POS AM: Post-effective amendment to a registration statement that is not immediately effective upon filing
Published on July 11, 1996
As filed with the Securities and Exchange Commission on July 10, 1996
Registration No. 33-94610
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
________________________________
RESMED INC.
(Exact name of registrant as specified in its charter)
________________________________
Delaware 3842 98-0152841
(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of incorporation or Classification Code Identification No.)
organization) Number)
82 WATERLOO ROAD, NORTH RYDE, NEW SOUTH WALES 2113, AUSTRALIA
61(2) 850-2300
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
__________________________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box.[x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.[ ]
If this Form is a post-effective amendment pursuant to Rule 462(c) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]
__________________________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
RESMED INC.
PROSPECTUS
RESMED INC.
197,000 SHARES
OF
COMMON STOCK
This Prospectus relates to 197,000 shares (the "Shares") of Common Stock,
$.004 par value, of ResMed Inc., a Delaware corporation ("ResMed" or the
"Company") which may be offered for sale by certain persons (collectively the
"Selling Stockholders") who have acquired or may acquire such shares upon
exercise of stock options granted to such persons by the Company.
The Shares may be offered to the public from time to time by the Selling
Stockholders. The Company will not receive any of the proceeds from the sale
of the Shares by the Selling Stockholders. The Company will pay certain of
the expenses of this offering. The Selling Stockholders will also bear
certain costs of this offering, including the commissions and discounts of any
underwriters, dealers and agents and any legal expenses of the Selling
Stockholders. The Common Stock may be sold directly or through underwriters,
dealers or agents in market transactions or privately-negotiated transactions.
Such sales may be made at prevailing market prices at the time of sale, at
prices related to such market prices, or at prices otherwise negotiated. See
"Plan of Distribution."
The Company's Common Stock is traded in the NASDAQ National Market System
under the symbol "RESM."
_________________________________________
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGE 6 HEREOF.
_________________________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
_________________________________________
The Shares being offered hereby by the Selling Stockholders have not been
registered for sale under the securities laws of any state or jurisdiction as
of the date of this Prospectus. Brokers or dealers effecting transactions in
the Shares should confirm the registration thereof under the securities laws
of the state in which such transactions occur, or the existence of any
exemption from registration.
The date of this Prospectus is July 10, 1996
AVAILABLE INFORMATION
The Company is subject to the informational requirements (File Number
0-26038) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act), and, in accordance therewith files reports and other information with
the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements, and other information can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450 5th
Street, N.W., Washington, D.C. 20549 and at the following Regional Offices of
the Commission: New York Regional Office, 7 World Trade Center, New York, New
York 10048 and Chicago Regional Office, Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60621. Copies of such material can be
obtained at prescribed rates by writing to the Securities and Exchange
Commission, Public Reference Section, 450 5th Street, N.W., Washington, D.C.
20549.
No dealer, sales representative or any other person has been authorized
to give any information or to make any representations in connection with this
offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or the Selling Stockholders. This Prospectus does
not constitute an offer to sell, or a solicitation of an offer to buy any
securities other than the registered securities to which it relates or an
offer to, or a solicitation of, any person in any jurisdiction where such
offer or solicitation would be unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company
since the date hereof or that the information contained herein is correct as
of any time subsequent to the date hereof.
The Company intends to furnish to its stockholders annual reports
containing audited consolidated financial statements reported on by its
independent certified public accountants and quarterly reports containing
unaudited consolidated financial information for the first three quarters of
each fiscal year.
SULLIVAN (Registered Trademark), VPAP (Registered Trademark), AutoSet
(Trademark), Bubble Mask (Trademark), Bubble Cushion(Trademark) and
SmartStart (Trademark) are trademarks of the Company.
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SUMMARY
The following summary is qualified by the more detailed information
including "Risk Factors," and Consolidated Financial Statements and Notes
thereto, appearing elsewhere in this Prospectus.
THE COMPANY
ResMed Inc. designs, manufactures and markets a diversified range of
products for the diagnosis and treatment of a severe form of sleep disorder
known as obstructive sleep apnea ("OSA"). OSA is a breathing disorder in
which the upper airway frequently collapses during sleep. This results in
cycles of subconscious awakenings which, in severe cases, can occur several
hundred times per night. Sufferers of OSA typically experience two or more
clinical symptoms of OSA, such as excessive daytime sleepiness or reduced
cognitive function, including memory loss and lack of concentration. OSA
sufferers also may experience oxygen deaturation, an increase in heart rate
and an elevation of blood pressure during the cycle of apneas. Several
reports indicate OSA may be associated with increased risk of cardiovascular
morbidity and mortality due to angina, stroke and heart attack.
The primary treatment for OSA is continuous positive airway pressure
("CPAP") which involves the delivery of low positive airway pressure through a
nasal mask worn by the OSA sufferer to pneumatically splint open the upper
airway. When used as prescribed, nasal CPAP prevents upper airway collapse
during sleep and is generally considered effective for treating symptoms of
OSA. In 1986, the Company's founders formed a relationship with Dr. Colin
Sullivan of the University of Sydney, the inventor of nasal CPAP for treating
OSA. The Company, in collaboration with Dr. Sullivan, the Chairman of
ResMed's Medical Advisory Board, has developed a range of products which are
now marketed in 40 countries. The Company's primary products include small,
portable air flow generators, which are used by the patient at home during
sleep. These products deliver either CPAP or variable positive airway
pressure ("VPAP"). VPAP provides different pressure levels for inhalation and
exhalation. In addition, the Company markets proprietary nasal masks ("Bubble
Masks"), humidifiers, air tubing, headgear and carry cases. The Company has
also developed several proprietary features such as a delay timer to allow
patients to fall asleep while air pressure from the air flow generator
gradually builds to the prescribed level, and a SmartStart function which
automatically starts and stops air flow with placement and removal of the
mask. In addition to its conventional air flow generators, the Company is
developing an autofeedback CPAP product known as AutoSet. This device
automatically and continuously adjusts the delivered air pressure in response
to abnormalities detected in the patient's breathing pattern.
While OSA has been diagnosed in a broad cross-section of the population,
it is predominant among middle-aged men and people who are obese, smoke,
consume alcohol in excess or use muscle relaxing drugs. In addition, patients
who are being treated for certain other medical conditions, including people
on dialysis treatment or suffering from diabetes, are medically predisposed to
OSA. In 1993, the National Commission on Sleep Disorders Research estimated
that approximately 20 million individuals in the U.S. suffer from sleep apnea,
of whom approximately 6.5 million over 30 years of age suffer from moderate to
severe OSA. However, there is a general lack of awareness of the disease
among both the medical community and the general public, which has led to a
corresponding failure to diagnose the disorder. It is estimated that less
than 3% of those afflicted by OSA know the cause of their fatigue or other
symptoms.
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The Company's net revenues have grown from approximately $816,000 in
fiscal 1990 to approximately $23.5 million in fiscal 1995. Net revenues for
the nine months ended March 31, 1996 represented a 43% increase over net
revenues for the nine months ended March 31, 1995. The Company believes that
this growth is due, in part, to the increasing number of OSA patients
receiving treatment. The Company expects that the market for OSA products
will increase in the future due to several factors, including greater
awareness in the medical community of OSA, an increase in the number and
capacity of sleep clinics, and improved products for home diagnosis and
treatment of OSA. The Company's strategy for the expansion of its business
operations consists of three key elements: (i) continued product development
and innovation; (ii) increased market penetration in the 40 countries in which
the Company currently markets its products, particularly the United States,
and expansion of its market presence beyond these regions; and (iii) increased
public and clinical awareness of OSA and its effects.
The Company holds the rights to five issued United States patents and
eleven issued foreign patents. In addition, the Company has eight pending
United States patent applications and twenty foreign patent applications.
The Company's executive offices are located at 82 Waterloo Road, North
Ryde, New South Wales 2113, Australia, and its telephone number is 61(2)
878-5244.
RISK FACTORS
An investment in the Common Stock involves a high degree of risk,
including risks of intense competition, potential technological change
resulting in product obsolescence, reliance on third parties for marketing,
compliance with changing government regulation, reliance on adequate
reimbursement by private and governmental insurance programs, and the risks
associated with international operations. For a discussion of these and other
risks to be considered, see "Risk Factors."
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RISK FACTORS
Certain statements in this Prospectus that are not historical fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may
cause the actual results of the Company to be materially different from
historical results or from any results expressed or implied by such
forward-looking statements. Such risks, uncertainties and other factors
include, but are not limited to, the following risks:
UNCERTAINTY OF MARKET ACCEPTANCE OF PRODUCTS
There can be no assurance that the Company will be able to enhance its
existing products, introduce or acquire new products and maintain or expand
its market share, gain market acceptance of its products or be able to develop
or acquire additional products. Limited market growth or failure of the
Company's products to achieve market acceptance would have a material adverse
effect on the business, financial condition and results of operations of the
Company.
INTENSE COMPETITION
The markets for the Company's products are highly competitive. The
failure of the Company to meet the prices offered by its competitors, or offer
products which either contain features similar to or more desirable than those
products offered by its competitors or which are perceived as reliable by
consumers could have a material adverse effect on the business, financial
condition and results of operations of the Company. The United States market
for products for the treatment of OSA is currently dominated by Respironics,
Inc. ("Respironics"). Other competitors in this market include Healthdyne
Technologies Inc. ("Healthdyne Technologies"), Nellcor Puritan Bennett
Corporation ("Nellcor Puritan Bennett") and DeVilbiss Healthcare Inc.
("DeVilbiss"), a division of Sunrise Medical Inc. Most of the Company's
competitors have greater financial, research, manufacturing and marketing
resources than the Company. In addition, some of the Company's competitors
sell additional lines of products, and therefore can bundle products to
offer higher discounts, or offer rebates or other incentive programs to gain
a competitive advantage. The Company's competitors may also employ litigation
to gain a competitive advantage. The Company's inability to compete
effectively against existing or future competitors would result in a material
adverse effect on the Company's business, financial condition and results
of operations. See "Business - Obstructive Sleep Apnea," "- Competition" and
"- Patents and Proprietary Rights and Related Litigation."
TECHNOLOGICAL CHANGE RESULTING IN PRODUCT OBSOLESCENCE
The market for products for the treatment of OSA is characterized by
frequent product improvements and evolving technology. The Company's
revenues and profitability could be adversely affected by technological
change. The development of new or innovative CPAP product technology by
others or the discovery of alternative treatments or a cure for OSA could
result in the Company's products becoming obsolete or noncompetitive, which
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business - The Market," "- Existing
Therapies."
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LIMITED COMMERCIAL EXPERIENCE
The Company has limited experience in manufacturing, marketing and
selling its products. The Company's ability to expand its operations will
depend in part upon its ability to further develop its distribution network,
manufacturing capabilities and financial management systems, procedures and
controls. There can be no assurance that the Company will be successful in
managing any expansion of its operations. Failure to do so could result in a
material adverse effect upon the Company's business, financial condition and
results of operations. See "Business - Manufacturing" and "- Sales and
Marketing."
UNCERTAINTY OF FINANCIAL PERFORMANCE; VARIABILITY OF QUARTERLY RESULTS
The Company's revenues and profitability are dependent principally on the
sale of its air flow generators, nasal mask systems and accessories. There
can be no assurance that the Company will be able to continue such sales or
will be able to achieve continued revenue growth and profitability. The
Company's results, including its net revenues and gross margins, have, from
time to time, fluctuated on a quarterly basis and may be subject to similar
fluctuations in the future. These fluctuations may result from the absence of
a backlog of orders for the Company's products, the introduction of new
products by the Company or its competitors, the geographic mix of product
sales, the success of the Company's marketing efforts in new regions, changes
in third-party reimbursement, timing of regulatory actions, timing of orders
by distributors, expenditures incurred for research and development,
competitive pricing in different regions, seasonality, the cost and effect of
promotional and marketing programs and the effect of foreign currency
transaction gains or losses, among other factors. In addition, the Company's
results of operations could be adversely affected by changes in tax laws in
the various countries in which the Company conducts its operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
LIMITED MARKETING CAPABILITIES; RELIANCE ON HOME HEALTH CARE DEALERS
The Company markets its products to physicians and clinicians
specializing in sleep disorders, to sleep clinics that diagnose OSA and to
home health care dealers. The Company has limited resources to market to the
more than 1,200 United States sleep clinics, and the more than 1,500 home
health care dealer branch locations, most of which use, sell and/or recommend
several brands of CPAP products. In general, OSA patients are influenced
significantly by sleep clinics and home health care dealers when purchasing
CPAP products. In the United States, when a sleep physician prescribes the
use of CPAP products for home treatment of OSA (which prescription may or may
not specify a brand of CPAP product), the patient purchases the product from a
home health care dealer. Sleep clinic physicians may prescribe CPAP products
for patients based on the brand of CPAP product that is used in the clinic to
treat OSA. Even if a sleep physician prescribes a certain brand name of CPAP
product, a home health care dealer may substitute a competitive CPAP product
for the patient. Home health care dealers are experiencing price pressures as
government and third-party reimbursement is declining for home care products.
Home health care dealers are requiring price discounts from manufacturers such
as the Company. There can be no assurance that physicians will continue to
prescribe the Company's products, or that home health care dealers and
patients will not substitute competing products when a prescription specifying
the Company's product has been written. The Company's business, financial
condition and results of operations could be materially adversely affected by
the Company's failure to market effectively to sleep clinics and/or home
health care dealers or to ensure that its products are properly marketed
and/or sold by such third parties. No assurance can be given that the Company
will have sufficient marketing capabilities in the future to sell its products
profitably or at all. The Company expects to incur significant expenditures
to develop an expanded direct sales force to market its products, and there
can be no assurance that such efforts will be successful. See "Business -
Sales and Marketing."
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LIMITED PROTECTION OF PATENTS AND PROPRIETARY RIGHTS
The Company relies on a combination of patents, trademarks, trade secrets
and non-disclosure agreements to protect its proprietary technology, rights
and know-how. There can be no assurance that the Company's patents will not
be infringed upon, that the non-disclosure agreements will not be breached,
that the Company would have adequate remedies for any such breach or
infringement, or that the Company's trade secrets will not otherwise become
known to or independently developed by competitors. The Company is pursuing
infringement actions against one of its competitors (Respironics) and is
investigating possible infringement by others. Litigation may be necessary to
enforce patents issued to the Company, to protect the Company's proprietary
rights, or to defend third-party claims of infringement by the Company of
proprietary rights of others. Such litigation could result in substantial
cost to the Company and a diversion of effort of the Company's personnel.
There can be no assurance that any patents now or hereafter issued to,
licensed by, or applied for by the Company will be upheld, if challenged, or
that the protections afforded thereby will not be circumvented by others.
Patent laws regarding the enforceability of patents vary from country to
country. Therefore, there can be no assurance that patent issues will be
uniformly resolved, or that local laws will provide the Company with
consistent rights and benefits. In addition, there can be no assurance that
others will not be issued patents which may prevent the sale of the Company's
products or require licensing and the payment of fees or royalties by the
Company in order for the Company to be able to market certain products.
POTENTIAL ADVERSE EFFECT OF RECENT AND PENDING PATENT LITIGATION
Recent and pending litigation involving Respironics has resulted in, and
can be expected to continue to result in, substantial cost to the Company and
a diversion of effort of the Company's personnel. The Company's original
Australian patent, which was due to expire in 1998 and covered the CPAP method
of treating, and the device for treatment of, OSA, was challenged by the
Australian distributor for Respironics, and in May 1994, was revoked by an
Australian appeals court in reliance on issues specific to Australian patent
law. Such revocation will permit competitors to market CPAP products in
Australia. Consequently, the Company expects its dominant market share in
Australia will decrease. At June 30, 1994, the Company accrued approximately
$300,000 for estimated additional costs associated with this litigation, which
amount remained outstanding at March 31, 1996.
In January 1995, the Company filed a complaint for patent infringement in
the United States District Court for the Southern District of California
against Respironics. The complaint seeks monetary damages from, and
injunctive relief against, Respironics resulting from its alleged
infringement of three of the Company's patents related to the CPAP system,
its delay timer feature and a Bubble Cushion type mask. In February 1995,
Respironics filed a complaint against the Company in the United States
District Court for the Western District of Pennsylvania seeking a
declaratory judgment that Respironics does not infringe claims of these
patents and that the Company's patents are invalid and unenforceable. The two
actions have been combined and are proceeding in the United States District
Court for the Western District of Pennsylvania. In June 1996 the Company
initiated a further action in Pennsylvania against Respironics regarding
alleged infringement of the Company's continuation patent, granted June 4,
1996, related to the delay timer feature. An adverse ruling as to any of the
four patents in suit could have an adverse effect on the Company's ability to
enforce its patents against Respironics and others and enable others to gain a
competitive advantage. See "Business - Patents and Proprietary Rights
and Related Litigation."
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On May 17, 1995, Respironics and its Australian distributor filed a
Statement of Claim against the Company and Dr. Peter C. Farrell in the Federal
Court of Australia, New South Wales District Registry. The Statement of Claim
alleges that the Company engaged in unfair trade practices, including the
misuse of the power afforded by its Australian patents and dominant market
position in violation of the Australian Trade Practices Act. The Statement of
Claim asserts damage claims in the aggregate amount of approximately $730,000,
constituting lost profit on sales. 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.
