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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, 2003
COMMISSION FILE NUMBER: 0-26038
RESMED INC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
98-0152841
(IRS EMPLOYER IDENTIFICATION NO)
14040 DANIELSON STREET
POWAY, CA 92064-6857
UNITED STATES OF AMERICA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(858) 746-2400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT
TITLE OF EACH CLASS
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 WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO FILING REQUIREMENTS
FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATIONS S-K (S 229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN AND WILL
NOT BE CONTAINED TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THE FORM 10-K OR
ANY AMENDMENT TO THIS FORM 10-K [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT). YES [X] NO [ ]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF
REGISTRANT AS OF SEPTEMBER 5, 2003, COMPUTED BY REFERENCE TO THE CLOSING SALE
PRICE OF SUCH STOCK ON THE NEW YORK STOCK EXCHANGE, WAS APPROXIMATELY
$1,372,490,000. (ALL DIRECTORS, EXECUTIVE OFFICERS, AND 10% STOCKHOLDERS OF
REGISTRANT ARE CONSIDERED AFFILIATES.)
AT SEPTEMBER 5, 2003, REGISTRANT HAD 33,815,865 SHARES OF COMMON STOCK, $.004
PAR VALUE, ISSUED AND OUTSTANDING. THIS NUMBER EXCLUDES 425,928 SHARES HELD BY
THE REGISTRANT AS TREASURY SHARES.
PORTIONS OF REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR ITS NOVEMBER 13, 2003
MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III OF THIS
REPORT.
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CONTENTS
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Part I
Item 1 . Business 3
Item 2 . Properties 17
Item 3 . Legal Proceedings 17
Item 4 . Submission of Matters to a Vote of Security Holders 19
Part II
Item 5 . Market for Registrant's Common Equity and Related Stockholder Matters 19
Item 6 . Selected Financial Data 21
Item 7 . Management's Discussion and Analysis of Financial Condition and Results of Operations 22
Item 7A. Quantitative and Qualitative Disclosures About Market and Business Risks 33
Item 8 . Consolidated Financial Statements and Supplementary Data 40
Item 9 . Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 41
Item 9A. Controls and Procedures 41
Part III
Item 10. Directors and Executive Officers of the Registrant 42
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial Owners and Management 42
Item 13. Certain Relationships and Related Transactions 42
Item 14. Principal Accountant Fees and Services 42
Part IV
Item 15. Exhibits, Consolidated Financial Statement Schedule and Reports on Form 8-K 42
... . . . Signatures 44
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ACTIVA, AERO-CLICK, AERO-FIX, AUTO VPAP, AUTOSCAN, AUTOSET, AUTOSET CS, AUTOSET
SPIRIT, AUTOSET T, AUTOSET.COM, AUTOSET-CS.COM, AUTOVIEW, BUBBLE CUSHION, BUBBLE
MASK, HUMIDAIRE, HUMIDAIRE 2I, IPAP MAX, IPAP MIN, MEDDTRAXX, MEPAL, MESAMIV,
MINNI MAX NCPAP, MIRAGE, PROTEGE , MORITZ II BILEVEL, POLY-MESAM, RESCAP,
RESALARM, RESCONTROL, RESMED, SLEEPKIT SOLUTIONS, S6, S7, SCAN, SELFSET,
SMARTSTART, SULLIVAN, TICONTROL, TRAXX, TWISTER REMOTE, ULTRA MIRAGE, VPAP AND
VPAP MAX, VSYNC, 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
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ITEM 1 BUSINESS
GENERAL
WE ARE A LEADING DEVELOPER, MANUFACTURER AND DISTRIBUTOR OF MEDICAL EQUIPMENT
FOR TREATING, DIAGNOSING, AND MANAGING SLEEP DISORDERED BREATHING, OR SDB. SDB
INCLUDES OBSTRUCTIVE SLEEP APNEA, OR OSA, AND 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 NASAL CPAP, WE HAVE DEVELOPED A NUMBER OF INNOVATIVE
PRODUCTS FOR SDB, INCLUDING AIRFLOW GENERATORS, DIAGNOSTIC PRODUCTS, MASK
SYSTEMS, HEADGEAR AND OTHER ACCESSORIES. OUR GROWTH HAS BEEN FUELLED BY
GEOGRAPHIC EXPANSION, INCREASED AWARENESS OF SDB AS A SIGNIFICANT HEALTH CONCERN
AMONG PHYSICIANS AND PATIENTS, AND OUR RESEARCH AND PRODUCT DEVELOPMENT EFFORT.
WE EMPLOY 1,464 PEOPLE AND SELL OUR PRODUCTS IN OVER 60 COUNTRIES THROUGH A
COMBINATION OF WHOLLY OWNED SUBSIDIARIES AND INDEPENDENT DISTRIBUTORS.
OUR WEB SITE ADDRESS IS WWW.RESMED.COM. WE MAKE OUR PERIODIC REPORTS, TOGETHER
WITH ANY AMENDMENTS, AVAILABLE ON OUR WEB SITE, FREE OF CHARGE, AS SOON AS
REASONABLY PRACTICABLE AFTER WE ELECTRONICALLY FILE OR FURNISH THE REPORTS WITH
THE SECURITIES AND EXCHANGE COMMISSION.
CORPORATE HISTORY
RESMED INC., A DELAWARE CORPORATION, WAS FORMED IN MARCH 1994 AS THE ULTIMATE
HOLDING COMPANY FOR OUR DOMESTIC, AUSTRALIAN 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), TRADING UNDER THE TICKER
SYMBOL RMD. ON NOVEMBER 25, 1999, WE ESTABLISHED A SECONDARY LISTING OF OUR
SHARES VIA CHESS DEPOSITARY INSTRUMENTS, OR CDIS, ON THE AUSTRALIAN STOCK
EXCHANGE (ASX), ALSO UNDER THE SYMBOL RMD. TEN CDIS ON THE ASX REPRESENT ONE
SHARE OF OUR COMMON STOCK ON THE NYSE. ON JULY 1, 2002, WE CONVERTED OUR ASX
LISTING STATUS FROM A FOREIGN EXEMPT LISTING TO A FULL LISTING.
OUR AUSTRALIAN SUBSIDIARY, RESMED HOLDINGS LIMITED, WAS ORIGINALLY ORGANIZED IN
1989 BY DR. PETER FARRELL TO ACQUIRE FROM BAXTER CENTER FOR MEDICAL RESEARCH PTY
LIMITED, OR BAXTER, THE RIGHTS TO CERTAIN TECHNOLOGY RELATING TO CPAP TREATMENT
AS WELL AS BAXTER'S EXISTING CPAP DEVICE BUSINESS. BAXTER HAD SOLD CPAP DEVICES
IN AUSTRALIA SINCE 1988, HAVING ACQUIRED THE RIGHTS TO THE TECHNOLOGY IN 1987.
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.
- -3-
THE MARKET
SLEEP IS A COMPLEX NEUROLOGICAL PROCESS THAT INCLUDES TWO DISTINCT STATES: RAPID
EYE MOVEMENT, OR REM, SLEEP AND NON-RAPID EYE MOVEMENT, OR NON-REM, SLEEP. REM
SLEEP, WHICH IS ABOUT 20-25% OF TOTAL SLEEP EXPERIENCED BY ADULTS, IS
CHARACTERIZED BY A HIGH LEVEL OF BRAIN ACTIVITY, BURSTS OF RAPID EYE MOVEMENT,
INCREASED HEART AND RESPIRATION RATES, AND PARALYSIS OF MANY MUSCLES. NON-REM
SLEEP IS SUBDIVIDED INTO FOUR STAGES THAT GENERALLY PARALLEL SLEEP DEPTH; STAGE
1 IS THE LIGHTEST AND STAGE 4 IS THE DEEPEST.
THE UPPER AIRWAY HAS NO RIGID SUPPORT AND IS HELD OPEN BY ACTIVE CONTRACTION OF
UPPER AIRWAY MUSCLES. NORMALLY, DURING REM SLEEP AND DEEPER LEVELS OF NON-REM
SLEEP, UPPER AIRWAY MUSCLES RELAX AND THE AIRWAY NARROWS. INDIVIDUALS WITH
NARROW UPPER AIRWAYS OR POOR MUSCLE TONE ARE PRONE TO TEMPORARY COLLAPSES OF THE
UPPER AIRWAY DURING SLEEP, OR APNEAS, OR NEAR CLOSURES OF THE UPPER AIRWAYS, OR
HYPOPNEAS. THESE BREATHING IRREGULARITIES RESULT IN A LOWERING OF BLOOD OXYGEN
CONCENTRATION, CAUSING THE CENTRAL NERVOUS SYSTEM TO REACT TO THE LACK OF OXYGEN
OR INCREASED CARBON DIOXIDE AND SIGNALING THE BODY TO RESPOND. TYPICALLY, THE
INDIVIDUAL SUBCONSCIOUSLY AROUSES FROM SLEEP, CAUSING THE THROAT MUSCLES TO
CONTRACT, OPENING THE AIRWAY. AFTER A FEW GASPING BREATHS, BLOOD OXYGEN LEVELS
INCREASE AND THE INDIVIDUAL CAN RESUME A DEEPER SLEEP UNTIL THE CYCLE REPEATS
ITSELF. SUFFERERS OF OSA TYPICALLY EXPERIENCE TEN OR MORE SUCH CYCLES PER HOUR.
WHILE THESE AWAKENINGS GREATLY IMPAIR THE QUALITY OF SLEEP, THE INDIVIDUAL IS
NOT NORMALLY AWARE OF THESE DISRUPTIONS. IN ADDITION, OSA HAS RECENTLY BEEN
RECOGNIZED AS A CAUSE OF HYPERTENSION AND A SIGNIFICANT CO-MORBIDITY FOR HEART
DISEASE, STROKE AND DIABETES. FOR EXAMPLE, ONE RECENT RESEARCH STUDY SHOWED
THAT 83% OF AN ADULT PATIENT POPULATION WITH DRUG-RESISTANT HYPERTENSION HAD
OSA.
IN ITS "WAKE UP AMERICA'' REPORT TO CONGRESS IN 1993, THE NATIONAL COMMISSION ON
SLEEP DISORDERS RESEARCH ESTIMATED THAT APPROXIMATELY 40 MILLION INDIVIDUALS IN
THE UNITED STATES SUFFER FROM CHRONIC DISORDERS OF SLEEP AND WAKEFULNESS, SUCH
AS SLEEP APNEA, INSOMNIA AND NARCOLEPSY. ACCORDING TO THIS REPORT, SLEEP APNEA
IS THE MOST COMMON SLEEP DISORDER, AFFECTING APPROXIMATELY 20 MILLION
INDIVIDUALS IN THE UNITED STATES. DESPITE THE HIGH PREVALENCE OF OSA, THERE IS
A GENERAL LACK OF AWARENESS OF OSA AMONG BOTH THE MEDICAL COMMUNITY AND THE
GENERAL PUBLIC. IT IS ESTIMATED THAT 10% OF THOSE AFFLICTED BY OSA KNOW THE
CAUSE OF THEIR EXCESSIVE DAYTIME SLEEPINESS OR OTHER SYMPTOMS. MANY HEALTH CARE
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. IN ADDITION,
PATIENTS WHO ARE BEING TREATED FOR CERTAIN OTHER CONDITIONS, INCLUDING THOSE
UNDERGOING DIALYSIS TREATMENT OR SUFFERING FROM DIABETES, MAY HAVE AN INCREASED
INCIDENCE OF OSA. RECENT STUDIES HAVE ALSO SHOWN THAT SDB IS PRESENT IN 45% OF
HYPERTENSION PATIENTS (INCLUDING 80% OF PATIENTS WITH DRUG-RESISTANT
HYPERTENSION), 60% OF STROKE PATIENTS AND 50% OF PATIENTS WITH CONGESTIVE HEART
FAILURE.
SLEEP-DISORDERED BREATHING AND OBSTRUCTIVE SLEEP APNEA
SLEEP DISORDERED BREATHING, OR SDB, ENCOMPASSES ALL PHYSIOLOGICAL PROCESSES THAT
CAUSE DETRIMENTAL BREATHING PATTERNS DURING SLEEP. MANIFESTATIONS INCLUDE
OBSTRUCTIVE SLEEP APNEA OR 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.
- -4-
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 INCREASED RISK OF CARDIOVASCULAR MORBIDITY AND
MORTALITY DUE TO ANGINA, STROKE AND HEART ATTACK. PATIENTS WITH OSA HAVE BEEN
SHOWN TO HAVE IMPAIRED DAYTIME PERFORMANCE IN A VARIETY OF COGNITIVE FUNCTIONS
INCLUDING PROBLEM SOLVING, RESPONSE SPEED AND VISUAL MOTOR COORDINATION, AND
STUDIES HAVE LINKED OSA TO INCREASED OCCURRENCES OF TRAFFIC AND WORKPLACE
ACCIDENTS.
GENERALLY, AN INDIVIDUAL SEEKING TREATMENT FOR THE SYMPTOMS OF OSA IS REFERRED
BY A GENERAL PRACTITIONER TO A SPECIALIST FOR FURTHER EVALUATION. THE DIAGNOSIS
OF OSA TYPICALLY REQUIRES MONITORING THE PATIENT DURING SLEEP AT EITHER A SLEEP
CLINIC OR THE PATIENT'S HOME. DURING OVERNIGHT TESTING, RESPIRATORY PARAMETERS
AND SLEEP PATTERNS ARE MONITORED ALONG WITH OTHER VITAL SIGNS SUCH AS HEART RATE
AND BLOOD OXYGEN LEVELS. THESE TESTS ALLOW SLEEP CLINICIANS TO DETECT ANY SLEEP
DISTURBANCES SUCH AS APNEAS, HYPOPNEAS OR SUBCONSCIOUS AWAKENINGS. WE ESTIMATE
THAT THERE ARE CURRENTLY MORE THAN 2,500 SLEEP CLINICS IN THE UNITED STATES, A
SUBSTANTIAL PORTION OF WHICH ARE AFFILIATED WITH HOSPITALS. THE NUMBER OF SLEEP
CLINICS HAS EXPANDED SIGNIFICANTLY FROM APPROXIMATELY 100 SUCH FACILITIES IN
1985.
EXISTING THERAPIES
PRIOR TO 1981, THE PRIMARY TREATMENT FOR OSA WAS A TRACHEOTOMY, A SURGICAL
PROCEDURE TO CUT A HOLE IN THE PATIENT'S WINDPIPE TO CREATE A CHANNEL FOR
AIRFLOW. MOST RECENTLY, SURGERY HAS INVOLVED EITHER UVULOPALATOPHARYNGOPLASTY
('UPPP'), IN WHICH SURGERY IS PERFORMED ON THE UPPER AIRWAY TO REMOVE EXCESS
TISSUE AND TO STREAMLINE THE SHAPE OF THE AIRWAY, OR MANDIBULAR ADVANCEMENT, IN
WHICH THE LOWER JAW IS MOVED FORWARD TO WIDEN THE PATIENT'S AIRWAY. UPPP ALONE
HAS A POOR SUCCESS RATE; HOWEVER, WHEN PERFORMED IN CONJUNCTION WITH 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 NASAL POSITIVE AIRWAY
PRESSURE IS GENERALLY ACKNOWLEDGED AS THE MOST EFFECTIVE AND LEAST INVASIVE
THERAPY FOR MANAGING OSA.
DURING CPAP TREATMENT, A PATIENT SLEEPS WITH A NASAL MASK 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. CONTINUOUS AIR PRESSURE APPLIED IN THIS MANNER ACTS
AS A PNEUMATIC SPLINT TO KEEP THE UPPER AIRWAY OPEN AND UNOBSTRUCTED. SOMETIMES
WHEN A PATIENT LEAKS AIR THROUGH THEIR MOUTH, A FULL-FACE MASK MAY NEED TO BE
USED.
CPAP IS NOT A CURE AND THEREFORE, MUST BE USED ON A DAILY BASIS AS LONG AS
TREATMENT IS REQUIRED. PATIENT COMPLIANCE HAS BEEN A MAJOR FACTOR IN THE
EFFICACY OF CPAP TREATMENT. EARLY GENERATIONS OF CPAP UNITS PROVIDED LIMITED
PATIENT COMFORT AND CONVENIENCE. PATIENTS EXPERIENCED SORENESS FROM THE
REPEATED USE OF NASAL MASKS AND HAD DIFFICULTY FALLING ASLEEP WITH THE CPAP
DEVICE OPERATING AT THE PRESCRIBED PRESSURE. IN MORE RECENT YEARS, PRODUCT
INNOVATIONS TO IMPROVE PATIENT COMFORT AND COMPLIANCE HAVE BEEN DEVELOPED.
THESE INCLUDE MORE COMFORTABLE MASK SYSTEMS; DELAY TIMERS WHICH GRADUALLY RAISE
AIR PRESSURE ALLOWING THE PATIENT TO FALL ASLEEP MORE EASILY; BILEVEL AIR FLOW
GENERATORS, INCLUDING VPAP SYSTEMS, WHICH PROVIDE DIFFERENT AIR PRESSURES FOR
INHALATION AND EXHALATION; HEATED HUMIDIFICATION SYSTEMS TO MAKE THE AIRFLOW
MORE COMFORTABLE; AND AUTO TITRATION DEVICES WHICH REDUCE THE AVERAGE PRESSURE
DELIVERED DURING THE NIGHT.
- -5-
BUSINESS STRATEGY
WE BELIEVE THAT THE SDB MARKET WILL CONTINUE TO GROW IN THE FUTURE DUE TO A
NUMBER OF FACTORS INCLUDING INCREASING AWARENESS OF OSA, IMPROVED UNDERSTANDING
OF THE ROLE OF SDB TREATMENT IN THE 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.
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, IN 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. WE BELIEVE THAT CONTINUED PRODUCT DEVELOPMENT AND
INNOVATION ARE KEY FACTORS TO OUR ONGOING SUCCESS. APPROXIMATELY 17% OF OUR
EMPLOYEES ARE DEVOTED TO RESEARCH AND DEVELOPMENT ACTIVITIES. IN FISCAL YEAR
2003, WE INVESTED $20.5 MILLION, OR 7.5% OF OUR REVENUES, IN RESEARCH AND
DEVELOPMENT.
EXPAND GEOGRAPHIC PRESENCE. WE MARKET OUR PRODUCTS IN OVER 60 COUNTRIES TO
SLEEP CLINICS, HOME HEALTH CARE DEALERS AND THIRD PARTY PAYERS. WE INTEND TO
INCREASE OUR SALES AND MARKETING EFFORTS IN OUR PRINCIPAL MARKETS, AS WELL AS
EXPAND THE DEPTH OF OUR PRESENCE 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 2002, WE DONATED A TOTAL OF $2.3 MILLION TO THE RESMED SLEEP
DISORDERED BREATHING FOUNDATIONS IN THE UNITED STATES AND AUSTRALIA TO FURTHER
ENHANCE RESEARCH AND AWARENESS OF SDB. THE FOUNDATIONS' CONTRIBUTIONS REPRESENT
RESMED'S 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. 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, 1,000 PATIENTS ARE BEING
TREATED BY THIS DEVICE IN EUROPE WITH SIGNIFICANT IMPROVEMENTS IN QUALITY OF
LIFE AND HEART FUNCTION. IN ADDITION, WE MAINTAIN CLOSE WORKING RELATIONSHIPS
WITH A NUMBER OF PROMINENT PHYSICIANS TO EXPLORE NEW MEDICAL APPLICATIONS FOR
OUR PRODUCTS AND TECHNOLOGY.
LEVERAGE THE EXPERIENCE OF OUR MANAGEMENT TEAM AND MEDICAL ADVISORY BOARD. OUR
SENIOR MANAGEMENT TEAM HAS EXTENSIVE EXPERIENCE IN THE MEDICAL DEVICE INDUSTRY
IN GENERAL, AND IN THE FIELD OF SDB IN PARTICULAR. OUR MEDICAL ADVISORY BOARD
IS COMPRISED OF EXPERTS IN THE FIELD OF SDB. 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.
- -6-
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.
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 SMALL NASAL MASK (OR SOMETIMES A FULL-FACE MASK).
OUR VPAP UNITS DELIVER ULTRA-QUIET, COMFORTABLE BILEVEL THERAPY. THERE ARE TWO
PRESET PRESSURES: A HIGHER PRESSURE AS THE PATIENT BREATHES IN, AND A LOWER
PRESSURE AS THE PATIENT BREATHES OUT. BREATHING OUT AGAINST A LOWER PRESSURE
MAKES TREATMENT MORE COMFORTABLE, PARTICULARLY FOR PATIENTS WHO NEED HIGH
PRESSURE LEVELS OR FOR THOSE WITH IMPAIRED BREATHING ABILITY.
AUTOSET SYSTEMS ARE BASED ON A PROPRIETARY TECHNOLOGY TO MONITOR BREATHING AND
CAN ALSO BE USED IN THE DIAGNOSIS, TREATMENT AND MANAGEMENT OF OSA. CPAP AND
VPAP AIR FLOW GENERATORS, TOGETHER WITH OUR DIAGNOSTIC PRODUCTS, ACCOUNTED FOR
APPROXIMATELY 54%, 58% AND 57% OF OUR NET REVENUES IN FISCAL YEARS 2003, 2002
AND 2001, RESPECTIVELY.
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AIR FLOW Description Date of
Generators Commercial
Introduction
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VPAP:
VPAP II Bilevel portable device providing March 1996
different pressure levels for inhalation and
exhalation, improved pressure switching and
reduced noise output and spontaneous breath
triggering
COMFORT. . . . . Bilevel device with limited features. March 1996
VPAP II ST . . . Bilevel portable device with spontaneous and April 1996
spontaneous/timed breath triggering modes
of operation.
VPAP II ST A . . Bilevel device with alarms. August 1998
VPAP MAX+. . . . Bilevel ventilatory support system for the November 1998
treatment of adult patients with respiratory
insufficiency or respiratory failure.
Moritz S#. . . . Bilevel portable device providing different October 2001*
pressure levels for inhalation and
exhalation with integrated humidifier
Moritz ST# . . . Bilevel ST device with spontaneous and October 2001*
spontaneous/timed breath triggering modes of
operation, and with power failure alarms, system
with integrated humidifier.
VPAP III . . . . Updated Bilevel Portable device encompassing April 2003
improved pressure synchronization, spontaneous
breath triggering and reduced noise.
VPAP III ST. . . Updated Bilevel ST Portable device encompassing April 2003
improved pressure synchronization, spontaneous
and spontaneous/timed breath triggering modes
of operation and reduced noise.
AutoSet:
AutoSet CS#. . . Delivers varying degrees of ventilatory assistance December 1998
to stabilize breathing and reduce Cheyne
Stokes respiration in congestive heart failure
patients.
AutoSet T. . . . Autotitrating device, which continually adjusts March 1999
CPAP treatment pressure based on patient airway
resistance.
AutoSet Spirit . Modular, autotitrating device with optional September 2001
integrated humidifier.
Magellan#. . . . Autotitrating device using airway resistance March 2003*
measurement.
CPAP:
Max II nCPAP#. . Continuous Positive Pressure flow Generator April 1997*
available with or without integrated humidifier.
Features low noise and reduced pressure swings
Minni Max nCPAP# CPAP device with integrated and attachable March 2000
humidifier and low noise levels.
ResMed S6 series Quiet, compact CPAP device with various June 2000
comfort features.
ResMed S7 series Continuous Positive Pressure flow generator July 2002
With integrated humidifier.
- -------------------------------------------------------------------------------------
*MAP product, not approved for marketing in the United States.
+ Sold in USA only
# Sold outside USA only
- -7-
MASK SYSTEMS
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 AND MOTORS ACCOUNTED FOR APPROXIMATELY 46%, 42% AND 43% OF OUR NET
REVENUES IN FISCAL YEARS 2003, 2002 AND 2001, RESPECTIVELY.
- --------------------------------------------------------------------------------
Date of
Mask Description Commercial
Products Introduction
- --------------------------------------------------------------------------------
Mirage Mask Proprietary mask design August 1997
with a contoured nasal
cushion that adjusts to
patient's facial contours.
Quiet, light and low profile.
Ultra Mirage Mask. . Advanced version of the June 2000
Mirage system with
reduced noise characteristics and
improved forehead bridge.
Mirage Full Face Mask Mirage-based full-face October 2001
Series 2 mask system. Provides an
effective method of
applying ventilatory assist
Non-invasive Positive
Pressure Ventilation
therapy. Can be used
to address mouth-breathing
problems in conventional
bilevel or CPAP therapy.
Papillon Mask# Nasal mask with only four April 2002*
major parts, allows
simplified handling for
patients and distributors.
Mirage Vista.Mask . . . . . Small nasal mask without November 2002
.. . . . . . . . . . . . . . forehead supports.
- --------------------------------------------------------------------------------
* MAP product, not approved for marketing in the United States.
+ Sold in USA only
# Sold outside USA only
DIAGNOSTIC PRODUCTS
WE MARKET SLEEP RECORDERS FOR THE DIAGNOSIS 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 Date of
Commercial
Introduction
- ---------------------------------------------------------------------------------------------------------------
Poly-MESAM Portable+ Diagnostic System+. . . . Configurable cardio-respiratory February 1995*
.. . . . . . . . . . . . . . . . . . . . . . . . polygraphy system up to 8 channels,
. . . . . . . . . . . . . . . . . . . . . . . .includes ECG, thorax and abdomen
.. . . . . . . . . . . . . . . . . . . . . . . . belts, PLMS sensor.
MEPAL Diagnostic+.System . . . . . . . . . . . .Polysomnography system designed for February 1999*
. . . . . . . . . . . . . . . . . . . . . . . .use in the sleep laboratory.
ResControl Device to permit remote monitoring and September 1999
adjustment of ResMed CPAP, VPAP,
and AutoSet T air flow generators. An
internal pressure transducer enables the
clinician to interface with
polysomnography to monitor airflow in
. . . . . . . . . . . . . . . . . . . . . . . .both titration and diagnostic studies.
Embla+ Digital sleep recorder that provides
comprehensive sleep diagnosis in a sleep
.. . . . . . . . . . . . . . . . . . . . . . . . laboratory. October 1999
Embletta+. Pocket-size digital recorder that November 2000
. . . . . . . . . . . . . . . . . . . . . . . .performs ambulatory sleep studies.
MEPAL mobil+ Diagnostic System . . . . . . . . .Ambulatory polysomnography system. March 2001*
- ---------------------------------------------------------------------------------------------------------------
*MAP product, not approved for marketing in the United States.
+Not manufactured by ResMed.
- -8-
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 AND H2I, WHICH CONNECT DIRECTLY WITH THE CPAP, VPAP AND AUTOSET FLOW
GENERATORS TO HUMIDIFY AND HEAT THE AIR DELIVERED TO THE PATIENT. THEIR USE
PREVENTS THE DRYING OF NASAL PASSAGES THAT CAN CAUSE DISCOMFORT. OTHER OPTIONAL
ACCESSORIES INCLUDE COLD PASSOVER HUMIDIFIERS, CARRY BAGS AND BREATHING
CIRCUITS. MAP ALSO OFFERS A RANGE OF ACCESSORIES, INCLUDING THE TWISTER REMOTE,
AN INTELLIGENT REMOTE CONTROL FOR USE IN THE SLEEP LAB ENVIRONMENT TO SET AND
MONITOR FLOW GENERATORS, THE AERO-CLICK CONNECTION SYSTEM, WHICH ALLOWS A QUICK,
SIMPLE CONNECT/DISCONNECT BETWEEN THE MASK AND CPAP AIR DELIVERY SOURCE AND THE
AEROFIX HEADGEAR, FOR THE COMFORTABLE ADJUSTMENT OF MASKS FOR CPAP THERAPY.
SINCE THE MAY 2002 ACQUISITION OF SERVO MAGNETICS INC., WE HAVE SOLD CUSTOM
ELECTRIC MOTORS, PRIMARILY FOR USE IN DATA STORAGE AND AEROSPACE APPLICATIONS.
PRODUCT DEVELOPMENT AND CLINICAL TRIALS
WE HAVE A STRONG TRACK RECORD IN INNOVATION IN THE SLEEP MARKET. IN 1989, WE
INTRODUCED OUR FIRST 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.
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. CURRENTLY, WE ARE BRINGING TO MARKET THE ACTIVA NASAL
MASK USING OUR PATENTED ACTIVE CUSHION TECHNOLOGY, WHICH AUTOMATICALLY SEALS
MASK LEAKS. WE ARE ALSO ABOUT TO LAUNCH OUR IMPROVED AUTOSET CS II (OUTSIDE THE
U.S. ONLY) TO TREAT CONGESTIVE HEART FAILURE PATIENTS WITH SIGNIFICANT CENTRAL
SLEEP APNEA.
WE CONTINUALLY SEEK TO IDENTIFY NEW APPLICATIONS OF OUR TECHNOLOGY FOR
SIGNIFICANT UNMET MEDICAL NEEDS. SDB IS ASSOCIATED WITH A NUMBER OF SYMPTOMS
BEYOND EXCESSIVE DAYTIME SLEEPINESS AND IRRITABILITY. RECENT STUDIES HAVE
ESTABLISHED A CLINICAL ASSOCIATION BETWEEN SDB AND HYPERTENSION, STROKE, AND
CONGESTIVE HEART FAILURE. WE SUPPORT CLINICAL TRIALS IN THE UNITED STATES,
GERMANY, FRANCE, THE UNITED KINGDOM 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 SERVE ON OUR MEDICAL ADVISORY BOARD. NEW PRODUCT IDEAS ARE ALSO
IDENTIFIED BY OUR MARKETING STAFF, DIRECT SALES FORCE, NETWORK OF DISTRIBUTORS,
MANUFACTURERS' REPRESENTATIVES, CUSTOMERS, AND PATIENTS. TYPICALLY, OUR INTERNAL
DEVELOPMENT STAFF THEN PERFORM NEW PRODUCT DEVELOPMENT.
IN FISCAL YEARS 2003, 2002 AND 2001, WE INVESTED $20.5 MILLION, $14.9 MILLION
AND $11.1 MILLION, RESPECTIVELY, ON RESEARCH AND DEVELOPMENT.
- -9-
SALES AND MARKETING
WE CURRENTLY MARKET OUR PRODUCTS IN OVER 60 COUNTRIES USING A NETWORK OF
DISTRIBUTORS, INDEPENDENT MANUFACTURERS' REPRESENTATIVES AND OUR DIRECT SALES
FORCE. WE ATTEMPT TO TAILOR OUR MARKETING APPROACH TO EACH NATIONAL MARKET,
BASED ON REGIONAL AWARENESS OF SDB AS A HEALTH PROBLEM, PHYSICIAN REFERRAL
PATTERNS, CONSUMER PREFERENCES AND LOCAL REIMBURSEMENT POLICIES.
NORTH AMERICA AND LATIN AMERICA. OUR PRODUCTS ARE TYPICALLY PURCHASED BY A HOME
HEALTHCARE DEALER WHO THEN SELLS THE PRODUCTS TO THE PATIENT. THE DECISION TO
PURCHASE OUR PRODUCTS, AS OPPOSED THOSE OF OUR COMPETITORS, IS MADE OR
INFLUENCED BY ONE OR MORE OF THE FOLLOWING INDIVIDUALS OR ORGANIZATIONS: THE
PRESCRIBING PHYSICIAN AND HIS OR HER STAFF, THE HOME HEALTHCARE DEALER, THE
INSURER AND THE PATIENT. 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 STATES
FIELD SALES ORGANIZATION MARKETS AND SELLS PRODUCTS TO MORE THAN 4,000 HOME
HEALTH CARE DEALER BRANCH LOCATIONS THROUGHOUT THE UNITED STATES. OUR DIRECT
SALES FORCE RECEIVES A BASE SALARY, PLUS COMMISSIONS, WHILE OUR INDEPENDENT
SALES REPRESENTATIVES RECEIVE HIGHER COMMISSIONS, BUT NO BASE SALARY.
WE ALSO PROMOTE AND MARKET OUR PRODUCTS DIRECTLY TO SLEEP CLINICS. PATIENTS WHO
ARE DIAGNOSED WITH OSA AND PRESCRIBED CPAP TREATMENT ARE TYPICALLY REFERRED BY
THE DIAGNOSING SLEEP CLINIC TO A HOME HEALTH CARE DEALER TO FILL THE
PRESCRIPTION. THE HOME HEALTH CARE DEALER, IN CONSULTATION WITH THE REFERRING
PHYSICIAN, WILL ASSIST THE PATIENT IN SELECTING THE EQUIPMENT, FIT THE PATIENT
WITH THE APPROPRIATE MASK AND SET THE FLOW GENERATOR PRESSURE TO THE PRESCRIBED
LEVEL. IN THE UNITED STATES, OUR SALES EMPLOYEES AND MANUFACTURERS'
REPRESENTATIVES ARE MANAGED BY TWO REGIONAL SALES DIRECTORS, OUR VICE PRESIDENT
OF SALES AND OUR CHIEF OPERATING OFFICER FOR THE AMERICAS.
OUR CANADIAN AND LATIN AMERICAN SALES ARE CONDUCTED THROUGH INDEPENDENT
DISTRIBUTORS. SALES IN NORTH AND LATIN AMERICA ACCOUNTED FOR 48%, 49% AND 52%
OF OUR NET REVENUES FOR FISCAL YEARS 2003, 2002 AND 2001, RESPECTIVELY.
EUROPE. WE MARKET OUR PRODUCTS IN MOST MAJOR EUROPEAN COUNTRIES. WE HAVE
WHOLLY OWNED SUBSIDIARIES IN GERMANY, FRANCE, UNITED KINGDOM, SPAIN,
SWITZERLAND, NETHERLANDS, AUSTRIA, SWEDEN AND FINLAND AND WE USE INDEPENDENT
DISTRIBUTORS TO SELL OUR PRODUCTS IN OTHER AREAS OF EUROPE. DISTRIBUTORS ARE
SELECTED IN EACH COUNTRY BASED ON THEIR KNOWLEDGE OF RESPIRATORY MEDICINE AND A
COMMITMENT TO SDB THERAPY. IN EACH COUNTRY IN WHICH WE HAVE A SUBSIDIARY, A
LOCAL SENIOR MANAGER IS RESPONSIBLE FOR DIRECT NATIONAL SALES.
OUR EXECUTIVE VICE PRESIDENT IS RESPONSIBLE FOR COORDINATION OF ALL EUROPEAN
ACTIVITIES AND, IN CONJUNCTION WITH LOCAL MANAGEMENT, THE DIRECT SALES ACTIVITY
IN EUROPE. SALES IN EUROPE ACCOUNTED FOR 42%, 42% AND 39% OF OUR TOTAL NET
REVENUES FOR FISCAL YEARS 2003, 2002 AND 2001, RESPECTIVELY.
