UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
DCD.C. 20549----------FORM 10-K
---------- [X][X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30,
20012004Commission file
numbernumber: 0-26038ResMed Inc (ExactRESMED INC.
(Exact name of Registrant as specified in its Charter)
Delaware
(State(State or other jurisdiction of incorporation or organization)
98-0152841
(IRS(IRS Employer Identification
No.)No)14040 Danielson Street
Poway, CA 92064-6857
United States Of America
(Address(Address of principal executive offices)
(858) 746-2400
(Registrant's(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:$.004 Par Value
Title of each class: Name of Each exchange upon which registered: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 PreferredStock,Rights to Purchase Series A Junior
Participating Preferred Stock
Name of each exchange upon which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the
Act:ActNone
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
[X][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'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III ofthethis Form 10-K or any amendment to this Form 10-K[_][ ]Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [x] No [ ]
The aggregate market value of the voting stock held by non-affiliates of registrant as of
September 7, 2001,December 31, 2003, computed by reference to the closing sale price of such stock on the New York Stock Exchange, was approximately$1,105,000,000.$1,466,319,000. (All directors, executive officers, and 10% stockholders of Registrant are considered affiliates.)At
September 7, 2001,August 20, 2004, registrant had31,870,06033,825,339 shares of Common Stock, $.004 par value, issued and outstanding. This number excludes 1,088,359 shares held by the registrant as treasury shares.Portions of
registrant'sregistrant’s definitive Proxy Statement for its November5, 200118, 2004 meeting of stockholders are incorporated by reference into Part III of this report.RESMED INC TABLE OF CONTENTS ______________________
PAGEPart I
Item 1
3 Item 2
18 Item 3
18 Item 4
19 Part II
Item 5
Market for Registrant'sRegistrant’s Common Equity,andRelated Stockholder17Matters
and Issuer Purchases of Equity Securities20 Item 6
22 Item 7
Management'sManagement’s Discussion and Analysis of Financial Condition and 19
Results ofFinancial OperationOperations23 Item
7A7AQuantitative and Qualitative Disclosures About Market and Business
24Risks33 Item 8
41 Item 9
Changes in and Disagreements with Accountants on Accounting and 32
Financial Disclosure41 Item 9A
41 Part III
Item 10
42 Item 11
42 Item 12
Security Ownership of Certain Beneficial Owners and Management 33and
Related Stockholder Matters42 Item 13
42 Item 14
42 Part IV
Item
1415Exhibits, Consolidated Financial Statement Schedule and Reports on
34Form 8-K43 Sullivan, VPAP,Activa, Aero-Click, Aero-Fix, ApneaLink, AutoVPAP, AutoScan, AutoSet, AutoSet CS, AutoSet Spirit, AutoSet T, AutoSet.com, AutoSet-CS.com, AutoView, Bubble Cushion, Bubble Mask,
Bubble Cushion, SmartStart, ResCap, Mirage,HumidAire,Aero-Click,HumidAire 2i, IPAP MAX, IPAP MIN, MEDDTRAXX, MEPAL, MESAMIV, MicroMesam, minni Max,nCPAP,MaxNcpap, Mirage, Protégé, Moritz II biLEVEL,Aero-Fix,Poly-MESAM, ResCap, ResAlarm, ResControl, ResMed, SleepKIT Solutions, S6, S7, SELFSET, SmartStart, Sullivan, Swift, TiControl, TRAXX, Twisterremove, SELFSET, MESAMIV; Poly-MESAM, MEPAL, Auto VPAP, AutoScan, AutoSet CS, AutoSet T, AutoView, IPAP MAX, ResControl, SCAN, S6,remote, Ultra Mirage, VPAP, VPAP MAX,AutoSet.com, AutoSet- CS.com, and ResMedVsync, are our trademarks.As used in this 10-K, the terms
"we," "us,"“we”, “us”, “our” and"our"“the Company” refer to ResMed Inc., a Delaware corporation, and its subsidiaries, on a consolidated basis, unless otherwise stated.PART I
Item 1 Business
ITEM 1 BUSINESS General
We are a leading developer, manufacturer and distributor of medical equipment for treating, diagnosing, and managing
sleep disorderedsleep-disordered breathing, or SDB. SDB includes obstructive sleep apnea, or OSA, andrelatedother 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 ColinSullivan of the University of Sydney, the current Chairman of our Medical Advisory Board.Sullivan. 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
nasalCPAP, we have developed a number of innovative products for SDB, includingflowairflow generators, diagnostic products, mask systems, headgear and other accessories. Our growth has beenfueledfuelled bya productive research and product development effort,geographic expansion,andincreased awareness of SDB as a significant health concern among physicians andpatients. In February 2001, we acquired MAP Medizin-Technologie GmbH, or MAP. MAP is a leading German designer, manufacturerpatients, anddistributor of medical devices for the diagnosisour research andtreatment 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 9501,520 people and sell our products in over 60 countries through a combination of wholly owned subsidiaries and independent distributors.Our web site address is www.resmed.com. We make our periodic reports, together with any amendments, available on our web site, free of charge, as soon as reasonably practicable after we electronically file or furnish the reports with the Securities and Exchange Commission.
Corporate History
ResMed
Inc,Inc., a Delaware corporation, was formed in March 1994 as the ultimate holding company for our domestic, AustralianEuropeanandUnited 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 onThethe NASDAQ National Market. On September 30, 1999 we transferred our principal public listing to the New York Stock Exchange (NYSE), trading under the ticker symbol RMD. On November 25, 1999, we established a secondary listing of ourshares ascommon stock via Chess Depositary Instruments, orCDIs,CDI’s, on the Australian Stock Exchange (ASX), also under the symbol RMD. TenCDIsCDI’s 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'sBaxter’s existing CPAP device business. Baxter had sold CPAP devices in Australia since 1988, having acquired the rights to the technology in1987 from Dr. Colin Sullivan. In addition to acquiring1987.Since formation we have acquired a number of operating businesses including Servo Magnetics Inc, Labhardt AG, 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 ABour German, French, Singaporean and Swedish distributors,on May 14, 2002; November 15, 2001; February 16, 2001; February 7,1996,1996; June 12,1996,1996; November 1,19971997; and January 31, 2000 respectively. During the 1999 fiscal year we made an equity investment in Medcare Flaga hf (Medcare), based in Iceland. We now marketFlaga'sMedcare’s polysomnographic products under the Embla and Embletta label inthe United States andselectedother markets. 2countries. - 3 -
The 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" report to Congressaddition, OSA has recently been recognized as a cause of hypertension and a significant co-morbidity for heart disease, stroke and diabetes.Scientists estimate that one in
1993,five adults have some form of obstructive sleep apnea. In theNational Commission on Sleep Disorders Research estimated thatU.S. alone, this represents approximately4043 millionindividuals 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.people. 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 thoseafflicted bywith OSAknow the cause of their fatiguehave been diagnosed orother symptoms. Healthtreated. Many health care professionals are often unable to diagnose OSA because they are unaware that such non-specific symptoms asfatigue,excessive daytime sleepiness, snoring, hypertension 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 and pain-killing drugs. Recently a strong association has been discovered between OSA and a number of cardiovascular diseases. Recent studies have shown that SDB is present in approximately 80% of patients with drug-resistant hypertension, approximately 60% of stroke patients and approximately 50% of patients with congestive heart failure. 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 DisorderedSleep-Disordered Breathing and Obstructive Sleep Apnea
Sleep disorderedSleep-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 and neuromusculardisease and upper airway resistance changes.disease. 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 blood pressure during the cycle of apneas. Several studies indicate that the oxygen
3desaturation, increased heart rate and elevated blood pressure caused by OSA may be associated with - 4 -
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'spatient’s home. During overnight testing, respiratory parameters and sleep patterns are monitored along with other vital signs such asblood 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 currentlymore than 2,000around 5,000 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 Therapies
Prior to 1981, the primary treatment for OSA was a tracheotomy, a surgical procedure to cut a hole in the
patient'spatient’s windpipe to create a channel for airflow. Most recently, surgery has involved either uvulopalatopharyngoplasty,('UPPP'),or 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 thepatient'spatient’s airway. UPPP alone has a poor success rate; however, when performed in conjunction withmandibular advancement,multi-stage upper airway surgical procedures, a greater success rate has been claimed.ThisThese combinedprocedure,procedures, performed by highly specialized surgeons,isare expensive andinvolvesinvolve prolonged and often painful recovery periods.NasalCPAP, by contrast, is a non-invasive means of treating OSA.
NasalCPAP was first used as a treatment for OSA in 1980 by Dr. Colin Sullivan, the past Chairman of our Medical Advisory Board. CPAP systems were commercialized for treatment of OSA in the United States in the mid1980's.1980’s. Today, use ofnasal positive airway pressureCPAP is generally acknowledged as the most effective and least invasive therapy for managing OSA.During
nasalCPAP treatment, a patient sleeps with a nasal mask connected to a small portableair flowairflow 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. Sometimes when a patient leaks air through their mouth, a full-face mask may need to be used.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 masksystems,systems; delay timers which gradually raise air pressure allowing the patient to fall asleep more easily; bilevel air flow generators, including VPAP systems, which provide different air pressures for inhalation and exhalation; heated humidification systems to make the airflow more comfortable; andautotitrationauto titration devices which reduce the average pressure delivered during the night.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- 5 -
management of cardiac, neurologic, metabolic 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: .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,SDB, increase patient comfort and encourage compliance with prescribed therapy. For example, in19971999 we introduced the Mirage Full Face Mask. This mask contains an inflatable air pocket, which conforms to thepatient'spatient’s facial contours, creating a more comfortable and better seal. Additionally, in19992002 we introduced the AutoSetTSpirit flow generator,anour second-generation autotitrating device that adapts to thepatient'spatient’s breathing patterns to more effectivelyprevent apneas.treat OSA. We believe that continued product development and innovation are key factors to our ongoing success. Approximately14%15% of our employees are devoted to research and development activities. In fiscal year2001,2004, we invested$11.1$26.2 million, or7.2%8% of our revenues, in research and development..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 the depth of our presence
into newin other 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. 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.
.During fiscal 2004, 2003 and 2002, we donated $0.5 million, $nil and $2.3 million respectively to the ResMed Sleep Disordered Breathing Foundations in the United States and Australia to further enhance research and awareness of SDB. The contributions to the Foundations reflect ResMed’s commitment to medical research into 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 heartfailure.failure, and have recognized SDB as a cause of hypertension or high blood pressure. Weare currently developinghave developed 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. Currently, over 1,000 patients are being treated by this device in Europe. 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. 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.SDB. 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
Our portfolio of products for the treatment of OSA and other forms of SDB
include flowincludes airflow generators, diagnostic products, mask systems, headgear and other accessories.5- 6 -
Air Flow Generators
We produce
nasalCPAP, 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 afull- 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
thatand can also be used in the diagnosis, treatment andtreatmentmanagement of OSA. CPAP and VPAP flow generators,together with our diagnostic products,accounted for approximately57%50%,60%53% and64%55% of our net revenues in fiscal years2001, 20002004, 2003 and1999,2002, respectively.
-------------------------------------------------------------------------------------------------------------- Date of Flow Generators Description Commercial Introduction --------------------------------------------------------------------------------------------------------------AIR FLOW
GENERATORS
DESCRIPTION DATEOF
COMMERCIAL
INTRODUCTION
VPAP
VPAP II
Bilevel portable device providing different pressure levels for March 1996inhalation and exhalation, improved pressure switching and reduced noise output and spontaneous breath triggering.March 1996
COMFORT
Bilevel device with limited features. March 1996
VPAP II ST
Bilevel portable device with spontaneous and April 1996spontaneous/timed breath triggering modes of operation.April 1996
VPAP II ST A
Bilevel device with power failurealarms.August 1998
VPAP MAX+
Bilevel ventilatory support system for the treatment of adult November 1998patients with respiratory insufficiency or respiratory failure.November 1998
Moritz S#
Bilevel portable device providing different pressure levels for inhalation and exhalation with integrated humidifier. October 2001*
Moritz ST#
Bilevel ST device with spontaneous and spontaneous/timed breath triggering modes of operation, and with power failure alarms, system with integrated humidifier. October 2001*
VPAP III
Updated Bilevel Portable device encompassing improved pressure synchronization, spontaneous breath triggering and reduced noise. April 2003
VPAP III ST
Updated Bilevel ST Portable device encompassing improved pressure synchronization, spontaneous and spontaneous/timed breath triggering modes of operation and reduced noise. April 2003
VPAP III STA
An upgraded Bi-level device with alarm features. August 2004
- 7 -
AIR FLOW GENERATORS DESCRIPTION DATEOF
COMMERCIAL
INTRODUCTION
AutoSet AutoSet CS# Automatic ventilatory assistance device specifically designed to normalize ventilation in congestive heart failure patients with Cheyne Stokes respiration. December 1998 AutoSet T Autotitrating device, which continually adjusts CPAP March 1999treatment pressure based on patient airway resistance.March 1999 AutoSet Spirit Modular, autotitrating device with advanced compliance monitoring and optional integrated humidifier. September 2001 Magellan# Autotitrating device using airway resistance measurement. March 2003* Autoset Respond Autotitrating device with basic compliance monitoring and optional integrated humidifier. September 2003 AutoSet CS2# Modular, automatic device specifically designed to normalize ventilation in congestive heart failure patients with Cheyne Stokes respiration. The device has an optional integrated humidifier. August 2004 CPAP Max II nCPAP# CPAP device with or without integrated humidifier. Features low noise and reduced pressure swings. April 1997* Minni Max nCPAP# CPAP device with integrated and attachable humidifier and low noise levels. March 2000* ResMed S6 series Quiet, compact CPAP device with various comfort features. June 2000 Minni Max nCPAP CPAP deviceResMed S7 series Continuous Positive Pressure flow generator with optional integrated humidification capabilities February 2001* and low noise levels. Moritz II Bilevel Bilevel portable device. February 2001* --------------------------------------------------------------------------------------------------------------humidifier.July 2002 *Date of acquisition of MAP. The MAP products are not approved* Not cleared for marketing in the United States.
6+ Sold in USA only
# Sold outside USA only
- 8 -
Mask Systems and Diagnostic Products
Mask systems are one of the most important elements of
an OSASDB treatmentsystem.systems. 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, motors and diagnostic products accounted for approximately 50%, 47% and 45% of our net revenues in fiscal years 2004, 2003 and 2002, respectively.
--------------------------------------------------------------------------------------------------------------- Date of Mask Products Description Commercial Introduction ---------------------------------------------------------------------------------------------------------------MASK PRODUCTS DESCRIPTION DATEOF
COMMERCIAL
INTRODUCTION
Mirage Mask Proprietary mask design with a contoured nasal cushion that August 1997adjusts topatient'spatient’s facial contours. Quiet, light and low profile.August 1997 Ultra Mirage Mask Advanced version of the Mirage system with reduced noise characteristics and improved forehead bridge. June 2000 Mirage Full Face Mask
Series 2
Mirage-based full facefull-face mask system. Provides an effectiveJune 1999 Maskmethod of applying ventilatory assist Noninvasive Positive Pressure Ventilation therapy. Can be used to address mouth- breathing problems in conventional bilevel or CPAP therapy.October 2001 Papillon Mask# Nasal mask with only four major parts, allows simplified handling for patients and distributors. April 2002* Mirage Vista Mask Small nasal mask without forehead supports. November 2002 Ultra Mirage Full Face Mask Advanced version of theFull-face mask incorporating our latest adjustable forehead support technology. August 2003 Mirage Activa Mask Nasal mask system with reduced noise June 2000 characteristicsutilizing Active Seal technology to mitigate leak andimproved forehead bridge. ---------------------------------------------------------------------------------------------------------------improve patient comfort.October 2003 Mirage Swift A light and unobtrusive nasal cannula mask system. August 2004 Diagnostic Products* Not cleared for marketing in the United States.
+ Sold in USA only
# Sold outside USA only
- 9 -
We market sleep recorders for the diagnosis
titrationandtreatmenttitration 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 ---------------------------------------------------------------------------------------------------------------AutoSetDIAGNOSTIC PRODUCTS DESCRIPTION DATEOF
COMMERCIAL
INTRODUCTION
Poly-MESAM 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 diagnostic studies. Embla Digital sleep recorder that provides comprehensive sleep October 1999 diagnosis in a sleep laboratory. Embletta Pocket-size digital recorder that performs ambulatory sleep November 2000 studies. MESAM IV Portable Portable diagnostic system that measures snore, heart rate, February 2001*+Diagnostic System
body position,+Configurable cardio-respiratory polygraphy system up to 8 channels, includes ECG, thorax and oxygen saturation in conjunction with computer assisted analysis. Poly-MESAM Portable Configurable polysomnography system adaptable toabdomen belts, PLMS sensor.February 2001* Diagnostic System individual sleep laboratory needs.1995*MEPAL Diagnostic+
System
Polysomnography system designed for use in the sleep laboratory. February 2001*1999*Embla+
Digital sleep recorder that provides comprehensive sleep diagnosis in a sleep laboratory. October 1999 Embletta+
Pocket-size digital recorder that performs ambulatory sleep studies. November 2000 MEPALmobil+
Diagnostic System
laboratory. MEPAL mobilAmbulatory polysomnography system. FebruaryMarch 2001* Diagnostic System ---------------------------------------------------------------------------------------------------------------ApneaLink
(MicroMesam)
A portable Sleep Apnea screening device for use by sleep professionals and primary care physicians. April 2004 *Date of acquisition of MAP. The MAP products are not approved*Not cleared for marketing in the United States.
7+Not manufactured by ResMed.
Accessories 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
SULLIVANHumidAire and H2i, which connect directly with the CPAP, VPAP and AutoSet flow generators to humidify and heat the air delivered to the patient. Their use prevents the drying of nasal passageswhichthat can cause discomfort. Other optional accessories includeacold passoverhumidifier,humidifiers, carry bags and breathing circuits. MAP also offers a range of accessories, including the Twister remote, an intelligent remote control for use in the sleeplablaboratory 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. Since the May 2002 acquisition of Servo Magnetics Inc., we have sold custom electric motors, primarily for use in data storage and aerospace applications.Product Development and Clinical Trials
We have a strong track record in innovation in the sleep market. In 1989, we introduced our first
nasalCPAP 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- 10 -
In 1999, we introduced the AutoSet T
Flowflow generator, an autotitrating device that adapts to thepatient'spatient’s breathing patterns to effectively prevent apneas. In 2001, we introduced our next generation autotitrating device, the AutoSet Spirit. The AutoSet Spirit is an autotitrating modular device with optional integrated humidifier. In September 2003 we introduced the ACTiva nasal mask using our patented Active Cushion Technology, which automatically seals mask leaks. Recently, we also launched an improved AutoSet CS 2 (outside the U.S. only) to treat congestive heart failure patients with significant central sleep apnea.We continually seek to identify new applications of our technology for significant unmet medical needs. SDB is associated with a number of symptoms beyond
fatigueexcessive daytime sleepiness 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.Wealsosupport clinical trials in the United States, Germany, France, the United Kingdom andAustralia.Australia to develop new clinical applications for our technology.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'manufacturers’ representatives, customers, and patients. Typically, our internal development staff thenperformsperform new product development.In fiscal years
2001, 20002004, 2003 and1999,2002, we invested$11,146,000, $8,499,000$26.2 million, $20.5 million and$6,542,000,$14.9 million, respectively, on research and development.Sales and Marketing
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 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. Our products are typically purchased by a home
healthcarehealth care 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 homehealthcarehealth care 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 8approach 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 AmericaIn 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 independentmanufacturers'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'manufacturers’ representatives are managed by two regional SalesManagers, a Director of Sales and ultimatelyDirectors, our Senior Vice PresidentU.S.of Sales, Marketing andMarketing.our Chief Operating Officer for the Americas.Our Canadian and Latin American sales are conducted through independent distributors. Sales in North
Americaand Latin America accounted for52%49%,54%48% and57%49% of our net revenues for fiscal years2001, 20002004, 2003 and1999,2002, respectively.Europe- 11 -
Europe. We market our products in most major European countries. We have wholly owned subsidiaries in
theGermany, France, United Kingdom,Germany, FranceSpain, Switzerland, Netherlands, Austria, Sweden andSweden,Finland 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
ExecutiveVice President Sales & Marketing Europe and Asia Pacific is responsible for coordination of all European activities and, in conjunction with local management, the direct sales activity in Europe. Sales in Europe accounted for39%43%,35%42% and34%42% of our total net revenues for fiscal years2001, 20002004, 2003 and1999,2002, 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
WorldWorld. Marketing in Australia and the rest of the world is the responsibility of ourExecutiveVicePresident.President Sales & Marketing. Sales in Australia and the rest of the world accounted for9%8%,11%10% and 9% of our total net revenues for the fiscal years ended June 30,2001, 20002004, 2003 and1999,2002, respectively.Other Marketing
EffortsEfforts. In addition to our, and our distributor’s sales efforts, we work with the followingorganizationscardiovascular disease associations topromote public and clinicalraise awareness ofSDB and OSA: . National Stroke Association: We have developed a strategic alliance withtheNational Stroke Association to increase awareness about the high prevalenceco-morbidity of SDB in cardiovascular disease patients (cardiovascular disease includes coronary artery disease, congestive heart failure, hypertension and stroke):(i) American College of Cardiology. We work with the
stroke survivor population. 9.American College of Cardiology and its more than 20,000 cardiologist members to increase education and awareness in the cardiology community regarding the morbidity associated with sleep apnea in their patients. We have co-sponsored educational symposia with Guidant Corp at ACC in 2003 and ACC 2004 on sleep apnea and cardiovascular disease. We have exhibited at ACC national conferences since 2001. Sleep apnea made it onto the formal ACC scientific sessions in 2004.(ii) American Heart
Association:Association. Weare working closelyhave worked withthe Western Affiliates ofthe American Heart Association and we have attended the annual Scientific Sessions since 2001. Sleep apnea has been ona numberthe official program of the Scientific Sessions since 2002. We work with various regional and localprogramsAHA affiliates to increase awareness regarding sleep apnea andeducation about SDB.cardiovascular disease.(iii) Heart Failure Society of America. We
are alsohave attended the Heart Failure Society of America national conferences since 2002. We have co-sponsored CME-level educational symposia with Guidant at HFSA 2003 and HFSA 2004 on sleep apnea and heart failure. We continue to see a very high level of interest amongst heart failure physicians, due to the significant (approximately 50%) prevalence of sleep apnea indiscussionsheart failure patients, and the outcome improvements in blood pressure and ejection fraction observed in peer-reviewed studies using CPAP treatment.Strategic Alliances
Guidant Corporation. The Guidant Corporation is a world leader in the treatment of cardiac and vascular disease. Guidant and ResMed have entered into an agreement pursuant to which the companies will work together in the areas of sleep-disordered breathing and cardiac rhythm disorders, disease states with
the national American Heart/American Stroke associations regarding national programs initially targeting cliniciansa significant patient population overlap. The companies plan to co-market to each other’s physician partners and customers, and to collaborate onthe impact of SDB on both heart diseaseresearch andstroke patients,development projects, clinical studies, as well asits rolephysician and patient education.MedCath Corporation. MedCath develops, owns, and operates hospitals in partnership with cardiologists and cardiovascular surgeons. Our alliance allows MedCath to offer SDB screening, diagnosis, and treatment in conjunction with services currently offered through the
development of hypertension, a major risk factor for both heart disease and stroke. . National Sleep Foundation: The National Sleep Foundationcompany’s cardiovascular diagnostic centers.- 12 -
Medcare. Medcare is a
non profit organization dedicatedglobal leader providing sleep diagnostic solutions toimproving public healthsleep service providers andsafety by raisingother professionals practicing sleep medicine. Medcare offers a broad range of solutions including thelevel of awarenessEmbla™/Somnologica andeducation towardREMbrandt™ sleeprelated programssystems. Medcare products are distributed to over 50 countries worldwide. We distribute Medcare products in selected countries andresearch. Wewe havebeen an active corporate partnera co-marketing agreement with Medcare for the U.S. andhave supported the National Sleep Foundation for a number of years.German markets.We believe that our affiliations and continued work with these organizations raises the awareness of SDB as a significant health concern.
