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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, 1997
COMMISSION FILE NUMBER 0-26038
RESMED INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 98-0152841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5744 PACIFIC CENTER BOULEVARD
SUITE 311
SAN DIEGO CA 92121
UNITED STATES OF AMERICA
(Address of principal executive offices)
619 622 2040
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
Common Stock, $.004 Par Value NASDAQ Stock Market
Rights to Purchase Series A Junior NASDAQ Stock Market
Participating Preferred Stock
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( ).
The aggregate market value of the voting stock held by non-affiliates of
Registrant as of September 25, 1997, computed by reference to the closing sale
price of such stock on the NASDAQ Stock Market, was approximately $161,019,427
(All directors and executive officers of Registrant are considered
affiliates.)
At September 25, 1997, Registrant had 7,226,713 shares of Common Stock, $.004
par value, issued and outstanding.
Portions of Registrant's Annual Report to Stockholders for the period ended
June 30, 1997 are incorporated by reference into Part I of this report.
Portions of Registrant's definitive Proxy Statement for its November 10, 1997
meeting of stockholders are incorporated by reference into Part III of this
report.
THE INFORMATION CONTAINED IN THIS REPORT INCLUDES FORWARD-LOOKING STATEMENTS,
WHICH ARE TYPICALLY IDENTIFIED BY THE WORDS "ANTICIPATES", "BELIEVES",
"EXPECTS", "INTENDS", "FORECASTS", "PLANS", "FUTURE", "STRATEGY", OR WORDS OF
SIMILAR IMPORT. VARIOUS IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS ARE
IDENTIFIED BELOW IN PART I, ITEM 3 AND PART II, ITEM 7 OF THIS REPORT.
PART I
Item 1. Business
General
ResMed Inc., ("ResMed" or the "Company") is a leading manufacturer and
distributor of medical equipment for the treatment of sleep disordered
breathing ("SDB") related respiratory conditions. The Company currently
sells its comprehensive range of treatment and diagnostic devices in 41
countries through a combination of wholly-owned subsidiaries and independent
distributors. Since formation in 1989 the Company has expanded its operations
through the introduction of a number of innovative product lines servicing
primarily the obstructive sleep apnea ("OSA") sector. As a consequence the
Company has been able to achieve a compound sales growth rate of 79% over the
period, well in excess of the market growth rate. The Company believes that
its success is attributable to its continuing focus on sleep disordered
breathing and the development of equipment for treatment of its associated
medical conditions.
Corporate History
ResMed Inc., a Delaware corporation, was formed in March 1994 as the
ultimate holding company for its Australian, European and United States
operating subsidiaries. On June 1, 1995 the Company completed an initial
public offering of common stock and on June 2, 1995 the Company's common stock
commenced trading on the NASDAQ Stock Market. Its Australian subsidiary,
ResMed Holdings Limited ("RHL"), was originally organized in 1989 by Dr. Peter
Farrell to acquire from Baxter Center for Medical Research Pty Limited
("Baxter"), the rights to certain technology relating to nasal Continuous
Positive Airway Pressure ("CPAP") treatment as well as Baxter's existing CPAP
device business. Baxter had sold CPAP devices in Australia since 1988, having
acquired the rights to the technology in 1987 from Dr. Colin Sullivan of the
University of Sydney, who invented nasal CPAP for the treatment of OSA. The
Company and its subsidiaries, since 1989, have specialized in the design,
manufacture and marketing of patented nasal CPAP and variable positive airway
pressure ("VPAP") equipment for the diagnosis and treatment of sleep
disordered breathing primarily OSA.
The Company acquired the distribution business of both Dieter W Priess
Medtechnik and Premium Medical SARL, its German and French distributors, on
February 7, 1996 and June 12, 1996, respectively.
- -2-
Obstructive Sleep Apnea
OSA is a breathing disorder in which an individual experiences a
temporary collapse of the upper airway during sleep. This restricts breathing
and severely disrupts the individual's sleep. Sleep is a complex neurological
process that includes two distinct states: rapid eye movement ("REM") sleep
and non-rapid eye movement ("non-REM") sleep. REM sleep, which is about
20-25% of total sleep in 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 inability of an individual to experience adequate amounts of
REM and deeper levels (stages 3 and 4) of non-REM sleep results in daytime
tiredness and reduced cognitive function, both of which are characteristic of
OSA.
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 upper
airway closure during sleep (an "apnea"), resulting in an inability to
breathe, or near closure (an "hypopnea") which causes snoring and breathing
difficulties. These breathing irregularities result in a lowering of blood
oxygen concentration, until the brain reacts to the lack of oxygen or
increased carbon dioxide and signals the body to respond. Typically, the
individual subconsciously arouses from REM sleep or from Stages 3 or 4 of
non-REM sleep to Stages 1 or 2 of non-REM sleep, causing the throat muscles to
contract, thus 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. The cycle of complete or partial upper airway closure with
subconscious arousal to lighter levels of sleep can be repeated as many as
several hundred times during six to eight hours of sleep. Sufferers of OSA
typically experience ten or more such cycles per hour. These awakenings
greatly impair the quality of sleep, although the individual is not normally
aware of these disruptions.
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) and irritability. OSA has
been associated with employment difficulties, marital discord, impotence and
other adverse effects. 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. Certain studies have
linked OSA to increased occurrences of traffic and workplace accidents. OSA
sufferers also may experience an increase in heart rate and an elevation of
blood pressure during the cycle of apneas. Several reports 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.
- -3-
The Market
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. Nearly 6.5 million of these
persons over the age of 30 experience moderate to severe forms of sleep apnea.
However, there is a general lack of awareness of OSA among both the medical
community and the general public, which has led to a corresponding failure to
diagnose the disorder. It is estimated that less than 3% of those persons
afflicted by OSA know the cause of their fatigue or other symptoms. Health
care professionals are often unable to diagnose OSA because they are unaware
that such non-specific symptoms as fatigue, snoring and irritability are
characteristic of OSA.
While OSA has been diagnosed in a broad cross-section of the population,
it is predominant among middle-aged men and those who are obese, smoke,
consume alcohol in excess or use muscle-relaxing drugs. In addition, patients
who are being treated for certain other conditions, including those undergoing
dialysis treatment or suffering from diabetes, are medically predisposed to
OSA.
Generally, an individual seeking treatment for the symptoms of OSA is
referred by a general practitioner to a specialist, such as a pulmonologist,
neurologist or psychiatrist for further evaluation. The diagnosis of OSA
typically requires monitoring the patient during sleep at either a sleep
clinic or the patient's home. During overnight testing, respiratory
parameters and sleep patterns are monitored along with other vital signs such
as blood pressure, heart rate and blood oxygen levels. These tests allow sleep
clinicians to detect any sleep disturbances such as apneas, hypopneas or
subconscious awakenings.
The Company estimates that there are currently more than 1,200 sleep
clinics in the United States, a substantial portion of which are affiliated
with hospitals. Sleep clinics generally range in size from one to six beds.
The number of sleep clinics has expanded significantly from approximately 100
such facilities in 1985. The Company believes that despite the increase in
sleep clinics, testing facilities currently remain inadequate to address the
large population of undiagnosed OSA sufferers.
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 mandibular advancement, a greater success rate has been
claimed. This combined procedure, performed by highly specialized surgeons,
is expensive and involves prolonged and often painful recovery periods.
- -4-
Nasal CPAP was first used as a treatment for OSA in 1980 by Dr. Colin
Sullivan, the Chairman of the Company's Medical Advisory Board. CPAP systems
were commercialized for treatment of OSA in the United States in the mid
1980's. Today, use of nasal CPAP, although not a medical cure for OSA, is
generally acknowledged as the most effective and least invasive treatment for
OSA, allowing the individual to enjoy a more normal sleep pattern. The Company
estimates that during fiscal 1997, CPAP treatment was prescribed for over
100,000 new patients in the United States.
During nasal CPAP treatment, a patient sleeps with a nasal mask connected
to a small portable air flow generator that delivers room air at a
predetermined 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. Upon diagnosis of OSA and the decision to
prescribe CPAP treatment for an OSA sufferer, the physician must determine an
appropriate pressure setting for the CPAP device. This pressure titration
(adjustment) procedure typically occurs in the sleep clinic while the patient
sleeps using the CPAP device, and a technician manually increases the pressure
until sleeping and breathing are normalized. After determination of the
proper therapeutic pressure, the patient is prescribed a nasal CPAP device set
to that pressure for home use.
CPAP is a treatment and not a cure for OSA, and therefore, must be used
on a nightly basis for life. 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. Recently, 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, and
bi-level flow generators which provide different air pressures for inhalation
and exhalation.
Business Strategy
The Company believes that the SDB market will increase in the future due
to a number of factors including the increased awareness of OSA, improved
understanding of the role of OSA in cardiac treatment and related disorders
and an increase in home based treatment. The Company's strategy for the
expansion of its business operations consists of the following key elements.
Continue Product Development and Innovation. The Company believes that
it is a leading innovator in nasal CPAP technology for the treatment of sleep
disordered breathing including OSA and that its continued product development
and innovation will be a key factor in its success. Since its founding, the
Company has introduced product advancements and improvements designed to
increase patient comfort and encourage compliance, such as delay timers,
heated humidifiers, and pliable Bubble Masks(Registered Trademark). The
Company is currently developing a range of automatic CPAP devices, including
further developments of its existing range of AutoSet(Trademark) products,
that are designed to continually adjust CPAP pressure to meet changing
individual patient's needs and to eliminate the need for manual pressure
titration.
- -5-
Expand Market Presence. The Company currently markets its products in 41
countries through a network of independent distributors, the Company's direct
sales force and manufacturers' representatives. The Company intends to
increase its sales and marketing efforts in its current markets, particularly
Europe and the United States, as well as to continue expansion into new
countries.
Increase Public and Clinical Awareness. The Company intends to promote
awareness of the prevalence of, and treatment alternatives for, SDB with three
main groups: (1) the population with predisposition to SDB; (2) primary care
physicians and other specialists, such as cardiologists and anesthesiologists;
and (3) special interest groups, such as sleep disorder support groups. The
Company is working with other physicians to explore new medical applications
for nasal CPAP, including the treatment of post-operative surgery patients and
pediatric patients, such as premature babies and infants at risk of Sudden
Infant Death Syndrome.
Products
The Company designs, manufactures and markets a range of equipment for
the diagnosis and treatment of SDB. These products consist of flow
generators, which are small, portable devices that provide a preset positive
airway pressure, air delivery systems that include nasal masks, tubing and
headsets that connect the flow generator to the patient and AutoSet diagnostic
equipment. In addition, the Company markets accessories to improve patient
comfort, convenience and compliance, such as heated humidifiers. The Company
also distributes laboratory and portable sleep diagnostic products
manufactured by both the Company and other parties.
Flow Generators
The Company manufactures and markets a broad range of flow generators
which are sold to the end user at prices which vary from approximately $800 to
$3,000, depending primarily upon the model, features and country of sale. Flow
generators accounted for approximately 66%, 68% and 67% of the Company's net
revenues in 1995, 1996 and 1997 respectively.
CPAP. The Company's CPAP flow generators consist of the
SULLIVAN(Registered Trademark) V series. The SULLIVAN(Registered Trademark) V
series offer a range of enhancements to the Company's initial CPAP products,
released in 1989 and 1994. The SULLIVAN(Registered Trademark) V range of flow
generators, which feature a 20% reduction in physical size when compared to
prior models, was introduced in July 1995 and is now the Company's main flow
generator product. The SULLIVAN(Registered Trademark) V line of flow
generators consists of four individual models with each model providing a
range of features depending upon the needs of patients. Each model
continuously delivers a fixed positive pressure flow to the patients.
VPAP(Registered Trademark). Since the introduction of the
SULLIVAN(Registered Trademark) VPAP(Registered Trademark) flow generator in
1994, the Company has released a number of Variable Positive Airway Pressure
(VPAP) flow generators which it believes improve patient comfort by applying
different air pressures for inhalation and exhalation. These features are
particularly beneficial for those patients with impaired breathing ability who
need high levels of air pressure for inhalation as well as less resistance for
exhalation.
- -6-
At June 1997 the Company had three main VPAP(Registered Trademark) flow
generators, the SULLIVAN(Registered Trademark) VPAP(Registered Trademark)II,
SULLIVAN(Registered Trademark) Comfort and SULLIVAN(Registered Trademark)
VPAP(Registered Trademark)II ST. These units were released from March 1996
and feature improved triggering and reduced noise.
Flow Generators Under Development. The Company is developing the
patented AutoSet(Trademark) technology for a range of CPAP devices for home
use in the treatment of SDB conditions. The AutoSet system is designed to
automatically adjust air pressure as needed on a breath by breath basis in
treating OSA and other SDB conditions.