DEPENDENCE ON KEY CUSTOMERS
Two distributors of the Company's products, one located in Australia and
the other in Germany, accounted for approximately 10% and 15% of the Company's
net revenues for the fiscal year ended June 30, 1995. In February, 1996, the
Company entered into an agreement to acquire the German distributor. See
"Recent Developments." There can be no assurance that the Australian
distributor or any of the Company's customers will continue to do business
with the Company. The loss of the Australian distributor could adversely
affect the Company's business, financial condition and results of operations.
See "Business - Sales and Marketing."
DEPENDENCE ON SINGLE-SOURCE SUPPLIERS
The Company purchases two key components for its CPAP devices from two
single-source suppliers. There can be no assurance that a replacement
supplier could be located on a timely basis or that available inventories
would be adequate to meet the Company's production needs during any prolonged
interruption of supply. A reduction or stoppage in supply, or the Company's
inability to develop alternate supply sources, if required, would limit its
ability to manufacture its CPAP devices and therefore could adversely affect
its business, financial condition and results of operations. See "Business -
Manufacturing."
UNCERTAINTY OF INTERNATIONAL SOURCE OF SUPPLY
The Company's sole supplier for one product component is located in
Europe. Operations in Europe are subject to the risks normally associated
with foreign operations including, but not limited to, possible changes in
export or import restrictions and the modification or introduction of other
governmental policies with potentially adverse effects. See "Business -
Sales and Marketing."
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT; PRICE CONTROLS
The cost of medical care is funded, in substantial part, by government
insurance programs, such as Medicare and Medicaid in the United States, and
private and corporate health insurance plans. The Company's success is
dependent upon the ability of the Company's customers to obtain adequate
reimbursement from such third-party payors for purchasing the Company's
products. Third-party payors may deny reimbursement if they determine that
the prescribed device has not received appropriate United States Food and Drug
Administration ("FDA") or other governmental regulatory clearances, is not
used in accordance with cost-effective treatment methods as determined by the
payor, or is experimental, unnecessary or inappropriate. Third-party payors
are increasingly challenging the prices charged for medical products and
services. Also, the trend towards managed
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health care in the United States and the concurrent growth of HMOs, which
could control or significantly influence the purchase of health care services
and products, as well as legislative proposals to reform health care, may all
result in lower prices for the Company's products. The cost containment
measures that health care providers are instituting in the face of the
uncertainty and the ultimate effect of any health care reform could have an
adverse effect on the Company's ability to sell its products and may have a
material adverse effect on the Company's business, financial condition and
results of operations. In some markets, such as Spain, France and Germany,
government reimbursement is currently available for purchase or rental of the
Company's products, subject to constraints such as price controls or unit
sales limitations. In other markets, such as Australia, the United Kingdom
and Japan, there is currently limited or no reimbursement for devices that
treat OSA. There can be no assurance that the Company's products will be
considered cost-effective by third-party payors, that reimbursement will be
available or, if currently available, will continue to be available, or that
changes in payors' reimbursement policies will not adversely affect the
Company's ability to sell its products on a profitable basis, if at all. See
"Business - Third-Party Reimbursement."
DEPENDENCE ON INTERNATIONAL SALES
Sales outside North America accounted for approximately 56%, 53% and 47%
of the Company's net revenues in fiscal 1993, 1994 and 1995, respectively, and
49% for the nine months ended March 31, 1996. The Company expects that such
sales will continue to account for a significant portion of the Company's net
revenues in the future. The Company's sales are subject to certain inherent
risks of global operations, including international monetary conditions,
tariffs, import licenses, trade policies, domestic and foreign tax policies
and foreign medical device manufacturing regulations. See "Business - Sales
and Marketing," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
UNCERTAINTY OF CURRENCY FLUCTUATIONS
The Company's international operations, conducted in various foreign
currencies, could be adversely affected by fluctuations in currency exchange
rates as well as changes in duty rates. The Company has had foreign currency
transaction gains and losses in recent periods. A significant fall in the
value of the United States dollar against certain international currencies
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
COSTS AND UNCERTAINTIES OF COMPLIANCE WITH AND CHANGES IN GOVERNMENT
REGULATION
The development, manufacture and marketing of the Company's products are
subject to extensive and rigorous regulation by the FDA and by other
governmental agencies and relevant foreign agencies. The process of obtaining
and maintaining FDA and other required regulatory approvals for medical device
products is generally lengthy and expensive, and the outcome is often
unpredictable. There can be no assurance that the Company's current market
clearances can be maintained or that approvals will be granted for the
Company's future products on the basis of 510(K) clearances. The regulatory
process may delay the marketing of new products for lengthy periods, result in
substantial additional costs and furnish an advantage to competitors.
Moreover, regulatory approvals, if granted, may include significant
limitations on the indicated uses for which a product may be marketed. The
FDA actively enforces regulations prohibiting marketing of products for
non-indicated uses.
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The Company is subject to FDA Good Manufacturing Practices ("GMP") and
extensive record keeping and reporting requirements for sales in the United
States. The Company's manufacturing facilities are subject to periodic
inspections by United States federal agencies and may be subject to similar
inspections by corresponding foreign agencies. To date, the Company's
manufacturing facilities in Australia have not been inspected by the FDA.
Failure to comply with applicable regulatory requirements can result in, among
other things, import detentions, fines, civil penalties, suspensions or losses
of approvals, recalls or seizures of products, operating restrictions and
criminal prosecutions.
The Company has experienced delays in the importation of certain product
accessories manufactured outside the United States due to certain tariff
classifications and restrictions. Changes in existing regulations or the
manner in which they are implemented or the adoption of new regulations could
prevent the Company from obtaining, or delay the timing of, future regulatory
approvals. No assurance can be given that new legislation or regulations,
changes in the interpretation or enforcement of existing regulations, or other
regulatory factors will not have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business -
Government Regulation."
RISK OF PRODUCT RECALL
The FDA and similar governmental authorities in other countries have the
authority to require the recall of products in the event of material
deficiencies or defects in design or manufacture. A government mandated or
voluntary product recall by the Company could occur as a result of component
failures, manufacturing errors or design defects. Any recall of products
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business - Government Regulation."
POTENTIAL PRODUCT LIABILITY CLAIMS
The Company is subject to potential product liability claims as a result
of the design, manufacture and marketing of medical devices. Claims alleging
product liability may involve large potential damages and significant defense
costs. There can be no assurance that the Company's insurance coverage will
be adequate or that all such claims will be covered by the Company's
insurance. Insurance varies in cost, can be difficult to obtain and may not
be available in the future on terms acceptable to the Company, if at all. A
successful claim against the Company in excess of the available insurance
coverage could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business - Product
Liability Insurance."
DEPENDENCE ON KEY PERSONNEL
The Company is substantially dependent upon the continued services of a
limited number of key employees and consultants. The loss of the services of
any one of these individuals could have a material adverse effect on the
Company's business, financial condition and results of operations.
Additionally, the future success of the Company will depend, among other
factors, on the Company's ability to continue to hire and retain the necessary
qualified scientific, technical and managerial personnel. The Company
competes for such personnel with numerous other companies, academic
institutions and other organizations. See "Management."
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LIMITING EFFECT OF CERTAIN CHARTER AND DELAWARE LAW PROVISIONS ON MARKET PRICE
OF COMMON STOCK
The Board of Directors has the authority to issue up to 2,000,000 shares
of Preferred Stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without further
vote or action by the stockholders. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. The issuance
of Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes may have the effect of
delaying, deferring or preventing a change in control of the Company, may
discourage bids for the Common Stock at a premium over the market price of the
Common Stock and may adversely affect the market price of the Common Stock and
the voting and other rights of the holders of the Common Stock. The Company
has no present plans to issue shares of Preferred Stock. The Company's Board
of Directors is divided into three classes, serving for staggered three year
terms. As such, at each annual meeting of stockholders, not more than one
class of the Company's directors is elected. Because it will require at least
two annual meetings to elect directors constituting a majority of the
Company's board of directors, such classification could discourage, delay or
prevent a merger, tender offer or proxy contest involving the Company.
Further, certain provisions of Delaware law could discourage, delay or prevent
a merger, tender offer or proxy contest involving the Company. See
"Management," "Description of Capital Stock Preferred Stock" and "
Delaware Anti-Takeover Statute."
POTENTIAL VOLATILITY OF STOCK PRICE
The stock markets have experienced price and volume fluctuations that
have particularly affected medical technology companies, resulting in changes
in the market prices of the stocks of many companies which may not have been
directly related to the operating performance of those companies. Such broad
market fluctuations may adversely affect the market price of the Common Stock.
In addition, the market price of the Common Stock may be highly volatile.
Factors such as variations in the Company's financial results, announcements
of technological innovations or new products by the Company or its
competitors, government regulation, developments with respect to patents,
proprietary rights or litigation, and general market conditions may have a
significant adverse effect on the market price of the Common Stock.
ABSENCE OF FUTURE DIVIDENDS
The Company currently intends to retain all future earnings, if any, for
use in the operation of its business, and does not anticipate paying any cash
dividends in the foreseeable future. See "Dividend Policy."
POTENTIAL LACK OF ENFORCEABILITY OF U.S. SECURITIES LAWS AGAINST CERTAIN
INSIDERS
Two of the Company's five directors and all but two of its officers named
herein reside outside the United States (principally in Australia). All or a
substantial portion of the assets of these persons and of the Company are
located outside the United States. As a result, it may not be possible for
investors to effect service of process in the United States upon such persons
or to enforce against them judgments of United States courts in respect of any
liabilities relating to the contents of this Prospectus or otherwise
predicated on Federal securities laws. In addition, the Company has been
advised by its Australian counsel that there is doubt as to the enforceability
of judgments of United States courts or the ability of stockholders to pursue
claims based on the contents of this Prospectus or otherwise predicated on
United States Federal securities laws against these persons in Australian
courts.
- - - -12-
RECENT DEVELOPMENTS
On February 7, 1996, ResMed-Priess GmbH (i.Gr.) ("ResMed-Priess"), a
wholly-owned subsidiary of ResMed, and Dieter W Priess Medizinische technische
Gerate, a registered German trader ("Priess"), consummated a transaction in
which ResMed-Priess purchased certain assets of Priess for approximately
$10.35 million, pursuant to that certain Purchase Agreement dated February 7,
1996 between ResMed-Priess and Priess. Pursuant to the terms of the Purchase
Agreement, $6.35 million of the purchase price was payable in cash upon
consummation of the transaction, and the remaining $4.0 million is a
contingent purchase price which may be payable over a five year period if
certain sales targets are achieved. The purchased assets include, among other
things, intangible assets and all of Priess' tangible personal property and
inventory used in connection with its medical device distribution and service
business. ResMed intends to continue to use the assets acquired in the
ongoing distribution business. The funds used to acquire Priess' assets were
obtained from ResMed's initial public offering of common stock which was
consummated in June 1995.
The unaudited pro forma condensed statements of operations of the
combined company for the fiscal year ended June 30, 1995, with pro forma
adjustments as if the transaction had taken place on July 1, 1994, show net
revenues for the combined company of $29,381,000 and net income of $3,547,000.
The unaudited pro forma condensed consolidated financial statements
are not necessarily indicative of the actual results that would have
occurred had the purchase been consummated on the applicable date
indicated. Moreover, they are not intended to be indicative of future
results of operations or financial position.
DIVIDEND POLICY
The Company has paid cash dividends of $0.03 and $0.04 per common share
during the fiscal years ended June 30, 1993 and 1994, respectively. The
Company did not pay dividends for the fiscal year ended June 30, 1995. The
Company currently intends to retain all future earnings, if any, for use in
the operation of its business, and does not anticipate paying any cash
dividends in the foreseeable future.
PRICE RANGE OF COMMON STOCK
In June 1995, the Company completed its initial public offering of its
common stock. Since June 2, 1995, the Company's Common Stock has been traded
through the National Market System of the NASDAQ Stock Market.
The following table sets forth the high and low closing prices of the
Common Stock as reported by NASDAQ for the periods indicated.
- - - -13-
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read
in conjunction with the Consolidated Financial Statements and related Notes
included elsewhere in this Prospectus and Management's Discussion and Analysis
of Financial Condition and Results of Operations. The selected consolidated
financial data presented below under the captions "Consolidated Statement of
Operations Data" and "Consolidated Balance Sheet Data" as of June 30, 1995 and
1994 and for the years then ended, are derived from the consolidated financial
statements of ResMed Inc., formerly ResCare Medical Systems, Ltd., and
subsidiaries, which financial statements have been audited by KPMG Peat
Marwick LLP, independent certified public accountants. The selected
consolidated financial data presented below, under the captions "Consolidated
Statement of Operations Data" and "Consolidated Balance Sheet Data" for, and
as of the end of, each of the years in the three-year period ended June 30,
1993, are derived from the consolidated financial statements of ResMed Inc.
and subsidiaries, which financial statements have been audited by Price
Waterhouse, independent accountants. The consolidated financial statements as
of June 30, 1995, 1994 and 1993, and for each of the years in the three-year
period ended June 30, 1995, and the reports thereon, are included elsewhere in
this prospectus. The data presented below under the heading "Consolidated
Statement of Operations Data" and "Consolidated Balance Sheet Data" for the
year ended June 30, 1991 and as of June 30, 1991 and 1992 have been derived
from audited consolidated financial statements that are not included herein.
The data presented below under the headings "Consolidated Statement of
Operations" and "Consolidated Balance Sheet Data" as of and for the nine
months ended March 31, 1995 and 1996 are derived from unaudited consolidated
financial statements of ResMed Inc. and subsidiaries included herein. The
unaudited consolidated financial statements include all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of the financial information set forth
therein, in accordance with generally accepted accounting principles. The
results of operations for the nine months ended March 31, 1996 are not
necessarily indicative of the results to be expected for any future period or
for the entire year.
- - - -14-
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ResMed Inc., a Delaware corporation, was formed in March 1994 as a
holding company for its Australian, European and United States operating
subsidiaries. Its Australian subsidiaries, RHL and ResCare Limited, were
originally organized in 1989 by Dr. Peter Farrell to acquire from Baxter
Center for Medical Research Pty Limited ("Baxter"), the rights to certain
technology relating to nasal CPAP treatment of OSA, as well as Baxter's
existing CPAP device business. Baxter had sold CPAP devices in Australia
since 1988, having acquired the rights to the technology in 1987 from Dr.
Colin Sullivan of the University of Sydney, who invented nasal CPAP for the
treatment of OSA.
The Company designs, manufactures and markets nasal CPAP equipment for
the diagnosis and treatment of obstructive sleep apnea. The Company's net
revenues are generated from the sale of its various nasal CPAP devices, nasal
mask systems, accessories and other products, and, to a lesser extent, from
royalties. The Company receives other income through licensing fees and
certain Australian government grants.
Prior to 1990, the Company engaged independent subcontractors to
manufacture its CPAP products and marketed its products in several countries
primarily through independent distributors. In 1990, the Company executed an
exclusive distribution agreement with Medtronic, Inc. ("Medtronic") for the
sale of its products in North America. In May 1992, the Company terminated
this arrangement with Medtronic, acquired certain inventory maintained by
Medtronic, employed four of Medtronic's sales employees, and issued stock
options to Medtronic, which were subsequently repurchased by the Company in
October 1993. After such termination, the Company established a direct sales
force in the United States and developed a network of independent sales
representatives. In early 1992, the Company commenced manufacturing
operations, consisting primarily of assembly activities, at its Sydney,
Australia facility. This facility was expanded in December 1994.
The Company has in the past been, and is currently engaged in significant
patent litigation relating to the enforcement and defense of certain of its
patents. Such litigation has required, and can be expected to continue to
require in the near future, significant expenditures for legal fees and other
related costs, as well as a diversion of the efforts of the Company's
personnel. The Company's original Australian patent, which was due to expire
in 1998 and covered the CPAP method of treating, and the device for treatment
of OSA, was challenged by the Australian distributor for Respironics, and in
May 1994, was revoked by an Australian appeals court in reliance on issues
specific to Australian patent law. Consequently, the Company expects its
dominant market share in Australia will decrease. At June 30, 1994, the
Company accrued approximately $300,000 for estimated additional costs
associated with this litigation, which amount remained outstanding at March
31, 1996. In January 1995, the Company filed a complaint for patent
infringement in the United States against Respironics. The complaint seeks
monetary damages from, and injunctive relief against Respironics resulting
from its alleged infringement of three of the Company's patents. In February
1995, Respironics filed a complaint against the Company seeking a declaratory
judgment that Respironics does not infringe claims of these patents and that
the Company's patents are invalid and unenforceable. The two actions have
been combined and are proceeding in the United States District Court for the
Western District of Pennsylvania. In June 1996 the Company initiated a
further action in Pennsylvania against Respironics regarding alleged
infringement of the Company's continuation patent, granted June 4, 1996,
related to the delay timer feature. An adverse ruling as to any of the four
patents in suit could have an adverse effect on the Company's ability to
enforce its patents against Respironics and others and enable others to gain a
competitive advantage. An adverse ruling could have an adverse effect on
the Company's ability to enforce its patents and proprietary rights to gain a
competitive advantage. On May 17, 1995, Respironics and its Australian
distributor filed a Statement of Claim against the Company and Dr.
