UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.CWashington DC 20549
_________________----------
FORM 10-K
_________________
(X)----------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNEFor the fiscal year ended June 30, 1998
COMMISSION FILE NUMBER2001
Commission file number 0-26038
RESMED INC.ResMed Inc
(Exact name of Registrant as specified in its Charter)
DELAWARE 98-0152841Delaware
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization)
98-0152841
(IRS Employer Identification No.)
10121 CARROLL CANYON ROAD
SAN DIEGO14040 Danielson Street
Poway CA 92131-1109
UNITED STATES OF AMERICA92064-6857
United States Of America
(Address of principal executive offices)
619 689 2400(858) 746-2400
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS:Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of Each exchange upon which registered:
Common Stock, $.004 Par Value New York Stock Exchange
Rights to Purchase Series A Junior New York Stock Exchange
Participating Preferred Stock
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrantregistrant (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 Registrantregistrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
Yes X[X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K (S 229.405 of this Chapter) is not contained herein and will
not be contained to the best of Registrant'sregistrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-K or
any amendment to this Form 10-K( ).10-K [_].
The aggregate market value of the voting stock held by non-affiliates of
Registrantregistrant as of September 8, 1998,7, 2001, computed by reference to the closing sale
price of such stock on the NASDAQNew York Stock Market,Exchange, was approximately
$289,026,265$1,105,000,000. (All directors, and executive officers, and 10% stockholders of
Registrant are considered affiliates.)
At September 8, 1998, Registrant7, 2001, registrant had 7,326,87331,870,060 shares of Common Stock, $.004
par value, issued and outstanding.
Portions of Registrant'sregistrant's definitive Proxy Statement for its November 6, 19985, 2001
meeting of stockholders are incorporated by reference into Part III of this
report.
THE INFORMATION CONTAINED IN THIS REPORT INCLUDES FORWARD-LOOKING STATEMENTS,
WHICH ARE TYPICALLY IDENTIFIED BY THE WORDS "ANTICIPATES"RESMED INC
TABLE OF CONTENTS
______________________
PAGE
Part I Item 1 Business 2
Item 2 Properties 15
Item 3 Legal Proceedings 16
Item 4 Submission of Matters to a Vote of Security Holders 16
Part II Item 5 Market for Registrant's Common Equity and Related Stockholder 17
Matters
Item 6 Selected Financial Data 18
Item 7 Management's Discussion and Analysis of Financial Condition and 19
Results of Financial Operation
Item 7A Quantitative and Qualitative Disclosures About Market and Business 24
Risks
Item 8 Consolidated Financial Statements and Supplementary Data 32
Item 9 Changes in and Disagreements with Accountants on Accounting and 32
Financial Disclosure
Part III Item 10 Directors and Executive Officers of the Registrant 33
Item 11 Executive Compensation 33
Item 12 Security Ownership of Certain Beneficial Owners and Management 33
Item 13 Certain Relationships and Related Transactions 33
Part IV Item 14 Exhibits, Consolidated Financial Statement Schedule and Reports on 34
Form 8-K
Sullivan, VPAP, AutoSet, Bubble Mask, Bubble Cushion, SmartStart,
ResCap, Mirage, HumidAire, Aero-Click, minni Max nCPAP, Moritz II
biLEVEL, Aero-Fix, Twister remove, SELFSET, MESAMIV; Poly-MESAM, MEPAL,
Auto VPAP, AutoScan, AutoSet CS, AutoSet T, AutoView, IPAP MAX,
ResControl, SCAN, S6, Ultra Mirage, VPAP MAX, AutoSet.com, AutoSet-
CS.com, and ResMed are our trademarks.
As used in this 10-K, the terms "we," "us," and "our" refer to ResMed
Inc., "BELIEVES",
"EXPECTS", "INTENDS", "FORECASTS", "PLANS", "FUTURE", "STRATEGY", OR WORDS OF
SIMILAR IMPORT. VARIOUS IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS ARE
IDENTIFIED BELOW IN PART I, ITEM 3 AND PART II, ITEM 7 OF THIS REPORT.a Delaware corporation, and its subsidiaries, unless otherwise
stated.
PART I
Item 1.1 Business
General
ResMed isWe are a leading designer,developer, manufacturer and distributor of medical
equipment for treating, diagnosing, and diagnosingmanaging sleep disordered
breathing, ("SDB").or SDB. SDB includes obstructive sleep apnea, or OSA, and
related respiratory conditions. The Company
currently sells a comprehensive range of diagnostic and treatment devices in
over 40 countries through a combination of fully owned subsidiaries and
independent distributors.disorders that occur during sleep. When ResMed waswe were
formed in 1989, its primeour primary purpose was to commercialize a devicetreatment for
treating obstructive sleep apnea (OSA). DevelopedOSA developed by Professor Colin Sullivan of the University of Sydney,
the current Chairman of our Medical Advisory Board. This treatment,
nasal continuous positive airway
pressure (CPAP)Continuous Positive Airway Pressure, or CPAP, was the first
successful noninvasive treatment for OSA. CPAP systems deliver
pressurized air, typically through a nasal mask, to prevent collapse of
OSA.the upper airway during sleep.
Since 1989, ResMed has broadened its focus to cover sleep disordered breathing
in all its manifestations. Operationsthe development of nasal CPAP, we have expanded rapidly through the
introduction ofdeveloped a number of
highly innovative products for SDB, including flow generators, diagnostic
products, mask systems, headgear and other accessories. Our growth has
been fueled by a productive research and product lines. Asdevelopment effort,
geographic expansion, and increased awareness of SDB as a consequence,significant
health concern among physicians and patients. In February 2001, we
acquired MAP Medizin-Technologie GmbH, or MAP. MAP is a leading German
designer, manufacturer and distributor of medical devices for the
Company has achieveddiagnosis and treatment of SDB, with a compound sales growth rate of 79% over the period.
This is well in excess of the market growth rate. ResMed believes its success
is due to a continuingparticular focus on sleep disordered breathingOSA. This
acquisition enhances our position in Europe, particularly in Germany,
the second largest market worldwide for OSA products.
We employ over 950 people and the developmentsell our products in over 60 countries
through a combination of technology for treating its unwanted medical consequences.wholly owned subsidiaries and independent
distributors.
Corporate History
ResMed Inc.,Inc, a Delaware corporation, was formed in March 1994 as the
ultimate holding company for itsour Australian, European and United States
operating subsidiaries. On June 1, 1995, the Companywe completed an initial public
offering of common stock and on June 2, 1995 the Company'sour common stock commenced
trading on The NASDAQ National Market. On September 30, 1999 we
transferred our principal public listing to the NASDAQNew York Stock Market. ItsExchange,
trading under the ticker symbol RMD. On November 25, 1999, we
established a secondary listing of our shares as Chess Depositary
Instruments, or CDIs, on the Australian Stock Exchange, also under the
symbol RMD. Ten CDIs on the ASX represent one share of our common stock
on the NYSE.
Our Australian subsidiary, ResMed Holdings Limited, ("RHL"), was originally
organized in 1989 by Dr. Peter Farrell to acquire from Baxter Center for
Medical Research Pty Limited, ("Baxter"),or Baxter, the rights to certain
technology relating to nasal Continuous
Positive Airway Pressure ("CPAP")CPAP treatment as well as Baxter's existing CPAP
device business. Baxter had sold CPAP devices in Australia since 1988,
having acquired the rights to the technology in 1987 from Dr. Colin
Sullivan of the
University of Sydney, who invented nasal CPAP for the treatment of OSA. The
Company and its subsidiaries, since 1989, have specializedSullivan.
In addition to acquiring MAP in the design,
manufacture and marketing of patented nasal CPAP and variable positive airway
pressure ("VPAP(Registered Trademark)") equipment for the diagnosis and
treatment of sleep disordered breathing, primarily OSA.
The CompanyFebruary 2001, we also acquired the
distribution businesses of Dieter WW. Priess Medtechnik, Premium Medical
SARL, and Innovmedics Pte Ltd itsand EINAR Egnell AB, our German, French,
Singaporean and SingaporeanSwedish distributors, on February 7, 1996, June 12,
1996, and November 1, 1997 and January 31, 2000, respectively. Obstructive Sleep Apnea
OSA is a breathing disorderDuring the
1999 fiscal year we made an equity investment in which an individual experiences a
temporary collapse ofFlaga hf, based in
Iceland. We now market Flaga's polysomnographic products under the upper airway during sleep. This restricts breathingEmbla
and severely disruptsEmbletta label in the individual's sleep.United States and selected other markets.
2
The Market
Sleep is a complex neurological process that includes two distinct states:
rapid eye movement, ("REM")or REM, sleep and non-rapid eye movement, ("non-REM")or non-REM,
sleep. REM sleep, which is about 20-25% of total sleep inexperienced by
adults, is characterized by a high level of brain activity, bursts of
rapid eye movement, increased heart and respiration rates, and paralysis
of many muscles. Non-REM sleep is subdivided into four stages that
generally parallel sleep depth:depth; stage 1 is the lightest and stage 4 is the
deepest.
- -2-
The upper airway has no rigid support and is held open by active
contraction of upper airway muscles. Normally, during REM sleep and deeper
levels of non-REM sleep, upper airway muscles relax and the airway
narrows. Individuals with narrow upper airways or poor muscle tone are
prone to temporary collapses of the upper airway closure during sleep, (an "apnea"), resulting in an inability to
breathe,or apneas,
or near closure (an "hypopnea") which causes snoring and breathing
difficulties.closures of the upper airways, or hypopneas. These breathing
irregularities result in a lowering of blood oxygen concentration, untilcausing
the brain reactscentral nervous system to react to the lack of oxygen or increased
carbon dioxide and signalssignaling the body to respond. Typically, the
individual subconsciously arouses from 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 ten or more
such cycles per hour. TheseWhile 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
sufferers also may experience an increase in heart rate and an elevation of
blood pressure during the cycle of apneas. 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. Several reports indicate that
the oxygen desaturation, increased heart rate and elevated blood pressure
caused by OSA may be associated with increased risk of cardiovascular
morbidity and mortality due to angina, stroke and heart attack.
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 millionDespite the high prevalence of these
persons over the age of 30 experience moderate to severe forms of sleep apnea.
However,OSA, 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.public. It is
estimated that less than 3%10% of those persons afflicted by OSA know the cause of
their fatigue or other symptoms. Health care professionals are often
unable to diagnose OSA because they are unaware that such non-specific
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, may be
medically predisposed to OSA. - -3-Recent studies have also shown that SDB is
associated with hypertension, the leading risk factor for the development
of stroke and heart disease, and that over 50% of post stroke patients and
patients with congestive heart failure have SDB.
Sleep Disordered Breathing and Obstructive Sleep Apnea
Sleep disordered breathing, or SDB, encompasses all physiological
processes that cause detrimental breathing patterns during sleep.
Manifestations include OSA, central sleep apnea, or CSA, and
hypoventilation syndromes that occur during sleep. Hypoventilation
syndromes are generally associated with obesity, chronic obstructive lung
disease, neuromuscular disease and upper airway resistance changes. OSA is
the most common form of SDB.
Sleep fragmentation and the loss of the deeper levels of sleep caused by
OSA can lead to excessive daytime sleepiness, reduced cognitive function,
including memory loss and lack of concentration, depression and
irritability. OSA sufferers also may experience an increase in heart rate
and an elevation of blood pressure during the cycle of apneas. Several
studies indicate that the oxygen
3
desaturation, increased heart rate and elevated blood pressure caused by
OSA may be associated with increased risk of cardiovascular morbidity and
mortality due to angina, stroke and heart attack. Patients with OSA have
been shown to have impaired daytime performance in a variety of cognitive
functions including problem solving, response speed and visual motor
coordination, and studies have linked OSA to increased occurrences of
traffic and workplace accidents.
Generally, an individual seeking treatment for the symptoms of OSA is
referred by a general practitioner to a specialist 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 estimatesWe
estimate that there are currently more than 1,8002,000 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. Most recently, surgery has involved either
uvulopalatopharyngoplasty ("UPPP"('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.
Nasal CPAP, by contrast, is a non-invasive means of treating OSA. Nasal
CPAP was first used as a treatment for OSA in 1980 by Dr. Colin Sullivan,
the Chairman of the Company'sour Medical Advisory Board. CPAP systems were
commercialized for treatment of OSA in the United States in the mid
1980's. Today, use of nasal positive airway pressure is generally
acknowledged as the most effective and least invasive therapy for managing
OSA.
The Company estimates that during fiscal 1998, 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 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 not a cure but a therapy for managing OSA, and therefore, must be
used on a nightlydaily basis for life.as long as treatment is required. Patient
compliance has been a major factor in the efficacy of CPAP treatment.
Early generations of CPAP units provided limited patient comfort and
convenience. Patients experienced soreness from the repeated use of nasal
masks and had difficulty falling asleep with the CPAP device operating at
the prescribed pressure. Over the
past fewIn more recent years, product innovations to
improve patient comfort and compliance have been developed. These include
more comfortable mask systems, delay timers which gradually raise air
pressure allowing the patient to fall asleep more easily, and bi-leveleasily; bilevel flow
generators, including VPAP systems, which provide different air pressures
for inhalation and exhalation.
- -4-
exhalation; heated humidification systems to make the
airflow more comfortable; and autotitration devices which reduce the
average pressure delivered during the night.
Business Strategy
The Company believesWe believe that the SDB market will increasecontinue to grow in the future due to
a number of factors including the increasedincreasing awareness of OSA, improved
understanding of the role of OSASDB treatment in the
4
management of cardiac, treatmentneurologic and related disorders, and an increase
in home based treatment andhome-based diagnosis. The Company'sOur strategy for the expansion of itsexpanding our business
operations and capitalizing on the growth of the SDB market consists of
the following key elements.elements:
. Continue Product Development and Innovation. The Company believes that
it isWe are committed to
ongoing innovation in developing products for the diagnosis and
treatment of SDB. We have been a leading innovator of products designed
to more effectively treat apneas, increase patient comfort and
encourage compliance with prescribed therapy. For example, in nasal CPAP1997 we
introduced the Mirage Mask. This mask contains an inflatable air
pocket, which conforms to the patient's facial contours, creating a
more comfortable and bi-level technology forbetter seal. Additionally, in 1999 we introduced
the treatment of sleep disorderedAutoSet T flow generator, an autotitrating device that adapts to
the patient's breathing including OSA andpatterns to more effectively prevent apneas. We
believe that continued product development and innovation will be aare key
factorfactors to our ongoing success. Approximately 14% of our employees are
devoted to research and development activities. In fiscal year 2001, we
invested $11.1 million, or 7.2% of our revenues, in its success. Since
its founding, the Company has introduced product advancementsresearch and
improvements
designed to increase patient comfort and encourage compliance, such as delay
timers, heated humidifiers, and pliable Bubble Masks(Registered Trademark)development.
. The Company is currently developing a range of automatic CPAP devices,
including further developments of its existing range of AutoSet(Registered
Trademark) products, that are designed to continually adjust CPAP pressure to
meet individual patients' changing needs and to eliminate the need for manual
pressure titration.
Expand and Deepen Geographic Presence. The Company currently markets itsWe market our products in over 4060 countries through a network of independent distributors,
the Company's direct sales force and manufacturers' representatives. The
Company actively markets its products
to sleep clinics, home health care dealers and managed care organizations. The Company intendsthird party payers. We
intend to increase itsour sales and marketing efforts in its currentour principal
markets, particularly Europe and
the United States, as well as to continue expansionexpand our presence into new countries. The
Company recently signed a distribution agreement with Invacare Corp., pursuant
to which Invacare Corp. has agreed to act as a distributorgeographic regions.
For example, our acquisition of certain ofMAP enhances our position in Europe,
particularly in Germany, the Company's products in the United States.second largest market worldwide for OSA
products.
. Increase Public and Clinical Awareness. The Company intendsWe intend to promotecontinue to expand
our existing promotional activities to increase awareness of the prevalence of,SDB and
our treatment alternatives for, SDB with three
main groups: (1)alternatives. These promotional activities target the
population with predisposition to SDB; (2)SDB as well as primary care
physicians and other specialists, such as cardiologists, neurologists pulmonologists and
anesthesiologists; and (3)pulmonologists. In addition, we also target special interest groups,
such as
sleep disorder support groups. The Company has sponsored international
symposia on different clinical effects of SDB, including cardiovascularthe National Stroke Association, the American Heart
Association and cerebrovascular implications of SDB. As well as educating the attending
specialist physicians, each conference has been published on a CD-ROM for
distribution to interested clinicians.National Sleep Foundation.
. Expand into New Markets. The CompanyClinical Applications. We continually seek to identify
new applications of our technology for significant unmet medical needs.
SDB is associated with a number of symptoms beyond fatigue and
irritability. In particular, recent studies have established a clinical
association between OSA and stroke and congestive heart failure. We are
currently developing a device, which has not been approved for sale in
the United States, for the treatment of Cheyne-Stokes breathing in
patients with congestive heart failure. In addition, we maintain close
working relationships with a number of prominent physicians to explore
new medical applications for our products and technology.
. Leverage the Experience of our Management Team and Medical Advisory
Board. Our senior management team has extensive experience in the
medical device industry in general, and in the field of SDB in
particular. Our Medical Advisory Board is comprised of experts in the
field of SDB, including Dr. Colin Sullivan, the inventor of nasal CPAP, includingCPAP.
We intend to continue to leverage the experience and expertise of these
individuals to maintain our innovative approach to the development of
products and increase awareness of the serious medical problems caused
by SDB.
Products
Our portfolio of products for the treatment of post-operative surgery patients and pediatric patients, such as premature
babies and infants at risk of Sudden Infant Death Syndrome. In 1998, the
Company sponsored an international symposium focused on noninvasive positive
pressure ventilation for lung disorders. The Company received a 510(k)
clearance from the FDA in June 1998 to market the Company's VPAP(Registered
Trademark) devices for ventilatory assistance. It has recently been
demonstrated that patients with chronic obstructive pulmonary diseaseOSA and other lung diseases can benefit from positive pressure ventilation by devices
similar to the Company's VPAP(Registered Trademark) devices. In August 1998
the Company received FDA clearance to market a VPAP product for ventilatory
assistance in the hospital critical care market. The Company has commenced
marketing appropriate devices for there application.
- -5-forms of SDB
include flow generators, diagnostic products, mask systems, headgear and
other accessories.
5
Products
Currently, ResMed producesFlow Generators
We produce nasal CPAP, VPAP(Registered Trademark)VPAP and AutoSet(Registered Trademark)AutoSet systems for the diagnosis,
titration and treatment of SDB. These areThe flow generator systems which deliver
positive airway pressure through a small nasal mask. The flow of air acts like an "air
splint" to keep the patient's upper airway open and prevent apneas. These
apneas occur when the muscles that normally hold the airway open during sleep,
relax too much and close the airway off. AutoSet(Registered Trademark)
systemsmask (or sometimes a full-
face mask). Our VPAP units deliver ultra-quiet, comfortable bilevel
therapy. There are based on a proprietary technology that can also be used in the
diagnosis of OSA.
ResMed also manufactures air delivery systems that include nasal masks,
tubing and headgear to connect the flow generator to the patient. In
addition, a growing range of sleep laboratory products and other accessories
which improve patient comfort, convenience and compliance are marketed.
CPAP and VPAP(Registered Trademark)
Introduced in July 1995, the SULLIVAN(Registered Trademark) V range of
flow generators is now the Company's main CPAP flow generator product. Each of
the four models in the range is small and compact and comes with different
features to suit different patient needs.
ResMed also manufacturers Variable Positive Airways Pressure
(VPAP(Registered Trademark)) units which have two preset pressures: a higher pressure whenas the patient
breathes in, and a lower pressure whenas the patient breathes out. TheBreathing
out against a lower pressure makes treatment more comfortable,
particularly for patients who need high pressure levels or for patientsthose with
impaired breathing ability. ThereAutoSet systems are primarily three modelsbased on a proprietary
technology to monitor breathing that can also be used in the VPAP(Registered Trademark)
range: the SULLIVAN(Registered Trademark) VPAP(Registered Trademark) II, the
SULLIVAN(Registered Trademark) Comfortdiagnosis and
the SULLIVAN(Registered Trademark)
VPAP(Registered Trademark) II ST. Released from March 1996, these units have
gained a reputation for delivering comfortable treatment. This is due to a
unique feature called IPAP max which assists in the triggering between the two
pressures. In June 1998, LCD screens were added to all three models for
convenience. In the same month ResMed received FDA clearance to market the
VPAP(Registered Trademark) II ST-A in the USA for ventilatory assistance.treatment of OSA. CPAP and VPAP(Registered Trademark) units are sold to the end user at
prices which vary from approximately $800 to $3,000, depending primarily upon
the model, features required and country of sale. FlowVPAP flow generators, together with our
diagnostic products, accounted for approximately 66%57%, 67%60% and 68%64% of the Company'sour
net revenues in fiscal 1998, 1997years 2001, 2000 and 19961999, respectively.
AutoSet(Registered Trademark) systems for managing OSA
ResMed markets devices incorporating its innovative AutoSet(Registered
Trademark) technology for diagnosis, titration and treatment in sleep clinics,
hospitals and patients' homes. Released in January 1998, AutoSet(Registered
Trademark) Clinical II is the clinical device allowing real-time observation
and review by the clinician of respiratory parameters during a sleep study.
AutoSet(Registered Trademark) Clinical II can be used to determine the CPAP
pressure required by a patient (titration) and assist in the diagnosis of
obstructive sleep apnea. Released in July 1998, AutoSet(Registered Trademark)
Portable II Plus can be used in sleep clinics, hospitals or patient's homes
and has additional features to monitor extra respiratory data.
ResMed is also developing the patented AutoSet(Registered Trademark)
technology for a range of CPAP devices for home use in the treatment of SDB
conditions. While conventional CPAP units operate at a fixed CPAP pressure;
actual pressure required for effective treatment of OSA can vary depending on
factors such as weight change, alcohol consumption, sedative use, stage of
sleep and body position. Due for release in late 1998, AutoSet(Registered
Trademark) T is designed to continually detect the level of airway resistance
and adjust the air pressure to the required level throughout the night. This
results in greater patient comfort and reduced pressure related side effects.
- -6-
The following table lists the Company's products.--------------------------------------------------------------------------------------------------------------
Date of
Flow Generators Description Commercial
Introduction
--------------------------------------------------------------------------------------------------------------
Date of Commercial
Product Features Introduction; Status
- ---------------------------------- ------------------------------------------------------------- --------------------------
FLOW GENERATORS:
Pediatric CPAP Fixed-pressure,VPAP II Bilevel portable device for infants September 1994 (Currently
and children sold solely outside the
United States)
SULLIVAN(Registered Trademark) A range of compact portable fixed-pressure July 1995
V Series devices with various features to facilitate
patient comfort
SULLIVAN(Registered Trademark) Dual pressure portable device provides March 1996
VPAP(Registered Trademark)IIproviding different pressure levels for March 1996
inhalation and exhalation, features improved pressure switching and
reduced noise output and spontaneous breath triggering
SULLIVAN(Registered Trademark)triggering.
COMFORT Limited featured dual pressureBilevel device with limited features. March 1996
SULLIVAN(Registered Trademark) Dual pressureVPAP II ST Bilevel portable device with spontaneous and April 1996
VPAP(Registered Trademark)II ST spontaneous and
spontaneous/timed breath triggering modes of operation
VPAP(Registered Trademark)operation.
VPAP II ST A Version of VPAP(Registered Trademark)II ST equipped August 1998Bilevel device with high/ low pressure, power failure alarms. For noninvasive positive pressure ventilation use
AutoSet(Registered Trademark)August 1998
VPAP MAX Bilevel ventilatory support system for the treatment of adult November 1998
patients with respiratory insufficiency or respiratory failure.
AutoSet T Micro processor controlled, automatically and September 1998
continuously monitors patient breathing.
AdjustsAutotitrating device which continually adjusts CPAP March 1999
treatment pressure in response
to patient's needs during the night
MASK SYSTEMS:
Bubble Mask(Registered Trademark) Includes Bubble Cushion(Registered Trademark), containingbased on patient airway resistance.
ResMed S6 series Quiet, compact CPAP device with various comfort features. June 19912000
Minni Max nCPAP CPAP device with integrated humidification capabilities February 2001*
and low noise levels.
Moritz II Bilevel Bilevel portable device. February 2001*
--------------------------------------------------------------------------------------------------------------
*Date of acquisition of MAP. The MAP products are not approved for
marketing in the United States.
6
Mask Systems
Mask systems are one of the most important elements of an OSA treatment
system. Masks are a primary determinant of patient comfort and as such may
drive or impede patient compliance with therapy. We have been a consistent
innovator in masks, improving patient comfort while minimizing size and
weight.
---------------------------------------------------------------------------------------------------------------
Date of
Mask Products Description Commercial
Introduction
---------------------------------------------------------------------------------------------------------------
Mirage Mask Proprietary mask design with a silicone membrane which readily adjusts to
patient's facial contours and ResCap(Registered Trademark)
five point attachment headgear
Modular Mask Frame Mask frame with T Bar forehead pads, to July 1995
prevent sideways movement of the frame
and provide maximum stability
SULLIVAN(Registered Trademark) Contains contoured nasal cushion whichthat August 1997
Mirage(Trademark) readily
adjusts to patient's facial contours. Lightweight, quiet,Quiet, light and low
profileprofile.
Mirage Full Face Mirage-based full face mask system. Provides an effective June 1999
Mask method of applying ventilatory assist Noninvasive Positive
Pressure Ventilation therapy. Can be used to address mouth-
breathing problems in conventional bilevel or CPAP therapy.
Ultra Mirage Mask Advanced version of the Mirage system ACCESSORIES:
HumidAire(Trademark) Attaches to CPAP or VPAP(Registered Trademark) systems. September 1997
Provides adjustable heated humidification, relieves
dryingwith reduced noise June 2000
characteristics and improved forehead bridge.
---------------------------------------------------------------------------------------------------------------
Diagnostic Products
We market sleep recorders for the diagnosis, titration and treatment of SDB
in sleep clinics and hospitals. These diagnostic systems record relevant
respiratory and sleep data, which can be analyzed by a sleep specialist or
physician who can then tailor an appropriate OSA treatment regimen for the
patient.
---------------------------------------------------------------------------------------------------------------
Date of
nasal passages, increasing patient comfort
DIAGNOSTIC SYSTEMS:
AutoSet(Registered Trademark) Micro processor controlled, automatically and December 1997
ClinicalDiagnostic Products Description Commercial
Introduction
---------------------------------------------------------------------------------------------------------------
AutoSet Portable II continuously monitors patient breathing.
Attaches to a PC and stores data for subsequent
evaluation. For use in sleep labs to aid OSA
diagnosis and titration of CPAP pressure.
AutoSet(Registered Trademark) An improved Portable version of AutoSet(Registered Trademark) June 1997
Portable IIthe AutoSet Clinical with PC processor functions builtJune 1997
Plus functions.
ResControl Device to permit remote monitoring and adjustment of September 1999
ResMed CPAP, VPAP, and AutoSet T Flow generators. An
internal pressure transducer enables the clinician to
interface with polysomnography to monitor airflow in For homeboth
titration and diagnostic studies.
Embla Digital sleep recorder that provides comprehensive sleep October 1999
diagnosis in a sleep laboratory.
Embletta Pocket-size digital recorder that performs ambulatory sleep November 2000
studies.
MESAM IV Portable Portable diagnostic system that measures snore, heart rate, February 2001*
Diagnostic System body position, and oxygen saturation in conjunction with
computer assisted analysis.
Poly-MESAM Portable Configurable polysomnography system adaptable to February 2001*
Diagnostic System individual sleep laboratory needs.
MEPAL Diagnostic Polysomnography system designed for use in the sleep studiesFebruary 2001*
System laboratory.
MEPAL mobil Ambulatory polysomnography system. February 2001*
Diagnostic System
---------------------------------------------------------------------------------------------------------------
- -7-*Date of acquisition of MAP. The MAP products are not approved for
marketing in the United States.
7
Innovative Mask Systems
ResMed's mask system consists of a nasal cushion which sits on a mask
frame held in place by headgear. The Bubble Mask(Registered Trademark)
includes a patented Bubble Cushion(Registered Trademark) which represents a
significant advance in patient comfort. Introduced in 1991, the Bubble
Cushion(Registered Trademark) is made from a thin, soft silicone membrane. The
membrane readily conforms to the patient's facial contours to form a seal and
minimize air leakage. When inflated by air pressure from the flow generator,
the cushion "floats" on the face. It complies with body movement and
eliminates the need for tight headgear to hold the cushion in place.
Typically, patients replace masks or mask cushions every 12 to 18 months,
at a cost of approximately $100-$200 depending upon the model. Bubble
Masks(Registered Trademark) are available in a variety of sizes and are sold
independently of the Company's flow generators either as replacement
products or with other manufacturers' flow generators. The Company also
manufactures the Bubble Mask(Registered Trademark) on an OEM basis for
Nellcor Puritan-Bennett, one of its competitors.
In June 1997, ResMed released the Mirage(Trademark) mask system which has
taken a large share of the mask market. Smaller and lighter than many other
types of mask, the Mirage(Trademark) features a specially contoured cushion
that fits a wider range of nose shapes. The standard Mirage(Trademark)
size fits most people so that clinicians can fit masks faster. The
Mirage(Trademark) also allows inventory costs to be reduced as it eliminates
the need to carry a large range of types and sizes of mask. Furthermore, the
Mirage(Trademark) mask works very well for both conventional CPAP and bi-level
treatment.
In July 1995, the Company introduced a new Modular Mask frame with a
T-bar which sits on the forehead to provide stability and prevent sideways
movement of the frame. The mask has a choice of four sizes of forehead arm to
ensure optimum positioning of the cushion and reduce leaks. Headgear includes
the ResCap(Registered Trademark) II which has five points of attachment to the
mask frame to provide an even distribution of pressure and secure fit. A nose
and mouth mask is also available for patients who experience significant mouth
leaks when using a nasal mask.
Mask systems, accessories and other products accounted for approximately
34%, 33% and 32% of the Company's net revenues in fiscal 1998, 1997 and 1996,
respectively.
Accessories and Other Products
In order toTo enhance patient comfort, convenience and compliance, ResMed
marketswe market a
variety of other products and accessories. These products include
humidifiers, such as the SULLIVAN(Registered Trademark) HumidAire(Trademark),SULLIVAN HumidAire, which connect directly with
the CPAP, VPAP and VPAP(Registered Trademark)AutoSet flow generators to humidify and if desired, heat the air
delivered to the patient. Their use prevents the drying of nasal passages
which can cause discomfort. Other optional accessories include a cold
passover humidifier, carry bags and replacement
filters.
ResMedbreathing circuits. MAP also manufactures products that are used primarily in sleep
clinics and hospitals to monitor key respiratory parameters. These products
consistoffers a
range of CPAP devices together, with additional diagnostic tools, to assist
cliniciansaccessories, including the Twister remote, an intelligent remote
control for use in the diagnosis of OSAsleep lab environment to set and establishment of therapeutic pressures
necessary to treat OSA suffers.
The Universal Control Unit (UCU) was first introduced in October 1995.
It was superseded in June 1997 by the UCU2. The UCU2 is a monitoring device
used by clinicians to measure and adjust the pressure being delivered by a
ResMed CPAP or VPAP(Registered Trademark) II device to a patient undergoing a
sleep study. It allows the clinician to conduct this review and adjustment
from a remote location within a sleep lab.
- -8-
The SULLIVAN(Registered Trademark) Compliance Application (SCAN ),
introduced in October 1995, and superseded in June 1997 by SCAN 2.0,
comprises the software necessary to download compliance data frommonitor flow
generators, with recording capabilities. Clinicians can use SCAN 2.0 tothe Aero-Click connection system, which allows a quick, simple
connect/disconnect between the mask and CPAP air delivery source and the
AeroFix headgear, for the comfortable adjustment of masks for CPAP
therapy.
Product Development and Clinical Trials
We have a strong track how often and how long a patient is undergoing treatment. In connection with a
modem, SCAN 2.0 allows compliance data to be downloaded from a flow generatorrecord in a patient's home direct toinnovation in the sleep laboratory.
Product Development
The Company ismarket. In 1989,
we introduced our first nasal CPAP device. Since then we have been
committed to an ongoing program of product advancement and development.
Currently, our product development efforts are focused on AutoSet(Registered Trademark) systems, improved CPAP, VPAPnot only
improving our current product offerings, but also expanding into new
product applications. For example, in 1997, we introduced the Mirage Mask.
This mask was based on the innovative Bubble Mask technology introduced in
1991, which used the principle of air inflation of the mask cushion to
create a more comfortable and mask systemsbetter seal by better conforming to patient
facial contours. Additionally, in 1999, we introduced the AutoSet T Flow
generator, an autotitrating device that adapts to the patient's breathing
patterns to effectively prevent apneas.
We continually seek to identify new applications of our technology for
significant unmet medical needs. SDB is associated with a number of
symptoms beyond fatigue and manufacturing cost-reduction programs.
The Company consultsirritability. In particular, recent studies
have established a clinical association between SDB and stroke and
congestive heart failure. For example, we are currently developing a
device, which has not been approved for sale in the United States, for the
treatment of Cheyne-Stokes breathing in patients with congestive heart
failure. We also support clinical trials in the United States, Germany,
France, the United Kingdom and Australia.
We consult with physicians at major sleep centers throughout the world to
identify technological trends in the treatment of SDB. Some of these
physicians currently serve on the Company'sour Medical Advisory Board. New product
ideas are also identified by the Company'sour marketing staff, direct sales force,
network of distributors, manufacturers' representatives, customers, and
patients. Typically, new product development is then performed by the
Company'sour internal development staff often in collaboration with Dr. Sullivan
and his colleagues at the University of Sydney Medical School, as well as
other research groups around the world such as Brown, Edinburgh, Essen and
Harvard Medical Schools.then performs new
product development.
In the three fiscal years ended June 30, 1998, 19972001, 2000 and 1996, the Company
expended $4,994,000, $3,807,0001999, we invested $11,146,000, $8,499,000
and $2,841,000,$6,542,000, respectively, on research and development.
Sales and Marketing
Our products are typically purchased by a home healthcare dealer who then
sells the products to the patient. The Companydecision to purchase our products,
as opposed those of our competitors, is made or influenced by one or more
of the following individuals or organizations: the prescribing physician
and his or her staff, the home healthcare dealer, the insurer and the
patient.
We currently markets itsmarket our products in over 4060 countries using a network of
distributors, independent manufacturers' representatives and itsour direct
sales force. The Company attemptsWe attempt to tailor itsour marketing
8
approach to each national market, based on regional awareness of SDB as a
health problem, physician referral patterns, consumer preferences and
local reimbursement policies.
North America.America and Latin America
In the United States, the Company'sour sales and marketing activities are conducted
through a field sales organization comprisedmade up of 23 regional territory
representatives, program development specialists and diagnostic system
specialists, plus two regional sales directors, and 27 independent manufacturers'
representatives organizations. Therepresentatives. Our United States field sales organization markets and
sells products to more than 4,5004,000 home health care dealer branch locations
throughout the United States. The CompanyOur direct sales force receives a base
salary, plus commissions, while our independent sales representatives
receive higher commissions, but no base salary.
We also promotespromote and markets itsmarket our products directly to sleep clinics.
Patients who are diagnosed with OSA and prescribed CPAP treatment are
typically referred by the diagnosing sleep clinic to a home health care
dealer to fill the prescription. The home health care dealer, in
consultation with the referring physician, will assist the patient in
selecting the equipment, fit the patient with the appropriate mask and set
the flow generator pressure to the prescribed level. In the United States,
our sales employees and manufacturers' subrepresentativesrepresentatives are managed by the two
regional sales managersSales Managers, a Director of Sales and the Company'sultimately our Senior
Vice President, - US Sales. The Vice
President - US Marketing, responsible for marketing in the United StatesU.S. Sales and Canada, is also based in the Company's office in San Diego. The Company'sMarketing.
Our Canadian and Latin American sales are conducted through a Canadian distributor.independent
distributors. Sales in North America and Latin America accounted for 52%,
43%54% and 49%57% of the Company's totalour net revenues for the fiscal years ended June 30, 1998, 19972001, 2000 and 1996,1999,
respectively.
- -9-
Europe. The Company markets itsEurope
We market our products in most major European countries. ResMed has fullyWe have wholly
owned subsidiaries in the United Kingdom, Germany, and France and usesSweden, and
we use independent distributors to sell itsour products in other areas of
Europe. These distributors have beenDistributors are selected in each country based on their knowledge
of respiratory medicine as well asand a commitment to SDB therapy. In each country
in which the Company haswe have a subsidiary, a local senior manager is responsible for
direct national sales. In addition, the
Company usesMAP conducts its sales efforts through a consultant in Switzerland to assist indirect
sales and marketing
efforts for selected European countries.
The Group'sforce.
Our Executive Vice President is responsible for coordination of all
European distributorsactivities and, in conjunction with local management, the direct
sales activity in Europe. Sales in Europe accounted for 35%39%, 44%35% and 36%34%
of the Company'sour total net revenues for the fiscal years ended June 30,
1998, 19972001, 2000 and 1996,1999,
respectively. As a result of the MAP acquisition, we expect European sales
to increase as a percentage of total net revenues in the near future.
Australia/Rest of World. Prior to May 1994, the Company was the
exclusive source of nasal CPAP flow generator unitsWorld
Marketing in Australia as a result
of ResMed Limited's ownership of Dr. Sullivan's original nasal CPAP patent.
This patent, which covered the CPAP method of treating OSA 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 permits competitors
to market CPAP products in Australia. Consequently, the Company's market
share in Australia has decreased from 1995 onwards.
Marketing in the rest of the world is the responsibility of
theour Executive Vice President based in Sydney, Australia.President. Sales in Australia and the rest of the world
accounted for 13%9%, 13%11% and 15%9% of the Company'sour total net revenues for the fiscal
years ended June 30, 1998, 19972001, 2000 and 1996,1999, respectively.
Other Marketing Efforts
In addition to our sales efforts, we work with the following organizations
to promote public and clinical awareness of SDB and OSA:
. National Stroke Association: We have developed a strategic alliance
with the National Stroke Association to increase awareness about the
high prevalence of SDB in the stroke survivor population.
9
. American Heart Association: We are working closely with the Western
Affiliates of the American Heart Association on a number of local
programs to increase awareness and education about SDB. We are also in
discussions with the national American Heart/American Stroke
associations regarding national programs initially targeting clinicians
on the impact of SDB on both heart disease and stroke patients, as well
as its role in the development of hypertension, a major risk factor for
both heart disease and stroke.
. National Sleep Foundation: The National Sleep Foundation is a non
profit organization dedicated to improving public health and safety by
raising the level of awareness and education toward sleep related
programs and research. We have been an active corporate partner and
have supported the National Sleep Foundation for a number of years.
We believe that our affiliations and continued work with these
organizations raises the awareness of SDB as a significant health concern.
Manufacturing
The Company'sOur principal manufacturing facilities are located in Sydney, Australia. The Company'sAustralia
and comprise a 120,000 square foot manufacturing and research and
development facility. Our manufacturing operations consist primarily of
assembly and testing of the Company'sour flow generators, masks and accessories. Of the
numerous raw materials, parts and components purchased for assembly of the Company'sour
therapeutic and diagnostic sleep disorder products, most are off-the-shelf
items available from multiple vendors. The Company'sWe generally manufacture to our
internal sales forecasts and fill orders as received. Our quality control
group performs tests at various steps in the manufacturing cycle to ensure
compliance with our specifications.
Our quality management system is based upon the Company's
specifications. The Company is currently inrequirements of ISO 9001,
EN46001 (European Medical Standards), FDA Quality System Regulations for
medical devices (21 CFR part 820) and the process of constructing a
new, approximately 120,000 square feet manufacturing facility inMedical Device Directive
(93/42/EEC). Our Sydney, Australia facility is accredited to ISO 9001 and
will shift its primaryEN46001 and our San Diego, California facility is accredited to ISO 9002
and EN46002. These two sites have third party audits conducted by the ISO
certification bodies at regular intervals.
Our newly acquired German manufacturing operationsoperation based in Munich operates
in a facility of approximately 24,000 square feet. This facility is
accredited to the new
facility when construction is completed. ConstructionISO 9001 and EN46001. The products are primarily flow
generators that have been developed internally by a small development
team. The manufacturing process consists of major sub-assemblies produced
externally by sub-contractors, and final assembly and test of the new facility is
expectedfinished
product being performed in house. Appropriate quality controls monitor and
measure product assembly and performance.
We purchase uniquely configured components for our devices from single-
source suppliers. A reduction or stoppage in supply while a replacement
supplier reconfigures its components, or while we reconfigure our
components for the replacement part, if required, would limit our ability
to be completed by early calendar 1999.
