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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, 1999
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.)
10121 CARROLL CANYON ROAD
SAN DIEGO CA 92131-1109
UNITED STATES OF AMERICA
(Address of principal executive offices)
858 689 2400
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS:
Common Stock, $.004 Par Value
Rights to Purchase Series A Junior
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 9, 1999, computed by reference to the closing sale
price of such stock on the NASDAQ Stock Market, was approximately $377,743,965
(All directors and executive officers of Registrant are considered affiliates.)
At September 9, 1999, Registrant had 14,876,459 shares of Common Stock, $.004
par value, issued and outstanding.
Portions of Registrant's definitive Proxy Statement for its November 8, 1999
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 is a leading designer, manufacturer and distributor of medical equipment
for treating and diagnosing sleep disordered breathing ("SDB"). SDB includes
sleep apnea and related respiratory conditions. The Company currently sells a
comprehensive range of diagnostic and treatment devices in over 40 countries
through a combination of wholly owned subsidiaries and independent distributors.
When ResMed was formed in 1989, its prime purpose was to commercialize a device
for treating obstructive sleep apnea (OSA). Developed by Professor Colin
Sullivan of the University of Sydney, nasal continuous positive airway pressure
(CPAP) was the first successful noninvasive treatment of OSA.
Since 1989, ResMed has broadened its focus to cover sleep disordered breathing
in all its manifestations. Operations have expanded rapidly through the
introduction of a number of highly innovative product lines. As of June 1999,
the Company's compound annual growth rate was well in excess of market growth
rates: 39% for sales and 55% for net income, using fiscal 1995 as a base.
ResMed believes its success is due to a continuing focus on sleep disordered
breathing and the development of technology for treating its unwanted medical
consequences.
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 National 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 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(Registered Trademark)") equipment for
the diagnosis and treatment of sleep disordered breathing, primarily OSA.
The Company acquired the distribution businesses of Dieter W Priess
Medtechnik, Premium Medical SARL and Innovmedics Pte Ltd, its German, French and
Singaporean distributors, on February 7, 1996, June 12, 1996 and November 1,
1997, 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 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 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
sufferers also may experience an increase in heart rate and an elevation of
blood pressure during the cycle of apneas. 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. 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.
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, may be medically predisposed to OSA.
- -3-
Generally, an individual seeking treatment for the symptoms of OSA is
referred by a general practitioner to a specialist for further evaluation. The
diagnosis of OSA typically requires monitoring the patient during sleep at
either a sleep clinic or the patient's home. During overnight testing,
respiratory parameters and sleep patterns are monitored along with other vital
signs such as 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 1,800 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.
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 positive airway pressure is generally acknowledged as the
most effective and least invasive therapy for managing OSA. The Company
estimates that during fiscal 1998, 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 not a cure, but a therapy for managing 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. Over the past few years, product
innovations to improve patient comfort and compliance have been developed. These
include more comfortable mask systems, delay timers which gradually raise air
pressure allowing the patient to fall asleep more easily, and bilevel flow
generators, including VPAP systems, which provide different air pressures for
inhalation and exhalation.
- -4-
Business Strategy
ResMed believes that the SDB market will increase in the future due to a
number of factors including increasing awareness of OSA, improved understanding
of the role of cardiac treatment and related disorders, and an increase in
home-based treatment and diagnosis.
ResMed's strategy for the expansion of its business operations consists of
the following key elements:
Continue Product Development and Innovation. ResMed is a leading innovator
in products for the diagnosis and treatment of sleep disordered breathing. Since
its founding, ResMed has introduced products designed to increase patient
comfort and encourage compliance with therapy. ResMed believes that continued
product development and innovation will be key factors in its ongoing success.
Expand and Deepen Geographic Presence. ResMed actively markets its
products in over 40 countries to sleep clinics, home health care dealers and
managed care organizations. ResMed intends to increase its sales and marketing
efforts in its current markets, especially Europe and the United States, as well
as continue geographic expansion.
In June 1999, ResMed formed a strategic alliance with Critical Care
Concepts Inc. (3Ci) to distribute selected ResMed products to the US hospital
market.
In February 1999, ResMed purchased a minority holding in Flaga hf, the
Icelandic manufacturer of the Embla(Trademark) range of sleep diagnostic
equipment. As part of the agreement, ResMed will become Flaga's distributor of
Embla(Trademark) equipment in the US and selected other countries.
Increase Public and Clinical Awareness. ResMed intends to promote
awareness of the prevalence of SDB and its treatment alternatives within three
main groups: (1) the population with predisposition to SDB; (2) primary care
physicians and other specialists, such as cardiologists, neurologists, and
pulmonologists; and (3) special interest groups, such as sleep disorder support
groups. ResMed has sponsored several international symposia on different
clinical effects of SDB, including the cardiovascular and cerebrovascular
implications of SDB. As well as educating the attending healthcare
professionals, each conference has been published in CD-ROM format for
distribution.
Expand into New Markets. ResMed is working with physicians to explore new
medical applications for nasal CPAP, including the treatment of stroke and
cardiac patients as well as post-operative surgery patients, women with
pre-eclampsia, and pediatric patients. There is now a recognized link between
SDB and common diseases such as chronic obstructive pulmonary disease, stroke,
and cardiac disease. New research on stroke and heart disease has found one in
two people who suffer a stroke, snore heavily and have obstructive sleep apnea,
and that these conditions may play a major role in heart attack and high blood
pressure. Treating sleep disordered breathing is thus promising to be an
exciting, clinically important and fast-growing business.
- -5-
Products
Currently, ResMed produces nasal CPAP, VPAP(Registered Trademark) and
AutoSet(Registered Trademark) systems for the diagnosis, titration and treatment
of SDB. These are flow generator systems which deliver positive airway pressure
through a small nasal mask. The flow of air acts like an "air splint" to keep
the patient's upper airway open and prevent apneas. These apneas occur when the
muscles that normally hold the airway open during sleep, relax too much and
close the airway off. AutoSet(Registered Trademark) systems are based on a
proprietary technology that can also be used in the diagnosis of OSA.
ResMed also manufactures air delivery systems that include nasal masks,
tubing and headgear to connect the flow generator to the patient. In addition, a
growing range of sleep laboratory products and other accessories which improve
patient comfort, convenience and compliance are marketed.
CPAP and VPAP(Registered Trademark)
Introduced in July 1995, the SULLIVAN(Registered Trademark) V range of flow
generators is now the Company's main CPAP flow generator product. Each of the
four models in the range is small and compact and comes with different features
to suit different patient needs.
ResMed also manufacturers Variable Positive Airways Pressure
(VPAP(Registered Trademark)) units which deliver ultra-quiet, comfortable
bilevel therapy. There are two preset pressures: a higher pressure for when the
patient breathes in and a lower pressure for when the patient breathes out.
Breathing out against a lower pressure makes treatment more comfortable,
particularly for patients who need high pressure levels, or for patients with
impaired breathing ability.
ResMed VPAP(Registered Trademark) systems have gained a reputation for
delivering comfortable treatment. This is due to a unique feature called IPAP
MAX(Trademark), which helps to ensure the system matches the patient's
respiratory cycle. The patient can thus tolerate the VPAP(Registered Trademark)
system better, resulting in more effective bilevel therapy.
There are five models in the VPAP(Registered Trademark) range: the
SULLIVAN(Registered Trademark) VPAP(Registered Trademark) II, the
SULLIVAN(Registered Trademark) Comfort, the SULLIVAN(Registered Trademark)
VPAP(Registered Trademark) II ST, the SULLIVAN(Registered Trademark)
VPAP(Registered Trademark) II ST-A and the SULLIVAN(Registered Trademark)
VPAP(Registered Trademark) MAX(Trademark).
The VPAP(Registered Trademark) MAX(Trademark) is a Ventilatory Support
System for the treatment of adult patients with respiratory insufficiency or
respiratory failure. In 1998, the system received FDA clearance for the US
hospital critical care market.
CPAP and VPAP(Registered Trademark) units are sold to the end user at
prices which vary from approximately $800 to $6,000, depending primarily upon
the model, features required and country of sale. Flow generators accounted for
approximately 64%, 66% and 67% of the Company's net revenues in fiscal 1999,
1998 and 1997 respectively.
AutoSet(Registered Trademark) T
In March 1999, the Company introduced the AutoSet(Registered Trademark) T
home CPAP unit for use in the treatment of SDB conditions. While conventional
CPAP units operate at a fixed CPAP pressure, 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(Registered Trademark) T is designed to continually detect the level of
airway resistance and adjust the air pressure to the required level throughout
the night. This results in greater patient comfort and reduced pressure related
side effects.
AutoSet(Registered Trademark) diagnostic systems for managing OSA
ResMed markets devices incorporating its innovative AutoSet(Registered
Trademark) technology for the diagnosis, titration and treatment of SDB in sleep
clinics, hospitals and patients' homes. The AutoSet(Registered Trademark)
Portable II Plus is a fully portable system for diagnosing OSA in sleep clinics,
hospitals or patients' homes, giving sleep clinics and specialists the means to
expand their capabilities and increase patient throughput. AutoSet(Registered
Trademark) Portable II Plus records relevant respiratory data, which can then
be downloaded to a computer for review and print out.
- -6-
In 1999, ResMed will release the AutoSet(Registered Trademark) Clinical
III software. This new software enables the AutoSet(Registered Trademark)
Portable II Plus to provide real time data during sleep studies.
The following table lists the Company's products.
Date of Commercial
Product Features Introduction; Status
- ---------------------------------- ---------------------------------------------------- --------------------
FLOW GENERATORS:
SULLIVAN(Registered Trademark) V A range of compact portable fixed-pressure July 1995
Series 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) Limited featured dual pressure device March 1996
COMFORT
SULLIVAN(Registered Trademark) Dual pressure portable device with April 1996
VPAP(Registered Trademark)II ST spontaneous and spontaneous/timed breath
triggering modes of operation
VPAP(Registered Trademark)II ST A Version of VPAP(Registered Trademark)II ST equipped August 1998
with high/ low pressure, power failure alarms.
For noninvasive positive pressure ventilation use
VPAP(Registered Trademark) The VPAP(Registered Trademark) MAX(Trademark) is a November 1998
MAX(Trademark) Ventilatory Support System for the treatment of
adult patients with respiratory insufficiency
or respiratory failure.
AutoSet(Registered Trademark) T Micro processor controlled, automatically and March 1999
continuously monitors patient breathing.
Adjusts CPAP treatment pressure in response
to patient's needs during the night
MASK SYSTEMS:
Bubble Mask(Registered Trademark) Includes Bubble Cushion(Registered Trademark), June 1991
containing a silicone membrane which readily
adjusts to patient's facial contours and
ResCap(Registered Trademark) five point attachment
headgear
Modular Mask Frame Mask frame with T Bar forehead pads, to July 1995
prevent sideways movement of the frame
and provide maximum stability
SULLIVAN(Registered Trademark) Contains contoured nasal cushion which August 1997
Mirage(Registered Trademark) readily adjusts to patient's facial contours.
