UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington DCWASHINGTON, D.C. 20549
----------________________________________
FORM 10-K
----------________________________________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended JuneFOR THE FISCAL YEAR ENDED JUNE 30, 2001
Commission file number2002
COMMISSION FILE NUMBER
0-26038
ResMed IncRESMED INC
(Exact name of Registrant as specified in its Charter)
DelawareDELAWARE
(State or other jurisdiction of incorporation or organization)
98-0152841
(IRS Employer Identification No.)
14040 Danielson Street
PowayDANIELSON STREET
POWAY, CA 92064-6857
United States Of AmericaUNITED STATES OF AMERICA
(Address of principal executive offices)
(858) 746-2400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of Each exchange upon which registered:
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS:
Common Stock, $.004 Par Value New York Stock Exchange
Rights to Purchase Series A Junior New York Stock Exchange
Participating Preferred Stock
Securities registered pursuant to Section 12(g) of the Act:NAME OF EACH EXCHANGE UPON WHICH REGISTERED:
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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 filing requirements
for the past 90 days. Yes [X][ X ] No [_][ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K (S 229.405 of this Chapter) is not contained herein and will
not be contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-K or
any amendment to this Form 10-K [_].[ ].
The aggregate market value of the voting stock held by non-affiliates of
registrant as of September 7, 2001,6, 2002, computed by reference to the closing sale
price of such stock on the New York Stock Exchange, was approximately
$1,105,000,000.$834,476,000. (All directors, executive officers, and 10% stockholders of
Registrant are considered affiliates.)
At September 7, 2001,6, 2002, registrant had 31,870,06032,912,599 shares of Common Stock, $.004
par value, issued and outstanding. This number excludes 360,347 shares held by
the registrant as treasury shares.
Portions of registrant's definitive Proxy Statement for its November 5, 200111, 2002
meeting of stockholders are incorporated by reference into Part III of this
report.
RESMED INC
______________________
TABLE OF CONTENTS
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PAGE
PAGE
Part I Item 1 Business 23
Item 2 Properties 1517
Item 3 Legal Proceedings 1617
Item 4 Submission of Matters to a Vote of Security Holders 1618
Part II Item 5 Market for Registrant's Common Equity and Related Stockholder 17
Matters 18
Item 6 Selected Financial Data 1820
Item 7 Management's Discussion and Analysis of Financial Condition and 1921
Results of Financial Operation
Item 7A Quantitative and Qualitative Disclosures About Market and Business 24
Risks 29
Item 8 Consolidated Financial Statements and Supplementary Data 3237
Item 9 Changes in and Disagreements with Accountants on Accounting and 3238
Financial Disclosure
Part III Item 10 Directors and Executive Officers of the Registrant 3338
Item 11 Executive Compensation 3338
Item 12 Security Ownership of Certain Beneficial Owners and Management 3339
Item 13 Certain Relationships and Related Transactions 3339
Part IV Item 14 Exhibits, Consolidated Financial Statement Schedule and Reports on 34
Form 8-K 39
Sullivan, VPAP, AutoSet, Bubble Mask, Bubble Cushion, SmartStart, ResCap,
Mirage, HumidAire, Aero-Click, minni Max nCPAP, Moritz II biLEVEL, Aero-Fix,
Twister remove, SELFSET, MESAMIV; Poly-MESAM, MEPAL, Auto VPAP, AutoScan,
AutoSet CS, AutoSet T, AutoView, IPAP MAX, ResControl, SCAN, S6, Ultra Mirage,
VPAP MAX, AutoSet.com, AutoSet-
CS.com,AutoSet-CS.com, and ResMed are our trademarks.
As used in this 10-K, the terms "we," "us," and "our" refer to ResMed Inc., a
Delaware corporation, and its subsidiaries, on a consolidated basis, unless
otherwise stated.
-2-
PART I
ItemITEM 1 Business
GeneralBUSINESS
GENERAL
We are a leading developer, manufacturer and distributor of medical equipment
for treating, diagnosing, and managing sleep disordered breathing, or SDB. SDB
includes obstructive sleep apnea, or OSA, and relatedother respiratory disorders that
occur during sleep. When we were formed in 1989, our primary purpose was to
commercialize a treatment for OSA developed by Professor Colin Sullivan of the
University of Sydney, the current Chairman of our Medical Advisory Board. This
treatment, nasal Continuous Positive Airway Pressure, or CPAP, was the first
successful noninvasive treatment for OSA. CPAP systems deliver pressurized air,
typically through a nasal mask, to prevent collapse of the upper airway during
sleep.
Since the development of nasal CPAP, we have developed a number of innovative
products for SDB, including flow generators, diagnostic products, mask systems,
headgear and other accessories. Our growth has been fueledfuelled by a productive research and product development effort,
geographic
expansion, and increased awareness of SDB as a significant health concern among
physicians and patients. In February 2001, we
acquired MAP Medizin-Technologie GmbH, or MAP. MAP is a leading German
designer, manufacturerpatients, and distributor of medical devices for the
diagnosisour research and treatment of SDB, with a particular focus on OSA. This
acquisition enhances our position in Europe, particularly in Germany,
the second largest market worldwide for OSA products.product development effort.
We employ over 950approximately 1,250 people and sell our products in over 60 countries
through a combination of wholly owned subsidiaries and independent distributors.
Corporate HistoryCORPORATE HISTORY
ResMed Inc,Inc., a Delaware corporation, was formed in March 1994 as the ultimate
holding company for our domestic, Australian European and United StatesEuropean operating
subsidiaries. On June 1, 1995, we completed an initial public offering of
common stock and on June 2, 1995 our common stock commenced trading on The
NASDAQ National Market. On September 30, 1999 we transferred our principal
public listing to the New York Stock Exchange, trading under the ticker symbol
RMD. On November 25, 1999, we established a secondary listing of our shares asvia
Chess Depositary Instruments, or CDIs, on the Australian Stock Exchange, also
under the symbol RMD. Ten CDIs on the ASX represent one share of our common
stock on the NYSE. On July 1, 2002, we converted our ASX listing status from a
foreign exempt listing to a full listing.
Our Australian subsidiary, ResMed Holdings Limited, was originally organized in
1989 by Dr. Peter Farrell to acquire from Baxter Center for Medical Research Pty
Limited, or Baxter, the rights to certain technology relating to CPAP treatment
as well as Baxter's existing CPAP device business. Baxter had sold CPAP devices
in Australia since 1988, having acquired the rights to the technology in 1987
from Dr. Colin Sullivan.
In addition to acquiringSince formation we have acquired a number of operating businesses with both
Labhardt Ag and Servo Magnetics Inc acquired during fiscal 2002, on November 15,
2001 and May 14, 2002 respectively. Previously we have acquired MAP in February 2001, we also acquired the
distribution businesses ofMedizin
Technologie GmbH, Dieter W. Priess Medtechnik, Premium Medical SARL, Innovmedics
Pte Ltd and EINAR Egnell AB, our German, French, Singaporean and Swedish
distributors, on February 16, 2001, February 7, 1996, June 12, 1996, November 1,
1997 and January 31, 2000, respectively. During the 1999 fiscal year we made an
equity investment in Flaga hf, based in Iceland. We now market Flaga's
polysomnographic products under the Embla and Embletta label in the United
States and selected other markets.
2-3-
The MarketTHE MARKET
Sleep is a complex neurological process that includes two distinct states: rapid
eye movement, or REM, sleep and non-rapid eye movement, or non-REM, sleep. REM
sleep, which is about 20-25% of total sleep experienced by adults, is
characterized by a high level of brain activity, bursts of rapid eye movement,
increased heart and respiration rates, and paralysis of many muscles. Non-REM
sleep is subdivided into four stages that generally parallel sleep depth; stage
1 is the lightest and stage 4 is the deepest.
The upper airway has no rigid support and is held open by active contraction of
upper airway muscles. Normally, during REM sleep and deeper levels of non-REM
sleep, upper airway muscles relax and the airway narrows. Individuals with
narrow upper airways or poor muscle tone are prone to temporary collapses of the
upper airway during sleep, or apneas, or near closures of the upper airways, or
hypopneas. These breathing irregularities result in a lowering of blood oxygen
concentration, causing the central nervous system to react to the lack of oxygen
or increased carbon dioxide and signaling the body to respond. Typically, the
individual subconsciously arouses from sleep, causing the throat muscles to
contract, opening the airway. After a few gasping breaths, blood oxygen levels
increase and the individual can resume a deeper sleep until the cycle repeats
itself. Sufferers of OSA typically experience ten or more such cycles per hour.
While these awakenings greatly impair the quality of sleep, the individual is
not normally aware of these disruptions.
In its "Wake Up America"America'' report to Congress in 1993, the National Commission on
Sleep Disorders Research estimated that approximately 40 million individuals in
the United States suffer from chronic disorders of sleep and wakefulness, such
as sleep apnea, insomnia and narcolepsy. According to this report, sleep apnea
is the most common sleep disorder, affecting approximately 20 million
individuals in the United States. Despite the high prevalence of OSA, there is
a general lack of awareness of OSA among both the medical community and the
general public. It is estimated that less than 10% of those afflicted by OSA
know the cause of their fatigue or other symptoms. Health care professionals are
often unable to diagnose OSA because they are unaware that such non-specific
symptoms as fatigue, snoring and irritability are characteristic of OSA.
While OSA has been diagnosed in a broad cross-section of the population, it is
predominant among middle-aged men and those who are obese, smoke, consume
alcohol in excess or use muscle-relaxing drugs. In addition, patients who are
being treated for certain other conditions, including those undergoing dialysis
treatment or suffering from diabetes, may be
medically predisposed tohave an increased incidence of OSA.
Recent studies have also shown that SDB is associated with hypertension, the
leading risk factor for the development of stroke and heart disease, and that
over 50% of post stroke patients and patients with congestive heart failure have
SDB.
Sleep Disordered Breathing and Obstructive Sleep ApneaSLEEP DISORDERED BREATHING AND OBSTRUCTIVE SLEEP APNEA
Sleep disordered breathing, or SDB, encompasses all physiological processes that
cause detrimental breathing patterns during sleep. Manifestations include OSA,
central sleep apnea, or CSA, and hypoventilation syndromes that occur during
sleep. Hypoventilation syndromes are generally associated with obesity, chronic
obstructive lung disease, neuromuscular disease and upper airway resistance
changes. OSA is the most common form of SDB.
Sleep fragmentation and the loss of the deeper levels of sleep caused by OSA can
lead to excessive daytime sleepiness, reduced cognitive function, including
memory loss and lack of concentration, depression and irritability. OSA
sufferers also may experience an increase in heart rate and an elevation of
-4-
blood pressure during the cycle of apneas. Several studies indicate that the
oxygen
3
desaturation, increased heart rate and elevated blood pressure caused by
OSA may be associated with increased risk of cardiovascular morbidity and
mortality due to angina, stroke and heart attack. Patients with OSA have been
shown to have impaired daytime performance in a variety of cognitive functions
including problem solving, response speed and visual motor coordination, and
studies have linked OSA to increased occurrences of traffic and workplace
accidents.
Generally, an individual seeking treatment for the symptoms of OSA is referred
by a general practitioner to a specialist for further evaluation. The diagnosis
of OSA typically requires monitoring the patient during sleep at either a sleep
clinic or the patient's home. During overnight testing, respiratory parameters
and sleep patterns are monitored along with other vital signs such as blood pressure, heart rate
and blood oxygen levels. These tests allow sleep clinicians to detect any sleep
disturbances such as apneas, hypopneas or subconscious awakenings. We estimate
that there are currently more than 2,000 sleep clinics in the United States, a
substantial portion of which are affiliated with hospitals. The number of sleep
clinics has expanded significantly from approximately 100 such facilities in
1985.
Existing TherapiesEXISTING THERAPIES
Prior to 1981, the primary treatment for OSA was a tracheotomy, a surgical
procedure to cut a hole in the patient's windpipe to create a channel for
airflow. Most recently, surgery has involved either uvulopalatopharyngoplasty
('UPPP'), in which surgery is performed on the upper airway to remove excess
tissue and to streamline the shape of the airway, or mandibular advancement, in
which the lower jaw is moved forward to widen the patient's airway. UPPP alone
has a poor success rate; however, when performed in conjunction with mandibular
advancement, a greater success rate has been claimed. This combined procedure,
performed by highly specialized surgeons, is expensive and involves prolonged
and often painful recovery periods.
Nasal CPAP, by contrast, is a non-invasive means of treating OSA. Nasal CPAP
was first used as a treatment for OSA in 1980 by Dr. Colin Sullivan, the
Chairman of our Medical Advisory Board. CPAP systems were commercialized for
treatment of OSA in the United States in the mid 1980's. Today, use of nasal
positive airway pressure is generally acknowledged as the most effective and
least invasive therapy for managing OSA.
During nasal CPAP treatment, a patient sleeps with a nasal mask connected to a
small portable air flow generator that delivers room air at a positive pressure.
The patient breathes in air from the flow generator and breathes out through an
exhaust port in the mask. Continuous air pressure applied in this manner acts
as a pneumatic splint to keep the upper airway open and unobstructed.
CPAP is not a cure but a therapy for managing OSA, and therefore, must be used
on a daily basis as long as treatment is required. Patient compliance has been
a major factor in the efficacy of CPAP treatment. Early generations of CPAP
units provided limited patient comfort and convenience. Patients experienced
soreness from the repeated use of nasal masks and had difficulty falling asleep
with the CPAP device operating at the prescribed pressure. In more recent
years, product innovations to improve patient comfort and compliance have been
developed. These include more comfortable mask systems,systems; delay timers which
gradually raise air pressure allowing the patient to fall asleep more easily;
bilevel flow generators, including VPAP systems, which provide different air
pressures for inhalation and exhalation; heated humidification systems to make
the airflow more comfortable; and autotitrationauto titration devices which reduce the
average pressure delivered during the night.
Business Strategy-5-
BUSINESS STRATEGY
We believe that the SDB market will continue to grow in the future due to a
number of factors including increasing awareness of OSA, improved understanding
of the role of SDB treatment in the 4
management of cardiac, neurologic and
related disorders, and an increase in home-based diagnosis. Our strategy for
expanding our business operations and capitalizing on the growth of the SDB
market consists of the following key elements:
. Continue Product Development and Innovation.elements.
CONTINUE PRODUCT DEVELOPMENT AND INNOVATION. We are committed to ongoing
innovation in developing products for the diagnosis and treatment of SDB. We
have been a leading innovator of products designed to more effectively treat
apneas, increase patient comfort and encourage compliance with prescribed
therapy. For example, in 19971999 we introduced the Mirage Full Face Mask. This
mask contains an inflatable air pocket, which conforms to the patient's facial
contours, creating a more comfortable and better seal. Additionally, in 19992002 we
introduced the AutoSet TSpirit flow generator, anour second generation
autotitrating device that adapts to the patient's breathing patterns to more
effectively prevent apneas. We believe that continued product development and
innovation are key factors to our ongoing success. Approximately 14% of our
employees are devoted to research and development activities. In fiscal year
2001,2002, we invested $11.1$14.9 million, or 7.2%7.3% of our revenues, in research and
development.
. Expand Geographic Presence.EXPAND GEOGRAPHIC PRESENCE. We market our products in over 60 countries to
sleep clinics, home health care dealers and third party payers. We intend to
increase our sales and marketing efforts in our principal markets, as well as
expand our presence into new geographic regions.
For example, our acquisition of MAP enhances our position in Europe,
particularly in Germany, the second largest market worldwide for OSA
products.
. Increase Public and Clinical Awareness.INCREASE PUBLIC AND CLINICAL AWARENESS. We intend to continue to expand our
existing promotional activities to increase awareness of SDB and our treatment
alternatives. These promotional activities target the population with
predisposition to SDB as well as primary care physicians and specialists, such
as cardiologists, neurologists and pulmonologists. In addition, we also target
special interest groups, including the National Stroke Association, the American
Heart Association and the National Sleep Foundation.
. ExpandIn addition during fiscal 2002, the Company donated a total of $2.3 million to
the ResMed Sleep Disordered Breathing Foundations in the United States and
Australia to further enhance research and awareness of SDB. The foundations'
contributions represent ResMed's continuing commitment to core medical research
into New Clinical Applications.sleep disordered breathing, particularly the treatment of obstructive sleep
apnea.
EXPAND INTO NEW CLINICAL APPLICATIONS. We continually seek to identify new
applications of our technology for significant unmet medical needs. SDB is
associated with a number of symptoms beyond fatigue and irritability. In particular, recentRecent
studies have established a clinical association between OSA and both stroke and
congestive heart failure. We are currently developing a device, which has not
been approved for sale in the United States, for the treatment of Cheyne-Stokes
breathing in patients with congestive heart failure. In addition, we maintain
close working relationships with a number of prominent physicians to explore new
medical applications for our products and technology.
. Leverage the Experience of our Management Team and Medical Advisory
Board.LEVERAGE THE EXPERIENCE OF OUR MANAGEMENT TEAM AND MEDICAL ADVISORY BOARD. Our
senior management team has extensive experience in the medical device industry
in general, and in the field of SDB in particular. Our Medical Advisory Board
is comprised of experts in the field of SDB, including Dr. Colin Sullivan, the
inventor of nasal CPAP. We intend to continue to leverage the experience and
expertise of these individuals to maintain our innovative approach to the
development of products and increase awareness of the serious medical problems
caused by SDB.
Products-6-
PRODUCTS
Our portfolio of products for the treatment of OSA and other forms of SDB
includeincludes flow generators, diagnostic products, mask systems, headgear and other
accessories.
5
Flow GeneratorsFLOW GENERATORS
We produce nasal CPAP, VPAP and AutoSet systems for the diagnosis, titration and
treatment of SDB. The flow generator systems deliver positive airway pressure
through a small nasal mask (or sometimes a full-
facefull-face mask). Our VPAP units
deliver ultra-quiet, comfortable bilevel therapy. There are two preset
pressures: a higher pressure as the patient breathes in, and a lower pressure as
the patient breathes out. Breathing out against a lower pressure makes treatment
more comfortable, particularly for patients who need high pressure levels or for
those with impaired breathing ability. AutoSet systems are based on a
proprietary technology to monitor breathing that can also be used in the
diagnosis and treatment of OSA. CPAP and VPAP flow generators, together with
our diagnostic products, accounted for approximately 57%58%, 60%57% and 64%60% of our net
revenues in fiscal years 2002, 2001 2000 and 1999,2000, respectively.
--------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------
Date of
Flow Generators Description Commercial
Introduction
--------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------
VPAP II
Bilevel portable device providing different pressure levels for March 1996 inhalation and
exhalation, improved pressure switching and reduced noise output and spontaneous
VPAP II breath triggering. March 1996
Bilevel portable device providing different pressure levels for inhalation and
Moritz S# exhalation with integrated humidifier. October 2001*
COMFORT Bilevel device with limited features. March 1996
VPAP II ST Bilevel portable device with spontaneous and April 1996
spontaneous/timed breath triggering
VPAP II ST modes of operation. April 1996
VPAP II ST A Bilevel device with power failure alarms. August 1998
VPAP MAXBilevel ST device with spontaneous and spontaneous/timed breath triggering modes
Moritz ST# of operation, and with power failure alarms, system with integrated humidifier. October 2001*
Bilevel ventilatory support system for the treatment of adult November 1998
patients with
VPAP MAX+ respiratory insufficiency or respiratory failure. November 1998
AUTOSET
AutoSet TSpirit Modular, autotitrating device with optional integrated humidifier. September 2001
Autotitrating device, which continually adjusts CPAP March 1999
treatment pressure based on
AutoSet T patient airway resistance. March 1999
Delivers varying degrees of ventilatory assistance to stabilize breathing and reduce
AutoSet CS# cheyne stokes respiration in congestive heart failure patients. December 1998
CPAP
ResMed S7 series+ Continuous Positive Pressure flow generator. July 2002
ResMed S6 series Quiet, compact CPAP device with various comfort features. June 2000
Continuous Positive Pressure flow generator available with or without integrated
Max II nCPAP# humidifier. Features low noise and reduced pressure swings. April 1997*
Minni Max nCPAPnCPAP# CPAP device with integrated humidification capabilities February 2001*and attachable humidifier and low noise levels. Moritz II Bilevel Bilevel portable device. February 2001*
--------------------------------------------------------------------------------------------------------------March 2000*
- ---------------------------------------------------------------------------------------------------------------------
*Date of acquisition of MAP. The MAP products are*MAP product, not approved for marketing in the United States.
6+ Sold in USA only
# Sold outside USA only
-7-
Mask SystemsMASK SYSTEMS
Mask systems are one of the most important elements of an OSA treatment system.
Masks are a primary determinant of patient comfort and as such may drive or
impede patient compliance with therapy. We have been a consistent innovator in
masks, improving patient comfort while minimizing size and weight. Masks,
accessories and motors accounted for approximately 42%, 43% and 40% of our net
revenues in fiscal years 2002, 2001 and 2000, respectively.
---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------------
Date of
Mask Products Description Commercial
Introduction
---------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------
Mirage Mask
Proprietary mask design with a contoured nasal cushion that August 1997
adjusts to patient's
Mirage Mask facial contours. Quiet, light and low profile. Mirage Full FaceAugust 1997
Mirage-based full face mask system. Provides an effective June 1999
Mask method of applying
ventilatory assist Noninvasive Positive Pressure Ventilation therapy. Can be used to
Mirage Full Face Mask Series 2 address mouth- breathing problems in conventional bilevel or CPAP therapy. Ultra Mirage MaskOctober 2001
Advanced version of the Mirage system with reduced noise June 2000
characteristics and
Ultra Mirage Mask improved forehead bridge. ---------------------------------------------------------------------------------------------------------------June 2000
Protege Mask+ Market entry mask. Upgradable to Ultra Mirage technology. May 2002
Nasal mask with only four major parts, allows simplified handling for patients and
Papillon Mask# distributors. April 2002*
- ----------------------------------------------------------------------------------------------------------------------------------
Diagnostic Products* MAP product, not approved for marketing in the United States.
+ Sold in USA only
# Sold outside USA only
DIAGNOSTIC PRODUCTS
We market sleep recorders for the diagnosis, titration and treatment of SDB in
sleep clinics and hospitals. These diagnostic systems record relevant
respiratory and sleep data, which can be analyzed by a sleep specialist or
physician who can then tailor an appropriate OSA treatment regimen for the
patient.
---------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------
Date of
Diagnostic Products Description Commercial
Introduction
---------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------
AutoSet Portable II Portable version of the AutoSet Clinical with PC processor June 1997
Plus functions.
ResControl
Device to permit remote monitoring and adjustment of September 1999 ResMed CPAP, VPAP, and
AutoSet T Flow generators. An internal pressure transducer enables the clinician
to interface with polysomnography to monitor airflow in both titration and
ResControl diagnostic studies. EmblaSeptember 1999
Digital sleep recorder that provides comprehensive sleep October 1999
diagnosis in a sleep
Embla+ laboratory. EmblettaOctober 1999
Embletta+ Pocket-size digital recorder that performs ambulatory sleep studies. November 2000
studies.
MESAM IV PortablePortable+ Portable diagnostic system that measures snore, heart rate, February 2001*
Diagnostic System body position, and
Diagnostic System+ oxygen saturation in conjunction with computer assisted analysis. December 1989*
Poly-MESAM PortablePortable+ Configurable polysomnographycardio-respiratory polygraphy system adaptableup to 8 channels, includes
Diagnostic System+ ECG, thorax and abdomen belts, PLMS sensor. February 2001*
Diagnostic1995*
MEPAL Diagnostic+
System individual sleep laboratory needs.
MEPAL Diagnostic Polysomnography system designed for use in the sleep laboratory. February 2001*1999*
MEPAL mobil+
Diagnostic System laboratory.
MEPAL mobil Ambulatory polysomnography system. FebruaryMarch 2001*
Diagnostic System
---------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------
*Date of acquisition of MAP. The MAP products are*MAP product, not approved for marketing in the United States.
7+Not manufactured by ResMed.
-8-
Accessories and Other ProductsACCESSORIES AND OTHER PRODUCTS
To enhance patient comfort, convenience and compliance, we market a variety of
other products and accessories. These products include humidifiers, such as the
SULLIVAN HumidAire, which connect directly with the CPAP, VPAP and AutoSet T
flow generators to humidify and heat the air delivered to the patient. Their
use prevents the drying of nasal passages whichthat can cause discomfort. Other
optional accessories include a cold passover humidifier, carry bags and
breathing circuits. MAP also offers a range of accessories, including the
Twister remote, an intelligent remote control for use in the sleep lab
environment to set and monitor flow generators, the Aero-Click connection
system, which allows a quick, simple connect/disconnect between the mask and
CPAP air delivery source and the AeroFix headgear, for the comfortable
adjustment of masks for CPAP therapy. Product DevelopmentSince the May 2002 acquisition of Servo
Magnetics Inc., we have sold custom electric motors for use in data storage and
Clinical Trialsaerospace applications.
