SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSACTION PERIOD FROM ___________ TO _____________ Commission file number: 0-26038 ResMed Inc. (Exact name of registrant as specified in its charter) Delaware 98-0152841 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 10121 Carroll Canyon Road San Diego, CA 92131-1109 United States Of America (Address of principal executive offices) (858) 689 2400 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X___ No ______ - As of March 31, 2000, there were 30,541,378 shares of Common Stock ($0.004 par value) outstanding. - -1- RESMED INC. AND SUBSIDIARIES INDEX PART I FINANCIAL INFORMATION Page Item 1 . .Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2000 3 (unaudited) and June 30, 1999 Unaudited Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2000 and 1999 and the Nine Months ended March 31, 2000 and 1999 Unaudited Condensed Consolidated Statements of Cash Flows. 5 for the Nine Months Ended March 31, 2000 and 1999 Notes to the Unaudited Condensed Consolidated Financial. . 6 Statements Item 2 . .Management's Discussion and Analysis of Financial Condition 12 and Results of Operations Item 3 . .Quantitative and Qualitative Disclosures About Market Risk 16 PART II OTHER INFORMATION Item 1 . .Legal Proceedings 17 Item 2 . .Changes in Securities 17 Item 3 . .Defaults Upon Senior Securities 17 Item 4 . .Submission of Matters to a Vote of Security Holders 17 Item 5 . .Other Information 17 Item 6 . .Exhibits and Reports on Form 8-K 17 SIGNATURES 18 - -2- PART I - FINANCIAL INFORMATION Item 1 - ------------------------------------------------------------------------------- RESMED INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (in US$ thousands, except share and per share data) March 31, June 30, 2000 1999 ------------ ---------- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (unaudited) Assets Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 16,356 $ 11,108 Marketable securities - available for sale. . . . . . . . . . . . . 7,926 5,626 Accounts receivable, net of allowance for doubtful accounts of. . . 23,491 17,898 $725 at March 31, 2000 and $421 at June 30, 1999 Inventories (note 3). . . . . . . . . . . . . . . . . . . . . . . . 17,435 10,725 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . 2,422 2,392 Prepaid expenses and other current assets . . . . . . . . . . . . . 3,904 3,022 ------------ ---------- Total current assets. . . . . . . . . . . . . . . . . . . . . . . . 71,534 50,771 ------------ ---------- Property, plant and equipment, net of accumulated depreciation of . 30,853 29,322 $12,258 at March 31, 2000 and $8,511 at June 30, 1999 Patents, net of accumulated amortization of $705 at March 31, 2000. 1,114 782 and $570 at June 30, 1999 Goodwill, net of accumulated amortization of $1,856 at March 31,. . 5,805 6,555 2000 and $1,459 at June 30, 1999 Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,898 2,459 ------------ ---------- Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 111,204 89,889 ============ ========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . 8,199 4,772 Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 9,535 7,779 Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . 6,262 5,691 ------------ ---------- Total current liabilities . . . . . . . . . . . . . . . . . . . . . 23,996 18,242 ------------ ---------- Stockholders' equity: Preferred stock, $0.01 par value, . . . . . . . . . . . . . . . . . - - 2,000,000 shares authorized; none issued Series A Junior Participating preferred stock, $0.01 par value, . . - - 150,000 shares authorized; none issued Common Stock, $0.004 par value, 50,000,000 shares . . . . . . . . . 122 118 Authorized; issued and outstanding 30,541,378 at March 31, 2000 and 29,616,000 at June 30, 1999 Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . 39,754 33,677 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . 59,316 43,281 Accumulated other comprehensive loss (note 4) . . . . . . . . . . . (11,984) (5,429) ------------ ---------- Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . 87,208 71, 647 ------------ ---------- Commitments and contingencies (note 5). . . . . . . . . . . . . . . - - Total liabilities and stockholders' equity. . . . . . . . . . . . . $ 111,204 $ 89,889 ============ ========== <FN> See accompanying notes to condensed consolidated financial statements. - -3- PART I - FINANCIAL INFORMATION Item 1 - ------------------------------------------------------------------------------- RESMED INC. AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Income (in US$ thousands, except per share data) Three Months Ended Nine Months Ended March 31, March 31, 2000 1999 2000 1999 ------------------- ------------------- -------- -------- Net revenue. . . . . . . . . . . . . . . . . $ 29,971 $ 22,760 $84,051 $63,484 Cost of sales. . . . . . . . . . . . . . . . 