AUSTRALIA/REST OF WORLD. MARKETING IN AUSTRALIA AND THE REST OF THE WORLD IS
THE RESPONSIBILITY OF OUR EXECUTIVE VICE PRESIDENT. SALES IN AUSTRALIA AND THE
REST OF THE WORLD ACCOUNTED FOR 10%, 9% AND 9% OF OUR TOTAL NET REVENUES FOR THE
FISCAL YEARS ENDED JUNE 30, 2003, 2002 AND 2001, RESPECTIVELY.
- -10-
OTHER MARKETING EFFORTS. IN ADDITION TO OUR, AND OUR DISTRIBUTOR'S SALES
EFFORTS, WE WORK WITH THE FOLLOWING CARDIOVASCULAR DISEASE ASSOCIATIONS
(CARDIOVASCULAR DISEASE INCLUDES CORONARY ARTERY DISEASE, CONGESTIVE HEART
FAILURE, HYPERTENSION, STROKE, AND TRANSIENT ISCHEMIC ATTACKS) TO RAISE
AWARENESS OF THE CO-MORBIDITY OF SDB IN CARDIOVASCULAR DISEASE PATIENTS:
(I) NATIONAL STROKE ASSOCIATION. WE HAVE DEVELOPED A STRATEGIC ALLIANCE WITH
THE NATIONAL STROKE ASSOCIATION TO INCREASE AWARENESS ABOUT THE HIGH PREVALENCE
OF SDB IN THE STROKE SURVIVOR POPULATION.
(II) AMERICAN HEART ASSOCIATION. WE ARE WORKING CLOSELY WITH THE WESTERN
AFFILIATES OF THE AMERICAN HEART ASSOCIATION ON A NUMBER OF LOCAL PROGRAMS TO
INCREASE AWARENESS AND EDUCATION ABOUT SDB. WE ARE ALSO IN DISCUSSIONS WITH THE
NATIONAL AMERICAN HEART/AMERICAN STROKE ASSOCIATIONS REGARDING NATIONAL PROGRAMS
INITIALLY TARGETING CLINICIANS ON THE IMPACT OF SDB ON BOTH HEART DISEASE AND
STROKE PATIENTS, AS WELL AS ITS ROLE IN THE DEVELOPMENT OF HYPERTENSION, A MAJOR
RISK FACTOR FOR BOTH HEART DISEASE AND STROKE.
(III) NATIONAL SLEEP FOUNDATION. THE NATIONAL SLEEP FOUNDATION IS A NON-PROFIT
ORGANIZATION DEDICATED TO IMPROVING PUBLIC HEALTH AND SAFETY BY RAISING THE
LEVEL OF AWARENESS AND EDUCATION TOWARD SLEEP RELATED PROGRAMS AND RESEARCH. WE
HAVE BEEN AN ACTIVE CORPORATE PARTNER AND HAVE SUPPORTED THE NATIONAL SLEEP
FOUNDATION FOR A NUMBER OF YEARS.
STRATEGIC ALLIANCES
GUIDANT CORPORATION. THE GUIDANT CORPORATION IS A WORLD LEADER IN THE TREATMENT
OF CARDIAC AND VASCULAR DISEASE. GUIDANT AND RESMED HAVE ENTERED INTO AN
AGREEMENT PURSUANT TO WHICH THE COMPANIES WILL WORK TOGETHER IN THE AREAS OF
SLEEP-DISORDERED BREATHING AND CARDIAC RHYTHM DISORDERS, DISEASE STATES WITH A
SIGNIFICANT PATIENT POPULATION OVERLAP. 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 WILL
ALLOW MEDCATH TO OFFER SDB SCREENING, DIAGNOSIS, AND TREATMENT IN CONJUNCTION
WITH SERVICES CURRENTLY OFFERED THROUGH THE COMPANY'S CARDIOVASCULAR DIAGNOSTIC
CENTERS.
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.
MANUFACTURING
OUR PRINCIPAL MANUFACTURING FACILITIES ARE LOCATED IN SYDNEY, AUSTRALIA AND
COMPRISE A 120,000 SQUARE FEET MANUFACTURING AND RESEARCH AND DEVELOPMENT
FACILITY. WE ALSO RENT SOME SPACE IN NEARBY BUILDINGS. WE ARE IN THE PROCESS
OF BUILDING A NEW 215,000 SQUARE FEET MANUFACTURING FACILITY IN SYDNEY, DUE TO
BE COMPLETED IN THE FIRST HALF OF CALENDAR 2004. 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 TWO
YEARS THE MANUFACTURING PROCESSES HAVE BEEN TRANSFORMED ALONG WORLD CLASS
MANUFACTURING GUIDELINES TO FLOW LINES STAFFED BY DEDICATED TEAMS. EACH TEAM IS
RESPONSIBLE FOR MANUFACTURE AND QUALITY OF THEIR PRODUCT GROUP AND DECISIONS ARE
BASED ON PERFORMANCE AND QUALITY MEASURES INCLUDING CUSTOMER FEEDBACK.
- -11-
OUR QUALITY MANAGEMENT SYSTEM IS BASED UPON THE REQUIREMENTS OF ISO 9001,
EN46001 (EUROPEAN MEDICAL STANDARDS), FDA QUALITY SYSTEM REGULATIONS FOR MEDICAL
DEVICES (21 CFR PART 820) AND THE MEDICAL DEVICE DIRECTIVE (93/42/EEC). OUR
SYDNEY, AUSTRALIA FACILITY IS ACCREDITED TO ISO 9001 AND EN46001 AND OUR SAN
DIEGO, CALIFORNIA FACILITY IS ACCREDITED TO ISO 9002 AND EN46002. THESE TWO
SITES HAVE THIRD PARTY AUDITS CONDUCTED BY THE ISO CERTIFICATION BODIES AT
REGULAR INTERVALS.
OUR GERMAN MANUFACTURING OPERATION BASED IN MUNICH OPERATES IN A FACILITY OF
APPROXIMATELY 24,000 SQUARE FEET. THIS FACILITY IS ACCREDITED TO ISO 9001 AND
EN46001 AND PRIMARILY ASSEMBLES AND TESTS FLOW GENERATORS FOR SALE BY OUR
SUBSIDIARY MAP GMBH. APPROPRIATE QUALITY CONTROLS MONITOR AND MEASURE PRODUCT
ASSEMBLY AND PERFORMANCE.
IN ADDITION TO OUR AUSTRALIAN AND GERMAN MANUFACTURING OPERATIONS WE ALSO
MANUFACTURE HIGH QUALITY ELECTRIC MOTORS FOR BOTH OUR FLOW GENERATOR DEVICES AND
EXTERNAL CUSTOMERS, PRIMARILY IN THE DATA STORAGE AND AEROSPACE SECTORS, AT OUR
SERVO MAGNETICS INC. (SMI) FACILITY AT CANOGA PARK, CALIFORNIA. THE SMI
FACILITY IS APPROXIMATELY 35,500 SQUARE FEET.
THIRD-PARTY REIMBURSEMENT
THE COST OF MEDICAL CARE IN MANY OF THE COUNTRIES IN WHICH WE OPERATE IS FUNDED
IN SUBSTANTIAL PART BY GOVERNMENT AND PRIVATE INSURANCE PROGRAMS. ALTHOUGH WE
DO NOT GENERALLY RECEIVE PAYMENTS FOR 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 CARE
DEALERS, HOSPITALS OR SLEEP CLINICS, WHICH THEN INVOICE THIRD-PARTY PAYERS
DIRECTLY. DOMESTIC THIRD-PARTY PAYERS INCLUDE MEDICARE, MEDICAID, AND CORPORATE
HEALTH INSURANCE PLANS. THESE PAYERS MAY DENY REIMBURSEMENT IF THEY DETERMINE
THAT A DEVICE IS NOT USED IN ACCORDANCE WITH COST-EFFECTIVE TREATMENT METHODS,
OR IS EXPERIMENTAL, UNNECESSARY OR INAPPROPRIATE. THE LONG-TERM TREND TOWARDS
MANAGED HEALTH CARE, OR LEGISLATIVE PROPOSALS TO REFORM HEALTH CARE, COULD
CONTROL OR SIGNIFICANTLY INFLUENCE THE PURCHASE OF HEALTH CARE SERVICES AND
PRODUCTS AND COULD RESULT IN LOWER PRICES FOR OUR PRODUCTS.
IN THE UNITED STATES, WE SELL OUR PRODUCTS PRIMARILY TO HOME HEALTH CARE DEALERS
AND TO SLEEP CLINICS; WE DO NOT FILE CLAIMS AND BILL GOVERNMENTAL PROGRAMS AND
OTHER THIRD-PARTY PAYERS DIRECTLY FOR REIMBURSEMENT FOR OUR PRODUCTS.
NEVERTHELESS, WE ARE STILL SUBJECT TO LAWS AND REGULATIONS RELATING TO
GOVERNMENTAL PROGRAMS, AND ANY VIOLATION OF THESE LAWS AND REGULATIONS COULD
RESULT IN CIVIL AND CRIMINAL PENALTIES, INCLUDING FINES.
IN PARTICULAR, THE FEDERAL ANTI-KICKBACK LAW PROHIBITS PERSONS FROM KNOWINGLY
AND WILLFULLY SOLICITING, RECEIVING, OFFERING OR PROVIDING REMUNERATION,
DIRECTLY OR INDIRECTLY, TO INDUCE EITHER THE REFERRAL OF AN INDIVIDUAL, OR THE
FURNISHING, RECOMMENDING OR ARRANGING FOR A GOOD OR SERVICE, FOR WHICH PAYMENT
MAY BE MADE UNDER A FEDERAL HEALTHCARE PROGRAM SUCH AS THE MEDICARE AND MEDICAID
PROGRAMS. THE GOVERNMENT HAS INTERPRETED THIS LAW BROADLY TO APPLY TO THE
MARKETING AND SALES ACTIVITIES OF MANUFACTURERS AND DISTRIBUTORS LIKE US. MANY
STATES HAVE ADOPTED LAWS SIMILAR TO THE FEDERAL ANTI-KICKBACK LAW. WE ARE ALSO
SUBJECT TO OTHER FEDERAL AND STATE FRAUD LAWS APPLICABLE TO PAYMENT FROM ANY
THIRD-PARTY PAYER. THESE LAWS PROHIBIT PERSONS FROM KNOWINGLY AND WILLFULLY
FILING FALSE CLAIMS OR EXECUTING A SCHEME TO DEFRAUD ANY HEALTHCARE BENEFIT
PROGRAM, INCLUDING PRIVATE THIRD-PARTY PAYERS. THESE LAWS MAY APPLY TO
MANUFACTURERS AND DISTRIBUTORS WHO PROVIDE INFORMATION ON COVERAGE, CODING AND
REIMBURSEMENT OF THEIR PRODUCTS TO PERSONS WHO BILL THIRD-PARTY PAYERS. WE
CONTINUOUSLY STRIVE TO COMPLY WITH THESE LAWS AND BELIEVE THAT OUR ARRANGEMENTS
DO NOT VIOLATE THESE LAWS. LIABILITY MAY STILL ARISE FROM THE INTENTIONS OR
ACTIONS OF THE PARTIES WITH WHOM WE DO BUSINESS OR FROM A DIFFERENT GOVERNMENTAL
AGENCY INTERPRETATION OF THE LAWS.
- -12-
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-TO-TWO YEAR LIMITED WARRANTIES ON OUR FLOW GENERATOR
PRODUCTS. WARRANTIES ON MASK SYSTEMS ARE FOR 90 DAYS. IN MOST MARKETS, WE RELY
ON OUR DISTRIBUTORS TO REPAIR OUR PRODUCTS WITH PARTS SUPPLIED BY US. IN THE
UNITED STATES, HOME HEALTH CARE DEALERS GENERALLY ARRANGE SHIPMENT OF PRODUCTS
TO OUR SAN DIEGO FACILITY FOR REPAIR.
WE RECEIVE RETURNS OF OUR PRODUCTS FROM THE FIELD FOR VARIOUS REASONS. WE
BELIEVE THAT THE LEVEL OF RETURNS EXPERIENCED TO DATE IS CONSISTENT WITH LEVELS
TYPICALLY EXPERIENCED BY MANUFACTURERS OF SIMILAR DEVICES. WE PROVIDE FOR
WARRANTIES AND RETURNS BASED ON HISTORICAL DATA.
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. IN THE UNITED STATES, OUR PRINCIPAL MARKET, RESPIRONICS, INC.,
DEVILBISS, A DIVISION OF SUNRISE MEDICAL INC., AND NELLCOR PURITAN BENNETT, A
SUBSIDIARY OF TYCO INC., ARE THE PRIMARY COMPETITORS FOR OUR CPAP PRODUCTS. OUR
PRINCIPAL EUROPEAN COMPETITORS ARE ALSO RESPIRONICS, DEVILBISS, AND NELLCOR
PURITAN BENNETT, AS WELL AS REGIONAL EUROPEAN MANUFACTURERS. THE DISPARITY
BETWEEN OUR RESOURCES AND THOSE OF OUR COMPETITORS MAY INCREASE AS A RESULT OF
THE RECENT TREND TOWARDS CONSOLIDATION IN THE HEALTH CARE INDUSTRY. IN
ADDITION, OUR PRODUCTS COMPETE WITH SURGICAL PROCEDURES AND DENTAL APPLIANCES
DESIGNED TO TREAT OSA AND OTHER SDB RELATED RESPIRATORY CONDITIONS. THE
DEVELOPMENT OF NEW OR INNOVATIVE PROCEDURES OR DEVICES BY OTHERS COULD RESULT IN
OUR PRODUCTS BECOMING OBSOLETE OR NONCOMPETITIVE, RESULTING IN A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ANY PRODUCT DEVELOPED BY US THAT GAINS REGULATORY CLEARANCE WILL HAVE TO COMPETE
FOR MARKET ACCEPTANCE AND MARKET SHARE. AN IMPORTANT FACTOR IN SUCH COMPETITION
MAY BE THE TIMING OF MARKET INTRODUCTION OF COMPETITIVE PRODUCTS. ACCORDINGLY,
THE RELATIVE SPEED WITH WHICH WE CAN DEVELOP PRODUCTS, COMPLETE CLINICAL TESTING
AND REGULATORY CLEARANCE PROCESSES AND SUPPLY COMMERCIAL QUANTITIES OF THE
PRODUCT TO THE MARKET ARE EXPECTED TO BE IMPORTANT COMPETITIVE FACTORS. IN
ADDITION, OUR ABILITY TO COMPETE WILL CONTINUE TO BE DEPENDENT ON THE EXTENT TO
WHICH WE ARE SUCCESSFUL IN PROTECTING OUR PATENTS AND OTHER INTELLECTUAL
PROPERTY.
- -13-
PATENTS AND PROPRIETARY RIGHTS AND RELATED LITIGATION
THROUGH OUR SUBSIDIARIES RESMED LIMITED, MEDIZINTECHNIK FUR ARZT UND PATIENT
GMBH AND SMI, WE OWN OR HAVE LICENSED RIGHTS TO 108 ISSUED UNITED STATES PATENTS
(INCLUDING 24 DESIGN PATENTS) AND 135 ISSUED FOREIGN PATENTS. IN ADDITION,
THERE ARE 139 PENDING UNITED STATES PATENT APPLICATIONS (INCLUDING 23 DESIGN
PATENT APPLICATIONS) AND 249 PENDING FOREIGN PATENT APPLICATIONS. SOME OF THESE
PATENTS AND PATENT APPLICATIONS RELATE TO SIGNIFICANT ASPECTS AND FEATURES OF
OUR PRODUCTS. THESE INCLUDE U.S. PATENTS RELATING TO 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, FOUR UNITED STATES PATENTS AND THREE FOREIGN PATENTS ARE DUE TO
EXPIRE IN THE NEXT FIVE YEARS, WITH ONE FOREIGN PATENT DUE TO EXPIRE IN EACH OF
THE YEARS 2004, 2005 AND 2007 AND TWO UNITED STATES PATENTS IN 2007 AND ONE
UNITED STATES PATENT IN EACH OF THE YEARS 2005 AND 2008. WE BELIEVE THAT THE
EXPIRATION OF THESE PATENTS WILL NOT HAVE A MATERIAL ADVERSE IMPACT ON OUR
COMPETITIVE POSITION.
WE RELY ON A COMBINATION OF PATENTS, TRADE SECRETS, TRADE MARKS AND
NON-DISCLOSURE AGREEMENTS TO PROTECT OUR PROPRIETARY TECHNOLOGY AND RIGHTS. OUR
SUBSIDIARY, RESMED LIMITED, IS PURSUING INFRINGEMENT ACTIONS AGAINST A
COMPETITOR AND IS INVESTIGATING POSSIBLE INFRINGEMENT BY OTHERS. SEE ITEM 3 -
"LEGAL PROCEEDINGS".
ADDITIONAL LITIGATION MAY BE NECESSARY TO ATTEMPT TO ENFORCE PATENTS ISSUED TO
US, TO PROTECT OUR RIGHTS, OR TO DEFEND THIRD-PARTY CLAIMS OF INFRINGEMENT BY US
OF THE PROPRIETARY RIGHTS OF OTHERS. PATENT LAWS REGARDING THE ENFORCEABILITY
OF PATENTS VARY FROM COUNTRY TO COUNTRY. THEREFORE, THERE 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 TO IT
BEING INTRODUCED INTO THE U.S. MARKET. OUR PRODUCTS CURRENTLY MARKETED IN THE
UNITED STATES ARE MARKETED IN RELIANCE ON 510(K) PRE-MARKETING CLEARANCES AS
EITHER CLASS I OR CLASS II DEVICES. THE PROCESS OF OBTAINING A SECTION 510(K)
CLEARANCE GENERALLY REQUIRES THE SUBMISSION OF PERFORMANCE DATA AND OFTEN
CLINICAL DATA, WHICH IN SOME CASES CAN BE EXTENSIVE, TO DEMONSTRATE THAT THE
DEVICE IS "SUBSTANTIALLY EQUIVALENT'' TO A DEVICE THAT WAS ON THE MARKET PRIOR
TO 1976 OR TO A DEVICE THAT HAS BEEN FOUND BY THE FDA TO BE "SUBSTANTIALLY
EQUIVALENT'' TO SUCH A PRE-1976 DEVICE. AS A RESULT, FDA APPROVAL REQUIREMENTS
MAY EXTEND THE DEVELOPMENT PROCESS FOR A CONSIDERABLE LENGTH OF TIME. IN
ADDITION, IN SOME CASES, THE FDA MAY REQUIRE ADDITIONAL REVIEW BY AN ADVISORY
PANEL, WHICH CAN FURTHER LENGTHEN THE PROCESS. THE PMA PROCESS, WHICH IS
RESERVED FOR NEW DEVICES THAT ARE NOT SUBSTANTIALLY EQUIVALENT TO ANY PREDICATE
DEVICE AND FOR HIGH RISK DEVICES OR THOSE THAT ARE USED TO SUPPORT OR SUSTAIN
HUMAN LIFE, MAY TAKE SEVERAL YEARS AND REQUIRES THE SUBMISSION OF EXTENSIVE
PERFORMANCE AND CLINICAL INFORMATION.
- -14-
AS A MEDICAL DEVICE MANUFACTURER, ALL OF OUR DOMESTIC AND AUSTRALIAN
MANUFACTURING FACILITIES ARE SUBJECT TO INSPECTION ON A ROUTINE BASIS BY THE
FDA. WE BELIEVE THAT OUR DESIGN, MANUFACTURING AND QUALITY CONTROL PROCEDURES
ARE IN SUBSTANTIAL COMPLIANCE WITH THE FDA'S REGULATORY REQUIREMENTS. MAP'S
FACILITIES ARE NOT SUBJECT TO FDA REGULATION, BECAUSE NONE OF MAP'S PRODUCTS IS
CURRENTLY MARKETED IN THE UNITED STATES.
SALES OF MEDICAL DEVICES OUTSIDE THE UNITED STATES ARE SUBJECT TO REGULATORY
REQUIREMENTS THAT VARY WIDELY FROM COUNTRY TO COUNTRY. APPROVAL FOR SALE OF OUR
MEDICAL DEVICES IN EUROPE IS THROUGH THE CE MARK PROCESS. 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; OUR DEVICES ARE LISTED IN THE UNITED STATES WITH FDA; IN AUSTRALIA
WITH THE THERAPEUTIC GOODS ADMINISTRATION, OR TGA; AND IN CANADA WITH HEALTH
CANADA.
EMPLOYEES
AS OF JUNE 30, 2003, WE HAD 1,464 EMPLOYEES OR FULL TIME CONSULTANTS, OF WHICH
540 PERSONS WERE EMPLOYED IN WAREHOUSING AND MANUFACTURING, 252 IN RESEARCH AND
DEVELOPMENT, 672 IN SALES, MARKETING AND ADMINISTRATION. OF OUR EMPLOYEES AND
CONSULTANTS, 705 WERE LOCATED IN AUSTRALIA, 349 IN THE UNITED STATES, 363 IN
EUROPE AND 47 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. MEDICAL ADVISORY BOARD MEMBERS MEET AS A GROUP
TWICE A YEAR WITH MEMBERS OF OUR SENIOR MANAGEMENT AND MEMBERS OF OUR RESEARCH
AND MARKETING DEPARTMENTS TO ADVISE US ON TECHNOLOGY TRENDS IN SDB AND OTHER
DEVELOPMENTS IN SLEEP DISORDERS MEDICINE. 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:
CLAUDIO BASSETTI, MD, IS A NEUROLOGIST WITH EXPERTISE IN SLEEP, SLEEP MEDICINE,
STROKE, AND CEREBROVASCULAR DISEASE. HE IS A LEADER IN STUDYING THE
IMPLICATIONS OF SDB ON STROKE AND IS HEAD OF THE NEUROLOGY OUTPATIENT CLINICS
AND VICE-CHAIRMAN OF THE NEUROLOGY DEPARTMENT AT THE UNIVERSITY HOSPITAL,
ZURICH. DR. BASSETTI IS A MEMBER OF THE AMERICAN ACADEMY OF NEUROLOGY, THE
AMERICAN SLEEP DISORDERS ASSOCIATION, AND EX-MEMBER OF THE SCIENTIFIC COMMITTEE
OF THE EUROPEAN SLEEP RESEARCH SOCIETY. HE IS ALSO A MEMBER OF BOARDS OF THE
SWISS SOCIETIES OF NEUROLOGY, NEUROSCIENCE AND SLEEP AND SITS ON THE EDITORIAL
BOARDS OF EUROPEAN NEUROLOGY, JOURNAL OF SLEEP RESEARCH, SLEEP MEDICINE, AND
SWISS ARCHIVES OF NEUROLOGY AND PSYCHIATRY. DR. BASSETTI HAS PRODUCED OVER 100
PUBLICATIONS.
- -15-
MICHAEL COPPOLA, MD IS A LEADING PULMONARY CRITICAL CARE AND SLEEP DISORDERS
PHYSICIAN AND IS PRESIDENT OF SPRINGFIELD MEDICAL ASSOCIATES, A MULTI-SPECIALTY
MEDICAL GROUP IN SPRINGFIELD, MASSACHUSETTS. HE IS AN ATTENDING PHYSICIAN AT
BAYSTATE MEDICAL CENTER AND MERCY HOSPITAL IN SPRINGFIELD, MASSACHUSETTS AND A
FELLOW OF THE AMERICAN COLLEGE OF CHEST PHYSICIANS. DR. COPPOLA IS ALSO THE
MEDICAL DIRECTOR OF SLEEP AVENUE, A SLEEP-DISORDERED BREATHING SPECIALTY
COMPANY, AND ASSOCIATE CLINICAL PROFESSOR OF MEDICINE AT TUFTS UNIVERSITY SCHOOL
OF MEDICINE.
TERENCE M. DAVIDSON, MD, FACS IS PROFESSOR OF SURGERY IN THE DIVISION OF
OTOLARYNGOLOGY - HEAD AND NECK SURGERY AT THE UNIVERSITY OF CALIFORNIA, SAN
DIEGO, SCHOOL OF MEDICINE. HE IS SECTION CHIEF OF HEAD AND NECK SURGERY AT THE
VETERANS ADMINISTRATION SAN DIEGO HEALTHCARE SYSTEM AND ASSOCIATE DEAN FOR
CONTINUING MEDICAL EDUCATION AT UCSD. HE IS ALSO DIRECTOR OF THE UCSD HEAD AND
NECK SURGERY SLEEP CLINIC IN LA JOLLA, CALIFORNIA.
ANTHONY N. DEMARIA, MD IS PROFESSOR OF MEDICINE AND CHIEF, DIVISION OF
CARDIOLOGY AT THE UNIVERSITY OF CALIFORNIA, SAN DIEGO, SPECIALIZING IN CARDIAC
IMAGING TECHNIQUES, PARTICULARLY ECHOCARDIOGRAPHY. HE IS A DIPLOMAT IN THE
AMERICAN BOARD OF INTERNAL MEDICINE AND IS BOARD CERTIFIED BY THE SUBSPECIALTY
BOARD IN CARDIOVASCULAR DISEASE. HE IS PAST PRESIDENT OF BOTH THE AMERICAN
COLLEGE OF CARDIOLOGY AND THE AMERICAN SOCIETY OF ECHOCARDIOGRAPHY. DR. DEMARIA
IS CURRENTLY THE EDITOR-IN-CHIEF OF THE JOURNAL OF THE AMERICAN COLLEGE OF
CARDIOLOGY AND HAS AUTHORED OR CO-AUTHORED OVER 400 ARTICLES FOR MEDICAL
JOURNALS.
NEIL J. DOUGLAS, MD, DSC, FRCP, IS PROFESSOR OF RESPIRATORY AND SLEEP MEDICINE,
UNIVERSITY OF EDINBURGH, AN HONORARY CONSULTANT PHYSICIAN, ROYAL INFIRMARY OF
EDINBURGH, AND DIRECTOR OF THE SCOTTISH NATIONAL SLEEP LABORATORY. HE IS VICE
PRESIDENT OF THE ROYAL COLLEGE OF PHYSICIANS OF EDINBURGH, CHAIRMAN OF THE
BRITISH SLEEP FOUNDATION, 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.
NICHOLAS HILL, MD, IS PROFESSOR OF MEDICINE AT TUFTS UNIVERSITY SCHOOL OF
MEDICINE AND CHIEF, PULMONARY, CRITICAL CARE AND SLEEP DIVISION, TUFTS-NEW
ENGLAND MEDICAL CENTER IN BOSTON. HE IS A FELLOW AND CHAIR OF THE HOME CARE
NETWORK IN THE AMERICAN COLLEGE OF CHEST PHYSICIANS AND A MEMBER OF THE
LEADERSHIP COMMITTEE FOR THE PULMONARY CIRCULATION ASSEMBLY AND IS CHAIR ELECT
OF THE PROGRAM COMMITTEE FOR THE CRITICAL CARE ASSEMBLY OF THE AMERICAN THORACIC
SOCIETY. HE IS ALSO A MEMBER OF THE PLANNING AND PROGRAM REVIEW COMMITTEES OF
THE AMERICAN THORACIC SOCIETY. DR. HILL'S MAIN RESEARCH INTERESTS ARE IN THE
ACUTE AND CHRONIC APPLICATIONS OF NONINVASIVE POSITIVE PRESSURE VENTILATION FOR
TREATING LUNG DISEASE.
BARRY J. MAKE, MD, IS DIRECTOR, EMPHYSEMA CENTER AND PULMONARY REHABILITATION
NATIONAL JEWISH MEDICAL AND RESEARCH CENTER, AND PROFESSOR OF PULMONARY SCIENCES
AND CRITICAL CARE MEDICINE OF THE UNIVERSITY OF COLORADO SCHOOL OF MEDICINE. HE
HAS SERVED ON NUMEROUS NATIONAL AND INTERNATIONAL COMMITTEES FOR RESPIRATORY
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.
BARBARA PHILLIPS, MD, MSPH, FCCP, IS PROFESSOR OF PULMONARY, CRITICAL CARE, AND
SLEEP MEDICINE AT THE UNIVERSITY OF KENTUCKY COLLEGE OF MEDICINE. SHE DIRECTS
THE SLEEP CENTER, SLEEP CLINICS, AND SLEEP FELLOWSHIP AT THE SAMARITAN SLEEP
CENTER IN LEXINGTON, KENTUCKY. DR. PHILLIPS SERVES AS A BOARD MEMBER OF THE
AMERICAN ACADEMY OF SLEEP MEDICINE AND OF THE NATIONAL SLEEP FOUNDATION. 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.
- -16-
HELMUT TESCHLER, MD, HELMUT TESCHLER, MD, IS ASSOCIATE PROFESSOR OF MEDICINE AND
HEAD OF THE DEPARTMENT OF RESPIRATORY MEDICINE, HIGH DEPENDENCY UNIT, AND CENTRE
OF SLEEP MEDICINE AT THE RUHRLANDKLINIK, MEDICAL FACULTY, UNIVERSITY OF ESSEN,
GERMANY. HE IS A FELLOW OF EACH OF THE FOLLOWING ASSOCIATIONS: GERMAN
PNEUMOLOGY SOCIETY, AMERICAN THORACIC SOCIETY, EUROPEAN RESPIRATORY SOCIETY AND
AMERICAN SLEEP DISORDERS ASSOCIATION.
J. WOODROW WEISS, MD, IS ASSOCIATE PROFESSOR OF MEDICINE AND CO-CHAIRMAN OF THE
DIVISION OF SLEEP MEDICINE AT HARVARD MEDICAL SCHOOL AS WELL AS CHIEF,
PULMONARY, CRITICAL CARE, AND SLEEP MEDICINE, BETH ISRAEL DEACONESS MEDICAL
CENTER, BOSTON, MASSACHUSETTS. HE IS AN INTERNATIONALLY RECOGNIZED RESEARCHER
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.
ITEM 2 PROPERTIES
OUR PRINCIPAL EXECUTIVE OFFICES AND U.S. DISTRIBUTION FACILITIES, CONSISTING OF
APPROXIMATELY 144,000 SQUARE FEET, ARE LOCATED IN POWAY (NORTH SAN DIEGO
COUNTY), CALIFORNIA IN A BUILDING WE OWN. WE LEASE FACILITIES FOR OUR
MANUFACTURING OPERATIONS AT NORTH RYDE, IN SYDNEY, AUSTRALIA IN A 120,000 SQUARE
FOOT FACILITY AND SOME SMALLER NEARBY BUILDINGS AND IN CANOGA PARK, CALIFORNIA
IN A 35,500 SQUARE FOOT FACILITY.
SALES AND WAREHOUSING FACILITIES ARE LEASED IN ABINGDON, ENGLAND;
MOENCHENGLADBACH, GERMANY; LYON, FRANCE; BASEL, SWITZERLAND; TROLLHAETTAN,
SWEDEN; HELSINKI, FINLAND AND SINGAPORE. PRIOR TO MOVING OUR EXECUTIVE OFFICES
AND DISTRIBUTION FACILITIES TO POWAY, CALIFORNIA, WE LEASED SPACE FOR THIS
PURPOSE IN SAN DIEGO, CALIFORNIA. OUR LEASE ON THOSE PREMISES EXPIRES IN 2005.
IN AUGUST 2000, WE BEGAN SUBLEASING THOSE PREMISES TO ANOTHER COMPANY.
MAP'S PRINCIPAL OFFICES ARE LOCATED IN MUNICH GERMANY IN A 45,000 SQUARE FOOT
FACILITY LEASED BY US. MAP'S SUBSIDIARIES ALSO LEASE SALES AND WAREHOUSE
FACILITIES IN LYSS, SWITZERLAND; VILLACH, AUSTRIA AND S'HERTOGENBOSCH, THE
NETHERLANDS.
IN APRIL 2002, WE PURCHASED A 30-ACRE SITE IN SYDNEY, AUSTRALIA ON WHICH WE ARE
DEVELOPING A NEW MANUFACTURING FACILITY DUE FOR COMPLETION IN FISCAL 2004.
CONSTRUCTION OF THE NEW MANUFACTURING PLANT COMMENCED IN JANUARY 2003 AND IS
CURRENTLY EXPECTED TO BE COMPLETED IN THE FIRST HALF OF CALENDAR 2004.
ITEM 3 LEGAL PROCEEDINGS
THE COMPANY WAS ENGAGED IN LITIGATION RELATING TO THE ENFORCEMENT AND DEFENSE OF
CERTAIN OF ITS PATENTS DURING THE FISCAL YEAR.
- -17-
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. THE
RESPIRONICS COMPLAINT ALSO MADE THE UNIVERSITY OF SYDNEY A PARTY AS THE
UNIVERSITY OF SYDNEY IS THE ASSIGNEE OF ONE OF THE PATENTS IN SUIT; RESMED
LIMITED IS THE EXCLUSIVE LICENSEE OF THAT PATENT. THE TWO ACTIONS WERE COMBINED
AND ARE PROCEEDING IN THE WESTERN DISTRICT OF PENNSYLVANIA. IN JUNE 1996,
RESMED LIMITED FILED AN ADDITIONAL COMPLAINT AGAINST RESPIRONICS FOR
INFRINGEMENT OF A FOURTH RESMED PATENT, AND THAT COMPLAINT WAS CONSOLIDATED WITH
THE EARLIER ACTION.
THE COURT HAS GRANTED THREE PARTIAL SUMMARY JUDGMENT MOTIONS, FINDING THAT
RESPIRONICS DOES NOT INFRINGE THREE OF THE FOUR PATENTS AT ISSUE. IN DECEMBER
1999, IN RESPONSE TO THE COURT'S RULING ON RESPIRONICS, INC.'S 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 OF THE THIRD
PARTIAL SUMMARY JUDGMENT. ON SEPTEMBER 9, 2003, THE COURT VACATED THE SUMMARY
JUDGMENTS.
RESMED AND RESPIRONICS HAVE AGREED TO SETTLE THIS ACTION. RESMED AND
RESPIRONICS WILL DISMISS ALL CLAIMS IN THE ACTION 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 BY AUGUST 1, 2003 AND
RESMED WILL NOT ASSERT INTELLECTUAL PROPERTY CLAIMS AGAINST THE NEW MASK. IN
ADDITION, FISHER & PAYKEL MAY CONTINUE TO SELL ITS EXISTING MASKS OUTSIDE THE
UNITED STATES UNTIL OCTOBER 1, 2003, UNDER LICENSE FROM RESMED, UNTIL IT
INTRODUCES THE NEW VERSION THERE. RESMED HAS DISMISSED THE LAWSUIT 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
SEEKS 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 CHARGES RESPIRONICS WITH COPYING RESMED'S
PROPRIETARY MASK TECHNOLOGY, AND ALLEGES VIOLATION OF THE LANHAM ACT, TRADEMARK
AND TRADE DRESS INFRINGEMENT, AND COMMON LAW VIOLATIONS RELATING TO THE
APPEARANCE OF RESMED'S MASK PRODUCTS. RESMED SEEKS 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 US DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF CALIFORNIA.