PRODUCT DEVELOPMENT AND CLINICAL TRIALS
We have a strong track record in innovation in the sleep market. In 1989, we
introduced our first nasal CPAP device. Since then we have been committed to an
ongoing program of product advancement and development. Currently, our product
development efforts are focused on not only improving our current product
offerings, but also expanding into new product applications. For example, in
1997, we introduced the Mirage Mask. This mask was based on the innovative
Bubble Mask technology introduced in 1991, which used the principle of air
inflation of the mask cushion to create a more comfortable and better seal by
better conforming to patient facial contours. Additionally, in 1999, we
introduced the AutoSet T Flow generator, an autotitrating device that adapts to
the patient's breathing patterns to effectively prevent apneas.
We continually seek to identify new applications of our technology for
significant unmet medical needs. SDB is associated with a number of symptoms
beyond fatigue and irritability. In particular, recentRecent studies have established a clinical
association between SDB and hypertension, stroke, and congestive heart failure.
For example, we are currently developing a device, which has not been approved
for sale in the United States, for the treatment of Cheyne-Stokes breathing in
patients with congestive heart failure. We also support clinical trials in the
United States, Germany, France, the United Kingdom and Australia.
We consult with physicians at major sleep centers throughout the world to
identify technological trends in the treatment of SDB. Some of these physicians
currently serve on our Medical Advisory Board. New product ideas are also
identified by our marketing staff, direct sales force, network of distributors,
manufacturers' representatives, customers, and patients. Typically, our
internal development staff then performs new product development.
In fiscal years 2002, 2001 2000 and 1999,2000, we invested $14,910,000, $11,146,000 $8,499,000
and
$6,542,000,$8,499,000, respectively, on research and development.
Sales and MarketingSALES AND MARKETING
Our products are typically purchased by a home healthcare dealer who then sells
the products to the patient. The decision to purchase our products, as opposed
those of our competitors, is made or influenced by one or more of the following
individuals or organizations: the prescribing physician and his or her staff,
the home healthcare dealer, the insurer and the patient.
We currently market our products in over 60 countries using a network of
distributors, independent manufacturers' representatives and our direct sales
force. We attempt to tailor our marketing 8
approach to each national market,
based on regional awareness of SDB as a health problem, physician referral
patterns, consumer preferences and local reimbursement policies.
North America and Latin America-9-
NORTH AMERICA AND LATIN AMERICA. In the United States, our sales and marketing
activities are conducted through a field sales organization made up of regional
territory representatives, program development specialists and diagnostic system
specialists, regional sales directors, and independent manufacturers'
representatives. Our United States field sales organization markets and sells
products to more than 4,000 home health care dealer branch locations throughout
the United States. Our direct sales force receives a base salary, plus
commissions, while our independent sales representatives receive higher
commissions, but no base salary.
We also promote and market our products directly to sleep clinics. Patients who
are diagnosed with OSA and prescribed CPAP treatment are typically referred by
the diagnosing sleep clinic to a home health care dealer to fill the
prescription. The home health care dealer, in consultation with the referring
physician, will assist the patient in selecting the equipment, fit the patient
with the appropriate mask and set the flow generator pressure to the prescribed
level. In the United States, our sales employees and manufacturers'
representatives are managed by two regional Sales Managers a Director of Sales and ultimately our Senior Vice
President U.S. Sales and Marketing.of Sales.
Our Canadian and Latin American sales are conducted through independent
distributors. Sales in North America and Latin America accounted for 52%49%, 54%52%
and 57%54% of our net revenues for fiscal years 2002, 2001 and 2000, and 1999,
respectively.
EuropeEUROPE. We market our products in most major European countries. We have
wholly owned subsidiaries in the United Kingdom, Germany, France, Netherlands,
Austria, Sweden and Sweden,Switzerland and we use independent distributors to sell our
products in other areas of Europe. Distributors are selected in each country
based on their knowledge of respiratory medicine and a commitment to SDB
therapy. In each country in which we have a subsidiary, a local senior manager
is responsible for direct national sales.
MAP conducts its sales efforts through a direct
sales force.
Our Executive Vice President is responsible for coordination of all European
activities and, in conjunction with local management, the direct sales activity
in Europe. Sales in Europe accounted for 39%42%, 35%39% and 34%35% of our total net
revenues for fiscal years 2002, 2001 and 2000, and 1999,
respectively.
As a result of the MAP acquisition, we expect European sales
to increase as a percentage of total net revenues in the near future.
Australia/Rest of WorldAUSTRALIA/REST OF WORLD. Marketing in Australia and the rest of the world is
the responsibility of our Executive Vice President. Sales in Australia and the
rest of the world accounted for 9%, 11%9% and 9%11% of our total net revenues for the
fiscal years ended June 30, 2002, 2001 and 2000, and 1999, respectively.
Other Marketing EffortsOTHER MARKETING EFFORTS. In addition to our sales efforts, we work with the
following organizationscardiovascular disease associations (CVD includes Coronary Artery
Disease, Congestive Heart Failure, Hypertension, Stroke, and Transient Ischemic
Attacks) to promote public and clinicalraise awareness of the co-morbidity of SDB and OSA:
.in cardiovascular disease
patients:
(1) National Stroke Association: We have developed a strategic alliance with
the National Stroke Association to increase awareness about the high prevalence
of SDB in the stroke survivor population.
9
.(2) American Heart Association: We are working closely with the Western
Affiliates of the American Heart Association on a number of local programs to
increase awareness and education about SDB. We are also in discussions with the
national American Heart/American Stroke associations regarding national programs
initially targeting clinicians on the impact of SDB on both heart disease and
stroke patients, as well as its role in the development of hypertension, a major
risk factor for both heart disease and stroke.
.-10-
(3) National Sleep Foundation: The National Sleep Foundation is a non profit
organization dedicated to improving public health and safety by raising the
level of awareness and education toward sleep related programs and research. We
have been an active corporate partner and have supported the National Sleep
Foundation for a number of years.
We believe that our affiliations and continued work with these organizations
raises the awareness of SDB as a significant health concern.
ManufacturingMANUFACTURING
Our principal manufacturing facilities are located in Sydney, Australia and
comprise a 120,000 square foot manufacturing and research and development
facility. Our manufacturing operations consist primarily of assembly and testing
of our flow generators, masks and accessories. Of the numerous raw materials,
parts and components purchased for assembly of our therapeutic and diagnostic
sleep disorder products, most are off-the-shelf items available from multiple
vendors. We generally manufacture to our internal sales forecasts and fill
orders as received. Our quality control
group performs tests at various steps inOver the last two years the manufacturing cycleprocesses have
been transformed along world class manufacturing guidelines to ensure
compliance with our specifications.flow lines
staffed by dedicated teams. Each team is responsible for manufacture and
quality of their product group and decisions are based on performance and
quality measures including customer feedback.
Our quality management system is based upon the requirements of ISO 9001,
EN46001 (European Medical Standards), FDA Quality System Regulations for medical
devices (21 CFR part 820) and the Medical Device Directive (93/42/EEC). Our
Sydney, Australia facility is accredited to ISO 9001 and EN46001 and our San
Diego, California facility is accredited to ISO 9002 and EN46002. These two
sites have third party audits conducted by the ISO certification bodies at
regular intervals.
Our newly acquired German manufacturing operation based in Munich operates in a facility of
approximately 24,000 square feet. This facility is accredited to ISO 9001 and
EN46001. The products areEN46001 and primarily assembles and tests flow generators that have been developed internallyfor sale by a small development
team. The manufacturing process consists of major sub-assemblies produced
externally by sub-contractors, and final assembly and test of the finished
product being performed in house.our
subsidiary MAP GmbH. Appropriate quality controls monitor and measure product
assembly and performance.
We purchase uniquely configured componentsIn addition to our Australian and German manufacturing operations we also
manufacture high quality electric motors for both our flow generator devices from single-
source suppliers. A reduction or stoppageand
external customers, primarily in supply while a replacement
supplier reconfigures its components, or while we reconfigurethe data storage and aerospace sectors, at our
components for the replacement part, if required, would limit our ability
to manufacture our devices, which could result in a significant reduction
in sales and profitability.
Third-Party ReimbursementServo Magnetics Incorporated (SMI) facility at Canoga Park, California. The SMI
facility is approximately 35,500 square feet .
THIRD-PARTY REIMBURSEMENT
The cost of medical care in many of the countries in which we operate is funded
in substantial part by government and private insurance programs. Although we
do not generally receive payments for 10
our products directly from these payers,
our success in major markets is dependent upon the ability of patients to obtain
adequate reimbursement for our products.
-11-
In the United States, our products are purchased primarily by home health care
dealers, hospitals or sleep clinics, which then invoice third-party payers
directly. Domestic third-party payers include Medicare, Medicaid, and corporate
health insurance plans. These payers may deny reimbursement if they determine
that a device is not used in accordance with cost-
effectivecost-effective treatment methods,
or is experimental, unnecessary or inappropriate. The long-term trend towards
managed health care, or legislative proposals to reform health care, could
control or significantly influence the purchase of health care services and
products as well as legislative proposals to reform health care, mayand could result in lower prices for our products.
In the United States, we sell our products primarily to home health care dealers
and to sleep clinics; we do not file claims and bill governmental programs and
other third-party payers directly for reimbursement for our products.
Nevertheless, we are still subject to laws and regulations relating to
governmental programs, and any violation of these laws and regulations could
result in civil and criminal penalties, including fines.
In particular, the federal Anti-Kickback Law prohibits persons from knowingly
and willfully soliciting, receiving, offering or providing remuneration,
directly or indirectly, to induce either the referral of an individual, or the
furnishing, recommending or arranging for a good or service, for which payment
may be made under a Federal healthcare program such as the Medicare and Medicaid
programs. The government has interpreted this law broadly to apply to the
marketing and sales activities of manufacturers and distributors like us. Many
states have adopted laws similar to the federal Anti-Kickback Law. We are also
subject to other federal and state fraud laws applicable to payment from any
third-party payer. These laws prohibit persons from knowingly and willfully
filing false claims or executing a scheme to defraud any healthcare benefit
program, including private third-party payers. These laws may apply to
manufacturers and distributors who provide information on coverage, coding and
reimbursement of their products to persons who bill third-party payers. We
continuously strive to comply with these laws and believe that our arrangements
do not violate these laws. Liability may still arise from the intentions or
actions of the parties with whom we do business or from a different governmental
agency interpretation of the laws.
In some foreign markets, such as Spain, France and Germany, government
reimbursement is currently available for purchase or rental of our products
subject, however, to constraints such as price controls or unit sales
limitations. In Australia and in some other foreign markets, there is currently
limited or no reimbursement for devices that treat OSA.
Service and WarrantySERVICE AND WARRANTY
We generally offer one-to-two year limited warranties on our flow generator
products. Warranties on mask systems are for 90 days. In most markets, we rely
on our distributors to repair our products with parts supplied by us. In the
United States, home health care dealers generally arrange shipment of products
to our San Diego facility for repair.
We receive returns of our products from the field for various reasons. We
believe that the level of returns experienced to date is consistent with levels
typically experienced by manufacturers of similar devices. We provide for
warranties and returns based on historical data.
11-12-
CompetitionCOMPETITION
The markets for our products are highly competitive. We believe that the
principal competitive factors in all of our markets are product features,
reliability and price. Reputation and efficient distribution are also important
factors.
We compete on a market-by-market basis with various companies, some of which
have greater financial, research, manufacturing and marketing resources than
ourselves. In the United States, our principal market, Respironics, Inc.,
DeVilbiss, a division of Sunrise Medical Inc., and Nellcor Puritan Bennett, a
subsidiary of Tyco Inc., are the primary competitors for our CPAP products. Our
principal European competitors are also Respironics, DeVilbiss, and Nellcor
Puritan Bennett, as well as regional European manufacturers. The disparity
between our resources and those of our competitors may increase as a result of
the recent trend towards consolidation in the health care industry. In
addition, our products compete with surgical procedures and dental appliances
designed to treat OSA and other SDB related respiratory conditions. The
development of new or innovative procedures or devices by others could result in
our products becoming obsolete or noncompetitive, resulting in a material
adverse effect on our business, financial condition and results of operations.
Any product developed by us that gains regulatory clearance will have to compete
for market acceptance and market share. An important factor in such competition
may be the timing of market introduction of competitive products. Accordingly,
the relative speed with which we can develop products, complete clinical testing
and regulatory clearance processes and supply commercial quantities of the
product to the market are expected to be important competitive factors. In
addition, our ability to compete will continue to be dependent on the extent to
which we are successful in protecting our patents and other intellectual
property.
Patents and Proprietary Rights and Related LitigationPATENTS AND PROPRIETARY RIGHTS AND RELATED LITIGATION
Through our subsidiaries ResMed Limited and MAP Medizintechnik fur Arzt und
Patient GmbH, we own or have licensed rights to 5172 issued United States patents
(including 1315 design patents) and 102116 issued foreign patents. In addition,
there are 8290 pending United States patent applications (including 49 design
patent applications) and 197218 pending foreign patent applications. Some of these
patents and patent applications relate to significant aspects and features of
our products. These include U.S. patents relating to CPAP devices, delay timer
system, the Bubble Mask, and an automated means of varying air pressure based
upon a patient's changing needs during nightly use, such as that employed in our
AutoSet device.
None ofOf our patents, istwo United States patents and three foreign patents are due to
expire in the next five years, with the
exception of fiveone foreign patentspatent due to expire in 2002 and one foreign
patent in each of
the years 2004, 2005 and 2005.2007 and two United States patents in 2007. We believe
that the expiration of these patents will not have a material adverse impact on
our competitive position.
We rely on a combination of patents, trade secrets, trade marks and
non-
disclosurenon-disclosure agreements to protect our proprietary technology and rights.
ResMed Limited is pursuing an infringement actionactions against onetwo of its competitors
and is investigating possible infringement by others. See Item 3 - "Legal
Proceedings".
Additional litigation may be necessary to attempt to enforce patents issued to
us, to protect our rights, or to defend third-party claims of infringement by us
of the proprietary rights of others. Patent laws regarding the enforceability
of patents vary from country to country. Therefore, there 12
can be no assurance
that patent issues will be uniformly resolved, or that local laws will provide
us with consistent rights and benefits.
Government Regulations-13-
GOVERNMENT REGULATIONS
Our products are subject to extensive regulation particularly as to safety,
efficacy and adherence to FDA Quality System Regulation, or QSR, and related
manufacturing standards. Medical device products are subject to rigorous FDA and
other governmental agency regulations in the United States and regulations of
relevant foreign agencies abroad. The FDA regulates the introduction,
manufacture, advertising, labeling, packaging, marketing, distribution, and
record keeping for such products, in order to ensure that medical products
distributed in the United States are safe and effective for their intended use.
In addition, the FDA is authorized to establish special controls to provide
reasonable assurance of the safety and effectiveness of most devices. Non
compliance with applicable requirements can result in import detentions, fines,
civil penalties, injunctions, suspensions or losses of regulatory approvals,
recall or seizure of products, operating restrictions, refusal of the government
to approve product export applications or allow us to enter into supply
contracts, and criminal prosecution.
The FDA requires that a manufacturer introducing a new medical device or a new
indication for use of an existing medical device obtain either a Section 510(k)
premarket notification clearance or a premarket approval, or PMA, prior to it
being introduced into the U.S. market. Our products currently marketed in the
United States are marketed in reliance on 510(k) pre-marketing clearances as
either Class I or Class II devices. The process of obtaining a Section 510(k)
clearance generally requires the submission of performance data and often
clinical data, which in some cases can be extensive, to demonstrate that the
device is "substantially equivalent'' to a device that was on the market prior
to 1976 or to a device that has been found by the FDA to be "substantially
equivalent'' to such a pre-1976 device. As a result, FDA approval requirements
may extend the development process for a considerable length of time. In
addition, in some cases, the FDA may require additional review by an advisory
panel, which can further lengthen the process. The PMA process, which is
reserved for new devices that are not substantially equivalent to any predicate
device and for high risk devices or those that are used to support or sustain
human life, may take several years and requires the submission of extensive
performance and clinical information.
As a medical device manufacturer, all of our domestic and Australian
manufacturing facilities are subject to inspection on a routine basis by the
FDA. We believe that our design, manufacturing and quality control procedures
are in substantial compliance with the FDA's regulatory requirements. MAP's
facilities are not subject to FDA regulation, because none of MAP's products is
currently marketed in the United States.
Sales of medical devices outside the United States are subject to regulatory
requirements that vary widely from country to country. Approval for sale of our
medical devices in Europe is through the CE mark process. OurWhere appropriate,
our products where appropriate, are CE marked to the European Union's Medical Device Directive.
Under the CE marketing scheme, our products are classified as either Class I or
Class II,II; our devices are listed in the United States with FDA,FDA; in Australia
with the Therapeutic Goods Administration, or TGA,TGA; and in Canada with Health
Canada.
Employees-14-
EMPLOYEES
As of June 30, 2001,2002, we have 953had 1,250 employees or full time consultants, of which
353503 persons were employed in warehousing and manufacturing, 129178 in research and
development, 276337 in sales and 13
marketing and 195232 in administration. Of our
employees and consultants, 517597 were located in Australia, 151317 in the United
States, 273318 in Europe and 1218 in Singapore, New Zealand and Malaysia.Asia.
We believe that the success of our business will depend, in part, on our ability
to attract and retain qualified personnel. None of our employees is covered by
a collective bargaining agreement. We believe that our relationship with our
employees is good.
Medical Advisory BoardMEDICAL ADVISORY BOARD
Our Medical Advisory Board, or MAB, consists of physicians and scientists specializing in the
field of sleep disordered breathing. MAB members meet as a group twice a year
with members of our senior management and members of our research and marketing
departments to advise us on technology trends in SDB and other developments in
sleep disorders medicine. MAB members are also available to consult on an
as-needed basis with our senior management. In alphabetical order, MAB members
include:
Claudio Bassetti,CLAUDIO BASSETTI, Dr. Claudio Bassetti is a Professor in the Faculty of
Medicine, University of Zurich, where he is the Director and Vice-Chairman of
the Neurological Clinic. A member of the American Academy of Neurology and the
American Sleep Disorders Association, Dr. Bassetti is also a member of the
scientific board of the European Sleep Research Society, and an associate editor
of 'Sleep Medicine'. He is on the editorial board of 'Swiss Archives of
Neurology and Psychiatry and has produced over 100 publications. Dr. Bassetti
is a leader in studying the implications of sleep disordered breathing on
stroke.
Michael Coppola,MICHAEL COPPOLA, MD, is a leading pulmonary critical care and sleep disorders
physician in private practice in Massachusetts. He is an attending physician at
Baystate Medical Center and Mercy Hospital in Springfield, MA and a Fellow of
the American College of Chest Physicians. He is Chairman of the Massachusetts
Sleep Breathing Disorders Society. He is also the Medical Director of Winmar
Diagnostics, a sleep disordered breathing specialty company, and Associate
Clinical Professor of Medicine at Tufts University School of Medicine.
TerenceTERENCE M. Davidson,DAVIDSON, MD, FACS, is Professor of Surgery in the Division of
Otolaryngology - Head and Neck Surgery at the University of California, San
Diego, School of Medicine. He is Section Chief of Head and Neck Surgery at the
Veterans Administration San Diego Healthcare System and Associate Dean for
Continuing Medical Education at UCSD. He is also director of the UCSD Head and
Neck Surgery Sleep Clinic in La Jolla, CA.
NeilANTHONY N. DEMARIA, MD is Professor of Medicine and Chief, Division of
Cardiology at the University of California, San Diego, specializing in cardiac
imaging techniques, particularly echocardiography. He is a Diplomat in the
American Board of Internal Medicine and is board certified by the Subspecialty
Board in Cardiovascular Disease. He is Past President of both the American
College of Cardiology and the American Society of Echocardiography. Dr. DeMaria
is currently the Editor-in-Chief Elect of the Journal of the American College of
Cardiology and has authored or co-authored over 400 articles for medical
journals.
NEIL J. Douglas,DOUGLAS, MD, FRCP, is Professor of Respiratory and Sleep Medicine,
University of Edinburgh, an Honorary Consultant Physician, Royal Infirmary of
Edinburgh and Director of the Scottish National Sleep Laboratory. He is Dean of
the Royal College of Physicians of Edinburgh and Vice Chairman of the UK Royal
Colleges Committee of CME Directors and a member of the Working Party on Sleep
Apnea of the Royal College of Physicians of London. He is a past Chairman of
the British Sleep Society and past Secretary of the British Thoracic Society. He
has published over 200 papers on breathing during sleep.
Nicholas Hill,-15-
NICHOLAS HILL, MD, is Professor of Medicine at Brown University and Director of
Critical Care Services at Rhode Island Hospital and Pulmonary Medicine at the
Miriam Hospital, both in Providence. He is a Fellow of the American College of
Chest Physicians and a member of the Planning Committee for the American
Thoracic Society.
14
BarryBARRY J. Make,MAKE, MD, is Director, Emphysema Center and Pulmonary Rehabilitation
National Jewish Medical and Research Center, and Professor of Pulmonary Sciences
and Critical Care Medicine of the University of Colorado School of Medicine. He
has served on numerous national and international committees for respiratory and
cardiovascular diseases. His research and clinical work has resulted in a large
number of publications on mechanisms, treatment and rehabilitation of chronic
respiratory disease.
Colin Sullivan,BARBARA PHILLIPS, MD, MSPH, FCCP, is Professor of Pulmonary, Critical Care, and
Sleep Medicine at the University of Kentucky College of Medicine. She directs
the Sleep Center, Sleep Clinics, and Sleep Fellowship at the Samaritan Sleep
Center in Lexington, KY. She is a Board member of the American Academy of Sleep
Medicine, a recipient of a Sleep Academic Award from the National Institutes of
Health, past president of the American Board of Sleep Medicine, and a past
member of the Advisory Board to the National Center of Sleep Disorders Research.
Her research interests are the epidemiology of sleep-disordered breathing and
sleep disorders in the aged.
COLIN SULLIVAN, MD, PhD, FRACP, FAA is Chairman of the MAB and the inventor of
nasal CPAP for treating obstructive sleep apnea. He is Professor of Medicine and
Director of the David Read Research Laboratory and Director of the Australian
Centre for Advanced Medical Technology at the Sydney University Medical School.
He is Head of the Centre for Respiratory Failure and Sleep Disorders, as well as
a thoracic physician at the Royal Prince Alfred Hospital. He is also Academic
head of the Pediatric Sleep Laboratory, New Children's Hospital, and Sydney
Children's Hospital. Dr. Sullivan is a Fellow of the Royal Australian College of
Physicians, and Fellow of the Australian Academy of Science.
Helmut Teschler,HELMUT TESCHLER, MD, is Associate Professor and Head of the Department of
Respiratory Medicine and Sleep Medicine, Ruhrlandklinik, Medical Faculty,
University of Essen, Germany. He is a Fellow of each of the following
Associations: German Pneumology Society, American Thoracic Society, European
Respiratory Society and American Sleep Disorders Association.
J. Woodrow Weiss,WOODROW WEISS, MD, is Associate Professor of Medicine and Co-Chairman of the
Division of Sleep Medicine at Harvard Medical School, as well as Chief,
Pulmonary & Critical Care Medicine, Beth Israel Deaconess Medical Center,
Boston, MA.
B. Tucker Woodson,TUCKER WOODSON, MD, FACS, is an Associate Professor of Otolaryngology and
Communication Sciences at the Medical College of Wisconsin. He is a Fellow of
the American Academy of Otolaryngology - Head and Neck Surgery and the American
College of Surgeons. Dr. Woodson is the Director of the Medical College of
Wisconsin/Froedert Memorial Lutheran Hospital Center for Sleep. He is active on
multiple committees for the American Academy of Sleep Medicine and American
Academy of Otolaryngology.
Item-16-
ITEM 2 PropertiesPROPERTIES
Our principal executive offices and U.S. distribution facilities, consisting of
approximately 144,000 square feet, are located in Poway (North San Diego
County), California in a building we own; part of the
building is leased to other companies. Primaryown. We lease facilities for our
manufacturing operations
are situated in Sydney, Australia in a 120,000 square foot facility
also
owned by us.and in Canoga Park, California in a 35,500 square foot facility.
Sales and warehousing facilities are leased in Oxford, England;
Moenchengladbach, Germany; Lyon, France; Trollhaettan, Sweden and Singapore.
Prior to moving our executive offices and distribution facilities to Poway,
California, we leased space for this purpose in San Diego, California. Our
lease on those premises expires in 2005. In August 2000, we began subleasing
those premises to another company.
MAP's principal offices are located in Munich Germany in a 45,000 square foot
facility leased by us. MAP's subsidiaries also lease sales and warehouse
facilities in Paris, Lyon and Nantes, France; Lyss, Switzerland; Villach, Austria and s'Hertogenbosch, The
Netherlands.
15
ItemITEM 3 Legal ProceedingsLEGAL PROCEEDINGS
We are currently engaged in litigation relating to the enforcement and defense
of certain of our patents.
