UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
_________________
FORM 10-K
_________________
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
COMMISSION FILE NUMBER 0-26038
RESMED INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 98-0152841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10121 CARROLL CANYON ROAD
SAN DIEGO CA 92131-1109
UNITED STATES OF AMERICA
(Address of principal executive offices)
619 689 2400
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS:
Common Stock, $.004 Par Value
Rights to Purchase Series A Junior
Participating Preferred Stock
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes 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'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( ).
The aggregate market value of the voting stock held by non-affiliates of
Registrant as of September 8, 1998, computed by reference to the closing sale
price of such stock on the NASDAQ Stock Market, was approximately $289,026,265
(All directors and executive officers of Registrant are considered
affiliates.)
At September 8, 1998, Registrant had 7,326,873 shares of Common
Stock, $.004 par value, issued and outstanding.
Portions of Registrant's definitive Proxy Statement for its November 6, 1998
meeting of stockholders are incorporated by reference into Part III of this
report.
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THE INFORMATION CONTAINED IN THIS REPORT INCLUDES FORWARD-LOOKING STATEMENTS,
WHICH ARE TYPICALLY IDENTIFIED BY THE WORDS "ANTICIPATES", "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.
PART I
Item 1. Business
General
ResMed is a leading designer, manufacturer and distributor of medical
equipment for treating and diagnosing sleep disordered breathing ("SDB"). SDB
includes sleep apnea 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.
When ResMed was formed in 1989, its prime purpose was to commercialize a
device for treating obstructive sleep apnea (OSA). Developed by Professor
Colin Sullivan of the University of Sydney, nasal continuous positive airway
pressure (CPAP) was the first successful noninvasive treatment of OSA.
Since 1989, ResMed has broadened its focus to cover sleep disordered breathing
in all its manifestations. Operations have expanded rapidly through the
introduction of a number of highly innovative product lines. As a consequence,
the Company has achieved 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 continuing focus on sleep disordered breathing and the development
of technology for treating its unwanted medical consequences.
Corporate History
ResMed Inc., a Delaware corporation, was formed in March 1994 as the
ultimate holding company for its Australian, European and United States
operating subsidiaries. On June 1, 1995 the Company completed an initial
public offering of common stock and on June 2, 1995 the Company's common stock
commenced trading on the NASDAQ Stock Market. Its 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"), the rights to certain technology relating to nasal Continuous
Positive Airway Pressure ("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 specialized 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 Company acquired the distribution businesses of Dieter W Priess
Medtechnik, Premium Medical SARL and Innovmedics Pte Ltd, its German, French
and Singaporean distributors, on February 7, 1996, June 12, 1996 and November
1, 1997, respectively.
Obstructive Sleep Apnea
OSA is a breathing disorder in which an individual experiences a
temporary collapse of the upper airway during sleep. This restricts breathing
and severely disrupts the individual's sleep. Sleep is a complex neurological
process that includes two distinct states: rapid eye movement ("REM") sleep
and non-rapid eye movement ("non-REM") sleep. REM sleep, which is about
20-25% of total sleep in adults, is characterized by a high level of brain
activity, bursts of rapid eye movement, increased heart and respiration rates,
and paralysis of many muscles. Non-REM sleep is subdivided into four stages
that generally parallel sleep depth: stage 1 is the lightest and stage 4 is
the deepest.
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The upper airway has no rigid support and is held open by active
contraction of upper airway muscles. Normally, during REM sleep and deeper
levels of non-REM sleep, upper airway muscles relax and the airway narrows.
Individuals with narrow upper airways or poor muscle tone are prone to upper
airway closure during sleep (an "apnea"), resulting in an inability to
breathe, or near closure (an "hypopnea") which causes snoring and breathing
difficulties. These breathing irregularities result in a lowering of blood
oxygen concentration, until the brain reacts to the lack of oxygen or
increased carbon dioxide and signals 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. 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 million of these
persons over the age of 30 experience moderate to severe forms of sleep apnea.
However, there is a general lack of awareness of OSA among both the medical
community and the general public, which has led to a corresponding failure to
diagnose the disorder. It is estimated that less than 3% of those persons
afflicted by OSA know the cause of their fatigue or other symptoms. 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.
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Generally, an individual seeking treatment for the symptoms of OSA is
referred by a general practitioner to a specialist, such as a pulmonologist,
neurologist or psychiatrist for further evaluation. The diagnosis of OSA
typically requires monitoring the patient during sleep at either a sleep
clinic or the patient's home. During overnight testing, respiratory
parameters and sleep patterns are monitored along with other vital signs such
as blood pressure, heart rate and blood oxygen levels. These tests allow sleep
clinicians to detect any sleep disturbances such as apneas, hypopneas or
subconscious awakenings.
The Company estimates that there are currently more than 1,800 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"), 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 was first used as a treatment for OSA in 1980 by Dr. Colin
Sullivan, the Chairman of the Company's Medical Advisory Board. CPAP systems
were commercialized for treatment of OSA in the United States in the mid
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 nightly basis for life. Patient compliance has been a major
factor in the efficacy of CPAP treatment. Early generations of CPAP units
provided limited patient comfort and convenience. Patients experienced
soreness from the repeated use of nasal masks and had difficulty falling
asleep with the CPAP device operating at the prescribed pressure. Over the
past few 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-level flow generators, including VPAP systems, which provide
different air pressures for inhalation and exhalation.
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Business Strategy
The Company believes that the SDB market will increase in the future due
to a number of factors including the increased awareness of OSA, improved
understanding of the role of OSA in cardiac treatment and related disorders
and an increase in home based treatment and diagnosis. The Company's strategy
for the expansion of its business operations consists of the following key
elements.
Continue Product Development and Innovation. The Company believes that
it is a leading innovator in nasal CPAP and bi-level technology for the
treatment of sleep disordered breathing including OSA and that continued
product development and innovation will be a key factor in its success. Since
its founding, the Company has introduced product advancements and improvements
designed to increase patient comfort and encourage compliance, such as delay
timers, heated humidifiers, and pliable Bubble Masks(Registered Trademark).
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 its
products in over 40 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 intends to increase its
sales and marketing efforts in its current markets, particularly Europe and
the United States, as well as to continue expansion into new countries. The
Company recently signed a distribution agreement with Invacare Corp., pursuant
to which Invacare Corp. has agreed to act as a distributor of certain of the
Company's products in the United States.
Increase Public and Clinical Awareness. The Company intends to promote
awareness of the prevalence of, and treatment alternatives for, SDB with three
main groups: (1) the population with predisposition to SDB; (2) primary care
physicians and other specialists, such as cardiologists, neurologists,
pulmonologists and anesthesiologists; and (3) special interest groups, such as
sleep disorder support groups. The Company has sponsored international
symposia on different clinical effects of SDB, including cardiovascular 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.
Expand into New Markets. The Company is working with physicians to
explore new medical applications for nasal CPAP, including 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 disease 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.
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Products
Currently, ResMed produces nasal CPAP, VPAP(Registered Trademark) and
AutoSet(Registered Trademark) systems for the diagnosis, titration and
treatment of SDB. These are 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)
systems 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 when the patient breathes in and a lower pressure when the patient
breathes out. The lower pressure makes treatment more comfortable,
particularly for patients who need high pressure levels, or for patients with
impaired breathing ability.
There are primarily three models in the VPAP(Registered Trademark)
range: the SULLIVAN(Registered Trademark) VPAP(Registered Trademark) II, the
SULLIVAN(Registered Trademark) Comfort 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.
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. Flow generators accounted
for approximately 66%, 67% and 68% of the Company's net revenues in fiscal
1998, 1997 and 1996 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.
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<TABLE>
<CAPTION>
The following table lists the Company's products.
<S> <C> <C>
Date of Commercial
Product Features Introduction; Status
- ---------------------------------- ------------------------------------------------------------- --------------------------
FLOW GENERATORS:
Pediatric CPAP Fixed-pressure, 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)II different pressure levels for inhalation and
exhalation, features improved pressure
switching and reduced noise output and
spontaneous breath triggering
SULLIVAN(Registered Trademark)
COMFORT Limited featured dual pressure device March 1996
SULLIVAN(Registered Trademark) Dual pressure portable device with April 1996
VPAP(Registered Trademark)II ST spontaneous and spontaneous/timed breath
triggering modes of operation
VPAP(Registered Trademark)II ST A Version of VPAP(Registered Trademark)II ST equipped August 1998
with high/ low pressure, power failure alarms.
