10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 14, 1996
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSACTION PERIOD FROM ___________ TO _____________
Commission file number: 0-26038
ResMed Inc.
(Exact name of registrant as specified in its charter)
Delaware 98-015286
(State or other jurisdiction of (I.R.S Employer
incorporation or organisation) Identification No.)
82 Waterloo Road
North Ryde New South Wales 2113
Australia
(Address of principal executive offices)
011 61 2 878 5244
(Registrant's telephone number including area code)
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 such filing
requirements for the past 90 days. Yes [X] No [ ]
As of March 31, 1996, 7,149,908 shares of Common Stock($0.004
par value) were outstanding.
ResMed Inc. and Subsidiaries
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ResMed Inc. and Subsidiaries
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ResMed Inc. and Subsidiaries
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ResMed Inc. and Subsidiaries
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ResMed Inc. and Subsidiaries
(1) Organization and Basis of Presentation
ResMed Inc. (the Company), is a Delaware corporation
formed in March 1994 as a holding company for ResMed
Holdings Ltd. (RHL), a company resident in Australia. RHL
designs, manufactures and markets devices for the
evaluation and treatment of sleep disordered breathing,
primarily obstructive sleep apnea. The Company's
principal manufacturing operations are located in
Australia. Other principal distribution and sales sites
are located in the United States, the United Kingdom,
Germany and Europe.
The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by
generally accepted accounting principles for complete
financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been
included. Operating results for the three months ended
March 31, 1996 and the nine months ended March 31,1996 are
not necessarily indicative of the results that may be
expected for the year ended June 30, 1996.
In May 1994, the stockholders of RHL approved a
reorganization and reincorporation of RHL resulting in the
exchange of the shares of the outstanding common stock of
RHL for the shares of the Company. In addition, effective
in March 1995, the Company effected a 5:2 stock split. As
a result of the reorganization, reincorporation and the
stock split, the accounts within the consolidated
financial statements have been restated to reflect a par
value of $.004 per share. The board of directors also
authorized 2,000,000 shares of $0.01 par value preferred
stock. None of the preferred stock was issued or
outstanding at March 31, 1996.
(2) Summary of Significant Accounting Policies
(a) Basis of Consolidation:
The consolidated financial statements include the
accounts of the Company and its wholly owned
subsidiaries. All significant intercompany
transactions and balances have been eliminated in
consolidation.
(b) Revenue Recognition:
Revenue on product sales is recorded at the time of
shipment. Royalty revenue from license agreements is
recorded when earned.
(c) Cash and Cash Equivalents:
Cash equivalents include certificates of deposit,
commercial paper, and other highly liquid investments
stated at cost, which approximates market.
Investments with original maturities of 90 days or
less are considered to be cash equivalents for
purposes of the consolidated statements of cash
flows.
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ResMed Inc. and Subsidiaries
(2) Summary of Significant Accounting Policies, Continued
(d) Inventories:
Inventories are stated at the lower of cost,
determined principally by the first-in, first-out
method, or net realizable value.
(e) Property, Plant and Equipment:
Property, plant and equipment is recorded at cost.
Depreciation expense is computed using the straight-
line method over the estimated useful lives of the
assets, generally two to 10 years. Assets held under
capital leases are recorded at the lower of the net
present value of the minimum lease payments or the
fair value of the leased asset at the inception of
the lease. Amortization expense is computed using
the straight-line method over the shorter of the
estimated useful lives of the assets or the period of
the related lease. Straight-line and accelerated
methods of depreciation are used for tax purposes.
Maintenance and repairs are charged to expense as
incurred.
(f) Patents:
The registration costs for new patents are capitalized
and amortized over the estimated useful life of the
patent, generally five years. In the event of a
patent being superseded, the unamortized costs are
written off immediately.
(g) Government Grants:
Government grants revenue is recognized when earned.
Grants have been obtained by the Company from the
Australian Federal Government to support continued
development and export of the Company's proprietary
positive airway pressure technology and to assist
development of export markets in the amount of
$129,000 for the three month period ended March 31,
1996 and $434,000 for the nine month period ended
March 31, 1996.