The Company markets similar devices both for diagnostic and treatment
purposes in sleep clinics (AutoSet(Trademark) Clinical) and at home
(AutoSet(Trademark) Portable). While conventional CPAP units operate at a
fixed CPAP pressure, the actual pressure required for effective treatment of
OSA can vary depending on factors such as weight change, alcohol consumption,
sedative use, stage of sleep and body position. The AutoSet(Trademark) range
is designed to detect the patient's level of airway resistance and to
continually adjust the air pressure to the appropriate therapeutic level
throughout the night. The results in greater patient comfort and reduced
pressure related side effects.
The following table lists the Company's current flow generator products.
Date of
Commercial
Product Features Introduction
- -------------------------------- --------------------------------------------- ---------------
Pediatric CPAP Fixed-pressure, portable device for infants September 1994*
and children
SULLIVAN(Registered Trademark) A range of compact portable fixed-pressure July 1995
V devices with various features to facilitate
patient comfort
SULLIVAN(Registered Trademark) Dual pressure portable device provides March 1996
VPAP(Registered Trademark)II different pressure levels for inhalation and
exhalation features improved pressure
switching and reduced noise output and
spontaneous breath triggering
SULLIVAN(Registered Trademark)
COMFORT Limited featured dual pressure device March 1996
SULLIVAN(Registered Trademark) Dual pressure portable device with April 1996
VPAP(Registered Trademark)II ST spontaneous and spontaneous/timed breath
triggering modes of operation
AutoSet(Trademark) Clinical Micro processor controlled, automatically. May 1996
and continuously adjusts pressure in
response to patient's needs. Stores data for
subsequent evaluation. For use in sleep
labs to aid diagnosis
AutoSet(Trademark) Portable An improved Portable version of June 1997
II AutoSet(Trademark) Clinical with PC
processor functions, for home use sleep
studies
* Currently sold solely outside the United States
- -7-
The Company provides optional features including a patented delay timer,
which allows the patient to select the time over which a gradual transition to
full therapeutic pressure is achieved, allowing the patient to fall asleep
more easily. Another feature, the SmartStart(Trademark) function,
automatically starts airflow when the patient breathes into the mask and stops
airflow upon removal of the mask. Some models record the number of hours a
patient receives therapy, permitting physicians to monitor patient compliance.
Most units come equipped with a carrying bag for enhanced portability. In
addition, every unit has international electric voltage compatibility.
Mask Systems, Accessories and Other Products
Mask systems, accessories and other products accounted for approximately
30% of the Company's net revenues in 1995, 1996 and 1997, respectively.
Mask Systems
The Company's mask system includes the mask frame, a nasal cushion, and
headgear to secure the nasal cushion to the face.
The Company's Bubble Mask(Registered Trademark) includes a patented
Bubble Cushion(Registered Trademark) which represents a significant advance in
patient comfort. Introduced in 1991, the Bubble Cushion(Registered Trademark)
contains a silicone membrane which readily adjusts to a patient's facial
contours. Air pressure seals the thin membrane around the patient's nose,
thereby minimizing air leakage and the possibility of skin irritation from
repeated usage. The Company's headgear includes the ResCap(Registered
Trademark) II which has a five-point attachment method of stabilizing the
Bubble Cushion(Registered Trademark) on the patient's nose.
In addition, in July 1995 the Company introduced the Modular Mask frame
which features T Bar forehead pads to prevent sideways movement of the frame
and provide maximum stability.
Typically, patients replace masks or mask cushions every 12 to 18 months,
at a cost of approximately $100-$200, depending upon the model. Bubble
Masks(Registered Trademark) are available in a variety of sizes and are sold
independently of the Company's flow generators either as replacement products
or with other manufacturers' flow generators. The Company also manufactures
the Bubble Mask(Registered Trademark) on an OEM basis for Nellcor Puritan
Bennett, one of its competitors.
Accessories and Other Products
In order to enhance patient comfort, convenience and compliance, the
Company markets a variety of other products and accessories. These products
include humidifiers which connect directly with the CPAP and VPAP flow
generator to moisten (humidify) and, if desired, heat air delivered to the
patient. This prevents the drying of nasal passages which can cause
discomfort upon repeated use of the system. Other optional accessories
include carry bags to carry portable flow generators and replacement filters.
Clinical Support
The Company also manufactures products that are used primarily in sleep
clinics and hospitals to monitor key respiratory parameters. These products
consist of CPAP devices together with additional diagnostic tools to assist
clinicians in the diagnosis of OSA and establishment of therapeutic pressures
necessary to treat OSA suffers.
- -8-
The Universal Control Unit (UCU) was first introduced in October 1995.
It was superseded in June 1997 by the UCU2. The UCU2 is a diagnostic and
monitoring device used by clinicians to measure and adjust the pressure being
delivered by either the Company's CPAP or VPAP devices to a patient undergoing
a sleep study. It allows the clinician to conduct this review and adjustment
from a remote location within the sleep lab. Using the UCU2, compliance data
from flow generators with recording capabilities, can be downloaded for
review. Clinicians can then track how the patient is coping with treatment in
the United States, clinical interface devices are typically provided to
clinics by the Company without charge in order to increase clinical awareness
and interest in the Company's products.
The SULLIVAN(Registered Trademark) Compliance Application
(SCAN(Trademark)), introduced in October 1995 comprises the software necessary
to download compliance data from flow generators with recording capabilities.
In connection with a modem, this product allows compliance data to be
downloaded from a flow generator in a patient's name direct to the sleep
laboratory.
AutoSet(Trademark) Clinical. The Company's AutoSet(Trademark) Clinical
allows the clinical real-time observation and review by a clinician of
respiratory parameters during a sleep study. AutoSet(Trademark) Clinical
incorporates a PC-based monitoring device which permits real-time diagnosis of
patient airway resistance. This device may also be used in the therapeutic
mode for automatic breath-by-breath adjustment to maintain an open airway.
AutoSet(Trademark) Clinical received FDA clearance in July 1996. The Company
is currently developing an AutoSet(Trademark) CPAP device for home use.
Product Development
The Company is committed to an ongoing program of product advancement and
development. Currently, the Company's product development efforts are focused
on automated flow generator systems, improved mask systems and manufacturing
cost-reduction programs.
The new SULLIVAN(Registered Trademark) Mirage(Trademark) mask system, due
for release in August 1997 is a complete mask system which is smaller, lighter
and quieter than most other masks on the market. Two sizes fit most patients,
reducing fitting time and inventory costs. The HumidAire(Trademark)
humidifier also due for release in August 1997 is ResMed's cost effective
solution for heated humidification.
The Company consults with physicians at major sleep centers throughout
the world to identify technology trends in the treatment of SDB. Some of
these physicians currently serve on the Company's Medical Advisory Board. New
product ideas are also identified by the Company's marketing staff, direct
sales force, network of distributors and manufacturers' representatives.
Typically, new product development is then performed by the Company's internal
development staff in collaboration with Dr. Sullivan and his colleagues at the
Royal Prince Alfred Hospital, the University of Sydney, and other research
groups around the world.
In the three fiscal years ended June 30, 1995, 1996 and 1997, the Company
expended $1,996,000, $2,841,000 and $3,807,000 respectively, on research and
development.
Sales and Marketing
The Company currently markets its products in 41 countries using a
network of distributors, independent manufacturers' representatives and its
direct sales force. The Company attempts to tailor its 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.
- -9-
America. In the United States, the Company's marketing activities are
conducted through a field sales organization comprised of 13 direct sales
employees, including three regional sales managers, and 21 independent
manufacturers' representatives' organizations. The Company's United States
field sales organization markets and sells the Company's products primarily to
more than 1,500 home health care dealer branch locations throughout the United
States. The Company also promotes and markets its 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, fits the patient with the appropriate mask and set the flow
generator pressure to the prescribed level. In the United States, sales
employees and manufacturers' representatives are managed by the three regional
sales managers and the Company's Vice President - US Sales. The Vice
President - US Marketing, responsible for marketing in the United States and
Canada, is also based in the Company's office in San Diego. The Company's
Canadian sales are conducted through a Canadian distributor. Sales in America
accounted for 53%, 49% and 43% of the Company's total net revenues for the
fiscal years ended June 30, 1995, 1996 and 1997, respectively.
Europe. The Company markets its products in most major European
countries. In countries other than the United Kingdom, Germany and France, in
each of which the Company has fully owned subsidiaries, the Company uses
independent distributors to sell its products. These distributors have been
selected in each country based on their knowledge of respiratory medicine as
well as a commitment to SDB therapy. In each country in which the Company has
a subsidiary a local senior manager is responsible for direct national sales.
The Group's Executive Vice President is responsible for coordination of all
European distributors and, in conjunction with local management, the direct
sales activity in Europe. In addition, the Company uses a consultant in
Switzerland to assist in sales and marketing efforts for selected European
countries. Sales in Europe accounted for 29%, 36% and 44% of the Company's
total net revenues for the fiscal years ended June 30, 1995, 1996 and 1997,
respectively.
Australia/Rest of World. Prior to May 1994, the Company was the
exclusive source of nasal CPAP flow generator units in Australia as a result
of ResMed Limited's ownership of Dr. Sullivan's original nasal CPAP patent.
This patent, which covered the CPAP method of treating, and the device for
treatment of, OSA was challenged by the Australian distributor for Respironics
and, in May 1994, was revoked by an Australian appeals court in reliance on
issues specific to Australian patent law. Such revocation permits competitors
to market CPAP products in Australia. Consequently, the Company's dominant
market share in Australia has decreased from 1996 onwards.
Marketing in the rest of the world is the responsibility of the Vice
President Corporate Marketing based in Sydney, Australia. Sales in Australia
and the rest of the world accounted for 18%, 15% and 13% of the Company's
total net revenues for the fiscal years ended June 30, 1995, 1996 and 1997,
respectively.
Medical Gases of Australia accounted for approximately 10%, 7% and 6% of
net sales in 1995, 1996 and 1997, respectively, and another customer, Priess
Medtechnik, prior to the acquisition of its business by ResMed in February
1996, accounted for approximately 15% and 8% 1995 and 1996, respectively.
- -10-
Manufacturing
The Company performs its manufacturing operations at its facility in
Sydney, Australia. The Company's manufacturing operations consist primarily
of assembly and testing of the Company's flow generators, masks and
accessories. Of the numerous raw materials, parts and components purchased
for assembly of the Company's diagnostic and therapeutic sleep disorder
products, most are off-the-shelf items available from multiple vendors. One
key components of each of the Company's CPAP and VPAP devices are purchased
from a single source supplier. The Company is currently qualifying additional
sources of supply for these components. The Company's quality control group
performs tests at various steps in the manufacturing cycle to ensure
compliance with the Company's specifications.
The Company generally manufactures to its internal sales forecasts and
fills orders as received and as a result has no significant backlog of orders
for its products. The Company uses management information systems to
integrate its manufacturing planning, billing and accounting systems.
Service and Warranty
The Company offers one-to-two year limited warranties on its flow
generator products. Warranties on mask systems are for 90 days. In most
markets, the Company relies on its distributors to repair the Company's
products with parts supplied by the Company. In the United States, home
health care dealers generally arrange shipment of products to the Company's
San Diego facility for repair.
The Company has received returns of its products from the field for
various reasons. The Company believes that the level of returns it has
experienced to date is consistent with levels typically experienced by
manufacturers of similar devices. The Company provides for warranties and
returns based on historical data.
Patents and Proprietary Rights and Related Litigation
The Company, through its subsidiary ResMed Limited, owns or has licensed
rights to 7 issued United States patents and 6 issued foreign patents. In
addition, there are 19 pending United States patent applications and 35
pending foreign patent applications. Some of these patents and patent
applications relate to significant aspects and features of the Company's
products. These include United States patents relating to CPAP devices, a
delay timer system, the Bubble Mask(Registered Trademark), and an automated
means of varying air pressure based upon a patient's changing needs during
nightly use, such as that employed in the Company's AutoSet(Trademark) Device.
No patents are due to expire in the next five years.
The Company relies on a combination of patents, trade secrets,
non-disclosure agreements and proprietary know-how to protect its proprietary
technology and rights. ResMed Limited is pursuing an infringement action
against one of its competitors (Respironics, Inc.) and is investigating
possible infringement by others.
In October 1994, in Australia, a patent held by ResMed was revoked on
appeal on the grounds that the patent was not entitled to claim priority to a
"provisional" application, which was filed before the inventor's publication.
As a result of this claim, ResMed based in part on advice from legal counsel,
at June 30, 1994 accrued approximately $300,000 for costs associated with this
patent litigation. Final and total settlement of which was made on May 29,
1997 for $246,000.
- -11-
Additional litigation may be necessary to enforce patents issued to the
Company, to protect the Company's proprietary rights, or to defend third-party
claims of infringement by the Company 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 the Company with
consistent rights and benefits.
ResMed Limited is also defending alleged breaches of the Australian Trade
Practices Act in a suit claiming damages of $730,000 brought in Sydney
Australia by Respironics and their Australian distributor. This action
relates to ResMed Limited exercising its rights to the Australian original
CPAP patent, which was revoked by the Federal Court of Australia in 1994.
