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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, 2002
COMMISSION FILE NUMBER
0-26038
RESMED INC
(Exact name of Registrant as specified in its Charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
98-0152841
(IRS Employer Identification No.)
14040 DANIELSON STREET
POWAY, CA 92064-6857
UNITED STATES OF AMERICA
(Address of principal executive offices)
(858) 746-2400
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS:
Common Stock, $.004 Par Value
Rights to Purchase Series A Junior
Participating Preferred Stock
NAME OF EACH EXCHANGE UPON WHICH REGISTERED:
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K (S 229.405 of this Chapter) is not contained herein and will
not be contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-K or
any amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of
registrant as of September 6, 2002, computed by reference to the closing sale
price of such stock on the New York Stock Exchange, was approximately
$834,476,000. (All directors, executive officers, and 10% stockholders of
Registrant are considered affiliates.)
At September 6, 2002, registrant had 32,912,599 shares of Common Stock, $.004
par value, issued and outstanding. This number excludes 360,347 shares held by
the registrant as treasury shares.
Portions of registrant's definitive Proxy Statement for its November 11, 2002
meeting of stockholders are incorporated by reference into Part III of this
report.
RESMED INC
______________________
TABLE OF CONTENTS
______________________
PAGE
Part I Item 1 Business 3
Item 2 Properties 17
Item 3 Legal Proceedings 17
Item 4 Submission of Matters to a Vote of Security Holders 18
Part II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 18
Item 6 Selected Financial Data 20
Item 7 Management's Discussion and Analysis of Financial Condition and 21
Results of Financial Operation
Item 7A Quantitative and Qualitative Disclosures About Market and Business Risks 29
Item 8 Consolidated Financial Statements and Supplementary Data 37
Item 9 Changes in and Disagreements with Accountants on Accounting and 38
Financial Disclosure
Part III Item 10 Directors and Executive Officers of the Registrant 38
Item 11 Executive Compensation 38
Item 12 Security Ownership of Certain Beneficial Owners and Management 39
Item 13 Certain Relationships and Related Transactions 39
Part IV Item 14 Exhibits, Consolidated Financial Statement Schedule and Reports on Form 8-K 39
Sullivan, VPAP, AutoSet, Bubble Mask, Bubble Cushion, SmartStart, ResCap,
Mirage, HumidAire, Aero-Click, minni Max nCPAP, Moritz II biLEVEL, Aero-Fix,
Twister remove, SELFSET, MESAMIV; Poly-MESAM, MEPAL, Auto VPAP, AutoScan,
AutoSet CS, AutoSet T, AutoView, IPAP MAX, ResControl, SCAN, S6, Ultra Mirage,
VPAP MAX, AutoSet.com, AutoSet-CS.com, and ResMed are our trademarks.
As used in this 10-K, the terms "we," "us," and "our" refer to ResMed Inc., a
Delaware corporation, and its subsidiaries, on a consolidated basis, unless
otherwise stated.
-2-
PART I
ITEM 1 BUSINESS
GENERAL
We are a leading developer, manufacturer and distributor of medical equipment
for treating, diagnosing, and managing sleep disordered breathing, or SDB. SDB
includes obstructive sleep apnea, or OSA, and other respiratory disorders that
occur during sleep. When we were formed in 1989, our primary purpose was to
commercialize a treatment for OSA developed by Professor Colin Sullivan of the
University of Sydney, the current Chairman of our Medical Advisory Board. This
treatment, nasal Continuous Positive Airway Pressure, or CPAP, was the first
successful noninvasive treatment for OSA. CPAP systems deliver pressurized air,
typically through a nasal mask, to prevent collapse of the upper airway during
sleep.
Since the development of nasal CPAP, we have developed a number of innovative
products for SDB, including flow generators, diagnostic products, mask systems,
headgear and other accessories. Our growth has been fuelled by geographic
expansion, increased awareness of SDB as a significant health concern among
physicians and patients, and our research and product development effort.
We employ approximately 1,250 people and sell our products in over 60 countries
through a combination of wholly owned subsidiaries and independent distributors.
CORPORATE HISTORY
ResMed Inc., a Delaware corporation, was formed in March 1994 as the ultimate
holding company for our domestic, Australian and European operating
subsidiaries. On June 1, 1995, we completed an initial public offering of
common stock and on June 2, 1995 our common stock commenced trading on The
NASDAQ National Market. On September 30, 1999 we transferred our principal
public listing to the New York Stock Exchange, trading under the ticker symbol
RMD. On November 25, 1999, we established a secondary listing of our shares via
Chess Depositary Instruments, or CDIs, on the Australian Stock Exchange, also
under the symbol RMD. Ten CDIs on the ASX represent one share of our common
stock on the NYSE. On July 1, 2002, we converted our ASX listing status from a
foreign exempt listing to a full listing.
Our Australian subsidiary, ResMed Holdings Limited, was originally organized in
1989 by Dr. Peter Farrell to acquire from Baxter Center for Medical Research Pty
Limited, or Baxter, the rights to certain technology relating to CPAP treatment
as well as Baxter's existing CPAP device business. Baxter had sold CPAP devices
in Australia since 1988, having acquired the rights to the technology in 1987
from Dr. Colin Sullivan.
Since formation we have acquired a number of operating businesses with both
Labhardt Ag and Servo Magnetics Inc acquired during fiscal 2002, on November 15,
2001 and May 14, 2002 respectively. Previously we have acquired MAP Medizin
Technologie GmbH, Dieter W. Priess Medtechnik, Premium Medical SARL, Innovmedics
Pte Ltd and EINAR Egnell AB, our German, French, Singaporean and Swedish
distributors, on February 16, 2001, February 7, 1996, June 12, 1996, November 1,
1997 and January 31, 2000, respectively. During the 1999 fiscal year we made an
equity investment in Flaga hf, based in Iceland. We now market Flaga's
polysomnographic products under the Embla and Embletta label in the United
States and selected other markets.
-3-
THE MARKET
Sleep is a complex neurological process that includes two distinct states: rapid
eye movement, or REM, sleep and non-rapid eye movement, or non-REM, sleep. REM
sleep, which is about 20-25% of total sleep experienced by adults, is
characterized by a high level of brain activity, bursts of rapid eye movement,
increased heart and respiration rates, and paralysis of many muscles. Non-REM
sleep is subdivided into four stages that generally parallel sleep depth; stage
1 is the lightest and stage 4 is the deepest.
The upper airway has no rigid support and is held open by active contraction of
upper airway muscles. Normally, during REM sleep and deeper levels of non-REM
sleep, upper airway muscles relax and the airway narrows. Individuals with
narrow upper airways or poor muscle tone are prone to temporary collapses of the
upper airway during sleep, or apneas, or near closures of the upper airways, or
hypopneas. These breathing irregularities result in a lowering of blood oxygen
concentration, causing the central nervous system to react to the lack of oxygen
or increased carbon dioxide and signaling the body to respond. Typically, the
individual subconsciously arouses from sleep, causing the throat muscles to
contract, opening the airway. After a few gasping breaths, blood oxygen levels
increase and the individual can resume a deeper sleep until the cycle repeats
itself. Sufferers of OSA typically experience ten or more such cycles per hour.
While these awakenings greatly impair the quality of sleep, the individual is
not normally aware of these disruptions.
In its "Wake Up America'' report to Congress in 1993, the National Commission on
Sleep Disorders Research estimated that approximately 40 million individuals in
the United States suffer from chronic disorders of sleep and wakefulness, such
as sleep apnea, insomnia and narcolepsy. According to this report, sleep apnea
is the most common sleep disorder, affecting approximately 20 million
individuals in the United States. Despite the high prevalence of OSA, there is
a general lack of awareness of OSA among both the medical community and the
general public. It is estimated that less than 10% of those 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 have an increased incidence of OSA.
Recent studies have also shown that SDB is associated with hypertension, the
leading risk factor for the development of stroke and heart disease, and that
over 50% of post stroke patients and patients with congestive heart failure have
SDB.
SLEEP DISORDERED BREATHING AND OBSTRUCTIVE SLEEP APNEA
Sleep disordered breathing, or SDB, encompasses all physiological processes that
cause detrimental breathing patterns during sleep. Manifestations include OSA,
central sleep apnea, or CSA, and hypoventilation syndromes that occur during
sleep. Hypoventilation syndromes are generally associated with obesity, chronic
obstructive lung disease, neuromuscular disease and upper airway resistance
changes. OSA is the most common form of SDB.
Sleep fragmentation and the loss of the deeper levels of sleep caused by OSA can
lead to excessive daytime sleepiness, reduced cognitive function, including
memory loss and lack of concentration, depression and irritability. OSA
sufferers also may experience an increase in heart rate and an elevation of
-4-
blood pressure during the cycle of apneas. Several studies indicate that the
oxygen desaturation, increased heart rate and elevated blood pressure caused by
OSA may be associated with increased risk of cardiovascular morbidity and
mortality due to angina, stroke and heart attack. Patients with OSA have been
shown to have impaired daytime performance in a variety of cognitive functions
including problem solving, response speed and visual motor coordination, and
studies have linked OSA to increased occurrences of traffic and workplace
accidents.
Generally, an individual seeking treatment for the symptoms of OSA is referred
by a general practitioner to a specialist for further evaluation. The diagnosis
of OSA typically requires monitoring the patient during sleep at either a sleep
clinic or the patient's home. During overnight testing, respiratory parameters
and sleep patterns are monitored along with other vital signs such as heart rate
and blood oxygen levels. These tests allow sleep clinicians to detect any sleep
disturbances such as apneas, hypopneas or subconscious awakenings. We estimate
that there are currently more than 2,000 sleep clinics in the United States, a
substantial portion of which are affiliated with hospitals. The number of sleep
clinics has expanded significantly from approximately 100 such facilities in
1985.
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, by contrast, is a non-invasive means of treating OSA. Nasal CPAP
was first used as a treatment for OSA in 1980 by Dr. Colin Sullivan, the
Chairman of our Medical Advisory Board. CPAP systems were commercialized for
treatment of OSA in the United States in the mid 1980's. Today, use of nasal
positive airway pressure is generally acknowledged as the most effective and
least invasive therapy for managing OSA.
During nasal CPAP treatment, a patient sleeps with a nasal mask connected to a
small portable air flow generator that delivers room air at a positive pressure.