For noninvasive positive pressure ventilation use
AutoSet(Registered Trademark) T Micro processor controlled, automatically and September 1998
continuously monitors patient breathing.
Adjusts CPAP treatment pressure in response
to patient's needs during the night
MASK SYSTEMS:
Bubble Mask(Registered Trademark) Includes Bubble Cushion(Registered Trademark), containing June 1991
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 which August 1997
Mirage(Trademark) readily adjusts to patient's facial contours.
Lightweight, quiet, low profile mask system
ACCESSORIES:
HumidAire(Trademark) Attaches to CPAP or VPAP(Registered Trademark) systems. September 1997
Provides adjustable heated humidification, relieves
drying of nasal passages, increasing patient comfort
DIAGNOSTIC SYSTEMS:
AutoSet(Registered Trademark) Micro processor controlled, automatically and December 1997
Clinical 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 II Clinical with PC processor functions built in
For home use sleep studies
</TABLE>
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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 to enhance patient comfort, convenience and compliance, ResMed
markets a variety of other products and accessories. These products include
humidifiers, such as the SULLIVAN(Registered Trademark) HumidAire(Trademark),
which connect directly with the CPAP and VPAP(Registered Trademark)
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 carry bags and replacement
filters.
ResMed also manufactures products that are used primarily in sleep
clinics and hospitals to monitor key respiratory parameters. These products
consist of CPAP devices together, with additional diagnostic tools, to assist
clinicians in the diagnosis of OSA 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.
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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 from flow
generators with recording capabilities. Clinicians can use SCAN 2.0 to 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 generator
in a patient's home direct to the sleep laboratory.
Product Development
The Company is committed to an ongoing program of product advancement and
development. Currently, product development efforts are focused on
AutoSet(Registered Trademark) systems, improved CPAP, VPAP and mask systems
and manufacturing cost-reduction programs.
The Company consults 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's Medical Advisory Board. New
product ideas are also identified by the Company's marketing staff, direct
sales force, network of distributors, manufacturers' representatives and
patients. Typically, new product development is then performed by the
Company's 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.
In the three fiscal years ended June 30, 1998, 1997 and 1996, the Company
expended $4,994,000, $3,807,000 and $2,841,000, respectively, on research and
development.
Sales and Marketing
The Company currently markets its products in over 40 countries using a
network of distributors, independent manufacturers' representatives and its
direct sales force. The Company attempts to tailor its marketing approach to
each national market, based on regional awareness of SDB as a health problem,
physician referral patterns, consumer preferences and local reimbursement
policies.
North America. In the United States, the Company's marketing activities
are conducted through a field sales organization comprised of 23 regional
territory representatives, program development specialists and diagnostic
system specialists, plus two regional sales directors and 27 independent
manufacturers' representatives organizations. The United States field sales
organization markets and sells products to more than 4,500 home health care
dealer branch locations throughout the United States.
The Company also promotes and markets its products directly to sleep
clinics. Patients who are diagnosed with OSA and prescribed CPAP treatment
are typically referred by the diagnosing sleep clinic to a home health care
dealer to fill the prescription. The home health care dealer, in consultation
with the referring physician, will assist the patient in selecting the
equipment, fit the patient with the appropriate mask and set the flow
generator pressure to the prescribed level. In the United States, sales
employees and manufacturers' subrepresentatives are managed by the two
regional sales managers and the Company's Vice President - US Sales. The Vice
President - US Marketing, responsible for marketing in the United States and
Canada, is also based in the Company's office in San Diego. The Company's
Canadian sales are conducted through a Canadian distributor. Sales in North
America accounted for 52%, 43% and 49% of the Company's total net revenues for
the fiscal years ended June 30, 1998, 1997 and 1996, respectively.
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Europe. The Company markets its products in most major European
countries. ResMed has fully owned subsidiaries in the United Kingdom, Germany
and France and uses independent distributors to sell its products in other
areas of Europe. These distributors have been selected in each country based
on their knowledge of respiratory medicine as well as a commitment to SDB
therapy. In each country in which the Company has a subsidiary, a local
senior manager is responsible for direct national sales. In addition, the
Company uses a consultant in Switzerland to assist in sales and marketing
efforts for selected European countries.
The Group's Executive Vice President is responsible for coordination of
all European distributors and, in conjunction with local management, the
direct sales activity in Europe. Sales in Europe accounted for 35%, 44% and
36% of the Company's total net revenues for the fiscal years ended June 30,
1998, 1997 and 1996, respectively.
Australia/Rest of World. Prior to May 1994, the Company was the
exclusive source of nasal CPAP flow generator units 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 the Executive
Vice President based in Sydney, Australia. Sales in Australia and the rest of
the world accounted for 13%, 13% and 15% of the Company's total net revenues
for the fiscal years ended June 30, 1998, 1997 and 1996, respectively.
Manufacturing
The Company's principal manufacturing facilities are located in Sydney,
Australia. The Company's manufacturing operations consist primarily of
assembly and testing of the Company's flow generators, masks and accessories.
Of the numerous raw materials, parts and components purchased for assembly of
the Company's therapeutic and diagnostic sleep disorder products, most are
off-the-shelf items available from multiple vendors.
The Company's quality control group performs tests at various steps in
the manufacturing cycle to ensure compliance with the Company's
specifications. The Company is currently in the process of constructing a
new, approximately 120,000 square feet manufacturing facility in Sydney,
Australia, and will shift its primary manufacturing operations to the new
facility when construction is completed. Construction of the new facility is
expected to be completed by early calendar 1999.
The Company generally manufactures to its internal 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-
<PAGE>
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.
Third-Party Reimbursement
The cost of medical care is funded in substantial part by government and
private insurance programs. Although the Company does not generally receive
payments for its products directly from these payors, the Company's success is
dependent upon the ability of patients to obtain adequate reimbursement for
the Company's products. In most markets, the Company's products are purchased
primarily by home health care dealers, hospitals or sleep clinics, which then
invoice third-party payors directly.
In the United States, third-party payors include Medicare, Medicaid and
corporate health insurance plans. These payors may deny reimbursement if they
determine that a device is not used in accordance with cost-effective
treatment methods, or is experimental, unnecessary or inappropriate.
Third-party payors are also increasingly challenging prices charged for
medical products and services, and certain private insurers have initiated
reimbursement systems designed to reduce health care costs. The trend towards
managed health care and the concurrent growth of HMOs which could control or
significantly influence the purchase of health care services and products, as
well as legislative proposals to reform health care, may result in lower
prices for the Company's products.
In some foreign markets, such as Spain, France and Germany, government
reimbursement is currently available for purchase or rental of the Company's
products subject, however, to constraints such as price controls or unit sales
limitations. In Australia and in some other foreign markets there is
currently limited or no reimbursement for devices that treat OSA.
Competition
The markets for the Company's products are highly competitive. The
Company believes that the principal competitive factors in all of its markets
are product features, reliability and price. Reputation and efficient
distribution are also important factors.
The Company competes on a market-by-market basis with various companies,
some of which have greater financial, research, manufacturing and marketing
resources than the Company. In the United States, its principal market,
Respironics, Inc. ("Respironics"), DeVilbiss, a division of Sunrise Medical
Inc., and Nellcor Puritan Bennett, a subsidiary of Mallinckrodt, Inc. are the
primary competitors for the Company's CPAP products. The Company's principal
European competitors are also Respironics, DeVilbiss and Nellcor Puritan
Bennett, as well as regional European manufacturers. The disparity between
the Company's resources and those of its competitors is likely to increase as
a result of the recent trend towards consolidation in the health care
industry. In addition, the Company's 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's products becoming obsolete or
noncompetitive, resulting in a material adverse effect on the Company's
business, financial condition and results of operations.
- -11-
<PAGE>
Any product developed by the Company 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 Company 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's ability to compete
will continue to be dependent on the extent to which the Company is successful
in protecting its patents and other intellectual property.
Patents and Proprietary Rights and Related Litigation
The Company, through its subsidiary ResMed Limited, owns or has licensed
rights to 10 issued United States patents (including 1 design patent) and 13
issued foreign patents. In addition, there are 39 pending United States
patent applications (including 5 design patent applications) and 66 pending
foreign patent applications. Some of these patents and patent applications
relate to significant aspects and features of the Company's products. These
include United States patents relating to CPAP devices, a delay timer system,
the Bubble Mask(Registered Trademark), 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.