- - - -15-
Peter C. Farrell in the Federal Court of Australia. The Statement of Claim
alleges that the Company engaged in unfair trade practices, including the
misuse of the power afforded by its Australian patents and dominant market
position in violation of the Australian Trade Practices Act. The Statement of
Claim asserts damage claims in the aggregate amount of approximately $730,000,
constituting lost profit on sales. While the Company intends to defend this
action, there can be no assurance that the Company will be successful in
defending such action or that the Company will not be required to make
significant payments to the claimants. Furthermore, the Company expects to
incur ongoing legal costs in defending such action.
The Company has invested significant resources in research and
development and product enhancement. Since 1989, the Company has developed
several innovations to the original CPAP device to increase patient comfort
and to improve ease of product use. The Company recently has been developing
products for automated treatment and monitoring of OSA, such as its AutoSet
product line. The Company's research and development expenses are subsidized
in part by grants from the Australian federal government. The Company also
receives grants from the Australian federal government to support marketing
efforts to increase Australian export sales, and for incorporation of computer
components into its products.
The Company's income tax rate is governed by the laws of the regions in
which the Company's income is recognized. To date, a substantial portion of
the Company's income has been subject to income tax in Australia where the
statutory rate rose from 33% to 36% in July 1995. During the past few years,
the Company's effective tax rate has fluctuated from approximately 25% to
approximately 33%. These fluctuations have resulted from, and future
effective tax rates will depend upon, numerous factors, including the amount
of research and development expenditures for which a 150% Australian tax
deduction is available, the level of non-deductible expenses, and the use of
available net operating loss carryforward deductions and other tax credits or
benefits available to the Company under applicable tax laws.
SALES BY GEOGRAPHIC REGION
The Company currently markets its products in 40 countries through direct
sales personnel, independent manufacturers' representatives and distributors.
The Company is subject to increasing competition in the United States, where
prices for the Company's products are generally lower than in most of the
Company's other markets. The following table sets forth the percentage of the
Company's net revenues in each of the geographic regions reflected below.
- - - -16-
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated (i) percentage
of net revenues represented by certain line items in the Company's
Consolidated Statement of Operations and (ii) the percentage changes from the
preceding periods.
NINE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1995.
Net Revenues. Net revenues increased for the nine months ended March 31,
1996 to $24.0 million from $16.8 million for the nine months ended March 31,
1995, an increase of $7.2 million or 43%. This increase was primarily
attributable to an increase in unit sales of the Company's flow generators and
accessories in North America and Europe and additional revenues generated in
Europe from the Priess business since the February 7, 1996 acquisition. Net
revenues increased in North American to $12.1 million from $8.8 million, and,
increased in Europe to $8.0 million from $4.7 million. In addition net
revenues were affected favorably by a product mix shift to new, higher-priced
products such as Sullivan VPAP. This favorable effect was partially offset by
a decrease in the selling prices of the Company's products in most geographic
markets.
Gross Profit. Gross profit increased for the nine months ended March 31,
1996 to $12.0 million from $8.6 million for the nine months ended March 31,
1995, an increase of $3.4 million or 39%. The increase resulted primarily from
increased unit sales during the nine months ended March 31, 1996. Gross
profit as a percentage of net revenues decreased for the nine months ended
March 31, 1996 to 50% from 51.3% in the nine months ended March 31, 1995.
This decrease was primarily due to an increase in the value of the Australian
dollar relative to the United States dollar during the period and, to a lesser
extent, to product mix changes.
- - - -17-
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased for the nine months ended March 31, 1996 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 administrative expenses remained static at 31% for the nine months
ended March 31, 1996 and 1995.
Research and Development Expenses. Research and development expenses
increased in the nine months ended March 31, 1996 to $2.0 million from $1.4
million for the nine months ended March 31, 1995, an increase of approximately
$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.
Other Income. Other income 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%. This increase 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 nine
months ended March 31, 1996 increased to approximately 30% from approximately
25% for the nine months ended March 31, 1995. This increase was 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.
FISCAL YEARS ENDED JUNE 30, 1995 AND JUNE 30, 1994
Net Revenues. Net revenues increased in fiscal 1995 to $23.5 million
from $13.9 million in fiscal 1994, an increase of $9.6 million or 69.6%. This
increase was primarily attributable to an increase in unit sales of the
Company's flow generators and accessories in North America, where net revenues
increased to $12.5 million from $6.5 million, and to a lessor extent, in
Europe, where net revenues increased to $6.8 million from $4.2 million. In
addition, net revenues were affected favorably by a product mix shift to new,
higher-priced products such as Sullivan VPAP. This favorable effect was
partially offset by a decrease in the selling prices of the Company's products
in most geographic areas.
Gross Profit. Gross profit increased in fiscal 1995 to $12.2 million
from $7.6 million in fiscal 1994, an increase of $4.6 million or 60.0%. This
increase resulted primarily from increased unit sales during fiscal 1995.
Gross profit as a percentage of net revenues declined in fiscal 1995 to 52.0%
from 55.2% in fiscal 1994, primarily as a result of an increasing percentage
of the Company's sales occurring in the United States, where prices for the
Company's products are lower than elsewhere in the world. In addition, gross
profit as a percentage of net revenues declined due to an increase in the
value of the Australian dollar relative to the United States dollar during the
period. This increased the relative cost of manufacturing which occurs in
Australia. Also contributing to the decrease was the introduction of a new
lower margin humidifier manufactured by a third party for the Company.
- - - -18-
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased in fiscal 1995 to $7.4 million from $4.8
million in fiscal 1994, an increase of $2.6 million or 54.9%. Selling,
general and administrative expenses as a percentage of net revenues declined
in fiscal 1995 to 31.7% from 34.7% in fiscal 1994. The dollar increase was
due primarily to an increase to 58 from 34 in the number of sales and
administrative personnel, and other expenses related to the increase in the
Company's sales. Rent and leasehold expenses also increased primarily due to
a substantial increase in the size of the Company's Australian facilities. In
addition, fiscal 1994 included $311,000 of expenses associated with the grant
of compensatory stock options and the establishment of a $300,000 reserve for
estimated costs associated with the Company's Australian patent litigation.
The decrease in selling, general and administrative expenses as a percentage
of net revenues was primarily due to increased efficiencies related to
increased sales.
Research and Development Expenses. Research and development expenses
increased in fiscal 1995 to $2.0 million from $1.5 million in fiscal 1994, an
increase of $500,000 or 29.1%. Research and development expenses as a
percentage of net revenues decreased to 8.5% in fiscal 1995 from 11.2% in
fiscal 1994. The dollar increase in the amount of research and development
expenditures was due primarily to an increase in the number of research and
development personnel to approximately 30 in 1995 from 20 in 1994. This
increase was also attributable to higher payments for consulting fees relating
to product development efforts.
Other Income. Other income increased in fiscal 1995 to $994,000 from
$542,000 for fiscal 1994, an increase of $452,000 or 84.4%. This increase was
due primarily to the recognition of income for the receipt in December 1994 of
an upfront payment of $189,000 from a Japanese company for the exclusive
rights to market certain respiratory and related products in the Japanese
market that are under development by the Company. In addition, government
grants for fiscal 1995 increased to $527,000 from $440,000 for fiscal 1994 as
a result of government computer grant claims of $357,000 recognized by the
Company on receipt of a favorable Australian government ruling in April 1995.
Income Taxes. The Company's effective income tax rate for fiscal 1995
was decreased to approximately 25.1% as compared to 32.7% for fiscal 1994.
This increase was primarily due to the Company's use of net operating loss
carryforward deductions available to offset United States income, and the
additional research and development expenses in Australia for which the
Company receives a 150% deduction for tax purposes.
FISCAL YEARS ENDED JUNE 30, 1994 AND JUNE 30, 1993
Net Revenues. Net revenues increased in fiscal 1994 to $13.9 million
from $7.7 million in fiscal 1993, an increase of $6.2 million or 81.1%. This
increase was primarily attributable to an increase in unit sales of the
Company's products, primarily in North America, where sales increased to $6.5
million from $3.4 million, and Europe, where sales increased to $4.2 million
from $2.3 million. Increases in net revenues also resulted in part from the
introduction of the SULLIVAN III in the last quarter of fiscal 1993. The
average selling prices for the Company's products declined slightly between
these periods.
Gross Profit. Gross profit increased in fiscal 1994 to $7.6 million from
$4.5 million in fiscal 1993, an increase of $3.1 million or 68.3%. Gross
profit as a percentage of net revenues declined in fiscal 1994 to 55.2% from
59.4% in fiscal 1993, as a result of an increasing percentage of the Company's
sales occurring in the United States, where prices for the Company's products
are lower than in most of the Company's other markets.
- - - -19-
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased in fiscal 1994 to $4.8 million from $3.1
million in fiscal 1993, an increase of $1.7 million or 55.9%. Selling, general
and administrative expenses as a percentage of net revenues declined in fiscal
1994 to 34.7% from 40.3% in fiscal 1993. The dollar increase was due
primarily to the increase from 22 to 34 in the number of sales and
administrative personnel, primarily relating to the expansion of the Company's
United States and international sales, marketing and promotional activities.
In addition, the Company incurred approximately $200,000 of expenses,
including legal fees, in connection with an unconsummated business combination
transaction and established a $300,000 reserve for estimated costs associated
with the Company's Australian patent litigation. Costs associated with the
granting of compensatory stock options increased to $311,000 in fiscal 1994
from $142,000 in fiscal 1993. The decrease in selling, general and
administrative expenses as a percentage of net revenues was primarily due to
increased efficiencies related to increased sales.
Research and Development Expenses. Research and development expenses
increased in fiscal 1994 to $1.5 million from $820,000 in fiscal 1993, an
increase of $680,000 or 88.5%. Research and development expenses as a
percentage of net revenues increased slightly to 11.2% in fiscal 1994 from
10.7% in fiscal 1993. The increase in the amount of research and development
expenditures was due primarily to an increase from 17 to 29 in the number of
research and development personnel during fiscal 1994. This increase was also
attributable to costs associated with the development of new product
prototypes and the payment of consulting fees relating to product development
efforts.
Other Income. Other income, consisting of primarily government grants,
remained relatively constant, aggregating $542,000 in fiscal 1994 as compared
to $568,000 in fiscal 1993.
Income Taxes. The Company's effective income tax rate for fiscal 1994
was approximately 32.7% as compared to 29.8% for fiscal 1993. This increase
was due to several factors including an increase in non-deductible expenses.
QUARTERLY RESULTS
The Company's results, including net revenues and gross margins, have,
from time to time, fluctuated on a quarterly basis and may be subject to
similar fluctuations in the future. These fluctuations may result from the
absence of a backlog of orders for the Company's products, the introduction of
new products by the Company or its competitors, the geographic mix of product
sales, the success of the Company's marketing efforts in new regions, changes
in third-party reimbursement, timing of regulatory actions, timing of orders
by distributors, expenditures incurred for research and development,
competitive pricing in different regions, seasonality, the cost and effect of
promotional and marketing programs and the effect of foreign currency
transaction gains or losses, among other factors.
The following table sets forth certain selected financial information of
the Company for its seven most recent fiscal quarters. In the opinion of the
Company's management, this unaudited information has been prepared on the same
basis as the audited financial information, and includes all adjustments
(consisting only of normal, recurring adjustments) necessary to present this
information fairly when read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto contained elsewhere in this
Prospectus:
- - - -20-
Although net revenues have generally increased over time, net revenues
have historically fluctuated on a quarterly basis as a result of seasonality
of demand, the timing of new product introductions and entry into new markets.
Government grant proceeds have fluctuated on a quarterly basis, in part due
to limitations on grant amounts that are dependent upon Company expenditures
and due to the timing of application for such grants.
- - - -21-
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996 and June 30, 1995, the Company had cash and cash
equivalents and marketable securities 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 ad $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 the changes in foreign currency exchange rates. The Company
attempts to manage this risk by entering into foreign currency option
contracts.
In May 1993, the Australian federal government agreed to lend the Company
approximately $800,000 over a six-year term. Such loan bears no interest for
the first three years and will bear interest at the rate of 3.8% thereafter
until maturity. The outstanding principal balance of such loan was
$787,000 and $861,000 at June 30, 1995 and March 31, 1996, respectively.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. ("SFAS") 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
effective for fiscal years beginning after December 15, 1995. SFAS 121
provides guidance for recognition and measurement of impairment of long-lived
assets, certain identifiable intangibles and goodwill related both to assets
to be held and used and assets to be disposed of. The adoption of SFAS 121 is
not expected to have a material effect on the Company's financial position or
results of operations.
In October 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock-Based Compensation," effective for fiscal years
beginning after December 15, 1995. Under the provisions of SFAS 123, the
Company is encouraged, but not required, to measure compensation costs related
to its employee stock compensation under the fair value method. If the
Company elects not to recognize compensation expense under this method, it is
required to disclose the pro forma effects based on the SFAS 123 methodology.
The Company anticipates adopting the pro forma method of disclosure under SFAS
123.
- - - -22-
BUSINESS
The Company designs, manufactures and markets nasal CPAP equipment for
the diagnosis and treatment of obstructive sleep apnea ("OSA").
OBSTRUCTIVE SLEEP APNEA
OSA is a breathing disorder in which an individual experiences a
temporary collapse of the upper airway during sleep. This restricts breathing
and severely disrupts the individual's sleep. Sleep is a complex neurological
process that includes two distinct states: non-rapid eve movement (non-REM)
sleep and rapid eye movement (REM) sleep. REM sleep, which occupies about
20-25% of sleep in adults, is characterized by a high level of brain activity,
bursts of rapid eye movement, increased heart and respiration rates, and
paralysis of many muscles. Non-REM sleep is subdivided into four stages that
generally parallel sleep depth: stage 1 is the lightest and stage 4 is the
deepest. The inability of an individual to experience adequate amounts of REM
and deeper levels (stages 3 and 4) of non-REM sleep results in daytime
tiredness and reduced cognitive function, both of which are characteristic of
OSA.
The upper airway has no rigid support and is held open by active
contraction of upper airway muscles. Normally, during REM sleep and deeper
levels of non-REM sleep, upper airway muscles relax and the airway narrows.
Individuals with narrow upper airways or poor muscle tone are prone to upper
airway closure during sleep (an "apnea"), resulting in an inability to
breathe, or near closure (an "hypopnea") which causes snoring and breathing
difficulties. These breathing irregularities result in a lowering of blood
oxygen concentration, and after 10 seconds or more, the brain reacts to the
lack of oxygen and signals the body to respond. Typically, the individual
subconsciously arouses from REM sleep or from Stages 3 or 4 of non-REM sleep
to Stages 1 or 2 of non-REM sleep, causing the throat muscles to contract,
thus opening the airway. After a few gasping breaths, blood oxygen levels
increase and the individual can resume a deeper sleep until the cycle repeats
itself. The cycle of complete or partial upper airway closure with
subconscious arousal to lighter levels of sleep can be repeated as many as
several hundred times during six to eight hours of sleep. Sufferers of OSA
typically experience 10 or more such cycles per hour and experience two or
more clinical symptoms of OSA, such as excessive daytime sleepiness or reduced
cognitive function. These awakenings greatly impair the quality of sleep,
although the individual is not normally aware of these disruptions.
Sleep fragmentation and the loss of the deeper levels of sleep caused by
OSA can lead to excessive daytime sleepiness, reduced cognitive function
(including memory loss and lack of concentration) and irritability. OSA has
been associated with employment difficulties, marital discord, impotence and
other adverse effects. Patients with OSA have been shown to have impaired
daytime performance in a variety of cognitive functions including problem
solving, response speed and visual motor coordination. Certain studies have
linked OSA to increased occurrences of traffic and workplace accidents. OSA
sufferers also may experience an increase in heart rate and an elevation of
blood pressure during the cycle of apneas. Several reports indicate that the
oxygen denaturation, 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.
- - - -23-
THE MARKET
In its "Wake Up America" report to Congress in 1993, the National
Commission on Sleep Disorders Research estimated that approximately 40 million
individuals in the United States suffer from chronic disorders of sleep and
wakefulness, such as sleep apnea, insomnia and narcolepsy. According to this
report, sleep apnea is the most common sleep disorder, affecting approximately
20 million individuals in the United States. Nearly 6.5 million of these
persons over the age of 30 experience moderate to severe forms of sleep apnea.
However, there is a general lack of awareness of OSA among both the medical
community and the general public, which has led to a corresponding failure to
diagnose the disorder. It is estimated that less than 3% of those persons
afflicted by OSA know the cause of their fatigue or other symptoms.
Healthcare professionals are often unable to diagnose OSA because they are
unaware that such nonspecific symptoms as fatigue, snoring and irritability
are characteristic of OSA.
While OSA has been diagnosed in a broad cross-section of the population,
it is predominant among middle-aged men and those who are obese, smoke,
consume alcohol in excess or use muscle-relaxing drugs. In addition, patients
who are being treated for certain other conditions, including those undergoing
dialysis treatment or suffering from diabetes, are medically predisposed to
OSA.