(h) Foreign Currency:
The consolidated financial statements of the Company's
non-U.S. subsidiaries are translated into U.S.
dollars for financial reporting purposes. Assets and
liabilities of non-U.S. subsidiaries whose functional
currencies are other than the U.S. dollar are
translated at period end exchange rates, revenue and
expense transactions are translated at average
exchange rates for the period. Cumulative translation
effects are reflected in stockholders' equity. Gains
and losses on transactions, denominated in other than
the functional currency of the entity, are reflected
in operations.
(i) Research and Development:
All research and development costs are expensed in the
period incurred.
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ResMed Inc. and Subsidiaries
(2) Summary of Significant Accounting Policies, Continued
(j) Net Income per Common and Common Equivalent Share:
Primary net income per common and common equivalent
share and net income per common and common equivalent
share assuming full dilution are computed using the
weighted average number of shares outstanding,
adjusted for the incremental shares attributed to
outstanding options to purchase common stock as
determined under the treasury stock method.
(k) Financial Instruments:
The carrying value of financial instruments, such as
cash and cash equivalents, foreign currency option
contracts, accounts receivable, accounts payable,
marketable securities and long-term debt approximate
their fair value. The Company does not hold or issue
financial instruments for trading purposes.
The following table presents the carrying amounts and
estimated fair values of the Company's financial
instruments at March 31, 1996 and June 30, 1995. The
Fair Value of Financial Instruments is defined as the
amount at which the instrument could be exchanged in
a current transaction between willing parties.
The carrying amounts shown in the table are included
in the statement of financial position under the
indicated captions.
(l) Foreign Exchange Risk Management:
The Company enters into various types of foreign
exchange contracts in managing its foreign exchange
risk, including derivative financial instruments
encompassing forward exchange contracts and foreign
currency options.
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ResMed Inc. and Subsidiaries
(2) Summary of Significant Accounting Policies, Continued
(l) Foreign Exchange Risk Management, Continued
The purpose of the Company's foreign currency hedging
activities is to protect the Company from adverse
exchange rate fluctuations with respect to net cash
movements resulting from the sales of products to
foreign customers and Australian manufacturing
activities. The Company enters into foreign currency
option contracts to hedge anticipated sales and
manufacturing costs denominated in principally
Australian Dollars, Pound Sterling and Deutschmarks.
The term of such currency derivatives is rarely more
than three years.
Premiums to enter certain foreign currency options are
included in other assets and are amortized over the
period of the agreement in the consolidated statement
of income against other income, net. At March 31,
1996 unamortized premiums amounted to $329,000.
Unrealised gains or losses are recognised as incurred
in the statement of financial position as either
other assets or other liabilities and are recorded
within other income, net on the Company's
consolidated statement of income. Unrealised gains
and losses on currency derivatives are determined
based on dealer quoted prices.
Foreign currency option contracts have been purchased
in part by the issue of put options to counterparts.
As a result, should foreign exchange rates drop below
a specified level, on a specific date, the Company is
required to deliver certain funds to counterparts at
contracted foreign exchange rates. As at March 31,
1996 none of the put options issued by the Company
are excersizable as foreign exchange rates remain
above the foreign exchange rates specified.
The Company is exposed to credit-related losses in the
event of nonperformance by counterparts to financial
instruments, but it does not expect any counterparts
to fail to meet their obligations given their high
credit ratings. The credit exposure of foreign
exchange options is represented by the fair value of
options with a positive fair value at the reporting
date.
At March 31, 1996 the Company held foreign currency
option contracts with notional amounts totalling
$44,100,000 to hedge foreign currency items. These
contracts mature at various dates prior to June 30,
1998.
(m) Income Taxes:
The Company accounts for income taxes under Statement
of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (Statement 109).
Statement 109 requires an asset and liability method
of accounting for income taxes. Under the asset and
liability method of Statement 109, 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
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ResMed Inc. and Subsidiaries
(2) Summary of Significant Accounting Policies, Continued
(m) Income Taxes, Continued:
those temporary differences are expected to be
recovered or settled. Under Statement 109, 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.