Manufacturing
Our principal manufacturing
facilities arefacility is located in Sydney, Australia and comprise a120,000215,000 squarefootfeet manufacturingand research and developmentfacility. 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 few years the manufacturingcycleprocesses have been transformed along lean manufacturing guidelines toensure 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 acquiredGerman manufacturing operation based in Munich operates in a facility of approximately 24,000 square feet. This facility is accredited to ISO 9001 andEN46001. The products areEN46001 and primarily assembles and tests flow generatorsthat have been developed internallyfor sale bya 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 insupply while a replacement supplier reconfigures its components, or while we reconfigurethe data storage and aerospace sectors, at ourcomponents 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.Servo Magnetics Inc. (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
10our products directly from these payers, our success in major markets is dependent upon the ability of patients to obtain adequate reimbursement for our products. 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 productsas 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;- 13 -
Even though we do not file claims
andor bill governmental programs and other third-party payers directly for reimbursement for ourproducts. Nevertheless,products sold in the United States, 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 Federalhealthcarehealth care 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 anyhealthcarehealth care 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, however, 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 Warranty
We generally offer
one-to-two yearone-year or 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.
11Competition
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.
ReputationCustomer support, 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
recenttrend 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.- 14 -
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 Litigation
Through our subsidiaries ResMed Limited,
and MAPMedizintechnik fur Arzt und Patient GmbH and SMI, we own or have licensed rights to51142 issued United States patents (including1335 design patents) and102167 issued foreign patents. In addition, there are82169 pending United States patent applications (including435 design patent applications)and 197, 301 pending foreign patentapplications.applications, 255 registered foreign designs and 45 pending foreign designs. Some of these patents and patent applications relate to significant aspects and features of our products. These include U.S. patents relating to our CPAP devices, a delay timer system, the Bubble Mask, and an automated means of varying air pressure based upon apatient'spatient’s changing needs during nightly use, such as that employed in our AutoSet device.None ofOf our patents,
isseven United States patents and two foreign patents are due to expire in the next five years, withthe exception of fiveone foreignpatentspatent due to expirein 2002 and one foreign patentin each of the years20042005 and2005.2007 and one United States patent in 2005, two United States patents in 2007 and four United States patents in 2008. 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 action against one of its competitors and is investigating possible infringement by others. See Item 3 - "Legal Proceedings". Additional litigationLitigation 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
12can be no assurance that patent issues will be uniformly resolved, or that local laws will provide us with consistent rights and benefits. 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 complianceNon-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
- 15 -
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''“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''“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'sFDA’s regulatory requirements.MAP'sMAP’s facilities are not subject to FDA regulation, because none ofMAP'sMAP’s productsisare 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 productswhere appropriate,are CE marked to the EuropeanUnion'sUnion’s Medical Device Directive. Under the CE marketing scheme, our products are classified as either Class I or ClassII,II; our devices are listed in the United States withFDA,FDA; in Australia with the Therapeutic Goods Administration, orTGA,TGA; and in Canada with Health Canada.Employees
As of June 30,
2001,2004, wehave 953had 1,520 employees or full time consultants, of which353599 persons were employed in warehousing and manufacturing,129225 in research and development,276696 in sales,and 13marketing and 195 inadministration. Of our employees and consultants,517740 were located in Australia,151382 in the United States,273387 in Europe and1211 inSingapore, 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 Board
Our Medical Advisory Board,
or MAB,consists of physiciansand scientistsspecializing in the field ofsleep disorderedsleep-disordered breathing.MABMedical Advisory Board 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.MABMedical Advisory Board members are also available to consult on an as-needed basis with our senior management. In alphabetical order,MABMedical Advisory Board members include:Claudio Bassetti
Dr. Claudio Bassetti, MD, is aProfessorneurologist with expertise inthe Faculty of Medicine, University of Zurich, where he is the Directorgeneral neurology, stroke andVice-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'.sleep medicine. Heis on the editorial board of 'Swiss Archives of Neurology and Psychiatry and has produced over 100 publications. Dr. Bassettiis a leader in studying the implications ofsleep disordered breathingSDB onstroke.stroke and is Head of the Neurology Outpatient Clinics and Vice-Chairman of the Neurology Department at the University Hospital, Zurich. Dr. Bassetti is board member of the European Neurological Society, of the Swiss Societies of Neurology, Neuroscience and Sleep and sits on the editorial boards of the Journal of Sleep Research, Sleep Medicine, and Swiss Archives of Neurology and Psychiatry. Dr. Bassetti has produced over 100 publications.- 16 -
Michael Coppola, MD, is a leading pulmonary, critical care, and sleep disorders physician and is President of Springfield Medical Associates, a multi-specialty medical group in
private practice inSpringfield, Massachusetts. He is an attending physician at Baystate Medical Center and Mercy Hospital,in Springfield, MAand a Fellow of the American College of Chest Physicians.He is Chairman of the Massachusetts Sleep Breathing Disorders Society. HeDr. Coppola is also the Medical Director ofWinmar Diagnostics,Sleep Ave LLC, asleep disorderedsleep-disordered breathing specialty company with sites in Massachusetts, Louisiana and Texas, and Associate Clinical Professor of Medicine at Tufts University School of Medicine.Terence M. 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.the University of California, San Diego. He is alsodirectorDirector of the UCSD Head and Neck Surgery Sleep Clinic in La Jolla, CA.Anthony 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 on 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 Editor-in-Chief of the Journal of the American College of Cardiology and has authored or co-authored over 400 articles for medical journals.
Neil J. Douglas, MD, DSc, FRCP, is Chairman of the MAB and 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
DeanPresident 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 apast Chairman of the British Sleep Society, and past Secretary of the British Thoracic Society.HeDr. Douglas has published over 200 papers on breathing during sleep.Nicholas Hill, MD, is Professor of Medicine at
BrownTufts University School of Medicine andDirector ofChief, Pulmonary, Critical CareServices at Rhode Island HospitalandPulmonary Medicine at the Miriam Hospital, bothSleep Division, Tufts-New England Medical Center inProvidence.Boston. He is a Fellow and Chair of the Home Care Network as well as a member of the Network Steering Committee for the American College of ChestPhysicians andPhysicians. For the American Thoracic Society, Dr. Hill is chair of the Program Committee for the Critical Care Assembly as well as a member of the PlanningCommitteeCommittee. Dr. Hill’s main research interests are in the acute and chronic applications of noninvasive positive pressure ventilation (NPPV) for treating lung disease as well as theAmerican Thoracic Society. 14pathogenesis and therapy of pulmonary hypertension. Barry J. 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 cardiovasculardiseases.HisDr. Make’s research and clinicalwork hasinvestigations have resulted in a large number of publications on mechanisms, treatment, and rehabilitation of chronic respiratorydisease. Colin Sullivan,disorders. His areas of focus are long-term noninvasive ventilation and chronic obstructive pulmonary diseases including emphysema.Barbara Phillips, MD,
PhD, FRACP, FAA is Chairman of the MAB and the inventor of nasal CPAP for treating obstructive sleep apnea. HeMSPH, 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. Dr. Phillips serves as a board member of the National Sleep Foundation, on the Health and Science Policy Committee of the American College of Chest Physicians, and on the Clinical Practice Committee of the American Thoracic Society. She has been a recipient of a Sleep Academic Award from the National Institutes of Health, president of the American Board of Sleep Medicine, andDirectora member of theDavid Read Research Laboratory and DirectorAdvisory Board to the National Center ofthe Australian Centre for Advanced Medical Technology at the Sydney University Medical School. He is Head of the Centre for Respiratory Failure andSleep Disordersas well as a thoracic physician atResearch. Her research interests are theRoyal Prince Alfred Hospital. He is also Academic headepidemiology of sleep-disordered breathing and sleep disorders in thePediatric 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.aged.- 17 -
Helmut Teschler, MD, is
AssociateProfessor of Medicine and Head of the Department of Respiratory Medicine, High Dependency Unit, and Centre of Sleep Medicine at the 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, 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, and Sleep Medicine, Beth Israel Deaconess Medical Center, Boston, MA. He is an internationally recognized researcher in sleep-disorders medicine.B. Tucker Woodson, MD, FACS, is
an AssociateProfessor of Otolaryngology and Communication Sciences at the Medical College ofWisconsin. He isWisconsin, a Diplomat of the American Academy of Sleep Medicine, and a Fellow of the American Academy of Otolaryngology - Head and Neck Surgery and the American College of Surgeons.Dr. WoodsonHe is the Director of the Medical College of Wisconsin/Froedert Memorial Lutheran Hospital Center for Sleep.He is activeDr. Woodson also sits on multiple committees for the American Academy of Sleep Medicine and American Academy of Otolaryngology.Item 2 Properties
ITEM 2 PROPERTIES 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. Primary manufacturingown. We lease facilities for our Research & Development operationsare situatedat North Ryde, in Sydney, Australia in a 120,000 squarefootfeet facility. We own our principal manufacturing facility consisting of a 215,000 square feet complex at Norwest, alsoowned by us.in Sydney, Australia and lease in Canoga Park, California a 35,500 square feet facility for manufacture of electronic motors.Sales and warehousing facilities are leased in
Oxford,Abingdon, England; Moenchengladbach, Germany; Lyon, France; Basel, Switzerland; Trollhaettan,SwedenSweden; Helsinki, Finland 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'sMAP’s principal offices are located in Munich, Germany in a 45,000 square
footfeet facility leased by us.MAP'sMAP’s subsidiaries also lease sales and warehouse facilities inParis, Lyon and Nantes, France;Lyss, Switzerland; Villach, Austria ands'Hertogenbosch,s’Hertogenbosch, The Netherlands.15Item 3 Legal Proceedings We are currently
ITEM 3 LEGAL PROCEEDINGS The Company was engaged in litigation relating to the enforcement and defense of certain of
our patents.its patents during the fiscal year ended June 30, 2004.1995 Litigation with Respironics. In January 1995,
weour subsidiary, ResMed Limited, filed a complaint in the United States District Court for the Southern District of California seeking monetary damages from and injunctive relief against Respironics, Inc. for alleged infringement of three ofourits patents. In February 1995, Respironics filed a complaint in theUnited StatesU.S. District Court for the Western District of Pennsylvania, in Pittsburgh, againstusResMed Limited seeking a declaratory judgment that Respironics, Inc. does not infringe claims of these patents and thatourResMed Limited’s patents are invalid and unenforceable.The two actions were combinedOn September 5, 2003, ResMed and
are proceedingRespironics settled this action. ResMed and Respironics have dismissed all claims in theUnited Statesaction with prejudice.- 18 -
2002 Litigation with Respironics. On October 11, 2002, ResMed Inc, ResMed Corp, and ResMed Limited filed a lawsuit in U.S. District Court for the Southern District of California, in San Diego against Respironics, Inc. ResMed’s suit seeking a judgment that certain of Respironics’ mask products (Contour Deluxe, Comfort Classic, Comfort Select, and Image3 masks) infringe patents held by ResMed. The complaint further charged Respironics with copying ResMed’s proprietary mask technology, and alleged violation of the Lanham Act, trademark and trade dress infringement, and common law violations relating to the appearance of ResMed’s mask products. ResMed sought an injunction and damages. On March 4, 2003, the Court denied Respironics’ motion to transfer the case to the U.S. District Court for the Western District of Pennsylvania.
In June 1996, we filed an additional complaint againstOn October 16, 2002 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 GmbHInc. filed a lawsuit inthe Civil Chamber of MunichU.S. District Courtagainst Hofrichter GmbH seeking actual and exemplary monetary damagesfor theunauthorizedWestern District of Pennsylvania, in Pittsburgh, against ResMed Limited seeking a declaratory judgment that Respironics, Inc. does not infringe the patents that are the subject of ResMed’s October 11, 2002 complaint filed in San Diego, that such patents are invalid andinfringing useunenforceable and that Respironics has not committed any other trademark, trade dress or common law violations. On July 29, 2003, the court ordered the case transferred to the U.S. District Court for the Southern District ofour trademarksCalifornia.On September 5, 2003, ResMed and
patents. An initial decision has been madeRespironics settled both lawsuits involved infavor of MAP. Hofrichter has filed an appealthe 2002 Litigation. ResMed and Respironics havesort Court determination thatdismissed all claims in theMAP patents do not apply to certain Hofrichter products. While we are prosecuting the aboveactionsthere can be no assurance that we will be successful.with prejudice.2002 Litigation with Fisher & Paykel Healthcare. On
March 31, 2000, weAugust 26, 2002, ResMed Inc., ResMed Corp. and ResMed Limited filed a lawsuit inthe United StatesU.S. DistrictcourtCourt for the Southern District of California, in San Diego againstMPV TrumaFisher & Paykel Healthcare Inc andTiara Medical Systems, Inc., seeking actualFisher & Paykel Healthcare Limited (“Fisher & Paykel Healthcare”). ResMed’s amended complaint sought a judgment that selected Fisher & Paykel Healthcare mask products infringe patents held by ResMed. The complaint further charged the defendants with the copying of ResMed proprietary mask technology andexemplary monetary damagesalleges violations of the Lanham Act, trademark andinjunctive relief for the unauthorized and infringing use of our trademarks,trade dress infringement andpatents relatedcommon law violations relating to the appearance of ResMed mask products.On May 6, 2003, ResMed and Fisher & Paykel Healthcare agreed to settle this patent infringement lawsuit. In accordance with the settlement, Fisher & Paykel introduced a new design of its mask in the United States and ResMed will not assert intellectual property claims against the new mask. ResMed has dismissed the lawsuit with prejudice.
Other Litigation. In addition to the matters described above, in the normal course of business, we are subject to routine litigation incidental 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 inbusiness. While theFederal 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 settlementresults of thisActionlitigation cannot be predicted with certainty, we believe that their final outcome will not have a material adverse effect onApril 16, 2001. Item 4 Submission of Matters toour consolidated financial statements taken as aVote of Security Holderswhole.
ITEM 4 SUBMISSIONOF MATTERSTOA VOTEOF SECURITY HOLDERS None.
16- 19 -
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters
ITEM 5 MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERSAND ISSUER PURCHASESOF EQUITY SECURITIES Our
Common Stock commenced tradingcommon stock is traded onJune 2, 1995 on The NASDAQ National Market under the symbol "RESM". On September 30, 1999, we transferred our primary listing tothe New York Stock Exchange (NYSE) under the symbol"RMD"“RMD”. The following table sets forth for the fiscal periods indicated the high and low closing prices for theCommon Stockcommon stock as reported by the New York Stock Exchange.
------------------------------------------------------------------------------------------------------------- 2001 2000 High Low High Low ------------------------------------------------Quarter One, ended September 30, $38.38 $24.63 $17.19 $11.82 Quarter Two, ended December 31, 41.50 25.50 23.13 12.75 Quarter Three, ended March 31, 47.00 36.65 39.62 20.34 Quarter Four, ended June 30, 57.68 37.91 38.06 22.00 -------------------------------------------------------------------------------------------------------------
2004 2003 High Low High Low Quarter One, ended September 30
$ 43.98 $ 38.58 $ 33.63 $ 24.89 Quarter Two, ended December 31
46.49 38.05 34.13 27.63 Quarter Three, ended March 31
47.95 40.69 33.87 29.67 Quarter Four, ended June 30
51.56 44.84 41.95 32.00 As of
September 7, 2001,August 20, 2004, there wereapproximately 13,500 beneficial64 holders of record of ourCommon Stock.common stock. We have not paid any cash dividends on our common stock sinceprior to theour 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 SalesSale 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,and Deutsche BancAlex.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 initialpurchasers'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 2003 and 2002, we repurchased $10.0 million and $56.8 million face value of our convertible subordinated notes respectively. The total purchase price of the notes was $9.4 million and $49.1 million, including $0.2 million and $0.6 million in accrued interest. We recognized a gain of $0.3 million and $4.0 million, net of tax of $0.2 million and $2.5 million, on these transactions. We did not repurchase any notes in fiscal 2004. At June 30, 2004, we had convertible subordinated notes outstanding of $113.25 million.
The notes
were issued pursuant to an exemption fromand theregistration requirementscommon stock issuable upon conversion of theSecurities and Exchange Act of 1933, as amended, ornotes (the “Securities”) were not registered under the Securities Actset forth under Rule 144Aor any other state or foreign securities laws at the time ofthe Securities Act. Accordingly, theissue. The notes were offered and sold only to"qualified“qualified institutionalbuyers"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.
- 20 -
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.year.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, 17we 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 alsoredeem some or all of the notes at any time on or after June22,20, 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
willdoes not limit the incurrence by us or our subsidiaries of senior indebtedness or other indebtedness. The notes mature on June 20, 2006.Item 6 Selected Financial DataOn 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. These shares were subsequently registered for resale under the Securities Act (Registration No. 335-100825), effective March 26, 2003; and consequently the shares may be resold in accordance with the prospectus that was part of the Registration Statement by the selling stockholder named in the prospectus or in a supplement to the prospectus.
Other sales of the shares 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.
Purchases of Equity Securities
The following table summarizes purchases by us of our common stock during the three months ended June 30, 2004:
Period Total
Number
of Shares
Average Price
Paid per Share
Total Number of Shares
Purchased as Part ofPublicly Announced Plans
or Programs (1)
Maximum Number of
Shares that May yet be
Purchased Under thePlans or Programs(1)
April 2004
Nil May 2004
Nil June 2004
Nil Total to June 30, 2004
886,369 $34.34 886,369 3,113,631 - 21 -
(1) On June 6, 2002, the Board of Directors authorized us to repurchase up to 4.0 million shares of our outstanding common stock. There is no expiration date for the repurchase of these shares. For the years ended June 30, 2004 and 2003, we repurchased 471,000 and 125,000 shares at a cost of $19.0 million and $3.5 million respectively. As at June 30, 2004, we have repurchased a total of 886,000 shares at a cost of $30.4 million. We may 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.
ITEM 6 SELECTED 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,
2001.2004. The data set forth below should be read in conjunction with the Consolidated Financial Statements and related Notes included elsewhere in this Report.