Lightweight, quiet, low profile mask system
SULLIVAN(Registered Trademark) A Mirage(Trademark) based full face mask product June 1999
Mirage(Registered Trademark) Full featuring adjustable cushion in a lightweight
Face Mask mask system
ACCESSORIES:
HumidAire(Trademark) Attaches to CPAP or VPAP(Registered Trademark) September 1997
systems. Provides adjustable heated
humidification, relieves drying of nasal passages,
increasing patient comfort
DIAGNOSTIC SYSTEMS:
AutoSet(Registered Trademark) An improved Portable version of AutoSet(Registered June 1997
Portable II Plus Trademark) Clinical with PC processor functions
built in for home use sleep studies
- -7-
Innovative Mask Systems
- -------------------------
In August 1997, ResMed released the Mirage(Registered Trademark) mask
system. The Mirage(Registered Trademark) is suitable for both conventional CPAP
and bilevel therapy, is small, lightweight, and designed for maximum patient
comfort. The specially contoured silicone cushion inflates with air pressure to
gently "float" on the patient's face. A number of other design features enhance
comfort and convenience and ensure effective pressure delivery.
The standard Mirage(Registered Trademark) size fits most people so that
clinicians can fit masks faster and more easily. Inventory costs can also be
reduced with the Mirage(Registered Trademark) as it eliminates the need to carry
a large range of types and sizes of mask.
The Mirage(Registered Trademark) Full Face Mask for patient compliance
Released in June 1999, the Mirage(Registered Trademark) Full Face mask
expands on the innovative design of the Mirage(Registered Trademark) nasal mask.
The Mirage(Registered Trademark) Full Face Mask provides an effective method of
applying ventilatory assist (Noninvasive Positive Pressure Ventilation - NPPV -
therapy) and can be used to address mouth-breathing problems in conventional
bilevel or CPAP therapy.
A range of other mask systems
ResMed also sells cushions, frames and headgear separately. A patented
Bubble Cushion(Registered Trademark), made from a thin, soft silicone membrane
readily conforms to the patient's facial contours to form a seal and minimize
air leakage. The cushion complies with body movement and eliminates the need
for tight headgear to form a secure seal.
Typically, patients replace mask cushions once or twice a year and headgear
every three to six months. Bubble Masks(Registered Trademark) are available
in a variety of sizes and are sold independently of ResMed systems, either as
replacement products or with other manufacturers' devices. The Company also
manufactures the Bubble Mask(Registered Trademark) on an OEM basis for one of
its competitors.
Mask systems, accessories and other products accounted for approximately
36%, 34% and 33% of the Company's net revenues in fiscal 1999, 1998 and 1997,
respectively.
Accessories and Other Products
---------------------------------
In order to enhance patient comfort, convenience and compliance, ResMed
markets a variety of other products and accessories. These products include
humidifiers, such as the SULLIVAN(Registered Trademark) HumidAire , which
connect directly with the CPAP and VPAP(Registered Trademark) flow generators to
humidify and, if desired, heat the air delivered to the patient. Their use
prevents the drying of nasal passages which can cause discomfort. Other
optional accessories include carry bags and replacement filters.
ResMed also manufactures and distributes products that are used primarily
in sleep clinics and hospitals to monitor key respiratory parameters. These
products include the Embla range of sleep diagnostic products, manufactured by
Flaga HF, as well as 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.
The Universal Control Unit (UCU) was first introduced in October 1995. It
was superseded in June 1997 by the UCU2. The UCU2 is a monitoring device used
by clinicians to measure and adjust the pressure being delivered by a ResMed
CPAP or bilevel device to a patient undergoing a sleep study. It allows the
clinician to conduct this review and adjustment from a remote location within a
sleep lab.
- -8-
The SULLIVAN(Registered Trademark) Compliance Application (SCAN ),
introduced in October 1995, and superseded in June 1997 by SCAN 2.0, comprises
the software necessary to download compliance data from flow generators with
recording capabilities. Clinicians can use SCAN 2.0 to track how often and how
long a patient is undergoing treatment. In connection with a modem, SCAN 2.0
allows compliance data to be downloaded from a flow generator in a patient's
home direct to the sleep laboratory.
Product Development
The Company is committed to an ongoing program of product advancement and
development. Currently, product development efforts are focused on
AutoSet(Registered Trademark) systems, improved CPAP, VPAP and mask systems and
manufacturing cost-reduction programs.
The Company consults with physicians at major sleep centers throughout the
world to identify technological trends in the treatment of SDB. Some of these
physicians currently serve on the Company's Medical Advisory Board. New product
ideas are also identified by the Company's marketing staff, direct sales force,
network of distributors, manufacturers' representatives and patients. Typically,
ResMed's internal development staff then perform new product development. The
Company has collaborative arrangements with researchers in several institutions
including the University of Sydney Medical School, as well as other research
groups around the world such as Brown, Edinburgh, Essen, University of
California, San Diego and Harvard Medical Schools.
In the three fiscal years ended June 30, 1999, 1998 and 1997, the Company
expended $6,542,000, $4,994,000 and $3,807,000, respectively, on research and
development.
Sales and Marketing
The Company currently markets its products in over 40 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.
North America. In the United States, the Company's marketing activities
are conducted through a field sales organization comprised of 23 regional
territory representatives, program development specialists and diagnostic system
specialists, plus two regional sales directors and 54 independent manufacturers'
representatives. The United States field sales organization markets and sells
products to more than 4,500 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, fit the
patient with the appropriate mask and set the flow generator pressure to the
prescribed level. In the United States, sales employees and manufacturers'
subrepresentatives are managed by the two regional sales managers and the
Company's Vice President - US Sales. In addition, the Company has a Director -
US Marketing, responsible for marketing in the United States. The Company's
Canadian and Latin American sales are conducted through independent
distributors. Sales in North America accounted for 57%, 52% and 43% of the
Company's total net revenues for the fiscal years ended June 30, 1999, 1998
and 1997, respectively.
- -9-
Europe. The Company markets its products in most major European countries.
ResMed has fully owned subsidiaries in the United Kingdom, Germany and France
and uses independent distributors to sell its products in other areas of Europe.
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. In addition, the Company uses a consultant in
Switzerland to assist in sales and marketing efforts for selected European
countries.
The Company's Executive Vice President is responsible for coordination of
all European distributors and, in conjunction with local management, the direct
sales activity in Europe. Sales in Europe accounted for 34%, 35% and 44% of the
Company's total net revenues for the fiscal years ended June 30, 1999, 1998 and
1997, respectively.
Australia/Rest of World. Marketing in Australia and the rest of the world
is also the responsibility of the Executive Vice President. Sales in Australia
and the rest of the world accounted for 9%, 13% and 13% of the Company's total
net revenues for the fiscal years ended June 30, 1999, 1998 and 1997,
respectively.
Manufacturing
The Company's principal manufacturing facilities are located 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 therapeutic and diagnostic sleep disorder products, most are
off-the-shelf items available from multiple vendors.
The Company's quality control group performs tests at various steps in the
manufacturing cycle to ensure compliance with the Company's specifications. In
April 1999 the Company completed construction of its 120,000 square feet
manufacturing and R&D facility in Sydney, Australia.
The Company generally manufactures to its internal sales forecasts and
fills orders as received. As a result, the Company generally 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.
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.
- -10-
In the United States, the Company's products are purchased primarily by
home health care dealers, hospitals or sleep clinics, which then invoice
third-party payors directly. Domestically third-party payors include Medicare,
Medicaid and corporate health insurance plans. These payors may deny
reimbursement if they determine that a device is not used in accordance with
cost-effective treatment methods, or is experimental, unnecessary or
inappropriate. 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 some other foreign markets there is currently
limited or no reimbursement for devices that treat OSA.
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.
The Company competes on a market-by-market basis with various companies,
some of which have greater financial, research, manufacturing and marketing
resources than the Company. In the United States, its principal market,
Respironics, Inc. ("Respironics"), DeVilbiss, a division of Sunrise Medical
Inc., and Nellcor Puritan Bennett, a subsidiary of Mallinckrodt, Inc. are the
primary competitors for the Company's CPAP products. The Company's principal
European competitors are also Respironics, DeVilbiss and Nellcor Puritan
Bennett, as well as regional European manufacturers. The disparity between the
Company's resources and those of its competitors is likely to increase as a
result of the recent trend towards consolidation in the health care industry.
In addition, the Company's products compete with surgical procedures and dental
appliances designed to treat OSA and other SDB related respiratory conditions.
The development of new or innovative procedures or devices by others could
result in the Company's products becoming obsolete or noncompetitive, resulting
in a material adverse effect on the Company's business, financial condition and
results of operations.
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. In addition, the Company's ability to compete
will continue to be dependent on the extent to which the Company is successful
in protecting its patents and other intellectual property.
Patents and Proprietary Rights and Related Litigation
The Company, through its subsidiary ResMed Limited, owns or has licensed
rights to 12 issued United States patents (including 2 design patents) and 20
issued foreign patents. In addition, there are 56 pending United States patent
applications (including 10 design patent applications) and 98 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(Registered Trademark) Device.
- -11-
None of the Company's patents are due to expire in the next five years,
with the exception of four foreign patents due to expire in April 2002. The
Company believes that the expiration of these patents will not have a material
adverse impact on the Company's competitive position.
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 and is investigating possible infringement by
others. See Item 3- "Legal Proceedings."
Additional litigation may be necessary to attempt 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.
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.
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 510(k) pre-marketing
clearances. The process of obtaining a Section 510(k) clearance generally
requires the submission of performance data and often clinical data, which in
some cases can be extensive, to demonstrate that the device is "substantially
equivalent" to a device that was on the market prior to 1976 or to a device that
has been found by the FDA to be "substantially equivalent" to such a pre-1976
device. As a result, FDA approval requirements may extend the development
process for a considerable length of time. In addition, in some cases, the FDA
may require additional review by an advisory panel, which can further lengthen
the process. The PMA process, which is reserved for new devices that are not
substantially equivalent to any predicate device and for high risk devices or
those that are used to support or sustain human life, may take several years and
requires the submission of extensive performance and clinical information.
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 of
the regulations.
- -12-
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.
Employees
As of June 30, 1999, the Company had 477 employees and 24 full time
consultants, of which 207 persons were employed in warehousing and
manufacturing, 82 in research and development, 114 in sales, marketing and 98 in
administration. Of the Company's employees and consultants, 338 were located in
Australia, 86 in the United States, 68 in Europe and 9 in Singapore, New Zealand
and Malaysia.