None of the Company's patents are due to expire in the next five years,
with the exception of four foreign patents which are due to expire in April
2002. The Company believes that the expiration of these patents will not have
any material adverse impact on the Company's competitive position.
The Company relies on a combination of patents, trade secrets,
non-disclosure agreements and proprietary know-how to protect its 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- "Legal Proceedings."
Additional litigation may be necessary to attempt to enforce patents
issued to the Company, to protect the Company's proprietary rights, or to
defend third-party claims of infringement by the Company of the proprietary
rights of others. Patent laws regarding the enforceability of patents vary
from country to country. Therefore, there can be no assurance that patent
issues will be uniformly resolved, or that local laws will provide the Company
with consistent rights and benefits.
Government Regulations
The Company's products are subject to extensive regulation particularly
as to safety, efficacy and adherence to FDA Quality System Regulation (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. Noncompliance with applicable requirements can result in import
detentions, fines, civil penalties, injunctions, suspensions or losses of
regulatory approvals, recall or seizure of products, operating restrictions,
refusal of the government to approve product export applications or allow the
Company to enter into supply contracts, and criminal prosecution.
- -12-
<PAGE>
The FDA requires that a manufacturer introducing a new medical device or
a new indication for use of an existing medical device obtain either a Section
510(k) premarket notification clearance or a premarket approval ("PMA") prior
to it being introduced into the market. The Company's products currently
marketed in the United States are marketed in reliance on 510(k) pre-marketing
clearances. The process of obtaining a Section 510(k) clearance generally
requires the submission of performance data and often clinical data, which in
some cases can be extensive, to demonstrate that the device is "substantially
equivalent" to a device that was on the market prior to 1976 or to a device
that has been found by the FDA to be "substantially equivalent" to such a
pre-1976 device. As a result, FDA 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 is 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 believes that its
design, manufacturing and quality control procedures meet the requirements of
the regulations.
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's medical devices in Europe is through the CE mark
process. The Company's products where appropriate, are CE marked to the
European Unions Medical Device Directive.
Employees
As of June 30, 1998, the Company had 373 employees and 17 full time
consultants, of which 172 persons were employed in warehousing and
manufacturing, 60 in research and development, 93 in sales, marketing and 65
in administration. Of the Company's employees and consultants, 265 were
located in Australia, 62 in the United States, 56 in Europe and 7 in Singapore
and Malaysia.
The Company believes that the success of its business will depend, in
part, on its ability to attract and retain qualified personnel. None of the
Company's employees is covered by a collective bargaining agreement. The
Company believes that its relationship with its employees is good.
Medical Advisory Board
The Company's international Medical Advisory Board ("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's senior management and members of its research and marketing
departments to advise the Company 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 senior management of the Company. MAB
members include:
Colin Sullivan, MD PhD FRACP, age 54 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 Laboratory at the Sydney University
Medical School as well as a thoracic physician at the Royal Prince Alfred
Hospital. In addition, he is a Fellow of the Royal Australian College 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. 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 MD and PhD degrees are from the University of Sydney
Medical School.
- -13-
<PAGE>
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 an MD from the University of Edinburgh.
Helmut Teschler, MD, age 45 is Associate Professor and Head of the Sleep
Laboratory, Ruhrlandklinik, Department of Pneumology, 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 at Harvard
Medical School, as well as Physician Director, Pulmonary-Medical Intensive
Care Unit and Director of the Section of Sleep Disorders Medicine in the
Pulmonary and Critical Care Division at 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 Harvard
Medical Schools. He holds a BA from Harvard and an MD from Case Western
Reserve School of Medicine.
B. Tucker Woodson, MD FACS, age 41 is an otolaryngologist and an Associate
Professor of Surgery 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 in
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-
<PAGE>
Members of the Medical Advisory Board, other than Dr. Sullivan, receive an
honorarium as well as reimbursement of traveling costs and other out-of-pocket
expenses incurred in attending any conferences as may be requested by the
Company.
Item 2 Properties
ResMed's principal executive offices, consisting of approximately 22,000
square feet, are located in San Diego, California. The Company leases this
property pursuant to an eight year lease which is scheduled to expire in 2005.
Primary manufacturing operations are currently at two locations in Sydney,
Australia. The leases for both these sites are scheduled to expire in 1999.
A new manufacturing facility is being constructed in Sydney and due for
completion in the first quarter of calendar 1999. Approximately 120,000 square
feet in size, it will house both existing Australian manufacturing facilities.
ResMed believes that once the new manufacturing facility is completed, its
facilities will be adequate to serve its operational needs for at least
two years.
Sales and warehousing facilities are also leased in Oxford, England,
Moenchengladbach, Germany, Lyon, France and Singapore.
Item 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 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 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 Company filed a complaint for patent infringement in
the United States against Respironics. The complaint seeks monetary damages
from, and injunctive relief against Respironics resulting from its alleged
infringement of three of the Company's patents. In February 1995, Respironics
filed a complaint against the Company seeking a declaratory judgment that
Respironics does not infringe claims of these patents and that the Company's
patents are invalid and unenforceable. The two actions have been combined and
are proceeding in the United States District Court for the Western District of
Pennsylvania.
In June 1996, the Company initiated a further action in Pennsylvania against
Respironics regarding alleged infringement of a fourth patent, granted June 4,
1996, related to the Company's delay timer feature. This action was again
consolidated with the ongoing case such that the two remaining actions are
proceeding together. On July 1, 1997 the Court granted Respironics a motion
for partial summary judgment holding that Respironics' accused products do not
infringe one of the four patents 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 Appeals for the Federal Circuit once 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 another 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-
<PAGE>
On May 17, 1995, Respironics and its Australian distributor filed a
Statement of Claim against ResMed Limited 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 in 1994. 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
asserts damage claims in the aggregate amount of approximately $1,000,000,
constituting lost profit on sales. While the Company intends to defend this
action, there can be no assurance that the Company will be successful in
defending such action or that the Company will not be required to make
significant payments to the claimants. Furthermore, the Company expects to
incur ongoing legal costs in defending such action.
Item 4 Submission of Matter to a Vote of Security Holders
None
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C>
High Low High Low
Quarter One $28.00 $23.50 $21.25 $14.50
Quarter Two 31.00 25.25 23.00 16.00
Quarter Three 35.50 28.00 25.00 17.25
Quarter Four 45.56 35.25 24.25 16.50
</TABLE>
As of September 8, 1998, there were approximately 2,416 beneficial
holders of the Company's Common Stock The Company does not intend to declare
any cash dividends in the foreseeable future.
Item 6 Selected Financial Data
The following table summarizes certain selected consolidated financial
data for, and as of the end of, each of the years in the five-year period
ended June 30, 1998. The data set forth below should be read in conjunction
with the Consolidated Financial Statements and related Notes included
elsewhere in this Report.
- -16-
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------
Consolidated Statement of Income Data: 1998 1997 1996 1995 1994
------------ ---------- ---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net revenues $ 66,519 $ 49,180 $ 34,562 $ 23,501 $ 13,857
Cost of sales 23,069 20,287 16,990 11,271 6,213
_________ _________ _________ _________ _________
Gross profit 43,450 28,893 17,572 12,230 7,644
_________ _________ _________ _________ _________
Selling, general and administrative
expenses 21,093 16,759 11,136 7,447 4,809
Research and development expenses 4,994 3,807 2,841 1,996 1,546
_________ _________ _________ _________ _________
Total operating expenses 26,087 20,566 13,977 9,443 6,355
_________ _________ _________ _________ _________
Income from operations 17,363 8,327 3,595 2,787 1,289
_________ _________ _________ _________ _________
Interest income, net 1,011 1,205 1,072 205 98
Government grants 611 316 537 527 440
Other, net (2,873) 1,239 1,357 262 4
_________ _________ _________ _________ _________
Total other income (loss), net (1,251) 2,760 2,966 994 542
_________ _________ _________ _________ _________
Income before income taxes 16,112 11,087 6,561 3,781 1,831
Income taxes 5,501 3,622 2,058 948 599
________ _________ _________ _________ _________
Net income 10,611 7,465 4,503 2,833 1,232
======== ========= ========= ========= =========
Diluted earnings per share $ 1.41 1.02 0.63 0.63 0.34
======== ========= ========= ========= =========
Weighted average common and common
equivalent 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 common shares
outstanding 7,250 7,189 7,090 3,904 3,137
Cash dividends per common share - - - - 0.04
</TABLE>
<TABLE>
<CAPTION>
As of June 30,
1998 1997 1996 1995 1994
--------------- ------- ------- ------- ------
Consolidated Balance Sheet Data: (in thousands)
<S> <C> <C> <C> <C> <C>
Working capital $ 32,759 $34,395 $30,844 $27,354 $5,010
Total assets 64,618 54,895 47,299 35,313 9,608
Long-term debt, less current maturities - 274 578 787 386
Total stockholders' equity 50,773 44,625 38,986 28,867 5,630
</TABLE>
- -17-
<PAGE>
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations
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, manufactures and markets equipment for the diagnosis
and treatment of sleep disordered breathing conditions, including obstructive
sleep apnea. The Company's net revenues are generated from the sale of its
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 has invested significant resources in research and
development and product enhancement. Since 1989, the Company has developed
several innovations to the original CPAP device to increase patient comfort
and to improve ease of product use. The Company has recently been developing
products for automated treatment, titration and monitoring of OSA, such as
AutoSet(Registered Trademark). The Company's research and development
expenses are subsidized in part by grants and tax incentives from the
Australian federal government. The Company has also received grants from the
Australian federal government to support marketing efforts to increase
Australian export sales, and for incorporation of computer components into its
products.
