-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EBgTnhhPyM33g+9TrMR/qdLE+OnLFja+TwmKmg9ju6em/mGnATqUEtAgGRMWbpG1 3kpDfGXXlJOxMa7q1+MyFA== 0000898430-00-000639.txt : 20000307 0000898430-00-000639.hdr.sgml : 20000307 ACCESSION NUMBER: 0000898430-00-000639 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 20000303 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXYGEN INC CENTRAL INDEX KEY: 0001068796 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 770449487 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-31580 FILM NUMBER: 560374 BUSINESS ADDRESS: STREET 1: 515 GALVESTON DRIVE CITY: REDWOOD CITY STATE: CA ZIP: 94063 BUSINESS PHONE: 6502985300 MAIL ADDRESS: STREET 1: 515 GALVESTON DRIVE CITY: REDWOOD CITY STATE: CA ZIP: 94063 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on March 3, 2000 Registration No. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 --------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- MAXYGEN, INC. (Exact name of Registrant as specified in its charter) --------------- Delaware 8731 77-0449487 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification No.)
MAXYGEN, INC. 515 Galveston Drive Redwood City, California 94063 (650) 298-5300 (Address, including zip code, and telephone number, including area code, of Maxygen, Inc.'s principal executive offices) --------------- RUSSELL J. HOWARD, Ph.D. President and Chief Executive Officer MAXYGEN, INC. 515 Galveston Drive Redwood City, California 94063 (650) 298-5300 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: JULIAN N. STERN BARRY E. TAYLOR AUGUST J. MORETTI TREVOR J. CHAPLICK Heller Ehrman White & McAuliffe Wilson Sonsini Goodrich & Rosati 2500 Sand Hill Road, Suite 100 Professional Corporation Menlo Park, California 94025-7063 650 Page Mill Road Telephone: (650) 234-4229 Palo Alto, California 94304 Facsimile: (650) 234-4299 Telephone: (650) 493-9300 Facsimile: (650) 845-5000
--------------- Approximate date of commencement of proposed sale to the public: As soon as practicable following the effectiveness of this Registration Statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering: [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [_] --------------- CALCULATION OF REGISTRATION FEE - ----------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------
Proposed Proposed Maximum Title of Each Class of Maximum Aggregate Amount of Securities to be Amount to be Offering Price Offering Registration Registered Registered(1) Per Share(2) Price(2) Fee - ----------------------------------------------------------------------------------- Common Stock, $0.0001 par value............ 1,725,000 $160.1875 $276,323,438 $72,950 - ----------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------
(1) Includes 225,000 shares which the underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended, based on the average of the high and low sale prices of the common stock on the Nasdaq National Market on March 1, 2000, as reported in The Wall Street Journal. --------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Subject to Completion, Dated March 3, 2000 1,500,000 Shares [MAXYGEN LOGO] Common Stock ----------- This is an offering of 1,500,000 shares of common stock of Maxygen, Inc. Maxygen is selling all of the 1,500,000 shares of common stock in this offering. The common stock is quoted on the Nasdaq National Market under the symbol "MAXY". The last reported sale price of the common stock on March 1, 2000 was $162.50 per share. See "Risk Factors" beginning on page 7 to read about factors you should consider before buying shares of the common stock. ----------- Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed on the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. -----------
Per Share Total --------- ------ Initial price to public....................................... $ $ Underwriting discount......................................... $ $ Proceeds, before expenses, to Maxygen......................... $ $
To the extent that the underwriters sell more than 1,500,000 shares of common stock, the underwriters have the option to purchase up to an additional 225,000 shares from Maxygen at the initial price to public less the underwriting discount. ----------- The underwriters expect to deliver the shares against payment in New York, New York on , 2000. Goldman, Sachs & Co. Robertson Stephens Credit Suisse First Boston Invemed Associates ----------- Prospectus dated , 2000. The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding us, the sale of our common stock in this offering, and our financial statements and notes to those financial statements that appear elsewhere in this prospectus. Our Business Overview We believe that we are the leader in the emerging field of directed molecular evolution, the process by which genes are modified for specific commercial uses. Our proprietary directed molecular evolution technologies, known as MolecularBreeding(TM) technologies, mimic the natural process of evolution and bring together advances in molecular biology and classical breeding, while capitalizing on the large amount of genetic information generated by government, academic and commercial laboratories. Unlike conventional technologies, MolecularBreeding directed molecular evolution technologies are efficient, in part because they require minimal understanding of complex underlying biological systems. We have designed our technologies to rapidly develop new genes for commercial applications, where such genes would be difficult or impossible to develop through other processes. We believe our MolecularBreeding directed molecular evolution technologies are commercially applicable to a broad range of industries. We are currently conducting research on more than 40 product candidates for the chemical, agricultural and pharmaceutical industries, enabling us to potentially generate short-term as well as long-term revenues. We have established collaborations with Novo Nordisk, DuPont/Pioneer Hi- Bred, AstraZeneca, DSM and Rio Tinto, all leaders in their respective markets, as well as with United States government agencies. Our commercial collaborators and U.S. government agencies have committed funding of over $102 million. While we will continue to establish strategic collaborations with leading companies and pursue additional grants from U.S. government agencies, we will also invest our own funds in certain areas. To that end, we have retained significant product commercialization rights to future applications of our technologies. Our Target Markets Our technologies address a number of multi-billion dollar industries. Our target markets include chemicals, agriculture, protein pharmaceuticals, and preventative and therapeutic vaccines. Within these markets, we are focusing our efforts on specific high-value opportunities. In chemicals, we are developing new processes using enzymes as catalysts that could increase yields and decrease manufacturing costs for multiple product classes, such as vitamins, pharmaceuticals, paints and plastics. In addition, we believe that processes using enzymes as catalysts may have utility for generating new useful materials such as fibers for industrial and consumer product applications. In agriculture, we are applying our technologies to potentially increase crop yield and qualities, including enhanced nutritional value in human food and animal feed. In pharmaceuticals and vaccines, we are focusing our efforts on developing products for a number of indications, including multiple forms of cancer, infectious diseases such as HIV and hepatitis, and diseases in which the body generates an improper immune response, such as rheumatoid arthritis and multiple sclerosis. Our Technologies Our MolecularBreeding directed molecular evolution technologies consist of two components: DNAShuffling(TM) recombination technologies and MaxyScan(TM) screening systems. DNAShuffling is the process of recombining single genes or gene families to generate a library of new modified genes. MaxyScan is a series of specialized screening systems that efficiently and rapidly select those gene products and enzymes best suited for specific commercial purposes. We have an extensive patent 3 portfolio, including 16 issued U.S. patents, of which six are owned by us and 10 have been licensed to us by others. Furthermore, we have over 55 families of patent applications relating to our MolecularBreeding directed molecular evolution technologies, the application of our technologies to diverse industries and specific proteins improved by our technologies. Our Accomplishments We have attracted a multi-disciplinary team comprised of leading experts in the field of directed molecular evolution. We have consistently been able to generate significant enhancements in many different genes that have relevance to multiple commercial applications. We have demonstrated improvements in 13 product candidates and have an additional 32 product candidates in earlier stages of development. For example, we have increased the anti-viral activity of a protein and developed new modified enzymes which have the potential to streamline chemical and pharmaceutical manufacturing processes. In addition, we have significantly improved the performance of multiple commercially relevant properties of the industrial enzyme subtilisin, one of the most studied and extensively modified commercial enzymes. Subtilisin, which is widely used in laundry detergents, had annual sales of $500 million in 1998. We believe that this example demonstrates the ability of our MolecularBreeding directed molecular evolution technologies to achieve significant improvements beyond the limits of other approaches in biotechnology. To date, we have established strategic alliances with Novo Nordisk in the area of industrial enzymes, DuPont/Pioneer Hi-Bred and AstraZeneca in agriculture, DSM in antibiotic manufacturing and Rio Tinto in chemical processing. Since 1997, our collaborators have committed funding of over $75 million, assuming we perform research for the full term of the existing collaborations. Of this amount, we have received approximately $33 million, including $15 million in equity investments. In addition, we could receive over $145 million in milestone payments based on the accomplishment of specific performance criteria, as well as royalties on product sales. We have received six grants from the U.S. National Institute of Standards and Technology- Advanced Technology Program and the Defense Advanced Research Projects Agency with total committed grant funding of over $27 million, of which we have expended approximately $7 million. These grants are primarily for the development of vaccines and the advancement of our MolecularBreeding directed molecular evolution technologies. Our Strategy Our strategy has four major components: . We will continue to develop our core MolecularBreeding directed molecular evolution technologies to extend our proprietary technology leadership by investing significantly in research and development programs. We will acquire and license technologies from third parties that complement our capabilities. . We will continue to establish strategic collaborations with leading companies in targeted industries and will pursue additional grants from U.S. government agencies. We have retained, and intend to retain, significant rights to develop and market certain applications of products arising from our strategic collaborations. . We plan to develop multiple products in the chemicals, agriculture and pharmaceutical industries to generate revenues in the short-, medium- and long-term. We expect to receive a diversified royalty stream from the sale of commercial products and processes that may be developed and commercialized by our existing collaborators as well as revenues from any products that result from our grant-funded programs and self-funded programs. . We plan to retain rights to use our technologies in multiple applications. We will invest our own funds in selected areas and product opportunities with the aim of capturing a high percentage of profits on product sales. 4 Our History We began operations in 1997 to commercialize technologies originally conceived by Dr. Willem P.C. Stemmer while at Affymax Research Institute, a subsidiary of Glaxo Wellcome plc. We now have over 145 employees and occupy our own facilities and executive offices, totaling 47,880 square feet, located at 515 Galveston Drive, Redwood City, California 94063. Our telephone number is (650) 298-5300. We were incorporated under the laws of Delaware on May 7, 1996. Maxygen(TM), MaxyScan(TM), MolecularBreeding(TM), DNAShuffling(TM), and the Maxygen logo are some of our trademarks. Other service marks, trademarks and trade names referred to in this prospectus are the property of their respective owners. The Offering Shares offered by Maxygen.................... 1,500,000 shares Shares to be outstanding after this offering.................................... 32,269,644 shares Nasdaq National Market symbol................ MAXY Use of proceeds.............................. For research and development activities, for capital expenditures, to finance possible acquisitions and investments in technology, and for working capital and other general corporate purposes.
--------------- The above information is based on shares outstanding as of February 15, 2000. This information excludes 2,111,602 shares of common stock issuable upon the exercise of options outstanding as of February 15, 2000 at a weighted average exercise price of $5.74 per share and 1,943,385 shares of common stock reserved for future issuance under our benefit plans. 5 Summary Financial Data See Note 1 of Notes to Financial Statements for an explanation of the method used to determine the number of shares used in computing per share data below. See Note 8 to Financial Statements for information concerning the deemed dividend upon issuance of convertible preferred stock in August 1999.
Year Ended December 31, -------------------------- 1997 1998 1999 ------- ------- -------- (in thousands, except per share data) Statement of Operations Data: Collaborative research and development revenue.... $ 341 $ 1,077 $ 8,895 Grant revenue..................................... -- 1,646 5,122 ------- ------- -------- Total revenues.................................... 341 2,723 14,017 Operating expenses: Research and development........................ 3,074 7,858 19,250 General and administrative...................... 1,461 3,920 7,498 ------- ------- -------- Total operating expenses.......................... 4,535 11,778 26,748 ------- ------- -------- Loss from operations.............................. (4,194) (9,055) (12,731) Net interest income............................... 161 229 1,413 ------- ------- -------- Net loss.......................................... (4,033) (8,826) (11,318) Deemed dividend upon issuance of convertible preferred stock.................................. -- -- (2,200) ------- ------- -------- Net loss attributable to common stockholders...... $(4,033) $(8,826) $(13,518) Basic and diluted net loss per share.............. $ (0.82) $ (1.31) $ (1.53) ======= ======= ======== Shares used in computing basic and diluted net loss per share................................... 4,917 6,748 8,854 Pro forma basic and diluted net loss per share.... $ (0.75) $ (0.74) ======= ======== Shares used in computing pro forma basic and diluted net loss per share....................... 11,762 18,249
In the "as adjusted" column below, we have adjusted the actual balance sheet data to give effect to receipt of the net proceeds from the sale in this offering of 1,500,000 shares of common stock at an assumed public offering price of $162.50 per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses.
December 31, 1999 ------------------ As Actual Adjusted -------- -------- (in thousands) Balance Sheet Data: Cash and cash equivalents................................... $136,343 $366,187 Working capital............................................. 132,510 362,354 Total assets................................................ 145,578 375,422 Non-current portion of equipment financing.................. 1,644 1,644 Accumulated deficit......................................... (24,177) (24,177) Total stockholders' equity.................................. 133,716 363,560
6 RISK FACTORS You should carefully consider the risks described below, together with all of the other information included in this prospectus, before deciding whether to invest in our common stock. The risks and uncertainties described below are not the only ones facing Maxygen. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition or results of operations. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment. We Have a History of Net Losses. We Expect to Continue to Incur Net Losses and We May Not Achieve or Maintain Profitability. We have incurred net losses since our inception, including a net loss of approximately $11.3 million for the year ended December 31, 1999. As of December 31, 1999, we had an accumulated deficit of approximately $24.2 million. We expect to have increasing net losses and negative cash flow in the foreseeable future. The size of these net losses will depend, in part, on the rate of growth, if any, in our contract revenues and on the level of our expenses. To date, we have derived all of our revenues from collaborations and grants and will continue to do so in the foreseeable future. Revenues from collaborations and grants are uncertain because our existing agreements have fixed terms and because our ability to secure future agreements will depend upon our ability to address the needs of our potential future collaborators. We expect to spend significant amounts to fund research and development and enhance our core technologies. As a result, we expect that our operating expenses will increase significantly in the near term and, consequently, we will need to generate significant additional revenues to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. We Are an Early Stage Company Deploying Unproven Technologies. If We Do Not Develop Commercially Successful Products, We May Be Forced to Cease Operations. You must evaluate us in light of the uncertainties and complexities affecting an early stage biotechnology company. Our MolecularBreeding directed molecular evolution technologies are new and in the early stage of development. We may not develop products that prove to be safe and efficacious in any market, meet applicable regulatory standards, are capable of being manufactured at reasonable costs, or can be marketed successfully. We may not be successful in the commercial development of products. Successful products will require significant development and investment, including testing, to demonstrate their cost-effectiveness prior to their commercialization. To date, companies in the biotechnology industry have developed and commercialized only a limited number of gene-based products. We have not proven our ability to develop and commercialize products. Further, none of our potential vaccine or protein therapeutic products are expected to enter clinical trials within the next year. We must conduct a substantial amount of additional research and development before any regulatory authority will approve any of our products. Our research and development may not indicate that our products are safe and effective, in which case regulatory authorities may not approve them. Problems frequently encountered in connection with the development and utilization of new and unproven technologies and the competitive environment in which we operate might limit our ability to develop commercially successful products. 7 Commercialization of Our Technologies Depends On Collaborations With Other Companies. If We Are Not Able to Find Collaborators in the Future, We May Not Be Able to Develop Our Technologies or Products. Since we do not currently possess the resources necessary to develop and commercialize potential products that may result from our MolecularBreeding directed molecular evolution technologies, or the resources to complete any approval processes which may be required for these products, we must enter into collaborative arrangements to develop and commercialize products. We have entered into collaborative agreements with other companies to fund the development of certain new products for specific purposes. These contracts expire after a fixed period of time. If they are not renewed or if we do not enter into new collaborative agreements, our revenues will be reduced and our products may not be commercialized. We have limited or no control over the resources that any collaborator may devote to our products. Any of our present or future collaborators may not perform their obligations as expected. These collaborators may breach or terminate their agreement with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. Further, our collaborators may elect not to develop products arising out of our collaborative arrangements or devote sufficient resources to the development, manufacture, market or sale of these products. If any of these events occur, we may not be able to develop our technologies or commercialize our products. We Intend to Conduct Proprietary Research Programs, and Any Conflicts With Our Collaborators or Any Inability to Commercialize Products Resulting from This Research Could Harm Our Business. An important part of our strategy involves conducting proprietary research programs. We may pursue opportunities in fields that could conflict with those of our collaborators. Moreover, disagreements with our collaborators could develop over rights to our intellectual property. Any conflict with our collaborators could reduce our ability to obtain future collaboration agreements and negatively impact our relationship with existing collaborators, which could reduce our revenues. Certain of our collaborators could also become competitors in the future. Our collaborators could develop competing products, preclude us from entering into collaborations with their competitors, fail to obtain timely regulatory approvals, terminate their agreements with us prematurely or fail to devote sufficient resources to the development and commercialization of products. Any of these developments could harm our product development efforts. We will either commercialize products resulting from our proprietary programs directly or through licensing to other companies. We have no experience in manufacturing and marketing, and we currently do not have the resources or capability to manufacture products on a commercial scale. In order for us to commercialize these products directly, we would need to develop, or obtain through outsourcing arrangements, the capability to manufacture, market and sell products. We do not have these capabilities, and we may not be able to develop or otherwise obtain the requisite manufacturing, marketing and sales capabilities. If we are unable to successfully commercialize products resulting from our proprietary research efforts, we will continue to incur losses. We May Encounter Difficulties in Managing Our Growth. These Difficulties Could Increase Our Losses. We have experienced a period of rapid and substantial growth that has placed and, if this growth continues, will place a strain on our human and capital resources. If we are unable to manage this growth effectively, our losses could increase. The number of our employees increased from 20 to 74 to 143 at December 31, 1997, 1998 and 1999, respectively. Our revenues increased from $341,000 in 1997 to 8 $2.7 million in 1998 and $14.0 million in 1999. Our ability to manage our operations and growth effectively requires us to continue to expend funds to improve our operational, financial and management controls, reporting systems and procedures and to attract and retain sufficient numbers of talented employees. If we are unable to successfully implement improvements to our management information and control systems in an efficient or timely manner, or if we encounter deficiencies in existing systems and controls, then management may receive inadequate information to manage the day-to-day operations of the Company. Since Our Technologies Can Be Applied to Many Different Industries, If We Focus Our Efforts on Industries Which Fail to Produce Viable Product Candidates, We May Fail to Capitalize on More Profitable Areas. We have limited financial and managerial resources. In light of the fact that our technologies may be applicable to numerous, diverse industries, we will be required to prioritize our application of resources to discrete efforts. This requires us to focus on product candidates in selected industries and forego efforts with regard to other products and industries. Our decisions may not produce viable commercial products and may divert our resources from more profitable market opportunities. Public Perception of Ethical and Social Issues May Limit the Use of Our Technologies, Which Could Reduce Our Revenues. Our success will depend in part upon our ability to develop products discovered through our MolecularBreeding directed molecular evolution technologies. Governmental authorities could, for social or other purposes, limit the use of genetic processes or prohibit the practice of our MolecularBreeding directed molecular evolution technologies. Ethical and other concerns about our MolecularBreeding directed molecular evolution technologies, particularly the use of genes from nature for commercial purposes, and products resulting therefrom could adversely affect their market acceptance. If the Public Does Not Accept Genetically Engineered Products, We Will Have Less Demand for Our Products. The commercial success of our potential products will depend in part on public acceptance of the use of genetically engineered products including drugs, plants and plant products. Claims that genetically engineered products are unsafe for consumption or pose a danger to the environment may influence public attitudes. Our genetically engineered products may not gain public acceptance. Negative public reaction to genetically modified organisms and products could result in greater government regulation of genetic research and resultant products, including stricter labeling laws or regulations, and could cause a decrease in the demand for our products. The subject of genetically modified organisms has received negative publicity in Europe, which has aroused public debate. The adverse publicity in Europe could lead to greater regulation and trade restrictions on imports of genetically altered products. If similar adverse public reaction occurs in the United States, genetic research and resultant products could be subject to greater domestic regulation and could cause a decrease in the demand for our products. Many Potential Competitors Who Have Greater Resources and Experience Than We Do May Develop Products and Technologies That Make Ours Obsolete. The biotechnology industry is characterized by rapid technological change, and the area of gene research is a rapidly evolving field. Our future success will depend on our ability to maintain a competitive position with respect to technological advances. Rapid technological development by others may result in our products and technologies becoming obsolete. 9 We face, and will continue to face, intense competition from organizations such as large biotechnology companies, as well as academic and research institutions and government agencies that are pursuing competing technologies for modifying DNA. These organizations may develop technologies that are superior alternatives to our technologies. Further, our competitors in the directed molecular evolution field may be more effective at implementing their technologies to develop commercial products. Some of these competitors have entered into collaborations with leading companies within our target markets to produce enzymes for commercial purposes. Any products that we develop through our MolecularBreeding directed molecular evolution technologies will compete in multiple, highly competitive markets. Most of the organizations competing with us in the markets for such products have greater capital resources, research and development and marketing staffs and facilities and capabilities, and greater experience in modifying DNA, obtaining regulatory approvals, manufacturing products and marketing. Accordingly, our competitors may be able to develop technologies and products more easily which would render our technologies and products and those of our collaborators obsolete and noncompetitive. Any Inability to Adequately Protect Our Proprietary Technologies Could Harm Our Competitive Position. Our success will depend in part on our ability to obtain patents and maintain adequate protection of our other intellectual property for our technologies and products in the U.S. and other countries. If we do not adequately protect our intellectual property, competitors may be able to practice our technologies and erode our competitive advantage. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the U.S., and many companies have encountered significant problems in protecting their proprietary rights in these foreign countries. These problems can be caused by, for example, a lack of rules and methods for defending intellectual property rights. The patent positions of biopharmaceutical and biotechnology companies, including our patent position, are generally uncertain and involve complex legal and factual questions. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. We will apply for patents covering both our technologies and products as we deem appropriate. However, these applications may be challenged and may not result in issued patents. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. Furthermore, others may independently develop similar or alternative technologies or design around our patented technologies. In addition, others may challenge or invalidate our patents, or our patents may fail to provide us with any competitive advantages. We rely upon trade secret protection for our confidential and proprietary information. We have taken security measures to protect our proprietary information. These measures may not provide adequate protection for our trade secrets or other proprietary information. We seek to protect our proprietary information by entering into confidentiality agreements with employees, collaborators and consultants. Nevertheless, employees, collaborators or consultants may still disclose our proprietary information, and we may not be able to meaningfully protect our trade secrets. In addition, others may independently develop substantially equivalent proprietary information or techniques or otherwise gain access to our trade secrets. Litigation or Other Proceedings or Third Party Claims of Intellectual Property Infringement Could Require Us to Spend Time and Money and Could Shut Down Some of Our Operations. Our commercial success depends in part on neither infringing patents and proprietary rights of third parties, nor breaching any licenses that we have entered into with regard to our technologies and products. Others have filed, and in the future are likely to file, patent applications covering genes or gene 10 fragments which we may wish to utilize with our MolecularBreeding directed molecular evolution technologies, or products that are similar to products developed with the use of our MolecularBreeding directed molecular evolution technologies. If these patent applications result in issued patents and we wish to use the claimed technology, we would need to obtain a license from the third party. Third parties may assert that we are employing their proprietary technology without authorization. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes these patents. We could incur substantial costs and diversion of management and technical personnel in defending ourselves against any of these claims or enforcing our patents or other intellectual property rights against others. Furthermore, parties making claims against us may be able to obtain injunctive or other equitable relief which could effectively block our ability to further develop, commercialize and sell products, and could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties. We may not be able to obtain these licenses at a reasonable cost, if at all. In that event, we could encounter delays in product introductions while we attempt to develop alternative methods or products. Defense of any lawsuit or failure to obtain any of these licenses could prevent us from commercializing available products. We routinely monitor the public disclosures of other companies operating in our industry regarding their technological development efforts. If we determine that these efforts violate our intellectual property or other rights, we intend to take appropriate action, which could include litigation. Any action we take could result in substantial costs and diversion of management and technical personnel. Furthermore, the outcome of any action we take to protect our rights may not be resolved in our favor. If We Lose Our Key Personnel or Are Unable to Attract and Retain Additional Personnel We May Be Unable to Pursue Collaborations or Develop Our Own Products. We are highly dependent on the principal members of our management and scientific staff, the loss of whose services might adversely impact the achievement of our objectives. In addition, recruiting and retaining qualified scientific personnel to perform future research and development work will be critical to our success. We do not currently have sufficient executive management personnel to fully execute our business plan. There is currently a shortage of skilled executives, which is likely to continue. As a result, competition for skilled personnel is intense, and the turnover rate can be high. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced scientists from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. Failure to attract and retain personnel would prevent us from pursuing collaborations or developing our products or core technologies. Our planned activities will require additional expertise in specific industries and areas applicable to the products developed through our technologies. These activities will require the addition of new personnel, including management, and the development of additional expertise by existing management personnel. The inability to acquire these services or to develop this expertise could impair the growth, if any, of our business. We Will Need Additional Capital in the Future. If Additional Capital is Not Available, We Will Have to Curtail or Cease Operations. Our future capital requirements will be substantial and will depend on many factors including payments received under collaborative agreements and government grants, the progress and scope of our collaborative and independent research and development projects, the effect of any acquisitions, and the filing, prosecution and enforcement of patent claims. 11 Changes may also occur that would consume available capital resources significantly sooner than we expect. We may be unable to raise sufficient additional capital. If we fail to raise sufficient funds, we will have to curtail or cease operations. We anticipate that the net proceeds of this offering and interest earned thereon, together with existing cash and cash equivalents and anticipated cash flows from operations, will enable us to maintain our currently planned operations for at least the next three years. If our capital resources are insufficient to meet future capital requirements, we will have to raise additional funds to continue the development of our technologies and complete the commercialization of products, if any, resulting from our technologies. Some of Our Programs Depend on Government Grants, Which May Be Withdrawn. The Government Has License Rights to Technology Developed With Its Funds. We have received and expect to continue to receive significant funds under various U.S. government research and technology development programs. The government may significantly reduce funding in the future for a number of reasons. For example, some programs are subject to a yearly appropriations process in Congress. Additionally, we may not receive funds under existing or future grants because of budgeting constraints of the agency administering the program. There can be no assurance that we will receive the entire funding under our existing or future grants. Our grants provide the U.S. government a non-exclusive, non-transferable paid up license to practice for or on behalf of the U.S. inventions made with federal funds. If the government exercises these rights, the U.S. government could use these inventions and Maxygen's potential market could be reduced. Our Potential Therapeutic Products Are Subject to a Lengthy and Uncertain Regulatory Process. If Our Potential Products Are Not Approved, We Will Not Be Able to Commercialize Those Products. The Food and Drug Administration must approve any vaccine or therapeutic product before it can be marketed in the U.S. Before we can file a new drug application or biologic license application with the FDA, the product candidate must undergo extensive testing, including animal and human clinical trials, which can take many years and require substantial expenditures. Data obtained from such testing are susceptible to varying interpretations which could delay, limit or prevent regulatory approval. In addition, changes in regulatory policy for product approval during the period of product development and regulatory agency review of each submitted new application or product license application may cause delays or rejections. The regulatory process is expensive and time consuming. Because our products involve the application of new technologies and may be based upon new therapeutic approaches, they may be subject to substantial review by government regulatory authorities and, government regulatory authorities may grant regulatory approvals more slowly for our products than for products using more conventional technologies. We have not submitted an application with the FDA or any other regulatory authority for any product candidate, and neither the FDA nor any other regulatory authority has approved any therapeutic product candidate developed with our MolecularBreeding directed molecular evolution technologies for commercialization in the U.S. or elsewhere. We or any of our collaborators may not be able to conduct clinical testing or obtain the necessary approvals from the FDA or other regulatory authorities for our products. The regulatory agencies of foreign governments must also approve our therapeutic products before the products can be sold in those other countries. Even after investing significant time and expenditures, we may not obtain regulatory approval for our products. Even if we receive regulatory approval, this approval may entail limitations on the indicated uses for which we can market a product. Further, once regulatory approval is obtained, a marketed product and its manufacturer are subject to continual review, and discovery of previously unknown problems with a product or manufacturer may result in restrictions on the product, manufacturer and manufacturing facility, including withdrawal of the product from the market. In certain countries, regulatory agencies also set or approve prices. 12 Laws May Limit Our Provision of Genetically Engineered Agricultural Products in the Future. These Laws Could Reduce Our Ability to Sell These Products. We may develop genetically engineered agricultural products. The field testing, production and marketing of genetically engineered plants and plant products are subject to federal, state, local and foreign governmental regulation. Regulatory agencies administering existing or future regulations or legislation may not allow us to produce and market our genetically engineered products in a timely manner or under technically or commercially feasible conditions. In addition, regulatory action or private litigation could result in expenses, delays or other impediments to our product development programs or the commercialization of resulting products. The FDA currently applies the same regulatory standards to foods developed through genetic engineering as applied to foods developed through traditional plant breeding. However, genetically engineered food products will be subject to premarket review if these products raise safety questions or are deemed to be food additives. Our products may be subject to lengthy FDA reviews and unfavorable FDA determinations if they raise questions, are deemed to be food additives, or if the FDA changes its policy. The FDA has also announced in a policy statement that it will not require that genetically engineered agricultural products be labeled as such, provided that these products are as safe and have the same nutritional characteristics as conventionally developed products. The FDA may reconsider or change its labeling policies, or local or state authorities may enact labeling requirements. Any such labeling requirements could reduce the demand for our products. The U.S. Department of Agriculture prohibits genetically engineered plants from being grown and transported except pursuant to an exemption, or under strict controls. If our future products are not exempted by the USDA, it may be impossible to sell such products. Adverse Events in the Field of Gene Therapy May Negatively Impact Regulatory Approval or Public Perception of Any Gene Therapy Products We or Our Collaborators May Develop. Currently, we are not engaged in developing gene therapy products; however, we may engage in these activities in the future either for our own account or with collaborators. If we or our collaborators develop gene therapy products, these products may encounter substantial delays in development and approval due to the government regulation and approval process. A recent death and other adverse events reported in gene therapy clinical trials may lead to more government scrutiny of proposed clinical trials of gene therapy products, stricter labeling requirements for these products and delays in the approval of gene therapy products for commercial sale. The commercial success of any potential gene therapy products made by us or our collaborators will depend in part on public acceptance of the use of gene therapies for the prevention or treatment of human diseases. Public attitudes may be influenced by claims that gene therapies are unsafe, and gene therapy products may not gain the acceptance of the public or the medical community. Negative public reaction to gene therapy could result in a decrease in demand for any gene therapy products we or our collaborators may develop. Health Care Reform and Restrictions on Reimbursements May Limit Our Returns on Pharmaceutical Products. Our future products are expected to include pharmaceutical products. Our ability and that of our collaborators to commercialize pharmaceutical products developed with our MolecularBreeding directed molecular evolution technologies may depend in part on the extent to which reimbursement for the cost of these products will be available from government health administration authorities, private health insurers and other organizations. Third-party payors are increasingly challenging the price of medical products and 13 services. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and there can be no assurance that adequate third party coverage will be available for any product to enable us to maintain price levels sufficient to realize an appropriate return on our investment in research and product development. Our Collaborations With Outside Scientists May Be Subject to Change Which Could Limit Our Access to Their Expertise. We work with scientific advisors and collaborators at academic and other institutions. These scientists are not our employees and may have other commitments that would limit their availability to us. Although our scientific advisors generally agree not to do competing work, if a conflict of interest between their work for us and their work for another entity arises, we may lose their services. Although our scientific advisors and collaborators sign agreements not to disclose our confidential information, it is possible that certain of our valuable proprietary knowledge may become publicly known through them. We May Be Sued for Product Liability. We may be held liable if any product we develop, or any product which is made with the use or incorporation of, any of our technologies, causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing or sale. These risks are inherent in the development of chemical, agricultural and pharmaceutical products. Although we intend to obtain product liability insurance, this insurance may be prohibitively expensive, or may not fully cover our potential liabilities. Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of products developed by us or our collaborators. If we are sued for any injury caused by our products, our liability could exceed our total assets. We Use Hazardous Chemicals and Radioactive and Biological Materials in Our Business. Any Claims Relating to Improper Handling, Storage or Disposal of These Materials Could Be Time Consuming and Costly. Our research and development processes involve the controlled use of hazardous materials, including chemicals, radioactive and biological materials. Some of these materials may be novel, including viruses with novel properties and animal models for the study of viruses. Our operations also produce hazardous waste products. Some of our work also involves the development of novel viruses and viral animal models. We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We believe that our current operations comply in all material respects with these laws and regulations. We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our total assets. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development, or production efforts. We believe that our current operations comply in all material respects with applicable Environmental Protection Agency regulations. In addition, certain of our collaborators are working with these types of hazardous materials in connection with our collaborations. To our knowledge, the work is performed in accordance with biosafety regulations. In the event of a lawsuit or investigation, we could be held responsible for any injury caused to persons or property by exposure to, or release of, these viruses and hazardous materials. Further, under certain circumstances, we have agreed to indemnify our collaborators against all damages and other liabilities arising out of development activities or products produced in connection with these collaborations. 14 Management May Invest or Spend the Proceeds of This Offering in Ways With Which You May Not Agree and in Ways That May Not Yield a Return. Management will retain broad discretion over the use of proceeds from this offering. Stockholders may not deem such uses desirable, and our use of the proceeds may not yield a significant return or any return at all. Management intends to use a majority of the proceeds from this offering for research and development, working capital and other general corporate purposes and to finance potential acquisitions or investments. Because of the number and variability of factors that determine our use of the net proceeds from this offering, we cannot assure you that these uses will not vary substantially from our currently planned uses. Pending these uses of the net proceeds from this offering, we intend to invest the net proceeds from this offering in short-term, interest-bearing, investment grade and U.S. government securities. Our Stock Price Has Been, and May Continue to Be, Extremely Volatile and You May Not Be Able to Resell Your Shares at or Above the Offering Price. The trading prices of life science company stocks in general, and ours in particular, have experienced extreme price fluctuations in recent months. The valuations of many life science companies without consistent product revenues and earnings, including ours, are extraordinarily high based on conventional valuation standards such as price to earnings and price to sales ratios. These trading prices and valuations may not be sustained. Any negative change in the public's perception of the prospects of biotechnology or life science companies could depress our stock price regardless of our results of operations. Other broad market and industry factors may decrease the trading price of our common stock, regardless of our performance. Market fluctuations, as well as general political and economic conditions such as recession or interest rate or currency rate fluctuations, also may decrease the trading price of our common stock. In addition, our stock price could be subject to wide fluctuations in response to factors including the following: . announcements of new technological innovations or new products by us or our competitors; . changes in financial estimates by securities analysts; . conditions or trends in the biotechnology and life science industries; . changes in the market valuations of other biotechnology or life science companies; . developments in domestic and international governmental policy or regulations; . announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; . developments in patent or other proprietary rights; . period-to-period fluctuations in our operating results; . future royalties from product sales, if any, by our strategic partners; and . sales of our common stock or other securities in the open market. In the past, stockholders have often instituted securities class action litigation after periods of volatility in the market price of a company's securities. If a stockholder files a securities class action suit against us, we would incur substantial legal fees and our management's attention and resources would be diverted from operating our business in order to respond to the litigation. 15 We Expect that Our Quarterly Results of Operations Will Fluctuate, and This Fluctuation Could Cause Our Stock Price to Decline, Causing Investor Losses. Our quarterly operating results have fluctuated in the past and are likely to do so in the future. These fluctuations could cause our stock price to fluctuate significantly or decline. Some of the factors which could cause our operating results to fluctuate include: . expiration of research contracts with collaborators or government research grants, which may not be renewed or replaced; . the success rate of our discovery efforts leading to milestones and royalties; . the timing and willingness of collaborators to commercialize our products which would result in royalties; and . general and industry specific economic conditions, which may affect our collaborators' research and development expenditures. A large portion of our expenses are relatively fixed, including expenses for facilities, equipment and personnel. Accordingly, if revenues decline or do not grow as anticipated due to expiration of research contracts or government research grants, failure to obtain new contracts or other factors, we may not be able to correspondingly reduce our operating expenses. In addition, we plan to significantly increase operating expenses in 2000. Failure to achieve anticipated levels of revenues could therefore significantly harm our operating results for a particular fiscal period. Due to the possibility of fluctuations in our revenues and expenses, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. Our operating results in some quarters may not meet the expectations of stock market analysts and investors. In that case, our stock price would probably decline. Future Sales of Our Common Stock May Depress Our Stock Price. The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market after the closing of this offering, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of common stock. There will be approximately 32,269,644 shares of common stock outstanding immediately after this offering, or approximately 32,494,644 shares if the representatives of the underwriters exercise their over-allotment option in full. Of these shares, 7,232,134 shares will be freely transferable without restriction or further registration under the Securities Act, except for any shares held by our "affiliates," as defined in Rule 144 of the Securities Act, 1,167,866 shares will be subject to lock-up agreements providing that the stockholders will not offer, sell or otherwise dispose of any of the shares of common stock owned by them until 90 days after the date of this prospectus and 17,250 shares will be subject to lock-up agreements which expire on June 13, 2000. The remaining 23,852,394 shares of common stock outstanding will be "restricted securities" as defined in Rule 144 and may be sold without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act. Our directors, officers and certain stockholders, including greater than 5% stockholders, who hold approximately 15,711,973 of these remaining shares have agreed not to sell any of these shares until 90 days after the date of this prospectus. Other stockholders holding approximately 8,140,421 shares have agreed in connection with our initial public offering not to sell any of these shares until June 13, 2000. See "Shares Eligible for Future Sale." 16 Some of Our Existing Stockholders Can Exert Control Over Us, and May Not Make Decisions that Are in the Best Interests of All Stockholders. After this offering, our officers, directors and principal stockholders (greater than 5% stockholders) will together control approximately 46% of our outstanding common stock, and Glaxo Wellcome International B.V. will own approximately 21% of our outstanding common stock. As a result, these stockholders, if they act together, and Glaxo Wellcome International B.V. by itself, will be able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of Maxygen and might affect the market price of our common stock, even when a change may be in the best interests of all stockholders. In addition, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders and accordingly, they could cause us to enter into transactions or agreements which we would not otherwise consider. If We Engage in Any Acquisition, We Will Incur a Variety of Costs, and We May Never Realize the Anticipated Benefits of the Acquisition. We are actively evaluating opportunities to acquire businesses, technologies, services or products that we believe are complementary with our business activities. If we do undertake any transaction of this sort, the process of integrating an acquired business, technology, service or product may result in unforeseen operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for ongoing development of our business. Moreover, we may fail to realize the anticipated benefits of any acquisition. Future acquisitions could reduce your ownership in Maxygen and could cause us to incur debt, expose us to future liabilities and result in amortization expenses related to goodwill and other intangible assets. In addition, recent proposed changes in the Financial Accounting Standards Board rules for merger accounting may affect the cost of making acquisitions or of being acquired. For example, if these proposed changes become effective we would likely have to record goodwill or other intangible assets that we would amortize to earnings if we merge with another company. Such amortization would adversely impact our future operating results. Further, accounting rule changes that reduce the availability of write-offs of the value of in-process research and development in connection with an acquisition could result in the capitalization and amortization of these amounts which would negatively impact results of operations in future periods. Our Facilities Are Located Near Known Earthquake Fault Zones, and the Occurrence of an Earthquake or Other Catastrophic Disaster Could Cause Damage to Our Facilities and Equipment, Which Could Require Us to Cease or Curtail Operations. Our facilities are located in the San Francisco Bay Area near known earthquake fault zones and are vulnerable to damage from earthquakes. In October 1989 a major earthquake that caused significant property damage and a number of fatalities struck this area. We are also vulnerable to damage from other types of disasters, including fire, floods, power loss, communications failures and similar events. If any disaster were to occur, our ability to operate our business at our facilities would be seriously, or potentially completely, impaired. In addition, the unique nature of our research activities and of much of our equipment could make it difficult for us to recover from a disaster. The insurance we maintain may not be adequate to cover our losses resulting from disasters or other business interruptions. As a New Investor, You Will Experience Immediate and Substantial Dilution. If you purchase shares of our common stock in this offering, you will incur immediate and substantial dilution of $151.27 per share in pro forma net tangible book value based on an assumed price to the public of $162.50 per share. If the holders of outstanding options or warrants exercise those options or warrants, you will incur further dilution. See "Dilution." 17 FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements within the meaning of the federal securities laws that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend," "potential" or "continue" or the negative of these terms or other comparable terminology. Examples of these forward-looking statements include, but are not limited to, statements regarding the following: (1) our MolecularBreeding directed molecular evolution technologies and processes, (2) our ability to realize commercially valuable discoveries in our programs, (3) our intellectual property portfolio, (4) our business strategies and plans and (5) our ability to develop products suitable for commercialization. These statements are only predictions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus or to conform these statements to actual results. USE OF PROCEEDS We will receive net proceeds from the sale of the 1,500,000 shares of common stock of approximately $229,843,750 at an assumed public offering price of $162.50 per share (approximately $264,395,313 if the underwriters' over- allotment option is exercised in full), after deducting the estimated underwriting discounts and offering expenses payable by us. We intend to use the net proceeds of the offering for research and development, working capital and other general corporate purposes and capital expenditures. The amounts and timing of our actual expenditures will depend upon numerous factors, including the status of our product development and commercialization efforts, the amount of proceeds actually raised in this offering, the amount of cash generated by our operations, competition, and sales and marketing activities. We are actively evaluating opportunities to acquire businesses, technologies, services or products that we believe are complementary with our business activities. We have not determined the amounts we plan to spend on any of the areas listed above or the timing of these expenditures. As a result, our management will have broad discretion to allocate the net proceeds from this offering. Pending application of the net proceeds as described above, we will invest the net proceeds in short-term, interest-bearing investment-grade and U.S. government securities. 18 PRICE RANGE OF COMMON STOCK Our common stock has been traded on the Nasdaq National Market since our initial public offering on December 16, 1999 under the symbol "MAXY." Prior to such time, there was no public market for our common stock. Through March 1, 2000, the high and low sale prices for the common stock, as reported on the Nasdaq National Market, were as follows:
High Low ------- ------ Fourth Quarter 1999 (from December 16, 1999) ................ $ 82.00 $31.98 First Quarter 2000 (through March 1, 2000)................... 176.00 52.00
On March 1, 2000, the last reported closing price of the common stock on the Nasdaq National Market was $162.50 per share. As of February 15, 2000, we had outstanding 30,769,644 shares of common stock held by approximately 313 holders of record. DIVIDEND POLICY We have never paid cash dividends on our common stock or any other securities. We anticipate that we will retain all of our future earnings, if any, for use in the expansion and operation of our business and do not anticipate paying cash dividends in the foreseeable future. 19 CAPITALIZATION The following table sets forth our capitalization as of December 31, 1999: . on an actual basis; and . on an as adjusted basis to reflect the sale of 1,500,000 shares of common stock offered by this prospectus at an assumed public offering price of $162.50 per share, after deducting the estimated underwriting discounts and offering expenses payable by us. The outstanding share information excludes 2,076,362 shares of common stock issuable upon the exercise of outstanding options under our option plans with a weighted average exercise price of $4.11 per share as of December 31, 1999. In addition, the outstanding share information excludes 1,887,488 shares of common stock reserved for issuance under our stock option and employee stock purchase plans as of December 31, 1999. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes thereto included elsewhere in this prospectus.
December 31, 1999 ------------------ As Actual adjusted -------- -------- (in thousands, except share and per share data) Long-term obligations.................................. $ 1,664 $ 1,664 -------- -------- Stockholders' equity:.................................. Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding actual and as adjusted..................................... -- -- Common stock, $0.0001 par value, 70,000,000 shares authorized; 30,860,781 shares issued and outstanding, actual; 32,360,781 shares issued and outstanding, as adjusted............................ 3 3 Additional paid-in capital........................... 176,517 406,361 Notes receivable from stockholders................... (1,411) (1,411) Deferred stock compensation.......................... (17,216) (17,216) Accumulated deficit.................................. (24,177) (24,177) -------- -------- Total stockholders' equity........................... 133,716 363,560 -------- -------- Total capitalization................................... $135,380 $365,224 ======== ========
20 DILUTION If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the as adjusted net tangible book value per share of our common stock after this offering. The net tangible book value of Maxygen at December 31, 1999, was $133.7 million, or $4.33 per share of common stock. Net tangible book value per share represents total tangible assets less total liabilities, divided by the number of outstanding shares of common stock on December 31, 1999. Our net tangible book value at December 31, 1999, after giving effect to the sale of the 1,500,000 shares of common stock at an assumed public offering price of $162.50 per share, and after deducting estimated underwriting discounts and commissions and estimated offering expenses would be $363.6 million or $11.23 per share. This represents an immediate increase in the net tangible book value of $6.90 per share to existing stockholders and an immediate dilution of $151.27 per share to new investors, or approximately 93% of the assumed offering price of $162.50 per share. The following table illustrates this per share dilution: Assumed public offering price per share........................... $162.50 Net tangible book value per share at December 31, 1999.......... $4.33 Increase in per share attributable to this offering ............ 6.90 ----- Net tangible book value per share after this offering ............ 11.23 ------- Dilution per share to new investors............................... $151.27 =======
The following table shows as of December 31, 1999, the number of shares of common stock purchased from us, the total consideration paid to us and the average price paid per share by existing stockholders and by new investors purchasing common stock in this offering at an assumed public offering price of $162.50 per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses.
Shares Purchased Total Consideration Average --------------------- ------------------------- Price Number Percentage Amount Percentage Per Share ---------- ---------- -------------- ---------- --------- (in thousands) Existing stockholders... 30,860,781 95.4% $159,462 39.5% $ 5.17 New investors........... 1,500,000 4.6 243,750 60.5 162.50 ---------- ----- -------- ----- Total................. 32,360,781 100.0% $403,212 100.0% ========== ===== ======== =====
The computations in the table above assume no exercise of any stock options outstanding after December 31, 1999. As of December 31, 1999, there were options outstanding to purchase a total of 2,076,362 shares of common stock at a weighted average exercise price of $4.11 per share. If any of these options are exercised, there will be further dilution to new public investors. 21 SELECTED FINANCIAL DATA The statement of operations data for the years ended December 31, 1997, 1998 and 1999 and the balance sheet data as of December 31, 1998 and 1999 are derived from our financial statements, which have been audited by Ernst & Young LLP, Independent Auditors, and are included elsewhere in this prospectus. When you read this selected financial data, it is important that you also read the historical financial statements and related notes included in this prospectus, as well as the section of this prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." Historical results are not necessarily indicative of future results. See Note 1 of Notes to Financial Statements for an explanation of the method used to determine the number of shares used in computing pro forma net loss per share. See Note 8 to Financial Statements for information concerning the deemed dividend upon issuance of convertible preferred stock in August 1999.