Generally, an individual seeking treatment for the symptoms of OSA is
referred by a general practitioner to a specialist, such as a pulmonologist,
neurologist or psychiatrist for further evaluation. The diagnosis of OSA
typically requires monitoring the patient during sleep at either a sleep
clinic or the patient's home. During overnight testing, respiratory
parameters and sleep patterns are monitored along with other vital signs, such
as blood pressure, heart rate and blood oxygen levels. These tests allow
sleep clinicians to detect any sleep disturbances such as apneas, hypopneas or
subconscious awakenings.
The Company estimates that there are currently more than 1,200 sleep
clinics in the United States, a substantial portion of which are affiliated
with hospitals. Sleep clinics generally range in size from one to six beds.
The number of sleep clinics has expanded significantly from approximately 100
such facilities in 1985. The Company believes that despite the increase in
sleep clinics, testing facilities currently remain inadequate to address the
large population of undiagnosed OSA sufferers.
EXISTING THERAPIES
Prior to 1981, the primary treatment for OSA was a tracheotomy, a
surgical procedure to cut a hole in the patient's windpipe to create a channel
for airflow. More recently, surgery has involved either
uvulopalatopharyngoplasty ("UPPP"), in which surgery is performed on the upper
airway to remove excess tissue and to streamline the shape of the airway, or
mandibular advancement, in which the lower jaw is moved forward to widen the
patient's airway. UPPP alone has a poor success rate; however, when performed
in conjunction with mandibular advancement, a greater success rate has been
claimed. This combined procedure, performed by highly specialized surgeons,
is expensive and involves prolonged and often painful recovery periods.
- - - -24-
Nasal continuous positive airway pressure ("CPAP") was first used as a
treatment for OSA in 1980 by Dr. Colin E. Sullivan, the Chairman of the
Company's Medical Advisory Board. CPAP systems were commercialized for
treatment of OSA in the United States in the mid-1980s. Today, use of nasal
CPAP, although not a medical cure for OSA, is generally acknowledged as the
most effective and least invasive treatment for OSA, allowing the individual
to enjoy a more normal sleep pattern. The Company estimates that during 1994,
CPAP treatment was prescribed for over 100,000 new patients in the United
States.
During nasal CPAP treatment, a patient sleeps with a nasal mask connected
to a small portable air flow generator that delivers room air at a
predetermined positive pressure. The patient breathes in air from the air
flow generator and breathes out through an exhaust port in the mask.
Continuous air pressure applied in this manner acts as a pneumatic splint to
keep the upper airway open and unobstructed. Upon diagnosis of OSA and the
decision to prescribe CPAP treatment for an OSA sufferer, the physician must
determine an appropriate pressure setting for the CPAP device. This pressure
titration (adjustment) procedure typically occurs in the sleep clinic while
the patient sleeps using the CPAP device and a technician manually increases
the pressure until sleeping and breathing are normalized. After determination
of the proper therapeutic pressure, the patient is prescribed a nasal CPAP
device set to that pressure for home use.
CPAP is a treatment and not a cure for OSA, and, therefore, must be used
on a nightly basis for life. Patient compliance has been a major factor in
the efficacy of CPAP treatment. Early generations of CPAP units provided
limited patient comfort and convenience. Patients experienced soreness from
the repeated use of nasal masks and had difficulty falling asleep with the
CPAP device operating at the prescribed pressure. Recently, product
innovations to improve patient comfort and compliance have been developed.
These include more comfortable mask systems, delay timers which gradually
raise air pressure allowing the patient to fall asleep more easily, and
bi-level air flow generators which provide different air pressures for
inhalation and exhalation.
BUSINESS STRATEGY
The Company believes that the number of OSA patients receiving treatment
will increase in the future due to several factors, including increased
awareness of OSA, an increase in the number and capacity of sleep clinics, and
improved products for the diagnosis and treatment of OSA at home. The
Company's strategy for the expansion of its business operations consists of
the following key elements:
Continue Product Development and Innovation. The Company believes that
it is a leading innovator in nasal CPAP technology for the treatment of OSA
and that its continued product development and innovation will be a key factor
in its success. Since its founding, the Company has introduced product
advancements and improvements designed to increase patient comfort and
encourage compliance, such as delay timers, heated humidifiers, and pliable
Bubble Masks. The Company is currently developing automatic CPAP devices,
such as AutoSet, that are designed to continually adjust CPAP pressure to meet
the individual patient's needs, eliminating the need for manual pressure
titration.
Expand Market Presence. The Company currently markets its products in 40
countries through a network of independent distributors, the Company's direct
sales force and manufacturers' representatives. The Company intends to
increase its sales and marketing efforts in its current markets, particularly
in the United States, as well as to continue expansion into new countries.
- - - -25-
Increase Public and Clinical Awareness. The Company intends to promote
awareness of the prevalence of, and treatment alternatives for, OSA with three
main groups: (1) populations with predispositions to OSA; (2) primary care
physicians and other specialists, such as cardiologists and anesthesiologists;
and (3) special interest groups, such as sleep disorder support groups. The
Company is working with other physicians to discover other medical
applications of nasal CPAP, including the treatment of post-operative surgery
patients and pediatric patients, such as premature babies and infants at risk
for Sudden Infant Death Syndrome.
PRODUCTS
The Company designs, manufactures and markets nasal CPAP equipment for
the diagnosis and treatment of OSA. These products consist of air flow
generators, which are small, portable devices that provide a preset positive
airway pressure, and air delivery systems that include nasal masks, tubing and
headsets that connect the airflow generator to the patient. In addition, the
Company markets accessories to improve patient comfort, convenience and
compliance, such as heated humidifiers.
AIR FLOW GENERATORS.
The Company manufactures and markets a broad range of air flow generators
which are sold to the end user at prices which vary from approximately $600 to
$3,000, depending upon the model, features and country of sale. Air flow
generators accounted for approximately 63%, 61% and 67% of the Company's net
revenues in 1993, 1994 and 1995 respectively.
CPAP. The Company's CPAP air flow generators consist of the APD2, the
SULLIVAN III, SULLIVAN IV and SULLIVAN V series. The APD2 was introduced in
1991 to replace an earlier model, the APD1. The SULLIVAN III and SULLIVAN IV
are enhancements to the APD2 that were introduced in 1993 and 1994,
respectively. The SULLIVAN V series of flow generators were introduced in
July 1995 and replaced the APD2, SULLIVAN III and SULLIVAN IV models. The
SULLIVAN V weighs less than 4.5 pounds, is about four inches high and
conveniently fits under most beds. Each model continuously delivers a fixed
pressure air flow to the patient.
VPAP. In 1994, the Company introduced the SULLIVAN VPAP (Variable
Positive Airway Pressure) in the United States which it believes will improve
patient comfort by applying different air pressure for inhalation and
exhalation. In March 1996 the Company released the SULLIVAN VPAP II and
Sullivan Comfort variable pressure flow generators to further enhance its
variable Positive Airway Pressure devices. The SULLIVAN VPAP is expected to
be particularly beneficial for those patients needing high levels of air
pressure for inhalation as well as less resistance for exhalation.
Air Flow Generators Under Development. The Company is developing the
AutoSet CPAP device for home use which is designed to automatically adjust air
pressure as needed on a breath by breath basis. The Company currently markets
a similar device for use in sleep clinics (AutoSet Clinical) outside of the
United States. While conventional CPAP units operate at a fixed CPAP
pressure, the actual pressure required for effective treatment of OSA can vary
depending on factors such as weight change, alcohol consumption, sedative use
and body position. The AutoSet is designed to detect the patient's level of
airway resistance and continually adjust the air pressure to the appropriate
therapeutic level throughout the night. The Company is developing a version
of the AutoSet which will record airway resistance and actual levels of
therapeutic air pressure during home use for later review by sleep physicians
for diagnostic purposes.
- - - -26-
The Company provides optional features including a delay timer, which
allows the patient to select the time over which a gradual transition to full
therapeutic pressure is achieved, allowing the patient to fall asleep more
easily. Another feature, of the SmartStart function, automatically starts
airflow when the patient breathes into the mask and stops airflow upon removal
of the mask. This feature, in conjunction with an installed hour meter,
records the number of hours a patient receives therapy, thereby permitting
physicians to monitor patient compliance. Most units come equipped with a
carry bag for enhanced portability. In addition, every unit has
international electric voltage compatibility.
MASK SYSTEMS. The Company's mask system includes the mask frame, a nasal
cushion, and headgear to secure the nasal cushion to the face. Mask systems
and components accounted for approximately 26%, 23% and 21% of the Company's
net revenues in 1993, 1994 and 1995, respectively.
The Company's Bubble Mask includes a patented Bubble Cushion which
represents a significant advance in patient comfort. Introduced in 1991, the
Bubble Cushion contains a silicone membrane which readily adjusts to a
patient's facial contours. Air pressure seals the thin membrane around the
patient's nose, thereby minimizing air leakage and the possibility of skin
irritation from repeated usage. The Company's headgear includes the ResCap
which has a five-point attachment method of stabilizing the Bubble Cushion on
the patient's nose.
- - - -27-
Typically, patients replace masks or mask cushions every 12 to 18 months,
at a cost of approximately $100-$200 depending upon the model and market.
Bubble Masks are available in a variety of sizes and are sold independently of
the Company's air flow generators either as replacement products or with other
manufacturers' air flow generators. The Company also manufactures the Bubble
Mask on an OEM basis for Puritan-Bennett, one of its competitors.
ACCESSORIES AND OTHER PRODUCTS.
In order to enhance patient comfort, convenience and compliance, the
Company also markets a variety of other products and accessories. These
products include humidifiers which connect directly with the CPAP and VPAP air
flow generator to moisten (humidify) and, if desired, heat air delivered to
the patient. This prevents the drying of nasal passages which can cause
discomfort upon repeated use of the system. Other optional accessories
include carry bags to carry portable flow generators, replacement filters, and
tubing that connects the mask to the air flow generator.
CLINICAL SUPPORT
The Company also manufactures products that are used primarily in sleep
clinics and hospitals to measure key respiratory parameters. These products
consist of CPAP devices together with additional diagnostic tools to assist
clinicians in the diagnosis, titration (measurement) and establishment of
therapeutic pressures necessary to treat OSA sufferers.
CPAP CLINICAL INTERFACE. Introduced in October 1991, the LCU/RCU is a
diagnostic and monitoring device that is used by clinicians to measure and
adjust the pressures being delivered by a CPAP device to a patient undergoing
a sleep study. The clinical interface allows the physician to conduct this
review and adjustment from a remote location within the sleep lab. In the
United States, clinical interface devices are typically provided to clinics by
the Company without charge in order to increase clinical awareness and
interest in the Company's products.
AUTOSET CLINICAL. The Company's AutoSet Clinical is the clinical version
of AutoSet allowing real-time observation and review by the clinician of
respiratory parameters during a sleep study. AutoSet Clinical incorporates a
PC-based monitoring device which permits real-time diagnosis of patient airway
resistance. This device may also be used in the therapeutic mode for
automatic breath--by-breath adjustment to maintain an open airway. AutoSet
Clinical is currently marketed only outside the United States. The Company
submitted an application for 510(k) clearance with the FDA in May 1995.
PRODUCT DEVELOPMENT
The Company is committed to an ongoing program of product advancement and
development. During the past year, the Company has introduced several new
products, including SULLIVAN VPAP II, Sullivan Comfort, SULLIVAN V and
improved nasal masks. Currently, the Company's product development efforts
are focused on automated CPAP systems, improved mask systems and a
manufacturing cost-reduction program for existing products.
- - - -28-
In December 1994, the Company entered into a marketing rights agreement
with a Japanese company for such company to market certain respiratory and
related products under development by the Company in Japan. The Company
received an up-front fee in exchange for such rights.
The Company consults with physicians at major sleep centers throughout
the world to identify technology trends in the treatment of OSA. Some of
these physicians currently serve on the Company's Medical Advisory Board. New
product ideas are also identified by the Company's marketing staff, direct
sales force, network of distributors and manufacturers' representatives.
Typically, new product development is then performed by the Company's internal
development staff in collaboration with Dr. Sullivan and his colleagues at the
Royal Prince Alfred Hospital, the University of Sydney, and other research
groups around the world.
SALES AND MARKETING
The Company currently markets its products in 40 countries using a
network of distributors, independent manufacturers' representatives and its
direct sales force. The Company attempts to tailor its marketing approach to
each national market, based on regional awareness of OSA as a health problem,
physician referral patterns, consumer preferences and local reimbursement
policies.
NORTH AMERICA. In the United States, the Company's marketing activities
are conducted through a field sales organization comprised of 18 direct sales
employees, including three regional sales managers, and nine independent
manufacturers' representatives organizations. The Company's United States
field sales organization markets and sells the Company's products primarily to
more than 1,500 home health care dealer branch locations throughout the United
States. The Company also promotes and markets its products directly to sleep
clinics. Patients who are diagnosed with OSA and prescribed CPAP treatment
are typically referred by the diagnosing sleep clinic to a home health care
dealer to fill the prescription. The home health care dealer, in consultation
with the referring physician, will assist the patient in selecting the
equipment, will fit the patient with the appropriate mask and set the flow
generator pressure to the prescribed level. In the United States, sales
employees and manufacturers' representatives are managed by the three regional
sales managers and the Company's national sales manager. A marketing manager,
responsible for marketing in the United States and Canada, is based in the
Company's office in San Diego. The Company's Canadian sales are conducted
through a Canadian distributor. Sales in North America accounted for 53% of
the Company's total net revenues for the fiscal year ended June 30, 1995 and
51% for the nine months ended March 31, 1996.
EUROPE. The Company markets its products in most major European
countries. In countries other than the United Kingdom and Germany, the
Company uses independent distributors to sell its products. These
distributors have been selected in each country based on their knowledge of
respiratory medicine as well as a commitment to nasal CPAP therapy. In the
United Kingdom, the Company has an office which is responsible for
coordination of all European distributors and who, in conjunction with a
United Kingdom sales manager, conducts direct sales in the United Kingdom. In
addition, the Company uses a consultant in Switzerland to assist in sales and
marketing efforts for selected European countries. Sales in Europe accounted
for 29% of the Company's total net revenues for the fiscal year ended June 30,
1996 and 33% for the nine months ended March 31, 1996.
- - - -29-
AUSTRALIA/REST OF WORLD. Prior to May 1994, the Company was the
exclusive source of nasal CPAP air flow generator units in Australia as a
result of its ownership of Dr. Sullivan's original nasal CPAP patent. This
patent, which was due to expire in 1998 and covered the CPAP method of
treating, and the device for treatment of, OSA, was challenged by the
Australian distributor for Respironics and in May 1994 was revoked by an
Australian appeals court in reliance on issues specific to Australian patent
law. Such revocation will permit competitors to market CPAP products in
Australia. Consequently, the Company expects its dominant market share in
Australia will decrease. The Company has expanded its direct sales effort
during 1994 and sales are currently conducted through its independent
distributors and its direct sales force of four people. Marketing in the rest
of the world is the responsibility of the Vice President of Sales and
Marketing based in Sydney, Australia. Sales in Australia and the rest of the
world accounted for 18% of the Company's total net revenues for the fiscal
year ended June 30, 1995 and 16% for the nine months ended March 31, 1996.
Two distributors of the Company's products located, one in Australia,
Medical Gases of Australia, and one in Germany, Priess Med Technik, accounted
for 10% and 16% of the Company's net revenues for the fiscal year ended June
30, 1995. In February, 1996, the Company entered into an agreement to acquire
Priess Med Technik. See "Recent Developments." There can be no assurance
that the Australian distributor or any of the Company's customers will
continue to do business with the Company.
MANUFACTURING
The Company performs its manufacturing operations at its facility in
Sydney, Australia. Although the Company has not been inspected by the FDA,
the Company believes it is in substantial compliance with all such FDA
requirements including following FDA Good Manufacturing Practices for medical
devices. The Company has recently expanded its manufacturing facilities in
Australia and intends to further expand such facilities or to establish
manufacturing facilities in the United States in the future. The timing of
such expenditure and the decision to expand the existing facilities or
establish additional facilities will depend upon the level of demand for the
Company's products, the geographic mix of such demand and the relative costs
of such establishment or expansion.
The Company's manufacturing operations consist primarily of assembly and
testing of the Company's air flow generators, masks and accessories. Of the
numerous raw materials, parts and components purchased for assembly of the
Company's diagnostic and therapeutic sleep disorder products, most are
off-the-shelf items, available from multiple vendors. Several components,
such as printed circuit boards and plastic mouldings, are produced by third
parties to meet certain specifications established by the Company. Two key
components of each of the Company's CPAP devices are purchased from single
source suppliers. While the Company maintains an inventory of these
components, there can be no assurance that such inventories would be adequate
to meet the Company's production needs during any prolonged interruption of
supply. The Company's supplier for one such component is located in Europe.
Operations in Europe are subject to the risks normally associated with foreign
operations including, but not limited to, possible changes in export or import
restrictions and the modification or introduction of other governmental
policies with potentially adverse effects. The Company is currently
qualifying additional sources of supply for these components. However, the
Company's inability to develop alternative supply sources, if required, or a
reduction or stoppage in supply, could adversely affect its ability to
manufacture its CPAP devices and therefore its business, financial condition
and results of operations. The Company's quality control group performs tests
at various steps in the manufacturing cycle to ensure compliance with the
Company's specifications.