(n) Priess Purchase
On February 7, 1996 the Company's fully owned German
subsidiary ResMed Priess GmbH acquired the business
and associated assets of Dieter W Priess
Medizintechnik (Priess), its German distributor for
$6,350,000 in cash. Priess is based in
Moenchengladbach, Germany and is engaged in the sale
and distribution of respiratory products. The
acquisition has been accounted for as a purchase and,
accordingly, the results of operations of Priess have
been included in the Company's consolidated financial
statements from February 7, 1996. The excess of the
purchase price over the fair value of the net
identifiable assets acquired of $4,461,000 has been
recorded as goodwill and is being amortized on a
straight-line basis over 15 years. The purchase
agreement also provides for additional payments of up
to $4,000,000 over the next four years contingent on
future sales revenues of Priess. The additional
payments, if any, will be accounted for as additional
goodwill.
The following unaudited pro forma financial
information presents the combined results of
operations of the Company and Priess as if the
acquisition had occurred as of the beginning of the
nine month periods ended March 31, 1996 and March 31,
1995, after giving effect to certain adjustments,
including amortization of goodwill, additional
depreciation expense, reduced interest income from
use of IPO funds relating to the acquisition, and
related income tax effects. The pro forma financial
information does not necessarily reflect the results
of operations that would have occurred had the
Company and Priess constituted a single entity during
such periods.
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ResMed Inc. and Subsidiaries
(2) Summary of Significant Accounting Policies, Continued
(n) Priess Purchase, Continued:
(3) Inventories
Inventories were comprised of the following at March 31,
1996 and June 30, 1995:
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ResMed Inc. and Subsidiaries
Net Revenues
Net revenues increased for the three months ended March 31,
1996 to $9.4 million from $6.4 million for the three months
ended March 31, 1995, an increase of $3.0 million or 47%. For
the nine month period ended March 31, 1996 net revenues
increased to $24.0 million from $16.8 million in fiscal 1995
an increase of $7.2 million or 43%. Both the three month and
nine month increase in net revenues are primarily attributable
to an increases in unit sales of the Company's flow generators
and accessories in North America and Europe and additional
revenues generated in Germany from the Priess business since
February 7, 1996, date of acquisition. Net revenues in North
America increased to $4.5 million from $3.4 million for the
quarter, $12.1 million from $8.8 million for the nine months
and in Europe to $3.6 million from $2.0 million for the
quarter, $8.0 million from $4.7 million for the nine months,
respectively.
Gross Profit
Gross profit increased for the three months ended March 31,
1996 to $4.6 million from $3.3 million for the three months
ended March 31, 1995, an increase of $1.3 million or 38%. The
increase resulted primarily from increased unit sales during
the quarter ended March 31, 1996. Gross profit as a
percentage of net revenues decreased for the three months
ended March 31, 1996 to 49% from 52% in the three months ended
March 31, 1995. This decrease was primarily due to a 5%
increase of the Australian dollar with respect to the United
States dollar over the three months ended March 1996 and to a
lesser extent product mix changes.
For the nine month period ended March 31, 1996 gross profit
increased to $12 million from $8.6 million in the same period
of fiscal 1995 an increase of $3.4 million or 39%. Gross
profit as a percentage of net revenues decreased for the nine
month period ended March 31, 1996 to 50% from 51%, for the
nine months ended March 31, 1995.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased for the
three months ended March 31, 1996 to $2.9 million from $2.0
million for the three months ended March 31, 1995, an increase
of $946,000 or 48%. As a percentage of net revenues, selling,
general and administrative expenses remained static at 31% for
the quarter ended March 31, 1996 and the three months ended
March 31, 1995. The increase in gross expenses was due
primarily to an increase from 56 to 90 in the number of sales
and administrative personnel, including 24 persons employed on
acquisition of Priess, legal costs associated with ongoing
legal action (refer Part II Item 1) and other expenses related
to the increase in Company sales.