The Company's income tax rate is governed by the laws of the regions in
which the Company's income is recognized. To date, a substantial portion of
the Company's income has been subject to income tax in Australia where the
statutory rate is 36% effective from July 1, 1995. During fiscal 1998, 1997
and 1996, the Company's effective tax rate has fluctuated from approximately
34% to approximately 31%. 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 Company under applicable tax laws.
Fiscal Year Ended June 30, 1998 Compared to Fiscal Year Ended June 30,
1997
Net Revenues. Net revenues increased in fiscal 1998 to $66.5 million
from $49.2 million in fiscal 1997, an increase of $17.3 million or 35%. This
increase was primarily attributable to an increase in unit sales of the
Company's flow generators and accessories in America where net revenues
increased to $34.3 million from $21.3 million and, to a lesser extent, in
Europe, where net revenues increased to $23.3 million from $21.5 million. Net
revenues also improved due to a shift to higher-priced bi-level based products
such as SULLIVAN(Registered Trademark) VPAP(Registered Trademark)II ST and
improved patient mask systems.
Gross Profit. Gross profit increased in fiscal 1998 to $43.5 million
from $28.9 million in 1997, an increase of $14.6 million or 50%. The increase
resulted primarily from increased unit sales during fiscal 1998. Gross profit
as a percentage of net revenues increased in fiscal 1998 to 65.3% from 58.7%
in 1997. The increase was primarily due to improved manufacturing
efficiencies, increased sales of higher margin diagnostic 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. Selling, general and
administrative expenses increased in 1998 to $21.1 million from $16.8 million
for 1997, an increase of $4.3 million or 26%. As a percentage of net
revenues, selling, general and administrative expenses decreased in fiscal
1998 to 31.7% from 34.1% for fiscal 1997. The gross increase in expenses was
due primarily to an increase to 158 from 113 in the number of sales and
administrative personnel 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 $1,189,000 and $924,000 in 1998
and 1997, respectively.
- -18-
<PAGE>
Research and Development Expenses. Research and development expenses
increased in fiscal 1998 to $5.0 million from $3.8 million in fiscal 1997, an
increase of $1.2 million or 31%. As a percentage of net revenues, research
and development expenses in fiscal 1998 marginally declined to 7.5% from 7.7%
in fiscal 1997. The dollar increase in research and development expenses was
due primarily to an increase in research and development equipment and
external consultancy fees.
Other Income (loss). Other income decreased in fiscal 1998 to a loss of
$1.3 million from a gain of $2.8 million for fiscal 1997, a decrease of $4.1
million. This decrease was due primarily to losses incurred in the Company's
foreign currency hedging structures as a consequence of the 21% devaluation in
the Australian dollar over fiscal 1998. Foreign currency losses for fiscal
1998 were $4.0 million compared to net foreign currency gains of $1.6 million
in 1997.
Income Taxes. The Company's effective income tax rate for fiscal 1998
increased to approximately 34.1% from approximately 32.7% for fiscal 1997.
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.
Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30,
1996
Net Revenues. Net revenues increased in fiscal 1997 to $49.2 million
from $34.6 million in fiscal 1996, an increase of $14.6 million or 42.3%.
This increase was primarily attributable to an increase in unit sales of the
Company's flow generators and accessories in Europe where net revenues
increased to $21.5 million from $12.4 million and, to a lesser extent, in
North America, where net revenues increased to $21.3 million 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 million
from $17.6 million in 1996, an increase of $11.3 million or 64.4%. The
increase resulted primarily from increased unit sales during fiscal 1997.
Gross profit as a percentage of net revenues increased in fiscal 1997 to 58.7%
from 50.8% in 1996. The increase was primarily due to a full year
profitability from the Company's German and French subsidiaries acquired in
February and June 1996, respectively, improved manufacturing efficiencies and
increased sales of higher margin diagnostic and bi-level units. These
improvements 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, General 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 in research and development
equipment and external consultancy fees.
- -19-
<PAGE>
Other Income. Other income decreased in fiscal 1997 to $2.8 million from
$3 million for fiscal 1996, a decrease of $200,000 or 6.9%. This decrease was
due primarily to the write down of certain investments held by the Company.
These write downs were partially offset by foreign currency gains which
increased to $1.6 million from $961,000 in 1997 and 1996, respectively, as a
result of both marking foreign currency options to market and cash deliveries
over the year.
Income Taxes. The Company's effective income tax rate for fiscal 1997
increased to approximately 32.7% 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.
Recent Accounting Developments
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income" and SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information", both effective for years beginning
after December 15, 1997. SFAS 130 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.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), was issued by the Financial Accounting Standards Board
in June 1998 and is effective for the Company's quarter ending September 30,
1999. 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, 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 closer to the date of initial adoption.
Year 2000
The Company conducted a strategic review of its information systems in
fiscal 1997 with a view to upgrading operations to facilitate the growth 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-
<PAGE>
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 is in the process of, and
has developed, a number 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 could have a material adverse effect on
future operating results 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 the Company's international operations are affected by
changes in exchange rates between currencies. Changes in exchange rates may
negatively affect the Company's consolidated net 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 activities which is managed through foreign
currency option contracts.
- -21-
<PAGE>
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 interest for the first
three years and will bear interest at a rate of 3.8% thereafter until
maturity. The outstanding principal balance of such loan was $227,000 and
$548,000 at June 30, 1998 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.
Foreign Currency Market Risk
The Company's functional currency is the US dollar although the Company
transacts business in various foreign currencies including a number of major
European currencies as well as the Australian dollar. The Company has
significant foreign currency exposure through both its Australian
manufacturing activities and international sales operations.
The Company has 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's foreign
currency exposures denominated in the Deutschmark and Australian dollar.
Under this program, increases or decreases in the Company's
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 East foreign currency markets, the
Company has temporarily suspended purchasing of foreign currency forward
exchange contracts for its United States dollar, Australian dollar exposure.
