10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 12, 1996
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSACTION PERIOD FROM ___________ TO
_____________
Commission file number: 0-26038
ResMed Inc.
(Exact name of registrant as specified in its charter)
Delaware 98-0152841
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
5744 Pacific Center Boulevard
Suite 311
San Diego CA 92121
United States Of America
(Address of principal executive offices)
619 622 2040
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes __X___ No ______
As of September 30, 1996, 7,183,276 shares of Common Stock($0.004 par value)
were outstanding.
INDEX
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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 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 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. 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 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 September 30, 1996 are not necessarily indicative of the results
that may be expected for the year ended June 30, 1997.
(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.
(d) Inventories:
Inventories are stated at the lower of cost, determined principally by
the first-in, first-out method, or net realizable value.
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RESMED INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(2) Summary of Significant Accounting Policies, Continued
(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 June 30, 1996, to assist development of export
markets. Grants of $89,000 and 135,000 have been recognized for the three
month period ended September 30, 1996 and September 30, 1995, respectively.
(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.
(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.
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RESMED INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(2) Summary of Significant Accounting Policies, Continued
(k) Financial Instruments:
The carrying value of financial instruments, such as cash and cash
equivalents, marketable securities - available for sale, accounts receivable,
government grants, foreign currency option contracts, accounts payable 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 September 30, 1996 and June
30, 1996. 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.
The purpose of the Company's foreign currency hedging activities is to
protect the Company from adverse exchange rate fluctuations with respect to
net cash movements resulting from the sales of products to foreign customers
and Australian manufacturing activities. The Company enters into foreign
currency option contracts to hedge anticipated sales and manufacturing costs
denominated in principally Australian Dollars, Pound Sterling and
Deutschmarks. The term of such foreign exchange contracts generally do not
exceed three years.
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RESMED INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(2) Summary of Significant Accounting Policies, Continued
(l) Foreign Exchange Risk Management, Continued
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 September 30, 1996
unamortized premiums amounted to $271,000.
Unrealized gains or losses are recognized as incurred in the statement of
financial position as either other assets or other liabilities and are
recorded within other income, net on the Company's consolidated statements of
income. Unrealized gains and losses on currency derivatives are determined
based on dealer quoted prices.
Foreign currency option contracts have been purchased in part by the
issue of put options to counterparts. As a result, should foreign exchange
rates drop below a specified level, on a specific date, the Company is
required to deliver certain funds to counterparts at contracted foreign
exchange rates. As at September 30, 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
non-performance 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 September 30, 1996 the Company held foreign currency option contracts
with notional amounts totaling $41,691,919 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 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.
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RESMED INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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RESMED INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
Net Revenues
Net revenues increased for the three months ended September 30, 1996 to $11.1
million from $6.7 million for the three months ended September 30, 1995, an
increase of $4.4 million or 66%. The three month increase in net revenues is
primarily attributable to an increase in unit sales of the Company's flow
generators and accessories in North America and Europe, which benefited
significantly from the additional revenues generated in Germany from the
Priess business which was acquired in February 1996. Net revenues in North
America increased to $4.4 million from $3.6 million for the quarter and in
Europe to $5.4 million from $1.9 million, respectively.
Gross Profit
Gross profit increased for the three months ended September 30, 1996 to $6.3
million from $3.5 million for the three months ended September 30, 1995, an
increase of $2.8 million or 80%. The increase resulted primarily from
increased unit sales, a shift to higher margin products, and a significant
improvement in European revenues during the quarter ended September 30, 1996.
Gross profit as a percentage of net revenues increased for the quarter ended
September 30, 1996 to 56% from 52% in three months ended September 30, 1995.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased for the three months
ended September 30, 1996 to $3.9 million from $2.1 million for the three
months ended September 30, 1995, an increase of $1.8 million or 84%. As a
percentage of net revenues, selling, general and administrative expenses
increased to 35% for the quarter ended September 30, 1996 from 32% for the
three months ended September 30, 1995. The increase in gross selling, general
and administrative expenses was due primarily to an increase from 70 to 88 in
the number of sales and administrative personnel, including 24 persons
employed on acquisition of Priess, an increase in legal costs from $61,000 to
$327,000 associated with ongoing legal action (refer Part II Item 1) and other
expenses related to the increase in Company sales.