The Company generally manufactures to its internalmanufacture our devices, which could result in a significant reduction
in sales forecasts and fills orders as received. As a result, the Company generally has no
significant backlog of orders for its products. The Company uses management
information systems to integrate its manufacturing planning, billing and
accounting systems.
- -10-
Service and Warranty
The Company offers one-to-two year limited warranties on its 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. The Company provides for warranties and
returns based on historical data.profitability.
Third-Party Reimbursement
The cost of medical care in many of the countries in which we operate is
funded in substantial part by government and private insurance programs.
Although the Company doeswe do not generally receive payments for
its10
our products directly from these payors, the Company'spayers, our success in major markets is
dependent upon the ability of patients to obtain adequate reimbursement
for the Company'sour products.
In most markets, the Company'sUnited States, our products are purchased primarily by home health
care dealers, hospitals or sleep clinics, which then invoice third-party
payorspayers directly. In the United States,Domestic third-party payorspayers include Medicare, Medicaid,
and corporate health insurance plans. These payorspayers may deny reimbursement
if they determine that a device is not used in accordance with cost-effectivecost-
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 long-term 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
result in lower prices for our products.
In the Company'sUnited States, we sell our products primarily to home health care
dealers and to sleep clinics; we do not file claims and bill governmental
programs and other third-party payers directly for reimbursement for our
products. Nevertheless, we are still subject to laws and regulations
relating to governmental programs, and any violation of these laws and
regulations could result in civil and criminal penalties, including fines.
In particular, the federal Anti-Kickback Law prohibits persons from
knowingly and willfully soliciting, receiving, offering or providing
remuneration, directly or indirectly, to induce either the referral of an
individual, or the furnishing, recommending or arranging for a good or
service, for which payment may be made under a Federal healthcare program
such as the Medicare and Medicaid programs. The government has interpreted
this law broadly to apply to the marketing and sales activities of
manufacturers and distributors like us. Many states have adopted laws
similar to the federal Anti-Kickback Law. We are also subject to other
federal and state fraud laws applicable to payment from any third-party
payer. These laws prohibit persons from knowingly and willfully filing
false claims or executing a scheme to defraud any healthcare benefit
program, including private third-party payers. These laws may apply to
manufacturers and distributors who provide information on coverage, coding
and reimbursement of their products to persons who bill third-party
payers. We continuously strive to comply with these laws and believe that
our arrangements do not violate these laws. Liability may still arise from
the intentions or actions of the parties with whom we do business or from
a different governmental agency interpretation of the laws.
In some foreign markets, such as Spain, France and Germany, government
reimbursement is currently available for purchase or rental of the Company'sour
products subject, however, to constraints such as price controls or unit
sales limitations. In Australia and in some other foreign markets, there
is currently limited or no reimbursement for devices that treat OSA.
Service and Warranty
We generally offer one-to-two year limited warranties on our flow
generator products. Warranties on mask systems are for 90 days. In most
markets, we rely on our distributors to repair our products with parts
supplied by us. In the United States, home health care dealers generally
arrange shipment of products to our San Diego facility for repair.
We receive returns of our products from the field for various reasons. We
believe that the level of returns experienced to date is consistent with
levels typically experienced by manufacturers of similar devices. We
provide for warranties and returns based on historical data.
11
Competition
The markets for the Company'sour products are highly competitive. The
Company believesWe believe that the
principal competitive factors in all of itsour markets are product features,
reliability and price. Reputation and efficient distribution are also
important factors.
The Company competesWe compete on a market-by-market basis with various companies, some of
which have greater financial, research, manufacturing and marketing
resources than the Company.ourselves. In the United States, itsour principal market,
Respironics, Inc. ("Respironics"), DeVilbiss, a division of Sunrise Medical Inc., and
Nellcor Puritan Bennett, a subsidiary of Mallinckrodt,Tyco Inc., are the primary
competitors for the Company'sour CPAP products. The Company'sOur principal European competitors are
also Respironics, DeVilbiss, and Nellcor Puritan Bennett, as well as
regional European manufacturers. The disparity between the Company'sour resources and
those of itsour competitors is likely tomay increase as a result of the recent trend
towards consolidation in the health care industry. In addition, the Company'sour
products compete with surgical procedures and dental appliances designed
to treat OSA and other SDB related respiratory conditions. The development
of new or innovative procedures or devices by others could result in the Company'sour
products becoming obsolete or noncompetitive, resulting in a material
adverse effect on the Company'sour business, financial condition and results of
operations.
- -11-
Any product developed by the Companyus that gains regulatory clearance will have to
compete for market acceptance and market share. An important factor in
such competition may be the timing of market introduction of competitive
products. Accordingly, the relative speed with which the Companywe can develop
products, complete clinical testing and regulatory clearance processes and
supply commercial quantities of the product to the market are expected to
be important competitive factors. In addition, the Company'sour ability to compete will
continue to be dependent on the extent to which the Company iswe are successful in
protecting itsour patents and other intellectual property.
Patents and Proprietary Rights and Related Litigation
The Company, through its subsidiaryThrough our subsidiaries ResMed Limited ownsand MAP Medizintechnik fur Arzt
und Patient GmbH, we own or hashave licensed rights to 1051 issued United
States patents (including 113 design patent)patents) and 13102 issued foreign
patents. In addition, there are 3982 pending United States patent
applications (including 54 design patent applications) and 66197 pending
foreign patent applications. Some of these patents and patent applications
relate to significant aspects and features of the Company'sour products. These include
United StatesU.S. patents relating to CPAP devices, a delay timer system, the Bubble
Mask(Registered Trademark),Mask, and an automated means of varying air pressure based upon a
patient's changing needs during nightly use, such as that employed in the Company's AutoSet(Registered Trademark) Device.our
AutoSet device.
None of the Company'sour patents areis due to expire in the next five years, with the
exception of fourfive foreign patents which are due to expire in April
2002. The Company believes2002 and one foreign
patent in each of the years 2004 and 2005. We believe that the expiration
of these patents will not have anya material adverse impact on the Company'sour
competitive position.
The Company reliesWe rely on a combination of patents, trade secrets, non-disclosuretrade marks and non-
disclosure agreements and proprietary know-how to protect itsour proprietary technology and rights.
ResMed Limited is pursuing an infringement action against one of its
competitors and is investigating possible infringement by others. See
Item 3-3 - "Legal Proceedings."Proceedings".
Additional litigation may be necessary to attempt to enforce patents
issued to the Company,us, to protect the Company's proprietaryour rights, or to defend third-party claims of
infringement by the Companyus of the proprietary rights of others. Patent laws
regarding the enforceability of patents vary from country to country.
Therefore, there
12
can be no assurance that patent issues will be uniformly resolved, or that
local laws will provide the Companyus with consistent rights and benefits.
Government Regulations
The Company'sOur products are subject to extensive regulation particularly as to
safety, efficacy and adherence to FDA Quality System Regulation, (QSR)or QSR,
and related manufacturing standards. Medical device products are subject
to rigorous FDA and other governmental agency regulations in the United
States and regulations of relevant foreign agencies abroad. The FDA
regulates the introduction, manufacture, advertising, labeling, packaging,
marketing, distribution, and record keeping for such products, in order to
ensure that medical products distributed in the United States are safe and
effective for their intended use. In addition, the FDA is authorized to
establish special controls to provide reasonable assurance of the safety
and effectiveness of most devices. NoncomplianceNon compliance with applicable
requirements can result in import detentions, fines, civil penalties,
injunctions, suspensions or losses of regulatory approvals, recall or
seizure of products, operating restrictions, refusal of the government to
approve product export applications or allow the
Companyus to enter into supply
contracts, and criminal prosecution.
- -12-
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")or PMA, prior to it being introduced into the market. The Company'sOur products
currently marketed in the United States are marketed in reliance on 510(k)
pre-marketing clearances.clearances as either Class I or Class II devices. The
process of obtaining a Section 510(k) clearance generally requires the
submission of performance data and often clinical data, which in some
cases can be extensive, to demonstrate that the device is "substantially
equivalent"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"equivalent'' to
such a pre-1976 device. As a result, FDA approval requirements may extend
the development process for a considerable length of time. In addition, in
some cases, the FDA may require additional review by an advisory panel,
which can further lengthen the process. The PMA process, which is reserved
for new devices that are not substantially equivalent to any predicate
device and for high risk devices or those that are used to support or
sustain human life, may take several years and requires the submission of
extensive performance and clinical information.
As a medical device manufacturer, the Company isall of our domestic and Australian
manufacturing facilities are subject to inspection on a routine basis by
the FDA for compliance with the FDA's QSR regulations which
impose procedural and documentation requirements with respect to design,
manufacturing and quality control activities. The Company believesFDA. We believe that itsour design, manufacturing and quality control
procedures meetare in substantial compliance with the requirementsFDA's regulatory
requirements. MAP's facilities are not subject to FDA regulation, because
none of MAP's products is currently marketed in the regulations.United States.
Sales of medical devices outside the United States are subject to
regulatory requirements that vary widely from country to country. Approval
for sale of the Company'sour medical devices in Europe is through the CE mark process.
The Company'sOur products where appropriate, are CE marked to the European UnionsUnion's
Medical Device Directive. Under the CE marketing scheme, our products are
classified as either Class I or Class II, our devices are listed in the
United States with FDA, in Australia with the Therapeutic Goods
Administration, or TGA, and in Canada with Health Canada.
Employees
As of June 30, 1998, the Company had 3732001, we have 953 employees and 17or full time consultants, of
which 172353 persons were employed in warehousing and manufacturing, 60129 in
research and development, 93276 in sales and
13
marketing and 65195 in administration. Of the Company'sour employees and consultants, 265517
were located in Australia, 62151 in the United States, 56273 in Europe and 712
in Singapore, New Zealand and Malaysia.
The Company believesWe believe that the success of itsour business will depend, in part, on itsour
ability to attract and retain qualified personnel. None of the
Company'sour employees
is covered by a collective bargaining agreement. The
Company believesWe believe that itsour
relationship with itsour employees is good.
Medical Advisory Board
The Company's internationalOur Medical Advisory Board, ("MAB")or MAB, consists of physicians and scientists
specializing in the field of sleep disordered breathing. MAB members meet
as a group twice a year with members of the
Company'sour senior management and members
of itsour research and marketing departments to advise the Companyus on technology
trends in SDB and other developments in sleep disorders medicine. MAB
members are also available to consult on an as-needed basis with our
senior management of the Company.management. In alphabetical order, MAB members include:
Colin Sullivan, MD PhD FRACP, age 54Claudio Bassetti, Dr. Claudio Bassetti is Chairmana Professor in the Faculty of
Medicine, University of Zurich, where he is the Director and Vice-Chairman
of the MABNeurological Clinic. A member of the American Academy of Neurology
and the inventor
of nasal CPAP for treating obstructive sleep apnea. HeAmerican Sleep Disorders Association, Dr. Bassetti is Professor of
Medicine and Directoralso a
member of the David Read Laboratory at the Sydney University
Medical School as well as a thoracic physician at the Royal Prince Alfred
Hospital. In addition, he is a Fellowscientific board of the Royal Australian CollegeEuropean Sleep Research Society, and
an associate editor of Physicians and Director of the National SIDS Council Pediatric Sleep
Laboratory at the Children's Hospital, Westmead. Dr Sullivan has continued to
contribute to the Company's innovation, product development and clinical
testing.'Sleep Medicine'. 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'Swiss Archives of Neurology and Psychiatry and has produced over 100
publications. Dr. Bassetti is a leader in studying the implications of
sleep disordered breathing on stroke.
Michael Coppola, MD, is a leading pulmonary critical care and PhD degrees are fromsleep
disorders physician in private practice in Massachusetts. He is an
attending physician at Baystate Medical Center and Mercy Hospital in
Springfield, MA and a Fellow of the American College of Chest Physicians.
He is Chairman of the Massachusetts Sleep Breathing Disorders Society. He
is also the Medical Director of Winmar Diagnostics, a sleep disordered
breathing specialty company, and Associate Clinical Professor of Medicine
at Tufts University School of Medicine.
Terence M. Davidson, MD, FACS, is Professor of Surgery in the Division of
Otolaryngology - Head and Neck Surgery at the University of SydneyCalifornia,
San Diego, School of Medicine. He is Section Chief of Head and Neck
Surgery at the Veterans Administration San Diego Healthcare System and
Associate Dean for Continuing Medical School.
- -13-
Education at UCSD. He is also
director of the UCSD Head and Neck Surgery Sleep Clinic in La Jolla, CA.
Neil J. Douglas, MD, FRCP, age 50 is Professor of Respiratory and Sleep Medicine,
University of Edinburgh, an Honorary Consultant Physician, Royal Infirmary
of Edinburgh and Director of the Scottish National Sleep Laboratory. He is
Dean of the Royal College of Physicians of Edinburgh and Vice Chairman of
the UK Royal Colleges Committee of CME Directors and a member of the
Working Party on Sleep Apnea of the Royal College of Physicians of London.
He is a past Chairman of the British Sleep Society and past Secretary of
the British Thoracic Society. He has published over 200 papers on
breathing during sleep.
Dr Douglas has anNicholas Hill, MD, fromis Professor of Medicine at Brown University and
Director of Critical Care Services at Rhode Island Hospital and Pulmonary
Medicine at the Miriam Hospital, both in Providence. He is a Fellow of the
American College of Chest Physicians and a member of the Planning
Committee for the American Thoracic Society.
14
Barry J. Make, MD, is Director, Emphysema Center and Pulmonary
Rehabilitation National Jewish Medical and Research Center, and Professor
of Pulmonary Sciences and Critical Care Medicine of the University of
Edinburgh.Colorado School of Medicine. He has served on numerous national and
international committees for respiratory and cardiovascular diseases. His
research and clinical work has resulted in a large number of publications
on mechanisms, treatment and rehabilitation of chronic respiratory
disease.
Colin Sullivan, MD, PhD, FRACP, FAA is Chairman of the MAB and the
inventor of nasal CPAP for treating obstructive sleep apnea. He is
Professor of Medicine and Director of the David Read Research Laboratory
and Director of the Australian Centre for Advanced Medical Technology at
the Sydney University Medical School. He is Head of the Centre for
Respiratory Failure and Sleep Disorders, as well as a thoracic physician
at the Royal Prince Alfred Hospital. He is also Academic head of the
Pediatric Sleep Laboratory, New Children's Hospital, and Sydney
Children's Hospital. Dr. Sullivan is a Fellow of the Royal Australian
College of Physicians, and Fellow of the Australian Academy of Science.
Helmut Teschler, MD, age 45 is Associate Professor and Head of the Sleep
Laboratory, Ruhrlandklinik, Department of
Pneumology,Respiratory Medicine and Sleep Medicine, Ruhrlandklinik, Medical Faculty,
University of Essen, Germany. He is a Fellow of each of the following
Associations: German Pneumology Society, American Thoracic Society,
European Respiratory Society and American Sleep Disorders Association.
He is an internationally recognized
researcher in sleep disorders medicine. Dr Teschler is a graduate in
Engineering from the University of Siegen, Germany and obtained his MD from
the University of Marburg, Germany.
J. Woodrow Weiss, MD, age 49 is Associate Professor of Medicine and Co-Chairman
of the Division of Sleep Medicine at Harvard Medical School, as well as
Physician Director, Pulmonary-Medical Intensive
Care Unit and Director of the Section of Sleep Disorders Medicine in theChief, Pulmonary and& Critical Care Division atMedicine, Beth Israel Hospital, Boston. Dr Weiss
is an internationally recognized researcher in sleep disorders medicine. Dr
Weiss was an intern and resident at the University of California, San
Francisco and completed research fellowships at both Dartmouth and HarvardDeaconess Medical
Schools. He holds a BA from Harvard and an MD from Case Western
Reserve School of Medicine.Center, Boston, MA.
B. Tucker Woodson, MD, FACS, age 41 is an otolaryngologist and an Associate Professor of SurgeryOtolaryngology
and Communication Sciences at the Medical College of Wisconsin. He is a
Fellow of the American Academy of Otolaryngology - Head and Neck Surgery
and did
surgical training with Dr. Fujita, the pioneer of uvulopalatopharyngoplasty to
treat obstructive sleep apnea. He has a primary research interest in the
surgical management of sleep apnea and evaluation of the upper airway. He is
a strong proponent of nasal CPAP and teaches extensively to other surgeons.
Dr Woodson did his surgical training in otolaryngology at Detroit's Henry Ford
Hospital and holds a BA from Washington University, St Louis and an MD from
the University of Missouri, Columbia.
Nicholas Hill, MD, age 48 is Professor of Medicine at Brown University and
Director of Critical Care Services at Rhode Island Hospital. He is a Fellow of
the American College of Chest Physicians. His main research interests are inSurgeons. Dr. Woodson is the acute and chronic applications of non-invasive positive pressure
ventilation for treating lung disease. He completed his internship and
residency at Tufts University School of Medicine and Boston Veterans
Administration Medical Center. Dr Hill holds a BA from Harvard and an MD from
Dartmouth Medical School.
Michael Coppola, MD, age 45 is a leading pulmonary critical care and sleep
disorders physician in private practice in Massachusetts. He is an attending
physician at Baystate Medical Center and Mercy Hospital in Springfield, MA and
a Fellow of the American College of Chest Physicians. He is chairman of the
Massachusetts Sleep Breathing Disorders Society and a Board Member of the
American Lung Association, Western Massachusetts. He holds a BS from Fordham
University, NY, an MD from Georgetown University, Washington D.C. and
completed his residency and fellowship in pulmonary medicine at Georgetown
University Hospital.
Ex officio: Terence M Davidson, MD, FACS, age 53 is Professor of Surgery in
the Division of Otolaryngology - Head and Neck Surgery at the University of
California, San Diego, School of Medicine. He is Section Chief of Head and
Neck Surgery at the VA San Diego Healthcare System and Associate Dean for
Continuing Medical Education at UCSD. He is also Chief of the Sleep Clinic at
the Center for Health Care, Rancho Bernardo where he has incorporated sleep
apnea diagnosis and treatment into an otolaryngology practice. He completed
his residency in surgery at UCLA and residency in otolaryngology at UCSD
School of Medicine. Dr Davidson holds a BA from University of California at
Riverside and an MD from UCLA.
- -14-
MembersDirector of the
Medical Advisory Board, other than Dr. Sullivan, receive an
honorarium as well as reimbursementCollege of traveling costsWisconsin/Froedert Memorial Lutheran Hospital Center
for Sleep. He is active on multiple committees for the American Academy
of Sleep Medicine and other out-of-pocket
expenses incurred in attending any conferences as may be requested by the
Company.American Academy of Otolaryngology.
Item 2 Properties
ResMed'sOur principal executive offices and U.S. distribution facilities,
consisting of approximately 22,000144,000 square feet, are located in Poway
(North San Diego California. The Company leases this
property pursuantCounty), California in a building we own; part of the
building is leased to an eight year lease which is scheduled to expire in 2005.other companies. Primary manufacturing operations
are currently at two locationssituated in Sydney, Australia. The leases for both these sites are scheduled to expireAustralia in 1999.
A new manufacturing facility is being constructed in Sydney and due for
completion in the first quarter of calendar 1999. Approximatelya 120,000 square feet in size, it will house both existing Australian manufacturing facilities.
ResMed believes that once the new manufacturingfoot facility is completed, its
facilities will be adequate to serve its operational needs for at least
two years.also
owned by us.
Sales and warehousing facilities are also leased in Oxford, England,England;
Moenchengladbach, Germany,Germany; Lyon, FranceFrance; Trollhaettan, Sweden and
Singapore. Prior to moving our executive offices and distribution
facilities to Poway, California, we leased space for this purpose in San
Diego, California. Our lease on those premises expires in 2005. In August
2000, we began subleasing those premises to another company.
MAP's principal offices are located in Munich Germany in a 45,000 square
foot facility leased by us. MAP's subsidiaries also lease sales and
warehouse facilities in Paris, Lyon and Nantes, France; Lyss,
Switzerland; Villach, Austria and s'Hertogenbosch, The Netherlands.
15
Item 3.3 Legal Proceedings
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.
The Company isWe are currently engaged in significant patent litigation relating to the enforcement and
defense of certain of itsour patents. In 1992,
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. The Company on May 29, 1997 paid $246,000 as total and
final settlement of costs associated with the litigation.
In January 1995, the Companywe filed a complaint for patent infringement in the United States against Respironics. The complaint seeksDistrict Court
for the Southern District of California seeking monetary damages from and
injunctive relief against Respironics resulting from itsfor alleged infringement of three
of the Company'sour patents. In February 1995, Respironics filed a complaint in the
United States District Court for the Western District of Pennsylvania
against the Companyus seeking a declaratory judgment that Respironics does not
infringe claims of these patents and that the Company'sour patents are invalid and
unenforceable. The two actions have beenwere 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 Pennsylvaniawe filed an additional complaint against Respironics regarding allegedfor
infringement of a fourth ResMed patent, granted June 4,
1996, related to the Company's delay timer feature. This actionand that complaint was again
consolidated with the ongoing case such that the two remaining actions are
proceeding together. On July 1, 1997 the Court grantedearlier action. As of this date, Respironics a motion
forhas
brought three partial summary judgment holdingmotions for non-infringement of
the ResMed patents; the Court has granted each of the motions. In
December 1999, in response to the Court's ruling on Respironics' third
summary judgment motion, the parties jointly stipulated to a dismissal of
charges of infringement under the fourth ResMed patent, with us reserving
the right to reassert the charges in the event of a favorable ruling on
appeal. It is our intention to appeal the summary judgment rulings after
a final judgment in the consolidated litigation has been entered in the
District Court proceedings.
In January 2001, MAP Medizin-Technologie GmbH filed a lawsuit in the
Civil Chamber of Munich Court against Hofrichter GmbH seeking actual and
exemplary monetary damages for the unauthorized and infringing use of our
trademarks and patents. An initial decision has been made in favor of
MAP. Hofrichter has filed an appeal and have sort Court determination
that Respironics' accused productsthe MAP patents do not infringe one ofapply to certain Hofrichter products.
While we are prosecuting the four patentsabove actions, there can be no assurance
that we will be successful.
On March 31, 2000, we filed a lawsuit in suit. Subsequently, the court undertook a
de novo review of the motion and on January 27, 1998 confirmed the initial
ruling. It is ResMed's intention to seek reversal of the ruling by appeal to the United States Court of AppealsDistrict court
for the Federal Circuit onceSouthern District of California against MPV Truma and Tiara
Medical Systems, Inc., seeking actual and exemplary monetary damages and
injunctive relief for the unauthorized and infringing use of our
trademarks, trade dress, and patents related to our Mirage mask. The
parties reached a final
judgement has been rendered. On June 18, 1998, a Magistrate Judge made a
Report and Recommendation that the Court make an order granting Respironics a
further motion for partial summary judgement holding that Respironics' accused
products do not infringe anotherconfidential out of the four patents in suit. That Report and
Recommendation is awaiting a decision by the Judge in the proceedings as to
whether to make an order granting the motion for partial summary judgement.
- -15-
Oncourt settlement on April 9, 2001.
In May, 17, 1995, Respironics and its Australian distributor filed a
Statement of Claim against ResMed Limitedus and Dr. Peter Farrell in the Federal Court of
Australia. This action relates to ResMed Limited exercising its
rights to the Australian original CPAP patent, which was revoked by the
Federal Court of Australia, alleging that we engaged in 1994.unfair trade practices. The
Statement of Claim alleges that
ResMed Limited 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
assertsasserted damage claims for lost profits on sales in
the aggregate amount of approximately $1,000,000,
constituting lost profit$1,000,000. The parties reached a
confidential out of court settlement of this Action 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.April 16, 2001.
Item 4 Submission of MatterMatters to a Vote of Security Holders
NoneNone.
16
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters
Our Common Stock commenced trading on June 2, 1995 on The NASDAQ
National Market under the symbol "RESM". On September 30, 1999, we
transferred our primary listing to the New York Stock Exchange (NYSE)
under the symbol "RMD". The following table sets forth for the fiscal
periods indicated the high and low closing prices for the Common Stock
as reported by the New York Stock Exchange.
The common stock of the Company commenced trading on June 2, 1995 on the
NASDAQ Stock Market under the symbol "RESM". The following table sets forth
for the fiscal periods indicated the high and low closing prices for the
Common Stock as reported by NASDAQ.
1998 1997-------------------------------------------------------------------------------------------------------------
2001 2000
High Low High Low
------------------------------------------------
High Low High Low
Quarter One, $28.00 $23.50 $21.25 $14.50ended September 30, $38.38 $24.63 $17.19 $11.82
Quarter Two, 31.00 25.25 23.00 16.00ended December 31, 41.50 25.50 23.13 12.75
Quarter Three, 35.50 28.00 25.00 17.25ended March 31, 47.00 36.65 39.62 20.34
Quarter Four, 45.56 35.25 24.25 16.50ended June 30, 57.68 37.91 38.06 22.00
-------------------------------------------------------------------------------------------------------------
As of September 8, 1998,7, 2001, there were approximately 2,41613,500 beneficial
holders of our Common Stock. We have not paid any cash dividends on our
common stock since prior to the Company's Common Stock The Company doesinitial public offering of our common
stock and we do not currently intend to declare
anypay cash dividends in the
foreseeable future. Management anticipates that all of our earnings and
other cash resources, if any, will be retained for the operation and
expansion of our business and for general corporate purposes.
Recent Sales of Unregistered Securities
On June 20, 2001, we issued $150.0 million of 4% convertible
subordinated notes due 2006 to initial purchasers including Merrill
Lynch, Pierce Fenner & Smith Incorporated, Deutsche Banc Alex. Brown
Inc., William Blair & Company, LLC, Macquarie Bank, and UBS Warburg LLC.
The discount to the initial purchasers on their purchase of the notes
was $4,650,000. On July 3, 2001, we issued an additional $30.0 million
in notes to the initial purchasers upon exercise of the initial
purchasers' over allotment option, with an additional discount to the
initial purchasers of $930,000. This increased the total amount of
convertible subordinated notes issued to $180.0 million, with a total
discount to the initial purchasers of $5,580,000.
The notes were issued pursuant to an exemption from the registration
requirements of the Securities and Exchange Act of 1933, as amended, or
the Securities Act, set forth under Rule 144A of the Securities Act.
Accordingly, the notes were offered and sold only to "qualified
institutional buyers" as defined in Rule 144A or in offshore
transactions outside the United States that met the requirements of Rule
903 of Regulation S under the Securities Act.
The notes are subject to an indenture between us and American Stock
Transfer & Trust Company, as trustee. The notes are convertible, at the
option of the holder, at any time on or prior to maturity, into shares
of our common stock at a conversion price of $60.60 per share, which is
equal to a conversion rate of 16.5017 shares per $1,000 principal amount
of notes. The conversion price is subject to adjustment. The notes bear
interest at 4% per year, payable semiannually on June 20 and December 20
of each year, beginning December 20, 2001.
We may redeem some or all of the notes at any time before June 20, 2004
at a redemption price of $1,000 per $1,000 principal amount of notes,
plus accrued and unpaid interest, if any, to the redemption date, if (a)
the closing price of our common stock has exceeded 150% of the
conversion price then in effect for at least 20 trading days within a
period of 30 consecutive trading days ending on the trading day before
the date of mailing of the provisional redemption notice and (b) a shelf
registration statement covering resale of the notes and the common stock
issuable upon conversion of the notes is effective and available for use
and expected to remain effective and available for use for the 30 days
following the provisional redemption date. Upon any such provisional
redemption,
17
we will make an additional payment in cash equal to $166.67 per $1,000
principal amount of notes, less the amount of any interest actually paid
on the notes before the provisional redemption date. We may also redeem
some or all of the notes at any time on or after June 22, 2004, but prior
to June 20, 2005, at a redemption price equal to 101.6% of the principal
amount of notes redeemed and at any time after June 19, 2005, at a
redemption price equal to 100.8% of the principal amount of notes
redeemed, plus in any case, accrued and unpaid interest, if any, to the
redemption date, if the closing price of our common stock has exceeded
130% of the conversion price then in effect for at least 20 trading days
within a period of 30 consecutive trading days ending on the trading day
before the date of mailing of the optional redemption notice.
The notes are general unsecured obligations and are subordinated to all
of our existing and future senior indebtedness and will be effectively
subordinated to all of the indebtedness and liabilities of our
subsidiaries. The indenture governing the notes will not limit the
incurrence by us or our subsidiaries of senior indebtedness or other
indebtedness. The notes mature on June 20, 2006.
Item 6 Selected Financial Data
The following table summarizes certain selected consolidated financial
data for, and as of the end of, each of the fiscal years in the five-year
period ended June 30, 1998.2001. The data set forth below should be read in
conjunction with the Consolidated Financial Statements and related Notes
included elsewhere in this Report.
- -16-
YearYears Ended June 30,
--------------------------------------
Consolidated Statement of Income Data: 2001 2000 1999 1998 1997 1996 1995 1994
------------ ---------- ---------- ---------- ----------
(In thousands, except per share data)
------------------------------------------------------
Net revenues $ 66,519 $ 49,180 $ 34,562 $ 23,501 $ 13,857$155,156 $115,615 $88,627 $66,519 $49,180
Cost of sales 50,377 36,991 29,416 23,069 20,287
16,990 11,271 6,213
_________ _________ _________ _________ _________------------------------------------------------------
Gross profit 104,779 78,624 59,211 43,450 28,893
17,572 12,230 7,644
_________ _________ _________ _________ _________------------------------------------------------------
Selling, general and administrative
expensesExpenses 49,364 36,987 27,414 21,093 16,759
11,136 7,447 4,809Provision for restructure 550 - - -
In-process research and development write off 17,677 - - - -
Research and development expenses 11,146 8,499 6,542 4,994 3,807
2,841 1,996 1,546
_________ _________ _________ _________ _________------------------------------------------------------
Total operating expenses 78,737 45,486 33,956 26,087 20,566
13,977 9,443 6,355
_________ _________ _________ _________ _________------------------------------------------------------
Income from operations 26,042 33,138 25,255 17,363 8,327
3,595 2,787 1,289
_________ _________ _________ _________ _________------------------------------------------------------
Other income (expenses):
Interest income (expense), net (762) 801 779 1,011 1,205
1,072 205 98
Government grants 72 279 833 611 316
537 527 440
Other, net 1,962 (52) (2,290) (2,873) 1,239
1,357 262 4
_________ _________ _________ _________ _________------------------------------------------------------
Total other income (loss), net(expenses) 1,272 1,028 (678) (1,251) 2,760
2,966 994 542
_________ _________ _________ _________ _________------------------------------------------------------
Income before income taxes 27,314 34,166 24,577 16,112 11,087
6,561 3,781 1,831
Income taxes 15,684 11,940 8,475 5,501 3,622
2,058 948 599
________ _________ _________ _________ _________------------------------------------------------------
Net income 10,611$ 11,630 $ 22,226 $16,102 $10,611 $ 7,465
4,503 2,833 1,232
======== ========= ========= ========= ===============================================================
Basic earnings per share $ 0.37 $ 0.74 $ 0.55 $ 0.37 $ 0.26
======================================================
Diluted earnings per share $ 1.41 1.02 0.63 0.63 0.34
======== ========= ========= ========= =========
Weighted average common and common
equivalent0.35 $ 0.69 $ 0.52 $ 0.35 $ 0.26
Basic shares outstanding 7,511 7,317 7,199 4,450 3,639
Basic earnings per common share $ 1.46 1.04 0.64 0.73 0.39
======== ========= ========= ========= =========
Weighted average common31,129 30,153 29,416 29,000 28,756
Diluted shares outstanding 7,250 7,189 7,090 3,904 3,137
Cash dividends per common share - - - - 0.0433,484 32,303 31,068 30,044 29,268
18
-------------------------------------------------
As of June 30,
2001 2000 1999 1998 1997 1996 1995 1994
--------------- ------- ------- ------- ------
Consolidated Balance Sheet Data: (in(In thousands)
Working capital 144,272 $ 32,75947,550 $32,529 $32,759 $34,395 $30,844 $27,354 $5,010
Total assets 288,090 115,594 89,889 64,618 54,895 47,299 35,313 9,608
Long-term debt, less current maturities 150,000 - - - 274 578 787 386
Total stockholders' equity 100,366 93,972 71,647 50,773 44,625
38,986 28,867 5,630=================================================
- -17-
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Management's discussion and analysis of financial condition and results
of operations should be read in conjunction with selected financial data
and consolidated financial statements and notes, included herein.
The Company designs, manufacturesWe design, manufacture and marketsmarket equipment for the diagnosis and
treatment of sleep disordered breathing conditions, including
obstructive sleep apnea. The Company'sOur net revenues are generated from the sale of
itsour various flow generator devices, nasal mask systems, accessories and
other products, and, to a lesser extent from royalties.
The Company receives other
income through interest and certain Australian government grants.
The Company hasWe have invested significant resources in research and development and
product enhancement. Since 1989, the Company haswe have developed several innovations
to the original CPAP device to increase patient comfort and to improve
ease of product use. The Company has recentlyWe have been developing products for automated
treatment, titration and monitoring of OSA, such as AutoSet(Registered Trademark). The Company'sthe AutoSet T flow
generator. Our research and development expenses arehave been subsidized in
part by grants and tax incentives from the Australian federal
government.
On February 16, 2001, we acquired all of the outstanding shares of MAP.
The Companytotal transaction was valued at approximately $70 million paid in
cash and the assumption of bank debt. MAP designs, manufactures and
distributes medical devices for the diagnosis and treatment of SDB, with
a particular focus on OSA.
The acquisition has also received grantsbeen accounted for as a purchase and accordingly,
the results of operations of MAP have been included in our consolidated
financial statements from February 16, 2001. The excess of the purchase
price over the fair market value of the net identifiable assets acquired
of $47.1 million has been recorded as goodwill and is currently being
amortized on a straight line basis over 20 years.
As a consequence of the MAP acquisition, we incurred non-recurring
acquisition charges of $550,000 for restructuring of MAP's unprofitable
French operations and $17,677,000 for purchased in-process research and
development.
Purchased in-process research and development of $17,677,000 was
expensed upon acquisition of MAP because technological feasibility of
the products under development had not been established and no further
alternative uses existed. The value of in process technology was
calculated by identifying research projects in areas for which
technological feasibility had not been established, estimating the costs
to develop the purchased in process technology into commercially viable
products, estimating the resulting net cash flows from such products,
discounting the net cash flows to present value, and applying the
reduced percentage completion of the projects thereto. The discount
rates used in the analysis were between 27% and 33% and were based on
the risk profile of the acquired assets.
All purchased research and development projects related to medical
equipment for the treatment of sleep disordered breathing, primarily
relating to the development of mask interface systems and
19
autotitrating devices for the treatment of obstructive sleep apnea and
associated disorders. Key assumptions used in the analysis included
gross margins ranging from 70% to 80%. As of the date of acquisition,
the mask interface systems are expected to be completed and commercially
available in 2002 and versions of the autotitrating devices between 2003
and 2005. These projects have estimated costs to complete totalling
approximately $2.0 million.
We believe that the assumptions used to value the acquired intangible
assets were reasonable at the time of acquisition. No assurance can be
given, however, that the underlying assumptions used to estimate
expected project revenues, development costs or profitability, or events
associated with such projects, will transpire as estimated. For these
reasons, among others, actual results may vary from the Australian federal government to support marketing efforts to increase
Australian export sales, and for incorporation of computer components into its
products.
The Company'sprojected
results.
Our income tax rate is governed by the laws of the regions in which the Company'sour
income is recognized. To date, a substantial portion of the Company'sour income has
been subject to income tax in Australia where the statutory rate is 36% effective from July 1, 1995.34%.
During fiscal 1998, 19972001, 2000 and 1996, the Company's1999, our effective tax rate has fluctuated
from approximately 34% to approximately 31%35%. These fluctuations have
resulted from, and future effective tax rates will depend upon, numerous
factors, including the amount of research and development expenditures
for which a 125% Australian tax deduction is available, the level of
non-deductible expenses, and the use of available net operating loss
carryforward deductions and other tax credits or benefits available to
the Companyus under applicable tax laws.
Fiscal Year Ended June 30, 19982001 Compared to Fiscal Year Ended June 30,
19972000
Net Revenues.revenues. Net revenues increased in fiscal 19982001 to $66.5$155.2 million
from $49.2$115.6 million in fiscal 1997,2000, an increase of $17.3$39.5 million or 35%34%.
This increase was primarily attributable to an increase in unit sales of
the
Company'sour flow generators and accessories in North and Latin America where net
revenues increased to $34.3$79.9 million from $21.3$62.7 million and to a lesser extent, in Europe,
where net revenues increased to $23.3$60.5 million from $21.5$40.5 million. Net
revenues also improved due towere unfavorably impacted by a shift to higher-priced bi-level based products
such as SULLIVAN(Registered Trademark) VPAP(Registered Trademark)II ST and
improved patient mask systems.decline in European foreign
exchange rates.
Gross Profit.profit. Gross profit increased in fiscal 19982001 to $43.5$104.8 million
from $28.9$78.6 million in 1997,fiscal 2000, an increase of $14.6$26.2 million or 50%33%.
The increase resulted primarily from increased unit sales during fiscal
1998.2001. Gross profit as a percentage of net revenues increasedwas 68%, consistent
with fiscal 2000. Lower flow generator selling prices were offset by a
decline in fiscal 1998 to 65.3% from 58.7%
in 1997. The increase was primarily due tothe Australian dollar, improved manufacturing efficiencies
and increased sales of higher margin diagnosticmask system units.
Selling, general and bi-level units
and a 21% devaluation in the Australian dollar, in which the Company's
manufacturing activities are denominated.
Selling, General and Administrative Expenses.administrative expenses. Selling, general and
administrative expenses increased in 19982001 to $21.1$49.4 million from $16.8$37.0
million for 1997,2000, an increase of $4.3$12.4 million or 26%33%. As a percentage
of net revenues, selling, general and administrative expenses decreasedwere
steady in fiscal 19982001, compared to 31.7% from 34.1% for fiscal 1997.2000 at 32%. The gross
increase in expenses was due primarily to an increase to 158471 from 113281 in
the number of sales and administrative personnel and other expenses
related to the increase in the
Company'sour sales. In addition, the Company incurred substantial legal fees
with respect to its ongoing patent action of $1,189,000 and $924,000 in 1998
and 1997, respectively.
- -18-
Research and Development Expenses.development expenses. Research and development expenses
increased in fiscal 19982001 to $5.0$11.1 million from $3.8$8.5 million in fiscal
1997,2000, an increase of $1.2$2.6 million or 31%. As a percentage of net
revenues, research and development expenses remained static in fiscal
1998 marginally declined2001 at 7%. The dollar increase in research and development expenses was
due primarily to 7.5% from 7.7%an increase in clinical trial costs, personnel and
external consultancy fees.
Other income (expense). Other income (expense) improved in fiscal 1997.2001
to $1.3 million from $1.0 million for fiscal 2000, an increase of $0.3
million. This improvement was due primarily to foreign currency gains
incurred in our foreign currency hedging structures, partially offset by
interest expense associated with the purchase of MAP. Net foreign
currency gains for fiscal 2001 were $2.0 million compared to net foreign
currency losses of $0.2 million in 2000.
20
Income taxes. Our effective income tax rate for fiscal 2001 before MAP
acquisition charges of $0.6 million for restructuring costs and in-
process research and development write off of $17.7 million was 34.4%
down from 34.9% for fiscal 2000. This reduction was primarily due to the
reduction in Australian corporate tax rates from 36% to 34% on July 1,
2000 and to additional research and development expenses in Australia
for which we received a 125% deduction for tax purposes.
Fiscal Year Ended June 30, 2000 Compared to Fiscal Year Ended June 30,
1999
Net revenues. Net revenues increased in fiscal 2000 to $115.6 million
from $88.6 million in fiscal 1999, an increase of $27 million or 30%.
This increase was primarily attributable to an increase in unit sales of
our flow generators and accessories in the Americas where net revenues
increased to $62.7 million from $51.0 million and, to a lesser extent,
in Europe, where net revenues increased to $40.5 million from $30.2
million. Net revenues were unfavorably impacted by a decline in European
foreign exchange rates and changes in domestic reimbursement regulations
with respect to our SULLIVAN VPAP II ST systems.
Gross profit. Gross profit increased in fiscal 2000 to $78.6 million
from $59.2 million in fiscal 1999, an increase of $19.4 million or 33%.