The Company does not use foreign currency forward exchange contracts or
purchased currency options for trading purposes
<TABLE>
<CAPTION>
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 exchange
rates, including foreign currency forward exchange agreements and foreign currency call options held at
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
1999 2000 Total Assets/(Liabilities)
-------------------- ---- ------------------- --------------------
(In thousands)
<S> <C> <C> <C> <C>
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 $1 = DM 1.17
</TABLE>
- -22-
<PAGE>
<TABLE>
<CAPTION>
Fair Value
1999 2000 Total Assets/(Liabilities)
-------------------- ------------------- ------------------- ---------------------
(In thousands)
<S> <C> <C> <C> <C>
Foreign Exchange Call Options
(Receive AUS$/Pay US$)
Option amount $ 24,333 $ 36,000 $ 60,333 $ 753
Average contractual exchange rate AUS $1 = USD 0.675 AUS $1 = USD 0.677 AUS $1 = USD 0.676
(Receive AUS$/Pay DM)
Option amount $ 2,350 - $ 2,350 $ 22
Average contractual exchange rate AUS $1 = DM 1.222 AUS $1 = DM 1.222
</TABLE>
Forward-Looking Statements
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities, patent and other litigation and similar matters. There are a
variety of factors that could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. The risks
and uncertainties that may affect the Company's business, financial condition
or results of operations include the following:
The market for products designed to treat sleep disordered breathing
related respiratory conditions is characterized by frequent product
improvements and evolving technology. The development of new or innovative
products by others or the discovery of alternative treatments for such
conditions could result in the Company's products becoming obsolete or
noncompetitive, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
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's
competitors have greater financial, research, manufacturing and marketing
resources than the Company. In addition, some of the Company's competitors
sell additional lines of products, and therefore can bundle products to offer
higher discounts, or offer rebates or other incentive programs to gain a
competitive advantage. The Company's competitors may also employ litigation
to gain a competitive advantage. The Company's inability to compete
effectively against existing or future competitors would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's 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 absence of a backlog of orders for the
Company's products, the introduction of new products by the Company or its
competitors, the geographic mix of product sales, the success of the Company's
marketing efforts in new regions, changes in third-party reimbursement, timing
of regulatory action, timing of order by distributors, expenditures incurred
for research and development, competitive pricing in different regions,
seasonality, the cost and effect of promotional and marketing programs and the
effect of foreign currency transaction gains or losses, among other factors,
In addition, the Company's results of operations could be adversely affected
by changes in tax laws in the various countries in which the Company conducts
its operations.
- -23-
<PAGE>
The Company's success is dependent upon the ability of the Company's
customers to obtain adequate reimbursement from third-party payors for
purchasing the Company's products. Third-party payors may deny reimbursement
if they determine that the prescribed device has not received appropriate
United States Food and Drug Administration ("FDA") or other governmental
regulatory clearances, is not used in accordance with cost-effective treatment
methods as determined by the payor, or is experimental, unnecessary or
inappropriate. Third-party payors are increasingly challenging the prices
charged for medical products and services. 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.
A substantial portion of the Company's net revenue is generated from
sales outside North America. The Company expects that such sales will
continue to account for a significant portion of the Company's net revenues in
the future. The Company's sales outside of North America are subject to
certain inherent risks 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 Company relating to intellectual
property rights and intellectual property licenses.
The information contained in this section is not intended to be an
exhaustive description of the risks and uncertainties inherent in the
Company's business or in its strategic plans. Please see Item 1 "Business"
and Item 3 "Legal Proceedings".
Item 8 Consolidated Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
a) Index to Consolidated Financial Statements
<S> <C>
Page
Independent Auditors' Report F1
Consolidated Balance Sheets as of June 30, 1997 and 1998 F2
Consolidated Statements of Income for the three years ended June 30, 1998 F3
Consolidated Statements of Stockholders' Equity for the three years ended June 30, 1998 F4
Consolidated Statements of Cash Flows for the three years ended June 30, 1998 F5
Notes to Consolidated Financial Statements F6
Schedule II - Valuation and Qualifying Accounts and Reserves 28
</TABLE>
b) Supplementary Data
Quarterly Financial Information (unaudited)
<TABLE>
<CAPTION>
The quarterly results for the years ended June 30, 1998 and 1997 are summarized below:
1998
--------------
<S> <C> <C> <C> <C> <C>
First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year
-------------- --------------- -------------- --------------- ----------
Net revenue $ 13,978 $ 16,146 $ 17,113 $ 19,282 $ 66,519
Gross profit 8,553 10,973 11,015 12,909 43,450
Net income 2,158 2,293 3,146 3,014 10,611
Basic earnings per share $ 0.30 0.32 0.43 0.42 1.46
Diluted earnings per share $ 0.29 0.31 0.42 0.40 1.41
</TABLE>
- -24-
<PAGE>
<TABLE>
<CAPTION>
1997
--------------
<S> <C> <C> <C> <C> <C>
First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year
-------------- --------------- -------------- --------------- -----------
Net revenue $ 11,141 $ 11,587 $ 12,468 $ 13,984 $ 49,180
Gross profit 6,291 6,872 7,348 8,382 28,893
Net income 1,840 1,682 1,898 2,045 7,465
Basic earning per share $ 0.26 0.23 0.26 0.28 1.04
Diluted earnings per share $ 0.25 0.23 0.26 0.28 1.02
<FN>
(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.
</TABLE>
Item 9 Changes in and Disagreements with Accountant on Accounting and
Financial Disclosure
None
PART III
Item 10 Directors and Executive Officers of the Registrant
Incorporated by reference to Registrant's definitive Proxy Statement for
its November 6, 1998 meeting of stockholders, which will be filed with the
Securities and Exchange Commission within 120 days from June 30, 1998.
Item 11 Executive Compensation
Incorporated by reference to Registrant's definitive Proxy Statement for
its November 6, 1998 meeting of stockholders, which will be filed with the
Securities and Exchange Commission within 120 days from June 30, 1998.
Item 12 Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to Registrant's definitive Proxy Statement for
its November 6, 1998 meeting of stockholders, which will be filed with the
Securities and Exchange Commission within 120 days from June 30, 1998.
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-
<PAGE>
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:
1.1 Consolidated Financial Statements and 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 filed as a part of this report:
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**
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 1998
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, USA
11.1 Statement re: Computation of Earning per Share
16.1 Letter regarding change in Certifying Accountant*
21.1 Subsidiaries of the Registrant
23.1 Consent and Report on Schedule of KPMG Peat Marwick LLP
27.1 Financial Data Schedule
* 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 from the Registrant's 1997 Proxy Statement
(File No. 0-26038).
b) Report on Form 8-K
None
- -26-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
ResMed Inc.:
We have audited the accompanying 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. 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 generally accepted auditing
standards. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three year period
ended June 30, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
San Diego, California
August 14, 1998
- -F1
<PAGE>
RESMED INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C>
June 30, June 30,
1998 1997
-------------- -------------
Assets
- ----------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 15,526 9,077
Marketable securities available for sale (note 3) 5,220 18,908
Accounts receivable, net of allowance for doubtful accounts
of $248 and $277 at June 30, 1998 and 1997, respectively 12,789 7,834
Government grants receivable 384 391
Inventories, net (note 4) 7,647 5,797
Deferred income taxes (note 10) 2,518 999
Prepaid expenses and other current assets 2,520 1,385
____________ ____________
Total current assets 46,604 44,391
____________ ____________
Property, plant and equipment, net (note 5) 11,111 4,916
Patents, net of accumulated amortization of $368 and $325
at June 30, 1998 and 1997, respectively 459 253
Deferred income taxes (note 10) - 157
Goodwill, net of amortization of $893 and $433 at June 30, 1998
and 1997, respectively 5,445 4,553
Other assets 999 625
____________ ____________
64,618 54,895
============ ============
Liabilities and Stockholders' Equity
- ----------------------------------------------------------------
Current liabilities:
Accounts payable 3,759 2,641
Accrued expenses (note 6) 6,637 3,537
Income taxes payable 3,222 3,544
Current portion of long debt (note 7) 227 274
____________ ____________
Total current liabilities 13,845 9,996
____________ ____________
Long-term debt less, current portion (note 7) - 274
____________ ____________
13,845 10,270
____________ ____________
Stockholders' equity (note 8):
Preferred stock, $.01 par value,
2,000,000 shares authorized; none issued - -
Series A Junior Participating preferred stock, $0.01 par value,
150,000 shares authorized; none issued - -
Common stock, $.004 par value, 15,000,000 shares authorized;
issued and outstanding 7,276,000 at June 30, 1998 and
7,202,413 at June 30, 1997 29 29
Additional paid-in capital 31,253 29,656
Retained earnings 27,179 16,568
Foreign currency translation adjustment (7,688) (1,628)
____________ ____________
Total stockholders' equity 50,773 44,625
____________ ____________
Commitments and contingencies (notes 14 and 16)
$ 64,618 54,895
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
- -F2-
<PAGE>
RESMED INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
June 30, June 30, June 30,
1998 1997 1996
-------------- ------------ ------------
Net revenues $ 66,519 49,180 34,562
Cost of sales 23,069 20,287 16,990