- -18-
RESMED AND RESPIRONICS HAVE AGREED TO SETTLE BOTH LAWSUITS INVOLVED IN THE 2002
LITIGATION. RESMED AND RESPIRONICS WILL FILE A STIPULATION TO DISMISS ALL
CLAIMS IN THE ACTIONS 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.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
- --------------------------------------------------------------------------------
PART II
- --------------------------------------------------------------------------------
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock commenced trading on June 2, 1995 on the NASDAQ National Market
under the symbol "RESM". On September 30, 1999, we transferred our primary
listing to the New York Stock Exchange (NYSE) under the symbol "RMD". The
following table sets forth for the fiscal periods indicated the high and low
closing prices for the common stock as reported by the New York Stock Exchange.
- ------------------------------------------------------------------
2003 2002
High Low High Low
- ------------------------------------------------------------------
Quarter One, ended September 30 $33.63 $24.89 $60.95 $45.90
Quarter Two, ended December 31. 34.13 27.63 61.75 50.47
Quarter Three, ended March 31 . 33.87 29.67 53.15 36.36
Quarter Four, ended June 30 . . 41.95 32.00 40.34 24.70
- ------------------------------------------------------------------
AS OF SEPTEMBER 5, 2003, THERE WERE 76 HOLDERS OF RECORD OF OUR COMMON STOCK.
WE HAVE NOT PAID ANY CASH DIVIDENDS ON OUR COMMON STOCK SINCE OUR 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.
SALE OF UNREGISTERED SECURITIES
ON JUNE 20, 2001, WE ISSUED $150.0 MILLION OF 4% CONVERTIBLE SUBORDINATED NOTES
DUE 2006 TO INITIAL PURCHASERS INCLUDING MERRILL LYNCH 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.
- -19-
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. AT JUNE 30, 2003, 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.
THE NOTES ARE SUBJECT TO AN INDENTURE BETWEEN US AND AMERICAN STOCK TRANSFER &
TRUST COMPANY, AS TRUSTEE. THE NOTES ARE CONVERTIBLE, AT THE OPTION OF THE
HOLDER, AT ANY TIME ON OR PRIOR TO MATURITY, INTO SHARES OF OUR COMMON STOCK AT
A CONVERSION PRICE OF $60.60 PER SHARE, WHICH IS EQUAL TO A CONVERSION RATE OF
16.5017 SHARES PER $1,000 PRINCIPAL AMOUNT OF NOTES. THE CONVERSION PRICE IS
SUBJECT TO ADJUSTMENT. THE NOTES BEAR INTEREST AT 4% PER YEAR, PAYABLE
SEMIANNUALLY ON JUNE 20 AND DECEMBER 20 OF EACH YEAR.
WE MAY REDEEM SOME OR ALL OF THE NOTES AT ANY TIME BEFORE JUNE 20, 2004 AT A
REDEMPTION PRICE OF $1,000 PER $1,000 PRINCIPAL AMOUNT OF NOTES, PLUS ACCRUED
AND UNPAID INTEREST, IF ANY, TO THE REDEMPTION DATE, IF (A) THE CLOSING PRICE OF
OUR COMMON STOCK HAS EXCEEDED 150% OF THE CONVERSION PRICE THEN IN EFFECT FOR AT
LEAST 20 TRADING DAYS WITHIN A PERIOD OF 30 CONSECUTIVE TRADING DAYS ENDING ON
THE TRADING DAY BEFORE THE DATE OF MAILING OF THE PROVISIONAL REDEMPTION NOTICE
AND (B) A SHELF REGISTRATION STATEMENT COVERING RESALE OF THE NOTES AND THE
COMMON STOCK ISSUABLE UPON CONVERSION OF THE NOTES IS EFFECTIVE AND AVAILABLE
FOR USE AND EXPECTED TO REMAIN EFFECTIVE AND AVAILABLE FOR USE FOR THE 30 DAYS
FOLLOWING THE PROVISIONAL REDEMPTION DATE. UPON ANY SUCH PROVISIONAL
REDEMPTION, WE WILL MAKE AN ADDITIONAL PAYMENT IN CASH EQUAL TO $166.67 PER
$1,000 PRINCIPAL AMOUNT OF NOTES, LESS THE AMOUNT OF ANY INTEREST ACTUALLY PAID
ON THE NOTES BEFORE THE PROVISIONAL REDEMPTION DATE.
WE MAY ALSO REDEEM SOME OR ALL OF THE NOTES AT ANY TIME ON OR AFTER JUNE 20,
2004, BUT PRIOR TO JUNE 20, 2005, AT A REDEMPTION PRICE EQUAL TO 101.6% OF THE
PRINCIPAL AMOUNT OF NOTES REDEEMED AND AT ANY TIME AFTER JUNE 19, 2005, AT A
REDEMPTION PRICE EQUAL TO 100.8% OF THE PRINCIPAL AMOUNT OF NOTES REDEEMED, PLUS
IN ANY CASE, ACCRUED AND UNPAID INTEREST, IF ANY, TO THE REDEMPTION DATE, IF THE
CLOSING PRICE OF OUR COMMON STOCK HAS EXCEEDED 130% OF THE CONVERSION PRICE THEN
IN EFFECT FOR AT LEAST 20 TRADING DAYS WITHIN A PERIOD OF 30 CONSECUTIVE TRADING
DAYS ENDING ON THE TRADING DAY BEFORE THE DATE OF MAILING OF THE OPTIONAL
REDEMPTION NOTICE.
THE NOTES ARE GENERAL UNSECURED OBLIGATIONS AND ARE SUBORDINATED TO ALL OF OUR
EXISTING AND FUTURE SENIOR INDEBTEDNESS AND WILL BE EFFECTIVELY SUBORDINATED TO
ALL OF THE INDEBTEDNESS AND LIABILITIES OF OUR SUBSIDIARIES. THE INDENTURE
GOVERNING THE NOTES WILL NOT LIMIT THE INCURRENCE BY US OR OUR SUBSIDIARIES OF
SENIOR INDEBTEDNESS OR OTHER INDEBTEDNESS. THE NOTES MATURE ON JUNE 20, 2006.
- -20-
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) OF THE
SECURITIES ACT OF 1933, AS AMENDED. NO SOLICITATION WAS MADE IN CONNECTION WITH
THIS ISSUANCE, OTHER THAN NEGOTIATION OF THE ACQUISITION, AND WE OBTAINED
REPRESENTATIONS FROM THE RECIPIENT REGARDING HIS INVESTMENT INTENT, EXPERIENCE
AND SOPHISTICATION. THESE SHARES WERE SUBSEQUENTLY REGISTERED FOR RESALE UNDER
THE SECURITIES ACT (REGISTRATION NO. 335-100825), EFFECTIVE MARCH 26, 2003; AND
CONSEQUENTLY THE SHARES MAY BE RESOLD IN ACCORDANCE WITH THE PROSPECTUS THAT WAS
PART OF THE REGISTRATION STATEMENT BY THE SELLING STOCKHOLDER NAMED IN THE
PROSPECTUS OR IN A SUPPLEMENT TO THE PROSPECTUS.
OTHER SALES OF THE SHARES MAY ONLY BE MADE IN COMPLIANCE WITH THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND ALL OTHER APPLICABLE SECURITIES LAWS, OR
PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY OTHER APPLICABLE
SECURITIES LAWS.
ITEM 6 SELECTED FINANCIAL DATA
The following table summarizes certain selected consolidated financial data for, and as of the end of, each of
the fiscal years in the five-year period ended June 30, 2003. The data set forth below should be read in
conjunction with the Consolidated Financial Statements and related Notes included elsewhere in this Report.
- ----------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME DATA: Years Ended June 30
- ---------------------------------------------- ----------------------------------------------------------------
(In thousands, except per share data) 2003 2002 2001 2000 1999
--------------------- --------- --------- --------- --------
Net revenues . . . . . . . . . . . . . . . . . $ 273,570 $204,076 $155,156 $115,615 $88,627
Cost of sales. . . . . . . . . . . . . . . . . 100,483 70,827 50,377 36,991 29,416
- ---------------------------------------------- --------------------- --------- --------- --------- --------
Gross profit . . . . . . . . . . . . . . . . . 173,087 133,249 104,779 78,624 59,211
- ---------------------------------------------- --------------------- --------- --------- --------- --------
Selling, general and administrative expenses . 85,313 64,481 49,364 36,987 27,414
Research and development expenses. . . . . . . 20,534 14,910 11,146 8,499 6,542
In-process research and development write off. - 350 17,677 - -
Donations to Research Foundations. . . . . . . - 2,349 - - -
Provision for restructure. . . . . . . . . . . - - 550 - -
- ---------------------------------------------- --------------------- --------- --------- --------- --------
Total operating expenses . . . . . . . . . . . 105,847 82,090 78,737 45,486 33,956
- ---------------------------------------------- --------------------- --------- --------- --------- --------
Income from operations . . . . . . . . . . . . 67,240 51,159 26,042 33,138 25,255
- ---------------------------------------------- --------------------- --------- --------- --------- --------
Other income (expenses):
Interest income (expense), net . . . . . . . . (2,549) (3,224) (762) 801 779
Government grants. . . . . . . . . . . . . . . - - 72 279 833
Other, net . . . . . . . . . . . . . . . . . . 1,907 108 1,962 (52) (2,290)
Gain on extinguishment of debt . . . . . . . . 529 6,549 - - -
- ---------------------------------------------- --------------------- --------- --------- --------- --------
Total other income (expenses). . . . . . . . . (113) 3,433 1,272 1,028 (678)
- ---------------------------------------------- --------------------- --------- --------- --------- --------
Income before income taxes . . . . . . . . . . 67,127 54,592 27,314 34,166 24,577
- ---------------------------------------------- --------------------- --------- --------- --------- --------
Income taxes . . . . . . . . . . . . . . . . . 21,398 17,086 15,684 11,940 8,475
- ---------------------------------------------- --------------------- --------- --------- --------- --------
Net income . . . . . . . . . . . . . . . . . . $ 45,729 $ 37,506 $ 11,630 $ 22,226 $16,102
- ---------------------------------------------- --------------------- --------- --------- --------- --------
Basic earnings per share . . . . . . . . . . . $ 1.38 $ 1.17 $ 0.37 $ 0.74 $ 0.55
Diluted earnings per share . . . . . . . . . . $ 1.33 $ 1.10 $ 0.35 $ 0.69 $ 0.52
Basic shares outstanding . . . . . . . . . . . 33,054 32,174 31,129 30,153 29,416
Diluted shares outstanding . . . . . . . . . . 34,439 34,080 33,484 32,303 31,068
- ---------------------------------------------- --------------------- --------- --------- --------- --------
- -21
- -----------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA: As of June 30
- -----------------------------------------------------------------------------------------------
(In thousands) 2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------
Working capital. . . . . . . . . . . . . $ 191,322 $142,809 $144,272 $ 47,550 $32,529
Total assets . . . . . . . . . . . . . . 459,595 376,191 288,090 115,594 89,889
Long-term debt, less current maturities. 113,250 123,250 150,000 - -
Total stockholders' equity . . . . . . . 286,433 192,930 100,366 93,972 71,647
- -----------------------------------------------------------------------------------------------
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH SELECTED FINANCIAL DATA AND
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES, INCLUDED HEREIN.
WE DESIGN, MANUFACTURE AND MARKET EQUIPMENT FOR THE DIAGNOSIS AND TREATMENT OF
SLEEP DISORDERED BREATHING CONDITIONS, INCLUDING OBSTRUCTIVE SLEEP APNEA. OUR
NET REVENUES ARE GENERATED FROM THE SALE AND RENTAL OF OUR VARIOUS FLOW
GENERATOR DEVICES, NASAL MASK SYSTEMS, ACCESSORIES AND OTHER PRODUCTS, AND, TO A
LESSER EXTENT FROM ROYALTIES AND SALES OF CUSTOM MOTORS.
WE HAVE INVESTED SIGNIFICANT RESOURCES IN RESEARCH AND DEVELOPMENT AND PRODUCT
ENHANCEMENT. SINCE 1989, WE HAVE DEVELOPED SEVERAL INNOVATIONS TO THE ORIGINAL
CPAP DEVICE TO INCREASE PATIENT COMFORT AND TO IMPROVE EASE OF PRODUCT USE. WE
HAVE BEEN DEVELOPING PRODUCTS FOR AUTOMATED TREATMENT, TITRATION AND MONITORING
OF OSA, SUCH AS THE AUTOSET T AND AUTOSET SPIRIT FLOW GENERATORS.
BUSINESS ACQUISITIONS
1. FISCAL YEAR ENDED JUNE 30, 2003
JOHN STARK AND ASSOCIATES. ON JULY 24, 2002 WE ACQUIRED THE BUSINESS OF JOHN
STARK AND ASSOCIATES, OUR TEXAS REPRESENTATIVE, FOR TOTAL CONSIDERATION OF $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 OUR 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.
2. FISCAL YEAR ENDED JUNE 30, 2002
LABHARDT ACQUISITION. ON NOVEMBER 15, 2001, WE ACQUIRED ALL THE COMMON STOCK OF
LABHARDT AG, OUR SWISS DISTRIBUTOR, FOR TOTAL CASH CONSIDERATION, INCLUDING
ACQUISITION COSTS, OF $5.5 MILLION.
THE ACQUISITION HAS BEEN ACCOUNTED FOR AS A PURCHASE AND ACCORDINGLY, THE
RESULTS OF OPERATIONS OF LABHARDT AG HAVE BEEN INCLUDED IN OUR CONSOLIDATED
FINANCIAL STATEMENTS FROM 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.
- -22-
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 ACQUISITIONS 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.
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 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 RATE USED
IN THE ANALYSIS WAS 19% AND WAS BASED ON THE RISK PROFILE OF THE ACQUIRED
ASSETS.
PURCHASED RESEARCH AND DEVELOPMENT PROJECTS RELATED TO ELECTRICAL MOTOR SYSTEMS
USED IN OUR FLOW GENERATOR DEVICES AND OTHER MEDICAL AND DATA STORAGE EQUIPMENT.
KEY ASSUMPTIONS USED IN THE ANALYSIS INCLUDED GROSS MARGINS OF 34%. AS OF THE
DATE OF ACQUISITION, NEW MOTOR SYSTEMS FOR USE IN MEDICAL AND HEALTH
APPLICATIONS WERE EXPECTED TO BE COMPLETED AND COMMERCIALLY AVAILABLE BY 2004.
THESE PROJECTS HAVE ESTIMATED COSTS TO COMPLETE TOTALLING APPROXIMATELY $0.5
MILLION.
WE BELIEVE THAT THE ASSUMPTIONS USED TO VALUE THE ACQUIRED INTANGIBLE ASSETS
WERE REASONABLE AT THE TIME OF ACQUISITION. NO ASSURANCE CAN BE GIVEN, HOWEVER,
THAT THE UNDERLYING ASSUMPTIONS USED TO ESTIMATE EXPECTED PROJECT REVENUES,
DEVELOPMENT COSTS OR PROFITABILITY, OR EVENTS ASSOCIATED WITH SUCH PROJECTS,
WILL TRANSPIRE AS ESTIMATED. FOR THESE REASONS, AMONG OTHERS, ACTUAL RESULTS
MAY VARY FROM THE PROJECTED RESULTS.
3. FISCAL YEAR ENDED JUNE 30, 2001
MAP MEDIZIN-TECHNOLOGIE GMBH (MAP). ON FEBRUARY 16, 2001 OUR WHOLLY-OWNED
GERMAN SUBSIDIARY, RESMED BETEILIGUNGS GMBH, ACQUIRED ALL THE COMMON STOCK OF
MAP MEDIZIN-TECHNOLOGIE GMBH ("MAP'') FOR TOTAL CONSIDERATION, INCLUDING
ACQUISITION COSTS, OF $55.4 MILLION. MAP IS A LEADING GERMAN DESIGNER,
MANUFACTURER AND DISTRIBUTOR OF MEDICAL DEVICES FOR THE DIAGNOSIS AND TREATMENT
OF SDB, WITH A PARTICULAR FOCUS ON OSA.
THE ACQUISITION HAS BEEN ACCOUNTED FOR AS A PURCHASE AND ACCORDINGLY, THE
RESULTS OF OPERATIONS OF MAP HAVE BEEN INCLUDED IN OUR CONSOLIDATED FINANCIAL
STATEMENTS FROM FEBRUARY 16, 2001. AN AMOUNT OF $47.1 MILLION, REPRESENTING THE
EXCESS OF THE PURCHASE PRICE OVER THE FAIR VALUE OF THE NET IDENTIFIABLE ASSETS
ACQUIRED, HAS BEEN RECORDED AS GOODWILL.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT OF $17.7 MILLION WAS EXPENSED UPON
ACQUISITION OF MAP BECAUSE TECHNOLOGICAL FEASIBILITY OF THE PRODUCTS UNDER
DEVELOPMENT HAD NOT BEEN ESTABLISHED AND NO FURTHER ALTERNATIVE USES EXISTED.
THE VALUE OF IN-PROCESS TECHNOLOGY WAS CALCULATED BY IDENTIFYING RESEARCH
PROJECTS IN AREAS FOR WHICH TECHNOLOGICAL FEASIBILITY HAD NOT BEEN ESTABLISHED,
ESTIMATING THE COSTS TO DEVELOP THE PURCHASED IN-PROCESS TECHNOLOGY INTO
COMMERCIALLY VIABLE PRODUCTS, ESTIMATING THE RESULTING NET CASH FLOWS FROM SUCH
PRODUCTS, DISCOUNTING THE NET CASH FLOWS TO PRESENT VALUE, AND APPLYING THE
REDUCED PERCENTAGE COMPLETION OF THE PROJECTS THERETO. THE DISCOUNT RATES USED
IN THE ANALYSIS WERE BETWEEN 27% AND 33% AND WERE BASED ON THE RISK PROFILE OF
THE ACQUIRED ASSETS.
- -23-
ALL PURCHASED RESEARCH AND DEVELOPMENT PROJECTS RELATED TO MEDICAL EQUIPMENT FOR
THE TREATMENT OF SLEEP DISORDERED BREATHING, PRIMARILY FOR THE DEVELOPMENT OF
MASK INTERFACE SYSTEMS AND AUTOTITRATING DEVICES FOR THE TREATMENT OF
OBSTRUCTIVE SLEEP APNEA AND ASSOCIATED DISORDERS. KEY ASSUMPTIONS USED IN THE
ANALYSIS INCLUDED GROSS MARGINS RANGING FROM 70% TO 80%. AS OF THE DATE OF
ACQUISITION, THE MASK INTERFACE SYSTEMS WERE EXPECTED TO BE COMPLETED AND
COMMERCIALLY AVAILABLE IN 2002 AND VERSIONS OF THE AUTOTITRATING DEVICES BETWEEN
2003 AND 2005. THESE PROJECTS HAD ESTIMATED COSTS TO COMPLETE TOTALLING
APPROXIMATELY $2.0 MILLION.
WE BELIEVE THAT THE ASSUMPTIONS USED TO VALUE THE ACQUIRED INTANGIBLE ASSETS
WERE REASONABLE AT THE TIME OF ACQUISITION. NO ASSURANCE CAN BE GIVEN, HOWEVER,
THAT THE UNDERLYING ASSUMPTIONS USED TO ESTIMATE EXPECTED PROJECT REVENUES,
DEVELOPMENT COSTS OR PROFITABILITY, OR EVENTS ASSOCIATED WITH SUCH PROJECTS,
WILL TRANSPIRE AS ESTIMATED. FOR THESE REASONS, AMONG OTHERS, ACTUAL RESULTS
MAY VARY FROM THE PROJECTED RESULTS.
DURING THE DECEMBER 2001, WE PAID AN AMOUNT OF $1.4 MILLION AS FINAL
CONSIDERATION ASSOCIATED WITH THE PURCHASE OF MAP. THE AMOUNT HAS BEEN RECORDED
AS GOODWILL.
IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE. ON ACQUISITION OF MAP IN FEBRUARY
2001, WE RECOGNIZED AS AN EXPENSE A CHARGE OF $17.7 MILLION WITH RESPECT TO FIVE
IN-PROCESS RESEARCH AND DEVELOPMENT PROGRAMS UNDER ACTIVE DEVELOPMENT BY MAP AT
DATE OF ACQUISITION. THE FIVE PROJECTS WERE:
(I) A SINGLE-WALLED NASAL CUSHION MASK SYSTEM
(II) NEW HEADGEAR SYSTEM
(III) STANDALONE ACTIVE HUMIDIFIER
(IV) AN AUTOTITRATION CPAP DEVICE FOR TREATMENT OF OSA
(V) A NEW OSA DIAGNOSTIC DEVICE
THE STATUS OF EACH PROJECT AS AT JUNE 30, 2003 IS AS NOTED BELOW:
(I) SINGLE-WALLED NASAL CUSHION - THE NASAL CUSHION UNDER DEVELOPMENT BY MAP
ON ACQUISITION WAS DUE FOR RELEASE IN OCTOBER 2001. DELAYS IN THE DESIGN AND
MANUFACTURING PROCESS DELAYED THE RELEASE FOR SEVEN MONTHS, UNTIL APRIL 2002.
THE DELAY IN RELEASE OF THE PRODUCT WAS NOT SIGNIFICANT OVER ITS EXPECTED LIFE
CYCLE, AND HAS MADE NO SIGNIFICANT IMPACT ON THE NET RETURN ASSUMPTIONS USED IN
THE INITIAL IN-PROCESS RESEARCH AND DEVELOPMENT MODEL. SINCE RELEASE, THE
PRODUCT (NOW REFERRED TO AS THE PAPILLON) HAS MET OR EXCEEDED SALES FORECASTS.
(II) NEW HEADGEAR - THE NEW HEADGEAR PRODUCT LINE WAS WITHHELD TO COINCIDE
WITH THE RELEASE OF THE PAPILLON MASK SYSTEM IN APRIL 2002 AND SO WAS ALSO SEVEN
MONTHS BEHIND SCHEDULE IN PROJECTED RELEASE DATES. SINCE RELEASE, THE NEW
HEADGEAR SYSTEM HAS EXCEEDED ORIGINAL SALES PROJECTIONS AND CONTINUES TO MEET OR
EXCEED INITIAL EXPECTATIONS.
(III) STANDALONE ACTIVE HUMIDIFIER - DUE TO OTHER PRIORITIES AND TO THE
INTRODUCTION OF INTEGRATED HUMIDIFICATION FLOW GENERATOR DEVICES BY A NUMBER OF
COMPETITORS DURING FISCAL 2002, WE HAVE DELAYED THE STANDALONE HUMIDIFIER
PROJECT.
- -24-
GIVEN THE RELATIVELY SMALL REVENUE FORECAST OF THE PRODUCT LINE IN THE
IPR&D MODEL, THE FINANCIAL IMPACT OF THIS PROJECT IS NOT MATERIAL TO OUR
BUSINESS OR THE NET RETURN OF THE MAP ACQUISITION.
(IV) AUTOTITRATION CPAP DEVICE - THE MAIN PRODUCT DEVELOPMENT EFFORT OF MAP
SINCE ACQUISITION HAS BEEN THE COMPLETION OF THE AUTOTITRATION CPAP FLOW
GENERATOR SPECIFIED IN THE INITIAL IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE.
THIS PROJECT EXPERIENCED SOME DELAYS DUE TO THE COMPLEXITY OF THE SOFTWARE
ALGORITHM DEVELOPMENT PROCESS AND ASSOCIATED ELECTRONICS. MAP RELEASED THE
PRODUCT IN NOVEMBER 2002; SINCE RELEASE, SALES OF THE PRODUCT (NOW REFERRED TO
AS MAGELLAN) HAVE BEEN WITHIN EXPECTATIONS.
(V) OSA DIAGNOSTIC DEVICE - MAP'S NEW DIAGNOSTIC DEVICE REMAINS ON TARGET
FOR INITIAL MARKET RELEASE IN CALENDAR 2003, ALTHOUGH THE FORECASTED RELEASE
DATE OF MARCH 2003 WAS NOT ACHIEVED. WE REMAIN CONFIDENT IN THE CAPACITY OF THE
DIAGNOSTIC ALGORITHM TO SIGNIFICANTLY ENHANCE THE DIAGNOSTIC PROCESS, AND REMAIN
CONFIDENT IN THE POTENTIAL OF THE PRODUCT TO SIGNIFICANTLY IMPACT THE TREATMENT
AND DIAGNOSIS OF OBSTRUCTIVE SLEEP APNEA IN THE GERMAN MARKET.
AS AT JUNE 30, 2003, THREE OF THE FIVE PROGRAMS HAVE BEEN COMPLETED WITH THE
RELEASE OF THE PAPILLON MASK SYSTEM, UPGRADED HEADGEAR AND THE MAGELLAN
AUTOMATED FLOW GENERATOR DEVICE. ALL THREE PRODUCTS ARE GENERATING SALES
REVENUE CONSISTENT WITH OUR ORIGINAL EXPECTATIONS AND ASSUMPTIONS USED IN
CALCULATING THE IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE. WE EXPECT TO
RELEASE PRODUCTS WITH RESPECT TO BOTH REMAINING IN-PROCESS RESEARCH AND
DEVELOPMENT PROGRAMS OVER THE NEXT TWELVE-MONTH PERIOD, WHICH IS GENERALLY
CONSISTENT WITH OUR ORIGINAL EXPECTATIONS.
GIVEN THE SUCCESSFUL COMPLETION OF THE ABOVE RESEARCH PROGRAMS AND PERFORMANCE
OF THE ASSOCIATED PRODUCT LINES, WE REMAIN CONFIDENT IN THE ASSUMPTIONS USED TO
DETERMINE THE IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE AND, AS A RESULT, THE
NET RETURN OF THE MAP ACQUISITION.
TAX EXPENSE. OUR INCOME TAX RATE IS GOVERNED BY THE LAWS OF THE REGIONS IN
WHICH OUR INCOME IS RECOGNIZED. TO DATE, A SUBSTANTIAL PORTION OF OUR INCOME
HAS BEEN SUBJECT TO INCOME TAX IN AUSTRALIA WHERE THE STATUTORY RATE WAS 30% IN
FISCAL 2003 AND 2002; AND WAS 34% IN FISCAL 2001. DURING FISCAL 2003, 2002 AND
2001, OUR EFFECTIVE TAX RATE HAS FLUCTUATED BETWEEN APPROXIMATELY 31% AND
APPROXIMATELY 57%. THESE FLUCTUATIONS HAVE RESULTED FROM, AND FUTURE EFFECTIVE
TAX RATES WILL DEPEND UPON, NUMEROUS FACTORS, INCLUDING THE AMOUNT OF RESEARCH
AND DEVELOPMENT EXPENDITURES FOR WHICH A 125% AUSTRALIAN TAX DEDUCTION IS
AVAILABLE, THE LEVEL OF NON-DEDUCTIBLE EXPENSES, AND THE USE OF AVAILABLE NET
OPERATING LOSS CARRYFORWARD DEDUCTIONS AND OTHER TAX CREDITS OR BENEFITS
AVAILABLE TO US UNDER APPLICABLE TAX LAWS.
WE ACCOUNT FOR INCOME TAXES UNDER THE ASSET AND LIABILITY METHOD. DEFERRED TAX
ASSETS AND LIABILITIES ARE RECOGNIZED FOR THE FUTURE TAX CONSEQUENCES
ATTRIBUTABLE TO DIFFERENCES BETWEEN THE FINANCIAL STATEMENT CARRYING AMOUNTS OF
EXISTING ASSETS AND LIABILITIES AND THEIR RESPECTIVE TAX BASES. DEFERRED TAX
ASSETS AND LIABILITIES ARE MEASURED USING ENACTED TAX RATES EXPECTED TO APPLY TO
TAXABLE INCOME IN THE YEARS IN WHICH THOSE TEMPORARY DIFFERENCES ARE EXPECTED TO
BE RECOVERED OR SETTLED. THE EFFECT ON DEFERRED TAX ASSETS AND LIABILITIES OF A
CHANGE IN TAX RATES IS RECOGNIZED IN INCOME IN THE PERIOD THAT INCLUDES THE
ENACTMENT DATE.
- -25-
FISCAL YEAR ENDED JUNE 30 2003, COMPARED TO FISCAL YEAR ENDED JUNE 30 2002
NET REVENUES. NET REVENUE INCREASED FOR THE YEAR ENDED JUNE 30, 2003 TO $273.6
MILLION FROM $204.1 MILLION FOR THE YEAR ENDED JUNE 30, 2002, 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 US DOLLAR (INCREASING SALES BY
APPROXIMATELY $16.8 MILLION) AND INCLUSION OF SALES OF $6.5 MILLION FROM SERVO
MAGNETICS INC. (SMI), THE SUBSIDIARY WE ACQUIRED IN MAY 2002. NET REVENUE IN
NORTH AND LATIN AMERICA INCREASED TO $130.7 MILLION FROM $100.9 MILLION FOR THE
YEARS ENDED JUNE 30, 2003 AND 2002 RESPECTIVELY. THIS GROWTH PRIMARILY REFLECTS
INCREASED PUBLIC AND PHYSICIAN AWARENESS OF SLEEP-DISORDERED BREATHING. NET
REVENUE IN INTERNATIONAL MARKETS INCREASED TO $142.8 MILLION FROM $103.1 MILLION
FOR THE YEARS ENDED JUNE 30, 2003 AND 2002 RESPECTIVELY. INTERNATIONAL SALES
GROWTH FOR THE YEAR ENDED JUNE 30, 2003 REFLECTS ORGANIC GROWTH IN 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 US DOLLAR, AS THE MAJORITY OF MANUFACTURING LABOR
AND OVERHEAD COSTS ARE INCURRED IN AUSTRALIA AND, TO A LESSER EXTENT, THE
INCLUSION OF SMI'S MOTOR SALES WHICH ACHIEVE LOWER MARGINS COMPARED TO OUR
OVERALL GROSS MARGIN.
SELLING, 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 US 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.
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 US 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.
- -26-
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.
FISCAL YEAR ENDED JUNE 30 2002, COMPARED TO FISCAL YEAR ENDED JUNE 30 2001
NET REVENUES. NET REVENUE INCREASED FOR THE YEAR ENDED JUNE 30, 2002 TO $204.1
MILLION FROM $155.2 MILLION FOR THE YEAR ENDED JUNE 30,2001, AN INCREASE OF
$48.9 MILLION OR 32%. THIS INCREASE WAS PRIMARILY ATTRIBUTABLE TO AN INCREASE
IN UNIT SALES OF OUR FLOW GENERATORS AND ACCESSORIES IN BOTH DOMESTIC AND
INTERNATIONAL MARKETS AND THE INCLUSION OF INCREMENTAL SALES OF $17.2 MILLION
FROM MAP MEDIZIN-TECHNOLOGIE GMBH "MAP", THE SUBSIDIARY WE ACQUIRED IN FEBRUARY
2001.
NET REVENUE IN NORTH AND LATIN AMERICA INCREASED TO $100.9 MILLION FROM $79.9
MILLION FOR THE YEARS ENDED JUNE 30, 2002 AND 2001 RESPECTIVELY. THIS GROWTH
REFLECTS INCREASED PUBLIC AND PHYSICIAN AWARENESS OF SLEEP-DISORDERED BREATHING.
NET REVENUE IN OTHER INTERNATIONAL MARKETS INCREASED TO $103.1 MILLION FROM
$75.2 MILLION FOR THE YEARS ENDED JUNE 30, 2002 AND 2001 RESPECTIVELY.
INTERNATIONAL SALES GROWTH FOR THE YEAR ENDED JUNE 30, 2002 REFLECTS ORGANIC
GROWTH IN THE OVERALL SLEEP-DISORDERED BREATHING MARKET AND A FULL YEAR OF SALES
FROM OUR SUBSIDIARY, MAP.
SALES OF FLOW GENERATORS FOR THE YEAR ENDED JUNE 30, 2002 INCREASED BY 35%
COMPARED TO THE YEAR ENDED JUNE 30, 2001 INCLUDING INCREASES OF 22% IN NORTH AND
LATIN AMERICA AND 47% ELSEWHERE. SALES OF MASK SYSTEMS, MOTORS AND OTHER
ACCESSORIES INCREASED BY 28% INCLUDING INCREASES OF 30% IN NORTH AND LATIN
AMERICA AND 24% ELSEWHERE, FOR THE YEAR ENDED JUNE 30, 2002 COMPARED TO THE YEAR
ENDED JUNE 30, 2002. THESE INCREASES REFLECT GROWTH IN THE OVERALL
SLEEP-DISORDERED BREATHING MARKET AND OUR ACQUISITION OF MAP.
GROSS PROFIT. GROSS PROFIT INCREASED FOR THE YEAR ENDED JUNE 30, 2002 TO $133.2
MILLION FROM $104.8 MILLION FOR THE YEAR ENDED JUNE 30, 2001, AN INCREASE OF
$28.5 MILLION OR 27%. GROSS PROFIT AS A PERCENTAGE OF NET REVENUE DECLINED FOR
THE YEAR ENDED JUNE 30, 2002 TO 65% FROM 68% FOR THE YEAR ENDED JUNE 30, 2001.
THE DECLINE IN GROSS MARGINS REFLECTS A CHANGE IN GEOGRAPHICAL SALES MIX, OTHER
THAN MAP SALES, WITH A RELATIVELY HIGHER PERCENTAGE OF DOMESTIC SALES, WHICH
ACHIEVE LOWER MARGINS, COMPARED TO INTERNATIONAL MARKETS. THE DECLINE ALSO
REFLECTS THAT GROSS MARGINS IN OUR ACQUIRED SUBSIDIARY, MAP, ARE HISTORICALLY
LOWER THAN THE AVERAGE MARGINS ACHIEVED BY OUR COMPANY AS A WHOLE.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES INCREASED FOR THE YEAR ENDED JUNE 30, 2002 TO $64.5
MILLION FROM $49.4 MILLION FOR THE YEAR ENDED JUNE 30, 2001, AN INCREASE OF
$15.1 MILLION OR 31%. AS A PERCENTAGE OF NET REVENUE, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES FOR THE YEAR ENDED JUNE 30, 2002 WAS 32%, CONSISTENT
WITH THE YEAR ENDED JUNE 30, 2001. THE INCREASE IN SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES WAS PRIMARILY DUE TO THE ADDITION OF 98 PERSONNEL IN
SALES AND ADMINISTRATION AND OTHER EXPENSES RELATED TO THE INCREASE IN OUR
SALES. SG&A IN FISCAL 2002 ALSO INCLUDED A PROVISION OF $1.0 MILLION AGAINST AN
OUTSTANDING RECEIVABLE FROM AMERICAN HOME PATIENT INC. (AHP), A SIGNIFICANT
CUSTOMER, WHO FILED FOR CHAPTER 11 BANKRUPTCY PROTECTION ON JULY 31, 2002.