Selling, general and administrative expenses for the nine
months ended March 31, 1996 also increased to $7.5 million
from $5.2 million for the nine months ended March 31, 1995 an
increase of $2.3 million or 43%. As a percentage of net
revenues selling, general and administration expenses remained
static at 31% for the nine months ended March 31, 1996 and
1995.
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ResMed Inc. and Subsidiaries
Research and Development Expenses
Research and development expenses increased for the three
months ended March 31, 1996 to $640,000 from $556,000 for the
three months ended March 31, 1995, an increase of $84,000 or
15%. As a percentage of net revenues, research and
development expenses for the three months ended March 31, 1996
decreased to 7% from 9% for the period ended March 31, 1996.
The increase in gross research and development expenses was
due to an increase from 24 to 31 in the number of engineering
personnel and increased payment for consulting fees to
facilitate product development of a number of new products.
For the nine month period ended March 31, 1996 research and
development expenses also increased to $2.0 million from $1.4
million for fiscal 1995 an increase of $568,000 or 39%. As a
percentage of net revenues research and development expenses
remained relatively consistent for the nine months ended March
31, 1996 and the nine months ended March 31, 1995. The gross
increase in research and development expenses for the nine
months ended March 31, 1996 reflects the cost increases noted
for the quarter ended March 31, 1996 relating to the
development of new products.
Other Income, net
Other income, net increased for the three months ended March
31, 1996 to $765,000 from $248,000 for the three months ended
March 31, 1995, an increase of $517,000 or 209%. This
increase was due primarily to interest revenue of $283,000
arising from the initial public offering of the Company and
net foreign exchange gains of $333,000 relating to foreign
exchange option contracts. Government grant income also
increased for the three months ended March 31, 1996 to
$129,000 from $68,000 for the three months ended March 31,
1995 reflecting an increase in both manufacturing and research
activity.
Other income, net also increased for the nine months ended
March 31, 1996 to $1.8 million, from $707,000 for the nine
months ended March 31, 1995 an increase of $1.1 million or
161%. The increase in other income, net over the nine month
period reflects increased interest income of $693,000 relating
to the initial public offering of the Company, additional
government grant incomes, which increased to $434,000 from
$253,000 for the nine months ended March 31, 1995 and the
receipt of $242,000 from Teijin Limited of Japan for certain
marketing rights for respiratory and related products in
Japan.
Income Taxes
The Company's effective income tax rate for the three months
ended March 31, 1996 increased to approximately 33% from
approximately 25.0% for the three months ended March 31, 1995.
For the nine month period ended March 31, 1996 the Company's
effective income tax rate increased to 30% from 25% for the
nine months ended March 31, 1995. These increases are
primarily due to an increase in the Australian corporate tax
rate from 33% to 36% on July 1, 1995 an effective German
corporate taxation rate of 51%, partially offset by additional
research and development expenses incurred in Australia for
which the Company receives a 150% deduction for tax purposes.
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ResMed Inc. and Subsidiaries
Liquidity and Capital Resources
As of March 31, 1996 and June 30, 1995, the Company had cash
and cash equivalents and marketable securities available for
sale of approximately $22.1 million and $23.8 million,
respectively. The Company's working capital approximated $29.9
million and $27.4 million, at March 31, 1996 and June 30,
1995, respectively. The increase in working capital balances
reflects the increase in cash balances arising from increased
selling activity, the receipt of approximately $5 million from
the exercise of 153,000 stock options and the exercise, by the
underwriters of the Company's initial public offering of their
full over allotment of 450,000 shares at a net offering price
of $10.23 per share. These increases were offset by the
payment of $6.5 million to acquire the Priess business.
During the nine months ended March 31, 1996, the Company's
operations generated $961,000 cash from operations, primarily
as a result of increased profit from operations offset
partially by increases in both inventory for new product
introductions and accounts receivable due to increased sales.
During the nine months ended March 31, 1995 approximately
$127,000 of cash was generated from operations.
The Company's capital expenditures for the nine month period
ended March 31, 1996 and 1995 aggregated $7.4 million and $1.1
million, respectively. The majority of the expenditures in the
nine month period ending March 31, 1996 relate to the purchase
of Priess, the purchase of production tooling and equipment
and, to a lesser extent, office furniture, computers and
research and development equipment. As a result of these
capital expenditures, the Company's March 31, 1996 balance
sheet reflects net property plant and equipment of
approximately $3.0 million at March 31, 1996, compared to $2.0
million at June 30, 1995.