____________ ____________ ____________
Gross profit 43,450 28,893 17,572
____________ ____________ ____________
Operating expenses:
Selling, general and administrative expenses 21,093 16,759 11,136
Research and development expenses 4,994 3,807 2,841
____________ ____________ ____________
Total operating expenses 26,087 20,566 13,977
____________ ____________ ____________
Income from operations 17,363 8,327 3,595
____________ ____________ ____________
Other (expenses) income:
Interest income, net 1,011 1,205 1,072
Government grants 611 316 537
Other, net (note 9) (2,873) 1,239 1,357
____________ ____________ ____________
Total other (expenses) income, net (1,251) 2,760 2,966
____________ ____________ ____________
Income before income taxes 16,112 11,087 6,561
Income taxes (note 10) 5,501 3,622 2,058
____________ ____________ ____________
Net income $ 10,611 7,465 4,503
============ ============ ============
Basic earnings per share $ 1.46 1.04 0.64
Diluted earnings per share 1.41 1.02 0.63
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
- -F3-
<PAGE>
RESMED INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS)
Foreign
Additional currency
Common stock paid-in Retained translation
Shares Amount capital earnings adjustment Total
------------ ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 6,534 $ 26 24,393 4,600 (152) 28,867
Common stock issued for cash, net 450 2 4,547 - - 4,549
Common stock issued on exercise of options (note 8) 188 1 467 - - 468
Foreign currency translation adjustment - - - - 599 599
Net income - - - 4,503 - 4,503
_________ _________ _________ _________ _________ _________
Balance, June 30, 1996 7,172 29 29,407 9,103 447 38,986
Common stock issued on exercise of options (note 8) 30 - 249 - - 249
Foreign currency translation adjustment - - - - (2,075) (2,075)
Net income - - - 7,465 - 7,465
_________ _________ _________ _________ _________ _________
Balance, June 30, 1997 7,202 29 29,656 16,568 (1,628) 44,625
Common stock issued on exercise of options (note 8) 74 - 1,020 - - 1,020
Tax benefit from exercise of options - - 577 - - 577
Foreign currency translation adjustment - - - - (6,060) (6,060)
Net income - - - 10,611 - 10,611
_________ _________ _________ _________ _________ _________
Balance, June 30, 1998 7,276 $ 29 31,253 27,179 (7,688) 50,773
========= ========= ========= ========= ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
- -F4-
<PAGE>
RESMED INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS)
<S> <C> <C> <C>
June 30, June 30, June 30,
1998 1997 1996
-------------- ------------- -------------
Cash flows from operating activities:
Net income $ 10,611 7,465 4,503
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,232 2,261 1,154
Goodwill amortization 483 349 123
Provision for service warranties 6 124 (117)
Deferred income taxes 416 (1,032) 112
Foreign currency options revaluation 1,143 (458) (844)
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)
Inventories (2,445) (259) 272
Prepaid expenses and other current assets (1,352) (180) (652)
Accounts payable, accrued expenses and other liabilities 1,031 417 792
Income taxes payable (1,185) 2,011 515
____________ ____________ ____________
Net cash provided by operating activities 6,783 9,475 3,453
____________ ____________ ____________
Cash flows from investing activities:
Purchases of property and equipment (10,110) (3,962) (1,472)
Purchase of marketable securities - available for sale (31,292) (50,141) (102,730)
Proceeds from sale of securities - available for sale 44,474 49,254 105,219
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) -
____________ ____________ ____________
Net cash provided by (used in) investing activities 339 (5,345) (6,268)
____________ ____________ ____________
Cash flows from financing activities:
Proceeds from issuance of common stock, net 1,020 249 5,017
Repayment of long-term debt (239) (287) -
____________ ____________ ____________
Net cash provided by (used in) financing activities 781 (38) 5,017
____________ ____________ ____________
Effect of exchange rate changes on cash (1,454) (525) 52
____________ ____________ ____________
Net increase in cash and cash equivalents 6,449 3,567 2,254
Cash and cash equivalents at beginning of the year 9,077 5,510 3,256
____________ ____________ ____________
Cash and cash equivalents at end of the year $ 15,526 9,077 5,510
============ ============ ============
Supplemental disclosure of cash flow information:
Income taxes paid $ 6,272 2,647 1,132
Interest paid - - -
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
- -F5-
<PAGE>
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
ResMed Inc. (the Company), is a Delaware corporation formed in March
1994 as a holding company for ResMed Holdings Ltd. (RHL), a company resident
in Australia. RHL designs, manufactures and markets devices for the
evaluation and treatment of sleep disordered breathing, primarily obstructive
sleep apnea. The Company's principal manufacturing operations are located in
Australia. Other principal distribution and sales sites are located in the
United States, United Kingdom, and Europe.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
(b) Revenue Recognition:
Revenue on product sales is recorded at the time of shipment.
Royalty revenue from license agreements is recorded when earned. 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 period of
expected benefits but not exceeding three years.
(c) Cash and Cash Equivalents:
Cash equivalents include certificates of deposit, commercial paper,
and other highly liquid investments stated at cost, which approximates market.
Investments with original maturities of 90 days or less are considered to be
cash equivalents for purposes of the consolidated statements of cash flows.
(d) Inventories:
Inventories are stated at the lower of cost, determined principally
by the first-in, first-out method, or net realizable value.
(e) Property, Plant and Equipment:
Property, plant and equipment is recorded at cost. Depreciation
expense is computed using the straight-line method over the estimated useful
lives of the assets, generally two to 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-
<PAGE>
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(f) Patents:
The registration costs for new patents are capitalized and amortized
over the estimated useful life of the patent, generally five years. In the
event of a patent being superseded, the unamortized costs are written off
immediately.
(g) Goodwill:
Goodwill arising from business acquisitions is amortized on a
straight-line basis over periods ranging from three to 15 years. The Company
carries goodwill at cost net of 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 and $123,000
for the years ended June 30, 1998, 1997 and 1996, respectively.
(h) Government 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 and $537,000 for the years
ended June 30, 1998, 1997 and 1996, respectively.
(i) Foreign Currency:
The consolidated financial statements of the Company's non-U.S.
subsidiaries are translated into U.S. dollars for financial reporting
purposes. Assets and liabilities of non-U.S. subsidiaries whose functional
currencies are other than the U.S. dollar are translated at year end exchange
rates; revenue and expense transactions are translated at average exchange
rates for the year. Cumulative translation adjustments are reflected in
stockholders' equity. Gains and losses on transactions denominated in other
than the functional currency of the entity are reflected in operations.
(j) Research and Development:
All research and development costs are expensed in the period
incurred.
(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. The weighted average shares
used to calculate basic earnings per share was 7,250,000, 7,189,000 and
7,090,000 for the years ended June 30, 1998, 1997 and 1996, 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, 128,000 and 109,000 for the years ended June 30, 1998, 1997 and 1996,
respectively.
- -F7-
<PAGE>
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(l) Financial 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, accounts
payable and debt approximate their fair value because of their short term
nature. 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:
The Company enters into various types of foreign exchange contracts in
managing its foreign exchange risk, including derivative financial instruments
encompassing forward exchange contracts and foreign currency options.
The purpose of the Company's foreign currency hedging activities is to
protect the Company from adverse exchange rate fluctuations with respect to
net cash movements resulting from the sales of products to foreign customers
and Australian manufacturing activities. The Company enters into foreign
currency option contracts to hedge anticipated sales and manufacturing costs
denominated in principally Australian dollars, Pound Sterling and
Deutschmarks. The term of such foreign exchange contracts generally do not
exceed three years.
Premiums to enter certain foreign currency options are included in other
assets and are amortized over the period of the agreement in the consolidated
statement of income against other (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 Sheets as either other assets or other liabilities and are recorded
within other income, net on the Company's Consolidated Statements of Income.
Unrealized gains and losses on currency derivatives are determined based on
dealer quoted prices.
Foreign currency option contracts have been purchased in part by the
issue of put options to counterparts. As a result, should foreign exchange
rates drop below a specified level, on a specific date, the Company is
required to deliver certain funds to counterparts at contracted foreign
exchange rates. 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-performance by counterparties to financial instruments, but it does not
expect any counterparties to fail to meet their obligations given their high
credit ratings. The credit exposure of foreign exchange options at June 30,
1998 is $775,000 which represents the positive fair value of options held by
the Company.
- -F8-
<PAGE>
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 $62,683,000 and $22,752,000 at June 30, 1998 and 1997, respectively
to hedge foreign currency items. These contracts mature at various dates prior
to June 2000.
(n) Income 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:
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.
At June 30, 1998 and 1997, the Company's investments in debt
securities were classified on the accompanying consolidated balance sheet as
marketable securities-available for sale. These investments are diversified
among high credit quality securities in accordance with the Company's
investment policy.
The amortized cost of debt securities classified as available for
sale is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization and interest are included in interest income.