In January 1995, we filed a complaint in the United States District Court for
the Southern District of California seeking monetary damages from and injunctive
relief against Respironics for alleged infringement of three of our patents. In
February 1995, Respironics filed a complaint in the United States District Court
for the Western District of Pennsylvania against us seeking a declaratory
judgment that Respironics does not infringe claims of these patents and that our
patents are invalid and unenforceable. The two actions were combined and are
proceeding in the United States District Court for the Western District of
Pennsylvania. In June 1996, we filed an additional complaint against
Respironics for infringement of a fourth ResMed patent, and that complaint was
consolidated with the earlier action. As of this date, Respironics has brought
three partial summary judgment motions for non-infringement of the ResMed
patents; the Court has granted each of the motions. In December 1999, in
response to the Court's ruling on Respironics' third summary judgment motion,
the parties jointly stipulated to a dismissal of charges of infringement under
the fourth ResMed patent, with us reserving the right to reassert the charges in
the event of a favorable ruling on appeal. It is our intention to appeal the
summary judgment rulings after a final judgment in the consolidated litigation
has been entered in the District Court proceedings.
In January 2001, MAP Medizin-Technologie GmbH filed a lawsuit in the Civil
Chamber of Munich Court against Hofrichter GmbH seeking actual and exemplary
monetary damages for the unauthorized and infringing use of our trademarks and
patents. An initial decision has been made in favor of MAP. Hofrichter has
filed an appeal and have sorthas sought Court determination that the MAP patents do not
apply to certain Hofrichter products.
On August 26, 2002, ResMed filed a lawsuit in Federal District Court in San
Diego against Fisher & Paykel Healthcare. The ResMed complaint seeks a judgment
that selected Fisher & Paykel Healthcare mask products (ACLAIM and ACLAIM 2
masks) infringe patents held by ResMed. The complaint further charges the
defendant with the copying of ResMed proprietary mask technology and alleges
trade dress and common law violations relating to the appearance of ResMed mask
products.
-17-
While we are prosecuting the above actions, there can be no assurance that we
will be successful.
On March 31, 2000, we filed a lawsuit in the United States District court
for the Southern District of California against MPV Truma and Tiara
Medical Systems, Inc., seeking actual and exemplary monetary damages and
injunctive relief for the unauthorized and infringing use of our
trademarks, trade dress, and patents related to our Mirage mask. The
parties reached a confidential out of court settlement on April 9, 2001.
In May, 1995, Respironics and its Australian distributor filed a
Statement of Claim against us and Dr. Farrell in the Federal Court of
Australia, alleging that we engaged in unfair trade practices. The
Statement of Claim asserted damage claims for lost profits on sales in
the aggregate amount of approximately $1,000,000. The parties reached a
confidential out of court settlement of this Action on April 16, 2001.
ItemITEM 4 Submission of Matters to a Vote of Security HoldersSUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
PART II
ItemITEM 5 Market for Registrant's Common Equity and Related Stockholder MattersMARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock commenced trading on June 2, 1995 on The NASDAQ National Market
under the symbol "RESM". On September 30, 1999, we transferred our primary
listing to the New York Stock Exchange (NYSE) under the symbol "RMD". The
following table sets forth for the fiscal periods indicated the high and low
closing prices for the Common Stock as reported by the New York Stock Exchange.
-------------------------------------------------------------------------------------------------------------2002 2001
2000-------------- --------------
High Low High Low
-------------------------------------------------------------- --------------
Quarter One, ended September 30, $60.95 $45.90 $38.38 $24.63 $17.19 $11.82
Quarter Two, ended December 31, 61.75 50.47 41.50 25.50 23.13 12.75
Quarter Three, ended March 31, 53.15 36.36 47.00 36.65 39.62 20.34
Quarter Four, ended June 30, 40.34 24.70 57.68 37.91 38.06 22.00
-------------------------------------------------------------------------------------------------------------
As of September 7, 2001,6, 2002, there were approximately 13,500 beneficial85 holders of record of our Common Stock.
We have not paid any cash dividends on our common stock since prior to the
initial public offering of our common stock and we do not currently intend to
pay cash dividends in the foreseeable future. Management anticipatesWe anticipate that all of our
earnings and other cash resources, if any, will be retained for the operation
and expansion of our business and for general corporate purposes.
Recent Sales of Unregistered SecuritiesSALE OF UNREGISTERED SECURITIES
On June 20, 2001, we issued $150.0 million of 4% convertible subordinated notes
due 2006 to initial purchasers including Merrill Lynch, Pierce Fenner & Smith
Incorporated, Deutsche Banc Alex. Brown Inc., William Blair & Company, LLC,
Macquarie Bank, and UBS Warburg LLC. The discount to the initial purchasers on
their purchase of the notes was $4,650,000.$4.7 million. On July 3, 2001, we issued an
additional $30.0 million in notes to the initial purchasers upon exercise of the
initial purchasers' over allotment option, with an additional discount to the
initial purchasers of $930,000.$0.9 million. This increased the total amount of
convertible subordinated notes issued to $180.0 million, with a total discount
to the initial purchasers of $5,580,000.$5.6 million.
During fiscal 2002, we repurchased $56.8 million face value of our convertible
subordinated notes. The total purchase price of the notes was $49.1 million,
including $0.6 million in accrued interest. We recognized a gain of
$4.0 million, net of tax of $2.5 million, on these transactions. As at June 30,
2002, we had convertible subordinated notes outstanding of $123.3 million.
-18-
The notes were issued pursuant to an exemption fromand the registration
requirementscommon stock issuable upon conversion of the Securities and Exchange Act of 1933, as amended, ornotes (the
"Securities") were not registered under the Securities Act set forth under Rule 144Aor any other state or
foreign securities laws at the time of the Securities Act.
Accordingly, theissue. The notes were offered and sold
only to "qualified institutional buyers" as defined in Rule 144A or in offshore
transactions outside the United States that met the requirements of Rule 903 of
Regulation S under the Securities Act.
The Securities were subsequently registered for resale under the Securities Act
(Registration No. 333-70500) effective October 9, 2001; and consequently the
Securities may be resold in accordance with the prospectus that is part of the
registration statement by the selling security holders named in the prospectus
or a supplement to the prospectus. Other sales of the Securities may only be
made in compliance with the registration requirements of the Securities Act and
all other applicable securities laws, or pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities Act
and any other applicable securities laws.
The notes are subject to an indenture between us and American Stock Transfer &
Trust Company, as trustee. The notes are convertible, at the option of the
holder, at any time on or prior to maturity, into shares of our common stock at
a conversion price of $60.60 per share, which is equal to a conversion rate of
16.5017 shares per $1,000 principal amount of notes. The conversion price is
subject to adjustment. The notes bear interest at 4% per year, payable
semiannually on June 20 and December 20 of each year, beginning December 20,
2001.
We may redeem some or all of the notes at any time before June 20, 2004 at a
redemption price of $1,000 per $1,000 principal amount of notes, plus accrued
and unpaid interest, if any, to the redemption date, if (a) the closing price of
our common stock has exceeded 150% of the conversion price then in effect for at
least 20 trading days within a period of 30 consecutive trading days ending on
the trading day before the date of mailing of the provisional redemption notice
and (b) a shelf registration statement covering resale of the notes and the
common stock issuable upon conversion of the notes is effective and available
for use and expected to remain effective and available for use for the 30 days
following the provisional redemption date. Upon any such provisional
redemption, 17
we will make an additional payment in cash equal to $166.67 per
$1,000 principal amount of notes, less the amount of any interest actually paid
on the notes before the provisional redemption date.
We may also redeem some or all of the notes at any time on or after June 22,
2004, but prior to June 20, 2005, at a redemption price equal to 101.6% of the
principal amount of notes redeemed and at any time after June 19, 2005, at a
redemption price equal to 100.8% of the principal amount of notes redeemed, plus
in any case, accrued and unpaid interest, if any, to the redemption date, if the
closing price of our common stock has exceeded 130% of the conversion price then
in effect for at least 20 trading days within a period of 30 consecutive trading
days ending on the trading day before the date of mailing of the optional
redemption notice.
The notes are general unsecured obligations and are subordinated to all of our
existing and future senior indebtedness and will be effectively subordinated to
all of the indebtedness and liabilities of our subsidiaries. The indenture
governing the notes will not limit the incurrence by us or our subsidiaries of
senior indebtedness or other indebtedness. The notes mature on June 20, 2006.
ItemOn May 14, 2002, we issued 853,448 shares of our common stock to one individual
as partial consideration for our acquisition of Servo Magnetics Incorporated.
We relied on the exemption from registration provided under Section 4(2) of the
Securities Act of 1933, as amended. No solicitation was made in connection with
this issuance, other than negotiation of the acquisition, and we obtained
representations from the recipient regarding his investment intent, experience
and sophistication.
-19-
ITEM 6 Selected Financial DataSELECTED FINANCIAL DATA
The following table summarizes certain selected consolidated financial data for,
and as of the end of, each of the fiscal years in the five-year period ended
June 30, 2001.2002. The data set forth below should be read in conjunction with the
Consolidated Financial Statements and related Notes included elsewhere in this
Report.
Years Ended June 30,
Consolidated Statement of Income Data:-------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME DATA: 2002 2001 2000 1999 1998 1997
(In thousands, except per share data)
-------------------------------------------------------------------------------------------------------
Net revenues $204,076 $155,156 $115,615 $88,627 $66,519
$49,180
Cost of sales 70,827 50,377 36,991 29,416 23,069
20,287
------------------------------------------------------
Gross profit 133,249 104,779 78,624 59,211 43,450
28,893
------------------------------------------------------
Selling, general and administrative Expensesexpenses 64,481 49,364 36,987 27,414 21,093
16,759
Provision for restructure - 550 - - -
In-process research and development write off 350 17,677 - - - -
Research and development expenses 14,910 11,146 8,499 6,542 4,994
3,807
------------------------------------------------------Donations to Research Foundations 2,349 - - - -
Total operating expenses 82,090 78,737 45,486 33,956 26,087
20,566
------------------------------------------------------
Income from operations 51,159 26,042 33,138 25,255 17,363 8,327
------------------------------------------------------
Other income (expenses):
Interest income (expense), net (3,224) (762) 801 779 1,011
1,205
Government grants - 72 279 833 611
316
Other, net 108 1,962 (52) (2,290) (2,873)
1,239
------------------------------------------------------Gain on extinguishment of debt 6,549 - - - -
Total other income (expenses) 3,433 1,272 1,028 (678) (1,251)
2,760
------------------------------------------------------
Income before income taxes 54,592 27,314 34,166 24,577 16,112
11,087
Income taxes 17,086 15,684 11,940 8,475 5,501
3,622
------------------------------------------------------
Net income $ 37,506 $ 11,630 $ 22,226 $16,102 $10,611
$ 7,465
======================================================
Basic earnings per share $ 1.17 $ 0.37 $ 0.74 $ 0.55 $ 0.37
$ 0.26
======================================================
Diluted earnings per share $ 1.10 $ 0.35 $ 0.69 $ 0.52 $ 0.35
$ 0.26
Basic shares outstanding 32,174 31,129 30,153 29,416 29,000
28,756
Diluted shares outstanding 34,080 33,484 32,303 31,068 30,044 29,268
18
-------------------------------------------------- --------------------------------------------------------------------------------------
As of June 30,
CONSOLIDATED BALANCE SHEET DATA 2002 2001 2000 1999 1998
1997
Consolidated Balance Sheet Data: (In thousands)
- --------------------------------------------------------------------------------------
Working capital 144,272$144,666 $144,272 $ 47,550 $32,529 $32,759
$34,395
Total assets 376,191 288,090 115,594 89,889 64,618 54,895
Long-term debt, less current maturities 123,250 150,000 - - -
274
Total stockholders' equity 192,930 100,366 93,972 71,647 50,773 44,625
=================================================
Item-20-
ITEM 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
OverviewMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with selected financial data and
consolidated financial statements and notes, included herein.
We design, manufacture and market equipment for the diagnosis and treatment of
sleep disordered breathing conditions, including obstructive sleep apnea. Our
net revenues are generated from the sale of our various flow generator devices,
nasal mask systems, accessories and other products, and, to a lesser extent from
royalties.royalties and sales of custom motors.
We have invested significant resources in research and development and product
enhancement. Since 1989, we have developed several innovations to the original
CPAP device to increase patient comfort and to improve ease of product use. We
have been developing products for automated treatment, titration and monitoring
of OSA, such as the AutoSet T and AutoSet Spirit flow generator.generators. Our research
and development expenses have been subsidized in part by grants and tax
incentives from the Australian federal government.
LABHARDT ACQUISITION
On February 16,November 15, 2001, we acquired all the common stock of the outstanding sharesLabhardt Ag, our Swiss
distributor, for total cash consideration, including acquisition costs, of MAP.
The total transaction was valued at approximately $70 million paid in
cash and the assumption of bank debt. MAP designs, manufactures and
distributes medical devices for the diagnosis and treatment of SDB, with
a particular focus on OSA.$5.5
million.
The acquisition has been accounted for as a purchase and accordingly, the
results of operations of MAPLabhardt Ag have been included in our consolidated
financial statements from February 16,November 15, 2001. The excess of the purchase price
over the fair market value of the net identifiable assets acquired of $47.1$1.3 million has
been recorded as goodwill and is currently being
amortized on a straight line basis over 20 years.
As a consequencegoodwill.
SMI ACQUISITION
On May 14, 2002, we acquired all of the MAPcommon stock of Servo Magnetics
Incorporated ("SMI") through a merger with our wholly-owned subsidiary, Servo
Magnetics Acquisitions Inc, for total consideration, including acquisition
we incurred non-recurringcosts, of $32.6 million. Consideration included the issue of 853,448 shares for
fair value of $24.8 million with the balance of the acquisition chargesprice paid in
cash. Upon consummation of $550,000the merger, the surviving corporation, Servo
Magnetics Acquisition Inc., changed its name to Servo Magnetics Inc.
The acquisition has been accounted for restructuringas a purchase and accordingly, the
results of MAP's unprofitable
French operations and $17,677,000 for purchased in-process research and
development.of SMI have been included in our consolidated financial
statements from May 14, 2002. The excess of the purchase price over the fair
value of the net identifiable assets acquired of $1.9 million has been recorded
as goodwill.
Purchased in-process research and development of $17,677,000$350,000 was expensed upon
acquisition of MAPSMI because technological feasibility of the products under
development had not been established and no further alternative uses existed.
The value of in process technology was calculated by identifying research
projects in areas for which technological feasibility had not been established,
estimating the costs to develop the purchased in process technology into
commercially viable products, estimating the resulting net cash flows from such
products, discounting the net cash flows to present value, and applying the
reduced percentage completion of the projects thereto. The discount ratesrate used
in the analysis were between 27%was 19% and 33% and werewas based on the risk profile of the acquired
assets.
All purchased-21-
Purchased research and development projects related to electrical motor systems
used in medical equipment for the treatment of sleep disordered breathing, primarily
relating to the development of mask interface systemsdevices and 19
autotitrating devices for the treatment of obstructive sleep apnea and
associated disorders.health equipment. Key assumptions used in the
analysis included gross margins ranging from 70% to 80%of approximately 34%. As of the date of
acquisition, the mask interfacenew motor systems for use in these devices are expected to be
completed and commercially available in 2002 and versions of the autotitrating devices between 2003
and 2005.by fiscal 2004. These projects have
estimated costs to complete totalling approximately $2.0 million.$450,000.
We believe that the assumptions used to value the acquired intangible
assets were reasonable at the time of acquisition. No assurance can be given,
however, that the underlying assumptions used to estimate expected project
revenues, development costs or profitability, or events associated with such
projects, will transpire as estimated. For these reasons, among others, actual
results may vary from the projected results.
TAX EXPENSE
Our income tax rate is governed by the laws of the regions in which our income
is recognized. To date, a substantial portion of our income has been subject to
income tax in Australia where the statutory rate iswas 30% in fiscal 2002 and was
34%. in fiscal 2001 and 2000 respectively. During fiscal 2002, 2001 2000 and 1999,2000,
our effective tax rate has fluctuated frombetween approximately 34% to31% and
approximately 35%. These fluctuations have resulted from, and future effective
tax rates will depend upon, numerous factors, including the amount of research
and development expenditures for which a 125% Australian tax deduction is
available, the level of non-deductible expenses, and the use of available net
operating loss carryforward deductions and other tax credits or benefits
available to us under applicable tax laws.
Fiscal Year Ended JuneFISCAL YEAR ENDED JUNE 30, 2002, COMPARED TO FISCAL YEAR ENDED JUNE 30, 2001
ComparedNET REVENUES. Net revenue increased in fiscal 2002 to Fiscal Year Ended June$204.1 million from
$155.2 million in fiscal 2001, an increase of $48.9 million or 32%. This
increase was primarily attributable to an increase in unit sales of our flow
generators and accessories in both domestic and international markets and also
to the acquisition on February 16, 2001 of MAP Medizin-Technologie GmbH "MAP".
GROSS PROFIT. Gross profit increased in fiscal 2002 to $133.2 million from
$104.8 million in fiscal 2001, an increase of $28.5 million or 27%. Gross
profit as a percentage of net revenue declined in fiscal 2002 to 65% from 68% in
fiscal 2001. The decline in gross margins reflects a change in geographical
sales mix (after adjusting for MAP sales), with a relatively higher percentage
of domestic sales, which achieve lower margins, compared to international
markets. The decline also reflects that gross margins in our acquired
subsidiary, MAP, are historically lower than the average margins achieved by our
Company as a whole.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased in 2002 to $64.5 million from $49.4 million
for 2001, an increase of $15.1 million or 31%. As a percentage of net revenue,
selling, general and administrative expenses in fiscal 2002 was 32%, consistent
with fiscal 2001. The increase in selling, general and administrative expenses
was primarily due to the addition of 98 personnel in sales and administration
and other expenses related to the increase in our sales. SG&A in fiscal
2002 also included a provision of $1.0 million against an outstanding receivable
from American Home Patient Inc. (AHP), a significant customer, who filed for
Chapter 11 Bankruptcy Protection on July 31, 2002. AHP's filing for Chapter 11
Bankruptcy Protection is not expected to materially impact our business.
-22-
PROVISION FOR RESTRUCTURE. In fiscal 2001, subsequent to the purchase of MAP,
we restructured MAP's French activities and took a charge of $0.6 million
associated with the closure of MAP's unprofitable French operations. We did not
incur any restructure charges in fiscal 2002.
IN PROCESS RESEARCH AND DEVELOPMENT WRITE-OFF. In fiscal 2002, purchased in
process research and development of $0.4 million was expensed upon the
acquisition of SMI because technological feasibility of the products under
development had not been established and no further alternative uses existed.
In fiscal 2001, purchased in process research and development of $17.7 million
was expensed upon acquisition of MAP because technological feasibility of the
products under development had not been established and no further alternative
uses existed.
DONATIONS TO FOUNDATIONS. In fiscal 2002, we committed $2.3 million to the
establishment of two ResMed Sleep Disordered Breathing Foundations, one in the
United States and one in Australia. The Foundations' overall mission is to
educate both the public and physicians about the inherent dangers of untreated
SDB/OSA, particularly as it relates to traffic and workplace accidents as well
as cerebrovascular and cardiovascular disease.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
in fiscal 2002 to $14.9 million from $11.1 million in fiscal 2001, an increase
of $3.8 million or 34%. As a percentage of net revenue, research and
development expenses increased to 7.3% in fiscal 2002 compared to 7.2% in fiscal
2001. The increase in research and development expenses was due to increased
salaries associated with an increase in personnel and increased charges for
consulting fees, clinical trials and technical assessments incurred to
facilitate development of new products and also includes research and
development expenditures of MAP.
OTHER INCOME (EXPENSE). Other income (expense), net, increased in fiscal 2002
to a net income of $3.4 million from net income of $1.3 million in fiscal 2001.
The increase in other income primarily reflects a gain on extinguishment of debt
of $6.5 million partially offset by increased net interest expense associated
with our convertible notes and foreign exchange losses.
INCOME TAXES. The Company's effective income tax rate declined to approximately
31.3% in fiscal 2002 from approximately 34.4% (excluding a non-recurring in
process research and development write-down of $17.7 million and restructuring
charge of $0.6 million) in fiscal 2001. The lower tax rate was primarily due to
the lowering of the corporate income tax rate in Australia from 34% to 30%
effective July 1, 2001. The Company also benefits from a 125% tax deduction on
research and development expenditures in Australia, which further reduces the
effective tax rate on Australian sourced income.
FISCAL YEAR ENDED JUNE 30, 2001 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2000
Net revenues.NET REVENUES. Net revenues increased in fiscal 2001 to $155.2 million from
$115.6$155.6 million in fiscal 2000, an increase of $39.5 million or 34%. This
increase was primarily attributable to an increase in unit sales of our flow
generators and accessories in North and Latin America where net revenues
increased to $79.9 million from $62.7 million and in Europe, where net revenues
increased to $60.5 million from $40.5 million. Net revenues were unfavorably
impacted by a decline in European foreign exchange rates.
Gross profit.-23-
GROSS PROFIT. Gross profit increased in fiscal 2001 to $104.8 million from $78.6
million in fiscal 2000, an increase of $26.2 million or 33%. The increase
resulted primarily from increased unit sales during fiscal 2001. Gross profit
as a percentage of net revenues was 68%, consistent with fiscal 2000. Lower
flow generator selling prices were offset by a decline in the Australian dollar,
improved manufacturing efficiencies and increased sales of higher margin mask
system units.
Selling, general and administrative expenses.SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased in 2001 to $49.4 million from $37.0 million
for 2000, an increase of $12.4 million or 33%. As a percentage of net revenues,
selling, general and administrative expenses were steady in fiscal 2001,
compared to fiscal 20002002 at 32%. The gross increase in expenses was due
primarily to an increase to 471 from 281 in the number of sales and
administrative personnel and other expenses related to the increase in our
sales.
Research and development expenses.RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
in fiscal 2001 to $11.1 million from $8.5 million in fiscal 2000,2001, an increase of
$2.6 million or 31%. As a percentage of net revenues, research and development
expenses remained static in fiscal 2001 at 7%. The dollar increase in research
and development expenses was due primarily to an increase in clinical trial
costs, personnel and external consultancy fees.
Other income (expense)OTHER INCOME (EXPENSE). Other income (expense) improved in fiscal 2001 to $1.3
million from $1.0 million for fiscal 2000, an increase of $0.3 million. This
improvement was due primarily to foreign currency gains incurred in our foreign
currency hedging structures, partially offset by interest expense associated
with the purchase of MAP. Net foreign currency gains for fiscal 2001 were $2.0
million compared to net foreign currency losses of $0.2 million in 2000.
20
Income taxes.INCOME TAXES. Our effective income tax rate for fiscal 2001 before MAP
acquisition charges of $0.6 million for restructuring costs and in-
processin-process
research and development write off of $17.7 million was 34.4% down from 34.9%
for fiscal 2000. This reduction was primarily due to the reduction in
Australian corporate tax rates from 36% to 34% on July 1, 2000 and to additional
research and development expenses in Australia for which we received a 125%
deduction for income tax purposes.
Fiscal Year Ended June 30, 2000 Compared to Fiscal Year Ended June 30,
1999
Net revenues. Net revenues increased in fiscal 2000 to $115.6 million
from $88.6 million in fiscal 1999, an increase of $27 million or 30%.
This increase was primarily attributable to an increase in unit sales of
our flow generators and accessories in the Americas where net revenues
increased to $62.7 million from $51.0 million and, to a lesser extent,
in Europe, where net revenues increased to $40.5 million from $30.2
million. Net revenues were unfavorably impacted by a decline in European
foreign exchange rates and changes in domestic reimbursement regulations
with respect to our SULLIVAN VPAP II ST systems.
Gross profit. Gross profit increased in fiscal 2000 to $78.6 million
from $59.2 million in fiscal 1999, an increase of $19.4 million or 33%.
The increase resulted primarily from increased unit sales during fiscal
2000. Gross profit as a percentage of net revenues increased in fiscal
2000 to 68% from 66.8% in 1999. The increase was due to improved
manufacturing efficiencies, a decline in the Australian Dollar and
increased sales of higher margin mask system units.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased in 2000 to $37.0 million from $27.4
million for 1999, an increase of $9.6 million or 35%. As a percentage of
net revenues, selling, general and administrative expenses increased in
fiscal 2000 to 32% from 31% for fiscal 1999. The gross increase in
expenses was due primarily to an increase to 281 from 212 in the number
of sales and administrative personnel and other expenses related to the
increase in our sales.
Research and development expenses. Research and development expenses
increased in fiscal 2000 to $8.5 million from $6.5 million in fiscal
1999, an increase of $2.0 million or 30%. As a percentage of net
revenues, research and development expenses remained static in fiscal
2000 at 7.4%. The dollar increase in research and development expenses
was due primarily to an increase in research and development equipment,
personnel and external consultancy fees.
Other income (expense). Other income (expense) improved in fiscal 2000
to $1.0 million from a loss of $0.7 million for fiscal 1999, a change of
$1.7 million. This improvement was due primarily to reduced losses
incurred in our foreign currency hedging structures, partially offset by
reduced government grants. Net foreign currency losses for fiscal 2000
were $0.2 million compared to net foreign currency losses of $2.5
million in 1999.
