UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-K


 

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended June 30, 20042006

 

Commission file number: 0-26038001-15317

 

RESMED INC.

(Exact name of Registrantregistrant as specified in its Charter)

 

Delaware

(State or other jurisdiction of incorporation or organization)

 

98-0152841

(IRS Employer Identification No)No.)

 

14040 Danielson Street

Poway, CA 92064-6857

United States Ofof America

(Address of principal executive offices)

 

(858) 746-2400

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act

Title of each class

Common Stock, $.004 Par Value

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

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes [ x ]    No [  ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes [  ]    No [x]

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’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [  ]Accelerated filer [ x ]Non-accelerated filer [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes [x][  ]    No [ x ]

 

The aggregate market value of the voting stock held by non-affiliates of registrant as of December 31, 2003,2005 (the last business day of the registrant’s most recently completed second fiscal quarter), computed by reference to the closing sale price of such stock on the New York Stock Exchange, was approximately $1,466,319,000.$2,632,489,000. (All directors, executive officers, and 10% stockholders of Registrantregistrant are considered affiliates.)

 

At August 20, 2004,23, 2006, registrant had 33,825,33975,932,458 shares of Common Stock, $.004 par value, issued and outstanding. This number excludes 1,088,3592,254,918 shares held by the registrant as treasury shares.

 

Portions of registrant’s definitive Proxy Statement for its November 18, 20049, 2006 meeting of stockholders are incorporated by reference into Part III of this report.



 

CONTENTS

 


Cautionary Note Regarding Forward Looking Statements3

Part I

  

Item 1

  

Business

  3
   

Item 2

1A
  

PropertiesRisk Factors

  1821
   

Item 3

2
  

Legal ProceedingsProperties

  1827
   

Item 4

3
  

Legal Proceedings

27
Item 4Submission of Matters to a Vote of Security Holders

  1928

Part II

  

Item 5

  Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
  2029
   

Item 6

  

Selected Financial Data

  2231
   

Item 7

  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
  2332
   

Item 7A

  

Quantitative and Qualitative Disclosures About Market and Business Risks

  3348
   

Item 8

  

Consolidated Financial Statements and Supplementary Data

  4150
   

Item 9

  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
  4151
   

Item 9A

  

Controls and Procedures

  4151
Item 9BOther Information54

Part III

  

Item 10

  

Directors and Executive Officers of the Registrant

  4255
   

Item 11

  

Executive Compensation

  4255
   

Item 12

  Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
  4255
   

Item 13

  

Certain Relationships and Related Transactions

  4255
   

Item 14

  

Principal Accountant Fees and Services

  4255

Part IV

  

Item 15

  

Exhibits and Consolidated Financial Statement Schedule and Reports on Form 8-KSchedules

  4355
      

Signatures

  

Certifications

S-1

 

Activa, ActiveCell, Adapt SV, Adaptiv, Aerial, Aero-Click, Aero-Fix, ApneaLink, AutoVPAP, AutoScan, AutoSet, AutoSet CS, AutoSet Spirit, AutoSet T, AutoSet Vantage, AutoSet.com, AutoSet-CS.com, AutoView, Bubble Cushion, Bubble Mask, Elisée, Eole, Escape, Helia, HumidAire, HumidAire 2i, IPAP MAX, IPAP MIN, MEDDTRAXX,Kidsta, Magellan, MAP, MEPAL, MESAMIV, MicroMesam,Meridian, MESAM, minni Max, MaxNcpap, Mirage, Protégé, Moritz II biLEVEL, Papillon, Poly-MESAM, ResCap, ResAlarm, ResControl, ResMed, SleepKIT Solutions, S6, S7, S8, SELFSET, SleepVantage, SmartStart, Spirit, Spiro+, Sullivan, Swift, TiControl, TRAXX, Twister remote, Ultra Mirage, Vential, VPAP, VPAP MAX, Vsync,VS Easyfit, are our trademarks.

 

As used in this 10-K, the terms “we”, “us”, “our” and “the Company” refer to ResMed Inc., a Delaware corporation, and its subsidiaries, on a consolidated basis, unless otherwise stated.

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PART I


Forward-Looking Statements

This report contains or may contain certain forward-looking statements and information that are based on the beliefs of our management as well as estimates and assumptions made by, and information currently available to our management. All statements other than statements regarding historical facts are forward-looking statements. The words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “future” and other similar expressions generally identify forward-looking statements, including, in particular, statements regarding the development and approval of new products and product applications, market expansion, pending litigation and the development of new markets for our products, such as cardiovascular and stroke markets. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on these forward-looking statements each of which applies only as of the date of this report. Such forward-looking statements reflect the views of our management at the time such statements are made and are subject to a number of risks, uncertainties, estimates and assumptions, including, without limitation, and in addition to those identified in the text surrounding such statements, those identified in Item 1A “Risk Factors” and elsewhere in this report.

In addition, important factors to consider in evaluating such forward-looking statements include changes or developments in social, economic, market, legal or regulatory circumstances, changes in our business or growth strategy or an inability to execute our strategy due to changes in our industry or the economy generally, the emergence of new or growing competitors, the actions or omissions of third parties, including suppliers, customers, competitors and governmental authorities, and various other factors. Should any one or more of these risks or uncertainties materialize, or the underlying estimates or assumptions prove incorrect, actual results may vary significantly from those expressed in such forward-looking statements, and there can be no assurance that the forward-looking statements contained in this report will in fact occur.

 

ITEM 1BUSINESS

 

General

 

We are a leading developer, manufacturer and distributor of medical equipment for treating, diagnosing, and managing sleep-disordered breathing and other respiratory disorders. Sleep-disordered breathing, or SDB. SDB, includes obstructive sleep apnea, or OSA, and other respiratory disorders that occur during sleep. When we were formed in 1989, our primary purpose was to commercialize a treatment for OSA developed by Professor Colin Sullivan. 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 CPAP, we have developed a number of innovative products for SDB and other respiratory disorders including airflow generators, diagnostic products, mask systems, headgear and other accessories. Our growth has been fuelled by geographic expansion, increased awareness of SDBrespiratory conditions as a significant health concern among physicians and patients, and our research and product development effort.efforts.

 

We employ 1,520approximately 2,500 people and sell our products in over 6067 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.

 

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Corporate History

 

ResMed Inc., a Delaware corporation, was formed in March 1994 as the ultimate holding company for our domestic, AustralianAmericas, Asia-Pacific and European operating subsidiaries. On June 1, 1995, we completed an initial public offering of common stock and on June 2, 1995 our common stock commenced trading on the NASDAQ National Market. On September 30, 1999 we transferred our principal public listing to the New York Stock Exchange, (NYSE),or NYSE, trading under the ticker symbol RMD. On November 25, 1999, we established a secondary listing of our common stock via Chess Depositary Instruments, or CDI’s, on the Australian Stock Exchange, (ASX),or ASX, also under the symbol RMD. Ten CDI’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’s existing CPAP device business. Baxter had sold CPAP devices in Australia since 1988, having acquired the rights to the technology in 1987.

 

Since formation we have acquired a number of operating businesses including Servo Magnetics Inc, Labhardt AG, MAP Medizin Technologie GmbH, Dieter W. Priess Medtechnik, Premium Medical SARL, Innovmedics Pte Ltd and EINAR Egnell AB on May 14, 2002; November 15, 2001; February 16, 2001; February 7, 1996; June 12, 1996; November 1, 1997; and January 31, 2000 respectively. During the 1999 fiscal year we made an equity investment in Medcare Flaga hf (Medcare), based in Iceland. We now market Medcare’s polysomnographic products under the Embla and Embletta label in selected countries.including:

 

Name of EntityDate of Acquisition

Dieter W. Priess Medtechnik

February 7, 1996

Premium Medical SARL

June 12, 1996

Innovmedics Pte Ltd

November 1, 1997

EINAR Egnell AB

January 31, 2000

MAP Medizin Technologie GmbH

February 16, 2001

Labhardt AG

November 15, 2001

Servo Magnetics Inc.

May 14, 2002

John Stark and Associates

July 24, 2002

Respro Medical Company Limited

July 2, 2003

Resprecare BV

December 1, 2004

Hoefner Medizintechnik GmbH

February 14, 2005

Saime SA

May 19, 2005

Pulmomed Medizinisch-Technische Geräte GmbH

July 1, 2005

PolarMed Holding AS

December 1, 2005

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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, orcalled apneas, orand to near closures of the upper airways, orairway called 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

- 4 -


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 addition, 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 five adults have some form of obstructive sleep apnea. In the U.S.United States alone, this represents approximately 43 million 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 those with OSA have been diagnosed or treated. Many health carehealthcare professionals are often unable to diagnose OSA because they are unaware that such non-specific symptoms as 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 aA 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, mayMore recently, studies have an increased incidence of OSA.shown a connection between SDB and diabetes: recent studies indicate that SDB is independently associated with glucose intolerance and insulin resistance.

 

Sleep-Disordered Breathing and Obstructive Sleep Apnea

 

Sleep-disordered breathing 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 neuromuscular 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 desaturation, 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’s home. During overnight testing, respiratory parameters and sleep patterns aremay be monitored, along with other vital signs such as heart rate and blood oxygen levels. Simpler tests, using devices such as our Apnealink, or our automatic positive airway pressure devices, monitor airflow during sleep, and use computer programs to analyze airflow patterns. These tests allow sleep clinicians to detect any sleep disturbances such as apneas, hypopneas or subconscious awakenings. We estimate that there are currently around 5,0003,000 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.

 

- 5 -


Existing Therapies

 

Prior toBefore 1981, the primary treatment for OSA was a tracheotomy, a surgical procedure to cut a hole in the patient’s windpipe to create a channel for airflow. Most recently, surgery hasalternative treatments have involved either uvulopalatopharyngoplasty, or UPPP, in which surgery is performed on the upper airway to remove excess tissue and to streamline the shape of the airway, implanting a device to add support to the soft palate, or mandibular advancement, in which the lower jaw is moved forward to widen the patient’s airway. UPPP alone has a poor success rate; however, when performed in conjunction with multi-stage upper airway surgical procedures, a greater success rate has been claimed. These combined procedures, performed by highly specialized surgeons, are expensive and involve prolonged and often painful recovery periods.

 

CPAP, by contrast, is a non-invasive means of treating OSA. CPAP 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 mid 1980’s. Today, use of CPAP is generally acknowledged as the most effective and least invasive therapy for managing OSA.

 

During CPAP treatment, a patient sleeps with a nasal maskinterface connected to a small portable airflow 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.interface. Continuous air pressure applied in this manner acts as a pneumatic splint to keep the upper airway open and unobstructed. Interfaces include nasal masks and nasal pillows. Sometimes, when a patient leaks air through their mouth, a full-face mask may need to be used.used, rather than a nasal interface.

 

CPAP is not a cure and therefore, must be used on a dailynightly 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 maskpatient interface systems; delay timers whichthat gradually raise air pressure allowing the patient to fall asleep more easily; bilevel air flow generators, including Variable Positive Airway Pressure, or VPAP systems, which provide different air pressures for inhalation and exhalation; heated humidification systems to make the airflow more comfortable; and auto titrationautotitration devices whichthat 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

- 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 SDB, increase patient comfort and encourage compliance with prescribed therapy. For example, in 1999 we introduced the Mirage Full Face Mask. This mask contains an inflatable air pocket, which conforms to the patient’s facial contours, creating a more comfortable and better seal. Additionally, inIn 2002 we introduced the AutoSet Spirit flow generator, our second-generation autotitrating device that adapts to the patient’s breathing patterns to more effectively treat OSA. In 2003, we introduced the Mirage Activa nasal mask, with active cushion

- 6 -


technology to automatically seal mask leaks. In 2004, we introduced the Mirage Swift nasal pillows system, a less obtrusive, lightweight, and flexible alternative to nasal masks. In 2005, we introduced the S8 range of CPAP, a small flow generator with optional integrated humidification. We believe that continued product development and innovation are key factors to our ongoing success. Approximately 15%12% of our employees are devoted to research and development activities. In fiscal year 2004,2006, we invested $26.2$37.2 million, or 8%6% of our revenues, in research and development.

 

Expand Geographic Presence.We market our products in over 6067 countries to sleep clinics, home health carehealthcare 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 in other geographic regions.

 

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, 20032006, 2005 and 2002,2004, we donated $0.8 million, $0.5 million $nil and $2.3$0.5 million, respectively to the ResMed Sleep Disordered Breathing FoundationsFoundation in the United States, and the ResMed Foundation in 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. Recent studies have established a clinical association between OSA and both stroke and congestive heart failure, and have recognized SDB as a cause of hypertension or high blood pressure. Research also indicates that SDB is independently associated with glucose intolerance and insulin resistance. We have 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. We have recently received FDA clearance and launched a new product in the United States for the treatment of respiratory insufficiency due to central sleep apnea, mixed apnea and periodic breathing, called the VPAP Adapt SV. The VPAP Adapt SV uses a technology known as adaptive servo-ventilation and was first made available to a select group of US key opinion leader sites beginning in the third quarter of fiscal 2006. Adaptive servo-ventilation, utilizes an advanced algorithm to calculate a patient-specific minute ventilation target and automatically adjusts pressure support to maintain the target. We believe this technology has allowed physicians to successfully treat complex breathing disorders in some patients who had previously tried and failed traditional PAP therapy.

 

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. 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 includes airflow generators, diagnostic products, mask systems, headgear and other accessories.

 

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Air Flow Generators

 

We produce CPAP, VPAP and AutoSet systems for the diagnosis, titration and treatment of SDB. The flow generator systems deliver positive airway pressure through a patient interface, either a small nasal mask, (or sometimes anasal pillows system, or full-face mask).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 and can also be used in the diagnosis, treatment and management of OSA. CPAP and VPAP flow generators accounted for approximately 50%52%, 53%49% and 55%50% of our net revenues in fiscal years 2006, 2005 and 2004, 2003respectively.

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With the acquisition of Saime in May 2005, we increased our presence in the European homecare ventilation market. The VS and 2002, respectively.Elisée range of products are sophisticated, yet easy to use for physicians, clinicians and patients. We believe these devices complement our VPAP III, VPAP Adapt SV and Autoset CS2 for patients who need ventilatory assistance.

 

AIR FLOW

GENERATORS

  DESCRIPTION  

DATEOF

COMMERCIAL

INTRODUCTION

  

VPAP Products

      
  

VPAP II

  Bilevel portable device providing different pressure levels for inhalation 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 spontaneous/timed breath triggering modes of operation.  

April 1996

  

VPAP II ST A

  Bilevel device with alarms.  

August 1998

  

VPAP MAX+

  Bilevel ventilatory support system for the treatment of adult patients 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*

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*

2001
  

VPAP III

  Updated Bilevel Portableportable device encompassing improved pressure synchronization, spontaneous breath triggering and reduced noise.  

April 2003

  

VPAP III ST

  Updated Bilevel ST Portableportable 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

VPAP Adapt SV#

The newest and most highly evolved bilevel device which uses adaptive servo-ventilation technology to treat patients with central sleep apnea, mixed apnea and periodic breathing.March 2006

 

* Not cleared for marketing in the United States

# Sold in United States only

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AIR FLOW

GENERATORS

DESCRIPTION

DATEOF

COMMERCIAL

INTRODUCTION

Ventilation Products

Helia 2*#

Dual mode ventilator that combines volumetric and barometric ventilation modes.August 1998

Eole 3 XLS*#

Ventilator device providing conventional volumetric ventilation through both controlled and assisted-controlled ventilation with etv functions.December 1999

VS Serena*#

Bi-level ventilator providing all ventilation modes with two pressure levels.June 2001

VS Ultra*#

Dual mode ventilator that combines volumetric and barometric ventilation from leakage to valve type with single or double limb circuit.March 2002

VS Integra*#

Pressure support ventilator that combines pressure modes with leakage or valve ventilators.March 2002

Elisée 350*#

Ventilator for use in Intensive Care Unit combining all conventional ventilation modes, diagnostic and monitoring functions.December 2003

Elisée 150*#

Ventilator device that combines volumetric and barometric ventilation modes with single or double limb circuit.June 2004

Elisée 370*#

Ventilator for use in Intensive Care Unit combining all conventional ventilation modes, diagnostic functions with external monitoring interface for ventilation loops.September 2004

Elisée 250*#

Ventilator for use in transport and emergency situations.April 2005

* Not cleared for marketing in the United States

# Sold outside United States only

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AIR FLOW

GENERATORS

  DESCRIPTION  

DATEOF

COMMERCIAL

INTRODUCTION

  
AutoSetAutomatic Positive Airway Pressure Devices      
  

AutoSet CSCS*#

  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 treatment pressure based on patient airway resistance.  March 1999
  

AutoSet Spirit

  Modular, autotitrating device with advanced compliance monitoring and optional integrated humidifier.  September 2001
  

MagellanMagellan*#

  Autotitrating device using airway resistance measurement.  March 2003*2003
  
Autoset

AutoSet Respond

  Autotitrating device with basic compliance monitoring and optional integrated humidifier.  September 2003
  

AutoSet CS2CS2*#

  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 nCPAPnCPAP*#

  CPAP device with or without integrated humidifier. Features low noise and reduced pressure swings.  April 1997*1997
  

MinniMini Max nCPAPnCPAP*#

  CPAP device with integrated and attachable humidifier and low noise levels.  March 2000*2000
  

ResMed S6 series

  Quiet, compact CPAP device with various comfort features.  June 2000
  

ResMed S7 series

  Continuous Positive Pressure flow generatorA CPAP device with optional integrated humidifier.  July 2002

ResMed S8 Series

A small CPAP device with optional integrated humidification.June 2005

 

* Not cleared for marketing in the United States.

+ Sold in USA onlyStates

# Sold outside USAUnited States only

 

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Mask Systems and Diagnostic Products

 

Mask systems are one of the most important elements of SDB treatment 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%48%, 47%51% and 45%50% of our net revenues in fiscal years 2004, 20032006, 2005 and 2002,2004, respectively.

 

MASK PRODUCTS  DESCRIPTION  

DATEOF

COMMERCIAL

INTRODUCTION

  

Mirage Mask

  Proprietary mask design with a contoured nasal cushion that adjusts to patient’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-face mask system. Provides an effective method of applying ventilatory assist Noninvasive Positive Pressure Ventilation therapy. Can be used to address mouth- breathingmouth-breathing problems in conventional bilevel or CPAP therapy.  October 2001
  

Papillon MaskMask*#

  Nasal mask with only four major parts, allows simplified handling for patients and distributors.  April 2002*2002
  

Mirage Vista Mask

  Small nasal mask without forehead supports.  November 2002
  
Ultra Mirage Full Face Mask  Full-face mask incorporating our latest adjustable forehead support technology.  August 2003
  

Mirage Activa Mask

  Nasal mask system utilizing Active Seal technology to mitigate leak and improve patient comfort.  October 2003
  

Mirage Swift

  A light and unobtrusive nasal cannula mask system.  August 2004
Silent Papillon Mask*#A low noise nasal mask with simplified assembly.March 2005
Hospital Full Face MaskDisposable full face mask specifically designed for hospital use.April 2005

Hospital Nasal Mask

Disposable nasal mask specifically designed for hospital use.April 2005

Ultra Mirage II

Advanced version of the Ultra Mirage Nasal System with improved comfort and ease of fit through enhanced forehead pads and support.July 2005

Meridian Nasal Mask

A value line nasal mask. Effective therapy supplied through a simple yet comfortable maskFebruary 2006

 

* Not cleared for marketing in the United States.

+ Sold in USA onlyStates

# Sold outside USAUnited States only

 

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We market sleep recorders for the diagnosis and titration 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.

 

DIAGNOSTIC PRODUCTS  DESCRIPTION  

DATEOF

COMMERCIAL

INTRODUCTION

  

Poly-MESAM Portable+

Diagnostic SystemSystem*+a#

  Configurable cardio-respiratory polygraphy system up to 8 channels, includes ECG, thorax and abdomen belts, PLMS sensor.  February 1995*1995
  

MEPAL Diagnostic System *+

System

a#
  Polysomnography system designed for use in the sleep laboratory.  February 1999*1999
  

Embla+a

  Digital sleep recorder that provides comprehensive sleep diagnosis in a sleep laboratory.  October 1999
  

Embletta+a

  Pocket-size digital recorder that performs ambulatory sleep studies.  November 2000
  

MEPALmobil *+

aDiagnostic System

  Ambulatory polysomnography system.  March 2001*2001
  

ApneaLink

(MicroMesam)

  A portable Sleep Apnea screening device for use by sleep professionals and primary care physicians.  April 2004

 

*Not cleared for marketing in the United States.States

+# Sold outside United States only

aNot manufactured by ResMed.ResMed

 

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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 HumidAire, H2i and H2i,H3i, which connect directly with the CPAP, VPAP and AutoSet flow generators to humidify and heat the air delivered to the patient. Their use preventshelps prevent the drying of nasal passages that can cause discomfort. Other optional accessories include cold passover humidifiers, carry bags and breathing circuits. To assist those professionals diagnosing or managing the treatment of patients there are data communications and control products such as the ResLink, ResControl and ResControl II modules that facilitate the transfer of data and other information to and from the flow generators. MAP also offers a range of accessories, including the Twister remote, an intelligent remote control for use in the sleep laboratory 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 also sold custom electric motors, primarily for use in data storage and aerospace applications.applications, but we do not expect custom electric motor sales to contribute material revenues in the future.

 

Product Development and Clinical Trials

 

We have a strong track record in innovation in the sleep market. In 1989, we introduced our first CPAP device. Since then we have been committed to an ongoing program of product advancement and development. Currently, our product development efforts are focused on not only improving our current product offerings, but also expanding into new product applications. For example, in 1997, we introduced the Mirage Mask. This mask was based on the innovative Bubble Mask technology introduced in 1991, which used the principle of air inflation of the mask cushion to create a more comfortable and better seal by better conforming to patient facial contours.

 

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In 1999, we introduced the AutoSet T flow generator, an autotitrating device that adapts to the patient’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 ACTivaActiva nasal mask using our patented Active Cushion Technology, which automatically seals mask leaks. Recently,In August 2004, we alsolaunched our Mirage Swift mask, a light and unobtrusive nasal cannula mask system. Also, in August 2004 we launched an improved AutoSet CS 2 (outside the U.S.United States only) to treat congestive heart failure patients with significant central sleep apnea. In March 2006 we launched the VPAP Adapt SV within the United States. This product is for the treatment of respiratory insufficiency due to central sleep apnea, mixed apnea and periodic breathing and uses a technology known as adaptive servo-ventilation.

 

We continually seek to identify new applications of our technology for significant unmet medical needs. SDB is associated with a number of symptoms beyond excessive daytime sleepiness and irritability. Recent studies have established a clinical association between SDB and hypertension, stroke, and congestive heart failure.failure and diabetes. We support clinical trials in the United States, Germany, France, the United Kingdom, Italy, Switzerland and 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 serveserved on our Medical Advisory Board.Board during fiscal year 2006. During fiscal year 2007, we intend to reorganize our Medical Advisory Board into several regional advisory boards. New product ideas are also identified by our marketing staff, direct sales force, network of distributors, manufacturers’ representatives, customers and patients.

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Typically, our internal development staff then performdevelops these ideas, where appropriate, into new product development.products.

 

In fiscal years 2004, 20032006, 2005 and 2002,2004 we invested $26.2$37.2 million, $20.5$30.0 million and $14.9$26.2 million, respectively, on research and development.

 

Sales and Marketing

 

We currently market our products in over 6067 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 health carehealthcare dealer who then sells the products to the patient. The decision to purchase our products, as opposed to 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,staff; the home health care dealer,healthcare dealer; the insurer and the patient. In the United States, our sales and marketing activities are conducted through a field sales organization made up of regional territory representatives, program development specialists, regional sales directors and independent manufacturers’ representatives. Our United StatesU.S. field sales organization markets and sells products to more than 4,000 home health carehealthcare 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 carehealthcare dealer to fill the prescription. The home health carehealthcare dealer, in consultation with the referring physician, will assist the patient in selecting the equipment, fit the patient with the appropriate mask and set the flow generator pressure to the prescribed level.

In the United States, our sales employees and manufacturers’ representatives are managed by two regional Sales Directors, our Seniorthe Chief Operating Officer Americas and Vice President of Sales, Marketing and our Chief Operating Officer for the Americas.

Marketing. Our Canadian and Latin American sales are conducted through independent distributors. Sales in North and Latin America accounted for 49%52%, 48%51% and 49% of our net revenues for fiscal years 2004, 20032006, 2005 and 2002,2004, respectively.

 

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Europe.    We market our products in most major European countries. We have wholly ownedwholly-owned subsidiaries in Austria, Finland, France, Germany, France,Spain, Sweden, Norway, Netherlands, Switzerland and the United Kingdom Spain, Switzerland, Netherlands, Austria, Sweden and Finland and wethat sell our products directly into those countries. 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. In many countries in Europe, we sell our products to home healthcare dealers who then sell the products to the patients. In Germany, we also operate a home healthcare company, in which we provide products and services directly to patients, and receive reimbursement directly from third party payers.

 

Our Vice President Sales & Marketing Europe and Asia PacificEuropean Chief Operating Officer is responsible for coordination of all European activities and, in conjunction with local management, the direct sales activity in Europe. Sales in Europe accounted for 43%39%, 42%41% and 42%43% of our total net revenues for fiscal years 2004, 20032006, 2005 and 2002,2004, respectively.

 

Australia/Rest of World.Asia Pacific.    Marketing in AustraliaAsia Pacific and the rest of the world is the responsibility of our Senior Vice President Sales & Marketing.Marketing Asia Pacific. We have wholly–owned subsidiaries in Australia,

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Hong Kong, Japan, Malaysia, New Zealand and Singapore that sell our products directly into those countries. We use a combination of our direct sales force and independent distributors in Australia and New Zealand, and use independent distributors to sell our products elsewhere in Asia Pacific. Sales in AustraliaAsia Pacific and the rest of the world accounted for 8%9%, 10%8% and 9%8% of our total net revenues for the fiscal years ended June 30,2006, 2005 and 2004, 2003 and 2002, respectively.

 

Other Marketing Efforts.    In addition to our and our distributor’sdistributors’ sales efforts, we work with the following cardiovascular disease associations to raise awareness of the co-morbidity of SDB in cardiovascular disease patients, (cardiovascular disease includesincluding coronary artery disease, congestive heart failure, hypertension and stroke):stroke:

 

American College of Cardiology.    We work with the 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 Corporation, which merged with Boston Scientific Corporation during fiscal year 2006, at ACC in 2003 and ACC 2004 on sleep apnea and cardiovascular disease. We have exhibited at ACC national conferences since 2001. Sleep apnea was included in the formal ACC scientific sessions in 2004.

(i)

American Heart Association.    We have worked with the American Heart Association, or AHA, and we have attended the annual Scientific Sessions of the AHA since 2001. Sleep apnea has been on the official program of the Scientific Sessions since 2002. We work with various regional and local AHA affiliates to increase awareness regarding sleep apnea and cardiovascular disease.

Heart Failure Society of America.    We have attended the Heart Failure Society of America national conferences since 2002. We have co-sponsored CME-level educational symposia with Guidant Corporation 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 in heart failure patients, and the outcome improvements in blood pressure and ejection fraction observed in peer-reviewed studies using CPAP treatment.

We also continue to work to raise awareness of SDB in diabetes. Current research is increasingly showing an independent association between OSA and type 2 diabetes. Accordingly, we initiated a study investigating the prevalence of OSA in the type 2 diabetic population. Due to the high prevalence of the co-incidence of SDB and type 2 diabetes, we are now actively supporting the American CollegeAssociation of Cardiology.    We workDiabetes Educators and are in the process of setting up further initiatives to develop the SDB market in the diabetic population.