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.
Medical Advisory Board
The Company's international Medical Advisory Board ("MAB") consists of
physicians and scientists specializing in the field of sleep disordered
breathing. 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 SDB and other
developments in sleep disorders medicine. MAB members are also available to
consult on an as-needed basis with senior management of the Company. MAB
members include:
Michael Coppola, MD, age 46 is a leading pulmonary critical care and sleep
disorders physician in private practice in Massachusetts. He is an attending
physician at Baystate Medical Center and Mercy Hospital in Springfield, MA and a
Fellow of the American College of Chest Physicians. He is Chairman of the
Massachusetts Sleep Breathing Disorders Society and Medical Director of Medical
Care Partners a multispecialty medical group. He is also the Medical Director of
Olympus Specialty Hospital, Medical Director of Winmar Diagnostics, a Sleep
Disordered Breathing specialty company, and a member of the faculty of Tufts
University School of Medicine.
Neil J. Douglas, MD FRCP, age 51 is Professor of Respiratory and Sleep Medicine,
University of Edinburgh, an Honorary Consultant Physician, Royal Infirmary of
Edinburgh and Director of the Scottish National Sleep Laboratory. He is Dean of
the Royal College of Physicians of Edinburgh and Vice Chairman of the UK Royal
Colleges Committee of CME Directors and a member of the Working Party on Sleep
Apnea of the Royal College of Physicians of London. He is a past Chairman of
the British Sleep Society and past Secretary of the British Thoracic Society. He
has published over 200 papers on breathing during sleep.
Nicholas Hill, MD, age 49 is Professor of Medicine at Brown University and
Director of Critical Care Services at Rhode Island Hospital. He is a Fellow of
the American College of Chest Physicians. His main research interests are in
the acute and chronic applications of non-invasive positive pressure ventilation
for treating lung disease.
Dr Barry J Make, MD, age 52 is Director, Emphysema Center and Pulmonary
Rehabilitation National Jewish Medical and Research Center, and Professor of
Pulmonary Sciences and Critical Care Medicine of the University of Colorado
School of Medicine. He has served on numerous national and international
committees, many of which were associated with respiratory and cardiovascular
diseases. His research and clinical work has resulted in a large number of
publications on treatment of, and rehabilitation from, respiratory disease.
- -13-
Colin Sullivan, MD PhD FRACP, age 55 is Chairman of the MAB and the inventor of
nasal CPAP for treating obstructive sleep apnea. He is Professor of Medicine and
Director of the David Read Laboratory at the Sydney University Medical School as
well as a thoracic physician at the Royal Prince Alfred Hospital. In addition,
he is a Fellow of the Royal Australian College of Physicians and Director of the
National SIDS Council Pediatric Sleep Laboratory at the Children's Hospital,
Westmead. Dr Sullivan has continued to contribute to the Company's innovation,
product development and clinical testing.
Helmut Teschler, MD, age 46 is Associate Professor and Head of the Department of
Respiratory Medicine and Sleep Medicine, Ruhrlandklinik, Medical Faculty,
University of Essen, Germany. He is a Fellow of each of the following
Associations: German Pneumology Society, American Thoracic Society, European
Respiratory Society, and American Sleep Disorders Association. He is an
internationally recognized researcher in respiratory medicine and sleep
disorders medicine.
J. Woodrow Weiss, MD, age 50 is Associate Professor of Medicine and Co-Chairman
of the Division of Sleep Medicine at Harvard Medical School, as well as Chief,
Pulmonary & Critical Care Medicine, Beth Israel Deaconess Medical Center, Boston
MA. Dr Weiss is an internationally recognized researcher in sleep disorders
medicine.
B. Tucker Woodson, MD FACS, age 42 is an otolaryngologist and 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 the American
College of Surgeons. Dr Woodson is the Co-Director of the Medical College of
Wisconsin/Froedert Memorial Lutheran Hospital Center for Sleep. He did surgical
training with Dr. Fujita, the pioneer of uvulopalatopharyngoplasty to treat
obstructive sleep apnea. He has a primary research interest in developing new
methods for surgical management of sleep apnea and improved evaluation of the
upper airway. He is a strong proponent of nasal CPAP and teaches extensively to
other surgeons.
Members of the Medical Advisory Board, other than Dr. Sullivan, receive an
honorarium as well as reimbursement of traveling costs and other out-of-pocket
expenses incurred in attending any conferences as may be requested by the
Company.
Item 2 Properties
----------
ResMed's principal executive offices, consisting of approximately 23,000 square
feet, are located in San Diego, California. The Company leases this property
pursuant to an eight year lease which is scheduled to expire in 2005. Primary
manufacturing operations are situated in Sydney, Australia in a newly completed
120,000 square feet facility owned by the Company.
Sales and warehousing facilities are also leased in Oxford, England,
Moenchengladbach, Germany, Lyon, France and Singapore.
Item 3 Legal Proceedings
------------------
The company is currently engaged in litigation relating to the enforcement and
defense of certain of its patents.
- -14-
In January 1995, the Company filed a complaint in the United States District
Court for the Southern District of California seeking monetary damages from and
injunctive relief against Respironics for alleged infringement of three ResMed
patents. In February 1995, Respironics filed a complaint in the United States
District Court for the Western District of Pennsylvania against the Company
seeking a declaratory judgment that Respironics does not infringe claims of
these patents and that the Company's patents are invalid and unenforceable. The
two actions were combined and are proceeding in the United States District Court
for the Western District of Pennsylvania. In June 1996, the Company filed an
additional complaint against Respironics for infringement of a fourth ResMed
patent, and that complaint was consolidated with the earlier action. As of this
date, Respironics has brought three partial summary judgment motions for
non-infringement of the ResMed patents; the Court has granted two of the
motions, and the third is currently awaiting judicial action. It is ResMed's
intention to appeal the summary judgment rulings after a final judgment in the
consolidated litigation has been entered in the District Court proceedings.
In May 1995, Respironics and its Australian distributor filed a Statement of
Claim against the Company and Dr. Farrell in the Federal Court of Australia,
alleging that the Company engaged in unfair trade practices. The Statement of
Claim asserts damage claims for lost profits on sales in the aggregate amount of
approximately $1,000,000. While the Company intends to defend this action,
there can be no assurance that the Company will be successful or that the
Company will not be required to make significant payments to the claimants.
Furthermore, the Company expects to incur ongoing legal costs in defending this
action, as well as in the continuing litigation of its patent cases.
Item 4 Submission of Matter to a Vote of Security Holders
----------------------------------------------------------
None
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 National 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.
1999 1998
High. . Low High Low
Quarter One . $26.38 $18.50 $14.00 $11.75
Quarter Two . 47.25 21.19 15.50 12.63
Quarter Three 51.44 23.00 17.75 14.00
Quarter Four. 37.13 19.75 22.78 17.63
As of September 9, 1999, there were approximately 3,611 beneficial holders
of the Company's Common Stock. The Company does not intend to declare any cash
dividends in the foreseeable future.
- -15-
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, 1999. 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: 1999 1998 1997 1996 1995
--------------------- ----------- ---------- ---------- -------
(In thousands, except per share data)
Net revenues. . . . . . . . . . . . . . $ 88,627 $ 66,519 $ 49,180 $ 34,562 $ 23,501
Cost of sales . . . . . . . . . . . . . 29,416 23,069 20,287 16,990 11,271
_______ _______ _______ _______ _______
Gross profit. . . . . . . . . . . . . . 59,211 43,450 28,893 17,572 12,230
_______ _______ _______ _______ _______
Selling, general and administrative
expenses . . . . . . . . . . . . . . . 27,414 21,093 16,759 11,136 7,447
Research and development expenses . . . 6,542 4,994 3,807 2,841 1,996
_______ _______ _______ _______ _______
Total operating expenses. . . . . . . . 33,956 26,087 20,566 13,977 9,443
_______ _______ _______ _______ _______
Income from operations. . . . . . . . . 25,255 17,363 8,327 3,595 2,787
_______ _______ _______ _______ _______
Other (expense) income:
Interest income, net. . . . . . . . . . 779 1,011 1,205 1,072 205
Government grants . . . . . . . . . . . 833 611 316 537 527
Other, net. . . . . . . . . . . . . . . (2,290) (2,873) 1,239 1,357 262
_______ _______ _______ _______ _______
Total other (expense) income, net . . . (678) (1,251) 2,760 2,966 994
_______ _______ _______ _______ _______
Income before income taxes. . . . . . . 24,577 16,112 11,087 6,561 3,781
Income taxes. . . . . . . . . . . . . . 8,475 5,501 3,622 2,058 948
_______ _______ _______ _______ _______
Net income. . . . . . . . . . . . . . . 16,102 10,611 7,465 4,503 2,833
======= ======= ======= ======= =======
Diluted earnings per share. . . . . . . $ 1.04 $ 0.71 $ 0.51 $ 0.31 $ 0.32
======= ======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding . . . . . 15,534 15,022 14,634 14,398 8,900
Basic earnings per share. . . . . . . . $ 1.09 $ 0.73 $ 0.52 $ 0.32 $ 0.36
======= ======= ======= ======= =======
Weighted average common shares
outstanding . . . . . . . . . . . . . . 14,708 14,500 14,378 14,188 7,808
Cash dividends per share. . . . . . . . - - - - -
As of June 30,
1999 1998 1997 1996 1995
---------------- ------- ------- ------- -------
Consolidated Balance Sheet Data: (in thousands)
Working capital . . . . . . . . . . . . $ 32,529 $32,759 $34,395 $30,844 $27,354
Total assets. . . . . . . . . . . . . . 89,889 64,618 54,895 47,299 35,313
Long-term debt, less current maturities - - 274 578 787
Total stockholders' equity. . . . . . . 71,647 50,773 44,625 38,986 28,867
- -16-
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 selected financial data and
consolidated financial statements and notes, included 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 generator 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, titration and monitoring of OSA, such as the recently
released AutoSet(Registered Trademark) T flow generator. 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 is 36%. During fiscal 1999, 1998 and 1997, the Company's effective tax
rate has fluctuated from approximately 35% 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.
Fiscal Year Ended June 30, 1999 Compared to Fiscal Year Ended June 30,
1998
Net Revenues. Net revenues increased in fiscal 1999 to $88.6 million from
$66.5 million in fiscal 1998, an increase of $22.1 million or 33%. This
increase was primarily attributable to an increase in unit sales of the
Company's flow generators and accessories in the Americas where net revenues
increased to $51.0 million from $34.3 million and, to a lesser extent, in
Europe, where net revenues increased to $30.2 million from $23.3 million. Net
revenues also improved due to a shift to higher-priced bilevel based products
such as SULLIVAN(Registered Trademark) VPAP(Registered Trademark)II ST and
increased sales of patient mask systems.