The results of the Company's international operations are
affected by changes in exchange rates between currencies.
Changes in exchange rates may negatively affect the Company's
consolidated net sales and gross profit margins from
international operations. The Company is exposed to the risk
that the dollar-value equivalent of anticipated cash flows
will be adversely affected by changes in foreign currency
exchange rates. The Company manages this risk through foreign
currency option contracts.
In May 1993, the Australian Federal Government agreed to lend
the Company up to $800,000 over a six year term. Such loan
bears no interest for the first three years and bears interest
at a rate of 3.8% thereafter until maturity. The outstanding
principal balance of such loan was $861,000 and $787,000 at
March 31, 1996 and June 30, 1995, respectively.
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ResMed Inc. and Subsidiaries
PART II OTHER INFORMATION
Item 1. Legal Proceedings
In October 1994, in Australia, a patent held by ResMed was
revoked on appeal on grounds that the patent was not
entitled to claim priority to a "provisional"
application, which was filed before the inventor's
publication. As a result of this claim, ResMed based in
part on advice from legal counsel, at June 30, 1994
accrued approximately $300,000 for costs associated with
this patent litigation which remains outstanding at March
31, 1996. This amount is included in accrued expenses on
the consolidated balance sheets.
In January 1995, the Company filed a complaint for patent
infringement in the United States District Court against
Respironics Inc., a Delaware registered company. In
response, in February 1995, Respironics filed a complaint
against the Company that asserts, (i) Respironics does
not infringe the subject patents; and (ii) that the
subject patents are invalid and unenforceable.
Management believes, based in part on advise from legal
counsel, that this action will not have a material
adverse effect on the operations or financial position of
the Company.
In May 1995, Respironics and its Australian distributor
filed a statement of claim against the Company and its
President in the Federal Court of Australia, New South
Wales District Registry. The statement of claim alleges
that the Company engaged in unfair trade practices,
including misuse of the power afforded by its Australian
patents and dominant market position in violation of the
Australian Trade Practices Act. The statement of claim
asserts damage claims in the aggregate amount of
approximately $730,000, constituting lost profit on
sales. While the Company intends to defend this action
vigorously, there can be no assurance that the Company
will be successful in defending such action or that the
Company will not be required to make significant payments
to the claimants. Furthermore, the Company expects to
incur ongoing legal costs in defending such action.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
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ResMed Inc. and Subsidiaries
Item 6. Exhibits and Report on Form 8K
Exhibits
27.1 Financial Data Schedule
Report on Form 8-K
The Company lodged a report under item 2 of Form 8-K and
an amended report under Item 2 of Form 8-K on February 21,
1996 and April 26, 1996, respectively to reflect the
acquisition of the business of Priess Medizintechnik on
February 7, 1996. Incorporated within the initial report on
Form 8-K and the amended report on Form 8-K, the Company lodged
the following:
* Audited Financial Statements of Dieter W Priess
Medizintechnik for the years ended December 31, 1995 and
December 31, 1994, respectively.
* Independent Auditors Report therein dated March 27, 1996.
* Unaudited Proforma Condensed Consolidated Financial
Statements of ResMed, Inc. as of December 31, 1995 for the
year ended June 30, 1995 and the six months ended December 31,
1995, respectively.
Exhibits thereto
2.1 Purchase Agreement dated February 7, 1996 between
Dieter W Priess Medizinische technische Gerate and ResMed-
Priess GmbH (I, GR).
23.1 Consent of KPMG Deutsche Treuhand Gesellschaft.
99.3 Press Release, dated February 12, 1996, issued by ResMed,
Inc.
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ResMed Inc. and Subsidiaries
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorised.
ResMed Inc.
Peter C Farrell
Peter C Farrell
President and Chief Executive Officer
Adrian M Smith
Adrian M Smith
Vice President Finance and Chief Financial Officer
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