Consolidated Statement of Income Data: Years Ended June 30 (In thousands, except per share data) 2004 2003 2002 2001 2000 Net revenues
$ 339,338 $ 273,570 $ 204,076 $ 155,156 $ 115,615 Cost of sales
122,602 100,483 70,827 50,377 36,991 Gross profit
216,736 173,087 133,249 104,779 78,624 Selling, general and administrative expenses
104,706 85,313 64,481 49,364 36,987 Research and development expenses
26,169 20,534 14,910 11,146 8,499 In-process research and development write off
- - 350 17,677 - Donations to Research Foundations
500 - 2,349 - - Provision for restructure
- - - 550 - Total operating expenses
131,375 105,847 82,090 78,737 45,486 Income from operations
85,361 67,240 51,159 26,042 33,138 Other income (expenses):
Interest income (expense), net
(1,683 ) (2,549 ) (3,224 ) (762 ) 801 Government grants
- - - 72 279 Other, net
990 1,907 108 1,962 (52 ) Gain on extinguishment of debt
- 529 6,549 - - Total other income (expenses)
(693 ) (113 ) 3,433 1,272 1,028 Income before income taxes
84,668 67,127 54,592 27,314 34,166 Income taxes
27,384 21,398 17,086 15,684 11,940 Net income
$ 57,284 $ 45,729 $ 37,506 $ 11,630 $ 22,226 Basic earnings per share
$ 1.70 $ 1.38 $ 1.17 $ 0.37 $ 0.74 Diluted earnings per share
$ 1.63 $ 1.33 $ 1.10 $ 0.35 $ 0.69 Basic shares outstanding
33,694 33,054 32,174 31,129 30,153 Diluted shares outstanding
35,125 34,439 34,080 33,484 32,303
Consolidated Balance Sheet Data: As of June 30 (In thousands) 2004 2003 2002 2001 2000 Working capital
$ 217,238 $ 191,322 $ 142,809 $ 144,272 $ 47,550 Total assets
544,159 459,595 376,191 288,090 115,594 Long-term debt, less current maturities
113,250 113,250 123,250 150,000 - Total stockholders’ equity
361,499 286,433 192,930 100,366 93,972 - 22 -
18
------------------------------------------------- As of June 30, 2001 2000 1999 1998 1997 Consolidated Balance Sheet Data: (In thousands)Working capital 144,272 $ 47,550 $32,529 $32,759 $34,395 Total assets 288,090 115,594 89,889 64,618 54,895 Long-term debt, less current maturities 150,000 - - - 274 Total stockholders' equity 100,366 93,972 71,647 50,773 44,625 =================================================Item 7 Management's Discussion and Analysis of Financial Condition and Results of OperationsOverview
Management'sManagement’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 disorderedsleep-disordered breathing conditions, including obstructive sleep apnea. Our net revenues are generated from the sale and rental of our various flow generator devices, nasal mask systems, accessories and other products, and, to a lesser extent fromroyalties.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. Our research and development expenses have been subsidized in part by grants and tax incentives from the Australian federal government.generators.Business Acquisitions
Fiscal year ended June 30, 2004
On
February 16, 2001,July 2, 2003 we acquiredallthe assets ofthe outstanding sharesRespro Medical Company Limited (“Respro”), our Hong Kong distributor for total consideration ofMAP. The total transaction was valued at approximately $70 million paid$184,000 incash 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.cash. The acquisition has been accounted for as a purchase and accordingly, the results of operations ofMAPRespro have been included within our consolidated financial statements from July 2, 2003. An amount of $89,000, representing the excess of the purchase price over the fair value of net identifiable assets acquired of $95,000, has been recorded as goodwill.Fiscal year ended June 30, 2003
John Stark and Associates. On July 24, 2002 we acquired the business of John Stark and Associates, our Texas representative, for total consideration of $300,000 in cash. The acquisition has been accounted for as a purchase and accordingly, the results of operations of John Stark and Associates were included within our consolidated financial statements from July 24, 2002. An amount of $300,000, representing the excess of the purchase price over the fair value of net identifiable assets acquired of $nil, has been recorded as goodwill.
Fiscal year ended June 30, 2002
Labhardt Acquisition. On November 15, 2001, we acquired all the common stock of Labhardt 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
February 16,November 15, 2001.TheAn amount of $4.2 million, representing the excess of the purchase price over the fairmarketvalue of the net identifiable assets acquired of$47.1$1.3 million, has been recorded asgoodwill 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 Acquisition Inc, for total consideration, including acquisitionwe 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 acquisitionchargesprice paid in cash. Upon consummation of$550,000the merger, the surviving corporation, Servo Magnetics Acquisition Inc., changed its name to Servo Magnetics Inc.- 23 -
The acquisition has been accounted for
restructuringas a purchase and accordingly, the results ofMAP's unprofitable Frenchoperationsand $17,677,000 for purchased in-process research and development.of SMI have been included in our consolidated financial statements from May 14, 2002. An amount of $30.7 million, representing 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$0.4 million was expensed upon acquisition ofMAPSMI because technological feasibility of the products under development had not been established and no further alternative uses existed. The value ofin processin-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 discountratesrate used in the analysiswere between 27%was 19% and33% and werewas based on the risk profile of the acquired assets.All purchasedPurchased research and development projects related to electrical motor systems used in our flow generator devices and other medical
equipment for the treatment of sleep disordered breathing, primarily relating to the development of mask interface systemsand19autotitrating devices for the treatment of obstructive sleep apnea and associated disorders.data storage equipment. Key assumptions used in the analysis included gross marginsranging from 70% to 80%of 34%.AsThe majority of the new motor systems have been completed and have performed in line with expectations at the time of acquisition.In-Process Research and Development Charge
On acquisition of MAP Medizin-Technologie GmbH (MAP) in February 2001, we recognized as an expense a charge of $17.7 million with respect to five in-process research and development programs under active development by MAP at date of acquisition. The five projects were:
(i) A single-walled nasal cushion mask system.
(ii) A new headgear system
(iii) A standalone active humidifier
(iv) An autotitration CPAP device for treatment of OSA
(v) A new OSA diagnostic screening device. The status of each project as of June 30, 2004 is noted below:
(i) Single-walled nasal cushion The nasal cushion under development by MAP on acquisition was originally due for release in October 2001. Delays in the design and manufacturing process delayed the release for seven months, until April 2002. The delay in release of the product was not significant over its expected life cycle, and has made no significant impact on the net return assumptions used in the initial in-process research and development model. Since release, the product (now referred to as the Papillon) has met or exceeded all sales forecasts.
(ii) New headgear The new headgear product line was withheld to coincide with the release of the Papillon mask
interface systems are expected to be completed and commercially availablesystem in April 2002 andversionsso was also seven months behind schedule in projected release dates. Since release, the new headgear system has exceeded original sales projections and continues to meet or exceed initial expectations.
(iii) Standalone active humidifier Due to other priorities and to the introduction of integrated humidification flow generator devices by a number of competitors during fiscal 2002, we have abandoned the standalone humidifier project.
- 24 -
Given the relatively small revenue forecast of the
autotitrating devices between 2003product line in the in-process research and2005. These projectsdevelopment model, the financial impact of this project is not material to ResMed or the net return of the MAP acquisition.
(iv) Auto titration CPAP Device The main product development effort of MAP since acquisition has been on the completion of the Autotitration CPAP flow generator specified in the initial in-process research and development charge, now referred to as the Magellan. This project experienced some delays due to the complexity of the software algorithm development process and associated electronics resulting in the product being released in November 2002. Sales are now broadly consistent with our initial expectations.
(v) OSA diagnostic screening device MAP’s new diagnostic screening device, now called the microMESAM, was released in the German market in March 2004. We remain confident in the capacity of the device to enhance the diagnostic process, and remain confident in the potential of the product to significantly impact the treatment and diagnosis of obstructive sleep apnea in the German market.
As at June 30, 2004, four of the five programs have
estimated costs to complete totalling approximately $2.0 million. We believe thatbeen completed with the release of the Papillon mask system, upgraded headgear, Magellan flow generator and MicroMESAM.Given the completion of the above research programs and performance of the associated product lines, we remain confident in the assumptions used to
valuedetermine theacquired intangible assets were reasonable atin-process research and development charge and, as a result, thetimenet return ofacquisition. No assurance can be given, however, thattheunderlying 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.MAP acquisition.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
is 34%.was 30% in fiscal 2004, 2003 and 2002. During fiscal2001, 20002004, 2003 and1999,2002, our effective tax rate has fluctuatedfrombetween approximately34% to31% and approximately35%33%. 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.We account 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.
Fiscal Year Ended June 30
20012004, Compared to Fiscal Year Ended June 3020002003Net
revenues.Revenues. Netrevenuesrevenue increasedin fiscal 2001for the year ended June 30, 2004 to$155.2$339.3 million from$115.6$273.6 millionin fiscal 2000,for the year ended June 30, 2003, an increase of$39.5$65.7 million or34%24%.ThisThe increase in net revenue was
primarilyattributable to an increase in unit sales of our flow generators, masks andaccessoriesaccessories. Sales also benefited from an appreciation of international currencies against the- 25 -
U.S. dollar (increasing sales by approximately $18.6 million). Net revenue in North and Latin America
where net revenuesincreased to$79.9$166.1 million from$62.7$130.7 million for the years ended June 30, 2004 and 2003 respectively. This growth primarily reflects increased public and physician awareness of sleep-disordered breathing. Net revenue inEurope, where net revenuesinternational markets increased to$60.5$173.2 million from$40.5$142.8 million for the years ended June 30, 2004 and 2003 respectively. International sales growth for the year ended June 30, 2004 reflects organic growth in the overall sleep-disordered breathing market and appreciation of international currencies against the U.S. dollar. Sales for the previous year ended June 30, 2003 included non-recurring SARS-related sales to China of approximately $5.0 million.Net revenues were unfavorably impactedExcluding the impact of these sales, international sales grew bya decline26%. Excluding both the impacts of the appreciation of international currencies against the U.S. dollar and SARS-related sales, international sales grew by 12%.Sales of flow generators for the year ended June 30, 2004 increased by 18% compared to the year ended June 30, 2003, including increases of 20% in
European foreign exchange rates.North and Latin America and 16% elsewhere. Sales of mask systems, motors and other accessories increased by 31%, including increases of 33% in North and Latin America and 29% elsewhere, for the year ended June 30, 2004 compared to the year ended June 30, 2003. These increases primarily reflect growth in the overall sleep-disordered breathing market and appreciation of international currencies against the U.S. dollar.Gross
profit.Profit. Gross profit increasedin fiscal 2001for the year ended June 30, 2004 to$104.8$216.7 million from$78.6$173.1 millionin fiscal 2000,for the year ended June 30, 2003, an increase of$26.2$43.6 million or33%25%.The increase resulted primarily from increased unit sales during fiscal 2001.Gross profit as a percentage of netrevenues was 68%, consistent with fiscal 2000. Lower flow generator selling prices were offset byrevenue increased for the year ended June 30, 2004 to 64% from 63% for the year ended June 30, 2003. The small improvement in gross margin reflects adecline in the Australian dollar, improved manufacturing efficiencies andmore favorable product mix due to increased sales of higher marginmask system units.products, partially offset by the impact of higher manufacturing costs resulting from a stronger Australian dollar against the U.S. dollar, as the majority of manufacturing labor and overhead costs are incurred in Australia.Selling,
generalGeneral andadministrative expenses.Administrative Expenses. Selling, general and administrative expenses increasedin 2001for the year ended June 30, 2004 to$49.4$104.7 million from$37.0$85.3 million for2000,the year ended June 30, 2003, an increase of$12.4$19.4 million or33%23%. As a percentage of netrevenues,revenue, selling, general and administrative expenseswere steady in fiscal 2001, compared to fiscal 2000 at 32%.for the year ended June 30, 2004 was 31%, consistent with the year ended June 30, 2003. Thegrossincrease in selling, general and administrative expenses was primarily dueprimarilyto an increaseto 471 from 281in the number of sales and administrative personnel and other expenses related to the increase in our sales. The increase in selling, general and administrative expenses was also attributable to appreciation of international currencies against the U.S. dollar which added approximately $8.1 million to our expenses as reported in U.S. dollars.Donations to Foundation. In the year ended June 30, 2004 we donated $0.5 million to the ResMed Sleep Disordered Breathing Foundation. The Foundation’s overall mission is to educate both the public and physicians about the inherent dangers of untreated SDB/OSA, particularly as it relates to cerebrovascular and cardiovascular disease.
Research and
development expenses.Development Expenses. Research and development expenses increasedin fiscal 2001for the year ended June 30, 2004 to$11.1$26.2 million from$8.5$20.5 millionin fiscal 2000,for the year ended June 30, 2003, an increase of$2.6$5.7 million or31%28%. As a percentage of netrevenues,revenue, research and development expensesremained static in fiscal 2001 at 7%.were 7.7% for the year ended June 30, 2004 compared to 7.5% for the year ended June 30, 2003. Thedollarincrease in research and development expenses was dueprimarilyto increased salaries associated with an increase inclinical trial costs,personnel andexternal consultancy fees.increased charges for consulting fees, clinical trials and technical assessments incurred to facilitate development of new products. The increase also reflects an appreciation of the Australian dollar against the U.S. dollar, as the majority of research and development costs are incurred in Australian dollars. The appreciation of international currencies against the U.S. dollar added approximately $3.8 million to our research and development expenses as reported in U.S. dollars.- 26 -
Other
income (expense).Income (Expense), Net. Otherincome (expense) improved in fiscal 2001expense, net increased for the year ended June 30, 2004 to$1.3net expense of $0.7 million from$1.0net expense of $0.1 million forfiscal 2000, anthe year ended June 30, 2003. The increase in other expense was attributable to no gains on extinguishment of$0.3 million. This improvement was due primarilydebt this year compared to $0.5 million for the year ended June 30, 2003, and lower net foreign currency exchange gains,incurred in our foreign currency hedging structures,partially offset by lower interest expenseassociated withdue to thepurchase of MAP. Net foreign currency gains for fiscal 2001 were $2.0 million compared to net foreign currency losses of $0.2 millionreduction in2000. 20convertible note debt. Income
taxes.Taxes. Our effective income tax rate increased to 32.3% forfiscal 2001 before MAP acquisition charges of $0.6 millionthe year ended June 30, 2004 from 31.9% forrestructuring costs and in- process research and development write off of $17.7 million was 34.4% down from 34.9% for fiscal 2000. This reductionthe year ended June 30, 2003. The marginally higher tax rate was primarily due to thereduction ingeographical mix of taxable income. We continue to benefit from the Australian corporate taxrates from 36% to 34% on July 1, 2000 and to additional research and development expensesrate of 30%, because we generate a majority of our taxable income inAustralia for which we received a 125% deduction for tax purposes.Australia.Fiscal Year Ended June 30
20002003, Compared to Fiscal Year Ended June 3019992002Net
revenues.Revenues. Netrevenuesrevenue increasedin fiscal 2000for the year ended June 30, 2003 to$115.6$273.6 million from$88.6$204.1 millionin fiscal 1999,for the year ended June 30, 2002, an increase of$27$69.5 million or30%34%.ThisThe increase in net revenue was
primarilyattributable to an increase in unit sales of our flow generators andaccessoriesaccessories. Sales also benefited from an appreciation of international currencies against the U.S. dollar (increasing sales by approximately $16.8 million) and inclusion of sales of $6.5 million from Servo Magnetics Inc. (SMI), the subsidiary we acquired in May 2002. Net revenue in North and Latin America increased to $130.7 million from $100.9 million for the years ended June 30, 2003 and 2002 respectively. This growth primarily reflects increased public and physician awareness of sleep-disordered breathing. Net revenue in international markets increased to $142.8 million from $103.1 million for the years ended June 30, 2003 and 2002 respectively. International sales growth for the year ended June 30, 2003 reflects organic growth in theAmericas where net revenuesoverall sleep-disordered breathing market, appreciation of international currencies against the U.S. dollar and SARS-related sales to China of approximately $5.0 million.Sales of flow generators for the year ended June 30, 2003 increased by 29% compared to
$62.7 million from $51.0 millionthe year ended June 30, 2002 including increases of 23% in North and Latin America and 33% elsewhere. Sales of mask systems, motors and other accessories increased by 40% including increases of 35% in North and Latin America and 47% elsewhere, for the year ended June 30, 2003 compared toa lesser extent,the year ended June 30, 2002. These increases primarily reflect growth inEurope, where net revenues increased to $40.5 million from $30.2 million. Net revenues were unfavorably impacted by a decline in European foreign exchange ratesthe overall sleep-disordered breathing market, appreciation of international currencies against the U.S. dollar andchanges in domestic reimbursement regulations with respect toourSULLIVAN VPAP II ST systems.acquisition of SMI.Gross
profit.Profit. Gross profit increasedin fiscal 2000for the year ended June 30, 2003 to$78.6$173.1 million from$59.2$133.2 millionin fiscal 1999,for the year ended June 30, 2002, an increase of$19.4$39.9 million or33%30%.The increase resulted primarily from increased unit sales during fiscal 2000.Gross profit as a percentage of netrevenues increased in fiscal 2000revenue decreased for the year ended June 30, 2003 to68%63% from66.8% in 1999. The increase was due to improved manufacturing efficiencies, a decline in65% for theAustralian Dollar and increased salesyear ended June 30, 2002, reflecting the impact of highermargin mask system units.manufacturing costs resulting from a stronger Australian dollar against the U.S. dollar, as the majority of manufacturing labor and overhead costs are incurred in Australia and, to a lesser extent, the inclusion of SMI’s motor sales which achieve lower margins compared to our overall gross margin.Selling,
generalGeneral andadministrative expenses.Administrative Expenses. Selling, general and administrative expenses increasedin 2000for the year ended June 30, 2003 to$37.0$85.3 million from$27.4$64.5 million for1999,the year ended June 30, 2002, an increase of$9.6$20.8 million or35%32%. As a percentage of netrevenues,revenue, selling, general and administrative expensesincreased in fiscal 2000for the year ended June 30, 2003 decreased to 31% compared to 32%from 31%forfiscal 1999.the year ended June 30, 2002. Thegrossincrease in selling, general and administrative expenses was primarily dueprimarilyto an increaseto 281 from 212in the number of sales and administrative personnel and other expenses related to the increase in our sales. The increase in selling, general and administrative expenses was also attributable to appreciation of international currencies against the U.S. dollar (adding approximately $6.0 million), the inclusion of $2.6 million from SMI’s operations, and $2.2 million in litigation costs associated with outstanding patent infringement lawsuits against competitors.- 27 -
Research and
development expenses.Development Expenses. Research and development expenses increasedin fiscal 2000for the year ended June 30, 2003 to$8.5$20.5 million from$6.5$14.9 millionin fiscal 1999,for the year ended June 30, 2002, an increase of$2.0$5.6 million or30%38%. As a percentage of netrevenues,revenue, research and development expensesremained static in fiscal 2000 at 7.4%.were 7.5% for the year ended June 30, 2003 compared to 7.3% for the year ended June 30, 2002. Thedollarincrease in research and development expenses was dueprimarilyto 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. The increase also reflects an appreciation of the Australian dollar against the U.S. dollar, as the majority of research and developmentequipment, personnelcosts are incurred in Australian dollars. In constant currency terms, research andexternal consultancy fees.development expenses for the year ended June 30, 2003 increased by $3.1 million, or 17%, compared to the year ended June 30, 2002.Other Income (Expense), Net. Other income (expense)
. Other income (expense) improved in fiscal 2000, net decreased for the year ended June 30, 2003 to$1.0net expense of $0.1 million froma lossnet income of$0.7$3.4 million forfiscal 1999, a changethe year ended June 30, 2002. The decrease in other income was attributable to lower gains on extinguishment of$1.7 million. This improvement was due primarily to reduced losses incurred in our foreign currency hedging structures,debt partially offset byreduced government grants. Net foreign currency losses for fiscal 2000 were $0.2 million compared toincreased net foreign currencylosses of $2.5 millionexchange gains, and lower interest expense due to the reduction in1999.convertible note debt.Income
taxes.Taxes. Our effective income tax ratefor fiscal 2000increased toapproximately 34.9%31.9% for the year ended June 30, 2003 fromapproximately 34.5%31.3% forfiscal 1999. This increasethe year ended June 30, 2002. The marginally higher tax rate was primarily due to thehigh relative taxes incurredgeographical mix of taxable income. We continue to benefit from the Australian corporate tax rate of 30%, because we generate a majority of our taxable income inFrance 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.Australia.Liquidity and Capital Resources
As of June 30,
20012004 and June 30,2000,2003, we had cash and cash equivalents and marketable securitiesavailable for saleavailable-for-sale ofapproximately $102.8$140.9 million and$22.0$121.0 million, respectively.Our workingWorking capitalapproximated $144.3was $217.2 million and$47.6$191.3 millionrespectively,at June 30,20012004 and2000. 21June 30, 2003 respectively. Inventories at June 30, 2004 increased by $6.4 million or 13% to $55.8 million compared to June 30, 2003 inventories of $49.4 million. The percentage 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. Duringinventories was less than thefiscal years24% incremental increase in revenues in the year ended June 30,20012004 compared to the year ended June 30, 2003. The lower inventory growth reflects the impact of the relocation of manufacturing to our new facility at Norwest in Sydney in the fourth quarter of fiscal year 2004 which temporarily lowered production volumes and2000,consequently inventory balances at June 30, 2004. Accounts receivable at June 30, 2004 were $67.2 million, an increase of $10.5 million or 19% over the June 30, 2003 accounts receivable balance of $56.7 million. This increase was modestly lower than the 24% incremental increase in revenues for the year ended June 30, 2004 compared to the year ended June 30, 2003. Accounts receivable days outstanding increased to 64 days for the quarter ended June 30, 2004, compared to 62 days for the quarter ended June 30, 2003. The increase reflected, in part, SARS-related sales to China of $5.0 million in the quarter ended June 30, 2003, which were collected prior to June 30, 2003. Our allowance for doubtful accounts as a percentage of total accounts receivable at June 30, 2004 and 2003 was 4.5% and 4.2%, respectively. The credit quality of ouroperationscustomers remains consistent with our past experience.During the year ended June 30, 2004, we generated cash of
approximately $29.5$76.5 millionand $20.3 million, respectively,from operations, primarily as a result ofcontinued increasesincreased profit and improved working capital management, particularly innet revenues, offset in part by increases inrespect of inventories and accountsreceivable, inventory and prepayments. Cash and cash equivalents and marketable securities available for sale increased to $102.8 million atpayable. 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 2000,2003 approximately$7.9 million and $6.4$59.3 million of cash wasreceived fromgenerated by operations.Capital expenditures for the
issue of common stock upon exercise of common stock options. Our investing activities (excluding the purchasesyears ended June 30, 2004 andsales of marketable securities and business acquisitions) for fiscal years 2001 and 20002003 aggregated$30.6$57.2 million and$20.4$25.6 million respectively.The majorityFor the year ended June 30, 2004, $40.9 million of thefiscal 2001 investing activities wereexpenditure related to the- 28 -
construction of our new manufacturing facility. Capital expenditure was also incurred for the acquisition of computer hardware and software and the purchase of production tooling and
equipment, office furniture, research and development equipment and costs associated withequipment. The capital expenditures in thecontinuing installationyear ended June 30, 2003 primarily reflected the construction of ourOracle applicationsnew manufacturing facility, acquisition of computersystem. In addition, we paid $17.2 million associated with thehardware and software including a disaster recovery system, and purchase ofthe new U.S. headquarters in Poway, California.production tooling equipment. As a result of these capital expenditures, ourJune 30, 2001balance sheet reflectsan increase innet property, plant and equipmenttoof approximately$55.1$147.3 million at June 30,2001, from $36.62004 compared to $104.7 million at June 30,2000, an increase2003.During the year ended June 30, 2004, we did not repurchase any convertible subordinated notes.