Gross Profit. Gross profit increased in fiscal 1999 to $59.2 million from
$43.5 million in fiscal 1998, an increase of $15.8 million or 36%. The increase
resulted primarily from increased unit sales during fiscal 1999. Gross profit
as a percentage of net revenues increased in fiscal 1999 to 66.8% from 65.3% in
1998. The increase was primarily due to improved manufacturing efficiencies and
increased sales of higher margin bilevel units.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased in 1999 to $27.4 million from $21.1 million
for 1998, an increase of $6.3 million or 30%. As a percentage of net revenues,
selling, general and administrative expenses decreased in fiscal 1999 to 30.9%
from 31.7% for fiscal 1998. The gross increase in expenses was due primarily to
an increase to 212 from 158 in the number of sales and administrative personnel
and other expenses related to the increase in the Company's sales.
- -17-
Research and Development Expenses. Research and development expenses
increased in fiscal 1999 to $6.5 million from $5.0 million in fiscal 1998, an
increase of $1.5 million or 31%. As a percentage of net revenues, research and
development expenses in fiscal 1999 marginally declined to 7.4% from 7.5% in
fiscal 1998. The dollar increase in research and development expenses was due
primarily to an increase in research and development equipment, personnel and
external consultancy fees.
Other Income (expense). Other income (expense) improved in fiscal 1999 to
a loss of $0.7 million from a loss of $1.3 million for fiscal 1998, a change of
$0.6 million. This improvement was due primarily to reduced losses incurred in
the Company's foreign currency hedging structures, partially offset by reduced
license fee income. Foreign currency losses for fiscal 1999 were $2.5 million
compared to net foreign currency losses of $4.0 million in 1998.
Income Taxes. The Company's effective income tax rate for fiscal 1999
increased to approximately 34.5% from approximately 34.1% for fiscal 1998. This
increase was primarily due to the high relative taxes incurred in France and
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, 1998 Compared to Fiscal Year Ended June 30,
1997
Net Revenues. Net revenues increased in fiscal 1998 to $66.5 million from
$49.2 million in fiscal 1997, an increase of $17.3 million or 35%. This
increase was primarily attributable to an increase in unit sales of the
Company's flow generators and accessories in America where net revenues
increased to $34.3 million from $21.3 million and, to a lesser extent, in
Europe, where net revenues increased to $23.3 million from $21.5 million. Net
revenues also improved due to a shift to higher-priced bilevel based products
such as SULLIVAN(Registered Trademark) VPAP(Registered Trademark)II ST and
improved patient mask systems.
Gross Profit. Gross profit increased in fiscal 1998 to $43.5 million from
$28.9 million in 1997, an increase of $14.6 million or 50%. The increase
resulted primarily from increased unit sales during fiscal 1998. Gross profit
as a percentage of net revenues increased in fiscal 1998 to 65.3% from 58.7% in
1997. The increase was primarily due to improved manufacturing efficiencies,
increased sales of higher margin diagnostic and bilevel units and a 21%
devaluation in the Australian dollar, in which the Company's manufacturing
activities are denominated.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased in 1998 to $21.1 million from $16.8 million
for 1997, an increase of $4.3 million or 26%. As a percentage of net revenues,
selling, general and administrative expenses decreased in fiscal 1998 to 31.7%
from 34.1% for fiscal 1997. The gross increase in expenses was due primarily to
an increase to 158 from 113 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 $1,189,000 and $924,000 in 1998 and 1997, respectively.
Research and Development Expenses. Research and development expenses
increased in fiscal 1998 to $5.0 million from $3.8 million in fiscal 1997, an
increase of $1.2 million or 31%. As a percentage of net revenues, research and
development expenses in fiscal 1998 marginally declined to 7.5% from 7.7% in
fiscal 1997. 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 (expense). Other income (expense) decreased in fiscal 1998 to
a loss of $1.3 million from a gain of $2.8 million for fiscal 1997, a decrease
of $4.1 million. This decrease was due primarily to losses incurred in the
Company's foreign currency hedging structures as a consequence of the 21%
devaluation in the Australian dollar during fiscal 1998. Foreign currency
losses for fiscal 1998 were $4.0 million compared to net foreign currency gains
of $1.6 million in 1997.
- -18-
Income Taxes. The Company's effective income tax rate for fiscal 1998
increased to approximately 34.1% from approximately 32.7% for fiscal 1997. 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.
Recent Accounting Developments
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), was issued by the Financial Accounting Standards Board
in June 1998 and is effective for the Company's quarter ending September 30,
2000. SFAS 133 standardizes the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts. Under the
standard, entities are required to carry all derivative instruments in the
balance sheet at fair value. The accounting for changes in the fair value (ie,
gains or losses) of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship and, if so, on the
reason for holding it. If certain conditions are met, entities may elect to
designate a derivative instrument as a hedge of exposures to changes in fair
values, cash flows, or foreign currencies. If the hedged exposure is a fair
value exposure, the gain or loss on the derivative instrument is recognized in
earnings in the period of change together with the offsetting loss or gain on
the hedged item attributable to the risk being hedged. If the hedged exposure
is a cash flow exposure, the effective portion of the gain or loss on the
derivative instrument is reported initially as a component of other
comprehensive income (outside earnings) and subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any amounts excluded
from the assessment of hedge effectiveness as well as the ineffective portion of
the gain or loss is reported in earnings immediately. Accounting for foreign
currency hedges is similar to the accounting for fair value and cash flow
hedges. If the derivative instrument is not designated as a hedge, the gain or
loss is recognized in earnings in the period of change.
The Company has not determined the impact that Statement 133 will have on
its financial statements and believes that such determination will not be
meaningful until closer to the date of initial adoption.
Year 2000
The Company conducted a number of reviews of its information systems during
fiscal 1998 and fiscal 1999, to identify all system upgrades required to
facilitate the growth in business activity. As a consequence of these review
procedures, internal application systems have been substantially upgraded in
recent years along with a strategic program to replace existing accounting
systems with the Oracle Applications Enterprise package. The decision to
replace the Company's existing information systems was driven by operational
requirements although, as a consequence of the Oracle implementation and upgrade
of other systems, the Company expects all information systems to be fully Year
2000 compliant by September 1999.
While management expects the costs associated with Year 2000 compliance to
be approximately $100,000, the global cost of implementing the Oracle
Application Enterprise package once completed is estimated to be approximately
$3,000,000.
The Company has completed a review of its product lines for Year 2000
compliance and, as a result of this review, believes there is no significant
Year 2000 exposure with regards to the Company's products.
- -19-
In addition to risks associated with the Company's internal computer
system, the Company is potentially vulnerable to the failure of third parties to
adequately address their Year 2000 issues. ResMed continues to assess the
readiness of key third parties by monitoring such parties' readiness statements.
Significant third parties with which the Company interfaces include, among
others, customers and business partners, technology suppliers and service
providers and the utility infrastructure (power, transport, telecommunications)
on which all entities rely. The most likely worst case scenario is that a lack
of readiness by these third parties would expose the Company to the potential
for loss, impairment of business process and activities and general disruption
of its markets. ResMed is in the process of obtaining assurances from its major
suppliers that they are addressing this issue and that products purchased by
ResMed will function properly in the Year 2000. However, there is no assurance
that the systems of third parties on which the Company relies will be Year 2000
ready, or that any system failure by such parties would not have a material
adverse effect on the Company.
Beyond the above review procedures, the Company is in the process of, and
has developed, a number of Year 2000 contingency plans should a Year 2000
compliance issue arise. However, there can be no assurance that customers,
suppliers and service providers on which the Company relies will resolve their
Year 2000 issues accurately, thoroughly and on schedule. Failure to complete the
Year 2000 project by December 31, 1999 could have a material adverse effect on
future operating results or financial condition.
Liquidity and Capital Resources
As of June 30, 1999 and June 30, 1998, the Company had cash and cash
equivalents and marketable securities available for sale of approximately $16.7
million and $20.7 million, respectively. The Company's working capital
approximated $32.5 million and $32.8 million, respectively, at June 30, 1999 and
1998. The marginal decline in working capital balances primarily reflects funds
used for construction of the Company's new manufacturing facility. Beyond this
expenditure, working capital balances increased due to increases in trade
receivables and inventories 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 much lesser extent, through sales of
common stock. During the fiscal years ended June 30, 1999 and 1998, the
Company's operations generated cash of approximately $18.2 million and $6.8
million, respectively, primarily as a result of continued increases in net
revenues, offset in part by increases in accounts receivable, inventory and
prepayments. Given $9.9 million expended on the new production facility, cash
and cash equivalents and marketable securities available for sale declined to
$16.7 million at June 30, 1999 from $20.7 million at June 30, 1998, a decline of
$4.0 million. During fiscal 1999 and 1998, approximately $2.1 million and $1.0
million of cash was received upon exercise of common stock options.
The Company's investing activities (excluding the purchases and sales of
marketable securities) for the fiscal years ended June 30, 1999 and 1998
aggregated $24.5 million and $12.8 million, respectively. The majority of the
1999 activities were for the construction of the new production facility and the
purchase of production tooling and equipment. To a lesser extent the Company
also purchased office furniture, research and development equipment and incurred
costs associated with implementation of its new Oracle applications computer
system. As a result the Company's June 30, 1999 balance sheet reflects an
increase in net property plant and equipment to approximately $29.3 million at
June 30, 1999, from $11.1 million at June 30, 1998, an increase of approximately
$18.2 million. The Company anticipates spending approximately a further $1.0
million for the ongoing implementation of its Oracle computer system over the
next twelve months. These payments are to be funded through cash flows from
operations and existing cash resources.
- -20-
The results of the Company's international operations are affected by
changes in exchange rates between currencies. Changes in exchange rates may
negatively affect the Company's consolidated net revenue and gross profit
margins from international operations. The Company has a substantial exposure
to fluctuations in the Australian dollar with respect to its manufacturing and
research activities which is managed through foreign currency option contracts.
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 bears interest at a rate of 3.8% thereafter until maturity. The
outstanding principal balance of the loan was repaid during fiscal 1999,
$227,000 remained outstanding at June 30, 1998.
The Company expects to satisfy all of its short-term liquidity requirements
through a combination of cash on hand and cash generated from operations.
Foreign Currency Market Risk
The Company's functional currency is the US dollar although the Company
transacts business in various foreign currencies including a number of major
European currencies as well as the Australian dollar. The Company has
significant foreign currency exposure through both its Australian manufacturing
activities and international sales operations.