Year Ended December 31, -------------------------- 1997 1998 1999 ------- ------- -------- (in thousands, except per share data) Statement Of Operations Data: Collaborative research and development revenue.... $ 341 $ 1,077 $ 8,895 Grant revenue..................................... -- 1,646 5,122 ------- ------- -------- Total revenues.................................... 341 2,723 14,017 Operating expenses: Research and development........................ 3,074 7,858 19,250 General and administrative...................... 1,461 3,920 7,498 ------- ------- -------- Total operating expenses.......................... 4,535 11,778 26,748 ------- ------- -------- Loss from operations.............................. (4,194) (9,055) (12,731) Net interest income............................... 161 229 1,413 ------- ------- -------- Net loss.......................................... (4,033) (8,826) (11,318) Deemed dividend upon issuance of convertible preferred stock.................................. -- -- (2,200) ------- ------- -------- Net loss attributable to common stockholders...... $(4,033) $(8,826) $(13,518) ======= ======= ======== Basic and diluted net loss per share.............. $ (0.82) $ (1.31) $ (1.53) ======= ======= ======== Shares used in computing basic and diluted net loss per share................................... 4,917 6,748 8,854 Pro forma basic and diluted net loss per share (unaudited)...................................... $ (0.75) $ (0.74) ======= ======== Shares used in computing pro forma basic and diluted net loss per share (unaudited)........... 11,762 18,249
December 31, --------------------------- 1997 1998 1999 ------- -------- -------- (in thousands) Balance Sheet Data: Cash and cash equivalents........................ $2,693 $15,306 $136,343 Working capital.................................. 2,152 12,264 132,510 Total assets..................................... 3,154 17,600 145,578 Non-current portion of equipment financing obligations..................................... -- -- 1,664 Accumulated deficit.............................. (4,033) (12,859) (24,177) Total stockholders' equity....................... 2,571 11,700 133,716
22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that are based upon current expectations. These forward-looking statements fall within the meaning of the federal securities laws that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend," "potential" or "continue" or the negative of these terms or other comparable terminology. Forward-looking statements involve risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in our forward-looking statements as a result of many factors, including those set forth under "Risk Factors" and elsewhere in this prospectus. Overview Maxygen was founded in May 1996 and began operations in March 1997. To date, we have generated revenues from research collaborations with large agriculture and chemical companies and from government grants. Our current collaborators are Novo Nordisk, DuPont/Pioneer Hi-Bred, AstraZeneca, DSM and Rio Tinto. Our government grants are from the Defense Advanced Research Projects Agency and the National Institute of Standards and Technology-Advanced Technology Program. We have invested heavily in establishing our MolecularBreeding directed molecular evolution technologies. These investments contributed to revenue increases from $341,000 in 1997 to $2.7 million in 1998 and $14.0 million in 1999. Our total headcount increased from 20 employees at the end of fiscal 1997 to 74 employees at the end of fiscal 1998 and to 143 employees at the end of fiscal 1999 of whom 80% were engaged in research and development. Research and development consisted of work for collaborators, government grant agencies and work advancing our core technologies. We have incurred significant losses since our inception. As of December 31, 1999, our accumulated deficit was $24.2 million and total stockholders' equity was $133.7 million. Operating expenses increased from $4.5 million in fiscal 1997, to $11.8 million in fiscal 1998 and to $26.7 million in fiscal 1999. We expect to incur additional operating losses over at least the next several years as we continue to expand our research and development efforts and infrastructure. Source of Revenue and Revenue Recognition Policy We recognize revenues from research collaboration agreements as earned upon achievement of the performance requirements of the agreements. Revenue related to grant agreements is recognized as related research and development expenses are incurred. Our existing corporate collaboration agreements with DuPont/Pioneer Hi-Bred and AstraZeneca provide for research funding for a specified number of full time researchers working in defined research programs. Revenue related to these payments is earned as the related research work is performed. In addition, our collaborators make technology advancement payments which are intended to fund development of our core technology, as opposed to a defined research program. These payments are recognized ratably over the applicable funding period. Payments received that are related to future performance are deferred and recognized as revenue as the performance requirements are achieved. As of December 31, 1999, we have deferred revenues of approximately $7.5 million. Our sources of potential revenue for the next several years are likely to be research, technology advancement and milestone payments under existing and possible future collaborative arrangements, government research grants, and royalties from our collaborators based on revenues received from any products commercialized under those agreements. See Note 2 of Notes to Financial Statements. 23 Deferred Compensation Deferred compensation for options granted to employees has been determined as the difference between the deemed fair market value for financial reporting purposes of our common stock on the date options were granted and the exercise price. Deferred compensation for options granted to consultants has been determined in accordance with Statement of Financial Accounting Standards No. 123 as the fair value of the equity instruments issued. Deferred compensation for options granted to consultants is periodically remeasured as the underlying options vest. In connection with the grant of stock options to employees, we recorded deferred stock compensation of approximately $2.6 million, $2.4 million and $19.5 million in the fiscal years ended December 31, 1997, 1998 and 1999, respectively. These amounts were initially recorded as a component of stockholders' equity and are being amortized as charges to operations over the vesting period of the options using a graded vesting method. We recorded amortization of deferred compensation of approximately $863,000, $1.6 million and $4.9 million for the fiscal years ended December 31, 1997, 1998 and 1999, respectively. The amortization expense relates to options awarded to employees in all operating expense categories. See Note 8 of Notes to Financial Statements. Results of Operations Comparison of Years Ended December 31, 1998 and 1999 Revenues Our total revenues for fiscal 1998 and 1999 were $2.7 million and $14.0 million, respectively. The increase of $11.3 million was due primarily to the addition of new research collaborations with AstraZeneca and DuPont/Pioneer Hi- Bred, new government grants and the expansion of existing government grants. Collaboration research and development revenue and grant revenue accounted for 40% and 60%, respectively, of total revenues in fiscal 1998, and 63% and 37%, respectively, of total revenues in fiscal 1999. Research and Development Expenses Our research and development expenses consist primarily of salaries and other personnel-related expenses, facility costs, supplies and depreciation of facilities and laboratory equipment. Research and development expenses increased 59% from $7.9 million in fiscal 1998 to $19.3 million in fiscal 1999. The increase was due primarily to increased staffing and other personnel- related costs to support our additional collaborative and internal research efforts. Also included in research and development expenses is $783,000 related to the acquisition of certain technology licenses from research institutions. The technology is being used in research and development and has no alternative future uses. Research and development expenses represented 289% of total revenues in fiscal 1998 and 137% of total revenues in fiscal 1999. The decrease as a percentage of total revenues was due primarily to the growth in our total revenues. We expect to continue to devote substantial resources to research and development, and we expect that research and development expenses will continue to increase in absolute dollars. General and Administrative Expenses Our general and administrative expenses consist primarily of personnel costs for finance, human resources, business development, legal and general management, as well as professional expenses, such as legal and accounting. General and administrative expenses increased 92% from $3.9 million in fiscal 1998 to $7.5 million in fiscal 1999. Expenses increased primarily due to increased staffing necessary to manage and support our growth. 24 General and administrative expenses represented 144% of total revenues for fiscal 1998 and 53% of total revenues for fiscal 1999. The decrease as a percentage of our total revenues was due primarily to the growth in our total revenues. We expect that our general and administrative expenses will increase in absolute dollar amounts as we expand our legal and accounting staff, add infrastructure and incur additional costs related to being a public company, including directors' and officers' insurance, investor relations programs and increased professional fees. Net Interest Income Net interest income represents income earned on our cash and cash equivalents net of interest expense. Net interest income increased from $229,000 in fiscal 1998 to $1.4 million in fiscal 1999. This increase was due to higher average cash balances. Deemed Dividend Upon Issuance of Convertible Preferred Stock We recorded a deemed dividend of $2.2 million in August 1999 upon the issuance of Series E convertible preferred stock. At the date of issuance, we believed the per share price of $6.25 represented the fair value of the preferred stock and was in excess of the deemed fair value of our common stock. Subsequent to the commencement of our initial public offering process, we re- evaluated the deemed fair market value of our common stock as of August 1999 and determined it to be $9.00 per share. Accordingly, the incremental fair value is deemed to be the equivalent of a preferred stock dividend. We recorded the deemed dividend at the date of issuance by offsetting charges and credits to additional paid in capital of $2.2 million, without any effect on total stockholders' equity. The amount increased the loss allocable to common stockholders, in the calculation of basic net loss per share for fiscal 1999. Provision for Income Taxes We incurred net operating losses in fiscal 1998 and 1999, and consequently we did not pay any federal, state or foreign income taxes. As of December 31, 1999, we had a federal net operating loss carryforwards of approximately $10.4 million. We also had federal research and development tax credit carryforwards of approximately $400,000. If not utilized, the net operating losses and credit carryforwards will expire at various dates beginning in 2011 through 2019. Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the change in the ownership provisions of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. See Note 9 of Notes to Financial Statements. Comparison of Years Ended December 31, 1997 and 1998 Revenues Our total revenues for fiscal 1997 and 1998 were $341,000 and $2.7 million, respectively. The increase of $2.4 million was due primarily to the addition of new research collaborations and government grants. Collaborative research and development revenue accounted for 100% of total revenues in fiscal 1997. Collaborative research and development revenue and grant revenue accounted for 40% and 60%, respectively, of total revenues in fiscal 1998. Research and Development Expenses Research and development expenses increased from $3.1 million in fiscal 1997 to $7.9 million in fiscal 1998. The increase was due primarily to increased staffing and other personnel-related costs. Research and development expenses represented 901% and 289% of total revenues in fiscal 1997 and 1998, respectively. The decreases as a percentage of total revenues was due primarily to the growth in our total revenues. 25 General and Administrative Expenses General and administrative expenses increased from $1.5 million in fiscal 1997 to $3.9 million in fiscal 1998. Expenses increased in each period due primarily to increased staffing and personnel-related costs resulting from additional staffing necessary to manage and support our growth. General and administrative expenses represented 428% of total revenues for fiscal 1997 and 144% of total revenues for fiscal 1998. The decrease as a percentage of our total revenues was due primarily to the growth in our total revenues. Net Interest Income Net interest income was $161,000 in fiscal 1997 and $229,000 in fiscal 1998. Changes in interest income were due primarily to changes in our average cash balances during these periods. Provision for Income Taxes We incurred net operating losses in fiscal 1997 and 1998 and consequently we did not pay any federal, state or foreign income taxes. Liquidity and Capital Resources Since inception, we have financed our operations primarily through private placements and a public offering of equity securities, receiving aggregate consideration from such sales totaling $157.0 million and research and development funding from collaborators and government grants totaling $22.0 million. As of December 31, 1999, we had $136.3 million in cash and cash equivalents and $166,000 available under an equipment financing line of credit. Our operating activities used cash of $2.6 million, $2.7 million and $3.0 million in fiscal 1997, 1998 and 1999, respectively. Uses of cash in operating activities were primarily to fund net operating losses offset by receipt of funding from collaborators which has been deferred. Additions of property and equipment were $459,000, $760,000 and $4.5 million in fiscal 1997, 1998 and 1999, respectively. We expect to continue to make significant investments in the purchase of property and equipment to support our expanding operations. We may use a portion of our cash to acquire or invest in complementary businesses, products or technologies, or to obtain the right to use such complementary technologies. Financing activities provided cash of $5.7 million, $16.1 million and $128.6 million in fiscal 1997, 1998 and 1999, respectively. These amounts are the proceeds we received from the sale of preferred stock, net of issuance costs, and proceeds from the sale of common stock including our initial public offering in December 1999. We expect cash flows from our corporate collaborators for the funding of research and technology advancement to total approximately $12 million in both 2000 and 2001 and up to this amount in 2002 and 2003 if our collaboration with DuPont/Pioneer Hi-Bred extends to a fourth and fifth year. DuPont/Pioneer Hi- Bred may terminate the agreement after three years, upon six months notice if a specified milestone has not been met. The above amounts include $1 million annually of technology advancement funding from AstraZeneca. In lieu of making this payment, AstraZeneca can elect to purchase $3 million of our equity securities at a 50% premium to the fair value of the securities on the date of issuance. Cash flows from government grants are determined by the expenses incurred by the Company. Total remaining committed grant funding amounts to $20 million through fiscal 2002; however some grant programs are subject to a yearly appropriations process in Congress and we may not receive funds under existing grants because of budgeting constraints of the agency administering the program. 26 We believe that the net proceeds from this offering and interest earned thereon, together with our current cash and cash equivalents and funding received from collaborators and government grants will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next three years. However, it is possible that we will seek additional financing within this timeframe. We may raise additional funds through public or private financing, collaborative relationships or other arrangements. We cannot assure you that additional funding, if sought, will be available on terms favorable to us. Further, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Our failure to raise capital when needed may harm our business and operating results. Disclosure about Market Risk Our exposure to market risk is confined to our cash and cash equivalents which have maturities of less than three months. We maintain an investment portfolio of depository accounts, master notes and liquidity optimized investment contracts. The securities in our investment portfolio are not leveraged, are classified as available-for-sale and are, due to their very short-term nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we do not believe that an increase in market rates would have any negative impact on the realized value of our investment portfolio. Impact of Year 2000 In 1999, we completed our remediation and testing of hardware and software systems to assess their Year 2000 readiness. We expensed less than $25,000 during 1999 relating to Year 2000 compliance. To date, we have not experienced any material adverse effect on our business or operating results as a result of any Year 2000 problems. In addition, we have not deferred any material information technology projects or equipment purchases as a result of our Year 2000 problem activities. However, we believe that it is not possible to determine with complete certainty that all Year 2000 problems affecting us have been identified or corrected. If we, our customers, our providers of hardware and software or our third-party computer network providers fail to remedy any Year 2000 issues, the reasonably likely worst case scenario would be the interruption of our research programs, which could have a material adverse affect on our business, financial conditions and results of operations. Presently we are unable to quantitatively estimate the duration and extent of any such interruption, or estimate the effect such interruption may have on our future revenue. However, we believe that the impact of any Year 2000 issue on our research operations will be limited to the ongoing execution of new experiments. We do not expect that any historical data will be affected. 27 BUSINESS Overview We believe that we are the leader in the emerging field of directed molecular evolution, the process by which new, modified genes are generated for specific commercial uses. Our MolecularBreeding directed molecular evolution technologies bring together advances in molecular biology and classical breeding, while capitalizing on the large amount of genetic information being generated by government, academic and commercial laboratories. Our principal objective is to maximize the value of our MolecularBreeding directed molecular evolution technologies through the development of multiple products in a broad range of industries including agriculture, chemicals and human therapeutics. We have established strategic alliances with recognized leaders in our target industries and with U.S. government agencies. To date, our corporate collaborators include Novo Nordisk in the area of industrial enzymes, DuPont/Pioneer Hi-Bred and AstraZeneca in agriculture, DSM in antibiotic manufacturing and Rio Tinto in chemical processing. Our government grants are from the Defense Advanced Research Projects Agency (DARPA) and the National Institute of Standards and Technology-Advanced Technology Program (NIST-ATP) primarily for the development of vaccines and the advancement of our MolecularBreeding directed molecular evolution technologies. Committed funding from our commercial collaborators and grant agencies totals over $102 million. We may additionally receive over $145 million in milestone payments based on the accomplishment of specific performance criteria, as well as royalties on product sales. We will continue to establish strategic collaborations with recognized leaders in several of our target industries and with U.S. government agencies. We plan to retain significant rights to develop and market products arising from our funded strategic collaborations. In addition, we will identify and invest our own funds in certain specific areas and product opportunities with the aim of capturing a high percentage of profits on product sales. We intend to fully develop and exploit the breadth of opportunity which we believe can be addressed by our MolecularBreeding directed molecular evolution technologies. Background Evolution and DNA Evolution is the process by which living organisms adapt to their environment. The first step of this process is sexual reproduction, which creates a variety of physical characteristics that increase the diversity of a population. Second, nature exerts a selective force on the individuals, dictating which characteristics will be favored and be passed to the next generation. As a result of changing environmental and competitive pressures, diversity may increase, leading to variation in the physical characteristics of individuals and species adapted for specific environments. The physical characteristics of an organism are determined by genetic information inherited from the previous generation. This genetic information is coded for by DNA, a molecule found in the cells of living organisms. DNA is comprised of four different chemical bases called nucleotides. Human cells have several billion nucleotides, the precise sequence of which determines the content of the genetic information. DNA is organized into discrete units called genes. Genes act alone or in combination to produce proteins, that not only form the fabric of cells but also direct them to perform biological functions which may in turn influence physical characteristics. Generally, the inherited biological properties or physical characteristics of an organism change only when the DNA in a gene is altered. In summary, variations in genes provide the basis for inherited diversity in a population, thus maximizing the opportunity for developing characteristics optimally suited for a specific environment. 28 Mutation and Recombination There are two predominant methods by which nature is able to change the genetic information encoded by DNA to create diversity: mutation and recombination. All organisms incur a certain number of mutations in their DNA as a result of normal cellular processes or interactions with external environmental factors such as radiation from sunlight. Mutation typically involves changes in individual nucleotides and is essentially random. Almost all mutations are harmful to the function of genes, but a very small percentage are beneficial and may pass more broadly into the population. Sexually reproducing organisms use recombination, a process that involves the organized exchange and reassortment of large sections of DNA from their parents. This process allows for new combinations of genes without disrupting the function of the newly created genes. This has a significant impact on physical characteristics and is the primary cause of diversity in a sexually reproducing population. Classical Breeding and Its Limitations Without any knowledge of the genetic basis of evolution, humans have been breeding crops and animals for over 4,000 years in the search for better physical characteristics. All of the domestic breeds of farm animals and horses, cereal crops, fruits, vegetables, crops for fiber, household pets, most ornamental flowers and many other species represent the results of many generations of selective breeding by humans. In all these cases, humans have cross-bred crops or animals with the most desired physical characteristics to produce improvements in the next generation. For example, modern corn now has a dramatically higher yield than the wild strain of corn which produced very small amounts of grain. This improvement probably began with ancient Inca farmers continually selecting, breeding and propagating the most robust seed corn. This is known as classical breeding. In the 19th century, advances in biology led to a better understanding of the basis of heredity. The discovery of the structure of DNA in 1953 subsequently led to the realization that genetic information was responsible for physical characteristics and that its manipulation could further improve the breeding process. In modern breeding, the DNA of offspring is often sequenced to determine whether or not they are carrying undesirable genes. This reduces the probability of breeding poor quality stock and increases the pace of improvement. Despite the improvements in classical breeding, this technique still has a number of significant limitations. First, the process is extremely time consuming, since the offspring must mature in order to determine if they carry the desired characteristic. For example, this cycle takes several years in cattle. Second, classical breeding can only be used to breed entire organisms and cannot readily use genetic information to modify or select for specific genes and the traits they represent. This limitation is compounded when multiple genes encode the selected trait or when the simultaneous breeding of multiple traits is desired. Thus, the scope of potential improvements accessible by classical breeding is limited. Modern Biotechnology and Its Current Limitations The modern biotechnology industry was founded on the ability to isolate genes from natural sources, and to make proteins from these genes for use in production systems. Despite some notable exceptions, the majority of proteins discovered by scientists and developed by the modern biotechnology industry have not been commercially successful. Similarly, in the chemical industry, most naturally occurring enzymes are not efficient or stable enough to be used for manufacturing chemicals. The lack of product success is due in part to the fact that the relevant proteins have not been evolved for commercial purposes. In recent years, significant research efforts in biotechnology have focused on identifying genes and elucidating their function. These efforts, which are known as genomics, have been highly successful in 29 identifying tens of thousands of genes, but are limited in their ability to rapidly develop products. This results from two primary causes. First, the genes identified by genomics have not been evolved for commercial purposes. Second, once a gene has been identified, a number of steps need to be completed before the genetic information can be used for the development of products. Typical deficiencies of naturally occurring genes and proteins which limit their commercial utility as therapeutic products include inappropriate availability in the body, stability, difficulty and cost of manufacture, lack of specificity, toxicity and other side effects. Similarly, in applications such as agricultural biotechnology and chemical processes using enzymes as catalysts, problems include the levels at which proteins can be made, specificity, stability, efficiency of enzyme function under industrial manufacturing conditions and purity. In addition, potential products with the highest commercial value often result from the action of multiple genes or multiple biological reactions and are difficult to optimize with modern biotechnology techniques. Many biotechnology companies have abandoned or never pursued development efforts with potential product candidates as a result of the unsuitability of the native proteins for commercial uses. One approach used by the traditional biotechnology industry to attempt to improve genes for commercial purposes is random mutagenesis. This technique, involving the random mutation of genes, usually results in harmful changes. In addition, the low probability of randomly improving a gene or sequence of complex biological reactions makes screening for positive changes prohibitively expensive and time consuming. A second approach, rational design, seeks to modify a gene to improve its properties based on knowledge regarding how the structure of the gene determines the function of its resultant protein. Fundamental research on the mechanism of action of the relevant protein is pursued until the knowledge gained allows a rational prediction of how to change the gene for desired effect. This process requires many simplifying assumptions, is costly and time intensive, and has been generally unsuccessful. As such, genes and gene products are generally too complex to commercialize using genomics, rational design, random mutagenesis or other current technologies. The Maxygen Solution We have developed proprietary MolecularBreeding directed molecular evolution technologies that address the limitations of classical breeding and traditional biotechnology by maximizing DNA variation, which is known as genetic diversity, through directed evolution at the molecular level. Maximizing genetic diversity increases the opportunity for developing characteristics optimally suited for a specific commercial purpose. Our MolecularBreeding directed molecular evolution technologies bring together advances in molecular biology and classical breeding, while capitalizing on the wealth of genetic information being developed by genomics. Our technologies are fast, inexpensive, commercially focused and results oriented. Our approach, unlike conventional approaches, requires minimal understanding of complex underlying biological systems. There are two components of our MolecularBreeding directed molecular evolution technologies. The first is DNAShuffling, our proprietary process for recombining genes into a diverse library of novel DNA sequences known as gene variants. The second is MaxyScan, a series of proprietary screening capabilities for the selection of desired commercial properties from the library of DNA sequences. The combination of DNAShuffling and MaxyScan specialized screening enables us to identify new products in a rapid, cost-effective manner. Virtually any product or process that utilizes or could utilize DNA or proteins can potentially be improved for optimal function using our MolecularBreeding directed molecular evolution technologies. We are therefore applying our technologies to evolve genes and proteins for use in fields as diverse as chemicals, agriculture, vaccines and protein pharmaceuticals. 30 We believe that our MolecularBreeding directed molecular evolution technologies provide distinctive advantages over traditional biotechnology, as summarized in the following table. Advantages of Maxygen's MolecularBreeding Directed Molecular Evolution Technologies
Maxygen's MolecularBreeding Directed Molecular Modern Evolution Characteristic Biotechnology Technologies - ------------------------------------------------------------------------------ Time to generate lead product candidates several years weeks to months - ------------------------------------------------------------------------------ Necessary understanding of the biological processes underlying lead product candidates yes no - ------------------------------------------------------------------------------ Ability to optimally improve properties for commercial applications no yes - ------------------------------------------------------------------------------ Cost to generate lead product candidates high low - ------------------------------------------------------------------------------ Amount of resulting genetic diversity limited virtually unlimited
31 Maxygen's MolecularBreeding Directed Molecular Evolution Technologies Our technologies mimic the natural events of evolution. First, genes are subjected to DNAShuffling, generating a diverse library of gene variants. Second, our proprietary MaxyScan screening systems select individual proteins from the gene variants in the library. The proteins that show improvements in the desired characteristics become the initial lead candidates. After confirmation of activity, the initial lead candidates are then used as the genetic starting material for additional rounds of shuffling. Once the level of improvement needed for the particular commercial application is achieved, the group of lead candidates is moved forward to the product or process development stage. [Graphic of MolecularBreeding(TM) Process] 32 Step One: DNAShuffling Recombination Technologies Our DNAShuffling recombination technologies work as follows: a single gene or multiple genes are cleaved into fragments and recombined, creating a population of new gene variants. The new genes created by DNAShuffling are then selected for one or more desired characteristics. This selection process yields a population of genes which becomes the starting point for the next cycle of recombination. As with classical breeding, this process is repeated until genes expressing the desired properties are identified. DNAShuffling recombination technologies can be used to evolve properties which are coded for by single genes, multiple genes and entire genomes. By repeating the process, DNAShuffling recombination technologies ultimately generate libraries with a high percentage of genes which have the desired function. Due to the high quality of these libraries, a relatively small number of screening tests need to be performed in order to identify gene variants with the desired commercial qualities. This process significantly reduces the cost and time associated with identifying multiple potential products. Step Two: MaxyScan Screening The ability to screen or select for a desired improvement in function is essential to the effective development of a newer improved gene or protein. As a result, we have invested significant resources in developing automated, rapid screens and selection formats. We have developed screening tests which can measure the production of proteins or small molecules in culture without significant purification steps or specific test reagents, thereby eliminating time-consuming steps required for traditional screening tests. We are also focusing on the development of reliable, cell-based screening tests that are predictive of specific functions relevant to our human therapeutics programs. Accordingly, we continue to develop new screening approaches and technologies. Our approach is to create multitiered screening systems whereby we use a less sensitive screening test as a first screen to quickly select proteins with the desired characteristics, followed by a more sensitive screening test to confirm value in these variants and to select for final lead product candidates. Unlike approaches that create random diversity, MolecularBreeding produces potentially valuable libraries of gene variants with a predominance of active genes with the desired function. This allows us to use complex biological screens and formats as a final screening test, as relatively few proteins must be screened to detect an improvement in the starting gene activity. We have access to multiple sources of genetic starting material. In addition to the wealth of publicly available genetic sequence information, we are able to access our collaborators' proprietary genes. Furthermore, we are able to inexpensively obtain our own genetic starting material which, when coupled with the DNAShuffling process, provides a virtually infinite amount of new, proprietary gene variants with potential commercial value. We use certain equipment and vendor software in conjunction with our DNAShuffling recombination technologies and MaxyScan screening systems, but to date, have not used internally developed software. We also use other software purchased from third party vendors to a limited extent in our research and development activities. Demonstrated Successes of Our MolecularBreeding Directed Molecular Evolution Technologies in Multiple Applications We have consistently achieved improvement in gene function using our MolecularBreeding directed molecular evolution technologies. Impressive results have been demonstrated in many different systems that have relevance to multiple commercial applications. Our technologies have the ability to generate improvements that would be difficult, costly, time intensive and, in many cases, impossible to achieve using other methods. We have shown that we can achieve improved gene function without a detailed understanding of the underlying complex biological processes. 33 For example, we have demonstrated our ability to improve genes that increase the anti-viral activity of a protein and develop new enzymes which have the potential to streamline chemical and pharmaceutical manufacturing processes. In addition, we have improved the performance of subtilisin, one of the most commercially valuable laundry detergent enzymes. Subtilisin is one of the most highly studied enzymes which has been extensively modified to improve its commercial properties. This example demonstrates the ability of MolecularBreeding to achieve further improvements beyond the limits of modern biotechnology. A summary of representative experiments published by our scientists is set forth below.
Example Property Activity Increase Publication - ----------------------------------------------------------------------------------------------------------- (Beta)-lactamase Increased antibiotic 32,000-fold Nature (1994) resistance/enzyme activity Antibody Increased expression level 100-fold Nature Medicine (1996) Antibody Increased antibody/receptor >440-fold Nature Medicine (1996) binding Green fluorescent Increased fluorescence 45-fold Nature Biotechnology (1996) protein (Beta)-galactosidase Increase in activity 66-fold activity Proceedings of the to fucosidase National Academy of Sciences (1997) Increase in specificity 1,000-fold specificity Arsenate pathway (3 Increased bacterial resistance 40-fold Nature Biotechnology (1997) genes) to arsenate Cephalosporinase family Increased antibiotic resistance 270-540-fold Nature (1998) Subtilisin protease Simultaneous improvement 2 to 4 fold in Nature Biotechnology (1999) in 3 properties 3 properties Human (Alpha)- Increased activity as 285,000-fold Nature Biotechnology (1999) interferon family measured by antiviral activity on mouse cells HSV thymidine kinase Increased sensitivity to 32-fold Nature Biotechnology (1999) family prodrug (AZT)
The Maxygen Strategy Our goal is to be the world leader in the commercialization of products and processes developed using directed molecular evolution. There are four basic elements to our business strategy: Expand Our Proprietary Technology Leadership. In order to expand our technology leadership, we will continue to develop our core MolecularBreeding directed molecular evolution technologies by investing significantly in research and development. We will acquire and license technologies from third parties that complement our capabilities. We will protect and build on our existing patent portfolio and also rely on trade secrets to protect our proprietary technologies. We will continue to recruit and collaborate with leaders in the field of directed molecular evolution. Expand Our Strategic Collaborations and Grants. We will continue to establish strategic collaborations with leading companies in different industries. We will also pursue additional grants from major U.S. government agencies. Our goal is to benefit from the combined expertise of Maxygen and our collaborators. Additionally, we seek to receive financial support from our collaborators for research and development of products and for our core technologies, as well as potential milestone and royalty payments on any products commercialized. 34 Maximize Commercial Applications of Our Technologies. We plan to develop multiple products for multiple industries. We believe we have short-, medium- and long-term commercial opportunities in the chemicals, agriculture and pharmaceutical industries. We believe our technologies have broad commercial applications, including the development of new and improved pharmaceuticals and vaccines, better agricultural products and more efficient chemical manufacturing systems. Retain Our Commercialization Rights. We have invested and plan to invest our own funds in certain areas and product opportunities with the aim of capturing a high percentage of profits on product sales. Potential Fields of Application We believe that our MolecularBreeding directed molecular evolution technologies can be applied to many different industries. We can potentially improve virtually any product or process that utilizes or could utilize DNA or proteins using our MolecularBreeding directed molecular evolution technologies. Potential applications of MolecularBreeding directed molecular evolution technologies include the development of new high-value products and the improvement of existing products and manufacturing processes. We can potentially use multiple approaches to develop products to solve complex problems, including the following: In Medicine . New and improved treatments for major diseases such as cancer, cardiovascular disease, diabetes and obesity. . New vaccines to treat and prevent viral diseases such as hepatitis, AIDS and emerging viral diseases and parasitic diseases such as malaria which affect millions of people each year. . Therapeutic vaccines and gene therapies to treat and prevent diseases such as multiple sclerosis, allergies and cancer. . New natural products for the development of better and cheaper antibiotics to counter the spread of infectious organisms that have developed a resistance to conventional antibiotics. . New natural products as improved therapies for cancer. . New gene therapies for treatments for hereditary diseases such as hemophilia and cystic fibrosis. In Agriculture and Food Production . Crops with increased yields which require less fertilizers, herbicides or insecticides. . Plants which can thrive on land where they could not otherwise survive, for example because of lack of water, high salt level or extreme temperatures. . Vaccines to treat and prevent diseases of farm animals. . Nutritionally improved forms of food and animal feed. . Food with increased health benefits. In the Chemical Industry . New, more cost-effective and more environmentally friendly production systems for plastics, vitamins, pharmaceuticals, fibers and adhesives. . New materials such as fibers and plastics. 35 . Plants as factories for the cheaper and more environmentally friendly production of substances such as plastics and pharmaceuticals. In the Environmental and Energy Industries . New systems for controlling pollution, such as novel processes for reduction of carbon emissions and polluting effluents. . Preparation of non-polluting and cleaner-burning energy sources. . Removal of pollutants, such as sulphur, from oil and other fossil fuels. Current Fields of Application We are currently applying our MolecularBreeding directed molecular evolution technologies to high-value opportunities in the fields of chemicals, agriculture, preventative and therapeutic vaccines and protein pharmaceuticals. Chemicals The chemicals industry is comprised of three major segments: commodity, specialty and fine chemicals. Together, 1998 sales in these segments exceeded $800 billion. Within these segments, approximately $50 billion is readily addressable by biological processing, for example, either by fermentation or through the use of enzyme catalysts. An additional $200 billion has been identified as potentially addressable by biological approaches within the next 10-20 years. Included in the potential market is the manufacturing of major chemicals, plastics, vitamins, compounds used in the manufacture of pharmaceuticals, enzymes for use as catalysts, the pigments and additives in paint and the polymers and fibers in our clothing. Enzymes occurring in nature are generally not able to meet the stringent activity requirements that would allow for the broad commercial use of enzymes as catalysts. We have demonstrated that MolecularBreeding directed molecular evolution technologies allow for the creation of new modified enzymes for use as catalysts, and metabolic pathways that overcome the limitations of naturally occurring enzymes. We are currently generating libraries of proprietary enzymes for use as catalysts, which we believe will offer a significant competitive advantage over existing chemical catalysts. These enzymes could provide increased yields and decreased manufacturing costs by a reduction in requirements for raw materials, capital equipment and energy. In addition, we believe these enzyme catalysts will have applicability in generating new useful materials. We have established multiple collaborations in the chemical industry, one with Novo Nordisk, the world's leading manufacturer of industrial enzymes, one with DSM, a leader in the production of bulk antibiotic products and intermediates and one with Rio Tinto, one of the world's largest mining companies. Our collaboration with Novo Nordisk was established in September 1997. Novo Nordisk had a market share of 45% of the industrial enzymes market in 1998. The total industrial enzymes market (a segment of the chemicals market) is estimated at $1.4 billion today, growing to over $3 billion by 2008. Together with Novo Nordisk, we are applying our MolecularBreeding directed molecular evolution technologies to the potential production of improved industrial enzymes. For example, we have significantly improved multiple commercially relevant properties in subtilisin, one of the most studied and highly modified industrial enzyme products. Under the five-year agreement, Novo Nordisk will pay us royalties on any sales of industrial enzyme products that are developed through our MolecularBreeding directed molecular evolution technologies. In March 1999, we commenced a three-year strategic collaboration with DSM to evolve new enzymes for use in the manufacture of certain classes of penicillin antibiotics. We are receiving research funding over the three year collaboration, and we will receive royalties from the implementation of any evolved enzymes developed through our MolecularBreeding directed molecular evolution technologies. 36 In January 2000, we entered into a three-year strategic collaboration with Rio Tinto to develop enzymatic systems for use in carbon dioxide fixation for use in chemical bioprocessing and other applications. We are receiving research funding over the three year collaboration, and will share revenues with Rio Tinto obtained from the use or sale of certain products or processes developed through our MolecularBreeding directed molecular evolution technologies. In addition to the existing collaborations, we expect to pursue independent development of high-value chemical products, as well as to enter into additional strategic alliances with leading chemical companies. Agriculture Today's agricultural biotechnology market is estimated at approximately $1 billion. It is expected to grow to approximately $6 billion by 2005. Over the past decade, companies have used biotechnology to provide protection from herbicides, diseases and pests, resulting in impressive increases in crop yield. The need for increased crop yield, the desire to move away from chemical pesticides, and the determination of the DNA sequence have combined to provide significant growth in agricultural biotechnology. In addition to yield improvement, the agricultural industry is investing heavily in biotechnology to develop crops with improved qualities such as higher oil content and enhanced nutritional value for human food or animal feed. A third area of great market potential is the use of plants as "factories" where the plant produces a substance that has commercial value, generally when processed and separated from the plant and sold as a pure preparation. Plants potentially can be used to manufacture pharmaceutical products and specialty or fine chemicals. We believe our MolecularBreeding directed molecular evolution technologies can be used to create numerous commercial opportunities in crop protection and plant quality traits. We are developing multiple commercial products for the agriculture industry through commercial collaborations with two of the world's leading agriculture companies, AstraZeneca and DuPont/Pioneer Hi-Bred. From these collaborations we have committed funding of over $61 million and may receive milestone payments of over $145 million based on the accomplishment of specific performance criteria, as well as royalties on product sales. The AstraZeneca and DuPont/Pioneer Hi-Bred collaborations fully fund our research and development efforts under these collaborations, and provide us with a large portfolio of potentially high-value gene products for the agricultural markets. Together with our collaborators, we are currently working on a broad portfolio of 12 potential products in areas of yield improvement and quality traits. We have retained significant rights to develop and market certain applications of the products resulting from the collaborations. In addition to the existing collaborations, we are pursuing and expect to pursue independent development of high-value agricultural products, and intend to enter into additional strategic alliances with leading agriculture companies. Preventative and Therapeutic Vaccines Worldwide sales of vaccines in 1998 exceeded $4 billion and are expected to exceed approximately $10 billion by 2005. Vaccines have been used for decades to prevent the onset of infectious disease in humans and animals. The vaccine market has the potential to increase dramatically for the following reasons: . Many physicians recognize vaccines as the preferred therapy for numerous infectious diseases given the increasing drug resistance of pathogens and the inability to prevent or effectively treat traditional and newly emerging viral infections. 37 . Researchers are investigating vaccines as treatments for cancer, autoimmune diseases, allergy and other non-infectious diseases. . Adults are increasingly using vaccines. . Travelers from developed countries are increasingly using vaccines. Vaccines are typically comprised of two elements: antigens, which are components of the invading pathogen that are recognized by cells of the immune system and trigger the body's defenses; and adjuvants, which are immune system boosters. The limited ability of existing antigens and adjuvants to generate the required immune responses has hindered the development of vaccines. We believe that we can generate new modified vaccines that have the potential to overcome the limitations of traditional vaccine development. We are building our research and development capabilities in the vaccine area with the support of government grant funding and have retained full commercialization rights, subject only to a license to the U.S. government as required by applicable statutes and regulations. Total committed government grant funding in the vaccine area is over $22 million. We believe our MolecularBreeding directed molecular evolution technologies have the potential ability to transform the design and development of vaccines through the identification of new genes and proteins that allow for the generation of broad and strong immune response. This would enable us to address both the treatment and prevention of a wide variety of diseases including cancer, allergy, diseases in which the body generates an improper immune response and infectious diseases such as AIDS and hepatitis. We are developing a portfolio of products in the vaccine area, including, for example, proprietary new improved antigens and adjuvants for stimulating the immune system. Protein Pharmaceuticals In 1998, the worldwide sales of therapeutic proteins made using recombinant DNA technology were approximately $17 billion, and are projected to reach approximately $19 billion in 2000. Protein pharmaceutical products, such as erythropoietin (1998 worldwide sales of $4 billion) and granulocyte colony stimulating factor (1998 worldwide sales of over $1.6 billion) represent some of the world's highest revenue pharmaceutical products. While some protein pharmaceuticals containing naturally occurring proteins can address large markets, many naturally occurring proteins are not well suited for commercialization without modification. We believe that our MolecularBreeding directed molecular evolution technologies provide the capabilities necessary to attain the improvements suitable for commercial use. Our MolecularBreeding directed molecular evolution technologies potentially can be applied to improve existing pharmaceutical proteins, create superior second generation high-value proteins with, for instance, improved stability, and create new proteins and pioneer new therapies. Our MolecularBreeding directed molecular evolution technologies potentially can also be applied to protein pharmaceuticals to improve desirable biological activities, alter binding activity, and reduce harmful side effects and toxicities. The area of human therapeutics presents significant opportunity for us as the rapid cloning and sequencing of the human genome is leading to the identification of hundreds of new genes and proteins that potentially could be optimized and developed as new protein pharmaceuticals. We are currently working on a number of protein pharmaceuticals at the research stage. We are pursuing a two-fold strategy to develop protein pharmaceuticals. First, we intend to collaborate with leading pharmaceutical and biotechnology companies and second, we are internally developing our own pharmaceutical product pipeline for future collaboration opportunities, licensing to others or independent commercialization. 38 Areas of Exploration In addition to those areas described above, we will continue to evaluate opportunities in fields such as antibody engineering, food and feed with enhanced nutritional benefits, natural products, gene therapy, liquid fuels and environmental applications. We are assessing these and other commercialization opportunities through discussions with potential corporate and academic collaborators and U.S. government agencies. In many instances, we have already established initial technology development and proof of principle models. Additional development may be funded through federal grants, corporate collaborators or our own funds. Antibodies Our MolecularBreeding directed molecular evolution technologies potentially allow for the generation of new antibodies with improved binding specificity for their targets and other improved therapeutic properties for multiple diseases. In particular, monoclonal antibodies, which originate from a single cell and that have specificity for particular disease targets, are an important sector of the biotechnology industry representing over 20% of all biopharmaceutical products in development. The FDA has recently approved for commercial sale several antibodies, including Genentech's Herceptin(R) and Novartis' Simulect(R), which have potential utility in a broad range of diseases. Nutritional Compounds We believe that our technologies may be applied to individual genes, gene families and entire complex biological pathways to develop foods, nutritional supplements and animal feed with improved health benefits. Specific applications include vitamins, sweeteners, preservatives and cholesterol lowering agents. These are potentially high-value products that are currently receiving significant attention in both the food and pharmaceutical industries. Natural Product Drug Discovery Natural products and natural product derivatives represent approximately 80% of 1998 product sales in the areas of antibiotics and cancer therapies. We may enter into collaborations with biotechnology and pharmaceutical companies to generate new libraries of lead natural product compounds by modifying enzymes and metabolic pathways through MolecularBreeding. We believe that new enzymes and pathways created through MolecularBreeding may allow for the generation of natural product variants in ways that are not feasible using existing chemical synthesis methodologies. Our efforts could potentially create new natural products with increased activity, stability, availability in the body or specificity. Gene Therapy Gene therapy is an approach to treat or prevent certain diseases by introducing therapeutic genes into target cells to produce specific proteins that will elicit a desired therapeutic response. We believe that our MolecularBreeding directed molecular evolution technologies are potentially well suited to the development of gene delivery and cell-targeting systems that could improve current modes of disease treatment and prevention. We have completed two internal programs that demonstrate the technical feasibility of MolecularBreeding to improve the properties of viral and non-viral gene therapy delivery methodologies. Liquid Fuels and Environmental Uses The depletion of fossil fuels and the effects of carbon dioxide emissions on the environment have raised awareness of the need to develop alternative fuels. Companies may employ our MolecularBreeding directed molecular evolution technologies to develop biological systems that produce cleaner burning fuels, such as methanol and ethanol, from alternative carbon sources, such as plant biomass and animal waste rather than petroleum. Additionally, companies potentially could use our MolecularBreeding directed molecular evolution technologies to develop systems containing enzymes for use as catalysts that could capture carbon dioxide which would otherwise be released into the environment, and potentially use the cabon dioxide to produce value-added products, such as fetilizers, polymers and plastics and cleaner burning fuels. 39 Corporate Collaborations Since inception, we have entered into strategic collaborations and several additional proof of principle collaborations with commercial entities and have received six grants from U.S. government agencies. Assuming our research efforts for existing collaborations are expended for the full research term, we have total committed funding of over $102 million, of which approximately $75 million is from our collaborators and $27 million from government funding. Of these committed funds, we have earned approximately $17 million; additionally, we have received $15 million in consideration of purchase of our equity. In addition, potential milestone payments from our existing collaborations could exceed $145 million based on the accomplishment of specific performance criteria, in addition to earned royalties on product sales. We expect that strategic collaborations and government grants will continue to be an important element of our business strategy. Our strategy in entering into strategic collaborations is to work with leaders in their respective industries on specific research projects. Our agreements grant to our strategic collaborators exclusive licenses under intellectual property developed by us in the collaboration for specific products for specific uses. Generally, we retain the right to work ourselves or with others on projects outside the scope of the areas and projects which are the subject of our collaborations. In the chemicals area, we have entered into research agreements with Novo Nordisk for industrial enzymes, DSM for enzymes for use in the manufacture of penicillin and Rio Tinto for chemical process validation. We retain the right to conduct other projects ourselves or with third parties. Even in those areas, such as agriculture, where we have entered into research agreements with DuPont/Pioneer Hi-Bred and AstraZeneca for multiple research projects relating to multiple crops and traits, we have the right to use these same crops to conduct other projects and develop other products, as well as the right to conduct projects using other crops. In our strategic collaborations, in exchange for commercial licenses to the products developed during the program in specified fields, we typically seek initial license fees, collaborative research funding, technology advancement funding, milestone payments for significant developments and royalties on product sales. We have entered into the following significant collaborations: Novo Nordisk In September 1997, we entered into a five year strategic collaboration with Novo Nordisk A/S, the world's largest producer of industrial enzymes, for the development and bulk production of specific industrial enzymes in fields such as laundry detergents, leather processing and pulp and paper manufacturing. Industrial enzymes are used for a broad spectrum of activities ranging from food preparation, to detergents, to pulp and paper manufacturing. Industrial enzymes today represent over a $1.4 billion market. Novo Nordisk will use our MolecularBreeding directed molecular evolution technologies to generate new industrial enzymes. In addition, Novo Nordisk has made a five year commitment to contribute funding for the research and development of new directed evolution technologies. Under the agreement, Novo Nordisk has an exclusive royalty-bearing license to use our MolecularBreeding directed molecular evolution technologies to develop proteins and enzymes for use in certain industrial enzyme fields. We have received an exclusive royalty- free license to certain Novo Nordisk technologies useful for the practice of MolecularBreeding in all fields outside the scope of the collaboration, except the field of human and veterinary diagnostic and therapeutic products, for which we received a co-exclusive license from Novo Nordisk. Under this agreement, Novo Nordisk will pay us a royalty on the sales of industrial enzyme products developed using our MolecularBreeding directed molecular evolution technologies. 40 DuPont/Pioneer Hi-Bred In December 1998, we entered into a five year strategic collaboration with Pioneer Hi-Bred International, Inc., a wholly-owned subsidiary of E.I. duPont de Nemours and Company, to utilize our MolecularBreeding directed molecular evolution technologies to generate new gene variants for use in the development of specific crop protection and quality grain traits in corn, soybeans and certain other crops. Under the terms of the agreement, in exchange for global commercialization rights, DuPont/Pioneer Hi-Bred purchased $5 million of our preferred stock, $5 million of our common stock at our initial public offering and paid $2.5 million in initial license fees. In addition, DuPont/Pioneer Hi- Bred has committed to pay us up to $27.5 million over five years for research and technology development, as well as possible milestone payments of up to $45 million based on the accomplishment of specific performance criteria and royalties on future product sales, if any. The agreement may be terminated by DuPont/Pioneer Hi-Bred after three years, upon six months notice, if a specified milestone has not been met. DSM In March 1999, we entered into a three year collaboration with Gist-Brocades N.V., a subsidiary of DSM N.V., to utilize our proprietary MolecularBreeding directed molecular evolution technologies to develop certain new enzymes for use in the manufacture of certain classes of penicillin antibiotics. Under the terms of the agreement, in exchange for global commercialization rights, we will receive research funding over three years and will receive royalties from the commercialization of any enzymes developed through our MolecularBreeding directed molecular evolution technologies. AstraZeneca In June 1999, we entered into a five year strategic collaboration with Zeneca Limited, a wholly-owned subsidiary of AstraZeneca plc, to utilize our MolecularBreeding directed molecular evolution technologies to improve the yield and quality of several of AstraZeneca's strategic crops. AstraZeneca is one of the world's leading agricultural companies. We have received $5 million in a preferred stock equity investment and could receive up to $21.5 million for research and development funding and technology advancement funding. We may receive over $100 million in potential milestone payments based on the accomplishment of specific performance criteria, in addition to royalties on product sales. In addition, each year of the collaboration AstraZeneca has the right to substitute their obligation to pay us $1 million in annual technology advancement funding with a $3 million equity investment at a 50% premium to the current market value. Rio Tinto In January 2000, we entered into a three year collaboration with Technological Resources Pty Limited, a wholly-owned subsidiary of Rio Tinto Corporation plc, to utilize our Molecular Breeding directed molecular evolution technologies to develop enzymatic systems to increase the efficiency of carbon dioxide fixation for use in chemical bioprocessing and other applications. Rio Tinto is one of the world's leading mining companies with extensive worldwide operations in the mining of minerals and metals. In connection with the collaboration, we will receive research and funding payments and technology advancement fees from Rio Tinto of up to $2.7 million. Rio Tinto and Maxygen each have exclusive rights to commercialize technology developed in the collaboration in specific fields, and Maxygen and Rio Tinto each will share revenues with the other from certain products or processes that are commercialized by the other. The collaboration provides that the parties may create a new entity to commercialize the technology arising from the collaboration. In addition to the above collaborations, we have entered into several proof of principle collaborations with parties such as Abbott, Pfizer and Novartis. 41 U.S. Government Grants and Collaborations Government grants allow us to focus on key internal scientific programs. In addition, we retain ownership of all intellectual property and commercial rights generated during the project, subject to a non-exclusive, non- transferable, paid-up license to practice for or on behalf of the U.S. inventions made with federal funds which is retained by the U.S. government as provided by the applicable statutes and regulations. We have obtained grant funding of over $27 million, primarily for the development of vaccines and the advancement of core technology, as outlined below. Summary of Grants
Granting Dollar Area of Grant Agency Description Grant Date Amount - --------------------------------------------------------------------------------- Improved Drug NIST-ATP Use of MolecularBreeding Sept. 1997 $ 2.0 Testing directed molecular million evolution technologies to develop new screening systems for use in accelerated discovery and development of new AIDS therapies and vaccines. Evolution of DARPA Use of MolecularBreeding Feb. 1998 $ 5.6 Vectors directed molecular million evolution technologies to evolve a new generation of DNA vectors for rapid and efficient delivery of antigens for immunization. Whole Genome NIST-ATP Use of MolecularBreeding Oct. 1998 $ 1.2 Shuffling directed molecular million evolution technologies to develop new or improved manufacturing processes. Decontamination DARPA Use of MolecularBreeding Dec. 1998 $ 3.8 directed molecular million evolution technologies to create enzyme-based decontamination compounds effective against pathogens. New Therapeutic and DARPA Use of MolecularBreeding April 1999 $ 7.7 Preventative DNA directed molecular million Vaccines evolution technologies to generate new vaccines with a broad spectrum of activity against multiple strains of several different pathogens. Aerosol-Based DARPA Use of MolecularBreeding Sept. 1999 $ 6.8 Vaccines directed molecular million evolution technologies to deliver aerosol-based preventative and therapeutic agents.