In addition to the above marketing efforts we have strategic alliances with the 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.    We have worked with the American Heart Association and we have attended the annual Scientific Sessions since 2001. Sleep apnea has been on the official program of the Scientific Sessions since 2002. We work with various regional and local AHA affiliates to increase awareness regarding sleep apnea and cardiovascular disease.

(iii) Heart Failure Society of America.    We have 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 in heart failure patients,Corporation and the outcome improvements in blood pressure and ejection fraction observed in peer-reviewed studies using CPAP treatment.

Strategic Alliances

GuidantMedCath Corporation. The Guidant Corporation is a world leader in the treatment of cardiac and vascular disease. Guidant and ResMedmerged with Boston Scientific Corporation during fiscal year 2006. Since fiscal year 2003, we have entered intohad an agreement pursuant towith Guidant under which the companies will work together in the areas of sleep-disordered breathing and cardiac rhythm disorders, disease states with a significant patient population overlap. TheCurrently, the companies plan to co-market to each other’s physician partners and customers, and to collaborate on research and development projects, clinical studies, as well as physician 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 company’s cardiovascular diagnostic centers.

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Medcare.    Medcare is a global leader providing sleep diagnostic solutions to sleep service providers and other professionals practicing sleep medicine. Medcare offers a broad range of solutions including the Embla/Somnologica and REMbrandt sleep systems. Medcare products are distributed to over 50 countries worldwide. We distribute Medcare products in selected countries and we have a co-marketing agreement with Medcare for the U.S. and German markets.

We believe that our affiliations and continued work with these organizations raises the awareness of SDB as a significant health concern.

 

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Manufacturing

 

Our principal manufacturing facility is located in Sydney, Australia and comprisecomprises a 215,000 square feetfoot manufacturing facility. Our manufacturing operations consist primarily of assembly and testing of our flow generators, masks and accessories. Of the numerous raw materials, parts and components purchased for assembly of our therapeutic and diagnostic sleep disorder products, most are off-the-shelf items available from multiple vendors. We generally manufacture to our internal sales forecasts and fill orders as received. Over the last few years, the manufacturing processes have been transformed along lean manufacturing guidelines to flow lines staffed by dedicated teams. Each team is responsible for the 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),ISO 13485, FDA Quality System Regulations for medical devices (21 CFR part 820)Medical Devices and the Medical Device Directive (93/42/EEC). Our Sydney, Australia facility isand San Diego, California facilities are each accredited to ISO 9001 and EN46001 and our San Diego, California facility is accredited to ISO 9002 and EN46002.13485. These two sites have third party audits conducted by the ISO certification bodies at regular intervals.

 

Our German manufacturing operation based in Munich operates in a facility of approximately 24,000 square feet. This facility is accredited to ISO 9001 and EN4600113485 and primarily assembles and tests flow generators for sale by our subsidiary MAP GmbH.German subsidiary. Appropriate quality controls monitor and measure product assembly and performance.

 

In additionAs part of the acquisition of Saime SA on May 19, 2005, we acquired a 7,000 square foot manufacturing facility in Paris, France. This facility is accredited to our AustralianISO 13485 and German manufacturing operations weis primarily responsible for the assembly of the Saime brand of mechanical ventilators and associated accessories.

We also manufacture high qualityhigh-quality electric motors for both our flow generator devices and external customers, primarily in the data storage and aerospace sectors,sector, at our Servo Magnetics Inc. (SMI), or SMI, facility at Canoga Park, California. The SMI facility is approximately 35,500 square feet. We have recently leased a larger site of 72,000 square feet at Chatsworth, California and expect to move to this new SMI facility in October 2006.

 

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. AlthoughIn Germany, we receive payments directly from these payers. Outside Germany, although we do not generally receive payments for our products directly from these payers, our success in major markets is dependent upon the ability of patients to obtain adequate reimbursement for our products.

 

In the United States, our products are purchased primarily by home health carehealthcare dealers, hospitals or sleep clinics, which then invoice third-party payers directly.directly for reimbursement. 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-effective treatment methods, or is experimental, unnecessary or inappropriate. The long-term trend towards managed health care,healthcare, or legislative proposals to reform health care,healthcare, could control or significantly influence the purchase of health carehealthcare services and products and could result in lower prices for our products. In some foreign markets, such as Spain, France and Germany, government reimbursement is currently available for purchase or rental of our products, however, subject 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.

 

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Even though we do not file claims or bill governmental programs and other third-party payers directly for reimbursement for our 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 Federal health carehealthcare program such as the Medicare and Medicaid programs. The government has interpreted this law broadly to apply to the marketing and sales activities of manufacturers and distributors like us. Many states have adopted laws similar to the federal Anti-Kickback Law. We are also subject to other federal and state fraud laws applicable to payment from any third-party payer. These laws prohibit persons from knowingly and willfully filing false claims or executing a scheme to defraud any health carehealthcare 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 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-year orand 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 carehealthcare 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.

 

Competition

 

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. Customer 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.us. 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.,; and Fisher & Paykel Healthcare Corporation Limited 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 trend towards consolidation in the health carehealthcare 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 onwhich would harm our business,revenues and financial condition and results of operations.condition.

 

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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

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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, Medizintechnik fur Arzt und Patient GmbH, SMI and SMI,Saime SA, we own or have licensed rights to 142220 issued United States patents (including 3560 design patents) and 167325 issued foreign patents. In addition, there are 169262 pending United States patent applications (including 3568 design patent applications), 301494 pending foreign patent applications, 255443 registered foreign designs and 45122 pending foreign designs. Some of these patents, and patent applications and designs 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 a patient’s changing needs during nightly use, such as that employed in our AutoSet device.

 

Of our patents, seven13 United States patents and two13 foreign patents are due to expire in the next five years, with one1 foreign patent due to expire in each of the years 20052008, 2 in 2010, and 200710 in 2011; and one1 United States patent in 2005, two2007, 6 United States patents in 2007 and four2008, 2 United States patents in 2008.2010, and 4 United States patents in 2011. 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 markscopyrights, trademarks and non-disclosure agreements to protect our proprietary technology and rights.

 

Litigation may be necessary to attempt to enforce patents issued to us, to protect our rights, or to defend third-party claims of infringement by us of the proprietary rights of others. Patent laws regarding the enforceability of patents vary from country to country. Therefore, there can be no assurance that patent issues will be uniformly resolved, or that local laws will provide us with consistent rights and benefits.

 

Government Regulations

 

Our products are subject to extensive regulation particularly as to safety, efficacy and adherence to FDA Quality System Regulation, or QSR, and related manufacturing standards. Medical device products are subject to rigorous FDA and other governmental agency regulations in the United States and regulations of relevant foreign agencies abroad. The FDA regulates the introduction, manufacture, advertising, labeling, packaging, marketing, distribution and record keeping for such products, in order to ensure that medical products distributed in the United States are safe and effective for their intended use. In addition, the FDA is authorized to establish special controls to provide reasonable assurance of the safety and effectiveness of most devices. Non-compliance with applicable requirements can result in import detentions, fines, civil penalties, injunctions, suspensions or losses of regulatory approvals, recall or seizure of products, operating restrictions, refusal of the government to approve product export applications or allow us to enter into supply contracts, and criminal prosecution.

 

The FDA requires that a manufacturer introducing a new medical device or a new indication for use of an existing medical device obtain either a Section 510(k) premarket notification clearance or a premarket approval, or PMA, prior tobefore introducing it being introduced into the U.S. market. Our products currently

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marketed in the United States are marketed in reliance on 510(k) pre-marketing clearances as either Class I or Class II devices. The process of obtaining a Section 510(k) clearance generally requires the submission of performance data and often clinical data, which in some cases can be extensive, to demonstrate that the device is “substantially equivalent” to a device that was on the market prior tobefore 1976 or to a device that has been found by the FDA to be “substantially equivalent” to such a pre-1976 device. As a result, FDA approval requirements may extend the development process for a

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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 riskhigh-risk devices or those that are used to support or sustain human life, may take several years and requires the submission of extensive performance and clinical information.

 

As a medical device manufacturer, all of our domestic and Australian manufacturing facilities are subject to inspection on a routine basis by the FDA. We believe that our design, manufacturing and quality control procedures are in substantial compliance with the FDA’s regulatory requirements. MAP’s facilities are not subject to FDA regulation, because none of MAP’s products are 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. Where appropriate, our products are CE marked to the European Union’s Medical Device Directive. Under the CE marketing scheme, our products are classified as either Class I or Class II; ourII. Our devices are listed in the United States with FDA; in Australia with the Therapeutic Goods Administration, or TGA;TGA, and in Canada with Health Canada.

 

Employees

 

As of June 30, 2004,2006, we had 1,520approximately 2,500 employees or full time consultants, of which 599approximately 900 persons were employed in warehousing and manufacturing, 225300 in research and development, 6961,300 in sales, marketing and administration. Of our employees and consultants 740approximately, 1,100 were located in Australia, 382500 in the United States, 387800 in Europe and 11100 in 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, consists of physicians specializing in the field of sleep-disordered breathing.breathing and ventilation. During fiscal 2006 the Medical Advisory Board members meetmet 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. Medical Advisory Board members are also available to consult on an as-needed basis with our senior management. In alphabetical order, Medical Advisory Board members include:during fiscal 2006 included:

Claudio Bassetti, M.D.

Michael Coppola, M.D.

Terence M. Davidson, M.D.

Anthony N. DeMaria, M.D.

Neil J. Douglas, M.D.

Nicholas Hill, M.D.

Barry J. Make, M.D.

Ralph Pascualy, M.D.

Barbara Phillips, M.D.

Bruce Robinson, M.D.

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Jonathan R. L. Schwartz, M.D.

Helmut Teschler, M.D.

B. Tucker Woodson, M.D.

During fiscal year 2007, we intend to reorganize our Medical Advisory Board into several regional advisory boards. Not all members of the Medical Advisory Board in fiscal year 2006 will continue as members during fiscal year 2007.

ITEM 1ARISK FACTORS

Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the other cautionary statements and risks described elsewhere, and the other information contained, in this Report and in our other filings with the SEC, including our subsequent reports on Forms 10-Q and 8-K. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on us, our business, financial condition and results of operations could be seriously harmed. In that event, the market price for our common stock will likely decline, and you may lose all or part of your investment.

 

Claudio BassettiOur inability to compete successfully in our markets may harm our business., MD, is    The markets for our sleep-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, manufacture and market innovative new products. The development of innovative new products by our competitors or the discovery of alternative treatments or potential cures for the conditions that our products treat could make our products noncompetitive or obsolete. Current competitors, new entrants, academics, and others are trying to develop new devices, alternative treatments or cures, and pharmaceutical solutions to the conditions our products treat.

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 neurologisttrend towards consolidation in the healthcare 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 expertise in general neurology, strokegreater 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.

Our business depends on our ability to market effectively to dealers of home healthcare products and sleep medicine. He isclinics.    We market our products primarily to home healthcare dealers and to sleep clinics that diagnose OSA and other sleep disorders. We believe that home healthcare dealers and sleep clinics play a leadersignificant role in studyingdetermining which brand of product a patient will use. The success of our business depends on our ability to market effectively to home healthcare dealers and sleep clinics to ensure that our products are properly marketed and sold by these third parties.

We have limited resources to market to approximately the implications3,000 U.S. sleep clinics and the more than 6,000 home healthcare dealer branch locations, most of SDBwhich use, sell or recommend several brands of products. In addition, home healthcare dealers have experienced price pressures as government and third-party reimbursement has declined for home healthcare products, and home healthcare dealers are requiring price discounts and longer periods of time to pay for products purchased from us. We

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cannot assure you that sleep clinic physicians will continue to prescribe our products, or that home healthcare dealers or patients will not substitute competing products when a prescription specifying our products has been written.

We have expanded our marketing activities to target the population with a predisposition to sleep-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 or sales of our products.

Any inability to market effectively our products outside the U.S. could impact our profitability.    Approximately half our revenues are generated outside the U.S., in over 67 different countries. Many of these countries have unique regulatory, medical and business environments, which may adversely impact our ability to market our products. If we are unable to market effectively our products outside the U.S., our overall financial performance could decline.

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.

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 strokeour management. Our ability to manage our growth effectively depends on our ability to implement and is Headimprove 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 effectively and efficiently our growth, our costs could increase faster than our revenues and our business could suffer.

If we fail to integrate our recent acquisitions with our operations, our business could suffer.    During the year ended June 30, 2006, we acquired PolarMed and Pulmomed and during the fiscal year ended June 30, 2005, we acquired Saime, Hoefner and Resprecare. We are currently in the process of integrating our operations with these recent acquisitions. The integration will require significant efforts from each company. We may find it difficult to integrate the operations as personnel may leave and licensees, distributors or suppliers may terminate their arrangements or demand amended terms to these arrangements. Additionally, our management may have their attention diverted while trying to integrate these companies. If we are not able to successfully integrate the operations, we may not realize the anticipated benefits of these acquisitions.

If we fail to implement our restructure plans successfully, our business could suffer.    In fiscal year 2005, we merged the operations of ResMed Germany and MAP into a single operating unit as part of our German restructure plan. We will continue to monitor the progress of this restructure and adjust our business strategies and personnel accordingly to achieve maximum efficiencies, cost savings and success. If we are not able to integrate the operations successfully, we may not fully realize the anticipated benefits 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.restructure.

 

- 1622 -


Michael CoppolaWe are subject to various risks relating to international activities that could affect our overall profitability.    We manufacture substantially all of our products outside the U.S. and sell a significant portion of our products in non-U.S. markets. Sales outside North and Latin America accounted for approximately 48% and 49% of our net revenues in the years ended June 30, 2006 and 2005, respectively. We expect that sales within these areas will account for approximately 50% of our net revenues in the foreseeable future. Our sales outside of North America and our operations in Europe, Australia and Asia are subject to several difficulties and risks that are separate and distinct from those we face in our U.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 in U.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.

Government and private insurance plans may not adequately 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 payers are increasingly challenging the prices charged for medical products and services. Therefore, even if a product is approved for marketing, we cannot assure you that reimbursement will be allowed for the product, that 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 treat sleep-disordered breathing conditions. Additionally, future legislation or regulation concerning the healthcare industry or third party or governmental coverage and reimbursement, particularly legislation or regulation limiting consumers’ reimbursement rights, may harm our business.

As we continue to develop new products, those products will generally not qualify for reimbursement, if at all, until they are approved for marketing. In the United States, we sell our products primarily to home healthcare dealers and to sleep clinics. We do not file claims and bill governmental programs and other third party payers directly for reimbursement for our products. However, we are still subject to laws and regulations relating to governmental reimbursement programs, particularly Medicaid and Medicare.

In addition to reimbursement for our products, our customers depend in part on reimbursement by government and private health insurers for other products. Any proposed reductions in reimbursement, 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.

Failure to comply with anti-kickback and fraud regulations could result in substantial penalties and changes in our business operations.    In particular, the federal Anti-Kickback Law prohibits persons from knowingly and willfully soliciting, receiving, offering or providing remuneration,

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directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending or arranging for a good or service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. The U.S. 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 any healthcare benefit program, including private third party payers. These laws may apply to manufacturers and distributors who provide information on coverage, coding, and reimbursement of their products to persons who do bill third party payers. Any violation of these laws and regulations could result in civil and criminal penalties (including fines), MD, isincreased legal expenses and exclusions from governmental reimbursement programs, all of which could have a leading pulmonary, critical care,material adverse effect upon our business, financial conditions and sleep disorders physicianresults of operations.

Complying with Food and is President of Springfield Medical Associates, a multi-specialty medical group in Springfield, Massachusetts. HeDrug Administration, or FDA, and other regulations is an attending physician at Baystate Medical Centerexpensive and Mercy Hospital,time-consuming process, and a Fellowany failure to comply could result in substantial penalties.    We are subject to various federal, state, local and international regulations regarding our business activities. Failure to comply with these regulations could result in, among other things, recalls of our products, substantial fines and criminal charges against us or against our employees. Furthermore, our products could be subject to recall if the American CollegeFDA or we determine, for any reason, that our products are not safe or effective. Any recall or other regulatory action could increase our costs, damage our reputation, affect our ability to supply customers with the quantity of Chest Physicians. Dr. Coppola is also the Medical Director of Sleep Ave LLC, a sleep-disordered breathing specialty company with sites in Massachusetts, Louisianaproducts they require and Texas, and Associate Clinical Professor of Medicine at Tufts University School of Medicine.materially affect our operating results.

 

Terence M. Davidson, MD, FACS, is ProfessorProduct sales, introductions or modifications may be delayed or canceled as a result of SurgeryFDA regulations 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 Division of Otolaryngology - HeadUnited States, we must obtain FDA clearance, which can be a lengthy and Neck Surgery attime-consuming process. We generally receive clearance from the University of California, San Diego School of Medicine. He isFDA to market our products in the United States under Section Chief of Head and Neck Surgery at the Veterans Administration, San Diego Healthcare System, and Associate Dean for Continuing Medical Education at the University of California, San Diego. He is also Director510(k) of the UCSD HeadFederal Food, Drug, and Neck Surgery Sleep ClinicCosmetic 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 La Jolla, CA.certain cases we may need to conduct clinical trials of a new product before 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.

Off-label marketing of our products could result in substantial penalties.    Clearance under Section 510(k) only permits us to market our products for the uses indicated on the labeling cleared by the FDA. We may request additional label indications for our current products, and the FDA may deny those requests outright, require additional expensive clinical data to support any additional indications or impose limitations on the intended use of any cleared products as a condition of clearance. If the FDA determines that we have marketed our products for off-label use, we could be subject to fines, injunctions or other penalties.

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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 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 or halt in supply while a replacement supplier reconfigures its components, or while we reconfigure our devices 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/or our products may infringe on the intellectual property rights of third parties.    We rely on a combination of patents, trade secrets and non-disclosure agreements to protect our intellectual property. Our success depends, in part, on our ability to obtain and maintain United States and foreign patent protection for our products, their uses and our processes to preserve our trade secrets and to operate without infringing on the proprietary rights of third parties. We have a number of pending patent applications, and we do not know whether any patents will issue from any of these applications. We do not know whether any of the claims in our issued patents or pending applications will provide us with any significant protection against competitive products or otherwise be commercially valuable. Legal standards regarding the validity of patents and the proper scope of their claims are still evolving, and there is no consistent law or policy regarding the valid breadth of claims. Additionally, there may be third party patents, patent applications and other intellectual property relevant to our products and technology which are not known to us and that block or compete with our products.

We face the risks that:

third parties will infringe our intellectual property rights;

our non-disclosure agreements will be breached;

we will not have adequate remedies for infringement;

our trade secrets will become known to or independently developed by our competitors; or

third parties will be issued patents that may prevent the sale of our products or require us to license and pay fees or royalties in order for us to be able to market some of our products.

Litigation may be necessary to enforce patents issued to us, to protect our proprietary rights, or to defend third party claims that we have infringed upon proprietary rights of others. For example, we are currently appealing the decision of a court in Germany that entered judgment in favor of certain plaintiffs that had claimed they should be listed as co-inventors on two of our German patent applications. 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, could be forced to design around the patents at issue or could be required to cease sales of the affected products. A license may not be available at all or on commercially viable terms, and we may not be able to redesign our products to avoid infringement. 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.

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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.

 

Anthony N. DeMaria, MD, is Professor of Medicine and Chief, Division of Cardiology at the University of California, San Diego, specializingWe are subject to tax audits by various tax authorities in cardiac imaging techniques, particularly echocardiography. He is a Diplomat on the American Board of Internal Medicine and is board certifiedmany jurisdictions.    From time to time we may be audited by the Subspecialty Boardtax authorities and are still subject to an ongoing German tax audit. Any final assessment resulting from this audit could result in cardiovascular disease. He is Past President of both the American College of Cardiologymaterial changes to our past or future taxable income, tax payable or deferred tax assets, and the American Society of Echocardiography. Dr. DeMaria is currently Editor-in-Chief of the Journal of the American College of Cardiologycould require us to pay penalties and has authored or co-authored over 400 articles for medical journals.interest that could materially adversely affect our financial results.

 

Neil J. Douglas, MD, DSc, FRCP, is ChairmanOur 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 MABfuture. These fluctuations may result from a number of factors, including:

the introduction of new products by us or our competitors;

the geographic mix of product sales;

the success of our marketing efforts in new regions;

changes in third party reimbursement;

timing of regulatory clearances and Professorapprovals;

timing of Respiratoryorders by distributors;

expenditures incurred for research and Sleep Medicine, Universitydevelopment;

competitive pricing in different regions;

seasonality;

the cost and effect of Edinburgh, an Honorary Consultant Physician, Royal Infirmarypromotional and marketing programs;

the effect of Edinburgh,foreign currency transaction gains or losses; and Director

other activities of our competitors.

Fluctuations in our quarterly operating results may cause the Scottish National Sleep Laboratory. He is Presidentmarket price of the Royal College of Physicians of Edinburgh, past Chairman of the British Sleep Society, and past Secretary of the British Thoracic Society. Dr. Douglas has published over 200 papers on breathing during sleep.our common stock to fluctuate.

 

Nicholas Hill, MD, is ProfessorIf a natural or man-made disaster strikes our manufacturing facilities, we will be unable to manufacture our products for a substantial amount of Medicine at Tufts University School of Medicinetime and Chief, Pulmonary, Critical Careour sales and Sleep Division, Tufts-New England Medical Center in Boston. He is a Fellowprofitability will decline.    Our facilities and Chair of the Home Care Network as well as a member of the Network Steering Committee for the American College of Chest Physicians. 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 Planning Committee. Dr. Hill’s main research interests aremanufacturing equipment we use to produce our products would be costly to replace and could require substantial lead-time to repair or replace. The facilities may be affected by natural or man-made disasters and in the acuteevent they were 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 chronic applicationsthe disruption of noninvasive positive pressure ventilation (NPPV) for treating lung disease as well as the pathogenesisour business from casualties, such insurance may not be sufficient to cover all of our potential losses 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 servedmay not continue to be available to us on numerous national and international committees for respiratory diseases. Dr. Make’s research and clinical investigations have resulted in a large number of publications on mechanisms, treatment, and rehabilitation of chronic respiratory disorders. His areas of focus are long-term noninvasive ventilation and chronic obstructive pulmonary diseases including emphysema.

Barbara Phillips, MD, MSPH, FCCP, is Professor of Pulmonary, Critical Care, and Sleep Medicineacceptable terms, or 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, and a member of the Advisory Board to the National Center of Sleep Disorders Research. Her research interests are the epidemiology of sleep-disordered breathing and sleep disorders in the aged.all.

 

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Helmut TeschlerDelaware law, provisions in our charter and our shareholder rights plan could make it difficult for another company to acquire us., MD,  �� Provisions of our certificate of incorporation may have the effect of delaying or preventing changes in control or management which might be beneficial to us or our security holders. In particular, our board of directors is Professordivided into three classes, serving for staggered three-year terms. Because of Medicinethis 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 Headto determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without further vote or action by the stockholders. Under our stockholder 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 Departmentholders of Respiratory Medicine, High Dependency Unit,our common stock will be subject to, and Centre of Sleep Medicine atmay be adversely affected by, the Ruhrlandklinik, Medical Faculty, University of Essen, Germany. He is a Fellow of eachrights of the following Associations: German Pneumology Society, American Thoracic Society, European Respiratory Societyholders 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 American Sleep Disorders Association.may adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock.

 

J. Woodrow Weiss, MD, is Associate ProfessorYou may not be able to enforce the judgments of MedicineU.S. courts against some of our assets or officers and Co-Chairmandirectors.    A substantial portion of our assets are located outside the United States. Additionally, two of our eight directors and three of our seven executive officers reside outside the United States, along with all or a substantial portion of the Divisionassets of Sleep Medicine at Harvard Medical Schoolthese persons. As a result, it may not be possible for investors to enforce judgments of U.S. courts relating to any liabilities under U.S. securities laws against our assets, those persons or their assets. In addition, we have been advised by our Australian counsel that some doubt exists as well as Chief, Pulmonary, Critical Care, and Sleep Medicine, Beth Israel Deaconess Medical Center, Boston, MA. He is an internationally recognized researcherto the ability of investors to pursue claims based on U.S. securities laws against these assets or these persons in sleep-disorders medicine.

B. Tucker Woodson, MD, FACS, is Professor of Otolaryngology and Communication Sciences at the Medical College of Wisconsin, 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. He is the Director of the Medical College of Wisconsin/Froedert Memorial Lutheran Hospital Center for Sleep. Dr. Woodson also sits on multiple committees for the American Academy of Sleep Medicine and American Academy of Otolaryngology.Australian courts.

 

ITEM 2PROPERTIES

 

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. We lease facilities consisting of approximately 120,000 square feet for our Research & Developmentresearch and development operations at North Ryde, in Sydney, Australia in a 120,000 square feet facility.Australia. We own our principal manufacturing facility consisting of a 215,000 square feetfoot complex at Norwest, also in Sydney, Australia and lease in Canoga Park, California a 35,500 square feetfoot facility for manufacture of electronic motors. On July 7, 2005, we purchased a 9.78 acre parcel of land at Kearney Mesa, San Diego for $21.0 million to develop our new corporate headquarters.

 

Sales and warehousing facilities are either leased or owned in Abingdon, England; Moenchengladbach,Munich, Germany; Bremen, Germany; Hochstadt, Germany; Lyon, France; Paris, France; Basel, Switzerland; Trollhaettan, Sweden; Villach and Vienna, Austria; Helsinki, FinlandFinland; Den Haag, Netherlands; Oslo, Norway and Singapore. Prior to moving our executive offices and distribution facilities to Poway, California, we leased space for this purpose in San Diego, California. Our lease on those premises expires in 2005. In August 2000, we began subleasing those premises to another company.

MAP’s principal offices are located in Munich, Germany in a 45,000 square feet facility leased by us. MAP’s subsidiaries also lease sales and warehouse facilities in Lyss, Switzerland; Villach, Austria and s’Hertogenbosch, The Netherlands.

 

ITEM 3LEGAL PROCEEDINGS

 

The Company was engaged in litigation relating to the enforcement and defense of certain of its patents during the fiscal year ended June 30, 2004.

1995 Litigation with Respironics.In January 1995, our 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 of its patents. In February 1995, Respironics filed a complaint in the U.S. District Court for the Western District of Pennsylvania, in Pittsburgh, against ResMed Limited seeking a declaratory judgment that Respironics, Inc. does not infringe claims of these patents and that ResMed Limited’s patents are invalid and unenforceable.

On September 5, 2003, ResMed and Respironics settled this action. ResMed and Respironics have dismissed all claims in the action with prejudice.

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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.

On October 16, 2002 Respironics, Inc. filed a lawsuit in U.S. District Court for the Western 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 and unenforceable 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 2002 Litigation. ResMed and Respironics have dismissed all claims in the actions with prejudice.

2002 Litigation with Fisher & Paykel Healthcare.    On August 26, 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 Fisher & Paykel Healthcare Inc and Fisher & 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 and alleges violations of the Lanham Act, trademark and trade dress infringement and common 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 business. While the results of this litigation cannot be predicted with certainty, we believe that their final outcome will not have a material adverse effect on our consolidated financial statements taken as a whole.

During September and October 2004, we began receiving tax assessment notices for the audit of one of our German subsidiaries by the German tax authorities for the years 1996 through 1998. Certain of

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these adjustments are being contested and appealed to the German tax authority office. We believe no additional provision is necessary for any tax adjustment that may result from the tax audit. However, the outcome of the audit cannot be predicted with certainty. Should any tax audit issues be resolved in a manner not consistent with management’s expectations, we could be required to adjust our provision for income tax in the period of resolution.