For the year ended June 30, 2003 we repurchased $10.0 million face value of
approximately $18.5 million. On February 16, 2001,ourwholly owned German subsidiary, ResMed Beteiligungs GmbH, acquired alloutstanding convertible subordinated notes. The total purchase price of thecommon stocknotes was $9.4 million, including $0.2 million in accrued interest. We recognized a gain ofMAP for total consideration, including acquisition costs,$0.3 million, net of$55.4 million. We also assumed approximately $14.5tax of $0.2 million,of bank debt in connection with the acquisition. Onon these transactions. At June20, 200130, 2004, weissued $150 million of 4%had convertible subordinated notesdue 2006; anoutstanding of $113.2 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 our current or future contractual obligations, if any, that may directly or indirectly apply to such transactions.
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 paid in October 2002 and $5.7 million paid in April 2003. We completed the first building, a manufacturing facility on this site in May 2004. New research and development and office facilities are expected to be completed in May 2006. We estimate that the additional
$30building costs for the new research and development and office facilities will be approximately $54 million. We expect to fund the project through a combination of cash on hand and cash generated from operations.On June 6, 2002, the Board of Directors authorized us to repurchase up to 4.0 million shares of
these notes were issued on July 3, 2001 upon exerciseour outstanding common stock. For the years ended June 30, 2004 and 2003, we repurchased 471,000 and 125,000 shares at a cost of $19.0 million and $3.5 million respectively. As at June 30, 2004, we have repurchased a total of 886,000 shares at a cost of $30.4 million. We may continue to repurchase shares of our common stock for cash in theinitial purchasers' over allotment option. For additional discussion regarding these notes, see "Item 5open market, or in negotiated or block transactions, from time to time as market and business conditions warrant.Details of contractual obligations at June 30, 2004 are as follows:
Payments Due by Period In $000’s Total Less than 1 year 1-3 years 4-5 years After 5 years Long-Term Debt
113,250 - 113,250 - - Operating Leases
11,223 4,947 5,178 1,098 Capital Leases
- - - - - Unconditional Purchase Obligations
4,820 4,820 - - - Total Contractual Cash Obligations
$ 129,293 9,767 118,428 1,098 - -
Market for Registrant's Common Equity and Related Stockholder Matters" and note 7 to the Consolidated Financial Statements included with this report.29 -Details of other commercial commitments at June 30, 2004 are as follows:
Total
Amounts
Committed
Amount of Commitment Expiration Per Period In $000’s Less than 1
year
1-3 years 4-5 years Over 5 years Lines of Credit
- - - - - Standby Letters of Credit
- - - - - Guarantees*
1,761 - 886 349 526 Standby Repurchase Obligations
- - - - - Other Commercial Commitments
- - - - - Total Commercial Commitments
$ 1,761 - 886 349 526
* The above guarantees relate to guarantees required by statutory authorities as a pre-requisite to developing our site at Norwest and requirements under contractual obligations with 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 tofluctuationsthe risk that the dollar value equivalent of anticipated cash flows would be adversely affected by changes inthe 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,andcash generated fromoperations. Newoperations and a $15.0 million undrawn revolving line of credit with Union Bank of California.Critical Accounting
PronouncementsPrinciples and EstimatesThe 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, goodwill, impaired assets, intangible assets, income taxes and contingencies.
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.
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 a 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.
- 30 -
(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 us. 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 our 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.
(6) Revenue Recognition. Revenue on product sales is recorded at the time of shipment, at which time title transfers to the customer. Revenue on product sales which require customer acceptance is not recorded until acceptance is received. Royalty revenue from license agreements is recorded when earned. Service revenue received in advance from service contracts is initially deferred and recognized ratably over the life of the service contract. Revenue received in advance from rental unit contracts is initially deferred and recognized ratably over the life of the rental contract. Revenue from sale of marketing and distribution rights is initially deferred and recognized ratably as revenue over the life of the contract. Freight charges billed to customers are included in revenue. All freight-related expenses are charged to cost of sales.
We do not offer a right of return or other recourse with respect to the sale of our products or similarly offer variable sale prices for subsequent events or activities. However, as part of our sales processes we may provide upfront discounts for large orders, one time special pricing to support new product introductions, sales rebates for centralized purchasing entities or price-breaks for regular order volumes. The costs of all such programs are recorded as an adjustment to revenue. In
July 2001,our domestic sales activities we use a number of Manufacturer Representatives to sell our products. These representatives are paid a direct commission on sales and act as an integral component of our domestic sales force. We do not sell our products to these representatives, and do not recognize revenue on such shipments. Our products are predominantly therapy-based equipment and require no installation. As such, we have no significant installation obligations.- 31 -
Recently Issued Accounting Pronouncements
In December 2003, the SEC issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” which codifies, revises and rescinds certain sections of SAB No. 101, “Revenue Recognition”, in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes noted in SAB No. 104 did not have a material effect on our consolidated results of operations, consolidated financial position or consolidated cash flows.
In May 2003, the Financial Accounting Standards Board
("FASB"(“FASB”) issued statement of financial accounting standard (“SFAS”) 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFASFinancial Accounting Standards ("SFAS")150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock.SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We adopted SFAS No.
142, Goodwill and Other Intangible Assets. We will adopt SFAS 142150 effective July 1,2001.2003. The adoption of SFAS142150 did not have a material impact on our consolidated financial position or results of operation.In January 2003, the FASB issued Interpretation No. (“FIN”) 46, Consolidation of Variable Interest Entities, which addresses the consolidation of certain entities (“variable interest entities”) in which an enterprise has a controlling financial interest through other than voting interests. FIN 46 requires
goodwill and intangible assets with indefinite useful lives to no longerthat a variable interest entity beamortized, but instead be tested for impairment at least annually. SFAS 142 provides a six-month transitional period fromconsolidated by theeffective date of adoption for us to perform an 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 amountholder of the22impairment. The second test must be performed as soon as possible, but no later than the endmajority of thefiscal year. Any impairment measured asexpected risks and rewards associated with the activities of thedatevariable interest entity. FIN 46 was effective for variable interest entities entered into prior to February 1, 2003 in periods beginning after June 15, 2003. The adoption ofadoption will be recognized asFIN 46 did not have a material impact on our financial condition or results of operation. In December 2003, thecumulative effect ofFASB issued achange in accounting principle. Becauserevision to FIN 46, to clarify some requirements and add new scope exceptions. The revised guidance is effective for the first reporting period beginning after December 15, 2003. The adoption of theextensive effort needed to complete this assessment, weprovisions of FIN 46R did not havenot determined whether therea material impact on our financial condition or results of operations.In April 2003, the FASB issued SFAS 149, Amendment of SFAS 133 on Derivative Instruments and Hedging Activities, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS 133. SFAS 149 is
any indication that goodwill is impairedeffective for contracts entered into orestimated the amount of any potential impairment. Effective July 1, 2001, we will also adopt FASB SFAS No. 141, Business Combinations. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiatedmodified after June 30,2001. We have evaluated the impact2003. The adoption of SFAS141 and believe that it will149 did not have a material impact on our results of operations, financial position or liquidity.SFASIn November 2002, the Emerging Issues Task Force (“EITF”) issued EITF Issue No.
133, 'Accounting00-21 “Accounting forDerivative Instruments and Hedging Activities', SFASRevenue Arrangements with Multiple Deliverables”. EITF Issue No.137, 'Accounting for Derivative Instruments and Hedging Activities' - Deferral00-21 addresses how to determine whether a revenue arrangement involving multiple deliverable contains more than one unit ofthe 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 theaccounting forderivative instruments, including certain derivative instruments embedded in other contracts. Underthestandard, entities are required to carry all derivative instruments inpurposes of revenue recognition and how thestatement 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 designatedrevenue arrangement consideration should be measured andqualifies 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 attributableallocated to therisk being hedged. If the hedged exposure is a cash flow exposure, the effective portionseparate units ofthe gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside earnings) and subsequently reclassifiedaccounting. EITF Issue No. 00-21 applies to revenue arrangements entered intoearnings 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 thereforeafter June 15, 2003. The adoption ofSFAS 133this statement did not have a material impact on our financialpositioncondition or results ofoperation. 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 Compensationoperations.-
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. 23Item 7A Quantitative and Qualitative Disclosures about Market and Business Risks32 -
ITEM 7A QUANTITATIVEAND QUALITATIVE DISCLOSURESABOUT MARKETAND BUSINESS RISKS Foreign Currency Market Risk
Our functional currency is the U.S. dollar, although the financial statements of our non-U.S. subsidiaries are maintained in their respective local currencies, and as such 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'sEuro’s and the Australian dollar. Under this program, increases or decreases in ourforeign- currency-denominatedforeign-currency-denominated financial assets, liabilities, and firm commitments are partially offset by gains and losses on the hedging instruments. We have determined our hedge program to be a non-effective hedge as defined under SFAS 133. The foreign currency derivatives portfolio is recorded in the consolidated balance sheets at fair value and included in other assets or other liabilities. All movements in the fair value of the foreign curency derivatives are recorded within other income, net on our consolidated statements of income.The table below provides information (in U.S. dollars) on our foreign-currency-denominated financial assets by legal entity functional currency as of June 30, 2004 (in thousands):
Foreign Currency Financial Assets Australian
dollar
(AUD)US
dollar
(USD)Euro Great
Britain
PoundSingapore
dollarNew
Zealand
dollarSwedish
KronaSwiss
FrancJapanese
YenAUD
Functional Currency Entities:
Assets
$ - 45,885 10,032 3,907 817 492 641 685 - Liability
$ - (12,328 ) (469 ) (7,267 ) (118 ) (15 ) - - (221 ) Net Total
$ - 33,557 9,563 (3,360 ) 699 477 641 685 (221 ) USD
Functional Currency Entities:
Assets
$ 20,648 - - - - - - - Liability
$ - - - - - - - - Net Total
$ 20,648 - - - - - - - Euro :
Functional Currency Entities:
Assets
$ 7,697 92 - - - - - 1,578 - Liability
$ (10 ) (283 ) - - - - - - - Net Total
$ 7,687 (191 ) - - - - - 1,578 - - 33 -
The table below provides information about our foreign currency derivative financial instruments and presents
suchthe 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 30,2001.2004. 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/ (Liabilities) (In thousands except exchange rates) As of June 30, 2001 2000 --------------------------------------------------------------Foreign Exchange Call Options (Receive AUS$/Pay U.S.$) Option amount $214,000 - $ 214,000 $ 577 $ 534 Average contractual exchange rate AUS $1 = USD 0.598 AUS $1 = USD 0.598 (Receive AUS$/Pay Euro) Option amount $ 9,368 $ 384 $ 9,752 $ 20 $ 367 Average contractual exchange rate AUS $1 = Euro 0.659 AUS $1 = Euro 0.667 AUS $1 = Euro 0.6597 ------------------------------------------------------------------------------------------------------------------------------------
(In thousands except exchange rates)
FY 2005
FY 2006
Total
Fair Value
Assets / (Liabilities)As of June 30
2004 2003 Foreign Exchange Call Options
(Receive AUD$/Pay U.S.$)
Option amount
$60,000 $66,000 $126,000 $ 1,816 $ 2,026 Average contractual exchange rate
AUD $1 = USD 0.705 AUD $1=USD 0.747 AUD $1 = USD 0.726 (Receive AUD$/Pay Euro)
Option amount
$14,623 $ - $14,623 $ 180 $ 552 Average contractual exchange rate
AUD $1 = Euro 0.58 AUD $1 = Euro 0.58 Interest Rate Risk
We are exposed to risk associated with changes in interest rates affecting the return on our investments.
At June 30,
2001,2004, 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,
2001,2004, would have resulted in approximately $0.2 million change in pretax income. In addition, the value of our marketable securities would change by approximately $0.3 million following a hypothetical 100 basis point change in interest rates. We do not use derivative financial instruments in our investment portfolio.24Forward-Looking Statements
This report on Form 10-K contains or may contain certain forward-looking statements and information that are based on
theour management’s beliefs,of our managementas well as on estimates and assumptions made by, and information currently available to our management. The words"believe," "expect," "anticipate," "estimate," "plan," "future"“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 andpending litigation.the development of new markets for our products, such as the cardiovascular and stroke markets. Theseforward- lookingforward-looking statements are madepursuant tounder the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Youare cautionedshould notto place undue relianceunduly rely on these forward-looking statements.Such forward- lookingForward-looking statements reflect the views of our management at the timesuchthe 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- 34 -
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. The markets for our
SDBsleep-disordered breathing 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 couldresult inmake our productsbecomingnoncompetitive 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.
25Our 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
OSAobstructive sleep apnea and other sleep disorders. We believe that home health care dealers and sleep clinics play a significant role in determining which brand ofCPAPproduct a patient will use.For example, in the United States, when a physician at a sleep clinic prescribes the useThe success ofa CPAP product, the patient typically purchases the product from aour business depends on our ability to market effectively to home health caredealer. 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 productdealers and sleep clinics to ensure thatis 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.our products are properly marketed and sold by these third parties.We have limited resources to market to the more than
2,0002,500 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 ofCPAPproducts. 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 expandhave expanded our marketing activities to target the population with a predisposition toSDBsleep- disordered breathing as well as primary care physicians and various medical specialists. We cannot assure you that these marketing efforts will be successful in increasing awareness of our products.- 35 -
Any inability to effectively market our products outside the U.S. could impact our profitability. Approximately half our revenues are generated outside the U.S., in approximately 60 different countries. Many of these countries have unique regulatory, medical, and business environments. If we are unable to effectively market our products outside the U.S., our overall financial performance could decline.
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
uponon 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 Germanyacquisitions with our operations, our business could suffer.On February 16, 2001, weThe integration of our acquiredall of the outstanding shares of MAP located near Munich, Germany. We are currently in the process of integrating ouroperationswith those of MAP. The integrationrequires significant efforts from our company and the acquired entity, for several years after eachcompany. We may find it difficultacquisition. Although we acquired our MAP subsidiary in February 2001, our Labhardt subsidiary in November 2001, and our Servo Magnetics subsidiary in May 2002, we continue tointegrate the operations of MAP. MAPadjust our business strategies, equipment, and personnelmay leave MAP because of the acquisitionto achieve maximum efficiencies andMAP 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.success. If we are not able to successfully integrate the operations ofMAP,our acquired entities, we may not fully realize the anticipated benefits of theMAP acquisition. 26acquisitions. We manufacture substantially all of our products outside the
United StatesU.S. 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 approximately48%51%,46%52%, and43%51% of our net revenues in fiscal years2001, 20002004, 2003 and1999,2002, respectively.As a result of the MAP acquisition, weWe expect that sales within these areas will account foroverapproximately 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 ourdomesticU.S. 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 indomesticU.S. 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. 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.
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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
payorspayers 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 forsuchthe product,orthat the reimbursement amount will be adequate or, that the reimbursement amount even if initially 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 treatsleep disorderedsleep-disordered breathingrelated respiratoryconditions. Additionally, future legislation or regulation concerning the health care industry or third party or governmental coverage and reimbursement, particularly legislation or regulation limitingconsumers'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.
27In 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 payorspayers directly for reimbursement for our products. However, we are still subject to laws and regulations relating to governmental reimbursement programs, particularly Medicaid and Medicare.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
healthcarehealth care 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 and other governments 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 anyhealthcarehealth care benefit program, including private third partypayors.payers. 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 partypayors.payers. Any violation of these laws and regulations could result in civil and criminal penalties, including fines.In addition to reimbursement for our products, our customers depend in part on reimbursement by government and private health insurers for other products. During fiscal year 2004, the US Government proposed reductions in reimbursement rates for some of these other products. Such proposed reductions, if they occur, may have a material impact on our customers. Any material impact on our customers may indirectly affect our sales to those customers, or the collectibility of receivables we have from those customers.
Complying with
FDAFood and Drug Administration and other regulations is an expensive andtime- consumingtime-consuming process, and any failure to comply could result in substantial penalties. We are subject to various federal, state, local and international regulations regardingthe testing, manufacture, distribution, marketing, promotion, record keeping and reporting ofourproducts. In particular, our failurebusiness activities. Failure to comply withFDAthese regulations could result in, among other things, recalls of our products, substantial finesand/orand criminal charges against usandor against our employees. A recall or other regulatory action could increase our costs, damage our reputation, and materially affect operating results.- 37 -
Product sales, introductions or modifications may be delayed or canceled as a result of the FDA or similar foreign regulations, which could cause our sales and profits 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.