The patient breathes in air from the flow generator and breathes out through an
exhaust port in the mask. Continuous air pressure applied in this manner acts
as a pneumatic splint to keep the upper airway open and unobstructed.
CPAP is not a cure but a therapy for managing OSA, and therefore, must be used
on a daily basis as long as treatment is required. Patient compliance has been
a major factor in the efficacy of CPAP treatment. Early generations of CPAP
units provided limited patient comfort and convenience. Patients experienced
soreness from the repeated use of nasal masks and had difficulty falling asleep
with the CPAP device operating at the prescribed pressure. In more recent
years, product innovations to improve patient comfort and compliance have been
developed. These include more comfortable mask systems; delay timers which
gradually raise air pressure allowing the patient to fall asleep more easily;
bilevel flow generators, including VPAP systems, which provide different air
pressures for inhalation and exhalation; heated humidification systems to make
the airflow more comfortable; and auto titration devices which reduce the
average pressure delivered during the night.
-5-
BUSINESS STRATEGY
We believe that the SDB market will continue to grow in the future due to a
number of factors including increasing awareness of OSA, improved understanding
of the role of SDB treatment in the management of cardiac, neurologic and
related disorders, and an increase in home-based diagnosis. Our strategy for
expanding our business operations and capitalizing on the growth of the SDB
market consists of the following key elements.
CONTINUE PRODUCT DEVELOPMENT AND INNOVATION. We are committed to ongoing
innovation in developing products for the diagnosis and treatment of SDB. We
have been a leading innovator of products designed to more effectively treat
apneas, increase patient comfort and encourage compliance with prescribed
therapy. For example, in 1999 we introduced the Mirage Full Face Mask. This
mask contains an inflatable air pocket, which conforms to the patient's facial
contours, creating a more comfortable and better seal. Additionally, in 2002 we
introduced the AutoSet Spirit flow generator, our second generation
autotitrating device that adapts to the patient's breathing patterns to more
effectively prevent apneas. We believe that continued product development and
innovation are key factors to our ongoing success. Approximately 14% of our
employees are devoted to research and development activities. In fiscal year
2002, we invested $14.9 million, or 7.3% of our revenues, in research and
development.
EXPAND GEOGRAPHIC PRESENCE. We market our products in over 60 countries to
sleep clinics, home health care dealers and third party payers. We intend to
increase our sales and marketing efforts in our principal markets, as well as
expand our presence into new geographic regions.
INCREASE PUBLIC AND CLINICAL AWARENESS. We intend to continue to expand our
existing promotional activities to increase awareness of SDB and our treatment
alternatives. These promotional activities target the population with
predisposition to SDB as well as primary care physicians and specialists, such
as cardiologists, neurologists and pulmonologists. In addition, we also target
special interest groups, including the National Stroke Association, the American
Heart Association and the National Sleep Foundation.
In addition during fiscal 2002, the Company donated a total of $2.3 million to
the ResMed Sleep Disordered Breathing Foundations in the United States and
Australia to further enhance research and awareness of SDB. The foundations'
contributions represent ResMed's continuing commitment to core medical research
into sleep disordered breathing, particularly the treatment of obstructive sleep
apnea.
EXPAND INTO NEW CLINICAL APPLICATIONS. We continually seek to identify new
applications of our technology for significant unmet medical needs. SDB is
associated with a number of symptoms beyond fatigue and irritability. Recent
studies have established a clinical association between OSA and both stroke and
congestive heart failure. We are currently developing a device, which has not
been approved for sale in the United States, for the treatment of Cheyne-Stokes
breathing in patients with congestive heart failure. In addition, we maintain
close working relationships with a number of prominent physicians to explore new
medical applications for our products and technology.
LEVERAGE THE EXPERIENCE OF OUR MANAGEMENT TEAM AND MEDICAL ADVISORY BOARD. Our
senior management team has extensive experience in the medical device industry
in general, and in the field of SDB in particular. Our Medical Advisory Board
is comprised of experts in the field of SDB, including Dr. Colin Sullivan, the
inventor of nasal CPAP. We intend to continue to leverage the experience and
expertise of these individuals to maintain our innovative approach to the
development of products and increase awareness of the serious medical problems
caused by SDB.
-6-
PRODUCTS
Our portfolio of products for the treatment of OSA and other forms of SDB
includes flow generators, diagnostic products, mask systems, headgear and other
accessories.
FLOW GENERATORS
We produce nasal CPAP, VPAP and AutoSet systems for the diagnosis, titration and
treatment of SDB. The flow generator systems deliver positive airway pressure
through a small nasal mask (or sometimes a full-face mask). Our VPAP units
deliver ultra-quiet, comfortable bilevel therapy. There are two preset
pressures: a higher pressure as the patient breathes in, and a lower pressure as
the patient breathes out. Breathing out against a lower pressure makes treatment
more comfortable, particularly for patients who need high pressure levels or for
those with impaired breathing ability. AutoSet systems are based on a
proprietary technology to monitor breathing that can also be used in the
diagnosis and treatment of OSA. CPAP and VPAP flow generators, together with
our diagnostic products, accounted for approximately 58%, 57% and 60% of our net
revenues in fiscal years 2002, 2001 and 2000, respectively.
- ---------------------------------------------------------------------------------------------------------------------
Date of
Flow Generators Description Commercial
Introduction
- ---------------------------------------------------------------------------------------------------------------------
VPAP
Bilevel portable device providing different pressure levels for inhalation and
exhalation, improved pressure switching and reduced noise output and spontaneous
VPAP II breath triggering. March 1996
Bilevel portable device providing different pressure levels for inhalation and
Moritz S# exhalation with integrated humidifier. October 2001*
COMFORT Bilevel device with limited features. March 1996
Bilevel portable device with spontaneous and spontaneous/timed breath triggering
VPAP II ST modes of operation. April 1996
VPAP II ST A Bilevel device with power failure alarms. August 1998
Bilevel ST device with spontaneous and spontaneous/timed breath triggering modes
Moritz ST# of operation, and with power failure alarms, system with integrated humidifier. October 2001*
Bilevel ventilatory support system for the treatment of adult patients with
VPAP MAX+ respiratory insufficiency or respiratory failure. November 1998
AUTOSET
AutoSet Spirit Modular, autotitrating device with optional integrated humidifier. September 2001
Autotitrating device, which continually adjusts CPAP treatment pressure based on
AutoSet T patient airway resistance. March 1999
Delivers varying degrees of ventilatory assistance to stabilize breathing and reduce
AutoSet CS# cheyne stokes respiration in congestive heart failure patients. December 1998
CPAP
ResMed S7 series+ Continuous Positive Pressure flow generator. July 2002
ResMed S6 series Quiet, compact CPAP device with various comfort features. June 2000
Continuous Positive Pressure flow generator available with or without integrated
Max II nCPAP# humidifier. Features low noise and reduced pressure swings. April 1997*
Minni Max nCPAP# CPAP device with integrated and attachable humidifier and low noise levels. March 2000*
- ---------------------------------------------------------------------------------------------------------------------
*MAP product, not approved for marketing in the United States.
+ Sold in USA only
# Sold outside USA only
-7-
MASK SYSTEMS
Mask systems are one of the most important elements of an OSA treatment system.
Masks are a primary determinant of patient comfort and as such may drive or
impede patient compliance with therapy. We have been a consistent innovator in
masks, improving patient comfort while minimizing size and weight. Masks,
accessories and motors accounted for approximately 42%, 43% and 40% of our net
revenues in fiscal years 2002, 2001 and 2000, respectively.
- ---------------------------------------------------------------------------------------------------------------------------------
Date of
Mask Products Description Commercial
Introduction
- ----------------------------------------------------------------------------------------------------------------------------------
Proprietary mask design with a contoured nasal cushion that adjusts to patient's
Mirage Mask facial contours. Quiet, light and low profile. August 1997
Mirage-based full face mask system. Provides an effective method of applying
ventilatory assist Noninvasive Positive Pressure Ventilation therapy. Can be used to
Mirage Full Face Mask Series 2 address mouth- breathing problems in conventional bilevel or CPAP therapy. October 2001
Advanced version of the Mirage system with reduced noise characteristics and
Ultra Mirage Mask improved forehead bridge. June 2000
Protege Mask+ Market entry mask. Upgradable to Ultra Mirage technology. May 2002
Nasal mask with only four major parts, allows simplified handling for patients and
Papillon Mask# distributors. April 2002*
- ----------------------------------------------------------------------------------------------------------------------------------
* MAP product, not approved for marketing in the United States.
+ Sold in USA only
# Sold outside USA only
DIAGNOSTIC PRODUCTS
We market sleep recorders for the diagnosis, titration and treatment of SDB in
sleep clinics and hospitals. These diagnostic systems record relevant
respiratory and sleep data, which can be analyzed by a sleep specialist or
physician who can then tailor an appropriate OSA treatment regimen for the
patient.
- --------------------------------------------------------------------------------------------------------------------
Date of
Diagnostic Products Description Commercial
Introduction
- --------------------------------------------------------------------------------------------------------------------
Device to permit remote monitoring and adjustment of ResMed CPAP, VPAP, and
AutoSet T Flow generators. An internal pressure transducer enables the clinician
to interface with polysomnography to monitor airflow in both titration and
ResControl diagnostic studies. September 1999
Digital sleep recorder that provides comprehensive sleep diagnosis in a sleep
Embla+ laboratory. October 1999
Embletta+ Pocket-size digital recorder that performs ambulatory sleep studies. November 2000
MESAM IV Portable+ Portable diagnostic system that measures snore, heart rate, body position, and
Diagnostic System+ oxygen saturation in conjunction with computer assisted analysis. December 1989*
Poly-MESAM Portable+ Configurable cardio-respiratory polygraphy system up to 8 channels, includes
Diagnostic System+ ECG, thorax and abdomen belts, PLMS sensor. February 1995*
MEPAL Diagnostic+
System Polysomnography system designed for use in the sleep laboratory. February 1999*
MEPAL mobil+
Diagnostic System Ambulatory polysomnography system. March 2001*
- --------------------------------------------------------------------------------------------------------------------
*MAP product, not approved for marketing in the United States.
+Not manufactured by ResMed.