Income taxes. Our effective income tax rate for fiscal 2000 increased to
approximately 34.9% from approximately 34.5% for fiscal 1999. This
increase was primarily due to the high relative taxes incurred in France
and Germany. These higher tax rates were partially offset by additional
research and development expenses in Australia for which we received a
125% deduction for tax purposes.
Liquidity and Capital ResourcesLIQUIDITY AND CAPITAL RESOURCES
As of June 30, 20012002 and June 30, 2000,2001, we had cash and cash equivalents and
marketable securities available for saleavailable-for-sale of approximately $92.8 million and
$102.8 million, and $22.0 million, respectively. Our workingWorking capital approximated $144.3$144.7 million and
$47.6$144.3 million respectively, at June 30, 2002 and June 30, 2001 and 2000.
21
The increase in working capital balances reflects cash received from our
$150 million subordinated convertible note issuance that occurred on June
20, 2001.
We have financed our operations and capital expenditures through cash
generated from operations and, to a lesser extent, through sales of common
stock and our 4% convertible subordinated notes issued June 20, 2001.respectively.
During the fiscal yearsyear ended June 30, 2001 and 2000, our operations2002, we generated cash of approximately $29.5$35.6 million and $20.3 million,
respectively,from
operations, primarily as a result of continued increases in net
revenues,increased profit from operations offset in part by
increases in inventory and accounts receivable inventory
and prepayments. Cash and cash equivalents and marketable securities
available for sale increased to $102.8 million atbalances. During the year ended
June 30, 2001 from $22.0
million at June 30, 2000, an increase of $80.8 million. During fiscal
2001 and 2000, approximately $7.9 million and $6.4$29.5 million of cash was received fromgenerated by operations.
Capital expenditures for the issue of common stock upon exercise of common stock
options.
Our investing activities (excluding the purchasesyear ended June 30, 2002 and sales of marketable
securities and business acquisitions) for fiscal years 2001 and 2000
aggregated $30.6$28.2
million and $20.4$27.5 million respectively. The majority of the fiscal 2001 investing activities wereexpenditures for
the year ended June 30, 2002 related to the purchase of land in Sydney described
below, a computer system upgrade and acquisition of production tooling and
equipment, office furniture, research and development
equipment and costs associated withequipment. The capital expenditures in the continuing installationyear ended June 30, 2001 primarily
reflected the capital expenditure of our
Oracle applications computer system. In addition, we paid $17.2 million associated withon the purchase of the new U.S.company's US
headquarters in Poway, California.California in July 2000. As a result of these capital
expenditures, our June 30, 2001 balance sheet reflects an
increase in net property plant and equipment of
approximately $79.3 million at June 30, 2002 compared to approximately $55.1 million at June
30, 2001.
-24-
On July 3, 2001, from $36.6we issued $30.0 million in over allotments for our 4%
convertible subordinated notes issue, increasing the total amount of convertible
subordinated notes then outstanding to $180.0 million. During fiscal 2002, we
repurchased $56.8 million face value of our convertible subordinated notes. The
total purchase price of the notes was $49.1 million, including $0.6 million in
accrued interest. We recognized a gain of $4.0 million, net of tax of $2.5
million, on these transactions. As at June 30, 2000, an increase2002, we had convertible
subordinated notes outstanding of approximately $18.5$123.3 million.
We may from time to time seek to retire our convertible subordinated notes
through cash purchases and/or exchanges for equity securities in open market
purchases, privately negotiated transactions, or otherwise. Such repurchases or
exchanges, if any, will depend on prevailing market conditions, our liquidity
requirements, and current or future contractual obligations of the Company, if
any, that may directly or indirectly apply to such transactions.
On February 16,November 15, 2001, our wholly owned German subsidiary, ResMed
Beteiligungs GmbH,we acquired all of the common stock of MAPLabhardt Ag, our
Swiss distributor, for total cash consideration, including acquisition costs, of
$5.5 million. The acquisition has been accounted for as a purchase and,
accordingly, the results of operations of Labhardt Ag have been included in our
consolidated financial statements from November 15, 2001. The excess of the
purchase price over the fair value of the net identifiable assets acquired of
$1.3 million has been recorded as goodwill.
On May 14, 2002 we acquired all of the common stock of Servo Magnetics Inc.
("SMI") for total consideration, including acquisition costs, of $55.4$32.6 million.
Consideration included the issue of 853,448 shares for fair value of $24.8
million, with the balance of the acquisition cost paid in cash. Subsequent to
the acquisition, we repaid all SMI's existing bank loans totaling $3.0 million.
The acquisition has been accounted for as a purchase and accordingly, the
results of operations of SMI have been included in the Company's consolidated
financial statements from May 14, 2002. The excess of the purchase price over
the fair value of the net identifiable assets acquired of $1.9 million has been
recorded as goodwill.
On October 2, 2001, we paid $1.4 million as final consideration associated with
the purchase of MAP on February 16, 2001. The amount has been recorded as
goodwill.
On April 26, 2002, we settled our purchase of a 30-acre site at Norwest Business
Park, located northwest of Sydney, Australia. The acquisition cost was $23.6
million, including deferred payments of $5.7 million due in October 2002 and
$5.7 million due in April 2003. We expect the first building, a manufacturing
facility, to be operational on this site in December 2003. New research and
development and office facilities are expected to be completed in 2004.
We estimate that the building costs will be approximately $30.0 million.
On May 8, 2002, we completed a sale and leaseback transaction of our Australian
facility located at North Ryde in Sydney, Australia. The property was sold for
$18.5 million with a three-year leaseback and a further one-year option. The
profit before tax on sale of the property of $5.5 million will be amortized over
the lease period. The cash made available from the sale will be utilized for
the construction of our new facilities at Norwest Business Park also located in
Sydney, Australia.
-25-
On June 6, 2002, the Board of Directors authorized the Company to repurchase up
to 4 million shares of its outstanding common stock. For fiscal year 2002, we
repurchased 290,047 shares at a cost of $7.9 million. We also
assumed approximately $14.5may continue to
repurchase shares of our common stock for cash in the open market, or in
negotiated or block transactions, from time to time as market and business
conditions warrant.
Details of contractual obligations at June 30, 2002 are as follows:
Payments Due by Period
Less than 1 year 1-3 years 4-5 years After 5 years
Long-Term Debt - 123,250 - -
Operating Leases 4,326 9,523 1,202 -
Unconditional Purchase Obligations 11,552 - - -
Total Contractual Cash Obligations 15,878 132,773 1,202 -
Details of other commercial commitments at June 30, 2002 are as follows:
In $000's Amount of Commitment Expiration Per Period
Total Amounts -----------------------------------------------------
Committed Less than 1 year 1-3 years 4-5 years Over 5 years
-----------------------------------------------------
Lines of Credit - - - - -
Standby Letters of Credit - - - - -
Guarantees(1) 13,678 11,821 663 - 1,194
Standby Repurchase Obligations - - - - -
Other Commercial Commitments - - - - -
Total Commercial Commitments 13,678 11,821 663 - 1,194
(1) The above guarantees relate to guarantees provided by banks. Guarantees
of $11.8 million of bank debtrelate to deferred payments due on our land purchase at Norwest
and have been recorded as a liability in connectionour financial accounts. The guarantees
are secured by cash deposits held with the acquisition.
On June 20, 2001 we issued $150 million of 4% convertible subordinated
notes due 2006; an additional $30 million of these notes were issued on
July 3, 2001 upon exercisebank. The balance of the initial purchasers' over allotment
option. For additional discussion regarding these notes, see "Item 5 -
Market for Registrant's Common Equityguarantees
relate to guarantees required by statutory authorities as a pre-requisite to
developing our site at Norwest and Related Stockholder Matters" and
note 7 to the Consolidated Financial Statements includedrequirements under contractual obligations
with this report.insurance companies transacting with our German subsidiaries.
The results of our international operations are affected by changes in exchange
rates between currencies. Changes in exchange rates may negatively affect our
consolidated net revenue and gross profit margins from international operations.
We have a substantial exposureare exposed to fluctuationsthe risk that the dollar value equivalent of anticipated cash
flows will be adversely affected by changes in the Australian dollar, with respect to our manufacturing
and research activities, which is managedforeign currency exchange rates.
We manage this risk through foreign currency option contracts.
We expect to satisfy all of our short-termshort term and long term liquidity requirements
through a combination of cash on hand and cash generated from operations.
NewCRITICAL ACCOUNTING PRINCIPLES AND ESTIMATES
In response to the SEC's Release numbers 33-8040 "Cautionary Advice Regarding
Disclosure About Critical Accounting PronouncementsPolicies" and 33-8056, "Commission
Statement about Management's Discussion and Analysis of Financial Condition and
Results of Operations," we have identified the following critical accounting
policies that affect the more significant judgments and estimates used in the
preparation of our financial statements. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires us to make estimates and judgments that affect
our reported amounts of assets and liabilities, revenues and expenses and
related disclosures of contingent assets and liabilities. On an ongoing basis
we evaluate our estimates, including those related to allowance for doubtful
accounts, inventory reserves, warranty obligations, impaired assets, intangible
assets, income taxes, revenue recognition and contingencies and litigation. We
state these accounting policies in the notes to the financial statements and at
relevant sections in this discussion and analysis. The estimates are based on
the information that is currently available to us and on various other
assumptions that we believe to be reasonable under the circumstances. Actual
results could vary from those estimates under different assumptions or
conditions.
-26-
We believe that the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our financial
statements:
(1) Allowance for Doubtful Accounts. We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments, which results in bad debt expense. We determine the
adequacy of this allowance by continually evaluating individual customer
receivables, considering customer's financial condition, credit history and
current economic conditions. If the financial condition of our customers were
to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
(2) Inventory Adjustments. Inventories are stated at lower of cost or market
and are determined by the first-in, first-out method. We review the components
of inventory on a regular basis for excess, obsolete and impaired inventory
based on estimated future usage and sales. The likelihood of any material
inventory write-downs is dependent on changes in competitive conditions, new
product introductions by us or our competitors, or rapid changes in customer
demand.
(3) Valuation of Goodwill, Intangible and Other Long-Lived Assets. We use
assumptions in establishing the carrying value, fair value and estimated lives
of our long-lived assets and goodwill. The criteria used for these evaluations
include management's estimate of the asset's continuing ability to generate
positive income from operations and positive cash flow in future periods
compared to the carrying value of the asset, as well as the strategic
significance of any identifiable intangible asset in our business objectives.
If assets are considered to be impaired, the impairment recognized is the amount
by which the carrying value of the assets exceeds the fair value of the assets.
Useful lives and related amortization or depreciation expense are based on our
estimate of the period that the assets will generate revenues or otherwise be
used by the Company. Factors that would influence the likelihood of a material
change in our reported results include significant changes in the asset's
ability to generate positive cash flow, loss of legal ownership or title to the
asset, a significant decline in the economic and competitive environment on
which the asset depends, significant changes in our strategic business
objectives, utilization of the asset, and a significant change in the economic
and/or political conditions in certain countries.
(4) Valuation of Deferred Income Taxes. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized. The likelihood of a material change in our expected realization of
these assets is dependent on future taxable income, our ability to deduct tax
loss carryforwards against future taxable income, the effectiveness of our tax
planning and strategies among the various tax jurisdictions that we operate in,
and any significant changes in the tax treatment received on our business
combinations.
(5) Provision for Warranty. We provide for the estimated cost of product
warranties at the time the related revenue is recognized. The amount of this
provision is determined by using a financial model which takes into
consideration actual historical expenses and potential risks associated with the
Company's different products. This financial model is then used to calculate
the future probable expenses related to warranty and the required level of the
warranty provision. Although we engage in product improvement programs and
processes, our warranty obligation is affected by product failure rates and
costs incurred to correct those product failures. Should actual product failure
rates or estimated costs to repair those product failures differ from our
estimates, revisions to our estimated warranty provision would be required.
-27-
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001,2002, the Financial Accounting Standards Board ("FASB") issued SFASStatement
of Financial Accounting Standards ("SFAS") No. 146, Accounting for Restructuring
Costs. SFAS 146 applies to costs associated with an exit activity (including
restructuring) or with a disposal of long-lived assets. Those activities can
include eliminating or reducing product lines, terminating employees and
contracts, and relocating plant facilities or personnel. Under SFAS 146, a
company will record a liability for a cost associated with an exit or disposal
activity when that liability is incurred and can be measured at fair value.
SFAS 146 will require a company to disclose information about its exit and
disposal activities, the related costs, and changes in those costs in the notes
to the interim and annual financial statements that include the period in which
an exit activity is initiated and in any subsequent period until the activity is
completed. SFAS 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002, with earlier adoption encouraged. Under SFAS
146, a company may not restate its previously issued financial statements and
the new Statement grandfathers the accounting for liabilities that a company had
previously recorded under Emerging Issues Task Force Issue 94-3. The Company
believes that it will not have a material impact on the results of operations,
financial position and liquidity of the Company.
The FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002,
which is effective for fiscal years beginning after May 15, 2002, but may be
adopted early. SFAS 145 rescinds SFAS 4 and SFAS 64, which required that all
gains and losses from debt extinguishment of debt be aggregated, and if
material, classified as an extraordinary item. As a result, gains and losses
from debt extinguishment are to be classified as extraordinary only if they meet
the criteria set forth in Accounting Principles Board 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. SFAS 145 also requires that sale-leaseback accounting be used for
capital lease modifications with economic effects similar to sale-leaseback
transactions. The Company has elected to early adopt SFAS No. 145 and has
classified gains from the extinguishment of debt as other income in its
Consolidated Statements of Income.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." For long-lived assets to be held and used, SFAS
No. 144 retains the requirements of SFAS No. 121 to (a) recognize an impairment
loss only if the carrying amount of a long-lived asset is not recoverable from
its undiscounted cash flows and (b) measure an impairment loss as the difference
between the carrying amount and fair value. Further, SFAS No. 144 eliminates
the requirement to allocate goodwill to long-lived assets to be tested for
impairment, describes a probability-weighted cash flow estimation approach to
deal with situations in which alternative courses of action to recover the
carrying amount of a long-lived asset are under consideration or a range is
estimated for the amount of possible future cash flows, and establishes a
"primary-asset" approach to determine the cash flow estimation period. For
long-lived assets to be disposed of other than by sale (e.g. assets abandoned,
exchanged or distributed to owners in a spin-off), SFAS No. 144 requires that
such assets be considered held and used until disposed of. Further, an
impairment loss should be recognized at the date an asset is exchanged for a
similar productive asset or distributed to owners in a spin-off if the carrying
amount exceeds its fair value. The Company believes that it will not have a
material impact on the results of operations, financial position and liquidity
of the Company.
-28-
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. We will adoptAs allowed under the Standard, the Company has adopted SFAS 142
effective July 1, 2001. SFAS 142 requires goodwill and intangible assets with
indefinite useful lives to no longer be amortized, but instead be tested for
impairment at least annually.
With the adoption of SFAS 142, provides a six-month transitionalthe Company reassessed the useful lives and
residual values of all acquired intangible assets to make any necessary
amortization period fromadjustments. Based on that assessment, only goodwill was
determined to have an indefinite useful life and no adjustments were made to the
effective dateamortization period or residual values of adoption for us to perform another intangible assets.
In accordance with SFAS 142 the Company has completed its initial assessment of
whether there is an
indication that goodwill is impaired. To the extent that an indication of
impairment exists, we must perform a second test to measure the amountimpairment. The results of the 22
impairment. The second test must be performed as soon as possible, butreview indicated that no later than the end of the fiscal year. Any impairment measured as of the
date of adoption will be recognized as the cumulative effect of a change
in accounting principle. Because of the extensive effort needed to
complete this assessment, we have not determined whether there is any
indication thatimpaired
goodwill is impaired or estimated the amount of any
potential impairment.currently exists.
Effective July 1, 2001, we will also adopt FASBthe Company adopted SFAS No. 141, Business
Combinations."Business
Combinations". SFAS 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001.
We have
evaluatedIn June 2001, the impactFASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs would be capitalized as part of the carrying amount of the long-lived
asset and depreciated over the life of the asset. The liability is accreted at
the end of each period through charges to operating expense. If the obligation
is settled for other than the carrying amount of the liability, the Company will
recognize a gain or loss on settlement. The provisions of SFAS 141 and believeNo. 143 are
effective for fiscal years beginning after June 15, 2002. The Company believes
that it will not have a material impact on ourthe results of operations, financial
position or
liquidity.
SFAS No. 133, 'Accounting for Derivative Instruments and Hedging
Activities', SFAS No. 137, 'Accounting for Derivative Instruments and
Hedging Activities' - Deferralliquidity of the Effective Date of FASB Statement No.
133 (an amendment of FASB Statement No. 133), and SFAS 138, 'Accounting
for Certain Derivative Instruments and Certain Hedging Activities' (an
amendment of FASB Statement No. 133) were issued by the FASB in June 1998,
June 1999 and June 2000, respectively and were effective for our quarter
ended September 30, 2000. SFAS 133 standardizes the accounting for
derivative instruments, including certain derivative instruments embedded
in other contracts. Under the standard, entities are required to carry all
derivative instruments in the statement of financial position at fair
value. The accounting for changes in the fair value (i.e., gains or
losses) of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship and, if so, on
the reason for holding it. If certain conditions are met, entities may
elect to designate a derivative instrument as a hedge of exposures to
changes in fair values, cash flows, or foreign currencies. If the hedged
exposure is a fair value exposure, the gain or loss on the derivative
instrument is recognized in earnings in the period of change together with
the offsetting loss or gain on the hedged item attributable to the risk
being hedged. If the hedged exposure is a cash flow exposure, the
effective portion of the gain or loss on the derivative instrument is
reported initially as a component of other comprehensive income (outside
earnings) and subsequently reclassified into earnings when the forecasted
transaction affects earnings. Any amounts excluded from the assessment of
hedge effectiveness as well as the ineffective portion of the gain or loss
is reported in earnings immediately. Accounting for foreign currency
hedges is similar to the accounting for fair value and cash flow hedges.
If the derivative instrument is not designated as a hedge, the gain or
loss is recognized in earnings in the period of change.
Due to the restrictive definition of hedge effectiveness contained in SFAS
133, our hedging contracts do not have hedge effectiveness and are
therefore marked to market with resulting gains or losses being recognized
in earnings in the period of change. This was consistent with our
previous accounting policy and therefore adoption of SFAS 133 did not have
a material impact on our financial position or results of operation.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin, ("SAB") No. 101 Revenue Recognition in Financial
Statements', which was effective for the first quarter of fiscal 2001.
SAB 101 requires, among other things, that license and other up-front fees
be recognized over the term of the agreement, unless the fees are in
exchange for products delivered or services performed that represent the
culmination of a separate earnings process. This did not have a material
impact on our financial position or results of operation.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of Accounting Principles Board Opinion No. 25. FIN 44 was
generally effective July 1, 2000. The application of FIN 44 did not have
a material impact on our consolidated financial statements.
23
ItemCompany.
ITEM 7A Quantitative and Qualitative Disclosures about Market and Business Risks
Foreign Currency Market RiskQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET AND BUSINESS
RISKS
FOREIGN CURRENCY MARKET RISK
Our functional currency is the U.S. dollar, although we transact business in
various foreign currencies including a number of major European currencies, as
well as the Australian dollar. We have significant foreign currency exposure
through both our Australian manufacturing activities and international sales
operations.
We have established a foreign currency hedging program using purchased currency
options to hedge foreign-currency-denominated financial assets, liabilities and
manufacturing expenditure. The goal of this hedging program is to economically
guarantee or lock in the exchange rates on our foreign currency exposures
denominated in Euro's and the Australian dollar. Under this program, increases
or decreases in our foreign-
currency-denominatedforeign-currency-denominated financial assets, liabilities,
and firm commitments are partially offset by gains and losses on the hedging
instruments.
-29-
The table below provides information (in US dollars) on our foreign-currency
denominated financial assets by legal entity functional currency:
Foreign Currency Financial Assets
AUD USD EUR GBP SGD NZD SEK CHF
AUD Functional Currency Entities:
Assets $ - 24,118,963 7,317,495 2,582,023 1,481,516 180,690 505,691 837,331
Liability - (1,793,640) - (2,748,233) - - - -
Net Total $ - 22,325,323 7,317,495 (166,210) 1,481,516 180,690 505,691 837,331
USD Functional Currency Entities:
Assets $17,297,437 - - - - - - -
Liability - - - - - - - -
Net Total $17,297,437 - - - - - - -
Euro Functional Currency Entities:
Assets $ 4,773,000 65,504 - - - - - 1,200,726
Liability - (3,740) - - - - - -
Net Total $ 4,773,000 61,764 - - - - - 1,200,726
The table below provides information about our foreign currency derivative
financial instruments and presents such information in U.S. dollar
equivalents. The table summarizes information on instruments and transactions
that are sensitive to foreign currency exchange rates, including foreign
currency call options held at June 30, 2001.2002. The table presents the notional
amounts and weighted average exchange rates by contractual maturity dates for
our foreign currency derivative financial instruments. These notional amounts
generally are used to calculate payments to be exchanged under the options
contracts.
------------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Fair Value --------------------------------------------------------------
2002 2003 Total Assets/Assets / (Liabilities)
(In thousands except exchange rates) FY 2003 FY 2004 Total As of June 30,
2002 2001 2000
--------------------------------------------------------------
Foreign Exchange Call Options
(Receive AUS$/Pay U.S.$)
Option amount $214,000 - $ 214,00054,000 $ 66,000 $ 120,000 $2,341 $ 577 $ 534
Average contractual exchange rate AUS $1 = USD 0.5980.549 AUS$1=USD 0.591 AUS $1 = USD 0.5980.571
(Receive AUS$/Pay Euro)
Option amount $ 9,36840,473 - $ 38440,473 $ 9,752423 $ 20 $ 367
Average contractual exchange rate AUS $1 = Euro 0.6590.592 AUS $1 = Euro 0.667 AUS $1 = Euro 0.6597
------------------------------------------------------------------------------------------------------------------------------------0.592
Interest Rate RiskINTEREST RATE RISK
We are exposed to risk associated with changes in interest rates affecting the
return on investments.
At June 30, 2001,2002, we maintained a portion of our cash and cash equivalents in
financial instruments with original maturities of three months or less. We
maintain a short-term investment portfolio containing financial instruments in
which the majority have original maturities of greater than three months but
less than twelve months. These financial instruments, principally comprised of
corporate obligations, are subject to interest rate risk and will decline in
value if interest rates increase. A hypothetical 100 basis point change in
interest rates during the twelve months ended June 30, 2001,2002, would have resulted
in approximately $0.2$0.3 million change in pretax income. We do not use derivative
financial instruments in our investment portfolio.
24-30-
Forward-Looking StatementsFORWARD-LOOKING STATEMENTS
This report on Form 10-K contains or may contain certain forward-looking
statements and information that are based on the beliefs of our management as
well as estimates and assumptions made by, and information currently available
to our management. The words "believe," "expect," "anticipate," "estimate,"
"plan," "future" and other similar expressions generally identify
forward-looking statements, including, in particular, statements regarding the
development and approval of new products and product applications, market
expansion, pending litigation and pending litigation.the development of new markets for the
Company's products, such as cardiovascular and stroke markets. These
forward-
lookingforward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. You are cautioned not to
place undue reliance on these forward-looking statements. Such forward-
lookingforward-looking
statements reflect the views of our management at the time such statements are
made and are subject to a number of risks, uncertainties, estimates and
assumptions, including, without limitation, and in addition to those identified
in the text surrounding such statements, those identified below and elsewhere in
this report. In addition, important factors to consider in evaluating such
forward-looking statements include changes or developments in social, economic,
market, legal or regulatory circumstances, changes in our business or growth
strategy or an inability to execute our strategy due to changes in our industry
or the economy generally, the emergence of new or growing competitors, the
actions or omissions of third parties, including suppliers, customers,
competitors and governmental authorities, and various other factors. Should any
one or more of these risks or uncertainties materialize, or the underlying
estimates or assumptions prove incorrect, actual results may vary significantly
from those expressed in such forward-looking statements, and there can be no
assurance that the forward-looking statements contained in this report will in
fact occur.
RISK FACTORS
The risks and uncertainties that may affect our business, financial condition or
results of operations include the following:
Our inability to compete successfully in our markets may harm our
business.OUR INABILITY TO COMPETE SUCCESSFULLY IN OUR MARKETS MAY HARM OUR BUSINESS.
The markets for our SDB products are highly competitive and are characterized by
frequent product improvements and evolving technology. Our ability to compete
successfully depends, in part, on our ability to develop innovative new products
and to be the first to market with those products. The development of innovative
new products by our competitors or the discovery of alternative treatments or
potential cures for the conditions that our products treat could result in our
products becoming noncompetitive or obsolete.