On December 23, 2002, three former contractors of our subsidiary MAP Medizin-Technologie GmbH initiated proceedings in Munich 1 Regional Court (Proceedings No. 7 O 23286/02), petitioning the Court for a declaration of inventorship with respect to MAP German Patent Applications identified as No. 100 31 079 and 101 92 802.5 and European Patent Application No. EP 01 967 819.7. On March 10, 2005, the Court entered judgement in favor of the plaintiffs, finding that they should be identified as co-inventors in place of certain individual defendants. In April 2005, MAP filed an appeal of that decision. We do not expect the outcome of this litigation to have an adverse material effect on our consolidated financial statements.

In March 2006, an Australian university made a demand that we pay extra royalties pursuant to a current patent license agreement. We rejected the demand and the University has agreed to discuss our position. We do not consider the claim to have merit. We do not expect that the outcome of this demand to have an adverse material effect on our consolidated financial statements.

 

ITEM 4SUBMISSIONOF MATTERSTOA VOTEOF SECURITY HOLDERS

 

None.

 

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PART II


 

ITEM 5MARKETFOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERSAND ISSUER PURCHASESOF EQUITY SECURITIES

 

Our common stock is traded on the New York Stock Exchange (NYSE) under the symbol “RMD”. The following table sets forth for the fiscal periods indicated the high and low closing prices for the common stock as reported by the New York Stock Exchange.

 

  2004  2003  2006  2005
  High  Low  High  Low  High  Low  High  Low
  

Quarter One, ended September 30

  $43.98  $38.58  $33.63  $24.89  $40.03  $32.21  $25.75  $21.95

Quarter Two, ended December 31

   46.49   38.05   34.13   27.63   42.72   37.01   25.55   21.73

Quarter Three, ended March 31

   47.95   40.69   33.87   29.67   44.31   36.86   30.25   24.91

Quarter Four, ended June 30

   51.56   44.84   41.95   32.00   48.50   41.76   33.14   28.15

 

As of August 20, 2004,23, 2006, there were 6448 holders of record of our common stock. We have not paid any cash dividends on our common stock since ourthe initial public offering of our common stock and we do not currently intend to pay cash dividends in the foreseeable future. We 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.

 

All share and per share information has been adjusted to reflect the two-for-one stock split effected in the form of a 100% stock dividend that was declared on August 10, 2005 and distributed on September 30, 2005.

Sale of Unregistered Securities

 

OnDuring fiscal year 2006, and pursuant to the Indenture dated June 20, 2001 we issued $150.0 million of 4% convertible subordinated notes due 2006 to initial purchasers including Merrill Lynch and Deutsche Banc Alex Brown Inc., William Blair & Company, LLC, Macquarie Bank, and UBS Warburg LLC. The discount to the initial purchasers on their purchase of the notes was $4.7 million. On July 3, 2001, we issued an additional $30.0 million in notes to the initial purchasers upon exercise of the initial purchasers’ over allotment option, with an additional discount to the initial purchasers of $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 $5.6 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 and the common stock issuable upon conversion of the notes (the “Securities”) were not registered under the Securities Act or any other state or foreign securities laws at the time of issue. The notes were offered and sold only to “qualified institutional buyers” as defined in Rule 144A or in offshore transactions outside the United States that met the requirements of Rule 903 of Regulation S under the Securities Act.

The Securities were subsequently registered for resale under the Securities Act (Registration No. 333-70500) effective October 9, 2001; and consequently the Securities may be resold in accordance with the prospectus that is part of the registration statement by the selling security holders named in the prospectus or a supplement to the prospectus. Other sales of the Securities may only be made in compliance with the registration requirements of the Securities Act and all other applicable securities laws, or pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and any other applicable securities laws.

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The notes are subject to an indenture between us and American Stock Transfer & Trust Company, as trustee. The notes are convertible, at trustee, holders of all of our 4% Convertible Subordinated Notes (“the optionNotes”) due 2006 converted the Notes into an aggregate of the holder, at any time on or prior to maturity, intoapproximately 3,737,593 shares of our common stock, atpar value $0.004, based on a conversion price of $60.60$30.30 per share, which is equalshare. The shares of common stock were issued solely to aexisting security holders upon 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.

We may redeem some or all of the notes at any time on or after June 20, 2004, but priorNotes pursuant 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 does not limit the incurrence by us or our subsidiaries of senior indebtedness or other indebtedness. The notes mature on June 20, 2006.

On 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)3(a)(9) of the Securities Exchange Act of 1933,1993, as amended. No solicitation was made in connection with this issuance,We did not pay or give, directly or indirectly, any commission or other than negotiation of the acquisition, and we obtained representations from the recipient regarding his investment intent, experience and sophistication. These shares were subsequently registeredremuneration 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.soliciting such conversion.

 

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.- 29 -


ITEM 5MARKETFOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERSAND ISSUER PURCHASESOF EQUITY SECURITIES

 

Purchases of Equity Securities

 

The following table summarizes purchases by us of our common stock during the three monthsyear ended June 30, 2004:2006:

 

Period  

Total

Number

of Shares

 

Average Price

Paid per Share

 

Total Number of Shares
Purchased as Part of

Publicly Announced Plans

or Programs (1)

 

Maximum Number of
Shares that May yet be
Purchased Under the

Plans 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
Period  

Total
Number

of Shares

  Average
Price Paid
per Share
  Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs(1)
  Maximum Number of
Shares that May yet be
Purchased Under the
Plans or Programs(1)
Opening Balance at
July 1, 2005
  2,254,918  $18.36  2,254,918  5,745,082

July 2005

  Nil          

August 2005

  Nil          

September 2005

  Nil          

October 2005

  Nil          

November 2005

  Nil          

December 2005

  Nil          

January 2006

  Nil          

February 2006

  Nil          

March 2006

  Nil          

April 2006

  Nil          

May 2006

  Nil          

June 2006

  Nil          

Total to June 30, 2006

  2,254,918  $18.36  2,254,918  5,745,082

(1)On June 6, 2002, the Board of Directors authorized us to repurchase up to 8.0 million shares of our outstanding common stock. There is no expiration date for the repurchase of these shares. For the years ended June 30, 2006 and 2005, we repurchased NIL and 482,000 shares at a cost of $NIL and $11.0 million, respectively. At June 30, 2006, we have repurchased a total of 2,254,918 shares at a cost of $41.4 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.

 

- 2130 -


(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 6SELECTED 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, 2004.2006. The data set forth below should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and our Consolidated Financial Statements and related Notes included elsewhere in this Report. The consolidated statements of operations data for the years ended June 30, 2006, 2005 and 2004 and the balance sheet data as of June 30, 2006 and 2005 are derived from our audited consolidated financial statements included elsewhere in this Report. The consolidated statements of operations data for the years ended June 30, 2003 and 2002 and the balance sheet data as of June 30, 2004, 2003 and 2002 are derived from our audited consolidated financial statements not included herein. Historical results are not necessarily indicative of the results to be expected in the future, and the results for the years presented should not be considered indicative of our future results of operations.

 

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
  
Consolidated Statement of Income Data:  Years Ended June 30 
(In thousands, except per share data)  2006  2005  2004  2003  2002 

Net revenues

  $606,996  $425,505  $339,338  $273,570  $204,076 

Cost of sales

   230,101   150,645   122,602   100,483   70,827 
Gross profit   376,895   274,860   216,736   173,087   133,249 
Selling, general and administrative expenses   200,168   135,703   104,706   85,313   64,481 
Research and development expenses   37,216   30,014   26,169   20,534   14,910 
Donations to Research Foundations   760   500   500   -   2,349 
In-process research and development charge   -   5,268   -   -   350 
Amortization of acquired intangible assets   6,327   870   -   -   - 
Restructuring expenses   1,124   5,152   -   -   - 
Total operating expenses   245,595   177,507   131,375   105,847   82,090 
Income from operations   131,300   97,353   85,361   67,240   51,159 
Other income (expenses):                     
Interest income (expense), net   1,320   (808)  (1,683)  (2,549)  (3,224)
Other, net   774   81   990   1,907   108 
Gain on extinguishment of debt   -   -   -   529   6,549 

Total other income (expenses)

   2,094   (727)  (693)  (113)  3,433 
Income before income taxes   133,394   96,626   84,668   67,127   54,592 
Income taxes   (45,183)  (31,841)  (27,384)  (21,398)  (17,086)

Net income

  $88,211  $64,785  $57,284  $45,729  $37,506 
Basic earnings per share  $1.22  $0.94  $0.85  $0.69  $0.58 
Diluted earnings per share  $1.16  $0.91  $0.82  $0.66  $0.55 
Weighted average:                     

Basic shares outstanding

   72,307   68,643   67,389   66,108   64,348 

Diluted shares outstanding

   77,162   74,942   70,251   68,878   68,161 

 

- 2231 -


All share and per share information has been adjusted to reflect the two-for-one stock split effected in the form of a 100% stock dividend that was declared on August 10, 2005 and distributed on September 30, 2005.

Consolidated Balance Sheet Data: As of June 30
(In thousands) 2006 2005 2004 2003 2002

Working capital

 $381,284 $141,659 $222,230 $191,322 $142,809

Total assets

  1,007,221  774,146  549,151  459,595  376,191

Long-term debt, less current maturities

  116,212  58,934  113,250  113,250  123,250

Total stockholders’ equity

  738,148  474,065  361,499  286,433  192,930

ITEM 7MANAGEMENTS DISCUSSIONAND ANALYSISOF FINANCIAL CONDITIONAND RESULTSOF OPERATIONS

 

Overview

 

Management’s discussion and analysis of financial condition and results of operations should be read in conjunction with selected financial data and consolidated financial statements and notes, included herein. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements due to known and unknown risks, uncertainties and other factors, including those risks discussed in “Risk Factors” and elsewhere in this report.

 

We design, manufactureare a leading developer, manufacturer and marketdistributor of medical equipment for the diagnosistreating, diagnosing, and treatment ofmanaging sleep-disordered breathing conditions, includingand other respiratory disorders. Sleep-disordered breathing, or SDB, includes obstructive sleep apnea. Our net revenues are generated fromapnea, or OSA, and other respiratory disorders that occur during sleep. When we were formed in 1989, our primary purpose was to commercialize a treatment for OSA developed by Professor Colin Sullivan. This treatment, nasal Continuous Positive Airway Pressure, or CPAP, was the sale and rental of our various flow generator devices,first successful noninvasive treatment for OSA. CPAP systems deliver pressurized air, typically through a nasal mask, systems, accessories and other products, and, to a lesser extent from royalties and salesprevent collapse of custom motors.the upper airway during sleep.

 

We have invested significant resources in research and development and product enhancement. Since 1989,the development of CPAP, we have developed several innovations to the original CPAP device to increase patient comfort and to improve easea number of product use. We have been developinginnovative products for automated treatment, titrationSDB and monitoringother respiratory disorders including airflow generators, diagnostic products, mask systems, headgear and other accessories. Our growth has been fuelled by geographic expansion, increased awareness of OSA, suchrespiratory conditions as the AutoSet Ta significant health concern among physicians and AutoSet Spirit flow generators.patients, and our research and product development effort.

 

We currently employ approximately 2,500 people and market our products in over 67 countries using a network of distributors, independent manufacturers’ representatives and our direct sales force. We market our products primarily to home health care dealers and sleep clinics. 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.

Our principal manufacturing facility is located in Sydney, Australia, and we have additional manufacturing facilities in Munich, Germany, Combs La Ville, France and Canoga Park, California. 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.

- 32 -


Business Acquisitions

Fiscal year ended June 30, 2006

PolarMed Holding AS (“PolarMed”).    On December 1, 2005, we acquired 100% of the outstanding stock of PolarMed, the holding company for PolarMed AS and its affiliates, for net cash consideration of $6.5 million. This consisted of $6.8 million in consideration less $0.3 million of cash acquired. Additionally, as part of the acquisition we assumed debt of $1.5 million. Under the purchase agreement, we may also be required to make additional future payments of up to $3.0 million based on the achievement of certain performance milestones following the acquisition through December 31, 2008. The acquisition and the immediate repayment of the majority of the assumed debt were funded with cash on hand.

PolarMed is predominantly a Norwegian based company, with affiliated operations based in Sweden and Denmark, which distributes medical equipment and associated services for the treatment of sleep and respiratory patients. PolarMed was our Norwegian distributor before the acquisition, and the acquisition is consistent with our strategy for ongoing expansion of our international operations.

The acquisition has been accounted for using purchase accounting and has been included within our consolidated financial statements from December 1, 2005. An amount of $4.4 million, representing the excess of the purchase price over the fair value of identifiable net assets acquired of $2.4 million, has been recorded as goodwill, which will not be tax deductible under Norwegian tax law. The cost of the acquisition was allocated to the assets acquired and liabilities assumed based on estimates of their respective fair values at the date of acquisition. We have not yet completed the purchase price allocation, as the appraisals associated with the valuation of certain tangible assets are not yet complete. We do not believe that the appraisals will materially modify the preliminary purchase price allocation. We expect to complete our purchase price allocation in the quarter ending September 30, 2006.

Pulmomed Medizinisch-Technische Geräte GmbH (“Pulmomed”).    On July 1, 2005, we acquired 100% of the outstanding stock of Pulmomed for net cash consideration of $2.5 million, including acquisition costs. Additionally, as part of the acquisition we assumed debt of $1.0 million. Under the purchase agreement, we may also be required to make additional future payments of up to $0.9 million based on the achievement of certain performance milestones following the acquisition through June 30, 2007.

Pulmomed is an Austrian based company that distributes medical equipment and associated services for the treatment of sleep and respiratory patients. The acquisition of Pulmomed is consistent with our strategy for ongoing expansion of our international operations.

The acquisition has been accounted for using purchase accounting and has been included within our consolidated financial statements from July 1, 2005. An amount of $1.8 million, representing the excess of the purchase price over the fair value of identifiable net assets acquired of $0.7 million, has been recorded as goodwill, which will not be tax deductible under Austrian tax law. The cost of the acquisition was allocated to the assets acquired and liabilities assumed based on estimates of their respective fair values at the date of acquisition. The fair values were determined by an independent appraisal and internal studies.

Of the potential additional future payments included within the purchase agreement, $0.3 million was accrued at June 30, 2006 as a result of the successful achievement of a performance milestone. The impact of this accrual was to increase the total acquisition consideration to $2.8 million from $2.5 million and to increase the amount recorded as goodwill by $0.3 million to $2.1 million.

- 33 -


Fiscal year ended June 30, 2005

Saime SAS (“Saime”).    We acquired 100% of the outstanding stock of Financiere ACE SAS, the holding company for Saime and its affiliates, on May 19, 2005, for net cash consideration of $40.6 million. This consisted of $51.1 million in consideration, including acquisition costs, less $10.5 million of cash acquired. At June 30, 2005, we had not yet completed the purchase price allocation as the appraisals associated with the valuation of certain tangible assets were not yet complete. The fair values have now been finalized based on the receipt and evaluation of independent appraisals. The impact of the completion of the purchase price allocation was to increase the fair value of the acquired fixed assets by approximately $0.7 million to $2.9 million, increase the fair value of acquired liabilities, including deferred tax liabilities, by approximately $0.4 million to $91.7 million, increase the fair value of acquired deferred tax assets by approximately $1.2 million to $2.0 million and to decrease the amount recorded as goodwill by $1.5 million to $64.8 million. The acquisition has been accounted for using purchase accounting and has been included within our consolidated financial statements from May 19, 2005.

Hoefner Medizintechnick GmbH (“Hoefner”).    We acquired 100% of the outstanding stock of Hoefner on February 14, 2005, for net cash consideration of $8.2 million. This consisted of the $10.7 million in total consideration, including acquisition costs, less $2.5 million of cash acquired. Under the purchase agreement, additional future payments of up to $0.9 million are possible based on the achievement of certain performance milestones following the acquisition through December 31, 2006. Of these potential additional payments, $0.6 million was paid during the year ended June 30, 2006 as a result of the successful achievement of a performance milestone. The impact of this payment was to increase the total acquisition consideration to $11.3 million from $10.7 million and to increase the amount recorded as goodwill by $0.6 million to $8.8 million. The acquisition has been accounted for using purchase accounting and has been included within our consolidated financial statements from February 14, 2005.

Resprecare BV (“Resprecare”).    On December 1, 2004, we acquired substantially all the assets of Resprecare BV, our Dutch distributor, for initial consideration of $5.9 million in cash, including acquisition costs. The acquisition of the exclusive Dutch distributor is consistent with our strategy for ongoing expansion of our international operations. Under the purchase agreement, we potentially were also required to make up to $1.4 million of additional future payments based on the achievement of certain milestones. Of these potential additional payments, $0.6 million was paid in January 2005 as a result of the successful achievement of a performance milestone and a further $0.7 million was accrued at June 30, 2005 as a result of the integration of the Dutch subsidiary of our subsidiary MAP with the newly-acquired Resprecare business. The final payment of $0.7 million was made in January 2006.

The acquisition was accounted for using purchase accounting and accordingly, the results of operations of Resprecare were included within our consolidated financial statements from December 1, 2004. An amount of $4.4 million, representing the excess of the purchase price over the fair value of identifiable net assets acquired of $2.8 million, was recorded as goodwill, which is tax deductible. An independent third party has completed a valuation of identifiable intangible assets associated with the Resprecare acquisition. As a result of this valuation, $1.7 million was recorded as a customer relationship intangible asset and is being amortized over its estimated useful life of seven years.

 

Fiscal year ended June 30, 2004

 

Respro Medical Company Limited (“Respro”).On July 2, 2003 we acquired the assets of Respro, Medical Company Limited (“Respro”), our Hong Kong distributor, for total consideration of $184,000 in cash. The acquisition has been

- 34 -


accounted for as ausing purchase accounting and accordingly, the results of operations of Respro 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, 2003In-Process Research and Development Charge (“IPR&D”)

 

John StarkOn acquisition of Saime in May 2005, we recognized as an expense a charge of $5.3 million with respect to IPR&D programs under active development by Saime that, at date of acquisition, had not reached technological feasibility and Associates.    On July 24, 2002 we acquired the business of John Starkhad no alternative future use. The estimated fair value assigned to IPR&D was based on an independent appraisal 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 excesswas comprised of the purchase price over the fair value of net identifiable assets acquired of $nil, has been recorded as goodwill.following projects (in thousands):

 

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.

Project  Value of IPR&D

Upgrade of the Elisee Series of ventilators

  $1,379

Next generation of portable ventilators

   3,889

Total

  $5,268

 

The acquisition has been accounted for as a purchase and accordingly, the results of operations of Labhardt AG have been included in our consolidated financial statements from November 15, 2001. 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.

SMI Acquisition.    On May 14, 2002, we acquired all of the common stock of Servo Magnetics Incorporated (“SMI”) 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 price paid in cash. Upon consummation of the merger, the surviving corporation, Servo Magnetics Acquisition Inc., changed its name to Servo Magnetics Inc.

- 23 -


The acquisition has been accounted for as a purchase and accordingly, the results of operations 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 $0.4 million was expensed upon acquisition of SMI because technological feasibility of the products under development had not been established and no further alternative uses existed. The value of in-process technologyIPR&D was calculated by identifying research projects in areas for which technological feasibility had not been established, estimating the costs to develop the purchased in 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 rate used in the analysis was 19% and25%, which was based on the risk profile of the acquired assets.

 

Purchased research andAs of the date of acquisition, these projects had estimated costs to complete totaling approximately $5.3 million. The projects were in various stages of development projects relatedbut are expected to electrical motor systems used in our flow generator devices and other medical and data storage equipment. Keyreach completion at various dates ranging from one to three years.

We believe that the assumptions used into value the analysis included gross margins of 34%. The majority of the new motor systems have been completed and have performed in line with expectationsacquired 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.

 

In-Process Research and Development ChargeStock-Based Compensation Costs

 

On acquisitionWe have granted stock options to personnel, including officers and directors, under both our 1995 Option Plan and our 1997 Equity Participation Plan, which we refer to collectively as the Plans. These options have expiration dates 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 atten years from the date of acquisition. The five projects were:grant and vest over three or four years. We granted these options with an exercise price equal to the market value as determined at the date of grant. We have also offered to our personnel, including officers and directors, the right to purchase shares of our common stock at a discount under our employee stock purchase plan, or ESPP.

 

(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 duePrior to July 1, 2005, we applied APB Opinion No. 25, “Accounting for releaseStock Issued to Employees” and related Interpretations, in October 2001. Delays in the design and manufacturing process delayed the releaseaccounting 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 referredour equity plans. For periods prior to as the Papillon) has met or exceeded all sales forecasts.

(ii)New headgear

The new headgear product line was withheld to coincideJuly 1, 2005, we complied with the releasedisclosure only provisions of the Papillon mask systemSFAS No. 123, “Accounting for Stock-Based Compensation”, or SFAS 123. No stock-based employee compensation cost was reflected 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 andnet income, as all options granted under those plans had an exercise price equal to the introductionmarket value of integrated humidification flow generator devices by a number of competitors during fiscal 2002, we have abandoned the standalone humidifier project.

 

- 2435 -


Givenunderlying common stock on the relatively small revenue forecastdate of grant (or within permitted discounted prices as it pertains to the product lineESPP). Results for periods before July 1, 2005 have not been restated to reflect, and do not include the impact of, SFAS No. 123(R), “Share Based Payment”, or SFAS 123(R). While our financial statements through June 30, 2005 account for stock option grants pursuant to APB No. 25, in accordance with SFAS No. 123, we disclose in the in-process research and development model,notes to our financial statements the financialpro forma impact on our net income had we accounted for stock option grants using the fair value based method 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.accounting.

 

As of July 1, 2005, we adopted SFAS No. 123(R), using the modified prospective method, which requires measurement of compensation expense of all stock-based awards at June 30, 2004, fourfair value on the date of grant and amortization of the five programsfair value over the vesting period of the award. Under the prospective method, the provisions of SFAS 123(R) apply to all awards granted or modified after the date of adoption. In addition, the unrecognized expense of awards not yet vested at the date of adoption, determined under the original provisions of SFAS No. 123, shall be recognized in net income in the periods after adoption. The fair value of stock options is determined using the Black-Scholes valuation model, which is consistent with valuation techniques previously utilized for options in footnote disclosures required under SFAS No. 123, as amended by SFAS No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure”. Such value is recognized as expense over the service period, net of estimated forfeitures, using the graded attribution method for stock-based awards granted prior to July 1, 2005 and the straight-line method for stock-based awards granted after July 1, 2005.

The application of SFAS 123(R) had the following effect on reported amounts relative to amounts that would have been completedreported under previous accounting (in thousands, except per share data):

   2006
   Under Previous
Accounting
  

SFAS 123(R)

Adjustments

  As
Reported

Cost of sales

  $229,210  $891  $230,101

Operating expenses:

            

Selling, general and administration

   187,796   12,372   200,168

Research and development

   35,174   2,042   37,216

Income from operations

   146,605   (15,305)  131,300

Income before income taxes

   148,699   (15,305)  133,394

Net income

   100,183   (11,972)  88,211

Inventories, net

   115,787   407   116,194

Earnings per share:

            

Basic

  $1.39  $(0.17) $1.22

Diluted

  $1.30  $(0.14) $1.16

Cashflow from operating activities

  $108,781  $(9,753) $99,028

Cashflow from financing activities

  $88,014  $9,753  $97,767

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The fair value of stock options granted under our stock option plans and purchase rights granted under our ESPP is estimated on the date of the grant using the Black-Scholes option-pricing model with the releasefollowing weighted average assumptions:

   Years ended June 30
   2006 2005 2004

Stock Options:

       

Weighted average fair value

  12.75 8.49 7.44

Weighted average risk-free interest rate

  3.9-4.5% 4.0% 2.9%

Dividend yield

  - -  

Expected option life in years

  3.9-5.2 3.5-4.6 3.3-4.2

Volatility

  28-30% 31% 43%

ESPP Purchase rights:

       

Weighted average risk-free interest rate

  3.2-4.9% 2.3% -

Dividend yield

  - - -

Expected option life

  6 months 6 months -

Volatility

  29-41% 31-38% -

Expected volatilities are based on a combination of historical volatilities of our stock and implied volatilities from traded options of our stock. The expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and our historical exercise patterns. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the Papillon mask system, upgraded headgear, Magellan flow generator and MicroMESAM.option.

 

Given the completionThe guidance in SFAS No. 123(R) is relatively new, and best practices are not well established. The application of the above research programsthese principles may be subject to further interpretation and performancerefinement over time. There are significant differences among option valuation models, and this may result in a lack of the associated product lines,comparability with other companies that use different models, methods and assumptions. If factors change and we remain confidentemploy different assumptions in the assumptions usedapplication of SFAS No. 123(R) in future periods, or if we decide to determineuse a different valuation model, the in-process researchcompensation expense that we record in the future under SFAS No. 123(R) may differ significantly from what we have recorded in the current period and development chargecould materially affect our operating income, net income and as a result, the net return of the MAP acquisition.income per share.

 

Tax Expense.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 was 30% in fiscal 2004, 2003year 2006, 2005 and 2002.2004. During fiscal 2004, 2003years 2006, 2005 and 2002,2004, our effective tax rate has fluctuated between approximately 31%32.3% and approximately 33%33.9%. 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.

 

During the fourth quarter of fiscal year 2006, we made the decision to repatriate earnings from certain foreign subsidiaries to take advantage of a temporary incentive under the American Jobs Creation Act of 2004. This temporary incentive provides an 85% exclusion from U.S. taxable income for qualifying dividends received from controlled foreign corporations. The repatriation of $75 million resulted in a one-time additional income tax expense of $3.5 million for the year ended June 30, 2006. The repatriation of these funds to the United States provides us with increased flexibility in the utilization of cash to further its strategic objectives.

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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, 2004,2006 Compared to Fiscal Year Ended June 30, 20032005

Net Revenues.    Net revenue increased for the year ended June 30, 2006 to $607.0 million from $425.5 million for the year ended June 30, 2005, an increase of $181.5 million or 43%. The increase in net revenue was attributable to an increase in unit sales of our flow generators, masks and accessories and incremental sales contributed from acquisitions. Sales were negatively impacted by the appreciation of international currencies against the U.S. dollar (decreasing sales by approximately $11.3 million).

Excluding the impact of acquisitions and unfavourable foreign currency movements sales for the year ended June 30, 2006 increased by 32% compared to the year ended June 30, 2005. Net revenue in North and Latin America increased for the year ended June 30, 2006 to $321.0 million from $218.1 million for the year ended June 30, 2005, an increase of $102.9 million or 47%. This growth has been generated by increased public and physician awareness of sleep-disordered breathing together with our continued investment in our sales force and marketing initiatives. Recent product releases, in particular our Mirage Swift mask and S8 flow generator platform, have also contributed strongly to our sales growth.

Net revenue in markets outside the Americas increased for the year ended June 30, 2006 to $286.0 million from $207.4 million for the years ended June 30, 2006 and 2005 respectively, an increase of 38%. International sales growth for the year ended June 30, 2006 reflects organic growth in the overall sleep-disordered breathing market and the recent acquisitions of Resprecare, Hoefner, Saime, PolarMed and Pulmomed. These acquisitions contributed incremental revenue of $52.7 million for the year ended June 30, 2006. Excluding the impact of acquisitions and unfavourable foreign currency movements, international sales for the year ended June 30, 2006 grew by 17% compared to the year ended June 30, 2005.

Sales of flow generators for the year ended June 30, 2006 totaled $316.6 million, an increase of 51% compared to the year ended June 30, 2005, including increases of 47% in North and Latin America and 53% elsewhere. Sales of mask systems, motors and other accessories totaled $290.4 million, an increase of 35%, including increases of 47% in North and Latin America and 16% elsewhere, for the year ended June 30, 2006, compared to the year ended June 30, 2005. These increases primarily reflect growth in the overall sleep-disordered breathing market, acquisitions during the year, and new product releases, particularly the Mirage Swift and our new flow generator platform, the S8.

Gross Profit.    Gross profit increased for the year ended June 30, 2006 to $376.9 million from $274.9 million for the year ended June 30, 2005, an increase of $102.0 million or 37%. Gross profit as a percentage of net revenue decreased for the year ended June 30, 2006 to 62% from 65% for the year ended June 30, 2005. The reduction in gross margin reflects the change in product and geographical mix of sales with a higher proportion of sales in flow generators, which generate lower margins relative to our mask sales, and higher North and Latin American sales, which also typically generate lower margins relative to our international sales, as well as the additional stock-based compensation costs. Stock-based compensation expenses of $0.9 million have been included within cost of sales for the year ended June 30, 2006 as compared to no stock-based compensation expense for the year ended June 30, 2005.

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Selling, General and Administrative Expenses.    Selling, general and administrative expenses increased for the year ended June 30, 2006 to $200.2 million from $135.7 million for the year ended June 30, 2005, an increase of $64.5 million or 48%. As a percentage of net revenue, selling, general and administrative expenses for the year ended June 30, 2006 was 33%, marginally higher than 32% in the year ended June 30, 2005. Stock-based compensation expenses of $12.4 million have been included within selling, general and administrative expenses for the year ended June 30, 2006. Excluding the impact of stock-based compensation expenses, as a percentage of net revenue, selling, general and administrative expenses for the year ended June 30, 2006 were 31%, which is marginally lower than 32% in the year ended June 30, 2005.

The increase in selling, general and administrative expenses was primarily due to stock-based compensation costs, an increase in the number of sales and administrative personnel to support our growth, the acquisitions of Resprecare, Hoefner, Saime, PolarMed and Pulmomed, continued infrastructure investment, particularly in our European businesses, and other expenses related to the increase in our sales. As a percentage of net revenue, we expect our future selling, general and administrative expense to continue in the historical range of 31% to 34%.

Research and Development Expenses.    Research and development expenses increased for the year ended June 30, 2006 to $37.2 million from $30.0 million for the year ended June 30, 2005, an increase of $7.2 million or 24%. As a percentage of net revenue, research and development expenses were 6% for the year ended June 30, 2006 compared to 7% for the year ended June 30, 2005. Stock-based compensation costs of $2.0 million have been included within research and development expenses for the year ended June 30, 2006. As a percentage of net revenue, we expect our future research and development expense to continue in the range of 5% to 7%.

Donations to Foundations.    In the years ended June 30, 2006 and 2005, we donated $0.8 million and $0.5 million, respectively, to the ResMed Foundation in the United States, and the ResMed Foundation in Australia. The Foundations’ overall mission includes the education of both the public and physicians about the inherent dangers of untreated SDB/OSA, particularly as it relates to cerebrovascular and cardiovascular disease.

In-process Research and Development Charge.    No in-process research and development charge was incurred for the year ended June 30, 2006. For the year ended June 30, 2005, purchased in-process research and development of $5.3 million was expensed upon the acquisition of Saime as technological feasibility of the products under development had not been established and no further alternative uses existed. The nature of this charge is explained in further detail in note 20 to the consolidated financial statements.

Amortization of Acquired Intangible Assets.    Amortization of acquired intangible assets for the year ended June 30, 2006 totaled $6.3 million compared to $0.9 million for the year ended June 30, 2005. The amortized amounts in 2006 related to acquired intangible assets associated with the acquisitions of Pulmomed, PolarMed, Saime, Hoefner and Resprecare.

Restructuring Expenses.    Restructuring expenses incurred for the year ended June 30, 2006 were $1.1 million compared to $5.2 million for the year ended June 30, 2005. Restructuring expenses for 2006 consisted of restructure charges associated with our integration of the separate operations of ResMed Germany and MAP into a single operating unit. We have completed the relocation of our ResMed Germany operation, previously located in Moenchengladbach, to Munich and associated integration of the back office functions including customer service, logistics and administration. We plan to continue to monitor the progress of this restructure and adjust our business strategies and personnel accordingly in an effort to maximize efficiencies and cost savings.

- 39 -


Other Income (Expense), Net.    Other income, net for the year ended June 30, 2006 was $2.1 million, an increase of $2.8 million from other expense, net of $0.7 million for the year ended June 30, 2005. This was predominantly due to higher interest income on additional cash balances and the lower interest expense due to the reduction in our convertible debt, which was converted into equity during the quarter ended March 31, 2006. Other factors included higher foreign currency gains on foreign currency transactions and hedging offset by an impairment loss of $1.2 million on one of our cost method investments.

Income Taxes.    Our effective income tax rate increased to approximately 33.9% for the year ended June 30, 2006 from approximately 33.0% for the year ended June 30, 2005. This was primarily due to the one-time additional income tax expense of $3.5 million associated with the repatriation of $75 million in dividends received from certain controlled foreign corporations. These dividend payments were made to take advantage of a temporary tax incentive under the American Jobs Creation Act of 2004, which provides an 85% exclusion from U.S. taxable income for qualifying dividends. The repatriation of these funds to the United States provides us with increased flexibility in the utilization of cash to further our strategic objectives.

Excluding the impact of the one-time additional income tax expense of $3.5 million relating to the dividend repatriation, the effective tax rate for the year ended June 30, 2006 was 31.2%. This compares to an adjusted effective tax rate of approximately 31.2% for the year ended June 30, 2005 when excluding the impact of the non-deductible in-process research and development charge of $5.3 million incurred in the prior year. We continue to benefit from the Australian corporate tax rate of 30% and certain Australian research and development tax benefits because we generate a majority of our taxable income in Australia.

Net Income.    As a result of the factors above, our net income for the year ended June 30, 2006 was $88.2 million or $1.16 per diluted share compared to net income of $64.8 million or $0.91 per diluted share for the year ended June 30, 2005. The net after tax impact of stock-based compensation costs, restructuring expenses, in-process research and development charge, amortization of acquired intangible assets and the repatriation of funds described above resulted in a reduction of diluted earnings per share of $0.26 and $0.12 on an after-tax basis, respectively, for the years ended June 30, 2006 and 2005.

Fiscal Year Ended June 30, 2005 Compared to Fiscal Year Ended June 30, 2004

 

Net Revenues.    Net revenue increased for the year ended June 30, 20042005 to $339.3$425.5 million from $273.6$339.3 million for the year ended June 30, 2003,2004, an increase of $65.7$86.2 million or 24%25%.

The increase in net revenue was attributable to an increase in unit sales of our flow generators, masks and accessories. Sales also benefited from an appreciation of international currencies against the

- 25 -


U.S. dollar (increasing sales by approximately $18.6$10.4 million). Net revenue in North and Latin America increased for the year ended June 30, 2005 to $218.1 million from $166.1 million for the year ended June 30, 2004, an increase of $52.0 million or 31%. This growth has been generated by increased public and physician awareness of sleep-disordered breathing together with our continued investment in our sales force and marketing initiatives. Product releases during the year, in particular our Mirage Swift mask, have also contributed strongly to our sales growth.

Net revenue in markets outside the Americas increased for the year ended June 30, 2005 to $207.4 million from $130.7$173.2 million for the years ended June 30, 2005 and 2004 and 2003 respectively. This growth primarily reflects increased public and physician awarenessrespectively, an increase of sleep-disordered breathing. Net revenue in international markets increased to $173.2 million from $142.8 million for the years ended June 30, 2004 and 2003 respectively.20%. International sales growth for the year ended June 30, 20042005 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. Excluding the impact of these sales, international sales grew by 26%. Excluding both the impacts of the appreciation of international currencies against the U.S. dollar and SARS-related sales,the acquisition during the year of Resprecare, Hoefner and Saime. These acquisitions contributed incremental revenue of $11.5 million for the year ended June 30, 2005. Excluding the impact of acquisitions, international sales grew by 12%13%.

 

- 40 -


Sales of flow generators for the year ended June 30, 2004 increased by 18%2005 totaled $209.8 million, an increase of 24% compared to the year ended June 30, 2003,2004, including increases of 20%22% in North and Latin America and 16%25% elsewhere. Sales of mask systems, motors and other accessories increased by 31%totaled $215.7 million, an increase of 27%, including increases of 33%38% in North and Latin America and 29%12% elsewhere, for the year ended June 30, 20042005, compared to the year ended June 30, 2003.2004. These increases primarily reflect growth in the overall sleep-disordered breathing market, andacquisitions during the year, appreciation of international currencies against the U.S. dollar.dollar and new product releases.

 

Gross Profit.    Gross profit increased for the year ended June 30, 20042005 to $216.7$274.9 million from $173.1$216.7 million for the year ended June 30, 2003,2004, an increase of $43.6$58.2 million or 25%27%. Gross profit as a percentage of net revenue increased for the year ended June 30, 20042005 to 64%65% from 63%64% for the year ended June 30, 2003.2004. The small improvement in gross margin reflects a more favorable product mix due to increased sales of higher margin mask 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.new product introductions.

 

Selling, General and Administrative Expenses.Selling, general and administrative expenses increased for the year ended June 30, 20042005 to $104.7$135.7 million from $85.3$104.7 million for the year ended June 30, 2003,2004, an increase of $19.4$31.0 million or 23%30%. As a percentage of net revenue, selling, general and administrative expenses for the year ended June 30, 20042005 was 31%32%, consistent withmarginally higher than 31% in the year ended June 30, 2003.2004. The increase in selling, general and administrative expenses was primarily due to an increase in the number of sales and administrative personnel to support our growth, the acquisitions of Resprecare, Hoefner and Saime, continued infrastructure investment, particularly in our European businesses, 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$4.0 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.    Research and development expenses increased for the year ended June 30, 20042005 to $26.2$30.0 million from $20.5$26.2 million for the year ended June 30, 2003,2004, an increase of $5.7$3.8 million or 28%15%. As a percentage of net revenue, research and development expenses were 7.7%7% for the year ended June 30, 20042005 compared to 7.5%8% for the year ended June 30, 2003.2004. The increase in research and development expenses was primarily due to increased salaries associated with an increase in personnelhigher employee compensation 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 development costs are incurred in Australian dollars. The appreciation of international currencies against the U.S. dollar added approximately $3.8$1.3 million to our research and development expenses as reported in U.S. dollars.

 

Donations to Foundations.    In the years ended June 30, 2005 and 2004 we donated $0.5 million and $0.5 million, respectively, to the ResMed Foundation in the U.S., and the Resmed Foundation in Australia. The Foundations’ overall mission includes the education of both the public and physicians about the inherent dangers of untreated SDB/OSA, particularly as it relates to cerebrovascular and cardiovascular disease.

In-process Research and Development Charge.    Purchased in-process research and development of $5.3 million was expensed upon acquisition of Saime as technological feasibility of the products under development had not been established and no further alternative uses existed. The nature of this charge is explained more fully in note 20 to the consolidated financial statements.

Amortization of Acquired Intangible Assets.    Amortization of acquired intangible assets for the year ended June 30, 2005 totaled $0.9 million compared to $nil for the year ended June 30, 2004, and related to acquired intangible assets totaling $46.0 million associated with the acquisitions of Saime, Hoefner and Resprecare.

- 2641 -


Restructuring Expenses.    Restructuring expenses incurred for the year ended June 30, 2005 were $5.2 million and consisted of restructure charges associated with our integration of the separate operations of ResMed Germany and MAP into a single operating unit. We have completed the relocation of our ResMed Germany operation, previously located in Moenchengladbach, to Munich and associated integration of the back office functions including customer service, logistics and administration. We will continue to monitor the progress of this restructure and adjust our business strategies and personnel accordingly to achieve maximum efficiencies and cost savings.

Other Income (Expense), Net.    Other expense, net increased for the year ended June 30, 2004 to net expense of2005 was $0.7 million, from net expense of $0.1 million forconsistent with the year ended June 30, 2003. The increase in2004. In fiscal year 2005, other expense, was attributable to no gains on extinguishment of debt this year compared to $0.5 million for the year ended June 30, 2003, andnet reflected lower net foreign currency exchange gains, partially offset by lower interest expense due to the reduction in our convertible note debt.debt that occurred in the 2004 fiscal year.

 

Income Taxes.    Our effective income tax rate increased to 32.3%approximately 33% for the year ended June 30, 20042005 from 31.9%approximately 32% for the year ended June 30, 2003.2004. However, adding back the impact of the non-deductible in-process research and development charge of $5.3 million taken in the year ended June 30, 2005 would result in an adjusted effective tax rate of approximately 31%. The marginally higherlower adjusted effective tax rate was primarily due to theour geographical mix of taxable income. WeIn particular, we continue to benefit from the Australian corporate tax rate of 30%, and certain Australian R&D tax benefits because we generate a majority of our taxable income in Australia.

 

Fiscal Year Ended June 30 2003, Compared to Fiscal Year Ended June 30 2002

Net Revenues.Income.    Net revenue increasedAs a result of the factors above, our net income for the year ended June 30, 20032005 was $64.8 million or $0.91 per diluted share compared to $273.6net income of $57.3 million from $204.1 millionor $0.82 per diluted share for the year ended June 30, 2002,2004. The restructuring expenses, in-process research and development charge and amortization of acquired intangible assets described above resulted in a reduction of earnings per diluted share of $0.12 and $0.00 on an increase of $69.5 million or 34%.

The increase in net revenue was attributable to an increase in unit sales of our flow generators and accessories. 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 millionafter-tax basis, respectively, for the years ended June 30, 20032005 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 the overall 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 the 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 to the year ended June 30, 2002. These increases primarily reflect growth in the overall sleep-disordered breathing market, appreciation of international currencies against the U.S. dollar and our acquisition of SMI.

Gross Profit.    Gross profit increased for the year ended June 30, 2003 to $173.1 million from $133.2 million for the year ended June 30, 2002, an increase of $39.9 million or 30%. Gross profit as a percentage of net revenue decreased for the year ended June 30, 2003 to 63% from 65% for the year ended June 30, 2002, reflecting 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 and, to a lesser extent, the inclusion of SMI’s motor sales which achieve lower margins compared to our overall gross margin.2004.

 

Selling, General and Administrative Expenses.    Selling, general and administrative expenses increased for the year ended June 30, 2003 to $85.3 million from $64.5 million for the year ended June 30, 2002, an increase of $20.8 million or 32%. As a percentage of net revenue, selling, general and administrative expenses for the year ended June 30, 2003 decreased to 31% compared to 32% for the year ended June 30, 2002. The increase in selling, general and administrative expenses was primarily due to an increase in 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.    Research and development expenses increased for the year ended June 30, 2003 to $20.5 million from $14.9 million for the year ended June 30, 2002, an increase of $5.6 million or 38%. As a percentage of net revenue, research and development expenses were 7.5% for the year ended June 30, 2003 compared to 7.3% for the year ended June 30, 2002. The increase in research and development expenses was due to increased salaries associated with an increase in personnel and increased charges for consulting fees, clinical trials and technical assessments incurred to facilitate development of new products. 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. In constant currency terms, research and 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), net decreased for the year ended June 30, 2003 to net expense of $0.1 million from net income of $3.4 million for the year ended June 30, 2002. The decrease in other income was attributable to lower gains on extinguishment of debt partially offset by increased net foreign currency exchange gains, and lower interest expense due to the reduction in convertible note debt.

Income Taxes.    Our effective income tax rate increased to 31.9% for the year ended June 30, 2003 from 31.3% for the year ended June 30, 2002. The marginally higher tax rate was primarily due to the geographical 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 in Australia.

Liquidity and Capital Resources

 

As of June 30, 20042006 and June 30, 2003,2005, we had cash and cash equivalents and marketable securities available-for-sale of $140.9$219.5 million and $121.0$142.2 million, respectively. Working capital was $217.2$381.3 million and $191.3$141.7 million at June 30, 20042006 and June 30, 20032005, respectively. The increase in working capital predominantly reflects the conversion of our convertible subordinated notes into equity in March 2006 as well as the growth and profitability of the business during the year.

 

Inventories at June 30, 20042006 increased by $6.4$27.1 million or 13%30% to $55.8$116.2 million compared to June 30, 20032005 inventories of $49.4$89.1 million. The percentage increase in inventories was lesslower than the 24% incremental increase of 43% in revenues in the year ended June 30, 20042006 compared to the year ended June 30, 2003. The lower inventory2005, which we believe reflects strong sales 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 and consequently inventory balances at June 30, 2004. improved working capital management.

Accounts receivable at June 30, 20042006 were $67.2$138.1 million, an increase of $10.5$34.2 million or 19%33% over the June 30, 20032005 accounts receivable balance of $56.7$104.0 million. ThisExcluding the incremental increase from acquisitions, our accounts receivables have increased by $31.3 million or 30%. The increase was modestly lower than the 24%43% incremental increase in revenues for the year ended June 30, 20042006 compared to the year ended June 30, 2003.2005 and predominantly reflects the impact of our acquisitions, as sales increased by 30% on an ex-acquisition basis. Accounts receivable days sales outstanding increased to 64of 70 days for the quarter endedat June 30, 2004,2006 decreased by 1 day compared to 6271 days for the quarter endedat 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, 2003.2005. Our allowance for doubtful accounts as a percentage of total accounts receivable at June 30, 20042006 and 20032005 was 4.5%3.3% and 4.2%3.0%, respectively. The credit quality of our customers remains consistent with our past experience.

 

During the year ended June 30, 2004,2006, we generated cash of $76.5$99.0 million from operations. This was higher than the cash generated from operations primarily as a result of increased profit and improved working capital management, particularly in respect of inventories and accounts payable. Duringfor the year ended June 30, 2003 approximately $59.32005 of $71.1 million and

- 42 -


was primarily the result of the increase in net income and improved working capital management. In addition, cash generated from operations for the year end June 30, 2006 was generatedreduced by operations.$9.8 million due to the initial adoption of SFAS 123(R) as tax benefits associated with employee stock options exercised during the year are required to be included within cash flows from financing activities. Prior to the adoption of SFAS 123(R), cash retained as a result of tax deductions relating to stock-based compensation was presented in operating cash flows, along with other tax cash flows.

 

Capital expenditures for the years ended June 30, 20042006 and 20032005 aggregated $57.2$102.7 million and $25.6$39.7 million respectively. For the year ended June 30, 2004, $40.9 million of the expenditure 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. The capital expenditures in the year ended June 30, 20032006 primarily reflected the construction of our new manufacturing, facility, acquisitionresearch and development building, purchase of land in San Diego, office facilities, computer hardware and software, including a disaster recovery system,rental and loan equipment and purchase of production tooling equipment.equipment and machinery. As a result of these capital expenditures, our balance sheet reflects net property, plant and equipment of approximately $147.3$245.4 million at June 30, 20042006 compared to $104.7$174.2 million at June 30, 2003.

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 our outstanding 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. At June 30, 2004, we had convertible subordinated notes outstanding of $113.2 million.2005.

 

We may from time to time seek to retireare currently building 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. Newnew research and development and office facilities are expectedat our existing site in Sydney, Australia and expect to behave this completed in MaySeptember 2006. We estimate that the additional building and fit-out costs for the new research and development and office facilities will be approximately $54$12.9 million. We expect to fund the project through a combination of cash on hand and cash generated from operations.

 

On June 6, 2002, the BoardJuly 7, 2005, we purchased a 9.78-acre parcel of Directors authorizedland in San Diego for $21.0 million. The new location at Kearney Mesa, San Diego will allow us to repurchase updevelop a new corporate headquarters. We are currently evaluating building options in relation to 4.0 million shares of our 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 the open market, or in negotiated or block transactions, from time to time as market and business conditions warrant.new corporate headquarters.

 

Details of contractual obligations at June 30, 20042006 are as follows:

 

   Payments Due by Period     Payments Due by Period
In $000’s Total Less than 1 year 1-3 years 4-5 years After 5 years  Total  2007  2008  2009  2010  2011  Thereafter

Long-Term Debt

  113,250 - 113,250 - -  $120,441  $4,796  $38,782  $13,110  $35,173  $28,580  $-

Operating Leases

  11,223 4,947 5,178 1,098     22,511   7,586   5,431   3,799   3,066   1,972   657

Capital Leases

  - - - - -   641   73   73   73   73   73   276

Unconditional Purchase Obligations

  4,820 4,820 - - -   12,926   12,926   -   -   -   -   -

Total Contractual Cash Obligations

 $129,293 9,767 118,428 1,098 -  $156,519  $25,381  $44,286  $16,982  $38,312  $30,625  $933

 

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Details of other commercial commitments at June 30, 20042006 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  Total
Amounts
Committed
  Amount of Commitment Expiration Per Period

Lines of Credit

   - - - - -
In $000’s Total
Amounts
Committed
  2007  2008  2009  2010  2011  Thereafter
   - - - - -  $34  $-  $-  $-  $-  $-

Guarantees*

   1,761 - 886 349 526   2,457   263   -   -   -   -   2,194

Standby Repurchase Obligations

   - - - - -

Other Commercial Commitments

   - - - - -

Total Commercial Commitments

  $1,761 - 886 349 526  $2,491  $297  $-  $-  $-  $-  $2,194

 

*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 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.

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During fiscal year 2006, and pursuant to the Indenture dated June 20, 2001 between us and American Stock Transfer & Trust Company, as trustee, holders of all of the 4% Convertible Subordinated Notes (“the Notes”) due 2006 converted the Notes into an aggregate of 3,737,593 shares of our common stock, par value $0.004. The Notes were converted into 33 shares of our common stock for each $1,000 principal amount of the Notes, at a conversion price of $30.30 per share. The dilutive impact of these conversions has been reflected in the reported earnings per share. With the conversion of the Notes we expect to realize interest expense savings in the future of approximately $2.2 million per annum.

On March 13, 2006, our wholly-owned subsidiaries ResMed Corp., Servo Magnetics Inc. and ResMed EAP Holdings Inc. entered into a Second Amended and Restated Revolving Loan Agreement with Union Bank of California, N.A. as administrative agent for the Lenders (the “Loan Agreement”), that provides for a revolving loan of up to $75 million. The Loan Agreement also contains customary covenants, including certain financial covenants and an obligation that we maintain certain financial ratios, including a maximum ratio of total debt to EBITDA (as defined in the Loan Agreement), a fixed charge coverage ratio, a minimum tangible net worth, and that certain of our subsidiaries maintain a minimum EBITDA and liquidity. We believe we are currently in compliance with all of these covenants. Draws under the revolving loans must be made before March 1, 2011, at which time all unpaid principal and interest under both loans must be repaid. The outstanding principal amount due under the loans will bear interest at a rate equal to LIBOR plus 0.75% to 1.00% (depending on the applicable leverage ratio). At June 30, 2006 there were no amounts outstanding under the Loan Agreement.

On June 8, 2006, our wholly-owned Australian subsidiary, ResMed Limited, entered into a Syndicated Facility Agreement with HSBC Bank Australia Limited as original financier, facility agent and security trustee, that provides for a loan in three tranches.

Tranche A is a EUR 50 million term loan facility that refinances all amounts outstanding under a previous syndicated facility agreement dated May 16, 2005 between ResMed Limited and HSBC Bank Australia Limited, to fund the obligations of our wholly-owned French subsidiary ResMed SA under its agreement to acquire Saime. Tranche A bears interest at a rate equal to LIBOR for deposits denominated in EUR plus a margin of 0.80% or 0.90%, depending on the ratio of the total debt to EBITDA of ResMed Inc. and its subsidiaries, which we refer to as the ResMed Group, for the most recently completed fiscal year for the applicable interest period. Payments of principal must be made to reduce the total outstanding principal amount of Tranche A to EUR 44.5 million on June 30, 2007, EUR 37.75 million on June 30, 2008, EUR 27.5 million on June 30, 2009, EUR 15 million on December 31, 2009, and the entire outstanding principal amount must be repaid in full on June 8, 2011. At June 30, 2006, the Tranche A facility loan had an amount outstanding of $61.7 million.

Tranche B is a USD 15 million term loan facility that may only be used for the purpose of financing capital expenditures and other asset acquisitions by the ResMed Group. Tranche B bears interest at a rate equal to LIBOR for deposits denominated in EUR, Australian dollars, USD, or Sterling plus a margin of 0.80% or 0.90%, depending on the ratio of the total debt to EBITDA of the ResMed Group for the most recently completed fiscal year for the applicable interest period. The entire principal amount must be repaid in full on June 8, 2011. At June 30, 2006, there were no amounts outstanding under the Tranche B facility loan agreement.

Tranche C is a USD 60 million term loan facility that may only be used for the purpose of the payment by ResMed Limited of a dividend to ResMed Holdings Limited, which will ultimately be paid to ResMed Inc. Tranche C bears interest at a rate equal to LIBOR for deposits denominated in EUR, Australian dollars or USD plus a margin of 0.70% or 0.80%, depending on the ratio of the total debt to EBITDA of the ResMed Group for the most recently completed fiscal year for the applicable

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interest period. Payments of principal must be made to reduce the total outstanding principal amount of Tranche C to USD 30 million on December 31, 2007 and the entire outstanding principal amount must be repaid in full by June 8, 2009. At June 30, 2006, the Tranche C facility loan had an amount outstanding of $58.6 million.

The Loan is secured by a pledge of one hundred percent of the shares of ResMed Inc.’s subsidiary, Saime SAS, pursuant to a Pledge Agreement. The Syndicated Facility Agreement also contains customary covenants, including certain financial covenants and an obligation that ResMed Limited maintain certain financial ratios, including a minimum debt service cover ratio, a maximum ratio of total debt to EBITDA and a minimum tangible net worth. The entire principal amount of the Loan and any accrued but unpaid interest may be declared immediately due and payable in the event of the occurrence of an event of default as defined in the Syndicated Facility Agreement. Events of default include, among other items, failure to make payments when due, breaches of representations, warranties or covenants, the occurrence of certain insolvency events, the occurrence of an event or change which could have a material adverse effect on ResMed Limited and its subsidiaries, and if ResMed Inc. ceases to control ResMed Limited, ResMed Corp., ResMed SAS, ResMed GmbH & Co. KG, ResMed (UK) Limited, Take Air Medical Handels-GmbH or Saime SAS.

Simultaneous with the Syndicated Facility Agreement, ResMed Limited entered into a working capital agreement with HSBC Bank Australia Limited for revolving, letter of credit and overdraft facilities up to a total commitment of 6.5 million Australian dollars for one year, and ResMed (UK) Limited entered into a working capital agreement with HSBC Bank plc for a revolving cash advance facility up to a total commitment of 3 million Sterling for one year.

We expect to satisfy all of our short-term liquidity requirements through a combination of cash on hand, cash generated from operations, our $75 million undrawn revolving line of credit with Union Bank of California and our $26.7 million undrawn facilities with HSBC.

 

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 are exposed to the risk that the dollar value equivalent of anticipated cash flows would be adversely affected by changes in foreign currency exchange rates. We manage this risk through foreign currency option contracts.

 

We expect to satisfy allStock Split

On August 10, 2005, our Board of Directors declared a two-for-one split of our short termcommon stock which was effected in the form of a 100% stock dividend. Stockholders received one additional share of common stock for every share held of record on September 15, 2005. All share numbers and long-term liquidity requirements through a combination of cash on hand, cash generated from operationsper share amounts contained in the consolidated financial statements and a $15.0 million undrawn revolving line of credit with Union Bank of California.accompanying notes have been retroactively adjusted to reflect this stock split.

 

Critical Accounting Principles and Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis we evaluate our estimates, including those related to allowance for doubtful accounts, inventory reserves, warranty obligations, goodwill, impaired assets, intangible assets, income taxes, deferred tax valuation allowances, contingencies and contingencies.stock-based compensation costs.

 

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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.

 

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(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 goodwill, intangibles and other long-lived assets and goodwill.assets. 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

- 46 -


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 recognize revenues to the extent that we 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 our domestic sales activities we use a number of Manufacturer Representativesrepresentatives 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.

 

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(7)    Stock-Based Compensation.    In accordance with SFAS 123(R), we measure the compensation of all stock-based awards at fair value on date of grant. Such value is recognized as compensation expense over the service period, net of estimated forfeitures. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including the type of awards, employee class, and historical experience. Actual results may differ substantially from these estimates.


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”) 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 No. 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 January 2003,November 2005, the FASB issued Interpretation No. (“FIN”) 46, ConsolidationFSP FAS123(R)-3, “Transition Election to Accounting for the Tax Effects of Variable Interest Entities,Share-Based Payment Awards”. This FSP requires an entity to follow either the transition guidance for the additional-paid-in-capital pool as prescribed in SFAS 123(R), or the alternative transition method as described in the FSP. We have made a one-time election to adopt the transition method described in this FSP 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. statements.

In December 2003,November 2005, the FASB issued a revisionFSP FAS115-1/124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to FIN 46,Certain Investments”, which addresses the determination as to clarify some requirementswhen an investment is considered impaired, whether that impairment is other than temporary, and add new scope exceptions.the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The revised guidance is effectivein this FSP amends FASB Statements No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, and FASB Statements No. 124 “Accounting for Certain Investments Held by Not-for-Profit Organizations”, and APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock”. We adopted this FSP during the first reporting period beginning after December 15, 2003. The adoption of the provisions of FIN 46Rfiscal year ended June 30, 2006 and it did not have a material impact on our financial condition or results of operations.statements.

 

In April 2003,June 2006, the FASB issued SFAS 149, AmendmentFIN No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of SFAS 133FASB Statement No. 109”, which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. The interpretation prescribes a recognition threshold and

- 47 -


measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 requires recognition of tax benefits that satisfy a greater than 50% probability threshold. It also provides guidance on Derivative Instrumentsderecognition, classification, interest and Hedging Activities, which amendspenalties, accounting in interim periods, disclosure, 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 149transition. FIN No. 48 is effective for contracts entered into or modified after June 30, 2003. Theus beginning July 1, 2007. We are assessing the potential impact that the adoption of SFAS 149 did notFIN No. 48 will have a material impact on our results of operations, financial position or liquidity.

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.statements.

 

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ITEM 7AQUANTITATIVEAND 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 wecurrencies. 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.expenditures. The goal of this hedging program is to economically guarantee or lock inlock-in the exchange rates on our foreign currency exposures denominated in Euro’s and the Australian dollar. Under this program, increases or decreases in our foreign-currency-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 No. 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 curencycurrency derivatives are recorded within other income, net on our consolidated statements of income.

 

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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, 20042006 (in thousands):

 

 
 Foreign Currency Financial Assets  Foreign Currency Financial Assets 
 Australian
dollar
(AUD)
 US
dollar
(USD)
 Euro Great
Britain
Pound
 Singapore
dollar
 New
Zealand
dollar
 Swedish
Krona
 Swiss
Franc
 Japanese
Yen
  

Australian

Dollar

(AUD)

 

US

Dollar

(USD)

 

Euro

(EUR)

 

Great

Britain

Pound

(GBP)

 

Singapore

Dollar

(SGD)

 

New

Zealand

Dollar

(NZD)

 

Swedish

Krona

(SEK)

 

Swiss

Franc

(CHF)

 

Norwegian

Krone

(NOK)

 

AUD

    

Functional Currency Entities:

    

Assets

 $-  45,885  10,032  3,907  817  492  641 685 -  $- $92,703  $93,586  $9,640  $830  $1,002  $537 $1,523  $1,092 

Liability

 $-  (12,328) (469) (7,267) (118) (15) - - (221)  -  (56,224)  (88,994)  (5,198)  (64)  (315)  -  (29)  - 

Net Total

 $-  33,557  9,563  (3,360) 699  477  641 685 (221)  -  36,479   4,592   4,442   766   687   537  1,494   1,092 

USD

    

Functional Currency Entities:

    

Assets

 $20,648  -  -  -  -  -  - -    41,007  -   -   -   -   -   -  -   - 

Liability

 $-  -  -  -  -  -  - -    -  -   -   -   -   -   -  -   - 

Net Total

 $20,648  -  -  -  -  -  - -    41,007  -   -   -   -   -   -  -   - 

Euro :

  
EURO  

Functional Currency Entities:

    

Assets

 $7,697  92  -  -  -  -  - 1,578 -   -  4,104   -   -   -   -   -  -   - 

Liability

 $(10) (283) -  -  -  -  - - -   -  (155)  -   (1,010)  -   -   -  -   - 

Net Total

 $7,687  (191) -  -  -  -  - 1,578 -   -  3,949   -   (1,010)  -   -   -  -   - 
GBP  
Functional Currency Entities:  
Assets  -  193   1,730   -   -   -   -  -   - 
Liability  -  -   -   -   -   -   -  -   - 
Net Total  -  193   1,730   -   -   -   -  -   - 
CHF  
Functional Currency Entities:  
Assets  -  9   1   2   -   -   -  -   - 
Liability  -  (133)  (635)  (218)  -   -   -  -   (15)
Net Total  -  (124)  (634)  (216)  -   -   -  -   (15)
SEK  
Functional Currency Entities:  
Assets  -  2   -   -   -   -   -  -   - 
Liability  -  (1,330)  (187)  (141)  -   -   -  -   (1,708)
Net Total  -  (1,328)  (187)  (141)  -   -   -  -   (1,708)

 

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The table below provides information about our foreign currency derivative financial instruments and presents the 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, 2004.2006. 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.

 

(In thousands except exchange rates)

 

FY 2005

 

FY 2006

 

Total

 

Fair Value
Assets / (Liabilities)

As of June 30

   Fair Value
Assets /
(Liabilities)
 2004 2003
 
(In thousands except exchange
rates)
  As of June 30
FY 2007 FY 2008 Total 2006 2005
 

(Receive AUD$/Pay U.S.$)

    

Option amount

 $60,000 $66,000 $126,000 $1,816 $2,026 $123,000 $9,000 $132,000 $1,035 $2,240

Average contractual exchange rate

 AUD $1 = USD 0.705 AUD $1=USD 0.747 AUD $1 = USD 0.726   AUD $1 = USD 0.778 AUD $1 = USD 0.767 AUD $1 = USD 0.777  
 

(Receive AUD$/Pay Euro)

    

Option amount

 $14,623 $         - $14,623 $180 $552 $53,718 $7,674 $61,392 $144 $758

Average contractual exchange rate

 AUD $1 = Euro 0.58 AUD $1 = Euro 0.58   AUD $1 = Euro 0.656 AUD $1 = Euro 0.660 AUD $1 = Euro 0.656  

 

Interest Rate Risk

 

We are exposed to risk associated with changes in interest rates affecting the return on our investments.

At June 30, 2004, we maintained a portion of our cash and cash equivalents in financial instruments with original maturitiesand debt. At June 30, 2006 we had total long-term debt, including the current portion of three months or less. We maintain a short-term investment portfolio containing financial instruments in which the majority have original maturitiesthose obligations, of greater than three months but less than twelve months. These financial instruments, principally comprised of corporate obligations, are$121.1 million. Of this debt, $0.6 million is at fixed interest rates and $120.4 million is subject to variable interest rate risk and will decline in value if interest rates increase.

rates. A hypothetical 100 basis point10% change in interest rates during the twelve monthsyear ended June 30, 2004,2006, 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.

Forward-Looking Statements

This report on Form 10-K contains or may contain certain forward-looking statements and information that are based on our management’s beliefs, as well as on estimates and assumptions made by, and information currently available to our management. The words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “future” and other similar expressions generally identify forward-looking statements, including, in particular, statements regarding the development and approval of new products and product applications, market expansion, pending litigation and the development of new markets for our products, such as the cardiovascular and stroke markets. These forward-looking statements are made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. You should not unduly rely on these forward-looking statements. Forward-looking statements reflect the views of our management at the time the 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

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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 sleep-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 could make our products noncompetitive or obsolete.

Additionally, some of our competitors have greater financial, research and development, manufacturing and marketing resources than we do. The past several years have seen a trend towards consolidation in the health care industry and in the markets for our products. Industry consolidation could result in greater competition if our competitors combine their resources or if our competitors are acquired by other companies with greater resources than ours. This competition could increase pressure on us to reduce the selling prices of our products or could cause us to increase our spending on research and development and sales and marketing. If we are unable to develop innovative new products, maintain competitive pricing, and offer products that consumers perceive to be as reliable as those of our competitors, our sales or gross margins could decrease which would harm our business.

Our business depends on our ability to market effectively to dealers of home health care products and sleep clinics.    We market our products primarily to home health care dealers and to sleep clinics that diagnose obstructive sleep apnea and other sleep disorders. We believe that home health care dealers and sleep clinics play a significant role in determining which brand of product a patient will use. The success of our business depends on our ability to market effectively to home health care dealers and sleep clinics to ensure that our products are properly marketed and sold by these third parties.

We have limited resources to market to the more than 2,500 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 of products. In addition, home health care dealers have experienced price pressures as government and third-party reimbursement have declined for home care products, and home health care dealers are requiring price discounts and longer periods of time to pay for products purchased from us. We cannot assure you that sleep clinic physicians will continue to prescribe our products, or that home health care dealers or patients will not substitute competing products when a prescription specifying our products has been written.

We have expanded our marketing activities to target the population with a predisposition to sleep- 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.

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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 on 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 acquisitions with our operations, our business could suffer.    The integration of our acquired operations requires significant efforts from our company and the acquired entity, for several years after each acquisition. 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 to adjust our business strategies, equipment, and personnel to achieve maximum efficiencies and success. If we are not able to successfully integrate the operations of our acquired entities, we may not fully realize the anticipated benefits of the acquisitions.

We manufacture substantially all of our products outside the U.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 approximately 51%, 52%, and 51% of our net revenues in fiscal years 2004, 2003 and 2002, respectively. We expect that sales within these areas will account for approximately 50% of our net revenues in the foreseeable future. Our sales outside of North America and our operations in Europe, Australia and Asia are subject to several difficulties and risks that are separate and distinct from those we face in our U.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 in U.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 payers are increasingly challenging the prices charged for medical products and services. Therefore, even if a product is approved for marketing, we cannot assure you that reimbursement will be allowed for the product, that 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 treat sleep-disordered breathing conditions. Additionally, future legislation or regulation concerning the health care industry or third party or governmental coverage and reimbursement, particularly legislation or regulation limiting consumers’ reimbursement rights, may harm our business.

As we continue to develop new products, those products will generally not qualify for reimbursement, if at all, until they are approved for marketing. In the United States, we sell our products primarily to home health care dealers and to sleep clinics. We do not file claims and bill governmental programs and other third party payers directly for reimbursement for our products. 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 health 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 any health 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 do bill third party 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 wepretax income. We have from those customers.no interest rate hedging agreements.

 

Complying with Food and Drug Administration and other regulations is an expensive and time-consuming process, and any failure to comply could result in substantial penalties.    We are subject to various federal, state, local and international regulations regarding our business activities. Failure to comply with these regulations could result in, among other things, recalls of our products, substantial fines and criminal charges against us or against our employees. A recall or other regulatory action could increase our costs, damage our reputation, and materially affect operating results.

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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.

Off-label marketing of our products could result in substantial penalties.    Clearance under Section 510(k) only permits us to market our products for the uses indicated on the labeling cleared by the FDA. We may request additional label indications for our current products, and the FDA may deny those requests outright, require additional expensive clinical data to support any additional indications or impose limitations on the intended use of any cleared products as a condition of clearance. If the FDA determines that we have marketed our products for off-label use, we could be subject to fines, injunctions or other penalties.

Disruptions in the supply of components from our single source suppliers could result in a significant reduction in sales and profitability.    We purchase uniquely configured components for our devices from 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 or halt in supply while a replacement supplier reconfigures its components, or while we reconfigure our devices 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

third parties will be issued patents that may prevent the sale of our products or require us to license and pay fees or royalties in order for us to be able to market some of our products.

Litigation may be necessary to enforce patents issued to us, to protect our proprietary rights, or to defend third party claims that we have infringed upon proprietary rights of others. The defense and prosecution of patent claims, including these pending claims, as well as participation in other inter-party proceedings, can be expensive and time consuming, even in those instances in which the outcome is favorable to us. If the outcome of any litigation or proceeding brought against us were adverse, we could be subject to significant liabilities to third parties, could be required to obtain licenses from third parties or could be required to cease sales of the affected products. Additionally, the laws regarding the enforceability of patents vary from country to country, and we cannot assure you that any patent issues we face will be uniformly resolved, or that local laws will provide us with consistent rights and benefits.

We are subject to 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.

We are subject to tax audits by various tax authorities in many jurisdictions.    From time to time we may be audited by the tax 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 our past or future taxable income, tax payable or deferred tax assets, and could require us to pay penalties and interest that could materially adversely affect our 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;

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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;

the effect of foreign currency transaction gains or losses; and

other activities of our competitors.

If a natural or man-made disaster strikes our manufacturing facilities, we will be unable to manufacture our products for a substantial amount of time and our sales and profitability will decline.    Our facilities and the manufacturing equipment we use to produce our products would be costly to replace and could require substantial lead-time to repair or replace. The facilities may be affected by natural or man-made disasters and in the event it was affected by a disaster, we would be forced to rely on third party manufacturers. Although we believe we possess adequate insurance for damage to our property and the disruption of our business from casualties, such insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.

Delaware law, provisions in our charter and our shareholder rights plan could make it difficult for another company 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 our 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 stockholder 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 seven directors and two of our five 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 counsel that some doubt exists as to the ability of investors to pursue claims based on U.S. securities laws against these assets or these persons in Australian courts.

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ITEM 8CONSOLIDATED FINANCIAL STATEMENTSAND SUPPLEMENTARY DATA

 

 a)Index to Consolidated Financial Statements

 

Report of Independent Registered Public Accounting Firm

  F1

Consolidated Balance Sheets as of June 30, 20042006 and 20032005

  F2

Consolidated Statements of Income for the years ended June 30, 2004, 20032006, 2005 and 20022004

  F3

Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended June 30, 2004, 20032006, 2005 and 20022004

  F4

Consolidated Statements of Cash Flows for the years ended June 30, 2004, 20032006, 2005 and 20022004

  F5

Notes to Consolidated Financial Statements for the years ended June 30, 20042006 and 20032005

  F6

Schedule II – Valuation and Qualifying Accounts and Reserves

   

 

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 b)Supplementary Data

 

Quarterly Financial Information (unaudited) - The quarterly results for the years ended June 30, 20042006 and 20032005 are summarized below (in thousands, except per share amounts):

 

2004  

First

Quarter

  

Second

Quarter

  

Third

Quarter

  

Fourth

Quarter

  

Fiscal

Year

2006  First
Quarter
  Second
Quarter
  Third
Quarter
  Fourth
Quarter
  Fiscal
Year

Net revenues

  $72,878  $82,292  $91,277  $92,891  $339,338  $127,127  $146,416  $162,281  $171,172  $606,996

Gross profit

   47,158   52,424   57,550   59,604   216,736   80,119   91,726   100,866   104,184   376,895

Net income

   12,249   14,151   15,029   15,855   57,284   16,442   22,314   26,362   23,093   88,211
  

Basic earnings per share

  $0.36  $0.42  $0.45  $0.47  $1.70  $0.23  $0.31  $0.36  $0.31  $1.22

Diluted earnings per share

  $0.35  $0.40  $0.43  $0.45  $1.63  $0.23  $0.30  $0.34  $0.30  $1.16

 

b)Supplementary Data, continued

2003  

First

Quarter

  

Second

Quarter

  

Third

Quarter

  

Fourth

Quarter

  

Fiscal

Year

2005  First
Quarter
  Second
Quarter
  Third
Quarter
  Fourth
Quarter
  Fiscal
Year

Net revenues

  $58,586  $65,293  $68,996  $80,695  $273,570  $87,733  $103,893  $108,454  $125,425  $425,505

Gross profit

   37,697   41,839   43,187   50,364   173,087   56,411   68,378   70,295   79,776   274,860

Net income

   9,571   10,384   12,250   13,524   45,729   13,926   17,404   17,877   15,578   64,785
  

Basic earnings per share

  $0.29  $0.31  $0.37  $0.41  $1.38  $0.21  $0.26  $0.26  $0.22  $0.94

Diluted earnings per share

  $0.28  $0.30  $0.35  $0.39  $1.33  $0.20  $0.25  $0.25  $0.22  $0.91

 

NB.Note: 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. All share and per share information has been adjusted to reflect the two-for-one stock split effected in the form of a 100% stock dividend that was declared on August 10, 2005 and distributed on September 30, 2005.

 

ITEM 9CHANGESINAND DISAGREEMENTSWITH ACCOUNTANTSON ACCOUNTINGAND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A9ACONTROLSAND 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 reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such

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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 the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2004.2006. 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.

 

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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.

 

MANAGEMENTS REPORTON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that:

(i)Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(ii)Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

(iii)Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2006. Management based this assessment on criteria for effective internal control over financial reporting described in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of ResMed Inc.’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors.

Based on our assessment and those criteria, management has concluded that the Company did maintain effective internal control over financial reporting as of June 30, 2006.

KPMG LLP, independent registered public accounting firm, who audited and reported on the consolidated financial statements of ResMed, Inc. included in this report, has issued an attestation report on management’s assessment of internal control over financial reporting.

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RESMED INC. AND SUBSIDIARIES

REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

ResMed Inc.:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that ResMed Inc. maintained effective internal control over financial reporting as of June 30, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). ResMed Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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RESMED INC. AND SUBSIDIARIES

REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

In our opinion, management’s assessment that ResMed Inc. maintained effective internal control over financial reporting as of June 30, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, ResMed Inc. maintained, in all material respects, effective internal control over financial reporting as of June 30, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of ResMed Inc. and subsidiaries as of June 30, 2006 and 2005, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended June 30, 2006, and our report dated September 11, 2006 expressed an unqualified opinion on those consolidated financial statements.

/s/KPMG LLP


San Diego, California

September 11, 2006

ITEM 9BOTHER INFORMATION

None.

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PART III


 

ITEM 10DIRECTORSAND EXECUTIVE OFFICERSOFTHE REGISTRANT

 

Incorporated by reference to our definitive Proxy Statement for our November 18, 2004,9, 2006, meeting of stockholders, which will be filed with the Securities and Exchange Commission within 120 days after June 30, 2004.2006.

The Company has filed, as exhibits to this Annual Report on Form 10-K for the year ended June 30, 2006, the certifications of its Principal Executive Officer and Principal Financial Officer required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

On December 15, 2005, the Company submitted to the New York Stock Exchange the Annual CEO Certification required pursuant to Section 303 A.12(a) of the New York Stock Exchange Listed Company Manual.

 

ITEM 11EXECUTIVE COMPENSATION

 

Incorporated by reference to our definitive Proxy Statement for our November 18, 2004,9, 2006, meeting of stockholders, which will be filed with the Securities and Exchange Commission within 120 days after June 30, 2004.2006.

 

ITEM 12SECURITY OWNERSHIPOF CERTAIN BENEFICIAL OWNERSAND MANAGEMENTAND RELATED STOCKHOLDER MATTERS

 

Incorporated by reference to our definitive Proxy Statement for our November 18, 2004,9, 2006, meeting of stockholders, which will be filed with the Securities and Exchange Commission within 120 days after June 30, 2004.2006.

 

ITEM 13CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS

 

No material transactions.

 

ITEM 14PRINCIPAL ACCOUNTANT FEESAND SERVICES

 

Incorporated by reference to our definitive Proxy Statement for our November 18, 2004,9, 2006, meeting of stockholders, which will be filed with the Securities and Exchange Commission within 120 days after June 30, 2004.2006.

 

- 42 -



PART IV


 

ITEM 15EXHIBITS,AND CONSOLIDATED FINANCIAL STATEMENTSTATEMENT, SCHEDULECHEDULES,AND REPORTSON FORM 8-K

 

A.The following documents are filed as part of this report:

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

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)

- 55 -


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 IncInc. 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 LimitedLtd 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)

11.110.11  

Computation of Earnings per Common Share

Loan Agreement between ResMed Limited and HSBC Bank Australia Limited(11)
21.110.12  

Subsidiaries of the Registrant

Saime Purchase Agreement(11)
23.110.13  

Independent Registered Public Accounting Firm’s ConsentFirst Amended and Report on Schedule

Restated Loan Agreement, dated as of November 1, 2005, by and among ResMed Corp., ResMed EAP Holdings Inc. and Union Bank of California, N.A.(8)
10.14Security Agreement, dated as of November 1, 2005, by and between ResMed EAP Holdings Inc. and Union Bank of California, N.A.(8)
10.15Continuing Guaranty, dated as of November 1, 2005, by and between ResMed Inc and Union Bank of California, N.A.(8)
10.16Commercial Promissory Note, dated as of November 1, 2005, made by ResMed Corp. and ResMed EAP Holdings Inc.(8)
10.17Commercial Promissory Note, dated as of November 1, 2005, made by ResMed Corp. and ResMed EAP Holdings Inc.(8)
10.18Second Amended and Restated Loan Agreement, dated March 13, 2006, by and among ResMed Corp., ResMed EAP Holdings Inc. and Union Bank of California, N.A.(9)
10.19Syndicated Facility Agreement, dated as of June 8, 2006, by and between ResMed Limited and HSBC Bank Australia Limited(10)

 

- 4356 -


10.20Deed of Guaranty and Indemnity, dated as of June 8, 2006, by and among HSBC Bank Australia Limited, ResMed Limited, ResMed SAS, ResMed GmbH & Co. KG, ResMed (UK) Limited and Take Air Medical Handels-GmbH(10)
10.21Deed of Guaranty and Indemnity, dated as of June 8, 2006, by and among HSBC Bank Australia Limited, ResMed Inc., ResMed Corp. and ResMed Limited(10)
10.22Working Capital Agreement, dated as of June 8, 2006, by and among ResMed (UK) Limited and HSBC Bank plc(10)
10.23Working Capital Agreement, dated as of June 8, 2006, by and among ResMed Limited and HSBC Bank Australia Limited(10)
21.1Subsidiaries of the Registrant
23.1Independent Registered Public Accounting Firm’s Consent and Report on Schedule
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-KS-1 (No. 33-91094) declared effective on June 1, 1995.

On April 29, 2004 we furnished a report(2)Incorporated by reference to the Registrant’s Registration Statement on Form 8-K that announced Peter C. Farrell, Ph.D., ResMed Inc.’s Chairman of the Board and Chief Executive Officer, stated8-A12G filed on April 28, 2004 that, in his view, analyst estimates of ResMed’s net profit25, 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 fiscal year endingended 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 due2001.

(6)Incorporated by reference to the expenses associated with complying with two sets of listing requirements, particularly given differences inRegistrant’s Report on Form 10-K for the regulatory requirements, andyear ended June 30, 2002.

(7)Incorporated by reference to the potential impact ResMed’s policy of not paying dividends may haveRegistrant’s 2003 Proxy Statement.

(8)Incorporated by reference to the Registrant’s Form 8-K dated November 8, 2005.

(9)Incorporated by reference to the Registrant’s Form 8-K dated March 13, 2006.

(10)Incorporated by reference to the Registrant’s Form 8-K dated June 8, 2006.

(11)Incorporated by reference to the Registrant’s Report on its trading price in Australia.Form 10-K dated June 30, 2005.

 

- 4457 -


RESMED INC. AANDND SUBSIDIARIES

 

REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Stockholders

ResMed Inc:Inc.:

 

We have audited the accompanying consolidated balance sheets of ResMed IncInc. and subsidiaries as of June 30, 2004,2006, and 2003,2005, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended June 30, 2004.2006. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company PublicAccounting 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, 20042006 and 2003,2005, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2004,2006, in conformity with U.S. generally accepted accounting principles.

As discussed Also, in Note 8our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements, taken as a whole, presents fairly, in all material respects, the Company has adopted the provisions of SFAS No. 142 “Accounting for Goodwill and Other Intangible Assets” and changed its method of accounting for goodwill in 2002 accordingly.information set forth therein.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of ResMed Inc.’s internal control over financial reporting as of June 30, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated September 11, 2006, expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP


San Diego, California

September 11, 2006


San Diego, California

August 13, 2004

 

F1


RESMED INC. AANDND SUBSIDIARIES

Consolidated Balance Sheets

June 30, 20042006 and 20032005

(In thousands, except share and per share data)

 

  

June 30,

2004

   

June 30,

2003

   

June 30,

2006

 

June 30,

2005

 
  


  


Assets

         

Current assets:

         

Cash and cash equivalents

   128,907   $114,491   $219,544  $142,185 

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 

Accounts receivable, net of allowance for doubtful accounts of $4,645 and $3,199 at June 30, 2006 and 2005, respectively

   138,147   103,951 

Inventories, net (note 5)

   55,797    49,386    116,194   89,107 

Deferred income taxes (note 13)

   7,041    8,301 

Deferred income taxes (note 14)

   26,636   15,230 

Prepaid expenses and other current assets

   6,821    6,500    9,763   9,737 
  


  


Total current assets

   277,829    241,905    510,284   360,210 
  


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 

Non-current assets:

   

Property, plant and equipment, net of accumulated depreciation of $115,471 and $88,970 at June 30, 2006 and 2005, respectively (note 7)

   245,376   174,168 

Goodwill (note 8)

   106,075    102,160    195,612   181,106 

Other intangibles (note 8)

   48,897   49,371 

Other assets

   8,173    7,098    7,052   9,291 
  


  


Total non-current assets

   266,330    217,690    496,937   413,936 
  


  


Total assets

  $544,159   $459,595   $1,007,221  $774,146 
  


  


Liabilities and Stockholders’ Equity

         

Current liabilities:

         

Accounts payable

  $18,574   $19,368   $45,045  $34,416 

Accrued expenses (note 9)

   22,591    19,140    40,901   34,414 

Deferred Revenue

   8,759    6,355 

Deferred revenue

   15,344   12,327 

Income taxes payable

   8,470    3,408    22,841   21,959 

Current portion of deferred profit on sale-leaseback

   2,197    2,312 

Current portion of long-term debt (note 10)

   4,869   115,435 
  


  


Total current liabilities

   60,591    50,583    129,000   218,551 

Non-current liabilities:

         

Deferred income taxes (note 14)

   12,377   11,695 

Deferred revenue

   8,819    7,210    11,484   10,901 

Convertible subordinated notes (note 10)

   113,250    113,250 

Deferred profit on sale-leaseback

   -    2,119 

Long-term debt (note 10)

   116,212   58,934 
  


  


Total non-current liabilities

   122,069    122,579    140,073   81,530 
  


  


Total liabilities

   182,660    173,162    269,073   300,081 
  


  


Commitments and contingencies (notes 16 and 18)

   -    - 

Stockholders’ equity: (note 11)

      

Commitments and contingencies (notes 17, 18 and 19)

   -   - 

Stockholders’ equity: (note 12)

   

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 

Common stock, $.004 par value, 200,000,000 shares authorized;

   

issued and outstanding 75,670,316 at June 30, 2006 and 70,001,080 at June 30, 2005

   303   280 

(excluding 2,254,918 and 2,254,918 shares held as Treasury stock respectively)

   

Additional paid-in capital

   132,875    107,432    353,464   179,865 

Retained earnings

   217,656    160,372 

Treasury stock

   (30,440)   (11,415)

Accumulated other comprehensive income

   41,273    29,910 

Retained earnings (note 6)

   370,652   282,441 

Treasury stock, at cost

   (41,405)  (41,405)

Accumulated other comprehensive income (note 6)

   55,134   52,884 
  


  


Total stockholders’ equity

   361,499    286,433    738,148   474,065 
  


  


Total liabilities and stockholders’ equity

  $544,159   $459,595   $1,007,221  $774,146 
  


  


All share and per share information has been adjusted to reflect the two-for-one stock split effected in the form of a 100% stock dividend that was declared on August 10, 2005 and distributed on September 30, 2005.

 

See accompanying notes to consolidated financial statements.

 

F2


RESMED INC. AANDND SUBSIDIARIES

Consolidated Statements of Income

Years Ended June 30, 2004, 20032006, 2005 and 20022004

(In thousands, except share and per share data)

 

  

June 30,

2004

 

June 30,

2003

 

June 30,

2002

   

June 30,

2006

  

June 30,

2005

 

June 30,

2004

 
  


  


Net revenues

  $339,338  $273,570  $204,076   $606,996  $425,505  $339,338 

Cost of sales(A)

   122,602   100,483   70,827    230,101   150,645   122,602 
  


  


Gross profit

   216,736   173,087   133,249    376,895   274,860   216,736 
  


  


Operating expenses:

         

Selling, general and administrative(A)

   104,706   85,313   64,481    200,168   135,703   104,706 

Research and development(A)

   26,169   20,534   14,910    37,216   30,014   26,169 

Donations to Research Foundations

   500   -   2,349 

In-process research and development write off

   -   -   350 

Donations to research foundations

   760   500   500 

In-process research and development charge (note 20)

   -   5,268   - 

Amortization of acquired intangible assets

   6,327   870   - 

Restructuring expenses (note 11)

   1,124   5,152   - 
  


  


Total operating expenses

   131,375   105,847   82,090    245,595   177,507   131,375 
  


  


Income from operations

   85,361   67,240   51,159    131,300   97,353   85,361 
  


  


Other income (expenses):

         

Gain on extinguishment of debt

   -   529   6,549 

Interest income (expense), net

   (1,683)  (2,549)  (3,224)   1,320   (808)  (1,683)

Other, net (note 12)

   990   1,907   108 

Other, net (note 13)

   774   81   990 
  


  


Total other income (expenses), net

   (693)  (113)  3,433    2,094   (727)  (693)
  


  


Income before income taxes

   84,668   67,127   54,592    133,394   96,626   84,668 

Income taxes (note 13)

   27,384   21,398   17,086 

Income taxes (note 14)

   45,183   31,841   27,384 
  


  


Net income

  $57,284  $45,729  $37,506   $88,211  $64,785  $57,284 
  


  


Basic earnings per share

  $1.70  $1.38  $1.17   $1.22  $0.94  $0.85 

Diluted earnings per share

  $1.63  $1.33  $1.10 

Diluted earnings per share (note 2-j)

  $1.16  $0.91  $0.82 

Basic shares outstanding

   33,694   33,054   32,174    72,307   68,643   67,389 

Diluted shares outstanding

   35,125   34,439   34,080    77,162   74,942   70,251 

(A)Includes stock-based compensation costs as follows (note 4):

      

Cost of sales

  $891  $-  $- 

Selling, general and administrative

   12,372   -   - 

Research and development

   2,042   -   - 
  


Total stock-based compensation costs

  $15,305  $-  $- 
  


All share and per share information has been adjusted to reflect the two-for-one stock split effected in the form of a 100% stock dividend that was declared on August 10, 2005 and distributed on September 30, 2005.

 

See accompanying notes to consolidated financial statements.

 

F3


RESMED INC. AANDND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

Years ended June 30, 2004, 20032006, 2005 and 20022004

(In thousands)

 

       Additional        Accumulated
Other
      Common Stock Additional
Paid-in
Capital
 Treasury Stock Retained
Earnings
 Accumulated
Other
Comprehensive
Income (Loss)
    Comprehensive
Income
 
  Common Stock Paid-in  Treasury Stock Retained  Comprehensive   Comprehensive  Shares Amount Shares Amount Total 

Balance, June 30, 2003

 67,572 $268  $107,300 (830) $(11,417) $160,372 $29,910  $286,433  
  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  

Common stock issued on exercise of options

 1,916  6   20,335  20,341  

Treasury stock purchases

        (290)  (7,873)    -   (7,873)   (4) (942)  (19,023)  (19,027) 

Tax benefit from exercise of options

  -   -   6,919  -   -   -   -   6,919    5,105  5,105  

Comprehensive income:

             

Net income

          37,506   -   37,506   37,506   57,284  57,284   57,284 

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

            

Other comprehensive income:

 

Foreign currency translation adjustments

            38,131   38,131   38,131   11,366   11,366   11,366 

Unrealized losses on marketable securities

            (96)  (96)  (96)  (3)  (3)  (3)
            


 


Comprehensive income/(loss)

            $83,764  $68,647 
            


 


             

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  

Balance, June 30, 2004

 69,488 $270  $132,740 (1,772) $(30,440) $217,656 $41,273  $361,499  

Common stock issued on exercise of options

 2,634  9   36,766  36,775  

Common stock issued on employee share purchase plan

 134  2   2,649  2,651  

Treasury stock purchases

      (2)   (471)  (19,025)     (19,027)   (1) (482)  (10,965)  (10,966) 

Tax benefit from exercise of options

       5,105       5,105    7,710  7,710  

Comprehensive income:

             

Net income

          57,284    57,284   57,284   64,785  64,785   64,785 

Other comprehensive income

            

Other comprehensive income:

 

Foreign currency translation adjustments

            11,366   11,366   11,366   11,617   11,617   11,617 

Unrealized losses on marketable securities

            (3)  (3)  (3)  (6)  (6)  (6)
            


 


Comprehensive income/(loss)

            $68,647  $76,396 
            


 


             

Balance, June 30, 2004

  34,744  $135  $132,875  (886) $(30,440) $217,656  $41,273  $361,499  

Balance, June 30, 2005

 72,256 $280  $179,865 (2,254) $(41,405) $282,441 $52,884  $474,065  

Common stock issued on exercise of options (note 12)

 1,805  7   30,790  30,797  

Common stock issued on employee share purchase plan (note 12)

 126  1   3,755  3,756  

Tax benefit from stock options exercised

  10,107  10,107  

Common stock issued on conversion of convertible subordinated notes

 3,738  15   113,235  113,250  

FAS123(R) stock-based compensation costs

  15,712  15,712  

Comprehensive income (note 6):

 

Net income

  88,211  88,211   88,211 

Other comprehensive income:

 

Foreign currency translation adjustments

  2,250   2,250   2,250 
 


Comprehensive income/(loss)

 $90,461 
 


 

Balance, June 30, 2006

 77,925 $303  $353,464 (2,254) $(41,405) $370,652 $55,134  $738,148  

 

All share and per share information has been adjusted to reflect the two-for-one stock split effected in the form of a 100% stock dividend that was declared on August 10, 2005 and distributed on September 30, 2005.

 

See accompanying notes to consolidated financial statements.

 

F4


RESMED INC. AANDND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended June 30, 2004, 20032006, 2005 and 20022004

(In thousands)

 

  June 30,
2004
 June 30,
2003
 June 30,
2002
   June 30,
2006
 June 30,
2005
 June 30,
2004
 
  


  


Cash flows from operating activities:

      

Net income

  $57,284  $45,729  $37,506   $88,211  $64,785  $57,284 

Adjustments to reconcile net income to net cash provided by operating activities:

      

by operating activities:

   

Depreciation and amortization

   17,867   12,583   9,972    40,970   28,292   17,867 

Provision for service warranties

   213   332   (85)

Provision for warranties

   1,890   501   213 

Deferred income taxes

   1,259   2,002   (6,153)   (11,915)  (7,997)  1,259 

Foreign currency options revaluation

   982   (2,117)  767    3,796   293   982 

Deferred borrowing costs

   804   834   1,254 

Amortization of deferred borrowing costs

   649   834   804 

Stock-based compensation costs

   15,305   -   - 

Tax benefit from stock options exercised

   5,105   4,250   6,919    -   7,710   5,105 

Gain on extinguishment of debt

   -   (529)  (6,549)

Impairment of cost-method investment

   1,156   -   - 

Release of profit on sale of building

   (2,440)  (2,012)  -    -   (2,371)  (2,440)

Other, net

   -   -   (162)

Purchased in-process research and development write off

   -   -   350 

Purchased in-process research and development write-off

   -   5,268   - 

Changes in operating assets and liabilities, net of effect of acquisitions:

      

Accounts receivable, net

   (13,129)  (6,102)  (9,765)   (28,287)  (27,996)  (13,129)

Inventories, net

   (6,722)  (2,988)  (7,063)   (25,041)  (22,562)  (6,722)

Prepaid expenses and other current assets

   15   (2,333)  4,785    (2,432)  558   15 

Accounts payable, accrued expenses and other liabilities

   15,303   9,635   3,864    14,726   23,764   15,303 
  


  


Net cash provided by operating activities

   76,541   59,284   35,640    99,028   71,079   76,541 
  


  


Cash flows from investing activities:

      

Purchases of property, plant and equipment

   (57,246)  (25,635)  (28,185)   (102,749)  (39,691)  (57,246)

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 

Capitalized interest

   (1,100)  -   - 

Purchases of marketable securities—available for sale

   (2,000)  (401,546)  (78,890)

Proceeds from sale of marketable securities—available for sale

   2,002   413,576   73,376 

Patent registration costs

   (2,358)  (1,560)  (1,720)   (3,115)  (2,819)  (2,358)

Business acquisitions, net of cash acquired

   (184)  (300)  (13,871)

Business acquisitions, net of cash acquired of $262 ($12,982 in 2005 and $Nil in 2004)

   (10,526)  (54,425)  (184)

Purchases of non-trading investments

   (1,535)  (1,625)  (3,987)   (2,386)  (1,873)  (1,535)

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 

Net cash used in investing activities

   (119,874)  (86,778)  (66,837)
  


  


Cash flows from financing activities:

      

Proceeds from issuance of common stock, net

   20,341   9,031   9,781    34,389   39,426   20,341 

Repayment of assumed borrowings from acquisitions

   (2,195)  (65,764)  - 

Repayment of borrowings

   -   -   (3,022)   (46,308)  -   - 

Proceeds from borrowings, net of borrowing costs

   -   -   28,402    102,128   62,500   - 

Redemption of borrowings, convertible note

   -   (9,217)  (48,454)

Tax benefit from stock option exercises

   9,753   -   - 

Purchases of treasury stock

   (19,027)  (3,542)  (7,873)   -   (10,966)  (19,027)

Installment payment for property purchase

   -   (12,609)  - 
  


  


Net cash provided by (used in) financing activities

   1,314   (16,337)  (21,166)

Net cash provided by financing activities

   97,767   25,196   1,314 
  


  


Effect of exchange rate changes on cash

   3,398   10,567   4,714    438   3,781   3,398 
  


  


Net increase in cash and cash equivalents

   14,416   41,631   32,724    77,359   13,278   14,416 

Cash and cash equivalents at beginning of the year

   114,491   72,860   40,136    142,185   128,907   114,491 
  


  


Cash and cash equivalents at end of the year

  $128,907  $114,491  $72,860   $219,544  $142,185  $128,907 
  


  


Supplemental disclosure of cash flow information:

      

Income taxes paid

  $15,141  $21,308  $18,328 

Interest paid

   4,530   4,530   6,557 

Income taxes paid, net of refunds

  $44,873  $24,747  $15,141 

Interest paid, net of capitalized interest

   4,566   4,530   4,530 
  


  


Fair value of assets acquired in acquisitions

   95   -  $9,060   $11,517  $89,188  $95 

Liabilities assumed

   -   -   (5,872)   (6,816)  (99,270)  - 

Goodwill on acquisition

   89   300   36,279    5,553   78,949   89 

Fair value of shares issued for acquisitions

   -   -   (24,784)

Acquisition costs accrued

   (1,279)  (1,726)  - 

Acquisition costs paid

   1,813   266   - 
  


  


Cash paid for acquisition, including acquisition costs

  $184  $300  $14,683   $10,788  $67,407  $184 
  


  


 

See accompanying notes to consolidated financial statements.

 

F5


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

 

(1)Organization and Basis of Presentation

 

ResMed Inc. (the(referred to herein as “we”, “us”, “our” or the “Company”) is a Delaware Corporationcorporation formed in March 1994 as a holding company for the ResMed Group. Through our subsidiaries, we design, manufacture and market devicesequipment for the evaluationdiagnosis and treatment of sleep-disordered breathing primarilyand other respiratory disorders, including obstructive sleep apnea. Our manufacturing operations are located in Australia, Germany, France and the United States of America. Major distribution and sales sites are located in the United States of America, Germany, France, the United Kingdom, Switzerland, Australia and Sweden.

All share and per share information in the notes has been adjusted to reflect the two-for-one stock split effected in the form of a 100% stock dividend that was declared on August 10, 2005 and distributed on September 30, 2005.

 

(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 intercompanyinter-company transactions and balances have been eliminated in consolidation.

 

The preparation of financial statements in conformity with U.S.accounting principles generally accepted accounting principlesin the United States of America requires management estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from management’s estimates.

 

 (b)Revenue Recognition

 

Revenue on product sales is generally recorded upon 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 or 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-relatedshipping and handling related expenses are charged to cost of sales.

 

We do not recognize revenues to the extent that we 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 recognize revenues if 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 act 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.

 

F6


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(2)Summary of Significant Accounting Policies, Continued

 (c)Cash and Cash Equivalents

 

Cash equivalents include certificates of deposit, commercial paper and other highly liquid investments and 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.

F6


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, determined principally by the first-in, first-out method, or net realizable value. We review and provide 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–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–line and accelerated methods of depreciation are used for tax purposes. Maintenance and repairs are charged to expense as incurred.

 

We capitalize interest in connection with the construction of facilities. Actual construction costs incurred relating to facilities under active development qualify for interest capitalization. Interest capitalization ceases when the construction of a facility is complete and available for use. During the year ended June 30, 2006, we capitalized $1.1 million of interest relating to such construction costs.

 (f)PatentsIntangible Assets

 

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.

 

Other intangible assets are amortized on a straight-line basis over their estimated useful lives, which range from seven to nine years. We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization. No impairment of intangible assets has been identified during any of the periods presented.

 (g)Goodwill

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 142, Goodwill and 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 that assessment only, goodwill was determined to have an indefinite useful life and no adjustments were made to the amortization period or residual values of other intangible assets.

 

We conducted our annual review for goodwill impairment as at June 30, 2004.during the final quarter of fiscal 2006. 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 determined based on estimated discounted cash flows andflows. Our goodwill impairment review involved a two steptwo-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, 2004 and 2003

 

(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 review indicated that no impaired goodwill exists.

 

 (h)Foreign Currency

 

The consolidated financial statements of 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 of non–U.S. subsidiaries whose functional currencies are other than the U.S. dollar are translated at period end exchange rates, and revenue and expense transactions are translated at average exchange rates for the period. Cumulative translation adjustments are recognized as part of comprehensive income, as described in Note 6, and are included in accumulated other comprehensive income in the consolidated balance sheetsheets 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.

 

 (i)Research and Development

 

ResearchAll research and development costs are expensed in the period incurred.

 

 (j)Earnings Perper Share

We calculate earnings per share in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share” (“SFAS 128”), as amended by SFAS No. 123(R), “Share Based Payments” (“SFAS 123(R)”). SFAS 128 requires the presentation of “basic” earnings per share and “diluted” earnings per share. Basic earnings per share is computed by dividing the net income available to common stockholders by the weighted average number of shares of common stock outstanding. For purposes of calculating diluted earnings per share, net income is adjusted for the after-tax amount of interest associated with convertible debt, and the denominator includes both the weighted average number of shares of common stock outstanding and the number of dilutive common stock equivalents such as stock options and convertible notes.

 

The weighted average shares used to calculate basic earnings per share were 33,694,000, 33,054,000,72,307,000, 68,643,000 and 32,174,00067,389,000 for the years ended June 30, 2004, 20032006, 2005 and 2002,2004, 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.presented and the assumed conversion of our convertible notes. Stock options had the effect of increasing the number of shares used in the calculation (by application of the treasury stock method) by 1,431,000, 1,385,0002,346,000, 2,561,000 and 1,906,0002,862,000 for the years ended June 30, 2006, 2005 and 2004, 2003respectively. The conversion of our convertible notes had the effect of increasing the number of shares used in the calculation by 2,509,000, 3,738,000 and 2002, respectively.

Stock options of 751,000, 1,408,000 and 726,000NIL for the years ended June 30, 2006, 2005 and 2004, 2003respectively. During the year ended June 30, 2006 all of our convertible notes were converted to common stock.

F8


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(2)Summary of Significant Accounting Policies, Continued

Stock options of 1,103,000, 568,000 and 20021,502,000 for the years ended June 30, 2006, 2005 and 2004 respectively, were not included in the computation of diluted earnings per share as the effect of exercising these options would have been anti-dilutive.

 

Basic and diluted earnings per share for the years ended June 30, 2006, 2005 and 2004 are calculated as follows (in thousands except per share data):

   2006  2005  2004

Numerator:

            

Net income

  $88,211  $64,785  $57,284

Adjustment for interest and deferred borrowing costs,

net of income tax effect(1)

   1,660   3,285   -

Net income, used in calculating diluted earnings per share

  $89,871  $68,070  $57,284

Denominator:

            

Basic weighted-average common shares outstanding

   72,307   68,643   67,389
  

Effect of dilutive securities:

            

Stock options

   2,346   2,561   2,862

Convertible subordinated notes

   2,509   3,738   -

Diluted potential common shares

   4,855   6,299   2,862
  

Diluted weighted average shares

   77,162   74,942   70,251

Basic earnings per share

  $1.22  $0.94  $0.85

Diluted earnings per share(1)

  $1.16  $0.91  $0.82

 (1)Diluted earnings per share has been calculated after adjusting the numerator (net income) by $1,660,000, $3,285,000 and $NIL for the years ended June 30, 2006, 2005 and 2004, respectively, for the effect of assumed conversion of our convertible notes, and the related reduction in interest expense, net of tax.

��(k)Financial Instruments

 

The carrying value of financial instruments, such as cash and cash equivalents, marketable securities available-for-sale, accounts receivable and accounts payable, approximate their fair value because of their short-term nature. The estimated fair value of the Company’s long-term debt at June 30, 2004

F8


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 $119.9 million compared with the carrying value of $113.3 million. Foreign currency option contracts are marked to market and therefore reflect their fair value. We 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.

 

 (l)Foreign Exchange Risk Management

 

We enter into various types of foreign exchange contracts in managing our foreign exchange risk, including derivative financial instruments encompassing forward exchange contracts and foreign currency options.

F9


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(2)Summary of Significant Accounting Policies, Continued

 

The purpose of our foreign currency hedging activities is to protect us from adverse exchange rate fluctuations with respect to net cash movements resulting from the sales of products to foreign customers and Australian manufacturing activities. We 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.

 

Our 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 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 currency derivatives are recorded within other income, net onin our consolidated statements of income.

 

We are exposed to credit-related losses in the event of non-performance by counter parties to financial instruments. The credit exposure of foreign exchange options at June 30, 20042006 and June 30, 20032005 was $2.0$1.2 million and $2.6$3.0 million, respectively, which represents the positive fair value of options held by us.

 

We held foreign currency option contracts with notional amounts totaling $140.6$193.4 million and $124.5$145.5 million at June 30, 20042006 and 2003,2005, respectively, to hedge foreign currency items. These contracts mature at various dates prior to July 2006.before December 2007.

 

 (m)Income Taxes

 

We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities 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.

 

F9


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 our investments in debt and equity securities at the time of purchase and re-evaluates such determination at each balance sheet date. Debt securities for which we do not have the intent or ability to hold to maturity are classified as available-for-sale. Securities available-for-sale are carried at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income.

 

At June 30, 20042006 and 2003, the2005, there were no investments in debt securities that were classified on the accompanying consolidated balance sheetsheets as marketable securities-available-for-sale. These investments are diversified among high credit quality securities in accordance with our investment policy.

As at June 30, 2004 and 2003, contractual maturities of marketable 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 costs related to certain products are charged to operations in the period in which the related revenue is recognized. The liability for warranty costs are included in accrued expenses in our consolidated balance sheets.

F10


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(2)Summary of Significant Accounting Policies, Continued

Changes in the liability for product warranty for the year ended June 30, 2006 are as follows (in thousands):

  

Balance at June 30, 2005

  $2,912 

Warranty accruals for the year ended June 30, 2006

   2,417 

Warranty costs incurred for the year ended June 30, 2006

   (527)

Foreign currency translation adjustments

   (149)

Balance at June 30, 2006

  $4,653 

 

 (p)Impairment of Long-Lived Assets

 

We periodically evaluate 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 exceedexceeds 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.

 

 (q)Cost- MethodCost-Method Investments

 

The aggregate carrying amount of our cost-method investments at June 30, 2004 were2006 and June 30, 2005 was $4.1 million and $5.3 million.million, respectively. At June 30, 2004,2006 we reviewed the carrying value of these investments. In fiscal 2006 and 2005, we recognized $1.2 million and $0.1 million, respectively, of impairment losses related to our cost-method investments, which include investments in privately held service companies, research companies and public companies. The expense associated with this impairment has been included in the other income (expense) line within the consolidated statements of income.

In addition to the impairment loss recognized an unrealized loss of $1.4 million was identified in relation to an investment in a public company. The severity of the impairment (fair value is approximately 40% less than the cost) and the duration of the impairment (less than 6 months) correlates with a devaluation in both the currency of the shares against the U.S. dollar and the actual share price. Because we have the ability and intent to hold this investment until a recovery of the fair value and because the decline in fair value is partly attributable to exchange rate movements, we do not consider this investment to be other-than-temporarily impaired at June 30, 2006. Except for the unrealized loss, we have determined that the fair value of the investments exceededexceeds the carrying values and no unrealised losses existed.values.

 

(3)(r)Capitalized Software Production CostsNew Accounting Pronouncements

 

Software development costsIn November 2005, the FASB issued FSP FAS123(R)-3, “Transition Election to Accounting for the Tax Effects of Share-Based Payment Awards”. This FSP requires an entity to follow either the transition guidance for the additional-paid-in-capital pool as prescribed in SFAS 123(R), or the alternative transition method as described in the FSP. We have been capitalized and are being amortizedmade a one-time election to adopt 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.transition method described in this FSP which did not have a material impact on our consolidated financial statements.

 

F10In November 2005, the FASB issued FSP FAS115-1/124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, which addresses the determination as to when an

F11


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(3)New Accounting Pronouncements, Continued

investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this FSP amends FASB Statements No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, and No. 124, and APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock”. We adopted this FSP during the fiscal year ended June 30, 20042006 and 2003it did not have a material impact on our consolidated financial statements.

In June 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109”, which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 requires recognition of tax benefits that satisfy a greater than 50% probability threshold. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 is effective for us beginning July 1, 2007. We are currently assessing the potential impact that the adoption of FIN No. 48 will have on our consolidated financial statements.

 

(2)Summary of Significant Accounting Policies, Continued

(s)(4)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.Plan, which we refer to collectively as the Plans. These options have expiration dates of ten years from the date of grant and vest ratably over three or four years. We granted these options with thean exercise price equal to the market value as determined at the date of grant.

We apply APB Opinion No. 25 in accounting forhave also offered to our equity planspersonnel, including officers and as all stock options are issued at market price on date of issue, no compensation cost has been recognized fordirectors, 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,right 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
2003
  2002  Average
Exercise Price
  Fair Value at
Date of Grant

1999

   -   -   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 withpurchase shares of stock. SFAS 150 is effective for all financial instruments entered intoour common stock at a discount under our employee stock purchase plan, 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, 2004 and 2003, was $12.0 million and $6.5 million respectively.ESPP.

 

F12


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

 

(4)Marketable Securities,Stock-based Employee Compensation, Continued

 

Expected maturities may differ from contractual maturities becausePrior to July 1, 2005 we applied APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related Interpretations, in accounting for our equity plans. For periods prior to July 1, 2005, we complied with the issuersdisclosure only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, or SFAS 123. No stock-based employee compensation cost was reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the securities mayunderlying common stock on the date of grant (or within permitted discounted prices as it pertains to the ESPP). Results for periods before July 1, 2005 have not been restated to reflect, and do not include the right to prepay obligations without prepayment penalties.impact of, SFAS No. 123(R), “Share-Based Payment”, or SFAS 123(R). 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 for stock option grants using the fair value based method of accounting:

 

(5)Inventories
   Years Ended June 30 
In thousands, except per share data  2005  2004 

Net income, as reported

  $64,785  $57,284 

Deduct: Stock-based employee compensation expense determined under fair value based method, net of related tax effects

   (10,323)  (9,394)

Pro forma net income

  $54,462  $47,890 

Adjustment for interest and deferred borrowing costs, net of related tax effects

   3,285   3,285 

Pro forma net income used in calculating diluted earnings per share

  $57,747  $51,175 
  

Earnings per share:

         

Basic - as reported

  $0.94  $0.85 

Basic - pro forma

  $0.80  $0.71 
  

Diluted - as reported

  $0.91  $0.82 

Diluted - pro forma

  $0.77  $0.68 

 

Inventories, net were comprisedAs of July 1, 2005, we adopted SFAS No. 123(R), using the modified-prospective method, which requires measurement of compensation expense of all stock-based awards at fair value on the date of grant and amortization of the following as of June 30, 2004 and 2003 (in thousands):

   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
Items
  Unrealized
Gains on
Securities
  Accumulated Other
Comprehensive
Income
  Retained
Earnings
  Accumulated
Comprehensive
Income

Beginning 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 June 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 comprisedfair value over the vesting period of the followingaward. Under the prospective method, the provisions of SFAS 123(R) apply to all awards granted or modified after the date of adoption. In addition, the unrecognized expense of awards not yet vested at the date of adoption, determined under the original provisions of SFAS No. 123, shall be recognized in net income in the periods after adoption. The fair value of stock options is determined using the Black-Scholes valuation model, which is consistent with valuation techniques previously utilized for options in footnote disclosures required under SFAS No. 123, as amended by SFAS No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure”. Such value is recognized as expense over the service period, net of June 30, 2004estimated forfeitures, using the graded attribution method for stock-based awards granted prior to July 1, 2005 and 2003 (in thousands):the straight-line method for stock-based awards granted after July 1, 2005.

   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, 2004 and 2003

 

(8)(4)Goodwill and Other Intangible AssetsStock-based Employee Compensation, Continued

 

The Company adoptedapplication of SFAS 142123(R) had the following effect on July 1, 2001. Under SFAS 142, goodwill amortization expense has notreported amounts relative to amounts that would have been recorded for the years ended June 30, 2004, 2003 and 2002.reported under previous accounting (in thousands, except per share data):

 

   2006
   Under Previous
Accounting
  SFAS 123(R)
Adjustments
  As
Reported

Cost of sales

  $229,210  $891  $230,101

Operating expenses:

            

Selling, general and administrative

   187,796   12,372   200,168

Research and development

   35,174   2,042   37,216

Income from operations

   146,605   (15,305)  131,300

Income before income taxes

   148,699   (15,305)  133,394

Income taxes

   48,516   (3,333)  45,183

Net income

   100,183   (11,972)  88,211

Inventories, net

   115,787   407   116,194

Earnings per share:

            

Basic

  $1.39  $(0.17) $1.22

Diluted

  $1.30  $(0.14) $1.16

Cash flow from operating activities

  $108,781  $(9,753) $99,028

Cash flow from financing activities

  $88,014  $9,753  $97,767

Changes in

The fair value of stock options granted under our stock option plans and purchase rights granted under our ESPP is estimated on the carrying amountdate of goodwill for the year ended June 30, 2004, were as follows:grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

(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
   Years ended June 30
   2006  2005  2004

Stock Options:

         

Weighted average grant date fair value

  $12.75  $8.49  $7.44

Weighted average risk-free interest rate

  3.9-4.5%  4.0%  2.9%

Dividend yield

  -  -  -

Expected option life in years

  3.9-5.2  3.5-4.6  3.3-4.2

Volatility

  28-30%  31%  43%

ESPP Purchase rights:

         

Weighted average risk-free interest rate

  3.2-4.9%  2.3%  -

Dividend yield

  -  -  -

Expected option life

  6 months  6 months  -

Volatility

  29-41%  31-38%  -

 

Other intangible assets amountedExpected volatilities are based on a combination of historical volatilities of our stock and implied volatilities from traded options of our stock. The expected life represents the weighted average period of time that options granted are expected to $4.8 million (netbe outstanding giving consideration to vesting schedules and our historical exercise patterns. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of accumulated amortization of $5.0 million) and $3.7 million (net of accumulated amortization of $3.4 million) at June 30, 2004 and 2003, respectively. These intangible assets consist of patents and are amortized overgrant for periods corresponding with the estimated usefulexpected 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 we issued $150.0 million of 4% convertible subordinated notes that are due to mature on June 20, 2006. On July 3, 2001, we 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.option.

 

F14


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(5)Inventories

Inventories, net were comprised of the following as of June 30, 20042006 and 20032005 (in thousands):

   2006  2005

Raw materials

  $41,979  $29,857

Work in progress

   3,520   1,820

Finished goods

   70,695   57,430
   $116,194  $89,107

(6)Comprehensive Income

The components of comprehensive income, net of tax, were as follows (in thousands):

   2006  2005 

Net income

  $88,211  $64,785 

Foreign currency translation gains/(losses)

   2,250   11,617 

Unrealized gains/(losses) on marketable securities

   -   (6)

Comprehensive income

  $90,461  $76,396 

We do not provide for U.S. income taxes on foreign currency translation adjustments since we do not provide for such taxes on undistributed earnings of foreign subsidiaries.

(7)Property, Plant and Equipment

Property, plant and equipment is comprised of the following as of June 30, 2006 and 2005 (in thousands):

   2006  2005 

Machinery and equipment

  $51,854  $42,623 

Computer equipment

   52,277   44,011 

Furniture and fixtures

   21,572   18,174 

Vehicles

   2,795   2,266 

Clinical, demonstration and rental equipment

   40,615   29,211 

Leasehold improvements

   11,604   4,940 

Land

   55,946   35,492 

Buildings

   77,474   77,101 

Construction in progress

   46,710   9,320 
    360,847   263,138 

Accumulated depreciation and amortization

   (115,471)  (88,970)
   $245,376  $174,168 

F15


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(8)Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill for the year ended June 30, 2006, were as follows:

(In thousands)  2006 

Balance at June 30, 2005

  $181,106 

Foreign currency translation adjustments

   8,952 

Acquisition of PolarMed (note 18)

   4,351 

Acquisition of Pulmomed (note 18)

   2,104 

Payment of earn-out relating to Hoefner acquisition (note 18)

   594 

Adjustment to purchase price allocation relating to Saime acquisition (note 18)

   (1,495)

Balance at June 30, 2006

  $195,612 

Patents and other intangibles is comprised of the following as of June 30, 2006 and June 30, 2005:

(In thousands)  June 30, 2006  June 30, 2005 

Developed/core product technology

  $31,336  $29,620 

Accumulated amortization

   (4,992)  (487)

Developed/core product technology, net of accumulated amortization

   26,344   29,133 

Trade names

   1,663   1,572 

Accumulated amortization

   (265)  (26)

Trade names, net of accumulated amortization

   1,398   1,546 

Customer relationships

   16,362   12,936 

Accumulated amortization

   (2,094)  (345)

Customer relationships, net of accumulated amortization

   14,268   12,591 

Patents

   16,151   13,200 

Accumulated amortization

   (9,264)  (7,099)

Patents, net of accumulated amortization

   6,887   6,101 

Patents and other intangibles, net of accumulated amortization

  $48,897  $49,371 

Intangible assets consist of patents, customer relationships, trade names and developed/core product technology and are amortized over the estimated useful life of the assets, generally between five and nine years. There are no expected residual values related to these intangible assets.

In fiscal year 2005, as part of the acquisition of Saime, we recognized an intangible asset with respect to developed/core product technology. Specifically, this technology related to the design and architecture of the hardware and algorithms that formed part of Saime’s ventilation products and is the subject of patents and other intellectual property protections. This technology is separable from goodwill as it is capable of being sold, transferred or licensed. This represents proprietary know-how predominantly associated with the following portfolio of products that were technologically feasible at the date of acquisition:

(i)Elisee Series: Combines all conventional ventilation modes and monitoring functions; and

(iii)VS Series (including Serena, Ultra and Integra): A new generation of ventilators using new blower technology.

F16


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(8)Goodwill and Other Intangible Assets, Continued

Both of these series of products continue to generate revenue which is consistent with the original expectations. Although no assurance can be given that the underlying assumptions used to value the acquired developed/core product technology will transpire as estimated, we remain confident in the assumptions used and, as a result, the net return of the Saime acquisition.

Amortization expense related to identifiable intangible assets, including patents, for the year ended June 30, 2006 was $8.5 million. Estimated annual amortization expense for the years ending June 30, 2007 through June 30, 2011, including the effect of the Resprecare, Hoefner, Saime, Pulmomed and PolarMed acquisitions is shown below (in thousands):

Fiscal Year  Amortization expense

2007

  $9,067

2008

   8,695

2009

   8,304

2010

   7,754

2011

   7,200

(9)Accrued Expenses

Accrued expenses at June 30, 2006 and 2005 consist of the following (in thousands):

   2006  2005

Product warranties

  $4,653  $2,912

Consulting and professional fees

   2,851   3,207

Value added taxes and other taxes due

   3,199   4,139

Employee related costs

   20,804   16,793

Accrued interest

   868   358

Marketing and promotional programs

   3,024   1,887

Restructuring

   138   474

Acquisition costs

   320   0

Customer advance

   1,102   1,042

Other

   3,942   3,602
   $40,901  $34,414

F17


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

(10)Long-TermLong-term Debt

Long-term debt at June 30, 2006 and 2005 consists of the following (in thousands):

   June 30, 2006  June 30, 2005

Convertible subordinated notes

  $-  $113,250

Long-term loan

   4,796   2,116

Capital lease

   73   69

Current portion of long-term debt

  $4,869  $115,435

Long-term loan

  $115,644  $58,328

Capital lease

   568   606

Non-current portion of long-term debt

  $116,212  $58,934

Convertible Subordinated Notes

During the year ended June 30, 2006 and pursuant to the Indenture dated June 20, 2001 between us and American Stock Transfer & Trust Company, as trustee, holders of all of the 4% Convertible Subordinated Notes (“the Notes”) due 2006 converted the Notes into an aggregate of 3,737,593 shares of our common stock, par value $0.004. The Notes were converted into 33 shares of our common stock for each $1,000 principal amount of the Notes, at a conversion price of $30.30 per share. No payment was made for accrued interest on Notes surrendered for conversion and the dilutive impact of these conversions has been reflected in the reported earnings per share.

Previous to the conversion, on January 5, 2006, we had exercised our right to call for an early redemption of all of the Notes, which at that time had an outstanding balance of $113.25 million. We provided notice to the trustee and the holders of the Notes that we were to redeem the Notes on March 3, 2006 at a redemption price of approximately $1,008 per $1,000 principal amount of Notes, or 100.8% of the principal amount thereof plus accrued and unpaid interest to the redemption date. However, as noted above, holders of all of the Notes exercised their option to convert the Notes into our common stock.

Revolving Facility

On March 13, 2006, our wholly-owned subsidiaries ResMed Corp., Servo Magnetics Inc. and ResMed EAP Holdings Inc. entered into a Second Amended and Restated Revolving Loan Agreement with Union Bank of California, N.A. as administrative agent for the Lenders (the “Loan Agreement”), that provides for a revolving loan of up to $75 million. Draws under the revolving loan must be made before March 1, 2011, at which time all unpaid principal and interest must be repaid. The outstanding principal amount due under the loan will bear interest at a rate equal to LIBOR plus 0.75% to 1.00% (depending on the applicable leverage ratio). At June 30, 2006 there were no amounts outstanding under the Loan Agreement.

The obligations of ResMed Corp., Servo Magnetics Inc. and ResMed EAP Holdings Inc. under the Loan Agreement are secured by substantially all of the personal property of each of ResMed Corp., Servo Magnetics Inc. and ResMed EAP Holdings Inc., and are guaranteed by ResMed Inc. under an Amended and Restated Continuing Guaranty and Pledge Agreement, which guaranty is secured by a pledge of the equity interests in ResMed Corp., Servo Magnetics Inc. and ResMed EAP Holdings Inc. held by ResMed Inc. The Loan Agreement also contains customary covenants, including certain financial covenants and an obligation that ResMed Inc. maintain certain financial ratios, including a maximum ratio of total debt to EBITDA (as

F18


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(10)Long-term Debt, Continued

 

defined in the Loan Agreement), a fixed charge coverage ratio, a minimum tangible net worth, and a minimum ResMed Corp., Servo Magnetics Inc. and ResMed EAP Holdings Inc. EBITDA and liquidity. The entire principal amount of the Loan and any accrued but unpaid interest may be declared immediately due and payable in the event of the occurrence of an event of default as defined in the Loan Agreement. Events of default include, among other items, failure to make payments when due, the occurrence of a material default in the performance of any covenants in the Loan Agreement or related document or a 35% or more change in control of ResMed Inc., ResMed Corp., Servo Magnetics Inc. or ResMed EAP Holdings Inc. At June 30, 2006, we were in compliance with our debt covenants.

Syndicated Facility

On June 8, 2006, our wholly-owned Australian subsidiary, ResMed Limited, entered into a Syndicated Facility Agreement with HSBC Bank Australia Limited as original financier, facility agent and security trustee, that provides for a loan in three tranches.

Tranche A is a EUR 50 million term loan facility that refinances all amounts outstanding under a previous syndicated facility agreement dated May 16, 2005 between ResMed Limited and HSBC Bank Australia Limited, to fund the obligations of our wholly owned French subsidiary ResMed SAS under its agreement to acquire Saime SA). Tranche A bears interest at a rate equal to LIBOR for deposits denominated in EUR plus a margin of 0.80% or 0.90%, depending on the ratio of the total debt to EBITDA of ResMed Inc. and its subsidiaries (the “ResMed Group”) for the most recently completed fiscal year for the applicable interest period. Payments of principal must be made to reduce the total outstanding principal amount of Tranche A to EUR 44.5 million on June 30, 2007, EUR 37.75 million on June 30, 2008, EUR 27.5 million on June 30, 2009, EUR 15 million on December 31, 2009, and the entire outstanding principal amount must be repaid in full on June 8, 2011. At June 30, 2006, the Tranche A facility loan had an amount outstanding of $61.7 million.

Tranche B is a USD 15 million term loan facility that may only be used for the purpose of financing capital expenditures and other asset acquisitions by the ResMed Group. Tranche B bears interest at a rate equal to LIBOR for deposits denominated in EUR, Australian dollars, USD or Sterling plus a margin of 0.80% or 0.90%, depending on the ratio of the total debt to EBITDA of the ResMed Group for the most recently completed fiscal year for the applicable interest period. The entire principal amount must be repaid in full on June 8, 2011. At June 30, 2006, there were no amounts outstanding under the Tranche B facility loan agreement.

Tranche C is a USD 60 million term loan facility that may only be used for the purpose of the payment by ResMed Limited of a dividend to ResMed Holdings Limited, which will ultimately be paid to ResMed Inc. Tranche C bears interest at a rate equal to LIBOR for deposits denominated in EUR, Australian dollars or USD plus a margin of 0.70% or 0.80%, depending on the ratio of the total debt to EBITDA of the ResMed Group for the most recently completed fiscal year for the applicable interest period. Payments of principal must be made to reduce the total outstanding principal amount of Tranche C to USD 30 million on December 31, 2007 and the entire outstanding principal amount must be repaid in full by June 8, 2009. At June 30, 2006, the Tranche C facility loan had an amount outstanding of $58.6 million.

Simultaneous with the Syndicated Facility Agreement, ResMed Limited entered into a working capital agreement with HSBC Bank Australia Limited for revolving, letter of credit and overdraft facilities up to a total commitment of 6.5 million Australian dollars for one year, and ResMed (UK) Limited entered into a working capital agreement with HSBC Bank plc for a revolving cash advance facility up to a total commitment of 3 million Sterling for one year.

The loan is secured by a pledge of one hundred percent of the shares of ResMed Inc.’s subsidiary, Saime SAS, pursuant to a Pledge Agreement. The Syndicated Facility Agreement also contains customary covenants,

F19


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(10)Long-term Debt, Continued

including certain financial covenants and an obligation that ResMed Limited maintain certain financial ratios, including a minimum debt service cover ratio, a maximum ratio of total debt to EBITDA and a minimum tangible net worth. The entire principal amount of the loan and any accrued but unpaid interest may be declared immediately due and payable in the event of the occurrence of an event of default as defined in the Syndicated Facility Agreement. Events of default include, among other items, failure to make payments when due, breaches of representations, warranties or covenants, the occurrence of certain insolvency events, the occurrence of an event or change which could have a material adverse effect on ResMed Limited and its subsidiaries, and if ResMed Inc. ceases to control ResMed Limited, ResMed Corp., ResMed SAS, ResMed GmbH & Co. KG, ResMed (UK) Limited, Take Air Medical Handels-GmbH or Saime SAS.

The obligations of ResMed Limited under the loan are subject to two guarantee and indemnity agreements, one on behalf of ResMed Inc. and its U.S. subsidiary, ResMed Corp., and another on behalf of ResMed’s international subsidiaries, ResMed SAS (other than Tranche C), ResMed GmbH & Co. KG, ResMed (UK) Limited and Take Air Medical Handels-GmbH. At June 30, 2006 we were in compliance with our debt covenants.

Capital Lease

As part of the acquisition of Saime we assumed a capital lease over land and buildings. This lease contains an option to purchase the property, for nominal consideration, at the end of the lease term in September 2014.

Details of contractual debt maturities at June 30, 2004, we had convertible subordinated notes outstanding2006 are as follows (in thousands):

      Payments Due by Period
   Total  2007  2008  2009  2010  Thereafter

Long-Term Debt

  $120,441  $4,796  $38,782  $13,110  $35,173  $28,580

Capital Leases

   641   73   73   73   73   349

Total

  $121,082  $4,869  $38,855  $13,183  $35,246  $28,929

(11)Restructuring Expenses

Restructuring expenses incurred during the year ended June 30, 2006 were $1.1 million ($0.7 million net of $113.3 million.tax) and are recorded in the consolidated statements of income as restructuring expenses. Restructuring expenses (predominantly one-time employee termination benefits) are associated with the integration of the separate operations of ResMed Germany and MAP into a single operating unit. We have substantially completed the relocation of our ResMed Germany operation (previously located in Moenchengladbach) to Munich and integration of the back office functions including customer service, logistics and administration. We will continue to monitor the progress of this restructure and adjust our business strategies and personnel accordingly to achieve maximum efficiencies and cost savings.

 

The notes are convertible, at the option of the holder, at any time on or priorF20


RESMED INC.AND SUBSIDIARIES

Notes 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.

We may redeem some or all of the notes at any time on or after June 22, 2004, but prior to June 20, 2005, at a redemption price equal to 101.6% of the principal amount of notes redeemed, and at any time after June 19, 2005, at a redemption price of 100.8% of the principal amount of notes, plus in any case accrued and unpaid interest, if any, to the redemption date, if the closing price of 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 does not limit us or our subsidiaries from incurring senior indebtedness or other indebtedness.

Interest is to be paid on the notes on June 20 and December 20 of each year.Consolidated Financial Statements

 

(11)Restructuring Expenses, Continued

Following is a summary of the restructuring liabilities related to the restructure and integration of the separate operations of ResMed Germany and MAP into a single operating unit, that were recorded during the years ended June 30, 2005 and June 30, 2006 (in thousands):

   Accrued
employee
costs
  Other
accrued
costs
  Total
accrued
costs
 

Balance at June 30, 2004

  $-  $-  $- 

Restructuring expenses

   4,673   479   5,152 

Cash payments

   (4,451)  (227)  (4,678)

Balance at June 30, 2005

  $222  $252  $474 

Restructuring expenses

   888   236   1,124 

Cash payments

   (1,044)  (408)  (1,452)

Foreign currency translation

   (28)  20   (8)

Balance at June 30, 2006

  $38  $100  $138 

(12)Stockholders’ Equity

 

Stock Options.    The Company has granted stock options to personnel, including officers and directors, in accordance with both the 1995 Option Plan and the 1997 Equity Participation Plan (collectively the “Plans”). These options have expiration dates of ten years from the date of grant and vest ratably 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.

 

The following table summarizes option activity:

  2004  Weighted
Average
Exercise
Price
 2003  Weighted
Average
Exercise
Price
 2002  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, 2004 and 2003

(11)Stockholders’ Equity, Continued

The total number of shares of Common Stockcommon 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 1,000,0002,000,000 and increases at the beginning of each fiscal year, commencing on July 1, 1998, by an amount equal to 4% of the outstanding Common Stockcommon stock on the last day of the preceding fiscal year. The maximum number of shares of Common Stockcommon stock issuable upon exercise of incentive stock options granted under the 1997 Plan, however, cannot exceed 8,000,000.16,000,000. 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 300,000.600,000.

 

The following table summarizes information about stock options outstanding at June 30, 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

(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, 2004 ($50.96 per share).

F16F21


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

 

(11)(12)Stockholders’ Equity, Continued

 

At June 30, 2006, there was $26.5 million in unrecognized compensation costs related to unvested stock options. This is expected to be recognized over a weighted average period of 2.9 years. The aggregate intrinsic value of the options outstanding and the options exercisable at June 30, 2006 was $183.8 million and $123.3 million, respectively. The aggregate intrinsic value of the options exercised during the year ended June 30, 2006 was $40.5 million. The total fair value of options that vested during the year ended June 30, 2006 was $17.1 million. 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 officersactivity during the fiscal year ended June 30, 2004 are as noted below.2006:

    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 endedactivity:

   2006  Weighted
Average
Exercise
Price
  2005  Weighted
Average
Exercise
Price
  2004  Weighted
Average
Exercise
Price

Outstanding at beginning of year

   8,301,408  $19.38   8,832,712  $16.27   9,490,356  $14.52

Granted

   2,030,700   38.17   2,336,650   25.30   1,820,474   20.66

Exercised

   (1,805,648)  17.06   (2,633,246)  13.97   (1,916,782)  10.62

Forfeited

   (423,568)  26.09   (234,708)  18.34   (561,336)  20.28

Outstanding at end of year

   8,102,892  $24.26   8,301,408  $19.38   8,832,712  $16.27

Exercise price range of granted options

  $32.99-45.46      $21.95–31.24      $19.60–25.78    

Options exercisable at end of year

   4,262,743  $18.03   3,987,754  $16.86   4,813,162  $14.35

The following table summarizes information about stock options outstanding at June 30, 2004.2006.

 

      

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, 2004 ($50.96 per share) multiplied by the number of shares to which the options apply exceeded the aggregate exercise price of such options.
Range of Exercise Prices  

Number

Outstanding

at June 30,

2006

  

Weighted

Average

Remaining

Contractual

Life In

Years

  

Number

Exercisable

at June 30,

2006

  

Weighted

Average

Remaining

Contractual

Life In

Years

$ 0 - $10

  500,590  2.46  500,590  2.46

$11 - $20

  2,697,755  6.32  2,192,760  6.08

$21 - $30

  2,823,947  7.31  1,530,589  6.32

$31 - $40

  2,062,100  9.50  38,804  8.92

$41 - $50

  18,500  9.80  Nil  Nil
   8,102,892  7.24  4,262,743  5.77

 

Employee Stock Purchase Plan (the “ESPP”).    The ESPP was approved by our shareholders at the Annual General Meeting in November 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 for a period of time determined by the Board of Directors’ Compensation Committee of no less than 3 months and no more than 27 months. The purchase price for our common stock under the ESPP will be the lower of 85% of the fair market value of our common stock on the date of grant or 85% of the

 

F18F22


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

 

(11)(12)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 3,250,0007,500,000 shares of our common stock authorized for sale under the ESPP.

 

During fiscal year 2006, we issued 125,995 shares to our employees in two offerings at an average share price of $29.81. We recognized $1.2 million of stock compensation expense associated with the ESPP.

Preferred Stock.    In April 1997, the boardBoard of directorsDirectors authorized 2,000,000 shares of $0.01 par value preferred stock. No such shares were issued or outstanding at June 30, 2004.2006.

 

Stock Purchase Rights.    In April 1997, the Company implemented a plan to protect stockholders’ rights in the event of a proposed takeover of the Company. Under the plan, each share of the Company’s outstanding common stock carries one right to purchase Series A Junior Participating Preferred Stock (the “Right”). The Right enables the holder, under certain circumstances, to purchase common stock of the Company or of the acquiring person at a substantially discounted price ten days after a person or group publicly announces it has acquired or has tendered an offer for 20% or more of the Company’s outstanding common stock. The Rights are redeemable at $0.01 per Right and expire in 2007.

 

Common Stock.    On June 6, 2002, the Board of Directors authorized the Company to repurchase up to 4.08.0 million shares of outstanding common stock. During fiscal year 2004years 2006 and 2003,2005, the Company repurchased 471,000NIL and 125,000482,000 shares at a cost of $19.0$NIL million and $3.5$11.0 million, respectively. As of June 30, 2006, we have repurchased a total of 2,254,918 shares at a cost of $41.4 million. Shares that are repurchased are classified as treasury stock pending future use and reduce the number of shares outstanding used in calculating earnings per share.

 

Convertible Subordinated Notes.    During the year ended June 30, 2006, and pursuant to the Indenture dated June 20, 2001 between us and American Stock Transfer & Trust Company, as trustee, holders of all of the 4% Convertible Subordinated Notes due 2006 converted the notes into an aggregate of 3,737,593 shares of the Company’s common stock, par value $0.004. The notes were converted into 33 shares of our common stock for each $1,000 principal amount of the notes, at a conversion price of $30.30 per share. The dilutive impact of these conversions has been reflected in the reported earnings per share.

Stock Split.    On August 10, 2005, our Board of Directors declared a two-for-one split of our Common Stock to be payable in the form of a 100% stock dividend. Stockholders received one additional share of Common Stock for every share held on September 30, 2005. All share and per share information has been adjusted for this stock split.

(12)(13)Other, net

 

Other, net in the statementconsolidated statements of operationsincome is comprised of the following at June 30, 2004, 20032006, 2005 and 20022004 (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 

(13)Income Taxes
   2006  2005  2004 

Gain/(loss) on foreign currency transactions and hedging

  $1,853  $36  $655 

Realized gain (loss) on sale of marketable securities

   -   (34)  (11)

Impairment of cost method investment

   (1,156)  -   - 

Other

   77   79   346 
   $774  $81  $990 

 

Income before income taxes for the years ended June 30, 2004, 2003, and 2002, was taxed under the following jurisdictions (in thousands):

   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

F19F23


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

 

(13)(14)Income Taxes Continued

Income before income taxes for the years ended June 30, 2006, 2005 and 2004, was taxed under the following jurisdictions (in thousands):

   2006  2005  2004

U.S.

  $5,472  $(54) $1,290

Non-U.S.

   127,922   96,680   83,378
   $133,394  $96,626  $84,668

 

The provision for income taxes is presented below (in thousands):

 

  2004 2003  2002   2006 2005 2004 

Current:

           

Federal

  $3,567  $1,303  $4,962   $7,507  $799  $3,567 

State

   372   14   752    1,370   246   372 

Non-U.S.

   22,186   18,079   17,525    48,221   38,793   22,186 
   26,125   19,396   23,239    57,098   39,838   26,125 

Deferred:

           

Federal

   1,293   892   (3,494)   (3,353)  618   1,293 

State

   (84)  325   (568)   (390)  (29)  (84)

Non-U.S.

   50   785   (2,091)   (8,172)  (8,586)  50 
   1,259   2,002   (6,153)   (11,915)  (7,997)  1,259 

Provision for income taxes

  $27,384  $21,398  $17,086   $45,183  $31,841  $27,384 

 

The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. federal income tax rate of 35% (34% for 2005 and 2004) to pretax income as a result of the following (in thousands):

 

  2004 2003 2002   2006 2005 2004 

Taxes computed at statutory U.S. rate

  $28,787  $23,495  $19,108   $46,688  $32,853  $28,787 

Increase (decrease) in income taxes resulting from:

        

Effect of AJCA dividend repatriation

   3,537   -   - 

State income taxes, net of U.S. tax benefit

   254   274   363    939   165   254 

Non-deductible expenses

   312   243   116    777   580   312 

Research and development credit

   (2,582)  (1,690)  (888)   (3,085)  (2,743)  (2,582)

Tax effect of intercompany dividends

   129   -   2,577 

Write-off of net operating losses due to business cessation

   -   -   1,046 

Tax effect of deemed dividends

   1,846   590   129 

Change in valuation allowance

   5,074   457   (2,614)   1,665   637   5,074 

Effect of non-U.S. tax rates

   (2,930)  (2,498)  (3,379)   (6,731)  (3,419)  (2,930)

In-process research and development write-off

   -   -   123    -   1,791   - 

Foreign tax credits

   (772)  -   -    (1,204)  -   (772)

Stock-based compensation expense

   2,006   -   - 

Other

   (888)  1,117   634    (1,255)  1,387   (888)
  $27,384  $21,398  $17,086   $45,183  $31,841  $27,384 

 

F20F24


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

 

(13)(14)Income Taxes, Continued

 

Deferred tax assets and liabilities are classified as current or non-current according to the classification of the related asset or liability. The components of the Company’s deferred tax assets and liabilities at June 30, 20042006 and 2003 (in thousands)2005 are as follows:follows (in thousands):

 

  2004 2003   2006 2005 

Deferred tax assets:

        

Employee benefit obligations

  $1,732  $1,208   $3,274  $2,306 

Inventory

  735  1,068 

Provision for service warranties

  419  343 

Inventories

   1,408   301 

Provision for warranties

   992   596 

Provision for doubtful debts

  867  768    1,024   692 

Net operating loss carryforwards

  723  1,277    2,598   4,505 

Foreign tax credits

  8,836  7,288    9,626   8,422 

AMT tax credit

  634  1,667    -   399 

Accrual for legal costs

  64  307 

Unrealized foreign exchange losses

   970   - 

Capital loss carryover

   521   - 

Intercompany profit in inventories

  8,958  6,013    18,611   14,376 

Capitalized software

  308  472 

Deferred gain on sale-leaseback

  659  1,329 

Stock-based compensation expense

   2,833   - 

Other

  1,821  2,112    2,448   2,031 
  25,756  23,852    44,305   33,628 

Less valuation allowance

  (8,459) (3,385)   (10,989)  (9,096)

Deferred tax assets

  17,297  20,467   $33,316  $24,532 
 

Deferred tax liabilities:

        

Patents

  (91) (93)

Unrealized gain on foreign currency options

  (599) (773)   (353)  (905)

Unrealized foreign exchange gains

  (1,472) (1,678)   -   (1,905)

Property, plant and equipment

  (2,885) (2,244)   (1,673)  (2,366)

Undistributed German income

  -  (3,448)

Deferred tax deductible goodwill amortization

  (4,780) (3,634)

Goodwill and other intangibles

   (16,500)  (15,062)

Other

  (429) (296)   (531)  (759)

Deferred tax liabilities

  (10,256) (12,166)   (19,057)  (20,997)

Net deferred tax asset

  $7,041  $8,301   $14,259  $3,535 

The net deferred tax assets and liabilities have been reported in the consolidated balance sheets at June 30, 2006 and 2005 as follows (in thousands):

   2006  2005 

Current deferred tax asset

  $26,636  $15,230 

Non-current deferred tax liability

   (12,377)  (11,695)

Net deferred tax asset

  $14,259  $3,535 

 

As of June 30, 2004,2006, the Company had $2,669,000$1,776,000 and $1,771,000$14,082,000 of U.S. state and non-U.S. net operating loss carryforwards, respectively, which expire in various years through 20242025 or carryforwardcarry forward indefinitely. The Company also had foreign tax credit carryforwards of $8,836,000 and alternative minimum tax credit carryforwards of $634,000.$9,626,000. The foreign tax credit carryforwards have expiration dates through 2009.2016.

 

The valuation allowance at June 30, 2004, relates to a provision for uncertainty as to the utilization of foreign tax credits of $8,033,000 and net operating loss carryforwards of $426,000 for Malaysia and Austria.

F21F25


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

 

(13)(14)Income Taxes, Continued

 

The valuation allowance at June 30, 2006, relates to a provision for uncertainty as to the utilization of foreign tax credits of $9,626,000, net operating loss carryforwards for certain non-U.S. countries of $842,000 and capital loss items of $521,000. We believe that it is more likely than not that the benefits of deferred tax assets, net of any valuation allowance, will be realized.

The Company has not provided for U.S. income and foreign withholding taxes on undistributed earnings from non-U.S. subsidiaries indefinitely invested outside the United States as of certain of its non-U.S. subsidiaries.June 30, 2006. The total amount of these undistributed earnings at June 30, 20042006 amounted to approximately $150,829,000.$266 million. Should the Company repatriate foreign earnings, the Company would have to adjust the income tax provision in the period management determined that the Company would repatriate earnings. The American Jobs Creation Act of 2004, or AJCA, enacted on October 22, 2004, provides for a one-time 85% dividends received deduction for certain foreign earnings repatriated. During the fourth quarter of fiscal 2006, we repatriated $75 million of foreign earnings under the AJCA and recorded a related tax expense of $3.5 million. This distribution does not change the Company’s intention to indefinitely reinvest undistributed earnings of its non-U.S. subsidiaries outside the United States.

 

(14)(15)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. From July 1, 2002 theThe Company contributes to the plans at the rate of 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, 2006, 2005 and 2004, 2003,were $3,846,000, $2,849,000 and 2002 were $2,410,000, $1,663,391 and $968,000, respectively.

 

(2) United Kingdom - The Company contributes to a defined contribution plan for each permanent United Kingdom employee. All employees, after serving a three-month qualifying period, are entitled to benefit on retirement, disability or death. Employees may contribute additional funds to the plan. The Company contributes to the plansplan at the rate of 5% of the salaries. Prior to January 2002, the Company contributed 3% forsalaries of all qualifiedUnited Kingdom employees. Total Company contributions to the plan were $33,000, $23,000$109,000, $67,000 and $16,000$33,000 in fiscal 2004, 2003,2006, 2005 and 20022004, respectively.

 

(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 planthe employee’s salary. Total Company contributions to the Company wasplan were $531,000, $514,000 and $362,000 $326,000 and $245,000 in fiscal 2004, 20032006, 2005 and 20022004, respectively.

 

(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 companyCompany guarantees a fixed 3% net return on accumulated contributions per annum. The Company contributes to the plansplan at variable rates whichthat have averaged 10% of salaries over the last three years. Total Company contributions to the plan were $139,000, $133,000$182,000, $85,000 and $94,000$139,000 in fiscal 2004, 20032006, 2005 and 20022004, respectively.

 

(15)Segment Information

(16) Segment Information

 

The Company operates solely in the sleep-disordered breathing sector of the respiratory medicine industry. The Company therefore believes that, given the single market focus of its operations and the inter-dependenceinter- dependence of its products, that the Company operates as a single operating segment. The Company assesses performance and allocates resources on the basis of a single operating entity.

 

F22F26


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

(16) Segment Information, Continued

(15)Segment Information, Continued

 

Financial information by geographic area for the years ended June 30, 2004, 20032006, 2005 and 2002,2004, is summarized below (in thousands):

 

  U.S.A  Germany  Australia  France  Rest of
World
  Total  U.S.A  Germany  Australia  France  Rest of
World
  Total
 

2004

                   

2006

                   

Revenue from external customers

  $159,283  67,253  10,293  34,629  67,880  $339,338  $320,941  96,436  18,709  59,402  111,508  $606,996
  

Long lived assets

  $33,010  6,842  108,683  1,075  5,831  $155,441  $54,118  17,190  162,522  7,080  11,518  $252,428
 

2003

                   

2005

                   

Revenue from external customers

  $124,375  51,992  6,972  27,745  62,486  $273,570  $210,495  72,824  14,160  47,537  80,489  $425,505
  

Long lived assets

  $34,340  5,765  68,300  1,030  2,350  $111,785  $32,090  11,615  130,310  2,544  6,900  $183,459
 

2002

                   

2004

                   

Revenue from external customers

  $95,463  35,386  5,569  20,957  46,701  $204,076  $159,283  67,253  10,293  34,629  67,880  $339,338
 

Long lived assets

  $34,127  3,738  46,370  599  2,455  $87,289  $33,010  6,842  108,683  1,075  5,831  $155,441

 

Net revenues from external customers isare based on the location of the customer. Long-lived assets of geographic areas are those assets used in the Company’s operations in each geographical area and excludes patents,intangibles, deferred tax assets and goodwill.

 

(16)(17)Commitments

 

The Company leases buildings, motor vehicles and office equipment under operating leases. As part of the acquisition of Saime the Company assumed a capital lease for land and buildings. This lease contains an option to purchase the property, for nominal consideration, at the end of the lease term. Rental charges for these itemsoperating leases are expensed as incurred. At June 30, 20042006 the Company had the following future minimum lease payments under non-cancelable operating leases and capital leases (in thousands):

 

Years  Operating
Leases
  Sub lease
rental income
  Total net minimum
lease payments
  Capital Leases Operating Leases
 

2005

   4,947   387   4,560

2006

   3,767   72   3,695

2007

   1,411   -   1,411  $97  $7,586

2008

   909   -   909   94   5,431

2009

   189      189   91   3,799

2010

   88   3,066

2011

   85   1,972

Thereafter

   -   -   -   292   657

Total minimum lease payments

  $11,223  $459  $10,764   747   22,511

Less: Interest portion

   (106)  -

Present value of net minimum lease payments

  $641  $22,511

 

Rent expenses under operating leases for the years ended June 30, 2004, 20032006, 2005 and 20022004 were approximately $5.5$7.5 million, $3.8$6.2 million and $2.3$5.5 million, respectively.

 

F23F27


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(17)Commitments, Continued

Details of other commercial commitments at June 30, 20042006 are as follows (in thousands):

   

Total

Amounts

Committed

  Amount of Commitment Expiration Per Period
     2007  2008  2009  2010  2011  Thereafter

Standby Letters of Credit

  $34  $34  $-  $-  $-  $-  $-

Guarantees*

   2,457   263   -   -   -   -   2,194

Total Commercial Commitments

  $2,491  $297  $-  $-  $-  $-  $2,194

*The above guarantees relate to guarantees required by statutory authorities as a pre-requisite to developing our site at Norwest Business Park, near Sydney, Australia, and 2003to guarantees required by contracts with insurance companies transacting with our German subsidiaries.

(18)Business Acquisitions

Fiscal year ended June 30, 2006

PolarMed Holding AS (“PolarMed”).    On December 1, 2005, we acquired 100% of the outstanding stock of PolarMed, the holding company for PolarMed AS and its affiliates, for net cash consideration of $6.5 million. This was comprised of $6.8 million in consideration less $0.3 million of cash acquired. Additionally, as part of the acquisition we assumed debt of $1.5 million. Under the purchase agreement, we may also be required to make additional future payments of up to $3.0 million based on the achievement of certain performance milestones following the acquisition through December 31, 2008. The acquisition and the immediate repayment of the majority of the assumed debt were funded with cash on hand.

PolarMed is predominantly a Norwegian based company, with affiliated operations based in Sweden and Denmark, which distributes medical equipment and associated services for the treatment of sleep and respiratory patients. PolarMed was our Norwegian distributor before the acquisition, and the acquisition is consistent with our strategy for ongoing expansion of our international operations.

The acquisition has been accounted for using purchase accounting and has been included within our consolidated financial statements from December 1, 2005. An amount of $4.4 million, representing the excess of the purchase price over the fair value of identifiable net assets acquired of $2.4 million, has been recorded as goodwill, which will not be tax deductible under Norwegian tax law. The cost of the acquisition was allocated to the assets acquired and liabilities assumed based on estimates of their respective fair values at the date of acquisition. We have not yet completed the purchase price allocation, as the appraisals associated with the valuation of certain tangible assets are not yet complete. We do not believe that the appraisals will materially modify the preliminary purchase price allocation. We expect to complete our purchase price allocation in the quarter ending September 30, 2006.

F28


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

(17)(18)Business Acquisitions, Continued

The following table summarizes the purchase price allocation of the assets acquired and liabilities assumed from PolarMed at the date of acquisition based on a preliminary independent appraisal and internal studies (in thousands):

   At December 1, 2005 

Cash

  $262 

Accounts receivable

   2,473 

Inventory

   2,170 

Other assets

   27 

Property, plant and equipment

   321 

Customer relationships (useful life of 7 years)

   1,780 

Goodwill (non-amortizing, non-tax deductible)

   4,351 

Total assets acquired

   11,384 

Current liabilities, primarily consisting of accounts payable, accrued expenses, taxes payable and deferred revenue

   (4,179)

Non current liabilities, primarily consisting of deferred tax liabilities

   (427)

Net assets acquired

  $6,778 

Pulmomed Medizinisch-Technische Geräte GmbH (“Pulmomed”).    On July 1, 2005, we acquired 100% of the outstanding stock of Pulmomed for net cash consideration of $2.5 million, including acquisition costs. Additionally, as part of the acquisition we assumed debt of $1.0 million. Under the purchase agreement, we may also be required to make additional future payments of up to $0.9 million based on the achievement of certain performance milestones following the acquisition through June 30, 2007.

Pulmomed is an Austrian based company that distributes medical equipment and associated services for the treatment of sleep and respiratory patients. The acquisition of Pulmomed is consistent with our strategy for ongoing expansion of our international operations.

The acquisition has been accounted for using purchase accounting and has been included within our consolidated financial statements from July 1, 2005. An amount of $1.8 million, representing the excess of the purchase price over the fair value of identifiable net assets acquired of $0.7 million, has been recorded as goodwill, which will not be tax deductible under Austrian tax law. The cost of the acquisition was allocated to the assets acquired and liabilities assumed based on estimates of their respective fair values at the date of acquisition. The fair values were determined by an independent appraisal and internal studies.

F29


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(18)Business Acquisitions, Continued

The following table summarizes the purchase price allocation of the assets acquired and liabilities assumed from Pulmomed at the date of acquisition (in thousands):

   At July 1, 2005 

Cash

  $1 

Accounts receivable

   377 

Inventory

   592 

Other assets

   217 

Property, plant and equipment

   458 

Customer relationships (useful life of 7 years)

   907 

Goodwill (non-amortizing, non-tax deductible)

   1,785 

Total assets acquired

   4,337 

Current liabilities, primarily consisting of accounts payable, accrued expenses, loans and deferred tax liabilities

   (1,668)

Non-current liabilities, primarily consisting of deferred tax liabilities

   (203)

Net assets acquired

  $2,466 

Of the potential additional future payments included within the purchase agreement, $0.3 million was accrued at June 30, 2006 as a result of the successful achievement of a performance milestone. The impact of this accrual was to increase the total acquisition consideration to $2.8 million from $2.5 million and to increase the amount recorded as goodwill by $0.3 million to $2.1 million.

Fiscal year ended June 30, 2005

Saime SAS (“Saime”).    We acquired 100% of the outstanding stock of Financiere ACE SAS, the holding company for Saime and its affiliates, on May 19, 2005, for net cash consideration of $40.6 million. This consisted of $51.1 million in consideration, including acquisition costs, less $10.5 million of cash acquired. At June 30, 2005, we had not yet completed the purchase price allocation as the appraisals associated with the valuation of certain tangible assets were not yet complete. The fair values have now been finalized based on the receipt and evaluation of independent appraisals. The impact of the completion of the purchase price allocation was to increase the fair value of the acquired fixed assets by approximately $0.7 million to $2.9 million, increase the fair value of acquired liabilities, including deferred tax liabilities, by approximately $0.4 million to $91.7 million, increase the fair value of acquired deferred tax assets by approximately $1.2 million to $2.0 million and to decrease the amount recorded as goodwill by $1.5 million to $64.8 million. The acquisition has been accounted for using purchase accounting and has been included within our consolidated financial statements from May 19, 2005.

Hoefner Medizintechnick GmbH (“Hoefner”).    We acquired 100% of the outstanding stock of Hoefner on February 14, 2005, for net cash consideration of $8.2 million. This consisted of the $10.7 million in total consideration, including acquisition costs, less $2.5 million of cash acquired. Under the purchase agreement, additional future payments of up to $0.9 million are possible based on the achievement of certain performance milestones following the acquisition through December 31, 2006. Of these potential additional payments, $0.6 million was paid during the year ended June 30, 2006 as a result of the successful achievement of a performance milestone. The impact of this payment was to increase the total acquisition

F30


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(18)Business Acquisitions, Continued

consideration to $11.3 million from $10.7 million and to increase the amount recorded as goodwill by $0.6 million to $8.8 million. The acquisition has been accounted for using purchase accounting and has been included within our consolidated financial statements from February 14, 2005.

Resprecare BV.    On December 1, 2004, we acquired substantially all the assets of Resprecare BV, our Dutch distributor, for initial consideration of $5.9 million in cash, including acquisition costs. The acquisition of the exclusive Dutch distributor is consistent with our strategy for ongoing expansion of our international operations. Under the purchase agreement, we potentially were also required to make up to $1.4 million of additional future payments based on the achievement of certain milestones. Of these potential additional payments, $0.6 million was paid in January 2005 as a result of the successful achievement of a performance milestone and a further $0.7 million was accrued at June 30, 2005 as a result of the integration of the Dutch subsidiary of our subsidiary MAP with the newly-acquired Resprecare business. The final payment of $0.7 million was made in January 2006.

The acquisition was accounted for using purchase accounting and accordingly, the results of operations of Resprecare were included within our consolidated financial statements from December 1, 2004. An amount of $4.4 million, representing the excess of the purchase price over the fair value of identifiable net assets acquired of $2.8 million, was recorded as goodwill, which is tax deductible. An independent third party has completed a valuation of identifiable intangible assets associated with the Resprecare acquisition. As a result of this valuation, $1.7 million was recorded as a customer relationship intangible asset and is being amortized over its estimated useful life of seven years.

 

Fiscal year ended June 30, 2004

 

On July 2, 2003 we acquired the assets of Respro Medical Company Limited (“Respro”), our Hong Kong distributor for total consideration of $184,000 in cash. The acquisition has been accounted for as ausing purchase accounting and accordingly, the results of operations of Respro hashave 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’s 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 $0.4 million was expensed upon acquisition of SMI because technological feasibility of the products under development had not been established and no further alternative uses existed. The value of in-process technology was calculated by identifying research projects in areas for which technological feasibility had not been established, estimating the costs to develop the purchased in-process technology into commercially viable products, estimating the resulting net cash flows from such products, discounting the net cash flows to present value, and applying the reduced percentage completion of the projects thereto. The discount rates used in the analysis were 19% and were based on the risk profile of the acquired assets.

The acquisition has been accounted for as a purchase and accordingly, the results of operations 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.

F24


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

(17)(19)Business Acquisitions, Continued

Fiscalyear ended June 30, 2002 (continued)Legal Actions and Contingencies

 

Labhardt AG.    On November 15, 2001, the Company’s wholly owned subsidiary ResMed International Inc. acquired all the Common Stock of Labhardt AG, its Swiss distributor for total cash consideration including acquisition costs of $5.5 million.

The acquisition has been accounted for as a purchase and accordingly, the results of operations of Labhardt 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 Associates, SMI and Labhardt AG are not included as the effects would not be significant to the consolidated financial statements.

(18)Legal Actions

The Company was engaged in litigation relating to the enforcement and defense of certain of its patents during the fiscal year ended June 30, 2004.

1995 Litigation with Respironics.In January 1995, our 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 of its patents. In February 1995, Respironics filed a complaint in the U.S. District Court for the Western District of Pennsylvania, in Pittsburgh, against ResMed Limited seeking a declaratory judgment that Respironics, Inc. does not infringe claims of these patents and that ResMed Limited’s patents are invalid and unenforceable.

On September 5, 2003, ResMed and Respironics settled this action. ResMed and Respironics have dismissed all claims in the action 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.

On October 16, 2002 Respironics, Inc. filed a lawsuit in U.S. District Court for the Western 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 and unenforceable 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 2002 Litigation. ResMed and Respironics have dismissed all claims in the actions with prejudice.

F25


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2004 and 2003

(18)Legal Actions, Continued

2002 Litigation with Fisher & Paykel Healthcare.    On August 26, 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 Fisher & Paykel Healthcare Inc and Fisher & 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 and alleges violations of the Lanham Act, trademark and trade dress infringement and common 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 business. While the results of this litigation cannot be predicted with certainty, we believe that their final outcome will not have a material adverse effect on our consolidated financial statements taken as a whole.

 

(19)In-Process Research and Development Charge

MAPDuring September and October 2004, the Company began receiving tax assessment notices for the audit of one of its German subsidiaries by the German tax authorities for the years 1996 through 1998. Certain of these adjustments are being contested and appealed to the German tax authority office. We believe no additional provision is necessary for any tax adjustment that may result from the tax audit. However, the outcome of the audit cannot be predicted with certainty. Should any tax audit issues be resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period of resolution.

 

On acquisitionDecember 23, 2002, three former contractors of our subsidiary MAP Medizin-Technologie GmbH (MAP)initiated proceedings in February 2001, we recognized as an expenseMunich 1 Regional Court (Proceedings No. 7 O 23286/02), petitioning the Court for a chargedeclaration of $17.7 millioninventorship with respect to five in-process researchMAP German Patent Applications identified as No. 100 31 079 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 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 in101 92 802.5 and European Patent Application No. EP 01 967 819.7. On March 10, 2005, 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.Court

 

F26F31


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2004

(19)Legal Actions and Contingencies, Continued

entered judgement in favor of the plaintiffs, finding that they should be identified as co-inventors in place of certain individual defendants. In April 2005, MAP filed an appeal of that decision. We do not expect the outcome of this litigation to have an adverse material effect on our consolidated financial statements.

In March 2006, an Australian university made a demand that we pay extra royalties pursuant to a current patent license agreement. We rejected the demand and 2003the University has agreed to discuss its position. We do not consider the claim to have merit. We do not expect the outcome of this demand to have an adverse material effect on our consolidated financial statements.

 

(19)(20)In-Process Research and Development Charge Continued

(ii)New headgear(“IPR&D”)

 

On acquisition of Saime in May 2005, we recognized as an expense a charge of $5.3 million with respect to IPR&D programs under active development by Saime that, at date of acquisition, had not reached technological feasibility and had no alternative future use. The new headgear product lineestimated fair value assigned to IPR&D was withheld to coincide with the releasebased on an independent appraisal and was comprised 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.following projects (in thousands):

 

(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 or the net return of the MAP acquisition.

(iv)Auto titration CPAP Device
Project  Value of IPR&D

Upgrade of the Elisee Series of ventilators

  $1,379

Next generation of portable ventilators

   3,889

Total

  $5,268

 

The main product development effortvalue of MAP since acquisition hasIPR&D was calculated by identifying research projects in areas for which technological feasibility had not been onestablished, 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 Autotitration CPAP flow generator specifiedprojects thereto. The discount rate used in the initial in-process research and development charge, now referred to asanalysis was 25%, which was based on the Magellan. This project experienced some delays due to the complexityrisk profile 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.acquired assets.

 

As at June 30, 2004, four of the five programs have been completed with the releasedate of the Papillon mask system, upgraded headgear, Magellan flow generator and MicroMESAM.acquisition, these projects had estimated costs to complete totaling approximately $1.1 million. The projects were in various stages of development but are expected to reach completion at various dates ranging from one to three years.

 

Given the completion of the above research programs and performance of the associated product lines, we remain confident inWe believe that the assumptions used to determinevalue the in-process research andacquired 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 charge and,costs or profitability, or events associated with such projects, will transpire as a result,estimated. For these reasons, among others, actual results may vary from the net return of the MAP acquisition.projected results.

 

F27F32


Schedule II


 

RESMED INC.AND SUBSIDIARIES

VALUATIONAND QUALIFYING ACCOUNTSAND RESERVES

YEARS ENDED JUNE 30, 2004, 20032006, 2005AND 20022004

(in thousands)

 

   Balance at
Beginning of
Period
  Charged to
costs and
expenses
  Other
(deductions)
  Balance at
end of period
  

Year 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

   Balance
at
Beginning
of Period
  Charged
to costs
and
expenses
  Other
(deductions)
  Balance
at end
of
period
  

Year ended June 30, 2006

              
  

Applied against asset account

              

Allowance for doubtful accounts

  $3,199  1,577  (131) $4,645
  

Year ended June 30, 2005

              
  

Applied against asset account

              

Allowance for doubtful accounts

  $3,197  611  (609) $3,199
  

Year ended June 30, 2004

              
  

Applied against asset account

              

Allowance for doubtful accounts

  $2,474  1,178  (455) $3,197

 

See accompanying report of independent registered public accounting firm.


RESMED INC.AND SUBSIDIARIES

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

DATED August 27, 2004September 8, 2006

 

ResMed Inc.

 

/S/    PPETERETER C. FC.FARRELL        ARRELL


Peter C. Farrell

President and Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

SIGNATURE  TITLE DATE

/S/    S/    PETER C. C.FARRELL


Peter C. Farrell

  

Chief Executive Officer,

President, Chairman of the Board

(Principal Executive Officer)

 August 27, 2004
September 8, 2006

/S/    ADRIAN M. SMITH        S/    BRETTA.SANDERCOCK


Adrian M. SmithBrett A. Sandercock

  

Senior Vice President Finance and

Chief Financial Officer

(Principal Financial Officer and

Principal Accounting Officer)

 August 27, 2004
September 8, 2006

/S/    S/    CHRISTOPHER G. G.ROBERTS        


Christopher G. Roberts

  

Director

 August 27, 2004
September 8, 2006

/S/    S/    MICHAEL A. A.QUINN        


Michael A. Quinn

  

Director

 August 27, 2004
September 8, 2006

/S/    S/    GARY W. W.PACE        


Gary W. Pace

  

Director

 August 27, 2004
September 8, 2006

/S/    S/    DONAGHMCCARTHY        


Donagh McCarthy

  

Director

 August 27, 2004
September 8, 2006

/S/    CHRISTOPHER A. BARTLETT        S/    RICHARDSULPIZIO        


Christopher BartlettRichard Sulpizio

  

Director

 August 27, 2004
September 8, 2006

/S/    LOUIS A. SIMPSON        S/    RONTAYLOR        


Louis SimpsonRon Taylor

  

Director

 August 27, 2004September 8, 2006

/S/    JOHNP.WAREHAM        


John P. Wareham

  

Director

September 8, 2006


RESMED INC.AND SUBSIDIARIES

EXHIBIT INDEX

2.2Agreement 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)

 

3.1Certificate of Incorporation of Registrant, as amended (1)

 

3.2By-laws of Registrant(1)

 

4.1Form of certificate evidencing shares of Common Stock(1)

 

4.2Rights agreement dated as of April 23, 1997(2)

 

4.3Indenture dated as of June 20, 2001, between ResMed IncInc. and American Stock Transfer & Trust Company(5)

 

4.4Registration Rights Agreement dated as of June 20, 2001, by and between ResMed Inc,Inc., Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Banc Alex Brown Inc., William Blair & Company, L.L.C., Macquarie Bank Limited and UBS Warburg LLC(5)

 

4.5Registration Rights Agreement dated as of May 14, 2002 between ResMed Inc., and Mr.Mr Leslie Hoffman(6)

 

10.11995 Stock Option Plan(1)

 

10.21997 Equity Participation Plan(3)

 

10.3Licensing Agreement between the University of Sydney and ResMed LimitedLtd dated May 17, 1991, as amended(1)

 

10.5Loan Agreement between the Australian Trade Commission and ResMed Limited dated May 3, 1994(1)

 

10.6Lease for 10121 Carroll Canyon Road, San Diego CA 92131-1109, U.S.A.USA(4)

 

10.7Sale and Leaseback Agreements for 97 Waterloo Rd, North Ryde, Australia(5)

 

10.8Employment Agreement dated as of May 14, 2002, between Servo Magnetics Acquisition Inc., and Mr.Mr Leslie Hoffman(6)

 

10.9Agreement for the purchase of Lot 6001, Norwest Boulevarde, Norwest Business Park, Baulkham Hills, Australia(6)

 

10.102003 Employee Stock Purchase Plan(7)

 

11.110.11Computation of Earnings per Common ShareLoan Agreement between ResMed Limited and HSBC Bank Australia Limited(11)

 

10.12Saime Purchase Agreement(11)

10.13First Amended and Restated Loan Agreement, dated as of November 1, 2005, by and among ResMed Corp., ResMed EAP Holdings Inc. and Union Bank of California, N.A.(8)

10.14Security Agreement, dated as of November 1, 2005, by and between ResMed EAP Holdings Inc. and Union Bank of California, N.A.(8)

10.15Continuing Guaranty, dated as of November 1, 2005, by and between ResMed Inc and Union Bank of California, N.A.(8)

10.16Commercial Promissory Note, dated as of November 1, 2005, made by ResMed Corp. and ResMed EAP Holdings Inc.(8)

10.17Commercial Promissory Note, dated as of November 1, 2005, made by ResMed Corp. and ResMed EAP Holdings Inc.(8)

10.18Second Amended and Restated Loan Agreement, dated March 13, 2006, by and among ResMed Corp., ResMed EAP Holdings Inc. and Union Bank of California, N.A.(9)

10.19Syndicated Facility Agreement, dated as of June 8, 2006, by and between ResMed Limited and HSBC Bank Australia Limited(10)

10.20Deed of Guaranty and Indemnity, dated as of June 8, 2006, by and among HSBC Bank Australia Limited, ResMed Limited, ResMed SAS, ResMed GmbH & Co. KG, ResMed (UK) Limited and Take Air Medical Handels-GmbH(10)

10.21Deed of Guaranty and Indemnity, dated as of June 8, 2006, by and among HSBC Bank Australia Limited, ResMed Inc., ResMed Corp. and ResMed Limited(10)

10.22Working Capital Agreement, dated as of June 8, 2006, by and among ResMed (UK) Limited and HSBC Bank plc(10)

10.23Working Capital Agreement, dated as of June 8, 2006, by and among ResMed Limited and HSBC Bank Australia Limited(10)


21.1Subsidiaries of the Registrant

 

23.1Independent Registered Public Accounting Firm’s Consent and Report on Schedule and Consent

 

31.1CertificationsCertification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2CertificationsCertification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1CertificationsCertification of Chief Executive Officer and Chief Financial Officer Pursuantpursuant 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 datedfor the year ended June 30, 2001.
(6)Incorporated by reference to the Registrant’s Report on Form 10-K datedfor the year ended June 30, 2002.
(7)Incorporated by reference to the Registrant’s 2003 Proxy Statement.
(8)Incorporated by reference to the Registrant’s Form 8-K dated November 8, 2005.
(9)Incorporated by reference to the Registrant’s Form 8-K dated March 13, 2006.
(10)Incorporated by reference to the Registrant’s Form 8-K dated June 8, 2006.
(11)Incorporated by reference to the Registrant’s Report on Form 10-K dated June 30, 2005.