Third-Party Reimbursement
The cost of medical care is funded in substantial part by government and
private insurance programs. Although the Company does not generally receive
payments for its products directly from these payors, the Company's success is
dependent upon the ability of patients to obtain adequate reimbursement for
the Company's products. In most markets, the Company's products are purchased
primarily by home health care dealers, hospitals or sleep clinics, which then
invoice third-party payors directly.
In the United States, third-party payors include Medicare, Medicaid and
corporate health insurance plans. These payors may deny reimbursement if they
determine that a device has not received appropriate FDA clearance, is not
used in accordance with cost-effective treatment methods, or is experimental,
unnecessary or inappropriate. Third-party payors are also increasingly
challenging prices charged for medical products and services, and certain
private insurers have initiated reimbursement systems designed to reduce
health care costs. The trend towards managed health care and the concurrent
growth of HMOs which could control or significantly influence the purchase of
health care services and products, as well as legislative proposals to reform
health care, may result in lower prices for the Company's products.
In some foreign markets, such as Spain, France and Germany, government
reimbursement is currently available for purchase or rental of the Company's
products subject, however, to constraints such as price controls or unit sales
limitations.
In Australia and in other foreign markets, such as the United Kingdom and
Japan, there is currently limited or no reimbursement for devices that treat
OSA.
Government Regulations
The Company's products are subject to extensive regulation particularly
as to safety, efficacy and adherence to FDA Quality System Regulation (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. Noncompliance 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 the
Company to enter into supply contracts, and criminal prosecution.
- -12-
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 ("PMA") prior
to it being introduced into the market. The Company's products currently
marketed in the United States are marketed in reliance on a 510(k)
pre-marketing clearance. 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 clearance requirements may extend
the development process for a considerable length of time. In addition, in
some cases, the FDA may require additional review by an advisory panel, which
can further lengthen the process. The PMA process, which is reserved for new
devices that are not substantially equivalent to any predicate device and for
high risk devices or those that are used to support or sustain human life, may
take several years and requires the submission of extensive performance and
clinical information.
As a medical device manufacturer, the Company is subject to inspection on
a routine basis by the FDA for compliance with the FDA's QSR regulations which
impose procedural and documentation requirements with respect to design,
manufacturing and quality control activities. The Company believes that its
design, manufacturing and quality control procedures meet the requirements for
the regulations.
Sales of medical devices outside the United States are subject to
regulatory requirements that vary widely from country to country. Approval
for sale of the Company's medical devices in Europe is through the CE mark
process. The Company's products where appropriate, are CE marked to the
European Unions Medical Device Directive.
Competition
The markets for the Company's products are highly competitive. The
Company believes that the principal competitive factors in all of its markets
are product features, reliability and price. Reputation and efficient
distribution are also important factors. Patent protection could also become
an important issue in the future.
The Company competes on a market-by-market basis with various companies,
some of which have greater financial and marketing resources than the Company.
In the United States, its principal market, Respironics, Healthdyne
Technologies, DeVilbiss and Nellcor Puritan Bennett are the primary
competitors for the Company's CPAP products. The Company's principal European
competitors are also Respironics, Healthdyne Technologies, DeVilbiss and
Nellcor Puritan Bennett, as well as regional European manufacturers.
Any product developed by the Company 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 the Company 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.
Employees
As of June 30, 1997, the Company had 270 employees and 14 full time
consultants, of which 129 persons are employed in warehousing and
manufacturing, 42 in research and development, 69 in sales and marketing and
44 in administration. Of the Company's employees and consultants, 199 are
located in Australia, 41 in the United States and 44 in Europe. The Company
believes that the success of its business will depend, in part, on its ability
to attract and retain qualified personnel. None of the Company's employees is
covered by a collective bargaining agreement. The Company believes that its
relationship with its employees is good.
- -13-
Medical Advisory Board
The Company has a Medical Advisory Board ("MAB") consisting of physicians and
scientists specializing in the field of sleep disorders. MAB members meet as
a group twice a year with members of the Company's senior management and
members of its research and marketing departments to advise the Company on
technology trends in sleep disordered breathing and other developments in
sleep disorders medicine. MAB members are also available to consult on an
as-needed basis with the senior management of the Company. MAB members are as
follows:
Colin Sullivan, M.D., Ph.D., F.R.A.C.P., age 53, is the inventor of nasal CPAP
for treating obstructive sleep apnea and is a thoracic physician at the
Royal Prince Alfred Hospital. He is Professor of Medicine and Director of the
David Read Laboratory at the Sydney University Medical School. He is a Fellow
of the Royal Australian College of Physicians and Director of the National
SIDS Council Pediatric Sleep Laboratory at the Royal Alexandria Children's
Hospital, Westmead. Dr. Sullivan is the Chairman of the Medical Advisory
Board, and has continued to contribute to the Company's innovation, product
development and clinical testing. He has authored over 100 papers in sleep
disorders and related respiratory areas and is on the editorial board of
several professional journals. Dr. Sullivan's M.D. and Ph.D. degrees are from
the University of Sydney Medical School.
William C. Dement, M.D., Ph.D., age 70, is the Lowell W. and Josephine Q.
Berry Professor of Psychiatry and Behavioral Sciences at the Stanford
University School of Medicine and Director of the Stanford Sleep Disorders
Clinic and Research Center. He was Chairman of the USA National Commission on
Sleep Disorders Research. During the 1950's, Dr. Dement was part of the team
at the University of Chicago that discovered REM sleep. In 1970 he
established the first sleep disorders clinic in which he introduced
polysomnography. Dr. Dement has co-authored more than 400 papers and has
written definitive textbooks on sleep. He is on the editorial board of
several professional journals. Dr. Dement is a graduate of the University of
Washington, Seattle, and received his M.D. and Ph.D. degrees from the
University of Chicago.
Neil J. Douglas, M.D., F.R.C.P., age 49, is Reader in Medicine and Respiratory
Medicine, University of Edinburgh, an Honorary Consultant Physician, Lothian
Health Board and Director, Scottish National Sleep Laboratory. He is a
member of the Action on Smoking and Health Scotland Council and the National
Panel of Specialists for Respiratory Medicine. He chairs the Ethics of
Medical Research Volunteer Studies Sub-Committee of Lothian Health Board and
is a member of the Working Party on Sleep Apnea of the Royal College of
Physicians of London. He is the author of over 100 papers in the area of
sleep and pulmonary medicine. Dr. Douglas has a M.D. from the University of
Edinburgh.
Ralph Pascualy, M.D., A.C.P., age 47, is Medical Director, Pacific Northwest
Sleep/Wake Disorders Center, Providence Medical Center, Seattle. He held
research fellowships in psychiatry prior to a professional focus on sleep
disorders medicine in the early 1980s. He was awarded the William C. Dement
Award in Sleep Disorders Medicine in 1983 and became an Accredited Clinical
Polysomnographer in 1986. Dr. Pascualy trained in sleep disorders medicine at
Stanford. He is Editor-in-Chief of the Research Newsletter of the Clinical
Sleep Society, Chairs the National Insurance Committee and is a member of the
Technology Committee of the Association of Sleep Disorders Centers. He is
also a member of the Gerontological Society, the American Psychiatric
Association, and National Affairs Committee of the Association of Professional
Sleep Societies. He is a graduate of Columbia University and received a M.D.
from the State University of New York.
- -14-
Helmut Teschler MD age 44 is Associate Professor and Head of the Sleep
Laboratory, Ruhrlandklinik, Department of Pneumology, 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. He is an internationally recognized
researcher in sleep disorders medicine. Dr Teschler is a graduate of
Engineering from the University of Siegen, Germany and obtained his MD from
the University of Marburg, Germany.
J. Woodrow Weiss MD age 48 is Associate Professor of Medicine at Harvard
Medical School, as well as Physician Director, Pulmonary-Medical Intensive
Care Unit and Co-Director of the Sleep Disorders Center at Beth Israel
Hospital, Boston. His main research interests are in the cardiovascular
consequences of sleep and sleep apnea, upper airway muscle control and
dyspnea. Dr Weiss was in intern and resident at the University of California,
San Francisco and completed research fellowships at both Dartmouth and Harvard
Medical Schools; he is an internationally- recognized researcher in sleep
disorders medicine. He holds a BA from Harvard and an MD from Case Western
Reserve School of Medicine.
B. Tucker Woodson MD FACS age 40 is an Otolaryngologist and is an Associate
Professor of Surgery at the Medical College of Wisconsin. He is a Fellow of
the American Academy of Otolaryngology - Head and Neck Surgery and did
surgical training with Dr. Fujite, the pioneer of uvulopalatopharyngoplasty to
treat obstructive sleep apnea. He has a primary research interest in the
surgical management of sleep apnea but is also a proponent of nasal CPAP. Dr.
Woodson did his surgical training in otolaryngology at Detroit's Henry Ford
Hospital and holds a BA from Washington University, St. Louis and an MD from
the University of Missouri, Columbia.
Clifford W. Zwillich, M.D., age 57, is Chief, Division of Pulmonary and
Critical Care Medicine, Pennsylvania State University, and Distinguished
Professor of Medicine. His major scientific interest is the body's control of
respiration. He serves on the Editorial Boards of more than 10 journals and
is active in numerous associations specializing in pulmonary medicine and
sleep disorders. Dr. Zwillich holds a B.A. degree from Hunter College and a
M.D. from the University of Kansas. He completed his senior residency at the
Harvard Medical School in the early 1970s and then undertook a research
fellowship at the University of Colorado Health Services Center.
Members of the Medical Advisory Board, other than Dr. Sullivan, receive
approximately $1,000 per month and all members receive reimbursement of
traveling costs and other out-of-pocket expenses incurred in attending such
industry conferences as may be requested by the Company.
Item 2 Properties
The Company's principal offices are located in Sydney, Australia, at a
leased facility of approximately 46,000 square feet. This facility is leased
through mid 1999 and contains approximately 28,000 square feet of assembly
space, and approximately 18,000 square feet devoted to research and
administration offices. The Company believes that this facility is adequate
to meet its requirements through late 1998 the anticipated completion date of
ResMed's new Australian operations center. Sales and warehousing facilities
are also leased in San Diego, California, Abingdon, England, Moenchengladbach,
Germany and Lyon, France.
- -15-
Item 3. Legal Proceedings
The following discussion contains forward-looking statements relating to
the Company's legal proceedings. Litigation is inherently uncertain and,
accordingly, actual results could differ materially from those expressed in
the forward-looking statements.
The Company is currently engaged in significant patent litigation
relating to the enforcement and defense of certain of its patents. In 1992 the
Company's original Australian patent, which was due to expire in 1998 and
covered the CPAP method of treating, and the device for treatment of OSA, was
challenged by the Australian distributor for Respironics, Inc. and in May
1994, was revoked by an Australian appeals court in reliance on issues
specific to Australian patent law. The Company's market share in Australia
decreased from 1995 and the Company expects that its market share in Australia
will continue to decrease. The Company on May 29, 1997 paid $246,000 as total
and final settlement of costs associated with the litigation.
In January 1995, the Company filed a complaint for patent infringement in
the United States against Respironics. The complaint seeks monetary damages
from, and injunctive relief against Respironics resulting from its alleged
infringement of three of the Company's patents. In February 1995, Respironics
filed a complaint against the Company seeking a declaratory judgment that
Respironics does not infringe claims of these patents and that the Company's
patents are invalid and unenforceable. The two actions have been combined and
will proceed in the United States District Court for the Western District of
Pennsylvania.
In June 1996 the Company initiated a further action in Pennsylvania against
Respironics regarding alleged infringement of a fourth patent, granted June 4,
1996, related to the delay timer feature. This action was again consolidated
with the ongoing case such that the two remaining actions are to proceed
together. On July 1, 1997 the Court granted Respironics a motion for partial
summary judgment in which Respironics alleged its accused products do not
infringe one of the four patents in suit. ResMed believes there are grounds
to appeal this dismissal and it is ResMed's intention to seek reversal of the
ruling by appeal to the United States Court of Appeals for the Federal
Circuit.
On May 17, 1995, Respironics and its Australian distributor filed a
Statement of Claim against the Company and Dr. Peter Farrell in the Federal
Court of Australia. The Statement of Claim alleges that the Company engaged
in unfair trade practices, including the misuse of the power afforded by its
Australian patent and dominant market position in violation of the Australian
Trade Practices Act. The Statement of Claim asserts damage claims in the
aggregate amount of approximately $730,000, constituting lost profit on sales.
While the Company intends to defend this action, there can be no assurance
that the Company will be successful in defending such action or that the
Company will not be required to make significant payments to the claimants.
Furthermore, the Company expects to incur ongoing legal costs in defending
such action.
Item 4 Submission of Matter to a Vote of Security Holders
None
- -16-
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters
The common stock of the Company commenced trading on June 2, 1995 on the
NASDAQ Stock Market under the symbol "RESM". The following table sets forth
for the fiscal periods indicated the high and low closing prices for the
Common Stock as reported by NASDAQ.
