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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________
FORM 10-K
________________________________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2003
COMMISSION FILE NUMBER: 0-26038
RESMED INC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
98-0152841
(IRS EMPLOYER IDENTIFICATION NO)
14040 DANIELSON STREET
POWAY, CA 92064-6857
UNITED STATES OF AMERICA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(858) 746-2400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT
TITLE OF EACH CLASS
COMMON STOCK, $.004 PAR VALUE
RIGHTS TO PURCHASE SERIES A JUNIOR
PARTICIPATING PREFERRED STOCK
NAME OF EACH EXCHANGE UPON WHICH REGISTERED
NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO FILING REQUIREMENTS
FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATIONS S-K (S 229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN AND WILL
NOT BE CONTAINED TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THE FORM 10-K OR
ANY AMENDMENT TO THIS FORM 10-K [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT). YES [X] NO [ ]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF
REGISTRANT AS OF SEPTEMBER 5, 2003, COMPUTED BY REFERENCE TO THE CLOSING SALE
PRICE OF SUCH STOCK ON THE NEW YORK STOCK EXCHANGE, WAS APPROXIMATELY
$1,372,490,000. (ALL DIRECTORS, EXECUTIVE OFFICERS, AND 10% STOCKHOLDERS OF
REGISTRANT ARE CONSIDERED AFFILIATES.)
AT SEPTEMBER 5, 2003, REGISTRANT HAD 33,815,865 SHARES OF COMMON STOCK, $.004
PAR VALUE, ISSUED AND OUTSTANDING. THIS NUMBER EXCLUDES 425,928 SHARES HELD BY
THE REGISTRANT AS TREASURY SHARES.
PORTIONS OF REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR ITS NOVEMBER 13, 2003
MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III OF THIS
REPORT.
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CONTENTS
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Part I
Item 1 . Business 3
Item 2 . Properties 17
Item 3 . Legal Proceedings 17
Item 4 . Submission of Matters to a Vote of Security Holders 19
Part II
Item 5 . Market for Registrant's Common Equity and Related Stockholder Matters 19
Item 6 . Selected Financial Data 21
Item 7 . Management's Discussion and Analysis of Financial Condition and Results of Operations 22
Item 7A. Quantitative and Qualitative Disclosures About Market and Business Risks 33
Item 8 . Consolidated Financial Statements and Supplementary Data 40
Item 9 . Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 41
Item 9A. Controls and Procedures 41
Part III
Item 10. Directors and Executive Officers of the Registrant 42
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial Owners and Management 42
Item 13. Certain Relationships and Related Transactions 42
Item 14. Principal Accountant Fees and Services 42
Part IV
Item 15. Exhibits, Consolidated Financial Statement Schedule and Reports on Form 8-K 42
... . . . Signatures 44
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ACTIVA, AERO-CLICK, AERO-FIX, AUTO VPAP, AUTOSCAN, AUTOSET, AUTOSET CS, AUTOSET
SPIRIT, AUTOSET T, AUTOSET.COM, AUTOSET-CS.COM, AUTOVIEW, BUBBLE CUSHION, BUBBLE
MASK, HUMIDAIRE, HUMIDAIRE 2I, IPAP MAX, IPAP MIN, MEDDTRAXX, MEPAL, MESAMIV,
MINNI MAX NCPAP, MIRAGE, PROTEGE , MORITZ II BILEVEL, POLY-MESAM, RESCAP,
RESALARM, RESCONTROL, RESMED, SLEEPKIT SOLUTIONS, S6, S7, SCAN, SELFSET,
SMARTSTART, SULLIVAN, TICONTROL, TRAXX, TWISTER REMOTE, ULTRA MIRAGE, VPAP AND
VPAP MAX, VSYNC, ARE OUR TRADEMARKS.
AS USED IN THIS 10-K, THE TERMS "WE", "US", "OUR" AND "THE COMPANY" REFER TO
RESMED INC., A DELAWARE CORPORATION, AND ITS SUBSIDIARIES, ON A CONSOLIDATED
BASIS, UNLESS OTHERWISE STATED.
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PART I
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ITEM 1 BUSINESS
GENERAL
WE ARE A LEADING DEVELOPER, MANUFACTURER AND DISTRIBUTOR OF MEDICAL EQUIPMENT
FOR TREATING, DIAGNOSING, AND MANAGING SLEEP DISORDERED BREATHING, OR SDB. SDB
INCLUDES OBSTRUCTIVE SLEEP APNEA, OR OSA, AND OTHER RESPIRATORY DISORDERS THAT
OCCUR DURING SLEEP. WHEN WE WERE FORMED IN 1989, OUR PRIMARY PURPOSE WAS TO
COMMERCIALIZE A TREATMENT FOR OSA DEVELOPED BY PROFESSOR COLIN SULLIVAN. THIS
TREATMENT, NASAL CONTINUOUS POSITIVE AIRWAY PRESSURE, OR CPAP, WAS THE FIRST
SUCCESSFUL NONINVASIVE TREATMENT FOR OSA. CPAP SYSTEMS DELIVER PRESSURIZED AIR,
TYPICALLY THROUGH A NASAL MASK, TO PREVENT COLLAPSE OF THE UPPER AIRWAY DURING
SLEEP.
SINCE THE DEVELOPMENT OF NASAL CPAP, WE HAVE DEVELOPED A NUMBER OF INNOVATIVE
PRODUCTS FOR SDB, INCLUDING AIRFLOW GENERATORS, DIAGNOSTIC PRODUCTS, MASK
SYSTEMS, HEADGEAR AND OTHER ACCESSORIES. OUR GROWTH HAS BEEN FUELLED BY
GEOGRAPHIC EXPANSION, INCREASED AWARENESS OF SDB AS A SIGNIFICANT HEALTH CONCERN
AMONG PHYSICIANS AND PATIENTS, AND OUR RESEARCH AND PRODUCT DEVELOPMENT EFFORT.
WE EMPLOY 1,464 PEOPLE AND SELL OUR PRODUCTS IN OVER 60 COUNTRIES THROUGH A
COMBINATION OF WHOLLY OWNED SUBSIDIARIES AND INDEPENDENT DISTRIBUTORS.
OUR WEB SITE ADDRESS IS WWW.RESMED.COM. WE MAKE OUR PERIODIC REPORTS, TOGETHER
WITH ANY AMENDMENTS, AVAILABLE ON OUR WEB SITE, FREE OF CHARGE, AS SOON AS
REASONABLY PRACTICABLE AFTER WE ELECTRONICALLY FILE OR FURNISH THE REPORTS WITH
THE SECURITIES AND EXCHANGE COMMISSION.
CORPORATE HISTORY
RESMED INC., A DELAWARE CORPORATION, WAS FORMED IN MARCH 1994 AS THE ULTIMATE
HOLDING COMPANY FOR OUR DOMESTIC, AUSTRALIAN AND EUROPEAN OPERATING
SUBSIDIARIES. ON JUNE 1, 1995, WE COMPLETED AN INITIAL PUBLIC OFFERING OF
COMMON STOCK AND ON JUNE 2, 1995 OUR COMMON STOCK COMMENCED TRADING ON THE
NASDAQ NATIONAL MARKET. ON SEPTEMBER 30, 1999 WE TRANSFERRED OUR PRINCIPAL
PUBLIC LISTING TO THE NEW YORK STOCK EXCHANGE (NYSE), TRADING UNDER THE TICKER
SYMBOL RMD. ON NOVEMBER 25, 1999, WE ESTABLISHED A SECONDARY LISTING OF OUR
SHARES VIA CHESS DEPOSITARY INSTRUMENTS, OR CDIS, ON THE AUSTRALIAN STOCK
EXCHANGE (ASX), ALSO UNDER THE SYMBOL RMD. TEN CDIS ON THE ASX REPRESENT ONE
SHARE OF OUR COMMON STOCK ON THE NYSE. ON JULY 1, 2002, WE CONVERTED OUR ASX
LISTING STATUS FROM A FOREIGN EXEMPT LISTING TO A FULL LISTING.
OUR AUSTRALIAN SUBSIDIARY, RESMED HOLDINGS LIMITED, WAS ORIGINALLY ORGANIZED IN
1989 BY DR. PETER FARRELL TO ACQUIRE FROM BAXTER CENTER FOR MEDICAL RESEARCH PTY
LIMITED, OR BAXTER, THE RIGHTS TO CERTAIN TECHNOLOGY RELATING TO CPAP TREATMENT
AS WELL AS BAXTER'S EXISTING CPAP DEVICE BUSINESS. BAXTER HAD SOLD CPAP DEVICES
IN AUSTRALIA SINCE 1988, HAVING ACQUIRED THE RIGHTS TO THE TECHNOLOGY IN 1987.
SINCE FORMATION WE HAVE ACQUIRED A NUMBER OF OPERATING BUSINESSES INCLUDING
SERVO MAGNETICS INC, LABHARDT AG, MAP MEDIZIN TECHNOLOGIE GMBH, DIETER W. PRIESS
MEDTECHNIK, PREMIUM MEDICAL SARL, INNOVMEDICS PTE LTD AND EINAR EGNELL AB ON MAY
14, 2002; NOVEMBER 15, 2001; FEBRUARY 16, 2001; FEBRUARY 7, 1996; JUNE 12, 1996;
NOVEMBER 1, 1997; AND JANUARY 31, 2000 RESPECTIVELY. DURING THE 1999 FISCAL
YEAR WE MADE AN EQUITY INVESTMENT IN MEDCARE FLAGA HF (MEDCARE), BASED IN
ICELAND. WE NOW MARKET MEDCARE'S POLYSOMNOGRAPHIC PRODUCTS UNDER THE EMBLA AND
EMBLETTA LABEL IN SELECTED COUNTRIES.
- -3-
THE MARKET
SLEEP IS A COMPLEX NEUROLOGICAL PROCESS THAT INCLUDES TWO DISTINCT STATES: RAPID
EYE MOVEMENT, OR REM, SLEEP AND NON-RAPID EYE MOVEMENT, OR NON-REM, SLEEP. REM
SLEEP, WHICH IS ABOUT 20-25% OF TOTAL SLEEP EXPERIENCED BY ADULTS, IS
CHARACTERIZED BY A HIGH LEVEL OF BRAIN ACTIVITY, BURSTS OF RAPID EYE MOVEMENT,
INCREASED HEART AND RESPIRATION RATES, AND PARALYSIS OF MANY MUSCLES. NON-REM
SLEEP IS SUBDIVIDED INTO FOUR STAGES THAT GENERALLY PARALLEL SLEEP DEPTH; STAGE
1 IS THE LIGHTEST AND STAGE 4 IS THE DEEPEST.
THE UPPER AIRWAY HAS NO RIGID SUPPORT AND IS HELD OPEN BY ACTIVE CONTRACTION OF
UPPER AIRWAY MUSCLES. NORMALLY, DURING REM SLEEP AND DEEPER LEVELS OF NON-REM
SLEEP, UPPER AIRWAY MUSCLES RELAX AND THE AIRWAY NARROWS. INDIVIDUALS WITH
NARROW UPPER AIRWAYS OR POOR MUSCLE TONE ARE PRONE TO TEMPORARY COLLAPSES OF THE
UPPER AIRWAY DURING SLEEP, OR APNEAS, OR NEAR CLOSURES OF THE UPPER AIRWAYS, OR
HYPOPNEAS. THESE BREATHING IRREGULARITIES RESULT IN A LOWERING OF BLOOD OXYGEN
CONCENTRATION, CAUSING THE CENTRAL NERVOUS SYSTEM TO REACT TO THE LACK OF OXYGEN
OR INCREASED CARBON DIOXIDE AND SIGNALING THE BODY TO RESPOND. TYPICALLY, THE
INDIVIDUAL SUBCONSCIOUSLY AROUSES FROM SLEEP, CAUSING THE THROAT MUSCLES TO
CONTRACT, OPENING THE AIRWAY. AFTER A FEW GASPING BREATHS, BLOOD OXYGEN LEVELS
INCREASE AND THE INDIVIDUAL CAN RESUME A DEEPER SLEEP UNTIL THE CYCLE REPEATS
ITSELF. SUFFERERS OF OSA TYPICALLY EXPERIENCE TEN OR MORE SUCH CYCLES PER HOUR.
WHILE THESE AWAKENINGS GREATLY IMPAIR THE QUALITY OF SLEEP, THE INDIVIDUAL IS
NOT NORMALLY AWARE OF THESE DISRUPTIONS. IN ADDITION, OSA HAS RECENTLY BEEN
RECOGNIZED AS A CAUSE OF HYPERTENSION AND A SIGNIFICANT CO-MORBIDITY FOR HEART
DISEASE, STROKE AND DIABETES. FOR EXAMPLE, ONE RECENT RESEARCH STUDY SHOWED
THAT 83% OF AN ADULT PATIENT POPULATION WITH DRUG-RESISTANT HYPERTENSION HAD
OSA.
IN ITS "WAKE UP AMERICA'' REPORT TO CONGRESS IN 1993, THE NATIONAL COMMISSION ON
SLEEP DISORDERS RESEARCH ESTIMATED THAT APPROXIMATELY 40 MILLION INDIVIDUALS IN
THE UNITED STATES SUFFER FROM CHRONIC DISORDERS OF SLEEP AND WAKEFULNESS, SUCH
AS SLEEP APNEA, INSOMNIA AND NARCOLEPSY. ACCORDING TO THIS REPORT, SLEEP APNEA
IS THE MOST COMMON SLEEP DISORDER, AFFECTING APPROXIMATELY 20 MILLION
INDIVIDUALS IN THE UNITED STATES. DESPITE THE HIGH PREVALENCE OF OSA, THERE IS
A GENERAL LACK OF AWARENESS OF OSA AMONG BOTH THE MEDICAL COMMUNITY AND THE
GENERAL PUBLIC. IT IS ESTIMATED THAT 10% OF THOSE AFFLICTED BY OSA KNOW THE
CAUSE OF THEIR EXCESSIVE DAYTIME SLEEPINESS OR OTHER SYMPTOMS. MANY HEALTH CARE
PROFESSIONALS ARE OFTEN UNABLE TO DIAGNOSE OSA BECAUSE THEY ARE UNAWARE THAT
SUCH NON-SPECIFIC SYMPTOMS AS EXCESSIVE DAYTIME SLEEPINESS, SNORING,
HYPERTENSION AND IRRITABILITY ARE CHARACTERISTIC OF OSA.
WHILE OSA HAS BEEN DIAGNOSED IN A BROAD CROSS-SECTION OF THE POPULATION, IT IS
PREDOMINANT AMONG MIDDLE-AGED MEN AND THOSE WHO ARE OBESE, SMOKE, CONSUME
ALCOHOL IN EXCESS OR USE MUSCLE-RELAXING AND PAIN-KILLING DRUGS. IN ADDITION,
PATIENTS WHO ARE BEING TREATED FOR CERTAIN OTHER CONDITIONS, INCLUDING THOSE
UNDERGOING DIALYSIS TREATMENT OR SUFFERING FROM DIABETES, MAY HAVE AN INCREASED
INCIDENCE OF OSA. RECENT STUDIES HAVE ALSO SHOWN THAT SDB IS PRESENT IN 45% OF
HYPERTENSION PATIENTS (INCLUDING 80% OF PATIENTS WITH DRUG-RESISTANT
HYPERTENSION), 60% OF STROKE PATIENTS AND 50% OF PATIENTS WITH CONGESTIVE HEART
FAILURE.
SLEEP-DISORDERED BREATHING AND OBSTRUCTIVE SLEEP APNEA
SLEEP DISORDERED BREATHING, OR SDB, ENCOMPASSES ALL PHYSIOLOGICAL PROCESSES THAT
CAUSE DETRIMENTAL BREATHING PATTERNS DURING SLEEP. MANIFESTATIONS INCLUDE
OBSTRUCTIVE SLEEP APNEA OR OSA, CENTRAL SLEEP APNEA, OR CSA, AND HYPOVENTILATION
SYNDROMES THAT OCCUR DURING SLEEP. HYPOVENTILATION SYNDROMES ARE GENERALLY
ASSOCIATED WITH OBESITY, CHRONIC OBSTRUCTIVE LUNG DISEASE AND NEUROMUSCULAR
DISEASE. OSA IS THE MOST COMMON FORM OF SDB.
- -4-
SLEEP FRAGMENTATION AND THE LOSS OF THE DEEPER LEVELS OF SLEEP CAUSED BY OSA CAN
LEAD TO EXCESSIVE DAYTIME SLEEPINESS, REDUCED COGNITIVE FUNCTION, INCLUDING
MEMORY LOSS AND LACK OF CONCENTRATION, DEPRESSION AND IRRITABILITY. OSA
SUFFERERS ALSO MAY EXPERIENCE AN INCREASE IN HEART RATE AND AN ELEVATION OF
BLOOD PRESSURE DURING THE CYCLE OF APNEAS. SEVERAL STUDIES INDICATE THAT THE
OXYGEN DESATURATION, INCREASED HEART RATE AND ELEVATED BLOOD PRESSURE CAUSED BY
OSA MAY BE ASSOCIATED WITH INCREASED RISK OF CARDIOVASCULAR MORBIDITY AND
MORTALITY DUE TO ANGINA, STROKE AND HEART ATTACK. PATIENTS WITH OSA HAVE BEEN
SHOWN TO HAVE IMPAIRED DAYTIME PERFORMANCE IN A VARIETY OF COGNITIVE FUNCTIONS
INCLUDING PROBLEM SOLVING, RESPONSE SPEED AND VISUAL MOTOR COORDINATION, AND
STUDIES HAVE LINKED OSA TO INCREASED OCCURRENCES OF TRAFFIC AND WORKPLACE
ACCIDENTS.
GENERALLY, AN INDIVIDUAL SEEKING TREATMENT FOR THE SYMPTOMS OF OSA IS REFERRED
BY A GENERAL PRACTITIONER TO A SPECIALIST FOR FURTHER EVALUATION. THE DIAGNOSIS
OF OSA TYPICALLY REQUIRES MONITORING THE PATIENT DURING SLEEP AT EITHER A SLEEP
CLINIC OR THE PATIENT'S HOME. DURING OVERNIGHT TESTING, RESPIRATORY PARAMETERS
AND SLEEP PATTERNS ARE MONITORED ALONG WITH OTHER VITAL SIGNS SUCH AS HEART RATE
AND BLOOD OXYGEN LEVELS. THESE TESTS ALLOW SLEEP CLINICIANS TO DETECT ANY SLEEP
DISTURBANCES SUCH AS APNEAS, HYPOPNEAS OR SUBCONSCIOUS AWAKENINGS. WE ESTIMATE
THAT THERE ARE CURRENTLY MORE THAN 2,500 SLEEP CLINICS IN THE UNITED STATES, A
SUBSTANTIAL PORTION OF WHICH ARE AFFILIATED WITH HOSPITALS. THE NUMBER OF SLEEP
CLINICS HAS EXPANDED SIGNIFICANTLY FROM APPROXIMATELY 100 SUCH FACILITIES IN
1985.
EXISTING THERAPIES
PRIOR TO 1981, THE PRIMARY TREATMENT FOR OSA WAS A TRACHEOTOMY, A SURGICAL
PROCEDURE TO CUT A HOLE IN THE PATIENT'S WINDPIPE TO CREATE A CHANNEL FOR
AIRFLOW. MOST RECENTLY, SURGERY HAS INVOLVED EITHER UVULOPALATOPHARYNGOPLASTY
('UPPP'), IN WHICH SURGERY IS PERFORMED ON THE UPPER AIRWAY TO REMOVE EXCESS
TISSUE AND TO STREAMLINE THE SHAPE OF THE AIRWAY, OR MANDIBULAR ADVANCEMENT, IN
WHICH THE LOWER JAW IS MOVED FORWARD TO WIDEN THE PATIENT'S AIRWAY. UPPP ALONE
HAS A POOR SUCCESS RATE; HOWEVER, WHEN PERFORMED IN CONJUNCTION WITH MULTI-STAGE
UPPER AIRWAY SURGICAL PROCEDURES, A GREATER SUCCESS RATE HAS BEEN CLAIMED.
THESE COMBINED PROCEDURES, PERFORMED BY HIGHLY SPECIALIZED SURGEONS, ARE
EXPENSIVE AND INVOLVE PROLONGED AND OFTEN PAINFUL RECOVERY PERIODS.
CPAP, BY CONTRAST, IS A NON-INVASIVE MEANS OF TREATING OSA. CPAP WAS FIRST USED
AS A TREATMENT FOR OSA IN 1980 BY DR. COLIN SULLIVAN, THE PAST CHAIRMAN OF OUR
MEDICAL ADVISORY BOARD. CPAP SYSTEMS WERE COMMERCIALIZED FOR TREATMENT OF OSA IN
THE UNITED STATES IN THE MID 1980'S. TODAY, USE OF NASAL POSITIVE AIRWAY
PRESSURE IS GENERALLY ACKNOWLEDGED AS THE MOST EFFECTIVE AND LEAST INVASIVE
THERAPY FOR MANAGING OSA.