28Off labelOff-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 labeloff-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. We purchase uniquely configured components for our devices from
single- source suppliers.various suppliers, including some who are single-source suppliers for us. 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 orstoppagehalt in supply while a replacement supplier reconfigures its components, or while we reconfigure ourcomponentsdevices 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. 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,
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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. anythird 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 five of our patents. Additional litigationLitigation may be necessary to enforce patents issued to us, to protect our proprietary
29rights, 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 potential 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.We are
dependent uponsubject to tax audits by various tax authorities in many jurisdictions. From time to time we may be audited by thecontinued services of key members oftax authorities and were subject to tax audits in France, the U.S. and Germany during the year ended June 30, 2004. The tax audits in France and the U.S. were concluded in the year ended June 30, 2004 with no material adjustments. The German tax audit remains ongoing. Any assessment resulting from this audit could result in material changes to oursenior managementpast or future taxable income, tax payable or deferred tax assets, anda limited number of key employeescould require us to pay penalties andconsultants. The loss of the services of any one of these individualsinterest that couldsignificantly disruptmaterially adversely affect ouroperations. 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.financial results.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;.- 39 -
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 orlosses. 30We are subject to an ongoing tax audit, the results of which may require significant tax adjustments. We are subject to an ongoing auditlosses; andother activities of ourtax 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.competitors.If a natural or
man mademan-made disaster strikes our manufacturing facilities, we will be unable to manufacture our products for a substantial amount of time and our sales and profitability will decline.We manufacture a significant portion of our products in our facilities in Australia. TheseOur facilities and the manufacturing equipment we use to produce our products would be costly to replace and could require substantiallead timelead-time to repair or replace. The facilities may be affected by natural orman mademan-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 byit difficult for another companymore difficult.to acquire us. 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 oursecurityholders.security holders. 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 of U.S. 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 andthreetwo of oureightfive executive 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 counsel31that 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- 40 -
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTSAND SUPPLEMENTARY DATA
a) Index to Consolidated Financial Statements
Report 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 a) Index to Consolidated Financial Statementsb) Supplementary Data
b) Supplementary Data Quarterly Financial Information (unaudited) - The quarterly results for the years ended June 30,
20012004 and20002003 are summarized below (in thousands, except per share amounts):
2004 First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Fiscal
Year
Net revenues
$ 72,878 $ 82,292 $ 91,277 $ 92,891 $ 339,338 Gross profit
47,158 52,424 57,550 59,604 216,736 Net income
12,249 14,151 15,029 15,855 57,284 Basic earnings per share
$ 0.36 $ 0.42 $ 0.45 $ 0.47 $ 1.70 Diluted earnings per share
$ 0.35 $ 0.40 $ 0.43 $ 0.45 $ 1.63
2001 ------------------------------------------------ First Second Third Fourth Fiscal Quarter Quarter Quarter Quarter Year ------------------------------------------------Net revenues $31,082 $34,366 $ 42,680 $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 per share $ 0.21 $ 0.22 ($0.33) $ 0.27 $ 0.37 Diluted earnings per share $ 0.20 $ 0.21 ($0.30) $ 0.25 $ 0.352000 ------------------------------------------------ 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 per share $ 0.16 $ 0.18 $ 0.19 $ 0.20 $ 0.74 Diluted earnings per share $ 0.15 $ 0.17 $ 0.18 $ 0.19 $ 0.69b) Supplementary Data, continued /(1)/
2003 First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Fiscal
Year
Net revenues
$ 58,586 $ 65,293 $ 68,996 $ 80,695 $ 273,570 Gross profit
37,697 41,839 43,187 50,364 173,087 Net income
9,571 10,384 12,250 13,524 45,729 Basic earnings per share
$ 0.29 $ 0.31 $ 0.37 $ 0.41 $ 1.38 Diluted earnings per share
$ 0.28 $ 0.30 $ 0.35 $ 0.39 $ 1.33 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.
Item 9 Changes
ITEM 9 CHANGESINAND DISAGREEMENTSWITH ACCOUNTANTSON ACCOUNTINGAND FINANCIAL DISCLOSURE None.
ITEM 9A CONTROLSAND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
Disagreementsreported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such- 41 -
information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with
Accountants on Accountingthe participation of our management, including our Chief Executive Officer and Chief FinancialDisclosure None. 32PART III Item 10 Directors and Executive OfficersOfficer, of theRegistranteffectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2004. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART III
ITEM 10 DIRECTORSAND EXECUTIVE OFFICERSOFTHE REGISTRANT Incorporated by reference to our definitive Proxy Statement for our November
5, 2001,18, 2004, meeting of stockholders, which will be filed with the Securities and Exchange Commission within 120 days after June 30,2001. Item 11 Executive Compensation2004.
ITEM 11 EXECUTIVE COMPENSATION Incorporated by reference to our definitive Proxy Statement for our November
5, 2001,18, 2004, meeting of stockholders, which will be filed with the Securities and Exchange Commission within 120 days after June 30,2001. Item 12 Security Ownership of Certain Beneficial Owners and Management2004.
ITEM 12 SECURITY OWNERSHIPOF CERTAIN BENEFICIAL OWNERSAND MANAGEMENTAND RELATED STOCKHOLDER MATTERS Incorporated by reference to our definitive Proxy Statement for our November
5, 2001,18, 2004, meeting of stockholders, which will be filed with the Securities and Exchange Commission within 120 days after June 30,2001. Item 13 Certain Relationships and Related Transactions2004.
ITEM 13 CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS No material transactions.
33
ITEM 14 PRINCIPAL ACCOUNTANT FEESAND SERVICES Incorporated by reference to our definitive Proxy Statement for our November 18, 2004, meeting of stockholders, which will be filed with the Securities and Exchange Commission within 120 days after June 30, 2004.
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PART IV
Item 14 Exhibits,
ITEM 15 EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, SCHEDULE,AND REPORTSON FORM 8-K
A. The following documents are filed as part of this report:
1. Consolidated Financial Statements Schedule,and ScheduleThe 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. Exhibits 2.1 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(6)
3.1 Certificate of Incorporation of Registrant, as amended(1)
3.2 By-laws of Registrant(1)
4.1 Form of certificate evidencing shares of Common Stock(1)
4.2 Rights agreement dated as of April 23, 1997(2)
4.3 Indenture dated as of June 20, 2001, between ResMed Inc and American Stock Transfer & Trust Company(5)
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 LLC (5)
4.5 Registration Rights Agreement dated as of May 14, 2002 between ResMed Inc., and Mr Leslie Hoffman(6)
10.1 1995 Stock Option Plan(1)
10.2 1997 Equity Participation Plan(3)
10.3 Licensing Agreement between the University of Sydney and ResMed Limited dated May 17, 1991, as amended(1)
10.5 Loan Agreement between the Australian Trade Commission and ResMed Limited dated May 3, 1994(1)
10.6 Lease for 10121 Carroll Canyon Road, San Diego CA 92131-1109, USA(4)
10.7 Sale and Leaseback Agreements for 97 Waterloo Rd, North Ryde, Australia(5)
10.8 Employment Agreement dated as of May 14, 2002, between Servo Magnetics Acquisition Inc., and Mr Leslie Hoffman(6)
10.9 Agreement for the purchase of Lot 6001, Norwest Boulevarde, Norwest Business Park, Baulkham Hills, Australia(6)
10.10 2003 Employee Stock Purchase Plan(7)
11.1 Computation of Earnings per Common Share
21.1 Subsidiaries of the Registrant
23.1 Independent Registered Public Accounting Firm’s Consent and Report on Schedule
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31.1 Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(1) Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (No. 33-91094) declared effective on June 1, 1995.
(2) Incorporated by reference to the Registrant’s Registration Statement on Form 8-A12G filed on April 25, 1997.
(3) Incorporated by reference to the Registrant’s 1997 Proxy Statement.
(4) Incorporated by reference to the Registrant’s Report on Form 10-K dated June 30, 1998.
(5) Incorporated by reference to the Registrant’s Report on Form 10-K for the year ended June 30, 2001.
(6) Incorporated by reference to the Registrant’s Report on Form 10-K for the year ended June 30, 2002.
(7) Incorporated by reference to the Registrant’s 2003 Proxy Statement. B. Reports on Form 8-K
a) The following documents are filed as part of this report: 1. Consolidated 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. Exhibits 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* 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 ofOn April
23, 1997*** 4.3 Indenture dated as of June 20, 2001, between ResMed Inc and American Stock Transfer & Trust Company 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 LLC 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 10121 Carroll Canyon Road, San Diego CA 92131- 1109, USA***** 11.1 Computation of Earnings per Common Share 21.1 Subsidiaries of the Registrant 23.1 Independent Auditors' Consent and Report on Schedule -------------------- * Incorporated by reference to the Registrant's Report on Form 8-K dated March 2, 2001 ** 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). ***** Incorporated by reference to the Registrant's Report on Form 10-K dated June 30, 1998 (File No. 0-26038) 34b) Reports on Form 8-K On May 1, 200129, 2004 wefiled 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 filedfurnished a report on Form 8-K that announcedour 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. 35SIGNATURES 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,PresidentPh.D., ResMed Inc.’s Chairman of the Board and Chief Executive Officer,President and Chief Executive Officer /S/ ADRIAN M. SMITH ------------------------------------------------------- Adrian M. Smith Vice President Finance and Chief Financial Officer Pursuantstated on April 28, 2004 that, in his view, analyst estimates of ResMed’s net profit for the fiscal year ending June 30, 2004, of approximately $56 million “are not silly.” Dr. Farrell also announced that ResMed is considering de-listing from the Australian Stock Exchange due to the expenses associated with complying with two sets of listing requirements,of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant andparticularly given differences in thecapacitiesregulatory requirements, and the potential impact ResMed’s policy of not paying dividends may have onthe 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 BartlettIndependent Auditors' Reportits trading price in Australia.- 44 -
REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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,
2001,2004, and2000,2003, and the related consolidated statements of income,stockholders'stockholders’ equity, and cash flows for each of the years in the three-year period ended June 30,2001.2004. These consolidated financial statements are the responsibility of theCompany'sCompany’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
auditingthe standardsgenerally accepted inof theUnited States of America.Public Company Public Oversight Board (United States). 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,
20012004 and2000,2003, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30,2001,2004, in conformity withaccounting principlesU.S. generally accepted accounting principles.As discussed in Note 8 to the
United Statesconsolidated financial statements, the Company has adopted the provisions ofAmerica. /s/ KPMG LLP KPMG LLP San Diego, California August 3, 2001 F-1ResMed Inc And SubsidiariesSFAS No. 142 “Accounting for Goodwill and Other Intangible Assets” and changed its method of accounting for goodwill in 2002 accordingly.
/s/ KPMG LLP
San Diego, California
August 13, 2004
F1
Consolidated Balance Sheets
June 30,
20012004 and2000 (In2003(In thousands, except share and per share data)
June 30, June 30, 2001 2000 -------------------------------------Assets Current assets: Cash and cash equivalents $ 40,136 $ 18,250 Marketable securities available for sale (note 3) 62,616 3,713 Accounts receivable, net of allowance for doubtful accounts of $892 and $833 at June 30, 2001 and 2000, respectively 32,248 24,688 Inventories, net (note 4) 29,994 15,802 Deferred income taxes (note 10) 4,152 2,361 Prepaid expenses and other current assets 8,736 4,358 ------------------------------------- Total current assets 177,882 69,172 ------------------------------------- Property, plant and equipment, net of accumulated depreciation of $19,930 at June 30, 2001 and $13,552 at June 30, 2000 (note 5) 55,092 36,576 Patents, net of accumulated amortization of $1,030 and $789 at June 30, 2001 and 2000, respectively 1,390 1,342 Goodwill, net of accumulated amortization of $3,193 and $2,003 at June 30, 2001 and 2000, respectively 47,870 5,626 Other assets 5,856 2,878 ------------------------------------- Total assets $288,090 $115,594 ===================================== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 7,971 $ 5,929 Accrued expenses (note 6) 16,751 9,224 Income taxes payable 8,888 6,469 ------------------------------------- Total current liabilities 33,610 21,622 Non current liabilities: Deferred revenue 4,114 - Convertible subordinated notes (note 7) 150,000 - ------------------------------------- Total non current liabilities 154,114 - ------------------------------------- Total liabilities 187,724 21,622 ------------------------------------- Stockholders' equity: (note 8) 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, 50,000,000 shares authorized; Issued and outstanding 31,478,780 at June 30, 2001 and 30,593,921 at June 30, 2000 126 122 Additional paid-in capital 52,675 41,495 Retained earnings 77,137 65,507 Accumulated other comprehensive loss (29,572) (13,152) ------------------------------------- Total stockholders' equity 100,366 93,972 ------------------------------------- Commitments and contingencies (notes 13 and 16) - - Total liabilities and stockholders' equity $288,090 $115,594 =====================================
June 30,
2004
June 30,
2003
Assets
Current assets:
Cash and cash equivalents
128,907 $ 114,491 Marketable securities available for sale (note 4)
12,021 6,533 Accounts receivable, net of allowance for doubtful accounts of $3,197 and $2,474 at June 30, 2004 and 2003, respectively
67,242 56,694 Inventories, net (note 5)
55,797 49,386 Deferred income taxes (note 13)
7,041 8,301 Prepaid expenses and other current assets
6,821 6,500 Total current assets
277,829 241,905 Property, plant and equipment, net of accumulated depreciation of $60,330 and $45,379 at June 30, 2004 and 2003 respectively (note 7)
147,268 104,687 Patents, net of accumulated amortization of $4,961 and $3,437 at June 30, 2004 and 2003, respectively
4,814 3,745 Goodwill (note 8)
106,075 102,160 Other assets
8,173 7,098 Total non-current assets
266,330 217,690 Total assets
$ 544,159 $ 459,595 Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$ 18,574 $ 19,368 Accrued expenses (note 9)
22,591 19,140 Deferred Revenue
8,759 6,355 Income taxes payable
8,470 3,408 Current portion of deferred profit on sale-leaseback
2,197 2,312 Total current liabilities
60,591 50,583 Non-current liabilities:
Deferred revenue
8,819 7,210 Convertible subordinated notes (note 10)
113,250 113,250 Deferred profit on sale-leaseback
- 2,119 Total non-current liabilities
122,069 122,579 Total liabilities
182,660 173,162 Commitments and contingencies (notes 16 and 18)
- - Stockholders’ equity: (note 11)
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, 100,000,000 shares authorized;
Issued and outstanding 33,858,272 at June 30, 2004 and 33,370,885 at June 30, 2003
(excluding 886,369 and 415,365 shares held as Treasury Stock respectively)
135 134 Additional paid-in capital
132,875 107,432 Retained earnings
217,656 160,372 Treasury stock
(30,440 ) (11,415 ) Accumulated other comprehensive income
41,273 29,910 Total stockholders’ equity
361,499 286,433 Total liabilities and stockholders’ equity
$ 544,159 $ 459,595 See accompanying notes to consolidated financial statements.
F-2ResMed Inc and SubsidiariesF2
Consolidated Statements of Income
Years
endedEnded June 30,2001, 20002004, 2003 and1999 (In2002(In thousands, except share and per share data)
June 30, June 30, June 30, 2001 2000 1999 --------------------------------------------------------Net revenues $155,156 $115,615 $88,627 Cost of sales 50,377 36,991 29,416 -------------------------------------------------------- Gross profit 104,779 78,624 59,211 -------------------------------------------------------- Operating expenses: Selling, general and administrative 49,364 36,987 27,414 Provision for restructure (note 6) 550 - - In-process research and development write off (note 14) 17,677 - - Research and development 11,146 8,499 6,542 -------------------------------------------------------- Total operating expenses 78,737 45,486 33,956 -------------------------------------------------------- Income from operations 26,042 33,138 25,255 -------------------------------------------------------- Other income (expenses): Interest income (expense), net (762) 801 779 Government grants 72 279 833 Other, net (note 9) 1,962 (52) (2,290) -------------------------------------------------------- Total other income (expenses), net 1,272 1,028 (678) -------------------------------------------------------- Income before income taxes 27,314 34,166 24,577 Income taxes (note 10) 15,684 11,940 8,475 -------------------------------------------------------- Net income $ 11,630 $ 22,226 $16,102 ======================================================== Basic earnings per share $0.37 $0.74 $0.55 Diluted earnings per share $0.35 $0.69 $0.52 Basic shares outstanding 31,129 30,153 29,416 Diluted shares outstanding 33,484 32,303 31,068
June 30,
2004
June 30,
2003
June 30,
2002
Net revenues
$ 339,338 $ 273,570 $ 204,076 Cost of sales
122,602 100,483 70,827 Gross profit
216,736 173,087 133,249 Operating expenses:
Selling, general and administrative
104,706 85,313 64,481 Research and development
26,169 20,534 14,910 Donations to Research Foundations
500 - 2,349 In-process research and development write off
- - 350 Total operating expenses
131,375 105,847 82,090 Income from operations
85,361 67,240 51,159 Other income (expenses):
Gain on extinguishment of debt
- 529 6,549 Interest income (expense), net
(1,683 ) (2,549 ) (3,224 ) Other, net (note 12)
990 1,907 108 Total other income (expenses), net
(693 ) (113 ) 3,433 Income before income taxes
84,668 67,127 54,592 Income taxes (note 13)
27,384 21,398 17,086 Net income
$ 57,284 $ 45,729 $ 37,506 Basic earnings per share
$ 1.70 $ 1.38 $ 1.17 Diluted earnings per share
$ 1.63 $ 1.33 $ 1.10 Basic shares outstanding
33,694 33,054 32,174 Diluted shares outstanding
35,125 34,439 34,080 See accompanying notes to consolidated financial statements.
F-3ResMed Inc And SubsidiariesF3
Consolidated Statements of
Stockholders'Stockholders’ EquityYears ended June 30,
2001, 20002004, 2003 and1999 (In2002(In thousands)
Accumulated Additional other Common stock paid-in Retained comprehensive Comprehensive Shares Amount capital Earnings income (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 30, 1999 29,616 118 33,677 43,281 (5,429) 71,647 Common stock issued to consultants 10 - 126 - - 126 Common stock issued on exercise of options (note 8) 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 30, 2000 30,594 $122 41,495 65,507 (13,152) 93,972 Common stock issued on exercise of options (note 8) 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) (16,420) --------------- Comprehensive income/(loss) $ (4,790) =============== Balance, June 30, 2001 31,479 $126 $52,675 $77,137 $(29,572) $100,366 ==============================================================
Additional Accumulated
OtherCommon Stock Paid-in Treasury Stock Retained Comprehensive Comprehensive Shares Amount Capital Shares Amount Earnings Income (loss) Total Income Balance, June 30, 2001
31,479 $ 126 $ 52,675 - - $ 77,137 $ (29,572 ) $ 100,366 Common stock issued on exercise of options (note 11)
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 37,506 Other comprehensive income
Foreign currency translation adjustments
21,342 21,342 21,342 Unrealized gains on marketable securities
105 105 105 Comprehensive income/(loss)
$ 58,953 Balance, June 30, 2002
33,108 132 94,153 (290 ) (7,873 ) 114,643 (8,125 ) 192,930 Common stock issued on exercise of options (note 11)
678 2 9,029 9,031 Treasury stock purchases
(125 ) (3,542 ) (3,542 ) Tax benefit from exercise of options
4,250 4,250 Comprehensive income:
Net income
45,729 45,729 45,729 Other comprehensive income
Foreign currency translation adjustments
38,131 38,131 38,131 Unrealized losses on marketable securities
(96 ) (96 ) (96 ) Comprehensive income/(loss)
$ 83,764 Balance, June 30, 2003
33,786 134 107,432 (415 ) (11,415 ) 160,372 29,910 286,433 Common stock issued on exercise of options (note 11)
958 3 20,338 20,341 Treasury stock purchases
(2 ) (471 ) (19,025 ) (19,027 ) Tax benefit from exercise of options
5,105 5,105 Comprehensive income:
Net income
57,284 57,284 57,284 Other comprehensive income
Foreign currency translation adjustments
11,366 11,366 11,366 Unrealized losses on marketable securities
(3 ) (3 ) (3 ) Comprehensive income/(loss)
$ 68,647 Balance, June 30, 2004
34,744 $ 135 $ 132,875 (886 ) $ (30,440 ) $ 217,656 $ 41,273 $ 361,499 See accompanying notes to consolidated financial statements.
