.7 million, compared to $12.2 million as of June 30, 2007.
Included in these amounts are unpaid installment receivables totaling $11.0 million and $11.4 million that meet the FASB No. 140 criteria and are not recorded on the Companys consolidated financial statements at September 30, 2007
and June 30, 2007, respectively. The estimated fair value of the Companys contingent recourse guarantee is $3.3 million and $2.2 million as of September 30, 2007 and June 30, 2007, respectively. Approximately 12% of the
Companys net sales were made under these financing arrangements during the three-month period ended September 30, 2007, and 13% of the Companys net sales were made under these financing arrangements during the three-month period
ended September 30, 2006. A portion of these sales was made with recourse. The Company is not dependent on these off-balance sheet arrangements.
Third Party Debt Guarantee
The Company has guaranteed the payment of certain third-party bank debt. The maximum potential amount of future
payments that the Company would be required to make, in the event that the third party defaults on its debt obligations, is $7.0 million. The term of the guarantee is five years from its December 2006 inception date. The current estimated fair value
of the guarantee is $1.5 million; this amount is included in the Consolidated Balance Sheet within other noncurrent liabilities and is being amortized into income over five years. The Company does not believe it is probable that the third party will
default on the amount subject to the guarantee.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Respironics, Inc. and Subsidiaries
Three months ended September 30, 2007
Product Warranties
Generally, the Companys standard product warranties are for a one- to three-year period (based on the specific product sold and country in which the Company does business) that covers both parts and labor. The Company provides for the
estimated cost of product warranties at the time revenue is recognized. The Companys product warranty liability reflects managements best estimate of probable liability under its product warranties. Management estimates the liability
based on the Companys stated warranty policies, which project the estimated warranty obligation on a product-by-product basis based on the historical frequency of claims, the cost to replace or repair its products under warranty, and the
number of products under warranty based on the warranty terms and historical units shipped. The warranty liability also includes estimated warranty costs that may arise from specific product issues, including product recalls or related field
actions. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The Company also engages in the sale of extended warranties and long-term service contracts for which revenue is
deferred and recognized over the warranty terms, which are generally between two and eight years. Changes in the liability for product warranty and deferred service revenues associated with these service programs for the three-month period ended
September 30, 2007 are as follows (in thousands):
Product Warranties
|
|
|
|
|
Balance as of June 30, 2007
|
|
$
|
23,223
|
|
Warranty accruals during the period
|
|
|
5,110
|
|
Service costs incurred during the period
|
|
|
(2,685
|
)
|
|
|
|
|
|
Balance at September 30, 2007
|
|
$
|
25,648
|
|
|
|
|
|
|
Deferred Service Revenues
|
|
|
|
|
Balance as of June 30, 2007
|
|
$
|
9,296
|
|
Revenues deferred during the period
|
|
|
1,516
|
|
Amounts recorded as revenue during the period
|
|
|
(1,046
|
)
|
|
|
|
|
|
Balance at September 30, 2007
|
|
$
|
9,766
|
|
|
|
|
|
|
The accruals for product warranties and deferred service revenues are classified with accrued expenses and other
current liabilities in the Consolidated Balance Sheet.
NOTE 7: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of financial instruments:
Cash and cash equivalents
The carrying amount of cash and cash equivalents, which include investments readily
convertible to known amounts of cash with original maturities of 90 days or less, approximate fair value because of the short maturity of those investments.
Short-term investments
Short-term investments are recorded in the Consolidated Balance Sheet at fair value. Fair values are based on quoted
market prices, estimates from brokers, and other appropriate valuation techniques. The fair value estimates do not necessarily reflect the values that could be realized in the current market on any one day.
Long-term obligations
The fair values of long-term debt obligations
are established from the market values of similar issues. The carrying amounts of the Companys obligations approximate their fair values at September 30, 2007 and June 30, 2007.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Respironics, Inc. and Subsidiaries
Three months ended September 30, 2007
Foreign currency exchange derivative contracts
Foreign currency exchange derivative contracts are recorded in the Consolidated Balance Sheet at fair value. As of September 30, 2007 and June 30, 2007, foreign currency contracts with a fair value of ($1.0)
million and $0.4 million, respectively, are recorded with prepaid expenses and other current assets.