The increase resulted primarily from increased unit sales during fiscal
2000. Gross profit as a percentage of net revenues increased in fiscal
2000 to 68% from 66.8% in 1999. The increase was due to improved
manufacturing efficiencies, a decline in the Australian Dollar and
increased sales of higher margin mask system units.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased in 2000 to $37.0 million from $27.4
million for 1999, an increase of $9.6 million or 35%. As a percentage of
net revenues, selling, general and administrative expenses increased in
fiscal 2000 to 32% from 31% for fiscal 1999. The gross increase in
expenses was due primarily to an increase to 281 from 212 in the number
of sales and administrative personnel and other expenses related to the
increase in our sales.
Research and development expenses. Research and development expenses
increased in fiscal 2000 to $8.5 million from $6.5 million in fiscal
1999, an increase of $2.0 million or 30%. As a percentage of net
revenues, research and development expenses remained static in fiscal
2000 at 7.4%. The dollar increase in research and development expenses
was due primarily to an increase in research and development equipment,
personnel and external consultancy fees.
Other Income (loss)income (expense). Other income decreased(expense) improved in fiscal 19982000
to $1.0 million from a loss of $1.3 million from a gain of $2.8$0.7 million for fiscal 1997,1999, a decreasechange of
$4.1$1.7 million. This decreaseimprovement was due primarily to reduced losses
incurred in the Company'sour foreign currency hedging structures, as a consequence of the 21% devaluation in
the Australian dollar over fiscal 1998. Foreignpartially offset by
reduced government grants. Net foreign currency losses for fiscal 19982000
were $4.0$0.2 million compared to net foreign currency gainslosses of $1.6$2.5
million in 1997.1999.
Income Taxes. The Company'staxes. Our effective income tax rate for fiscal 19982000 increased to
approximately 34.1%34.9% from approximately 32.7%34.5% for fiscal 1997.1999. This
increase was primarily due to the high relative taxes incurred in France
and Germany. These higher tax rates were partially offset by additional
research and development expenses in Australia for which the Companywe received a
125% deduction for tax purposes.
Fiscal Year EndedLiquidity and Capital Resources
As of June 30, 1997 Compared to Fiscal Year Ended2001 and June 30, 1996
Net Revenues. Net revenues increased in fiscal 1997 to $49.22000, we had cash and cash equivalents
and marketable securities available for sale of approximately $102.8
million from $34.6and $22.0 million, in fiscal 1996, an increase of $14.6respectively. Our working capital
approximated $144.3 million or 42.3%.
This increase was primarily attributable to anand $47.6 million, respectively, at June 30,
2001 and 2000.
21
The increase in unit sales of the
Company's flow generatorsworking capital balances reflects cash received from our
$150 million subordinated convertible note issuance that occurred on June
20, 2001.
We have financed our operations and accessories in Europe where net revenues
increased to $21.5 millioncapital expenditures through cash
generated from $12.4 millionoperations and, to a lesser extent, through sales of common
stock and our 4% convertible subordinated notes issued June 20, 2001.
During the fiscal years ended June 30, 2001 and 2000, our operations
generated cash of approximately $29.5 million and $20.3 million,
respectively, primarily as a result of continued increases in
North America, where net
revenues, offset in part by increases in accounts receivable, inventory
and prepayments. Cash and cash equivalents and marketable securities
available for sale increased to $21.3$102.8 million at June 30, 2001 from $16.8
million. In addition, net revenues improved due to a continuing market shift
to higher-priced bi-level based products such as SULLIVAN(Registered
Trademark) VPAP(Registered Trademark)II ST. This favorable effect was
partially offset by decreases in the selling prices of the Company's CPAP
products in the United States.
Gross Profit. Gross profit increased in fiscal 1997 to $28.9$22.0
million from $17.6 million in 1996,at June 30, 2000, an increase of $11.3$80.8 million. During fiscal
2001 and 2000, approximately $7.9 million or 64.4%. The
increase resulted primarily from increased unit sales during fiscal 1997.
Gross profit as a percentageand $6.4 million of net revenues increased in fiscal 1997 to 58.7%
from 50.8% in 1996. The increasecash was
primarily due to a full year
profitabilityreceived from the Company's Germanissue of common stock upon exercise of common stock
options.
Our investing activities (excluding the purchases and French subsidiaries acquired in
February and June 1996, respectively, improved manufacturing efficiencies and
increased sales of higher margin diagnosticmarketable
securities and bi-level units. These
improvementsbusiness acquisitions) for fiscal years 2001 and 2000
aggregated $30.6 million and $20.4 million, respectively. The majority of
the fiscal 2001 investing activities were however, partially offset by continuing price competition
in the United States, where prices for the Company's products are lower than
elsewhere in the world.
Selling, Generalpurchase of production
tooling and Administrative Expenses. Selling, general and
administrative expenses increased in 1997 to $16.8 million from $11.1 million
for 1996, an increase of $5.7 million or 50.5%. As a percentage of net
revenues, selling, general and administrative expenses increased in fiscal
1997 to 34.1% from 32.2% for fiscal 1996. The increase in expenses was due
primarily to an increase to 113 from 87 in the number of sales and
administrative personnel and to a limited extent additional selling expenses
arising from the acquisition of the Company's German distributor in February
1996, and other expenses related to the increase in the Company's sales. In
addition the Company incurred substantial legal fees with respect to its
ongoing patent action of $924,000 and $773,000 in 1997 and 1996, respectively.
Research and Development Expenses. Research and development expenses
increased in fiscal 1997 to $3.8 million from $2.8 million in fiscal 1996, an
increase of approximately $1.0 million or 34.0%. As a percentage of net
revenues, research and development expenses in fiscal 1997 decreased to 7.7%
from 8.2% in fiscal 1996. The dollar increase in research and development
expenses was due primarily to an increase inequipment, office furniture, research and development
equipment and external consultancy fees.costs associated with the continuing installation of our
Oracle applications computer system. In addition, we paid $17.2 million
associated with the purchase of the new U.S. headquarters in Poway,
California. As a result, our June 30, 2001 balance sheet reflects an
increase in net property, plant and equipment to approximately $55.1
million at June 30, 2001, from $36.6 million at June 30, 2000, an increase
of approximately $18.5 million.
On February 16, 2001, our wholly owned German subsidiary, ResMed
Beteiligungs GmbH, acquired all the common stock of MAP for total
consideration, including acquisition costs, of $55.4 million. We also
assumed approximately $14.5 million of bank debt in connection with the
acquisition.
On June 20, 2001 we issued $150 million of 4% convertible subordinated
notes due 2006; an additional $30 million of these notes were issued on
July 3, 2001 upon exercise of the initial purchasers' over allotment
option. For additional discussion regarding these notes, see "Item 5 -
-19-
Other Income. Other income decreased in fiscal 1997 to $2.8 million from
$3 millionMarket for fiscal 1996, a decrease of $200,000 or 6.9%. This decrease was
due primarilyRegistrant's Common Equity and Related Stockholder Matters" and
note 7 to the write downConsolidated Financial Statements included with this report.
The results of certain investments heldour international operations are affected by changes in
exchange rates between currencies. Changes in exchange rates may
negatively affect our consolidated net revenue and gross profit margins
from international operations. We have a substantial exposure to
fluctuations in the Company.
These write downs were partially offset byAustralian dollar, with respect to our manufacturing
and research activities, which is managed through foreign currency gains which
increasedoption
contracts.
We expect to $1.6 million from $961,000 in 1997 and 1996, respectively, assatisfy all of our short-term liquidity requirements through
a resultcombination of both marking foreign currency options to marketcash on hand and cash deliveries
over the year.
Income Taxes. The Company's effective income tax rate for fiscal 1997
increased to approximately 32.7%generated from approximately 31.4% for fiscal 1996.
This increase was primarily due to the high relative taxes incurred in
Germany. These higher tax rates were partially offset by additional research
and development expenses in Australia for which the Company received a 125%
deduction for tax purposes.
Recentoperations.
New Accounting DevelopmentsPronouncements
In June 1997,July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS 130,
"Reporting Comprehensive Income"Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. We will adopt SFAS 131, "Disclosures about Segments142 effective July 1, 2001. SFAS
142 requires goodwill and intangible assets with indefinite useful lives
to no longer be amortized, but instead be tested for impairment at least
annually.
SFAS 142 provides a six-month transitional period from the effective date
of adoption for us to perform an Enterpriseassessment of whether there is an
indication that goodwill is impaired. To the extent that an indication of
impairment exists, we must perform a second test to measure the amount of
the
22
impairment. The second test must be performed as soon as possible, but no
later than the end of the fiscal year. Any impairment measured as of the
date of adoption will be recognized as the cumulative effect of a change
in accounting principle. Because of the extensive effort needed to
complete this assessment, we have not determined whether there is any
indication that goodwill is impaired or estimated the amount of any
potential impairment.
Effective July 1, 2001, we will also adopt FASB SFAS No. 141, Business
Combinations. SFAS 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. We have
evaluated the impact of SFAS 141 and Related Information", both effective for years beginning
after December 15, 1997. SFAS 130believe that it will require companies to report
comprehensive income and SFAS 131 will require companies to report segment
performance as it is used internally. These statements impose additional
disclosure requirements.not have a
material impact on our results of operations, financial position or
liquidity.
SFAS No. 133, "Accounting'Accounting for Derivative Instruments and Hedging
Activities" (SFASActivities', SFAS No. 137, 'Accounting for Derivative Instruments and
Hedging Activities' - Deferral of the Effective Date of FASB Statement No.
133 (an amendment of FASB Statement No. 133), wasand SFAS 138, 'Accounting
for Certain Derivative Instruments and Certain Hedging Activities' (an
amendment of FASB Statement No. 133) were issued by the Financial Accounting Standards BoardFASB in June 1998,
June 1999 and isJune 2000, respectively and were effective for the Company'sour quarter
endingended September 30, 1999.2000. SFAS 133 standardizes the accounting for
derivative instruments, including certain derivative instruments embedded
in other contracts. Under the standard, entities are required to carry all
derivative instruments in the statement of financial position at fair
value. The accounting for changes in the fair value (ie,(i.e., gains or
losses) of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship and, if so, on
the reason for holding it. If certain conditions are met, entities may
elect to designate a derivative instrument as a hedge of exposures to
changes in fair values, cash flows, or foreign currencies. If the hedged
exposure is a fair value exposure, the gain or loss on the derivative
instrument is recognized in earnings in the period of change together with
the offsetting loss or gain on the hedged item attributable to the risk
being hedged. If the hedged exposure is a cash flow exposure, the
effective portion of the gain or loss on the derivative instrument is
reported initially as a component of other comprehensive income (outside
earnings) and subsequently reclassified into earnings when the forecasted
transaction affects earnings. Any amounts excluded from the assessment of
hedge effectiveness as well as the ineffective portion of the gain or loss
is reported in earnings immediately. Accounting for foreign currency
hedges is similar to the accounting for fair value and cash flow hedges.
If the derivative instrument is not designated as a hedge, the gain or
loss is recognized in earnings in the period of change.
The company has not determined the impact that Statement 133 will have on
its financial statements and believes that such determination will not be
meaningful until closerDue to the daterestrictive definition of initial adoption.
Year 2000
The Company conducted a strategic review of its information systemshedge effectiveness contained in fiscal 1997SFAS
133, our hedging contracts do not have hedge effectiveness and are
therefore marked to market with a view to upgrading operations to facilitate the growthresulting gains or losses being recognized
in business activity. As a consequence of these review procedures a decision was
made to replace existing internal systems with the Oracle Applications
Enterprise package. The decision to replace the Company's existing
information systems was driven by operational requirements although as a
consequence all information systems are expected to be fully Year 2000
compliant. While management expects the costs associated with Year 2000
compliance to be approximately $100,000, the cost of implementing the Oracle
Application Enterprise package is estimated to be $2,000,000.
- -20-
In addition, the Company has commenced a review of its product lines to
identify any products or systems with embedded technology which may not be
Year 2000 compliant. To date, this review has not revealed any significant
Year 2000 exposure with regards to the Company's products.
The Company is also conducting a review of the Year 2000 compliance of
its vendors and customers and any Year 2000 associated issues with respect to
any customer or supplier interface systems. In addition, the Company is
currently analyzing all other computer related systems and equipment to ensure
Year 2000 compliance. This review is expected to be completed during fiscal
1999 as part of the construction of the Company's new Australian manufacturing
facility.
Beyond the above review procedures, the Company isearnings in the processperiod of change. This was consistent with our
previous accounting policy and has developed, a numbertherefore adoption of Year 2000 contingency plans should a Year 2000
compliance issue arise. However, there can be no assurance that customers,
suppliers and service providers on which the Company relies will resolve their
Year 2000 issues accurately, thoroughly and on schedule. Failure to complete
the Year 2000 project by Year 2000 couldSFAS 133 did not have
a material adverse effectimpact on future operating resultsour financial position or financial condition.
Liquidity and Capital Resources
As of June 30, 1998 and June 30, 1997, the Company had cash and cash
equivalents and marketable securities available for sale of approximately
$20.7 million and $28.0 million, respectively. The Company's working capital
approximated $32.8 million and $34.4 million, respectively, at June 30, 1998
and 1997. The decline in working capital balances primarily reflects funds
used for construction of the Company's new manufacturing facility. Beyond
this expenditure, working capital balances increased due to increases in trade
receivables and inventories partially offset by increases in accrued expenses
and income taxes payable.
The Company has financed its operations and capital expenditures through
cash generated from operations and, to a much lesser extent, through sales of
common stock. During the fiscal years ended June 30, 1998 and 1997, the
Company's operations generated cash of approximately $6.8 million and $9.5
million, respectively, primarily as a result of continued increases in net
revenues, offset in part by increases in accounts receivable, inventory and
prepayments. Given $4.3 million expended on the new production facility, cash
and cash equivalents and marketable securities available for sale declined to
$20.7 million at June 30, 1998 from $28.0 million at June 30, 1997, a decline
of $7.2 million. During fiscal 1998 and 1997, approximately $1.0 million and
$249,000 of cash was received upon exercise of common stock options.
The Company's investing activities (excluding the purchases and sales of
marketable securities) for the fiscal years ended June 30, 1998 and 1997
aggregated $12.8 million and $4.5 million, respectively. The majority of the
1998 activities were for the construction of the new production facility and
the purchase of production tooling and equipment. To a lesser extent the
Company also purchased office furniture, computers and research and
development equipment. As a result the Company's June 30, 1998 balance sheet
reflects an increase in net property plant and equipment to approximately
$11.1 million at June 30, 1998, from $4.9 million at June 30, 1997, an
increase of approximately $6.2 million.
The results of operation.
In December 1999, the Company's international operations are affected by
changesSecurities and Exchange Commission issued Staff
Accounting Bulletin, ("SAB") No. 101 Revenue Recognition in exchange rates between currencies. Changes in exchange rates may
negatively affect the Company's consolidated net revenue and gross profit
margins from international operations. As less than 2% of the Company's net
revenues are generated in South East Asia, the Company does not anticipate
being significantly impacted by the continuing Asian economic crisis, except
to the extent the crisis affects the Company's other markets. The Company has
a substantial exposure to fluctuations in the Australian dollar with respect
to its manufacturing and research activitiesFinancial
Statements', which is managed through foreign
currency option contracts.
- -21-
In August 1997, the Company commenced construction of its new Australian
production facility. This development is anticipated to be completed by early
calendar 1999 and is expected to be financed through either Company cash
reserves or by a sale and leaseback transaction. The Company anticipates
spending approximately $9.0 million for the construction of its new
manufacturing facility and computer systems over the next twelve months. These
payments are to be funded through cash flows from operations and existing cash
resources.
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 interestwas effective for the first three yearsquarter of fiscal 2001.
SAB 101 requires, among other things, that license and will bear interest atother up-front fees
be recognized over the term of the agreement, unless the fees are in
exchange for products delivered or services performed that represent the
culmination of a rateseparate earnings process. This did not have a material
impact on our financial position or results of 3.8% thereafter until
maturity.operation.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of Accounting Principles Board Opinion No. 25. FIN 44 was
generally effective July 1, 2000. The outstanding principal balanceapplication of such loan was $227,000FIN 44 did not have
a material impact on our consolidated financial statements.
23
Item 7A Quantitative and $548,000 at June 30, 1998Qualitative Disclosures about Market and 1997, respectively.
The Company expects to satisfy all of its short-term liquidity
requirements through a combination of cash on hand and cash generated from
operations.Business Risks
Foreign Currency Market Risk
The Company'sOur functional currency is the USU.S. dollar although the Company
transactswe transact business
in various foreign currencies including a number of major European
currencies as well as the Australian dollar. The Company hasWe have significant foreign
currency exposure through both itsour Australian manufacturing activities
and international sales operations.
The Company hasWe have established a foreign currency hedging program using
foreign currency forward exchange contracts and purchased
currency options to hedge foreign-currency-denominated financial assets,
liabilities and manufacturing expenditure. The goal of this hedging
program is to economically guarantee or lock in the exchange rates on
the Company'sour foreign currency exposures denominated in Euro's and the Deutschmark and Australian
dollar. Under this program, increases or decreases in the Company's
foreign-currency-denominatedour foreign-
currency-denominated financial assets, liabilities, and firm commitments
are partially offset by gains and losses on the hedging instruments.
Based on recent volatility in the Far EastThe table below provides information about our foreign currency
markets, the
Company has temporarily suspended purchasing ofderivative financial instruments and presents such information in U.S.
dollar equivalents. The table summarizes information on instruments and
transactions that are sensitive to foreign currency forward
exchange contracts for its United States dollar, Australian dollar exposure.
The Company does not userates,
including foreign currency forwardcall options held at June 30, 2001. The table
presents the notional amounts and weighted average exchange contracts or
purchasedrates by
contractual maturity dates for our foreign currency derivative financial
instruments. These notional amounts generally are used to calculate
payments to be exchanged under the options for trading purposescontracts.
The table below provides information about the Company's foreign currency derivative financial
instruments, by functional currency and presents such information in US dollar equivalents. The table
summarizes information on instruments and transactions that are sensitive to foreign currency------------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Fair Value
--------------------------------------------------------------
2002 2003 Total Assets/ (Liabilities)
(In thousands except exchange rates, including foreign currency forward exchange agreements and foreign currency call options held atrates) As of June 30,
1998. For both foreign currency forward exchange agreements and foreign currency call options,
the table presents the notional amounts and weighted average exchange rates by expected (contractual)
maturity dates. These notional amounts generally are used to calculate payments to be exchanged under
the contract or options.
Fair Value
19992001 2000
Total Assets/(Liabilities)
-------------------- ---- ------------------- --------------------
(In thousands)--------------------------------------------------------------
Foreign Currency Derivatives
Forward Exchange Agreements
(Receive AUS$/Pay US$)
Contract amount $ 9,171 - $ 9,171 ($1,651)
Average contractual exchange rate AUS $1 = USD 0.755 AUS $1 = USD 0.755
(Receive AUS$/Pay DM)
Contract amount $ 1,491 - $ 1,491 ($46)
Average contractual exchange rate AUS $1 = DM 1.17 AUS $1 = DM 1.17
- -22-
Fair Value
1999 2000 Total Assets/(Liabilities)
-------------------- ------------------- ------------------- ---------------------
(In thousands)
Foreign Exchange Call Options
(Receive AUS$/Pay US$U.S.$)
Option amount $214,000 - $ 24,333214,000 $ 36,000577 $ 60,333 $ 753534
Average contractual exchange rate AUS $1 = USD 0.6750.598 AUS $1 = USD 0.677 AUS $1 = USD 0.6760.598
(Receive AUS$/Pay DM)Euro)
Option amount $ 2,350 -9,368 $ 2,350384 $ 229,752 $ 20 $ 367
Average contractual exchange rate AUS $1 = DM 1.222Euro 0.659 AUS $1 = DM 1.222Euro 0.667 AUS $1 = Euro 0.6597
------------------------------------------------------------------------------------------------------------------------------------
Interest Rate Risk
We are exposed to risk associated with changes in interest rates
affecting the return on investments.
At June 30, 2001, we maintained a portion of our cash and cash
equivalents in financial instruments with original maturities of three
months or less. We maintain a short-term investment portfolio containing
financial instruments in which the majority have original maturities of
greater than three months but less than twelve months. These financial
instruments, principally comprised of corporate obligations, are subject
to interest rate risk and will decline in value if interest rates
increase. A hypothetical 100 basis point change in interest rates during
the twelve months ended June 30, 2001, would have resulted in
approximately $0.2 million change in pretax income. We do not use
derivative financial instruments in our investment portfolio.
24
Forward-Looking Statements
From time to time, the CompanyThis report on Form 10-K contains or may publishcontain certain forward-looking
statements relatingand information that are based on the beliefs of our management
as well as estimates and assumptions made by, and information currently
available to such matters as anticipated financial performance, business
prospects, technological developments,our management. The words "believe," "expect," "anticipate,"
"estimate," "plan," "future" and other similar expressions generally
identify forward-looking statements, including, in particular, statements
regarding the development and approval of new products research and development
activities, patentproduct
applications, market expansion and pending litigation. These forward-
looking statements are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. You are cautioned not
to place undue reliance on these forward-looking statements. Such forward-
looking statements reflect the views of our management at the time such
statements are made and are subject to a number of risks, uncertainties,
estimates and assumptions, including, without limitation, and in addition
to those identified in the text surrounding such statements, those
identified below and elsewhere in this report. In addition, important
factors to consider in evaluating such forward-looking statements include
changes or developments in social, economic, market, legal or regulatory
circumstances, changes in our business or growth strategy or an inability
to execute our strategy due to changes in our industry or the economy
generally, the emergence of new or growing competitors, the actions or
omissions of third parties, including suppliers, customers, competitors
and governmental authorities, and various other litigation and similar matters. There are a
varietyfactors. Should any one or
more of factors that could causethese risks or uncertainties materialize, or the Company'sunderlying
estimates or assumptions prove incorrect, actual results and
experience to differ materiallymay vary
significantly from the anticipated results or other
expectationsthose expressed in such forward-looking statements, and
there can be no assurance that the Company's forward-looking statements.statements contained in
this report will in fact occur.
The risks and uncertainties that may affect the Company'sour business, financial
condition or results of operations include the following:
Our inability to compete successfully in our markets may harm our
business.
The marketmarkets for our SDB products designed to treat sleep disordered breathing
related respiratory conditions isare highly competitive and are
characterized by frequent product improvements and evolving technology.
Our ability to compete successfully depends, in part, on our ability to
develop innovative new products and to be the first to market with those
products. The development of innovative new or innovative products by othersour competitors or
the discovery of alternative treatments or potential cures for suchthe
conditions that our products treat could result in the Company'sour products becoming
obsoletenoncompetitive or noncompetitive, which would have a material adverse effect on the Company's
business, financial condition and resultsobsolete.
Additionally, some of operations.
The market for the Company's products is also 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. Most of the Company'sour competitors have greater financial, research and
development, manufacturing and marketing resources than we do. The past
several years have seen a trend towards consolidation in the Company.health care
industry and in the markets for our products. Industry consolidation could
result in greater competition if our competitors combine their resources
or if our competitors are acquired by other companies with greater
resources than ours. This competition could increase pressure on us to
reduce the selling prices of our products or could cause us to increase
our spending on research and development and sales and marketing. If we
are unable to develop innovative new products, maintain competitive
pricing, and offer products that consumers perceive to be as reliable as
those of our competitors, our sales or gross margins could decrease which
would harm our business.
25
Our business depends on our ability to market effectively to dealers of
home health care products and sleep clinics.
We market our products primarily to home health care dealers and to sleep
clinics that diagnose OSA and other sleep disorders. We believe that home
health care dealers and sleep clinics play a significant role in
determining which brand of CPAP product a patient will use. For example,
in the United States, when a physician at a sleep clinic prescribes the
use of a CPAP product, the patient typically purchases the product from a
home health care dealer. The physician may or may not prescribe a specific
brand of CPAP product. If a specific brand is prescribed, we believe the
brand prescribed depends upon the brand of CPAP product that is used in
the sleep clinic. If a specific brand is not prescribed, the home health
care dealer may recommend a specific brand. Occasionally, even if the
physician prescribes a specific brand, a home health care dealer may
substitute a competitive CPAP product for the patient. We have limited
resources to market to the more than 2,000 U.S. sleep clinics and the more
than 4,000 home health care dealer branch locations, most of which use,
sell or recommend several brands of CPAP products. In addition, home
health care dealers have experienced price pressures as government and
third-party reimbursement have declined for home care products, and home
health care dealers are requiring price discounts and longer periods of
time to pay for products purchased from us. We cannot assure you that
sleep clinic physicians will continue to prescribe our products, or that
home health care dealers or patients will not substitute competing
products when a prescription specifying our products has been written. The
success of our business depends on our ability to market effectively to
home health care dealers and sleep clinics and to ensure that our products
are properly marketed and sold by these third parties.
We intend to expand our marketing activities to target the population with
a predisposition to SDB as well as primary care physicians and
specialists. We cannot assure you that these marketing efforts will be
successful in increasing awareness of our products.
If we are unable to support our continued growth, our business could
suffer.
We have experienced rapid and substantial growth. As we continue to grow,
the complexity of our operations increases, placing greater demands on our
management. Our ability to manage our growth effectively depends upon our
ability to implement and improve our financial and management information
systems on a timely basis and to effect other changes in our business.
Unexpected difficulties during expansion, the failure to attract and
retain qualified employees, the failure to successfully replace or upgrade
our management information systems, the failure to manage costs or our
inability to respond effectively to growth or plan for future expansion
could cause our growth to stop. If we fail to manage our growth, our
business could suffer.
If we fail to integrate our recent acquisition in Germany with our
operations, our business could suffer.
On February 16, 2001, we acquired all of the outstanding shares of MAP
located near Munich, Germany. We are currently in the process of
integrating our operations with those of MAP. The integration requires
significant efforts from each company. We may find it difficult to
integrate the operations of MAP. MAP personnel may leave MAP because of
the acquisition and MAP licensees, distributors or suppliers may terminate
their arrangements with MAP, or demand amended terms to these
arrangements. Additionally, our management may have their attention
diverted while trying to integrate the two companies. This diversion or
these difficulties in integration could have an adverse impact on us. If
we are not able to successfully integrate the operations of MAP, we may
not realize the anticipated benefits of the MAP acquisition.
26
We manufacture substantially all of our products outside the United States
and sell a significant portion of our products in non-U.S. markets,
subjecting us to various risks relating to international activities that
could adversely affect our overall profitability.
Sales outside North and Latin America accounted for approximately 48%,
46%, and 43% of our net revenues in fiscal years 2001, 2000 and 1999,
respectively. As a result of the MAP acquisition, we expect that sales
within these areas will account for over 50% of our net revenues in the
foreseeable future. Our sales outside of North America and our operations
in Europe, Australia and Asia are subject to several difficulties and
risks that are separate and distinct from those we face in our domestic
operations, including:
. fluctuations in currency exchange rates;
. tariffs and other trade barriers;
. compliance with foreign medical device manufacturing regulations;
. reduction in third party payer reimbursement for our products;
. inability to obtain import licenses;
. changes in trade policies and in domestic and foreign tax policies;
. possible changes in export or import restrictions; and
. the modification or introduction of other governmental policies with
potentially adverse effects.
Fluctuations in foreign currency exchange rates could result in declines
in our reported sales and earnings.
Since our international sales and a significant portion of our
manufacturing costs are denominated in local currencies and not in U.S.
dollars, our reported sales and earnings are subject to fluctuations in
foreign exchange rates. We had foreign currency transaction losses in
recent periods and may have further losses in the future. We expect that
international sales will continue to be a significant portion of our
business and that a significant portion of our manufacturing costs will
continue to be denominated in Australian dollars.
Government and private insurance plans may not reimburse patients for our
products, which could result in reductions in sales or selling prices for
our products.
Our ability to sell our products depends in large part on the extent to
which reimbursement for the cost of our products will be available from
government health administration authorities, private health insurers and
other organizations. These third party payors are increasingly challenging
the prices charged for medical products and services. Therefore, even if a
product is approved for marketing, we cannot assure you that reimbursement
will be allowed for such product or that the reimbursement amount will be
adequate or, if adequate, will not subsequently be reduced. For example,
in some markets, such as Spain, France and Germany, government
reimbursement is currently available for purchase or rental of our
products but is subject to constraints such as price controls or unit
sales limitations. In other markets, such as Australia and the United
Kingdom, there is currently limited or no reimbursement for devices that
treat sleep disordered breathing related respiratory conditions.
Additionally, future legislation or regulation concerning the health care
industry or third party or governmental coverage and reimbursement,
particularly, legislation or regulation limiting consumers' reimbursement
rights may harm our business. As we continue to develop new products,
those products will generally not qualify for reimbursement, if at all,
until they are approved for marketing.
27
In the United States, we sell our products primarily to home health care
dealers and to sleep clinics. We do not file claims and bill governmental
programs and other third party payors directly for reimbursement for our
products. However, we are still subject to laws and regulations relating
to governmental reimbursement programs, particularly Medicaid and
Medicare.
In particular, the federal Anti-Kickback Law prohibits persons from
knowingly and willfully soliciting, receiving, offering or providing
remuneration, directly or indirectly, to induce either the referral of an
individual, or the furnishing, recommending or arranging for a good or
service, for which payment may be made under a federal healthcare program
such as the Medicare and Medicaid programs. The government has interpreted
this law broadly to apply to the marketing and sales activities of
manufacturers and distributors like us. Many states have adopted laws
similar to the federal Anti-Kickback Law. We are also subject to other
federal and state fraud laws applicable to payment from any third party
payer. These laws prohibit persons from knowingly and willfully filing
false claims or executing a scheme to defraud any healthcare benefit
program, including private third party payors. These laws may apply to
manufacturers and distributors who provide information on coverage,
coding, and reimbursement of their products to persons who do bill third
party payors. Any violation of these laws and regulations could result in
civil and criminal penalties, including fines.
Complying with FDA and other regulations is an expensive and time-
consuming process, and any failure to comply could result in substantial
penalties.
We are subject to various federal, state, local and international
regulations regarding the testing, manufacture, distribution, marketing,
promotion, record keeping and reporting of our products. In particular,
our failure to comply with FDA regulations could result in, among other
things, recalls of our products, substantial fines and/or criminal charges
against us and our employees.
Product sales, introductions or modifications may be delayed or canceled
as a result of the FDA or similar foreign regulations, which could cause
our sales to decline.
Before we can market or sell a new medical device in the United States, we
must obtain FDA clearance, which can be a lengthy and time-consuming
process. We generally receive clearance from the FDA to market our
products in the United States under Section 510(k) of the Federal Food,
Drug, and Cosmetic Act or our products are exempt from the 510(k)
clearance process. We have modified some of our 510(k) approved products
without submitting new 510(k) notices, which we do not believe were
required. However, if the Company's competitors
sellFDA disagrees with us and requires us to submit
new 510(k) notifications for modifications to our existing products, we
may be required to stop marketing the products while the FDA reviews the
510(k) notification. Any new product introduction or existing product
modification could be subjected to a lengthier, more rigorous FDA
examination process. For example, in certain cases we may need to conduct
clinical trials of a new product prior to submitting a 510(k) notice.
Additionally, we may be required to obtain premarket approvals for our
products. The requirements of these more rigorous processes could delay
product introductions and increase the costs associated with FDA
compliance. Marketing and sale of our products outside the United States
are also subject to regulatory clearances and approvals, and if we fail to
obtain these regulatory approvals, our sales could suffer. We cannot
assure you that any new products we develop will receive required
regulatory approvals from U.S. or foreign regulatory agencies.
28
Off label marketing of our products could result in substantial penalties.
Clearance under Section 510(k) only permits us to market our products for
the uses indicated on the labeling cleared by the FDA. We may request
additional lines oflabel indications for our current products, and therefore can bundlethe FDA may
deny those requests outright, require additional expensive clinical data
to support any additional indications or impose limitations on the
intended use of any cleared products as a condition of clearance. If the
FDA determines that we have marketed our products for off label use, we
could be subject to offer
higher discounts, or offer rebatesfines, injunctions or other incentive programspenalties.
Disruptions in the supply of components from our single source suppliers
could result in a significant reduction in sales and profitability.
We purchase uniquely configured components for our devices from single-
source suppliers. We cannot assure you that a replacement supplier would
be able to gainconfigure its components for our devices on a timely basis or,
in the alternative, that we would be able to reconfigure our devices to
integrate the replacement part. A reduction or stoppage in supply while a
replacement supplier reconfigures its components, or while we reconfigure
our components for the replacement part, would limit our ability to
manufacture our devices, which could result in a significant reduction in
sales and profitability. We cannot assure you that our inventories would
be adequate to meet our production needs during any prolonged interruption
of supply.
Our intellectual property may not protect our products, and our products
may infringe on the intellectual property rights of third parties.
We rely on a combination of patents, trade secrets and non-disclosure
agreements to protect our intellectual property. Our success depends, in
part, on our ability to obtain and maintain United States and foreign
patent protection for our products, their uses and our processes to
preserve our trade secrets and to operate without infringing on the
proprietary rights of third parties. We have a number of pending patent
applications, and we do not know whether any patents will issue from any
of these applications. We do not know whether any of the claims in our
issued patents or pending applications will provide us with any
significant protection against competitive advantage.products or otherwise be
commercially valuable. Legal standards regarding the validity of patents
and the proper scope of their claims are still evolving, and there is no
consistent law or policy regarding the valid breadth of claims.
Additionally, there may be third party patents, patent applications and
other intellectual property relevant to our products and technology which
are not known to us and that block or compete with our products.
We face the risks that:
. third parties will infringe our intellectual property rights;
. our non-disclosure agreements will be breached;
. we will not have adequate remedies for infringement;
. our trade secrets will become known to or independently developed by
our competitors; or
. any third parties will be issued patents that may prevent the sale of
our products or require us to license and pay fees or royalties in
order for us to be able to market some of our products.
We are currently engaged in litigation relating to the enforcement and
defense of five of our patents. Additional litigation may be necessary to
enforce patents issued to us, to protect our proprietary
29
rights, or to defend third party claims that we have infringed upon
proprietary rights of others. The Company's competitorsdefense and prosecution of patent
claims, including these pending claims, as well as participation in other
inter-party proceedings, can be expensive and time consuming, even in
those instances in which the outcome is favorable to us. If the outcome of
any litigation or proceeding brought against us were adverse, we could be
subject to significant liabilities to third parties, could be required to
obtain licenses from third parties or could be required to cease sales of
the affected products. Additionally, the laws regarding the enforceability
of patents vary from country to country, and we cannot assure you that any
patent issues we face will be uniformly resolved, or that local laws will
provide us with consistent rights and benefits.
We are subject to product liability claims that may also employ litigationexceed the scope and
amount of our insurance coverage, which would expose us to gainliability for
uninsured claims.
We are subject to potential product liability claims as a competitive advantage. The Company's inability to compete
effectivelyresult of the
design, manufacture and marketing of medical devices. Any product
liability claim brought against existingus, with or future competitorswithout merit, could result in
the increase of our product liability insurance rates. In addition, we
would have to pay any amount awarded by a material
adverse effectcourt in excess of our policy
limits. Our insurance policies have various exclusions, and thus we may be
subject to a product liability claim for which we have no insurance
coverage, in which case, we may have to pay the entire amount of any
award. We cannot assure you that our insurance coverage will be adequate
or that all claims brought against us will be covered by our insurance.
Insurance varies in cost and can be difficult to obtain, and we cannot
assure you that we will be able to obtain insurance in the future on terms
acceptable to us or at all. A successful product liability claim brought
against us in excess of our insurance coverage, if any, may require us to
pay substantial amounts, which could harm our business.
Our business could suffer if we lose the Company's business, financial conditionservices of key members of our
management.
We are dependent upon the continued services of key members of our senior
management and a limited number of key employees and consultants. The loss
of the services of any one of these individuals could significantly
disrupt our operations. Additionally, our future success will depend,
among other factors, on our ability to continue to hire and retain the
necessary qualified scientific, technical and managerial personnel. We
compete for such personnel with numerous other companies, academic
institutions and organizations.
Our quarterly operating results are subject to fluctuation for a variety
of operations.
The Company'sreasons.
Our operating results 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 absencea number of a backlog of orders for the
Company's products,factors, including:
. the introduction of new products by the Companyus or its
competitors,our competitors;
. the geographic mix of product sales,sales;
. the success of the Company'sour marketing efforts in new regions,regions;
. changes in third-party reimbursement,third party reimbursement;
. timing of regulatory action,clearances and approvals;
. timing of orderorders by distributors,distributors;
. expenditures incurred for research and development,development;
. competitive pricing in different regions,
seasonality,regions;
. seasonality;
. the cost and effect of promotional and marketing programsprograms; and
. the effect of foreign currency transaction gains or losses, among other factors,
In addition,losses.
30
We are subject to an ongoing tax audit, the Company's results of operationswhich may require
significant tax adjustments.
We are subject to an ongoing audit of our tax returns for the years 1995
through 1998, which began in February 1998. The IRS may disagree with our
tax positions on such returns, and if challenged by the IRS, our tax
positions may not be sustained by the courts. As a result of these audits,
we may be required to make certain tax adjustments and pay additional
taxes and fines that may be significant and have a negative impact on our
result of operations.
If a natural or man made disaster strikes our manufacturing facilities, we
will be unable to manufacture our products for a substantial amount of
time and our sales will decline.
We manufacture a significant portion of our products in our facilities in
Australia. These facilities and the manufacturing equipment we use to
produce our products would be costly to replace and could require
substantial lead time to repair or replace. The facilities may be affected
by natural or man made disasters and in the event it was affected by a
disaster, we would be forced to rely on third party manufacturers.
Although we believe we possess adequate insurance for damage to our
property and the disruption of our business from casualties, such
insurance may not be sufficient to cover all of our potential losses and
may not continue to be available to us on acceptable terms, or at all.
Delaware law, provisions in our charter and our shareholder rights plan
could make the acquisition of our company by another company more
difficult.
Provisions of our certificate of incorporation may have the effect of
delaying or preventing changes in control or management which might be
beneficial to us or our securityholders. In particular, our board of
directors is divided into three classes, serving for staggered three-year
terms. Because of this classification it will require at least two annual
meetings to elect directors constituting a majority of our board of
directors.
Additionally, our 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. Under our
stockholders rights plan, we have also issued purchase rights to the
holders of our common stock that entitle those holders to purchase our
Series A Junior Participating Preferred Stock at a discount, under certain
circumstances. The rights of the holders of our common stock will be
subject to, and may be adversely affected by, changes in tax lawsthe rights of the holders of
any preferred stock that may be issued in the various countriesfuture. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in whichcontrol, may discourage bids for our common stock at a premium
over the Company conducts
its operations.
- -23-
The Company's success is dependent uponmarket price of our common stock and may adversely affect the
abilitymarket price of our common stock and the voting and other rights of the
Company's
customersholders of our common stock.
You may not be able to obtain adequate reimbursement from third-party payors for
purchasingenforce the Company's products. Third-party payors may deny reimbursement
if they determine that the prescribed device has not received appropriate
United States Foodjudgments of U.S. courts against some
of our assets or officers 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. The cost containment measures that
health care providers are instituting 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 of rental of the Company's products, subject
to constraints such as price controls or unit sales limitations. In Australia
and some other foreign markets there is currently limited or no reimbursement
for devices that treat sleep disordered breathing related respiratory
conditions.directors.
A substantial portion of our assets are located outside the Company's net revenue is generated from
salesUnited States.
Additionally, two of our six directors and three of our eight officers
reside outside North America. The Company expects that such sales will
continue to account forthe United States, along with all or a significantsubstantial portion
of the Company's net revenues in
the future. The Company's sales outsideassets of North America are subjectthese persons. As a result, it may not be possible for
investors to certain inherent risksenforce judgments of global operations, including fluctuations in
currency exchange rate, tariffs, import licenses, trade policies, domestic and
foreign tax policies and foreign medical device manufacturing regulations.
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.
Other factors which could potentially have a material adverse effect on
the Company's business, results of operations or financial conditions include
the costs and other effects of legal and administrative cases and proceedings,
settlements and investigations, claims and changes in those items, and
developments or assertions by or against the CompanyU.S. courts relating to intellectual
property rights and intellectual property licenses.any liabilities
under U.S. securities laws against our assets, those persons or their
assets. In addition, we have been advised by our Australian counsel
31
that some doubt exists as to the ability of investors to pursue claims
based on U.S. securities laws against these assets or these persons in
Australian courts.
The information contained in this section is not intended to be an
exhaustive description of the risks and uncertainties inherent in the
Company'sour
business or in itsour strategic plans. Please see Item 1 "Business" and
Item 3 "Legal Proceedings".