F-4ResMed Inc And SubsidiariesF4
Consolidated Statements of Cash Flows
Years ended June 30,
2001, 20002004, 2003 and1999 (In2002(In thousands)
June 30, June 30, June 30, 2001 2000 1999 ---------------------------------------------------------Cash flows from operating activities: Net income $ 11,630 $ 22,226 $ 16,102 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,015 6,248 3,973 Goodwill amortization 1,430 690 633 Provision for service warranties 174 184 240 Deferred income taxes (2,306) 77 549 Foreign currency options revaluation 2,766 2,158 125 Non cash consulting expenses - 126 - Restructuring provision 550 - - Purchased in-process research and development write off 17,677 - - Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable, net (5,531) (7,394) (5,516) Inventories (8,130) (6,027) (2,919) Prepaid expenses and other current assets (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 --------------------------------------------------------- Net cash provided by operating activities 29,520 20,275 18,188 --------------------------------------------------------- Cash flows from investing activities: Purchases of property, plant and equipment (27,459) (16,168) (20,515) Purchase of marketable securities - available for sale (79,879) (36,804) (7,290) Proceeds from sale of marketable securities - available for sale 20,976 38,717 6,862 Patent registration costs (516) (961) (445) Business acquisitions, net of cash acquired of $367 (note 14) (55,070) (576) (2,024) Purchases of investments (2,602) (2,732) (1,529) --------------------------------------------------------- Net cash used in investing activities (144,550) (18,524) (24,941) --------------------------------------------------------- Cash flows from financing activities: Proceeds from issuance of common stock, net 7,943 6,380 2,125 Repayment of borrowings (82,854) - (235) Proceeds from borrowings, net of borrowing costs 213,937 - - --------------------------------------------------------- Net cash provided by financing activities 139,026 6,380 1,890 --------------------------------------------------------- Effect of exchange rate changes on cash (2,110) (989) 445 --------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 21,886 7,142 (4,418) Cash and cash equivalents at beginning of the year 18,250 11,108 15,526 --------------------------------------------------------- Cash and cash equivalents at end of the year $ 40,136 $ 18,250 $ 11,108 ========================================================= Supplemental disclosure of cash flow information: Income taxes paid $ 12,908 $ 9,716 $ 5,374 Interest paid 1,439 - - ========================================================= Fair value of assets acquired in acquisition $ 33,139 $ 383 - Liabilities assumed (24,821) (36) - Goodwill on acquisition 47,119 229 2,024 --------------------------------------------------------- Cash paid for acquisition $ 55,437 $ 576 $ 2,024 =========================================================
June 30,
2004June 30,
2003June 30,
2002Cash flows from operating activities:
Net income
$ 57,284 $ 45,729 $ 37,506 Adjustments to reconcile net income to net cash provided by operating activities:
by operating activities:
Depreciation and amortization
17,867 12,583 9,972 Provision for service warranties
213 332 (85 ) Deferred income taxes
1,259 2,002 (6,153 ) Foreign currency options revaluation
982 (2,117 ) 767 Deferred borrowing costs
804 834 1,254 Tax benefit from stock options exercised
5,105 4,250 6,919 Gain on extinguishment of debt
- (529 ) (6,549 ) Release of profit on sale of building
(2,440 ) (2,012 ) - Other, net
- - (162 ) Purchased in-process research and development write off
- - 350 Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net
(13,129 ) (6,102 ) (9,765 ) Inventories, net
(6,722 ) (2,988 ) (7,063 ) Prepaid expenses and other current assets
15 (2,333 ) 4,785 Accounts payable, accrued expenses and other liabilities
15,303 9,635 3,864 Net cash provided by operating activities
76,541 59,284 35,640 Cash flows from investing activities:
Purchases of property, plant and equipment
(57,246 ) (25,635 ) (28,185 ) Purchases of marketable securities - available for sale
(78,890 ) (13,544 ) (393,072 ) Proceeds from sale of marketable securities - available for sale
73,376 26,845 435,871 Patent registration costs
(2,358 ) (1,560 ) (1,720 ) Business acquisitions, net of cash acquired
(184 ) (300 ) (13,871 ) Purchases of non-trading investments
(1,535 ) (1,625 ) (3,987 ) Proceeds from sale of non-trading investments
- 3,936 - Proceeds from sale-leaseback
- - 18,500 Net cash provided by (used in) investing activities
(66,837 ) (11,883 ) 13,536 Cash flows from financing activities:
Proceeds from issuance of common stock, net
20,341 9,031 9,781 Repayment of borrowings
- - (3,022 ) Proceeds from borrowings, net of borrowing costs
- - 28,402 Redemption of borrowings, convertible note
- (9,217 ) (48,454 ) Purchases of treasury stock
(19,027 ) (3,542 ) (7,873 ) Installment payment for property purchase
- (12,609 ) - Net cash provided by (used in) financing activities
1,314 (16,337 ) (21,166 ) Effect of exchange rate changes on cash
3,398 10,567 4,714 Net increase in cash and cash equivalents
14,416 41,631 32,724 Cash and cash equivalents at beginning of the year
114,491 72,860 40,136 Cash and cash equivalents at end of the year
$ 128,907 $ 114,491 $ 72,860 Supplemental disclosure of cash flow information:
Income taxes paid
$ 15,141 $ 21,308 $ 18,328 Interest paid
4,530 4,530 6,557 Fair value of assets acquired in acquisitions
95 - $ 9,060 Liabilities assumed
- - (5,872 ) Goodwill on acquisition
89 300 36,279 Fair value of shares issued for acquisitions
- - (24,784 ) Cash paid for acquisition, including acquisition costs
$ 184 $ 300 $ 14,683 See accompanying notes to consolidated financial statements.
F-5ResMed Inc And SubsidiariesF5
Notes to Consolidated Financial Statements
June 30,
20012004 and2000 1. Organization and Basis of Presentation2003
(1) Organization and Basis of Presentation ResMed
IncInc. (the"Company"“Company”) is a DelawarecorporationCorporation formed in March 1994 as a holding company for the ResMedHoldings Ltd (RHL), a company resident in Australia. The Company designs, manufacturesGroup. Through our subsidiaries, we design, manufacture andmarketsmarket devices for the evaluation and treatment ofsleep disorderedsleep-disordered breathing, primarily obstructive sleep apnea.The Company's corporate officesOur manufacturing operations arebased in San Diego, California with its principal manufacturing operationlocated inAustralia. Other majorAustralia, Germany, and the United States of America. Major distribution and sales sites are located in the United States of America, Germany, France, United Kingdom,France, Germany, SwedenSwitzerland, Australia andSingapore. 2. Summary of Significant Accounting Policies (a) Basis of ConsolidationSweden.
(2) Summary 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
onin consolidation.The preparation of financial statements in conformity with
accounting principlesU.S. generally acceptedin the United States of Americaaccounting principles requires management estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ frommanagement'smanagement’s estimates.(b) Revenue Recognition
(b) Revenue Recognition Revenue on product sales is generally recorded upon shipment, at which time title transfers to the
time of shipment.customer. Revenue on product sales which require customer acceptance is not recorded until acceptance is received. Royalty revenue from license agreements is recorded when earned. Service revenue received in advance from service contracts is initiallycapitalizeddeferred andprogressivelyrecognizedas revenueratably over the life of the service contract. Revenue received in advance from rental unit contracts is initially deferred and recognized ratably over the life of the rental contract. Revenue from sale of marketing or distribution rights is initiallycapitalizeddeferred andprogressivelyrecognized ratably as revenue over the life of the contract.(c) CashFreight charges billed to customers are included in revenue. All freight-related expenses are charged to cost of sales.We do not offer a right of return or other recourse with respect to the sale of our products, other than returns for product defects or other warranty claims, nor do we offer variable sale prices for subsequent events or activities. However, as part of our sales processes we may provide upfront discounts for large orders, one time special pricing to support new product introductions, sales rebates for centralized purchasing entities or price-breaks for regular order volumes. The costs of all such programs are recorded as an adjustment to revenue. In our U.S. sales activities we use a number of manufacturer representatives to sell our products. These representatives are paid a direct commission on sales and
Cash Equivalentsact as an integral component of our U.S. sales force. We do not sell our products to these representatives and do not recognize revenue on such shipments. Our products are predominantly therapy-based equipment and require no installation. As such, we have no significant installation obligations.
(c) Cash and Cash Equivalents Cash equivalents
includinginclude 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) InventoriesF6
RESMED INC.AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
(2) Summary of Significant Accounting Policies, Continued
(d) Inventories Inventories are stated at the lower of cost,
or market,determined principally by the first-in, first-outmethod. (e) Property, Plantmethod, or net realizable value. We review andEquipmentprovide for any product obsolescence in our manufacturing and distribution operations with assessments of individual products and components (based on estimated future usage and sales) being performed throughout the year.
(e) Property, Plant and Equipment Property, plant and equipment, including rental equipment, is recorded at cost. Depreciation expense is computed using the
straight-linestraight–line method over the estimated useful lives of the assets, generally two to ten years except for buildings which are depreciated over an estimated useful life of 40 years.Straight-lineStraight–line and accelerated methods of depreciation are used for tax purposes. Maintenance and repairs are charged to expense as incurred.F-6ResMed Inc And Subsidiaries Notes to Consolidated Financial Statements June 30, 2001 and 2000 2. Summary of Significant Accounting Policies (continued) (f) Patents
(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”) 142, Goodwill
Goodwill arising from business acquisitions has beenand Other Intangible Assets. As allowed under the Standard, we 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, we 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 to20 years. The Company carries goodwill at cost net of accumulated amortization. The Company reviews its goodwill carrying value when events indicate thathave animpairment 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 toits discounted cash flow value andthe amortization periodis re-assessed. Amortization expenseor residual values of other intangible assets.We conducted our annual review for goodwill impairment as at June 30, 2004. In conducting our review of goodwill impairment, we identified reporting units, being components of our operating segment, as each of the entities acquired and giving rise to the goodwill. The fair value for each reporting unit was
$1,430,000, $690,000determined based on discounted cash flows and$633,000 for the years endedinvolved a two step process as follows:
Step 1-
Compare the fair value for each reporting unit to its carrying value, including goodwill. For each reporting unit where the carrying value, including goodwill, exceeds the reporting unit’s fair value, move on to step 2. If a reporting unit’s fair value exceeds the carrying value, no further work is performed and no impairment charge is necessary. F7
RESMED INC.AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30,
2001, 20002004 and1999, 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 development2003
(2) Summary of Significant Accounting Policies, Continued
(g) Goodwill (continued)
Step 2- Allocate the fair value of the reporting unit to its identifiable tangible and non-goodwill intangible assets and liabilities. This will derive an implied fair value for the goodwill. Then, compare the implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill is greater than the implied fair value of its goodwill, an impairment loss must be recognized for the excess. The results of the
Company's proprietary positive airway pressure technology and to assist development of export markets. Grants have been recognized in the amount of $72,000, $279,000 and $833,000 for the years ended June 30, 2001, 2000 and 1999, respectively. (i) Foreign Currencyreview indicated that no impaired goodwill exists.
(h) Foreign Currency The consolidated financial statements of
the Company's non-U.S.our 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 ofnon-U.S.non–U.S. subsidiaries whose functional currencies are other than the U.S. dollar are translated atyearperiod end exchange rates, and revenue and expense transactions are translated at average exchange rates for theyear.period. Cumulative translation adjustments are recognized as part of comprehensive income, as described in Note15,6, and are included in accumulated other comprehensivelossincome 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.(j)
(i) Research and Development Research
and Development All researchand development costs are expensed in the period incurred.F-7ResMed Inc And Subsidiaries Notes to Consolidated Financial Statements June 30, 2001 and 2000 2. Summary of Significant Accounting Policies (continued) (k) Earnings Per Share
(j) Earnings Per Share The weighted average shares used to calculate basic earnings per share were
31,129,000, 30,153,000,33,694,000, 33,054,000, and29,416,00032,174,000 for the years ended June 30,2001, 20002004, 2003 and1999,2002, 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) by2,355,000, 2,150,0001,431,000, 1,385,000 and1,652,0001,906,000 for the years ended June 30,2001, 20002004, 2003 and1999,2002, respectively.(l) Financial InstrumentsStock options of 751,000, 1,408,000 and 726,000 for the years ended June 30, 2004, 2003 and 2002 respectively, were not included in the computation of diluted earnings per share as the effect of exercising these options would have been anti-dilutive.
(k) Financial Instruments The carrying value of financial instruments, such as
ofcash and cash equivalents, marketable securities- available for sale,available-for-sale, accountsreceivable, government grantsreceivable and accounts payable approximate their fair value because of theirshort termshort-term nature. The estimated fair value of theCompany'sCompany’s long-term debt at June 30,20012004F8
RESMED INC.AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
(2) Summary of Significant Accounting Policies, Continued
(k) Financial Instruments (continued) approximates
$147.9$119.9 million compared with the carrying value of$150.0$113.3 million. Foreign currency option contracts are marked to market and therefore reflect their fair value.The Company doesWe do 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
(l) Foreign Exchange Risk Management We enter into various types of foreign exchange contracts in managing
itsour foreign exchange risk, including derivative financial instruments encompassing forward exchange contracts and foreign currency options.The purpose of
the Company'sour foreign currency hedging activities is to protectthe Companyus 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 entersWe enter 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 recognizedOur foreign currency derivatives portfolio represents a cash flow hedge program against the net cash flow of our international manufacturing operations. We have determined our hedge program to be a non-effective hedge as
incurreddefined under SFAS 133. The foreign currency derivatives portfolio is recorded in the consolidated balance sheetsas eitherat fair value and included in other assets or otherliabilities andliabilities.All movements in the fair value of the foreign currency derivatives are recorded within other income, net on
the Company'sour consolidated statements of income.Unrealized gains and losses on currency derivativesWe are
determined based on dealer quoted prices. The Company isexposed to credit-related losses in the event ofnon- performancenon-performance bycounterpartiescounter parties to financial instruments. The credit exposure of foreign exchange options at June 30,20012004 and June 30, 2003 was$597,000,$2.0 million and $2.6 million respectively, which represents the positive fair value of options held bythe Company. The Companyus.We held foreign currency option contracts with notional amounts
totalling $223,752,000totaling $140.6 million and$171,530,000$124.5 million at June 30,20012004 and2000,2003, respectively to hedge foreign currency items. These contracts mature at various dates prior to July2002. F-8ResMed Inc And Subsidiaries Notes to Consolidated Financial Statements June 30, 2001 and 2000 2. Summary of Significant Accounting Policies (continued) (n) Income Taxes The Company accounts2006.
(m) Income Taxes We account for income taxes under the asset and liability method.
DeferredWe recognize deferred tax assets and liabilitiesare recognizedfor 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 SecuritiesF9
RESMED INC.AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
(2) Summary of Significant Accounting Policies, Continued
(n) Marketable Securities Management determines the appropriate classification of
itsour investments in debt and equity securities at the time of purchase and re-evaluates such determination at each balance sheet date. Debt securities for whichthe Company doeswe do not have the intent or ability to hold to maturity are classified asavailable for sale.available-for-sale. Securitiesavailable for saleavailable-for-sale are carried at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensiveincome (loss).income.At June 30,
20012004 and2000,2003, theCompany'sinvestments in debt securities were classified on the accompanying consolidated balance sheet as marketablesecurities available for sale.securities-available-for-sale. These investments are diversified among high credit quality securities in accordance withthe Company'sour investment policy.The amortized costAs at June 30, 2004 and 2003, contractual maturities 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) Warrantymarketable securities-available-for-sale were (in thousands):
2004 2003 Due less than one year
$ 11,025 $ 6,533 Due one to less than three years
- - Due more than three years
996 - Total
$ 12,021 $ 6,533
(o) Warranty Estimated future warranty
obligationscosts related to certain products areprovided by chargescharged to operations in the period in which the related revenue is recognized.(q) Impairment of Long-Lived Assets The Company
(p) Impairment of Long-Lived Assets We periodically
evaluatesevaluate 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-9ResMed Inc And Subsidiaries
(q) Cost- Method Investments The aggregate carrying amount of our cost-method investments at June 30, 2004 were $5.3 million. At June 30, 2004, we reviewed the carrying value of these investments and determined that the fair value of the investments exceeded the carrying values and no unrealised losses existed.
(r) Capitalized Software Production Costs Software development costs have been capitalized and are being amortized to the 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 $1.2 million and $1.6 million at June 30, 2004 and 2003 respectively.
F10
RESMED INC.AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30,
20012004 and2000 3. Marketable Securities2003
(2) Summary of Significant Accounting Policies, Continued
(s) Stock-based Employee Compensation We have granted stock options to personnel, including officers and directors, under both our 1995 Option Plan and our 1997 Equity Participation Plan. These options have expiration dates of ten years from the date of grant and vest over three or four years. We granted these options with the exercise price equal to the market value as determined at the date of grant.
We apply APB Opinion No. 25 in accounting for our equity plans and as all stock options are issued at market price on date of issue, no compensation cost has been recognized for the grant of stock options. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS 123, Accounting for Stock-Based Compensation, to stock-based employee compensation (in thousands except per share data):
Years Ended June 30 In thousands, except per share data 2004 2003 2002 Net income, as reported
$ 57,284 $ 45,729 $ 37,506 Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects.
9,394 14,102 18,975 Pro forma net income
47,890 31,627 18,531 Earnings per share:
Basic - as reported
$ 1.70 $ 1.38 $ 1.17 Basic - pro forma
$ 1.42 $ 0.96 $ 0.58 Diluted - as reported
$ 1.63 $ 1.33 $ 1.10 Diluted - pro forma
$ 1.36 $ 0.92 $ 0.54 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 2.9%, 2.8% and 4.8% for the years ended June 30, 2004, 2003 and 2002 respectively; no dividend yield; expected option lives of 3.7 and 3.3 and 5.5 years for the years ended June 30, 2004, 2003 and 2002 respectively, and volatility of 43%, 63% and 60% for the years ended June 30, 2004, 2003 and 2002 respectively.
The following table illustrates the fair value of compensation costs as determined under the provisions of SFAS 123 by year of option grant (in thousands, except per share data):
Fiscal Year of Grant 2004 June 30
20032002 Average
Exercise PriceFair Value at
Date of Grant1999
- - 5 11.93 5.27 2000
- 55 971 14.14 6.56 2001
348 2,664 7,142 27.71 13.41 2002
3,658 9,942 21,074 50.18 26.21 2003
4,466 9,035 - 26.54 12.22 2004
$ 4,223 $ - $ - $ 40.60 $ 14.89 Compensation Cost
$ 12,695 $ 21,696 $ 29,192 Tax Effected
$ 9,394 $ 14,102 $ 18,975 F11
RESMED INC.AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
(3) New Accounting Pronouncements In December 2003, the SEC issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” (SAB No. 104), which codifies, revises and rescinds certain sections of SAB No. 101, “Revenue Recognition”, in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes noted in SAB No. 104 did not have a material effect on our consolidated results of operations, consolidated financial position or consolidated cash flows.
In May 2003, the Financial Accounting Standards Board (“FASB”) issued statement of financial accounting standard (“SFAS”) 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We adopted SFAS 150 effective July 1, 2003. The adoption of SFAS 150 did not have a material impact on our consolidated financial position or results of operation.
In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS 133. SFAS 149 is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS 149 did not have a material impact on our results of operations, financial position or liquidity.
In January 2003, the FASB issued Interpretation No. (“FIN”) 46, Consolidation of Variable Interest Entities, which addresses the consolidation of certain entities (“variable interest entities”) in which an enterprise has a controlling financial interest through other than voting interests. FIN 46 requires that a variable interest entity be consolidated by the holder of the majority of the expected risks and rewards associated with the activities of the variable interest entity. FIN 46 was effective for variable interest entities entered into prior to February 1, 2003 in periods beginning after June 15, 2003. The adoption of FIN 46 did not have a material impact on our financial condition or results of operation. In December 2003, the FASB issued a revision to FIN 46, to clarify some requirements and add new scope exceptions. The revised guidance is effective for the first reporting period beginning after December 15, 2003. The adoption of the provisions of FIN 46R did not have a material impact on our financial condition or results of operations.
In November 2002, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables”. EITF Issue No. 00-21 addresses how to determine whether a revenue arrangement involving multiple deliverable contains more than one unit of accounting for the purposes of revenue recognition and how the revenue arrangement consideration should be measured and allocated to the separate units of accounting. EITF Issue No. 00-21 applies to revenue arrangements entered into after June 15, 2003. The adoption of this statement did not have a material impact on our financial condition or results of operations.
(4) Marketable Securities The estimated fair value of marketable securities available for sale as of June 30,
20012004 and2000,2003, was$62,616,000$12.0 million and$3,713,000,$6.5 million respectively.The estimated fair value of each investment approximates the amortized cost, and therefore, there are no unrealized gains or losses as ofF12
RESMED INC.AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30,
2001 or 2000.2004 and 2003
(4) Marketable Securities, Continued Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
4. Inventories
(5) Inventories Inventories, net were comprised of the following as of June 30,
20012004 and20002003 (in thousands):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
2004 2003 Raw materials
$ 15,277 $ 13,712 Work in progress
2,254 2,288 Finished goods
38,266 33,386 $ 55,797 $ 49,386
(6) Comprehensive Income The table below presents other comprehensive income:
(in US$ 000’s) Foreign
Currency
ItemsUnrealized
Gains on
SecuritiesAccumulated Other
Comprehensive
IncomeRetained
EarningsAccumulated
Comprehensive
IncomeBeginning balance, July 1, 2003
$ 29,901 $ 9 $ 29,910 $ 160,372 $ 190,282 Current period change
11,366 (3 ) 11,363 57,284 68,647 Ending balance, June 30, 2004
$ 41,267 $ 6 $ 41,273 $ 217,656 $ 258,929 The Company does not provide for U.S. income taxes on foreign currency translation adjustments since it does not provide for such taxes on undistributed earnings of foreign subsidiaries. Accumulated other comprehensive income at June 30, 2004 and
EquipmentJune 30, 2003 consisted of foreign currency translation adjustments with net credit balances of $41.3 million and $29.9 million, respectively and unrealized gains on securities with net credit balance of $6,000 (net of tax $2,000) and $9,000 (net of tax $6,000), respectively.
(7) Property, Plant and Equipment Property, plant and equipment is comprised of the following as of June 30,
20012004 and20002003 (in thousands):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 Construction in Process - 4,645 --------------------- 75,022 50,128 Accumulated depreciation and amortization (19,930) (13,552) --------------------- $ 55,092 $ 36,576 ===================== F-10ResMed Inc And Subsidiaries
2004 2003 Machinery and equipment
$ 33,605 $ 25,278 Computer equipment
33,542 28,487 Furniture and fixtures
13,613 11,528 Vehicles
2,015 1,749 Clinical, demonstration and rental equipment
21,763 18,056 Leasehold improvements
1,346 1,213 Land
32,990 31,913 Buildings
68,249 19,231 Construction in Progress
475 12,611 207,598 150,066 Accumulated depreciation and amortization
(60,330 ) (45,379 ) $ 147,268 $ 104,687 F13
RESMED INC.AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30,
20012004 and2000 6. Accrued Expenses Accrued expenses at2003
(8) Goodwill and Other Intangible Assets The Company adopted SFAS 142 on July 1, 2001. Under SFAS 142, goodwill amortization expense has not been recorded for the years ended June 30,
20012004, 2003 and2000 consist2002.Changes in the carrying amount 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 Provision for restructure(a) 375 - Promotional programs 1,198 - Other 1,157 933 --------------------------- $16,751 $9,224 =========================== (a) Subsequent to the purchase of MAP Medizin-Technologie GmbH, the Company has begun limited restructuring of MAP's activities andgoodwill for the year ended June 30,2001, has taken a charge2004, were as follows:
(In US$ thousands) 2004 Balance at June 30, 2003
$ 102,160 Foreign currency translation adjustments
3,826 Goodwill on acquisition of the assets of Respro Medical Company Limited
(our Hong Kong distributor)
89 Balance at June 30, 2004
$ 106,075 Other intangible assets amounted to $4.8 million (net of
$550,000 associated with the saleaccumulated amortization of $5.0 million) andclosure$3.7 million (net ofMAP's unprofitable French operation. At June 30, 2001, the provision for restructure was $375,000 representing amounts to be paid on terminationaccumulated amortization ofemployees and leases. 7. Long-Term Debt Long-term debt$3.4 million) at June 30,20012004 and20002003, respectively. These intangible assets consist of patents and are amortized over thefollowing (in thousands): 2001 2000 ----------------------------- 4% Convertible subordinate notes due 2006 $150,000 $ - =============================estimated useful life of the patent, generally five years. There are no expected residual values related to these intangible assets.