1996 1997
1995/1996 High Low High Low
Quarter One 18.00 12.00 21.25 14.50
Quarter Two 17.75 10.50 23.00 16.00
Quarter Three 14.25 10.50 25.00 17.25
Quarter Four 17.25 12.50 24.25 16.50
As of September 25, 1997, there were approximately 2,046 beneficial
holders of the Company's Common Stock. The Company does not intend to
declare any cash dividends in the foreseeable future.
Item 6 Selected Financial Data
The following table summarizes certain selected consolidated financial data for, and as of the end of, each of the
years in the five-year period ended June 30, 1997. The data set forth below should be read in conjunction with the
Consolidated Financial Statements and related Notes included elsewhere in this Report.
Year Ended June 30,
--------------------------------------
Consolidated Statement of Income Data: 1993 1994 1995 1996 1997
---------- --------- --------- --------- ---------
(In thousands, except per share data)
Net revenues $ 7,650 13,857 23,501 34,562 49,180
Cost of sales 3,109 6,213 11,271 16,990 20,287
_________ _________ _________ _________ _________
Gross profit 4,541 7,644 12,230 17,572 28,893
_________ _________ _________ _________ _________
Selling, general and administrative
expenses 3,084 4,809 7,447 11,136 16,759
Research and development expenses 820 1,546 1,996 2,841 3,807
_________ _________ _________ _________ _________
Total operating expenses 3,904 6,355 9,443 13,977 20,566
_________ _________ _________ _________ _________
Income (loss) from operations 637 1,289 2,787 3,595 8,327
_________ _________ _________ _________ _________
Interest income, net 61 98 205 1,072 1,205
Government grants 432 440 527 537 316
Other, net 75 4 262 1,357 1,239
_________ _________ _________ _________ _________
Total other income, net 568 542 994 2,966 2,760
_________ _________ _________ _________ _________
Income before income taxes 1,205 1,831 3,781 6,561 11,087
Income taxes 359 599 948 2,058 3,622
_________ _________ _________ _________ _________
Net income $ 846 1,232 2,833 4,503 7,465
========= ========= ========= ========= =========
Net income per common and
common equivalent share $ 0.22 0.34 0.63 0.63 1.02
========= ========= ========= ========= =========
Cash dividends per common share $ 0.03 0.04 - - -
Weighted average common and common
equivalent shares outstanding 3,914 3,639 4,450 7,199 7,317
- -17-
As of June 30,
1993 1994 1995 1996 1997
------- ------ ------ ------ ------
Consolidated Balance Sheet Data: (in thousands)
Working capital $ 2,589 5,010 27,354 30,844 34,395
Total assets 5,173 9,608 35,313 47,299 54,895
Long-term debt, less current maturities 163 386 787 578 274
Total stockholders' equity 2,895 5,630 28,867 38,986 44,625
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's discussion and analysis of financial condition and results
of operations should be read in conjunction with the selected financial data
and consolidated financial statements and notes thereto included elsewhere
herein.
The Company designs, manufactures and markets equipment for the diagnosis
and treatment of sleep disordered breathing conditions including obstructive
sleep apnea. The Company's net revenues are generated from the sale of its
various flow generators devices, nasal mask systems, accessories and other
products, and, to a lesser extent from royalties. The Company receives other
income through interest and certain Australian government grants.
The Company has invested significant resources in research and
development and product enhancement. Since 1989, the Company has developed
several innovations to the original CPAP device to increase patient comfort
and to improve ease of product use. The Company has recently been developing
products for automated treatment and monitoring of OSA, such as
AutoSet(Trademark). The Company's research and development expenses are
subsidized in part by grants and tax incentives from the Australian federal
government. The Company has also received grants from the Australian federal
government to support marketing efforts to increase Australian export sales,
and for incorporation of computer components into its products.
The Company's income tax rate is governed by the laws of the regions in
which the Company's income is recognized. To date, a substantial portion of
the Company's income has been subject to income tax in Australia where the
statutory rate which prior to June 30, 1995 was 33%, increased to 36%
effective July 1, 1995. During fiscal 1995, 1996 and 1997, the Company's
effective tax rate has fluctuated from approximately 25% to approximately 33%.
These fluctuations have resulted from, and future effective tax rates will
depend upon, numerous factors, including the amount of research and
development expenditures for which a 125% Australian tax deduction is
available, the level of non-deductible expenses, and the use of available net
operating loss carryforward deductions and other tax credits or benefits
available to the Company under applicable tax laws.
Following is a comparative discussion by fiscal year of the results of
operations for the three years ended June 30, 1997.
Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30,
1996
Net Revenues. Net revenues increased in fiscal 1997 to $49.2 million
from $34.6 million in fiscal 1996, an increase of $14.6 million or 42.3%.
This increase was primarily attributable to an increase in unit sales of the
Company's flow generators and accessories in Europe where net revenues
increased to $21.5 million from $12.4 million and, to a lesser extent, in
North America, where net revenues increased to $21.3 million from $16.8
million. In addition, net revenues improved due to a continuing market shift
to higher-priced bi-level based products such as Sullivan VPAP(Registered
Trademark)II ST. This favorable effect was partially offset by decreases in
the selling prices of the Company's CPAP products in the United States.
- -18-
Gross Profit. Gross profit increased in fiscal 1997 to $28.9 million
from $17.6 million in 1996, an increase of $11.3 million or 64.4%. The
increase resulted primarily from increased unit sales during fiscal 1997.
Gross profit as a percentage of net revenues increased in fiscal 1997 to 58.7%
from 50.8% in 1996. The increase was primarily due to a full year
profitability from the Company's German and French subsidiaries acquired in
February and June 1996, respectively, improved manufacturing efficiencies and
increased sales of higher margin diagnostic and bi-level units. These
improvements were, however, partially offset by continuing price competition
in the United States, where prices for the Company's products are lower than
elsewhere in the world.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased in 1997 to $16.8 million from $11.1 million
for 1996, an increase of $5.7 million or 50.5%. As a percentage of net
revenues, selling, general and administrative expenses increased in fiscal
1997 to 34.1% from 32.2% for fiscal 1996. The increase in expenses was due
primarily to an increase to 113 from 87 in the number of sales and
administrative personnel and to a limited extent additional selling expenses
arising from the acquisition of the Company's German distributor in February
1996, and other expenses related to the increase in the Company's sales. In
addition the Company incurred substantial legal fees with respect to its
ongoing patent action of $773,000 and $924,000 in 1996 and 1997, respectively.
Research and Development Expenses. Research and development expenses
increased in fiscal 1997 to $3.8 million from $2.8 million in fiscal 1996, an
increase of approximately $1 million or 34.0%. As a percentage of net
revenues, research and development expenses in fiscal 1997 decreased to 7.7%
from 8.2% in fiscal 1996. The dollar increase in research and development
expenses was due primarily to an increase in research and development
equipment and external consultancy fees.
Other Income. Other income decreased in fiscal 1997 to $2.8 million from
$3 million for fiscal 1996, a decrease of $200,000 or 6.9%. This decrease
was due primarily to the write down of certain investments held by the
Company. These write downs were partially offset by foreign currency gains
which increased from $961,000 to $1.6 million in 1996 and 1997, respectively,
as a result of both marking foreign currency options to market and cash
deliveries over the year.
Income Taxes. The Company's effective income tax rate for fiscal 1997
increased to approximately 32.7% from approximately 31.4% for fiscal 1996.
This increase was primarily due to the high relative taxes incurred in
Germany. These higher tax rates were partially offset by additional research
and development expenses in Australia for which the Company received a 125%
deduction for tax purposes.
Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30,
1995
Net Revenues. Net revenues increased in fiscal 1996 to $34.6 million
from $23.5 million in fiscal 1995, an increase of $11.1 million or 47.1%.
This increase was primarily attributable to an increase in unit sales of the
Company's flow generators and accessories in Europe where net revenues
increased to $12.4 million from $6.8 million and, to a lesser extent, in North
America, where net revenues increased to $16.8 million from $12.5 million. In
addition, net revenues were affected favorably by a product mix shift to new,
higher-priced products such as SULLIVAN(Registered Trademark) VPAP(Registered
Trademark)II. This favorable effect was partially offset by a decrease in the
selling prices of the Company's CPAP products in most geographic markets.
- -19-
Gross Profit. Gross profit increased in fiscal 1996 to $17.6 million
from $12.2 million in 1995, an increase of $5.4 million or 43.7%. The
increase resulted primarily from increased unit sales during fiscal 1996.
Gross profit as a percentage of net revenues declined in fiscal 1996 to 50.8%
from 52.0% in 1995. The decrease was primarily due to an increase in the
value of the Australian Dollar relative to the US Dollar over the period and
continuing price competition in the United States, where prices for the
Company's products are lower than elsewhere in the world. The increased value
of the Australian Dollar increases the relative cost of manufacturing in
Australia where the Company's manufacturing facilities are located.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased in 1996 to $11.1 million from $7.4 million
for 1995, an increase of $3.7 million or 49.5%. As a percentage of net
revenues, selling, general and administrative expenses increased in fiscal
1996 to 32.2% from 31.7% for fiscal 1995. The increase in expenses was due
primarily to the acquisition of the Company's German distributor in February
1996, an increase to 87 from 58 in the number of sales and administrative
personnel, and other expenses related to the increase in the Company's sales.
In addition the Company incurred substantial legal fees with respect to its
ongoing patent action of $278,000 and $773,000, in 1995 and 1996,
respectively.
Research and Development Expenses. Research and development expenses
increased in fiscal 1996 to $2.8 million from $2.0 million in fiscal 1995, an
increase of approximately $800,000 or 42.3%. As a percentage of net revenues,
research and development expenses in fiscal 1996 decreased to 8.2% from 8.5%
in fiscal 1995. The dollar increase in research and development expenses was
due primarily to an increase in research and development equipment and
external consultancy fees.
Other Income. Other income increased in fiscal 1996 to $3.0 million from
$994,000 for fiscal 1995, an increase of $2.0 million or 198.4%. This
increase was due primarily to the recognition of unrealized gains on foreign
currency options of $961,000, as a result of marking the options to market
which arose from revaluation of the Australian Dollar over the year, and $1.1
million of interest income derived from funds generated from the Company's
June 2, 1995 initial public offering of common stock.
Income Taxes. The Company's effective income tax rate for fiscal 1996
increased to approximately 31.4% from approximately 25.1% for fiscal 1995.
This increase was primarily due to the an increase in the Australian income
tax rate from 33% to 36% from July 1, 1995 and high relative taxes incurred in
Germany. These higher tax rates were partially offset by additional research
and development expenses in Australia for which the Company received a 150%
deduction for tax purposes.
Recent Accounting Developments
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. ("SFAS") 128, "Earnings Per
Share", effective for both interim and fiscal years ending after December 15,
1997. SFAS 128 simplifies existing standards for computing and presenting
earnings per share for common and potential common stock. The adoption of
SFAS 128 is not expected to have a material effect on the Company's present
method of calculating and reporting earnings per share.
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income" and SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information", both effective for years beginning
after December 15, 1997. SFAS 130 will require companies to report
comprehensive income and SFAS 131 will require companies to report segment
performance as it is used internally. These statements merely add additional
disclosure requirements.
- -20-
Liquidity and Capital Resources
As of June 30, 1996 and June 30, 1997, the Company had cash and cash
equivalents and marketable securities available for sale of approximately
$23.5 million and $28.0 million, respectively. The Company's working capital
approximated $30.8 million and $34.4 million, respectively, at June 30, 1996
and 1997. The increase in working capital balances primarily reflects
increases in trade receivables and cash and cash equivalents partially offset
by increases in accrued expenses and income taxes payable.
The Company has financed its operations and capital expenditures through
cash generated from operations and to a lesser extent through sales of common
stock. During the fiscal years ended June 30, 1996 and 1997, the Company's
operations generated cash of approximately $3.5 million and $9.5 million,
respectively, primarily as a result of continued increases in net revenues,
offset in part by increases in accounts receivable, inventory and prepayments.
Similarly, cash and cash equivalents and marketable securities available for
sale increased to $28.0 million at June 30, 1997 from $23.5 million at June
30, 1996, an increase of $4.5 million. During fiscal 1996 and 1997
approximately $468,000 and $249,000 of cash was received from sales of common
stock on exercise of outstanding options.
The Company's investing activities (excluding the purchases and sales of
marketable securities) for the fiscal years ended June 30, 1996 and 1997
aggregated $8.7 million and $4.5 million, respectively. The majority of the
1997 activities were for the purchase of production tooling and equipment and,
to a lesser extent, for the purchase of office furniture, computers and
research and development equipment. The majority of 1996 activities related
to the purchase of the businesses of Priess Medizintechnik and Premium Medical
for $6.8 million. As a result the Company's June 30, 1997 balance sheet
reflects an increase in net property plant and equipment to approximately $4.9
million at June 30, 1997, from $3.3 million at June 30, 1996, an increase of
approximately $1.6 million.