-8-
ACCESSORIES AND OTHER PRODUCTS
To enhance patient comfort, convenience and compliance, we market a variety of
other products and accessories. These products include humidifiers, such as the
SULLIVAN HumidAire, which connect directly with the CPAP, VPAP and AutoSet T
flow generators to humidify and heat the air delivered to the patient. Their
use prevents the drying of nasal passages that can cause discomfort. Other
optional accessories include a cold passover humidifier, carry bags and
breathing circuits. MAP also offers a range of accessories, including the
Twister remote, an intelligent remote control for use in the sleep lab
environment to set and monitor flow generators, the Aero-Click connection
system, which allows a quick, simple connect/disconnect between the mask and
CPAP air delivery source and the AeroFix headgear, for the comfortable
adjustment of masks for CPAP therapy. Since the May 2002 acquisition of Servo
Magnetics Inc., we have sold custom electric motors for use in data storage and
aerospace applications.
PRODUCT DEVELOPMENT AND CLINICAL TRIALS
We have a strong track record in innovation in the sleep market. In 1989, we
introduced our first nasal CPAP device. Since then we have been committed to an
ongoing program of product advancement and development. Currently, our product
development efforts are focused on not only improving our current product
offerings, but also expanding into new product applications. For example, in
1997, we introduced the Mirage Mask. This mask was based on the innovative
Bubble Mask technology introduced in 1991, which used the principle of air
inflation of the mask cushion to create a more comfortable and better seal by
better conforming to patient facial contours. Additionally, in 1999, we
introduced the AutoSet T Flow generator, an autotitrating device that adapts to
the patient's breathing patterns to effectively prevent apneas.
We continually seek to identify new applications of our technology for
significant unmet medical needs. SDB is associated with a number of symptoms
beyond fatigue and irritability. Recent studies have established a clinical
association between SDB and hypertension, stroke, and congestive heart failure.
For example, we are currently developing a device, which has not been approved
for sale in the United States, for the treatment of Cheyne-Stokes breathing in
patients with congestive heart failure. We also support clinical trials in the
United States, Germany, France, the United Kingdom and Australia.
We consult with physicians at major sleep centers throughout the world to
identify technological trends in the treatment of SDB. Some of these physicians
currently serve on our Medical Advisory Board. New product ideas are also
identified by our marketing staff, direct sales force, network of distributors,
manufacturers' representatives, customers, and patients. Typically, our
internal development staff then performs new product development.
In fiscal years 2002, 2001 and 2000, we invested $14,910,000, $11,146,000 and
$8,499,000, respectively, on research and development.
SALES AND MARKETING
Our products are typically purchased by a home healthcare dealer who then sells
the products to the patient. The decision to purchase our products, as opposed
those of our competitors, is made or influenced by one or more of the following
individuals or organizations: the prescribing physician and his or her staff,
the home healthcare dealer, the insurer and the patient.
We currently market our products in over 60 countries using a network of
distributors, independent manufacturers' representatives and our direct sales
force. We attempt to tailor our marketing approach to each national market,
based on regional awareness of SDB as a health problem, physician referral
patterns, consumer preferences and local reimbursement policies.
-9-
NORTH AMERICA AND LATIN AMERICA. In the United States, our sales and marketing
activities are conducted through a field sales organization made up of regional
territory representatives, program development specialists and diagnostic system
specialists, regional sales directors, and independent manufacturers'
representatives. Our United States field sales organization markets and sells
products to more than 4,000 home health care dealer branch locations throughout
the United States. Our direct sales force receives a base salary, plus
commissions, while our independent sales representatives receive higher
commissions, but no base salary.
We also promote and market our products directly to sleep clinics. Patients who
are diagnosed with OSA and prescribed CPAP treatment are typically referred by
the diagnosing sleep clinic to a home health care dealer to fill the
prescription. The home health care dealer, in consultation with the referring
physician, will assist the patient in selecting the equipment, fit the patient
with the appropriate mask and set the flow generator pressure to the prescribed
level. In the United States, our sales employees and manufacturers'
representatives are managed by two regional Sales Managers and our Vice
President of Sales.
Our Canadian and Latin American sales are conducted through independent
distributors. Sales in North America and Latin America accounted for 49%, 52%
and 54% of our net revenues for fiscal years 2002, 2001 and 2000, respectively.
EUROPE. We market our products in most major European countries. We have
wholly owned subsidiaries in the United Kingdom, Germany, France, Netherlands,
Austria, Sweden and Switzerland and we use independent distributors to sell our
products in other areas of Europe. Distributors are selected in each country
based on their knowledge of respiratory medicine and a commitment to SDB
therapy. In each country in which we have a subsidiary, a local senior manager
is responsible for direct national sales.
Our Executive Vice President is responsible for coordination of all European
activities and, in conjunction with local management, the direct sales activity
in Europe. Sales in Europe accounted for 42%, 39% and 35% of our total net
revenues for fiscal years 2002, 2001 and 2000, respectively.
AUSTRALIA/REST OF WORLD. Marketing in Australia and the rest of the world is
the responsibility of our Executive Vice President. Sales in Australia and the
rest of the world accounted for 9%, 9% and 11% of our total net revenues for the
fiscal years ended June 30, 2002, 2001 and 2000, respectively.
OTHER MARKETING EFFORTS. In addition to our sales efforts, we work with the
following cardiovascular disease associations (CVD includes Coronary Artery
Disease, Congestive Heart Failure, Hypertension, Stroke, and Transient Ischemic
Attacks) to raise awareness of the co-morbidity of SDB in cardiovascular disease
patients:
(1) National Stroke Association: We have developed a strategic alliance with
the National Stroke Association to increase awareness about the high prevalence
of SDB in the stroke survivor population.
(2) American Heart Association: We are working closely with the Western
Affiliates of the American Heart Association on a number of local programs to
increase awareness and education about SDB. We are also in discussions with the
national American Heart/American Stroke associations regarding national programs
initially targeting clinicians on the impact of SDB on both heart disease and
stroke patients, as well as its role in the development of hypertension, a major
risk factor for both heart disease and stroke.
-10-
(3) National Sleep Foundation: The National Sleep Foundation is a non profit
organization dedicated to improving public health and safety by raising the
level of awareness and education toward sleep related programs and research. We
have been an active corporate partner and have supported the National Sleep
Foundation for a number of years.
We believe that our affiliations and continued work with these organizations
raises the awareness of SDB as a significant health concern.
MANUFACTURING
Our principal manufacturing facilities are located in Sydney, Australia and
comprise a 120,000 square foot manufacturing and research and development
facility. Our manufacturing operations consist primarily of assembly and testing
of our flow generators, masks and accessories. Of the numerous raw materials,
parts and components purchased for assembly of our therapeutic and diagnostic
sleep disorder products, most are off-the-shelf items available from multiple
vendors. We generally manufacture to our internal sales forecasts and fill
orders as received. Over the last two years the manufacturing processes have
been transformed along world class manufacturing guidelines to flow lines
staffed by dedicated teams. Each team is responsible for manufacture and
quality of their product group and decisions are based on performance and
quality measures including customer feedback.
Our quality management system is based upon the requirements of ISO 9001,
EN46001 (European Medical Standards), FDA Quality System Regulations for medical
devices (21 CFR part 820) and the Medical Device Directive (93/42/EEC). Our
Sydney, Australia facility is accredited to ISO 9001 and EN46001 and our San
Diego, California facility is accredited to ISO 9002 and EN46002. These two
sites have third party audits conducted by the ISO certification bodies at
regular intervals.
Our German manufacturing operation based in Munich operates in a facility of
approximately 24,000 square feet. This facility is accredited to ISO 9001 and
EN46001 and primarily assembles and tests flow generators for sale by our
subsidiary MAP GmbH. Appropriate quality controls monitor and measure product
assembly and performance.
In addition to our Australian and German manufacturing operations we also
manufacture high quality electric motors for both our flow generator devices and
external customers, primarily in the data storage and aerospace sectors, at our
Servo Magnetics Incorporated (SMI) facility at Canoga Park, California. The SMI
facility is approximately 35,500 square feet .
THIRD-PARTY REIMBURSEMENT
The cost of medical care in many of the countries in which we operate is funded
in substantial part by government and private insurance programs. Although we
do not generally receive payments for our products directly from these payers,
our success in major markets is dependent upon the ability of patients to obtain
adequate reimbursement for our products.
-11-
In the United States, our products are purchased primarily by home health care
dealers, hospitals or sleep clinics, which then invoice third-party payers
directly. Domestic third-party payers include Medicare, Medicaid, and corporate
health insurance plans. These payers may deny reimbursement if they determine
that a device is not used in accordance with cost-effective treatment methods,
or is experimental, unnecessary or inappropriate. The long-term trend towards
managed health care, or legislative proposals to reform health care, could
control or significantly influence the purchase of health care services and
products and could result in lower prices for our products.
In the United States, we sell our products primarily to home health care dealers
and to sleep clinics; we do not file claims and bill governmental programs and
other third-party payers directly for reimbursement for our products.
Nevertheless, we are still subject to laws and regulations relating to
governmental programs, and any violation of these laws and regulations could
result in civil and criminal penalties, including fines.
In particular, the federal Anti-Kickback Law prohibits persons from knowingly
and willfully soliciting, receiving, offering or providing remuneration,
directly or indirectly, to induce either the referral of an individual, or the
furnishing, recommending or arranging for a good or service, for which payment
may be made under a Federal healthcare program such as the Medicare and Medicaid
programs. The government has interpreted this law broadly to apply to the
marketing and sales activities of manufacturers and distributors like us. Many
states have adopted laws similar to the federal Anti-Kickback Law. We are also
subject to other federal and state fraud laws applicable to payment from any
third-party payer. These laws prohibit persons from knowingly and willfully
filing false claims or executing a scheme to defraud any healthcare benefit
program, including private third-party payers. These laws may apply to
manufacturers and distributors who provide information on coverage, coding and
reimbursement of their products to persons who bill third-party payers. We
continuously strive to comply with these laws and believe that our arrangements
do not violate these laws. Liability may still arise from the intentions or
actions of the parties with whom we do business or from a different governmental
agency interpretation of the laws.
In some foreign markets, such as Spain, France and Germany, government
reimbursement is currently available for purchase or rental of our 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.