AHP'S FILING FOR CHAPTER 11 BANKRUPTCY PROTECTION IS NOT EXPECTED TO MATERIALLY
IMPACT OUR BUSINESS.
- -27-
PROVISION FOR RESTRUCTURE. IN THE YEAR ENDED JUNE 30, 2001, SUBSEQUENT TO THE
PURCHASE OF MAP, WE RESTRUCTURED MAP'S UNPROFITABLE FRENCH ACTIVITIES AND TOOK A
CHARGE OF $0.6 MILLION ASSOCIATED WITH THEIR CLOSURE. WE DID NOT INCUR ANY
RESTRUCTURE CHARGES FOR THE YEAR ENDED JUNE 30, 2002.
IN-PROCESS RESEARCH AND DEVELOPMENT WRITE-OFF. IN THE YEAR ENDED JUNE 30, 2002,
PURCHASED IN- PROCESS RESEARCH AND DEVELOPMENT OF $0.4 MILLION WAS EXPENSED UPON
THE ACQUISITION OF SMI BECAUSE TECHNOLOGICAL FEASIBILITY OF THE PRODUCTS UNDER
DEVELOPMENT HAD NOT BEEN ESTABLISHED AND NO FURTHER ALTERNATIVE USES EXISTED.
IN THE YEAR ENDED JUNE 30, 2001, PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
OF $17.7 MILLION WAS EXPENSED UPON ACQUISITION OF MAP.
DONATIONS TO FOUNDATIONS. IN THE YEAR ENDED JUNE 30, 2002, WE COMMITTED $2.3
MILLION TO THE ESTABLISHMENT OF TWO RESMED SLEEP DISORDERED BREATHING
FOUNDATIONS, ONE IN THE UNITED STATES AND ONE IN AUSTRALIA. THE FOUNDATIONS'
OVERALL MISSION IS TO EDUCATE BOTH THE PUBLIC AND PHYSICIANS ABOUT THE INHERENT
DANGERS OF UNTREATED SDB/OSA, PARTICULARLY AS IT RELATES TO CEREBROVASCULAR AND
CARDIOVASCULAR DISEASE.
RESEARCH AND DEVELOPMENT EXPENSES. RESEARCH AND DEVELOPMENT EXPENSES INCREASED
IN FISCAL 2002 TO $14.9 MILLION FROM $11.1 MILLION FOR THE YEAR ENDED JUNE 30,
2001, AN INCREASE OF $3.8 MILLION OR 34%. AS A PERCENTAGE OF NET REVENUE,
RESEARCH AND DEVELOPMENT EXPENSES INCREASED TO 7.3% FOR THE YEAR ENDED JUNE 30,
2002 COMPARED TO 7.2% IN FISCAL 2001. THE INCREASE IN RESEARCH AND DEVELOPMENT
EXPENSES WAS DUE TO INCREASED SALARIES ASSOCIATED WITH AN INCREASE IN PERSONNEL
AND INCREASED CHARGES FOR CONSULTING FEES, CLINICAL TRIALS AND TECHNICAL
ASSESSMENTS INCURRED TO FACILITATE DEVELOPMENT OF NEW PRODUCTS, AND ALSO
INCLUDES RESEARCH AND DEVELOPMENT EXPENDITURES OF MAP.
OTHER INCOME (EXPENSE). OTHER INCOME (EXPENSE), NET, INCREASED FOR THE YEAR
ENDED JUNE 30, 2002, TO A NET INCOME OF $3.4 MILLION FROM NET INCOME OF $1.3
MILLION FOR THE YEAR ENDED JUNE 30, 2001. THE INCREASE IN OTHER INCOME
PRIMARILY REFLECTS A GAIN ON EXTINGUISHMENT OF DEBT OF $6.5 MILLION PARTIALLY
OFFSET BY INCREASED NET INTEREST EXPENSE ASSOCIATED WITH OUR CONVERTIBLE NOTES
AND FOREIGN EXCHANGE LOSSES.
INCOME TAXES. OUR EFFECTIVE INCOME TAX RATE DECLINED TO APPROXIMATELY 31.3% FOR
THE YEAR ENDED JUNE 30, 2002, FROM APPROXIMATELY 57.4% FOR THE YEAR ENDED JUNE
30, 2001. THE LOWER TAX RATE IS A COROLLARY OF THE HIGH EFFECTIVE TAX RATE
IN FISCAL 2001. THE HIGH EFFECTIVE TAX RATE FOR THE YEAR ENDED JUNE 30, 2001 WAS
PRIMARILY DUE TO NON-DEDUCTIBLE EXPENSES OF $17.7 MILLION FOR AN IN-PROCESS
RESEARCH AND DEVELOPMENT WRITE-DOWN AND $0.6 MILLION IN RESTRUCTURING CHARGES.
TO A LESSER EXTENT, THE LOWER EFFECTIVE TAX RATE ALSO REFLECTS THE LOWERING OF
THE CORPORATE INCOME TAX RATE IN AUSTRALIA FROM 34% TO 30% EFFECTIVE
JULY 1, 2001. WE ALSO BENEFIT FROM A 125% TAX DEDUCTION ON RESEARCH AND
DEVELOPMENT EXPENDITURES IN AUSTRALIA, WHICH FURTHER REDUCES THE EFFECTIVE
TAX RATE ON AUSTRALIAN SOURCED INCOME.
LIQUIDITY AND CAPITAL RESOURCES
AS OF JUNE 30, 2003 AND JUNE 30, 2002, WE HAD CASH AND CASH EQUIVALENTS AND
MARKETABLE SECURITIES AVAILABLE-FOR-SALE OF APPROXIMATELY $121.0 MILLION AND
$92.8 MILLION, RESPECTIVELY. WORKING CAPITAL APPROXIMATED $191.3 MILLION AND
$142.8 MILLION AT JUNE 30, 2003 AND JUNE 30, 2002 RESPECTIVELY.
- -28-
INVENTORIES AT JUNE 30, 2003 INCREASED BY $8.2 MILLION OR 20% TO $49.4 MILLION
COMPARED TO JUNE 30, 2002 INVENTORIES OF $41.2 MILLION. THE PERCENTAGE INCREASE
IN INVENTORIES WAS LESS THAN THE 34% INCREMENTAL INCREASE IN REVENUES IN THE
YEAR ENDED JUNE 30, 2003 COMPARED TO THE YEAR ENDED JUNE 30, 2002. THE
IMPROVEMENT REFLECTS BETTER INVENTORY MANAGEMENT PRACTICES AND VERY STRONG
FOURTH QUARTER SALES. ACCOUNTS RECEIVABLE AT JUNE 30, 2003 WERE $56.7 MILLION,
AN INCREASE OF $10.5 MILLION OR 23% OVER THE JUNE 30, 2002 ACCOUNTS RECEIVABLE
BALANCE OF $46.2 MILLION. THIS INCREASE WAS LOWER THAN THE 34% INCREMENTAL
INCREASE IN REVENUES FOR THE YEAR ENDED JUNE 30, 2003 COMPARED TO THE YEAR ENDED
JUNE 30, 2002, REFLECTING IMPROVED COLLECTIONS. ACCOUNTS RECEIVABLE DAYS
OUTSTANDING IMPROVED TO 62 DAYS FOR THE QUARTER ENDED JUNE 30, 2003, COMPARED TO
72 DAYS FOR THE QUARTER ENDED JUNE 30, 2002. THE IMPROVEMENT 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.
DURING THE YEAR ENDED JUNE 30, 2003, WE GENERATED CASH OF $59.3 MILLION FROM
OPERATIONS, PRIMARILY AS A RESULT OF INCREASED PROFIT AND IMPROVED WORKING
CAPITAL MANAGEMENT, PARTICULARLY IN RESPECT OF INVENTORIES AND ACCOUNTS PAYABLE.
DURING THE YEAR ENDED JUNE 30, 2002 APPROXIMATELY $35.6 MILLION OF CASH WAS
GENERATED BY OPERATIONS.
CAPITAL EXPENDITURES FOR THE YEARS ENDED JUNE 30, 2003 AND 2002 AGGREGATED $25.6
MILLION AND $28.2 MILLION RESPECTIVELY. THE MAJORITY OF THE EXPENDITURES FOR
THE YEAR ENDED JUNE 30, 2003 RELATED TO THE CONSTRUCTION OF OUR NEW
MANUFACTURING FACILITY, ACQUISITION OF COMPUTER HARDWARE AND SOFTWARE INCLUDING
A DISASTER RECOVERY SYSTEM, AND PURCHASE OF PRODUCTION TOOLING AND EQUIPMENT.
THE CAPITAL EXPENDITURES IN THE YEAR ENDED JUNE 30, 2002 PRIMARILY REFLECTED THE
PURCHASE OF LAND IN SYDNEY DESCRIBED BELOW AND A COMPUTER SYSTEM UPGRADE. AS A
RESULT OF THESE CAPITAL EXPENDITURES, OUR BALANCE SHEET REFLECTS NET PROPERTY,
PLANT AND EQUIPMENT OF APPROXIMATELY $104.7 MILLION AT JUNE 30, 2003 COMPARED TO
$79.3 MILLION AT JUNE 30, 2002.
DURING 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, 2003, WE HAD CONVERTIBLE SUBORDINATED NOTES
OUTSTANDING OF $113.2 MILLION.
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.
WE MAY FROM TIME TO TIME SEEK TO RETIRE OUR CONVERTIBLE SUBORDINATED NOTES
THROUGH CASH PURCHASES AND/OR EXCHANGES FOR EQUITY SECURITIES IN OPEN MARKET
PURCHASES, PRIVATELY NEGOTIATED TRANSACTIONS, OR OTHERWISE. SUCH REPURCHASES OR
EXCHANGES, IF ANY, WILL DEPEND ON PREVAILING MARKET CONDITIONS, OUR LIQUIDITY
REQUIREMENTS, AND OUR CURRENT OR FUTURE CONTRACTUAL OBLIGATIONS, IF ANY, THAT
MAY DIRECTLY OR INDIRECTLY APPLY TO SUCH TRANSACTIONS.
ON JULY 3, 2001, WE ISSUED $30.0 MILLION IN OVER ALLOTMENTS FOR OUR 4%
CONVERTIBLE SUBORDINATED NOTES ISSUE, INCREASING THE TOTAL AMOUNT OF CONVERTIBLE
SUBORDINATED NOTES THEN OUTSTANDING TO $180.0 MILLION.
ON OCTOBER 2, 2001, WE PAID $1.4 MILLION AS FINAL CONSIDERATION ASSOCIATED WITH
THE PURCHASE OF MAP ON FEBRUARY 16, 2001. THE AMOUNT HAS BEEN RECORDED AS
GOODWILL.
- -29-
ON NOVEMBER 15, 2001, WE ACQUIRED ALL OF THE COMMON STOCK OF LABHARDT AG, OUR
SWISS DISTRIBUTOR, FOR TOTAL CASH CONSIDERATION, INCLUDING ACQUISITION COSTS, OF
$5.5 MILLION. THE ACQUISITION HAS BEEN ACCOUNTED FOR AS A PURCHASE AND,
ACCORDINGLY, THE RESULTS OF OPERATIONS OF LABHARDT AG HAVE BEEN INCLUDED IN OUR
CONSOLIDATED FINANCIAL STATEMENTS FROM NOVEMBER 15, 2001. THE EXCESS OF THE
PURCHASE PRICE OVER THE FAIR VALUE OF THE NET IDENTIFIABLE ASSETS ACQUIRED OF
$1.3 MILLION HAS BEEN RECORDED AS GOODWILL.
ON 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 EXPECT THE FIRST BUILDING, A MANUFACTURING
FACILITY, TO BE OPERATIONAL ON THIS SITE IN THE FIRST HALF OF CALENDAR 2004.
NEW RESEARCH AND DEVELOPMENT AND OFFICE FACILITIES ARE EXPECTED TO BE COMPLETED
IN 2005.
WE ESTIMATE THAT THE BUILDING COSTS WILL BE APPROXIMATELY $40.0 MILLION.
ON MAY 8, 2002, WE COMPLETED A SALE AND LEASEBACK TRANSACTION OF OUR AUSTRALIAN
FACILITY LOCATED AT NORTH RYDE IN SYDNEY, AUSTRALIA. THE PROPERTY WAS SOLD FOR
$18.5 MILLION WITH A THREE-YEAR LEASEBACK AND A FURTHER ONE-YEAR OPTION. THE
PROFIT BEFORE TAX ON SALE OF THE PROPERTY OF $5.5 MILLION WILL BE AMORTIZED OVER
THE LEASE PERIOD. THE CASH MADE AVAILABLE FROM THE SALE WILL BE UTILIZED FOR
THE CONSTRUCTION OF OUR NEW FACILITIES AT NORWEST BUSINESS PARK ALSO LOCATED IN
SYDNEY, AUSTRALIA.
ON MAY 14, 2002 WE ACQUIRED ALL OF THE COMMON STOCK OF SERVO MAGNETICS
INCORPORATED ("SMI") 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.
SUBSEQUENT TO THE ACQUISITION, WE REPAID ALL SMI'S EXISTING BANK LOANS TOTALING
$3.0 MILLION. THE ACQUISITION HAS BEEN ACCOUNTED FOR AS A PURCHASE AND
ACCORDINGLY, THE RESULTS OF OPERATIONS OF SMI HAVE BEEN INCLUDED IN OUR
CONSOLIDATED FINANCIAL STATEMENTS FROM MAY 14, 2002. THE EXCESS OF THE PURCHASE
PRICE OVER THE FAIR VALUE OF THE NET IDENTIFIABLE ASSETS ACQUIRED OF $1.9
MILLION HAS BEEN RECORDED AS GOODWILL.
ON JUNE 6, 2002, THE BOARD OF DIRECTORS AUTHORIZED US TO REPURCHASE UP TO 4.0
MILLION SHARES OF OUR OUTSTANDING COMMON STOCK. FOR THE YEARS ENDED JUNE 30,
2003 AND 2002, WE REPURCHASED 125,000 AND 290,000 SHARES AT A COST OF $3.5
MILLION AND $7.9 MILLION RESPECTIVELY. 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.
DETAILS OF CONTRACTUAL OBLIGATIONS AT JUNE 30, 2003 ARE AS FOLLOWS:
- ---------------------------------------------------------------------------------------------------------------
Payments Due by Period
- ---------------------------------------------------------------------------------------------------------------
In $000's Total Less than 1 year 1-3 years 4-5 years After 5 years
Long-Term Debt . . . . . . . . . . . . $ 113,250 - 113,250 - -
Operating Leases . . . . . . . . . . . 14,440 5,134 6,388 2,196 722
Capital Leases . . . . . . . . . . . . - - - - -
Unconditional Purchase Obligations (1) 29,967 29,967 - - -
- ---------------------------------------------------------------------------------------------------------------
Total Contractual Cash Obligations . . 157,657 $35,101 119,638 2,196 722
- ---------------------------------------------------------------------------------------------------------------
(1) The figure includes unconditional purchase obligations of $30.0 million
relating to the construction of our manufacturing and warehouse facility at
Norwest in Sydney, Australia.
Details of other commercial commitments at June 30, 2003 are as follows:
- ----------------------------------------------------------------------------------------------------------------
In $000's Total Amounts Amount of Commitment Expiration Per Period
Committed Less than 1 year 1-3 years 4-5 years Over 5 years
- ----------------------------------------------------------------------------------------------------------------
Lines of Credit. . . . . . . . $ 118 118 - - -
Standby Letters of Credit. . . - - - - -
Guarantees*. . . . . . . . . . 2,378 - 793 - 1,585
Standby Repurchase Obligations - - - - -
Other Commercial Commitments . - - - - -
- ----------------------------------------------------------------------------------------------------------------
Total Commercial Commitments . $2,496 118 793 - 1,585
- ----------------------------------------------------------------------------------------------------------------
*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.
- -30-
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 ALL OF OUR SHORT TERM AND LONG-TERM LIQUIDITY REQUIREMENTS
THROUGH A COMBINATION OF CASH ON HAND, CASH GENERATED FROM OPERATIONS AND A
$15.0 MILLION UNDRAWN REVOLVING LINE OF CREDIT WITH UNION BANK OF CALIFORNIA.
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 AND
CONTINGENCIES.
WE STATE THESE ACCOUNTING POLICIES IN THE NOTES TO THE FINANCIAL STATEMENTS AND
AT RELEVANT SECTIONS IN THIS DISCUSSION AND ANALYSIS. THE ESTIMATES ARE BASED
ON THE INFORMATION THAT IS CURRENTLY AVAILABLE TO US AND ON VARIOUS OTHER
ASSUMPTIONS THAT WE BELIEVE TO BE REASONABLE UNDER THE CIRCUMSTANCES. ACTUAL
RESULTS COULD VARY FROM THOSE ESTIMATES UNDER DIFFERENT ASSUMPTIONS OR
CONDITIONS.
WE BELIEVE THAT THE FOLLOWING CRITICAL ACCOUNTING POLICIES AFFECT THE MORE
SIGNIFICANT JUDGMENTS AND ESTIMATES USED IN THE PREPARATION OF OUR FINANCIAL
STATEMENTS:
(1) ALLOWANCE FOR DOUBTFUL ACCOUNTS. WE MAINTAIN AN ALLOWANCE FOR DOUBTFUL
ACCOUNTS FOR ESTIMATED LOSSES RESULTING FROM THE INABILITY OF OUR CUSTOMERS TO
MAKE REQUIRED PAYMENTS, WHICH RESULTS IN BAD DEBT EXPENSE. WE DETERMINE THE
ADEQUACY OF THIS ALLOWANCE BY CONTINUALLY EVALUATING INDIVIDUAL CUSTOMER
RECEIVABLES, CONSIDERING A CUSTOMER'S FINANCIAL CONDITION, CREDIT HISTORY AND
CURRENT ECONOMIC CONDITIONS. IF THE FINANCIAL CONDITION OF OUR CUSTOMERS WERE
TO DETERIORATE, RESULTING IN AN IMPAIRMENT OF THEIR ABILITY TO MAKE PAYMENTS,
ADDITIONAL ALLOWANCES MAY BE REQUIRED.
(2) INVENTORY ADJUSTMENTS. INVENTORIES ARE STATED AT LOWER OF COST OR MARKET
AND ARE DETERMINED BY THE FIRST-IN, FIRST-OUT METHOD. WE REVIEW THE COMPONENTS
OF INVENTORY ON A REGULAR BASIS FOR EXCESS, OBSOLETE AND IMPAIRED INVENTORY
BASED ON ESTIMATED FUTURE USAGE AND SALES. THE LIKELIHOOD OF ANY MATERIAL
INVENTORY WRITE-DOWNS IS DEPENDENT ON CHANGES IN COMPETITIVE CONDITIONS, NEW
PRODUCT INTRODUCTIONS BY US OR OUR COMPETITORS, OR RAPID CHANGES IN CUSTOMER
DEMAND.
(3) VALUATION OF GOODWILL, INTANGIBLE AND OTHER LONG-LIVED ASSETS. WE USE
ASSUMPTIONS IN ESTABLISHING THE CARRYING VALUE, FAIR VALUE AND ESTIMATED LIVES
OF OUR LONG-LIVED ASSETS AND GOODWILL. THE CRITERIA USED FOR THESE EVALUATIONS
INCLUDE MANAGEMENT'S ESTIMATE OF THE ASSET'S CONTINUING ABILITY TO GENERATE
POSITIVE INCOME FROM OPERATIONS AND POSITIVE CASH FLOW IN FUTURE PERIODS
COMPARED TO THE CARRYING VALUE OF THE ASSET, AS WELL AS THE STRATEGIC
SIGNIFICANCE OF ANY IDENTIFIABLE INTANGIBLE ASSET IN OUR BUSINESS OBJECTIVES.
IF ASSETS ARE CONSIDERED TO BE IMPAIRED, THE IMPAIRMENT RECOGNIZED IS THE AMOUNT
BY WHICH THE CARRYING VALUE OF THE ASSETS EXCEEDS THE FAIR VALUE OF THE ASSETS.
USEFUL LIVES AND RELATED AMORTIZATION OR DEPRECIATION EXPENSE ARE BASED ON OUR
ESTIMATE OF THE PERIOD THAT THE ASSETS WILL GENERATE REVENUES OR OTHERWISE BE
USED BY US.
FACTORS THAT WOULD INFLUENCE THE LIKELIHOOD OF A MATERIAL CHANGE IN OUR REPORTED
RESULTS INCLUDE SIGNIFICANT CHANGES IN THE ASSET'S ABILITY TO GENERATE POSITIVE
CASH FLOW, LOSS OF LEGAL OWNERSHIP OR TITLE TO THE ASSET, A SIGNIFICANT DECLINE
IN THE ECONOMIC AND COMPETITIVE ENVIRONMENT ON WHICH THE ASSET DEPENDS,
SIGNIFICANT CHANGES IN OUR STRATEGIC BUSINESS OBJECTIVES, UTILIZATION OF THE
ASSET, AND A SIGNIFICANT CHANGE IN THE ECONOMIC AND/OR POLITICAL CONDITIONS IN
CERTAIN COUNTRIES.
- -31-
(4) VALUATION OF DEFERRED INCOME TAXES. VALUATION ALLOWANCES ARE ESTABLISHED,
WHEN NECESSARY, TO REDUCE DEFERRED TAX ASSETS TO THE AMOUNT EXPECTED TO BE
REALIZED. THE LIKELIHOOD OF A MATERIAL CHANGE IN OUR EXPECTED REALIZATION OF
THESE ASSETS IS DEPENDENT ON FUTURE TAXABLE INCOME, OUR ABILITY TO DEDUCT TAX
LOSS CARRYFORWARDS AGAINST FUTURE TAXABLE INCOME, THE EFFECTIVENESS OF OUR TAX
PLANNING AND STRATEGIES AMONG THE VARIOUS TAX JURISDICTIONS THAT WE OPERATE IN,
AND ANY SIGNIFICANT CHANGES IN THE TAX TREATMENT RECEIVED ON OUR BUSINESS
COMBINATIONS.
(5) PROVISION FOR WARRANTY. WE PROVIDE FOR THE ESTIMATED COST OF PRODUCT
WARRANTIES AT THE TIME THE RELATED REVENUE IS RECOGNIZED. THE AMOUNT OF THIS
PROVISION IS DETERMINED BY USING A FINANCIAL MODEL, WHICH TAKES INTO
CONSIDERATION ACTUAL, HISTORICAL EXPENSES AND POTENTIAL RISKS ASSOCIATED WITH
OUR DIFFERENT PRODUCTS. THIS FINANCIAL MODEL IS THEN USED TO CALCULATE THE
FUTURE PROBABLE EXPENSES RELATED TO WARRANTY AND THE REQUIRED LEVEL OF THE
WARRANTY PROVISION. ALTHOUGH WE ENGAGE IN PRODUCT IMPROVEMENT PROGRAMS AND
PROCESSES, OUR WARRANTY OBLIGATION IS AFFECTED BY PRODUCT FAILURE RATES AND
COSTS INCURRED TO CORRECT THOSE PRODUCT FAILURES. SHOULD ACTUAL PRODUCT FAILURE
RATES OR ESTIMATED COSTS TO REPAIR THOSE PRODUCT FAILURES DIFFER FROM OUR
ESTIMATES, REVISIONS TO OUR ESTIMATED WARRANTY PROVISION WOULD BE REQUIRED.
(6) REVENUE RECOGNITION. REVENUE ON PRODUCT SALES IS RECORDED AT THE TIME OF
SHIPMENT, AT WHICH TIME TITLE TRANSFERS TO THE CUSTOMER. REVENUE ON PRODUCT
SALES WHICH REQUIRE CUSTOMER ACCEPTANCE IS NOT RECORDED UNTIL ACCEPTANCE IS
RECEIVED. ROYALTY REVENUE FROM LICENSE AGREEMENTS IS RECORDED WHEN EARNED.
SERVICE REVENUE RECEIVED IN ADVANCE FROM SERVICE CONTRACTS IS INITIALLY DEFERRED
AND RECOGNIZED RATABLY OVER THE LIFE OF THE SERVICE CONTRACT. REVENUE RECEIVED
IN ADVANCE FROM RENTAL UNIT CONTRACTS IS INITIALLY DEFERRED AND RECOGNIZED
RATABLY OVER THE LIFE OF THE RENTAL CONTRACT. REVENUE FROM SALE OF MARKETING
AND DISTRIBUTION RIGHTS IS INITIALLY DEFERRED AND RECOGNIZED RATABLY AS REVENUE
OVER THE LIFE OF THE CONTRACT. FREIGHT CHARGES BILLED TO CUSTOMERS ARE INCLUDED
IN REVENUE. ALL FREIGHT-RELATED EXPENSES ARE CHARGED TO COST OF SALES.
WE DO NOT OFFER A RIGHT OF RETURN OR OTHER RECOURSE WITH RESPECT TO THE SALE OF
OUR PRODUCTS OR SIMILARLY OFFER VARIABLE SALE PRICES FOR SUBSEQUENT EVENTS OR
ACTIVITIES. HOWEVER, AS PART OF OUR SALES PROCESSES WE MAY PROVIDE UPFRONT
DISCOUNTS FOR LARGE ORDERS, ONE TIME SPECIAL PRICING TO SUPPORT NEW PRODUCT
INTRODUCTIONS, SALES REBATES FOR CENTRALIZED PURCHASING ENTITIES OR PRICE-BREAKS
FOR REGULAR ORDER VOLUMES. THE COSTS OF ALL SUCH PROGRAMS ARE RECORDED AS AN
ADJUSTMENT TO REVENUE. IN OUR DOMESTIC SALES ACTIVITIES WE USE A NUMBER OF
MANUFACTURER REPRESENTATIVES TO SELL OUR PRODUCTS. THESE REPRESENTATIVES ARE
PAID A DIRECT COMMISSION ON SALES AND ACT AS AN INTEGRAL COMPONENT OF OUR
DOMESTIC SALES FORCE. WE DO NOT SELL OUR PRODUCTS TO THESE REPRESENTATIVES, AND
DO NOT RECOGNIZE REVENUE ON SUCH SHIPMENTS. OUR PRODUCTS ARE PREDOMINANTLY
THERAPY BASED EQUIPMENT AND REQUIRE NO INSTALLATION. AS SUCH, WE HAVE NO
SIGNIFICANT INSTALLATION OBLIGATIONS.
- -32-
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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. THE COMPANY INTENDS TO ADOPT SFAS NO. 150 EFFECTIVE JULY 1, 2003 AND DOES
NOT BELIEVE THAT THE ADOPTION WILL HAVE A MATERIAL IMPACT ON ITS 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 COMPANY IS CURRENTLY EVALUATING THE IMPACT OF THIS
STATEMENT.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET AND BUSINESS
RISKS
FOREIGN CURRENCY MARKET RISK
OUR FUNCTIONAL CURRENCY IS THE U.S. DOLLAR, ALTHOUGH WE TRANSACT BUSINESS IN
VARIOUS FOREIGN CURRENCIES, INCLUDING A NUMBER OF MAJOR EUROPEAN CURRENCIES AS
WELL AS THE AUSTRALIAN DOLLAR. WE HAVE SIGNIFICANT FOREIGN CURRENCY EXPOSURE
THROUGH BOTH OUR AUSTRALIAN MANUFACTURING ACTIVITIES AND INTERNATIONAL SALES
OPERATIONS.
WE HAVE ESTABLISHED A FOREIGN CURRENCY HEDGING PROGRAM USING PURCHASED CURRENCY
OPTIONS TO HEDGE FOREIGN-CURRENCY-DENOMINATED FINANCIAL ASSETS, LIABILITIES AND
MANUFACTURING EXPENDITURE. THE GOAL OF THIS HEDGING PROGRAM IS TO ECONOMICALLY
GUARANTEE OR LOCK IN THE EXCHANGE RATES ON OUR FOREIGN CURRENCY EXPOSURES
DENOMINATED IN EURO'S AND THE AUSTRALIAN DOLLAR. UNDER THIS PROGRAM, INCREASES
OR DECREASES IN OUR FOREIGN-CURRENCY-DENOMINATED FINANCIAL ASSETS, LIABILITIES,
AND FIRM COMMITMENTS ARE PARTIALLY OFFSET BY GAINS AND LOSSES ON THE HEDGING
INSTRUMENTS.
THE TABLE BELOW PROVIDES INFORMATION (IN US DOLLARS) ON OUR
FOREIGN-CURRENCY-DENOMINATED FINANCIAL ASSETS BY LEGAL ENTITY FUNCTIONAL
CURRENCY AS OF JUNE 30, 2003 (IN THOUSANDS):
- ----------------------------------------------------------------------------------------------------------
Foreign Currency Financial Assets
- ----------------------------------------------------------------------------------------------------------
Australian US dollar Euro Great Singapore NZ dollar Swedish Swiss Franc
dollar (AUD) (USD) Britain dollar Krona
Pound
- ----------------------------------------------------------------------------------------------------------
AUD
Functional
Currency
Entities:
Assets . . $- 29,609 9,849 1,782 1,547 961 648 128
Liability. $- (6,620) (69) (5,173) (926) (5) (20) -
Net Total. $- 22,989 9,780 (3,391) 621 956 628 128
USD
Functional
Currency
Entities:
Assets . . $23,711 - - - - - - -
Liability. $- - - - - - - -
Net Total. $23,711 - - - - - - -
Euro :
Functional
Currency
Entities:
Assets . . $ 9,726 69 - - - - - 1,251
Liability. $- (227) - - - - - -
- ----------------------------------------------------------------------------------------------------------
Net Total. $ 9,726 (158) - - - - - 1,251
- ----------------------------------------------------------------------------------------------------------
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, 2003. 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.
- -33-
- -------------------------------------------------------------------------------------------------------------------
Fair Value Assets/
(Liabilities)
- -------------------------------------------------------------------------------------------------------------------
(In thousands except exchange rates) FY 2004 FY 2005 Total As of June 30
2003 2002
- -------------------------------------------------------------------------------------------------------------------
Foreign Exchange Call Options
(Receive AUD$/Pay U.S.$)
Option amount. . . . . . . . . . . $66,000 $24,000 $90,000 $2,026 $2,341
Average contractual exchange rate. AUD $1 = USD 0.662 AUD $1=USD 0.647 AUD $1 = USD 0.658
(Receive AUD$/Pay Euro)
Option amount. . . . . . . . . . . $20,538 $13,928 $34,466 $552 $423
Average contractual exchange rate. AUD $1 = Euro 0.590 AUD $1 = Euro 0.580 AUD $1 = Euro 0.586
- -------------------------------------------------------------------------------------------------------------------
INTEREST RATE RISK
WE ARE EXPOSED TO RISK ASSOCIATED WITH CHANGES IN INTEREST RATES AFFECTING THE
RETURN ON OUR INVESTMENTS.
AT JUNE 30, 2003, WE MAINTAINED A PORTION OF OUR CASH AND CASH EQUIVALENTS IN
FINANCIAL INSTRUMENTS WITH ORIGINAL MATURITIES OF THREE MONTHS OR LESS. WE
MAINTAIN A SHORT-TERM INVESTMENT PORTFOLIO CONTAINING FINANCIAL INSTRUMENTS IN
WHICH THE MAJORITY HAVE ORIGINAL MATURITIES OF GREATER THAN THREE MONTHS BUT
LESS THAN TWELVE MONTHS. THESE FINANCIAL INSTRUMENTS, PRINCIPALLY COMPRISED OF
CORPORATE OBLIGATIONS, ARE SUBJECT TO INTEREST RATE RISK AND WILL DECLINE IN
VALUE IF INTEREST RATES INCREASE.
A HYPOTHETICAL 100 BASIS POINT CHANGE IN INTEREST RATES DURING THE TWELVE MONTHS
ENDED JUNE 30, 2003, WOULD HAVE RESULTED IN APPROXIMATELY $0.8 MILLION CHANGE IN
PRETAX INCOME. IN ADDITION, THE VALUE OF OUR MARKETABLE SECURITIES WOULD CHANGE
BY APPROXIMATELY $0.7 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 THE BELIEFS OF OUR MANAGEMENT AS
WELL AS ESTIMATES AND ASSUMPTIONS MADE BY, AND INFORMATION CURRENTLY AVAILABLE
TO OUR MANAGEMENT. THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," "ESTIMATE,"
"PLAN," "FUTURE" AND OTHER SIMILAR EXPRESSIONS GENERALLY IDENTIFY
FORWARD-LOOKING STATEMENTS, INCLUDING, IN PARTICULAR, STATEMENTS REGARDING THE
DEVELOPMENT AND APPROVAL OF NEW PRODUCTS AND PRODUCT APPLICATIONS, MARKET
EXPANSION, PENDING LITIGATION AND 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. 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 BELOW AND ELSEWHERE IN THIS
REPORT. IN ADDITION, IMPORTANT FACTORS TO CONSIDER IN EVALUATING SUCH
FORWARD-LOOKING STATEMENTS INCLUDE CHANGES OR DEVELOPMENTS IN SOCIAL, ECONOMIC,
MARKET, LEGAL OR REGULATORY CIRCUMSTANCES, CHANGES IN OUR BUSINESS OR GROWTH
STRATEGY OR AN INABILITY TO EXECUTE OUR STRATEGY DUE TO CHANGES IN OUR INDUSTRY
OR THE ECONOMY GENERALLY, THE EMERGENCE OF NEW OR GROWING COMPETITORS, THE
ACTIONS OR OMISSIONS OF THIRD PARTIES, INCLUDING SUPPLIERS, CUSTOMERS,
COMPETITORS AND GOVERNMENTAL AUTHORITIES, AND VARIOUS OTHER FACTORS. SHOULD ANY
ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR THE UNDERLYING
ESTIMATES OR ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY SIGNIFICANTLY
FROM THOSE EXPRESSED IN SUCH FORWARD-LOOKING STATEMENTS, AND THERE CAN BE NO
ASSURANCE THAT THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT WILL IN
FACT OCCUR.