The Company has established a foreign currency hedging program using
purchased currency options to hedge foreign-currency-denominated financial
assets, liabilities and manufacturing expenditure. The goal of this hedging
program is to economically guarantee or lock in the exchange rates on the
Company's foreign currency exposures denominated in the Deutschmark and
Australian dollar. Under this program, increases or decreases in the Company's
foreign-currency-denominated financial assets, liabilities, and firm commitments
are partially offset by gains and losses on the hedging instruments.
The Company does not use foreign currency forward exchange contracts or
purchased currency options for trading purposes.
The table below provides information about the Company's foreign currency derivative financial instruments, by
functional currency and presents such information in US dollar equivalents. The table summarizes information on
instruments and transactions that are sensitive to foreign currency exchange rates, including foreign currency call
options held at June 30, 1999. The table presents the notional amounts and weighted average exchange rates by expected
(contractual) maturity dates for the Company's foreign currency derivative financial instruments. These notional amounts
generally are used to calculate payments to be exchanged under the contract or options.
Fiscal Year
-------------------- Fair Value
2000 2001 Total Assets/(Liabilities)
-------------------- ------------------- -------------------- ---------------------
(In thousands)
Foreign Exchange Call Options
(Receive AUS$/Pay US$)
Option amount. . . . . . . . . . . $ 49,500 $ 9,000 $ 58,500 $ 1,091
Average contractual exchange rate. AUS $1 = USD 0.6771 AUS $1 = USD 0.680 AUS $1 = USD 0.6774
(Receive AUS$/Pay DM)
Option amount. . . . . . . . . . . $ 2,640 $ 1,320 $ 3,960 $ 320
Average contractual exchange rate. AUS $1 = DM 1.12 AUS $1 = DM 1.12 AUS $1 = DM 1.12
- -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 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
or rental of the Company's products, subject to constraints such as price
controls or unit sales limitations. In Australia and some other foreign markets
there is currently limited or no reimbursement for devices that treat sleep
disordered breathing related respiratory conditions.
- -22-
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, 1998 and 1999. . . . . . . . . . . . . . . . F2
Consolidated Statements of Income for the three years ended June 30, 1999 . . . . . . . F3
Consolidated Statements of Stockholders' Equity for the three years ended June 30, 1999 F4
Consolidated Statements of Cash Flows for the three years ended June 30, 1999 . . . . . 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 June 30, 1999 and 1998 are
summarized below:
1999
--------
First. . Second Third Fourth Fiscal
Quarter. Quarter Quarter Quarter Year
-------- -------- -------- -------- ------
Net revenue. . . . . . . . $ 19,244 $ 21,480 $ 22,760 $25,143 $88,627
Gross profit . . . . . . . 13,160 14,516 14,859 16,676 59,211
Net income . . . . . . . . 3,184 3,913 4,368 4,637 16,102
Basic earnings per share . $ 0.22 $ 0.27 $ 0.30 $ 0.31 $ 1.09
Diluted earnings per share $ 0.21 $ 0.25 $ 0.28 $ 0.30 $ 1.04
1998
--------
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- -------
Net revenue. . . . . . . . $ 13,978 $ 16,146 $ 17,113 $19,282 $66,519
Gross profit . . . . . . . 8,553 10,973 11,015 12,909 43,450
Net income . . . . . . . . 2,158 2,293 3,146 3,014 10,611
Basic earnings per share . $ 0.15 $ 0.16 $ 0.22 $ 0.21 $ 0.73
Diluted earnings per share $ 0.15 $ 0.15 $ 0.21 $ 0.20 $ 0.71
(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 Accountants on Accounting and
--------------------------------------------------------------------
Financial Disclosure
----------------
None
- -23-
PART III
Item 10 Directors and Executive Officers of the Registrant
--------------------------------------------------------
Incorporated by reference to Registrant's definitive Proxy Statement for
its November 8, 1999 meeting of stockholders, which will be filed with the
Securities and Exchange Commission within 120 days from June 30, 1999.
Item 11 Executive Compensation
-----------------------
Incorporated by reference to Registrant's definitive Proxy Statement for
its November 8, 1999 meeting of stockholders, which will be filed with the
Securities and Exchange Commission within 120 days from June 30, 1999.
Item 12 Security Ownership of Certain Beneficial Owners and Management
-------------------------------------------------------------------
Incorporated by reference to Registrant's definitive Proxy Statement for
its November 8, 1999 meeting of stockholders, which will be filed with the
Securities and Exchange Commission within 120 days from June 30, 1999.
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, 2000 (subject to extension for an additional
five-year term) for which he receives annual payments of $186,000 per annum.
The Company also reimburses Dr. Sullivan for his out-of-pocket expenses in
performing such consulting services. The Company has also agreed to pay $130,000
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
$186,000, $278,000 and $353,000 for the Company's fiscal years ended June 30,
1999, 1998 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 1997 Equity Participation Plan***
10.3 Licensing Agreement between the University of Sydney and ResMed Limited
dated May 17, 1991, as amended*
10.4 Consulting Agreement between Colin Sullivan and ResMed Limited
effective from 1 January 1998****
10.5 Loan Agreement between the Australian Trade Commission and ResMed
Limited dated May 3, 1994*
10.6 Lease for 10121 Carroll Canyon Road, San Diego 92131-1109, USA****
11.1 Statement re: Computation of Earning per Share
21.1 Subsidiaries of the Registrant
23.1 Independent Auditors' Report and Consent and Report on Schedule
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 Registrant's Report on Form 8-K (File
No. 0-26038).
*** Incorporated by reference from the Registrant's 1997 Proxy Statement
(File No. 0-26038).
**** Incorporated by reference from the Registrant's Report on Form 10-K
dated Jun 30, 1998 (File No. 0-26038)
b) Report on Form 8-K
None
- -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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of their operations
and their cash flows for each of the years in the three year period ended June
30, 1999, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
KPMG LLP
San Diego, California
August 6, 1999
- -F1-
RESMED INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
June 30, June 30,
1999 1998
-------------- ---------
Assets
- ------------------------------------------------------------------
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . $ 11,108 15,526
Marketable securities available for sale (note 3). . . . . . . . . 5,626 5,220
Accounts receivable, net of allowance for doubtful accounts
of $421 and $248 at June 30, 1999 and 1998, respectively. . . . 17,898 12,789
Government grants receivable . . . . . . . . . . . . . . . . . . . - 384
Inventories, net (note 4). . . . . . . . . . . . . . . . . . . . . 10,725 7,647
Deferred income taxes (note 10). . . . . . . . . . . . . . . . . . 2,392 2,518
Prepaid expenses and other current assets. . . . . . . . . . . . . 3,022 2,520
________ . .________
Total current assets. . . . . . . . . . . . . . . . . . . . . . 50,771 46,604
________ . .________
Property, plant and equipment, net of accumulated amortization of
$8,511 at June 30, 1999 and $5,395 at June 30, 1998 (note 5). . 29,322 11,111
Patents, net of accumulated amortization of $570 and $368
at June 30, 1999 and 1998, respectively . . . . . . . . . . . . 782 459
Goodwill, net of accumulated amortization of $1,459 and $893 at
June 30, 1999 and 1998, respectively. . . . . . . . . . . . . . 6,555 5,445
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,459 999
________ . .________
Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . . 89,889 64,618
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------------------------------------
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . 4,772 3,759
Accrued expenses (note 6). . . . . . . . . . . . . . . . . . . . . 7,779 6,637
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . 5,691 3,222
Current portion of long term debt (note 7) . . . . . . . . . . . . - 227
________ . .________
Total current liabilities . . . . . . . . . . . . . . . . . . . 18,242 13,845
________ . .________
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; none issued. . . . . . . . . . . . . - -
Common stock, $.004 par value, 50,000,000 shares authorized;
issued and outstanding 14,808,000 at June 30, 1999 and
14,552,000 at June 30, 1998. . . . . . . . . . . . . . . . . . 59 58
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . 33,736 31,224
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . 43,281 27,179
Accumulated other comprehensive income (loss). . . . . . . . . . . (5,429) (7,688)
________ . .________
Total stockholders' equity. . . . . . . . . . . . . . . . . . . 71,647 50,773
________ . .________
Commitments and contingencies (notes 14 and 16)
$ 89,889 64,618
======== ========
See accompanying notes to consolidated financial statements.
- -F2-
RESMED INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
June 30, June 30, June 30,
1999 1998 1997
-------------- -------------- ---------
Net revenues . . . . . . . . . . . . . . . . . . $ 88,627 66,519 49,180
Cost of sales. . . . . . . . . . . . . . . . . . 29,416 23,069 20,287
________ ________ ________
Gross profit . . . . . . . . . . . . . . . . . . 59,211 43,450 28,893
________ ________ ________
Operating expenses:
Selling, general and administrative expenses. 27,414 21,093 16,759
Research and development expenses . . . . . . 6,542 4,994 3,807
________ ________ ________
Total operating expenses . . . . . . . . . . . . 33,956 26,087 20,566
________ ________ ________
Income from operations . . . . . . . . . . . . . 25,255 17,363 8,327
________ ________ ________
Other (expenses) income:
Interest income, net. . . . . . . . . . . . . 779 1,011 1,205
Government grants . . . . . . . . . . . . . . 833 611 316
Other, net (note 9) . . . . . . . . . . . . . (2,290) (2,873) 1,239
________ ________ ________
Total other (expenses) income, net . . . . . . . (678) (1,251) 2,760
________ ________ ________
Income before income taxes . . . . . . . . . . . 24,577 16,112 11,087
Income taxes (note 10) . . . . . . . . . . . . . 8,475 5,501 3,622
________ ________ ________
Net income . . . . . . . . . . . . . . . . . . . $ 16,102 10,611 7,465
======== ======== ========
Basic earnings per share . . . . . . . . . . . . $ 1.09 $ 0.73 $ 0.52
Diluted earnings per share . . . . . . . . . . . $ 1.04 $ 0.71 $ 0.51
See accompanying notes to consolidated financial statements.