10,152 7,901 26,980 20,949 Gross profit . . . . . . . . . . . . . . . . 19,819 14,859 57,071 42,535 ------------------- ------------------- -------- -------- Operating expenses Selling, general and administrative expenses 9,459 6,636 26,864 19,889 Research and development expenses. . . . . . 2,103 1,512 5,964 4,581 ------------------- ------------------- -------- -------- Total operating expenses . . . . . . . . . . 11,562 8,148 32,828 24,470 ------------------- ------------------- -------- -------- Income from operations . . . . . . . . . . . 8,257 6,711 24,243 18,065 ------------------- ------------------- -------- -------- Other income (expenses), net: Interest income, net . . . . . . . . . . . . 205 152 542 555 Government grants. . . . . . . . . . . . . . - 138 279 402 Other income (expenses), net . . . . . . . . 533 (353) (380) (1,567) ------------------- ------------------- -------- -------- Total other income (expenses), net . . . . . 738 (63) 441 (610) ------------------- ------------------- -------- -------- Income before income taxes . . . . . . . . . 8,995 6,648 24,684 17,455 Income taxes . . . . . . . . . . . . . . . . 3,157 2,280 8,649 5,990 ------------------- ------------------- -------- -------- Net income . . . . . . . . . . . . . . . . . $ 5,838 $ 4,368 $16,035 $11,465 =================== =================== ======== ======== Basic earnings per share . . . . . . . . . . $ 0.19 $ 0.15 $ 0.53 $ 0.39 Diluted earnings per share . . . . . . . . . $ 0.18 $ 0.14 $ 0.50 $ 0.37 <FN> See accompanying notes to condensed consolidated financial statements. - -4- PART I - FINANCIAL INFORMATION Item 1 - ------------------------------------------------------------------------------- RESMED INC. AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Cash Flows (in US$ thousands) Nine Months Ended March 31, 2000 1999 ------------------- --------- Cash flows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,035 $ 11,465 ------------------- --------- Adjustment to reconcile net income to net cash provided by operating activities: Depreciation and amortization. . . . . . . . . . . . . . . . . . 4,860 3,328 Provision for service warranties . . . . . . . . . . . . . . . . 157 214 Foreign currency options revaluations. . . . . . . . . . . . . . 1,928 115 Changes in operating assets and liabilities: Accounts receivable, net . . . . . . . . . . . . . . . . . . . . (6,021) (3,384) Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . (7,481) (2,371) Prepaid expenses and other current assets. . . . . . . . . . . . (919) (283) Accounts payable, accrued expenses and other liabilities . . . . 4,578 5,202 ------------------- --------- Net cash provided by operating activities. . . . . . . . . . . . 13,137 14,286 ------------------- --------- Cash flows from investing activities: Purchases of property, plant and equipment . . . . . . . . . . . (8,194) (17,899) Patents costs. . . . . . . . . . . . . . . . . . . . . . . . . . (623) (151) Purchase of investments. . . . . . . . . . . . . . . . . . . . . (1,489) (1,529) Business acquisitions. . . . . . . . . . . . . . . . . . . . . . (576) (1,033) Purchases of marketable securities - available for sale. . . . . (27,128) (11,809) Proceeds from sale of marketable securities - available for sale 24,828 11,687 ------------------- --------- Net cash used in investing activities. . . . . . . . . . . . . . (13,182) (20,734) ------------------- --------- Cash flows from financing activities: Proceeds from issuance of common stock . . . . . . . . . . . . . 6,081 1,713 Repayment of long term debt. . . . . . . . . . . . . . . . . . . - (114) ------------------- --------- Net cash provided by financing activities. . . . . . . . . . . . 6,081 1,599 ------------------- --------- Effect of exchange rate changes on cash. . . . . . . . . . . . . (788) 167 ------------------- --------- Net (decrease)/increase in cash and cash equivalents . . . . . . 5,248 (4,682) ------------------- --------- Cash and cash equivalents at beginning of period . . . . . . . . 11,108 15,526 ------------------- --------- Cash and cash equivalents at end of period . . . . . . . . . . . $ 16,356 $ 10,844 =================== ========= Supplemental disclosure of cash flow information: Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . $ 7,930 $ 4,029 <FN> See accompanying notes to condensed consolidated financial statements. - -5- PART I - FINANCIAL INFORMATION Item 1 - ------------------------------------------------------------------------------- RESMED INC. AND SUBSIDIARIES NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) Organization and Basis of Presentation ------------------------------------------ ResMed Inc. (the Company) is a Delaware corporation formed in March 1994 as a holding company for ResMed Group. The Company designs, manufactures and markets devices for the evaluation and treatment of sleep disordered breathing, primarily obstructive sleep apnea. The Company's principal manufacturing operations are located in Australia. Other principal distribution and sales sites are located in the United States, the United Kingdom and Europe. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended March 31, 2000 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2000. (2) Summary of Significant Accounting Policies ---------------------------------------------- (a) Basis of Consolidation: ------------------------ The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated on consolidation. (b) Revenue Recognition: -------------------- Revenue on product sales is recorded at the time of shipment. Royalty revenue from license agreements is recorded when earned. Service revenue received in advance from service contracts is initially deferred and recognized as revenue over the life of the service contract. Revenue from sale of marketing and distribution rights is initially deferred and recognized as revenue over the period of expected benefits but not exceeding three years. (c) Cash and Cash Equivalents: ---------------------------- Cash equivalents include certificates of deposit, commercial paper, and other highly liquid investments stated at cost, which approximates market. Investments with original maturities of 90 days or less are considered to be cash equivalents for purposes of the consolidated statements of cash flows. (d) Inventories: ----------- Inventories are stated at the lower of cost, determined principally by the first-in first-out method, or net realizable value. - -6- PART I - FINANCIAL INFORMATION Item 1 - ------------------------------------------------------------------------------- RESMED INC. AND SUBSIDIARIES NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (2) Summary of Significant Accounting Policies, Continued ---------------------------------------------------------- (e) Property, Plant and Equipment: -------------------------------- Property, plant and equipment is recorded at cost. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets, generally two to ten years. Assets held under capital leases are recorded at the lower of the net present value of the minimum lease payments or the fair value of the leased asset at the inception of the lease. Amortization expense is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the period of the related lease. Maintenance and repairs are charged to expense as incurred. (f) Patents: ------- The registration costs for new patents are capitalized and amortized over the estimated useful life of the patent, generally five years. In the event of a patent being superseded, the unamortized costs are written off immediately. (g) Goodwill -------- Goodwill arising from business acquisitions is amortized on a straight-line basis over periods ranging from three to 15 years. The Company carries goodwill at cost net of amortization. The Company reviews its goodwill carrying value when events indicate that an impairment may have occurred in goodwill. If, based on the undiscounted cash flows, management determines goodwill is not recoverable, goodwill is written down to its discounted cash flow value and the amortization period is re-assessed. (h) Government Grants: ------------------ Government grants revenue is recognized when earned. Grants have been obtained by the Company from the Australian Federal Government to support continued development and export of the Company's proprietary positive airway pressure technology and to assist development of export markets. Grants of $138,000 have been recognized for the three month period ended March 31, 1999, and $279,000 and $402,000 for the nine month periods ended March 31, 2000 and 1999, respectively. (i) Foreign Currency: ----------------- The consolidated financial statements of the Company's non-U.S. subsidiaries 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 "Other Comprehensive Income (loss)", as described in Note 4, and are included in "Accumulated Other Comprehensive Income (loss)" on the Condensed Consolidated Balance Sheet until such time as the subsidiary is sold or substantially or completely liquidated. Gains and losses on transactions, denominated in other than the functional currency of the entity, are reflected in operations. - -7- PART I - FINANCIAL INFORMATION Item 1 - ------------------------------------------------------------------------------- RESMED INC. AND SUBSIDIARIES NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (2) Summary of Significant Accounting Policies, Continued ---------------------------------------------------------- (j) Research and Development: -------------------------- All research and development costs are expensed in the period incurred. (k) Earnings Per Share: -------------------- The weighted average shares used to calculate basic earnings per share was 30,294,000 and 29,492,000 for the quarters ended March 31, 2000 and 1999, respectively, and 29,975,000 and 29,398,000 for the nine month periods ended March 31, 2000 and 1999, respectively. The difference between basic earnings per share and diluted earnings per share is attributable to the impact of outstanding stock options during the periods presented. Stock options had the effect of increasing the number of shares used in the calculation (by application of the treasury stock method) by 2,259,000 and 1,969,000 for the quarters ended March 31, 2000 and 1999, respectively, and by 1,894,000 and 1,494,000 for the nine month periods ended March 31, 2000 and 1999, respectively. (l) Financial Instruments: ---------------------- The carrying value of financial instruments, such as cash and cash equivalents, marketable securities - available for sale, accounts receivable, government grants, foreign currency option contracts, accounts payable and long-term debt, approximate their fair value. The Company does not hold or issue financial instruments for trading purposes. The fair value of financial instruments is defined as the amount for which the instrument could be exchanged in a current transaction between willing parties. (m) Foreign Exchange Risk Management: ------------------------------------ The Company enters into various types of foreign exchange contracts in managing its foreign exchange risk, including derivative financial instruments encompassing foreign currency options. The purpose of the Company's foreign currency hedging activities is to protect the Company from adverse exchange rate fluctuations with respect to net cash movements resulting from the sales of products to foreign customers and Australian manufacturing activities. The Company enters into foreign currency option contracts to hedge anticipated sales and manufacturing costs denominated in principally Australian Dollars and Euros. The terms of such foreign exchange contracts generally do not exceed three years. - -8- PART I - FINANCIAL INFORMATION Item 1 - ------------------------------------------------------------------------------- RESMED INC. AND SUBSIDIARIES NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (2) Summary of Significant Accounting Policies, Continued ---------------------------------------------------------- (m) Foreign Exchange Risk Management, Continued: ------------------------------------------------ Unrealized gains or losses are recognized as incurred in the accompanying balance sheets as either other assets or other liabilities and are recorded within other income, net on the Company's consolidated statements of income. Unrealized gains and losses on currency derivatives are determined based on dealer quoted prices. The Company is exposed to credit related losses in the event of non performance by counterparties to financial instruments, but it does not expect any counterparties to fail to meet their obligations given their high credit ratings. The credit exposure of foreign exchange options is represented by the positive fair value of options at the reporting date. The Company held foreign currency option contracts with notional amounts totaling $144,136,000 and $62,460,000 at March 31, 2000 and June 30, 1999, respectively, to hedge foreign currency items. These contracts mature at various dates prior to December 31, 2001. (n) Income Taxes: ------------- The Company accounts for income taxes under the Statement of Financial Accounting Standards No 109, 'Accounting for Income Taxes' (Statement 109). Statement 109 requires an asset and liability method of accounting for income taxes. Under the asset and liability method of Statement 109, 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. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (o) Warranty: --------- Estimated future warranty costs related to products are accrued to operations in the period in which the related revenue is recognized. (p) Impairment of Long-Lived Assets: ----------------------------------- The Company periodically evaluates the carrying value of long-lived assets to be held and used, including certain identifiable intangible assets, when events and circumstances indicate that the carrying amount of an asset may not be recovered. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted 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 exceeds 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. - -9- PART I - FINANCIAL INFORMATION Item 1 - ------------------------------------------------------------------------------- RESMED INC. AND SUBSIDIARIES NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (3) Inventories ----------- Inventories were comprised of the following at March 31, 2000 and June 30, 1999: (In $US thousands) March 31, June 30, 2000 1999 ---------- --------- Raw materials. . . $ 5,642 $ 4,153 Work in progress . 1,375 74 Finished goods . . 10,418 6,498 ---------- --------- $ 17,435 $ 10,725 ========== ========= (4) Comprehensive Income --------------------- Statement of Financial Accounting Standards No. 130, 'Reporting Comprehensive Income', establishes standards for the reporting and display of comprehensive income and its components in the financial statements. The only component of comprehensive income that impacts the Company is foreign currency translation adjustments. The net loss associated with the foreign currency translation adjustments for the three months ended March 31, 2000 was $5.7 million compared to a net gain of $147,000 for the three months ended March 31, 1999. The net loss associated with the foreign currency translation adjustments for the nine months ended March 31, 2000 was $6.6 million compared to a net gain of $619,000 for the nine months ended March 31, 1999. The Company does not provide for US income taxes on foreign currency translation adjustments since it does not provide for such taxes on undistributed earnings of foreign subsidiaries. Accumulated other comprehensive loss at March 31, 2000 and June 30, 1999 consisted solely of foreign currency translation adjustments with balances of $12.0 million and $5.4 million, respectively. (5) Commitments and Contingencies ------------------------------- In January 1995, the Company filed a complaint in the United States District Court for the Southern District of California seeking monetary damages from and injunctive relief against Respironics for alleged infringement of three ResMed patents. In February 1995, Respironics filed a complaint in the United States District Court for the Western District of Pennsylvania against the Company seeking a declaratory judgment that Respironics does not infringe claims of these patents and that the Company's patents are invalid and unenforceable. The two actions were combined and are proceeding in the United States District Court for the Western District of Pennsylvania. In June 1996, the Company filed an additional complaint against Respironics for infringement of a fourth ResMed patent, and that complaint was consolidated with the earlier action. As of this date, Respironics has brought three partial summary judgment motions for non-infringement of the ResMed patents; the Court has granted each of the motions. In December 1999, in response to the Court's ruling on Respironics' third summary judgment motion, the parties jointly stipulated to a dismissal of charges of infringement under the fourth ResMed patent, with ResMed reserving the right to reassert the charges in the event of a favorable ruling on appeal. It is ResMed's intention to appeal the summary judgment rulings after a final judgment in the consolidated litigation has been entered in the District Court proceedings. - -10- PART I - FINANCIAL INFORMATION Item 1 - ------------------------------------------------------------------------------- RESMED INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (5) Commitments and Contingencies, Continued ------------------------------------------- On March 31, 2000, the Company filed a lawsuit in the United States District Court for the Southern District of California against MPV Truma and Tiara Medical Systems, Inc, seeking actual and exemplary monetary damages and injunctive relief for the unauthorized and infringing use of the Company's trademarks, trade dress, and design patents related to its Mirage mask design. While the Company is prosecuting the above actions, there can be no assurance that the Company will be successful. In May 1995, Respironics and its Australian distributor filed a Statement of Claim against the Company and Dr. Farrell in the Federal Court of Australia, alleging that the Company engaged in unfair trade practices. The Statement of Claim asserts damage claims for lost profits on sales in the aggregate amount of approximately $1,000,000. While the Company is defending this action, there can be no assurance that the Company will be successful or that the Company will not be required to make significant payments to the claimants. Furthermore, the Company is incurring ongoing legal costs in defending this action, as well as in the