Item 8 Consolidated Financial Statements and Supplementary Data
a) Index to Consolidated Financial Statements
Page
Page
Independent Auditors' Report F1
Consolidated Balance Sheets as of June 30, 19972001 and 19982000 F2
Consolidated Statements of Income for the three years ended June 30, 19982001, 2000 and 1999 F3
Consolidated Statements of Stockholders' Equity for the three years ended June 30, 19982001, 2000 and 1999 F4
Consolidated Statements of Cash Flows for the three years ended June 30, 19982001, 2000 and 1999 F5
Notes to Consolidated Financial Statements F6
Schedule II - Valuation and Qualifying Accounts and Reserves 2830
b) Supplementary Data
Quarterly Financial Information (unaudited)
The quarterly results for the years ended June 30, 2001 and 2000 are
summarized below (in thousands, except per share amounts):
The quarterly results for the years ended June 30, 1998 and 1997 are summarized below:
1998
--------------2001
------------------------------------------------
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year
-------------- --------------- -------------- --------------- ----------
Net revenuerevenues $31,082 $34,366 $ 13,978 $ 16,146 $ 17,113 $ 19,282 $ 66,51942,680 $47,028 $155,156
Gross profit 8,553 10,973 11,015 12,909 43,45021,087 23,021 28,923 31,748 104,779
Net income 2,158 2,293 3,146 3,014 10,611(loss) 6,580 6,898 (10,194) 8,346 11,630
Basic earnings per share $ 0.30 0.32 0.43 0.42 1.460.21 $ 0.22 ($0.33) $ 0.27 $ 0.37
Diluted earnings per share $ 0.29 0.31 0.42 0.40 1.41
- -24-
0.20 $ 0.21 ($0.30) $ 0.25 $ 0.35
1997
--------------2000
------------------------------------------------
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year
-------------- --------------- -------------- --------------- -----------
Net revenue $ 11,141 $ 11,587 $ 12,468 $ 13,984 $ 49,180revenues $25,945 $28,135 $29,971 $31,564 $115,615
Gross profit 6,291 6,872 7,348 8,382 28,89317,721 19,531 19,819 21,553 78,624
Net income 1,840 1,682 1,898 2,045 7,4654,835 5,362 5,838 6,191 22,226
Basic earningearnings per share $ 0.26 0.23 0.26 0.28 1.040.16 $ 0.18 $ 0.19 $ 0.20 $ 0.74
Diluted earnings per share $ 0.25 0.23 0.26 0.28 1.02
(1)0.15 $ 0.17 $ 0.18 $ 0.19 $ 0.69
/(1)/ Per share amounts for each quarter are computed independently,
and, due to the computation formula, the sum of the four
quarters may not equal the year.
Item 9 Changes in and Disagreements with AccountantAccountants on Accounting and
Financial Disclosure
NoneNone.
32
PART III
Item 10 Directors and Executive Officers of the Registrant
Incorporated by reference to Registrant'sour definitive Proxy Statement for itsour
November 6, 19985, 2001, meeting of stockholders, which will be filed with the
Securities and Exchange Commission within 120 days fromafter June 30, 1998.2001.
Item 11 Executive Compensation
Incorporated by reference to Registrant'sour definitive Proxy Statement for itsour
November 6, 19985, 2001, meeting of stockholders, which will be filed with the
Securities and Exchange Commission within 120 days fromafter June 30, 1998.2001.
Item 12 Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to Registrant'sour definitive Proxy Statement for itsour
November 6, 19985, 2001, meeting of stockholders, which will be filed with the
Securities and Exchange Commission within 120 days fromafter June 30, 1998.2001.
Item 13 Certain Relationships and Related Transactions
Dr. Colin Sullivan, a member of the Company's Medical Advisory Board,
provides consulting services to the Company pursuant to a Consulting Agreement
that terminates on December 31, 2000 (subject to extension for an additional
five-year term) for which he receives annual payments of $186,000 per annum.
The company also reimburses Dr. Sullivan for his out-of-pocket expenses in
performing such consulting services. The Company has also agreed to pay
$130,000 to Dr. Sullivan for a period of 24 months following the termination
of his consulting relationship with the Company. Total payments to Dr.
Sullivan were $278,000, $353,000 and $314,000 for the Company's fiscal years
ended June 30, 1998, 1997 and 1996, respectively.
- -25-No material transactions.
33
PART IV
Item 14 Exhibits, Consolidated Financial Statements, Schedule, and Reports on
Form 8-K
a) The following documents are filed as part of this report:
1.11. Consolidated Financial Statements and Schedule.Schedule
The consolidated financial statements and schedule of the
Company and its consolidated subsidiaries are set forth in the
"Index to Consolidated Financial Statements" under Item 8 of
this report.
3. Exhibits. The following exhibits are filed2. Exhibits
2.1 Sale and Assignment Agreement, dated as a part of this report:February 16,
2001 between ResMed Inc, ResMed Beteiligungs GmbH and the
shareholders of MAP Medizin-Technologie GmbH*
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**
4.2 Rights agreement dated as of April 23, 1997***
4.3 Indenture dated as of June 20, 2001, between ResMed Inc
and American Stock Transfer & Trust Company
4.4 Registration Rights Agreement dated as of June 20, 2001,
by and between ResMed Inc, Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Banc
Alex Brown Inc., William Blair & Company, L.L.C.,
Macquarie Bank Limited and UBS Warburg LLC
10.1 1995 Stock Option Plan**
10.2 1997 Equity Participation Plan****
10.3 Licensing Agreement between the University of Sydney and
ResMed Limited dated May 17, 1991, as amended**
10.4 Consulting Agreement between Colin Sullivan and ResMed
Limited effective from 1 January 19981998*****
10.5 Loan Agreement between the Australian Trade Commission and
ResMed Limited dated May 3, 1994**
10.6 Lease for 82 Waterloo Road, Sydney, Australia*
10.7 Lease for 10121 Carroll Canyon Road, San Diego 92131-1109, USACA 92131-
1109, USA*****
11.1 Statement re: Computation of EarningEarnings per Common Share
16.1 Letter regarding change in Certifying Accountant*
21.1 Subsidiaries of the Registrant
23.1 Independent Auditors' Consent and Report on Schedule
of KPMG Peat Marwick LLP
27.1 Financial Data Schedule--------------------
* Incorporated by reference to the Registrant's Report on Form 8-K
dated March 2, 2001
** 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 from the Registrant's Report on Form 8-K
(File No. 0-26038).
*** Incorporated by reference fromto the Registrant's Registration
Statement on Form 8-A12G filed on April 25, 1997.
**** Incorporated by reference to the Registrant's 1997 Proxy
Statement (File No. 0-26038).
b)***** Incorporated by reference to the Registrant's Report on Form
10-K dated June 30, 1998 (File No. 0-26038)
34
b) Reports on Form 8-K
None
- -26-On May 1, 2001 we filed a report on Form 8-K/A reporting Pro Forma
Condensed Consolidated Financial Information associated with the
acquisition, on February 16, 2001, of MAP Medizin-Technologie GmbH.
On June 12, 2001 we filed a report on Form 8-K that announced our
proposed private placement of $150 million of convertible subordinated
notes and included a press release issued by us on June 11, 2001 to
that same effect.
On June 15, 2001, we filed a report on Form 8-K that announced we had
entered into a purchase agreement providing for the sale to certain
initial purchasers of $150 million of convertible subordinated notes
(plus an additional $30 million to cover over allotments, if any). The
report included a press release issued by us on June 14, 2001 to that
effect. The report also announced the specific pricing for the sale of
the convertible subordinated notes and included a press release dated
June 15, 2001, to that effect.
35
INDEPENDENT AUDITORS' REPORTSIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DATED September 20, 2001
ResMed Inc
/S/ PETER C. FARRELL
-------------------------------------------------------
Peter C. Farrell, President and Chief Executive Officer
President and Chief Executive Officer
/S/ ADRIAN M. SMITH
-------------------------------------------------------
Adrian M. Smith
Vice President Finance and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/S/ PETER C. FARRELL Chief Executive Officer, September 20, 2001
---------------------------------------------
Peter C. Farrell President, Chairman of the Board
(Principal Executive Officer)
/S/ CHRISTOPHER G. ROBERTS Director September 20, 2001
---------------------------------------------
Christopher G. Roberts
/S/ MICHAEL A. QUINN Director September 20, 2001
---------------------------------------------
Michael A. Quinn
/S/ GARY W. PACE Director September 20, 2001
---------------------------------------------
Gary W. Pace
/S/ DONAGH MCCARTHY Director September 20, 2001
---------------------------------------------
Donagh McCarthy
/S/ CHRISTOPHER BARTLETT Director September 20, 2001
---------------------------------------------
Christopher Bartlett
Independent Auditors' Report
The Board of Directors and Stockholders
ResMed Inc.:Inc:
We have audited the accompanying consolidated balance sheets of ResMed Inc.Inc and
subsidiaries as of June 30, 19982001, and 1997,2000, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the years
in the three yearthree-year period ended June 30, 1998.2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ResMed Inc. and
subsidiaries as of June 30, 19982001 and 1997,2000, and the results of their operations
and their cash flows for each of the years in the three yearthree-year period ended June
30, 1998,2001, in conformity with accounting principles generally accepted accounting
principles.in the
United States of America.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
San Diego, California
August 14, 1998
- -F13, 2001
F-1
RESMED INC. AND SUBSIDIARIESResMed Inc And Subsidiaries
Consolidated Balance Sheets
June 30, 2001 and 2000
(In thousands, except share and per share data)
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
June 30, June 30,
1998 1997
-------------- -------------2001 2000
-------------------------------------
Assets
- ----------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 15,526 9,07740,136 $ 18,250
Marketable securities available for sale (note 3) 5,220 18,90862,616 3,713
Accounts receivable, net of allowance for doubtful accounts
of $248$892 and $277$833 at June 30, 19982001 and 1997,2000, respectively 12,789 7,834
Government grants receivable 384 39132,248 24,688
Inventories, net (note 4) 7,647 5,79729,994 15,802
Deferred income taxes (note 10) 2,518 9994,152 2,361
Prepaid expenses and other current assets 2,520 1,385
____________ ____________8,736 4,358
-------------------------------------
Total current assets 46,604 44,391
____________ ____________177,882 69,172
-------------------------------------
Property, plant and equipment, net of accumulated depreciation of
$19,930 at June 30, 2001 and $13,552 at June 30, 2000 (note 5) 11,111 4,91655,092 36,576
Patents, net of accumulated amortization of $368$1,030 and $325$789
at June 30, 19982001 and 1997,2000, respectively 459 253
Deferred income taxes (note 10) - 1571,390 1,342
Goodwill, net of accumulated amortization of $893$3,193 and $433$2,003 at
June 30, 19982001 and 1997,2000, respectively 5,445 4,55347,870 5,626
Other assets 999 625
____________ ____________
64,618 54,895
============ ============5,856 2,878
-------------------------------------
Total assets $288,090 $115,594
=====================================
Liabilities and Stockholders' Equity
- ----------------------------------------------------------------
Current liabilities:
Accounts payable 3,759 2,641$ 7,971 $ 5,929
Accrued expenses (note 6) 6,637 3,53716,751 9,224
Income taxes payable 3,222 3,544
Current portion of long debt (note 7) 227 274
____________ ____________8,888 6,469
-------------------------------------
Total current liabilities 13,845 9,996
____________ ____________
Long-term debt less,33,610 21,622
Non current portionliabilities:
Deferred revenue 4,114 -
Convertible subordinated notes (note 7) 150,000 -
274
____________ ____________
13,845 10,270
____________ ____________-------------------------------------
Total non current liabilities 154,114 -
-------------------------------------
Total liabilities 187,724 21,622
-------------------------------------
Stockholders' equityequity: (note 8):
Preferred stock, $.01 par value,
2,000,000 shares authorized; none issued - -
Series A Junior Participating preferred stock, $0.01 par value,
150,000250,000 shares authorized; none issued - -
Common stock, $.004 par value, 15,000,00050,000,000 shares authorized;
issuedIssued and outstanding 7,276,00031,478,780 at June 30, 19982001 and
7,202,41330,593,921 at June 30, 1997 29 292000 126 122
Additional paid-in capital 31,253 29,65652,675 41,495
Retained earnings 27,179 16,568
Foreign currency translation adjustment (7,688) (1,628)
____________ ____________77,137 65,507
Accumulated other comprehensive loss (29,572) (13,152)
-------------------------------------
Total stockholders' equity 50,773 44,625
____________ ____________100,366 93,972
-------------------------------------
Commitments and contingencies (notes 1413 and 16) $ 64,618 54,895
============ ============
- -
Total liabilities and stockholders' equity $288,090 $115,594
=====================================
See accompanying notes to consolidated financial statements.
- -F2-F-2
RESMED INC. AND SUBSIDIARIESResMed Inc and Subsidiaries
Consolidated Statements of Income
Years ended June 30, 2001, 2000 and 1999
(In thousands, except per share data)
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
June 30, June 30, June 30,
1998 1997 1996
-------------- ------------ ------------2001 2000 1999
--------------------------------------------------------
Net revenues $ 66,519 49,180 34,562$155,156 $115,615 $88,627
Cost of sales 23,069 20,287 16,990
____________ ____________ ____________50,377 36,991 29,416
--------------------------------------------------------
Gross profit 43,450 28,893 17,572
____________ ____________ ____________104,779 78,624 59,211
--------------------------------------------------------
Operating expenses:
Selling, general and administrative expenses 21,093 16,759 11,13649,364 36,987 27,414
Provision for restructure (note 6) 550 - -
In-process research and development write off (note 14) 17,677 - -
Research and development expenses 4,994 3,807 2,841
____________ ____________ ____________11,146 8,499 6,542
--------------------------------------------------------
Total operating expenses 26,087 20,566 13,977
____________ ____________ ____________78,737 45,486 33,956
--------------------------------------------------------
Income from operations 17,363 8,327 3,595
____________ ____________ ____________26,042 33,138 25,255
--------------------------------------------------------
Other income (expenses) income::
Interest income (expense), net 1,011 1,205 1,072(762) 801 779
Government grants 611 316 53772 279 833
Other, net (note 9) (2,873) 1,239 1,357
____________ ____________ ____________1,962 (52) (2,290)
--------------------------------------------------------
Total other (expenses) income (expenses), net (1,251) 2,760 2,966
____________ ____________ ____________1,272 1,028 (678)
--------------------------------------------------------
Income before income taxes 16,112 11,087 6,56127,314 34,166 24,577
Income taxes (note 10) 5,501 3,622 2,058
____________ ____________ ____________15,684 11,940 8,475
--------------------------------------------------------
Net income $ 10,611 7,465 4,503
============ ============ ============11,630 $ 22,226 $16,102
========================================================
Basic earnings per share $ 1.46 1.04 0.64$0.37 $0.74 $0.55
Diluted earnings per share 1.41 1.02 0.63
$0.35 $0.69 $0.52
Basic shares outstanding 31,129 30,153 29,416
Diluted shares outstanding 33,484 32,303 31,068
See accompanying notes to consolidated financial statements.
- -F3-F-3
RESMED INC. AND SUBSIDIARIESResMed Inc And Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended June 30, 2001, 2000 and 1999
(In thousands)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS)
ForeignAccumulated
Additional currencyother
Common stock paid-in Retained translationcomprehensive Comprehensive
Shares Amount capital earnings adjustmentEarnings income (loss) Total ------------ ----------- ---------- ----------- ----------- -----------Income
--------------------------------------------------------------------------------
Balance, June 30, 1995 6,5341998 29,104 $117 $31,165 $27,179 $ 26 24,393 4,600 (152) 28,867
Common stock issued for cash, net 450 2 4,547 - - 4,549(7,688) $ 50,773
Common stock issued on exercise of options (note 8) 188512 1 4672,124 - - 468
Foreign currency translation adjustment2,125
Tax benefit from exercise of options - - 388 - - 599 599388
Comprehensive income:
Net income - - - 4,50316,102 - 4,503
_________ _________ _________ _________ _________ _________16,102 $ 16,102
Other comprehensive income
Foreign currency translation adjustments 2,259 2,259 2,259
---------------
Comprehensive income $ 18,361
===============
--------------------------------------------------------------------------------
Balance, June 30, 1996 7,172 29 29,407 9,103 447 38,9861999 29,616 118 33,677 43,281 (5,429) 71,647
Common stock issued to consultants 10 - 126 - - 126
Common stock issued on exercise of options (note 8) 30 - 249968 4 6,376 - - 249
Foreign currency translation adjustment6,380
Tax benefit from exercise of options - - 1,316 - - (2,075) (2,075)1,316
Comprehensive income:
Net income - - - 7,46522,226 - 7,465
_________ _________ _________ _________ _________ _________22,226 $ 22,226
Other comprehensive income
Foreign currency translation adjustments (7,723) (7,723) (7,723)
---------------
Comprehensive income $ 14,503
===============
--------------------------------------------------------------------------------
Balance, June 30, 1997 7,202 29 29,656 16,568 (1,628) 44,6252000 30,594 $122 41,495 65,507 (13,152) 93,972
Common stock issued on exercise of options (note 8) 74 - 1,020885 4 7,939 - - 1,0207,943
Tax benefit from exercise of options - - 5773,241 - - 577
Foreign currency translation adjustment - - - - (6,060) (6,060)3,241
Comprehensive income:
Net income - - - 10,61111,630 - 10,611
_________ _________ _________ _________ _________ _________11,630 $ 11,630
Other comprehensive income
Foreign currency translation adjustments - - - - (16,420) (16,420) (16,420)
---------------
Comprehensive income/(loss) $ (4,790)
===============
Balance, June 30, 1998 7,276 $ 29 31,253 27,179 (7,688) 50,773
========= ========= ========= ========= ========= =========
2001 31,479 $126 $52,675 $77,137 $(29,572) $100,366
==============================================================
See accompanying notes to consolidated financial statements.
- -F4-F-4
RESMED INC. AND SUBSIDIARIESResMed Inc And Subsidiaries
Consolidated Statements of Cash Flows
Years ended June 30, 2001, 2000 and 1999
(In thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS)
June 30, June 30, June 30,
1998 1997 1996
-------------- ------------- -------------2001 2000 1999
---------------------------------------------------------
Cash flows from operating activities:
Net income $ 10,611 7,465 4,50311,630 $ 22,226 $ 16,102
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,232 2,261 1,1547,015 6,248 3,973
Goodwill amortization 483 349 1231,430 690 633
Provision for service warranties 6 124 (117)174 184 240
Deferred income taxes 416 (1,032) 112(2,306) 77 549
Foreign currency options revaluation 1,143 (458) (844)2,766 2,158 125
Non cash consulting expenses - 126 -
Restructuring provision 550 - -
Purchased in-process research and development write off 17,677 - -
Changes in operating assets and liabilities, net of effect
of acquisitions:
Accounts receivable, net (5,096) (1,714) (2,327)
Government grants (61) 491 (78)(5,531) (7,394) (5,516)
Inventories (2,445) (259) 272(8,130) (6,027) (2,919)
Prepaid expenses and other current assets (1,352) (180) (652)(3,470) (1,572) (204)
Accounts payable and accrued expenses and other liabilities 1,031 417 7922,633 1,412 2,873
Income taxes payable (1,185) 2,011 515
____________ ____________ ____________5,082 2,147 2,332
---------------------------------------------------------
Net cash provided by operating activities 6,783 9,475 3,453
____________ ____________ ____________29,520 20,275 18,188
---------------------------------------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment (10,110) (3,962) (1,472)(27,459) (16,168) (20,515)
Purchase of marketable securities - available for sale (31,292) (50,141) (102,730)(79,879) (36,804) (7,290)
Proceeds from sale of marketable securities - available for sale 44,474 49,254 105,21920,976 38,717 6,862
Patent registration costs (516) (961) (445)
Business acquisitions, net of cash acquired of $367 (note 14) (55,070) (576) (2,024)
Purchases of patents (369) (132) (97)
Purchase of other assets - - (373)
Business acquisitions (1,699) (1,177) (6,815)
Proceeds from sale of non trading investments - 1,113 -
Purchases of non trading investments (665) - -
Loan receivables - (300) -
____________ ____________ ____________(2,602) (2,732) (1,529)
---------------------------------------------------------
Net cash provided by (used in)used in investing activities 339 (5,345) (6,268)
____________ ____________ ____________(144,550) (18,524) (24,941)
---------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 1,020 249 5,0177,943 6,380 2,125
Repayment of long-term debt (239) (287)borrowings (82,854) - ____________ ____________ ____________(235)
Proceeds from borrowings, net of borrowing costs 213,937 - -
---------------------------------------------------------
Net cash provided by (used in) financing activities 781 (38) 5,017
____________ ____________ ____________139,026 6,380 1,890
---------------------------------------------------------
Effect of exchange rate changes on cash (1,454) (525) 52
____________ ____________ ____________(2,110) (989) 445
---------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 6,449 3,567 2,25421,886 7,142 (4,418)
Cash and cash equivalents at beginning of the year 9,077 5,510 3,256
____________ ____________ ____________18,250 11,108 15,526
---------------------------------------------------------
Cash and cash equivalents at end of the year $ 15,526 9,077 5,510
============ ============ ============40,136 $ 18,250 $ 11,108
=========================================================
Supplemental disclosure of cash flow information:
Income taxes paid $ 6,272 2,647 1,13212,908 $ 9,716 $ 5,374
Interest paid 1,439 - -
=========================================================
Fair value of assets acquired in acquisition $ 33,139 $ 383 -
Liabilities assumed (24,821) (36) -
Goodwill on acquisition 47,119 229 2,024
---------------------------------------------------------
Cash paid for acquisition $ 55,437 $ 576 $ 2,024
=========================================================
See accompanying notes to consolidated financial statements.
- -F5-F-5
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNEResMed Inc And Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1998 AND 19972001 and 2000
1. ORGANIZATION AND BASIS OF PRESENTATIONOrganization and Basis of Presentation
ResMed Inc.Inc (the Company),"Company") is a Delaware corporation formed in March 1994
as a holding company for ResMed Holdings Ltd.Ltd (RHL), a company resident in
Australia. RHLThe Company designs, manufactures and markets devices for the
evaluation and treatment of sleep disordered breathing, primarily
obstructive sleep apnea. The Company's corporate offices are based in San
Diego, California with its principal manufacturing operations areoperation located in
Australia. Other principalmajor distribution and sales sites are located in the
United States, United Kingdom, France, Germany, Sweden and Europe.Singapore.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESSummary of Significant Accounting Policies
(a) Basis of Consolidation: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 on
consolidation.
The preparation of financial statements in consolidation.conformity with accounting
principles generally accepted in the United States of America requires
management estimates and assumptions that affect amounts reported in
the financial statements and accompanying notes. Actual results could
differ from management's estimates.
(b) Revenue Recognition:Recognition
Revenue on product sales is recorded at the time of shipment. Royalty
revenue from license agreements is recorded when earned. Service
revenue received in advance from service contracts is initially
capitalized and progressively recognized as revenue over the life of
the service contract. Revenue from sale of marketing or distribution
rights is initially capitalized and progressively recognized as
revenue over the periodlife of expected benefits but not exceeding three years.the contract.
(c) Cash and Cash Equivalents:Equivalents
Cash equivalents includeincluding certificates of deposit, commercial paper
and other highly liquid investments are 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
Inventories are stated at the lower of cost or market, determined
principally by the first-in, first-out method, or net realizable value.method.
(e) Property, Plant and Equipment: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 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.
- -F6-F-6
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNEResMed Inc And Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1998 AND 19972001 and 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Summary of Significant Accounting Policies (continued)
(f) Patents: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) Goodwill:Goodwill
Goodwill arising from business acquisitions ishas been amortized on a
straight-line basis over periods ranging from three to 1520 years. The
Company carries goodwill at cost net of accumulated amortization. The
Company reviews its goodwill carrying value when events indicate that
an impairment may have occurred in goodwill. If, based on the
undiscounted cash flows, management determines goodwill is not
recoverable, goodwill is written down to its discounted cash flow
value and the amortization period is re-assessed.
Amortization expense of goodwill was $483,000, $349,000$1,430,000, $690,000 and $123,000$633,000
for the years ended June 30, 1998, 19972001, 2000 and 1996,1999, respectively.
(h) Government Grants:Grants
Government grants revenue is recognized when earned. Grants have been
obtained by the Company from the Australian Federal Government to
support the continued development of the Company's proprietary
positive airway pressure technology and to assist development of
export markets. Grants have been recognized in the amount of $611,000, $316,000$72,000,
$279,000 and $537,000$833,000 for the years ended June 30, 1998, 19972001, 2000 and
1996,1999, respectively.
(i) Foreign Currency: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
year end exchange rates;rates, and revenue and expense transactions are
translated at average exchange rates for the year. Cumulative
translation adjustments are reflectedrecognized as part of comprehensive
income, as described in stockholders' equity.Note 15, and are included in accumulated other
comprehensive loss in the consolidated balance sheet until such time
as the subsidiary is sold or substantially or completely liquidated.
Gains and losses on transactions, denominated in other than the
functional currency of the entity, are reflected in operations.
(j) Research and Development:Development
All research and development costs are expensed in the period
incurred.
F-7
ResMed Inc And Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
2. Summary of Significant Accounting Policies (continued)
(k) Earnings Per Share:
During the year ended June 30, 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (Statement 128).
As required by Statement 128, all prior period information has been restated
to conform to the provisions of Statement 128.Share
The weighted average shares used to calculate basic earnings per share
was 7,250,000, 7,189,000were 31,129,000, 30,153,000, and 7,090,00029,416,000 for the years ended June
30, 1998, 19972001, 2000 and 1996,1999, respectively. The difference between basic
earnings per share and diluted earnings per share is attributable to
the impact of outstanding stock options during the periods presented.
Stock options had the effect of increasing the number of shares used
in the calculation (by application of the treasury stock method) by
261,000, 128,0002,355,000, 2,150,000 and 109,0001,652,000 for the years ended June 30, 1998, 19972001,
2000 and 1996,1999, respectively.
- -F7-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(l) Financial Instruments:Instruments
The carrying value of financial instruments, such as of cash and cash
equivalents, marketable securities - available for sale, accounts
receivable, government grants receivable foreign currency option contracts,and accounts payable and debt
approximate their fair value because of their short term nature. The
estimated fair value of the Company's long-term debt at June 30, 2001
approximates $147.9 million compared with the carrying value of $150.0
million. Foreign currency option contracts are marked to market and
therefore reflect 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.
(m) Foreign Exchange Risk Management: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, principally denominated in principally Australian
dollars Pound Sterling and Deutschmarks.Euros. The termterms of such foreign exchangecurrency option 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 (expenses) income, net. Unamortized
premiums amounted to $267,000, $565,000 and $302,000 at June 30, 1998, 1997
and 1996, respectively.
Unrealized gains or losses are recognized as incurred in the
Consolidated
Balance Sheetsconsolidated balance sheets as either other assets or other
liabilities and are recorded within other income, net on the Company's
Consolidated Statementsconsolidated statements of Income.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. At June 30, 1998 and 1997 no put options issued by the Company
were outstanding.
The Company is exposed to credit-related losses in the event of non-performancenon-
performance by counterparties to financial instruments, but it does not
expect any counterparties to fail to meet their obligations given their high
credit ratings.instruments. The credit
exposure of foreign exchange options at June 30, 1998 is $775,0002001 was $597,000,
which represents the positive fair value of options held by the
Company.
- -F8-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(m) Foreign Exchange Risk Management(continued):
The Company held foreign currency option contracts with notional
amounts totaling $62,683,000totalling $223,752,000 and $22,752,000$171,530,000 at June 30, 19982001 and
1997,2000, respectively to hedge foreign currency items. These contracts
mature at various dates prior to July 2002.
F-8
ResMed Inc And Subsidiaries
Notes to Consolidated Financial Statements
June 2000.30, 2001 and 2000
2. Summary of Significant Accounting Policies (continued)
(n) Income Taxes:Taxes
The Company accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
(o) Marketable Securities:Securities
Management determines the appropriate classification of its
investments in debt and equity securities at the time of purchase and
re-evaluates 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.accumulated other
comprehensive income (loss).
At June 30, 19982001 and 1997,2000, the Company's investments in debt
securities were classified on the accompanying consolidated balance
sheet as marketable securities-availablesecurities available for sale. These investments
are diversified among high credit quality securities in accordance
with the Company's investment policy.
The amortized cost of debt securities classified as available for
saleavailable-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.
(p) Warranty:Warranty
Estimated future warranty obligations related to certain products are
provided by charges to operations in the period in which the related
revenue is recognized.
(q) Impairment of Long-Lived Assets:Assets
The Company periodically evaluates the carrying value of long-lived
assets to be held and used, including certain identifiable intangible
assets, when events and circumstances indicate that the carrying
amount of an asset may not be recovered. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount
of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair
value, less costs to sell.
- -F9-F-9
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNEResMed Inc And Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1998 AND 19972001 and 2000
3. MARKETABLE SECURITIESMarketable Securities
The estimated fair value of marketable securities available for sale atas of
June 30, 19982001 and 1997,2000, was $5,220,000$62,616,000 and $18,908,000,$3,713,000, respectively. The
estimated fair value of each investment approximates the amortized cost,
and therefore, there are no unrealized gains or losses as of June 30, 19982001
or 1997.2000.
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
Inventories were comprised of the following at June 30, 1998 and 1997 (in
thousands) :
1998 1997
--------- --------
Raw materials $ 2,169 1,797
Work in progress 546 284
Finished goods 4,932 3,716
________ ________
$ 7,647 5,797
======== ========
Inventories
Inventories net, were comprised of the following as of June 30, 2001 and
2000 (in thousands):
2001 2000
---------------------------
Raw materials $ 7,584 $ 4,826
Work in progress 98 297
Finished goods 22,312 10,679
---------------------------
$29,994 $15,802
===========================
5. PROPERTY, PLANT AND EQUIPMENT, NET
Property, Plant and Equipment
Property, plant and equipment is comprised of the following at June 30,
1998 and 1997 (in thousands):
1998 1997
------------ -----------
Machinery and equipment $ 4,368 2,813
Computer equipment 1,616 1,370
Furniture and fixtures 1,682 709
Vehicles 761 589
Clinical, demonstration and rental equipment 3,302 2,555
Leasehold improvements 505 347
Land 3,196 -
Building under construction 1,076 -
________ ________
16,506 8,383
Accumulated depreciation and amortization (5,395) (3,467)
__________ __________
$ 11,111 4,916
========== ==========
In August 1997 the Company entered into an agreementfollowing as of June 30,
2001 and 2000 (in thousands):
2001 2000
---------------------
Machinery and equipment $ 10,930 $ 8,024
Computer equipment 12,829 9,685
Furniture and fixtures 8,667 5,214
Vehicles 1,219 1,214
Clinical, demonstration and rental equipment 8,194 7,844
Leasehold improvements 663 552
Land 5,333 3,113
Buildings 27,187 9,837
Construction in Process - 4,645
---------------------
75,022 50,128
Accumulated depreciation and amortization (19,930) (13,552)
---------------------
$ 55,092 $ 36,576
=====================
F-10
ResMed Inc And Subsidiaries
Notes to purchase for
approximately $3.2 million, a 173,000ft2 parcel of land in close proximity to
its Australian production facility. It is the Company's intention to develop
the site as its Australian Operations center from fiscal 1999 onwards.
- -F10-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNEConsolidated Financial Statements
June 30, 1998 AND 19972001 and 2000
6. ACCRUED EXPENSES
Accrued Expenses
Accrued expenses at June 30, 1998 and 1997 consist of the following (in
thousands) :
1998 1997
----------- ----------
Service warranties $ 290 348
Relocation provision 190 -
Consulting and legal fees 295 243
Royalties 319 49
Value added taxes due 1,758 730
Employee benefits 1,053 591
Employee withholding taxes 248 210
Deferred revenue 665 -
Accrued foreign currency losses 1,030 -
Other 789 1,366
__________ __________
$ 6,637 3,537
========== ==========
7. LONG-TERM DEBT
As part of an agreement between ResMed and the Australian Federal
Government, ResMed obtained an $870,000 loan facility of which $227,000 and
$548,000 were outstanding at June 30, 19982001 and 1997, respectively.2000 consist of the following (in
thousands):
2001 2000
---------------------------
Service warranties $ 739 $ 601
Consulting and professional fees 809 324
Royalties 290 240
Value added taxes due 6,033 2,520
Employee related costs 4,687 3,087
Deferred revenue 1,388 1,341
Clinical research 75 178
Provision for restructure(a) 375 -
Promotional programs 1,198 -
Other 1,157 933
---------------------------
$16,751 $9,224
===========================
(a) Subsequent to the purchase of MAP Medizin-Technologie GmbH, the Company
has begun limited restructuring of MAP's activities and for the year ended
June 30, 2001, has taken a charge of $550,000 associated with the sale and
closure of MAP's unprofitable French operation. At June 30, 2001, the
provision for restructure was $375,000 representing amounts to be paid on
termination of employees and leases.
7. Long-Term Debt
Long-term debt at June 30, 2001 and 2000 consist of the following (in
thousands):
2001 2000
-----------------------------
4% Convertible subordinate notes due 2006 $150,000 $ -
=============================
On June 20, 2001 the Company issued $150.0 million of 4% convertible
subordinated notes that are due to mature on June 20, 2006. On July 3,
2001, the Company received an additional $30.0 million in over allotments.
This increased the total amount of convertible subordinated notes issued to
$180.0 million.
The loan
facilitynotes are convertible, at the option of the holder, at any time on or
prior to maturity, into shares of common stock of ResMed Inc. The notes are
convertible at a conversion price of $60.60 per share, which is equal to a
conversion rate of 16.5017 shares per $1,000 principal amount of notes,
subject to adjustment.
Interest is to be paid on the notes on June 20 and December 20 of each year,
beginning December 20, 2001.
The Company may redeem some or all of the notes at any time before June 20,
2004 at a redemption price of $1,000 per $1,000 principal amount of notes,
plus accrued and unpaid interest, if any, to the redemption date, if the
closing price of our common stock has exceeded 150% of the conversion price
then in effect for at least 20 trading days within a period of 30
consecutive trading days ending on the trading day before the date of
mailing of the provisional redemption notice. Upon any such provisional
redemption, the Company will make an additional payment in cash equal to
$166.67 per $1,000 principal amount of notes, less the amount of any
interest actually paid on the notes before the provisional redemption date.
F-11
ResMed Inc And Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
7. Long-Term Debt (continued)
The Company may also redeem some or all of the notes at any time on or after
June 22, 2004, but prior to June 20, 2005, at a redemption price equal to
101.6% of the principal amount of notes redeemed, and at any time after June
19, 2005, at a redemption price of 100.8% of the principal amount of notes,
plus in any case accrued and unpaid interest, if any, to the redemption
date, if the closing price of the Company's common stock has exceeded 130%
of the conversion price then in effect for at least 20 trading days within a
period of 30 consecutive trading days ending on the trading day before the
date of mailing of the optional redemption notice.
The notes are general unsecured obligations and accrues interest at 3.8% per annum beginning May 3,
1996 through April 3, 1999.are subordinated to all of
the Company's existing and future senior indebtedness and will be
effectively subordinated to all of the indebtedness and liabilities of the
Company's subsidiaries. The facility is payable in six monthly
installments beginning November 3, 1996. Prior to May 3, 1996,indenture governing the loan was
interest free.notes will not limit
the Company or its subsidiaries from incurring senior indebtedness or other
indebtedness.
8. STOCKHOLDERS' EQUITYStockholders' Equity
Stock Options - The Company has granted stock options to personnel,
-------------
including officers and directors in accordance with both the 1995 Option
Plan and the 1997 Equity Participation Plan.Plan (collectively the "Plans").
These options have expiration dates of ten years from the date of grant and
vest over three years. The Company granted these options with the exercise
price equal to the market value as determined at the date of grant.
In August 1997 as part of the introduction of the 1997 Equity Participation
Plan, the Company cancelled 10,97043,880 options, being all non-issued options
remaining under the 1995 Option Plan.
The following table summarizes option activity:
The following table summarizes options activity
---------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
19982001 Price 19972000 Price 19961999 Price
--------------- --------- -------------- --------- --------------- ------------------------------------------------------------------------------
Outstanding at beginning of year 439,0883,298,022 $10.12 3,142,272 $ 13.97 494,9007.32 $ 13.64 431,5002,403,160 $ 8.724.57
Granted 249,400 24.33 - - 269,800 16.251,569,690 27.27 1,336,900 14.14 1,265,000 11.31
Exercised (73,630) 13.85 (30,660) 8.55 (187,500) 6.21(884,859) 8.98 (967,985) 6.59 (512,688) 4.15
Forfeited (14,068) 20.38 (25,152) 14.15 (18,900) 12.24
_____________ _______ _____________ _______ _____________ _______(130,035) 17.78 (213,165) 10.04 (13,200) 11.32
---------------------------------------------------------------------
Outstanding at end of year 600,7903,852,818 $17.14 3,298,022 $10.12 3,142,272 $ 18.25 439,088 $ 13.97 494,900 $ 13.64
============= ======= ============= ======= ============= =======7.32
---------------------------------------------------------------------
Price range of granted options $ 24-35 -24-$40 $ 13.06-16.3413-$27 $ 10-$12
Options exercisable at end of year 275,8681,240,427 $ 13.52 205,0338.02 1,368,286 $ 13.10 84,7876.92 1,254,126 $ 9.994.00
---------------------------------------------------------------------
- -F11-F-12
ResMed Inc And Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
8. STOCKHOLDERS' EQUITY (CONTINUED)Stockholders' Equity (continued)
The total number of shares of Common Stock authorized for issuance upon
exercise of options and other awards, or upon vesting of restricted or
deferred stock awards, under the 1997 Plan iswas initially established at
250,0001,000,000 and increases at the beginning of each fiscal year, commencing on
July 1, 1998, by an amount equal to 4% of the outstanding Common Stock on
the last day of the preceding fiscal year. The maximum number of shares of
Common Stock issuable upon exercise of incentive stock options granted under
the 1997 Plan, however, cannot exceed 2,000,000. And,8,000,000. Furthermore, the maximum
number of shares which may be subject to options, rights or other awards
granted under the 1997 Plan to any individual in any calendar year cannot
exceed 75,000.300,000.
The following table summarizes information about stock options outstanding
at June 30, 2001.
The following table summarizes information about stock options outstanding
at June 30, 1998.
Weighted Average
Exercise Prices Number Outstanding at Remaining Number Exercisable at
Exercise Prices June 30, 19982001 Contractual Life June 30, 19982001
----------------------------------------------------------------------------------------------------------------------------------
$ 0 - ---------------- --------------------- ---------------- ---------------------
11.00 144,115 6.92 144,115
13.06 5,000 7.88 2,500
16.34 210,045 8.00 129,253
24.00 234,130 9.10$10 735,578 5.35 732,244
$11 - 35.00 7,500$20 1,577,049 7.64 489,510
$21 - $30 1,178,901 9.42 18,673
$31 - $40 347,290 9.75 -
________ ________ ________
600,790 8.19 275,868
======== ======== ========$41 - $50 14,000 9.58 -
----------------------------------------------------------------------------------------------------------------------------------
3,852,818 7.96 1,240,427
----------------------------------------------------------------------------------------------------------------------------------
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
fiscal 1998, 1997 and 1996, respectively.The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock options.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS 123, the Company's net income
would have been reduced to the pro forma amounts indicated below:
-------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
1998 1997 1996
------- ------ ------
Net income (in thousands):
As reported $10,611 $7,465 $4,503$11,630 $22,226 $16,102
Pro forma 9,380 6,467 3,9982,859 17,511 12,951
Basic earnings per common shareshare:
As reported $ 1.460.37 $ 1.040.74 $ 0.640.55
Pro forma 1.29 0.90 0.56$ 0.09 $ 0.58 $ 0.44
Diluted income per common and common equivalent shareshare:
As reported $ 1.410.35 $ 1.020.69 $ 0.630.52
Pro forma 1.25 0.88 0.56$ 0.09 $ 0.54 $ 0.42
-------------------------------------------------------------------------------------------------------------------------------
The fair value of each stock option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
weighted average risk-free interest rates of 5.75% for fiscal 2001, and 6.5%
and 5.8% for fiscal 1998,19972000 and 1996,1999, respectively; no dividend yield; expected
lives of four years; and volatility of 34%61% for 19982001 and 62.7%2000 and 55% for
19971999.
F-13
ResMed Inc And Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2001 and 1996,
respectively.
Pro forma net income reflects only options granted after 1994.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS 123 is not reflected in the pro forma net income amounts presented
above because compensation cost is reflected over the options vesting period
of 3 years and compensation cost for options granted prior to, and not in
connection with, the Company's initial public offering on June 2, 1995 are not
considered.2000
8. Stockholders' Equity (continued)
Preferred Stock - In April 1997, the board of directors authorized 2,000,000
---------------
shares of $0.01 par value preferred stock. No such shares were issued or
outstanding at June 30, 1998.