SERVICE AND WARRANTY
We generally offer one-to-two year limited warranties on our flow generator
products. Warranties on mask systems are for 90 days. In most markets, we rely
on our distributors to repair our products with parts supplied by us. In the
United States, home health care dealers generally arrange shipment of products
to our San Diego facility for repair.
We receive returns of our products from the field for various reasons. We
believe that the level of returns experienced to date is consistent with levels
typically experienced by manufacturers of similar devices. We provide for
warranties and returns based on historical data.
-12-
COMPETITION
The markets for our products are highly competitive. We believe that the
principal competitive factors in all of our markets are product features,
reliability and price. Reputation and efficient distribution are also important
factors.
We compete on a market-by-market basis with various companies, some of which
have greater financial, research, manufacturing and marketing resources than
ourselves. In the United States, our principal market, Respironics, Inc.,
DeVilbiss, a division of Sunrise Medical Inc., and Nellcor Puritan Bennett, a
subsidiary of Tyco Inc., are the primary competitors for our CPAP products. Our
principal European competitors are also Respironics, DeVilbiss, and Nellcor
Puritan Bennett, as well as regional European manufacturers. The disparity
between our resources and those of our competitors may increase as a result of
the recent trend towards consolidation in the health care industry. In
addition, our products compete with surgical procedures and dental appliances
designed to treat OSA and other SDB related respiratory conditions. The
development of new or innovative procedures or devices by others could result in
our products becoming obsolete or noncompetitive, resulting in a material
adverse effect on our business, financial condition and results of operations.
Any product developed by us that gains regulatory clearance will have to compete
for market acceptance and market share. An important factor in such competition
may be the timing of market introduction of competitive products. Accordingly,
the relative speed with which we can develop products, complete clinical testing
and regulatory clearance processes and supply commercial quantities of the
product to the market are expected to be important competitive factors. In
addition, our ability to compete will continue to be dependent on the extent to
which we are successful in protecting our patents and other intellectual
property.
PATENTS AND PROPRIETARY RIGHTS AND RELATED LITIGATION
Through our subsidiaries ResMed Limited and MAP Medizintechnik fur Arzt und
Patient GmbH, we own or have licensed rights to 72 issued United States patents
(including 15 design patents) and 116 issued foreign patents. In addition,
there are 90 pending United States patent applications (including 9 design
patent applications) and 218 pending foreign patent applications. Some of these
patents and patent applications relate to significant aspects and features of
our products. These include U.S. patents relating to CPAP devices, delay timer
system, the Bubble Mask, and an automated means of varying air pressure based
upon a patient's changing needs during nightly use, such as that employed in our
AutoSet device.
Of our patents, two United States patents and three foreign patents are due to
expire in the next five years, with one foreign patent due to expire in each of
the years 2004, 2005 and 2007 and two United States patents in 2007. We believe
that the expiration of these patents will not have a material adverse impact on
our competitive position.
We rely on a combination of patents, trade secrets, trade marks and
non-disclosure agreements to protect our proprietary technology and rights.
ResMed Limited is pursuing infringement actions against two 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
us, to protect our rights, or to defend third-party claims of infringement by us
of the proprietary rights of others. Patent laws regarding the enforceability
of patents vary from country to country. Therefore, there can be no assurance
that patent issues will be uniformly resolved, or that local laws will provide
us with consistent rights and benefits.
-13-
GOVERNMENT REGULATIONS
Our products are subject to extensive regulation particularly as to safety,
efficacy and adherence to FDA Quality System Regulation, or QSR, and related
manufacturing standards. Medical device products are subject to rigorous FDA and
other governmental agency regulations in the United States and regulations of
relevant foreign agencies abroad. The FDA regulates the introduction,
manufacture, advertising, labeling, packaging, marketing, distribution, and
record keeping for such products, in order to ensure that medical products
distributed in the United States are safe and effective for their intended use.
In addition, the FDA is authorized to establish special controls to provide
reasonable assurance of the safety and effectiveness of most devices. Non
compliance with applicable requirements can result in import detentions, fines,
civil penalties, injunctions, suspensions or losses of regulatory approvals,
recall or seizure of products, operating restrictions, refusal of the government
to approve product export applications or allow us to enter into supply
contracts, and criminal prosecution.
The FDA requires that a manufacturer introducing a new medical device or a new
indication for use of an existing medical device obtain either a Section 510(k)
premarket notification clearance or a premarket approval, or PMA, prior to it
being introduced into the U.S. market. Our products currently marketed in the
United States are marketed in reliance on 510(k) pre-marketing clearances as
either Class I or Class II devices. The process of obtaining a Section 510(k)
clearance generally requires the submission of performance data and often
clinical data, which in some cases can be extensive, to demonstrate that the
device is "substantially equivalent'' to a device that was on the market prior
to 1976 or to a device that has been found by the FDA to be "substantially
equivalent'' to such a pre-1976 device. As a result, FDA approval requirements
may extend the development process for a considerable length of time. In
addition, in some cases, the FDA may require additional review by an advisory
panel, which can further lengthen the process. The PMA process, which is
reserved for new devices that are not substantially equivalent to any predicate
device and for high risk devices or those that are used to support or sustain
human life, may take several years and requires the submission of extensive
performance and clinical information.
As a medical device manufacturer, all of our domestic and Australian
manufacturing facilities are subject to inspection on a routine basis by the
FDA. We believe that our design, manufacturing and quality control procedures
are in substantial compliance with the FDA's regulatory requirements. MAP's
facilities are not subject to FDA regulation, because none of MAP's products is
currently marketed in the United States.
Sales of medical devices outside the United States are subject to regulatory
requirements that vary widely from country to country. Approval for sale of our
medical devices in Europe is through the CE mark process. Where appropriate,
our products are CE marked to the European Union's Medical Device Directive.
Under the CE marketing scheme, our products are classified as either Class I or
Class II; our devices are listed in the United States with FDA; in Australia
with the Therapeutic Goods Administration, or TGA; and in Canada with Health
Canada.
-14-
EMPLOYEES
As of June 30, 2002, we had 1,250 employees or full time consultants, of which
503 persons were employed in warehousing and manufacturing, 178 in research and
development, 337 in sales and marketing and 232 in administration. Of our
employees and consultants, 597 were located in Australia, 317 in the United
States, 318 in Europe and 18 in Asia.
We believe that the success of our business will depend, in part, on our ability
to attract and retain qualified personnel. None of our employees is covered by
a collective bargaining agreement. We believe that our relationship with our
employees is good.
MEDICAL ADVISORY BOARD
Our Medical Advisory Board, or MAB, consists of physicians specializing in the
field of sleep disordered breathing. MAB members meet as a group twice a year
with members of our senior management and members of our research and marketing
departments to advise us on technology trends in SDB and other developments in
sleep disorders medicine. MAB members are also available to consult on an
as-needed basis with our senior management. In alphabetical order, MAB members
include:
CLAUDIO BASSETTI, Dr. Claudio Bassetti is a Professor in the Faculty of
Medicine, University of Zurich, where he is the Director and Vice-Chairman of
the Neurological Clinic. A member of the American Academy of Neurology and the
American Sleep Disorders Association, Dr. Bassetti is also a member of the
scientific board of the European Sleep Research Society, and an associate editor
of 'Sleep Medicine'. He is on the editorial board of 'Swiss Archives of
Neurology and Psychiatry and has produced over 100 publications. Dr. Bassetti
is a leader in studying the implications of sleep disordered breathing on
stroke.
MICHAEL COPPOLA, MD, 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. He is also the Medical Director of Winmar
Diagnostics, a sleep disordered breathing specialty company, and Associate
Clinical Professor of Medicine at Tufts University School of Medicine.
TERENCE M. DAVIDSON, MD, FACS, is Professor of Surgery in the Division of
Otolaryngology - Head and Neck Surgery at the University of California, San
Diego, School of Medicine. He is Section Chief of Head and Neck Surgery at the
Veterans Administration San Diego Healthcare System and Associate Dean for
Continuing Medical Education at UCSD. He is also director of the UCSD Head and
Neck Surgery Sleep Clinic in La Jolla, CA.
ANTHONY N. DEMARIA, MD is Professor of Medicine and Chief, Division of
Cardiology at the University of California, San Diego, specializing in cardiac
imaging techniques, particularly echocardiography. He is a Diplomat in the
American Board of Internal Medicine and is board certified by the Subspecialty
Board in Cardiovascular Disease. He is Past President of both the American
College of Cardiology and the American Society of Echocardiography. Dr. DeMaria
is currently the Editor-in-Chief Elect of the Journal of the American College of
Cardiology and has authored or co-authored over 400 articles for medical
journals.
NEIL J. DOUGLAS, MD, FRCP, is Professor of Respiratory and Sleep Medicine,
University of Edinburgh, an Honorary Consultant Physician, Royal Infirmary of
Edinburgh and Director of the Scottish National Sleep Laboratory. He is 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.
-15-
NICHOLAS HILL, MD, is Professor of Medicine at Brown University and Director of
Critical Care Services at Rhode Island Hospital and Pulmonary Medicine at the
Miriam Hospital, both in Providence. He is a Fellow of the American College of
Chest Physicians and a member of the Planning Committee for the American
Thoracic Society.
BARRY J. MAKE, MD, is Director, Emphysema Center and Pulmonary Rehabilitation
National Jewish Medical and Research Center, and Professor of Pulmonary Sciences
and Critical Care Medicine of the University of Colorado School of Medicine. He
has served on numerous national and international committees for respiratory and
cardiovascular diseases. His research and clinical work has resulted in a large
number of publications on mechanisms, treatment and rehabilitation of chronic
respiratory disease.
BARBARA PHILLIPS, MD, MSPH, FCCP, is Professor of Pulmonary, Critical Care, and
Sleep Medicine at the University of Kentucky College of Medicine. She directs
the Sleep Center, Sleep Clinics, and Sleep Fellowship at the Samaritan Sleep
Center in Lexington, KY. She is a Board member of the American Academy of Sleep
Medicine, a recipient of a Sleep Academic Award from the National Institutes of
Health, past president of the American Board of Sleep Medicine, and a past
member of the Advisory Board to the National Center of Sleep Disorders Research.
Her research interests are the epidemiology of sleep-disordered breathing and
sleep disorders in the aged.