- -F3-
RESMED INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(IN THOUSANDS)
Accumulated
Additional other
Common stock paid-in Retained comprehensive
Shares Amount capital earnings income (loss) Total
----------- ---------- --------- --------- -------------- --------------
Balance, June 30, 1996. . . . . . . . . . . . . . . 14,344 $ 58 29,378 9,103 447 38,986
Common stock issued on exercise of options (note 8) 60 - 249 - - 249
Comprehensive income
Net income. . . . . . . . . . . . . . . . . . . . - - - 7,465 - 7,465
Other comprehensive income
Foreign currency translation adjustments. . . . (2,075) (2,075)
. . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income. . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . _________ _________ _________ _________ _________ _________
Balance, June 30, 1997. . . . . . . . . . . . . . . 14,404 58 29,627 16,568 (1,628) 44,625
Common stock issued on exercise of options (note 8) 148 - 1,020 - - 1,020
Tax benefit from exercise of options. . . . . . . . - - 577 - - 577
Comprehensive income
Net income. . . . . . . . . . . . . . . . . . . . - - - 10,611 - 10,611
Other comprehensive income
Foreign currency translation adjustments. . . . (6,060) (6,060)
. . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income. . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . _________ _________ _________ _________ _________ _________
Balance, June 30, 1998. . . . . . . . . . . . . . . 14,552 58 31,224 27,179 (7,688) 50,773
Common stock issued on exercise of options (note 8) 256 1 2,124 - - 2,125
Tax benefit from exercise of options. . . . . . . . - - 388 - - 388
Comprehensive income
Net income. . . . . . . . . . . . . . . . . . . . - - - 16,102 - 16,102
Other comprehensive income
Foreign currency translation adjustments. . . . 2,259 2,259
. . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income. . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . _________ _________ _________ _________ _________ _________
Balance, June 30, 1999. . . . . . . . . . . . . . . 14,808 59 33,736 43,281 (5,429) 71,647
========= ========= ========= ========= ========= =========
Comprehensive
Income
----------
Balance, June 30, 1996
Common stock issued on exercise of options (note 8)
Comprehensive income
Net income. . . . . . . . . . . . . . . . . . . . 7,465
Other comprehensive income
Foreign currency translation adjustments. . . . (2,075)
. . . . . . . . . . . . . . . . . . . . . . . . . ________
Comprehensive income. . . . . . . . . . . . . . . . 5,390
========
Balance, June 30, 1997
Common stock issued on exercise of options (note 8)
Tax benefit from exercise of options
Comprehensive income
Net income. . . . . . . . . . . . . . . . . . . . 10,611
Other comprehensive income
Foreign currency translation adjustments. . . . (6,060)
. . . . . . . . . . . . . . . . . . . . . . . . . _________
Comprehensive income. . . . . . . . . . . . . . . . 4,551
=========
Balance, June 30, 1998
Common stock issued on exercise of options (note 8)
Tax benefit from exercise of options
Comprehensive income
Net income. . . . . . . . . . . . . . . . . . . . 16,102
Other comprehensive income
Foreign currency translation adjustments. . . . 2,259
. . . . . . . . . . . . . . . . . . . . . . . . . _________
Comprehensive income. . . . . . . . . . . . . . . . 18,361
=========
Balance, June 30, 1999
See accompanying notes to consolidated financial statements.
- -F4-
RESMED INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(IN THOUSANDS)
June 30, June 30, June 30,
1999 1998 1997
-------------- ------------ ---------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 16,102 10,611 7,465
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . 3,973 3,232 2,261
Goodwill amortization. . . . . . . . . . . . . . . . . . . 633 483 349
Provision for service warranties . . . . . . . . . . . . . 240 6 124
Deferred income taxes. . . . . . . . . . . . . . . . . . . 549 (416) (1,032)
Foreign currency options revaluation . . . . . . . . . . . 125 1,143 (458)
Changes in operating assets and liabilities, net of effect
of acquisitions:
Accounts receivable, net . . . . . . . . . . . . . . . . . (5,516) (5,096) (1,714)
Government grants. . . . . . . . . . . . . . . . . . . . . 401 (61) 491
Inventories. . . . . . . . . . . . . . . . . . . . . . . . (2,919) (2,445) (259)
Prepaid expenses and other current assets. . . . . . . . . (605) (1,352) (180)
Accounts payable, accrued expenses and other liabilities . 2,873 1,031 417
Income taxes payable . . . . . . . . . . . . . . . . . . . 2,332 (353) 2,011
________. . ________ ________
Net cash provided by operating activities. . . . . . . . . 18,188 6,783 9,475
________. . ________ ________
Cash flows from investing activities:
Purchases of property and equipment. . . . . . . . . . . . (20,515) (10,110) (3,962)
Purchase of marketable securities - available for sale . . (7,290) (31,292) (50,141)
Proceeds from sale of securities - available for sale. . . 6,862 44,474 49,254
Purchases of patents . . . . . . . . . . . . . . . . . . . (445) (369) (132)
Business acquisitions. . . . . . . . . . . . . . . . . . . (2,024) (1,699) (1,177)
Proceeds from sale of non trading investments. . . . . . . - - 1,113
Purchases of investments . . . . . . . . . . . . . . . . . (1,529) (665) -
Loan receivables . . . . . . . . . . . . . . . . . . . . . - - (300)
________. . ________ ________
Net cash provided by (used in) investing activities. . . (24,941) 339 (5,345)
________. . ________ ________
Cash flows from financing activities:
Proceeds from issuance of common stock, net. . . . . . . . 2,125 1,020 249
Repayment of long-term debt. . . . . . . . . . . . . . . . (235) (239) (287)
________. . ________ ________
Net cash provided by (used in) financing activities. . . 1,890 781 (38)
________. . ________ ________
Effect of exchange rate changes on cash . . . . . . . . . . . 445 (1,454) (525)
________. . ________ ________
Net increase (decrease) in cash and cash equivalents. . . . . (4,418) 6,449 3,567
Cash and cash equivalents at beginning of the year. . . . . . 15,526 9,077 5,510
________. . ________ ________
Cash and cash equivalents at end of the year. . . . . . . . . $ 11,108 15,526 9,077
======== ======== ========
Supplemental disclosure of cash flow information:
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . $ 5,374 6,272 2,647
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . - - -
See accompanying notes to consolidated financial statements.
- -F5-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
1. ORGANIZATION AND BASIS OF PRESENTATION
ResMed Inc. (the Company), is a Delaware corporation formed in March 1994
as a holding company for ResMed Holdings Ltd. (RHL), a company resident in
Australia. ResMed designs, manufactures and markets devices for the evaluation
and treatment of sleep disordered breathing, primarily obstructive sleep apnea.
The Company's corporate offices are based in San Diego, California with its
principal manufacturing operation located in Australia. Other distribution and
sales sites are located in the United States, United Kingdom, Singapore and
Europe.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
(b) Revenue Recognition:
Revenue on product sales is recorded at the time of shipment. Royalty
revenue from license agreements is recorded when earned. Service revenue
received in advance from service contracts is initially capitalized and
progressively recognized as revenue over the life of the service contract.
Revenue from sale of marketing or distribution rights is initially capitalized
and progressively recognized as revenue over the period of expected benefits but
not exceeding three years.
(c) Cash and Cash Equivalents:
Cash equivalents include certificates of deposit, commercial paper,
and other highly liquid investments stated at cost, which approximates market.
Investments with original maturities of 90 days or less are considered to be
cash equivalents for purposes of the consolidated statements of cash flows.
(d) Inventories:
Inventories are stated at the lower of cost, determined principally by
the first-in, first-out method, or net realizable value.
(e) Property, Plant and Equipment:
Property, plant and equipment is recorded at cost. Depreciation
expense is computed using the straight-line method over the estimated useful
lives of the assets, generally two to ten years. Assets held under capital
leases are recorded at the lower of the net present value of the minimum lease
payments or the fair value of the leased asset at the inception of the lease.
Amortization expense is computed using the straight-line method over the shorter
of the estimated useful lives of the assets or the period of the related lease.
Straight-line and accelerated methods of depreciation are used for tax purposes.
Maintenance and repairs are charged to expense as incurred.
- -F6-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(f) Patents:
The registration costs for new patents are capitalized and amortized
over the estimated useful life of the patent, generally five years. In the
event of a patent being superseded, the unamortized costs are written off
immediately.
(g) Goodwill:
Goodwill arising from business acquisitions is amortized on a
straight-line basis over periods ranging from three to 15 years. The Company
carries goodwill at cost net of accumulated amortization. The Company reviews
its goodwill carrying value when events indicate that an impairment may have
occurred in goodwill. If, based on the undiscounted cash flows, management
determines goodwill is not recoverable, goodwill is written down to its
discounted cash flow value and the amortization period is re-assessed.
During fiscal 1999 the Company paid $2,024,000 as a final deferred
goodwill payment on the 1996 acquisition of its German distributor.
Amortization expense of goodwill was $633,000, $483,000 and $349,000
for the years ended June 30, 1999, 1998 and 1997, respectively.
(h) Government Grants:
Government grants revenue is recognized when earned. Grants have been
obtained by the Company from the Australian Federal Government to support the
continued development of the Company's proprietary positive airway pressure
technology and to assist development of export markets. Grants have been
recognized in the amount of $833,000, $611,000 and $316,000 for the years ended
June 30, 1999, 1998 and 1997, respectively.
(i) Foreign Currency:
The consolidated financial statements of the Company's non-U.S.
subsidiaries are translated into U.S. dollars for financial reporting purposes.
Assets and liabilities of non-U.S. subsidiaries whose functional currencies are
other than the U.S. dollar are translated at year end exchange rates, and
revenue and expense transactions are translated at average exchange rates for
the year. Cumulative translation adjustments are recognized as part of
"Comprehensive Income", as described in Note 15, and are included in
"Accumulated Other Comprehensive Income" on the Consolidated Balance Sheet until
such time as the subsidiary is sold or substantially or completely liquidated.
Gains and losses on transactions, denominated in other than the functional
currency of the entity, are reflected in operations.
(j) Research and Development:
All research and development costs are expensed in the period
incurred.
- -F7-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(k) Earnings Per Share:
During the year ended June 30, 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (Statement 128).
As required by Statement 128, all prior period information has been restated to
conform to the provisions of Statement 128. The weighted average shares used to
calculate basic earnings per share were 14,708,000, 14,500,000, and 14,378,000
for the years ended June 30, 1999, 1998 and 1997, respectively. The difference
between basic earnings per share and diluted earnings per share is attributable
to the impact of outstanding stock options during the periods presented. Stock
options had the effect of increasing the number of shares used in the
calculation (by application of the treasury stock method) by 826,000, 522,000
and 256,000 for the years ended June 30, 1999, 1998 and 1997, respectively.
(l) Financial Instruments:
The carrying value of financial instruments, such as of cash and cash
equivalents, marketable securities - available for sale, accounts receivable,
government grants receivable, foreign currency option contracts, accounts
payable and debt approximate their fair value because of their short term
nature. The Company does not hold or issue financial instruments for trading
purposes.
The fair value of financial instruments is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
(m) Foreign Exchange Risk Management:
The Company enters into various types of foreign exchange contracts in
managing its foreign exchange risk, including derivative financial instruments
encompassing forward exchange contracts and foreign currency options.
The purpose of the Company's foreign currency hedging activities is to
protect the Company from adverse exchange rate fluctuations with respect to net
cash movements resulting from the sales of products to foreign customers and
Australian manufacturing activities. The Company enters into foreign currency
option contracts to hedge anticipated sales and manufacturing costs denominated
in principally Australian dollars and Deutschmarks. The term of such foreign
currency option contracts generally do not exceed three years.
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 Statements of Income.