- -F12-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
8. STOCKHOLDERS' EQUITY (CONTINUED)2001.
Stock Purchase Rights - In April 1997, the Company implemented a plan to
---------------------
protect stockholders' rights in the event of a proposed takeover of the
Company. Under the plan, each share of the Company's outstanding common
stock carries one right to purchase Series A Junior Participating Preferred
Stock (the "Right"). The Right enables the holder, under certain
circumstances, to purchase common stock of the Company or of the acquiring
person at a substantially discounted price ten days after a person or group
publicly announces it has acquired or has tendered an offer for 15%20% or more
of the Company's outstanding common stock. The Rights are redeemable at
$0.01 per Right and expire in 2007.
Common Stock - During fiscal 2000, the Board of Directors declared a two-
------------
for-one split of the Company's common stock, effective March 31, 2000.
Stockholders' equity has been restated for all periods presented to give
retroactive recognition to the stock split by reclassifying from additional
paid-in capital to common stock, the par value of the additional shares as a
result of the stock split.
9. OTHER, NET
Other, net is comprised of the following at June 30, 1998, 1997 and 1996Other, net
Other, net is comprised of the following at June 30, 2001, 2000 and 1999 (in
thousands):
-------------------------------------------------------
2001 2000 1999
-------------------------------------------------------
1998 1997 1996
------------ ----------- ----------
License fees $ 1,272 - 242
Unrealized gain/125 $ 167 $ 58
Gain/(loss) on foreign currency hedging position (1,050) 485 961(2,766) (1,863) 435
Gain/(loss) on foreign currency transactions (2,927) 1,117 1474,747 1,681 (2,888)
Write downback of investments (125) (175)investment - - 300
Other (43) (188) 7
__________ __________ __________(144) (37) (195)
-------------------------------------------------------
$ (2,873) 1,239 1,357
========== ========== ==========1,962 $ (52) $(2,290)
=======================================================
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, of which $242,000 was recognized in fiscal 1996.
In March 1998, the Company granted to a third party licenses to three of the
Company's patents for a non refundablenon-refundable payment of $1,250,000. The license
agreement will allow the third party to manufacture and distribute certain
products featuring the Company's patented technology in the USU.S. homecare
market, additionallymarket. Additionally, the Company will earn royalties on products
manufactured.
10. INCOME TAXES
Income before income taxes for the years ended June 30, 1998, 1997 and
1996,Income Taxes
Income before income taxes for the years ended June 30, 2001, 2000, and
1999, was taxed under the following jurisdictions (in thousands):
---------------------------------------------------
2001 2000 1999
---------------------------------------------------
1998 1997 1996
----------- ---------- -----------
U.S. $ 1,730 4,054 (32)3,482 $ 4,644 $ 4,043
Non-U.S. 14,382 7,033 6,593
__________ __________ __________
$ 16,112 11,087 6,561
========== ========== ==========23,832 29,522 20,534
---------------------------------------------------
$27,314 $34,166 $24,577
===================================================
- -F13-F-14
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNEResMed Inc And Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1998 AND 19972001 and 2000
10. INCOME TAXES (CONTINUED)
Income Taxes (continued)
The provision for income taxes is presented below (in thousands):
------------------------------------------------
2001 2000 1999
------------------------------------------------
1998 1997 1996
------------ ----------- ----------
Current:
Federal $ (13) (20) -2,938 $ 1,396 $ 772
State (148) 479 -203 77 174
Non-U.S. 6,078 4,223 1,958
__________ __________ __________
5,917 4,682 1,958
__________ __________ __________14,790 10,390 6,980
------------------------------------------------
17,931 11,863 7,926
------------------------------------------------
Deferred:
Federal (226) 366 -(652) 390 360
State 94 (61) -90 14 (12)
Non-U.S. (284) (1,365) 100
__________ __________ __________
(416) (1,060) 100
__________ __________ __________(1,685) (327) 201
------------------------------------------------
(2,247) 77 549
------------------------------------------------
Provision for income taxes $ 5,501 3,622 2,058
========== ========== ==========$15,684 $11,940 $8,475
================================================
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. federal income tax rate of 34% to
pretax income as a result of the following (in thousands):
------------------------------------------------
2001 2000 1999
------------------------------------------------
1998 1997 1996
------------ ----------- -----------
Computed "expected"'expected' tax expense $ 5,478 3,770 2,2319,287 $11,616 $8,356
Increase (decrease) in income taxes
resultingResulting from:
Non-deductible expenses 29 129 9460 715 302
Research and development credit (371) (388) (349)(781) (430) (250)
Tax effect of intercompany dividends (321) (34) -(3,885) (508) 13
Utilization of net operating loss carryforwards (22) (26) (8)(5) (4) -
Change in valuation allowance 47 - 1294,431 22 71
Effect of non-U.S. tax rates 415 (115) 2264 714 455
State income taxes (36) 264356 235 131
In-process research and development write-off 6,010 - -
Provision for restructure 187 - -
Other 282 22 (180)
__________ __________ __________
$ 5,501 3,622 2,058
========== ========== ==========(380) (420) (603)
------------------------------------------------
$15,684 $11,940 $8,475
================================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
comprised of the following at June 30, 2001 and 2000 (in thousands):
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are comprised
of the following at June 30, 1998 and 1997 (in thousands):------------------------------
2001 2000
------------------------------
1998 1997
------------ -----------
Deferred tax assets:
Employee benefit obligations $ 263 133573 $ 534
Provision for service warranties 95 135203 203
Provision for doubtful debts 317 254
Net operating loss carryforwards 383 6512,206 79
Deferred foreign tax credits 334 -
Write down of investments 102 -7,193 970
Accrual for legal costs 183 4795 76
Intercompany profit in inventories 1,658 1,0083,492 2,188
Property, plant and equipment 189 290
Other accruals 634 345
__________ __________
3,652 2,751663 418
------------------------------
14,925 5,012
Less valuation allowance (16) (651)
__________ __________(5,592) (86)
------------------------------
Deferred tax assets 3,636 2,100
__________ __________$ 9,333 $4,926
------------------------------
- -F14-F-15
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNEResMed Inc And Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1998 AND 19972001 and 2000
10. Income Taxes (continued)
10. INCOME TAXES (CONTINUED)-------------------------------
2001 2000
-------------------------------
1998 1997
------------ -----------
Deferred tax liabilities:
Patents (135) (91)
Government grants receivable (138) (141)
Unamortized$ (382) (413)
Capitalized software (495) (453)
Unrealized gain on foreign exchange premiums (184) (227)currency options (179) (306)
Unrealized foreign exchange gains (250) - (196)
Undistributed German income (243) (366)
Royalties receivable (58)(2,104) (992)
Deferred tax deductible goodwill amortization (1,698) -
Other receivables - (71)(197) (168)
Other (110) (48)
__________ __________(126) (37)
-------------------------------
Deferred tax liabilities (1,118) (944)
__________ __________(5,181) (2,565)
-------------------------------
Net deferred tax asset $ 2,518 1,156
========== ==========4,152 2,361
===============================
The valuation allowance at June 30, 1998 and 1997,2001, primarily relates to a provision
for uncertainty as to the utilization of deferred foreign tax credits of
$4,322,000 and net operating loss carryforwards.carryforwards of $1,046,000 relating to
MAP. The net change in the valuation allowance was a declinean increase of $635,000,$5,506,000
for the year ended June 30, 2001, in comparison to an increase of $22,000
and an increase of $475,000 and $125,000$48,000, for the years ended June 30, 1998, 19972000 and 1996,1999,
respectively. The measurement of deferred 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
1998, 19972001, 2000 and 19961999 were reduced by $22,000,
$27,000$5,000, $4,000 and $8,000,$0, respectively,
through the utilization of net operating loss carryforwards.
Based on the Company's history of taxable income and its
projection of future earnings, management believes that it is more likely than
not that sufficient taxable income will be generated in the foreseeable future
to realize the net deferred tax asset.
At June 30, 1998, ResMed has2001, the net operating loss carryforwards for U.S.
federal income tax purposes of approximately $1,079,000 which are availablerelate to offset future U.S. federal taxable income, if any, through 2010. These losses
have been recognized at June 1998 as the entity involved has generated taxable
income in both fiscal 1998MAP,
Singapore and 1997.Malaysia.
11. EMPLOYEE RETIREMENT PLANS
ResMedEmployee Retirement Plans
The Company contributes to a number of employee retirement plans for the
benefit of its employees. These plans are detailed as follows:
Australia ResMed- The Company contributes to defined contribution pension plans
---------
for each employee 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. ResMedThe Company contributes to the plans at the rate of 6% - 6.5%8% of the
salaries of all Australian employees. Total Company contributions to the
plans for the years ended June 30, 1998, 19972001, 2000, and 19961999 were $362,000, $318,000$814,000,
$632,000 and $374,000,$457,000, respectively.
United Kingdom During fiscal 1998, ResMed established- The Company contributes to a defined contribution plan for
--------------
each permanent United Kingdom employee. All employees, after serving a
three month qualifying period, are entitled to benefit on retirement,
disability or death. Employees may contribute additional funds to the plan.
ResMedThe Company contributes to the plans at the rate of 3% of the salaries.
Total Company contributions to the plan were $5,000$7,000, $8,000 and $4,000$8,000 in
fiscal 19982001, 2000, and 19971999 respectively.
- -F15-F-16
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNEResMed Inc. And Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1998 AND 19972001 and 2000
11. EMPLOYEE RETIREMENT PLANS (CONTINUED)Employee Retirement Plans (continued)
United States - The Company sponsors a defined contribution pension plan
-------------
available to substantially all domestic employees. Company contributions to
this plan are based on a percentage of employee contributions to a maximum
of 3% of employee salaries. The cost of this plan to the Company was
$54,000$158,000, $123,000 and $39,000$96,000 in fiscal 19982001, 2000 and 19971999 respectively.
12. GEOGRAPHIC SEGMENT INFORMATION
ResMedSegment Information
The Company operates primarilysolely in the sleep disordered breathing sector of the
respiratory medicine industry. Geographic segments have been classified into three regions; America, EuropeThe Company therefore believes that, given
the single market focus of its operations and Australia/Restthe inter dependence of World. America includesits
products that the U.S., CanadaCompany operates as a single operating segment. The
Company assesses performance and South
America, Australia/Restallocates resources on the basis of World includes Australia, New Zealand, South Africaa
single operating entity.
Financial information by geographic area for the years ended June 30, 2001,
2000 and Asia.
Financial information by geographic region for the years ended June 30, 1998, 1997
and 1996,1999, is summarized below (in thousands):
-----------------------------------------------------------------------------
Rest of
U.S.A Germany Australia France World Total
-----------------------------------------------------------------------------
Corporate,
Australia/ unallocated
Rest of and
America Europe World eliminations Total
----------- ---------- ----------- ------------- ----------
1998
- -------------------------
Net revenues
2001
Revenue from external customers $74,981 25,646 5,318 17,592 31,619 $155,156
Long lived assets $30,475 3,063 25,130 555 1,725 $ 34,319 23,327 8,873 - 66,519
========== ========== ========== ========== ==========
Income60,948
=============================================================================
2000
Revenue from operations $ 2,568 9,680 6,264 (1,149) 17,363
========== ========== ========== ========== ==========
Identifiableexternal customers $58,419 14,317 4,444 11,949 26,486 $115,615
Long lived assets $ 13,440 12,472 27,217 3,067 56,196
========== ========== ========== ========== ==========
1997
- -------------------------
Net revenues8,126 1,248 27,595 622 1,863 $ 21,263 21,500 6,417 - 49,180
========== ========== ========== ========== ==========
Income39,454
=============================================================================
1999
Revenue from operationsexternal customers $47,229 13,181 3,489 6,978 17,750 $ 1,615 9,084 (921) (1,451) 8,327
========== ========== ========== ========== ==========
Identifiable88,627
Long lived assets $ 8,703 8,677 22,755 8,798 48,933
========== ========== ========== ========== ==========
1996
- -------------------------
Net revenues2,525 816 26,611 400 1,429 $ 16,830 12,400 5,332 - 34,562
========== ========== ========== ========== ==========
Transfer among areas - - 4,062 (4,062) -
========== ========== ========== ========== ==========
Total revenues $ 16,830 12,400 9,394 (4,062) 34,562
========== ========== ========== ========== ==========
Income from operations $ 1,504 5,066 (2,771) (204) 3,595
========== ========== ========== ========== ==========
Identifiable assets $ 5,508 6,671 18,241 11,973 42,393
========== ========== ========== ========== ==========31,781
=============================================================================
- -F16-F-17
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNEResMed Inc And Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1998 AND 19972001 and 2000
12. GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)Segment Information (continued)
Net revenues which represent net sales to unaffiliatedfrom external 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. Identifiablecustomer. Long-lived assets of geographic areas are those assets used in the
Company's operations in each geographical area and excludes Patents, Deferredpatents,
deferred tax assets and Goodwill.goodwill.
13. RELATED PARTY TRANSACTIONS
For the years endedCommitments
The Company leases buildings, motor vehicles and office equipment under
operating leases. Rental charges for these items are expensed as incurred.
At June 30, 1998, 1997 and 1996, consulting service fees
in the amount of $278,000, $353,000 and $314,000, were paid to Dr. Colin
Sullivan, a shareholder. Dr. Sullivan provides consulting services to2001 the Company pursuant to a consulting agreement that terminates on December 31,
2000 (subject to extension for an additional five year term) for which he
receives annualhad the following future minimum lease payments
of $186,000. The Company also reimburses Dr.
Sullivan for his out-of-pocket expenses in performing such consulting
services.
The Company has also agreed to pay to Dr. Sullivan $130,000 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.
14. COMMITMENTS
The Company leases buildings, motor vehicles and office equipment under
operating leases. Rental charges for these items are expensed as incurred.
At June 30, 1998 the Company had the following future minimum lease payments
under non cancelable operating leases.
Operating
leases
Years $ '000
- ------------------------------ ----------
1999 $ 713
2000 380
2001 293
2002 276
2003 256
Thereafter 668
_________
Total minimum lease payments $ 2,586
=========
under non-cancelable operating leases (in thousands):
----------------------------------------------------------------------------
Operating Sub lease Total net minimum
Years Leases rental income lease payments
----------------------------------------------------------------------------
2002 $1,720 $ 330 $ 1,390
2003 1,540 245 1,295
2004 1,179 251 928
2005 529 257 272
2006 439 130 309
Thereafter 468 - 468
----------------------------------------------------------------------------
Total minimum lease payments $5,875 $ 1,213 $ 4,662
============================================================================
Rent expenses under operating leases for the years ended June 30, 1998,
19972001, 2000
and 19961999 were approximately $607,000, $585,000$1,087,000, $744,000 and $467,000,$789,000, respectively.
- -F17-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
15. BUSINESS ACQUISITION
Priess14. Business Acquisition
On February 7, 199616, 2001 the Company's fully owned German subsidiarySubsidiary, ResMed
PriessBeteiligungs GmbH, acquired all the business and associated assetscommon stock of Dieter W Priess
Medizintechnik (Priess), its German distributorMAP Medizin-Technologie
GmbH ("MAP'') for $6,350,000 in cash from a
4% stockholdertotal consideration, including acquisition costs, of the Company. Priess is based in Moenchengladbach, Germany
and is engaged in the distribution and sale of respiratory products.$55.4
million.
The acquisition has been accounted for as a purchase and accordingly, the
results of operations of PriessMAP have been included in the Company's
consolidated financial statements from February 7, 1996.16, 2001. The excess of the
purchase price over the fair value of the net identifiable assets acquired
of $4,461,000$47.1 million has been recorded as goodwill and is being amortized on a
straight-linestraight line basis over 1520 years.
Purchased in-process research and development of $17,677,000 was expensed
upon acquisition of MAP because technological feasibility of the products
under development had not been established and no further alternative uses
existed. The purchase agreement also providesvalue of in process technology was calculated by identifying
research projects in areas for additional paymentswhich technological feasibility had not been
established, estimating the costs to develop the purchased in process
technology into commercially viable products, estimating the resulting net
cash flows from such products, discounting the net cash flows to present
value, and applying the reduced percentage completion of upthe projects
thereto. The discount rates used in the analysis were between 27% and 33%
and were based on the risk profile of the acquired assets.
All purchased research and development projects related to $4,000,000 over four years contingent on future salesmedical equipment
for the treatment of sleep disordered breathing, primarily relating to the
development of mask interface systems and autotitrating devices for the
treatment of obstructive sleep apnea and associated disorders. Key
assumptions used in the analysis included gross margins ranging from 70% to
80%. As of the date of acquisition, the mask interface systems are expected
to be completed and commercially available in 2002 and versions of the
autotitrating devices between 2003 and 2005. These projects have estimated
costs to complete totalling approximately $2.0 million.
F-18
ResMed Inc And Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
14. Business Acquisition (Continued)
The Company believes that the assumptions used to value the acquired
intangible assets were reasonable at the time of acquisition. No assurance
can be given, however, that the underlying assumptions used to estimate
expected project revenues, of Priess.
On December 5, 1996 and October 9, 1997 in accordancedevelopment costs or profitability, or events
associated with such projects, will transpire as estimated. For these
reasons, among others, actual results may vary from the acquisition
contract the Company paid a total of $2,000,000 to Priess as required on
achievement of certain sales targets, further additional payments, if any,
will be accounted for as additional goodwill.
$ '000
----------
Fair value of assets acquired
Inventory $ 1,524
Property plant and equipment 532
_________
2,056
_________
Goodwill on acquisition 6,461
_________
Cash consideration $ 8,517
=========
projected results.
The following unaudited pro formapro-forma financial information presents the
combined results of operations of the Company and PriessMAP as if the acquisition
had occurred as of the beginning of the yearyears ended June 30, 19962001 and 2000,
respectively and after giving effect to certain adjustments, including
amortization of goodwill additional
depreciationand increased interest expense reduced interest income from use of IPO funds relating
toassociated with debt
funding the acquisition, and related income tax effects.acquisition. The pro formapro-forma financial information does not
necessarily reflect the results of operations that would have occurred had
the Company and PriessMAP constituted a single entity during such periods.
Year ended
June 30,1996
$ '000
-------------
Net revenue (in thousands) $ 38,558
Net income (in thousands) 5,476
Net income per common and common equivalent share $ 0.76
- -F18-years.
The pro-forma net income for the year ended June 30, 2001 excludes non-
recurring acquisition charges of $17,677,000 for purchased in-process
research and development and $550,000 for restructuring of MAP's French
operations.
(In thousands except per share data)
-----------------------
2001 2000
-----------------------
Net revenue $172,250 $138,396
Net income 28,556 17,612
Basic earnings per share $ 0.92 $ 0.58
Diluted earnings per share $ 0.85 $ 0.55
Basic shares outstanding 31,129 30,153
Diluted shares outstanding 33,484 32,303
On January 31, 2000, the Company's wholly owned Swedish subsidiary, ResMed
Sweden AB, acquired the business and associated assets of Einar Egnell AB,
its Swedish distributor for $576,000 in cash. The acquisition has been
accounted for as a purchase and accordingly, the results of operations of
the Einar Egnell business have been included in the Company's consolidated
financial statements from January 31, 2000. The excess of the purchase
price over the fair value of the net identifiable assets acquired of
$229,000 has been recorded as goodwill and is being amortized on a straight
line basis over five years.
In fiscal 1999, the Company paid $2,024,000 as a final deferred goodwill
payment on the 1996 acquisition of its German distributor.
15. Comprehensive Income
As of July 1, 1999, the Company adopted Statement of Financial Accounting
Standards No. 130, 'Reporting Comprehensive Income' which established
standards for the reporting and display of comprehensive income and its
components in the financial statements. The only component of comprehensive
income that impacts the Company is foreign currency translation adjustments.
The net loss associated with foreign currency translation adjustments for
the year ended June 30, 2001 was $16.4 million compared to a net loss of
$7.7 million for the year ended June 30, 2000 and net gain of $2.3 million
for the year ended June 30, 1999.
F-19
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNEResMed Inc And Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1998 AND 19972001 and 2000
15. BUSINESS ACQUISITION (CONTINUED)
Premium Medical Purchase
On June 12, 1996 the Company's fully owned French subsidiary ResMed SA
acquired the business and associated assets of Premium Medical SARL (Premium),
its French distributor for $348,000 in cash. Premium was based in Paris,
France and was 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 the Premium business have been included in the
Company's consolidated financial statements from June 12, 1996. The excess of
the purchase price over the fair value of the net identifiable assets acquired
of $115,000 has been recorded as goodwill and is being amortized on a
straight-line basis over 5 years.
Year Ended
June 30,
1996
$ 000
-----------
Fair value of assets acquired
Inventory $ 229
Property plant and equipment 4
_________
233
_________
Goodwill on acquisition 115
_________
Cash consideration $ 348
=========
Comprehensive Income (Continued)
Comprehensive income/(loss) for the years ended June 30, 2001, June 30, 2000
and June 30, 1999 was ($4.8) million, $14.5 million and $18.4 million,
respectively. The Company does not provide for U.S. income taxes on foreign
currency translation adjustments since it does not provide for such taxes on
undistributed earnings of foreign subsidiaries. Accumulated other
comprehensive loss at June 30, 2001 and June 30, 2000 consisted of foreign
currency translation adjustments and represent unrealized losses of $29.6
million and $13.2 million, respectively.
16. LEGAL ACTIONSLegal Actions
The Company is currently engaged in significant patent litigation relating to the enforcement
and defense of certain of its patents.
In 1992 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, Inc. and in May
1994, was revoked by an Australian appeals court in reliance on issues
specific to Australian patent law. The Company's market share in Australia
decreased from 1995 and the Company expects that its market share in Australia
will continue to decrease. The Company on May 29, 1997 paid $246,000 as total
and final settlement of costs associated with the litigation.
In January 1995, the Company filed a complaint for patent infringement in the United States against Respironics. The complaint seeksDistrict
Court for the Southern District of California seeking monetary damages from
and injunctive relief against Respironics resulting from itsfor alleged infringement of three
of the Company'sResMed patents. In February 1995, Respironics filed a complaint in the
United States District Court for the Western District of Pennsylvania
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 beenwere combined and are proceeding in the
United States District Court for the Western District of Pennsylvania. - -F19-
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
16. LEGAL ACTIONS (CONTINUED)
In
June 1996, the Company initiated a further action in Pennsylvaniafiled an additional complaint against Respironics regarding allegedfor
infringement of a fourth ResMed patent, granted
June 4, 1996, related to the Company's delay timer feature. This actionand that complaint was
again consolidated
with the ongoing case such that the two remaining actions
are proceeding together. On July 1, 1997 the Court grantedearlier action. As of this date, Respironics a
motion forhas brought three
partial summary judgment holding that Respironics' accused products
do not infringe onemotions for non-infringement of the four patents in suit. Subsequently,ResMed patents;
the court
undertook a de novo reviewCourt has granted each of the motions. In December 1999, in response to
the Court's ruling on Respironics' third summary judgment motion, andthe
parties jointly stipulated to a dismissal of charges of infringement under
the fourth ResMed patent, with ResMed reserving the right to reassert the
charges in the event of a favorable ruling on January 27, 1998 confirmed the
initial ruling.appeal. It is ResMed's
intention to seek reversalappeal the summary judgment rulings after a final judgment in
the consolidated litigation has been entered in the District Court
proceedings.
In January 2001, MAP Medizin-Technologie GmbH filed a lawsuit in the Civil
Chamber of Munich Court against Hofrichter GmbH seeking actual and exemplary
monetary damages for the unauthorized and infringing use of the ruling byCompany's
trademarks and patents. An initial decision has been made in favor of MAP.
Hofrichter has filed an appeal and have sort Court determination that the
MAP patents do not apply to certain Hofrichter products.
While the Company is prosecuting the above actions, there can be no
assurance that the Company will be successful.
On March 31, 2001, we filed a lawsuit in the United States District Court of Appeals
for the Federal Circuit onceSouthern District of California against MPV Truma and Tiara Medical
Systems, Inc., seeking actual and exemplary monetary damages and injunctive
relief for the unauthorized and infringing use of our trademarks, trade
dress, and patents related to our Mirage mask. The parties reached a
final judgement has been rendered. On June 18, 1998, a Magistrate Judge made
a Report and Recommendation that the Court make an order granting Respironics
a further motion for partial summary judgement holding that Respironics'
accused products do not infringe anotherconfidential out of the four patents in suit. That
Report and Recommendation is awaiting a decision by the Judge in the
proceedings as to whether to make an order granting the motion for partial
summary judgement.
Oncourt settlement on April 9, 2001.
In May 1995, Respironics and its Australian distributor filed a Statement of
Claim against the Companyus and DrDr. Farrell in the Federal Court of Australia.
The Statement of Claim allegesAustralia, alleging
that the Companywe 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.practices. The Statementstatement of Claim assertsasserted
damage claims for lost profits on sales in the aggregate amount of
approximately $1,000,000, constituting lost profit$1,000,000. The parties reached a confidential out of court
settlement of this Action 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.
- -F20-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DATED September 14, 1998 ResMed Inc.
By: /S/ PETER C FARRELL
Peter C. Farrell, President and Chief Executive Officer
(Principal Executive Officer)
By: /S/ ADRIAN M SMITH
Adrian M. Smith, Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
/S/ PETER C FARRELL Chief Executive Officer, President, September 14, 1998
__________________________ Chairman of the Board (Principal
Peter C. Farrell Executive Officer)
/S/ CHRISTOPHER G ROBERTS
__________________________
Christopher G. Roberts Director September 14, 1998
/S/ MICHAEL A QUINN
__________________________
Michael A. Quinn Director September 14, 1998
/S/ GARY W PACE
__________________________
Gary W. Pace Director September 14, 1998
/S/ DONAGH MCCARTHY
__________________________
Donagh McCarthy Director September 14, 1998
- -27-April 16, 2001.
F-20
Schedule II
--------------------------------------------------------------------------------
ResMed Inc and Subsidiaries
Valuation and Qualifying Accounts and Reserves
Years Ended June 30, 2001, 2000 and 1999
(in thousands)
RESMED INC AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS)
-----------------------------------------------------------------------
Balance at Charged to Other Balance at
beginningBeginning of costs and (deductions) end of
Period expenses period
expenses additions period
------------- ---------- ------------ ---------------------------------------------------------------------------------
Year ended June 30, 19982001
Applied against asset account $833 681 (622) 892
Allowance for doubtful accounts
=======================================================================
Year ended June 30, 2000
Applied against asset account
Allowance for doubtful accounts $ 277 79 (108) 248
======= ======= ======= =======$421 632 (220) 833
=======================================================================
Year ended June 30, 19971999
Applied against asset account
Allowance for doubtful accounts 175 102 - 277
======= ======= ======= =======
Year ended June 30, 1996
Applied against asset account
Allowance for doubtful accounts 144 31 - 175
======= ======= ======= =======$248 348 (175) 421
=======================================================================
- -28-See accompanying independent auditor's report.
EXHIBIT INDEX
a) The following documents are filedExhibit Index
2.1 Sale and Assignment Agreement dated as part of this report:
1.1 Consolidated Financial StatementsFebruary 16, 2001, between
ResMed Inc, ResMed Beteilingungs GmbH and Schedule.
The consolidated financial statements and schedulethe shareholders of the Company and its
consolidated subsidiaries are set forth in the "Index to Consolidated
Financial Statements" under Item 8 of this report.
3. Exhibits. The following exhibits are filed as a part of this report:MAP
Medizin-Technologie GmbH*
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**
4.2 Rights agreement dated as of April 23, 1997***
4.3 Indenture dated as of June 20, 2001, between ResMed Inc and American
Stock Transfer & Trust Company
4.4 Registration Rights Agreement dated as of June 20, 2001, by and between
ResMed Inc, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Deutsche Banc Alex Brown Inc., William Blair & Company,
L.L.C., Macquarie Bank Limited and UBS Warburg LLC
10.1 1995 Stock Option Plan**
10.2 1997 Equity Participation Plan****
10.3 Licensing Agreement between the University of Sydney and ResMed Limited
dated May 17, 1991, as amended**
10.4 Consulting Agreement between Colin Sullivan and ResMed Limited effective
from 1 January 19981998*****
10.5 Loan Agreement between the Australian Trade Commission and ResMed
Limited dated May 3, 1994**
10.6 Lease for 82 Waterloo Road, Sydney, Australia*
10.7 Lease for 10121 Carroll Canyon Road, San Diego 92131-1109, USAU.S.A.*****
11.1 Statement re: Computation of EarningEarnings per Common Share
16.1 Letter regarding change in Certifying Accountant*
21.1 Subsidiaries of the Registrant
23.1 Independent Auditors' Consent and Report on Schedule
of KPMG Peat Marwick LLP
27.1 Financial Data Schedule------------------------------
* Incorporated by reference to the Registrant's Report on Form 8-K dated
March 2, 2001
** 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 from the registrants ReportRegistrants' Registration Statement
on Form 8-K (File
No. 0-26038).8-A12G filed April 25, 1997.
**** Incorporated by reference from the Registrant's 1997 Proxy Statement
(File No. 0-26038).
b)***** Incorporated by reference from the Registrant's Report on Form 8-K
None
Exhibit 10.4
EFFECTIVE FROM: 1 January 1998
BETWEEN
RESMED LIMITED
AND
COLIN EDWARD SULLIVAN
FURTHER RESTATED CONSULTANCY AGREEMENT
THIS FURTHER RESTATED CONSULTING AGREEMENT is effective from 1st day of
January 1998.
BETWEEN
RESMED LIMITED, A.C.N. 003 765 142 of 82 Waterloo Road, North Ryde, NSW
("ResMed")
AND
COLIN EDWARD SULLIVAN of 25 Wharf Road, Birchgrove in the State of New South
Wales, University Professor, (the "Consultant")
WHEREAS
A. ResMed carries on business as a manufacturer of health care equipment,
with particular focus on sleep disordered breathing.
B. The Consultant is Professor of Medicine at the University of Sydney
("the University") and Director of the Sleep Disorders Centre at the Royal
Prince Alfred Hospital, is generally recognised as the pioneer of the
treatment of obstructive sleep apnoea by means of nasal CPAP.
C. ResMed wishes to continue the engagement of the Consultant to provide
consulting services as more particularly described herein to ResMed.
D. ResMed and the Consultant are parties to a Non-Competition Agreement
and a Consultancy Deed both10-K
dated 8 October 1990, a letter form agreement
dated 19 April 1991 and a Consultancy Agreement dated 1 September 1993 and an
Amended and Restated Consultancy Agreement dated 2 September 1994 (the "Prior
Agreements").
E. It has been agreed that the rights and obligations between the parties
should be consolidated in this Further Restated Consultancy Agreement with the
intention that it supersede the Prior Agreements.
- 2 -
IT IS AGREED
1. DEFINITIONS
1.1 "CPAP" means the fields comprising the diagnosis and treatment of
snoring and sleep apnea and other conditions which can be treated by nasal
continuous positive airway pressure and the diagnosis and treatment of sleep
disordered breathing.
1.2 "Confidential Information" means all information and data (including
any copy or extract made of or from such information or data) concerning the
operations, dealings, organizations, business, finance, transactions,
customers, trade secrets, prospects, markets, scientific formulae, designs,
drawings, know-how, manufacturing processes and affairs of ResMed and any
other intellectual property ResMed in whatever form including, without
limitation, all such information and data recorded or stored by means of
mechanical, electronic or other device.
2. CONSULTANCY
2.1 The Consultant will provide to ResMed, and ResMed will engage the
Consultant to provide to it, for the term of this Agreement and for the
consideration expressed in Clause 4, the following consulting services:
2.1.1 to conduct experimental and investigative work in relation to
CPAP and devices related to the diagnosis and treatment of sleep disordered
breathing;
2.1.2 to attend product development and research meetings of ResMed's
staff as requested by ResMed;
2.1.3 to participate and contribute to intellectual property rights
protection activities;
2.1.4 to give lectures and talks to professional bodies and actual
and potential customers as requested by ResMed;
- 3 -
2.1.5 to provide such other consulting services to ResMed as it may
reasonably request and the Consultant is willing to provide.
2.2 ResMed recognises that the Consultant has academic and clinical
responsibilities and accordingly ResMed shall take reasonable account of these
other responsibilities in making requests under Clauses 2.1.2, 2.1.3, 2.1.4
and 2.1.5.
2.3 The services described in sub-clauses 2.1.1, 2.1.2, 2.1.3 and 2.15 are
hereinafter called the "R&D Services" and the services described in sub-clause
2.1.4 are hereinafter called the "Marketing & Promotional Services".
3. NON-COMPETITION
3.1 In consideration of the amount paid and to be paid by ResMed to the
Consultant pursuant to this Agreement (including Clause 3.2) the Consultant:
(a) acknowledges that the contact he establishes with clients of
ResMed is of great value to ResMed;
(b) agrees that he shall not without the prior written consent of
ResMed participate assist or otherwise be concerned directly or indirectly in
any capacity in any CPAP business, or sleep disordered breathing diagnosis or
treatment business or related devices business or own or control directly more
than 10% of the shares or other securities of a corporation or trust carrying
on a CPAP business or sleep disordered breathing diagnosis or treatment
business or related devices business or act as consultant or adviser to any
other company, person, firm, organisation or body in the field of CPAP, sleep
disordered breathing diagnosis or treatment business or related devices
business during the term of this Agreement and for a period of twenty-four
months thereafter provided that nothing herein shall prevent the Consultant
from continuing his academic and clinical responsibilities of a like nature to
those pertaining at the date of this Agreement.
- 4 -
3.2 In consideration for the Consultant's covenant not to compete for the
period of twenty-four months after the term of this Agreement but subject to
the Consultant not having breached such covenant ResMed agrees to pay to the
Consultant the sum of A$100,000 at the expiration of twelve months, and a
further sum of A$100,000 at the expiration of twenty-four months, after the
term of this Agreement.
4. CONSIDERATION
4.1 ResMed shall pay to the Consultant in consideration for him entering
and complying with this Agreement: A$75,000 per quarter of ResMed's fiscal
year (or such other amount as the parties may agree from time to time); and
4.2 ResMed will pay directly, or reimburse to the Consultant, agreed
expenses incurred or to be incurred by the Consultant in the course of or
arising in relation to the R&D Services or the Marketing and Promotional
Services.
5. USE OF NAME
5.1 The parties acknowledge that ResMed is the proprietor of the trademark
"SULLIVAN" and uses that mark extensively. In addition the Consultant
authorises ResMed to use the name "SULLIVAN" generally in connection with its
business and CPAP and CPAP related products and sleep disordered breathing
diagnosis and treatment products and related products.
6. TERM
6.1 This Agreement is effective from 1 January 1998 and will continue
until 31 December 2000, and may be renewed for a further period of five (5)
years by mutual agreement between the parties.
- 5 -
6.2 In the event of the death or permanent disablement of the Consultant
during the term of this Agreement, this Agreement shall be automatically
terminated but in such event ResMed will pay to the Consultant or his legal
personal representatives an amount equal to 50% of the payments which would
otherwise have been due to the Consultant under Clause 4, for the balance of
the term of this Agreement. If such balance is less than twelve (12) months,
then ResMed will pay 50% of the payments calculated in the manner set out in
Clause 4 for twelve (12) months after termination.
7. CONFIDENTIAL INFORMATION AND INTELLECTUAL PROPERTY
7.1 The Consultant acknowledges that all Confidential Information which
may come into the Consultant's possession during the consultancy is and
remains the property of ResMed.
7.2 The Consultant shall, upon termination of the Consultant's
appointment, return all property or Confidential Information belonging to
ResMed which has come into the Consultant's possession in the course of the
Consultant's consultancy, whether or not originally supplied to the Consultant
by ResMed.
7.3 The Consultant shall not at any time disclose to any person (other
than a Director of ResMed or a person approved by ResMed) any Confidential
Information which may come into his possession and he shall not make use of
any such Confidential Information to gain directly or indirectly any improper
advantage to himself or any other person.
7.4 The Consultant hereby:
(a) agrees to disclose to ResMed any discovery, invention, secret process
or improvement in procedure made, developed or discovered by the Consultant
whilst a consultant to ResMed in connection with or in any way affecting or
relating to CPAP or the diagnosis or treatment of sleep disordered breathing;
(b) assigns to ResMed all copyright, patent rights or other proprietary
rights attaching to such discovery, invention, secret process or improvement;
- 6 -
(c) agrees to:
(i) apply or join in applying (at the expense of ResMed) for letters
patent or other similar protection in Australia or in any other part of the
world for any such discovery, invention, secret process or improvement; and
(ii) execute all instruments and do all things necessary for vesting the
said letters patent or other similar protection when obtained and all right
and title to and interest in such discovery, invention, secret process or
improvement in ResMed or its nominee;
(d) appoints ResMed as his attorney to execute on his behalf any
instrument and to do any act or thing necessary for the purpose of giving to
ResMed or its nominee the full benefit of the provisions of this clause; and
(e) agrees that unless otherwise agreed by the Parties in writing this
Agreement shall be conclusive evidence of ResMed's authority to execute any
instrument or do any act or thing necessary to give to ResMed or its nominee
the full benefit of this clause.
8. INDEMNITY
8.1 ResMed will indemnify and hold harmless the Consultant against all
actions, suits, claims, demands, losses, costs and expenses incurred by the
Consultant which are caused by or arise out of the defects or alleged defects
in the design or manufacture of CPAP or CPAP related products and products for
the diagnosis or treatment of sleep disordered breathing or related products
sold or made available by ResMed.
8.2 Further to Clause 8.1, ResMed will cause its product liability
insurance policies in force during the term of this Agreement to be endorsed
to cover the Consultant as a co-insured.
9. DISPUTE RESOLUTION
- 7 -
9.1 Any dispute between the parties in relation to any matters the subject
of this Agreement which cannot be resolved by negotiation shall be submitted
to Arbitration under the rules of the Australian Commercial Disputes Centre
Ltd and the outcome of that Arbitration will be final and binding on both
parties.
10. CONTINUITY
10.1 Not later than six (6) months prior to the end of the term of this
Agreement the parties will enter into negotiations in good faith with a view
to continuing the provision of consulting services by the Consultant to ResMed
for a further term.
11. PRIOR AGREEMENTS
11.1 The Prior Agreements are terminated by mutual agreement.
IN WITNESS WHEREOF the parties have duly executed this Agreement
SIGNED for and on behalf of )
RESMED LIMITED )
in the presence of: )
/S/ ADRIAN M SMITH /S/ CHRISTOPHER G ROBERTS
__________________________ ____________________________
Signature of Witness Signature of Authorised Person
Adrian M Smith Christopher G Roberts
__________________________ ____________________________
Name of Witness (Print) Name of Authorised Person
Company Secretary Director
Office Held Office Held
SIGNED by )
COLIN EDWARD SULLIVAN )
in the presence of: )
/S/ KEN MCDONALD /S/ COLIN EDWARD SULLIVAN
__________________________ ____________________________
Signature of Witness Signature of COLIN EDWARD SULLIVAN
Ken McDonald
__________________________
Name of Witness (Print)
Exhibit 10.7
STANDARD INDUSTRIAL LEASE
(NET)
SCRIPPS RANCH BUSINESS CENTER
WESTERN SALT COMPANY,
A CALIFORNIA CORPORATION
"LANDLORD"
AND
RESMED CORP.,
A MINNESOTA CORPORATION
"TENANT"
TABLE OF CONTENTS
SECTION PAGE
1. BASIC LEASE PROVISIONS. 1
2. DEFINITIONS. 2
3. PREMISES. 6
4. TERM; DELIVERY OF PREMISES. 7
5. RENT. 8
6. SECURITY DEPOSIT. 10
7. USE. 10
8. MAINTENANCE, REPAIRS AND ALTERATIONS. 12
9. TAXES 14
10. UTILITIES. 14
11. INSURANCE. 15
12. WAIVER AND INDEMNITY. 17
13. DAMAGE AND DESTRUCTION. 18
14. CONDEMNATION. 20
15. ASSIGNMENT AND SUBLETTING. 21
16. DEFAULT BY TENANT; REMEDIES. 23
17. TENANT'S INSOLVENCY. 25
18. DEFAULT BY LANDLORD. 27
19. SUBORDINATION AND ESTOPPEL. 27
20. HAZARDOUS MATERIALS. 29
21. NOTICE. 30
22. OTHER TERMS AND CONDITIONS. 30
23. GENERAL PROVISIONS. 32
24. ADDENDUM. 38
EXHIBITS
A Site Plan
B Premises and Improvements to Premises
C Rules and Regulations
D Signage Criteria
E Environmental Questionnaire
F Declaration of Restrictions
STANDARD INDUSTRIAL LEASE-NET
THIS STANDARD INDUSTRIAL LEASE-NET ("LEASE"), dated for reference purposes
only August 6, 1997, is made at San Diego, California, between WESTERN SALT
COMPANY, a California corporation ("LANDLORD"), and RESMED CORP., a Minnesota
corporation ("TENANT").