The results of the Company's international operations are affected by
changes in exchange rates between currencies. Changes in exchange rates may
negatively affect the Company's consolidated net sales and gross profit
margins from international operations. The Company is exposed to the risk
that the dollar-value equivalent of anticipated cash flows will be adversely
affected by changes in foreign currency exchange rates. The Company manages
this risk by entering into foreign currency option contracts.
In August 1997 the Company entered into an agreement to acquire a 173,000
square ft site for construction of a new Australian operation center. This
development will commence in late 1997 and will be financed through either
company cash reserves or by a sale and leaseback transaction.
In May 1993, the Australian Federal Government agreed to lend the Company
up to $870,000 over a six year term. Such loan bears no interest for the first
three years and will bear interest at a rate of 3.8% thereafter until
maturity. The outstanding principal balance of such loan was $867,000 and
$548,000 at June 30, 1996 and 1997, respectively.
The Company expects to satisfy all of its short-term liquidity
requirements through a combination of cash on hand and cash generated from
operations.
- -21-
Forward-Looking Statements
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities, patent and other litigation and similar matters. There are a
variety of factors that could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. The risks
and uncertainties that may affect the Company's business, financial condition
or results of operations include the following:
The market for products designed to treat sleep disordered breathing
related respiratory conditions is characterized by frequent product
improvements and evolving technology. The development of new or innovative
products by others or the discovery of alternative treatments for such
conditions could result in the Company's products becoming obsolete or
noncompetitive, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
The market for the Company's products is also highly competitive. The
failure of the Company to meet the prices offered by its competitors, or offer
products which either contain features similar to or more desirable than those
products offered by its competitors or which are perceived as reliable by
consumers could have a material adverse effect on the business, financial
condition and results of operations of the Company. Most of the Company's
competitors have greater financial, research, manufacturing and marketing
resources than the Company. In addition, some of the Company's competitors
sell additional lines of products, and therefore can bundle products to offer
higher discounts, or offer rebates or other incentive programs to gain a
competitive advantage. The Company's competitors may also employ litigation
to gain a competitive advantage. The Company's inability to compete
effectively against existing or future competitors would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's 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 the absence of a backlog of orders for the
Company's products, the introduction of new products by the Company or its
competitors, the geographic mix of product sales, the success of the Company's
marketing efforts in new regions, changes in third-party reimbursement, timing
of regulatory action, timing of order by distributors, expenditures incurred
for research and development, competitive pricing in different regions,
seasonality, the cost and effect of promotional and marketing programs and the
effect of foreign currency transaction gains or losses, among other factors,
In addition, the Company's results of operations could be adversely affected
by changes in tax laws in the various countries in which the Company conducts
its operations.
The Company's success is dependent upon the ability of the Company's
customers to obtain adequate reimbursement from third-party payors for
purchasing the Company's products. Third-party payors may deny reimbursement
if they determine that the prescribed device has not received appropriate
United States Food and Drug Administration ("FDA") or other governmental
regulatory clearances, is not used in accordance with cost-effective treatment
methods as determined by the payor, or is experimental, unnecessary or
inappropriate. Third-party payors are increasingly challenging the prices
charged for medical products and services. The cost containment measures that
health care providers are instituting could have an adverse
- -22-
effect on the Company's ability to sell its products and may have a material
adverse effect on the Company's business, financial condition and results of
operations. In some markets, such as Spain, France and Germany, government
reimbursement is currently available for purchase of rental of the Company's
products, subject to constraints such as price controls or unit sales
limitations. In other markets, such as Australia, the United Kingdom and
Japan, there is currently limited or no reimbursement for devices that treat
sleep disordered breathing related respiratory conditions.
A substantial portion of the Company's net revenue is generated from
sales outside North America. The Company expects that such sales will
continue to account for a significant portion of the Company's net revenues in
the future. The Company's sales outside of North America are subject to
certain inherent risks of global operations, including fluctuations in
currency exchange rate, tariffs, import licenses, trade policies, domestic and
foreign tax policies and foreign medical device manufacturing regulations.
The Company has had foreign currency transaction gains and losses in recent
periods. A significant fall in the value of the United States dollar against
certain international currencies could have a material adverse effect on the
Company's business, financial condition and results of operations.
Other factors which could potentially have a material adverse effect on
the Company's business, results of operations or financial conditions include
the costs and other effects of legal and administrative cases and proceedings,
settlements and investigations, claims and changes in those items, and
developments or assertions by or against the Company relating to intellectual
property rights and intellectual property licenses.
The information contained in this section is not intended to be an
exhaustive description of the risks and uncertainties inherent in the
Company's business or in its strategic plans. Please see Item 1 "Business"
and Item 3 "Legal Proceedings".
Item 8 Consolidated Financial Statements and Supplementary Data
a) Index to Consolidated Financial Statements
Page
Independent Auditors' Report F1
Consolidated Balance Sheets as of June 30, 1996 and 1997 F2
Consolidated Statements of Income for the three years ended June 30, 1997 F3
Consolidated Statements of Stockholders' Equity for the three years ended June 30, 1997 F4
Consolidated Statements of Cash Flows for the three years ended June 30, 1997 F5
Notes to Consolidated Financial Statements F6
Schedule II - Valuation and Qualifying Accounts and Reserves 27
b) Supplementary Data
Quarterly Financial Information (unaudited)
The quarterly results for the years ended 30 June 1997 and 1996 are
summarized below:
1997
--------
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
-------- ------- ------- ------- ------
Net revenue $11,141 11,587 12,468 13,984 49,180
Gross profit 6,291 6,872 7,348 8,382 28,893
Net income 1,840 1,682 1,898 2,045 7,465
Net income per
common and common
equivalent share(1) $ 0.25 0.23 0.26 0.28 1.02
- -23-
1996
--------
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
-------- ------- ------- ------- ------
Net revenue $ 6,703 7,896 9,360 10,603 34,562
Gross profit 3,491 3,892 4,586 5,604 17,572
Net income 880 922 1,207 1,493 4,503
Net income per
common and common
equivalent share(1) $ 0.12 0.13 0.17 0.21 0.63
(1) 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 Accountant on Accounting and
Financial Disclosure
None
PART III
Item 10 Directors and Executive Officers of the Registrant
Incorporated by reference to Registrant's definitive Proxy Statement for
its November 10, 1997 meeting of stockholders, which will be filed with the
Securities and Exchange Commission within 120 days from June 30, 1997.
Item 11 Executive Compensation
Incorporated by reference to Registrant's definitive Proxy Statement for
its November 10, 1997 meeting of stockholders, which will be filed with the
Securities and Exchange Commission within 120 days from June 30, 1997.
Item 12 Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to Registrant's definitive Proxy Statement for
its November 10, 1997 meeting of stockholders, which will be filed with the
Securities and Exchange Commission within 120 days from June 30, 1997.
Item 13 Certain Relationships and Related Transactions
Dr. Colin Sullivan, a member of the Company's Medical Advisory Board,
provides consulting services to the Company pursuant to a Consulting agreement
that terminates on December 31, 1997 ( subject to extension for an additional
five-year term ) for which he receives annual payments based on the net sales
( as defined in the Consulting Agreement ) of certain of the Company's
products subject to a $90,000 per annum minimum payment. The company also
reimburses Dr. Sullivan for his out-of-pocket expenses in performing such
consulting services. The Company has also agreed to pay such amounts to Dr.
Sullivan for a period of 24 months following the termination of his consulting
relationship with the Company. Total payments to Dr. Sullivan were $228,000,
$314,000 and $353,000 for the Company's fiscal years ended June 30, 1995, 1996
and 1997, respectively.
- -24-
PART IV
Item 14 Exhibits, Consolidated Financial Statements, Schedule, and
Reports on Form 8-K
a) The following documents are filed as part of this report:
1.1 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.
3. Exhibits. The following exhibits are filed as a part of this report:
3.1 Certificate of Incorporation of Registrant, as amended*
3.2 By-laws of Registrant*
4.1 Form of certificate evidencing shares of Common Stock*
4.2 Rights agreement dated as of April 23, 1997**
10.1 1995 Stock Option Plan*
10.2 Licensing Agreement between the University of Sydney and ResMed
Limited dated May 17, 1991, as amended*
10.3 Amended and Restated Consulting Agreement between Colin Sullivan and
ResMed Limited dated September 2, 1994*
10.4 Loan Agreement between the Australian Trade Commission and ResMed
Limited dated May 3, 1994*
10.5 Lease for 82 Waterloo Road, Sydney, Australia*
10.6 Lease for 5744 Pacific Center Boulevard, San Diego, USA*
11.1 Statement re: Computation of Earning per Share
16.1 Letter regarding change in Certifying Accountant*
21.1 Subsidiaries of the Registrant
23.1 Consent and Report on Schedule of KPMG Peat Marwick LLP
27.1 Financial Data Schedule
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (No. 33-91094) declared effective on June 1, 1995.
** Incorporated by reference from the registrants. Report on Form 8-K
(File No. 0-26038).
b) Report on Form 8-K
Report filed on April 15, 1997 with respect to the adoptions of a Rights
Agreement granting shareholders right to purchase Series A Junior
Participating preference stock.
- -25-
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, 1996 and 1997, 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, 1997. 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 generally accepted auditing
standards. 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, 1996 and 1997, and the results of their
operations and their cash flows for each of the years in the three year period
ended June 30, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
San Diego, California
August 11, 1997
- -F1-
RESMED INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
June 30, June 30,
1996 1997
------------- -------------
Assets
- ----------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 5,510 9,077
Marketable securities (note 3) 18,021 18,908
Accounts receivable, net of allowance for doubtful accounts
of $175 and $277 at June 30, 1996 and 1997, respectively 6,252 7,834
Government grants 915 391
Inventories, net (note 4) 6,134 5,797
Deferred income taxes (note 10) 380 999
Prepaid expenses and other current assets 1,014 1,385
____________ ____________
Total current assets 38,226 44,391
____________ ____________
Property and equipment, net (note 5) 3,284 4,916
Patents, net of accumulated amortization of $260 and
$325 at June 30, 1996 and 1997, respectively 217 253
Deferred income taxes (note 10) - 157
Goodwill, net of amortization of $120 and $433 at
June 30, 1996 and 1997, respectively 4,309 4,553
Other assets 1,263 625
____________ ____________
$ 47,299 54,895
=========== ===========
Liabilities and Stockholders' Equity
- ----------------------------------------------------------------
Current liabilities:
Accounts payable $ 2,421 2,641
Accrued expenses (note 6) 2,815 3,537
Income taxes payable 1,857 3,544
Current portion of long debt (note 7) 289 274
____________ ____________
Total current liabilities 7,382 9,996
____________ ____________
Long-term debt less, current portion (note 7) 578 274
Deferred income taxes (note 10) 353 -
____________ ____________
8,313 10,270
____________ ____________
Stockholders' equity (note 8):
Preferred stock, $.01 par value,
2,000,000 shares authorized; none issued - -
Series A Junior Participating preferred stock, $0.01 par value,
150,000 shares authorized non issued - -
Common stock, $.004 par value, 15,000,000 shares authorized;
issued and outstanding 7,172,408 at June 30, 1996 and
7,202,413 at June 30, 1997 29 29
Additional paid-in capital 29,407 29,656
Retained earnings 9,103 16,568
Foreign currency translation adjustment 447 (1,628)
____________ ____________
Total stockholders' equity 38,986 44,625
____________ ____________
Commitments and contingencies (notes 16 and 18)
$ 47,299 54,895
=========== ===========
See accompanying notes to consolidated financial statements.
- -F2-
RESMED INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
June 30, June 30, June 30,
1995 1996 1997
------------- ------------ ------------
Net revenues $ 23,501 34,562 49,180
Cost of sales 11,271 16,990 20,287
____________ ____________ ____________
Gross profit 12,230 17,572 28,893
____________ ____________ ____________
Operating expenses:
Selling, general and administrative expenses 7,447 11,136 16,759
Research and development expenses 1,996 2,841 3,807
____________ ____________ ____________
Total operating expenses 9,443 13,977 20,566
____________ ____________ ____________
Income from operations 2,787 3,595 8,327
____________ ____________ ____________
Other income:
Interest income, net 205 1,072 1,205
Government grants 527 537 316
Other, net (note 9) 262 1,357 1,239
____________ ____________ ____________
Total other income, net 994 2,966 2,760
____________ ____________ ____________
Income before income taxes 3,781 6,561 11,087
Income taxes (note 10) 948 2,058 3,622
____________ ____________ ____________
Net income $ 2,833 4,503 7,465
=========== =========== ===========
Net income per common and common equivalent
share $ 0.63 0.63 1.02
Weighted average common and common equivalent
shares outstanding 4,449,867 7,199,438 7,316,743
See accompanying notes to consolidated financial statements.
