10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 13, 1997
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, 1997
[ ] 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, 1997, 7,243,994 shares of Common Stock($0.004 par value)
were outstanding.
RESMED INC. AND SUBSIDIARIES
INDEX
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PART I. FINANCIAL INFORMATION
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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, 1997 are not necessarily indicative of the results
that may be expected for the year ended June 30, 1998.
(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. 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, 1997, to assist development of export
markets. Grants of $157,000 and $89,000 have been recognized for the three
month period ended September 30, 1997 and September 30, 1996, 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 adjustments 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:
Net income per common and common equivalent share is 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 Fair Value of Financial Instruments is defined as the amount at which
the instrument could be exchanged in a current transaction between willing
parties.
(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.
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, 1997
unamortized premiums amounted to $582,000.
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, 1997 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
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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
options is represented by the fair value of options with a positive fair value
at the reporting date.
At September 30, 1997 the Company held foreign currency option contracts
with notional amounts totaling $47,453,000 to hedge foreign currency items.
These contracts mature at various dates prior to December 31, 1999.
(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.
(4) Commitments and contingencies
The following discussion contains forward-looking statements relating to
the Company's legal proceedings. Litigation is inherently uncertain and,
accordingly, actual results could differ materially from those expressed in
the forward-looking statements.
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RESMED INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(4) Commitments and contingencies, Continued
The Company is currently engaged in significant patent litigation
relating to the enforcement and defense of certain of its patents. 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 will proceed 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 a fourth patent, granted June 4,
1996, related to the delay timer feature. This action was again consolidated
with the ongoing case such that the two remaining actions are to proceed
together. On July 1, 1997 the Court granted Respironics a motion for partial
summary judgment in which Respironics alleged its accused products do not
infringe one of the four patents in suit. On August 8, 1997 the Court over
turned Respironics partial summary judgement and undertook to reassess the
motion.
On May 17, 1995, Respironics and its Australian distributor filed a
Statement of Claim against the Company and Dr. Peter 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 patent 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.
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RESMED INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
Net Revenues
Net revenues increased for the three months ended September 30, 1997 to $14.0
million from $11.1 million for the three months ended September 30, 1996, an
increase of $2.8 million or 25%. 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, partially offset by a
reduction in major European exchange rates. Net revenues in North America
increased to $7.0 million from $4.4 million for the quarter and in Europe
remained at $5.4 million for both the three months ended September 30, 1997
and September 30, 1996, respectively. European sales increased 11% for the
quarter in local currency terms compared with the three months ended September
30, 1996.
Gross Profit
Gross profit increased for the three months ended September 30, 1997 to $8.6
million from $6.3 million for the three months ended September 30, 1996, an
increase of $2.3 million or 36%. The increase resulted primarily from
increased unit sales, a shift to higher margin products and a decline in the
Australian dollar which in relative terms reduces the Company's manufacturing
costs. Gross profit as a percentage of net revenues increased for the quarter
ended September 30, 1997 to 61% from 56% in three months ended September 30,
1996.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased for the three months
ended September 30, 1997 to $4.7 million from $3.9 million for the three
months ended September 30, 1996, an increase of $0.7 million or 19%. As a
percentage of net revenues, selling, general and administrative expenses
decreased to 33% for the quarter ended September 30, 1997 from 35% for the
three months ended September 30, 1996. The gross increase in gross selling,
general and administrative expenses was due primarily to an increase from 88
to 119 in the number of sales and administrative personnel 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, 1997 to $1.3 million from $791,000 for the three months ended
September 30, 1996, an increase of $474,000 or 60%. As a percentage of net
revenues, research and development expenses for the three months ended
September 30, 1997 increased to 9% from 7% for the period ended September 30,
1996. 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 decreased for the three months ended September 30, 1997 to
$656,000 from $1,128,000 for the three months ended September 30, 1996, a
decrease of $472,000 or 42%. This decrease was due primarily to a reduction
in net foreign exchange gains which decreased for the three months ended
September 30, 1997 to $332,000 from $750,000 for the three months ended
September 30, 1996. Government grants income increased for the three months
ended September 30, 1997 to $157,000 from $89,000 for the three months ended
September 30, 1996 reflecting the recognition of Australian Federal Government
research awards.
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RESMED INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
Income Taxes
The Company's effective income tax rate for the three months ended September
30, 1997 increased to approximately 35% from approximately 32% for the three
months ended September 30, 1996. The increased tax rate primarily relates to
amendments to the Australian research and development tax concession for which
the Company received a 150% deduction until August 1996. Subsequent to August
20, 1996 the Company receives a 125% deduction for research and development
expenditures incurred in Australia.
Liquidity and Capital Resources
As of September 30, 1997 and June 30, 1997, the Company had cash and cash
equivalents and marketable securities available for sale of approximately $28
million. The Company's working capital approximated $36 million and $34.4
million, at September 30, 1997 and June 30, 1997, respectively. The increase
in working capital balances reflects the increase in cash generated from
operations and proceeds from exercise of stock options.
During the three months ended September 30, 1997, the Company's operations
generated $1.5 million cash from operations, primarily as a result of
increased profit from operations offset partially by increases in inventories
and accounts receivable. During the three months ended September 30, 1996
approximately $1.8 million of cash was provided by operations primarily due to
increased profit from operations.
The Company's capital expenditures for the three month period ended September
30, 1997 and 1996 aggregated $1.6 million and $691,000 respectively. The
majority of the expenditures in the three month period ending September 30,
1997 relates to the construction of the Company's new Australian facility,
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, 1997 balance sheet reflects net property plant and equipment of
approximately $5.5 million at September 30, 1997, compared to $4.9 million at
June 30, 1997.
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 $532,000 and $548,000 at
September 30, 1997 and June 30, 1997, respectively.
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RESMED INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Refer Note 4 to the Condensed Consolidated Financial Statements
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
Exhibits. The following exhibits are filed as a part of this report:
11.1 Statement re: Computation of Earnings of Share
27.1 Financial Data Schedule
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RESMED INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ResMed Inc.
/s/ PETER C FARRELL
Peter C Farrell
President and Chief Executive Officer
/s/ ADRIAN M SMITH
Adrian M Smith
Vice President Finance and Chief Financial Officer
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Exhibit 11.1
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