DURING CPAP TREATMENT, A PATIENT SLEEPS WITH A NASAL MASK CONNECTED TO A SMALL
PORTABLE AIRFLOW GENERATOR THAT DELIVERS ROOM AIR AT A POSITIVE PRESSURE. THE
PATIENT BREATHES IN AIR FROM THE FLOW GENERATOR AND BREATHES OUT THROUGH AN
EXHAUST PORT IN THE MASK. CONTINUOUS AIR PRESSURE APPLIED IN THIS MANNER ACTS
AS A PNEUMATIC SPLINT TO KEEP THE UPPER AIRWAY OPEN AND UNOBSTRUCTED. SOMETIMES
WHEN A PATIENT LEAKS AIR THROUGH THEIR MOUTH, A FULL-FACE MASK MAY NEED TO BE
USED.
CPAP IS NOT A CURE AND THEREFORE, MUST BE USED ON A DAILY BASIS AS LONG AS
TREATMENT IS REQUIRED. PATIENT COMPLIANCE HAS BEEN A MAJOR FACTOR IN THE
EFFICACY OF CPAP TREATMENT. EARLY GENERATIONS OF CPAP UNITS PROVIDED LIMITED
PATIENT COMFORT AND CONVENIENCE. PATIENTS EXPERIENCED SORENESS FROM THE
REPEATED USE OF NASAL MASKS AND HAD DIFFICULTY FALLING ASLEEP WITH THE CPAP
DEVICE OPERATING AT THE PRESCRIBED PRESSURE. IN MORE RECENT YEARS, PRODUCT
INNOVATIONS TO IMPROVE PATIENT COMFORT AND COMPLIANCE HAVE BEEN DEVELOPED.
THESE INCLUDE MORE COMFORTABLE MASK SYSTEMS; DELAY TIMERS WHICH GRADUALLY RAISE
AIR PRESSURE ALLOWING THE PATIENT TO FALL ASLEEP MORE EASILY; BILEVEL AIR FLOW
GENERATORS, INCLUDING VPAP SYSTEMS, WHICH PROVIDE DIFFERENT AIR PRESSURES FOR
INHALATION AND EXHALATION; HEATED HUMIDIFICATION SYSTEMS TO MAKE THE AIRFLOW
MORE COMFORTABLE; AND AUTO TITRATION DEVICES WHICH REDUCE THE AVERAGE PRESSURE
DELIVERED DURING THE NIGHT.
- -5-
BUSINESS STRATEGY
WE BELIEVE THAT THE SDB MARKET WILL CONTINUE TO GROW IN THE FUTURE DUE TO A
NUMBER OF FACTORS INCLUDING INCREASING AWARENESS OF OSA, IMPROVED UNDERSTANDING
OF THE ROLE OF SDB TREATMENT IN THE MANAGEMENT OF CARDIAC, NEUROLOGIC, METABOLIC
AND RELATED DISORDERS, AND AN INCREASE IN HOME-BASED DIAGNOSIS. OUR STRATEGY FOR
EXPANDING OUR BUSINESS OPERATIONS AND CAPITALIZING ON THE GROWTH OF THE SDB
MARKET CONSISTS OF THE FOLLOWING KEY ELEMENTS.
CONTINUE PRODUCT DEVELOPMENT AND INNOVATION. WE ARE COMMITTED TO ONGOING
INNOVATION IN DEVELOPING PRODUCTS FOR THE DIAGNOSIS AND TREATMENT OF SDB. WE
HAVE BEEN A LEADING INNOVATOR OF PRODUCTS DESIGNED TO MORE EFFECTIVELY TREAT
SDB, INCREASE PATIENT COMFORT AND ENCOURAGE COMPLIANCE WITH PRESCRIBED THERAPY.
FOR EXAMPLE, IN 1999 WE INTRODUCED THE MIRAGE FULL FACE MASK. THIS MASK
CONTAINS AN INFLATABLE AIR POCKET, WHICH CONFORMS TO THE PATIENT'S FACIAL
CONTOURS, CREATING A MORE COMFORTABLE AND BETTER SEAL. ADDITIONALLY, IN 2002 WE
INTRODUCED THE AUTOSET SPIRIT FLOW GENERATOR, OUR SECOND-GENERATION
AUTOTITRATING DEVICE THAT ADAPTS TO THE PATIENT'S BREATHING PATTERNS TO MORE
EFFECTIVELY TREAT OSA. WE BELIEVE THAT CONTINUED PRODUCT DEVELOPMENT AND
INNOVATION ARE KEY FACTORS TO OUR ONGOING SUCCESS. APPROXIMATELY 17% OF OUR
EMPLOYEES ARE DEVOTED TO RESEARCH AND DEVELOPMENT ACTIVITIES. IN FISCAL YEAR
2003, WE INVESTED $20.5 MILLION, OR 7.5% OF OUR REVENUES, IN RESEARCH AND
DEVELOPMENT.
EXPAND GEOGRAPHIC PRESENCE. WE MARKET OUR PRODUCTS IN OVER 60 COUNTRIES TO
SLEEP CLINICS, HOME HEALTH CARE DEALERS AND THIRD PARTY PAYERS. WE INTEND TO
INCREASE OUR SALES AND MARKETING EFFORTS IN OUR PRINCIPAL MARKETS, AS WELL AS
EXPAND THE DEPTH OF OUR PRESENCE IN OTHER GEOGRAPHIC REGIONS.
INCREASE PUBLIC AND CLINICAL AWARENESS. WE INTEND TO CONTINUE TO EXPAND OUR
EXISTING PROMOTIONAL ACTIVITIES TO INCREASE AWARENESS OF SDB AND OUR TREATMENT
ALTERNATIVES. THESE PROMOTIONAL ACTIVITIES TARGET THE POPULATION WITH
PREDISPOSITION TO SDB AS WELL AS PRIMARY CARE PHYSICIANS AND SPECIALISTS, SUCH
AS CARDIOLOGISTS, NEUROLOGISTS AND PULMONOLOGISTS. IN ADDITION, WE ALSO TARGET
SPECIAL INTEREST GROUPS, INCLUDING THE NATIONAL STROKE ASSOCIATION, THE AMERICAN
HEART ASSOCIATION AND THE NATIONAL SLEEP FOUNDATION.
DURING FISCAL 2002, WE DONATED A TOTAL OF $2.3 MILLION TO THE RESMED SLEEP
DISORDERED BREATHING FOUNDATIONS IN THE UNITED STATES AND AUSTRALIA TO FURTHER
ENHANCE RESEARCH AND AWARENESS OF SDB. THE FOUNDATIONS' CONTRIBUTIONS REPRESENT
RESMED'S COMMITMENT TO MEDICAL RESEARCH INTO SLEEP-DISORDERED BREATHING,
PARTICULARLY THE TREATMENT OF OBSTRUCTIVE SLEEP APNEA.
EXPAND INTO NEW CLINICAL APPLICATIONS. WE CONTINUALLY SEEK TO IDENTIFY NEW
APPLICATIONS OF OUR TECHNOLOGY FOR SIGNIFICANT UNMET MEDICAL NEEDS. RECENT
STUDIES HAVE ESTABLISHED A CLINICAL ASSOCIATION BETWEEN OSA AND BOTH STROKE AND
CONGESTIVE HEART FAILURE, AND HAVE RECOGNIZED SDB AS A CAUSE OF HYPERTENSION OR
HIGH BLOOD PRESSURE. WE HAVE DEVELOPED A DEVICE, WHICH HAS NOT BEEN APPROVED
FOR SALE IN THE UNITED STATES, FOR THE TREATMENT OF CHEYNE-STOKES BREATHING IN
PATIENTS WITH CONGESTIVE HEART FAILURE. CURRENTLY, 1,000 PATIENTS ARE BEING
TREATED BY THIS DEVICE IN EUROPE WITH SIGNIFICANT IMPROVEMENTS IN QUALITY OF
LIFE AND HEART FUNCTION. IN ADDITION, WE MAINTAIN CLOSE WORKING RELATIONSHIPS
WITH A NUMBER OF PROMINENT PHYSICIANS TO EXPLORE NEW MEDICAL APPLICATIONS FOR
OUR PRODUCTS AND TECHNOLOGY.
LEVERAGE THE EXPERIENCE OF OUR MANAGEMENT TEAM AND MEDICAL ADVISORY BOARD. OUR
SENIOR MANAGEMENT TEAM HAS EXTENSIVE EXPERIENCE IN THE MEDICAL DEVICE INDUSTRY
IN GENERAL, AND IN THE FIELD OF SDB IN PARTICULAR. OUR MEDICAL ADVISORY BOARD
IS COMPRISED OF EXPERTS IN THE FIELD OF SDB. WE INTEND TO CONTINUE TO LEVERAGE
THE EXPERIENCE AND EXPERTISE OF THESE INDIVIDUALS TO MAINTAIN OUR INNOVATIVE
APPROACH TO THE DEVELOPMENT OF PRODUCTS AND INCREASE AWARENESS OF THE SERIOUS
MEDICAL PROBLEMS CAUSED BY SDB.
- -6-
PRODUCTS
OUR PORTFOLIO OF PRODUCTS FOR THE TREATMENT OF OSA AND OTHER FORMS OF SDB
INCLUDES AIRFLOW GENERATORS, DIAGNOSTIC PRODUCTS, MASK SYSTEMS, HEADGEAR AND
OTHER ACCESSORIES.
AIR FLOW GENERATORS
WE PRODUCE CPAP, VPAP AND AUTOSET SYSTEMS FOR THE DIAGNOSIS, TITRATION AND
TREATMENT OF SDB. THE FLOW GENERATOR SYSTEMS DELIVER POSITIVE AIRWAY PRESSURE
THROUGH A SMALL NASAL MASK (OR SOMETIMES A FULL-FACE MASK).
OUR VPAP UNITS DELIVER ULTRA-QUIET, COMFORTABLE BILEVEL THERAPY. THERE ARE TWO
PRESET PRESSURES: A HIGHER PRESSURE AS THE PATIENT BREATHES IN, AND A LOWER
PRESSURE AS THE PATIENT BREATHES OUT. BREATHING OUT AGAINST A LOWER PRESSURE
MAKES TREATMENT MORE COMFORTABLE, PARTICULARLY FOR PATIENTS WHO NEED HIGH
PRESSURE LEVELS OR FOR THOSE WITH IMPAIRED BREATHING ABILITY.
AUTOSET SYSTEMS ARE BASED ON A PROPRIETARY TECHNOLOGY TO MONITOR BREATHING AND
CAN ALSO BE USED IN THE DIAGNOSIS, TREATMENT AND MANAGEMENT OF OSA. CPAP AND
VPAP AIR FLOW GENERATORS, TOGETHER WITH OUR DIAGNOSTIC PRODUCTS, ACCOUNTED FOR
APPROXIMATELY 54%, 58% AND 57% OF OUR NET REVENUES IN FISCAL YEARS 2003, 2002
AND 2001, RESPECTIVELY.
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AIR FLOW Description Date of
Generators Commercial
Introduction
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VPAP:
VPAP II Bilevel portable device providing March 1996
different pressure levels for inhalation and
exhalation, improved pressure switching and
reduced noise output and spontaneous breath
triggering
COMFORT. . . . . Bilevel device with limited features. March 1996
VPAP II ST . . . Bilevel portable device with spontaneous and April 1996
spontaneous/timed breath triggering modes
of operation.
VPAP II ST A . . Bilevel device with alarms. August 1998
VPAP MAX+. . . . Bilevel ventilatory support system for the November 1998
treatment of adult patients with respiratory
insufficiency or respiratory failure.
Moritz S#. . . . Bilevel portable device providing different October 2001*
pressure levels for inhalation and
exhalation with integrated humidifier
Moritz ST# . . . Bilevel ST device with spontaneous and October 2001*
spontaneous/timed breath triggering modes of
operation, and with power failure alarms, system
with integrated humidifier.
VPAP III . . . . Updated Bilevel Portable device encompassing April 2003
improved pressure synchronization, spontaneous
breath triggering and reduced noise.
VPAP III ST. . . Updated Bilevel ST Portable device encompassing April 2003
improved pressure synchronization, spontaneous
and spontaneous/timed breath triggering modes
of operation and reduced noise.
AutoSet:
AutoSet CS#. . . Delivers varying degrees of ventilatory assistance December 1998
to stabilize breathing and reduce Cheyne
Stokes respiration in congestive heart failure
patients.
AutoSet T. . . . Autotitrating device, which continually adjusts March 1999
CPAP treatment pressure based on patient airway
resistance.
AutoSet Spirit . Modular, autotitrating device with optional September 2001
integrated humidifier.
Magellan#. . . . Autotitrating device using airway resistance March 2003*
measurement.
CPAP:
Max II nCPAP#. . Continuous Positive Pressure flow Generator April 1997*
available with or without integrated humidifier.
Features low noise and reduced pressure swings
Minni Max nCPAP# CPAP device with integrated and attachable March 2000
humidifier and low noise levels.
ResMed S6 series Quiet, compact CPAP device with various June 2000
comfort features.
ResMed S7 series Continuous Positive Pressure flow generator July 2002
With integrated humidifier.
- -------------------------------------------------------------------------------------
*MAP product, not approved for marketing in the United States.
+ Sold in USA only
# Sold outside USA only
- -7-
MASK SYSTEMS
MASK SYSTEMS ARE ONE OF THE MOST IMPORTANT ELEMENTS OF SDB TREATMENT SYSTEMS.
MASKS ARE A PRIMARY DETERMINANT OF PATIENT COMFORT AND AS SUCH MAY DRIVE OR
IMPEDE PATIENT COMPLIANCE WITH THERAPY. WE HAVE BEEN A CONSISTENT INNOVATOR IN
MASKS, IMPROVING PATIENT COMFORT WHILE MINIMIZING SIZE AND WEIGHT. MASKS,
ACCESSORIES AND MOTORS ACCOUNTED FOR APPROXIMATELY 46%, 42% AND 43% OF OUR NET
REVENUES IN FISCAL YEARS 2003, 2002 AND 2001, RESPECTIVELY.
- --------------------------------------------------------------------------------
Date of
Mask Description Commercial
Products Introduction
- --------------------------------------------------------------------------------
Mirage Mask Proprietary mask design August 1997
with a contoured nasal
cushion that adjusts to
patient's facial contours.
Quiet, light and low profile.
Ultra Mirage Mask. . Advanced version of the June 2000
Mirage system with
reduced noise characteristics and
improved forehead bridge.
Mirage Full Face Mask Mirage-based full-face October 2001
Series 2 mask system. Provides an
effective method of
applying ventilatory assist
Non-invasive Positive
Pressure Ventilation
therapy. Can be used
to address mouth-breathing
problems in conventional
bilevel or CPAP therapy.
Papillon Mask# Nasal mask with only four April 2002*
major parts, allows
simplified handling for
patients and distributors.
Mirage Vista.Mask . . . . . Small nasal mask without November 2002
.. . . . . . . . . . . . . . forehead supports.
- --------------------------------------------------------------------------------
* MAP product, not approved for marketing in the United States.
+ Sold in USA only
# Sold outside USA only
DIAGNOSTIC PRODUCTS
WE MARKET SLEEP RECORDERS FOR THE DIAGNOSIS AND TITRATION OF SDB IN SLEEP
CLINICS AND HOSPITALS. THESE DIAGNOSTIC SYSTEMS RECORD RELEVANT RESPIRATORY AND
SLEEP DATA, WHICH CAN BE ANALYZED BY A SLEEP SPECIALIST OR PHYSICIAN WHO CAN
THEN TAILOR AN APPROPRIATE OSA TREATMENT REGIMEN FOR THE PATIENT.
- ---------------------------------------------------------------------------------------------------------------
Diagnostic Products Description Date of
Commercial
Introduction
- ---------------------------------------------------------------------------------------------------------------
Poly-MESAM Portable+ Diagnostic System+. . . . Configurable cardio-respiratory February 1995*
.. . . . . . . . . . . . . . . . . . . . . . . . polygraphy system up to 8 channels,
. . . . . . . . . . . . . . . . . . . . . . . .includes ECG, thorax and abdomen
.. . . . . . . . . . . . . . . . . . . . . . . . belts, PLMS sensor.
MEPAL Diagnostic+.System . . . . . . . . . . . .Polysomnography system designed for February 1999*
. . . . . . . . . . . . . . . . . . . . . . . .use in the sleep laboratory.
ResControl Device to permit remote monitoring and September 1999
adjustment of ResMed CPAP, VPAP,
and AutoSet T air flow generators. An
internal pressure transducer enables the
clinician to interface with
polysomnography to monitor airflow in
. . . . . . . . . . . . . . . . . . . . . . . .both titration and diagnostic studies.
Embla+ Digital sleep recorder that provides
comprehensive sleep diagnosis in a sleep
.. . . . . . . . . . . . . . . . . . . . . . . . laboratory. October 1999
Embletta+. Pocket-size digital recorder that November 2000
. . . . . . . . . . . . . . . . . . . . . . . .performs ambulatory sleep studies.
MEPAL mobil+ Diagnostic System . . . . . . . . .Ambulatory polysomnography system. March 2001*
- ---------------------------------------------------------------------------------------------------------------
*MAP product, not approved for marketing in the United States.
+Not manufactured by ResMed.
- -8-
ACCESSORIES AND OTHER PRODUCTS
TO ENHANCE PATIENT COMFORT, CONVENIENCE AND COMPLIANCE, WE MARKET A VARIETY OF
OTHER PRODUCTS AND ACCESSORIES. THESE PRODUCTS INCLUDE HUMIDIFIERS, SUCH AS THE
HUMIDAIRE AND H2I, WHICH CONNECT DIRECTLY WITH THE CPAP, VPAP AND AUTOSET FLOW
GENERATORS TO HUMIDIFY AND HEAT THE AIR DELIVERED TO THE PATIENT. THEIR USE
PREVENTS THE DRYING OF NASAL PASSAGES THAT CAN CAUSE DISCOMFORT. OTHER OPTIONAL
ACCESSORIES INCLUDE COLD PASSOVER HUMIDIFIERS, CARRY BAGS AND BREATHING
CIRCUITS. MAP ALSO OFFERS A RANGE OF ACCESSORIES, INCLUDING THE TWISTER REMOTE,
AN INTELLIGENT REMOTE CONTROL FOR USE IN THE SLEEP LAB ENVIRONMENT TO SET AND
MONITOR FLOW GENERATORS, THE AERO-CLICK CONNECTION SYSTEM, WHICH ALLOWS A QUICK,
SIMPLE CONNECT/DISCONNECT BETWEEN THE MASK AND CPAP AIR DELIVERY SOURCE AND THE
AEROFIX HEADGEAR, FOR THE COMFORTABLE ADJUSTMENT OF MASKS FOR CPAP THERAPY.
SINCE THE MAY 2002 ACQUISITION OF SERVO MAGNETICS INC., WE HAVE SOLD CUSTOM
ELECTRIC MOTORS, PRIMARILY FOR USE IN DATA STORAGE AND AEROSPACE APPLICATIONS.
PRODUCT DEVELOPMENT AND CLINICAL TRIALS
WE HAVE A STRONG TRACK RECORD IN INNOVATION IN THE SLEEP MARKET. IN 1989, WE
INTRODUCED OUR FIRST CPAP DEVICE. SINCE THEN WE HAVE BEEN COMMITTED TO AN
ONGOING PROGRAM OF PRODUCT ADVANCEMENT AND DEVELOPMENT. CURRENTLY, OUR PRODUCT
DEVELOPMENT EFFORTS ARE FOCUSED ON NOT ONLY IMPROVING OUR CURRENT PRODUCT
OFFERINGS, BUT ALSO EXPANDING INTO NEW PRODUCT APPLICATIONS. FOR EXAMPLE, IN
1997, WE INTRODUCED THE MIRAGE MASK. THIS MASK WAS BASED ON THE INNOVATIVE
BUBBLE MASK TECHNOLOGY INTRODUCED IN 1991, WHICH USED THE PRINCIPLE OF AIR
INFLATION OF THE MASK CUSHION TO CREATE A MORE COMFORTABLE AND BETTER SEAL BY
BETTER CONFORMING TO PATIENT FACIAL CONTOURS.
IN 1999, WE INTRODUCED THE AUTOSET T FLOW GENERATOR, AN AUTOTITRATING DEVICE
THAT ADAPTS TO THE PATIENT'S BREATHING PATTERNS TO EFFECTIVELY PREVENT APNEAS.