Realized gains and losses are included in other income or expense. The cost
of securities sold is based on the specific identification method.
(p) 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:
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-
<PAGE>
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
3. MARKETABLE SECURITIES
The estimated fair value of marketable securities available for sale at
June 30, 1998 and 1997, was $5,220,000 and $18,908,000, 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, 1998 or
1997.
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
<TABLE>
<CAPTION>
Inventories were comprised of the following at June 30, 1998 and 1997 (in
thousands) :
<S> <C> <C>
1998 1997
--------- --------
Raw materials $ 2,169 1,797
Work in progress 546 284
Finished goods 4,932 3,716
________ ________
$ 7,647 5,797
======== ========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
Property, plant and equipment is comprised of the following at June 30,
1998 and 1997 (in thousands):
<S> <C> <C>
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
========== ==========
</TABLE>
In August 1997 the Company entered into an agreement 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-
<PAGE>
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
6. ACCRUED EXPENSES
<TABLE>
<CAPTION>
Accrued expenses at June 30, 1998 and 1997 consist of the following (in
thousands) :
<S> <C> <C>
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
========== ==========
</TABLE>
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, 1998 and 1997, respectively. The loan
facility is unsecured and accrues interest at 3.8% per annum beginning May 3,
1996 through April 3, 1999. The facility is payable in six monthly
installments beginning November 3, 1996. Prior to May 3, 1996, the loan was
interest free.
8. STOCKHOLDERS' 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. These options have expiration dates of ten years from
date of grant and vest over three years. The Company granted these options
with the exercise price equal to the market value as determined at the date of
grant.
In August 1997 as part of the introduction of the 1997 Equity
Participation Plan, the Company cancelled 10,970 options, being all non-issued
options remaining under the 1995 Option Plan.
<TABLE>
<CAPTION>
The following table summarizes options activity
<S> <C> <C> <C> <C> <C> <C>
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
1998 Price 1997 Price 1996 Price
--------------- --------- -------------- --------- --------------- ---------
Outstanding at beginning of year 439,088 $ 13.97 494,900 $ 13.64 431,500 $ 8.72
Granted 249,400 24.33 - - 269,800 16.25
Exercised (73,630) 13.85 (30,660) 8.55 (187,500) 6.21
Forfeited (14,068) 20.38 (25,152) 14.15 (18,900) 12.24
_____________ _______ _____________ _______ _____________ _______
Outstanding at end of year 600,790 $ 18.25 439,088 $ 13.97 494,900 $ 13.64
============= ======= ============= ======= ============= =======
Price range of granted options $ 24-35 - $ 13.06-16.34
Options exercisable at end of year 275,868 $ 13.52 205,033 $ 13.10 84,787 $ 9.99
</TABLE>
- -F11-
<PAGE>
8. 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 is initially established at 250,000
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, 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.
<TABLE>
<CAPTION>
The following table summarizes information about stock options outstanding
at June 30, 1998.
<S> <C> <C> <C>
Weighted Average
Number Outstanding at Remaining Number Exercisable at
Exercise Prices June 30, 1998 Contractual Life June 30, 1998
- ---------------- --------------------- ---------------- ---------------------
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 -
35.00 7,500 9.75 -
________ ________ ________
600,790 8.19 275,868
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
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. 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:
<S> <C> <C> <C>
1998 1997 1996
------- ------ ------
Net income (in thousands)
As reported $10,611 $7,465 $4,503
Pro forma 9,380 6,467 3,998
Basic earnings per common share
As reported $ 1.46 $ 1.04 $ 0.64
Pro forma 1.29 0.90 0.56
Diluted income per common and common equivalent share
As reported $ 1.41 $ 1.02 $ 0.63
Pro forma 1.25 0.88 0.56
</TABLE>
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 5.8% for fiscal
1998,1997 and 1996, respectively; no dividend yield; expected lives of four
years; and volatility of 34% for 1998 and 62.7% for 1997 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.
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-
<PAGE>
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
8. STOCKHOLDERS' EQUITY (CONTINUED)
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% or more of the Company's outstanding common
stock. The Rights are redeemable at $0.01 per Right and expire in 2007.
9. OTHER, NET
<TABLE>
<CAPTION>
Other, net is comprised of the following at June 30, 1998, 1997 and 1996 (in
thousands):
<S> <C> <C> <C>
1998 1997 1996
------------ ----------- ----------
License fees $ 1,272 - 242
Unrealized gain/(loss) on foreign currency
hedging position (1,050) 485 961
Gain/(loss) on foreign currency transactions (2,927) 1,117 147
Write down of investments (125) (175) -
Other (43) (188) 7
__________ __________ __________
$ (2,873) 1,239 1,357
========== ========== ==========
</TABLE>
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 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 US homecare
market, additionally the Company will earn royalties on products
manufactured.
10. INCOME TAXES
<TABLE>
<CAPTION>
Income before income taxes for the years ended June 30, 1998, 1997 and
1996, was taxed under the following jurisdictions (in thousands):
<S> <C> <C> <C>
1998 1997 1996
----------- ---------- -----------
U.S. $ 1,730 4,054 (32)
Non-U.S. 14,382 7,033 6,593
__________ __________ __________
$ 16,112 11,087 6,561
========== ========== ==========
</TABLE>
- -F13-
<PAGE>
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
10. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
The provision for income taxes is presented below (in thousands):
<S> <C> <C> <C>
1998 1997 1996
------------ ----------- ----------
Current:
Federal $ (13) (20) -
State (148) 479 -
Non-U.S. 6,078 4,223 1,958
__________ __________ __________
5,917 4,682 1,958
__________ __________ __________
Deferred:
Federal (226) 366 -
State 94 (61) -
Non-U.S. (284) (1,365) 100
__________ __________ __________
(416) (1,060) 100
__________ __________ __________
Provision for income taxes $ 5,501 3,622 2,058
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
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):
<S> <C> <C> <C>
1998 1997 1996
------------ ----------- -----------
Computed "expected" tax expense $ 5,478 3,770 2,231
Increase (decrease) in income taxes
resulting from:
Non-deductible expenses 29 129 9
Research and development credit (371) (388) (349)
Tax effect of intercompany dividends (321) (34) -
Utilization of net operating loss carryforwards (22) (26) (8)
Change in valuation allowance 47 - 129
Effect of non-U.S. tax rates 415 (115) 226
State income taxes (36) 264 -
Other 282 22 (180)
__________ __________ __________
$ 5,501 3,622 2,058
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
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):
<S> <C> <C>
1998 1997
------------ -----------
Deferred tax assets:
Employee benefit obligations $ 263 133
Provision for service warranties 95 135
Net operating loss carryforwards 383 651
Deferred foreign tax credits 334 -
Write down of investments 102 -
Accrual for legal costs 183 479
Intercompany profit in inventories 1,658 1,008
Other accruals 634 345
__________ __________
3,652 2,751
Less valuation allowance (16) (651)
__________ __________
Deferred tax assets 3,636 2,100
__________ __________
</TABLE>
- -F14-
<PAGE>
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
10. INCOME TAXES (CONTINUED)
<S> <C> <C>
1998 1997
------------ -----------
Deferred tax liabilities:
Patents (135) (91)
Government grants receivable (138) (141)
Unamortized foreign exchange premiums (184) (227)
Unrealized foreign exchange gains (250) -
Undistributed German income (243) (366)
Royalties receivable (58) -
Other receivables - (71)
Other (110) (48)
__________ __________
Deferred tax liabilities (1,118) (944)
__________ __________
Net deferred tax asset $ 2,518 1,156
========== ==========
</TABLE>
The valuation allowance at June 30, 1998 and 1997, primarily relates to a
provision for uncertainty as to the utilization of net operating loss
carryforwards. The net change in the valuation allowance was a decline of
$635,000, and an increase of $475,000 and $125,000 for the years ended June
30, 1998, 1997 and 1996, 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, 1997 and 1996 were reduced by $22,000,
$27,000 and $8,000, respectively through the utilization of net operating loss
carryforwards. Based on the Company's history of taxable income and its
projection of future earnings, 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 has net operating loss carryforwards for U.S.
federal income tax purposes of approximately $1,079,000 which are available 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 1998 and 1997.