- -34-
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 RESULT IN OUR PRODUCTS BECOMING NONCOMPETITIVE OR OBSOLETE.
ADDITIONALLY, SOME OF OUR COMPETITORS HAVE GREATER FINANCIAL, RESEARCH AND
DEVELOPMENT, MANUFACTURING AND MARKETING RESOURCES THAN WE DO. THE PAST SEVERAL
YEARS HAVE SEEN A TREND TOWARDS CONSOLIDATION IN THE HEALTH CARE INDUSTRY AND IN
THE MARKETS FOR OUR PRODUCTS. INDUSTRY CONSOLIDATION COULD RESULT IN GREATER
COMPETITION IF OUR COMPETITORS COMBINE THEIR RESOURCES OR IF OUR COMPETITORS ARE
ACQUIRED BY OTHER COMPANIES WITH GREATER RESOURCES THAN OURS. THIS COMPETITION
COULD INCREASE PRESSURE ON US TO REDUCE THE SELLING PRICES OF OUR PRODUCTS OR
COULD CAUSE US TO INCREASE OUR SPENDING ON RESEARCH AND DEVELOPMENT AND SALES
AND MARKETING. IF WE ARE UNABLE TO DEVELOP INNOVATIVE NEW PRODUCTS, MAINTAIN
COMPETITIVE PRICING, AND OFFER PRODUCTS THAT CONSUMERS PERCEIVE TO BE AS
RELIABLE AS THOSE OF OUR COMPETITORS, OUR SALES OR GROSS MARGINS COULD DECREASE
WHICH WOULD HARM OUR BUSINESS.
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.
- -35-
ANY INABILITY TO EFFECTIVELY MARKET OUR PRODUCTS OUTSIDE THE U.S. COULD IMPACT
OUR PROFITABILITY. APPROXIMATELY HALF OUR REVENUES ARE GENERATED OUTSIDE THE
U.S., IN APPROXIMATELY 60 DIFFERENT COUNTRIES. MANY OF THESE COUNTRIES HAVE
UNIQUE REGULATORY, MEDICAL, AND BUSINESS ENVIRONMENTS. IF WE ARE UNABLE TO
MARKET OUR PRODUCTS EFFECTIVELY 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 RECENT 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 52%, 51%, AND 48% OF OUR NET REVENUES IN FISCAL YEARS 2003, 2002
AND 2001, 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 DOMESTIC OPERATIONS, INCLUDING:
-FLUCTUATIONS IN CURRENCY EXCHANGE RATES;
-TARIFFS AND OTHER TRADE BARRIERS;
-COMPLIANCE WITH FOREIGN MEDICAL DEVICE MANUFACTURING REGULATIONS;
-REDUCTION IN THIRD PARTY PAYER REIMBURSEMENT FOR OUR PRODUCTS;
-INABILITY TO OBTAIN IMPORT LICENSES;
-CHANGES IN TRADE POLICIES AND IN DOMESTIC AND FOREIGN TAX POLICIES;
-POSSIBLE CHANGES IN EXPORT OR IMPORT RESTRICTIONS; AND
-THE MODIFICATION OR INTRODUCTION OF OTHER GOVERNMENTAL POLICIES WITH
POTENTIALLY ADVERSE EFFECTS.
FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES COULD RESULT IN DECLINES IN OUR
REPORTED SALES AND EARNINGS. 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.
- -36-
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 OR THAT THE REIMBURSEMENT AMOUNT WILL BE ADEQUATE OR, IF
ADEQUATE, WILL NOT SUBSEQUENTLY BE REDUCED. FOR EXAMPLE, IN SOME MARKETS, SUCH
AS SPAIN, FRANCE AND GERMANY, GOVERNMENT REIMBURSEMENT IS CURRENTLY AVAILABLE
FOR PURCHASE OR RENTAL OF OUR PRODUCTS BUT IS SUBJECT TO CONSTRAINTS SUCH AS
PRICE CONTROLS OR UNIT SALES LIMITATIONS. IN OTHER MARKETS, SUCH AS AUSTRALIA
AND THE UNITED KINGDOM, THERE IS CURRENTLY LIMITED OR NO REIMBURSEMENT FOR
DEVICES THAT TREAT SLEEP-DISORDERED BREATHING 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 HEALTHCARE PROGRAM SUCH AS THE MEDICARE AND MEDICAID
PROGRAMS. THE GOVERNMENT HAS INTERPRETED THIS LAW BROADLY TO APPLY TO THE
MARKETING AND SALES ACTIVITIES OF MANUFACTURERS AND DISTRIBUTORS LIKE US. MANY
STATES 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.
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/OR CRIMINAL CHARGES AGAINST US AND OUR
EMPLOYEES.
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 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.
- -37-
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 IN WHICH WE USE SINGLE-SOURCE SUPPLIERS. WE CANNOT ASSURE YOU THAT A
REPLACEMENT SUPPLIER WOULD BE ABLE TO CONFIGURE ITS COMPONENTS FOR OUR DEVICES
ON A TIMELY BASIS OR, IN THE ALTERNATIVE, THAT WE WOULD BE ABLE TO RECONFIGURE
OUR DEVICES TO INTEGRATE THE REPLACEMENT PART. A REDUCTION OR STOPPAGE IN
SUPPLY WHILE A REPLACEMENT SUPPLIER RECONFIGURES ITS COMPONENTS, OR WHILE WE
RECONFIGURE OUR 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, 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.
- -38-
WE ARE CURRENTLY ENGAGED IN LITIGATION RELATING TO THE ENFORCEMENT AND DEFENSE
OF A NUMBER OF OUR PATENTS. ADDITIONAL 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.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATION FOR A VARIETY OF
REASONS. OUR OPERATING RESULTS HAVE, FROM TIME TO TIME, FLUCTUATED ON A
QUARTERLY BASIS AND MAY BE SUBJECT TO SIMILAR FLUCTUATIONS IN THE FUTURE. THESE
FLUCTUATIONS MAY RESULT FROM A NUMBER OF FACTORS, INCLUDING:
-THE INTRODUCTION OF NEW PRODUCTS BY US OR OUR COMPETITORS;
-THE GEOGRAPHIC MIX OF PRODUCT SALES;
-THE SUCCESS OF OUR MARKETING EFFORTS IN NEW REGIONS;
-CHANGES IN THIRD PARTY REIMBURSEMENT;
-TIMING OF REGULATORY CLEARANCES AND APPROVALS;
-TIMING OF ORDERS BY DISTRIBUTORS;
-EXPENDITURES INCURRED FOR RESEARCH AND DEVELOPMENT;
-COMPETITIVE PRICING IN DIFFERENT REGIONS;
-SEASONALITY;
-THE COST AND EFFECT OF PROMOTIONAL AND MARKETING PROGRAMS;
-THE EFFECT OF FOREIGN CURRENCY TRANSACTION GAINS OR LOSSES; AND
-OTHER ACTIVITIES OF OUR COMPETITORS.
- -39-
IF A NATURAL OR MAN-MADE DISASTER STRIKES OUR MANUFACTURING FACILITIES, WE WILL
BE UNABLE TO MANUFACTURE OUR PRODUCTS FOR A SUBSTANTIAL AMOUNT OF TIME AND OUR
SALES WILL DECLINE. 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
THREE OF OUR SEVEN 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.
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
a) Index to Consolidated Financial Statements
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F1
Consolidated Balance Sheets as of June 30, 2003 and 2002 . . . . . . . . . . . . . . . . . . . . F2
Consolidated Statements of Income for the years ended June 30, 2003, 2002 and 2001 . . . . . . . F3
Consolidated Statements of Stockholders' Equity for the years ended June 30, 2003, 2002 and 2001 F4
Consolidated Statements of Cash Flows for the years ended June 30, 2003, 2002 and 2001 . . . . . F5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . F6
Schedule II - Valuation and Qualifying Accounts and Reserves . . . . . . . . . . . . . . . . . . 47
B) SUPPLEMENTARY DATA
- -40-
QUARTERLY FINANCIAL INFORMATION (UNAUDITED) - THE QUARTERLY RESULTS FOR THE
YEARS ENDED JUNE 30, 2003 AND 2002 ARE SUMMARIZED BELOW (IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS):
- --------------------------------------------------------------------------------------
2003 First Second Third Fourth Fiscal
Quarter Quarter Quarter Year Year
- --------------------------------------------------------------------------------------
Net revenues $58,586 $65,293 $68,996 $80,695 $273,570
Gross profit 37,697 41,839 43,187 50,364 173,087
Net income 9,571 10,384 12,250 13,524 45,729
Basic earnings per share $ 0.29 $ 0.31 $ 0.37 $ 0.41 $ 1.38
Diluted earnings per share $ 0.28 $ 0.30 $ 0.35 $ 0.39 $ 1.33
- --------------------------------------------------------------------------------------
2002 First Second Third Fourth Fiscal
. . . . . . . . . . . . . . Quarter Quarter Quarter Year Year
- --------------------------------------------------------------------------------------
Net revenues $46,129 $48,924 $52,776 $56,247 $204,076
Gross profit 30,833 31,837 33,771 36,808 133,249
Net income (loss) 8,538 8,779 10,379 9,810 37,506
Basic earnings (loss) per share $ 0.27 $ 0.27 $ 0.32 $ 0.30 $ 1.17
Diluted earnings (loss) per share $ 0.25 $ 0.26 $ 0.31 $ 0.29 $ 1.10
- --------------------------------------------------------------------------------------
NB. PER SHARE AMOUNTS FOR EACH QUARTER ARE COMPUTED INDEPENDENTLY, AND, DUE TO
THE COMPUTATION FORMULA, THE SUM OF THE FOUR QUARTERS MAY NOT EQUAL THE YEAR.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
ITEM 9A CONTROLS AND 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 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,
2003. BASED ON THE FOREGOING, OUR CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL
OFFICER CONCLUDED THAT OUR DISCLOSURE CONTROLS AND PROCEDURES WERE EFFECTIVE AT
THE REASONABLE ASSURANCE LEVEL.
THERE HAS BEEN NO CHANGE IN OUR INTERNAL CONTROLS OVER FINANCIAL REPORTING
DURING OUR MOST RECENT FISCAL QUARTER THAT HAS MATERIALLY AFFECTED, OR IS
REASONABLY LIKELY TO MATERIALLY AFFECT, OUR INTERNAL CONTROLS OVER FINANCIAL
REPORTING.
- -41-
- --------------------------------------------------------------------------------
PART III
- --------------------------------------------------------------------------------
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
INCORPORATED BY REFERENCE TO OUR DEFINITIVE PROXY STATEMENT FOR OUR NOVEMBER 13,
2003, MEETING OF STOCKHOLDERS, WHICH WILL BE FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION WITHIN 120 DAYS AFTER JUNE 30, 2003.
ITEM 11 EXECUTIVE COMPENSATION
INCORPORATED BY REFERENCE TO OUR DEFINITIVE PROXY STATEMENT FOR OUR NOVEMBER 13,
2003, MEETING OF STOCKHOLDERS, WHICH WILL BE FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION WITHIN 120 DAYS AFTER JUNE 30, 2003.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
INCORPORATED BY REFERENCE TO OUR DEFINITIVE PROXY STATEMENT FOR OUR NOVEMBER 13,
2003, MEETING OF STOCKHOLDERS, WHICH WILL BE FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION WITHIN 120 DAYS AFTER JUNE 30, 2003.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NO MATERIAL TRANSACTIONS.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
INCORPORATED BY REFERENCE TO OUR DEFINITIVE PROXY STATEMENT FOR OUR NOVEMBER 13,
2003, MEETING OF STOCKHOLDERS, WHICH WILL BE FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION WITHIN 120 DAYS AFTER JUNE 30, 2003.
PART IV
ITEM 15 EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, SCHEDULE, AND REPORTS
ON FORM 8-K
A. THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
THE CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE OF THE COMPANY AND ITS
CONSOLIDATED SUBSIDIARIES ARE SET FORTH IN THE "INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS" UNDER ITEM 8 OF THIS REPORT.
2. EXHIBITS
2.1 SALE AND ASSIGNMENT AGREEMENT, DATED AS OF FEBRUARY 16, 2001 BETWEEN
RESMED INC, RESMED BETEILIGUNGS GMBH AND THE SHAREHOLDERS OF MAP
MEDIZIN-TECHNOLOGIE GMBH (1)
- -42-
2.2 AGREEMENT AND PLAN OF MERGER DATED AS OF MAY 14, 2002 AMONG RESMED INC.,
SERVO MAGNETICS ACQUISITION INC., SERVO MAGNETICS INCORPORATED AND MR
LESLIE HOFFMAN (7)
3.1 CERTIFICATE OF INCORPORATION OF REGISTRANT, AS AMENDED (2)
3.2 BY-LAWS OF REGISTRANT (2)
4.1 FORM OF CERTIFICATE EVIDENCING SHARES OF COMMON STOCK (2)
4.2 RIGHTS AGREEMENT DATED AS OF APRIL 23, 1997 (3)
4.3 INDENTURE DATED AS OF JUNE 20, 2001, BETWEEN RESMED INC AND AMERICAN
STOCK TRANSFER & TRUST COMPANY (6)
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 (6)
4.5 REGISTRATION RIGHTS AGREEMENT DATED AS OF MAY 14, 2002 BETWEEN RESMED
INC., AND MR LESLIE HOFFMAN (7)
10.1 1995 STOCK OPTION PLAN (2)
10.2 1997 EQUITY PARTICIPATION PLAN (4)
10.3 LICENSING AGREEMENT BETWEEN THE UNIVERSITY OF SYDNEY AND RESMED LIMITED
DATED MAY 17, 1991, AS AMENDED (2)
10.4 CONSULTING AGREEMENT BETWEEN COLIN SULLIVAN AND RESMED LIMITED
EFFECTIVE FROM 1 JANUARY 1998 (5)
10.5 LOAN AGREEMENT BETWEEN THE AUSTRALIAN TRADE COMMISSION AND RESMED
LIMITED DATED MAY 3, 1994 (2)
10.6 LEASE FOR 10121 CARROLL CANYON ROAD, SAN DIEGO CA 92131-1109, USA (5)
10.7 SALE AND LEASEBACK AGREEMENTS FOR 97 WATERLOO RD, NORTH RYDE, AUSTRALIA
(6)
10.8 EMPLOYMENT AGREEMENT DATED AS OF MAY 14, 2002, BETWEEN SERVO MAGNETICS
ACQUISITION INC., AND MR LESLIE HOFFMAN (7)
10.9 AGREEMENT FOR THE PURCHASE OF LOT 6001, NORWEST BOULEVARDE, NORWEST
BUSINESS PARK, BAULKHAM HILLS, AUSTRALIA (7)
11.1 COMPUTATION OF EARNINGS PER COMMON SHARE
21.1 SUBSIDIARIES OF THE REGISTRANT
23.1 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF
SARBANES-OXLEY ACT
31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF
SARBANES-OXLEY ACT
32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT
(1) INCORPORATED BY REFERENCE TO THE REGISTRANT'S REPORT ON FORM 8-K DATED
MARCH 2, 2001.
(2) INCORPORATED BY REFERENCE TO THE REGISTRANT'S REGISTRATION STATEMENT ON
FORM S-1 (NO. 33-91094) DECLARED EFFECTIVE ON JUNE 1, 1995.
(3) INCORPORATED BY REFERENCE TO THE REGISTRANT'S REGISTRATION STATEMENT ON
FORM 8-A12G FILED ON APRIL 25, 1997.
(4) INCORPORATED BY REFERENCE TO THE REGISTRANT'S 1997 PROXY STATEMENT.
(5) INCORPORATED BY REFERENCE TO THE REGISTRANT'S ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 1998.
(6) INCORPORATED BY REFERENCE TO THE REGISTRANT'S ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2001.
(7) INCORPORATED BY REFERENCE TO THE REGISTRANT'S ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2002.
B. REPORTS ON FORM 8-K
NONE.
- -43-
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
RESMED INC:
WE HAVE AUDITED THE ACCOMPANYING CONSOLIDATED BALANCE SHEETS OF RESMED INC AND
SUBSIDIARIES AS OF JUNE 30, 2003, AND 2002, AND THE RELATED CONSOLIDATED
STATEMENTS OF INCOME, STOCKHOLDERS' EQUITY, AND CASH FLOWS FOR EACH OF THE YEARS
IN THE THREE-YEAR PERIOD ENDED JUNE 30, 2003. THESE CONSOLIDATED FINANCIAL
STATEMENTS ARE THE RESPONSIBILITY OF THE COMPANY'S MANAGEMENT. OUR
RESPONSIBILITY IS TO EXPRESS AN OPINION ON THESE CONSOLIDATED FINANCIAL
STATEMENTS BASED ON OUR AUDITS.
WE CONDUCTED OUR AUDITS IN ACCORDANCE WITH AUDITING STANDARDS GENERALLY ACCEPTED
IN THE UNITED STATES OF AMERICA. THOSE STANDARDS REQUIRE THAT WE PLAN AND
PERFORM THE AUDIT TO OBTAIN REASONABLE ASSURANCE ABOUT WHETHER THE FINANCIAL
STATEMENTS ARE FREE OF MATERIAL MISSTATEMENT. AN AUDIT INCLUDES EXAMINING, ON A
TEST BASIS, EVIDENCE SUPPORTING THE AMOUNTS AND DISCLOSURES IN THE FINANCIAL
STATEMENTS. AN AUDIT ALSO INCLUDES ASSESSING THE ACCOUNTING PRINCIPLES USED AND
SIGNIFICANT ESTIMATES MADE BY MANAGEMENT, AS WELL AS EVALUATING THE OVERALL
FINANCIAL STATEMENT PRESENTATION. WE BELIEVE THAT OUR AUDITS PROVIDE A
REASONABLE BASIS FOR OUR OPINION.
IN OUR OPINION, THE CONSOLIDATED FINANCIAL STATEMENTS REFERRED TO ABOVE PRESENT
FAIRLY, IN ALL MATERIAL RESPECTS, THE FINANCIAL POSITION OF RESMED INC. AND
SUBSIDIARIES AS OF JUNE 30, 2003 AND 2002, AND THE RESULTS OF THEIR OPERATIONS
AND THEIR CASH FLOWS FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED JUNE
30, 2003, IN CONFORMITY WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE
UNITED STATES OF AMERICA.
AS DISCUSSED IN NOTE 7 TO THE CONSOLIDATED FINANCIAL STATEMENTS, THE COMPANY HAS
ADOPTED THE PROVISIONS OF SFAS NO. 42 "ACCOUNTING FOR GOODWILL AND OTHER
INTANGIBLE ASSETS" AND CHANGED ITS METHOD OF ACCOUNTING FOR GOODWILL IN 2002
ACCORDINGLY.
/S/ KPMG LLP
- -----------------------
SAN DIEGO, CALIFORNIA
AUGUST 8, 2003
F1
RESMED INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
June 30, June 30,
---------- ----------
2003 2002
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 114,491 $ 72,860
Marketable securities available for sale (note 4). . . . . . . . . . . . . . . . . . 6,533 19,979
Accounts receivable, net of allowance for doubtful accounts of $2,474 and $1,938 at
June 30, 2003 and 2002, respectively . . . . . . . . . . . . . . . . . . . . . . . . 56,694 46,199
Inventories, net (note 5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,386 41,173
Deferred income taxes (note 12). . . . . . . . . . . . . . . . . . . . . . . . . . . 8,301 9,289
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . . . . 6,500 4,213
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241,905 193,713
---------- ----------
Property, plant and equipment, net of accumulated depreciation of $45,379
and $31,084 at June 30, 2003 and 2002 respectively (note 6). . . . . . . . . . . . . 104,687 79,279
Patents, net of accumulated amortization of $3,437 and $1,862
at June 30, 2003 and 2002, respectively. . . . . . . . . . . . . . . . . . . . . . . 3,745 2,653
Goodwill (note 7). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,160 92,536
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,098 8,010
---------- ----------
Total non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217,690 182,478
---------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 459,595 $ 376,191
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,368 $ 11,605
Accrued expenses (note 8). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,140 15,273
Deferred Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,355 3,636
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,408 6,905
Payable for property purchase. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 11,552
Current portion of deferred profit on sale-leaseback . . . . . . . . . . . . . . . . 2,312 1,933
---------- ----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,583 50,904
Non-current liabilities:
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,210 5,402
Convertible subordinated notes (note 9). . . . . . . . . . . . . . . . . . . . . . . 113,250 123,250
Deferred profit on sale-leaseback. . . . . . . . . . . . . . . . . . . . . . . . . . 2,119 3,705
---------- ----------
Total non-current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,579 132,357
---------- ----------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173,162 183,261
---------- ----------
Commitments and contingencies (notes 15 and 18). . . . . . . . . . . . . . . . . . . - -
Stockholders' equity: (note 10)
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 33,370,885 at June 30, 2003 and 32,818,160 at June 30, 2002 . 134 132
(excluding 415,365 and 290,047 shares held as Treasury Stock respectively)
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,432 94,153
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,372 114,643
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,415) (7,873)
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . 29,910 (8,125)
---------- ----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286,433 192,930
---------- ----------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . $ 459,595 $ 376,191
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F2
RESMED INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
June 30, June 30, June 30,
2003 2002 2001
Net revenues. . . . . . . . . . . . . . . . . . . . . . $273,570 $204,076 $155,156
Cost of sales . . . . . . . . . . . . . . . . . . . . . 100,483 70,827 50,377
- ---------------------------------------------------------------------------------------
Gross profit. . . . . . . . . . . . . . . . . . . . . . 173,087 133,249 104,779
- ---------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative . . . . . . . . . . 85,313 64,481 49,364
Research and development. . . . . . . . . . . . . . . . 20,534 14,910 11,146
In-process research and development write off (note 19) - 350 17,677
Donations to Research Foundations . . . . . . . . . . . - 2,349 -
Provision for restructure . . . . . . . . . . . . . . . - - 550
- ---------------------------------------------------------------------------------------
Total operating expenses. . . . . . . . . . . . . . . . 105,847 82,090 78,737
- ---------------------------------------------------------------------------------------
Income from operations. . . . . . . . . . . . . . . . . 67,240 51,159 26,042
- ---------------------------------------------------------------------------------------
Other income (expenses):
Gain on extinguishment of debt. . . . . . . . . . . . . 529 6,549 -
Interest income (expense), net. . . . . . . . . . . . . (2,549) (3,224) (762)
Government grants . . . . . . . . . . . . . . . . . . . - - 72
Other, net (note 11). . . . . . . . . . . . . . . . . . 1,907 108 1,962
- ---------------------------------------------------------------------------------------
Total other income (expenses), net. . . . . . . . . . . (113) 3,433 1,272
- ---------------------------------------------------------------------------------------
Income before income taxes. . . . . . . . . . . . . . . 67,127 54,592 27,314
Income taxes (note 12). . . . . . . . . . . . . . . . . 21,398 17,086 15,684
- ---------------------------------------------------------------------------------------
Net income. . . . . . . . . . . . . . . . . . . . . . . $ 45,729 $ 37,506 $ 11,630
=======================================================================================
Basic earnings per share. . . . . . . . . . . . . . . . $ 1.38 $ 1.17 $ 0.37
Diluted earnings per share. . . . . . . . . . . . . . . $ 1.33 $ 1.10 $ 0.35
Basic shares outstanding. . . . . . . . . . . . . . . . 33,054 32,174 31,129
Diluted shares outstanding. . . . . . . . . . . . . . . 34,439 34,080 33,484
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F2
RESMED INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Common Stock Paid-in Treasury Stock Retained Comprehensive
Shares Amount Capital Shares Amount Earnings Income (loss) Total Income
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2000 . . 30,594 $ 122 $ 41,495 $ - $65,507 $(13,152) $93,972
Common stock issued on
exercise of options
(note 10) 885 4 7,939 - - 7,943
Tax benefit from exercise
of options . . . . . . . . - - 3,241 - - 3,241
Comprehensive income:
Net income . . . . . . . . - - - 11,630 - 11,630 $ 11,630
Other comprehensive income:
Foreign currency translation
adjustments. . - - - - (16,420) (16,420) (16,420)
Comprehensive income/(loss) ------------
$(4,790)
============
BALANCE, JUNE 30, 2001 . . 31,479 126 52,675 - 77,137 (29,572) 100,366
Common stock issued on
exercise of options
(note 10) 776 3 9,778 - 9,781
Common stock issued for
acquisitions . . . . . . . 853 3 24,781 24,784
Treasury stock purchases . (290) (7,873) (7,873)
Tax benefit from exercise
of options . . . . . . . . - - 6,919 - 6,919
Comprehensive income:
Net income . . . . . . . . 37,506 37,506 37,506
Other comprehensive income
Foreign currency
translation adjustments. . 21,342 21,342 21,342
Unrealized gains on
marketable securities. . . 105 105 105
Comprehensive income/(loss). . . . ------------
$58,953
============
BALANCE, JUNE 30, 2002 . . 33,108 132 94,153 (290) (7,873) 114,643 (8,125) 192,930
Common stock issued on
exercise of options
(note10) 678 2 9,029 9,031
Treasury stock purchases . (125) (3,542) (3,542)
Tax benefit from exercise
of options . . . . . . . . 4,250 4,250
Comprehensive income:
Net income . . . . . . . . 45,729 45,729 45,729
Other comprehensive income
Foreign currency
translation adjustments. . 38,131 38,131 38,131
Unrealized losses on
marketable securities. . . (96) (96) (96)
.. . . . . . . ------------
Comprehensive income/(loss). . . . . . . $83,764
============
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2003 . . 33,786 $ 134 $107,432 (415) ($11,415) $ 160,372 $29,910 $286,433
- --------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F4
RESMED INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
(IN THOUSANDS)
June 30, June 30, June 30,
2003 2002 2001
--------- ---------- ----------
Cash flows from operating activities:
Net income:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,729 $ 37,506 $ 11,630
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . 12,583 9,972 7,015
Goodwill amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 1,430
Provision for service warranties . . . . . . . . . . . . . . . . . . . . . . . . . 332 (85) 174
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,002 (6,153) (2,306)
Foreign currency options revaluation . . . . . . . . . . . . . . . . . . . . . . . (2,117) 767 2,766
Deferred borrowing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 834 1,254 -
Tax benefit from stock options exercised . . . . . . . . . . . . . . . . . . . . . 4,250 6,919 3,241
Gain on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . (529) (6,549) -
Release of profit on sale of building. . . . . . . . . . . . . . . . . . . . . . . (2,012) - -
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (162) -
Restructuring provision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 550
Purchased in-process research and development write off. . . . . . . . . . . . . . - 350 17,677
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,102) (9,765) (5,531)
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,988) (7,063) (8,130)
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . . . (2,333) 4,785 (3,470)
Accounts payable, accrued expenses and other liabilities . . . . . . . . . . . . . 9,635 3,864 4,474
--------- ---------- ----------
Net cash provided by operating activities. . . . . . . . . . . . . . . . . . . . . 59,284 35,640 29,520
--------- ---------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment . . . . . . . . . . . . . . . . . . . . (25,635) (28,185) (27,459)
Purchases of marketable securities - available for sale. . . . . . . . . . . . . . (13,544) (393,072) (79,879)
Proceeds from sale of marketable securities - available for sale . . . . . . . . . 26,845 435,871 20,976
Patent registration costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,560) (1,720) (516)
Business acquisitions, net of cash acquired of $nil (2002: $812) (note 16) . . . . (300) (13,871) (55,070)
Purchases of non-trading investments . . . . . . . . . . . . . . . . . . . . . . . (1,625) (3,987) (2,602)
Proceeds from sale of non-trading investments. . . . . . . . . . . . . . . . . . . 3,936 - -
Proceeds from sale-leaseback . . . . . . . . . . . . . . . . . . . . . . . . . . . - 18,500 -
--------- ---------- ----------
Net cash provided by (used in) investing activities. . . . . . . . . . . . . . . . (11,883) 13,536 (144,550)
--------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net. . . . . . . . . . . . . . . . . . . . 9,031 9,781 7,943
Repayment of borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (3,022) (82,854)
Proceeds from borrowings, net of borrowing costs . . . . . . . . . . . . . . . . . - 28,402 213,937
Redemption of borrowings, convertible note . . . . . . . . . . . . . . . . . . . . (9,217) (48,454) -
Purchases of treasury stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,542) (7,873) -
Installment payment for property purchase. . . . . . . . . . . . . . . . . . . . . (12,609) - -
--------- ---------- ----------
Net cash provided by (used in) financing activities. . . . . . . . . . . . . . . . (16,337) (21,166) 139,026
--------- ---------- ----------
Effect of exchange rate changes on cash. . . . . . . . . . . . . . . . . . . . . . 10,567 4,714 (2,110)
--------- ---------- ----------
Net increase in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . 41,631 32,724 21,886
Cash and cash equivalents at beginning of the year . . . . . . . . . . . . . . . . 72,860 40,136 18,250
--------- ---------- ----------
Cash and cash equivalents at end of the year . . . . . . . . . . . . . . . . . . . 114,491 $ 72,860 $ 40,136
========= ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,308 $ 18,328 $ 12,908
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,530 6,557 1,439
--------- ---------- ----------
Fair value of assets acquired in acquisitions. . . . . . . . . . . . . . . . . . . - $ 9,060 $ 33,139
Liabilities assumed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (5,872) (24,821)
Goodwill on acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 36,279 47,119
Fair value of shares issued for acquisitions . . . . . . . . . . . . . . . . . . . - (24,784) -
--------- ---------- ----------
Cash paid for acquisition, including acquisition costs . . . . . . . . . . . . . . $ 300 $ 14,683 $ 55,437
========= ========== ==========
See accompanying notes to consolidated financial statements.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F5
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(1) ORGANIZATION AND BASIS OF PRESENTATION
RESMED INC. (THE "COMPANY"), IS A DELAWARE CORPORATION FORMED IN MARCH 1994
AS A HOLDING COMPANY FOR THE RESMED GROUP. THE COMPANY, THROUGH ITS
SUBSIDIARIES, DESIGNS, MANUFACTURES AND MARKETS DEVICES FOR THE EVALUATION AND
TREATMENT OF SLEEP-DISORDERED BREATHING, PRIMARILY OBSTRUCTIVE SLEEP APNEA. THE
COMPANY'S MANUFACTURING OPERATIONS ARE LOCATED IN AUSTRALIA, GERMANY, AND THE
UNITED STATES OF AMERICA. MAJOR DISTRIBUTION AND SALES SITES ARE LOCATED IN THE
UNITED STATES OF AMERICA, GERMANY, FRANCE, UNITED KINGDOM, SWITZERLAND,
AUSTRALIA AND SWEDEN.
(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.
THE PREPARATION OF FINANCIAL STATEMENTS IN CONFORMITY WITH ACCOUNTING
PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA REQUIRES
MANAGEMENT ESTIMATES AND ASSUMPTIONS THAT AFFECT AMOUNTS REPORTED IN THE
FINANCIAL STATEMENTS AND ACCOMPANYING NOTES. ACTUAL RESULTS COULD DIFFER FROM
MANAGEMENT'S ESTIMATES.
(B) REVENUE RECOGNITION
REVENUE ON PRODUCT SALES IS 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 AND DISTRIBUTION RIGHTS
IS INITIALLY DEFERRED AND RECOGNIZED RATABLY AS REVENUE OVER THE LIFE OF THE
CONTRACT. FREIGHT CHARGES BILLED TO CUSTOMERS ARE INCLUDED IN REVENUE. ALL
FREIGHT-RELATED EXPENSES ARE CHARGED TO COST OF SALES.
WE DO NOT OFFER A RIGHT OF RETURN OR OTHER RECOURSE WITH RESPECT TO THE SALE OF
OUR PRODUCTS OR SIMILARLY OFFER VARIABLE SALE PRICES FOR SUBSEQUENT EVENTS OR
ACTIVITIES. HOWEVER, AS PART OF OUR SALES PROCESSES WE MAY PROVIDE UPFRONT
DISCOUNTS FOR LARGE ORDERS, ONE TIME SPECIAL PRICING TO SUPPORT NEW PRODUCT
INTRODUCTIONS, SALES REBATES FOR CENTRALIZED PURCHASING ENTITIES OR PRICE-BREAKS
FOR REGULAR ORDER VOLUMES. THE COSTS OF ALL SUCH PROGRAMS ARE RECORDED AS AN
ADJUSTMENT TO REVENUE. IN OUR DOMESTIC SALES ACTIVITIES WE USE A NUMBER OF
MANUFACTURER REPRESENTATIVES TO SELL OUR PRODUCTS. THESE REPRESENTATIVES ARE
PAID A DIRECT COMMISSION ON SALES AND ACT AS AN INTEGRAL COMPONENT OF OUR
DOMESTIC SALES FORCE. WE DO NOT SELL OUR PRODUCTS TO THESE REPRESENTATIVES AND
DO NOT RECOGNIZE REVENUE ON SUCH SHIPMENTS. OUR PRODUCTS ARE PREDOMINANTLY
THERAPY-BASED EQUIPMENT AND REQUIRE NO INSTALLATION. AS SUCH, WE HAVE NO
SIGNIFICANT INSTALLATION OBLIGATIONS.
F6
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(C) CASH AND CASH EQUIVALENTS
CASH EQUIVALENTS INCLUDING CERTIFICATES OF DEPOSIT, COMMERCIAL PAPER
AND OTHER HIGHLY LIQUID INVESTMENTS ARE STATED AT COST, WHICH APPROXIMATES
MARKET. INVESTMENTS WITH ORIGINAL MATURITIES OF 90 DAYS OR LESS ARE CONSIDERED
TO BE CASH EQUIVALENTS FOR PURPOSES OF THE CONSOLIDATED STATEMENTS OF CASH
FLOWS.
(D) INVENTORIES
INVENTORIES ARE STATED AT THE LOWER OF COST, DETERMINED PRINCIPALLY BY THE
FIRST-IN, FIRST-OUT METHOD, OR NET REALIZABLE VALUE. THE COMPANY REVIEWS AND
PROVIDES FOR ANY PRODUCT OBSOLESCENCE IN ITS 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.
(F) PATENTS
THE REGISTRATION COSTS FOR NEW PATENTS ARE CAPITALIZED AND AMORTIZED
OVER THE ESTIMATED USEFUL LIFE OF THE PATENT, GENERALLY FIVE YEARS. IN THE
EVENT OF A PATENT BEING SUPERSEDED, THE UNAMORTIZED COSTS ARE WRITTEN OFF
IMMEDIATELY.
(G) GOODWILL
IN JULY 2001, THE FINANCIAL ACCOUNTING STANDARDS BOARD ("FASB") ISSUED STATEMENT
OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") 142, GOODWILL AND OTHER INTANGIBLE
ASSETS. AS ALLOWED UNDER THE STANDARD, THE COMPANY 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, THE COMPANY 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.
THE COMPANY CONDUCTED ITS ANNUAL REVIEW FOR GOODWILL IMPAIRMENT IN JULY 2003.
IN CONDUCTING OUR REVIEW OF GOODWILL IMPAIRMENT, THE COMPANY 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 DISCOUNTED CASH FLOWS AND INVOLVED A TWO
STEP PROCESS AS FOLLOWS:
F7
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(G) GOODWILL (CONTINUED)
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.
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) GOVERNMENT GRANTS
GOVERNMENT GRANTS REVENUE IS RECOGNIZED WHEN EARNED. GRANTS HAVE BEEN
OBTAINED BY THE COMPANY FROM THE AUSTRALIAN FEDERAL GOVERNMENT TO SUPPORT THE
CONTINUED DEVELOPMENT OF THE COMPANY'S PROPRIETARY POSITIVE AIRWAY PRESSURE
TECHNOLOGY AND TO ASSIST DEVELOPMENT OF EXPORT MARKETS. GRANTS HAVE BEEN
RECOGNIZED IN THE AMOUNT OF $NIL, $NIL, AND $72,000 FOR THE YEARS ENDED JUNE 30,
2003, 2002 AND 2001, RESPECTIVELY.
(I) FOREIGN CURRENCY
THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY'S NON-U.S.
SUBSIDIARIES, WHOSE FUNCTIONAL CURRENCIES ARE OTHER THAN U.S. DOLLARS, ARE
TRANSLATED INTO U.S. DOLLARS FOR FINANCIAL REPORTING PURPOSES. ASSETS AND
LIABILITIES OF NON-U.S. SUBSIDIARIES WHOSE FUNCTIONAL CURRENCIES ARE OTHER THAN
THE U.S. DOLLAR ARE TRANSLATED AT YEAR END EXCHANGE RATES, AND REVENUE AND
EXPENSE TRANSACTIONS ARE TRANSLATED AT AVERAGE EXCHANGE RATES FOR THE YEAR.
CUMULATIVE TRANSLATION ADJUSTMENTS ARE RECOGNIZED AS PART OF COMPREHENSIVE
INCOME, AS DESCRIBED IN NOTE 17, AND ARE INCLUDED IN ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS) IN THE CONSOLIDATED BALANCE SHEET UNTIL SUCH TIME AS
THE SUBSIDIARY IS SOLD OR SUBSTANTIALLY OR COMPLETELY LIQUIDATED. GAINS AND
LOSSES ON TRANSACTIONS, DENOMINATED IN OTHER THAN THE FUNCTIONAL CURRENCY OF THE
ENTITY, ARE REFLECTED IN OPERATIONS.
(J) RESEARCH AND DEVELOPMENT
RESEARCH AND DEVELOPMENT COSTS ARE EXPENSED IN THE PERIOD INCURRED.
F8
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(K) EARNINGS PER SHARE
THE WEIGHTED AVERAGE SHARES USED TO CALCULATE BASIC EARNINGS PER SHARE WERE
33,054,000, 32,174,000, AND 31,129,000 FOR THE YEARS ENDED JUNE 30, 2003, 2002
AND 2001, RESPECTIVELY. THE DIFFERENCE BETWEEN BASIC EARNINGS PER SHARE AND
DILUTED EARNINGS PER SHARE IS ATTRIBUTABLE TO THE IMPACT OF OUTSTANDING STOCK
OPTIONS DURING THE PERIODS PRESENTED. STOCK OPTIONS HAD THE EFFECT OF
INCREASING THE NUMBER OF SHARES USED IN THE CALCULATION (BY APPLICATION OF THE
TREASURY STOCK METHOD) BY 1,385,000, 1,906,000 AND 2,355,000 FOR THE YEARS ENDED
JUNE 30, 2003, 2002 AND 2001, RESPECTIVELY.
STOCK OPTIONS OF 1,408,000, 726,000 AND NIL FOR THE YEARS ENDED JUNE 30,
2003, 2002 AND 2001 RESPECTIVELY, WERE NOT INCLUDED IN THE COMPUTATION OF
DILUTED EARNINGS PER SHARE AS THE EFFECT OF EXERCISING THESE OPTIONS WOULD HAVE
BEEN ANTI-DILUTIVE.
(L) FINANCIAL INSTRUMENTS
THE CARRYING VALUE OF FINANCIAL INSTRUMENTS, SUCH AS CASH AND CASH
EQUIVALENTS, MARKETABLE SECURITIES - AVAILABLE FOR SALE, ACCOUNTS RECEIVABLE,
GOVERNMENT GRANTS RECEIVABLE AND ACCOUNTS PAYABLE APPROXIMATE THEIR FAIR VALUE
BECAUSE OF THEIR SHORT-TERM NATURE. THE ESTIMATED FAIR VALUE OF THE COMPANY'S
LONG-TERM DEBT AT JUNE 30, 2003 APPROXIMATES $117.3 MILLION COMPARED WITH THE
CARRYING VALUE OF $113.3 MILLION. FOREIGN CURRENCY OPTION CONTRACTS ARE MARKED
TO MARKET AND THEREFORE REFLECT THEIR FAIR VALUE. THE COMPANY DOES NOT HOLD OR
ISSUE FINANCIAL INSTRUMENTS FOR TRADING PURPOSES.
THE FAIR VALUE OF FINANCIAL INSTRUMENTS IS DEFINED AS THE AMOUNT AT WHICH THE
INSTRUMENT COULD BE EXCHANGED IN A CURRENT TRANSACTION BETWEEN WILLING PARTIES.
(M) FOREIGN EXCHANGE RISK MANAGEMENT
THE COMPANY ENTERS INTO VARIOUS TYPES OF FOREIGN EXCHANGE CONTRACTS IN
MANAGING ITS FOREIGN EXCHANGE RISK, INCLUDING DERIVATIVE FINANCIAL INSTRUMENTS
ENCOMPASSING FORWARD EXCHANGE CONTRACTS AND FOREIGN CURRENCY OPTIONS.
THE PURPOSE OF THE COMPANY'S FOREIGN CURRENCY HEDGING ACTIVITIES IS TO
PROTECT THE COMPANY FROM ADVERSE EXCHANGE RATE FLUCTUATIONS WITH RESPECT TO NET
CASH MOVEMENTS RESULTING FROM THE SALES OF PRODUCTS TO FOREIGN CUSTOMERS AND
AUSTRALIAN MANUFACTURING ACTIVITIES. THE COMPANY ENTERS INTO FOREIGN CURRENCY
OPTION CONTRACTS TO HEDGE ANTICIPATED SALES AND MANUFACTURING COSTS, PRINCIPALLY
DENOMINATED IN AUSTRALIAN DOLLARS AND EUROS. THE TERMS OF SUCH FOREIGN CURRENCY
OPTION CONTRACTS GENERALLY DO NOT EXCEED THREE YEARS.
THE COMPANY'S FOREIGN CURRENCY DERIVATIVES PORTFOLIO REPRESENTS A CASHFLOW
HEDGE PROGRAM AGAINST THE NET CASH FLOW OF ITS INTERNATIONAL MANUFACTURING
OPERATIONS. THE COMPANY HAS DETERMINED ITS HEDGE PROGRAM TO BE A NON-EFFECTIVE
HEDGE AS DEFINED UNDER SFAS 133. AS SUCH, 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 ON THE COMPANY'S CONSOLIDATED STATEMENTS OF INCOME.
F9
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(M) FOREIGN EXCHANGE RISK MANAGEMENT (CONTINUED)
THE COMPANY IS EXPOSED TO CREDIT-RELATED LOSSES IN THE EVENT OF
NON-PERFORMANCE BY COUNTERPARTIES TO FINANCIAL INSTRUMENTS. THE CREDIT EXPOSURE
OF FOREIGN EXCHANGE OPTIONS AT JUNE 30, 2003 WAS $2.6 MILLION, WHICH REPRESENTS
THE POSITIVE FAIR VALUE OF OPTIONS HELD BY THE COMPANY.
THE COMPANY HELD FOREIGN CURRENCY OPTION CONTRACTS WITH NOTIONAL AMOUNTS
TOTALING $124.5 MILLION AND $160.5 MILLION AT JUNE 30, 2003 AND 2002,
RESPECTIVELY TO HEDGE FOREIGN CURRENCY ITEMS. THESE CONTRACTS MATURE AT VARIOUS
DATES PRIOR TO JULY 2005.
(N) INCOME TAXES
THE COMPANY ACCOUNTS FOR INCOME TAXES UNDER THE ASSET AND LIABILITY
METHOD. DEFERRED TAX ASSETS AND LIABILITIES ARE RECOGNIZED FOR THE FUTURE TAX
CONSEQUENCES ATTRIBUTABLE TO DIFFERENCES BETWEEN THE FINANCIAL STATEMENT
CARRYING AMOUNTS OF EXISTING ASSETS AND LIABILITIES AND THEIR RESPECTIVE TAX
BASES. DEFERRED TAX ASSETS AND LIABILITIES ARE MEASURED USING ENACTED TAX RATES
EXPECTED TO APPLY TO TAXABLE INCOME IN THE YEARS IN WHICH THOSE TEMPORARY
DIFFERENCES ARE EXPECTED TO BE RECOVERED OR SETTLED. THE EFFECT ON DEFERRED TAX
ASSETS AND LIABILITIES OF A CHANGE IN TAX RATES IS RECOGNIZED IN INCOME IN THE
PERIOD THAT INCLUDES THE ENACTMENT DATE.
(O) MARKETABLE SECURITIES
MANAGEMENT DETERMINES THE APPROPRIATE CLASSIFICATION OF ITS
INVESTMENTS IN DEBT AND EQUITY SECURITIES AT THE TIME OF PURCHASE AND
RE-EVALUATES SUCH DETERMINATION AT EACH BALANCE SHEET DATE. DEBT SECURITIES FOR
WHICH THE COMPANY DOES NOT HAVE THE INTENT OR ABILITY TO HOLD TO MATURITY ARE
CLASSIFIED AS AVAILABLE FOR SALE. SECURITIES AVAILABLE FOR SALE ARE CARRIED AT
FAIR VALUE, WITH THE UNREALIZED GAINS AND LOSSES, NET OF TAX, REPORTED IN
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS). REALIZED GAINS AND LOSSES ARE
INCLUDED IN OTHER INCOME OR EXPENSE.
AT JUNE 30, 2003 AND 2002, THE COMPANY'S INVESTMENTS IN DEBT
SECURITIES WERE CLASSIFIED ON THE ACCOMPANYING CONSOLIDATED BALANCE SHEET AS
MARKETABLE SECURITIES AVAILABLE-FOR-SALE. THESE INVESTMENTS ARE DIVERSIFIED
AMONG HIGH CREDIT QUALITY SECURITIES IN ACCORDANCE WITH THE COMPANY'S INVESTMENT
POLICY.
AT JUNE 30, 2003, CONTRACTUAL MATURITIES OF MARKETABLE SECURITIES
AVAILABLE-FOR-SALE WERE ALL LESS THAN ONE YEAR.
(P) WARRANTY
ESTIMATED FUTURE WARRANTY OBLIGATIONS RELATED TO CERTAIN PRODUCTS ARE
PROVIDED BY CHARGES TO OPERATIONS IN THE PERIOD IN WHICH THE RELATED REVENUE IS
RECOGNIZED.
F10
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(Q) IMPAIRMENT OF LONG-LIVED ASSETS
THE COMPANY PERIODICALLY EVALUATES THE CARRYING VALUE OF LONG-LIVED
ASSETS TO BE HELD AND USED, INCLUDING CERTAIN IDENTIFIABLE INTANGIBLE ASSETS,
WHEN EVENTS AND CIRCUMSTANCES INDICATE THAT THE CARRYING AMOUNT OF AN ASSET MAY
NOT BE RECOVERED. RECOVERABILITY OF ASSETS TO BE HELD AND USED IS MEASURED BY A
COMPARISON OF THE CARRYING AMOUNT OF AN ASSET TO FUTURE NET CASH FLOWS EXPECTED
TO BE GENERATED BY THE ASSET. IF SUCH ASSETS ARE CONSIDERED TO BE IMPAIRED, THE
IMPAIRMENT TO BE RECOGNIZED IS MEASURED BY THE AMOUNT BY WHICH THE CARRYING
AMOUNT OF THE ASSETS EXCEED THE FAIR VALUE OF THE ASSETS. ASSETS TO BE DISPOSED
OF ARE REPORTED AT THE LOWER OF THE CARRYING AMOUNT OR FAIR VALUE, LESS COSTS TO
SELL.
(R) CAPITALIZED SOFTWARE PRODUCTION COSTS
SOFTWARE DEVELOPMENT COSTS HAVE BEEN CAPITALIZED AND WILL BE AMORTIZED TO
THE COST OF PRODUCT REVENUES OVER THE ESTIMATED ECONOMIC LIVES (GENERALLY THREE
TO FIVE YEARS) OF THE PRODUCTS THAT INCLUDE SUCH SOFTWARE. TOTAL NET
CAPITALIZED SOFTWARE PRODUCTION COSTS WERE $1,557,000 AND $1,132,000 AT JUNE 30,
2003 AND 2002 RESPECTIVELY.
(S) STOCK-BASED EMPLOYEE COMPENSATION
THE COMPANY APPLIES APB OPINION NO. 25 IN ACCOUNTING FOR ITS PLANS AND AS ALL
STOCK OPTIONS ARE ISSUED AT MARKET PRICE ON DATE OF ISSUE, NO COMPENSATION COST
HAS BEEN RECOGNIZED FOR ITS STOCK OPTIONS. THE FOLLOWING TABLE ILLUSTRATES THE
EFFECT ON NET INCOME AND EARNINGS PER SHARE IF THE COMPANY HAD APPLIED THE FAIR
VALUE RECOGNITION PROVISIONS OF FASB STATEMENT 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, TO STOCK-BASED EMPLOYEE COMPENSATION.
-------------------------------------------------------------------------------
Years Ended June 30
2003 2002 2001
- -------------------------------------------------------------------------------
Net income, as reported. . . . . . . . . . . . . . . $45,729 $37,506 $11,630
Deduct: Total stock-based employee compensation . . 14,102 18,975 8,770
expense determined under fair value based method for
all awards, net of related tax effects.
Pro forma net income . . . . . . . . . . . . . . . . 31,627 18,531 2,860
Earnings per share:
Basic - as reported. . . . . . . . . . . . . . . . . $ 1.38 $ 1.17 $ 0.37
Basic - pro forma. . . . . . . . . . . . . . . . . . $ 0.96 $ 0.58 $ 0.09
Diluted - as reported . . . . . . . . . . . . . . . $ 1.33 $ 1.10 $ 0.35
Diluted - pro forma. . . . . . . . . . . . . . . . . $ 0.92 $ 0.54 $ 0.09
- -------------------------------------------------------------------------------
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 2.8%, 4.8% AND 6.0% FOR THE YEARS
ENDED JUNE 30, 2003, 2002 AND 2001 RESPECTIVELY; NO DIVIDEND YIELD; EXPECTED
OPTION LIVES OF 3.3 YEARS FOR THE YEAR ENDED JUNE 30, 2003 AND 5.5 AND 4.8 YEARS
FOR THE YEARS ENDED JUNE 30, 2002 AND 2001, RESPECTIVELY, AND VOLATILITY OF 63%,
60% AND 61% FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND 2001 RESPECTIVELY.
F11
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(S) STOCK-BASED EMPLOYEE COMPENSATION (CONTINUED)
THE FOLLOWING TABLE ILLUSTRATES THE FAIR VALUE OF COMPENSATION COSTS AS
DETERMINED UNDER THE PROVISIONS OF FASB STATEMENT 123 BY YEAR OF OPTION GRANT:
- -------------------------------------------------------------------------------
Fiscal June 30 Average Fair Value at
Year of Grant 2003 2002 2001 Exercise Price Date of Grant
- -------------------------------------------------------------------------------
2003. . . . . . . $ 9,035 $ - $ - $ 26.54 $12.22
2002. . . . . . . 9,942 21,074 - 50.18 26.21
2001. . . . . . . 2,664 7,142 10,272 27.71 13.41
2000. . . . . . . 55 971 2,540 14.14 6.56
1999. . . . . . . - 5 682 11.93 5.27
- -------------------------------------------------------------------------------
Compensation Cost $21,696 $29,192 $13,494
===============================================================================
Tax Effected. . . $14,102 $18,975 $ 8,770
===============================================================================
(3) NEW ACCOUNTING PRONOUNCEMENTS
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. THE COMPANY INTENDS TO ADOPT SFAS 150 EFFECTIVE JULY 1, 2003 AND DOES NOT
BELIEVE THAT THE ADOPTION WILL HAVE A MATERIAL IMPACT ON ITS 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 COMPANY IS CURRENTLY EVALUATING THE IMPACT OF THIS
STATEMENT.
IN DECEMBER 2002, THE FASB ISSUED SFAS 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE, WHICH AMENDS SFAS 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION. SFAS 148 AMENDS THE DISCLOSURE REQUIREMENTS IN SFAS
123 FOR STOCK-BASED COMPENSATION FOR ANNUAL PERIODS ENDING AFTER DECEMBER 15,
2002 AND FOR INTERIM PERIODS BEGINNING AFTER DECEMBER 15, 2002. SFAS 148 AMENDS
SFAS 123 TO PROVIDE ALTERNATIVE METHODS OF TRANSITION FOR AN ENTITY THAT
VOLUNTARILY CHANGES TO FAIR VALUE BASED METHOD OF ACCOUNTING FOR STOCK-BASED
EMPLOYEE COMPENSATION. IT ALSO AMENDS THE DISCLOSURE PROVISIONS OF SFAS 123 TO
REQUIRE PROMINENT DISCLOSURE ABOUT THE EFFECTS ON REPORTED NET INCOME OF AN
ENTITY'S ACCOUNTING POLICY DECISIONS WITH RESPECT TO STOCK-BASED EMPLOYEE
COMPENSATION. FINALLY, SFAS 148 AMENDS ACCOUNTING PRINCIPLES BOARD ("APB")
OPINION NO. 28, INTERIM FINANCIAL REPORTING, TO REQUIRE DISCLOSURE ABOUT THOSE
EFFECTS IN INTERIM FINANCIAL INFORMATION. THE COMPANY HAS ADOPTED THE AMENDED
DISCLOSURE PROVISIONS OF SFAS 148.
F12
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(3) NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED
IN JULY 2002, THE FASB ISSUED SFAS 146, ACCOUNTING FOR RESTRUCTURING COSTS.
SFAS 146 APPLIES TO COSTS ASSOCIATED WITH AN EXIT ACTIVITY (INCLUDING
RESTRUCTURING) OR WITH A DISPOSAL OF LONG-LIVED ASSETS. THOSE ACTIVITIES CAN
INCLUDE ELIMINATING OR REDUCING PRODUCT LINES, TERMINATING EMPLOYEES AND
CONTRACTS, AND RELOCATING PLANT FACILITIES OR PERSONNEL. UNDER SFAS 146, A
COMPANY WILL RECORD A LIABILITY FOR A COST ASSOCIATED WITH AN EXIT OR DISPOSAL
ACTIVITY WHEN THAT LIABILITY IS INCURRED AND CAN BE MEASURED AT FAIR VALUE.
SFAS 146 REQUIRES A COMPANY TO DISCLOSE INFORMATION ABOUT ITS EXIT AND DISPOSAL
ACTIVITIES, THE RELATED COSTS, AND CHANGES IN THOSE COSTS IN THE NOTES TO THE
INTERIM AND ANNUAL FINANCIAL STATEMENTS THAT INCLUDE THE PERIOD IN WHICH AN EXIT
ACTIVITY IS INITIATED AND IN ANY SUBSEQUENT PERIOD UNTIL THE ACTIVITY IS
COMPLETED.
SFAS 146 IS EFFECTIVE PROSPECTIVELY FOR EXIT OR DISPOSAL ACTIVITIES INITIATED
AFTER DECEMBER 31, 2002. UNDER SFAS 146, A COMPANY MAY NOT RESTATE ITS
PREVIOUSLY ISSUED FINANCIAL STATEMENTS AND SFAS 146 GRANDFATHERS THE ACCOUNTING
FOR LIABILITIES THAT A COMPANY HAD PREVIOUSLY RECORDED UNDER EMERGING ISSUES
TASK FORCE ISSUE 94-3. THE ADOPTION OF SFAS 146 DID NOT HAVE A MATERIAL IMPACT
ON THE RESULTS OF OPERATIONS, FINANCIAL POSITION OR LIQUIDITY OF THE COMPANY.
THE FASB ISSUED SFAS 145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64,
AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS AS OF APRIL 2002.
SFAS 145 RESCINDS SFAS 4 AND SFAS 64, WHICH REQUIRED THAT ALL GAINS AND LOSSES
FROM EXTINGUISHMENT OF DEBT BE AGGREGATED, AND IF MATERIAL, CLASSIFIED AS AN
EXTRAORDINARY ITEM. AS A RESULT, GAINS AND LOSSES FROM DEBT EXTINGUISHMENT ARE
TO BE CLASSIFIED AS EXTRAORDINARY ONLY IF THEY MEET THE CRITERIA SET FORTH IN
APB OPINION NO. 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS
OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND
INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS. SFAS 145 ALSO REQUIRES THAT
SALE-LEASEBACK ACCOUNTING BE USED FOR CAPITAL LEASE MODIFICATIONS WITH ECONOMIC
EFFECTS SIMILAR TO SALE-LEASEBACK TRANSACTIONS. THE COMPANY HAS CLASSIFIED
GAINS FROM THE EXTINGUISHMENT OF DEBT AS OTHER INCOME IN ITS CONSOLIDATED
STATEMENTS OF INCOME.
IN AUGUST 2001, THE FASB ISSUED SFAS 144, "ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS." FOR LONG-LIVED ASSETS TO BE HELD AND USED, SFAS
144 RETAINS THE REQUIREMENTS OF SFAS 121 TO (A) RECOGNIZE AN IMPAIRMENT LOSS
ONLY IF THE CARRYING AMOUNT OF A LONG-LIVED ASSET IS NOT RECOVERABLE FROM ITS
UNDISCOUNTED CASH FLOWS AND (B) MEASURE AN IMPAIRMENT LOSS AS THE DIFFERENCE
BETWEEN THE CARRYING AMOUNT AND FAIR VALUE. FURTHER, SFAS 144 ELIMINATES THE
REQUIREMENT TO ALLOCATE GOODWILL TO LONG-LIVED ASSETS TO BE TESTED FOR
IMPAIRMENT, DESCRIBES A PROBABILITY-WEIGHTED CASH FLOW ESTIMATION APPROACH TO
DEAL WITH SITUATIONS IN WHICH ALTERNATIVE COURSES OF ACTION TO RECOVER THE
CARRYING AMOUNT OF A LONG-LIVED ASSET ARE UNDER CONSIDERATION OR A RANGE IS
ESTIMATED FOR THE AMOUNT OF POSSIBLE FUTURE CASH FLOWS, AND ESTABLISHES A
"PRIMARY-ASSET" APPROACH TO DETERMINE THE CASH FLOW ESTIMATION PERIOD. FOR
LONG-LIVED ASSETS TO BE DISPOSED OF OTHER THAN BY SALE (E.G. ASSETS ABANDONED,
EXCHANGED OR DISTRIBUTED TO OWNERS IN A SPIN-OFF), SFAS 144 REQUIRES THAT SUCH
ASSETS BE CONSIDERED HELD AND USED UNTIL DISPOSED.
FURTHER, AN IMPAIRMENT LOSS SHOULD BE RECOGNIZED AT THE DATE AN ASSET IS
EXCHANGED FOR A SIMILAR PRODUCTIVE ASSET OR DISTRIBUTED TO OWNERS IN A SPIN-OFF
IF THE CARRYING AMOUNT EXCEEDS ITS FAIR VALUE. THE COMPANY ADOPTED SFAS 144 ON
JULY 1, 2002. ADOPTION OF THE STANDARD DID NOT HAVE A MATERIAL IMPACT ON THE
RESULTS OF OPERATIONS, FINANCIAL POSITION OR LIQUIDITY OF THE COMPANY.
F13
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(3) NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED
IN JULY 2001, THE FASB ISSUED SFAS 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
AS ALLOWED UNDER THE STANDARD, THE COMPANY HAS ADOPTED SFAS 142 EFFECTIVE JULY
1, 2001. SFAS 142 REQUIRES GOODWILL AND INTANGIBLE ASSETS WITH INDEFINITE
USEFUL LIVES TO NO LONGER BE AMORTIZED, BUT INSTEAD BE TESTED FOR IMPAIRMENT AT
LEAST ANNUALLY.
WITH THE ADOPTION OF SFAS 142, THE COMPANY 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. IN
ACCORDANCE WITH SFAS 142 THE COMPANY COMPLETED ITS ANNUAL ASSESSMENT OF GOODWILL
IMPAIRMENT IN JULY 2002. THE RESULTS OF THE REVIEW INDICATED THAT NO IMPAIRED
GOODWILL CURRENTLY EXISTS.
IN JUNE 2001, THE FASB ISSUED SFAS 143, "ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS," WHICH REQUIRES THAT THE FAIR VALUE OF A LIABILITY FOR AN ASSET
RETIREMENT OBLIGATION BE RECOGNIZED IN THE PERIOD IN WHICH IT IS INCURRED IF A
REASONABLE ESTIMATE OF FAIR VALUE CAN BE MADE. THE ASSOCIATED ASSET RETIREMENT
COSTS WOULD BE CAPITALIZED AS PART OF THE CARRYING AMOUNT OF THE LONG-LIVED
ASSET AND DEPRECIATED OVER THE LIFE OF THE ASSET. THE LIABILITY IS ACCRETED AT
THE END OF EACH PERIOD THROUGH CHARGES TO OPERATING EXPENSE. IF THE OBLIGATION
IS SETTLED FOR OTHER THAN THE CARRYING AMOUNT OF THE LIABILITY, THE COMPANY WILL
RECOGNIZE A GAIN OR LOSS ON SETTLEMENT. THE PROVISIONS OF SFAS 143 ARE
EFFECTIVE FOR FISCAL YEARS BEGINNING AFTER JUNE 15, 2002. THE INITIAL ADOPTION
OF SFAS 143 DID NOT HAVE A MATERIAL IMPACT ON THE RESULTS OF OPERATIONS,
FINANCIAL POSITION OR LIQUIDITY OF THE COMPANY.
(4) MARKETABLE SECURITIES
THE ESTIMATED FAIR VALUE OF MARKETABLE SECURITIES AVAILABLE FOR SALE AS OF
JUNE 30, 2003 AND 2002, WAS $6,533,000 AND $19,979,000 RESPECTIVELY.
EXPECTED MATURITIES MAY DIFFER FROM CONTRACTUAL MATURITIES BECAUSE THE
ISSUERS OF THE SECURITIES MAY HAVE THE RIGHT TO PREPAY OBLIGATIONS WITHOUT
PREPAYMENT PENALTIES.
(5) INVENTORIES
INVENTORIES, NET WERE COMPRISED OF THE FOLLOWING AS OF JUNE 30, 2003 AND
2002 (IN THOUSANDS):
- ------------------------------------
2003 2002
- ------------------------------------
Raw materials. . $13,712 $ 8,130
Work in progress 2,288 2,057
Finished goods . 33,386 30,986
- ------------------------------------
$49,386 $41,173
- ------------------------------------
F14
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(6) PROPERTY, PLANT AND EQUIPMENT
PROPERTY, PLANT AND EQUIPMENT IS COMPRISED OF THE FOLLOWING AS OF JUNE 30,
2003 AND 2002 (IN THOUSANDS):
- ------------------------------------------------------------------
2003 2002
- ------------------------------------------------------------------
Machinery and equipment. . . . . . . . . . . $ 25,278 $ 19,381
Computer equipment 28,487 20,520
Furniture and fixtures . . . . . . . . . . . 11,528 9,204
Vehicles . . . . . . . . . . . . . . . . . . 1,749 1,531
Clinical, demonstration and rental equipment 18,056 11,651
Leasehold improvements . . . . . . . . . . . 1,213 685
Land . . . . . . . . . . . . . . . . . . . . 31,913 27,121
Buildings. . . . . . . . . . . . . . . . . . 19,231 19,188
Construction in Progress . . . . . . . . . . 12,611 1,082
- ------------------------------------------------------------------
150,066 110,363
Accumulated depreciation and amortization. . (45,379) (31,084)
- ------------------------------------------------------------------
$104,687 $ 79,279
- ------------------------------------------------------------------
(7) GOODWILL AND OTHER INTANGIBLE ASSETS
THE COMPANY ADOPTED SFAS 142 ON JULY 1, 2001. THE FOLLOWING TABLE RECONCILES
THE PRIOR YEAR'S REPORTED OPERATING INCOME AND NET INCOME TO THEIR RESPECTIVE
PRO-FORMA BALANCES ADJUSTED TO EXCLUDE GOODWILL AMORTIZATION EXPENSE WHICH IS NO
LONGER RECORDED UNDER SFAS 142, FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND
2001, (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS).
- ---------------------------------------------------------------------
2003 2002 2001
- ---------------------------------------------------------------------
OPERATING INCOME:
Reported income from operations . . . . . $67,240 $51,159 $26,042
Add back: goodwill amortization . . . . . - - 1,430
- ---------------------------------------------------------------------
Adjusted income from operations . . . . . $67,240 $51,159 $27,472
- ---------------------------------------------------------------------
NET INCOME:
Reported net income . . . . . . . . . . . $45,729 $37,506 $11,630
Add back: goodwill amortization after tax - - 1,430
- ---------------------------------------------------------------------
Adjusted net income . . . . . . . . . . . $45,729 $37,506 $13,060
- ---------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
Reported basic earnings per share . . . . $ 1.38 $ 1.17 $ 0.37
Goodwill amortization after tax . . . . . - - $ 0.05
- ---------------------------------------------------------------------
Adjusted basic earnings per share . . . . $ 1.38 $ 1.17 $ 0.42
- ---------------------------------------------------------------------
DILUTED EARNINGS PER SHARE:
Reported diluted earnings per share . . . $ 1.33 $ 1.10 $ 0.35
Goodwill amortization after tax . . . . . - - $ 0.04
- ---------------------------------------------------------------------
Adjusted diluted earnings per share . . . $ 1.33 $ 1.10 $ 0.39
- ---------------------------------------------------------------------
F15
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(7) GOODWILL AND OTHER INTANGIBLE ASSETS, CONTINUED
CHANGES IN THE CARRYING AMOUNT OF GOODWILL FOR THE YEAR ENDED JUNE 30, 2003,
WERE AS FOLLOWS:
- ---------------------------------------------------------------------
(In US$thousands) 2003
- ---------------------------------------------------------------------
Balance at June 30, 2002. . . . . . . . . . . . . . . $ 92,536
Foreign currency translation adjustments. . . . . . . 9,324
Goodwill on acquisition of John Stark and Associates. 300
- ---------------------------------------------------------------------
Balance at June 30, 2003. . . . . . . . . . . . . . . $102,160
- ---------------------------------------------------------------------
OTHER INTANGIBLE ASSETS AMOUNTED TO $3.7 MILLION (NET OF ACCUMULATED
AMORTIZATION OF $3.4 MILLION) AND $2.7 MILLION (NET OF ACCUMULATED AMORTIZATION
OF $1.9 MILLION) AT JUNE 30, 2003 AND 2002, RESPECTIVELY. THESE INTANGIBLE
ASSETS CONSIST OF PATENTS AND ARE AMORTIZED OVER THE ESTIMATED USEFUL LIFE OF
THE PATENT, GENERALLY FIVE YEARS. THERE ARE NO EXPECTED RESIDUAL VALUES RELATED
TO THESE INTANGIBLE ASSETS.
(8) ACCRUED EXPENSES AT JUNE 30, 2003 AND 2002 CONSIST OF THE FOLLOWING (IN
THOUSANDS):
- --------------------------------------------------------
2003 2002
- --------------------------------------------------------
Service warranties. . . . . . . . . . $ 1,304 $ 744
Consulting and professional fees. . . 2,001 596
Value added taxes and other taxes due 1,173 847
Employee related costs. . . . . . . . 9,849 6,817
Research foundation grants. . . . . . 899 1,344
Convertible note interest . . . . . . 126 137
Promotional programs. . . . . . . . . 1,426 2,746
Other . . . . . . . . . . . . . . . . 2,362 2,042
- ---------------------------------------------------------
$19,140 $15,273
- ---------------------------------------------------------
(9) LONG-TERM DEBT
LONG-TERM DEBT AT JUNE 30, 2003 AND 2002 CONSISTS OF THE FOLLOWING (IN
THOUSANDS):
-------------------------------------------------------
2003 2002
- --------------------------------------------------------
Outstanding at beginning of year $123,250 $150,000
Issued . . . . . . . . . . . . . - 30,000
Repurchased. . . . . . . . . . . (10,000) (56,750)
- --------------------------------------------------------
Outstanding at end of year . . . $113,250 $123,250
- --------------------------------------------------------
F16
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(9) LONG-TERM DEBT, CONTINUED
ON JUNE 20, 2001 THE COMPANY ISSUED $150.0 MILLION OF 4% CONVERTIBLE
SUBORDINATED NOTES THAT ARE DUE TO MATURE ON JUNE 20, 2006. ON JULY 3, 2001,
THE COMPANY RECEIVED AN ADDITIONAL $30.0 MILLION IN OVER ALLOTMENTS. THIS
INCREASED THE TOTAL AMOUNT OF CONVERTIBLE SUBORDINATED NOTES ISSUED TO $180.0
MILLION.
THE COMPANY MAY REDEEM SOME OR ALL OF THE NOTES AT ANY TIME BEFORE JUNE 20,
2004 AT A REDEMPTION PRICE OF $1,000 PER $1,000 PRINCIPAL AMOUNT OF NOTES, PLUS
ACCRUED AND UNPAID INTEREST, IF ANY, TO THE REDEMPTION DATE, IF THE CLOSING
PRICE OF THE COMPANY'S COMMON STOCK HAS EXCEEDED 150% OF THE CONVERSION PRICE
THEN IN EFFECT FOR AT LEAST 20 TRADING DAYS WITHIN A PERIOD OF 30 CONSECUTIVE
TRADING DAYS ENDING ON THE TRADING DAY BEFORE THE DATE OF MAILING OF THE
PROVISIONAL REDEMPTION NOTICE. UPON ANY SUCH PROVISIONAL REDEMPTION, THE
COMPANY WILL MAKE AN ADDITIONAL PAYMENT IN CASH EQUAL TO $166.67 PER $1,000
PRINCIPAL AMOUNT OF NOTES, LESS THE AMOUNT OF ANY INTEREST ACTUALLY PAID ON THE
NOTES BEFORE THE PROVISIONAL REDEMPTION DATE.