Unrealized gains and losses on currency derivatives are determined based on
dealer quoted prices.
Foreign currency option contracts have been purchased in part by the issue
of put options to counterparts. As a result, should foreign exchange rates drop
below a specified level, on a specific date, the Company is required to deliver
certain funds to counterparts at contracted foreign exchange rates. At June 30,
1999 and 1998 no put options issued by the Company were outstanding.
The Company is exposed to credit-related losses in the event of
non-performance by counterparties to financial instruments, but it does not
expect any counterparties to fail to meet their obligations given their high
credit ratings. The credit exposure of foreign exchange options at June 30,
1999 is $1,411,000 which represents the positive fair value of options held by
the Company.
- -F8-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(m) Foreign Exchange Risk Management(continued):
The Company held foreign currency option contracts with notional amounts
totaling $62,460,000 and $62,683,000 at June 30, 1999 and 1998, respectively to
hedge foreign currency items. These contracts mature at various dates prior to
April 2001.
(n) Income Taxes:
The Company accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(o) Marketable Securities:
Management determines the appropriate classification of its
investments in debt and equity securities at the time of purchase and
re-evaluates such determination at each balance sheet date. Debt securities for
which the Company does not have the intent or ability to hold to maturity are
classified as available for sale. Securities available for sale are carried at
fair value, with the unrealized gains and losses, net of tax, reported in
accumulated other comprehensive income (loss).
At June 30, 1999 and 1998, 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.
(p) Warranty:
Estimated future warranty obligations related to certain products are
provided by charges to operations in the period in which the related revenue is
recognized.
(q) Impairment of Long-Lived Assets:
The Company periodically evaluates the carrying value of long-lived
assets to be held and used, including certain identifiable intangible assets,
when events and circumstances indicate that the carrying amount of an asset may
not be recovered. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
- -F9-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
3. MARKETABLE SECURITIES
The estimated fair value of marketable securities available for sale at
June 30, 1999 and 1998, was $5,626,000 and $5,220,000, 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, 1999 or 1998.
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, 1999 and 1998 (in
thousands) :
1999 1998
---------- -----
Raw materials. . $ 4,153 2,169
Work in progress 74 546
Finished goods . 6,498 4,932
______. _____
$ 10,725 7,647
====== =====
5. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment is comprised of the following at June 30,
1999 and 1998 (in thousands):
1999 1998
------------ -------
Machinery and equipment. . . . . . . . . . . $ 8,134 4,368
Computer equipment . . . . . . . . . . . . . 4,692 1,616
Furniture and fixtures . . . . . . . . . . . 3,977 1,682
Vehicles . . . . . . . . . . . . . . . . . . 987 761
Clinical, demonstration and rental equipment 5,502 3,302
Leasehold improvements . . . . . . . . . . . 344 505
Land . . . . . . . . . . . . . . . . . . . . 3,476 3,196
Buildings. . . . . . . . . . . . . . . . . . 10,721 1,076
_______ ._______
37,833 16,506
Accumulated depreciation and amortization. . (8,511) (5,395)
_______ ._______
$ 29,322 11,111
======= =======
- -F10-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
6. ACCRUED EXPENSES
Accrued expenses at June 30, 1999 and 1998 consist of the following (in
thousands):
1999 1998
----------- -----
Service warranties. . . . . . . $ 478 290
Relocation provision. . . . . . - 190
Royalties . . . . . . . . . . . 123 319
Value added taxes due . . . . . 2,074 1,758
Employee related costs. . . . . 2,451 1,301
Deferred revenue. . . . . . . . 949 665
Accrued foreign currency losses - 1,030
Other . . . . . . . . . . . . . 1,704 1,084
______. .______
$ 7,779 6,637
====== ======
7. LONG-TERM DEBT
As part of an agreement between ResMed and the Australian Federal
Government in fiscal 1994, ResMed obtained an $870,000 loan facility which was
fully repaid during fiscal 1999. $227,000 was outstanding at June 30, 1998. The
loan facility was unsecured and accrued interest at 3.8% per annum beginning May
3, 1996 through April 3, 1999. Prior to May 3, 1996, the loan was interest
free.
8. STOCKHOLDERS' EQUITY
Stock Options
The Company has granted stock options to personnel, including officers and
directors in accordance with both the 1995 Option Plan and the 1997 Equity
Participation Plan. 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.
In August 1997 as part of the introduction of the 1997 Equity Participation
Plan, the Company cancelled 21,940 options, being all non-issued options
remaining under the 1995 Option Plan.
The following table summarizes option activity;
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
1999 Price 1998 Price 1997 Price
----------- ---------- -------- ---------- -------- ------
Outstanding at beginning of year . 1,201,580 $ 9.13 878,176 $ 6.99 989,800 $ 6.82
Granted. . . . . . . . . . . . . . 632,500 22.62 498,800 12.17 - -
Exercised. . . . . . . . . . . . . (256,344) 8.29 (147,260) 6.93 (61,320) 4.28
Forfeited. . . . . . . . . . . . . (6,600) 22.63 (28,136) 10.19 (50,304) 7.08
_________. . _______ _________ _______ ________ _______
Outstanding at end of year . . . . 1,571,136 $ 14.63 1,201,580 $ 9.13 878,176 $ 6.99
========= ======= ========= ======= ======== =======
Price range of granted options . . $ 20-23 $ 12-17.50 -
Options exercisable at end of year 627,063 $ 7.99 551,736 $ 6.76 410,066 $ 6.55
- -F11-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
8. STOCKHOLDERS' EQUITY (CONTINUED)
The total number of shares of Common Stock authorized for issuance upon
exercise of options and other awards, or upon vesting of restricted or deferred
stock awards, under the 1997 Plan was initially established at 500,000 and
increases at the beginning of each fiscal year, commencing on July 1, 1998, by
an amount equal to 4% of the outstanding Common Stock on the last day of the
preceding fiscal year. The maximum number of shares of Common Stock issuable
upon exercise of incentive stock options granted under the 1997 Plan, however,
cannot exceed 4,000,000. Furthermore, the maximum number of shares which may be
subject to options, rights or other awards granted under the 1997 Plan to any
individual in any calendar year cannot exceed 150,000.
The following table summarizes information about stock options outstanding
at June 30, 1999.
Weighted Average
Number Outstanding at Remaining Number Exercisable at
Exercise Prices. June 30, 1999 Contractual Life June 30, 1999
- ---------------- --------------------- ---------------- ---------------------
$5.50. . . . . . 194,646 5.92 194,646
$6.53. . . . . . 5,000 6.88 5,000
$8.17. . . . . . 325,186 7.00 325,186
$12.00 . . . . . 409,404 8.10 97,231
$17.50 . . . . . 15,000 8.75 5,000
$22.63 . . . . . 564,900 9.00 -
$23.13 . . . . . 24,000 9.00 -
$22.50 . . . . . 28,000 9.25 -
$19.75 . . . . . 5,000 9.78 -
_________ . . . ________ ________
1,571,136. 7.97 627,063
========= ======== ========
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 1999, 1998 and 1997, respectively. Had the Company determined
compensation cost based on 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:
1999 1998 1997
------- ------- ------
Net income (in thousands)
As reported. . . . . . . . . . . . . . . . . . . . . $16,102 $10,611 $7,465
Pro forma. . . . . . . . . . . . . . . . . . . . . . 12,951 9,380 6,467
Basic earnings per common share
As reported. . . . . . . . . . . . . . . . . . . . . $ 1.09 $ 0.73 $ 0.52
Pro forma. . . . . . . . . . . . . . . . . . . . . . $ 0.88 $ 0.65 $ 0.45
Diluted income per common and common equivalent share
As reported. . . . . . . . . . . . . . . . . . . . . $ 1.04 $ 0.71 $ 0.51
Pro forma. . . . . . . . . . . . . . . . . . . . . . $ 0.83 $ 0.62 $ 0.44
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 1999,
1998 and 1997, respectively; no dividend yield; expected lives of four years;
and volatility of 55% for 1999, 34% for 1998 and 62.7% for 1997, respectively.
Pro forma net income reflects only options granted after 1994. 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.
- -F12-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
8. STOCKHOLDERS' EQUITY (CONTINUED)
Preferred Stock
In April 1997 the board of directors authorized 2,000,000 shares of $0.01
par value preferred stock. No such shares were issued or outstanding at June
30, 1999.
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 of the Company's outstanding common stock. The Rights are
redeemable at $0.01 per Right and expire in 2007.
Common Stock
The 1998 Annual Meeting of Stockholders approved a two-for-one split of the
Company's common stock, effective November 6, 1998. Stockholders' Equity has
been restated to give retroactive recognition to the stock split by
reclassifying from additional paid-in capital to common stock, the par value of
the additional shares as a result of the stock split.
9. OTHER, NET
Other, net is comprised of the following at June 30, 1999, 1998 and 1997
(in thousands):
1999 1998 1997
------------ ----------- ------
License fees . . . . . . . . . . . . . . . . $ 58 1,272 -
Unrealized gain/(loss) on foreign currency
hedging position . . . . . . . . . . . . . 435 (1,050) 485
Gain/(loss) on foreign currency transactions (2,888) (2,927) 1,117
Write down of investments. . . . . . . . . . 300 (125) (175)
Other. . . . . . . . . . . . . . . . . . . . (195) (43) (188)
________. . _______ ______
($2,290) (2,873) 1,239
======== ======== ======
In March 1998, the Company granted to a third party licenses to three of
the Company's patents for a non refundable payment of $1,250,000. The license
agreement will allow the third party to manufacture and distribute certain
products featuring the Company's patented technology in the US homecare market.
Additionally, the Company will earn royalties on products manufactured.