1. BASIC LEASE PROVISIONS.
The words and figures set forth in this Section 1 are used as defined
terms in this Lease.
1.1. PREMISES: The real property and improvements which are the
subject of this Lease. The Premises consist of 22,976 RENTABLE SQUARE FEET as
depicted on Exhibit B. The address for the Premises is 10121 - 10123 Carroll
Canyon Road, San Diego, California 92131.
1.2. BUILDING: The industrial building addressed at 10121 - 10123 Carroll
Canyon Road, San Diego, California, consisting of 22,976 rentable square feet.
1.3. PROJECT: Scripps Ranch Business Center, consisting of six (6)
buildings which contain a total rentable area of approximately 157,735 square
feet. The Project, is depicted on Exhibit A.
1.4. TERM: Ninety six (96) months
1.5. COMMENCEMENT AND EXPIRATION DATES:
(a) Commencement Date: The earlier of (i) completion of Tenant's Work
as set forth in Exhibit B, or (ii) January 1, 1998
(b) Expiration Date: December 31, 2005; however, subject to the actual
Commencement Date
(c) Delivery of the Premises: September 1, 1997 (estimated)
1.6. EXTENSION OPTION PERIOD: One (1); for sixty (60)
months
1.7. INITIAL MONTHLY BASE RENT: $14,934.40
1.8. PREPAID BASE RENT: $14,934.40
1.9. PERIODIC INCREASE IN BASE RENT:
Lease Year Base Rent
2 $15,382.43
3 $15,843.90
4 $16,319.22
5 $16,808.80
6 $17,313.06
7 $17,832.45
8 $18,367.43
1.10. SECURITY DEPOSIT AMOUNT: $14,934.40
1.11. TENANT IMPROVEMENT ALLOWANCE: $206,784.00 (Subject to the
provisions of Exhibit B and Section 26 of the Addendum to Lease).
- -1-
1.12. TENANT'S SHARE OF OPERATING EXPENSES:
(a) Real Property Taxes: 20.52%
(b) Other Operating Expenses: 14.57%
1.13. PERMITTED USE: General office and warehouse for design,
production, sales, distribution and shipping of respiratory products.
1.14. TENANT'S GUARANTOR(S): N/A
1.15. BROKER(S): The Sande Company - Tenant
CB Commercial Real Estate Group - Landlord
1.16. PARKING: Sixty nine (69) vehicles; including six (6) contiguous
to the Building marked "reserved" for Tenant
1.17. LANDLORD'S ADDRESS FOR NOTICE: H. G. Fenton Material Company
c/o Fenton-Western Properties
7220 Trade Street, Suite 300 92121
Post Office Box 64
San Diego, California 92112
Tel: (619) 566-2000
Fax: (619) 549-3587
1.18 TENANT'S ADDRESS FOR NOTICE: ResMed Corp.
10121 Carroll Canyon Road
San Diego, California 92131
Tel:
Fax:
Attention:
1.19 ADDENDUM: Section 24-27
2. DEFINITIONS.
The captions appearing in this Section 2 are used as defined terms in
this Lease.
2.1. ADDITIONAL RENT. All sums payable by Tenant hereunder other
than Base Rent, including without limitation; Tenant's Share of Operating
Expenses; late charges; interest on past due amounts; attorneys' fees; and
reimbursement to Landlord of sums advanced by Landlord to cure any default or
discharge any obligation of Tenant hereunder.
2.2. BASE RENT. The basic monthly rent payable to Tenant for the use and
occupancy of the Premises, in accordance with Section 5 of this Lease.
2.3. BUSINESS PARK. The overall planned industrial development of which
the Project is a part.
2.4. COMMENCEMENT DATE. The first day of the Term, as determined in
accordance with Section 4.1 below.
2.5. COMMON AREAS. All areas and facilities outside the Premises and
within the Building and Project that Tenant is permitted to use, as provided
and designated by the Landlord from time to time for the general non-exclusive
use of Landlord, Tenant and other tenants of the Building and Project and
their respective employees, suppliers, shippers, customers, invitees,
licensees or other visitors, including without limitation hallways, entryways,
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common rest rooms on multi-tenant floors, elevators (if any), stairways,
common pipes, conduits, wires and appurtenant equipment serving the Premises,
parking areas, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, parkways, driveways and landscaped areas.
2.6. DECLARATION. The recorded Declaration of Covenants, Conditions and
Restrictions for the Business Park, as the same may be amended from time to
time.
2.7. DELIVERY OF THE PREMISES. The date of the inspection and acceptance
(or deemed acceptance) of the Premises by Tenant, following Landlord's notice
that Landlord's Delivery Work has been substantially completed in accordance
with Exhibit B attached hereto.
2.8. HAZARDOUS MATERIALS. Any and all materials or substances which have
been determined to be nuisance or dangerous, toxic or hazardous or a pollutant
or contaminant, including but not limited to any hydrocarbon material,
flammable explosives, asbestos, urea formaldehyde, radioactive materials or
waste, or other hazardous, toxic, contaminating or polluting materials,
substances or wastes, including, without limitation, any "hazardous
substances," "hazardous wastes," "hazardous materials" or "toxic substances"
under any Hazardous Materials Laws.
2.9. HAZARDOUS MATERIALS LAWS. All federal, state and local laws,
ordinances and regulations, including, but not limited to, the Federal Water
Pollution Control Act (33 U.S.C. 1251, et seq.), Resource Conservation &
Recovery Act (42 U.S.C. 6901, et seq.), Safe Drinking Water Act (42 U.S.C.
3000f, et seq.), Toxic Substances Control Act (15 U.S.C. 2601. et seq.), the
Clean Air Act (42 U.S.C. 7401, et seq.), Comprehensive Environmental
Response, Compensation and Liability Act (42 U.S.C. 9601, et seq.),
California Health & Safety Code ( 25100, et seq., 39000, et seq.), California
Safe Drinking Water & Toxic Enforcement Act of 1986 (California Health &
Safety Code 25429.5, et seq.), California Water Code ( 13000, et seq.),and
other comparable federal, state or local law, regulation or interpretation
thereof, whether currently in force or enacted in the future, together with
any licenses, permits, plans or approvals generated pursuant to or as a result
of any such law, which regulates or proscribes the use, storage, disposal,
cleanup, transportation, release or threatened release into the environment or
presence of Hazardous Materials.
2.10. LEASE YEAR. A period of twelve consecutive full calendar months.
The first Lease Year shall begin on the Commencement Date if the Commencement
Date is the first day of a calendar month; otherwise, the first Lease Year
shall begin on the first day of the first full calendar month after the month
in which the Commencement Date occurs. Each succeeding Lease Year shall begin
on the anniversary of the beginning of the first Lease Year. If Tenant should
extend the Term pursuant to any extension option granted herein, the first day
of the Extension Term shall also be deemed to be the first day of a Lease Year
for all purposes of this Lease.
2.11. TENANT'S WORK OR TENANT IMPROVEMENTS. The improvements and other
work, if any, to be accomplished by Tenant in accordance with Exhibit B.
2.12. LANDLORD'S DELIVERY WORK. All items of Landlord's Work except those
which Landlord reasonably cannot complete prior to the Commencement Date,
e.g., Landlord's Work that cannot be performed by Landlord until Tenant (i)
provides Landlord with plans and specifications therefor, or (ii) obtains a
building permit, or (iii) completes those items of Tenant's Work that are
necessarily completed prior to a particular item of Landlord's Work.
2.13. LANDLORD'S WORK. The improvements and other work, if any, to be
accomplished by Landlord in accordance with Exhibit B.
2.14. MORTGAGE. Any mortgage, trust deed or other encumbrance, and all
renewals, extensions or replacements thereof, now or hereafter imposed by
Landlord upon the real property which includes the Premises.
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2.15. MORTGAGEE. The holder of a Mortgage.
2.16. OPERATING EXPENSES. All costs incurred by Landlord, if any, for any
of the following:
(a) The operation, repair and maintenance, in neat, clean and good
order and condition of (i) the Common Areas of the Project, including without
limitation all parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways, landscaped areas,
striping, bumpers, and irrigation systems, common area lighting facilities,
and fences and gates; (ii) fire detection in the Project, including sprinkler
system maintenance and repair; and (iii) unless allocated directly to Tenant
pursuant to Section 8.1(b), the Building's heating, ventilation and air
conditioning ("HVAC") systems
(b) Trash disposal for the Project, and to the extent any such services
are provided, janitorial service, security services, gardening, painting,
plumbing, electrical, carpentry, window washing, signage and equipment rental
expenses, and any other service to be provided by Landlord that is elsewhere
in the Lease stated to be an item of Operating Expenses.
(c) Any deductible portion of an insured loss concerning any of the items
or matters described in this Section.
(d) Premiums for any insurance policies maintained by Landlord pursuant to
Section 11 below.
(e) Real Property Taxes to be paid by Landlord.
(f) Utilities not separately metered to Tenant or other tenants of the
Project.
(g) Independent contractors for services (excluding capital improvements),
and compensation (including employment taxes and fringe benefits) of all
persons who perform regular and recurring duties connected with day-to-day
operation, maintenance and repair of the Project, provided such compensation
is commercially reasonable.
(h) Maintenance and repair of roofs, building walls, foundations, and all
sewer and water facilities.
(i) A property management fee in the amount of fifteen percent (15%) of
the preceding items of Operating Expenses.
The inclusion of the improvements, facilities and services set forth in the
foregoing definition shall not be deemed Landlord's representation that such
improvements or facilities exist, nor shall it impose on Landlord any
obligation either to have those improvements or facilities or to provide those
services, unless the improvements or facilities already exist in the Project
or Landlord already provides the services as of the Commencement Date, or
unless Landlord has agreed to do so elsewhere in the Lease. Notwithstanding
the foregoing or anything in this Lease to the contrary, in no event shall
Operating Expenses include the following: (A) depreciation, (B) leasing
commissions, attorney's fees and other costs and expenses incurred in
connection with negotiations or disputes with tenant or prospective tenants or
litigation to collect rent from tenants of the Project, (C) capital items of
any kind or nature except as specifically allowed in this Lease.
2.17. REAL PROPERTY TAXES. All general property and improvement
taxes and all forms of assessment, special assessment or reassessment, license
fee, license tax, business license tax, commercial rental tax, in lieu tax,
levy, charge, penalty (to the extent not imposed as a result of Landlord's
negligence) or similar imposition, imposed by any authority having the direct
power to tax, including any city, county, state or federal government, or any
school, agricultural, lighting, drainage or other improvement or special
assessment district thereof, or any agency or public body, as against any
legal or equitable interest of Landlord in the Premises and all improvements
thereon and thereto as they presently exist or as they may be expanded,
developed, constructed or altered from time to time, including but not limited
to: (a) any tax on Landlord's rent, right to rent or other income from the
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Premises or all or any portion of the Project or as against Landlord's
business of leasing the Premises, but specifically excluding Landlord's
federal, state or city income, franchise, corporate, personal property, stock
transfer, revenues, inheritance or estate taxes; (b) any assessments, taxes,
fees, levies or charges in addition to, or in substitution, partially or
totally, for any assessment, tax, fee, levy or charge previously included
within the definition of real property tax before adoption of Proposition 13
by the voters of the State of California in the June 1978 election, it being
acknowledged by Tenant and Landlord that assessments, taxes, fees, levies and
charges may be imposed by governmental agencies for such services as fire
protection, street, sidewalk and road maintenance, refuse removal and for
other governmental services that were before Proposition 13 provided without
charge to property owners or occupants; and (c) any assessment, tax, fee, levy
or charge upon this transaction or any document to which Tenant is a party
which is imposed on the creation or transfer of an interest or an estate in
the Premises. It is the intention of Tenant and Landlord that all new and
increased assessments, taxes, fees, levies and charges, and all similar
assessments, taxes, fees, levies and charges be included within the definition
of Real Property Taxes for the purposes of this Lease. Real Property Taxes
for the first year of the Term shall be calculated as if the Premises and
related improvements were fully assessed. If at any time during the Term the
laws concerning the methods of real property taxation prevailing at the
commencement of the Lease Term are changed so that a tax or excise on rents or
any other tax, however described, is levied or assessed against Landlord as a
substitution in whole or in part for any real property taxes, then Real
Property Taxes shall include, but not be limited to, any such assessment, tax,
fee, levy or charge allocable to or measured by the area of the Premises or
the rent payable hereunder, including, without limitation, any gross income
tax with respect to the receipt of such rent, or upon or with respect to the
possession, leasing, operating, management, maintenance, alteration, repair,
use or occupancy by Tenant of the Premises, or any portion thereof. With
respect to any assessments that may be levied against or upon the Premises,
the Building or all or any portion of the Project and that under the laws then
in force may be evidenced by improvement or other bonds, or may be paid in
annual installments, there shall be included within the definition of Real
Property Taxes with respect to any tax fiscal year only the amount currently
payable on such tax, bond or assessment, including interest, for such tax
fiscal year or the current annual installment for such tax fiscal year.
3. PREMISES.
3.1. LEASE OF PREMISES. In consideration of the rent and covenants
set forth below, Landlord hereby leases the Premises to Tenant, and Tenant
hires the Premises from Landlord, for the term, at the rental, and upon all of
the conditions set forth herein. Except as otherwise provided herein, this
Lease is subject to: (i) all covenants, conditions, restrictions, easements,
mortgages, deeds of trust, lease, ground or underlying leases, rights of way,
reciprocal easement agreements to which Landlord is a party which affect the
Project and all other matters now or hereafter affecting the Project or the
Premises; and (ii) all zoning laws, ordinances and building codes now or
hereafter affecting the Project or the Premises. In the event Landlord has a
leasehold interest in the Project or the Premises, this Lease shall terminate
upon the termination of such leasehold interest whether such termination is
voluntary, involuntary, or by operation of law, without liability of Landlord
(unless otherwise specifically set forth herein).
3.2. LANDLORD'S RESERVED RIGHTS. Landlord reserves to itself the absolute
rights: (i) to use the roof, exterior walls and area beneath the Premises, and
(ii) to install, use, maintain and replace equipment, machinery, pipes,
conduits and wiring located within the Premises which serve other parts of the
Project, in a manner and in locations that do not unreasonably interfere with
Tenant's use of the Premises.
3.3. CONDITION OF PREMISES. Tenant acknowledges that except to the extent
expressly set forth in this Lease or in a written addendum or amendment
hereto, neither Landlord nor its agents have made (i) any promise to alter,
remodel or otherwise improve, or (ii) any representation or warranty with
respect to the condition of, the Premises, the Building or any part of the
Project or improvements thereon or therein. Tenant's taking possession of the
Premises shall be deemed acceptance of the Premises by Tenant, and shall be
deemed conclusively to establish that the Premises are in good and
satisfactory condition as of the date Tenant takes possession. Subject to the
completion of any Landlord's Work, Tenant accepts possession of the Premises
in their current, "as is", condition, and acknowledges that it has inspected
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the Premises before signing this Lease and is fully aware of the condition of
the Premises. Notwithstanding the foregoing, and prior to Landlord's Delivery
of the Premises, Landlord shall cause a licensed professional to inspect any
existing HVAC system, electrical system and sprinkler system ("Existing
Utility Systems") located in or on the Premises to ensure that each Existing
Utility System and any related component is in proper working order and
condition. After completion of any such inspection, Landlord shall provide
Tenant with a written report certifying the same.
3.4. RIGHTS IN COMMON AREAS. Landlord grants to Tenant and to Tenant's
employees, invitees and licensees a non-exclusive license during the Term to
use the Common Areas, subject to the terms and conditions of this Lease.
Tenant acknowledges that others, including without limitation Landlord and
other tenants of the Building and Project, and their respective employees,
invitees and visitors, and other persons authorized by Landlord, will also be
entitled to use the Common Areas. Without advance notice to Tenant and
without any liability to Tenant in any respect, Landlord shall have the right
to:
(a) Establish and enforce reasonable rules and regulations concerning
the maintenance, management, use and operation of the Common Areas.
(b) Close off any of the Common Areas to whatever extent required in the
opinion of Landlord and its counsel to prevent a dedication of any of the
Common Areas or the accrual of any rights by any person or the public to the
Common Areas, provided such closure does not deprive Tenant of the substantial
benefit and enjoyment of the Premises.
(c) Temporarily close any of the Common Areas for maintenance, alteration
or improvements purposes.
(d) Select, appoint or contract with any person for the purpose of
operating and maintaining the Common Areas, subject to such terms and at such
rates as Landlord deems reasonable and proper.
(e) Change the size, use, shape or nature of any portion of the Common
Areas, provided change does not deprive Tenant of the reasonable benefit and
enjoyment of the Premises. So long as Tenant is not thus deprived of the
reasonable use and benefit of the Premises, Landlord will also have the right
at any time to change the arrangement or location of, or both, or to regulate
or eliminate the use of, any concourse, parking spaces, garage, or any
elevators, stairs, toilets or other public conveniences in the Project,
without incurring any liability to Tenant or entitling Tenant to any abatement
of rent, and such action will not constitute an actual or constructive
eviction of Tenant.
(f) Erect one or more additional buildings on the Common Areas, expand the
existing buildings or other buildings to cover a portion of the Common Areas,
convert Common Areas to a portion of the Building or other buildings, or
convert any portion of such other buildings to Common areas. Upon erection of
any additional buildings or change in the Common Areas, the portion of the
Project upon which buildings or structures have been erected will no longer be
deemed to be a part of the Common Areas. In the event of any such changes in
the size or use of the Common Areas of the Project, Landlord may make an
appropriate adjustment in the Building's or any buildings' pro rata share of
exterior Common Areas of the Project as appropriate, and a corresponding
adjustment to Tenant's Share of Operating Expenses.
4. TERM; DELIVERY OF PREMISES.
4.1. TERM. The Term shall be for the number of months set forth at
Section 1.4 above, beginning on the Commencement Date and ending on the
Expiration Date. Notwithstanding the foregoing, if Delivery of the Premises
has not occurred by the Commencement Date, then the Commencement Date shall be
the actual date of Delivery of the Premises, as advanced day-for-day for each
day's delay therein that is Tenant Delay. Landlord shall not be liable for
any damage incurred by Tenant as a result of any delay in Delivery of the
Premises, and this Lease shall not thereby become void or voidable. "TENANT
DELAY" means delay in the Delivery of the Premises caused by any of the
following: (i) non-compliance by Tenant with matters to be performed by Tenant
or Tenant's agents as specified in Exhibit B; (ii) Tenant's failure to respond
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within a reasonable time during the design or construction periods to requests
for approval, consent, explanation or interpretation of anything relating to
the construction of Landlord's Work; (iii) the effect of any change orders or
other revisions of any items of Landlord's Work initiated or necessitated by
Tenant or its agents; or (iv) any other cause within Tenant's exclusive
control that adversely affects the date of Delivery of the Premises.
4.2. DELIVERY OF THE PREMISES. Upon completion of Landlord's Delivery
Work, the parties shall jointly inspect the Premises. If any defects in
Landlord's Delivery Work exist at the time of such inspection, Tenant shall
notify Landlord thereof in writing upon its inspection of the Premises and
Landlord shall correct such defects; provided, however, that Delivery of the
Premises to Tenant shall be delayed only if the existence of any such defects
would materially adversely affect Tenant's occupancy of the Premises, in which
case the date of Delivery of the Premises shall be the date upon which
Landlord notifies Tenant that such defects have been substantially corrected.
Upon inspection and Delivery of the Premises to Tenant, Tenant shall at
Landlord's request sign a written statement acknowledging Tenant's inspection
and acceptance of the Premises. If Tenant shall fail to contact Landlord and
inspect the Premises within five (5) days after notice from Landlord that
Landlord's Delivery Work has been substantially completed, Landlord's notice
shall be conclusive and binding and Delivery of the Premises shall be deemed
to have occurred on the last day of the five-day period. If a dispute shall
arise between Landlord and Tenant as to completion of any of Landlord's Work,
the certificate of Landlord's architect shall be binding and conclusive upon
all parties. Notwithstanding the foregoing, unless otherwise agreed to, if
Tenant shall begin Tenant's Work or shall otherwise occupy the Premises prior
to substantial completion of Landlord's Delivery Work, Delivery of the
Premises shall be deemed to have been the date of such commencement of
Tenant's Work or other occupancy of the Premises.
4.3. TERMINATION FOR NON-COMMENCEMENT. Notwithstanding the foregoing, in
the event that Delivery of the Premises has not occurred within six months
after Lessee and Lessor have executed this Lease, then for a period of ten
(10) days after the expiration of such six-month period either party not in
default hereunder may cancel and terminate this Lease, without any liability
to the other party, upon written notice to the other party; and provided
further, however, that if such written notice of termination is not delivered
by either party within the ten-day period, the foregoing right to terminate
this Lease shall itself terminate and be of no further force or effect.
4.4. MEMORANDUM OF COMMENCEMENT DATE. Following the Delivery of the
Premises, Landlord shall prepare and forward to Tenant two copies of a written
Memorandum of Commencement Date, signed by Landlord, confirming the
Commencement Date and the date on which the Term will expire. Within ten (10)
days after receipt thereof, Tenant shall sign and return one copy of the
Memorandum of Commencement Date, indicating either Tenant's agreement with the
matters set forth therein or any areas of disagreement. Tenant's failure to
return a copy of the Memorandum of Commencement Date within such ten-day
period shall be conclusively deemed Tenant's agreement with all matters set
forth therein. Any dispute or disagreement on Tenant's part as to the
Commencement Date set forth in such memorandum shall, at the election of
either party, be submitted to final, binding arbitration in San Diego,
California under the Commercial Arbitration Rules of the American Arbitration
Association.
4.5. EARLY POSSESSION. If Tenant occupies the Premises prior to the
Commencement Date, such occupancy shall be subject to all provisions of this
Lease and shall not advance the Expiration Date, and Tenant shall pay monthly
Base Rent for such period at the initial rate set forth in Section 1.7.
5. RENT.
5.1. GENERAL. From and after the Commencement Date, Tenant agrees to
pay Landlord, in advance, on the first day of each and every calendar month
during the Term, Base Rent and Additional Rent as specified in this Section.
Payment of all such rent shall be without offset or demand, shall be in lawful
money of the United States of America and shall be made at the address set
forth for Landlord herein or at such other place as Landlord may direct.
5.2. BASE RENT. Base Rent shall initially be in the amount per month set
forth in Section 1.7.
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5.3. ANNUAL ADJUSTMENT TO BASE RENT. Base Rent shall be increased during
the Term in accordance with the schedule set forth in Section 1.9.
5.4. OPERATING EXPENSES. The parties intend that, subject only to the
specific exceptions set forth herein, this Lease be absolutely net to
Landlord. Accordingly, in addition to Base Rent and subject to the provisions
of this Section and Section 27 of the Addendum to Lease, Tenant shall pay, as
Additional Rent, Tenant's Share of Operating Expenses incurred by Landlord
during each calendar year of the Term, pursuant to the following terms and
conditions:
(a) Landlord shall provide to Tenant, at or before the Commencement
Date, a good faith estimate of Tenant's Share of Operating Expenses that
Landlord anticipates will actually be incurred for the calendar year in which
the Commencement Date occurs. Landlord shall also provide to Tenant, as soon
as possible following the first day of each succeeding calendar year, a good
faith estimate of Tenant's Share of Operating Expenses with respect to such
succeeding calendar year of the Term.
(b) Each annual estimate of Tenant's Share of Operating Expenses
determined by Landlord pursuant to this Section shall be divided into twelve
(12) equal monthly installments. Tenant shall pay to Landlord such monthly
installment of Tenant's Shares of Operating Expenses with each monthly payment
of Base Rent. In the event the estimated amount of Tenant's Share of
Operating Expenses has not yet been determined for any calendar year, Tenant
shall pay the monthly installment in the estimated amount determined for the
preceding calendar year until the estimate for the current calendar year has
been provided to Tenant, at which time Tenant shall pay any shortfall for the
preceding months of the calendar year and shall thereafter make the monthly
installment payment in accordance with the current estimate.
(c) Within sixty (60) days following the end of each calendar year of the
Term, Landlord shall determine and provide to Tenant a statement setting forth
the amount of Operating Expenses actually incurred with respect to such
calendar year. In the event that Tenant's Share of such actual Operating
Expenses exceeds the sum of the monthly installments actually paid by Tenant
for such calendar year, Tenant shall pay the difference to Landlord, within
thirty (30) days following receipt of such statement. In the event the sum of
such installments exceeds Tenant's Share of such Operating Expenses actually
incurred, the difference shall be applied as a credit to future installments
of Tenant's Share of Operating Expenses.
(d) Upon written request of Tenant, Landlord shall provide an accounting
of the Operating Expenses for the preceding calendar year. Landlord shall
keep at its home office full, accurate and separate books of account with
backup documentation of Operating Expenses for a period of three full years
after the end of each calendar year, which Tenant shall have the right to
examine and copy at no expense to Landlord, at reasonable times and upon
reasonable notice. Tenant shall have the right, upon twenty (20) days' prior
notice to Landlord, not more frequently than annually and at Tenant's sole
cost and expense, to conduct an audit of Landlord's books and records
regarding such Operating Expenses to confirm the accuracy of Landlord's
accounting; provided, however, that such audit shall not unreasonably
interfere with the conduct of Landlord's business.
5.5. LATE CHARGES. Tenant acknowledges that late payment by Tenant
to Landlord of Base Rent or Additional Rent due hereunder will cause Landlord
to incur costs not contemplated by this Lease, the exact amount of which is
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Landlord by the terms of any mortgage or deed of trust covering the Premises.
Therefore, if any payment of Base Rent is not paid within five (5) days after
the date due, Tenant shall pay to Landlord ten percent (10%) of the amount
due; and if Additional Rent is not paid within five (5) days after the date
due, Tenant shall pay to Landlord ten percent (10%) of the amount due or Two
Hundred Fifty Dollars ($250.00), whichever is greater; provided, however, that
for the first such delinquency in any calendar year, the late charge will not
be imposed unless and until the payment of Base Rent or Additional Rent has
not been paid within five (5) days after written notice of delinquency from
Landlord. The parties agree that such late charge represents a fair and
reasonable estimate of the costs that Landlord will incur by reason of the
late payment by Tenant. The late charge shall be deemed Additional Rent and
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the right to require it shall be in addition to all of Landlord's other rights
and remedies hereunder or at law and shall not be construed as limiting
Landlord's remedies in any manner.
6. SECURITY DEPOSIT.
Tenant shall pay has paid to Landlord, immediately upon execution of this
Lease, a security deposit in the amount set forth at Section 1.10 ("SECURITY
DEPOSIT"). The Security Deposit shall be held by Landlord as security for the
faithful performance by Tenant of all of the terms, covenants and conditions
of this Lease to be kept and performed by Tenant. If Tenant defaults with
respect to any provision of this Lease, including, but not limited to, the
provisions relating to the payment of rent, Landlord may (but shall not be
required to) use, apply or retain all or any part of the Security Deposit for
the payment of any rent or any other sum in default, or for the payment of any
other amount which Landlord may spend or become obligated to spend by reason
of Tenant's default or to compensate Landlord for any other loss or damage
which Landlord may suffer by reason of Tenant's default. If any portion of
the Security Deposit is so used or applied, Tenant shall, upon demand
therefor, deliver cash to Landlord in an amount sufficient to restore the
Security Deposit to its original amount, and Tenant's failure to do so shall
be a material breach of this Lease. Landlord shall not be required to keep
the Security Deposit separate from its general funds, and Tenant shall not be
entitled to interest thereon. If Tenant shall fully and faithfully perform
every provision of this Lease to be performed by it, the Security Deposit or
any balance thereof shall be returned to Tenant (or at Landlord's option, to
the last assignee of Tenant's interests hereunder) at the expiration of the
Term, provided that Landlord may retain the Security Deposit until such time
as any amount due from Tenant under this Lease has been determined and paid in
full.
7. USE.
7.1. PERMITTED USE. The Premises shall be used and occupied only for
the purposes and activities set forth in Section 1.13 above, and for no other
uses or purposes whatsoever. If any governmental license or permit shall be
required for the proper and lawful conduct of Tenant's business or other
activity carried on in the Premises, or if a failure to procure such a license
or permit might or would in any way affect Landlord or the Business Park, then
Tenant, at Tenant's expense, shall (i) duly procure and thereafter maintain
such license or permit and submit the same for inspection by Landlord, and
(ii) at all times, comply with the requirements of each such license or
permit.
7.2. CONDITION OF PREMISES. Landlord warrants to Tenant, but without
regard either to any Tenant's Work or to the use for which Tenant will use the
Premises, that as of the date of Delivery of the Premises, the Premises do not
violate the Declaration or any other covenants or restrictions of record or
any applicable building code, regulation or ordinance in effect on the date of
this Lease. In the event it should be determined that this warranty has been
violated, then after written notice from Tenant, Landlord shall promptly, at
its sole cost and expense, rectify any such violation. In the event Tenant
does not give Landlord any such written notice of violation within three (3)
months after the Commencement Date, the correction of such violation shall
thereafter be Tenant's obligation, to be performed at Tenant's sole cost and
expense. The foregoing warranty shall be of no force or effect if, prior to
the date of this Lease, Tenant was the owner or occupant of the Premises, in
which event Tenant shall correct any such violation whenever determined to
exist, at Tenant's sole cost and expense.
7.3. COMPLIANCE WITH REQUIREMENTS. Subject to Section 7.2 above, Tenant
shall, at Tenant's expense, promptly comply with all applicable statutes,
ordinances, rules, regulations, applicable covenants and restrictions of
record, and requirements of any fire insurance underwriters of rating bureaus,
now in effect or which may hereafter come into effect during the Term, whether
or not they reflect a change in policy from that now existing, relating in any
manner to the Premises and the occupation and use by Tenant of the Premises.
Tenant shall not use or permit the use of the Premises in any manner that will
tend to create waste or a nuisance or shall tend to disturb other occupants of
the Business Park. Without limiting the generality of the foregoing, Tenant
shall, at its sole cost and expense, comply promptly with all Hazardous
Materials Laws and with all environmental laws and ordinances applicable to
the conduct of Tenant's business, including all air quality and air pollution
regulations of the regional air pollution control district. If at any time it
reasonably appears to Landlord that Tenant is not fulfilling its obligations
under this Section, Landlord may cause to be performed, at Tenant's sole cost,
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an audit or inspection of the Premises to evaluate Tenant's compliance
herewith.
7.4. COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT. Landlord shall
ensure that as of the date of this lease, the design and construction of the
Building, the Premises and any Common Areas are in compliance with Title III
of the Americans With Disabilities Act ("ADA") and other applicable laws and
regulations that relate to access by the disabled or handicapped. Tenant
shall be responsible for compliance with the ADA and related statutes with
respect to any alterations or improvements to the Premises and the operation
of any businesses conducted from the Premises; Landlord shall have no
responsibility or liability with respect thereto. In the event of any changes
to the ADA or other applicable statutes, or any rules or regulations
promulgated pursuant thereto, that become effective after the date of this
Lease, Tenant shall be responsible, at its sole expense, for any necessary
alterations or improvements to the Premises, and Landlord shall be responsible
for any necessary alterations or improvements to the Building or any Common
Areas; provided, however, that Landlord's costs and expenses incurred in
connection with any such alterations or improvements shall be conclusively
deemed to be Operating Expenses, notwithstanding the classification of such
costs and expenses as capital items in accordance with generally accepted
accounting practice; provided, however, that Landlord shall not include in
Operating Expenses amortization of any ADA cost incurred solely for
improvements to the leased Premises or another tenant in the Business Park and
not part of a more general program of compliance with amendments to or
subsequent regulations issued under the ADA.
7.5. RULES AND REGULATIONS. Tenant shall at all times comply with the
Declaration and with the rules and regulations for the Business Park. A copy
of the rules and regulations in existence on the date of this Lease is
attached hereto as Exhibit C, but Landlord reserves the right to amend the
rules and regulations at any time by giving notice of amendment to Tenant, if
Landlord determines such amendments to be to the best interests of the
Building and its tenants. Tenant shall not be bound by any such amended rules
and regulations until Tenant has received a written copy thereof. Landlord
agrees that the rules and regulations shall be enforced in a uniform and
non-discriminatory manner; provided, however, that Landlord shall not be
liable to Tenant for Landlord's failure to enforce the rules and regulations
against any other tenants of the Project.
8. MAINTENANCE, REPAIRS AND ALTERATIONS.
8.1. TENANT'S OBLIGATIONS.
(a) Tenant shall keep and maintain in good, sanitary order, condition
and repair (including replacement of parts and equipment if necessary) the
Premises and every part thereof and any and all appurtenances thereto wherever
located, including, without limitation, the interior surfaces of the exterior
wall, the exterior and interior portion of all doors, door frames, door
checks, windows (including window sashes, casements and frames), plate glass,
storefront, Tenant's signs, all plumbing and sewage facilities within the
Premises (including free flow up to the main sewer line), fixtures, heating
and air conditioning (subject to (b) below) and electrical systems (whether or
not located in the Premises), fire sprinkler system, walls, floor and
ceilings, and all other repairs, replacements, renewals and restorations,
interior and exterior, ordinary and extraordinary, foreseen and unforeseen,
and all other work performed, and additions, alterations, and improvements
installed by or on behalf of Tenant. Any glass broken shall promptly be
replaced by Tenant with glass of the same quality, size and kind. If Tenant
shall fail to replace same within seventy-two (72) hours after such glass is
broken, Landlord shall have the right, but shall not be obligated, to replace
such glass, in which event Tenant shall, promptly upon demand therefor by
Landlord, reimburse Landlord for expenses incurred by Landlord in connection
therewith.
(b) Landlord herein elects to maintain the HVAC system through a
maintenance contract which will be procured by Landlord. Tenant shall
reimburse Landlord, upon demand and as Additional Rent, for Landlord's costs
thereof. The parties acknowledge that through the Initial Term and any
Extension Term, Tenant shall be responsible for payment to Landlord upon
demand and as Additional Rent, of any part or component that may need repair
or replacement for the HVAC System(s) which serve only the Premises.
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(c) Tenant shall, at Tenant's sole cost and expense, comply with all laws,
rules, orders, ordinances, directions, regulations and legal requirements of
federal, state, county or municipal governmental authorities now or hereafter
affecting or applying to the Premises, including, without limitation, the
Americans With Disabilities Act. Notwithstanding the foregoing, if any such
laws, ordinances, regulations or orders shall require structural alterations
to be made to the Building (such as the installation of sprinklers), and if
such alterations are required generally in all warehouse/industrial buildings
in San Diego and are not required as a result of the specific nature of
Tenant's design, layout, configuration or use of the Premises or caused by
Tenant or any of its employees, agents, contractors or subtenant's, then it
shall be Landlord's responsibility to make such structural alterations. If
the law, ordinances, regulation or order requiring the structural alteration
was adopted or became effective after the date of this Lease, then
amortization, in accordance with generally accepted accounting principles
consistently applied, of Landlord's costs and expenses incurred in making such
structural alterations, together with interest incurred by Landlord in
connection therewith, shall be included within Operating Expenses. If the
structural alteration was required by a law, ordinance, regulation or order
that was adopted and became effective prior to the date of this Lease, then no
such amortization shall be permitted, and Landlord shall be solely responsible
for the costs and expenses associated therewith.
8.2. CONDITION ON TERMINATION. On the last day of the Term, or on
any sooner termination, Tenant shall surrender the Premises to Landlord in the
same condition as received, ordinary wear and tear excepted, clean and free of
debris. Any damage or deterioration of the Premises shall not be deemed
ordinary wear and tear if the same could have been prevented by good
maintenance practices. Tenant shall repair any damage to the Premises
occasioned by the installation or removal of Tenant's trade fixtures,
alterations, furnishings and equipment, and shall leave all air lines, power
panels, electrical distribution systems, lighting fixtures, HVAC systems,
plumbing and fencing in good operating condition.
8.3. LANDLORD'S RIGHTS. If Tenant fails to perform Tenant's obligations
under Section 8.1 or 8.2 or under any other provision of this Lease, Landlord
may enter the Premises after three (3) days' prior written notice to Tenant
(except in the case of emergency, in which case no notice shall be required)
and perform such obligations on Tenant's behalf and put the Premises in good
order, condition and repair, and the cost thereof together with interest
thereon from the date incurred at the maximum rate then allowed by law shall
be due and payable as Additional Rent to Landlord together with Tenant's next
Base Rent installment.
8.4. LANDLORD'S OBLIGATIONS. Except for any Landlord's Work as set forth
in Exhibit B, and Sections 13 and 14 relating to damage and condemnation, and
the provisions in this Section 8.4 below which relate solely to multi-tenant
buildings, the parties intend that Landlord shall have no obligation
whatsoever to repair and maintain the Premises or the equipment therein,
whether structural or non-structural, all of which the parties intend to be
obligations of Tenant pursuant to this Section 8. Notwithstanding the
foregoing provisions of Paragraphs 8.1 to 8.4, Landlord and Tenant acknowledge
that Landlord shall keep in good condition and repair the foundations,
exterior walls, structural condition of interior bearing walls, and roof of
the Building, as well as the Common Areas, and all costs and expenses incurred
by Landlord in connection therewith shall be included within Operating
Expenses. Landlord shall have no obligation to make repairs under this
Section until a reasonable time after receipt of written notice from Tenant of
the need for such repairs.
8.5. WAIVER. Tenant expressly waives all rights to make repairs at the
expense of Landlord or deduct any amounts from rent as provided in any statute
or law in effect during the Term of this Lease, including its rights under the
provisions of 1941 and 1942 of the Civil Code of the State of California.
8.6. ALTERATION AND ADDITIONS.
(a) Tenant shall not, without Landlord's prior written consent which
shall not be unreasonably withheld, make any alterations, improvements,
additions, or Utility Installations in, to or about the Premises. Tenant
shall make no change or alteration to the exterior of the Building without
Landlord's prior written consent, which consent may be withheld for any reason
in Landlord's sole discretion and which may at Landlord's discretion be
conditioned upon Tenant's providing Landlord, at Tenant's sole cost and
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expense, a lien and completion bond in an amount equal to one and one-half (1
1/2) times the cost of the work; provided however, that Tenant shall be
entitled to perform alterations with a total cost of less than $5,000, which
do not affect the Building's structure or mechanical or electrical systems or
require issuance of a permit by the City of San Diego, upon written notice to
but without obtaining the prior approval of Landlord. As used in this
Section, the term "UTILITY INSTALLATIONS" shall mean carpeting, window
coverings, air lines, power panels, electrical distribution systems, lighting
fixtures, space heaters, air conditioning, plumbing and fencing. Landlord may
require that Tenant remove at the expiration of the Term any or all
alterations, improvements, additions or Utility Installations which were not
part of the original Tenant Improvements, and restore the Premises and the
Common Areas to their prior condition; provided, however, that Tenant shall
not be obligated to remove any such alterations, improvements, additions or
Utility Installations that were affirmatively approved in advance by Landlord
unless Landlord so advised Tenant at the time of approval. Should Tenant make
any alterations, improvements, additions or Utility Installations without the
prior approval of Landlord, for which Landlord's approval or consent was
required hereunder, Landlord may, at any time during the Term of this lease,
require that Tenant remove any or all of the same.
(b) Except for improvements to be accomplished by Landlord at its expense,
if any, Tenant shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Tenant at or for use in
the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Building or any interest therein. Tenant shall
give Landlord not less than ten days' notice prior to the commencement of any
work in the Premises, and Landlord shall have the right to post notices of
non-responsibility in or on the Premises or the Building as provided by law.
If Tenant shall, in good faith, contest the validity of any such lien, claim
or demand, then Tenant shall, at its sole expense, defend itself and Landlord
against the same and shall pay and satisfy any adverse judgment that may be
rendered thereon before the enforcement thereof against the Landlord or the
Building, upon the condition that if Landlord shall require, Tenant shall
furnish to Landlord a surety bond satisfactory to Landlord in an amount equal
to one and one-half (1 ) times the amount of such contested lien claim or
demand, indemnifying Landlord against liability for such claim or lien and for
all costs of defense thereof, of obtaining the release of any lien, and of
making the Building free from the effect of such lien or claim. In addition,
Landlord may require Tenant to pay Landlord's attorneys' fees and costs in
participating in such action if Landlord shall decide it is in Landlord's best
interest to do so. In any event, Landlord may pay the lien claim prior to the
enforcement thereof, in which event Tenant shall reimburse Landlord in full,
including attorneys' fees for any such expense, as Additional Rent, with the
next due rents.