(9) Accrued expenses at June 30, 2004 and 2003 consist of the following (in thousands):
2004 2003 Service warranties
$ 1,557 $ 1,304 Consulting and professional fees
1,275 2,001 Value added taxes and other taxes due
1,877 1,173 Employee related costs
14,349 9,849 Research foundation grants
- 899 Convertible note interest
126 126 Promotional programs
1,157 1,426 Other
2,250 2,362 $ 22,591 $ 19,140
(10) Long-Term Debt On June 20, 2001
the Companywe issued $150.0 million of 4% convertible subordinated notes that are due to mature on June 20, 2006. On July 3, 2001,the Companywe received an additional $30.0 million in over allotments. This increased the total amount of convertible subordinated notes issued to $180.0 million.During the year ended June 30, 2004, we did not repurchase any of our convertible subordinated notes.
During the year ended June 30, 2003, we repurchased $10.0 million face value of our convertible subordinated notes. The total purchase price of the notes was $9.4 million, including $0.2 million in accrued interest. We recognized a gain of $0.3 million, net of tax of $0.2 million, on these transactions.
During the year ended June 30, 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.
F14
RESMED INC.AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
(10) Long-Term Debt, Continued As at June 30, 2004, we had convertible subordinated notes outstanding of $113.3 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 currently 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 CompanyWe 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 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. 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-11ResMed Inc And Subsidiaries Notes to Consolidated Financial Statements June 30, 2001 and 2000 7. Long-Term Debt (continued) The Company may alsoredeem 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 ofthe Company'sour 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'sour existing and future senior indebtedness and will be effectively subordinated to all of the indebtedness and liabilities ofthe Company'sour subsidiaries. The indenture governing the noteswilldoes not limitthe Companyus oritsour subsidiaries from incurring senior indebtedness or other indebtedness.8. Stockholders' EquityInterest is to be paid on the notes on June 20 and December 20 of each year.
(11) Stockholders’ Equity Stock
Options -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"“Plans”). These options have expiration dates of ten years from the date of grant and vest over three or four 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 2001 Price 2000 Price 1999 Price ---------------------------------------------------------------------Outstanding at beginning of year 3,298,022 $10.12 3,142,272 $ 7.32 $ 2,403,160 $ 4.57 Granted 1,569,690 27.27 1,336,900 14.14 1,265,000 11.31 Exercised (884,859) 8.98 (967,985) 6.59 (512,688) 4.15 Forfeited (130,035) 17.78 (213,165) 10.04 (13,200) 11.32 --------------------------------------------------------------------- Outstanding at end of year 3,852,818 $17.14 3,298,022 $10.12 3,142,272 $ 7.32 --------------------------------------------------------------------- Price range of granted options $ 24-$40 $ 13-$27 $ 10-$12 Options exercisable at end of year 1,240,427 $ 8.02 1,368,286 $ 6.92 1,254,126 $ 4.00 ---------------------------------------------------------------------F-12ResMed Inc And Subsidiaries
2004 Weighted
Average
Exercise
Price2003 Weighted
Average
Exercise
Price2002 Weighted
Average
Exercise
Price ($)Outstanding at beginning of year
4,745,178 $ 29.04 4,200,998 $ 27.94 3,852,818 $ 17.14 Granted
910,237 41.32 1,470,675 26.54 1,328,600 50.18 Exercised
(958,391 ) 21.23 (678,400 ) 13.31 (775,803 ) 12.61 Forfeited
(280,668 ) 40.56 (248,095 ) 38.85 (204,617 ) 26.75 Outstanding at end of year
4,416,356 $ 32.53 4,745,178 $ 29.04 4,200,998 $ 27.94 Price range of granted options
$ 39.19-51.56 $ 25.42-37.40 $ 33.15-$52.20 Options exercisable at end of year
2,406,581 $ 28.70 2,192,309 $ 23.32 1,631,044 $ 13.76 F15
RESMED INC.AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30,
20012004 and2000 8. Stockholders' Equity (continued)2003
(11) 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,
2001.2004.
Exercise Prices Number Outstanding at
June 30, 2004
Weighted Average
Remaining Contractual Life
Number Exercisable at
June 30, 2004
$ 0 - $10
234,125 2.66 234,125 $11 - $20
482,293 4.72 482,293 $21 - $30
1,449,802 7.48 795,539 $31 - $40
452,652 7.87 256,126 $41 - $50
853,837 9.46 16,733 $51 - $60
943,647 7.12 621,765 4,416,356 7.27 2,406,581 The following table summarizes in-the-money and out-of-the-money options at June 30, 2004.
Exercisable Unexercisable Total Shares Wtd. Avg.
Exer. Price ($)Shares Wtd. Avg.
Exer. Price ($)Shares Wtd. Avg.
Exer. Price ($)In-the-Money
2,353,914 28.17 1,983,442 36.58 4,337,356 32.03 Out-of-the-Money(1)
52,667 52.20 26,333 52.20 79,000 52.20 Total Options Outstanding
2,406,581 28.70 2,009,775 36.79 4,416,356 32.38
Weighted Average Exercise Prices Number Outstanding at Remaining Number Exercisable at(1) Out-of-the-money options are those options with an exercise price equal to or above the closing sales price of the Company’s common stock on the New York Stock Exchange on June 30, 2001 Contractual Life2004 ($50.96 per share).F16
RESMED INC.AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
(11) Stockholders’ Equity, Continued The following table summarizes outstanding stock option plan and employee share plans balances as at June 30, 2004.
Plan Category Number of securities
to be issued upon
exercise of
outstanding
options
Weighted-average
exercise price of
outstanding options
Number of securities
remaining available
for future issuance
under equity
compensation plans
1997 Equity participation
plan approved by
security holders
4,416,356 $ 32.38 30,265 (1) Employee stock purchase
plan approved by security
holders
- - 3,250,000 Equity compensation
plans not approved by
security holders
- - - Total
4,416,356 $ 32.38 3,280,265
(1) The total number of authorized shares of common stock under the 1997 Equity Participation Plan increases at the beginning of each fiscal year by an amount equal to 4% of the outstanding common stock on the last day of the preceding fiscal year. Stock Options by Recipient
The following table summarizes stock option grants by recipient, with executive officers (as defined in Exchange Act Rule 3b-7) separately disclosed. As at June 30, 2004, the Company had 7 executive officers.
June 30, 2004 June 30, 2003 June 30, 2002 Non-Executive Directors
60,000 60,000 73,000 Executive Officers
91,000 278,500 167,000 Staff
759,237 1,132,175 1,088,600 Gross Options Issued
910,237 1,470,675 1,328,600 Employees
1,520 1,464 1,250 Average Options per Employee
599 1,005 1,063 The following table discloses employee and executive option grants as a percentage of total options.
2004 2003 2002 Net grants during the period as% of outstanding shares (%)
3 4 4 Grants to executive officers during the period as% of total options granted (%)
10 19 13 Grants to executive officers during the period as% of outstanding shares (%)
- 1 1 Cumulative options held by executive officers as% of total options outstanding (%)
13 16 16 F17
RESMED INC.AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
(11) Stockholders’ Equity, Continued Options granted to executive officers during the fiscal year ended June 30, 2004 are as noted below.
Individual Grants Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
for Option Term(1)(2)Number of
Securities
Underlying
Options Per
Grant
Percent of Total
Options Granted to
Employees (%)
Exercise
Price
($/Share)
Expiration Date 5% 10% Peter Farrell
60,000 7.1 % $ 41.49 Dec 18, 2013 $ 1,372,476 $ 3,380,475 Paul Eisen
15,000 1.8 % $ 41.49 Dec 18, 2013 $ 343,119 $ 845,119 David Pendarvis
6,000 0.7 % $ 41.49 Dec 18, 2013 $ 137,248 $ 338,047 Adrian Smith
10,000 1.2 % $ 41.49 Dec 18, 2013 $ 228,746 $ 563,412 Total
91,000 10.8 %
(1) Represents options granted under our 1997 Equity Participation Plan, which typically are exercisable starting 12 months after the grant date, with 33% of the shares covered thereby becoming exercisable at that time and an additional 33% of the option shares becoming exercisable on each successive anniversary date, with all option shares exercisable beginning on either the third or fourth anniversary date. Under the terms of the 1997 Plan, this exercise schedule may be accelerated in certain specific situations. In addition, we have the right to require the surrender of outstanding options upon the grant of lower priced options to the same individual.
(2) Assumed annual rates of stock appreciation for illustrative purposes only. Actual stock prices will vary from time to time based upon market factors and our financial performance. No assurance can be given that such rates will be achieved. The following table summarizes option exercises and remaining holdings of executive officers during the year ended June 30, 2004.
No. of Securities Underlying
All Unexercised Options
Value of Unexercised In-the
Money Options(1)
Shares
Acquired on
Exercise
Value Realized Exercisable Unexercisable Exercisable Unexercisable Peter Farrell
74,374 $ 1,848,622 180,593 126,667 $ 4,560,328 $ 1,600,733 Kieran Gallahue
- 0 16,666 133,334 $ 316,487 $ 2,532,013 David Pendarvis
- 0 10,000 26,000 $ 184,450 $ 425,720 Paul Eisen
- 0 2,000 19,000 $ 51,080 $ 244,210 Adrian Smith
19,000 796,362 53,333 21,667 $ 1,512,250 $ 267,025
(1) Represents the amount by which the closing sales price of our common stock on the New York Stock Exchange on June 30, 2001 ----------------------------------------------------------------------------------------------------------------------------------$ 0 - $10 735,578 5.35 732,244 $11 - $20 1,577,049 7.64 489,510 $21 - $30 1,178,901 9.42 18,673 $31 - $40 347,290 9.75 - $41 - $50 14,000 9.58 - ---------------------------------------------------------------------------------------------------------------------------------- 3,852,818 7.96 1,240,427 ----------------------------------------------------------------------------------------------------------------------------------2004 ($50.96 per share) multiplied by the number of shares to which the options apply exceeded the aggregate exercise price of such options.Employee Stock Purchase Plan (the “ESPP”). The
Company applies APB Opinion No. 25ESPP was approved by our shareholders at the Annual General Meeting inaccountingNovember 2003. Under the ESPP, participants are offered the right to purchase shares of our common stock at a discount during successive offering periods. Each offering period under the ESPP will be forits Plansa period of time determined by the Board of Directors’ Compensation Committee of no less than 3 months andaccordingly,nocompensation cost has been recognizedmore than 27 months. The purchase price foritsour common stockoptions. Hadunder theCompany determined compensation cost based onESPP will be the lower of 85% of the fairvalue at the grant date for its stock options under SFAS 123, the Company's net income would have been reduced to the pro forma amounts indicated below:
------------------------------------------------------------------------------------------------------------------------------- 2001 2000 1999Net income (in thousands): As reported $11,630 $22,226 $16,102 Pro forma 2,859 17,511 12,951 Basic earnings per common share: As reported $ 0.37 $ 0.74 $ 0.55 Pro forma $ 0.09 $ 0.58 $ 0.44 Diluted income per common and common equivalent share: As reported $ 0.35 $ 0.69 $ 0.52 Pro forma $ 0.09 $ 0.54 $ 0.42 -------------------------------------------------------------------------------------------------------------------------------The fairmarket value ofeachour common stockoption grant was estimatedon the date of grantusingor 85% of theBlack-Scholes option-pricing model with the following assumptions: weighted average risk-free interest rates of 5.75% for fiscal 2001, and 6.5% and 5.8% for fiscal 2000 and 1999, respectively; no dividend yield; expected lives of four years; and volatility of 61% for 2001 and 2000 and 55% for 1999. F-13ResMed Inc And SubsidiariesF18
RESMED INC.AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30,
20012004 and2000 8. Stockholders' Equity (continued)2003
(11) Stockholders’ Equity, Continued fair market value of our common stock on the date of purchase. An individual participant cannot subscribe for more than $25,000 in common stock during any calendar year. There is a maximum of 3,250,000 shares of our common stock authorized for sale under the ESPP.
Preferred
Stock -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 30,2001.2004.Stock Purchase
Rights -Rights. In April 1997, the Company implemented a plan to---------------------protectstockholders'stockholders’ rights in the event of a proposed takeover of the Company. Under the plan, each share of theCompany'sCompany’s outstanding common stock carries one right to purchase Series A Junior Participating Preferred Stock (the"Right"“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 theCompany'sCompany’s outstanding common stock. The Rights are redeemable at $0.01 per Right and expire in 2007.Common
Stock - During fiscal 2000,Stock. On June 6, 2002, the Board of Directorsdeclaredauthorized the Company to repurchase up to 4.0 million shares of outstanding common stock. During fiscal year 2004 and 2003, the Company repurchased 471,000 and 125,000 shares at atwo- ------------ for-one splitcost of $19.0 million and $3.5 million respectively. Shares that are repurchased are classified as treasury stock pending future use and reduce theCompany'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 valuenumber ofthe additionalsharesas a result of the stock split. 9.outstanding used in calculating earnings per share.
(12) Other, net Other, net
Other, netin the statement of operations is comprised of the following at June 30,2001, 20002004, 2003 and19992002 (in thousands):
2004 2003 2002 Gain/(loss) on foreign currency hedging position
$ (982 ) $ 2,117 $ (767 ) Gain/(loss) on foreign currency transactions
1,637 (562 ) 182 Realized gain (loss) on sale of marketable securities
(11 ) 115 301 Other
346 237 392 $ 990 $ 1,907 $ 108
------------------------------------------------------- 2001 2000 1999 -------------------------------------------------------License fees $ 125 $ 167 $ 58 Gain/(loss) on foreign currency hedging position (2,766) (1,863) 435 Gain/(loss) on foreign currency transactions 4,747 1,681 (2,888) Write back of investment - - 300 Other (144) (37) (195) ------------------------------------------------------- $ 1,962 $ (52) $(2,290) =======================================================(13) Income Taxes 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 TaxesIncome before income taxes for the years ended June 30,
2001, 2000,2004, 2003, and1999,2002, was taxed under the following jurisdictions (in thousands):
--------------------------------------------------- 2001 2000 1999 ---------------------------------------------------U.S. $ 3,482 $ 4,644 $ 4,043 Non-U.S. 23,832 29,522 20,534 --------------------------------------------------- $27,314 $34,166 $24,577 ===================================================F-14ResMed Inc And Subsidiaries
2004 2003 2002 U.S.
$ 1,290 $ 3,061 $ 418 Non-U.S.
83,378 64,066 54,174 $ 84,668 $ 67,127 $ 54,592 F19
RESMED INC.AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30,
20012004 and2000 10. Income Taxes (continued)2003
(13) Income Taxes, Continued The provision for income taxes is presented below (in thousands):
------------------------------------------------ 2001 2000 1999 ------------------------------------------------Current: Federal $ 2,938 $ 1,396 $ 772 State 203 77 174 Non-U.S. 14,790 10,390 6,980 ------------------------------------------------ 17,931 11,863 7,926 ------------------------------------------------ Deferred: Federal (652) 390 360 State 90 14 (12) Non-U.S. (1,685) (327) 201 ------------------------------------------------ (2,247) 77 549 ------------------------------------------------ Provision for income taxes $15,684 $11,940 $8,475 ================================================
2004 2003 2002 Current:
Federal
$ 3,567 $ 1,303 $ 4,962 State
372 14 752 Non-U.S.
22,186 18,079 17,525 26,125 19,396 23,239 Deferred:
Federal
1,293 892 (3,494 ) State
(84 ) 325 (568 ) Non-U.S.
50 785 (2,091 ) 1,259 2,002 (6,153 ) Provision for income taxes
$ 27,384 $ 21,398 $ 17,086 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%35% to pretax income as a result of the following (in thousands):
2004 2003 2002 Taxes computed at statutory U.S. rate
$ 28,787 $ 23,495 $ 19,108 Increase (decrease) in income taxes resulting from:
State income taxes, net of U.S. tax benefit
254 274 363 Non-deductible expenses
312 243 116 Research and development credit
(2,582 ) (1,690 ) (888 ) Tax effect of intercompany dividends
129 - 2,577 Write-off of net operating losses due to business cessation
- - 1,046 Change in valuation allowance
5,074 457 (2,614 ) Effect of non-U.S. tax rates
(2,930 ) (2,498 ) (3,379 ) In-process research and development write-off
- - 123 Foreign tax credits
(772 ) - - Other
(888 ) 1,117 634 $ 27,384 $ 21,398 $ 17,086 F20
RESMED INC.AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
------------------------------------------------ 2001 2000 1999 ------------------------------------------------Computed 'expected' tax expense $ 9,287 $11,616 $8,356 Increase (decrease) in income taxes Resulting from: Non-deductible expenses 460 715 302 Research and development credit (781) (430) (250) Tax effect of intercompany dividends (3,885) (508) 13 Utilization of net operating loss carryforwards (5) (4) - Change in valuation allowance 4,431 22 71 Effect of non-U.S. tax rates 4 714 455 State income taxes 356 235 131 In-process research and development write-off 6,010 - - Provision for restructure 187 - - Other (380) (420) (603) ------------------------------------------------ $15,684 $11,940 $8,475 ================================================(13) Income Taxes, Continued The
tax effects of temporary differences that give rise to significant portionscomponents of the Company’s deferred tax assets anddeferred taxliabilitiesare comprised of the followingat June 30,20012004 and20002003 (in thousands):
------------------------------ 2001 2000 ------------------------------Deferred tax assets: Employee benefit obligations $ 573 $ 534 Provision for service warranties 203 203 Provision for doubtful debts 317 254 Net operating loss carryforwards 2,206 79 Deferred foreign tax credits 7,193 970 Accrual for legal costs 5 76 Intercompany profit in inventories 3,492 2,188 Property, plant and equipment 189 290 Other accruals 663 418 ------------------------------ 14,925 5,012 Less valuation allowance (5,592) (86) ------------------------------ Deferred tax assets $ 9,333 $4,926 ------------------------------F-15ResMed Inc And Subsidiaries Notes to Consolidated Financial Statementsare as follows:
2004 2003 Deferred tax assets:
Employee benefit obligations
$1,732 $1,208 Inventory
735 1,068 Provision for service warranties
419 343 Provision for doubtful debts
867 768 Net operating loss carryforwards
723 1,277 Foreign tax credits
8,836 7,288 AMT tax credit
634 1,667 Accrual for legal costs
64 307 Intercompany profit in inventories
8,958 6,013 Capitalized software
308 472 Deferred gain on sale-leaseback
659 1,329 Other
1,821 2,112 25,756 23,852 Less valuation allowance
(8,459 ) (3,385 ) Deferred tax assets
17,297 20,467 Deferred tax liabilities:
Patents
(91 ) (93 ) Unrealized gain on foreign currency options
(599 ) (773 ) Unrealized foreign exchange gains
(1,472 ) (1,678 ) Property, plant and equipment
(2,885 ) (2,244 ) Undistributed German income
- (3,448 ) Deferred tax deductible goodwill amortization
(4,780 ) (3,634 ) Other
(429 ) (296 ) Deferred tax liabilities
(10,256 ) (12,166 ) Net deferred tax asset
$7,041 $8,301 As of June 30,
20012004, the Company had $2,669,000 and2000 10. Income Taxes (continued)$1,771,000 of U.S. state and non-U.S. net operating loss carryforwards, respectively, which expire in various years through 2024 or carryforward indefinitely. The Company also had foreign tax credit carryforwards of $8,836,000 and alternative minimum tax credit carryforwards of $634,000. The foreign tax credit carryforwards have expiration dates through 2009.