NOTE 8: STOCK OPTIONS AND PURCHASE PLANS
At September 30, 2007, the Company has these active employee stock option plans: the 2000 Stock Incentive Plan and the 2006 Stock Incentive
Plan, and the 2007 Employee Stock Purchase Plan. These share based compensation plans are described more fully in Note N of the Consolidated Financial Statements included in the Companys June 30, 2007 Annual Report on Form 10-K.
The Company adopted FASB Statement No. 123 (Revised 2004)Share-Based Payment (FASB No. 123(R)) on July 1, 2005 using the
modified prospective method. Stock-based compensation expense in the three-month periods ended September 30, 2007 and 2006 was $3.6 million ($2.5 million after tax, or $0.03 per share) and $3.0 million ($2.1 million after tax, or $0.03 per
share), respectively. For the three-month period ended September 30, 2007 stock-based compensation expense was comprised of $3.4 million attributable to stock options and $0.2 million attributable to the employee stock purchase plan. For the
three-month period ended September 30, 2006 stock-based compensation expense included $2.8 million attributable to stock options and $0.2 million attributable to the employee stock purchase plan.
NOTE 9: COMPREHENSIVE INCOME
The components of comprehensive
income are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
Translation
Adjustments
|
|
Unrealized Gains on
Derivatives Qualifying
as
Hedges
|
|
|
Unrealized Gain
on Short-Term
Investments
|
|
Total Accumulated
Other Comprehensive
Income
(Loss)
|
Balance, June 30, 2007
|
|
$
|
1,407
|
|
$
|
411
|
|
|
$
|
1
|
|
$
|
1,819
|
Amounts arising during the period
|
|
|
7,171
|
|
|
(996
|
)
|
|
|
|
|
|
6,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2007
|
|
$
|
8,578
|
|
$
|
(585
|
)
|
|
$
|
1
|
|
$
|
7,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 10: ACQUISITIONS
Mayo
On January 2, 2007, the Company acquired the homecare assets of its Australian distributor, Mayo Healthcare Pty Ltd (Mayo). The acquisition provides the Company with a direct presence in the
Australian sleep therapy, home noninvasive ventilation and oxygen markets. The cash purchase price totaled approximately $6.2 million (including transaction costs) with provisions for additional payments to be made based on operating performance
through 2009. The results of operations of the acquired business are included in the Companys Consolidated Statements of Operations beginning on the acquisition date, January 2, 2007. The acquisition did not materially impact the
Companys net sales or net income during the three-month period ended September 30, 2007.
Emerson
On April 3, 2007, the Company acquired the assets of J. H. Emerson Company (Emerson) for a cash purchase price of $23.7 million (including transaction costs). Emerson, located in Cambridge, Massachusetts, is a
manufacturer, supplier, and wholesaler of the CoughAssist
®
which helps patients to clear broncho-pulmonary secretions to reduce the risk of respiratory complications. Prior to the
acquisition, Emerson was the Companys supplier of the CoughAssist
®
. The acquisition of the Emerson assets further expands the Companys portfolio of Home Respiratory Care
products and will enable the Company to better secure the needs of respiratory impaired patients. The results of operations of the Emerson business are included in the Companys Consolidated Statement of Operations beginning on the acquisition
date, April 3, 2007. The acquisition did not materially impact the Companys net sales or net income during the three-month period ended September 30, 2007.
Other
During the year ended June 30, 2007, the Company acquired the majority of the stock of its distributors in Norway and Denmark, totaling $7.2 million (including transaction costs). These
acquisitions did not materially impact the Companys net sales or net income during the three-month period ended September 30, 2007.