Additionally, some of our competitors have greater financial, research and
development, manufacturing and marketing resources than we do. The past several
years have seen a trend towards consolidation in the health care industry and in
the markets for our products. Industry consolidation could result in greater
competition if our competitors combine their resources or if our competitors are
acquired by other companies with greater resources than ours. This competition
could increase pressure on us to reduce the selling prices of our products or
could cause us to increase our spending on research and development and sales
and marketing. If we are unable to develop innovative new products, maintain
competitive pricing, and offer products that consumers perceive to be as
reliable as those of our competitors, our sales or gross margins could decrease
which would harm our business.
25-31-
Our business depends on our ability to market effectively to dealers of
home health care products and sleep clinics.OUR BUSINESS DEPENDS ON OUR ABILITY TO MARKET EFFECTIVELY TO DEALERS OF HOME
HEALTH CARE PRODUCTS AND SLEEP CLINICS.
We market our products primarily to home health care dealers and to sleep
clinics that diagnose OSA and other sleep disorders. We believe that home
health care dealers and sleep clinics play a significant role in determining
which brand of CPAP product a patient will use. For example, in the United States,
when a physician at a sleep clinic prescribes the use of a CPAP product, the patient
typically purchases the product from a home health care dealer. The physician
may or may not prescribe a specific brand of CPAP product. If a specific brand is
prescribed, we believe the brand prescribed depends upon the brand of CPAP product
that is used in the sleep clinic. If a specific brand is not prescribed, the
home health care dealer may recommend a specific brand. Occasionally, even if
the physician prescribes a specific brand, a home health care dealer may
substitute a competitive CPAP product for the patient. We have limited resources to
market to the more than 2,000 U.S. sleep clinics and the more than 4,000 home
health care dealer branch locations, most of which use, sell or recommend
several brands of CPAP products. In addition, home health care dealers have
experienced price pressures as government and third-party reimbursement have
declined for home care products, and home health care dealers are requiring
price discounts and longer periods of time to pay for products purchased from
us. We cannot assure you that sleep clinic physicians will continue to
prescribe our products, or that home health care dealers or patients will not
substitute competing products when a prescription specifying our products has
been written. The success of our business depends on our ability to market
effectively to home health care dealers and sleep clinics and to ensure that our
products are properly marketed and sold by these third parties.
We intend to expand our marketing activities to target the population with a
predisposition to SDB as well as primary care physicians and specialists. We
cannot assure you that these marketing efforts will be successful in increasing
awareness of our products.
If we are unable to support our continued growth, our business could
suffer.IF WE ARE UNABLE TO SUPPORT OUR CONTINUED GROWTH, OUR BUSINESS COULD SUFFER.
We have experienced rapid and substantial growth. As we continue to grow, the
complexity of our operations increases, placing greater demands on our
management. Our ability to manage our growth effectively depends upon our
ability to implement and improve our financial and management information
systems on a timely basis and to effect other changes in our business.
Unexpected difficulties during expansion, the failure to attract and retain
qualified employees, the failure to successfully replace or upgrade our
management information systems, the failure to manage costs or our inability to
respond effectively to growth or plan for future expansion could cause our
growth to stop. If we fail to manage our growth, our business could suffer.
If we fail to integrate our recent acquisition in Germany with our
operations, our business could suffer.IF WE FAIL TO INTEGRATE OUR RECENT ACQUISITION IN GERMANY WITH OUR OPERATIONS,
OUR BUSINESS COULD SUFFER.
On February 16, 2001, we acquired all of the outstanding shares of MAP located
near Munich, Germany. We are currently in the process of integrating our
operations with those of MAP. The integration requires significant efforts from
each company. We may find it difficult to integrate the operations of MAP. MAP
personnel may leave MAP because of the acquisition and MAP licensees,
distributors or suppliers may terminate their arrangements with MAP, or demand
amended terms to these arrangements. Additionally, our management may have their
attention diverted while trying to integrate the two companies. This diversion
or these difficulties in integration could have an adverse impact on us. If we
are not able to successfully integrate the operations of MAP, we may not realize
the anticipated benefits of the MAP acquisition.
26-32-
We manufacture substantially all of our products outside the United States
and sell a significant portion of our products in non-U.S. markets,
subjecting us to various risks relating to international activities that
could adversely affect our overall profitability.WE MANUFACTURE SUBSTANTIALLY ALL OF OUR PRODUCTS OUTSIDE THE UNITED STATES AND
SELL A SIGNIFICANT PORTION OF OUR PRODUCTS IN NON-U.S. MARKETS, SUBJECTING US TO
VARIOUS RISKS RELATING TO INTERNATIONAL ACTIVITIES THAT COULD ADVERSELY AFFECT
OUR OVERALL PROFITABILITY.
Sales outside North and Latin America accounted for approximately 48%51%, 46%48%, and
43%46% of our net revenues in fiscal years 2002, 2001 and 2000, and 1999,
respectively. As a result of the MAP acquisition, weWe
expect that sales within these areas will account for overapproximately 50% of our
net revenues in the foreseeable future. Our sales outside of North America and
our operations in Europe, Australia and Asia are subject to several difficulties
and risks that are separate and distinct from those we face in our domestic
operations, including:
.- - fluctuations in currency exchange rates;
.- - tariffs and other trade barriers;
.- - compliance with foreign medical device manufacturing regulations;
.- - reduction in third party payer reimbursement for our products;
.- - inability to obtain import licenses;
.- - changes in trade policies and in domestic and foreign tax policies;
.- - possible changes in export or import restrictions; and
.- - the modification or introduction of other governmental policies with
potentially adverse effects.
Fluctuations in foreign currency exchange rates could result in declines
in our reported sales and earnings.FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES COULD RESULT IN DECLINES IN OUR
REPORTED SALES AND EARNINGS.
Since our international sales and a significant portion of our manufacturing
costs are denominated in local currencies and not in U.S. dollars, our reported
sales and earnings are subject to fluctuations in foreign exchange rates. We had
foreign currency transaction losses in recent periods and may have further
losses in the future. We expect that international sales will continue to be a
significant portion of our business and that a significant portion of our
manufacturing costs will continue to be denominated in Australian dollars.
Government and private insurance plans may not reimburse patients for our
products, which could result in reductions in sales or selling prices for
our products.GOVERNMENT AND PRIVATE INSURANCE PLANS MAY NOT REIMBURSE PATIENTS FOR OUR
PRODUCTS, WHICH COULD RESULT IN REDUCTIONS IN SALES OR SELLING PRICES FOR OUR
PRODUCTS.
Our ability to sell our products depends in large part on the extent to which
reimbursement for the cost of our products will be available from government
health administration authorities, private health insurers and other
organizations. These third party payors are increasingly challenging the prices
charged for medical products and services. Therefore, even if a product is
approved for marketing, we cannot assure you that reimbursement will be allowed
for such product or that the reimbursement amount will be adequate or, if
adequate, will not subsequently be reduced. For example, in some markets, such
as Spain, France and Germany, government reimbursement is currently available
for purchase or rental of our products but is subject to constraints such as
price controls or unit sales limitations. In other markets, such as Australia
and the United Kingdom, there is currently limited or no reimbursement for
devices that treat sleep disordered breathing related respiratory conditions.
Additionally, future legislation or regulation concerning the health care
industry or third party or governmental coverage and reimbursement,
particularly, legislation or regulation limiting consumers' reimbursement rights
may harm our business. As we continue to develop new products, those products
will generally not qualify for reimbursement, if at all, until they are approved
for marketing. 27
In the United States, we sell our products primarily to home
health care dealers and to sleep clinics. We do not file claims and bill
governmental programs and other third party payors directly for reimbursement
for our products. However, we are still subject to laws and regulations relating
to governmental reimbursement programs, particularly Medicaid and Medicare.
-33-
In particular, the federal Anti-Kickback Law prohibits persons from knowingly
and willfully soliciting, receiving, offering or providing remuneration,
directly or indirectly, to induce either the referral of an individual, or the
furnishing, recommending or arranging for a good or service, for which payment
may be made under a federal healthcare program such as the Medicare and Medicaid
programs. The government has interpreted this law broadly to apply to the
marketing and sales activities of manufacturers and distributors like us. Many
states have adopted laws similar to the federal Anti-Kickback Law. We are also
subject to other federal and state fraud laws applicable to payment from any
third party payer. These laws prohibit persons from knowingly and willfully
filing false claims or executing a scheme to defraud any healthcare benefit
program, including private third party payors. These laws may apply to
manufacturers and distributors who provide information on coverage, coding, and
reimbursement of their products to persons who do bill third party payors. Any
violation of these laws and regulations could result in civil and criminal
penalties, including fines.
Complying withCOMPLYING WITH FDA and other regulations is an expensive and time-
consuming process, and any failure to comply could result in substantial
penalties.AND OTHER REGULATIONS IS AN EXPENSIVE AND TIME-CONSUMING
PROCESS, AND ANY FAILURE TO COMPLY COULD RESULT IN SUBSTANTIAL PENALTIES.
We are subject to various federal, state, local and international regulations
regarding the testing, manufacture, distribution, marketing, promotion, record
keeping and reporting of our products. In particular, our failure to comply with
FDA regulations could result in, among other things, recalls of our products,
substantial fines and/or criminal charges against us and our employees.
Product sales, introductions or modifications may be delayed or canceled
as a result of thePRODUCT SALES, INTRODUCTIONS OR MODIFICATIONS MAY BE DELAYED OR CANCELED AS A
RESULT OF THE FDA or similar foreign regulations, which could cause
our sales to decline.OR SIMILAR FOREIGN REGULATIONS, WHICH COULD CAUSE OUR SALES TO
DECLINE.
Before we can market or sell a new medical device in the United States, we must
obtain FDA clearance, which can be a lengthy and time-consuming process. We
generally receive clearance from the FDA to market our products in the United
States under Section 510(k) of the Federal Food, Drug, and Cosmetic Act or our
products are exempt from the 510(k) clearance process. We have modified some of
our 510(k) approved products without submitting new 510(k) notices, which we do
not believe were required. However, if the FDA disagrees with us and requires us
to submit new 510(k) notifications for modifications to our existing products,
we may be required to stop marketing the products while the FDA reviews the
510(k) notification. Any new product introduction or existing product
modification could be subjected to a lengthier, more rigorous FDA examination
process. For example, in certain cases we may need to conduct clinical trials of
a new product prior to submitting a 510(k) notice. Additionally, we may be
required to obtain premarket approvals for our products. The requirements of
these more rigorous processes could delay product introductions and increase the
costs associated with FDA compliance. Marketing and sale of our products outside
the United States are also subject to regulatory clearances and approvals, and
if we fail to obtain these regulatory approvals, our sales could suffer. We
cannot assure you that any new products we develop will receive required
regulatory approvals from U.S. or foreign regulatory agencies.
28
Off label marketing of our products could result in substantial penalties.OFF LABEL MARKETING OF OUR PRODUCTS COULD RESULT IN SUBSTANTIAL PENALTIES.
Clearance under Section 510(k) only permits us to market our products for the
uses indicated on the labeling cleared by the FDA. We may request additional
label indications for our current products, and the FDA may deny those requests
outright, require additional expensive clinical data to support any additional
indications or impose limitations on the intended use of any cleared products as
a condition of clearance. If the FDA determines that we have marketed our
products for off label use, we could be subject to fines, injunctions or other
penalties.
Disruptions in the supply of components from our single source suppliers
could result in a significant reduction in sales and profitability.-34-
DISRUPTIONS IN THE SUPPLY OF COMPONENTS FROM OUR SINGLE SOURCE SUPPLIERS COULD
RESULT IN A SIGNIFICANT REDUCTION IN SALES AND PROFITABILITY.
We purchase uniquely configured components for our devices from single-
sourcesingle-source
suppliers. We cannot assure you that a replacement supplier would be able to
configure its components for our devices on a timely basis or, in the
alternative, that we would be able to reconfigure our devices to integrate the
replacement part. A reduction or stoppage in supply while a replacement supplier
reconfigures its components, or while we reconfigure our components for the
replacement part, would limit our ability to manufacture our devices, which
could result in a significant reduction in sales and profitability. We cannot
assure you that our inventories would be adequate to meet our production needs
during any prolonged interruption of supply.
Our intellectual property may not protect our products, and our products
may infringe on the intellectual property rights of third parties.OUR INTELLECTUAL PROPERTY MAY NOT PROTECT OUR PRODUCTS, AND OUR PRODUCTS MAY
INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES.
We rely on a combination of patents, trade secrets and non-disclosure agreements
to protect our intellectual property. Our success depends, in part, on our
ability to obtain and maintain United States and foreign patent protection for
our products, their uses and our processes to preserve our trade secrets and to
operate without infringing on the proprietary rights of third parties. We have a
number of pending patent applications, and we do not know whether any patents
will issue from any of these applications. We do not know whether any of the
claims in our issued patents or pending applications will provide us with any
significant protection against competitive products or otherwise be commercially
valuable. Legal standards regarding the validity of patents and the proper scope
of their claims are still evolving, and there is no consistent law or policy
regarding the valid breadth of claims. Additionally, there may be third party
patents, patent applications and other intellectual property relevant to our
products and technology which are not known to us and that block or compete with
our products.
We face the risks that:
.- - third parties will infringe our intellectual property rights;
.- - our non-disclosure agreements will be breached;
.- - we will not have adequate remedies for infringement;
.- - our trade secrets will become known to or independently developed by our
competitors; or
.- - any third parties will be issued patents that may prevent the sale of our
products or require us to license and pay fees or royalties in order for us to
be able to market some of our products.
We are currently engaged in litigation relating to the enforcement and defense
of fivea number of our patents. Additional litigation may be necessary to enforce
patents issued to us, to protect our proprietary
29
rights, or to defend third
party claims that we have infringed upon proprietary rights of others. The
defense and prosecution of patent claims, including these pending claims, as
well as participation in other inter-party proceedings, can be expensive and
time consuming, even in those instances in which the outcome is favorable to us.
If the outcome of any litigation or proceeding brought against us were adverse,
we could be subject to significant liabilities to third parties, could be
required to obtain licenses from third parties or could be required to cease
sales of the affected products. Additionally, the laws regarding the
enforceability of patents vary from country to country, and we cannot assure you
that any patent issues we face will be uniformly resolved, or that local laws
will provide us with consistent rights and benefits.
We are subject to product liability claims that may exceed the scope and
amount of our insurance coverage, which would expose us to liability for
uninsured claims.-35-
WE ARE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT MAY EXCEED THE SCOPE AND AMOUNT
OF OUR INSURANCE COVERAGE, WHICH WOULD EXPOSE US TO LIABILITY FOR UNINSURED
CLAIMS.
We are subject to potential product liability claims as a result of the design,
manufacture and marketing of medical devices. Any product liability claim
brought against us, with or without merit, could result in the increase of our
product liability insurance rates. In addition, we would have to pay any amount
awarded by a court in excess of our policy limits. Our insurance policies have
various exclusions, and thus we may be subject to a product liability claim for
which we have no insurance coverage, in which case, we may have to pay the
entire amount of any award. We cannot assure you that our insurance coverage
will be adequate or that all claims brought against us will be covered by our
insurance. Insurance varies in cost and can be difficult to obtain, and we
cannot assure you that we will be able to obtain insurance in the future on
terms acceptable to us or at all. A successful product liability claim brought
against us in excess of our insurance coverage, if any, may require us to pay
substantial amounts, which could harm our business.
Our business could suffer if we lose the services of key members of our
management.OUR BUSINESS COULD SUFFER IF WE LOSE THE SERVICES OF KEY MEMBERS OF OUR
MANAGEMENT.
We are dependent upon the continued services of key members of our senior
management and a limited number of key employees and consultants. The loss of
the services of any one of these individuals could significantly disrupt our
operations. Additionally, our future success will depend, among other factors,
on our ability to continue to hire and retain the necessary qualified
scientific, technical and managerial personnel. We compete for such personnel
with numerous other companies, academic institutions and organizations.
Our quarterly operating results are subject to fluctuation for a variety
of reasons.OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATION FOR A VARIETY OF
REASONS.
Our operating results have, from time to time, fluctuated on a quarterly basis
and may be subject to similar fluctuations in the future. These fluctuations may
result from a number of factors, including:
.- - the introduction of new products by us or our competitors;
.- - the geographic mix of product sales;
.- - the success of our marketing efforts in new regions;
.- - changes in third party reimbursement;
.- - timing of regulatory clearances and approvals;
.- - timing of orders by distributors;
.- - expenditures incurred for research and development;
.- - competitive pricing in different regions;
.- - seasonality;
.- - the cost and effect of promotional and marketing programs; and
.- - the effect of foreign currency transaction gains or losses.
30
We are subject to an ongoing tax audit, the results of which may require
significant tax adjustments.
We are subject to an ongoing audit of our tax returns for the years 1995
through 1998, which began in February 1998. The IRS may disagree with our
tax positions on such returns, and if challenged by the IRS, our tax
positions may not be sustained by the courts. As a result of these audits,
we may be required to make certain tax adjustments and pay additional
taxes and fines that may be significant and have a negative impact on our
result of operations.
If a natural or man made disaster strikes our manufacturing facilities, we
will be unable to manufacture our products for a substantial amount of
time and our sales will decline.IF A NATURAL OR MAN MADE DISASTER STRIKES OUR MANUFACTURING FACILITIES, WE WILL
BE UNABLE TO MANUFACTURE OUR PRODUCTS FOR A SUBSTANTIAL AMOUNT OF TIME AND OUR
SALES WILL DECLINE.
We manufacture a significant portion of our products in our facilities in
Australia. These facilities and the manufacturing equipment we use to produce
our products would be costly to replace and could require substantial lead time
to repair or replace. The facilities may be affected by natural or man made
disasters and in the event it was affected by a disaster, we would be forced to
rely on third party manufacturers. Although we believe we possess adequate
insurance for damage to our property and the disruption of our business from
casualties, such insurance may not be sufficient to cover all of our potential
losses and may not continue to be available to us on acceptable terms, or at
all.
Delaware law, provisions in our charter and our shareholder rights plan
could make the acquisition of our company by another company more
difficult.-36-
DELAWARE LAW, PROVISIONS IN OUR CHARTER AND OUR SHAREHOLDER RIGHTS PLAN COULD
MAKE THE ACQUISITION OF OUR COMPANY BY ANOTHER COMPANY MORE DIFFICULT.
Provisions of our certificate of incorporation may have the effect of delaying
or preventing changes in control or management which might be beneficial to us
or our securityholders. In particular, our board of directors is divided into
three classes, serving for staggered three-year terms. Because of this
classification it will require at least two annual meetings to elect directors
constituting a majority of our board of directors.
Additionally, our board of directors has the authority to issue up to 2,000,000
shares of preferred stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
further vote or action by the stockholders. Under our stockholdersstockholder rights plan,
we have also issued purchase rights to the holders of our common stock that
entitle those holders to purchase our Series A Junior Participating Preferred
Stock at a discount, under certain circumstances. The rights of the holders of
our common stock will be subject to, and may be adversely affected by, the
rights of the holders of any preferred stock that may be issued in the future.
The issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control, may discourage bids for our common stock at a
premium over the market price of our common stock and may adversely affect the
market price of our common stock and the voting and other rights of the holders
of our common stock.
You may not be able to enforce the judgments ofYOU MAY NOT BE ABLE TO ENFORCE THE JUDGMENTS OF U.S. courts against some
of our assets or officers and directors.COURTS AGAINST SOME OF OUR
ASSETS OR OFFICERS AND DIRECTORS
A substantial portion of our assets are located outside the United States.
Additionally, two of our sixseven directors and three of our eight officers reside
outside the United States, along with all or a substantial portion of the assets
of these persons. As a result, it may not be possible for investors to enforce
judgments of U.S. courts relating to any liabilities under U.S. securities laws
against our assets, those persons or their assets. In addition, we have been
advised by our Australian counsel 31
that some doubt exists as to the ability of
investors to pursue claims based on U.S. securities laws against these assets or
these persons in Australian courts.
The information contained in this section is not intended to be an exhaustive
description of the risks and uncertainties inherent in our business or in our
strategic plans. Please see Item 1 "Business" and Item 3 "Legal Proceedings".
Item 8 Consolidated Financial Statements and Supplementary Data
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
a) Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report F1
Consolidated Balance Sheets as of June 30, 20012002 and 20002001 F2
Consolidated Statements of Income for the years ended June 30, 2002, 2001 2000 and 19992000 F3
Consolidated Statements of Stockholders' Equity for the years ended June 30, 2002, 2001 2000 and 19992000 F4
Consolidated Statements of Cash Flows for the years ended June 30, 2002, 2001 2000 and 19992000 F5
Notes to Consolidated Financial Statements F6
Schedule II - Valuation and Qualifying Accounts and Reserves 3042
-37-
b) Supplementary Data
Quarterly Financial Information (unaudited). The quarterly results for the
years ended June 30, 20012002 and 20002001 are summarized below (in thousands, except
per share amounts):
2001
------------------------------------------------
First Second Third Fourth Fiscal
2002 Quarter Quarter Quarter Quarter Year
------------------------------------------------- -------------------------------------------------------------------------------------
Net revenues $31,082 $34,366$ 46,129 $ 48,924 $ 52,776 $ 56,247 $204,076
Gross profit 30,833 31,837 33,771 36,808 133,249
Net income 8,538 8,779 10,379 9,810 37,506
Basic earnings per share $ 0.27 $ 0.27 $ 0.32 $ 0.30 $ 1.17
Diluted earnings per share $ 0.25 $ 0.26 $ 0.31 $ 0.29 $ 1.10
First Second Third Fourth Fiscal
2001 Quarter Quarter Quarter Quarter Year
- -------------------------------------------------------------------------------------
Net revenues $ 31,082 $ 34,366 $ 42,680 $47,028$ 47,028 $155,156
Gross profit 21,087 23,021 28,923 31,748 104,779
Net income (loss) 6,580 6,898 (10,194) 8,346 11,630
Basic earnings (loss) per share $ 0.21 $ 0.22 ($0.33) $ 0.27 $ 0.37
Diluted earnings per share $ 0.20 $ 0.21 ($0.30) $ 0.25 $ 0.35
2000
------------------------------------------------
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
------------------------------------------------
Net revenues $25,945 $28,135 $29,971 $31,564 $115,615
Gross profit 17,721 19,531 19,819 21,553 78,624
Net income 4,835 5,362 5,838 6,191 22,226
Basic earnings(loss) per share $ 0.16 $ 0.18 $ 0.19 $ 0.20 $ 0.74
Diluted earnings per share0.21 ($0.30) $ 0.150.25 $ 0.17 $ 0.18 $ 0.19 $ 0.690.35
/(1)/NB. Per share amounts for each quarter are computed independently, and, due to
the computation formula, the sum of the four quarters may not equal the year.
ItemITEM 9 Changes in and Disagreements with Accountants on Accounting and
Financial DisclosureCHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
32
PART III
ItemITEM 10 Directors and Executive Officers of the RegistrantDIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to our definitive Proxy Statement for our November 5, 2001,11,
2002, meeting of stockholders, which will be filed with the Securities and
Exchange Commission within 120 days after June 30, 2001.
Item2002.
On August 21, 2002, Dana Voien was appointed Senior Vice President, New
Business, Marketing and Clinical Education Affairs and replaced Dr Deirdre
Stewart as an Officer of the Company. Dr Stewart has been appointed to the new
position of Vice President, Strategic Clinical Initiatives.
On September 1, 2002, David Pendarvis was appointed Vice President, Global
General Counsel and an Officer of the Company. Norman DeWitt, ResMed's former
General Counsel and former officer, will be leaving full-time employment with
ResMed by the end of this calendar year.
ITEM 11 Executive CompensationEXECUTIVE COMPENSATION
Incorporated by reference to our definitive Proxy Statement for our November 5, 2001,11,
2002, meeting of stockholders, which will be filed with the Securities and
Exchange Commission within 120 days after June 30, 2001.
Item2002.
-38-
ITEM 12 Security Ownership of Certain Beneficial Owners and ManagementSECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to our definitive Proxy Statement for our November 5, 2001,11,
2002, meeting of stockholders, which will be filed with the Securities and
Exchange Commission within 120 days after June 30, 2001.
Item2002.
ITEM 13 Certain Relationships and Related TransactionsCERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No material transactions.
33
PART IV
ItemITEM 14 Exhibits, Consolidated Financial Statements, Schedule, and Reports on
FormEXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, SCHEDULE, AND REPORTS
ON FORM 8-K
a) The following documents are filed as part of this report:
1. Consolidated Financial Statements and ScheduleCONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
The consolidated financial statements and schedule of the Company and its
consolidated subsidiaries are set forth in the "Index to Consolidated Financial
Statements" under Item 8 of this report.
2. ExhibitsEXHIBITS
2.1 Sale and Assignment Agreement, dated as of February 16, 2001 between
ResMed Inc, ResMed Beteiligungs GmbH and the shareholders of MAP
Medizin-Technologie GmbH*
2.2 Agreement and Plan of Merger dated as of May 14, 2002 among ResMed Inc.,
Servo Magnetics Acquisition Inc., Servo Magnetics Incorporated and Mr Leslie
Hoffman.