------------------------------- 2001 2000 -------------------------------Deferred tax liabilities: Patents $ (382) (413) Capitalized software (495) (453) Unrealized gain on foreign currency options (179) (306) Unrealized foreign exchange gains - (196) Undistributed German income (2,104) (992) Deferred tax deductible goodwill amortization (1,698) - Other receivables (197) (168) Other (126) (37) ------------------------------- Deferred tax liabilities (5,181) (2,565) ------------------------------- Net deferred tax asset $ 4,152 2,361 ===============================The valuation allowance at June 30,
2001, primarily2004, relates to a provision for uncertainty as to the utilization ofdeferredforeign tax credits of$4,322,000$8,033,000 and net operating loss carryforwards of$1,046,000 relating$426,000 for Malaysia and Austria.F21
RESMED INC.AND SUBSIDIARIES
Notes to
MAP. The net change in the valuation allowance was an increase of $5,506,000 for the year endedConsolidated Financial StatementsJune 30,
2001, in comparison to an increase2004 and 2003
(13) Income Taxes, Continued The Company has not provided U.S. income taxes on undistributed earnings of
$22,000 and an increasecertain of$48,000, for the years ended June 30, 2000 and 1999, respectively.its non-U.S. subsidiaries. Themeasurementtotal amount ofdeferred tax assets and liabilitiesthese undistributed earnings at June 30,of each year, reflect foreign currency translation adjustments, changes in enacted tax rates and changes in temporary differences. Income taxes in 2001, 2000 and 1999 were reduced by $5,000, $4,000 and $0, respectively, through the utilization of net operating loss carryforwards. At June 30, 2001, the net operating loss carryforwards relate2004 amounted toMAP, Singapore and Malaysia. 11. Employee Retirement Plansapproximately $150,829,000.
(14) 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:
(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.TheFrom July 1, 2002 the Company contributes to the plans at the rate of8%9% of the salaries of all Australian employees. Prior to July 2002, the Company contributed 8% for all qualified employees. Total Company contributions to the plans for the years ended June 30,2001, 2000,2004, 2003, and19992002 were$814,000, $632,000$2,410,000, $1,663,391 and$457,000,$968,000, respectively.(2) United Kingdom - The Company contributes to a defined contribution plan for
--------------each permanent United Kingdom employee. All employees, after serving athree monththree-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 of3%5% of the salaries. Prior to January 2002, the Company contributed 3% for all qualified employees. Total Company contributions to the plan were$7,000, $8,000$33,000, $23,000 and$8,000$16,000 in fiscal2001, 2000,2004, 2003, and19992002 respectively.F-16ResMed Inc. And Subsidiaries Notes to Consolidated Financial Statements June 30, 2001 and 2000 11. Employee Retirement Plans (continued)(3) United 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$158,000, $123,000$362,000, $326,000 and$96,000$245,000 in fiscal2001, 20002004, 2003 and19992002 respectively.12. Segment Information(4) Switzerland - The Company sponsors a fixed return defined contribution fund for each permanent Swiss employee. As part of the Company’s contribution to the fund the company guarantees a fixed 3% net return on accumulated contributions per annum. The Company contributes to the plans at variable rates which have averaged 10% of salaries over the last three years. Total Company contributions to the plan were $139,000, $133,000 and $94,000 in fiscal 2004, 2003 and 2002 respectively.
(15) Segment Information The Company operates solely in the
sleep disorderedsleep-disordered breathing sector of the respiratory medicine industry. The Company therefore believes that, given the single market focus of its operations and theinter 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.F22
RESMED INC.AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
(15) Segment Information, Continued Financial information by geographic area for the years ended June 30,
2001, 20002004, 2003 and1999,2002, is summarized below (in thousands):
----------------------------------------------------------------------------- Rest of U.S.A Germany Australia France World Total -----------------------------------------------------------------------------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 Long lived assets $ 2,525 816 26,611 400 1,429 $ 31,781 =============================================================================F-17ResMed Inc And Subsidiaries Notes to Consolidated Financial Statements June 30, 2001 and 2000 12. Segment Information (continued)
U.S.A Germany Australia France Rest of
WorldTotal 2004
Revenue from external customers
$ 159,283 67,253 10,293 34,629 67,880 $ 339,338 Long lived assets
$ 33,010 6,842 108,683 1,075 5,831 $ 155,441 2003
Revenue from external customers
$ 124,375 51,992 6,972 27,745 62,486 $ 273,570 Long lived assets
$ 34,340 5,765 68,300 1,030 2,350 $ 111,785 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 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'sCompany’s operations in each geographical area and excludes patents, deferred tax assets and goodwill.13. Commitments
(16) 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,
20012004 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 ============================================================================
Years Operating
LeasesSub lease
rental incomeTotal net minimum
lease payments2005
4,947 387 4,560 2006
3,767 72 3,695 2007
1,411 - 1,411 2008
909 - 909 2009
189 189 Thereafter
- - - Total minimum lease payments
$ 11,223 $ 459 $ 10,764 Rent expenses under operating leases for the years ended June 30,
2001, 20002004, 2003 and19992002 were approximately$1,087,000, $744,000$5.5 million, $3.8 million and$789,000,$2.3 million, respectively.14. Business AcquisitionF23
RESMED INC.AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
(17) Business Acquisitions Fiscal year ended June 30, 2004
On
February 16, 2001July 2, 2003 we acquired theCompany's fully owned German Subsidiary, ResMed Beteiligungs GmbH, acquired all the common stockassets ofMAP Medizin-Technologie GmbH ("MAP''Respro Medical Company Limited (“Respro”), our Hong Kong distributor for total considerationincluding acquisition costs,of$55.4 million.$184,000 in cash. The acquisition has been accounted for as a purchase and accordingly, the results of operations ofMAPRespro has been included within our consolidated financial statements from July 2, 2003. An amount of $89,000, representing the excess of the purchase price over the fair value of net identifiable assets acquired of $95,000, has been recorded as goodwill.Fiscal year ended June 30, 2003
On July 24, 2002 we acquired the business of John Stark and Associates, our Texas representative, for total consideration of $0.3 million in cash. The acquisition has been accounted for as a purchase and accordingly, the results of operations of John Stark and Associates were included within the Company’s consolidated financial statements from July 24, 2002. An amount of $0.3 million representing the excess of the purchase price over the fair value of net identifiable assets acquired of $nil, has been recorded as goodwill.
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 accordingly, the results of operations of SMI have been included in the
Company'sCompany’s consolidated financial statements fromFebruary 16, 2001. TheMay 14, 2002. An amount of $30.7 million, representing the excess of the purchase price over the fair value of the net identifiable assets acquired of$47.1$1.9 million, has been recorded asgoodwill and is being amortized on a straight line basis over 20 years.goodwill.Purchased in-process research and development of
$17,677,000$0.4 million was expensed upon acquisition ofMAPSMI because technological feasibility of the products under development had not been established and no further alternative uses existed. The value ofin processin-process technology was calculated by identifying research projects in areas for which technological feasibility had not been established, estimating the costs to develop the purchasedin processin-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 werebetween 27% and 33%19% 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-18ResMed 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 30, 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 ----------------------- 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 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 businessSMI have been included inthe Company'sour consolidated financial statements fromJanuary 31, 2000. TheMay 14, 2002. An amount of $30.7 million, representing the excess of the purchase price over the fair value of the net identifiable assets acquired of$229,000$1.9 million, has been recorded asgoodwill 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 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 of comprehensive income that impacts the Company is foreign currency translation adjustments. The net loss associated with foreign currency translation adjustments 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-19ResMed Inc And Subsidiariesgoodwill.F24
RESMED INC.AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
(17) Business Acquisitions, Continued
Fiscal year ended June 30, 2002 (continued) 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
2000 15. Comprehensive Income (Continued) Comprehensive income/(loss) foraccordingly, theyears ended June 30, 2001, June 30, 2000results of operations of Labhardt AG have been included in the Company’s consolidated financial statements from November 15, 2001. An amount of $4.2 million, representing 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 Respro Medical Company Limited, John Stark and
June 30, 1999 was ($4.8) million, $14.5 millionAssociates, SMI and$18.4 million, respectively.Labhardt AG are not included as the effects would not be significant to the consolidated financial statements.
(18) Legal Actions The Company
does not provide for U.S. 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, 2001 and June 30, 2000 consisted of foreign currency translation adjustments and represent unrealized losses of $29.6 million and $13.2 million, respectively. 16. Legal Actions The Company is currentlywas engaged in litigation relating to the enforcement and defense of certain of itspatents.patents during the fiscal year ended June 30, 2004.1995 Litigation with Respironics. In January 1995,
the Companyour subsidiary, ResMed Limited, filed a complaint in the United States District Court for the Southern District of California seeking monetary damages from and injunctive relief against Respironics, Inc. for alleged infringement of threeResMedof its patents. In February 1995, Respironics filed a complaint in theUnited StatesU.S. District Court for the Western District of Pennsylvania, in Pittsburgh, againstthe CompanyResMed Limited seeking a declaratory judgment that Respironics, Inc. does not infringe claims of these patents and thatthe Company'sResMed Limited’s patents are invalid and unenforceable.The two actions were combinedOn September 5, 2003, ResMed and
are proceedingRespironics settled this action. ResMed and Respironics have dismissed all claims in theUnited Statesaction with prejudice.2002 Litigation with Respironics. On October 11, 2002, ResMed Inc, ResMed Corp, and ResMed Limited filed a lawsuit in U.S. District Court for the Southern District of California, in San Diego against Respironics, Inc. ResMed’s suit seeking a judgment that certain of Respironics’ mask products (Contour Deluxe, Comfort Classic, Comfort Select, and Image3 masks) infringe patents held by ResMed. The complaint further charged Respironics with copying ResMed’s proprietary mask technology, and alleged violation of the Lanham Act, trademark and trade dress infringement, and common law violations relating to the appearance of ResMed’s mask products. ResMed sought an injunction and damages. On March 4, 2003, the Court denied Respironics’ motion to transfer the case to the U.S. District Court for the Western District of Pennsylvania.
In June 1996, the Company filed an additional complaint againstOn October 16, 2002 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 GmbHInc. filed a lawsuit inthe Civil Chamber of MunichU.S. District Courtagainst Hofrichter GmbH seeking actual and exemplary monetary damagesfor theunauthorizedWestern District of Pennsylvania, in Pittsburgh, against ResMed Limited seeking a declaratory judgment that Respironics, Inc. does not infringe the patents that are the subject of ResMed’s October 11, 2002 complaint filed in San Diego, that such patents are invalid andinfringing useunenforceable and that Respironics has not committed any other trademark, trade dress or common law violations. On July 29, 2003, the court ordered the case transferred to the U.S. District Court for the Southern District of California.On September 5, 2003, ResMed and Respironics settled both lawsuits involved in the
Company's trademarks2002 Litigation. ResMed andpatents. An initial decision has been madeRespironics have dismissed all claims infavor of MAP. Hofrichter has filed an appealthe actions with prejudice.F25
RESMED INC.AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and
have sort Court determination that the MAP patents do not apply to certain Hofrichter products. While the Company is prosecuting the above actions, there can be no assurance that the Company will be successful.2003
(18) Legal Actions, Continued 2002 Litigation with Fisher & Paykel Healthcare. On
March 31, 2001, weAugust 26, 2002, ResMed Inc., ResMed Corp. and ResMed Limited filed a lawsuit inthe United StatesU.S. District Court for the Southern District of California, in San Diego againstMPV TrumaFisher & Paykel Healthcare Inc andTiara Medical Systems, Inc., seeking actualFisher & Paykel Healthcare Limited (“Fisher & Paykel Healthcare”). ResMed’s amended complaint sought a judgment that selected Fisher & Paykel Healthcare mask products infringe patents held by ResMed. The complaint further charged the defendants with the copying of ResMed proprietary mask technology andexemplary monetary damagesalleges violations of the Lanham Act, trademark andinjunctive relief for the unauthorized and infringing use of our trademarks,trade dress infringement andpatents relatedcommon law violations relating to the appearance of ResMed mask products.On May 6, 2003, ResMed and Fisher & Paykel Healthcare agreed to settle this patent infringement lawsuit. In accordance with the settlement, Fisher & Paykel introduced a new design of its mask in the United States and ResMed will not assert intellectual property claims against the new mask. ResMed has dismissed the lawsuit with prejudice.
Other Litigation. In addition to the matters described above, in the normal course of business, we are subject to routine litigation incidental 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 inbusiness. While theFederal 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 settlementresults of thisActionlitigation cannot be predicted with certainty, we believe that their final outcome will not have a material adverse effect onApril 16, 2001. F-20Schedule II -------------------------------------------------------------------------------- ResMed Inc and Subsidiaries Valuation and Qualifying Accounts and Reserves Years Ended June 30, 2001, 2000 and 1999 (in thousands)our consolidated financial statements taken as a whole.
----------------------------------------------------------------------- Balance at Charged to Other Balance at Beginning of costs(19) In-Process Research and (deductions) end of Period expenses period -----------------------------------------------------------------------Year ended June 30, 2001 Applied against asset account $833 681 (622) 892 Allowance for doubtful accounts ======================================================================= Year ended June 30, 2000 Applied against asset account Allowance for doubtful accounts $421 632 (220) 833 ======================================================================= Year ended June 30, 1999 Applied against asset account Allowance for doubtful accounts $248 348 (175) 421 =======================================================================Development ChargeSee accompanying independent auditor's report.Exhibit Index 2.1 Sale and Assignment Agreement dated as of February 16, 2001, between ResMed Inc, ResMed Beteilingungs GmbH and the shareholdersMAP
On acquisition of MAP Medizin-Technologie
GmbH* 3.1 CertificateGmbH (MAP) in February 2001, we recognized as an expense a charge ofIncorporation$17.7 million with respect to five in-process research and development programs under active development by MAP at date ofRegistrant, as amended** 3.2 By-lawsacquisition. The five projects were:
(i) A single-walled nasal cushion mask system.
(ii) A new headgear system
(iii) A standalone active humidifier
(iv) An autotitration CPAP device for treatment of OSA
(v) A new OSA diagnostic screening device. The status 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 datedeach project as of June20, 2001, between30, 2004 is as noted below:
(i) Single-walled nasal cushion The nasal cushion under development by MAP on acquisition was originally due for release in October 2001. Delays in the design and manufacturing process delayed the release for seven months, until April 2002. The delay in release of the product was not significant over its expected life cycle, and has made no significant impact on the net return assumptions used in the initial in-process research and development model. Since release, the product (now referred to as the Papillon) has met or exceeded all sales forecasts.
F26
RESMED INC.AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
(19) In-Process Research and Development Charge, Continued
(ii) New headgear The new headgear product line was withheld to coincide with the release of the Papillon mask system in April 2002 and so was also seven months behind schedule in projected release dates. Since release, the new headgear system has exceeded original sales projections and continues to meet or exceed initial expectations.
(iii) Standalone active humidifier Due to other priorities and to the introduction of integrated humidification flow generator devices by a number of competitors during fiscal 2002, we have abandoned the standalone humidifier project.
Given the relatively small revenue forecast of the product line in the in-process research and development model, the financial impact of this project is not material to ResMed
Incor the net return of the MAP acquisition.
(iv) Auto titration CPAP Device The main product development effort of MAP since acquisition has been on the completion of the Autotitration CPAP flow generator specified in the initial in-process research and
American Stock Transfer & Trust Company 4.4 Registration Rights Agreement dateddevelopment charge, now referred to as the Magellan. This project experienced some delays due to the complexity of the software algorithm development process and associated electronics resulting in the product being released in November 2002. Sales are now broadly consistent with our initial expectations.
(v) OSA diagnostic screening device MAP’s new diagnostic screening device, now called the microMESAM, was released in the German market in March 2004. We remain confident in the capacity of the device to enhance the diagnostic process, and remain confident in the potential of the product to significantly impact the treatment and diagnosis of obstructive sleep apnea in the German market.
As at June
20, 2001,30, 2004, four of the five programs have been completed with the release of the Papillon mask system, upgraded headgear, Magellan flow generator and MicroMESAM.Given the completion of the above research programs and performance of the associated product lines, we remain confident in the assumptions used to determine the in-process research and development charge and, as a result, the net return of the MAP acquisition.
F27
RESMED INC.AND SUBSIDIARIES
VALUATIONAND QUALIFYING ACCOUNTSAND RESERVES
YEARS ENDED JUNE 30, 2004, 2003AND 2002
(in thousands)
Balance at
Beginning of
PeriodCharged to
costs and
expensesOther
(deductions)Balance at
end of periodYear ended June 30, 2004
Applied against asset account
Allowance for doubtful accounts
$ 2,474 1,178 (455 ) 3,197 Year ended June 30, 2003
Applied against asset account
Allowance for doubtful accounts
$ 1,938 1,144 (608 ) 2,474 Year ended June 30, 2002
Applied against asset account
Allowance for doubtful accounts
$ 892 1,542 (496 ) 1,938 See accompanying report of independent registered public accounting firm.
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
and betweenthe undersigned, thereunto duly authorized.DATED August 27, 2004
ResMed
Inc, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Banc Alex BrownInc., William Blair & Company, L.L.C., Macquarie Bank Limited and UBS Warburg LLC 10.1 1995 Stock Option Plan** 10.2 1997 Equity Participation Plan**** 10.3 Licensing Agreement between
/S/ PETERC.FARRELL
Peter C. Farrell
President and Chief Executive Officer
Pursuant to the
Universityrequirements ofSydney 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 betweentheAustralian Trade Commission and ResMed Limited dated May 3, 1994** 10.6 Lease for 10121 Carroll Canyon Road, San Diego 92131-1109, U.S.A.***** 11.1 ComputationSecurities Exchange Act ofEarnings per Common Share 21.1 Subsidiaries1934, this report has been signed below by the following persons on behalf of the Registrant23.1 Independent Auditors' ConsentandReportin the capacities and onSchedule ------------------------------ * Incorporated by reference totheRegistrant's Report on Form 8-K dated March 2, 2001 ** Incorporated by reference to the Registrant's Registration Statement on Form S-1 (No. 33-91094) declared effective June 1, 1995. *** Incorporated by reference from the Registrants' Registration Statement on Form 8-A12G filed April 25, 1997. **** Incorporated by reference from the Registrant's 1997 Proxy Statement (File No. 0-26038)dates indicated.
SIGNATURE TITLE DATE /S/ PETER C. FARRELL
Peter C. Farrell
Chief Executive Officer,
President, Chairman of the Board
(Principal Executive Officer)
August 27, 2004 /S/ ADRIAN M. SMITH
Adrian M. Smith
Senior Vice President Finance and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
August 27, 2004 /S/ CHRISTOPHER G. ROBERTS
Christopher G. Roberts
Director
August 27, 2004 /S/ MICHAEL A. QUINN
Michael A. Quinn
Director
August 27, 2004 /S/ GARY W. PACE
Gary W. Pace
Director
August 27, 2004 /S/ DONAGH MCCARTHY
Donagh McCarthy
Director
August 27, 2004 /S/ CHRISTOPHER A. BARTLETT
Christopher Bartlett
Director
August 27, 2004 /S/ LOUIS A. SIMPSON
Louis Simpson
Director
August 27, 2004 RESMED INC.
***** Incorporated by reference from the Registrant's Report on Form 10-K dated June 30, 1998 (File No. 0-26038)AND SUBSIDIARIESEXHIBIT INDEX
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(6)
3.1 Certificate of Incorporation of Registrant, as amended (1)
3.2 By-laws of Registrant(1)
4.1 Form of certificate evidencing shares of Common Stock(1)
4.2 Rights agreement dated as of April 23, 1997(2)
4.3 Indenture dated as of June 20, 2001, between ResMed Inc and American Stock Transfer & Trust Company (5)
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 LLC(5)
4.5 Registration Rights Agreement dated as of May 14, 2002 between ResMed Inc., and Mr. Leslie Hoffman(6)
10.1 1995 Stock Option Plan(1)
10.2 1997 Equity Participation Plan(3)
10.3 Licensing Agreement between the University of Sydney and ResMed Limited dated May 17, 1991, as amended(1)
10.5 Loan Agreement between the Australian Trade Commission and ResMed Limited dated May 3, 1994(1)
10.6 Lease for 10121 Carroll Canyon Road, San Diego 92131-1109, U.S.A.(4)
10.7 Sale and Leaseback Agreements for 97 Waterloo Rd, North Ryde, Australia(5)
10.8 Employment Agreement dated as of May 14, 2002, between Servo Magnetics Acquisition Inc., and Mr. Leslie Hoffman(6)
10.9 Agreement for the purchase of Lot 6001, Norwest Boulevarde, Norwest Business Park, Baulkham Hills, Australia(6)
10.10 2003 Employee Stock Purchase Plan(7)
11.1 Computation of Earnings per Common Share
21.1 Subsidiaries of the Registrant
23.1 Independent Registered Public Accounting Firm’s Report on Schedule and Consent
31.1 Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(1) Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (No. 33-91094) declared effective on June 1, 1995.
(2) Incorporated by reference to the Registrant’s Registration Statement on Form 8-A12G filed on April 25, 1997.
(3) Incorporated by reference to the Registrant’s 1997 Proxy Statement.
(4) Incorporated by reference to the Registrant’s Report on Form 10-K dated June 30, 1998.
(5) Incorporated by reference to the Registrant’s Report on Form 10-K dated June 30, 2001.
(6) Incorporated by reference to the Registrant’s Report on Form 10-K dated June 30, 2002.
(7) Incorporated by reference to the Registrant’s 2003 Proxy Statement.