- - - -30-
The Company generally manufactures to its internal sales forecasts and
fills orders as received and as a result has no significant backlog of orders
for its products. The Company uses management information systems fully
integrate its manufacturing planning, billing and accounting systems. The
systems operate on local area computer networks that run commercially
available software packages allowing management real-time information and
monitoring of daily operations.
SERVICE AND WARRANTY
The Company offers one-to-two year limited warranties on its air flow
generator products. Warranties on mask systems are for 90 days. In most
markets, the Company relies on its distributors to repair the Company's
products, with parts supplied by the Company. In the United States, home
health care dealers generally arrange shipment of products to the Company's
San Diego facility for repair.
The Company has received returns of its products from the field for
various reasons. The Company believes that the level of returns it has
experienced to date is consistent with levels typically experienced by
manufacturers of similar devices.
PATENTS AND PROPRIETARY RIGHTS AND RELATED LITIGATION
The Company owns or has licensed rights to five issued United States
patents and eleven issued foreign patents. In addition, the Company has
eight pending United States patent applications and twenty foreign patent
applications. Some of these patents and patent applications relate to
significant aspects and features of the Company's products. These include
United States patents relating to CPAP devices, a delay timer system, the
Bubble Mask and an automated means of varying air pressure based upon a
patient's changing needs during nightly use, such as employed in the Company's
AutoSet device.
The Company relies on a combination of patents, trade secrets,
non-disclosure agreements and proprietary know-how to protect its proprietary
technology and rights. There can be no assurance that the Company's patents
will not be infringed upon, that the non-disclosure agreements will not be
breached, that the Company would have adequate remedies for any such breach or
infringement, or that the Company's trade secrets will not otherwise become
known to or independently developed by competitors. The Company is pursuing
an infringement action against one of its competitors (Respironics) and is
investigating possible infringement by others. Other litigation may be
necessary to enforce patents issued to the Company, to protect the Company's
proprietary rights, or to defend third-party claims of infringement by the
Company of proprietary rights of others. Such litigation could result in
substantial cost to the Company, and diversion of effort by the Company's
personnel. There can be no assurance that any patents now or hereafter issued
to, licensed by, or applied for by the Company will be upheld, if challenged,
or that the protections afforded thereby will not be circumvented by others.
Patent laws regarding the enforceability of patents vary from country to
country. Therefore, there can be no assurance that patent issues will be
uniformly resolved, or that local laws will provide the Company with
consistent rights and benefits. In addition, there can be no assurance that
others will not be issued patents which may prevent the sale of the Company's
products or require licensing and the payment of fees or royalties by the
Company in order for the Company to be able to market certain products.
- - - -31-
Recent and pending litigation has resulted in, and can be expected to
continue to result in, substantial cost to the Company and a diversion of
effort of the Company's personnel. In May 1994, the Company's original
Australian patent, which was issued in 1981 and was due to expire in 1998,
covering the CPAP method of treating and the device for treatment of OSA was
challenged by the Australian distributor for Respironics and was revoked by an
Australian appeals court in reliance on issues specific to Australian patent
law. Under Australian patent law, a patent application can be filed
provisionally to secure priority status and the inventor has a one-year period
to finalize the application. The patent is entitled to the benefit of its
initial filing date provided the final application corresponds sufficiently to
the provisional application. During the period prior to the final application
for the Company's patent in question, Dr. Sullivan published his work on CPAP
for treatment of OSA. The court concluded Dr. Sullivan's patent could not be
"fairly based" on the provisional application on which it had relied for
priority, and therefore priority was not granted to this application. Such
"Provisional" applications and "fair basing" are aspects that are peculiar to
Australian patent law. As a result of such conclusion, the Australian appeals
court revoked Dr. Sullivan's original 1981 CPAP patent on the grounds that it
was anticipated by his prior publication. Such revocation will permit the
Company's competitors to market CPAP devices substantially identical to those
of the Company in Australia. Consequently, it can be expected that the
Company's dominant market share in Australia will decrease over time. During
the fiscal year ended June 30, 1995 and the nine months ended March 31, 1996,
Australia represented approximately 15.7% and 12.4%, respectively, of the
Company's net revenues. At June 30, 1994, the Company accrued approximately
$300,000 for estimated additional costs associated with this litigation, which
amount remained outstanding as of March 31, 1996. The Company believes the
validity of its other patents will not be affected by this decision.
In January 1995, the Company filed a complaint for patent infringement in
the United States District Court for the Southern District of California
against Respironics. The complaint seeks monetary damages from, and
injunctive relief against Respironics resulting from its alleged infringement
of three of the Company's patents related to the CPAP device, its delay timer
feature and the Bubble Mask (the "Subject Patents"). In February 1995,
Respironics filed a complaint against the Company in the United States
District Court for the Western District of Pennsylvania seeking a declaratory
judgment that (i) Respironics does not infringe claims of the Subject Patents
and (ii) the Subject Patents are invalid and unenforceable. In May 1995, the
two actions were combined are proceeding in the United States District Court
for the Western District of Pennsylvania. In June 1996 the Company
initiated a further action in Pennsylvania against Respironics regarding
alleged infringement of the Company's continuation patent, granted June 4,
1996, related to the delayed timer feature. The action is continuing and is
expected to be defended by Respironics. An adverse ruling as to any of the
four patents in suit could have an adverse effect on the Company's ability to
enforce its patents against Respironics and others and enable others to gain
a competitive advantage.
On May 17, 1995, Respironics and its Australian distributor filed a
Statement of Claim against the Company and Dr. Peter C. Farrell in the Federal
Court of Australia, New South Wales District Registry. The Statement of Claim
alleges that the Company engaged in unfair trade practices, including the
misuse of the power afforded by its Australian patents and dominant market
position in violation of the Australian Trade Practices Act. The Statement of
Claim asserts damage claims in the aggregate amount of approximately $900,000,
constituting lost profit on sales. While the Company intends to defend this
action, there can be no assurance that the Company will be successful in
defending such action or that the Company will not be required to make
significant payments to the claimants. Furthermore, the Company expects to
incur ongoing legal costs in defending such action.
In addition, there can be no assurance that others do not have or will
not be issued patents which may prevent the sale of the Company's future
products or require licensing and the payment of fees or royalties by the
Company in order for the Company to be able to market certain products.
Litigation may be necessary to defend against claims of infringement of patent
rights owned by the Company's competitors.
- - - -32-
THIRD-PARTY REIMBURSEMENT
The cost of medical care is funded in substantial part by government and
private insurance programs. Although the Company does not generally receive
payments for its products directly from these payors, the Company's success is
dependent upon the ability of patients to obtain adequate reimbursement for
the Company's products. In most markets, the Company's products are purchased
primarily by home health care dealers, hospitals or sleep clinics, which then
invoice third-party payors directly.
In the United States, third-party payors include Medicare, Medicaid and
corporate health insurance plans. These payors may deny reimbursement if they
determine that a device has not received appropriate FDA clearance, is not
used in accordance with cost-effective treatment methods, or is experimental,
unnecessary or inappropriate. Third-party payors are also increasingly
challenging prices charged for medical products and services, and certain
private insurers have initiated reimbursement systems designed to reduce
health care costs. The trend towards managed health care and the concurrent
growth of HMOs which could control or significantly influence the purchase of
health care services and products, as well as legislative proposals to reform
health care, may all result in lower prices for the Company's products. There
can be no assurance that the Company's products will be considered cost-
effective by third-party payors, that reimbursement will be available or, if
currently available, will continue to be available, or that payors'
reimbursement policies will not adversely affect the Company's ability to
sell its products on a profitable basis, if at all.
The cost containment measures that health care providers are instituting
in the face of the uncertainty and the ultimate effect of any health care
reform could have an adverse effect on the Company's ability to sell its
products and may have a material adverse effect on the Company business,
financial condition and results of operations.
In some foreign markets, such as Spain, France and Germany, government
reimbursement is currently available for purchase or rental of the Company's
products subject, however, to constraints such as price controls or unit sales
limitations.
In Australia and in other foreign markets, such as the United Kingdom and
Japan, there is currently limited or no reimbursement for devices that treat
OSA.
GOVERNMENT REGULATION
The Company's products are subject to extensive regulation particularly
as to safety, efficacy and adherence to GMP and related manufacturing
standards. Medical device products are subject to rigorous FDA and other
governmental agency regulations in the United States and regulations of
relevant foreign agencies abroad. The FDA regulates the introduction,
manufacture, advertising, labeling, packaging, marketing, distribution and
record keeping for such products, in order to ensure that medical products
distributed in the United States are safe and effective for their intended
use. In addition, the FDA is authorized to establish special controls to
provide reasonable assurance of the safety and effectiveness of most devices.
Noncompliance with applicable requirements can result in import detentions,
fines, civil penalties, injunctions, suspensions or losses of regulatory
approvals, recall or seizure of products, operating restrictions, refusal of
the government to approve product export applications or allow the Company to
enter into supply contracts, and criminal prosecution.
- - - -33-
The FDA requires that a manufacturer introducing a new medical device or
a new indication for use of an existing medical device obtain either a Section
510(k) premarket notification clearance or a premarket approval ("PMA") prior
to it being introduced into the market. The Company's products currently
marketed in the United States are marketed in reliance on 510(k) pre-marketing
clearance. The process of obtaining a Section 510(k) clearance generally
requires the submission of performance data and often clinical data, which in
some cases can be extensive, to demonstrate that the device is "substantially
equivalent" to a device that was on the market prior to 1976 or to a device
that has been found by the FDA to be "substantially equivalent" to such a
pre-1976 device. As a result, FDA clearance requirements may extend the
development process for a considerable length of time. In addition, in some
cases, the FDA may require additional review by an advisory panel, which can
further lengthen the process. The PMA process, which is reserved for new
devices that are not substantially equivalent to any predicate device and for
high risk devices or those used to support or sustain human life, may take
several years and requires the submission of extensive performance and
clinical information.
As a medical device manufacturer, the Company is subject to inspection on
a routine basis by the FDA for compliance with the FDA's current GMP
regulations which impose procedural and documentation requirements with
respect to manufacturing and quality control activities. Although the
Company has never been the subject of a GMP inspection by the FDA, the
Company believes that its manufacturing and quality control procedures meet
the requirements of these regulations. If the FDA were to determine that the
Company's products were not manufactured or sold in accordance with the FDA
regulations, the FDA would have the authority to ban products from the market,
impose civil penalties, effect recalls of previously sold products from
customer locations and prohibit the operation of manufacturing facilities
located within the United States.
Sales of medical devices outside the United States are subject to
regulatory requirements that vary widely from country to country. The time
required to obtain approvals by foreign countries may vary from that required
for FDA approval.
COMPETITION
The markets for the Company's products are highly competitive. The
Company believes that the principal competitive factors in all of its markets
are product features, reliability and price. Reputation and efficient
distribution are also important factors. Patent protection could also become
an important issue in the future. Failure of the Company to offer products
which contain features similar to or more desirable than those products
offered by its competitors, which are perceived as reliable by consumers, or
to meet the prices offered by its competitors could have a material adverse
effect on the business, financial condition and results of operations of the
Company.
The Company competes on a market-by-market basis with various companies,
most of which may have greater financial and marketing resources than the
Company. The Company believes that it competes favorably in the United
States, its principal market, where Respironics, Healthdyne Technologies,
DeVilbiss and Nellcor Puritan Bennett are the primary competitors for the
Company's CPAP products. The Company's principal European competitors are
also Respironics, Healthdyne Technologies, DeVilbiss and Nellcor Puritan
Bennett, as well as regional European manufacturers.
- - - -34-
Any product developed by the Company that gains regulatory approval will
have to compete for market acceptance and market share. An important factor
in such competition may be the timing of market introduction of competitive
products. Accordingly, the relative speed with which the Company can develop
products, complete clinical testing and regulatory approval processes and
supply commercial quantities of the product to the market are expected to be
important competitive factors.
The Company's products may also face competition from other methods of
treatment for OSA, such as surgical procedures and pharmaceutical treatment.
PRODUCT LIABILITY INSURANCE
The Company's business exposes it to potential product liability risks
that are inherent in the design, manufacture and marketing of medical devices.
Claims alleging product liability may involve large potential damages and
significant defense costs. Although the Company currently maintains product
liability insurance intended to cover such claims with coverage limits which
the Company deems adequate for such purpose, there can be no assurance that
the coverage elements of the Company's insurance policies will be adequate or
that all such claims will be covered by the Company's insurance. In addition,
the Company's insurance policies must be renewed annually. While the Company
has been able to obtain product liability insurance in the past, such
insurance varies in cost, can be difficult to obtain and may not be available
in the future on terms acceptable to the Company, if it is available at all.
A successful claim against the Company in excess of the available insurance
coverage could have a material adverse effect on the Company's business,
financial condition or results of operations.
EMPLOYEES
As of March 31, 1996, the Company had 205 employees and 11 full time
consultants, including 95 persons in manufacturing, 31 in research and
development, 57 in sales and marketing and 33 in administration. Of the
Company's employees and consultants, 155 are located in Australia, 30 in the
United States, 24 in Germany, and seven in the United Kingdom and the rest of
Europe. The Company believes that the success of its business will depend, in
part, on its ability to attract and retain qualified personnel. None of the
Company's employees is covered by a collective bargaining agreement. The
Company believes that its relationship with its employees is good.
FACILITIES
The Company's principal offices are located in Sydney, Australia at a
leased facility of approximately 44,000 square feet. This facility is leased
through 1997 and contains approximately 28,000 square feet of assembly space,
and approximately 16,000 square feet devoted to research and administrative
offices. The Company believes that this facility is adequate to meet its
requirements at least through early 1997. Sales and warehousing facilities
are also leased in San Diego, California, Moenchengladbach, Germany, and
Oxford, England.
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MANAGEMENT
Dr. Farrell has been President and a director of the Company since its
inception in June 1989 and Chief Executive Officer since July 1990. From July
1984 to June 1989, Dr. Farrell served as Vice President, Research and
Development at various subsidiaries of Baxter International, Inc. ("Baxter")
and from August 1985 to June 1989, he also served as Managing Director of the
Baxter Center for Medical Research Pty Ltd., a subsidiary of Baxter. From
January 1978 to December 1989, he was Foundation Director of the Center for
Biomedical Engineering at the University of New South Wales where he currently
serves as a Visiting Professor. Dr. Farrell from 1992 to 1996 was a director
of F.H. Faulding & Co. Limited, a pharmaceutical company with annual revenues
over $1 billion. He holds a B.E. in chemical engineering with Honors from the
University of Sydney, an S.M. in chemical engineering from the Massachusetts
Institute of Technology, a Ph.D. in chemical engineering and bioengineering
from the University of Washington, Seattle and a D.Sc. from the University of
New South Wales.
Dr. Roberts joined the Company in August 1992 as Executive Vice
President. He has been a director of the Company since September 1992. He
also served as a director of the Company from August 1989 to November 1990.
From February 1989 to June 1992, Dr. Roberts served in various positions, most
recently as Vice President-Clinical and Regulatory Affairs, with medical
device subsidiaries of Pacific Dunlop Limited, a large multinational
manufacturing company. From January 1984 to December 1988, he served as
President of BGS Medical Corporation, a medical device company which was
acquired in September 1987 by Electro Biology Inc. ("EBI"), at which time he
became Vice President-Clinical and Regulatory Affairs of EBI. Dr. Roberts
holds a B.E. in chemical engineering with Honors from the University of New
South Wales, an M.B.A. from Macquarie University and a Ph.D. in biomedical
engineering from the University of New South Wales.
- - - -36-
Mr. Flicker has been Vice President, Corporate Development since February
1995. From December 1989 until February 1995 he served as Vice President,
Finance of the Company and has served as Secretary of the Company since August
1990. From July 1989 to November 1989, he was an engineering consultant with
Bio-Agrix Pty Ltd., a biomedical engineering consulting company. From July
1988 to June 1989, Mr. Flicker served as Business Development Manager at
Baxter Center for Medical Research Pty Ltd., a subsidiary of Baxter. From
July 1984 to July 1988, Mr. Flicker served as Executive Director of the
Medical Engineering Research Association, an Australian biomedical industry
association. Mr. Flicker holds a B.E. with Honors in mechanical engineering
and a M.E. in biomedical engineering from the University of New South Wales.
Dr. Berthon-Jones has been Vice President, Clinical Research of the
Company since July 1994. From July 1988 to June 1994, he was a research
scientist at the David Read Laboratory at the University of Sydney. During
1988, Dr. Berthon-Jones was a self-employed software consultant. From July
1985 until June 1988, he was a senior research officer at the University of
Sydney Department of Physiology. Dr. Berthon-Jones holds a M.D. and Ph.D.
from the University of Sydney.
Dr. Hallett has been Vice President, marketing USA, from March 1996.
From January 1993 to February 1996 Dr Hallett was Vice President European
Operations. From July 1989 to December 1992, he was a Baxter Visiting
Research Fellow-Biomedical Engineering at the University of New South
Wales. From October 1986 to June 1989, Dr. Hallett was a research engineer
at the Baxter Center for Medical Research, Sydney, Australia. From March
1985 to October 1986, he was a technical support marketing executive at
Terumo Corporation, a manufacturer of medical electronics and cardiopulmonary
bypass equipment. Dr. Hallett received a B.E. in Chemical and Materials
Engineering from the University of Auckland, and a Masters and Ph.D. in
Biomedical Engineering from the University of New South Wales.