In the
three-month period ended September 30, 2007, the Company invested a total of $12.1 million for a majority equity interest in its distributor in Finland and minority equity interests in two sleep companies. The international distributors
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Respironics, Inc. and Subsidiaries
Three months ended September 30, 2007
results of operations are included in the Companys Consolidated Statements of Operations beginning on the acquisition date. One of the sleep companies
developed and markets a sleep enhancing, stress-reducing product to the retail market. The Company is using the cost-method of accounting for this investment since its ownership is less than 20% of the outstanding voting stock of the investee and it
determined that it does not exercise significant influence over the investees operations. The other company is a development stage sleep company. The Company is using the equity-method of accounting for this investment since its ownership is
greater than 20% but less than 50% of the outstanding voting stock of the investee and the Company determined it does have significant influence over the investees operations. The Company recorded $5.4 million of in-process research and
development expenses related to their investment; this amount is reflected in the Consolidated Statement of Operations for the three-month period ended September 30, 2007.
NOTE 11: INCOME TAXES
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109 (FIN 48), which became effective for the Company on July 1, 2007. FIN 48 prescribes a comprehensive model for how companies should recognize,
measure, present and disclose in their financial statements uncertain tax positions taken or expected to be taken on an income tax return. Under FIN 48, tax positions should initially be recognized in the financial statements when it is more likely
than not the position will be sustained upon examination by the tax authorities. Such tax positions should be initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate
settlement with the tax authority assuming full knowledge of the position and all relevant facts.
The Company adopted the provisions of FIN 48 on
July 1, 2007. As a result of the implementation of FIN 48, the Company recognized a net $3.9 million increase in the liability for unrecognized tax benefits which was accounted for as a reduction to the July 1, 2007 balance of retained
earnings. After recognition of these items in connection with the implementation of FIN 48, the total liability for unrecognized tax benefits at July 1, 2007 was $20.8 million. Of this total, $16.1 million of net tax benefits would reduce the
Companys effective tax rate if the tax benefits were recognized in the financial statements. At September 30, 2007, the Companys total liability for unrecognized net tax benefits is $23.4 million, of which $18.7 million would reduce
the effective tax rate.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. The total amount
of accrued interest and penalties included in the FIN 48 liability above as of July 1, 2007 was $3.8 million. The Company recognized $0.4 million of interest and penalties in income tax expense for the three months ended September 30, 2007 and
at September 30, 2007 the total amount of accrued interest and penalties included in the FIN 48 liability is $4.2 million.
As of July 1, 2007,
the Company is not aware of any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next 12 months.
The tax years 2003-2006 remain open to examination by the major taxing authority jurisdictions to which the Company is subject.
NOTE 12: RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006,
the FASB issued Statement No. 155, Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statements No. 133 and 140 (FASB No. 155). FASB No. 155 permits fair value re-measurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of FASB Statement No. 133, and establishes a
requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. In addition, FASB
No. 155 clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and amends FASB No. 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative financial instrument. FASB No. 155 is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that
begins after September 15, 2006. The Company adopted FASB No. 155 on July 1, 2007, and there was no material impact on its Consolidated Financial Statements.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Respironics, Inc. and Subsidiaries
Three months ended September 30, 2007
In March 2006, the FASB issued Statement No. 156, Accounting for Servicing of Financial Assetsan
amendment of FASB Statement No. 140 (FASB No. 156). FASB No. 156 requires that an entity separately recognize a servicing asset or a servicing liability when it undertakes an obligation to service a financial asset under a
servicing contract in certain situations. Such servicing assets or servicing liabilities are required to be initially measured at fair value, if practicable. FASB No. 156 also allows an entity to choose either the amortization method or the
fair value measurement method to account for servicing assets and servicing liabilities within the scope of this Statement. FASB No. 156 is effective after the beginning of an entitys first fiscal year that begins after September 15,
2006. The Company adopted FASB No. 156 on July 1, 2007, and there was no material impact to its Consolidated Financial Statements.