In February 2000, we entered into a cooperative research and development agreement (CRADA) with the National Cancer Institute, National Institute of Health. The CRADA is a three year research agreement under which we will work with the National Cancer Institute to develop with our MolecularBreeding directed molecular evolution technologies, specific therapeutic proteins for the treatment of certain types of cancer. We will have the option to acquire an exclusive, royalty-bearing 42 license to any inventions owned by the National Cancer Institute that are developed in the CRADA, on terms to be later established. The CRADA can be terminated by either the National institute of Health or Maxygen at any time by advance notice to the other party. Intellectual Property and Technology Licenses Pursuant to the technology transfer agreement we entered into with Affymax Technologies N.V. and Glaxo Group Limited, each a wholly-owned subsidiary of Glaxo Wellcome plc, we were assigned all rights to the patents, applications and know-how related to MolecularBreeding directed molecular evolution technologies. Affymetrix, Inc. retains an exclusive, royalty-free license under the patents and patent applications previously owned by Affymax for use in the diagnostics and research supply markets for specific applications. In addition, Affymax assigned jointly to us and to Affymetrix a family of patent applications relating to circular PCR techniques. We have an extensive patent portfolio including six issued U.S. patents relating to our proprietary MolecularBreeding directed molecular evolution technologies. Counterpart applications of these U.S. patents are pending in other major industrialized countries. We have an additional 86 pending U.S. patent applications and 70 pending foreign and international counterpart applications relating to our MolecularBreeding directed molecular evolution technologies and specialized screening technologies, and the application of these technologies to diverse industries including agriculture, protein pharmaceuticals, vaccines, gene therapy, chemicals and therapeutic drugs. We have exclusively licensed patent rights and technology for specific uses from Novo Nordisk, the California Institute of Technology, Stanford University and the University of Washington. These licenses give us rights to an issued U.S. patent, 16 U.S. patent applications, and 81 additional international or foreign counterpart applications. In addition, we received from Affymax a worldwide, non-exclusive license to certain Affymax patent applications and patents related to technology for displaying multiple diverse proteins on the surface of bacterial viruses. Competition We believe we are the leader in the field of directed molecular evolution. We are aware that companies such as Diversa and Ixsys have alternative methods for obtaining genetic diversity. Academic institutions such as Caltech and the University of Washington are working in this field, and we have licensed certain technology from Caltech and the University of Washington. In the future, we expect the field to become highly competitive and that companies and academic and research institutions will seek to develop technologies that could be competitive with our MolecularBreeding directed molecular evolution technologies. Any products that we may develop through our MolecularBreeding directed molecular evolution technologies will compete in highly competitive markets. Many of our potential competitors in these markets have substantially greater financial, technical and personnel resources than we do, and we cannot assure you that they will not succeed in developing technologies and products that would render our technologies and products or those of our collaborators obsolete or noncompetitive. In addition, many of those competitors have significantly greater experience than we do in their respective fields. We are aware that Energy Biosystems Corporation and Diversa Corporation have described technologies that appear to have some similarities to our patented proprietary technologies. We monitor publications and patents that relate to directed molecular evolution to be aware of developments in the field and evaluate appropriate courses of action in relation to these developments. 43 Employees As of February 15, 2000 we had 149 full-time employees, 64 of whom hold Ph.D. or M.D. degrees and 119 of whom were engaged in full-time research activities. We plan to expand our corporate development programs and hire additional staff as corporate collaborations and government grants are established. We continue to search for qualified individuals with interdisciplinary training and flexibility to address the various aspects and applications of our technologies. None of our employees is represented by a labor union, and we consider our employee relations to be good. Facilities We lease an aggregate of 47,880 square feet of office and laboratory facilities in Redwood City, California. The lease expires on February 24, 2005 with respect to 31,166 square feet and on March 31, 2002 with respect to 16,714 square feet. We have an option to extend the term of the lease for three years with respect to the 16,714 square feet. We believe that the facilities we currently lease are sufficient for approximately the next three months and that anticipated future growth for the next six months can be accommodated by leasing additional space near our current facilities. Legal Proceedings We are not currently a party to any material pending legal proceedings. 44 MANAGEMENT Directors and Executive Officers Our directors and executive officers as of February 15, 2000, are as follows:
Name Age Position ---- --- -------- Russell J. Howard, Ph.D....... 49 Director, President and Chief Executive Officer Simba Gill, Ph.D.............. 35 Chief Financial Officer and Senior Vice President of Business Development Michael Rabson, Ph.D.......... 46 General Counsel and Senior Vice President of Legal Affairs Willem P.C. Stemmer, Ph.D. ... 42 Vice President of Research John Bedbrook, Ph.D........... 50 President of Agriculture Howard A. Simon............... 40 Vice President of Human Resources Norman Kruse, Ph.D............ 50 Director of Intellectual Property, Chief Patent Counsel Isaac Stein (1)(2)............ 53 Chairman of the Board and Director Robert J. Glaser, M.D. (2).... 81 Director M.R.C. Greenwood, Ph.D........ 56 Director Adrian Hennah (1)............. 42 Director Gordon Ringold, Ph.D. (1)(2).. 49 Director George Poste, D.V.M., Ph.D.... 55 Director Julian N. Stern............... 75 Secretary
- -------- (1)Member of the audit and finance committee (2)Member of the compensation committee Russell J. Howard, Ph.D., has served as our President, Chief Executive Officer and Director since June 1998 and is one of our co-founders. Dr. Howard was elected our President and Chief Operating Officer in May 1997. Originally trained in biochemistry and chemistry, Dr. Howard has spent over 20 years studying infectious diseases, primarily malaria, and currently serves on the National Institutes of Health and USAID advisory panels for malaria vaccine development. Prior to joining Maxygen, Dr. Howard was from August 1994 to June 1996 the President and Scientific Director of Affymax Research Institute. Simba Gill, Ph.D., joined us in July 1998 as the Chief Financial Officer and Senior Vice President of Business Development. Prior to joining us, from November 1996 to July 1998, Dr. Gill was at Megabios Corp. where he was Vice President of Business Development. Prior to this from November 1995 to November 1996, Dr. Gill was Director of Business Development at Systemix. Prior to joining Systemix, Dr. Gill worked at Boehringer Mannheim in a variety of corporate functions including Global Product Manager for erythropoietin, Manager of Corporate Business Development and Director of New Diagnostics Program Management. Dr. Gill received his Ph.D. in immunology at King's College, London University in collaboration with the U.K. biotechnology company CellTech, and his M.B.A. from INSEAD in Fontainbleau, France. Michael Rabson, Ph.D., joined us in September 1999 as Senior Vice President of Legal Affairs and General Counsel. Prior to joining us from February 1996 to September 1999, Dr. Rabson was a member of Wilson Sonsini Goodrich & Rosati, P.C. Prior to becoming a member, Dr. Rabson was an associate at Wilson Sonsini Goodrich & Rosati, P.C. Dr. Rabson received his Ph.D. in infectious disease epidemiology from Yale University and did a post-doctoral fellowship at the National Cancer Institute, National Institutes of Health. He was a patent examiner at the U.S. Patent and Trademark Office before he received his J.D. from Yale Law School. Willem P.C. Stemmer, Ph.D., is one of our co-founders and the inventor of MolecularBreeding. He has served as our Vice President of Research since March 1997. Dr. Stemmer's background is in medical genetics, where he originally worked on antibody engineering for immunotherapy of cancer. Prior to the 45 organization of Maxygen, he was a distinguished scientist at Affymax Research Institute from 1992 to 1996. He is a co-founder and board member of the Diversity Biotechnology Consortium, a joint academic and business effort focused on theoretical issues in molecular diversity and evolution. Dr. Stemmer has pioneered our MolecularBreeding directed molecular evolution technologies and has authored more than 14 papers on the subject and is the named inventor on more than 20 patent applications covering the technologies and, to date, five issued patents. John Bedbrook, Ph.D., joined us in November 1999 as President of Agriculture. Prior to this Dr. Bedbrook was Chief Executive Officer of Plant Science Ventures from the beginning of 1999 until he joined us and Chief Technology Officer at SAVIA from February 1998 to October 1999. Prior to joining SAVIA, Dr. Bedbrook held several senior management positions including Executive Vice President of Research and Development and Co-President at DNA Plant Technology Corp. from 1988 to 1997. Dr. Bedbrook also served as a Scientific Board Member and Director for many organizations. Dr. Bedbrook received his Ph.D. in Molecular Biology from the University of Auckland in New Zealand. Howard A. Simon joined us in November 1999 as Vice President of Human Resources. Prior to joining us, from 1993 to November 1999 Mr. Simon was a partner in the Labor, Employment and Benefits Law Group of Landels Ripley & Diamond, LLP. Mr. Simon is a 1985 graduate of the Boalt Hall School of Law at the University of California, Berkeley. Also in 1985, Mr. Simon received his Master of Arts Degree with highest honors from the Graduate Theological Union of Berkeley. Norman Kruse, Ph.D., joined us in March 1998 as the Director of Intellectual Property, Chief Patent Counsel. Prior to joining us, from December 1995 to February 1998, Dr. Kruse was a patent attorney at Chiron Corporation. Dr. Kruse was a patent attorney at Townsend and Townsend and Crew from January 1993 to December 1995. Dr. Kruse received his Ph.D. in molecular biology from the University of Washington and worked initially as a scientist and manager in the diagnostics industry. Subsequently, he managed technology assessment and acquisition for Triton Biosciences, during which time he obtained his J.D. from Golden Gate University of Law in San Francisco. Isaac Stein has served as our Chairman of the Board since June 1998 and a director since May 1996 and is one of our co-founders. Since November 1982, Mr. Stein has been president of Waverley Associates, Inc. a private investment firm. Mr. Stein is also a Managing Member of Technogen Enterprises, L.L.C. and Technogen Managers, L.L.C., which is the general partner of Technogen Associates, L.P. and a director of ALZA Corporation, the Benham Group of mutual funds and CV Therapeutics, Inc. He is also a trustee of Stanford University and the Chairman of the Board of UCSF Stanford Health Care. Robert J. Glaser, M.D., has served as our Director since September 1997. Dr. Glaser was Director for Medical Science at the Lucille P. Markey Charitable Trust from 1984 to June 1997, and a trustee from 1988 to June 1997. In accordance with the donor's will, the Trust ceased operations in June 1997. Dr. Glaser is also a director of ALZA Corporation and Hanger Orthopedic Group, Inc. Dr. Glaser has held faculty appointments at several universities, including Dean of the School of Medicine at Stanford University and Professor of Social Medicine at Harvard University. Originally trained as an internist, Dr. Glaser has 124 publications on streptococcal infections, rheumatic fever, medical education and health care, as well as being a contributor to numerous scientific treatises. M.R.C. Greenwood, Ph.D., has served as our Director since February 1999. Dr. Greenwood has been Chancellor of the University of California ("UC") at Santa Cruz since July 1996. Prior to being named Chancellor of UC Santa Cruz, Dr. Greenwood was Dean of Graduate Studies and Vice President at UC Davis from July 1989 to July 1996. In addition, from November 1993 to May 1995, Dr. Greenwood took a leave from UC Davis to serve as Associate Director for Science in the White House Office of Science and Technology Policy. Dr. Greenwood received her doctorate in physiology, developmental biology and neurosciences from Rockefeller University. 46 Adrian Hennah has served as our Director since September 1997. Mr. Hennah has held several key positions in the Glaxo Wellcome organization. He is currently leading a coordination team planning for the integration of Glaxo Wellcome with Smithkline Beecham. He was previously Senior Vice President and Chief Financial Officer of Glaxo Wellcome Inc. Prior to that, Mr. Hennah had a range of responsibilities within research and development including finance, business redesign and strategy process, human resources and engineering at Glaxo Wellcome plc since 1984, and he led the team coordinating the integration of Glaxo and Wellcome. Mr. Hennah is also a Director of Affymetrix. Mr. Hennah has a degree in law from Cambridge University and is a Sloan Fellow of the London Business School. Gordon Ringold, Ph.D., has served as our Director since September 1997. Dr. Ringold has served as Chairman and Chief Executive Officer of SurroMed, a biotechnology company focused on novel clinical databases since 1997. From March 1995 to February 2000, Dr. Ringold was Chief Executive Officer and Scientific Director of Affymax Research Institute where he managed the development of novel technologies to accelerate the pace of drug discovery. Prior to serving as Chief Executive Officer, Dr. Ringold was the President and Scientific Director of Affymax Research Institute. Dr. Ringold received his Ph.D. in the laboratory of Dr. Harold Varmus, prior to joining the Stanford University School of Medicine, Department of Pharmacology, and serving as the Vice President and Director of the Institute for Cancer and Development Biology of Syntex Research. Dr. Ringold is a Managing Member of Technogen Enterprises, L.L.C. and Technogen Managers, L.L.C., which is the general partner of Technogen Associates, L.P. George Poste, D.V.M., Ph.D., has served as our Director since October 1999. Dr. Poste has been Chief Science and Technology Officer at SmithKline Beecham since January 1997 and is a member of the Board of Directors of SmithKline Beecham. Prior to being appointed to Chief Science and Technology Officer, Dr. Poste was President of Research and Development at SmithKline Beecham since 1989. Dr. Poste is also a Research Professor at the University of Pennsylvania and holds the William Pitt Fellowship at Pembroke College, Cambridge University. He is a Board-certified pathologist and was awarded a D.Sc. for meritorious research contributions by the University of Bristol in 1987. Dr. Poste received his Doctorate in Veterinary Medicine in 1966 and his Ph.D. in Virology in 1969 from the University of Bristol. Julian N. Stern has served as our Secretary since March 1997. He has been an attorney with the law firm of Heller Ehrman White & McAuliffe since 1956. He is currently the sole employee of a professional corporation that is a partner of Heller Ehrman. He is also a director of ALZA Corporation. Scientific Advisory Board The following individuals are members of our Scientific Advisory Board: Baruch S. Blumberg, M.D., Ph.D., is a Distinguished Scientist at Fox Chase Cancer Center, Philadelphia, and University Professor of Medicine and Anthropology at the University of Pennsylvania. Dr. Blumberg's research has covered many areas including clinical research, epidemiology, virology, genetics and anthropology. Dr. Blumberg was awarded the Nobel Prize in 1976 for his work on infectious diseases and specifically for the discovery of the hepatitis B virus and has also been elected to the National Inventors Hall of Fame for similar work. Dr. Blumberg's research and insight into infectious diseases are valuable to Maxygen programs related to vaccines and hepatitis B in particular. Arthur Kornberg, M.D., is an active Professor Emeritus at the Stanford University School of Medicine, Department of Biochemistry. Dr. Kornberg has received numerous accolades including several honorary degrees and awards, the National Medal of Science, and the Nobel Prize in Medicine in 1959. He is a member of several prestigious scientific societies and serves as a member of several scientific advisory boards. Dr. Kornberg's years of research in enzymes and metabolism is a valuable contribution to directing the internal research programs of Maxygen. 47 Joshua Lederberg, Ph.D., a research geneticist, is Professor Emeritus at the Rockefeller University, in New York. Formerly, Dr. Lederberg was a professor of genetics at the University of Wisconsin and at Stanford University School of Medicine. Dr. Lederberg is a pioneer in the field of bacterial genetics with the discovery of genetic recombination in bacteria, work for which he received the Nobel Prize in Physiology and Medicine in 1958. Maxygen is funding work in Dr. Lederberg's laboratory pertaining to the study of cell fusion and the generation of genetically diverse recombinants. His work and guidance in genetic recombination is important to our MolecularBreeding directed molecular evolution technologies. Alejandro C. Zaffaroni, Ph.D., is one of our co-founders. Dr. Zaffaroni is a biochemist by training and a highly successful biotechnology entrepreneur, who has co-founded and built several companies including ALZA Corporation, DNAX Institute of Molecular and Cellular Biology, Affymax N.V. and Affymetrix, Inc. Dr. Zaffaroni has repeatedly recognized the commercial value of leading-edge technologies and has turned those visions into highly successful companies. In 1995, Dr. Zaffaroni was awarded the National Medal of Technology by President Clinton in recognition of his contributions to the pharmaceutical and biotechnology industries. Dr. Zaffaroni is a Managing Member of Technogen Enterprises, L.L.C. and Technogen Managers, L.L.C., which is the general partner of Technogen Associates, L.P. Frances Arnold, Ph.D., is a Professor of Chemical Engineering and Biochemistry at the California Institute of Technology. She received her Ph.D. in Chemical Engineering from the University of California, Berkeley. She has authored or co-authored more than 120 publications and has 18 patents issued or pending. Dr. Arnold's research focuses on engineering new enzymes and pathways by directing their evolution in the laboratory. Her awards include an Office of Naval Research Young Investigator Award, a Presidential Young Investigator Award and a David and Lucille Packard Fellowship in Science and Engineering. Maxygen is funding work at Dr. Arnold's laboratory pertaining to directed molecular evolution. Dr. Arnold provides on-going guidance in the field of directed molecular evolution and its applications in the chemical industry. Board Composition and Committees We currently have seven directors who each serve until the next meeting of stockholders and until their successors are duly qualified. Our board of directors currently has an audit committee and a compensation committee. The audit committee consists of Adrian Hennah, Gordon Ringold and Isaac Stein. The audit committee makes recommendations to the board of directors regarding the selection of independent auditors, reviews the scope of audit and other services by our independent auditors, reviews the accounting principles and auditing practices and procedures to be used for our financial statements and reviews the results of those audits. The compensation committee consists of Robert J. Glaser, Gordon Ringold and Issac Stein. The compensation committee makes recommendations to the board of directors regarding our stock and compensation plans, approves compensation of certain officers and grants stock options. Compensation Committee Interlocks and Insider Participation Interlocks None of the members of the compensation committee is currently, or has ever been at any time since our formation, one of our officers or employees, nor has served as a member of the board of directors or compensation committee of any entity that has one or more officers serving as a member of our board of directors or compensation committee. In March 1997, Mr. Stein issued a full recourse promissory note in the amount of $120,000 in favor of Maxygen in connection with the purchase of 600,000 shares of our common stock, which he repaid in full in January 2000. 48 Director Compensation We reimburse our nonemployee directors for expenses incurred in connection with attending board and committee meetings but do not compensate them for their services as board or committee members. We have in the past granted nonemployee directors options to purchase our common stock pursuant to the terms of our stock plans, and our board continues to have the discretion to grant options to new nonemployee directors. Beginning after our stockholders meeting in 2000, our nonemployee directors will each receive nondiscretionary, automatic grants of options to purchase 20,000 shares of our common stock upon joining the board of directors and nondiscretionary, automatic grants of options to purchase 5,000 shares of our common stock each year pursuant to the 1999 Nonemployee Directors Stock Option Plan. Executive Compensation The following table sets forth the compensation paid by us during 1997, 1998 and 1999 to our Chief Executive Officer and to our four other most highly compensated executive officers. Summary Compensation Table
Long-Term Annual Compensation Compensation ----------------------------- ------------ Awards ------------ Number of Securities Other Annual Underlying All Other Name and Position Year Salary Bonus Compensation Options Compensation(1) ----------------- ---- ------ ----- ------------ ------------ --------------- Russell J. Howard........... 1999 $225,000 $ -- $ -- 172,500 $832 President, Chief Executive 1998 218,333 -- -- 200,000 833 Officer and Director 1997 153,750 -- -- 150,000 666 Simba Gill(2)............... 1999 192,850 -- 1,500(3) 126,738 686 Chief Financial Officer and 1998 99,750 10,000 55,414(4) 330,000 275 Senior Vice President of 1997 -- -- -- -- -- Business Development Michael Rabson(5)........... 1999 57,539 -- -- 350,000 145 Senior Vice President of 1998 -- -- -- -- -- Legal Affairs and 1997 -- -- -- -- -- General Counsel Willem P.C. Stemmer......... 1999 154,500 -- -- 122,500 786 Vice President of Research 1998 136,667 -- -- -- 502 1997 81,667 -- -- 300,000 345 John Bedbrook(6)............ 1999 34,599 -- -- 200,000 310 President of Agriculture 1998 -- -- -- -- -- 1997 -- -- -- -- -- Norman Kruse................ 1999 147,791 -- 32,209(7) 66,543 Director of Intellectual 1998 118,767 10,000 114,809(8) 87,500 Property, Chief Patent 1997 -- -- Counsel Joseph Affholter(10)........ 1999 139,019 -- 62,321(9) 65,700 541 Former Vice President of 1998 84,480 10,000 85,264(10) 110,000 393 Biocatalysis and Chemicals 1997 -- -- -- -- --
- -------- (1) Consists of term life insurance premiums paid by Maxygen on behalf of the listed individual. (2) Dr. Gill joined Maxygen in July 1998. His annualized salary for 1998 was $190,000. (3) Consists of $1,500 for reimbursement of relocation expenses. (4) Consists of $19,550 in the form of a housing allowance and $35,864 for reimbursement of relocation expenses. (5) Dr. Rabson joined Maxygen in September 1999. Dr. Rabson's annualized salary for 1999 was $220,000. (6) Dr. Bedbrook joined Maxygen in November 1999. Dr. Bedbrook's annualized salary for 1999 was $212,500. (7) Consists of $32,209 in the form of a housing allowance. (8) Consists of $31,233 in the form of a housing allowance and $83,575 for reimbursement of relocation expenses. 49 (9) Consists of $55,381 in the form of a housing allowance and $6,946 as interest forgiven on a promissory note. (10) Consists of $39,953 in the form of a housing allowance, $42,444 for reimbursement of relocation expenses and $2,867 as interest forgiven on a promissory note. (11) Dr. Affholter joined Maxygen in May 1998. In January 2000, Dr. Affholter resigned as our Vice President of Biocatalysis and Chemicals and is no longer an employee. Stock Options Granted in the Fiscal Year Ended December 31, 1999 The following table sets forth information with respect to stock options granted during the fiscal year ended December 31, 1999 to each of the named executive officers. All options were granted under Maxygen's 1997 Stock Option Plan. The following options are immediately exercisable in full at the date of grant, but shares purchased on exercise of unvested options are subject to a repurchase right in our favor that entitles us to repurchase unvested shares at their original exercise price on termination of the employee's services with us. The repurchase right lapses as to 25% of the shares on the first anniversary of the grant date and the balance, ratably by year, over the next three years. Under certain circumstances the vesting of options, and consequently the lapse of the repurchase right, may be accelerated. See "-- Employee Benefit Plans--1997 Stock Option Plan". The percentage of options granted is based on an aggregate of 2,986,830 options granted by Maxygen during the fiscal year ended December 31, 1999 to our employees, including the named executive officers. The potential realizable value amounts in the last two columns of the following chart represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term assuming an initial price equal to $16.00, the initial public offering price. The assumed 5% and 10% annual rates of stock price appreciation from the date of grant to the end of the option term are provided in accordance with rules of the SEC and do not represent our estimate or projection of the future common stock price. Actual gains, if any, on stock option exercises are dependent on the future performance of the common stock, overall market conditions and the option holder's continued employment through the vesting period.
Individual Grants ---------------------------------------- % of Total Potential Realizable Options Value at Assumed Number of Granted Annual Rates of Stock Securities to Exercise Price Appreciation Underlying Employees Price for Option Terms Options in Fiscal Per Expiration --------------------- Name Granted Year Share Date 5% 10% ---- ---------- --------- -------- ---------- ---------- ---------- Russell J. Howard....... 172,500 5.8% $0.75 9/08/09 $4,366,374 $7,029,354 President, Chief Executive Officer and Director Simba Gill.............. 120,138 4.0 0.75 9/08/09 3,040,971 4,895,609 Chief Financial Officer 6,600 0.2 0.50 3/24/09 168,711 270,599 and Senior Vice President of Business Development Michael Rabson.......... 350,000 11.7 0.75 9/08/09 8,859,310 14,262,458 Senior Vice President of Legal Affairs and General Counsel Willem P.C. Stemmer..... 122,500 4.1 0.75 9/08/09 3,100,758 4,991,860 Vice President of Research John Bedbrook........... 200,000 6.7 7.50 11/10/09 3,712,463 6,799,976 President of Agriculture Norman Kruse............ 46,543 1.6 0.75 9/8/09 1,178,111 1,896,622 Director of 20,000 0.7 0.75 9/27/09 506,246 814,998 Intellectual Property and Chief Patent Counsel Joseph Affholter........ 45,700 1.5 0.75 9/8/09 1,156,772 1,862,269 Former Vice President 20,000 0.7 0.75 9/27/09 506,246 814,998 of Biocatalysis and Chemicals
50 Aggregated Option Exercises in Fiscal Year 1999 and Fiscal-Year End Option Values The following table sets forth certain information regarding exercised stock options during the fiscal year ended December 31, 1999 and unexercised options held as of December 31, 1999 by each of the named executive officers. We granted all options under our 1997 Stock Option Plan. These options are immediately exercisable in full at the date of grant, but shares purchased on exercise of unvested options are subject to a repurchase right in our favor that entitles us to repurchase unvested shares at their original exercise price on termination of the employee's services with us. Generally, the repurchase right lapses as to 25% of the shares on the first anniversary of the grant date and the balance, ratably by year, over the next three years. Under certain circumstances the vesting of options, and consequently the lapse of the repurchase right, may be accelerated. See "--Employee Benefit Plans--1997 Stock Option Plan". The value realized is based on the fair market value of the underlying securities as of the date of exercise, minus the per share exercise price, multiplied by the number of shares underlying the option. The value of unexercised in-the-money options are based on a value of $71.00 per share, the last reported sale price of our common stock on the Nasdaq National Market on December 31, 1999, minus the per share exercise price, multiplied by the number of shares underlying the option. Each of the people below who exercised options paid 10% of the exercise price by cash and the remaining amount with a full recourse promissory note.
Value of Number of Securities Unexercised In-The Money Number of Underlying Unexercised Options at Fiscal Year- Shares Options at Fiscal Year-End End Acquired on Value -------------------------------- ------------------------- Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable ---- ----------- -------- --------------- -------------- ----------- ------------- Russell J. Howard President, Chief Executive Officer and Director............... 75,000 $33,750 297,500 -- $20,955,625 $ -- Simba Gill Chief Financial Officer and Senior Vice President of Business Development(1) ........ 126,738 1,650 -- -- -- -- Michael Rabson Senior Vice President of Legal Affairs and General Counsel........ 350,000 -- -- -- -- -- Willem P.C. Stemmer Vice President of Research............... 122,500 -- -- -- -- -- John Bedbrook President of Agriculture............ -- -- 200,000 -- 12,700,000 -- Norman Kruse Director of Intellectual Property, Chief Patent Counsel... 154,043 45,391 -- -- -- -- Joseph Affholter Former Vice President of Biocatalysis and Chemicals.............. 175,700 49,500 -- -- -- --
- -------- (1) Our right of repurchase lapses over a four-year period with respect to 25% of the underlying shares at the first anniversary of the grant date and in equal monthly installments over the next three years. 51 Employee Benefit Plans 1997 Stock Option Plan Our board of directors adopted our 1997 Stock Option Plan on March 1, 1997. This plan provides for the grant of incentive stock options to our employees and nonstatutory stock options to our employees, directors and consultants. As of February 15, 2000, 7,500,000 shares of common stock were reserved for issuance under this plan. Of these shares, 2,111,602 shares were subject to outstanding options and 1,243,385 shares were available for future grant. The stock option plan provides for annual increases in the number of shares available for issuance on the first day of each year, beginning January 1, 2001, equal to the lesser of 1,500,000 shares, 4% of the outstanding shares on the date of the annual increase or an amount determined by our board of directors. Our board of directors or a committee appointed by the board administers the stock option plan and determines the terms of options granted, including the exercise price, the number of shares subject to individual option awards and the vesting period of options. The exercise price of nonstatutory options must generally be at least 85% of the fair market value of the common stock on the date of grant. The exercise price of incentive stock options cannot be lower than 100% of the fair market value of the common stock on the date of grant and, in the case of incentive stock options granted to holders of more than 10% of our voting power, not less than 110% of the fair market value. The term of an incentive stock option cannot exceed ten years, and the term of an incentive stock option granted to a holder of more than 10% of our voting power cannot exceed five years. A participant may not transfer rights granted under our stock option plan other than by will, the laws of descent and distribution or as otherwise provided under the stock option plan. Options granted under our stock option plan will accelerate and become fully exercisable for a period of 30 days in the event we are acquired, unless the successor corporation assumes or substitutes other equivalent options in their place. Our board of directors may not, without the adversely affected optionee's prior written consent, amend, modify or terminate the stock plan if the amendment, modification or termination would impair the rights of optionees. Our stock option plan will terminate in 2007 unless terminated earlier by the board of directors. On September 8, 1999, the board of directors granted options to purchase an aggregate of 187,387 shares of our common stock to our employees. These options were granted under the 1997 Stock Option Plan and vest according to individual schedules set by the board. The board of directors also retained the right to accelerate vesting of these options based upon company-wide performance and the performance of individual option holders. To date, the board has accelerated portions of such options based on 1999 performance. 1999 Employee Stock Purchase Plan Our board of directors adopted our 1999 Employee Stock Purchase Plan on September 29, 1999. This plan provides our employees with an opportunity to purchase our common stock through accumulated payroll deductions. A total of 400,000 shares of common stock has been reserved for issuance under the purchase plan through March 2001. In addition, the purchase plan provides for annual increases in the number of shares available for issuance under the purchase plan on the first day of each year, beginning January 1, 2001, equal to the lesser of 200,000 shares, 0.75% of the outstanding shares on the date of the annual increase or such amount as may be determined by the board. The board of directors or a committee appointed by the board administers the purchase plan. The board or its committee has full and exclusive authority to interpret the terms of the purchase plan and determine eligibility. 52 Employees are eligible to participate if they are customarily employed by us or any participating subsidiary for at least 20 hours per week. However, an employee may not be granted an option to purchase stock under the purchase plan: . if such an employee immediately after grant owns stock possessing five percent or more of the total combined voting power or value of all classes of our capital stock, or . if, and to the extent that, such an employee has rights to purchase stock under all of our employee stock purchase plans in excess of $25,000 worth of stock for each calendar year. The purchase plan, which is intended to qualify under Section 423 of the Internal Revenue Code of 1986, as amended, allows for favorable tax treatment of participants, offering periods of up to 24 months, as determined by the plan administrator, although it is anticipated that offering periods will generally be 12 months, each including two six-month purchase periods. The offering periods will generally start on the first trading day on or after April 1 of each year, except for the first offering period which will commence on the first trading day before the effective date of this offering, will end on the last trading day on or before March 31, 2001, and will have two purchase periods ending on the last trading days of September 2000 and March 2001. The purchase plan permits participants to purchase common stock though payroll deductions of up to 15% of the participant's "compensation." Compensation is defined as the participant's base straight time gross earnings and commissions but excludes payments for overtime, shift premium payments, incentive compensation, incentive payments, bonuses and other compensation. Amounts deducted and accumulated for the participant's account are used to purchase shares of common stock on the last trading day of each purchase period at a price of 85% of the lower of the fair market values of the common stock at the beginning of the offering period and the end of the purchase period. Participants may reduce their withholding percentage to zero at any time during an offering period and may increase their withholding percentage or decrease it, but to more than zero, on the first day of each purchase period. Participants may end their participation at any time during an offering period, and they will be paid their payroll deductions to date. Participation ends automatically upon termination of employment with us. A participant may not transfer rights granted under the purchase plan other than by will, the laws of descent and distribution or as otherwise provided under the purchase plan. The purchase plan provides that, if we merge with or into another corporation or a sale of substantially all of our assets, a successor corporation may assume or substitute for each outstanding purchase right. If the successor corporation refuses to assume or substitute for the outstanding purchase rights, the offering period then in progress will be shortened, and a new exercise date will be set. The purchase plan will terminate in 2009. However, the board of directors has the authority to amend or terminate the purchase plan at any time and may apply any action to affect their outstanding rights to purchase stock under the purchase plan. 1999 Nonemployee Directors Stock Option Plan We have adopted the 1999 Nonemployee Directors Stock Option Plan and have reserved a total of 300,000 shares of common stock for issuance thereunder. Maxygen will automatically grant each nonemployee director who becomes a Maxygen director after our stockholder meeting in 2000 a nonstatutory stock option to purchase 20,000 shares of common stock on the date on which such person first becomes a director. At the first board of directors meeting immediately following each annual stockholders meeting beginning with the 1999 Annual Stockholders Meeting, Maxygen will automatically 53 grant each nonemployee director a nonstatutory option to purchase 5,000 shares of common stock. The exercise price of options under the director plan will be equal to the fair market value of the common stock on the date of grant. The maximum term of the options granted under the director plan is ten years. Options will become exercisable at the rate determined by the plan administrator. Shares underlying options granted to a director upon joining our board are subject to a right of repurchase in our favor which lapses with respect to 25% of the shares one year after the date of grant and at a rate of 25% of the shares at the end of each year thereafter. Each subsequent grant is subject to a right of repurchase for one year after the date of grant. The director plan will terminate in September 2009, unless terminated earlier in accordance with the provisions of the director plan. 401(k) Plan In May 1997, our board of directors adopted a Retirement Savings and Investment Plan covering our full-time employees located in the United States. This plan is intended to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended, so that contributions to this plan by employees, and the investment earnings thereon, are not taxable to employees until withdrawn. Pursuant to the plan, employees may elect to reduce their current compensation by up to the lesser of 25% of their annual compensation or the statutory prescribed annual limit ($10,500 in 2000) and to have the amount of the reduction contributed to the plan. We do not currently make additional matching contributions on behalf of plan participants. Separation Arrangements In January 2000, Dr. Affholter resigned his position as Vice President of Biocatalysis and Chemicals. In connection with his resignation, Dr. Affholter entered into a separation agreement with Maxygen whereby Dr. Affholter received acceleration of the vesting of options to purchase 20,675 shares of Maxygen's common stock. He also retained his right to receive acceleration of options to purchase up to 16,875 shares of Maxygen common stock under certain specified circumstances. The agreement also provided for the restructuring of Dr. Affholter's loan arrangements with Maxygen as described in "Related Party Transactions". In connection with his resignation, Dr. Affholter entered into a consulting agreement with Maxygen whereby he would remain as a consultant to Maxygen through June 30, 2001. The agreement provides for consulting fees at an hourly rate with minimum monthly hour requirements for each month of the agreement. The agreement also provides for the vesting of 6,875 unvested options on June 30, 2001 that were held by Dr. Affholter prior to his resignation. Limitation of Liability and Indemnification Our certificate of incorporation and bylaws limit the liability of directors, officers, employees and other agents to the fullest extent permitted by Delaware law; provided however that we indemnify any such person in connection with a proceeding initiated by such person only if such proceeding was authorized by our board. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except for liability for: (1) breach of their duty of loyalty to the corporation or its stockholders, (2) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) unlawful payments of dividends or unlawful stock repurchases or redemptions, or (4) any transaction from which the director derived an improper personal benefit. This limitation of liability does not apply to liabilities arising under the federal or state securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. We believe that indemnification under our bylaws and certificate of incorporation covers at least negligence and gross negligence on the part of indemnified parties. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in this capacity, regardless of whether the bylaws permit indemnification. We have obtained directors' and officers' liability insurance to cover certain liabilities described above. 54 We intend to enter into agreements to indemnify our officers and directors, in addition to the indemnification provided for in our bylaws. These agreements, among other things, will indemnify our officers and directors for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of Maxygen arising out of such person's services as one of our directors or such person's services to any of our subsidiaries or any other company or enterprise to which the person provides services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors. There is no pending litigation or proceeding involving a director or officer of Maxygen in which indemnification is required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification. 55 RELATED PARTY TRANSACTIONS Since inception (May 1996), there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or are to be a party in which the amount involved exceeds $60,000 and in which any current director, executive officer or holder of more that 5% of our common stock had or will have a direct or indirect interest other than (1) compensation arrangements, which are described where required under "Management" and (2) the transactions described below. In February 1997, we entered into a services agreement with Affymax Research Institute. Pursuant to the services agreement, Affymax provided certain accounting, administrative and facilities management services to us and allowed us to occupy certain facilities leased by Affymax in exchange for specified annual fees. The services agreement terminated on April 1, 1999. At the time of our formation, we entered into a technology transfer agreement with Affymax Technologies N.V. and Glaxo Group Limited, each a wholly-owned subsidiary of Glaxo Wellcome plc, pursuant to which we were assigned all right, title and interest in the patents, patent applications and confidential information relating to our MolecularBreeding directed molecular evolution technologies, subject to an exclusive royalty-free license under the patents and patent applications for use in the diagnostics and research supply markets for specific applications. In exchange for the intellectual property transferred we issued 5,460,000 shares of our common stock to Affymax. In March 1997, in connection with our formation, we made loans to certain officers and directors to purchase our common stock, which are evidenced by full recourse promissory notes and secured by the common stock underlying this stock purchase. The promissory notes bear interest at 6.42% per year, and interest payments on the notes are due and payable on June 30 and December 31 of each year. Unpaid principal and interest on the notes are due and payable on the earlier of 30 days after termination of the participant's employment, directorship or consultancy with us, or three years after the date of the promissory note. As of February 15, 2000, the original and outstanding principal amounts of each promissory note by a director or executive officer are set forth below.
Original Note Outstanding Director or Executive Officer Amount Note Amount ----------------------------- -------- ----------- Russell J. Howard ...................................... $ 60,000 $ 60,000 Isaac Stein............................................. 120,000 0 Willem P.C. Stemmer..................................... 120,000 120,000
56 Options granted to our directors, executive officers and key employees are immediately exercisable as to both vested and unvested shares, with unvested shares being subject to a right of repurchase in our favor in the event of termination of employment prior to vesting of all shares. These individuals pay the exercise price for their outstanding options pursuant to full recourse promissory notes secured by the common stock underlying the options. The notes bear interest at 5.59% per year, and interest payments on the notes are due and payable on June 30 and December 31 of each year. Unpaid principal and interest on the notes are due and payable on the earlier of 30 days after termination of the participant's employment, directorship or consultancy with us, or three years after the date of the promissory note. As of February 15, 2000, the original and outstanding principal amounts of each promissory note by a director or executive officer are set forth below.
Original and Outstanding Director or Executive Officer Note Amount ----------------------------- ----------- Joseph Affholter(1).............................................. $ 23,141 Simba Gill....................................................... 173,163 Russell J. Howard................................................ 47,250 Norman Kruse..................................................... 56,728 Michael S. Rabson................................................ 236,250 Gordon Ringold................................................... 99,000 Howard Simon..................................................... 259,875 Willem P.C. Stemmer.............................................. 136,688
- -------- (1) Unpaid principal and interest under Dr. Affholter's notes are due and payable on June 30, 2002. In April 1998, we loaned $72,500 to Dr. Joseph Affholter, which is evidenced by a full recourse promissory note. In April 1999, we loaned an additional $77,500 to Dr. Affholter and received from Dr. Affholter a full recourse promissory note covering all amounts due from Dr. Affholter, which note was secured by a deed of trust on Dr. Affholter's principal residence and bore interest at 5.70% per year with respect to $72,500 of the principal and 4.83% with respect to $77,500 of the principal. Under the terms of the promissory note, interest was generally forgiven. The promissory note was due with respect to $72,500 of the principal on April 1, 2003 and with respect to $77,500 of the principal on March 30, 2004. In connection with Dr. Affholter's resignation in January 2000, the loans were converted into a personal loan of $150,000, with interest calculated semi-annually from February 1, 2001 at 5.59%. The arrangements also defer payment of such loan until April 1, 2003 with respect to $72,500 of the principal and until March 30, 2004 with respect to $77,500 of the principal. The loan is secured by a pledge of vested shares of Maxygen common stock valued at $300,000 as of the date of the loan conversion. In March 1997, December 1997 and April 1998, we sold to various investors a total of 2,795,000 shares of Series A preferred stock at a purchase price of $2.00 per share. In August 1998, we sold to various investors a total of 3,666,667 shares of Series B preferred stock at a purchase price of $3.00 per share. In December 1998, we sold to a collaborator a total 1,000,000 shares of Series C preferred stock at a purchase price of $5.00 per share. In June 1999, we sold to various investors a total of 3,636,364 shares of Series D preferred stock at a purchase price of $5.50 per share. In August 1999, we sold to a collaborator a total of 800,000 shares of Series E preferred stock at a purchase price of $6.25. Upon the initial public offering, each share of preferred stock was converted into one share of common stock. Holders of the converted common stock are entitled to registration rights. See "Description of Capital Stock--Registration Rights." 57 The table below sets forth our current officers, directors, immediate family members of officers and directors and holders of more than 5% of our outstanding stock who since January 1, 1997 invested in, or became beneficial owners of our common stock issued upon conversion of our preferred stock.
Stockholder Common Stock ----------- ------------ Holders of More than 5%: Glaxo Wellcome International B.V.............................. 1,250,000 Technogen Associates, L.P. (1)................................ 3,274,772 Technogen Enterprises, L.L.C. (2)............................. 3,274,772 Directors: Gordon Ringold (3)............................................ 3,291,439 Isaac Stein (4)............................................... 3,348,106 Officers: Russell Howard (5)............................................ 55,136 Willem Stemmer................................................ 125,000 Michael Rabson................................................ 9,100 Immediate Family Members of Officers and Directors: Bhagwant Gill and Krishna Gill (6)............................ 128,787 Joseph Glaser, II (7)......................................... 8,712 Robert Glaser, Jr. (8)........................................ 10,991 Sally Glaser (9).............................................. 9,718
- -------- (1) Consists of 3,211,574 shares held by Technogen Associates, L.P. and 63,198 shares held by Technogen Enterprises, L.L.C. Technogen Enterprises, L.L.C. and Technogen Associates, L.P. are under common control. (2) Consists of 3,211,574 shares held by Technogen Associates, L.P. and 63,198 shares held by Technogen Enterprises, L.L.C. Technogen Enterprises, L.L.C. and Technogen Associates, L.P. are under common control. (3) Includes 3,211,574 shares held by Technogen Associates, L.P. and 63,198 shares held by Technogen Enterprises, L.L.C. Technogen Managers, L.L.C. is the general partner of Technogen Associates, L.P. Dr. Ringold is a Managing Member of Technogen Enterprises, L.L.C. and Technogen Managers, L.L.C. and disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in the limited liability companies. (4) Includes 3,211,574 shares held by Technogen Associates, L.P. and 63,198 shares held by Technogen Enterprises, L.L.C. Technogen Managers, L.L.C. is the general partner of Technogen Associates, L.P. Mr. Stein is a Managing Member of Technogen Enterprises, L.L.C. and Technogen Managers, L.L.C. and disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in the limited liability companies. Also includes 525,667 shares held by the Stein 1995 Revocable Trust, of which Mr. Stein is a trustee and 41,667 shares held by Stein Partners, of which Mr. Stein is a general partner. (5) Includes 53,636 shares held by the Russell and Maureen Howard Trust, of which Dr. Howard is a trustee. (6) Drs. Gill are the parents of Simba Gill. (7) Mr. Glaser is the son of Robert J. Glaser. (8) Mr. Glaser is the son of Robert J. Glaser. (9) Ms. Glaser is the daughter of Robert J. Glaser. We believe that all transactions between us and our officers, directors, principal stockholders and other affiliates have been and will be on terms no less favorable to us than could be obtained from unaffiliated third parties. 58 PRINCIPAL STOCKHOLDERS The following table sets forth the beneficial ownership of our common stock as of February 15, 2000 by: . each person who is known by us to beneficially own more than 5% of our common stock; . each of the named executive officers and each of our directors; and . all of our executive officers and directors as a group. Percentage of ownership is based on 30,769,644 shares outstanding as of February 15, 2000, and 32,269,644 shares outstanding after this offering, assuming no exercise of the underwriters' over-allotment options. Beneficial ownership is calculated based on SEC requirements. All shares of the common stock subject to options currently exercisable or exercisable within 60 days after February 15, 2000 are deemed to be outstanding for the purpose of computing the percentage of ownership of the person holding such options, but are not deemed to be outstanding for computing the percentage of ownership of any other person. Unless otherwise indicated below, each stockholder named in the table has sole or shared voting and investment power with respect to all shares beneficially owned, subject to applicable community property laws. Unless otherwise indicated in the table, the address of each individual listed in the table is Maxygen, Inc., 515 Galveston Drive, Redwood City, California 94063.
Number of Percentage of Shares Shares Beneficially Owned Beneficially ------------------------ Owned Prior to Before After Beneficial Owner the Offering Offering Offering ---------------- -------------- ---------- ---------- Glaxo Wellcome International BV 6,785,000 22.1% 21.0% (1)............................... Huis ter Heideweg 62 3705 LZ Zeist The Netherlands Technogen Associates, L.P. (2)..... 3,274,772 10.6 10.1 525 University Avenue, Suite 700 Palo Alto, California 94301 Technogen Enterprises, L.L.C. (3).. 3,274,772 10.6 10.1 525 University Avenue, Suite 700 Palo Alto, California 94301 Russell J. Howard, Ph.D. (4)....... 877,636 2.9 2.7 Willem P.C. Stemmer, Ph.D. (5)..... 1,147,500 3.7 3.6 Simba Gill, Ph.D. (6).............. 456,738 1.5 1.4 John Bedbrook, Ph.D. (7)........... 203,000 * * Norman Kruse, Ph.D. (8)............ 149,375 * * Michael Rabson, Ph.D. (9) ......... 361,100 1.2 1.1 Isaac Stein (10)................... 3,862,106 12.6 12.0 Robert J. Glaser, M.D.............. -- * * M.R.C. Greenwood, Ph.D. (11)....... 75,000 * * Adrian Hennah (12)................. 75,000 * * George Poste, Ph.D. (13)........... 75,000 * * Gordon Ringold, Ph.D. (14)......... 3,821,439 12.4 11.8 Joseph Affholter, Ph.D. (15)....... 67,313 * * All directors and executive officers as a group (14 persons) (16).............................. 8,076,303 26.2 25.0
- -------- *Less than 1% of Maxygen's outstanding common stock. (1) Includes 75,000 shares subject to immediately exercisable options held by Adrian Hennah and which Mr. Hennah has assigned to Glaxo Wellcome plc which is the parent of Glaxo Wellcome International BV. (2) Consists of 3,211,574 shares held by Technogen Associates, L.P. and 63,198 shares held by Technogen Enterprises, L.L.C. Technogen Enterprises, L.L.C. and Technogen Associates, L.P. are under common control. (3) Consists of 3,211,574 shares held by Technogen Associates, L.P. and 63,198 shares held by Technogen Enterprises, L.L.C. Technogen Enterprises, L.L.C. and Technogen Associates, L.P. are under common control. 59 (4) Includes 53,636 shares held by the Russell and Maureen Howard Trust, of which Dr. Howard is a trustee. Also includes 297,500 shares that are subject to immediately exercisable options. As of February 15, 2000, we have the right to repurchase 444,375 shares including shares issuable upon exercise of options held by Dr. Howard if Dr. Howard ceases his employment, directorship or consultancy with us. (5) Includes 352,187 shares that are subject to our right of repurchase as of February 15, 2000 if Dr. Stemmer ceases his employment, directorship or consultancy with us. (6) Includes 307,537 shares that are subject to our right of repurchase as of February 15, 2000 if Dr. Gill ceases his employment, directorship or consultancy with us. (7) Includes 200,000 shares that are subject to immediately exercisable options. As of February 15, 2000, we have the right to repurchase all of the shares issuable upon exercise of these options if Dr. Bedbrook ceases his employment, directorship or consultancy with us. (8) Includes 127,500 shares that are subject to our right of repurchase as of February 15, 2000 if Dr. Kruse ceases his employment, directorship or consultancy with us. (9) As of February 15, 2000, we have the right to repurchase 350,000 of these shares if Dr. Rabson ceases his employment, directorship or consultancy with us. (10) Includes 3,211,574 shares that are held by Technogen Associates, L.P. and 63,198 shares held by Technogen Enterprises, L.L.C. Technogen Managers, L.L.C. is the general partner of Technogen Associates, L.P. Mr. Stein is a Managing Member of Technogen Enterprises, L.L.C. and Technogen Managers, L.L.C. and disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in the limited liability companies. Includes 525,667 shares held by the Stein 1995 Revocable Trust, of which Mr. Stein is a trustee and 41,667 shares held by Stein Partners, of which Mr. Stein is a general partner. As of February 15, 2000, we have the right to repurchase 162,500 shares held by Mr. Stein if he ceases his employment, directorship or consultancy with us. (11) Includes 75,000 shares that are subject to immediately exercisable options. As of February 15, 2000, we have the right to repurchase 56,250 shares issuable upon exercise of these options if Dr. Greenwood ceases her employment, directorship or consultancy with us. (12) Includes 75,000 shares that are subject to immediately exercisable options. As of February 15, 2000, we have the right to repurchase 37,500 shares issuable upon exercise of these options if Mr. Hennah ceases his employment, directorship or consultancy with us. Mr. Hennah has assigned beneficial ownership of these shares to Glaxo Wellcome plc and disclaims beneficial ownership of the shares. (13) Includes 75,000 shares that are subject to immediately exercisable options. As of February 15, 2000, we have the right to repurchase all of the shares issuable upon exercise of these options if Dr. Poste ceases his employment, directorship or consultancy with us. (14) Includes 3,211,574 shares held by Technogen Associates, L.P. and 63,198 shares held by Technogen Enterprises, L.L.C. Technogen Managers, L.L.C. is the general partner of Technogen Associates, L.P. Dr. Ringold is a Managing Member of Technogen Enterprises, L.L.C. and Technogen Managers, L.L.C. and disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in the limited liability companies. Also includes 20,000 shares held by the Gregory Zarucki Ringold 1998 Trust, 20,000 shares held by the Alexander Zarucki Ringold 1998 Trust and 20,000 shares held by the Melanie Gault-Ringold 1998 Trust. As of February 15, 2000, we have the right to repurchase 137,500 shares held by Dr. Ringold if he ceases his employment, directorship or consultancy with us. (15) Includes 6,875 shares that are subject to our right of repurchase as of February 15, 2000 if Dr. Affholter ceases his employment, directorship or consultancy with us. (16) Includes shares included pursuant to notes (2), (3), (4), (5), (6), (7), (8), (9), (10), (11), (12), (13), (14) and (15), 175,200 shares beneficially owned by Howard Simon, of which 136,500 shares are subject to immediately exercisable options and 38,500 shares are subject to our right of repurchase as of February 15, 2000. 60 DESCRIPTION OF CAPITAL STOCK General Our amended and restated certificate of incorporation authorizes the issuance of up to 70,000,000 shares of common stock, par value $0.0001 per share, and 5,000,000 shares of preferred stock, par value $0.0001 per share, the rights and preferences of which may be established from time to time by our board of directors. As of February 15, 2000, we had outstanding 30,769,644 shares of common stock held by approximately 313 holders of record. Common Stock Each holder of common stock is entitled to one vote for each share on all matters to be voted upon by the stockholders and there are no cumulative voting rights. Subject to preferences to which holders of preferred stock issued after the sale of the common stock offered hereby may be entitled, holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors out of funds legally available therefor. In the event of our liquidation, dissolution or winding up, holders of common stock will be entitled to share in our assets remaining after the payment of liabilities and the satisfaction of any liquidation preference granted to the holders of any outstanding shares of preferred stock. Holders of common stock have no preemptive or conversion rights or other subscription rights, and there are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are, and the shares of common stock offered by us in this offering, when issued and paid for, will be, fully paid and nonassessable. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock, which we may designate in the future. Preferred Stock Our board of directors is authorized, subject to any limitations prescribed by law, without stockholder approval, from time to time to issue up to an aggregate of five million shares of preferred stock, $0.0001 par value per share, in one or more series, each of such series to have such rights and preferences, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be determined by the board of directors. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be issued in the future. Issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of our outstanding voting stock. We have no present plans to issue any shares of preferred stock. Registration Rights Pursuant to a registration rights agreement entered into between us and holders of 19,458,031 shares of common stock issued upon conversion of our Series A, Series B, Series C, Series D and Series E preferred stock, we are obligated, under limited circumstances and subject to specified conditions and limitations, to use our reasonable best efforts to register the registrable shares. We must use our reasonable best efforts to register shares of the registrable shares: - if we receive written notice from holders of 50% or more of the registrable shares requesting that we effect a registration with respect to at least 20% of the registrable shares then held by the holders requesting registration; - if we decide to register our own securities; or - if (1) we receive written notice from any holder or holders of the registrable shares requesting that we effect a registration on Form S-3 (a shortened form of registration statement) with respect to the registrable shares and (2) we are then eligible to use Form S-3 (which at the earliest could occur 12 calendar months after the closing of this offering). 61 However, in addition to certain other conditions and limitations, if we are proposing to issue registered shares and the underwriters request to decrease the number of shares registered, we can limit the number of registerable shares included in the registration statement. The underwriters have requested that no registerable shares be registered in this offering. In addition, the holders of these registration rights have entered into lockup agreements and waived their registration rights until 180 days following this offering. Anti-Takeover Provisions Charter and Bylaw Provisions Certain provisions of our certificate of incorporation and bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock. Certain of these provisions allow us to issue preferred stock without any vote or further action by the stockholders, require advance notification of stockholder proposals and nominations of candidates for election as directors, and eliminate cumulative voting in the election of directors. In addition, our bylaws provide that special meetings of the stockholders may be called only by the board of directors and that the authorized number of directors may be changed only by resolution of the board of directors. These provisions may make it more difficult for stockholders to take certain corporate actions and could have the effect of delaying or preventing a change in control of Maxygen. Delaware Law We are subject to Section 203 of the Delaware General Corporation Law. This law prohibits a Delaware corporation from engaging in any business combination with any interested stockholder, unless any of the following conditions are met. First, this law does not apply if prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder. Second, the law does not apply if upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by persons who are directors and also officers and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer. Third, the law does not apply if at or after the date of the transaction, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. Transfer Agent and Registrar The Transfer Agent and Registrar for our common stock is ChaseMellon Shareholder Services, L.L.C. 62 SHARES ELIGIBLE FOR FUTURE SALE Future sales of substantial amounts of common stock in the public market could adversely affect the market price of our common stock. Upon completion of this offering, we will have outstanding an aggregate of 32,269,644 shares of common stock, assuming the issuance of 1,500,000 shares of common stock offered hereby and no exercise of options after February 15, 2000. Of the 6,900,000 shares sold in our initial public offering, 1,500,000 shares sold in this offering and 17,250 shares issued upon exercise of options between December 22, 1999 and February 15, 2000, 7,232,134 shares will be freely tradable without restriction or further registration under the Securities Act, except for any shares held by "affiliates" of Maxygen as that term is defined in Rule 144 under the Securities Act, 1,167,866 shares will be subject to lock-up agreements providing that the stockholders will not offer, sell or otherwise dispose of any of the shares of common stock owned by them until 90 days after the date of this prospectus and 17,250 shares will be subject to lock-up agreements which expire on June 12, 2000. Shares purchased by affiliates may generally only be sold pursuant to an effective registration statement under the Securities Act or in compliance with limitations of Rule 144 as described below. The remaining 23,852,394 shares of common stock were issued and sold by us in reliance on exemptions from the registration requirements of the Securities Act. All of these shares are subject to "lock-up" agreements entered into in connection with our initial public offering providing that the stockholder will not offer, sell or otherwise dispose of any of the shares of common stock owned by them before June 13, 2000. Additionally, our directors, officers and certain stockholders, including greater than 5% stockholders, who collectively hold 15,711,973 shares of our common stock have entered into lock-up agreements in connection with this offering. These lock-up agreements expire on the 90th day following the date of this prospectus. Goldman, Sachs & Co., however, may in its sole discretion, at any time without notice, release all or any portion of the shares subject to lock-up agreements. Upon expiration of the lock-up agreements, these shares will become eligible for sale pursuant to Rule 144(k), Rule 144 and Rule 701 as discussed below. We have in effect a registration statement under the Securities Act registering the shares to be issued under our stock option plans. As a result, any options exercised under the stock option plans or issued under any other benefit plan since the filing of the registration statement governing our benefit plans will be freely tradeable in the public market after the expiration the 180 day lock-ups entered into in connection with our initial public offering, except that shares held by affiliates will still be subject to the limitations of Rule 144. Also beginning three months after the date of this offering, holders of 19,458,031 shares of our common stock will be entitled to certain rights with respect to registration of these shares for sale in the public market. See "Description of Capital Stock -- Registration Rights". Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon effectiveness of the registration. Rule 144 In general, under Rule 144 as currently in effect, subject to the provisions of any lock-up agreements, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell in "broker's transactions" or to market makers, within any three-month period, a number of shares that does not exceed the greater of: - 1% of the number of shares of common stock then outstanding (which will equal approximately 322,696 shares immediately after this offering); or - the average weekly trading volume in the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. 63 Sales under Rule 144 are generally subject to the availability of current public information about Maxygen. Rule 144(k) Under Rule 144(k), a person who is not deemed to have been our affiliate at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell such shares without having to comply with the manner of sale, public information, volume limitation or notice filing provisions of Rule 144. Therefore, "144(k) shares" may be sold immediately upon expiration of the lock-up agreements. Rule 701 In general, under Rule 701, any of our employees, directors, officers, consultants or advisors who purchase shares from us in connection with a compensatory stock or option plan or other written agreement before the effective date of our initial public offering is entitled to sell such shares in reliance on Rule 144, in the case of affiliates, without having to comply with the holding period and notice filing requirements of Rule 144 and, in the case of non-affiliates, without having to comply with the public information, volume limitation or notice filing requirements of Rule 144. LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for Maxygen by Heller Ehrman White & McAuliffe, Palo Alto, California. Certain legal matters will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation. An investment partnership composed of current and former members of and persons associated with Wilson Sonsini Goodrich & Rosati, Professional Corporation, beneficially own 4,546 shares of our common stock. Heller Ehrman White & McAuliffe, certain of its employees and HEWM Investors, an entity affiliated with Heller Ehrman White & McAuliffe, beneficially own 35,000 shares of our common stock. Julian N. Stern, the sole shareholder of a professional corporation that is a partner of Heller Ehrman White & McAuliffe and Secretary of Maxygen beneficially owns 66,000 shares of our common stock. EXPERTS Ernst & Young LLP, independent auditors, have audited our financial statements at December 31, 1998 and 1999, and for the each of the three years in the period ended December 31, 1999 as set forth in their report. We have included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given upon the authority of such firm as experts in accounting and auditing. 64 WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the SEC a registration statement on Form S-1 (including exhibits and schedules) under the Securities Act, with respect to the shares to be sold in this offering. This prospectus does not contain all of the information set forth in the registration statement. For further information with respect to us and the common stock offered in this prospectus, reference is made to the registration statement, including the exhibits, financial statements and notes to the financial statements filed as a part of the registration statement. You should read the documents filed with the SEC as exhibits to the registration statement for a more complete description of the matter involved. We will be filing quarterly and annual reports, proxy statements and other information with the SEC. You may read and copy any document that we file at the public reference facilities of the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from the SEC's web site at http://www.sec.gov. 65 MAXYGEN, INC. INDEX TO FINANCIAL STATEMENTS Report of Ernst & Young LLP Independent Auditors.......................... F-2 Balance Sheets............................................................ F-3 Statements of Operations.................................................. F-4 Statement of Stockholders' Equity......................................... F-5 Statements of Cash Flows.................................................. F-6 Notes to Financial Statements............................................. F-7
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Maxygen, Inc. We have audited the accompanying balance sheets of Maxygen, Inc. as of December 31, 1998 and 1999, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Maxygen, Inc. at December 31, 1998 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Palo Alto, California February 18, 2000 F-2 MAXYGEN, INC. BALANCE SHEETS (in thousands, except share and per share amounts)
December 31, ----------------- 1998 1999 ------- -------- ASSETS Current assets: Cash and cash equivalents................................. $15,306 $136,343 Grant and other receivables............................... 600 3,038 Prepaid expenses and other current assets................. 271 800 ------- -------- Total current assets..................................... 16,177 140,181 Property and equipment, net............................... 1,001 4,764 Deposits and other assets................................. 422 633 ------- -------- Total assets............................................. $17,600 $145,578 ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $466 $370 Accrued compensation...................................... 153 393 Other accrued liabilities................................. 286 1,803 Deferred revenue.......................................... 2,903 4,935 Related party payables.................................... 105 -- Current portion of equipment financing obligations........ -- 170 ------- -------- Total current liabilities................................... 3,913 7,671 Deferred revenue............................................ 1,987 2,527 Non-current portion of equipment financing obligations ..... -- 1,664 Commitments Stockholders' equity: Convertible preferred stock, $0.0001 par value, 25,000,000 shares and 5,000,000 shares authorized at December 31, 1998 and 1999, respectively, 7,461,667 and no shares issued and outstanding at December 31, 1998 and 1999, respectively ..................................... 1 -- Common stock, $0.0001 par value: 70,000,000 shares authorized, 9,230,500, and 30,860,781 shares issued and outstanding at December 31, 1998 and 1999, respectively.. 1 3 Additional paid-in capital................................ 27,706 176,517 Notes receivable from stockholders........................ (548) (1,411) Deferred stock compensation............................... (2,601) (17,216) Accumulated deficit....................................... (12,859) (24,177) ------- -------- Total stockholders' equity............................... 11,700 133,716 ------- -------- Total liabilities and stockholders' equity............... $17,600 $145,578 ======= ========
See accompanying notes. F-3 MAXYGEN, INC. STATEMENTS OF OPERATIONS (in thousands, except per share data)
Year ended December 31, -------------------------- 1997 1998 1999 ------- ------- -------- Collaborative research and development revenue..... $341 $1,077 $8,895 Grant revenue...................................... -- 1,646 5,122 ------- ------- -------- Total revenues..................................... 341 2,723 14,017 Operating expenses: Research and development (Including charges for stock compensation of $317, $651 and $3,998 in 1997, 1998 and 1999, respectively).............. 3,074 7,858 19,250 General and administrative (Including charges for stock compensation of $546, $910 and $2,501 in 1997, 1998 and 1999, respectively).............. 1,461 3,920 7,498 ------- ------- -------- Total operating expenses........................... 4,535 11,778 26,748 ------- ------- -------- Loss from operations............................... (4,194) (9,055) (12,731) Interest income (expense), net..................... 161 229 1,413 ------- ------- -------- Net loss........................................... (4,033) (8,826) (11,318) Deemed dividend upon issuance of convertible preferred stock (Note 8).......................... -- -- (2,200) ------- ------- -------- Net loss attributable to common stockholders....... $(4,033) $(8,826) $(13,518) ======= ======= ======== Basic and diluted net loss per share............... $(0.82) $(1.31) $(1.53) ======= ======= ======== Shares used in computing basic and diluted net loss per share......................................... 4,917 6,748 8,854
See accompanying notes. F-4 MAXYGEN, INC. STATEMENT OF STOCKHOLDERS' EQUITY (in thousands, except share and per share amounts)
Convertible Notes Preferred Stock Common Stock Additional Receivable Deferred Total ------------------- ----------------- Paid-In from Stock Accumulated Stockholders' Shares Amount Shares Amount Capital Stockholders Compensation Deficit Equity ----------- ------ ---------- ------ ---------- ------------ ------------ ----------- ------------- Issuance of common stock to Affymax Technologies N.V. and Glaxo Group Limited for technology in March 1997........ -- $ -- 5,460,000 $ -- $ -- $ -- $ -- $ -- $ -- Issuance of common stock to founders for promissory notes at $0.20 per share............. -- -- 2,100,000 1 419 (420) -- -- -- Issuance of Series A convertible preferred stock to investors at $2.00 per share for cash.............. 2,790,000 -- -- -- 5,580 -- -- -- 5,580 Issuance of common stock to employees upon exercise of stock options for $0.20 per share... -- -- 100,000 -- 20 -- -- -- 20 Payments received on promissory notes............. -- -- -- -- -- 141 -- -- 141 Deferred stock compensation...... -- -- -- -- 2,639 -- (2,639) -- -- Amortization of deferred stock compensation...... -- -- -- -- -- -- 863 -- 863 Net loss from inception to December 31, 1997.............. -- -- -- -- -- -- -- (4,033) (4,033) ----------- ---- ---------- ----- -------- ------- -------- -------- -------- Balance at December 31, 1997.............. 2,790,000 -- 7,660,000 1 8,658 (279) (1,776) (4,033) 2,571 Issuance of Series A convertible preferred stock to investors at $2.00 per share for cash.............. 5,000 -- -- -- 10 -- -- -- 10 Issuance of Series B convertible preferred stock to investors at $3.00 per share for cash, less issuance cost of $36............... 3,666,667 1 -- -- 10,966 -- -- -- 10,967 Issuance of Series C convertible preferred stock to a collaborator for cash at $5.00 per share............. 1,000,000 -- -- -- 5,000 -- -- -- 5,000 Options granted to consultants for services rendered.......... -- -- -- -- 209 -- -- -- 209 Issuance of common stock to consultants for cash and services at $2.25 and $4.00 per share, and to employees upon exercise of stock options for cash and promissory notes at $0.20 and $0.30 per share... -- -- 1,570,500 -- 477 (269) -- -- 208 Deferred stock compensation...... -- -- -- -- 2,386 -- (2,386) -- -- Amortization of deferred stock compensation...... -- -- -- -- -- -- 1,561 -- 1,561 Net loss.......... -- -- -- -- -- -- -- (8,826) (8,826) ----------- ---- ---------- ----- -------- ------- -------- -------- -------- Balance at December 31, 1998.............. 7,461,667 1 9,230,500 1 27,706 (548) (2,601) (12,859) 11,700 Issuance of common stock to employees upon exercise of options for cash and promissory notes at $0.20, $0.30, $0.75 and $7.50 per share... -- -- 2,640,650 -- 1,645 (863) -- -- 782 Options granted to consultants for services rendered.......... -- -- -- -- 875 -- -- -- 875 Issuance of common stock for services rendered and certain technology rights at $4.00, $5.16 and $6.25 per share......... -- -- 191,600 -- 845 -- -- -- 845 Issuance of Series D convertible preferred stock to investors at $5.50 per share for cash, less issuance costs of $37............... 3,636,364 -- -- -- 19,963 -- -- -- 19,963 Issuance of Series E convertible preferred stock to a collaborator at $6.25 per share... 800,000 -- -- -- 5,000 -- -- -- 5,000 Issuance of common stock for initial public offering at $16.00 per share less issuance costs of $9,403... -- -- 6,900,000 1 100,996 -- -- -- 100,997 Conversion of convertible preferred stock to common stock...... (11,898,031) (1) 11,898,031 1 -- -- -- -- -- Deferred stock compensation...... -- -- -- -- 19,487 -- (19,487) -- -- Amortization of deferred stock compensation...... -- -- -- -- -- -- 4,872 -- 4,872 Net loss.......... -- -- -- -- -- -- -- (11,318) (11,318) ----------- ---- ---------- ----- -------- ------- -------- -------- -------- Balance at September 30, 1999.............. -- $ -- 30,860,781 $ 3 $176,517 $(1,411) $(17,216) $(24,177) $133,716 =========== ==== ========== ===== ======== ======= ======== ======== ========
See accompanying notes. F-5 MAXYGEN, INC. STATEMENTS OF CASH FLOWS (in thousands, except per share data)
Year ended December 31, -------------------------- 1997 1998 1999 ------- ------- -------- Operating activities Net loss........................................... $(4,033) $(8,826) $(11,318) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.................... 40 178 729 Deferred stock compensation amortization......... 863 1,561 4,862 Common stock issued and stock options granted to consultants for services rendered and for certain technology rights....................... -- 332 1,730 Changes in operating assets and liabilities: Grant and other receivables.................... (10) (590) (2,438) Prepaid expenses and other current assets...... (32) (239) (529) Deposits and other assets...................... -- (422) (211) Accounts payable............................... 101 365 (96) Accrued liabilities............................ 231 208 1,757 Deferred revenue............................... 199 4,691 2,572 Related party payables......................... 52 53 (105) ------- ------- -------- Net cash used in operating activities.............. (2,589) (2,689) (3,047) ------- ------- -------- Investing activities Acquisition of property and equipment.............. (459) (760) (4,492) ------- ------- -------- Financing activities Proceeds from issuance of convertible preferred stock, net of issuance costs...................... 5,580 14,477 24,963 Proceeds from notes payable........................ -- 1,500 -- Borrowings under equipment financing obligations... -- -- 1,834 Payments received on promissory notes.............. 141 -- -- Proceeds from issuance of common stock, net of issuance costs.................................... 20 85 101,779 ------- ------- -------- Net cash provided by financing activities.......... 5,741 16,062 128,576 ------- ------- -------- Net increase in cash and cash equivalents.......... 2,693 12,613 121,037 Cash and cash equivalents at beginning of period... -- 2,693 15,306 ------- ------- -------- Cash and cash equivalents at end of period......... $2,693 $15,306 $136,343 ======= ======= ======== Schedule of noncash transactions Issuance of common stock in exchange for note receivable........................................ $420 $269 $863 Conversion of note payable to preferred stock...... $ -- $1,500 $ --
See accompanying notes. F-6 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS 1. Organization and Summary of Significant Accounting Policies Maxygen, Inc. (the "Company") was incorporated in Delaware on May 7, 1996 to develop and apply proprietary directed molecular evolution technologies, also known as "MolecularBreeding," to evolve new or improved properties into single genes, multigene pathways, vectors, and genomes. Since the technology can be applied to a wide range of genetic targets, the Company will explore commercial opportunities for the directed evolution of novel enzymes and metabolic processes, novel products for agriculture, as well as opportunities in the fields of human medicine, such as gene therapy, vaccines, and protein pharmaceuticals. The MolecularBreeding directed molecular evolution technologies were conceived at Affymax Research Institute ("Affymax"), a subsidiary of Glaxo Group Ltd. In March 1997, as a result of the determination that a substantial future investment in the further research and development of the technology was merited, all rights to the MolecularBreeding directed molecular evolution technologies were transferred by Affymax to the Company in exchange for the issuance of 5,460,000 shares of common stock. This transaction represented the formation of the Company and thus the common shares issued were not assigned any value for accounting purposes. The technology rights transferred to the Company represented research and development stage technology with no immediate commercial application or alternative future use, and were recorded at the historic carrying value of Glaxo Group Ltd. as determined in accordance with generally accepted accounting principles in the United States. The total amount of costs incurred by Glaxo Group Ltd. to develop the MolecularBreeding directed molecular evolution technologies are not determinable but were not significant to Affymax or Glaxo Group Ltd. Operations commenced in March 1997 and have consisted primarily of technology and product development. Operational activity and expenses incurred for the period from inception (May 7, 1996) through March 1997 were immaterial. Through December 31, 1998, the Company was in the development stage. During fiscal 1999, the Company entered into its second corporate research collaboration and recognized significant revenues associated with collaborative research agreements and expects to receive significant revenues under these agreements in the future. Consequently, the Company is no longer considered to be in the development stage. The Company will require additional financial resources to complete the development and commercialization of its products. Management plans to continue to finance the Company primarily through issuances of equity securities, collaborative research and development arrangements, government grants, and debt financing. If the financing arrangements contemplated by management are not consummated, the Company may have to seek other sources of capital or reevaluate its operating plans. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company's cash and cash equivalents are maintained with one financial institution and consist of depository accounts, master notes, and liquidity optimized general investment contracts. The Company has classified its marketable securities as "available-for- sale" and recorded these securities at fair value. At December 31, 1998 and 1999, these instruments are classified as cash F-7 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) equivalents. Unrealized gains and losses, which are considered to be temporary, are recorded as a separate component of stockholders' equity until realized. At December 31, 1998 and 1999, the fair value of all of the Company's marketable securities approximated cost. Property and Equipment Property and equipment, including the cost of purchased software, are stated at cost, less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful life of the assets (generally three to five years). Leasehold improvements are amortized over the shorter of six years or the estimated useful life of the assets. Revenue Recognition Non-refundable up-front payments received in connection with research and development collaboration agreements, including technology advancement funding that is intended for the development of the Company's core technology, are deferred and recognized on a straight-line basis over the relevant periods specified in the agreement, generally the research term. Revenue related to collaborative research with the Company's corporate collaborators is recognized as research services are performed over the related funding periods for each contract. Under these agreements, the Company is required to perform research and development activities as specified in each respective agreement. The payments received under each respective agreement are not refundable and are generally based on a contractual cost per full-time equivalent employee working on the project. Research and development expenses under the collaborative research agreements approximate or exceed the revenue recognized under such agreements over the term of the respective agreements. Deferred revenue may result when the Company does not incur the required level of effort during a specific period in comparison to funds received under the respective contracts. Milestone and royalty payments, if any, will be recognized pursuant to collaborative agreements upon the achievement of specified milestones. The Company was awarded Defense Advanced Research Projects Agency grants and National Institute of Standards and Technology-Advanced Technology Program grants totaling approximately $10.6 million in 1998 and $14.5 million in 1999, for various research and development projects. The terms of these grant agreements are three years. Revenue related to grant agreements is recognized as related research and development expenses are incurred. Research and Development Expenses Research and development expenses consist of costs incurred for Company- sponsored as well as collaborative research and development activities. These costs include direct and research-related overhead expenses as well as the cost of funding research at universities and other research institutions, and are expensed as incurred. Costs to acquire technologies that are utilized in research and development and that have no alternative future use are expensed when incurred (see Note 3). Stock-Based Compensation The Company accounts for common stock options granted to employees using the intrinsic value method and, thus, recognizes no compensation expense for options granted with exercise F-8 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) prices equal to or greater than the fair value of the Company's common stock on the date of the grant. In 1998 and 1999, the Company recognized deferred stock compensation related to certain stock option grants (see Note 8). Pro forma information required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") is also included in Note 8. Stock compensation expense for options granted to nonemployees has been determined in accordance with SFAS 123 and EITF 96-18 as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. The fair value of options granted to nonemployees is periodically remeasured as the underlying options vest. Net Loss Per Share Basic and diluted net loss per common share are presented in conformity with the Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), for all periods presented. Following the guidance given by the Securities and Exchange Commission Staff Accounting Bulletin No. 98, common stock and convertible preferred stock that has been issued or granted for nominal consideration prior to the anticipated effective date of the initial public offering must be included in the calculation of basic and diluted net loss per common share as if these shares had been outstanding for all periods presented. To date, the Company has not issued or granted shares for nominal consideration. In accordance with SFAS 128, basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Pro forma basic and diluted net loss per common share, as presented in the statements of operations, has been computed for the years ended December 31, 1998 and 1999 as described above, and also gives effect to the conversion of the convertible preferred stock that automatically converted to common stock immediately prior to the completion of the Company's initial public offering (using the if- converted method) from the original date of issuance. The following table presents the calculation of basic, diluted and pro forma basic and diluted net loss per share (in thousands, except per share data):
Year ended December 31, -------------------------- 1997 1998 1999 ------- ------- -------- Net loss attributable to common stockholders....... $(4,033) $(8,826) $(13,518) ======= ======= ======== Basic and diluted: Weighted-average shares of common stock outstanding..................................... 6,329 8,789 10,879 Less: weighted-average shares subject to repurchase...................................... (1,412) (2,041) (2,025) ------- ------- -------- Weighted-average shares used in computing basic and diluted net loss per share.................. 4,917 6,748 8,854 ======= ======= ======== Basic and diluted net loss per share............... $ (0.82) $ (1.31) $ (1.53) ======= ======= ======== Pro forma: Shares used above................................ 6,748 8,854 Pro forma adjustment to reflect weighted effect of conversion of convertible preferred stock (unaudited)..................................... 5,014 9,395 ------- -------- Shares used in computing pro forma basic and diluted net loss per share (unaudited).......... 11,762 18,249 ======= ======== Pro forma basic and diluted net loss per share (unaudited)..................................... $ (0.75) $ (0.74) ======= ========
F-9 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) The Company has excluded all convertible preferred stock, outstanding stock options, and shares subject to repurchase from the calculation of diluted loss per common share because all such securities are antidilutive for all applicable periods presented. The total number of shares excluded from the calculations of diluted net loss per share, prior to application of the treasury stock method for options, was 6,232,000, 11,305,000 and 2,601,000 at December 31, 1997, 1998 and 1999, respectively. Such securities, had they been dilutive, would have been included in the computations of diluted net loss per share along with restricted common stock subject to the Company's right of repurchase. See Note 8 for further information on these securities. Segment Reporting As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas, and major customers. The Company has determined that it operates in only one segment. Accordingly, the adoption of this statement had no impact on the Company's financial statements. Effect of New Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which will be effective for the year ending 2001. This statement establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments imbedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. The Company believes the adoption of SFAS 133 will not have a material effect on the financial statements, since it currently does not hold derivative instruments or engage in hedging activities. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). "SOP 98-1" requires that entities capitalize certain costs related to internal-use software once certain criteria have been met. The adoption of SOP 98-1, as required in 1999, had no impact on the Company's financial statements for the year ended December 31, 1999. The Company expenses as incurred the costs associated with developing software for use in research and development activities in accordance with Statement of Financial Accounting Standards No. 2, "Accounting for Research and Development Costs" and related interpretations. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition", which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. Management believes that the Company's revenue recognition policy is in compliance with the provisions of SAB 101 and that the impact of SAB 101 will have no material effect on the financial position or results of operations of the Company. F-10 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 2. Collaborative Agreements AstraZeneca In June 1999, the Company entered into a noncancelable (other than for material breach), five-year collaborative research agreement with Zeneca Limited, a wholly-owned subsidiary of AstraZeneca plc ("AstraZeneca") to improve the yield and quality of several of AstraZeneca's strategic crops. Pursuant to the agreement, AstraZeneca paid $2.5 million in technology advancement funding. AstraZeneca will also provide research funding of $15 million over the research term for defined research programs covering specified crops, potential milestone payments that could exceed $100 million as well as royalties on future product sales, as defined in the agreement. On an annual basis beginning in the second year of the agreement, AstraZeneca must either pay $1 million in annual technology advancement funding or purchase $3 million shares of the Company's stock at a 50% premium to the current fair value. If AstraZeneca elects this option, then the resulting $1 million premium will be accounted for as technology advancement funding. The technology advancement funding is intended to fund the Company's continuing development of its core MolecularBreeding directed molecular evolution technology. Because the agreement does not specify a required level of effort or other specific performance criteria, the funding is being recognized ratably over the five- year term of the agreement. Revenue recognized under the collaborative research agreement with AstraZeneca was $1.6 million (18% of total collaborative research and development revenues) for the year ended December 31, 1999, consisting of research funding earned of $896,000 technology advancement funding of $536,000 and licensing fees of $161,000. In August 1999, in conjunction with the agreement, AstraZeneca purchased 800,000 shares of Series E convertible preferred stock at $6.25 per share. The Company recorded a deemed dividend of $2.2 million at the date of issuance. The deemed dividend is further described in Note 8. DuPont/Pioneer Hi-Bred International, Inc. In December 1998, the Company entered into a five-year collaborative research and license agreement with Pioneer Hi-Bred International, Inc., a subsidiary of E.I. duPont de Nemours and Company ("DuPont/Pioneer Hi-Bred") to utilize MolecularBreeding directed molecular evolution technologies to generate novel gene products for use in the development of specific crop protection and quantity grain traits in corn, soybeans, and certain other crops. Pursuant to the agreement, DuPont/Pioneer Hi-Bred paid an up-front, nonrefundable license fee of $2.5 million which is being recognized ratably over the research term and agreed to provide nonrefundable research and development funding of up to $20 million, potential milestone payments of up to $45 million and royalties on future product sales, as defined in the agreement. The agreement also provides for nonrefundable technology advancement payments of up to $7.5 million which are being recognized ratably over the applicable research term. The agreement may be terminated by DuPont/Pioneer Hi-Bred after three years upon six-months notice, if a specified technological milestone has not been met. Revenue recognized under the collaborative research agreement with DuPont/Pioneer Hi-Bred was $62,000 and $6.0 million for the years ended December 31, 1998 and 1999, respectively (6% and 67%, respectively, of total collaborative research and development revenues). F-11 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) In December 1998, in conjunction with the agreement, DuPont/Pioneer Hi-Bred purchased 1,000,000 shares of Series C convertible preferred stock at $5.00 per share which was the fair value of the preferred stock on the date of issuance. Furthermore, in December 1999, DuPont/Pioneer Hi-Bred purchased 312,500 shares of the Company's common stock at the initial public offering price of $16.00. DSM In March 1999, the Company entered into a three-year collaborative research and license agreement with Gist-brocades N.V., a subsidiary of DSM N.V. ("DSM") to utilize the Company's proprietary MolecularBreeding directed molecular evolution technologies to develop certain novel enzymes involved in the manufacture of certain classes of antibiotics. Under the terms of the agreement, DSM will receive worldwide commercialization rights and the Company will receive research payments of approximately $2.3 million over the three- year term and may receive royalty payments in the future. Total revenue of $596,000 was recognized for the year ended December 31, 1999 (7% of total collaborative research and development revenue). Novo Nordisk A/S In September 1997, the Company entered into a five-year License and Collaboration Agreement with Novo Nordisk A/S ("Novo Nordisk") to use MolecularBreeding directed molecular evolution technologies to develop products. The agreement provides for research and development funding as well as royalty payments on future products to the Company upon the occurrence of specified events as defined in the agreement. As set forth in the agreement, Novo Nordisk will fund up to $500,000 of research funding under the development program on an annual basis. Total revenue of $544,000 and $454,000 was recognized for the years ended December 31, 1998 and 1999, respectively (51% and 5%, respectively, of total collaborative research and development revenue). Other Collaborations The Company has entered into corporate collaborations under which it has completed all of its research obligations. Revenue recognized pursuant to these agreements was $341,000, $461,000, and $252,000 for the years ended December 31, 1997, 1998 and 1999, respectively (100%, 43%, and 3%, respectively, of total collaborative research and development revenue). 3. Sponsored License and Research Agreements The Company has entered into several research agreements to fund research at universities and other organizations. These agreements are generally cancelable by either party upon written notice and may be extended by mutual consent of both parties. Research and development expenses are recognized as the related services are performed, generally ratably over the period of the service. Expenses under these agreements were approximately $254,000, $702,000, and $1,122,000 for the years ended December 31, 1997, 1998 and 1999, respectively. In addition, in 1999 the Company issued 175,000 shares of common stock with a fair value of $783,000 to research institutions in exchange for technology licenses. This amount is included in F-12 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) research and development expense for year ended December 31, 1999 as the related technology is in research and development and has no alternative future uses. 4. Property and Equipment Property and equipment consisted of the following (in thousands):
December 31, -------------------- 1997 1998 1999 ---- ------ ------ Leasehold improvements................................. $-- $ -- $1,352 Machinery and laboratory equipment..................... 406 1,123 3,719 Computer equipment and software........................ 36 68 266 Furniture and fixtures................................. 16 28 374 ---- ------ ------ 458 1,219 5,711 Less accumulated depreciation and amortization......... (39) (218) (947) ---- ------ ------ Property and equipment, net............................ $419 $1,001 $4,764 ==== ====== ======
5. Equipment Financing In June 1999, the Company entered into an equipment financing agreement for up to $2.0 million with a financing company. In July through December 1999, the Company financed $1.8 million in equipment purchases structured as loans. The equipment loans are to be repaid over 48 months at interest rates of 11.73% to 12.13% and are secured by the related equipment. During the first 6 months of the loan terms, the payments consist of interest only. Accumulated amortization of assets acquired pursuant to these obligations was approximately $226,000 at December 31, 1999. At December 31, 1999, the Company's future minimum principal payments under the equipment financing arrangements are as follows (in thousands):
Year ended December 31, ------------ 2000.................................................................. $ 173 2001.................................................................. 511 2002.................................................................. 575 2003.................................................................. 564 2004.................................................................. 11 ------ $1,834 ======
6. Commitments Services and Facility Agreement In February 1997, the Company entered into a services and facility agreement, which was amended in September 1998 and February 1999, with Affymax Research Institute ("ARI"), a related party. Under the agreement, ARI provided certain accounting, human resources, materials management, facility, safety, library, and information technology services, as well as the use of designated space in the ARI facility for specified periods. In exchange, the Company agreed to pay ARI $417,000 for the period from February 1, F-13 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 1997 to December 31, 1997, $667,000 for the period from January 1, 1998 to December 31, 1998, and $135,000 for the period from January 1, 1999 to April 1, 1999. These expenses were determined by ARI based upon the relative percentage of effort expended by ARI personnel on the Company's affairs and the relative use of facilities and fixed assets of ARI. Management believes that the charges from ARI were reasonable and would not have been materially different on a stand-alone basis. In addition, ARI agreed to transfer title of fixed assets with a carrying value of approximately $55,000 to the Company. At December 31, 1998, the Company paid ARI approximately $105,000 under this agreement. The agreement expired in April 1999. Consulting Agreement In September 1998, the Company entered into a consulting arrangement whereby the Company is committed to pay to a consulting firm up to a specified percentage, as outlined in the agreement, of funds received in connection with certain of the Company's agricultural collaborative agreements. The term of the payments owed pursuant to this agreement is five years, ending in fiscal year 2004. For the fiscal years ended December 31, 1998 and 1999, the Company expensed $199,000 and $292,000, respectively, related to this agreement. Facility Leases The Company leases facilities under an operating lease which commenced in 1999. The lease expires for specified facilities in 2002 and 2005. The lease contains a renewal option on the facilities under the portion of the lease that expires in 2002. This lease also includes scheduled rent increases. The scheduled rent increases are recognized on a straight-line basis over the term of the lease. Minimum annual rental commitments under operating leases are as follows (in thousands):
Year ended December 31, ------------ 2000.................................................................. $1,528 2001.................................................................. 1,451 2002.................................................................. 1,113 2003.................................................................. 1,019 2004.................................................................. 1,043 Thereafter............................................................ 173 ------ $6,327 ======
Rent expense allocated from the services and facility agreement for the years ended December 31, 1997, 1998 and 1999 was approximately $122,000, $147,000 and $1,269,000, respectively. 7. Related Party Notes Receivable The Company issued full recourse loans to certain employees, of which $620,000 and $1,561,000 was outstanding at December 31, 1998 and 1999, respectively. These loans bear interest at rates ranging from 4.83% to 6.42% with terms ranging from three to five years. One loan totaling $150,000 was for the purchase of the employee's residence and is secured by a deed of trust on the employee's residence and is classified on the balance sheet as other assets. The remaining loans were for the purchase of the Company's common stock and are classified in stockholders' equity. F-14 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 8. Stockholders' Equity Convertible Preferred Stock In connection with the terms of the collaboration agreement with AstraZeneca, the Company issued Series E convertible preferred stock in August 1999 at $6.25 per share. At the date of issuance, the Company believed the per share price of $6.25 represented the fair value of the preferred stock and was in excess of the deemed fair value of its common stock. Subsequent to the commencement of the Company's initial public offering process, the Company re- evaluated the deemed fair market value of its common stock as of August 1999 and determined it to be $9.00 per share. Accordingly, the incremental fair value is deemed to be the equivalent of a preferred stock dividend. The Company recorded the deemed dividend at the date of issuance by offsetting charges and credits to additional paid in capital of $2,200,000, without any effect on total stockholders' equity. The amount increased the loss allocable to common stockholders in the calculation of basic net loss per share for the year ended December 31, 1999. In December 1999, the Company completed its initial public offering of common stock under the Securities Act of 1933, in which $101.0 million in net proceeds was realized (including net proceeds from a simultaneous private placement and the exercise of the underwriter's over-allotment option). Upon the completion of the initial public offering, all of the Series A, B, C, D, and E preferred stock outstanding converted into 11,898,031 shares of common stock. Also, concurrent with the close of the Company's initial public offering, the Company's articles of incorporation were amended to authorize 5,000,000 shares of undesignated preferred stock, none of which are issued or outstanding. The Company's board of directors is authorized to fix the designation, powers, preferences, and rights of any such series. The Company's articles of incorporation was also amended to increase the authorized number of shares of common stock to 70,000,000 shares. 1997 Stock Option Plan In 1997, the Company authorized the 1997 Stock Option Plan (the "Plan") under which the board of directors may issue incentive stock options to employees, including officers and members of the board of directors who are also employees, and nonqualified stock options to employees, officers, directors, consultants, and advisors of the Company. Under the Plan, incentive options to purchase the Company's common shares may be granted to employees at prices not lower than fair value at the date of grant, as determined by the board of directors. Nonstatutory options (options which do not qualify as incentive options) may be granted to key employees, including directors and consultants, at prices not lower than 85% of fair value at the date of grant (110% in certain cases), as determined by the board of directors. Options have a term of ten years. Certain options are immediately exercisable, at the discretion of the board of directors. Shares issued pursuant to the exercise of an unvested option are subject to the Company's right of repurchase which lapse over periods specified by the board of directors, generally four years from the date of grant. If not immediately exercisable, options generally vest over four years (vesting at a rate of 25% at the end of each year). The stock option plan provides for annual increases in the number of shares available for issuance on the first day of each year, beginning January 1, 2001, equal to the lesser of 1,500,000 shares, 4% of the outstanding shares on the date of the annual increase or an amount determined by the board of directors. F-15 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Activity under the Plan is as follows:
Options Outstanding -------------------------- Weighted- Average Shares Number of Exercise Price Available Shares Per Share ---------- ---------- -------------- Shares authorized..................... 2,140,000 -- -- Options granted....................... (1,891,550) 1,891,550 $0.20 Options exercised..................... -- (100,000) $0.20 ---------- ---------- Balance at December 31, 1997.......... 248,450 1,791,550 $0.20 Shares authorized..................... 3,860,000 -- -- Options granted....................... (1,537,120) 1,537,120 $0.30 Options exercised..................... -- (1,495,500) $0.22 Options canceled...................... 38,500 (38,500) $0.24 ---------- ---------- Balance at December 31, 1998.......... 2,609,830 1,794,670 $0.27 Shares Authorized..................... 1,500,000 -- -- Options granted....................... (2,986,830) 2,986,830 $3.25 Options exercised..................... -- (2,640,650) $0.62 Options canceled...................... 64,488 (64,488) $0.35 ---------- ---------- Balance at December 31, 1999.......... 1,187,488 2,076,362 $4.11 ========== ==========
The options outstanding and exercisable at December 31, 1999 are as follows:
Options Outstanding ------------------------------- Weighted-Average Exercise Remaining Price Number Outstanding Contractual Life Vested Options -------- ------------------ ---------------- -------------- (In years) $ 0.20 336,825 7.6 177,374 $ 0.30 345,000 8.7 58,750 $ 0.50 73,750 9.1 22,750 $ 0.63 18,500 9.4 -- $ 0.75 398,162 9.7 8,229 $ 7.50 683,125 9.9 17,500 $10.80 2,500 9.9 2,500 $11.00 127,250 9.9 -- $16.00 91,250 10.0 -- --------- ------- 2,076,362 287,103 ========= =======
The weighted-average fair value of options granted in fiscal 1997, 1998 and 1999 was $1.80, $2.13, and $10.02 respectively. At December 31, 1997, 1998 and 1999, 75,000, 1,064,250, and 2,692,718 shares of common stock issued upon the exercise of options were subject to repurchase at a weighted-average price of $0.20, $0.23, and $0.61, respectively. F-16 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Pro forma net loss information is required to be disclosed by SFAS 123 and has been determined as if the Company has accounted for its employee stock options under the fair market value method of that statement. The fair value for these options was estimated at the date of grant using the minimum value method with the following weighted-average assumptions:
1997 1998 1999 ------------ ------------ ------------ Expected dividend yield............... 0% 0% 0% Risk-free interest rate range......... 5.9% to 6.6% 4.4% to 5.6% 5.1% to 6.2% Expected life......................... 5 years 5 years 5 years
For periods following the Company's initial public offering, the Black Scholes method will be used to calculate the fair value of options granted. This method includes the above assumptions as well as the estimated volatility of the Company's common stock. The full effect of SFAS 123 will not be fully reflected until fiscal 2002. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods. The Company's pro forma net loss information is as follows (in thousands, except per share amounts):
Year ended December 31, -------------------------- 1997 1998 1999 ------- ------- -------- Net loss attributable to common stockholders-- as reported.................................. $(4,033) $(8,826) $(13,518) ======= ======= ======== Net loss attributable to common stockholders-- pro forma.................................... $(4,054) $(8,871) $(13,669) ======= ======= ======== Basic and diluted net loss per share--as reported..................................... $ (0.82) $ (1.31) $ (1.53) ======= ======= ======== Basic and diluted net loss per share--pro forma........................................ $ (0.82) $ (1.31) $ (1.54) ======= ======= ========
In March through December 1998, the Company granted 173,000 common stock options, of which 86,500 were fully vested, to consultants for services rendered. In addition, in September 1998, 75,000 shares of common stock were issued to consultants for services at a deemed fair value of $2.25 per share. Expense of $364,000 was recognized in 1998 related to these transactions. During the year ended December 31, 1999, the Company issued 15,000 shares of common stock for services rendered at a deemed fair market value of $4.00 per share. Also during the year ended December 31, 1999, the Company granted 87,000 common stock options to consultants for services rendered. Expense of $928,000 was recognized in 1999 related to these transactions. Options granted to consultants are periodically re-valued as they vest in accordance with SFAS 123 and EITF 96-18 using a Black-Scholes model and the following weighted-average assumptions for 1999: estimated volatility of 0.7, risk-free interest rates of 4.4% to 6.2%, no dividend yield, and an expected life of the option equal to the full term, generally ten years from the date of grant. During the years ended December 31, 1997, 1998 and 1999, in connection with the grant of certain share options to employees, the Company recorded deferred stock compensation of $2.6 million, $2.4 million and $19.5 million, respectively, representing the difference between the exercise price and the deemed fair value of the Company's common stock for financial reporting purposes on the date such stock options were granted. Deferred compensation is included as a reduction of stockholders' equity and is being amortized to expense on a graded vesting method. During the years ended December 31, 1997, 1998 and 1999, the Company recorded amortization of deferred stock compensation expense of approximately $863,000, $1.6 million and $4.9 million, respectively. F-17 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 1999 Employee Stock Purchase Plan In September 1999, the Company's board of directors adopted the 1999 Employee Stock Purchase Plan (the "Purchase Plan"). A total of 400,000 shares of the Company's common stock have been reserved for issuance under the Purchase Plan. The Purchase Plan permits eligible employees to purchase common stock at a discount, but only through payroll deductions, during defined offering periods. The price at which stock is purchased under the Purchase Plan is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. The initial offering period commenced on December 16, 1999. In addition, the Purchase Plan provides for annual increases in the number of shares available for issuance under the purchase plan on the first day of each year, beginning January 1, 2001, equal to the lesser of 200,000 shares, 0.75% of the outstanding shares on the date of the annual increase or such amount as may be determined by the board. No shares have been issued to date under the Puchase Plan. Nonemployee Directors Stock Option Plan In September 1999, the Company adopted the 1999 Nonemployee Directors Stock Option Plan and reserved a total of 300,000 shares of common stock for issuance thereunder. Each nonemployee director who becomes a director of the Company will be automatically granted a nonstatutory stock option to purchase 20,000 shares of common stock on the date on which such person first becomes a director. At each board meeting immediately following each annual stockholders meeting beginning with the first board meeting after the 1999 Annual Stockholders Meeting, each nonemployee director will automatically be granted a nonstatutory option to purchase 5,000 shares of common stock. The exercise price of options under the director plan will be equal to the fair market value of the common stock on the date of grant. The maximum term of the options granted under the director plan is ten years. Each initial grant under the director plan will vest as to 25% of the shares subject to the option one year after the date of grant and at a rate of 25% of the shares at the end of each year. Each subsequent grant will vest in full one year after the date of grant. The director plan will terminate in September 2009, unless terminated earlier in accordance with the provisions of the director plan. Common Stock The founders' shares issued in March 1997 are also subject to repurchase. The repurchase right for these shares lapses at a rate of 25% on an annual basis in four years. The holders of unvested shares have voting and other rights identical to other common stockholders. At December 31, 1997, 1998 and 1999, 1,575,000, 1,050,000, and 525,000 shares, respectively, of common stock at a weighted-average price of $0.20 per share were subject to repurchase. At December 31, 1999, the Company has reserved shares of common stock for future issuance as follows: 1999 Stock Purchase Plan........................................... 400,000 1999 Nonemployee Directors Stock Option Plan....................... 300,000 1997 Stock Option Plan............................................. 3,263,850 --------- 3,963,850 =========
F-18 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 9. Income Taxes At December 31, 1999, the Company had federal and state net operating loss carryforwards of approximately $10.4 million and $7.3 million, respectively. The Company also had federal and California research and development tax credit carryforwards of approximately $400,000 and $300,000, respectively. The net operating loss and credit carryforwards will expire at various dates beginning in the year 2011 through 2019, if not utilized. The state of California net operating losses will begin to expire in the year 2006. Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the 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. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets for financial reporting and the amount used for income tax purposes. Significant components of the Company's deferred tax assets for federal and state income taxes are as follows (in thousands):
December 31, ---------------- 1998 1999 ------- ------- Net operating loss carryforwards........................... $ 1,800 $ 4,000 Research credits........................................... 400 700 Capitalized research and development....................... 100 300 Deferred revenue........................................... 900 1,000 Other...................................................... 200 100 ------- ------- Total deferred tax assets.................................. 3,400 6,100 Valuation allowance........................................ (3,400) (6,100) ------- ------- Net deferred tax assets.................................... $ -- $ -- ======= =======
Because of the Company's lack of earnings history, the deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $2.2 million and $2.7 million during the years ended December 31, 1998 and 1999, respectively. 10. Subsequent Event (unaudited) Technological Resources PTY Limited In January 2000, the Company entered into a three year collaborative research and development agreement with Technological Resources PTY Limited, a wholly owned subsidiary of Rio Tinto Limited ("TRPL"), to develop novel enzymatic systems to increase the efficiency of carbon dioxide fixation. Pursuant to the agreement, TRPL agreed to provide nonrefundable research and development funding and technology advancement payments of up to $2.7 million, as well as revenue sharing on certain commercialized products and processes. F-19 UNDERWRITING Maxygen and the underwriters for the offering named below have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co., FleetBoston Robertson Stephens Inc., Credit Suisse First Boston Corporation and Invemed Associates LLC are the representatives of the underwriters.
Underwriters Number of Shares ------------ ---------------- Goldman, Sachs & Co....................................... FleetBoston Robertson Stephens Inc........................ Credit Suisse First Boston Corporation.................... Invemed Associates LLC.................................... --------- Total................................................... 1,500,000 =========
If the underwriters sell more shares than the total number set forth in the table above, the underwriters have an option to buy up to an additional 225,000 shares from Maxygen to cover such sales. They may exercise that option for 30 days. If any shares are purchased under this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters by Maxygen. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase 225,000 additional shares.
Paid by Maxygen --------------- No Full Exercise Exercise -------- -------- Per Share................................................ $ $ Total.................................................... $ $
Shares sold by the underwriters to the public will initially be offered at the initial price to public set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial price to public. Any of these securities dealers may resell any shares purchased from the underwriters to other brokers or dealers at a discount of up to $ per share from the initial price to public. If all the shares are not sold at the initial price to public, the representatives may change the offering price and the other selling terms. Maxygen has agreed with the underwriters not to dispose of or hedge any of its common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 90 days after the date of this prospectus, except with the prior written consent of Goldman, Sachs & Co. This restriction does not apply to any existing employee benefit plans or securities issued in connection with acquisition transactions, provided that the recipients of such securities agree not to dispose of or hedge any of such securities for the same 90 day period. See "Shares Eligible for Future Sale" for a discussion of transfer restrictions. Certain persons associated with Invemed Associates LLC, one of the underwriters, hold an aggregate of 114,497 shares of common stock, of which 73,590 shares were purchased in August 1998 for $3.00 per share and 40,907 shares were purchased in June 1999 for $5.50 per share. These associated persons also hold a pecuniary interest in a small portion of the shares of common stock held by Technogen Associates, L.P. by virtue of limited partnership interests held by such associated persons in Technogen Associates. In addition, Invemed Fund L.P., a fund for which Invemed Associates is the sole general partner, purchased 363,636 shares of common stock in June 1999 for $5.50 per share. By virtue of Invemed Associates' partnership interest in Invemed Fund, together with its entitlement to a percentage U-1 return on investments made by Invemed Fund once the investment has generated a return of 20 percent, Invemed Associates received 200,477 shares of common stock on December 29, 1999, the date Invemed Fund declared a distribution of the common stock held by Invemed Fund. In addition, three entities affiliated with Credit Suisse First Boston Corporation, one of the underwriters, are the limited partners of the Invemed Fund. At the time of the December 29, 1999 distribution of the common stock from the Invemed Fund, these entities received an aggregate of 163,159 shares of common stock. In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of the common stock while the offering is in progress. The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions. These activities by the underwriters may stabilize, maintain or affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected on The Nasdaq National Market, in the over-the-counter market or otherwise. Maxygen will pay the expenses of the offering, excluding underwriting discounts and commissions. The expenses of the offering are estimated to be approximately $500,000. Maxygen has agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act of 1933. U-2 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. --------------- TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 7 Forward-Looking Statements............................................... 18 Use of Proceeds.......................................................... 18 Price Range of Common Stock.............................................. 19 Dividend Policy.......................................................... 19 Capitalization........................................................... 20 Dilution................................................................. 21 Selected Financial Data.................................................. 22 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 23 Business................................................................. 28 Management............................................................... 45 Related Party Transactions............................................... 56 Principal Stockholders................................................... 59 Description of Capital Stock............................................. 61 Shares Eligible for Future Sale.......................................... 63 Legal Matters............................................................ 64 Experts.................................................................. 64 Where You Can Find Additional Information................................ 65 Index to Financial Statements............................................ F-1 Underwriting............................................................. U-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 1,500,000 Shares Maxygen, Inc. Common Stock --------------- [MAXYGEN LOGO] --------------- Goldman, Sachs & Co. Robertson Stephens Credit Suisse First Boston Invemed Associates Representatives of the Underwriters - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II Information Not Required In Prospectus Item 13. Other Expenses of Issuance and Distribution. The following table sets forth all expenses to be paid by Maxygen, other than the underwriting discounts and commissions payable by Maxygen, in connection with the sale of the common stock being registered. All amounts shown are estimates except for the SEC registration fee, the NASD filing fee and the Nasdaq National Market filing fee.
AMOUNT TO BE PAID -------- SEC registration fee............................................... $ 72,950 NASD filing fee.................................................... 28,133 Nasdaq National Market filing fee.................................. 17,250 Blue sky qualification fees and expenses........................... 2,500 Printing and engraving expenses.................................... 150,000 Legal fees and expenses............................................ 120,000 Accounting fees and expenses....................................... 75,000 Transfer agent and registrar fees and expenses..................... 2,500 Miscellaneous...................................................... 31,667 -------- Total............................................................ $500,000 ========
Item 14. Indemnification of Directors and Officers. Section 145 of the Delaware General Corporation Law permits indemnification of officers, directors and other corporate agents under certain circumstances and subject to certain limitations. Our Certificate of Incorporation and Bylaws provide that we will indemnify our directors, officers, employees and agents to the full extent permitted by Delaware General Corporation Law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. In addition, we intend to enter into indemnification agreements with our directors and officers that require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service (other than liabilities arising from willful misconduct of a culpable nature). The indemnification provisions in our Certificate of Incorporation and Bylaws and the indemnification agreement entered into between us and our directors may be sufficiently broad to permit indemnification of our officers and directors for liabilities (including reimbursement of expenses incurred) arising under the Securities Act. We also maintain director and officer liability insurance to insure our directors and officers against the cost of defense, settlement or payment of a judgment under certain circumstances. In addition, the underwriting agreement filed as Exhibit 1.1 to this Registration Statement provides for indemnification by the underwriters of the Company and our officers and directors for certain liabilities arising under the Securities Act, or otherwise. Reference is made to Item 17 of this Registration Statement for additional information regarding indemnification of officers and directors. Item 15. Recent Sales of Unregistered Securities. Since our incorporation in May 1996, we have sold and issued the following securities which were not registered under the Securities Act: 1. In March 1997, we issued to Affymax Technologies, N.V. and Glaxo Group Limited (both subsidiaries of Glaxo Wellcome plc) a total of 5,460,000 shares of common stock in exchange for the transfer of intellectual property and other technology assets. In addition, we sold an aggregate of 2,100,000 shares of common stock to four founders of Maxygen for aggregate consideration of $420,000 which was paid by II-1 promissory note, secured by the common stock underlying the stock purchase. In May 1998, we issued 125,000 shares of common stock to the California Institute of Technology in exchange for the license of intellectual property. In September 1998, we sold 75,000 shares of common stock to three of our consultants for aggregate consideration of $22,500. In March 1999, we issued 15,000 shares of common stock to Cahan & Associates in consideration for consulting services. In April 1999, we issued 50,000 shares of common stock to the University of Washington in exchange for the license of intellectual property. In December 1999, we issued 1,600 shares of common stock to one of our consultants for aggregate consideration of $10,000. 2. In March 1997, we sold 2,500,000 shares of Series A preferred stock to two investors for aggregate consideration of $5,000,000. In December 1997, we sold 290,000 shares of Series A preferred stock to 16 investors for aggregate consideration of $580,000. In April 1998, we sold 5,000 shares of Series A preferred stock to one investor for aggregate consideration of $10,000. 3. In August 1998, we sold 3,666,667 shares of Series B preferred stock to 63 investors for aggregate consideration of $10,966,000. 4. In December 1998, we sold 1,000,000 shares of Series C preferred stock to Pioneer Overseas Corporation for an aggregate consideration of $5,000,000. 5. In June 1999, we sold 3,636,364 shares of Series D preferred stock to 62 investors for aggregate consideration of $19,963,000. 6. In August 1999, we sold 800,000 shares of Series E preferred stock to AstraZeneca Holdings, B.V. for aggregate consideration of $5,000,000. 7. From inception through December 22, 1999, we granted and outstanding options to purchase an aggregate of 2,076,362 shares of common stock with exercise prices ranging from $0.20 to $16.00 per share. From inception through December 22, 1999, options to purchase 4,236,150 shares of common stock were exercised for aggregate consideration of approximately $2 million. There were no underwriters employed in connection with any of the transactions set forth in Item 15. The issuances of securities described in Items 15(1) through 15(6) were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act and Regulation D promulgated thereunder as transactions by an issuer not involving a public offering. With respect to the grant of stock options described in Item 15(7), an exemption from registration was unnecessary in that none of the transactions involved a "sale" of securities as this term is used in Section 2(3) of the Securities Act. The sale and issuance of securities and the exercise of options described in Item 15(7) were deemed to be exempt from registration under the Securities Act by virtue of Rule 701 promulgated thereunder in that they were offered and sold either pursuant to a written compensatory benefit plan or pursuant to a written contract relating to compensation, as provided in Rule 701.The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions. All recipients either received adequate information about us or had access, through employment or other relationships, to such information. II-2 Item 16. Exhibits and Financial Statement Schedules. (A) EXHIBITS
Exhibit Number Description of Document ------- ---------------------------------------------------------------------- 1.1 Form of Underwriting Agreement 3.1* Amended and Restated Certificate of Incorporation (Filed as Exhibit 3.8 to Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 333-89413) on November 22, 1999 (the "November Amendment No. 1") and incorporated herein by reference) 3.2* Amended and Restated Bylaws (Filed as Exhibit 3.9 to the Registration Statement on Form S-1 (Registration No. 333-89413) on October 20, 1999 (the "October Registration Statement") and incorporated herein by reference) 4.1* Specimen Common Stock Certificate (Filed as Exhibit 4.1 to the November Amendment No. 1 and incorporated herein by reference) 4.2* Registration Rights Agreement among Maxygen, Affymax Technologies N.V., Alejandro Zaffaroni and Glaxo Wellcome plc dated March 14, 1997 (Filed as Exhibit 4.2 to the October Registration Statement and incorporated herein by reference) 4.3* Amendment to Registration Rights Agreement and Consent dated as of July 31, 1998 among Maxygen and certain holders of Series A preferred stock (Filed as Exhibit 4.3 to the October Registration Statement and incorporated herein by reference) 4.4* Second Amendment to Registration Rights Agreement and Consent dated as of December 23, 1998 among Maxygen and certain holders of Series A preferred stock and Series B preferred stock (Filed as Exhibit 4.4 to the October Registration Statement and incorporated herein by reference) 4.5* Third Amendment to Registration Rights Agreement and Consent dated as of June 15, 1999 among Maxygen, and certain holders of Series A preferred stock, Series B preferred stock, Series C preferred stock and Series D preferred stock (Filed as Exhibit 4.5 to the October Registration Statement and incorporated herein by reference) 4.6* Series E Preferred Stock Purchase Agreement among Maxygen, AstraZeneca Holdings, B.V. and Zeneca Limited dated as of June 18, 1999 (Filed as Exhibit 4.6 to the October Registration Statement and incorporated herein by reference) 4.7* Fourth Amendment to Registration Rights Agreement and Consent dated as of August 6, 1999 among Maxygen, certain holders of Series A preferred stock, Series B preferred stock, Series C preferred stock, Series D preferred stock and Series E preferred stock (Filed as Exhibit 4.7 to the October Registration Statement and incorporated herein by reference) 5.1 Opinion of Heller Ehrman White & McAuliffe 10.1* 1997 Stock Option Plan, as amended (Filed as Exhibit 10.1 to the November Amendment No. 1 and incorporated herein by reference) 10.2* Form of Promissory Note dated March 14, 1997 executed by each of Russell J. Howard, Isaac Stein and Willem P.C. Stemmer in favor of Maxygen (Filed as Exhibit 10.2 to the October Registration Statement and incorporated herein by reference) 10.3*+ Technology Transfer Agreement among Maxygen, Affymax Technologies N.V. and Glaxo Wellcome plc dated March 14, 1997, as amended, effective March 1, 1998 (Filed as Exhibit 10.3 to Amendment No. 2 to the Registration Statement on Form S-1 (Registration No. 333-89413) on December 15, 1999 (the "December Amendment No. 2") and incorporated herein by reference) 10.4* Lease between Metropolitan Life Insurance Company and Maxygen dated October 21, 1998 (Filed as Exhibit 10.4 to the October Registration Statement and incorporated herein by reference) 10.5* First Amendment to Lease dated as of February 26, 1999 by and between Metropolitan Life Insurance Company and Maxygen (Filed as Exhibit 10.5 to the October Registration Statement and incorporated herein by reference) 10.6* Promissory Note dated April 22, 1999 executed by Joseph Affholter and Roxanne Affholter in favor of Maxygen (Filed as Exhibit 10.6 to the October Registration Statement and incorporated herein by reference) 10.7* Form of Officer and Director Indemnification Agreement (Filed as Exhibit 10.7 to the October Registration Statement and incorporated herein by reference)
II-3
Exhibit Number Description of Document ------- ---------------------------------------------------------------------- 10.8* 1999 Nonemployee Directors Stock Option Plan (Filed as Exhibit 10.8 to the October Registration Statement and incorporated herein by reference) 10.9* 1999 Employee Stock Purchase Plan (Filed as Exhibit 10.9 to the November Amendment No. 1 and incorporated herein by reference) 10.10* Form of Promissory Note issued in connection with exercise of stock options (Filed as Exhibit 10.10 to the October Registration Statement and incorporated herein by reference) 10.11*+ License and Collaboration Agreement between Maxygen and Novo Nordisk A/S effective as of September 17, 1997, as amended June 29, 1998, July 29, 1998, and April 19, 1999 (Filed as Exhibit 10.11 to the December Amendment No. 2 and incorporated herein by reference) 10.12*+ Collaborative Research and License Agreement entered into as of December 23, 1998 by and between Pioneer Hi-Bred International, Inc. and Maxygen (Filed as Exhibit 10.12 to Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 333-89413) on December 16, 1999 and incorporated herein by reference) 10.13*+ Agreement between Maxygen and Gist-Brocades B.V. entered into March 15, 1999 (Filed as Exhibit 10.13 to the December Amendment No. 2 and incorporated herein by reference) 10.14*+ Collaboration Agreement effective as of June 18, 1999 by and between Zeneca Limited and Maxygen (Filed as Exhibit 10.14 to the December Amendment No. 2 and incorporated herein by reference) 10.15++ Collaborative Research and Development Agreement made as of January 19, 2000 between Technological Resources Pty Limited and Maxygen 10.16 Letter agreement dated January 28, 2000, between Maxygen and Joseph A. Affholter 10.17 Exclusive Consulting Agreement dated January 28, 2000, between Maxygen and Joseph A. Affholter 10.18 Promissory Note dated January 28, 2000, executed by Joseph A. Affholter and Roxanne B. Affholter in favor of Maxygen 10.19 Pledge Agreement dated January 28, 2000, among Joseph A. Affholter, Roxanne B. Affholter and Maxygen 10.20++ Cooperative Research and Development Agreement between the National Cancer Institute, National Institutes of Health dated February 24, 2000 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of Heller Ehrman White & McAuliffe (included in Exhibit 5.1) 24.1 Power of Attorney (see page II-6) 27.1 Financial Data Schedule
- -------- * Previously filed in connection with the Registration Statement on Form S-1 declared effective on December 15, 1999 and incorporated herein by reference. + Confidential treatment has been granted with respect to portions of the exhibit. A complete copy of the agreement, including the redacted terms, has been separately filed with the Securities and Exchange Commission. ++ Confidential treatment has been requested with respect to portions of the exhibit. A complete copy of the agreement including redacted terms, has been separately filed with the Securities and Exchange Commission. (B) FINANCIAL STATEMENT SCHEDULES. All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. Item 17. Undertakings The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. II-4 Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; and (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Redwood City, California, on the 3rd day of March, 2000. MAXYGEN, INC. /s/ Russell J. Howard By:_____________________________________ Russell J. Howard, Ph.D. President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE POWER OF ATTORNEY PRESENTS, that each person whose signature appears below hereby constitutes and appoints Isaac Stein and Simba Gill, and each of them acting individually, as his or her true and lawful attorneys-in-fact and agents, each with full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments or any abbreviated registration statement and any amendments thereto filed pursuant to Rule 462(b) increasing the number of securities for which registration is sought), and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, with full power of each to act alone, 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 for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Russell J. Howard, Ph.D. President, Chief Executive March 3, 2000 ____________________________________ Officer and Director Russell J. Howard, Ph.D. (Principal Executive Officer) /s/ Simba Gill, Ph.D. Senior Vice President of March 3, 2000 ____________________________________ Business Development and Chief Simba Gill, Ph.D. Financial Officer (Principal Financial and Accounting Officer) /s/ Isaac Stein Chairman of the Board March 3, 2000 ____________________________________ Isaac Stein /s/ Robert J. Glaser, M.D. Director March 3, 2000 ____________________________________ Robert J. Glaser, M.D. /s/ M.R.C. Greenwood, Ph.D. Director March 3, 2000 ____________________________________ M.R.C. Greenwood, Ph.D.
II-6
Signature Title Date --------- ----- ---- /s/ Adrian Hennah Director March 3, 2000 ____________________________________ Adrian Hennah /s/ Gordon Ringold, Ph.D. Director March 3, 2000 ____________________________________ Gordon Ringold, Ph.D. /s/ George Poste, Ph.D. Director March 3, 2000 ____________________________________ George Poste, Ph.D.
II-7 EXHIBIT INDEX
Exhibit Number Description of Document ------- ---------------------------------------------------------------------- 1.1 Form of Underwriting Agreement 3.1* Amended and Restated Certificate of Incorporation (Filed as Exhibit 3.8 to Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 333-89413) on November 22, 1999 (the "November Amendment No. 1") and incorporated herein by reference) 3.2* Amended and Restated Bylaws (Filed as Exhibit 3.9 to the Registration Statement on Form S-1 (Registration No. 333-89413) on October 20, 1999 (the "October Registration Statement") and incorporated herein by reference) 4.1* Specimen Common Stock Certificate (Filed as Exhibit 4.1 to the November Amendment No. 1 and incorporated herein by reference) 4.2* Registration Rights Agreement among Maxygen, Affymax Technologies N.V., Alejandro Zaffaroni and Glaxo Wellcome plc dated March 14, 1997 (Filed as Exhibit 4.2 to the October Registration Statement and incorporated herein by reference) 4.3* Amendment to Registration Rights Agreement and Consent dated as of July 31, 1998 among Maxygen and certain holders of Series A preferred stock (Filed as Exhibit 4.3 to the October Registration Statement and incorporated herein by reference) 4.4* Second Amendment to Registration Rights Agreement and Consent dated as of December 23, 1998 among Maxygen and certain holders of Series A preferred stock and Series B preferred stock (Filed as Exhibit 4.4 to the October Registration Statement and incorporated herein by reference) 4.5* Third Amendment to Registration Rights Agreement and Consent dated as of June 15, 1999 among Maxygen, and certain holders of Series A preferred stock, Series B preferred stock, Series C preferred stock and Series D preferred stock (Filed as Exhibit 4.5 to the October Registration Statement and incorporated herein by reference) 4.6* Series E Preferred Stock Purchase Agreement among Maxygen, AstraZeneca Holdings, B.V. and Zeneca Limited dated as of June 18, 1999 (Filed as Exhibit 4.6 to the October Registration Statement and incorporated herein by reference) 4.7* Fourth Amendment to Registration Rights Agreement and Consent dated as of August 6, 1999 among Maxygen, certain holders of Series A preferred stock, Series B preferred stock, Series C preferred stock, Series D preferred stock and Series E preferred stock (Filed as Exhibit 4.7 to the October Registration Statement and incorporated herein by reference) 5.1 Opinion of Heller Ehrman White & McAuliffe 10.1* 1997 Stock Option Plan, as amended (Filed as Exhibit 10.1 to the November Amendment No. 1 and incorporated herein by reference) 10.2* Form of Promissory Note dated March 14, 1997 executed by each of Russell J. Howard, Isaac Stein and Willem P.C. Stemmer in favor of Maxygen (Filed as Exhibit 10.2 to the October Registration Statement and incorporated herein by reference) 10.3*+ Technology Transfer Agreement among Maxygen, Affymax Technologies N.V. and Glaxo Wellcome plc dated March 14, 1997, as amended, effective March 1, 1998 (Filed as Exhibit 10.3 to Amendment No. 2 to the Registration Statement on Form S-1 (Registration No. 333-89413) on December 15, 1999 (the "December Amendment No. 2") and incorporated herein by reference) 10.4* Lease between Metropolitan Life Insurance Company and Maxygen dated October 21, 1998 (Filed as Exhibit 10.4 to the October Registration Statement and incorporated herein by reference) 10.5* First Amendment to Lease dated as of February 26, 1999 by and between Metropolitan Life Insurance Company and Maxygen (Filed as Exhibit 10.5 to the October Registration Statement and incorporated herein by reference) 10.6* Promissory Note dated April 22, 1999 executed by Joseph Affholter and Roxanne Affholter in favor of Maxygen (Filed as Exhibit 10.6 to the October Registration Statement and incorporated herein by reference) 10.7* Form of Officer and Director Indemnification Agreement (Filed as Exhibit 10.7 to the October Registration Statement and incorporated herein by reference)
Exhibit Number Description of Document ------- ---------------------------------------------------------------------- 10.8* 1999 Nonemployee Directors Stock Option Plan (Filed as Exhibit 10.8 to the October Registration Statement and incorporated herein by reference) 10.9* 1999 Employee Stock Purchase Plan (Filed as Exhibit 10.9 to the November Amendment No. 1 and incorporated herein by reference) 10.10* Form of Promissory Note issued in connection with exercise of stock options (Filed as Exhibit 10.10 to the October Registration Statement and incorporated herein by reference) 10.11*+ License and Collaboration Agreement between Maxygen and Novo Nordisk A/S effective as of September 17, 1997, as amended June 29, 1998, July 29, 1998, and April 19, 1999 (Filed as Exhibit 10.11 to the December Amendment No. 2 and incorporated herein by reference) 10.12*+ Collaborative Research and License Agreement entered into as of December 23, 1998 by and between Pioneer Hi-Bred International, Inc. and Maxygen (Filed as Exhibit 10.12 to Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 333-89413) on December 16, 1999 and incorporated herein by reference) 10.13*+ Agreement between Maxygen and Gist-Brocades B.V. entered into March 15, 1999 (Filed as Exhibit 10.13 to the December Amendment No. 2 and incorporated herein by reference) 10.14*+ Collaboration Agreement effective as of June 18, 1999 by and between Zeneca Limited and Maxygen (Filed as Exhibit 10.14 to the December Amendment No. 2 and incorporated herein by reference) 10.15++ Collaborative Research and Development Agreement made as of January 19, 2000 between Technological Resources Pty Limited and Maxygen 10.16 Letter agreement dated January 28, 2000, between Maxygen and Joseph A. Affholter 10.17 Exclusive Consulting Agreement dated January 28, 2000, between Maxygen and Joseph A. Affholter 10.18 Promissory Note dated January 28, 2000, executed by Joseph A. Affholter and Roxanne B. Affholter in favor of Maxygen 10.19 Pledge Agreement dated January 28, 2000, among Joseph A. Affholter, Roxanne B. Affholter and Maxygen 10.20++ Cooperative Research and Development Agreement between the National Cancer Institute, National Institutes of Health dated February 24, 2000 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of Heller Ehrman White & McAuliffe (included in Exhibit 5.1) 24.1 Power of Attorney (see page II-6) 27.1 Financial Data Schedule
- -------- * Previously filed in connection with the Registration Statement on Form S-1 declared effective on December 15, 1999 and incorporated herein by reference. + Confidential treatment has been granted with respect to portions of the exhibit. A complete copy of the agreement, including the redacted terms, has been separately filed with the Securities and Exchange Commission. ++ Confidential treatment has been requested with respect to portions of the exhibit. A complete copy of the agreement including redacted terms, has been separately filed with the Securities and Exchange Commission. EX-1.1 2 UNDERWRITING AGREEMENT EXHIBIT 1.1 Maxygen, Inc. Common Stock par value $0.0001 per share Underwriting Agreement ---------------------- , 2000 Goldman, Sachs & Co., Credit Suisse First Boston Corporation, FleetBoston Robertson Stephens Inc., Invemed Associates LLC, As representatives of the several Underwriters named in Schedule I hereto, c/o Goldman, Sachs & Co. 85 Broad Street, New York, New York 10004. Ladies and Gentlemen: Maxygen, Inc., a Delaware corporation (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of 1,500,000 shares (the "Firm Shares") and, at the election of the Underwriters, up to 225,000 additional shares (the "Optional Shares") of Common Stock, par value $.0001 ("Stock") of the Company (the Firm Shares and the Optional Shares that the Underwriters elect to purchase pursuant to Section 2 hereof being collectively called the "Shares"). 1. The Company represents and warrants to, and agrees with, each of the Underwriters that: (a) A registration statement on Form S-1 (File No. 333-[_____]) (the "Initial Registration Statement") in respect of the Shares has been filed with the Securities and Exchange Commission (the "Commission"); the Initial Registration Statement and any post-effective amendment thereto, each in the form heretofore delivered to you, and, excluding exhibits thereto, to you for each of the other Underwriters, have been declared effective by the Commission in such form; other than a registration statement, if any, increasing the size of the offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the "Act"), which became effective upon filing, no other document with respect to the Initial Registration Statement has heretofore been filed with the Commission; and no stop order suspending the effectiveness of the Initial Registration Statement, any post-effective amendment thereto or the Rule 462(b) Registration Statement, if any, has been issued and no proceeding for that purpose has been initiated or threatened by the Commission (any preliminary prospectus included in the Initial Registration Statement or filed with the Commission pursuant to Rule 424(a) of the rules and regulations of the Commission under the Act is hereinafter called a "Preliminary Prospectus"; the various parts of the Initial Registration Statement and the Rule 462(b) Registration Statement, if any, including all exhibits thereto and including the information contained in the form of final prospectus filed with the Commission pursuant to Rule 424(b) under the Act in accordance with Section 5(a) hereof and deemed by virtue of Rule 430A under the Act to be part of the Initial Registration Statement at the time it was declared effective, each as amended at the time such part of the Initial Registration Statement became effective or such part of the Rule 462(b) Registration Statement, if any, became or hereafter becomes effective, are hereinafter collectively called the "Registration Statement"; such final prospectus, in the form first filed pursuant to Rule 424(b) under the Act, is hereinafter called the "Prospectus"; (b) No order preventing or suspending the use of any Preliminary Prospectus has been issued by the Commission, and each Preliminary Prospectus, at the time of filing thereof, conformed in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through Goldman, Sachs & Co. expressly for use therein; (c) The Registration Statement conforms, and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus will conform, in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder and do not and will not, as of the applicable effective date as to the Registration Statement and any amendment thereto, and as of the applicable filing date as to the Prospectus and any amendment or supplement thereto, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through Goldman, Sachs & Co. expressly for use therein; (d) Neither the Company nor any of its subsidiaries has sustained since the date of the latest audited financial statements included in the Prospectus any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus; and, since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any change in the capital stock (other than upon the exercise of options granted pursuant to employee or director stock option plans) or long- term debt of the Company or any of its subsidiaries or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus; 2 (e) The Company and its subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries; (f) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus, and has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties or conducts any business so as to require such qualification, or is subject to no material liability or disability by reason of the failure to be so qualified in any such jurisdiction; and each subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation; (g) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and conform to the description of the Stock contained in the Prospectus; and all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and (except for directors' qualifying shares) are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims; (h) The unissued Shares to be issued and sold by the Company to the Underwriters hereunder have been duly and validly authorized and, when issued and delivered against payment therefor as provided herein, will be duly and validly issued and fully paid and non-assessable and will conform to the description of the Stock contained in the Prospectus; (i) The issue and sale of the Shares by the Company and the compliance by the Company with all of the provisions of this Agreement and the consummation of the transactions herein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other material agreement or material instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, nor will such action result in any violation of the provisions of the Certificate of Incorporation or By-laws of the Company or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties; and no consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Shares or the consummation by the Company of the transactions contemplated by this Agreement, except the registration under the Act of the Shares and such consents, approvals, authorizations, registrations or qualifications as may be required under state 3 securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters; (j) Neither the Company nor any of its subsidiaries is in violation of its Certificate of Incorporation or By-laws or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which it is a party or by which it or any of its properties may be bound; (k) The statements set forth in the Prospectus under the caption "Description of Capital Stock", insofar as they purport to constitute a summary of the terms of the Stock and under the caption "Underwriting", insofar as they purport to describe the provisions of the laws and documents referred to therein, are accurate, complete and fair; (l) Other than as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a material adverse effect on the current or future consolidated financial position, stockholders' equity or results of operations of the Company and its subsidiaries; and, to the best of the Company's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; (m) The Company is not and, after giving effect to the offering and sale of the Shares, will not be an "investment company", as such term is defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"); (n) Neither the Company nor any of its affiliates does business with the government of Cuba or with any person or affiliate located in Cuba within the meaning of Section 517.075, Florida Statutes; (o) Ernst & Young, LLP, who have certified certain financial statements of the Company and its subsidiaries, are independent public accountants as required by the Act and the rules and regulations of the Commission thereunder; and (p) All of the stockholders listed on Schedule II hereto have delivered agreements (collectively, the "Lock-up Agreements") that restrict the holders thereof from, among other things, selling, granting any option for the purchase of, pledging, or otherwise transferring or disposing of the economic interest in, any shares of Stock held by such persons, or any securities convertible into or exercisable or exchangeable for Stock, for a period of 90 days after the date of the Prospectus without the prior written consent of Goldman, Sachs & Co., provided, however, that any shares of Stock purchased by the persons listed in Schedule II-A hereto in the Company's initial public offering or traded in the Nasdaq National Market or any other over-the-counter market or stock exchange are not subject to the foregoing restriction; and the Company has no reason to believe any Lock-up Agreement is not a valid and binding obligation of each party thereto other than the Underwriters; and 4 (q) The Company has imposed a stop-transfer instruction with the Company's transfer agent in order to enforce the Lock-up Agreements. (r) The Company has reviewed its operations and that of its subsidiaries and any third parties with which the Company or any of its subsidiaries has a material relationship to evaluate the extent to which the business or operations of the Company or any of its subsidiaries has been and will be affected by the Year 2000 Problem. As a result of such review, the Company has no reason to believe, and does not believe, that the Year 2000 Problem has had or will have a material adverse effect on the general affairs, management, the current or future consolidated financial position, business prospects, stockholders' equity or results of operations of the Company and its subsidiaries or result in any material loss or interference with the Company's business or operations. The "Year 2000 Problem" as used herein means any significant risk that computer hardware or software used in the receipt, transmission, processing, manipulation, storage, retrieval, retransmission or other utilization of data or in the operation of mechanical or electrical systems of any kind will not, in the case of dates or time periods occurring after December 31, 1999, function at least as effectively as in the case of dates or time periods occurring prior to January 1, 2000. 2. Subject to the terms and conditions herein set forth, (a) the Company agrees to issue and sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at a purchase price per share of $[___], the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto and (b) in the event and to the extent that the Underwriters shall exercise the election to purchase Optional Shares as provided below, the Company agrees to issue and sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at the purchase price per share set forth in clause (a) of this Section 2, that portion of the number of Optional Shares as to which such election shall have been exercised (to be adjusted by you so as to eliminate fractional shares) determined by multiplying such number of Optional Shares by a fraction, the numerator of which is the maximum number of Optional Shares which such Underwriter is entitled to purchase as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the maximum number of Optional Shares that all of the Underwriters are entitled to purchase hereunder. The Company hereby grants to the Underwriters the right to purchase at their election up to 225,000 Optional Shares, at the purchase price per share set forth in the paragraph above, for the sole purpose of covering sales of shares in excess of the number of Firm Shares. Any such election to purchase Optional Shares may be exercised only by written notice from you to the Company, given within a period of 30 calendar days after the date of this Agreement, setting forth the aggregate number of Optional Shares to be purchased and the date on which such Optional Shares are to be delivered, as determined by you but in no event earlier than the First Time of Delivery (as defined in Section 4 hereof) or, unless you and the Company otherwise agree in writing, earlier than two or later than ten business days after the date of such notice. 3. Upon the authorization by you of the release of the Firm Shares, the several Underwriters propose to offer the Firm Shares for sale upon the terms and conditions set forth in the Prospectus. 5 4. (a) The Shares to be purchased by each Underwriter hereunder, in definitive form, and in such authorized denominations and registered in such names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior notice to the Company shall be delivered by or on behalf of the Company to Goldman, Sachs & Co., through the facilities of the Depository Trust Company ("DTC"), for the account of such Underwriter, against payment by or on behalf of such Underwriter of the purchase price therefor by wire transfer of Federal (same-day) funds to the account specified by the Company to Goldman, Sachs & Co. at least forty-eight hours in advance. The Company will cause the certificates representing the Shares to be made available for checking and packaging at least twenty-four hours prior to the Time of Delivery (as defined below) with respect thereto at the office of DTC or its designated custodian (the "Designated Office"). The time and date of such delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m., New York City time, on [________] or such other time and date as Goldman, Sachs & Co. and the Company may agree upon in writing, and, with respect to the Optional Shares, 9:30 a.m., New York time, on the date specified by Goldman, Sachs & Co. in the written notice given by Goldman, Sachs & Co. of the Underwriters' election to purchase such Optional Shares, or such other time and date as Goldman, Sachs & Co. and the Company may agree upon in writing. Such time and date for delivery of the Firm Shares is herein called the "First Time of Delivery", such time and date for delivery of the Optional Shares, if not the First Time of Delivery, is herein called the "Second Time of Delivery", and each such time and date for delivery is herein called a "Time of Delivery". (b) The documents to be delivered at each Time of Delivery by or on behalf of the parties hereto pursuant to Section 7 hereof, including the cross receipt for the Shares and any additional documents requested by the Underwriters pursuant to Section 7(j) hereof, will be delivered at the offices of Heller Ehrman White & McAuliffe, 2500 Sand Hill Road, Menlo Park, California, 94025-7063 (the "Closing Location"), and the Shares will be delivered at the Designated Office, all at such Time of Delivery. A meeting will be held at the Closing Location at 1:00 p.m., New York City time, on the New York Business Day next preceding such Time of Delivery, at which meeting the final drafts of the documents to be delivered pursuant to the preceding sentence will be available for review by the parties hereto. For the purposes of this Section 4, "New York Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York are generally authorized or obligated by law or executive order to close. 5. The Company agrees with each of the Underwriters: (a) To prepare the Prospectus in a form approved by you and to file such Prospectus pursuant to Rule 424(b) under the Act not later than the Commission's close of business on the second business day following the execution and delivery of this Agreement, or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Act; to make no further amendment or any supplement to the Registration Statement or Prospectus which shall be disapproved by you promptly after reasonable notice thereof; to advise you, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish you with copies thereof; to advise you, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or prospectus, of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any 6 request by the Commission for the amending or supplementing of the Registration Statement or Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or prospectus or suspending any such qualification, promptly to use its best efforts to obtain the withdrawal of such order; (b) Promptly from time to time to take such action as you may reasonably request to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Shares, provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction; (c) Prior to 10:00 A.M., New York City time, on the New York Business Day next succeeding the date of this Agreement and from time to time, to furnish the Underwriters with copies of the Prospectus in New York City in such quantities as you may reasonably request, and, if the delivery of a prospectus is required at any time prior to the expiration of nine months after the time of issue of the Prospectus in connection with the offering or sale of the Shares and if at such time any event shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary during such period to amend or supplement the Prospectus in order to comply with the Act, to notify you and upon your request to prepare and furnish without charge to each Underwriter and to any dealer in securities as many copies as you may from time to time reasonably request of an amended Prospectus or a supplement to the Prospectus which will correct such statement or omission or effect such compliance, and in case any Underwriter is required to deliver a prospectus in connection with sales of any of the Shares at any time nine months or more after the time of issue of the Prospectus, upon your request but at the expense of such Underwriter, to prepare and deliver to such Underwriter as many copies as you may request of an amended or supplemented Prospectus complying with Section 10(a)(3) of the Act; (d) To make generally available to its securityholders as soon as practicable, but in any event not later than eighteen months after the effective date of the Registration Statement (as defined in Rule 158(c) under the Act), an earnings statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Act and the rules and regulations thereunder (including, at the option of the Company, Rule 158); (e) During the period beginning from the date hereof and continuing to and including the date 90 days after the date of the Prospectus, not to offer, sell, contract to sell or otherwise dispose of, except as provided hereunder any securities of the Company that are substantially similar to the Shares, including but not limited to any securities that are convertible into or exchangeable for, or that represent the right to receive, Stock or any such substantially similar securities (other than pursuant to employee, director or consultant stock option or stock purchase plans existing on, or upon the conversion or exchange of convertible or exchangeable securities outstanding as of, the date of this Agreement or in connection with any acquisition transaction, provided that the recipients of the Company's securities in any such transaction agree in writing not to offer, sell, contract to sell or otherwise dispose of such securities during the same 90 day period), without your prior written consent; 7 (f) To furnish to its stockholders as soon as practicable after the end of each fiscal year an annual report (including a balance sheet and statements of income, stockholders' equity and cash flows of the Company and its consolidated subsidiaries certified by independent public accountants) and, as soon as practicable after the end of each of the first three quarters of each fiscal year (beginning with the fiscal quarter ending after the effective date of the Registration Statement), to make available to its stockholders consolidated summary financial information of the Company and its subsidiaries for such quarter in reasonable detail; (g) During a period of five years from the effective date of the Registration Statement, to furnish to you copies of all reports or other communications (financial or other) furnished to stockholders, and to deliver to you (i) as soon as they are available, copies of any reports and financial statements furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company is listed; and (ii) such additional information concerning the business and financial condition of the Company as you may from time to time reasonably request (such financial statements to be on a consolidated basis to the extent the accounts of the Company and its subsidiaries are consolidated in reports furnished to its stockholders generally or to the Commission); (h) To use the net proceeds received by it from the sale of the Shares pursuant to this Agreement in the manner specified in the Prospectus under the caption "Use of Proceeds"; (i) To use its best efforts to list for quotation the Shares on the National Association of Securities Dealers Automated Quotations National Market System ("NASDAQ"); (j) To file with the Commission such information on Form 10-Q or Form 10-K as may be required by Rule 463 under the Act; (k) If the Company elects to rely upon Rule 462(b), the Company shall file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement, and the Company shall at the time of filing either pay to the Commission the filing fee for the Rule 462(b) Registration Statement or give irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the Act; and (l) The Company will (i) cooperate with the Underwriters to enforce the terms of each Lock-up Agreement (as defined in Section 1(p)), (ii) issue stop-transfer instructions to the transfer agent for the Stock with respect to any transaction or contemplated transaction that would constitute a breach of or default under the applicable Lock-up Agreement, and (iii) upon written request of Goldman, Sachs & Co., release from the Lock-up Agreements those shares of Stock held by those holders set forth in such request. In addition, except with the prior written consent of Goldman, Sachs & Co., the Company agrees not to amend or terminate, waive any right under, or consent to any transaction that would otherwise be prohibited under, any Lock-up Agreement, or take any other action that would directly or indirectly have the same effect as such an amendment, termination, waiver or consent; and 6. The Company covenants and agrees with the several Underwriters that the Company will pay or cause to be paid the following: (i) the fees, disbursements and expenses of the Company's counsel and accountants in connection with the registration of the Shares under the Act and all other expenses in connection with the preparation, printing and filing of the Registration Statement, any Preliminary Prospectus and the Prospectus and amendments and supplements thereto and the mailing and delivering of copies thereof to the Underwriters and dealers; (ii) the cost of printing or producing any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum, closing 8 documents (including any compilations thereof) and any other documents in connection with the offering, purchase, sale and delivery of the Shares; (iii) all expenses in connection with the qualification of the Shares for offering and sale under state securities laws as provided in Section 5(b) hereof, including the fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky survey (iv) all fees and expenses in connection with listing the Shares on the NASDAQ; (v) the filing fees incident to, and the fees and disbursements of counsel for the Underwriters in connection with, securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of the Shares; (vi) the cost of preparing stock certificates; (vii) the cost and charges of any transfer agent or registrar; and (viii) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section. It is understood, however, that, except as provided in this Section, and Sections 8 and 11 hereof, the Underwriters will pay all of their own costs and expenses, including the fees of their counsel, stock transfer taxes on resale of any of the Shares by them, and any advertising expenses connected with any offers they may make. 7. The obligations of the Underwriters hereunder, as to the Shares to be delivered at each Time of Delivery, shall be subject, in their discretion, to the condition that all representations and warranties and other statements of the Company herein are, at and as of such Time of Delivery, true and correct, the condition that the Company shall have performed all of its obligations hereunder theretofore to be performed, and the following additional conditions: (a) The Prospectus shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period prescribed for such filing by the rules and regulations under the Act and in accordance with Section 5(a) hereof; if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have become effective by 10:00 P.M., Washington, D.C. time, on the date of this Agreement; no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and all requests for additional information on the part of the Commission shall have been complied with to your reasonable satisfaction; (b) Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for the Underwriters, shall have furnished to you such written opinion or opinions (a draft of each such opinion is attached as Annex II(a) hereto), dated such Time of Delivery, with respect to the matters covered in paragraphs (i), (ii), (vii), (xiii) and (xiv) of subsection (c) below as well as such other related matters as you may reasonably request, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters; (c) Heller, Ehrman White & McAuliffe, counsel for the Company, shall have furnished to you their written opinion (a draft of such opinion is attached as Annex II(b) hereto), dated such Time of Delivery, in form and substance satisfactory to you, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the Delaware with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; (ii) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company (including the Shares being delivered at such Time of Delivery) have been duly and validly authorized and issued and are fully paid and non-assessable; and the Shares conform to the description of the Stock contained in the Prospectus; 9 (iii) The Company has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties or conducts any business so as to require such qualification or is subject to no material liability or disability by reason of failure to be so qualified in any such jurisdiction (such counsel being entitled to rely in respect of the opinion in this clause upon opinions of local counsel, published compilations of the laws of such state and in respect of matters of fact upon certificates of officers of the Company, provided that such counsel shall state that they believe that both you and they are justified in relying upon such opinions and certificates); (iv) Each subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation; and all of the issued shares of capital stock of each such subsidiary have been duly and validly authorized and issued, are fully paid and non-assessable, and (except for directors' qualifying shares) are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims (such counsel being entitled to rely in respect of the opinion in this clause upon opinions of local counsel and in respect to matters of fact upon certificates of officers of the Company or its subsidiaries, provided that such counsel shall state that they believe that both you and they are justified in relying upon such opinions and certificates); (v) The Company and its subsidiaries have good and marketable title in fee simple to all real property owned by them, in each case free and clear of all liens, encumbrances and defects except such as (a) are described in the Prospectus or (b) do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and its subsidiaries in a manner that could reasonably be expected to result in a material adverse change, in the condition, financial or otherwise, or in the earnings, business, operations or prospects, whether or not arising from transactions in the ordinary course of business, of the Company and its subsidiaries, considered as one entity. Any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries (in giving the opinion in this clause, such counsel may state that no examination of record titles for the purpose of such opinion has been made, and that they are relying upon a general review of the titles of the Company and its subsidiaries, upon opinions of local counsel and abstracts, reports and policies of title companies rendered or issued at or subsequent to the time of acquisition of such property by the Company or its subsidiaries, upon opinions of counsel to the lessors of such property and, in respect to matters of fact, upon certificates of officers of the Company or its subsidiaries, provided that such counsel shall state that they believe that both you and they are justified in relying upon such opinions, abstracts, reports, policies and certificates); (vi) To such counsel's knowledge and other than as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject and, to such counsel's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; (vii) This Agreement has been duly authorized, executed and delivered by the Company; 10 (viii) The issue and sale of the Shares being delivered at such Time of Delivery by the Company and the compliance by the Company with all of the provisions of this Agreement and the consummation of the transactions herein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to such counsel to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, nor will such action result in any violation of the provisions of the Certificate of Incorporation or By-laws of the Company or any statute or any order, rule or regulation known to such counsel of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties; (ix) No consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Shares or the consummation by the Company of the transactions contemplated by this Agreement, except the registration under the Act of the Shares, and such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters; (x) Neither the Company nor any of its subsidiaries is in violation of its Certificate of Incorporation or By-laws or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which it is a party or by which it or any of its properties may be bound; (xi) The statements set forth in the Prospectus under the caption "Description of Capital Stock", insofar as they purport to constitute a summary of the terms of the Stock are accurate, complete and fair; (xii) The Company is not an "investment company", as such term is defined in the Investment Company Act; and (xiii) The Registration Statement and the Prospectus and any further amendments and supplements thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Act and the rules and regulations thereunder. (xiv) Although they do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus, except for those referred to in the opinion in subsection (xi) of this section 7(c), they have no reason to believe that, as of its effective date, the Registration Statement or any further amendment thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein, as to which such counsel need express no opinion) contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that, as of its date, the Prospectus or any further amendment or supplement thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein, as to which such counsel need express no opinion) contained an untrue statement of a material fact or omitted to state a material fact necessary 11 to make the statements therein, in the light of the circumstances under which they were made, not misleading or that, as of such Time of Delivery, either the Registration Statement or the Prospectus or any further amendment or supplement thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein, as to which such counsel need express no opinion) contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and they do not know of any amendment to the Registration Statement required to be filed or of any contracts or other documents of a character required to be filed as an exhibit to the Registration Statement or required to be described in the Registration Statement or the Prospectus which are not filed or described as required; (d) On the date of the Prospectus at a time prior to the execution of this Agreement, at 9:30 a.m., New York City time, on the effective date of any post- effective amendment to the Registration Statement filed subsequent to the date of this Agreement and also at each Time of Delivery, Ernst & Young, LLP shall have furnished to you a letter or letters, dated the respective dates of delivery thereof, in form and substance satisfactory to you, to the effect set forth in Annex I hereto (the executed copy of the letter delivered prior to the execution of this Agreement is attached as Annex I(a) hereto and a draft of the form of letter to be delivered on the effective date of any post-effective amendment to the Registration Statement and as of each Time of Delivery is attached as Annex I(b) hereto); (e) (i) Neither the Company nor any of its subsidiaries shall have sustained since the date of the latest audited financial statements included in the Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus, and (ii) since the respective dates as of which information is given in the Prospectus there shall not have been any change in the capital stock or long-term debt of the Company or any of its subsidiaries or any change, or any development involving a prospective change, in or affecting the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus, the effect of which, in any such case described in clause (i) or (ii), is in the judgment of the Representatives so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus; (f) On or after the date hereof (i) no downgrading shall have occurred in the rating accorded the Company's debt securities, if any, or preferred stock, if any, by any "nationally recognized statistical rating organization", as that term is defined by the Commission for purposes of Rule 436(g)(2) under the Act, and (ii) no such organization shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of any of the Company's debt securities or preferred stock; (g) On or after the date hereof there shall not have occurred any of the following: (i) a suspension or material limitation in trading in securities generally on the New York Stock Exchange or on NASDAQ; (ii) a suspension or material limitation in trading in the Company's securities on NASDAQ; (iii) a general moratorium on commercial banking activities declared by either Federal or New York or California State authorities; or (iv) the outbreak or escalation of hostilities involving the United States or the declaration by the United States of a national emergency or war, if the effect of 12 any such event specified in this clause (iv) in the judgment of the Representatives makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus; (h) The Shares to be sold at such Time of Delivery shall have been duly listed for quotation on NASDAQ; (i) The Company has obtained and delivered to the Underwriters executed copies of an agreement from each stockholder listed on Schedule II hereto, substantially to the effect set forth in Subsection 1(p) hereof in form and substance satisfactory to you; (j) The Company shall have complied with the provisions of Section 5(c) hereof with respect to the furnishing of prospectuses on the New York Business Day next succeeding the date of this Agreement; and (k) The Company shall have furnished or caused to be furnished to you at such Time of Delivery certificates of officers of the Company satisfactory to you as to the accuracy of the representations and warranties of the Company herein at and as of such Time of Delivery, as to the performance by the Company of all of its obligations hereunder to be performed at or prior to such Time of Delivery, as to the matters set forth in subsections (a) and (e) of this Section and as to such other matters as you may reasonably request. (l) Townsend and Townsend and Crew LLP (TTC), special counsel for the Company, shall have furnished to you its written opinion dated such Time of Delivery, in form and substance satisfactory to you, to the effect that: (i) To such counsel's knowledge, except as generally described in the Prospectus, the Company has not received any notice of infringement or of conflict with rights or claims of others with respect to any intellectual property, except for an advisory letter from Ixsys Corporation, which TTC understands has been discussed with you, and with respect to which TTC has provided opinions of invalidity of the Ixsys patents and noninfringement of the Company's activities with respect to the Ixsys patents. Except as generally described in the Prospectus, nothing has come to such counsel's attention that has led them to believe that any patents of others are infringed by the processes or practices of the Company, or by the manufacture, use or sale of the Company's products. (ii) To such counsel's knowledge, except (a) in connection with assertions or inquiries made by Patent Office examiners in the ordinary course of the prosecution of the Company's patent applications in the Patent Office and an opposition in the Australian Patent Office, which TTC understands has been discussed with you or (b) as may be generally described in the Prospectus, there is not pending or threatened in writing any action, suit, proceeding or claim (x) challenging the validity or scope of the patent applications held by or licensed to the Company or (y) asserting that any patent is infringed by the processes or practices of the Company, or by the manufacture, use or sale of the Company's products. (iii) Such counsel, as patent counsel to the Company, except as may be generally described in the Prospectus, do not know of any pending or threatened litigation or any governmental proceeding, statute or regulation which would affect the Company's intellectual property rights to patents or patent applications, or under any instrument or other document relating thereof. (iv) Such counsel believes that the descriptions relating to patents and patent applications with respect to all patent matters under "Risk Factors - Any Inability to Adequately 13 Protect Our Proprietary Technologies Could Harm Our Competitive Position", "Risk Factors - Litigation or Other Proceedings or Third Party Claims of Intellectual Property Infringement Could Require Us to Spend Time and Money and Could Shut Down Some of Our Operations", Business - The Maxygen Solution", "Business - Maxygen's Molecular Breeding Technologies" and "Business - Intellectual Property and Technology Licenses" in the Prospectus are accurate and fairly present the information shown, and such counsel does not know of any instrument or other document relating to patents or patent applications required to be summarized or described therein or to be filed as an exhibit thereto which is not so summarized, described or filed. (v) Such counsel does not believe that the statements relating to patents, patent applications and patent matters under "Risk Factors - Any Inability to Adequately Protect Our Proprietary Technologies Could Harm Our Competitive Position", "Risk Factors - Litigation or Other Proceedings or Third Party Claims of Intellectual Property Infringement Could Require Us to Spend Time and Money and Could Shut Down Some of Our Operations", Business - The Maxygen Solution", "Business - Maxygen's Molecular Breeding Technologies" and "Business -Intellectual Property and Technology Licenses" in the Registration Statement such counsel reviewed, contained any untrue statement of a material fact or omitted to state any material fact which was required to be stated therein from a patent law perspective or necessary in order to make the statements therein not misleading. 8. (a) The Company will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by any Underwriter through Goldman, Sachs & Co. expressly for use therein. (b) Each Underwriter will indemnify and hold harmless the Company against any losses, claims, damages or liabilities to which the Company may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Underwriter through Goldman, Sachs & Co. expressly for use therein; and will reimburse the Company for any legal or 14 other expenses reasonably incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred. (c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and 15 opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) The obligations of the Company under this Section 8 shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section 8 shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company and to each person, if any, who controls the Company within the meaning of the Act. 9. (a) If any Underwriter shall default in its obligation to purchase the Shares which it has agreed to purchase hereunder at a Time of Delivery, you may in your discretion arrange for you or another party or other parties to purchase such Shares on the terms contained herein. If within thirty-six hours after such default by any Underwriter you do not arrange for the purchase of such Shares, then the Company shall be entitled to a further period of thirty-six hours within which to procure another party or other parties satisfactory to you to purchase such Shares on such terms. In the event that, within the respective prescribed periods, you notify the Company that you have so arranged for the purchase of such Shares, or the Company notifies you that it has so arranged for the purchase of such Shares, you or the Company shall have the right to postpone such Time of Delivery for a period of not more than seven days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments to the Registration Statement or the Prospectus which in your opinion may thereby be made necessary. The term "Underwriter" as used in this Agreement shall include any person substituted under this Section with like effect as if such person had originally been a party to this Agreement with respect to such Shares. (b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased does not exceed one-eleventh of the aggregate number of all the Shares to be purchased at such Time of Delivery, then the Company shall have the right to require each non-defaulting Underwriter to purchase the number of shares 16 which such Underwriter agreed to purchase hereunder at such Time of Delivery and, in addition, to require each non-defaulting Underwriter to purchase its pro rata share (based on the number of Shares which such Underwriter agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made; but nothing herein shall relieve a defaulting Underwriter from liability for its default. (c) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased exceeds one-eleventh of the aggregate number of all the Shares to be purchased at such Time of Delivery, or if the Company shall not exercise the right described in subsection (b) above to require non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement (or, with respect to the Second Time of Delivery, the obligations of the Underwriters to purchase and of the Company to sell the Optional Shares) shall thereupon terminate, without liability on the part of any non-defaulting Underwriter or the Company, except for the expenses to be borne by the Company and the Underwriters as provided in Section 6 hereof and the indemnity and contribution agreements in Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default. 10. The respective indemnities, agreements, representations, warranties and other statements of the Company and the several Underwriters, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of any Underwriter or any controlling person of any Underwriter, or the Company, or any officer or director or controlling person of the Company, and shall survive delivery of and payment for the Shares. 11. If this Agreement shall be terminated pursuant to Section 9 hereof, the Company shall not then be under any liability to any Underwriter except as provided in Sections 6 and 8 hereof; but, if for any other reason, any Shares are not delivered by or on behalf of the Company as provided herein, the Company will reimburse the Underwriters through you for all out-of-pocket expenses approved in writing by you, including fees and disbursements of counsel, reasonably incurred by the Underwriters in making preparations for the purchase, sale and delivery of the Shares not so delivered, but the Company shall then be under no further liability to any Underwriter except as provided in Sections 6 and 8 hereof. 12. In all dealings hereunder, you shall act on behalf of each of the Underwriters, and the parties hereto shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of any Underwriter made or given by you jointly or by Goldman, Sachs & Co. on behalf of you as the representatives. All statements, requests, notices and agreements hereunder shall be in writing, and if to the Underwriters shall be delivered or sent by mail, telex or facsimile transmission to you as the representatives in care of Goldman, Sachs & Co., 32 Old Slip, 21st Floor, New York, New York 10005, Attention: Registration Department; and if to the Company shall be delivered or sent by mail to the address of the Company set forth in the Registration Statement, Attention: Secretary; provided, however, that any notice to an Underwriter pursuant to Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its Underwriters' Questionnaire, or telex constituting such Questionnaire, which address will be supplied to the 17 Company by you upon request. Any such statements, requests, notices or agreements shall take effect upon receipt thereof. 13. This Agreement shall be binding upon, and inure solely to the benefit of, the Underwriters, the Company and, to the extent provided in Sections 8 and 10 hereof, the officers and directors of the Company and each person who controls the Company or any Underwriter, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign by reason merely of such purchase. 14. Time shall be of the essence of this Agreement. As used herein, the term "business day" shall mean any day when the Commission's office in Washington, D.C. is open for business. 15. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 16. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. 18 If the foregoing is in accordance with your understanding, please sign and return to us seven (7) counterparts hereof, and upon the acceptance hereof by you, on behalf of each of the Underwriters, this letter and such acceptance hereof shall constitute a binding agreement between each of the Underwriters and the Company. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in a form of Agreement among Underwriters, the form of which shall be submitted to the Company for examination upon request, but without warranty on your part as to the authority of the signers thereof. Very truly yours, Maxygen, Inc. By: ____________________________________ Name: Title: Accepted as of the date hereof: Goldman, Sachs & Co. Credit Suisse First Boston Corporation FleetBoston Robertson Stephens Inc. Invemed Associates LLC By: __________________________________ Goldman, Sachs & Co. On behalf of each of the Underwriters 19
- ------------------------------------------------------------------------------------------------------------------- SCHEDULE I - ------------------------------------------------------------------------------------------------------------------- Number of Optional - ------------------------------------------------------------------------------------------------------------------- Shares to be - ------------------------------------------------------------------------------------------------------------------- Total Number of Purchased if - ------------------------------------------------------------------------------------------------------------------- Firm Shares Maximum Option - ------------------------------------------------------------------------------------------------------------------- Underwriter to be Purchased Exercised ----------- --------------- -------------- - ------------------------------------------------------------------------------------------------------------------- Goldman, Sachs & Co........................................... - ------------------------------------------------------------------------------------------------------------------- Credit Suisse First Boston Corporation........................ - ------------------------------------------------------------------------------------------------------------------- FleetBoston Robertson Stephens Inc............................ - ------------------------------------------------------------------------------------------------------------------- Invemed Associates LLC........................................ - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Total................................................. - -------------------------------------------------------------------------------------------------------------------
20 SCHEDULE II Schedule IIA: Russell J. Howard Russell and Maureen Howard Trust Simba Gill Michael Rabson Willem P.C. Stemmer John Bedbrook Howard A. Simon Norman Kruse Isaac Stein Stein 1995 Revocable Trust Stein Partners Robert J. Glaser M.R.C. Greenwood Adrian Hennah Gordon Ringold Gregory Zarucki Ringold 1998 Trust Alexander Zarucki Ringold 1998 Trust Melanie Gault-Ringold 1998 Trust George Poste Julian N. Stern Glaxo Wellcome International BV Glaxo Wellcome plc Technogen Associates, L.P. Technogen Enterprises, L.L.C. Lombard Odier & Cie Schedule IIB: R.A. Investment Group and Affiliates R.A. Investment Group Pioneer Hi-Bred International Pioneer Overseas Corporation Alejandro Zaffaroni Zaffaroni Family Partnership L.P. Zaffaroni Revocable Trust 1/24/86 Alejandro & Lida Zaffroni Revoc. Trust UTA 1-24-86 Elisa Zaffaroni Trust UTA 4-15-89 Charles Adam Zaffaroni Trust UTD 12/29/88 Alexander Peter Zaffaroni Trust UTD 12/29/88 The Zaffaroni Family Partnership L.P. Alexander Peter Zaffaroni Trust UTD 04/15/89 Charles Adam Zaffaroni Trust UTD 04/15/89 Miller Family Investors, L.L.C. Jerry Cohn [Other Directed Share Purchasers Allocated Shares by Dr. Zaffaroni and R.A. Investment Group] 21 EX-5.1 3 OPINION OF HELLER EHRMAN WHITE & MCAULIFFE [Heller Ehrman White & McAuliffe Letterhead] EXHIBIT 5.1 March 2, 2000 Maxygen, Inc. 515 Galveston Drive Redwood City, California 94063 22800-0001 Re: Registration Statement on Form S-1 Dear: Ladies and Gentlemen: We have acted as counsel to Maxygen, Inc., a Delaware corporation (the "Company"), in connection with the Registration Statement on Form S-1 to be filed with the Securities and Exchange Commission on March 3, 2000 (as may be further amended or supplemented, the "Registration Statement") for the purpose of registering under the Securities Act of 1933, as amended, 1,725,000 shares of its authorized but unissued Common Stock, par value $.0001 per share (the "Shares"). The Shares, which include up to 225,000 shares of the Company's Common Stock issuable pursuant to an over-allotment option granted to the underwriters, are to be sold pursuant to an Underwriting Agreement (the "Underwriting Agreement") among the Company and Goldman, Sachs & Co., Robertson Stephens, Invemed Associates and Credit Suisse First Boston, as representatives of the several underwriters named in Schedule I to the Underwriting Agreement. We have assumed the authenticity of all records, documents and instruments submitted to us as originals, the genuineness of all signatures, the legal capacity of natural persons and the conformity to the originals of all records, documents and instruments submitted to us as copies. In rendering our opinion, we have examined the following records, documents and instruments: (a) The Amended and Restated Certificate of Incorporation of the Company, certified by the Delaware Secretary of State as of March 2, 2000, and certified to us by an officer of the Company as being complete and in full force as of the date of this opinion; (b) The Amended and Restated Bylaws of the Company certified to us by an officer of the Company as being complete and in full force and effect as of the date of this opinion; (c) A Certificate of an officer of the Company (i) attaching records certified to us as constituting all records of proceedings and actions of the Board of Directors, including any committee Maxygen, Inc. March 2, 2000 Page 2 thereof, and stockholders of the Company relating to the Shares, and the Registration Statement, and (ii) certifying as to certain factual matters; (d) The Registration Statement; and (e) A letter from ChaseMellon Shareholder Services, L.L.C., dated as of March 2, 2000, as to the number of shares of the Company's Common Stock that were outstanding on March 1, 2000. This opinion is limited to the federal law of the United States of America and the General Corporation Law of the State of Delaware, and we disclaim any opinion as to the laws of any other jurisdiction. We further disclaim any opinion as to any other statute, rule, regulation, ordinance, order or other promulgation of any other jurisdiction or any regional or local governmental body or as to any related judicial or administrative opinion. Based upon the foregoing and our examination of such questions of law as we have deemed necessary or appropriate for the purpose of this opinion, and assuming that (i) the Registration Statement becomes and remains effective during the period when the Shares are offered and sold, (ii) the Underwriting Agreement signed by the parties thereto conforms in all material respects to the draft filed as Exhibit 1.1 to the Registration Statement, (iii) the currently unissued Shares to be sold by the Company are issued, delivered and paid for in accordance with the terms of the Underwriting Agreement, (iv) appropriate certificates evidencing the Shares will be executed and delivered by the Company, and (v) all applicable securities laws are complied with, it is our opinion that, when issued by the Company, the currently unissued Shares covered by the Registration Statement will be legally issued, fully paid and nonassessable. This opinion is rendered to you in connection with the Registration Statement and is solely for your benefit. This opinion may not be relied upon by you for any other purpose, or relied upon by any other person, firm, corporation or other entity for any purpose, without our prior written consent. We disclaim any obligation to advise you of any change of law that occurs, or any facts of which we may become aware, after the date of this opinion. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. Very truly yours, /s/ Heller Ehrman White & McAuliffe EX-10.15 4 COLLABORATIVE RESEARCH EXHIBIT 10.15 THIS COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT (the "Agreement") is made as of the 19th day of January, 2000 (the "Effective Date") BETWEEN TECHNOLOGICAL RESOURCES PTY LIMITED (ACN 002 183 557) through its business unit, Research and Technology Development, of 55 Collins Street, Melbourne, Victoria 3000, a wholly owned subsidiary of Rio Tinto Limited ("TRPL") AND MAXYGEN INC. of 515 Galveston Drive, Redwood City, CA 94063, United States of America ("MAXYGEN") PURPOSE OF AGREEMENT A. TRPL wishes to develop Carbon Sequestration technologies for use in connection with *******, and for other purposes more generally. B. MAXYGEN has expertise in developing biotechnologies, particularly those relating to gene shuffling, across a broad range of applications. C. TRPL and MAXYGEN wish to collaborate through the sharing of their expertise to develop a particular technology for Carbon Sequestration. D. The purpose of this Agreement is to establish the terms and conditions upon which the Project will be established, carried out and commercialized by TRPL and MAXYGEN. IT IS AGREED 1. DEFINITIONS AND INTERPRETATION For purposes of this Agreement, the following defined words shall have the meanings indicated: 1.1 "Affiliate" means any corporation, firm, limited liability company, partnership or other entity that directly or indirectly controls or is controlled by or is under common control with MAXYGEN. As used in this paragraph, control includes, without limitation, ownership, directly or through one or more affiliates, of fifty percent (50%) or more of the shares of stock entitled to vote for the election of directors, in the case of a corporation, or fifty percent (50%) or more of the equity interests in the case of any other type of legal entity, status as a general partner in any partnership, or any other arrangement whereby a party controls or has the right to control the board of directors or equivalent governing body of a corporation or other entity, or if such level of ownership or control is prohibited in any country, any entity owned or controlled by or owning or THE SYMBOL "*******" IS USED TO INDICATE THAT A PORTION OF THE EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. controlling at the maximum control or ownership right permitted in the country where such entity exists; 1.2 "Agreement" means this agreement, including its Schedules, and any amendment to it agreed to in writing by the Parties; 1.3 "Applications" means each of the TRPL Coal Applications, the Non-TRPL Coal Applications, the Biomass Applications, the Non-Renewable Energy Applications, and the Value Added Products Applications; 1.4 "Background Technology" means the MAXYGEN Background Technology and/or the TRPL Background Technology, as appropriate; 1.5 "Biomass" means organisms, living or dead, or the products of living organisms; 1.6 "Biomass Applications" means *******; 1.7 "Business Unit" means the TRPL Business unit, Research and Technology Development; 1.8 "Carbon Entity" means the joint venture vehicle or any other legal entity (if any) established by the Parties or with the authority of the Parties, to Exploit the Project Technology for the Applications; 1.9 "Carbon Sequestration" means *******; 1.10 "Confidential Information" means all know-how, financial information and other commercially valuable information in whatever form including unpatented inventions, trade secrets, formulae, graphs, drawings, designs, biological materials, samples, devices, models and other materials of whatever description which a Party discloses to the other Party and designates as Confidential Information at the time of disclosure. The following are exceptions to such information: (a) information which is already in the public domain; (b) information which hereafter becomes part of the public domain otherwise than as a result of an unauthorized disclosure by the recipient Party or its representatives; (c) information which is or becomes available to the recipient Party, other than under an obligation of confidentiality, from a Third Party lawfully in possession of such information and who has the lawful power to disclose such information to the recipient Party; (d) information which is rightfully known by the recipient Party (as shown by its written records) prior to the date of disclosure to it hereunder; or (e) information which is independently developed by the recipient Party without any use of or reference to any Confidential Information of the other Party; 2 1.11 "Contributions" means the contributions (including funding, personnel, research activities and equipment, etc.) a Party will make to the Project as specified in the Project Plan; 1.12 "Control" or "Controlled" means possession of the ability to grant the licenses or sublicenses as provided for herein without violating the terms of any agreement or other arrangement with any Third Party; 1.13 "Exploit" and/or "Exploitation" means to use, make, have made, import, lease, sell, sublicense or otherwise dispose of to a Third Party, or offer to use, make, lease, sell, sublicense or otherwise dispose of to a Third Party; 1.14 "Feasibility Milestone" means Decision Milestone 2 (as defined in the Project Plan) for the Project established in the Project Plan; 1.15 "Gene" means any gene selected for Shuffling in the Project by the Management Committee pursuant to clause 3.2; 1.16 "Gene Variant" means any altered form of a Gene which meets the applicable criteria agreed by the Management Committee and is made in connection with the Project through the use of Shuffling Technology; 1.17 "Improvements" means any enhancement, modification, adaptation or extension to the Materials made by MAXYGEN or jointly by TRPL and MAXYGEN, and all Intellectual Property Rights subsisting in them; 1.18 "Intellectual Property Rights" means statutory and other proprietary rights in respect of trade marks, patents, circuit layouts, copyrights, confidential information, know-how and all other rights with respect to Intellectual Property as defined in Article 2 of the Convention Establishing the World Intellectual Property Organization of July 1967; 1.19 "Management Committee" means the management committee established pursuant to clause 3; 1.20 "Manufacturing Costs" means, with respect to Products sold by MAXYGEN (and/or its Affiliates) or TRPL (and/or RIO TINTO Group Members), as the case may be, (i) ******* costs related to the manufacture of Products, by MAXYGEN (and/or its Affiliates) or TRPL (and/or RIO TINTO Group Members), as the case may be, including without limitation, costs for personnel, materials, quality control, regulatory compliance, administrative expenses, subcontractors, fixed and variable manufacturing overhead costs and business unit or division *******, and the like, as determined and allocated in accordance with generally accepted accounting principles (GAAP), consistently applied by the applicable Party, excluding *******, or (ii) with respect to Products purchased by MAXYGEN (and/or its Affiliates) or TRPL (and/or RIO TINTO Group Members), as the case may be, from a Third Party manufacturer, ******* paid to the manufacturer for such Products; 3 1.21 "Materials" means any chemical or biological substances including, without limitation, any: (a) organic or inorganic chemical element or compound; (b) gene; (c) vector or construct, plasmid, phage or virus; (d) host organism, including bacteria and plant cells; (e) eukaryotic or prokaryotic cell line or expression system; (f) protein, including any peptide or amino acid sequence, enzyme, antibody or protein conferring targeting properties and any fragment of a protein or peptide or enzyme; (g) genetic material, including any genetic control element (e.g., promoters), Gene, Gene Variant or Shuffled Gene; or (h) assay or reagent; 1.22 "MAXYGEN Background Technology" means all Materials provided by MAXYGEN for use in the Project and Intellectual Property Rights of MAXYGEN which are necessary for the conduct of the Project and made available by MAXYGEN for the conduct of the Project; 1.23 "MAXYGEN Field" means all uses except *******; 1.24 "Net Revenues" with respect to a particular Product means Net Sales for such Product, less: (a) an amount for such manufacturing equal to ******* of the Manufacturing Costs related to such Products; and (b) any expenses incurred or accrued in connection with the installation, packaging, labeling, marketing, sale or other disposition of the Products by MAXYGEN (and/or its Affiliates) or TRPL (and/or RIO TINTO Group Members), as the case may be, and general and administrative expenses relating to the preceding, as determined and allocated in accordance with generally accepted accounting principles, consistently applied by the applicable Party. 1.25 "Net Sales" means the amounts (including, without limitation, *******) received by MAXYGEN (and/or its Affiliates) or TRPL (and/or RIO TINTO Group Members), as the case may be, from Third Parties (including without limitation Sublicensees) with respect to the Exploitation of Products, less: (i) rebates, credits and cash, trade and quantity discounts, actually taken, (ii) excise taxes, sales, use, value added, and other consumption taxes and other compulsory payments to governmental authorities, actually paid, (iii) the cost of any shipping packages and packing, if billed separately, (iv) insurance costs and outbound transportation charges prepaid or allowed, (v) import and/or export duties and tariffs actually paid, and (vi) amounts allowed or credited due to returns or *******. All transfers of Products between MAXYGEN and/or its Affiliates or TRPL and/or RIO TINTO Group Members, as the case may be, shall be disregarded for purposes of computing Net Sales, unless the purchaser is the end-user of such Product; 1.26 "Non-Renewable Energy Applications" means *******; 1.27 "Non-TRPL Coal Applications" means *******; 4 1.28 "Objective" means the development, through the use of Shuffling Technology, of Shuffled Genes which have an enhanced capability in Carbon Sequestration with a view to Exploitation by the Parties as set forth in this Agreement; 1.29 "Parties" means the parties to this Agreement and their successors and permitted assigns and "Party" means one of them; 1.30 "Phase I" means the first phase of the Project as described in the Project Plan, up to achievement of the Feasibility Milestone; 1.31 "Phase II" means the second phase of the Project involving further research for the scale-up the development of a prototype apparatus for the Applications utilizing Shuffled Genes or proteins expressed therefrom; 1.32 "Phase II Milestones" means the milestones established by the Parties in writing at the commencement of Phase II which milestones are directed at achieving the Objective; 1.33 "Product" means any product that is, or incorporates or is made through the use of one or more Shuffled Genes or proteins expressed therefrom. Any process utilizing one or more Shuffled Genes or proteins expressed therefrom shall also be considered a Product; 1.34 "Project" means the research activities comprised in Phase I and Phase II which are to be undertaken by the Parties pursuant to this Agreement as described more particularly in the Project Plan; 1.35 "Project Commencement Date" means the date thirty (30) days after the Effective Date or such earlier date as the Parties may agree in writing to commence Phase I of the Project; 1.36 "Project Plan" means the initial plan referred to in clause 2.1 which has been agreed by the parties as of the Effective Date for the conduct of the Project, which plan may be amended from time to time by the Management Committee; 1.37 "Project Technology" means all ideas, inventions, discoveries, innovations, data, software, databases, results, information, reports, samples, Materials, Improvements, Shuffled Genes, prototypes and artifacts, whether or not patentable, instructions, processes and formulae, including, without limitation, biological, chemical, physical and analytical, safety, manufacturing and quality control data and information, in each case, which is/are conceived or reduced to practice or otherwise developed or made or the utility of which for the Objective is determined or discovered by either Party, or a Third Party on behalf of a Party, as part of the conduct of the Project during the Project Term, and all Intellectual Property Rights subsisting in the foregoing; 1.38 "Project Term" means the period beginning on the Project Commencement Date and ending on the third anniversary of the Project Commencement Date or as extended or subject to earlier termination in accordance with clause 2.2; 5 1.39 "Revenues" shall mean: (a) the ******* by MAXYGEN (and/or its Affiliates) or TRPL (and/or RIO TINTO Group Members), as the case may be, for: (1) ******* from Sublicensees with respect to *******; (2) ******* from Sublicensees with respect to *******; (3) ******* of Products by Sublicensees; (4) ******* for Products; and (5) all other consideration (including, without limitation, ******* received by MAXYGEN (and/or its Affiliates) or TRPL (and/or RIO TINTO Group Members), as the case may be, attributable to the use of one or more Products; LESS, in the case of (3), (4) and/or (5) above, on a Product-by- Product basis, amounts paid by MAXYGEN (and/or its Affiliates) or TRPL (and/or RIO TINTO Group Members), as the case may be, to Third Parties for Intellectual Property Rights to manufacture, use, import or sell such Product. (b) In the event that a Product is sold in combination with one or more other product(s), components, ingredients or active agent(s) which are not Products, Revenues from such sales of such Product shall be calculated by multiplying the Revenues of that combination by the fraction A/(A + B), where A is the gross selling price of the Product sold separately and B is the gross selling price of the other product, components, ingredient or active agent(s) sold separately. In the event that no such separate sales are made by the Party, Net Sales for revenue sharing determination shall be as reasonably allocated by the Party between such Product and such other product, components, ingredient or agent, based upon their relative importance and proprietary protection. In the event that the other Party believes such allocation is inequitable and the Parties are unable to resolve such dispute after bona fide negotiations in good faith, the matter may be submitted to arbitration pursuant to clause 23 below. 1.40 "RIO TINTO Associate" means a corporation or unincorporated joint venture or other business association regulated by contractual arrangement in which, as of December 31, 1999, a RIO TINTO Group Member has: (a) not less than a 40% shareholding or participating interest; or (b) if less than a 40% shareholding or participating interest, a shareholding or participating interest of at least 25%, provided that such shareholding or participating interest is equal to or greater than any other shareholding or participating interest; 6 1.41 "RIO TINTO Group Member" means Technological Resources Pty Limited, Rio Tinto Corporation plc (of 6 St James's Square, London, England), Rio Tinto Limited, and all RIO TINTO Associates having such status as of 31 December 1999; 1.42 "Schedule" means any schedule to this Agreement; 1.43 "Shuffled Gene" means (i) any Gene Variant that the Management Committee designates as meeting applicable criteria established by the Management Committee, and (ii) any Shuffled Gene Derivative; 1.44 "Shuffled Gene Derivative" means any modified form of a Shuffled Gene designated by the Management Committee, which modification is developed from or made to the Shuffled Gene by any means, including without limitation, any codon modified variant, splice variant, mutation, derivative or variant of a Shuffled Gene, and any fragment(s) of the preceding; 1.45 "Shuffle", "Shuffled" and "Shuffling" means the recombination and/or rearrangement and/or mutation of genetic material for the creation of genetic diversity using intellectual property and/or tangible property owned or Controlled by MAXYGEN; 1.46 "Shuffling Technology" means techniques, methodologies, processes, materials and/or instrumentation useful for Shuffling, and generally applicable screening techniques, methodologies, or processes of using the resulting genetic material to identify potential usefulness; 1.47 "Sublicensee" means an entity (other than Affiliates in the case of MAXYGEN and RIO TINTO Group Members in the case of TRPL) to whom TRPL or MAXYGEN, as the case may be, has granted a license or sublicense to Exploit Products; 1.48 "Third Party" means any person other than TRPL, a RIO TINTO Group Member, MAXYGEN, or an Affiliate of MAXYGEN; 1.49 TRPL Background Technology" means all Materials provided by TRPL for use in the Project and Intellectual Property Rights of TRPL which are necessary for the conduct of the Project and made available by TRPL for the conduct of the Project; 1.50 "TRPL Coal Applications" means *******; 1.51 "TRPL Field" means *******. 1.52 "Value Added Products Applications" means *******. 1.53 Interpretation. In this Agreement, except where the context indicates to the contrary: (a) the expression "person" includes an individual, a body corporate, a joint venture, a trust, an agency or other body; 7 (b) words importing the singular will include the plural (and vice versa) and words denoting a given gender will include all other genders; (c) headings are for convenience only and will not affect interpretation of this Agreement; (d) all monetary amounts are expressed in United States currency; (e) the Schedule forms part of this Agreement. 2. PROJECT AND REPORTING 2.1 Project Plan. The Parties will conduct the Project with the goal of achieving the Objective in accordance with the Project Plan. The Project Plan will establish: (i) the scope of the development activities which will be performed during each of Phase I and, if applicable, Phase II; (ii) objectives, work plan activities and time schedules with respect to the Project; and (iii) the Feasibility Milestone for Phase I and, if applicable, Phase II Milestone(s). The initial Project Plan has been agreed by the Parties in writing as of the Effective Date. The Management Committee will review the Project Plan on an ongoing basis and may make changes to it. 2.2 Term. The term of Phase I of the Project will commence on the Project Commencement Date and, unless terminated earlier due to the termination of the Agreement pursuant to clause 2.11 or clause 14, or extended by mutual agreement of the Parties, will terminate upon completion of the Project Term. The term of Phase II of the Project, if any, shall be as agreed by the Parties. 2.3 Phase I and Phase II. (a) Completion of Phase I. Phase I will be completed upon achievement of the Feasibility Milestone or, if earlier, expiration of the Project Term. (b) Negotiation of Phase II. Upon achievement of the Feasibility Milestone, the Parties will promptly negotiate bona fide in good faith (i) whether to conduct Phase II, (ii) the duration of Phase II, (iii) the research funding to be provided in connection with Phase II, and (iv) appropriate modifications to the Project Plan to establish the Phase II Milestone(s) and the activities to be undertaken by the Parties in Phase II. MAXYGEN agrees for a period of six (6) months following the earlier of (a) achievement of *******, or (b) the expiration of the Project Term (such six month period the "Phase II Negotiation Period"), that TRPL shall be MAXYGEN's preferred partner for the conduct of Phase II or, subject to clauses 2.12 and 12.4, *******, and that during the Phase II Negotiation Period MAXYGEN will not, without TRPL's consent, negotiate with any Third Party to enter into a collaboration to conduct Phase II research or, subject to clauses 2.12 and 12.4, *******. TRPL agrees that if it is not interested in pursuing Phase II or other *******, it will promptly notify MAXYGEN in writing. If TRPL notifies MAXYGEN that it is not interested in pursuing Phase II research prior to expiration of the Phase II Negotiation Period, or if the Parties do not agree in 8 writing upon the items referred to in (i) through (iv) above during the Phase II Negotiation Period, then (a) the Project shall terminate, (b) neither Party shall have any obligation to conduct research in Phase II, (c) TRPL shall have no obligations to provide research funding for Phase II, (d) MAXYGEN shall be free to pursue such research on its own or with any Third Party, and (e) TRPL shall have no rights to use any Project Technology for any purpose. (c) Phase II. If the Parties agree in writing (i) to conduct Phase II, (ii) the duration of Phase II, (iii) the research funding to be provided in connection with Phase II, and (iv) appropriate modifications to the Project Plan to establish the Phase II Milestone(s) and the activities to be undertaken by the Parties in Phase II, then the Parties shall devote the agreed-upon resources to undertake the Phase II research activities, and TRPL shall provide further development funding at the agreed level for the conduct of Phase II. Phase II will be completed upon completion of the Phase II Milestones or, if earlier, expiration of the time period agreed by the Parties for the conduct of Phase II, unless terminated earlier in accordance with clause 14. 2.4 Efforts. Each of MAXYGEN and TRPL will conduct activities in connection with the Project as described in the Project Plan. The Parties agree to use reasonable efforts to carry out the Project and make their Contributions in the manner and at the times specified in the Project Plan. 2.5 Project Funding. (a) TRPL Expenses. TRPL shall be responsible for the expense of its own participation in the Project. (b) TRPL Funding. TRPL shall pay to MAXYGEN funding for Phase I of the Project of U.S. ******* each year of Phase I of the Project for total amount of U.S. *******. The amount of funding TRPL will pay to MAXYGEN for Phase II of the Project, if any, shall be agreed by the parties pursuant to clause 2.3(c). MAXYGEN shall have no obligation to expend any amount or incur any expense in connection with the Project except the amounts paid by TRPL to MAXYGEN pursuant to this clause 2.5(b). All payments pursuant to this clause 2.5(b) will be made inclusive of any taxes or any other charge payable in respect of such payment or the satisfaction by a Party of its obligations under this Agreement or any other matter arising out of, connected with or related to, this Agreement (including, without limitation, any applicable goods and services taxes or value added taxes, sales taxes or withholding taxes). (c) Timing of Payments. The amounts to be paid to MAXYGEN in connection with the Project will be paid quarterly, in advance. The initial payment for the first quarter of the first year of the Project will be made within fourteen (14) days after the Project Commencement Date, and subsequent payments will be made on or before the applicable quarterly anniversaries of the Project Commencement Date. 9 (d) Third Party Technology. MAXYGEN will be responsible for all payments due to Third Parties for the acquisition of licenses to intellectual property necessary for the practice of Shuffling Technology per se in the Project, and the costs of negotiating and preparing such licenses. If the Management Committee agrees that it is necessary for MAXYGEN to acquire any license to any other intellectual property or technology (e.g., a gene or Gene) from a Third Party for the conduct of MAXYGEN's activities in connection with the Project, the Management Committee will determine how such arrangements might proceed and what costs TRPL and/or MAXYGEN should contribute (if any) to the cost of acquiring the necessary license; provided, if the Management Committee does not agree upon allocation of costs between the Parties, then MAXYGEN shall have no liability hereunder for not acquiring or maintaining such licenses, or for failing to undertake or perform any research activities set forth in the Project Plan for which such license is necessary. (e) Subcontracts. With the prior written approval of the Management Committee, MAXYGEN may enter into agreements with Third Parties for the performance of activities in furtherance of the Project. If any such agreement is for the performance of activities in furtherance of the Project for which TRPL will be responsible for paying, TRPL shall be responsible for directly paying to the third party all compensation required to be paid pursuant to such Agreement and/or for reimbursing MAXYGEN for all expenses incurred by MAXYGEN in connection with such agreements, including, without limitation, the out-of-pocket costs of negotiating and preparing such agreements. (f) Capital Expenditures. If the conduct of the Project necessitates the purchase of specialized capital equipment, the Management Committee will determine whether such equipment will be purchased; provided, it is understood that TRPL shall not be obligated without its consent to provide funding in excess of the amounts set forth in clause 2.5(b) for Phase I or such funding as the Parties may agree for Phase II pursuant to clause 2.3. If the Management Committee approves any such purchase, TRPL and MAXYGEN in proportions to be agreed by them, will pay the full cost (including costs for taxes, shipping, etc.) for such purchases. Neither Party will have any obligation to purchase or to contribute to the purchase of any such equipment unless both Parties agree pursuant to this clause and provide reimbursement as agreed, and neither Party will have any liability hereunder for not purchasing or otherwise obtaining access to such equipment. 2.6 Technology Advancement Fees. TRPL will pay to MAXYGEN an annual technology advancement fee of ******* each year during Phase I of the Project. Such funds shall be used by MAXYGEN for the development of Materials or Intellectual Property Rights which may be useful for the conduct of the Project. The first such fee will be paid to MAXYGEN on or before the Project Commencement Date and each subsequent fee will be paid to MAXYGEN on or before each anniversary of the Project Commencement Date. Such amounts will not be refundable nor creditable against other amounts due to MAXYGEN under this Agreement, and will be paid in addition to any amounts due from TRPL pursuant to Section 2.5(b). 10 2.7 Contributions to Project. (a) Phase I. During Phase I of the Project, (i) TRPL will provide funding for the Project as set forth in clause 2.5 and will provide representatives on the Management Committee appropriately qualified to perform their supervisory and management functions on the Management Committee, and (ii) MAXYGEN will: (i) Use reasonable endeavors to ensure the success of the Project, including without limiting the foregoing, (where required by the Project Plan) devoting sufficient research personnel, and laboratory facilities; (ii) Engage personnel appropriately qualified to perform (where required by the Project Plan), supervise, analyze and report on all the results conducted pursuant to the Project; and (iii) Deploy such scientific, technical, financial and other resources to accord the Project such priority as is necessary to conduct the Project as specified in the Project Plan. (b) Phase II. During Phase II of the Project, each Party will: (i) Use reasonable endeavors to ensure the success of the Project, including without limiting the foregoing, (where required by the Project Plan) devoting sufficient research personnel, and laboratory facilities; (ii) Engage personnel appropriately qualified to perform (where required by the Project Plan), supervise, analyze and report on all the results conducted pursuant to the Project; and (iii) Deploy such scientific, technical, financial and other resources to accord the Project such priority as is necessary to conduct the Project as specified in the Project Plan. 2.8 Selection of Genes for Shuffling. With respect to any gene that the Management Committee considers for Shuffling in the Project, both Parties shall inform the Management Committee of any information of which it is aware with respect to Third Party patent applications or patents which may relate to the use of the gene in the Project and/or the development or commercialization of Products based on Shuffled Genes resulting from the Shuffling of such gene in the Project; provided, neither Party shall have any obligation to provide the Management Committee with any document which would result in (i) a breach of the attorney/client privilege with respect thereto or (ii) a breach of an obligation of confidentiality owed to a Third Party. It is understood that the Parties anticipate that MAXYGEN will propose genes for Shuffling in the Project. The Management Committee shall have the sole authority to select the Genes for use in the Project. The Management Committee shall consider technical feasibility and freedom to operate risks for the commercialization of Products in the selection of Genes. 11 2.9 Materials; Limited Use. MAXYGEN shall provide reasonable quantities of Materials (which may include, without limitation, Shuffled Genes and/or Gene Variants which are potential Shuffled Genes) to TRPL as set forth in the Project Plan, which TRPL shall use solely for research activities in the conduct of the Project approved in advance by the Management Committee. TRPL shall provide a written summary of the results of all such research activity to the Management Committee. In the event that TRPL obtains rights to Exploit one or more Shuffled Genes as set forth in clause 5.2 or 5.3, TRPL shall also have the right to use Shuffled Genes provided hereunder for such purpose. Except in connection with the practice of the rights granted to TRPL in clause 5.2 and/or 5.3 hereof, TRPL shall not without the express prior written consent of MAXYGEN, (i) transfer any of the Shuffled Genes, Gene Variants or other Materials provided by MAXYGEN to any Third Party, (ii) use the data and information obtained from the research activities conducted using such Shuffled Genes, Gene Variants or other Materials provided by MAXYGEN (including without limitation any sequence information regarding the Shuffled Genes or Gene Variants or the proteins expressed therefrom) for any purpose other than the purpose of conducting research activities in the Project approved in advance by the Management Committee, (iii) authorize any Third Party to obtain or use any of the Shuffled Genes, Gene Variants or other Materials provided by MAXYGEN for any purpose, or (iv) use any data relating to any Shuffled Genes, Gene Variants or other Materials provided by MAXYGEN, including without limitation consensus sequences or structural motifs, to reverse engineer, reconstruct, synthesize or otherwise modify or copy any Shuffled Gene or Gene Variant or any other gene or product with similar biological activities, or to attempt the same. 2.10 Reporting. MAXYGEN will provide quarterly written reports (the "Report") to the Management Committee no less than fourteen (14) days prior to any scheduled meeting. Each Report will document the conduct of the Project, the results of the Project, expenditures incurred and milestones achieved for the previous quarter. 2.11 Termination. (a) In the event that either Party materially breaches its obligations with respect to the conduct of the Project, the other Party shall have the right to terminate the Project and this Agreement as set forth in clause 14.2 below. (b) In the event that Decision Milestone 1 (as set forth in the Project Plan) has not been met on or before the date ******* months following the Project Commencement Date, with three (3) months written notice, TRPL shall have the right to terminate the Project and the Agreement. In the event of such termination, (i) TRPL shall have no further obligation to provide Contributions following the effective date of such termination, and (ii) MAXYGEN shall retain all rights to the Project Technology as set forth in clause 5.1. (c) The Parties may mutually agree to terminate the Project and the Agreement as provided in clause 14.3, below. 12 2.12 Further Agreements Relating to *******. If Maxygen wishes to enter an agreement with a Third Party during the Project with respect to research relating to *******, Maxygen shall have the right to do so provided that (i) such agreement would not diminish MAXYGEN's obligations to the Project nor affect the rights and licenses granted to TRPL in clause 5.2(a) below, and (ii) MAXYGEN provides TRPL notice of the agreement prior to its execution. MAXYGEN agrees to discuss with TRPL in bona fide good faith the impact of any such an agreement on the Project, and subject to its confidentiality obligations, to identify to TRPL the other party to such agreement, the nature of the arrangement and the activities to be performed under such an agreement. 3. PROJECT MANAGEMENT 3.1 Membership. The management of the Projects will be carried out by the Management Committee consisting of two (2) representatives of each of TRPL and MAXYGEN. One representative from each of TRPL and MAXYGEN will have technical expertise and one representative from each of TRPL and MAXYGEN will have management/commercial expertise. A MAXYGEN representative will serve as chairperson of the Management Committee. A Party may change any of its appointments to the Management Committee at any time by written notice to the other Party. From time to time, the Management Committee may establish subcommittees to oversee particular activities. 3.2 Authority. The Management Committee will be responsible for the oversight, direction and management of the Project. The responsibilities of the Management Committee will include: (i) selection of the Genes which will be Shuffled in the Project as set forth in clause 2.8, (ii) establishment of the criteria for identification of Shuffled Genes, (iii) designation of Gene Variants as Shuffled Genes (iv) review and modification of the Project Plan, (v) ensuring satisfactory flow of information by the review of quarterly reports and (vi) approving the acquisition of capital equipment and Third Party licenses. Quarterly reports will be available to all members of the Management Committee at least fourteen (14) days prior to the meeting. 3.3 Decisions. A quorum for the Management Committee will be the full membership of the Management Committee as defined in clause 3.1. All decisions of the Management Committee must be unanimous and recorded in writing. If the Management Committee is unable to make a unanimous decision, the terms of the then-current Project Plan shall remain in effect. In the event that a member of the Management Committee believes that the then-current Project Plan should be changed and the Management Committee cannot agree, then the chairperson of the Management Committee will seek to resolve the matter pursuant to clause 23.1, but clauses 23.2, 23.3 and 23.4 shall not apply to the resolution of such matters. 3.4 Meetings. The Management Committee will meet on a quarterly basis in person or as otherwise agreed and will, additionally, communicate regularly by telephone, facsimile and/or video conference. Attendance at meetings may be in person, by telephone or by televideo conference, and will be at the respective expense of the participating Parties. Each Party recognizes the importance of the Management Committee to the success of the Project and will use diligent efforts to cause all of its representatives to attend all 13 meetings of the Management Committee. With the prior approval of the Management Committee, other personnel of the Parties may attend Management Committee meetings. 3.5 Minutes. The chairperson of the Management Committee will appoint a person to keep accurate minutes of its meetings. Draft minutes will be prepared and delivered to each Party within twenty (20) days after each meeting. Draft minutes will be edited by each Party's Management Committee representatives and will be adopted in final form with their approval and agreement and will record the final decisions made by the Management Committee. Minutes of the Management Committee meetings will be treated as Confidential Information of each Party. 4. INTELLECTUAL PROPERTY RIGHTS 4.1 Ownership. (a) Background Technology. All rights to a Party's Background Technology remain vested solely in that Party. (b) Project Technology. MAXYGEN will own all Project Technology regardless of which Party conceives, reduces to practice or otherwise develops such Project Technology. Subject to clause 4.1(a) and the license rights granted pursuant to this Agreement to TRPL, TRPL agrees to assign and hereby irrevocably assigns to MAXYGEN its entire right, title and interest in the Project Technology and Improvements. TRPL agrees to execute in a timely manner such documents as MAXYGEN may request to document and perfect MAXYGEN's sole ownership of the Project Technology, including all Intellectual Property Rights subsisting in it. (c) Governing Law. It is understood and agreed that inventorship of Project Technology (whether or not patentable) will be determined in accordance with United States patent laws or the law of California, as applicable. 4.2 Research Licenses. Each Party grants to the other Party a royalty-free, non-exclusive, non-transferable right to use its Background Technology to the extent necessary for the carrying out of the Project during the Project Term, and solely to carry out the Project; provided, (i) nothing hereunder grants TRPL any right or license under the MAXYGEN Background Technology to practice any Shuffling Technology, and (ii) nothing hereunder grants MAXYGEN any right or license under the TRPL Background Technology for any use other than performance of the Project. 4.3 Cooperation. Each Party will do all things reasonably necessary to give effect to the ownership and licensing arrangements referred to in this clause 4. 4.4 Third Party Rights. TRPL agrees that MAXYGEN is in the business of Shuffling genes on behalf of Third Parties, and that, subject to the limitations expressed in clause 12.4 of this Agreement, MAXYGEN has granted and will grant to Third Parties rights to acquire licenses for genes derived from Shuffling, provided always that MAXYGEN will not, 14 during the Project, grant any licenses that are inconsistent with, or would prevent the granting of, the licenses to TRPL described in clause 5.2(a). It is understood and agreed by TRPL that, even if MAXYGEN complies with its obligations under this Agreement, genes derived through Shuffling activities that MAXYGEN conducted with Third Parties in the course of MAXYGEN's other business activities may result in Third Party patent applications and patents, including patent applications and patents owned by such Third Parties, or owned jointly by MAXYGEN and such Third Parties, which could conflict with patent applications and patents owned by TRPL. MAXYGEN will use its reasonable efforts to avoid such conflict and, unless TRPL is damaged as a proximate result of such a material breach by MAXYGEN of this clause 4.4, then MAXYGEN will have no liability under this Agreement with respect to any such conflict. 4.5 No Implied Licenses. No rights or licenses with respect to any intellectual property owned by MAXYGEN or TRPL are granted or will be deemed granted under this Agreement or in connection with it, other than those rights expressly granted in this Agreement. 5. COMMERCIALIZATION OF PROJECT TECHNOLOGY 5.1 Phase I. Except as provided in clause 5.2 or 12.4 below, or as the Parties may agree in writing as set forth in clause 5.3 below, MAXYGEN shall have the right to use, sublicense and otherwise Exploit the Project Technology without obligation to obtain consent of, pay royalties to, or otherwise account to, TRPL, and TRPL will have no rights to use MAXYGEN Background Technology or Project Technology for any purpose. 5.2 Phase II. If the Parties commence the conduct of Phase II as described in clause 2.3 above, then each Party will have the right to Exploit the Project Technology and the Intellectual Property Rights subsisting in that technology for the Applications as set out in this clause 5.2, unless the Parties agree otherwise in writing as set forth in clause 5.3, below. (a) To TRPL. (i) Commercial License. Subject to sharing of Revenues as set forth in clause 5.2(c) below, TRPL will be granted an exclusive, irrevocable, worldwide, royalty-bearing license, including the right to sub-license, to Exploit the Project Technology in the TRPL FIELD. (ii) Background Technology. In furtherance of the license granted in (i), above, and solely to the extent it is necessary to exercise the foregoing license, MAXYGEN will also grant TRPL a non-exclusive, irrevocable, worldwide license under the MAXYGEN Background Technology to Exploit the Project Technology in the TRPL Field in accordance with the foregoing license, provided, in no event shall TRPL have any right or license under the MAXYGEN Background Technology to practice any Shuffling Technology. TRPL will not be obligated, as a result of this 15 license, to pay any additional royalties to MAXYGEN beyond those specified in clause 5.2(c). (b) To MAXYGEN. Subject to sharing of Revenues as set forth in clause 5.2(c) below, and solely to the extent it is necessary for MAXYGEN to Exploit the Project Technology in the MAXYGEN Field, MAXYGEN will be granted a non-exclusive, irrevocable, royalty-bearing license to Exploit the TRPL Background Technology for the MAXYGEN Field. (c) Revenue Sharing. MAXYGEN and TRPL shall share in all Revenues on the following basis: Exploitation by TRPL (and/or RIO TINTO Group Members): Share of Revenues- ---------------------------- TRPL MAXYGEN -------- ------- (i) TRPL Coal Applications ******* ******* (ii) Non-TRPL Coal Applications ******* ******* Exploitation by MAXYGEN (and/or its Affiliates): Share of Revenues- ------------------------------- TRPL MAXYGEN -------- ------- (iii) Biomass Applications ******* ******* (iv) Non-Renewable Energy Applications ******* ******* (iv) Value Added Products Applications ******* ******* It is understood and agreed that the revenue sharing set forth in this clause 5.2(c) applies with respect to Revenues received by MAXYGEN (and/or its Affiliates) or TRPL (and/or RIO TINTO Group Members), as the case may be, attributable to the Exploitation of Products. (d) Payment Term. The Revenue sharing payments due from each Party under clause 5.2(c) shall be payable on a country-by-country and Product-by-Product basis, until the earlier of (i) ******* years following the first commercial sale or other Exploitation of such Product in such country or (ii) ******* years following the first commercial sale or other Exploitation of any Product by such Party. (e) Convenience. The Parties acknowledge that the other Party may not own or control patent applications or patents covering the manufacture, sale or use of a particular Product. However, the Parties agree that substantial value is contributed by the Parties' conduct and support of the Project in accelerated time to market, enhanced probability of success and the potential for multiple Products and, for the convenience of the Parties, the Parties (for their convenience) agree to 16 make Revenue sharing payments set forth in clause 5.2(c) during the applicable period set forth in clause 5.2(d), regardless of whether any particular Product is covered by a patent application or patent. (f) Non-Cash Consideration. MAXYGEN (and/or its Affiliates) and TRPL (and/or RIO TINTO Group Members) shall not transfer Products for consideration other than cash or cash equivalents without providing the other Party fair compensation therefore consistent with this Agreement. If MAXYGEN (and/or its Affiliates) or TRPL (and/or RIO TINTO Group Members) receives any consideration in a form other than cash or a cash equivalent (e.g., a license under other intellectual property owned or Controlled by a Third Party) as part or all of the consideration included in the definition of Net Sales and/or Revenue, then MAXYGEN or TRPL, as the case may be, shall notify the other Party, and the fair market value of the non-cash consideration received by MAXYGEN (and/or its Affiliates) or TRPL (and/or RIO TINTO Group Members), as the case may be, for such Product shall be agreed by MAXYGEN and TRPL, or if the Parties are unable to agree on such fair market value, either Party may submit such matter to arbitration pursuant to clause 23 below, in order to determine the fair market value of such consideration. 5.3 Negotiation of Carbon Entity. Upon completion of Phase II, the Parties will negotiate bona fide in good faith, for a period of three (3) months or, if the Phase II Milestones have been achieved in the Project, for a period of six (6) months (the applicable period referred to as the "Negotiation Period"), whether and on what terms the Parties may be willing to (i) establish a joint venture vehicle (the "Carbon Entity") for Exploitation of Project Technology for some or all Applications or (ii) provide for another arrangement for Exploiting the Project Technology (whether by grant to both Parties of non-exclusive rights, with right to sublicense, for Exploitation of the Project Technology for the Applications, or otherwise). It is understood that such negotiations will need to address, among other things, corporate structure of any such Carbon Entity, appropriate licenses to be granted to the Carbon Entity with respect to the Project Technology and Background Technology of the Parties, respective rights of the Parties in connection with the Carbon Entity or other agreed means of Exploitation, and appropriate revenue sharing terms. The Parties shall have no obligation to continue such negotiations after expiration of the Negotiation Period. It is understood and agreed that, except to the extent the Parties may otherwise expressly agree in writing, the exploitation rights and corresponding revenue sharing obligations set forth in clause 5.2 shall remain in effect. 6. PAYMENTS; BOOKS AND RECORDS 6.1 Reports and Payments. After the first commercial sale of a Product by a Party or its Sublicensees, or RIO TINTO Group Members in the case of TRPL, or Affiliates in the case of MAXYGEN, such Party shall make quarterly written reports to the other Party within ninety (90) days after the end of each calendar quarter, stating in each such report the Revenues received by such Party, by country, with respect to each applicable Product during the calendar quarter upon which payments are due under clause 5.2 and/or 5.3 17 above. Concurrently with making such reports, the Party making the report shall pay the other Party all amounts due under clause 5.2 and/or 5.3 for such calendar quarter. 6.2 Payment Method. All payments due under this Agreement shall be made by bank wire transfer in immediately available funds to a bank account designated by the receiving Party. All payments hereunder shall be made in U.S. dollars. In the event that the due date of any payment subject to clause 5 hereof is a Saturday, Sunday or national holiday, such payment may be paid on the following business day. Any payments that are not paid on the date such payments are due under this Agreement shall bear interest at the prime rate as reported by the Chase Manhattan Bank, New York, New York, on the date such payment is due, plus an additional two percent (2%), or, if less, at the maximum rate permitted by law, in each case calculated on the number of days such payment is delinquent. If any currency conversion shall be required in connection with the calculation of royalties hereunder, such conversion shall be made using the selling exchange rate for conversion of the foreign currency into U.S. Dollars, quoted for current transactions reported in The Wall Street Journal for the last business day of the calendar quarter to which such payment pertains. 6.3 Withholding Taxes. Except as otherwise provided in clause 2.5(b), all amounts required to be paid pursuant to this Agreement may be paid with deduction for withholding for or on account of any taxes (other than taxes imposed on or measured by the paying Party's net income) or similar governmental charge imposed by an applicable jurisdiction ("Withholding Taxes"). Upon request, the Party making payment with such deduction shall provide to the other Party a certificate evidencing the payment of any Withholding Taxes hereunder. 6.4 Other Factors Affecting Payment. As to countries covered by this Agreement which require governmental approval for remitting payments out of the country or which limit the amount of payments payable within the country, if the payments made hereunder by a Party in respect of Net Revenues from sales of Products exceed the rate approved or permitted by such country, then the rate of payment payable in respect of sales of Products sold in such country shall be the maximum rate approved or permitted by that country. 6.5 Local Payment. If any portion of the payments due hereunder cannot be remitted from a country because of government control, and it is legally permissible to remit such payments within the country, then the Party obligated to make such payment shall have the obligation and the right to deposit in a bank of the other Party's election in such country, and in trust for the other Party, that portion of payments that could not be remitted from the country. 6.6 Inspection of Books and Records. Each Party shall maintain accurate books and records which enable the calculation of the portions of Net Proceeds payable hereunder to be verified. The Parties shall retain the books and records for each quarterly period for ******* years after the submission of the corresponding report under clause 6.1 hereof or such shorter time as may be required by applicable law. Upon thirty (30) days prior notice, each Party (the "Audited Party") shall make its books and records available to 18 independent accountants selected by the other Party (the "Auditing Party"), which accountants are reasonably acceptable to the Audited Party and have entered into a reasonable confidentiality agreement with the Audited Party, to conduct a review or audit once per calendar year, for the sole purpose of verifying the accuracy of the Audited Party's payments in compliance with this Agreement. The accounting firm shall report to the Auditing Party only whether there has been a royalty underpayment and, if so, the amount thereof. 7. PATENT PROSECUTION AND ENFORCEMENT 7.1 Treatment of Project Technology. MAXYGEN will have the sole discretion to decide which of the Project Technology will be: (a) retained as its Confidential Information; or (b) included in any patent application or other application for registered Intellectual Property Rights. 7.2 Filing of Patents. If MAXYGEN decides that the Project Technology or any part of it will be included in any patent application or other application for registered Intellectual Property Rights protection, the application will be made by MAXYGEN in its own name and at its cost. TRPL will, at MAXYGEN's cost, render such assistance as MAXYGEN reasonably requires in the preparation, filing and prosecution of the patent. 7.3 Notice. Each Party will give the other prompt notice of: (a) any claim or allegation that the exercise of the rights under this Agreement constitute an infringement of the rights of any Third Party; and (b) any Third Party's infringement or threatened infringement of a Party's Intellectual Property Rights in and to Project Technology (including without limitation, copyright, design and patent rights), of which it becomes aware. 7.4 Enforcement. If either Party hereto becomes aware that any Intellectual Property Rights in and to Project Technology are being or have been infringed by any Third Party, such party shall promptly notify the other Party in writing describing the facts relating thereto in reasonable detail. MAXYGEN shall have the initial right, but not the obligation, to institute, prosecute and control any action, suit or proceeding with respect to such infringement, including any declaratory judgment action (each an "Action"), at its expense; using counsel of its choice. In the event that TRPL has exclusive rights to Project Technology in the TRPL Field pursuant to clause 5.2 and/or clause 5.3 and MAXYGEN fails to initiate or defend any Action involving an infringement that is within the scope of such exclusive rights of TRPL within ******* months of receiving notice of any infringement, TRPL shall have the right, but not the obligation, to initiate and control such an Action, at its expense. In any such event, TRPL shall promptly give MAXYGEN written notice thereof, and MAXYGEN shall cooperate reasonably with TRPL in connection with any such Action, at TRPL's expense; including without limitation, by joining such Action as a party if requested by TRPL. Any amounts 19 recovered by TRPL in such an Action in excess of amounts paid to reimburse MAXYGEN and amounts expended by TRPL for the expenses incurred in connection with such Action, shall be *******. 7.5 In the event that TRPL has exclusive rights to Project Technology in the TRPL Field pursuant to clause 5.2 and/or 5.3, MAXYGEN will keep TRPL reasonably informed regarding any Action as described in clause 7.4 instituted by MAXYGEN with respect to infringement within the TRPL Field. 8. INDEPENDENT RESEARCH 8.1 Independent Research. Subject to clauses 2.3(b), 2.12 and 12.4, each Party is entitled to conduct research outside of the Project free of any obligation to the other Party. Neither Party will have any obligation to conduct any research in the Project except as expressly described in the Project Plan. 8.2 No Reverse Engineering. Except as expressly provided in this Agreement or other express written agreement between MAXYGEN and TRPL, TRPL shall not, and shall not authorize a RIO TINTO Group Member to, develop or commercialize, or authorize the development or commercialization of, or Exploit any process or product utilizing in any way any Gene Variant or Shuffled Gene, or any gene (or genetic element) which is based on or derived from any Gene Variant or Shuffled Gene, regardless of whether such gene (or genetic element) is made or obtained through synthesis, or mutation of a starting gene (or genetic element), or any product derived therefrom which contains or is made with the use of such a gene (or genetic element) or a Gene Variant or Shuffled Gene, or protein expressed from any of the foregoing. Except pursuant to a further written agreement between MAXYGEN and TRPL, TRPL will not itself, or through any Third Party, use any Project Technology and/or Improvements or structure- function data relating to any Gene Variants, including without limitation, consensus sequences or structural motifs, to reverse engineer, reconstruct, synthesize or otherwise modify or copy any Gene Variant or Shuffled Gene or any other gene or product with similar biological activities, or to attempt the same. 9. CONFIDENTIALITY 9.1 Confidential Information. Except as expressly provided herein, the Parties agree that the receiving Party will keep completely confidential and will not publish or otherwise disclose and will not use for any purpose except for the purposes contemplated by this Agreement any Confidential Information of the other Party (the "Disclosing Party") furnished to it by the Disclosing Party pursuant to this Agreement. Project Technology shall be deemed Confidential Information of MAXYGEN. In addition, except as expressly provided herein or to comply with applicable law, regulation or the order of a court of competent jurisdiction, the Parties agree that each Party will keep completely confidential and will not publish or otherwise disclose the terms of this Agreement. 20 9.2 Permitted Disclosures. Confidential Information and/or the terms of this Agreement may be disclosed: (a) to employees, agents, consultants and actual or bona fide potential Sublicensees of the non-Disclosing Party or its Affiliates (in the case of MAXYGEN) or of RIO TINTO Group Members (in the case of TRPL), but only to the extent reasonably required to accomplish the purposes of this Agreement and only if the non-Disclosing Party obtains prior written agreement from such employees, agents, consultants and actual or bona fide potential Sublicensees of the non-Disclosing Party or its Affiliates (in the case of MAXYGEN) or of RIO TINTO Group Members (in the case of TRPL) to whom disclosure is to be made to hold in confidence and not make use of such information for any purpose other than those permitted by this Agreement. Each Party will use at least the same standard of care as it uses to protect proprietary or confidential information of its own to ensure that such employees, agents and consultants do not disclose or make any unauthorized use of the Confidential Information; and (b) to the extent reasonably necessary in prosecuting or defending litigation, complying with applicable governmental regulations, laws or court orders, or otherwise submitting required information to tax or other governmental authorities; provided that, if a Party is required to make any such disclosure of the terms of this Agreement or the other Party's Confidential Information, it will give reasonable advance notice to the other Party of such disclosure and, will use its reasonable efforts to secure confidential treatment of such Confidential Information (whether through protective orders or otherwise). 10. PUBLIC STATEMENTS AND PUBLICATION 10.1 Use of Names. Except to the extent required to comply with the law or a court order, neither Party will use the name or logo of the other Party without its written consent. In no event will either Party knowingly make any inaccurate or misleading statement concerning the other Party or the Project. 10.2 No Prejudice. Subject to the provisions of clause 10.3, the Parties will use their reasonable efforts to ensure nothing is done which might prejudice the subsistence or Exploitation of the Project Technology or which would preclude the grant of a patent or cause the loss of Intellectual Property Rights protection. The Parties agree and acknowledge that this clause 10 is subject to the obligations of confidentiality contained in clause 9. 10.3 Publicity. All publicity, press releases and other announcements relating to this Agreement and/or the Project will be reviewed in advance by, and will be subject to the approval of, both Parties; provided, approval shall be deemed to have been given if the reviewing Party does not respond within seven (7) days. Notwithstanding the foregoing, either Party may, without review or approval of the other Party, (i) publicize the existence and general subject matter of this Agreement without the other Party's approval, and (ii) disclose the terms of this Agreement to the extent required to comply with applicable 21 securities laws. The Parties agree to release within ten (10) days after the Project Commencement Date a joint press release in an agreed form. Once a particular disclosure has been approved for disclosure, either Party may make disclosures which do not differ materially from it following review and approval by the other Party; provided, such approval shall be deemed to have been given if the reviewing Party does not respond within two (2) working days of the reviewing Party having received the material for review and approval. 10.4 Publication. The Parties (through their Management Committee members for so long as it exists, and afterward through such representatives as each Party may designate) will cooperate in appropriate publication of the results of research and development work performed pursuant to this Agreement, but subject to the predominating interest to obtain patent protection for any patentable subject matter. To this end, it is agreed that prior to any public disclosure of such results, the Party proposing disclosure will send the representatives of the other Party described above a copy of the information to be disclosed, and will allow the other Party thirty (30) days from the date of receipt in which to determine whether the information to be disclosed contains subject matter for which patent protection should be sought prior to disclosure, or otherwise contains Confidential Information of the reviewing Party which such Party desires to maintain as a trade secret. If notification is not received during the thirty (30) day period, the Party proposing disclosure will be free to proceed with the disclosure. If due to a valid business reason or a reasonable belief by the non-disclosing Party that the disclosure contains (i) Confidential Information of the non-disclosing Party, or (ii) subject matter for which a patentable invention should be sought, then prior to the expiration of the thirty (30) day period, the non-disclosing Party will so notify the representative of the disclosing Party, and the disclosing Party will then (a) at the request of the non-disclosing Party delete any Confidential Information of the non-disclosing Party, and/or (b) delay public disclosure for an additional period of up to sixty (60) days to permit the preparation and filing of a patent application on the subject matter to be disclosed or other protective action to be taken. The determination of authorship for any paper will be in accordance with accepted scientific practice. 11. LIMITATION OF LIABILITY Subject to the provisions of clause 12 and clause 13, each Party will carry out the Project and use the other Party's Background Technology at its own risk. To the full extent permitted at law each Party excludes all warranties applicable to the Project, the Project Technology, and its Background Technology. Where under law any warranty cannot be excluded, each Party's liability is, at the option of the other Party, limited to the reperformance of its Contributions to the Project or the payment of the cost of having its Contributions to the Projects performed again. TO THE FULL EXTENT LAWFUL, NEITHER PARTY IS LIABLE TO THE OTHER PARTY FOR ANY SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES ARISING UNDER OR PURSUANT TO THIS AGREEMENT, WHETHER IN RESPECT OF ITS NEGLIGENCE OR OTHER DEFAULT, OR OTHERWISE. 22 12. REPRESENTATIONS AND WARRANTIES 12.1 Each Party represents and warrants to the other that it has the legal power, authority and right to enter into this Agreement and to perform its respective obligations set forth herein. 12.2 Each Party represents and warrants that as of the Effective Date of this Agreement it is not a Party to any agreement or arrangement with any Third Party or under any obligation or restriction, including pursuant to its certificate of incorporation or bylaws or rules, which in any way limits or conflicts with its ability to fulfill any of its obligations under this Agreement, and will not enter into any such agreement during the term of this Agreement. 12.3 Each Party represents and warrants that, to the best of its belief as of the Effective Date of this Agreement, there are no actions, suits, investigations, claims or proceedings pending or threatened in any way relating to its Background Technology. 12.4 MAXYGEN warrants to TRPL that it has not and will not during the period the Project is being conducted enter into any arrangement or understanding with any Third Party which arrangement or understanding requires MAXYGEN or any of its Affiliates, to provide Material or to conduct any project for the primary purpose of using Shuffling Technology for *******. Notwithstanding the above, it is understood and agreed that MAXYGEN shall have the right, at all times, to provide Material or conduct any projects alone or with Third Parties (a) where the primary purpose of such activities is *******. 12.5 Subject to clauses 12.3 and 12.4, MAXYGEN and TRPL each specifically disclaim that the Project will be successful, in whole or part or that any activities undertaken by one or both of them with respect to the Project will be successful. MAXYGEN AND TRPL EXPRESSLY DISCLAIM ANY WARRANTIES OR CONDITIONS, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, WITH RESPECT TO THE CONFIDENTIAL INFORMATION, INTELLECTUAL PROPERTY RIGHTS OF SUCH PARTY INCLUDING WITHOUT LIMITATION, PATENTS OR KNOW-HOW, MATERIALS, IMPROVEMENTS, SHUFFLING TECHNOLOGY, PROGRAM TECHNOLOGY, GENE(S), GENE VARIANT(S), OR SHUFFLED GENE(S), INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE, VALIDITY OF ANY SHUFFLING TECHNOLOGY OR PROJECT TECHNOLOGY, PATENTED OR UNPATENTED, OR NON-INFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. 13. INDEMNIFICATION AND INSURANCE 13.1 MAXYGEN. MAXYGEN will indemnify, defend and hold harmless TRPL and its officers, employees and agents from and against any and all Third Party actions, claims, demands, costs, liabilities or expenses (including actual legal costs) (each a "Liability") made, sustained, brought or prosecuted or in any manner based upon, occasioned by or attributable to any injury to any person (including death) or loss of or damage to property 23 which may arise from or as a direct result of MAXYGEN's conduct of activities in connection with the Project; except, in each case, to the extent due to the negligence or willful misconduct of TRPL. Notwithstanding the above, the foregoing obligations shall not apply to any Liability arising out of or in connection with the use of any particular Gene or Shuffled Gene in the Project. 13.2 TRPL. TRPL will indemnify, defend and hold harmless MAXYGEN and its officers, employees and agents from and against any and all Third Party actions, claims, demands, costs, liabilities or expenses (including actual legal costs) (each a "Liability") made, sustained, brought or prosecuted or in any manner based upon, occasioned by or attributable to any injury to any person (including death) or loss of or damage to property which may arise from or as a direct result of TRPL's conduct of activities in connection with the Project; except, in each case, to the extent due to the negligence or willful misconduct of MAXYGEN. 13.3 Insurance. Each Party will procure adequate insurances such as are customary and appropriate in their industry, including product liability insurance at the time of Exploitation by such Party, and Third Party liability insurance in respect of its participation in the Project and its use and permitted Exploitation of the Background Technology and Project Technology. Each such insurance policy held by MAXYGEN and TRPL will note the other Party's interest as a named insured under the policy and include a waiver of the insurers' right of subrogation against the other Party. Each Party will, on the request of the other Party, produce evidence of the currency of the insurance policies referred to in this clause 13. Each Party undertakes at all times to comply with the terms of its insurance policies the subject of clause 13. 14. TERM AND TERMINATION 14.1 Term. The initial term of this Agreement will commence on the Effective Date, and, unless terminated earlier as provided in this clause 14, continue in full force and effect on a country-by-country and Product-by- Product basis until there are no remaining payment obligations for such Product in such country. 14.2 Termination for Breach. A Party may terminate this Agreement and the Project by notice in writing to the other Party on the happening of one or more of the following: (a) if a Party commits a material breach or default of any of the terms and conditions contained herein, and does not within sixty (60) days of receipt of notice in writing from the other Party requiring the breach to be remedied cure the breach within such time; or (b) if a material warranty, representation or statement given or made by a Party in this Agreement is not complied with or proves to be untrue and is not otherwise compensable in an award of damages. 14.3 Termination by Mutual Agreement. The Parties may terminate this Agreement by written mutual agreement. In the event that such termination occurs during the conduct of the Project, the Parties shall negotiate bona fide in good faith an orderly and 24 reasonably prompt wind-down of the Project and the associated funding obligations of TRPL. 14.4 Termination for Insolvency. TRPL may, in its sole discretion, terminate this Agreement (together with the Project, if such termination is during the Project Term) by providing MAXYGEN with written notice on the happening of any of the following events: (a) if MAXYGEN is the subject of winding up or liquidation proceedings, whether voluntary or compulsory, otherwise than for the purpose of and followed by, a reconstruction, amalgamation or reorganization; (b) if MAXYGEN has become insolvent, bankrupt or is subject to the appointment of a mortgagee, a receiver or manager or an inspector to investigate its affairs, enters into any arrangement or composition with its creditors generally, or is unable to pay its debts as and when they become due; (c) if execution is levied upon all or any part of the assets of MAXYGEN, provided that no breach will take place hereunder if the execution is contested in good faith or if within thirty (30) days after it is levied payment is made in full to the judgment creditor in question of all amounts owing to such judgment creditor, such termination to be effective immediately upon receipt of the above mentioned written notice. In the event of termination of this Agreement by TRPL pursuant to this clause 14.4 during Phase I and/or the Phase II Negotiation Period described in clause 2.3, MAXYGEN shall grant to TRPL the licenses described in clause 5.2(a), which license shall be subject to the sharing of Revenues as set forth in clause 5.2(c). 14.5 Effect of Termination. (a) Accrued Obligations. Termination of this Agreement for any reason will not release either Party hereto from any liability which, at the time of such termination, has already accrued to the other Party or which is attributable to a period prior to such termination nor preclude either Party from pursuing all rights and remedies it may have at law or in equity with respect to any breach of this Agreement. (b) Return of Confidential Information and Background Technology. Upon termination of this Agreement, TRPL and MAXYGEN will each promptly return to the other Party all Confidential Information received from the other Party (except one copy of which may be retained by legal counsel for archival purposes and ensuring compliance with clause 9), and all MAXYGEN Background Technology will be returned to MAXYGEN. (c) Sublicenses. Upon termination of this Agreement, any sublicenses granted by each Party shall remain in force and effect and shall be assigned by the Party granting such sublicense (the "Sublicensing Party") to the other Party, provided, however, that the financial obligations of each Sublicensee to the non- 25 Sublicensing Party shall be limited to the amounts the Sublicensing Party would have been obligated to pay to non-Sublicensing Party for the activities of such Sublicensee pursuant to this Agreement. (d) Stock on Hand. In the event this Agreement is terminated for any reason after the first commercial sale of one or more Products by a Party, such Party and its Sublicensees and its Affiliates (in the case of MAXYGEN) and RIO TINTO Group Members (in the case of TRPL) shall have right to sell or otherwise dispose of the stock of any such Product then on hand, subject to all applicable revenue sharing or other payment obligations. (e) Licenses. (i) In the event of any termination by MAXYGEN pursuant to clause 14.2(a) for TRPL's failure to make Revenue sharing payments due under clause 5.2(c), the licenses, if any, granted to TRPL pursuant to clause 5.2(a) shall terminate concurrently. (ii) In the event of any termination by TRPL pursuant to clause 14.2(a) for MAXYGEN's failure to make Revenue sharing payments due under clause 5.2(c), the licenses, if any, granted to MAXYGEN pursuant to clause 5.2(a) shall terminate concurrently. In the event of any termination by TRPL pursuant to clause 14.4, the licenses, if any, granted to MAXYGEN pursuant to clause 5.2(b) shall terminate concurrently. (iii) Except as provided in this clause 14.5(e), the licenses and rights granted to the Parties under this Agreement in effect at the effective date of such termination shall survive; provided, nothing in this clause 14.5(e) shall prohibit, or be construed to prohibit, the later termination of such a surviving license in accordance with clause 14.2(a) and/or 14.4 and this clause 14.5(e). (f) Liquidated Damages. If MAXYGEN terminates this Agreement pursuant to clause 14.2 during Phase II of the Project, then TRPL shall pay to MAXYGEN as liquidated damages for the failure to pay such amount, *******. The payment of such amount shall not limit MAXYGEN's right to seek or obtain any other remedies available to it at law or in equity. 14.6 Survival. The provisions of clauses 2.9, 4.1, 4.4, 4.5, 5.1, 5.2(c), 5.2(d), 5.2(e), 5.2(f), 6, 7.1, 7.2, 7.3, 8, 9, 10, 11, 12.5, 13.1, 13.2, 14.5, 14.6, 15, 16, 21, 22, 23 and 25 will survive the expiration or termination of this Agreement for any reason. 15. GOVERNING LAW This Agreement and any dispute arising from the performance or any breach of it, including without limitation, any arbitration, will be governed by and construed in accordance with the laws of the State of California. without reference to conflicts of laws 26 principles. Each Party submits to the jurisdiction of the federal and state courts in, and for, the State of California and the courts of appeal therefrom. 16. ASSIGNMENT This Agreement will not be assigned by either Party to any third Party hereto without the written consent of the other Party, and any purported assignment prohibited by this provision shall be null and void; except either Party may assign this Agreement, without such consent, to (i) an Affiliate, in the case of MAXYGEN, or to a RIO TINTO Group Member, in the case of TRPL; or (ii) an entity that acquires all or substantially all of the business or assets of such Party to which this Agreement pertains, whether by merger, reorganization, acquisition, sale or otherwise. The terms and conditions of this Agreement shall be binding on and inure to the benefit of the permitted successors and assigns of the Parties. 17. SEVERABILITY Each word, phrase, sentence, paragraph, section, clause and subclause ("a provision") of this Agreement is severable and if a court determines that a provision is unenforceable, illegal or void then the court may sever that provision without affecting the validity of the other provisions of this Agreement. 18. WAIVER The failure by TRPL or MAXYGEN to exercise or delay in exercising a power or right does not operate as a waiver of that power or right. The exercise of a power or right does not preclude its future exercise or the exercise of any other power or right. 19. AMENDMENT This Agreement can only be amended by written agreement between the Parties. 20. NOTICES Any notice required or permitted by this Agreement will be in writing and will be sent by prepaid registered or certified mail, return receipt requested, internationally recognized courier or personal delivery, or by fax with confirming letter mailed under the conditions described above in each case addressed to the other party at the address shown below or at such other address for which such party gives notice hereunder. Such notice will be deemed to have been given when delivered: If to MAXYGEN: Maxygen, Inc. 515 Galveston Drive Redwood City, CA 94063 Attn: Chief Executive Officer 27 If to TRPL: Technological Resources Pty Limited 55 Collins Street South Melbourne Victoria 3000 Attn: General Manager Commercial 21. ENTIRE AGREEMENT This Agreement, together with its Schedules, which are hereby incorporated by reference, contains the whole agreement of the Parties relating to its subject matter and it supersedes any and all agreements, understandings or commitments in connection with the same subject matter. 22. RELATIONSHIP The Parties agree that this document does not create or evidence a relationship between them of joint venture, partnership, employer and employee or principal and agent. 23. DISPUTE RESOLUTION 23.1 Senior Executives. The Parties agree to co-operate and to use all reasonable endeavors to resolve any disputes or differences between them. Disputes between the Parties representative on the Management Committee which remain unresolved for thirty (30) days will be referred to the Chief Executive Officer in the case of MAXYGEN and the Managing Director- Research & Technology, in the case of TRPL, for resolution. 23.2 Mediation. If a dispute arises out of or relates to this Agreement, or the breach of it, and if said dispute cannot be settled through negotiation, the parties agree first to try in good faith to settle the dispute by non-binding mediation under the appropriate rules, if any, for such mediation under the rules of the International Chamber of Commerce ("ICC") or, if there are no such rules at the time of such mediation, under the Commercial Mediation Rules of the American Arbitration Association, before resorting to arbitration, or some other dispute resolution procedures. 23.3 Arbitration. If the Parties are unable to resolve any dispute, controversy or claim between them arising out of or relating to the validity, construction, enforceability or performance of this Agreement, including disputes relating to alleged breach or to termination of this Agreement (each, a "Dispute"), the Dispute will be finally settled by binding arbitration conducted pursuant to the applicable rules of the ICC then in effect by one (1) arbitrator appointed in accordance with such rules. The arbitration shall take place in Melbourne, Australia, if initiated by MAXYGEN, and in Palo Alto, California, if initiated by TRPL. The arbitrator will determine what discovery will be permitted, consistent with the goal of limiting the cost and time which the parties will expend for discovery; provided the arbitrator will permit such discovery as they deem necessary to permit an equitable resolution of the dispute; provided, the arbitrator shall not order or permit discovery against one Party of a type and scope such Party cannot obtain against the other Party for use in the arbitration as a result of the laws of the country of residence of the other Party. The costs of any arbitration, including administrative fees and fees of 28 the arbitrator, will be shared equally by the Parties. Each Party will bear the cost of its own attorneys' fees and expert fees. The decision and/or award rendered by the arbitrator will be written (specifically stating the arbitrator's findings of facts as well as the reasons upon which the arbitrator's decision is based), final and non-appealable (except for an alleged act of corruption or fraud on the part of the arbitrator) and may be entered in any court of competent jurisdiction. The Parties agree that, any provision of applicable law notwithstanding, they will not request, and the arbitrator will have no authority to award, punitive or exemplary damages against any Party. The arbitrator will have the authority to grant injunctive relief and order specific performance. The Parties and the arbitrator will use their best efforts to complete any such arbitration within one (1) year, unless a Party can demonstrate to the arbitrator that the complexity of the issues or other reasons warrant the extension of the time table. In such case, the arbitrator may extend such time table as reasonably required. The arbitrator will, in rendering its decision, apply the substantive law of the State of California, without regard to its conflict of laws provisions. 23.4 Interlocutory Relief. Compliance with this clause 23 is a condition precedent to seeking relief in any court or tribunal in respect of a dispute, but nothing in this clause 23 will prevent a Party from seeking interlocutory relief in courts of appropriate jurisdiction, pending the establishment of the arbitral tribunal or pending the arbitral tribunal's determination of the merits of the controversy, if necessary to protect the Confidential Information, rights or property of that Party. 24. FORCE MAJEURE Neither Party will be liable for any failure to carry out its obligations under this Agreement where such failure is due to any cause beyond the reasonable control of such party. 25. MISCELLANEOUS 25.1 Advice of Counsel. MAXYGEN and TRPL have each consulted counsel of their choice regarding this Agreement, and each acknowledges and agrees that this Agreement will not be deemed to have been drafted by one Party or another and will be construed accordingly. 25.2 Further Assurances. At any time or from time to time on and after the date of this Agreement, either Party will at the request of the other Party (i) deliver to the requesting Party such records, data or other documents consistent with the provisions of this Agreement, (ii) execute, and deliver or cause to be delivered, all such consents, documents or further instruments of assignment, transfer or license, and (iii) take or cause to be taken all such actions, as the requesting Party may reasonably deem necessary or desirable in order for the requesting Party to obtain the full benefits of this Agreement. 25.3 Compliance with Laws. Each Party will furnish to the other Party any information requested or required by that Party during the term of this Agreement or any extension of it to enable that Party to comply with the requirements of any federal, state or 29 government agency. Each Party will comply with all applicable U.S. and Australian state, regional and local laws, rules and regulations relating to its activities to be performed pursuant to this Agreement, and will obtain, at its own expense, all necessary approvals, consents and permits required by the applicable agencies of the government of the United States and foreign jurisdictions. 25.4 Headings. The captions to the several clauses and subclauses are not a part of this Agreement, but are included for convenience of reference only and will not affect its meaning or interpretation. 25.5 Binding Effect. This Agreement will be binding upon and inure to the benefit of the parties and their respective legal representatives, successors and permitted assigns. 25.6 Counterparts. This Agreement may be executed in two counterparts, each of which will be deemed an original and which together will constitute one instrument. 25.7 Business Unit. The obligations of TRPL under this Agreement are obligations of the Business Unit and MAXYGEN acknowledges that nothing in this Agreement binds any other Business Unit of TRPL in so far as the obligations of TRPL relate to the conduct of the Project. 25.8 Performance Warranty. Notwithstanding clause 25.7, TRPL and MAXYGEN hereby respectively warrant and guarantee the performance of any and all rights and obligations of this Agreement by their Sublicensees and Affiliates, in the case of MAXYGEN, and RIO TINTO Group Members, in the case of TRPL. 30 EXECUTED BY THE PARTIES AS AN AGREEMENT Signed for and on behalf of ) TECHNOLOGICAL ) RESOURCES PTY LIMITED ) ) By R. Batterham ) /s/ R. Batterham ----------------------------------- ) (print name) ) ) Chief Technologist ) - ------------------------------------- ) Title ) ) ) a duly authorized officer of TRPL ) and in the presence of: ) ) J. M. Elliott ) /s/ J. M. Elliott - ------------------------------------- ) Witness ) ) ) Signed for and on behalf of ) MAXYGEN INC. ) ) ) By /s/ Russell Howard ) ----------------------------------- ) Russell Howard ) Chief Executive Officer ) ) ) a duly authorized officer of ) MAXYGEN INC. ) and in the presence of: ) ) /s/ Michael Rabson ) - ------------------------------------- ) Witness ) 31 EX-10.16 5 LETTER AGREEMENT EXHIBIT 10.16 January 28, 2000 Joseph A. Affholter, Ph.D. 17440 Lakeview Drive Morgan Hill, CA 95037 Re: Separation from Employment Dear Joe: This letter, upon your signature, will constitute the agreement between you and Maxygen, Inc. on the terms of your separation from employment with Maxygen. 1. Your employment with Maxygen will end effective January 28, 2000. 2. You will be paid your base salary through the effective date of your separation, plus all accrued and unused FTO time, less customary payroll deductions. 3. Within thirty days of your separation, you will return to Maxygen any and all information and materials you have that are or relate to Maxygen's Confidential Information, as that term is defined in the Confidential Information, Secrecy and Inventions Agreement you signed with Maxygen on April 29, 1998 (the "CI Agreement"), whether in hard copy, electronic form or in any other format. You further agree to continue to be bound by the terms of the CI Agreement. Notwithstanding the foregoing, it is understood that, by virtue of your former employment with Maxygen and your ongoing consultancy with Maxygen as described below, you will continue to have in your possession Confidential Information of Maxygen. You agree to treat such information as provided in the CI Agreement. 4. Upon approval of the Maxygen Board of Directors, Maxygen agrees to accelerate the vesting of 20,675 stock options granted to you on June 19, 1998, under the terms of the Maxygen 1997 Stock Option Plan. Those shares will vest as of your separation date at an exercise price of $0.30 per share. An additional 6,875 stock options granted to you on June 19, 1998, under the terms of the Maxygen 1997 Stock Option Plan will vest on June 30, 2001, pursuant to the terms of the Exclusive Consulting Agreement attached hereto ("the Consulting Agreement"), which you agree to sign and which is incorporated into this letter by this reference. Except as provided in this Paragraph 4, Paragraph 5 below and the Exclusive Consulting Agreement, all other non-vested Maxygen stock options granted to you will be cancelled as of your separation date. Joseph A. Affholter January 28, 2000 Page 2 5. Maxygen also agrees that you will continue to be eligible to participate in the Maxygen Bonus Plan for 1998-1999, as follows. Maxygen acknowledges that you currently have 16,875 unvested Incentive Stock Options in the bonus plan at an exercise price of $0.75. The Board, in its sole discretion, has the right to determine whether to approve accelerated vesting of a percentage of unvested bonus options for the members of Maxygen's senior management team. Maxygen agrees that if the Board approves accelerated vesting of a percentage of bonus shares for other members of Maxygen's senior management team, you will receive accelerating of the same percentage under the same terms. Any additional unvested shares remaining in the bonus plan for which the Board does not approve accelerated vesting will be forfeited as of your separation date. 6. Within 10 business days following the execution of this letter and the Consulting Agreement, Maxygen agrees to provide you with a mutually acceptable letter of recommendation from the President and Chief Executive Officer of Maxygen focusing on your professional strengths and contributions to Maxygen. Maxygen also agrees to work with you to develop a mutually acceptable public statement describing your departure from Maxygen. You agree to direct any questions regarding the reasons for your separation from Maxygen to the Vice President, Human Resources of Maxygen. On behalf of Maxygen, we will respond by stating only your dates of employment and job title and by reiterating information contained in the letter. Maxygen agrees to keep confidential all other aspects of the reasons for your separation from employment with Maxygen. 7. Maxygen further agrees to modify the housing loans provided to you by Maxygen in March 1998 and April 1999 (which loans currently have a total outstanding principal balance of $150,000), to a personal loan for $150,000, with interest calculated semi-annually from February 1, 2001 at 5.59%, and to defer payment of such loan until April 1, 2003 with respect to $72,500 of the principal and until March 30, 2004 with respect to $77,500 of the principal. You agree that the personal loan will be secured by a pledge of vested shares of Maxygen stock valued at $300,000 as of the date your loans are converted, upon your execution of the loan documents attached hereto. Maxygen further to defer repayment of the loan provided to you in connection with your early exercise of Incentive Stock Options on October 9, 1999 to June 30, 2002, provided that the Consulting Agreement has not been terminated before June 30, 2001 (a) for cause by Maxygen, or (b) for any reason by you. 8. In consideration of all the above, you, for yourself, your representatives, heirs, successors and assigns, waive and release and promise never to assert any and all claims that you have or might have as of the date you sign this letter, whether known or unknown, against Maxygen, and its current and former officers, directors, shareholders, agents, attorneys, employees, successors, assigns, parents, affiliates and subsidiaries, arising from or related to your employment with Maxygen, and/or the termination of your employment with Maxygen. Joseph A. Affholter January 28, 2000 Page 3 These claims include, but are not limited to, claims arising under federal, state and local statutory or common law, such as Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Family and Medical Leave Act, the California Fair Employment and Housing Act, the California Family Rights Act, and the law of contract and tort. 9. You, for yourself, your representatives, heirs, successors and assigns, waive, release and promise never to assert any such claims, even if you do not believe that you presently have such claims. You therefore waive your rights under section 1542 of the California Civil Code, which states: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known to him must have materially affected his settlement with the debtor. 10. Unless required by law, you will use your best efforts not to disclose to others any information regarding: (a) any Confidential Information of Maxygen, as that term is defined in the CI Agreement; (b) the terms and nature of this separation letter and the benefit being paid under it. However, you may disclose this information to your spouse and immediate family, and to your attorney(s), accountant(s) or tax expert(s), investment or other advisor(s) to whom you believe you must make the disclosure in order for them to render professional services to you. You will require them, however, to maintain the confidentiality of this information just as you must. 11. In the event that you breach any of your obligations under this separation letter or as otherwise imposed by law, Maxygen will be entitled to recover the benefit paid under the agreement and to obtain all other relief provided by law or equity. Notwithstanding the foregoing, in the event of any breach of the provisions of Paragraph 10(b) above, Maxygen's ability to recover the benefits paid to you under this letter will be reduced by 25% upon each successive anniversary of the date on which you sign this letter. Joseph A. Affholter January 28, 2000 Page 4 Joe, I am pleased that we were able to end your employment with Maxygen on these amicable terms. Maxygen and I thank you for your service to the Company and wish you every success in your future endeavors. Sincerely, /s/ Russell Howard Russell Howard President and Chief Executive Officer Maxygen, Inc. By signing this letter, I acknowledge that I have had the opportunity to review this separation letter carefully; that I have read and understand the terms of the letter and that I voluntarily agree to them; and that I have been advised that I may consult with an attorney prior to signing this letter and the release contained herein. /s/ Joseph A. Affholter Dated: January 28, 2000. __________________________ Joseph A. Affholter, Ph.D. EX-10.17 6 EXCLUSIVE CONSULTING AGREEMENT EXHIBIT 10.17 EXCLUSIVE CONSULTING AGREEMENT ------------------------------ This Exclusive Consulting Agreement ("Agreement") entered into by and between Maxygen, Inc. (hereinafter "Maxygen"), a Delaware corporation, and Joseph A. Affholter, Ph.D. (hereinafter "Consultant"), an individual. In consideration of the promises set forth below, the parties agree as follows. 1. Term of this Agreement. This Agreement will be effective as of the date set forth below and will continue in effect until June 30, 2001, unless it is terminated in accordance with the provisions of Paragraph 8, below ("Contract Term"). 2. Services to be Performed by Consultant. Consultant agrees to provide those services specified in Exhibit A to this Agreement. Written requests or approvals for services to be conducted by Consultant under this Agreement may be given by: Maxygen's CEO, President, General Counsel, VP of Business Development, Intellectual Property Counsel and/or chemical business management. Such requests may be received by e-mail, fax or written letter. 3. Relationship of the Parties. a. The parties intend to create an independent contractor and principal relationship by this Agreement. Consultant will not represent himself as an agent, employee, joint venturer or partner of Maxygen. Notwithstanding the above, Maxygen acknowledges Consultant as an expert in the field of directed molecular evolution and recognizes Consultant's right to use data in the public domain (which Consultant does not otherwise have an obligation to maintain in confidence) to highlight the relevance of directed molecular evolution technologies in multiple industries. b. The conduct and control of the work performed pursuant to this Agreement will lie with Consultant. However, Consultant will perform this work at the specific direction (though not control) of Maxygen. c. (i) During the first six (6) months of the Contract Term, subject to Consultant's obligations under Paragraph 7 of the Agreement, Consultant may perform services for other clients, persons or companies as Consultant sees fit, except that Consultant may not knowingly accept employment with, perform services for, become a founder of, or engage in any conduct, role or capacity in which the Consultant would provide to any business entity any technical or business advice or information related to the development or use of (x) technologies commonly referred to as "gene shuffling" or "molecular breeding" in any format including, without limitation, single gene, gene family, or whole genome-based formats, or (y) other novel methods for generating high- quality genetic diversity via directed evolution of genetic materials. (ii) During the portion of the Contract Term after the date six (6) months from the start of the Contract Term, subject to Consultant's obligations under Paragraph 7 of the Agreement, Consultant may perform services for other clients, persons or companies as Consultant sees fit, except that Consultant may not knowingly accept employment with, perform services for, become a founder of, or engage in any conduct, role or capacity in which the Consultant would provide to any business entity any technical advice or information related to the development or use of in vitro or in vivo recombination-based methods for directed molecular -- ----- -- ---- evolution, without limitation those commonly referred to as "gene shuffling" or "molecular breeding," in any format; however, during such period Consultant may (provided he does not disclose or use any Confidential Information of Maxygen) provide advice regarding targets to which directed molecular evolution could be applied to develop commercial products or processes, without providing technical advice or information on how to accomplish the same. (iii) Notwithstanding Paragraphs 3.C(i) and (ii) above, Consultant may (x) conduct the activities described therein (without any disclosure or use of Maxygen Confidential Information) to the extent that Consultant can reasonably demonstrate that he could have done so prior to his employment with Maxygen, and (y) Consultant may comment generally on benefits of using Maxygen technology by reference to information then within the public domain. (iv) If during the Contract Term Consultant wishes to conduct any activity which he believes may fall within the scope of the then-prohibited activities described in Paragraphs 3.C(i) or (ii) above, he shall provide to Maxygen notice describing in writing the activities he wishes to conduct, but shall have no obligation to disclose to Maxygen the confidential information of third parties. Maxygen shall within ten (10) business days of receipt of such notice and information notify Consultant in writing whether or not he may conduct such activities for such third party; provided, such time period shall not apply if the Consultant has failed to provide Maxygen sufficient detail regarding the proposed activities to reasonably allow it to evaluate the impact of Consultant's proposed activities on Maxygen. In the event Maxygen declines to permit Consultant to perform the proposed activities, it will summarize in brief written form the basis for its denial and, where feasible, provide positive guidance as to changes in the proposed activities which could make the proposed activity acceptable, provided Maxygen has no obligation to approve any activities which are not expressly permitted by Paragraphs 3.C(i) or (ii) above. Unless agreed to otherwise by the Parties in writing, a failure of Maxygen to provide a response within the specified 10 business day period, shall constitute approval of the proposed activity. 4. Benefits. Consultant will not be eligible for, nor will participate in, any health, pension, or other employee benefit plan sponsored or established by Maxygen for the benefit of its employees. 5. Billings. Consultant agrees to submit to the Controller of Maxygen, Inc., at 515 Galveston Drive, Redwood City, California 94063, by the tenth day of each calendar month, in a form reasonably acceptable to Maxygen, a written invoice or facsimile that sets forth (i) the number of hours worked by Consultant each day, together with a detailed description of the services performed, including time and expenses for agreed-upon travel, and (ii) the total compensation owed for the month. 6. Compensation to Consultant. Maxygen will pay Consultant for services requested by Maxygen and actually performed by Consultant, at the rate of $250 per hour, but in no event fewer than forty hours per month for the months of February, March, April and May 2000, twenty-five hours per month for the months of June and July 2000, and five hours per month thereafter for the remainder of the Contract Term (the "Consulting Fees"). Consultant is not expected to be available on an "on-call" basis, but will be available for business meetings and travel at agreed-upon times, and will be given notice of upcoming travel and Maxygen's consulting needs as far in advance as reasonably practical (generally ten business days or more). Nothing herein shall be interpreted as requiring Consultant to provide more than the above-described minimum number of consulting hours per month. Maxygen agrees to make Payment no later than 30 days after receipt of the invoice in the form described in Paragraph 5 above. No payments will be made to Consultant as reimbursement for travel and other business expenses unless agreed in advance in writing by Maxygen. In addition, upon approval of the Board of Directors of Maxygen, on June 30, 2001, Maxygen will vest in Consultant 6,875 Stock Options at an exercise price of $0.30, which options otherwise would have vested had Consultant been an employee of Maxygen on April 29, 2000, provided that this Agreement has not been terminated prior to June 30, 2001 pursuant to Paragraph 8 of this Agreement either (i) for cause by Maxygen, or (ii) for any reason by Consultant. Consultant understands and agrees that because of his separation from employment with Maxygen, his continuing option will become a Non-statutory Option and will no longer be an Incentive Stock Option. Consultant further understands and agrees that the only option that will continue to vest during the Contract Term will be for the aforesaid 6,875 options. 7. Confidential Information. a. Maxygen has and will develop, compile, and own certain proprietary techniques and confidential information ("Confidential Information") that have great value in its business. Consultant acknowledges and agrees that Confidential Information includes information Consultant learns or acquires in connection with the performance of services under this Agreement. Confidential Information includes all information that has or could have commercial value or other utility in the business in which Maxygen is engaged, or in which it contemplates engaging, or that Maxygen has acquired in confidence from third parties. Confidential Information also includes all other non-public information of Maxygen or third parties disclosed to Maxygen in confidence, the unauthorized disclosure of which could be detrimental to the interests of Maxygen, whether or not this information is identified as Confidential Information. Confidential Information also includes all information that Consultant may have learned about Maxygen's business, operations or plans during the negotiation of this Agreement or during his prior employment with Maxygen. Confidential Information also includes all information defined as "Confidential Information" in the Maxygen Confidential Information, Secrecy and Inventions Agreement signed by Consultant on April 29, 1998 ("the CI Agreement"). Consultant agrees to continue to be bound by the CI Agreement, including but not limited to the Inventions portion thereof, and acknowledges that the CI Agreement remains in all respects valid and in force, throughout and after the Contract Term. b. By example and without limitation, Confidential Information includes any and all information concerning Maxygen's research programs, product development, biological materials, research methods, related products, technology, inventions, patent applications, trade secrets or other products and any other information of value relating to the business affairs and/or fields of interest of Maxygen, whether communicated orally or in writing, including without limitation, concepts, techniques, processes, designs, biological materials, methods for developing or identifying novel products, software, databases, cost data, and other technical know-how, financial, research, marketing and personnel information, and other business information including information with respect to which Maxygen is under an obligation of confidentiality with any third party. Confidential Information does not include information: (i) generally known in the relevant trade or industry; or (ii) known to and freely usable by Consultant before entering into this Agreement with Maxygen; but Confidential Information shall not be deemed to be generally known (x) merely because it is embraced by more general information subject to the above, or (y) merely because it is published in general terms without description of the specific Confidential Information subject to this section. c. Consultant acknowledges and agrees that Confidential Information is proprietary, constitutes a valuable asset of Maxygen, and is the sole property of Maxygen. Consultant agrees that at all times during and after the Contract Term, he will hold in trust, keep confidential, and not disclose to any third party, or make any use of, the Confidential Information of Maxygen, except as is strictly required to perform services under this Agreement and with the prior written approval of Maxygen. Consultant further agrees not to disclose, or to cause the transmission, removal, or transport of, Confidential Information from Maxygen's principal place of business at 515 Galveston Drive, Redwood City, California 94063, or any other place of business; provided, Consultant may communicate freely with Maxygen. d. Consultant acknowledges that all documents, whether in hard copy, electronic for or any other format, including, but not limited to, laboratory and other notebooks, software, computer programs, tapes, printouts, records, databases, manuals, letters, email messages, reports, blueprints, drawings, customer lists, and other evidence of Confidential Information and other information concerning the business, operation, or plans of Maxygen, including copies, that come into the possession of Consultant, whether produced by Consultant or others are and will remain the property of Maxygen, and will be treated as Confidential Information. e. Consultant acknowledges that the unauthorized use or disclosure of Maxygen's Confidential Information by Consultant may lead to immediate termination of this Agreement under Paragraph 8, and can lead to legal action by Maxygen. f. Notwithstanding the foregoing, it is understood that, by virtue of his former employment with Maxygen and his ongoing consultancy with Maxygen under this Agreement, Consultant will continue to have in his possession Confidential Information of Maxygen. Consultant agrees to treat such information as provided in the CI Agreement. 8. Termination of this Agreement. a. On Written Notice. Either party may terminate this Agreement, without cause, by giving thirty (30) days' notice to the other party. In the event of such termination, the parties agree to act toward each other in good faith during the notice period. In the event of such termination by Maxygen, the stock options referred to in Paragraph 6 shall vest as of the effective date of termination. If this Agreement is terminated by Maxygen for any reason other than for cause or for any reason by Consultant prior to July 1, 2000, Maxygen agrees to pay the minimal Consulting Fees that would have been payable through July 31, 2000. b. For Cause. Either party may terminate this Agreement for cause, effective immediately, upon written notice of termination for cause to the other party. In the event of such termination by Maxygen, the stock options referred to in Paragraph 6 shall be forfeited. For purposes of this Agreement, "cause" includes but is not limited to: 1) Any material breach of this Agreement, including but not limited to inducing or assisting infringement of any Maxygen patent or copyright misappropriation of any Maxygen trade secret; and 2) Any act by one party that exposes the other to potential liability to others for, among other things, personal injury, property damage, patent infringement or trade secret misappropriation. c. In the event of termination of this Agreement, Maxygen agrees to pay for all services provided under this Agreement to the effective date of the termination. 9. Indemnification. a. Consultant will indemnify, defend, and hold harmless Maxygen, its directors, officers, employees, agents and assigns against any and all liability imposed or claimed, including attorneys' fees and other legal expenses, arising directly or indirectly from any act or failure to act by Consultant in connection with the performance of services under this Agreement. b. Consultant will indemnify, defend and hold Maxygen harmless against any and all liability imposed or claimed, including attorneys' fees and other legal expenses, arising directly or indirectly from any violation of federal, state or local law by Consultant in connection with the performance of services under this Agreement, including but not limited to, the California Fair Employment and Housing Act, Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, and the Americans with Disabilities Act. c. Maxygen will have no duty to indemnify or defend Consultant. 10. Severability. Whenever possible, each provision of this Agreement will be interpreted in such a manner as to be effective and valid under applicable law. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remaining provisions will nevertheless continue in full force without being impaired or invalidated in any way. 11. Governing Law. This Agreement will be construed in accordance with the law of the State of California without reference to principles of conflicts of laws. 12. Waiver. The waiver by either party of a breach of any provision of this Agreement will not operate, or be construed, as a waiver of any subsequent breach by the other party. 13. Assignment. Consultant agrees that he will not assign this Agreement, nor any duties or obligations under it, without the prior written consent of Maxygen. Maxygen shall have the right to assign this Agreement. 14. Notices. All notices or other written communications provided for under this Agreement will be in writing and will be deemed to have been given either (i) upon personal delivery or confirmed facsimile transmission, (ii) one day after deposit with a courier service for next day delivery, or (iii) five days after deposit in the U.S. mail, registered mail--postage prepaid, to the following addresses. a. Joseph A. Affholter, Ph.D. 17440 Lakeview Drive Morgan Hill, CA 95037 Facsimile Number: 408/779-3580 b. Maxygen, Inc. 515 Galveston Drive Redwood City, California 94063 Attention: General Counsel Facsimile Number: 650/298-5803 Either party may change its or his address by giving notice to the other party in accordance with this paragraph. 15. Entire Agreement. Except as provided in Paragraph 7.a above and the separation letter, this Agreement supercedes any and all other agreements, both oral or written, between Consultant and Maxygen with respect to the subject matter of this Agreement, and the Agreement contains all of the promises and agreements between the parties with regard to its subject matter. Both Consultant and Maxygen acknowledge that no representations, inducements, promises, or agreements, oral or otherwise, have been made by the other party, or anyone acting on behalf of the party, that are not contained in this Agreement. The parties also acknowledge that no agreement, statement or promise that is not referenced or contained in this Agreement will be valid or binding. Any modification of this Agreement will be effective only if it is in writing and signed by Consultant and an authorized representative of Maxygen. 16. Arbitration of Disputes. The parties agree that any controversy or claim arising out of this Agreement, or any alleged breach of this Agreement, will be subject to good faith mediation between the parties on mutually acceptable terms. Any remaining claim or controversy will be arbitrated in San Francisco, California, before a single arbitrator, in accordance with the Commercial Dispute Resolution Rules of the American Arbitration Association then in effect. The arbitrator's decision will be final and binding on both parties. The prevailing party will be entitled to reasonable costs and attorneys' fees, including expert witness fees. 17. Injunctive Relief. Notwithstanding Paragraph 16, Consultant agrees that a breach by him of his obligations under Paragraph 7 of this Agreement relating to Confidential Information will cause Maxygen irreparable injury and damage. Consultant agrees that Maxygen is entitled to injunctive and other equitable relief to prevent a breach of Paragraph 7 of the Agreement or to secure its enforcement. A request for equitable relief by Maxygen shall not be a waiver of any other rights or remedies Maxygen or Consultant may have. 18. Attorneys' Fees. If any legal action is brought that arises out of or relates to this Agreement, including an action for injunctive relief, the prevailing party will be entitled to reasonable attorneys' fees, which may be set by the court in the same action or in a separate action brought for that purpose, in addition to any other relief to which that party may be entitled. Executed on the dates set forth below. Dated: January 28, 2000 /S/ Joseph A. Affholter, Ph.D. ------------------------ ---------------------------- Dated: January 28, 2000 MAXYGEN, INC. ------------------------- By /s/ Russell Howard ----------------------------------------- Russell Howard President and Chief Executive Officer Exhibit A Contract Services ----------------- 1. Advice regarding the development of technologies relating to directed evolution, gene shuffling and Molecular Breeding directed molecular evolution technologies, and the use of such technologies to develop products and processes using such technologies for commercial uses. 2. Transitioning to new leadership within Maxygen all existing partner management responsibilities, projects, initiatives, and potential business partner communications in which consultant was involved or engaged while an employee of Maxygen. 3. Assisting in establishing new collaborative relationships between Maxygen and third parties. 4. Cooperation with Maxygen and its counsel in connection with any intellectual property disputes with third parties in which Maxygen may become engaged, which cooperation shall include not providing advice or guidance to any third party with respect to any intellectual property dispute involving any type of directed molecular evolution without Maxygen's prior written consent. 5. Other services to be determined at the parties' mutual written consent. EX-10.18 7 PROMISSORY NOTE DATED JANUARY 28, 2000 EXHIBIT 10.18 PROMISSORY NOTE $150,000 Redwood City, California January 28, 2000 Joseph Affholter and Roxanne Affholter ("Obligor"), for value received, hereby promise to pay to the order of Maxygen, Inc. or holder ("Payee"), in lawful money of the United States at the address of Payee set forth below, the principal sum of One Hundred Fifty Thousand Dollars ($150,000), together with interest on the unpaid principal from February 1, 2001 at the compounded annual rate of 5.59%. Interest shall be due and payable on June 30 and December 31 of each year. Unpaid principal together with all accrued interest shall be due and payable with respect to Seventy-Two Thousand Five Hundred Dollars ($72,500) of principal on April 1, 2003, and with respect to Seventy-Seven Thousand Five Hundred Dollars ($77,500) of principal on March 30, 2004. If any payment of principal or interest on this note shall become due on a Saturday, Sunday, or a public holiday under the laws of the State of California, such payment shall be made on the next succeeding business day and such extension of time shall be included in computing interest in connection with such payment. This Note is secured by a Pledge Agreement of even date herewith. Upon payment in full of all principal and interest payable hereunder, this Note shall be surrendered to Obligor for cancellation. Obligor waives presentment, demand for performance, notice of nonperformance, protest, notice of protest, and notice of dishonor. No delay on the part of Payee in exercising any right hereunder shall operate as a waiver of such right under this Note. This Note is being delivered in and shall be construed in accordance with the laws of the State of California. In the event that Obligor fails to make payment on any date for payment hereinabove specified of all principal and interest due hereunder on such date, Obligor shall be deemed to be in default hereunder. In the event of such default, Payee may, at Payee's option and in Payee's sole discretion, five days after giving notice of default to Obligor, accelerate the maturity of all amounts due under this Note by giving notice of such acceleration. If the indebtedness represented by this Note or any part thereof is collected at law or in equity or in bankruptcy, receivership or other judicial proceedings or if this Note is placed in the hands of attorneys for collection after default, Obligor agrees to pay, in addition to the principal and interest payable hereon, reasonable attorneys' fees and costs incurred by Payee. Any notice or other communication (except payment) required or permitted hereunder shall be in writing and shall be deemed to have been given upon delivery, if personally delivered or upon deposit if deposited in the United States mail for mailing by certified mail, postage prepaid, and addressed as follows: If to Payee: Maxygen, Inc. 515 Galveston Drive Redwood City, California 94063 Attention: President If to Obligor: Joseph A. Affholter 17440 Lakeview Drive Morgan Hill, California 95037 Any payment shall be deemed made upon receipt by Payee. Payee or Obligor may change their address for purposes of this paragraph by giving to the other party notice in conformance with this paragraph of such new address. Obligors: /s/ Joseph A. Affholter ----------------------- Joseph A. Affholter /s/ Roxanne B. Affholter ------------------------ Roxanne B. Affholter PAYMENTS MADE
Date Principal Amount Interest Received By ==== ================ ======== ===========
EX-10.19 8 PLEDGE AGREEMENT DATED JANUARY 28, 2000 EXHIBIT 10.19 PLEDGE AGREEMENT This PLEDGE AGREEMENT ("Agreement"), dated effective as of January 28, 2000, is made between Joseph Affholter and Roxanne Affholter ("Pledgors"), and Maxygen, Inc. ("Pledgee" and "Pledge Holder"). For good and valuable consideration and to secure the payment of Pledgors' indebtedness to the Pledgee, the parties agree as follows: 1. Pledgors' Indebtedness. (a) Pledgors have borrowed One Hundred Fifty Thousand Dollars ($150,000) from the Pledgee, evidenced by a Promissory Note. (b) Pledgors have executed the Note and are required to secure the Note by delivery of this Agreement. 2. Pledge. Pledgors hereby pledge to the Pledge Holder on behalf of the Pledgee, and grant to the Pledgee a security interest in, the following (the "Pledged Collateral"): (i) that number of shares of the Common Stock of Maxygen, Inc. having a market value of Three Hundred Thousand Dollars ($300,000) calculated based on the closing price of Maxygen common stock on January 27, 2000 (the "Shares") and the certificates representing such Shares, and all other securities, instruments, dividends, cash, and other property that may be received, receivable, or otherwise distributed in respect of or in exchange for any of the Shares; and (ii) all other proceeds of the foregoing. If, at any time, the Pledgee reasonably believes that the Pledged Collateral is insufficient to guarantee payment of unpaid principal and interest of the Note, Pledgee in its discretion may demand the pledge of additional collateral by Pledgors and failure by the Pledgors to deliver such additional collateral within fifteen (15) days from such demand shall be an Event of Default. 3. Security for Obligations. (a) This Agreement secures the payment of all of the Pledgors' present and future obligations, duties, and liabilities under the Note and under this Agreement (all referred to as the "Obligations"). (b) This Agreement shall create a continuing security interest in the Pledged Collateral and shall (i) remain in full force and effect until payment in full of the Obligations; (ii) be binding upon Pledgors and their successors and assigns; and (iii) inure to the benefit of the Pledgee and its successors, transferees, and assigns. 4. Delivery of Pledged Shares. All certificates or instruments representing or evidencing the Shares and other Pledged Collateral shall be held by the Pledge Holder on behalf of the Pledgee under this Agreement and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to the Pledgee or the Pledge Holder. If Pledgors fail to perform any Obligation, the Pledge Holder or the Pledgee may perform, or cause performance of, that Obligation, and the expenses incurred in connection with that performance shall be payable by Pledgors under Section 8. 5. Rights in Absence of Default. (a) So long as there has been and is no Event of Default (as defined in Section 7(a) below) or event which, with the giving of notice or the lapse of time, or both, would become an Event of Default: (i) Pledgors shall be entitled to exercise any and all voting and other consensual rights pertaining to any or all of the Pledged Collateral for any purpose not inconsistent with the terms of this Agreement or the Note; provided that Pledgors shall not exercise or shall refrain from exercising any of those rights if, in the judgment of the Pledgee, that action would have a material adverse effect on the value of the Pledged Collateral or any part of it. (ii) Dividends, other distributions, and interest paid or payable in respect of, and instruments and other property received, receivable, or otherwise distributed in respect of, or in exchange for, any Pledged Collateral shall constitute, and shall be immediately delivered to the Pledge Holder to hold as, Pledged Collateral, and shall, if received by Pledgors, be received in trust for the benefit of the Pledgee, be segregated from other property or funds of Pledgors, and be immediately delivered to the Pledge Holder as Pledged Collateral in the same form as so received (with any necessary endorsement). (iii) The Pledge Holder shall execute and deliver (or cause to be executed and delivered) to Pledgors all such proxies and other instruments as Pledgors may reasonably request for the purpose of enabling them to exercise the voting and other rights that they are entitled to exercise pursuant to paragraph (i) of this Section 5(a). (b) When and so long as there is an Event of Default or an event which, with the giving of notice or the lapse of time, or both, would become an Event of Default, all rights of Pledgors to exercise the voting and other rights that they would otherwise be entitled to exercise pursuant to Section 5(a)(i) shall cease, and all those rights shall 2 become vested in the Pledge Holder, who shall then have the sole right to exercise those voting and other rights. 6. Transfers and Liens. Pledgors agree that they will not (i) sell or otherwise dispose of, or grant any option with respect to, any of the Pledged Collateral without the prior written consent of the Pledgee; or (ii) create or permit to exist any lien upon or with respect to any of the Pledged Collateral, except for the security interest under this Agreement. 7. Events of Default; Remedies upon Default. (a) The following each shall constitute events of default ("Events of Default") under this Agreement: (i) If Pledgors fail to perform or observe any term, covenant, or Obligation under this Agreement or the Note, or if any representation or warranty made by Pledgors in this Agreement or the Note is untrue or misleading in any material respect as of the date with respect to which that representation or warranty was made; (ii) If a notice of lien, levy, or assessment is filed or recorded with respect to all or a substantial part of the Pledged Collateral, except for a lien that relates to current taxes not yet due and payable, and if the applicable claim is not discharged or satisfied within thirty days of Pledgors' actual or constructive knowledge of that filing or recordation; and (iii) If all or a substantial part of the Pledged Collateral is attached, seized, or subjected to a writ or distress warrant, or is levied upon, or comes within the possession of any receiver, trustee, custodian, or assignee for the benefit of creditors, and that Pledged Collateral is not returned to Pledgors or the writ, distress warrant, or levy is not dismissed, stayed, or lifted within thirty days. (b) When and so long as there is any Event of Default, the Pledgee may exercise in respect of the Pledged Collateral, in addition to other rights and remedies provided for in this Agreement or otherwise available to it, all the rights and remedies of a secured party upon a default under the Uniform Commercial Code in effect in the State of California at that time. 8. Expenses. On demand, Pledgors will pay the Pledge Holder all reasonable expenses, including attorneys' fees and costs, which the Pledge Holder may incur in connection with (i) the exercise or enforcement of any of the rights of the Pledge Holder or the 3 Pledgee under this Agreement; or (ii) Pledgors' failure to perform or observe any of the provisions of this Agreement. 9. Security Interest Absolute. All rights and security interests of the Pledge Holder or Pledgee, and all Obligations of Pledgors, under this Agreement shall be absolute and unconditional irrespective of: (i) any lack of validity or enforceability of the Note or any other agreement or instrument relating to it; (ii) any change in the time, manner, or place of payment of, or in any other term of, any of the Obligations, or any other amendment or wavier of or consent to any departure from the Note; (iii) any exchange, release, or non-perfection of any other collateral, or any release, amendment, or waiver of any of the Obligations; or (iv) any other circumstance that might otherwise constitute a defense available to, or a discharge or, Pledgors in respect of the Obligations or of this Agreement. 10. Further Assurances. Pledgors agree that at any time and from time to time, Pledgors will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Pledge Holder may reasonably request, in order to perfect and protect any security interest granted or purported to be granted by this Agreement or to enable the Pledge Holder to exercise and enforce the rights and remedies under this Agreement with respect to any Pledged Collateral. 11. Entire Agreement; Amendment; Wavier. This Agreement and the Note embody the entire agreement of the parties hereto with respect to the subject matter of this Agreement and supersede all prior agreements with respect to that subject matter. This Agreement may not be amended or modified except in a writing signed by both parties. No waiver of any provision in this Agreement shall be deemed to, or shall operate as a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. Except as expressly provided in this Agreement, no waiver shall be binding unless executed in writing by the party making the waiver. 12. Notices. Any notice, request, claim or other communication required or permitted hereunder will be in writing and will be deemed to have been duly given if delivered by hand or if sent by certified mail, postage and certification prepaid, to Pledgors at 17440 Lakeview Drive, Morgan Hill, California 95037, or to the Pledgee and the Pledge Holder at 515 Galveston Drive, Redwood City, California 94063, or to such other address 4 or addresses as any party may have furnished to the other in writing in accordance herewith. 13. Captions. Captions are used for reference purposes only and should be ignored in the interpretation of the Agreement. Unless the context requires otherwise, all references in this Agreement to Sections are to the sections of this Agreement. 14. Governing Law; Terms. This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts wholly made and performed in the State of California. Unless otherwise defined above, terms defined in Division 9 of the Uniform Commercial Code as adopted in the State of California are used in this Agreement with their statutory meanings. 15. Counterparts. This Agreement may be executed in one or more counterparts all of which together shall constitute one and the same instrument. The parties have duly executed this Agreement as of the date first written above. /s/ Joseph A. Affholter - ----------------------------------- Joseph A. Affholter "Pledgor" /s/ Roxanne B. Affholter - ----------------------------------- Roxanne B. Affholter "Pledgor" MAXYGEN, INC. By: /s/ Russell Howard -------------------------------- "Pledge Holder" and "Pledgee" 5 EX-10.20 9 COOPERATIVE RESEARCH AND DEVELOPMENT AGREEMENT EXHIBIT 10.20 PUBLIC HEALTH SERVICE COOPERATIVE RESEARCH AND DEVELOPMENT AGREEMENT This Cooperative Research and Development Agreement, hereinafter referred to as the "CRADA," consists of this Cover Page, an attached Agreement, and various Appendices referenced in the Agreement. This Cover Page serves to identify the Parties to this CRADA: (1) the following Bureau(s), Institute(s), Center(s) or Division(s) of the National Institutes of Health ("NIH"), the Food and Drug Administration ("FDA"), and the Centers for Disease Control and Prevention ("CDC"): The National Cancer Institute hereinafter singly or collectively referred to as the Public Health Service ("PHS"); and (2) Maxygen, Incorporated, which has offices at 515 Galveston Drive, Redwood City, California, 94063 hereinafter referred to as the "Collaborator." THE SYMBOL "*******" IS USED TO INDICATE THAT A PORTION OF THE EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. COOPERATIVE RESEARCH AND DEVELOPMENT AGREEMENT Article 1. Introduction This Cooperative Research and Development Agreement (CRADA) between PHS and the Collaborator will be effective when signed by all Parties. The research and development activities which will be undertaken by each of the Parties in the course of this CRADA are detailed in the Research Plan (RP) which is attached as Appendix A. The funding and staffing commitments of the Parties are set forth in Appendix B. Any exceptions or changes to the CRADA are set forth in Appendix C. This CRADA is made under the authority of the Federal Technology Transfer Act, 15 U.S.C. (S)3710a and is governed by its terms. Article 2. Definitions As used in this CRADA, the following terms shall have the indicated meanings: 2.1 "Affiliate" means any corporation or other business entity controlled by, controlling, or under common control with Collaborator. For this purpose, A "control" means direct or indirect beneficial ownership of at least fifty (50) percent of the voting stock or at least fifty (50) percent interest in the income of such corporation or other business. 2.2 "Cooperative Research and Development Agreement" or "CRADA" means this Agreement, entered into by PHS pursuant to the Federal Technology Transfer Act of 1986, as amended, 15 U.S.C. 3710a et seq. and Executive Order 12591 ------ of October 10, 1987. 2.3 "Government" means the Government of the United States as represented through the PHS agency that is a Party to this agreement. 2.4 "IP" means intellectual property. 2.5 "Invention" means any invention or discovery which is or may be patentable or otherwise protected under title 35, United States Code, or any novel variety or plant which is or may be protectable under the Plant Variety Protection Act (7 U.S.C. 2321 et seq.). ------ 2.6 "Principal Investigator(s)" or "PIs" means the persons designated respectively by the Parties to this CRADA who will be responsible for the scientific and technical conduct of the RP. 2.7 "Proprietary/Confidential Information" means confidential scientific, business, or financial information provided that such information does not include: 2.7.1. information that is publicly known or available from other sources who are not under a confidentiality obligation to the source of the information; 2 2.7.2. information which has been made available by its owners to others without a confidentiality obligation; 2.7.3. information which is already known by or available to the receiving Party without a confidentiality obligation; or 2.7.4. information which relates to potential hazards or cautionary warnings associated with the production, handling or use of the subject matter of the Research Plan of this CRADA. 2.8 "Research Materials" means all tangible materials other than Subject Data first produced in the performance of this CRADA. 2.9 "Research Plan" or "RP" means the statement in Appendix A of the respective research and development commitments of the Parties to this CRADA. 2.10 "Subject Invention" means any Invention of the Parties, conceived or first actually reduced to practice in the performance of the Research Plan of this CRADA. 2.11 "Subject Data" means all recorded information first produced in the performance of this CRADA by the Parties. Article 3. Cooperative Research 3.1 Principal Investigators. PHS research work under this CRADA will be performed by the PHS laboratory identified in the RP, and the PHS Principal Investigator (PI) designated in the RP will be responsible for the scientific and technical conduct of this project on behalf of PHS. Also designated in the RP is the Collaborator PI who will be responsible for the scientific and technical conduct of this project on behalf of the Collaborator. 3.2 Research Plan Change. The RP may be modified by mutual written consent of the Principal Investigators. Substantial changes in the scope of the RP will be treated as amendments under Article 13.6. Article 4. Reports 4.1 Interim Reports. The Parties shall exchange formal written interim progress reports on a schedule agreed to by the PIs, but at least within twelve (12) months after this CRADA becomes effective and at least within every twelve (12) months thereafter. Such reports shall set forth the technical progress made, identifying such problems as may have been encountered and establishing goals and objectives requiring further effort, any modifications to the Research Plan pursuant to Article 3.2, and all CRADA-related patent applications filed. 4.2 Final Reports. The Parties shall exchange final reports of their results within four (4) months after completing the projects described in the RP or after the expiration or termination of this CRADA. 3 Article 5. Financial and Staffing Obligations 5.1 PHS and Collaborator Contributions. The contributions of the Parties, including payment schedules, if applicable, are set forth in Appendix B. PHS shall not be obligated to perform any of the research specified herein or to take any other action required by this CRADA if the funding is not provided as set forth in Appendix B. PHS shall return excess funds to the Collaborator when it sends its final fiscal report pursuant to Article 5.2, except for staffing support pursuant to Article 10.3. Collaborator acknowledges that the U.S. Government will have the authority to retain and expend any excess funds for up to one (1) year subsequent to the expiration or termination of the CRADA to cover any costs incurred during the term of the CRADA in undertaking the work set forth in the RP. 5.2 Accounting Records. PHS shall maintain separate and distinct current accounts, records, and other evidence supporting all its obligations under this CRADA, and shall provide the Collaborator a final fiscal report pursuant to Article 4.2. 5.3 Capital Equipment. Equipment purchased by PHS with funds provided by the Collaborator shall be the property of PHS. All capital equipment provided under this CRADA by one party for the use of another Party remains the property of the providing Party unless other disposition is mutually agreed upon by in writing by the Parties. If title to this equipment remains with the providing Party, that Party is responsible for maintenance of the equipment and the costs of its transportation to and from the site where it will be used. Article 6. Intellectual Property Rights and Patent Applications 6.1 Reporting. The Parties shall promptly report to each other in writing each Subject Invention resulting from the research conducted under this CRADA that is reported to them by their respective employees. Each Party shall report all Subject Inventions to the other Party in sufficient detail to determine inventorship. Such reports shall be treated as Proprietary/Confidential Information in accordance with Article 8.4. 6.2 Collaborator Employee Inventions. If the Collaborator does not elect to retain its IP rights, the Collaborator shall offer to assign these IP rights to the Subject Invention to PHS pursuant to Article 6.5. If PHS declines such assignment, the Collaborator may release its IP rights as it may determine. 6.3 PHS Employee Inventions. PHS on behalf of the U.S. Government may elect to retain IP rights to each Subject Invention made solely by PHS employees. If PHS does not elect to retain IP rights, PHS shall offer to assign these IP rights to such Subject Invention to the Collaborator pursuant to Article 6.5. If the Collaborator declines such assignment, PHS may release IP rights in such Subject Invention to its employee inventors pursuant to Article 6.6. 6.4 Joint Inventions. Each Subject Invention made jointly by PHS and Collaborator employees shall be jointly owned by PHS and the Collaborator. The Collaborator may elect to file the joint patent or other IP application(s) thereon and shall notify PHS promptly upon making this election. If the Collaborator decides to file such applications, 4 it shall do so in a timely manner and at its own expense. If the Collaborator does not elect to file such application(s), PHS on behalf of the U.S. Government shall have the right to file the joint application(s) in a timely manner and at its own expense. If either Party decides not to retain its IP rights to a jointly owned Subject Invention, it shall offer to assign such rights to the other Party pursuant to Article 6.5. If the other Party declines such assignment, the offering Party may release its IP rights as provided in Articles 6.2, 6.3, and 6.6. 6.5 Filing of Patent Applications. With respect to Subject Inventions made by the Collaborator as described in Article 6.2, or by PHS as described in Article 6.3, a Party exercising its right to elect to retain IP rights to a Subject Invention agrees to file patent or other IP applications in a timely manner and at its own expense and after consultation with the other Party. The Party shall notify the other Party of its decision regarding filing in countries other than the United States in a timely manner. The Party may elect not to file a patent or other IP application thereon in any particular country or countries provided it so advises the other Party ninety (90) days prior to the expiration of any applicable filing deadline, priority period or statutory bar date, and hereby agrees to assign its IP right, title and interest in such country or countries to the Subject Invention to the other Party and to cooperate in the preparation and filing of a patent or other IP applications. In any countries in which title to patent or other IP rights is transferred to the Collaborator, the Collaborator agrees that PHS inventors will share in any royalty distribution that the Collaborator pays to its own inventors. 6.6 Release to Inventors. In the event neither of the Parties to this CRADA elects to file a patent or other IP application on a Subject Invention, either or both (if a joint invention) may retain or release their IP rights in accordance with their respective policies and procedures. However, the Government shall retain a nonexclusive, non-transferable, irrevocable, royalty-free license to practice any such Subject Invention or have it practiced throughout the world by or on behalf of the Government. 6.7 Patent Expenses. The expenses attendant to the filing of patent or other IP applications generally shall be paid by the Party filing such application. If an exclusive license to any Subject Invention is granted to the Collaborator, the Collaborator shall be responsible for all past and future out-of-pocket expenses in connection with the preparation, filing, prosecution and maintenance of any applications claiming such exclusively- licensed inventions and any patents or other IP grants that may issue on such applications. The Collaborator may waive its exclusive license rights on any application, patent or other IP grant at any time, and incur no subsequent compensation obligation for that application, patent or IP grant. 6.8 Prosecution of Intellectual Property Applications. Within one month of receipt or filing, each Party shall provide the other Party with copies of the applications and all documents received from or filed with the relevant patent or other IP office in connection with the prosecution of such applications. Each Party shall also provide the other Party with the power to inspect and make copies of all documents retained in the patent or other IP application files by the applicable patent or other IP office. Where licensing is contemplated by Collaborator, the Parties agree to consult with each other with respect to 5 the prosecution of applications for PHS Subject Inventions described in Article 6.3 and joint Subject Inventions described in Article 6.4. If the Collaborator elects to file and prosecute IP applications on joint Subject Inventions pursuant to Article 6.4, PHS will be granted an associate power of attorney (or its equivalent) on such IP applications. Article 7. Licensing 7.1 Option for Commercialization License. With respect to Government IP rights to any Subject Invention not made solely by the Collaborator's employees for which a patent or other IP application is filed, PHS hereby grants to the Collaborator an exclusive option to elect an exclusive or nonexclusive commercialization license, which is substantially in the form of the appropriate model PHS license agreement. This option does not apply to Subject Inventions conceived prior to the effective date of this CRADA that are reduced to practice under this CRADA, if prior to that reduction to practice, PHS has filed a patent application on the invention and has licensed it or offered to license it to a third party. The terms of the license will fairly reflect the nature of the invention, the relative contributions of the Parties to the invention and the CRADA, the risks incurred by the Collaborator and the costs of subsequent research and development needed to bring the invention to the marketplace. The field of use of the license will be commensurate with the scope of the RP. 7.2 Exercise of License Option. The option of Article 7.1 must be exercised by written notice mailed within three (3) months after either (i) Collaborator receives written notice from PHS that the patent or other IP application has been filed; or (ii) the date Collaborator files such IP application. Exercise of this option by the Collaborator initiates a negotiation period that expires nine (9) months after the exercise of the option. If the last proposal by the Collaborator has not been responded to in writing by PHS within this nine (9) month period, the negotiation period shall be extended to expire one (1) month after PHS so responds, during which month the Collaborator may accept in writing the final license proposal of PHS. In the absence of such acceptance, or an extension of the time limits by PHS, PHS will be free to license such IP rights to others. In the event that the Collaborator elects the option for an exclusive license, but no such license is executed during the negotiation period, PHS agrees not to make an offer for an exclusive license on more favorable terms to a third party for a period of six (6) months without first offering Collaborator those more favorable terms. These times may be extended at the sole discretion of PHS upon good cause shown in writing by the Collaborator. 7.3 License for PHS Employee Inventions and Joint Inventions. Pursuant to 15 U.S.C. (S) 3710a(b)(1)(A), for Subject Inventions made under this CRADA by a PHS employee(s) or jointly by such employee(s) and employees of the Collaborator pursuant to Articles 6.3 and 6.4 and licensed pursuant to the option of Article 7.1, the Collaborator grants to the Government a nonexclusive, nontransferable, irrevocable, paid-up license to practice the invention or have the invention practiced throughout the world by or on behalf of the Government. In the exercise of such license, the Government shall not publicly disclose trade secrets or commercial or financial information that is privileged or confidential 6 within the meaning of 5 U.S.C. 552(b)(4) or which would be considered as such if it had been obtained from a non-Federal party. 7.4 License in Collaborator Inventions. Pursuant to 15 U.S.C. (S) 3710a(b)(2), for inventions made solely by Collaborator employees under this CRADA pursuant to Article 6.2, the Collaborator grants to the Government a nonexclusive, nontransferable, irrevocable, paid-up license to practice the invention or have the invention practiced throughout the world by or on behalf of the Government for research or other Government purposes. 7.5 Third Party License. Pursuant to 15 U.S.C. (S) 3710a(b)(1)(B), if PHS grants an exclusive license to a Subject Invention made wholly by PHS employees or jointly with a Collaborator under this CRADA, pursuant to Articles 6.3 and 6.4, the Government shall retain the right to require the Collaborator to grant to a responsible applicant a nonexclusive, partially exclusive, or exclusive sublicense to use the invention in Collaborator's licensed field of use on terms that are reasonable under the circumstances; or if the Collaborator fails to grant such a license, to grant the license itself. The exercise of such rights by the Government shall only be in exceptional circumstances and only if the Government determines (i) the action is necessary to meet health or safety needs that are not reasonably satisfied by Collaborator, (ii) the action is necessary to meet requirements for public use specified by Federal regulations, and such requirements are not reasonably satisfied by the Collaborator; or (iii) the Collaborator has failed to comply with an agreement containing provisions described in 15 U.S.C. 3710a(c)(4)(B). The determination made by the Government under this Article is subject to administrative appeal and judicial review under 35 U.S.C. 203(2). 7.6 Joint Inventions Not Exclusively Licensed. In the event that the Collaborator does not acquire an exclusive commercialization license to IP rights in all fields in joint Subject Inventions described in Article 6.4, then each Party shall have the right to use the joint Subject Invention and to license its use to others in all fields not exclusively licensed to Collaborator. The Parties may agree to a joint licensing approach for such IP rights. Article 8. Proprietary Rights and Publication 8.1 Right of Access. PHS and the Collaborator agree to exchange all Subject Data produced in the course of research under this CRADA. Research Materials will be shared equally by the Parties to the CRADA unless other disposition is agreed to by the Parties. All Parties to this CRADA will be free to utilize Subject Data and Research Materials for their own purposes, consistent with their obligations under this CRADA. 8.2 Ownership of Subject Data and Research Materials. Subject to the sharing requirements of Paragraph 8.1 and the regulatory filing requirements of Paragraph 8.3, the producing Party will retain ownership of and title to all Subject Inventions, all Subject Data and all Research Materials produced solely by their investigators. Jointly developed Subject Inventions, Subject Data and Research Materials will be jointly owned. 7 8.3 Dissemination of Subject Data and Research Materials. To the extent permitted by law, the Collaborator and PHS agree to use reasonable efforts to keep Subject Data and Research Materials confidential until published or until corresponding patent applications are filed. Any information that would identify human subjects of research or patients will always be maintained confidentially. To the extent permitted by law, the Collaborator shall have the exclusive right to use any and all CRADA Subject Data in and for any regulatory filing by or on behalf of Collaborator, except that PHS shall have the exclusive right to use Subject Data for that purpose, and authorize others to do so, if the CRADA is terminated or if Collaborator abandons its commercialization efforts. 8.4 Proprietary/Confidential Information. Each Party agrees to limit its disclosure of Proprietary/Confidential Information to the amount necessary to carry out the Research Plan of this CRADA, and shall place a confidentiality notice on all such information. Confidential oral communications shall be reduced to writing within 30 days by the disclosing Party. Each Party receiving Proprietary/Confidential Information agrees that any information so designated shall be used by it only for the purposes described in the attached Research Plan. Any Party may object to the designation of information as Proprietary/Confidential Information by another Party. Subject Data and Research Materials developed solely by the Collaborator may be designated as Proprietary/Confidential Information when they are wholly separable from the Subject Data and Research Materials developed jointly with PHS investigators, and advance designation of such data and material categories is set forth in the RP. The exchange of other confidential information, e.g., patient-identifying data, should be similarly limited and treated. Jointly developed Subject Data and Research Material derived from the Research Plan may be disclosed by Collaborator to a third party under a confidentiality agreement for the purpose of possible sublicensing pursuant to the Licensing Agreement and subject to Article 8.7. 8.5 Protection of Proprietary/Confidential Information. Proprietary/Confidential Information shall not be disclosed, copied, reproduced or otherwise made available to any other person or entity without the consent of the owning Party except as required under court order or the Freedom of Information Act (5 U.S.C. ' 552). Each Party agrees to use its best efforts to maintain the confidentiality of Proprietary/Confidential Information. Each Party agrees that the other Party is not liable for the disclosure of Proprietary/Confidential Information which, after notice to and consultation with the concerned Party, the other Party in possession of the Proprietary/Confidential Information determines may not be lawfully withheld, provided the concerned Party has been given an opportunity to seek a court order to enjoin disclosure. 8.6 Duration of Confidentiality Obligation. The obligation to maintain the confidentiality of Proprietary/Confidential Information shall expire at the earlier of the date when the information is no longer Proprietary Information as defined in Article 2.7 or three (3) years after the expiration or termination date of this CRADA. The Collaborator may request an extension to this term when necessary to protect Proprietary/Confidential Information relating to products not yet commercialized. 8 8.7 Publication. The Parties are encouraged to make publicly available the results of their research. Before either Party submits a paper or abstract for publication or otherwise intends to publicly disclose information about a Subject Invention, Subject Data or Research Materials, the other Party shall be provided thirty (30) days to review the proposed publication or disclosure to assure that Proprietary/Confidential Information is protected. The publication or other disclosure shall be delayed for up to thirty (30) additional days upon written request by any Party as necessary to preserve U.S. or foreign patent or other IP rights. Article 9. Representations and Warranties 9.1 Representations and Warranties of PHS. PHS hereby represents and warrants to the Collaborator that the official signing this CRADA has authority to do so. 9.2 Representations and Warranties of the Collaborator. 9.2.1. The Collaborator hereby represents and warrants to PHS that the Collaborator has the requisite power and authority to enter into this CRADA and to perform according to its terms, and that the Collaborator's official signing this CRADA has authority to do so. The Collaborator further represents that it is financially able to satisfy any funding commitments made in Appendix B. 9.2.2. The Collaborator certifies that the statements herein are true, complete, and accurate to the best of its knowledge. The Collaborator is aware that any false, fictitious, or fraudulent statements or claims may subject it to criminal, civil, or administrative penalties. Article 10. Termination 10.1 Termination By Mutual Consent. PHS and the Collaborator may terminate this CRADA, or portions thereof, at any time by mutual written consent. In such event the Parties shall specify the disposition of all property, inventions, patent or other IP applications and other results of work accomplished or in progress, arising from or performed under this CRADA, all in accordance with the rights granted to the Parties under the terms of this Agreement. 10.2 Unilateral Termination. Either PHS or the Collaborator may unilaterally terminate this entire CRADA at any time by giving written notice at least thirty (30) days prior to the desired termination date, and any rights accrued in property, patents or other IP rights shall be disposed of as provided in paragraph 10.1. 10.3 Staffing. If this CRADA is mutually or unilaterally terminated prior to its expiration, funds will nevertheless remain available to PHS for continuing any staffing commitment made by the Collaborator pursuant to Article 5.1 above and Appendix B, if applicable, for a period of six (6) months after such termination. If there are insufficient funds to cover this expense, the Collaborator agrees to pay the difference. 9 10.4 New Commitments. No Party shall make new commitments related to this CRADA after a mutual termination or notice of a unilateral termination and shall, to the extent feasible, cancel all outstanding commitments and contracts by the termination date. 10.5 Termination Costs. Concurrently with the exchange of final reports pursuant to Articles 4.2 and 5.2, PHS shall submit to the Collaborator for payment a statement of all costs incurred prior to the date of termination and for all reasonable termination costs including the cost of returning Collaborator property or removal of abandoned property, for which Collaborator shall be responsible. Article 11. Disputes 11.1 Settlement. Any dispute arising under this CRADA which is not disposed of by agreement of the Principal Investigators shall be submitted jointly to the signatories of this CRADA. If the signatories are unable to jointly resolve the dispute within thirty (30) days after notification thereof, the Assistant Secretary for Health (or his/her designee or successor) shall propose a resolution. Nothing in this Article shall prevent any Party from pursuing any additional administrative remedies that may be available and, after exhaustion of such administrative remedies, pursuing all available judicial remedies. 11.2 Continuation of Work. Pending the resolution of any dispute or claim pursuant to this Article, the Parties agree that performance of all obligations shall be pursued diligently in accordance with the direction of the PHS signatory. Article 12. Liability 12.1 Property. The U.S. Government shall not be responsible for damages to any Collaborator property provided to PHS, where Collaborator retains title to the property, or any property acquired by Collaborator for its own use pursuant to this CRADA. 12.2 NO WARRANTIES. EXCEPT AS SPECIFICALLY STATED IN ARTICLE 9, THE PARTIES MAKE NO EXPRESS OR IMPLIED WARRANTY AS TO ANY MATTER WHATSOEVER, INCLUDING THE CONDITIONS OF THE RESEARCH OR ANY INVENTION OR PRODUCT, WHETHER TANGIBLE OR INTANGIBLE, MADE, OR DEVELOPED UNDER THIS CRADA, OR THE OWNERSHIP, MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE OF THE RESEARCH OR ANY INVENTION OR PRODUCT. 12.3 Indemnification. The Collaborator agrees to hold the U.S. Government harmless and to indemnify the Government for all liabilities, demands, damages, expenses and losses arising out of the use by the Collaborator for any purpose of the Subject Data, Research Materials and/or Subject Inventions produced in whole or part by PHS employees under this CRADA, unless due to the negligence or willful misconduct of PHS, its employees, or agents. The Collaborator shall be liable for any claims or damages it incurs in connection with this CRADA. PHS has no authority to indemnify the Collaborator. 12.4 Force Majeure. Neither Party shall be liable for any unforeseeable event beyond its reasonable control not caused by the fault or negligence of such Party, which causes such 10 Party to be unable to perform its obligations under this CRADA, and which it has been unable to overcome by the exercise of due diligence. In the event of the occurrence of such a force majeure event, the Party unable to perform shall promptly notify the other Party. It shall further use its best efforts to resume performance as quickly as possible and shall suspend performance only for such period of time as is necessary as a result of the force majeure event. Article 13. Miscellaneous 13.1 Governing Law. The construction, validity, performance and effect of this CRADA shall be governed by Federal law, as applied by the Federal Courts in the District of Columbia. Federal law and regulations will preempt any conflicting or inconsistent provisions in this CRADA. 13.2 Entire Agreement. This CRADA constitutes the entire agreement between the Parties concerning the subject matter of this CRADA and supersedes any prior understanding or written or oral agreement. 13.3 Headings. Titles and headings of the articles and subarticles of this CRADA are for convenient reference only, do not form a part of this CRADA, and shall in no way affect its interpretation. The PHS component that is the Party for all purposes of this CRADA is the Bureau(s), Institute(s), Center(s) or Division(s) listed on the Cover Page herein. 13.4 Waivers. None of the provisions of this CRADA shall be considered waived by any Party unless such waiver is given in writing to the other Party. The failure of a Party to insist upon strict performance of any of the terms and conditions hereof, or failure or delay to exercise any rights provided herein or by law, shall not be deemed a waiver of any rights of any Party. 13.5 Severability. The illegality or invalidity of any provisions of this CRADA shall not impair, affect, or invalidate the other provisions of this CRADA. 13.6 Amendments. If either Party desires a modification to this CRADA, the Parties shall, upon reasonable notice of the proposed modification or extension by the Party desiring the change, confer in good faith to determine the desirability of such modification or extension. Such modification shall not be effective until a written amendment is signed by the signatories to this CRADA or by their representatives duly authorized to execute such amendment. 13.7 Assignment. Neither this CRADA nor any rights or obligations of any Party hereunder shall be assigned or otherwise transferred by either Party without the prior written consent of the other Party. 13.8 Notices. All notices pertaining to or required by this CRADA shall be in writing and shall be signed by an authorized representative and shall be delivered by hand or sent by certified mail, return receipt requested, with postage prepaid, to the addresses indicated on the signature page for each Party. Notices regarding the exercise of license options 11 shall be made pursuant to Article 7.2. Any Party may change such address by notice given to the other Party in the manner set forth above. 13.9 Independent Contractors. The relationship of the Parties to this CRADA is that of independent contractors and not agents of each other or joint venturers or partners. Each Party shall maintain sole and exclusive control over its personnel and operations. Collaborator employees who will be working at PHS facilities may be asked to sign a Guest Researcher or Special Volunteer Agreement appropriately modified in view of the terms of this CRADA. 13.10 Use of Name or Endorsements. By entering into this CRADA, PHS does not directly or indirectly endorse any product or service provided, or to be provided, whether directly or indirectly related to either this CRADA or to any patent or other IP license or agreement which implements this CRADA by its successors, assignees, or licensees. The Collaborator shall not in any way state or imply that this CRADA is an endorsement of any such product or service by the U.S. Government or any of its organizational units or employees. Collaborator issued press releases that reference or rely upon the work of PHS under this CRADA shall be made available to PHS at least 7 days prior to publication for review and comment. 13.11 Exceptions to this CRADA. Any exceptions or modifications to this CRADA that are agreed to by the Parties prior to their execution of this CRADA are set forth in Appendix C. 13.12 Reasonable Consent. Whenever a Party's consent or permission is required under this CRADA, such consent or permission shall not be unreasonably withheld. Article 14. Duration of Agreement 14.1 Duration. It is mutually recognized that the duration of this project cannot be rigidly defined in advance, and that the contemplated time periods for various phases of the RP are only good faith guidelines subject to adjustment by mutual agreement to fit circumstances as the RP proceeds. In no case will the term of this CRADA extend beyond the term indicated in the RP unless it is revised in accordance with Article 13.6. 14.2 Survivability. The provisions of Articles 4.2, 5-8, 10.3-10.5, 11.1, 12.2-12.4, 13.1, 13.10 and 14.2 shall survive the termination of this CRADA. SIGNATURES BEGIN ON THE NEXT PAGE 12 FOR PHS: /s/ Alan Rabson 12/31/99 - --------------------------------------------- ---------------------- Alan Rabson, M.D. Date Deputy Director, NCI Mailing Address for Notices: National Cancer Institute Technology Development & Commercialization Branch NCI-FCRDC 1003 West Seventh Street, Fairview Center, Suite 502 Frederick, MD 21701 phone: 301-846-5465 fax: 301-8466820 FOR THE COLLABORATOR: /s/ Russell J. Howard 2/24/00 - --------------------------------------------- ---------------------- Russell J. Howard, Ph.D. Date CEO and President Mailing Address for Notices: Maxygen, Inc. 515 Galveston Drive Redwood City, CA 94063 phone: 650-298-5300 fax: 650-364-2715 13 Appendix A: RESEARCH PLAN ------------------------- Title: Shuffling of *******. National Cancer Institute (NCI) Principal Investigators: ******* ******* Collaborator Principal Investigator: ******* Term of CRADA: 3 years from execution of this CRADA. A Letter of Intent (LOI) for this CRADA was executed by and between the Parties on 10/13/99. GOALS OF THE CRADA: - ------------------ This CRADA Research Plan (RP) describes a collaboration between the NCI- Developmental Therapeutics Program (DTP) and Maxygen. The CRADA collaboration leverages the NCI research on ******* and Maxygen's proprietary Shuffling Technology which can rapidly evolve and select improved versions of natural and synthetic *******. The major activity of this CRADA is for the DTP and Maxygen to collaborate to screen and characterize ******* provided by Maxygen. The major goal of this CRADA is to maximize the chemotherapeutic potential of *******. Goal A of this CRADA is to screen and optimize evolved ******* synergize with that of the commercially-available, tubulin inhibitor, *******, on breast cancer cell lines. The ******* provided by Maxygen for screening and optimization under this CRADA will be targeted toward one or the other of the following improved cytotoxicity and antigenic profiles: (1) An evolved, *******. (2) An evolved derivative of the *******. One of the great attractions of ******* as anti-tumor agents is that they act by mechanisms that are insensitive to mutations in *******. Additionally, they synergize with the activity of DNA damaging agents such as ******* in some, but not all, cell lines [32]. The Shuffled ******* may be expressed as fusions to targeting domains such as *******. 14 Goal B: Implement an in vivo mouse model program to identify clinical candidates from the optimized evolved *******. Candidate molecules selected for improved activity from the efforts as described in Goal A are to be screened by the NCI-Biological Testing Branch (BTB) in ******* animal models containing *******. SCIENTIFIC BACKGROUND - --------------------- Maxygen's Shuffling Technology: Maxygen's Shuffling Technology: Maxygen's Shuffling Technology consists of proprietary techniques, methodologies, processes, materials and/or instrumentation useful for the recombination, rearrangement, and/or mutation of genetic material for the creation of genetic diversity, and subsequent techniques useful for the high-throughput (HTP) screening of the resultant genetic material to identify potentially useful genes. Shuffling, as practiced in the laboratory, mirrors the process of natural evolution by which the tremendous diversity of all life forms may have been created. In nature, the accumulation of mutations and the process of sexual reproduction creates genetic diversity. This genetic diversity is subjected to natural selection pressures such that only some of the genetic diversity survives. Humans have used the enormous amount of existing genetic diversity to their advantage by breeding domestic dogs, horses, cattle, cats, vegetables, fruits, and cereals from wild breeding stocks. Breeders select whatever characteristics they desire from within existing species and breed them together, regardless of whether the resulting animal or plant would ever survive (i.e. be useful) in nature. In just a few generations of breeding, substantial variation and novel properties can be achieved. Shuffling is, in essence, the application of classical breeding principles to sub-genomic sequences. This approach to sequence evolution generalizes concepts from classical genetics, allowing one to selectively breed DNA sequences in the test tube. Maxygen begins with the natural diversity already present in a gene family or creates it by mutagenesis, and then rapidly shuffles the diversity to create a large pool of novel genes. Their process involves fragmenting the genes into pieces and reassembling them in a homology-dependent fashion. Those genes that encode proteins with the desired novel properties are then selected using high-throughput (HTP) screening assays. As with traditional breeding, Maxygen's technology does not require a rational understanding of the genes involved in order to engineer novel properties. This technology provides a powerful tool for rapidly evolving single genes, operons and whole viruses for desired properties, and has many advantages relative to random mutation or rational sequence design. ******* RELATED PATENT APPLICATIONS AND PATENTS, OTHER AGREEMENTS: - --------------------------------------------------------- 15 The Parties hereby modify their rights under the following prior agreements: Confidential Disclosure Agreement: Two-way agreement # 3-60778-99; *******. ******* ******* and the Parties agree that the materials and/or information provided thereunder are now governed by the terms of this CRADA in accordance with Article 13.2, except that the obligations of the parties with regard to confidentiality shall remain retroactive to December 14, 1998. Letter of Intent: A Letter of Intent (LOI) for this CRADA was executed by and - ---------------- between the Parties on 10/13/99. With this exception, there are no other existing CRADAs between NIH and Maxygen. Related Patents/Patent Applications of NCI: - ------------------------------------------ Note: Maxygen has decided not to apply for a license at this time for the NIH Intellectual Property listed below. Maxygen would prefer to wait for results obtained from the Research Plan of this CRADA before applying for a license. Nothing herein is a commitment by NIH not to license this patent(s) to others who may apply for a license pursuant to 37CFR 404 in the interim. ******* 16 APPENDIX B ---------- FINANCIAL AND STAFFING CONTRIBUTIONS OF THE PARTIES - --------------------------------------------------- Maxygen Staffing: (total of 0.******* person-years for 1st year of CRADA. Staffing in subsequent years 2-3 will be contingent on the results obtained in the initial year). Changes in staffing levels will be documented by written amendment. Maxygen will provide scientific staff and other support as necessary to conduct the research outlined in Appendix A, Research Plan. Staffing for the first year will be as follows: Name Position / title % of time devoted to CRADA Research Plan -------------------------- ---------------------------------------- ******* Principal Investigator ******* Duties: Direct the research described in the CRADA goals and provide scientific staff and other support as necessary to conduct the Research Plan as outlined in Appendix A. ******* Manager, Business Development ******* Duties: Assess commercial progress and opportunities, and provide on-going business support for Research Plan activities. ******* Maxygen ******* Duties: Creation of Shuffled ******* at Maxygen, and scale-up of expression. ******* Maxygen ******* Duties: Expression and HTP screening of *******. The above assignments and time allocations are approximate. During the term of the CRADA, these staffing assignments and percentages of time devoted to CRADA research are likely to vary from the information provided above. Maxygen Financial Support: No funding will be provided to the National Cancer Institute for collaborative research and development pursuant to this CRADA. National Cancer Institute Staffing: (total of ******* person-years/year). 17 Name Position / title % time devoted to CRADA Research - ------------------------------------ -------------------------------- ******* NCI, Principal Investigator ******* Duties: To direct the research described in the CRADA goals and provide scientific staff and other support as necessary to conduct the Research Plan as outlined in Appendix A. ******* Principal Investigator ******* Duties: To direct the research described in the CRADA goals and provide scientific staff and other support as necessary to conduct the Research Plan as outlined in Appendix A. *******, SAIC Investigator ******* Duties: Supervise SAIC personnel on project and conduct in vitro assays. ******* NCI/DTP / LDDR ******* Duties: Conduct in vitro assays. ******* NCI/DTP Investigator ******* Duties: Conduct in vitro assays ******* NCI/DTP Investigator ******* Duties: Conduct in vivo assays ******* SAIC Research Technician ******* Duties: Conduct in vivo assays NCI Financial Support: NCI will provide no funding to the Collaborator for collaborative research and development pursuant to this CRADA inasmuch as financial contributions by the U.S. government to non-Federal parties under a CRADA are not authorized under the Federal Technology Transfer Act [15 U.S.C. (S) 3710a(d)(1)]. 18 APPENDIX C ---------- EXCEPTIONS OR MODIFICATIONS TO THIS CRADA ----------------------------------------- The PHS Model CRADA is replaced in its entirety by the following in which additional terms are underlined, while deletions are struck-out. 19 PUBLIC HEALTH SERVICE COOPERATIVE RESEARCH AND DEVELOPMENT AGREEMENT This Cooperative Research and Development Agreement, hereinafter referred to as the CRADA, consists of this Cover Page, an attached Agreement, and various Appendices referenced in the Agreement. This Cover Page serves to identify the Parties to this CRADA: (1) the following Bureau(s), Institute(s), Center(s) or Division(s) of the National Institutes of Health (`NIH'), The National Cancer Institute (`NCI'), hereinafter referred to as the National Institutes of Health (`NIH'); and (2) Maxygen, Inc. which has offices at 515 Galveston Drive, Redwood City, California 94063, hereinafter referred to as the `Collaborator'. 20 COOPERATIVE RESEARCH AND DEVELOPMENT AGREEMENT Article 1. Introduction This Cooperative Research and Development Agreement (CRADA) between NIH and the Collaborator will be effective when signed by all Parties. The research and development activities which will be undertaken by each of the Parties in the course of this CRADA are detailed in the Research Plan which is attached as Appendix A. The funding and staffing commitments of the Parties are set forth in Appendix B. Any exceptions or changes to the CRADA are set forth in Appendix C. This CRADA is made under the authority of the Federal Technology Transfer Act, 15 U.S.C. (S)3710a and is governed by its terms. Article 2. Definitions As used in this CRADA, the following terms shall have the indicated meanings: 2.1 "Affiliate" means any corporation or other business entity controlled by, controlling, or under common control with Collaborator. For this purpose, A "control" means direct or indirect beneficial ownership of at least fifty (50) percent of the voting stock or at least fifty (50) percent interest in the income of such corporation or other business. 2.2 "Cooperative Research and Development Agreement" or "CRADA" means this Agreement, entered into by NIH pursuant to the Federal Technology Transfer Act of 1986, as amended, 15 U.S.C. 3710a et seq. and Executive Order 12591 of October 10, 1987. 2.3 "Government" means the Government of the United States as represented through the NIH agency that is a Party to this agreement. 2.4 "IP" means intellectual property. 2.5 "Invention" means any invention or discovery which is or may be patentable or otherwise protected under title 35, United States Code, or any novel variety or plant which is or may be protectable under the Plant Variety Protection Act (7 U.S.C. 2321 et seq.). 21 2.6 "Principal Investigator(s)" or "PIs" means the persons designated respectively by the Parties to this CRADA who will be responsible for the scientific and technical conduct of the Research Plan. 2.7 "Proprietary/Confidential Information" means confidential scientific, business, or financial information provided that such information does not include: 2.7.1. information that is publicly known or available from other sources who are not under a confidentiality obligation to the source of the information; 2.7.2. information which has been made available by its owners to others without a confidentiality obligation; 2.7.3. information which is already known by or available to the receiving Party without a confidentiality obligation; or 2.7.4. information which relates to potential hazards or cautionary warnings associated with the production, handling or use of the subject matter of the Research Plan of this CRADA. 2.8 "Research Materials" means all tangible materials other than Subject Data first produced in the performance of the Research Plan of this CRADA. 2.9 "Research Plan" means the statement in Appendix A of the respective research and development commitments of the Parties to this CRADA. 2.10 "Subject Invention" means any Invention of the Parties, conceived or first actually reduced to practice in the performance of the Research Plan of this CRADA. 2.11 "Subject Data" means all recorded information first produced in the performance of the Research Plan of this CRADA by the Parties. 2.12 "Steering Committee" means the joint NIH Collaborator research and development team whose composition and responsibilities with regard to the studies performed under this CRADA are described in Article 3.3 of this CRADA. 22 2.13 "Shuffling" means the systems set up by man to use high speed recombination and/or rearrangement and/or mutation of genetic material for the creation of genetic diversity. 2.14 "Shuffling Technology" means techniques, methodologies, processes, materials and/or instrumentation useful for Shuffling, and the screening of genetic material resulting from Shuffling to identify potential useful genes. Article 3. Cooperative Research 3.1 Principal Investigators. NIH research work under this CRADA will be performed by the NIH laboratory identified in the Research Plan, and the NIH Principal Investigator (PI) designated in the Research Plan will be responsible for the scientific and technical conduct of this project on behalf of NIH. Also designated in the Research Plan is the Collaborator PI who will be responsible for the scientific and technical conduct of this project on behalf of the Collaborator. 3.2 Research Plan Change. The Research Plan may be modified by mutual written consent of the Principal Investigators. Substantial changes in the scope of the Research Plan will be treated as amendments under Article 13.6. If the results from the Research Plan are promising, NIH and Collaborator shall discuss, in good faith, plans to support and to submit proposals for further research in a separate clinical CRADA. If the Research Plan is amended to include the participation of any extramural grantee investigators, NIH shall urge the grantee investigators to cooperate exclusively with the Collaborator. However, such urging shall not constitute a condition of any grant award. 3.3 Steering Committee and CRADA Research. The Parties agree to establish a Steering Committee comprising at least the Principal Investigators designated pursuant to Article 3.1 to conduct and monitor the research in accordance with the Research Plan, review Subject Inventions disclosures and to review proposed publications and data. Details of the research and development as set forth in the Research Plan shall be formulated, reviewed and/or approved in Steering Committee meetings before implementation of any resource-intensive study. Notwithstanding the forgoing, Collaborator has the option to sponsor its own pre-clinical studies outside the scope of this CRADA. 3.4 Composition of Steering Committee. Collaborator and NIH shall have equal voice in decisions of the Steering Committee. The initial composition of the Steering Committee shall be voting members on behalf of NIH and two voting members on behalf of Collaborator. A Steering Committee member representing NIH will co-chair the Steering committee with the Steering Committee member representing Collaborator. The membership of the Steering Committee may be changed from time to time as mutually agreed by NIH and Collaborator in writing. 23 3.5 Meetings. The Steering Committee shall meet within one month of the execution of this CRADA, and then regularly once a quarter thereafter or as appropriate. The Steering Committee shall be the forum for discussion of issues for which differences in opinion may arise and shall be the initial forum to attempt to resolve any disputes arising therefrom. In the event, resolution of such dispute(s) is not achieved in the Steering Committee, the dispute resolution mechanism of Article 11 herein shall be implemented. The Principal Investigators shall report regularly to the Steering Committee on the progress of the research and development efforts covered by this CRADA, but not less than once a quarter, unless mutually agreed. Attendance at the Steering Committee meetings shall be limited to members of the Steering Committee and invited participants, as mutually agreed to by the Parties. Invited participants shall be non-voting members of the Steering Committee. 3.6 Written Record. The Steering Committee shall appoint one of its members to act as the Committee Secretary for each meeting, such appointment alternately between the parties from meeting to meeting. The Secretary shall prepare, for Committee approval and signature, written summaries of each Steering Committee meeting within two weeks of each Steering Committee meeting. These summaries shall include information about Steering Committee deliberations and describe issues addressed and decisions reached. Written materials created by the Steering Committee shall be treated as described in subarticle 3.7 below. The written summary shall be deemed to be deemed to be approved by the Committee if no comments are received within two weeks of receipt thereof. Upon incorporation of modifications in accordance with such comments, the revised summary shall be transmitted to Committee members of signature, but will be deemed approved within two weeks of receipt thereof. 3.7 Treatment of Steering Committee Proprietary Information. Except as required by law and subject to Article 8 of this CRADA, the Parties agree that Proprietary/Confidential Information including disclosures of such data in discussions and information exchanged at meetings of the Steering Committee, and in written summaries of Steering Committee meetings, shall be maintained as confidential to the Parties, and shall not be disclosed to any third parties without the consultation and written agreement within the Steering Committee. Article 4. Reports 4.1 Interim Reports. The Parties shall exchange formal written interim progress reports on a schedule agreed to by the PIs, but at least within twelve (12) months after this CRADA becomes effective and at least within every twelve (12) months thereafter. Such reports shall set forth the technical progress made, identifying such problems as may have been encountered and establishing goals and objectives requiring further effort, any modifications to the Research Plan pursuant to Article 3.2, and all CRADA-related patent applications filed. 24 Steering Committee reports or copies of annual reports updating the progress of the CRADA research shall satisfy the minimum reporting requirements under this Article 4.1. 4.2 Final Reports. The Parties shall exchange final reports of their results within four (4) months after completing the projects described in the Research Plan or after the expiration or termination of this CRADA. Article 5. Financial and Staffing Obligations 5.1 NIH and Collaborator Contributions. The contributions of the Parties, including payment schedules, if applicable, are set forth in Appendix B. NIH shall not be obligated to perform any of the research specified herein or to take any other action required by this CRADA if the funding is not provided as set forth in Appendix B. NIH shall return excess funds to the Collaborator when it sends its final fiscal report pursuant to Article 5.2, except for staffing support pursuant to Article 10.3. Collaborator acknowledges that the U.S. Government will have the authority to retain and expend any excess funds for up to one (1) year subsequent to the expiration or termination of the CRADA to cover any costs incurred during the term of the CRADA in undertaking the work set forth in the Research Plan. 5.2 Accounting Records. NIH shall maintain separate and distinct current accounts, records, and other evidence supporting all its obligations under this CRADA, and shall provide the Collaborator a final fiscal report pursuant to Article 4.2. 5.3 Capital Equipment. Equipment purchased by NIH with funds provided by the Collaborator shall be the property of NIH. All capital equipment provided under this CRADA by one party for the use of another Party remains the property of the providing Party unless other disposition is mutually agreed upon by in writing by the Parties. If title to this equipment remains with the providing Party, that Party is responsible for maintenance of the equipment and the costs of its transportation to and from the site where it will be used. Article 6. Intellectual Property Rights and Patent Applications 6.1 Reporting. The Parties shall promptly report to each other in writing each Subject Invention resulting from the research conducted under this CRADA that is reported to them by their respective employees. Each Party shall report all Subject Inventions to the other Party in sufficient detail to determine inventorship. Such reports shall be treated as Proprietary/Confidential Information in accordance with Article 8.4. 25 6.2 Collaborator Employee Inventions. If the Collaborator does not elect to retain title to its IP rights in a Subject Invention, the Collaborator shall offer to assign these IP rights to the Subject Invention to NIH pursuant to Article 6.5. If NIH declines such assignment, the Collaborator may release title to its IP rights as it may determine. 6.3 NIH Employee Inventions. NIH on behalf of the U.S. Government may elect to retain title to its IP rights to each Subject Invention made solely by NIH employees. If NIH does not elect to retain title to its IP rights, NIH shall offer to assign these IP rights to such Subject Invention to the Collaborator pursuant to Article 6.5. If the Collaborator declines such assignment, NIH may release title to its IP rights in such Subject Invention to its employee inventors pursuant to Article 6.6. 6.4 Joint Inventions. Each Subject Invention made jointly by NIH and Collaborator employees shall be jointly owned by NIH and the Collaborator. If NIH and Collaborator both agree that a patent application should be filed on a jointly owned Subject Invention, then the parties shall consult about the best manner to proceed in filing and prosecuting the jointly owned patent application. If NIH and Collaborator elect to file jointly, then each shall bear one-half the costs of such filing and prosecution. However, NIH only has authority to reimburse such costs directly to law firms under contract to NIH. Alternatively, the Collaborator may elect to file the joint patent or other IP application(s) thereon and shall notify NIH promptly upon making this election. If the Collaborator decides to file such applications, it shall do so in a timely manner and at its own expense. If the Collaborator does not elect to file such application(s), NIH on behalf of the U.S. Government shall have the right to file the joint application(s) in a timely manner and at its own expense. If either Party decides not to retain title to its IP rights to a jointly owned Subject Invention, it shall offer to assign such rights to the other Party pursuant to Article 6.5. If the other Party declines such assignment, the offering Party may release title to its IP rights as provided in Articles 6.2, 6.3, and 6.6. 6.5 Filing of Patent Applications. With respect to Subject Inventions made by the Collaborator as described in Article 6.2, or by NIH as described in Article 6.3, a Party exercising its right to elect to retain title to its IP rights to a Subject Invention agrees to file patent or other IP applications in a timely manner and at its own expense and after consultation with the other Party. The Party shall notify the other Party of its decision regarding filing in countries other than the United States in a timely manner. The Party may elect not to file a patent or other IP application thereon in any particular country or countries provided it so advises the other Party ninety (90) days prior to the expiration of any applicable filing deadline, priority period or statutory bar date, and hereby agrees to assign its IP right, title and interest in the Subject Invention in such country or countries to the Subject Invention to the other Party and to cooperate in the preparation and filing of a patent or other IP applications. In any countries in which title to patent or other IP rights for Subject Inventions is transferred to the Collaborator, the Collaborator agrees that NIH 26 inventors will share in any royalty distribution that the Collaborator pays to its own inventors. 6.6 Release to Inventors. In the event neither of the Parties to this CRADA elects to file a patent or other IP application on a Subject Invention, either or both (if a joint invention) may retain or release titles to their IP rights in accordance with their respective policies and procedures. If NIH elects not to retain title to its IP rights in and to any such Subject Invention made solely or jointly by NIH, the Government shall retain a nonexclusive, non-transferable, irrevocable, royalty-free license to practice any such Subject Invention, or have it practiced throughout the world by or on behalf of the Government. Similarly, if Collaborator elects not to retain title to any IP rights to Subject Inventions made jointly or solely by its employees and, pursuant to Article 6.2 herein, offers such rights to NIH which waives such rights, then Collaborator shall be free to release such rights to its employee inventors subject to the Government retaining a nonexclusive, non-transferable, irrevocable, royalty-free license to practice, or have such Subject Inventions(s) practiced throughout the world by or on behalf of the Government. 6.7 Patent Expenses. The expenses attendant to the filing of patent or other IP applications generally shall be paid by the Party filing such application unless agreed otherwise in connection with jointly owned patent applications. If an exclusive license to any Subject Invention is granted to the Collaborator, the Collaborator shall be responsible for all past and future out-of-pocket expenses in connection with the preparation, filing, prosecution and maintenance of any applications claiming such exclusively- licensed inventions and any patents or other IP grants that may issue on such applications. The Collaborator may waive its exclusive license rights on any application, patent or other IP grant at any time, and incur no subsequent compensation obligation for that application, patent or IP grant. 6.8 Prosecution of Intellectual Property Applications. Within one month of receipt or filing, each Party shall provide the other Party with copies of the applications and all documents received from or filed with the relevant patent or other IP office in connection with the prosecution of such applications. Each Party shall also provide the other Party with the power to inspect and make copies of all documents retained in the patent or other IP application files by the applicable patent or other IP office. Where licensing is contemplated by Collaborator, the Parties agree to consult with each other with respect to the prosecution of applications for NIH Subject Inventions described in Article 6.3 and joint Subject Inventions described in Article 6.4. If the one party elects to file and prosecute IP applications on joint Subject Inventions pursuant to Article 6.4, the other party will be granted an associate power of attorney (or its equivalent) on such IP applications. Patent counsel for each party shall cooperate with patent counsel for the other party in connection with the filing, prosecution and maintenance of patent applications claiming joint Subject Inventions. Associate power of Attorney will not be used by either party to make any submissions to the USPTO without consulting with the other party. 27 Article 7. Licensing 7.1 Option for Commercialization License. With respect to Government IP rights to any Subject Invention not made solely by the Collaborator's employees for which a patent or other IP application is filed, NIH hereby grants to the Collaborator an exclusive option to elect an exclusive or nonexclusive commercialization license, which is substantially in the form of the appropriate model NIH license agreement. This option does not apply to Subject Inventions conceived prior to the effective date of this CRADA that are reduced to practice under this CRADA, if prior to that reduction to practice, NIH has filed a patent application on the invention and has licensed it or offered to license it to a third party. The terms of the license will fairly reflect the nature of the invention, the relative contributions of the Parties to the invention and the CRADA, the risks incurred by the Collaborator and the costs of subsequent research and development needed to bring the invention to the marketplace. The field of use of the license will be commensurate with the scope of the Research Plan. The Collaborator shall have the right to sublicense the license rights granted hereunder, provided that the Collaborator obtains the prior written consent of NIH for the sublicensing of its non-exclusive license rights, such consent to be reasonably given in situations where Collaborator sublicenses its exclusive rights in one or more Subject Inventions(s) to sublicensee(s) and requests to sublicense its non- exclusive rights in Subject Invention(s) to the same sublicensee(s); and any such sublicensee shall be bound by the terms of this license. 7.2 Exercise of License Option. The option of Article 7.1 must be exercised with respect to a particular Subject Invention by written notice mailed within three (3) months after either (i) Collaborator receives written notice from NIH that the patent or other IP application has been filed; or (ii) the date Collaborator files such IP application. Exercise of this option by the Collaborator initiates a negotiation period that expires nine (9) months after the exercise of the option. If the last proposal by the Collaborator has not been responded to in writing by NIH within this nine (9) month period, the negotiation period shall be extended to expire one (1) month after NIH so responds, during which month the Collaborator may accept in writing the final license proposal of NIH. In the absence of such acceptance, or an extension of the time limits by NIH, NIH will be free to license its rights in such Subject Invention to others. In the event that the Collaborator elects the option for an exclusive license, but no such license is executed during the negotiation period, NIH agrees not to make an offer for an exclusive license on more favorable terms to a third party for a period of twelve (12) months without first offering Collaborator those more favorable terms. These times may be extended at the sole discretion of NIH upon good cause shown in writing by the Collaborator. 28 7.3 License for NIH Employee Inventions and Joint Inventions. Pursuant to 15 U.S.C. (S) 3710a(b)(1)(A), for Subject Inventions made under this CRADA by a NIH employee(s) or jointly by such employee(s) and employees of the Collaborator pursuant to Articles 6.3 and 6.4 and licensed pursuant to the option of Article 7.1, the Collaborator grants to the Government a nonexclusive, nontransferable, irrevocable, paid-up license to practice the invention or have the invention practiced throughout the world by or on behalf of the Government. In the exercise of such license, the Government shall not publicly disclose trade secrets or commercial or financial information that is privileged or confidential within the meaning of 5 U.S.C. 552(b)(4) or which would be considered as such if it had been obtained from a non-Federal party. The retained non-exclusive Government licenses described in this Article 7, and elsewhere herein, are intended by the NIH to be invoked by the NIH in circumstances consistent with the legislative history of the Stevenson-Wydler Technology Innovation Act, as amended, that provide for such licenses. 7.4 License in Collaborator Inventions. Pursuant to 15 U.S.C. (S) 3710a(b)(2), for inventions made solely by Collaborator employees under this CRADA pursuant to Article 6.2, (1) NIH hereby ensures Collaborator that Collaborator shall retain title in such Subject Inventions, and (2) the Collaborator grants to the Government a nonexclusive, nontransferable, irrevocable, paid-up license to practice the Subject invention or have the Subject Invention practiced throughout the world by or on behalf of the Government for research or other Government purposes. As stated in the Research Plan, during the course and in the performance of this CRADA, the Collaborator will only use Shuffling Technology that Collaborator has developed or develops outside the course and performance of the CRADA program. If the progress of the CRADA research would benefit by the development of inventive Shuffling Technology subject matter during the course of the CRADA, Collaborator will attempt to develop such inventive subject matter outside the scope, course and performance of the present CRADA. Such inventive Shuffling Technology subject matter shall not be considered to comprise a Subject Invention as defined herein. However, selected Shuffled ******* and their corresponding DNA clones are considered Research Materials of the CRADA and fall under the scope of the CRADA Research Plan. 7.5 Third Party License. Pursuant to 15 U.S.C. (S) 3710a(b)(1)(B), if NIH grants an exclusive license to a Subject Invention made wholly by NIH employees or jointly with a Collaborator under this CRADA, pursuant to Articles 6.3 and 6.4, the Government shall retain the right to require the Collaborator to grant to a responsible applicant a nonexclusive, partially exclusive, or exclusive sublicense to use the invention in Collaborator's licensed field of use on terms that are reasonable under the circumstances; or if the Collaborator fails to grant such a license, to grant the license itself. The exercise of such rights by the Government shall only be in exceptional circumstances and only if the Government determines (i) the action is necessary to meet health or safety needs that are not reasonably satisfied by Collaborator, (ii) the action is necessary to meet requirements 29 for public use specified by Federal regulations, and such requirements are not reasonably satisfied by the Collaborator; or (iii) the Collaborator has failed to comply with an agreement containing provisions described in 15 U.S.C. 3710a(c)(4)(B). The determination made by the Government under this Article is subject to administrative appeal and judicial review under 35 U.S.C. 203(2). 7.6 Joint Inventions Not Exclusively Licensed. In the event that the Collaborator does not acquire an exclusive commercialization license to IP rights in all fields in joint Subject Inventions described in Article 6.4, then each Party shall have the right to use the joint Subject Invention and to license its use to others in all fields not exclusively licensed to Collaborator. The Parties may agree to a joint licensing approach for such IP rights. Article 8. Proprietary Rights and Publication 8.1 Right of Access. NIH and the Collaborator agree to exchange all Subject Data produced in the course of research under this CRADA. Research Materials will be shared equally by the Parties to the CRADA unless other disposition is agreed to by the Parties. All Parties to this CRADA will be free to utilize Subject Data and Research Materials for their own purposes, consistent with their obligations under this CRADA provided that NIH shall not have direct access to and/or direct use of Collaborator's proprietary Shuffling Technology in the performance of the CRADA. 8.2 Ownership of Subject Data and Research Materials. Subject to the sharing requirements of Paragraph 8.1 and the regulatory filing requirements of Paragraph 8.3, the producing Party will retain ownership of and title to all Subject Inventions, all Subject Data and all Research Materials produced solely by their investigators. Jointly developed Subject Inventions, Subject Data and Research Materials will be jointly owned. 8.3 Dissemination of Subject Data and Research Materials. To the extent permitted by law, the Collaborator and NIH agree to use reasonable efforts to keep Subject Data and Research Materials confidential until published or until corresponding patent applications are filed. Any information that would identify human subjects of research or patients will always be maintained confidentially. To the extent permitted by law, the Collaborator shall have the exclusive right to use any and all CRADA Subject Data in and for any regulatory filing by or on behalf of Collaborator, except that NIH shall have the exclusive right to use Subject Data for that purpose, and authorize others to do so, if Collaborator abandons its commercialization efforts. 8.4 Proprietary/Confidential Information. Each Party agrees to limit its disclosure of Proprietary/Confidential Information to the other Party hereunder to the amount necessary 30 CRADA #00880 to carry out the Research Plan of this CRADA, and shall place a confidentiality notice on all such information. Confidential oral communications shall be reduced to writing within 30 days by the disclosing Party. Each Party receiving Proprietary/Confidential Information of the other Party pursuant to this CRADA agrees that any information so designated shall be used by it only for the purposes described in the attached Research Plan. Any Party may object to the designation of information as Proprietary/Confidential Information by another Party. Subject Data and Research Materials developed solely by the Collaborator may be designated as Proprietary/Confidential Information when they are wholly separable from the Subject Data and Research Materials developed jointly with NIH investigators, and advance designation of such data and material categories is set forth in the Research Plan. The exchange of other confidential information, e.g., patient-identifying data, should be similarly limited and treated. Jointly developed Subject Data and Research Material derived from the Research Plan may be disclosed by Collaborator to a third party under a confidentiality agreement for the purpose of possible sublicensing pursuant to any licensing agreement of Subject Inventions or such purposes as Collaborator considers appropriate to pursue its commercial interests including, but not limited to, disclosures to manufacturing subcontractors, clinical or preclinical laboratories, medical or scientific consultants, quality control, quality assurance or analytical laboratories, or government regulatory agencies. 8.5 Protection of Proprietary/Confidential Information. Proprietary/Confidential Information shall not be disclosed, copied, reproduced or otherwise made available to any other person or entity without the consent of the owning Party except as required under court order or the Freedom of Information Act (5 U.S.C. (S) 552). Each Party agrees to use its best efforts to maintain the confidentiality of Proprietary/Confidential Information. Each Party agrees that the other Party is not liable for the disclosure of Proprietary/Confidential Information which, after notice to and consultation with the concerned Party, the other Party in possession of the Proprietary/Confidential Information determines may not be lawfully withheld, provided the concerned Party has been given an opportunity to seek a court order to enjoin disclosure. 8.6 Duration of Confidentiality Obligation. The obligation to maintain the confidentiality of Proprietary/Confidential Information shall expire at the earlier of the date when the information is no longer Proprietary Information as defined in Article 2.7 or three (3) years after the expiration or termination date of this CRADA unless, after the said three (3) years, any Party informs the other Party that the Confidential Information is still secret and confidential, in which case the obligation shall extend for a further successive periods of two (2) years. The Collaborator may request an extension to these terms when necessary to protect Proprietary/Confidential Information relating to products not yet commercialized. 8.7 Publication. The Parties are encouraged to make publicly available the results of their research. Before either Party submits a paper or abstract for publication or otherwise intends to publicly disclose information about a Subject Invention, Subject Data or 31 Research Materials, or any other confidential information concerning this CRADA, the submitting Party shall first submit a draft of the proposed disclosure to the Steering Committee for review at least 30 days prior to any submission for publication or other public disclosure. As defined under Article 8.4, if such proposed disclosure contains Proprietary/Confidential Information of a Party, such Party may require that such Confidential Information be deleted or modified from the proposed disclosure in accordance with Article 8.5. The Steering Committee shall provide advisory review and comments prior to submission of proposed disclosures for publication and/or public presentation. The submitting party will seriously consider the suggested modifications of the Steering Committee. To avoid loss of patent rights as a result of premature public disclosure of patentable information, the reviewing Party shall notify the submitting Party in writing within 30 days after receipt of such proposed disclosure whether the reviewing Party desires that a patent application be filed on any invention disclosed in such proposed disclosure. In the event that the reviewing Party desires such filing, the submitting Party shall withhold publication or disclosure of such proposed disclosure until the earlier of: (i) the date a patent application is filed thereon, or (ii) the date the Parties determine after consultation that no patentable invention exists, or (iii) 60 days after receipt by the submitting Party of the reviewing Party's written notice of its desire to file such patent application. Article 9. Representations and Warranties 9.1 Representations and Warranties of NIH. NIH hereby represents and warrants to the Collaborator that the official signing this CRADA has authority to do so. 9.2 Representations and Warranties of the Collaborator. (a) The Collaborator hereby represents and warrants to NIH that the Collaborator has the requisite power and authority to enter into this CRADA and to perform according to its terms, and that the Collaborator's official signing this CRADA has authority to do so. The Collaborator further represents that it is financially able to satisfy any funding commitments made in Appendix B. (b) The Collaborator certifies that the statements herein are true, complete, and accurate to the best of its knowledge. The Collaborator is aware that any false, fictitious, or fraudulent statements or claims may subject it to criminal, civil, or administrative penalties. 9.3 NIH Disclosure of Third Party Rights. NIH hereby acknowledges that Research Materials provided to Collaborator during the course of the CRADA research may be 32 subject to third party patent and other rights. NIH will exercise its best efforts to provide Collaborator with all non-privileged and non-confidential information its PI and NIH have in their possession, or of which they are aware, identifying third party rights in and to Research Materials supplied by NIH to Collaborator under this CRADA. Article 10. Termination 10.1 Termination By Mutual Consent. NIH and the Collaborator may terminate this CRADA, or portions thereof, at any time by mutual written consent. In such event the Parties shall specify the disposition of all property, inventions, patent or other IP applications and other results of work accomplished or in progress, arising from or performed under this CRADA, all in accordance with the rights granted to the Parties under the terms of this Agreement. 10.2 Unilateral Termination. Either NIH or the Collaborator may unilaterally terminate this entire CRADA at any time by giving written notice at least thirty (30) days prior to the desired termination date, and any rights accrued in property, patents or other IP rights shall be disposed of as provided in paragraph 10.1, provided that, if either Party unilaterally terminates this CRADA for reasons other than for cause including, but not limited to, lack of interest, unwillingness or inability of either Party to contribute resources to the continuation of the CRADA research, and decides not to retain title to its IP rights to Subject Inventions, then pursuant to Articles 6.2, 6.3 and 6.4, such Party shall offer to assign these IP rights to such Subject Inventions to the other Party. 10.3 Staffing. If this CRADA is mutually or unilaterally terminated by Collaborator prior to its expiration, funds will nevertheless remain available to NIH for continuing any staffing commitment made by the Collaborator pursuant to Article 5.1 above and Appendix B, if applicable, for a period of six (6) months after such termination. If there are insufficient funds to cover this expense, the Collaborator agrees to pay the difference. 10.4 New Commitments. No Party shall make new commitments related to this CRADA after a mutual termination or notice of a unilateral termination and shall, to the extent feasible, cancel all outstanding commitments and contracts by the termination date. 10.5 Termination Costs. 33 Collaborator shall not be responsible to NIH for any termination costs. Article 11. Disputes 11.1 Settlement. Any dispute arising under this CRADA which is not disposed of by agreement of the Principal Investigators shall be submitted jointly to the signatories of this CRADA. If the signatories are unable to jointly resolve the dispute within thirty (30) days after notification thereof, the Assistant Secretary for Health (or his/her designee or successor) shall propose a resolution. Nothing in this Article shall prevent any Party from pursuing any additional administrative remedies that may be available and, after exhaustion of such administrative remedies, pursuing all available judicial remedies. 11.2 Continuation of Work. Pending the resolution of any dispute or claim pursuant to this Article, the Parties agree that performance of all non-disputed obligations shall be pursued diligently in accordance with the direction of the NIH signatory. Disputed obligations shall be pursued diligently by each Party in accordance with their best judgment and subject to their obligation to mitigate any damages resulting from their actions. Article 12. Liability 12.1 Property. The U.S. Government shall not be responsible for damages to any Collaborator property provided to NIH, where Collaborator retains title to the property, or any property acquired by Collaborator for its own use pursuant to this CRADA. 12.2 NO WARRANTIES. EXCEPT AS SPECIFICALLY STATED IN ARTICLE 9, THE PARTIES MAKE NO EXPRESS OR IMPLIED WARRANTY AS TO ANY MATTER WHATSOEVER, INCLUDING THE CONDITIONS OF THE RESEARCH OR ANY INVENTION OR PRODUCT, WHETHER TANGIBLE OR INTANGIBLE, MADE, OR DEVELOPED UNDER THIS CRADA, OR THE OWNERSHIP, MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE OF THE RESEARCH OR ANY INVENTION OR PRODUCT. 12.3 Indemnification. The Collaborator agrees to hold the U.S. Government harmless and to indemnify the Government for all liabilities, demands, damages, expenses and losses arising out of the use by the Collaborator for any purpose of the Subject Data, Research Materials and/or Subject Inventions produced in whole or part by NIH employees under this CRADA, unless due to the negligence or willful misconduct or willful misrepresentation of NIH, its employees, or agents. The Collaborator shall be liable 34 for any claims or damages arising from the liable acts of the Collaborator in connection with this CRADA. NIH has no authority to indemnify the Collaborator. 12.4 Force Majeure. Neither Party shall be liable for any unforeseeable event beyond its reasonable control not caused by the fault or negligence of such Party, which causes such Party to be unable to perform its obligations under this CRADA, and which it has been unable to overcome by the exercise of due diligence. In the event of the occurrence of such a force majeure event, the Party unable to perform shall promptly notify the other Party. It shall further use its best efforts to resume performance as quickly as possible and shall suspend performance only for such period of time as is necessary as a result of the force majeure event. Article 13. Miscellaneous 13.1 Governing Law. The construction, validity, performance and effect of this CRADA shall be governed by Federal law, as applied by the Federal Courts in the District of Columbia. Federal law and regulations will preempt any conflicting or inconsistent provisions in this CRADA. 13.2 Entire Agreement. This CRADA constitutes the entire agreement between the Parties concerning the subject matter of this CRADA and supersedes any prior understanding or written or oral agreement. The Parties hereby modify their rights under the following prior agreement(s): Confidential Disclosure Agreement: Two-way agreement # 3-60778-99: ******* Effective date: December 14, 1998 Material Transfer Agreement: # 2-50178 Provider: Maxygen; Recipient: NCI, DTP ******* Executed: October xx, 1999; expiration date: October xx, 2002. and the Parties agree that the information provided thereunder is now governed by the terms of this CRADA. 13.3 Headings. Titles and headings of the articles and subarticles of this CRADA are for convenient reference only, do not form a part of this CRADA, and shall in no way affect its interpretation. The NIH component that is the Party for all purposes of this CRADA is the Bureau(s), Institute(s), Center(s) or Division(s) listed on the Cover Page herein. 35 13.4 Waivers. None of the provisions of this CRADA shall be considered waived by any Party unless such waiver is given in writing to the other Party. The failure of a Party to insist upon strict performance of any of the terms and conditions hereof, or failure or delay to exercise any rights provided herein or by law, shall not be deemed a waiver of any rights of any Party. 13.5 Severability. The illegality or invalidity of any provisions of this CRADA shall not impair, affect, or invalidate the other provisions of this CRADA. 13.6 Amendments. If either Party desires a modification to this CRADA, the Parties shall, upon reasonable notice of the proposed modification or extension by the Party desiring the change, confer in good faith to determine the desirability of such modification or extension. Such modification shall not be effective until a written amendment is signed by the signatories to this CRADA or by their representatives duly authorized to execute such amendment. 13.7 Assignment. Neither this CRADA nor any rights or obligations of any Party hereunder shall be assigned or otherwise transferred by either Party without the prior written consent of the other Party, provided that a Party may assign its rights and obligations under this CRADA without such consent to an Affiliate or a third party that succeeds to substantially all of the business or assets of the assigning Party, by way of merger, sale of assets or otherwise. 13.8 Notices. All notices pertaining to or required by this CRADA shall be in writing and shall be signed by an authorized representative and shall be delivered by hand or sent by certified mail, return receipt requested, with postage prepaid, to the addresses indicated on the signature page for each Party. Notices regarding the exercise of license options shall be made pursuant to Article 7.2. Any Party may change such address by notice given to the other Party in the manner set forth above. 13.9 Independent Contractors. The relationship of the Parties to this CRADA is that of independent contractors and not agents of each other or joint venturers or partners. Each Party shall maintain sole and exclusive control over its personnel and operations. Collaborator employees who will be working at NIH facilities may be asked to sign a Guest Researcher or Special Volunteer Agreement appropriately modified in view of the terms of this CRADA. 13.10Use of Name or Endorsements. By entering into this CRADA, NIH does not directly or indirectly endorse any product or service provided, or to be provided, whether directly or 36 indirectly related to either this CRADA or to any patent or other IP license or agreement which implements this CRADA by its successors, assignees, or licensees. The Collaborator shall not in any way state or imply that this CRADA is an endorsement of any such product or service by the U.S. Government or any of its organizational units or employees. Collaborator issued press releases that reference or rely upon the work of NIH under this CRADA shall be made available to NIH at least 7 days prior to publication for review and comment. 13.11 Exceptions to this CRADA. Any exceptions or modifications to this CRADA that are agreed to by the Parties prior to their execution of this CRADA are set forth in Appendix C. 13.12 Reasonable Consent. Whenever a Party's consent or permission is required under this CRADA, such consent or permission shall not be unreasonably withheld. Article 14. Duration of Agreement 14.1 Duration. It is mutually recognized that the duration of this project cannot be rigidly defined in advance, and that the contemplated time periods for various phases of the Research Plan are only good faith guidelines subject to adjustment by mutual agreement to fit circumstances as the Research Plan proceeds. In no case will the term of this CRADA extend beyond the term indicated in the Research Plan unless it is revised in accordance with Article 13.6. 14.2 Survivability. The provisions of Articles 4.2, 5-8, 10.3-10.5, 11.1, 12.2-12.4, 13.1, 13.10 and 14.2 shall survive the termination of this CRADA. SIGNATURES BEGIN ON THE NEXT PAGE FOR NIH: ________________________________________ Date:_______________________ Alan Rabson, M.D. Deputy Director, NCI Mailing Address for Notices: 37 National Cancer Institute Technology Development & Commercialization Branch NCI-FCRDC 1003 West Seventh Street, Fairview Center, Suite 502 Frederick, MD 21701 Phone: 301-846-5465 Fax: 301-8466820 FOR THE COLLABORATOR: _______________________________________ Date:_______________________ _______________________________________ Mailing Address for Notices: __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ 38 EX-23.1 10 CONSENT OF ERNST & YOUNG EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Financial Data" and "Experts" and to the use of our report dated February 18, 2000, in the Registration Statement (Form S-1) and related Prospectus of Maxygen, Inc. for the registration of 1,725,000 shares of its common stock. /s/ Ernst & Young LLP Palo Alto, California March 2, 2000 EX-27.1 11 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 136,343 0 3,038 0 0 140,181 5,711 947 145,578 7,671 0 0 0 3 133,713 145,578 0 14,017 0 0 26,748 0 58 13,518 0 13,518 0 0 0 13,518 (0.74) (0.74)
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