Mr. Nicklin has been Vice President, Manufacturing of the Company since
January 1990. From October 1987 to November 1989, he served as the
Manufacturing Director of Valuca Pty Ltd., a manufacturer of small electrical
appliances. From November 1989 to January 1990, Mr. Nicklin was a consultant
to Hanimex, a manufacturer of photographic products. From November 1978 to
October 1986, Mr. Nicklin held various positions, including General Manager,
Manufacturing, at Hanimex. Mr. Nicklin holds a certificate in mechanical
engineering.
Mr. Smith has been Vice President, Finance since February 1995. From
January 1986 through January 1995, Mr. Smith was employed by Price Waterhouse
specializing in the auditing of listed public companies in the medical and
scientific field. Mr. Smith holds a B.Ec. from Macquarie University and is a
certified chartered accountant.
Mr. Abourizk joined the Company as General Counsel in July 1995. From
1993 to June 1995, Mr. Abourizk managed the Sydney office of Francis Abourizk
Lightowlers, a legal partnership specializing in intellectual property
matters. From March 1989 to May 1993, Mr. Abourizk was Deputy Manager of
Sirotech Legal Group a technology transfer company. During the period from
March 1986 to February 1989, Mr. Abourizk became a Senior Associate in the
Intellectual Property Group of an Australian national law firm, Corrs Pavey
Whiting & Byrne. Mr. Abourizk received a B.Sc. (Hons) from Monash University
in 1978 and LL.B. degree in 1980 and in 1993 gained a Graduate Diploma in
Intellectual Property from University of Melbourne. Mr. Abourizk is admitted
to practice before the High Court of Australia, the Supreme Court of Victoria
(Barrister and Solicitor) and the Supreme Court of New South Wales (Solicitor).
- - - -37-
Mr. Yerbury joined the Company as Vice President, Product Development in
July 1995. From July 1994 he was employed as a management consultant
specializing in technology development. Since May 1991, Mr. Yerbury served as
Divisional General Manager of British Aerospace Australia in charge of
contract management and radio tracking systems. From February 1988 to April
1991, Mr. Yerbury was the General Manager of Lend Lease Technology, part of
the Australian Lend Lease Corporation, responsible for development and
commercialization of remote radio based tracking system and radio data
networks. Mr. Yerbury received a degree in Chemical Engineering from the
University College London.
Mr. DeWitt has been Vice President, U.S. Operations since October 1994.
From November 1990 to September 1994, he was an attorney in private practice
in Minneapolis, Minnesota, most recently affiliated with the financial
management advisory firm of Stevens, Foster & Co., Inc. and as a consultant to
the Company. Prior thereto, Mr. DeWitt held positions both as an attorney and
senior manager with Westlund Companies, Inc., a real estate construction firm,
from March 1988 to October 1990. Mr. DeWitt holds a B.A. from Amherst
College, a J.D. from the University of Minnesota Law School and a L.L.M. from
William Mitchell College of Law.
Dr. Wright has been Vice President, Sales and Marketing of the Company
since June 1994. From October 1991 to May 1994, he was New Business
Development Manager at Johnson & Johnson Medical Pty Ltd., a subsidiary of
Johnson and Johnson, Inc. From September 1988 to September 1991, Dr. Wright
was a Project Manager at Sirotech Ltd., a technology transfer company. From
May 1987, Dr. Wright was a Senior Project Leader at Vaso Products, a
subsidiary of Bellara Medical Products Ltd., Australia, a manufacturer of
vascular devices. Dr. Wright received a B.Sc. degree from the University of
NSW, a Ph.D. from the University of Sydney, and a Graduate Diploma (Marketing)
from the University of Technology, Sydney.
Mr. McCarthy has been a director of the Company since November 1994.
Since June 1993 he has been the President of the North America Renal Division
of Baxter. Mr. McCarthy has held various positions at Baxter since 1982,
including that of Vice President-Global Marketing, Strategy and Product
Development. Mr. McCarthy received a B.S. in Engineering from the National
University of Ireland and a M.B.A. from the Wharton School, University of
Pennsylvania.
Dr. Pace has been a director of the Company since July 1994. Dr. Pace is
President and Chief Executive Officer of Research Triangle Pharmaceuticals
Inc., a start-up company exploring opportunities in pharmaceuticals, since
November 1994. From January 1993 to September 1994, he was the founding
President and Chief Executive Officer of Free Radical Sciences Inc., a
start-up pharmaceutical company and is currently a member of its Scientific
Advisory Board. From September 1989 to January 1993, he was Senior Vice
President of Clintec International, Inc., a Baxter/Nestle joint venture and
manufacturer of clinical nutritional products. Dr. Pace holds a B.Sc. with
Honors from the University of New South Wales and a Ph.D. from the
Massachusetts Institute of Technology.
- - - -38-
Mr. Quinn, a director of the Company since September 1992, has been a
management and financial consultant since February 1992. From July 1988 to
January 1992, he served as Executive Chairman of Phoenix Scientific Industries
Limited, a manufacturer of health care and scientific products. From July
1983 to June 1988, Mr. Quinn was Managing Director and Company Secretary at
Memtec Limited, an industrial membrane filtration company ("Memtec"). He
currently is a director of Memtec and of Heggies Bulkhaul Limited. Mr. Quinn
holds a B.Sc. in physics and applied mathematics and a Bachelor of Economics
from the University of Western Australia and a M.B.A. from Harvard University.
The Company's Board of Directors is divided into three classes of
directors, with directors serving for staggered, three-year terms. Mr. Quinn
is the sole current member of Class I, whose term expires in 1998. Dr.
Roberts and Mr. McCarthy are members of Class II, whose term expires in 1996.
Dr. Farrell and Dr. Pace are members of Class III, whose term expires in 1997.
All non-employee directors are entitled to receive reimbursement for
traveling costs and other out--of-pocket expenses incurred in attending Board
of Directors' meetings and such other industry conferences attended at the
request of the Company. Non-employee directors receive annual compensation
in the amount of $10,000.
MEDICAL ADVISORY BOARD
The Company has a Medical Advisory Board ("MAB") consisting of physicians
and scientists specializing in the field of sleep disorders. MAB members meet
as a group twice a year with members of the Company's senior management and
members of its research and marketing departments to advise the Company on
technology trends in the treatment of OSA and other developments in sleep
disorders medicine. MAB members are also available to consult on an as-needed
basis with the senior management of the Company. MAB members are as follows:
Colin Sullivan, M.D., Ph.D., F.R.A.C.P., age 52, is the inventor of nasal
CPAP for treating obstructive sleep apnea and is a thoracic physician at the
Royal Prince Alfred Hospital. He is Professor of Medicine and Director of the
David Read Laboratory at the Sydney University Medical School. He is a Fellow
of the Royal Australian College of Physicians and Director of the National
SIDS Council Pediatric Sleep Laboratory at the Royal Alexandria Children's
Hospital, Camperdown. Dr. Sullivan is the Chairman of the Medical Advisory
Board, and has continued to contribute to the Company's innovation, product
development and clinical testing, producing multiple patented inventions,
including the delay timer, AutoSet and the Bubble Mask. He has authored over
100 papers in sleep disorders and related respiratory areas and is on the
editorial board of several professional journals. Dr. Sullivan's M.D. and
Ph.D. degrees are from the University of Sydney Medical School.
William C. Dement, M.D., Ph.D., age 59, is the Lowell W. and Josephine Q.
Berry Professor of Psychiatry and Behavioral Sciences at the Stanford
University School of Medicine and Director of the Stanford Sleep Disorders
Clinic and Research Center. He was Chairman of the USA National Commission on
Sleep Disorders Research. During the 1950's, Dr. Dement was part of the team
at the University of Chicago that discovered REM sleep. In 1970 he
established the first sleep disorders clinic in which he introduced
polysomnography. Dr. Dement has co-authored more than 400 papers and has
written definitive textbooks on sleep. He is on the editorial board of
several professional journals. Dr. Dement is a graduate of the University of
Washington, Seattle, and received his M.D. and Ph.D. degrees from the
University of Chicago.
- - - -39-
Neil J. Douglas, M.D., F.R.C.P., age 48, is Reader in Medicine and
Respiratory Medicine, University of Edinburgh, an Honorary Consultant
Physician, Lothian Health Board and Director, Scottish National Sleep
Laboratory. He is a member of the Action on Smoking and Health Scotland
Council and the National Panel of Specialists for Respiratory Medicine. He
chairs the Ethics of Medical Research Volunteer Studies Sub-Committee of
Lothian Health Board and is a member of the Working Party on Sleep Apnea of
the Royal College of Physicians of London. He is the author of over 100
papers in the area of sleep and pulmonary medicine. Dr. Douglas has a M.D.
from the University of Edinburgh.
Ralph Pascualy, M.D., A.C.P., age 46, is Medical Director, Pacific
Northwest Sleep/Wake Disorders Center, Providence Medical Center, Seattle. He
held research fellowships in psychiatry prior to a professional focus on sleep
disorders medicine in the early 1980s. He was awarded the William C. Dement
Award in Sleep Disorders Medicine in 1983 and became an Accredited Clinical
Polysomnographer in 1986. Dr. Pascualy trained in sleep disorders medicine at
Stanford. He is Editor-in-Chief of the Research Newsletter of the Clinical
Sleep Society, Chairs the National Insurance Committee and is a member of the
Technology Committee of the Association of Sleep Disorders Centers. He is
also a member of the Gerontological Society, the American Psychiatric
Association, and National Affairs Committee of the Association of Professional
Sleep Societies. He is a graduate of Columbia University and received a M.D.
from the State University of New York.
Clifford W. Zwillich, M.D., age 56, is Chief, Division of Pulmonary and
Critical Care Medicine, Pennsylvania State University, and Distinguished
Professor of Medicine. His major scientific interest is the body's control of
respiration. He serves on the Editorial Boards of more than 10 journals and
is active in numerous associations specializing in pulmonary medicine and
sleep disorders. Dr. Zwillich holds a B.A. degree from Hunter College and a
M.D. from the University of Kansas. He completed his senior residency at the
Harvard Medical School in the early 1970s and then undertook a research
fellowship at the University of Colorado Health Services Center.
Members of the Medical Advisory Board, other than Dr. Sullivan, receive
approximately $1,000 per month and all members receive reimbursement of
traveling costs and other out-of-pocket expenses incurred in attending such
industry conferences as may be requested by the Company.
EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation for services
rendered in all capacities to the Company during its fiscal years ended June
30, 1993, 1994 and 1995 by its chief executive officer and each of its
executive officers whose compensation exceeded $100,000 during its fiscal year
ended June 30, 1995.
- - - -40-
The following table sets forth certain information on grants of stock
options made during the fiscal year ended June 30, 1995 under the Company's
1995 Stock Option Plan, to the executive officers named in the Summary
Compensation Table and certain information concerning all options exercised
and held by such persons. Options granted under the 1995 Stock Option Plan
are exercisable starting 12 months after the grant date, with 33% of the
shares covered thereby becoming exercisable at that time and an additional 33%
of the option shares becoming exercisable on each successive anniversary date,
with all option shares exercisable beginning on the third anniversary date.
Under the terms of the Company's 1995 Stock Option Plan, this exercise
schedule may be accelerated in certain specific situations.
- - - -41-
PENSION PLANS
The Company contributes to government-mandated independently managed
retirement trusts for all Australian employees under 65 years of age at a rate
ranging from 5% to 5.5% of each employee's annual salary. Employees may make
additional voluntary contributions through salary reduction. All Company
contributions are immediately and fully vested to the employee's account. The
retirement trusts, which provide lump sum benefits on retirement, disability
or death of participants, are controlled by Australian government regulation.
Each such trust's assets are adequate to satisfy all current vested benefits.
The Company also pays for death and disability insurance for Australian
employees under 60 years of age. The lump sum benefit is capped at $113,000
per employee, with the actual benefit being dependent on the employee's age
and salary.
CONSULTING AND NON-COMPETITION AGREEMENTS
The Company has no employment agreements with any of its executive
officers. Dr. Farrell is a party to a non-competition agreement with the
Company which provides that he will not compete with the Company through
January 1997, or for a period of 24 months following termination of
employment, if his employment is terminated prior to such date. Dr. Sullivan
is a party to a Consulting Agreement with the Company expiring on December 31,
1997 (subject to extension for an additional five year term), which provides
for Dr. Sullivan to perform certain consulting services to the Company, as and
when requested by the Company, and to receive certain consulting fees, based
in part on the level of sales of certain of the Company's products. The
agreement provides that Dr. Sullivan will not compete with the Company during
the term of such agreement and for a two-year period thereafter.
STOCK OPTION PLAN
The Company's 1995 Stock Option Plan (the "Plan") was adopted by the
Board of Directors on April 6, 1995. The Plan provides for the granting of up
to 700,000 options, which are intended to qualify either as incentive stock
options ("Incentive Stock Options") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, or as options which are not
intended to meet the requirements of such section ("Nonstatutory Stock
Options"). Options to purchase shares may be granted under the Plan to
persons who, in the case of Incentive Stock Options, are employees (including
officers) of the Company, or, in the case of Nonstatutory Stock Options, are
employees (including officers), non-employee directors or consultants of the
Company.
- - - -42-
The Plan provides for its administration by the Board of Directors or a
committee chosen by the Board of Directors (the "Committee"), which has
discretionary authority, subject to certain restrictions, to determine the
number of shares issued pursuant to Incentive Stock Options and Nonstatutory
Stock Options and the individuals to whom, the times at which, and the
exercise price for which, options will be granted.
The exercise price of all Incentive Stock Options granted under the Plan
must be at least equal to the fair market value of such shares on the date of
the grant or, in the case of Incentive Stock Options granted to the holder of
more than 10 percent of the Company's Common Stock, at least 110% of the fair
market value of such shares on the date of the grant. The maximum exercise
period for which Incentive stock Options may be granted is 10 years from the
date of grant (five years in the case of an individual owning more than 10% of
the Company's Common Stock). The aggregate fair market value (determined at
the date of the option grant) of shares with respect to which Incentive Stock
Options are exercisable for the first time by the holder of the option during
any calendar year shall not exceed $100,000.
On June 1, 1995, the Committee granted options under the Plan to purchase
in the aggregate up to 235,000 shares of Common Stock at an exercise price of
$11.00 per share. Such options vest rateably over three years and have a term
of 10 years.
- - - -43-
CERTAIN TRANSACTIONS
From February 1992 through March 31, 1994, the Company rented certain
office furniture and equipment from Dr. Farrell at $750 per month. In March
1994, the Company purchased such office furniture and equipment from Dr.
Farrell for $22,500, being its fair market value at the time of purchase.
Dr. Sullivan provides consulting services to the Company pursuant to a
Consulting Agreement that terminates on December 31, 1997 (subject to
extension for an additional five-year term) for which he receives annual
payments based on the net sales (as defined in the Consulting Agreement) of
certain of the Company's products subject to a $90,000 per annum minimum
payment. The Company also reimburses Dr. Sullivan for his out-of-pocket
expenses in performing such consulting services. The Company has also agreed
to pay such amounts to Dr. Sullivan for a period of 24 months following the
termination of his consulting relationship with the Company in exchange for
his agreement not to compete with the Company during this period. Total
payments to Dr. Sullivan were $52,000, $147,000 and $228,000 for the Company's
fiscal years ended June 30, 1993, 1994 and 1995, respectively, and $215,000
for the nine months ended March 31, 1996.
As of March 31, 1995, there were outstanding options ("RHL Options") to
purchase up to 1,054,750 shares of Common Stock of RHL, the Company's wholly
owned subsidiary. The exercise prices of such options ranged from $0.15 to
$3.64, with a weighted average exercise price of $2.14. The majority of the
RHL Options were exercised for shares of common stock of RHL and each such
share was surrendered in exchange for 2.5 shares of Common Stock of the
Company. As a result, RHL received $1,768,000, and the Company issued 857,750
shares of Common Stock to such holders. The balance of the RHL Options were
exchanged, prior to the completion of the Company's initial public offering,
for options to purchase up to 197,000 shares of Common Stock at an aggregate
exercise price of approximately $473,600.
- - - -44-
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 15,000,000 shares
of Common Stock and 2,000,000 shares of Preferred Stock. The following
summary of certain rights of the Common Stock and Preferred Stock is subject
to, and qualified in its entirety by, the provisions of the Company's
Certificate of Incorporation that is included as an exhibit to the
Registration Statement of which this Prospectus is a part, and by the
provisions of applicable law, the material terms of which are set forth below.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding Preferred Stock, the holders of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. In the event of liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights of Preferred Stock, if any, then outstanding. The Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and non-assessable, and the
shares of Common Stock to be issued upon completion of this offering will be
fully paid and non-assessable.
PREFERRED STOCK
As of the date hereof, there were no outstanding shares of Preferred
Stock. The Board of Directors has the authority to issue the Preferred Stock
in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the
designation of such series, without further vote or action by the
stockholders. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the stockholders and may adversely affect the voting and
other rights of the holders of Common Stock, including the loss of voting
control to others. At present, the Company has no plans to issue any of the
Preferred Stock.