10. INCOME TAXES
Income before income taxes for the years ended June 30, 1999, 1998 and
1997, was taxed under the following jurisdictions (in thousands):
1999 1998 1997
----------- ---------- ------
U.S. . . . . $ 4,043 1,730 4,054
Non-U.S. . . 20,534 14,382 7,033
_______ _______ ______
$ 24,577 16,112 11,087
======= ======= ======
- -F13-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
10. INCOME TAXES (CONTINUED)
The provision for income taxes is presented below (in thousands):
1999 1998 1997
------------ ----------- -------
Current:
Federal. . . . . . . . . . $ 772 (13) (20)
State. . . . . . . . . . . 174 (148) 479
Non-U.S. . . . . . . . . . 6,980 6,078 4,223
_______ . . _______ _______
7,926 5,917 4,682
_______ . . _______ _______
Deferred:
Federal. . . . . . . . . . 360 (226) 366
State. . . . . . . . . . . (12) 94 (61)
Non-U.S. . . . . . . . . . 201 (284) (1,365)
_______ . . _______ _______
549 (416) (1,060)
_______ . . _______ _______
Provision for income taxes $ 8,475 5,501 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 34% to pretax income as a
result of the following (in thousands):
1999 1998 1997
------------ ----------- ------
Computed "expected" tax expense . . . . . . . . . $ 8,356 5,478 3,770
Increase (decrease) in income taxes
resulting from:
Non-deductible expenses . . . . . . . . . . . . 302 29 129
Research and development credit . . . . . . . . (250) (371) (388)
Tax effect of intercompany dividends. . . . . . 13 (321) (34)
Utilization of net operating loss carryforwards - (22) (26)
Change in valuation allowance . . . . . . . . . 71 47 -
Effect of non-U.S. tax rates. . . . . . . . . . 455 415 (115)
State income taxes. . . . . . . . . . . . . . . 131 (36) 264
Other . . . . . . . . . . . . . . . . . . . . . (603) 282 22
______. . ______ ______
$ 8,475 5,501 3,622
====== ====== ======
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, 1999 and 1998 (in thousands):
1999 1998
------------ -------
Deferred tax assets:
Employee benefit obligations . . . $ 333 $ 263
Provision for service warranties . 170 95
Net operating loss carryforwards . 64 383
Deferred foreign tax credits . . . 1,334 334
Write down of investments. . . . . - 102
Accrual for legal costs. . . . . . 426 183
Intercompany profit in inventories 1,567 1,658
Unrealized foreign exchange losses 173 -
Property, plant and equipment. . . 450 -
Other accruals . . . . . . . . . . 312 634
_______ . _______
4,829 3,652
Less valuation allowance. . . . (64) (16)
_______ . _______
Deferred tax assets . . . . . . 4,765 3,636
_______ . _______
- -F14-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
10. INCOME TAXES (CONTINUED)
1999 1998
------------ -------
Deferred tax liabilities:
Patents . . . . . . . . . . . . . . . . . . (243) (135)
Capitalized software. . . . . . . . . . . . (536) -
Unrealized gain on foreign currency options (508) (184)
Unrealized foreign exchange gains . . . . . - (250)
Undistributed German income . . . . . . . . (892) (243)
Royalties receivable. . . . . . . . . . . . (18) (58)
Other receivables . . . . . . . . . . . . . (41) -
Other . . . . . . . . . . . . . . . . . . . (135) (248)
_______ . _______
Deferred tax liabilities . . . . . . . . . (2,373) (1,118)
_______ . _______
Net deferred tax asset . . . . . . . . . . $ 2,392 2,518
======= =======
The valuation allowance at June 30, 1999 and 1998, primarily relates to a
provision for uncertainty as to the utilization of net operating loss
carryforwards. The net change in the valuation allowance was an increase of
$48,000 for the year ended June 30, 1999, in comparison to a decline of
$635,000, and an increase of $475,000 for the years ended June 30, 1998 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
1999, 1998 and 1997 were reduced by $Nil, $22,000 and $26,000, respectively
through the utilization of net operating loss carryforwards.
At June 30, 1999, ResMed has exhausted its net operating loss carryforwards
for U.S. federal income tax purposes. The net operating loss carryforwards
relate to Singapore, Malaysia and New Zealand.
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 7% of the salaries of all Australian employees. Total Company
contributions to the plans for the years ended June 30, 1999, 1998 and 1997 were
$457,000, $362,000 and $318,000, respectively.
United Kingdom
During fiscal 1998, 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 were $8,000, $5,000 and $4,000 in fiscal 1999, 1998 and 1997 respectively.
- -F15-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
11. EMPLOYEE RETIREMENT PLANS (CONTINUED)
United States
The Company sponsors a defined contribution pension plan available to
substantially all domestic employees. Company contributions to this plan are
based on a percentage of employee contributions to a maximum of 3% of employee
salaries. The cost of this plan to the Company was $96,000, $54,000 and $39,000
in fiscal 1999, 1998 and 1997 respectively.
12. SEGMENT INFORMATION
ResMed operates solely in the sleep disordered breathing sector of the
respiratory medicine industry. The Company therefore believes that, given the
single market focus of its operations and the inter dependence of its products
that ResMed operates as a single operating segment. The Company assesses
performance and allocates resources on the basis of a single operating entity.
Financial information by geographic area for the years ended June 30, 1999,
1998 and 1997, is summarized below (in thousands):
Rest of
U.S.A Germany Australia World Total
-------- ------- --------- ------ ------
1999
- --------
Revenue from external customers $ 47,229 13,181 3,489 24,728 88,627
Long lived assets . . . . . . . $ 2,525 816 26,611 1,829 31,781
====== ====== ====== ====== ======
1998
- --------
Revenue from external customers $ 31,170 11,248 3,670 20,431 66,519
Long lived assets . . . . . . . $ 1,707 595 9,211 597 12,110
====== ====== ====== ====== ======
1997
- --------
Revenue from external customers $ 19,077 12,264 4,117 13,722 49,180
Long lived assets . . . . . . . $ 1,249 631 3,265 396 5,541
====== ====== ====== ====== ======
- -F16-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
12. SEGMENT INFORMATION (CONTINUED)
Net revenues from external customers is based on the location of the
customer. Long lived assets of geographic areas are those assets used in the
Company's operations in each geographical area and excludes patents, deferred
tax assets and goodwill.
13. RELATED PARTY TRANSACTIONS
For the years ended June 30, 1999, 1998 and 1997, consulting service fees
in the amount of $186,000, $278,000 and $353,000, were paid to Dr. Colin
Sullivan, a shareholder. Dr. Sullivan provides consulting services to the
Company pursuant to a consulting agreement that terminates on December 31, 2000
(subject to extension for an additional five year term) for which he receives
annual payments of $186,000. The Company also reimburses Dr. Sullivan for his
out-of-pocket expenses in performing such consulting services.
The Company has also agreed to pay to Dr. Sullivan $130,000 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.
14. 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, 1999 the Company had the following future minimum lease payments under
non cancelable operating leases.
Operating
leases
Years $ '000
- ---------------------------- ----------
2000 $ 564
2001 645
2002 629
2003 607
2004 616
Thereafter . . . . . . 538
______
Total minimum lease payments $ 3,599
======
Rent expenses under operating leases for the years ended June 30, 1999,
1998 and 1997 were approximately $789,000, $607,000 and $585,000, respectively.
- -F17-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
15. COMPREHENSIVE INCOME
As of July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", which established standards
for the reporting and display of comprehensive income and its components in the
financial statements. The only component of comprehensive income that impacts
the Company is foreign currency translation adjustments. The net gain
associated with foreign currency translation adjustments for the year ended June
30, 1999 was $2.3 million compared to losses of $6.1 million and $2.1 million
for the years ended June 30, 1998 and 1997, respectively. The Company does not
provide for US income taxes on foreign currency translation adjustments since it
does not provide for such taxes on undistributed earnings of foreign
subsidiaries. Accumulated other comprehensive income at June 30, 1999 and June
30, 1998 consisted solely of foreign currency translation adjustments and
represent unrealized losses of $5.4 million and $7.7 million, respectively.
16. LEGAL ACTIONS
The Company is currently engaged in litigation relating to the enforcement and
defense of certain of its patents.
In January 1995, the Company filed a complaint in the United States District
Court for the Southern District of California seeking monetary damages from and
injunctive relief against Respironics for alleged infringement of three ResMed
patents. In February 1995, Respironics filed a complaint in the United States
District Court for the Western District of Pennsylvania against the Company
seeking a declaratory judgment that Respironics does not infringe claims of
these patents and that the Company's patents are invalid and unenforceable. The
two actions were combined and are proceeding in the United States District Court
for the Western District of Pennsylvania. In June 1996, the Company filed an
additional complaint against Respironics for infringement of a fourth ResMed
patent, and that complaint was consolidated with the earlier action. As of this
date, Respironics has brought three partial summary judgment motions for
non-infringement of the ResMed patents; the Court has granted two of the
motions, and the third is currently awaiting judicial action. It is ResMed's
intention to appeal the summary judgment rulings after a final judgment in the
consolidated litigation has been entered in the District Court proceedings.
In May 1995, Respironics and its Australian distributor filed a Statement of
Claim against the Company and Dr. Farrell in the Federal Court of Australia,
alleging that the Company engaged in unfair trade practices. The Statement of
Claim asserts damage claims for lost profits on sales in the aggregate amount of
approximately $1,000,000. While the Company intends to defend this action,
there can be no assurance that the Company will be successful or that the
Company will not be required to make significant payments to the claimants.
Furthermore, the Company expects to incur ongoing legal costs in defending this
action, as well as in the continuing litigation of its patent cases.
- -F18-
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 13, 1999 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 13, 1999
__________________________ Chairman of the Board (Principal
Peter C. Farrell . . . . . Executive Officer)
/S/ CHRISTOPHER G ROBERTS. September 13, 1999
__________________________
Christopher G. Roberts . . Director
/S/ MICHAEL A QUINN. . . . September 13, 1999
__________________________
Michael A. Quinn . . . . . Director
/S/ GARY W PACE. . . . . . September 13, 1999
__________________________
Gary W. Pace . . . . . . . Director
/S/ DONAGH MCCARTHY. . . . September 13, 1999
__________________________
Donagh McCarthy. . . . . . Director
- -26-
Schedule II
------------
RESMED INC AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED JUNE 30, 1999, 1997 AND 1996
(IN THOUSANDS)
Balance at Charged to Other Balance at
beginning of costs and (deductions) end of
period expenses additions period
------------- ---------- ------------ ----------
Year ended June 30, 1999
Applied against asset account
Allowance for doubtful accounts $ 248 348 (175) 421
===== ===== ===== =====
Year ended June 30, 1998
Applied against asset account
Allowance for doubtful accounts $ 277 79 (108) 248
===== ===== ===== =====
Year ended June 30, 1997
Applied against asset account
Allowance for doubtful accounts $ 175 102 - 277
===== ===== ===== =====
- -27-
EXHIBIT INDEX
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 1997 Equity Participation Plan***
10.3 Licensing Agreement between the University of Sydney and ResMed Limited
dated May 17, 1991, as amended*
10.4 Consulting Agreement between Colin Sullivan and ResMed Limited
effective from 1 January 1998****
10.5 Loan Agreement between the Australian Trade Commission and ResMed
Limited dated May 3, 1994*
10.6 Lease for 10121 Carroll Canyon Road, San Diego 92131-1109, USA****
11.1 Statement re: Computation of Earning per Share
21.1 Subsidiaries of the Registrant
23.1 Independent Auditors' Report and Consent and Report on Schedule
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).
*** Incorporated by reference from the Registrant's 1997 Proxy Statement
(File No. 0-26038).
**** Incorporated by reference from the Registrant's Report on Form 10-K
dated Jun 30, 1998 (File No. 0-26038)