11. EMPLOYEE RETIREMENT PLANS
ResMed contributes to a number of employee retirement plans for the
benefit of its employees. These plans are detailed as follows:
Australia
ResMed 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. ResMed contributes to
the plans at the rate of 6% - 6.5% of the salaries of all Australian
employees. Total Company contributions to the plans for the years ended June
30, 1998, 1997 and 1996 were $362,000, $318,000 and $374,000, respectively.
United Kingdom
During fiscal 1998, ResMed established 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. ResMed contributes to
the plans at the rate of 3% of the salaries. Total Company contributions to
the plan were $5,000 and $4,000 in fiscal 1998 and 1997 respectively.
- -F15-
<PAGE>
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
11. 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 was $54,000 and $39,000 in fiscal 1998 and
1997 respectively.
12. GEOGRAPHIC SEGMENT INFORMATION
ResMed operates primarily in the respiratory medicine industry.
Geographic segments have been classified into three regions; America, Europe
and Australia/Rest of World. America includes the U.S., Canada and South
America, Australia/Rest of World includes Australia, New Zealand, South Africa
and Asia.
<TABLE>
<CAPTION>
Financial information by geographic region for the years ended June 30, 1998, 1997
and 1996, is summarized below (in thousands):
<S> <C> <C> <C> <C> <C>
Corporate,
Australia/ unallocated
Rest of and
America Europe World eliminations Total
----------- ---------- ----------- ------------- ----------
1998
- -------------------------
Net revenues $ 34,319 23,327 8,873 - 66,519
========== ========== ========== ========== ==========
Income from operations $ 2,568 9,680 6,264 (1,149) 17,363
========== ========== ========== ========== ==========
Identifiable assets $ 13,440 12,472 27,217 3,067 56,196
========== ========== ========== ========== ==========
1997
- -------------------------
Net revenues $ 21,263 21,500 6,417 - 49,180
========== ========== ========== ========== ==========
Income from operations $ 1,615 9,084 (921) (1,451) 8,327
========== ========== ========== ========== ==========
Identifiable assets $ 8,703 8,677 22,755 8,798 48,933
========== ========== ========== ========== ==========
1996
- -------------------------
Net revenues $ 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
========== ========== ========== ========== ==========
</TABLE>
- -F16-
<PAGE>
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
12. GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)
Net revenues which represent net sales to unaffiliated customers, is
based on the location of the customers. Transfers between geographic areas
are recorded at amounts generally above cost and in accordance with the rules
and regulations of the respective governing tax authorities. Operating income
or loss consists of total net sales less operating expenses, and does not
include either interest and other income, net, or income taxes. Identifiable
assets of geographic areas are those assets used in the Company's operations
in each area and excludes Patents, Deferred tax assets and Goodwill.
13. RELATED PARTY TRANSACTIONS
For the years ended 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 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. 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
<TABLE>
<CAPTION>
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.
<S> <C>
Operating
leases
Years $ '000
- ------------------------------ ----------
1999 $ 713
2000 380
2001 293
2002 276
2003 256
Thereafter 668
_________
Total minimum lease payments $ 2,586
=========
</TABLE>
Rent expenses under operating leases for the years ended June 30, 1998,
1997 and 1996 were approximately $607,000, $585,000 and $467,000,
respectively.
- -F17-
<PAGE>
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
15. BUSINESS ACQUISITION
Priess
On February 7, 1996 the Company's fully owned German subsidiary ResMed
Priess GmbH acquired the business and associated assets of Dieter W Priess
Medizintechnik (Priess), its German distributor for $6,350,000 in cash from a
4% stockholder of the Company. Priess is based in Moenchengladbach, Germany
and is engaged in the distribution and sale of respiratory products. The
acquisition has been accounted for as a purchase and, accordingly, the results
of operations of Priess have been included in the Company's consolidated
financial statements from February 7, 1996. The excess of the purchase price
over the fair value of the net identifiable assets acquired of $4,461,000 has
been recorded as goodwill and is being amortized on a straight-line basis over
15 years. The purchase agreement also provides for additional payments of up
to $4,000,000 over four years contingent on future sales revenues of Priess.
On December 5, 1996 and October 9, 1997 in accordance with 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.
<TABLE>
<CAPTION>
<S> <C>
$ '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
=========
</TABLE>
The following unaudited pro forma financial information presents the
combined results of operations of the Company and Priess as if the acquisition
had occurred as of the beginning of the year ended June 30, 1996 after giving
effect to certain adjustments, including amortization of goodwill, additional
depreciation expense, reduced interest income from use of IPO funds relating
to the acquisition, and related income tax effects. The pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had the Company and Priess constituted a single entity during
such periods.
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
- -F18-
<PAGE>
RESMED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
15. BUSINESS ACQUISITION (CONTINUED)
<TABLE>
<CAPTION>
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.
<S> <C>
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
=========
</TABLE>
16. LEGAL 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 seeks monetary damages
from, and injunctive relief against Respironics resulting from its alleged
infringement of three of the Company's patents. In February 1995, Respironics
filed a complaint against the Company seeking a declaratory judgment that
Respironics does not infringe claims of these patents and that the Company's
patents are invalid and unenforceable. The two actions have been combined and
are proceeding in the United States District Court for the Western District of
Pennsylvania.
- -F19-
<PAGE>
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 Pennsylvania
against Respironics regarding alleged infringement of a fourth patent, granted
June 4, 1996, related to the Company's delay timer feature. This action was
again consolidated with the ongoing case such that the two remaining actions
are proceeding together. On July 1, 1997 the Court granted Respironics a
motion for partial summary judgment holding that Respironics' accused products
do not infringe one of the four patents 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 Appeals for the Federal Circuit once 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 another 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.
On May 1995, Respironics and its Australian distributor filed a Statement
of Claim against the Company and Dr Farrell in the Federal Court of Australia.
The Statement of Claim alleges that the Company engaged in unfair trade
practices, including the misuse of the power afforded by its Australian
patents and dominant market position in violation of the Australian Trade
Practices Act. The Statement of Claim asserts damage claims in the aggregate
amount of approximately $1,000,000, constituting lost profit on sales. While
the Company intends to defend this action, there can be no assurance that the
Company will be successful in defending such action or that the Company will
not be required to make significant payments to the claimants. Furthermore,
the Company expects to incur ongoing legal costs in defending such action.
- -F20-
<PAGE>
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)
<TABLE>
<CAPTION>
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.
<S> <C> <C>
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
</TABLE>
- -27-
<PAGE>
Schedule II
<TABLE>
<CAPTION>
RESMED INC AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at Charged to Other Balance at
beginning of costs and (deductions) end of
period expenses additions period
------------- ---------- ------------ ----------
Year ended June 30, 1998
Applied against asset account
Allowance for doubtful accounts $ 277 79 (108) 248
======= ======= ======= =======
Year ended June 30, 1997
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
======= ======= ======= =======
</TABLE>
- -28-
<PAGE>
EXHIBIT INDEX
a) The following documents are filed as part of this report:
1.1 Consolidated Financial Statements and 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 filed as a part of this report:
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**
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 1998
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, USA
11.1 Statement re: Computation of Earning per Share
16.1 Letter regarding change in Certifying Accountant*
21.1 Subsidiaries of the Registrant
23.1 Consent and Report on Schedule of KPMG Peat Marwick LLP
27.1 Financial Data Schedule
* 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 Report on Form 8-K (File
No. 0-26038).
*** Incorporated by reference from the Registrant's 1997 Proxy Statement
(File No. 0-26038).
b) Report on Form 8-K
None
<PAGE>
Exhibit 10.4
EFFECTIVE FROM: 1 January 1998
BETWEEN
RESMED LIMITED
AND
COLIN EDWARD SULLIVAN
FURTHER RESTATED CONSULTANCY AGREEMENT
<PAGE>
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 both 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.
<PAGE>
- 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;
<PAGE>
- 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.
<PAGE>
- 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.
<PAGE>
- 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;
<PAGE>
- 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
<PAGE>
- 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)
<PAGE>
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"
<PAGE>
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
<PAGE>
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-
<PAGE>
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,
- -2-
<PAGE>
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
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<PAGE>
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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<PAGE>
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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<PAGE>
Exhibit 11.1
<TABLE>
<CAPTION>
RESMED INC AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended June 30,
--------------------
<S> <C> <C> <C>
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
============ ============ ============
</TABLE>
<PAGE>
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
<PAGE>
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
<PAGE>
Exhibit 27.1
RESMED INC
<TABLE>
<CAPTION>
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.
<S> <C> <C>
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
</TABLE>