DELAWARE ANTI-TAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any "business combination" with any "interested
stockholder" for a period of three years following the date that such
stockholder became an interested stockholder, unless: (i) prior to such date,
the Board of Directors of the corporation, approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned by persons who
are directors and also officers and by employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender
- - - -45-
or exchange offer; or (iii) on or subsequent to such date, the business
combination is approved by the Board of Directors and authorized at an annual
or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder. Under Section 203, the restrictions
described above also do not apply to certain business combinations proposed by
an interested stockholder following the announcement or notification of one of
certain extraordinary transactions involving the corporation and a person who
had not been an interested stockholder during the previous three years or who
became an interested stockholder during the previous three years or who became
an interested stockholder with the approval of a majority of the corporation's
directors and which transaction is approved or not opposed by the majority of
the board of directors then in office.
Section 203 generally defines a business combination to include: (i) any
merger or consolidation involving the corporation and the interested
stockholders; (ii) any sale, transfer, pledge or other disposition of 10% or
more of the assets of the corporation to the interested stockholder-, (iii)
subject to certain exceptions, any transaction which results in the issuance
or transfer by the corporation of any stock of the corporation to the
interested stockholder; (iv) any transaction involving the corporation which
has the effect of increasing the proportionate share of the stock of any class
or series of the corporation beneficially owned by the interested stockholder;
or (v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
TRANSFER AGENT
The transfer agent for the Common Stock is American Stock Transfer &
Trust Company, 40 Wall Street, New York, New York 10005.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of May 17, 1996 by (i)
each person (or group of affiliated persons) known by the Company to be the
beneficial owner of more than 5% of the outstanding Common Stock, (ii) each of
the Company's Directors, (iii) the Company's Chief Executive Officer and the
other named executive officer, and (iv) all of the Company's executive
officers and Directors as a group. Except as otherwise indicated in the
footnotes to this table, the Company believes that the persons named in this
table have sole voting and investment power with respect to all the shares of
Common Stock indicated.
- - - -46-
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of Common Stock subject to options
currently exercisable or convertible, or exercisable or convertible within 60
days of June 15, 1995 are deemed outstanding for computing the percentage of
the person holding such options but are not outstanding for computing the
percentage of any other person. Except as indicated in the footnotes to this
table and pursuant to applicable community property laws, the persons named in
the table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them.
- - - -47-
(2) Includes 6,250 shares held by his wife and 121,750 shares held of
record by Cabbit Pty Ltd., an Australian corporation controlled by Dr. Roberts
and his wife, of which 5,000 shares of Common Stock are held through ResMed
Staff Partnership. Does not include options to purchase shares of Common
Stock which may be acquired upon the exercise of options granted under the
1995 Option Plan which are not currently exercisable.
(3) Does not include options to purchase shares of Common Stock which may
be acquired upon the exercise of options granted under the 1995 Option Plan
which are not currently exercisable.
(4) Includes 22,000 shares held by his wife, 62,500 shares held jointly
with his wife and 22,500 shares held of record by NewFolk Pty Ltd, an
Australian corporation controlled by Mr. Flicker and his wife. Does not
include options to purchase shares of Common Stock which may be acquired upon
the exercise of options granted under the 1995 Option Plan which are not
currently exercisable.
- - - -48-
SELLING STOCKHOLDERS
The Shares to which this Prospectus relates are being registered for
reoffers and resales by Selling Stockholders of the Company who may acquire
such shares pursuant to the exercise of options previously granted by the
Company. The Selling Stockholders named below may resell all, a portion, or
none of the shares that they acquire or may acquire pursuant to the exercise
of such options. The following table sets forth certain information
concerning the Selling Stockholders as of July 14, 1995. No Selling
Stockholder holds in excess of one percent of the outstanding Common Stock of
the Company.
- - - -49-
PLAN OF DISTRIBUTION
The Shares are being sold by the Selling Stockholders for their own
accounts. The Shares may be sold or transferred for value by the Selling
Stockholders, or by pledgees, donees, transferees or other successors in
interest to the Selling Stockholders, in one or more transactions in the
over-the-counter market, in negotiated transactions or in a combination of
such methods of sale, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices or at prices otherwise
negotiated. The Selling Stockholders may effect such transactions by selling
the Shares to or through broker-dealers, and such broker-dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Selling Stockholders and/or the purchasers of the shares for whom
such broker-dealers may act as agent (which compensation may be less than or
in excess of customary commissions). The Selling Stockholders and any
broker-dealers that participate in the distribution of the Shares may be
deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act and any commissions received by them and any profit on the
resale of the Shares sold by them may be deemed to be underwriting discounts
and commissions under the Securities Act of 1933.
There can be no assurance that any of the Selling Stockholders will sell
any or all of the Shares of Common Stock offered by them hereunder.
The Company will not receive any of the proceeds of the sale of the
Shares by the Selling Stockholders. To the extent that the Selling
Stockholders exercise their options to acquire the Shares, of which there can
be no assurance, the Company will receive proceeds from the payment of the
exercise price therefor. Any such proceeds will be applied by the Company to
working capital to be used for general corporate purposes.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the
Selling Stockholders by Latham and Watkins, San Diego, California.
EXPERTS
The Consolidated Financial Statements and schedule of ResMed Inc. and
subsidiaries as of June 30, 1994 and 1995 and for the years then ended have
been included herein and in the Registration Statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The Consolidated Financial Statements and schedule of ResMed Inc. and
subsidiaries as of June 30, 1993 and for the years ended June 30, 1992 and
1993, have been included herein in reliance upon the report of Price
Waterhouse, independent accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
- - - -50-
Prior to October 1994, Price Waterhouse served as the Company's
independent accountants. Price Waterhouse advised the Company that, as a
result of having performed valuation services in connection with a proposed
transaction, they could no longer be deemed independent for the purposes of
auditing the Company's financial statements and issuing a report thereon for
the fiscal year ended June 30, 1994. In November 1994, the Company's Board of
Directors retained KPMG Peat Marwick LLP to serve as the Company's independent
auditors. The Company had no disagreements with Price Waterhouse on any
matter of accounting principles or practices, financial statement disclosure,
or auditing scope or procedures.
The statements in this Prospectus in the first and second paragraphs
under the caption "Business-Patents and Proprietary Rights and Related
Litigation" (except as such statements relate to foreign patents and foreign
patent application) have been reviewed by Merchant & Gould, patent counsel for
the Company, as experts on such matters, and, based upon that review, such
statements are included herein.
- - - -51-
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Seventh of the Certificate of Incorporation of ResMed Inc.
("Registrant") provides with respect to the indemnification of directors and
officers that Registrant shall indemnify to the fullest extent permitted by
Sections 102(b)(7) and 145 of the Delaware General Corporation Law, as amended
from time to time, each person that such Sections grant Registrant the power
to indemnify. Article Seventh of the Certificate of Incorporation of
Registrant also provides that no director shall be liable to Registrant or any
of its stockholders for monetary damages for breach of fiduciary duty as a
director, except with respect to (1) a breach of the director's duty of
loyalty to Registrant or its stockholders, (2) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(3) liability under Section 174 of the Delaware General Corporation Law or (4)
a transaction from which the director derived an improper personal benefit, it
being the intention of the foregoing provision to eliminate the liability of
Registrant's directors to Registrant or its stockholders to the fullest extent
permitted by Section 102(b)(7) of Delaware General Corporation Law, as amended
from time to time.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In May 1994, Registrant, a newly formed holding company, issued in the
aggregate 3,589,958 shares of Common Stock to seventy persons (54 persons who
were not U.S. persons and who were outside of the United States, and 16 of
whom were U.S. persons) constituting all of the shareholders of ResCare
Holdings Ltd., an Australian corporation ("RHL"), in exchange for all of the
outstanding shares of RHL. Exemption from registration under the Securities
Act of 1933, as amended (the "Securities Act"), is claimed for the issuance of
Common Stock referred to above in reliance upon the exemptions afforded by
Section 4(2) of the Securities Act for transactions not involving a public
offering, and by Section 3(a)(9) for securities exchanged by the issuer with
its existing security holders.
- - - -II-1-
Since May 1994, an additional 88,375 shares of Common Stock were issued
to two persons in isolated transactions in exchange for shares of RHL acquired
during such period upon the exercise of outstanding options to acquire shares
of RHL ("RHL Options"). In April 1995, Registrant offered to all Australian
residents holding RHL Options the opportunity to exchange the shares of RHL
which may be acquired by such persons upon the exercise of such RHL Options
for shares of Common Stock. Registrant received irrevocable acceptances of
such offer from all of such holders on or prior to April 7, 1995, and has
completed such exchange. These issuances were made in accordance with the
provisions of Regulation S under the Securities Act.
In April 1995, Registrant offered to all United States and United Kingdom
residents holding RHL Options (22 persons, substantially all of whom were
employees or persons with a business relationship with the Company) to
exchange the RHL Options for options to purchase Common Stock. Registrant
received irrevocable acceptances of such offer from all of such holders on or
prior to April 7, 1995, and has completed such exchange. Exemption from
registration under the Securities Act is claimed for this offer in reliance on
the exemption afforded by Section 4(2) of the Securities Act.
Each certificate evidencing such shares of Common Stock bears an
appropriate restrictive legend and "stop transfer" orders are maintained on
Registrant's stock transfer records thereagainst. None of these sales
involved participation by an underwriter or a broker-dealer.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following is a list of Exhibits filed herewith as part of the
Registration Statement:
3.1 -Certificate of Incorporation of Registrant, as amended*
3.2 -By-laws of Registrant*
4.1 -Form of certificate evidencing shares of Common Stock*
5.1 -Opinion of Parker Duryee Rosoff & Haft**
10.1 -1995 Stock Option Plan*
10.2 -Licensing Agreement between the University of Sydney and ResCare
Limited dated May 17, 1991, as amended.*
10.3 -Amended and Restated Consulting Agreement between Colin Sullivan and
ResCare Limited dated September 2, 1994*
10.4 -Loan Agreement between the Australian Trade Commission and ResCare
Limited dated May 3, 1993.*
10.5 -Lease for 82 Waterloo Road, Sydney, Australia*
10.6 -Lease for 5744 Pacific Center Blvd., San Diego*
16.1 -Letter re Change in Certifying Accountant*
21.1 -Subsidiaries of the Registrant**
23.1 -Consent of KPMG Peat Marwick LLP
23.2 -Consent of Price Waterhouse
23.3 -Consent of Parker Duryee Rosoff & Haft (included in Exhibit 5.1)**
23.4 -Consent of KPMG Deutsche Treuhand Gesellschaft
24.1 -Power of Attorney**
_______________
*Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (No. 33-91094) declared effective on June 1, 1995.
**Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (No. 33-94610) filed with the Commission on July 14, 1995.
(b) Financial Statement Schedules.
- - - -II-2-
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
The other financial statement schedules are omitted because the
conditions requiring their filing do not exist or the information required
thereby is included in the financial statements filed, including the notes
thereto.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of Registrant pursuant to Item 14 of this Part II to the Registration
Statement, or otherwise, Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by Registrant of expenses incurred or paid by a director,
officer or controlling person of Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against the
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
- - - -II-3-
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of North
Ryde, State of New South Wales, Country of Australia, on the 10th day of
July, 1996.
RESMED INC.
By: Peter C Farrell
________________________________
Peter C. Farrell
President
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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
Notes to Consolidated Financial Statements
1. Organization and Basis of Presentation
ResMed Inc. is a Delaware corporation formed in March 1994 as a holding
company for ResCare 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.
ResMed Inc.'s ("ResMed", or "the Company") principal manufacturing operations
are located in Australia. Other principal distribution and sales sites are
located in the United States, the United Kingdom and Europe.
In May 1994, the shareholders of RHL approved a reorganization and
reincorporation of RHL resulting in the exchange of the shares of the
outstanding common stock of RHL for the shares of ResMed. In addition,
effective in March 1995, the Company effected a 5:2 stock split. As a result
of the reorganization, reincorporation and the stock split, the accounts
within the consolidated financial statements have been reclassified to reflect
a par value of $.004 per share. The board of directors also authorized
2,000,000 shares of $0.01 par value preferred stock. No such shares where
issued or outstanding at June 30, 1995.
2. Summary of Significant Accounting Policies
(a) Basis of Consolidation:
The consolidated financial statements include the accounts of ResMed
and its wholly owned subsidiaries. All significant transactions and balances
have been eliminated in consolidation.
(b) Revenue Recognition:
Revenue on product sales is recorded at the time of shipment, when
earned. 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 with original maturities of three months
or less stated at cost, which approximates market. Investments with original
maturities of three months or less are considered to be cash equivalents for
purposes of the consolidated statements of cash flows.
(d) Inventories:
Inventories are stated at the lower of cost, determined principally by
the first-in, first-out method, or net realizable value.
F-8
RESMED INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
(e) Property and Equipment:
Property and equipment is recorded at cost. Depreciation expense is
computed using the straight-line method over the estimated useful lives of the
assets, generally two to ten years. 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 ResMed from the Australian Federal Government to support the
continued development and export of ResMed's proprietary positive airway
pressure technology and to assist development of export markets in the amount
of $432,000, $440,000 and $527,000 for the years ended June 30, 1993, 1994 and
1995, respectively.
(h) Foreign Currency:
The consolidated financial statements of ResMed's non-U.S.
subsidiaries are translated into U.S. dollars for financial reporting
purposes. The assets and liabilities of non-U.S. subsidiaries whose
functional currencies are other than the U.S. dollar are translated at average
exchange rates throughout the year. The cumulative translation effects are
reflected in stockholders' equity. Gains and losses on transactions
denominated in other than the functional currency of the entity are reflected
in operations.
(i) Research and Development:
All research and development costs are expensed in the period
incurred.
(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.
F-9
RESMED INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
(k) Financial Instruments :
The carrying value of financial instruments such as cash and cash
equivalents, trade receivables and payables and long-term debt approximate
their fair value. ResMed also enters into foreign currency option contracts
to manage fluctuations in foreign currency exchange rates.
ResMed had outstanding foreign currency option contracts at June 30,
1995, maturing from August 1995 to October 1995. The U.S. dollar equivalent
face amounts of outstanding contracts was approximately $1,500,000 and
$2,000,000, at June 30, 1994 and 1995, respectively. The carrying value at
June 30, 1994 and 1995 approximated fair value.
(l) Income Taxes:
ResMed accounts for income taxes under Statement of 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 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.
(m) Marketable Securities Available for Sale:
The Company adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" (FAS
115), on July 1, 1994. In accordance with FAS 115, prior years' financial
statements have not been restated to reflect the change in accounting method.
There was no cumulative effect as a result of adopting FAS 115 in fiscal 1995.
Management determines the appropriate classification of its
investments in debt and equity securities at the time of purchase and
reevaluates such determination at each balance sheet date. Debt securities
for which the Company does not have the intent or ability to hold to maturity
are classified as available for sale. Securities available for sale are
carried at fair value, with the unrealized gains and losses, net of tax,
reported in a separate component of shareholders' equity. At June 30, 1995,
the Company had no investments that qualified as trading or held to maturity.
The amortized cost of debt securities classified as available for sale
is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization and interest are included in interest income.
Realized gains and losses are included in other income or expense. The cost
of securities sold is based on the specific identification method.
F-10
RESMED INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
(m) Marketable Securities Available for Sale (continued):
At June 30, 1995, the Company's investments in debt securities were
classified on the accompanying consolidated balance sheet as marketable
securities-available for sale. These investments are diversified among high
credit quality securities in accordance with the Company's investment policy.
3. Marketable Securities - Available for Sale
On July 1, 1994 the Company adopted statement of Financial Accounting
Standard No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The fair value of Marketable Securities - Available for Sale at
June 30, 1995 was $20,510,000. These securities have contractual maturity
dates between 2002 and 2025. The estimated fair value of each investment
approximates the amortized cost, and therefore, there are no unrealized gains
or losses as of June 30, 1995.
Expected maturities may differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations without
prepayment penalties.
4. Inventories
5. Property and Equipment
F-11
RESMED INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
6. Accrued Expenses
7. Long-term Debt
As part of an agreement between ResMed and the Australian Federal
Government, ResMed obtained an $800,000 loan facility of which $386,000 and
$787,000 were outstanding at June 30, 1994 and 1995, respectively. The loan
facility is unsecured and accrues interest at 3.8% per annum beginning May 3,
1996 through April 3, 1997. The facility is payable in six monthly
installments beginning November 3, 1996. Prior to May 3, 1996, the loan is
interest free.
8. Stockholders' Equity
Initial Public Offering
On June 1, 1995, the Company completed an initial public offering of
2,000,000 new shares of common stock at a price of $11.00 per share, resulting
in net proceeds of approximately $18.9 million, after deducting issuance costs
of $1.6 million.
On July 10, 1995, the underwriters for the above-mentioned public offering
exercised their over-allotment of 450,000 new shares of common stock,
resulting in additional net proceeds of approximately $4.6 million, after
deducting issuance costs of approximately $347,000.
F-12
RESMED INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8. Stockholders' Equity (continued)
Stock Options
Prior to the formation of the Company, RHL, a wholly owned subsidiary, at
the discretion of the directors, from time-to-time granted stock options to
key personnel, including officers, directors and outside consultants. The
options granted by RHL were exchanged for options with similar terms to
purchase common stock of ResMed. These options have expiration dates of two
to five years from the date of grant and vest immediately.