THE COMPANY MAY ALSO REDEEM SOME OR ALL OF THE NOTES AT ANY TIME ON OR
AFTER JUNE 22, 2004, BUT PRIOR TO JUNE 20, 2005, AT A REDEMPTION PRICE EQUAL TO
101.6% OF THE PRINCIPAL AMOUNT OF NOTES REDEEMED, AND AT ANY TIME AFTER JUNE 19,
2005, AT A REDEMPTION PRICE OF 100.8% OF THE PRINCIPAL AMOUNT OF NOTES, PLUS IN
ANY CASE ACCRUED AND UNPAID INTEREST, IF ANY, TO THE REDEMPTION DATE, IF THE
CLOSING PRICE OF THE COMPANY'S COMMON STOCK HAS EXCEEDED 130% OF THE CONVERSION
PRICE THEN IN EFFECT FOR AT LEAST 20 TRADING DAYS WITHIN A PERIOD OF 30
CONSECUTIVE TRADING DAYS ENDING ON THE TRADING DAY BEFORE THE DATE OF MAILING OF
THE OPTIONAL REDEMPTION NOTICE.
THE NOTES ARE GENERAL UNSECURED OBLIGATIONS AND ARE SUBORDINATED TO ALL OF
THE COMPANY'S EXISTING AND FUTURE SENIOR INDEBTEDNESS AND WILL BE EFFECTIVELY
SUBORDINATED TO ALL OF THE INDEBTEDNESS AND LIABILITIES OF THE COMPANY'S
SUBSIDIARIES. THE INDENTURE GOVERNING THE NOTES DOES NOT LIMIT THE COMPANY OR
ITS SUBSIDIARIES FROM INCURRING SENIOR INDEBTEDNESS OR OTHER INDEBTEDNESS.
DURING THE YEAR ENDED JUNE 30, 2003 THE COMPANY REPURCHASED $10.0 MILLION
FACE VALUE OF ITS CONVERTIBLE SUBORDINATED NOTES. THE TOTAL PURCHASE PRICE OF
THE NOTES WAS $9.4 MILLION, INCLUDING $0.2 MILLION IN ACCRUED INTEREST. THE
COMPANY RECOGNIZED A GAIN OF $0.3 MILLION, NET OF TAX OF $0.2 MILLION, ON THESE
TRANSACTIONS.
DURING THE YEAR ENDED JUNE 30, 2002, THE COMPANY REPURCHASED $56.8 MILLION
FACE VALUE OF ITS CONVERTIBLE SUBORDINATED NOTES. THE TOTAL PURCHASE PRICE OF
THE NOTES WAS $49.1 MILLION, INCLUDING $0.6 MILLION IN ACCRUED INTEREST. THE
COMPANY RECOGNIZED A GAIN OF $4.0 MILLION, NET OF TAX OF $2.5 MILLION ON THESE
TRANSACTIONS. AS AT JUNE 30, 2002, THE COMPANY HAD CONVERTIBLE SUBORDINATED
NOTES OUTSTANDING OF $123.3 MILLION.
THE NOTES ARE CONVERTIBLE, AT THE OPTION OF THE HOLDER, AT ANY TIME ON OR
PRIOR TO MATURITY, INTO SHARES OF COMMON STOCK OF RESMED INC. THE NOTES ARE
CONVERTIBLE AT A CONVERSION PRICE OF $60.60 PER SHARE, WHICH IS EQUAL TO A
CONVERSION RATE OF 16.5017 SHARES PER $1,000 PRINCIPAL AMOUNT OF NOTES, SUBJECT
TO ADJUSTMENT.
F17
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(9) LONG-TERM DEBT, CONTINUED
INTEREST IS TO BE PAID ON THE NOTES ON JUNE 20 AND DECEMBER 20 OF EACH
YEAR.
(10) STOCKHOLDERS' EQUITY
STOCK OPTIONS. THE COMPANY HAS GRANTED STOCK OPTIONS TO PERSONNEL,
INCLUDING OFFICERS AND DIRECTORS IN ACCORDANCE WITH BOTH THE 1995 OPTION PLAN
AND THE 1997 EQUITY PARTICIPATION PLAN (COLLECTIVELY THE "PLANS"). THESE
OPTIONS HAVE EXPIRATION DATES OF TEN YEARS FROM THE DATE OF GRANT AND VEST OVER
THREE OR FOUR YEARS. THE COMPANY GRANTED THESE OPTIONS WITH THE EXERCISE PRICE
EQUAL TO THE MARKET VALUE AS DETERMINED AT THE DATE OF GRANT.
IN AUGUST 1997 AS PART OF THE INTRODUCTION OF THE 1997 EQUITY PARTICIPATION
PLAN, THE COMPANY CANCELLED 43,880 OPTIONS, BEING ALL NON-ISSUED OPTIONS
REMAINING UNDER THE 1995 OPTION PLAN.
THE FOLLOWING TABLE SUMMARIZES OPTION ACTIVITY:
- -----------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
2003 Price 2002 Price ($) 2001 Price ($)
- -----------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year . 4,200,998 $27.94 3,852,818 $ 17.14 3,298,022 $10.12
Granted. . . . . . . . . . . . . . 1,470,675 26.54 1,328,600 50.18 1,569,690 27.27
Exercised. . . . . . . . . . . . . (678,400) 13.31 (775,803) 12.61 (884,859) 8.98
Forfeited. . . . . . . . . . . . . (248,095) 38.85 (204,617) 26.75 (130,035) 17.78
- -----------------------------------------------------------------------------------------------------------------
Outstanding at end of year . . . . 4,745,178 $29.04 4,200,998 $ 27.94 3,852,818 $17.14
- -----------------------------------------------------------------------------------------------------------------
Price range of granted options . . $25.42-37.40 $33.15-$52.20 $24-$40
Options exercisable at end of year 2,192,309 23.32 1,631,044 13.76 1,240,427 $ 8.02
- -----------------------------------------------------------------------------------------------------------------
THE TOTAL NUMBER OF SHARES OF COMMON STOCK AUTHORIZED FOR ISSUANCE UPON
EXERCISE OF OPTIONS AND OTHER AWARDS, OR UPON VESTING OF RESTRICTED OR DEFERRED
STOCK AWARDS, UNDER THE 1997 PLAN WAS INITIALLY ESTABLISHED AT 1,000,000 AND
INCREASES AT THE BEGINNING OF EACH FISCAL YEAR, COMMENCING ON JULY 1, 1998, BY
AN AMOUNT EQUAL TO 4% OF THE OUTSTANDING COMMON STOCK ON THE LAST DAY OF THE
PRECEDING FISCAL YEAR. THE MAXIMUM NUMBER OF SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE OF INCENTIVE STOCK OPTIONS GRANTED UNDER THE 1997 PLAN, HOWEVER,
CANNOT EXCEED 8,000,000. FURTHERMORE, THE MAXIMUM NUMBER OF SHARES WHICH MAY BE
SUBJECT TO OPTIONS, RIGHTS OR OTHER AWARDS GRANTED UNDER THE 1997 PLAN TO ANY
INDIVIDUAL IN ANY CALENDAR YEAR CANNOT EXCEED 300,000.
F18
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(10) STOCKHOLDERS' EQUITY, CONTINUED
The following table summarizes information about stock options outstanding at June
30, 2003.
- ---------------------------------------------------------------------------------------------
Number Outstanding at Weighted Average Number Exercisable at
Exercise Prices June 30, 2003 Remaining Contractual Life June 30, 2003
- ---------------------------------------------------------------------------------------------
0 - $10. . . . 335,765 3.43 335,764
11 - $20. . . . 735,665 5.76 735,165
21 - $30. . . . 2,015,854 8.38 538,165
31 - $40. . . . 540,250 8.08 210,667
41 - $50. . . . 1,038,644 8.10 346,215
51 - $60. . . . 79,000 8.08 26,333
- ---------------------------------------------------------------------------------------------
4,745,178. . . . 2,192,309
- ---------------------------------------------------------------------------------------------
THE FOLLOWING TABLE SUMMARIZES IN-THE-MONEY AND OUT-OF-THE-MONEY OPTIONS AS AT
JUNE 30, 2003.
- -----------------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Total
-----------------------------------------------------------------------------------------------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Exer. Price ($) Shares Exer. Price ($) Shares Exer. Price ($)
- -----------------------------------------------------------------------------------------------------------------
In-the-Money . . . . . . . 1,816,261 $ 17.68 1,800,773 $ 27.01 3,617,034 $ 22.33
Out-of-the-Money(1). . . . 376,048 $ 50.55 752,096 $ 50.55 1,128,144 $ 50.55
Total Options Outstanding 2,192,309 $ 23.32 2,552,869 $ 33.95 4,745,178 $ 29.04
- -----------------------------------------------------------------------------------------------------------------
(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, 2003 ($39.20 PER SHARE).
THE FOLLOWING TABLE SUMMARIZES OUTSTANDING STOCK OPTION PLAN BALANCES AS AT JUNE
30, 2003.
- -------------------------------------------------------------------------------------------
Plan Category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available
exercise of outstanding option for future issuance
outstanding under equity
. . . . options compensation plans
- -------------------------------------------------------------------------------------------
Equity compensation
plans approved by . . 4,745,178 $ 29.04 888,525
security holders
Equity compensation
plans not approved by
security holders. . . - - -
- -------------------------------------------------------------------------------------------
Total . . . . . . . . 4,745,178 $ 29.04 888,525
- -------------------------------------------------------------------------------------------
F19
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(10) STOCKHOLDERS' EQUITY, CONTINUED
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, 2003, THE COMPANY HAD 7 EXECUTIVE OFFICERS.
- ----------------------------------------------------------------------------
June 30, 2003 June 30, 2002 June 30, 2001
- ----------------------------------------------------------------------------
Non-Executive Directors. . . 60,000 73,000 69,000
Executive Officers . . . . . 278,500 167,000 167,500
Staff. . . . . . . . . . . . 1,132,175 1,088,600 1,333,190
- ----------------------------------------------------------------------------
Gross Options Issued . . . . 1,470,675 1,328,600 1,569,690
- ----------------------------------------------------------------------------
Employees. . . . . . . . . . 1,464 1,250 953
- ----------------------------------------------------------------------------
Average Options per Employee 1,005 1,063 1,647
- ----------------------------------------------------------------------------
THE FOLLOWING TABLE DISCLOSES EMPLOYEE AND EXECUTIVE OPTION GRANTS AS A
PERCENTAGE OF TOTAL OPTIONS.
- -----------------------------------------------------------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------------------
Net grants during the period as % of outstanding shares (%) . . . . . . . . . . . . 4 4 5
Grants to executive officers during the period as % of total options granted (%). . 19 13 11
Grants to executive officers during the period as % of outstanding shares (%) . . . 1 1 1
Cumulative options held by executive officers as % of total options outstanding (%) 16 16 17
- -----------------------------------------------------------------------------------------------------
OPTIONS GRANTED TO EXECUTIVE OFFICERS DURING THE FISCAL YEAR ENDED JUNE 30, 2003
ARE AS NOTED BELOW.
- -----------------------------------------------------------------------------------------------------------------
Potential Realizable Value at
Assumed Annual Rates of
Individual Grants Stock Price Appreciation for
Option Term (1)(2)
- -----------------------------------------------------------------------------------------------------------------
Number of
Securities
Underlying Percent of Total Exercise
Options Per Options Granted Price
Grant to Employees (%) ($/Share) Expiration Date 5% 10%
- -----------------------------------------------------------------------------------------------------------------
Peter Farrell . . . 60,000 4.08% $25.42 July 11, 2012 $ 840,886 $2,071,142
Walter Flicker. . . 6,000 0.41% $25.42 July 11, 2012 $ 84,089 $ 207,114
Kieran Gallahue . . 150,000 10.20% $31.97 January 13,2013 $2,643,894 $6,512,038
David Pendarvis . . 15,000 1.02% $27.63 October 1, 2012 $ 228,498 $ 562,801
David Pendarvis . . 15,000 1.02% $37.40 May 27, 2013 $ 309,295 $ 761,809
Christopher Roberts 15,000 1.02% $25.42 July 11, 2012 $ 210,221 $ 517,786
Klaus Schindhelm. . 7,500 0.51% $25.42 July 11, 2012 $ 105,111 $ 258,893
Adrian Smith. . . . 10,000 0.68% $25.42 July 11, 2012 $ 140,148 $ 345,190
- -----------------------------------------------------------------------------------------------------------------
Total . . . . . . . 278,500 18.94%
- -----------------------------------------------------------------------------------------------------------------
F20
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(10) STOCKHOLDERS' EQUITY, CONTINUED
(1) REPRESENTS OPTIONS GRANTED UNDER OUR 1997 EQUITY PARTICIPATION PLAN,
WHICH TYPICALLY ARE EXERCISABLE STARTING 12 MONTHS AFTER THE GRANT
DATE, WITH 33% OF THE SHARES COVERED THEREBY BECOMING EXERCISABLE AT
THAT TIME AND AN ADDITIONAL 33% OF THE OPTION SHARES BECOMING
EXERCISABLE ON EACH SUCCESSIVE ANNIVERSARY DATE, WITH ALL OPTION
SHARES EXERCISABLE BEGINNING ON EITHER THE THIRD OR FOURTH
ANNIVERSARY DATE. UNDER THE TERMS OF THE 1997 PLAN, THIS EXERCISE
SCHEDULE MAY BE ACCELERATED IN CERTAIN SPECIFIC SITUATIONS. IN
ADDITION, WE HAVE THE RIGHT TO REQUIRE THE SURRENDER OF OUTSTANDING
OPTIONS UPON THE GRANT OF LOWER PRICED OPTIONS TO THE SAME
INDIVIDUAL.
(2) ASSUMED ANNUAL RATES OF STOCK APPRECIATION FOR ILLUSTRATIVE
PURPOSES ONLY. ACTUAL STOCK PRICES WILL VARY FROM TIME TO TIME BASED
UPON MARKET FACTORS AND OUR FINANCIAL PERFORMANCE. NO ASSURANCE CAN
BE GIVEN THAT SUCH RATES WILL BE ACHIEVED.
THE FOLLOWING TABLE SUMMARIZES OPTION EXERCISES AND REMAINING HOLDINGS OF
EXECUTIVE OFFICERS DURING THE YEAR ENDED JUNE 30, 2003.
- -----------------------------------------------------------------------------------------------------------------------
No. of Securities Underlying Value of Unexercised In-the
All Unexercised Options Money Options (1)
- -----------------------------------------------------------------------------------------------------------------------
Shares Acquired on
Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------
Peter Farrell. . 31,000 $ 658,355 181,634 140,000 $3,880,982 $ 1,215,472
Walter Flicker . 38,000 $ 855,544 3,601 15,999 $ 3,892 $ 131,258
Kieran Gallahue. 0 0 0 150,000 $ 0 $ 1,084,500
David Pendarvis. 0 0 0 30,000 $ 0 $ 200,550
Chris Roberts. . 60,000 $ 1,963,440 40,000 35,000 $ 711,453 $ 303,872
Klaus Schindhelm 0 0 42,501 17,499 $ 979,140 $ 151,928
Adrian Smith . . 0 0 60,000 24,000 $1,542,360 $ 196,100
- ------------------------------------------------------------------------------------------------------------------------
(1) REPRESENTS THE AMOUNT BY WHICH THE CLOSING SALES PRICE OF OUR COMMON STOCK
ON THE NEW YORK STOCK EXCHANGE ON JUNE 30, 2003 ($39.20 PER SHARE)
MULTIPLIED BY THE NUMBER OF SHARES TO WHICH THE OPTIONS APPLY EXCEEDED THE
AGGREGATE EXERCISE PRICE OF SUCH OPTIONS.
PREFERRED STOCK. IN APRIL 1997, THE BOARD OF DIRECTORS AUTHORIZED 2,000,000
SHARES OF $0.01 PAR VALUE PREFERRED STOCK. NO SUCH SHARES WERE ISSUED OR
OUTSTANDING AT JUNE 30, 2003.
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 4.0 MILLION SHARES OF OUTSTANDING COMMON STOCK. DURING FISCAL
YEAR 2003, THE COMPANY REPURCHASED 125,000 SHARES AT A COST OF $3.5 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.
F21
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(11) OTHER, NET
OTHER, NET IS COMPRISED OF THE FOLLOWING AT JUNE 30, 2003, 2002 AND 2001
(IN THOUSANDS):
- -----------------------------------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------
Gain/(loss) on foreign currency hedging position $2,117 $(767) (2,766)
Gain/(loss) on foreign currency transactions . . (562) 182 4,747
Realized gain on sale of marketable securities. . 115 301 -
Other. . . . . . . . . . . . . . . . . . . . . . 237 392 (19)
- -----------------------------------------------------------------------------
$1,907 $ 108 $ 1,962
- -----------------------------------------------------------------------------
(12) INCOME TAXES
INCOME BEFORE INCOME TAXES FOR THE YEARS ENDED JUNE 30, 2003, 2002, AND
2001, WAS TAXED UNDER THE FOLLOWING JURISDICTIONS (IN THOUSANDS):
- -----------------------------------
2003 2002 2001
- -----------------------------------
U.S. . . $ 3,061 $ 418 $ 3,482
Non-U.S. 64,066 54,174 23,832
$67,127 $54,592 $27,314
- -----------------------------------
THE PROVISION FOR INCOME TAXES IS PRESENTED BELOW (IN THOUSANDS):
- ---------------------------------------------------------
2003 2002 2001
- ---------------------------------------------------------
Current:
Federal . . . . . . . . . $ 1,303 $ 4,962 $ 2,938
State . . . . . . . . . . 14 752 203
Non-U.S.. . . . . . . . . 18,079 17,525 14,790
- ---------------------------------------------------------
19,396 23,239 17,931
- ---------------------------------------------------------
Deferred:
Federal . . . . . . . . . 892 (3,494) (652)
State . . . . . . . . . . 325 (568) 90
Non-U.S.. . . . . . . . . 785 (2,091) (1,685)
2,002 (6,153) (2,247)
- ---------------------------------------------------------
Provision for income taxes $21,398 $17,086 $15,684
- ---------------------------------------------------------
THE PROVISION FOR INCOME TAXES DIFFERS FROM THE AMOUNT OF INCOME TAX
DETERMINED BY APPLYING THE APPLICABLE U.S. FEDERAL INCOME TAX RATE OF 35% TO
PRETAX INCOME AS A RESULT OF THE FOLLOWING (IN THOUSANDS):
F22
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(12) INCOME TAXES, CONTINUED
- -----------------------------------------------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------
Taxes computed at statutory U.S. rate . . . . . . . . . . . $23,495 $19,108 $ 9,287
Increase (decrease) in income taxes resulting from:
State income taxes, net of U.S. tax benefit . . . . . . . . 274 363 356
Non-deductible expenses . . . . . . . . . . . . . . . . . . 243 116 460
Research and development credit . . . . . . . . . . . . . . (1,690) (888) (781)
Tax effect of intercompany dividends. . . . . . . . . . . . - 2,577 (3,885)
Utilization of net operating loss carryforwards . . . . . . - - (5)
Write-off of net operating losses due to business cessation - 1,046 -
Change in valuation allowance . . . . . . . . . . . . . . . 457 (2,614) 4,431
Effect of non-U.S. tax rates. . . . . . . . . . . . . . . . (2,498) (3,379) 4
In-process research and development write-off . . . . . . . - 123 6,010
Provision for restructure . . . . . . . . . . . . . . . . . - - 187
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,117 634 (380)
- -----------------------------------------------------------------------------------------
$21,398 $17,086 $15,684
- -----------------------------------------------------------------------------------------
THE MEASUREMENT OF DEFERRED TAX ASSETS AND LIABILITIES AT JUNE 30 OF EACH
YEAR REFLECT FOREIGN CURRENCY TRANSLATION ADJUSTMENTS, CHANGES IN ENACTED TAX
RATES AND CHANGES IN TEMPORARY DIFFERENCES. THE TAX EFFECTS OF TEMPORARY
DIFFERENCES THAT GIVE RISE TO SIGNIFICANT PORTIONS OF THE DEFERRED TAX ASSETS
AND DEFERRED TAX LIABILITIES ARE COMPRISED OF THE FOLLOWING AT JUNE 30, 2003 AND
2002 (IN THOUSANDS):
- --------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------
Deferred tax assets:
Employee benefit obligations . . . . . . . . . $ 1,208 $ 940
Inventory. . . . . . . . . . . . . . . . . . . 1,068 289
Provision for service warranties . . . . . . . 343 195
Provision for doubtful debts . . . . . . . . . 768 648
Net operating loss carryforwards . . . . . . . 1,277 1,088
Foreign tax credits. . . . . . . . . . . . . . 7,288 7,291
AMT tax credit . . . . . . . . . . . . . . . . 1,667 1,675
Accrual for legal costs. . . . . . . . . . . . 307 54
Intercompany profit in inventories . . . . . . 6,013 5,606
Capitalized software . . . . . . . . . . . . . 472 -
Deferred gain on sale-leaseback. . . . . . . . 1,329 1,740
Other. . . . . . . . . . . . . . . . . . . . . 2,112 1,679
- --------------------------------------------------------------------
23,852 21,205
- --------------------------------------------------------------------
Less valuation allowance . . . . . . . . . . . (3,385) (2,950)
- --------------------------------------------------------------------
Deferred tax assets. . . . . . . . . . . . . . 20,467 $18,255
- --------------------------------------------------------------------
Deferred tax liabilities:
Patents . . . . . . . . . . . . . . . . . . . (93) (74)
Capitalized software. . . . . . . . . . . . . - (451)
Unrealized gain on foreign currency options . (773) (829)
Unrealized foreign exchange gains . . . . . . (1,678) (238)
Property, plant and equipment. . . . . . . . . (2,244) (1,595)
Undistributed German income . . . . . . . . . (3,448) (3,355)
Deferred tax deductible goodwill amortization (3,634) (2,410)
Other . . . . . . . . . . . . . . . . . . . . (296) (14)
- --------------------------------------------------------------------
Deferred tax liabilities . . . . . . . . . . . (12,166) (8,966)
- --------------------------------------------------------------------
Net deferred tax asset . . . . . . . . . . . . $ 8,301 $ 9,289
- --------------------------------------------------------------------
F23
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(12) INCOME TAXES, CONTINUED
AS OF JUNE 30, 2003, THE COMPANY HAD $2,219,000, $4,602,000 AND $934,000 OF
US FEDERAL, US STATE AND NON-US NET OPERATING LOSS CARRYFORWARDS, RESPECTIVELY,
WHICH EXPIRE IN VARIOUS YEARS THROUGH 2023 OR CARRYFORWARD INDEFINITELY. THE
COMPANY ALSO HAD FOREIGN TAX CREDIT CARRYFORWARDS OF $7,288,000 AND ALTERNATIVE
MINIMUM TAX CREDIT CARRYFORWARDS OF $1,667,000. THE FOREIGN TAX CREDIT
CARRYFORWARDS HAVE EXPIRATION DATES THROUGH 2008.
THE VALUATION ALLOWANCE AT JUNE 30, 2003, PRIMARILY RELATES TO A PROVISION
FOR UNCERTAINTY AS TO THE UTILIZATION OF FOREIGN TAX CREDITS OF $3,303,000 AND
NET OPERATING LOSS CARRYFORWARDS OF $82,000 FOR MALAYSIA AND FINLAND.
(13) 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 THE 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, 2003, 2002, AND
2001 WERE $1,663,391, $968,000 AND $814,000, 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 PLANS AT THE RATE OF 5% OF THE SALARIES.
PRIOR TO JANUARY 2002, THE COMPANY CONTRIBUTED 3% FOR ALL QUALIFIED
EMPLOYEES. TOTAL COMPANY CONTRIBUTIONS TO THE PLAN WERE $23,376, $16,000
AND $7,000 IN FISCAL 2003, 2002, AND 2001 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 PLAN TO THE COMPANY WAS
$326,000, $245,000 AND $158,000 IN FISCAL 2003, 2002 AND 2001 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 COMPANY GUARANTEES A FIXED 3% NET RETURN ON ACCUMULATED
CONTRIBUTIONS PER ANNUM. THE COMPANY CONTRIBUTES TO THE PLANS AT VARIABLE
RATES WHICH HAVE AVERAGED 10% OF SALARIES OVER THE LAST THREE YEARS. TOTAL
COMPANY CONTRIBUTIONS TO THE PLAN WERE $133,000 AND $94,000 IN FISCAL 2003
AND 2002 RESPECTIVELY.
F24
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(14) 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-DEPENDENCE OF ITS PRODUCTS
THAT THE COMPANY OPERATES AS A SINGLE OPERATING SEGMENT. THE COMPANY ASSESSES
PERFORMANCE AND ALLOCATES RESOURCES ON THE BASIS OF A SINGLE OPERATING ENTITY.
FINANCIAL INFORMATION BY GEOGRAPHIC AREA FOR THE YEARS ENDED JUNE 30, 2003,
2002 AND 2001, IS SUMMARIZED BELOW (IN THOUSANDS):
- -----------------------------------------------------------------------------------------
Rest of
U.S.A Germany Australia France World Total
- -----------------------------------------------------------------------------------------
2003
Revenue from external customers $124,375 51,992 6,972 27,745 62,486 $273,570
Long lived assets . . . . . . . $ 34,340 5,765 68,300 1,030 2,350 $111,785
- -----------------------------------------------------------------------------------------
2002
Revenue from external customers $ 95,463 35,386 5,569 20,957 46,701 $204,076
Long lived assets . . . . . . . $ 34,127 3,738 46,370 599 2,455 $ 87,289
- -----------------------------------------------------------------------------------------
2001
Revenue from external customers $ 74,981 25,646 5,318 17,592 31,619 $155,156
Long lived assets . . . . . . . $ 30,475 3,063 25,130 555 1,725 $ 60,948
- -----------------------------------------------------------------------------------------
NET REVENUES FROM EXTERNAL CUSTOMERS IS BASED ON THE LOCATION OF THE
CUSTOMER. LONG-LIVED ASSETS OF GEOGRAPHIC AREAS ARE THOSE ASSETS USED IN THE
COMPANY'S OPERATIONS IN EACH GEOGRAPHICAL AREA AND EXCLUDES PATENTS, DEFERRED
TAX ASSETS AND GOODWILL.
F25
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(15) COMMITMENTS
THE COMPANY LEASES BUILDINGS, MOTOR VEHICLES AND OFFICE EQUIPMENT UNDER
OPERATING LEASES. RENTAL CHARGES FOR THESE ITEMS ARE EXPENSED AS INCURRED. AT
JUNE 30, 2003 THE COMPANY HAD THE FOLLOWING FUTURE MINIMUM LEASE PAYMENTS UNDER
NON-CANCELABLE OPERATING LEASES (IN THOUSANDS):
- ------------------------------------------------------------------------------
Operating Sub lease Total net minimum
Years. . . . . . . . . . . . Leases rental income lease payments
- ------------------------------------------------------------------------------
2004 . . . . . . . . . . . . $ 5,134 $ 358 $ 4,776
2005 . . . . . . . . . . . . 4,817 387 4,430
2006 . . . . . . . . . . . . 1,571 72 1,499
2007 . . . . . . . . . . . . 1,244 - 1,244
2008 . . . . . . . . . . . . 952 - 952
Thereafter . . . . . . . . . 722 - 722
Total minimum lease payments $ 14,440 $ 817 $ 13,623
- ------------------------------------------------------------------------------
RENT EXPENSES UNDER OPERATING LEASES FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND
2001 WERE APPROXIMATELY $3,801,000, $2,267,000 AND $1,087,000, RESPECTIVELY.
(16) BUSINESS ACQUISITIONS
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.
F26
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(16) BUSINESS ACQUISITIONS, CONTINUED
FISCAL YEAR ENDED JUNE 30, 2002 (CONTINUED)
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.
PURCHASED RESEARCH AND DEVELOPMENT PROJECTS RELATED TO ELECTRICAL MOTOR SYSTEMS
USED IN OUR FLOW GENERATOR DEVICES AND OTHER MEDICAL AND DATA STORAGE EQUIPMENT.
KEY ASSUMPTIONS USED IN THE ANALYSIS INCLUDED GROSS MARGINS OF 34%. AS OF THE
DATE OF ACQUISITION, NEW MOTOR SYSTEMS FOR USE IN MEDICAL AND HEALTH
APPLICATIONS ARE EXPECTED TO BE COMPLETED AND COMMERCIALLY AVAILABLE BY 2004.
THESE PROJECTS HAVE ESTIMATED COSTS TO COMPLETE TOTALING APPROXIMATELY $0.5
MILLION.
THE COMPANY BELIEVES THAT THE ASSUMPTIONS USED TO VALUE ACQUIRED INTANGIBLE
ASSETS NOTED ABOVE WERE REASONABLE AT THE TIME OF ACQUISITION AND AS AT MARCH
31, 2003. NO ASSURANCE CAN BE GIVEN, HOWEVER, THAT THE UNDERLYING ASSUMPTIONS
USED TO ESTIMATE EXPECTED PROJECT REVENUES, DEVELOPMENT COSTS OR PROFITABILITY,
OR EVENTS ASSOCIATED WITH SUCH PROJECTS, WILL TRANSPIRE AS ESTIMATED. FOR THESE
REASONS, AMONG OTHERS, ACTUAL RESULTS MAY VARY FROM THE PROJECTED RESULTS.
LABHARDT AG. ON NOVEMBER 15, 2001, THE COMPANY'S WHOLLY OWNED SUBSIDIARY RESMED
INTERNATIONAL INC. ACQUIRED ALL THE COMMON STOCK OF LABHARDT AG, ITS SWISS
DISTRIBUTOR FOR TOTAL CASH CONSIDERATION INCLUDING ACQUISITION COSTS OF $5.5
MILLION.
THE ACQUISITION HAS BEEN ACCOUNTED FOR AS A PURCHASE AND ACCORDINGLY, THE
RESULTS OF OPERATIONS OF LABHARDT 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 SMI AND LABHARDT AG ARE NOT INCLUDED
AS THE EFFECTS WOULD NOT BE SIGNIFICANT TO THE CONSOLIDATED FINANCIAL
STATEMENTS.
FISCAL YEAR ENDED JUNE 30, 2001
MAP MEDIZIN-TECHNOLOGIE GMBH (MAP). ON FEBRUARY 16, 2001 THE COMPANY'S FULLY
OWNED GERMAN SUBSIDIARY, RESMED BETEILIGUNGS GMBH, ACQUIRED ALL THE COMMON STOCK
OF MAP MEDIZIN-TECHNOLOGIE GMBH ("MAP'') FOR TOTAL CONSIDERATION, INCLUDING
ACQUISITION COSTS, OF $55.4 MILLION. MAP IS A LEADING GERMAN DESIGNER,
MANUFACTURER AND DISTRIBUTOR OF MEDICAL DEVICES FOR THE DIAGNOSIS AND TREATMENT
OF SDB, WITH A PARTICULAR FOCUS ON OSA.
F27
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(16) BUSINESS ACQUISITION, CONTINUED
FISCAL YEAR ENDED JUNE 30, 2001 (CONTINUED)
THE ACQUISITION HAS BEEN ACCOUNTED FOR AS A PURCHASE AND ACCORDINGLY, THE
RESULTS OF OPERATIONS OF MAP HAVE BEEN INCLUDED IN THE COMPANY'S CONSOLIDATED
FINANCIAL STATEMENTS FROM FEBRUARY 16, 2001. AN AMOUNT OF $47.1 MILLION,
REPRESENTING THE EXCESS OF THE PURCHASE PRICE OVER THE FAIR VALUE OF THE NET
IDENTIFIABLE ASSETS ACQUIRED, HAS BEEN RECORDED AS GOODWILL.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT OF $17.7 MILLION WAS EXPENSED UPON
ACQUISITION OF MAP BECAUSE TECHNOLOGICAL FEASIBILITY OF THE PRODUCTS UNDER
DEVELOPMENT HAD NOT BEEN ESTABLISHED AND NO FURTHER ALTERNATIVE USES EXISTED.
THE VALUE OF IN PROCESS TECHNOLOGY WAS CALCULATED BY IDENTIFYING RESEARCH
PROJECTS IN AREAS FOR WHICH TECHNOLOGICAL FEASIBILITY HAD NOT BEEN ESTABLISHED,
ESTIMATING THE COSTS TO DEVELOP THE PURCHASED IN PROCESS TECHNOLOGY INTO
COMMERCIALLY VIABLE PRODUCTS, ESTIMATING THE RESULTING NET CASH FLOWS FROM SUCH
PRODUCTS, DISCOUNTING THE NET CASH FLOWS TO PRESENT VALUE, AND APPLYING THE
REDUCED PERCENTAGE COMPLETION OF THE PROJECTS THERETO. THE DISCOUNT RATES USED
IN THE ANALYSIS WERE BETWEEN 27% AND 33% AND WERE BASED ON THE RISK PROFILE OF
THE ACQUIRED ASSETS.
ALL PURCHASED RESEARCH AND DEVELOPMENT PROJECTS RELATED TO MEDICAL EQUIPMENT FOR
THE TREATMENT OF SLEEP DISORDERED BREATHING, PRIMARILY RELATING TO THE
DEVELOPMENT OF MASK INTERFACE SYSTEMS AND AUTOTITRATING DEVICES FOR THE
TREATMENT OF OBSTRUCTIVE SLEEP APNEA AND ASSOCIATED DISORDERS. KEY ASSUMPTIONS
USED IN THE ANALYSIS INCLUDED GROSS MARGINS RANGING FROM 70% TO 80%. AS OF THE
DATE OF ACQUISITION, THE MASK INTERFACE SYSTEMS ARE EXPECTED TO BE COMPLETED AND
COMMERCIALLY AVAILABLE IN 2002 AND VERSIONS OF THE AUTOTITRATING DEVICES BETWEEN
2003 AND 2005. THESE PROJECTS HAVE ESTIMATED COSTS TO COMPLETE TOTALLING
APPROXIMATELY $2.0 MILLION.