- -F3-
RESMED INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
(IN THOUSANDS)
Foreign
Additional currency
Common stock paid-in Retained translation
Shares Amount capital earnings adjustment Total
------- ------- --------- -------- ---------- --------
Balance June 30, 1994 3,590 $ 14 3,729 1,767 120 5,630
Common stock issued for cash, net (note 8) 2,000 8 18,950 - - 18,958
Common stock issued on exercise of options (note 8) 944 4 1,714 - - 1,718
Foreign currency translation adjustment - - - - (272) (272)
Net income - - - 2,833 - 2,833
________ ________ ________ ________ ________ ________
Balance, June 30, 1995 6,534 26 24,393 4,600 (152) 28,867
Common stock issued for cash, net (note 8) 450 2 4,547 - - 4,549
Common stock issued on exercise of options (note 8) 188 1 467 - - 468
Foreign currency translation adjustment - - - - 599 599
Net income - - - 4,503 - 4,503
________ ________ ________ ________ ________ ________
Balance, June 30, 1996 7,172 29 29,407 9,103 447 38,986
Common stock issued on exercise of options (note 8) 30 - 249 - - 249
Foreign currency translation adjustment - - - - (2,075) (2,075)
Net income - - - 7,465 - 7,465
________ ________ ________ ________ ________ ________
Balance, June 30, 1997 7,202 $ 29 29,656 16,568 (1,628) 44,625
======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
- -F4-
RESMED INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
(IN THOUSANDS)
June 30, June 30, June 30,
1995 1996 1997
-------------- ------------- -------------
Cash flows from operating activities:
Net income $ 2,833 4,503 7,465
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 590 1,154 2,261
Goodwill amortization - 123 349
Provision for service warranties 267 (117) 124
Deferred income taxes (133) 112 (1,032)
Foreign currency options revaluation 14 (844) (458)
Changes in operating assets and liabilities, net of effect
of acquisitions:
Accounts receivable, net (1,589) (2,327) (1,714)
Government grants (328) (78) 491
Inventories (2,596) 272 (259)
Prepaid expenses and other current assets (41) (652) (180)
Accounts payable, accrued expenses and other liabilities 1,385 792 417
Income taxes payable 292 515 2,011
____________ ____________ ____________
Net cash provided by operating activities 694 3,453 9,475
____________ ____________ ____________
Cash flows from investing activities:
Purchases of property and equipment (1,805) (1,472) (3,962)
Purchase of marketable securities - available for sale (27,187) (102,730) (50,141)
Proceeds from sale of securities - available for sale 6,677 105,219 49,254
Purchases of patents - (97) (132)
Purchase of other assets - (373) -
Business acquisitions - (6,815) (1,177)
Proceeds from sale of non trading investments - - 1,113
Loan receivables - - (300)
Other 15 - -
____________ ____________ ____________
Net cash used in investing activities (22,300) (6,268) (5,345)
____________ ____________ ____________
Cash flows from financing activities:
Proceeds from issuance of common stock, net 20,723 5,017 249
Proceeds from issuance of long-term debt 420 - -
Repayment of long-term debt - - (287)
____________ ____________ ____________
Net cash provided by (used in) financing activities 21,143 5,017 (38)
____________ ____________ ____________
Effect of exchange rate changes on cash (20) 52 (525)
____________ ____________ ____________
Net increase (decrease) in cash and cash equivalents (483) 2,254 3,567
Cash and cash equivalents at beginning of the year 3,739 3,256 5,510
____________ ____________ ____________
Cash and cash equivalents at end of the year $ 3,256 5,510 9,077
=========== =========== ===========
Supplemental disclosure of cash flow information:
Income taxes paid $ 600 1,132 2,647
Interest paid - - -
See accompanying notes to consolidated financial statements.
- -F5-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
ResMed Inc. is a Delaware corporation formed in March 1994 as a holding
company for ResMed Holdings Ltd. ("RHL") (formerly ResCare Holding Limited), a
company incorporated in Australia. ResMed designs, manufactures and markets
devices for the evaluation and treatment of sleep disordered breathing,
primarily obstructive sleep apnea. ResMed Inc.'s ("ResMed", or "the Company")
principal manufacturing operations are located in Australia. Other principal
distribution and sales sites are located in the United States, United Kingdom,
Germany, France and Europe.
In May 1994, the shareholders of RHL approved a reorganization and
reincorporation of RHL resulting in the exchange of the shares of the
outstanding common stock of RHL for the shares of ResMed. In addition,
effective in March 1995, the Company effected a 5:2 stock split. As a result
of the reorganization, reincorporation and the stock split, the accounts
within the consolidated financial statements have been reclassified to reflect
a par value of $.004 per share. The board of directors also authorized
2,000,000 shares of $0.01 par value preferred stock. No such shares were
issued or outstanding at June 30, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Consolidation:
The consolidated financial statements include the accounts of ResMed
and its wholly owned subsidiaries. All significant transactions and balances
have been eliminated in consolidation.
(b) Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(c) Revenue Recognition:
Revenue on product sales is recorded at the time of shipment, when
earned. Royalty revenue from license agreements is recorded when earned.
(d) Cash and Cash Equivalents:
Cash equivalents include certificates of deposit, commercial paper,
and other highly liquid investments with original maturities of three months
or less stated at cost, which approximates market.
(e) Inventories:
Inventories are stated at the lower of cost, determined principally
by the first-in, first-out method, or net realizable value.
- -F6-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(f) Property and Equipment:
Property and equipment is recorded at cost. Depreciation expense is
computed using the straight-line method over the estimated useful lives of the
assets, generally two to ten years. Amortization expense is computed using
the straight-line method over the shorter of the estimated useful lives of the
assets or the period of the related lease. Straight-line and accelerated
methods of depreciation are used for tax purposes. Maintenance and repairs
are charged to expense as incurred.
(g) 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 or deemed to have no future value, the
unamortized costs are written off immediately.
(h) Goodwill:
Goodwill arising from business acquisitions is amortized on a
straight-line basis over periods ranging from three to 15 years. The Company
carries goodwill at cost net of amortization. The Company reviews its
goodwill carrying value when events indicate that an impairment may have
occurred in goodwill. If, based on the undiscounted cash flows, management
determines goodwill is overvalued, goodwill is written down to its discounted
cash flow value and the amortization period is re-assessed.
Amortization expense of goodwill was $123,000 and $349,000 for the
years ended June 30, 1996 and 1997, respectively.
(i) Government Grants:
Government grants revenue is recognized when earned. Grants have
been obtained by ResMed from the Australian Federal Government to support the
continued development and export of ResMed's proprietary positive airway
pressure technology and to assist development of export markets in the amount
of $527,000, $537,000 and $316,000 for the years ended June 30, 1995, 1996 and
1997, respectively.
(j) Foreign Currency:
The consolidated financial statements of ResMed's non-U.S.
subsidiaries are translated into U.S. Dollars for financial reporting
purposes. The 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. Income statements are translated at weighted average
rates. The cumulative translation effects are reflected in stockholders'
equity. Gains and losses on transactions denominated in other than the
functional currency of the entity are reflected in operations.
(k) Research and Development:
All research and development costs are expensed in the period
incurred.
- -F7-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(l) Net Income per Common and Common Equivalent Share:
Net income per common and common equivalent share is computed using
the weighted average number of shares outstanding adjusted for the incremental
shares attributed to outstanding options to purchase common stock as
determined under the treasury stock method.
(m) Financial Instruments :
The carrying value of financial instruments, which consists of cash and
cash equivalents, foreign currency option contracts (included in other
assets), government grants, accounts receivable, accounts payable, marketable
securities and long-term debt approximate their fair value. The Company does
not hold or issue financial instruments for trading purposes.
The fair value of financial instruments is defined as the amount at which the
instrument could be exchanged in a current transaction between willing
parties.
(n) 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 principally in Pound
Sterling and Deutschmarks. The term of such currency derivatives is generally
less than three years.
Premiums to enter certain foreign currency options are included in other
assets and are amortized over the period of the agreement in the consolidated
statement of income against other income, net. Unamortized premiums amounted
to $302,000 and $565,000 at June 30, 1996 and June 30, 1997, respectively.
Unrealized gains or losses are recognized as incurred in the consolidated
balance sheets as either other assets or other liabilities and are recorded
within other income, net on the Company's consolidated statement of income.
Unrealized gains and losses on currency derivatives are determined based on
dealer quoted prices.
The Company is exposed to credit-related losses in the event of
nonperformance by counterparts to financial instruments, but it does not
expect any counterparts will fail to meet their obligations given their high
credit ratings. The credit exposure of foreign exchange options is
represented by the fair value of options with a positive fair value at the
reporting date. The Company does not require collateral on its financial
instruments.
The Company held foreign currency option contracts with notional amounts
totaling $43,595,000 and $22,752,000 at June 30, 1996 and June 30, 1997,
respectively to hedge foreign currency items. These contracts mature at
various dates prior to February 27, 1999.
- -F8-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(o) Income Taxes:
ResMed 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.
(p) Marketable Securities:
The Company adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" (FAS
115), on July 1, 1994. There was no cumulative effect as a result of adopting
FAS 115 in fiscal 1995.
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 a separate component of shareholders' equity.
At June 30, 1996 and 1997, the Company's investments in debt
securities were classified on the accompanying consolidated balance sheet as
marketable securities-available for sale. These investments are diversified
among high credit quality securities in accordance with the Company's
investment policy.
The amortized cost of debt securities classified as available for
sale is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization and interest are included in interest income.
Realized gains and losses are included in other income or expense. The cost
of securities sold is based on the specific identification method.
(q) Accounting Changes
The Company adopted SFAS 123, "Accounting for Stock-Based
Compensation," in 1997, under which the Company elected to continue following
Accounting Principles Board (APB) Opinion 25. The Company also adopted SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", in 1997. The effects of the adoption of SFAS 121
was not material to financial position, results of operations and cash flows.
- -F9-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
3. MARKETABLE SECURITIES
The fair value of marketable securities available for sale at June 30,
1996 and 1997, was $18,021,000 and $18,908,000, respectively. The estimated
fair value of each investment approximates the amortized cost, and therefore,
there are no unrealized gains or losses as of June 30, 1996 or 1997.
Expected maturities may differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations without
prepayment penalties.
4. INVENTORIES
Inventories were comprised of the following at June 30, 1996 and 1997 (in
thousands) :
1996 1997
---------- ---------
Raw materials $ 2,088 1,797
Work in progress 257 284
Finished goods 3,789 3,716
_________ _________
$ 6,134 5,797
======== ========
5. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following at June 30, 1996 and
1997 (in thousands):
1996 1997
----------- ----------
Machinery and equipment $ 1,893 2,813
Computer equipment 780 1,370
Rental units 155 138
Furniture and fixtures 538 709
Vehicles 461 589
Clinical and demonstration equipment 1,300 2,417
Leasehold improvements 355 347
_________ _________
5,482 8,383
Accumulated depreciation and amortization (2,198) (3,467)
_________ _________
$ 3,284 4,916
======== ========
- -F10-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
6. ACCRUED EXPENSES
Accrued expenses at June 30, 1996 and 1997 consist of the following (in
thousands):
1996 1997
----------- ----------
Service warranties $ 280 348
Legal 394 153
Royalties 39 49
Value added taxes due 654 730
Consulting fees 133 90
Employee benefits 522 591
Employee withholding taxes - 210
Other 793 1,366
__________ __________
$ 2,815 3,537
========= =========
7. LONG-TERM DEBT
As part of an agreement between ResMed and the Australian Federal
Government, ResMed obtained an $870,000 loan facility of which $867,000 and
$548,000 were outstanding at June 30, 1996 and 1997, respectively. The loan
facility is unsecured and accrues interest at 3.8% per annum beginning May 3,
1996 through April 3, 1999. The facility is payable in six monthly
installments beginning November 3, 1996. Prior to May 3, 1996, the loan was
interest free.
The aggregate annual maturities of long-term debt at June 30, 1997 are as
follows:
Year ending June 30 Amount
- ------------------- ------------
1998 $ 274
1999 274
___________
$ 548
==========
8. STOCKHOLDERS' EQUITY
Initial Public Offering
On June 2, 1995, the Company completed an initial public offering of
2,000,000 new shares of common stock at a price of $11.00 per share, resulting
in net proceeds of approximately $18.9 million, after deducting issuance
costs.
On July 10, 1995, the underwriters for the above-mentioned public
offering exercised their over-allotment of 450,000 new shares of common stock,
resulting in additional net proceeds of approximately $4.5 million, after
deducting issuance costs.
- -F11-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
8. STOCKHOLDERS' EQUITY (CONTINUED)
Stock Options
Prior to the formation of the Company, RHL, a wholly owned subsidiary, at
the discretion of the directors, from time-to-time granted stock options to
key personnel, including officers, directors and outside consultants. The
options granted by RHL were exchanged for options with similar terms to
purchase common stock of ResMed and have subsequently been fully exercised.