COLIN SULLIVAN, MD, PhD, FRACP, FAA 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 Research Laboratory and Director of the Australian
Centre for Advanced Medical Technology at the Sydney University Medical School.
He is Head of the Centre for Respiratory Failure and Sleep Disorders, as well as
a thoracic physician at the Royal Prince Alfred Hospital. He is also Academic
head of the Pediatric Sleep Laboratory, New Children's Hospital, and Sydney
Children's Hospital. Dr. Sullivan is a Fellow of the Royal Australian College of
Physicians, and Fellow of the Australian Academy of Science.
HELMUT TESCHLER, MD, 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.
J. WOODROW WEISS, MD, is Associate Professor of Medicine and Co-Chairman of the
Division of Sleep Medicine at Harvard Medical School, as well as Chief,
Pulmonary & Critical Care Medicine, Beth Israel Deaconess Medical Center,
Boston, MA.
B. TUCKER WOODSON, MD, FACS, is an Associate Professor of Otolaryngology and
Communication Sciences 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 Director of the Medical College of
Wisconsin/Froedert Memorial Lutheran Hospital Center for Sleep. He is active on
multiple committees for the American Academy of Sleep Medicine and American
Academy of Otolaryngology.
-16-
ITEM 2 PROPERTIES
Our principal executive offices and U.S. distribution facilities, consisting of
approximately 144,000 square feet, are located in Poway (North San Diego
County), California in a building we own. We lease facilities for our
manufacturing operations in Sydney, Australia in a 120,000 square foot facility
and in Canoga Park, California in a 35,500 square foot facility.
Sales and warehousing facilities are leased in Oxford, England;
Moenchengladbach, Germany; Lyon, France; Trollhaettan, Sweden and Singapore.
Prior to moving our executive offices and distribution facilities to Poway,
California, we leased space for this purpose in San Diego, California. Our
lease on those premises expires in 2005. In August 2000, we began subleasing
those premises to another company.
MAP's principal offices are located in Munich Germany in a 45,000 square foot
facility leased by us. MAP's subsidiaries also lease sales and warehouse
facilities in Lyss, Switzerland; Villach, Austria and s'Hertogenbosch, The
Netherlands.
ITEM 3 LEGAL PROCEEDINGS
We are currently engaged in litigation relating to the enforcement and defense
of certain of our patents.
In January 1995, we 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 of our patents. In
February 1995, Respironics filed a complaint in the United States District Court
for the Western District of Pennsylvania against us seeking a declaratory
judgment that Respironics does not infringe claims of these patents and that our
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, we filed an additional complaint against
Respironics for infringement of a fourth ResMed patent, and that complaint was
consolidated with the earlier action. As of this date, Respironics has brought
three partial summary judgment motions for non-infringement of the ResMed
patents; the Court has granted each of the motions. In December 1999, in
response to the Court's ruling on Respironics' third summary judgment motion,
the parties jointly stipulated to a dismissal of charges of infringement under
the fourth ResMed patent, with us reserving the right to reassert the charges in
the event of a favorable ruling on appeal. It is our intention to appeal the
summary judgment rulings after a final judgment in the consolidated litigation
has been entered in the District Court proceedings.
In January 2001, MAP Medizin-Technologie GmbH filed a lawsuit in the Civil
Chamber of Munich Court against Hofrichter GmbH seeking actual and exemplary
monetary damages for the unauthorized and infringing use of our trademarks and
patents. An initial decision has been made in favor of MAP. Hofrichter has
filed an appeal and has sought Court determination that the MAP patents do not
apply to certain Hofrichter products.
On August 26, 2002, ResMed filed a lawsuit in Federal District Court in San
Diego against Fisher & Paykel Healthcare. The ResMed complaint seeks a judgment
that selected Fisher & Paykel Healthcare mask products (ACLAIM and ACLAIM 2
masks) infringe patents held by ResMed. The complaint further charges the
defendant with the copying of ResMed proprietary mask technology and alleges
trade dress and common law violations relating to the appearance of ResMed mask
products.
-17-
While we are prosecuting the above actions, there can be no assurance that we
will be successful.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock commenced trading on June 2, 1995 on The NASDAQ National Market
under the symbol "RESM". On September 30, 1999, we transferred our primary
listing to the New York Stock Exchange (NYSE) under the symbol "RMD". The
following table sets forth for the fiscal periods indicated the high and low
closing prices for the Common Stock as reported by the New York Stock Exchange.
2002 2001
-------------- --------------
High Low High Low
-------------- --------------
Quarter One, ended September 30, $60.95 $45.90 $38.38 $24.63
Quarter Two, ended December 31, 61.75 50.47 41.50 25.50
Quarter Three, ended March 31, 53.15 36.36 47.00 36.65
Quarter Four, ended June 30, 40.34 24.70 57.68 37.91
As of September 6, 2002, there were 85 holders of record of our Common Stock.
We have not paid any cash dividends on our common stock since prior to the
initial public offering of our common stock and we do not currently intend to
pay cash dividends in the foreseeable future. We anticipate that all of our
earnings and other cash resources, if any, will be retained for the operation
and expansion of our business and for general corporate purposes.
SALE OF UNREGISTERED SECURITIES
On June 20, 2001, we issued $150.0 million of 4% convertible subordinated notes
due 2006 to initial purchasers including Merrill Lynch, Pierce Fenner & Smith
Incorporated, Deutsche Banc Alex. Brown Inc., William Blair & Company, LLC,
Macquarie Bank, and UBS Warburg LLC. The discount to the initial purchasers on
their purchase of the notes was $4.7 million. On July 3, 2001, we issued an
additional $30.0 million in notes to the initial purchasers upon exercise of the
initial purchasers' over allotment option, with an additional discount to the
initial purchasers of $0.9 million. This increased the total amount of
convertible subordinated notes issued to $180.0 million, with a total discount
to the initial purchasers of $5.6 million.
During fiscal 2002, we repurchased $56.8 million face value of our convertible
subordinated notes. The total purchase price of the notes was $49.1 million,
including $0.6 million in accrued interest. We recognized a gain of
$4.0 million, net of tax of $2.5 million, on these transactions. As at June 30,
2002, we had convertible subordinated notes outstanding of $123.3 million.
-18-
The notes and the common stock issuable upon conversion of the notes (the
"Securities") were not registered under the Securities Act or any other state or
foreign securities laws at the time of issue. The notes were offered and sold
only to "qualified institutional buyers" as defined in Rule 144A or in offshore
transactions outside the United States that met the requirements of Rule 903 of
Regulation S under the Securities Act.
The Securities were subsequently registered for resale under the Securities Act
(Registration No. 333-70500) effective October 9, 2001; and consequently the
Securities may be resold in accordance with the prospectus that is part of the
registration statement by the selling security holders named in the prospectus
or a supplement to the prospectus. Other sales of the Securities may only be
made in compliance with the registration requirements of the Securities Act and
all other applicable securities laws, or pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities Act
and any other applicable securities laws.
The notes are subject to an indenture between us and American Stock Transfer &
Trust Company, as trustee. The notes are convertible, at the option of the
holder, at any time on or prior to maturity, into shares of our common stock at
a conversion price of $60.60 per share, which is equal to a conversion rate of
16.5017 shares per $1,000 principal amount of notes. The conversion price is
subject to adjustment. The notes bear interest at 4% per year, payable
semiannually on June 20 and December 20 of each year, beginning December 20,
2001.
We may redeem some or all of the notes at any time before June 20, 2004 at a
redemption price of $1,000 per $1,000 principal amount of notes, plus accrued
and unpaid interest, if any, to the redemption date, if (a) the closing price of
our common stock has exceeded 150% of the conversion price then in effect for at
least 20 trading days within a period of 30 consecutive trading days ending on
the trading day before the date of mailing of the provisional redemption notice
and (b) a shelf registration statement covering resale of the notes and the
common stock issuable upon conversion of the notes is effective and available
for use and expected to remain effective and available for use for the 30 days
following the provisional redemption date. Upon any such provisional
redemption, we will make an additional payment in cash equal to $166.67 per
$1,000 principal amount of notes, less the amount of any interest actually paid
on the notes before the provisional redemption date.
We may also redeem some or all of the notes at any time on or after June 22,
2004, but prior to June 20, 2005, at a redemption price equal to 101.6% of the
principal amount of notes redeemed and at any time after June 19, 2005, at a
redemption price equal to 100.8% of the principal amount of notes redeemed, plus
in any case, accrued and unpaid interest, if any, to the redemption date, if the
closing price of our common stock has exceeded 130% of the conversion price then
in effect for at least 20 trading days within a period of 30 consecutive trading
days ending on the trading day before the date of mailing of the optional
redemption notice.
The notes are general unsecured obligations and are subordinated to all of our
existing and future senior indebtedness and will be effectively subordinated to
all of the indebtedness and liabilities of our subsidiaries. The indenture
governing the notes will not limit the incurrence by us or our subsidiaries of
senior indebtedness or other indebtedness. The notes mature on June 20, 2006.
On May 14, 2002, we issued 853,448 shares of our common stock to one individual
as partial consideration for our acquisition of Servo Magnetics Incorporated.
We relied on the exemption from registration provided under Section 4(2) of the
Securities Act of 1933, as amended. No solicitation was made in connection with
this issuance, other than negotiation of the acquisition, and we obtained
representations from the recipient regarding his investment intent, experience
and sophistication.
-19-
ITEM 6 SELECTED FINANCIAL DATA
The following table summarizes certain selected consolidated financial data for,
and as of the end of, each of the fiscal years in the five-year period ended
June 30, 2002. The data set forth below should be read in conjunction with the
Consolidated Financial Statements and related Notes included elsewhere in this
Report.
Years Ended June 30,
-------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME DATA: 2002 2001 2000 1999 1998
(In thousands, except per share data)
-------------------------------------------------
Net revenues $204,076 $155,156 $115,615 $88,627 $66,519
Cost of sales 70,827 50,377 36,991 29,416 23,069
Gross profit 133,249 104,779 78,624 59,211 43,450
Selling, general and administrative expenses 64,481 49,364 36,987 27,414 21,093
Provision for restructure - 550 - - -
In-process research and development write off 350 17,677 - - -
Research and development expenses 14,910 11,146 8,499 6,542 4,994
Donations to Research Foundations 2,349 - - - -
Total operating expenses 82,090 78,737 45,486 33,956 26,087
Income from operations 51,159 26,042 33,138 25,255 17,363
Other income (expenses):
Interest income (expense), net (3,224) (762) 801 779 1,011
Government grants - 72 279 833 611
Other, net 108 1,962 (52) (2,290) (2,873)
Gain on extinguishment of debt 6,549 - - - -
Total other income (expenses) 3,433 1,272 1,028 (678) (1,251)
Income before income taxes 54,592 27,314 34,166 24,577 16,112
Income taxes 17,086 15,684 11,940 8,475 5,501
Net income $ 37,506 $ 11,630 $ 22,226 $16,102 $10,611
Basic earnings per share $ 1.17 $ 0.37 $ 0.74 $ 0.55 $ 0.37
Diluted earnings per share $ 1.10 $ 0.35 $ 0.69 $ 0.52 $ 0.35
Basic shares outstanding 32,174 31,129 30,153 29,416 29,000
Diluted shares outstanding 34,080 33,484 32,303 31,068 30,044
- --------------------------------------------------------------------------------------
As of June 30,
CONSOLIDATED BALANCE SHEET DATA 2002 2001 2000 1999 1998
(In thousands)
- --------------------------------------------------------------------------------------
Working capital $144,666 $144,272 $ 47,550 $32,529 $32,759
Total assets 376,191 288,090 115,594 89,889 64,618
Long-term debt, less current maturities 123,250 150,000 - - -
Total stockholders' equity 192,930 100,366 93,972 71,647 50,773
-20-
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with selected financial data and
consolidated financial statements and notes, included herein.
We design, manufacture and market equipment for the diagnosis and treatment of
sleep disordered breathing conditions, including obstructive sleep apnea. Our
net revenues are generated from the sale of our various flow generator devices,
nasal mask systems, accessories and other products, and, to a lesser extent from
royalties and sales of custom motors.
We have invested significant resources in research and development and product
enhancement. Since 1989, we have developed several innovations to the original
CPAP device to increase patient comfort and to improve ease of product use. We
have been developing products for automated treatment, titration and monitoring
of OSA, such as the AutoSet T and AutoSet Spirit flow generators. Our research
and development expenses have been subsidized in part by grants and tax
incentives from the Australian federal government.
LABHARDT ACQUISITION
On November 15, 2001, we acquired all the common stock of Labhardt Ag, our Swiss
distributor, for total cash consideration, including acquisition costs, of $5.5
million.
The acquisition has been accounted for as a purchase and accordingly, the
results of operations of Labhardt Ag have been included in our consolidated
financial statements from November 15, 2001. The excess of the purchase price
over the fair value of the net identifiable assets acquired of $1.3 million has
been recorded as goodwill.
SMI ACQUISITION
On May 14, 2002, we acquired all of the common stock of Servo Magnetics
Incorporated ("SMI") through a merger with our wholly-owned subsidiary, Servo
Magnetics Acquisitions Inc, for total consideration, including acquisition
costs, of $32.6 million. Consideration included the issue of 853,448 shares for
fair value of $24.8 million with the balance of the acquisition price paid in
cash. Upon consummation of the merger, the surviving corporation, Servo
Magnetics Acquisition Inc., changed its name to Servo Magnetics Inc.
The acquisition has been accounted for as a purchase and accordingly, the
results of operations of SMI have been included in our consolidated financial
statements from May 14, 2002. The excess of the purchase price over the fair
value of the net identifiable assets acquired of $1.9 million has been recorded
as goodwill.
Purchased in-process research and development of $350,000 was expensed upon
acquisition of SMI because technological feasibility of the products under
development had not been established and no further alternative uses existed.
The value of in process technology was calculated by identifying research
projects in areas for which technological feasibility had not been established,
estimating the costs to develop the purchased in process technology into
commercially viable products, estimating the resulting net cash flows from such
products, discounting the net cash flows to present value, and applying the
reduced percentage completion of the projects thereto. The discount rate used
in the analysis was 19% and was based on the risk profile of the acquired
assets.
-21-
Purchased research and development projects related to electrical motor systems
used in medical devices and health equipment. Key assumptions used in the
analysis included gross margins of approximately 34%. As of the date of
acquisition, new motor systems for use in these devices are expected to be
completed and commercially available by fiscal 2004. These projects have
estimated costs to complete totalling approximately $450,000.
We believe that the assumptions used to value the acquired intangible
assets were reasonable at the time of acquisition. No assurance can be given,
however, that the underlying assumptions used to estimate expected project
revenues, development costs or profitability, or events associated with such
projects, will transpire as estimated. For these reasons, among others, actual
results may vary from the projected results.
TAX EXPENSE
Our income tax rate is governed by the laws of the regions in which our income
is recognized. To date, a substantial portion of our income has been subject to
income tax in Australia where the statutory rate was 30% in fiscal 2002 and was
34% in fiscal 2001 and 2000 respectively. During fiscal 2002, 2001 and 2000,
our effective tax rate has fluctuated between approximately 31% and
approximately 35%. These fluctuations have resulted from, and future effective
tax rates will depend upon, numerous factors, including the amount of research
and development expenditures for which a 125% Australian tax deduction is
available, the level of non-deductible expenses, and the use of available net
operating loss carryforward deductions and other tax credits or benefits
available to us under applicable tax laws.
FISCAL YEAR ENDED JUNE 30, 2002, COMPARED TO FISCAL YEAR ENDED JUNE 30, 2001
NET REVENUES. Net revenue increased in fiscal 2002 to $204.1 million from
$155.2 million in fiscal 2001, an increase of $48.9 million or 32%. This
increase was primarily attributable to an increase in unit sales of our flow
generators and accessories in both domestic and international markets and also
to the acquisition on February 16, 2001 of MAP Medizin-Technologie GmbH "MAP".
GROSS PROFIT. Gross profit increased in fiscal 2002 to $133.2 million from
$104.8 million in fiscal 2001, an increase of $28.5 million or 27%. Gross
profit as a percentage of net revenue declined in fiscal 2002 to 65% from 68% in
fiscal 2001. The decline in gross margins reflects a change in geographical
sales mix (after adjusting for MAP sales), with a relatively higher percentage
of domestic sales, which achieve lower margins, compared to international
markets. The decline also reflects that gross margins in our acquired
subsidiary, MAP, are historically lower than the average margins achieved by our
Company as a whole.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased in 2002 to $64.5 million from $49.4 million
for 2001, an increase of $15.1 million or 31%. As a percentage of net revenue,
selling, general and administrative expenses in fiscal 2002 was 32%, consistent
with fiscal 2001. The increase in selling, general and administrative expenses
was primarily due to the addition of 98 personnel in sales and administration
and other expenses related to the increase in our sales. SG&A in fiscal
2002 also included a provision of $1.0 million against an outstanding receivable
from American Home Patient Inc. (AHP), a significant customer, who filed for
Chapter 11 Bankruptcy Protection on July 31, 2002. AHP's filing for Chapter 11
Bankruptcy Protection is not expected to materially impact our business.
-22-
PROVISION FOR RESTRUCTURE. In fiscal 2001, subsequent to the purchase of MAP,
we restructured MAP's French activities and took a charge of $0.6 million
associated with the closure of MAP's unprofitable French operations. We did not
incur any restructure charges in fiscal 2002.
IN PROCESS RESEARCH AND DEVELOPMENT WRITE-OFF. In fiscal 2002, purchased in
process research and development of $0.4 million was expensed upon the
acquisition of SMI because technological feasibility of the products under
development had not been established and no further alternative uses existed.
In fiscal 2001, purchased in process research and development of $17.7 million
was expensed upon acquisition of MAP because technological feasibility of the
products under development had not been established and no further alternative
uses existed.
DONATIONS TO FOUNDATIONS. In fiscal 2002, we committed $2.3 million to the
establishment of two ResMed Sleep Disordered Breathing Foundations, one in the
United States and one in Australia. The Foundations' overall mission is to
educate both the public and physicians about the inherent dangers of untreated
SDB/OSA, particularly as it relates to traffic and workplace accidents as well
as cerebrovascular and cardiovascular disease.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
in fiscal 2002 to $14.9 million from $11.1 million in fiscal 2001, an increase
of $3.8 million or 34%. As a percentage of net revenue, research and
development expenses increased to 7.3% in fiscal 2002 compared to 7.2% in fiscal
2001. The increase in research and development expenses was due to increased
salaries associated with an increase in personnel and increased charges for
consulting fees, clinical trials and technical assessments incurred to
facilitate development of new products and also includes research and
development expenditures of MAP.
OTHER INCOME (EXPENSE). Other income (expense), net, increased in fiscal 2002
to a net income of $3.4 million from net income of $1.3 million in fiscal 2001.
The increase in other income primarily reflects a gain on extinguishment of debt
of $6.5 million partially offset by increased net interest expense associated
with our convertible notes and foreign exchange losses.
INCOME TAXES. The Company's effective income tax rate declined to approximately
31.3% in fiscal 2002 from approximately 34.4% (excluding a non-recurring in
process research and development write-down of $17.7 million and restructuring
charge of $0.6 million) in fiscal 2001. The lower tax rate was primarily due to
the lowering of the corporate income tax rate in Australia from 34% to 30%
effective July 1, 2001. The Company also benefits from a 125% tax deduction on
research and development expenditures in Australia, which further reduces the
effective tax rate on Australian sourced income.
FISCAL YEAR ENDED JUNE 30, 2001 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2000
NET REVENUES. Net revenues increased in fiscal 2001 to $155.2 million from
$155.6 million in fiscal 2000, an increase of $39.5 million or 34%. This
increase was primarily attributable to an increase in unit sales of our flow
generators and accessories in North and Latin America where net revenues
increased to $79.9 million from $62.7 million and in Europe, where net revenues
increased to $60.5 million from $40.5 million. Net revenues were unfavorably
impacted by a decline in European foreign exchange rates.
-23-
GROSS PROFIT. Gross profit increased in fiscal 2001 to $104.8 million from $78.6
million in fiscal 2000, an increase of $26.2 million or 33%. The increase
resulted primarily from increased unit sales during fiscal 2001. Gross profit
as a percentage of net revenues was 68%, consistent with fiscal 2000. Lower
flow generator selling prices were offset by a decline in the Australian dollar,
improved manufacturing efficiencies and increased sales of higher margin mask
system units.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased in 2001 to $49.4 million from $37.0 million
for 2000, an increase of $12.4 million or 33%. As a percentage of net revenues,
selling, general and administrative expenses were steady in fiscal 2001,
compared to fiscal 2002 at 32%. The gross increase in expenses was due
primarily to an increase to 471 from 281 in the number of sales and
administrative personnel and other expenses related to the increase in our
sales.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
in fiscal 2001 to $11.1 million from $8.5 million in fiscal 2001, an increase of
$2.6 million or 31%. As a percentage of net revenues, research and development
expenses remained static in fiscal 2001 at 7%. The dollar increase in research
and development expenses was due primarily to an increase in clinical trial
costs, personnel and external consultancy fees.
OTHER INCOME (EXPENSE). Other income (expense) improved in fiscal 2001 to $1.3
million from $1.0 million for fiscal 2000, an increase of $0.3 million. This
improvement was due primarily to foreign currency gains incurred in our foreign
currency hedging structures, partially offset by interest expense associated
with the purchase of MAP. Net foreign currency gains for fiscal 2001 were $2.0
million compared to net foreign currency losses of $0.2 million in 2000.
INCOME TAXES. Our effective income tax rate for fiscal 2001 before MAP
acquisition charges of $0.6 million for restructuring costs and in-process
research and development write off of $17.7 million was 34.4% down from 34.9%
for fiscal 2000. This reduction was primarily due to the reduction in
Australian corporate tax rates from 36% to 34% on July 1, 2000 and to additional
research and development expenses in Australia for which we received a 125%
deduction for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2002 and June 30, 2001, we had cash and cash equivalents and
marketable securities available-for-sale of approximately $92.8 million and
$102.8 million, respectively. Working capital approximated $144.7 million and
$144.3 million at June 30, 2002 and June 30, 2001 respectively.
During the year ended June 30, 2002, we generated cash of $35.6 million from
operations, primarily as a result of increased profit from operations offset by
increases in inventory and accounts receivable balances. During the year ended
June 30, 2001 approximately $29.5 million of cash was generated by operations.
Capital expenditures for the year ended June 30, 2002 and 2001 aggregated $28.2
million and $27.5 million respectively. The majority of the expenditures for
the year ended June 30, 2002 related to the purchase of land in Sydney described
below, a computer system upgrade and acquisition of production tooling and
equipment. The capital expenditures in the year ended June 30, 2001 primarily
reflected the capital expenditure of $17.2 million on the company's US
headquarters in Poway, California in July 2000. As a result of these capital
expenditures, our balance sheet reflects net property plant and equipment of
approximately $79.3 million at June 30, 2002 compared to $55.1 million at June
30, 2001.
-24-
On July 3, 2001, we issued $30.0 million in over allotments for our 4%
convertible subordinated notes issue, increasing the total amount of convertible
subordinated notes then outstanding to $180.0 million. During fiscal 2002, we
repurchased $56.8 million face value of our convertible subordinated notes. The
total purchase price of the notes was $49.1 million, including $0.6 million in
accrued interest. We recognized a gain of $4.0 million, net of tax of $2.5
million, on these transactions. As at June 30, 2002, we had convertible
subordinated notes outstanding of $123.3 million.
We may from time to time seek to retire our convertible subordinated notes
through cash purchases and/or exchanges for equity securities in open market
purchases, privately negotiated transactions, or otherwise. Such repurchases or
exchanges, if any, will depend on prevailing market conditions, our liquidity
requirements, and current or future contractual obligations of the Company, if
any, that may directly or indirectly apply to such transactions.
On November 15, 2001, we acquired all of the common stock of Labhardt Ag, our
Swiss distributor, for total cash consideration, including acquisition costs, of
$5.5 million. The acquisition has been accounted for as a purchase and,
accordingly, the results of operations of Labhardt Ag have been included in our
consolidated financial statements from November 15, 2001. The excess of the
purchase price over the fair value of the net identifiable assets acquired of
$1.3 million has been recorded as goodwill.
On May 14, 2002 we acquired all of the common stock of Servo Magnetics Inc.
("SMI") for total consideration, including acquisition costs, of $32.6 million.
Consideration included the issue of 853,448 shares for fair value of $24.8
million, with the balance of the acquisition cost paid in cash. Subsequent to
the acquisition, we repaid all SMI's existing bank loans totaling $3.0 million.
The acquisition has been accounted for as a purchase and accordingly, the
results of operations of SMI have been included in the Company's consolidated
financial statements from May 14, 2002. The excess of the purchase price over
the fair value of the net identifiable assets acquired of $1.9 million has been
recorded as goodwill.
On October 2, 2001, we paid $1.4 million as final consideration associated with
the purchase of MAP on February 16, 2001. The amount has been recorded as
goodwill.
On April 26, 2002, we settled our purchase of a 30-acre site at Norwest Business
Park, located northwest of Sydney, Australia. The acquisition cost was $23.6
million, including deferred payments of $5.7 million due in October 2002 and
$5.7 million due in April 2003. We expect the first building, a manufacturing
facility, to be operational on this site in December 2003. New research and
development and office facilities are expected to be completed in 2004.
We estimate that the building costs will be approximately $30.0 million.
On May 8, 2002, we completed a sale and leaseback transaction of our Australian
facility located at North Ryde in Sydney, Australia. The property was sold for
$18.5 million with a three-year leaseback and a further one-year option. The
profit before tax on sale of the property of $5.5 million will be amortized over
the lease period. The cash made available from the sale will be utilized for
the construction of our new facilities at Norwest Business Park also located in
Sydney, Australia.
-25-
On June 6, 2002, the Board of Directors authorized the Company to repurchase up
to 4 million shares of its outstanding common stock. For fiscal year 2002, we
repurchased 290,047 shares at a cost of $7.9 million. We may continue to
repurchase shares of our common stock for cash in the open market, or in
negotiated or block transactions, from time to time as market and business
conditions warrant.
Details of contractual obligations at June 30, 2002 are as follows:
Payments Due by Period
Less than 1 year 1-3 years 4-5 years After 5 years
Long-Term Debt - 123,250 - -
Operating Leases 4,326 9,523 1,202 -
Unconditional Purchase Obligations 11,552 - - -
Total Contractual Cash Obligations 15,878 132,773 1,202 -
Details of other commercial commitments at June 30, 2002 are as follows:
In $000's Amount of Commitment Expiration Per Period
Total Amounts -----------------------------------------------------
Committed Less than 1 year 1-3 years 4-5 years Over 5 years
-----------------------------------------------------
Lines of Credit - - - - -
Standby Letters of Credit - - - - -
Guarantees(1) 13,678 11,821 663 - 1,194
Standby Repurchase Obligations - - - - -
Other Commercial Commitments - - - - -
Total Commercial Commitments 13,678 11,821 663 - 1,194
(1) The above guarantees relate to guarantees provided by banks. Guarantees
of $11.8 million relate to deferred payments due on our land purchase at Norwest
and have been recorded as a liability in our financial accounts. The guarantees
are secured by cash deposits held with the bank. The balance of the guarantees
relate to guarantees required by statutory authorities as a pre-requisite to
developing our site at Norwest and requirements under contractual obligations
with insurance companies transacting with our German subsidiaries.
The results of our international operations are affected by changes in exchange
rates between currencies. Changes in exchange rates may negatively affect our
consolidated net revenue and gross profit margins from international operations.
We are exposed to the risk that the dollar value equivalent of anticipated cash
flows will be adversely affected by changes in foreign currency exchange rates.
We manage this risk through foreign currency option contracts.
We expect to satisfy all of our short term and long term liquidity requirements
through a combination of cash on hand and cash generated from operations.
CRITICAL ACCOUNTING PRINCIPLES AND ESTIMATES
In response to the SEC's Release numbers 33-8040 "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies" and 33-8056, "Commission
Statement about Management's Discussion and Analysis of Financial Condition and
Results of Operations," we have identified the following critical accounting
policies that affect the more significant judgments and estimates used in the
preparation of our financial statements. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires us to make estimates and judgments that affect
our reported amounts of assets and liabilities, revenues and expenses and
related disclosures of contingent assets and liabilities. On an ongoing basis
we evaluate our estimates, including those related to allowance for doubtful
accounts, inventory reserves, warranty obligations, impaired assets, intangible
assets, income taxes, revenue recognition and contingencies and litigation. We
state these accounting policies in the notes to the financial statements and at
relevant sections in this discussion and analysis. The estimates are based on
the information that is currently available to us and on various other
assumptions that we believe to be reasonable under the circumstances. Actual
results could vary from those estimates under different assumptions or
conditions.
-26-
We believe that the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our financial
statements:
(1) Allowance for Doubtful Accounts. We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments, which results in bad debt expense. We determine the
adequacy of this allowance by continually evaluating individual customer
receivables, considering customer's financial condition, credit history and
current economic conditions. If the financial condition of our customers were
to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
(2) Inventory Adjustments. Inventories are stated at lower of cost or market
and are determined by the first-in, first-out method. We review the components
of inventory on a regular basis for excess, obsolete and impaired inventory
based on estimated future usage and sales. The likelihood of any material
inventory write-downs is dependent on changes in competitive conditions, new
product introductions by us or our competitors, or rapid changes in customer
demand.
(3) Valuation of Goodwill, Intangible and Other Long-Lived Assets. We use
assumptions in establishing the carrying value, fair value and estimated lives
of our long-lived assets and goodwill. The criteria used for these evaluations
include management's estimate of the asset's continuing ability to generate
positive income from operations and positive cash flow in future periods
compared to the carrying value of the asset, as well as the strategic
significance of any identifiable intangible asset in our business objectives.
If assets are considered to be impaired, the impairment recognized is the amount
by which the carrying value of the assets exceeds the fair value of the assets.
Useful lives and related amortization or depreciation expense are based on our
estimate of the period that the assets will generate revenues or otherwise be
used by the Company. Factors that would influence the likelihood of a material
change in our reported results include significant changes in the asset's
ability to generate positive cash flow, loss of legal ownership or title to the
asset, a significant decline in the economic and competitive environment on
which the asset depends, significant changes in our strategic business
objectives, utilization of the asset, and a significant change in the economic
and/or political conditions in certain countries.
(4) Valuation of Deferred Income Taxes. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized. The likelihood of a material change in our expected realization of
these assets is dependent on future taxable income, our ability to deduct tax
loss carryforwards against future taxable income, the effectiveness of our tax
planning and strategies among the various tax jurisdictions that we operate in,
and any significant changes in the tax treatment received on our business
combinations.
(5) Provision for Warranty. We provide for the estimated cost of product
warranties at the time the related revenue is recognized. The amount of this
provision is determined by using a financial model which takes into
consideration actual historical expenses and potential risks associated with the
Company's different products. This financial model is then used to calculate
the future probable expenses related to warranty and the required level of the
warranty provision. Although we engage in product improvement programs and
processes, our warranty obligation is affected by product failure rates and
costs incurred to correct those product failures. Should actual product failure
rates or estimated costs to repair those product failures differ from our
estimates, revisions to our estimated warranty provision would be required.
-27-
NEW ACCOUNTING PRONOUNCEMENTS
In July 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, Accounting for Restructuring
Costs. SFAS 146 applies to costs associated with an exit activity (including
restructuring) or with a disposal of long-lived assets. Those activities can
include eliminating or reducing product lines, terminating employees and
contracts, and relocating plant facilities or personnel. Under SFAS 146, a
company will record a liability for a cost associated with an exit or disposal
activity when that liability is incurred and can be measured at fair value.
SFAS 146 will require a company to disclose information about its exit and
disposal activities, the related costs, and changes in those costs in the notes
to the interim and annual financial statements that include the period in which
an exit activity is initiated and in any subsequent period until the activity is
completed. SFAS 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002, with earlier adoption encouraged. Under SFAS
146, a company may not restate its previously issued financial statements and
the new Statement grandfathers the accounting for liabilities that a company had
previously recorded under Emerging Issues Task Force Issue 94-3. The Company
believes that it will not have a material impact on the results of operations,
financial position and liquidity of the Company.
The FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002,
which is effective for fiscal years beginning after May 15, 2002, but may be
adopted early. SFAS 145 rescinds SFAS 4 and SFAS 64, which required that all
gains and losses from debt extinguishment of debt be aggregated, and if
material, classified as an extraordinary item. As a result, gains and losses
from debt extinguishment are to be classified as extraordinary only if they meet
the criteria set forth in Accounting Principles Board Opinion No. 30, Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. SFAS 145 also requires that sale-leaseback accounting be used for
capital lease modifications with economic effects similar to sale-leaseback
transactions. The Company has elected to early adopt SFAS No. 145 and has
classified gains from the extinguishment of debt as other income in its
Consolidated Statements of Income.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." For long-lived assets to be held and used, SFAS
No. 144 retains the requirements of SFAS No. 121 to (a) recognize an impairment
loss only if the carrying amount of a long-lived asset is not recoverable from
its undiscounted cash flows and (b) measure an impairment loss as the difference
between the carrying amount and fair value. Further, SFAS No. 144 eliminates
the requirement to allocate goodwill to long-lived assets to be tested for
impairment, describes a probability-weighted cash flow estimation approach to
deal with situations in which alternative courses of action to recover the
carrying amount of a long-lived asset are under consideration or a range is
estimated for the amount of possible future cash flows, and establishes a
"primary-asset" approach to determine the cash flow estimation period. For
long-lived assets to be disposed of other than by sale (e.g. assets abandoned,
exchanged or distributed to owners in a spin-off), SFAS No. 144 requires that
such assets be considered held and used until disposed of. Further, an
impairment loss should be recognized at the date an asset is exchanged for a
similar productive asset or distributed to owners in a spin-off if the carrying
amount exceeds its fair value. The Company believes that it will not have a
material impact on the results of operations, financial position and liquidity
of the Company.
-28-
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. As allowed under the Standard, the Company has adopted SFAS 142
effective July 1, 2001. SFAS 142 requires goodwill and intangible assets with
indefinite useful lives to no longer be amortized, but instead be tested for
impairment at least annually.
With the adoption of SFAS 142, the Company reassessed the useful lives and
residual values of all acquired intangible assets to make any necessary
amortization period adjustments. Based on that assessment, only goodwill was
determined to have an indefinite useful life and no adjustments were made to the
amortization period or residual values of other intangible assets.
In accordance with SFAS 142 the Company has completed its initial assessment of
goodwill impairment. The results of the review indicated that no impaired
goodwill currently exists.
Effective July 1, 2001, the Company adopted SFAS No. 141, "Business
Combinations". SFAS 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs would be capitalized as part of the carrying amount of the long-lived
asset and depreciated over the life of the asset. The liability is accreted at
the end of each period through charges to operating expense. If the obligation
is settled for other than the carrying amount of the liability, the Company will
recognize a gain or loss on settlement. The provisions of SFAS No. 143 are
effective for fiscal years beginning after June 15, 2002. The Company believes
that it will not have a material impact on the results of operations, financial
position and liquidity of the Company.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET AND BUSINESS
RISKS
FOREIGN CURRENCY MARKET RISK
Our functional currency is the U.S. dollar, although we transact business in
various foreign currencies including a number of major European currencies, as
well as the Australian dollar. We have significant foreign currency exposure
through both our Australian manufacturing activities and international sales
operations.
We have established a foreign currency hedging program using purchased currency
options to hedge foreign-currency-denominated financial assets, liabilities and
manufacturing expenditure. The goal of this hedging program is to economically
guarantee or lock in the exchange rates on our foreign currency exposures
denominated in Euro's and the Australian dollar. Under this program, increases
or decreases in our foreign-currency-denominated financial assets, liabilities,
and firm commitments are partially offset by gains and losses on the hedging
instruments.
-29-
The table below provides information (in US dollars) on our foreign-currency
denominated financial assets by legal entity functional currency:
Foreign Currency Financial Assets
AUD USD EUR GBP SGD NZD SEK CHF
AUD Functional Currency Entities:
Assets $ - 24,118,963 7,317,495 2,582,023 1,481,516 180,690 505,691 837,331
Liability - (1,793,640) - (2,748,233) - - - -
Net Total $ - 22,325,323 7,317,495 (166,210) 1,481,516 180,690 505,691 837,331
USD Functional Currency Entities:
Assets $17,297,437 - - - - - - -
Liability - - - - - - - -
Net Total $17,297,437 - - - - - - -
Euro Functional Currency Entities:
Assets $ 4,773,000 65,504 - - - - - 1,200,726
Liability - (3,740) - - - - - -
Net Total $ 4,773,000 61,764 - - - - - 1,200,726
The table below provides information about our foreign currency derivative
financial instruments and presents such information in U.S. dollar
equivalents. The table summarizes information on instruments and transactions
that are sensitive to foreign currency exchange rates, including foreign
currency call options held at June 30, 2002. The table presents the notional
amounts and weighted average exchange rates by contractual maturity dates for
our foreign currency derivative financial instruments. These notional amounts
generally are used to calculate payments to be exchanged under the options
contracts.
Fair Value Assets / (Liabilities)
(In thousands except exchange rates) FY 2003 FY 2004 Total As of June 30,
2002 2001
Foreign Exchange Call Options
(Receive AUS$/Pay U.S.$)
Option amount $ 54,000 $ 66,000 $ 120,000 $2,341 $ 577
Average contractual exchange rate AUS $1 = USD 0.549 AUS$1=USD 0.591 AUS $1 = USD 0.571
(Receive AUS$/Pay Euro)
Option amount $ 40,473 - $ 40,473 $ 423 $ 20
Average contractual exchange rate AUS $1 = Euro 0.592 AUS $1 = Euro 0.592
INTEREST RATE RISK
We are exposed to risk associated with changes in interest rates affecting the
return on investments.
At June 30, 2002, we maintained a portion of our cash and cash equivalents in
financial instruments with original maturities of three months or less. We
maintain a short-term investment portfolio containing financial instruments in
which the majority have original maturities of greater than three months but
less than twelve months. These financial instruments, principally comprised of
corporate obligations, are subject to interest rate risk and will decline in
value if interest rates increase. A hypothetical 100 basis point change in
interest rates during the twelve months ended June 30, 2002, would have resulted
in approximately $0.3 million change in pretax income. We do not use derivative
financial instruments in our investment portfolio.
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FORWARD-LOOKING STATEMENTS
This report on Form 10-K contains or may contain certain forward-looking
statements and information that are based on the beliefs of our management as
well as estimates and assumptions made by, and information currently available
to our management. The words "believe," "expect," "anticipate," "estimate,"
"plan," "future" and other similar expressions generally identify
forward-looking statements, including, in particular, statements regarding the
development and approval of new products and product applications, market
expansion, pending litigation and the development of new markets for the
Company's products, such as cardiovascular and stroke markets. These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. You are cautioned not to
place undue reliance on these forward-looking statements. Such forward-looking
statements reflect the views of our management at the time such statements are
made and are subject to a number of risks, uncertainties, estimates and
assumptions, including, without limitation, and in addition to those identified
in the text surrounding such statements, those identified below and elsewhere in
this report. In addition, important factors to consider in evaluating such
forward-looking statements include changes or developments in social, economic,
market, legal or regulatory circumstances, changes in our business or growth
strategy or an inability to execute our strategy due to changes in our industry
or the economy generally, the emergence of new or growing competitors, the
actions or omissions of third parties, including suppliers, customers,
competitors and governmental authorities, and various other factors. Should any
one or more of these risks or uncertainties materialize, or the underlying
estimates or assumptions prove incorrect, actual results may vary significantly
from those expressed in such forward-looking statements, and there can be no
assurance that the forward-looking statements contained in this report will in
fact occur.
RISK FACTORS
The risks and uncertainties that may affect our business, financial condition or
results of operations include the following:
OUR INABILITY TO COMPETE SUCCESSFULLY IN OUR MARKETS MAY HARM OUR BUSINESS.
The markets for our SDB products are highly competitive and are characterized by
frequent product improvements and evolving technology. Our ability to compete
successfully depends, in part, on our ability to develop innovative new products
and to be the first to market with those products. The development of innovative
new products by our competitors or the discovery of alternative treatments or
potential cures for the conditions that our products treat could result in our
products becoming