THE COMPANY BELIEVES THAT THE ASSUMPTIONS USED TO VALUE THE ACQUIRED INTANGIBLE
ASSETS WERE REASONABLE AT THE TIME OF ACQUISITION. NO ASSURANCE CAN BE GIVEN,
HOWEVER, THAT THE UNDERLYING ASSUMPTIONS USED TO ESTIMATE EXPECTED PROJECT
REVENUES, DEVELOPMENT COSTS OR PROFITABILITY, OR EVENTS ASSOCIATED WITH SUCH
PROJECTS, WILL TRANSPIRE AS ESTIMATED. FOR THESE REASONS, AMONG OTHERS, ACTUAL
RESULTS MAY VARY FROM THE PROJECTED RESULTS.
THE FOLLOWING UNAUDITED PRO-FORMA FINANCIAL INFORMATION PRESENTS THE COMBINED
RESULTS OF OPERATIONS OF THE COMPANY AND MAP AS IF THE ACQUISITION HAD OCCURRED
AS OF THE BEGINNING OF THE YEAR ENDED JUNE 30, 2001 AND AFTER GIVING EFFECT TO
CERTAIN ADJUSTMENTS, INCLUDING AMORTIZATION OF GOODWILL AND INCREASED INTEREST
EXPENSE ASSOCIATED WITH DEBT FUNDING THE ACQUISITION. THE PRO-FORMA FINANCIAL
INFORMATION DOES NOT NECESSARILY REFLECT THE RESULTS OF OPERATIONS THAT WOULD
HAVE OCCURRED HAD THE COMPANY AND MAP CONSTITUTED A SINGLE ENTITY DURING FISCAL
2001.
- ------------------------------------------------
(In thousands except per share data) 2001
- ------------------------------------------------
Net revenue. . . . . . . . . . . . . $172,250
Net income . . . . . . . . . . . . . 28,556
Basic earnings per share . . . . . . $ 0.92
Diluted earnings per share . . . . . $ 0.85
Basic shares outstanding . . . . . . 31,129
Diluted shares outstanding . . . . . 33,484
- ------------------------------------------------
F28
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(16) BUSINESS ACQUISITION, CONTINUED
FISCAL YEAR ENDED JUNE 30, 2001 (CONTINUED)
DURING THE DECEMBER 2001, THE COMPANY PAID AN AMOUNT OF $1.4 MILLION AS FINAL
CONSIDERATION ASSOCIATED WITH THE PURCHASE OF MAP. THE AMOUNT HAS BEEN RECORDED
AS GOODWILL.
(17) COMPREHENSIVE INCOME
MOVEMENTS IN COMPREHENSIVE INCOME (LOSS) FOR THE YEAR ENDED JUNE 30, 2003 ARE
PRESENTED BELOW (IN THOUSANDS):
- -------------------------------------------------------------------------------------------------------------
Foreign Unrealized Accumulated Other Retained Accumulated
Currency Gains on Comprehensive Earnings Comprehensive
Items Securities Income (Loss) Income (Loss)
- -------------------------------------------------------------------------------------------------------------
Beginning balance, July 1, 2002 ($8,230) 105 ($8,125) $114,643 $ 106,518
Current period change . . . . . 38,131 (96) 38,035 45,729 83,764
- -------------------------------------------------------------------------------------------------------------
Ending balance, June 30, 2003 . $ 29,901 9 $ 29,910 $160,372 $ 190,282
- -------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME/(LOSS) FOR THE YEARS ENDED JUNE 30, 2003, JUNE 30,
2002 AND JUNE 30, 2001 WAS $83.8 MILLION, $59.0 MILLION AND ($4.8) MILLION,
RESPECTIVELY.
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 INCOME (LOSS) AT JUNE
30, 2003 AND JUNE 30, 2002 CONSISTED OF FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
WITH NET CREDIT BALANCE OF $29.9 MILLION AND A NET DEBIT BALANCE OF $8.2 MILLION
RESPECTIVELY AND UNREALIZED GAINS ON SECURITIES OF $9,000 (NET OF TAX OF $6,000)
AND $105,000 (NET OF TAX OF $57,000), RESPECTIVELY.
(18) LEGAL ACTIONS
THE COMPANY WAS ENGAGED IN LITIGATION RELATING TO THE ENFORCEMENT AND DEFENSE OF
CERTAIN OF ITS PATENTS DURING THE FISCAL YEAR.
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. THE
RESPIRONICS COMPLAINT ALSO MADE THE UNIVERSITY OF SYDNEY A PARTY AS THE
UNIVERSITY OF SYDNEY IS THE ASSIGNEE OF ONE OF THE PATENTS IN SUIT; RESMED
LIMITED IS THE EXCLUSIVE LICENSEE OF THAT PATENT. THE TWO ACTIONS WERE COMBINED
AND ARE PROCEEDING IN THE WESTERN DISTRICT OF PENNSYLVANIA. IN JUNE 1996,
RESMED LIMITED FILED AN ADDITIONAL COMPLAINT AGAINST RESPIRONICS FOR
INFRINGEMENT OF A FOURTH RESMED PATENT, AND THAT COMPLAINT WAS CONSOLIDATED WITH
THE EARLIER ACTION.
F29
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(18) LEGAL ACTIONS, CONTINUED
THE COURT HAS GRANTED THREE PARTIAL SUMMARY JUDGMENT MOTIONS, FINDING THAT
RESPIRONICS DOES NOT INFRINGE THREE OF THE FOUR PATENTS AT ISSUE. IN DECEMBER
1999, IN RESPONSE TO THE COURT'S RULING ON RESPIRONICS, INC.'S 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 OF THE THIRD
PARTIAL SUMMARY JUDGMENT. ON SEPTEMBER 9, 2003, THE COURT VACATED THE SUMMARY
JUDGMENTS.
RESMED AND RESPIRONICS HAVE AGREED TO SETTLE THIS ACTION. RESMED AND
RESPIRONICS WILL DISMISS ALL CLAIMS IN THE ACTION 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 BY AUGUST 1, 2003 AND
RESMED WILL NOT ASSERT INTELLECTUAL PROPERTY CLAIMS AGAINST THE NEW MASK. IN
ADDITION, FISHER & PAYKEL MAY CONTINUE TO SELL ITS EXISTING MASKS OUTSIDE THE
UNITED STATES UNTIL OCTOBER 1, 2003, UNDER LICENSE FROM RESMED, UNTIL IT
INTRODUCES THE NEW VERSION THERE. RESMED HAS DISMISSED THE LAWSUIT 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
SEEKS 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 CHARGES RESPIRONICS WITH COPYING RESMED'S
PROPRIETARY MASK TECHNOLOGY, AND ALLEGES VIOLATION OF THE LANHAM ACT, TRADEMARK
AND TRADE DRESS INFRINGEMENT, AND COMMON LAW VIOLATIONS RELATING TO THE
APPEARANCE OF RESMED'S MASK PRODUCTS. RESMED SEEKS 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 US DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF CALIFORNIA.
RESMED AND RESPIRONICS HAVE AGREED TO SETTLE THIS ACTION. RESMED AND
RESPIRONICS WILL DISMISS ALL CLAIMS IN THE ACTION WITH PREJUDICE.
F30
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(18) LEGAL ACTIONS, CONTINUED
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
MAP
ON ACQUISITION OF MAP IN FEBRUARY 2001, THE COMPANY RECOGNIZED AS AN EXPENSE A
CHARGE OF $17.7 MILLION WITH RESPECT TO FIVE IN-PROCESS RESEARCH AND DEVELOPMENT
PROGRAMS UNDER ACTIVE DEVELOPMENT BY MAP AT DATE OF ACQUISITION. THE FIVE
PROJECTS WERE:
(I) A SINGLE-WALLED NASAL CUSHION MASK SYSTEM.
(II) A NEW HEADGEAR SYSTEM
(III) STANDALONE ACTIVE HUMIDIFIER
(IV) AN AUTOTITRATION CPAP DEVICE FOR TREATMENT OF OSA
(V) A NEW OSA DIAGNOSTIC DEVICE.
THE STATUS OF EACH PROJECT IS AS NOTED BELOW:
(I) SINGLE-WALLED NASAL CUSHION
THE NASAL CUSHION UNDER DEVELOPMENT BY MAP ON ACQUISITION WAS ORIGINALLY DUE FOR
RELEASE IN OCTOBER 2001. DELAYS IN THE DESIGN AND MANUFACTURING PROCESS DELAYED
THE RELEASE FOR SEVEN MONTHS, UNTIL APRIL 2002. THE DELAY IN RELEASE OF THE
PRODUCT WAS NOT SIGNIFICANT OVER ITS EXPECTED LIFE CYCLE, AND HAS MADE NO
SIGNIFICANT IMPACT ON THE NET RETURN ASSUMPTIONS USED IN THE INITIAL IN-PROCESS
RESEARCH AND DEVELOPMENT MODEL. SINCE RELEASE, THE PRODUCT (NOW REFERRED TO AS
THE PAPILLON) HAS MET OR EXCEEDED ALL SALES FORECASTS.
(II) NEW HEADGEAR
THE NEW HEADGEAR PRODUCT LINE WAS WITHHELD TO COINCIDE WITH THE RELEASE OF THE
PAPILLION 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.
F31
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(19) IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE, CONTINUED
(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
DELAYED 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
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. 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.
(V) OSA DIAGNOSTIC DEVICE
MAP'S NEW DIAGNOSTIC DEVICE REMAINS ON TARGET FOR INITIAL MARKET RELEASE IN
CALENDAR 2003 ALTHOUGH THE FORECASTED RELEASE DATE OF MARCH 2003 WAS NOT
ACHIEVED. WE REMAIN CONFIDENT IN THE CAPACITY OF THE DEVICE TO ENHANCE THE
DIAGNOSTIC PROCESS, AND REMAIN CONFIDENT IN THE POTENTIAL OF THE PRODUCT TO
SIGNIFICANTLY IMPACT THE TREATMENT AND DIAGNOSIS OF OBSTRUCTIVE SLEEP APNEA IN
THE GERMAN MARKET.
AS AT JUNE 30, 2003, THREE OF THE FIVE PROGRAMS HAVE BEEN COMPLETED WITH THE
RELEASE OF THE PAPILLON MASK SYSTEM, UPGRADED HEADGEAR AND THE MAGELLAN
AUTOMATED FLOW GENERATOR CPAP DEVICE. ALL THREE PRODUCTS ARE GENERATING SALES
REVENUE CONSISTENT WITH OUR ORIGINAL EXPECTATIONS AND ASSUMPTIONS USED IN
CALCULATING THE IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE. WE EXPECT TO
RELEASE PRODUCTS WITH RESPECT TO BOTH REMAINING IN-PROCESS RESEARCH AND
DEVELOPMENT PROGRAMS OVER THE NEXT TWELVE-MONTH PERIOD, WHICH IS GENERALLY
CONSISTENT WITH OUR ORIGINAL EXPECTATIONS.
GIVEN THE SUCCESSFUL COMPLETION OF THE ABOVE RESEARCH PROGRAMS AND PERFORMANCE
OF THE ASSOCIATED PRODUCT LINES, WE REMAIN CONFIDENT IN THE ASSUMPTIONS USED TO
DETERMINE THE IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE AND AS A RESULT THE NET
RETURN OF THE MAP ACQUISITION.
F32
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 SEPTEMBER 10, 2003
RESMED INC.
/S/ PETER C. FARRELL
- ----------------------------------------
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/ PETER C. FARRELL . . . . . . Chief Executive Officer, September 10, 2003
Peter C. Farrell . . . . . . .President, Chairman of the Board
(Principal Executive Officer)
- --------------------------------------------------------------------------------------------
/S/ ADRIAN M. SMITH . . . . . . Vice President Finance and September 10, 2003
Adrian M. Smith. . . . . . . .Chief Financial Officer
- --------------------------------------------------------------------------------------------
/S/ CHRISTOPHER G. ROBERTS . Director September 10, 2003
Christopher G. Roberts
- --------------------------------------------------------------------------------------------
/S/ MICHAEL A. QUINN . . . . . . Director September 10, 2003
Michael A. Quinn
- --------------------------------------------------------------------------------------------
/S/ GARY W. PACE . . . . . . . . Director September 10, 2003
Gary W. Pace
- --------------------------------------------------------------------------------------------
/S/ DONAGH MCCARTHY. . . . . . . Director September 10, 2003
Donagh McCarthy
- --------------------------------------------------------------------------------------------
/S/ CHRISTOPHER A. BARTLETT. . . Director September 10, 2003
Christopher Bartlett
- --------------------------------------------------------------------------------------------
/S/ LOUIS A. SIMPSON . . . . . . Director September 10, 2003
Louis Simpson
- --------------------------------------------------------------------------------------------
- -44-
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, PETER C. FARRELL, CERTIFY THAT:
1. I HAVE REVIEWED THIS ANNUAL REPORT ON FORM 10-K OF RESMED INC.;
2. BASED ON MY KNOWLEDGE, THIS REPORT DOES NOT CONTAIN ANY UNTRUE STATEMENT
OF A MATERIAL FACT OR OMIT TO STATE A MATERIAL FACT NECESSARY TO MAKE THE
STATEMENTS MADE, IN LIGHT OF THE CIRCUMSTANCES UNDER WHICH SUCH
STATEMENTS WERE MADE, NOT MISLEADING WITH RESPECT TO THE PERIOD COVERED
BY THIS REPORT;
3. BASED ON MY KNOWLEDGE, THE FINANCIAL STATEMENTS, AND OTHER FINANCIAL
INFORMATION INCLUDED IN THIS REPORT, FAIRLY PRESENT IN ALL MATERIAL
RESPECTS THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOWS OF
THE REGISTRANT AS OF, AND FOR, THE PERIODS PRESENTED IN THIS REPORT;
4. THE REGISTRANT'S OTHER CERTIFYING OFFICER AND I ARE RESPONSIBLE FOR
ESTABLISHING AND MAINTAINING DISCLOSURE CONTROLS AND PROCEDURES (AS
DEFINED IN EXCHANGE ACT RULES 13A-15(E) AND 15D-15(E)) FOR THE REGISTRANT
AND HAVE:
(A) DESIGNED SUCH DISCLOSURE CONTROLS AND PROCEDURES, OR CAUSED
SUCH DISCLOSURE CONTROLS AND PROCEDURES TO BE DESIGNED UNDER OUR
SUPERVISION, TO ENSURE THAT MATERIAL INFORMATION RELATING TO THE
REGISTRANT, INCLUDING ITS CONSOLIDATED SUBSIDIARIES, IS MADE KNOWN TO
US BY OTHERS WITHIN THOSE ENTITIES, PARTICULARLY DURING THE PERIOD IN
WHICH THIS REPORT IS BEING PREPARED;
(B) EVALUATED THE EFFECTIVENESS OF THE REGISTRANT'S DISCLOSURE CONTROLS
AND PROCEDURES AND PRESENTED IN THIS REPORT OUR CONCLUSIONS ABOUT THE
EFFECTIVENESS OF THE DISCLOSURE CONTROLS AND PROCEDURES, AS OF THE
END OF THE PERIOD COVERED BY THIS REPORT BASED ON SUCH EVALUATION;
AND
(C) DISCLOSED IN THIS REPORT ANY CHANGE IN THE REGISTRANT'S INTERNAL
CONTROL OVER FINANCIAL REPORTING THAT OCCURRED DURING THE
REGISTRANT'S MOST RECENT FISCAL QUARTER (THE REGISTRANT'S FOURTH
FISCAL QUARTER IN THE CASE OF AN ANNUAL REPORT) THAT HAS MATERIALLY
AFFECTED, OR IS REASONABLY LIKELY TO MATERIALLY AFFECT, THE
REGISTRANT'S INTERNAL CONTROL OVER FINANCIAL REPORTING; AND
5. THE REGISTRANT'S OTHER CERTIFYING OFFICER AND I HAVE DISCLOSED, BASED ON
OUR MOST RECENT EVALUATION OF INTERNAL CONTROL OVER FINANCIAL REPORTING,
TO THE REGISTRANT'S AUDITORS AND THE AUDIT COMMITTEE OF THE REGISTRANT'S
BOARD OF DIRECTORS (OR PERSONS PERFORMING THE EQUIVALENT FUNCTIONS):
(A) ALL SIGNIFICANT DEFICIENCIES AND MATERIAL WEAKNESSES IN THE DESIGN OR
OPERATION OF INTERNAL CONTROL OVER FINANCIAL REPORTING WHICH ARE
REASONABLY LIKELY TO ADVERSELY AFFECT THE REGISTRANT'S ABILITY TO
RECORD, PROCESS, SUMMARIZE AND REPORT FINANCIAL INFORMATION; AND
(B) ANY FRAUD, WHETHER OR NOT MATERIAL, THAT INVOLVES MANAGEMENT OR OTHER
EMPLOYEES WHO HAVE A SIGNIFICANT ROLE IN THE REGISTRANT'S INTERNAL
CONTROL OVER FINANCIAL REPORTING.
SEPTEMBER 10, 2003
/S/ PETER C. FARRELL
- -----------------------------------------
PETER C. FARRELL
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
- -45-
EXHIBIT 31.2
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, ADRIAN M. SMITH, CERTIFY THAT:
1. I HAVE REVIEWED THIS ANNUAL REPORT ON FORM 10-K OF RESMED INC.;
2. BASED ON MY KNOWLEDGE, THIS REPORT DOES NOT CONTAIN ANY UNTRUE STATEMENT
OF A MATERIAL FACT OR OMIT TO STATE A MATERIAL FACT NECESSARY TO MAKE THE
STATEMENTS MADE, IN LIGHT OF THE CIRCUMSTANCES UNDER WHICH SUCH
STATEMENTS WERE MADE, NOT MISLEADING WITH RESPECT TO THE PERIOD COVERED
BY THIS REPORT;
3. BASED ON MY KNOWLEDGE, THE FINANCIAL STATEMENTS, AND OTHER FINANCIAL
INFORMATION INCLUDED IN THIS REPORT, FAIRLY PRESENT IN ALL MATERIAL
RESPECTS THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOWS OF
THE REGISTRANT AS OF, AND FOR, THE PERIODS PRESENTED IN THIS REPORT;
4. THE REGISTRANT'S OTHER CERTIFYING OFFICER AND I ARE RESPONSIBLE FOR
ESTABLISHING AND MAINTAINING DISCLOSURE CONTROLS AND PROCEDURES (AS
DEFINED IN EXCHANGE ACT RULES 13A-15(E) AND 15D-15(E)) FOR THE REGISTRANT
AND HAVE:
(A) DESIGNED SUCH DISCLOSURE CONTROLS AND PROCEDURES, OR CAUSED SUCH
DISCLOSURE CONTROLS AND PROCEDURES TO BE DESIGNED UNDER OUR
SUPERVISION, TO ENSURE THAT MATERIAL INFORMATION RELATING TO THE
REGISTRANT, INCLUDING ITS CONSOLIDATED SUBSIDIARIES, IS MADE KNOWN TO
US BY OTHERS WITHIN THOSE ENTITIES, PARTICULARLY DURING THE PERIOD IN
WHICH THIS REPORT IS BEING PREPARED;
(B) EVALUATED THE EFFECTIVENESS OF THE REGISTRANT'S DISCLOSURE CONTROLS
AND PROCEDURES AND PRESENTED IN THIS REPORT OUR CONCLUSIONS ABOUT THE
EFFECTIVENESS OF THE DISCLOSURE CONTROLS AND PROCEDURES, AS OF THE
END OF THE PERIOD COVERED BY THIS REPORT BASED ON SUCH EVALUATION;
AND
(C) DISCLOSED IN THIS REPORT ANY CHANGE IN THE REGISTRANT'S INTERNAL
CONTROL OVER FINANCIAL REPORTING THAT OCCURRED DURING THE
REGISTRANT'S MOST RECENT FISCAL QUARTER (THE REGISTRANT'S FOURTH
FISCAL QUARTER IN THE CASE OF AN ANNUAL REPORT) THAT HAS MATERIALLY
AFFECTED, OR IS REASONABLY LIKELY TO MATERIALLY AFFECT, THE
REGISTRANT'S INTERNAL CONTROL OVER FINANCIAL REPORTING; AND
5. THE REGISTRANT'S OTHER CERTIFYING OFFICER AND I HAVE DISCLOSED, BASED ON
OUR MOST RECENT EVALUATION OF INTERNAL CONTROL OVER FINANCIAL REPORTING,
TO THE REGISTRANT'S AUDITORS AND THE AUDIT COMMITTEE OF THE REGISTRANT'S
BOARD OF DIRECTORS (OR PERSONS PERFORMING THE EQUIVALENT FUNCTIONS):
(A) ALL SIGNIFICANT DEFICIENCIES AND MATERIAL WEAKNESSES IN THE DESIGN OR
OPERATION OF INTERNAL CONTROL OVER FINANCIAL REPORTING WHICH ARE
REASONABLY LIKELY TO ADVERSELY AFFECT THE REGISTRANT'S ABILITY TO
RECORD, PROCESS, SUMMARIZE AND REPORT FINANCIAL INFORMATION; AND
(B) ANY FRAUD, WHETHER OR NOT MATERIAL, THAT INVOLVES MANAGEMENT OR OTHER
EMPLOYEES WHO HAVE A SIGNIFICANT ROLE IN THE REGISTRANT'S INTERNAL
CONTROL OVER FINANCIAL REPORTING.
SEPTEMBER 10, 2003
/S/ ADRIAN M. SMITH
- --------------------------------------------------------
ADRIAN M. SMITH
VICE PRESIDENT FINANCE AND CHIEF FINANCIAL OFFICER
- -46-
EXHIBIT 32.1
THE FOLLOWING CERTIFICATIONS ARE BEING FURNISHED SOLELY TO ACCOMPANY THE REPORT
PURSUANT TO 18 U.S.C. 1350 AND IN ACCORDANCE WITH SEC RELEASE NO. 33-8238.
THESE CERTIFICATIONS SHALL NOT BE DEEMED "FILED" FOR PURPOSES OF SECTION 18 OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, NOR SHALL THEY BE INCORPORATED
BY REFERENCE IN ANY FILING OF THE COMPANY UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, WHETHER MADE BEFORE OR AFTER THE DATE HEREOF, REGARDLESS OF ANY GENERAL
INCORPORATION LANGUAGE IN SUCH FILING.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. 1350, AS CREATED BY SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002, THE UNDERSIGNED OFFICER OF RESMED INC., A DELAWARE CORPORATION (THE
"COMPANY"), HEREBY CERTIFIES, TO HIS KNOWLEDGE, THAT:
(I) THE ACCOMPANYING ANNUAL REPORT ON FORM 10-K OF THE COMPANY FOR THE
PERIOD ENDED JUNE 30, 2003 (THE "REPORT") FULLY COMPLIES WITH THE
REQUIREMENTS OF SECTION 13(A) OR SECTION 15(D), AS APPLICABLE, OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED; AND
(II) THE INFORMATION CONTAINED IN THE REPORT FAIRLY PRESENTS, IN ALL
MATERIAL RESPECTS, THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
THE COMPANY.
DATED: SEPTEMBER 10, 2003
/S/ PETER C. FARRELL
- -----------------------------------------
PETER C. FARRELL
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN
PROVIDED TO RESMED INC. AND WILL BE RETAINED BY RESMED INC. AND FURNISHED TO THE
SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. 1350, AS CREATED BY SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002, THE UNDERSIGNED OFFICER OF RESMED INC., A DELAWARE, CORPORATION
(THE "COMPANY"), HEREBY CERTIFIES, TO HIS KNOWLEDGE, THAT:
(I) THE ACCOMPANYING ANNUAL REPORT ON FORM 10-K OF THE COMPANY FOR THE
PERIOD ENDED JUNE 30, 2003 (THE "REPORT") FULLY COMPLIES WITH THE
REQUIREMENTS OF SECTION 13(A) OR SECTION 15(D), AS APPLICABLE, OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED; AND
(II) THE INFORMATION CONTAINED IN THE REPORT FAIRLY PRESENTS, IN ALL
MATERIAL RESPECTS, THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
THE COMPANY.
DATED: SEPTEMBER 10, 2003
/S/ ADRIAN M. SMITH
- --------------------------------------------------------
ADRIAN M. SMITH
VICE PRESIDENT FINANCE AND CHIEF FINANCIAL OFFICER
A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN
PROVIDED TO RESMED INC. AND WILL BE RETAINED BY RESMED INC. AND FURNISHED TO THE
SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.
- -47-
SCHEDULE II
RESMED INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years Ended June 30, 2003, 2002 and 2001
(in thousands)
- --------------------------------------------------------------------------------------------
Balance at Charged to Other Balance at
Beginning of costs and (deductions) end of period
Period expenses
- --------------------------------------------------------------------------------------------
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
YEAR ENDED JUNE 30, 2001
Applied against asset account
Allowance for doubtful accounts $ 833 681 (622) 892
- --------------------------------------------------------------------------------------------
SEE ACCOMPANYING INDEPENDENT AUDITOR'S REPORT.
- -48-
RESMED INC. AND SUBSIDIARIES
EXHIBIT INDEX
2.1 SALE AND ASSIGNMENT AGREEMENT DATED AS OF FEBRUARY 16, 2001, BETWEEN
RESMED INC, RESMED BETEILINGUNGS GMBH AND THE SHAREHOLDERS OF MAP
MEDIZIN-TECHNOLOGIE GMBH (1)
2.2 AGREEMENT AND PLAN OF MERGER DATED AS OF MAY 14, 2002 AMONG RESMED INC.,
SERVO MAGNETICS ACQUISITION INC., SERVO MAGNETICS INCORPORATED AND MR.
LESLIE HOFFMAN (7)
3.1 CERTIFICATE OF INCORPORATION OF REGISTRANT, AS AMENDED (2)
3.2 BY-LAWS OF REGISTRANT (2)
4.1 FORM OF CERTIFICATE EVIDENCING SHARES OF COMMON STOCK (2)
4.2 RIGHTS AGREEMENT DATED AS OF APRIL 23, 1997 (3)
4.3 INDENTURE DATED AS OF JUNE 20, 2001, BETWEEN RESMED INC AND AMERICAN
STOCK TRANSFER & TRUST COMPANY (6)
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 (6)
4.5 REGISTRATION RIGHTS AGREEMENT DATED AS OF MAY 14, 2002 BETWEEN RESMED
INC., AND MR. LESLIE HOFFMAN (7)
10.1 1995 STOCK OPTION PLAN (2)
10.2 1997 EQUITY PARTICIPATION PLAN (4)
10.3 LICENSING AGREEMENT BETWEEN THE UNIVERSITY OF SYDNEY AND RESMED LIMITED
DATED MAY 17, 1991, AS AMENDED (2)
10.4 CONSULTING AGREEMENT BETWEEN COLIN SULLIVAN AND RESMED LIMITED
EFFECTIVE FROM 1 JANUARY 1998 (5)
10.5 LOAN AGREEMENT BETWEEN THE AUSTRALIAN TRADE COMMISSION AND RESMED
LIMITED DATED MAY 3, 1994 (2)
10.6 LEASE FOR 1091 CARROLL CANYON ROAD, SAN DIEGO 92131-1109, U.S.A.(5)
10.7 SALE AND LEASEBACK AGREEMENTS FOR 97 WATERLOO RD, NORTH RYDE, AUSTRALIA
(6)
10.8 EMPLOYMENT AGREEMENT DATED AS OF MAY 14, 2002, BETWEEN SERVO MAGNETICS
ACQUISITION INC., AND MR. LESLIE HOFFMAN (7)
10.9 AGREEMENT FOR THE PURCHASE OF LOT 6001, NORWEST BOULEVARDE, NORWEST
BUSINESS PARK, BAULKHAM HILLS, AUSTRALIA (7)
11.1 COMPUTATION OF EARNINGS PER COMMON SHARE
21.1 SUBSIDIARIES OF THE REGISTRANT
23.1 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
31.1 CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
31.2 CERTIFICATIONS OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
32.1 CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
- --------------------------------------------------------------------------------
(1) INCORPORATED BY REFERENCE TO THE REGISTRANT'S REPORT ON FORM 8-K DATED MARCH
2, 2001.
(2) INCORPORATED BY REFERENCE TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM
S-1 (NO. 33-91094) DECLARED EFFECTIVE ON JUNE 1, 1995.
(3) INCORPORATED BY REFERENCE TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM
8-A12G FILED ON APRIL 25, 1997.
(4) INCORPORATED BY REFERENCE TO THE REGISTRANT'S 1997 PROXY STATEMENT.
(5) INCORPORATED BY REFERENCE TO THE REGISTRANT'S REPORT ON FORM 10-K DATED JUNE
30, 1998.
(6) INCORPORATED BY REFERENCE TO THE REGISTRANT'S REPORT ON FORM 10-K DATED JUNE
30, 2001.
(7) INCORPORATED BY REFERENCE TO THE REGISTRANT'S REPORT ON FORM 10-K DATED JUNE
30, 2002.
- -49-
EXHIBIT 11.1
RESMED INC. AND SUBSIDIARIES
Computation of Earnings Per Common Share
(in thousands, except per share amounts)
- -----------------------------------------------------------------------------------------------------------------
Year Ended June 30,
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------
BASIC EARNINGS:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $45,729 $37,506 $11,630
- -----------------------------------------------------------------------------------------------------------------
Shares/ Weighted average number of common shares outstanding. . . . . . . . . . . . . 33,054 32,174 31,129
- -----------------------------------------------------------------------------------------------------------------
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.38 $ 1.17 $ 0.37
- -----------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $45,729 $37,506 $11,630
- -----------------------------------------------------------------------------------------------------------------
Shares/ Weighted average number of common shares outstanding . . . . . . . . . . . . . 33,054 32,174 31,129
- -----------------------------------------------------------------------------------------------------------------
Additional shares assuming conversion of stock options under treasury stock method . . 1,385 1,906 2,355
- -----------------------------------------------------------------------------------------------------------------
Weighted average number of common and common equivalent shares outstanding as adjusted 34,439 34,080 33,484
- -----------------------------------------------------------------------------------------------------------------
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.33 $ 1.10 $ 0.35
- -----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING INDEPENDENT AUDITOR'S REPORT.
- -50-
EXHIBIT 21.1
RESMED INC.
SUBSIDIARIES OF THE REGISTRANT
RESMED CORPORATION (A MINNESOTA CORPORATION)
RESMED (MALAYSIA) SDN BHD (A MALAYSIAN CORPORATION) (2)
RESMED (UK) LIMITED (A UNITED KINGDOM CORPORATION) (1)
RESMED ASIA PACIFIC LIMITED (INCORPORATED UNDER THE LAWS OF NEW SOUTH WALES,
AUSTRALIA) (1)
RESMED BETEILIGUNGS GMBH (A GERMAN CORPORATION)
RESMED FINLAND OY (A FINLAND CORPORATION)
RESMED HOLDINGS LIMITED (INCORPORATED UNDER THE LAWS OF NEW SOUTH WALES,
AUSTRALIA)
RESMED HONG KONG LIMITED (A HONG KONG CORPORATION)
RESMED INTERNATIONAL INC (A DELAWARE CORPORATION)
RESMED KK (A JAPANESE CORPORATION) (2)
RESMED LIMITED (INCORPORATED UNDER THE LAWS OF NEW SOUTH WALES, AUSTRALIA) (1)
RESMED NEW ZEALAND LIMITED (A NEW ZEALAND CORPORATION) (2)
RESMED PRIESS GMBH (A GERMAN CORPORATION)
RESMED PRIESS GMBH AND CO KG (A GERMAN CORPORATION) (2)
RESMED R&D LIMITED (INCORPORATED UNDER THE LAWS OF NEW SOUTH WALES, AUSTRALIA)
(1)
RESMED SA (A FRENCH CORPORATION) (2)
RESMED SINGAPORE PTE LTD (A SINGAPOREAN CORPORATION) (2)
RESMED SPAIN SL (A SPANISH CORPORATION) (2)
RESMED SWEDEN AB (A SWEDISH CORPORATION) (2)
SERVO MAGNETICS INC. (A DELAWARE CORPORATION)
LABHARDT AG (A SWISS CORPORATION) (2)
MAP HIRSCH MEDIZINTECHNIK F R ARZT UND PATIENT GMBH (AN AUSTRIAN CORPORATION)
(4)
MAP MEDISCHE TECHNIEK VOOR ARTS EN PATIENT BV (A DUTCH CORPORATION) (4)
MAP MEDIZINTECHNIK F R ARZT UND PATIENT GMBH (A SWISS CORPORATION) (4)
MAP MEDIZIN-TECHNOLOGIE GMBH (A GERMAN CORPORATION) (3)
- --------------------------------------------------------------------------------
(1) A SUBSIDIARY OF RESMED HOLDINGS LIMITED
(2) A SUBSIDIARY OF RESMED INTERNATIONAL INC
(3) A SUBSIDIARY OF RESMED BETEILIGUNGS GMBH
(4) A SUBSIDIARY OF MAP MEDIZIN-TECHNOLOGIE GMBH
- -51-
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
THE BOARD OF DIRECTORS AND STOCKHOLDERS
RESMED INC:
THE AUDITS REFERRED TO IN OUR REPORT DATED AUGUST 8, 2003, INCLUDED THE RELATED
FINANCIAL STATEMENT SCHEDULE AS OF JUNE 30, 2003 AND FOR EACH OF THE YEARS IN
THE THREE-YEAR PERIOD ENDED JUNE 30, 2003. THIS FINANCIAL STATEMENT SCHEDULE IS
THE RESPONSIBILITY OF THE COMPANY'S MANAGEMENT. OUR RESPONSIBILITY IS TO
EXPRESS AN OPINION ON THIS FINANCIAL STATEMENT SCHEDULE BASED ON OUR AUDITS. IN
OUR OPINION, SUCH FINANCIAL STATEMENT SCHEDULE, WHEN CONSIDERED IN RELATION TO
THE BASIC CONSOLIDATED FINANCIAL STATEMENTS TAKEN AS A WHOLE, PRESENTS FAIRLY IN
ALL MATERIAL RESPECTS THE INFORMATION SET FORTH THEREIN.
OUR REPORT REFERS TO A CHANGE IN THE METHOD OF ACCOUNTING FOR GOODWILL.
WE CONSENT TO INCORPORATION BY REFERENCE IN THE REGISTRATION STATEMENTS (NOS.
333-08013 AND 333-88231) ON FORM S-8 AND THE REGISTRATION STATEMENTS (NOS.
333-70500 AND 333-100825) ON FORM S-3 OF RESMED INC. OF OUR REPORTS INCLUDED
HEREIN.
/S/ KPMG LLP
- ------------------------
SAN DIEGO, CALIFORNIA
SEPTEMBER 10, 2003