These options have expiration dates of two to five years from the date of
grant and vested immediately.
The Company grants stock options to personnel, including officers and
directors in accordance with the 1995 Option Plan. These options have
expiration dates of ten years from date of grant and vest over three years.
The Company granted these options with the exercise price equal to the market
value as determined at the date of grant.
The following table summarizes options activity (adjusted for 5:2 stock split effected in fiscal 1995)
Years ended June 30,
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
1995 Price 1996 Price 1997 Price
---------------------- --------- -------------- --------- -------------- ---------
Outstanding at beginning of year 1,141,500 $ 2.68 431,500 $ 8.72 494,900 $ 13.64
Granted 235,000 11.00 269,800 16.25 - -
Exercised (944,500) 2.55 (187,500) 6.21 (30,660) 8.55
Forfeited (500) 11.00 (18,900) 12.24 (25,152) 14.15
____________ ______ ____________ ______ ____________ ______
Outstanding at end of year 431,500 $ 8.72 494,900 $ 13.64 439,088 $ 13.97
============ ====== ============ ====== ============ ======
Price range of granted options $ 11.00 13.06-16.34 -
Options exercisable at end of year 197,000 $ 6.01 84,787 $ 9.99 205,033 $ 13.10
Shares reserved for granting
future stock options
Beginning of year - 469,000 213,650
End of year 469,000 213,650 238,802
The following table summarizes information about stock options outstanding
at June 30, 1997
Weighted Average
Number Outstanding at Remaining Number Exercisable at
Exercise Prices June 30, 1997 Contractual Life June 30, 1997
- ---------------- --------------------- ---------------- ---------------------
11.00 192,038 7.92 124,404
13.06 5,000 8.88 -
16.34 242,050 9.00 80,629
________ ________
439,088 8.53 205,033
========= =========
- -F12-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
8. STOCKHOLDERS' EQUITY (CONTINUED)
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
fiscal 1995, 1996 and 1997, respectively. Had the Company determined
compensation cost based in the fair value at the grant date for its stock
options under SFAS 123 the Company's net income would have been reduced to the
pro forma amounts indicated below:
1996 1997
Net income (in thousands)
As reported $4,503 7,465
Pro forma 3,998 6,467
Net income per common and common equivalent share
As reported $ 0.63 1.02
Pro forma 0.56 0.88
The fair value of each stock option grant was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions: weighted average risk-free interest rates of 5.8% for fiscal 1996
and 1997, respectively; no dividend yield; expected lives of four years; and
volatility of 62.7%.
Pro forma net income reflects only options granted in 1995 and 1996.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS 123 is not reflected in the pro forma net income amounts presented
above because compensation cost is reflected over the options vesting period
of 3 years and compensation cost for options granted prior to, and not in
connection with, the Company's initial public offering on June 2, 1995 are not
considered.
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 15% or more for the Company's outstanding common stock.
The Rights are redeemable at $0.01 per Right and expire in 2007.
9. OTHER, NET
Other, net is comprised of the following at June 30, 1995, 1996 and 1997 (in
thousands):
1995 1996 1997
------------- ----------- ------------
License fees $ 189 242 -
Unrealized gain/(loss) on foreign currency options (97) 961 485
Gain/(loss) on foreign currency transactions 166 147 1,117
Write down of investments - - (175)
Other 4 7 (188)
___________ ___________ ___________
$ 262 1,357 1,239
========== ========== ==========
- -F13-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
9. OTHER, NET (CONTINUED)
In November 1994, the Company and an unrelated third-party entered
into a marketing rights agreement for the third-party to exclusively market
certain respiratory and related products under development by the Company in
the Japanese market. Under the terms of the agreement, the third-party is
required to provide up to $470,000 to the Company, of which $189,000 and
$242,000 has been recognized in the consolidated statements of income during
the years ended June 30, 1995 and June 30, 1996, respectively. The amounts
recognized were limited by certain performance requirements of the agreement.
10. INCOME TAXES
Income before income taxes for the years ended June 30, 1995, 1996 and
1997, was taxed under the following jurisdictions (in thousands).
1995 1996 1997
------------ ------------ -----------
U.S. $ 11 (32) 4,054
Non-U.S. 3,770 6,593 7,033
___________ ___________ ___________
$ 3,781 6,561 11,087
========== ========== ===========
The provision (benefit) for income taxes is presented below (in
thousands) :
Current:
Federal $ - - (20)
State - - 479
Non-U.S. 1,081 1,958 4,223
___________ ___________ ___________
$ 1,081 1,958 4,682
___________ ___________ ___________
Deferred:
Federal $ - - 366
State - - (61)
Non-U.S. (133) 100 (1,365)
___________ ___________ ___________
Provision for income taxes $ 948 2,058 3,622
=========== =========== ===========
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):
1995 1996 1997
------------- ------------ ------------
Computed "expected" tax expense $ 1,286 2,296 3,880
Increase (decrease) in income taxes
resulting from:
Non-deductible expenses 40 9 133
Research and development credit (274) (359) (399)
Non taxable interest income - (125) -
Tax effect of intercompany dividends - - (35)
Utilization of net operating loss carryforwards (11) (8) (27)
Change in valuation allowance (10) 133 -
Effect of non-U.S. tax rates (29) 233 (118)
Effect of a change in Australian tax rates (48) - -
State income taxes - - 272
Other (6) (121) (84)
___________ ___________ ___________
$ 948 2,058 3,622
========== ========== ==========
- -F14-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
10. INCOME TAXES (CONTINUED)
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, 1996 and 1997 (in thousands):
1996 1997
------------- ------------
Deferred tax assets:
Employee benefit obligations $ 97 133
Provision for service warranties 101 135
Net operating loss carryforwards 176 651
Accrual for legal costs 272 479
Intercompany profit in inventories 437 1,008
Other accruals 197 345
___________ ___________
1,280 2,751
Less valuation allowance (176) (651)
___________ ___________
Deferred tax assets 1,104 2,100
___________ ___________
Deferred tax liabilities:
Patents (78) (91)
Government grants (329) (141)
Unamortized foreign exchange premiums (109) (227)
Unrealized foreign exchange gains (346) -
Undistributed German income - (366)
Amortization expense (92) -
Other receivables - (71)
Other (123) (48)
___________ ___________
Deferred tax liabilities (1,077) (944)
___________ ___________
Net deferred tax asset $ 27 1,156
========== ==========
The valuation allowance at June 30, 1996 and 1997, primarily relates to a
provision for uncertainty as to the utilization of net operating loss
carryforwards. The net change in the valuation allowance was a decrease of
$21,000 an increase of $125,000 and $475,000 for the years ended June 30,
1995, 1996 and 1997, respectively. The measurement of deferred tax assets and
liabilities at June 30 of each year, reflect foreign currency translation
adjustments, changes in enacted tax rates and changes in temporary
differences. Income taxes in 1995, 1996 and 1997 were reduced by $11,000,
$8,000 and $27,000, respectively through the utilization of net operating loss
carryforwards. Based on the Company's history of taxable income and its
projection of future earnings, management believes that it is more likely than
not that sufficient taxable income will be generated in the foreseeable future
to realize the net deferred tax asset.
At June 30, 1997, ResMed has net operating loss carryforwards for U.S.
federal income tax purposes of approximately $1,861,000 which are available to
offset future U.S. federal taxable income, if any, through 2010. These have
not been recognized as the entity involved has not generated taxable income to
date. The majority of these net operating loss carryforwards relate to
deductions for exercise of stock options which will be credited to additional
paid in capital when realized.
- -F15-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
11. EMPLOYEE RETIREMENT PLANS
ResMed contributes to a number of employee retirement plans for the
benefit of its employees. These plans are detailed as follows:
Australia
ResMed 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. ResMed contributes
to the plans at the rate of 6% - 6.5% of the salaries of all Australian
employees. Total Company contributions to the plans for the years ended June
30, 1995, 1996 and 1997 were $157,000, $374,000 and $318,000, respectively.
United Kingdom
During fiscal 1997 ResMed established 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. ResMed contributes to
the plans at the rate of 3% of the salaries. Total Company contributions to
the plan for the year ended June 30, 1997 were $4,000.
Unites 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 was $39,000 in fiscal 1997.
12. SIGNIFICANT CUSTOMERS
ResMed's customers are located primarily in the United States, Europe and
Australia. One customer, Medical Gases of Australia, accounted for
approximately, 10%, 7% and 6% of net sales in 1995, 1996 and 1997,
respectively, and another customer, Priess, located in Germany, accounted for
approximately 15% and 8% of net sales in 1995 and 1996, respectively. The
business of Priess was acquired by ResMed on February 7, 1996.
13 DEPENDENCE ON KEY SUPPLIERS
The Company purchases two key components for its CPAP and VPAP devices
from single source suppliers. Management is attempting to qualify additional
sources of supply for these components; however, there can be no assurance
that a replacement supplier could be located on a timely basis or that
available inventories would be adequate to meet the Company's production needs
during any prolonged interruption of supply. The Company's supplier for one
such component is located in Europe. Operations in Europe are subject to the
risks normally associated with foreign operations including, but not limited
to, possible changes in export or import restrictions and the modification or
introduction of other governmental policies with potentially adverse effects.
A reduction or stoppage in supply, or the Company's inability to develop
alternate supply sources, if required, would limit its ability to manufacture
its CPAP and VPAP devices and therefore could adversely affect its business,
financial condition and results of operations.
- -F16-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
14. GEOGRAPHIC SEGMENT INFORMATION
ResMed operates primarily in the respiratory medicine industry.
Geographic segments have been classified into three regions; America, Europe
and Australia/Rest of World. America includes the U.S., Canada and South
America, Australia/Rest of World includes Australia, New Zealand, South Africa
and Asia.
Financial information by geographic region for the years ended June 30, 1995, 1996 and 1997,
is summarized below (in thousands):
Corporate,
Australia/ unallocated
Rest of and
America Europe World eliminations Total
------------ ----------- ------------ ------------- -----------
1995
- ------------------------------
Net revenues $ 12,549 6,757 4,195 - 23,501
Transfers among areas - - 6,551 (6,551) -
___________ ___________ ___________ ___________ ___________
Total revenues $ 12,549 6,757 10,746 (6,551) 23,501
=========== =========== =========== =========== ===========
Income (loss) from operations $ 1,296 3,803 (2,312) - 2,787
=========== =========== =========== =========== ===========
Identifiable assets $ 3,721 462 11,199 19,631 35,013
=========== =========== =========== =========== ===========
1996
- ------------------------------
Net revenues $ 16,830 12,400 5,332 - 34,562
Transfers among areas - - 4,062 (4,062) -
=========== =========== =========== =========== ===========
Total revenues $ 16,830 12,400 9,394 (4,062) 34,562
=========== =========== =========== =========== ===========
Income (loss) from operations $ 1,504 5,066 (2,771) (204) 3,595
=========== =========== =========== =========== ===========
Identifiable assets $ 5,508 6,671 18,241 11,973 42,393
=========== =========== =========== =========== ===========
1997
- ------------------------------
Net revenues $ 21,263 21,500 6,417 - 49,180
Transfers among areas - - - - -
=========== =========== =========== =========== ===========
Total revenues $ 21,263 21,500 6,417 - 49,180
=========== =========== =========== =========== ===========
Income (loss) from operations $ 1,615 9,084 (921) (1,451) 8,327
=========== =========== =========== =========== ===========
Identifiable assets $ 8,703 8,677 22,755 8,798 48,933
=========== =========== =========== =========== ===========
Net revenues which represent net sales to unaffiliated customers, is
based on the location of the customers. Transfers between geographic areas
are recorded at amounts generally above cost and in accordance with the rules
and regulations of the respective governing tax authorities. Operating income
or loss consists of total net sales less operating expenses, and does not
include either interest and other income, net, or income taxes. Identifiable
assets of geographic areas are those assets used in the Company's operations
in each area.
- -F17-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
15. RELATED PARTY TRANSACTIONS
For the years ended June 30, 1995, 1996 and 1997, legal and consulting
service fees in the amount of $282,000, $314,000 and $353,000, were paid to
certain directors of subsidiaries and director-related entities and
shareholders.
Included in these amounts are payments made to Dr. Colin Sullivan for the
year ended June 30, 1995 in which year he was a director of a subsidiary. Dr.
Sullivan provides consulting services to the Company pursuant to a consulting
agreement that terminates on December 31, 1997 (subject to extension for an
additional five year term) for which he receives annual payments based on the
net sales (as defined in the Consulting Agreement) of certain of the Company's
products, subject to a $90,000 per annum minimum payment. The Company also
reimburses Dr. Sullivan for his out-of-pocket expenses in performing such
consulting services.
The Company has also agreed to pay such amounts to Dr. Sullivan for a
period of 24 months following the termination of his consulting relationship
with the Company in exchange for his agreement not to compete with the Company
during this period. Total payments to Dr. Sullivan were, $228,000, $314,000
and $353,000 for the Company's fiscal years ended June 30, 1995, 1996 and
1997, respectively.