(c) All alterations, improvements, additions and Utility Installations
(exclusive of all trade fixtures of Tenant) which may be made on the Premises,
shall be the property of Landlord and shall remain upon and be surrendered
with the Premises at the expiration of the Lease term, unless Landlord
requires their removal. Notwithstanding the provisions of this Section 8.6,
Tenant's machinery and equipment (other than Utility Installations), other
than that which is affixed to the Premises so that it cannot be removed
without material damage to the Premises or the Building, shall remain the
property of Tenant and may be removed by Tenant subject to the provisions of
Section 8.2.
9. TAXES
9.1. REAL PROPERTY TAXES. Landlord shall pay all Real Property Taxes
with respect to the Building and the Project, which shall be included in
Operating Expenses. If the Premises are separately assessed, or included
within an assessor's parcel that does not encompass the entire Project,
Landlord shall adjust Tenant's Share of Operating Expenses as it relates to
Real Property Taxes, to reflect the proportion between the area of the
Premises and the total area of the assessor's parcel encompassing the
Premises.
9.2. PERSONAL PROPERTY TAXES. Tenant shall pay prior to delinquency all
taxes assessed against and levied upon trade fixtures, furnishings, equipment
and all other personal property of Tenant contained in the Premises or
elsewhere. When possible, Tenant shall cause said trade fixtures,
furnishings, equipment and all other personal property to be assessed and
billed separately from the real property of Landlord. If any of Tenant's said
personal property shall be assessed with Landlord's real property, Tenant
shall pay to Landlord the taxes attributable to Tenant within ten days after a
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receipt of a written statement setting forth the taxes applicable to Tenant's
property.
10. UTILITIES.
Tenant shall be solely responsible for, shall arrange for, and shall
promptly pay all charges, including meter and connection fees, for water, gas,
electricity, sewer, and any other utility used upon or furnished to the
Premises. In the event any such utility is not separately metered, Tenant
shall pay its share of the cost thereof, as equitably determined by Landlord,
as Additional Rent, as part of Operating Expenses. In this regard, Tenant
acknowledges and agrees that if Tenant's use of the Premises results in a
disproportionately heavy use of water or other commonly metered utilities,
then Landlord, at Landlord's discretion, and in a reasonable and equitable
manner, may adjust Tenant's Share of Operating Expenses to reflect such
disproportionately heavy use. Landlord does not warrant that any services
Landlord supplies will not be interrupted, e.g., because of accidents,
repairs, alterations, improvements or any reason beyond the reasonable control
of Landlord and no such interruption not caused by Landlord shall: (i) be
considered an eviction or disturbance of Tenant's use and possession of the
Premises; (ii) entitle Tenant to terminate this Lease; (iii) make Landlord
liable to Tenant for damages; (iv) abate Base Rent, Additional Rent or any
other sums due hereunder; or (v) relieve Tenant from performing its
obligations hereunder.
11. INSURANCE.
11.1. LIABILITY INSURANCE-TENANT. Prior to the earlier of the
Commencement Date or Tenant's occupancy of the Premises, Tenant, at its own
expense, shall obtain from and shall thereafter keep in force with companies
reasonably acceptable to Landlord, commercial general liability insurance
applying to the use and occupancy of the Premises, or any areas adjacent
thereto, and the business operated by Tenant or any other occupant on the
Premises. Such insurance shall: include broad form contractual liability
insurance coverage specifically insuring all of Tenant's indemnity obligations
under this Lease; have a minimum combined single limit liability of at least
$2,000,000; be written to apply to all bodily injury, property damage,
personal injury and other covered loss, however occasioned, occurring during
the policy term; contain endorsements deleting any employee exclusion on
personal injury coverage; include products and completed operations coverage;
provide for severability of interests or a cross-liability provision or
endorsement; be endorsed to delete any liquor liability exclusion; and afford
coverage for all claims based on acts, omissions, injury and damage, which
claims occurred or arose (or the onset of which occurred or arose) in whole or
in part during the policy period. The foregoing policy of insurance shall
name Landlord and any parties designated by Landlord as additional insureds,
and shall include a per-location endorsement, Form C62504 or equivalent. In
addition, Tenant shall maintain non-owned automobile liability insurance. The
policy limits herein specified shall be increased from time to time upon
written demand from Landlord, if circumstances reasonably justify such
increases. Tenant shall furnish Landlord with a certificate of such insurance
within thirty days after the Commencement Date and whenever requested shall
satisfy Landlord that such policy is in full force and effect. The policy
shall be endorsed to provide that its coverage shall be primary and
noncontributing with any insurance carried by Landlord, and shall be further
endorsed to provide that it shall not be canceled or altered without thirty
days' prior written notice to Landlord.
11.2. LIABILITY INSURANCE-LANDLORD. Landlord shall obtain and keep in
force during the Term commercial general liability insurance, insuring against
liability for injury to or death of persons and loss of or damage to property
occurring in or on the Common Areas. Landlord's liability insurance shall be
in amount of not less than $2,000,000 combined single limit per occurrence for
bodily and personal injury and property damage.
11.3. PROPERTY INSURANCE-LANDLORD.
(a) Landlord shall maintain in full force and effect at all times a
standard policy or policies insuring against "all risk" perils (also known as
"special perils") covering the Building and other improvements owned by
Landlord in the Business Park in an amount at least sufficient to avoid the
effects of coinsurance provisions of the policy or policies (i.e., not less
than ninety percent [90%] of the actual replacement cost of the Building and
other improvements, without deduction for depreciation and excluding
foundations, excavation costs and the cost of underground flues, pipes and
drains, if such costs are properly excludable under coinsurance requirements).
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Such insurance shall include (i) a standard form of lender's loss payable
endorsement, issued to the holder or holders of a mortgage or deed of trust
secured in whole or in part by the Building and the other property on which
the insured improvements are located; (ii) at Landlord's sole option, coverage
for flood or earthquake or both; and (iii) rental income insurance equal to
Base Rent and Operating Expenses for up to one year. In addition, Landlord
shall obtain and keep in force during the Term such other insurance as
Landlord deems advisable.
(b) Tenant shall pay for any increase in the property insurance of the
Building or such other building or buildings if the increase is caused by
Tenant's acts, omissions, use or occupancy of the Premises. Tenant shall not
do or permit to be done anything which shall invalidate the insurance policies
referred to in this Section 11.3. If Tenant does or permits to be done
anything which shall increase the cost of the insurance policies referred to
in this Section 11.3, then Tenant shall within thirty (30) days after demand
therefor by Landlord reimburse Landlord for any additional premiums
attributable to any act or omission or operation of Tenant causing such
increase in the cost of insurance. Landlord shall deliver to Tenant a written
statement setting forth the amount of any such insurance cost increase and
showing in reasonable detail the manner in which it has been computed.
11.4. PROPERTY INSURANCE-TENANT. Tenant shall pay for and shall
maintain in full force and effect at all times, a standard policy insuring
against "all risk" perils (also known as "special perils"), covering all
exterior glass, whether plate or otherwise, and all interior glass, stock in
trade, merchandise, trade fixtures, equipment and other personal property
located in the Premises and used by Tenant in connection with its business.
Tenant shall furnish Landlord with a duly executed certificate evidencing such
coverage at the commencement of the Term and not less than thirty (30) days
before the expiration of the term of such coverage.
11.5. INSURANCE POLICIES. Each policy of insurance required to be
maintained by Tenant hereunder shall name Landlord, and any other parties in
interest designated by Landlord, as additional insureds and shall contain a
clause that the insurer will not cancel or change such insurance without first
giving Landlord thirty (30) days' prior written notice. Such insurance may be
furnished by Tenant under any blanket policy carried by it or under a separate
policy therefor; provided that such blanket policy shall contain an
endorsement that names Landlord (and any other parties in interest designated
by Landlord) as an additional insured, references the Premises and guarantees
that a minimum limit equal to the insurance amounts required in this Lease
will be available specifically for the Premises. All insurance shall be with
a good and solvent insurance company authorized to do business in the State in
which the Business Park is located, having a minimum rating of A and X in
Best's Insurance Guide. A copy of the paid-up policy or other evidence
reasonably satisfactory to Landlord shall be delivered to Landlord prior to
the Term Commencement Date and not less than thirty (30) days prior to each
renewal or extension of such policy of insurance. In the event that Tenant
shall deliver a certificate of insurance in lieu of a copy of the paid-off
insurance policy at any time during the Term of this Lease, a copy of such
insurance policy shall be provided to Landlord as soon thereafter as
practicable. No policy of insurance under this Section shall provide for a
deductible in excess of Ten Thousand Dollars ($10,000), provided that Tenant
shall remain obligated for the insurance deductible. All public liability,
property damage or casualty policies and the coverage evidenced thereby shall
be primary with respect to any policies carried by Landlord and any coverage
carried by Landlord shall pay only amounts in excess of the limits in said
policies of Tenant. In addition to the foregoing, in the event Tenant fails
to provide to keep in force any of the insurance required pursuant to this
Section 11, then Landlord, in its discretion and without waiving any of its
rights under this Lease, may provide such insurance, in which event the cost
thereof shall be payable by Tenant to Landlord as Additional Rent on the first
day of the calendar month immediately following demand therefor from Landlord.
11.6. WAIVER OF SUBROGATION. Each party hereby waives any and all rights
of recovery against the other party hereto and its officers, agents,
employees, or representatives, and Tenant hereby waives any rights it may have
against any trust deed holder, for the loss, damage, or injury to property
arising from any event which is covered by insurance against fire, vandalism,
malicious mischief, and extended coverage, and such other perils as are from
time to time included in the "all risk" insurance policy(ies) carried by
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Landlord and Tenant pursuant to this Section 11, provided that such waiver
shall apply only to the extent of any recovery by the injured party under such
insurance. In the event the other party is a self-insurer (as may be
permitted herein), such waiver shall be to the limit of that insurance
required to be carried hereunder. Each party hereto, on behalf of its
respective insurance companies hereby waives, to the extent of any recovery
under any such insurance policies, any right of subrogation that one may have
against the other, and Tenant, on behalf of its insurance companies, hereby
waives any right of subrogation which such insurer may have against any trust
deed holder. Each party hereto shall cause its respective insurance policies
to contain endorsements evidencing such waivers of subrogation. The foregoing
releases and waivers of subrogation shall be operative only so long as same
shall neither preclude the obtaining of insurance nor diminish, reduce or
impair the liability of any insurer. In the event that a waiver of
subrogation cannot be obtained, the other party is relieved of the obligation
to obtain a waiver of subrogation rights with respect to the particular
insurance involved.
12. WAIVER AND INDEMNITY.
12.1. WAIVER AND EXEMPTION OF LANDLORD FROM LIABILITY. Tenant hereby
agrees that except for damage or injury resulting from Landlord's sole active
negligence or willful misconduct, Landlord shall not be liable for injury to
Tenant's business or any loss of income, including damage to the goods, wares,
merchandise or other property of Tenant or of Tenant's employees, invitees,
customers, or any other person in or about the Premises, or the Common Areas.
Landlord shall not be liable, except when the damage or injury is a result of
Landlord's sole active negligence or willful misconduct, for injury to the
person of Tenant, Tenant's employees, agents or contractors, whether such
damage or injury is caused by or results from fire, steam, electricity, gas,
water or rain, or from the breakage, leakage, obstruction or other defects of
pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures or from any other cause, whether said damage or injury results from
conditions arising upon the Premises, or the Common Areas or from other
sources or places and regardless of whether the cause of such damage or injury
or the means of repairing the same is inaccessible to Tenant. Landlord shall
not be liable for any damages arising from any act or neglect of any other
tenant, occupant or use of the Business Park or from the failure of Landlord
to enforce the provisions of any other lease in the Business Park. Tenant, as
a material part of the consideration to Landlord, hereby assumes all risk of
damage to property of Tenant or injury to persons, in, upon or about the
Premises and elsewhere arising from the above or any other causes, and Tenant
hereby waives all claims in respect thereof against Landlord.
12.2. TENANT'S INDEMNITY. Tenant shall indemnify, protect, defend, and
hold Landlord and Landlord's officers, directors, employees and agents
(collectively, "REPRESENTATIVES") harmless from and against any and all
claims, actions, demands, proceedings, losses, damages, costs of any kind or
character (including reasonable attorneys' fees and court costs), expenses,
liabilities, judgments, fines, penalties, or interest (collectively,
"LOSSES"), arising from or out of Tenant's use of the Premises, or from the
conduct of Tenant's business or from any activity, work or things done,
permitted or suffered by Tenant in or about the Premises or elsewhere. Tenant
shall also indemnify, protect, defend, and hold Landlord and Landlord's
representatives harmless from and against any and all Losses arising from any
breach or default in the performance of any obligation on Tenant's part to be
performed under the terms of this Lease, or arising from any act or omission
of Tenant, or any of Tenant's agents, contractors, or employees, and from and
against all costs, attorneys' fees, expenses and liabilities reasonably
incurred in the defense of any such claim or any action or proceeding brought
thereon; and in case any action or proceeding be brought against Landlord or
any of Landlord's representatives by reason of any such claim, Tenant upon
notice from Landlord shall defend the same at Tenant's expense by counsel
reasonably satisfactory to Landlord and Landlord shall cooperate with Tenant
in such defense. Neither termination of this Lease nor completion of the acts
to be performed under this Lease shall release Tenant from its obligations to
defend or indemnify Landlord as required hereunder so long as the event upon
which any such Loss is predicated shall have occurred prior to the effective
date of any such termination or completion.
12.3. LANDLORD'S INDEMNITY. Landlord shall defend, indemnify and hold
Tenant and Tenant's representatives harmless from and against any and all
Losses arising in any way from (i) the sole active negligence or willful
misconduct of Landlord; or (ii) any breach or default in the performance of
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any obligation on Landlord's part to be performed under this Lease. Landlord
shall defend any such action or proceeding brought against Tenant or its
representatives at Landlord's expense with counsel reasonably satisfactory to
Tenant. Neither termination of this Lease nor completion of the acts to be
performed under this Lease shall release Landlord from its obligations to
defend or indemnify Tenant as required hereunder so long as the event upon
which any such Loss is predicated shall have occurred prior to the effective
date of any such termination or completion.
13. DAMAGE AND DESTRUCTION.
13.1 DEFINITIONS.
(a) "PARTIAL DAMAGE" shall mean if the Premises are damaged or
destroyed to the extent that the cost of repair is less than fifty percent
(50%) of the then replacement cost of the Premises.
(b) "TOTAL DESTRUCTION" shall mean if the Premises are damaged or
destroyed to the extent that the cost of repair is fifty percent (50%) or more
of the then replacement cost of the Premises.
(c) "INSURED LOSS" shall mean damage or destruction which was covered by
an event required to be covered by the insurance described in Section 11.3.
The fact that an insured Loss has a deductible amount shall not make the loss
an uninsured loss.
(d) "REPLACEMENT COST" shall mean the amount of money necessary to be
spent in order to repair or rebuild the damaged area to the condition that
existed immediately prior to the damage occurring, excluding all improvements
made by tenants.
13.2 PARTIAL DAMAGE.
(a) Insured Loss: Subject to the provisions of Sections 11.4 and
11.5, if at any time during the Term there is damage which is an Insured Loss
and which falls into the classification of Partial Damage, then Landlord
shall, at Landlord's expense, repair such damage to the Premises, but not
Tenant's fixtures or equipment, as soon as reasonably possible and this Lease
shall continue in full force and effect. In no event, however, shall Landlord
be obligated to spend for such repairs more than the amount of available
insurance proceeds, plus the amount of any deductible elected by Landlord.
(b) Uninsured Loss: Subject to the provisions of Sections 11.4 and 11.5,
if at any time during the Term there is damage which is not an Insured Loss
and which falls within the classification of Partial Damage, unless caused by
a negligent or willful act of Tenant (in which event Tenant shall make the
repairs at Tenant's expense), which damage causes substantial interference
with the normal conduct of Tenant's business. Landlord may at Landlord's
option either (i) repair such damage as soon as reasonably possible at
Landlord's expense, in which event this Lease shall continue in full force and
effect, or (ii) give written notice to Tenant within thirty days after the
date of the occurrence of such damage of Landlord's intention to cancel and
terminate this Lease as of the date of the occurrence of such damage. In the
event Landlord elects to give such notice of Landlord's intention to cancel
and terminate this Lease, Tenant shall have the right within ten days after
the receipt of such notice to give written notice to Landlord of Tenant's
intention to repair such damage at Tenant's expense, without reimbursement
from Landlord, in which event this Lease shall continue in full force and
effect, and Tenant shall proceed to make such repairs as soon as reasonably
possible. If Tenant does not give such notice within such ten-day period this
Lease shall be canceled and terminated as of the date of the occurrence of
such damage.
13.3 TOTAL DESTRUCTION. Subject to the provisions of Sections 11.4
and 11.5, if at any time during the Term there is damage, whether or not it is
an Insured Loss, which falls into the classification of Total Destruction,
then Landlord may at Landlord's option either (i) repair such damage or
destruction, but not Tenant's fixtures, equipment or tenant improvements
(except for tenant improvements initially constructed at the commencement of
the Term), as soon as reasonably possible at Landlord's expense, and this
Lease shall continue in full force and effect, or (ii) give written notice to
Tenant within thirty days after the date of occurrence of such damage of
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Landlord's intention to cancel and terminate this Lease, in which case this
Lease shall be canceled and terminated as of the date of the occurrence of
such damage.
13.4 DAMAGE NEAR END OF TERM. Subject to the following sentence, if at
any time during the last year of the Term of this Lease as extended form time
to time there is substantial damage, whether or not an Insured Loss, which
falls within the classification of Partial Damage, Landlord may at its option
cancel and terminate this Lease as of the date of occurrence of such damage by
giving written notice to Tenant, within thirty days after the date of
occurrence of such damage, of Landlord's election to terminate.
Notwithstanding the foregoing, in the event that Tenant has an option to
extend or renew this Lease, and the time within which said option may be
exercised has not yet expired, Tenant shall exercise such option, if it is to
be exercised at all, no later than thirty days after the occurrence of an
Insured Loss falling within the classification of Partial Damage during the
last year of the Term. If Tenant duly exercises such option during the thirty
day period, Landlord shall, at Landlord's expense, repair such damage, but not
Tenant's fixtures, equipment or tenant improvements, as soon as reasonably
possible and this Lease shall continue in full force and effect; provided,
however, that in no event shall Landlord be obligated to spend for such
repairs more than the amount of available insurance proceeds, plus the amount
of any deductible elected by Landlord. If Tenant fails to exercise such
option during the thirty-day period, then Landlord may at Landlord's option
terminate and cancel this Lease as of the date of the occurrence of such
damage.
13.5 ABATEMENT OF RENT. In the event Landlord repairs or restores the
Premises pursuant to the provisions of this Section 13, the rent payable
hereunder for the period during which such damage, repair or restoration
continues shall be abated in proportion to the degree to which Tenant's normal
and customary use of the Premises is impaired. Except for abatement of rent,
if any, Tenant shall have no claim against Landlord for any damage suffered by
reason of any such damage, destruction, repair or restoration.
13.6. WAIVER. Landlord and Tenant waive the provisions of any statutes
which relate to termination of leases when leased property is destroyed and
agree that such event shall be governed by the terms of this Lease.
14. CONDEMNATION.
14.1. TOTAL CONDEMNATION OF PREMISES. If the whole of the Premises
shall be taken by any public authority under condemnation, the power of
eminent domain, or by a sale in lieu thereof under threat of condemnation
(collectively "taking" or "taken" as the case may be), then the Term shall
cease as of the day of possession pursuant to such taking, and the Rent shall
be paid up to that day. Landlord shall refund such rent as may have been paid
in advance for the period subsequent to the date of such possession.
14.2. PARTIAL CONDEMNATION.
(a) If less than the whole but more than twenty percent (20%) of the
Premises shall be taken, Tenant shall have the right to terminate this Lease
or, subject to Landlord's right of termination as set forth in Section
14.2(b), to continue in possession of the remainder of the Premises and shall
notify Landlord in writing within ten (10) days after notice of such taking of
Tenant's intention. If twenty percent (20%) or less of the Premises shall be
so taken, the Term shall cease with respect to the part so taken as of the day
possession shall be taken, and Tenant shall pay rent up to that day for the
part so taken.
(b) If more than twenty percent (20%) of the Building or more than twenty
percent (20%) of the Premises shall be taken, Landlord may, by notice to
Tenant delivered on or before the date surrendering possession, terminate this
Lease.
(c) In the event this Lease is not so terminated, Tenant shall remain in
the portion of the Premises not so taken, and all of the terms, provisions,
covenants, conditions, and agreements contained herein shall continue in
effect with respect to the portion not so taken, except that Base Rent shall
be reduced in proportion to the amount of the Premises taken, and Landlord
shall, to the extent of severance damages received by Landlord in connection
with such condemnation, repair any damage to the Premises caused by such
condemnation except to the extent that Tenant has been reimbursed therefor by
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the condemning authority, Tenant shall pay any amount in excess of such
severance damages required to complete such repair.
14.3. LANDLORD'S AND TENANT'S DAMAGES. Any award for the taking of
all or any part of the Premises under the power of eminent domain or any
payment made under threat of the exercise of such power shall be the property
of Landlord, whether such award shall be made as compensation for diminution
in value of the leasehold or for the taking of the fee, or as severance
damages; provided, however, that Tenant shall be entitled to any award for
loss of or damage to Tenant's trade fixtures, moving costs and removable
personal property to the extent separately awarded. Tenant shall have the
right to negotiate its award separately with the condemning authority;
provided, however, that Tenant's right to pursue its claim shall be
subordinate to the right of Landlord's first lien mortgage to the extent
required to discharge the first lien mortgage after application of Landlord's
award.
14.4. WAIVER. This Article 14 is in lieu of, and Tenant hereby expressly
waives any rights it may have under, any statute governing the condemnation of
the Premises, including 1932 and 1933 of the California Civil Code and
1265.130 of the California Code of Civil Procedure.
15. ASSIGNMENT AND SUBLETTING.
15.1. LANDLORD'S CONSENT REQUIRED. Tenant shall not voluntarily or
by operation of law assign, transfer, mortgage, sublet, or otherwise transfer
or encumber all or any part of Tenant's interest in the Lease or in the
Premises, without Landlord's prior written consent, which shall not be
unreasonably withheld. Any attempted assignment, transfer, mortgage,
encumbrance or sublease without such consent shall be void, and shall
constitute a breach of this Lease without the need for notice to Tenant.
15.2. PROCEDURE. In the event Tenant wishes to sublet or assign the
Premises, or any portion thereof, Tenant shall submit in writing to Landlord
(i) the name of the proposed sublessee or assignee, (ii) a statement
describing the nature of the business to be carried on in the Premises, (iii)
a copy of the proposed sublease or assignment, including all terms and
conditions thereof, (iv) Landlord's lease application form, completed by the
proposed assignee or sublessee, (v) financial statements for the proposed
assignee or sublessee, which shall include, at a minimum, prior year and year
to date (current to within six months) balance sheets, income and expense
statements and sources and uses of cash statements, and (vi) such other
financial information regarding such sublessee or assignee as Landlord shall
reasonably request.
15.3. PROVISIONS APPLICABLE TO BOTH ASSIGNMENT AND SUBLETTING.
(a) No sublessee or assignee shall further assign or sublet all or
any part of the Premises without Landlord's prior written consent.
(b) The consent by Landlord to any assignment or sublease shall not
constitute a consent to any subsequent assignment or sublease by Tenant or to
any assignment or sublease by the sublessee. However, Landlord may consent to
subsequent subleases and assignments of the sublease or any amendments or
modifications thereto, provided Landlord notifies Tenant or anyone else liable
on the Lease or sublease and Landlord shall obtain their consent thereto.
(c) If Tenant subleases the Premises or any part of it or assigns any of
its rights under this Lease in and to the Premises, fifty percent (50%) of all
rents paid by the sublessee or assignee which are in excess of the amount of
Base Rent and Additional Rent then payable by Tenant under this Lease shall be
the property of and shall be paid to Landlord. As used herein, "excess" rent
shall mean the positive difference, if any, in any given month, resulting from
the subtraction of (X) the sum of the Base Rent and Additional Rent paid by
Tenant under the Lease, from (Y) the effective rental rate paid by the
sublessee or assignee over the entire term of the assignment or sublease,
reduced by the costs to Tenant of applicable leasing commissions, attorneys'
fees and tenant improvement or relocation expenses incurred by Tenant in
connection therewith. The parties acknowledge that the provisions of this
Section are a material inducement for Landlord's execution of this Lease and
that Tenant has represented and warranted that its sole purpose for entering
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into this Lease is to obtain possession of the Premises and not to generate
revenues from the leasing or subleasing of any portion of the Premises.
(d) In the event of any default under this Lease, Landlord may proceed
directly against Tenant, any guarantors or any one else responsible for the
performance of this Lease, including the sublessee, without first exhausting
Landlord's remedies against any other person or entity responsible therefor to
Landlord, or any security held by Landlord or Tenant.
15.4. PROVISIONS APPLICABLE TO SUBLETTING. Regardless of Landlord's
consent, the following terms and conditions shall apply to any sublease by
Tenant of all or any part of the Premises and shall be included in subleases.
(a) Tenant hereby assigns and transfers to Landlord all of Tenant's
interest in all rentals and income arising from any sublease made by Tenant,
and Landlord may collect such rent and income and apply the same toward
Tenant's obligations under this Lease; provided, however, that until a default
shall occur in the performance of Tenant's obligations under this Lease,
Tenant may receive, collect and enjoy the rents accruing under such sublease.
Landlord shall not, by reason of any assignment of such sublease to Landlord
or by reason of the collection of the rents from a sublessee, be deemed liable
to the sublessee for any failure of Tenant to perform and comply with any of
Tenant's obligations to such sublessee under such sublease. Tenant hereby
irrevocably authorizes and directs any such sublessee, upon receipt of a
written notice from Landlord stating that a default exists in the performance
of Tenant's obligations under this Lease, to pay to Landlord the rents due and
to become due under the sublease. Tenant agrees that such sublessee shall
have the right to rely upon any such statement and request from Landlord, and
that such sublessee shall pay such rents to Landlord without any obligation or
right to inquire as to whether such default exists and notwithstanding any
notice from or claim from Tenant to the contrary, Tenant shall have no right
or claim against such sublessee or Landlord for any such rents so paid by said
sublessee to Landlord.
(b) No sublease entered into by Tenant shall be effective unless and until
it has been approved in writing by Landlord. By entering into a sublease, any
sublessee shall be deemed, for the benefit of Landlord, to have assumed and
agreed to comply with all of Tenant's obligations hereunder, except to the
extent such obligations are contrary to or inconsistent with provisions
contained in a sublease to which Landlord has expressly consented in writing.
(c) Landlord's written consent to any sublease of the Premises by Tenant
shall not constitute an acknowledgment that no default then exists under this
Lease of the obligations to be performed by Tenant nor shall such consent be
deemed a waiver of any then existing default, except as may be otherwise
stated by Landlord at the time in writing.
(d) With respect to any sublease to which Landlord has consented, Landlord
agrees to deliver a copy of any notice of default by Tenant of the sublessee.
Such sublessee shall have the right to cure a default of Tenant within ten
days after service of said notice of default upon such sublessee, and the
sublessee shall have a right of reimbursement and offset from and against
Tenant for any such defaults cured by the sublessee.
(e) If Tenant's obligations under this Lease have been guaranteed by third
parties, then a sublease, and Landlord's consent thereto, shall not be
effective unless said guarantors give their written consent to such sublease
and the terms thereof.
(f) The consent by Landlord to any sublease shall not release Tenant from
its obligations or alter the primary liability of Tenant to pay the rent and
perform and comply with all of the obligations of Tenant to be performed under
this Lease.
(g) In the event Tenant shall default in the performance of its
obligations under this Lease, Landlord, at its option and without any
obligation to do so, may require any sublessee to attorn to Landlord, in which
event Landlord shall undertake the obligations of Tenant under such sublease
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from the time of the exercise of said option to the termination of such
sublease; provided, however, Landlord shall not be liable for any prepaid
rents or security deposit paid by such sublessee to Tenant or for any other
prior defaults of Tenant under such sublease.
(h) Each and every consent required of Tenant under a sublease shall also
require the consent of Landlord.
15.5. ATTORNEYS' FEES. In the event Tenant shall assign or sublet
the Premises or request the consent of Landlord to any assignment or sublease
or if Tenant shall request the consent of Landlord for any act Tenant proposes
to do, then Tenant shall pay Landlord's reasonable attorneys' fees incurred in
connection therewith, such attorneys' fees not to exceed $500.00 for each such
request.
15.6. CONTINUING LIABILITY OF TENANT. No transfer permitted by this
Section shall release Tenant or change Tenant's primary liability to pay the
rent and to perform all other obligations of Tenant under this Lease.
Landlord's acceptance of rent from any other person is not a waiver of any
provision of this Section. Consent to one transfer is not a consent to any
subsequent transfer. If Tenant's transferee defaults under this Lease,
Landlord may proceed directly against Tenant without pursuing remedies against
the transferee. Landlord may consent to subsequent assignments or
modifications of this Lease by Tenant's transferee, without notifying Tenant
or obtaining its consent. Such action shall not relieve Tenant of its
liability under this Lease.
15.7. EFFECT OF TERMINATION. In the event of Tenant's surrender of this
Lease or the termination of this Lease in any other manner, Landlord may, at
its option, either terminate any or all subtenancies or succeed to the
interest of Tenant as sublessor thereunder. No merger shall result from
Tenant's sublease of the Premises under this Section, Tenant's surrender of
this Lease or the termination of this Lease in any other manner.
16. DEFAULT BY TENANT; REMEDIES.
16.1. EVENTS OF DEFAULT. The occurrence of any of the following
(each, a "DEFAULT") shall constitute a material breach or default by Tenant of
its obligations hereunder;
(a) Failure by Tenant to pay rent when due if the failure continues
for three (3) days after notice has been given to Tenant that the rent is
delinquent.
(b) Failure by Tenant to perform any provision of this Lease required of
it other than clause (a) above if the failure is not cured within ten (10)
days after notice has been given to Tenant. If, however, the failure cannot
reasonably be cured within the cure period, Tenant shall not be in default of
this Lease if Tenant commences to cure the failure within the cure period and
diligently and in good faith continues to cure the failure.
(c) To the extent permitted by law, a general assignment by Tenant or any
Guarantor of the Lease for the benefits of creditors, or the filing by or
against Tenant or any Guarantor of any proceeding under any insolvency or
bankruptcy law, unless in the case of a proceeding filed against Tenant or any
Guarantor the same is dismissed within sixty (60) days, or the appointment of
a trustee or receive to take possession of all or substantially all of the
assets of Tenant or any Guarantor, unless possession is restored to Tenant or
such Guarantor within thirty (30) days, or any execution or other judicially
authorized seizure of all or substantially all of Tenant's assets located upon
the Premises or of Tenant's interest in this Lease, unless such seizure is
discharged within thirty (30) days (each, an "INSOLVENCY EVENTS").
16.2. DEFAULT NOTICES. Notices given under this Section will specify
the alleged failure or breach and the applicable Lease provisions; and shall
demand that Tenant perform the provisions of this Lease or pay the rent that
is delinquent, as the case may be, within the applicable period of time or
quit the Premises. No such notice shall be deemed a forfeiture or a
termination of this Lease unless Landlord so elects in the notice. The
purpose of the notice requirements in this Section is to extend the notice
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requirements of the unlawful detainer statutes. Such notice shall, however,
be in lieu of and not in addition to any notice required under the unlawful
detainer statutes.
16.3. LANDLORD'S REMEDIES. Landlord shall have the below listed remedies
if Tenant commits a default. These remedies are not exclusive; they are
cumulative to any remedies now or later allowed by law.
(a) Landlord may terminate Tenant's right to possession of the
Premises at any time. No act by Landlord other than giving notice of
termination to Tenant shall terminate this Lease. Acts of maintenance,
efforts to relet the Premises or the appointment of a receiver on Landlord's
initiative to protect Landlord's interest under this Lease shall not
constitute a termination of Tenant's right to possession. On termination,
Landlord shall have the right to recover from Tenant:
(i) The worth at the time of the award of the unpaid rent that had
been earned at the time of termination of this Lease;
(ii) The worth at the time of the award of the amount by which the unpaid
rent that would have been earned after the date of termination of this Lease
until the time of award exceeds the amount of the loss of rent that Tenant
proves could have been reasonably avoided;
(iii) The worth at the time of the award of the amount by which unpaid
rent for the balance of the Term after the time of award exceeds the amount of
the loss of rent that Tenant proves could have been reasonably avoided; and
(iv) Any other amount, including reasonable attorneys' fees and court
costs, necessary to compensate Landlord for all detriment proximately caused
by Tenant's default or which in the ordinary course of things would be likely
to result therefrom.
The phrase "worth at the time of the award" as used in clauses (i) and (ii)
above is to be computed by allowing interest at the rate of twelve percent
(12%) per annum, but not to exceed the then legal rate of interest. The same
phrase as used in clause (iii) above is to be computed by discounting the
amount at the discount rate of the Federal Reserve Bank of San Francisco at
the time of the award, plus one percent (1%).
(b) Landlord may exercise the remedy provided in California Civil
Code 1951.4, that is, Landlord may continue this Lease in full force and
effect, and collect Base Rent and Operating Expenses as they become due, so
long as Landlord does not terminate Tenant's right to possession pursuant to
Section 17.3(a) above. During the period that Tenant is in default, Landlord
may enter the Premises and relet them or any part of them, to third parties
for Tenant's account, for a shorter or longer term than the Term of this
Lease, and for such rental and on such other terms as Landlord, in its sole
discretion, shall deem advisable and Tenant shall be immediately liable to
Landlord for all costs which Landlord incurs in reletting the Premises,
including, without limitation, broker's commissions, advertising expenses, the
cost of remodeling the Premises which may be required for reletting, and all
such similar costs. No act by Landlord pursuant to this Section shall
terminate this Lease unless Landlord shall notify Tenant that it elects to
terminate this Lease. After Tenant's default and for as long as Landlord does
not terminate Tenant's right to possession of the Premises, Tenant shall have
the right to assign its interest in the Lease upon the reasonable prior
consent of Landlord; provided, however, that Tenant shall not be released from
any liability under this Lease as a result of such assignment.
(c) Landlord may, after expiration of any applicable cure period, unless
there is an emergency (in which case Landlord need not wait), correct or
remedy any failure of Tenant not timely cured. The reasonable cost paid by
Landlord to correct or remedy any such default will immediately become due and
payable to Landlord an additional rent.
(d) Nothing contained in this Lease shall limit Landlord to the remedies
specifically set forth in this Section 16.3. Upon Tenant's default or breach,
Landlord shall be entitled to exercise any right or remedy then provided by
law, including without limitation the right to obtain injunctive relief and
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the right to recover all damages caused by Tenant's default or breach in the
performance of any of its obligations under this Lease.
16.4. INTEREST. Any amount owed to Landlord under the terms and
provisions of this Lease which is not paid when due shall bear interest at the
highest rate allowed by applicable law from the date the same becomes due and
payable by the terms and provisions of this Lease until paid, unless otherwise
specifically provided in this Lease.
16.5. MITIGATION. Efforts by Landlord to mitigate damages caused by
Tenant's breach shall not be construed as a waiver of Landlord's right to
recover damages.
16.6. RIGHT OF LANDLORD TO RE-ENTER. In the event of any termination of
this Lease, Landlord shall have the immediate right to enter upon and
repossess the Premises, and any personal property of Tenant may be removed
from the Premises and stored in any public warehouse at the risk and expenses
of Tenant.
16.7. RECAPTURABLE EXPENSES. Tenant acknowledges that Landlord has
undertaken or may undertake certain expenses in connection with the Lease,
including payment of some or all of the following: brokerage commissions, the
costs of any Landlord's Work, moving expenses or other categories of cost of
expense ("RECAPTURABLE EXPENSES"). Notwithstanding any provision or
implication to the contrary in this Lease, in the event of premature
termination of the Term of this Lease pursuant to Section 16.3(a) following
Tenant's default, there shall be immediately due and payable from Tenant, as
Additional Rent which has been fully earned at the time of termination, the
unamortized portion of the Recapturable Expenses actually incurred by
Landlord. For purposes of this Section, the unamortized portion of the
Recapturable Expenses shall be determined by multiplying the total
Recapturable Expenses actually incurred by Landlord by a fraction, the
numerator of which is the number of months remaining in the Term following
premature termination in which unabated Base Rent would have been payable to
Landlord pursuant to the Lease, and the denominator of which is the total
number of months in the Term, both before and after the premature termination,
in which unabated Base Rent was paid or would have been payable to Landlord
had the Lease not been terminated. Any Recapturable Expenses due to Landlord
in accordance with this Section shall be in addition to any sums otherwise
recoverable pursuant to Section 16.3(a) of this Lease.
17. TENANT'S INSOLVENCY.
17.1. APPLICABILITY OF SECTION. In addition to any rights or
remedies of Landlord under the terms of this Lease, the following provisions
shall specifically apply upon the occurrence of an Insolvency Event (as
defined in Section 16.1(c) above).
17.2. ASSUMPTION OR REJECTION OF LEASE.
(a) Notwithstanding anything to the contrary contained herein, Tenant
as debtor in possession and any receiver or trustee in bankruptcy for Tenant
(collectively, "TENANT'S TRUSTEE") shall either assume or reject this Lease
within sixty (60) days following the entry of an order for relief or within
such earlier time as may be provided by applicable law.
(b) Notwithstanding anything to the contrary contained herein, in the
event that this Lease is attempted to be assumed under the Bankruptcy Code by
Tenant's Trustee during the existence of any Default by Tenant, no such
attempted assumption shall be effective unless and until Tenant's Trustee: (i)
cures, or provides adequate assurance that it will promptly cure such Default;
and (ii) compensates, or provides adequate assurance that it will promptly
compensate, Landlord for any actual pecuniary loss to Landlord resulting from
such Default; and (iii) provides adequate assurance of future performance of
Tenant's obligations and covenants under this Lease. Landlord shall be
entitled to reimbursement from the estate of Tenant for all actual costs
incurred by Landlord in considering any proposed assignee of the Lease
pursuant to this Section 17.
(c) Tenant's Trustee may assign this Lease pursuant to the provisions of
the Bankruptcy Code only if: (A) Tenant's Trustee assumes the Lease in
accordance with the above provisions of this Section 17.2; and (B) the
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assignee of Tenant's Trustee assumes all of the obligations arising under this
Lease and provides adequate assurance of its future performance of Tenant's
obligations and covenants under this Lease (whether or not a Default has
occurred under the Lease). Any such assignee shall, upon demand, execute and
deliver to Landlord, an instrument confirming such assumption.
(d) For purposes of Section 17.2(b) and (c), the term "adequate assurance
of future performance" shall include, without limitation, at least the
following:
(i) Any proposed assignee must have, as demonstrated to Landlord's
satisfaction, a net worth (as defined in accordance with generally accepted
accounting principles consistently applied) in an amount sufficient to assure
that the proposed assignee will have the resources to meet the financial
responsibilities under this Lease, including the payment of all rent. The
financial condition and resources of Tenant and any Guarantor(s) are material
inducements to Landlord entering into this Lease.
(ii) Any proposed assignee must have engaged in the permitted use
described in Section 1.13 for at least five (5) years prior to any such
proposed assignment.
(iii) In entering into this Lease, Landlord considered extensively
Tenant's permitted use and determined that such permitted business would add
substantially to the tenant balance in the Business Park, and were it not for
Tenant's agreement to operate only Tenant's permitted business on the
Premises, Landlord would not have entered into this Lease. Landlord's
anticipated benefits from the lease of the Premises will be materially
impaired if a trustee in bankruptcy or any assignee of this Lease operates any
business other than Tenant's permitted business.
(iv) Any assumption of this Lease by a proposed assignee shall not
adversely affect Landlord's relationship with any of the remaining tenants in
the Premises, taking into consideration any and all other "use" clauses and/or
"exclusivity" clauses which may then exist under their leases with Landlord.
(v) Any proposed assignee must not be engaged in any business or activity
which it will conduct on the Premises and which will subject the Premises to
contamination by any Hazardous Materials.
(vi) The percentage rent, if any, due under this Lease shall not decline
substantially.
(vii) Any assumption or assignment of this Lease shall not breach
substantially any provision in any other lease, financing agreement, or master
agreement relating to the Business Park.
(viii) Any assumption or assignment of this Lease shall not alter or
affect materially any other obligation or duty of Tenant not to be used to
circumvent the remainder of the provisions of this Lease.
18. DEFAULT BY LANDLORD.
18.1. LANDLORD'S DEFAULT. Landlord shall be in default if Landlord
fails to perform any provision of this Lease required of it and the failure is
not cured within thirty (30) days after notice has been given to Landlord.