3.1 Certificate of Incorporation of Registrant, as amended**
3.2 By-laws of Registrant**
4.1 Form of certificate evidencing shares of Common Stock**
4.2 Rights agreement dated as of April 23, 1997***
4.3 Indenture dated as of June 20, 2001, between ResMed Inc and American
Stock Transfer & Trust CompanyCompany******
4.4 Registration Rights Agreement dated as of June 20, 2001, by and between
ResMed Inc,Inc., Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Deutsche Banc Alex Brown Inc., William Blair & Company, L.L.C.,
Macquarie Bank Limited and UBS Warburg LLCLLC******
4.5 Registration Rights Agreement dated as of May 14, 2002 between ResMed
Inc., and Mr Leslie Hoffman
10.1 1995 Stock Option Plan**
10.2 1997 Equity Participation Plan****
10.3 Licensing Agreement between the University of Sydney and ResMed Limited
dated May 17, 1991, as amended**
10.4 Consulting Agreement between Colin Sullivan and ResMed Limited
effective from 1 January 1998*****
10.5 Loan Agreement between the Australian Trade Commission and ResMed
Limited dated May 3, 1994**
-39-
ITEM 14 EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, SCHEDULE, AND REPORTS
ON FORM 8-K (CONTINUED)
10.6 Lease for 10121 Carroll Canyon Road, San Diego CA 92131-
1109,92131-1109, USA*****
10.7 Sale and Leaseback Agreements for 97 Waterloo Rd, North Ryde, Australia
10.8 Employment Agreement dated as of May 14, 2002, between Servo Magnetics
Acquisition Inc., and Mr Leslie Hoffman.
10.9 Agreement for the purchase of Lot 6001, Norwest Boulevarde, Norwest
Business Park, Baulkham Hills, Australia
11.1 Computation of Earnings per Common Share
21.1 Subsidiaries of the Registrant
23.1 Independent Auditors' Consent and Report on Schedule
--------------------
* Incorporated*Incorporated by reference to the Registrant's Report on Form 8-K dated March 2,
20012001.
**Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (No. 33-91094) declared effective on June 1, 1995.
***Incorporated by reference to the Registrant's Registration Statement on Form
8-A12G filed on April 25, 1997.
****Incorporated by reference to the Registrant's 1997 Proxy Statement (File No. 0-26038).Statement.
*****Incorporated by reference to the Registrant's Report on Form 10-K dated
June 30, 1998 (File No. 0-26038)
34
1998.
******Incorporated by reference to the Registrant's Report on Form 10-K dated
June 30, 2001.
b) Reports on Form 8-K
On May 1, 2001 we filed a report on Form 8-K/A reporting Pro Forma
Condensed Consolidated Financial Information associated with the
acquisition, on February 16, 2001, of MAP Medizin-Technologie GmbH.
On June 12, 2001 we filed a report on Form 8-K that announced our
proposed private placement of $150 million of convertible subordinated
notes and included a press release issued by us on June 11, 2001 to
that same effect.
On June 15, 2001, we filed a report on Form 8-K that announced we had
entered into a purchase agreement providing for the sale to certain
initial purchasers of $150 million of convertible subordinated notes
(plus an additional $30 million to cover over allotments, if any). The
report included a press release issued by us on June 14, 2001 to that
effect. The report also announced the specific pricing for the sale of
the convertible subordinated notes and included a press release dated
June 15, 2001, to that effect.
35None.
-40-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DATED September 20, 2001
ResMed Inc
/S/ PETER C. FARRELL
-------------------------------------------------------
Peter C. Farrell, President and Chief Executive Officer
President and Chief Executive Officer
/S/ ADRIAN M. SMITH
-------------------------------------------------------
Adrian M. Smith
Vice President Finance and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/S/ PETER C. FARRELL Chief Executive Officer, September 20, 2001
---------------------------------------------
Peter C. Farrell President, Chairman of the Board
(Principal Executive Officer)
/S/ CHRISTOPHER G. ROBERTS Director September 20, 2001
---------------------------------------------
Christopher G. Roberts
/S/ MICHAEL A. QUINN Director September 20, 2001
---------------------------------------------
Michael A. Quinn
/S/ GARY W. PACE Director September 20, 2001
---------------------------------------------
Gary W. Pace
/S/ DONAGH MCCARTHY Director September 20, 2001
---------------------------------------------
Donagh McCarthy
/S/ CHRISTOPHER BARTLETT Director September 20, 2001
---------------------------------------------
Christopher Bartlett
Independent Auditors' ReportINDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
ResMed Inc:
We have audited the accompanying consolidated balance sheets of ResMed Inc and
subsidiaries as of June 30, 2001,2002, and 2000,2001, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the years
in the three-year period ended June 30, 2001.2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ResMed Inc. and
subsidiaries as of June 30, 20012002 and 2000,2001, and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 2001,2002, in conformity with accounting principles generally accepted in the
United States of America.
/s/ KPMG LLPAs discussed in Note 6 to the consolidated financial statements, the Company has
adopted the provisions of SFAS No. 142 "Accounting for Goodwill and Other
Intangible Assets" and accordingly has changed its method of accounting for
goodwill.
/S/ KPMG LLP
San Diego, California
August 3, 2001
F-19, 2002
-F1-
ResMed Inc And Subsidiaries
Consolidated Balance Sheets
June 30, 2001 and 2000
(In thousands, except share and per share data)
RESMED INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
June 30, June 30,
2002 2001 2000
-------------------------------------
AssetsASSETS
Current assets:
Cash and cash equivalents $ 40,13672,860 $ 18,25040,136
Marketable securities available for sale (note 3) 19,979 62,616 3,713
Accounts receivable, net of allowance for doubtful accounts
of $892$1,938 and $833$892 at June 30, 2002 and 2001, and 2000, respectively 46,199 32,248 24,688
Inventories, net (note 4) 41,173 29,994 15,802
Deferred income taxes (note 10)11) 9,289 4,152 2,361
Prepaid expenses and other current assets 4,213 8,736 4,358
-------------------------------------
Total current assets 193,713 177,882
69,172
---------------------------------------------- ---------
Property, plant and equipment, net of accumulated depreciation of
31,084 at June 30, 2002 and $19,930 at June 30, 2001 and $13,552 at June 30, 2000 (note 5) 79,279 55,092 36,576
Patents, net of accumulated amortization of $1,030$1,862 and $789$1,030
at June 30, 2002 and 2001, and 2000, respectively 2,653 1,390
1,342
Goodwill net of accumulated amortization of $3,193 and $2,003 at
June 30, 2001 and 2000, respectively(note 6) 92,536 47,870 5,626
Other assets 8,010 5,856
2,878
-------------------------------------Total non current assets 182,478 110,208
--------- ---------
Total assets $376,191 $288,090
$115,594
=====================================
Liabilities and Stockholders' Equity========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,97111,605 $ 5,9297,971
Accrued expenses (note 6)7) 17,052 16,751 9,224
Income taxes payable 6,905 8,888
6,469
-------------------------------------Payable for property purchase 11,552 -
Current portion of deferred profit on sale-leaseback 1,933 -
Total current liabilities 49,047 33,610 21,622
Non current liabilities:
Deferred revenue 7,259 4,114 -
Convertible subordinated notes (note 7)8) 123,250 150,000
Deferred profit on sale-leaseback 3,705 -
-------------------------------------
Total non current liabilities 134,214 154,114 -
-------------------------------------
Total liabilities 183,261 187,724 21,622
-------------------------------------
Stockholders' equity: (note 8)9)
Preferred stock, $.01 par value, 2,000,000 shares authorized; none issued - -
Series A Junior Participating preferred stock, $0.01 par value,
250,000 shares authorized; none issued - -
Common stock, $.004 par value, 50,000,000100,000,000 shares authorized;
Issued and outstanding 33,108,207 at June 30, 2002 and 31,478,780 at June 30, 2001 and
30,593,921 at June 30, 2000132 126 122
Additional paid-in capital 94,153 52,675 41,495
Retained earnings 114,643 77,137
65,507Treasury stock (7,873) -
Accumulated other comprehensive loss (8,125) (29,572) (13,152)
-------------------------------------
Total stockholders' equity 192,930 100,366 93,972
-------------------------------------
Commitments and contingencies (notes 1314 and 16)17) - -
--------- ---------
Total liabilities and stockholders' equity $376,191 $288,090
$115,594
=============================================== =========
See accompanying notes to consolidated financial statements.
F-2-F2-
ResMed Inc and Subsidiaries
Consolidated Statements of Income
Years ended June 30, 2001, 2000 and 1999
(In thousands, except per share data)
RESMED INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
June 30, June 30, June 30,
2002 2001 2000 1999
--------------------------------------------------------
Net revenues $204,076 $155,156 $115,615 $88,627
Cost of sales 70,827 50,377 36,991
29,416
--------------------------------------------------------
Gross profit 133,249 104,779 78,624 59,211
--------------------------------------------------------
Operating expenses:
Selling, general and administrative 64,481 49,364 36,987 27,414
Provision for restructure (note 6)7) - 550 - -
In-process research and development write off (note 14)15) 350 17,677 - -
Research and development 14,910 11,146 8,499
6,542
--------------------------------------------------------Donations to Research Foundations 2,349 - -
Total operating expenses 82,090 78,737 45,486 33,956
--------------------------------------------------------
Income from operations 51,159 26,042 33,138 25,255
--------------------------------------------------------
Other income (expenses):
Gain on extinguishment of debt 6,549 - -
Interest income (expense), net (3,224) (762) 801
779
Government grants - 72 279 833
Other, net (note 9)10) 108 1,962 (52) (2,290)
--------------------------------------------------------
Total other income (expenses), net 3,433 1,272 1,028 (678)
--------------------------------------------------------
Income before income taxes 54,592 27,314 34,166 24,577
Income taxes (note 10)11) 17,086 15,684 11,940
8,475
--------------------------------------------------------
Net income $ 37,506 $ 11,630 $ 22,226
$16,102
========================================================
Basic earnings per share $0.37 $0.74 $0.55$ 1.17 $ 0.37 $ 0.74
Diluted earnings per share $0.35 $0.69 $0.52$ 1.10 $ 0.35 $ 0.69
Basic shares outstanding 32,174 31,129 30,153 29,416
Diluted shares outstanding 34,080 33,484 32,303 31,068
See accompanying notes to consolidated financial statements.
F-3-F3-
ResMed Inc And Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended June 30, 2001, 2000 and 1999
(In thousands)
RESMED INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Additional other
Common stock paid-inTreasury Stock Other
------------ Paid-in -------------- Retained comprehensive Comprehensive
Shares Amount capitalCapital Shares Amount Earnings incomeIncome (loss) Total
Income
--------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 29,104 $117 $31,165 $27,179 $ (7,688) $ 50,773
Common stock issued on exercise of options (note 8) 512 1 2,124 - - 2,125
Tax benefit from exercise of options - - 388 - - 388
Comprehensive income:
Net income - - - 16,102 - 16,102 $ 16,102
Other comprehensive income
Foreign currency translation adjustments 2,259 2,259 2,259
---------------
Comprehensive income $ 18,361
===============
--------------------------------------------------------------------------------
Balance, June
BALANCE, JUNE 30, 1999 29,616 118 33,677$118 $33,677 $ 43,281 (5,429)($5,429) $ 71,647
Common stock issued to consultants 10 - 126 - - 126
Common stock issued on exercise of options (note 8)9) 968 4 6,376 - - 6,380
Tax benefit from exercise of options - - 1,316 - - 1,316
Comprehensive income:
Net income - - - 22,226 - 22,226
$ 22,226
Other comprehensive income
Foreign currency translation adjustments (7,723) (7,723)
(7,723)
---------------
Comprehensive income
$ 14,503
===============
--------------------------------------------------------------------------------
Balance, June- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2000 30,594 $122122 41,495 65,507 (13,152) 93,972
Common stock issued on exercise of options (note 8)9) 885 4 7,939 - - 7,943
Tax benefit from exercise of options - - 3,241 - - 3,241
Comprehensive income:
Net income - - - 11,630 - 11,630
$ 11,630
Other comprehensive income
Foreign currency translation adjustments - - - - (16,420) (16,420)
Comprehensive income/(loss)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2001 31,479 126 52,675 77,137 (29,572) 100,366
Common stock issued on exercise of options (note 9) 776 3 9,778 - 9,781
Common stock issued for acquisitions 853 3 24,781 24,784
Treasury stock purchases (290) (7,873) (7,873)
Tax benefit from exercise of options - - 6,919 - 6,919
Comprehensive income:
Net income 37,506 37,506
Other comprehensive income
Foreign currency translation adjustments 21,342 21,342
Unrealized gains on marketable securities 105 105
Comprehensive income/(loss)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2002 33,108 $132 $94,153 (290) $(7,873) $114,643 $ (8,125) $192,930
- -------------------------------------------------------------------------------------------------------------------------------
(TABLE CONTINUED)
- ------------------------------------------------------------------
Comprehensive
Income
- ------------------------------------------------------------------
BALANCE, JUNE 30, 1999
Common stock issued to consultants
Common stock issued on exercise of options (note 9)
Tax benefit from exercise of options
Comprehensive income:
Net income $ 22,226
Other comprehensive income
Foreign currency translation adjustments (7,723)
Comprehensive income $ 14,503
- ------------------------------------------------------------------
BALANCE, JUNE 30, 2000
Common stock issued on exercise of options (note 9)
Tax benefit from exercise of options
Comprehensive income:
Net income $ 11,630
Other comprehensive income
Foreign currency translation adjustments (16,420)
---------------
Comprehensive income/(loss) $ (4,790)
===============
Balance, June- ------------------------------------------------------------------
BALANCE, JUNE 30, 2001
31,479 $126 $52,675 $77,137 $(29,572) $100,366
==============================================================Common stock issued on exercise of options (note 9)
Common stock issued for acquisitions
Treasury stock purchases
Tax benefit from exercise of options
Comprehensive income:
Net income 37,506
Other comprehensive income
Foreign currency translation adjustments 21,342
Unrealized gains on marketable securities 105
Comprehensive income/(loss) $ 58,953
- ------------------------------------------------------------------
BALANCE, JUNE 30, 2002
- ------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4-F4-
ResMed Inc And Subsidiaries
Consolidated Statements of Cash Flows
Years ended June 30, 2001, 2000 and 1999
(In thousands)
RESMED INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(IN THOUSANDS)
June 30, June 30, June 30,
2002 2001 2000 1999
---------------------------------------------------------
Cash flows from operating activities:
Net incomeincome: $ 37,506 $ 11,630 $ 22,226 $ 16,102
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 9,972 7,015 6,248
3,973
Goodwill amortization - 1,430 690 633
Provision for service warranties (85) 174 184 240
Deferred income taxes (6,153) (2,306) 77 549
Foreign currency options revaluation 767 2,766 2,158
125
Non cash consulting expensesDeferred borrowing costs 1,254 - -
Tax benefit from stock options exercised 6,919 3,241 1,316
Gain on extinguishment of debt (6,549) - -
Other, net (162) - 126
-
Restructuring provision - 550 - -
Purchased in-process research and development write off 350 17,677 - -
Changes in operating assets and liabilities, net of effect
of acquisitions:
Accounts receivable, net (9,765) (5,531) (7,394)
(5,516)
Inventories, net (7,063) (8,130) (6,027) (2,919)
Prepaid expenses and other current assets 4,785 (3,470) (1,572)
(204)
Accounts payable, and accrued expenses 2,633 1,412 2,873
Income taxes payable 5,082 2,147 2,332
---------------------------------------------------------and other liabilities 3,864 4,474 2,243
Net cash provided by operating activities 35,640 29,520 20,275
18,188
------------------------------------------------------------------- ---------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (28,185) (27,459) (16,168)
(20,515)
PurchasePurchases of marketable securities - available for sale (393,072) (79,879) (36,804) (7,290)
Proceeds from sale of marketable securities - available for sale 435,871 20,976 38,717 6,862
Patent registration costs (1,720) (516) (961) (445)
Business acquisitions, net of cash acquired of $367$812 (note 14)15) (13,871) (55,070) (576) (2,024)
Purchases of investments (3,987) (2,602) (2,732)
(1,529)
---------------------------------------------------------Proceeds from sale-leaseback 18,500 - -
Net cash used inprovided by (used in) investing activities 13,536 (144,550) (18,524)
(24,941)
------------------------------------------------------------------- ---------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 9,781 7,943 6,380 2,125
Repayment of borrowings (3,022) (82,854) - (235)
Proceeds from borrowings, net of borrowing costs 28,402 213,937 -
Redemption of borrowings (48,454) - ----------------------------------------------------------
Purchases of treasury stock (7,873) - -
Net cash provided by (used in) financing activities (21,166) 139,026 6,380
1,890
------------------------------------------------------------------- ---------- ---------
Effect of exchange rate changes on cash 4,714 (2,110) (989)
445
---------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 32,724 21,886 7,142 (4,418)
Cash and cash equivalents at beginning of the year 40,136 18,250 11,108 15,526
---------------------------------------------------------
Cash and cash equivalents at end of the year $ 72,860 $ 40,136 $ 18,250
$ 11,108
=========================================================---------- ---------- ---------
Supplemental disclosure of cash flow information:
Income taxes paid $ 18,328 $ 12,908 $ 9,716
$ 5,374
Interest paid 6,557 1,439 - -
=========================================================
Fair value of assets acquired in acquisitionacquisitions $ 9,060 $ 33,139 $ 383
-
Liabilities assumed (5,872) (24,821) (36) -
Goodwill on acquisition 36,279 47,119 229
2,024
---------------------------------------------------------Fair value of shares issued for acquisitions (24,784) - -
Cash paid for acquisition, including acquisition costs $ 14,683 $ 55,437 $ 576
$ 2,024
=========================================================---------- ---------- ---------
See accompanying notes to consolidated financial statements.
F-5-F5-
ResMed Inc And Subsidiaries
Notes to Consolidated Financial Statements
JuneRESMED INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
and 2000
1. Organization and Basis of PresentationORGANIZATION AND BASIS OF PRESENTATION
ResMed Inc (the "Company") is a Delaware corporation formed in March 1994
as a holding company for ResMed Holdings Ltd (RHL), a company resident in
Australia. The Company designs, manufactures and markets devices for the
evaluation and treatment of sleep disordered breathing, primarily obstructive
sleep apnea. The Company's corporate offices are based in San Diego, California
with its principal manufacturing operation located in Australia. Other major
distribution and sales sites are located in the United States, United Kingdom,
France, Germany, Sweden, Switzerland and Singapore.
2. Summary of Significant Accounting PoliciesSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated on consolidation.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Actual results could differ from
management's estimates.
(b) Revenue Recognition
Revenue on product sales is recorded at the time of shipment. Royalty
revenue from license agreements is recorded when earned. Service revenue
received in advance from service contracts is initially capitalized and
progressively recognized as revenue over the life of the service contract.
Revenue from sale of marketing or distribution rights is initially capitalized
and progressively recognized as revenue over the life of the contract.
(c) Cash and Cash Equivalents
Cash equivalents including certificates of deposit, commercial paper
and other highly liquid investments are stated at cost, which approximates
market. Investments with original maturities of 90 days or less are considered
to be cash equivalents for purposes of the consolidated statements of cash
flows.
(d) Inventories
Inventories are stated at the lower of cost or market, determined
principally by the first-in, first-out method.
(e) Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation
expense is computed using the straight-line method over the estimated useful
lives of the assets, generally two to ten years. Straight-line and accelerated
methods of depreciation are used for tax purposes. Maintenance and repairs are
charged to expense as incurred.
F-6-F6-
ResMed Inc And Subsidiaries
Notes to Consolidated Financial Statements
JuneRESMED INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
and 2000
2. Summary of Significant Accounting Policies (continued)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(f) Patents
The registration costs for new patents are capitalized and amortized
over the estimated useful life of the patent, generally five years. In the
event of a patent being superseded, the unamortized costs are written off
immediately.
(g) Goodwill
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, Goodwill arising from business acquisitionsand Other
Intangible Assets. As allowed under the Standard, the Company has beenadopted SFAS
142 effective July 1, 2001. SFAS 142 requires goodwill and intangible assets
with indefinite useful lives to no longer be amortized, but instead be tested
for impairment at least annually.
With the adoption of SFAS 142, the Company reassessed the useful lives and
residual values of all acquired intangible assets to make any necessary
amortization period adjustments. Based on a
straight-line basis over periods ranging from threethat assessment, only goodwill was
determined to 20 years. The
Company carries goodwill at cost net of accumulated amortization. The
Company reviews its goodwill carrying value when events indicate thathave an impairment may have occurred in goodwill. If, based on the
undiscounted cash flows, management determines goodwill is not
recoverable, goodwill is written downindefinite useful life and no adjustments were made to its discounted cash flow
value and the
amortization period is re-assessed.or residual values of other intangible assets.
In accordance with SFAS 142 the Company has completed its initial assessment of
goodwill impairment. The results of the review indicated that no impaired
goodwill currently exists.
Amortization expense of goodwill was $nil, $1,430,000 $690,000 and $633,000$690,000 for the years
ended June 30, 2002, 2001 2000 and 1999,2000, respectively.
(h) Government Grants
Government grants revenue is recognized when earned. Grants have been
obtained by the Company from the Australian Federal Government to support the
continued development of the Company's proprietary positive airway pressure
technology and to assist development of export markets. Grants have been
recognized in the amount of $nil, $72,000 $279,000 and $833,000$279,000 for the years ended June
30, 2002, 2001 2000 and 1999,2000, respectively.
(i) Foreign Currency
The consolidated financial statements of the Company's non-U.S.
subsidiaries, whose functional currencies are other than U.S. dollars, are
translated into U.S. dollars for financial reporting purposes. Assets and
liabilities of non-U.S. subsidiaries whose functional currencies are other than
the U.S. dollar are translated at year end exchange rates, and revenue and
expense transactions are translated at average exchange rates for the year.
Cumulative translation adjustments are recognized as part of comprehensive
income, as described in Note 15,16, and are included in accumulated other
comprehensive loss in the consolidated balance sheet until such time as the
subsidiary is sold or substantially or completely liquidated. Gains and losses
on transactions, denominated in other than the functional currency of the
entity, are reflected in operations.
-F7-
RESMED INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(j) Research and Development
All researchResearch and development costs are expensed in the period incurred.
F-7
ResMed Inc And Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
2. Summary of Significant Accounting Policies (continued)
(k) Earnings Per Share
The weighted average shares used to calculate basic earnings per share were
32,174,000, 31,129,000, 30,153,000, and 29,416,00030,153,000 for the years ended June 30, 2002, 2001
2000 and 1999,2000, respectively. The difference between basic earnings per share and
diluted earnings per share is attributable to the impact of outstanding stock
options during the periods presented. Stock options had the effect of
increasing the number of shares used in the calculation (by application of the
treasury stock method) by 1,906,000, 2,355,000 2,150,000 and 1,652,0002,150,000 for the years ended
June 30, 2002, 2001 2000 and 1999,2000, respectively.
(l) Financial Instruments
The carrying value of financial instruments, such as of cash and cash
equivalents, marketable securities - available for sale, accounts receivable,
government grants receivable and accounts payable approximate their fair value
because of their short term nature. The estimated fair value of the Company's
long-term debt at June 30, 20012002 approximates $147.9$102.5 million compared with the
carrying value of $150.0$123.3 million. Foreign currency option contracts are marked
to market and therefore reflect their fair value. The Company does not hold or
issue financial instruments for trading purposes.
The fair value of financial instruments is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
(m) Foreign Exchange Risk Management
The Company enters into various types of foreign exchange contracts in
managing its foreign exchange risk, including derivative financial instruments
encompassing forward exchange contracts and foreign currency options.
The purpose of the Company's foreign currency hedging activities is to
protect the Company from adverse exchange rate fluctuations with respect to net
cash movements resulting from the sales of products to foreign customers and
Australian manufacturing activities. The Company enters into foreign currency
option contracts to hedge anticipated sales and manufacturing costs, principally
denominated in Australian dollars and Euros. The terms of such foreign currency
option contracts generally do not exceed three years.
Unrealized gains or losses are recognized as incurred in the consolidated
balance sheets as either other assets or other liabilities and are recorded
within other income, net on the Company's consolidated statements of income.
Unrealized gains and losses on currency derivatives are determined based on
dealer quoted prices.
-F8-
RESMED INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(m) Foreign Exchange Risk Management (continued)
The Company is exposed to credit-related losses in the event of
non-
performancenon-performance by counterparties to financial instruments. The credit exposure
of foreign exchange options at June 30, 20012002 was $597,000,$2.8 million, which represents
the positive fair value of options held by the Company.
The Company held foreign currency option contracts with notional amounts
totalling $223,752,000totaling $160.5 million and $171,530,000$223.8 million at June 30, 20012002 and 2000,2001,
respectively to hedge foreign currency items. These contracts mature at various
dates prior to July 2002.
F-8
ResMed Inc And Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
2. Summary of Significant Accounting Policies (continued)2004.
(n) Income Taxes
The Company accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(o) Marketable Securities
Management determines the appropriate classification of its
investments in debt and equity securities at the time of purchase and
re-evaluates such determination at each balance sheet date. Debt securities for
which the Company does not have the intent or ability to hold to maturity are
classified as available for sale. Securities available for sale are carried at
fair value, with the unrealized gains and losses, net of tax, reported in
accumulated other comprehensive income (loss). Realized gains and losses are
included in other income or expense.
At June 30, 20012002 and 2000,2001, the Company's investments in debt
securities were classified on the accompanying consolidated balance sheet as
marketable securities available for sale. These investments are diversified
among high credit quality securities in accordance with the Company's investment
policy.
The amortized cost of debt securities classified as available-for-sale
is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization and interest are included in interest
income. Realized gains and losses are included in other income or
expense. The cost of securities sold is based on the specific
identification method.
(p) Warranty
Estimated future warranty obligations related to certain products are
provided by charges to operations in the period in which the related revenue is
recognized.
-F9-
RESMED INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(q) Impairment of Long-Lived Assets
The Company periodically evaluates the carrying value of long-lived
assets to be held and used, including certain identifiable intangible assets,
when events and circumstances indicate that the carrying amount of an asset may
not be recovered. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value, less costs to
sell.
F-9
ResMed Inc And Subsidiaries
Notes(r) Capitalized Software Production Costs
Software development costs have been capitalized and will be amortized to
Consolidated Financial Statementsthe cost of product revenues over the estimated economic lives (generally three
to five years) of the products that include such software. Total net
capitalized software production costs were $1,132,000 and $nil at June 30, 2002
and 2001 and 2000respectively.
3. Marketable SecuritiesMARKETABLE SECURITIES
The estimated fair value of marketable securities available for sale as of
June 30, 2002 and 2001, was $19,979,000 and 2000, was $62,616,000, and $3,713,000, respectively. The
estimated fair value of each investment approximates the amortized cost,
and therefore, there are no unrealized gains or losses as of June 30, 2001
or 2000.
Expected maturities may differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations without
prepayment penalties.
4. InventoriesINVENTORIES
Inventories, net were comprised of the following as of June 30, 20012002 and
20002001 (in thousands):
2002 2001
Raw materials $ 8,130 $ 7,584
Work in progress 2,057 98
Finished goods 30,986 22,312
$41,173 $29,994
------- -------
-F10-
RESMED INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
2000
---------------------------
Raw materials $ 7,584 $ 4,826
Work in progress 98 297
Finished goods 22,312 10,679
---------------------------
$29,994 $15,802
===========================
5. Property, Plant and EquipmentPROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following as of June 30,
2002 and 2001 (in thousands):
2002 2001
Machinery and equipment $ 19,381 $ 10,930
Computer equipment 20,520 12,829
Furniture and fixtures 9,204 8,667
Vehicles 1,531 1,219
Clinical, demonstration and rental equipment 11,651 8,194
Leasehold improvements 685 663
Land 27,121 5,333
Buildings 19,188 27,187
Construction in Progress 1,082 -
110,363 75,022
--------- ---------
Accumulated depreciation and amortization (31,084) (19,930)
$ 79,279 $ 55,092
--------- ---------
6. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted SFAS 142 on July 1, 2001. The following table reconciles
the prior year's reported operating income and net income to their respective
pro-forma balances adjusted to exclude goodwill amortization expense which is no
longer recorded under SFAS 142, for the years ended June 30, 2002, 2001 and
2000, (in thousands):(In $ thousands, except per share amounts).
2002 2001 2000
OPERATING INCOME:
Reported income from operations $51,159 $26,042 $33,138
Add back: goodwill amortization - 1,430 690
Adjusted income from operations $51,159 $27,472 $33,828
------- ------- -------
NET INCOME:
Reported net income $37,506 $11,630 $22,226
Add back: goodwill amortization after tax - 1,430 690
Adjusted net income $37,506 $13,060 $22,916
------- ------- -------
BASIC EARNINGS PER SHARE:
Reported basic earnings per share $ 1.17 $ 0.37 $ 0.74
Goodwill amortization after tax - $ 0.05 $ 0.02
Adjusted basic earnings per share $ 1.17 $ 0.42 $ 0.76
------- ------- -------
DILUTED EARNINGS PER SHARE:
Reported diluted earnings per share $ 1.10 $ 0.35 $ 0.69
Goodwill amortization after tax - $ 0.04 $ 0.02
Adjusted diluted earnings per share $ 1.10 $ 0.39 $ 0.71
------- ------- -------
-F11-
RESMED INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
2000
---------------------
Machinery and equipment $ 10,930 $ 8,024
Computer equipment 12,829 9,685
Furniture and fixtures 8,667 5,214
Vehicles 1,219 1,214
Clinical, demonstration and rental equipment 8,194 7,844
Leasehold improvements 663 552
Land 5,333 3,113
Buildings 27,187 9,837
Construction6. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
Changes in Process - 4,645
---------------------
75,022 50,128
Accumulated depreciation and amortization (19,930) (13,552)
---------------------
$ 55,092 $ 36,576
=====================
F-10
ResMed Inc And Subsidiaries
Notes to Consolidated Financial Statementsthe carrying amount of goodwill for the year ended June 30, 2002,
were as follows:
In US$ thousands) 2002
Balance at June 30, 2001 $47,870
Foreign currency translation adjustments 8,387
Goodwill on acquisition of Labhardt Ag (Note 15) 4,161
Goodwill on acquisition of Servo Magnetics Inc (Note 15) 30,701
Contingent payment for MAP (Note 15) 1,417
Balance at June 30, 2002 $92,536
-------
Other intangible assets amounted to $2.7 million (net of accumulated
amortization of $1.9 million) and $1.4 million (net of accumulated amortization
of $1.0 million) at June 30, 2002 and 2001, respectively. These intangible
assets consist of patents and 2000
6. Accrued Expensesare amortized over the estimated useful life of
the patent, generally five years. There are no expected residual values related
to these intangible assets.
7. ACCRUED EXPENSES
Accrued expenses at June 30, 20012002 and 20002001 consist of the following (in
thousands):
2001 2000
---------------------------
Service warranties $ 739 $ 601
Consulting and professional fees 809 324
Royalties 290 240
Value added taxes due 6,033 2,520
Employee related costs 4,687 3,087
Deferred revenue 1,388 1,341
Clinical research 75 178
2002 2001
Service warranties $ 744 $ 739
Consulting and professional fees 596 809
Royalties 55 290
Value added taxes due 847 6,033
Employee related costs 6,817 4,687
Deferred revenue 1,779 1,388
Research foundation grants 1,344 -
Convertible note interest 137 164
Provision for restructure(a) 375 -
Promotional programs 1,198 -
Other 1,157 933
---------------------------
$16,751 $9,224
===========================
(a) Subsequent to the purchase of MAP Medizin-Technologie GmbH, the Company
has begun limited restructuring of MAP's activities and for restructure - 375
Promotional programs 2,746 1,198
Other 1,987 1,068
$17,052 $16,751
------- -------
During the year ended June 30, 2001, has takenthe Company took a restructuring
charge of $550,000 associated with the sale and closure of MAP's unprofitable
French operation. At June 30, 2002 and 2001, the provision for restructure was
$nil and $375,000, representing amounts to be paid on
termination of employees and leases.
7. Long-Term Debtrespectively.
8. LONG-TERM DEBT
Long-term debt at June 30, 2002 and 2001 consists of the following (in
thousands):
2002 2001
Outstanding at beginning of year $150,000 $ -
Issued 30,000 150,000
Repurchased (56,750) -
Outstanding at end of year $123,250 $150,000
--------- --------
-F12-
RESMED INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
and 2000 consist of the following (in
thousands):
2001 2000
-----------------------------
4% Convertible subordinate notes due 2006 $150,000 $ -
=============================8. LONG-TERM DEBT (CONTINUED)
On June 20, 2001 the Company issued $150.0 million of 4% convertible
subordinated notes that are due to mature on June 20, 2006. On July 3, 2001,
the Company received an additional $30.0 million in over allotments. This
increased the total amount of convertible subordinated notes issued to $180.0
million.
The notes are convertible, at the option of the holder, at any time on or
prior to maturity, into shares of common stock of ResMed Inc. The notes are
convertible at a conversion price of $60.60 per share, which is equal to a
conversion rate of 16.5017 shares per $1,000 principal amount of notes,
subject to adjustment.
Interest is to be paid on the notes on June 20 and December 20 of each year,
beginning December 20, 2001.
The Company may redeem some or all of the notes at any time before June 20,
2004 at a redemption price of $1,000 per $1,000 principal amount of notes, plus
accrued and unpaid interest, if any, to the redemption date, if the closing
price of ourthe Company's common stock has exceeded 150% of the conversion price
then in effect for at least 20 trading days within a period of 30 consecutive
trading days ending on the trading day before the date of mailing of the
provisional redemption notice. Upon any such provisional redemption, the
Company will make an additional payment in cash equal to $166.67 per $1,000
principal amount of notes, less the amount of any interest actually paid on the
notes before the provisional redemption date.
F-11
ResMed Inc And Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
7. Long-Term Debt (continued)
The Company may also redeem some or all of the notes at any time on or
after June 22, 2004, but prior to June 20, 2005, at a redemption price equal to
101.6% of the principal amount of notes redeemed, and at any time after June 19,
2005, at a redemption price of 100.8% of the principal amount of notes, plus in
any case accrued and unpaid interest, if any, to the redemption date, if the
closing price of the Company's common stock has exceeded 130% of the conversion
price then in effect for at least 20 trading days within a period of 30
consecutive trading days ending on the trading day before the date of mailing of
the optional redemption notice.
The notes are general unsecured obligations and are subordinated to all of
the Company's existing and future senior indebtedness and will be effectively
subordinated to all of the indebtedness and liabilities of the Company's
subsidiaries. The indenture governing the notes does not limit the Company or
its subsidiaries from incurring senior indebtedness or other indebtedness.
During fiscal 2002, the Company repurchased $56.8 million face value of its
convertible subordinated notes. The total purchase price of the notes was $49.1
million, including $0.6 million in accrued interest. The Company recognized a
gain of $4.0 million, net of tax of $2.5 million on these transactions. As at
June 30, 2002, the Company had convertible subordinated notes outstanding of
$123.3 million.
The notes are convertible, at the option of the holder, at any time on or
prior to maturity, into shares of common stock of ResMed Inc. The notes are
convertible at a conversion price of $60.60 per share, which is equal to a
conversion rate of 16.5017 shares per $1,000 principal amount of notes, subject
to adjustment.
Interest is to be paid on the notes on June 20 and December 20 of each
year.
The notes are general unsecured obligations and are subordinated to all of
the Company's existing and future senior indebtedness and will be effectively
subordinated to all of the indebtedness and liabilities of the Company's
subsidiaries. The indenture governing the notes will not limit the Company or
its subsidiaries from incurring senior indebtedness or other indebtedness.
8. Stockholders' Equity
Stock Options-F13-
RESMED INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
9. STOCKHOLDERS' EQUITY
STOCK OPTIONS - The Company has granted stock options to personnel,
-------------
including officers and directors in accordance with both the 1995 Option Plan
and the 1997 Equity Participation Plan (collectively the "Plans"). These
options have expiration dates of ten years from the date of grant and vest over
three years. The Company granted these options with the exercise price equal to
the market value as determined at the date of grant.
In August 1997 as part of the introduction of the 1997 Equity Participation
Plan, the Company cancelled 43,880 options, being all non-issued options
remaining under the 1995 Option Plan.
The following table summarizes option activity:
---------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
2002 Price 2001 Price ($) 2000 Price 1999 Price
---------------------------------------------------------------------($)
Outstanding at beginning of year 3,852,818 $17.14 3,298,022 $10.12$ 10.12 3,142,272 $ 7.32
$ 2,403,160 $ 4.57
Granted 1,328,600 50.18 1,569,690 27.27 1,336,900 14.14
1,265,000 11.31
Exercised (775,803) 12.61 (884,859) 8.98 (967,985) 6.59
(512,688) 4.15
Forfeited (204,617) 26.75 (130,035) 17.78 (213,165) 10.04 (13,200) 11.32
---------------------------------------------------------------------
Outstanding at end of year 4,200,998 $27.94 3,852,818 $17.14$ 17.14 3,298,022 $10.12 3,142,272 $ 7.32
---------------------------------------------------------------------10.12
Price range of granted options $33.15-$52.20 $ 24-$40 $ 13-$27
$ 10-$12
Options exercisable at end of year 1,631,044 13.76 1,240,427 $ 8.02 1,368,286 $ 8.02 1,368,286 $ 6.92 1,254,126 $ 4.00
---------------------------------------------------------------------
F-12
ResMed Inc And Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
8. Stockholders' Equity (continued)
The total number of shares of Common Stock authorized for issuance upon
exercise of options and other awards, or upon vesting of restricted or deferred
stock awards, under the 1997 Plan was initially established at 1,000,000 and
increases at the beginning of each fiscal year, commencing on July 1, 1998, by
an amount equal to 4% of the outstanding Common Stock on the last day of the
preceding fiscal year. The maximum number of shares of Common Stock issuable
upon exercise of incentive stock options granted under the 1997 Plan, however,
cannot exceed 8,000,000. Furthermore, the maximum number of shares which may be
subject to options, rights or other awards granted under the 1997 Plan to any
individual in any calendar year cannot exceed 300,000.
The following table summarizes information about stock options outstanding
at June 30, 2001.2002.
Weighted Average
Exercise Prices
Number Outstanding at RemainingWeighted Average Number Exercisable at
Exercise Prices at June 30, 20012002 Remaining Contractual Life June 30,
2001
----------------------------------------------------------------------------------------------------------------------------------2002
$ 0 - $10 735,578 5.35 732,244
$11508,810 4.01 508,810
11 - $20 1,577,049 7.64 489,510
$211,107,355 6.75 747,166
21 - $30 1,178,901 9.42 18,673
$31973,803 8.43 267,121
31 - $40 347,290 9.75 -
$41357,330 8.88 104,446
41 - $50 14,000 9.5850,300 9.37 3,501
51 - ----------------------------------------------------------------------------------------------------------------------------------
3,852,818 7.96 1,240,427
----------------------------------------------------------------------------------------------------------------------------------$60 1,203,400 9.09 0
- --------------------------------------------------------------------------------------------
4,200,998 7.69 1,631,044
- --------------------------------------------------------------------------------------------
-F14-
RESMED INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
9. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes outstanding stock option plan balances as at
June 30, 2002
Number of securities Number of securities
to be issued upon Weighted-average remaining available for
exercise of outstanding exercise price of future issuance under
Plan Category options outstanding option equity compensation plans
Equity compensation
plans approved by
security holders 4,200,998 $27.94 763,491
Equity compensation
plans not approved by
security holders - - -
Total 4,200,998 $27.94 763,491
The Company applies APB Opinion No. 25 in accounting for its Plans and accordingly,as all
stock options are issued at market price on date of issue, no compensation cost
has been recognized for its stock options. Had the Company determined
compensation cost based onunder SFAS 123, the fair value at the grant date for its stock
options under SFAS 123,would have reduced the Company's net income
would have been reduced to the pro forma amounts
indicated below:
-------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999
Net income (in thousands):
As reported $37,506 $11,630 $22,226
$16,102
Pro forma 18,531 2,859 17,511 12,951
Basic earnings per common share:
As reported $ 1.17 $ 0.37 $ 0.74
$ 0.55
Pro forma $ 0.58 $ 0.09 $ 0.58 $ 0.44
Diluted income per common and common equivalent share:
As reported $ 1.10 $ 0.35 $ 0.69
$ 0.52
Pro forma $ 0.54 $ 0.09 $ 0.54 $ 0.42
-------------------------------------------------------------------------------------------------------------------------------
The fair value of each stock option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
weighted average risk-free interest rates of 5.75%4.8% for fiscal 2002, and 6.0% and
6.5% for fiscal 2001 and 6.5%
and 5.8% for fiscal 2000, and 1999, respectively; no dividend yield; expected option
lives of four years;5.5 years for fiscal 2002 and 4.8 and 3.8 years for fiscal 2001 and
2000, respectively; and volatility of 61%60% for 20012002 and 200061% and 55% for 1999.
F-13fiscal
2001 and 2000.
Fair Value of compensation costs by period of Grant are noted below (in
thousands except per share data):
-F15-
ResMed Inc And Subsidiaries
Notes
RESMED INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Average Fair
Year of Grant FY02 FY01 FY00 Exercise Fair Value at Value at
Price Date of Grant June 30, 2002
2002 $21,074 $ - $ - $50.18 $26.10 $11.98
2001 7,142 10,272 - 27.27 13.41 14.96
2000 971 2,540 5,201 14.14 6.56 18.59
1999 5 682 1,803 11.31 5.27 19.80
1998 - - 250 6.08 2.13 24.95
- --------------------------------------------------------------------------------------
Compensation Cost $29,192 $13,494 $7,254
- --------------------------------------------------------------------------------------
Tax Effected $18,975 $ 8,771 $4,715
- --------------------------------------------------------------------------------------
The following table summarizes stock option grants by recipient, with executive
employees as defined pursuant to Consolidated Financial StatementsSection 16(b) of Securities Exchange Act of
1934 separately disclosed. As at June 30, 2001 and 2000
8. Stockholders' Equity (continued)
Preferred Stock -2002, the Company has 8 executive
employees.
June 30, June 30, June 30,
2002 2001 2000
Directors 73,000 21,000 48,000
Executives 167,000 167,500 166,770
Staff 1,088,600 1,381,190 1,122,130
Gross Options Issued 1,328,600 1,569,690 1,336,900
--------- --------- ---------
Employees 1,250 953 605
========= ========= =========
Average Options per Employee 1,063 1,647 2,210
--------- --------- ---------
PREFERRED STOCK. In April 1997, the board of directors authorized 2,000,000
---------------
shares of $0.01 par value preferred stock. No such shares were issued or
outstanding at June 30, 2001.
Stock Purchase Rights -2002.
STOCK PURCHASE RIGHTS. In April 1997, the Company implemented a plan to
---------------------
protect stockholders' rights in the event of a proposed takeover of the Company.
Under the plan, each share of the Company's outstanding common stock carries one
right to purchase Series A Junior Participating Preferred Stock (the "Right").
The Right enables the holder, under certain circumstances, to purchase common
stock of the Company or of the acquiring person at a substantially discounted
price ten days after a person or group publicly announces it has acquired or has
tendered an offer for 20% or more of the Company's outstanding common stock.
The Rights are redeemable at $0.01 per Right and expire in 2007.
Common Stock -COMMON STOCK. During fiscal 2000, the Board of Directors declared a
two-
------------
for-onetwo-for-one split of the Company's common stock, effective March 31, 2000.
Stockholders' equity has been restated for all periods presented to give
retroactive recognition to the stock split by reclassifying from additional
paid-in capital to common stock, the par value of the additional shares as a
result of the stock split.
9. Other, netOn June 6, 2002, the Board of Directors authorized the Company to
repurchase up to 4.0 million shares of outstanding common stock. During fiscal
year 2002, the Company repurchased 290,047 shares at a cost of $7.9 million.
Shares that are repurchased are classified as treasury stock pending future use
and reduce the number of shares outstanding used in calculating earnings per
share.
-F16-
RESMED INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
10. OTHER, NET
Other, net is comprised of the following at June 30, 2002, 2001 2000 and 19992000
(in thousands):
-------------------------------------------------------
2002 2001 2000 1999
-------------------------------------------------------
License fees $ 148 $ 125 $ 167 $ 58
Gain/(loss) on foreign currency hedging position (767) (2,766) (1,863) 435
Gain/(loss) on foreign currency transactions 182 4,747 1,681
(2,888)
Write backRealized gain on sale of investmentmarketable securities 301 - -
300
Other 244 (144) (37) (195)
-------------------------------------------------------
$ 1,962 $ (52) $(2,290)
=======================================================
In March 1998, the Company granted to a third party licenses to three of the
Company's patents for a non-refundable payment of $1,250,000. The license
agreement will allow the third party to manufacture and distribute certain
products featuring the Company's patented technology in the U.S. homecare
market. Additionally, the Company will earn royalties on products
manufactured.
10. Income Taxes- -----------------------------------------------------------------------------
$108 $1,962 $(52)
- -----------------------------------------------------------------------------
11. INCOME TAXES
Income before income taxes for the years ended June 30, 2002, 2001, 2000, and
1999,2000, was taxed under the following jurisdictions (in thousands):
---------------------------------------------------
2002 2001 2000 1999
---------------------------------------------------
U.S. $ 418 $ 3,482 $ 4,644
$ 4,043
Non-U.S. 54,174 23,832 29,522
20,534
---------------------------------------------------$54,592 $27,314 $34,166 $24,577
===================================================
F-14
ResMed Inc And Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
10. Income Taxes (continued)
The provision for income taxes is presented below (in thousands):
------------------------------------------------2002 2001 2000 1999
------------------------------------------------
Current:
Federal $ 4,962 $ 2,938 $ 1,396
$ 772
State 752 203 77
174
Non-U.S. 17,525 14,790 10,390
6,980
------------------------------------------------23,239 17,931 11,863
7,926
------------------------------------------------
Deferred:
Federal (3,494) (652) 390
360
State (568) 90 14
(12)
Non-U.S. (2,091) (1,685) (327)
201
------------------------------------------------(6,153) (2,247) 77 549
------------------------------------------------
Provision for income taxes $17,086 $15,684 $11,940 $8,475
================================================
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. federal income tax rate of 34%-F17-
RESMED INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
11. INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount of income tax determined by
applying the applicable U.S. federal income tax rate of 35% to pretax income as a result
of the following (in thousands):
------------------------------------------------2002 2001 2000 1999
------------------------------------------------
Computed 'expected'"expected" tax expense $19,108 $ 9,287 $11,616 $8,356
Increase (decrease) in income taxes Resultingresulting from:
Non-deductible expenses 116 460 715 302
Research and development credit (888) (781) (430) (250)
Tax effect of intercompany dividends 2,577 (3,885) (508) 13
Utilization of net operating loss carryforwards - (5) (4)
Write-off of net operating losses due to business cessation 1,046 - -
Change in valuation allowance (2,614) 4,431 22 71
Effect of non-U.S. tax rates (3,379) 4 714 455
State income taxes, net of U.S. tax benefit 363 356 235 131
In-process research and development write-off 123 6,010 - -
Provision for restructure - 187 -
-
Other 634 (380) (420)
(603)
------------------------------------------------$17,086 $15,684 $11,940
$8,475
======================================================== ======== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are comprised
of the following at June 30, 20012002 and 20002001 (in thousands):
------------------------------2002 2001
2000
------------------------------======== ========
Deferred tax assets:
Employee benefit obligations $ 940 $ 573
$ 534Inventory 289 -
Provision for service warranties 203195 203
Provision for doubtful debts 648 317 254
Net operating loss carryforwards 1,088 2,206 79
Deferred foreign tax credits 7,291 7,193
970AMT tax credit 1,675 -
Accrual for legal costs 54 5 76
Intercompany profit in inventories 5,606 3,492 2,188
Property, plant and equipment - 189
290Deferred gain on sale-leaseback 1,740 -
Other accruals 1,679 663
418
------------------------------21,205 14,925
5,012-------- --------
Less valuation allowance (2,950) (5,592) (86)
------------------------------
Deferred tax assets $18,255 $ 9,333 $4,926
------------------------------
F-15
ResMed Inc And Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
10. Income Taxes (continued)
-------------------------------
2001 2000
-------------------------------
Deferred tax liabilities:
Patents $ (382) (413)($74) ($382)
Capitalized software (451) (495) (453)
Unrealized gain on foreign currency options (829) (179) (306)
Unrealized foreign exchange gains (238) -
(196)Property, plant and equipment (1,595) -
Undistributed German income (3,355) (2,104) (992)
Deferred tax deductible goodwill amortization (2,410) (1,698) -
Other receivables - (197)
(168)
Other (14) (126) (37)
-------------------------------
Deferred tax liabilities (8,966) (5,181) (2,565)
-------------------------------
Net deferred tax asset $ 9,289 $ 4,152
2,361
===============================-------- --------
-F18-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
11. INCOME TAXES (CONTINUED)
The valuation allowance at June 30, 2001,2002, primarily relates to a provision
for uncertainty as to the utilization of deferred foreign tax credits of
$4,322,000$2,787,000 and net operating loss carryforwards of $1,046,000$163,000 relating to
MAP.Singapore and Malaysia. The net change in the valuation allowance was an increasea decline
of $5,506,000$2,642,000 for the year ended June 30, 2001,2002, in comparison to an increase of
$22,000$5,506,000 and an increase of $48,000,$22,000, for the years ended June 30, 20002001 and
1999,2000, respectively. The measurement of deferred tax assets and liabilities at
June 30 of each year, reflect foreign currency translation adjustments, changes
in enacted tax rates and changes in temporary differences. Income taxes in
2002, 2001 2000 and 19992000 were reduced by $nil, $5,000 $4,000 and $0,$4,000 respectively,
through the utilization of net operating loss carryforwards.
At June 30, 2001, the net operating loss carryforwards relate to MAP,
Singapore and Malaysia.
11. Employee Retirement Plans12. EMPLOYEE RETIREMENT PLANS
The Company contributes to a number of employee retirement plans for the
benefit of its employees. These plans are detailed as follows:
Australia -(1) Australia. The Company contributes to defined contribution pension
plans
--------- for each employee resident in Australia. All Australian employees after
serving a qualifying period, are entitled to benefits on retirement, disability
or death. Employees may contribute additional funds to the plans. The Company
contributes to the plans at the rate of 8% of the salaries of all Australian
employees. This rate increased to 9% effective July 1, 2002. Total Company
contributions to the plans for the years ended June 30, 2002, 2001, and 2000
were $968,000, $814,000 and 1999 were $814,000,
$632,000, and $457,000, respectively.
(2) United Kingdom -Kingdom. The Company contributes to a defined contribution plan for
--------------
each permanent United Kingdom employee. All employees, after serving a three
month qualifying period, are entitled to benefit on retirement, disability or
death. Employees may contribute additional funds to the plan. The Company
contributes to the plans at the rate of 3% of the salaries. Total Company
contributions to the plan were $16,000, $7,000 $8,000 and $8,000 in fiscal 2001, 2000, and 1999 respectively.
F-16
ResMed Inc. And Subsidiaries
Notes to Consolidated Financial Statements
June 30,2002, 2001,
and 2000 11. Employee Retirement Plans (continued)respectively.
(3) United States -States. The Company sponsors a defined contribution pension plan
-------------
available to substantially all domestic employees. Company contributions to
this plan are based on a percentage of employee contributions to a maximum of 3%
of employee salaries. The cost of this plan to the Company was $245,000,
$158,000 $123,000 and $96,000$123,000 in fiscal 2002, 2001 and 2000 and 1999 respectively.
12. Segment Information13. SEGMENT INFORMATION
The Company operates solely in the sleep disordered breathing sector of the
respiratory medicine industry. The Company therefore believes that, given the
single market focus of its operations and the inter dependenceinter-dependence of its products
that the Company operates as a single operating segment. The Company assesses
performance and allocates resources on the basis of a single operating entity.
Financial information by geographic area for the years ended June 30, 2002,
2001 2000 and 1999,2000, is summarized below (in thousands):
-F19-
RESMED INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
13. SEGMENT INFORMATION (CONTINUED)
-----------------------------------------------------------------------------
Rest of
U.S.A Germany Australia France World Total
-----------------------------------------------------------------------------
2002
Revenue from external customers $95,463 35,386 5,569 20,957 46,701 $204,076
Long lived assets $34,127 3,738 46,370 599 2,455 $ 87,289
2001
Revenue from external customers $74,981 25,646 5,318 17,592 31,619 $155,156
Long lived assets $30,475 3,063 25,130 555 1,725 $ 60,948
=============================================================================
2000
Revenue from external customers $58,419 14,317 4,444 11,949 26,486 $115,615
Long lived assets $ 8,126 1,248 27,595 622 1,863 $ 39,454
=============================================================================
1999
Revenue from external customers $47,229 13,181 3,489 6,978 17,750 $ 88,627$58,419 14,317 4,444 11,949 26,486 $115,615
Long lived assets $ 2,525 816 26,611 400 1,4298,126 1,248 27,595 622 1,863 $ 31,781
=============================================================================39,454
F-17
ResMed Inc And Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
12. Segment Information (continued)
Net revenues from external customers is based on the location of the
customer. Long-lived assets of geographic areas are those assets used in the
Company's operations in each geographical area and excludes patents, deferred
tax assets and goodwill.
13. Commitments14. COMMITMENTS
The Company leases buildings, motor vehicles and office equipment under
operating leases. Rental charges for these items are expensed as incurred. At
June 30, 20012002 the Company had the following future minimum lease payments under
non-cancelable operating leases (in thousands):
----------------------------------------------------------------------------
Operating Sub lease Total net minimum
Years Leases rental income lease payments
----------------------------------------------------------------------------
2002 $1,720 $ 330 $ 1,390
2003 1,540 245 1,295
2004 1,179 251 928
2005 529 257 272
2006 439 130 309
Thereafter 468 - 468
----------------------------------------------------------------------------
Total minimum lease payments $5,875 $ 1,213 $ 4,662
============================================================================
Operating Sub lease Total net minimum
Years Leases rental lease payments
income
2003 $ 4,326 $247 $ 4,079
2004 4,339 257 4,082
2005 3,967 268 3,699
2006 1,217 68 1,149
2007 991 - 991
Thereafter 211 - 211
Total minimum lease payments $15,051 $840 $14,211
Rent expenses under operating leases for the years ended June 30, 2002, 2001 2000
and
19992000 were approximately $2,267,000, $1,087,000 and $744,000, respectively.
-F20-
RESMED INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
15. BUSINESS ACQUISITIONS
FISCAL YEAR ENDED JUNE 30, 2002
SERVO MAGNETICS INC (SMI). On May 14, 2002, the Company acquired all of the
common stock of Servo Magnetics Incorporated through a merger with our
wholly-owned subsidiary, Servo Magnetics Acquisition Inc., for total
consideration, including acquisition costs, of $32.6 million. Consideration
included the issue of 853,448 shares for fair value of $24.8 million with the
balance of the acquisition cost paid in cash. Upon consummation of the merger,
the surviving corporation, Servo Magnetics Acquisition Inc., changed its name to
Servo Magnetics, Inc.
The acquisition has been accounted for as a purchase and $789,000, respectively.
14. Business Acquisitionaccordingly, the
results of operations of SMI have been included in the Company's consolidated
financial statements from May 14, 2002. The excess of the purchase price over
the fair value of the net identifiable assets acquired of $1.9 million has been
recorded as goodwill.
Purchased in-process research and development of $350,000 was expensed upon
acquisition of SMI because technological feasibility of the products under
development had not been established and no further alternative uses existed.
The value of in process technology was calculated by identifying research
projects in areas for which technological feasibility had not been established,
estimating the costs to develop the purchased in process technology into
commercially viable products, estimating the resulting net cash flows from such
products, discounting the net cash flows to present value, and applying the
reduced percentage completion of the projects thereto. The discount rates used
in the analysis were 19% and were based on the risk profile of the acquired
assets.
Purchased research and development projects related to electrical motor systems
used in the company's flow generator devices and other medical and data storage
equipment. Key assumptions used in the analysis included gross margins of 34%.
As of the date of acquisition, new motor systems for use in medical and health
applications are expected to be completed and commercially available by 2004.
These projects have estimated costs to complete totaling approximately $0.5
million.
The Company believes that the assumptions used to value acquired intangible
assets noted above were reasonable at the time of acquisition. No assurance can
be given, however, that the underlying assumptions used to estimate expected
project revenues, development costs or profitability, or events associated with
such projects, will transpire as estimated. For these reasons, among others,
actual results may vary from the projected results.
LABHARDT AG. On November 15, 2001, the Company's wholly owned subsidiary ResMed
International Inc. acquired all the Common Stock of Labhardt Ag, its Swiss
distributor for total cash consideration including acquisition costs of $5.5
million.
The acquisition has been accounted for as a purchase and accordingly, the
results of operations of Labhardt have been included in the Company's
consolidated financial statements from November 15, 2001. The excess of the
purchase price over the fair value of the net identifiable assets acquired of
$1.3 million has been recorded as goodwill.
Pro-forma financial information related to SMI and Labhardt Ag are not included
as the effects would not be significant to the consolidated financial
statements.
-F21-
RESMED INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
15. BUSINESS ACQUISITION (CONTINUED)
FISCAL YEAR ENDED JUNE 30, 2001
MAP MEDIZIN-TECHNOLOGIE GMBH (MAP). On February 16, 2001 the Company's fully
owned German Subsidiary, ResMed Beteiligungs GmbH, acquired all the common stock
of MAP Medizin-Technologie GmbH ("MAP'') for total consideration, including
acquisition costs, of $55.4 million. MAP is a leading German designer,
manufacturer and distributor of medical devices for the diagnosis and treatment
of SDB, with a particular focus on OSA.
The acquisition has been accounted for as a purchase and accordingly, the
results of operations of MAP have been included in the Company's consolidated
financial statements from February 16, 2001. The excess of the purchase price
over the fair value of the net identifiable assets acquired of $47.1 million has
been recorded as goodwill and is being amortized on a
straight line basis over 20 years.goodwill.
Purchased in-process research and development of $17,677,000 was expensed upon
acquisition of MAP because technological feasibility of the products under
development had not been established and no further alternative uses existed.
The value of in process technology was calculated by identifying research
projects in areas for which technological feasibility had not been established,
estimating the costs to develop the purchased in process technology into
commercially viable products, estimating the resulting net cash flows from such
products, discounting the net cash flows to present value, and applying the
reduced percentage completion of the projects thereto. The discount rates used
in the analysis were between 27% and 33% and were based on the risk profile of
the acquired assets.
All purchased research and development projects related to medical equipment for
the treatment of sleep disordered breathing, primarily relating to the
development of mask interface systems and autotitrating devices for the
treatment of obstructive sleep apnea and associated disorders. Key assumptions
used in the analysis included gross margins ranging from 70% to 80%. As of the
date of acquisition, the mask interface systems are expected to be completed and
commercially available in 2002 and versions of the autotitrating devices between
2003 and 2005. These projects have estimated costs to complete totalling
approximately $2.0 million.
F-18
ResMed Inc And Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
14. Business Acquisition (Continued)
The Company believes that the assumptions used to value the acquired intangible
assets were reasonable at the time of acquisition. No assurance can be given,
however, that the underlying assumptions used to estimate expected project
revenues, development costs or profitability, or events associated with such
projects, will transpire as estimated. For these reasons, among others, actual
results may vary from the projected results.
The following unaudited pro-forma financial information presents the combined
results of operations of the Company and MAP as if the acquisition had occurred
as of the beginning of the years ended June 30, 2001 and 2000, respectively and
after giving effect to certain adjustments, including amortization of goodwill
and increased interest expense associated with debt funding the acquisition. The
pro-forma financial information does not necessarily reflect the results of
operations that would have occurred had the Company and MAP constituted a single
entity during such years.
The pro-forma net income for the year ended June-F22-
RESMED INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
excludes non-
recurring acquisition charges of $17,677,000 for purchased in-process
research and development and $550,000 for restructuring of MAP's French
operations.
(In thousands except per share data)
-----------------------
2001 2000
-----------------------15. BUSINESS ACQUISITION (CONTINUED)
(In thousands except per share data) 2001 2000
Net revenue $172,250 $138,396
Net income 28,556 17,612
Basic earnings per share $ 0.92 $ 0.58
Diluted earnings per share $ 0.85 $ 0.55
Basic shares outstanding 31,129 30,153
Diluted shares outstanding 33,484 32,303
During the December 2001, the Company paid an amount of $1.4 million as final
consideration associated with the purchase of MAP. The amount has been recorded
as goodwill.
EINAR EGNELL AB. On January 31, 2000, the Company's wholly owned Swedish
subsidiary, ResMed Sweden AB, acquired the business and associated assets of
Einar Egnell AB, its Swedish distributor for $576,000 in cash. The acquisition
has been accounted for as a purchase and accordingly, the results of operations
of the Einar Egnell business have been included in the Company's consolidated
financial statements from January 31, 2000. The excess of the purchase price
over the fair value of the net identifiable assets acquired of $229,000 has been
recorded as goodwill and is being amortized on a straight
line basis over five years.
In fiscal 1999, the Company paid $2,024,000 as a final deferred goodwill
payment on the 1996 acquisition of its German distributor.
15. Comprehensive Incomegoodwill.
16. COMPREHENSIVE INCOME
As of July 1, 1999, the Company adopted Statement of Financial Accounting
Standards No. 130, 'Reporting Comprehensive Income' which established standards
for the reporting and display of comprehensive income and its components in the
financial statements.
The only component ofMovements in comprehensive income that impacts the Company is foreign currency translation adjustments.
The net loss associated with foreign currency translation adjustments(loss) for the year ended June 30, 2001 was $16.4 million compared to a net loss of
$7.7 million for the year ended June 30, 2000 and net gain of $2.3 million
for the year ended June 30, 1999.
F-19
ResMed Inc And Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
15. Comprehensive Income (Continued)2002 are
presented below (in thousands):
Foreign Unrealized Accumulated Other Retained Accumulated
Currency Gains on Comprehensive Earnings Comprehensive
Items Securities Income (Loss) Income (Loss)
Beginning balance, July 1, 2001 ($29,572) - ($29,572) $ 77,137 $ 47,565
Current period change 21,342 105 21,447 37,506 58,953
Ending balance, June 30, 2002 ($8,230) 105 ($8,125) $114,643 $106,518
Comprehensive income/(loss) for the years ended June 30, 2002, June 30,
2001 and June 30, 2000 and June 30, 1999 was $59.0 million, ($4.8) million $14.5 million and $18.4$14.5 million,
respectively.
The Company does not provide for U.S.US income taxes on foreign currency translation
adjustments since it does not provide for such taxes on undistributed earnings
of foreign subsidiaries. Accumulated other comprehensive loss at June 30, 20012002
and June 30, 20002001 consisted of foreign currency translation adjustments with net
debit balances of $8.2 million and represent unrealized losses of $29.6 million, respectively and $13.2 million,unrealized
gains on securities of $105,000 (net of tax of $57,000) and zero, respectively.
16. Legal Actions-F23-
RESMED INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
17. LEGAL ACTIONS
The Company is currently engaged in litigation relating to the enforcement and
defense of certain of its patents.
In January 1995, the Company filed a complaint in the United States District
Court for the Southern District of California seeking monetary damages from and
injunctive relief against Respironics for alleged infringement of three ResMed
patents. In February 1995, Respironics filed a complaint in the United States
District Court for the Western District of Pennsylvania against the Company
seeking a declaratory judgment that Respironics does not infringe claims of
these patents and that the Company's patents are invalid and unenforceable. The
two actions were combined and are proceeding in the United States District Court
for the Western District of Pennsylvania. In June 1996, the Company filed an
additional complaint against Respironics for infringement of a fourth ResMed
patent, and that complaint was consolidated with the earlier action. As of this
date, Respironics has brought three partial summary judgment motions for
non-infringement of the ResMed patents; the Court has granted each of the
motions. In December 1999, in response to the Court's ruling on Respironics'
third summary judgment motion, the parties jointly stipulated to a dismissal of
charges of infringement under the fourth ResMed patent, with ResMed reserving
the right to reassert the charges in the event of a favorable ruling on appeal.
It is ResMed's intention to appeal the summary judgment rulings after a final
judgment in the consolidated litigation has been entered in the District Court
proceedings.
In January 2001, MAP Medizin-Technologie GmbH filed a lawsuit in the Civil
Chamber of Munich Court against Hofrichter GmbH seeking actual and exemplary
monetary damages for the unauthorized and infringing use of the Company's
trademarks and patents. An initial decision has been made in favor of MAP.
Hofrichter has filed an appeal and have sort Court determination that the MAP
patents do not apply to certain Hofrichter products.
On August 26, 2002, ResMed filed a lawsuit in Federal District Court in San
Diego against Fisher & Paykel Healthcare. The ResMed complaint seeks a judgment
that selected Fisher & Paykel Healthcare mask products (ACLAIM and ACLAIM 2
masks) infringe patents held by ResMed. The complaint further charges the
defendant with the copying of ResMed proprietary mask technology and alleges
trade dress and common law violations relating to the appearance of ResMed mask
products.
While the Company is prosecuting the above actions, there can be no assurance
that the Company will be successful.
On March 31, 2001, we filed a lawsuit-F24-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DATED September 9, 2002
ResMed Inc
/S/ PETER C. FARRELL
_
_______________________
Peter C. Farrell
President and Chief Executive Officer
/S/ ADRIAN M. SMITH
_
_______________________
Adrian M. Smith
Vice President Finance and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the United States District Courtcapacities and on the dates indicated.
SIGNATURE TITLE DATE
/S/ PETER C. FARRELL Chief Executive Officer, September 9, 2002
Peter C. Farrell President, Chairman of the Board
(Principal Executive Officer)
/S/ CHRISTOPHER G. ROBERTS Director September 9, 2002
Christopher G. Roberts
/S/ MICHAEL A. QUINN Director September 9, 2002
Michael A. Quinn
/S/ GARY W. PACE Director September 9, 2002
Gary W. Pace
/S/ DONAGH MCCARTHY Director September 9, 2002
Donagh McCarthy
/S/ CHRISTOPHER A. BARTLETT Director September 9, 2002
Christopher Bartlett
/S/ LOUIS A. SIMPSON Director September 9, 2002
Louis Simpson
-41-
CERTIFICATIONS
I, Peter C. Farrell, certify that:
1. I have reviewed this annual report on Form 10-K of ResMed Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the Southern Districtperiods presented in this annual report.
Date: September 9, 2002
/S/ PETER C. FARRELL
- ------------------------------
Peter C. Farrell
President and Chief Executive Officer
I, Adrian M. Smith, certify that:
1. I have reviewed this annual report on Form 10-K of California against MPV TrumaResMed Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and Tiara Medical
Systems, Inc., seeking actualother financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and exemplary monetary damagescash flows of the
registrant as of, and injunctive
relief for, the unauthorizedperiods presented in this annual report.
Date: September 9, 2002
/S/ ADRIAN M. SMITH
- ------------------------------
Adrian M. Smith
Vice President Finance
and infringing use of our trademarks, trade
dress, and patents related to our Mirage mask. The parties reached a
confidential out of court settlement on April 9, 2001.
In May 1995, Respironics and its Australian distributor filed a Statement of
Claim against us and Dr. Farrell in the Federal Court of Australia, alleging
that we engaged in unfair trade practices. The statement of Claim asserted
damage claims for lost profits on sales in the aggregate amount of
approximately $1,000,000. The parties reached a confidential out of court
settlement of this Action on April 16, 2001.
F-20Chief Financial Officer
-42-
ScheduleSCHEDULE II
--------------------------------------------------------------------------------
ResMed Inc and Subsidiaries
Valuation and Qualifying Accounts and Reserves
Years Ended June 30, 2001, 2000 and 1999
(in thousands)
-----------------------------------------------------------------------RESMED INC AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(IN THOUSANDS)
Balance at Charged to Other Balance at
Beginning of costs and (deductions)deductions) end of period
Period expenses period
-----------------------------------------------------------------------
Year ended June 30, 2001
Applied against asset account $833 681 (622) 892
Allowance for doubtful accounts
=======================================================================
Year ended June 30, 20002002:
Applied against asset account
Allowance for doubtful accounts $421 632 (220) 833
=======================================================================$892 1,542 (496) 1,938
Year ended June 30, 19992001:
Applied against asset account
Allowance for doubtful accounts $248 348 (175) 421
=======================================================================$833 681 (622) 892
Year ended June 30, 2000:
Applied against asset account
Allowance for doubtful accounts $421 632 (220) 833
See accompanying independent auditor's report.
-43-
Exhibit IndexEXHIBIT INDEX
2.1 Sale and Assignment Agreement dated as of February 16, 2001, between
ResMed Inc, ResMed Beteilingungs GmbH and the shareholders of MAP
Medizin-Technologie GmbH*
2.2 Agreement and Plan of Merger dated as of May 14, 2002 among ResMed Inc.,
Servo Magnetics Acquisition Inc., Servo Magnetics Incorporated and Mr Leslie
Hoffman.
3.1 Certificate of Incorporation of Registrant, as amended**
3.2 By-laws of Registrant**
4.1 Form of certificate evidencing shares of Common Stock**
4.2 Rights agreement dated as of April 23, 1997***
4.3 Indenture dated as of June 20, 2001, between ResMed Inc and American
Stock Transfer & Trust CompanyCompany******
4.4 Registration Rights Agreement dated as of June 20, 2001, by and between
ResMed Inc, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Deutsche Banc Alex Brown Inc., William Blair & Company, L.L.C.,
Macquarie Bank Limited and UBS Warburg LLCLLC******
4.5 Registration Rights Agreement dated as of May 14, 2002 between ResMed
Inc., and Mr Leslie Hoffman.
10.1 1995 Stock Option Plan**
10.2 1997 Equity Participation Plan****
10.3 Licensing Agreement between the University of Sydney and ResMed Limited
dated May 17, 1991, as amended**
10.4 Consulting Agreement between Colin Sullivan and ResMed Limited
effective from 1 January 1998*****
10.5 Loan Agreement between the Australian Trade Commission and ResMed
Limited dated May 3, 1994**
10.6 Lease for 101211091 Carroll Canyon Road, San Diego 92131-1109, U.S.A.*****
10.7 Sale and Leaseback Agreements for 97 Waterloo Rd, North Ryde, Australia
10.8 Employment Agreement dated as of May 14, 2002, between Servo Magnetics
Acquisition Inc., and Mr Leslie Hoffman.
10.9 Agreement for the purchase of Lot 6001, Norwest Boulevarde, Norwest
Business Park, Baulkham Hills, Australia
11.1 Computation of Earnings per Common Share
21.1 Subsidiaries of the Registrant
23.1 Independent Auditors' Consent and Report on Schedule
------------------------------
* Incorporated- ----------------------
*Incorporated by reference to the Registrant's Report on Form 8-K dated March 2,
20012001.
**Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (No. 33-91094) declared effective on June 1, 1995.
***Incorporated by reference fromto the Registrants'Registrant's Registration Statement on Form
8-A12G filed on April 25, 1997.
****Incorporated by reference fromto the Registrant's 1997 Proxy Statement
(File No. 0-26038).Statement.
*****Incorporated by reference fromto the Registrant's Report on Form 10-K dated
June 30, 1998 (File No. 0-26038)1998.
******Incorporated by reference to the Registrant's Report on Form 10-K dated
June 30, 2001.
-44-
EXHIBIT 11.1
- -------------
RESMED INC AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended June 30,
2002 2001 2000
BASIC EARNINGS
Net income $37,506 $11,630 $22,226
Shares
Weighted average number of common
shares outstanding 32,174 31,99 30,153
Basic earnings per share $ 1.17 $ 0.37 $ 0.74
DILUTED EARNINGS
Net income $37,506 $11,630 $22,226
Shares
Weighted average number of common
shares outstanding 32,174 31,99 30,153
Additional shares assuming conversion of
stock options under treasury stock method 1,906 2,355 2,150
Weighted average number of common and
common equivalent shares outstanding
as adjusted 34,080 33,484 32,303
Diluted earnings per share $ 1.10 $ 0.35 $ 0.69
See accompanying independent auditor's report.
----------------------------------------------
-45-
EXHIBIT 21.1
RESMED INC
SUBSIDIARIES OF THE REGISTRANT
ResMed Holdings Limited (incorporated under the laws of New South Wales,
Australia)
ResMed Limited (incorporated under the laws of New South Wales, Australia)*
ResMed Asia Pacific Limited (incorporated under the laws of New South Wales,
Australia)*
ResMed Corporation (a Minnesota corporation)
ResMed (UK) Limited (a United Kingdom corporation)*
ResMed International Inc (a Delaware corporation)
ResMed Priess GmbH and Co Kg (a German corporation)**
ResMed SA (a French corporation)**
ResMed Priess GmbH (a German corporation)
ResMed Singapore Pte Ltd (a Singaporean corporation)**
ResMed (Malaysia) Sdn Bhd (a Malaysian Corporation)**
ResMed New Zealand Limited (a New Zealand Corporation)**
ResMed R&D Limited (incorporated under the laws of New South Wales, Australia)*
ResMed Sweden AB (a Swedish corporation)**
ResMed KK (a Japanese corporation)**
ResMed Beteiligungs GmbH (a German corporation)
MAP Medizin-Technologie GmbH (a German corporation)***
MAP Medizintechnik f r Arzt und Patient GmbH & Co Kg (a German corporation)****
MAP Medizintechnik f r Arzt und Patient GmbH (a Swiss corporation)****
MAP Hirsch Medizintechnik f r Arzt und Patient GmbH (an Austrian
corporation)****
MAP Techniques Avanc es pour M decins et Patients SA (a French corporation)****
Blue Medic SA (a French corporation)****
MAP Medische Techniek voor Arts en Patient BV (a Dutch corporation)****
Labhardt Ag (A Swiss corporation)**
Servo Magnetics Inc. (a Delaware corporation)
ResMed Spain SL (a Spanish corporation)**
- -------------------
*A subsidiary of ResMed Holdings Limited
** A subsidiary of ResMed International Inc
*** A subsidiary of ResMed Beteiligungs GmbH
**** A subsidiary of MAP Medizin-Technologie GmbH
-46-
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
The Board of Directors and Stockholders
ResMed Inc:
The audits referred to in our report dated August 9, 2002, included the related
financial statement schedule as of June 30, 2002 and for each of the years in
the three-year period ended June 30, 2002. This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
Our report refers to a change in the method of accounting for goodwill.
We consent to incorporation by reference in the registration statements, (Nos.
333-08013 and 333-88231) on Form S-8 and the registration statement (No.
333-70500) on Form S3 of ResMed Inc. of our reports included herein.
/S/ KPMG LLP
San Diego, California
September 9, 2002
-47-