16. COMMITMENTS
The Company leases buildings, motor vehicles and office equipment under
operating leases. Rental charges for these items are expensed as incurred.
At June 30, 1997 the Company had the following future minimum lease payments
under non cancelable operating leases.
Operating
leases
Years $000
- ----------------------------- ----------
1998 $ 550
1999 463
2000 168
2001 29
2002 29
Thereafter 77
_________
Total minimum lease payments $ 1,315
=========
Rent expense under operating leases for the years ended June 30, 1995,
1996 and 1997 was approximately $162,000, $467,000 and $585,000, respectively.
In August 1997 the Company entered into an agreement to purchase for
approximately $3.6 million a 173,000 square ft parcel of land in close
proximity to its Australian production facility. It is the Company's
intention to develop the site as its Australian Operations center from fiscal
1999 onwards.
- -F18-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
17. BUSINESS ACQUISITION
Priess
On February 7, 1996 the Company's fully owned German subsidiary ResMed
Priess GmbH acquired the business and associated assets of Dieter W Priess
Medizintechnik (Priess), its German distributor for $6,350,000 in cash from a
4% stockholder of the Company. Priess is based in Moenchengladbach, Germany
and is engaged in the distribution and sale of respiratory products. The
acquisition has been accounted for as a purchase and, accordingly, the results
of operations of Priess have been included in the Company's consolidated
financial statements from February 7, 1996. The excess of the purchase price
over the fair value of the net identifiable assets acquired of $4,461,000 has
been recorded as goodwill and is being amortized on a straight-line basis over
15 years. The purchase agreement also provides for additional payments of up
to $4,000,000 over four years contingent on future sales revenues of Priess.
On December 5, 1996 in accordance with the acquisition contract the Company
paid an additional $1,000,000 to Priess as required on achievement of certain
sales targets, further additional payments, if any, will be accounted for as
additional goodwill.
$'000
----------
Fair value of assets acquired
Inventory $ 1,524
Property plant and equipment 532
_________
2,056
_________
Goodwill on acquisition 5,461
_________
Cash consideration $ 7,517
========
The following unaudited pro forma financial information presents the
combined results of operations of the Company and Priess as if the acquisition
had occurred as of the beginning of the years ended June 30, 1995 and June 30,
1996, after giving effect to certain adjustments, including amortization of
goodwill, additional depreciation expense, reduced interest income from use of
IPO funds relating to the acquisition, and related income tax effects. The
pro forma financial information does not necessarily reflect the results of
operations that would have occurred had the Company and Priess constituted a
single entity during such periods.
Year Ended
June 30,
1995 1996
Net sales (in thousands) $ 29,381 $38,558
Net income (in thousands) 3,547 5,476
Net income per common and common equivalent share $ 0.80 $ 0.76
- -F19-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
17. BUSINESS ACQUISITION (CONTINUED)
Premium Medical Purchase
On June 12, 1996 the Company's fully owned French subsidiary ResMed SA
acquired the business and associated assets of Premium Medical SARL (Premium),
its French distributor for $348,000 in cash. Premium was based in Paris,
France and was engaged in the sale and distribution of respiratory products.
The acquisition has been accounted for as a purchase and, accordingly, the
results of operations of the Premium business have been included in the
Company's consolidated financial statements from June 12, 1996. The excess of
the purchase price over the fair value of the net identifiable assets acquired
of $115,000 has been recorded as goodwill and is being amortized on a
straight-line basis over 5 years.
Year Ended
June 30,
1996
$000
-----------
Fair value of assets acquired
Inventory $ 229
Property plant and equipment 4
_________
233
_________
Goodwill on acquisition 115
_________
Cash consideration $ 348
========
18. LEGAL ACTIONS
The Company is currently engaged in significant patent litigation
relating to the enforcement and defense of certain of its patents. In 1992 the
Company's original Australian patent, which was due to expire in 1998 and
covered the CPAP method of treating, and the device for treatment of OSA, was
challenged by the Australian distributor for Respironics, Inc. and in May
1994, was revoked by an Australian appeals court in reliance on issues
specific to Australian patent law. The Company's market share in Australia
decreased from 1995 and the Company expects that its market share in Australia
will continue to decrease. The Company on May 29, 1997 paid $246,000 as total
and final settlement of costs associated with the litigation.
In January 1995, the Company filed a complaint for patent infringement in
the United States against Respironics. The complaint seeks monetary damages
from, and injunctive relief against Respironics resulting from its alleged
infringement of three of the Company's patents. In February 1995, Respironics
filed a complaint against the Company seeking a declaratory judgment that
Respironics does not infringe claims of these patents and that the Company's
patents are invalid and unenforceable. The two actions have been combined and
will proceed in the United States District Court for the Western District of
Pennsylvania.
- -F20-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
18. LEGAL ACTIONS (CONTINUED)
In June 1996 the Company initiated a further action in Pennsylvania
against Respironics regarding alleged infringement of a fourth patent, granted
June 4, 1996, related to the delay timer feature. This action was again
consolidated with the ongoing case such that the two remaining actions are to
proceed together. On July 1, 1997 the Court granted Respironics a motion for
partial summary judgment in which Respironics alleged its accused products do
not infringe one of the four patents in suit. Based on legal advice ResMed
believes there are grounds to appeal this dismissal and it is ResMed's
intention to seek reversal of the ruling by appeal to the United States Court
of Appeal for the Federal Circuit.
In May 1995, Respironics and its Australian distributor filed a statement
of claim against the Company and its President in the Federal Court of
Australia, New South Wales District Registry. The statement of claim alleges
that the Company engaged in unfair trade practices, including the misuse of
the power afforded by its Australian patents and dominant market position in
violation of the Australian Trade Practices Act. The statement of claim
asserts damage claims in the aggregate amount of approximately $730,000,
constituting lost profit on sales. While the Company intends to defend this
action, there can be no assurance that the Company will be successful in
defending such action or that the Company will not be required to make
significant payments to the claimants. Furthermore, the Company expects to
incur ongoing legal costs in defending such action.
- -F21-
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 25, 1997 ResMed Inc.
By: /S/ PETER C FARRELL
Peter C. Farrell, President and Chief Executive Officer
(Principal Executive Officer)
By: /S/ ADRIAN M SMITH
Adrian M. Smith, Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
/S/ PETER C FARRELL Chief Executive Officer, President, September 25, 1997
__________________________ Chairman of the Board (Principal
Peter C. Farrell Executive Officer)
/S/ CHRISTOPHER G ROBERTS September 25, 1997
__________________________
Christopher G. Roberts Director
/S/ MICHAEL A QUINN September 25, 1997
__________________________
Michael A. Quinn Director
/S/ GARY W PACE September 25, 1997
__________________________
Gary W. Pace Director
/S/ DONAGH MCCARTHY September 25, 1997
__________________________
Donagh McCarthy Director
- -26-
Schedule II
RESMED INC AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
(IN THOUSANDS)
Balance at Charged to Other Balance at
beginning of costs and (deductions) end of
period expenses additions period
------------- ---------- ------------ ----------
Year ended June 30, 1995
Applied against asset accounts:
Allowance for doubtful accounts $ 35 112 (3) 144
======= ======= ======= =======
Year ended June 30, 1996
Applied against asset account
Allowance for doubtful accounts 144 31 - 175
======= ======= ======= =======
Year ended June 30, 1997
Applied against asset account
Allowance for doubtful accounts 175 102 - 277
======= ======= ======= =======
- -27-
EXHIBIT INDEX
a) The following documents are filed as part of this report:
1.1 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.
3. Exhibits. The following exhibits are filed as a part of this report:
3.1 Certificate of Incorporation of Registrant, as amended*
3.2 By-laws of Registrant*
4.1 Form of certificate evidencing shares of Common Stock*
4.2 Rights agreement dated as of April 23, 1997**
10.1 1995 Stock Option Plan*
10.2 Licensing Agreement between the University of Sydney and ResMed
Limited dated May 17, 1991, as amended*
10.3 Amended and Restated Consulting Agreement between Colin Sullivan and
ResMed Limited dated September 2, 1994*
10.4 Loan Agreement between the Australian Trade Commission and ResMed
Limited dated May 3, 1994*
10.5 Lease for 82 Waterloo Road, Sydney, Australia*
10.6 Lease for 5744 Pacific Center Boulevard, San Diego, USA*
11.1 Statement re: Computation of Earning per Share
16.1 Letter regarding change in Certifying Accountant*
21.1 Subsidiaries of the Registrant
23.1 Consent and Report on Schedules of KPMG Peat Marwick LLP
27.1 Financial Data Schedule
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (No. 33-91094) declared effective on June 1, 1995.
** Incorporated by reference from the registrants. Report on Form 8-K
(File No. 0-26038).
b) Report on Form 8-K
Report filed on April 15, 1997 with respect to the adoptions of a rights
agreement granting shareholders right to purchase Series A Junior
Participating preference stock.
Exhibit 11.1
RESMED INC AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended June 30,
--------------------
1995 1996 1997
-------------------- -------------- --------------
PRIMARY EARNINGS
Net income $ 2,833 4,503 7,465
============ ============ ============
Shares
Weighted average number of common
shares outstanding 3,905 7,090 7,189
Additional shares assuming conversion of
stock options under treasury stock method 545 109 128
___________ ___________ ___________
Weighted average number of common
shares and common equivalent outstanding
as adjusted 4,450 7,199 7,317
============ ============ ============
Primary earnings per common and common
equivalent share: $ 0.63 $ 0.63 $ 1.02
============ ============ ============
FULLY DILUTED EARNINGS
Net Income $ 2,833 4,503 7,465
============ ============ ============
Shares
Weighted average number of common
shares outstanding 3,905 7,090 7,189
Additional shares assuming conversion of
stock options under treasury stock method 608 128 196
___________ ___________ ___________
Weighted average number of common and
common equivalent shares outstanding 4,513 7,218 7,385
as adjusted
============ ============ ============
Fully diluted earnings per common and
common equivalent share: $ 0.62 $ 0.62 $ 1.01
============= ============= =============
Exhibit 21.1
RESMED INC
SUBSIDIARIES OF THE REGISTRANT
ResMed Holdings Limited (incorporated under the laws of New South Wales,
Australia)
ResMed Limited (incorporated under the laws of New South Wales, Australia)*
ResMed Corporation (a Minnesota corporation)*
ResMed (UK) Limited (a United Kingdom corporation)*
ResMed International Inc (a Delaware corporation)
ResMed Priess GmbH and Co Kg (a German corporation)**
ResMed SA (a French corporation)**
ResMed Priess GmbH (a German corporation)
*A subsidiary of ResMed Holdings Limited
** A subsidiary of ResMed International Inc
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 11, 1997, included the
related financial statement schedule as of June 30, 1997 and for each of the
years in the three-year period ended June 30, 1997. 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.
We consent to incorporation by reference in the registration statement (No.
333-08013) on Form S-8 of ResMed Inc. of our report dated August 11, 1997,
relating to the consolidated balance sheets of ResMed Inc. and subsidiaries as
of June 30, 1996 and 1997, 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, 1997, and the related schedule, which report appears in
the June 30, 1997 annual report on Form 10-K of ResMed Inc.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
San Diego, California
September 23, 1997
Exhibit 27.1
RESMED INC
This schedule contains summary financial information extracted from ResMed
Inc's Annual June 30, 1997 financial report and is qualified in its entirety
by reference to such financial statements.
Period Type 12 Months 12 Months
Fiscal-Year-End June 30, 1997 June 30, 1996
Period-End June 30, 1997 June 30, 1996
Exchange-Rate 1 1
Cash 9,077,000 5,510,000
Securities 18,908,000 18,021,000
Receivables 7,834,000 6,252,000
Allowances (277,000) (175,000)
Inventory 5,797,000 6,134,000
Current-Assets 44,391,000 38,226,000
PP&E 4,916,000 3,284,000
Depreciation 0 0
Total-Assets 54,895,000 47,299,000
Current-Liabilities 9,996,000 7,382,000
Bonds 0 0
Preferred-Mandatory 0 0
Preferred 0 0
Common 29,000 29,000
Other-Se 29,656,000 29,407,000
Total-Liability-And-Equity 54,895,000 47,299,000
Sales 49,180,000 34,562,000
Total-Revenues 49,180,000 34,562,000
CGS 20,287,000 16,990,000
Total-Costs 0 0
Other-Expenses 0 0
Loss-Provision 0 0
Interest-Expense 0 0
Income-Pretax 11,087,000 6,561,000
Income-Tax 3,622,000 2,058,000
Income-Continuing 7,465,000 4,503,000
Discontinued 0 0
Extraordinary 0 0
Changes 0 0
Net-Income 7,465,000 4,503,000
EPS-Primary 1.02 0.63
EPS-Diluted 1.01 0.62