On June 1, 1995, the Company granted 235,000 stock options to personnel,
including officers, directors and outside consultants in accordance with the
1995 option plan. These options have expiration dates of ten years from date
of grant and vest over three years. The Company granted these options
with the exercise price equal to the market value at the date of grant.
During the year ended June 30, 1994, ResMed repurchased 500,000 options
from a former distributor for $348,000. Expenses related to compensatory
options granted for the years ended June 30, 1993 and 1994 were $143,000, and
$322,000, respectively. No such expense was incurred in fiscal 1995.
F-13
RESMED INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
9. Other, net
In November 1994, the Company and an unrelated third-party entered into a
marketing rights agreement for the third-party to exclusively market certain
respiratory and related products under development by the Company in the
Japanese market. Under the terms of the agreement the third-party is required
to provide up to $380,000 to the Company, of which $189,000 has been
recognized in the consolidated statements of income during the year ended
June 30, 1995. The amounts recognized were limited by certain performance
requirements of the agreement.
10. Income Taxes
The provision (benefit) for income taxes is presented below (in thousands):
F-14
RESMED INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10. Income Taxes (continued)
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RESMED INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10. Income Taxes (continued)
The valuation allowance at June 30, 1994 and 1995, primarily relates to
a provision for uncertainty as to the utilization of net operating loss
carryforwards. The net change in the valuation allowance was an increase
of $59,000 for the year ended June 30, 1994. For the year ended June 30,
1995, the net change in the valuation allowance was a decrease of $10,000.
The measurement of tax assets and liabilities at June 30 of each year,
reflect foreign currency translation adjustments, changes in enacted tax
rates and changes in temporary differences. Income taxes in 1993 and 1995
were reduced by $98,000 and $11,000, respectively, through the utilization
of net operating loss carryforwards. Based on the Company's history of
taxable income and its projection of future earnings, it believes that it is
more likely than not that sufficient taxable income will be generated in the
foreseeable future to realize the deferred tax asset.
At June 30, 1995, ResMed has net operating loss carryforwards for U.S.
federal income tax purposes of approximately $32,000 which are available to
offset future U.S. federal taxable income, if any, through 2009. In addition,
ResMed has net operating loss carryforwards for European income tax purposes
of approximately $42,000 which are available to offset future European taxable
income, if any, over an indefinite period.
11. Employee Retirement Plans
ResMed contributes to defined contribution (accumulation) pension plans
(the plans) as required by Australian law covering all eligible employees
resident in Australia. All Australian employees after serving a qualifying
period, are entitled to benefits on retirement, disability or death.
Employees may contribute additional funds to the plans. ResMed contributes to
the plans at the rate of 5% - 5.5% of the salaries of all Australian
employees. Additionally, certain executives, at their discretion, may direct
that an additional percentage of their total salary and benefit package be
contributed to their individual plan account. Total Company contributions to
the plans, for the years ended June 30, 1993, 1994 and 1995 were $74,000,
$131,000 and $157,000, respectively.
12. Significant Customers
ResMed's customers are located primarily in the United States, Europe and
Australia. One customer, Medical Gases of Australia, accounted for
approximately, 21%, 18% and 10% of net sales in 1993, 1994 and 1995,
respectively, and another customer, Priess Med Technik, located in Germany,
accounted for approximately 20%, 19% and 15% of net sales in 1993, 1994 and
1995, respectively. The principals of Priess Med Technik own approximately 4%
of the outstanding common stock of the Company.
13. Geographic Segment Information
ResMed operates primarily in the respiratory medicine industry.
Geographic segments have been classified into three regions; North America,
Europe and Australia/Rest of World. North America includes the U.S. and
Canada, Australia/Rest of World includes Australia, New Zealand, South Africa
and Asia.
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RESMED INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
13. Geographic Segment Information (continued)
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RESMED INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
13 Geographic Segment Information (continued)
Net revenues which represent net sales to unaffiliated customers, is
based on the location of the customers. Transfers between geographic areas
are recorded at amounts generally above cost and in accordance with the rules
and regulations of the respective governing tax authorities. Operating
income or loss consists of total net sales less operating expenses, and does
not include either interest and other income, net, or income taxes.
Identifiable assets of geographic areas are those assets used in the
Company's operations in each area.
14. Related Party Transactions
For the years ended June 30, 1993, 1994 and 1995, legal and consulting
service fees in the amount of $119,000, $414,000 and $282,000, were paid to
certain directors of subsidiaries and director-related entities.
Included in these amounts are payments made to Dr. Colin Sullivan. Dr.
Sullivan provides consulting services to the Company pursuant to a consulting
agreement that terminates on December 31, 1997 (subject to extension for an
additional five year term) for which he receives annual payments based on the
net sales (as defined in the Consulting Agreement) of certain of the Company's
products, subject to a $90,000 per annum minimum payment. The Company also
reimburses Dr. Sullivan for his out-of-pocket expenses in performing such
consulting services.
The Company has also agreed to pay such amounts to Dr. Sullivan for a
period of 24 months following the termination of his consulting relationship
with the Company in exchange for his agreement not to compete with the Company
during this period. Total payments to Dr. Sullivan were $52,000, $147,000 and
$228,000 for the Company's fiscal years ended June 30, 1993, 1994 and 1995,
respectively.
15. Commitments
The Company leases certain equipment and fixtures under capital leases.
Included in property and equipment are approximately $63,000 and $62,000 of
assets held under capital leases at June 30, 1994 and June 30, 1995,
respectively. Accumulated amortization related to leased assets was
approximately $24,000 and $38,000 at June 30, 1994 and 1995, respectively.
At June 30, 1995, the present value of future minimum capital lease
payments, included in accrued expenses in the accompanying consolidated
balance sheets, and the future minimum lease payments under noncancellable
operating leases are as follows:
F-18
RESMED INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Rent expense under operating leases for the years ended June 30, 1993,
1994 and 1995 was approximately $105,000, $104,000 and $162,000,
respectively.
16. Legal Actions
In October 1994, in Australia, a patent held by ResMed was revoked on
appeal on the grounds that the patent was not entitled to claim priority to a
"provisional" application, which was filed before the inventor's publication.
As a result of this claim, ResMed based in part on advice from legal counsel,
at June 30, 1994 accrued approximately $300,000 for costs associated with this
patent litigation which remains outstanding at June 30, 1995. 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 advice 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 the misuse of
the power afforded by its Australian patents and dominant market position in
violation of the Australian Trade Practices Act. The statement of claim
asserts damage claims in the aggregate amount of approximately $730,000,
constituting lost profit on sales. While the Company intends to defend this
action, there can be no assurance that the Company will be successful in
defending such action or that the Company will not be required to make
significant payments to the claimants. Furthermore, the Company expects to
incur ongoing legal costs in defending such action.
F-19
DIETER W PRIESS
MEDIZINTECHNIK
FINANCIAL STATEMENTS AND SCHEDULES
DECEMBER 31, 1995, AND 1994
WITH INDEPENDENT AUDITORS' REPORT THEREON
F-20
INDEPENDENT AUDITORS' REPORT
Mr. Dieter W. Priess
Trading as Dieter W. Priess Medizintechnik
We have audited the accompanying balance sheets of Dieter W. Priess
Medizintechnik as of December 31, 1995 and 1994, and the related statements of
income, movements in equity and cash flows for the years then ended. These
financial statements are the responsibility of the business's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dieter W. Priess
Medizintechnik at December 31, 1995 and 1994, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
Dusseldorf, Germany, March 27, 1996
KPMG Deutsche Treuhand Gesellschaft
F-21
Dieter W. Priess
Medizintechnik
F-22
Dieter W. Priess
Medizintechnik
F-23
Dieter W. Priess
Medizintechnik
F-24
Dieter W. Priess
Medizintechnik
F-25
Dieter W. Priess
Medizintechnik
Notes to Financial Statements
December 31, 1995 and 1994
(1) Summary of Significant Accounting Policies and Practices
(a) DESCRIPTION OF BUSINESS
The business is privately owned by Mr. Dieter W. Priess. It is engaged
in the purchasing and selling of products for the diagnosis and treatment of a
severe form of sleep disorder known as obstructive sleep apnea. The business's
customers are located throughout Germany. The business is dependent on one
major supplier, ResMed Ltd., which supplies approximately 80% of total
merchandise.
The assets and liabilities disclosed represent the assets and liabilities
allocated by Mr. Dieter W. Priess to the business.
(b) PRESENTATION OF FINANCIAL STATEMENTS
The accompanying financial statements have been prepared in accordance
with United States of America generally accepted accounting principles.
(c) CASH EQUIVALENTS
Cash equivalents of DM 154,407 and DM 302,432 at December 31, 1995 and
1994, respectively, consist of bank deposits with an initial term of less than
three months.
(d) INVENTORIES
Inventories, which represent principally purchased products, are stated
at the lower of cost or market. Cost is determined using the first-in,
first-out method for all inventories.
F-26
Dieter W. Priess
Medizintechnik
Notes to Financial Statements
(1) Summary of Significant Accounting Policies and Practices (cont'd)
(e) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost.
(f) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
F-27
Dieter W. Priess
Medizintechnik
Notes to Financial Statements
(2) Income Taxes
The business is subject to a local tax on income of 17.6% in 1995 and
1994 . German federal income taxes are levied at the owner level.
Local income tax expense attributable to income was DM 828,788 and DM
797,962 for the years ended December 31, 1995 and 1994, respectively and
differed from the amounts computed by applying the local income tax rate to
pretax income as a result of the following:
(3) Leases
The business has several noncancellable operating leases, primarily for
administrative equipment, that expire over the next three years. Rental
expense was DM 62,907 and 57,814 in 1995 and 1994, respectively.
Future minimum lease payments under noncancellable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31,
1995 are:
F-28
Dieter W. Priess
Medizintechnik
Notes to Financial Statements
(5) Bank Overdraft
The business has a credit facility of DM 1,000,000 granted until August
30, 1996. The used portion of the facility bears interest at a rate of
interest fixed quarterly by the bank. The rate of interest ruling at December
31, 1995 was 9.25%. The credit facility is secured by trade receivables,
plant and equipment and a mortgage on land and buildings of the business.
Additional securities have been given by the owner of the business and parties
related to the owner.
F-30
Dieter W. Priess
Medizintechnik
Notes to Financial Statements
The bank loans are secured by the same securities securing the credit
facility (See note 5).
(8) Long-term Debt (cont'd)
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1995 are as follows: 1996, DM 56,556; 1997, DM
56,110; 1998 DM 60,833; 1999 DM 65,955; and 2000 DM 71,512.
The business paid DM 65,610 and DM 63,472 for interest and DM 1,520,574
and DM 702,404 for income taxes in 1995 and 1994, respectively.
(10) Events Subsequent to Balance Date
On February 7, 1996 Mr. Dieter W. Priess entered into a contract to sell
certain assets and the operations of Dieter W. Priess Medizintechnik to
ResMed-Priess GmbH. ResMed- Priess GmbH is a wholly owned subsidiary of
ResMed Inc., which is incorporated in the United States of America.
F-31
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial
statements present the estimated effects of the acquisition of the Priess
Medizintechnik Medical Products Distribution business ("Priess").
The Pro Forma Condensed Consolidated Statements of Operations for
the year ended June 30, 1995 and the six months ended December 31,
1995 assume that the purchase occurred on July 1, 1994. Also
presented is the unaudited December 31, 1995 Pro Forma Condensed
Consolidated Balance Sheet giving effect to the purchase of Priess as
if it had been consummated on December 31, 1995. See "Note 1 -
Basis of Presentation".
The pro forma information is based on the historical consolidated
financial statements of ResMed Inc and the historical financial
statements of Priess adjusted for related preliminary estimates and
assumptions. The pro forma adjustments are applied to the historical
consolidated financial statements of ResMed Inc and Priess to account
for the Priess acquisition using the purchase method of accounting.
Under purchase accounting, the total purchase price of Priess was
allocated to the assets and liabilities acquired based on their relative
fair values as of the acquisition date, with the excess of purchase price
over the fair value of tangible assets acquired less the fair value of
liabilities assumed recorded as intangible assets. Although the final
allocation may differ, the Pro Forma Condensed Consolidated
financial information reflects ResMed Inc's management's best
estimate based on currently available information.
The unaudited pro forma condensed consolidated financial statements
are not necessarily indicative of the actual results that would have
occurred had the purchase been consummated on the applicable date
indicated. Moreover, they are not intended to be indicative of future
results of operations or financial position. These unaudited pro forma
financial statements should be read in conjunction with the Notes to
the Pro Forma Condensed Consolidated Financial Statements, the
audited financial statements and notes for Priess included herein and
the audited historical consolidated financial statements of ResMed
Inc.
F-32
RESMED INC
F-33
RESMED INC
F-34
RESMED INC
F-35
RESMED INC
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited pro forma condensed statements of
operations present the historical results of operations of ResMed Inc
and Priess for the year ended June 30, 1995 and the six months ended
December 31, 1995, with pro forma adjustments as if the transaction
had taken place on July 1, 1994. The unaudited pro forma condensed
balance sheet presents the historical balance sheets of ResMed Inc and
Priess as of December 31, 1995 with pro forma adjustments as if the
transaction had been consummated as of December 31, 1995, in a
transaction accounted for as a purchase in accordance with generally
accepted accounting principles.
Certain reclassifications have been made to the historical financial
statements of Priess to conform to the pro forma condensed financial
statement presentation.
2. Adjustments to Reflect Entity Acquired
3. Pro Forma Adjustments
The following adjustments give pro forma effect to the Transactions
(Dollars in Thousands):
F-36
RESMED INC
3. Pro Forma Adjustments (Continued)
The following adjustments to the unaudited pro forma statements of
operations reflect:
c) Adjustments for the elimination of various items charged or
credited to Priess by the vendors which would not have been
incurred if the transactions had occurred at the beginning of
the period presented. These items include personal costs and
costs associated with other insignificant business activities not
acquired.
d) The acquisition was funded from proceeds from ResMed Inc's
IPO dated June 2, 1995. This entry represents the elimination
of interest income from cash reserves and marketable
securities held for sale.
e) The amortization of excess of costs over acquired net assets
over an estimate life of 15 years. Such amortization expense is
subject to possible adjustment at a later date. Amortization
expense was $294,000 and $147,000 for the year ended June
30, 1995 and the six month period ended December 31, 1995,
respectively.
f) Additional German corporate taxation expense incurred by
ResMed Inc. on incorporation of Priess as if the transaction
had occurred as of the beginning of the period presented. Prior
to acquisition the entity was subject solely to regional German
trade tax with Federal German corporate tax payable by the
vendors individually.
g) The tax effect, using German statutory rate, on the net pro
forma adjustments.
h) Elimination of intercompany sales made by ResMed Inc to
Priess and associated profit in Priess inventory as if the
transaction had occurred as of the beginning of the period
presented.
The pro forma condensed consolidated statements of operations do not
reflect any cost savings or economies of scale that the Corporation's
management believes might have been achieved had the transaction
occurred at the beginning of the period presented.
F-37
RESMED INC. AND SUBSIDIARIES
F-38
ResMed Inc. and Subsidiaries
F-39
ResMed Inc. and Subsidiaries
F-40
ResMed Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(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.
F-41
ResMed Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(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.
F42
ResMed Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(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.
F-43
ResMed Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(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 from its 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 balance
sheet 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 exercisable 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
F-44
ResMed Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(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.
F-45
ResMed Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(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:
F46
ResMed Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
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.
F-47
ResMed Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
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.
F-48
ResMed Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
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.
F-49
Exhibit 23.1
The Board of Directors
ResMed, Inc.
The audit referred to in our report dated August 4, 1995, included the
related financial statement schedule as of June 30, 1995, and for each of the
years in the two-year period ended June 30, 1995, included in the
Registration Statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidate financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference to
our firm under the headings "Selected Consolidated Financial Data" and
"Experts" in the Prospectus.
KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
San Diego, California
July 9, 1996
Exhibit 23.2
ResMed Inc
(Formerly ResCare Medical Systems Limited)
82 Waterloo Road
NORTH RYDE NSW 2113
Dear Sirs
We consent to the use in this Registration Statement No 33-94610 of ResMed Inc
of our report dated September 23, 1994, appearing in the Prospectus, which is
part of such Registration Statement, and to the references to us under the
headings "Selected Consolidated Financial Data" and "Experts" in such
Prospectus.
The audits referred to in our report included the related financial statement
schedule as of June 30, 1993, and for the year ended June 30, 1993 in the
Registration Statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidate financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
PRICE WATERHOUSE
Price Waterhouse
Parramatta, Australia
July 10, 1996
Exhibit 23.4
To the Sole Shareholder
Mr. Dieter W. Priess
Trading as Dieter W. Priess Medizintechnik:
We consent to the inclusion of our report dated March 27, 1996, with respect
to the balance sheets of Dieter W. Priess Medizintechnik as of December 31,
1995 and 1994, and the related statements of income, movements in equity, and
cash flows for the years then ended, which report appears in the Amendment
No. 1 of Form S-1 of ResMed Inc. dated July 8, 1996.
Dusseldorf, Germany
July 10, 1996
KPMG DEUTSCHE TREUHAND-GESELLSCHAFT
KPMG Deutsche Treuhand-Gessellschaft
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft