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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-22890
SANGSTAT MEDICAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3076-069
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1505 ADAMS DRIVE
MENLO PARK, CALIFORNIA 94025
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, ZIP CODE)
Registrant's telephone number, including area code: (650) 328-0300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.001 par value)
Preferred Share Purchase Rights
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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 this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant, as of March 18, 1999 was approximately $229,528,000 (based on the
closing price for shares of the Registrant's Common Stock as reported by the
NASDAQ National Market System of $18.25 on that date). Shares of Common
Stock held by each officer, director, and holder of 5% or more of the
outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
On March 18, 1999 approximately 16,307,684 shares of the Registrant's Common
Stock, $.001 par value, were outstanding.
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PART I
ITEM 1. BUSINESS
Overview
SangStat, The Transplant Company(R), is a specialty pharmaceutical
company applying a disease management approach to improve the outcome of
organ transplantation. The Company's devices, drugs and services form a
family of products that address the needs of patients in each stage of
transplant care from pre-transplant monitoring to lifetime post-
transplant care. SangStat's product pipeline is a combination of
proprietary and licensed-in products that are in various stages of
research, development and marketing. The Company plans to capitalize on
this pipeline by developing relationships with key providers and managed
care organizations to better integrate the management of transplant
recipients' care to improve the outcomes and lower costs.
SangStat has a variety of monitoring and therapeutic products and
product candidates to address the pre-transplant, acute care and chronic
phases of transplantation. SangStat received U.S. Food and Drug
Administration ("FDA") marketing approval for SangCya(TM) (Cyclosporine
Oral Solution, USP [MODIFIED]) ("SANGCYA") in October 1998 and
received marketing approval in the United Kingdom in January 1999.
Cyclosporine, which to date has only been marketed by Novartis AG
("Novartis"), is the leading immunosuppressive drug used by transplant
patients, with estimated worldwide sales of over $1.3 billion in 1998.
SANGCYA is AB rated to Neoral oral solution which signifies that SANGCYA
is therapeutically equivalent to, and interchangeable with, Neoral oral
solution. SANGCYA will be marketed with the CYCLOTECH device, a hand-
held liquid dispensing device once CYCLOTECH is commercially available.
Thymoglobulin [Anti-thymocyte Globulin, (Rabbit)] ("THYMOGLOBULIN")
has been marketed in Europe since 1985. THYMOGLOBULIN was approved for
marketing in the United States by the FDA in December 1998 for acute
renal rejection and launched by the Company in February 1999. SangStat
is also conducting clinical trials for the following products and
devices: SANG-2000, a capsule dosage form based on an oil-free
cyclosporine formulation technology similar to SANGCYA; a generic
AZATHIOPRINE product candidate for use as an adjunct therapy in chronic
immunosuppression; ANTILFA, for prevention of Delayed Graft Function
(DGF); ALLOTRAP 1258, a proprietary HLA peptide designed to promote
graft acceptance; CELSIOR, a formulated solution for organ preservation;
and CYCLOSTAT and CREASTAT for monitoring cyclosporine and serum
creatinine concentrations, respectively. To further the Company's goal
of providing comprehensive disease management, the Company has a
division, THE TRANSPLANT PHARMACY, which provides mail order
distribution of drugs and transplant patient management services.
Organ Transplantation
Organ transplantation can save or improve the lives of patients with
organ failures for whom there are few alternative treatments.
Transplantation involves surgically replacing the failed organ of a
transplant recipient with a viable organ from a donor. Because the
success of a transplant depends on the degree of compatibility between
the organ donor and the recipient, a typical transplant candidate must
wait on a national computerized waiting list until a compatible organ
can be found. Currently, there are approximately 100,000 transplant
candidates registered on waiting lists in approximately 500 transplant
centers throughout North America and Europe. At any given time,
approximately 70% of these patients are waiting for kidney transplants.
The other patients are waiting for liver, heart, heart-lung, bowel or
pancreas transplants. Each year approximately 50,000 new patients
receive donated organs. In order to prevent rejection of implanted
organs, recipients must begin a life-long regimen of immunosuppressive
therapy immediately upon receiving a donated organ. There are more than
240,000 patients in North America and Europe that need daily
immunosuppressive therapy to prevent graft rejection and graft loss.
In addition to being a life-saving and life-enhancing procedure,
transplantation can be cost-effective as well. For example, the cost
over a 10-year period of a kidney transplant is generally less than the
cost of dialysis. However, transplantation is still very costly, due in
substantial part to the costs of lifetime immunosuppressive therapy and
associated side effects as well as the costs of treating rejection and
infection episodes. Therefore, products that limit the need for
immunosuppression and reduce the frequency and severity of rejection and
infection episodes could significantly improve the cost-effectiveness of
transplantation.
The Transplant Immune Response
The function of the immune system is to protect the body from damage
caused by invading microorganisms or other foreign matter, including
donor organs. This defensive function is performed by the humoral (B-
cell) and cell-mediated (T-cell) arms of the immune system. When
challenged, the humoral and cell-mediated systems interact and generate
a coordinated immune response to recognize, target and eliminate the
pathogen or, in the case of transplantation, the donor organ, thereby
resulting in graft rejection. Specifically, the donor organ antigens
(HLA molecules) are recognized by the immune system of the graft
recipient as being "non-self."
The immune response to a transplant depends on the level of
compatibility between donor and recipient HLA molecules. The HLA system
consists of a complex array of molecules playing a key role in the
normal immune response as well as in graft acceptance or rejection. Dr.
Jean Dausset, a scientific advisor to SangStat, and Nobel Prize laureate
for this pioneering discovery, originally discovered HLAs. Molecular
differences between an organ donor's and a recipient's HLAs lead to the
recognition of the donor's HLAs as non-self by the recipient's immune
system. Graft rejection results when the recipient's immune system T-
cell progenitors recognize the donor's HLAs as non-self, activate
against the graft and proliferate into numerous cytotoxic T-cells. When
these cytotoxic T-cells invade and attack the graft, rejection and loss
of the organ often occur. In addition to T-cells, anti-HLA antibodies
can play an active role in the anti-graft immune response. The presence
of anti-HLA antibodies in the recipient's blood may indicate a high risk
of accelerated rejection. Maximizing HLA compatibility by selecting, for
a given recipient, the donor whose HLAs are as similar as possible to
the recipient's HLAs and not recognized by antibodies preexisting in the
recipient's blood, is key to reducing the risk of rejection.
However, because it is extremely difficult to get a perfect HLA match
except in identical twins, rejection episodes occur frequently. Current
therapies used to reduce the occurrence of rejection episodes involve
the chronic use of immunosuppressants, which impair the entire immune
system of the recipient. Even with the use of immunosuppressants, graft
rejection remains frequent, and their chronic use can lead to serious
side effects, including life-threatening infections, kidney or liver
toxicity and cancers.
The Transplant Process
A typical transplant patient progresses through three clinical phases:
the pre-transplant phase; the acute phase (surgery and first year post-
transplant); and the chronic phase (lifetime post-transplant).
The Pre-Transplant Phase. A transplant candidate is registered on a
national computerized waiting list, which ranks candidates according to
the urgency of the need for a transplant and maintains the data
necessary to determine if a compatible organ becomes available. A kidney
transplant candidate usually waits months or even years for a compatible
organ and continues to undergo dialysis several times per week to
substitute for the failed kidneys. Typically, a blood sample is
collected as frequently as monthly and evaluated to estimate the
candidate's level of immune sensitization against a panel of HLA
molecules representative of the population of prospective organ donors.
This procedure, called Panel Reactive Antibody (PRA) testing utilizes
microlymphocytotoxicity, a complex and subjective laboratory method
developed in the 1960s. Traditional HLA compatibility testing lacks
accuracy and standardization and therefore often results in poor
matching of donors and recipients.
The Acute Phase (Surgery and First Year Post-Transplant). Most organs
are retrieved from trauma victims who are declared brain-dead but
maintain cardiac function until their organs are removed. The harvested
organs are stored in a preservation solution to prevent deterioration
and then tissue typed to determine the level of HLA antigens. Each organ
is cross-matched with approximately 100 potential recipients on the
transplant waiting lists. Once the best candidate for each organ has
been chosen, the organ is shipped in an organ preservation solution to
the recipient's transplant center. The length of storage time allowed
before transplant varies among organ types and can severely limit the
distance an organ can be shipped. The quality of organ preservation is
therefore an important factor contributing to the viability of the
transplant.
Transplant surgery has become a relatively safe and standardized
procedure. After the transplant, the challenge for physicians is to
prevent graft rejection by suppressing the activity of T-cells.
Consequently, the success of the transplant is highly dependent on the
immunosuppressive regimen that is initiated the day of transplantation
and continued daily for the rest of the patient's life. In addition,
organ recipients must be regularly monitored to measure the body's
immune response and blood drug levels and to identify acute rejection
episodes.
Despite the use of immunosuppressants, during the first year following
transplantation many transplant patients (estimates range from 15% in
certain populations to more than 60% in others, depending on risk
factors and therapy) undergo one or more graft rejection episodes.
During a rejection episode, the body mounts an immune attack on the
graft, resulting in impaired function of the transplanted organ. Because
rejection, infection and drug toxicity produce similar symptoms,
diagnosis of rejection may be difficult until it reaches an advanced
stage and is confirmed by an invasive graft biopsy. The only way to stop
the rejection process is by administering additional immunosuppressive
therapy, such as high doses of steroids, and/or anti-T-cell monoclonal
and/or polyclonal antibodies. In many cases, rejection can be arrested
and organ damage reversed. However, at the end of the first year, about
20% to 50% of kidney transplant patients (and a higher percentage for
other organs) have had rejection. This rejection may lead to graft loss
in about 20% of kidney transplant patients (and a higher percentage for
other organs). If the graft loss occurs early post-transplant (within
the first few months following transplantation), surgery is typically
required to remove the rejected kidney. Regardless of whether surgery
is performed, the patient must return to chronic dialysis and possibly
receive a second transplant, which has a lower probability of success
than the first. Failure to reverse rejection of other organs often
results in the death of the patient.
The Chronic Phase (Lifetime Post-Transplant). The use of
immunosuppressants, initiated during the acute phase, is continued daily
throughout the patient's lifetime to minimize or prevent the loss of the
graft by acute or chronic rejection. Conventional therapy typically
combines several drugs, most commonly cyclosporine, azathioprine and
steroids, or alternative combinations for certain patients using
tacrolimus and/or mycophenolate mofetil. These drugs act nonspecifically
and broadly impair the recipient's immune system in order to reduce the
immune response against the graft. Cyclosporine is the leading
immunosuppressive drug used in the post-transplant phase. In 1998,
worldwide sales of Novartis' cyclosporines, Sandimmune and Neoral, were
estimated at over $1.3 billion. Even with the use of immunosuppressants,
patients have an approximate 5% to 20% risk of losing grafts per year
during the first three years following transplantation, and less than
50% of patients have functioning grafts after approximately ten years.
Products, Product Candidates and Services
SangStat's portfolio of complementary drugs, monitoring products,
product candidates and services are designed to prevent and treat graft
rejection and monitor patients throughout the patient's lifetime. The
following table summarizes SangStat's principal products, product
candidates and services.
<TABLE>
<CAPTION>
TRANSPLANT POTENTIAL CLINICAL
PHASE PRODUCT/SERVICE USE STATUS(1)
- -------------- ----------------- -------------------- -------------------------
<S> <C> <C> <C>
Pre-Transplant PRA-STAT(R) Detects anti-HLA Marketed US and Europe
Monitoring antibodies in
candidates monthly
Transplant Thymoglobulin(R) Treats acute Marketed worldwide
Acute Care kidney rejection (FDA approval 12/98)
episodes
Lymphoglobuline Treats acute Marketed outside US
kidney rejection
episodes
Allotrap 1258(2) Promotes graft Pre-clinical
acceptance
Celsior(TM) Preserves organs Cardiac clinical trials
prior to completed. Filing
transplantation anticipated first half 1999
Antilfa(TM) For prevention of Phase III
Delayed Graft
Function (DGF)
Lifetime Post- SangCya(TM) Chronic Markted in US (US launch
Transplant Cyclosporine Oral immunosuppression 11/98)
Care Solution (prevent organ UK approval 1/99
rejection)
Sang-2000 Chronic Bioequivalance trials
Cyclosporine immunosuppression completed. Filing
Capsules (prevent organ anticipated first half 1999
rejection)
CycloTech(R) Dispensing/Dosing FDA 510(k) clearance
device 8/98 (3)
Cyclo-Stat(TM) Device for measuring Clinical trials
cyclosporine levels
in blood
CreaStat(TM) Device for measuring Clinical trials
creatinine levels
in blood
Azathioprine Chronic Bioequivalance trials
immunosuppression completed. Filing
(prevent organ anticipated first half 1999
rejection)
The Transplant Mail order and 17 centers participating
Pharmacy (R) patient management
program
</TABLE>
(1) "Phase I, II or III" indicates that the product candidate is in a certain
stage of clinical trials. "Bioequivalence Trials" are clinical studies in
healthy volunteers which assess pharmacokinetic parameters of the drug
candidate against the reference drug to support an application for the approval
of a generic drug without the need for safety and efficacy trials.
"Marketed" means that commercial sales of the product have commenced.
See "-Government Regulation."
(2) ALLOTRAP 1258 is a second generation peptide to Allotrap 2702.
Allotrap 1258 currently in pre-clinical development was found to be more
potent than 2702 and the Company may decide to develop this peptide in
lieu of Allotrap 2702. The result of the Phase II study in Europe showed
that Allotrap 2702 was safe and well-tolerated in the study.
(3) Not yet commercially available.
CYCLOSPORINE PRODUCTS
SANGCYA
On October 31, 1998 the FDA granted marketing approval to SANGCYA for
prevention of rejection in solid organ transplant recipients, and an AB
rating versus Neoral(R) oral solution (a Novartis cyclosporine
formulation). SANGCYA includes the same active ingredient, in the same
concentration, in the same dosage form and is bioequivalent to Neoral
but in a formulation proprietary to SangStat. The United States Patent
and Trademark Office has issued two separate patents owned by SangStat,
Patent No. 5,766,629 (June, 1998) and Patent No. 5,827,822 (October
1998), covering SangStat's proprietary cyclosporine formulation
technology for developing multiple formulations and dosage forms of
cyclosporine including SangCya. The AB rating signifies that SANGCYA is
therapeutically equivalent to, and interchangeable with, Neoral oral
solution. SANGCYA was launched in the United States in November 1998.
It is marketed in the United States by the SangStat direct sales force.
SANGCYA is the first therapeutically equivalent competitor of Neoral
oral solution to be introduced in the U.S. cyclosporine marketplace.
Cyclosporine, the leading immunosuppressive drug used to prevent graft
rejection in transplantation, is marketed by Novartis in two different
formulations, Sandimmune and Neoral. Neoral is the newer formulation of
cyclosporine marketed by Novartis. Approximately 70% of the patients in
the U.S. on Sandimmune(R), the older formulation of cyclosporine first
introduced in 1983, have switched to Neoral, the newer, less expensive
and more bioavailable formulation introduced in 1995.
There are approximately 140,000 transplant recipients in the U.S. and
250,000 worldwide who require daily immunosuppressive therapy for life
from the time of transplant surgery, and the majority of these
individuals take cyclosporine. Global sales of cyclosporine were
estimated at $1.3 billion in 1998, with oral solution sales representing
approximately 10% of the total cyclosporine market.
SANGCYA's indications are identical to Neoral's indications and include
(i) the prophylaxis of organ rejection in kidney, liver and heart
allogeneic transplants; (ii) the treatment of patients with severe,
active rheumatoid arthritis where the disease has not adequately
responded to methotrexate; and (iii) the treatment of adult, non-
immunocompromised patients with severe (i.e. extensive and or
disabling), recalcitrant, plaque psoriasis who have failed to respond to
at least one systemic therapy (e.g.; PUVA, retinoids or methotrexate),
or in patients for whom either systemic therapies are contraindicated,
or cannot be tolerated.
SANGCYA was granted marketing approval in the United Kingdom on January
28, 1999. SangStat plans to seek marketing approval in other countries
of the European Union through the mutual recognition procedure. See -
European Regulation - Approval of Therapeutic Products. SangStat expects
to launch SANGCYA in the UK during the first half of 1999. The European
market is roughly equivalent to the U.S. market in size and scope. There
are approximately 20,000 new transplant recipients per year concentrated
in just 250 transplant centers and over 100,000 transplant recipients in
Europe who require daily lifelong immunosuppressive therapy from the
time of transplant surgery. Estimated 1998 sales of cyclosporine
exceeded $450 million in Europe and $70 million in the UK.
CYCLOTECH
In August 1998, SangStat received marketing clearance (510k) from the
FDA for the CYCLOTECH device. CYCLOTECH is a hand-held liquid dispensing
device intended for use by transplant recipients with SANGCYA Oral
Solution. The CYCLOTECH device contains electronic event monitoring
capabilities, recording medication dosing patterns that can be viewed by
physicians via a proprietary software interface. This software enables
physicians, via computer, to download recorded information from the
CYCLOTECH device that includes a patient's detailed daily dosing history
for up to a full year. The CYCLOTECH device and software will be
supplied to transplant centers and utilized as part of a comprehensive
disease management offering which includes SANGCYA Oral Solution.
SangStat expects to launch CYCLOTECH in the U.S. in the second quarter
of 1999 with full commercial availability in the U.S. in the second half
of 1999. SangStat expects to launch CYCLOTECH in selected countries
outside the U.S., including but not limited to, the United Kingdom and
Australia.
SANG-2000
In January 1999, SangStat announced the positive results of the SANG-
2000 bioequivalence pivotal trial versus Neoral(R) cyclosporine capsules.
SANG-2000 cyclosporine is a capsule dosage form based on an oil-free
cyclosporine formulation technology similar to SANGCYA and covered by
United States Patent No. 5,766,629, which was issued in June, 1998.
Based on these results, SangStat intends to file for marketing clearance
in the U.S. and Europe during the first half of 1999.
SangStat's SANG-2000 pivotal pharmacokinetic trial was a single-dose,
randomized, cross-over bioequivalence trial in 27 healthy human
volunteers comparing SangStat's cyclosporine capsule with the reference
drug, Neoral capsule. Subjects had blood samples taken at defined time
points over a 36-hour period and the cyclosporine blood levels were
analyzed using a standardized, validated cyclosporine assay.
Under current FDA regulations and policy, SANG-2000 capsule may be
approved without the need to duplicate the safety and efficacy trials if
it is shown to be bioequivalent to Neoral capsule. Two different
formulations of the same drug are considered bioequivalent if the drug's
absorption rate, blood concentration and persistence in the bloodstream
are demonstrated to be equivalent according to defined regulatory
policy. Two key pharmacokinetic parameters, area under the blood
concentration vs. time curve (AUC) and the maximum drug concentration
(Cmax) are measured in human bioequivalence trials. These parameters are
calculated from drug levels measured in the blood over a defined time
period following dosing.
Based on this trial, under current FDA policy, and subject to FDA
review, SANG-2000 and Neoral capsules may be considered bioequivalent:
the 90% confidence intervals (for the ratio of the log transformed
parameters of SANG-2000 and Neoral capsules) were contained within the
range of 80% to 125%, for AUC and Cmax. Statistical comparison of the key
pharmacokinetic parameters for SANG-2000 and Neoral yield results which
the Company believes demonstrate bioequivalence; however, the FDA has
not yet reviewed any of these data.
Successful development and commercialization of SANG-2000 is subject to
numerous risks, including failure to obtain regulatory approvals and
potential intellectual property claims of third parties, including those
of Novartis and its contract manufacturers. In addition, if the Company
is unable to demonstrate to the FDA that SANG-2000 is bioequivalent to
the Neoral capsule, a currently approved Novartis formulation, the
Company would be required to undertake additional development work and
seek regulatory approval through the potentially longer NDA process if
it wished to continue to pursue this product candidate.
THYMOGLOBULIN/LYMPHOGLOBULINE
THYMOGLOBULIN was granted approval for marketing by the FDA on December
30, 1998 for the treatment of acute rejection in kidney transplant
recipients. THYMOGLOBULIN is a pasteurized anti-thymocyte rabbit
immunoglobulin that induces immunosuppression as a result of T-cell
depletion and immune modulation. THYMOGLOBULIN is made up of a variety
of antibodies that recognize key receptors on T-cells, the cells of a
transplant recipient's immune system that recognize and ultimately
reject foreign objects such as a transplant. The exact mechanism is
unknown, researchers believe THYMOGLOBULIN antibodies may inactivate
and kill these T-cells, thus reversing the rejection process.
SangStat launched THYMOGLOBULIN in the United States in February 1999.
It is marketed by SangStat's direct sales force. In Europe, SangStat
markets THYMOGLOBULIN under the trademark THYMOGLOBULINE through its
wholly owned European affiliate IMTIX-SangStat. Acquired by SangStat in
1998, and operating now in Europe as IMTIX-SangStat, IMTIX was a
division of the French pharmaceutical company Pasteur Merieux Connaught
("PMC"), a world leader in vaccines (Rhone Poulenc group) that had
previously registered THYMOGLOBULINE in 51 European and other
countries. THYMOGLOBULINE is a leader in Europe among anti-T cell
antibodies and is indicated in Europe for prophylaxis and rejection in
kidney, pancreas and liver transplants; treatment of rejection crises
and acute Graft Versus Host Disease in allogeneic bone marrow
transplantation; and aplastic anemia.
In Canada, SangStat has filed a New Drug Submission (NDS) and is
generating revenues through the distribution of THYMOGLOBULIN under that
country's Emergency Drug Release (EDR) program, which permits the
distribution of certain products before final regulatory approval.
The Company announced in January 1998 the preliminary positive results
of the first U.S. double blinded trial evaluating THYMOGLOBULIN vs.
Atgam for induction therapy, at the time of transplant, to prevent acute
graft rejection in kidney transplant patients. Atgam is an
anti-thymocyte globulin (equine) marketed by Pharmacia and Upjohn.
Based on the results of this induction trial, SangStat expects to
conduct further studies with THYMOGLOBULIN for the prevention of organ
transplant rejection, as part of its development program for this new
indication in the United States. The Company is also conducting North
American clinical trials with THYMOGOLBULIN for use in bone marrow
transplantation.
SangStat acquired LYMPHOGLOBULINE in 1998 as part of the IMTIX
acquisition. LYMPHOGLOBULINE is a pasteurized anti-thymocyte equine
immunoglobulin that induces immunosuppression as a result of T-cell
depletion and immune modulation. LYMPHOGLOBULINE is marketed
internationally by IMTIX-SangStat for the prophylaxis and rejection in
organ transplantation. It is not available in the United States and the
Company has no plans to seek approval in the United States for this
product.
AZATHIOPRINE
Azathioprine is an immunosuppressant that inhibits the development of T-
cells by interfering with the differentiation and proliferation of
activated lymphocytes. It is used as an adjunct for the prevention of
rejection in renal organ transplantation. The patent for azathioprine
composition of matter has expired. Therapy is usually initiated shortly
after transplantation and continued daily for the patient's lifetime. It
is used in conjunction with cyclosporine and steroids in the standard
"triple therapy" regimen used by the majority of U.S. transplant
centers. It is currently marketed as Imuran by Glaxo Wellcome Ltd. and
as generic azathioprine by Roxane Laboratories and Bedford Laboratories.
United States sales of all azathioprine products in 1998 were estimated
to be $45 million.
SangStat has developed a generic AZATHIOPRINE for use in transplantation
as an adjunct therapy in chronic immunosuppression and has completed its
pharmacokinetic and human bioequivalency trials. The Company intends to
seek market approval by filing an Abbreviated New Drug Application
("ANDA") with the FDA and to market the product as a branded
therapeutic substitute for Imuran.
ANTILFA
ANTILFA (Odulimomab), the monoclonal antibody 25.3, is a mouse lgG1 with
specificity to the chain of the human leukocyte function-associated
molecule LFA-1. ANTILFA can be used to block the LFA-1 molecule, thus
reducing the cell-cell interaction. An anti-LFA-1 (CD11a) mAb, which
inhibits adhesion of leukocytes is a potential agent for the prevention
of acute renal allograft rejection. SangStat is conducting Phase III
clinical trials with ANTILFA for prevention of Delayed Graft Function.
SangStat acquired ANTILFA as part of the IMTIX transaction with PMC.
ALLOTRAP PEPTIDES
The ALLOTRAP family of peptides is derived from the Company's
proprietary sHLA technology and is designed to promote graft acceptance.
SangStat believes that the ALLOTRAP family of peptides may enable the
body to accept a graft as self without otherwise limiting the normal
operation of the immune system, thus possibly reducing the need for
chronic immunosuppressive therapy. The Company believes that if an
ALLOTRAP peptide is exposed to the recipient's T-cell progenitors
simultaneously with the donor's HLAs, the T-cell progenitors are
deactivated. As a result, the T-cells are not activated against the
donor's HLA and do not reject the graft.
The results of an initial Phase II safety study in Europe showed that
ALLOTRAP 2702 was safe and well-tolerated in the study. Toxicology
studies have been completed in a second generation peptide, ALLOTRAP
1258. Pre-clinical development has indicated that this second generation
peptide may be more potent than ALLOTRAP 2702. As a result, the Company
may decide to pursue the development of ALLOTRAP 1258 rather than
ALLOTRAP 2702. The Company is also pursuing licensing opportunities for
ALLOTRAP 1258 in the autoimmune area.
Although the Company believes it conducted its clinical trials taking
into account both European and U.S. regulatory standards, there can be
no assurance that such data will be accepted by the FDA. The Company
expects to conduct several additional Phase II clinical studies to
assess product efficacy and optimize dosage before potentially
conducting large-scale Phase III trials. The use of ALLOTRAP peptides to
promote graft acceptance in humans is novel and unproven and there can
be no assurance that such peptides will prove to be safe or effective in
humans for any clinical indication for any transplant type or at any
dosage.
PRA-STAT
PRA-STAT is intended to improve HLA compatibility between organ donors
and recipients by providing accurate, rapid, efficient and standardized
testing. PRA-STAT is designed for Panel Reactive Antibody (PRA) testing
to track the appearance and disappearance of anti-HLA antibodies in
transplant candidates, and to analyze such antibodies. This guides the
selection criteria of the prospective donor for each transplant
candidate. PRA testing is often performed every month on patients
waiting for transplants. PRA-STAT was introduced in March 1994. In July
1996, the Company completed an agreement with Baxter Healthcare
Corporation ("Baxter") to reacquire marketing rights to PRA-STAT in
order to market this monitoring product directly and to better establish
its own product distribution capabilities. The terms of this
reacquisition included the obligation to pay Baxter royalties on future
sales of the reacquired product.
CELSIOR
The quality of organ preservation is an important factor contributing to
the viability of the transplant. Most organs are retrieved from trauma
victims who are declared brain-dead but maintain cardiac function until
their organs are removed. The procured organs are stored in a
preservation solution to prevent deterioration and tissue typed to
determine the HLA antigens. Following this, each donor must be
crossmatched with the patients on the transplant waiting lists, each
organ being crossmatched with approximately 100 potential recipients.
Once the best candidate for each organ has been chosen, the organs are
shipped to the recipient's transplant center. The amount of storage time
allowed before transplant varies between organ types and can severely
limit the distance an organ can be shipped. SangStat licensed CELSIOR
from PMC in 1993 and acquired all rights to CELSIOR in the PMC-IMTIX
transaction. CELSIOR is a formulated solution to store and extend
viability of organs between organ recovery and transplantation. CELSIOR
is sold by IMTIX-SangStat internationally for organ preservation. In
the U.S., SangStat intends to assess the effect of CELSIOR on organ
viability and speed of post-transplant organ function recovery. After
consultation with the FDA, the Company voluntarily withdrew its 510(k)
in 1996 for a two-component CELSIOR product in favor of a one component
product. The Company has completed a multicenter clinical trial for a
redesigned, one-component, ready-to-use CELSIOR product candidate for
cardiac transplantation and intends to submit a new 510(k) during the
first half of 1999 for this indication. The Company plans to conduct a
multicenter clinical trial for use of CELSIOR in lung transplantation.
CYCLOSTAT and CREASTAT
The efficacy and safety of a transplant depends on individual
susceptibility to graft rejection and immunosuppressive therapy.
Transplant recipients must visit a clinic to provide a blood sample for
the determination of a cyclosporine level. Similarly, the monitoring of
kidney graft function requires the regular determination of serum
creatinine concentrations. SangStat is developing several monitoring
products for at-home use, which will assist the physician in customizing
drug therapy for each patient: CYCLOSTAT and CREASTAT.
CYCLOSTAT and CREASTAT are at-home blood collection devices for the
measurement of cyclosporine and creatinine levels in capillary blood
samples obtained from a fingerstick. These user-friendly blood
collection devices will allow more frequent monitoring of cyclosporine
levels and kidney function and improve out-patient management. They are
designed to provide a health care provider with a patient's cyclosporine
blood level without requiring the patient to travel to a health care
facility. These at-home tests offer convenience to both patient and
health care providers; patients will not have to arrange to travel to a
health care facility. Both products are in development. The Company
plans to seek marketing clearance of these products from the FDA upon
successful completion of clinical trials.
THE TRANSPLANT PHARMACY
To further the Company's goal to provide comprehensive disease
management, in September 1996 SangStat established THE TRANSPLANT
PHARMACY, a program designed to provide mail order distribution of drugs
and other services for transplant patients. Its first site of operation
opened in September 1996 at the University of Tennessee Bowld Hospital
Organ Transplant Center in Memphis, Tennessee. As of December 31, 1998,
there were seventeen participating transplant center sites actively
referring patients in the U.S.. The Company has also established a
central mail order facility in Menlo Park, California.
This service encourages the promotion of medication compliance, measures
clinical and economic outcomes, and provides feedback directly to
clinicians. Patients electing to enroll are able to have all of their
medications filled through the program's central pharmacy. THE
TRANSPLANT PHARMACY also places a key individual, such as a pharmacist,
in each transplant center to interact directly with physicians, nurses
and patients. THE TRANSPLANT PHARMACY's program seeks to provide a
singular and integrated approach to the management of transplantation,
in which the Company's drugs, monitoring products, and services can be
supplied to meet the needs of individual transplant centers and their
patients.
On November 11, 1998, the Office of the Inspector General ("OIG") of
the Department of Health & Human Services issued an Advisory Opinion
which stated that the placement by a pharmacy of a licensed pharmacist
at a hospital transplant center might constitute prohibited remuneration
under the anti-kickback statute section 1128B9B) of the Social Security
Act. The Company did not request the Advisory Opinion. The OIG
regulations state that such opinions only apply to the requesting
parties and the fact pattern set forth in their request for an advisory
opinion. The Company believes that the operation of The Transplant
Pharmacy differs from the fact pattern set out in the Advisory Opinion
and does not constitute prohibited remuneration. There can be no
assurance that the OIG will agree with this analysis, in which case The
Transplant Pharmacy's program may be modified so that it would no longer
include an on-site pharmacist at transplant centers.
Sales and Marketing
The Company currently markets through its direct sales force those
products for which it retains commercial rights and has obtained
regulatory approval. The Company hired a new Vice President of Sales on
February 1, 1999. As of March 18, 1999, the Company has 21 Transplant
Account Managers ("TAMs"), supervised by three regional sales
directors, who detail primarily to the approximately 250 transplant
centers in the United States. A number of the TAMs have backgrounds in
transplantation, either from detailing other transplant products or with
clinical backgrounds as nurses or as transplant coordinators in
transplant centers. There are also two national account directors who
call on group purchasing organizations and managed care groups. The
Company also uses a variety of marketing techniques to promote its
products, including sampling, journal advertising, promotional material,
specialty publications, rebate coupons, product guarantees, educational
conferences and exposure of its products on the Internet. In Europe,
the products are marketed through IMTIX-SangStat's existing sales force
and marketing team, which includes approximately 30 people who have been
selling THYMOGLOBULIN and LYMPHOGLOBULIN, among other products, for the
past ten years. There are also approximately 250 transplant centers in
Europe.
For certain territories, however, the Company may also enter into co-
promotion arrangements or other licensing arrangements with
pharmaceutical, diagnostic or biotechnology companies. In 1997,
SangStat entered into an exclusive agreement with Amgen for the
registration, marketing and distribution of SANGCYA and SANG-2000 in
certain Asian Pacific Rim territories. SangStat retains the exclusive
commercial rights to SANGCYA and SANG-2000 for all other territories
including North America and Europe.
To the extent the Company enters into co-promotion or other licensing
arrangements, any revenues received by the Company will be dependent on
the efforts of third parties and there can be no assurance that such
efforts will be successful. To the extent that the Company itself
undertakes to market a substantial portion of its products, or is unable
to enter into co-promotion agreements or to arrange for third party
distribution of its products, additional expenditures, management
resources and time will be required to develop a sales force.
Warehousing and Distribution
The Company utilizes an independent warehousing corporation to
store and distribute SANGCYA and THYMOGLOBULIN from one central
warehousing location in Kentucky. Upon the receipt of a purchase order
through electronic data input, phone, mail or facsimile, the order is
placed to the warehouse for shipment, usually within 24 hours, to the
customer placing the order. The warehousing corporation is also
responsible for invoicing and collections.
Strategic Relationships/Licensing Arrangements
The Company evaluates on an ongoing basis potential collaborative
relationships with corporate and other partners where such relationships
may complement and expand SangStat's research, development, sales and
marketing capabilities. There can be no assurance that the Company will
be interested in or able to negotiate any additional collaborative
arrangements or that, if established, such relationships will be
successful.
Pasteur Merieux Connaught
On September 30, 1998, the Company completed the acquisition of PMC's
organ transplant business known as IMTIX. The resulting wholly owned
subsidiary of the Company, named IMTIX-SangStat, is dedicated to the
research, development, manufacture and marketing of pharmaceuticals for
transplantation. The Company will pay PMC royalties on IMTIX-SangStat
product sales that are variable and contingent upon the sales of such
IMTIX-SangStat products. Currently the Company contracts with PMC for
certain steps in the manufacturing process of THYMOGLOBULIN and
LYMPHOGLOBULINE. Additionally, the Company leases from PMC the
manufacturing facilities for these two products. These agreements with
PMC expire on dates ranging from 2008 to 2013. See "Risk Factors -
Risks Associated With the Manufacture of SANGCYA, SANG-2000 and
THYMOGLOBULIN."
Amgen, Inc.
In December 1997, the Company signed an exclusive agreement with
Amgen, Inc. ("Amgen") for the registration, marketing and distribution
of SANGCYA and SANG-2000 in select territories in the Asia/Pacific rim.
SangStat has retained the exclusive commercial rights to SANGCYA and
SANG-2000 in all other territories including North America and Western
Europe. Under the terms of the agreement, Amgen will have exclusive
rights to market SANGCYA and SANG-2000, under SangStat's branded
trademark, in Australia, New Zealand, China and Taiwan. The licensing
agreement includes an initial payment to SangStat, other milestone
payments based on key regulatory submissions and approvals, and
royalties. Amgen made four payments to SangStat in 1998 based upon
milestones set forth in the Agreement.
Stanford University
SangStat has a worldwide, exclusive license from Stanford University
to make, sell or otherwise distribute products covered by patents and
patent applications on certain HLA peptides, including some of the
ALLOTRAP peptides. Stanford University has no obligation to conduct any
further research with respect to such ALLOTRAP peptides. The exclusivity
of SangStat's rights under the license agreement with Stanford
University expire in October 2007. Additionally, under the terms of this
agreement, SangStat must pay to Stanford University annual license fees
and a royalty on products covered by the license agreement.
Competition
The drugs being developed by the Company compete with existing and
new drugs being created by pharmaceutical, biopharmaceutical, and
biotechnology companies and universities. Many of these entities have
significantly greater research and development capabilities, as well as
substantial marketing, manufacturing, financial and managerial resources
and represent significant competition for the Company. The principal
factors upon which the Company's products compete are product utility,
therapeutic benefits, ease of use, effective marketing, distribution and
price. The Company believes it competes favorably with respect to all of
these factors. With respect to SANGCYA, SANG-2000, THYMOGLOBULIN, and
AZATHIOPRINE, the Company will be competing against large companies that
have significantly greater financial resources and established marketing
and distribution channels for equivalent products. For example,
Novartis currently controls virtually 100% of the worldwide cyclosporine
markets and has significantly greater resources than SangStat. There
can be no assurance that the Company will be able to compete
successfully against Novartis. The generic drug industry is
characterized by intense price competition and the Company anticipates
that it will face this and other forms of competition. There can be no
assurance that developments by others will not render the Company's
products or technologies obsolete or noncompetitive or that the Company
will be able to keep pace with technological developments. Many of the
competitors have developed or are in the process of developing
technologies that are, or in the future may be, the basis for
competitive products. Some of these products may have an entirely
different approach or means of accomplishing the desired therapeutic
effect than products being developed by the Company and may be more
effective and less costly. In addition, many of these competitors have
significantly greater experience than the Company in undertaking
preclinical testing and human clinical trials of pharmaceutical products
and obtaining regulatory approvals of such products. Accordingly, the
Company's competitors may succeed in commercializing products more
rapidly than the Company. The Company believes that other companies are
developing cyclosporine formulations that may be marketed as generic
equivalents. Were these competitors to develop their products more
rapidly and complete the regulatory process sooner, it could have a
material adverse effect on the Company's business, financial condition,
cash flows and results of operations.
Treatments for the problems associated with transplantation that the
Company's products seek to address are currently available. For example,
Sandimmune and Neoral, marketed by Novartis, compete with SANGCYA and
SANG-2000. Orthoclone OKT3, marketed by Johnson & Johnson and ATGAM,
marketed by Pharmacia & Upjohn Inc., Simulect, marketed by Novartis, and
Zenapax, marketed by F. Hoffmann La-Roche Ltd., are competitive with
THYMOGLOBULIN. Prograf marketed by Fujisawa Pharmaceutical Co. Ltd,
CellCept, marketed by F. Hoffmann La-Roche Ltd. and Imuran, marketed by
Glaxo Wellcome Ltd. are or would be competitive with SANGCYA, SANG-2000
and AZATHIOPRINE. All of such products are commercially available for
use as immunosuppressive drugs and are widely prescribed. In addition,
One Lambda Inc., Pel Freez, Biotest Diagnostics Corp., and Genetic
Therapy, Inc. market products for pre-transplant HLA monitoring and
Abbott Laboratories markets a cyclosporine level post-transplant
monitoring device, all of which are widely used. Additional therapeutics
and monitoring products are available or are under development by these
and other parties including, but not limited to: American Home Products
Corp. (rapamycin), Bristol Myers Squibb (CTLA4), and DuPont Merck
(ViaSpan), and other companies including, but not limited to Abbott
(cyclosporine), MedImmune Inc., BioTransplant, Inc., and Ivax Corp. In
addition, THE TRANSPLANT PHARMACY also competes with other drug
distribution companies, such as Chronimed Inc., MedCo, and Stadtlander
Drug Company. To the extent these companies' therapeutics, monitoring
products and services address the problems associated with
transplantation on which the Company has focused, they may represent
significant competition.
Patents and Proprietary Technology
The Company's policy is to seek patent protection and to enforce its
intellectual property rights. The Company has three issued patents in
the United States which cover its cyclosporine formulation technology,
for developing multiple formulations and dosage forms of cyclosporine.
The Company has ten issued patents which cover several different test
formats for sHLA-based and allied assays, including PRA-STAT. The
Company's patents expire on various dates beginning in the year 2008 and
ending in the year 2017. SangStat has patent applications pending in the
United States in the pretransplant and post-transplant monitoring,
cyclosporine, and xenotransplantation areas. The Company has also filed
patent applications with respect to several product candidates in many
other countries, including Japan, Canada and the countries regulated by
the European Patent Office.
There can be no assurance that SangStat can manufacture, or have
manufactured, formulate or commercialize SANGCYA and SANG-2000 without
infringing patent or other proprietary rights of Novartis or other third
parties. The Company has recently been sued by Novartis for patent
infringement. See "Risk Factors-Litigation with Novartis."
Some of the Company's family of ALLOTRAP peptides are being developed
under an exclusive, worldwide, license from Stanford University.
Although Stanford has filed patent applications with respect to such
technology, no assurance can be given that the patent application or any
of its claims will be allowed, valid, or enforceable or that the
Company's products will not infringe on other patents.
Patent applications in the United States are maintained in secrecy
until patents issue. Since publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries by several
months, SangStat cannot be certain that it was the first to discover
compositions covered by its pending patent applications or the first to
file patent applications on such compositions. There can be no assurance
that the Company's pending patent applications will result in issued
patents or that any of its issued patents will afford protection against
a competitor.
There can be no assurance that any patent issued to, or licensed by,
the Company will provide protection that has commercial significance.
The Company's patents involve specific claims and thus do not provide
broad coverage. There can be no assurance that the Company's patent
applications or any claims of these patent applications will be allowed,
valid or enforceable, that any patents or any claims of these patents
will provide the Company with competitive advantages for its products or
that they will not be successfully challenged or circumvented by the
Company's competitors.
The Company also relies on trade secrets and proprietary know-how
which it seeks to protect, in part, by confidentiality agreements with
its employees and consultants. There can be no assurance that these
agreements will not be breached, that the Company would have adequate
remedies for any breach or that the Company's trade secrets will not
otherwise become known or independently developed by competitors. The
Company has registered or applied for registration of the names of most
of its products under development or commercialized for research and
development use. However, there can be no assurance that any trademark
registration will be granted or not challenged by competitors.
Manufacturing
In 1998, the Company leased a manufacturing facility in Lyon, France
as part of the IMTIX transaction for the manufacture of THYMOGLOBULIN.
The Company's wholly-owned subsidiary, IMTIX-SangStat, manufactures
THYMOGLOBULIN. There can be no assurance that IMTIX-SangStat will
continue to meet FDA, or other regulatory agency's, standards governing
Good Manufacturing Practices ("GMP"). The Company currently relies on
PMC to perform certain services for the Company in the manufacturing
process. See "Risk Factors-Risks Associated with the Manufacture of
SANGCYA, SANG-2000 and THYMOGLOBULIN."
The Company lacks facilities to manufacture any of its other drugs or
drug candidates in accordance with current GMP prescribed by the FDA.
The Company generally relies on third parties to manufacture compounds
other than THYMOGLOBULIN for commercial sales and clinical trials,
including SANGCYA, CYCLOTECH, SANG-2000, ALLOTRAP 1258, AZATHIOPRINE and
CELSIOR and has contracted for commercial production of these compounds.
The Company depends on such third parties to perform their obligations
effectively and on a timely basis. There can be no assurance that such
parties will perform and any such failure may delay clinical development
or submission of products for regulatory approval, or otherwise impair
the Company's competitive position which could have a material adverse
effect on the Company's business, financial condition, cash flows and
results of operations. In addition, the manufacturing of drug candidates
involves a number of technical steps and requires meeting stringent
quality control specifications imposed by government regulatory bodies
and by the Company itself. Additionally, such products can only be
manufactured in facilities approved by the applicable regulatory
authorities. Because of these and other factors, the Company may not be
able to quickly and efficiently replace its manufacturing capacity in
the event that its manufacturers are unable to manufacture their
products at one or more of their facilities. If these manufacturers were
affected for any reason, the Company's ability to ship its products
could be impaired, which could have a material adverse effect on the
Company's business, financial condition, cash flows and results of
operations.
For certain of its products and potential products, the Company will
need to develop further its production technologies for use on a larger
scale in order to conduct human clinical trials and produce such
potential products for commercial sale at an acceptable cost. The
Company intends to rely on its third-party manufacturers to meet FDA
required GMP. However, the Company is ultimately responsible for any
failure of such manufacturers to meet such requirements.
The Company has contracted for commercial scale production of
cyclosporine bulk material for SANGCYA and SANG-2000 with Gensia Sicor
as well as with a second FDA approved manufacturer. In addition, the
Company has contracted for the production of its finished formulated
SANGCYA and SANG-2000 with Eli Lilly and Company. The Company has also
contracted for manufacture of azathioprine bulk material with an FDA
approved manufacturer and with a separate FDA approved manufacturer for
production of its finished formulated AZATHIOPRINE product candidate.
There can be no assurance that such third parties will perform
satisfactorily and any such failure may delay clinical trial development
or the submission of the product for regulatory approval, impair the
Company's ability to deliver products on a timely basis, or otherwise
impair the Company's competitive position, which could have a material
adverse effect on the Company's business, financial condition and
results of operations. See "Risks Associated with the Manufacture of
SANGCYA, SANG-2000 and THYMOGLOBULIN."
Cyclosporine is particularly difficult to manufacture since it must
be extracted from whole cells and carefully purified. There can be no
assurance that SANGCYA and SANG-2000 can be manufactured in commercial
quantities at an economical cost. There can be no assurance that
SangStat can manufacture, or have manufactured, formulate or
commercialize SANGCYA or SANG-2000 without infringing patent or other
proprietary rights of Novartis or other third parties, due in part to
the large number and scope of these patents and the difficulty of
solubilizing cyclosporine into a formulated drug product. Although
Novartis' composition of matter patent for cyclosporine expired in
September 1995 in the United States, Novartis' patents relating to
formulations are expected to continue to present significant barriers to
entry to potential competitors. See "Risk Factors-Litigation with
Novartis."
The Company is currently purchasing ALLOTRAP peptides for its
clinical trials under a supply agreement with UCB, S.A. ("UCB"). The
Company believes that UCB adheres to established GMP production methods
and complies with the Company's quality control and quality assurance
standards. More than 10 lots of clinical amounts of ALLOTRAP peptides
have been manufactured by UCB to date. The Company expects to purchase
ALLOTRAP peptides from UCB for commercial sale. However, there can be no
assurance that UCB will be able to scale up its manufacturing to support
the commercial sale of ALLOTRAP peptides or that supply of ALLOTRAP
peptides to the Company will be uninterrupted.
With respect to its monitoring products including PRA-STAT, the
Company has contracted for third party manufacturing and which the
Company believes operates in compliance with GMP. However, there can be
no assurance that this third party would pass a regulatory inspection
from the FDA or other agencies. The raw materials required for the
majority of the Company's products and product candidates are currently
available from several suppliers in quantities sufficient to conduct the
Company's research, development and clinical development activities.
However, there can be no assurance that the raw materials necessary for
the manufacture of the Company's products and product candidates will be
available in sufficient quantities or at a reasonable cost.
Complications or delays in obtaining raw materials or in product
manufacturing could delay the submission of products for regulatory
approval, product launch and the initiation of new development programs,
which could materially impair the Company's business, financial
condition, cash flows and results of operations. See "Risk Factors-
Limited Manufacturing Capability."
Government Regulation
SangStat's research and development activities, preclinical studies
and clinical trials, and ultimately the manufacturing, marketing and
labeling of its products, are subject to extensive regulation by the FDA
and other regulatory authorities in the United States and other
countries. The United States Federal Food, Drug, and Cosmetic Act (the
"Act") and the regulations promulgated thereunder and other federal and
state statutes and regulations govern, among other things, the testing,
manufacture, safety, efficacy, labeling, storage, record keeping,
approval, advertising, promotion, import and export of the Company's
products. Preclinical study and clinical trial requirements and the
regulatory approval process typically take years and require the
expenditure of substantial resources. Additional government regulation
may be established that could prevent or delay regulatory approval of
the Company's product candidates. Delays or rejections in obtaining
regulatory approvals would adversely affect the Company's ability to
commercialize any product candidates the Company develops and the
Company's ability to receive product revenues or royalties. If
regulatory approval of a product candidate is granted, the approval may
include significant limitations on the indicated uses for which the
product may be marketed.
The FDA and other regulatory authorities require that the safety and
efficacy of certain of the Company's product candidates be supported
through adequate and well-controlled clinical trials. If the results of
pivotal clinical trials submitted by the Company in applications for
approval do not establish the safety and efficacy of the Company's
product candidates to the satisfaction of the FDA and other regulatory
authorities, the Company will not receive the approvals necessary to
market its product candidates, which would have a material adverse
effect on the Company's business, financial condition, cash flows and
results of operations.
FDA Regulation-Approval of Therapeutic Products
The Company's therapeutic products are regulated as drugs and, in the
case of THYMOGLOBULIN, as biological products. The steps ordinarily
required before a drug or biological product may be marketed in the
United States include (a) preclinical and clinical studies, (b) the
submission to the FDA of an Investigational New Drug application
("IND"), which must become effective before human clinical trials may
commence, (c) adequate and well-controlled human clinical trials to
establish the safety and efficacy of the drug, (d) the submission to the
FDA of New Drug Application ("NDA"), or Biological License Application
("BLA"), if applicable, and (e) FDA approval of the application,
including approval of all product labeling.
Preclinical tests include laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the
potential safety and efficacy of each product. Preclinical safety tests
must be conducted by laboratories that comply with FDA regulations
regarding Good Laboratory Practice. The results of the preclinical tests
are submitted to the FDA as part of an IND and are reviewed by the FDA
before the commencement of human clinical trials. Unless the FDA objects
to an IND, the IND will become effective 30 days following its receipt
by the FDA. There can be no assurance that submission of an IND will
result in FDA authorization to commence clinical trials or that the lack
of an objection means that the FDA will ultimately approve an
application for marketing approval.
Clinical trials involve the administration of the investigational
product to humans under the supervision of a qualified principal
investigator. Clinical trials must be conducted in accordance with Good
Clinical Practices ("GCP") under protocols submitted to the FDA as part
of the IND. Also, each clinical trial must be approved and conducted
under the auspices of an Institutional Review Board ("IRB") and with
patient informed consent. The IRB will consider, among other things,
ethical factors, the safety of human subjects and the possible liability
of the institution conducting the clinical trials.
Clinical trials are typically conducted in three sequential phases,
but the phases may overlap. Phase I clinical trials involve the initial
introduction of the drug into healthy human volunteers. In Phase I
clinical trials, the drug is tested for safety (adverse effects), dosage
tolerance, metabolism, distribution, excretion and pharmacodynamics
(clinical Pharmacology). Phase II clinical trials are conducted in a
target patient population to gather evidence about the pharmacokinetics,
safety and biological or clinical efficacy of the drug for specific
indications; to determine dosage tolerance and optimal dosage; and to
identify possible adverse effects and safety risks. When a compound has
shown evidence of efficacy and an acceptable safety profile in Phase II
evaluations, Phase III clinical trials are undertaken to evaluate
clinical efficacy and to test for safety in an expanded patient
population. There can be no assurance that any of the Company's clinical
trials will be completed successfully or within any specified time
period. The Company or the FDA may suspend clinical trials at any time,
if either entity concludes that clinical subjects are being exposed to
an unacceptable health risk, or for other reasons.
There can be no assurance that, after the results of the Phase III
clinical trials have been announced, the FDA will not disagree with the
design of the Phase III clinical trial protocols. In addition, the FDA
inspects and reviews clinical trial sites, informed consent forms, data
from the clinical trial sites, including case report forms and record
keeping procedures, and the performance of the protocols by clinical
trial personnel to determine compliance with good clinical practice. The
FDA also examines whether there was bias in the conduct of clinical
trials. The conduct of clinical trials is complex and difficult,
especially in Phase III. There can be no assurance that the design or
the performance of the Phase III clinical trial protocols will be
successful.
The results of preclinical studies and clinical trials, if
successful, are submitted in an application to seek the FDA approval to
market the drug or biological product for a specified use. The testing
and approval process requires substantial time and effort, and there can
be no assurance that any approval will be granted for any product or
that approval will be granted according to any schedule. The FDA may
refuse to approve an application if it believes that applicable
regulatory criteria are not satisfied. The FDA may also require
additional testing for safety and efficacy of the drug. Moreover, if
regulatory approval of a drug product is granted, the approval will be
limited to specific indications. There can be no assurance that any of
the Company's product candidates will receive regulatory approvals for
marketing, or if approved, that approval will be for the indications
requested by the Company.
The FDA has implemented an accelerated review process for drugs that
treat serious or life threatening diseases and conditions. Such approval
is subject to the additional requirement that, following product launch,
a Company continues to study the drug to verify and describe its
clinical benefit. Under these FDA Accelerated Approval Procedures, the
FDA may withdraw approval if the Company fails to show due diligence in
conducting post-marketing clinical trials or if these clinical trials
fail to demonstrate clinical benefit to the FDA's satisfaction. When
appropriate, the Company intends to pursue opportunities for accelerated
review of its products. The Company cannot predict the ultimate
opportunities for accelerated review of its products. The Company cannot
predict the ultimate effect of the accelerated review process on the
timing or likelihood of FDA review of any of its product candidates.
For certain drugs that are generic versions of previously approved
products, there is an abbreviated FDA approval process. A sponsor may
submit an Abbreviated Application for: (1) a drug product that is the
"same" as the drug product listed in the approved drug product list
published by the FDA (the "listed drug") with respect to active
ingredient(s), route of administration, dosage form, strength and
conditions of use recommended in the labeling; (2) a drug product that
differs with regard to certain changes from a listed drug if the FDA has
approved a petition from a prospective applicant permitting the
submission of an Abbreviated Application for the changed product; and
(3) a drug that is a duplicate of, or meets the monograph for, an
approved antibiotic drug. While the Company believes that SANG-2000 and
AZATHIOPRINE will qualify for this abbreviated format, there can be no
assurance that the FDA will not require additional information or that
these products will be approved for marketing.
An Abbreviated Application need not contain the clinical and
preclinical data supporting the safety and effectiveness of the product.
The applicant must instead demonstrate that the product is bioequivalent
to the listed drug. FDA regulations define bioequivalence as the absence
of a significant difference in the rate and the extent to which the
active ingredient moiety becomes available at the site of drug action
when administered at the same molar dose under similar conditions in an
appropriately designed study. If the approved generic drug is both
bioequivalent and pharmaceutically equivalent to the listed drug, the
agency may assign a code to the product in an FDA publication that will
represent a determination by the agency that the product is
therapeutically equivalent to the listed drug. This designation will be
considered by third parties in determining whether the generic drug will
be utilized as an alternative to the listed drug. There can be no
assurance that the Company will receive an "AB" rating on SANG-2000 or
AZATHIOPRINE, which would permit automatic substitution of SANG-2000 for
Neoral Capsules and AZATHIOPRINE for Imuran.
FDA Regulation-Approval of Monitoring Products
The Company's monitoring products are regulated as medical devices by
the FDA and as such require regulatory clearance prior to commercial
distribution. New medical devices are generally introduced to the market
based on a premarket notification or "510(k)" submission to the FDA in
which the sponsor establishes that the proposed device is "substantially
equivalent" to a legally marketed Class I or Class II medical device or
to a Class III medical device for which the FDA has not required
premarket approval. The claim of substantial equivalence will generally
have to be supported by various types of data and materials including,
in some instances, preclinical and/or clinical test results.
Following submission of the 510(k), the sponsor may not place the
device into U.S. commercial distribution until a substantial equivalence
order is issued by the FDA. The order may be sent within 90 days of
submission but could take significantly longer. The order may declare
the FDA's determination that the device is "substantially equivalent" to
another legally marketed device and allow the proposed device to be
marketed in the United States. The FDA may, however, determine that the
proposed device is not substantially equivalent, or may require further
information, such as additional test data, before the FDA is able to
make a determination regarding substantial equivalence. Such
determination or request for additional information could delay the
Company's market introduction of its products by several quarters or
more and could have a material adverse effect on the Company's business,
financial condition and results of operations. There is no assurance
that a 510(k) marketing clearance will be granted for these products.
Additional regulatory barriers may be encountered by not meeting
performance requirements of American Society of Histocompatability and
Immunogenetics ("ASHI") and the labeling requirements of Clinical
Laboratory Improvements Amendment ("CLIA").
If the sponsor of a 510(k) cannot obtain an FDA order declaring
substantial equivalence, the sponsor will have to submit a premarket
approval application ("PMA"). A PMA will generally have to be supported
by extensive data, including preclinical and clinical trial data, to
prove the safety and efficacy of the device. Although, by statute, the
FDA has 180 days to review a PMA once it has been accepted for filing.
PMA reviews more often involve a significantly longer time period,
usually 12 to 24 months or longer from the date of filing. There also
can be no assurance that the data collected by the sponsor would support
a PMA marketing approval.
The sponsor may be required to obtain an Investigational Device
Exemption ("IDE") before it commences clinical testing to support a
510(k) submission or PMA. Each clinical trial must be approved and
conducted under the auspices of an IRB and with patient informed
consent. The IRB will consider, among other things, ethical factors, the
safety of human subjects, and the possible liability of the institution
conducting the clinical trials. For some products, the sponsor must also
submit the protocol to the FDA. The sponsor of the IDE may be able to
distribute limited amounts of these products for research use only if
certain FDA requirements are met. Some of these requirements may also
apply to distribution for clinical investigational use only. The FDA
monitors and oversees the use and distribution of all "research use
only" and "investigational use only" devices. There can be no assurances
that the FDA will determine that the Company's product candidates are
substantially equivalent to other legally marketed devices. The FDA may
require the submission of a PMA, which would delay the Company's market
introduction of its products and could have a material adverse effect on
the Company's business, financial condition and results of operations.
The testing and approval process will require substantial time and
effort, and there can be no assurance that any approval will be granted
for any product or that approval will be granted according to any
schedule. The FDA may refuse to approve a PMA if it believes that
applicable regulatory criteria are not satisfied. The FDA may also
require additional testing for safety and efficacy of the device.
Moreover, if the PMA is approved, the approval will be limited to
specific indications or uses. There can be no assurance that any of the
Company's product candidates will receive regulatory approvals for
commercial distribution, or if approved that approval will be for the
indications requested by the Company.
Prior to any approval of the Company's products for marketing, all
manufacturing facilities must pass the FDA preapproval inspections.
FDA Regulation-Post-Approval Requirements
Even if regulatory approvals for the Company's product candidates are
obtained, the Company, its products and the facilities manufacturing the
Company's products are subject to continual review and periodic
inspection. Each U.S. drug and device manufacturing establishment must
be registered with the FDA. Domestic manufacturing establishments are
subject to biennial inspections by the FDA and must comply with the
FDA's GMP regulations. To supply device products for use in the United
States, foreign manufacturing establishments must comply with the FDA's
GMP regulations and are subject to periodic inspection by the FDA or by
regulatory authorities in those countries under reciprocal agreements
with the FDA. In complying with GMP regulations, manufacturers must
expend funds, time and effort in the area of production and quality
control to ensure full technical compliance. The FDA stringently applies
regulatory standards for manufacturing.
Labeling and promotional activities are regulated by the FDA and, in
certain instances, by the Federal Trade Commission. The Company must
also report certain adverse events involving its drugs and devices to
the agency under regulations issued by the FDA. The FDA can impose other
post-marketing controls on the Company and its products, and has
expanded authority in this regard for certain products, such as devices
approved under PMAs.
Failure to comply with applicable regulatory requirements, can result
in, among other things, warning letters, fines, injunctions, civil
penalties recall or seizure of products, total or partial suspension of
production, refusal of the government to grant approvals, premarket
clearance or pre-market approval, withdrawal of approvals and criminal
prosecution of the Company and employees.
European Regulations
The Company's activities in Europe are regulated by both the law of
the European Union ("EU") and by the national law of the EU Member
States. There are a number of EU Regulations and Directives in force
governing the authorization and the marketing of medicinal products. The
purpose of such Regulations and Directives is to harmonize the legal
framework regulating medicinal products in the EU. In the event of a
conflict between EU legislation and national law, EU legislation takes
precedence over national law. Once adopted, Regulations apply
immediately in Member States, Directives must be implemented into
national law by Member States. Failure to implement Directives by
national governments either properly or in a timely fashion still leaves
significant areas of regulation to national law. Efforts to harmonize
regulation of medicines within the EU began in 1965 with the adoption of
Directive 65/65 which required Member States to establish premarket
approval requirements and prescribed the criteria for approval. Since
then, the EU has issued a series of measures aimed at making regulation
of medicinal products more uniform.
European Regulations-Approval of Therapeutic Products
In addition to Regulations and Directives, the EU has formulated non-
binding guidelines (the "Guidelines") which set out detailed EU
requirements relating to the quality, safety and efficacy of medicinal
products. Such Guidelines have been formulated by the European
Commission in consultation with the Committee for Proprietary Medicinal
Products ("CPMP"). Although these Guidelines are not legally binding,
failure to comply with them makes it less likely that product research
work submitted in support of an application for marketing authorizations
will be acceptable to the competent authorities throughout the EU. In
European countries which are not EU Member States, national laws apply
which are frequently divergent from the EU framework. The following
paragraphs relate only to regulation in EU Member States.
When adequate preclinical data are available, an application normally
will be made either to the relevant national regulatory authority and/or
to an ethics committee for approval to carry out a clinical trial with
the unlicensed medicinal product. While marketing authorizations must be
supported by clinical trials of a type and extent set out in the
Directives and Guidelines, the actual approval process for commencement
of clinical trials is not currently harmonized by EU law and varies from
state to state.
Clinical trials are typically conducted in three sequential phases
which may overlap. In Phase I, the product is tested in humans to
determine certain parameters relating to safety, potential adverse
effects and/or pharmacokinetics. Phase II involves studies in a target
patient population to collect additional pharmacokinetic clinical data
demonstrating safety and, subsequently, to determine the preliminary
biological or clinical efficacy and optional dosage of the product.
Phase III trials are then undertaken to collect further data to
demonstrate quality, safety and efficacy within an expanded target
patient population. The various European regulatory authorities may
require multiple Phase III trials to support the quality, safety and
efficacy of the product. This process may take three to six or more
years to complete.
When appropriate clinical trial data supporting quality, safety and
efficacy are available, an application for a marketing authorization may
be submitted. In 1993, legislation was adopted which established a very
new and amended system for the registration of medicinal products in the
EU. The main purpose of this system is to prevent the existence of
essentially separate national approval systems which have been a major
obstacle to harmonization. One of the most significant features of this
new system is the establishment of a new European Agency for the
Evaluation of Medicinal Products ("EMEA"). Under the new system,
marketing authorizations, broadly speaking, may be submitted at either a
centralized, a decentralized or a national level.
The centralized procedure is administered by the EMEA; this procedure
is mandatory for the approval of biotechnology and high technology
products and available at the applicant's option for other products. The
centralized procedure provides for the first time in the EU for the
grant of a single marketing authorization which is valid in all EU
Member States.
As of January 1995, a mutual recognition procedure is available at
the request of the applicant for all medicinal products which are not
subject to the centralized procedure under the so-called "decentralized
procedure". The decentralized procedure became mandatory as of January
1, 1998. The decentralized procedure creates a new system for mutual
recognition of national approval decisions, makes changes in existing
procedures for national approvals and establishes procedures for co-
ordinated EU action on product suspensions and withdrawals. Under this
procedure, the holder of a national marketing authorization for which
mutual recognition is sought may submit an application to one or more
Member States, certify that the dossier is identical to that on which
the first approval was based or explain any differences and certify that
identical dossiers are being submitted to all Member States from which
recognition is sought. Within 90 days of receiving the application and
assessment report, each Member State must decide whether to recognize
the approval. The procedure encourages Member States to work with
applicants and other regulatory authorities to resolve disputes
concerning mutual recognition. If such disputes cannot be resolved
within the 90-day period provided for review, the application will be
subject to a binding arbitration procedure.
The Company will choose the appropriate route of European regulatory
filing to accomplish the most rapid regulatory approvals. However, there
can be no assurance that the chosen regulatory strategy will secure
regulatory approvals or approvals of the Company's chosen products
indications.
Under all procedures approval of an application must be refused if,
after review, it appears that the quality, safety or efficacy of a
medicinal product has not been adequately demonstrated by the applicant.
In practice, requirements for specific post-marketing surveillance, or
Phase IV studies, are increasingly imposed as de facto conditions of the
grant of a marketing authorization.
In some Member States, before a product is marketed, it is also
necessary to obtain approval for the price to be charged for the
product. However, this is not the position in the United Kingdom, for
example, where the initial price is set by the Company (subject to the
constraints of the Pharmaceutical Price Regulation System, which
controls the profitability of a Company's business with the National
Health Service). The European Commission is presently reviewing various
matters relating to the pricing of medicinal products within the EU.
Currently EU regulation does not harmonize the pricing measures Member
States may enact, but only seeks to guarantee the transparency of these
measures. The Company believes it is unlikely the EU will regulate in
the area of health care financing. The Company believes that
determination of prices and reimbursement of health care products is
therefore likely to remain a prerogative to the Member States for the
foreseeable future. There can be no assurance that Member States will
not adopt new cost containment policies that will limit marketing
opportunities in the EU.
The passage of a product through the approval system is likely to
take a considerable period of time. However, it is hoped that the new
authorization system will limit the length of time the review process
will take. Generally under the scheme the review process is intended to
take a maximum of 210 days after the receipt of a valid application.
It should also be noted that each national regulatory authority has
the power to suspend or revoke a marketing authorization any time if it
is no longer satisfied as to the product's safety, quality and efficacy.
Increasing harmonization of decision-making by national authorities
through the CPMP and/or a new European agency, and the existence of a
mechanism by which any EU distribution could compel a Member State to
act in accordance with a CPMP opinion, should result in more efficiency
and future market authorization process.
EU law requires that companies manufacturing products must hold a
manufacturer's authorization and must comply with EU requirements as to
GMP. These standards are enforced by inspection. Primary responsibility
for ensuring that manufacturing procedures conform to marketing
authorizations and good manufacturing practice requirements will rest
with the authorities in the Member States where the product is
manufactured or first imported into the EU.
A procedure for abridged applications for generic products also
exists in the EU. The general effect of the abridged application
procedure is to give scope for the emergence of generic competition once
patent protection has expired and the original product has been on the
market for at least six years or ten years. Independent of any patent
protection, under the abridged procedure, new products benefit in
principle from a basic six-year period of protection (commencing with
the data of first authorization in the EU) from abridged applications
for a marketing authorization. Abridged applications can be made
principally for medicinal products which are essentially similar to
medicinal products which have been authorized for either six or ten
years. Under the abridged application procedure, the applicant is not
required to provide the results of pharmacological and toxicological
tests or the results of clinical trials. For such abridged applications,
all data concerning manufacturing, quality and bioavailability are
required. The applicant submitting the abridged application generally
must provide evidence or information that the drug product subject to
this application is essentially similar to that of the listed drug
product: (1) it has the same qualitative and quantitative composition
with respect to the active ingredient; (2) the dosage form; and (3)
similarity in bioavailability between the new drug product and the
reference listed drug. This period of protection is extended to ten
years in respect of products derived from certain biotechnological
processes or other high-technology medicinal products viewed by the
competent authorities as representing a significant innovation. Further,
each Member State may have a discretion to extend the basic six-year
period of protection to a ten-year period, to all products marketed in
its territory. Most Member States have exercised such discretion. This
protection does not prevent another Company from making a full
application supported by all necessary pharmacological, toxicological
and clinical data within the period of protection. The application of
the rules of marketing exclusivity to various product situations remains
uncertain, and divergent views are taken by some of the EU regulatory
authorities on the availability of the period of protection where new
products are different from existing products only in terms of, for
instance, strength or dosage form.
European Regulations-Monitoring Products
The Commission of the European Communities proposed a draft of new
directives to govern approvals of in vitro diagnostic medical devices in
late 1995, amending the existing Directive. Future approvals of the
Company's monitoring products may therefore be dependent on meeting the
conditions of the proposed Directive. When the Company's monitoring
products meet the essential requirements of the Directive, such
monitoring products will have CE markings of conformity.
Environmental Regulation
In connection with its research and development activities and its
manufacturing materials and products, the Company is subject to federal,
state and local laws, rules, regulations and policies governing the use,
generation, manufacture, storage, air emission, effluent discharge,
handling and disposal of certain materials, biological specimens, and
wastes. Although the Company believes that it has complied with these
laws, regulations and policies in all material respects and has not been
required to take any action to correct any noncompliance, there can be
no assurance that the Company will not be required to incur significant
costs to comply with environmental and health and safety regulations in
the future. The Company's research and development involves the
controlled use of hazardous materials, including but not limited to
certain hazardous chemicals and infectious biological specimens.
Although the Company believes that its safety procedures for handling
and disposing of such materials comply with the standards prescribed by
state and federal regulations, the risk of accidental contamination or
injury from these materials cannot be eliminated. In the event of such
an accident, the Company could be held liable for any damages that
result and any such liability could exceed the resources of the Company.
Third Party Reimbursement
The operating results of the Company will depend in part on the
availability of adequate reimbursement for the Company's products from
third-party payors, such as government entities, private health insurers
and managed care organizations. Third-party payors increasingly are
seeking to negotiate the pricing of medical services and products. In
some cases, third-party payors will pay or reimburse a user or supplier
of a prescription drug product only a portion of the purchase price of
the product. In the case of the Company's prescription products, payment
or reimbursement by third-party payors of only a portion of the cost of
such products could make such products less attractive, from a cost
perspective, to users, suppliers and prescribing physicians. There can
be no assurance that reimbursement, if available, will be adequate. If
adequate reimbursement levels are not provided by government entities or
other third-party payors for the Company's products, the Company's
business, financial condition and results of operations would be
materially adversely affected.
A number of legislative and regulatory proposals aimed at changing the
United States' health care system have been proposed in recent years.
While the Company cannot predict whether any such proposals will be
adopted, or the effect that any such proposal may have on its business,
such proposals, if enacted, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Product Liability Insurance
The Company faces an inherent risk of exposure to product liability
claims in the event that the use of its products is alleged to have
resulted in adverse effects. Such risk exists even with respect to those
products that are manufactured in licensed and regulated facilities or
that otherwise received regulatory approval for commercial sale. There
can be no assurance that the Company will not be subject to significant
product liability claims. The Company currently has product liability
insurance in the amount of $10.0 million per claim and $10.0 million in
the aggregate on a claims-made basis. Many of the Company's customers
require the Company to maintain product liability insurance coverage as
a condition to their conducting business with the Company. As the loss
of such insurance coverage could result in a loss of such customers, the
Company intends to take all reasonable steps necessary to maintain such
insurance coverage. There can be no assurance that insurance coverage
will be available in the future on commercially reasonable terms, or at
all, or that such insurance will be adequate to cover potential product
liability claims, or that the loss of insurance coverage or the
assertion of a product liability claim or claims would not materially
adversely affect the Company's business, financial condition and results
of operations.
Scientific, Medical, Pharmacy, Regulatory and Business and Medical
Ethics Advisory Boards
The Company's Scientific, Medical, Pharmacy, Regulatory, Business and
Medical Ethics Advisory Boards consist of individuals with recognized
expertise in immunology, transplantation or regulatory affairs. The
Scientific, Medical, Pharmacy, Regulatory, and Business and Medical
Ethics Advisory Boards' members advise the Company about present and
long-term scientific planning, research and development. Members meet
individually or as a group with the management of the Company from time
to time. Each member of the Scientific, Medical, Pharmacy and Regulatory
Advisory Boards has entered into a consulting agreement with the
Company.
The following persons are members of one or more of the Company's
Scientific, Medical, Pharmacy. Regulatory, Business and Medical Ethics
Advisory Boards:
Rita Alloway, Pharm.D., is an Associate Professor in the Department
of Clinical Pharmacy at the University of Tennessee, Memphis, Tennessee.
Dr. Alloway is a Board Certified Pharmacotherapy Specialist practicing
at the UT William F. Bowld Hospital. Her current research is focused on
individualizing and optimizing immune suppressive regimes for the
transplant recipient. Dr. Alloway is the Past President of the Mid South
College of Clinical Pharmacy.
Gilbert J. Burckart, Pharm. D., is a member of the Pharmacy faculty
at the University of Pittsburgh and established the Clinical
Pharmacokinetics Laboratory with Dr. Raman Venkataramanan. In
conjunction with Dr. Thomas Starzl and other members of the Pittsburgh
Transplantation Institute, Dr. Burckart has studied drug disposition in
organ transplant patients since that time, and he is the Principal
Investigator of an NIH grant in this area that is now entering its ninth
year. Dr. Burckart also has a joint appointment as a Professor of
Pediatrics in the School of Medicine.
Dean S. Collier, Pharm.D., is Assistant Professor, Department of
Pharmacy Practice, University of Nebraska Medical Center. He conducts
research with various immunotherapeutics and has published several
articles on this subject. He received his Pharm.D. from the University
of Iowa and completed an Immunotherapy Fellowship at the University of
Nebraska.
Jean Dausset, M.D., received a Nobel Prize in Medicine in 1980 for
work that led to the discovery of HLA. In 1984, he founded and is
currently serving as President of the Human Polymorphism Study Center
(CEPH) which is currently engaged in research directed toward mapping
the human genome. Professor Dausset is a member of the French Academy of
Sciences, a foreign member of the American Academy of Arts and Sciences
and of the National Academy of Sciences.
Robert E. Dupuis, Pharm.D., BCPS, is a Clinical Associate Professor
at the School of Pharmacy, and Assistant Director of Toxicology in the
Department of Laboratory Medicine, University of North Carolina at
Chapel Hill. He is a board-certified Pharmacology Specialist and
received his Pharm.D. from State University of New York at Buffalo.
Roy First, M.D., is a Professor of Internal Medicine at the
University of Cincinnati Medical Center, and Director of the Section of
Transplantation in the Division of Nephrology and Hypertension. He is a
Past President of the American Society of Transplant Physicians (ASTP),
and is current Chairman of the Ad Hoc Committee for Organ Donation of
the United Network for Organ Sharing (UNOS). Dr. First obtained his
medical degree at the University of Witwatersrand in Johannesburg, South
Africa in 1966.
A. Osama Gaber, M.D., is Associate Professor, Department of Surgery,
University of Tennessee and President of the Medical Staff at UT William
F. Bowld Hospital. He was President of the Tennessee Transplant Society
and is Co-Chair SEOPF Pancreas Transplant Committee.
Ronald D. Guttmann, M.D., FRCPC, is Director of the McGill Center for
Clinical Immunobiology and Transplantation, and a Professor of Medicine
at the McGill University Faculty of Medicine, Montreal, Quebec, Canada.
Dr. Guttmann was previously affiliated with the Peter Bent Brigham
Hospital and Harvard Medical School.
Amy M. Haddad, Ph.D., is a Professor at the Center for Health Policy
& Ethics and School of Pharmacy & Allied Health Professions, Creighton
University, Omaha Nebraska.
Dennis F. Heinrichs, B.S.N., M.B.A., is the President/Chief Operating
Officer, LifeLink Foundation, Inc.
Curtis D. Holt, Pharm.D., is the Transplant Pharmacist Specialist,
UCLA-Cedars Medical Centers and Assistant Clinical Professor or Surgery,
UCLA School of Medicine, Division of Liver and Pancreas Transplantation.
He is also the Director of Clinical Research, Dumont-UCLA Liver
Transplant Program.
Cheryl Jacobs, LICSW, is the clinical transplant social worker at the
University of Minnesota (Fairview University Medical Center) since 1991.
Her primary focus is on kidney transplant recipients and living organ
donors.
N. David Kennedy, Pharm.D., MPA, FASCP, is Manager of Medical
Affairs, Plasma Operations for the American Red Cross. He is
recognized as an expert on plasma derivatives and many topics associated
with blood products, including being a nationally known speaker on
Creutzfeldt-Jakob Disease.
Sherry LaForest, Pharm.D., is a clinical pharmacist at Methodist
Hospital in Indianapolis. She was previously Assistant Professor of
Pharmacy Practice at Temple University, as well as Clinical Pharmacy
Specialist for the Heart Failure and Transplant teams at Temple
University Hospital. She is active in the American College of Clinical
Pharmacy and a member of the International Society of Heart and Lung
Transplantation.
Kathleen D. Lake, Pharm.D., BCPS, is the Director of Clinical
Research and Transplant Therapeutics, Divisions of Nephrology & Surgery
and Senior Associate Research Scientist at the University of Michigan
Medical School in Ann Arbor. She received her B.S. and Pharm.D. degrees
from the University of Minnesota and is a Board Certified
Pharmacotherapy Specialist. Dr. Lake has been involved in the area of
transplantation since 1985 and specializes in the pharmacotherapy of
transplant patients. Dr. Lake has been a member of the Board of Regents
of the American College of Pharmacy for the past eight years, is Editor
of the Transplant Pharmacy Newsletter, is a member of the Working Group
of Transplant Cardiologists, and has recently been appointed to the
Scientific Studies Committee of the American Society of Transplant
Physicians.
Richard M. Lewis, M.D., is currently Professor of Urology and
director of Renal Transplantation at Loyola University Medical Center.
He is a member of American Society of Transplant Physicians, the
American Urological Association (AUA), the Society for Renovascular
Surgery and Renal Transplantation (AUA).
Suzanne Valerie McDiarmid, M.B., Ch. B., is an Associate Professor of
Pediatrics and Surgery, University of California Los Angeles and
Director, Pediatric Liver Transplant Program, UCLA-Cedars-Sinai Medical
Center. She is a member of several professional organizations including
the American Society of Transplant Physicians, the International Liver
Transplant Society and the American Association for the Study of Liver
Disease as well as being named a Fellow of the American Academy of
Pediatrics.
Marsha Morien, serves as Director, Transplantation Services, Nebraska
Health System. She is a member of the Board of Directors for Hickman-
Kenyon Systems, Inc., a software firm that develops and markets
databases for transplantation and other protocol driven clinical care.
Barbara Oliver, is a transplant recipient (renal) and a member of
Board of Directors, Transplant Recipients International Organization,
Inc. (TRIO), chairing their Commications Committee and is the president
of the Kentuckiana/Louisville Chapter.
Douglas James Norman, M.D., is a Professor of Medicine and the
Director if The Medical Transplantation Program, Oregon Health Sciences
University. He is a member of the American Society of Transplant
Physicians, the Pacific Northwest Transplant Society, the National
Kidney Foundation, and the Western Association of Physicians.
Shi-Hui Pan, Pharm.D., a Transplant Pharmacy Specialist at the
Comprehensive Liver Disease and Treatment Center, St. Vincent Medical
Center, Los Angeles, California. Prior to this, she was a Transplant
Pharmacy Specialist for kidney, heart, lung and liver transplant
programs at Cedars-Sinai Medical Center, Los Angeles, California, for
six years. She received her transplant fellowship training, Pharm.D.
and M.S. from the University of Minnesota, College of Pharmacy.
Roger Ratouis, Ph.D., is a consultant for regulatory affairs. From
1959 to 1990, Dr. Ratouis was employed by Roussel Uclaf where he held
various positions, first in research, then in pharmaceutical
development, before heading the Regulatory Affairs and Planning
Department in the Health Care Division.
William G. Reiss, Pharm.D., BCPS, is an Assistant Professor of
Pharmacy, University of Maryland at Baltimore. He is primarily involved
in the clinical management of solid organ transplant and conducts
research in the area clinical pharmacokinetics. He is a board-certified
Pharmacology Specialist and received his Pharm.D. from State University
of New York at Buffalo.
Employees
As of December 31, 1998, the Company employed 241 people worldwide.
None of the Company's current employees is represented by a labor union
or is the subject of a collective bargaining agreement. The Company
believes that it maintains good relations with its employees.
ITEM 2. PROPERTIES
The Company headquarters are located in Menlo Park, California. Floor
space in Menlo Park is approximately 27,600 square feet, including
offices, laboratory space, manufacturing space, storage area and
specialized areas for pilot production and preclinical testing. The
Menlo Park facilities serve as the principal sites for preclinical
research, clinical trial management, process development, monitoring
product manufacturing, quality assurance and quality control, and
regulatory affairs. The leases for these building spaces expire in June
1999 and may be renewed for subsequent years. The Company currently has
no plans to renew such leases. In addition, the Company leases
approximately 4,500 square feet in Menlo Park for its central mail order
pharmacy.
The Company has entered into a sublease commencing June 1999 for
approximately 44,000 square feet in Fremont, California, including
offices, laboratory space, storage area and specialized areas for pilot
production and preclinical testing. The Company intends to relocate its
headquarters from Menlo Park, California to Fremont, California in
approximately June 1999. The lease for the Fremont building space will
expire in 2005 and may be renewed for subsequent years.
The Company also leases approximately 23,000 square feet from PMC in
Lyon, France for marketing, sales, adminstration and manufacturing of
THYMOGLOBULIN. These leases expire in 2013.
The Company leases approximately 2,000 square feet in Missassauga,
Ontario, Canada. The lease for this facility expires in August 1999, and
the Company has the option to renew its lease for subsequent five-year
periods. This site is used as headquarters for marketing and sales
activities of SangStat Canada, Ltd.
The Company believes that its current facilities are suitable and
adequate to meet its needs for the foreseeable future and anticipates
that it will be able to expand its facilities to nearby locations as the
need develops.
ITEM 3. LEGAL PROCEEDINGS
Novartis vs. SangStat
On February 11, 1999, Novartis Pharmaceuticals Corporation filed a
lawsuit (case number 99-065) in Federal District Court for the District
of Delaware against the Company alleging infringement of United States
patent #5,389,382, a cyclosporine technology patented by Novartis A.G.
The Novartis patent does not cover Neoral but rather a separate delivery
system not used in the Neoral formulation. Novartis seeks the following
relief: (i) a finding that SangStat willfully infringed the patent;
(ii) to permanently enjoin SangStat from infringing the Novartis patent;
(iii) treble damages; and (iv) reasonably attorneys' fees , costs and
expenses. SangStat's answer is due April 5, 1999 and discovery will not
begin until after the answer is filed. SangStat believes that the
lawsuit is without merit and that it does not infringe the Novartis
patent. SangStat intends to defend itself vigorously against this
claim.
Although the Company is optimistic that this dispute will ultimately be
resolved favorably to the Company, the course of litigation is
inherently uncertain and there can be no assurance of a favorable
outcome. As a result of the Novartis suit, SangStat could be enjoined
from selling SANGCYA for a significant period of time or ultimately be
prevented from selling SANGCYA. Should this happen, the Company does not
believe it would be able to obtain a license from Novartis on acceptable
terms because the Company believes cyclosporine is an important product
for Novartis and that Novartis would not want to diminish its profits
from this product by licensing it on acceptable terms to the Company.
Failure to obtain any such required license could prevent the Company
from selling SANGCYA entirely, which would have a material adverse
effect on the Company's future results of operations. The litigation,
whether or not resolved favorably to the Company, is likely to be
expensive, lengthy and time consuming, will divert management's
attention and could have a material adverse effect on the Company's
business, financial condition, cash flows and results of operations.
SANG-2000 is not covered by this lawsuit and the Company does not
believe that this lawsuit will have an impact on the regulatory approval
of Sang-2000. See "Risk Factors-Litigation with Novartis."
Novartis vs. FDA
Novartis Pharmaceuticals Corporation sued the FDA on February 11, 1999
in the United States District Court for the District of Columbia (case
number 1:99CV-00323) alleging that the FDA did not follow its own
regulations in approving SANGCYA in October 1998. The lawsuit against
the FDA appears to be based on arguments similar to those used in the
failed citizen' petition in which Novartis alleged that because Neoral
and SANGCYA, both oral solutions, are based on different formulation
technologies, they should be classified as different dosage forms.
Novartis asks that the court rescind the AB rating that was given to
SANGCYA. Loss of the "AB" rating would prevent SANGCYA from being
automatically substitutable for Neoral oral solution, which would impede
the marketing of SANGCYA. The Company believes that the lawsuit is
without merit and that the FDA will prevail in this matter. Although
the Company is optimistic that this dispute will ultimately be resolved
favorably to the Company, the course of litigation is inherently
uncertain and there can be no assurance of a favorable outcome.
Novartis' requested relief, if granted, could have a significant
negative economic impact on SangStat. In order to defend its interests
vigorously, SangStat filed a Motion for Leave to Intervene in this
lawsuit on February 23, 1999. The Court has not yet ruled on this
motion. See "Risk Factors-Litigation with Novartis."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock commenced trading publicly on the Nasdaq
National Market on December 14, 1993 and is traded under the symbol SANG. The
following table sets forth for the periods indicated the high and low daily
closing prices for the Common Stock:
HIGH LOW
-------- --------
FISCAL YEAR ENDED DECEMBER 31, 1997
First Quarter........................... 30.250 26.500
Second Quarter.......................... 27.375 13.750
Third Quarter........................... 30.625 21.500
Fourth Quarter.......................... 40.500 28.000
FISCAL YEAR ENDED DECEMBER 31, 1998
First Quarter........................... 38.719 23.562
Second Quarter.......................... 34.812 24.312
Third Quarter........................... 31.969 16.566
Fourth Quarter.......................... 30.532 16.500
On March 18, 1999 the closing sale price of the Common Stock as reported
on the Nasdaq National Market was $18.25 per share. As of March 18, 1999
there were approximately 130 holders of record of the Common Stock.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends since its
inception. The Company currently intends to retain all earnings, if any, for use
in the expansion of its business and therefore does not anticipate paying any
dividends in the foreseeable future.
The Company has not declared or paid any cash dividends since its
inception. The Company currently intends to retain all earnings, if any,
for use in the expansion of its business and therefore does not
anticipate paying any dividends in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to the
Company's statements of operations for each of the three years in the period
ended December 31, 1998, and with respect to the balance sheets as of December
31, 1998 and 1997, are derived from the Consolidated Financial Statements of
the Company which are included elsewhere in this Annual Report on Form 10-K.
The statement of operations data for the years ended December 31, 1995 and 1994
and the balance sheet data as of December 31, 1996, 1995 and 1994, are derived
from audited consolidated financial statements not included herein. The data
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements of the Company and the Notes thereto included elsewhere in
this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Net product sales................ $18,586 $3,777 $2,399 $2,698 $674
Collaborative agreement.......... 1,092 750 -- 1,125 3,000
--------- --------- --------- --------- ---------
Total revenues.............. 19,678 4,527 2,399 3,823 3,674
--------- --------- --------- --------- ---------
Operating expenses:
Cost of sales and manufacturing.. 12,532 3,736 2,846 2,753 1,503
Research and development......... 17,688 16,210 8,330 6,647 4,845
Selling, general and
administrative................. 27,149 11,067 6,120 3,773 3,157
Acquired in-process research
and development................ 3,218 -- -- -- --
Amortization of intangible assets 351 -- -- -- --
--------- --------- --------- --------- ---------
Total operating expenses.... 60,938 31,013 17,296 13,173 9,505
--------- --------- --------- --------- ---------
Loss from operations.................. (41,260) (26,486) (14,897) (9,350) (5,831)
Other income (expense) - net.......... 3,053 5,506 2,123 672 284
--------- --------- --------- --------- ---------
Net loss before income taxes($38,207) ($20,980) ($12,774) ($8,678) ($5,547)
Income taxes.......................... 257 -- -- -- --
--------- --------- --------- --------- ---------
Net loss....................($38,464) ($20,980) ($12,774) ($8,678) ($5,547)
Net loss per common share(1).......... ($2.39) ($1.36) ($1.03) ($0.92) ($0.79)
========= ========= ========= ========= =========
Shares used in per share
computations(1)..................... 16,080 15,376 12,405 9,385 7,049
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments......................... $29,660 $92,036 $41,321 $9,222 $12,378
Working capital....................... $46,828 93,812 40,724 8,451 11,367
Total assets.......................... 107,327 104,354 44,750 11,560 14,450
Long-term obligations, excluding
current portion..................... 16,402 1,557 1,100 1,091 1,153
Accumulated deficit...................(100,270) (61,806) (40,826) (28,052) (19,374)
Total stockholders' equity............ 59,587 97,470 40,955 8,281 11,328
</TABLE>
- -------------------------------
(1) For a description of the computation of net loss per share see
Note 1 of Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with "Selected Consolidated Financial Data" and the Company's
Consolidated Financial Statements and Notes thereto included elsewhere
in this Annual Report on Form 10-K. Except for the historical
information contained herein, the discussion in this Annual Report on
Form 10-K contains certain forward-looking statements that involve risks
and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The cautionary statements made
in this Annual Report on Form 10-K should be read as being applicable to
all related forward-looking statements wherever they appear in this
Annual Report on Form 10-K. The Company's actual results could differ
materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed in "Risk
Factors," as well as those discussed elsewhere herein.
SangStat is a specialty pharmaceutical company, applying a disease
management approach to improve the outcome of organ transplantation.
The Company has a total of 12 monitoring and therapeutic product and
product candidates to address the pre-transplant, acute care and chronic
phases of transplantation. During 1998, the Company launched one of its
lead products, prepared for the launch of its second lead product,
conducted additional clinical studies, built a sales and marketing sales
team and developed THE TRANSPLANT PHARMACY(TM).
The Company's accumulated deficit from inception through December 31,
1998 was $100,270,000. The Company's operating loss has increased each
year since inception and losses are expected to continue in the near
future as a result of a number of factors including the uncertainty in
the timing and the amount of revenue to be earned upon product sales,
expenses required for product development, clinical trials and marketing
and sales activities. In addition, the Company's business is subject to
significant risks, including but not limited to, the success of its
research and development efforts, litigation by third parties regarding
intellectual property, in particular, litigation with Novartis regarding
SANGCYA, obtaining and enforcing patents important to the Company's
business, the lengthy and expensive regulatory approval process,
reliance on third parties to manufacture products or product candidates,
competition from other products and uncertainties associated with health
care reform measures. Even if the Company's products appear promising at
various stages of development, they may not reach the market for a
number of reasons. Such reasons include, but are not limited to, the
possibilities that the product candidates will be found to be
ineffective or unsafe, be difficult to manufacture on a large scale, be
uneconomical to market, be precluded from commercialization by
proprietary rights of third parties or be unacceptable to providers,
payors or patients. Additional expenses, delays and losses of
opportunities that may arise out of these and other risks could have a
material adverse impact on the Company's business, financial condition,
cash flows and results of operations.
Results of Operations
Acquisition. On September 30, 1998, the Company completed the acquisition
of Pasteur Merieux Connaught's (PMC) organ transplant business known as
IMTIX. The acquisition was accounted for using the purchase method of
accounting. The resulting wholly owned subsidiary of the Company, named
IMTIX-SangStat, is dedicated to the research, development, manufacture
and marketing of pharmaceuticals for transplantation. The aggregate
purchase price of approximately $31 million consisted of $10 million
paid upon closing and a non-interest bearing note of $21 million payable
over five years as follows: $3 million in 1999, $3 million in 2000, $6
million in 2001, $5 million in 2002 and $4 million in 2003. The note
payable is discounted at a rate of 9.25% and is included in Notes
payable. In addition, the Company will pay PMC certain royalties on
IMTIX-SangStat product sales. The aggregate purchase price and
approximately $2.5 million of acquisition costs were allocated to the
net tangible assets acquired based on their fair value on the date of
acquisition, identifiable intangible assets and purchased in-process
research and development. The purchased in-process research and
development of approximately $3.2 million was charged to the Company's
operations in the third quarter of 1998 and represents the value of
products that had not yet reached technological feasibility and no
alternative future use. The estimated value for the in-process
technology was determined using the income approach which discounted to
present value the cash flows expected to be derived from the in-process
products. The projections were based on historical trends and future
expectations of the acquired company's revenue and expenses to be
generated from the in-process products. The discount rate used
reflected the risk associated with development of the in-process
products. The Company currently intends to continue the development of
the acquired in-process products and has not yet determined if it will
be successful in its efforts to complete as the safety and efficacy of
these products has not yet been determined. The determination of the
products' safety and efficacy is expected to be completed in 1999 with
estimated costs to complete the clinical studies less than $500,000.
Depending on the outcome of the ongoing clinical studies, further
studies may be required to fully assess the feasibility of the acquired
in-process products. Approximately $14.2 million of the purchase price
was allocated to various specified intangible assets and is being
amortized over their estimated useful lives ranging from five to
fourteen years. Amortization for the year -ended December 31, 1998 was
$351,000.
Total revenues. Net product sales for the year ended December 31,
1998 were $18,586,000, representing an increase of $14,809,000 or 392%
from 1997. The increase was due primarily to an increase in sales of THE
TRANSPLANT PHARMACY and sales of therapeutic products in Europe as a
result of the acquisition of IMTIX. Net product sales for the year
ended December 31, 1997 were $3,777,000, an increase of $1,378,000 or
57% from 1996. The increase primarily reflected a 36% increase in sales
of Monitoring Products and an 894% increase in sales of THE TRANSPLANT
PHARMACY.
Revenue from collaborative agreements was $1,093,000 in 1998, an
increase of $343,000 or 46% from 1997. The Company received milestone
payments of $1,000,000 in 1998 from Amgen under the collaborative
distribution agreement for SANGCYA and SANG-2000 in certain territories
outside the United States; in 1997, the Company received an initial
payment of $750,000 from Amgen under that same collaborative
distribution agreement
Cost of sales and manufacturing. Cost of sales and manufacturing
expenses were $12,532,000 for the year ended December 31, 1998, an
increase of $8,796,000 or 235% from 1997. The increase was substantially
due to additional costs associated with increased sales of Therapeutic
Products and THE TRANSPLANT PHARMACY. For the year ended December 31,
1997, cost of sales and manufacturing expenses were $3,736,000, an
increase of $890,000 or 31% over the prior year. The increase reflected
declines of 4% and 1% in costs of sales for Monitoring Products and
THYMOGLOBULIN, respectively, offset by the increased sales volume of THE
TRANSPLANT PHARMACY.
Research and development. Research and development expenses were
$17,688,000 for the year ended December 31, 1998, representing an
increase of $1,478,000 or 9% over 1997. The increase is primarily due
to spending for THYMOGLOBULIN, AZATHIOPRINE and XENOJECT(TM) and the
addition of IMTIX research & development spending in the fourth quarter
of 1998. For the year ended December 31, 1997, research and
development expenses were $16,210,000 reflecting an increase of
$7,880,000 or 95% from the prior year. The increase primarily reflected
continued expansion of clinical and regulatory activities for SANGCYA ,
SANG-2000 and THYMOGLOBULIN.
SangCya(TM), oral solution, the Company's first cyclosporine product
candidate, was approved by the U.S. Food and Drug Administration (FDA)
on October 31, 1998, as a bioequivalent formulation to Neoral(R) for the
prevention of rejection in organ transplant recipients. SangCya was
launched in the U.S. in the fourth quarter of 1998 and has also been
filed in Europe under the mutual recognition process.
Selling, general and administrative. Selling, general and
administrative expenses were $27,149,000 for the year ended December 31,
1998, reflecting an increase of $16,081,000 or 145% over 1997. The
increase is principally due to the Company's expansion of its commercial
infrastructure and launch and pre-launch activities to help support the
U.S. launches of the Company's first two therapeutic products, SANGCYA
and THYMOGLOBULIN, the growth of The Transplant Pharmacy and the
addition of IMTIX expenses in the fourth quarter of 1998. For the year
ended December 31, 1997, selling, general and administrative expenses
were $11,068,000, an increase of $4,948,000 or 81% over the prior year.
The increase reflected the Company's expansion of its marketing and
sales staff for its therapeutic products, SANGCYA and THYMOGLOBULIN and
continued growth of THE TRANSPLANT PHARMACY.
Interest income - net. Interest income was $3,611,000 for the year
ended December 31, 1998, which represented a decrease of $2,106,000 from
the prior year. The decrease reflects the decrease in the average cash
balance available for investment as a result of the Company's use of
cash for operating activities. For the year ended December 31, 1997,
interest income was $5,717,000, an increase of $3,456,000 over 1996,
which was primarily due to the increase in average cash balances
available for investment as a result of the sale of equity securities
during 1996 and 1997.
Interest expense for the year ended December 31, 1998 was $558,000,
an increase of $348,000 over the same period in 1997. Interest expense
for the year ended December 31, 1997 was $210,000, an increase of
$72,000 over the same period in 1996.
Income taxes. For the year ended December 31, 1998, the Company
recorded a provision of $257,000 for European income taxes based upon
income earned from IMTIX in the fourth quarter. A tax provision was not
recorded in 1997 or 1996.
Net loss. Net loss for the year ended December 31, 1998 was
$38,464,000 compared to a loss of $20,980,000 in 1997 and a loss of
$12,774,000 in 1996. These increases primarily reflect increases in
research and development, including clinical trials and regulatory
affairs, and selling, general and administrative expenses.
Liquidity and Capital Resources
From inception through December 31, 1998, the Company has financed
its operations substantially from proceeds of approximately $137,977,000
from public offerings of its Common Stock and $21,236,000 from private
placements of equity securities.
During the years ended December 31, 1998, 1997 and 1996, the
Company's net cash used in operating activities was approximately
$40,952,000, $22,352,000 and $12,526,000 respectively. The increase in
net cash used in operating activities in each year above is
substantially due to the increased amount of net loss incurred in each
year. As of December 31, 1998, the Company had cash, cash equivalents
and short-term investments of $29,660,000 and total assets of
$107,327,000.
Net cash used in investing activities totaled $23,416,000 and
$17,048,000 during the years ended December 31, 1997 and 1996, respectively,
and resulted substantially from the Company's net purchases of short-term
investments. For the year ended December 31, 1998, net cash provided by
investing activities was $6,489,000, which was primarily the result of
the maturity of short-term investments, offset by cash used for the
purchase of IMTIX.
Net cash provided by financing activities totaled $29,000,
$76,615,000 and $44,811,000 during the years ended December 31, 1998,
1997 and 1996, respectively. Such amounts were substantially comprised of
proceeds received from the sale of Common Stock during the respective periods
offset in part by net repayments of notes payable and capital lease
obligations.
Although the Company has no current contractual obligations relating
to capital expenditures, it anticipates that capital expenditures,
primarily for its United States operations, will aggregate approximately
$2.6 million during 1999.
The Company utilizes various computer software packages in the
conduct of its business activities. The Company has conducted a
preliminary assessment of its internal information technology systems to
identify the systems that could be affected by the Year 2000 issue.
Based on this preliminary assessment, the Company currently has no
reason to believe that its internal information technology systems are
not Year 2000 compliant. The Company intends to continue to assess the
Year 2000 compliance of its internal information technology systems. To
date, the Company has not made any material expenditures related to the
Year 2000 compliance of its internal information technology systems and
the Company does not currently anticipate spending any material amounts
for Year 2000 remediation. There can be no assurance that Year 2000
errors or defects will not be discovered in the Company's internal
information technology systems. In the event Year 2000 errors or defects
are discovered in the Company's internal information technology systems
and the Company is not able to remedy such errors or defect in a timely
manner or the cost to remedy such errors or defects is significant,
there would be a material adverse effect on the Company's business,
results of operations or financial condition. The Company has not yet
fully assessed the extent of its exposure, or investigated the plans of
its suppliers and vendors to address their exposures to these year 2000
problems, and thus the Company may be adversely impacted should these
organizations not successfully address this issue.
At December 31, 1998, the Company had Federal, state and foreign net
operating loss ("NOL") carryforwards of approximately $93,699,000,
$24,821,000 and $1,502,000, respectively, available to reduce future
taxable income. In addition, the Company had available research and
experimentation credit carryforwards of approximately $1,490,000 and
$803,000 for federal and state tax purposes. The Company's ability to
realize the benefits of the NOL and credit carryforwards is dependent
upon the generation of sufficient taxable income in the respective
taxing jurisdiction prior to their expiration. There can be no assurance
that the Company will be able to generate sufficient taxable income to
avail itself of such benefits. Furthermore, utilization of the net
operating loses and credits may be subject to an annual limitation due
to ownership change limitations provided by the Internal Revenue Code of
1986 and similar state provisions. The annual limitation may result in
the expiration of net operating loses and credits before utilization.
The Company anticipates the need, within the next twelve months, to
raise additional funds through additional financings, including private
or public equity and/or debt offerings and collaborative research and
development arrangements with corporate partners. There can be no
assurance that adequate funds will be raised on favorable terms, if at
all, or that discussions with potential collaborative partners will
result in any agreements. The Company's future capital requirements
will depend on many factors, including its research and development
programs, the scope and results of clinical trials, the time and costs
involved in obtaining regulatory approvals, the costs involved in
obtaining and enforcing patents or any litigation by third parties
regarding intellectual property, the status of competitive products, the
establishment of manufacturing capacity or third-party manufacturing
arrangements, the establishment of sales and marketing capabilities, the
establishment of collaborative relationships with other parties, and the
costs of manufacturing scale-up and working capital requirements for
inventory and financing of accounts receivable. If adequate funds are
not available, the Company may be required to delay, scale back or
eliminate one or more of its development programs or obtain funds
through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain technologies,
product candidates or products that the Company would not otherwise
relinquish.
SangCya Approved in UK
On February 4, 1999, the Company announced that the United Kingdom
granted, under their national regulatory procedure, marketing approval
to SangCya(TM) Oral Solution (cyclosporine) for prevention of rejection in
solid organ transplant recipients as well as other immunosuppressant
indications. Based on this approval, SangStat intends to seek additional
European Member State approvals through the Mutual Recognition
Procedure. This application was submitted to the UK Medicines Control
Agency on February 12, 1998 with the aim of benefiting from the European
Community Mutual Recognition Procedure for obtaining regulatory approval
in multiple Member States. This procedure involves the filing of the
submission in only one Member State (e.g. UK), which upon grant of
marketing authorization, then serves as the Reference Member State for
the other Concerned Member States. In accordance with the EC
legislation, once this procedure is initiated, these Concerned Member
States are required to mutually recognize the initial authorization and
summary of Product Characteristics within 90 days. This is expected to
result in SangCya approval in most European countries during the second
half of 1999. The European market is roughly equivalent to the U.S.
market in size and scope. There are approximately 20,000 new transplant
recipients per year concentrated in just 250 transplant centers and over
100,000 transplant recipients in Europe who require daily lifelong
immunosuppressive therapy from the time of transplant surgery. Estimated
1998 sales of cyclosporine exceeded $450 million in Europe and $70
million in the UK.
Recently Issued Accounting Pronouncements
In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income, which
requires an enterprise to report, by major components and as a single
total, the change in its net assets during the period from non-owner
sources.
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, which establishes annual and interim reporting standards
for an enterprise's business segments and related disclosures about its
products, services, geographic areas and major customers. The adoption of
this statement in 1998 did not impact the Company's consolidated financial
position, results of operations or cash flows.
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities.
This Statement requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS 133 will be effective for the
Company's year ending December 31, 2000. Management believes
that this Statement will not have a significant impact on the Company.
Risk Factors
History of Operating Losses; Future Profitability Uncertain.
SangStat was incorporated in 1988 and has experienced significant
operating losses since that date. As of December 31, 1998, the Company's
accumulated deficit was $100,270,000. The Company's operating expenses
have increased from approximately $17.3 million to $31.0 million to
$60.9 million over the last three fiscal years. Total revenues increased
from approximately $2.4 million to $4.5 million to $19.7 million while
net losses from operations increased from approximately $14.9 million to
$26.5 million to $41.3 million over the last three fiscal years. There
can be no assurance that the Company will ever achieve significant
revenues from product sales or profitable operations. To date, the
Company's product revenues have been substantially dependent on sales of
certain organ transplantation products, including a limited number of
monitoring products, international sales of THYMOGLOBULIN and
LYMPHOGLOBULINE, and limited initial sales in North America of
THYMOGLOBULIN and SANGCYA.
Future Growth Dependent on Sales of Key Products. The Company
expects to derive a majority of its future revenues from sales of
SANGCYA, SANG-2000 and THYMOGLOBULIN. SANGCYA and THYMOGLOBLIN were
launched in November 1998 and February 1999, respectively and the
Company expects to file for regulatory approval for SANG-2000 in the
first half. Accordingly, any factor adversely affecting the sale of
these key products, individually or collectively, would have a material
adverse effect on the Company's business, financial condition and
results of operations. Sales of these key products could be adversely
affected by competitive changes, regulatory matters, manufacturing or
supply interruptions, number of contracts with managed care providers
and group purchasing organization, factors affecting production,
marketing or pricing actions, changes in the prescribing practices of
transplant physicians, reimbursement practices of third party payors,
product liability claims or other factors. In particular, with respect
to SANGCYA and SANG-2000, sales may be affected by perceptions of both
patients and physicians regarding use of a generic version of a
critical, life-saving therapeutic, the availability and acceptance of
the CYCLOTECH device to be used in connection with SANGCYA, and intense
competitive pressure from Novartis as well as the Novartis litigation.
See "-Uncertainty of Market Acceptance; "-Substantial
Competition;" and "-Litigation with Novartis."
Litigation with Novartis. On February 11, 1999, Novartis
Pharmaceuticals Corporation filed a lawsuit (case number 99-065) in
Federal District Court for the District of Delaware against the Company
alleging infringement of United States patent #5,389,382, a cyclosporine
technology patented by Novartis A.G. The Novartis patent does not cover
Neoral but rather a separate delivery system not used in the Neoral
formulation. Novartis seeks the following relief: (i) a finding that
SangStat willfully infringed the patent; (ii) to permanently enjoin
SangStat from infringing the Novartis patent; (iii) treble damages; and
(iv) reasonably attorneys' fees , costs and expenses. SangStat's answer
is due April 5, 1999 and discovery will not begin until after the answer
is filed. SangStat believes that the lawsuit is without merit and that
it does not infringe the Novartis patent. SangStat intends to defend
itself vigorously against this claim.
Although the Company is optimistic that this dispute will ultimately
be resolved favorably to the Company, the course of litigation is
inherently uncertain and there can be no assurance of a favorable
outcome. As a result of the Novartis suit, SangStat could be enjoined
from selling SANGCYA for a significant period of time or ultimately be
prevented from selling SANGCYA. Should this happen, the Company does not
believe it would be able to obtain a license from Novartis on acceptable
terms because the Company believes cyclosporine is an important product
for Novartis and that Novartis would not want to diminish its profits
from this product by licensing it on acceptable terms to the Company.
Failure to obtain any such required license could prevent the Company
from selling SANGCYA entirely, which would have a material adverse
effect on the Company's future results of operations. The litigation,
whether or not resolved favorably to the Company, is likely to be
expensive, lengthy and time consuming, will divert management's
attention and could have a material adverse effect on the Company's
business, financial condition, cash flows and results of operations.
SANG-2000 is not covered by this lawsuit and the Company does not
believe that this lawsuit will have an impact on the regulatory approval
of Sang-2000.
Novartis Pharmaceuticals Corporation sued the FDA on February 11,
1999 in the United States District Court for the District of Columbia
(case number 1:99CV-00323) alleging that the FDA did not follow its own
regulations in approving SANGCYA in October 1998. The lawsuit against
the FDA appears to be based on arguments similar to those used in the
failed citizen's petition in which Novartis alleged that because Neoral
and SANGCYA, both oral solutions, are based on different formulation
technologies, they should be classified as different dosage forms.
Novartis asks that the court rescind the AB rating that was given to
SANGCYA. Loss of the "AB" rating would prevent SANGCYA from being
automatically substitutable for Neoral oral solution, which would impede
the marketing of SANGCYA. The Company believes that the lawsuit is
without merit and that the FDA will prevail in this matter. Although
the Company is optimistic that this dispute will ultimately be resolved
favorably to the Company, the course of litigation is inherently
uncertain and there can be no assurance of a favorable outcome.
Novartis' requested relief, if granted, could have a significant
negative economic impact on SangStat. In order to defend its interests
vigorously, SangStat filed a Motion for Leave to Intervene in this
lawsuit on February 23, 1999. The Court has not yet ruled on this
motion.
Fluctuations in Operating Results. The Company's operating losses
have increased each year since inception and losses may be expected to
continue in the near future as a result of a number of factors including
the uncertainty in the timing and the amount of revenue earned upon
product sales and achievement of research and development milestones,
funding under collaborative research agreements and expenses required
for product development, clinical trials and marketing and sales
activities. The Company's operating results may fluctuate significantly
depending on other factors, including the introduction of new products
by the Company's competition, regulatory actions, market acceptance of
the Company's products, adoption of new technologies, manufacturing
capabilities, legal actions and third-party reimbursement policies.
No Assurance of Successful Product Development. To achieve
profitable operations, the Company, alone or with others, must
successfully develop, obtain regulatory approval for, manufacture,
introduce and market its products and product candidates. There can be
no assurance that the Company's product development efforts will be
successfully completed, that required regulatory approvals will be
obtained, or that any products if developed and introduced will be
successfully marketed.
The Company's product candidates will require extensive development,
testing and investment, as well as regulatory approval prior to
commercialization. Cost overruns due to unanticipated regulatory delays
or demands, unexpected adverse side effects or insufficient therapeutic
efficacy would prevent or substantially slow down the development effort
and ultimately would have a material adverse effect on the Company.
Furthermore, there can be no assurance that the Company's research and
development efforts will be successful and that any given product will
be approved by appropriate regulatory authorities or that any product
candidate under development will be safe, effective or capable of being
manufactured in commercial quantities at an economical cost, will not
infringe the proprietary rights of others or will achieve market
acceptance.
THYMOGLOBULIN was approved for sale in the U.S. in December 1998.
SANGCYA was approved for sale in the U.S. in October 1998 and in the
U.K. in January 1999. The Company has also filed an NDS for marketing
approval of THYMOGLOBULIN in Canada. The Company's other principal
pharmaceutical product candidates, including the Company's capsule
formulation of cyclosporine (SANG-2000), the Company's formulation of
AZATHIOPRINE, ANTILFA, and ALLOTRAP 1258, have not been approved for
commercial sale in any country. SangStat has developed a generic
AZATHIOPRINE for use in transplantation as an adjunct therapy in chronic
immunosuppression and has completed its pharmacokinetic and human
bioequivalency trials. The Company intends to seek market approval by
filing an ANDA with the FDA. In 1996, the Company voluntarily withdrew
its 510(k) for a two-component CELSIOR product and has completed a
multi-center clinical trial for a redesigned one-component, ready-to-use
CELSIOR product candidate. The results of an initial Phase II safety
study in Europe showed that ALLOTRAP 2702 was safe and well-tolerated in
the study. Toxicology studies have been completed in a second generation
peptide, ALLOTRAP 1258. Pre-clinical development has indicated that this
second generation peptide may be more potent than ALLOTRAP 2702. As a
result, the Company may decide to pursue the development of ALLOTRAP
1258 rather than ALLOTRAP 2702. The Company has designed the ALLOTRAP
clinical trials to comply with regulatory standards in France as well as
in the United States, so that it may use the data to support its NDA to
the FDA. There can be no assurance that such data will be accepted by
the FDA. The use of ALLOTRAP peptides to promote graft acceptance in
humans is novel and unproven and there can be no assurance that such
peptides will prove to be safe or effective in humans for any clinical
indication, including for any transplant type or at any dosage. The
Company has no clinical evidence in humans that ALLOTRAP peptides will
be effective in promoting graft acceptance or safety in transplant
patients and there can be no assurance that ALLOTRAP or any other
product candidates based on ALLOTRAP peptides will receive marketing
approval or become viable commercial products. Certain of the Company's
monitoring product candidates are in development and have not been
approved for commercial sale. There can be no assurance that these
product candidates will be successfully developed, receive regulatory
approval or be marketed on a profitable basis. See "Business-Products
and Product Candidates."
Risks Associated With the Manufacture of SANGCYA, SANG-2000 and
THYMOGLOBULIN. Cyclosporine is particularly difficult to manufacture
and there can be no assurance that SANGCYA or SANG-2000 can be
manufactured in commercial quantities at an economical cost. The Company
has contracted for commercial scale production of cyclosporine bulk
material (i.e. the active ingredient of cyclosporine) for SANGCYA and
SANG-2000 from both Gensia Sicor and a second FDA approved supplier.
Gensia Sicor received approval in July 1997 of an ANDA from the FDA for
the manufacture of bulk cyclosporine drug substance. SangStat's second
supplier of bulk cyclosporine drug substance has also been approved by
the FDA. The Company has also separately subcontracted the manufacture
of SANGCYA and SANG-2000 product with Eli Lilly. There can be no
assurance that such third parties will perform satisfactorily and any
such failure may delay regulatory approval, product launch, impair the
Company's ability to deliver products on a timely basis, or otherwise
impair the Company's competitive position, which would have a material
adverse effect on the Company's business, financial condition, cash
flows and results of operations.
THYMOGLOBULIN is also difficult to manufacture and there can be no
assurance that SangStat will be able to manufacture commercial
quantities at an economical cost. The Company recently acquired the
IMTIX division of PMC, including certain manufacturing capabilities with
respect to THYMOGLOBULIN. From time to time, prior to the acquisition,
certain batches of THYMOGLOBULIN did not meet manufacturing
specifications, resulting in a shortage of THYMOGLOBULIN product for
commercial sale. Since the acquisition, all batches of THYMOGLOBULIN
have met manufacturing specifications. Even after the acquisition, the
Company still relies on PMC for certain important manufacturing
services, including, but not limited to, quality assurance and quality
control, as well as lyophilization. There can be no assurance that PMC
will continue to provide these critical manufacturing services to the
Company in an effective manner or without interruption. There can be no
assurance that the Company will not experience manufacturing
difficulties with respect to THYMOGLOBULIN in the future.
Uncertainty of Market Acceptance. Whether or not regulatory
approvals are obtained, uncertainty exists as to whether the Company's
products will be accepted by the market. In particular, there can be no
assurance that the Company's product candidates would obtain significant
market share. Factors that may affect the willingness of patients,
physicians, pharmacists and third-party payors to convert to SangStat
products, if approved, include price, perception of bioequivalence,
perceived clinical benefits and risks, ease of use, other product
features and brand loyalty. In addition, other factors may limit the
market acceptance of products developed by the Company, including the
timing of regulatory approval and market entry relative to competitive
products, the availability of alternative therapies, the price of the
Company's products relative to alternative therapies, the availability
of third-party reimbursement and the extent of marketing efforts by the
Company or third-party distributors or agents retained by the Company.
There can be no assurance that patients, physicians, pharmacists, or
third-party payors will accept the Company's products. In particular,
with respect to SANGCYA and SANG-2000, if product approval is obtained,
there can be no assurance that the Company will be successful in taking
significant market share away from Novartis.
Volatility of Common Stock Price. The market prices for securities
of pharmaceutical and biotechnology companies, including the Company,
have historically been highly volatile. The market has from time to
time experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. Factors
such as fluctuations in the Company's operating results, announcements
of new therapeutic products by the Company or its competitors,
announcements regarding collaborative agreements, governmental
regulation, clinical trial results, developments in patent or other
proprietary rights, litigation, public concern as to the safety of drugs
developed by the Company or others, comments made by securities analysts
and general market conditions may have a significant effect on the
market price of the Company's Common Stock. In particular, the
realization of any of the risks described on this 10-K could have a
significant and adverse impact on the market price.
Ability to Manage Growth. The Company has recently experienced a
period of expansion of its operations that has placed a strain upon its
management system and resources. The Company's ability to compete
effectively and to manage future growth, if any, will require the
Company to continue to improve its financial and management controls,
reporting systems and procedures on a timely basis and expand, train and
manage an increasing number of employees. The Company's failure to do
so would have a material adverse effect on the Company's business,
financial condition and results of operations.
Uncertainty Regarding Patents and Proprietary Rights. The Company's
success depends in part on its ability to obtain and enforce patent
protection for its products and to preserve its trade secrets. The
Company holds patents and pending patent applications in the United
States and abroad. The Company's patents involve specific claims and
thus do not provide broad coverage. There can be no assurance that the
Company's patent applications or any claims of these patent applications
will be allowed, or found to be valid or enforceable, that any patents
or any claims of these patents will provide the Company with competitive
advantages for its products or that such issued patents and any patents
issued under pending patent applications will not be successfully
challenged or circumvented by the Company's competitors. The Company has
not conducted extensive patent and prior art searches with respect to
many of its product candidates and technologies, and there can be no
assurance that third-party patents or patent applications do not exist
or could not be filed in the United States, Europe or other countries
which would have an adverse effect on the Company's ability to market
its products. There can be no assurance that any claims in the Company's
patent applications would be allowed, or found to be valid or
enforceable, or that any of the Company's products would not infringe on
others' patents or proprietary rights in the United States or abroad.
The ALLOTRAP peptide family is being developed under an exclusive,
worldwide license from Stanford University. Although Stanford has filed
patent applications with respect to such technology, there can be no
assurance that, other than the patent application that has issued, any
of the claims of such patent applications will be allowed, or found to
be valid or enforceable and as to the issued patent, that the claims
will be found to be valid or enforceable.
There can be no assurance that SangStat can manufacture, or have
manufactured, formulate or commercialize SANGCYA and SANG-2000 without
infringing patent or other proprietary rights of Novartis or other third
parties. The Company has recently been sued by Novartis for patent
infringement. See "-Litigation with Novartis."
Patent applications in the United States are maintained in secrecy
until patents issue. Since publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries by several
months, SangStat cannot be certain that it was the first to discover
compositions covered by its pending patent applications or the first to
file patent applications on such compositions. There can be no assurance
that the Company's pending patent applications will result in issued
patents or that any of its issued patents will afford protection against
a competitor.
The Company also relies on trade secrets and proprietary know-how
which it seeks to protect, in part, by confidentiality agreements with
its employees and consultants. There can be no assurance that these
agreements will not be breached, that the Company would have adequate
remedies for any breach or that the Company's trade secrets will not
otherwise become known or independently developed by competitors. The
Company has registered or applied for registration of the names of most
of its products under development or commercialized for research and
development use. However, there can be no assurance that any trademark
registration will be granted or not challenged by competitors. See
"Business-Patents and Proprietary Technology."
Substantial Competition. The drugs being developed by the Company
compete with existing and new drugs being created by pharmaceutical,
biopharmaceutical, biotechnology and diagnostics companies and
universities. Many of these entities have significantly greater research
and development capabilities, as well as substantial marketing,
manufacturing, financial and managerial resources and represent
significant competition for the Company. The principal factors upon
which the Company's products compete are product utility, therapeutic
benefits, ease of use, effectiveness marketing, distribution and price.
With respect to THYMOGLOBULIN, SANGCYA, SANG-2000, and AZATHIOPRINE, the
Company will be competing against large companies that have
significantly greater financial resources and established marketing and
distribution channels for competing products. For example, Novartis
currently controls virtually 100% of the worldwide cyclosporine markets
and has significantly greater resources than the Company. There can be
no assurance that the Company will be able to compete successfully
against Novartis. To date, the Company has a limited number of contracts
with managed care providers and group purchasing organizations. The
Company's future sales will be dependent on the Company's ability to
enter into contracts with these entities. The drug industry is
characterized by intense price competition and the Company anticipates
that it will face this and other forms of competition. There can be no
assurance that developments by others will not render the Company's
products or technologies obsolete or noncompetitive or that the Company
will be able to keep pace with technological developments. Many of the
competitors have developed or are in the process of developing
technologies that are, or in the future may be, the basis for
competitive products. Some of these products may have an entirely
different approach or means of accomplishing the desired therapeutic
effect than products being developed by the Company and may be more
effective and less costly. In addition, many of these competitors have
significantly greater experience than the Company in undertaking
preclinical testing and human clinical trials of pharmaceutical products
and obtaining regulatory approvals of such products. Accordingly, the
Company's competitors may succeed in commercializing products more
rapidly than the Company. For example, the Company believes that the
degree of market penetration of SANG-2000 is dependent in part on
whether the Company is the first company to market a bioequivalent
formulation of cyclosporine. The Company believes that other companies
may be developing cyclosporine formulations that may be marketed as
generic equivalents. Were these competitors to develop their products
more rapidly and complete the regulatory process sooner, it could have a
material adverse effect on the Company's business, financial condition,
cash flows and results of operations.
Treatments for the problems associated with transplantation that the
Company's products seek to address are currently available. For example,
Sandimmune and Neoral, marketed by Novartis, compete with SANGCYA and
SANG-2000. Orthoclone OKT3, marketed by Johnson & Johnson and ATGAM,
marketed by Pharmacia & Upjohn Inc., Simulect, marketed by Novartis, and
Zenapax, marketed by Roche Ltd., would be competitive with
THYMOGLOBULIN. Prograf marketed by Fujisawa Pharmaceutical Co. Ltd,
CellCept, marketed by Roche Ltd. and Imuran, marketed by Glaxo Wellcome
Ltd. would be competitive with SANGCYA, SANG-2000 and AZATHIOPRINE. All
of such products are commercially available for use as immunosuppressive
drugs and are widely prescribed. In addition, One Lambda Inc., Pel
Freez, Biotest Diagnostics Corp., and Genetic Therapy, Inc. market
products for pre-transplant HLA monitoring and Abbott Laboratories
markets a cyclosporine level post-transplant monitoring device, all of
which are widely used. Additional therapeutics and monitoring products
are available or are under development by these and other parties
including, but not limited to: American Home Products Corp. (rapamycin),
Bristol Myers Squibb (CTLA4), and DuPont Merck (ViaSpan), and other
companies including, but not limited to Abbott (cyclosporine), MedImmune
Inc., BioTransplant, Inc., and Ivax Corp. All of the aforementioned
competitive and other drugs are commercially available for use as
immunosuppressive drugs and are widely prescribed. To the extent these
therapeutics, monitoring products or novel transplant procedures address
the problems associated with transplantation on which the Company has
focused, they may represent significant competition. See "Business-
Competition."
Limited Manufacturing Capability. In 1998, the Company leased a
manufacturing facility in Lyon, France as part of the IMTIX transaction
for the manufacture of THYMOGLOBULIN. The Company's wholly-owned
subsidiary, IMTIX-SangStat, manufactures THYMOGLOBULIN. There can be no
assurance that IMTIX-SangStat will continue to meet FDA standards
governing Good Manufacturing Practices ("GMP"). The Company currently
relies on PMC to perform certain services for the Company in the
manufacturing process. See "--Risks Related to the Manufacture of
SANGCYA, SANG-2000, and THYMOGLOBULIN."
The Company lacks facilities to manufacture any of its other drugs or
drug candidates in accordance with current GMP prescribed by the FDA.
The Company generally relies on third parties to manufacture compounds
other than THYMOGLOBULIN and devices for commercial sales and clinical
trials, including SANGCYA, PRA-STAT, CYCLOTECH, SANG-2000, ALLOTRAP
1258, AZATHIOPRINE and CELSIOR and has contracted for commercial
production of these compounds and devices. There can be no assurance
that manufacturers will meet FDA standards governing GMP or other
regulatory guidelines, that any BLA's required for manufacturing will be
filed, reviewed and approved, or that any third-party manufacturer will
pass a preapproval inspection. The Company is currently purchasing
ALLOTRAP 1258 for clinical trials from UCB Bioproducts S.A. ("UCB")
located in Belgium, and intends to contract with UCB for commercial
production. The Company has contracted for commercial scale production
of cyclosporine bulk material for SANGCYA and SANG-2000 with Gensia
Sicor as well as with a second FDA approved manufacturer. In addition,
the Company has contracted for the production of its finished formulated
SANGCYA and SANG-2000 with Eli Lilly and Company. The Company has also
contracted for manufacture of azathioprine bulk material with an FDA
approved manufacturer and with a separate FDA approved manufacturer for
production of its finished formulated AZATHIOPRINE product candidate.
There can be no assurance that the Company will be able to enter into
secondary commercial scale manufacturing contracts or that any other
third-party arrangements can be established on a timely or commercially
reasonable basis, or at all. The Company will depend on all such third
parties to perform their obligations effectively and on a timely basis.
There can be no assurance that such parties will perform and any
failures by third parties may delay clinical development or submission
of products for regulatory approval, or otherwise impair the Company's
competitive position which could have a material adverse effect on the
Company's business, financial condition, cash flows and results of
operations. In addition, the manufacturing of drug candidates involves a
number of technical steps and requires meeting stringent quality control
specifications imposed by government regulatory bodies and by the
Company itself. Additionally, such products can only be manufactured in
facilities approved by the applicable regulatory authorities. Because of
these and other factors, the Company may not be able to replace its
manufacturing capacity quickly or efficiently in the event that its
manufacturers are unable to manufacture their products at one or more of
their facilities. For certain of its potential products, the Company
will need to develop its production technologies further for use on a
larger scale in order to conduct human clinical trials and produce such
products for commercial scale at an acceptable cost.
The Transplant Pharmacy. Establishing THE TRANSPLANT PHARMACY as a
viable distribution system entails a number of risks including the
Company's ability to enter into agreements with transplant centers to
utilize THE TRANSPLANT PHARMACY's services, compliance with state
regulations regarding pharmacy licensing and compliance with federal and
state laws regulating payments for referrals for health care services.
On November 11, 1998, the Office of the Inspector General (OIG) of
the Department of Health & Human Services issued an Advisory Opinion
which stated that the placement by a pharmacy of a licensed pharmacist
at a hospital transplant center might constitute prohibited remuneration
under the anti-kickback statute section 1128B9B) of the Social Security
Act. The Company did not request the Advisory Opinion and the Advisory
Opinion only applies to the requesting party. The Company believes that
the operation of The Transplant Pharmacy differs from the fact pattern
set out in the Advisory Opinion and does not constitute prohibited
remuneration. There can be no assurance that the OIG will agree with
this analysis, in which case The Transplant Pharmacy's program may be
modified so that it would no longer include an on-site pharmacist at
transplant centers. There can be no assurance that the Company will be
successful in establishing THE TRANSPLANT PHARMACY as a viable
distribution method for the Company's products and services. See
"Business-Products, Product Candidates and Services."
No Assurance of FDA, Canadian or European Regulatory Approval;
Government Regulation. The Company's research, preclinical development,
clinical trials, manufacturing, marketing and distribution of its
products in the United States and other countries are subject to
extensive regulation by numerous governmental authorities including, but
not limited to, the FDA. In order to obtain regulatory approval of a
drug product, the Company must demonstrate to the satisfaction of the
applicable regulatory agency, among other things, that such product is
safe and effective for its intended uses and that the manufacturing
facilities are in compliance with GMP requirements. The Company must
also demonstrate the approvability of a BLA for its biological products.
The approval of the Company's generic product candidates is dependent on
demonstrating bioequivalence with reference products in addition to
assurance of compliance with GMP regulations. In order to market its
monitoring products, which are considered to be medical devices, the
Company or its licensees will be required either to receive 510(k)
marketing clearance or Premarket Approval Application ("PMA") approvals
from the FDA for such products among other regulatory requirements. To
obtain a 510(k) marketing clearance, the Company must show that a
monitoring product is "substantially equivalent" to a legally marketed
product not requiring FDA approval. In addition, the Company must
demonstrate that it is capable of manufacturing the product to the
relevant standards. To obtain PMA approval, the Company must submit
extensive data, including pre-clinical and clinical trial data to prove
the safety and efficacy of the device. Additionally, the Company is
currently distributing several monitoring products for research or
investigational use. Although the Company believes it is complying with
FDA regulations regarding such distribution, there can be no assurance
that the FDA will not determine that the Company is violating FDA
regulations with respect to the distribution of these products. The
process of obtaining FDA and other required regulatory approvals is
lengthy and will require the expenditure of substantial resources, and
there can be no assurance that the Company will be able to obtain the
necessary approvals. Moreover, if and when such approval is obtained,
the marketing, distribution and manufacture of the Company's products
would remain subject to extensive regulatory requirements administered
by the FDA and other regulatory bodies. Failure to comply with
applicable regulatory requirements can result in, among other things,
warning letters, fines, injunctions, civil penalties, recall or seizure
of products, total or partial suspension of production, refusal of the
government to grant pre-market clearance or pre-market approval,
withdrawal of approvals and criminal prosecution of the Company and
employees. Additionally, the Company intends to pursue commercialization
of its products in European countries. Both the Company's pre-transplant
and post-transplant monitoring products should be subject to regulation
as in vitro medical devices for which regulations are being presently
formulated under harmonized European Directives. This new Directive is
likely to impose additional requirements on the pre-transplant
donor/recipient matching products and the post-transplant monitoring
products. This legislation may include, among other things, requirements
with respect to the design, safety and performance of the products as
well as impose premarket approval procedures such as product type
certification and quality systems certification of manufacturing. The
Company's therapeutic products are subject to foreign regulatory
requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement, which vary from country to
country. The process of obtaining foreign regulatory approvals can be
lengthy and require the expenditure of substantial resources, and there
can be no assurance that the Company will be able to obtain the
necessary approvals or the approvals for the proposed indications. See
"Business-Government Regulation."
Dependence on Collaborative Relationships. The Company has in the
past relied on collaborative relationships to finance certain of its
research and development programs. The Company may enter into
collaborative relationships with corporate and other partners to develop
and commercialize certain of its potential products. There can be no
assurance that the Company will be able to negotiate acceptable
collaborative arrangements in the future, that such collaborations will
be available to the Company on acceptable terms or that any such
relationships, if established, will be scientifically or commercially
successful. See "Business-Strategic Relationships."
Dependence upon Key Personnel. The Company's ability to develop its
business depends in part upon its attracting and retaining qualified
management and scientific personnel. As the number of qualified
personnel is limited, competition for such personnel is intense. There
can be no assurance that the Company will be able to continue to attract
or retain such people. The loss of key personnel or the failure to
recruit additional key personnel could significantly impede attainment
of the Company's objectives and have a material adverse effect on the
Company's financial condition and results of operations. The Company's
planned activities will require the addition of new personnel, including
management, and the development of additional expertise by existing
management personnel, in areas such as research, product development,
preclinical testing, clinical trial management, regulatory affairs,
finance, manufacturing, pharmacy affairs and marketing and sales. The
inability to acquire such services or to develop such expertise could
have a material adverse effect on the Company's business, financial
condition and results of operations.
Uncertainty of Pharmaceutical Pricing and Reimbursement. The
Company's ability to commercialize its products may depend in part on
the extent to which reimbursement for the cost of such products and
related treatment will be available from government health
administration authorities, private health coverage insurers and other
organizations. Significant uncertainty exists as to the pricing,
availability of distribution channels and reimbursement status of newly
approved healthcare products and there can be no assurance that adequate
third party coverage will be available for the Company to maintain price
levels sufficient for realization of an appropriate return on its
investment in product development. In certain foreign markets, pricing
or profitability of healthcare products is subject to government
control. In the United States, there have been, and the Company expects
that there will continue to be, a number of federal and state proposals
to implement similar governmental control. In addition, an increasing
emphasis on managed care in the United States has and will continue to
increase the pressure on pharmaceutical pricing. While the Company
cannot predict whether any such legislative or regulatory proposals will
be adopted or the effect such proposals or managed care efforts may have
on its business, the announcement of such proposals or efforts could
have a material adverse effect on the Company's ability to raise
capital, and the adoption of such proposals or efforts could have a
material adverse effect on the Company's business, financial condition
and results of operations. Further, to the extent that such proposals or
efforts have a material adverse effect on other pharmaceutical companies
that are prospective corporate partners for the Company, the Company's
ability to establish corporate collaborations may be adversely affected.
In addition, third-party payors are increasingly challenging the prices
charged for medical products and services. If the Company succeeds in
bringing one or more products to the market, there can be no assurance
that these products will be considered cost effective or that
reimbursement to the consumer will be available or will be sufficient to
allow the Company to sell its products on a competitive basis. See
"Business-Products, Product Candidates and Services."
Product Liability Exposure; Limited Insurance Coverage. The Company
faces an inherent business risk of exposure to product liability claims
in the event that the use of products manufactured by the Company
results in adverse effects during research, clinical development or
commercial use. While the Company will attempt to take appropriate
precautions, there can be no assurance that it will avoid significant
product liability exposure. The Company's product liability insurance
coverage is currently limited to $10,000,000 which may not be adequate
insurance coverage to cover potential liability exposures. Moreover,
there can be no assurance adequate insurance coverage will be available
at acceptable cost, if at all, or that a product liability claim would
not materially adversely affect the business, financial condition, cash
flows and results of operations of the Company.
Hazardous Materials. In connection with its research and development
activities and operations, the Company is subject to federal, state and
local laws, rules, regulations and policies governing the use,
generation, manufacture, storage, air emission, effluent discharge,
handling and disposal of certain materials, biological specimens and
wastes. There can be no assurance that the Company will not incur
significant costs to comply with environmental and health and safety
regulations. The Company's research and development involves the
controlled use of hazardous materials, including but not limited to
certain hazardous chemicals and infectious biological specimens.
Although the Company believes that its safety procedures for handling
and disposing of such materials comply with the standards prescribed by
state and federal regulations, the risk of accidental contamination or
injury from these materials cannot be eliminated. In the event of such
an accident, the Company could be held liable for any damages that
result and any such liability could exceed the resources of the Company.
See "Business-Government Regulation."
Effect of Certain Provisions: Anti-takeover Effects of Certificate of
Incorporation, Bylaws, Stockholder Rights Plan and Delaware Law.
Certain provisions of the Company's Certificate of Incorporation and
Bylaws could delay or make more difficult a merger, tender offer or
proxy contest involving the Company, which could adversely affect the
market price of the Company's Common Stock. The Company's Board of
Directors has the authority to issue up to 5,000,000 shares of Preferred
Stock and to determine the price, rights preferences, privileges and
restrictions, including voting rights, of those shares without any
further vote or action by the stockholders. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the
rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock could have the effect of making
it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. Further, the Company has
adopted a stockholder rights plan. The plan allows for the issuance of a
dividend to stockholders of rights to acquire shares of the Company or,
under certain circumstances, an acquiring corporation, at less than half
their fair market value. The plan could have the effect of delaying,
deferring or preventing a change in control of the Company. In addition,
the Company is subject to the antitakeover provisions of Section 203 of
the Delaware General Corporation Law, which will prohibit the Company
from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless
the business combination is approved in a prescribed manner. The
application of Section 203 also could have the effect of delaying or
preventing a change of control of the Company.
Year 2000 Issue
The Company utilizes various computer software packages in the
conduct of its business activities. The Company has conducted a
preliminary assessment of its internal information technology systems to
identify the systems that could be affected by the Year 2000 issue.
Based on this preliminary assessment, the Company currently has no
reason to believe that its critical internal information technology
systems are not Year 2000 compliant. The Company intends to continue to
assess the Year 2000 compliance of its internal information technology
systems. To date, the Company has not made any material expenditures
related to the Year 2000 compliance of its internal information
technology systems and the Company does not currently anticipate
spending any material amounts for Year 2000 remediation. Total cost of
completing Year 2000 compliance is estimated to be less than $100,000.
There can be no assurance that Year 2000 errors or defects will not be
discovered in the Company's internal information technology systems. In
the event Year 2000 errors or defects are discovered in the Company's
internal information technology systems and the Company is not able to
remedy such errors or defect in a timely manner or the cost to remedy
such errors or defects is significant, there would be a material adverse
effect on the Company's business, results of operations or financial
condition. The Company has not yet fully assessed the extent of its
exposure, or fully investigated the plans of its suppliers and vendors
to address their exposures to these year 2000 problems, and thus the
Company may be adversely impacted should these organizations not
successfully address this issue. Completion of this work is targeted for
June 30, 1999. When all assessments have been completed, the Company
will develop a contingency plan for any areas in which a Year 2000
exposure exists.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Disclosures. The following discussion about the
Company's market risk disclosures involves forward-looking statements.
Actual results could differ materially from those projected in the
forward-looking statements. The Company is exposed to market risk
related to changes in interest rates and equity security price risk.
Interest Rate Sensitivity. The Company maintains a short-term
investment portfolio consisting mainly of government and corporate bonds
purchased with an average maturity of less than two years. These
available-for-sale securities are subject to interest rate risk and will
fall in value if market interest rates increase. If market interest
rates were to increase immediately and uniformly by 10 percent from
levels at December 31, 1998, the fair value of the portfolio would
decline by an immaterial amount. The Company generally has the ability
to hold fixed income investments until maturity and therefore does not
expect operating results or cash flows to be affected to any significant
degree by the effect of a sudden change in market interest rates on its
securities portfolio.
Equity Price Risk. The Company holds a small portfolio of
marketable-equity traded securities that are subject to market price
volatility. Equity price fluctuations of plus or minus 15 percent would
not have a material impact on the Company.
All of the potential changes noted above are based on sensitivity
analyses performed on the Company's financial positions at December 31,
1998. Actual results may differ materially.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to item 14(a)(1) and 14(a)(2) of this Annual Report
on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information required by Items 10 through 13 of Part III is
incorporated by reference from the registrant's Proxy Statement, under
the captions "Nomination and Election of Directors," "Beneficial
Stock Ownership," "Compensation of Executive Officers" and
"Compensation Committee Interlocks and Insider Participation in Insider
Participation and Certain Transactions", which Proxy Statement will be
mailed to stockholders in connection with the registrant's annual
meeting of stockholders which is expected to be held in May 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Annual Report
on Form 10-K:
1. Financial Statements.
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Comprehensive Income for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements for the years ended
December 31, 1998, 1997 and 1996
2. Financial Statement Schedule.
Schedule II - Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because they are not required, are not
applicable or the information is included in the consolidated financial
statements and notes thereto.
3. Exhibits. Reference is made to Item 14(c) of this Annual
Report on Form 10-K.
(b) Reports on Form 8-K.
Form 8-K filed on October 15, 1998 as amended on December 14, 1998
(c) Exhibits.
2.1 (7) Agreement and Plan of Merger dated as of July 24, 1995 between
SangStat Delaware, Inc., and SangStat Medical Corporation, a
California corporation, as filed with the Delaware Secretary of
State on August 11, 1995.
2.2 (9) Master Agreement between SangStat Medical Corporation and
Pasteur Merieux Serums & Vaccins, S.A. dated June 10, 1998,
including Exhibit 8 thereto.
3.2 (7) Certificate of Incorporation of SangStat Delaware, Inc.
3.4 (6) Certificate of Designation for the Series A Junior Participating
Preferred Stock, filed with the Delaware Secretary of State on
August 16, 1995.
3.5 (7) Amended and Restated Bylaws of the Registrant.
4.5 (3) Specimen Common Stock Certificate of Registrant.
10.1 (1)(3)Collaborative Agreement effective April 19, 1993, as amended,
between SangStat and Baxter Healthcare Corporation.
10.2 (1)(3)License Agreement, dated October 21, 1991, between the Registrant
and The Board of Trustees of Leland Stanford Junior University.
10.3 (3) Contract for the Provision of Services, dated October 5, 1993
between the Centre Hospitalier Universitaire de Nantes and SangStat
Atlantique.
10.4 (1)(3)License Agreement, dated October 13, 1993, between the
Registrant and Pasteur Merieux Serums et Vaccins.
10.5 (1)(3)Letter Agreement between SangStat and Ortho Biotech.
10.6 (2)(3)1990 Stock Option Plan, as amended October 1992 and form of Stock
Option Agreement.
10.7 (2)(3)1993 Stock Option/Stock Issuance Plan.
10.8 (3) Series B Stock Purchase Agreement, dated September 21, 1989,
between the Registrant and the Investors listed in Schedule A
thereto.
10.9 (3) Series C Stock and Warrant Purchase Agreement, dated January 26,
1990, between the Registrant and the Investors listed in Schedule A
thereto.
10.10 (3) Series D Stock and Warrant Purchase Agreement, dated July 15, 1991,
between the Registrant and the Investors listed in Schedule A
thereto.
10.11 (3) Amendment Agreement to the Series D Stock and Warrant Purchase
Agreement, dated October 5, 1992, between the Registrant and the
Investors listed in Schedule A of that certain Series D Stock and
Warrant Purchase Agreement, dated July 15, 1991.
10.12 (3) Note and Warrant Purchase Agreement, dated October 2, 1992, between
the Registrant and the Investors listed in the Schedule of Lenders
thereto.
10.13 (3) Series E Stock and Warrant Purchase Agreement, dated April 19,
1993, between the Registrant and the Investors listed in Schedule A
thereto.
10.14 (2)(3)Amended and Restated Shareholders Agreement, dated January 26,
1990, between the Registrant and Philippe Pouletty.
1993, between the Registrant and the Investors listed in Schedule A
thereto.
10.14 (2)(3)Amended and Restated Shareholders Agreement, dated January 26,
1990, between the Registrant and Philippe Pouletty.
10.15 (3) Equipment Lease Agreement dated October 11, 1990 between SangStat
and David Rammler.
10.16 (3) Real Property Lease, dated August 20, 1990, between the Registrant
and Menlo Business Park and Patrician Associates, Inc.
10.17 (3) Lease Agreement dated September 1, 1993 between SangStat Atlantique
and Center Hospitalier, Universitaire de Nantes.
10.18 (7) Form of Indemnification Agreement to be entered into between the
Registrant and each of its officers and directors.
10.19 (1)(3)License Agreement, dated November 15, 1993, between the Registrant
and the Board of Trustees of Leland Stanford Junior University.
10.20 (3) Letter Agreement between the Registrant and Baxter Healthcare
Corporation dated December 11, 1993.
10.21 (1)(5)License Agreement with Pasteur Merieux Serums et Vaccins.
10.22 (2)(5)Supply Agreement with Pasteur Merieux Serums et Vaccins.
10.23 (4) Common Stock Purchase Agreement, dated December 23, 1994, between
the Registrant and the Investors listed in Schedule A thereto.
10.25 (8) Rights Agreement, dated as of August 14, 1995, between the
Registrant and First National Bank of Boston.
10.26 Real Property Sub-Lease, dated March 8, 1999, between the
Registrant and Kelley-Clarke, Inc. Real Property lease between
Kelly-Clarke Inc. and Kaiser Development Company dated September
1, 1988 as amended on February 26, 1990, May 1, 1990, May 5,
1990, and April 19, 1995
21.1 Subsidiaries of Registrant.
23.1 Independent Auditors' Consent.
24.1 Power of Attorney. (Reference is made to page 61)
27.1 Financial Data Schedule.
____________
(1) Confidential Treatment has been granted for the deleted portions
of this document.
(2) Management contract or compensatory plan or arrangement.
(3) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-1 (No. 33-70436).
(4) Previously filed as an Exhibit to the Registrant's Form 8-K filed
January 6, 1994.
(5) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-1 (No. 33-88432).
(6) Previously filed as an Exhibit to Registrant's Form 8-K filed
August 14, 1995.
(7) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form 8-B filed December 4, 1995.
(8) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-3 (No. 333-2301).
(9) Previously filed as Exhibits to the Registrant's Form 8-K/A
as amended on December 14, 1998.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of SangStat Medical Corporation:
We have audited the accompanying consolidated balance sheets of SangStat
Medical Corporation and subsidiaries (the Company) as of December 31,
1998 and 1997, and the related consolidated statements of operations,
comprehensive income, stockholders' equity and cash flows for each of
the three years in the period ended December 31, 1998. Our audits also
included the consolidated financial statement schedule listed in Item
14(a)2. These financial statements and financial schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial schedule
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, such consolidated financial statements present fairly,
in all material respects, the financial position of SangStat Medical
Corporation and subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
February 2, 1999
SANGSTAT MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $16,285,653 $50,630,819
Short-term investments........................ 13,374,742 41,404,955
Accounts receivable (net of allowance for
doubtful accounts $928,917 in 1998 and
$139,297 in 1997)............................ 10,962,814 1,012,631
Other receivables............................. 2,441,393 581,420
Inventories................................... 33,375,259 3,757,451
Prepaid expenses.............................. 1,727,058 1,752,036
------------- -------------
Total current assets.................. 78,166,919 99,139,312
PROPERTY AND EQUIPMENT--Net..................... 3,133,768 2,015,373
INTANGIBLE ASSETS--Net of accumulated
amortization of $351,144..................... 14,151,172 --
OTHER ASSETS.................................... 11,875,449 3,199,785
------------- -------------
TOTAL................................. $107,327,308 $104,354,470
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................. $25,824,098 $3,486,726
Accrued liabilities........................... 3,197,225 1,222,607
Capital lease obligations--current portion.... 492,921 327,222
Notes payable--current portion................ 1,824,768 290,855
------------- -------------
Total current liabilities............. 31,339,012 5,327,410
------------- -------------
CAPITAL LEASE OBLIGATIONS....................... 765,290 1,020,361
------------- -------------
NOTES PAYABLE................................... 15,636,361 536,507
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 16)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 5,000,000
shares authorized; none outstanding......... -- --
Common stock, $.001 par value, 25,000,000
shares authorized; outstanding: 1998,
16,214,851 shares; 1997, 16,009,531
shares...................................... 160,250,935 159,265,454
Accumulated deficit........................... (100,269,950) (61,806,012)
Accumulated other comprehensive income......... (394,340) 10,750
------------- -------------
Total stockholders' equity............ 59,586,645 97,470,192
------------- -------------
TOTAL................................. $107,327,308 $104,354,470
============= =============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
SANGSTAT MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES:
Net product sales................... $18,585,859 $3,777,170 $2,398,979
Revenue from collaborative
agreements (Note 8)............... 1,092,629 750,000 --
------------- ------------- -------------
Total revenues................... 19,678,488 4,527,170 2,398,979
------------- ------------- -------------
COSTS AND OPERATING EXPENSES:
Cost of sales and manufacturing
expenses.......................... 12,531,559 3,735,776 2,845,802
Research and development............ 17,688,113 16,210,198 8,330,129
Selling, general and administrative. 27,148,614 11,067,763 6,120,489
Acquired in-process research and
development....................... 3,218,516 -- --
Amortization of intangible assets... 351,144 -- --
------------- ------------- -------------
Total costs and operating
expenses....................... 60,937,946 31,013,737 17,296,420
------------- ------------- -------------
Loss from operations............. (41,259,458) (26,486,567) (14,897,441)
INTEREST INCOME--NET.................. 3,052,721 5,506,381 2,123,606
------------- ------------- -------------
LOSS BEFORE INCOME TAXES.............. (38,206,737) (20,980,186) (12,773,835)
INCOME TAXES.......................... 257,201 -- --
------------- ------------- -------------
NET LOSS.............................. ($38,463,938) ($20,980,186) ($12,773,835)
============= ============= =============
NET LOSS PER SHARE - Basic and
diluted (Note 1).................... ($2.39) ($1.36) ($1.03)
============= ============= =============
WEIGHTED AVERAGE COMMON SHARES........ 16,080,444 15,375,753 12,405,081
============= ============= =============
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net loss.............................. ($38,463,938) ($20,980,186) ($12,773,835)
Unrealized gains and losses on
marketable securities classified
as available for sale............... (493,702) (78,097) 91,969
Foreign currency translation
adjustments......................... 88,612 (34,648) (26,177)
------------- ------------- -------------
Total comprehensive loss.............. ($38,869,028) ($21,092,931) ($12,708,043)
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
SANGSTAT MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
------------------------- Accumulated Comprehensive
Shares Amount Deficit Income Total
----------- ------------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES, January 1, 1996............ 9,598,083 $36,275,765 ($28,051,991) $57,703 $8,281,477
Sale of common stock (net of
issuance costs of $408,729)........ 3,450,000 45,062,271 -- -- 45,062,271
Exercise of stock options............ 81,117 96,817 -- -- 96,817
Issuance of stock for services....... 360 8,460 -- -- 8,460
Stock option compensation expense.... -- 214,000 -- -- 214,000
Accumulated translation adjustment... -- -- -- (26,177) (26,177)
Unrealized gain on investments....... -- -- -- 91,969 91,969
Net loss............................. -- -- (12,773,835) -- (12,773,835)
----------- ------------- -------------- ---------- -------------
BALANCES, December 31, 1996.......... 13,129,560 81,657,313 (40,825,826) 123,495 40,954,982
Sale of common stock (net of
issuance costs of $542,325)........ 2,730,000 76,634,775 -- -- 76,634,775
Exercise of stock options............ 146,671 741,160 -- -- 741,160
Issuance of stock for services....... 3,300 79,200 -- -- 79,200
Stock option compensation expense.... -- 153,006 -- -- 153,006
Accumulated translation adjustment... -- -- -- (34,648) (34,648)
Unrealized gain on investments....... -- -- -- (78,097) (78,097)
Net loss............................. -- -- (20,980,186) -- (20,980,186)
----------- ------------- -------------- ---------- -------------
BALANCES, December 31, 1997.......... 16,009,531 159,265,454 (61,806,012) 10,750 97,470,192
Exercise of stock options............ 205,320 868,973 -- -- 868,973
Stock option compensation expense.... -- 116,508 -- -- 116,508
Accumulated translation adjustment... -- -- -- 88,612 88,612
Unrealized loss on investments....... -- -- -- (493,702) (493,702)
Net loss............................. -- -- (38,463,938) -- (38,463,938)
----------- ------------- -------------- ---------- -------------
BALANCES, December 31, 1998.......... 16,214,851 $160,250,935 ($100,269,950) ($394,340) $59,586,645
=========== ============= ============== ========== =============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
SANGSTAT MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................... ($38,463,938) ($20,980,186) ($12,773,835)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization................ 1,937,478 629,018 421,261
Stock compensation expense................... 116,508 232,206 222,460
Acquired in-process research and development. 3,218,516 -- --
Deferred income taxes........................ 257,201 -- --
Changes in assets and liabilities:
Accounts receivable........................ (4,162,935) (631,503) 5,167
Other receivables.......................... (656,151) (109,722) (316,123)
Inventories................................ (18,979,864) (2,966,786) (37,016)
Prepaid expenses........................... 1,464,377 (1,341,952) (344,110)
Accounts payable........................... 15,132,367 2,438,310 63,502
Accrued liabilities........................ (815,599) 378,840 232,860
------------- ------------- -------------
Net cash used in operating activities....... (40,952,040) (22,351,775) (12,525,834)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............ (1,383,842) (516,049) (279,888)
Maturities of short-term investments........... 34,210,182 13,012,560 16,560,957
Purchase of short-term investments............. (6,673,671) (32,993,651) (33,362,727)
Business acquired in purchase transaction,
net of cash acquired...................... (10,737,164) -- --
Other assets................................... (8,926,027) (2,919,144) 33,444
------------- ------------- -------------
Net cash provided by (used in) investing
activities......................... 6,489,478 (23,416,284) (17,048,214)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock........................... 868,973 77,375,935 45,159,088
Note payable borrowings........................ 216,303 -- 383,000
Notes payable repayments....................... (676,165) (404,547) (446,481)
Repayment of capital lease obligations......... (380,327) (355,930) (285,018)
------------- ------------- -------------
Net cash provided by financing activities... 28,784 76,615,458 44,810,589
------------- ------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.......... 88,612 (35,520) (26,787)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... (34,345,166) 30,811,879 15,209,754
CASH AND CASH EQUIVALENTS, Beginning of year..... 50,630,819 19,818,940 4,609,186
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, End of year........... $16,285,653 $50,630,819 $19,818,940
============= ============= =============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Property acquired under capital leases......... $290,955 $1,144,459 $318,863
============= ============= =============
Property acquired under notes payable.......... $ -- $ -- $290,050
============= ============= =============
Unrealized gain (loss) on investments.......... ($493,702) ($78,097) $91,969
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest......... $225,054 $225,562 $149,295
============= ============= =============
On September 30, 1998, the Company acquired IMTIX (see Note 2).
In conjunction with this acquisition, liabilities were assumed as follows:
Fair value of assets acquired................ $35,138,650
Acquired in-process research and development. 3,218,516
Cash paid.................................... (11,661,684)
Discounted note payable...................... (16,208,456)
-------------
Liabilities assumed..................... $10,487,026
=============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
SANGSTAT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization-SangStat Medical Corporation and subsidiaries (the
Company) is a specialty pharmaceutical company applying a disease
management approach to improve the outcome of organ transplantation. The
Company's products and product candidates are designed to prevent and
treat graft rejection and monitor patients throughout the lifelong
transplantation process.
Principles of Consolidation-The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries.
Intercompany accounts and transactions are eliminated.
Revenue Recognition-Revenue from product sales is recognized upon
shipment, net of estimated sales allowances. Revenue from collaborative
agreements is recognized in accordance with the contract terms,
generally as milestones are met and no significant obligation for future
services exists (see Note 8).
Research and Development-Research and development costs are expensed
as incurred and include expenses associated with new product research,
clinical trials of existing technologies and regulatory affairs
activities associated with product candidates.
Cash and Cash Equivalents-The Company considers all highly liquid
debt instruments purchased with an original maturity date of three
months or less to be cash equivalents.
Short-Term Investments - The Company has classified all of its
investments as available-for-sale securities. While the Company's
practice is to hold debt securities to maturity, the Company has
classified all debt securities as available-for-sale securities, as the
sale of such securities may be required prior to maturity to implement
management strategies. The carrying value of all securities is adjusted
to fair market value, with unrealized gains and losses, net of deferred
taxes, being excluded from earnings and reported as a separate component
of stockholders' equity and is included in accumulated other comprehensive
income. Cost is based on the specific identification method for purposes of
computing realized gains or losses.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out) or market.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is calculated using the straight-line method over estimated
useful lives of three to five years. Leasehold improvements and assets
under capital leases are amortized over the shorter of their lease term
or estimated useful life.
Other Assets - At December 31, 1998 and 1997, other assets included a
$2.0 and $2.5 million investment in Gensia Sicor, respectively. Gensia
Sicor is one of the Company's suppliers of bulk cyclosporine drug
substance (see Note 3). At December 31, 1998, other assets also includes
$7.5 million of restricted cash that serves as collateral for a note payable
(See Note 2) and $727,000 of deferred income tax benefits.
Income Taxes - The Company records income taxes using the asset and
liability approach, whereby deferred tax assets and liabilities, net of
valuation allowances, are recorded for the future tax consequences of
temporary differences between financial statement and tax bases of
assets and liabilities and for the benefit of net operating loss
carryforwards.
Foreign Currency Translation - Operations of the Company's foreign
subsidiaries are measured using local currency as the functional
currency for each subsidiary. Assets and liabilities of the foreign
subsidiaries are translated into U.S. dollars at the exchange rates in
effect as of the balance sheet dates, and results of operations for each
subsidiary are translated using average rates in effect for the periods
presented. Foreign currency transaction gains and losses are included in
the consolidated statements of operations.
Stock-Based Compensation - The Company accounts for stock-based awards
to employees using the intrinsic value method in accordance with APB
No. 25, Accounting for Stock Issued to Employees ("APB 25"). The Company
adopted the disclosure requirements of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, (SFAS 123),
which requires the disclosure of pro forma net income and earnings per
share as if the Company adopted the fair value-based method in measuring
compensation expense.
Net Loss Per Share - The Company adopted Statement of Financial
Accounting Standards No. 128, Earnings per Share ("SFAS 128"), which
replaces the previously reported primary and fully diluted loss per
share with basic and diluted earnings per share (EPS) and requires a
dual presentation of basic and diluted EPS. Basic EPS excludes dilution
and is computed by dividing net loss by the weighted average of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution that would occur if securities or other contracts to issue
common stock were exercised or converted into common stock. Common share
equivalents including stock options, warrants and redeemable convertible
preferred stock have been excluded, as their effect would be
antidilutive.
The following is a reconciliation of the numerators and denominators of
the basic and diluted net loss per share computations:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net Loss (Numerator):
Net loss............................. ($38,463,938) ($20,980,186) ($12,773,835)
============= ============= =============
Shares (Denominator):
Weighted average shares outstanding.. 16,080,444 15,375,753 12,405,081
============= ============= =============
Net Loss Per Share, Basic and Diluted ($2.39) ($1.36) ($1.03)
============= ============= =============
</TABLE>
Certain Significant Risks and Uncertainties - The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company sells its products to organizations in the healthcare
industry in the United States, Canada and Europe, and does not require
its customers to provide collateral or other security to support
accounts receivable. The Company maintains allowances for estimated
potential bad debt losses.
The Company participates in the dynamic biopharmaceutical industry.
The Company believes that changes in any of the following areas could
have a negative impact on the Company in terms of its future financial
position and results of operations: ability to obtain additional
financing; successful product development; manufacturing and marketing
capabilities; ability to negotiate acceptable collaborative
relationships; obtaining necessary FDA and foreign regulatory approvals;
ability to attract and retain key personnel; litigation and other claims
against the Company, including, but not limited to, patent claims;
increased competition; uncertainty regarding health care reimbursement
and reform; and potential exposure for product liability and hazardous
materials.
Recently Issued Accounting Standards - In the first quarter of 1998, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income, which requires an enterprise to report,
by major components and as a single total, the change in its net assets
during the period from non-owner sources.
The following are the components of accumulated other comprehensive income:
December 31,
----------------------------
1998 1997
------------- -------------
Unrealized gain (loss) on investments $ (468,938) $ 24,764
Accumulated translation adjustments 74,598 (14,014)
------------- -------------
Total $ (394,340) $ 10,750
============= =============
In 1998, the Company adopted Financial Accounting Standards Board (FASB) issued
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, which establishes annual and interim reporting standards
for an enterprise's business segments and related disclosures about its
products, services, geographic areas and major customers.
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities.
This Statement requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS 133 will be effective for the
Company's fiscal year ending December 31, 2000. Management believes that
this statement will not have a significant impact on the Company.
Other than the addition of the statement of comprehensive income, the
adoption of SFAS Nos. 130 and 131 did not impact the Company's
financial statements.
2. ACQUISITION
On September 30, 1998, the Company completed the acquisition of
Pasteur Merieux Connaught's (PMC) organ transplant business known as
IMTIX. The acquisition was accounted for using the purchase method of
accounting. The resulting wholly owned subsidiary of the Company, named
IMTIX-SangStat, is dedicated to the research, development, manufacture
and marketing of pharmaceuticals for transplantation. The aggregate
purchase price of approximately $31 million consisted of $10 million
paid upon closing and a non-interest bearing note of $21 million payable
over five years as follows: $3 million in 1999, $3 million in 2000, $6
million in 2001, $5 million in 2002 and $4 million in 2003. The note
payable is discounted at a rate of 9.25% and is included in Notes
payable (see Note 7). In addition, the Company will pay PMC certain
royalties on IMTIX-SangStat product sales. The aggregate purchase price
and approximately $2.5 million of acquisition costs were allocated to
the net tangible assets acquired based on their fair value on the date
of acquisition, identifiable intangible assets and purchased in-process
research and development. The purchased in-process research and
development of approximately $3.2 million was charged to the Company's
operations in the third quarter of 1998 and represents the value of
products that had not yet reached technological feasibility and no
alternative future use. The estimated value for the in-process
technology was determined using the income approach which discounted to
present value the cash flows expected to be derived from the in-process
products. The projections were based on historical trends and future
expectations of the acquired company's revenue and expenses to be
generated from the in-process products. The discount rate used
reflected the risk associated with development of the in-process
products. The Company currently intends to continue the development of
the acquired in-process products and has not yet determined if it will
be successful in its efforts to complete as the safety and efficacy of
these products has not yet been determined. The determination of the
products' safety and efficacy is expected to be completed in 1999 with
estimated costs to complete the clinical studies less than $500,000.
Depending on the outcome of the ongoing clinical studies, further
studies may be required to fully assess the feasibility of the acquired
in-process products. Approximately $14.2 million of the purchase price
was allocated to various specified intangible assets and is being
amortized over their estimated useful lives ranging from five to
fourteen years. The amounts allocated to intangible assets were
determined on the basis of the appraised value of the related intangible
assets. The appraisal techniques used in the Company's acquisitions
included certain assumptions, including, the extent, character and
utility, the income generating or cost-savings attributes, the nature
and timing of the functional or economic obsolescence and the relative
risk and uncertainty associated with an investment in intangible assets.
Additionally, as part of the acquisition, the Company has approximately
$7.5 million of restricted cash that serves as collateral for the
standby letter of credit in favor of Pasteur Merieux Connaught.
The operating results of IMTIX have been included in the consolidated
statements of operations since the date of acquisition. Pro forma
results of operations, assuming the acquisition had taken place at
January 1, 1997, would be as follows (in thousands except for net loss
per share):
1998 1997
------------ ------------
Revenue................... $36,971 $24,645
Loss from operations...... (41,539) (34,452)
Net loss.................. (38,112) (28,079)
Net loss per share........ ($2.37) ($1.83)
3. INVESTMENTS
Available-for-sale securities consist of the following:
December 31, 1998
---------------------------------------------------
Unrealized Unrealized Estimated
Amortized Gain on Loss on Fair
Cost Investments Investments Value
------------ ------------ ------------ ------------
Corporate bonds ....$13,169,685 $70,897 ($5,840) $13,234,742
One year CD ........ 140,000 -- -- 140,000
------------ ------------ ------------ ------------
Short-term
investments........ 13,309,685 70,897 (5,840) 13,374,742
Corporate equity
securities......... 2,500,000 -- (533,995) 1,966,005
------------ ------------ ------------ ------------
Total...............$15,809,685 $70,897 ($539,835) $15,340,747
============ ============ ============ ============
December 31, 1997
---------------------------------------------------
Unrealized Unrealized Estimated
Amortized Gain on Loss on Fair
Cost Investments Investments Value
------------ ------------ ------------ ------------
Corporate bonds ....$30,102,832 $28,260 ($9,267) $30,121,825
Commercial paper ... 11,299,487 -- (16,357) 11,283,130
------------ ------------ ------------ ------------
Short-term
investments........ 41,402,319 28,260 (25,624) 41,404,955
Corporate equity
securities......... 2,500,000 22,128 -- 2,522,128
------------ ------------ ------------ ------------
Total...............$43,902,319 $50,388 ($25,624) $43,927,083
============ ============ ============ ============
Corporate equity securities represent the Company's investment in Gensia
Sicor and are included in other assets.
The contractual maturities of available-for-sale debt securities at
December 31, 1998 are as follows:
Estimated
Amortized Fair
Cost Value
------------ ------------
Within one year ..............$11,683,437 $11,714,932
One year to two years......... 1,626,248 1,659,810
------------ ------------
Short-term investments........$13,309,685 $13,374,742
============ ============
4. INVENTORIES
Inventories consist of:
December 31,
-------------------------
1998 1997
------------ ------------
Raw materials.............................. $18,103,938 $1,929,954
Work in process............................ 8,945,516 144,389
Finished goods............................. 6,325,805 1,683,108
------------ ------------
Total................................ $33,375,259 $3,757,451
============ ============
5. PROPERTY AND EQUIPMENT
Property and equipment consist of:
December 31,
-------------------------
1998 1997
------------ ------------
Machinery and equipment.................... $5,800,936 $3,852,666
Furniture and fixtures..................... 574,537 156,955
Leasehold improvements..................... 403,273 283,470
------------ ------------
Total...................................... 6,778,746 4,293,091
Accumulated depreciation and amortization.. (3,644,978) (2,277,718)
------------ ------------
Property and equipment--net................ $3,133,768 $2,015,373
============ ============
Included in machinery and equipment at December 31, 1998 and 1997 are
assets leased under capital leases of $1,086,578 and $1,330,802 (net of
accumulated amortization of $1,022,291 and $813,007), respectively.
6. ACCRUED LIABILITIES
Accrued liabilities consist of:
December 31,
-------------------------
1998 1997
------------ ------------
Salaries and related benefits.............. $2,499,443 $1,086,683
Other...................................... 697,782 135,924
------------ ------------
Total............................. $3,197,225 $1,222,607
============ ============
7. NOTES PAYABLE
Notes payable consist of:
December 31,
-------------------------
1998 1997
------------ ------------
Notes due to former Series E
preferred stockholders.................... $141,586 $462,239
Baxter equipment note....................... 191,038 227,144
Research and development loan............... 16,434 107,381
Other loans................................. 518,662 30,598
Note payable to PMC......................... 21,000,000 --
Discount on note payable to PMC............. (4,406,591) --
------------ ------------
Total....................................... 17,461,129 827,362
Less current portion........................ (1,824,768) (290,855)
------------ ------------
Long-term................................... $15,636,361 $536,507
============ ============
Upon the Company's initial public offering in 1993, notes payable of
$1,240,897 were issued to Series E preferred stockholders in accordance
with certain anti-dilution provisions of the Series E preferred stock
purchase agreement. These notes are payable in annual installments
through 2003 and bear interest at 6.06%.
The Baxter equipment note is payable in quarterly installments
through 2003 and bears interest at 8.25%.
The research and development loan provided by the French government
is denominated in French Francs, does not bear interest and is payable
in 1999. Other loans consist primarily of a note payable for insurance
and a non-interest bearing loan denominated in French Francs provided by
a French government agency.
On September 30, 1998, the Company completed the acquisition of
Pasteur Merieux Connaught's organ transplant business known as IMTIX.
The aggregate purchase price of approximately $31 million consisted of
$10 million paid upon closing and $21 million payable over five years as
follows: $3 million in 1999, $3 million in 2000, $6 million in 2001, $5
million in 2002 and $4 million in 2003. The note payable is discounted
at a rate of 9.25%, which the Company believes is consistent with its
normal borrowing rate. The resulting discount of approximately $4.8
million is being accreted as an addition to interest expense over the
term of the note. As of December 31, 1998, $384,000 of amortization had
been recognized.
As of December 31, 1998, future principal payments of notes payable are
as follows:
Years Ending December 31,
- ---------------------------------
1999.......................................... $1,824,768
2000.......................................... 1,804,992
2001.......................................... 5,106,944
2002.......................................... 4,532,777
2003.......................................... 3,864,569
Thereafter.................................... 327,079
------------
Total............................. $17,461,129
============
8. COLLABORATIVE AGREEMENTS
In December 1997, the Company signed an agreement with Amgen Inc.
("Amgen") for the exclusive registration, marketing and distribution
of SANGCYA and SANG-2000 in selected territories in the Asia/Pacific Rim
region. SangStat has retained the exclusive commercial rights to
SANGCYA and SANG-2000 in all other territories including North America
and Western Europe. Under the terms of the agreement, Amgen will have
exclusive rights to market SANGCYA and SANG-2000, under SangStat's
branded trademark, in Australia, New Zealand, China and Taiwan. The
licensing agreement includes an initial $750,000 payment to SangStat and
other milestone and reimbursement payments based on key regulatory
submissions and approvals. The initial $750,000 payment was received in
1997 and is included in revenue from collaborative agreements in the
Consolidated Statements of Operations. Additional payments and
reimbursements of $1,036,145 were received in 1998 and are included in
revenue from collaborative agreements in the Consolidated Statements of
Operations.
In April 1993, the Company entered into a collaborative licensing,
marketing and development agreement (the Agreement) with Baxter
Healthcare Corporation (Baxter). The Agreement provided to Baxter
exclusive marketing rights to certain products. The Agreement was
amended upon written consent of the parties such that, effective July 1,
1996, the Company reacquired exclusive commercial rights for the
monitoring products from Baxter. Since that date, the Company has been
marketing these monitoring products through its own sales staff in the
United States and Europe.
9. LEASING ARRANGEMENTS
The Company leases administrative facilities under operating leases
and machinery and equipment under capital leases expiring through 2003.
As of December 31, 1998, future minimum annual payments under capital
and operating leases are as follows:
Capital Operating
Years Ending December 31, Leases Leases
- --------------------------------- ----------- -----------
1999......................................... $639,379 $954,147
2000......................................... 588,921 677,365
2001......................................... 152,230 660,062
2002......................................... 46,430 635,478
2003......................................... 2,100 543,017
----------- -----------
Total minimum lease payments................. 1,429,060 $3,470,069
===========
Less amounts representing interest........... (170,849)
-----------
Present value of minimum lease payments...... 1,258,211
Less current portion......................... (492,921)
-----------
Capital lease obligations.................... $765,290
===========
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
$760,946, $343,710 and $289,007, respectively.
10. STOCKHOLDERS' EQUITY
Common Stock - In March 1996, the Company issued 3,450,000 shares of
common stock in a public offering for net consideration of $45,062,271,
and in March and April of 1997 issued a total of 2,730,000 shares of
common stock in a public offering for net consideration of $76,634,775.
Stockholder Rights Plan - In August 1995, the Company's Board of
Directors approved a plan to protect stockholders' rights in the event
of a proposed takeover of the Company. Under the plan a preferred share
purchase right (Right) is attached to each share of common stock. The
Rights are exercisable only if a person or group acquires 15% or more of
the Company's common stock or announces a tender offer, the consummation
of which would result in ownership by a person or group of 15% or more
of the Company's common stock. Each Right will entitle stockholders to
buy one one-hundredth of a share of a new series of junior participating
preferred stock at an exercise price of $45 upon certain events. If,
after the Rights become exercisable, the Company is acquired in a merger
or other business combination transaction, or sells 50% or more of its
assets or earnings power, each Right will entitle its holder to
purchase, at the Right's then-current price, a number of the acquiring
company's common shares having a market value at the time of twice the
Right's exercise price. If a person or group acquires 15% or more of the
Company's outstanding common stock, each Right will entitle its holder
(other than such person or members of such group) to purchase, at the
Right's then-current exercise price, a number of the Company's common
shares (or cash, other securities or property) having a market value
twice the Right's exercise price. At any time within ten days after a
person or group has acquired beneficial ownership of 15% or more of the
Company's common stock, the Rights are redeemable for $.01 per Right at
the option of the Board of Directors. The Rights expire on August 25,
2005, unless earlier redeemed or exchanged.
Stock Option Plans - Under the Company's stock option plans, incentive
or non-statutory stock options to purchase up to 3,242,200 shares of
common stock may be granted to employees, directors, and consultants.
Incentive and non-statutory options must be granted at not less than
fair market value at the date of grant.
A summary of stock option activity is as follows:
Weighted
Average
Number of Exercise
Shares Price
---------- ----------
Balances, January 1, 1996 .............................. 1,014,213 $3.85
Options granted (weighted average fair value of $8.16).. 243,700 15.02
Options exercised....................................... (81,117) 1.19
Options canceled........................................ (7,204) 6.47
---------- ----------
Balances, December 31, 1996 (737,333) vested at a
weighted average exercise price of $6.15)............. 1,169,592 6.61
Options granted (weighted average fair value of $13.81). 487,542 22.35
Options exercised....................................... (146,671) 5.05
Options canceled........................................ (9,274) 18.47
---------- ----------
Balances, December 31, 1997 (784,199 vested at a
weighted average exercise price of $13.16).............1,501,189 11.78
Options granted (weighted average fair value of $16.43). 1,363,757 25.64
Options exercised....................................... (205,320) 4.24
Options canceled........................................ (103,983) 22.31
---------- ----------
Balances, December 31, 1998............................. 2,555,643 19.32
========== ==========
Options to purchase common stock generally vest over a period of four
years, are exercisable immediately and expire ten years from the date of
grant. Unvested common shares acquired under the plan are subject to
repurchase by the Company at the original issuance price. At
December 31, 1998, 1,125 outstanding shares were subject to such
repurchase rights at prices ranging from $13.50 to $23.63 per share. As
of December 31, 1998, options for 48,720 shares, which were granted
outside of the stock option plan, were outstanding and are included in
the above table. As of December 31, 1998, 230,017 shares were available
under the plan for future grant.
During 1996, the Board of Directors, subject to shareholder approval,
approved the 1996 Directors' Option Plan and in accordance with the Plan
granted options to purchase a total of 74,000 shares of common stock to
non-employee Directors in 1996 at option prices of $13.50 to $23.50 per
share. At the Annual Stockholder's meeting on June 19, 1997, the 1996
Directors' Option Plan was approved by a vote of the stockholders. Under
this Plan, up to a total 250,000 options to purchase shares of the
Company's common stock may be issued. The fair market value of the
Company's stock on the measurement date of June 19, 1997 was $23.63 per
share. The difference between the fair market value on the measurement
date and the exercise price of the options granted in 1996 is being
amortized over the vesting period of these options. Also in accordance
with the Directors' Option Plan, during 1998 and 1997, each of the six
non-employee Directors were granted options to purchase 3,000 shares of
the Company's common stock. In addition, in 1998, each of the non-
employee directors was granted options to purchase 10,000 shares of the
Company's common stock. Options granted under the Directors' Option
Plan are also included in the above table.
Additional information regarding options outstanding as of
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable Vested Options
------------------------------------- ---------------------
Weighted Avg. Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (yrs) Price Vested Price
- ---------------- ----------- ------------ ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
$0.19 - $2.50 138,289 3.3 $0.73 138,289 $0.73
2.51 - 5.00 158,835 6.1 4.92 151,994 4.92
5.10 - 8.25 281,157 5.7 6.24 212,938 6.22
8.26 - 13.50 178,064 7.3 13.50 77,381 13.50
13.51 - 26.50 1,179,928 9.1 21.23 281,020 20.43
26.51 - 30.00 308,588 9.2 28.70 25,384 28.82
30.01 - 35.00 255,782 9.2 33.00 53,762 33.00
35.01 - 55.00 55,000 8.9 36.13 10,000 36.13
----------- ------------ ----------- --------- -----------
2,555,643 8.1 $19.32 950,768 $12.44
=========== ============ =========== ========= ===========
</TABLE>
Additional Stock Plan Information - Effective for 1996, the Company
was required to adopt the disclosure requirements of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123). SFAS 123 defines a fair value method of
accounting for stock-based compensation awards to employees. The Company
has elected to continue to follow the provisions of Accounting
Principals Board No. 25, Accounting for Stock Issued to Employees, and
its related interpretations.
SFAS 123 requires that the fair value of stock-based awards to
employees be calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These
models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the Black-
Scholes option pricing model with the following weighted average
assumptions: expected life, five and a half years; stock volatility, 69%
in 1998, 61% in 1997, and 54% in 1996; risk free interest rate,
approximately 5.25% in 1998, 6% in 1997, and 6% in 1996; and no dividend
payments during the expected term. Forfeitures are recognized as they
occur. If the computed fair values of the plan awards had been amortized
to expense over the vesting period of the awards, pro forma net loss
would have been approximately $44,789,000 ($2.79 loss per share) in
1998, $23,647,000 ($1.54 loss per share) in 1997, and $13,378,000 ($1.08
loss per share) in 1996.
11. INCOME TAXES
Loss before income taxes and provision for income taxes
consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Income (loss) before income taxes:
Domestic..................... ($35,616,375) ($20,655,443) ($12,634,970)
Foreign...................... (2,590,362) (324,743) (138,865)
Provision for income taxes:
Domestic..................... -- --
Foreign - deferred........... 257,201 -- --
------------- ------------- -------------
Net loss ($38,463,938) ($20,980,186) ($12,773,835)
============= ============= =============
</TABLE>
No income tax provision (benefit) has been provided due to the Company's
continuing losses.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as operating loss
and tax credit carryforwards. Significant components of the Company's deferred
income tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating losses............... $34,169,555 $20,249,517
General business credits........... 2,293,271 2,324,855
Accruals and reserves deductible
in different periods............. 2,547,209 2,691,360
Depreciation....................... 354,287 196,995
Other.............................. 232,000 --
------------- -------------
39,596,322 25,462,727
Valuation allowance................. (38,869,322) (25,462,727)
------------- -------------
Total......................... $727,000 $ --
============= =============
</TABLE>
Based on its history of operating losses, the Company has placed a
valuation allowance of $38,869,322 and $25,462,727 against its otherwise
recognizable net deferred tax assets at December 31, 1998 and 1997,
respectively, due to the uncertainty surrounding the realizability of these
benefits.
At December 31, 1998,, the Company had federal, California and foreign net
operating loss carryforwards of approximately $93,699,000, $24,821,000, and
$1,502,000, respectively, available to reduce future taxable income. Such
carryforwards expire beginning in 1998 through 2019.
Also at December 31, 1998, the Company had research and experimentation
credit carryforwards available of approximately $1,490,000 and $803,000 for
federal and state tax purposes, respectively. The federal tax credit
carryforwards expire beginning in 2004 and the state tax credit carryforwards
have no expiration date.
Utilization of the net operating losses and credits may be subject to an
annual limitation due to ownership change limitations provided by the Internal
Revenue Code of 1986 and similar state provisions. The annual limitation may
result in the expiration of net operating losses and credits before utilization.
12. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) tax-deferred savings plan, whereby eligible
employees may contribute a portion of their eligible compensation.
Company contributions are discretionary and through December 31, 1998
the Company had not made any contributions.
13. MAJOR CUSTOMERS
For the year ended December 31, 1998, the Company did not have any single
customer that accounted for more than 10% of revenue. However, one
customer, had an accounts receivable balance of 10% of the total
accounts receivable as of December 31, 1998. Two customers accounted
for approximately 17% and 16%, respectively, of total revenues in 1997.
A different customer accounted for approximately 10% of total revenues
in 1996.
14. FOREIGN OPERATIONS
The Company is engaged in the business of developing and marketing
products and services for use in transplantation. The Company's
operations in Europe primarily relate to the manufacture, marketing,
research and development and clinical study of therapeutic products for
transplantation. The Company's operations in the rest of the world are
principally sales and marketing related.
Summarized data for the Company's domestic and foreign operations are
as follows:
<TABLE>
<CAPTION>
UNITED REST OF
STATES EUROPE CANADA THE WORLD CONSOLIDATED
------------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Sales to unaffiliated
customers.............. $11,655,898 $4,885,238 $1,355,953 $1,781,399 $19,678,488
============= ============ ============ =========== =============
Loss from operations...... ($38,923,146) ($2,186,954) ($149,358) -- ($41,259,458)
============= ============ ============ =========== =============
Total assets.............. $67,461,238 $39,413,114 $452,956 -- $107,327,308
============= ============ ============ =========== =============
Year ended December 31, 1997:
Sales to unaffiliated
customers.............. $2,761,970 $568,823 $1,196,377 -- $4,527,170
============= ============ ============ =========== =============
Loss from operations...... ($24,478,875) ($1,650,726) ($356,966) -- ($26,486,567)
============= ============ ============ =========== =============
Total assets.............. $102,337,876 $1,369,084 $647,510 -- $104,354,470
============= ============ ============ =========== =============
Year ended December 31, 1996:
Sales to unaffiliated
customers.............. $931,706 $275,154 $1,192,119 -- $2,398,979
============= ============ ============ =========== =============
Loss from operations...... ($13,431,697) ($1,312,577) ($153,167) -- ($14,897,441)
============= ============ ============ =========== =============
Total assets.............. $43,005,162 $953,026 $791,928 -- $44,750,116
============= ============ ============ =========== =============
</TABLE>
15. BUSINESS SEGMENT DATA
The Company is a specialty pharmaceutical company engaged in the
discovery, development, manufacturing and marketing of transplantation
products worldwide as well as applying a disease management approach to
improve the outcome of organ transplantation. The Company is organized
and operates in two business segments: transplantation products and
transplantation services. Transplantation products consist primarily of
products for patient monitoring and therapeutic products for preventing
and treating organ rejection. Transplantation services consist
principally of mail order pharmaceutical and patient management
services. The following information is presented in accordance with the
requirements of SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information."
Transplantation Transplantation
Products Services Total
-------------- ---------------- --------------
Net Revenues...............1998 $11,294,138 $8,384,350 $19,678,488
1997 3,206,422 1,320,748 4,527,170
1996 2,398,979 -- 2,398,979
Interest income........... 1998 3,610,822 -- 3,610,822
1997 5,716,607 -- 5,716,607
1996 2,261,450 -- 2,261,450
Interest expense...........1998 558,101 -- 558,101
1997 210,226 -- 210,226
1996 137,844 -- 137,844
Depreciation and
amortization...............1998 1,872,359 65,119 1,937,478
1997 586,954 42,064 629,018
1996 421,261 -- 421,261
Segment loss...............1998 (35,984,107) (2,479,831) (38,463,938)
1997 (19,586,094) (1,394,092) (20,980,186)
1996 (12,773,835) -- (12,773,835)
Segment assets.............1998 104,348,907 2,978,401 107,327,308
1997 103,534,562 819,908 104,354,470
1996 44,750,116 -- 44,750,116
16. SUBSEQUENT EVENTS
Litigation
Novartis vs. SangStat
On February 11, 1999, Novartis Pharmaceuticals Corporation filed a
lawsuit (case number 99-065) in Federal District Court for the District
of Delaware against the Company alleging infringement of United States
patent #5,389,382, a cyclosporine technology patented by Novartis A.G.
The Novartis patent does not cover Neoral but rather a separate delivery
system not used in the Neoral formulation. Novartis seeks the following
relief: (i) a finding that SangStat willfully infringed the patent;
(ii) to permanently enjoin SangStat from infringing the Novartis patent;
(iii) treble damages; and (iv) reasonably attorneys' fees , costs and
expenses. SangStat's answer is due April 5, 1999 and discovery will not
begin until after the answer is filed. SangStat believes that the
lawsuit is without merit and that it does not infringe the Novartis
patent. SangStat intends to defend itself vigorously against this
claim.
Although the Company is optimistic that this dispute will ultimately be
resolved favorably to the Company, the course of litigation is
inherently uncertain and there can be no assurance of a favorable
outcome. As a result of the Novartis suit, SangStat could be enjoined
from selling SANGCYA for a significant period of time or ultimately be
prevented from selling SANGCYA. Should this happen, the Company does not
believe it would be able to obtain a license from Novartis on acceptable
terms because the Company believes cyclosporine is an important product
for Novartis and that Novartis would not want to diminish its profits
from this product by licensing it on acceptable terms to the Company.
Failure to obtain any such required license could prevent the Company
from selling SANGCYA entirely, which would have a material adverse
effect on the Company's future results of operations. The litigation,
whether or not resolved favorably to the Company, is likely to be
expensive, lengthy and time consuming, will divert management's
attention and could have a material adverse effect on the Company's
business, financial condition, cash flows and results of operations.
SANG-2000 is not covered by this lawsuit and the Company does not
believe that this lawsuit will have an impact on the regulatory approval
of Sang-2000. See "Risk Factors-Litigation with Novartis."
Novartis vs. FDA
Novartis Pharmaceuticals Corporation sued the FDA on February 11, 1999
in the United States District Court for the District of Columbia (case
number 1:99CV-00323) alleging that the FDA did not follow its own
regulations in approving SANGCYA in October 1998. The lawsuit against
the FDA appears to be based on arguments similar to those used in the
failed citizen's petition in which Novartis alleged that because Neoral
and SANGCYA, both oral solutions, are based on different formulation
technologies, they should be classified as different dosage forms.
Novartis asks that the court rescind the AB rating that was given to
SANGCYA. Loss of the "AB" rating would prevent SANGCYA from being
automatically substitutable for Neoral oral solution, which would impede
the marketing of SANGCYA. The Company believes that the lawsuit is
without merit and that the FDA will prevail in this matter. Although
the Company is optimistic that this dispute will ultimately be resolved
favorably to the Company, the course of litigation is inherently
uncertain and there can be no assurance of a favorable outcome.
Novartis' requested relief, if granted, could have a significant
negative economic impact on SangStat. In order to defend its interests
vigorously, SangStat filed a Motion for Leave to Intervene in this
lawsuit on February 23, 1999. The Court has not yet ruled on this
motion. See "Risk Factors-Litigation with Novartis."
Relocation of Corporate Headquarters
The Company will relocate its headquarters from Menlo Park, California
to Fremont, California in approximately June 1999. Floor space in
Fremont will be approximately 44,000 square feet, including offices,
laboratory space, storage area and specialized areas for pilot
production and pre-clinical testing. The lease for the Fremont building
space will expire in 2005 and may be renewed for subsequent years.
The future minimum payments by year and in the aggregate consists of the
following:
<TABLE>
<S> <C>
1999......................................... $222,176
2000......................................... 438,273
2001......................................... 532,123
2002......................................... 692,023
2003......................................... 794,673
Thereafter................................... 1,237,110
-------------
Total minimum lease payments................. $3,916,378
=============
</TABLE>
Schedule II
SANGSTAT MEDICAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Balance Additions Balance
at charged to at
beginning costs end
of and of
Description period expenses Deductions Other period
- -------------------------------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1996
Allowance for doubtful accounts $16,228 $24,150 $ -- -- $40,378
1997
Allowance for doubtful accounts $40,378 $123,626 $24,707 (1) -- $139,297
1998
Allowance for doubtful accounts $139,297 $772,808 $231,041 (1) $247,853 (2)$928,917
</TABLE>
(1) Accounts written off, net of recoveries.
(2) Allowance added from the acquisition of IMTIX.
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, on
March 30, 1999.
SANGSTAT MEDICAL CORPORATION
By: /s/ JEAN-JACQUES BIENAIME
-------------------------
Jean-Jacques Bienaime
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jean-Jacques Bienaime and Carole
L. Nuechterlein, and each of them, as his true and lawful attorneys-in-
fact and agents, with full power of substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities, to sign
any and all amendments to this Report on Form 10-K, and to file the
same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them,
or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
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/ PHILIPPE POULETTY Chairman of the March 30 , 1999
- ------------------------------- Board of Directors
Philippe Pouletty, M.D.
/s/JEAN-JACQUES BIENAIME Chief Executive Officer March 30 , 1999
- -------------------------------
Jean-Jacques Bienaime
/s/ JAMES F. HINRICHS Chief Financial Officer March 30, 1999
- ------------------------------- (Principal Accounting Officer)
James F. Hinrichs, CFA.
/s/ FREDRIC J. FELDMAN Director March 30 , 1999
- -------------------------------
Fredric J. Feldman, Ph.D.
/s/ ELIZABETH M. GREETHAM Director March 30 , 1999
- -------------------------------
Elizabeth Greetham
/s/ RICHARD D. MURDOCK Director March 30 , 1999
- -------------------------------
Richard D. Murdock
/s/ ANDREW PERLMAN, M.D, PHD Director March 30 , 1999
- -------------------------------
Andrew Perlman, M.D., Ph.D.
/s/ VINCENT WORMS Director March 30 , 1999
- -------------------------------
Vincent Worms
<PAGE>
SANGSTAT MEDICAL CORPORATION
Index to Exhibits
Sequentially
Exhibit Numbered
No. Description Page
- ------- ------------------------------------------------------------
2.1 (7) Agreement and Plan of Merger dated as of July 24, 1995 between the
SangStat Delaware, Inc., and SangStat Medical Corporation, a
California corporation, as filed with the Delaware Secretary of
State on August 11, 1995.
2.2 (9) Master Agreement between SangStat Medical Corporation and
Pasteur Merieux Serums & Vaccins, S.A. dated June 10, 1998,
including Exhibit 8 thereto.
3.1 (8) Amended and Restated Articles of Incorporation of the
Registrant filed November 29, 1993.
3.3 (7) 3.3(7) Bylaws of Registrant.
3.4 (6) Certificate of Designation for the Series A Junior Participating
Preferred Stock, filed with the Delaware Secretary of State on
August 16, 1995.
4.5 (3) Specimen Common Stock Certificate of Registrant.
10.1 (1)(3)Collaborative Agreement effective April 19, 1993, as amended,
between SangStat and Baxter Healthcare Corporation.
10.2 (1)(3)License Agreement, dated October 21, 1991, between the Registrant
and The Board of Trustees of Leland Stanford Junior University.
10.3 (3) Contract for the Provision of Services, dated October 5, 1993
between the Centre Hospitalier Universitaire de Nantes and SangStat
Atlantique.
10.4 (1)(3)License Agreement, dated October 13, 1993, between the
Registrant and Pasteur Merieux Serums et Vaccine.
10.5 (1)(3)Letter Agreement between SangStat and Ortho Biotech.
10.6 (2)(3)1990 Stock Option Plan, as amended October 1992 and form of Stock
Option Agreement.
10.7 (2)(3)1993 Stock Option/Stock Issuance Plan.
10.8 (3) Series B Stock Purchase Agreement, dated September 21, 1989,
between the Registrant and the Investors listed in Schedule A
thereto.
10.9 (3) Series C Stock and Warrant Purchase Agreement, dated January 26,
1990, between the Registrant and the Investors listed in Schedule A
thereto.
10.10 (3) Series D Stock and Warrant Purchase Agreement, dated July 15, 1991,
between the Registrant and the Investors listed in Schedule A
thereto.
10.11 (3) Amendment Agreement to the Series D Stock and Warrant Purchase
Agreement, dated October 5, 1992, between the Registrant and the
Investors listed in Schedule A of that certain Series D Stock and
Warrant Purchase Agreement, dated July 15, 1991.
10.12 (3) Note and Warrant Purchase Agreement, dated October 2, 1992, between
the Registrant and the Investors listed in the Schedule of Lenders
thereto.
10.13 (3) Series E Stock and Warrant Purchase Agreement, dated April 19,
1993, between the Registrant and the Investors listed in Schedule A
thereto.
10.14 (2)(3)Amended and Restated Shareholders Agreement, dated January 26,
1990, between the Registrant and Philippe Pouletty.
10.15 (3) Equipment Lease Agreement dated October 11, 1990 between SangStat
and David Rammler.
10.16 (3) Real Property Lease, dated August 20, 1990, between the Registrant
and Menlo Business Park and Patrician Associates, Inc.
10.17 (3) Lease Agreement dated September 1, 1993 between SangStat Atlantique
and Center Hospitalier.
10.18 (7) Form of Indemnification Agreement to be entered into between the
Registrant and each of its officers and directors.
10.19 (1)(3)License Agreement, dated November 15, 1993, between the Registrant
and the Board of Trustees of Leland Stanford Junior University.
10.20 (3) Letter Agreement between the Registrant and Baxter Healthcare
Corporation dated December 11, 1993.
10.21 (1)(5)License Agreement with Pasteur Merieux Serums et Vaccins.
10.22 (2)(5)Supply Agreement with Pasteur Merieux Serums et Vaccins.
10.23 (4) Common Stock Purchase Agreement, dated December 23, 1994, between
the Registrant and the Investors listed in Schedule A thereto.
10.25 (8) Rights Agreement, dated as of August 14, 1995, between the
Registrant and First National Bank of Boston.
10.26 Real Property Sub-Lease, dated March 8, 1999, between the
Registrant and Kelley-Clarke, Inc. Real Property lease between
Kelly-Clarke Inc. and Kaiser Development Company dated September
1, 1988 as amended on February 26, 1990, May 1, 1990, May 5,
1990, and April 19, 1995
21.1 (5) Subsidiaries of Registrant.
23.1 Independent Auditors' Consent.
24.1 Power of Attorney. (Reference is made to page 47)
27.1 Financial Data Schedule.
____________
(1) Confidential Treatment has been granted for the deleted portions
of this document.
(2) Management contract or compensatory plan or arrangement.
(3) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-1 (No. 33-70436).
(4) Previously filed as an Exhibit to the Registrant's Form 8-K filed
January 6, 1994.
(5) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-1 (No. 33-88432).
(6) Previously filed as an Exhibit to Registrant's Form 8-K filed
August 14, 1995.
(7) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form 8-B filed December 4, 1995.
(8) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-3 (No. 333-2301).
(9) Previously filed as Exhibits to the Registrant's Form 8-K/A
as amended on December 14, 1998.
EXHIBIT 10.26
SUBLEASE
THIS SUBLEASE ("Sublease") is entered into as of the 8th day of March,
1999 between Kelley-Clarke, Inc., a California corporation ("Sublandlord")
and SangStat Medical Corporation, a Delaware corporation ("Subtenant")
with reference to the following facts:
A. Pursuant to that certain Lease Agreement dated November 28, 1988,
as amended on February 26, 1990 ("First Amendment"); May 1, 1990 ("Second
Amendment"); May 5, 1992 ("Third Amendment"); and January 18, 1995
("Fourth Amendment") between TriNet Essential Facilities X, Inc.
("Landlord") and Kelley-Clarke, Inc., as Tenant (collectively Master
Lease"), a copy of which is attached hereto as Exhibit A and made a part
hereof, Sublandlord leased from Landlord and Landlord leased to
Sublandlord approximately 44,000 rentable square feet of space (the
"Master Lease Premises") which consists of the' building located at 6300
Dumbarton Circle, Fremont, California ("Building").
B. Subtenant desires to sublet from Sublandlord the Master Lease
Premises as more particularly set forth in Exhibit B attached hereto and
made a part hereof ("'Subleased Premises"), and Sublandlord does hereby
sublet the same to Subtenant upon the terms, covenants and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the covenants herein contained,
and for other good and valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties do hereby agree as follows:
1 - Sublease. Sublandlord does hereby sublease and demise to
Subtenant, and Subtenant does hereby hire and take from Sublandlord, all
of the Subleased Premises subject to: (i) the covenants, agreements,
terms, provisions and conditions of this Sublease for the term hereinafter
stated; and (ii) the covenants, agreements, terms, provisions and
conditions of the Master Lease. Subtenant hereby acknowledges receipt of
the Master Lease attached hereto as Exhibit A. Sublandlord represents to
Subtenant that the copy of the Master Lease attached hereto is true and
correct and that there are no amendments or modifications to such document
other than as so attached. Capitalized terms not otherwise defined herein
shall have the meaning ascribed to them in the Master Lease.
2.Term.
A. The term of this Sublease ("Term") shall commence on June
1, 1999 (the "Commencement Date") and shall end June 30, 2005, or on such
earlier date upon which said Term may expire or be terminated pursuant to
any of the conditions of limitation or other provisions of this Sublease,
the Master Lease, or pursuant to law. The parties shall use their best
efforts to execute all requisite documents as expeditiously as possible.
B. Subtenant shall have the right of access to the
Subleased Premises, subject to all of the provisions of this Sublease,
other than payment of base rent and Additional Rent (as
defined in Section 4-B. below), at any time between the date of Landlord
consent to this fully executed Sublease and the Commencement Date for the
purposes of performing measurements and space planning and any
construction of Alterations (as defined in Section 7.B. below), provided
that Subtenant shall give Sublandlord reasonable prior notice in advance
of accessing the Subleased Premises.
I Use. Subtenant shall use the Subleased Premises for office,
administration, R&D and distribution of products related to the transplant
industry and otherwise in conformance with allowable uses under the Master
Lease.
4. Rent.
A. Subtenant shall pay Sublandlord as monthly base rent for
the Subleased Premises on the first (1st) day of each calendar month
during the Term of this Sublease according to the following schedule:
Monthly NNN
Months Rent
--------- ------------
1-12 $31,739.45
13-24 $39,939.45
25-36 $47,489.45
37-48 $64,939.45
49-60 $67,139.45
61-73 $69,339.45
The base rent for June 1999 shall be due and payable on the mutual
execution of this Sublease. The base rent for October, November and
December 1999 shall be paid in full on October 1, 1999. All rent shall be
payable, in advance, without any offset, deduction, or abatement, except
as otherwise set forth in this Sublease. The base rent shall be a triple
net rent, and Subtenant shall also be fully responsible for "Additional
Rent" assessed against the Subleased Premises pursuant to Section 4.B.
below.
B. Subtenant shall also pay to Sublandlord all "Additional
Rent"' for the Subleased Premises for each calendar month of the Term
within ten (10) business days after delivery by Sublandlord of invoices
evidencing "Additional Rent". If Subtenant fails to reimburse
Sublandlord for "Additional Rent" within such ten (10) business day
period, Subtenant shall also pay interest on such amount at ten percent
(10% per annum) from the date due until paid. "Additional Rent" shall
consist of Subtenant's share prorated, based on actual square footage on
which Subtenant is obligated to pay rent as set forth in the table below,
of all payments which Sublandlord is required to pay to Master Landlord
for Real Property Taxes and Common Maintenance Costs pursuant to Articles
7 and 8 of the Master Lease and any delinquent charges due and payable by
Subtenant to Sublandlord. For purposes herein, "Rent' shall include all
monthly base rent, security deposit, and Additional Rent.
Subtenant's occupancy schedule shall be as follows:
Months Square Feet
1-12 28,000
13-24 32,000
25-36 35,000
37-48 44,000
49-60 44,000
61-73 44,000
5. Incorporation of Master Lease. Except to the extent that they are
inapplicable to, or modified by, or excluded by, the terms of this
Sublease, all of the covenants, agreements, terms, provisions and
conditions of the Master Lease are hereby incorporated into and made a
part of this Sublease. Except to the extent that they are inapplicable to,
or modified by, the terms of this Sublease, the rights and obligations
contained in the Master Lease are hereby imposed upon the respective
parties hereto, Sublandlord being substituted for "Lessor" named in the
Master Lease, Subtenant being substituted for the "Lessee" named in the
Master Lease, and "Subleased Premises" being substituted for the
"Premises" named in the Master Lease, except for Articles I, Sections 1.
1, 1.2, 1.4, 1.5 and 1.6, Article 4, Article 5, Sections 6. 1 and 6.2,
Article 16, Section 30.2, Article 32, Article 47, Article 48, Section
50.12, Exhibit C, the First Amendment, Second Amendment, Third Amendment
and Fourth Amendment, except Section 4 as so excluded, inapplicable or
modified, all acts and obligations to be performed and all of the terms
and conditions to be observed by Sublandlord as Lessee under the Master
Lease with respect to the Master Lease Premises shall be performed and
observed by Subtenant with respect to the Subleased Premises.
6. Subordination Rights to the Master Lease and Ground Lease. This
Sublease and Subtenant's rights under this Sublease shall at all times be
subject and subordinate to we underlying Master Lease. If any conflict
between the Master Lease and the Sublease occurs, the Master Lease will
control, except as inapplicable to, or modified by, the terms of its
Sublease or excluded from the incorporation provisions of Section 5
hereof. Subtenant acknowledge and agrees that any termination of the
underlying Master Lease pursuant to Subtenant's rights under the Master
Lease shall extinguish the Sublease at Landlord's discretion, upon at
least thirty (30) days prior written notice to Subtenant, without
liability to Sublandlord; provided, however, that such termination is not
due to the default of Sublandlord under the Master Lease or to the
voluntary surrender by Sublandlord of its rights under the Master Lease.
7. Condition of Subleased Premium.
A. Sublandlord shall deliver the Subleased Premises in broom
clean condition, with all existing improvements in place, including
without limitation, the UPS and security system, but shall remove the
freezers and kitchen equipment as soon as possible. Sublandlord
represents and warrants that the roof, including the structure and
membrane, foundations and exterior walls shall be in sound condition
and repair as of the Commencement Date. In addition, Sublandlord, at
its sole cost and expense, shall deliver all building systems,
including but not limited to HVAC, mechanical, plumbing, electrical and
elevator in good working condition and repair. Sublandlord shall also
provide Subtenant a sixty (60) day discovery period from the
Commencement Date, whereby Sublandlord after notice from Subtenant,
shall repair and/or replace any broken or inoperable building systems,
excluding any damage caused by Subtenant.
B. Subtenant shall not make or suffer to be made any
alterations, additions or improvements (collectively, "Alterations") in,
on or to the Subleased Premises without the prior written consent of
Sublandlord and Landlord, which shall not be unreasonably withheld or
delayed. All Alterations shall be performed in compliance with Article 20
of the Master Lease. The Alterations shall be made by Subtenant, at
Subtenant's sole cost and expense, and any contractor or person selected
by Subtenant to make the same shall first be reasonably approved by
Sublandlord and Landlord. Upon the expiration or sooner termination of
this Sublease, Subtenant shall, upon written demand by Landlord (but not
Sublandlord), at Subtenant's sole cost and expense, forthwith and with all
due diligence, remove any Alterations made by Subtenant, which Landlord
requires at the time of its, consent be removed at Sublease expiration:
provided, however, Subtenant shall have no obligation to reconstruct any
of Sublandlord's improvements that were demolished as part of its
Alterations, and Sublandlord shall remain solely responsible, at its cost,
for removing the Special Improvements and Additional improvements (as
defined in the Master Lease). Finally, Sublandlord shall cooperate with
Subtenant and use good faith efforts to acquire Landlord's consent to any
Alterations.
C. The general terms and conditions regarding Subtenant's
construction of its Alterations shall be governed by the terms of the
Master Lease; provided, however, that: (i) there shall be no specified
subcontractors unless Subtenant approves such subcontractor and the party
requesting such subcontractor agrees to pay any additional costs; (ii)
neither Sublandlord nor Landlord shall charge a construction management
fee; and (iii) if performance or payment bonds are required by Sublandlord
and/or Landlord, they would be at such party's expense.
9. Insurance. Subtenant, at its sole cost and expense, shall obtain
and keep in full force and effect during the entire term of this Sublease
such insurance, and in such amounts, as are required under Sections 10.5,
11.1 and 12.1 of the Master Lease. Sublandlord and the Landlord shall be
named as additional insured parties under any such policy of insurance.
Subtenant and Sublandlord shall each obtain from their respective insurers
hereof a waiver of all rights of subrogation as set forth in Section 14.1
of the Master Lease and the other waivers contained in Section 14.2 of the
Master Lease shall apply as between the Subtenant and Sublandlord.
10. Security deposit. Upon execution hereof, Subtenant shall deposit
with Sublandlord Sixty Nine Thousand Three Hundred Thirty Nine and 45/100
Dollars ($69,339.45) in cash, as security for the performance by Subtenant
of the terms and conditions of this Sublease. If Subtenant is in default
after passage of the applicable notice and cure provision, the remaining
balance of the security deposit shall be immediately due and payable.
If Subtenant fails to pay Rent. Additional Rent or other expenses due
hereunder or otherwise defaults with respect to any of this Sublease,
Sublandlord may draw upon, use, apply or retain all or any portion of the
security deposit for the payment of any Rent. Additional Rent, or other
expenses in default, for the payment of any other sum which Sublandlord
has become obligated to pay by reason of Subtenant's default, or to
compensate Sublandlord for any out-of-pocket expenses which Sublandlord
has suffered thereby. If Sublandlord so uses or applies all or any portion
of the security deposit, then Subtenant shall within ten (10) business
days after written demand therefor, deposit cash with Sublandlord in the
amount required to restore the security deposit. If at the end of the
Sublease Term, Sublandlord shall return to Subtenant that portion of the
security deposit which has not been applied by Sublandlord pursuant to
this Section 10, or which is not otherwise required to cure Subtenant's
defaults. Notwithstanding the foregoing, Sublandlord shall give Subtenant
five (5) business days' prior written notice prior to Sublandlord drawing
upon or using in any manner the security deposit.
11. Notices. All notices and other communications which are required
or desired to be given by either party to the other hereunder shall be in
writing and shall be sent by United States registered or certified mail,
postage prepaid, return receipt requested, addressed to the appropriate
party at its address as such party shall have last designated by notice to
the other party in the manner herein provided. Notices and communications
to Sublandlord shall be sent to:
Sublandlord:
For Mail Purposes: For Delivery Purposes:
Kelley Clarke, Inc Kelley Clarke, Inc
P.O. Box 5558 1470 S. Valley Vista Ave., Suite 200
Diamond Bar, CA 91765-7558 Diamond Bar, CA 91765-7558
Attn: President Attn: President
Subtenant:
SangStat Medical Corporation
6300 Dumbarton Circle
Fremont, CA 94555
Attn: Ralph Levy
Notices and commununications to Subtenant shall be sent to the Subleased
Premises. Notices and other communications shall be deemed given on the
date so mailed.
12. Amendments. Sublandlord and Subtenant shall not amend in any
respect this Sublease unless such is in writing and signed by both
parties.
13. Consent. This Sublease shall be subject to the consent by
Landlord to the terms and conditions of this Sublease, w1ucti shall not
become effective unless and until such consent is executed and delivered
by such parties.
If Landlord fails to consent to this Sublease within thirty (30) days of
the date of this Sublease, the Sublease shall automatically terminate and
neither party shall have any continuing rights against or obligations to
the other with respect to the Subleased Premises or this Sublease, except
that Sublandlord shall return to Subtenant all advance rents and security
deposits paid by Subtenant to Sublandlord.
14. Indemnification.
A. Subtenant shall indemnify, defend, protect and hold
harmless Sublandlord and Sublandlord's officers, directors, agents and
employees (collectively, Sublandlord's Parties") from and against all
liability, cost, damage and expense (including, without limitation,
reasonable attorneys' fees) arising from either: (i) the negligence,
willful misconduct, or breach of this Sublease by Subtenant or Subtenant's
officers, directors, agents or employees (collectively "Subtenant's
Parties"); (ii) the use of the Subleased Premises by Subtenant or
Subtenant's Parties; (iii) the construction of the Alterations or any
claims for work or labor performed, or for materials or supplies furnished
to or at the request of Subtenant in relation thereto; or (iv) the use,
release or disposal of Hazardous Materials by Subtenant or Subtenant's
Parties in, on or about the Subleased Premises: provided, however, that
the indemnification provided in this Section 14-A. shall not apply to the
extent that any liability, cost, damage or expense arises from the
negligence, willful misconduct, or breach of this Sublease by Sublandlord
or Sublandlord's Parties.
B. Sublandlord shall indemnify, defend, protect and hold
harmless Subtenant's Parties from and against all liability, cost, damage
and expense (including, without limitation, reasonable attorneys' fees)
arising from either (i) the negligence, willful misconduct, or breach of
this Sublease or the Master Lease by Sublandlord or Sublandlord's Parties;
(ii) the use of the Master Lease Premises by Sublandlord or Sublandlord's
Parties; or (iii) the use, release or disposal of Hazardous Materials by
Sublandlord or Sublandlord's, Parties in, on or about the Subleased
Premises; provided, however, that the indemnification provided in this
Section 14-B. shall not apply to the extent that any liability, cost,
damage or expense arises from the negligence, willful misconduct, or
breach of this Sublease by Subtenant or Subtenant's Parties.
C. The terms of this Section 14 shall survive the expiration or
termination of this Sublease.
15. Miscellaneous.
A. Subtenant shall be entitled to use, on an exclusive basis and free
of charge, 167 parking stalls available for use by Sublandlord for the
Subleased Premises as set forth in the Master Lease.
B. This Sublease may be executed in counterparts each of which when
executed shall constitute but one original, and all of which together
shall constitute a single agreement.
C. Sublandlord shall remove its existing signs, at its sole expense,
as soon as possible after mutual execution of the Sublease. Subtenant
shall have the right, at its sole cost and expense, to install: (i) door
signage at the entrance to the Premises; (ii) multiple Building Signage;
and (iii) monument signage on Dumbarton Circle. All signage shall be
subject to the terms of the Master Lease and the consent of Sublandlord,
Landlord and the City of Fremont.
E. Sublandlord and Subtenant represent and warrant that they
have negotiated this Sublease directly with Colliers Parrish
("Colliers") and Tory Corporate Real Estate Advisors, Inc. (dba The
Staubach Company) (collectively "Brokers"). Sublandlord shall pay the
Brokers a commission pursuant to a separate written agreement with each
broker. Subtenant has not authorized or employed, or acted by implication
to authorize or to employ, any other real estate broker or salesman to act
for Subtenant in connection with this Sublease. Each party shall hold the
other harmless from and indemnify and defend the other against any and all
claims by any real estate broker or salesman other than the Brokers
identified above claiming to represent that party for a commission,
finders fee or other compensation as a result of each party entering into
this Sublease.
F. By consenting to this Sublease, in the event the Sublease
is terminated for any reason during the term of this Sublease, Landlord
agrees that, so long as Subtenant is not in default under the terms of the
Sublease, the right of Subtenant to retain possession of the Subleased
Premises shall not be distributed and Subtenant leasehold interest in the
Subleased Premises shall not be extinguished, subject to all of the terms,
covenants and conditions of this Sublease and such terms, covenants and
conditions of the Master Lease as are expressly incorporated into this
Sublease by reference thereto.
G. Sublandlord represents to Subtenant the following: (i) that
the Master Lease is in full force and effect and that, to the best of
Sublandlord's knowledge, no default or event that, with the passing of
time or the giving of notice or both, would constitute a default, exists
on the part of Sublandlord, and to the best of Sublandlord's knowledge,
the Landlord thereunder; and (ii) to the best of Sublandlord's knowledge,
there are no hazardous materials present in, on or about the Subleased
Premises. Sublandlord agrees to maintain the Master Lease, in full force
and effect except to the extent its failure to maintain the Master Lease
is due to the failure of Subtenant to comply with its obligations under
this Sublease, provided Subtenant receives prior written notice from
Sublandlord as required by the Master Lease. During the Term, Sublandlord
shall not enter into any amendment of the Master Lease that during the
initial term, would materially diminish Subtenant's rights or materially
increase Subtenant's obligations hereunder.
H. The covenants and conditions herein contained shall apply
to and bind the heirs, successors, executors, administrators and assigns
of all of the parties hereto; and all of the parties hereto shall be
jointly and severally liable hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this
Sublease as of this date first above written.
"SUBLANDLORD" "SUBTENANT"
KELLEY-CLARKE, INC SANGSTAT MEDICAL CORPORATION,
a California corporation a Delaware corporation
By: ___________________ By: ___________________
Its: ____________________ Its: ____________________
<PAGE>
ARDENWOOD CORPORATE COMMONS
KELLEY-CLARKE, INC.
FREMONT, CALIFORNIA
ARTICLE 1. - SALIENT LEASE TERMS
THIS LEASE is dated for reference purposes only this 1st day of September,
1988.
1. 1 Rent KAISER DEVELOPMENT COMPANY
Payment: c/o Bedford Properties, Inc.
P. 0. Box 1267
Lafayette, CA 94549
1.2 Parties Lessor: KAISER DEVELOPMENT' COMPANY
and c/o Bedford Properties, Inc.
Notice 3470 Mount Diablo Boulevard, Suite A200
Addresses: Lafayette, CA 94549
Lessee: KELLEY-CLARKE, INC
a California corporation
30740 Santana Street
Hayward, CA 94540-4801 until commencement,
thereafter, at the Leased Premises
(Section 4 9. 12)
1.3 Premises: (A) Name and Location of Complex:
Ardenwood Corporate Commons
Fremont, California
(B) Leased Premises:
Dumbarton circle
Fremont, California
(C) Approximately 44,000 square feet of
Rentable Area on approximately 2.399 acres of land
area.
(Section 3-2)
1.4 Term: (A) Initial Term: 120 Months
(B) Options to Extend: Two at Five years each
(Section 4. 1)
1.5 Rent: Minimum Monthly Rent
(A) Commencement through 60th lease month:See Article 6
(B) Balance of Initial Term: 1.1699 x Beginning Rent
(C) Each extended Term: 90% of fair market value.
(Section 6.1)
1.6 Security Deposit: Fifty Thousand Dollars ($50,000)
(Section 16. 1)
1.7 Use: Premises used solely for general office purposes (including,
however, a test kitchen and storage area which in the aggregate,
may not exceed 5,000 square feet.)
(Section 17. 1)
1.8 Initial 1.3%
Pro Rata% (Section 8.3)
1.9 Declaration of
Restrictions:
Date Recorded: Series Number
Original March 30, 1984 84-062367
Modified June 29, 1984 84-127903
Modified May 28, 1985 85-061691
Modified October 1, 1986 86-241538
Modified March 12, 1987 87-069602
Two amendments of the Restrictions are to be recorded in the
form substantially as attached hereto as Exhibit "H".
(Section 3.4)
1.10 Contents: This Lease consists of:
Pages 1 through 46
Sections-1 through 50.16
Exhibits:
A. Legal Description of Leased Premises
B. Plot Plan of Leased Premises
C. Construction Obligations
D. Acknowledgment of Rent and Commencement of Term
E. Plot Plan of Complex
F. Lessee's Sign
G. Rental Reimbursement Agreement
H. Declaration of Restrictions
I. Purchase Agreement
J. Hazardous Materials Report
K. Memorandum of Lease
L. Quitclaim Deed
M. First Offer Area
The above terms are incorporated in this Lease as indicated above and
referenced herein.
ARTICLE 2. DEFINITIONS
2.1 "Building": The structure or structures upon the Leased
Premises which is completely enclosed by walls and a roof.
"Commencement of Construction": The date upon which the
trenching for foundations of the Building is commenced, in the case of
Lessor's work under Exhibit "C"; or in the case of a repair or
reconstruction in event of a casualty, the date upon which the general
building contractor commences work under the terms of its building
contract.
"Commencement Date": See Section 4.1.
"Common Maintenance Areas": See Section 8.1.
"Common Maintenance Costs": See Section 8.4.
"Complex": See Section 3.2.
"Hazardous Materials":See Section 18.3.
"Lease Month": Any calendar month, or portion thereof
following the commencement hereof, which period is included the Term.
"Leased Premises": The real property, land and improvements
thereto leased to Lessee hereunder.
"Lessee Delay": : Any delay in delivery of the premises by
Lessor following substantial completion of Lessor's work specified in
Exhibit "C", as a result of design decisions, revisions or additional
work or preparation of plans by Lessee or its agents.
"Major Uninsured Casualty": A casualty not covered by the
insurance required to be obtained by Lessor pursuant to Section 10.2,
(whether or not Lessor has obtained such insurance) , the cost for repair
of which exceeds $l00,000 in Lessor's sole good faith judgement.
"Occupant": Any party with a possessory right to occupy any
premises within the complex, including without limitation, owners,
tenants, subtenants or licensees.
"Permissible Delay ":Any delay in the performance of any
covenant under this Lease, which delay results from strikes, walkouts,
riots, shortages of materials, governmental regulations, acts of God,
inclement weather, fire, flood or other casualty, or other causes, other
than financial causes, beyond the reasonable control of the party
obligated to perform the task.
"Rent": Minimum Monthly Rent and all other sums required to
be paid by Lessee pursuant to the terms of this Lease.
"Rentable Area": The area within Building(s) measured to the
inside finished surface of the dominant portion of the permanent outer
Building walls without deduction.
"Restrictions": See Section 3.3.
"Structural": Any portion of the Leased Premises or Complex
or Building which provides bearing support to any other integral member of
the Leased Premises, including by limitation the roof structure (trusses,
joists, beams), posts, load bearing walls, foundations, girders, floor
joists, footings, and other load bearing members constructed by Lessor.
"Substantial Completion": Completion of construction work to
a degree that occupancy can occur without material impairment of Lessee's
ability to conduct the business operations intended to be conducted within
the Leased Premises.
"Taxes or Real Estate Taxes": See Section 7.1.
" Term": The term of the Lease as specified in Article 4
hereof, including any partial month at the commencement of the Term.
"Total Project Costs": Same definition as for Construction
Costs as defined in Exhibit "C".
"Transfer": See Section 9.2.
"Usable Area": The number of square feet computed by
measuring to the finished surface of the office side of corridor and other
permanent walls, to the center of partitions that separate the permanent
walls, to the center of partitions that separate the office from adjoining
Usable Areas, and to the inside finished surface of the permanent outer
Building walls. No deductions shall be made for the columns and
projections necessary to the Building.
ARTICLE 3. PREMISES
3.1 Demising Clause. Lessor hereby leases to Lessee, and Lessee
hires from Lessor a portion of the Complex as hereinafter defined.
3.2 Description. The "Complex" consists of those parcels of real
property originally held in common ownership with, and contiguous to, the
parcel of which the Leased Premises forms a part, which is referenced in
Section 1.3(A) and delineated in Exhibit "F" attached hereto and made a
part hereof by reference. The premises leased herein are described in
Section 1.3(B) and Exhibit "A" and delineated on Exhibit "B", which is
attached hereto and made a part hereof by reference, consisting of the
approximate amount of square footage as specified in Section 1.3(C)
hereof. Lessor reserves the area beneath and above the Leased Premises and
the use thereof together with the right to install, maintain, use, repair
and replace underground pipes, ducts, conduits and wires leading through
the Leased Premises serving other parts of the Complex, so long as such
items are concealed and Lessor uses reasonable efforts to minimize
interference with Lessee's business operations in the Leased Premises.
Such reservation in no way affects the maintenance obligations imposed
herein.
3.3 Covenants, Conditions and Restrictions. The parties agree that
this Lease is subject to the effect of (a) any covenants, conditions,
restrictions, easements, mortgages or deeds of trust, ground leases,
rights of way of record, and any other matters or documents of record; (b)
any zoning laws of the city, county and state where the Complex is
situated; and (c) general and special taxes not delinquent. Lessee agrees
that as to its leasehold estate, Lessee and all persons in possession or
holding under Lessee, will conform to and will not violate the terms of
any covenants, conditions or restrictions of record which may now or
hereafter encumber the property (hereinafter the "Restrictions"). This
Lease is subordinate to the restrictions and any amendments or
modifications thereto. Any amendments, modifications or additional
Restrictions effectuated after the date hereof, in order to govern this
Lease, must have been subject to Lessee's prior written consent which may
not be unreasonably withheld or delayed.
3.4 Declaration of Restrictions. The Leased Premises are or will
be subject to a Declaration of Restrictions as referenced in Section 1.9
hereof.
ARTICLE 4. TERM
4.1 Commencement Date.
(a) The Term shall commence on the earlier of: (i) ten
(10) days following the date Lessor notifies Lessee of the Substantial
Completion of its construction obligations described in Exhibit "C" to
this Lease provided a Certificate of Occupancy has been issued; and (ii)
when Lessee occupies the Leased Premises for the purpose of conducting
business. The Term shall continue for the period of months specified in
Section 1.4 of the Lease, plus the portion of a calendar month, if any,
immediately following commencement.
(b) If despite Lessor's diligent efforts Lessor's work
upon the Leased Premises improved in accordance with the provisions of
Exhibit "C" are not substantially completed by a date which is 300 days
following the date of the issuance of the building permit to the Lessor
for construction of the Lessor's work specified in Exhibit "C" (the
"Estimated Completion Date") , provided that said date shall be extended
for period equal to the time construction has been delayed due to
Permissible Delays, then, in such event, for each day of such further
delay caused by Lessor, Lessee shall be credited with an amount equal to a
sum derived by dividing the Minimum Monthly Rent at commencement of the
Term by 30, which credit shall be applicable to Tenant's Minimum Monthly
Rent obligation. However, for each day of delay beyond the Estimated
Completion Date caused by Lessee Delay, Lessee shall pay additional rent
to Lessor computed in the same manner which shall be payable with the
first regular installment of Minimum Monthly Rent. However, any such
delay, whether caused by Lessee or Lessor, shall be subject to a 5 day
period during which the culpable party shall not be responsible for the
remedies herein above described. In no event, however, shall extensions
resulting from Permissible Delay exceed 180 days. Each party shall notify
the other of any delays caused by the other party within a reasonable time
following the first party's knowledge of the delay. However, failure to
notify shall not constitute a waiver of the rights of either party
hereunder arising as a result of the delay.
(c) If the Term has not commenced within three (3) years
from date of execution hereof, it shall be automatically terminated.
4.2 Acknowledgment of Commencement. After delivery of the Leased
Premises to Lessee, Lessee shall execute a written acknowledgement of the
date of commencement and the agreed upon rent in the form attached hereto
as Exhibit "D" and by this reference it shall be incorporated herein.
4. 3 Option to Extend the Term-Negotiated Rental-Three
Arbitrators
(a) Notice of Exercise. Lessee hall have the right to extend
the initial term hereof for two (2) additional and consecutive, periods of
five (5) years each upon the same terms and conditions as stated herein,
except for Minimum Monthly Rent and further, except that the number of
additional periods shall be reduced by one for each extension that is
exercised. Each such extension is herein referred to as "Extended Term."
Failure to timely exercise any extension option hereunder shall cause all
subsequent options to immediately become null and void. Lessee must
exercise its right, if at all, by written notification (the "Notice of
Exercise") to Lessor not less than three hundred sixty (360) days prior
to the expiration of the initial term hereof, or the then current Extended
Term, if any, provided that Lessee has not caused a Notice of Default
under the provisions of Article 26 to be sent to it by Lessor at least
five (5) times during the initial term (in the case of exercise of the
First Option to Extend) or three (3) times during the first Extended Term
(in the case of exercising the Second Option to Extend.)
(b) Options Are Personal. The options to extend granted herein
are personal to the original Lessee executing this Lease, and
notwithstanding anything to the contrary contained in the Lease, the
rights contained in this Section 4.3 are not assignable or transferable by
such original Lessee except in connection with an assignment made pursuant
to Section 9.3(c). However, a sublease shall not invalidate Lessee's
rights hereunder. Lessor grants the rights contained herein to Lessee in
consideration of Lessee's strict compliance with the provisions hereof,
including, without limitation, the manner of exercise of this option.
(c) Fair Market Rental. If Lessee exercises the right to
extend the Term, then the Minimum Monthly Rent shall be adjusted to be
equal to ninety per cent (90%) of the Fair Market Rental for the premises
as of the date of the commencement of each such Extended Term, pursuant to
the procedures hereinafter set forth. The term "Fair Market Rental"
means the Minimum Monthly Rent chargeable for the Leased Premises based
upon the following factors applicable to the Leased Premises or any
comparable premises:
(i) Rental rates being charged for comparable premises
in the same geographical location.
(ii) The relative locations of the comparable premises
(iii) Improvements, or allowances provided for
improvements, or to be provided, or the lack thereof.
(iv) Rental adjustments, if any, or rental concessions.
(v) Services and utilities provided or to be provided.
(vi) Use limitations or restrictions.
(vii) The age of the building.
(viii) That no brokerage commissions are payable.
(ix) Any other relevant Lease terms or conditions.
In no event, however, shall ninety per cent (90%) of the Fair Market
Rental be less than the Minimum Monthly Rent in effect immediately prior
to the commencement date of the Extended Term in question. The Fair Market
Rental evaluation may include provision for further rent adjustments
during the Extended Term in question if such adjustments are commonly
required in the market place for similar types of leases.
(d) Determination of Fair Market Rental. Upon exercise of the
right to extend the term, and included within the Notice of Exercise,
Lessee shall notify Lessor of its opinion of Fair Market Rental as above
defined for the Extended Term. However, in no event shall Lessor be
obligated to join any such discussions, nor shall any appraisal or
Arbitration described herein commence prior to three hundred sixty-five
(365) days before the expiration of the then current Term. If the parties
are unable to agree upon a Minimum Monthly Rent for the Extended Term
within thirty (30) days thereafter, then, within ten (10) days after the
expiration of such period, either party at its own cost and expense and by
giving notice to the other party in writing, may appoint a real estate
appraiser who is a Member of the Appraisal Institute, or Society of Real
Estate Appraisers, or an equivalent professional organization, with at
least five (5) years' experience appraising properties devoted to the same
general type of use (e.g. office) as the Leased Premises in the county in
which the Leased Premises are located, ("Qualified Appraiser"), to set
the Minimum Monthly Rent for the Extended Term. The terms "Minimum
Monthly Rent" and ninety per cent (90%) of the "Fair Market Rental" as
used in this article shall be interchangeable. If a party does not appoint
a Qualified Appraiser within ten (10) days after the first party has given
notice of the name of its Qualified Appraiser, the single Qualified
Appraiser appointed shall be the sole appraiser and shall set the Fair
Market Rental for the Extended Term. If two Qualified Appraisers are
appointed by the parties, they shall meet promptly, on five (5) days'
notice to the parties, to take such evidence and other information as the
parties may deem reasonable to submit to the Qualified Appraisers. Within
thirty (30) days after the selection of the last of the two Qualified
Appraisers to be appointed by the parties, the Qualified Appraisers shall
render their opinions of the Fair Market Rental of the premises as above
qualified. If the two valuations are within ten per cent (10%) of each
other, they shall be averaged and ninety per cent (90%) of the average of
the two shall be the Minimum Monthly Rent for the Extended Term. If only
one appraisal is timely submitted, ninety per cent (90%) of that appraisal
shall constitute the Minimum Monthly Rent for the Extended Term. If the
two valuations are separated by more than ten per cent (10%), then the two
appraisers shall, within ten (10) days following the last date for
submission of the two appraisals of Fair Market Rental, appoint a third
Qualified Appraiser. If they are unable to agree upon a third Qualified
Appraiser within such ten (10) day period, either of the parties to this
Lease, by giving five (5) days' notice to the other party, may demand
Arbitration as specified in Subsection (f) of this Section. If neither
party applies for Arbitration within the ten (10) day period herein
specified, the two appraisals of value shall be averaged as stated above.
(c) Arbitration. In the event the parties are unable to
mutually agree upon a Minimum Monthly Rent for the Extended Term, and in
such event proceed to the Appraisal or Arbitration procedure herein
specified, both parties shall be bound to submit the matter for such
determination. The procedure specified in this Article for appointment of
Qualified Appraisers, delivery of appraisals, appointment of an
Arbitrator, and determination of Fair Market Rental Value thereby is
herein collectively referred to as "Arbitration." The Arbitration shall
be conducted and determined in the County where the Leased Premises are
situated. If the Arbitration is not concluded before the commencement of
the Extended Term, Lessee shall pay Minimum Monthly Rent to Lessor in an
amount equal to ninety per cent (90%) of the Fair Market Rental set forth
in the appraisal by Lessor's Qualified Appraiser until the Fair Market
Rental is determined in accordance with the Arbitration provisions hereof.
If the Fair Market Rental as determined by Arbitration differs from that
stated by Lessor's Qualified Appraiser, then any adjustment required to
correct the amount previously paid by Lessee shall be made by payment by
the appropriate party within thirty (30) days after the determination of
Fair Market Rental by Arbitration has been concluded, as provided herein.
Lessee shall be obligated to make payment during the entire Extended Term
of the Minimum Monthly Rent determined in accordance with the Arbitration
procedures hereunder.
(f) Demand for Arbitration. A party demanding Arbitration
hereunder shall make its demand in writing ("Demand Notice") within ten
(10) days after the delivery of the last of the two appraisals presented
by the Qualified Appraisers as specified in Subsection (d) above. A copy
of the Demand Notice shall be sent to the Presiding Judge of the Superior
Court of Alameda County. The Presiding Judge, is hereinafter referred to
as the "Appointer". The Appointer, acting in his personal, private
capacity, shall appoint within ten (10) days thereafter a Qualified
Appraiser. The Arbitrator shall be qualified to serve as an expert
witness, over objection, and to give opinion testimony addressed to the
issue in a court of competent jurisdiction.
(g) Decision of the Arbitrator. As used herein, the term
Arbitrator refers to a third Qualified Appraiser, selected by any of the
methods heretofore set forth. The Arbitrator shall, within ninety (90)
days after his appointment, state in writing his determination as to
whether the Fair Market Rental stated by Lessor's Qualified Appraiser or
the Fair Market Rental stated by Lessee's Qualified Appraiser, most
closely approximates his own. The Arbitrator shall have the right to
consult experts and competent authorities with factual information or
evidence pertaining to a determination of Fair Market Rental, but any such
consultation shall be made in the presence of both parties with full right
to cross examine. The Arbitrator may not state his own opinion of Fair
Market Rental, but is strictly limited to the selection of one of the two
appraisals submitted by the other two Qualified Appraisers. The Arbitrator
shall have no right to propose a middle ground or any modification of
either of the proposed valuation, and shall have no power to modify this
Lease. The valuation so chosen as most closely approximating that of the
Arbitrator shall constitute his decision. The Arbitrator shall render a
decision and award in writing, with counterpart copies to each party.
(h) Successor Arbitrator; Fees and Expenses. In the event of
failure, refusal, or inability of the Arbitrator to act in a timely
manner, a successor shall be appointed in the same manner as such
Arbitrator was first chosen hereunder. The fees and expenses of the
Arbitrator and for the administrative hearing fee, if any, shall be
divided equally between the parties. Each party shall bear its own
attorneys' fees and other expenses including fees of witnesses in
presenting evidence, and the fees and cost of its own Qualified Appraiser.
(i) Recission. Within ten (10) days following the date that
the Minimum Monthly Rent for the ensuing option period is established by
the procedures herein, Lessee may, by written notice to the Lessor, elect
to rescind its exercise of the option in which case the Lease term shall
expire on the expiration of the then current Term.
ARTICLE 5. PRE-TERM POSSESSION
5.1 Conditions of Entry. Lessor may notify Lessee when the Leased
Premises are ready for Lessee's fixturing or Lessee's work, which may be
prior to Substantial Completion by Lessor. Lessee may thereupon enter the
Leased Premises for such purposes at its own risk, to make such
improvements as Lessee shall have the right to make, to install fixtures,
supplies, furniture and other property. Lessee agrees that it shall not in
any way interfere with the progress of Lessor's work by such entry. Should
such entry prove an impediment to the progress of Lessor's work, in
Lessor's judgment, Lessor may demand that Lessee forthwith vacate the
Leased Premises until such time as Lessor's work is complete, and Lessee
shall immediately comply with this demand.
During the course of any pre-term possession, whether such pre-term
period arises because of an obligation of construction on the part of
Lessor, or otherwise, all terms and conditions of this Lease, except
for rent and commencement, shall apply, particularly with reference to
indemnity by Lessee of Lessor under Article 14 herein for all
occurrences within or about the Leased Premises.
ARTICLE 6 MINIMUM RENT
6.1 Payment. Lessee shall pay to Lessor at the address specified
in Section 1.1, or at such other place as Lessor may otherwise designate,
as "Minimum Monthly Rent" for the Leased Premises the amount specified
in Section 1.5 hereof, payable in advance on the first day of each month
during the Term. If the Term commences on other than the first day of a
calendar month, the rent for the first partial month shall be prorated
accordingly.
All payments of Minimum Monthly Rent (including sums defined as rent in
Section 27.2) shall be in lawful money of the United States, and payable
without deduction, offset, counterclaim, prior notice or demand.
6.2 Calculation of Minimum Monthly Rent.
(a) The Minimum Monthly Rent shall be calculated as
follows:
(i) Total Project Costs, as that term is defined in
Exhibit "C" hereto, exclusive of land costs, shall form the basis of the
calculation of Minimum Monthly Rent.
(ii) Total Project Costs shall be multiplied by ten per
cent (10%) and the product thereof divided by .97.
(iii) The quotient derived in (ii) above shall be
divided by twelve to arrive at the Minimum Monthly Rent at commencement of
the Term.
(b) At least ten (10) days prior to the date when the first
payment of Minimum Monthly Rent is due hereunder, Lessor shall estimate
Total Project Costs, make the calculation of Minimum Monthly Rent on an
estimated basis in writing, and forward the same to Lessee. Lessee shall
pay the Minimum Monthly Rent so estimated until a final determination of
initial Minimum Monthly Rent, as hereinafter described, is established.
(c) Within ninety (90) days following the Commencement Date,
Lessor shall deliver to Lessee an itemized accounting of Total Project
Costs. Within thirty (30) days thereafter Lessee may, at its option, have
Total Project Costs audited by Lessee's independent certified public
accountant. If Lessee's calculation of Total Project Costs and Lessor's
calculation thereof differ, Lessee shall submit its calculation thereof in
writing to Lessor within the thirty (30) day examination period specified
in the preceding sentence. The parties shall negotiate in good faith to
resolve their differences within fifteen (15) days following the date of
Lessee's notice to Lessor of Lessee's determination of Total Project
Costs. If the parties are unable to resolve their differences within this
period, the matter may be submitted by either party to the public
accounting firm of Peat, Marwick & Mitchell who shall make a final
determination within sixty (60) days thereafter. Upon establishment of the
Minimum Monthly Rent, should there be a difference from that estimated by
Lessor as stated in (b) above, the Lessor shall pay, if the determination
so establishes, the due sum for any overpayment received from Lessee
during the period of the determination of Total Project Costs, within ten
(10) days after the final determination thereof in accordance with the
terms of this paragraph. Upon establishment of the Minimum Monthly Rent,
the parties, on request of either party, shall amend this Lease to so
state the established initial Minimum Monthly Rent. If it is established
by the process specified in this Section 6.2(c) that Lessor has overstated
Project Costs by more than $100,000.00, Lessor shall pay the reasonable
cost of Lessee's certified public accountants who perform Lessee's audit.
6.3 Rent Adjustment. The Minimum Monthly Rent as established in
Section 6.2 above shall be effective from the Commencement Date through
the sixtieth (60th) Lease Month, commencing with the first (1st) day of
the sixty first (61st) Lease Month the Minimum Monthly Rent shall be
increased by multiplying the Minimum Monthly Rent established in the
preceding Section 6.2 by 1.1699. At such time, either party may require
that another Lease amendment be executed setting forth the newly
established Minimum Monthly Rent for the balance of the initial term. The
Minimum Monthly Rent for any Extended Term has been provided for in
Section 4.3 hereof.
6.4 Late Payment. If during any twelve (12) month period Lessee
fails on more than one occasion to make any payment of Minimum Monthly
Rent to Lessor within five (5) days following receipt of written notice
from Lessor that such is due, then Lessor may, by giving written notice to
Lessee, require that Lessee pay the Minimum Monthly Rent to Lessor
quarterly in advance. Having been caused to commence quarterly payments
under the provisions of this section, should Lessee thereafter make its
quarterly rental payments on or before the first business day of each
quarter for eight (8) consecutive quarters, thereafter Lessee's rental
payment schedule shall revert to monthly periods.
ARTICLE 7 TAXES
7.1 Definition. In this Article 7 the terms "Real Property Taxes" and
"Taxes" are used interchangeably. "Real Property Taxes" as used in this
Lease shall include all Real Property Taxes on the Building, the Leased
Premises, the land on which the Building is situated, and the various
estates in the Building and the land, including this Lease, as well as all
personal property taxes levied on the property used in the operation of
the Leased Premises, whether or not now customary or within the
contemplation of the parties to this Lease. "Taxes" also shall include
the reasonable cost to Lessor of contesting the amount, validity, or
applicability of any Taxes mentioned in this Section. Further included in
the definition of Taxes herein shall be general and special assessments,
fees of every kind and nature, commercial rental tax, levy, penalty or tax
(other than any tax which may be levied upon or against the general net
income or profits of Lessor or its successors or assigns, inheritance or
estate taxes) imposed by any authority having the direct or indirect power
to tax, as against any legal or equitable interest of Lessor in the Leased
Premises in the real property of which the Leased Premises are a part, as
against Lessor's right to rent or other income therefrom, or as against
Lessor's business of leasing the Leased Premises, any tax, fee, or charge
with respect to the possession, leasing, transfer of interest, operation,
management, maintenance, alteration, repair, use, or occupancy by Lessee,
of the Leased Premises or any portion thereof, the Building, or the
Complex, or any tax imposed in substitution, partially or totally, for any
tax previously included within the definition of Taxes herein, or any
additional tax, the nature of which may or may not have been previously
included within the definition of Taxes.
7. 2 Assessments. With respect to any general or special
assessments which may be levied upon or against the Leased Premises, the
Building, the Complex, or the underlying realty, or which may be evidenced
by improvement or other bonds, and which may be paid in annual or
semi-annual installments, only the current amount of such installment, pro
rated for any partial year, and statutory interest, shall be included
within the computation of Taxes for which Lessee is responsible hereunder.
7.3 Payment. Lessee shall pay to the Lessor at least thirty (30)
days prior to the date when such Taxes would be delinquent but not prior
to ten (10) days following notice from Lessor of the amount due, all Real
Property Taxes as hereinabove defined applicable to the Leased Premises or
arising under section 7.1 above.
7. 4 Estimated Payments. If required by Lessor's lender Lessor may,
at its option, estimate the amount of Taxes next due and collect from
Lessee on a monthly or quarterly basis, at Lessor's option, the amount of
Lessee's estimated tax obligation. On or before March 1 of each year
during the Term, Lessor shall provide Lessee with a reconciliation of
Lessee's account with respect to such estimated tax payments. In event it
is established upon such reconciliation that Lessee has not paid
sufficient amount in estimated tax payments to cover its pro rata share
for the year in question, Lessee shall pay to Lessor the full amount of
any such shortage within ten (10) days of date of billing. If it is
established that Lessee has made an overpayment of its tax obligation upon
such reconciliation, Lessee shall receive, at Lessor's option, either a
credit applicable to the next ensuing estimated tax payments, or a credit
to a tax reserve account to be held by Lessor for application to sums due
in respect of reassessment or escape assessments applicable to the period
in question, but yet to be billed.
7.5 Personal Property Taxes. Lessee shall pay prior to delinquency
all Taxes assessed against and levied upon trade fixtures, furnishings,
equipment and all other personal property of Lessee contained in the
Leased Premises or elsewhere. When possible, Lessee shall cause such trade
fixtures, furnishings, equipment and all other personal property to be
assessed and billed separately from the real property of Lessor. If any of
Lessee's said personal property shall be assessed with Lessor's real
property, Lessee shall pay Lessor Taxes attributable to Lessee within ten
(10) days after receipt of a written statement setting forth the Taxes
applicable to Lessee's property, including an explanation of the
calculation of the sum due from Lessee.
7.6 Net Rent. It is the intention of Lessor and Lessee that the
rental received by Lessor be net of any Taxes of any sort to be paid by
Lessor, subject to the exclusions stated in Section 7.1.
In the event it shall not be lawful for Lessee to reimburse Lessor for any
of the Taxes covered by this Article, the Minimum Monthly Rent payable to
Lessor under the terms of this Lease shall be increased by the amount of
the portion allocable to Lessee so as to net to Lessor the amount which
would have been receivable by Lessor if such tax had not been imposed.
ARTICLE 8. COMMON MAINTENANCE
8. 1 Definition of Common Maintenance Areas. The term "Common
Maintenance Areas" as used herein means all areas and facilities within
the Complex, but outside the boundaries of any lot within the recorded
subdivision which comprises the Complex, including, however, any recorded
lot owned by Lessor or an affiliate of Lessor which is used for the
general benefit of the Complex, and further including, without limitation,
streets (whether public or private), sidewalks, and landscaped areas, all
as generally described on Exhibit "E" attached hereto. Exhibit "E" is
tentative and Lessor reserves the right to make alterations thereto from
time to time, and to exclude areas of other parcels in the Complex, in
Lessor's sole judgment, so long as no such alteration or exclusion shall
unreasonably interfere with the access to the Leased Premises, nor shall
it cause a material interference as a result of the unreasonable activity
of the Lessor, with Lessee's use of the Leased Premises as described in
Section 1.7 hereof.
8.2 Rights and Duties of Lessor. Lessor shall, in a manner it
deems proper in its opinion, maintain the Common Maintenance Areas in a
manner consistent with similar developments in the area, establish and
enforce reasonable rules and regulations concerning such areas, close any
of the Common Maintenance Areas to whatever extent required in the opinion
of Lessor's counsel to prevent a dedication of any of the Common
Maintenance Areas or the accrual of any rights of any person or of the
public to the Common Maintenance Areas, close temporarily any of the
Common Maintenance Areas for maintenance purposes, and make changes to the
Common Maintenance Areas including, without limitation, changes in the
location of driveways, entrances, exits, vehicular parking spaces, parking
area, the designation of areas for the exclusive use of others, the
direction of the flow of traffic or construction of additional buildings
thereupon; provided, however, that Lessor shall use diligent efforts to
minimize interference with Lessee's business, use and enjoyment of the
Common Maintenance Areas and the Leased Premises and Lessor shall not
prevent Lessee's access to the Leased Premises. Lessee hereby acknowledges
that Lessor is under no obligation to provide security for the Maintenance
Areas but may do so at its option.
8.3 Payment by Lessee. Lessee shall pay to Lessor, as additional
rent, its proportionate share of Common Maintenance costs as hereinafter
defined, within ten (10) days of receiving a bill therefore from Lessor,
but no more frequently than monthly. Lessee's proportionate share (or
"Pro Rata %") shall be that fraction of Common Maintenance Costs the
numerator of which is the number of square feet of land area in the Leased
Premises and the denominator of which is the gross square footage of land
area in all lots, whether or not built upon, within the Complex. Lessee's
Initial Pro Rata % of Common Maintenance Costs is stated in Section 1. 8.
Lessor may bill Lessee estimated charges in accordance with Section 8.5.
Notwithstanding the preceding provisions of this Section 8.3, Lessee's
proportionate share as to certain expenses included in Common Maintenance
Costs may be calculated differently to yield a higher percentage share for
Lessee as to certain expenses in the event Lessor permits other owners or
occupants in the Complex to incur such expenses directly rather than have
Lessor incur the expense in common for the complex, in such case Lessee's
proportionate share of the applicable expense shall be calculated as
having as its denominator the gross square footage of land area of all
lots in the Complex less the gross leasable area of tenants who have
incurred such expense directly. In any case in which Lessee, with Lessor's
consent, incurs such expenses directly, Lessee's proportionate share of
Common Maintenance Costs will be calculated specially so that expenses of
the same character which are incurred by Lessor for the benefit of other
occupants in the Complex shall not be charged to Lessee. Nothing herein
shall imply that Lessor will permit Lessee or any other occupant of the
Complex to incur Common Maintenance Costs. Any such permission shall be in
the sole discretion of Lessor, which Lessor may grant or withhold in its
sole good faith business judgment.
8.4 Definition of Common Maintenance Costs.
(a) "Common Maintenance Costs" means all sums (including
"Capital Costs" as hereinafter defined and to the extent stated herein)
expended by Lessor for the maintenance, repair, replacement and operation
of the Common Maintenance Areas, as well as liability insurance premiums,
security services for the Complex, Ardenwood Corporate Commons Owners'
Association expenses, property taxes on property held for the general
benefit of the Complex and a management fee of ten per cent (10%) of
Common Maintenance Area costs. Capital Costs are defined as those
expenditures which do not normally recur more frequently than at five (5)
year intervals in the normal course of operation and maintenance of the
Complex. Notwithstanding anything above which may be to the contrary,
Common Maintenance Costs shall include a portion of all Capital Costs,
representing any costs of capital improvements made by Lessor to the
Complex for the purpose of reducing recurring expenses or utility costs
and from which Lessee can expect a reasonable benefit, or that are
required by governmental law, ordinance, regulation or mandate, not
applicable to the Complex at the time of the original construction. The
portion thereof to be included each year in Common Maintenance Costs shall
be that fraction allocable to the calendar year in question calculated by
amortizing. the cost over the reasonably useful life of such improvement,
as determined by Lessor, with interest on the unamortized balance at ten
per cent (10%) per annum or such higher rate as may have been paid by
Lessor for funds borrowed for the purpose of constructing such
improvements, but in no event to exceed the highest rate permissible by
law.
(b) Exclusions from Common Maintenance Costs. The following
costs and expenses shall be excluded from the definition of Common
Maintenance Costs:
(i) Any costs or expense to the extent to
which Lessor is paid or reimbursed from any person (other than as payment
for Common Maintenance Costs), including, but not limited to, (1) work or
services performed for any tenant (including Lessee) at such tenant's
cost, (2) the cost of any item for which Lessor is or is entitled to be
paid or reimbursed by insurance or otherwise, and (3) increased insurance
or Real Estate Taxes assessed specifically to any tenant of the Complex;
(ii) The cost of correcting defects in the design,
construction, or equipment, or latent defects in any buildings in the
complex or on the Common Maintenance Areas in the complex;
(iii) The cost of installing, operating and maintaining
any athletic or recreation club, provided, however, if Lessor does install
and or operate such a facility, Lessee and Lessee's employees may not have
the use thereof.
(iv) Salaries and bonuses of officers and executives of
Lessor;
(v) The cost of any work or services performed for any
facility other than the Complex;
(vi) Repaving or resurfacing costs of the parking and
driveway areas except to the extent the charges included are based on an
amortization of such costs over the reasonably useful life of the work
done at an interest rate equal to the prime rate chargeable by Bank of
America to its best customers plus 1%, adjusted annually not to exceed the
maximum that may be charged under law and then only if such repaving or
resurfacing is not due to negligent construction of the parking and
driveway;
(vii) Interest on debt or amortization payments on any
mortgage and rental under any ground lease or other underlying lease;
(viii) Any fees, costs and commissions incurred in
procuring or attempting to procure other tenants including brokerage
commissions, finders' fees, attorneys' fees, entertainment costs and
travel expenses;
(ix) Any costs representing an amount paid to a person,
firm, corporation or other entity related to Lessor which is in excess of
the amount which would have been paid in the absence of such relationship;
(x) Any cost of painting or decorating of any interior
parts of the buildings in the Complex other than buildings in the Common
Maintenance Areas:
(xi) Lessor's general overhead:
(xii) The cost of initial cleaning and rubbish removal
from the Complex and the buildings thereon to be performed prior to final
completion of the building;
(xiii) The cost of the initial landscaping of the
complex;
(xiv) Attorneys' fees, accounting fees, and expenditures
incurred in connection with negotiations, disputes and claims of other
tenants or occupants of the Complex or with other third parties except as
specifically otherwise provided in the Lease;
(xv) The cost of any uninsured repairs or replacements
other than the deductible portion of any insured risk:
(xvi) Costs which, under generally accepted accounting
principles, are properly classified as capital expenses, except for
capital costs as defined in Subsection (a) above, and except as
specifically set forth in this Subsection (b);
(xvii) The cost of the initial stock of tools and
equipment for operation, repair and maintenance of the Complex and the
Buildings thereon;
(xviii) The cost of acquiring sculptures, paintings and
other objects of art;
(xviiii) Costs related to correcting items which were
not in compliance with law for any of the buildings, the Complex, or the
Common Maintenance Areas as of the Commencement Date.
8.5 Estimated Payments. Lessor shall have the right, at its
option, to estimate Lessee's pro rata share of Common Maintenance Costs
due in the future from Lessee and to collect from Lessee on a monthly or
quarterly basis, as Lessor may elect, the amount of Lessee's estimated pro
rata share of such costs. Lessor shall provide Lessee with a
reconciliation of Lessee's account at least annually, and if such
reconciliation shall indicate that Lessee's account is insufficient to
satisfy Lessee's pro rata share of Common Maintenance Costs for the period
estimated, Lessee shall immediately pay to Lessor any deficiency. Any
excess in such account indicated by the reconciliation shall be credited
to Lessee's account to reduce the estimated payments for the next ensuing
period.
8.6 Audit Rights. At anytime within ninety (90) days following the
date that Lessor presents Lessee with a reconciliation of Lessee's account
with respect to Common Maintenance Costs for the preceding year, Lessee
shall have the right upon five (5) days prior written notice to Lessor to
cause Lessor's books and records with respect to Common Maintenance Costs
to be audited by an independent certified public accountant of Lessee's
selection (the "Lessee's Accountant"). Should Lessee's Accountant
establish in its judgment that the actual Common Maintenance Costs were
more than five percent (5%) less than those charged to Lessee by Lessor
for the period in question, Lessor shall either: (i) Repay Lessee the
amount of the overpayment plus the reasonable costs for the audit
chargeable by Lessee's Accountant; or (ii) Contest the findings of
Lessee's Accountant by demanding the matter be submitted to arbitration
under the Rules of the American Arbitration Association in San Francisco,
California. In the latter case, both parties shall promptly submit the
matter to arbitration. The decision of the arbitrator elected by the San
Francisco office of the American Arbitration Association shall be
conclusive. The cost of the arbitrator shall be paid by the unsuccessful
party to the arbitration.
ARTICLE 9. ASSIGNMENT AND SUBLETTING
9.1 "Transfer of the Leased Premises" Defined. The terms
"Transfer of the Leased Premises" or "Transfer" as used herein shall
include any assignment of all or any part this Lease (including assignment
by operation of law), subletting of all or any part the Leased Premises or
transfer of possession, or right of possession or contingent right of
possession of all or any portion of the Leased Premises including without
limitation, concession, mortgage, devise, hypothecation, agency, franchise
or management agreement, or to suffer any other person (the agents and
servants of Lessee excepted) to occupy or use the said Leased Premises or
any portion thereof. If Lessee is a corporation which is not deemed a
public corporation, or is an unincorporated association or partnership, or
Lessee consists of more than one party, the transfer, assignment or
hypothecation of any stock or interest in such corporation, association,
partnership or ownership interest, in the aggregate in excess of
twenty-five percent (25%), shall be deemed a Transfer of the Leased
Premises.
9.2 No Transfer Without Consent. Lessee shall not suffer a
Transfer of the Leased Premises or any interest therein, or any part
thereof, or any right or privilege appurtenant thereto without the prior
written consent of Lessor, and a consent to one Transfer of the Leased
Premises shall not be deemed to be a consent to any subsequent Transfer of
the Leased Premises. Any transfer of the Leased Premises without such
consent shall be void, and shall, at the option of Lessor, terminate this
Lease
9.3 When Consent Granted.
(a) The consent of Lessor to a Transfer may not be
unreasonably withheld. Lessor shall respond to Lessee's request for
consent within ten (10) business days following Lessor's receipt of the
information described in Section 9.4 hereof. Should Lessor deny consent it
shall specify its reasons therefor in its written denial. Should Lessor
fail to respond within ten (10) business days to Lessee's request for
consent, Lessor's consent shall be deemed to have been granted.
(b) Should Lessor withhold its consent for any of the
following reasons, which list is not exclusive, such withholding shall be
deemed to be reasonable if exercised in good faith:
(i) Financial strength of the proposed transferee is
adequate in Lessor's reasonable judgment to meet the obligations of this
lease;
(ii) A proposed transferee whose occupation of the
Leased Premises would cause a diminution in the reputation of the Complex
or the other businesses located therein;
(iii) A proposed transferee whose impact on the common
facilities or the other occupants of the Complex would be disadvantageous;
or
(iv) A proposed transferee whose occupancy will require
a variation in the terms of the Lease.
(v) Lessee agrees that its personal business skills or
operation and philosophy were an important inducement to Lessor for
entering into this Lease Agreement and that Lessor may reasonably object
to the transfer of the Leased Premises to another whose proposed use,
while permitted by the use clause of this Lease, would involve a different
quality, manner or type of business skills than that of Lessee.
(c) Notwithstanding any other provision hereof, Lessee shall
have the right, without the prior consent of Lessor, to assign this Lease
in connection with a merger or consolidation of Lessee, or to a subsidiary
of Lessee, or to a company incorporated or to be incorporated by Lessee,
provided that Lessee owns or beneficially controls all or substantially
all of the issued and outstanding shares of capital stock of such company.
In any of such events, Lessee shall be required to provide Lessor written
notice of such event, and to further provide Lessor with the name of the
Assignee. In the event of an assignment of this Lease described in this
Subsection 9.3(c), the provisions of Subsection 9.5(b) shall not be
applicable. All other provisions of this Lease, including the balance of
the provisions of section 9.5 shall apply.
9.4 Procedure for Obtaining Consent.
(a) Lessor need not commence its review of any proposed
Transfer, or respond to any request by Lessee with respect to such, unless
and until it has received from Lessee adequate descriptive information
concerning the business to be conducted by the proposed transferee, the
transferee's financial capacity, and such other information as may
reasonably be required in order to form a prudent judgment as to the
acceptability of the proposed Transfer, including, without limitation, the
following:
(i) If an individual or unincorporated entity for which
there is personal liability: The past two year's Federal Income Tax
returns of the proposed transferee or, in the alternative, the past two
years' audited annual Balance Sheets and Profit and Loss statements,
certified correct by a Certified Public Accountant (the "Audited
Statements");.
(ii) If a Corporate entity: the past two (2) years'
Audited Statements;
(iii) Banking references of the proposed transferee;
(iv) A resume of the business background and experience
of the proposed transferee;
(v) An executed copy of the instrument by which Lessee
proposes to effectuate the Transfer.
(b) Lessee shall reimburse Lessor as additional rent for
Lessor's reasonable costs and attorney's fees, not to exceed $2,500 per
request, incurred in conjunction with the processing and documentation of
any proposed Transfer of the Leased Premises, whether or not consent is
granted.
9.5 Effect of Transfer. If Lessor consents to a Transfer, the
following conditions shall apply:
(a) Each and every. covenant, condition or obligation imposed
upon Lessee by this Lease and each and every right, remedy or benefit
afforded Lessor by this Lease shall not be impaired or diminished as a
result of such Transfer.
(b) (i) On a monthly basis, any sums of money, or other
economic consideration received by Lessee from the Transferee in such
month (whether or not for a period longer than one month), including
higher rent, bonuses, key money, or the like which exceed, in the
aggregate, the total sums which Lessee pays Lessor under this Lease in
such month, or the prorated portion thereof the numerator of which is the
Transfer Space and denominator of which is 44,000 (the "Prorata
Portion") if the Leased Premises transferred is less than the entire
Leased Premises (the "Transfer Profit"), shall be payable as follows:
A. Transfer Profit realized on the first 10,000 square
feet of Rentable Area, in the aggregate for which a Transfer is contracted
(the "Threshold Transfer Space") shall be divided equally between Lessor
and Lessee provided, however, following deduction for the benefit of
Lessee for those subleasing costs incurred by Lessee and described in
Subsection 9.5(b) (ii) below, Lessor is first allocated the sum of $4,730
per month (or the, applicable Prorata Portion thereof) representing a
return on Lessor's investment in the land which is part of the Leased
Premises;
B. However, once Lessee contract Transfer, in the
aggregate, more than the Threshold Transfer Space then all Transfer Profit
(including that realized thereafter from Threshold Transfer Space) shall
be allocated eighty percent (80%) to Lessor and twenty percent (20%) to
Lessee.
(ii) Lessor's share of the Transfer Profit shall be paid
with Lessee's payment of Minimum Monthly Rent each month. Notwithstanding
the provisions above, there shall be no allocation of land profit to
Lessor as described in Subsection (A) above if Landlord's entitlement is
governed by the provisions of Subsection (B). Further, in the case of a
profit split governed by the provisions of Subsection (ii), Lessee shall
be entitled, prior to calculation of Transfer Profit, and as a deduction
therefrom, to a return of brokerage commissions, advertising costs, rent
concessions and tenant improvements provided to the Transferee and paid
for by the Lessee which sum, prior to deduction, shall be calculated as
based upon an amortization of such costs at no interest over the remaining
term of the applicable Transfer. Thus, by example, if Lessee expends the
sum of $10,000 to place a Transferee in possession of a. portion of the
Premises, and the term of the sublease applicable to such Transfer is
three (3) years, then, each month the Lessee shall be entitled to a prior
allocation from Transfer Profit in the amount of $277.77.
(c) No Transfer, whether or not consent of Lessor is
required hereunder, shall relieve Lessee of its primary obligation to pay
the rent and to perform all other obligations to be performed by Lessee
hereunder. The acceptance of rent by Lessor from any person shall not be
deemed to be a waiver by Lessor of any provision of this Lease or to be a
consent to any Transfer of the Leased Premises.
(d) If Lessor consents to a sublease, such sublease
shall not extend beyond the expiration of the Term except as follows:
(i) Lessee may exercise an option to extend the
term, keeping in effect any sublease it may have entered into, provided
that Kelley-Clarke, Inc. is in possession of not less than 22,000 square
feet of Rentable Area; or
(ii) If Kelley-Clarke, Inc.(or an assignee of
Kelley-Clarke, Inc. described in Subsection 9.3(c)), is not in possession
at commencement of any Extended Term of at least 22,000 square feet of
Rentable Area, it may exercise an option to extend provided the sublessee
has been approved by the Lessor herein in accordance with the provisions
of this Article 9 and this Lease is amended in a writing executed by all
parties to restate the rent for the Extended Term to be one hundred
percent (100%) of fair market value instead of ninety-percent (90%) of
fair market value as described in Section 6.2 herein.
(e) No Transfer shall be valid and no transferee shall
take possession of the Leased Premises or any part thereof unless, within
ten (10) days after the execution of the documentary evidence thereof,
Lessee shall deliver to Lessor a duly executed duplicate original of the
Transfer instrument in form reasonably satisfactory to Lessor which
provides that (i) the transferee assumes Lessee's obligations for the
payment of rent and for the full and faithful observance and performance
of the covenants, terms and conditions contained herein, (ii) such
transferee will, at Lessor's election, attorn directly to Lessor in the
event Lessee's Lease is terminated for any reason on the terms set forth
ARTICLE 10. PROPERTY INSURANCE
10.1 Use of Premises. No use shall be made or permitted to be made on the
Leased Premises, nor acts done, which will increase the existing rate of
insurance upon any other building in the complex or cause the cancellation
of any insurance policy covering the Building, or any part thereof, nor
shall Lessee sell, or permit to be kept, used or sold, in or about the
Leased Premises, any article which may be prohibited by the standard form
of all-risk fire insurance policies. Lessee shall, at its sole cost and
expense, comply with any and all requirements pertaining to the Leased
Premises, of any insurance organization or company, necessary for the
maintenance of reasonable property damage and public, liability insurance,
covering the Leased Premises, the Building or the Complex.
10.2 Lessor's Property Insurance. Subject to reimbursement by Lessee
as provided herein, Lessor shall obtain "All Risk" property insurance
(including inflation endorsement and sprinkler leakage endorsement
excluding coverage of any of Lessee's personal property on or in the
building) for full replacement value of the Building owned by Lessor
exclusive of foundations and footings. Such insurance shall also include
coverage for rental loss on an All Risk basis for a period of not less
than six (6) months commencing from the date of the loss. Further, such
insurance may, if required by Lessor's lender, or if commercially
available, include earthquake and flood peril coverage.
10.3 Pro rata Share of Premiums.
(a) Lessee shall pay to Lessor, during the Term, as additional
rent, its pro rata share (as reasonably determined- by Lessor's insurance
advisor) of the insurance premiums for the property insurance carried by
Lessor covering the Complex (the "Complex Insurance Premium") Such pro
rata share shall be computed by evaluating all the risk factors for each
property covered by Lessor's insurance policy or policies, including
without limitation, size of premises, type of construction, use, and fire
safety provisions. Lessor's policy may be a blanket coverage policy
including properties beyond those in the Complex. The sum due under this
subsection shall be in addition to that which may be due under the
previous section of this Lease.
(b) Lessee shall pay any such premium portion to Lessor within
ten (10) days after receipt by Lessee of Lessor's billing therefor.
10.4 Estimated Payments. Lessor shall have the right, at its option,
to estimate Lessee's pro rata share of insurance premiums for property
insurance to be due in the future from Lessee, and to collect from Lessee
on a monthly or quarterly basis, as Lessor may elect, the amount of
Lessee's prorate share of such cost. Lessor shall provide Lessee with a
reconciliation of Lessee's account at least annually, and if such
reconciliation shall indicate that Lessee's account is insufficient to
satisfy Lessee's pro rata share of insurance premiums for the period
estimated, Lessee shall immediately pay to Lessor any deficiency. Any
excess in such account indicated by the reconciliation shall be credited
to Lessee's account to reduce the estimated payments for the next ensuing
period.
10.5 Personal Property Insurance. Lessee shall maintain in full force and
effect on all of its fixtures and equipment in the Leased Premises a policy
or policies Of fire and casualty insurance in "all risk" form to the extent
of at least ninety percent (90%) of their replacement cost, or that
percentage of the replacement cost required to negate the effect of a
co-insurance provision, whichever is greater. No such policy shall have a
deductible in a greater amount than FIVE HUNDRED DOLLARS ($500.00). Lessee
shall also insure in the same manner the physical value of all its leasehold
improvements in the Leased Premises. During the Term, the proceeds from any
such policy or policies of insurance shall be used for the repair or
replacement of the fixtures, equipment, and leasehold improvements so
insured. Lessor shall have no interest in said insurance, and will sign all
documents necessary or proper in connection with the settlement of any claim
or loss by Lessee. Lessee shall also maintain insurance for all plate glass
upon the Leased Premises. Lessee may self insure the plate glass.
ARTICLE 11, LIABILITY INSURANCE
11.1 Lessee's Insurance. Lessee shall, at Lessee Is expense, obtain
and keep in force during the Term, a comprehensive general liability
insurance policy insuring Lessor and Lessee against the risks of personal
injury and property damage arising out of the ownership, use, occupancy or
maintenance of the Leased Premises and all areas appurtenant thereto. Such
insurance shall be a combined single limit policy in an amount not less
than ONE MILLION DOLLARS ($1,000,000.00) per occurrence and an umbrella
policy of THREE MILLION DOLLARS ($3, 000,000. 00) combined single 1imit
per occurrence. The policy shall contain cross liability endorsements and
shall insure performance by Lessee of the indemnity provisions of this
Lease. In addition, such policy shall cover contractual liability, and
products liability. The limits of said insurance shall not, however, limit
any liability of Lessee hereunder. Said insurance shall have a Lessor's
protective liability endorsement attached thereto. Not more frequently
than every three (3) years, if, in the reasonable opinion of Lessor, the
amount of liability insurance required hereunder is not adequate, Lessee
shall promptly increase said insurance coverage as required by Lessor.
ARTICLE 12, INSURANCE POLICY REQUIRMENTS
12.1 General Requirements. All insurance policies required to be
carried by Lessee hereunder shall conform to the following requirements:
(a) The insurer in each case shall carry a designation in
"Best's Insurance Reports"' as issued from time to time throughout the
Term as follows: Policy holders, rating of A; financial rating of not less
than X;
(b) The insurer shall be qualified to do business in the state
in which the Leased Premises are located;
(c) The policy shall be in a form reasonably acceptable to
Lessor;
(d) Each policy (except Lessee ' s Personal Property Insurance)
shall name Lessor as an additional insured and, at Lessor's request, shall
carry a lender's loss payee endorsement in favor of Lessor's lender and
such other endorsement(s) as Lessor may from time to time require;
(e) An executed copy of each insurance policy or a certificate
thereof, shall be delivered to Lessor at commencement of the Term and
shall remain in effect throughout the Term, including copies of any
renewals or certificates thereof, at least thirty (30) days prior to the
expiration of such policies:
(f) These policies shall require that Lessor be in writing by
the insurer at least thirty (30) days prior to any cancellation or
expiration of such policy, or any reduction in the amounts of insurance
carried;
(g) Each policy shall be primary, not contributing with, and
not in excess of, coverage which Lessor may carry;
(h) All liability insurance required to be carried by Lessee
hereunder shall state that Lessor is entitled to recovery for the
negligence of Lessee even though Lessor is named as an additional insured;
shall provide for severability of interest; shall provide that an act or
omission of one of the insureds or additional insureds which would void or
otherwise reduce coverage shall not void or reduce coverages as to the
other insured or additional insured; and shall afford coverage after the
expiration of the Term (by separate policy or extension if necessary) for
all claims based -on acts, -omissions, injury or damage which occurred or
arose (or the onset of which occurred or arose) in whole or in part during
the Term.
ARTICLE 13. LESSEE INSURANCE DEFAULT
13.1 Rights of Lessor. In the event that Lessee fails to obtain any
insurance required of it under the terms of this Lease, Lessor may, at its
option, but is not obligated to, obtain such insurance on behalf of Lessee
and bill Lessee, as additional rent, for the cost thereof. Payment shall
be due within ten (10) days of receipt of the billing therefor by Lessee.
ARTICLE 14. IMDEMIFICATION, WAIVER OF CLAIMS AND SUBROGATION
14.1 Waiver of Subrogation. Lessor and Lessee release each other, and
their respective authorized representatives, from any claims for damage to
any person or to the Leased Premises and the Building and other
improvements in which the Leased Premises are located, and to the
fixtures, personal property, Lessee's improvements and alterations of
either Lessor or Lessee, in or on the Leased Premises and the Building and
other improvements in which the Leased Premises are located, including
loss of income, that are caused by or result from risks insured or
required under the terms of this Lease to be insured against under any
property insurance policies carried or to be carried by either of the
parties.
14.2 Form of Policy Each party shall cause each such insurance
policy obtained by it to provide that the insurance company waives all
rights of recovery by way of subrogation against either party in
connection with any damage covered by such policy. Neither party shall be
liable to the other for any damage caused by fire or any other risks
insured against under any property insurance policy carried under the
terms of this Lease. If any such insurance policy cannot be obtained with
a waiver of subrogation without payment of an additional premium charge
above that charged by the insurance companies issuing such policies
without waiver of subrogation, the party receiving the benefit shall elect
to either forfeit the benefit or shall pay such additional premium to the
insurance carrier requiring such additional premium.
14.3 Indemnity.
(a) Lessee, as a material part of the consideration to be
rendered to Lessor, shall indemnify, defend, protect and hold harmless
Lessor against all actions, claims, demands, damages, liabilities, losses,
penalties, or expenses of any kind which may be brought or imposed upon
Lessor or which Lessor may pay or incur by reason of injury to person or
property, from whatever cause, all or in any way connected with the
condition or use of the Leased
Premises, or the Improvements or personal property there in or thereon,
including without limitation any liability or injury to the person or
property of Lessee, its agents, officers, employees or invitees, but
excluding any demands, damages, liabilities, losses, penalties or expenses
of any kind arising out of, or in connection with, the sole negligence or
willful act of the Lessor, its agents, officers, employees or invitees.
Lessee agrees to indemnify, defend and protect Lessor and hold it harmless
from any and all liability, loss, cost or obligation on account of, or
arising out of, any such injury or loss however occurring, including
breach of the provisions of this Lease and the negligence of the parties
hereto.
(b) Lessor as a material part of the consideration to be
rendered to Lessee, shall indemnify, defend, protect and hold Lessee
harmless against all actions, claims, demands, damages liabilities,
losses, penalties, or expenses of any kind, including attorney's fees and
costs related thereto, which may be brought or imposed upon Lessee or
which Lessee may pay or incur by reason of injury to person or property
caused by the negligence or willful act of Lessor, or Lessor's breach of
the Restrictions, or, only to the extent of liability in excess of the
policy limits of the insurance policies required to be carried by Lessee
hereunder, Lessor's breach of this Lease.
14.4 Defense of Claims. In the event any action, suit or proceeding
is brought against Lessor by reason of any such occurrence, Lessee, upon
Lessor's request will at Lessee's expense resist and defend such action,
suit or proceeding, or cause the same to be resisted and defended by
counsel designated either by Lessee or by the insurer whose policy covers
the occurrence and in either case approved by Lessor. The obligations of
Lessee under this Section arising by reason of any occurrence taking place
during the Lease term shall survive any termination of this Lease.
14.5 Waiver, of Claims. Lessee, as a material part of the
consideration to be rendered to Lessor, hereby waives all claims against
Lessor for damages to goods, wares, merchandise and loss of business in,
upon or about the Leased Premises from any cause arising at any time,
including breach of the provisions of this Lease and the negligence of the
parties hereto.
14.6 References. Wherever in this Article the term Lessor or Lessee
is used and such party is to receive the benefit of a provision contained
in this Article, such term shall refer not only to that party but also to
its officers, directors, employees, partners and agents.
ARTICLE 15. DESTRUCTION
15.1 Rights of Termination. In the event the Leased Premises suffers (a) a
Major Uninsured Casualty, or (b) a casualty which cannot be repaired
within two hundred ten (10) days from the date of destruction under the
laws and regulations of state-federal, county or municipal authorities, or
other authorities with jurisdiction (hereinafter collectively a "Major
Casualty"), Lessor may terminate this Lease as at the date of the damage
upon written notice to Lessee following the casualty. However, if Lessor
elects to terminate this Lease as a result of a Major Uninsured Casualty,
within fifteen (15) days following the date Lessee receives notice of
Lessor's election to terminate, Lessee may cause this Lease to continue in
full force and effect by written notice to Lessor stating that Lessee will
pay the full cost of the repair of such casualty provided that within ten
(10) days following receipt of a written estimate of Lessor's building
contractor retained for the purpose of reconstruction of the Major
Uninsured Casualty, Lessee deposits with Lessor the full amount of such
estimate subject to additional payments for other charges as are incurred
in the course of Lessor's good faith reconstruction. In the event of a
Major Casualty, Lessor shall deliver to Lessee at the time that it elects
to terminate under the provisions hereof, or if Lessor does not elect to
terminate, then within sixty (60) days of the date of the casualty, a
statement of Lessor's best good faith judgment of the cost of the
reconstruction, and the time estimated to elapse from the date of the
casualty through completion of the reconstruction (the "Reconstruction
Period"). If the Reconstruction Period is estimated to take longer than
two hundred ten (210) days, then, Lessee may elect by written notice to
the Lessor within thirty (30) days following the date of Lessee's receipt
of the estimates described in the preceding sentence, to terminate this
Lease.
15.2 Repairs. In the event of a casualty other than a Major Casualty,
or, in the alternative, in the event either party elects to terminate this
Lease under the terms of Section 15.1 above, then this Lease shall
continue in full force and effect and Lessor shall forthwith undertake to
make such repairs to reconstitute the Leased Premises to as near the
condition as existed prior to the casualty as practicable. Such partial
destruction shall in no way annul or void this -Lease except that Lessee
shall be entitled to a proportionate reduction of Minimum Monthly Rent
following the casualty and until the time th6 Leased Premises are
restored. Such reduction shall be an amount, which reflects the degree of
interference with Lessee's business. So long as Lessee conducts its
business in the Leased Premises there shall be no abatement until the
parties agree on the amount thereof. If the parties cannot agree within
forty five (45) days of the casualty, the matter shall be submitted to
Arbitration under the rules of the American Arbitration Association. Upon
the resolution of the dispute, the settlement shall be retroactive and
Lessor shall within ten (10) days thereafter refund to Lessee any sums due
in respect of the reduced rental from the date of the casualty. Lessor's
obligations to restore shall in no way include any construction originally
performed by Lessee or subsequently undertaken by Lessee, but shall
include solely that property constructed by Lessor prior to commencement
of the Term.
15.3 Repair Costs. The cost of any repairs to be made by Lessor,
pursuant to Section 15.2 of this Lease, shall be paid by Lessor utilizing
available insurance proceeds. Lessee shall reimburse Lessor upon
completion of the repairs for any deductible for which no insurance
proceeds will be obtained under Lessor's insurance policy, or if other
premises are also repaired, a pro rata share based on total costs of
repair equitably apportioned to the Leased Premises. Lessee shall,
however, not be responsible to pay any deductible or its share of any
deductible to the extent that Lessee ' s payment would be in excess of
$10, 000 if Lessee `s consent has not been received by Lessor, unless such
denial of consent by Lessee s unreasonable.
15.4 Waiver. Lessee hereby waives all statutory or common law rights
of termination in respect to any partial destruction or casualty which
Lessor is obligated to repair or may elect to repair under the terms of
this Article.
15.5 End of Term Casualty.
(a) In the event of a casualty occurring during the last twelve
(12) full calendar months of the original Term hereof or of any Extended
Term the cost for repair of which exceeds $50,000 in Lessor's best good
faith judgment, either Lessor or Lessee shall have the right to terminate
this Lease by written notice to the other delivered, in Lessor's case
within thirty (30) days of the date of the casualty and, in the Lessee's
case within thirty (30) days of the date of receipt from Lessor of
Lessor's best good faith estimate of the cost of repair.
(b) In the event of a casualty occurring during the period
commencing with the first day of the twenty-fourth (24th) month prior to
the expiration of the then current Term, and expiring on the last day of
the thirteenth (13th) month prior to the expiration of the then current
Term, the cost for repair of which exceeds two hundred thousand dollars
($200,000) in Lessor's best good faith judgment, either party shall have
the right to terminate this Lease provided it gives the other party one
hundred twenty (120) days written notice thereof, which notice shall be
delivered not later than thirty (30) days following the date that Lessor
delivers to Lessee Lessor's best good faith estimate of the cost of
repair.
(c) Notwithstanding the foregoing, if within thirty (30) days
of the date of the casualty described in this Section 15.5, Lessee has the
right under the terms of this Lease to extend the Term, and does exercise
its right to do so within thirty (30) days of the date of the casualty,
the election by Lessor to terminate under the provisions of this Section
15.5 shall be void and the repair of the Leased Premises or termination of
the Lease shall be subject to the other provision of this Article 15.
ARTICLE 16, SECURITY DEPOST
16.1 Payment on Lease Execution. Lessee shall pay Lessor upon
execution hereof the sum specified in Section 1.6.. This sum is designated
as a Security Deposit and shall remain the sole and separate property of
Lessor until actually repaid to Lessee (or at Lessor's option the last
assignee, if any, of Lessee's interest hereunder), said sum not being
earned by Lessee until all conditions precedent for its payment to Lessee
have been fulfilled. As this sum both in equity and at law is Lessor's
separate property, Lessor shall not be required to keep said deposit
separate from his general accounts. If Lessee fails to pay rent or other
charges when due hereunder, or otherwise defaults with respect to any
provision of this Lease, including and not limited to Lessee's obligation
to restore or clean the Leased Premises following vacation thereof,
Lessee, at Lessor's election, shall be deemed not to have earned the right
to repayment of the Security Deposit, or those portions thereof used or
applied by Lessor for the payment of any rent or other charges in default,
or for the payment of any other sum to which Lessor may become obligated
by reason of Lessee's default, or to compensate Lessor for any loss or
damage which Lessor may suffer thereby. Lessor may retain such portion of
the Security Deposit, as it reasonably deems necessary to restore or clean
the Leased Premises following vacation by Lessee. The Security Deposit is
not to-be characterized as rent until and unless so applied in respect of
a default by Lessee. Within sixty (60) days following the expiration of
the Term, provided Lessee is not in default at expiration of the Term
under this Lease, Lessor shall repay to Lessee that portion of the
Security Deposit not applied as provided herein (the "Unused Deposit"),
with interest on the Unused Deposit at 7% per annum for the entire period
of the Term during which such Unused Deposit had not been applied by the
Lessor.
16.2 Restoration of Deposit. If Lessor elects to use or apply all or
any portion of the Security Deposit as provided in Section 16.1, Lessee
shall within ten (10) days after written demand therefor pay to Lessor in
cash, an amount equal to that portion of the Security Deposit used or
applied by Lessor, and Lessee's failure to so do shall be a material
breach of this Lease. The ten (10) day notice specified in the preceding
sentence shall insofar as not prohibited by law, constitute full
satisfaction notice of default provisions required by law or ordinance.
16.3 Early Earnback. If Lessee has not been in default under the
provisions of this Lease at any time during the first thirty six (36) full
months of the term hereof and, further, Lessee has maintained a net worth
computed in accordance with generally accepted accounting principles of
not less than four million ($4,000,000) dollars during such period, then,
in such event, Lessee shall have earned the right to have Lessor repay to
Lessee within ten (10) days following the date upon which Lessee provides
Lessor with satisfactory evidence that it has met the conditions set forth
in this Subsection 16.3, the full amount of the Security Deposit plus
interest thereon at seven percent (7%) per annum, compounded, from
commencement of the term through the* date of repayment. Lessee represents
to Lessor that it has a- net worth at commencement of the term, calculated
in accordance with generally accepted accounting principles, of not less
than four million dollars (4,000,000). Lessee shall provide on request of
Lessor, not more frequently than annually, during the Term, copies of its
most recent financial statements certified to be true and correct by the
Chief Financial officer of the company, to such officer's best knowledge
and belief. If at any time the net worth of Lessee declines below four
million dollars ($4,000,000), then it shall so notify Lessor, and within
ten (10) days following request therefor from Lessor, Lessee shall
reinstate the Security Deposit by cash payment to Lessor in the full
amount thereof, subject to its right to once again earn back the Security
Deposit as provided in this Section 16.3.
ARTICLE 17, USE
17.1 Permitted Use. The Leased Premises may be used and occupied only
for the purposes specified in Section 1.7 hereof, and for no other purpose
or purposes. Lessee shall promptly comply with all laws, ordinances,
orders and regulations affecting the Leased Premises, their cleanliness,
safety, occupation and use. Lessor represents that the Lessee's use as
specified in Section 1.7 is permissible by law in the Leased Premises at
commencement of the Term. This representation pertains only to compliance
as at the Commencement Date and does not apply to use or law violations or
activities occurring thereafter.
ARTICLE 18. COMPLIANCE WITH LAWS AND REGULATIONS
18.1 Lessee's Obligations. Lessee shall, at its sole cost and
expense, comply with all of the requirements of all municipal, state and
federal authorities now in force, or which may hereafter be in force,
pertaining to the Leased Premises, and shall faithfully observe in the use
of the Leased Premises all municipal ordinances and state and federal
statutes now in force or which may hereafter be in force. The judgment of
any court of competent jurisdiction, or the admission of Lessee in any
action or proceeding against Lessee, whether Lessor be a party thereto or
not, that any such ordinance or statute pertaining to the Leased Premises
has been violated, shall be conclusive of that fact as between Lessor and
Lessee.
18.2 Condition of Leased Premises. Lessee shall be deemed to have
accepted the Leased Premises on the Commencement Date subject to all
applicable zoning, municipal, county and state laws, ordinances, rules,
regulations, orders, restrictions of record, and requirements in -effect
during the Term or any part of the Term hereof regulating the Leased
Premises, but, however, subject to Lessee's right to inspect the Premises
for a period of thirty (30) days following commencement and to provide to
Lessor within that period a list of all items improperly or inadequately
completed, or which are defective (the "Punch List") Lessor shall
diligently undertake to correct the Punch List items.
18.3 Hazardous Materials.
(a) Hazardous Materials Defined. As used herein, the term
"Hazardous Materials" shall mean (i) any hazardous or toxic wastes,
materials or substances, and any other pollutants or contaminants, which
are or may become regulated by any applicable local, state or federal
laws, including but not limited to, 33 U.S.C. Section 1251 et seg.,42
U.S.C. 6901 et seg., 42 U.S.C. Section 7401 et seg., 42 U.S.C. 9601 et
seg., and California Health and Safety Code Sections 25100 et seg., and
25300 et seg., California Water Code, Section 13020 et seg., or any
successor(s) thereto (collectively "Environmental Laws"); (ii) petroleum:
(iii) asbestos; (iv) polychlorinated biphenyls; and (v) radioactive
materials.
(b) Use. etc. of Hazardous Materials. Lessee agrees that during
the Term of this Lease, there shall be no use, presence, disposal,
storage, generation, (collectively "Hazardous
Use"), or intentional Release, as defined in 42 U.S .C. Section 9601 (22),
or any successor(s) thereto, or threatened Release of Hazardous Materials
on, from or under the Leased Premises except to the extent that, and. in
accordance with such conditions as, Lessor may have previously approved in
writing. It is further agreed that Lessee shall be entitled to use and
store only those
Hazardous Materials which are necessary for Lessee's business, provided
that such usage and storage is in full compliance with Environmental Laws,
and all judicial and administrative decisions pertaining thereto. Lessee
shall not be entitled to install any tanks under, on or about the Leased
Premises for the storage of Hazardous Materials without the express
written consent of Lessor, which may be given or withheld in Lessor's sole
arbitrary judgment.
(c) Hazardous Materials _Report. At any time during the Term,
upon five (5) days prior written notice to Lessee, Lessor may arrange for
the preparation, including the tests necessary therefor, of a written
report by a professional consultant with respect to Hazardous Materials
(the "Report"). Should the Report indicate the existence of Hazardous
Materials in excess of the levels specified in that report described in
Exhibit "J" attached hereto (the "Hazardous Materials Report") which
indicates the level of Hazardous Materials, if any, in existence on the
Leased Premises at date hereof and further, the presence of such Hazardous
materials has been caused by the Hazardous Use by Lessee, then, in such
case, the cost of the Report shall be borne by the Lessee and Lessee shall
pay the full cost thereof within ten (10) days following the date it
receives a written invoice therefor. If the Report does not so indicate,
Lessor shall bear the cost of the Report.
(d) Release of Hazardous materials: Notification and Clean-up.
If at any time during the Term Lessee or Lessor knows or believes that any
Release of any Hazardous Materials -has come or will come to be located
upon, about, or beneath the Leased Premises, then Lessee or Lessor, as the
case may be, shall, as soon as reasonably possible, either prior to the
Release or following the discovery thereof, give verbal and. follow-up
written notice of that condition to the other party. Lessee covenants to
investigate, clean up and otherwise remediate any Release of Hazardous
Materials caused by the acts or omissions of Lessee, or its agents,
employees, representatives, invitees, licensees, subtenants, customers or
contractors at Lessee's cost and expense; such investigation, clean-up and
remediation shall be performed only after Lessee has obtained Lessor's
written consent, which shall not be unreasonably withheld; provided,
however, that Lessee shall be entitled to respond immediately to an
emergency without obtaining Lessor's written consent. All clean-up and
remediation shall be done to the reasonable satisfaction of Lessor.
(e) Indemnity. Lessee shall indemnify, defend and hold Lessor
harmless from and against any and all claims, judgments, damages,
penalties, fines, liabilities, losses, suits, administrative proceedings
and costs (including, but not limited to, attorneys and consultants fees)
arising from or related to Hazardous Use or Release of Hazardous Materials
on or about the Leased Premises caused by the acts or omissions of Lessee,
its agents, employees, representatives, invitees, licensees, subtenants,
customers or contractors.
18. 4 Indemnity . Lessee agrees to indemnify, defend, protect and
hold harmless Lessor, its directors, officers, employees, partners,
and agents' from and against any and all losses, claims,
demands, actions, damages (whether direct or consequential) penalties,
liabilities, costs and expenses, including all attorneys' fees and legal
expenses, arising out of any violation or alleged Violation of any of the
laws or regulations referred to in this Article 18, or breach of any of
the provisions of this Article. This indemnification shall survive
termination of this Lease.
18.5 Lessor's Indemnity. Lessor shall indemnify, defend and hold
Lessee harmless from and against any and all claims, judgments, damages,
penalties, fines, liabilities, losses, suits, administrative proceedings
and costs. (including, but not limited. to, attorneys' and consultants'
fees) arising from or related to Hazardous Use or release of Hazardous
Materials on or about the Leased Premises caused by the acts or omissions
of Lessor, its agents, employees, representatives, or arising out of any
violation or alleged violation of any of the laws or regulations referred
to in Article 18, or breach of any of -the provisions of this Article 18,
by Lessor. This indemnification shall survive termination of this Lease.
ARTICLE 12. UTILITIES
19.1 Payment by Lessee. Lessee, from the time it first enters the
Leased Premises for the purpose of setting fixtures, or from the
commencement of this Lease, whichever date shall first occur, and
throughout the term of this Lease, shall pay all charges including
connection fees for water, gas, heat, sewer, power, telephone services and
any other utility supplied to or consumed in or on the Leased Premises.
Lessee shall not allow refuse, garbage or trash to accumulate outside of
the Leased Premises except on the day of scheduled scavenger pick-up
services, and then only in areas designated for that purpose by Lessor.
Lessor shall not be responsible or liable for any interruption in utility
services, except when* caused by Lessor's sole negligence, nor shall such
interruption affect the continuation or validity of this Lease. In the
event of an interruption in utility service caused by the sole negligence
of the Lessor, which interruption continues unabated for 72 consecutive
hours following written notice to Lessor, during business days,
thereafter, Lessee shall bill to the Lessor the amount of 1/30th of the
Minimum Monthly Rent then in effect for each day of such interruption
during which Lessee is unable to operate its business in the Leased
Premises.
ARTICLE 20. ALTERATIONS
20.1 Consent or Lessor; Ownership. Lessee shall not make, or suffer
to be made, any alterations to the Leased Premises, or any part thereof,
unless the cost of which will not exceed S25,000 in the aggregate and the
alterations are nonstructural and interior in nature, without the written
consent of Lessor first had and obtained. Notwithstanding anything to the
contrary herein, Lessee may not demolish or remove any improvements paid
for by Lessor without Lessor's prior consent. Any additions to, or
alterations of, the Leased Premises, except trade fixtures, shall upon
expiration or termination of this Lease become a part of the realty and
belong to Lessor. Except as otherwise provided in this Lease, Lessee shall
have the right to remove its trade fixtures placed upon the Leased
Premises provided that Lessee restores the Leased Premises as indicated
below.
20.2 Requirements Any alterations additions or installations
performed by Lessee (hereinafter collectively "Alterations") shall be
subject to strict conformity with the following requirements:
(a) All alterations shall be at the sole cost and expense of
Lessee;
(b) Prior to Commencement of any work of alteration, Lessee
shall submit detailed plans and specifications, including working drawings
if available, (hereinafter referred to as "Plans") of the proposed
alterations, which shall be subject to the consent of Lessor in accordance
with the terms of Section 20.1 above;
(c) Following approval of the Plans by Lessor, Lessee shall
give Lessor at least tan (10) days prior written notice of commencement of
work in the Leased Premises so that Lessor may post notices of
non-responsibility in or upon the Leased Premises as provided by law;
(d) No alterations shall be commenced without Lessee having
previously obtained all appropriate permits and approvals required by and
of governmental agencies copies of which shall be provided to Lessor prior
to commencement of work;
(e) All alterations shall be performed in a skillful and
workmanlike manner, consistent with the best practices and standards of
the construction industry, and pursued with diligence in accordance with
the Plans previously approved by Lessor and in full accord with all
applicable laws and ordinances. All material, equipment, and articles
incorporated in the alterations is to be new, and of recent manufacture
except for specialty design features with unique high quality
characteristics, and of the most suitable grade for the purpose intended;
(f) Lessee must obtain the prior written approval from Lessor
for Lessee's contractor prior to commencement of the work. Lessee's
contractor shall maintain all of the insurance reasonably required by
Lessor, including comprehensive general liability, workers' compensation,
builder's risk insurance and course of construction insurance;
(g) As a condition of approval of the alterations, Lessor may
require performance and labor and materialmen's payment bonds issued by a
surety approved by Lessor, in a sum equal to the cost of the alterations
guarantying the completion of the alterations free and clear of all liens
and other charges in accordance with the Plans. Such bonds shall name
Lessor as beneficiary;
(h) The alterations must be performed in a manner such that
they will not interfere with the quiet enjoyment of the other lessees in
the Complex.
20.3 Liens. Lessee shall keep the Leased Premises and the Complex
in which the Leased Premises are situated, free from any liens arising out
of any work performed, materials furnished or obligations incurred by
Lessee In the event a mechanic's or other lien is filed against the Leased
Premises or the Complex of which the Leased Premises forms a part as a
result of a claim arising through Lessee, Lessor may demand that Lessee
furnish to Lessor a surety bond satisfactory to Lessor in an amount equal
to at least one hundred fifty percent (150%) of the amount of the
contested lien claim or demand, indemnifying Lessor against liability for
the same and holding the Leased Premises free from the effect of such lien
or claim. Such bond must be posted within twenty (20) days following
notice from Lessor unless. Lessee otherwise expunges such liens from the
record. In addition, Lessor may require Lessee to pay Lessor's attorney's
fees and costs in participating in any action to foreclose such lien if
Lessor shall decide it is to it; best interest to do so. Lessor may pay
the claim prior to the enforcement thereof, in which event Lessee shall
reimburse Lessor in full, including attorney's fees, for any such expense,
as additional rent, with the next due rental.
20.4 Restoration. Lessee shall return the Leased Premises to Lessor
at the expiration or earlier termination of this Lease in good and
sanitary order, condition and repair, free of rubble and debris, broom
clean, reasonable wear and tear excepted and subject to the provisions of
Article 15. All damage to the Leased Premises caused by the removal of
trade fixtures and other personal property that Lessee is permitted or
required to remove under the terms of this Lease and/or such restoration
shall be repaired by Lessee at its sole cost and expense prior to
termination.
20.5 Removal. In no event shall Lessee be obligated to remove any
improvements initially installed in the Leased Premises as of the
Commencement Date. Notwithstanding any other provision hereof, any
improvements or other alterations made subsequent to the Commencement Date
that Lessor will require Lessee to remove upon the expiration of the Term
shall be designated as items to be removed by Lessor at the time Lessor
grants its consent for such alterations pursuant to Section 20.1 of the
Lease. If Lessor does not so designate for removal, such alterations or
improvements may be removed by Lessee at its discretion prior to the
expiration of the term.
ARTICLE 21. MAINTENANCE AND REPAIRS
21.1 Obligations of Lessee. Except as specifically set forth herein,
Lessee shall, at its sole cost and expense, keep and maintain the Leased
Premises and appurtenances, and every part thereof in good and sanitary
order, condition and repair including all necessary replacements.
Notwithstanding the foregoing, Lessor shall, at Lessee's expense, perform
all necessary repairs, maintenance and replacement of the heating,
ventilating and air conditioning system ("HVAC"), painting of exterior
walls for maintenance of appearance, but not solely for design purposes
(not less than once in each five year period of the term, including
extensions) and maintenance of the Leased Premises outside of the Building
such as the parking and landscaped areas, (the "Premises Maintenance
costs") . Lessee shall, at its sole cost, keep and maintain all utilities,
fixtures and mechanical equipment used by Lessee in good order, condition
and repair. Lessor need not competitively bid the work described herein,
provided the costs billed to Lessee do not exceed those which are normal
and customary for the work performed.
21.2 Premises Maintenance Costs. Lessee shall pay to Lessor, as
additional rent, all Premises Maintenance Costs plus a management fee in
the amount of 10% thereof, within ten (10) days of receiving a billing
therefor from Lessor, but no more frequently than monthly. Lessor may bill
Lessor estimated charges in accordance with Section 21.3. it is the intent
of the parties -that all maintenance and replacement expenditures with
respect to the Leased Premises and the Building be borne by Lessee,
whether performed by Lessee or Lessor, this Lease being intended to be
absolutely net except for costs incurred as a result of the willful act or
sole negligence of the Lessor, its agents, contractors or employees or
other costs to be borne by the Lessor as expressly set forth in this
Lease.
21.3 Estimated Payments. Lessor shall have the right, at its option,
to estimate Lessee's Premises Maintenance Costs due in the future from
Lessee and to collect from Lessee on a monthly or quarterly basis, as
Lessor may elect, the amount of Lessee's estimated Premises Maintenance
Costs. Lessor shall provide Lessee with a reconciliation of Lessee's
account at least annually, and if such reconciliation shall indicate that
Lessee's account is insufficient to satisfy the Premises Maintenance Costs
for the period estimated, Lessee shall immediately pay to Lessor any
deficiency. Any excess in such account indicated by the reconciliation
shall be credited to Lessee's account to reduce the estimated payments for
the next ensuing period.
21.4 Lessor Maintenance Obligation.. Except for the negligence of
Lessee, Lessor, at Lessor's expense, shall be responsible for the
maintenance, repair and replacement of the following: structural portions
of the Building (including foundation slab, structure of the exterior
walls, columns and roof structure), roof membrane and plumbing installed
in the concrete slab. Lessee covenants that Lessee, its agents,
contractors or representatives shall not at any time enter upon the roof
except in the physical presence of the Lessor. A breach of this provision
shall constitute a material breach of this Lease.
21.5 Waiver. Subject to the provisions of Section 30.1(b) Lessee
waives all rights it may have under law to make repairs at Lessor's
expense.
ARTICLE 22. CONDEMNATION
22.1 Definitions.
(a) "Condemnation" means (i) the exercise of any governmental
power, whether by legal proceedings or otherwise, by a condemnor and/or
(ii) a voluntary sale or transfer by Lessor to any condemnor, either under
threat of condemnation or while legal proceedings for condemnation are
pending.
(b) "Date. of taking" means the date the condemnor has the
right to possession of the property being condemned.
(c) "Award" means all compensation, sums or anything of value
awarded, paid or received on a total or partial condemnation.
(d) "Condemnor" means any public or quasi-public authority, or
private corporation or individual, having the power of condemnation.
22.2 Total Taking. If the Leased Premises are totally taken by
condemnation, this Lease shall terminate on the date of taking.
22.3 Partial Taking; Common Area.
(a) If any portion of the Leased Premises is taken by
condemnation, this Lease shall remain in effect, except that Lessee can
elect to terminate this Lease if so much of the Building is taken as to
materially interfere with Lessee's use of the Leased Premises.
(b) If any part of the area of the Leased Premises outside the
Building are taken by condemnation, this Lease shall remain in full force
and effect so long as there is no material interference with the access to
the Leased Premises, except that if thirty percent (30%) or more of such
Area is taken by condemnation, either party shall have the election to
terminate this Lease pursuant to this Section.
(c) If fifty percent (50%) or more of the Building is taken,
Lessor shall have the election to terminate this Lease in the manner
prescribed herein.
22.4 Termination or Abatement. If either party elects to terminate this
Lease under the provisions of Section 22.3(such party is hereinafter
referred to as the "Terminating Party") it must terminate by giving notice
(the "Notice of Termination") to the other party (the "Non terminating
Party") within thirty (30) days after the nature and extent of the taking
have been finally determined (the "Decision Period"). The Terminating
Party shall notify the Non terminating Party of the date of termination,
which date shall not be earlier than sixty (60) days after the Terminating
Party has notified the Non terminating Party of its election to terminate
nor later than the date of taking. If Notice of Termination is not given
within the Decision Period, the Lease shall continue in full force and
effect except that Minimum Monthly Rent shall be reduced by subtracting
therefrom an amount calculated by multiplying the Minimum Monthly Rent in
effect prior to the taking by a fraction the numerator of which is the
number of square feet taken from the Leased Premises and the denominator
of which is the number of square feet in the Leased Premises prior to the
taking.
22.5 Restoration. If there is a partial taking of the Leased Premises
and this Lease remains in full force and effect pursuant to this Article,
Lessor, at its cost, shall accomplish all necessary restoration so that
the Leased Premises is returned as near as practical to its condition
immediately prior to the date of the taking, but in no event shall Lessor
be obligated to expend more for such restoration than the extent of funds
actually paid to Lessor by the condemnor.
22.6 Award. Any award arising from the condemnation or the settlement
thereof shall belong to and be paid to Lessor except that Lessee shall
receive from the award compensation for the following if specified in the
award by the condemning authority, so long as it does not reduce Lessor's
award in respect of the real property: Lessee's trade fixtures, tangible
personal property, goodwill, loss of business and relocation expenses. At
all events, Lessor shall be solely entitled to all award in respect of the
real property, including the bonus value of the leasehold. Lessee shall
not be entitled to any award until Lessor has received the above sum in
full.
ARTICLE 23. INTERUPTION
23.1 Interruption If as a result of Lessor's uninsured negligence the
Leased Premises suffers a casualty which results in Lessee being unable to
operate its business upon the Leased Premises for one hundred -twenty
(120) consecutive days, then, within thirty (30) days following the
expiration of such one hundred twenty (120) consecutive day period, Lessee
by written notice within such period to Lessor may terminate this Lease.
ARTICLE 24, ENTRY BY LESSOR
24.1 Rights of Lessor Lessee shall permit Lessor and Lessors agents
upon 24 hours prior telephonic notice (except in the case of emergencies
or regularly scheduled contract maintenance) to enter the Leased Premises
at all reasonable times for the purpose of inspecting the same or for the
purpose of maintaining the Building, or for the purpose of making repairs,
alterations or additions to any portion of the Building, including the
erection and maintenance of such scaffolding, canopies, fences and props
as may be required, or for the purpose of posting notices of
non-responsibility for alterations, additions or repairs', or for the
purpose of placing upon the Building any usual or ordinary "for sale"
signs. if such entry upon the Premises by the Lessor will cause a material
interruption in the business operations of the Lessee, Lessee must so
inform the Lessor when Lessor makes its request. In such case Lessor shall
agree to delay its entry for up to five (5) days to avoid such
interruption. During any entry exercised by Lessor hereunder, Lessor shall
diligently attempt to minimize any interruption or interference with
Lessee's use of the Leased Premises and its business operations. In the
event a material interruption in Lessee's business operations occurs as a
result of Lessor's negligence, Lessee shall bill to the Lessor the amount
of 1/30th of the Minimum Monthly Rent then in effect for each day of such
interruption following written notice to Lessor during which Lessee is
unable to operate its business in the Leased Premises. Lessee shall permit
Lessor, at any time within one hundred eighty (180) days prior to the
expiration of this Lease, to place upon the Leased Premises any usual or
ordinary "to let" or "to lease" signs. This Section in no way affects the
maintenance obligations of the parties hereto.
ARTICLE 25. SIGNS
25.1 Approval. Installation and Maintenance. Lessee shall not place
on the Leased Premises or on the Complex, any exterior signs or
advertisements nor any interior signs or advertisements that are visible
from the exterior of the Leased Premises, without Lessor's prior written
consent, which Lessor reserves the right to withhold for any aesthetic
reason in its sole judgment. However, Lessor may not exercise its rights
hereunder in such a manner as to discriminate against Lessee as compared
to other occupants of the Complex. The cost of installation and regular
maintenance of any such signs approved by Lessor shall be at the sole
expense of Lessee. At the termination of this Lease or any extension
thereof, Lessee shall remove all his signs, and all. damage caused by such
removal shall be repaired at Lessee's expense. Upon approval of Lessee's
sign by Lessor, an exhibit thereof shall be attached hereto as Exhibit
"F."
ARTICLE 26. DEFAULT
26.1 Definition. The occurrence of any of the following shall
constitute a material default and breach of this Lease by
(a) Any failure by Lessee to pay the rental or to make any
other payment required to be made by Lessee hereunder within five (5) days
following written notice from Lessor that such is due (any such notice
shall be concurrent with any required statutory default notice);
(b) A failure by Lessee to observe and perform any other
provision of this Lease to be observed or performed by Lessee, where such
failure continues for fifteen (15) days after written notice thereof by
Lessor to Lessee; provided, however, that if the nature of the default is
such that the same cannot reasonably be cured within the fifteen (15) day
period allowed, Lessee shall not be deemed to be in default if Lessee
shall, within such ten (10) day period, commence to cure and thereafter
diligently prosecute the same to completion;
(c) Either (1) the appointment of a receiver (except a receiver
appointed at the instance or request of Lessor) to take possession of all
or substantially all of the assets of Lessee, or (2) a general assignment
by Lessee for the benefit of creditors, or (3) any action taken or
suffered by Lessee under any insolvency or bankruptcy act shall constitute
a breach of this Lease by Lessee. In such event, Lessor may, at its
option, declare this Lease terminated and forfeited by Lessee, and Lessor
shall be entitled to immediate possession of 'the Leased Premises. Upon
such notice of termination, this Lease shall terminate immediately and
automatically by its own limitation.
ARTICLE 27. REMEDIES UPON DEFAULT
27.1 Termination and Damage. In the event of any default by Lessee, then,
in addition to any other remedies available to Lessor herein or at law or
in equity, Lessor shall have the immediate option to terminate this Lease
and all rights of Lessee hereunder by giving written notice of such
intention to terminate. In the event that Lessor shall elect to so
terminate this Lease, then Lessor may recover from Lessee:
(a) The worth at the time " of award of any unpaid rent which
had been earned at the time of such termination; plus
(b) The worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time
of award exceeds the amount of such rental loss Lessee proves could have
been reasonably avoided; plus
(c) The worth at the time of award of the amount by which the
unpaid rent for the balance of the term after the time of award exceeds
the amount of such rental loss that Lessee proves could be reasonably
avoided; plus
(d) Any other amount necessary to compensate Lessor for all the
detriment proximately caused by Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of events
would be likely to result therefrom; and
(e) At Lessor's election, such other amounts in addition to or
in lieu of the foregoing as may be permitted from time to time by the
applicable law in the state in which the Leased Premises are located.
27.2 Definitions.
(a) The term "rent", as used in this Lease, shall be deemed to
be and to mean the Minimum Monthly Rent and all other sums required to be
paid by Lessee pursuant to the terms of this Lease.
(b) As used in Sections 27.1(a) and (b) above, the ..worth at
the time of award" is computed by allowing interest at the rate of ten
percent (10%) per annum. As used in Section 27.1(c) above, the "worth at
the time of award" is computed by discounting such amount at the discount
rate of the Federal Reserve Bank for the region in which the Complex is
located at the time of award plus one percent (1%).
27.3 Personal Property. In the event of any default by Lessee, Lessor
shall also have the right, with or without terminating this Lease, to
reenter the Leased Premises and remove all persons and property from the
Leased Premises; such property may be removed and stored in a public
warehouse or elsewhere at the cost of and for the account of Lessee.
27.4 Recovery of Rent; Reletting.
(a) In the event of the vacation or abandonment of the Leased
Premises by Lasses or in the event that Lessor shall elect to reenter as
provided in Section 27.3 above, or shall take possession of the Leased
Premises pursuant to legal proceeding or pursuant to any notice provided
by law, then if Lessor does not elect to terminate this Lease as provided
in Section 27.1 above, Lessor may from time to time, without terminating
this Lease, either recover all rental as it becomes. due or relet the
Leased Premises or any part thereof for such term or terms and. at such
rental or rentals and upon such other terms and conditions as Lessor in
its sole discretion, may deem advisable with the right to make
alterations and repairs to the Leased Premises.
(b) In the event that Lessor shall elect to so relet, then
rentals received by Lessor from such reletting shall be applied: first, to
the payment of any indebtedness other than rent due hereunder from Lessee
to Lessor; second, to the payment of any cost of such reletting; third, to
the payment of the cost of any alterations and repairs to the Leased
Premises; fourth, to the payment of rent due and unpaid hereunder; and the
residue, if any, shall be held by Lessor and applied in payment of future
rent as the same may become due and payable hereunder. Should that portion
of such rentals received from such reletting during any month, which is
applied by the payment of rent hereunder, be less than the rent payable
during that month by Lessee hereunder, then Lessee shall pay such
deficiency to Lessor immediately upon demand therefor by Lessor. Such
deficiency shall be calculated and paid monthly. Lessee shall also pay to
Lessor as soon as ascertained, any costs and expenses incurred by Lessor
in such reletting or in making such alterations and repairs not covered by
the rentals received from such reletting.
(c) No reentry -or taking possession of the Leased Premises or
any other action under this Section shall be construed as an election to
terminate this Lease unless a written notice of such intention, be given
to Lessee or unless the termination thereof be decreed by a court of
competent jurisdiction. Notwithstanding any reletting without termination
by Lessor because of any default by Lessee, Lessor may at any time after
such reletting elect to terminate this Lease.-for any such default.
27.5 No Waiver. Efforts by Lessor to mitigate the damages caused by
Lessee's default in this Lease shall not constitute a waiver of Lessor's
right to recover damages hereunder, nor shall Lessor have any obligation
to mitigate damages hereunder.
27.6 Curing Defaults. Should Lessee fail to repair, maintain, and/or
service the Leased Premises, or any part or contents thereof at any time
or times, or perform any other obligations imposed by this Lease or
otherwise, then after having given Lessee reasonable notice of the failure
or failures and a reasonable opportunity, which in no case shall exceed
fifteen (15) days subject to the proviso of Section 26.1(b), to remedy the
failure, Lessor may perform or contract for the performance of the repair,
maintenance, or other Lessee obligation, and Lessee shall pay Lessor for
all direct and indirect costs incurred in connection therewith within ten
(10) days of receiving a bill therefor from Lessor.
27.7 Cumulative Remedies. The various rights, options, election powers,
and remedies of Lessor contained in this Article and elsewhere in this
Lease shall be construed as cumulative and no one of them exclusive of any
others or of any legal or equitable remedy which Lessor might otherwise
have in the event of breach or default, and the exercise of one right or
remedy by Lessor shall not in any way impair its right to any other right
or remedy.
ARTICLE 28. FORFITURE OF PROPERTY AND LESSOR'S LIEN
28.1 Removal of Personal Property. Lessee agrees that as at the date of
termination of this Lease or repossession of the Leased Premises by
Lessor, by way of default or otherwise, it shall remove all personal
property to which it has the right to ownership pursuant to the terms of
this Lease. -Any and all such property of Lessee not removed by such date
shall, at the option of Lessor, irrevocably become the sole property of
Lessor. Lessee waives all rights to notice and all common law and
statutory claims and causes of action which it may have against Lessor
subsequent to such date as regards the storage, destruction, damage, loss
of use and ownership of the personal property affected by the terms of
this Article. Lessee acknowledges Lessor's need to relet the Leased
Premises upon termination of this Lease or repossession of the Leased
Premises and understands that the forfeitures and waivers provided herein
are necessary to aid said reletting, and to prevent Lessor incurring a
loss for inability to deliver the Leased Premises to a prospective lessee.
ARTICLE 29. SURRENDER OF LEASE
29.1 No Merger. The voluntary or other surrender of this Lease by
Lessee, or a mutual cancellation thereof, shall not work as a merger, and
shall, at the option of Lessor, terminate all or any existing subleases or
subtenancies, or may, at the option of Lessor, operate as an assignment to
it of any or all such subleases or subtenancies.
ARTICLE 30. LESSOR'S EXCULPATION AND DEFAULT
30.1 Default by Lessor.
(a) Lessor shall not be in default unless Lessor fails to
perform obligations required of Lessor within a reasonable time, but in no
event later than fifteen (15) days after written notice of Lessee to
Lessor specifying wherein Lessor has failed to perform such obligations;
provided, however, that if the nature of Lessor's obligation is such that
more than fifteen (15) days are reasonably required for performance, then
Lessor shall not be in default if Lessor commences performance within such
fifteen (15) day period and thereafter diligently prosecutes the same to
completion.
(b) Lessee's Right to Perform Lessor's Covenants. If Lessor
fails to make any payment or perform any other act-on its part to be
performed under this Lease, provided that Lessee has delivered to Lessor
written notice of such default and Lessor has failed to cure such default
within the time period required under this article, Lessee may, but shall
not be obligated to and without waiving or releasing Lessor from any
obligation of Lessor under this Lease, make such payment or perform such
other act to the extent Lessee may deem desirable, and in connection
therewith, pay expenses and employ counsel. All sums so paid by Lessee and
all penalties, interest and other costs in connection therewith shall be
due and payable by Lessor within five (5) days after receipt of notice of
payment by Lessee, together with interest thereon at the maximum rate
permitted by law, plus collection costs and attorneys' fees.
30.2 Limited Liability. In the event of default, breach, or
violation by Lessor (which term includes Lessor's partners, co-ventures,
co-tenants, officers, directors, employees, agents, or representatives) of
any Lessor's obligations under this Lease, Lessor's liability to Lessee
shall be limited to its ownership interest in the Leased Premises (or its
interest in the Complex, if applicable) or the proceeds of a public sale
of such interest pursuant to foreclosure of a judgment against Lessor.
Lessor may, at its option, and among its other alternatives, relieve
itself of all liability under this Lease by conveying the Leased Premises
to Lessee. Notwithstanding any such -conveyance, Lessee's leasehold and
ownership interest shall not merge.
30.3 No Recourse. Lessor (as defined in Section 30.1) shall not be
personally liable for any deficiency beyond its interest in the Leased
Premises.
30.4 Valid . The provisions of Section 30.2 and 30.3 shall be valid
so long as the Leased Premises are not encumbered by Deeds of Trust the
outstanding balance of which at the time such were recorded, in the
aggregate, did not exceed eighty' percent (80%) of the fair market value
of the Leased Premises. The valuation of an institutional lender secured
by the Leased Premises shall be conclusive as to the test described in
this Section 30.4.
ARTICLE 31. ATTORNEY'S FEES
31.1 Actions. Proceedings, etc. Lessee hereby agrees to pay, as
additional rent, all attorney's fees and disbursements, and all other
court costs or expenses of legal proceedings or other 'legal services
which Lessor may incur or pay out by reason of, or in connection with:
(a) any action or proceeding brought by Lessor wherein Lessor
obtains a final judgment. or award against Lessee (including Arbitration)
on account of any default by Lessee in the observance or performance of
any obligation under this Lease including, but not limited to, matters
involving payment of rent and additional rent, alterations or other
Lessee's work and subletting or assignment;
(b) any action or proceeding brought by Lessee against Lessor
(or any officer, partner, or employee of Lessor) in which Lessee fails to
secure a final judgment against Lessor;
(c) any other appearance by Lessor (or any officer, partner, or
employee of Lessor) as a witness or otherwise in any action or proceeding
whatsoever involving or affecting Lessee or this Lease;
(d) provisions (a), (b) and (c) above in this Section
31.1 shall be reciprocal for the benefit of the Lessee when the
Lessor has been the causative and unsuccessful party.
31.2 Survival. The obligations of the Parties under this Section
shall survive the expiration or any other termination of this Lease. This
Section is intended to supplement (and not to limit) other provisions of
this Lease pertaining to indemnities and/or attorney's fees.
31.3 Counsel Fees. Should it be necessary for either party to employ
legal counsel to enforce any of the provisions of this Lease, the
unsuccessful party agrees to pay, as additional rent, all attorney's fees
and Court costs reasonably incurred thereby, whether or not Lessor
commences any legal action or proceeding.
The "unsuccessful party" is the party against who the relief sought is
obtained.
ARTICLE 33. NOTICES
32.1 Writing. All notices, demands and requests required or permitted
to be given or made under any provision of this Lease, shall be in writing
and shall be given or made by personal service or by mailing same by
registered or certified mail, return receipt requested, postage prepaid,
or by reputable courier which provides written evidence of delivery,
addressed to the respective party at the address set forth in Section 1.2
Of this Lease or at such other address as the party may from time to time
designate, by a written notice, sent to the other in the manner aforesaid.
32.2 Effective Data. Any such notice, demand or request ("notice")
shall be deemed given or made on the fifth day after the date so mailed.
Notwithstanding the foregoing, notice given by personal delivery to the
party at its address as aforesaid, shall be deemed given on the day on
which delivery is made. Notice given by a reputable courier service which
provides written, evidence of delivery shall be deemed given on the
business day immediately following deposit with the courier service.
32.3 Authorization to Receive. Each person and/or entity whose
signature is affixed to this Lease as Lessee or as guarantor of Lessee's
obligations ("obligor") designates such other obligor their agent for the
purpose of receiving any notice pertaining to this Lease or service of
process in the event of any litigation or dispute arising from any
obligation imposed by this Lease.
ARTICLE 33. SUBORDIRATION
33.1 Priority of Encumbrances. This Lease, at Lessor's option, shall
be subordinate to any ground lease, mortgage, deed of trust, or any other
hypothecation for security now or hereafter placed upon the real property
of which the Leased Premises are a part and to any and all advances made
on the security thereof and to all renewals, modifications,
consolidations, replacements and extensions thereof. Notwithstanding such
subordination, Lessee's right to quiet possession of the Leased Premises
shall not be disturbed if Lessee is not in default and so long as Lessee
shall pay the rent and observe and perform all the provisions of this
Lease, unless this Lease is otherwise terminated pursuant to its terms. If
any mortgagee, trustee or ground lessor shall elect to have this Lease
prior to the lien of its mortgage, deed of trust or ground lease, and
shall give written notice thereof to Lessee, this Lease shall be deemed
prior to such mortgage, deed of trust or ground lease, whether this Lease
is dated prior or subsequent to the date of said mortgage, deed of trust
or ground lease or the date of recording thereof.
33.2 Execution of Documents. Provided Lessee receives a written
nondisturbance, recognition and attornment agreement in form reasonably
satisfactory to Lessee from the Lender for whose benefit Lessee agrees to
execute any documents required to effectuate such subordination as is
described in Section 33.1, or to make this Lease prior to the lien of any
mortgage, deed of trust or ground lease, as the case may be. It is
understood by all parties, that Lessee's failure to execute the
subordination documents referred to above may cause Lessor serious
financial damage by causing the failure of a financing or sale
transaction.
33.3 Attornment. Lessee shall attorn to any purchaser at any
foreclosure sale, or to any grantee or transferee designated in any Deed
given in lieu of foreclosure.
ARTICLE 34. ESTOPPEL CERTIFICATE
34.1 Execution by Lessee. Within ten (10) days of request
therefor by Lessor, Lessee shall execute a Written statement
acknowledging the commencement and termination dates of this Lease
that it is in full force and effect, has not been modified (or if it
has, stating such modifications), and providing any other pertinent
information as Lessor or its agent might reasonably request. Failure
to comply with this Article shall be a material breach of this Lease
by Lessee giving Lessor all rights and remedies under Article 27
hereof, as well as a right to damages caused by the loss of a loan
or sale which may result from such failure by Lessee.
34.2 Financing. if Lessor desires to finance or refinance the
Leased Premises, or any part thereof, or the Building, Lessee hereby
agrees to deliver to any lender designated by Lessor such financial
statements of Lessee as may be reasonably required by such lender.
Such statements shall include the past two (2) years, financial
statements of Lessee. All such financial statements shall be
received by Lessor prior to the default date specified in Section
26.1(a) in confidence and shall be used only for the purposes herein
set forth.
ARTICLE 35. WAIVER
35.1 Effect of Waiver. The waiver by Lessor of any breach of
any Lease provision shall not be deemed to be a waiver of such Lease
provision or any subsequent breach of the same or any other term,
covenant or condition therein contained. The subsequent acceptance
of rent hereunder by Lessor shall not be deemed to be a waiver of
any preceding breach by Lessee of any provision of this Lease, other
than the failure of Lessee to pay the particular rental so accepted,
regardless of Lessor's knowledge of such preceding breach at the
time of acceptance of such rent.
ARTICLE 36. HOLDING OVER
36.1 Month-to-Month Tenancy on Acceptance. If Lessee should
remain in possession of the Leased Premises after the expiration of
the. Term and without executing a new Lease, then, upon acceptance
of rent by Lessor, such holding over shall be construed as a tenancy
from month to month, subject to all the conditions, provisions and
obligations of this Lease as existed during the last month of the
term hereof, so far as applicable to a month to month tenancy,
except that the Minimum Monthly Rent shall be equal to 1251 of the
Minimum Monthly Rent payable immediately prior to the expiration or
sooner termination of the Lease.
ARTICLE 37. SUCCESSORS AND ASSIGNS
37.1 Binding Effect. The covenants and conditions herein
contained shall, subject to the provisions as to assignment, apply
to and bind the heirs, successors, executors, administrators and
assigns of all of the parties hereto; and all of the parties hereto
shall be jointly and severally liable hereunder.
ARTICLE 38. TIME
38.1 Time is of the Essence Time is of the essence this Lease with respect
to each and every article, section and subsection hereof.
ARTICLE 39, EFFECT OF LESSOR'S CONVEYANCE
39.1 Release of Lessor. If, during the term of this Lease, Lessor
shall sell its interest in the Building or Complex of which the Leased
Premises forms a part, or the Leased Premises, then from and after the
effective date of the sale or conveyance, Lessor shall be released and
discharged from any and all obligations and' responsibilities under this
Lease, except those already accrued.
ARTICLE 40, TRANSFER OF SECURITY
40.1 Transfer to Purchaser. If any security be given by Lessee to secure
the faithful performance of all or any of the covenants of this Lease on
the part of Lessee, Lessor may transfer and/or deliver the security, as
such, to the purchaser of the reversion, in the event that the reversion
be sold, and thereupon Lessor shall be discharged from any further
liability in reference thereto.
ARTICLE 41, CORPORATE AUTHORITY
41.1 Authorization to Execute.
(a) Each individual executing this Lease on behalf of Lessee
corporation, . represents and warrants that he is duly authorized to
execute and deliver this Lease an behalf of said corporation in accordance
with a duly adopted resolution of the Board of Directors of said
corporation or in accordance with the Bylaws of said corporation, and that
this Lease is binding upon said corporation in accordance with its terms.
Further, Lessee shall, within thirty (30) days after execution of this
Lease, deliver to Lessor a certified copy of a resolution of the Board of
Directors of said corporation authorizing or ratifying the execution of
this Lease.
(b) The parties executing this Lease on behalf of the Lessor
corporation represent and warrant that they are authorized to do so under
the terms of a valid resolution.
ARTICLE 42, WAIVER OF CALIFORNIA CODE SECTIONS
42.1 Waiver by Lessee. Lessee waives (for itself and all persons
claiming under Lessee) the provisions of civil Code Sections 1932(2) and
1933(4) with respect to the destruction of the Leased Premises, Civil Code
Sections 1941 and 1942 with respect to Lessor's repair duties and Lessee's
right to repair, Code of Civil Procedure Section 1265.130, allowing either
party to petition the Superior Court to terminate this Lease in the event
of a partial taking of the Leased Premises by condemnation as herein
defined, and any right of redemption or reinstatement of Lessee under any
present or future case law or statutory provision (including Code of Civil
Procedure Sections 473 and 1179 and Civil Code Section 3275) in the event
Lessee is dispossessed from the Leased Premises for any reason. This
waiver applies to future statutes enacted in addition to or in
substitution for the statutes specified herein.
ARTICLE 43, WASTE
43.1 Waste or Nuisance. Lessee shall not commit, or suffer to be
committed, any waste upon the Leased Premises, or any nuisance, or other
act or thing which may disturb the quiet, enjoyment of any other tenant or
occupant of the Complex in which the Leased Premises are located. in the
instrument of transfer and (iii) such instrument of transfer contains such
other assurances as Lessor reasonably deems necessary.
ARTICLE 44. BANRUPTCY
44. 1 Bankruptcy Events. If at any time during the Term shall be
filed by or against Lessee in any court pursuant to any statute either of
the United States or of any State a petition in bankruptcy or insolvency
or for reorganization or for the appointment of a receiver or trustee of
all or a portion of Lessee's property, or if a receiver or trustee takes
possession of any of the assets of Lessee, or if the leasehold interest
herein passes to a receiver, or if Lessee makes an assignment for the
benefit of creditors or petitions for or enters into an arrangement (any
of which are referred to herein as "a bankruptcy event") , then the
following provisions shall apply:
(a) At all events any receiver or trustee in bankruptcy or
Lessee as debtor in possession ("debtor"), shall either expressly assume
or reject this Lease within sixty (60) days following the entry of an
"Order for Relief".
(b) In the event of an assumption of the Lease by a debtor,
receiver, or trustee, such debtor, receiver, or trustee shall immediately
after such assumption (1) cure any default or provide adequate assurances
that defaults will be promptly cured; and (2) compensate Lessor f or
actual pecuniary loss or provide adequate assurances that compensation
will be made for actual pecuniary loss; and (3) provide adequate assurance
of future performance.
For the purposes of this paragraph 44.1 (b), adequate assurance
of future performance of all obligations under this Lease shall include,
but is not limited to:
(i) written assurance that rent and any other
consideration due under the Lease shall first be paid before any other of
Lessee's costs of operation of its business in the Leased Premises are
paid;
(ii) written agreement that assumption of this Lease will
not cause a breach of any provision hereof including, but not limited to,
any provision relating to use or exclusivity in this or any other Lease,
or agreement relating to the Leased Premises, or if such a breach is
caused, the debtor, receiver or trustee will indemnify Lessor against such
loss (including costs of suit and attorney's fees), occasioned by such
breach;
(c) Where a default exists under the Lease, the party assuming
the Lease may not require Lessor to provide services or supplies
.11-.ncidental to the Lease before its assumption by such trustee or
debtor, unless Lessor is compensated under the terms of the Lease for such
services and supplies provided before the assumption of such Lease.
(d) The debtor, receiver, or trustee may only assign this Lease
if adequate assurance of future performance by the assignee is provided,
whether or not there has been a default under the Lease. Any consideration
paid by any assignee in excess of the rental reserved in the Lease shall
be the sole property of, and paid to, Lessor. Upon assignment by the
debtor or trustee the obligations of the Lease shall be deemed to have
been assumed and the assumptor shall execute an assignment agreement on
request of Lessor.
(e) Lessor shall be entitled to the fair market value for the Leased,
Premises and the services provided by Lessor (but in no event less than
the rental reserved in the Lease) subsequent to commencement of a
bankruptcy event.
(f) Lessor specifically reserves any and all remedies available
to Lessor in Article 27 hereof or at law or in equity in respect of a
bankruptcy event by Lessee to the extent such remedies are permitted by
law.
ARTICLE 45. LATE CHARGE
45.1 Late Payment by Lessee. Lessee acknowledges that late payment
by Lessee to Lessor of rent or any other payment due hereunder will cause
Lessor to incur costs not contemplated by this Lease, the exact amount of
such costs being extremely difficult and impractical to fix. Such costs
include, without limitation, processing and accounting charges, and late
charges that may be imposed on Lessor by the terms of any encumbrance and
note secured by any encumbrance covering the Leased Premises. Therefore,
if any installment of rent, or any other payment due hereunder from Lessee
is not received by Lessor within ten (10) days following* written notice
from Lessor, Lessee shall pay to. Lessor an additional sum of five per
cent (5%) of such rent or other charge as a late charge" The parties agree
that this late charge represents a fair and reasonable estimate of the
cost that Lessor will incur by reason of late payment by Lessee.
Acceptance of any late charge shall not constitute a waiver of Lessee
default with respect to the overdue amount, or prevent Lessor from
exercising any other rights or remedies available to Lessor.
ARTICLE 46, MORTGAGEE PROTECTION
46.1 Notice And Right to cure Default. Lessee agrees to give any
mortgagee(s) and/or trust deed holders, by registered mail, a copy of any
notice of default served upon Lessor, provided that prior to such notice
Lessee has been notified, in writing (by way of Notice of Assignment of
Rents and Leases, or otherwise), of the address of such mortgagees and/ or
trust deed holders. Lessee further agrees that if Lessor shall have failed
to cure such default within the time provided for in this Lease, then the
mortgagees and/or trust deed holders shall have an additional thirty (30)
days within which to cure such default or if such default cannot be cured
within that time, then such additional time as may be necessary if within
such thirty (30) days, any mortgagee and/or trust deed holder has
commenced and is diligently pursuing the remedies necessary to cure such
default (including but not limited to commencement of foreclosure
proceedings, if necessary to effect such cure) , in which event this Lease
shall not be terminated while such remedies are being so diligently
pursued; provided, however, that notwithstanding the time extension
provided herein, Lessee may undertake the cure of a Lessor default after
the expiration of the period permitted Lessor under the provisions of this
Lease.
ARTICLE 47, EXISTING LEASE
47.1 Procedure. At commencement of the term, vacation of the
Existing Lease premises by the Lessee, and occupancy of the Leased
Premises by Lessee, Lessor agrees to reimburse Lessee or, to pay on behalf
of Lessee, as Lessee shall elect, the Minimum Monthly Rent obligation of
its existing lease at 30740 Santana Street, Hayward, California, (the
"Existing Lease") , by execution of Agreement in form and substance as
attached hereto as Exhibit "G", by both parties.
47.2 Financial Obligation. In no event shall Lessor's obligation under
the Existing Lease for payment of its obligation under this Article 47,
and Exhibit G exceed two hundred fifty three thousand dollars ($253,000).
ARTICLE 48. OPTION TO PURCHASE
48.1 Grant Lessee shall I have the option to purchase the Leased
Premises ("option") on the terms and conditions set forth in this Article
48 and in Exhibit I.
48.2 Exercise Periods. The Option shall be exercisable only within
the following time periods (the "Exercise Periods") :
(a) Within sixty (60) days following the Commencement Date; or
(b) During the sixty first (61st) Lease Month of the Term; or
(c) During the one hundred-twenty first (121st) Lease Months of
the Term, provided, however, Lessee has timely exercised its first option
to extend the Term.
48.3 Method of Exercise. The exercise of this Option shall be by
written notice delivered to Lessor prior to the expiration of each
Exercise Period, but not before commencement of the applicable Exercise
Period, accompanied by a fully executed copy of the Purchase Agreement
attached hereto as Exhibit I, with all blanks filled in, but otherwise
unaltered (the "Purchase Agreement").
48.4 Effect of Exercise. Upon Lessee's exercise of this Option, this
Purchase Agreement shall constitute a contract for the purchase of the
Leased Premises.
48.5 Purchase Price. The purchase price must be established prior to
the exercise of the Option. The purchase price shall be the higher of the
following:
(a) One hundred ten percent (110%) multiplied by the sum of the
following:
(i)Total Project Costs which formed the basis for the
calculation of minimum monthly rent under the provisions of Section 6.2
hereof; and
(ii) "Negative Cash Flow" as hereinafter defined; and
(iii)five dollars thirty cents ($5.30) per square foot times
the number of square feet of land area in the Leased Premises (the "Land
Value")
or
(b) The fair market value of the Leased Premises determined in
accordance with the provisions of Section 48.6.
The term "Negative Cash Flow" means an annual sum computed as at each
anniversary of the term of this Lease, provided such sum is negative, by
subtracting the following from all sums received by the Lessor from the
Lessee during the annual period which is the subject of the calculation:
(i)all costs of operation, maintenance, insurance, tax,
administration, management, supervision, and reconstruction, related to
the Leased Premises other than (1) those costs included in Construction
Costs as defined in Exhibit "C" hereto upon which the initial calculation
of minimum monthly rent was based; (2) those costs which have been paid or
reimbursed to Lessor by Lessee pursuant to this Lease; and
(ii)all interests costs for any note secured by a deed of trust
encumbering the Leased Premises which were not included in Total Project
Costs, provided the principal amount of such note does not exceed an
amount equivalent to the Total Project costs plus the Land Value.
It is the intent of the parties that the purchase price not be less than
one hundred tan percent (110%) of all sums of any type or nature expended
by the Lessor in respect of the Leased Premises f or which Lessor has not
received reimbursement.
48.6 Fair Market Value. The Fair Market Value of the Leased Premises
shall be determined as follows:
(a) Not less than one hundred twenty (120) days prior to Lessee
I s planned exercise of-this Option. Lessee* shall notify Lessor of its
opinion of the fair market value of the Leased Premises as that term is
hereinafter defined. If the parties are unable t ' q agree upon a fair
market value within thirty (30) days thereafter (the "Negotiation Period")
, then within ten (10) days after the expiration of the -Negotiation
Period, either party at its own cost and expense and by giving notice to
the other in writing, may appoint a real estate appraiser who is a member
of the American Appraisal Institute, or the Society or Real Estate
Appraisers, or an equivalent professional organization, with at lease five
(5) years experience appraising office properties in Alameda County
California ("Qualified Appraiser") , to set the fair market value in
writing. If a party does not appoint a Qualified Appraiser within ten (10)
days after the first party has given notice of the name of its Qualified
Appraiser, the single Qualified Appraiser shall be the sole appraiser and
shall set the fair market value for purposes of establishing a purchase
price. If two Qualified Appraisers are appointed by the parties, they
shall meet promptly, on five (5) days notice to the parties, to take such
evidence and other information as the parties may deem reasonable to
submit to the Qualified Appraisers. Within thirty (30) days after the
selection of the last of the two Qualified Appraisers to be appointed by
the parties, the Qualified Appraisers shall render their opinions of the
fair market value in writing. If the two valuations are within ten (10%)
percent of each other, they shall be averaged and the average of the two
shall be the fair market value. If only one appraisal is timely submitted,
that appraisal shall constitute the fair market value. If the two
valuations are separated by more than ten (10%) percent, than the two
appraisers shall, within. ten (10) days following the last for submission
of the two appraisals of fair market value, appoint a third Qualified
Appraiser. If they are unable to agree upon a third Qualified Appraiser
within such ten (10) day period, either of the parties to this Lease, by
giving five (5) days notice to the other party, may demand Arbitration as
specified below. If neither party applies for Arbitration within the ten
(10) day period herein specified, the two appraisals of value shall be
averaged as stated above.
(b) Fair Market Value . The term "fair market value" as used in
this Article 48 shall mean the fair market value of the Leased Premises
deter-mined in accordance with good appraisal practice including
consideration of the following factors:
(i) Rental rates being charged for comparable
premises in the same geographical area;
(ii) The rental rate specified in this Lease
increased, however, by a factor calculated as follows:
A. The total number of square feet in the land
area underlying the Leased Premises shall be multiplied by five dollars
and thirty-five cents ($5.30)
B. The product derived in "All shall be
multiplied by ten percent (10%).
C. The product derived in "B" shall be divided
by .97;
D. The quotient derived in "C" above shall be
multiplied by 1.1699; and
E. The product of "D" above shall be divided
by 12 and the quotient added to the current Minimum Monthly Rent under the
terms of this Lease for purposes of establishing the Minimum Monthly Rent
to be considered the contract rent hereunder for valuation purposes.
(iii) It is the intent of the parties that the fair market
value of the Leased Premises shall be determined by the comparable value
market analysis, reproduction costs, and end income analysis methods of
appraisal. The income analysis shall give consideration to both (i) the
fair market rental value of the Leased Premises as if unencumbered by this
Lease, and (ii) the contract rentals hereunder increased as provided in
(ii) above.
(iv) All terms and conditions of any financing secured
by deeds of trust encumbering the Leased Premises.
(v) The outstanding principal balance of any assessment
bonds encumbering the Leased Premises or as the close of escrow.
(c) Arbitration In the event the parties are to
mutually agree upon a fair market value, and in such event proceed to the
Appraisal or Arbitration procedure herein specified, both parties shall be
bound to submit the matter for such determination. The procedure specified
in this article for appointment of Qualified Appraisers, delivery of
appraisals, appointment of an Arbitrator, and determination of fair market
value thereby, is herein collectively referred to as "Arbitration" The
Arbitration shall be conducted and determined in Alameda County where the
Leased Premises are situated.
(d) Demand for Arbitration.- A party demanding Arbitration
hereunder shall make its demand in writing ("Demand Notice") within ten
(10) days after the delivery of the last of the two appraisals presented
by the Qualified Appraisers as specified above. A copy of the Demand
Notice shall be sent to the Presiding Judge of the* highest trial court in
such county for the state in which the Leased Premises are located. The
Presiding Judge is hereinafter referred to as the "Appointer". The
Appointer, acting in his personal, private capacity, shall appoint within
ten (10) days thereafter a Qualified Appraiser. The Arbitrator shall be
qualified to serve as an expert witness, over objection, to give opinion
testimony addressed to the issue in a court of competent jurisdiction.
(e) Decision of the Arbitrator. As used herein, the term
Arbitrator refers to a third Qualified Appraiser, selected by any of the
methods heretofore set forth. The Arbitrator shall, within sixty (60) days
after his appointment, state in writing his determination as to whether
the fair market value stated by Lessor's Qualified Appraiser or the fair
market value stated by Lessee's Qualified Appraiser, most closely
approximates his own. the Arbitrator shall have the right to consult
experts and competent authorities with factual information or evidence
pertaining to a determination of fair market value, but any such
consultation shall be made in the presence of both parties with full right
to cross examine. The Arbitrator may not state his own opinion of fair
market value, but is strictly limited to the selection of one of the two
appraisals submitted by the other two Qualified Appraisers. The Arbitrator
shall have no right to propose a middle ground or any modification of
either of the proposed valuations, and shall have no power to modify this
Lease. The valuation so chosen as most closely approximating that of the
Arbitrator shall constitute his decision and shall be final and binding
upon the parties absent fraud or gross error. The Arbitrator shall render
a decision and award in writing, with counterpart copies to each party.
Judgment may be entered thereon in any court of competent jurisdiction.
(f) Successor Arbitrator; Fees and Expenses. In the event of
failure, refusal, or inability of the Arbitrator to act in a timely
manner, a successor shall be appointed in the same manner as such
Arbitrator was first chosen hereunder. The fees and expenses of the
Arbitrator and for the administrative hearing fee, if any, shall be
divided equally between the parties. Each party shall bear its own
attorneys' fees and other expenses including fees of witnesses in
presenting evidence, and the fees and cost of its own Qualified Appraiser.
48.7 Payment. The purchase price shall be payable in cash at closing
over the above; (i) outstanding balance of assessment bonds encumbering
the Leased Premises; and (ii) the outstanding principal balance of any
loan encumbering the Leased Premises which is not subject to early
prepayment. All assumption fees, the responsibility for qualifying for
assumption, payment of prepayment penalties or other costs associated with
financing which encumbers the Leased Premises at the time of closing shall
be at the sole cost and expense of Lessee.
48.8 Time. Time is of the essence of the Lease and this Option
agreement, and the Option Exercise Periods set forth herein are agreed by
the parties to have been negotiated subject to no variation whatsoever
without the express written consent of both parties, it being further
agreed and understood that the dates for exercise and closing were not
intended to be approximate, but are intended to be exact.
48.9 Assignment. This Option to purchase is not assignable except as
provided in Subsection 9.3(c) and shall become null and void and of no
further force or effect upon the assignment of this Lease or the sublease
of more than thirty percent (30%) of the Building.
48.10 Memorandum Lessee shall have 'the right to record a short form
memorandum of this Lease disclosing Lessee's option to purchase set forth
herein, and Lessor shall execute and have acknowledged such short form
lease memorandum, in the form attached hereto as Exhibit M.
48.11 Quitclaim Deed. On the expiration of the last to occur of the
Exercise Periods described in Section 48.2, without exercise of the option
described in this Article 48 by the Lessee, Lessee shall, on demand of
Lessor, execute a Quitclaim Deed in the form attached hereto as Exhibit
"L", in recordable form, for recordation by the Lessor to expunge Lessee's
rights under this Article 48.
ARTICLE 49. PARKING
49.1 Lessor shall provide that Lessee shall have available to it not
less than four (4) parking places per 1, 000 square feet of Usable Area.
ARTICLE 50. MISCELLANEOUS PROVISIONS
50.1 Captions. The captions of this Lease are for convenience only
and are not a part of this Lease and do not in any way limit or amplify
the terms and provisions of this Lease.
50.2 Number and gender.. Whenever the singular number is used in this
Lease and when required by the context, the same shall include the plural,
the plural shall include the singular, and the masculine gender shall
include the feminine and neuter genders, and the word "Person" shall
include corporation, firm or association. If there be more than one
Lessee, the obligations imposed under this Lease upon Lessee, shall be
joint and several.
50.3 Modifications. This instrument contains all of the agreements,
conditions and representations made between the parties to this Lease and
may not be modified orally or in any other manner than by an agreement in
writing signed by all of the parties to this Lease.
50.4 Payments. Except as otherwise expressly stated, each payment
required to be made by Lessee shall be in addition to and not in
substitution for other payments to be made by Lessee.
50.5 Severability. The invalidity of any provision of this Lease, as
determined by a Court of competent jurisdiction, shall in no way affect
the validity of any other provision hereof.
50.6 No Offer. The preparation and submission of a draft of this
Lease by either party to the other shall not constitute an offer nor shall
either party be bound to any terms of this Lease or the entirety of the
Lease itself until both parties have fully executed a final document and
an original signature document has been received by both parties until
such time as described in the previous sentence, either party is free to
terminate negotiations with no obligation to the other.
50.7 Disputed Sums. Under the terms of this Lease numerous charges
are and may be due from Lessee to Lessor including, without limitation,
Common Area charges, real estate taxes, insurance reimbursement and other
items of a similar nature including advances made by Lessor in respect of
Lessee I s default at Lessor I s option. In event that at any time during
the term there is a dispute between the parties as to the amount due f or
any of such charges claimed by Less-or to be due, the amount demanded by
Lessor shall be paid by Lessee until the resolution of the dispute between
the parties or by litigation. Failure by Lessee to pay the disputed sums
until resolution shall constitute a default under the terms of the Lease.
50.8 Light, Air and View. No diminution of light, air, or view by
any structure which may hereafter be erected (whether or not by Lessor)
shall entitle Lessee to any reduction of rent, result in any liability of
Lessor to Lessee, or in any other way affect this Lease or Lessee's
obligations hereunder.
50.9 Public Transportation Information. Lessee shall establish and
maintain during the Term hereof a program to encourage maximum use of
public transportation by personnel of Lessee employed on the Leased
Premises, including without limitation the distribution to such employees
of written materials explaining the convenience and availability of public
transportation facilities adjacent or proximate to the Complex, staggering
working hours of employees, and encouraging use of such facilities, all at
Lessee's sole reasonable cost' and expense. Lessee shall comply with all
requirements of any local transportation management ordinance.
50.10 Rules and Regulations. Lessee agrees to comply with all
reasonable rules and regulations adopted and promulgated by Lessor and
applicable to all tenants in the Complex for the lawful, orderly, clean,
safe, aesthetic, quiet, and beneficial use, operation, maintenance,
management, and enjoyment of the complex, provided Lessee has received
prior written notice thereof.
50.11 Joint and Several Liability. Should Lessee consist of more than
one person or entity, they shall be jointly and severally liable on this
Lease.
50.12 First Offer - Adjacent Space. During the first sixty (60) Lease
months of the Term hereof, Lessee shall have the right, subject to the
specific conditions expressly provided herein to negotiate for additional
space within the Complex provided:
(a) Lessee first notifies Lessor in writing that it wishes to
lease additional space which may be no more than 10,0.00 square feet of
Rentable Area; and
(b) That the building area to which the right specified in this
Section 50.12 is applicable are those buildings which may be constructed
upon any parcel within the Complex all or a portion of which lies within
the areas described by cross-hatching on Exhibit "M" attached hereto and
made a part hereof by reference and this right shall apply to no other
area of the Complex; and
(c) That the rental which shall form the basis of the
negotiation between the Lessor and the Lessee with regard to such
additional space shall be ninety percent (90%) of Lessor's good faith
judgment as to the fair market value thereof, in Lessors sole good faith
discretion; and
(d) That Lessor shall have no obligation to negotiate with
Lessee for any space for which it is currently in lease discussions with
any prospective tenant provided, however, that once such discussions are
conclusively terminated, and Lessee has indicated an interest therein,
Lessor shall make that space available as "First Offer Space" under the
provisions of this section 50.12; and
(e) Lessor's obligation extends to a good faith negotiation
with Lessee and neither party is bound to proceed to execute a lease which
it deems to be unsatisfactory as to the First Offer Space: and
(f) The rights under this Section 50.12 shall expire and be of
no further force and affect on the expiration of the sixtieth (60th)
Lease, month following commencement of the Term hereof.
50.13 Reimbursable Expenditures. Lessee shall not be obligated for a
pro rata share of any expenditures due to be paid by it hereunder to the
extent of the unreasonableness of such expenditure.
50.14 Lien Waivers. Subject to review and satisfaction of counsel
for Lessor, Lessor shall execute any reasonable Lien Waiver forms
submitted to it by Lessee releasing any interest Lessor may have in
Lessor's personal property and or alterations that Lessee may remove
pursuant to Article 20 hereof, in favor of a third party vendor, lender,
or Lessor, provided that such reasonable documentary alterations as Lessor
or Lessor's counsel requests to protect the interest of Lessor in the
Leased Premises are adequately provided. Lessor shall execute such
documentation within ten (10) days of receipt of a document in form
agreeable to Lessor's counsel.
50.15 Consents. Wherever the consent or approval of either party is
required under this Lease, such consent or approval shall not be
unreasonably withheld or delayed, unless otherwise specified in this
Lease.
50.16 Lessor's Representations. Notwithstanding any other provision
hereof, Lessor hereby warrants that as of the Commencement Date the Leased
Premises are in good condition and repair and built in a good and
workmanlike manner in accordance with the approved Final Plans. Lessor
also warrants that all building equipment is in good operating order as of
the Commencement Date and that the Leased Premises and the Common
Maintenance Areas are in compliance with all applicable laws and
governmental regulations as of the Commencement Date, but makes no
warranty as to conditions or compliance with laws and regulations
thereafter.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease as of
the day and year first written above.
LESSOR LESSEE
KAISER DEVELOPMENT COMPANY KELLEY-CLARKE, INC.
By: /s/ Edward T Pike, III By: /s/ John F. Blazin, VP
<PAGE>
LEASE AMENDMENT
This Lease Amendment ("Amendment") is made this 26th day of
February, 1990 by and between BEDFORD DEVELOPMENT COMPANY ("Lessor") and
KELLEY-CLARKE, INC. ("Lessee").
RECITALS
A. Lessor's predecessor in interest, Kaiser Development Company,
and Lessee entered into that certain Lease dated September 1, 1988 (the
"Lease") for premises located in Ardenwood Corporate Commons, Fremont,
California ("Leased Premises") as more fully described in the Lease.
B. Lessor is currently constructing the Leased Premises.
C. The parties wish to amend the Lease to reflect, among other
things, additional construction to be required of Lessor.
CONSIDERATION
In consideration of the covenants and agreements herein contained,
and for other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties agree as follows:
TERMS
1. Lessor agrees to perform and install the following additional
improvements which were not part of Lessor's construction obligations
under the Lease and which shall not be deemed part of the Total Project
Costs, as that term is defined in the Lease:
Construction of a commercial kitchen, an employee kitchen, a walk-in
freezer, a walk-in cooler, pallet racks, and an outdoor enclosure
for the freezer and cooler ("Special Improvements")
Lessor shall pay all costs associated with the design, engineering and
installation of the Special Improvements which shall be more particularly
described in the "Plans" defined below.
2. The parties have agreed to Plans ("Plans") adequately
describing the Special Improvements.
3. Lessor shall pay for the first one hundred sixty-two thousand
six hundred dollars ($162,600) of such Special Improvement costs. If the
costs exceed one hundred sixty-two thousand six hundred dollars
($162,600), Lessee shall have the option of reducing the scope of work of
the Special Improvements to reduce the costs thereof, or of paying in cash
to Lessor prior to construction of such Special Improvements the costs
thereof exceeding one hundred sixty-two thousand six hundred dollars
($162,600). All delays in construction caused by the engineering, design
or installation of the Special Inprovements and the review process
required thereby shall be "Lessee Delays" as defined in the Lease.
4. Minimum Monthly Rent, calculated in accordance with Section
6.2 of the Lease shall be increased by the sum of two thousand two hundred
forty dollars ($2,240).
5. Notwithstanding the provision of the Lease, Lessee shall be
required to remove all Special Improvements from the Leased Premises at
the expiration or termination of the Lease unless Lessor agrees to the
contrary.
6. Notwithstanding any provision of the Lease to the contrary,
Lessee shall maintain and repair (and replace as necessary) at its sole
cost and expense all Special Improvements.
7. Sections 48.2(a) and 48.2(c) of the Lease are hereby deleted.
8. Section 49.1 of the Lease is hereby deleted and replaced with
the following:
"49.1 Lessor shall provide that Lessee shall have available to
it not less than four (4) parking places per 1,000 square feet of
Usable Area, but in no event is Lessor required to provide for
Lessee's use more than 156 parking spaces."
9. Exhibit "B" of the Lease is hereby deleted and replaced with
Exhibit "B" attached hereto which shall henceforth be deemed the Exhibit
"B" to the Lease.
IN WITNESS WHEREOF, the parties have executed this Amendment.
LESSOR LESSEE
BEDFORD DEVELOPMENT COMPANY KELLEY-CLARKE, INC.
By: __________________________ By: _________________________
William C. Pratt,
Its: Area Manager President
By: __________________________
John F. Blazin,
Vice President
<PAGE>
SECOND LEASE AMENDMENT
This Second Lease Amendment ("Amendment") is made this 1st day of
May, 1990 by and between BEDFORD DEVELOPMENT COMPANY ("Lessor") and
KELLEY-CLARKE, INC. ("Lessee").
RECITALS
WHEREAS,
A. Lessor's predecessor in interest, Kaiser Development Company,
and Lessee entered into that certain Lease dated September 1, 1988 (the
"Lease") for premises located in Ardenwood Corporate Commons, Fremont,
California ("Leased Premises") as more fully described in the Lease.
B. The Lease vas modified by Lease Amendment dated February 26,
1990.
C. Lessor is currently constructing the Leased Premises.
D. The parties wish to further amend the Lease to reflect, among
other things, additional construction to be required of Lessor.
CONSIDERATION
In consideration of the covenants and agreements herein contained,
and for other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties agree as follows:
TERMS
1. Lessor agrees to perform and install the following additional
improvements which were not part of Lessor's construction obligations
under the Lease and which shall not be deemed part of the Total Project
Costs, as that term is defined in the Lease:
Construction of a computer room with raised floor and ramp, together
with necessary plumbing, hvac, electrical and fire suppression
systems ("Additional Improvements").
Lessor shall pay all costs ("Costs") associated with the design,
engineering and installation of the Additional Improvements (including
permit, application and other processing fees, and legal fees associated
with this Second Amendment) which shall be more particularly described in
the "Plans" defined below.
2. The Parties have agreed to Plans ("Plans") adequately
describing the Additional Improvements.
3. All delays in construction caused by the engineering, design
or installation of the Additional Improvements and the review process
required thereby shall be "Lessee Delays" as defined in the Lease.
4. Minimum Monthly Rent, as calculated in accordance with Section
6.2 of the Lease and as adjusted per the Lease Amendment shall be
increased by the sum of one thousand three hundred eighty dollars and
seventy-two cents ($1,380.72) per month.
5. Notwithstanding the provision of the Lease, Lessee shall be
required to remove all Additional Improvements from the Leased Premises at
the expiration or termination of the Lease unless Lessor agrees to the
contrary.
6. Notwithstanding any provision of the Lease to the contrary,
Lessee maintain and repair (and replace as necessary) at its sole cost and
expense all Additional Improvements.
7. Lessee will accept the Additional Improvements as constructed
in accordance with the Plans and shall hold Lessor harmless from all
liabilities with respect thereto from and after the date of delivery of
the Leased Premises to Lessee.
IN WITNESS WHEREOF, the Parties have executed this Amendment.
LESSOR LESSEE
BEDFORD DEVELOPMENT COMPANY KELLEY-CLARKE, INC.
By: __________________________ By: _________________________
William C. Pratt,
Its: Area Manager President
By: __________________________
John F. Blazin,
Vice President
<PAGE>
THIRD AMENDMENT TO LEASE
This Third Amendment ("Third Amendment") in made this 5th day of
May, 1992 by and between BEDFORD DEVELOPMENT COMPANY ("Lessor") and
KELLEY-CLARKE, INC. ("Lessee").
RECITALS
A. Lesser and Lessee entered into that certain lease dated
September 1, 1988 (the "Original Lease"), which was amended on February
26, 1990 (the "First Amendment") and on May 1, 1990, (the "Second
Amendment"), for certain property generally situated at 6300 Dumbarton
Circle, Fremont, California, which collectively are hereinafter called the
"Lease". The Lease affects Premises which are more particularly
described in the Lease (the "Leased Premises");
B. The parties hereto wish by this Amendment to amend the Lease.
CONSIDERATION
Therefore, in consideration of the agreements herein contained, and
for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the Parties agree as follows:
1. Unless otherwise stated any capitalized term is hereby given
the same meaning as set forth in the Lease.
2. Except as otherwise stated in this Amendment, the terms of the
Lease remain in full force and effect and the Lease, as hereby amended
shall bind, and inure to the benefit of, the successors of the parties
hereto.
3. MINIMUM MONTHLY RENT. Notwithstanding any provision of the
Lease to the contrary, the Minimum Monthly Rent as set forth in Section
1.5 of the Lease shall be amended to read as follows:
Months 1-60 $40,951.29 per month
Months 61-121 $47,908.92 per month
4. All other terms and conditions of the Lease are hereby
ratified and reconfirmed.
IN WITNESS WHEREOF, the parties have executed this Amendment.
LESSOR LESSEE
BEDFORD DEVELOPMENT COMPANY KELLEY-CLARKE, INC.
By: __________________________ By: _________________________
J. Randell Moore John F. Blazin,
Vice President President/CEO
Date: 6/9/92 Date: May 18, 1992
By: __________________________
<PAGE>
FOURTH AMENDMENT TO LEASE
This Fourth Amendment ("Fourth Amendment") is made this 19th day of
April, 1995 ("Effective Date") by and between KRDC, Inc., a California
Corporation, formerly Bedford Development Company and also Kaiser
Development Company ("Lessor"), and Kelley-Clarke, Inc., a California
corporation ("Lessee").
RECITALS
WHEREAS,
A. Lessor and Lessee entered. into that certain Lease dated
September 1, 1988 (the "Original Lease") which was amended on February
26, 1990 (the "First Amendment") ; on May 1, 1990, (the "Second
Amendment") ; and on May 5, 1992, (the "Third Amendment") for certain
property generally situated at 6300 Dumbarton Circle, Fremont, California,
(the Original Lease, as amended, is referred to herein as the "Lease").
The Lease covers the premises which are more particularly described
therein (the "Leased Premises");
B. The parties hereto wish by this Amendment to amend the Lease.
CONSIDERATION
Therefore, in consideration of the agreements herein contained, and
for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows:
TERMS
1. Unless otherwise stated, any capitalized term is hereby given
the same meaning as set forth in the Lease.
2. Except as otherwise stated in this Amendment, the terms of the
Lease remain in full force and effect and the Lease, as hereby amended
shall bind, and inure to the benefit of, the successors of the parties
hereto.
3. Premises. Effective October 25, 1994, Section 1. 3 (C) of the
Lease is amended by deleting "2.399 acres" and substituting in place
thereof "approximately 2.64 acres" to reflect the increased gross square
footage of land area in the Complex as depicted on Parcel Map No. 6773
(being a subdivision of Parcel 1 through 4, inclusive of Parcel Map 4483,
filed for record in Book 152 of Maps at Pages 78-82, Alameda County
Records, City of Fremont, County of Alameda, State of California). The
detailed legal description of the Leased Premises is forthcoming and shall
be attached hereto upon final completion. A copy of Parcel Map No. 6773 is
attached hereto for reference as Exhibit "A".
4. Term. The term shall be extended by an additional sixty (60)
months, commencing July 1, 2000 and expiring June 30, 2005.
5. Option to Extend. The provisions pertaining to the Options to
Extend (two at five years each) as specified in Sections 1.4 (B), 1.5(C)
and 4.3 of the Lease shall be deleted in their entirety and the provisions
attached hereto as Exhibit "B" shall be substituted in their place.
6. Minimum Monthly Rent. The Minimum Monthly Rent as set forth in
Section 1.5 of the Lease shall be amended to read as follows:
07/01/1995 - 06/30/2000 $ 44,572.00 per month
07/01/2000 - 06/30/2005 $ 51,920.00 per month
Section 1. 5 (C) of the Lease is hereby deleted and of no further
force and effect.
7. Initial Pro Rata %. Due to the increase in the gross square
footage of land area in the Complex as described in Paragraph 3 of this
Amendment, effective January 1, 1995, Lessee's Initial Pro Rata % as set
forth in Section 1.8 of the Lease shall be revised from "1.3%" to
"0.9136%" (approximately 2.64 acres/approximately 288.96 total acres).
8. 0ption to Purchase. The provisions of Article 48 .(Option to
Purchase) of the Lease are hereby deleted in their entirety and shall
hereafter be of no further force and effect.
9. Parking. The provisions in Section 49.1 of the Lease are
hereby amended as follows:
Notwithstanding anything to the contrary in the Lease, Lessor shall
provide within six (6) months from execution of this Amendment, at
Lessor's expense: i) ten (10) additional parking stalls; and ii) thirty
one (31) relocated stalls, as shown on the attached Exhibit "C" (Parking
Plan). The Exhibit "C" is intended as a preliminary parking plan and is
subject to all necessary governmental approvals and compliance with all
applicable laws, ordinances and regulations.
10. First Offer - Adjacent Space. The provisions in Section 50.12
of the Lease shall hereinafter be deleted and of no further force and
effect.
11. Right of First Offer to Purchase.
(a) Grant. Subject to the terms of this Section 11, Lessor
grants to Lessee a right of first offer to purchase the Leased Premises
(the "Purchase Right").
(b) Term. The term of the Purchase Right ("Purchase Right
Term") shall commence on the earlier to occur of (i) one (1) year after
the Effective Date, or (ii) one (1) day after the date on which Lessor
conveys fee title to the Leased Premises to a bona fide third party, and
shall terminate on the expiration or earlier termination of the initial
Lease term.
(c) Covenants of Lessor. Subject to the conditions precedent
established by Section 11(e) below, if, at any time during Purchase Right
Term, Lessor decides to offer the Leased Premises for sale to a bona fide
third party, Lessor shall first provide Lessee with a written notice
("Sale Notice") detailing the purchase price of the Leased Premises,
payment terms, conditions of title, costs of escrow and other relevant
terms.
(d) Exercise of Lessee's Purchase Right.
(i) Within five (5) business days of receipt of a Sale
Notice from Lessor, Lessee shall either (a) provide written notice
("Purchase Notice") to Lessor of Lessee's election to purchase the
Leased Premises on the terms stated in the Sale Notice and deliver to
Lessor a refundable deposit in the amount of S50,000 ("Deposit") to be
used toward the purchase price for the Leased Premises, or (b) provide
written notice ("Counteroffer Notice") to Lessor of Lessee's election
not to purchase the Leased Premises, but stating the purchase price
("Counteroffer") at which Lessee would be willing to purchase the Leased
Premises. If Lessee shall fail to provide to Lessor either a Purchase
Notice or a Counteroffer Notice, Lessee shall be deemed to have waived its
right to purchase the Leased Premises (under any terms) for the twelve
(12) month period immediately following the applicable Sale Notice.
(ii) Within fifteen (15) business days of Lessee's
delivery to Lessor of the Purchase Notice, Lessor and Lessee shall execute
an agreement of purchase and sale satisfactory to Lessor (which agreement
shall contain the terms specified in the Sale Notice). If Lessor and
Lessee shall fail to execute an agreement of purchase and sale within such
time, Lessee shall be deemed to have waived its right to purchase the
Leased Promises for the twelve (12) month period immediately following the
Sale Notice, as long as the terms in the agreement of purchase and sale to
a bona fide third party do not materially differ from the terms of the
agreement of purchase and sale presented to Lessee by Lessor.
(iii) If Lessee shall deliver to Lessor a Counteroffer
Notice, Lessor may, at any time during the twelve (12) month period
following the date of the Sale Notice, either (a) notify Lessee in writing
("Counteroffer Acceptance Notice") of Lessor's acceptance of the
Counteroffer, or (b) proceed with the sale of the Leased Premises to a
bona fide third party provided the purchase price for such sale is in
excess of the Counteroffer and the terms of sale are otherwise generally
in accordance with the terms stated in the Sale Notice. If Lessor elects
to accept Lessee's Counteroffer, Lessee shall deliver the Deposit to
Lessor within five (5) business days of receipt of the Counteroffer
Acceptance Notice and Lessor and Lessee shall, within fifteen (15)
business days following delivery of the Deposit, execute an agreement of
purchase and sale satisfactory to Lessor (which agreement shall contain
the terms specified in the Sale Notice except that the purchase price
shall be the amount of the Counteroffer). If Lessor and Lessee shall fail
to execute an agreement of purchase and sale within such time, Lessee
shall be deemed to have waived its right to purchase the Leased Premises
for the twelve (12) month period immediately following the Counteroffer
Acceptance Notice, as long as the terms in the agreement of purchase and
sale to a bona fide third party do not materially differ from the terms of
the agreement of purchase and sale presented to Lessee by Lessor.
(e) Conditions to Purchase Right. Notwithstanding anything
to the contrary in this Section 11, Lessor shall have no obligation to
provide Lessee with a Sale Notice, and Lessee shall have no right to
exercise Lessee's Purchase Right, if Lessee is in default either: (i) at
the time Lessor seeks to sell the Leased Premises, or (ii) upon the date
Lessee seeks to close escrow on the sale of the Leased Premises. The
Purchase Right shall be personal to Lessee and shall not be transferable
with any assignment of this Lease or subletting of the Premises.
(f) Terms for Purchase Right. In the event that Lessee
exercises Lessee's Purchase Right, Lessee's purchase of the Leased
Premises shall be on all of the same terms and conditions described in the
Sale Notice.
(g) Continuing Right. Lessee's failure to exercise its
Purchase Right shall not be deemed a waiver or relinquishment of such
right if Lessor fails to convey the Leased Premises to a bona fide third
party within one (1) year of the date of the Sale Notice.
(h) Exceptions to Offer. Notwithstanding anything to the
contrary in this Section 11, Lessor shall not be obligated to provide
Lessee with a Sale Notice, and the terms of this Section 11 shall not
apply, in the event of: (i) a transfer of the Premises to an affiliate of
Lessor (ii) a portfolio sale, or (iii) a foreclosure sale.
(i) Subordinate Nature. Lessee's Purchase Right shall be
subject and subordinate to the lien of any mortgage, deed of trust or
other lien resulting from any other method of financing or refinancing,
now or hereafter in force against the Building or Leased Promises, and to
all advances made or hereafter to be made upon the security thereof.
(j) Closing Costs. Lessor and Lessee shall each pay the fees
of their respective attorneys and consultants in connection with the sale
of the Leased Promises to Lessee. All closing costs incurred in connection
with that sale shall be apportioned in accordance with local custom.
(k) Successors and Assigns. Lessee's Purchase Right shall be
binding on the successors and assigns of Lessor.
All other terms and conditions of the Lease are hereby ratified and
reconfirmed.
IN WITNESS WHEREOF, the parties have executed this Amendment.
LESSOR: LESSEE:
KRDC, Inc., a California corporation Kelley-Clarke, Inc., a California
corporation
By: Kemper Real Estate Management
Company, a Delaware corporation, its
duly authorized agent
By: ________________________________ By: ________________________________
Lisa A. Berlin C. William Frankland
its duly authorized agent its: Vice-Chairman,
Chief Financial Officer
Date: ______________________________ Date: 4/21/95
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
Nos. 33-77300, 33-80155, 33-353181 and 33-363345 on Forms S-8 and
No. 33-96766 on Form S-3 of SangStat Medical Corporation of our report
dated February 2, 199appearing in this Annual Report of Form 10-K of
SangStat Medical Corporation for the year ended December 31, 1998.
/s/ DELOITTE & TOUCHE LLP
- ---------------------------
DELOITTE & TOUCHE LLP
San Jose, California
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from the Consolidated Balance Sheet and Consolidated Statement of
Income included in the Company's Form 10-K for the period ended
December 31, 1998 and is qualified in its entirety by reference to
such Financial Statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<PERIOD-TYPE> 12-MOS
<CASH> 16,285,653
<SECURITIES> 13,374,742
<RECEIVABLES> 11,891,731
<ALLOWANCES> 928,917
<INVENTORY> 33,375,259
<CURRENT-ASSETS> 78,166,919
<PP&E> 6,778,746
<DEPRECIATION> 3,644,978
<TOTAL-ASSETS> 107,327,308
<CURRENT-LIABILITIES> 31,339,012
<BONDS> 0
0
0
<COMMON> 160,250,935
<OTHER-SE> (100,664,290)
<TOTAL-LIABILITY-AND-EQUITY> 107,327,308
<SALES> 18,585,859
<TOTAL-REVENUES> 19,678,488
<CGS> 12,531,559
<TOTAL-COSTS> 12,531,559
<OTHER-EXPENSES> 44,836,727
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,052,721)
<INCOME-PRETAX> (38,206,737)
<INCOME-TAX> 257,201
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (38,463,938)
<EPS-PRIMARY> ($2.39)
<EPS-DILUTED> ($2.39)
</TABLE>