If, however, the failure cannot reasonably be cured within the cure period,
Landlord shall not be in default of this Lease if Landlord commences to cure
the failure within the cure period and diligently and in good faith continues
to cure the failure. Notices given under this Section shall specify the
alleged breach and the applicable Lease provisions. If Landlord shall at any
time default beyond the applicable notice and cure period, Tenant shall have
the right to cure such default on Landlord's behalf. Any sums expended by
Tenant in doing so, and all reasonably necessary incidental costs and expenses
incurred in connection therewith, shall be payable by Landlord to Tenant
within thirty (30) days following demand therefor by Tenant; provided,
however, that Tenant shall not be entitled to any deduction or setoff against
any rent otherwise payable to Landlord under this Lease.
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18.2. NOTICE TO MORTGAGEE(S). Whenever Tenant serves notice on Landlord
of Landlord's default, written notice shall also be served at the same time
upon the Mortgagee under any first- or second-priority Mortgage; provided,
however, that Tenant shall have no obligation to provide such notice unless
and until Tenant has received written notice of the Mortgagee's existence and
address. Such Mortgagee shall have the periods of time within which to cure
Landlord's defaults as are provided in Section 18.1, which periods shall
commence to run thirty (30) days after the commencement of the periods within
which Landlord must cure its defaults under Section 18.1. In this connection,
any representative of the Mortgagee shall have the right to enter upon the
Premises for the purpose of curing Landlord's default. Such Mortgagee shall
notify Landlord and Tenant of the address of such Mortgagee to which such
notice shall be sent, and the agreements of Tenant under this Section are
subject to prior receipt of such notice. If the nature of the default is such
that the Mortgagee's possession is required to cure the default, then Tenant
will not terminate the Lease so long as such Mortgagee commences proceedings
to obtain possession of the Premises within the period of time afforded to the
Mortgagee to cure such default, and once the Mortgagee has obtained
possession, diligently proceeds to cure the default. Nothing contained in
this Lease shall be construed to impose any obligation on any Mortgagee to
cure any default by Landlord under the Lease.
19. SUBORDINATION AND ESTOPPEL.
19.1. SUBORDINATION. Subject to the provisions of this Section 19,
at the option and upon written declaration of Landlord, this Lease and the
leasehold estate created hereby shall be subject, subordinate and inferior to
the lien and charge of any Mortgage; provided, however, that this Lease shall
not be subordinate to any Mortgage arising after the date of this Lease, or
any renewal, extension or replacement thereof, unless and until Landlord
provides Tenant with an agreement from the Mortgagee of the type normally
provided by commercial lenders in southern California ("NON-DISTURBANCE
AGREEMENT"), setting forth that so long as Tenant is not in default hereunder,
Landlord's and Tenant's rights and obligations hereunder shall remain in force
and Tenant's right to possession shall be upheld, that Tenant's rights of
occupancy shall not be disturbed in the event of a termination of foreclosure
of the Mortgage, and that Tenant shall receive all of the rights and services
provided for under the Lease. Subject to the foregoing condition, (i)
Landlord hereby expressly reserves the right, at its option and declaration,
to place Mortgages upon and against the Premises and/or any part thereof,
superior in lien and effect to this Lease and the estate created hereby, and
(ii) Landlord shall be entitled to sign, acknowledge and record in the Office
of the County Recorder of the County in which the Premises are situated, a
declaration that this Lease and leasehold estate are subject, subordinate and
inferior to any Mortgage placed or to be placed by Landlord upon or against
the Premises and/or any part thereof (in favor of any Mortgagee, trustee or
title insurance company insuring the interest of any such Mortgagee),
recordation of which shall, of and by itself and without further notice to or
act or agreement of Tenant, make this Lease and the estate created hereby
subject, subordinate and inferior thereto. Notwithstanding the foregoing,
Tenant shall, promptly following a request by Landlord and after receipt of
the Non-Disturbance Agreement, execute and acknowledge any subordination
agreement or other documents required to establish of record the priority of
any such Mortgage over this Lease, so long as such agreement does not
otherwise increase Tenant's obligations or diminish Tenant's rights hereunder.
19.2. ATTORNMENT. In the event of foreclosure of any Mortgage, whether
superior or subordinate to this Lease, then (a) this Lease shall continue in
force; (b) Tenant's quiet possession shall not be disturbed if Tenant is not
in default hereunder; (c) Tenant shall attorn to and recognize the Mortgagee
or purchaser at foreclosure sale ("NEW OWNER") as Tenant's landlord for the
remaining term of this Lease; and (d) the New Owner shall not be bound by (i)
any payment of rent for more than one month in advance, (ii) any amendment,
modification or ending of this Lease without the New Owner's consent after the
New Owner's name is given to Tenant, unless the amendment, modification or
ending is specifically authorized by the original Lease and does not require
Landlord's prior agreement or consent, or (iii) any liability for any act or
omission of a prior Landlord. At the request of the New Owner, Tenant shall
execute a new lease for the Premises, setting forth all of the provisions of
this Lease except that the term of the new lease shall be for the balance of
the Term.
19.3. ESTOPPEL CERTIFICATE. Tenant shall execute and deliver to Landlord,
within ten days after receipt of Landlord's request, any estoppel certificate
or other statement to be furnished to any prospective purchaser of or any
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lender against the Premises. Such estoppel certificate shall acknowledge and
certify each of the following matters, to the extent each may be true: that
the Lease is in effect and not subject to any rental offsets, claims or
defenses to its enforcement; the commencement and termination dates of the
Term; that Tenant is paying rent on a current basis; that any Landlord's Work
required to be furnished under the Lease has been completed in all respects;
that the Lease constitutes the entire agreement between Tenant and Landlord
relating to the Premises; that Tenant has accepted the Premises and is in
possession thereof; that the Lease has not been modified, altered or amended
except in specified respects by specified instruments; and that Tenant has no
notice of any prior assignment, hypothecation or pledge of rents or the Lease.
Tenant shall also, upon request of Landlord, certify and agree for the
benefit of any Mortgagee against the Premises or the Building that Tenant will
not look to such Mortgagee: as being liable for any act or omission of
Landlord; as being obligated to cure any defaults of Landlord under the Lease
which occurred prior to the time Mortgagee, its successors or assigns,
acquired Landlord's interest in the Premises by foreclosure or otherwise; as
being bound by any payment of Base Rent or Additional Rent by Tenant to
Landlord for more than one month in advance; or as being bound by Landlord to
any amendment or modification of the Lease without Mortgagee's written
consent.
19.4. REMEDIES. Failure of the Tenant to sign any statement or instrument
delivered by Landlord or Mortgagee to effectuate the provisions of this
Section 19 within ten (10) days after request to do so by Landlord shall
constitute a Default of this Lease, and Landlord shall have the right to
exercise any remedies or rights Landlord may now or hereafter have hereunder
or at law or in equity.
20. HAZARDOUS MATERIALS.
20.1. TENANT'S ENVIRONMENTAL QUESTIONNAIRE. Tenant warrants and
represents, and acknowledges that this Lease was entered into by Landlord in
material reliance upon the information set forth in the environmental
questionnaire, in the form attached as Exhibit E, that was previously
delivered by Tenant to Landlord.
20.2. TENANT'S OBLIGATIONS.
(a) Tenant shall at all times and in all respects comply with all
Hazardous Materials Laws, and shall, at its own expense, procure, maintain in
effect and comply with all conditions of any and all permits, licenses, and
other governmental and regulatory approvals required for Tenant's use of the
Premises, including, without limitation, discharge of (appropriately treated)
materials or wastes into or through any sanitary sewer serving the Premises.
Except as discharged into the sanitary sewer in strict accordance and
conformity with all applicable Hazardous Materials Laws, Tenant shall cause
any and all Hazardous Materials removed from the Premises to be removed and
transported solely by duly licensed haulers to duly licensed facilities for
final disposal of such materials and wastes. Tenant shall in all respects
handle, treat, deal with and manage any and all Hazardous Materials in, on,
under or about the Premises in total conformity with all applicable Hazardous
Materials Laws and prudent industry practices regarding management of such
Hazardous Materials.
(b) Upon expiration or earlier termination of the Term, Tenant shall cause
all Hazardous Materials released or emitted by Tenant or its representatives
on the Premises to be removed from the Premises and transported for use,
storage or disposal in accordance with and compliance with all applicable
Hazardous Materials Laws.
(c) Except in the event of an emergency, Tenant shall not take any
remedial action in response to the presence of any Hazardous Materials in or
about the Premises, nor enter into any settlement agreement, consent decree or
other compromise in respect to any claims relating to any Hazardous Materials
in any way connected with the Premises, without first notifying Landlord of
Tenant's intention to do so and affording Landlord ample opportunity to
appear, intervene or otherwise appropriately assert and protect Landlord's
interest with respect thereto.
(d) Tenant shall immediately notify Landlord in writing of: (i) any
enforcement, cleanup, removal or other governmental or regulatory action
instituted, completed or threatened pursuant to any Hazardous Materials Laws;
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(ii) any claim made or threatened by any person against Tenant or the Premises
relating to damage, contribution, cost recovery compensation, loss or injury
resulting from or claimed to result from any Hazardous Materials; and (iii)
any reports made to any environmental agency arising out of or in connection
with any Hazardous Materials in or removed from the Premises, including any
complaints, notices, warnings or asserted violations in connection therewith.
Tenant shall also supply to Landlord as promptly as possible, and in any event
within five business days after Tenant first receives or sends the same,
copies of all claims, reports, complaints, notices, warnings or asserted
violations, relating in any way to the Premises or Tenant's use thereof.
Tenant shall promptly deliver to Landlord copies of hazardous waste manifests
reflecting the legal and proper disposal of all Hazardous Materials removed
from the Premises.
20.3. INDEMNITY. With respect to Tenant's use and occupancy of the
Premises and Common Areas, Tenant shall indemnify, defend (by counsel
reasonably acceptable to Landlord), protect, and hold Landlord and each of
Landlord's officers, directors, shareholders, employees, agents, attorneys,
successors and assigns, free and harmless from and against any and all claims,
liabilities, penalties, forfeitures, losses or expenses (including attorneys'
fees), or death of or injury to any person or damage to any property
whatsoever, arising from or caused in whole or in part, directly or
indirectly, by (a) the presence in, on, under or about the Premises, or
discharge in or from the Premises, of any Hazardous Materials that arose or
occurred by reason of the acts or omissions of Tenant or its employees,
contractors, invitees and representatives; (b) Tenant's use, analysis,
storage, transportation, disposal, release, threatened release, discharge or
generation of Hazardous Materials to, in , on, under, about or from the
Premises; or (c) Tenant's failure to comply with any Hazardous Materials Law.
Tenant's obligations hereunder shall include, without limitation, and whether
foreseeable or unforeseeable, all costs of any required or necessary repair,
cleanup or detoxification or decontamination of the Premises, or the
preparation and implementation of any closure, remedial action or other
required plans in connection therewith, and shall survive the expiration or
earlier termination of the Term. For purposes of the release and indemnity
provisions thereof, any acts or omissions of Tenant, or by employees, agents,
assignees, subtenants, contractors or subcontractors of Tenant or others
acting for or on behalf of Tenant (whether or not they are negligent,
intentional, willful or unlawful) shall be strictly attributable to Tenant.
21. NOTICE.
All notices, demands or requests from one party to the other shall be in
writing. Notices may be personally delivered, sent by Federal Express or
other reputable express delivery service, sent by telecopier with first-class
mail backup, or sent by certified mail, postage prepaid, to the addresses set
forth at Section 1.17 or 1.18, as applicable. Notices shall be deemed
received upon actual delivery to the addressee with respect to personal or
express delivery service or telecopier, and three (3) days after deposit in
the mails with respect to mailing. Each party shall have the right, from time
to time, to designate a different address by notice given in conformity with
this Section to the other party.
22. OTHER TERMS AND CONDITIONS.
22.1. SIGNAGE. Tenant shall not place or permit to be placed, any
sign, advertisement, notice or other similar matter on the doors, windows,
exterior walls, roof or other areas of the Premises which are open to the view
of persons outside the Premises, except in accordance with Landlord's signage
plan which is attached as Exhibit D.
22.2. PARKING. In connection with its use and occupancy of the Premises,
Tenant shall have the right to park in the parking area of the Project, at no
additional charge and on a non-reserved basis and on terms and conditions to
be established by the Landlord from time to time during the Term and any
Extension Term, no more than the number of vehicles set forth in Section 1.16.
The parking authorized by this Section shall be for personal transportation
to and from the Premises, and not for long-term storage of automobiles or for
short- or long-term storage of boats, trailers or recreational vehicles.
Landlord reserves the right to designate certain parking areas in the Project
as being for the exclusive use of other tenants of the Project.
22.3. SITE PLAN. The purpose of the site plan attached hereto as Exhibit
A is to show the existing development of the Project, the approximate
locations of buildings areas, traffic lanes, sidewalks, parking areas, curb
cuts and abutting thoroughfares, and of the Premises, and those intended to be
leased to other tenants, whether named thereon or not. All such information
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is subject to change at Landlord's option without notice, and no rights are
granted to Tenant by the inclusion of said plot plan as a part of this Lease.
No representations or warranties are made by Landlord that the Project or the
Business Park will be developed as shown. The foregoing is in addition to,
not in substitution of, all rights reserved to Landlord pursuant to Section 3
above.
22.4. EASEMENTS. Landlord reserves to itself the right, from time to
time, to grant such easements, rights and dedications as Landlord deems
necessary or desirable, and to cause the recordation of parcel maps and
restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with Tenant's normal conduct of its
business on the Premises. Tenant shall sign any of the aforementioned
documents upon request of Landlord and failure to do so shall constitute a
material default of this Lease by Tenant without the need for further notice
to Tenant.
22.5. NO LIGHT, AIR OR VIEW EASEMENTS. No diminution or shutting off of
light, air or view by any structure which may be erected on lands adjacent to
the Building shall in any way affect this Lease or impose any liability on
Landlord.
22.6. SECURITY MEASURES. Tenant acknowledges that Landlord does not
intend to provide guard service or other security measures for the benefit of
the Premises. Tenant assumes all responsibility for the protection of Tenant,
its agents, and invitees and the property of Tenant and of Tenant's agents and
invitees from acts of third parties, and assumes all risk in connection with
any failure to provide or lack of such security measures. Tenant hereby
waives any and all claims for damages to persons or property sustained by
Tenant, or by any other person or entity, arising from, out of or in
connection with, or alleged to arise from, out of or in connection with,
Landlord's not providing any security measure for the Premises or Project.
Nothing herein contained shall prevent Landlord, at Landlord's sole option,
from providing security protection for the Premises, in which event the costs
thereof shall be included within Operating Expenses.
22.7. HOLDING OVER BY TENANT. Tenant agrees upon the expiration or
termination of this Lease, immediately and peaceably to yield up and surrender
the Premises; notice to quit or vacate is hereby expressly waived. Tenant
shall be liable to Landlord for any and all damages incurred by Landlord as
the result of any failure by Tenant to timely surrender possession of the
Premises as required herein. If Tenant shall hold over after the expiration
of this Lease for any cause, such holding over shall be deemed a tenancy at
sufferance or, at the sole discretion of Landlord, a tenancy from
month-to-month, in which event such month-to-month tenancy shall be upon the
same terms, conditions and provisions set forth in this Lease, at one and
one-half (1 1/2) times the Base Rent that was in effect immediately prior to
the termination.
22.8. LANDLORD'S RIGHT OF ENTRY. Landlord and Landlord's agents may enter
upon the Premises at any reasonable time and upon reasonable notice (except no
notice shall be required in an emergency) to make such repairs, additions or
improvements as Landlord shall deem necessary; to post such notices as
Landlord may deem necessary to exempt Landlord and Landlord's interest in the
Building and Premises from responsibility on account of any work or repairs
done by Tenant upon or in connection with the Premises; to inspect and examine
the Premises and see that the covenants hereof are being kept and performed;
or to exhibit the Premises to prospective tenants or purchasers.
22.9. FURNISHING OF FINANCIAL STATEMENTS. Tenant acknowledges that
Landlord entered into this Lease in reliance upon receiving current and
periodic financial reports documenting the progress of Tenant's business
operations. Accordingly, Tenant shall deliver to Landlord, within ten (10)
days after request therefor from time to time and in any event no later than
June 30 of each year of the Term, financial statements reflecting Tenant's
current financial condition and financial statements for each of the two (2)
years prior to the then-current fiscal statement year. Such statements shall
be prepared in accordance with generally accepted accounting principles and,
if such is the normal practice of Tenant, shall be audited by an independent
certified public accountant.
22.10 AUCTIONS. Tenant shall not conduct, nor permit to be conducted,
either voluntarily or involuntarily, any auction upon the Premises, without
first having obtained Landlord's prior written consent. Notwithstanding
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anything to the contrary in this Lease, Landlord shall not be obligated to
exercise any standard of reasonableness in determining whether to grant such
consent.
22.11. KEYS. Two (2) keys to the Premises will be furnished by Landlord.
Additional keys will be furnished upon Tenant paying Landlord the cost
thereof. No additional lock or locks shall be placed by Tenant on any
entrance door in the Building unless written consent of Landlord shall have
been first obtained and, should such consent be so obtained, Landlord shall be
supplied with keys to each such lock and no other than the employees of
Landlord or those it has authorized in writing shall work on or modify any
lock which is part of the entrance to the Premises or Building. Tenant shall
be permitted the duplication of any keys to be made however, Tenant shall not
cause or allow any keys to be possessed by any person other than an authorized
agent of Tenant. Tenant agrees, at the termination of the tenancy, to return
all keys of all doors.
22.12. OTHER TENANCIES. Landlord reserves the absolute right to effect
such other tenancies in the Business Center as Landlord, in the exercise of
its sole business judgment, shall determine to promote the best interest
thereof. Tenant does not rely on the fact nor does Landlord represent, that
any specific tenants shall, during the Term of this Lease, occupy any space in
the Business Park, notwithstanding the appearance of any names of tenants on
the site plan attached hereto as Exhibit A, or any replacements or
substitutions thereof.
22.13. BROKERS' FEES. Landlord has agreed to pay a fee for brokerage
services rendered in this transaction to the broker(s) identified in Section
1.15. Such brokerage commission shall be payable in accordance with the
separate written agreement between Landlord and such broker(s), which alone
shall govern such brokers' entitlement to any commission. Landlord and Tenant
each represent and warrant to the other that no broker, agent or finder,
licensed or otherwise has been engaged by it, respectively, in connection with
the transaction contemplated by this Agreement, other than the broker(s) named
above. In the event of any other claim for broker's, agent's or finder's fee
or commission in connection with this transaction, the party upon whose
alleged statement, representation or agreement such claim or liability arises
shall indemnify, save, hold harmless and defend the other party from and
against such claim and liability.
23. GENERAL PROVISIONS.
23.1. EXCULPATION. The obligations of Landlord under this Lease do
not constitute personal obligations of Landlord or its directors, officers or
shareholders, and Tenant shall look solely to the Project and to no other
assets of Landlord for satisfaction of any liability with respect to this
Lease, and agrees not to seek recourse against the directors, officers or
shareholders of Landlord, nor against any of their personal assets, for such
satisfaction.
23.2. CONVEYANCE BY LANDLORD. Landlord shall be free at all times,
without need of consent or approval by Tenant, to assign its interest in this
Lease and/or to convey fee title to the Premises. Each conveyance by Landlord
of Landlord's interest in the Lease or the Premises prior to expiration or
termination hereof shall be subject to this Lease and shall relieve the
grantor of any further obligations or liability as Landlord, and Tenant shall
look solely to Landlord's successor in interest for all future obligations of
Landlord. Tenant hereby agrees to attorn to Landlord's successors in
interest, whether such interest is acquired by sale, transfer, foreclosure,
deed in lieu of foreclosure or otherwise. The term "Landlord" as used in this
Lease, so far as covenants and obligations on the part of Landlord are
concerned, shall be limited to mean and include only the owner at the time in
question of the fee title of the Premises. Without further agreement, the
transferee of such title shall be deemed to have assumed and agreed to observe
and perform any and all obligations of Landlord hereunder during its ownership
of the Premises.
23.3. QUIET ENJOYMENT. Landlord agrees that so long as Tenant is not in
default hereunder Tenant shall have the quiet enjoyment of the Premises
without hindrance on the part of Landlord. Landlord further agrees that
Landlord will warrant and defend Tenant in the peaceful and quiet enjoyment of
the Premises against the lawful claims of all persons claiming by, through or
under Landlord.
23.4. NO ACCORD AND SATISFACTION. No payment by Tenant or receipt by
Landlord of a lesser amount than the rent herein stipulated shall be deemed to
be other than on account of the earliest stipulated rent, nor shall any
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endorsement or statement on any check or any letter accompanying any check or
payment as rent be deemed an accord and satisfaction, and Landlord shall
accept such check or payment without prejudice to Landlord's right to recover
the balance of such rent or pursue any other remedy in this Lease provided.
23.5. WAIVER. No delay or omission in the exercise of any right or remedy
of Landlord for any Default by Tenant hereunder shall impair such right or
remedy or be construed as a waiver thereof. One or more waivers of any
covenant or condition by Landlord shall not be construed as a waiver of a
subsequent breach of the same covenant or condition, and the consent or
approval by Landlord to or of any act by Tenant requiring Landlord's consent
or approval shall not be deemed to render unnecessary Landlord's consent or
approval to or of any subsequent similar act by Tenant. No breach of a
covenant or condition of this Lease shall be deemed to have been waived by
Landlord unless such waiver is in writing signed by Landlord. The acceptance
of any rent or other charges hereunder shall not be deemed a waiver of any
breach or Default hereunder other than the payment of the amount accepted by
Landlord.
23.6. CUMULATIVE RIGHTS. The various rights, options, elections, powers
and remedies contained in this Lease shall be construed as cumulative and no
one of them shall be exclusive of any of the others, or of any other legal or
equitable remedy which either party might otherwise have in the event of
breach or default in the terms hereof, and the exercise of one right or remedy
by such party shall not impair its right to any other right or remedy until
all obligations imposed upon the other party have been fully performed.
23.7. INDEPENDENT COVENANTS. This Lease shall be construed as though the
covenants herein between Landlord and Tenant are independent and not
dependent, and Tenant hereby expressly waives the benefit of any statute to
the contrary and agrees that if Landlord fails to perform its obligations set
forth herein, Tenant shall not be entitled to make any repairs or perform any
acts hereunder at Landlord's expense or to any setoff of the rent or other
amounts owing hereunder against Landlord; provided, however, the foregoing
shall in no way impair the right of Tenant to commence a separate action
against Landlord for any violation by Landlord of the provisions hereof so
long as notice is first given to Landlord and any Mortgagee (of whose address
Tenant has theretofore been notified) and an opportunity is granted to
Landlord and such holder to correct such violation as provided above.
23.8. RELATIONSHIP OF THE PARTIES. Nothing contained herein shall be
deemed or construed by the parties hereto, nor by any third party, as creating
the relationship of principal and agent or of partnership or of joint venture
between the parties hereto, it being understood and agreed that neither the
method of computation of rent, nor any other provision contained herein, nor
any acts of the parties hereto, shall be deemed to create any relationship
between the parties hereto other than the relationship of landlord and tenant.
23.9. FORCE MAJEURE. If either party is delayed in the performance of any
covenant of this Lease because of any of the following causes, then such
performance shall be excused for the period of the delay and the period for
such performance shall be extended for a period equivalent to the period of
such delay; acts of the other party; action of the elements; war, riot or
civil insurrection; building moratoria, trip generation restrictions or other
similar action by the City of San Diego or other governmental agency or
entity; labor disputes; inability to procure or a general shortage of labor or
materials in the normal channels of trade; delay in transportation; delay in
inspections; or any other cause beyond the reasonable control of the party so
obligated, whether similar or dissimilar to the foregoing, financial inability
excepted; provided, however, that except as specifically set forth elsewhere
in this Lease, no such events shall affect Tenant's obligation to pay Base
Rent, Additional Rent or any other amount payable under this Lease, nor shall
such events affect the length of the Term (except to the extent expressly
provided herein).
23.10. CONSENTS. With respect to any provision of this Lease which either
provides or is held to provide that Landlord shall not unreasonably withhold
or unreasonably delay any consent or approval, Tenant shall not be entitled to
make any claim for, and Tenant hereby expressly waives, any claim for damages,
it being understood and agreed that Tenant's sole remedy therefor shall be an
action for specific performance.
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23.11. COUNTERPARTS. This Lease may be executed in two or more
counterparts, each of which shall be an original, but all of which shall
constitute one and the same instrument.
23.12. AUTHORITY. Each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute
and deliver this Lease on behalf of said entity. Upon the request of the
other party, any such party shall, at the time of the execution of this Lease,
deliver to the other party evidence of such authority satisfactory to the
other party.
23.13. RECORDING. Tenant shall not record this Lease or any short form or
memorandum version hereof without the prior written consent of Landlord, which
may be withheld at Landlord's sole discretion.
23.14. INTERPRETATION AND USE OF PRONOUNS. Wherever herein the singular
number is used, the same shall include the plural, and the masculine gender
shall include the feminine and the neuter genders. All conditions contained
herein shall be deemed covenants. The words "breach" or "default" are used
interchangeably herein and each shall be deemed to include the other.
23.15. CAPTIONS AND INTERPRETATIONS. Section titles or captions contained
in this Lease are inserted as a matter of convenience and for reference and in
no way define, limit, extend or describe the scope of this Lease or any
provision hereof. No provision in this Lease is to be interpreted for or
against either party because that party or its legal representative drafted
such provision.
23.16. SEVERABILITY. If any term, covenant, condition or provision of
this Lease is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the provisions shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
23.17. APPLICABLE LAW. This Lease shall be governed by, and construed in
accordance with, the laws of the State of California, notwithstanding the
fact that Landlord or Tenant may be located in another State or that this
Lease may be executed in another State. If any provision of this Lease or the
application thereof to any person or circumstances shall, to any extent, be
invalid or unenforceable, the remainder of this Lease shall not be affected
thereby, and each provision of this Lease shall be valid and enforceable to
the fullest extent permitted by law. Any action brought to enforce or nullify
this Lease or the provisions hereof shall be brought in San Diego County,
California, and in no other forum.
23.18. WAIVER OF RIGHT OF REDEMPTION. Tenant hereby waives for Tenant and
for all those claiming under Tenant all right now or hereafter existing to
redeem, by statute or by order or judgment of any court or by any legal
process or writ, Tenant's right of occupancy of the Premises after any
termination of this Lease. Tenant hereby waives its rights under California
code of civil procedure 1179.
23.19 ATTORNEYS' FEES. In case suit shall be brought for any unlawful
detainer of the Premises, for the recovery of any rent due under the
provisions of this Lease, or because of the breach or alleged breach of any
other covenant herein contained, the prevailing party shall recover from the
non-prevailing party all costs and expenses incurred therein, including
reasonable attorneys' fees and expenses incurred in enforcing any judgment.
If Landlord, through no fault of its own, is made a party to any litigation
relating to the subject matter covered by this Lease instituted by or against
Tenant, then Tenant shall defend, indemnify and hold Landlord harmless from
and against all costs and expenses, including reasonable attorneys' fees,
incurred by Landlord in connection therewith. In addition thereto, Tenant
agrees to pay Landlord's costs, expenses and reasonable attorneys' fees with
respect to: (i) each request to Landlord for permission or consent to assign
or sublet the Premises, as provided in Section 15.5 above; (ii) each request
made by Tenant to modify, amend or supplement this Lease; and (iii) any breach
or default by Tenant which is cured prior to litigation. Landlord shall
notify Tenant of the amount of such attorneys' fees, and Tenant shall pay the
same (as Additional Rent) within fifteen (15) days after such notice.
23.20. JOINT AND SEVERAL OBLIGATIONS. If there shall be more than one
Tenant, they shall all be bound jointly and severally by the terms,
provisions, covenants, conditions, and agreements herein. No rights, however,
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shall inure to the benefit of any assignee of Tenant unless the assignment to
such assignee has been approved by Landlord in writing as required hereunder.
23.21. SUCCESSORS AND ASSIGNS. The covenants and conditions herein
contained shall, subject to the provisions as to assignments, apply to and
bind the heirs, successors, executors, administrators and assigns of the
respective parties hereof. If this Lease is signed by more than one person as
Tenant, their obligation shall be joint and several.
23.22. TIME OF THE ESSENCE. Time is expressly declared to be of the
essence of this Lease, and of all covenants and conditions herein contained.
23.23. NO THIRD-PARTY BENEFICIARIES. The provisions of this Lease are
solely for the benefit of the parties hereto, and no broker or other third
party shall be entitled to any benefits hereof or hereunder.
23.24. ENTIRE AGREEMENT. This Lease and the exhibits, and the Addendum,
if any, attached hereto and forming a part hereof, set forth all the terms,
provisions, covenants, conditions, promises, agreements and understandings
between Landlord and Tenant concerning the Premises. There are no warranties,
representations, covenants, promises, agreements, conditions or
understandings, either oral or written, between them other than set forth
herein. No alteration, amendment, change or addition to this Lease shall be
binding upon Landlord or Tenant unless reduced to writing and signed by each
party.
23.25. NO OPTION BY LANDLORD. Preparation of this Lease by Landlord or
Landlord's agent and submission of same to Tenant shall not be deemed an
option or offer to lease the Premises on the terms and conditions contained
herein or a reservation of the Premises in favor of Tenant. This Lease shall
become binding upon Landlord only upon Landlord's execution and delivery of
this Lease to Tenant. The receipt (which shall include the cashing, deposit
or other negotiation of checks, money orders and the like) of any moneys by
Landlord which are tendered by Tenant along with a Tenant-executed copy of
this Lease, or at any time prior to Landlord's delivery of a fully executed
copy of this Lease to Tenant, shall not constitute an acceptance of Tenant's
offer to lease as contained herein. Tenant acknowledges that Landlord will
not deliver a fully executed copy of this Lease until Landlord has received
both any Guaranties required hereunder, and such corporate resolutions or
other information as reasonably satisfies Landlord as to the incumbency and
authority to sign of each individual signing this Lease or any Guaranty.
Tenant also acknowledges that the fully executed Lease will not be delivered
by Landlord to Tenant unless and until approved by Landlord's lender, and that
in determining whether to approve. Landlord's lender will consider Tenant's
lease application, credit information, biographical data on Tenant's key
officers or principals, and financial statements relating to Tenant's
business. Notwithstanding the foregoing, delivery of this Lease by Tenant to
Landlord after signature by Tenant shall constitute an option which can be
accepted by Landlord at any time until two (2) week s after delivery of the
signed Lease by Tenant.
23.26. EXHIBITS. All exhibits described herein, if any, are part of this
Lease and by this reference are expressly incorporated herein. This Lease
contains the following Exhibits:
Exhibit A Project Site Plan
Exhibit B Premises and Improvements to Premises
Exhibit C Rules and Regulations
Exhibit D Signage Criteria
Exhibit E Environmental Questionnaire
Exhibit F Declaration of Restrictions
23.27. ADDENDUM. The attached Addendum, if any is specified in
Section 1.19 above, is part of this Lease and by this reference is expressly
incorporated herein.
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IN WITNESS WHEREOF, the parties hereto have executed this Lease on the date(s)
set forth by their respective signatures.
LANDLORD:
Date: 8/14/97 WESTERN SALT COMPANY, a California corporation
By /s/ Kevin D. Hill
Kevin D. Hill, Leasing Manager
By /s/ Michael P. Neal
Michael P. Neal, Vice President, R.E. Portfolio
Management and Development
TENANT:
Date: 8-6-97 RESMED CORP., a Minnesota corporation
By /s/ Norman DeWitt
- -32-
ADDENDUM TO LEASE
The following additional provisions are a part of, and incorporated in, the
Lease to which this Addendum is attached. In the event of any conflict
between the provisions of this Addendum and the body of the Lease, this
Addendum shall control.
24. OPTION TO EXTEND.
Subject to satisfaction of the conditions precedent set forth below,
Tenant shall have one (1) option to extend the Term ("EXTENSION OPTION") for
sixty (60) months beginning the day after the expiration of the initial Term
("EXTENSION TERM"), on the following terms and conditions:
24.1. Tenant's Extension Option shall be subject to satisfaction of
each of the following conditions precedent, which are solely for the benefit
of, and may be waived unilaterally by, Landlord:
(a) The Extension Option shall be exercised by written notice
delivered by Tenant to Landlord not later than six (6) months prior to the end
of the Term;
(b) Tenant shall be in occupancy of at least one hundred percent (100%) of
the area of the Premises directly or through a wholly owned subsidiary (at any
tier), and not through an unaffiliated assignee or sublessee; and
(c) The Lease shall be in effect and Tenant shall not be in default of any
material provision thereof both on the day such written notice is delivered to
Landlord and on the last day of the Term; provided, however, if Tenant is in
default but the cure period has not run, this condition shall be deemed
satisfied if Tenant cures the default within the applicable cure period.
24.2. In the event the Term shall be extended following exercise by
Tenant of the Extension Option, then all of the terms, covenants and
conditions of this Lease shall remain in full force and effect during the
Extension Term, except that the initial monthly Base Rent during the Extension
Term shall be adjusted to the then-effective market rate, including increases
to Base Rent, as reasonably determined by Landlord for new leases for
comparable space in the area ("FAIR MARKET RENTAL VALUE"), which shall be
determined in accordance with Section 24.3.
24.3. Landlord's determination of the initial monthly Base Rent shall be
delivered to Tenant within thirty (30) days after Tenant's Extension Option
notice is delivered as set forth in 24.1(a) above. In the event Tenant
rejects Landlord's determination and so notifies Landlord within ten (10) days
after the receipt of the determination, Landlord and Tenant shall, within
thirty (30) days after Tenant rejects Landlord's determination, jointly select
an M.A.I. appraiser to determine the Fair Market Rental Value for the Premises
during the Extension Term, taking into account all relevant factors for
comparable space in the Scripps Ranch area. Tenant shall have thirty (30)
days after receipt of the appraiser's report to notify Landlord in writing
that Tenant does not agree with the appraiser's determination of Fair Market
Rental Value and therefore that Tenant elects to retract its exercise of the
Extension Option, in which case the Term shall expire on its schedule
expiration date. The costs of the appraiser shall be borne equally by the
parties.
26. ADDITIONAL TENANT IMPROVEMENT ALLOWANCE.
Subject to the terms and conditions of this Section, and in addition to
the Tenant Improvement Allowance as set forth in Section 1.11, Landlord shall,
at Tenant's request, make available to Tenant up to an additional $22,976.00
for any cost and expense of constructing improvements to the Premises as
described in the attached Exhibit B (the "Additional Tenant Improvement
Allowance"). In the event Tenant does elect to have Landlord pay for any such
Additional Tenant Improvement Allowance, Tenant shall pay to Landlord each
month during the remaining Term, as Additional Rent, an amount (the
"Improvement Amortization Rent") equal to the Additional Tenant Improvement
Allowance so advanced by Landlord multiplied by 0.015174, as a constant based
on a ninety six (96) month amortization period at the rate of ten percent
(10%) per annum. To illustrate, if Tenant should require Landlord to pay
$15,000 in Additional Tenant Improvement Allowance, then the Improvement
Amortization Rent would be in the amount of $227.61 per month throughout the
Term. Any Improvement Amortization Rent shall be payable at the same time and
in the same manner as monthly Base Rent, beginning with the Commencement Date
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and continuing on the first day of each month throughout the remaining Term.
When the amount of any Improvement Amortization Rent has been determined, the
parties shall execute and attach to the Lease a written statement specifying
such amount.
27. ADDITIONAL PROVISIONS RE OPERATING EXPENSES.
Notwithstanding anything in the Lease to the contrary, during the initial
Term, Tenant's Share of the Projects Operating Expenses for any calendar year
shall be limited to one hundred seven percent (107%) of the Operating Expenses
[(excluding trash disposal, common area utilities (water and electricity),
real estate taxes and property insurance)] actually paid by Tenant during the
preceding calendar year; provided, however, that with respect to the amount
payable for calendar year 1998, the limitation shall be Tenant's Share of one
hundred seven percent (107%) of the Operating Expenses actually incurred by
Landlord for calendar year 1997, reasonably "grossed up" by Landlord to
reflect any increases in Operating Expenses that would have been incurred had
Tenant been in occupancy of the Premises for all of calendar year 1997.
LANDLORD:
Date: 8/14/97 WESTERN SALT COMPANY, a California corporation
By /s/ Kevin D. Hill
Kevin D. Hill, Leasing Manager
By /s/ Michael P. Neal
Michael P. Neal, Vice President, R.E. Portfolio
Management and Development
TENANT:
Date: 8-6-97 RESMED CORP., a Minnesota corporation
By /s/ Norman DeWitt
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Exhibit 11.1
RESMED INC AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended June 30,
--------------------
1998 1997 1996
-------------------- ------------- -------------
BASIC EARNINGS
Net income $ 10,611 7,465 4,503
============ ============ ============
Shares
Weighted average number of common
shares outstanding 7,250 7,189 7,090
============ ============ ============
Basic earnings per share $ 1.46 $ 1.04 $ 0.64
============ ============ ============
DILUTED EARNINGS
Net income $ 10,611 7,465 4,503
============ ============ ============
Shares
Weighted average number of common
shares outstanding 7,250 7,189 7,090
Additional shares assuming conversion of
stock options under treasury stock method 261 128 109
____________ ____________ ____________
Weighted average number of common and
common equivalent shares outstanding 7,511 7,317 7,199
as adjusted
============ ============ ============
Diluted earnings per share $ 1.41 $ 1.02 $ 0.63
============ ============ ============
Exhibit 21.1
RESMED INC
SUBSIDIARIES OF THE REGISTRANT
ResMed Holdings Limited (incorporated under the laws of New South Wales,
Australia)
ResMed Limited (incorporated under the laws of New South Wales, Australia)*
ResMed Corporation (a Minnesota corporation)
ResMed (UK) Limited (a United Kingdom corporation)*
ResMed International Inc (a Delaware corporation)
ResMed Priess GmbH and Co Kg (a German corporation)**
ResMed SA (a French corporation)**
ResMed Priess GmbH (a German corporation)
ResMed Singapore Pte Ltd (a Singaporean corporation)**
ResMed (Malaysia) Sdn Bhd (a Malaysian Corporation)**
*A subsidiary of ResMed Holdings Limited
** A subsidiary of ResMed International Inc
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
The Board of Directors and Stockholders
ResMed Inc.:
The audits referred to in our report dated August 14, 1998, included the
related financial statement schedule as of June 30, 1998 and for each of the
years in the three-year period ended June 30, 1998. 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 consolidated financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
We consent to incorporation by reference in the registration statement (No.
333-08013) on Form S-8 of ResMed Inc. of our report dated August 14, 1998,
relating to the consolidated balance sheets of ResMed Inc. and subsidiaries as
of June 30, 1998 and 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 1998, which report appears in the June 30, 1998 annual
report on Form 10-K of ResMed Inc.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
San Diego, California
September 14, 1998
Exhibit 27.1
RESMED INC
This schedule contains summary financial information extracted from ResMed
Inc's Annual June 30, 1998 financial report and is qualified in its entirety
by reference to such financial statements.
Period Type 12 Months 12 Months
Fiscal-Year-End June 30, 1998 June 30, 1997
Period-End June 30, 1998 June 30, 1997
Exchange-Rate 1 1
Cash 15,526,000 9,077,000
Securities 5,220,000 18,908,000
Receivables 12,789,000 7,834,000
Allowances (248,000) (277,000)
Inventory 7,647,000 5,797,000
Current-Assets 46,604,000 44,391,000
PP&E 11,111,000 4,916,000
Depreciation 0 0
Total-Assets 64,618,000 54,895,000
Current-Liabilities 13,845,000 9,996,000
Bonds 0 0
Preferred-Mandatory 0 0
Preferred 0 0
Common 29,000 29,000
Other-Se 31,253,000 29,656,000
Total-Liability-And-Equity 64,618,000 54,895,000
Sales 66,519,000 49,180,000
Total-Revenues 66,519,000 49,180,000
CGS 23,069,000 20,287,000
Total-Costs 0 0
Other-Expenses 0 0
Loss-Provision 0 0
Interest-Expense 0 0
Income-Pretax 16,112,000 11,087,000
Income-Tax 5,501,000 3,622,000
Income-Continuing 10,611,000 7,465,000
Discontinued 0 0
Extraordinary 0 0
Changes 0 0
Net-Income 10,611,000 7,465,000
EPS-Basic 1.46 1.04
EPS-Diluted 1.41 1.02
(File No. 0-26038)