continuing litigation of its patent cases. - -11- PART I - FINANCIAL INFORMATION Item 2 - ------------------------------------------------------------------------------- RESMED INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net Revenue Net revenue increased for the three months ended March 31, 2000 to $30.0 million from $22.8 million for the three months ended March 31, 1999, an increase of $7.2 million or 32%. For the nine month period ended March 31, 2000 net revenue increased to $84.1 million from $63.5 million in the nine month period ended March 31, 1999 an increase of $20.6 million or 32%. Both the three month and nine month increases in net revenue were attributable to an increase in unit sales of the Company's flow generators and accessories in North and Latin America, Europe and the Asia Pacific. In fiscal 2000 net revenue in North and Latin America increased to $15.4 million from $12.4 million for the quarter, and to $45.1 million from $36.5 million for the nine month periods ended March 31. In Europe net revenue increased to $11.2 million from $8.4 million for the quarter, and to $29.9 million from $21.9 million for the nine month periods ended March 31, 2000 and 1999, respectively. Gross Profit Gross profit increased for the three months ended March 31, 2000 to $19.8 million from $14.9 million for the three months ended March 31, 1999, an increase of $4.9 million or 33%. Gross profit as a percentage of net revenue increased for the quarter ended March 31, 2000 to 66% from 65% for the three months ended March 31, 1999. These increases resulted primarily from a shift in geographical sales mix and improved manufacturing capacity utilization. For the nine month period ended March 31, 2000 gross profit increased to $57.1 million from $42.5 million in the same period of fiscal 1999 an increase of $14.6 million or 34%. Gross profit as a percentage of net revenue increased for the nine month period ended March 31, 2000 to 68% from 67% achieved for the nine months ended March 31, 1999. These increases also resulted from a favorable shift in geographical sales mix and improved manufacturing capacity utilization. Selling, General and Administrative Expenses Selling, general and administrative expenses increased for the three months ended March 31, 2000 to $9.5 million from $6.6 million for the three months ended March 31, 1999, an increase of $2.9 million or 44%. This increase was primarily due to an increase from 197 to 264 in the number of sales and administrative personnel to support sales growth, an increase in property costs associated with new offices in Europe as well as continuing investment in IT activities. As a percentage of net revenue, selling, general and administrative expenses increased to 32% for the three months ended March 31, 2000 from 29% for the three months ended March 31, 1999. Selling, general and administrative expenses for the nine months ended March 31, 2000 increased to $26.9 million from $19.9 million for the nine months ended March 31, 1999, an increase of $7.0 million or 35%. As a percentage of net revenue, selling, general and administration expenses increased to 32% for the nine months ended March 31, 2000 from 31% for the nine months ended March 31, 1999. - -12- PART I - FINANCIAL INFORMATION Item 2 - ------------------------------------------------------------------------------- RESMED INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Research and Development Expenses Research and development expenses increased for the three months ended March 31, 2000 to $2.1 million from $1.5 million for the three months ended March 31, 1999, an increase of $600,000 or 39%. The increase reflects increased expenditure associated with new products currently under development. As a percentage of net revenue, research and development expenses for the three months ended March 31, 2000 and March 31, 1999, remained at 7%. For the nine months ended March 31, 2000 research and development expenses increased to $6.0 million from $4.6 million for the corresponding period in fiscal 1999, an increase of $1.4 million or 30%. The increase was due to additional costs relating to development and evaluation of new products. As a percentage of net revenue, research and development expenses for the nine month periods ended March 31, 2000 and March 31, 1999, remained at 7%. Other Income (Expenses), Net Other income, net increased for the three months ended March 31, 2000 to $533,000 from expense of $353,000 for the three months ended March 31, 1999, an increase of $886,000. The increase in other income, net reflects foreign currency gains associated with the weakening of the Australian Dollar during the quarter. Other income (expenses), net improved for the nine months