Research and Development Expenses
Research and development expenses increased for the three months ended
September 30, 1996 to $791,000 from $680,000 for the three months ended
September 30, 1995, an increase of $111,000 or 16%. As a percentage of net
revenues, research and development expenses for the three months ended
September 30, 1996 decreased to 7% from 10% for the period ended September 30,
1995. The increase in gross research and development expenses was due to an
increase in charges for consulting fees and technical assessments incurred to
facilitate product development of a number of new products.
Other Income, net
Other income, net increased for the three months ended September 30, 1996 to
$1,128,000 from $542,000 for the three months ended September 30, 1995, an
increase of $586,000 or 108%. This increase was due primarily to net foreign
exchange gains of $750,000 relating to marking to market foreign currency
option contracts. Government grants income declined for the three months
ended September 30, 1996 to $89,000 from $135,000 for the three months ended
September 30, 1995 reflecting the termination of Australian Federal Government
export grants. This termination was marginally offset by an increase in both
manufacturing and research activity for which the Company receives grant
revenues.
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RESMED INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
Income Taxes
The Company's effective income tax rate for the three months ended September
30, 1996 increased to approximately 32% from approximately 28% for the three
months ended September 30, 1995. The increased tax rate primarily relates to
a relatively higher German effective corporate taxation rate. This effective
tax rate increase is partially offset by the increase in Australian research
and development expenses incurred in the first quarter of fiscal 1997 over the
first quarter of fiscal 1996 for which the Company received a 150% deduction
under Australian tax law. The 150% research and development deduction was
only available on expenses incurred up to August 20, 1996. Subsequent to
August 20, 1996 the Company receives a 125% deduction for research and
development expenditures incurred in Australia, under revised Australian
taxation legislation.
Liquidity and Capital Resources
As of September 30, 1996 and June 30, 1996, the Company had cash and cash
equivalents and marketable securities available for sale of approximately
$24.7 million and $23.5 million, respectively. The Company's working capital
approximated $31.5 million and $30.5 million, at September 30, 1996 and June
30, 1996, respectively. The increase in working capital balances reflects the
increase in cash generated from operations.
During the three months ended September 30, 1996, the Company's operations
generated $1.8 million cash from operations, primarily as a result of
increased profit from operations offset partially by increases in accounts
receivable due to increased sales. During the three months ended September
30, 1995 approximately $1.2 million of cash was used by operations primarily
due to increased inventory levels.
The Company's capital expenditures for the three month period ended September
30, 1996 and 1995 aggregated $687,000 and $229,000 respectively. The majority
of the expenditures in the three month period ending September 30, 1996
relates to the purchase of computer software and hardware, production tooling
and equipment and, to a lesser extent, office furniture and research and
development equipment. As a result of these capital expenditures, the
Company's September 30, 1996 balance sheet reflects net property plant and
equipment of approximately $3.6 million at September 30, 1996, compared to
$3.3 million at June 30, 1996.
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 $870,000 over a six year term. Such loan bears no interest for the first
three years and bears interest at a rate of 3.8% thereafter until maturity.
The outstanding principal balance of such loan was $870,000 and $867,000 at
September 30, 1996 and June 30, 1996, respectively.
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RESMED INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
Item 1. Legal Proceedings
In October 1994, in Australia, a patent held by ResMed was revoked on
appeal on grounds that the patent was not entitled to claim priority to a
"provisional" application, which was filed before the inventor's publication.
As a result of this claim, ResMed based in part on advice from legal counsel,
at June 30, 1994 accrued approximately $300,000 for costs associated with this
patent litigation which remains outstanding at September 30, 1996. This
amount is included in accrued expenses on 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 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 $901,000,
constituting lost profit on sales. While the Company intends to defend this
action vigorously, there can be no assurance that the Company will be
successful in defending such action or that the Company will not be required
to make significant payments to the claimants. Furthermore, the Company
expects to incur ongoing legal costs in defending such action.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Report on Form 8K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ResMed Inc.
PETER C FARRELL
________________________
Peter C Farrell
President and Chief Executive Officer
ADRIAN M SMITH
________________________
Adrian M Smith
Vice President Finance and Chief Financial Officer
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