IN 2001, WE INTRODUCED OUR NEXT GENERATION AUTOTITRATING DEVICE, THE AUTOSET
SPIRIT. THE AUTOSET SPIRIT IS AN AUTOTITRATING MODULAR DEVICE WITH OPTIONAL
INTEGRATED HUMIDIFIER. CURRENTLY, WE ARE BRINGING TO MARKET THE ACTIVA NASAL
MASK USING OUR PATENTED ACTIVE CUSHION TECHNOLOGY, WHICH AUTOMATICALLY SEALS
MASK LEAKS. WE ARE ALSO ABOUT TO LAUNCH OUR IMPROVED AUTOSET CS II (OUTSIDE THE
U.S. ONLY) TO TREAT CONGESTIVE HEART FAILURE PATIENTS WITH SIGNIFICANT CENTRAL
SLEEP APNEA.
WE CONTINUALLY SEEK TO IDENTIFY NEW APPLICATIONS OF OUR TECHNOLOGY FOR
SIGNIFICANT UNMET MEDICAL NEEDS. SDB IS ASSOCIATED WITH A NUMBER OF SYMPTOMS
BEYOND EXCESSIVE DAYTIME SLEEPINESS AND IRRITABILITY. RECENT STUDIES HAVE
ESTABLISHED A CLINICAL ASSOCIATION BETWEEN SDB AND HYPERTENSION, STROKE, AND
CONGESTIVE HEART FAILURE. WE SUPPORT CLINICAL TRIALS IN THE UNITED STATES,
GERMANY, FRANCE, THE UNITED KINGDOM AND AUSTRALIA TO DEVELOP NEW CLINICAL
APPLICATIONS FOR OUR TECHNOLOGY.
WE CONSULT WITH PHYSICIANS AT MAJOR SLEEP CENTERS THROUGHOUT THE WORLD TO
IDENTIFY TECHNOLOGICAL TRENDS IN THE TREATMENT OF SDB. SOME OF THESE PHYSICIANS
CURRENTLY SERVE ON OUR MEDICAL ADVISORY BOARD. NEW PRODUCT IDEAS ARE ALSO
IDENTIFIED BY OUR MARKETING STAFF, DIRECT SALES FORCE, NETWORK OF DISTRIBUTORS,
MANUFACTURERS' REPRESENTATIVES, CUSTOMERS, AND PATIENTS. TYPICALLY, OUR INTERNAL
DEVELOPMENT STAFF THEN PERFORM NEW PRODUCT DEVELOPMENT.
IN FISCAL YEARS 2003, 2002 AND 2001, WE INVESTED $20.5 MILLION, $14.9 MILLION
AND $11.1 MILLION, RESPECTIVELY, ON RESEARCH AND DEVELOPMENT.
- -9-
SALES AND MARKETING
WE CURRENTLY MARKET OUR PRODUCTS IN OVER 60 COUNTRIES USING A NETWORK OF
DISTRIBUTORS, INDEPENDENT MANUFACTURERS' REPRESENTATIVES AND OUR DIRECT SALES
FORCE. WE ATTEMPT TO TAILOR OUR MARKETING APPROACH TO EACH NATIONAL MARKET,
BASED ON REGIONAL AWARENESS OF SDB AS A HEALTH PROBLEM, PHYSICIAN REFERRAL
PATTERNS, CONSUMER PREFERENCES AND LOCAL REIMBURSEMENT POLICIES.
NORTH AMERICA AND LATIN AMERICA. OUR PRODUCTS ARE TYPICALLY PURCHASED BY A HOME
HEALTHCARE DEALER WHO THEN SELLS THE PRODUCTS TO THE PATIENT. THE DECISION TO
PURCHASE OUR PRODUCTS, AS OPPOSED THOSE OF OUR COMPETITORS, IS MADE OR
INFLUENCED BY ONE OR MORE OF THE FOLLOWING INDIVIDUALS OR ORGANIZATIONS: THE
PRESCRIBING PHYSICIAN AND HIS OR HER STAFF, THE HOME HEALTHCARE DEALER, THE
INSURER AND THE PATIENT. IN THE UNITED STATES, OUR SALES AND MARKETING
ACTIVITIES ARE CONDUCTED THROUGH A FIELD SALES ORGANIZATION MADE UP OF REGIONAL
TERRITORY REPRESENTATIVES, PROGRAM DEVELOPMENT SPECIALISTS, REGIONAL SALES
DIRECTORS, AND INDEPENDENT MANUFACTURERS' REPRESENTATIVES. OUR UNITED STATES
FIELD SALES ORGANIZATION MARKETS AND SELLS PRODUCTS TO MORE THAN 4,000 HOME
HEALTH CARE DEALER BRANCH LOCATIONS THROUGHOUT THE UNITED STATES. OUR DIRECT
SALES FORCE RECEIVES A BASE SALARY, PLUS COMMISSIONS, WHILE OUR INDEPENDENT
SALES REPRESENTATIVES RECEIVE HIGHER COMMISSIONS, BUT NO BASE SALARY.
WE ALSO PROMOTE AND MARKET OUR PRODUCTS DIRECTLY TO SLEEP CLINICS. PATIENTS WHO
ARE DIAGNOSED WITH OSA AND PRESCRIBED CPAP TREATMENT ARE TYPICALLY REFERRED BY
THE DIAGNOSING SLEEP CLINIC TO A HOME HEALTH CARE DEALER TO FILL THE
PRESCRIPTION. THE HOME HEALTH CARE DEALER, IN CONSULTATION WITH THE REFERRING
PHYSICIAN, WILL ASSIST THE PATIENT IN SELECTING THE EQUIPMENT, FIT THE PATIENT
WITH THE APPROPRIATE MASK AND SET THE FLOW GENERATOR PRESSURE TO THE PRESCRIBED
LEVEL. IN THE UNITED STATES, OUR SALES EMPLOYEES AND MANUFACTURERS'
REPRESENTATIVES ARE MANAGED BY TWO REGIONAL SALES DIRECTORS, OUR VICE PRESIDENT
OF SALES AND OUR CHIEF OPERATING OFFICER FOR THE AMERICAS.
OUR CANADIAN AND LATIN AMERICAN SALES ARE CONDUCTED THROUGH INDEPENDENT
DISTRIBUTORS. SALES IN NORTH AND LATIN AMERICA ACCOUNTED FOR 48%, 49% AND 52%
OF OUR NET REVENUES FOR FISCAL YEARS 2003, 2002 AND 2001, RESPECTIVELY.
EUROPE. WE MARKET OUR PRODUCTS IN MOST MAJOR EUROPEAN COUNTRIES. WE HAVE
WHOLLY OWNED SUBSIDIARIES IN GERMANY, FRANCE, UNITED KINGDOM, SPAIN,
SWITZERLAND, NETHERLANDS, AUSTRIA, SWEDEN AND FINLAND AND WE USE INDEPENDENT
DISTRIBUTORS TO SELL OUR PRODUCTS IN OTHER AREAS OF EUROPE. DISTRIBUTORS ARE
SELECTED IN EACH COUNTRY BASED ON THEIR KNOWLEDGE OF RESPIRATORY MEDICINE AND A
COMMITMENT TO SDB THERAPY. IN EACH COUNTRY IN WHICH WE HAVE A SUBSIDIARY, A
LOCAL SENIOR MANAGER IS RESPONSIBLE FOR DIRECT NATIONAL SALES.
OUR EXECUTIVE VICE PRESIDENT IS RESPONSIBLE FOR COORDINATION OF ALL EUROPEAN
ACTIVITIES AND, IN CONJUNCTION WITH LOCAL MANAGEMENT, THE DIRECT SALES ACTIVITY
IN EUROPE. SALES IN EUROPE ACCOUNTED FOR 42%, 42% AND 39% OF OUR TOTAL NET
REVENUES FOR FISCAL YEARS 2003, 2002 AND 2001, RESPECTIVELY.
AUSTRALIA/REST OF WORLD. MARKETING IN AUSTRALIA AND THE REST OF THE WORLD IS
THE RESPONSIBILITY OF OUR EXECUTIVE VICE PRESIDENT. SALES IN AUSTRALIA AND THE
REST OF THE WORLD ACCOUNTED FOR 10%, 9% AND 9% OF OUR TOTAL NET REVENUES FOR THE
FISCAL YEARS ENDED JUNE 30, 2003, 2002 AND 2001, RESPECTIVELY.
- -10-
OTHER MARKETING EFFORTS. IN ADDITION TO OUR, AND OUR DISTRIBUTOR'S SALES
EFFORTS, WE WORK WITH THE FOLLOWING CARDIOVASCULAR DISEASE ASSOCIATIONS
(CARDIOVASCULAR DISEASE INCLUDES CORONARY ARTERY DISEASE, CONGESTIVE HEART
FAILURE, HYPERTENSION, STROKE, AND TRANSIENT ISCHEMIC ATTACKS) TO RAISE
AWARENESS OF THE CO-MORBIDITY OF SDB IN CARDIOVASCULAR DISEASE PATIENTS:
(I) NATIONAL STROKE ASSOCIATION. WE HAVE DEVELOPED A STRATEGIC ALLIANCE WITH
THE NATIONAL STROKE ASSOCIATION TO INCREASE AWARENESS ABOUT THE HIGH PREVALENCE
OF SDB IN THE STROKE SURVIVOR POPULATION.
(II) AMERICAN HEART ASSOCIATION. WE ARE WORKING CLOSELY WITH THE WESTERN
AFFILIATES OF THE AMERICAN HEART ASSOCIATION ON A NUMBER OF LOCAL PROGRAMS TO
INCREASE AWARENESS AND EDUCATION ABOUT SDB. WE ARE ALSO IN DISCUSSIONS WITH THE
NATIONAL AMERICAN HEART/AMERICAN STROKE ASSOCIATIONS REGARDING NATIONAL PROGRAMS
INITIALLY TARGETING CLINICIANS ON THE IMPACT OF SDB ON BOTH HEART DISEASE AND
STROKE PATIENTS, AS WELL AS ITS ROLE IN THE DEVELOPMENT OF HYPERTENSION, A MAJOR
RISK FACTOR FOR BOTH HEART DISEASE AND STROKE.
(III) NATIONAL SLEEP FOUNDATION. THE NATIONAL SLEEP FOUNDATION IS A NON-PROFIT
ORGANIZATION DEDICATED TO IMPROVING PUBLIC HEALTH AND SAFETY BY RAISING THE
LEVEL OF AWARENESS AND EDUCATION TOWARD SLEEP RELATED PROGRAMS AND RESEARCH. WE
HAVE BEEN AN ACTIVE CORPORATE PARTNER AND HAVE SUPPORTED THE NATIONAL SLEEP
FOUNDATION FOR A NUMBER OF YEARS.
STRATEGIC ALLIANCES
GUIDANT CORPORATION. THE GUIDANT CORPORATION IS A WORLD LEADER IN THE TREATMENT
OF CARDIAC AND VASCULAR DISEASE. GUIDANT AND RESMED HAVE ENTERED INTO AN
AGREEMENT PURSUANT TO WHICH THE COMPANIES WILL WORK TOGETHER IN THE AREAS OF
SLEEP-DISORDERED BREATHING AND CARDIAC RHYTHM DISORDERS, DISEASE STATES WITH A
SIGNIFICANT PATIENT POPULATION OVERLAP. THE COMPANIES PLAN TO CO-MARKET TO EACH
OTHER'S PHYSICIAN PARTNERS AND CUSTOMERS, AND TO COLLABORATE ON RESEARCH AND
DEVELOPMENT PROJECTS, CLINICAL STUDIES, AS WELL AS PHYSICIAN AND PATIENT
EDUCATION.
MEDCATH CORPORATION. MEDCATH DEVELOPS, OWNS, AND OPERATES HOSPITALS IN
PARTNERSHIP WITH CARDIOLOGISTS AND CARDIOVASCULAR SURGEONS. OUR ALLIANCE WILL
ALLOW MEDCATH TO OFFER SDB SCREENING, DIAGNOSIS, AND TREATMENT IN CONJUNCTION
WITH SERVICES CURRENTLY OFFERED THROUGH THE COMPANY'S CARDIOVASCULAR DIAGNOSTIC
CENTERS.
MEDCARE. MEDCARE IS A GLOBAL LEADER PROVIDING SLEEP DIAGNOSTIC SOLUTIONS TO
SLEEP SERVICE PROVIDERS AND OTHER PROFESSIONALS PRACTICING SLEEP MEDICINE.
MEDCARE OFFERS A BROAD RANGE OF SOLUTIONS INCLUDING THE EMBLA /SOMNOLOGICA AND
REMBRANDT SLEEP SYSTEMS. MEDCARE PRODUCTS ARE DISTRIBUTED TO OVER 50 COUNTRIES
WORLDWIDE. WE DISTRIBUTE MEDCARE PRODUCTS IN SELECTED COUNTRIES AND WE HAVE A
CO-MARKETING AGREEMENT WITH MEDCARE FOR THE U.S. AND GERMAN MARKETS.
WE BELIEVE THAT OUR AFFILIATIONS AND CONTINUED WORK WITH THESE ORGANIZATIONS
RAISES THE AWARENESS OF SDB AS A SIGNIFICANT HEALTH CONCERN.
MANUFACTURING
OUR PRINCIPAL MANUFACTURING FACILITIES ARE LOCATED IN SYDNEY, AUSTRALIA AND
COMPRISE A 120,000 SQUARE FEET MANUFACTURING AND RESEARCH AND DEVELOPMENT
FACILITY. WE ALSO RENT SOME SPACE IN NEARBY BUILDINGS. WE ARE IN THE PROCESS
OF BUILDING A NEW 215,000 SQUARE FEET MANUFACTURING FACILITY IN SYDNEY, DUE TO
BE COMPLETED IN THE FIRST HALF OF CALENDAR 2004. OUR MANUFACTURING OPERATIONS
CONSIST PRIMARILY OF ASSEMBLY AND TESTING OF OUR FLOW GENERATORS, MASKS AND
ACCESSORIES. OF THE NUMEROUS RAW MATERIALS, PARTS AND COMPONENTS PURCHASED FOR
ASSEMBLY OF OUR THERAPEUTIC AND DIAGNOSTIC SLEEP DISORDER PRODUCTS, MOST ARE
OFF-THE-SHELF ITEMS AVAILABLE FROM MULTIPLE VENDORS. WE GENERALLY MANUFACTURE
TO OUR INTERNAL SALES FORECASTS AND FILL ORDERS AS RECEIVED. OVER THE LAST TWO
YEARS THE MANUFACTURING PROCESSES HAVE BEEN TRANSFORMED ALONG WORLD CLASS
MANUFACTURING GUIDELINES TO FLOW LINES STAFFED BY DEDICATED TEAMS. EACH TEAM IS
RESPONSIBLE FOR MANUFACTURE AND QUALITY OF THEIR PRODUCT GROUP AND DECISIONS ARE
BASED ON PERFORMANCE AND QUALITY MEASURES INCLUDING CUSTOMER FEEDBACK.
- -11-
OUR QUALITY MANAGEMENT SYSTEM IS BASED UPON THE REQUIREMENTS OF ISO 9001,
EN46001 (EUROPEAN MEDICAL STANDARDS), FDA QUALITY SYSTEM REGULATIONS FOR MEDICAL
DEVICES (21 CFR PART 820) AND THE MEDICAL DEVICE DIRECTIVE (93/42/EEC). OUR
SYDNEY, AUSTRALIA FACILITY IS ACCREDITED TO ISO 9001 AND EN46001 AND OUR SAN
DIEGO, CALIFORNIA FACILITY IS ACCREDITED TO ISO 9002 AND EN46002. THESE TWO
SITES HAVE THIRD PARTY AUDITS CONDUCTED BY THE ISO CERTIFICATION BODIES AT
REGULAR INTERVALS.
OUR GERMAN MANUFACTURING OPERATION BASED IN MUNICH OPERATES IN A FACILITY OF
APPROXIMATELY 24,000 SQUARE FEET. THIS FACILITY IS ACCREDITED TO ISO 9001 AND
EN46001 AND PRIMARILY ASSEMBLES AND TESTS FLOW GENERATORS FOR SALE BY OUR
SUBSIDIARY MAP GMBH. APPROPRIATE QUALITY CONTROLS MONITOR AND MEASURE PRODUCT
ASSEMBLY AND PERFORMANCE.
IN ADDITION TO OUR AUSTRALIAN AND GERMAN MANUFACTURING OPERATIONS WE ALSO
MANUFACTURE HIGH QUALITY ELECTRIC MOTORS FOR BOTH OUR FLOW GENERATOR DEVICES AND
EXTERNAL CUSTOMERS, PRIMARILY IN THE DATA STORAGE AND AEROSPACE SECTORS, AT OUR
SERVO MAGNETICS INC. (SMI) FACILITY AT CANOGA PARK, CALIFORNIA. THE SMI
FACILITY IS APPROXIMATELY 35,500 SQUARE FEET.
THIRD-PARTY REIMBURSEMENT
THE COST OF MEDICAL CARE IN MANY OF THE COUNTRIES IN WHICH WE OPERATE IS FUNDED
IN SUBSTANTIAL PART BY GOVERNMENT AND PRIVATE INSURANCE PROGRAMS. ALTHOUGH WE
DO NOT GENERALLY RECEIVE PAYMENTS FOR OUR PRODUCTS DIRECTLY FROM THESE PAYERS,
OUR SUCCESS IN MAJOR MARKETS IS DEPENDENT UPON THE ABILITY OF PATIENTS TO OBTAIN
ADEQUATE REIMBURSEMENT FOR OUR PRODUCTS.
IN THE UNITED STATES, OUR PRODUCTS ARE PURCHASED PRIMARILY BY HOME HEALTH CARE
DEALERS, HOSPITALS OR SLEEP CLINICS, WHICH THEN INVOICE THIRD-PARTY PAYERS
DIRECTLY. DOMESTIC THIRD-PARTY PAYERS INCLUDE MEDICARE, MEDICAID, AND CORPORATE
HEALTH INSURANCE PLANS. THESE PAYERS MAY DENY REIMBURSEMENT IF THEY DETERMINE
THAT A DEVICE IS NOT USED IN ACCORDANCE WITH COST-EFFECTIVE TREATMENT METHODS,
OR IS EXPERIMENTAL, UNNECESSARY OR INAPPROPRIATE. THE LONG-TERM TREND TOWARDS
MANAGED HEALTH CARE, OR LEGISLATIVE PROPOSALS TO REFORM HEALTH CARE, COULD
CONTROL OR SIGNIFICANTLY INFLUENCE THE PURCHASE OF HEALTH CARE SERVICES AND
PRODUCTS AND COULD RESULT IN LOWER PRICES FOR OUR PRODUCTS.
IN THE UNITED STATES, WE SELL OUR PRODUCTS PRIMARILY TO HOME HEALTH CARE DEALERS
AND TO SLEEP CLINICS; WE DO NOT FILE CLAIMS AND BILL GOVERNMENTAL PROGRAMS AND
OTHER THIRD-PARTY PAYERS DIRECTLY FOR REIMBURSEMENT FOR OUR PRODUCTS.
NEVERTHELESS, WE ARE STILL SUBJECT TO LAWS AND REGULATIONS RELATING TO
GOVERNMENTAL PROGRAMS, AND ANY VIOLATION OF THESE LAWS AND REGULATIONS COULD
RESULT IN CIVIL AND CRIMINAL PENALTIES, INCLUDING FINES.
IN PARTICULAR, THE FEDERAL ANTI-KICKBACK LAW PROHIBITS PERSONS FROM KNOWINGLY
AND WILLFULLY SOLICITING, RECEIVING, OFFERING OR PROVIDING REMUNERATION,
DIRECTLY OR INDIRECTLY, TO INDUCE EITHER THE REFERRAL OF AN INDIVIDUAL, OR THE
FURNISHING, RECOMMENDING OR ARRANGING FOR A GOOD OR SERVICE, FOR WHICH PAYMENT
MAY BE MADE UNDER A FEDERAL HEALTHCARE PROGRAM SUCH AS THE MEDICARE AND MEDICAID
PROGRAMS. THE GOVERNMENT HAS INTERPRETED THIS LAW BROADLY TO APPLY TO THE
MARKETING AND SALES ACTIVITIES OF MANUFACTURERS AND DISTRIBUTORS LIKE US. MANY
STATES HAVE ADOPTED LAWS SIMILAR TO THE FEDERAL ANTI-KICKBACK LAW. WE ARE ALSO
SUBJECT TO OTHER FEDERAL AND STATE FRAUD LAWS APPLICABLE TO PAYMENT FROM ANY
THIRD-PARTY PAYER. THESE LAWS PROHIBIT PERSONS FROM KNOWINGLY AND WILLFULLY
FILING FALSE CLAIMS OR EXECUTING A SCHEME TO DEFRAUD ANY HEALTHCARE BENEFIT
PROGRAM, INCLUDING PRIVATE THIRD-PARTY PAYERS. THESE LAWS MAY APPLY TO
MANUFACTURERS AND DISTRIBUTORS WHO PROVIDE INFORMATION ON COVERAGE, CODING AND
REIMBURSEMENT OF THEIR PRODUCTS TO PERSONS WHO BILL THIRD-PARTY PAYERS. WE
CONTINUOUSLY STRIVE TO COMPLY WITH THESE LAWS AND BELIEVE THAT OUR ARRANGEMENTS
DO NOT VIOLATE THESE LAWS. LIABILITY MAY STILL ARISE FROM THE INTENTIONS OR
ACTIONS OF THE PARTIES WITH WHOM WE DO BUSINESS OR FROM A DIFFERENT GOVERNMENTAL
AGENCY INTERPRETATION OF THE LAWS.
- -12-
IN SOME FOREIGN MARKETS, SUCH AS SPAIN, FRANCE AND GERMANY, GOVERNMENT
REIMBURSEMENT IS CURRENTLY AVAILABLE FOR PURCHASE OR RENTAL OF OUR PRODUCTS,
HOWEVER, SUBJECT TO CONSTRAINTS SUCH AS PRICE CONTROLS OR UNIT SALES
LIMITATIONS. IN AUSTRALIA AND IN SOME OTHER FOREIGN MARKETS, THERE IS CURRENTLY
LIMITED OR NO REIMBURSEMENT FOR DEVICES THAT TREAT OSA.
SERVICE AND WARRANTY
WE GENERALLY OFFER ONE-TO-TWO YEAR LIMITED WARRANTIES ON OUR FLOW GENERATOR
PRODUCTS. WARRANTIES ON MASK SYSTEMS ARE FOR 90 DAYS. IN MOST MARKETS, WE RELY
ON OUR DISTRIBUTORS TO REPAIR OUR PRODUCTS WITH PARTS SUPPLIED BY US. IN THE
UNITED STATES, HOME HEALTH CARE DEALERS GENERALLY ARRANGE SHIPMENT OF PRODUCTS
TO OUR SAN DIEGO FACILITY FOR REPAIR.
WE RECEIVE RETURNS OF OUR PRODUCTS FROM THE FIELD FOR VARIOUS REASONS. WE
BELIEVE THAT THE LEVEL OF RETURNS EXPERIENCED TO DATE IS CONSISTENT WITH LEVELS
TYPICALLY EXPERIENCED BY MANUFACTURERS OF SIMILAR DEVICES. WE PROVIDE FOR
WARRANTIES AND RETURNS BASED ON HISTORICAL DATA.
COMPETITION
THE MARKETS FOR OUR PRODUCTS ARE HIGHLY COMPETITIVE. WE BELIEVE THAT THE
PRINCIPAL COMPETITIVE FACTORS IN ALL OF OUR MARKETS ARE PRODUCT FEATURES,
RELIABILITY AND PRICE. CUSTOMER SUPPORT, REPUTATION AND EFFICIENT DISTRIBUTION
ARE ALSO IMPORTANT FACTORS.
WE COMPETE ON A MARKET-BY-MARKET BASIS WITH VARIOUS COMPANIES, SOME OF WHICH
HAVE GREATER FINANCIAL, RESEARCH, MANUFACTURING AND MARKETING RESOURCES THAN
OURSELVES. IN THE UNITED STATES, OUR PRINCIPAL MARKET, RESPIRONICS, INC.,
DEVILBISS, A DIVISION OF SUNRISE MEDICAL INC., AND NELLCOR PURITAN BENNETT, A
SUBSIDIARY OF TYCO INC., ARE THE PRIMARY COMPETITORS FOR OUR CPAP PRODUCTS. OUR
PRINCIPAL EUROPEAN COMPETITORS ARE ALSO RESPIRONICS, DEVILBISS, AND NELLCOR
PURITAN BENNETT, AS WELL AS REGIONAL EUROPEAN MANUFACTURERS. THE DISPARITY
BETWEEN OUR RESOURCES AND THOSE OF OUR COMPETITORS MAY INCREASE AS A RESULT OF
THE RECENT TREND TOWARDS CONSOLIDATION IN THE HEALTH CARE INDUSTRY. IN
ADDITION, OUR PRODUCTS COMPETE WITH SURGICAL PROCEDURES AND DENTAL APPLIANCES
DESIGNED TO TREAT OSA AND OTHER SDB RELATED RESPIRATORY CONDITIONS. THE
DEVELOPMENT OF NEW OR INNOVATIVE PROCEDURES OR DEVICES BY OTHERS COULD RESULT IN
OUR PRODUCTS BECOMING OBSOLETE OR NONCOMPETITIVE, RESULTING IN A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ANY PRODUCT DEVELOPED BY US THAT GAINS REGULATORY CLEARANCE WILL HAVE TO COMPETE
FOR MARKET ACCEPTANCE AND MARKET SHARE. AN IMPORTANT FACTOR IN SUCH COMPETITION
MAY BE THE TIMING OF MARKET INTRODUCTION OF COMPETITIVE PRODUCTS. ACCORDINGLY,
THE RELATIVE SPEED WITH WHICH WE CAN DEVELOP PRODUCTS, COMPLETE CLINICAL TESTING
AND REGULATORY CLEARANCE PROCESSES AND SUPPLY COMMERCIAL QUANTITIES OF THE
PRODUCT TO THE MARKET ARE EXPECTED TO BE IMPORTANT COMPETITIVE FACTORS. IN
ADDITION, OUR ABILITY TO COMPETE WILL CONTINUE TO BE DEPENDENT ON THE EXTENT TO
WHICH WE ARE SUCCESSFUL IN PROTECTING OUR PATENTS AND OTHER INTELLECTUAL
PROPERTY.
- -13-
PATENTS AND PROPRIETARY RIGHTS AND RELATED LITIGATION
THROUGH OUR SUBSIDIARIES RESMED LIMITED, MEDIZINTECHNIK FUR ARZT UND PATIENT
GMBH AND SMI, WE OWN OR HAVE LICENSED RIGHTS TO 108 ISSUED UNITED STATES PATENTS
(INCLUDING 24 DESIGN PATENTS) AND 135 ISSUED FOREIGN PATENTS. IN ADDITION,
THERE ARE 139 PENDING UNITED STATES PATENT APPLICATIONS (INCLUDING 23 DESIGN
PATENT APPLICATIONS) AND 249 PENDING FOREIGN PATENT APPLICATIONS. SOME OF THESE
PATENTS AND PATENT APPLICATIONS RELATE TO SIGNIFICANT ASPECTS AND FEATURES OF
OUR PRODUCTS. THESE INCLUDE U.S. PATENTS RELATING TO OUR CPAP DEVICES, A DELAY
TIMER SYSTEM, THE BUBBLE MASK, AND AN AUTOMATED MEANS OF VARYING AIR PRESSURE
BASED UPON A PATIENT'S CHANGING NEEDS DURING NIGHTLY USE, SUCH AS THAT EMPLOYED
IN OUR AUTOSET DEVICE.
OF OUR PATENTS, FOUR UNITED STATES PATENTS AND THREE FOREIGN PATENTS ARE DUE TO
EXPIRE IN THE NEXT FIVE YEARS, WITH ONE FOREIGN PATENT DUE TO EXPIRE IN EACH OF
THE YEARS 2004, 2005 AND 2007 AND TWO UNITED STATES PATENTS IN 2007 AND ONE
UNITED STATES PATENT IN EACH OF THE YEARS 2005 AND 2008. WE BELIEVE THAT THE
EXPIRATION OF THESE PATENTS WILL NOT HAVE A MATERIAL ADVERSE IMPACT ON OUR
COMPETITIVE POSITION.
WE RELY ON A COMBINATION OF PATENTS, TRADE SECRETS, TRADE MARKS AND
NON-DISCLOSURE AGREEMENTS TO PROTECT OUR PROPRIETARY TECHNOLOGY AND RIGHTS. OUR
SUBSIDIARY, RESMED LIMITED, IS PURSUING INFRINGEMENT ACTIONS AGAINST A
COMPETITOR AND IS INVESTIGATING POSSIBLE INFRINGEMENT BY OTHERS. SEE ITEM 3 -
"LEGAL PROCEEDINGS".
ADDITIONAL LITIGATION MAY BE NECESSARY TO ATTEMPT TO ENFORCE PATENTS ISSUED TO
US, TO PROTECT OUR RIGHTS, OR TO DEFEND THIRD-PARTY CLAIMS OF INFRINGEMENT BY US
OF THE PROPRIETARY RIGHTS OF OTHERS. PATENT LAWS REGARDING THE ENFORCEABILITY
OF PATENTS VARY FROM COUNTRY TO COUNTRY. THEREFORE, THERE CAN BE NO ASSURANCE
THAT PATENT ISSUES WILL BE UNIFORMLY RESOLVED, OR THAT LOCAL LAWS WILL PROVIDE
US WITH CONSISTENT RIGHTS AND BENEFITS.
GOVERNMENT REGULATIONS
OUR PRODUCTS ARE SUBJECT TO EXTENSIVE REGULATION PARTICULARLY AS TO SAFETY,
EFFICACY AND ADHERENCE TO FDA QUALITY SYSTEM REGULATION, OR QSR, AND RELATED
MANUFACTURING STANDARDS. MEDICAL DEVICE PRODUCTS ARE SUBJECT TO RIGOROUS FDA AND
OTHER GOVERNMENTAL AGENCY REGULATIONS IN THE UNITED STATES AND REGULATIONS OF
RELEVANT FOREIGN AGENCIES ABROAD. THE FDA REGULATES THE INTRODUCTION,
MANUFACTURE, ADVERTISING, LABELING, PACKAGING, MARKETING, DISTRIBUTION, AND
RECORD KEEPING FOR SUCH PRODUCTS, IN ORDER TO ENSURE THAT MEDICAL PRODUCTS
DISTRIBUTED IN THE UNITED STATES ARE SAFE AND EFFECTIVE FOR THEIR INTENDED USE.
IN ADDITION, THE FDA IS AUTHORIZED TO ESTABLISH SPECIAL CONTROLS TO PROVIDE
REASONABLE ASSURANCE OF THE SAFETY AND EFFECTIVENESS OF MOST DEVICES. NON
COMPLIANCE WITH APPLICABLE REQUIREMENTS CAN RESULT IN IMPORT DETENTIONS, FINES,
CIVIL PENALTIES, INJUNCTIONS, SUSPENSIONS OR LOSSES OF REGULATORY APPROVALS,
RECALL OR SEIZURE OF PRODUCTS, OPERATING RESTRICTIONS, REFUSAL OF THE GOVERNMENT
TO APPROVE PRODUCT EXPORT APPLICATIONS OR ALLOW US TO ENTER INTO SUPPLY
CONTRACTS, AND CRIMINAL PROSECUTION.
THE FDA REQUIRES THAT A MANUFACTURER INTRODUCING A NEW MEDICAL DEVICE OR A NEW
INDICATION FOR USE OF AN EXISTING MEDICAL DEVICE OBTAIN EITHER A SECTION 510(K)
PREMARKET NOTIFICATION CLEARANCE OR A PREMARKET APPROVAL, OR PMA, PRIOR TO IT
BEING INTRODUCED INTO THE U.S. MARKET. OUR PRODUCTS CURRENTLY MARKETED IN THE
UNITED STATES ARE MARKETED IN RELIANCE ON 510(K) PRE-MARKETING CLEARANCES AS
EITHER CLASS I OR CLASS II DEVICES. THE PROCESS OF OBTAINING A SECTION 510(K)
CLEARANCE GENERALLY REQUIRES THE SUBMISSION OF PERFORMANCE DATA AND OFTEN
CLINICAL DATA, WHICH IN SOME CASES CAN BE EXTENSIVE, TO DEMONSTRATE THAT THE
DEVICE IS "SUBSTANTIALLY EQUIVALENT'' TO A DEVICE THAT WAS ON THE MARKET PRIOR
TO 1976 OR TO A DEVICE THAT HAS BEEN FOUND BY THE FDA TO BE "SUBSTANTIALLY
EQUIVALENT'' TO SUCH A PRE-1976 DEVICE. AS A RESULT, FDA APPROVAL REQUIREMENTS
MAY EXTEND THE DEVELOPMENT PROCESS FOR A CONSIDERABLE LENGTH OF TIME. IN
ADDITION, IN SOME CASES, THE FDA MAY REQUIRE ADDITIONAL REVIEW BY AN ADVISORY
PANEL, WHICH CAN FURTHER LENGTHEN THE PROCESS. THE PMA PROCESS, WHICH IS
RESERVED FOR NEW DEVICES THAT ARE NOT SUBSTANTIALLY EQUIVALENT TO ANY PREDICATE
DEVICE AND FOR HIGH RISK DEVICES OR THOSE THAT ARE USED TO SUPPORT OR SUSTAIN
HUMAN LIFE, MAY TAKE SEVERAL YEARS AND REQUIRES THE SUBMISSION OF EXTENSIVE
PERFORMANCE AND CLINICAL INFORMATION.
- -14-
AS A MEDICAL DEVICE MANUFACTURER, ALL OF OUR DOMESTIC AND AUSTRALIAN
MANUFACTURING FACILITIES ARE SUBJECT TO INSPECTION ON A ROUTINE BASIS BY THE
FDA. WE BELIEVE THAT OUR DESIGN, MANUFACTURING AND QUALITY CONTROL PROCEDURES
ARE IN SUBSTANTIAL COMPLIANCE WITH THE FDA'S REGULATORY REQUIREMENTS. MAP'S
FACILITIES ARE NOT SUBJECT TO FDA REGULATION, BECAUSE NONE OF MAP'S PRODUCTS IS
CURRENTLY MARKETED IN THE UNITED STATES.
SALES OF MEDICAL DEVICES OUTSIDE THE UNITED STATES ARE SUBJECT TO REGULATORY
REQUIREMENTS THAT VARY WIDELY FROM COUNTRY TO COUNTRY. APPROVAL FOR SALE OF OUR
MEDICAL DEVICES IN EUROPE IS THROUGH THE CE MARK PROCESS. WHERE APPROPRIATE,
OUR PRODUCTS ARE CE MARKED TO THE EUROPEAN UNION'S MEDICAL DEVICE DIRECTIVE.
UNDER THE CE MARKETING SCHEME, OUR PRODUCTS ARE CLASSIFIED AS EITHER CLASS I OR
CLASS II; OUR DEVICES ARE LISTED IN THE UNITED STATES WITH FDA; IN AUSTRALIA
WITH THE THERAPEUTIC GOODS ADMINISTRATION, OR TGA; AND IN CANADA WITH HEALTH
CANADA.
EMPLOYEES
AS OF JUNE 30, 2003, WE HAD 1,464 EMPLOYEES OR FULL TIME CONSULTANTS, OF WHICH
540 PERSONS WERE EMPLOYED IN WAREHOUSING AND MANUFACTURING, 252 IN RESEARCH AND
DEVELOPMENT, 672 IN SALES, MARKETING AND ADMINISTRATION. OF OUR EMPLOYEES AND
CONSULTANTS, 705 WERE LOCATED IN AUSTRALIA, 349 IN THE UNITED STATES, 363 IN
EUROPE AND 47 IN ASIA.
WE BELIEVE THAT THE SUCCESS OF OUR BUSINESS WILL DEPEND, IN PART, ON OUR ABILITY
TO ATTRACT AND RETAIN QUALIFIED PERSONNEL. NONE OF OUR EMPLOYEES IS COVERED BY
A COLLECTIVE BARGAINING AGREEMENT. WE BELIEVE THAT OUR RELATIONSHIP WITH OUR
EMPLOYEES IS GOOD.
MEDICAL ADVISORY BOARD
OUR MEDICAL ADVISORY BOARD, CONSISTS OF PHYSICIANS SPECIALIZING IN THE FIELD OF
SLEEP DISORDERED BREATHING. MEDICAL ADVISORY BOARD MEMBERS MEET AS A GROUP
TWICE A YEAR WITH MEMBERS OF OUR SENIOR MANAGEMENT AND MEMBERS OF OUR RESEARCH
AND MARKETING DEPARTMENTS TO ADVISE US ON TECHNOLOGY TRENDS IN SDB AND OTHER
DEVELOPMENTS IN SLEEP DISORDERS MEDICINE. MEDICAL ADVISORY BOARD MEMBERS ARE
ALSO AVAILABLE TO CONSULT ON AN AS-NEEDED BASIS WITH OUR SENIOR MANAGEMENT. IN
ALPHABETICAL ORDER, MEDICAL ADVISORY BOARD MEMBERS INCLUDE:
CLAUDIO BASSETTI, MD, IS A NEUROLOGIST WITH EXPERTISE IN SLEEP, SLEEP MEDICINE,
STROKE, AND CEREBROVASCULAR DISEASE. HE IS A LEADER IN STUDYING THE
IMPLICATIONS OF SDB ON STROKE AND IS HEAD OF THE NEUROLOGY OUTPATIENT CLINICS
AND VICE-CHAIRMAN OF THE NEUROLOGY DEPARTMENT AT THE UNIVERSITY HOSPITAL,
ZURICH. DR. BASSETTI IS A MEMBER OF THE AMERICAN ACADEMY OF NEUROLOGY, THE
AMERICAN SLEEP DISORDERS ASSOCIATION, AND EX-MEMBER OF THE SCIENTIFIC COMMITTEE
OF THE EUROPEAN SLEEP RESEARCH SOCIETY. HE IS ALSO A MEMBER OF BOARDS OF THE
SWISS SOCIETIES OF NEUROLOGY, NEUROSCIENCE AND SLEEP AND SITS ON THE EDITORIAL
BOARDS OF EUROPEAN NEUROLOGY, JOURNAL OF SLEEP RESEARCH, SLEEP MEDICINE, AND
SWISS ARCHIVES OF NEUROLOGY AND PSYCHIATRY. DR. BASSETTI HAS PRODUCED OVER 100
PUBLICATIONS.
- -15-
MICHAEL COPPOLA, MD IS A LEADING PULMONARY CRITICAL CARE AND SLEEP DISORDERS
PHYSICIAN AND IS PRESIDENT OF SPRINGFIELD MEDICAL ASSOCIATES, A MULTI-SPECIALTY
MEDICAL GROUP IN SPRINGFIELD, MASSACHUSETTS. HE IS AN ATTENDING PHYSICIAN AT
BAYSTATE MEDICAL CENTER AND MERCY HOSPITAL IN SPRINGFIELD, MASSACHUSETTS AND A
FELLOW OF THE AMERICAN COLLEGE OF CHEST PHYSICIANS. DR. COPPOLA IS ALSO THE
MEDICAL DIRECTOR OF SLEEP AVENUE, A SLEEP-DISORDERED BREATHING SPECIALTY
COMPANY, AND ASSOCIATE CLINICAL PROFESSOR OF MEDICINE AT TUFTS UNIVERSITY SCHOOL
OF MEDICINE.
TERENCE M. DAVIDSON, MD, FACS IS PROFESSOR OF SURGERY IN THE DIVISION OF
OTOLARYNGOLOGY - HEAD AND NECK SURGERY AT THE UNIVERSITY OF CALIFORNIA, SAN
DIEGO, SCHOOL OF MEDICINE. HE IS SECTION CHIEF OF HEAD AND NECK SURGERY AT THE
VETERANS ADMINISTRATION SAN DIEGO HEALTHCARE SYSTEM AND ASSOCIATE DEAN FOR
CONTINUING MEDICAL EDUCATION AT UCSD. HE IS ALSO DIRECTOR OF THE UCSD HEAD AND
NECK SURGERY SLEEP CLINIC IN LA JOLLA, CALIFORNIA.
ANTHONY N. DEMARIA, MD IS PROFESSOR OF MEDICINE AND CHIEF, DIVISION OF
CARDIOLOGY AT THE UNIVERSITY OF CALIFORNIA, SAN DIEGO, SPECIALIZING IN CARDIAC
IMAGING TECHNIQUES, PARTICULARLY ECHOCARDIOGRAPHY. HE IS A DIPLOMAT IN THE
AMERICAN BOARD OF INTERNAL MEDICINE AND IS BOARD CERTIFIED BY THE SUBSPECIALTY
BOARD IN CARDIOVASCULAR DISEASE. HE IS PAST PRESIDENT OF BOTH THE AMERICAN
COLLEGE OF CARDIOLOGY AND THE AMERICAN SOCIETY OF ECHOCARDIOGRAPHY. DR. DEMARIA
IS CURRENTLY THE EDITOR-IN-CHIEF OF THE JOURNAL OF THE AMERICAN COLLEGE OF
CARDIOLOGY AND HAS AUTHORED OR CO-AUTHORED OVER 400 ARTICLES FOR MEDICAL
JOURNALS.
NEIL J. DOUGLAS, MD, DSC, FRCP, IS PROFESSOR OF RESPIRATORY AND SLEEP MEDICINE,
UNIVERSITY OF EDINBURGH, AN HONORARY CONSULTANT PHYSICIAN, ROYAL INFIRMARY OF
EDINBURGH, AND DIRECTOR OF THE SCOTTISH NATIONAL SLEEP LABORATORY. HE IS VICE
PRESIDENT OF THE ROYAL COLLEGE OF PHYSICIANS OF EDINBURGH, CHAIRMAN OF THE
BRITISH SLEEP FOUNDATION, PAST CHAIRMAN OF THE BRITISH SLEEP SOCIETY, AND PAST
SECRETARY OF THE BRITISH THORACIC SOCIETY. DR. DOUGLAS HAS PUBLISHED OVER 200
PAPERS ON BREATHING DURING SLEEP.
NICHOLAS HILL, MD, IS PROFESSOR OF MEDICINE AT TUFTS UNIVERSITY SCHOOL OF
MEDICINE AND CHIEF, PULMONARY, CRITICAL CARE AND SLEEP DIVISION, TUFTS-NEW
ENGLAND MEDICAL CENTER IN BOSTON. HE IS A FELLOW AND CHAIR OF THE HOME CARE
NETWORK IN THE AMERICAN COLLEGE OF CHEST PHYSICIANS AND A MEMBER OF THE
LEADERSHIP COMMITTEE FOR THE PULMONARY CIRCULATION ASSEMBLY AND IS CHAIR ELECT
OF THE PROGRAM COMMITTEE FOR THE CRITICAL CARE ASSEMBLY OF THE AMERICAN THORACIC
SOCIETY. HE IS ALSO A MEMBER OF THE PLANNING AND PROGRAM REVIEW COMMITTEES OF
THE AMERICAN THORACIC SOCIETY. DR. HILL'S MAIN RESEARCH INTERESTS ARE IN THE
ACUTE AND CHRONIC APPLICATIONS OF NONINVASIVE POSITIVE PRESSURE VENTILATION FOR
TREATING LUNG DISEASE.
BARRY J. MAKE, MD, IS DIRECTOR, EMPHYSEMA CENTER AND PULMONARY REHABILITATION
NATIONAL JEWISH MEDICAL AND RESEARCH CENTER, AND PROFESSOR OF PULMONARY SCIENCES
AND CRITICAL CARE MEDICINE OF THE UNIVERSITY OF COLORADO SCHOOL OF MEDICINE. HE
HAS SERVED ON NUMEROUS NATIONAL AND INTERNATIONAL COMMITTEES FOR RESPIRATORY
DISEASES. DR. MAKE'S RESEARCH AND CLINICAL INVESTIGATIONS HAVE RESULTED IN A
LARGE NUMBER OF PUBLICATIONS ON MECHANISMS, TREATMENT, AND REHABILITATION OF
CHRONIC RESPIRATORY DISORDERS.
BARBARA PHILLIPS, MD, MSPH, FCCP, IS PROFESSOR OF PULMONARY, CRITICAL CARE, AND
SLEEP MEDICINE AT THE UNIVERSITY OF KENTUCKY COLLEGE OF MEDICINE. SHE DIRECTS
THE SLEEP CENTER, SLEEP CLINICS, AND SLEEP FELLOWSHIP AT THE SAMARITAN SLEEP
CENTER IN LEXINGTON, KENTUCKY. DR. PHILLIPS SERVES AS A BOARD MEMBER OF THE
AMERICAN ACADEMY OF SLEEP MEDICINE AND OF THE NATIONAL SLEEP FOUNDATION. SHE
HAS BEEN A RECIPIENT OF A SLEEP ACADEMIC AWARD FROM THE NATIONAL INSTITUTES OF
HEALTH, PRESIDENT OF THE AMERICAN BOARD OF SLEEP MEDICINE, AND A MEMBER OF THE
ADVISORY BOARD TO THE NATIONAL CENTER OF SLEEP DISORDERS RESEARCH. HER RESEARCH
INTERESTS ARE THE EPIDEMIOLOGY OF SLEEP-DISORDERED BREATHING AND SLEEP DISORDERS
IN THE AGED.
- -16-
HELMUT TESCHLER, MD, HELMUT TESCHLER, MD, IS ASSOCIATE PROFESSOR OF MEDICINE AND
HEAD OF THE DEPARTMENT OF RESPIRATORY MEDICINE, HIGH DEPENDENCY UNIT, AND CENTRE
OF SLEEP MEDICINE AT THE RUHRLANDKLINIK, MEDICAL FACULTY, UNIVERSITY OF ESSEN,
GERMANY. HE IS A FELLOW OF EACH OF THE FOLLOWING ASSOCIATIONS: GERMAN
PNEUMOLOGY SOCIETY, AMERICAN THORACIC SOCIETY, EUROPEAN RESPIRATORY SOCIETY AND
AMERICAN SLEEP DISORDERS ASSOCIATION.
J. WOODROW WEISS, MD, IS ASSOCIATE PROFESSOR OF MEDICINE AND CO-CHAIRMAN OF THE
DIVISION OF SLEEP MEDICINE AT HARVARD MEDICAL SCHOOL AS WELL AS CHIEF,
PULMONARY, CRITICAL CARE, AND SLEEP MEDICINE, BETH ISRAEL DEACONESS MEDICAL
CENTER, BOSTON, MASSACHUSETTS. HE IS AN INTERNATIONALLY RECOGNIZED RESEARCHER
IN SLEEP-DISORDERS MEDICINE.
B. TUCKER WOODSON, MD, FACS, IS PROFESSOR OF OTOLARYNGOLOGY AND COMMUNICATION
SCIENCES AT THE MEDICAL COLLEGE OF WISCONSIN, A DIPLOMAT OF THE AMERICAN ACADEMY
OF SLEEP MEDICINE, AND A FELLOW OF THE AMERICAN ACADEMY OF OTOLARYNGOLOGY - HEAD
AND NECK SURGERY AND THE AMERICAN COLLEGE OF SURGEONS. HE IS THE DIRECTOR OF
THE MEDICAL COLLEGE OF WISCONSIN/FROEDERT MEMORIAL LUTHERAN HOSPITAL CENTER FOR
SLEEP. DR. WOODSON ALSO SITS ON MULTIPLE COMMITTEES FOR THE AMERICAN ACADEMY OF
SLEEP MEDICINE AND AMERICAN ACADEMY OF OTOLARYNGOLOGY.
ITEM 2 PROPERTIES
OUR PRINCIPAL EXECUTIVE OFFICES AND U.S. DISTRIBUTION FACILITIES, CONSISTING OF
APPROXIMATELY 144,000 SQUARE FEET, ARE LOCATED IN POWAY (NORTH SAN DIEGO
COUNTY), CALIFORNIA IN A BUILDING WE OWN. WE LEASE FACILITIES FOR OUR
MANUFACTURING OPERATIONS AT NORTH RYDE, IN SYDNEY, AUSTRALIA IN A 120,000 SQUARE
FOOT FACILITY AND SOME SMALLER NEARBY BUILDINGS AND IN CANOGA PARK, CALIFORNIA
IN A 35,500 SQUARE FOOT FACILITY.
SALES AND WAREHOUSING FACILITIES ARE LEASED IN ABINGDON, ENGLAND;
MOENCHENGLADBACH, GERMANY; LYON, FRANCE; BASEL, SWITZERLAND; TROLLHAETTAN,
SWEDEN; HELSINKI, FINLAND AND SINGAPORE. PRIOR TO MOVING OUR EXECUTIVE OFFICES
AND DISTRIBUTION FACILITIES TO POWAY, CALIFORNIA, WE LEASED SPACE FOR THIS
PURPOSE IN SAN DIEGO, CALIFORNIA. OUR LEASE ON THOSE PREMISES EXPIRES IN 2005.
IN AUGUST 2000, WE BEGAN SUBLEASING THOSE PREMISES TO ANOTHER COMPANY.
MAP'S PRINCIPAL OFFICES ARE LOCATED IN MUNICH GERMANY IN A 45,000 SQUARE FOOT
FACILITY LEASED BY US. MAP'S SUBSIDIARIES ALSO LEASE SALES AND WAREHOUSE
FACILITIES IN LYSS, SWITZERLAND; VILLACH, AUSTRIA AND S'HERTOGENBOSCH, THE
NETHERLANDS.
IN APRIL 2002, WE PURCHASED A 30-ACRE SITE IN SYDNEY, AUSTRALIA ON WHICH WE ARE
DEVELOPING A NEW MANUFACTURING FACILITY DUE FOR COMPLETION IN FISCAL 2004.
CONSTRUCTION OF THE NEW MANUFACTURING PLANT COMMENCED IN JANUARY 2003 AND IS
CURRENTLY EXPECTED TO BE COMPLETED IN THE FIRST HALF OF CALENDAR 2004.
ITEM 3 LEGAL PROCEEDINGS
THE COMPANY WAS ENGAGED IN LITIGATION RELATING TO THE ENFORCEMENT AND DEFENSE OF
CERTAIN OF ITS PATENTS DURING THE FISCAL YEAR.
- -17-
1995 LITIGATION WITH RESPIRONICS. IN JANUARY 1995, OUR SUBSIDIARY, RESMED
LIMITED, FILED A COMPLAINT IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN
DISTRICT OF CALIFORNIA SEEKING MONETARY DAMAGES FROM AND INJUNCTIVE RELIEF
AGAINST RESPIRONICS, INC. FOR ALLEGED INFRINGEMENT OF THREE OF ITS PATENTS. IN
FEBRUARY 1995, RESPIRONICS FILED A COMPLAINT IN THE U.S. DISTRICT COURT FOR THE
WESTERN DISTRICT OF PENNSYLVANIA, IN PITTSBURGH, AGAINST RESMED LIMITED SEEKING
A DECLARATORY JUDGMENT THAT RESPIRONICS, INC. DOES NOT INFRINGE CLAIMS OF THESE
PATENTS AND THAT RESMED LIMITED'S PATENTS ARE INVALID AND UNENFORCEABLE. THE
RESPIRONICS COMPLAINT ALSO MADE THE UNIVERSITY OF SYDNEY A PARTY AS THE
UNIVERSITY OF SYDNEY IS THE ASSIGNEE OF ONE OF THE PATENTS IN SUIT; RESMED
LIMITED IS THE EXCLUSIVE LICENSEE OF THAT PATENT. THE TWO ACTIONS WERE COMBINED
AND ARE PROCEEDING IN THE WESTERN DISTRICT OF PENNSYLVANIA. IN JUNE 1996,
RESMED LIMITED FILED AN ADDITIONAL COMPLAINT AGAINST RESPIRONICS FOR
INFRINGEMENT OF A FOURTH RESMED PATENT, AND THAT COMPLAINT WAS CONSOLIDATED WITH
THE EARLIER ACTION.
THE COURT HAS GRANTED THREE PARTIAL SUMMARY JUDGMENT MOTIONS, FINDING THAT
RESPIRONICS DOES NOT INFRINGE THREE OF THE FOUR PATENTS AT ISSUE. IN DECEMBER
1999, IN RESPONSE TO THE COURT'S RULING ON RESPIRONICS, INC.'S THIRD SUMMARY
JUDGMENT MOTION, THE PARTIES JOINTLY STIPULATED TO A DISMISSAL OF CHARGES OF
INFRINGEMENT UNDER THE FOURTH RESMED PATENT, WITH RESMED RESERVING THE RIGHT TO
REASSERT THE CHARGES IN THE EVENT OF A FAVORABLE RULING ON APPEAL OF THE THIRD
PARTIAL SUMMARY JUDGMENT. ON SEPTEMBER 9, 2003, THE COURT VACATED THE SUMMARY
JUDGMENTS.
RESMED AND RESPIRONICS HAVE AGREED TO SETTLE THIS ACTION. RESMED AND
RESPIRONICS WILL DISMISS ALL CLAIMS IN THE ACTION WITH PREJUDICE.
2002 LITIGATION WITH FISHER & PAYKEL HEALTHCARE. ON AUGUST 26, 2002, RESMED
INC., RESMED CORP. AND RESMED LIMITED FILED A LAWSUIT IN U.S. DISTRICT COURT FOR
THE SOUTHERN DISTRICT OF CALIFORNIA, IN SAN DIEGO AGAINST FISHER & PAYKEL
HEALTHCARE INC AND FISHER & PAYKEL HEALTHCARE LIMITED ("FISHER & PAYKEL
HEALTHCARE"). RESMED'S AMENDED COMPLAINT SOUGHT A JUDGMENT THAT SELECTED FISHER
& PAYKEL HEALTHCARE MASK PRODUCTS INFRINGE PATENTS HELD BY RESMED. THE
COMPLAINT FURTHER CHARGED THE DEFENDANTS WITH THE COPYING OF RESMED PROPRIETARY
MASK TECHNOLOGY AND ALLEGES VIOLATIONS OF THE LANHAM ACT, TRADEMARK AND TRADE
DRESS INFRINGEMENT AND COMMON LAW VIOLATIONS RELATING TO THE APPEARANCE OF
RESMED MASK PRODUCTS.
ON MAY 6, 2003, RESMED AND FISHER & PAYKEL HEALTHCARE AGREED TO SETTLE THIS
PATENT INFRINGEMENT LAWSUIT. IN ACCORDANCE WITH THE SETTLEMENT, FISHER & PAYKEL
INTRODUCED A NEW DESIGN OF ITS MASK IN THE UNITED STATES BY AUGUST 1, 2003 AND
RESMED WILL NOT ASSERT INTELLECTUAL PROPERTY CLAIMS AGAINST THE NEW MASK. IN
ADDITION, FISHER & PAYKEL MAY CONTINUE TO SELL ITS EXISTING MASKS OUTSIDE THE
UNITED STATES UNTIL OCTOBER 1, 2003, UNDER LICENSE FROM RESMED, UNTIL IT
INTRODUCES THE NEW VERSION THERE. RESMED HAS DISMISSED THE LAWSUIT WITH
PREJUDICE.
2002 LITIGATION WITH RESPIRONICS. ON OCTOBER 11, 2002, RESMED INC, RESMED CORP,
AND RESMED LIMITED FILED A LAWSUIT IN U.S. DISTRICT COURT FOR THE SOUTHERN
DISTRICT OF CALIFORNIA, IN SAN DIEGO AGAINST RESPIRONICS, INC. RESMED'S SUIT
SEEKS A JUDGMENT THAT CERTAIN OF RESPIRONICS' MASK PRODUCTS (CONTOUR DELUXE,
COMFORT CLASSIC, COMFORT SELECT, AND IMAGE3 MASKS) INFRINGE PATENTS HELD BY
RESMED. THE COMPLAINT FURTHER CHARGES RESPIRONICS WITH COPYING RESMED'S
PROPRIETARY MASK TECHNOLOGY, AND ALLEGES VIOLATION OF THE LANHAM ACT, TRADEMARK
AND TRADE DRESS INFRINGEMENT, AND COMMON LAW VIOLATIONS RELATING TO THE
APPEARANCE OF RESMED'S MASK PRODUCTS. RESMED SEEKS AN INJUNCTION AND DAMAGES.
ON MARCH 4, 2003, THE COURT DENIED RESPIRONICS' MOTION TO TRANSFER THE CASE TO
THE U.S. DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA.
ON OCTOBER 16, 2002 RESPIRONICS, INC. FILED A LAWSUIT IN U.S. DISTRICT COURT FOR
THE WESTERN DISTRICT OF PENNSYLVANIA, IN PITTSBURGH, AGAINST RESMED LIMITED
SEEKING A DECLARATORY JUDGMENT THAT RESPIRONICS, INC. DOES NOT INFRINGE THE
PATENTS THAT ARE THE SUBJECT OF RESMED'S OCTOBER 11, 2002 COMPLAINT FILED IN SAN
DIEGO, THAT SUCH PATENTS ARE INVALID AND UNENFORCEABLE AND THAT RESPIRONICS HAS
NOT COMMITTED ANY OTHER TRADEMARK, TRADE DRESS OR COMMON LAW VIOLATIONS. ON
JULY 29, 2003, THE COURT ORDERED THE CASE TRANSFERRED TO THE US DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF CALIFORNIA.
- -18-
RESMED AND RESPIRONICS HAVE AGREED TO SETTLE BOTH LAWSUITS INVOLVED IN THE 2002
LITIGATION. RESMED AND RESPIRONICS WILL FILE A STIPULATION TO DISMISS ALL
CLAIMS IN THE ACTIONS WITH PREJUDICE.
OTHER LITIGATION. IN ADDITION TO THE MATTERS DESCRIBED ABOVE, IN THE NORMAL
COURSE OF BUSINESS, WE ARE SUBJECT TO ROUTINE LITIGATION INCIDENTAL TO OUR
BUSINESS. WHILE THE RESULTS OF THIS LITIGATION CANNOT BE PREDICTED WITH
CERTAINTY, WE BELIEVE THAT THEIR FINAL OUTCOME WILL NOT HAVE A MATERIAL ADVERSE
EFFECT ON OUR CONSOLIDATED FINANCIAL STATEMENTS TAKEN AS A WHOLE.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
- --------------------------------------------------------------------------------
PART II
- --------------------------------------------------------------------------------
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock commenced trading on June 2, 1995 on the NASDAQ National Market
under the symbol "RESM". On September 30, 1999, we transferred our primary
listing to the New York Stock Exchange (NYSE) under the symbol "RMD". The
following table sets forth for the fiscal periods indicated the high and low
closing prices for the common stock as reported by the New York Stock Exchange.
- ------------------------------------------------------------------
2003 2002
High Low High Low
- ------------------------------------------------------------------
Quarter One, ended September 30 $33.63 $24.89 $60.95 $45.90
Quarter Two, ended December 31. 34.13 27.63 61.75 50.47
Quarter Three, ended March 31 . 33.87 29.67 53.15 36.36
Quarter Four, ended June 30 . . 41.95 32.00 40.34 24.70
- ------------------------------------------------------------------
AS OF SEPTEMBER 5, 2003, THERE WERE 76 HOLDERS OF RECORD OF OUR COMMON STOCK.
WE HAVE NOT PAID ANY CASH DIVIDENDS ON OUR COMMON STOCK SINCE OUR INITIAL PUBLIC
OFFERING OF OUR COMMON STOCK AND WE DO NOT CURRENTLY INTEND TO PAY CASH
DIVIDENDS IN THE FORESEEABLE FUTURE. WE ANTICIPATE THAT ALL OF OUR EARNINGS AND
OTHER CASH RESOURCES, IF ANY, WILL BE RETAINED FOR THE OPERATION AND EXPANSION
OF OUR BUSINESS AND FOR GENERAL CORPORATE PURPOSES.
SALE OF UNREGISTERED SECURITIES
ON JUNE 20, 2001, WE ISSUED $150.0 MILLION OF 4% CONVERTIBLE SUBORDINATED NOTES
DUE 2006 TO INITIAL PURCHASERS INCLUDING MERRILL LYNCH AND DEUTSCHE BANC ALEX
BROWN INC., WILLIAM BLAIR & COMPANY, LLC, MACQUARIE BANK, AND UBS WARBURG LLC.
THE DISCOUNT TO THE INITIAL PURCHASERS ON THEIR PURCHASE OF THE NOTES WAS $4.7
MILLION. ON JULY 3, 2001, WE ISSUED AN ADDITIONAL $30.0 MILLION IN NOTES TO THE
INITIAL PURCHASERS UPON EXERCISE OF THE INITIAL PURCHASERS' OVER ALLOTMENT
OPTION, WITH AN ADDITIONAL DISCOUNT TO THE INITIAL PURCHASERS OF $0.9 MILLION.
THIS INCREASED THE TOTAL AMOUNT OF CONVERTIBLE SUBORDINATED NOTES ISSUED TO
$180.0 MILLION, WITH A TOTAL DISCOUNT TO THE INITIAL PURCHASERS OF $5.6 MILLION.
- -19-
DURING FISCAL 2003 AND 2002, WE REPURCHASED $10.0 MILLION AND $56.8 MILLION FACE
VALUE OF OUR CONVERTIBLE SUBORDINATED NOTES RESPECTIVELY. THE TOTAL PURCHASE
PRICE OF THE NOTES WAS $9.4 MILLION AND $49.1 MILLION, INCLUDING $0.2 MILLION
AND $0.6 MILLION IN ACCRUED INTEREST. WE RECOGNIZED A GAIN OF $0.3 MILLION AND
$4.0 MILLION, NET OF TAX OF $0.2 MILLION AND $2.5 MILLION, ON THESE
TRANSACTIONS. AT JUNE 30, 2003, WE HAD CONVERTIBLE SUBORDINATED NOTES
OUTSTANDING OF $113.25 MILLION.
THE NOTES AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THE NOTES (THE
"SECURITIES") WERE NOT REGISTERED UNDER THE SECURITIES ACT OR ANY OTHER STATE OR
FOREIGN SECURITIES LAWS AT THE TIME OF ISSUE. THE NOTES WERE OFFERED AND SOLD
ONLY TO "QUALIFIED INSTITUTIONAL BUYERS" AS DEFINED IN RULE 144A OR IN OFFSHORE
TRANSACTIONS OUTSIDE THE UNITED STATES THAT MET THE REQUIREMENTS OF RULE 903 OF
REGULATION S UNDER THE SECURITIES ACT.
THE SECURITIES WERE SUBSEQUENTLY REGISTERED FOR RESALE UNDER THE SECURITIES ACT
(REGISTRATION NO. 333-70500) EFFECTIVE OCTOBER 9, 2001; AND CONSEQUENTLY THE
SECURITIES MAY BE RESOLD IN ACCORDANCE WITH THE PROSPECTUS THAT IS PART OF THE
REGISTRATION STATEMENT BY THE SELLING SECURITY HOLDERS NAMED IN THE PROSPECTUS
OR A SUPPLEMENT TO THE PROSPECTUS. OTHER SALES OF THE SECURITIES MAY ONLY BE
MADE IN COMPLIANCE WITH THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND
ALL OTHER APPLICABLE SECURITIES LAWS, OR PURSUANT TO AN EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
AND ANY OTHER APPLICABLE SECURITIES LAWS.
THE NOTES ARE SUBJECT TO AN INDENTURE BETWEEN US AND AMERICAN STOCK TRANSFER &
TRUST COMPANY, AS TRUSTEE. THE NOTES ARE CONVERTIBLE, AT THE OPTION OF THE
HOLDER, AT ANY TIME ON OR PRIOR TO MATURITY, INTO SHARES OF OUR COMMON STOCK AT
A CONVERSION PRICE OF $60.60 PER SHARE, WHICH IS EQUAL TO A CONVERSION RATE OF
16.5017 SHARES PER $1,000 PRINCIPAL AMOUNT OF NOTES. THE CONVERSION PRICE IS
SUBJECT TO ADJUSTMENT. THE NOTES BEAR INTEREST AT 4% PER YEAR, PAYABLE
SEMIANNUALLY ON JUNE 20 AND DECEMBER 20 OF EACH YEAR.
WE MAY REDEEM SOME OR ALL OF THE NOTES AT ANY TIME BEFORE JUNE 20, 2004 AT A
REDEMPTION PRICE OF $1,000 PER $1,000 PRINCIPAL AMOUNT OF NOTES, PLUS ACCRUED
AND UNPAID INTEREST, IF ANY, TO THE REDEMPTION DATE, IF (A) THE CLOSING PRICE OF
OUR COMMON STOCK HAS EXCEEDED 150% OF THE CONVERSION PRICE THEN IN EFFECT FOR AT
LEAST 20 TRADING DAYS WITHIN A PERIOD OF 30 CONSECUTIVE TRADING DAYS ENDING ON
THE TRADING DAY BEFORE THE DATE OF MAILING OF THE PROVISIONAL REDEMPTION NOTICE
AND (B) A SHELF REGISTRATION STATEMENT COVERING RESALE OF THE NOTES AND THE
COMMON STOCK ISSUABLE UPON CONVERSION OF THE NOTES IS EFFECTIVE AND AVAILABLE
FOR USE AND EXPECTED TO REMAIN EFFECTIVE AND AVAILABLE FOR USE FOR THE 30 DAYS
FOLLOWING THE PROVISIONAL REDEMPTION DATE. UPON ANY SUCH PROVISIONAL
REDEMPTION, WE WILL MAKE AN ADDITIONAL PAYMENT IN CASH EQUAL TO $166.67 PER
$1,000 PRINCIPAL AMOUNT OF NOTES, LESS THE AMOUNT OF ANY INTEREST ACTUALLY PAID
ON THE NOTES BEFORE THE PROVISIONAL REDEMPTION DATE.
WE MAY ALSO REDEEM SOME OR ALL OF THE NOTES AT ANY TIME ON OR AFTER JUNE 20,
2004, BUT PRIOR TO JUNE 20, 2005, AT A REDEMPTION PRICE EQUAL TO 101.6% OF THE
PRINCIPAL AMOUNT OF NOTES REDEEMED AND AT ANY TIME AFTER JUNE 19, 2005, AT A
REDEMPTION PRICE EQUAL TO 100.8% OF THE PRINCIPAL AMOUNT OF NOTES REDEEMED, PLUS
IN ANY CASE, ACCRUED AND UNPAID INTEREST, IF ANY, TO THE REDEMPTION DATE, IF THE
CLOSING PRICE OF OUR COMMON STOCK HAS EXCEEDED 130% OF THE CONVERSION PRICE THEN
IN EFFECT FOR AT LEAST 20 TRADING DAYS WITHIN A PERIOD OF 30 CONSECUTIVE TRADING
DAYS ENDING ON THE TRADING DAY BEFORE THE DATE OF MAILING OF THE OPTIONAL
REDEMPTION NOTICE.
THE NOTES ARE GENERAL UNSECURED OBLIGATIONS AND ARE SUBORDINATED TO ALL OF OUR
EXISTING AND FUTURE SENIOR INDEBTEDNESS AND WILL BE EFFECTIVELY SUBORDINATED TO
ALL OF THE INDEBTEDNESS AND LIABILITIES OF OUR SUBSIDIARIES. THE INDENTURE
GOVERNING THE NOTES WILL NOT LIMIT THE INCURRENCE BY US OR OUR SUBSIDIARIES OF
SENIOR INDEBTEDNESS OR OTHER INDEBTEDNESS. THE NOTES MATURE ON JUNE 20, 2006.
- -20-
ON MAY 14, 2002, WE ISSUED 853,448 SHARES OF OUR COMMON STOCK TO ONE INDIVIDUAL
AS PARTIAL CONSIDERATION FOR OUR ACQUISITION OF SERVO MAGNETICS INCORPORATED.
WE RELIED ON THE EXEMPTION FROM REGISTRATION PROVIDED UNDER SECTION 4(2) OF THE
SECURITIES ACT OF 1933, AS AMENDED. NO SOLICITATION WAS MADE IN CONNECTION WITH
THIS ISSUANCE, OTHER THAN NEGOTIATION OF THE ACQUISITION, AND WE OBTAINED
REPRESENTATIONS FROM THE RECIPIENT REGARDING HIS INVESTMENT INTENT, EXPERIENCE
AND SOPHISTICATION. THESE SHARES WERE SUBSEQUENTLY REGISTERED FOR RESALE UNDER
THE SECURITIES ACT (REGISTRATION NO. 335-100825), EFFECTIVE MARCH 26, 2003; AND
CONSEQUENTLY THE SHARES MAY BE RESOLD IN ACCORDANCE WITH THE PROSPECTUS THAT WAS
PART OF THE REGISTRATION STATEMENT BY THE SELLING STOCKHOLDER NAMED IN THE
PROSPECTUS OR IN A SUPPLEMENT TO THE PROSPECTUS.
OTHER SALES OF THE SHARES MAY ONLY BE MADE IN COMPLIANCE WITH THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND ALL OTHER APPLICABLE SECURITIES LAWS, OR
PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY OTHER APPLICABLE
SECURITIES LAWS.
ITEM 6 SELECTED FINANCIAL DATA
The following table summarizes certain selected consolidated financial data for, and as of the end of, each of
the fiscal years in the five-year period ended June 30, 2003. The data set forth below should be read in
conjunction with the Consolidated Financial Statements and related Notes included elsewhere in this Report.
- ----------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME DATA: Years Ended June 30
- ---------------------------------------------- ----------------------------------------------------------------
(In thousands, except per share data) 2003 2002 2001 2000 1999
--------------------- --------- --------- --------- --------
Net revenues . . . . . . . . . . . . . . . . . $ 273,570 $204,076 $155,156 $115,615 $88,627
Cost of sales. . . . . . . . . . . . . . . . . 100,483 70,827 50,377 36,991 29,416
- ---------------------------------------------- --------------------- --------- --------- --------- --------
Gross profit . . . . . . . . . . . . . . . . . 173,087 133,249 104,779 78,624 59,211
- ---------------------------------------------- --------------------- --------- --------- --------- --------
Selling, general and administrative expenses . 85,313 64,481 49,364 36,987 27,414
Research and development expenses. . . . . . . 20,534 14,910 11,146 8,499 6,542
In-process research and development write off. - 350 17,677 - -
Donations to Research Foundations. . . . . . . - 2,349 - - -
Provision for restructure. . . . . . . . . . . - - 550 - -
- ---------------------------------------------- --------------------- --------- --------- --------- --------
Total operating expenses . . . . . . . . . . . 105,847 82,090 78,737 45,486 33,956
- ---------------------------------------------- --------------------- --------- --------- --------- --------
Income from operations . . . . . . . . . . . . 67,240 51,159 26,042 33,138 25,255
- ---------------------------------------------- --------------------- --------- --------- --------- --------
Other income (expenses):
Interest income (expense), net . . . . . . . . (2,549) (3,224) (762) 801 779
Government grants. . . . . . . . . . . . . . . - - 72 279 833
Other, net . . . . . . . . . . . . . . . . . . 1,907 108 1,962 (52) (2,290)
Gain on extinguishment of debt . . . . . . . . 529 6,549 - - -
- ---------------------------------------------- --------------------- --------- --------- --------- --------
Total other income (expenses). . . . . . . . . (113) 3,433 1,272 1,028 (678)
- ---------------------------------------------- --------------------- --------- --------- --------- --------
Income before income taxes . . . . . . . . . . 67,127 54,592 27,314 34,166 24,577
- ---------------------------------------------- --------------------- --------- --------- --------- --------
Income taxes . . . . . . . . . . . . . . . . . 21,398 17,086 15,684 11,940 8,475
- ---------------------------------------------- --------------------- --------- --------- --------- --------
Net income . . . . . . . . . . . . . . . . . . $ 45,729 $ 37,506 $ 11,630 $ 22,226 $16,102
- ---------------------------------------------- --------------------- --------- --------- --------- --------
Basic earnings per share . . . . . . . . . . . $ 1.38 $ 1.17 $ 0.37 $ 0.74 $ 0.55
Diluted earnings per share . . . . . . . . . . $ 1.33 $ 1.10 $ 0.35 $ 0.69 $ 0.52
Basic shares outstanding . . . . . . . . . . . 33,054 32,174 31,129 30,153 29,416
Diluted shares outstanding . . . . . . . . . . 34,439 34,080 33,484 32,303 31,068
- ---------------------------------------------- --------------------- --------- --------- --------- --------
- -21
- -----------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA: As of June 30
- -----------------------------------------------------------------------------------------------
(In thousands) 2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------
Working capital. . . . . . . . . . . . . $ 191,322 $142,809 $144,272 $ 47,550 $32,529
Total assets . . . . . . . . . . . . . . 459,595 376,191 288,090 115,594 89,889
Long-term debt, less current maturities. 113,250 123,250 150,000 - -
Total stockholders' equity . . . . . . . 286,433 192,930 100,366 93,972 71,647
- -----------------------------------------------------------------------------------------------
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH SELECTED FINANCIAL DATA AND
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES, INCLUDED HEREIN.
WE DESIGN, MANUFACTURE AND MARKET EQUIPMENT FOR THE DIAGNOSIS AND TREATMENT OF
SLEEP DISORDERED BREATHING CONDITIONS, INCLUDING OBSTRUCTIVE SLEEP APNEA. OUR
NET REVENUES ARE GENERATED FROM THE SALE AND RENTAL OF OUR VARIOUS FLOW
GENERATOR DEVICES, NASAL MASK SYSTEMS, ACCESSORIES AND OTHER PRODUCTS, AND, TO A
LESSER EXTENT FROM ROYALTIES AND SALES OF CUSTOM MOTORS.
WE HAVE INVESTED SIGNIFICANT RESOURCES IN RESEARCH AND DEVELOPMENT AND PRODUCT
ENHANCEMENT. SINCE 1989, WE HAVE DEVELOPED SEVERAL INNOVATIONS TO THE ORIGINAL
CPAP DEVICE TO INCREASE PATIENT COMFORT AND TO IMPROVE EASE OF PRODUCT USE. WE
HAVE BEEN DEVELOPING PRODUCTS FOR AUTOMATED TREATMENT, TITRATION AND MONITORING
OF OSA, SUCH AS THE AUTOSET T AND AUTOSET SPIRIT FLOW GENERATORS.
BUSINESS ACQUISITIONS
1. FISCAL YEAR ENDED JUNE 30, 2003
JOHN STARK AND ASSOCIATES. ON JULY 24, 2002 WE ACQUIRED THE BUSINESS OF JOHN
STARK AND ASSOCIATES, OUR TEXAS REPRESENTATIVE, FOR TOTAL CONSIDERATION OF $0.3
MILLION IN CASH. THE ACQUISITION HAS BEEN ACCOUNTED FOR AS A PURCHASE AND
ACCORDINGLY, THE RESULTS OF OPERATIONS OF JOHN STARK AND ASSOCIATES WERE
INCLUDED WITHIN OUR CONSOLIDATED FINANCIAL STATEMENTS FROM JULY 24, 2002. AN
AMOUNT OF $0.3 MILLION, REPRESENTING THE EXCESS OF THE PURCHASE PRICE OVER THE
FAIR VALUE OF NET IDENTIFIABLE ASSETS ACQUIRED OF $NIL, HAS BEEN RECORDED AS
GOODWILL.
2. FISCAL YEAR ENDED JUNE 30, 2002
LABHARDT ACQUISITION. ON NOVEMBER 15, 2001, WE ACQUIRED ALL THE COMMON STOCK OF
LABHARDT AG, OUR SWISS DISTRIBUTOR, FOR TOTAL CASH CONSIDERATION, INCLUDING
ACQUISITION COSTS, OF $5.5 MILLION.
THE ACQUISITION HAS BEEN ACCOUNTED FOR AS A PURCHASE AND ACCORDINGLY, THE
RESULTS OF OPERATIONS OF LABHARDT AG HAVE BEEN INCLUDED IN OUR CONSOLIDATED
FINANCIAL STATEMENTS FROM NOVEMBER 15, 2001. AN AMOUNT OF $4.2 MILLION,
REPRESENTING THE EXCESS OF THE PURCHASE PRICE OVER THE FAIR VALUE OF THE NET
IDENTIFIABLE ASSETS ACQUIRED OF $1.3 MILLION, HAS BEEN RECORDED AS GOODWILL.
- -22-
SMI ACQUISITION. ON MAY 14, 2002, WE ACQUIRED ALL OF THE COMMON STOCK OF SERVO
MAGNETICS INCORPORATED ("SMI") THROUGH A MERGER WITH OUR WHOLLY-OWNED
SUBSIDIARY, SERVO MAGNETICS ACQUISITIONS INC, FOR TOTAL CONSIDERATION, INCLUDING
ACQUISITION COSTS, OF $32.6 MILLION. CONSIDERATION INCLUDED THE ISSUE OF
853,448 SHARES FOR FAIR VALUE OF $24.8 MILLION WITH THE BALANCE OF THE
ACQUISITION PRICE PAID IN CASH. UPON CONSUMMATION OF THE MERGER, THE SURVIVING
CORPORATION, SERVO MAGNETICS ACQUISITION INC., CHANGED ITS NAME TO SERVO
MAGNETICS INC.
THE ACQUISITION HAS BEEN ACCOUNTED FOR AS A PURCHASE AND ACCORDINGLY, THE
RESULTS OF OPERATIONS OF SMI HAVE BEEN INCLUDED IN OUR CONSOLIDATED FINANCIAL
STATEMENTS FROM MAY 14, 2002. AN AMOUNT OF $30.7 MILLION, REPRESENTING THE
EXCESS OF THE PURCHASE PRICE OVER THE FAIR VALUE OF THE NET IDENTIFIABLE ASSETS
ACQUIRED OF $1.9 MILLION, HAS BEEN RECORDED AS GOODWILL.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT OF $0.4 MILLION WAS EXPENSED UPON
ACQUISITION OF SMI BECAUSE TECHNOLOGICAL FEASIBILITY OF THE PRODUCTS UNDER
DEVELOPMENT HAD NOT BEEN ESTABLISHED AND NO FURTHER ALTERNATIVE USES EXISTED.
THE VALUE OF IN-PROCESS TECHNOLOGY WAS CALCULATED BY IDENTIFYING RESEARCH
PROJECTS IN AREAS FOR WHICH TECHNOLOGICAL FEASIBILITY HAD NOT BEEN ESTABLISHED,
ESTIMATING THE COSTS TO DEVELOP THE PURCHASED IN PROCESS TECHNOLOGY INTO
COMMERCIALLY VIABLE PRODUCTS, ESTIMATING THE RESULTING NET CASH FLOWS FROM SUCH
PRODUCTS, DISCOUNTING THE NET CASH FLOWS TO PRESENT VALUE, AND APPLYING THE
REDUCED PERCENTAGE COMPLETION OF THE PROJECTS THERETO. THE DISCOUNT RATE USED
IN THE ANALYSIS WAS 19% AND WAS BASED ON THE RISK PROFILE OF THE ACQUIRED
ASSETS.
PURCHASED RESEARCH AND DEVELOPMENT PROJECTS RELATED TO ELECTRICAL MOTOR SYSTEMS
USED IN OUR FLOW GENERATOR DEVICES AND OTHER MEDICAL AND DATA STORAGE EQUIPMENT.
KEY ASSUMPTIONS USED IN THE ANALYSIS INCLUDED GROSS MARGINS OF 34%. AS OF THE
DATE OF ACQUISITION, NEW MOTOR SYSTEMS FOR USE IN MEDICAL AND HEALTH
APPLICATIONS WERE EXPECTED TO BE COMPLETED AND COMMERCIALLY AVAILABLE BY 2004.
THESE PROJECTS HAVE ESTIMATED COSTS TO COMPLETE TOTALLING APPROXIMATELY $0.5
MILLION.
WE BELIEVE THAT THE ASSUMPTIONS USED TO VALUE THE ACQUIRED INTANGIBLE ASSETS
WERE REASONABLE AT THE TIME OF ACQUISITION. NO ASSURANCE CAN BE GIVEN, HOWEVER,
THAT THE UNDERLYING ASSUMPTIONS USED TO ESTIMATE EXPECTED PROJECT REVENUES,
DEVELOPMENT COSTS OR PROFITABILITY, OR EVENTS ASSOCIATED WITH SUCH PROJECTS,
WILL TRANSPIRE AS ESTIMATED. FOR THESE REASONS, AMONG OTHERS, ACTUAL RESULTS
MAY VARY FROM THE PROJECTED RESULTS.
3. FISCAL YEAR ENDED JUNE 30, 2001
MAP MEDIZIN-TECHNOLOGIE GMBH (MAP). ON FEBRUARY 16, 2001 OUR WHOLLY-OWNED
GERMAN SUBSIDIARY, RESMED BETEILIGUNGS GMBH, ACQUIRED ALL THE COMMON STOCK OF
MAP MEDIZIN-TECHNOLOGIE GMBH ("MAP'') FOR TOTAL CONSIDERATION, INCLUDING
ACQUISITION COSTS, OF $55.4 MILLION. MAP IS A LEADING GERMAN DESIGNER,
MANUFACTURER AND DISTRIBUTOR OF MEDICAL DEVICES FOR THE DIAGNOSIS AND TREATMENT
OF SDB, WITH A PARTICULAR FOCUS ON OSA.
THE ACQUISITION HAS BEEN ACCOUNTED FOR AS A PURCHASE AND ACCORDINGLY, THE
RESULTS OF OPERATIONS OF MAP HAVE BEEN INCLUDED IN OUR CONSOLIDATED FINANCIAL
STATEMENTS FROM FEBRUARY 16, 2001. AN AMOUNT OF $47.1 MILLION, REPRESENTING THE
EXCESS OF THE PURCHASE PRICE OVER THE FAIR VALUE OF THE NET IDENTIFIABLE ASSETS
ACQUIRED, HAS BEEN RECORDED AS GOODWILL.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT OF $17.7 MILLION WAS EXPENSED UPON
ACQUISITION OF MAP BECAUSE TECHNOLOGICAL FEASIBILITY OF THE PRODUCTS UNDER
DEVELOPMENT HAD NOT BEEN ESTABLISHED AND NO FURTHER ALTERNATIVE USES EXISTED.
THE VALUE OF IN-PROCESS TECHNOLOGY WAS CALCULATED BY IDENTIFYING RESEARCH
PROJECTS IN AREAS FOR WHICH TECHNOLOGICAL FEASIBILITY HAD NOT BEEN ESTABLISHED,
ESTIMATING THE COSTS TO DEVELOP THE PURCHASED IN-PROCESS TECHNOLOGY INTO
COMMERCIALLY VIABLE PRODUCTS, ESTIMATING THE RESULTING NET CASH FLOWS FROM SUCH
PRODUCTS, DISCOUNTING THE NET CASH FLOWS TO PRESENT VALUE, AND APPLYING THE
REDUCED PERCENTAGE COMPLETION OF THE PROJECTS THERETO. THE DISCOUNT RATES USED
IN THE ANALYSIS WERE BETWEEN 27% AND 33% AND WERE BASED ON THE RISK PROFILE OF
THE ACQUIRED ASSETS.
- -23-
ALL PURCHASED RESEARCH AND DEVELOPMENT PROJECTS RELATED TO MEDICAL EQUIPMENT FOR
THE TREATMENT OF SLEEP DISORDERED BREATHING, PRIMARILY FOR THE DEVELOPMENT OF
MASK INTERFACE SYSTEMS AND AUTOTITRATING DEVICES FOR THE TREATMENT OF
OBSTRUCTIVE SLEEP APNEA AND ASSOCIATED DISORDERS. KEY ASSUMPTIONS USED IN THE
ANALYSIS INCLUDED GROSS MARGINS RANGING FROM 70% TO 80%. AS OF THE DATE OF
ACQUISITION, THE MASK INTERFACE SYSTEMS WERE EXPECTED TO BE COMPLETED AND
COMMERCIALLY AVAILABLE IN 2002 AND VERSIONS OF THE AUTOTITRATING DEVICES BETWEEN
2003 AND 2005. THESE PROJECTS HAD ESTIMATED COSTS TO COMPLETE TOTALLING
APPROXIMATELY $2.0 MILLION.
WE BELIEVE THAT THE ASSUMPTIONS USED TO VALUE THE ACQUIRED INTANGIBLE ASSETS
WERE REASONABLE AT THE TIME OF ACQUISITION. NO ASSURANCE CAN BE GIVEN, HOWEVER,
THAT THE UNDERLYING ASSUMPTIONS USED TO ESTIMATE EXPECTED PROJECT REVENUES,
DEVELOPMENT COSTS OR PROFITABILITY, OR EVENTS ASSOCIATED WITH SUCH PROJECTS,
WILL TRANSPIRE AS ESTIMATED. FOR THESE REASONS, AMONG OTHERS, ACTUAL RESULTS
MAY VARY FROM THE PROJECTED RESULTS.
DURING THE DECEMBER 2001, WE PAID AN AMOUNT OF $1.4 MILLION AS FINAL
CONSIDERATION ASSOCIATED WITH THE PURCHASE OF MAP. THE AMOUNT HAS BEEN RECORDED
AS GOODWILL.
IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE. ON ACQUISITION OF MAP IN FEBRUARY
2001, WE RECOGNIZED AS AN EXPENSE A CHARGE OF $17.7 MILLION WITH RESPECT TO FIVE
IN-PROCESS RESEARCH AND DEVELOPMENT PROGRAMS UNDER ACTIVE DEVELOPMENT BY MAP AT
DATE OF ACQUISITION. THE FIVE PROJECTS WERE:
(I) A SINGLE-WALLED NASAL CUSHION MASK SYSTEM
(II) NEW HEADGEAR SYSTEM
(III) STANDALONE ACTIVE HUMIDIFIER
(IV) AN AUTOTITRATION CPAP DEVICE FOR TREATMENT OF OSA
(V) A NEW OSA DIAGNOSTIC DEVICE
THE STATUS OF EACH PROJECT AS AT JUNE 30, 2003 IS AS NOTED BELOW:
(I) SINGLE-WALLED NASAL CUSHION - THE NASAL CUSHION UNDER DEVELOPMENT BY MAP
ON ACQUISITION WAS DUE FOR RELEASE IN OCTOBER 2001. DELAYS IN THE DESIGN AND
MANUFACTURING PROCESS DELAYED THE RELEASE FOR SEVEN MONTHS, UNTIL APRIL 2002.
THE DELAY IN RELEASE OF THE PRODUCT WAS NOT SIGNIFICANT OVER ITS EXPECTED LIFE
CYCLE, AND HAS MADE NO SIGNIFICANT IMPACT ON THE NET RETURN ASSUMPTIONS USED IN
THE INITIAL IN-PROCESS RESEARCH AND DEVELOPMENT MODEL. SINCE RELEASE, THE
PRODUCT (NOW REFERRED TO AS THE PAPILLON) HAS MET OR EXCEEDED SALES FORECASTS.
(II) NEW HEADGEAR - THE NEW HEADGEAR PRODUCT LINE WAS WITHHELD TO COINCIDE
WITH THE RELEASE OF THE PAPILLON MASK SYSTEM IN APRIL 2002 AND SO WAS ALSO SEVEN
MONTHS BEHIND SCHEDULE IN PROJECTED RELEASE DATES. SINCE RELEASE, THE NEW
HEADGEAR SYSTEM HAS EXCEEDED ORIGINAL SALES PROJECTIONS AND CONTINUES TO MEET OR
EXCEED INITIAL EXPECTATIONS.
(III) STANDALONE ACTIVE HUMIDIFIER - DUE TO OTHER PRIORITIES AND TO THE
INTRODUCTION OF INTEGRATED HUMIDIFICATION FLOW GENERATOR DEVICES BY A NUMBER OF
COMPETITORS DURING FISCAL 2002, WE HAVE DELAYED THE STANDALONE HUMIDIFIER
PROJECT.
- -24-
GIVEN THE RELATIVELY SMALL REVENUE FORECAST OF THE PRODUCT LINE IN THE
IPR&D MODEL, THE FINANCIAL IMPACT OF THIS PROJECT IS NOT MATERIAL TO OUR
BUSINESS OR THE NET RETURN OF THE MAP ACQUISITION.
(IV) AUTOTITRATION CPAP DEVICE - THE MAIN PRODUCT DEVELOPMENT EFFORT OF MAP
SINCE ACQUISITION HAS BEEN THE COMPLETION OF THE AUTOTITRATION CPAP FLOW
GENERATOR SPECIFIED IN THE INITIAL IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE.
THIS PROJECT EXPERIENCED SOME DELAYS DUE TO THE COMPLEXITY OF THE SOFTWARE
ALGORITHM DEVELOPMENT PROCESS AND ASSOCIATED ELECTRONICS. MAP RELEASED THE
PRODUCT IN NOVEMBER 2002; SINCE RELEASE, SALES OF THE PRODUCT (NOW REFERRED TO
AS MAGELLAN) HAVE BEEN WITHIN EXPECTATIONS.
(V) OSA DIAGNOSTIC DEVICE - MAP'S NEW DIAGNOSTIC DEVICE REMAINS ON TARGET
FOR INITIAL MARKET RELEASE IN CALENDAR 2003, ALTHOUGH THE FORECASTED RELEASE
DATE OF MARCH 2003 WAS NOT ACHIEVED. WE REMAIN CONFIDENT IN THE CAPACITY OF THE
DIAGNOSTIC ALGORITHM TO SIGNIFICANTLY ENHANCE THE DIAGNOSTIC PROCESS, AND REMAIN
CONFIDENT IN THE POTENTIAL OF THE PRODUCT TO SIGNIFICANTLY IMPACT THE TREATMENT
AND DIAGNOSIS OF OBSTRUCTIVE SLEEP APNEA IN THE GERMAN MARKET.
AS AT JUNE 30, 2003, THREE OF THE FIVE PROGRAMS HAVE BEEN COMPLETED WITH THE
RELEASE OF THE PAPILLON MASK SYSTEM, UPGRADED HEADGEAR AND THE MAGELLAN
AUTOMATED FLOW GENERATOR DEVICE. ALL THREE PRODUCTS ARE GENERATING SALES
REVENUE CONSISTENT WITH OUR ORIGINAL EXPECTATIONS AND ASSUMPTIONS USED IN
CALCULATING THE IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE. WE EXPECT TO
RELEASE PRODUCTS WITH RESPECT TO BOTH REMAINING IN-PROCESS RESEARCH AND
DEVELOPMENT PROGRAMS OVER THE NEXT TWELVE-MONTH PERIOD, WHICH IS GENERALLY
CONSISTENT WITH OUR ORIGINAL EXPECTATIONS.
GIVEN THE SUCCESSFUL COMPLETION OF THE ABOVE RESEARCH PROGRAMS AND PERFORMANCE
OF THE ASSOCIATED PRODUCT LINES, WE REMAIN CONFIDENT IN THE ASSUMPTIONS USED TO
DETERMINE THE IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE AND, AS A RESULT, THE
NET RETURN OF THE MAP ACQUISITION.
TAX EXPENSE. OUR INCOME TAX RATE IS GOVERNED BY THE LAWS OF THE REGIONS IN
WHICH OUR INCOME IS RECOGNIZED. TO DATE, A SUBSTANTIAL PORTION OF OUR INCOME
HAS BEEN SUBJECT TO INCOME TAX IN AUSTRALIA WHERE THE STATUTORY RATE WAS 30% IN
FISCAL 2003 AND 2002; AND WAS 34% IN FISCAL 2001. DURING FISCAL 2003, 2002 AND
2001, OUR EFFECTIVE TAX RATE HAS FLUCTUATED BETWEEN APPROXIMATELY 31% AND
APPROXIMATELY 57%. THESE FLUCTUATIONS HAVE RESULTED FROM, AND FUTURE EFFECTIVE
TAX RATES WILL DEPEND UPON, NUMEROUS FACTORS, INCLUDING THE AMOUNT OF RESEARCH
AND DEVELOPMENT EXPENDITURES FOR WHICH A 125% AUSTRALIAN TAX DEDUCTION IS
AVAILABLE, THE LEVEL OF NON-DEDUCTIBLE EXPENSES, AND THE USE OF AVAILABLE NET
OPERATING LOSS CARRYFORWARD DEDUCTIONS AND OTHER TAX CREDITS OR BENEFITS
AVAILABLE TO US UNDER APPLICABLE TAX LAWS.
WE ACCOUNT FOR INCOME TAXES UNDER THE ASSET AND LIABILITY METHOD. DEFERRED TAX
ASSETS AND LIABILITIES ARE RECOGNIZED FOR THE FUTURE TAX CONSEQUENCES
ATTRIBUTABLE TO DIFFERENCES BETWEEN THE FINANCIAL STATEMENT CARRYING AMOUNTS OF
EXISTING ASSETS AND LIABILITIES AND THEIR RESPECTIVE TAX BASES. DEFERRED TAX
ASSETS AND LIABILITIES ARE MEASURED USING ENACTED TAX RATES EXPECTED TO APPLY TO
TAXABLE INCOME IN THE YEARS IN WHICH THOSE TEMPORARY DIFFERENCES ARE EXPECTED TO
BE RECOVERED OR SETTLED. THE EFFECT ON DEFERRED TAX ASSETS AND LIABILITIES OF A
CHANGE IN TAX RATES IS RECOGNIZED IN INCOME IN THE PERIOD THAT INCLUDES THE
ENACTMENT DATE.
- -25-
FISCAL YEAR ENDED JUNE 30 2003, COMPARED TO FISCAL YEAR ENDED JUNE 30 2002
NET REVENUES. NET REVENUE INCREASED FOR THE YEAR ENDED JUNE 30, 2003 TO $273.6
MILLION FROM $204.1 MILLION FOR THE YEAR ENDED JUNE 30, 2002, AN INCREASE OF
$69.5 MILLION OR 34%.
THE INCREASE IN NET REVENUE WAS ATTRIBUTABLE TO AN INCREASE IN UNIT SALES OF OUR
FLOW GENERATORS AND ACCESSORIES. SALES ALSO BENEFITED FROM AN APPRECIATION OF
INTERNATIONAL CURRENCIES AGAINST THE US DOLLAR (INCREASING SALES BY
APPROXIMATELY $16.8 MILLION) AND INCLUSION OF SALES OF $6.5 MILLION FROM SERVO
MAGNETICS INC. (SMI), THE SUBSIDIARY WE ACQUIRED IN MAY 2002. NET REVENUE IN
NORTH AND LATIN AMERICA INCREASED TO $130.7 MILLION FROM $100.9 MILLION FOR THE
YEARS ENDED JUNE 30, 2003 AND 2002 RESPECTIVELY. THIS GROWTH PRIMARILY REFLECTS
INCREASED PUBLIC AND PHYSICIAN AWARENESS OF SLEEP-DISORDERED BREATHING. NET
REVENUE IN INTERNATIONAL MARKETS INCREASED TO $142.8 MILLION FROM $103.1 MILLION
FOR THE YEARS ENDED JUNE 30, 2003 AND 2002 RESPECTIVELY. INTERNATIONAL SALES
GROWTH FOR THE YEAR ENDED JUNE 30, 2003 REFLECTS ORGANIC GROWTH IN THE OVERALL
SLEEP DISORDERED BREATHING MARKET, APPRECIATION OF INTERNATIONAL CURRENCIES
AGAINST THE U.S. DOLLAR AND SARS-RELATED SALES TO CHINA OF APPROXIMATELY $5.0
MILLION.
SALES OF FLOW GENERATORS FOR THE YEAR ENDED JUNE 30, 2003 INCREASED BY 29%
COMPARED TO THE YEAR ENDED JUNE 30, 2002 INCLUDING INCREASES OF 23% IN NORTH AND
LATIN AMERICA AND 33% ELSEWHERE. SALES OF MASK SYSTEMS, MOTORS AND OTHER
ACCESSORIES INCREASED BY 40% INCLUDING INCREASES OF 35% IN NORTH AND LATIN
AMERICA AND 47% ELSEWHERE, FOR THE YEAR ENDED JUNE 30, 2003 COMPARED TO THE YEAR
ENDED JUNE 30, 2002. THESE INCREASES PRIMARILY REFLECT GROWTH IN THE OVERALL
SLEEP-DISORDERED BREATHING MARKET, APPRECIATION OF INTERNATIONAL CURRENCIES
AGAINST THE U.S. DOLLAR AND OUR ACQUISITION OF SMI.
GROSS PROFIT. GROSS PROFIT INCREASED FOR THE YEAR ENDED JUNE 30, 2003 TO $173.1
MILLION FROM $133.2 MILLION FOR THE YEAR ENDED JUNE 30, 2002, AN INCREASE OF
$39.9 MILLION OR 30%. GROSS PROFIT AS A PERCENTAGE OF NET REVENUE DECREASED FOR
THE YEAR ENDED JUNE 30, 2003 TO 63% FROM 65% FOR THE YEAR ENDED JUNE 30, 2002,
REFLECTING THE IMPACT OF HIGHER MANUFACTURING COSTS RESULTING FROM A STRONGER
AUSTRALIAN DOLLAR AGAINST THE US DOLLAR, AS THE MAJORITY OF MANUFACTURING LABOR
AND OVERHEAD COSTS ARE INCURRED IN AUSTRALIA AND, TO A LESSER EXTENT, THE
INCLUSION OF SMI'S MOTOR SALES WHICH ACHIEVE LOWER MARGINS COMPARED TO OUR
OVERALL GROSS MARGIN.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES INCREASED FOR THE YEAR ENDED JUNE 30, 2003 TO $85.3
MILLION FROM $64.5 MILLION FOR THE YEAR ENDED JUNE 30, 2002, AN INCREASE OF
$20.8 MILLION OR 32%. AS A PERCENTAGE OF NET REVENUE, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES FOR THE YEAR ENDED JUNE 30, 2003 DECREASED TO 31%
COMPARED TO 32% FOR THE YEAR ENDED JUNE 30, 2002. THE INCREASE IN SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES WAS PRIMARILY DUE TO AN INCREASE IN THE
NUMBER OF SALES AND ADMINISTRATIVE PERSONNEL AND OTHER EXPENSES RELATED TO THE
INCREASE IN OUR SALES. THE INCREASE IN SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES WAS ALSO ATTRIBUTABLE TO APPRECIATION OF INTERNATIONAL CURRENCIES
AGAINST THE US DOLLAR (ADDING APPROXIMATELY $6.0 MILLION), THE INCLUSION OF $2.6
MILLION FROM SMI'S OPERATIONS, AND $2.2 MILLION IN LITIGATION COSTS ASSOCIATED
WITH OUTSTANDING PATENT INFRINGEMENT LAWSUITS AGAINST COMPETITORS.
RESEARCH AND DEVELOPMENT EXPENSES. RESEARCH AND DEVELOPMENT EXPENSES INCREASED
FOR THE YEAR ENDED JUNE 30, 2003 TO $20.5 MILLION FROM $14.9 MILLION FOR THE
YEAR ENDED JUNE 30, 2002, AN INCREASE OF $5.6 MILLION OR 38%. AS A PERCENTAGE
OF NET REVENUE, RESEARCH AND DEVELOPMENT EXPENSES WERE 7.5% FOR THE YEAR ENDED
JUNE 30, 2003 COMPARED TO 7.3% FOR THE YEAR ENDED JUNE 30, 2002. THE INCREASE
IN RESEARCH AND DEVELOPMENT EXPENSES WAS DUE TO INCREASED SALARIES ASSOCIATED
WITH AN INCREASE IN PERSONNEL AND INCREASED CHARGES FOR CONSULTING FEES,
CLINICAL TRIALS AND TECHNICAL ASSESSMENTS INCURRED TO FACILITATE DEVELOPMENT OF
NEW PRODUCTS. THE INCREASE ALSO REFLECTS AN APPRECIATION OF THE AUSTRALIAN
DOLLAR AGAINST THE US DOLLAR, AS THE MAJORITY OF RESEARCH AND DEVELOPMENT COSTS
ARE INCURRED IN AUSTRALIAN DOLLARS. IN CONSTANT CURRENCY TERMS, RESEARCH AND
DEVELOPMENT EXPENSES FOR THE YEAR ENDED JUNE 30, 2003 INCREASED BY $3.1 MILLION,
OR 17%, COMPARED TO THE YEAR ENDED JUNE 30, 2002.
- -26-
OTHER INCOME (EXPENSE), NET. OTHER INCOME (EXPENSE), NET DECREASED FOR THE YEAR
ENDED JUNE 30, 2003 TO NET EXPENSE OF $0.1 MILLION FROM NET INCOME OF $3.4
MILLION FOR THE YEAR ENDED JUNE 30, 2002. THE DECREASE IN OTHER INCOME WAS
ATTRIBUTABLE TO LOWER GAINS ON EXTINGUISHMENT OF DEBT PARTIALLY OFFSET BY
INCREASED NET FOREIGN CURRENCY EXCHANGE GAINS, AND LOWER INTEREST EXPENSE DUE TO
THE REDUCTION IN CONVERTIBLE NOTE DEBT.
INCOME TAXES. OUR EFFECTIVE INCOME TAX RATE INCREASED TO 31.9% FOR THE YEAR
ENDED JUNE 30, 2003 FROM 31.3% FOR THE YEAR ENDED JUNE 30, 2002. THE MARGINALLY
HIGHER TAX RATE WAS PRIMARILY DUE TO THE GEOGRAPHICAL MIX OF TAXABLE INCOME. WE
CONTINUE TO BENEFIT FROM THE AUSTRALIAN CORPORATE TAX RATE OF 30%, BECAUSE WE
GENERATE A MAJORITY OF OUR TAXABLE INCOME IN AUSTRALIA.
FISCAL YEAR ENDED JUNE 30 2002, COMPARED TO FISCAL YEAR ENDED JUNE 30 2001
NET REVENUES. NET REVENUE INCREASED FOR THE YEAR ENDED JUNE 30, 2002 TO $204.1
MILLION FROM $155.2 MILLION FOR THE YEAR ENDED JUNE 30,2001, AN INCREASE OF
$48.9 MILLION OR 32%. THIS INCREASE WAS PRIMARILY ATTRIBUTABLE TO AN INCREASE
IN UNIT SALES OF OUR FLOW GENERATORS AND ACCESSORIES IN BOTH DOMESTIC AND
INTERNATIONAL MARKETS AND THE INCLUSION OF INCREMENTAL SALES OF $17.2 MILLION
FROM MAP MEDIZIN-TECHNOLOGIE GMBH "MAP", THE SUBSIDIARY WE ACQUIRED IN FEBRUARY
2001.
NET REVENUE IN NORTH AND LATIN AMERICA INCREASED TO $100.9 MILLION FROM $79.9
MILLION FOR THE YEARS ENDED JUNE 30, 2002 AND 2001 RESPECTIVELY. THIS GROWTH
REFLECTS INCREASED PUBLIC AND PHYSICIAN AWARENESS OF SLEEP-DISORDERED BREATHING.
NET REVENUE IN OTHER INTERNATIONAL MARKETS INCREASED TO $103.1 MILLION FROM
$75.2 MILLION FOR THE YEARS ENDED JUNE 30, 2002 AND 2001 RESPECTIVELY.
INTERNATIONAL SALES GROWTH FOR THE YEAR ENDED JUNE 30, 2002 REFLECTS ORGANIC
GROWTH IN THE OVERALL SLEEP-DISORDERED BREATHING MARKET AND A FULL YEAR OF SALES
FROM OUR SUBSIDIARY, MAP.
SALES OF FLOW GENERATORS FOR THE YEAR ENDED JUNE 30, 2002 INCREASED BY 35%
COMPARED TO THE YEAR ENDED JUNE 30, 2001 INCLUDING INCREASES OF 22% IN NORTH AND
LATIN AMERICA AND 47% ELSEWHERE. SALES OF MASK SYSTEMS, MOTORS AND OTHER
ACCESSORIES INCREASED BY 28% INCLUDING INCREASES OF 30% IN NORTH AND LATIN
AMERICA AND 24% ELSEWHERE, FOR THE YEAR ENDED JUNE 30, 2002 COMPARED TO THE YEAR
ENDED JUNE 30, 2002. THESE INCREASES REFLECT GROWTH IN THE OVERALL
SLEEP-DISORDERED BREATHING MARKET AND OUR ACQUISITION OF MAP.
GROSS PROFIT. GROSS PROFIT INCREASED FOR THE YEAR ENDED JUNE 30, 2002 TO $133.2
MILLION FROM $104.8 MILLION FOR THE YEAR ENDED JUNE 30, 2001, AN INCREASE OF
$28.5 MILLION OR 27%. GROSS PROFIT AS A PERCENTAGE OF NET REVENUE DECLINED FOR
THE YEAR ENDED JUNE 30, 2002 TO 65% FROM 68% FOR THE YEAR ENDED JUNE 30, 2001.
THE DECLINE IN GROSS MARGINS REFLECTS A CHANGE IN GEOGRAPHICAL SALES MIX, OTHER
THAN MAP SALES, WITH A RELATIVELY HIGHER PERCENTAGE OF DOMESTIC SALES, WHICH
ACHIEVE LOWER MARGINS, COMPARED TO INTERNATIONAL MARKETS. THE DECLINE ALSO
REFLECTS THAT GROSS MARGINS IN OUR ACQUIRED SUBSIDIARY, MAP, ARE HISTORICALLY
LOWER THAN THE AVERAGE MARGINS ACHIEVED BY OUR COMPANY AS A WHOLE.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES INCREASED FOR THE YEAR ENDED JUNE 30, 2002 TO $64.5
MILLION FROM $49.4 MILLION FOR THE YEAR ENDED JUNE 30, 2001, AN INCREASE OF
$15.1 MILLION OR 31%. AS A PERCENTAGE OF NET REVENUE, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES FOR THE YEAR ENDED JUNE 30, 2002 WAS 32%, CONSISTENT
WITH THE YEAR ENDED JUNE 30, 2001. THE INCREASE IN SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES WAS PRIMARILY DUE TO THE ADDITION OF 98 PERSONNEL IN
SALES AND ADMINISTRATION AND OTHER EXPENSES RELATED TO THE INCREASE IN OUR
SALES. SG&A IN FISCAL 2002 ALSO INCLUDED A PROVISION OF $1.0 MILLION AGAINST AN
OUTSTANDING RECEIVABLE FROM AMERICAN HOME PATIENT INC. (AHP), A SIGNIFICANT
CUSTOMER, WHO FILED FOR CHAPTER 11 BANKRUPTCY PROTECTION ON JULY 31, 2002.
AHP'S FILING FOR CHAPTER 11 BANKRUPTCY PROTECTION IS NOT EXPECTED TO MATERIALLY
IMPACT OUR BUSINESS.
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PROVISION FOR RESTRUCTURE. IN THE YEAR ENDED JUNE 30, 2001, SUBSEQUENT TO THE
PURCHASE OF MAP, WE RESTRUCTURED MAP'S UNPROFITABLE FRENCH ACTIVITIES AND TOOK A
CHARGE OF $0.6 MILLION ASSOCIATED WITH THEIR CLOSURE. WE DID NOT INCUR ANY
RESTRUCTURE CHARGES FOR THE YEAR ENDED JUNE 30, 2002.
IN-PROCESS RESEARCH AND DEVELOPMENT WRITE-OFF. IN THE YEAR ENDED JUNE 30, 2002,
PURCHASED IN- PROCESS RESEARCH AND DEVELOPMENT OF $0.4 MILLION WAS EXPENSED UPON
THE ACQUISITION OF SMI BECAUSE TECHNOLOGICAL FEASIBILITY OF THE PRODUCTS UNDER
DEVELOPMENT HAD NOT BEEN ESTABLISHED AND NO FURTHER ALTERNATIVE USES EXISTED.
IN THE YEAR ENDED JUNE 30, 2001, PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
OF $17.7 MILLION WAS EXPENSED UPON ACQUISITION OF MAP.
DONATIONS TO FOUNDATIONS. IN THE YEAR ENDED JUNE 30, 2002, WE COMMITTED $2.3
MILLION TO THE ESTABLISHMENT OF TWO RESMED SLEEP DISORDERED BREATHING
FOUNDATIONS, ONE IN THE UNITED STATES AND ONE IN AUSTRALIA. THE FOUNDATIONS'
OVERALL MISSION IS TO EDUCATE BOTH THE PUBLIC AND PHYSICIANS ABOUT THE INHERENT
DANGERS OF UNTREATED SDB/OSA, PARTICULARLY AS IT RELATES TO CEREBROVASCULAR AND
CARDIOVASCULAR DISEASE.
RESEARCH AND DEVELOPMENT EXPENSES. RESEARCH AND DEVELOPMENT EXPENSES INCREASED
IN FISCAL 2002 TO $14.9 MILLION FROM $11.1 MILLION FOR THE YEAR ENDED JUNE 30,
2001, AN INCREASE OF $3.8 MILLION OR 34%. AS A PERCENTAGE OF NET REVENUE,
RESEARCH AND DEVELOPMENT EXPENSES INCREASED TO 7.3% FOR THE YEAR ENDED JUNE 30,
2002 COMPARED TO 7.2% IN FISCAL 2001. THE INCREASE IN RESEARCH AND DEVELOPMENT
EXPENSES WAS DUE TO INCREASED SALARIES ASSOCIATED WITH AN INCREASE IN PERSONNEL
AND INCREASED CHARGES FOR CONSULTING FEES, CLINICAL TRIALS AND TECHNICAL
ASSESSMENTS INCURRED TO FACILITATE DEVELOPMENT OF NEW PRODUCTS, AND ALSO
INCLUDES RESEARCH AND DEVELOPMENT EXPENDITURES OF MAP.
OTHER INCOME (EXPENSE). OTHER INCOME (EXPENSE), NET, INCREASED FOR THE YEAR
ENDED JUNE 30, 2002, TO A NET INCOME OF $3.4 MILLION FROM NET INCOME OF $1.3
MILLION FOR THE YEAR ENDED JUNE 30, 2001. THE INCREASE IN OTHER INCOME
PRIMARILY REFLECTS A GAIN ON EXTINGUISHMENT OF DEBT OF $6.5 MILLION PARTIALLY
OFFSET BY INCREASED NET INTEREST EXPENSE ASSOCIATED WITH OUR CONVERTIBLE NOTES
AND FOREIGN EXCHANGE LOSSES.
INCOME TAXES. OUR EFFECTIVE INCOME TAX RATE DECLINED TO APPROXIMATELY 31.3% FOR
THE YEAR ENDED JUNE 30, 2002, FROM APPROXIMATELY 57.4% FOR THE YEAR ENDED JUNE
30, 2001. THE LOWER TAX RATE IS A COROLLARY OF THE HIGH EFFECTIVE TAX RATE
IN FISCAL 2001. THE HIGH EFFECTIVE TAX RATE FOR THE YEAR ENDED JUNE 30, 2001 WAS
PRIMARILY DUE TO NON-DEDUCTIBLE EXPENSES OF $17.7 MILLION FOR AN IN-PROCESS
RESEARCH AND DEVELOPMENT WRITE-DOWN AND $0.6 MILLION IN RESTRUCTURING CHARGES.
TO A LESSER EXTENT, THE LOWER EFFECTIVE TAX RATE ALSO REFLECTS THE LOWERING OF
THE CORPORATE INCOME TAX RATE IN AUSTRALIA FROM 34% TO 30% EFFECTIVE
JULY 1, 2001. WE ALSO BENEFIT FROM A 125% TAX DEDUCTION ON RESEARCH AND
DEVELOPMENT EXPENDITURES IN AUSTRALIA, WHICH FURTHER REDUCES THE EFFECTIVE
TAX RATE ON AUSTRALIAN SOURCED INCOME.
LIQUIDITY AND CAPITAL RESOURCES
AS OF JUNE 30, 2003 AND JUNE 30, 2002, WE HAD CASH AND CASH EQUIVALENTS AND
MARKETABLE SECURITIES AVAILABLE-FOR-SALE OF APPROXIMATELY $121.0 MILLION AND
$92.8 MILLION, RESPECTIVELY. WORKING CAPITAL APPROXIMATED $191.3 MILLION AND
$142.8 MILLION AT JUNE 30, 2003 AND JUNE 30, 2002 RESPECTIVELY.
- -28-
INVENTORIES AT JUNE 30, 2003 INCREASED BY $8.2 MILLION OR 20% TO $49.4 MILLION
COMPARED TO JUNE 30, 2002 INVENTORIES OF $41.2 MILLION. THE PERCENTAGE INCREASE
IN INVENTORIES WAS LESS THAN THE 34% INCREMENTAL INCREASE IN REVENUES IN THE
YEAR ENDED JUNE 30, 2003 COMPARED TO THE YEAR ENDED JUNE 30, 2002. THE
IMPROVEMENT REFLECTS BETTER INVENTORY MANAGEMENT PRACTICES AND VERY STRONG
FOURTH QUARTER SALES. ACCOUNTS RECEIVABLE AT JUNE 30, 2003 WERE $56.7 MILLION,
AN INCREASE OF $10.5 MILLION OR 23% OVER THE JUNE 30, 2002 ACCOUNTS RECEIVABLE
BALANCE OF $46.2 MILLION. THIS INCREASE WAS LOWER THAN THE 34% INCREMENTAL
INCREASE IN REVENUES FOR THE YEAR ENDED JUNE 30, 2003 COMPARED TO THE YEAR ENDED
JUNE 30, 2002, REFLECTING IMPROVED COLLECTIONS. ACCOUNTS RECEIVABLE DAYS
OUTSTANDING IMPROVED TO 62 DAYS FOR THE QUARTER ENDED JUNE 30, 2003, COMPARED TO
72 DAYS FOR THE QUARTER ENDED JUNE 30, 2002. THE IMPROVEMENT REFLECTED, IN
PART, SARS-RELATED SALES TO CHINA OF $5.0 MILLION IN THE QUARTER ENDED JUNE 30,
2003, WHICH WERE COLLECTED PRIOR TO JUNE 30, 2003.
DURING THE YEAR ENDED JUNE 30, 2003, WE GENERATED CASH OF $59.3 MILLION FROM
OPERATIONS, PRIMARILY AS A RESULT OF INCREASED PROFIT AND IMPROVED WORKING
CAPITAL MANAGEMENT, PARTICULARLY IN RESPECT OF INVENTORIES AND ACCOUNTS PAYABLE.
DURING THE YEAR ENDED JUNE 30, 2002 APPROXIMATELY $35.6 MILLION OF CASH WAS
GENERATED BY OPERATIONS.
CAPITAL EXPENDITURES FOR THE YEARS ENDED JUNE 30, 2003 AND 2002 AGGREGATED $25.6
MILLION AND $28.2 MILLION RESPECTIVELY. THE MAJORITY OF THE EXPENDITURES FOR
THE YEAR ENDED JUNE 30, 2003 RELATED TO THE CONSTRUCTION OF OUR NEW
MANUFACTURING FACILITY, ACQUISITION OF COMPUTER HARDWARE AND SOFTWARE INCLUDING
A DISASTER RECOVERY SYSTEM, AND PURCHASE OF PRODUCTION TOOLING AND EQUIPMENT.
THE CAPITAL EXPENDITURES IN THE YEAR ENDED JUNE 30, 2002 PRIMARILY REFLECTED THE
PURCHASE OF LAND IN SYDNEY DESCRIBED BELOW AND A COMPUTER SYSTEM UPGRADE. AS A
RESULT OF THESE CAPITAL EXPENDITURES, OUR BALANCE SHEET REFLECTS NET PROPERTY,
PLANT AND EQUIPMENT OF APPROXIMATELY $104.7 MILLION AT JUNE 30, 2003 COMPARED TO
$79.3 MILLION AT JUNE 30, 2002.
DURING THE YEAR ENDED JUNE 30, 2003 WE REPURCHASED $10.0 MILLION FACE VALUE OF
OUR OUTSTANDING CONVERTIBLE SUBORDINATED NOTES. THE TOTAL PURCHASE PRICE OF THE
NOTES WAS $9.4 MILLION, INCLUDING $0.2 MILLION IN ACCRUED INTEREST. WE
RECOGNIZED A GAIN OF $0.3 MILLION, NET OF TAX OF $0.2 MILLION, ON THESE
TRANSACTIONS. AT JUNE 30, 2003, WE HAD CONVERTIBLE SUBORDINATED NOTES
OUTSTANDING OF $113.2 MILLION.
DURING THE YEAR ENDED JUNE 30, 2002, WE REPURCHASED $56.8 MILLION FACE VALUE OF
OUR CONVERTIBLE SUBORDINATED NOTES. THE TOTAL PURCHASE PRICE OF THE NOTES WAS
$49.1 MILLION, INCLUDING $0.6 MILLION IN ACCRUED INTEREST. WE RECOGNIZED A GAIN
OF $4.0 MILLION, NET OF TAX OF $2.5 MILLION, ON THESE TRANSACTIONS.
WE MAY FROM TIME TO TIME SEEK TO RETIRE OUR CONVERTIBLE SUBORDINATED NOTES
THROUGH CASH PURCHASES AND/OR EXCHANGES FOR EQUITY SECURITIES IN OPEN MARKET
PURCHASES, PRIVATELY NEGOTIATED TRANSACTIONS, OR OTHERWISE. SUCH REPURCHASES OR
EXCHANGES, IF ANY, WILL DEPEND ON PREVAILING MARKET CONDITIONS, OUR LIQUIDITY
REQUIREMENTS, AND OUR CURRENT OR FUTURE CONTRACTUAL OBLIGATIONS, IF ANY, THAT
MAY DIRECTLY OR INDIRECTLY APPLY TO SUCH TRANSACTIONS.
ON JULY 3, 2001, WE ISSUED $30.0 MILLION IN OVER ALLOTMENTS FOR OUR 4%
CONVERTIBLE SUBORDINATED NOTES ISSUE, INCREASING THE TOTAL AMOUNT OF CONVERTIBLE
SUBORDINATED NOTES THEN OUTSTANDING TO $180.0 MILLION.
ON OCTOBER 2, 2001, WE PAID $1.4 MILLION AS FINAL CONSIDERATION ASSOCIATED WITH
THE PURCHASE OF MAP ON FEBRUARY 16, 2001. THE AMOUNT HAS BEEN RECORDED AS
GOODWILL.
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ON NOVEMBER 15, 2001, WE ACQUIRED ALL OF THE COMMON STOCK OF LABHARDT AG, OUR
SWISS DISTRIBUTOR, FOR TOTAL CASH CONSIDERATION, INCLUDING ACQUISITION COSTS, OF
$5.5 MILLION. THE ACQUISITION HAS BEEN ACCOUNTED FOR AS A PURCHASE AND,
ACCORDINGLY, THE RESULTS OF OPERATIONS OF LABHARDT AG HAVE BEEN INCLUDED IN OUR
CONSOLIDATED FINANCIAL STATEMENTS FROM NOVEMBER 15, 2001. THE EXCESS OF THE
PURCHASE PRICE OVER THE FAIR VALUE OF THE NET IDENTIFIABLE ASSETS ACQUIRED OF
$1.3 MILLION HAS BEEN RECORDED AS GOODWILL.
ON APRIL 26, 2002, WE SETTLED OUR PURCHASE OF A 30-ACRE SITE AT NORWEST BUSINESS
PARK, LOCATED NORTHWEST OF SYDNEY, AUSTRALIA. THE ACQUISITION COST WAS $23.6
MILLION, INCLUDING DEFERRED PAYMENTS OF $5.7 MILLION PAID IN OCTOBER 2002 AND
$5.7 MILLION PAID IN APRIL 2003. WE EXPECT THE FIRST BUILDING, A MANUFACTURING
FACILITY, TO BE OPERATIONAL ON THIS SITE IN THE FIRST HALF OF CALENDAR 2004.
NEW RESEARCH AND DEVELOPMENT AND OFFICE FACILITIES ARE EXPECTED TO BE COMPLETED
IN 2005.
WE ESTIMATE THAT THE BUILDING COSTS WILL BE APPROXIMATELY $40.0 MILLION.
ON MAY 8, 2002, WE COMPLETED A SALE AND LEASEBACK TRANSACTION OF OUR AUSTRALIAN
FACILITY LOCATED AT NORTH RYDE IN SYDNEY, AUSTRALIA. THE PROPERTY WAS SOLD FOR
$18.5 MILLION WITH A THREE-YEAR LEASEBACK AND A FURTHER ONE-YEAR OPTION. THE
PROFIT BEFORE TAX ON SALE OF THE PROPERTY OF $5.5 MILLION WILL BE AMORTIZED OVER
THE LEASE PERIOD. THE CASH MADE AVAILABLE FROM THE SALE WILL BE UTILIZED FOR
THE CONSTRUCTION OF OUR NEW FACILITIES AT NORWEST BUSINESS PARK ALSO LOCATED IN
SYDNEY, AUSTRALIA.
ON MAY 14, 2002 WE ACQUIRED ALL OF THE COMMON STOCK OF SERVO MAGNETICS
INCORPORATED ("SMI") FOR TOTAL CONSIDERATION, INCLUDING ACQUISITION COSTS, OF
$32.6 MILLION. CONSIDERATION INCLUDED THE ISSUE OF 853,448 SHARES FOR FAIR
VALUE OF $24.8 MILLION, WITH THE BALANCE OF THE ACQUISITION COST PAID IN CASH.
SUBSEQUENT TO THE ACQUISITION, WE REPAID ALL SMI'S EXISTING BANK LOANS TOTALING
$3.0 MILLION. THE ACQUISITION HAS BEEN ACCOUNTED FOR AS A PURCHASE AND
ACCORDINGLY, THE RESULTS OF OPERATIONS OF SMI HAVE BEEN INCLUDED IN OUR
CONSOLIDATED FINANCIAL STATEMENTS FROM MAY 14, 2002. THE EXCESS OF THE PURCHASE
PRICE OVER THE FAIR VALUE OF THE NET IDENTIFIABLE ASSETS ACQUIRED OF $1.9
MILLION HAS BEEN RECORDED AS GOODWILL.
ON JUNE 6, 2002, THE BOARD OF DIRECTORS AUTHORIZED US TO REPURCHASE UP TO 4.0
MILLION SHARES OF OUR OUTSTANDING COMMON STOCK. FOR THE YEARS ENDED JUNE 30,
2003 AND 2002, WE REPURCHASED 125,000 AND 290,000 SHARES AT A COST OF $3.5
MILLION AND $7.9 MILLION RESPECTIVELY. WE MAY CONTINUE TO REPURCHASE SHARES OF
OUR COMMON STOCK FOR CASH IN THE OPEN MARKET, OR IN NEGOTIATED OR BLOCK
TRANSACTIONS, FROM TIME TO TIME AS MARKET AND BUSINESS CONDITIONS WARRANT.
DETAILS OF CONTRACTUAL OBLIGATIONS AT JUNE 30, 2003 ARE AS FOLLOWS:
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Payments Due by Period
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In $000's Total Less than 1 year 1-3 years 4-5 years After 5 years