ended March 31, 2000 to a loss of $380,000, from a loss of $1.6 million for the nine months ended March 31, 1999. The improvement in other income (expense), net primarily reflects reduced foreign currency losses associated with the Company's foreign exchange hedging program. Income Taxes The Company's effective income tax rate for the three months ended March 31, 2000 increased to 35.1% of income from 34.3% for the three months ended March 31, 1999 and to 35.0% from 34.3% for the nine months ended March 31, 1999. - -13- PART I - FINANCIAL INFORMATION Item 2 - ------------------------------------------------------------------------------- RESMED INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources As of March 31, 2000 and June 30, 1999, the Company had cash and cash equivalents and marketable securities available for sale of approximately $24.3 million and $16.7 million, respectively. The Company's working capital approximated $47.5 million and $32.5 million, at March 31, 2000 and June 30, 1999, respectively. The increase in working capital primarily reflects an increase in cash/marketable securities and management's decision to increase inventories, particularly in the US and Europe, to support sales growth and launching of the ResMed S6 CPAP range and Ultra Mirage masks. During the nine months ended March 31, 2000, the Company's operations generated $13.1 million in cash, primarily as a result of increased profit from operations, partially offset by increases in inventory and receivables balances. During the nine months ended March 31, 1999 approximately $14.3 million of cash was generated by operations. The Company's capital expenditures for the nine month period ended March 31, 2000 and 1999 aggregated $8.2 million and $17.9 million, respectively. The majority of the expenditures in the nine month period ended March 31, 2000 related to purchases of computer software and hardware, production tooling and equipment and, to a lesser extent, office furniture and research and development equipment. The reduction in expenditures in the nine month period ended March 31, 2000 compared to the nine months ended March 31, 1999 reflects the cessation of capital expenditure on the company's new manufacturing facility following its completion in March 1999. As a result of these capital expenditures, the Company's March 31, 2000 balance sheet reflects net property, plant and equipment of approximately $30.9 million, compared to $29.3 million at June 30, 1999. On January 31, 2000 the Company's fully owned Swedish subsidiary, ResMed Sweden AB, acquired the business and associated assets of Einar Egnell AB its Swedish distributor for $576,000 in cash. The acquisition has been accounted for as a purchase and accordingly, the results of operations of the Einar Egnell business have been included in the company's consolidated financial statements from January 31, 2000. The excess of the purchase price over the fair value of the net identifiable assets acquired of $229,000 has been recorded as goodwill and is being amortized on a straight-line basis over 5 years. During the nine month period ended March 31, 1999 the Company paid $1.0 million in business acquisition payments in relation to the 1996 acquisition of Priess. During the nine month period ended March 31, 1999 the Company paid $1.0 million to purchase a minority holding in Flaga Hf, the Iceland based manufacturer of the Embla range of sleep diagnostic equipment. The results of the Company's international operations are affected by changes in exchange rates between currencies. Changes in exchange rates may negatively affect the Company's consolidated net revenue and gross profit margins from international operations. The Company has a substantial exposure to fluctuations in the Australian dollar with respect to its manufacturing and research activities which is managed through foreign currency option contracts. - -14- PART I - FINANCIAL INFORMATION Item 2 - ------------------------------------------------------------------------------- Recent Accounting Developments SFAS No 133, 'Accounting for Derivative Instruments and Hedging Activities' (SFAS 133), and SFAS No 137, 'Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No 133 (an amendment of FASB Statement No 133)' were issued by the Financial Accounting Standards Board in June 1998 and June 1999, respectively and are effective for the Company's quarter ending September 30, 2000. SFAS 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the statement of financial position at fair value. The accounting for changes in the fair value (ie, gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair values, cash flows, or foreign currencies. If the hedged exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness as well as the ineffective portion of the gain or loss is reported in earnings immediately. Accounting for foreign currency hedges is similar to the accounting for fair value and cash flow hedges. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change. The company has not determined the impact that Statement 133 will have on its financial statements and believes that such determination will not be meaningful until closer to the date of initial adoption. In December 1999, the Securities and Exchange Commission ('SEC') issued Staff Accounting Bulletin No 101 ('SAB 101'), 'Revenue Recognition in Financial Statements'. The company will be required to adopt SAB 101 in the first quarter of fiscal 2001. SAB101 requires, among other things, that license and other up-front fees be recognized over the term of the agreement, unless the fees are in exchange for products delivered or services performed that represent the culmination of a separate earnings process. The Company does not expect this to have a material impact on the Company's financial position or results of operation. - -15- PART I - FINANCIAL INFORMATION Item 3 - ------------------------------------------------------------------------------- RESMED INC. AND SUBSIDIARIES QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FOREIGN CURRENCY MARKET RISK The Company's functional currency is the US dollar although the Company transacts business in various foreign currencies including a number of major European currencies as well as the Australian dollar. The Company has significant foreign currency exposure through both its Australian manufacturing activities and international sales operations. The Company has established a foreign currency hedging program using currency options to hedge foreign-currency-denominated financial assets, liabilities and manufacturing expenditure. The goal of this hedging program is to economically guarantee or lock in the exchange rates on the Company's foreign currency exposures denominated in the Euro and Australian dollar. Under this program, increases or decreases in the Company's foreign-currency-denominated financial assets, liabilities, and firm commitments are partially offset by gains and losses on the hedging instruments. The table below provides information about the Company's foreign currency derivative financial instruments, by functional currency and presents such information in US 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 March 31, 2000. The table presents the notional amounts and weighted average exchange rates by expected (contractual) maturity dates for the Company's foreign currency derivative financial instruments. These notional amounts generally are used to calculate payments to be exchanged under the contract or options. Fiscal Year ------------------------------------------------------------------------------------ (In US$thousands) 2000 2001 2002 Total ------------------- ------------------- ------------------ -------------------- Foreign Exchange Call Options (Receive AUS$/Pay US$) Option amount. . . . . . . . . . . $ 15,000 $ 72,000 $ 36,000 $ 123,000 Average contractual exchange rate AUS $1 = USD 0.675 AUS $1 = USD 0.689 AUS $1 = USD 0.691 AUS $1 = USD 0.688 (Receive AUS$/Pay Euro) Option amount. . . . . . . . . . . $ 2,976 $ 12,056 $ 6,104 $ 21,136 Average contractual exchange rate AUS $1 = Euro 0.635 AUS $1 = Euro 0.644 AUS$1 = Euro 0.652 AUS $1 = Euro 0.645 (In US$thousands) Fair Value of Assets ------------------- Foreign Exchange Call Options (Receive AUS$/Pay US$) Option amount. . . . . . . . . . . $ 320 (Receive AUS$/Pay Euro) Option amount. . . . . . . . . . . $ 501 - -16- PART II - FINANCIAL INFORMATION - ------------------------------------------------------------------------------- RESMED INC. AND SUBSIDIARIES Item 1 Legal Proceedings Refer Note 5 to Condensed Consolidated Financial Statements Item 2 Changes in Securities None Item 3 Defaults Upon Senior Securities None Item 4 Submission of Matters to a Vote of Security Holders None Item 5 Other Information None Item 6 Exhibits and Report on Form 8K Exhibits The following exhibits are filed as part of this report Exhibit 27.1 Financial Data Schedule Report on Form 8-K None - -17- PART II - FINANCIAL INFORMATION - ------------------------------------------------------------------------------- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ResMed Inc. /S/ PETER C FARRELL - ---------------------- Peter C Farrell President and Chief Executive Officer /S/ ADRIAN M SMITH - --------------------- Adrian M Smith Vice President Finance and Chief Financial Officer - -18- PART II - FINANCIAL INFORMATION - -------------------------------------------------------------------------------