In June 2006,
the FASB ratified the Emerging Issues Task Force (EITF) consensus on EITF Issue No. 06-2, Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43 (EITF 06-2). EITF 06-2 requires companies to
accrue the costs of compensated absences under a sabbatical or similar benefit arrangement over the requisite service period. EITF 06-2 is effective for the Company beginning on July 1, 2007. The cumulative effect of the application of this
consensus on prior period results should be recognized through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. Elective retrospective application is also permitted. The Company adopted EITF 06-2 on
July 1, 2007, and this adoption did not have a material impact to its Consolidated Financial Statements.
In July 2006, the FASB issued FIN 48 which
creates a single model to address uncertainty in income tax positions. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial
statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 scopes income taxes out of FASB Statement No. 5, Accounting for
Contingencies. FIN 48 is effective for an entitys fiscal year beginning after December 15, 2006. The Company adopted FIN 48 as of July 1, 2007, as required, and the impact of this adoption is discussed in Note 11 to the
Consolidated Financial Statements.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (FASB No. 157).
FASB No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair value measurements. FASB No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. The Company will be required to adopt the provisions of FASB No. 157 on July 1, 2008, and is currently evaluating the impact of such adoption on its Consolidated Financial Statements.
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (FASB No. 159). This
Standard allows companies to elect to follow fair value accounting for certain financial assets and liabilities in an effort to mitigate volatility in earnings without having to apply complex hedge accounting provisions. FASB No. 159 is
applicable only to certain financial instruments and is effective for fiscal years beginning after November 15, 2007. The Company will be required to adopt the provisions of FASB No. 159 on July 1, 2008, and is currently evaluating
the impact of such adoption on its Consolidated Financial Statements.
NOTE 13: SUBSEQUENT EVENTS
On October 2, 2007, the Company acquired 100% of the outstanding shares of Apollo Light Systems, Inc. (Apollo), a privately-held company which manufactures light
therapy systems for melatonin suppression and circadian rhythm sleep disorders. Apollo, located in American Fork, Utah, has annual revenues of approximately $5.0 million. The cash purchase price for Apollo was $6.5 million with provisions for
additional payments to be made based on its operating performance over the next year. Total potential earn-out payments are less than the base purchase price.
On October 8, 2007, the Company sold its Novametrix pulse oximetry business to Dixtal Medical, Inc. after deciding to exit this line of business and refocus on its core technologies. As of September 30, 2007 and June 30, 2007
the Companys assets related to this business, which approximated the sales price, were classified in the Consolidated Balance Sheet as assets held for sale within prepaid expenses and other current assets and other (long-term)
assets. The sale transaction will not have a material impact on the Companys Consolidated Statement of Operations during the three-month period ended December 31, 2007.
On November 5, 2007, the trial on the Invacare patent infringement claim began, and on November 8, 2007 a jury returned a verdict in favor of Respironics. See Note 6 for more details on this litigation.
****************
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Respironics, Inc. and Subsidiaries
Three months ended September 30, 2007
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 Managements Discussion and
Analysis of Financial Condition and Results of Operations, along with statements in reports filed with the Securities and Exchange Commission (SEC), 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 Companys 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: developments in the healthcare industry; the success of the Companys marketing, sales, and promotion programs; future sales, acceptance, and quality of the Companys products
and programs; the results of clinical trials; the timing and success of new product introductions; new product development; anticipated cost savings; FDA and other regulatory requirements, enforcement actions, product recalls or related field
actions; future results from acquisitions and strategic investments; growth rates in foreign markets; regulations and other factors affecting operations and sales outside the United States; foreign currency fluctuations; the effects of a major
natural disaster, cyber-attack or other catastrophic event that results in the destruction or disruption of any critical business or information technology systems; customer consolidation and concentration; increasing price competition and other
competitive factors in the manufacture, distribution, and sale of products; interest rate fluctuations; expiration of intellectual property rights; intellectual property and related litigation; other litigation; future levels of earnings and
revenues; the number of equity awards granted to employees and changes in the Companys stock price; and third party reimbursement; all of which are subject to change.
14
Respironics, Inc. and Subsidiaries
Three Months Ended September 30, 2007